Money Matters Newsletter:
May 3, 2016
Seven Reasons Why US Recession Risks Are Fading
The Investment View from Prescott, Arizona
And then there are the always-present geopolitical risks, and widening cracks in the Chinese economy. We may be close to seeing that the emperor has no clothes over in Beijing. In addition, markets do not like uncertainty, and with presidential elections heating up, that could add to market instability.
Slice of Life
As you are receiving this, I am returning from the annual conference of NAAIM, the National Association of Active Investment Managers that I was president of in 2008 – an interesting time in the industry.
It is good to see old friends, and see some new up-and-coming managers in our “Shark Tank” competition patterned after the popular TV show. Each of the past two years I have met an analyst whose signals I have added to HCM portfolios. Typically, these are investment analysts whose work is not available anywhere else. They don’t have a retail business like Hepburn Capital’s and don’t want the restrictions of running a mutual fund but just love to crunch numbers and make computers get up and dance on their toes.
The long/short strategies for both gold and Treasury bonds have both worked well for us since added to the portfolios. I’m looking forward to see what kind of talent the Shark Tank brings this year.
What The Markets are Doing
The stock markets have been on a real rollercoaster ride for the past 9 months or so. The S&P 500** has been recovering recently after two double digit drops in a few months. In January The S&P 500 Index** was down 5.07%, then it went sort of flat in February with a .41% loss, up big in March with a 6.6% gain and flat again with a measly .27% gain in April.
For the past 12 months, ending April 29th, the S&P 500** is down 1.97%. No reward for a lot of risk, and certainly not a place for investors to charge in blindly.
The bond market measured by the Vanguard Total Market Bond Fund (VBMFX) was in negative territory for most of the past year, with its share price dropping from $10.95 to $10.92 over the past 12 months. Fortunately, income investments pay dividends, which gave it a total return of 2.47% for the year ending April 29th.
Junk (high yield) bonds, the investment everyone loves to hate, have shown a strong rebound over the past 3 months – another plus for the economy.
Gold has leveled off after a huge rise in January and February. We have seen rises of this magnitude fizzle out several times over the past 5 years as gold lost 43% of its value. Will the prices hold? No one really knows. My gold strategy goes both long and short so we can make money with gold going either up or down. Our gold strategy, a small portion of each portfolio since last November, has produced a double digit gain for us.
Oil is finally finding more favorable prices after losing 80% of its value over the past two years. This is good for two reasons. A lot of people are employed in energy related fields, and energy prices can be a reflection of industrial activity. This may be just a dead cat bounce, but things could be looking up too.
There are many ways to look at the national real estate markets and different organizations report on new home sales, resales, unsold inventories, building starts, multi-family vs single family and they all use different measurements and terminology. Frankly, it is hard to tell which end is up sometimes.
I keep seeing widely conflicting reports on real estate markets. Strong sales of one sort offset by weak sales of another. Then the next month they seem to change direction. The lack of uniformity in direction could be a sign of trouble brewing in real estate. Real estate stocks have rebounded, like the broad stock market, but index levels are still below their highs of two years ago, adding to the lack of direction in this important market. With wages stagnant and housing prices rising these past few years, we are going to reach a point where buyers become less willing, or less able, to pay the higher prices. It feels like this is what is beginning to hold the real estate market back.
What’s Going On In Your Portfolio?
Like the markets in general, all of HCM’s portfolios had flat performance in April, but all have outperformed the S&P 500 Index** since the stock market began its series of sharp drops last summer.
Shock Absorber Growth* portfolios continue to hold some cash and a hedge (inverse funds that go up when the market goes down) since the market’s upward momentum from February has waned, and the next big move may likely be down. I’m not sure about that, but I would rather give up a little opportunity than lose actual money.
Shock Absorber Growth* portfolios also include both a gold and treasury bond position that each go long and short with their respective funds as the market dictates. Both have been adding return to the portfolio while the stock market has been flat.
Our Flexible Income* portfolios are flat for April, after putting up strong returns since adding the long/short Treasury bond strategy to the portfolio on July 1, 2015.
Municipal Income* accounts are showing slow, but steady positive returns. Lower than my Flexible Income* portfolio, but greatly outpacing the yields available on individual municipal bonds.
So everything seems to be working, and nothing needs fixing. Life is good!
College Classes Coming
Mark your calendars for June 8th, which is the beginning of my next Yavapai College Class called Understanding Investments – a fundamentals class.
This course is designed to help investors become more confident about their financial decisions. In an easy-to-grasp format, this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include: recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk reducing strategies that anyone can use.
Call the college at 717-7755 to register for course # SU16-116, offered on three consecutive Wednesdays from 3-5 p.m., beginning June 8th. Tuition is $65.
Need a Speaker?
Having taught classes at the local college for more than 25 years, I often present for both large and small groups with programs like The Top 10 Investment Scams and How to Avoid Them. My latest topic, Investing in Future Technologies, has grown into a terrific talk for clubs or groups. After all, who isn’t intrigued by the prospect of getting a peek into the future?
If your organization needs a speaker, please have your program coordinator call the office at 928.778.4000 to schedule a time when I can present one of these programs to your group.
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment. 928-778-4000
What We Were Saying Back Then
In my Dec 9, 2014 newsletter I reported on self-help guru Tony Robbins’ foray into the investment advisory industry. Robbins recently interviewed 27 people he met on a Wall Street sidewalk, and only one knew what a fiduciary was. A fiduciary is someone who legally must look out for your interest, not their own.
Most brokers, wealth managers, financial advisers and planners are selling you something and give you advice based upon what they want to sell you, not necessarily what is best for you. They are not fiduciaries.
A new Fiduciary Rule is being implemented within the financial services industry, and by next year anyone who provides advice on a retirement plan will be required to act as a fiduciary to the owner. This new rule will cover your 401k, IRA, TSA, 403(b) or deferred compensation plan.
According to Robbins, the industry average of all fees charged in a 401k is 3.12% per year. If advisers will begin to find you the best deal on fees as well as good investments, the savings for investors can be huge.
Consider what happens if 2% of that 3.12% in fees can be saved. Due to the power of compounding, after 36 years, an investor earning 8% per year will have twice the money saved as an investor earning 6%. This difference in earning power may be enough to get you an additional decade of income when you retire, maybe more.
Powerful Wall Street companies, many of them national brokerage houses whose names you would recognize, along with the politicians they control, are trying to overturn this new rule, so expect lawsuits and political maneuvering to block its implementation.
I was disappointed on April 28th when Congress sided with the Wall Street interests and voted to repeal the new Fiduciary Rule, striking a blow right at the heart of your savings. The vote on House Resolution 88 was strictly along party lines, and it is expected to be vetoed by the President, but is an example of powerful forces clashing. This election season, I would suggest you ask your candidate if they supported this resolution to keep you from having fiduciary protections. You might be surprised.
For the record, Hepburn Capital has always operated as a fiduciary to its clients and is already in compliance with the new rule.
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 mutual funds and exchange traded funds (ETFs), including inverse and leveraged funds, 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, repeating as needed. Growth stocks are not used.
* 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) 2015 William T. Hepburn. All rights reserved.