Money Matters Newsletter:
August 4, 2015
Will the Market Feel the Heat in August?
The Investment View from Prescott, Arizona
After six years or rampant government money creation, investors everywhere are focused upon when our Federal Reserve Bank will start draining the excess cash from the liquidity pool it created. The debate centers around whether they should begin raising rates now while the economy is still sluggish, or wait until the economy is stronger and give inflation time to really take hold.
I will be surprised if the Fed waits very much longer to begin raising rates. Most of the cash created is not in the general economy, but is being hoarded by banks that needed rescuing a few years ago, but are no longer in danger of failing. The amount of money the Fed created is so large that a slow drain may take a generation or more to complete, so why put it off? Let’s get on with it!
Interest rates go down when the Fed stimulates the economy, so they can be expected to go up when the Fed begins to pull back. Interest rates affect our lives much more than the price of IBM stock, too, so when rates rise everyone is going to feel it.
Many of you have expressed worry that your bonds and bond funds will lose money when interest rates rise. That’s right, as we all could see when rates jumped up in the first half of 2015. I have included my ideas about what to do to protect you from rising rates in the “What’s Happening in Your Portfolio” section of this newsletter.
But a key thing to remember is that stocks have been in a bull market largely because of bonds. If bonds turn down, they could easily take stocks with them.
It has been a boring spring for the stock markets, but it looks like things are going to be livelier soon, with a lot of negative influences coming to bear in the next few months, a time in which the stock market is normally weak, anyway. Some of the things I am seeing are:
U.S. consumer confidence suffered its biggest drop in four years last month on a less upbeat jobs outlook, plus home appreciation in major cities appears stalled, suggesting a pause in housing demand.
Consumer spending makes up about 60% of the economy and a drop in oil prices normally leaves consumers feeling good because of extra money left in their pocket after gassing up the car, but consumer confidence is sagging when it should be growing – not a good thing.
Transport stocks – trucking, railroads, etc., have been falling all year, another bad sign. Raw materials moving to factories and finished goods moving to market make transport stocks the first to react to changes in the economy. Last week United Parcel Service Inc. said that U.S. economic growth appears to be slowing. And with transports being weak for months, this looks like a trend, not a blip to be ignored.
The stock market has been stalled out for over five months now, and although the US stock market indices have not declined much, more stocks have been falling than rising. This Advance/Decline indicator is the same one that flashed warning signals months before the major market tops in 2000 and 2007 and it has been flashing a caution sign for over 5 months now.
No one can predict short-term events that might cause the market to sell-off, and most bull markets don’t end with a bang, but with a whimper. The markets began to decline more than a year before both the 9-11 crash and the 2008 crash. At first the declines were so gradual that they could be shrugged off. This market has been whimpering for over five months now. How lucky do you feel?
The market may just slowly drift down avoiding a spectacular drop. However, with so much electronic trading available, declines could be more jarring. I am also seeing a large number of indicators and analyses pointing to a market decline beginning fairly soon.
Despite what popular media would have you believe, it really is possible to successfully avoid protracted downturns, and in fact, I believe that dodging them is critical for long term investment success.
My strategies are built on the idea that minimizing/avoiding major stock market declines matters far more to wealth preservation and generation than being up over any one bull market cycle. There have been no real down periods in which to prove this over the past few years, but the longer we go without such a major decline, the more shocking and meaningful it will end up being when it does happen.
At HCM, we are in position to quickly defend client portfolios in the event of a market decline. If you worry about potential investment losses, please call the office to set up a free telephone consultation to review your situation and talk about how I help clients manage the risks of being invested. 928.778.4000
Slice of Life
The Women I Work For
A little over 10 years ago I interviewed 19 year-old Yvette Zurita for an administrative position at Hepburn Capital. Although Yvette could not work the hours I thought I needed, she was everything I could want in an employee; bright, articulate and dependable. But, there was also an intangible quality to this young woman that I later identified as her unflappability, so I gave her a shot. What a good move that turned out to be for me and the company.
Yvette is one of those people to whom you never have to tell anything twice, and her attention to detail greatly compliments my big picture style of work. Over the years she has grown to become my operations manager and Yvette makes running a very complex business look easy.
In October, Yvette got married and since her husband is part of a family business in Fresno, CA, she moved there. Advanced technology allows Yvette to work seamlessly from Fresno. She continues to make Hepburn Capital run very smoothly, and I am grateful!
How Are The Markets Doing?
The bond markets stabilized a bit in July after a sharp decline that began in late January and picked up steam in the second quarter. High yield bonds, a big part of our income portfolios until recently, have also been weak this year.
Even municipal bonds have had problems this year. Puerto Rico recently defaulted on a small portion of its $73 billion dollar municipal bond debt. There is speculation that this could be a “rats leaving a sinking ship” kind of event. Investment News reports on a statement by Morningstar Analyst Beth Foos, that “…half of U.S. open-end municipal-bond funds hold some exposure” to Puerto Rican debt, so defaults there could ripple across the bond markets.
Gold broke down sharply in July, and the charts of gold prices do not indicate that a bottom has been reached. Even after 4 years of mounting losses, this is shaping up to be a really bad summer for long-suffering gold bugs.
Beginning in May, European stock markets suffered a sharp 10% drop while Japanese markets merely drifted lower. Both look pretty good compared to the Chinese stock markets which experienced a 26% decline over 2 ½ months beginning in late April.
As I mentioned elsewhere in this newsletter, the stock market continues to bounce up a few percent and then down a few percent without making any real progress. As of this writing on July 31, 2015 the market is below where it was on February 20th, more than five months ago. This market presents lots of risk with little reward. Not a good combination.
With few markets anywhere in the world looking good, I worry that the only thing holding the U.S. stock market up is money from overseas traders looking to invest in anything that is not going down. The problem is that this hot money can move out of the US stock markets in a hurry, adding one more reason to be ready for a sharp decline rather than a slow one.
Need A Speaker?
I often present for both large and small groups with programs like The Top 10 Investment Scams and How to Avoid Them. My new topic, Investing in Future Technologies, has grown into a terrific talk for clubs or groups. I mean, who isn’t intrigued by the prospect of getting a peek into the future?
If your organization needs a speaker, please have them call the office at 928.778.4000 to schedule a time when I can present one of these programs to your group.
What’s Going On In Your Portfolio?
My new Future Technologies* strategy has been hot, hot, hot recently after merely doing well in late 2014. We are approaching Future Tech’s* one year anniversary on August 19th, and celebrating number one rankings with this strategy over the 3 and 6 month periods ending June 30, 2015 as verified by Theta Research, an independent tracking service monitoring several hundred strategies for independent money managers like Hepburn Capital. Details can be seen at www.thetaresearch.com.
Future Tech* has just put in another strong month in July and will be adding to its already great performance numbers. Yeah!
For this reason, in mid-July, I increased the allocation to Future Tech* in Shock Absorber Growth* portfolios from 40% to 50% of the portfolios.
The rest of Shock Absorber Growth* includes 20% of my Impact strategy that moves in and out of an Index fund, and 30% of my Targeted Growth strategy that holds a number of stocks being held for long term capital gains.
My Shock Absorber Growth portfolios are currently hedged with investments that go up as the market goes down – our shock absorbers – to offset the risk of decline. I am also maintaining the flexibility to increase our hedge if the decline I am concerned about begins to take hold.
With the income markets being hit hard as interest rates rose in the first half of the year, my Flexible Income* model went through significant restructuring to protect it from further rate increases. Now, 1/3 of Flexible Income* portfolios are allocated to a strategy that moves back and forth between Government bond funds, cash and inverse funds which are designed to make money in declining bond markets. Another 1/3 is in a short term bond fund that has shown the ability to resist the negative effects of rising interest rates. The balance is in a blend of income funds, including emerging market bonds and adjustable rate bonds.
Municipal Income* accounts remain in cash for the time being until the situation with Puerto Rican bonds becomes clear.
College Classes Coming…
Mark your calendars for the Yavapai College Class, Understanding Investments, that begins in September.
This course is designed to help investors become more confident about their financial decisions. In an easy-to-grasp format, this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk reducing strategies that anyone can use.
I try to keep the classes lively, and the most fun has been when friends wanting to learn brought other friends and the social level is high. If you know someone who has complained about their finances or who has financial decisions to make, why not suggest this class to them. Telling your friends about me is one of the nicest things you can do.
Mark your calendars for Wednesdays, September 9th through the 23rd, from 3:00 to 5:00 p.m. Call the college at 717-7755 to register for course #FA15-135. Tuition is $65.
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment. 928-778-4000
Our Spotlight Strategy
With our Future Technologies strategy we strive to provide a high rate of capital appreciation using primarily equity investments in emerging technologies.
We invest primarily in stocks, ETFs and a money market fund. The proprietary HCM Safety Net suite of indicators is used to warn of potential stock market declines in which case exposure may be quickly reduced or hedged using inverse funds or ETFs.
Click here to read more about Future Technologies.
Did you hear the one about the Buddhist monk who approaches a hot dog stand and says “make me one with everything”?
Free Services for Non-Profits
For almost 30 years now, Prescott has been very good to me and to Hepburn Capital Management.
One way I express my gratitude and give a little back to our town is by waiving my fee when I manage money for local churches and non-profit organizations. I already do this for several churches and charities, and would be happy to do the same for yours.
If you know of a local board that is not pleased with the earnings rate on their savings, I would be happy to speak with them to see if my risk reducing strategies might provide more satisfactory results. Just call the office to schedule an in-office meeting or to have me address a board meeting. 928-778-4000
* 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.
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.
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) 2014 William T. Hepburn. All rights reserved.