January 11, 2011

Update On Credit Card Rules

The Investment View from Prescott, Arizona

The federal government has just finished issuing a dizzying array of rules and reforms affecting the plastic you carry in your wallet. Although these reforms are much needed, the banks are already scrambling to extract fees from us in other creative ways.  It will be interesting to see the credit card landscape in another year or two.

In case you had trouble keeping track, here are some of the important changes.

Credit cards: Under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, consumers must be given a 45-day notice before any significant changes affecting their account terms can take effect. Such changes include higher interest rates, fees, and finance charges. Consumers who exceed their credit limits cannot be charged an over-limit fee without their consent. Card issuers must send statements a minimum of 21 days before the due date, which must be the same date every month.¹

Debit cards: Banks are required to have a debit-card user’s permission before they can charge overdraft fees on point-of-sale purchases and ATM withdrawals (overdrafts via paper checks and automatic payments are exempt; banks can continue to cover them for a fee without the account holder’s permission). Card holders who agree to the fees will have their purchases authorized when their accounts don’t have sufficient funds. Card holders who don’t accept the fees will likely see their over-limit purchases declined.²

Gift cards (and certificates): Issuers cannot charge inactivity fees on cards sold on or after August 22, 2010, unless the card or certificate has been inactive for at least one year. After one year, the issuer may levy inactivity fees, but no more than once per month. The money stored in a gift card must be usable for at least five years from the date the card was issued. If a consumer adds money to the card, the amount added must also retain its value for at least five years.³

1) Bankrate.com, 2010
2) National Foundation for Credit Counseling, 2010
3) Federal Reserve, 2010

Cathy and I just returned on Sunday from a week of recharging our batteries at our favorite RV park in the Palm Springs area. It was nice to be in shorts and tee-shirts and walking the golf course every day again.

It was a great trip other than 40 miles of bad road on the California section of I-10 and a little shrapnel hitting us when the semi we were following that night slammed into a small car that pulled onto the road with no lights and no warning.  

Amazingly, the woman driving the car walked away from it all.   Since I was the first on the scene and hadn’t practiced first aid since my Boy Scout days, I was especially grateful that she was not badly hurt.  Her survival, when her back bumper and rear seat became one, gave me a new respect for the crumple zone technology they have built into passenger cars these days.

How’s The Market Doing?

The stock market had an incredible December in which the S&P 500** Index had 81% up days, compared to the historical average of about 51%.   The stock market seems to finally be losing steam with 3 of the last 4 days down (through January 7th).  It is overdue for a breather.  

The decline that is underway was not unexpected, as in my last newsletter I had written about the lack of participation in the market as volume of shares trading hands in December was unusually low.

Low volume uptrends can be easily reversed by just a small number of sellers, so they always make me especially cautious.

January looks to be a rocky month for stocks and then hopefully we should have a few months of lower risk money making opportunities.

After the first trading day of the year, major stock indexes are mixed, with the Dow Jones 30 Industrials** and the Nasdaq Composite Index** up and the S&P 500** and Russell 2000** (Small Company) indexes are both down.  The Europe Asia and Far East Index** of developed countries and emerging markets indexes are down for the year, with Japan being one of the only bright spots in international investments.

This type of stock market action confirms my outlook for a rough January.

The sharp decline in the bond markets that began in November has abated, however the bond market is going sideways, not up.  Is this just a pause in a longer decline, or a reversal point which will send bond prices higher?   Recent charts don’t give me a clear reading on this, however with the 60 year cycle low clearly behind us, right on schedule last November, bond investors should be prepared for outcomes that tend to work out poorly.

Treasury bond yields that are sharply higher than just a few months ago have attracted foreign buyers.  When foreigners want to buy our bonds, they first must buy dollars creating demand that pushes up the value of the dollar.

The gold decline I have been expecting for a while appears to be unfolding as gold has dropped sharply this past week.  There is a 13 12/ month cycle in gold which is pointing hard down this month, and although I expect this rough patch for gold to not be too severe, right now is not the time to be buying gold.

Oil, basic materials and agricultural commodities are looking strong as discussed elsewhere in this newsletter.

What We Were Saying Back Then

From my January 12, 2010 Newsletter:
“. . . the long maligned US dollar may have bottomed on world markets.  It is too early to tell for sure, but I noticed this turnaround last month.”

Back to the present:   The dollar did in fact rise during the first half of 2010, as commodity prices fell, making the 2008 low for the dollar appear to be an all time low with a significant uptrend following it.  If this trend continues, the dollar should continue to strengthen.

It is normal for the prices of things not denominated in dollars such as commodities which are counted in barrels, bushels, pounds and ounces to move in the opposite direction of the dollar.  During the first half of last year when the dollar made a big run, commodity prices drifted downward as one would expect.

Now, as the value of the dollar is once again rising we would once again expect to see commodity prices falling as we did last year, but commodities, across the board, are rising strongly despite the influence of a rising dollar.  

This indicates strong underlying strength in commodity prices and could be the precursor to a strong whiff of inflation coming down the pike.  Stay tuned . . .

What’s Going On In Your Portfolio?

The Flexible Income* model sports five new income stocks all with dividends in the 7% range, plus a high yield bond fund and a floating rate bank loan fund.  I believe that all of these can better withstand another bond market decline should another one occur.   

The use of stocks in the Flexible Income* model is new, however, I’d like to point out that these are not growth stocks that tend to have volatile price changes normally associated with stock investing.  These are income oriented stocks that tend to be much more stable in price than common growth stocks.  

If your portfolio is managed using our Flexible Income* strategy, rest assured that the risk reducing features of this strategy are still operating as normal, so this remains a low risk way to invest.  If this change concerns you, feel free to make an appointment to discuss this new tactic that I am using.

Treasury bonds have been under pressure for several months, so I think it is wise for bond investors like us to be ready to defend portfolio values if interest rates continue to creep upward.

In addition we have two currency funds, one which should benefit from a strong dollar.  We also own about 10% in a physical gold ETF, after paring our holdings back in anticipation of the low for gold I expect over the next month or so.  After that cycle bottom is behind us I will reevaluate the amount of gold in our portfolios.

The Careful Growth* model is invested in 27% energy and basic materials stocks, including some gold, and 15% in growth stocks.  We currently hold 20% in international, and baring a quick turnaround, I will be paring this back soon.

We currently hold inverse ETFs calculated to make our holdings “market neutral”, meaning the effects of a general market decline should cancel itself out with gains in the hedges.  This technique allows me to protect your portfolios from an imminent decline without having to sell holdings that we will want to hold when the market resumes its uptrend.

If the market decline picks up speed and triggers our HCM Safety Net levels, current holdings will be sold off one by one and our overall investment posture will shift so that the hedges outnumber traditional holdings and, in this way, we can actually profit from large declines.

This has been an especially effective risk control measure for us in the past.

A change is being implemented for Careful Growth* portfolios that will get us back to fully invested more quickly after a decline appears to be over.  My aversion to risk has had us reentering the market slowly, causing us to miss some valuable opportunities over the past 18 months.  This change should improve our financial performance.

My style of investing is not perfect.  There is no perfect way to do this.  What keeps my long term track record better than the main market averages with less than half the risk is my ability and willingness to change my strategies so that they Adapt to Changing Markets®.

A big difference in investing with me or buying a mutual fund is that most mutual funds will invest the same way year in and year out.  If something is not working it is up to you to recognize it and change funds.  At Hepburn Capital we continually evaluate our strategies and performance to see what is working and what is not.  If things need changing, I take care of it for you, so you have less to worry about.

Riddle:

Q: Different lights do make me strange, thus into different sizes I will change.   What am I?

A: I am the pupil of an eye.

Our Spotlight Strategy

Flexible Income Strategy

*    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.

Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information

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.