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High Yield Bonds Are Back in Action

High Yield Bonds Are Back in Action

When we last updated you on our High Yield program in August, financial markets were still reeling from weeks of China-related volatility and a general dis-ease with the global economic outlook. Now we see markets recovering despite a still-weak backdrop.  As a result, we re-entered the High Yield bond sector  and wanted to give you our latest thoughts.

Energy has been driving High Yield action this year, and slower growth in China is driving energy. The country’s massive demand for fuel and raw materials drove commodity prices sharply higher in recent years and enticed companies around the world to invest in those sectors. Many financed expansion with High Yield bonds.

The commodity price curve started to break in mid-2014. Crude oil peaked just over $100 then began a steady slide downwards. Other commodity prices followed and default fears started rising for High Yield bond issuers. Those fears turned out to be overdone for the most part. Actual defaults were rare and some companies even raised new debt and equity capital as oil prices stabilized in early 2015.

The respite didn’t last long. As summer began, Chinese stocks began sliding, oil prices retreated again and fear once again swept through the markets. An additional mystery also developed. Would the Federal Reserve finally raise U.S. short term interest rates? Inconclusive economic data and a steady stream of conflicting comments from Fed officials had everyone on edge.

Fed policy affects more than the U.S. economy. Emerging market nations have large amounts of dollar-denominated debt that will be more expensive to repay if the the dollar gains value because the Fed raised interest rates.

As always, our primary task is to assess risk levels and judge whether potential gains outweigh the risk of re-entering the sector. When we talk about High Yield bonds, the “high” part is always relative. It might be more accurate to call them “Higher Yield” bonds. Normally, their interest rate is higher than Treasury or investment-grade corporate bonds. The “spread” between High Yield and Treasury bonds is an important indicator. 

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Interest rates always reflect repayment risk. If you have a car loan or home mortgage, the lender judged your financial situation and assessed the chance you would miss your payments. The higher the risk, the higher your interest rate.

The same applies to businesses. Stable, established companies operting in a favorable economy can borrow at very low rates. Lenders/bondholders accept lower returns because they feel very confident of recovering their principle.

The U.S. government pays the lowest interest rates because it is the world’s ultimate safe haven. This year the Treasury issued short-term paper at 0% yield.  People still bought it, too. To them, safety was more important than yield.

Bond investing is all about keeping risk and reward in the right balance. We moved from High Yield bonds to cash several months ago because that balance had changed. Weak oil prices and slow economic growth raised doubts that companies could stay current on their debt payments.

Now the pendulum is swinging the other way. Rates have moved up enough to again outweigh the risk in High Yield bonds. As often happens in stocks, excessively negative sentiment pushed bond prices below their reasonable valuations.

Currently, High Yield spreads above Treasury rates are higher than historically normal while default rates are well below average.  In theory, this is an ideal combination for High Yield investors.

Risk hasn’t disappeared. Federal Reserve policy is still uncertain and third-quarter corporate profits are unimpressive so far. We remain vigilant, but on balance we now believe potential gains outweigh the known risk factors.

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.








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When You Need COBRA and When You Don't

When You Need COBRA and When You Don't

Job changes can be the path to a better career, but the change can be stressful even in the best circumstances. You say good-bye to one set of colleagues and, if you already have new position, you say hello to another. If you don’t have new employment lined up, you have to launch a search.

The stress doesn’t end there. Your 401K retirement plan and health insurance usually change along with your job. You have to evaluate options and make important decisions, possibly on short notice. None of this is easy.

We’ve addressed the 401K challenge before. What about health insurance? Your employer will likely offer you “COBRA coverage.” Should you take it, or look elsewhere?

The answer to that question is different than it was just a few years ago. As with many other health care decisions, ObamaCare is part of the equation now.

COBRA is a 1985 law that requires large employers to offer departing workers continued health insurance coverage at their own cost. Your employer will stop subsidizing the cost, but you can still purchase coverage under the company’s plan for up to eighteen months in most cases.

You’ve probably heard people in this situation complain about COBRA coverage being so expensive. That isn’t quite right. COBRA costs the same as it did when you worked for the employer, except for a 2% administrative fee employers can add if they wish.  The difference is that under COBRA you can see the amount that was bundled inside your paycheck while you worked there.

Nevertheless, gaining visibility of your family’s full health insurance bill can be startling. According to the Kaiser Family Foundation, the average annual COBRA premium in 2014 was $6,145 for individual coverage and $17,170 to insure a family. On a monthly basis, that’s $512 and $1,431, respectively. Paying either amount is not a pleasant thought, especially if you just became unemployed.

Unfortunately, many workers had few other alternatives prior to ObamaCare. Individual health insurance was also expensive and often had only limited benefits for preexisting conditions.

This changed with the 2014 launch of ObamaCare. New state and federal exchanges made insurance coverage available to everyone, with tax credits to subsidize the cost for those at lower income levels (below $47,000 for an individual or below $97,000 for a family of four).

Plans available this way do not limit coverage for preexisting conditions. Costs vary based on age, gender, location and other factors, but are often significantly lower than COBRA coverage through your ex-employer. According to eHealth’s Health Insurance Price Index for 2015, the average individual premium for this year is $3,432 and average family coverage is $8,724.

Timing is important if you want to realize these savings. Job termination opens a 60-day enrollment window to sign up for an ObamaCare plan. Employer coverage ends on termination or soon after, and the deadline to sign up for COBRA can come quick.

If you know you will quit a job soon and won’t be starting another immediately, it makes sense to evaluate the ObamaCare plans before you make the move. Visit HealthCare.gov and you can see what is available in your area and compare against the employer plan, should you  continue under COBRA.

Whether public or private, health insurance is still a maze few people are prepared to navigate, especially under pressure and on short notice. Thinking ahead can help. Consider all your options and don’t think COBRA is the only one.

While we aren’t health care experts or insurance agents at Republic Wealth, but we can call on our wide network for specialized advice. Let us know if you have questions on the topic and we will try to help.






IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.




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The Burden of Small Business Healthcare

The Burden of Small Business Healthcare

As the job market tightens, employers increasingly have to offer competitive pay and benefits to attract top talent. Health insurance is a key part of the package, yet many small business owners still offer no coverage.

This can be the right move in some cases. Under the Affordable Care Act, everyone now has access to individual and family health coverage through the state or federal online marketplaces. Workers with family income below 400% of the poverty line ($47,000 for an individual or $97,000 for a family of four) can receive tax credits that partially or fully offset the cost. Your employees in this category can buy subsidized health coverage at no cost to you.

The situation changes as businesses add employees. The health care reform law’s employer mandate currently applies only to companies with at least 100 full-time equivalent employees. The threshold drops to 50 full-time equivalent employees next year. Businesses in this group that do not offer qualified health insurance to their employees could face penalties.

Some employers have changed their staffing model to rely more on part-time workers to avoid the employer mandate. This can postpone the requirement, but you will eventually have to comply if your business grows. What are your choices?

If you are still below the 50-employee mark, the Affordable Care Act operates the Small Business Health Options Program, or SHOP. It operates similar to the individual marketplaces. You can look online to view plans and prices in your area. You can also purchase the same plans through participating insurance agents or brokers. A good agent may be able to provide additional information and help you make a better selection.

If you have fewer than 25 employers, buying the SHOP plans could make eligible for a special tax credit. To receive the credit, your average employee salary must be $50,000 per year or less and you must pay at least 50% of their health care premiums. The credit can be worth up to 50% of your premium contribution. Consult your business tax accountant for more advice on the credit.

Slightly larger “small” businesses with 50-100 full-time employees are in a tighter spot. They are not eligible for SHOP plans but too small attract the attention of insurers who offer corporate plans. Many are raising deductibles or increasing employee contributions in order to keep costs down. Some might actually come out ahead by paying the employer mandate penalty. We suggest you consult with your attorney and business auditor before taking that course, however.

Another unwelcome change is getting closer, too. The so-called “Cadillac tax” on high-cost health plans takes effect in 2018. That may seem like a long time away, but you can take steps now to reduce its eventual impact.

Beginning in 2018, the portion of any annual health insurance premium that exceeds $10,200 for individual coverage and $27,500 for family coverage will face a 40% federal excise tax. The thresholds will adjust with the Consumer Price Index after 2018, but that may not be much help. Health Care costs have been rising far faster than inflation.

This will be a problem for employers in the more expensive regions, but in time will hit nearly every business unless health care cost increases diminish. Employers should consider whether to offer the most generous plans to employees. They may be affordable now, but the cost could skyrocket if they trigger the Cadillac tax in a few years.

Most of the small business owners would much prefer to concentrate on their businesses and not have to deal with health insurance for their employees. Between the employer mandate and the need to hire the best team, going without health coverage is usually not a good option, either. It is becoming a necessary part of running all but the very smallest businesses.

While we aren’t health care experts at Republic Wealth, we can call on our wide network for specialized advice. Let us know if you have questions on the topic and we will try to help.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.




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Making More Health Care Cost Less

Making More Health Care Cost Less

Health care costs are consuming a bigger-than-ever part of family budgets, even when everyone is healthy. Those with serious health issues, or even minor but chronic conditions, can find medical expenses overwhelming. There must be a better way.

In fact, there are many better ways, but we can’t have them until the political process makes them available. Meanwhile, we can only make the best of what we have. Thanks to ObamaCare, our options now are quite different than a few years ago.

Prior to 2014, people under 65 with preexisting conditions had few choices unless they had employer-provided health coverage. Insurers routinely declined or limited coverage for anyone who might generate significant claims. If you were in that category and made too much money to qualify for Medicaid (which isn’t hard) you were out of luck.

This is no longer true. Now all ObamaCare plans are open to everyone. Even if your income is too high to receive the tax credits on the health care exchanges, you can still buy the same coverage through an agent. Insurers must accept all applicants, though they can charge higher or lower premiums based on age, gender and smoking status.

The new landscape brought some surprising results. Those who are generally healthy and can afford to pay routine expenses out of pocket will usually be fine with a high-deductible “Bronze” plan, especially if they can pair it with a health savings account.

People with chronic conditions are a different story. Their best bet is often to buy the most expensive “Platinum” plan.

This may sound strange, so let’s look at an actual couple we know as an example. They are married, both in their 50s and self-employed.

•    The husband, whom we will call Pablo, is in good health and expects only a few doctor visits and prescriptions. He simply needs to insure against accidents or some major health surprise.

•    The wife, Glenda, is in good health, too, but has a chronic condition that requires regular treatment. Without insurance, her routine expenses would be about $2,000 per month. They could go much higher if her condition worsens, too.

The first point to make here is that the spouses have quite different situations. Rather than buy a “family plan” that treats both the same, they should look for separate plans that best fit each one’s circumstances. A family plan might still work better if they had minor children, though.

Pablo and Glenda’s research turns up two plans whose networks include their preferred doctors and hospitals.

•    The Bronze plan is $400 per month with a $6,600 annual out of pocket maximum.
•    The Platinum plan is $730 per month with a $1,500 out of pocket maximum.
 
(There were also Silver and Gold plans in between, but we will look only at the highest and lowest for an easy comparison.)

Which is the better deal? For comparison, you first want to consider the part you know is certain: the premiums. On an annual basis, the Bronze plan costs $4,800 and Platinum coverage costs $8,760.

In Glenda’s case, we also know with certainty that she will have claims totaling at least $24,000 during the year. So her full-year cash outlay for the Bronze plan would be $4,800 in premiums plus $6,600 in claims. That’s $11,400 total cost if she picks the less expensive Bronze coverage.

How much will the more expensive Platinum coverage cost Glenda? It would be $730 x 12 months, or $8,760, plus her $1,500 out of pocket maximum. Total: $10,260. That’s $1,140 less than the “less expensive” plan.

Pablo’s math is different. Barring surprises, he’ll only have claims of $2,000 or so for the year. His best choice is to spend $4,800 on the Bronze plan, pay his expenses out of pocket, and end the year having spent only $6,800.

The calculations would change if Glenda’s condition cured or Pablo developed serious illness. Their “worst-case” medical spending scenario for the year, if both spend up to their out-of-pocket max coverage plus premiums, is $21,660.

Their math may also change for 2016, as insurers have not yet announced new prices and coverage limits. Media reports say increases are likely. They will work with their agent in November to re-evaluate their options.

Health care prices have been climbing quickly in recent years. Both employers and insurers are trying to shift more of the burden onto patients with higher premiums, higher deductibles or more restrictive provider networks. Expect more cost control moves next year.

Unexpected health care costs can blow a hole in your financial plan, so be sure you are prepared. We aren’t insurance agents or health care experts at Republic Wealth, but we can call on our wide network for specialized advice. Let us know if you have questions on the topic and we will try to help.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.




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Medicare May Take a Bigger Bite in 2016

Medicare May Take a Bigger Bite in 2016

Health care, already a major living expense for many retirees, may get even more costly in 2016. Some Medicare beneficiaries will see sharply higher premiums next year, but there may be a way to avoid it and save thousands of dollars.

The background for this situation is a twisted bureaucratic mess. We’ll try to unravel for you.

Currently, the standard Part B premium is $104.90 per month, with surcharges for those with higher incomes. It could be as much as $335.70 per month.

Note this rate is per person, so a retiree couple who are both on Medicare could pay as much as $671.40 per month in Part B premiums. That’s $8,056.80 annually - just for premiums, and not counting the untold thousands in Medicare taxes you likely paid over your career. There are also deductibles and copays if you actually use your benefits.

The Medicare system’s trustees said this year to expect a 52% increase in Part B (outpatient services) premiums. The Department of Health and Human Services will announce a final decision this fall. If the estimate is right, a high-income couple on Medicare could have to pay closer to $1,000 per month in Part B premiums.

However, most Medicare beneficiaries will probably see no increase in their Medicare premiums. How can this be?

The Social Security Act has a “hold harmless” provision. If Medicare premiums in a given year rise more than that year’s Social Security cost of living adjustment (COLA), the beneficiaries don’t have to pay the difference.

Because inflation is currently very low, it now looks like Social Security will have no COLA for 2016. That means Medicare premiums can’t go up. They will stay at $104.90 per month plus any income-based surcharges.

Is this good news? Maybe.

The “hold harmless” provision only applies if you have your Medicare premiums automatically deducted from your Social Security check each month. That will not be the case for everyone.

One example would be retirement-aged people who are using the popular “file and suspend” strategy to hold out for a higher benefit, but still pay for Medicare coverage. Some experts suggest un-suspending from Social Security for a short period in order to keep their Medicare premiums down.

This is also a problem for anyone who enrolls in Medicare for the first time in 2016. They will not have had any premiums deducted in 2015. Their choices will be to either pay the higher rates, or wait until 2017 to enroll. Waiting could leave them with no health coverage at all in 2016, unless they still have employer-based coverage.

These are tough decisions for individuals. They make no logical sense, either. The result for 2016 will be that most Medicare recipients will pay artificially low premiums while a smaller group pay sharply higher premiums than people the same age or older.

Unfortunately, we can’t change the law. We must work with what we have. If you will turn 65 in 2016 or you are using the “file and suspend” strategy, we suggest you contact the Social Security and Medicare offices to get more information on how the COLA change may affect you.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Seasonality Update: Selling in May Helped This Year

Seasonality Update: Selling in May Helped This Year

The year 2015 isn’t just confounding short-term traders. It is also highlighting the way stock market returns tend to follow seasonal patterns.  The old “Sell in May and Go Away” rule looked questionable at first, but those who heeded it are probably glad they did.

Let’s start with a review.  According to Stock Trader’s Almanac, equity markets show a significant performance bias based on the time of year.  Historically, most gains occur in the fall, winter and spring.  The summer months tend to be flat.  Hence the saying, “Sell in May and Go Away” until sometime in October/November.

Does this rule work every year?  No, it doesn’t. Some years show strong gains in the summer and/or big declines in the winter. The pattern is still strong enough to convince many investment managers, including Republic Wealth, to include it in their decision-making process.

At Republic Wealth, the strategy typically holds balanced mutual funds from the fall through the spring to take advantage of the seasonally strong period and then shifts to more conservative non-equity investments for the summer months.  Historically, the summer holding would be a traditional bond fund but with the current low-interest rate environment of the last several years, we changed the holding to simply non-equity exposure.  This summer, our holdings are a preferred securities fund, a structured credit fund, and an absolute return fund. 

After a volatile start in 2015, major benchmarks finished the first quarter largely unchanged.  The strength persisted until the latter half of April when markets entered a sideways trading range that ultimately resolved to the downside in mid-August.

Republic Wealth’s strategy does not follow “sell in May” by selling exactly on May 1st.  We use other indicators to fine-tune our seasonality “sell” signal. This year it triggered in the last few days of April.

Since our move out of stock exposure, May brought small market gains, but a loss in June left domestic stocks slightly lower for the two-month period and roughly at breakeven for the first half of the year. July was volatile but ended positively. Then August unwound all the upward progress and left the S&P 500 at a 4.2% year-to-date loss, not counting dividends.

Holding the S&P 500 for the January-April period would have resulted in a 1.3% gain, not counting dividends. The next four months were significantly worse with a -5.4% loss, so being on the sidelines for that period would have avoided losses. The seasonal investor would have still had that 1.3% gain at the end of August, while the “buy and hold” investor would be down 4.2%.

b2ap3_thumbnail_150903-SPX-seasonality-2015.png 
Alternatively, this year’s Republic Wealth holding yielded a return of approximately -0.45% gross of management fees from the end of April through the end of August. This compares to our benchmark 50% S&P 500 and 50% Barclays Aggregate return of -2.85% over the same period.

Of course, we’re only looking at one instance of the seasonal pattern. Some years it worked better, and in other years, the results were worse. Even in years where we don’t see meaningful pullback, we are lowering overall portfolio volatility by reducing exposure for half of the year.

We won’t have a final verdict for 2015 until the seasonal strategy re-enters the market, which typically occurs sometime in October. Further losses in September-October will add to the seasonal investor’s 2015 advantage. Gains in that period will reduce the advantage from a return only (not risk) perspective.

The adage “Sell in May and Go Away” has worked well this year and we believe it is a valuable tool in controlling portfolio risk. We want to stack the odds in our favor, and that includes minimizing risk during unfavorable periods. Preventing large losses is critical to a successful long-term investment strategy.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Stock Market Makes a Death Cross

Stock Market Makes a Death Cross

The primary index covering U.S. large cap stocks marked recent volatility with a rare and ominous-sounding “Death Cross” chart formation. The financial media, always alert for signs of doom, quickly boosted this arcane event to headline news status.

Should investors worry about the Death Cross? Probably not, but it does give us some useful information about the stock market’s prospects.

A Death Cross occurs when a market’s short-term trend drops below its long-term trend, as measured by 50-day and 200-day moving averages. Those are simply the index’s average price for the last 50 or 200 trading days. A moving average smooths out the daily fluctuations so you can more easily see the prevailing trend.

In the chart below, you can see the S&P 500 price (blue line) zigzagging up and down with each day’s action. Which way is the trend? It’s hard to tell, at least until the last month when the index plunged.
 b2ap3_thumbnail_150902-SPX2015.png
The 50-day moving average (orange line) is much smoother. It was in a gentle uptrend this year until early summer, and then started a gradual decline.

The 200-day moving average (gray line) is even smoother. That’s because a longer period cancels out more of the daily volatility. It stayed in an uptrend longer than the 50-DMA, finally rolling over in late August.

Note how the sharp drop in the index had only a minimal effect on both DMAs. If it doesn’t recover soon, the moving averages will gradually drop lower and eventually meet up with the index again.

The “Death Cross” is what happened inside the black circle. On Friday, Aug. 28, the orange 50-DMA crossed under the gray 200-DMA. That means the shorter-term bearishness is beginning to outweigh the longer-term uptrend.

What next? Before we run for our lives, let’s see what happened following previous Death Cross instances. Bespoke Investment Group is a research firm that tracks these things. Here is what their data shows.

b2ap3_thumbnail_150902-DeathCrossesTable.png 
Prior to the current Death Cross, the numbers had lined up in this fashion only ten times since 1928. Looking at the following week, the index rose six times and fell four times. Average those ten weeks and you get zero change at all. So that’s not so bad.

Pull back to the next month and the picture changes. Only two of those month-long periods were positive. One of them (1987) was a double-digit -10.11% loss. Another one (2010) was almost double-digit positive, though, with a 9.57% gain.

Go out even further to the three months after a Death Cross and the odds of a gain go up to 70%. They improve even more to 90% if you wait six months.

When we look at actual data this way, the Death Cross isn’t nearly so frightening. Historically, it seems to signal a few weeks of higher volatility, followed by a renewed uptrend within 3-6 months.

Obviously, we do not know what the next week, month or six months will bring. This time could be different. Many other indicators continue to advise caution.

We remain generally defensive in our Republic Wealth managed account programs – but not because the Death Cross scares us. We make our decisions based on hard data, not media headlines. Over time this approach has served us well, and we are optimistic it will keep us well-positioned as these trend changes unfold.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.


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High Yield Update: Safely in Neutral

High Yield Update: Safely in Neutral

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Financial markets have taken a wild ride in August, with stocks, bonds, currencies, and commodities all moving up, down, and sometimes both on the same day.

High yield bonds typically move in-line with equity market in periods of market stress when investors flee from risk. This time we have seen a noted sell-off compound an already challenging environment. Oil prices, which had stabilized in the first half of the year, again headed lower in early July.

Our Republic Wealth High Yield program dodged much of this volatility. The risk indicators we follow turned negative several weeks ago, so we began moving our client accounts fifty percent to two-thirds cash in late July and completed the process before extreme volatility set in at the beginning of this week. 

While our strategy has been far from perfect in this challenging environment, it has worked to avoid much of the losses suffered of late.  At the same time, we are not eager to remain on the sidelines. Low interest rates prevent us from earning any return at all while we are in cash, but the current environment tells us that now is the time to protect what we have.

We have learned over the years that avoiding big losses is one of the best ways to achieve long-term success. High yield bonds are not immune from large losses as, for example, they suffered losses of 25% or more in 2008. Rather than spend valuable time recovering, we try not to endure meaningful losses in the first place.

Simple math explains why this matters. If your account falls 10% in value one month, then gains 10% the following month, are you back where you started? No, you’re still down 1%.

b2ap3_thumbnail_150828-losses.png

Recovery grows exponentially harder with greater losses. You need a 25% gain to make up a 20% loss and a 43% gain to recover from a 30% loss.

Are losses like this possible in high yield bonds? You bet they are. Such losses happened this year in certain segments, notably energy. Companies who issued bonds on the assumption oil and gas prices would remain high found themselves deep in red ink. It deepened even further starting in early July when Iran said it would ramp up oil production quickly after reaching a nuclear arms deal with Western powers. Prices have plunged since then, dipping below $40 this week before recovering in a large rally yesterday. 

b2ap3_thumbnail_150828-HY.png

Energy is not the high yield market’s only problem, but certainly the biggest. This graph shows total return in a High Yield benchmark over the last twelve months. The top line is the overall index while the bottom is only the energy portion.

Meanwhile, signs of economic weakness in China followed by a currency devaluation sent global equity markets reeling in mid-August. This sent Treasury yields lower as investors looked for safe havens and made high yield even less attractive.

The market volatility also cast doubt on whether the Federal Reserve will hike interest rates next month. As we have said before, high yield bonds have historically performed well in rising rate environments. The bigger challenge is the Fed’s indecisiveness. The markets need to see a clear direction, one way or the other.

As noted earlier, we do not know when conditions will improve enough to justify reentering the high yield market. It could be next week, next month or longer. We don’t want to jump back in too soon, nor wait too long. We find patience usually pays off in these situations. 

Just as the stock market encompasses many different segments, bonds come in many shapes and flavors. The High Yield segment competes with Treasury bonds, investment grade corporate bonds, emerging market bonds, and others for investor attention and capital. Don’t be surprised to see some parts of your portfolio outpace others in this turbulent market. This is normal, and is also a sign that you are prudently diversified.

Republic Wealth will continue to monitor market activity and assess whether the time is right to move back into high yield bond funds. Our job is to seize opportunities for you while also keeping risks acceptable. That is our primary goal and we will keep working hard on your behalf.

 


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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RADIO CLIP: David Levy on Fear and Investing

RADIO CLIP: David Levy on Fear and Investing

With the stock market showing extreme volatility, KCBS Radio in San Francisco called on Republic Wealth's David Levy to discuss "Fear and Investing." You can listen to the clip below.

 

Artist Name - KCBS.mp3

 

TRANSCRIPT

HOST: With us on the Newsline is David Levy, Portfolio Manager at Republic Wealth Advisors in Austin, Texas. Mr. Levy, thanks for joining us this morning.

LEVY: My pleasure, glad to be here.

HOST: Obviously, pulling the covers up over our head is not a good option, so what should we be doing?

LEVY: Typically, we think we should be doing something, and in many cases that’s really the problem. When we see extreme moves in the market like we saw at the open this morning, really the best course of action is to do nothing. Fear is a powerful emotion and it can get in the way of making logical decisions. So in many cases it’s probably most prudent to take a step back, take a deep breath, and really evaluate what’s changed and what course of action you may need to take going forward.

HOST 2: Do people tend to be able to do that, or do they spend the rest of their lives beating themselves up for what they could have done or should have done in a time of stress or crisis?

LEVY: Many times investors will second-guess themselves. It’s easy to make a decision in hindsight. With that said, you can only do so much and do what you can do, so the right time, if you were looking to lighten up on your positions, if you felt like you were overexposed to stocks, was not at the open of the market today when fear was high. The time to do that was previously. It was last week, it was last month, and that’s why you need to look from time to time at your overall portfolio and evaluate what potential risks you can take, because stocks moving lower in a large sense this morning is not normal, but stocks do have volatility. We’ve grown very accustomed to stocks moving higher, in only one direction over the last couple of years which have been very good for the stock market, but the reality is what goes up also has the potential to go down.

HOST: Are the pros pretty good about this? I mean, are they smart enough to do what was suggested in our update from CBS News, which is to shop for bargains, or do even the pros get scared sometimes?

LEVY: Well, certainly pros are pros because they are that by name, but at the same time, you look at certain stocks this morning and you really see some levels that are really too good to pass up. Verizon this morning was trading all the way down to $38, now it’s $46, that roughly a 21% move in roughly two hours of trading. Apple is another one, it traded as low as $92, now it’s $108. So whereas the average individual investor may look at that and scratch their head, seeing Apple trading in the low $90s, saying maybe I need to do something, but not being able to actually pull the trigger. Generally speaking, pros can understand that disconnect and be more quick to actually make a decision, a buy decision, and there are obviously plenty of people that saw the fear this morning and were able to take advantage of it just as, at the same time, some people were probably too fearful and chose not to step in.

HOST 2: Thanks for your time this morning. That’s David Levy, portfolio manager at Republic Wealth Advisors in Austin, Texas, as we have been whipsawed by Wall Street this morning, at one point the Dow Jones 30 industrials down more than a thousand points within the session.

 

END TRANSCRIPT


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Stock Market Update: S&P 500 Breaks Down

Stock Market Update: S&P 500 Breaks Down

Summer seasonal trends historically bring stock market weakness, and this year is no exception. The major benchmarks have pulled back over the last few weeks after touching record highs in the spring and again in mid-July. Today brought a large wave of selling pressure.

Is a major crash imminent? We don’t think so, but we have turned considerably more defensive by raising cash positions and tightening stop-loss levels.

Many events are contributing to this weakness. The U.S. economy still shows mild but reliable “Plow Horse” growth. The rest of the world is not so stable. Worries about the Chinese economy as well as a move last week by the Chinese central bank to weaken its currency have wide global implications.

Other emerging market countries are beginning to react already. A potential Chinese downturn is also affecting crude oil prices. The West Texas Intermediate benchmark is very close to dropping below $40 - not good for energy stocks.

Traders are also anticipating a possible Federal Reserve interest rate hike next month. The latest data, including minutes of last months Fed meeting, released yesterday, suggest the Fed may further postpone tighter policy. We really wish they would just get on with it.

While news of these events is interesting to follow, our investment strategies adapt to the current market environment as opposed to trading on news headlines and speculation.

First, let’s keep the current weakness in context. Just one month ago on July 20, the S&P 500 Index closed at 2128, a few points shy of an all-time high set in May. Today, the market closed at 2036, a 4.6% decline from its high point. This pullback is very mild volatility by historical standards.

The bars in the chart below show the S&P 500 yearly returns back to 1980, and for the first half of 2015. The red numbers below each bar show how far down the index fell at its worst point during the year. Stocks have actually shown much lower than average downside volatility so far this year and in the three prior calendar years.


b2ap3_thumbnail_SPX-drawdowns.png 
Of course, the year isn’t over yet and the present drawdown could get worse. So far, though, this volatility is mild in historical context. Even a 10% decline – which we haven’t seen since 2011 – would simply be normal volatility.

The S&P 500 has been in a “trading range” this year between a high of 2134 and a March low near 2040. The index has stayed between those two levels since February, indicated by the blue lines in the chart below.


b2ap3_thumbnail_SPX-082015.jpg
With today’s close, the market broke through the lower bound of the range. Unless the index is able to recover back into the range in the next few trading days, it appears that the selloff will get worse – and could do so very quickly.

While we have no way of predicting the next move, as of today it seems that the risks of a greater decline to the lows made in January and then October 2014 are rising. For that reason, we have been reducing equity exposure by raising cash in Republic Wealth managed programs over the last few weeks.

In Republic Wealth’s 15+ year history, we have never hesitated to assume a defensive posture when our indicators showed weakness. Could a recovery begin tomorrow? Yes, but we think now is a time to err on the side of caution.

As always, we are available to discuss your portfolio strategy at any time. Feel free to call on us.

 

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