www.hgaadvisors.com
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124461892A57
1595 Allouez Ave, Green Bay, WI 54311
July 2013
(920) 435-8436 www.hgaadvisors.com
The Rest of the Story
But there was more to June than the exodus from bonds.
For many investors June shattered a myth which
Nothing but cash coped well. In normal times bonds and
they’d clung to for a long time. Bonds are supposed to
stocks work well together in a portfolio. Typically, if bonds
yield steady interest and not suffer volatility like the stock
go down, stocks go up and vice versa which lowers volatility.
market. But we’re near an inflection
They rarely move in tandem (in the
Change
point in history. June showed that
Year- investment world that means they are
Mid May
when interest rates rise bonds can
toBond Category
not very correlated). But in June, eveto Mid
date
be quite volatile.
June
rything but cash moved down.
A lot of June’s reaction was due
Long-term US Treasuries
-6.7%
-4.7%
“Anyone who has anything but
to comments by officials about
Emerging market bonds
-4.9%
-4.9% U.S. stocks is not keeping up…. Even
eventual changes in quantitative
International govt. bonds
-4.3%
-5.3% a marginal allocation to anything outeasing. “The exodus from bonds
-4.1%
-3.5% side the U.S. has not performed as
comes as Federal Reserve officials, TIPS (Treasury Inflation Protected Securities)
well as the U.S” B
including chairman Ben Bernanke,
Municipal bonds
-3.0%
-1.3%
Here is how the rest of the world
have suggested that the central bank
Short-term US Treasuries
-.13%
.04% markets performed during June, as
could taper the pace of its $85 bilwell as bonds:
Source: Yahoo Finance
lion-per-month bond buying pro-
The June Swoon
gram this year, assuming the economy continues to improve.” A
Chasing Yield
Many investors were primarily in bonds as they no
longer trust the stock market and can’t take that level of
volatility. With low interest rates they had started investing in things earning better interest than CDs and bank
deposits. Much of that went into intermediate and highyield bonds. Chasing yield meant many people who
thought they were safe from volatility were hit with 4-7%
losses in June without any allocation to stocks.
We’ve been moving bond allocations to shorterduration the past few years as the inescapable rise in interest rates is just a matter of ‘when’, not ‘if’. The bonds that
take the worst hit are longer duration bonds. Bonds move
down in value with a rise in interest rates in proportion to
their duration. The longer the duration the more of a fall
the bond takes.
Chinese stocks – down 13%
Emerging market stocks – down 6.5%
Europe – down 6.7%
Source: Yahoo Finance
We reduced allocations to emerging markets, international
stocks as well as longer-duration bonds during June but even
the safer short-duration bonds were hit.
In a typical month the rest of the world is in-line with the
US market and bonds are fairly stable. Yes, the US market
was down 1.5% but the rest of the world markets faired
much, much worse .
Luckily July has reversed course so far. But it is a reminder that although things are calm on the surface, volatility
lurks not far below.
A
Investors Yank Record $62 billion from Bonds, Ben Rooney,
cnn.money.com, June 26, 2013
B
We’re All Wrong About the Bull Market, Michael Gayed, Marketwatch, July 15, 2013
Registered Representative, Securities offered through Cambridge Investment Research, Inc.,
a Broker/Dealer, Member FINRA/SIPC.
Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor.
Cambridge and Hanson Financial Services are not affiliated.
COURSE CORRECTIONS, July 2013
HANSON FINANCIAL SERVICES
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We’ve Moved
Listening to the music (the financial press) things
seem calm. The market is at all-time highs, government indicators show the economy is steadily creating jobs, we have low inflation, and we’re pulling
troops out of our last remaining conflict. We should
be calm and comfortable shouldn’t we? Rock-a-bye
investor. What is there to worry about?
Investors have a tendency to be most calm just
before a large correction takes place. It is like they
aren’t listening to the words of the lullaby. We’re not
saying a correction is necessarily imminent, but many
investors are calming down to a degree that has us
concerned.
Not all evidence points to clear sailing ahead. That
said, there are respected investors predicting an accelerating economy, growing corporate profits and markets climbing higher for years to come. We hope they
are right. But we have to plan for the worst while
hoping for the best.
The US stock market is nearly the only financial
market doing well. Signs elsewhere don’t fit the music of the lullaby. “Do not look at the world through
rose-colored S&P 500 glasses. Home bias is making
everyone believe this is the 1990s again, but anyone
who has had anything but the S&P 500 very much
disagrees. Such unrelenting outperformance means
caution should be warranted.” D
As of July 24th we’ve relocated our office to a
new location. We’ve been in Bellevue on Allouez
Avenue for 10 years and our lease was up.
As we evaluated options we knew we’d grown
over the years and had no more space to expand. All
but one of our staff now live to the west (from West
Depere to Oconto) and this move saves about 3
hours of combined commuting time each and every
day for our staff. The economy also helped as it is
currently a renter’s market for office space so we
were able to get more space for a lesser cost.
Our phone numbers remain the same. We look
forward to meeting with you in our new location.
Details on the move are later in this letter.
A New Staff Member
When you call or visit you will likely talk to or
meet Kelsey Langlitz. Kelsey is manning the reception desk and working on various administrative
tasks for us. She has administrative experience in a
law firm and as an executive assistant. She is taking
classes through NWTC for certification as an Administrative Assistant. Kelsey catches on with new
software very quickly and is a great addition to our
group.
What is there to worry about? Some of the things we
monitor, and develop contingency plans for:
Investors Being Lulled
Dr. John Hussman makes a great point in a recent
newsletter. Sometimes we can be lulled to sleep by something that should really be worrying us.
Rock-a-bye baby
On the treetop
When the wind blows
The cradle will rock
Interest Rates
A rise in interest rates from the current historical
low back to average rates will have a big negative
impact on the value of bonds. And it will roil other
markets as well. Bonds are usually thought of as low
volatility interest producing securities fit for widows
and retirees. But when (not if) rates rise that will be
far from the truth.
We’ve been warning of it for years and a hiccup in
the usually calm market was heard recently. “Like
prisoners on death row, everyone knew this day
would eventually come. That didn’t make it any more
pleasant when Warden Bernanke showed up at our
cell door with a Bible.” E
We already talked about this in the previous article
but there is more to come at some time. If the Federal
Reserve has their druthers it will be about 2015. But
the market may at some time have a different idea
When the bough breaks
The cradle will fall
And down will come baby
Cradle and all
“I’ve always thought that singing “Rock-a-bye
baby” offers a bizarre lesson to our young, encouraging them to be lulled gently to sleep by describing a
scene that should have them wide-eyed with terror.
Let’s get this straight. You’ve got this baby, in a cradle, teetering on some fractured bough, at the top of
a tree, complacently rocking with each breeze, with
baby, cradle, and all facing an inevitable disaster
that’s inherent in the situation itself. And everyone is
OK with this.” C
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(Continued from page 2)
percent spike in just six weeks. The spike is causing a sense of urgency now, a rush to buy before
rates go higher, but that will be short term. Home
sales and home prices will both come down if rates
don't return to their lows, and the expectation is
that they will not. rates don't return to their lows,
and the expectation is that they will not.” F
China
China’s growth has slowed recently and many
have become quite concerned about the ramifications for the world economy. It is the world’s second largest economy and has a huge impact for the
US and Europe. For thirty years China’s economy
has been focused on exports and depending on selling cheap products abroad. That unbalanced model
with no domestic demand can cause bubbles to form
and if demand from the US and Europe wanes, as it
has, that can mean trouble.
“The credit driven growth model is clearly falling
apart, says Fitch’s senior director in Beijing. “There
is just no way to grow out of a debt problem when
credit is already twice as large as GDP and growing
nearly twice as fast,” Chu, 41, said in an interview. G
“We see massive overcapacity in certain industries. One of the largest shipyards in China declared
bankruptcy. Another shipyard run by a Chinese company is asking the government for a bailout. In the
solar sector in China, we’ve seen two big bankruptcies of some of the largest manufacturers in the
world. There are similar pressures in steel and aluminum.” 12
Inflation
Source: Economist Robert Schiller
and the ‘bond vigilantes’ may make the move before the Fed.
Those investors who have forsaken stocks and
moved to all bonds thinking they will be safer may
have a rude awakening sometime in the next few
years.
Debt levels
The government debt in the US has tripled since
2000 and spending has doubled but the affects that
many have warned of have not come to be. The
economy is still chugging along. So, does the
amount of debt matter? Will it in the future?
It doesn’t bring the economy down when interest
on the debt is at historical lows. And that is right
where we are as the above chart shows. So the debt
has tripled but the cost to taxpayers has not risen
much because interest rates fell. But they can’t stay
this low forever.
When interest rates return to historical levels the
interest cost will increase dramatically. This increased cost could be a significant drag on the
economy. There will be calls for higher taxes and
getting spending under control again when that happens. But the risk is being drug into a recession
again when rates rise.
Inflation is the scourge of people living on fixed
incomes. With inflation the prices of most things
keep rising – food, gas, electronics, electricity, cars,
etc. But it can also hurt everyone if it is heavy or prolonged. It can hit corporate earnings and thus stocks,
it can mean that bond yields are not keeping up with
increasing prices, it can mean recession and layoffs.
But economic readings of inflation are low, for now.
The problem is that it can rise quickly and unexpectedly. If the Federal Reserve or their counterparts
in the Eurozone, Japan and elsewhere don’t manage
things very carefully, inflation can quickly get out of
control. And guess what happens when inflation rises? Interest rates do to (see section on Interest Rates).
They have to make sure they don’t make changes too
late or too early, but just at the right time.
Housing
Housing has been the bright spot in the US economy this year. The recent spike in interest rates,
however, may be a sign of problems to come.
“The market has seen rising rates before, but
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WHAT ELSE WE’RE DOING
Andy and Bette Hanson
We had an incredible adventure on a river boat cruise of the Rhone-Saone and Seine Rivers in France
this past June. We got to see the French countryside, Monet’s Gardens, the Arc de Triomphe, places Van
Gogh painted, vineyards, the Louvre with the Mona Lisa, the spot where Joan of Arc was burned at the
stake, an incredible food mart in the gastronomy capital of France, i.e. Lyon, the Eiffle Tower, the Palace
of the Popes, the Normandy Beaches and monuments. The food was delicious especially the different
cheeses from the areas we traveled through. The tours were amazing and tiring, but the memories will
last forever. We are so grateful to have had this opportunity.
Patti Trick
My husband Joel and I recently visited our oldest son Adam where he works and lives up
on the Gunflint Trail in far northern Minnesota. We enjoyed perfect summer weather while
we were there, in contrast to all of our previous visits when it was cold and rainy. We stayed
in a cabin on the shore of a beautiful lake and caught plenty of fish right off our private
dock, so were able to enjoy a meal of fresh fish. We also hiked to a remote and beautiful
waterfall, and one of the highlights of our trip was finally seeing a moose in the wild, a cow
Doug Gjerde
We’ve had a great summer with many outdoor activities. My side had an unplanned mini
family reunion in the town I grew up in. My niece was having her final dance recital and my
88 year old Aunt from AZ and my sister from MT were able to attend so we got other family
together and had a great time. The picture is on the river in Ottawa, IL with my kids, my aunt,
my niece and my sisters.
We also had somewhat of a reunion with Anita’s family as three generations from 3 states
joined together to ride bikes in the Ride for Nature in Door County. And we were lucky
enough to get all the kids together and spend a long weekend in a cabin on a lake up near
Boulder Junction. We swam and kayaked and had our annual summertime miniature golf game.
Yulia Barstow
If you would have to describe the last three months of my life in one word, this word
would be "construction". For the last quarter I've been busy managing the renovation of
our new office. It was very dynamic and interesting, but at the same time a challenging
and stressful ride. My children would find the strangest things in mommy's purse: bricks,
AD25F94E2A569E265915E9D1A5FCDE6B5AC25123245125C9A5A42964255754D1512A5
My second best tool after a financial calculator was measuring tape. Along with financial
statements, investment prospectuses and economic commentaries, I was reading blueprints and floor plans.
Now I am taking my Bob-the-Builder hat off and am looking forward to meeting you
at our new “home”.
Deanna Roeger
With the arrival of spring, we found ourselves busy planting our garden and working
outside. We are looking forward to fresh tomatoes, peppers, beans, and tiny pumpkins. In
early spring we were able to visit some friends in Wausau, and also got out to LaCrosse
for the first time. We have managed only one trip to Door County so far this summer, but
hope to have at least a couple more. At the end of June we took a road trip to visit family
and friends back in Buffalo and Rochester NY. It was great to see all of them again. The
picture shows a beautiful day on the patio, relaxing with family and friends. From the left,
we have my husband, Jeff, me, Jessika, Jordan, Peter and Janice.
COURSE CORRECTIONS, July 2013
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HANSON FINANCIAL SERVICES
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(Continued from page 3)
So, we must watch closely for any event that may be a
shock to the economy and have plans ready in case it is big
enough to tip us into a recession.
With unprecedented levels of debt in many developed
countries the tinder is there. Let us hope the Fed can keep
things managed well. But we can react if we see things
going awry.
C
Rock-A-Bye Baby, Dr. John Hussman, Advisor Perspectives,
July 15, 2013
D
We’re All Wrong About the Bull Market, Michael Gayed,
Marketwatch, July 15, 2013
E
Rising Interest Rates 101, Phil DeMuth, Forbes, July 15, 2013
F
Dire predictions for housing recovery, Diana Olick, CNBC,
July 10, 2013
G China Credit-Bubble Calls Pits Fitch’s Chu Against S&P,
Bloomberg, May 29, 2013
H
A very clear explanation of China’s economic woes, Brad
Plummer, Washington Post, July 16, 2013
I
Empirical Research Partners analysis
J
Economy skids dangerously close to contraction, Marketwatch, July 15, 2013
K
Is the US economy stronger than GDP numbers suggest?,
James Pethrokoukis, American Enterprise Institute, July 15,
2013
Corporate profits
The level of the stock market and individual stock
prices depend on estimates of future profits of the companies. At record levels, the market has priced in a great
future for corporations. The big question is whether this
is justified. Only time will tell.
During the recovery from our last recession much of
the increase in earnings has come from efficiency increases and share buybacks. It has not come from a
strong growth in sales. To keep the market advance moving is going to require increases in top-line growth going
forward.
We may get there if unemployment keeps falling and
consumers keep spending. Many companies are holding
back on spending for big projects or expenses due to uncertainty. There is uncertainty in future interest rates and
the duration and stability of this recovery. Capital expenditures remains depressed in 8 of 10 economic sectors.I
Another factor holding up profits and thus stock prices
is that companies’ cost of debt are at historical lows.
Once interest rates increase, profits will start falling,
which will put pressure on stock prices. So much depends
on interest rates staying low and stable.
Not A Market To Win a Beauty Contest
“If this is the most-hated bull market ever, as has been
suggested, maybe there's good reason for it.”
While the US Market has returned to the market highs
hit in 2007 and 2000, much of the rest of the world and
markets have suffered. Other markets are not validating the
return to highs of the US. Year-to-date as of the end of the
quarter Asia is down 5.8%, China is down 8.6%, the recent
darlings called the BRICs (Brazil, Rusia, India and China)
are down 12.6% with Brazil itself down 19.5%. 2
“While the rally this year looks good on paper it has
come on the backs of some of the ugliest internals you
could imagine. Just look at the qualities the biggest gainers
share: Low price-to-earnings ratios, zero dividend yields,
high short interest and lowest analyst ratings.”
“Jeffrey D. Saut, chief investment strategist at Raymond
James, said he is mindful of the old market adage, "When
they start running the dogs, it's time to start looking over
your shoulder. Saut believes the market is a week or two at
most away from the first "meaningful decline of the year to
commence."
Low economic growth
This recovery (from the recession of 2007/2008) has
been weak compared to past recoveries. Economic
growth has been a fraction of the typical recovery. When
growth is strong the economy has a chance of absorbing a
shock and not toppling into recession. There is less cushion when growth is low, as it is now.
“The big question for the second half is whether job
growth can continue to outperform and push the economy
to grow faster, or whether the first-half growth slump will
drag down the hiring rate. With the tax hikes and sequester fading into the rearview mirror, there’s reason for
optimism. But there’s no room for complacency.” D
Now, estimates of 2013’s growth are being dialed back
to low numbers. “Thanks to a disappointing June retail
sales report, banks across Wall Street are cutting their
second-quarter GDP forecasts. Barclays and Citi, for instance, are now looking for growth of just 0.5% annualized. JPMorgan thinks the data add “some downside risk
to our 1.0% GDP number for last quarter.” K
COURSE CORRECTIONS, July 2013
1 Most Hated Bull Market Ever? Maybe It Should Be, Jeff
Cox, CNBC.COM, July 9, 2013
2 Source: Morningstar
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Finding Our New Office
Our new location is about a half mile from the Velp
Avenue exit off US Hwy 41. It is on Velp west of the Harley Davidson Dealership and across from Julie’s Café. It
is on the south side of the street, left if coming from the
highway.
The large sign at the street says “Kerber Rose Professional Building”,and we are in the second building
from the street (Building B).
*
Indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee
future results.
These are the views of Doug Gjerde, Yulia Barstow
and Andy Hanson and not necessarily those of Cambridge or its affiliates. Information provided in this
newsletter is believed to be from reliable sources, but
no guarantees can be made to its accuracy or completeness.
COURSE CORRECTIONS, July 2013
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HANSON FINANCIAL SERVICES