July 31, 2012

The Goose That Lays the Golden Eggs

The Investment View from Prescott, Arizona
By Will Hepburn

A friend recently forwarded an article about how US based multinational companies are not concerned with bringing jobs to America, but with making money for their shareholders.  The writer’s purpose was to make US based multinationals seem unpatriotic at best, and anti-American at worst, but it cuts both ways.

European, Brazilian and companies of many other countries including the U.S., are primarily run by the profit motive rather than politics.  They all base decisions upon a combination of labor costs, taxes and transportation of materials to and goods from their factories.  The nationality of the workers is way down their list of considerations.  

Since the profit motive is relatively straight forward compared to politics and I have a healthy distrust of political decisions, I find some comfort in this.  The challenge is to keep politics from polluting and perverting business while upholding legitimate public interests.

Each attempt to impose political will onto businesses has the potential to drain a little lifeblood out of the goose that lays the golden egg.  Some politicians don’t realize or seem to care that the goose can bleed to death.

The irony in the jobs issue is that the U.S. exports are at all time highs, and not by a small amount.  It is easy to think US industrial hegemony has been in decline since the 1960’s, yet our exports now are 100 times greater than they were back then. 

It is impossible to export both jobs and goods.  To be exported, goods have to be made here.  Clearly we are making more goods, so why does it feel like we are losing jobs?  Because we are so unbelievably productive.  Our high-tech robots and assembly lines can produce goods more inexpensively than low wage workers in Sri-Lanka or wherever.  Think about that statement.  That is what the export numbers are saying.

Sure, we could have more workers working if we tore down the ultra-efficient factories and tried to compete head to head with the sweat shops of the Far East, but those aren’t really the kinds of jobs we want, and we might lose that battle.  We are winning this one.

Free enterprise is the ultimate form of democracy.  Each time one of us spends a dollar we are saying we want more of what we spend our money on and the corporations are the ones that count the votes and respond to give us even more of what we vote for.  The voting says we all want the less expensive goods more than sweat shop level jobs.  Sadly, the voting also says that we want the efficiency and value offered by the Wal-Marts of the world more than the warm and fuzzy feeling that we get from mom and pop stores that remind us of days past.

The pundit class likes to peddle a victim mentality, but we are not being taken advantage of.  We are competing in a global competition and the competitors are doing exactly what we tell them with our “votes”.

The solution for more and better jobs here is for our workers, our kids really, to become the masters of the robots.  Study hard sciences, like engineering and math instead of warm and fuzzy, but less productive fields.  We will all live better and have more good jobs, too.

One of the other dynamics at play in this issue is that of deflation.  Inflation is described as too many dollars chasing too few goods.  Deflation is the opposite; too many goods chasing too few dollars (although the central banks are printing money like crazy, much of it is getting sucked into the black hole of debt repayment and is not available for general economic spending).  With the increasing efficiency, we and every other manufacturer around the world continue to flood the market with too many goods, fueling deflation. 

Only when the least efficient producers are taken off line (think of all the photos you have seen of factories and warehouses closed in the 1930’s, never to reopen.) will the production of goods fall in line with demand and get the economy back into equilibrium.  I just hope it is the sweatshops overseas that prove to be less efficient than our factories here.

A Slice of Life

I’ve just completed my annual pilgrimage back to the Midwest to visit family and I am finishing this newsletter sitting atop a sand dune overlooking Lake Michigan in Door County, Wisconsin.  I just love the technology that allows me to work in neat places like this just as efficiently as if I were sitting at my desk in Prescott.

Door County is the peninsula that separates Green Bay from Lake Michigan and is considered the Cape Cod of the Midwest.  It is particularly nice this time of year…mid-70’s temperature and clear today. 

A particularly memorable part of the trip was spent going through 100 year old family photos of my grandparents as young people, my parents getting married, even shots of a young Great Aunt Lizzie who eventually lived to be 107 – and died back in 1963 when 107 meant something.

Scottsdale Office Date

Will Hepburn will be in the Scottsdale office on Friday, August 10th.  If you would like to meet with Will and the Valley is more convenient than the Prescott office, please call for an appointment at (928) 778-4000.

How’s the Market Doing?

Although the market continues in the uptrend that began June 2nd, the quality of the uptrend has deteriorated with sharp ups and downs returning.  As of this writing on July 27th at least the last two days were up, which is good.

Also, the problems that triggered the decline into that June low are still with us.  Deep problems in Europe with no real solution in sight, a slowing economy in China (Asia’s engine of growth), and legislation in place here mandating steep tax increases likely to wipe out what little growth there has been.

In my opinion, the main reason for the recent rally is the belief of investors that the Fed and other central banks will do whatever is necessary to prevent significant declines in the stock markets.  My concern is how effective further stimulus will be.  We are seeing less economic boost from each ton of new money printed.  Is the Fed running out of silver bullets?

Commodity prices have firmed up considerably in the past month or two. I’m not sure how long the trend will continue but if it does, it may reflect an increase in inflation pressures and make it difficult for the Fed to continue to control interest rates.

Mental Floss

Create a window-box veggie patch using guttering.

What’s Going On In Your Portfolio?

Shock Absorber Growth* portfolios are positioned for a strong market, with holdings in real estate, utilities and growth funds hedged with a small amount of an inverse China fund.  The effect has been to follow the market up and down with much lower volatility, recently averaging about half the losses and ¾ of the gains of the S&P 500 Index**, a pretty good combination.

We unloaded our inverse Treasury bond fund in Flexible Income* accounts since it was not working and was holding us back instead of helping, replacing it with a corporate bond ETF.  We still hold municipal, high yield and floating rate loan funds in Flex Income* portfolios.

Our best performing strategy over the past year continues to be our Municipal strategy*, which, ironically, is also the most lightly utilized by our clients.

Housekeeping

There is an operational item that we will be changing on our next set of trades:

For accounts under $5,000, which are held as an accommodation for clients who otherwise meet our minimums, we are sometimes having trouble buying certain investments in small enough amounts to execute our strategies.  For this reason, going forward, we may select a single investment for these accounts that approaches the objective for the account.

If you have an accommodation account like this and this is not OK with you, please let us know as soon as possible so other arrangements can be made.

Our Spotlight Strategy

With our Shock Absorber Growth strategy we strive to provide growth in all markets from a blend of both long and short equity investments.

We first select the strongest of about 40 different stock market segments, sectors and regions, and then select the most complimentary inverse funds to use a Shock Absorbing hedge for those investments. The HCM Safety Net indicator is designed to warn of sudden potential declines in which case stock market exposure is quickly reduced.

For more information please click here: [Shock Absorber Growth] 

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.