June 10, 2014
What’s Next in the Series of Investment Bubbles?
The Investment View from Prescott, Arizona
In 2000, the technology bubble deflated and the stock market began a crash from which some investors have yet to recover. The tech laden Nasdaq** composite Index still needs to gain another 20% to again hit its 2000 highs, and that is after 14 years of being underwater. Ugh!
After the stock market collapse, investors began to look in places other than the stock market and in response to cheap mortgage money began bidding up the price of real estate, creating a bubble there. When real estate began to slide, investors who were lucky enough to be able to sell their property had to find another place for their money.
Commodity prices went into a bubble (remember $150.00 a barrel oil in 2008?) until they, too, crashed.
The latest investment category to post record high prices is bonds, due in large part to government buying. Until a year ago, interest rates had been at historic lows, meaning that bond prices, which move opposite to interest rates, were at historic highs. If you bought tech stocks in 1999 or real estate in 2006, you can imagine what I mean. Prices so high that they can only go down! The question is when.
A decline in bond prices will mean an increase in interest rates, perhaps accompanied by inflation. Rising inflation and rising interest rates often go hand in hand.
Many people who remember the high inflation of the 1970s have been expecting more inflation for many years, especially with the government printing so much money.
The text book definition of inflation is too many dollars chasing too few goods, and we definitely have too many dollars, so why don’t we have inflation?
The reason is that the definition of inflation has two parts. The first is too much money and the second is money being spent on goods. What we don’t have is inflationary spending, yet anyway. All that new cash is either being used to pay down debt or it is just sitting in banks earning interest as a method of shoring up the banks. But it is not being spent.
But things may be changing. Local governments are reporting record increases in sales tax revenues, a concrete indicator of rising spending. Interest rates have begun to creep back up, too. The government is gradually cutting back their buying of bonds which had kept interest rates low and bond prices high. This will allow interest rates to float back up to a level determined by the market, not the government.
The president of the Chicago branch of the Federal Reserve Bank, at an economic conference in Istanbul last week, said that “the Fed’s 2% inflation target should not be seen as a ceiling and that the target could be higher.”
The Fed is normally very circumspect about what it says so it does not openly influence a market. For one of their members to openly say we should expect high interest rates is an extraordinary statement.
One of the problems with inflation is it rarely just creeps up. Normally it spikes up in response to some event. I don’t know what that event might be, but with the Fed withdrawing its support from interest rate markets and telling us to expect higher inflation, something is coming.
The real problem is embodied in the words of William Hamilton, an early editor of the Wall Street Journal. “The graveyards of Wall Street are littered with men who were right too soon.”
All of those investors who were sure that inflation was coming 5, 10 or 15 years ago have been really, really wrong. The key to successful investing is to not invest based upon opinion, but on hard evidence. We want to see inflation taking off before actually moving into investments that will benefit from it.
I continually watch the investment markets for signs of problems and can move to protect my client’s investments very quickly. I would suggest that you be prepared do so, too, or call me for an appointment to see how I can help do it for you.
Slice of Life
Until just a few years ago I played about 200 softball games a year including tournament play all over the southwest part of the country. The ball on the shelf at my office is one that I hit over a 300 ft fence at Pioneer Park twice in one game at age 55 so I did pretty well out there.
I finally had to start acting my age and hung up my ball glove a few years back. I did not realize how softball defined me as “not old” until I quit and no longer had bragging rights.
I was chairman of the league for several years so I still support it and may even begin to umpire for them a bit just to hang around the fields. But I will definitely leave the glove at home.
I’m excited because the team sponsored by Hepburn Capital is in first place in its Prescott Senior Softball league, too.
Life is good!
Mental Floss
On April 23, we celebrated the 450th birthday of the greatest word-maker who ever trod the earthly stage. Of the 20,138 base words that Shakespeare employs in his plays, sonnets, and other poems, his is the first known use of more than 1,700 of them! The most verbally innovative of our authors, Shakespeare made up more than 8.5 percent of his written vocabulary. Reading his works is like witnessing the birth of modern English.
Among his verbal inventions are: auspicious, bedroom, bump, dishearten, dwindle, hurry, lapse, lonely, majestic, road, sneak, and useless. So great is his influence on his native tongue that we find it hard to imagine a time when these words did not exist.
How’s the Market Doing?
Follow Through is Happening
The market had been showing a split personality for more than 3 months, with the large company indexes, The Dow 30** and the S&P 500**, holding steady, while the Tech and small cap indexes broke down significantly.
Every time the small company index had a good day, it would immediately stumble and fall lower. Finally a few weeks ago, the small caps broke out of their slump. The best markets are when everything is going up and we now have that. A rising tide will lift all boats, including yours.
Last month I warned about an impending decline in gold prices, and two weeks ago (this is written on June 8th) gold broke down through a price level it had held steady at for several months. There is a cyclical low for gold due in another month or so, telling us that this is not a time to be a buyer of gold.
Interest rates which had been drifting lower during the weak economic period last winter and spring have begun to reverse up. I can’t say that this is the beginning of another prolonged uptrend, but many analysts have been looking for rates to rise and this may be what we are seeing.
College Classes Coming
Annuities: The Good, The Bad and The Ugly
Insurance salesmen who can’t find enough business in Phoenix are coming to the area pushing free lunch seminars about annuities. Normally these seminars tout the highest commissioned products and rarely mention the many other options available within the annuity universe.
This 2-hour Yavapai College class has been designed to provide a more balanced approach to looking at annuities, so if you or your friends are interested in annuities, I’d encourage you to sit in on this class.
Date: Thursday, June 26th, from 1:00-3:00 p.m. Call the college at 717-7755 to register for class # SU14-119. Tuition is $45
What’s Going On In Your Portfolio?
As a result of this healthier market, the hedge against a market decline that we held during April and May in the growth model* became unproductive and was sold a couple of weeks back. Risk measures have declined and we have been fully invested for growth for the past few weeks.
Our Shock Absorber Growth* model portfolio currently holds real estate, health care, energy and transportation stocks and funds plus several diversified growth funds. When we are in longer term up trends you will see more individual stocks in the portfolio – currently we have 3. In nascent up trends like we have now I use more mutual funds and will shift to individual stocks as the uptrend becomes more established.
Our Flexible Income* model holds high yield, inflation resistant, emerging market and adjustable rate bond funds as well as a preferred stock fund and a diversified bond fund.
Need a Speaker?
I have had fun doing presentations on “The Top 10 Investment Scams and How to Avoid Them” all over the country. Everyone from local service clubs to Mensa groups have found this program to be both entertaining and very worthwhile.
If your organization needs a speaker, please have them call the office to schedule a time when I can present this program to your group.
What We Were Saying Back Then
As I have mentioned in past newsletters, when it comes to figuring out the direction of the overall stock market, there are only two factors which really matter and they are not dividend yields, earnings growth, IPOs, etc. The only two factors that move the overall stock market are (1) How much money is there? and (2) How much does that money want to be invested?
The Fed has been doing its best to affect that equation by expanding the money supply. Although the rate of increase in the money supply is lower than last year, new money is still being pumped into the economy at rates that a few years ago would have seemed astronomical. Now it seems like that money is also wanting to be invested.
If it keeps up this could be a year in which “Sell in May and Go Away” doesn’t work.
Want to See a Show?
In a golf tournament last week I won four tickets to the Outbound Country Music Fest, June 14th at Pioneer Park, but have a prior commitment so won’t be able to use them. If you would like two or all four tickets please call the office at 778-4000 to reserve them.
Performances begin at 1:30, with headliners the Bellamy Brothers at 6:30 and Emerson Drive at 8:30.
Since the show is outdoors, bring your lawn chairs.
Scottsdale Office Date
Please call the office (928-778-4000) to schedule and appointment with Will in Scottsdale.
Our Spotlight Strategy
With our Shock Absorber Growth strategy we strive to provide an acceptable rate of capital appreciation while experiencing one half of the risk of the S&P 500 Stock Index*, using primarily equity investments.
Your money will be invested primarily in stocks and commodities mutual funds and ETFs, both foreign and domestic, inverse and leveraged, and a money market fund. The proprietary HCM Safety Net indicator is designed to warn of potentially sudden declines in which case stock market exposure may be quickly reduced.
If you would like a current copy of our SEC Form ADV, Part 2, or our Privacy Policy, they are on our website at www.hepburncapital.com/PR/form-adv.pdf and www.hepburncapital.com/images/PrivacyPolicy.pdf respectively.
* 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.
Flexible Income
Adaptive Balance
Adaptive Growth
Shock Absorber Growth
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.
