Everything Looking Rosy? Maybe That is Not A Good Sign!
The Investment View from Prescott, Arizona
We are entering the colder months which are normally the strongest part of the year. The first year of the presidential cycle is now behind us, and normally it is the weakest of the 4 years in the cycle. The Federal Reserve Board has indicated that it will keep pouring cash into the economy, which is a good thing for the markets.{autotoc enabled=yes}
Data from Bank of America Merrill Lynch Global Research show that $231 billion flowed into stock funds during the first 10 months of the year, so clearly investors are climbing on the band wagon.
But, can things be too good? Are the markets getting ahead of themselves?
Plenty of sentiment indicators say the markets are ripe for a turnaround. Frothy is the word that is used to describe this kind of market.
There are 3 major sentiment indexes followed by analysts, the AAII, Investors Intelligence and NAAIM Survey of Manager Sentiment that I developed back in 2006 as the President of that national organization. These surveys poll individuals, newsletter writers and professional money managers as to how they feel about the markets.
Right now all 3 groups are strongly bullish which, as crazy as it sounds is really a negative for the markets.
One of the reasons this business is so difficult is that the right action is often counter-intuitive. Sentiment is a perfect example.
If you were a member of one of these 3 groups of investors and you responded “I’m bullish on the market” that really means that you are fully invested to best take advantage of a rising or bull market.
Taking this logic a step further, this also means that you would no longer be a potential buyer of investments – your money is already invested – you can now only a be potential seller. Since the future market activity is a balance of buyers and sellers, this heavily bullish sentiment means that there are fewer potential buyers and more potential sellers, a recipe for a market decline.
How long will it take to work off this bullish sentiment? Perhaps not long, but no one really knows.
Those who advocate a passive approach to investing such as buying an Index Fund and just holding it, would be having a good year going so far. But if the markets turn around they can change quickly. In 2011 the S&P 500 Index** dropped 16% in about a week as the market “corrected”. That is enough to wipe out the whole years worth of gains for many investors if they are not prepared to take action in the event of a market correction.
The only way to protect oneself from an impending market correction is with a sell discipline. In the face of so much uncertainty in the world, the most valuable part of an investment portfolio is flexibility – the ability to Adapt to Changing Markets®.
How’s The Market Doing?
This is probably a result of the flood of cash that the Feds are injecting into the economy. That money has to be stored somewhere before it goes into bricks and mortar and the financial markets are the logical choice.
The bond market has rallied back from its September lows, but is still mired in a longer term downtrend that I have mentioned in several prior newsletters.
Bonds face a headwind created as rising interest rates cause principal values to erode, digging into gains made as interest is collected, sometimes wiping them out completely.
The gold market also seems locked into a downtrend lasting more than two years now and is currently 32% below its 2011 highs. Silver is also struggling, having lost 57% since its high in 2011.
Oil prices have been in the news lately after a 10% drop. You can see the effect of this as you go to the gas pumps. Lower oil prices are good for the economy as money that might otherwise go to paying for gasoline can now be put to other uses.
Weak commodity prices are a cause for concern since this normally happens late in an economic cycle.
What We Were Saying Back Then
In my October 8th newsletter I mentioned how Tesla, a new maker of very stylish all-electric cars, sported stock prices reminiscent of the tech bubble in the late 1990’s. Tesla has no earnings and is burning cash (as well as cars, lately), but the stock price had risen sharply to where the value of all Tesla stock was equal to the very successful, very profitable Hyundai car company. Something did not add up.
The stock has since dropped from its high of $194.50 on Sept 30th to its November 19th price of $129.44. That is a decline of 33% in about 45 days.
Now Tesla stock is only vastly overpriced rather than grossly overpriced.
With 3 Tesla cars catching fire recently, the media is piling on with headlines in the past week such as an AP story “Official: Tesla factory had previous violation”, or Bloomberg’s article, “Are there cockroaches under Tesla’s hood?”, or the Motley Fool article on ”Why Tesla’s profit margin isn’t what it seems”.
Could the party be over for Tesla? It sure looks and feels like tech stocks did in the year 2000 before the tech heavy NASDAQ stock index dropped 79% of its value. With luck, Tesla will begin to show a profit and pull out of its nose dive and not end up as disastrous as some of those tech stocks did.
Disclosure: Hepburn Capital has not owned Tesla stock in any of our portfolios, and it is not on our list of potential acquisitions.
What’s Going On In Your Portfolio?
Our growth model – Shock Absorber Growth* is its public name – is doing well, as we have been fully invested or close to it for most of the past few months. As of Friday, November 15th, we have equity investments in energy, international, health care, retail, banking, entertainment, a 3D printing company and diversified growth funds.
The Flexible Income* model is also fully invested in high yield, diversified and floating rate bond funds. Due to the broad downtrend in bonds caused by rising interest rates we have been avoiding Treasury bonds and other of the most interest rate sensitive bond categories.
Our Spotlight Strategy
With our Shock Absorber Growth strategy, we first select the strongest of about 40 different stock market segments, sectors and regions, and then select the most complimentary inverse funds to use as a Shock Absorbing hedge for those investments.
The HCM Safety Net indicator is designed to warn of sudden potential declines, in which case stock market exposure is quickly reduced.
In Other News…
A Thank You From Hepburn Capital
The Myth of The Black Friday Deal
Watches and jewelry, typical last-minute targets for well-heeled shoppers, get more expensive as the season progresses, according to Decide Inc., the consumer-price research firm that gathered and analyzed the data for that article. Blenders, which might sit around for months if they aren’t bought in the holiday window, get much cheaper at the end.
The gist of that article was that Black Friday is not as good as the media makes it out to be.
In researching this subject for this year, I noticed that the Christian Science Monitor has a wonderful piece exposing 16 different myths about Black Friday.
If you are a die-hard deal hunter, check this out before running the Friday morning gauntlet after Thanksgiving! http://tinyurl.com/Black-Friday-Myths
Mental Floss
From the Pew Research Center, here is a quiz on how much science adults know. Only 7% of the adult population gets all 13 questions correct. See how you do. http://www.pewresearch.org/quiz/science-knowledge/
Have You Received a Statement This Quarter?
For all of our investment management clients, we have arranged for independent custodians to send you account statements at least quarterly, even if there is no activity in your accounts.
Bernie Madoff made off with billions because he was allowed to produce his own phony statements. Our independently produced statements, mailed directly from the custodian, are for your protection.
If you have not received a statement this quarter, please call the office so we can correct that situation for you.
Scottsdale Office
Will is happy to meet with you in Scottsdale if this is a better fit for your schedule. Please call the office to schedule your appointment (928. 778.4000).
Latest Scam Update
We want to pass along an alert from our primary custodian, NFS, about a new scam that targets taxpayers. The victims are told they owe money to the IRS and funds can only be paid by wire or pre-paid debit card. If the potential victim refuses to cooperate, the scammer then becomes hostile and threatens with arrest and suspension of licenses.
IRS takes this matter seriously and wants citizens to know the following:
- -They do not ask for a credit card number over the telephone. Nor will they request a prepaid debit card or wire transfer.
- -The first IRS contact is usually by mail.
Characteristics of the scam:
- -The scammers use fake names and IRS badge numbers. They use common first and last names.
- -Scammers may recite the victim’s last four social security digits.
- -The phone number used by the scammers will spoof the IRS and be a toll free number.
- -The scammers will send bogus emails to support these phone calls.
- -Victims generally hear background noise of what seems to be a call center.
- -After threatening the victims, the scammers will call back pretending to be local police or DMV. They also spoof these phone numbers.
Please also remember that lottery sweepstakes, phishing, and debt relief scams are still a cause for concern. This is just a new way scammers are attempting to access money and confidential information.
If you think you are being scammed, please call the office so we can help you report the scam to the proper agencies. (928 778-4000)
