February 11, 2014
Of Tapering and Cannonballs
The Investment View from Prescott, Arizona
The world economy has been held afloat for the past two years on a sea of money created during the Federal Reserve Board’s Quantitative Easing programs called QE I, QE II, Operation Twist and the current version, called QE Infinity by those of us in the business.
The extra money effectively replaces all that cash getting sucked into the black hole of debt service as people around the world frantically pay down excessive debt. When most of the world’s money is going to pay off loans that provided cash for cars, houses, vacations or technology in the past, there is little left to buy cars, houses, vacations or technology today and commerce grinds to a halt.
Make no mistake. Despite what some say about the evils of big business, commerce is the goose that lays the golden egg – producing jobs, affordable goods and our good standard of living.
With good reason, investors are concerned about what will happen when the Fed turns off the economic stimulus spigot. When QE I and QE II were completed, they went right from full speed to zero, and the shock was sharply negative. Financial markets suffered great losses.
It appears that the Fed has learned from their earlier mistakes and is only tapering off the current stimulus program, not stopping it completely like they last did in the summer of 2011. That particular toe-stubber by the Fed caused the stock market to drop 16% in about two weeks.
The current tapering means the monthly increase in the money supply is reduced, first to $75 billion and now to $65 billion per month rather than $85 billion as it had been all of last year. $65 billion per month is still a lot of new money being added to the economy.
If the economy can grow a bit and replace this $20 billion stimulus reduction then we won’t feel a thing. At least that is the theory. The Fed has announced that they will continue the tapering with another reduction and another until there is no more new money being added to the economy. I expect that process to take many months.
Another reason that I don’t expect the tapering effect to be jarring like it was in 2011, is that other world banks, primarily in Japan and Europe, are also priming the economic pumps with new money. Since money in one country can easily flow elsewhere, their money stimulates our economy, too.
With all the central banks in stimulus mode, it is less likely that actions by the Fed, the US central bank, will tip the scales by themselves.
So the end of this stimulus program should not be as scary as it was the last few times around.
Something to keep an eye on are the actions of Janet Yellen, the newly appointed replacement for Ben Bernanke as Chairman of our Federal Reserve Bank.
Fed Chairman Arthur Burns killed the Nifty 50 bubble in the 1970s. Paul Volker threw the country into two huge back-to-back recessions trying to break the inflation cycle when he became Chairman in 1979. Alan Greenspan took office in 1987 and shortly after brought us the Black Monday stock market crash, a 23% drop in the Dow Jones Industrial Average in only one day. And Ben Bernanke killed the real estate market after taking over the Fed in 2005.
The word from Wall Street is that Janet Yellen will not be changing much as she takes over the Fed, but that may be just spin. New Fed chairmen have a history of making big waves in the financial markets as they cannonball into the pool. It will be interesting to see what Janet Yellen becomes noted for as history is written.
You can be assured I will be watching for signs of change.
A New Teen Center for Prescott
I recently had the pleasure of meeting a powerful young woman named Courtney Osterfelt. Courtney is a very effective mover and shaker whose latest project is a much needed teen center in Prescott called The Launch Pad. I believe Courtney has the vision, experience and dedication to pull this feat off.
In addition to being a supervised place for Quad City teens to hang out without getting into trouble, the idea is to provide tutoring, games, dances, music and other entertainment for our local teens. Having had a teen just a few years ago, I can attest to how important after school activities are for kids. Idle hands are a devil’s workshop and all that.
One local girl made a video of kids expressing their thoughts about a new teen center. Check it out at www.youtube.com/watch?v=H4BNhYrjHUA&feature=youtu.be
If you would like to help launch the Launch Pad, consider stopping by their fundraiser February 15th, from 6:00 p.m. to 10:00 p.m. at ‘Tis Gallery, 105 S. Cortez St. There will be a presentation at 7:15.
This event is by invitation only, so please call the office to reserve a space if you would like to attend. There is no charge for admission, but donations are being sought. If you can’t attend, but would like to help this worthy project, please send your check to “Boys to Men” with “Launch Pad” in the memo area and mail to Courtney Osterfelt, 1660 City View Trail, Prescott, AZ 86303.
Launch Pad, for both boys and girls, is getting off the ground under the auspices of Boys to Men, Arizona, a non-profit, non-sectarian program that guides boys ages 13-17 through crucial teen years.
Our tech manager Laurel Fitzhugh would like me to mention that her daughter Victoria has published a small e-book for fundraising. Please see it at http://bit.ly/1eNZEWT. All proceeds will benefit the Prescott Arizona’s Teen Center.
College Classes Coming – Annuities: The Good, the Bad and the Ugly
My next class at Yavapai College is called “Annuities: The Good, the Bad and the Ugly”.
This 2-hour class is designed to provide a more balanced look at annuities than is available at the free-lunch sales seminars. Nothing will be sold at this class, but you do have to bring your own food.
The date is Thursday, February 27th from 1:00 to 3:00 p.m. at Yavapai College. To register for course # WS14-146 call the College at 717-7755. Tuition is $45, payable to Yavapai College.
“Worrying does not take away tomorrow’s troubles; it takes away today’s peace.”
How’s the Market Doing?
What a difference a few days can make!
Right after my last newsletter was published, the stock market rolled over and entered the sharpest correction in over a year with the Dow Jones Index** of 30 Industrials losing over 7% through the middle of last week (this is written on February 9th).
Emerging markets were down much more with China losing over 15% from recent highs, and markets in a few other countries were down even more.
Could the U.S. and European markets that had led the world on the upside last year now play catch-up to the serious corrections, even bear markets, elsewhere? It is possible. Some of my research suggests a serious correction of bear market proportions during this 2nd year of the Four-Year Presidential Cycle, which is normally the weakest of the 4 years.
The biggest reason for expecting a serious correction to arrive later rather than sooner is that even though The Fed is providing less stimulus each month, it will still be injecting a substantial amount of new money into the economy until late spring. And the markets normally see strength into April or May, too.
However, rather than reacting to current events, the stock markets more often look ahead and may be reacting in anticipation of 2nd and 3rd quarter weakness to come, perhaps due to the end of Fed stimulus programs.
Last year’s laggards, government bonds, soared in January as interest rates dropped.
Even gold is showing signs of life as the commodity markets in general are trying to turn around after several years of decline.
Everything seems to be in flux with trends possibly changing in many major markets. The nature of the bounce from the recent stock market dip will tell us a lot about what to expect as it unfolds over the next few weeks.
IRS Form W-9 Coming for Your IRA
As required by new tax regulations, National Financial Services (NFS) will mail letters to retirement account owners on February 28, 2014, asking that they return a W-9 to NFS.
W-9 forms are very simple forms that confirm your name and tax ID for the IRS.
You should complete the W-9 that will be enclosed, providing your name and Taxpayer Identification Number to avoid mandatory 10% tax withholding on any future distributions from your IRA should a W-9 not be provided.
What’s Going On In Your Portfolio?
The Flexible Income* model, that had not seen any trading during the 4th quarter, has seen several changes over the past month. My move into a couple of high dividend paying stocks was ill-timed as the stock market turned down sharply just days after buying them, so they were quickly culled from the portfolio when they showed losses.
With Government bonds being the strongest segment of the bond market we now have allocated a portion of the portfolio to them, along with high yield and adjustable rate and diversified bond funds.
Our Shock Absorber Growth* portfolios quickly shed the bank stocks that were strong last fall, but weakest in late January. That cash was put into a “shock absorber” hedge, an inverse fund that goes up as its market goes down, offsetting price swings in our remaining holdings. This move kept our portfolio fluctuations very small compared to the major indexes.
Municipal bonds* funds continue to do well and our municipal model is fully invested.
Scottsdale Office Date
Will is available to meet you in Scottsdale, if that is more convenient, for an account review. Please call the office to make an appointment. (928) 778-4000
Our Spotlight Strategy
With our Flexible Income Strategy we strive to provide high total return consistent with Capital Preservation.
Your money will be invested in bond or currency funds, including precious metals that may be used as currencies and equity-income investments whose price trend is up. If the price cycles down, holdings are replaced with new investments that are going up. Repeat as needed. Growth stocks are not used.
We only send to people who have personally requested a subscription through contact with staff, or who opted-in at our website, http://www.HepburnCapital.com. Please call us at 928-778-4000 if you have any questions.
Our mailing address is:
2069 Willow Creek Road, Suite A
Prescott, AZ 86301
* 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.
** Market Indexes are unmanaged lists of stocks considered representative of a broad segment of the 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.
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 Changing 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. Securities, including mutual fund shares 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, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2014 William T. Hepburn. All rights reserved.