May 1, 2008

Some Relief from Inflation?

Over the past few months I have written several times about inflation and why you should expect it to rise. One nagging indicator has been telling me that inflation may not be the problem we are all worried about, at least for a while. Last night and again today I have had other things come up which bolster the case made by my lone (lonely) inflation indicator that would not give in. Let me describe what I am seeing. Each week I review 140 different market indicators…things like the money supply, corporate earnings, upward or downward momentum of the markets, interest rates and lots more. I rate them according to the importance I see in each one and add up the list to sense shifts in the market.

The one inflation indicator that has refused to even blush when everything else is flashing red is Treasury Inflation Protected Securities, or TIPS for short. These are bonds that smart investors want to own instead of regular Treasuries during times of inflation. We owned them in many of our managed accounts until a few months ago, because they were going up in value last fall when little else was.

But a funny thing happened on the way to the market. TIPS have not outperformed regular bonds for months now, and have actually gone down in value for the last 5-6 weeks. If inflation is really the problem that all the text book examples say it should be, why is this key segment of the market not reacting as one would expect? TIPS should be going up, not down. Interesting. Very interesting.

In the face of the well publicized rise in gasoline and food prices, I decided not to raise this question of “could we all be wrong about inflation?” for fear you would all send me to the funny farm for evaluation.

Last Friday night, April 25, I went on my annual shopping trip, and visited a new Kohl’s store in town. I was astounded at the values I found there. I wondered how in the world they could make money with so many $10-12 shirts and $16 pants. On the way home I stopped at Costco and found bone-in rib-eye steaks for 4.99/lb that were close to $10 last year. I thought to myself, inflation hasn’t hit these two stores. What is happening?

Then today I was reading the Sentiment Trader newsletter, written by colleague Jason Goepfert. He reported on 3 significant indicators pointing to gasoline price relief. One indicator – his “Smart Money” indicator shows professional traders all positioning themselves for a decline in gasoline prices. Good news! Another of his indicators, Public Sentiment, is at an extreme reading, and since 1990 has shown 95% accuracy predicting lower prices after reaching this level. 95%! That is an indicator worth noting.

I’ve written several times about when the market does not do what I expect, I’ve learned not to beat myself up, but to look for a larger force affecting the market that is not yet evident. This is one of those cases.

The Federal Reserve Board Governors met this week, and as I expected they moved to gradually stabilize interest rates rather than continue large cuts. They seem to have calmed the financial turmoil surrounding the mortgage markets. Although they have fewer tools left to work with, now the Fed can work on inflation.

Rising interest rates would tend to cause the dollar to rise in value, which in turn will hold commodity prices down. Some interest rates have already begun to rise. Oil, an important commodity, is pretty darned high, but remember, what goes up must come down. This dynamic of rising interest rates – a symptom of inflation – may contain the seeds of actually reducing inflation, and that may be what is being reflected in the markets. We’ll see.

I’ll write more about what may be causing this phenomenon in upcoming newsletters, but for now, rest easy knowing there are a few more rays of sunshine on the inflation front, and more tangibly, for the future price of gasoline.

Family and Friends Discounts

A client recently saved $279 per year with my Family and Friends Discount when she referred someone to me who opened a new managed account.

You may recall that I offer volume discounts by having lower fee percentages on larger accounts.

Family and Friends Discounts are created when I use the combined value of your accounts plus the values of any family members or friends who become HCM clients, to determine the management fee.

Larger account values = lower fee percentage.

Your accounts will still be held in the strictest confidence and will remain separate from those of family and friends. I merely add up the values of all accounts in the Family and Friends group to determine the fee level.

So, please, send your family and friends in to see me for a free consultation. By introducing friends to us you may save a chunk of money with our Family and Friends Discount while you are helping your friends out.

Just call the office at 778-4000 if you would like one of our Hepburn Capital brochures to give to your friends, or you can see and print the brochure right now.

Inheritors Handbook

Frequently I consult with clients who are inheriting, and over the years I have given out over 50 copies of The Inheritors Handbook by Dan Rottenberg. This easy-to-grasp work does a great job of covering the 3 phases of inheriting; advanced planning, estate logistics and receipt/reinvestment of inherited money.

We normally keep a few copies of this book on hand, so if you or a friend will be inheriting, please call the office at 778-4000 and we can mail one or arrange for you to pick it up. No charge.

Account updates

I have made no changes in our model accounts* since my last newsletter. Growth Strategies are approximately 60% invested in the stock market with the balance in bonds and cash. I had intended to move more into the market last week, but the rebound off of last month’s bottom seems to be slowing down, so I am being cautions.

In this type of market the probability is for a negative resolution to any uncertainty, and the market’s slowing of upward momentum is a concern. I’d rather be safe than sorry so I’m waiting for the market to show me some more strength before investing more of your money.

Flexible Income accounts still hold 1/3 cash along with High Yield bonds and a fund that goes up as the value of the dollar goes down.

As of this writing, all of our models* are showing gains over the past month.

* 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 the 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.
Information in this newsletter is 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 constitutes a solicitation for the purchase or sale of any security. Adviser will not transact business unless properly registered and licensed in the potential.

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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 listed above 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 are not insured by the FDIC or any other agency, are not guaranteed by any financial institution, are not obligations of 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.
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