July 16, 2013
Investing in Future Technologies
The Investment View from Prescott, Arizona
At the Ft. Worth conference I attended two weeks ago there was a fascinating session on Future Technologies presented by Jim Lee a “professional futurist”.
Jim touched on a half dozen ideas that all exist in some form today and look destined to become big parts of our lives in the future. They include:
1. 3D Printing. Three dimensional printers exist now and can be purchased at suppliers such as Staples if you are an early adopter of new technology. We have had a 3D printing company in our Growth model portfolios in the past, but do not currently own it.
There has recently been controversy over the potential for people to print themselves a gun on such a printer. Gaining less attention is the potential to “print” food by using various amino acids as the ink.
What fascinated me was the idea that by hooking a 3D scanner to a 3D printer you then have a 3D photocopier. And when you scan a 3D image, send it over the Internet to a 3D printer you really have a 3D fax. Beam me up, Scotty! Well, not quite, but I can see that being next.
2. Regenerative Health Care. Stem cell research is allowing scientists to grow many tissues from our own stem cells, bypassing the troublesome issue of rejection of foreign tissue.
3D printing technology has been used to print cells into tissue, such as skin and even liver tissue, although problems delivering blood flow to tissues is limiting the thickness of successful tissue printing at the moment.
3. OLEDs are Organic Light Emitting Diodes, organic substances that emit light when subjected to electric current. OLEDs can be molded into flexible sheets that can be used in digital displays such as telephone screens and computer monitors. OLEDs operate without a backlight and gives superior contrast and lower energy usage than LCD screens.
Some of the newest cell phones from Samsung are sporting OLED screens, so the viability of this technology will be proven over the next few years.
4. Robots have been in increasing use for a generation and are one reason our unemployment rate stays stubbornly high – fewer people are needed to assemble things.
Until recently, most robots have done rote, repetitive tasks in fixed locations – think welding car frames. Now, however, robots are controlled with self contained video and limited thought processes to allow them to decide what to do next, and where to do it. This is a big leap in robotics. Amazon warehouses will soon be full of little robots reading orders, taking goods from shelves and packaging them up.
5. The Internet will expand. It began with people interacting. Email, Facebook and websites where you can look up people or companies and research sites.
We will see steady increases in things talking to things over the Internet. RFIDs are Radio Frequency Identification Devices. They are the little tags that buzz the detector going out of the stores.
Currently they are used to track livestock from pasture to plate. The ear tags cows wear can monitor what they eat, when they are milked, due for slaughter and can identify which beef goes to which retail outlet so the folks who want lean beef can get it.
Car theft is dropping dramatically due to tracking capabilities built into many models.
There are currently 4 billion people worldwide with access to the Internet, but there are 40 billion objects coming on line.
6. Graphene can be described as a one-atom thick layer of the mineral graphite. It is light and when arranged in hexagonal rows is a super strong, super conducting (electricity), anti-bacterial that can be used for everything from water filtering to building integrated circuits that can double Lithium-ion battery life.
The 2010 Nobel Prize in Physics went to two scientists for their groundbreaking research into graphene uses. This is really exciting technology.
As I mentioned, I have already held a few investments in these areas, and I will continue to watch them for inclusion into our growth model when market conditions are conducive to this kind of investing.
I don’t want to rain on anyone’s parade, but many of these emerging technology stocks won’t make it as technologies evolve. They can have very volatile prices and should not be invested in unless one can bear the risk of loss, adequately diversify away the business risk of these emerging technologies and/or hedge market risk. This means these investments will not be suitable for many accounts, especially smaller ones. Sorry.
Hepburn Addresses “Nerd Camp”
The American Mensa Society is a gathering place for high IQ people, and each summer Mensa has its Annual Gathering (AG – everything is acronyms in Mensa talk) hosting around 1,800 folks at one time. I went to the Ft. Worth AG two weeks ago to put on an investment program for the Mensans. What an interesting time it was presenting to a room full of brainiacs.
Actually it went well, with lots and lots of questions and tangential discussions.
Nerd camp, as the AG is sometimes called, offers 10-12 program tracks at any one time, and there were fascinating presentations on the Great Russian Meteor Fall of 2013, Forensic Entomology (CSI insects), Futuristic Technology, debates on everything from what people should learn in high school, gun control, the future of libertarianism and more, game rooms, joke rooms, Richard Lederer on language and on and on for 4 days. The Rocky Horror Picture Show is a cult favorite for younger folks. I skipped that one.
Keeping up with a crowd like that for a few days sure keeps one humble.
Scottsdale Office Date
If you prefer to meet with Will in Scottsdale, he will be there on August 23rd. Please call the office (928 778-4000) to schedule an appointment.
How’s the Market Doing?
The US stock market seems to be driven by statements from the Federal Reserve Board. It was driven down in June by talk of the Fed tightening the financial spigots, and has recovered from the sharp swoon it took over the past couple of months after the dovish comments by Fed Chairman Ben Benrnanke.
The market is currently over-bought and poised for a pull-back of some sort. The relationship of the up-legs of a market move to its down-legs helps us determine the real trend of the market, so this week will be instructive as to the market’s direction. This is a time to pay close attention to the market action.
Foreign stock markets, too, have recovered over the past few weeks, but it is too early to say if all this stock market action is a change from the downtrend in place since January or merely an upward correction in the continuing downtrend. Remember the market never goes in a straight line, but zigs and zags like a staircase as it follows a particular trend.
The sharp bond market decline as interest rates spiked in May and June fueled a massive sell off of bond funds and ETFS. Although the decline seems to have abated a little in the past week, the Barclay’s Total Bond Market Index has not broken out of its downtrend.
Readers of this newsletter know I believe the bond market has turned the corner in a 60 year interest rate cycle, suggesting the beginning of a 30 year period of generally rising interest rates. Rising interest rates are not good for business or kind to the stock market.
With that said, the rate of rise in interest rates in May and June was unsustainable. The interest paid on a 10-Year Treasury Bond rose from a low of 1.66% on May 2nd, to 2.73% on July 3rd. That same rate of change over one year would put interest rates at 27%. Fortunately, financial markets never go in a straight line, so continuing the recent climb forever is not something that will happen. At the moment, we are getting a break in the rate of climb of interest rates.
No one knows precisely what rates will do since Ben Bernanke is working like the Wizard of Oz behind the curtain, madly pulling levers to keep interest rates from getting out of hand. Those folks at the Fed may be the brightest minds in the business, but we are still in uncharted waters, so anything can happen.
The drop in the gold and other precious metals prices has reached historic proportions, which leads me to believe the decline may be near its end. However, just because something has lost a lot of money does not mean it can’t go down a lot more, and the chart patterns that indicate a decline are still clear. This is still a very dangerous time to invest in gold. Buying gold now, because one believes it is approaching a price bottom, is like trying to catch a falling knife. You might end up with something good, but you can also loose a finger or two. High risk stuff.
The VIX fear index that I discussed in my last newsletter has declined steadily over the past week or two, and that is a good sign that investors are settling down again.
There are still several technical indications that are pointing to more stock market trouble this summer, so this is a time for investors to be patient rather than aggressive.
What’s Going On In Your Portfolio?
With the rebound in the stock and bond markets, I have removed the inverse hedges from both our income* and growth* models. While they help us in declining markets they hold us back in rising markets.
As of this writing on Saturday, July 13th, the Flexible Income* model portfolio holds 4 different bond funds and 52% in cash.
The Growth* model portfolio holds retail and chemical stocks along with a health care fund and a diversified growth fund and 59% in cash.
Municipal Income* accounts are 100% in cash.
When you see me holding large cash positions like this it means I am waiting for the market to show its primary trend. Right now that is not clear, so I am being patient and keeping your money out of harm’s way.
The Promise of Life Anew!
Driving out Iron Springs Road through the area ravaged by the earlier Doce fire, we noticed shoots of green poking up through the charred soil and at the base of burned out bushes. Gives one hope!
Another touching moment along the road is the new memorial overlook in Yarnell. The overlook is on the uphill side of the road across from several burned out homes which can distract you and you can miss the memorial. You can park in the Ranch House Restaurant lot.
The site has several billboards memorializing the 19 Granite Mountain Hotshots who perished in that fire, but it is all the more poignant for being in the midst of a burn area, with a burned bush right in front of you, a burned out house to your right and normalcy in the other directions. It is a strange feeling.
The site of the tragedy is marked with a flag and is visible a mile or two across the valley. It is worth visiting. Graciously, tissues are provided at the site.
Donations for the Granite Mountain Hot Shot families are getting national response and rightly so, however the needs of the Yarnell citizens who have lost their homes and businesses are still critical, and they can use some help. Pastor Paul at the Yarnell Presbyterian Church is coordinating some of the relief efforts. We are told by Kay Huckelberry of the Yarnell Hill Recovery Group that the best form of gift is a Visa, Target, or Walmart gift card, mailed to the church at PO Box 484, Yarnell, AZ 85326.
If you need a tax deduction, there is a fund for Yarnell Hill Fire Victims at the National Bank of Arizona. The Wickenberg branch of the bank can be called for wire instructions (928) 684-0177. Checks can be mailed to the bank at 540 W. Wickenberg Way, Wickenberg, AZ 85390 or to the Yarnell Presbyterian Church. Checks should be made out to Yarnell Hill Fire Recovery Group.
100% of all donations go immediately to the Yarnell fire victims.
For life holds cheers as well as tears,
Take this old toast from me:
This world a riddle hard you call …
A mess from which you fain would shrink?
Perhaps ‘tis wisdom, all in all.
To learn to laugh as well as think.
Time for a Review?
It is not my style to call you and bug you about your investments, but I am always happy to go over your accounts with you. In fact it is important that we do reviews periodically so that we can ensure that our investment objectives are still in sync with your life situation. If you have not had a portfolio review for a while and would like one, please call the office at (928) 778-4000 to schedule an appointment, either in person or on the phone.
If you don’t feel the need for a formal review, please remember that it is important for you to call us if your financial situation, goals or sensitivity to risk change.
Our Spotlight Strategy
With our Adaptive Growth Strategy, we strive to provide high total return from a combination of investments from both the equity and income markets with the emphasis on equities.
Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to the strength or weakness of the market, directing exposure in the HCM Long/Short Equity strategy to range from 0% to a maximum of 80% of account value. The balance, 20% to 100% is invested using the HCM Flexible Income strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines in which case stock market exposure is quickly reduced. [Adaptive Growth]
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 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.