March 23, 2010

A Real Vacation

On our recent trip, the desert between Prescott and San Diego was as green as it gets with vivid splashes of colorful flowers along the sides of many highways thanks to all the winter rains.

The prize for color has to go to Carlsbad, CA, known for its flower farms, which had banks of purple flowers that were “put-your-sunglasses-on-now” brilliant in the sunlight.

Cathy and I parked the motorhome at her sister’s place, a block from the “Swami’s” in Encinitas, 30 miles north of San Diego.  If you want to spend an enjoyable hour, wander through the gardens maintained by followers of Paramhansa Yogananda, which are open to the public.  With the smell of flowers and the sound of the surf it is a wonderful setting.

I did just enough over there to keep my reputation as a workaholic intact.  In fact, my 130 mile one-way trip during LA’s rush hour to Westlake Village to sign up a new client ought to qualify me for hazardous duty pay.

But I also played golf, rode my bike until my buns hurt and even had coconut cream pie for breakfast one day.  Yep, it was a good vacation.

Flirting With A Double-Dip?

Last month The Federal Reserve Board announced its first move in turning down the spigots of money supply growth that helped refloat our economy over the past two years.

It was a minor move, almost more symbolic than impactful, but it is the first sign of a change in a powerful trend.

During my Army training, in 1971, we were taught that the most dangerous times on patrol were when you first stepped out of the compound and when you were on your way back in, because you tend to relax, thinking “its over”.

The Fed signaled that we are turning around and heading back to camp.  The danger however is still great, and perhaps greater than it has been.  If the Fed miscalculates, we risk having the country slip back into recession again: the dreaded “double dip” that analysts talk about.

If you have ever baked a soufflé, you know the recipe says do not disturb the soufflé until it is fully baked or you risk having your soufflé fall.  Withdrawing liquidity from the economy before it is really healthy again may cause the same phenomenon – a collapse just when you think the task is completed.

During the 1930’s the government blew it big time when, during 1936, it began withdrawing some of the economic stimulus that buoyed us up during the great depression and created a double dip by starting another period of recession in1937. This second dip was a bad one and made the great depression last a lot longer than it might have otherwise – so long that it took moving to a wartime economy in WWII to shock us out of it.

Although I have disagreed with some of the Fed’s actions (like insulating bondholders from all risk in the financial crisis even if they made bad investments), they also get kudos for their creative ways of dealing with the problems we have faced.  These men are not dummies, far from it.

It is easy to criticize, so let’s all just hope the Fed has the recovery calibrated correctly as they start to withdraw stimulus from this economy.

The Stock Market Is Defying Gravity

The stock market has simply refused to take a breather for the past month or so, staying high for so long it makes me worry that it will need detox when it finally comes down.

As I often state, the market never goes in one direction for very long. It zigs and zags as it creates its trends.  However the period since February 8th is about as straight a line as one ever sees from the stock market.  We are due for a good “Zag”.  Overdue, in fact.

Friday, (I am writing this on Sunday, March 21st) may have been the first part of the zag,  Only time will tell, but for this reason – risk of at least a short term decline being very high – we have remained only about half invested in stocks.

I do not expect any kind of crash, because the market is showing other healthy signs, but I think it is better to invest after these dips than before them.

Successful investors are patient investors, so this is a time to be patient.

Some RIAs Are Facing Hard Times – Not Us

In a March 8, 2010 article, Hilary Johnson of Investment News reported that only 5 of the 50 biggest Registered Investment Adviser firms saw an increase in assets (a fancy term for investment dollars they manage) last year.  That means that 90% of RIAs shrunk in size last year.

Increases in assets come from two places.  Earnings that make existing accounts larger, and new assets coming into the firm to be managed.  

It is really too bad that the big boys have been having so much trouble.  We sure aren’t.

I’m going to try not to gloat as I tell you that Hepburn Capital saw its assets grow by 67% last year.

It was a very good year for both us and our investors.

Thank you for your support, your business and your referrals.  We could not have done it without you!

What We Were Saying Back Then

From my February 3, 2004 newsletter:

Years ago, people would frequently berate the Japanese for their economic successes. The imp in me would say “Thank God for the Japanese” much to the chagrin of those around me. The way I looked at it, the Japanese spent billions of dollars to build car plants here and then they left 98% of the money they made here in the form of paychecks for American workers, supplies and parts, taxes, etc.

What really made this sweet for the U.S. was that the 2% profit that went to Japan was also sent back to us to buy our stocks and Treasury bonds. We ended up getting all of the money. Life was good – for us.

Now Japan is in a financial mess and has been for a dozen years. Like you, I find it disturbing that so many American companies are now exporting jobs by building plants abroad like the Japanese did in the 1980’s. I just hope that somewhere in the world folks are saying “Thank God for the Americans”.

What’s Going On In Your Portfolio?

Flexible Income accounts* are back to their boring ways of making money slowly, and are currently fully invested with a mix of high yield bond funds, floating rate bond funds, an Aussie dollar denominated account which acts like a money market fund with growth potential and an Exchange Traded Fund holding high dividend paying financial preferred stocks.

I normally do not buy “common” stocks for these accounts, but preferreds are not like common stocks and have much lower risk.  They are bought for income and not for price appreciation.

Our Careful Growth portfolios* hold up to 46% in individual stocks, 10-20% in stock funds, along with 20% gold or gold mining stocks, plus some bond funds and about 24% in cash.  If the stock market pulls back a bit, I plan to take it as a buying opportunity and put more cash to work.

Riddle Of The Week:

Our Socially Responsible Investment (SRI) portfolio uses the same kinds of analysis to determine buy and sell points as does our Careful Growth model, but with a very limited selection of mutual funds, ETFs and sometimes individual stocks to select from.

SRI qualified investments are screened to eliminate influences such as tobacco, alcohol, gaming, or weapons manufacture or to focus on companies perceived to be socially or environmentally benign.

SRI portfolios are meant for clients who are as concerned with how the money is made as well as how much is made.

Because of the severely limited universe of investments available in SRI funds and ETFs, performance may vary significantly from the Careful Growth model.

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.

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

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.