September 4, 2018
The Investment View from Prescott, Arizona
Twenty years ago, I got to work with John Mauldin when the late Leonard Nimoy, John and I were asked to collaborate with Avian Rogers on a Y2K book she was writing. John currently writes a newsletter to “1.5 million of his closest friends” and is the most articulate financial analyst I know.
John recently reported on a retreat he attended up in Maine in early August with some other well connected, leading thinkers of the day. He has an extremely negative outlook for our financial markets a few years out, due to the massive, worldwide debt bubble that will have to be dealt with before long. The crowd at the retreat was significantly more optimistic than John expected, however, and their outlooks centered on two issues.
One, they think tax cuts and deregulation will keep our economy growing and keep the subject of a recession at least a year or two out in the future. Yes, corporations all got tax breaks, but most Americans are also taking home more money due to the tax cuts. Strong GDP growth of 4.6%, released after Mauldin’s retreat, validate this growing economy theory.
Second, they aren’t worried about tariffs and trade wars. In fact, a China trade expert (not at all a Trump fan, Mauldin added) had these thoughts:
- The Trump administration will use the recently signed trade agreement with Mexico to extract concessions from Canada, particularly as to how Canadian tariffs are hurting our dairy farmers.
- With NAFTA revisions done, Trump will pivot to China whose stock market is off more than 19% this year as of this writing on August 30th. The massive trade imbalance between the two countries means that China has a lot more to lose than we do in this battle of dueling tariffs, and their economy is beginning to feel the bite.
- Europe has recently signaled their willingness to negotiate tariffs down to zero, a really good thing.
True, Trump has agreed to pay several billion in subsidies to US soybean farmers who have been negatively impacted by Chinese tariffs placed as reprisals for ours. But the soybean subsidy money is being paid from the tariffs on Chinese goods we import, so there is not a net cost to us.
The bottom line analysis of the retreat attendees is that our economic recovery will endure into 2020, so we should all enjoy the good times while we can, before Mauldin’s massive debt repayment/reset issues come into play.
The US stock markets shrugged off rising risks of international trade disputes and ignored seasonal weaknesses that are usually present this time of year and had another good month in August, while foreign markets generally posted losses for the month. China is in a bear market with their main index down over 20% from January highs. This is due to the increasing strength of the dollar on world markets.
The bond market had a good month in August as interest rates eased off a bit from their August 1st peak. Junk bonds were the strongest bond segment, a trend which often precedes stock market strength.
Gold’s multi-month slide has been interrupted by a rise over the past few weeks. Since gold and the dollar usually move opposite to each other, continuing dollar strength will be giving gold a stiff headwind.
Speaking of headwinds, in June I wrote about cracks appearing in the housing markets. This week, there was a report in Systems & Forecasts newsletter by Dr. Marvin Appel presenting a case that housing affordability is at its lowest since 2008 due to rising home costs and higher mortgage rates. This is causing homebuilder stocks to be the worst performing segment of the stock market this year – another sign that all is not clear for the housing industry.
No, I am not saying sell your real estate, but at this point I would not be an aggressive buyer. This market feels toppy, sort of like 2005 did.
Cherry Picking Stocks
Due to the high-risk market environment that will persist into September and perhaps October as of this writing on September 3rd, we are holding almost 30% of Shock Absorber Growth holdings in cash. A few weeks ago, I dropped our protective hedges to keep them from slowing us down in response to the market strength. This has allowed us to keep up with the strong stock markets the past couple of weeks with 30% less risk.
I am looking forward to the time in the next month or two when the seasonal weakness and presidential cycle weakness are behind us and I will put the cash reserves back to work. Right now, risk is too high for me to sleep well being fully invested.
Our stock selection continues to be superior, so I expect us to once again outpace the market when we are fully invested. The way I select stocks is to not mindlessly buy an index fund, but instead I take the all stocks held in an index that interests me, run them through my analysis programs and cherry pick the index, only buying a few of its best performers. l leave those dogs that every index contains to the ordinary advisers and the index fund buyers.
Flexible Income portfolios had a good month in August, with all holdings posting nice gains. We easily outperformed the US Aggregate Bond Index ETF (AGG) during the period.
Municipal income accounts also had another strong month.
- Shock Absorber Growth is our 100% growth portfolio.
- Flexible Income is our 100% income portfolio.
- Adaptive Growth Portfolios are currently allocated with 80% Shock Absorber Growth and 20% Flexible Income.
- Adaptive Balance is 50/50 between growth and income.
What we were saying back then…
In my book, Why Bad Things Happen to Good Investments, I caution investors that big Wall Street firms often seed the news wires with fake news.
Much of this disinformation is designed to get us investors here on Main Street to do one thing so Wall Street can do the opposite without causing large price moves. Big institutions buy and sell in such large amounts that they need a lot of sellers if they want to buy, and a lot of buyers when they want to sell, or prices can get wildly pushed up or down by the institution’s trade.
In the August 31st issue of AdvisorHub, I noted an article with a headline that says “ . . . Growth Stocks Face Rolling Bear Market”.
Upon reading the article, there were no facts presented beyond the strength of growth stocks recently compared to other stocks, primarily value stocks. That is hardly news and suggests absolutely nothing of substance.
This is the kind of article designed to nudge a few financial advisors into suggesting to their clients that they sell growth stocks.
This kind of article validates my expectation for a strong 4th quarter of 2018, led by growth stocks.
The recent tax reform is likely to lead more taxpayers to use the standard deduction instead of itemizing, eliminating many charitable deductions in the process. However, making your donations from your tax-sheltered retirement accounts (401ks, IRA, etc.) can allow you to make contributions with untaxed dollars, with the same effect as deducting them.
To do this, consider making your charitable contributions directly from your IRA, with a QCD, Qualified Charitable Distribution. You have to be 70½ to qualify, but QCDs count toward your Required Minimum Distribution, so if you are taking RMDs, why not create an added benefit for yourself while you do so. You will get a Form 1099 at tax time, but can just record the amount as a non-taxable QCD.
QCDs cannot be distributed to you first. The donation must go directly from the custodian to the charity. Talk to your tax adviser about the benefits of a QCD.
College Classes Coming
- Tax Tips for Arizona Newcomers
Tell your new friends that they can discover valuable tax savings from details about Arizona taxation that may differ from states in which they have lived in the past. Tax deductions, tax credits, investment and estate planning considerations unique to Arizona will all be discussed. Thursday, Sept 27th from 2:00-4:00 pm at Yavapai College. Register online with the link below or call the college at 717-7755 to register for class #FA18-129. Tuition is $45. Click here to register online.
- Why Bad Things Happen to Good Investments
If you are not a reader, this new class is the Cliff’s Notes version of my new book, all in 2 hours on Thursday, October 4th at 2:00. Register online with the link below or call 717-7755 for class #FA18-132, Tuition is $45. Click here to register online.
I am having a lot of fun speaking on my new book, Why Bad Things Happen to Good Investments. I recently addressed the Prescott Noon Lions Club and have engagements lined up at the Peregrine Book Company, The Senior Connection and The Phoenix Mensa Group, with more inquiries coming in each week.
I also do programs on “The Top 10 Investment Scams and How to Avoid Them.” For a number of years, I did presentations to both local and national groups on “Investing in Future Technologies,” but I have retired that one because it is so doggoned hard to keep my program up with the pace of change in the technology around us.
If your organization ever needs a speaker, please have your program coordinator call the office at 928-778-4000 to schedule a time when I can present one of these programs to your group.
With our Shock Absorber Growth portfolio, we strive to provide an acceptable rate of capital appreciation while experiencing one half of the risk of the S&P 500** Stock Index*, using primarily equity investments.
Your money will be invested primarily in stocks and commodities mutual funds and ETFs, both foreign and domestic, inverse and leveraged, and a money market fund. The proprietary HCM Safety Net indicator is designed to warn of potentially sudden declines in which case stock market exposure may be quickly reduced.
Click here to read more about Shock Absorber Growth.
Utah Highway 12
Southern Utah has to be one of the best kept secrets in the entire country. And Highway 12 consistently ranks in our top 10 scenic highways. This excerpt from TravelAndLeisure.com sums it up pretty well.
“The red rock majesty of Utah is on triumphant display on State Route 12 winding between Capitol Reef and Bryce Canyon national parks. The 124-mile strip has funky small towns and very few entry points, so it takes a map and determination to witness the steep sandstone canyons and bluffs of purple sage, and to tackle the narrow cliff-hanging ridgeline road called The Hogback.”
I drove this road last month, and I can tell you that every corner and hilltop presents a different and spectacular landscape as you wind through Bryce, Escalante, Grand Staircase and Capitol Reef. Put this one on your bucket list, but park the RV first and drive this road in your car.
It is incredibly spectacular!
* 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 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) 2018 William T. Hepburn. All rights reserved.