November 2, 2010


The Investment View from Prescott, Arizona


How Not To Do Market Timing

The Wall Street Journal ran an article on October 16th discussing how pension funds are reducing their holdings of stocks from an average of 70% down to only 45% and moving to more conservative investments, primarily bonds.

The first thing that came to my mind is if they are such good money managers, why didn't they think do this 3 years ago before the wheels came off the stock market and government bonds had already soared in price?  

The reported move is a huge one for lethargic institutions like pension funds, and in my opinion it is setting them up for more headaches going forward.

Perhaps you recall my frequent descriptions of the bond market as a teeter-totter, with bond prices on one end and interest rates on the other.  Currently, interest rates on Treasury bonds, the most conservative of all bonds, are at historic lows.  That means T-bond prices are at historic highs.

Anyone, including pension funds, loading up on investments at historically high prices will have trouble ever achieving the great American investment goal of buy low, sell high.  Starting out by buying high is making it almost certain that they will get the whole thing backwards and hurt the returns of their stakeholders.

Another way to look at this type of change is when pension funds are fully loaded with stocks, and 70% is about as much stock as a pension fund can have and stay within legal guidelines, they can no longer be buyers of stocks because legal guidelines prevent them from going beyond 70%.  At that point they can only be potential sellers.

Since the direction of the market is determined by the balance of buyers and sellers, looking at things this way can give us an interesting insight.  Now that the pension funds are at historic lows in their stock holdings, they can not sell much more due to those same legal limits.  They have made the change from being potential sellers of stocks to being mainly potential buyers.

Since having more buyers than sellers moves markets higher, this means a big source of selling pressure has abated, a big group of buyers is lurking and this all bodes well for stock prices over the long run.

I have become friends over the years with Jason Goepfert who runs Sentiment and is a genius when it comes to mining data to find meaning.  Jason recently looked at stock market performance over the next 1, 2 and 3 years after pension funds cut their stock allocations by large amounts like they have done recently.   The stock market was positive 78%, 89% and 95% of the time, respectively.

In a nutshell, doing the opposite of what pension funds do when they try to time a market can be very instructive - and profitable.



Traveling Man . . .Pullout_11-2-10


The past couple of weeks have been a busy time for me.  I traveled last week to Ft. Worth for a meeting of money managers at the American Association of Professional Technical Analysts Conference.  One presentation that is seared into my memory was given by Yngvi Hardarson, an investment analyst from Iceland. Yngvi discussed the collapse of the Icelandic currency that took their stock market down from 10,000 to 297 in 2008.  That is a 97% loss.  Gulp!

I came away from that presentation realizing that in the U.S. we should not take our financial challenges for granted lest we end up going down that same road (collapsing currency).  Hopefully the winners of the election will get the message and get the country on the right track again.

As you are receiving this newsletter, I am in Chicago presenting to another group of money managers at the National Association of Active Investment Managers Conference.

If you want to feel pressure, try holding the attention of "a roomful of throbbing brains", as someone once called these investment managers, for a two hour presentation.   Although I get nervous before hand and I sometimes feel like the runt of the litter in the presence of these seasoned pros, I learn a lot whether sitting in the audience or putting on the program.

I think I'll be ready to stay home for a few weeks when I get back.


Shriners Hospitals for Children


Occasionally I mention my work with the local Shrine club.  Mostly we are known for putting on the Shrine Circus, riding funny go carts in parades and clowning around.  A saying around the club is that we have fun and help kids.

The helping kids part is our Shriners Hospitals for Children®, a health care system of 22 hospitals dedicated to improving the lives of children by providing specialty care.   

Children with orthopedic conditions, burns, spinal cord injuries, and cleft lip and palate are eligible for care regardless of their ability to pay.

But the Shriners Hospitals can't help kids we don't know about, so I would like to ask you to be my eyes and ears on this project.  

If you learn of a child who needs this kind of specialty care, please call me at

928. 778.4000 so I can get them on the path toward treatment at a Shriners Hospital.


The Ghost of Smoot-HawleyTypewriter

What We Were Saying Back Then


In my October 28, 2008 newsletter, I discussed the resurgent strength of the dollar, which for most of 2008 was the strongest currency in the world.  "Who'dathunkit" was the term I used then.

Currency issues are back in the news as the Federal Reserve announces plans to print more money which, according to all the text books, should lower the value of the dollar and create some inflation.  The dollar declined all summer, but the vote is still out on inflation.

A weaker dollar helps our manufacturers as U.S. goods become cheaper to foreign buyers.  This is part of the U.S. playbook for dealing with the economic funk the country is in.  Boost the manufacturing of export items and create more jobs.

The problem is that other countries are making moves to lower the value of their currencies to protect their jobs and export business just like we are doing.  This is creating a "race to the bottom" in currency values.  

Taxes on foreigners and tariffs are also cropping up around the world.  Trade tensions everywhere are escalating as countries implement policies to keep their economies humming and their citizens working just like we are doing by lowering the value of the dollar.  All this has me greatly concerned.

The ill conceived Smoot-Hawley Tariff Act of 1930 did more to worsen the Great Depression than anything else, as all countries imposed tariffs on imported goods to protect their farmers and jobs from foreign competition.  It caused international trade to grind to a halt, throwing everyone out of work both here and overseas.  

Smoot-Hawley had the opposite effect of what the politicians expected.  Jobs weren't created, they were destroyed.  Talk about unintended consequences!  

Hopefully cooler heads will prevail this time around so we can avoid trade wars like in the 1930s.


What's Going On In Your Portfolio?portfolio


We continue to remain close to fully invested in stocks for our Careful Growth* strategy with a mix of gold, energy, basic materials, a healthy dose of emerging market stock funds and some growth stocks.  

I say close to fully invested because I did take the precaution of raising about 15% in cash to be able to hedge our investments against a possible post-election dip in the market, despite my being generally optimistic over stocks potential over the next 6-12 months.  

As of this writing on October 31st, I no longer think a hedge will be necessary since the stock market has already cooled off substantially in the past two weeks, making a sudden reversal less likely.

However, cooling stock markets can turn into declining stock markets, so I will continue to watch them closely.

The Flexible Income* accounts also hold some gold, inflation protected bonds, currency funds and diversified bond funds.   

Interest rates have begun to rise on longer-term Treasuries despite the Federal Reserve buying back bonds.  One would think with the additional buying the Fed is doing that prices would rise, driving interest rates down, but no.  This is not a good sign, and if the trend continues I may make changes in the Flexible Income* portfolios to Adapt to Changing Markets®.

For right now, it isn't broke so I won't try to fix it.




Q: Take one out and scratch my head,
I am now black but once was red.

What am I?



A: A Match


IRA Account Fees


It is that time of year again when IRA fees are billed.  In the past two weeks, invoices for IRA fees from Ceros and National Financial Services were sent out.  These fees cover the added cost of IRA accounting to the IRS and are paid by all IRA account holders.

Unlike banks or mutual fund companies that can hide these costs by burying them in their management fees, National Financial does not manage investments, so it just bills the fees directly.  It may not be pretty, but to keep things a notch above the rest of the industry, we do not hide fees here at Hepburn Capital.

You do not have to do anything regarding the IRA fees.  They will be deducted from your account(s) next month.


Our Spotlight Strategyspotlight_cropped


With our Balanced Strategy we strive to provide high total return.








*    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.