February 2, 2021

Hi-Ho Sliver Away: Is This the Largest Pump and Dump Scheme Ever?

Crazy investor behavior is the single most dependable feature of late-stage bubbles. We see plenty of it now, as fund manager Jeremy Grantham recently stated.

Day traders, many of whom trade on a site called Robinhood and communicate on social media site Reddit, coordinated their actions last week and ganged up on hedge funds and national brokerage firms with a technique called a “short squeeze” (Google it if you want to know how it works). This caused huge losses for the firms due to incredible price changes, both up and down, in a handful of stocks. I have not seen this degree of bald-faced speculation in stocks, that in my opinion aren’t worth owning, since early 2000, just as the tech bubble was bursting.

There seems to be a lot of anger and hatred among these mostly small retail investors who are banding together to pile into just a few stocks. It feels like a “rage against the Man” more than a desire to make a profit. But they have been effective.

And of course, conspiracy to manipulate stock markets is illegal, so look for some jail time to come out of this too. Whether the regulators will be focusing on the day traders, hedge fund managers or brokerage firms that may have halted trading in the target stocks at the behest of hedge fund clients who are their bigger revenue sources is a really good question. Stay tuned on that one.

I’ve given talks around Prescott, and at national Mensa conventions on “The Top 10 Investment Scams and How to Avoid Them.” This phenomenon feels like the old “pump and dump” scam where hustlers develop a good story to hype a worthless stock and then sell into the buying frenzy they create before the stock price drifts back down into worthless territory where it belongs.

The poster child for this story has been a retail company called GameStop (symbol: GME) which was priced below $5 for most of 2020. It hit $483 per share last Thursday before dropping to $132 ninety minutes later, and closing the day at $193. (Data from Yahoo) Crazy does not even begin to describe the ride that stock has taken. Did I mention that GameStop, as a company, has not turned a profit in several years? No surprise there.

Social media buzz is now focusing on silver, which is up 7% for the day as of this writing on February 1^st, so stay tuned.

(Shadowridge does not own any GME shares in its or client accounts and does not have it on any lists to be purchased.)

I can’t imagine this not ending badly.

Save the Date!

Hear the GameStop/Robinhood/Reddit Controversy Explained

Discover how the GameStop/Robinhood/Reddit Controversy that has rocked the stock market these past few weeks may affect both you and the stock markets.

Thursday, February 11th at 11:00 am (Mountain Time), my Shadowridge team will be doing a 30-minute video presentation with four short segments via Zoom. I am presenting on the GameStop controversy.

The webinar will include a market update by Shadowridge CEO and Chief Investment Officer, Ryan Redfern, and tax and planning tips from Laura Redfern, Certified Financial Planner™, and Phil Lebkuecher, Behavioral Finance Specialist.

Please plan on watching and getting to know your investment team. The presentation is scheduled for less than 30 minutes plus time for Q&A.

Please note: You will need to have the Zoom app installed in order to attend the webinar.

What Does the New President Mean for Your Savings?

As an investor, I am indifferent to who the president is. However, the number one question I have been fielding lately is what the election outcome means for your accounts with me.

From what the numbers show me there is no persuasive historical evidence, one way or the other, regarding the long-term impact of politics on stock market returns, as this article from The Hustle newsletter points out:

How does the S&P 500 perform after a US presidential election?

When it comes to the stock market, one of the best ways to get a sense of what the future holds is to look to the past.

To do so, The Hustle teamed up with Toggle AI — an analytics firm that provides insights to both hedge funds and retail investors — to analyze the S&P 500 index across 14 prior elections dating back to 1964.

Here’s how the index performs after 2 presidential election-related scenarios: 1) the incumbent party wins; and 2) a new party takes power.

To be sure, the election outcome is one of many factors that drives stock performance. This analysis will keep a narrow focus.

Incumbent party stays = double-digit stock gains 1 year after

Since 1964, 7 elections have resulted in the same party staying in power.

The market was higher 3 months after the election in all 7 of these instances, with an average gain of +5.7%. By the 1 year mark, all but one election (Nixon, 1972) saw gains…the average gain was +14.4%.

One caveat to keep in mind is that a solid economy is often a positive tailwind for a presidential re-election bid — so a case could be made that the market is set up favorably for the incumbent president (and, secondarily, his/her party).

New party in power = stocks down slightly 1 year after

Looking back at the same data (1964 to present), the sitting party has also lost 7 presidential elections — and a shift in party typically comes with a negative short-term market result.

A White House flip sees an average decline of -1.5% after 3 months. A year out, the market has been down in 4 of 7 of these instances, with an average dip of -1.0%.

Of course, what we’ve presented here is based on a small sample size.

Previous results can provide context. But as is oft-noted in the investment community, past performance is not a guarantee of future results.

All elections have something that makes them stand out…

… ’64, ’68, and ’72 were colored by the Vietnam War, riots, and political assassinations; ’00 and ’08 came during financial crises; ’04 was during the Iraq War.

However, this election cycle is particularly strange and unpredictable. We’re in the middle of an international pandemic, a misinformation war, and the worst economic downturn since the Great Depression.

This data doesn’t mean that the reelection of our current president would be better for the market. But it still provides some interesting historical perspective.

(From The Hustle newsletter Nov 2, 2020)

January 2021 Market Commentary

(By Ryan Redfern, Shadowridge Asset Management, LLC)

So far, 2021 isn’t having as much strength or conviction in the stock market as I would have thought or even hoped. As of close yesterday, the S&P500¹ is only slightly above break-even on the year at just under 1%. And while the index started out relatively strong and was up around 2.8% at one point, it didn’t take much to give back what little gains had been made (FastTrack data).

As we mentioned last month, the valuation of the stock market measured by the Shiller PE Ratio is still uncomfortably high. It’s far too early to be calling a top in the stock market, but I can’t help but think we’re getting close. Or at least will be pushing the boundaries over the next few months or quarters.

The buzz I’m seeing this past month is the suggestion that the next “bubble” to burst will be debt. There is no doubt that everything from Student Loans, to Auto Loans, to Home Equity Loans are all being stretched to their limits and have the potential to set up bigger problems across the economy.

In addition, we’re now seeing euphoric activity in stocks from individual investors (looking at you Reddit and Robinhood). The activity in a few specific stocks that I won’t name here is feeling a bit too much like 1999: excessive excitement over investments that really aren’t worth much of anything at all. We’ve seen this before and know how it can end. Spoiler alert: it isn’t pretty.

Going global – one shift we are seeing is that stock market valuations around the world are, in several cases, less over-valued than the U.S. domestic markets. Will and I both have been researching where those opportunities exist and how we can shift our models into those areas. You’ll likely see more exposure to global funds and stocks in your account in the coming months to reflect those findings.

Volatility is back! This month’s chart shows the VIX (Volatility) Index, and we can see that it spiked back up into the high 30’s (green line). The last few times it spiked like that, it corresponded with market pull-backs of around -7.5% (in June, September, and October – some more and some less). So far, the pull-back off of the January high has been around 2.5%, so it is possible that the market could continue to go down for the next few days and into early February. But if volatility is short-lived, then we could see the market rebound into February. At this point, it’s anybody’s guess.

Bonds – the bond markets started off the year in negative territory and can’t quite seem to go positive. The Aggregate Bond Index AGG is down -0.63% Year-to-Date (FastTrack Data). So far, bonds haven’t been a good diversifier or risk-off asset that they normally can be, but they also aren’t falling apart. So, for now, there doesn’t appear to be much to be concerned about. But after last March’s craziness in the bond markets, we do watch this market much closer than we did before.

What We’ve Been Doing in Our Models – we’ve been backing out of the market and reducing our allocations, expecting the drop we’re now (finally) seeing in the last week of January. However, we were able to grab a piece of the Inauguration Day bump that only lasted a couple of days. Now we’re looking at where we can improve our allocation holdings when the next buy signal occurs. That could be as early as next week – which is what we are hoping for.

I hope your 2021 is off to a great start!

1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.

2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.

The Hidden Side of Money

(By Laura Redfern, CFP®, Shadowridge Asset Management, LLC)

“What would you do if you won the lottery?” It’s a fun mental exercise that many people like to play, whether they actually buy a lottery ticket or not. The possibilities seem endless, and the empowerment seems tantalizing. But the reality isn’t always what we dream. Lottery winners are known to experience sleep deprivation, paranoia, and even depression after this sudden and drastic change to their lives.

Susan Bradley, founder of the Sudden Money Institute, says, “When money changes, life changes, and when life changes, money changes.” This is true whether we are talking about billions of dollars, or smaller amounts. Money changes our lives.

Thankfully, there are things we can do to harness that change, moving towards a positive experience even in the midst of the unexpected. Here are a few facets of dealing with a windfall that are often overlooked:

Relationships. Asking WHO is involved, not just “how much,” can help to re-focus on an important part of the equation: people! Relationships will also change when money changes, but often not in the ways we assume they will. We use a “Managing Expectations” tool to help clients sort through their assumptions and the emotions felt around them. For example, one woman who inherited money was feeling an immense amount of pressure to make a donation to a charity, because she assumed the charity expected it of her. When she was able to talk to them about it, she discovered the assumption was her own, not the charity’s at all. Exploring assumptions that you and others may have around your money can be a healthy exercise at any time!
Slow down. Inheritors or lottery winners often feel like they have a lot to DO immediately after the big money event. In part, this is true: there are documents to be filed, money to be transferred, and some decisions to be made up-front. However, we often put a lot of additional pressure on ourselves (or those around us) over things that aren’t necessarily urgent, but we perceive to be so. An important part of managing any financial transition well is to give yourself time to absorb and process all the new info that is coming at you. Taking time to sleep, decompress or just chill, and digest all that is happening, is essential to maintaining good mental and physical health during this time. If that seems difficult, you might develop a personal statement that you can repeat when you feel pressured, like, “I don’t know all the pieces yet, so I’m not ready to make a decision on anything that’s not absolutely essential. I’m giving myself time to get organized, figure out what’s possible, and look into different ways of managing my resources. There’s a lot involved and I’m relieved to be going slowly in the beginning.”
Reflection. Making big, life-altering decisions too quickly without some time for reflection can lead to feelings of insecurity or regret. “Me time” is not selfish here; it is an essential element to clarify what is most important, what needs to be protected, and what is sacred in times of great change. We use several tools here to help clients write their “next chapter” and visualize what a successful transition looks and feels like. For couples involved in a sudden money event, this can be especially important, because they are often surprised to discover they are not exactly on the same page. That’s normal and OK – as long as a conversation ensues that encourages reflection of both people involved. It is possible to explore areas that are the same and different, and to work with both visions of the future together.

While most of us will probably never experience winning the lottery, it is possible we might experience other life changing events: an unexpected or larger than expected inheritance; a legal settlement; the sale of a successful business. The monetary amount is not as important as the disruption a sudden money event brings to our lives.

But thankfully, with some thoughtful inquiry into our relationships and assumptions, with a little breathing room by slowing down, and with some healthy reflection, we can manage disruption in a positive way that will lead us toward greater growth and a better future.

What’s Happening in Your Portfolio

Both our growth suite of strategies, and our income portfolios have had a good January, posting nice gains through the close of business January 29, 2021.

The S&P 500 Index** and the Dow Jones Industrial Average** both posted losses in January. Your returns being better than the indexes can be attributed to both Ryan Redfern at Shadowridge and Will at Hepburn Capital putting some of your gains “in the bank” for you as our indicators began telling us to lighten up on stock holdings during the month.

With the recent frothiness in the market and the growing gap between high stock market valuations and weakening economic expectations, Shadowridge’s growth suite of strategies, of which my Future Technologies strategy comprises about 25%, has dialed back its risk and now has less than 50% exposure to the stock market, with the balance in cash or Treasury bond funds.

And that is how we are staying in sync with this market.

If you have a friend who is nervous about their investments, the best thing you could do for them is to suggest they call us for a second opinion on their account. There is no cost for such a consultation, but possibly a whole lot of benefit for most investors. Please pass along our phone number (928) 778-4000, or just forward this newsletter to them with a short note suggesting they call us.

When Will Tax Forms be Available?

Each year about this time, everyone starts looking for 1099s so you can start doing taxes. And since I invest the same way you do, I share your frustration in having to wait and wait for the 1099s to arrive. As in past years, the 1099s are scheduled to be completed and in the mail by February 15^th, but later in February is a more reasonable expectation. Here is why your patience is called for:

Congress and the regulators who implement tax policy have until December 31^st to fiddle with the tax code. So not until January 1st can late changes to regulations be translated into computer code and accounting programs finalized. That takes time to get the details just right.

By mid-January corporations can finally do their accounting, create their tax returns and send relevant information to mutual funds, ETFs, and other entities that own their stock. And that takes more time to get it all right.

Mutual funds have to get dividend and capital gain information from thousands of corporations and reconcile the final corporate accountings with the dividend and capital gain distribution information they used late last year to make taxable distributions for the fund.

Previous year distributions are sometimes recharacterized into another category that can change the tax treatment. That all takes a lot more time, but when the funds have their accounting done, the data can finally be passed along to custodians such as E*Trade Advisor Services and combined into your 1099s.

As you can see, there are a lot of moving parts in the process before E*Trade can even begin. The more that E*Trade or any of the other firms in this chain try to rush the process, the greater the chance that there will be an error or overlooked recharacterization that will cause every entity in the chain to have to issue a corrected 1099, causing you to have to redo your taxes if you try to be an early filer.

Since all custodians are in the same boat waiting for tax information with which to compile 1099s, the more patient you are getting your taxes done, the less chance that you will need to file a corrected 1040 filing.

My advice is to relax, not try to file at the earliest possible moment, and just let the process unfold.

Mental Floss…

From my friend Richard Lederer, Verbivore.com

Have you heard about the nuclear scientist who had too many ions in the fire?
I recently read a book about anti-gravity. I couldn’t put it down.
Nature abhors a vacuum. So does my dog.
Technically Moses was the first to download data from the cloud onto his tablet.
What do you get if you divide the circumference of a jack-o-lantern by its diameter? Pumpkin pi.

Moving Day

The Prescott office will be closed on February 4th and 5th as I box things up for my move to a new office at my home at 969 West Rosser Street, in Prescott. The office building has been sold, and my new home has a wonderful office setup. I think you will enjoy the setting. I expect to be operating normally in the new digs by Monday, February 8th. Please call for an appointment to be sure that I am there when you stop by.

As usual, the Shadowridge Team will be backing me up on moving days, so just call the office at 928-778-4000 if you need anything.

* 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.

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 Shadowridge Asset 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 Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.