End of Summer Newsletter

End of Summer Newsletter

by Timothy Guthrie on Sep 26, 2018

Newsletter

YTD Review

 

To review, January saw the stock market shoot straight up, over 6%. The first week of February saw a change though, and suddenly the market reacted negatively to what President Trump has been proposing for 20 years or more, that the US seek better trade deals. It has been the type of issue that everyone gave lip service to, but no one really tried to do anything about it. For my favorite take on the trade issue, read this:

 

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/8/27/us-stops-subsidizing-global-growth

 

The article is written by Brian Wesbury (my favorite economist, and chief economist for First Trust- we use a lot of their ETFs). I find Mr. Wesbury a unusually straight shooter who is not afraid to express his opinion.

 

The market fell 10% in February and continued to be very volatile in March and April. I took some ‘defensive maneuvers” that reduced our losses about 2% compared to the market and tried to ease our way back into the market over the next few months after I sold most of our more aggressive ETFs invested in tech and more volatile sectors and slowly added them back when the declines appeared to be in the rear-view mirror.

 

As things unfolded every time President Trump spoke about tariffs the market fell, but each time its’ reaction was more subdued. By early summer things had improved

 

In July the market firmed up and in August, major stock indexes climbed 4-5%. We all benefited nicely.

 

We have had excellent success with our 10% allocation to mid-cap stocks in The Eventide Gilead Fund. This fund is a very a competitive mid cap fund, (symbol ETILX) that had gained over 18% by the end of August. I worked on the theory that mid-cap stocks would benefit more from the business tax cuts, as they could not try all the tax ‘tricks’ the large companies could employ.

 

We also did very well with our average 10% allocation to medical device manufacturers. I believe that demographics and advances in technology will continue to drive innovation and rapid sales growth for companies that make pacemakers, artificial knee, and similar devices. We use the iShares Medical Device ETF, (IHI) and it has done great this year, up over 26% through the end of August (we on average did not own it all year, as I did sell some holdings in February, but we got back in and many are up 20% or more). A few of us also have the Fidelity Medical equipment fund, with similar performance).

 

Still on the medical theme our biotech fund (ETIHX- the Eventide Healthcare Fund) was not only rated the #1 biotech fund in the country by the Wall Street Journal but was up well over 20%. See the attachment to this email. The biotech sector can be very volatile, so generally I keep it to a 4-5% allocation. Even at this smaller size, it has added to our performance. Some younger whippersnappers and aggressive types might have a 10% allocation. I believe this sector has outstanding long-term performance potential for a variety of reasons: demographics, advancing technology, and a shortage new drugs by the major pharmaceutical companies.

 

As of August 31st, my “average client” is up 8.4% for the year. This has been outstanding performance. The average balanced fund was up about 4% and many investors are doing worse that that this year. Our performance is especially good, because we are only 70-80% stocks on average and with the all stock S&P 500 up 8.52% (barely ahead of us) our risk/reward ratio is outstanding. The investing year has been so tough that influential advisors are writing articles to explain to clients why they are doing so poorly (2-3% gains for the year)” because they have a professionally diversified portfolio”. See this:

 

https://www.thestreet.com/amp/investing/stocks/dear-financial-advisor-why-is-my-portfolio-performing-so-14712955

 

Since the average Bullseye client is up 8.4% so I believe those other advisors just followed the herd mentality. Our accounts are globally diversified too, and I seek to manage the downside risk as well. Please remember when I discuss “average”

 

client results, your account may be doing better or worse. Typically, this year, more aggressive clients with a higher percentage of their account in stocks are doing better. Please contact me to review your results and discuss if you desire to change your investing risk tolerance or goals.

 

You might ask what do I see moving forward? I see a strong economy, excellent job market, rising wages and the highest small business outlook in history. I also see increasing political and global risk. It is very possible I reduce risk before the election, by reducing stock exposure across the board, keeping allocations to my favorite sectors but reducing the allocation by 10-20%. I also may be re-allocating the accounts ahead of the Christmas shopping season. I am trying find an acceptable path to ‘investing in a strong shopping season’ without loading up on retailers (I have never really liked investing in retailers, and consider the whole sector not very desirable, with low barriers to entry, fierce competition and declining profit margins). I might try increasing our allocation to financial technology stocks on the theory that a strong Christmas shopping season would see more transactions and benefit the financial tech sector, regardless of which toy, electronic gadget or store was the most popular.

 

Additionally, I have been trimming and eliminating some positions in foreign securities, taking some nice gains in individual stocks, selling some losing positions, and reallocating into more broadly diversified US stock vehicles like the First Trust ETF, First Trust Capital Strength (FTCS). This excellent ETF has great track record built on investing in companies that are in excellent financial position, with little debt, and lots of assets and cash.

 

Cash

 

Occasionally clients ask me about the cash in their portfolios. Usually this involves a larger or increased cash balance. Naturally, clients expect that I will be investing their funds, and so they want to know why I have increased the cash position. There are two reasons why I might hold larger cash positions. One is that I am in the middle of re-balancing the account, and the cash position is very short term. Soon I finish rebuilding the account and the cash returns to normal levels. The second reason is cash is virtually risk free, and if I want to reduce risk, cash is good place to park the proceeds from the recently sold positions. Sometimes increasing the cash position is like using the brakes in car. I want to slow down, reduce risk and getting better view of what’s coming down the road. I did this in August of 2016. Before the election, I went to 20% cash, by selling a portion of our higher risk stocks/funds/ETFs. Since everyone was worried about the election, raising cash was an appropriate way to ‘tap the brakes’ and reduce risk. The market fell 4% before the election and raising the cash allocation by selling stocks saved us money.

 

The next question is “can’t you invest those funds in something that earns more than almost nothing?” The answer is simple. No. Anything that can earn more has some risk. If the goal is short term risk reduction, then cash is the best option because it has virtually no risk. I have tried to earn more with our ‘cash cushion’ in the past by putting the new ‘safety’ money in a short-term bond fund or similar low risk product, and then the bond market has a hick up, and the fund drops

 

.5%. Not a big drop but while trying earn a dollar we lost two dollars. Cash on the other hand, is virtually risk free, and TD Ameritrade’s cash account is FDIC insured.

 

Gold and Precious Metals

 

I have also had a client ask me recently about investing in gold or other precious metals. Through certain investment products I use in client accounts, many clients do have a small (less than 2%) exposure to gold, and a few might have a slightly higher exposure. So, we do own a little gold. The First Eagle US Value fund is about 10% invested in gold. The fund owns gold as hedge against a war or other major calamity. The fund is often 6-10% of a client account, so that’s where we get the 1% gold exposure from.

 

However, even though I use, and appreciate that mutual fund, I am not a fan of investing in gold (and other precious metals) generally. The advertisements on cable TV proclaim gold is ‘safe’ and ‘solid’ but that omits the fact that gold prices can decline and that lots of folks lose money buying gold. Further, gold prices have been declining for years. Gold prices have declined 15% in the past two years, while your stocks have appreciated 20-30%. Further, gold has declined 30% in price the past 5 years. Ouch. How ‘safe and secure’ is that? In addition, gold pays no dividend or interest. I bought P&G stock for many clients earlier in the year. At the price we paid, P&G had a 4% dividend. If the stock price DOES NOT appreciate at all, but merely stays the same, in 10 years, you would have a 40% return on the dividend alone. Also, gold doesn’t grow. You could buy the stock of a company that does well, and the size, scale, sales and profits of the company could advance greatly. You could buy 100 shares, and 20 years later have 1,000 shares due to stock splits. If you buy 20 ounces of gold and stick in a safe (another downside of buying gold is that it is expensive to own it, requiring insurance, a safe etc.,) for 20 years, you received no dividends and you still just have 20 ounces of gold.

 

There can be some trading opportunities in gold (or other metals) prices, and if this is an interesting option the best way to try this is by investing in gold mining companies. If the price of gold rises 10%, gold mining companies might rise 50% in price due to their sensitivity to gold prices.

 

Some own gold in case ‘society breaks down’. The idea being that you could use gold to buy things, in a time when paper dollars are not useful. This become problematic, how do I buy 10 chickens with a gold coin worth $1,200? Or 5lbs of corn meal? You could make a better argument for silver coins, but the for investing, the same principal applies. Some things are both hard to prepare for and have a very low risk of occurring. When the last time we had a ‘society break down’ in the US? Maybe in certain limited places, for short periods of time during Sherman’s March in the Civil War? I don’t know how to prepare for such an event. If you had a wonderful productive diversified farm that could produce virtually any food you needed, when criminals found out and got desperate, they would take it from you, by any means necessary. I don’t lose sleep thinking about how to prepare for this type of event. I do think it is very wise to prepare for a storm or power outage. I have a generator, firewood, and lots of food on hand. It might also be a good idea to keep $1,000 in twenty-dollar bills in a safe. In a more likely emergency, $20’s can be very useful for buying fuel, food or help of some sort, and your credit card doesn’t work when the power is out.

 

One more thing about the TV advertisements for gold and silver. They proclaim stocks are nothing more than “paper” and gee, paper is not very secure. The problem is, these claims confuse the paper stock certificate for the real assets of the company. Back to our P&G example. A P&G stock certificate is indeed, printed on paper, but the company the paper stock certificate represents is indeed very real and substantial. P&G owns giant office buildings, giant factories, giant distribution centers all over the world, these are more secure than paper, and just a small part of the company’s assets.

 

If you own gold, or silver I not criticizing you, but I would encourage you to keep it in perspective, and not to over allocate to this sector and realize it’s limitations.

 

Official Notice

 

I can’t read your mind. I know, shocking. If you have a question about your account, about something I have referenced in this newsletter or anything else investment related, call, or email. If you have a life change, like having another child, switching jobs, or retiring, please contact me so we can make sure your account is allocated for your new situation. I will do my best to review your account, answer your questions, or help you plan for your life changes. How to reach Tim:

 

Cell- 513-774-3325

 

Email- tim@bullseyeinv.com

 

Bullseye Investment Management, LLC

 

Cincinnati office:

 

431 Ohio Pike, suite 214, Cincinnati, OH 45255

 

Ashland office:

 

1505 Carter Ave., Suite #300, Ashland, OH 41101

 

Mailing address:

 

P.O. Box 123, Milford OH 45150