IN THIS ISSUE:
1.More Americans Want Gun Control After Sandy Hook
2.Obama Unveils Sweeping New Gun Controls
3. How To Play The Upcoming Debt Battles
4. “Legacy” – Smoothing Out Returns & Reducing Risk
5. The Legacy “Core” Portfolio
In last week’sE-Letter, I discussed the three upcoming debt battles. Those include: 1) the sequester (automatic spending cuts) coming on March 1st; 2) the debt ceiling battle that was coming in late February/early March; and 3) the continuing resolution fight in late March.
As you probably know, the Republican leadership in the House decided last Friday to cave in to Obama on the debt ceiling issue (ie – no spending cuts). This week, they hope to pass a temporary extension of the debt ceiling until April 15, during which time they hope the Senate will adopt a new federal budget for the first time in almost four years.
If somehow the Senate passes a new budget, and the House approves it, then it’s possible that all three upcoming debt battles could go away. I would NOT count on that! I don’t think Senate Majority Leader Harry Reid will spearhead a drive to pass a new budget and if not, all three debt battles could still play out.
If I am right, then a lot of market turmoil still lies ahead over the next few months. Near the end of last week’s E-Letter, I alluded to an investment strategy that could position many of you to take advantage of the debt battles we will likely face just ahead. I’ll get specific today.
However, before we get to that discussion of how to potentially take advantage of the upcoming debt battles, I have some commentary on President Obama’ssweeping gun control initiatives that he announced last week, in the wake of the Sandy Hook Elementary School massacre on December 14. While we expected that Obama would seize upon the Sandy Hook tragedy to put forth new gun control laws, we did not know that they would be the most wide-sweeping regulations in more than a generation. Let’s get started.
More Americans Want Gun Control After Sandy Hook
Ever since the tragedy on December 14 at Sandy Hook Elementary School in Newtown, Connecticut occurred – when Adam Lanza senselessly murdered 26 people (20 children and six staff) and then himself – there has been a growing cry from millions of Americans for some kind of new gun controls. And the current occupant of the White House is all too happy to oblige.
Last week, the president unveiled the most sweeping new gun control laws since the so-called Brady Bill was passed in 1993, requiring background checks on firearm purchasers in the US. Obama’s proposals go much further as I will discuss below.
A new (Jan. 10-13) Washington Post/ABC News poll found that 40% of respondents said addressing gun violence should be a “high priority” for Congress and President Obama. Another 28% said it should be the “highest priority.” 51% said they support a ban on semi-automatic handguns. 61% said they support a ban on high-capacity ammunition clips (over 10 bullets). 58% said they would support a nationwide ban on the sale of assault rifles.
88% said they support background checks on people buying firearms at gun shows. 76% support background checks on anyone buying gun ammunition. 71% support the creation of a new federal database to track all gun sales in the country. These numbers are just stunning!
According to the Washington Post, all of these numbers are up substantially from previous surveys on these issues. There were also some new questions not asked in previous surveys, but included this time due to the Sandy Hook Elementary School massacre.
For example, 55% said they support a new law to require an armed guard in every school in the country. 87% said they are “more likely” or “much more likely” to support new gun control laws in the wake of the Newtown, CT school shootings.
Obama Unveils Sweeping New Gun Controls
Last week in a bold attempt to increase gun regulation, President Obama unveiled the most sweeping effort at gun control policy reform in a generation. These gun control proposals, which came at the end of a month-long review process spearheaded by Vice President Biden, are broken down into four key subsections: law enforcement, the availability of dangerous firearms and ammunition, school safety and mental health.
In an effort to touch on all four of those elements, the president recommended requiring: 1) criminal background checks for all gun sales; 2) reinstating the assault weapons ban; 3) restoring a 10-round limit on ammunition magazines; 4) eliminating armor-piercing bullets; 5) providing mental health services in schools; 6) allocating funds to hire more police officers; and 7) instituting a federal gun trafficking statute, among other policies.
While some of these new regulations require congressional approval, President Obama unilaterally issued 23 Executive Orders/Actions (with no congressional approval) that go into effect immediately. Those actions include: 1) requiring federal agencies to hand over relevant data for a background check system; 2) providing law enforcement officials, first responders and school officials with better training for active shooting situations; and 3) directing the Centers for Disease Control to research the causes and prevention of gun violence, among many other new policies and directives.
In total, the new proposals and Executive Orders go beyond what most gun control advocates were hoping for at the start of Biden's review process, during which he held 22 different meetings with 229 different organizations and 31 elected officials.
I wrote about the new gun control measures in myBLOGlast Thursday if you care to get more of my thoughts on this issue. The bottom line is:
None of these new gun control edicts will have any significant effect on evil people who can still obtain weapons and then attack innocents in schools, theaters and other “gun-free” places.
Many gun owners fear that these new regulations are simply the next step toward a National Gun Registry. While that may be what Obama wants ultimately, I don’t see any way it would pass Congress. I hope I’m right on that one. Even if I am right today, that doesn’t mean a future Congress would not vote for such a registry.
It remains to be seen just how much of President Obama’s gun control agenda will ultimately be passed by Congress. What we do know is that Obama issued 23 Executive Orders/Actions to implement as much as he could without congressional approval. Again, see myBLOGfrom last Thursday for more specific comments on Obama’s latest gun control initiatives.
Sadly, I think Congress will pass most of what Obama wants. I hope I’m wrong. Let’s move on to our main topic today.
How To Play The Upcoming Debt Battles
You will recall that last week I discussed the upcoming debt ceiling debates. Those included: 1) the sequester (automatic spending cuts) coming on March 1st; 2) the debt ceiling battle that was coming around mid-March; and 3) the continuing resolution fight in late March.
Last Friday, as you now know, the Republican leaders in the House decided topunt on the debt ceiling for three-month extension. They will try to get a formal vote this week to extend the debt ceiling until April 15. They are calling on the Senate to pass a new budget in the interim that could head-off all three budget battles that lie ahead.
It remains to be seen if the Senate will pass a new budget anytime soon. President Obama will submit his new budget for fiscal year 2014 in late February, as the president is required to do. But none of his previous budgets have been passed into law by the Senate or the House.
So the likelihood is that we will see all three debt battles noted just above play out over the next three months. As investors, we need to be prepared.
During the last debt ceiling showdown in the summer of 2011, the Dow Jones Industrial Average plunged over 2,000 points. The S&P 500 Index lost over 16% of its value in May – September of 2011 as the debt ceiling battle played out – and it could happen again…soon!
So, how should you be investing when you don’t know whether the government will be able to pay its bills or not, and when you know the stock markets could take another pounding just ahead? This week, I’m going to mention two ways that you can play the debt ceiling debate this time around. The first is the Equity Alternative Program, an investment strategy I first introduced in myJuly 10, 2012 E-Letter.
The other alternative is a combination approach that includes providing additional diversification while reducing risk. Our Legacy “Core” Program features the Equity Alternative Program in combination with Sojourn’s Columbus High-Yield Bond Program and Scotia Partners’ S&P Plus Program. While all three of these programs are recommended individually, the combination seeks additional diversification and reduced portfolio losing periods.
Quick Review of the Equity Alternative Program
Since I have discussed the details of the Equity Alternative Program (EAP) in both myJuly 10, 2012andDecember 4, 2012E-Letters, I won’t go into a lot of specifics about the strategy today. This is the money manager I alluded to at the end of last week’s E-Letter that actually gained over 17% in May – September of 2011 during the last debt ceiling battle when the S&P 500 Index plunged16%.
This same strategy has gained an average of 19.9% (net of fees and expenses) over the last five years, with a worst losing period (drawdown) of only -12.9%. I believe that EAP may be a good place to have a portion of your money any time, but especially during the upcoming debt ceiling, sequester and continuing resolution battles just ahead.
EAP is a long/short approach to 30-year Treasury Bonds developed by Vinay Munikoti, founder of System Research, Inc. It is a 100% mechanical quantitative strategy with the potential to profit in both rising and falling interest rate environments.
System Research employs a wide range of economic and technical inputs to develop a signal, including inflation forecasts, equity money flow, yield curve analysis and international bond yield trends. The result is a trade signal that is not driven exclusively by technical analysis nor economic forecasting models, but is a systematic combination of both.
Market risk is managed by scaling back on allocations if trailing stops are breached. Positions range from 0% invested up to 100% long or 100% short. Unallocated funds remain in cash (money market), but 100% cash positions are rare. You can learn more about EAP by clicking on the followingAdvisor Profile link.
Finally, the timing for getting started with the Equity Alternative Program could not be better in my opinion. Treasury bond yields are at or near historic lows, and we all know that long-term rates will go up at some point. EAP is one of thebest Treasury trading program I have ever seen, but as always, past performance is no guarantee of future results.
“Legacy” – Smoothing Out Returns & Reducing Risk
Because even professional money managers experience losing periods from time to time, we recommend that clients have accounts with more than one of our recommended money managers. That’s why we have developed our “ Legacy Portfolios” featuring combinations of the various professionally managed investments we offer.
Why develop combinations of actively managed programs? Simple, they have the potential to enhance diversification of your portfolio, to smooth out performance and reduce overall portfolio risk. Rather than hopping from one investment to another, our Legacy Portfolios allow you to benefit from an account containing two or more non-correlated investment strategies.
Each Legacy Portfolio consists of a hypothetical illustration showing how the actual track records of two or more active money managers would have performed under certain assumptions. The result is the ability to see how different non-correlated strategies would have complemented each other in the past.
Keep in mind, however, that each Legacy Portfolio is simply an illustration that provides a starting point from which you can work with your Halbert Wealth Investment Consultant to tailor an actively managed portfolio that meets your particular needs and objectives.
The Legacy “Core” Portfolio
The Legacy Core Portfolio combines three alternative investment strategies into a single portfolio to enhance diversification. Each of the three participating money managers has a different strategy and approach to the market.
It is designed for individuals who have $150,000 or more to invest in active investment strategies. All of the following investments participating in the Legacy Core Portfolio are part of our AdvisorLink® Program:
$75,000 (50%) to Sojourn Columbus High-Yield Bond Program
$50,000 (33%) to System Research Equity Alternative Program
$25,000 (17%) to Scotia Growth S&P Plus Program
Since I have already recapped the Equity Alternative Program above, I’ll only summarize the Sojourn and Scotia programs below. Sojourn’s Columbus High-Yield Bond (CHYB) Program is a long-only, tactical approach to high-yield investing. It seeks to identify and confirm trends in high-yield bond mutual funds and invest accordingly. The historical performance of the CHYB Program can best be described as “slow and steady wins the race,” exactly what you’d expect to see in a “core” investment program.
The types of funds included in CHYB can include not only actively managed high-yield bond funds but also high-yield index mutual funds, multi-sector bond funds and even floating rate bank loan funds. When no bond funds are attractive, the strategy moves to the safety of cash (money market).
Scotia Growth S&P Plus Program’s trading signals are generated by a quantitative trading model based on an analysis of short-term movements against the long-term and intermediate-term trends in the S&P 500 Index. A separate overlay may also result in overbought and oversold signals. Scotia’s model is 100% mechanical, meaning that the money manager follows whatever signal is generated by the trading model with no additional discretion.
Scotia’s Growth S&P Plus Program is a long/short strategy trading 2X leveraged S&P 500 index funds, a more aggressive alternative. However, this is an example where adding a modest allocation to a more aggressive strategy, along with two uncorrelated programs, can make sense and increase overall returns.
The ability to combine a variety of different non-correlated strategies to obtain an overall moderate-risk portfolio is one of the distinct advantages of working with Halbert Wealth Management. The following hypothetical performance information for the Legacy Core Portfolio helps tell the story:
The payoff of any combination of investment strategies is how they perform together, both from a risk and reward standpoint. The performance numbers above show how the combination of Columbus, EAP and Scotia produced a double-digit return with lower risk than any one of the programs alone, based on month-end drawdowns. (As always, past performance is no guarantee of future results.)
The Legacy Core Portfolio shown above is just one illustration. We custom design other Legacy combinations based on each individual client’sspecific investment goals and risk tolerance. With over a dozen professional money managers in our stable, we can customize a Legacy program that works for you.
Phil Denney, CFP® and Spencer Wright, our Investment Consultants, stand ready to visit with you about your investment needs and then prepare a personalized Legacy Portfolio tailored to your specific goals, at no cost or obligation on your part. You can contact Phil or Spencer in any of the following ways:
- Give them a call at 800-348-3601
- Send an e-mail to[email protected]
- Contact us through our website atwww.HalbertWealth.com
Time is short – the political maneuvering over the debt ceiling, spending cuts and federal budget has just been kicked down the road temporarily – they havenot gone away. The sooner you contact us, the sooner you can be on your way to creating your own investment Legacy. Also be sure to read the Important Information below my signature.
Gary D. Halbert
IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Sojourn Financial Strategies, LLC (Sojourn), Systems Research (SR), Scotia Partners, Ltd. (SPL) and Purcell Advisory Services (PAS) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors may not be available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from these Advisors in exchange for introducing client accounts. For more information on HWM, Sojourn, SR, SPL and PAS, please consult their respective Form ADV Part 2. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.
As benchmarks for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) and the Barclays Aggregate Bond Index were used. Both represent unmanaged, passive buy-and-hold approaches, and are designed to represent their specific market. The volatility and investment characteristics of these indexes may differ materially (more or less) from that of these programs since they are unmanaged Indexes which cannot be invested in directly. The performance of the S & P 500 Stock Index (with dividends reinvested) and the Barclays Aggregate Bond Index is not meant to imply that investors should consider an investment in these programs, which are actively managed, as comparable to an investment in the “blue chip” stocks that comprise the S & P 500 Stock Index or the U.S. investment grade, fixed rate bond market securities including government, government agency, corporate and mortgage-backed securities of between one and ten years that comprise the Barclays Aggregate Bond Index.
Performance illustrations presented are a hypothetical composite of the actual returns of the Sojourn Columbus High Yield (50%), the Systems Research Equity Alternative Program (33.3%) and the Scotia S&P Growth Plus Program (16.7%) starting in April 2007. The numbers presented are for illustration purposes only, are not meant to represent an actual track record and are assumed to be rebalanced annually It is important to review the separate disclosures for each of the individual programs in order to get more detailed information on each of them, including how the performance numbers were calculated.
The performance numbers for these three programs have not been verified by HWM, and therefore HWM is not responsible for their accuracy. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.
This combined performance illustration is hypothetical and not model results, and has many inherent limitations. The limitations include: 1) there are often large differences between hypothetical performance results and the actual trading results achieved by a particular program; 2) hypothetical performance results are prepared with the benefit of hindsight; 3) hypothetical results may not reflect the impact that market or economic factors might have had on the investment methods if actual money was invested; 4) hypothetical returns do not reflect the actual performance of an account and may not be indicative of the Advisors’ ability to manage money; 5) other clients may have had materially different investment results; and 6) these numbers should not be used to predict future performance.
When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; v) the rate of brokerage commissions and transaction fees charged to an account; and (vi) whether the programs included are rebalanced periodically. There can be no assurance that an account opened with the allocations shown to these three programs by any person will achieve performance returns similar to those provided by the illustration herein.
In addition, you should be aware that (i) these trading programs are speculative and involve risk; (ii) the trading programs’ performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the programs; and (iv) the trading programs’ fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.
Returns illustrated are net of the applicable management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Consult with your tax advisor for more detailed information. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. “Annualized” returns take into account compounding of earnings over the course of an investment’s actual track record. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.
© Halbert Wealth Management