August 14, 2012
The Investment View from Prescott, Arizona
This came in an email from a friend, and is brilliant in the way it cuts thru all the political doublespeak we get and puts government spending in perspective.
* U.S.Tax revenue: $2,170,000,000,000
* Fed budget: $3,820,000,000,000
* New debt: $ 1,650,000,000,000
* National debt: $14,271,000,000,000
* Recent budget cuts: $ 38,500,000,000
Let’s now remove 8 zeros and pretend it’s a household budget:
* Annual family income: $21,700
* Money the family spent: $38,200
* New debt on the credit card: $16,500
* Outstanding balance on the credit card: $142,710
* Total budget cuts so far: $38.50
I Am So Grateful
The British Open was played last month in Scotland, and an article focused on the old WWII gun emplacements still visible at some coastal courses. The Temporary Rules for the Richmond (Great Britain) Golf Club provide an interesting insight to life in those times:
1.Players are asked to collect bomb and shrapnel splinters to save these from causing damage to the mowing machines.
2.In competitions, during gunfire or while bombs are falling, players may take cover without penalty for ceasing play.
3.A ball moved by enemy action may be replaced, and if lost or destroyed, a ball may be dropped not nearer the whole without penalty.
4.A ball lying in a crater may be lifted and dropped, not nearer the hole.
5.A player whose stroke is affected by the simultaneous explosion of a bomb may play another ball from the same place. Penalty one stroke.
I will never complain about our course conditions again.
Count every ‘F ‘ in the following text:
FINISHED FILES ARE THE RE
SULT OF YEARS OF SCIENTI
FIC STUDY COMBINED WITH
THE EXPERIENCE OF YEARS…
WRONG, THERE ARE 6 — no joke.
READ IT AGAIN!
Really, go Back and Try to find the 6 F’s before you scroll down.
The reasoning behind this is that the brain cannot process ‘OF.’
Incredible or what? Go back and look again!!
Anyone who counts all 6 ‘F’s’ on the first go is a genius.
Three is normal, four is quite rare.
Scottsdale Office Date
If you live in the Valley and meeting Will in Scottsdale is more convenient for you, please call the office for an appointment. (800) 778-4610
How’s the Market Doing?
The stock market seems to have settled into a relatively orderly uptrend, taking 3 steps forward and only two backward. So although the going is a little rough, in general the market is going in the right direction.
Gold has stopped its year long decline and been in a sideways price range for 3 months now. It is close to breaking out to the upside, but hasn’t done so yet. This is the 4th attempt to break out in 3 months, so certainly not a slam dunk to happen, but it is something to keep an eye on.
Interest rates have risen for about 3 weeks now despite the Federal Reserve’s efforts to keep them low. With the price of energy and other commodities rising, it is possible that inflation is creeping back into the scenario, but it is really too early to tell for sure.
Despite what you have heard about the problems of municipalities, muni bonds have been one of the best performing classes of bonds over the past year. The number of municipal defaults has been very small, despite the headlines they make. For this reason, I recommend using mutual funds to own municipals rather than individual bonds. With default risk looming, the credit analysts at the mutual fund companies are worth their salt.
I’m taking care of my procrastination issues. You just wait and see.
What’s Going On In Your Portfolio?
I have made a significant change in our Shock Absorber Growth* portfolios. The shock absorbing hedges (investments that go up when other things go down), were implemented to protect us against the sudden drops in the stock market that we saw in 2010 and 2011, but have not worked well at all this year.
The problem was that the smaller ups and downs worked against us and the cost of continually carrying those “hedges” was too great and kept us from making money when the market went up. So we have stopped using them in that manner.
Since the traditional(long) investment selection has continued to be good, I expect that this change will gets us back on the track to profitability in our growth and balanced portfolios. As of this writing on August 10th, we are fully invested for a rising market.
This has been the toughest 12 month period I can remember for making money while trying to control the inherent risks of stock investing, I feel confident about the changes I have made to get us back on track to profitability, and apologize for getting us off track this past year.
Flexible Income* portfolios have also been held back by our hedging activity designed to protect against rising interest rates. With rates at historic lows, rising rates seemed likely, but did not happen, causing several small losses. Most of the investments we have used this year have worked well except the inverse bond funds used for hedging. With the Fed manipulating the interest rate markets, normal interest rate patterns have gone out the window. As a result, we will be using them very sparingly until the Fed stops trying to control rates.
Everyone who invests runs into losses occasionally. I did not build a successful 25 year career investing by having many periods like this. It is said that the most successful investors are the patient ones. This is one of those times to be patient.
The Interest Rate Store
Our New Sister Company
I get frequent questions about The Interest Rate Store, the new business in the ground floor level of my office building. The Interest Rate Store is a sister company of ours, owned by me, but otherwise unaffiliated with Hepburn Capital.
Over the past few years, just about every investment has delivered losses at some point. Even CDs with rates below the rate of inflation are losing purchasing power. Since Hepburn Capital is strictly in the money management business, when clients would ask about investments with guarantees against loss, such as fixed rate annuities, we did not have a solution for them within Hepburn Capital. The Interest Rate Store provides that solution by specializing in all forms of fixed rate annuities – the kind that come with performance guarantees.
So if you have an interest in reducing risk even further than the level that Hepburn Capital’s lower risk strategies do, call the office at 778-4000 and I will be happy to put on my Interest Rate Store hat and help you understand the intricacies of annuities and decide if they may be something you would be comfortable with.
Our Spotlight Strategy
With our Flexible Income Strategy we strive to provide high total return consistent with Capital
Your money will be invested in bond or currency funds, including
precious metals that may be used as currencies and equity-income
investments whose price trend is up. If the price cycles down, holdings
are replaced with new investments that are going up. Growth stocks are not used.
For more information please click on the following link: [Flexible Income]
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 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.