December 5, 2017
Bitcoin Hits $10,000
The Investment View from Prescott, Arizona
Among the financial news items this past week was that bitcoin hit $10,000! Did you get some?? No, I didn’t buy any either.
Is bitcoin in a bubble? It sure looks like one. Investments that jump up 900% in less than a year have always crashed, and when they do, they usually don’t stop going down until they are lower than when they started their parabolic rise. A parabola goes up at increasingly steep angles until it is going straight up. In finance, nothing goes straight up for long, so when you see a parabolic rise, it is usually time to sell, not buy.
Economists have long held that investors are rational people who act in enlightened self-interest. History suggests economists should get out more, and in this case I’d say bitcoin investors are greedy, not self-enlightened.
Financial manias and bubbles are a feature of economic history. Past bubbles include: the Dutch tulip bubble in 1636, canal and railroad manias in the U.S. and Britain in the 1830's, and stock manias in the 1920's and 1990's.
You can read more about bubbles in the classic book: Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, originally published in 1841. It is spot-on in its description of bubbles that have happened since then.
What I see that is different about this bubble is that it is being fueled by demand generated by new ways to invest in bitcoin, such as ETFs, plus options and futures products that are soon to be unveiled. These institutions are driving up the bitcoin price by making access easier, not by making bitcoin any more useful or valuable than it was. They are allowing more speculators to join the fray, but that does not change the fact that parabolic rises are something to run from not run to.
Many bitcoin copycats are now competing for attention in what is called the cryptocurrency market, and there is no telling what impact that may have on bitcoin itself.
According to Wikipedia, there are currently 1324 different cryptocurrencies and the number is growing daily. By market capitalization, bitcoin is currently the largest, followed by Ethereum, bitcoin cash, Ripple and Litecoin. But bitcoin is certainly not alone in that market, so why is it worth over $10,000 while 770 cryptocurrencies are worth less than 10 cents, and 1086 are worth less than $1? The hype of being first into the market is my thinking, because none of them have any real value.
Shifting thoughts a bit, have you ever bought a plane ticket with mileage points? Do you use a credit card that gives you points you can redeem for merchandise? These are like cryptocurrencies used within companies to avoid banking regulations.
I wrote a few months back about the banking services revolution percolating in Silicon Valley as giants like Amazon, Google, Microsoft and Walmart begin to develop their own currencies which can be used instead of dollars. Several big technology companies are working with the regulators so they can begin to operate more like banks.
This is the tip of the iceberg that is the movement away from dollars and the traditional banking regulations that come with them. Cryptocurrencies are another movement in that same direction.
I will admit that 30 years ago I could not foresee how much the Internet would come to dominate our lives, so I may just not yet be able to put bitcoin into perspective with the changes that are brewing in the financial services industries. Could they change our lives in a generation like the Internet did? Possibly.
But at $10,000 per bitcoin I think I will just watch and invest in something else, thank you.
Christmas Gift from Hepburn Capital
Although we don’t always get to say it, we at Hepburn Capital are thankful for your business. Here is one more way that we can say “thank you”.
I don’t know about you, but I hate to stand in long lines at the Post Office, and at this time of the year the lines are longer than ever.
For a few years, Hepburn Capital has maintained a UPS account complete with the ability to weigh packages, pay for and print UPS labels online. Bring your packages to Hepburn Capital’s Prescott office and in a few minutes our staff can weigh, process and take your payment for your shipping costs. Since we won’t have to wait in line, we will even take them to the UPS store for you if you would like us to.
This is just Hepburn Capital’s way of saying thank you for your business and making the holidays a little brighter for those in our circle of clients and friends. Merry Christmas!
And while you are at the office, please pick up one of our letter openers that makes cutting wrapping paper a breeze.
What We Were Saying Back Then - #1 Investment Scam
I have a lot of fun speaking around the country, and one of the topics I address is the "Top 10 Investment Scams and How to Avoid Them." If you have a club or organization that looks for speakers, I’d be happy to present to them as well.
I recently addressed the Regional Gathering of Phoenix Mensa and updated my material with the 2017 report from the National Association of State Securities Administrators. The report includes the top 10 scams the regulators deal with, ranked roughly in order of prevalence or concern.
#1 on the 2017 list was unlicensed individuals, such as life insurance agents, selling securities. I expect that most incidents occur when an annuity salesman says the mutual funds you hold should be sold to move into their annuity. That is an illegal act unless the insurance agent is also licensed to sell and advise on securities like mutual funds.
To verify that a person is licensed or registered to sell securities, call your state securities regulator or enter their name in BrokerCheck.com for commission based brokers or AdviserInfo.sec.gov for fee-only advisers to see (1) if they are licensed, and (2) if they are, see their disciplinary history. If the person does not show up on one of these sites, don’t take their advice.
What the Markets Are Doing
The bond markets continue to struggle against the headwind of rising interest rates. What happens is a bond might pay $1 in interest, but rising rates push the resale value of the bonds down by $1.05 - creating a net loss.
The Vanguard Total Market Bond Fund, which follows the most popular bond index, lost .37 percent in November, which was the same performance our Flexible Income portfolio posted. Both had just a tad better performance than 7-10 year Treasury bonds (symbol IEF).
All the major stock indexes are up for the month and year to date as of November 30, 2017.
There is a divergent pattern of prices on the tech heavy Nasdaq index compared to other major indexes, but it is too soon to tell what it means. I suspect that some of the big gainers tech has produced this year are being sold for tax purposes and the proceeds are moving into banking and financial stocks, which we also own a few of.
Gold markets have been very quiet with its price almost exactly where it began the month. Silver, always more volatile than gold, is in a significant decline.
What's Going on In Your Portfolio
Shock Absorber Growth portfolios had a good month going until the last few days of November when volatility hit tech stocks. However, we still ended the month with a profit, and have double-digit gains for the year in growth portfolios.
It is too early to tell if the volatility that hit the Nasdaq index last week is the beginning of a trend change, but I am watching it closely.
I have made adjustments in the Flexible Income portfolios since they have been disappointing over the past year since interest rates began to rise. Just like I do with specific investments, I adapt our strategies to the current market environment, and it was time to adjust the strategies used in the income portfolios. Although Flexible Income portfolios have outperformed the Vanguard Total Market Bond Fund by a ration of 2:1 over the past two years, they underperformed over the past year. Time for a change.
The changes include adding emerging market bond funds and a global real estate fund that has a great dividend. These holdings pay great dividends and are less effected by US interest rates, so ought to improve the portfolio. If not, they will be weeded out of the portfolio and replaced.
There is nothing for you to do, but I wanted you to know I am “on it” so to speak.
My long/short gold strategy, which had produced double-digit gains this year, is included in both Shock Absorber Growth and Flexible Income portfolios, but has spent most of the month in cash as the gold markets are trendless at the moment. That means there has been no profit being made although there is risk, so that is a good time to sit out.
- Shock Absorber Growth is our 100% growth portfolio.
- Flexible Income is our 100% income portfolio.
- Adaptive Growth Portfolios are currently hold 80% Growth and 20% Income.
- Adaptive Balance is 50/50.
Arizona Tax Credits
If you prefer to use your money to do good rather than funding state spending, Arizona tax credits are something you should look into. You can completely offset a potential total AZ income tax of up to $4,782 for married filing jointly filers, and $2,391 for other status tax filers by donating to local charities and schools.
The deadline for making 2017 contributions has been moved back to April 17, 2017 so don’t feel pressured to make decisions before consulting your tax preparer.
Normally I talk at length about these tax credits in my December newsletter, but with the new deadline I will wait and have more information about tax credits in upcoming newsletters.
College Classes Coming
My next Classes begin at the end of January. Stay tuned for details in the next newsletter.
Our Spotlight Strategy - Future Technologies
With our Adaptive Growth Strategy we strive to provide high total return from a combination of investments from both the equity and income markets with the emphasis on equities.
Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to the strength or weakness of the market, directing exposure in the HCM Shock Absorber Growth strategy in range from 20% to a maximum of 80% of account value. The balance, 20% to 80%, is invested using the HCM 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 Growth.