January 29, 2013
Is There a Worm in Apple?
The Investment View from Prescott, Arizona
I don’t short individual stocks (a technique to make money as a stock goes down) in my practice, but a few weeks ago I made a comment to the office staff that it sure looked like a good time to short Apple, despite it already being down 25% from its $702 high price posted in September.
Well respected Doubleline fund manager Jeff Gundlach had said “Apple is over-owned” meaning there are a lot more potential sellers than buyers left, a bad thing for a stock’s price. Pimco’s Mohamed El-Erian commented more diplomatically about Apple’s “uncertain product cycle”, casting doubt about whether they will be able to keep hitting innovative home runs without Steve Jobs’ genius driving the company.
I don’t follow financial news all that closely, preferring to focus on just the price movement and the charts they generate, so I did not know of those comments until I began writing today. My remark back then was based on a clear breakdown of Apple’s price chart. My first analysis showed a decline to around $350 as a possibility. The price was $520 then and it is $439 today and this is despite good earnings reports just released.
Remember, stocks are not priced on what happened last quarter or last year which is the basis for those earnings reports and price-to-earnings ratios that investors like to use. Stocks are priced upon whether the holders think the price will go up or down in the future.
The wave of selling currently underway shows that many owners of Apple stock, including a lot of fund managers, think the growth phase of Apple’s rise is over. If owners of Apple stock are lucky it will enter a long protracted sideways “consolidation” such as Wal-Mart and Microsoft experienced in the early 2000s.
Apple might emerge as a dividend paying blue-chip stock, or it may become just another tech company that gets eclipsed by some whiz-kids in a garage or dorm room. But I think that those who wait for Apple to get back to $700 again will be waiting a looooong time.
A Slice of Life
I had fun last week doing a talk on the Top 10 Investment Scams Affecting Retirees and How to Avoid Getting Taken By Them to about 25 members of Debbie Stewart’s Senior Connection resource service. This talk has turned into one of my favorites.
Debbie is one of Prescott’s tireless workers, doing grant writing, planned giving and marketing workshops to non-profits in the region. Her Senior Connection program is a resource for retirees and care-givers to discover the various agencies and service providers available to them. The Senior Connection offers regular programs geared to retirees, including a newsletter and speakers bureau.
Check out the website at www.SeniorConnection.us
And if you have a group that could use a speaker, tell your program chairman about my Top 10 Scams talk. It has been very popular, there is no sales pitch, and I can do it on short notice if your group finds itself in need. Call the office at 778-4000 to schedule a date.
How’s the Market Doing?
A Goldilocks Market?
The stock market is settling into a pretty respectable uptrend. Market volatility has dropped to lows not seen since 2006, and the stock market is acting nice as it rides a rising tide of newly printed money. Enjoy it while it lasts.
The Democrats and Republicans have put off arguing about the public debt for a few more months which should contribute to the relative peace and quiet after last year’s elections. A quote on the Internet caught my eye recently: “Witnessing the republicans and the democrats bicker over the U.S. debt is like watching two drunks argue over a bar bill on the Titanic”. That sums up my feelings pretty well.
Two of the Fed’s remaining major concerns, the housing industry and job growth, have made notable progress over the past few months which may be contributing to the smooth market we are seeing. That, and a continuing flood of newly printed money from Washington.
It is hard to see what will go wrong with our current circumstances. It feels like a scene from Goldilocks, “Not too hot, and not too cold. Just right.” But I have a general sense of unease about the problems that can be created by unlimited money printing, a slower economy and constantly increasing public debt. I just don’t know how the world can get back to normal without some huge paybacks. 
It has been many years since the Federal Reserve “took the punchbowl away from the party”, meaning turned down the financial spigots, but I remember those times as definitely painful for the average investor. Belt tightening measures will be imposed at some point and normally both stocks and bonds retreat when that happens.
History shows that we have “generational” bull and bear markets. Generational bulls contain a few, usually mild individual bear markets, defined as a 20% decline. Generational bears, on the other hand, present numerous, often severe, individual bear markets. Losses greater than 50% that the stock indexes posted in 2000-03 and 2007-09 clearly tell us that we are experiencing a generational bear market.
Some analysts call these long down periods “secular” bear markets. I call them generational bears, not because a full cycle lasts 30 years or more, but that generational bear markets wipe out or completely discourage a whole generation of folks that never invest again.
This pattern is not new. It goes back over 200 years and has presented 7 distinct generational cycles over that time. So, we can learn from this bit of history, or we can ignore it at our peril.
This generational market cycle suggests that we will have more individual bear markets coming in the near future. The 3 generational bear markets of the 20th century produced 4, 5 and 6 individual bear markets respectively. As bad as things seem, we have had only two bear markets since 2000. This suggests that we are likely to have more bear markets before we get back to good times like we had in the 1980s and ‘90s.
I’m guessing that austerity measures needed to bring the national debt under control will be the catalyst for the next bear market, and an improving economy brings that possibility closer and closer.
The central bankers of the world have been very creative in keeping our economic boat afloat during 5 years of financial crisis, but we are in uncharted waters. This means they have not yet run the economy onto a reef and if we are fortunate, they may not for a while. We really don’t know what the limits of their creativity are. But there may also be icebergs floating out there, too. We just don’t know.
For now, just enjoy the prosperity, but continue to manage the risks that are still out there by being willing to sell and move to cash or investments that act differently than the stock market.
Mental Floss
Q: What occurs once in a minute, twice in a moment and never in one thousand years?
A: The letter M
What’s Going On In Your Portfolio?
The Flexible Income* strategy has held a great combination of investments recently with all holdings contributing to the gains in these accounts. Even our municipal bond* holdings which had a rough month in December have recently produced nice gains as of this writing on January 25th.
The Vanguard Total Bond Market Index fund which we use to gage the health of the overall bond market has declined .44% over the past six months, while Flexible Income* accounts have made fairly steady gains over this same period. We had a rough year from mid 2011 until mid 2012, but financial life is good once again for Flexible Income* account holders.
One of the leading groups in Flexible Income* accounts has been our high yield investments. High quality investments, including government bonds, are what is pulling the bond indexes down. High yields, sometimes referred to as junk, have a lousy nickname, but as you can see make great investments when held at the right times.
When high yield bonds rally, it usually means the economy is expected to be good and default rates on the lower credit rated companies that issue junk bonds are expected to be minor. This environment is often fertile ground for stocks, too.
Our growth strategy*, which we changed to be more in sync with the markets in mid 2012, has begun to produce stock-market-like gains with a fraction of the risk. Current holdings include homebuilder, real estate, and energy stocks and funds plus two diversified growth funds with a small (10%) hedge still being held as a portfolio shock absorber.
There are still four more trading days to go in January, but accounts that follow our Growth model* look like they will also post a nice gain in January.
And of course our blended strategies, Adaptive Balance* (currently a 50/50 mix of Flexible Income* and Growth*) and Adaptive Growth* (currently 80% growth and 20% Flexible Income*) are doing well as both Growth* and Flexible Income* models are showing gains.
I get frequent questions about gold so let me tell you why we don’t own any at the moment. Gold’s decline may have stopped temporarily, but it really is not in an uptrend, either, which is one of my main criteria for buying. Gold is still in the trading range that has contained it for the past year and a half. As attractive as the radio ads make it sound, gold has declined and been going down since it peaked in August 2011. Until gold begins to mount a serious rally, I will be a watcher, not a buyer.
Scottsdale Office Date
If it works better for you to meet with Will in the Valley, please call 928-778-4000 to set up an appointment.
Online Account Access
Our primary custodian, National Financial Services, offers 24-hour online access to your account, plus features like earlier account statements, electronic statements rather than paper ones, complete account history and more through its MyStreetscape.com website.
If you haven’t requested online access, contact the office at 778-4000 and we will get you the access codes you will need to get started.
Just Let Me Know
As a client of mine you may know me as an investment manager, but I have years of related experiences to draw upon. Just let me know if there is anything else I can help you with. Membership has its privileges, you know. The only thing I ask in return is that if you have any friends that could use my services please think of me. I’ll treat them just the way I have treated you. That is the way I do business.
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.
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 the S&P 500 Index.
Traditional Income
Flexible Income
Adaptive Balance
Adaptive Growth
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.
