September 3, 2019
Over-Hyping a Possible Recession
The financial media is fretting about an interest rate phenomenon called a “yield curve inversion” in the United States that Bloomberg first reported on December 3, 2018, saying that it means that a recession is imminent. If one happens, it’ll be the most well-announced recession in history. It is true that recessions have often followed yield curve inversions 3-12 months later, but every investor has had ample warning and time to prepare for this one – if it happens at all.
History tells us that when financial market events are widely expected they rarely happen. In a small boat, if everyone moves to the same side to avoid a wave from one direction the boat will flip in the other direction. The markets are like that, too.
Could this time be different? With so many investors moving out of the market due to predictions of doom, the opposite may well happen. Also, right now, several things differ from any other pre-recession environment:
As DoubleLine Fund’s Jeffery Gundlach says, “there has never been a recession in the post-war era without Leading Economic Indicators (LEI) first going negative.” As of July 2019, the Conference Board’s latest Index of Leading Economic Indicators (data through July 2019) is at an all-time high, telling us to expect an economic expansion, not a recession.
Money, measured by the interest you pay to borrow it, is still cheap as is oil, and in the last 75 years recessions have always been preceded by spikes in interest rates or the cost of energy, or both, and so far we have neither.
This interest rate inversion is also different from ones in the past that led to recession. Previous interest rate changes were driven by market forces. This yield curve inversion has been manufactured by the Federal Reserve and other central banks. Since it began differently, I believe it will end differently, too.
It is true that in Europe and parts of Asia, manufacturing and industry is already in recession according to Martin Pring of Systems and Forecasts.
Strong private consumption is sustaining the economic expansion in the US, according to Nouriel Roubini. Keep in mind that consumer spending is about 60% of the economy, and that is a factor that is not likely to change until unemployment rises significantly, which it hasn’t. The Consumer Confidence Index remains near all-time highs, as well, so I have no doubt the US economy remains strong.
I have a real problem thinking that our economy is going to collapse based upon current data. The real problem is the fear generated by election politics and a media that fans the flames of fear. Elections often hinge on the state of the economy, and media bias could be a factor behind this drumbeat of recession we are hearing. Here is a good example from the AP published on August 18th:
“WASHINGTON — A number of U.S. business economists appear sufficiently concerned about the risks of some of President Donald Trump’s economic policies that they expect a recession in the U.S. by the end of 2021.
Thirty-four percent of economists surveyed by the National Association for Business Economics, in a report being released Monday, said they believe a slowing economy will tip into recession in 2021.”
It makes me wonder why they don’t say, “66% of economists don’t predict a recession”. To me that is the more important message.
Shrewd investors should filter all the news they take in for this type of bias. Critical thinking is more valuable than ever these days. If you are tired of being whipped back and forth by news articles that only confuse, call my office for an appointment (928-778-4000). I have systems to reduce the misinformation and point me toward investments that Adapt to Changing Markets®, my own trademarked term.
What the Markets Are Doing
The Big One is Coming, but When?
Despite all the trade war headlines, Brexit jitters and talk of impending recession, the stock market is doing just fine. A 6.83% decline in May, followed by a recovery to new highs in July leading to a 5.99% decline in early August are market movements that merely provide texture in the market’s zigging and zagging along, and are certainly not something to freak out about.
Trade wars and inverted yield curves are no longer new, so should not have much negative impact on the markets going forward.
Certainly, there is the potential for a recession or even a deflationary spiral in our future. There always is. However, as William Peter Hamilton, the fourth editor of The Wall Street Journal, said, “Wall Street’s graveyards are filled with men who were right too soon.” Fearful investors who have sold stocks to buy bonds this summer may be digging their own grave.
Investment returns from around the world have been unimpressive lately. Over the past one year, ending August 30, 2019, developed international markets are all showing losses, with China leading the way down with a -5.54% based upon closing prices, without dividends. The 30-stock Dow Jones Industrial average has been the strongest major index with a 1.60% gain, and the S&P 500 Index considered representative of the US stock market has gained just a fraction at .87%. (Data from Fasttrack)
I feel that there are enough investors sitting on the sidelines in cash, that when we shake off the current blahs, this market could really take off. All that cash is like rocket fuel just waiting for a spark, so being bearish here seems to carry more risk than being bullish.
The bond markets carry much more risk than normal right now. After this year’s surprising drop in interest rates, bond prices are outrageously high, yet banks are still buying our Treasury bonds. It makes me wonder if buy-low-and-sell-high is no longer in effect. Of course we know it is, but do bond buyers?
Banks and insurance companies are struggling as their profit margins, based upon what interest rate they can borrow at (from you), and what they can reinvest at (in bonds), get squeezed.
John Mauldin reports that globally about $17 trillion in government and corporate debt is now trading at negative yields. These low rates are putting enormous pressure on banks around the world. They are forced to buy US Treasuries because that is the only place they can find any profit margin at all.
I worry that when US yields get low enough that no one wants our bonds either, that the investing world will realize that the emperor has no clothes. This is uncharted territory for investors.
I have said here in the newsletter countless times, do not invest on the news, invest on the facts. Personally, I make 90% of my decisions based upon what my spreadsheets and charts, all based upon facts, tell me is actually happening.
I don’t know exactly what will happen in the markets next year or in 2021, but I have confidence that my systems of studying the markets will allow me to recognize change before you read about it in the newspaper.
Gold is up 18% YTD, and almost all of that gain has come in the past 3 months after essentially making no gain over the previous 5 years. Inflation is ticking up oh-so slightly, and gold may be telling us that it is here to stay, but it is too soon to know for sure.
There may come a time to use hedges, gold and cash as the best places to invest, but that time is not here yet. If you want a professional to invest for you when the time is right, call the office for an appointment to get started. 928-778-4000.
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 previously lived. Tax deductions, tax credits, investment and estate planning considerations unique to Arizona will all be discussed. Monday, September 9th from 2:00-4:00 pm at Yavapai College. Register online with the link below or call the college at 928-717-7755 to register for class #FA19-041. Tuition is $45.
Register for the class online: Tax Tips for Arizona Newcomers
Fun-damentals of Investing for Retirees
Coming in October, along with a new 2-hour class on IRA Strategies – stay tuned for details!
What’s Happening in Your Portfolio
August saw the stock markets drop into one of the most well-defined trading ranges I can ever remember seeing. This chart illustrates that.
From this pattern it is difficult to tell in which direction the market is likely to go, breaking up or breaking down. I’ll wait for the market to tell me that.
Because of this uncertainty and the fact that we are heading into September, which has a reputation as a poor month for stocks, I have our Shock Absorber Growth* model portfolio positioned to take only moderate risk, with a few good growth stocks combined with cash and a small hedge, which will go up if the stock market goes down.
Because of the cash and hedges, our equivalent stock market exposure is only 61%. If the market breaks down, I’ll use the cash to buy more hedges, and if breaks up I’ll use it to buy more stocks. And that is how we are staying in sync with this market.
I have added a new screen to my stock selection routine during this past month.
In addition to my normal spreadsheet work to find strong stocks with low price volatility, (quantitative analysis), I screen for things like debt levels, insider and institutional ownership (fundamental analysis). I dislike stocks which have 90% or more of their shares owned by hedge funds, pension funds or mutual funds. If most all of the shares are owned by these institutions, they are no longer potential buyers, only potential sellers of the stock, and when they decide to sell, things can get ugly in a big way.
Then I look at the charts of companies that have passed these earlier screens (technical analysis). What has been added are screens to keep me looking toward companies that not only have good earnings, but whose earnings turned out to be greater than Wall Street estimates. Companies that outdo the experts quickly become Wall Street favorites, often with strong price rises. I don’t try to compete head-to-head with the elephants of Wall Street, but I can surf the waves they create.
Flexible Income* portfolios still have about 50% in various bond funds, but are moving to holding more dividend stocks as I think the bond market rally is nearing its end.
Our municipal income strategy continues to enjoy a strong year. A muni fund is one we continue to hold in our Flexible Income* model, too.
- 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.
Who Wants to be a Trillionaire?
My office walls have several unique currencies hanging on the wall. One is a pair of 100 trillion dollar notes from Zimbabwe, printed during a period of runaway inflation over there. I paid $5 for mine about ten years back.
Reading Fred Fuld’s Investment Trivia 2019 this weekend, I noticed that he mentions my Zimbabwe note and how they now sell as collector’s items on Ebay for up to $250. That makes my profit 5,000% on the trade. I wish I had that touch on everything.
A Peek into the Future
Thousands of autonomous delivery robots are about to descend on US college campuses.
What it is: Having just raised $40 million in its Series A round, autonomous robot delivery startup Starship Technologies is now targeting U.S. college campuses. In total, Starship’s self-driving delivery bots have traveled 350,000 miles, completing over 100,000 deliveries across 20 different countries. With extensive testing under its belt, the company plans to deploy thousands of its all-electric, six-wheeled bots for college food deliveries over the next two years. Already in action at George Mason University and Northern Arizona University, the robots can carry up to 20 pounds of cargo and make deliveries within a three-to-four-mile radius.
Why it’s important: Online grocery shopping is predicted to surge up to fivefold over the next ten years, and American consumers are expected to spend upwards of $100 billion on food-at-home items by 2025. While today’s human-conducted delivery services (think: Postmates and DoorDash) are on the rise, these non-automated options remain heavily subsidized, as labor costs far exceed those of roboticized alternatives. By first targeting college campuses, companies like Starship can benefit from well-defined, easily navigable environments (not to mention an abundance of tech-savvy, young buyers) while building out an expanded business model for urban integration.
You drop something when you were younger, you just pick it up.
When you’re older and you drop something, you stare at it for a bit contemplating if you actually need it anymore.
Our Spotlight Strategy – Flexible Income
With our Flexible Income Strategy we strive to provide high total return consistent with Capital Preservation.
Your money will be invested in bond mutual funds and exchange traded funds (ETFs), including inverse and leveraged funds, currency funds, including precious metals that may be used as currencies and income producing stocks whose price trend is up. If the price cycles down, holdings are replaced with new investments that are going up, repeating as needed. Growth stocks are not used.
Click here to read more about Flexible Income.
A Slice of Life
CBD: The Wild West of Health Care
Asking friends what they think of CBD oil really opened my eyes to the demand for this newly available anti-inflammatory. Virtually everyone knows what it is, and about half of my friends, mostly retirees, have tried it in one form or another.
Being an old athlete, I have lots of aches and pains, and I love how CBD cream knocks down the arthritis pain in my back. Several friends use it as a gentle sleep aid.
However, with supply limited due to its very recent legalization, and lack of standardization, labeling or FDA guidelines, it is hard to know what you are really getting when you buy CBD oils and creams. What good is a low price if there isn’t much of the good stuff in the package, or if its manufacturing process was not all that clean? I like to know what I am using on my body.
Enter Mary O’Neill who runs a licensed acupuncture practice four days a week and is our front office person at Hepburn Capital on Tuesdays. I’ve known Mary for many years and trust her with my money and my health. At her office, Mary carries a line of CBD products, CBD Clinic, that is only available through licensed health care practitioners, so it is thoroughly screened, tested and quality controlled. I like that.
If you want a CBD supply that you can count on, call Mary at 928-713-0071.
A Slice of Life
A few years back I met a wonderful, easy going woman, Gina (pronounced Ginna) Peacock, who is tall, trim, beautiful, has a slightly warped sense of humor like me, and we have been having a good time ever since.
So, on Gina’s birthday, I took her to Las Vegas under false pretenses, ostensibly to see a show, and popped ‘the question’ while we were there.
We have both been in Prescott for 30+ years and the thought of having a wedding party for our many, many friends made us tired just thinking about it. So, we did a quickie ceremony on old Fremont Street in Las Vegas. We passed on having Elvis officiate but did celebrate the wedding with a slider at the White Castle across the street.
With the short notice we didn’t have rings, but I bought Gina a new golf putter, so it was sort of “with this putter I thee wed.” So, I am now a married man!
We have been honeymooning for 2 ½ years, and are eager for more.
* 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) 2019 William T. Hepburn. All rights reserved.