April 5, 2011

An 8% Cut in Social Security Coming?


The Investment View from Prescott, Arizona

David Gertner of AARP estimates that as many as ¾ of seniors will have their entire Social Security increase wiped out by rising Medicare premiums as only a "slight" cost of living adjustment is estimated this year by the federal government.

This effectively means a third straight year without a real increase for Social Security recipients. 

In my March 22nd newsletter I wrote, "The cynic in me sees high inflation as government's preferred means to deal with the federal debt.  Governments don't go bankrupt.  They inflate the money supply to pay off earlier debts and promises (like pensions and social security) with newly printed money".


I would add to that: money that becomes worth less with each round of printing.

Hmmm.  Let's see.  The Feds give COLA with one hand and take it away with the other.  With 8% inflation at the wholesale level, this means that about the time you are not getting your COLA from Social Security, your cost of living may be rising 8%.

Frequent changes in CPI (Consumer Price Index) calculations, which all seem to hold CPI to lower levels than before, along with the COLA shell game, means that social security recipients are really paying for years of excessive government spending by having some of their money's purchasing power taken from them every year.

This is the silent tax that is inflation.

Slice of Life


Cathleen and I have some tickets for the Yavapai Symphony Association on April 17th, and we will not be able to go.  We are hoping to give the tickets to someone who will appreciate them.  Is that you?

The Phoenix Symphony Orchestra with guest conductor Christian Lindberg will be performing Nielsen's Helios Overture, Kundrann's Karma by Lindberg, and Sibelius' Symphony No. 2.

There is a pre-concert lecture at 2:00 which is always well attended and is a wonderful way to enhance your experience.  The concert itself begins at 3:00 at the Yavapai College Performance Hall.

Call the office (928-778-4000) if you can use the tickets.  First come, first served since we have only two tickets.  Consider them a bonus for reading this newsletter first, before all those other emails.

The Voice of HCM Asks For Help


Everyone who deals with Hepburn Capital knows the wonderful voice of Sheri Congdon, who began running our front office almost 10 years ago.

What you may not know is that Sheri's son, Brian Vega, is developmentally disabled and has lived in a group home run by Salem Christian Homes, Inc., (SCH) a non-profit organization in Chino, CA, that serves individuals with autism, mental retardation, Down syndrome as well as other disabilities.

SCH has been Brian's home for more than 30 years, but the stability of Brian's environment continues to be threatened by the budget cutbacks in California.

An April 30th "5k Run, Walk and Roll" fundraiser will help bridge a $130,000 gap in SCH's finances.  Sheri plans to participate, and is looking for sponsors willing to donate on Brian's behalf.

Please consider a tax deductable donation of $25, $50, $100 or more to this very worthwhile cause, and help support Sheri, her family, and the many who need our help now more than ever.

You may get details and register online at this link (click on the "Donate Now" button on the left side of the web page to make online donations).  If it will be easier for you, just drop a check off at our office made out to Salem Christian Homes, Inc., or call the office (928-778-4000) with your credit card information and we can register you on the phone.

Your support is appreciated beyond words.

Mental Floss:riddle


Q: Which is heavier:
a pound of feathers
or a pound of gold?


A: A pound of feathers. Some would say a pound is a pound, but the fact is: Gold is a precious metal and is therefore weighed in the Troy system of measurement. This means that a pound of gold weighs only 12 oz and a pound of feathers weighs 16 oz.

Trust_Docs_istock_4-4-11A New Trust Provision to Consider


I get to see a lot of living trusts while helping clients with financial decisions. 

The Prescott Estate Planning Council is a group of CPAs, Estate Planning Attorneys and a few of us financial types who often are "issue spotters" in this regard.  One recent meeting was very interesting, with members from several disciplines talking about current events and issues.

Local attorney, Chuck Walker, spoke on the function of a "Trust Protector" who can be named in your trust to have the power to modify the trust if needed to protect the beneficiaries. 

Living trusts become irrevocable when the original parties die and can no longer change or revoke the trust.  But, this inflexibility can create conflicts with state law, force moneys onto beneficiaries with special needs or addiction issues when it may not be in their best interests, and many other problems that cannot be foreseen when the trust is originally created. 

A Trust Protector has the power to change an irrevocable trust when it is in the best interest of the beneficiaries, as long as this provision is contained in your trust.

I was not familiar with the Trust Protector provision, but it sure makes sense.  If you don't have this provision in your trust, I would suggest that you ask your attorney to consider adding it.

How's The Market Doing?Pullout_4-5-11


The stock market seems to be recovering from its international jitters, and after a scary 6-7% dip for US Indexes - 10% for International Indexes - seems to be resuming its uptrend. 

The Federal Reserve is scheduled to continue buying treasury bonds until June of this year.  This replaces the bonds with newly printed money and does two things. The first is to buoy up the financial markets since that new money has to go somewhere.  The second is that it increases inflationary pressures.

Considering that the Fed has been providing over $100 billion per month of buying power for Treasury bonds, it will be interesting to see what happens after June when the Fed is scheduled to stop buying.

If interest rates begin to rise to attract buyers for our federal debt, that will not be good for individuals.  It may hurt the real estate market considered essential to economic recovery, or push financial markets down, putting the Federal Reserve under pressure to continue to print more money.

However, with inflation already on the rise, if the Fed continues to flood the world with dollars they will stop flirting with inflation and start kissing it on the lips.

The Fed will be finding themselves on the horns of a dilemma, and it makes me glad that my strategies Adapt to Changing Markets® because the ride could get wild this summer.  These strategies have the ability to quickly change to investments important to your financial security.

If your money is not already actively managed, call the office for an appointment.  It is important that you not wait too long or you are effectively playing financial chicken with your life savings.

Looking Back


Looking_Back_Rear_View_Mirror_istock_4-4-11Ten years ago last month, I launched my Tactical High Yield* strategy.  Since its scope has been expanded from using only high-yield bonds and cash, to include global and US bonds, currencies and high-yielding investments of all sorts, it has been called Flexible Income* for the past few years.

That this relatively conservative strategy has outperformed both the stock and bond markets these past ten years is one thing.   The fact that Flexible Income's* largest drawdown (being an investment's drop from a peak value to the lowest value before resuming an uptrend) was only 4.85%, once in the entire 10 year period, is remarkable.  That is about 1/10th the risk of stocks, and shows that this is a good strategy indeed.

During periods with wild stock markets like we have seen the past decade, (the stock market has lost over 50% twice in the past ten years) bonds normally outperform stocks, so the fact that this strategy has been my best performer is not too surprising.

However, I am especially pleased with Flexible Income's* performance compared to the alternatives.  For the period of March 30, 2001 to March 31, 2011, only 3 of 1,957 funds reported in the Fasttrack database outperformed this strategy with a lower drawdown.  This means that our Flexible Income* model outperformed 99.85% of all bond funds during the period.

Over the past few years, I have had offers to run this strategy for both a large asset management firm and a mutual fund company.  I have declined both times because the small size of this strategy (compared to the entire bond market, anyway) helps it be successful.  If I were to be running a billion dollar mutual fund, it would not be nimble like Flexible Income* is today.

And this way, the "secret sauce" in my Flexible Income* strategy remains my little trade secret. 

Happy Birthday Flexible Income*.

What's Going On In Your Portfolio?portfolio


The bond markets went sideways during the first quarter of 2011, with the Barclays Aggregate Bond Index, which trades with ticker symbol AGG, actually declining just a tad for the quarter.  (2/100% qualifies as a "tad", don't you think?)  Our Flexible Income* model was up 2.22% for the quarter.

Flexible Income* accounts are fully invested with 30% gold and silver, and a mix of convertible, high yield and floating rate bonds funds making up the balance of the portfolio.

After underperforming the stock market for a few months, I made some changes to the Careful Growth* Strategy in January. Although we are still down a bit for the year, the Careful Growth* model has outperformed the S&P 500** by over 4.9% since January 27th when the changes were first implemented, so the changes have clearly put us back on the right track.

Careful Growth* currently is 65% invested with 35% in cash (money market fund, actually).  Cash in the portfolio was as high as 60% last month when events in Egypt, Libya and Japan were rocking the markets, so things look better now than they did a month or so ago.

Growth* account holdings include 25% gold and silver, 25% oil stocks, and 15% growth stocks along with the cash.

Municipal* accounts are fully invested in short term muni funds.  Socially Screened* portfolios hold 30% gold and silver bullion, 10% alternative energy fund, and 35% in growth stocks.

Our Spotlight Strategyspotlight_cropped


Flexible Income strives to outperform the U.S. bond market over long periods while taking less risk.








*    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.





Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information





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.