October 1, 2019

The Words Don’t Match the Music

For more than a year now there has been a drumbeat of recession coming, recession next year, recession likely. I know that a recession is always out there on the horizon, but they really don’t matter until they are happening right now. I’m sorry, but I am just not seeing a recession when I look at the numbers, which makes me wonder about all the news stories regarding one.

Market metrics such as the numbers of stocks rising vs falling, the share volume of rising stocks vs falling, numbers of stocks beating estimates for earnings and sales all are bullish.

Employment is staying high and wages are beginning to rise. Interest rates and energy prices are all low, an environment that is good for business.

And housing, which accounts for about 15% of GDP, is doing great as this item from Elliot Eisenberg, PhD notes: “. . . August existing homes sales hit their best level in almost 18 months, August starts were at their highest level since 6/07 . . . August new sales are at their best level since 10/07. June and July new sales were revised up!”

Recessions, when they begin to show up in the numbers generally take many months to actually take hold on the economy, and the stock markets are the best early predictor of a recession. The stock market may be doing its normal two steps forward, one step back, but as of this writing on September 27th, the S&P 500** is within 2.12% of its all-time high of 3,025 on July 26th. So, the stock market is not exactly projecting a recession, either.

So, what is happening? I am wondering if the flood of recession articles might be more politically motivated rather than based in economic reality. Remember, the media outlets that are talking up an imminent recession are the same ones that predicted that Mrs. Clinton was a sure thing to win the presidency in 2016, so I don’t believe a lot of what I see, hear or read from them.

The end game may just be to make the public fear a recession enough to curtail spending and investment enough to actually create one. Recessions and their big brother depressions are aptly named because they are as much a psychological phenomenon as an economic one, and mind games are a basic tool of the misinformation campaigns I mention frequently here.

I would not recommend selling based upon these kinds of news reports and would stay invested until the market tells us a recession is happening. Right now, the words aren’t matching the music of the market, so investors need to decide which to follow.

I’m happier every day that I make my investment decisions based upon the numbers rather than the daily news.

What the Markets Are Doing

John Mauldin published this piece from Robert Ross, editor and senior equity analyst at Yield Shark, that sets a very positive tone for our stock markets.

“When Being Bullish Is Contrarian — Sometimes investors seem to have a death wish. Maybe it’s a hangover from the financial crisis… or fatigue from the longest bull market in history. Whatever it is, most market analysts have ignored positive economic data when it doesn’t fit their “doom and gloom” forecast. Look at the Bloomberg Economic Surprise Index (BESI). The index includes existing home sales, jobless claims, consumer spending, and other key measures of US economic strength.

The BESI slumped in late 2018/early 2019: Source: Bloomberg Today, it sits at an 11-month high and says the outlook for the US economy is strong. Not many Wall Street analyst would agree with that right now. There is a clear disconnect between economic reality and the rhetoric on Wall Street. When that happens, it creates opportunities for investors who spot the mismatch early and get positioned accordingly.”

A shift in market sentiment has been slowly emerging since late August as defensive stocks began to lag and growth stocks took over leadership of the markets. On Sept 9th, Apple‘s announcement to enter the streaming entertainment business rocked the technology world. That caused sharp losses in former growth leaders now facing a new competitor, but the market stabilized quickly.

Interest rates have risen since early September, and the lows of 2016 have not been broken, telling me that the generational shift in interest rates from a long-term decline in rates to a long-term rise is still unfolding as suggested by the 60-year cycle evident since the 1760’s. This is not a good thing for bonds as they appear to be caught in the beginning a 30-year downtrend which will be a serious headwind for bond holders.

Much is being made of the negative interest rates now being paid on government bonds in two thirds of the world bond markets and what will happen if our bond yields drop that low. First of all, I don’t think that will happen here. Just because Europe and Japan are experiencing negative rates doesn’t mean we will, too.

If our rates were to go negative, 10-year bonds bought today might make a 5-10% capital gain as rates dropped to zero. And, if rates jumped back from zero to the historic average of 6%, ten-year bonds could lose around 50% of their market value. Let’s see, a potential 5% gain paired with a potential 50% loss? That is not a good risk-reward relationship if you ask me. Bond holders will get creamed if that happens.

Gold extended its run in September, but is currently in a short-term downtrend.

Energy markets were shocked by the attacks on the Saudi oil installations, but bounced back shortly after when Saudi production started coming back online.

China’s stock markets are caught in an ongoing downtrend that began at the start of last year, when President Trump began talking about changing our trade relationship with that country.

European stock indexes, after a strong first quarter of 2019, have done nothing.

College Classes Coming

Fun-damentals of Investing for Retirees

Investing does not need to be dry. I try to make investing come alive with insights, humor and insider tips that allow you to discover how the principals being taught relate to you personally. This course can help you become more confident about your financial decisions.

In an easy format, we discuss 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 taxes on IRAs, planning to get the results you want, avoiding common investment mistakes and proven risk-reducing strategies that anyone can use.

3 Thursdays: October 24, October 31, and November 7th. 2:00-4:00 pm at Yavapai College. Tuition is $45.

Register online with the link below or call the college at 928-717-7755 to register for class #FA19-035.

Register for the class online: Fun-damentals of Investing for Retirees

Smart IRA Strategies

Discover proven strategies for IRA rollovers, conversions to Roth IRAs, special rules when inheriting IRAs, how to manage taxation on your IRA withdrawals, age 70 ½ decisions, eliminating taxes with Qualified Charitable Distributions, the best kinds of investments to use in IRAs, and more in this important class. If you have an IRA, this class can save you a lot of money and help you get the results you want.

Thursday, October 17th from 2:00-4:00 pm at Yavapai College. Tuition is $45.

Register online with the link below or call the college at 928-717-7755 to register for class #FA19-039.

Register for the class online: Smart IRA Strategies

What’s Happening in Your Portfolio

The stock market endured a sharp 6% decline during the 3rd quarter before recovering part of that loss, and our Shock Absorber Growth* suite of strategies did a good job of navigating the investing waters. The two-day period of September 9th-10th was the exception when tech stocks hit an air pocket, causing values in Shock Absorber Growth* strategies to drop. I was able to react quickly, and by midday on September 10th, I had sold the weakening stocks and raised our cash position from 18% to 38%.

Two days does not make a trend and the market has stabilized since then, allowing me to put some of our cash back to work in the current leaders.

Current cash levels in the portfolios are about 20%, with small hedges reducing our equivalent stock market exposure down to 66%.

As of this writing on Friday, September 27th, the S&P 500** index closed at 2,971, and seems to be having trouble breaking above its previous high from July 26th, of 3,025.

If the market continues up through the 3025 S&P price, I will get more and more aggressive and put the cash to work as I will be expecting a strong 4th quarter for the stock market.

If it retreats, I will add to the small hedge we now hold as those investments go up as the market goes down, cushioning the portfolio and allowing us to keep our stronger stocks without much risk. We will remain in capital preservation mode until we get the upside breakout above 3,025. Rather than guessing about what the market will do, I am waiting for the market to tell me what it is trying to do before acting.

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

Flexible Income* portfolios lost some ground as interest rates pulled our bond ETFs downward. I have sold them and moved that money into managed income funds that have fared much better than the indexes.

Our Municipal Income* portfolio had another solid quarter and continues to be our best performing model. As a result, muni funds have been added to our Flexible Income* portfolios.

• 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

I fly, yet I have no wings. I cry, yet I have no eyes. Darkness follows me; lower light I never see.

What am I?

Answer:  A cloud.

Our Spotlight Strategy – Adaptive Balance

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 indicators are used to determine a stock market exposure that adapts to both strength and weakness in the market, directing exposure to the HCM Shock Absorber Growth strategy 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.

Click here to read more about Adaptive Balance.

A Slice of Life

I Love Technology!

I may have said this before, but I love technology, especially when it allows me to work from anywhere. The past 3 weeks I have been in the Mediterranean, driving and cruising around and seeing some fabulous sites. Technology allows me to trade and do investment analysis from anywhere, as you can see in this photo from our hotel above the beach at Tossa de Mar on northeast Spain’s Costa Brava.

Among the sights we have seen are the Carrières de Lumières in Provence, France. This old limestone quarry dug into the side of a hill left a group of 40’ high, straight walled caverns. Someone had the idea to project onto the walls the works of Van Gogh. All of the walls simultaneously have Van Gogh images and then fade them in and out while changing scenes. The whole thing is simply mesmerizing. Check it out at https://www.carrieres-lumieres.com

I’m doing my final edit of this newsletter in the Barcelona airport, heading home. So, I’ll be back in the office tomorrow by the time you get this.

Life is really good when you can do what you love anywhere in the world.

* 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) 2019 William T. Hepburn. All rights reserved.