February 23, 2010

Will Hepburn to Address Money Manager Conference.

About the time you are receiving this newsletter, I will be on an airplane heading for Houston to do a presentation to a room full of money managers at a national conference.  I always take home more than I give in these presentations, as the audience will be made up of many very savvy money managers, mutual fund and hedge fund managers.

A few years ago, someone playfully called this group a “room full of throbbing brains”.  The level of innovation and technical skill is amazing.  Just the questions themselves often give me valuable insights as to what others are thinking and doing, so I always looking forward to these meetings.

Estate Tax Repeal A Good Thing?  Maybe Not.

For the past year estate planners have been on the edge of their chairs wondering what would really happen with the estate (death) tax set to expire this year.  Lawyers and financial planners have a tough time planning without knowing what to expect about the law.

It seemed hard to believe that the Feds would allow this tax to just fade away into the sunset (pun intended).  Although only a little over 40,000 estates actually pay taxes each year, they are often very big amounts.  To deal with its huge debts the government is not likely to overlook any amount, much less a significant one.

And the cynic in me looks at only 40,000 votes to be possibly lost vs. billions of dollars to be gained.  I would expect most politicians to grab the money and run by extending the death tax.

But they haven’t .

You would think this is good news, right?  Don’t count on it.  When the government gives us something there is always a payback.

In a Feb 7th article in InvestmentNews, writer Bob Gordon points out that the other side of this double edged sword is that we will no longer have capital gains taxes wiped out at death through what is called a “step up in tax basis”.

Consider the person who inherits the family farm, the house they grew up in, or pop’s long time holdings in IBM when mom and dad pass away, and chooses to sell it.  Last year there would be no capital gains tax to pay if the property sold for what it was worth when the second parent died.

This year the entire amount, less what was paid for the property many years earlier by mom and dad, is taxable as a capital gain.  If you can even find out what was paid.  Ugh!

This is effectively a tax increase that will affect virtually everyone who inherits regardless of their income level.  I expect that Government revenues will actually increase dramatically through this latest “tax repeal”.  

George Orwell would be proud of this bit of double speak.

Estate taxation just became more complicated rather than less.  I am not a tax expert, but I wanted to point out this new wrinkle in the laws.  Be sure to discuss it with your tax professional, now, for this may affect you if you expect to inherit someday.

And, beware of the person who says “I’m from the government and I’m here to help you.”

Here is a link to the article I mentioned:
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20100207/REG/302079973/0/FRONTPAGE&template=printart

1099 Deadline Pushed Back

Riddle:

Are the Brakes Working on Your Investments?

Stock markets around the world seem to be moving up and down at the same time, reflecting more of an outlook of global economic issues rather than the potential in individual companies, sectors or segments of the markets.  

This phenomenon of all markets acting like one is a common feature of declining markets.

In all-as-one markets like this, traditional diversification is of no help.  The only way to preserve principal values is to have a safety-net mechanism that tells you when it is time to get out of stocks altogether.

At Hepburn Capital, my first line of defense for your money – your safety net –  is “stops”.  I use them on most all of our holdings.  

Stop is shorthand for “stop loss order”, a predetermined price somewhere below the previous price.  If the current price drops to the stop-loss level, that is a clear signal that the trend has changed and this investment is no longer performing well.

To sell based upon this type of indicator is to “be stopped out” of an investment.  I often sell when a stop is hit but not always.  At a minimum it triggers a series of analyses so I figure out what is really happening with the investment.

Just as you would never drive a car without brakes, one should never own investments without knowing at what point you will concede that this just isn’t working anymore and it is time to “tap the brakes” in your portfolio.

The value in a disciplined use of stops is that you keep small losses from ever becoming big losses, which is a key to successful investing.   You can always buy back in if the market resumes its uptrend, but my style is to be more safe than sorry.

This is a good market to be using stops.  We were stopped out of our last stock position nearly a month ago.

If you have friends who are dissatisfied with how their money is being managed, please forward this article to them to see if “brakes” might be what they need.

What We Were Saying a Year Ago.

From my Feb 24, 2009 Newsletter:

The great lesson of 2008 is that ordinary methods of diversification – just owning different kinds of stocks and bonds, etc. – are ineffective in the markets of the 21st Century. Diversifying among strategies takes the concept of diversification one level deeper, and this is what most investors, and sadly many advisers, have overlooked in their planning.

What’s Going On In Your Portfolio?

There have been no changes in our portfolios in the past couple of weeks.  As mentioned earlier in this newsletter, our system of stops has had us completely out of the stock market for 4 weeks now.

Both Careful Growth and Flexible Income models* are invested for capital preservation at the moment.

We are holding roughly half our money in the relative safety of a money market fund, with the balance being spread among several types of bond funds and currency funds.  

The dollar keeps rising slowly, so we are taking advantage of that, making money slowly with rising dollar funds while we wait for the market to resume it’s uptrend.

With the market taking a sharp drop since January 19th, bonds and money market funds have been a nice place to be.

I do think that markets will recover, but I expect a sloppy, choppy bottom to form before the uptrend resumes for real. That could take a week or a month.  Hopefully I will recognize it when I see it.   

Although there are some growth investments that look interesting right now, in a market correction like we have seen since mid January, it is generally not a good time to buy stocks.

So far, a key indicator, trading volume on up days, has not shown up.  Until that happens, history suggests the probabilities of success are against us if we buy into the stock market.

I’d rather wait for the uptrend to resume.  Investing is less risky that way.

Municipal Bond Strategy

Municipals are favorites of high tax bracket investors due to the income-tax-free nature of their interest payments.

However, like any other type of bonds they can go up and down, sometimes dramatically as we saw in the Fall of 2008, when the average of 592 muni bond funds in the Fast Track database lost 16.06% of its value at one point.

Our municipal bond strategy tells me when to hold municipals and when to be in cash, or very short term municipals that behave a lot like cash but with tax free interest.

Just a few days into the new year, Muni accounts were moved back into high yield municipal funds which have performed very nicely since then.  Making money slowly, as I like to say.

Referrals are a great compliment.  Thank you for the many referrals we get.  If you like what we are doing, please continue to tell your friends.

*    The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed.   Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account.  Not all trades are profitable.  It should not be assumed that current or future holdings will be profitable.   A list of all trades in these accounts for the past 12 months will be provided upon written request.

**  The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market.  Investors cannot invest directly in the S&P 500 Index.

This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy.  Please discuss any legal or tax matters with your advisors in those areas.  Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.

Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information