May 12, 2009
We Have Liftoff!!
Basic economics tells us what drove the stock market so far down this past year. A huge amount of selling is what drives markets down.
What do you think the sellers did with their proceeds? They sat on the sidelines in cash – money market funds, T-Bills and CDs – tired of earning next to nothing and waiting for the storm to abate and present them with a time to get back into the market.
Several times this past winter I described the huge amount of cash that built up on the sidelines since the market’s peak in October, 2007 as rocket fuel and I suggested that when the rocket takes off it could be spectacular. Well, that rocket has lifted off and life is good for clients of Hepburn Capital.
The market turned around two months ago on March 9th, and because I had been expecting it, I was ready to take advantage of it. I began investing for this uptrend on March 12th and within another week the trend had clearly broken upward. And since then there has been no looking back.
Our Flexible Income strategy* has recently hit all time highs having entirely made up the small losses of the past year, and then some.
Our growth accounts* have shown astonishing growth as our small holdings in bank and financial stock funds have almost doubled in value. The Careful Growth model* is within single digits of its all time highs with double digit gains so far this month (as of this writing on May 8th).
Naturally those of you invested in our Balanced strategy* have seen great returns, too, since you have about half of Flexible Income* and half of Careful Growth*.
Current holdings are pretty much unchanged from my last report and include banking and financial funds, emerging markets, technology, retail, leisure and high yield bonds, all of which are doing well at the moment. Some, amazingly so.
With that said, it is time to get all of our feet back on the ground. There is a saying that trees do not grow to the sky, and the uptrend of the past two months has been so steep that it is clearly unsustainable.
Some day it will end and all of those who missed the rally will be able to point and say “I told you so”. Even a broken clock is right twice a day. In the mean time we will have made some great gains.
There are a couple of price points close ahead at which I expect to see increased selling. We call these areas “resistance”. Whether the selling will be heavy or not, I cannot tell, however you can rest assured that as soon as the trend turns down in a decisive manner I will act quickly to protect the gains we have racked up since early March.
Because no one can accurately predict the market, I will wait until the price action shows me a change in trend, and then I will act quickly. As Albert Einstein said, “Make things as simple as possible, but no simpler.”
If you have friends that are struggling to deal with the ups and downs of this stock market, please ask them to call me. I may be able to help them. And telling your friends about my work is good for them and for me, a real win-win.
Promoted to Chairman of the Board
The past week found me in Denver, presiding over the annual conference of NAAIM, the National Association of Active Investment Managers and turning the gavel over to a new president.
This next year I will be the Chairman and still active as I steer policy within the organization. Between the up and down market that has put active management in the sweet spot of the industry, and the projects I have pushed to initiate over the past few years, NAAIM is gaining much national attention.
For years, market watchers polled individuals for one sentiment survey and newsletter writers for another. I had noticed that as strange as it seems, no one ever polled actual money managers.
Sentiment indicators work backwards from what you would logically expect, as I have explained in past newsletters. When investors say they are bearish on the market that means they have probably already sold, too. This changes them from being potential sellers to being potential buyers. And when buyers outnumber sellers markets will begin to move up. So a bearish sentiment reading is really a bullish factor. Got it? Yeah, I know. This is a crazy business.
The NAAIM Survey of Active Manager Sentiment, is a weekly poll of NAAIM members who are professional money managers. It gauges their confidence in the stock market by asking how much of their portfolios are in stocks and then averages all of the answers. You can see the results at http://www.naaim.org/naaimadsenttrend.php In this chart you can see that NAAIM managers as a whole became progressively more conservative even before the market peak in 2007. This is no contrary indicator, as these men and women have shown that they are consistently ahead of market action, not opposite of it.
On January first, we launched the NAAIM Actively Managed Mutual Fund Index to provide the industry’s first hard data on active management vs. passive index investing. The Index has handily outperformed the S&P 500** over the past couple of years, as well as year-to-date.
The inaugural NAAIM Award for Advancement of Active Management, a $10,000 cash prize for the academic paper that best furthers our cause, was given at an awards dinner on May 2, 2009 to Justin Lent, an independent trader & quantitative trading consultant for his work on Tactical Equity Allocation Model (T.E.A.M.) A Quantitative Approach for Investing in Long-Term Trends by using Short-Term Mean-Reversion Techniques to Optimize Risk-Adjusted Returns. If you don’t know what all that means, that’s OK. I do, and that is one of the things you pay me to take care of.
NAAIM is a greatly respected organization, and these projects are part of why that is so. Getting to lead this group of innovators and entrepreneurs was a great privilege.
Congratulations Matt and Cathleen
Today is Mother’s Day and I got to listen to my son Matt serenade my wife, Cathleen, on the stage at the Yavapai College Choral Union performance. Cathleen sings in Angelorum, a high powered women’s choir that has toured internationally, and Matt is with YC’s chamber singers. Matt also wowed the audience during last week’s Big Band performance at Yavapai. He definitely has his mom’s talent for music.
Happy Mother’s Day, everyone.
Riddle of the Week
What gets wetter and wetter the more it dries?
(Check your answer below after the college class schedule.)
FIN100 Basic Investing for Retirees
My Yavapai College class, Basic Investing for Retirees has been one of the most popular classes offered at the college since I began teaching it in 1990. As part of the Community Education program, this is a non credit class including 8 hours in the class room – four days for two hours a day.
My basic class has proven so popular that former students often show up again bringing a group of friends with them, creating a very social atmosphere. And I have figured out how to make the class fun, too.
In February, we filled the class to its capacity, so as friends and clients I wanted to let you know that if you want to sit in on this class, now is the time to call the college and register. And if you have a friend who has had a rough time in the market, please tell them about this great class.
In Basic Investing for Retirees investors wanting a financially healthy retirement can discover how to more effectively use stocks, bonds, mutual funds and annuities.
Topics include investments with the most potential to get the results you want, which ones to avoid in this economy and why, managing IRA taxation, 5 powerful risk reducing strategies everyone can use to get through the recession, the #1 blunder investors make without knowing it and the great lesson of 2008. Ask any questions you want. This class will give you dozens of tools, insights and tactics to gain better control over your investments, right now.
Wednesdays and Thursdays, June 3 to 11, 2009 1:30-3:30 Class #S050 $75
FIN101 Advanced Investment Analysis Using Charts
If a picture is worth 1,000 words, a chart is worth 1,000 numbers. Most of us find it easier to relate to pictures than pages full of numbers. By using charts you can feel better about your investment decisions and perhaps become a better investor.
This course is designed for the somewhat experienced investor who wants to use technical analysis of investments as a decision-making tool.
Topics include understanding moving averages, trend-line analysis, relative strength analysis, ulcer indexes, price momentum oscillators, breadth and volume indicators and more. Explore several web-based charting services available to the public.
Wednesdays and Thursdays, June 17 and 18, 2009 1:00 PM – 4:00 PM Class #S051 $70
For details or to register call Yavapai College 717-7755 Or visit www.yc.edu/ce
This Week’s Riddle Answer
* 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.
Information in this newsletter is 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 constitutes a solicitation for the purchase or sale of any security.