April 2, 2019

Who Makes Your Investment Decisions?

Money is the mother’s milk of the financial markets. Without it, prices would float down toward zero as sellers wait for buyers with money to spend! As a result of this relationship, one of the indicators I follow is money flows in the markets.

As my friend Tom McClellan, publisher of the McClellan Market Report, has said, “There are only two things that matter in the market. How much money is there to invest and how willing investors are to spend that money?”

Smart investors learn to ignore the financial media’s hype and focus on what really matters, like how much money there is in the market place. This is called liquidity.

Canaries are very sensitive to poisonous gasses and were often taken into coal mines as early warning systems to alert miners of the buildup of harmful gasses. Two categories of investments, closed-end bond funds and high-yield (junk) bonds are like our canary in the coal mine as they are some of the first issues to decline when liquidity gets tight. Right now, both are performing strongly, telling me that there is a lot of money to be invested. As long as investors don’t panic and decide to hoard that money, the markets should be just fine.

There has been a lot of talk in the media about impending recessions, global economic slowdowns and the like. Right now this news is not affecting the markets, and in fact, recessions often take months or years to occur after events like those being reported now have occurred.

Right now, I am not seeing the classic causes of economic recession such as rising interest rates or high oil prices, so any slowdown that does come along is likely to be a garden-variety economic downturn caused by overheated industries. Both automobiles and smart phone industries have excess capacity, so these are likely candidates for weakness, but many industries will probably remain healthy.

My advice is to ignore the media reports of impending doom. Keep in mind that this is the same media that told you Hillary was a slam dunk to be president, and a few other whoppers. Don’t fall for what they are saying until you actually see markets turning down.

If the market stays stable or goes up, stay invested. If the market actually begins to go down, that is when moves to preserve your capital should be made, and not before. The biggest mistake amateur investors make is to get out of a market too early and then not know when to get back in. If you see yourself in this description you need a different way to invest.

My job is to watch the market for you and move your money out of investments going down and into other investments going up, or cash as the moment calls for.

If you are an HCM client you have nothing to worry about. If you are not yet a client of mine, call today for an appointment to talk about making me your designated worrier so you can go off and enjoy life. I am a pro and have been successfully reading and maneuvering in these markets for 32 years.

Who makes your investment decisions, you or a professional investment manager?

What the Markets Are Doing

The stock market had another gain in March, its third up month in a row.

Despite media talk of impending recession, the market keeps chugging along. Don’t fall for what they are saying until you actually see markets turning down.

Yesterday, on April 1, 2019 (no foolin’), reports out of China showed a strong rebound in manufacturing activity that indicate the fiscal stimulus China has been applying lately has gotten traction. Remember what Quantitative Easing did for the US a few years back? That is similar to what China has done to restore the strong growth which has been the hallmark of their economy for a generation or so.

The bond markets rose in March as interest rates drifted down. Lower interest rates raise the resale price of existing bonds issued at earlier, higher rates. If interest rates rise the opposite is true, bond prices will go down, but that is not the case now.

Real estate demand seems to have flattened out in most areas of the US (source @TGMacro), and average prices have even dipped a bit since a year ago. More worrisome is the sharp rise in the supply of homes being sold. The easy money in real estate may already have been made.

The gold market has been sort of squirrely lately with no clear trend. My gold timing model just signaled a sell, so by the time you read this I will be out of gold. Trendless markets are tough on everyone. I think I will hold that allocation in cash and just watch the gold market for a while.

Bitcoin, the largest of the electronic cryptocurrencies has broken out above $4,000 this past month. Fans would say it is up over $800 from its December lows, implying that this is a time to buy. I’m not a fan. I’d say bitcoin is down over $13,000 from its highs of only 16 months ago.

In my experience, price bubbles that burst like bitcoin’s don’t stop declining until they get to the price the bubble took off from. That is below $1,000 – way below where we are now. And, let’s be clear, bitcoin was clearly in a price bubble in 2017, so caveat investor.

Oil continues an orderly climb to $60 per barrel for West Texas oil. Look for gasoline prices to begin rising. This is a good price balance point for oil as it allows energy companies to operate at a profit and consumers can still get gasoline at a reasonable price. If we get much above this price, energy users seek cheaper alternatives. Below this price, producers can get squeezed out of business, crimping supply and running prices up in one of those inevitable cycles.

The dollar remains strong around the world. There are three things that make for a strong currency.

1. Economic strength. As bad as the media would have you think we are doing, we are a lot better off than most places in the world.
2. Political Stability. Our politics might seem crazy, but watch what is happening in Britain, Italy, Venezuela or many other areas. We have it easy in comparison.
3. Military might. No country in the world can match our military. Enough said.

Perhaps the biggest boost for the dollar in world markets is that we are now the world’s largest exporter of oil and gas, meaning we have to give fewer dollars to OPEC.

Anyone who has ever bet against the dollar or the U.S. has lost, so enjoy the good times.

Ready for a Review?

I try not to bug you about matters that you have asked me to take care of for you, but it is important that we occasionally review your circumstances and investment portfolio to ensure that you understand what I am doing for you. I would like to know that you are comfortable with the work and the strategies I am employing on your behalf, and that they are still appropriate for your life circumstances.

If your life circumstances have, or will soon change, you would like to see the details on a strategy we are using or review anything else about your portfolio, please call the office to arrange a time to talk, either in person or on the phone.

The number is 928-778-4000.

What’s Happening in Your Portfolio

The first quarter was a good one for your investments with Hepburn Capital. With the upward momentum of the stock markets slowing down, HCM’s Shock Absorber Growth* suite of strategies posted another gain for March, capping off a strong first quarter.

We remain fully invested as we have been all year with tech stocks, growth stocks industrial sector funds (lower cost exchange traded funds – ETFs – actually). In a nod to slowing momentum in the stock markets, a utilities EFT was added to our sector strategy in March.

Flexible Income* portfolios had another strong month, and as of March 29th have outperformed the Vanguard Total Market Bond Index Fund (symbol: VBMFX), year-to-date. We currently hold a mix of REITs, high yield (junk) bonds, and low volatility income funds.

Municipal Income* portfolios continue their steady performance with a nice gain, year-to-date.

• Shock Absorber Growth* is our 100% growth portfolio. 
• Flexible Income* is our 100% income portfolio.  
• Adaptive Growth Portfolios* (growth & income) are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*. 
• Adaptive Balance* (income & growth) is 50/50 between growth and income.

A Peek into the Future

I thought you might enjoy this article from Peter Diamandis’ Abundance Insider newsletter of March 30, 2019:

Toyota’s Planned Moon Rover Has 18x The Range Of A Tesla Model S

What it is: Japanese automaker Toyota and JAXA, the Japanese space agency, recently announced a collaboration to further develop lunar mobility technology. The partnership commits more resources to accelerate and develop a pressurized lunar rover powered by a hydrogen fuel cell. Using Toyota’s fuel cell technology, the vehicle will have an anticipated cruising range of 6,214 miles, nearly equivalent to the entire circumference of the Moon and more than double the width of the United States. Using the ‘live off the land’ principle of in-situ resource utilization, the hydrogen fuel cells allow the rover to readily refuel from rich hydrogen and water deposits on the Moon, without the need to bring added fuel for the rocket launch.

Why it’s important: This partnership demonstrates the massive terrestrial impact of space exploration. From the invention of CMOS imaging sensors to freeze-dried food, space continues to catalyze hyper-impactful innovation for use on Earth and beyond. By developing its fuel cell technology for the demanding environment of space, Toyota will also inevitably demonetize and democratize these innovations for its global consumer base.

Mental Floss

What do you do or say when an innocent child asks you something so innocent and they are so serious? Read on and you’ll discover the joy in it! These have to be original and genuine. No adult is this creative!

STEVEN (age 3) – hugged and kissed his mom good night. “I love you so much that when you die I’m going to bury you outside my bedroom window.”

SUSAN (age 4) – was drinking juice when she got the hiccups. “Please don’t give me this juice again,” she said, “It makes my teeth cough.”

JAMES (age 4) – was listening to a Bible story. His dad read: “The man named Lot was warned to take his wife and flee out of the city but his wife looked back and was turned to salt.” Concerned, James asked: “What happened to the flea?”

Tax Time Note

Don’t forget that you have both electronic and paper 1099s available on your online account access. If you want to save tax prep dollars, send your tax preparer an electronic 1099 so they do not have to manually enter this tax data. Call the office at 928-778-4000 if you need help finding this handy item in your account documentation.

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 (Island) Life

I had a little business to do in Puerto Rico last month, and was pleased to see the place well along in recovery from the devastating hurricane Maria in late 2016. There were still a few places boarded up, and some businesses look like they will not be coming back, but the island was full of busy, happy people.

The many beaches are Caribbean beautiful, the food was excellent everywhere we went, and we visited many scenic small towns as we explored the 100-mile-long island. Plus, being a US territory the place feels like America, not like a foreign country. It is very affordable, comfortable and almost everyone speaks some English.

Driving in Puerto Rico is a real adventure with some roads still lacking lane striping and some road signs missing, making it tough for tourists to find their way around. And the many aggressive drivers zip into the smallest openings in traffic. The most amazing part was that despite all the crazy driving, we did not hear one horn honking the whole week.

As I said, happy people on Puerto Rico. We will be back.

* 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.