Money Matters Newsletter:
June 30, 2015
Here We Go Again!
The Investment View from Prescott, Arizona
Do you ever wonder why the CPI (Consumer Price Index) and employment numbers run counter to your personal and business experiences? The problem lies in biased and often-manipulated government reporting.
The government has changed the formula they use to calculate the CPI 23 times since 1980, and according to ShadowStats.com, each time the resulting official Inflation number has been lower than it would have been with the previous formula.
Of course, the government has real incentive to keep the CPI as low as possible since big government dollars are paid out with each cost of living increase for Social Security recipients, military and other government workers.
For several years Inflation has been held down due to low housing and oil prices. Now that housing and oil prices have bottomed and are beginning to rise, the government announced the 23rd change of the CPI formula. No real surprise, I suppose, just business as usual in Washington, DC.
At the June 17th news conference following the recent Federal Reserve Board meeting, Chairwoman Janet Yellen was clear about three things. Rates will start rising later this year; rates will rise by one percentage point every 12 months for the next three years, which is unusually slow, just half as fast as in past rate-rising cycles; and a sustained GDP growth above 2.5% a year is not expected soon.
This does not bode well for financial markets going forward. First of all, economic growth below 2.5% per year means that there will be fewer jobs being created and lower stock market expectations than we have seen in the eras of past years.
And interest rates affect your life much more than the price of say, Apple stock, so rising rates will put a slight drain on everyone’s pocketbooks. I’m not sure the Fed can control the rise of interest rates and limit them to 1% per year. In past rising rate eras, rates spiked up, like a cork released underwater. But then, I was surprised that the Fed could hold rates artificially low like they have been, so I’ll be interested in watching this dynamic unfold.
Yellen makes her controlled rate hike sound good, but a Treasury bond 10 years from maturity, that closed last night (I’m writing this on June 27th) paying 2.47% would drop 23% of its resale value after a 3% rate hike. This kind of a principal loss to a bond investor is almost unthinkable. Now you know why I say that the bond market carries almost as much risk as the stock market these days.
Incidentally, a 3% rise in yields would put the 10 Year Treasury at a 5.97% yield, right about at its historic norm.
Slice of Life
This newsletter is coming out a week earlier than normal since I am scheduled to be in Louisville this week making a presentation at the American Mensa Annual Gathering (their term for convention) on the topic of Future Technologies. I have presented to this group several times now and always learn a bunch from the audience full of geniuses.
I plan to drive north of Louisville to French Lick, Indiana, to chill for a few days at a classic old hotel that has been refurbished and play golf at a world class course they have there.
Back in the day, French Lick used to be a Chicago mob hideout used when they had to go on the lam. The name French Lick comes from salt licks around the hot springs there, so I fully expect to come back with my reputation intact.
On The Light Side
History Channel’s Sam Houston mini-series revived Texas separatists’ claim that Texas never entered the Union. It’s not unique to Texas.
In Canada there’s a radical group that refuses to speak English, they are called separatists; in the U.S. we have the same kind of group, they’re called economists.
How Are The Markets Doing?
The stock market continues to be bound within the tight trading range it has been in since February. Looking at a chart of the S&P 500 Index** gives a picture of a market whose upward momentum has failed. Is this a prelude to gravity finally pulling this market back to reality? Could be.
For sure, it is a picture of a market that is running out of buyers. With markets being nothing but a balance between the numbers of buyers and sellers, if there are fewer buyers pushing the market up, all it takes is some bad news to bring out more sellers and the market can go down in a hurry.
However, the bond market’s problems make the stock market look like the place to be. Since February, the Vanguard Total Bond Market Fund (VBMFX), considered to be representative of the entire US bond market, has lost over 3% for its investors.
Oil and gold markets continue to chop sideways, which is a relief of sorts after the huge losses in both of those markets in recent years. The Dow Jones U.S. Real Estate Index is also down almost 20% in 2015.
Clearly we have many markets that are having trouble producing profits. The solution: strategies that Adapt to Changing Markets® as we do here at Hepburn Capital. Most investors don’t have a clue that these changes are afoot. But at Hepburn Capital, we know and have ways to react to these changes.
Greecing The Skids
With the news being dominated by Greece’s default, I wanted to give you my thoughts on the issue:
First of all, Greece is small. Their entire economy is about the size of the state of Missouri so the ramifications of its default are greatly exaggerated by the bad news sellers. The French banks have the greatest exposure. US Institutions, almost none.
My only concern is will this be the thing that begins a domino effect of cascading debt defaults, which could bring us another 2008. That is possible, but that won’t happen overnight and I’ll have time to react and move to cash, gold, etc. as safe havens – IF and when I see that beginning to happen.
The market wend down yesterday, but has opened up today (Tuesday, June 30th), underscoring the fact that this is a reaction to news, and not a financial earthquake.
And we need to keep perspective on this Greek default. This is not the first. In fact, Wikipedia says “Greece has spent 90 years of its 194 years as an independent country in default or debt restructuring, that’s nearly 50%.” The world has survived 90 years of Greek defaults. I think we can survive a few more.
What’s Going On In Your Portfolio?
Income portfolios everywhere, including ours, came under pressure in the second quarter of 2015 as interest rates began to rise. I have reacted to this change by adding a conservative bond model to our Flexible Income* strategy. It is designed to crank out modest returns, using one of the most stable of all bond funds.
To further bolster Flexible Income* portfolios, beginning in July, I am hiring long-time friend John McClure, of ProfitScore Capital Management, Inc., to run a Treasury bond strategy that moves back and forth between traditional bond funds and inverse bond funds, enabling it to make money in either up or down markets. John’s strategy won the 2015 NAAIM Shark Tank (patterned after the popular TV show) run by the National Association of Active Money Managers, so I am excited to be working with John on this. John’s business is described on his Form ADV which you can see here.
Growth portfolios have made modest gains this year, primarily due to the great success of my Future Technologies* strategy which invests in stocks of companies involved in biotech, nano-tech, robotics and Internet of Everything work. Future Tech* is one of the underlying strategies that makes up my Shock Absorber Growth* portfolios.
Bragging Rights: HCM’s Future Technologies* strategy is rated #1 over the past 3 months among all money managers being tracked by Independent Verification firm Theta Research (www.ThetaResearch.com) and in the top 3% over the past 6 months.
I began offering this strategy in August, so I do not have a full year of history yet, but this is about as good as I can be doing. I am excited!
Because of changes in the bond markets, I am encouraging Flexible Income* clients to move a little bit toward growth in their allocations using my Adaptive Balance* strategy instead. You can see its description below.
College Classes Coming…
Managing an Inheritance: Planning It, Getting It, and Keeping It.
July 8th, 3:00-5:00 pm
If you plan to be on the receiving end of an inheritance from a parent or other loved one, planning is crucial if you hope to preserve your windfall, save on taxes and avoid family squabbles.
This two-hour discussion will guide you through the heart of complex issues, both emotional and financial, that beneficiaries face during the three phases of inheriting: planning your inheritance, receiving it, and making your life better because of it.
Topics include documents you may need, dealing with disability, the use of trusts, basic estate planning principals and protecting your new assets.
Call Yavapai College at 717-7755 to enroll in course # SU15-124, Tuition $45.
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment.
Our Spotlight Strategy
The Adaptive Balance* portfolios are a blend of Flexible Income* and Shock Absorber Growth* strategies. The word Adaptive in the name refers to a mix that can change from 50/50 income and growth in strong stock markets, to 90% Flexible Income* in weak stock market times.
On paper, Adaptive Balance* does some stock market investing, so it would appear to have higher risk than Flexible Income* portfolios which avoid growth stocks. However, with the specter of rising interest rates hampering the bond markets, I believe the risks in the two strategies to be similar, but with better potential rewards with Adaptive Balance*.
Click here to read more about Adaptive Balance.
~ Caffeine increases the power of aspirin and other painkillers, that is why it is found in some medicines.
~ The University of Alaska spans four time zones.
~ Your tongue is the only muscle in your body that is attached at only one end.
The Women I Work For
Just about the time that my Operations Manager, Yvette Zurita was making plans to marry a fellow from Fresno, a good friend and tax prep guru Shari Graham was retiring. We took the opportunity to snag Shari’s assistant, Mary O’Neill, to administratively fill the position that Yvette was going to leave in the office when she moved.
As it turned out, we had almost two years to cross-train Mary before Yvette actually moved, so that and the fact that Mary is such a quick learner, made the transition very smooth.
On days Mary is not in the office, she is running Prescott Acupuncture working her passion of helping people heal. And it works, too! I’ve had Mary do acupuncture on me and it feels great. You can check her out at http://www.prescottacupuncture.com/
So, thank you Mary, for being one of the people who make my life run so smoothly.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and 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.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
Shock Absorber Growth
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.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2014 William T. Hepburn. All rights reserved.