June 4, 2013
Should We Raise Corporate Taxes?
The Investment View from Prescott, Arizona
The link below will bring up a fascinating graphic from the New York Times.
Income tax rates for each of the 500 companies in the S&P 500 index** are plotted along the tax rate spectrum (0% to 60%+). The size of each company’s bubble shows how large the company is. Hover your mouse over a bubble to see the taxes each company has been paying.
The overall corporate tax rate is 29.1%. But there are big disparities among companies. Some of the companies most trashed by those who want to raise their taxes even more already pay the highest taxes. Check it out:
http://www.nytimes.com/interactive/2013/05/25/sunday-review/corporate-taxes.html?_r=1&
Click on the “Show Industries” icon to see each industry broken down. There are also large disparities between companies operating in the same industry. No doubt the reasons are complicated in each case.
One thing for sure, the “tax the rich corporations” movement will raise more questions than it answers.
A Slice of Life
Laurel Taylor, HCM’s technology coordinator, has long been a foster parent, and at the moment is caring for four abused, abandoned or neglected children.
Over the years, Hepburn Capital has supported Laurel in this endeavor, having paid for braces and specialized treatment for several of her kids.
This summer, Laurel wants to find a way to send her foster kids to Young Life camp, a wonderful experience for any child.
To get scholarship funds for her kids, Laurel’s family is selling Young Life raffle tickets. $20 gets you a shot at winning iPads, Colorado River raft trips, 2 Cardinals season tickets, vacations in Mexico, house paint job, spa days at the Biltmore and much more. You can see a flyer with the prizes here.
They also have discount wallet cards for local businesses in Prescott and Prescott Valley, available for $10.
If you would like to help, just stop by the office or call 778-4000 to arrange for tickets to be mailed to you. The kids thank you in advance.
How’s The Market Doing?
Volatility in the stock market is increasing, and if it continues, that may indicate that a downtrend is underway. It is too early to tell if we are experiencing merely a pause in the uptrend that has been underway all year or whether this is the beginning of something more serious. I am watching the market closely, however.
The bond markets took some big hits this past month as interest rates spiked up more sharply than they have in over a year. Right now rates have gone so far, so fast, that I expect a pullback, however we have a pattern of rising tops and rising bottoms on the yield chart of 10-year Treasuries, which is the basic definition of an uptrend in rates.
Uptrends in interest rates are not good since interest rates probably affect your life a lot more than stock prices. So, this can become a big deal.
Interest rates have a pretty clear 60 year cycle, and history suggests we should have seen the bottom of the interest rate cycle last year. Right now the July 25, 2012 low in 10-year yields of 1.44% marks the bottom – right on time, I might add. The sobering part of this is the suggestion that we face 30 years of rising rates.
When history is written, higher rates may be seen as the payback everyone expects from all the money printing that is going on.
The good news for savers is that CDs may start to pay a little interest.
In the bond markets, prices of lower rated “junk” bonds have held up much better than “safer” government bonds. This suggests that the problems are related to interest rate sensitivity and not a softening business cycle – so far, anyway.
Commodity prices, which include oil, Ag-products like corn and wheat, steel, gold, etc. have been declining for over two years now when measured by the Reuters CRB Total Return Commodity Index. Of course this is no secret to gold investors, as I have written about gold’s troubles several times over recent months.
Commodities are important as an indicator of inflation. While there are plenty of reasons to expect inflation in the current easy money environment, there is clearly no inflation reflected in commodity prices.
Hear Juni Fisher, June 22nd
Free Tickets
Last year I was lucky to hear Juni Fisher, the 2011 Western Music Association Entertainer of the Year, performing here in Prescott. Juni is a wonderful balladeer who brings a frequent tear to the 
eye as she tells and sings her always authentic and touching stories of life in the old west.
Juni will be here again, performing outdoors at Mortimer Farms in Dewey as part of the Dewey-Humboldt Cowboy Gathering and Western Heritage Festival, on June 22nd.
I was so impressed with the virtuosity of this woman that I have arranged to get block of 20 tickets for the event, and two of them have your name on them. My treat. Bring your lawn chairs and look for the signs off of Highway 69.
The program begins at 6:00 p.m. on June 22nd. Please call the HCM office to reserve your tickets and experience a neat bit of our Western heritage. Tickets will be available on a first come first served basis, so call now! 778-4000.
Model Portfolio
When I use the term “model portfolio” or “strategy” it describes a hypothetical $250,000 account, currently our minimum s
ize for new accounts. We often accept smaller accounts as an accommodation for existing clients, referrals and friends, but larger accounts are most efficient for us to manage.
Despite trading at the same time in investments with similar objectives, smaller accounts occasionally end up with different results than larger accounts.
The reason for this is that some trades involve fixed transaction charges, such as the $15.50 the custodian charges to execute a stock or ETF transaction. Large accounts have larger trade sizes and can absorb these fixed costs without greatly affecting performance. The profitability of a smaller trade can be more greatly impacted by transaction costs, so as a policy matter we try to have fewer of them in smaller accounts, focusing instead on no-transaction fee mutual funds.
This may lead to different holdings in different sized accounts, and can create different performance results, too. For example, there were six times in 2011 that we had different holdings in Flexible Income* accounts of various sizes. Usually, the performance difference is minimal, but not always.
One exception occurred in February 2011 when we bought gold and silver bullion ETFs in the Flexible Income* model. To minimize transaction charges in smaller accounts we only bought gold in them while we bought both gold and silver in larger accounts.
As it turned out, Silver was by far, our best trade for the year, adding almost 5% onto the return of larger accounts. Unfortunately, there was no way to know that ahead of time, so smaller accounts did not participate in this particular gain.
So when I mention model returns, it is possible that your returns will be different, sometimes significantly so. I’d be happy to sit down with you in person and show you how this works anytime you have questions.
What’s Going On In Your Portfolio?
Since our last newsletter, two high dividend paying stocks we held in both growth* and income* model portfolios since December, both triggered sell signals, and we took good profits in both. A couple of newer holdings in the same industry also headed south and were closed out when they hit our protective “safety net” sell levels. Our other holdings seem to be up one day and down the next, so we are just watching them closely.
As of May 31st, the Flexible Income* model portfolio holds high yield municipal, floating rate and high yield funds, a couple of diversified bond funds and about 17% in cash.
Growth model* portfolios hold real estate, health care, technology and consumer goods stocks and funds, plus a couple of diversified growth funds and 8% in cash.
Our Adaptive Balance* and Adaptive Growth* portfolios have been maxed out for much of this year at 50/50 and 80/20 ratios of growth to income. It is possible this mix may change to further reduce our exposure to risk if the current market weakness continues. Stay tuned.
Scottsdale Office
Please call the office (928 778-4000) to schedule an appointment. Will can meet with you in Scottsdale rather than Prescott for your convenience.
Our Spotlight Strategy
With our Adaptive Balance Strategy, we strive to provide high total return from a combination of investments in both the equity and income markets with an emphasis on the income markets.
Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to both strength and weakness in the market, directing exposure to the HCM Long/Short Equity strategy ranging from 0% to a maximum of 50% of account value. The balance, 50% to 100% of account value, is invested in the 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.: Adaptive Balance
Don’t Be Afraid of Public Wi-Fi
1. Don’t make online purchases or access your bank account from public wi-fi site.
2. Double-check the network name. Thieves can set up fake Wi-Fi hotspots with legitimate sounding names to hijack your information. When in doubt, double-check the network name with a server, barista or other employee before logging on.
3. Turn auto-connect off. Many tablets and smart phones have a setting that will allow these devices to automatically connect to any open Wi-Fi network. Check your settings to make sure this feature is turned off to retain control of what networks you access.
4. Switch up your passwords. Don’t use the same password for all of your online accounts. This way if one account is compromised, the rest stay safe.
5. Encrypt your data. Most devices allow encryption of data you send. Use encryption and most thieves will only see gibberish if they intercept your transmissions.
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.
