March 31, 2020

The Month That Changed Everything

I think the virus going around has something in common with the Harry Potter villain, Lord Voldemort, who was “He Who Shall Not be Named” in those books. Every week or two the virus gets a new name. First Wuhan, then Coronavirus, then Covid-19, and now SARS-CoV-2. I wish they would pick a name and stick with it!

Moving right along, it would be good if we all kept some perspective about this virus. As of this writing on March 28th, the world has had 30,299 deaths from SARS-CoV-2. To put that in perspective, the world has had a total of 14,097,860 deaths from all causes year-to-date as of 11:53 a.m. Arizona time today (source: Worldometers.com). That means that despite all the headlines, this virus is responsible for only 2/10 of 1% of all deaths in the world. I’m beginning to think the fear factor is worse than the disease.

In the US, an average of 7,778 persons died each day in 2018. At that same rate, by Mach 27, 2020, this means that we should have had about 676,686 deaths from all causes in the US so far this year. We have had 1,993 deaths in the US from SARS-CoV-2, which means that only 3/10 of 1% of all US deaths are due to this particular malady.

On Sunday, March 29, 2020, immunologist Dr Anthony Fauci was quoted as saying that there could be up to 200,000 deaths in the US from this virus. As bad as that sounds, that is only 6/100th of 1% of the US population, or 1 in roughly 1,600 citizens. Way less than my examples a few paragraphs above.

Our government recognizes that economic damage from lock-downs can also cost lives. I believe that before the end of April the administration will have the data it needs to begin opening up many areas, keeping lock downs in place only for “hot spots”.

Although unprecedented events are happening quickly and the economic situation is changing daily, the cavalry is on its way.

The Federal Government’s $2 trillion relief bill signed by President Trump on Friday, equals 40% of the government’s annual budgeted expenditures. That is a huge injection of money into the economy that will occur over the next couple of months, on top of normal expenditures. And, I don’t believe that it is the last relief bill we will see.

The Federal Reserve Bank, or FED as it is known, has also injected over $1.1 trillion dollars into the economy in just four weeks through March 25th, according to the latest reporting that is available. From what the FED has stated, that number is likely to jump to $1.4 trillion by next week’s report.

The economic stimulus of those two actions are like each man, woman and child in the US spending $10,303. There are going to be a lot of folks put back to work as that money gets spent.

With this huge economic stimulus unfolding, all it will take is a little good news for the markets to begin recovering. I think that good news will be in the form of an effective treatment or vaccine being found, social distancing slowing down the spread of the virus, or perhaps the virus subsiding during warm weather. There are many human trials that have been fast-tracked by the FDA, so this news could be coming soon.

Just the lifting of “shelter in place” travel, restaurant and entertainment restrictions will bring a huge sigh of relief to many segments of the economy.

I suspect that the scary numbers about virus growth rates being bandied about in the media reflect the increase of our testing capacity more than the spread of the virus. Over time, the virus growth rate will subside, and that also will bring a great wave of relief to many of us.

I suspect it will be a long time before the economy gets back to normal, and certain segments will never be the same.

Look at education, where many colleges and some high schools have gone completely to online learning. When restrictions are lifted, many students will realize they like being able to do a day’s worth of schooling in a few hours, online, at whatever time of day they prefer, in their PJs perhaps, and decide not to go back for traditional classroom teaching. A lot of teaching jobs will never come back.

Shopping patterns will change, putting another nail in the coffin of retail stores. Will travel plans change too? All we can do is wait and see.

When asked by someone “what will happen?” I usually say “I don’t know, but I’m confident I will recognize it when it does, since I have my finger on the pulse of the market, daily.

As my friend, and retired money manager, Dave Lucca said “If the market only ever goes up, no one really needs an investment manager. It’s going down, and you are needed now!”

My 2018 book, Why Bad Things Happen to Good Investments, discusses why so many investors can’t seem to do the “buy low – sell high” objective correctly. It sounds very simple, but most people don’t realize that “buy low – sell high” is a two-part strategy, so they never plan for how or when to sell high.

If you need a more pro-active investment manager, one who can protect your investments in falling markets, you need me now more than ever. Please call me to discuss my strategies that Adapt to Changing Markets®, and I will show you how I weed the garden of client portfolios, pulling out investments that begin to fall and moving that money to cash or other investments that show strength. Call us at 928-778-4000.

It is going to be a long time before the investment markets get back to the stable growth we enjoyed last year, and before this is over there will probably be more sickening declines that hit investors like a gut punch. But it is not too late to save a portfolio that lacks sell strategies. So, don’t delay any more. Call 928-778-4000 for your appointment, now!

What the Markets Are Doing

The stock market endured its fastest 35% decline in history. 35% … yikes! Due to the math of gains and losses, that loss will take a 54% gain to get back to even.

This is not voodoo economics, but based on the fact that if you start with $1 and lose 50¢, to get back to $1 you have to earn the 50¢ back but now only have 50¢ to work with not the original $1.

$The Month That Changed Everything$ Fortunately, the average investor, represented by the S&P 500 Index of stocks was down only 35% at last week’s intraday low, not 50% as my example suggested. And a 35% loss only requires a 54% gain to get back to even. It is easy to say “only a 54% gain to break even” when it is someone else’s money, as most HCM clients lost only pennies on the dollar this year and growth investors actually have a gain YTD (through March 30, 2020).

Ironically, the Chinese Large Company Index ETF (Symbol FXI) only lost 24.91% from its January 13th high, so China’s stock market has fared much better that the rest of the world. Go figure.

During March there was no place to hide, investment wise. Bonds, which normally go up when stocks go down, hit a huge pothole when in only seven trading days between March 9-18, 2020, the high-quality corporate bond index (Symbol: LQD) dropped 15.65% of its value (source Fasttrack), and the iShares National Municipal Bond ETF (Symbol: MUB) lost 11.65%. Long-Term Treasury Bonds (Symbol: TLT) dropped 15.73% too. This was caused by lack of liquidity, meaning no one wanted to buy even the highest quality bonds in that market.

This chart from Yahoo (Symbol: AGG) represents the total bond market and shows this March dip I am writing about. I call this a bond market cockroach. As the saying goes, there is never just one cockroach, and this is why the FED is wading quickly into the liquidity pool. To stomp out bond market cockroaches.

This is not the first such cockroach, the last one being in Sept 2019. Each time a cockroach appears, the FED steps in and floods the market with cash. However, each time it seems to take a larger amount of cash to get the economy and markets stable again. How much is going to be enough this time? I don’t know. No one does. But when the FED steps back at some time in the future, all of those money junkies are going to feel the withdrawal in a big way.

Oil prices are down a Lot. Capital L. West Texas Intermediate Crude is at $19.48 per barrel, 1/3 the price it was a year ago. This might be good for gasoline buyers, but energy producers need oil at $40-50 per barrel to break even, meaning a lot of producers will go out of business.

Gold bounced strongly as the economic stimulus packages push interest rates below the rate of inflation, normally a good thing for gold prices.

One bright spot in a dismal stock market report is that 2,800 insiders (meaning corporate executives and board members), bought $1.19 billion of their own company stock in March, through the 26th, according to the Wall Street Journal.

This is good because there are many reasons why insiders sell stock, but only one reason they buy. They think business will be good and the company stock price will be going up. And these are the insiders, the folks in the know!

What’s Happening in Your Portfolio

I just love these kinds of markets! My system of “weeding the garden” to sell stocks as they show weakness had us pretty much out of the stock market during the worst of the S&P 500’s waterfall decline in March. This chart shows how HCM clients have done, year-to-date, through this writing on March 28, 2020 (source: Fasttrack).

Normally we would expect our Flexible Income accounts (which have no growth stocks) to do well when the stock market declines. Investors getting out of stock have to put their money somewhere and the bond market is the usual choice. Money moving into the bond market drives bond prices up and interest rates down, but that did not happen this time and our Flexible Income suite of strategies was our worst performer, down 15.11% year-to-date. That is a lot better than the stock market, but not what conservative income investors expect.

I have moved Flexible Income portfolios to 62% cash and Treasury Bills, considered the world’s safest investment. This strategy fills out its list of holdings with 25% gold and a small holding in a low volatility fund that has been working well lately. At the moment we are earning close to 2% dividends on the Treasuries, a good place to be until the bond market shows me what it wants to do.

Our Shock Absorber Growth Suite of strategies (four strategies, each with different buy and sell disciplines) has made a tiny profit this year, as of March 30th, and is waaay ahead of the S&P 500 Index for the year. I have done this by selling investments as they begin to weaken, and when cash builds up from these sales, that is my signal to use inverse fund as hedges (not to be confused with hedge funds). These are investments that go up as a market goes down, sort of like the shock absorbers on your car, stabilizing your portfolios in rough markets.

Our Ultra Focus strategy holds four Chinese Index funds, each showing nice gains, along with some T-Bills. I regularly scan 533 index ETFs (Exchange Traded Funds) and Chinese ETFs hold most of the top spots for recent performance, so this is where Ultra Focus is concentrated.

Target growth holds index ETFs in Consumer Goods (makers of TP, Purell, etc.), Health Care and Pharmaceuticals, plus a handful of growth stocks and a gold fund.

Future Technologies holds Index ETFs in Biotech, Telecom and Chinese Tech and Internet Indexes, and a few individual tech stocks.

Our Long/Short Index strategy holds a low volatility S&P 500 fund and a chunk of T-Bills.

Currently Shock Absorber Growth holds about 46% stocks and at this writing we hold no hedges, but I am prepared to put them back on as soon as the market turns down in a meaningful way. The late Marty Zweig had a saying, “Don’t Fight the FED,” and with money flooding our markets, last week’s rally could continue. So our 46% stocks, rather than zero or 100%, is a prudent position in my opinion.

And that is how we are staying in sync with this market.

Shock Absorber Growth* is our 100% growth portfolio.
Flexible Income* is our 100% income portfolio.
Adaptive Growth Portfolios* are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*.
Adaptive Balance* is 50/50 between growth and income.

Mental Floss…

Our Spotlight Strategy – Flexible Income

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 income producing stocks 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.

Click here to read more about Flexible Income.

Ladies: Treat Yourself

Jennifer Brown has run a high-end hair salon, Salon 3 West, on the first floor of my office building for many years. Jennifer wants you to know that she is running a special, offering private appointments to get your hair done. There will be no other clients around. Now you can get your hair done in a luxurious environment and do your social distancing too!

If you have never seen Jennifer’s salon, it is worth the visit just to see what has been done with this exquisite space, including rich woods, arched walkways, decorative tile, a fireplace and more. This may be the finest hair salon in the Prescott area. Check it out!

Call Jennifer at (928) 778-7111 for your private appointment. Go ahead and mention my name if you want to.

* 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.