January 3, 2017
Looking to 2017
The Investment View from Prescott, Arizona
The most frequent question I am asked these days is, what will a Trump presidency mean for an investor like you?
The Trump rally, as some are calling the stock market bounce that began the day before the election, may be just a reaction to the lessening of uncertainty that the election had raised to a fever pitch, but there are also signs that Trump is generating great optimism in the country.
Consumer confidence as measured by the Conference Board has shot up an amazing 12.8% since the election to its highest reading since 2001! Similarly, the University of Michigan consumer sentiment index is up 12.3% at its second-best level in over a decade. Many consumers are also investors, and investors with confidence in the future are investing more.
Pundits are saying the rally could create as much as a 20% rise in the major stock indexes. Since the election we have seen the S&P 500 up 7.37% and the Russell 2000 Index of small company stocks up more than 17%, so much of the projected rise has already occurred. I would not be surprised if the market trended higher during Trump’s first 100 days in office, but after that, the reality that really big programs take a long time to implement might set in.
Plus the Trump rally masks certain economic weaknesses that are not going away. Auto sales are so weak that the big automakers are slowing down production. Persistent underemployment is hidden by government accounting tricks. And big risk to stock markets is the surge in bond yields which make stock dividends less attractive in comparison. The rising value of the U.S. dollar which makes foreign travel so affordable also hurts sales of US companies doing business overseas.
The first year of the four-year presidential cycle is historically the weakest of the four years, so this precedent will provide a headwind for the markets despite anything Trump does.
Positive effects from the new political environment won’t be felt right away, so I would expect that by mid-year investors will begin to realize that the huge changes Trump talked about will take a very long time to implement, and some of that positive sentiment driving the financial markets since November will dissipate.
In the background will be problems with European banks, primarily in Italy, that are largely insolvent. Negative interest rates (below zero – you have to pay to have a bank hold your money over there) are driving depositors out and weakening banks at a time when loans are going bad.
On the other side of the world, the Chinese banks are really in bad shape due to real estate and other infrastructure overbuilding directed by the political leaders to keep peasants working. The Chinese government is forced to pump a massive infusion of cash into their banks so the banks have money to loan out for unneeded projects. The government raises cash for the banks by selling bonds. Some of the bonds are US Treasuries that the Chinese bought in years past, but which they are now selling.
The Chinese bond market is failing. China had a recent bond offering in which they could not sell all the bonds. This is affecting our markets, driving our rates up as they sell our bonds because no one wants to buy their bonds.
You may recall bond market disasters in Orange County, CA in 1994 and a hedge fund called Long Term Capital Management run by several Nobel prize winners which imploded in spectacular fashion in 1998 bringing Wall Street to its knees. China’s bond market is under such extreme stress that it has had trading halts and the government has implemented currency controls so Chinese money cannot be taken out of the country. Money market rates in China were 6.83% as of Dec 21st. Why do they offer such high rates? Because they really, really need the money.
This is one reason that Bitcoin values have risen this year. Bitcoin is one place the Chinese have been able to bury their cash.
What the Markets Are Doing
The US stock markets flattened out during the second half of December after the post-election rally seemed to run out of gas. The S&P 500 Index ended the year up 9.54%, with most of that gain coming right after the election.
The bond markets ended the year with small gains in most categories, with lower quality bonds doing the best as investors chased their higher yields. Since interest rates began spiking up in July, the Vanguard Total Bond Market Index Fund is down 3.01%. If interest rates keep rising, expect losses to continue to mount for investors in bonds and bond funds.
Oil prices finally bounced after a two year slide. Oil hit $27 a barrel in January, and is currently at about $53. Surprisingly the prices at the pump have not risen much as oil prices recovered.
Gold eked out an 8% gain for the year, despite a 16% decline since July which wiped out the makings of a really good year. Oddly, gold prices plummeted as interest rates rose, defying conventional wisdom.
Emerging market stocks had a decent year, but for the past 3 months are showing a downtrend with no bottom in sight. The significant decline in Chinese stocks over the past 3 months wiped out a decent rally, leaving a meager 1% gain for 2016, hardly paying investors for the risk they took.
My New Year's Resolution:
I will be ruthless about unsubscribing to useless emails and using filters to sort email and keep my inbox manageable. Ruthless, I say!
College Classes Coming
Tax Tips for Arizona Newcomers
Discover valuable tax savings from details about Arizona taxation that may differ from states in which you have lived previously. Tax deductions, tax credits and estate planning considerations unique to Arizona will all be discussed. Will Hepburn and Jay Lode, CPA lead this class.
Feb 1st, 2:00-4:00 p.m.
Call Yavapai College at 717-7755 to register for
Class # WS17-145. Tuition is $45.
Please tell your friends about this course I have offered at Yavapai College since 1990. It is a great way to introduce them to my work.
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.
Thursdays, Feb 8th-22th, 2:00-4:00 p.m.
Call Yavapai College at 717-7755 to register for
Class # WS17-149. Tuition is $65.
What's Going on in Your Portfolio?
The Shock Absorber Growth model portfolio ended the year with a 4.50% gain by taking only about 40% of the risk of the stock indexes. The S&P 500 had a 2016 maximum period of loss of -10.51%, while SA Growth’s maximum period of loss was -3.49%. Historically our risk is much lower than the stock market’s and 2016 confirmed that.
As of December 31st, the Shock Absorber Growth model portfolio includes 45% in my Future Technologies strategy, 40% in Targeted Growth stocks, 10% in gold. We are not fully invested at the moment since I expect early January volatility in the stock markets. I am writing this on January 2nd, and you may be seeing volatility by the time you are reading this.
SA Growth ended the year with only a 35% exposure to the stock market, meaning if the Index average goes up $1 we should make 35 cents. And if it goes down $1 we should only lose 35 cents. If my stock selection is better than average we will do better when the market goes up.
Stock holdings in Targeted Growth include our weakest performers, Profunds Ultra Bank (BKPIX) fund at -2.42%, and Otter Tail Corp (OTTR) at +.23%, offset by our strongest performers Chevron (CVX) at +35% and an energy infrastructure fund (ZMLP) that gas gained us 39% since its purchase.
Future Tech holdings include current stinkers Amkor (AMKR) and International Games (IGT), down 13% and 9% respectively. Both will be sold if they don’t recover soon. Offsetting them are top gainers Nvidia (NVDA), a maker of graphics cards for computers with a gain of 211% since I bought it in May, and John Bean Technologies (JBT) up 40% since its purchase. And no, that is not a typo. Nvidia is up 211%.
Both growth strategies are holding around 20% cash with a small hedge so we can continue to hold our winners even if the market gets choppy.
The Flexible Income model portfolio gained 6.73% for the year 2016, a little better than the .25% you can get from your bank or 2% government bonds.
What is important to you is that when Aggregate Bond Market Index (AGG) began its 3.47% decline between July 2016 and December 31st, your Flexible Income portfolio kept making profits. Actually, 2.82% in that period, to be exact.
As of December 31st, the Flexible Income model portfolio contains 50% Direxion Treasury Bear fund (DXSTX), 10% and an energy infrastructure fund (ZMLP), 10% inverse gold funds, and 30% in some high yield bond funds with all holdings performing well.
Adaptive Growth and Adaptive Balance portfolios are currently invested for maximum growth with 80% and 50% Shock Absorber Growth allocations respectively. The remaining allocations are in Flexible Income.
Municipal Income portfolios have been in cash for the past couple of months as the municipal bond market endures a significant slide. Other municipal investors might be losing money, but not you.
Big Brother and Technology
One of the hottest consumer technology items lately has been the home automating smart speakers such as Amazon Echo, Apple’s Siri, and Google Home. They truly are amazing, waiting patiently for your voice command to do chores around your home, or look things up almost instantaneously.
However, lawyers and law enforcement agencies have discovered that these always-listening devices are a treasure trove of information about you, what you do and what you have said in the privacy of your own home. Former privacy, that is.
One news report showed government requests for Facebook data growing dramatically with about half of those requests coming from law enforcement.
The new breed of low cost DNA tests let you see what your family background is. But there is a hidden risk to these tests. Databases containing these commercial DNA tests are not considered medical records and can be subpoenaed by law enforcement. If a criminal has DNA similar to yours, the cops may come to your door asking the whereabouts of that wayward brother-in-law.
Furthermore, a report by the Center for Digital Democracy warned that all wearable gadgets posed serious privacy and security risks.
Technology is fun, but we are just beginning to realize some of the practical and ethical issues being created in its wake.
You do not want to have me,
But when you have me,
You do not want to lose me.
What am I?
Our Spotlight Strategy - Adaptive Growth
With our Shock Absorber Growth Strategy we strive to provide an acceptable rate of capital appreciation while experiencing one half of the risk of the S&P 500 Stock Index**, using primarily equity investments.
Your money will be invested primarily in stocks and commodities mutual funds and ETFs, both foreign and domestic, inverse and leveraged, and a money market fund. The proprietary HCM Safety Net indicator is designed to warn of potentially sudden declines, in which case stock market exposure may be quickly reduced.
Click here to read more about Shock Absorber Growth.