Money Matters Newsletter:
The Investment View from Prescott, Arizona
October 8, 2014
Payback Time?
Normally the term payback carries negative connotations, but not this time.
In 2009 -10 the US loaned the European Central Bank many hundreds of billions of dollars through various techniques. The numbers reported ranged from $586 billion to $925 billion depending upon how you count it. Afterall, what’s a few extra billion between friends?
At the time I wondered why our government made such a big gesture at a time when our own banking system teetered on the brink of collapse, but money is fungible, meaning it can move from place to place and form to form very easily. Instead of Europe sucking up all of our Fed stimulus, we just gave them their own checkbook to play with.
I also realize now, that in Fed-terms, $925 billion isn’t all that much.
But, now it’s payback time! Just when everyone is worried about what will happen when the Fed spigots are turned off at the end of this month and no new printed money is pumped into our economy (at least none that we will see), Europe has announced they will begin priming their economic pump by buying bonds just like our Fed has done in recent years.
Remember, money is fungible. Regardless of where it enters the world financial system it will flow to the place it can earn the greatest return for the least risk. Borders are not much of a deterrent to money flows anymore.
What this means is that if the US economy needs liquidity there will be a bunch of it over the pond. This ought to provide a good soft landing for our economy if things continue to slide.
Need a Speaker?
Our newest investment strategy, Future Technologies, has grown into a terrific talk for clubs or groups. I mean, who isn’t intrigued by the prospect of getting a peek into the future?
The Prescott Noon Lions asked me to present to them, and several people said it was one of the best programs they had had in a long time.
This talk is about advances in emerging technologies and how they might affect your lives. Some will afford us healthier lives, and others will improve our quality of life and free us from everyday tasks as life altering as the introduction of central heating which freed us from constant wood gathering and wood cutting chores.
If your organization needs a speaker, please have them call the office at 928.778.4000 to schedule a time when I can present this program to your group.
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“Stock investing is easy. Just buy a good stock and hold it. When it goes up, sell it. And if it don’t go up, don’t buy it.” A New Class at Yavapai College
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A Slice of Life
A few weeks ago I was able to visit Karchner Cavern’s, about 40 minutes east of Tucson, and I want to report that this newest Arizona State Park is a real gem that belongs on everyone’s bucket list.
Two cavers discovered the caverns in the 1970’s and kept it a secret from everyone except the landowners until state funding was approved to buy and secure the site so it could be protected and kept in pristine condition.
Double air locks preserve the humidity so the cave formations can continue to grow, and gentle pathways take you right up to beautiful, sometimes translucent stalactites and stalagmites, waves of cave bacon (Google it) on the ceilings, and the magnificent Kubla Kahn formation in the Throne Room.
We stayed at the Copper Queen Hotel in downtown Bisbee, too. It is a well preserved relic from the past. The lobby evokes luxury of 115 years ago with swinging saloon doors, original brocade couches and leather easy chairs, the original front desk and an old time dining room –with good food, too. The mining museum across the street is one of the best small museums I have seen.
If you ever want to spend a delightful couple of days in Southeast Arizona, add in Tombstone, bird watching in Benson or hiking Cochise’ Stronghold in the Dragoon Mountains and you will have a wonderful trip.
How Are The Markets Doing?
A number of geopolitical risks are keeping a dark shadow over the stock markets. Riots by pro-democracy protestors in normally staid Hong Kong threaten stability there. Mix in Islamic fundamentalists stirring up added unrest in the Middle East, Russians grabbing land in Ukraine, with some Ebola here and there and things look pretty uncertain.
But the biggest culprit in the market’s recent weakness is one most would never have suspected, a strong dollar.
Strong dollars are high priced, and that means the goods sold overseas by our many multi-national corporations become more expensive in those markets leading to lower sales. The price of gas is down because the price of the dollar is up. Each buck now buys a little more oil than it did a few months ago. The flip side is that each Euro now buys a little less of items priced in dollars and that hurts sales.
Perhaps this should have been expected. Many pundits thought the dollar would go into the dumper as the Federal Reserve printed truckloads of money. So, logically it makes sense that having the Fed turn off the printing press later this month would cause the dollar to rise. Whodathunkit?
But the weaker economy I mentioned in my last newsletter (Messages from the Bond Market: lower commodity prices, lower interest rates, weak junk bonds, etc.) has begun to be recognized by the stock markets with heavy selling on one day being replaced by a “let’s buy the dips” mentality creating sharp ups and downs in prices during the past week or two. This price volatility often precedes sharp declines.
I have expected the large institutions, like hedge funds, mutual funds, and pension funds to begin selling well in advance of the Fed’s turning off the financial spigots, and this feels like what I have been expecting.
Since we are in the seasonally weak period of the stock market, I don’t think this is the time to try to buy the dips. Patient investors are the most successful investors.
Gold prices have just broken down through a significant level, suggesting that the primary trend for gold is still down rather than beginning to turn up as it appeared to be heading the past three months.
What’s Going On In Your Portfolio?
As small losses began to show themselves over the past two weeks, cash levels have been increased to reduce risk in both our Flexible Income* and Shock Absorber Growth* model portfolios.
As of October 3rd, Flexible Income* holds two inverse bond funds, two diversified bond funds and a preferred stock fund along with 21% in cash.
Shock Absorber Growth* portfolios are about 50% in cash with existing investments fully hedged to offset stock market risk.
Our new Future Technologies* strategy which is being integrated into Shock Absorber Growth* portfolios continues to impress, consistently outperforming the S&P 500 Index**. During September, Future Tech* made a small profit while the S&P 500 Index** lost 1.54% for the month. Future Tech* currently holds 10 great stocks in the nanotech, stem cell research, robotics and IoT (Internet of Things) market segments.
Adaptive Balance* portfolios are currently holding a 50/50 mix of growth and income. Adaptive Growth* is 80/20, with growth over-weighted. Municipal Income* accounts are fully invested in high yield municipal funds.
What we were saying back then.
Last month’s article, Messages from the Bond Market, has proven to be right on from the causes I mentioned, leading to sharp market declines over the past two weeks.
Another type of message came from the bond market recently with the announcement that Bill Gross, manager of the Pimco Total Return Fund, the largest mutual fund in the business, was being investigated by the SEC. Gross also left Pimco to work for another fund family last week.
With all the turbulence in the bond markets recently, all we need is more volatility which could be caused as investors flee the largest bond fund of all. If only 44% of investors left Pimco Total Return, over $100 billion in bonds could be thrown onto the market. That large of a supply of bonds is likely to cause an imbalance between buyers and sellers driving bond prices down.
The last time a financial tsunami that big happened was over 20 years ago in the wake of the California insurance commissioner forcing insurance companies to dump junk bonds onto the market. The shock waves were felt everywhere from Wall Street to Orange County, which was pushed into default.
These are interesting times in the bond markets.
Scottsdale Office
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment.
928-778-4000
College Classes Coming
This month begins the fall schedule at Yavapai College (YC). I’ll be teaching Fundamentals of Investing for Retirement which is a class I’ve been teaching now for 25 years. Yikes!
In October I teach a new class on Managing an Inheritance: Planning It, Receiving It, and Keeping It.
For details, look in the YC catalogue that came in the mail last week; or call the college at 928.717.7755 for details.
Our Spotlight Strategy
With our Adaptive 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.
Mental Floss
Clean gutters with your leaf blower and PVC….
If you would like a current copy of our Privacy Policy or our SEC Form ADV, Part 2, you can find them at our website at www.hepburncapital.com/images/PrivacyPolicy.pdf or www.hepburncapital.com/PR/form-adv.pdf respectively.
* 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.
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.
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) 2014 William T. Hepburn. All rights reserved.
