Monthly Update September 2014
CONCLUSION
Our last monthly update on August 7 was written on the day of the closing low of the recent correction in the S&P 500 at 1909. I’d conveyed the thoughts of a change in character in the market, given weakness in corporate high yield bonds, small company shares and global equities. Though it continues to be a bull market in U.S. stocks until proven otherwise, this process (a change in character) appears to be playing itself out, with more evidence emerging.
Since the August 7 close, the S&P 500 moved to another new high at 2007 on September 5, which was unconfirmed by a number of other measures and indexes. One such comparison is illustrated below, the chart produced courtesy of www.stockcharts.com.
The chart above shows the S&P 500 Index (the thin bars) with a chart of the HYG (a high yield bond ETF) overlaid behind it. High yield bonds tend to have a high correlation with the stock market. You can see the HYG (solid black line) peaked before the S&P 500 did in late June, and failed to surpass that peak in late August, again not confirming the peak in stocks. Our own high yield bond fund risk models remain in negative mode, and I suspect that high yield is going to lead the way down for the stock market, with first major support at the red line on the chart, just under the 1900 level for the S&P 500, which represents the 200-day moving average.
This past week, treasury yields surged nearly 30 basis points (see the chart below along with high yield bonds), and this has brought even more focus to this week’s Federal Reserve Board meeting. At some point, the Fed is going to stop injecting money into the financial markets, and the past 6 years has shown when that happens, stock prices have fallen.
With most U.S. stock market valuation measures matching or exceeding those of October 2007, along with historic highs in bullish sentiment, upside potential from current levels is relatively limited compared to the downside risk.
Below is how accounts are presently situated:
TABR Tactical Equity Exposure 43% slightly below neutral
TABR Real Estate Exposure 50% partially invested since early January (this sector got hit hard last week with the uptick in rates)
TABR Bond Exposure 100% Fully invested in PIMCO GNMA and Loomis Sayles Bond (a partial sell is very near on this fund)
TABR High Yield Bond Funds Funds are about 90% in short term bond funds, our model remains on its August 1 Sell signal
Education Corner—Did You Know?
Whether married or single, if one has a revocable living trust document, and you die, your successor trustee (usually the spouse with married couples) needs to collaborate with your estate attorney and CPA to file Form 706, within 9 months of the date of death of the person. This form figures the estate tax imposed by Chapter 11 of the Internal Revenue Code. It can also be used to compute the generation-skipping transfer tax, if applicable. Even though most families will not owe estate tax given today’s limits ($5.34 million per person), it is still a good idea to file the form, since for trust administration purposes, one would want to take advantage of the step-up in basis on assets with unrealized capital gains.
I’ve only touched on some of the key areas above. Bottom line, there is a lot of administrative work that must be done when someone dies, IF you are going to do things properly and follow one’s trust documents. We routinely work with our client’s estate attorneys and accountants to ensure these things get done. If you are single or married without a proper estate plan (and I’m sorry, I’m not talking about LegalZoom.com—would you perform cancer surgery on yourself?), you are not doing your heirs any favors.
Material of a Less Serious Nature
Well, we got 16 replies on our attempt to inject some humor into these writings. They were all positive, and though these thoughts are sent each month to over 250 individuals, we realize many of you have in-boxes with hundreds of emails, and don’t always offer an opinion. Here’s hoping you are chuckling, even silently, so here goes # 2.
The “Benefits” of Bran Flakes
Mike and Yvonne were 85 years old and had been married for 60 years. Though they were far from rich, they managed to get by because they carefully watched their pennies. Though not young, they were both in very good health, largerly due to Yvonne’s insistence on healthy foods and exercise for the last decade.
One day, their good health didn’t help when they went on vacation and their plane crashed, sending them off to Heaven. They reached the pearly gates, and St. Peter escorted them inside. He took them to a beautiful mansion, furnished in gold and fine silks, with a fully stocked kitchen and a waterfall in the master bath. A maid could be seen hanging their favorite clothes in the closet. They gasped in astonishment when he said, “Welcome to Heaven. This will be your home now.”
Mike asked Peter how much all this was going to cost. “Why, nothing,” Peter replied. “Remember, this is your reward in heaven.” Mike looked out the window and right there he saw a championship golf course, finer and more beautiful than any ever built on Earth.
“What are the green fees?” grumbled Mike. “This is Heaven,” St. Peter replied. “You can play for free, every day.” Next, they went to the clubhouse and saw the lavish buffet lunch. “Don’t even ask,” said St. Peter to Mike. “This is Heaven; it is all free for you to enjoy.” Mike looked around and nervously asked Yvonne “Well, where are the low fat and low cholesterol foods and the decaffeinated tea?” “That’s the best part,” St. Peter replied. “You can eat and drink as much as you like and you will never get fat or sick. This is Heaven!”
“No gym to work out at?” said Mike. “Not unless you want to,” was the answer. “No testing my sugar or blood pressure or . . .” “Never again.”
Mike glared at Yvonne and said, “You and your DAMN Bran Flakes. We could have been here ten years ago!”
For those of you who know him, “Mike” reminds me of Walter, the grumpy old man depicted in Jeff Dunham’s hilarious shows.
Sincerely,
Bob Kargenian, CMT
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