September 16, 2016
Economic Reality Approaching the Presidential Election
It’s almost hard to believe that summer’s end is near. 2016 began with a huge thud when we experienced the worst January for investment market performance on record. January’s decline got our year off on a terrible note and was primarily caused by panic about business slowdown in China as well as crashing oil prices. On February 11, 2016, we sent you a letter that predicted that the low for this market cycle (a market cycle is 3-5 years approximately) was likely to have been reached on that day. As it turns out, that prediction was correct. Since that time, the equity markets have moved strongly with our investors’ portfolios, from February 12th through September 14th, realizing a return of 15.81% after all expenses. Our single largest investment sector, banking, during those same days has actually appreciated 33.92%. You may have noticed in your accounts that in the past couple of weeks we have reallocated assets to become more defensive. With AAPL stock having surged from February 12th we took an approximate net profit of over 50% in that position to cash. We further hedged your investment assets with a 5% allocation to an inverse S&P 500 ETF called Proshares Ultra VIX. This 5% allocation will offset potential short-term market declines to a significant extent as it tends to go up in value when the market goes down. These short term defensive measures are just that – they are intended to be short-term hedges. Our long term thesis is still intact. That thesis is, as we approach and go through the election in November of this year several things are going to happen in a synergistic way that should produce a very strong positive result for the United States economy and for investors as a whole. That belief is predicated along the factors that follow.
I believe that Donald Trump will win the presidential election by a large margin (2%+ points). For those of you, like myself, who keep a close eye on the political realm, the democrat’s candidate for President, Hillary Clinton, has not had an easy time of overcoming what appeared to be very factual allegations of gross incompetence in handling our nation’s highest classified data as Secretary of State, an ongoing email scandal that threatens to literally swamp her entire campaign right now, and the impending release of over 15,000 work related emails that Mrs. Clinton did not provide to the state department (as she swore under oath to Congress and told the American people she did). These factors, as well as the incompetence shown by the State Department and President Obama’s administration in dealing with the Benghazi attack, a Mid-East where flames that have never been higher (caused again by the gross incompetence of the State Department under Mrs. Clinton’s leadership as well as President Obama’s naïve and incompetent policies), and the pay-for-play policies that have enriched the Clinton’s through the Clinton foundation and provided a paid vacation lifestyle (that no one I know could ever afford), are all leading the American people (in my view) to the conclusion that Mrs. Clinton will not become our president.
Change is Coming
The American people have reached a point in our nation’s history where they are demanding change from political leaders of all stripes. Both republican and democrat elected officials continue to feather their own nests while allowing our country, in so many ways, to be destroyed from within and to be attacked from without. Incompetence at all levels of Government has, in our lifetimes, never been so high. Trump brings a refreshing business view to bear (Like Governor John Y. Brown Jr did for KY in the 80s) with an awareness of the danger of our porous borders and the need to make American businesses competitive on the global stage. These factors I believe will lead to his inevitable election. What happens after that, from our detailed analysis, should be a very long and sustained economic advance that raises real incomes for American families, produces significant job growth (unlike the slow crawl we’ve seen for the past 8 years) and that puts Americans jobs, opportunities and safety ahead of political considerations, and global governments.
When I look at current events it almost seems like I’m back in 1980. The transition from the Carter administration to the Reagan administration was dramatic and striking. Then, a non-attorney (like Trump), Ronald Reagan, succeeded a naïve but well-meaning politician, Jimmy Carter, into office and began what was known as “A New Dawn in America”. Under the Carter administration our enemies abroad were emboldened just as under President Obama. Under the Carter administration we had lost the respect of our allies (which impaired our ability to do business overseas) just as we have under President Obama. Under the Carter administration joblessness had climbed and politics in Washington was at a standstill and in turmoil, just as under president Obama. I think the same positive net economic effect of the 1981 presidential election will occur in this new political transition from the Obama administration to Trump!
But what if I’m wrong? What if Hillary Clinton gets elected? I’ve thought that question through many times and I bring it up now because it’s been asked several times by our clients. If you think about it, no single sector of our economy has contributed as many millions of dollars to Mrs. Clinton’s campaigns over the years as the financial services sector. When businesses contribute money through their employees to campaigns they do so to gain access and influence. There is no question in my mind that my industry, and related financial service industries, have completely and utterly bought and paid for Mrs. Clinton’s loyalty. She will not impair her wealth, or her rich donor’s wealth, by advocating any policies that could harm our investment markets. For that reason, I am of the opinion that a Clinton presidency may slow down our investment asset growth but not in any way impair it. The striking difference in my mind is that a Clinton presidency, while continuing to reward the investor class (which includes most of the people reading this) would also slow underlying economic growth and opportunity for our kids and grandkids. It would continue the destructive shift of wealth from the private sector to the public sector by growing the federal government. It would continue the same policies that invaded our privacy, peered into our homes, monitored our mail, listened in on our phone calls and cataloged and stored them, and have attempted to trample many constitutional rights including our Second Amendment right to keep and bear arms. In other words, I think a Clinton presidency would be highly destructive of the economy long term but would only slow investors wealth growth but not impair it long term.
A Trump presidency on the other hand would utilize sound business principles that were last utilized by President Reagan and his administration to control the growth of government, stop the confiscatory confiscation of tax assets, bring hope and change (real change) back to Washington, and put politicians at all levels in government on notice that they can be fired if they are not doing the work of our people.
With that thesis of a change of Government – a real change – an impending Trump presidency, I want to make several observations. First, we may be moving sideways in the valuation of your investment assets in for the next month or two months. Second, as we get closer to the election in November and the inauguration in January, I believe both our economy and the investment markets will surge as they have generally since our February 11th low market call. Third, beyond that, with a new government in place that intends to do the will of the people and protect American Jobs and the futures of our kids, I think we’re in line for an extended and powerful upside rally in our equity markets. I think this particularly applies to Spectrum Financials’ portfolios. Our portfolios at the current time are grossly undervalued and have very high relative income and dividend support. Our portfolios also tend to respond rapidly to underlying positive movements in the economy. For that reason, I believe our portfolios will move much stronger to the upside as the economy enters a real time of healing. The impending seismic change in our regulatory agencies (EPA, IRS, FCC, etc.…) is also Reaganesque. By firing regulators who pervert our constitution and subvert regulations and the law to achieve political ends we have stymied business growth and job opportunities. When this regulatory oppression is ended with a Trump administration I believe business will be incentivized to take off in a very powerful way. For example, the impending reduction, favored by both parties in Washington, of the corporate tax rate from a low of 35% to something to a rate of 25% will also cause an immediate upward revaluation of equities and positive appreciation from newfound corporate cash flows – just as we saw under Reagan.
In summary, it’s my opinion that we are likely to see some additional sideways movements in the market over the next month or two. However, as we get closer to the election and as the polls begin to show that we’re likely to see a change in political policies with a more conservative president, I think we’ll see investment assets begin to appreciate as they have since our February 11th market low call. That trend will be accelerated in all likelihood once our new government is seated in January of 2017. With huge economic tailwinds of low interest rates and very low oil prices I think the next rally and positive growth can equal or exceed the nine-and-a-half-year uninterrupted economic expansion that occurred during Ronald Reagan’s era! I think the change of attitude in our country towards allowing mass immigration of people that are taking jobs from American that have the least amount of education (negatively impacting our minority communities) and ending regulatory oppression that has been thrust upon the American people for the past eight years will produce dramatic changes not only in attitude but in profits, jobs, and opportunities for our children and grandchildren. Our portfolios are uniquely positioned to outperform in this net phase.
What we see ahead appears to me to look almost like a Golden Investment Age. I would strongly recommend that you embrace it and position for it now. We will maintain a significantly higher than normal cash level as we go through this short period of sideways movement but when we move back into the market we’re likely to do it quickly. If you have assets that you have not entrusted to our firm I would recommend you depositing those funds so now!
With My Appreciation
For the past 29 years I have had the privilege of working with exceptional people and serving their
needs as a portfolio manager and certified financial planner. One of the most rewarding things about that is because our clients are a cut above, I have learned a lot from listening to them about business, investment, leadership, and life. One of the most important lessons I have had to learn was about patience. In our throwaway society that requires immediate gratification it’s easy to forget long-term results and focus on the short-term results. Our firm’s returns since February have been exceptional but we have lagged the market prior to that time all the way back to approximately June of 2015. This short period of underperformance can skew our numbers and more importantly cause concern for you as a client of our firm. The decisions that I have made personally about the management of your precious capital and investment assets have been made thoughtfully and with great conviction. As a matter of fact, I am more comfortable with the portfolio right now than I have been with any portfolio I have assembled in my entire career. It is my honest belief that we are going to see not only a large positive change in our nation’s economy, and a corresponding large upward movement in our nations investment markets. I also believe that the unique positioning of our portfolio should insure us a much larger upside move than the average. This letter is getting long so I am not going to go into a lot of detail on that point but I will address it later. Suffice it to say that your portfolio is resistant to downside pressure due to our current positioning but also overwhelming positioned for rapid appreciation in the market that we are going to see in the next 3 to 5 years. This movement started in February and we believe it has many years to run. So remember something that I have had to learn over and over again. Patience is always rewarded! Please give me a call if you have any questions.
C. Kelly Buckley, MBA, CFP®
Managing Director for Asset Management