November 5, 2019

This Space Stuff is Getting Serious

Two pieces crossed my desk last week from Peter Diamandis’ Abundance Insider that may change the way I look at space projects. Once relegated to the “no immediate benefit” cubby in my mind, these space projects are happening now, with commercial implications:

NASA’s Collaborating with Caterpillar on Moon Mining Machines

What it is: NASA has recently teamed up with autonomous construction vehicle manufacturer Caterpillar to develop machines for excavating and mining the Moon. The two have long collaborated on robotics projects, but it is the autonomous capabilities of Caterpillar’s vehicles that make the company uniquely positioned to develop technology for NASA’s lunar exploration programs. According to NASA spokesperson Clare Skelly, “there are many synergies between what NASA needs to meet exploration goals and Caterpillar technologies used here on Earth.”

Why it’s important: On the heels of revived interest in lunar exploration and the goal of establishing a lunar base, NASA has been heavily pursuing methods to make tasks easier for astronauts. Given multiple hazards associated with navigating the lunar surface, semi-autonomous vehicles could minimize dangerous construction work done conducted directly by astronauts. Once validated and fully autonomous, Moon-mining machines might one day provide a continuous supply of raw materials, from dust to water, for NASA’s proposed lunar outpost.

(From Will): Caterpillar’s stock price has been in a general downtrend for two years, but last week’s strong performance suggested a breaking out of the downtrend. This new market (or maybe just this article) may be part of the reason.

The other item I saw was about the ongoing 5G cellular buildout. 5G has the ability to provide safer, more efficient homes, allow cars to get enough data to drive autonomously, and more hard-to-imagine things including holographic telephone calls. Yep, it can be like the person is sitting next to you. Beam me over, Scotty! 5G is so efficient it will replace traditional Wi-Fi. Latency, or waiting times for data, will be so reduced that it will become unnoticeable. Surgery will be able to be done over the Internet using robotic instruments.

Three major competitors are engaged in an entirely new kind of space race. First up is the work of an engineer named Greg Wyler, who has long pursued the use of technology to eradicate poverty. Back in the early 2000s, on a shoestring budget, Wyler helped bring 3G to communities in Africa.

Today, backed with billions from SoftBank, Qualcomm and Virgin, he’s launching OneWeb: a constellation of about two thousand satellites bringing 5G download speeds to everyone.

Yet despite the radical network upgrade of OneWeb, Wyler’s a David compared to goliaths such as Amazon and SpaceX. Early this year, Amazon joined the satellite competition, announcing the e-commerce giant’s intention to deploy “Project Kuiper,” a constellation of 3,236 satellites aimed at providing high-speed broadband to unserved and underserved communities around the world.

And SpaceX topped these figures in 2019, as Musk’s rocket company began launching a monster constellation of now over 30,000 satellites called Starlink. If Musk succeeds, it’ll mean global gigabit connection speeds at near-zero costs. Sixty-six of those satellites are already in orbit, and another 1,000+ are scheduled to launch in 2020.

(From Will again): When I first heard about these private space races, I thought the uber-rich were just exercising their egos having space ships and all. Now I see the commercial potential of owning or controlling all of these transformative cellular services. Maybe that kind of vision is why they are so rich.

What the Markets Are Doing

As of November 1st, two major stock indexes have broken out to the upside of the trading range that they have been stuck in for the past 6 months. The Dow Jones Industrial Average and the small company Russell 2000 have not yet broken out, but all in all, this new uptrend is good news for stock owners.

As an uptrend builds momentum, it is normal to see the markets exhibit reduced sensitivity to news headlines which have rocked the markets this past summer. It is a good sign when the market can shake off negative news and move upward, ignoring uncertainties like the political polarization gripping the US, trade war negotiations and the Brexit cloud hanging over England and the EU, plus an economy that has slowed some after the boost provided by last year’s tax cuts. The markets are climbing the wall of worry, as the old saying goes.

The crowd who is out of the stock market because they are waiting for the recession the media has been wringing their hands about for almost 12 months, which looks unlikely to appear any time soon, will become more and more disappointed and disillusioned as the stock market marches upward. Their investment money will begin to trickle back into the stock market, putting a strong tailwind at the back of current investors.

As expected, the Federal Reserve cut interest rates last week for a third consecutive time this year in a move that is stated to support maximum employment and stable prices – something we have all enjoyed the past few years.

Rate cuts have been good for investors during past business cycles. In a Bloomberg interview, Ryan Detrick of LPL, said “We’ve seen periods of economic slowdowns that had three consecutive 25 basis point cuts . . . The good news is the economy accelerated after the slowdowns and stocks did quite well . . . the market tends to extend its gains after three successive interest-rate cuts by 10% over six months, and 20% a year later.”

High quality bonds such as Treasuries struggled, caught in a tug of war as the Fed lowered short term rates and the market pushed long term rates higher. Rising interest rates depress existing bond prices, hurting bond holders.

High Yield (junk) bonds have been strong, however. Junk bonds are one of the better indicators of what to expect from the stock market, and they are sending out another good signal for stocks right now.

International stocks are also doing well now and have broken out above the trading range they have been caught in for most of this year.

Oil remains at remarkably stable prices, well below the highs.

Recessions have never happened in recent history during times of low gasoline prices and low interest rates. Unless one of those spikes up, a recession looks very unlikely. Combining that with favorable seasonality for stocks makes gains very likely. This is a good chance to step back and enjoy the ride in what I expect will be a very significant move higher into year end.

What’s Happening in Your Portfolio

As I suggested in my mid-month update (sent to clients, only), due to improving market conditions, I was becoming more and more invested after spending much of the summer holding significant amounts of cash and hedges as the market chopped sharply up and down.

There were 10 different trend changes over just the past three months, and this presented the most difficult environments I have seen as a trend follower.

The kind of market we have just come through is the kind that can wear you out or scare you out, and I’ll tell you I’m glad the market is breaking out with a new feeling. My strength is in ignoring the noise of the media and clearly identifying a market trend as it unfolds with facts and math. However, I do not have a crystal ball to see what is coming, but only respond to actual changes in the market. When a trend causes us some small losses, I react to get in sync with the new trend. When the trend changes and causes more small losses, my system picks up those signals and tells me to re-sync the portfolios. A choppy market like we had this summer can cause a series of small losses which can add up, and that is what happened to our Shock Absorber Growth* suite of strategies the past few months.

Now that we are entering a period that usually delivers solid stock gains, and the Fed is giving the market a shot of adrenaline with its rate cuts, I have moved our Shock Absorber Growth* accounts to fully invested, and the accounts have begun to respond nicely.

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

If you have friends that are lamenting being out of the market as it moves upward, have them give me a call to discuss whether my strategies that Adapt to Changing Markets® can help them. Or stop by to pick up one of last year’s new books “Why Bad Things Happen to Good Investments.” Please don’t keep me a secret. Telling your friends about my work is one of the nicest things you can do for me – and them.

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.

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

Your kind thoughts, business and referrals are what keeps Hepburn Capital going strong after all these years. This time of year, we like to pause and give thanks that you are in our circle of friends.

A tangible way we can do this is to help you avoid long lines at the post office by using our US Postal Service account and do your mailing from our office. We have found the USPS to be the most cost-effective shipper, and we have the scales and computer accounts so we can price your shipment, print postage-paid labels for your packages and have the Postal Service pick up your package at our office.

Hopefully, this service can be a headache going away for you. Check it out, and enjoy a happy Thanksgiving.

* 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.