October 8, 2013
Government Shutdown: What Me Worry?
The Investment View from Prescott, Arizona
I was amused when the stock market soared on Tuesday of last week following the announcement of the shut down of all non-essential services and the government furlough of over 1million workers.
What business would keep that many non-essential workers on the payroll? What is interesting is the public reaction. For most of us it was busines as usual.
I admit to consuming maybe 1/10th the news I did in years past. News today is intended less to inform than it used to be and is crafted and presented in such a way as to sway our views to a partisan agenda. There used to be a clear separation between news reporting and editorializing. Now almost all news sources have a significant bias, and it is polarizing the nation in a way I don’t think is good. In short, that stuff can make you crazy.
But the political theater in Washington also makes it difficult to make decent investment decisions based upon what politicians say or do. That is the main reason I make most of my investment decisions based upon data, not upon news.
To put this in perspective beyond the hyperbole of what the shutdown might mean or the effects if it continues, let me point out that this is not the first government shutdown, but the 18th in recent memory. And life goes on.
This chart, courtesy of www.chartoftheday.com shows the average stock market performance for a month before and three months after a government shutdown.
As you can see there is market volatility leading up to the actual shutdown (day 0 on the chart), and then the market generally moves up as investors realize that the economy continues to function.
I have seen interesting studies done on the performance of the stock markets during periods when Congress is in session vs. on vacation and the stock market tends to be stronger when Congress is in recess. There must be a message in there somewhere.
There may be short term weakness in the stock market as nervous investors find reasons to sell due to the politics going on, but the longer term seems positive.
College Class Coming Up
Annuities: The Good, the Bad and the Ugly
Rates on annuities are rising back to decent levels, so expect to see a raft of free lunch seminars where annuities are featured. Normally these seminars push the highest commissioned products and rarely mention the many other options available within the annuity universe.
This 2-hour Yavapai College class has been designed to provide a more balanced approach to looking at annuities, so if you or your friends are interested in annuities, I’d encourage you to sit in on this class.
Date: Thursday, October 17th, from 1:00-3:00 p.m. Call the college at 928 717-7755 to register for class # FA13-149. Tuition is $45
Mental Floss
Why the Arizona summer heat is happily tolerated:
How’s The Market Doing?
The stock market is settling down into a comfortable three steps forward two steps backward pattern, which, while not sounding perfect, is actually very good for this time of year. September and October are known for stock market ugliness, but the current pattern with the stock market down about 2% from its high point does not deserve that kind of label.
Recently, with the government providing a high degree of financial stimulus in the markets, it has made sense to try to hold stocks through minor corrections. While it is critical to follow a set of rules that are based on the way that the market and stocks actually work, it is also important to recognize what is working in the current market environment.
The Fed stimulus has stimulated higher markets with an absence of the emotional components that usually accompany market cycles. For this reason it is a good time to just be patient as the stock market takes a breather.
The Fed’s Quantitative Easing is a policy that is designed to create inflation. The purpose of this inflation was originally to create demand for real estate. However, now it has become an artificial method of creating wealth through equity oriented asset classes like real estate, commodities, and most especially, the stock market. The other very important effect of QE is that, by inflating the currency, the national debt is reduced, in real dollars.
This effort to diminish the national debt by monetizing it may help the nation and equity investors survive its crushing debt, but the debt holders will be the ones that pay for this policy. Their T-bonds will be worth less and less over time if the government’s QE policy continues and is successful. Unfortunately, so will any other dollar denominated investment. This means holders of CDs, corporate bonds, municipal bonds, annuities and mortgages will find it hard to make a real profit going forward.
The bond market has strengthened over the past few weeks, but is still well below the levels seen last spring.
The ability of this government policy to push the equity markets higher should not be underestimated.
What’s Going On In Your Portfolio?
There have been few changes in our model portfolios since my last newsletter. We are fully invested in both our Growth* and Flexible Income* models and with the market drifting down the past few weeks, our growth model‘s current stock holdings have actually made a modest gain as of this writing on October 4th, so the portfolio is well positioned to outperform when the market turns up. This is a time to be patient.
Growth* portfolios hold around 21% health care and biotech, 19% energy, 24% international, along with assorted retail, tech, leisure and banking stocks and one diversified growth fund.
Flexible Income* models hold a mix of high yield, floating rate and diversified bond funds.
And we finally have a buy signal on our municipal bond strategy for the first time in many months and will be investing those accounts over the next few days.
Scottsdale Office Date
Please call the office (928 778-4000) to schedule an appointment if it would be more convenient to meet with Will in Scottsdale.
Tesla Reminiscent of the Tech Bubble
What We Were Saying Back Then
Tesla motors have been on fire this summer. And I don’t mean just the Tesla Model S that burned up and was reported in the news last week, either. 
The stock price has jumped from $50 to almost $200 just since May and has gone up almost 10 times over the past year. That is huge!
So, is Tesla a good investment? If you like to invest in a good story, maybe. But if you prefer companies you invest in to have earnings or a lot of cash on hand, not so much.
Tesla has yet to show a profit, and if their electric cars perform well enough to develop a market for themselves, there is nothing to stop big name auto manufactures from entering that marketplace and sending Tesla to join the ranks of Packard, Studebaker, Stutz, Cord and other specialty car makers who just couldn’t compete on a broad scale.
When an unprofitable company that has sold only 2,250 cars (per Wikipedia) is valued the same as the incredibly successful Hyundai Motors, and is also valued at 1/3 of auto giant Ford that is the kind of story of stock valuations we saw during the tech bubble of the late 1990’s.
With 68% of Tesla stock held by institutions, when they decide to get out it could create a wave of selling that could drive stock prices down as fast as they have gone up. The emperor may be seen to have no clothes.
Individuals owning Tesla stock might be wise to consider taking their profits and moving on, while the moving is good.
Our Spotlight Strategy
With our Adaptive Growth Strategy we strive to provide high total return from a combination of investments from both the equity and income markets with the emphasis on equities.
Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to the strength or weakness of the market, directing exposure in the HCM Long/Short Equity strategy to range from 0% to a maximum of 80% of account value. The balance, 20% to 100% is invested using the HCM Flexible Income strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines in which case stock market exposure is quickly reduced. Adaptive Growth
If you would like a current copy of our SEC Form ADV, Part 2, it is on our website at hepburncapital.com/form-adv.html
* 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 an Index.
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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.
