July 2, 2019

Intentionally Fake News or Just Bad Guesses?

I frequently rail against misleading financial news, and don’t get me started on what I think about most political news. News doesn’t have to be intentionally fake to be damaging to your financial well-being. A good example is this Wall Street Journal piece (6/10/2019, Pg. B-1, By Avantika Chilkoti and Daniel Kruger) forwarded from friend John Randall, who highlights noteworthy news items of the day.

All 50 Economists in Survey Missed Predicting Current Low Bond Yields.

‘Yield Dive Catches Forecasters Off Guard’

“The [rapid and unexpected] drop in 10-year Treasury yields… [to] 2.085%, down from 3.23% in… November… biggest… decline since 2012…Few analysts anticipated the rush into government debt. In October, when yields on the 10-year Treasury were near their peak of around 3.2%, none of the more than 50 respondents in The Wall Street Journal’s monthly survey of economists predicted yields would fall below 2.75% by June 2019. The average forecast was 3.39%… JPMorgan Chase [and other banks recently] revised… year-end prediction for the 10-year Treasury yield to 1.75% from 2.9%…

“Investors holding bonds before yields plunged have made money because bond prices rise when yields fall.”

Note from Will: I just can’t stress enough why you should not invest based upon news stories, even from the much-respected Wall Street Journal, especially opinion or forecast type articles. No one knows the future. No one! Especially economists and journalists.

Only invest upon what the prices are telling you right now. Prices don’t lie, and they don’t make mistakes 50 out of 50 times like this group of experts did.

I’m sure they all meant well, but . . . 50 experts out of 50 wrong! Egad! The Wall Street Journal needs to get a new crowd to survey.

What the Markets Are Doing

I have been impressed by the number of friends and clients who want to move out of the stock market because of trade jitters, political jitters, market falling jitters or ______ (insert your favorite jitters here). My standard response is: “Don’t sell on rumors or feelings, sell only on facts.”

Right now, we are beginning the seventh month of a bull market and a bear market has never begun with unemployment, interest rates and energy prices so very low. All recessions are triggered by spikes in one of those three indicators, so I would say that a recession is not in our future for the next year at least.

The fact is that in the last 18 months the S&P 500 Index**, considered representative of the US stock market, has had six declines of between 6% and 20%, and each of them seemed pretty scary when they were happening. But this number of fluctuations over 18 months is entirely normal looking at stock market history, even in bull markets.

As you can see from its chart, the S&P 500** has come up against and retreated from overhead “resistance” 3 times, and is currently making it’s 4th run at a breakout. My experience tells me that the more times a price attempts to break out, the more likely it is to succeed. So, my advice is to keep the faith and only sell stocks if the price breaks downwards from these prices. (Note: As of my final edit on the morning of July 1st, the S&P 500** has indeed broken out to the upside as I thought was likely. ~WH)

The end of June and early July are what some call the Summer Rally Zone, often a time of strong performance. This doesn’t ensure that gains will be made every year during this time, but that the probabilities are in an investor’s favor right now.

When rail, trucking and shipping companies are busy, that means factories and retailers are creating demand. When goods stop flowing, economies stop growing. This is why analysts watch shipping and transportation indexes.

Reports I am seeing show that freight volumes moved by truck are, so far, holding their own, and railroads are holding up better than many have feared. Remember comparisons to 2018 are skewed because last year was one of the best years economically in a dozen years. This past week the Dow Jones 20 Transportation stock index has broken above a significant indicator level (200 Day Moving Average for the technically minded) and that is a good sign.

Automotive stocks are struggling, and will continue to do so as people are driving cars much longer before trading up. Compounding the financial woes of auto companies is that so many are throwing huge sums of money into research on electric vehicles (EV), according to Dent research. Volkswagen pledges to invest $90 billion over 10 years. To put that amount in perspective, it is about 7 times VW’s annual profits.

This financial craziness is not being driven by consumer demand, but by government regulations mandating average mileage guidelines across a company’s offerings. I don’t think this will end well for auto companies or those who own their stocks.

Gold finally broke out of the sideways trend it has had for the last few years, making gold bugs happy. War jitters with Iran seem to be the cause, but I’m not sure that is a permanent situation, so it will be interesting to see what gold does going forward.

Bonds continue their bear market rally as yields on 10-Year Treasuries are at 2.00% as of this writing on June 29th, down from 3.16% in the past 9 months. A generational bear market like bonds are now in is expected to last 20-30 years! During that time there will be years that one can make money if they are willing to trade into and then out of bonds. This is one of those times. Bond investors will find that for every good year for bonds there will likely be two bad years, robbing long-term bond holders of earlier gains. My suggestion is to trade bond cycles, don’t try to hold them for the long term.

What We Were Saying Back Then…

An Update on Bitcoin

I have frequently questioned investing in Bitcoin and other cryptocurrencies because I can’t see the real value beyond pure speculation.

On June 19th, Bloomberg News reported how a government task force will recommend that all nations implement regulations modeled after our Patriot Act’s Know Your Customer rule to prevent money laundering and terrorist financing. You know when you have to show a driver’s license every time you open an account or stay at a hotel so they know you aren’t a terrorist? That is the Know Your Customer rule in action.

Bitcoin and its fellow cryptocurrencies have enjoyed much of their popularity because their anonymity offers a way to skirt the government oversight exercised over traditional financial systems. Well, get ready to kiss much of that anonymity goodbye.

The new rules will apply to businesses working with tokens and cryptocurrencies, such as exchanges, custodians and crypto hedge funds. These rules appear to be the biggest threat to crypto since their inception.

Compliance with the new rules will be costly and technically difficult as exchanges currently have no way of knowing who the recipient of the funds is. Many cryptocurrency buyers will flee the market as intrusive new regulations are imposed.

The end result could be that many crypto businesses will face increased compliance costs and some businesses will be forced to shut down completely because their business model cannot bear these new costs.

Of course, once the government knows who is trading in Bitcoin, will the tax man be far behind? I think not. Lots of Whammies coming for the cryptocurrency industry. My advice is to just watch for a while.

What’s Happening in Your Portfolio

The stock market rebounded sharply in June after its May decline, and all of HCM strategies rebounded, also.

Our new Ultra Focus* strategy now makes up 20% of our Shock Absorber Growth* suite of strategies. Ultra Focus* chooses from among the strongest of 1,005 stocks making new 52-week high prices this past week and is an exciting new strategy to be added to our strategic diversification.

The balance of Shock Absorber Growth* includes Future Technologies* at 40%, Targeted Growth* 35% and Gold 5%, although that portion was moved to cash after a nice double-digit gain in gold the past few weeks.

If you would like to see how these strategies work, call the office at 928.778.4000 for an appointment to discuss how they could be put to work for you.

Flexible Income* had a nice month racking up small, steady gains as we expect an income strategy to do. Flex Income* holds two real estate income stocks, a preferred stock fund, Treasury and bond index funds, plus a couple of very low volatility income funds.

Our Municipal Income* fund remains in its very low volatility uptrend.

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.

A Peek into the Future — 6 ways Social Security will change in 2020

This interesting article by Mary Beth Franklin appeared in a June issue of InvestmentNews.

6 ways Social Security will change in 2020

Over the past 10 years, the U.S. population age 65 and over has increased 34% to more than 50 million people. As the enormous baby boomer generation continues to march toward retirement at the rate of 10,000 people a day, they are straining the resources of Social Security. Here are six ways that the nation’s primary retirement income program will change in 2020.

1. Dipping into the trust fund

Beginning in 2020, Social Security will begin paying out more in benefits than it receives in revenue for the first time since the Social Security trust funds were established in 1983, according to the latest Social Security and Medicare Trustees report. Unless Congress acts, the current $2.8 trillion in excess trust fund revenue accumulated over the past 35 years will be exhausted by 2034, leaving Social Security able to pay only 77% of promised benefits from ongoing FICA taxes.

2. Smaller COLA

Due to persistent low inflation, the annual Social Security cost-of-living adjustment for 2020 is expected to be about 1.8% — a full percentage point below this year’s COLA of 2.8%. The official COLA announcement, which will measure the increase in the Consumer Price Index during the third quarter of 2019 over the third quarter of the previous year, will be unveiled in October. But with an average COLA of just 1.4% over the past decade, Social Security benefits have lost one-third of their buying power since 2000 as many of the goods and services purchased by typical retirees, including housing costs and health care, have increased several times faster than Social Security COLAs during that period.

3. More benefits will be taxed

Even with a meager COLA in 2020, higher benefits mean more retirees will be subject to income taxes on at least a portion of their Social Security benefits. When taxes on Social Security benefits were first imposed in 1983, the tax affected only about 10% of senior households, according to an analysis by The Senior Citizens League. Last year, nearly half of older household paid taxes on a portion of their Social Security benefits. Social Security benefits are taxable once combined income exceeds $25,000 for individuals and $34,000 for married couples — thresholds that have never been indexed for inflation.

4. Full retirement age increases

The same legislation that permitted taxation of Social Security benefits also instituted a gradual increase in the full retirement age from 65 to 67. People who turn 62 in 2020 will still be eligible to claim reduced Social Security benefits, but they will have to wait until they’re 66 and 8 months to claim their full retirement age benefit amount. For those born in 1960 or later, the full retirement age increases to 67.

5. End of file-and-suspend bonus

In 2015, Congress made two major changes to Social Security claiming strategies, one of which involved the “file-and-suspend” bonus. People who reached full retirement age after April 29, 2016, were no longer allowed to “file and suspend” their benefits, triggering payments for eligible family members while their own benefits continued to grow by 8% per year up to age 70. The last batch of people who filed and suspended by that April 29, 2016, deadline will turn 70, the age at which their Social Security benefits automatically begin, in 2020.

6. Spousal benefit strategy disappears

The second change that Congress implemented in 2015 prevents people who reach full retirement age in 2020 or later from filing a restricted claim for spousal benefits. However, people who were born in 1953 or earlier can still use this strategy, which allows them to claim half of their spouse’s or ex-spouse’s full retirement age benefit amount while their own benefits continue to earn delayed retirement credits up until age 70. At that point, they can switch to their own maximum retirement benefit.

Mental Floss

First rule of cleaning while listening to music:

The toilet brush is never the microphone… NEVER!

Our Spotlight Strategy – Shock Absorber Growth

With our Shock Absorber Growth Strategy 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.

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A Slice of Life — One Less Irritation in Life

I discovered an easy way to get rid of one of my chronic irritations in life. If you are like me, you probably hate having new shoes get scuffed almost immediately by rubbing against the wall in your car’s footwell. I can’t count the number of new shoes that have ended up frustrating me so!

A few months ago, I tried spraying Scotchgard on a pair of new shoes and now, 4 months later, they still look just like new. Gina says shoes are like jewelry for her feet, so she is certainly on board with my idea to keep shoes looking sharp.

Check it out. A simple, low-cost way to keep your shoes looking new!

* 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.