Nauset Wealth Managment

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Nauset Insights

Saving Your Identity…Or At Least Your Sanity

As a result of the Equifax breach several clients have called us for advice on how to protect their identity. Below is our view on the situation and some recommendations for how you can lower the risk that your identity is misused. We have also attached a short article that provides further recommendations.

  1. Assume your critical, personal information has already been obtained by someone through a data breach. It’s an unfortunate result of our interconnected world. Equifax is only one of many major data breaches over the past several years. Anthem, the state of Connecticut, several major retailers, even a company that provided recreational state licensing services to several western states are a few examples of other incidents.
  2. Taking precautions should reduce (but not eliminate) the risk of misuse of your information.
  3. Check your credit card statements and bank statements each month.
  4. Consider a credit monitoring service. Credit monitoring services vary but, generally speaking they will alert you to changes in your credit, suspicious use of your credit cards and other accounts. They may also coordinate the freezing of your credit. Here are a few credit monitoring services to consider. Nauset neither endorses any of these services nor do we receive compensation from any of them. You should do your own due diligence before working with any of them.
  5. Freeze your credit report. Freezing your credit restricts access to your credit report, however, also requires you to unlock your credit if you want to obtain a new loan, credit card, etc. For this to be effective you have to freeze your credit report at all three major credit bureaus. As noted above, a credit monitoring service may do this for you, which might make paying for the service worth it. If you want the added protection of freezing your credit on your own, here are the addresses for each of the three credit bureaus: Equifax, Experian and TransUnion. You can call or initiate the service online for each.
  6. Here is a brief article, written by Nick Clements and published in Forbes, about other steps you can take to prevent misuse of your information. 

Redefining Wealth

I have come to believe that most people view wealth as having more money than they currently have. However, I assume that at some asset level that definition changes. Amazingly, at least according to a Spectrum Group study, the number may be more than $25,000,000. How can this be? I remember in Paul Sullivan’s book, The Thin Green Line, his observation that the wealthiest person he ever knew was his grandfather, who was as a mailman. How is this possible? He lived comfortably, and apparently happily, within his means.

As I reflect on it, our clients who feel the wealthiest are not necessarily the ones with the most money. For them, wealth is about spending and enjoying the life their assets and income offer.

There are two actions we find that help clients become wealthier and neither involve having more money. First, look at money as the mirror of wealth, not the definition itself. Let your assets and your income tell you how to become wealthy by living within your means. Second, apply your life’s timeline to your definition of wealth. Do you want to act wealthy today by out-spending your means only to be poor in the future?  That’s short-term wealthy. Don’t you want to be long-term wealthy by living comfortably for your lifetime?

It’s not always so easy to figure out what lifestyle you can afford over the long term. It’s even harder to make decisions about what to keep or cut out of your lifestyle in order to be long-term wealthy. Having helped clients go through this process, I can tell you it’s worth it.

http://spectrem.com/Content/wealthy-define-wealthy.aspx

 

Waiting for Godot?

The chorus of investment pundits calling for an end to the current US stock rally has grown larger and louder and yet, the market continues higher. Let’s examine why a correction will happen, why predicting it is hard (and potentially hazardous to your portfolio) and how we think about it.

Corrections have a strong track record of showing up (unlike Godot), as part of a normal market. A correction is commonly defined as a -10% decline. The average intra-year decline is historically -14%. Even in positive years, it is unusual not to experience a mid-to-high single digit decline. (See chart).

We have been waiting for a correction (like Godot), but not for very long. The last S&P 500 correction began in the summer 2015 and hit its low for the year in October. The drop happened to be a decline of about -12%. From November 2015 until February 2016 the market again took a double-digit dive. Since then the market has climbed +33% with fresh highs being set on July 12, experiencing one measly -6% drop along the way.

Based on history we expect a correction to occur before the end of the year. However, timing and duration are elusive and we are not trying to predict it. A correction may be triggered by almost any event – Fed Reserve action, oil prices, a poor jobs report, or a geopolitical incident. Rather than trying to guess the timing, the key is to understand the drivers of any correction in order to assess new investment opportunities.

Post-election Views or Much Ado About…

Well, we can’t say nothing. We aren’t going to rehash the election surprise. What we will do is share our views on the post-election market behavior, outline a possible scenario and actions we are considering and what we will be watching for over the coming months and years.

What happened? Virtually no one in the financial world predicted a rally immediately following a Trump victory, which also very few people predicted. For the record, the S&P 500 opened the day after the election, November 8, at 2130 and closed at 2182 on November 16. This equates to a +2.4% rally that leaves us just below the all-time market highs hit this past August. Now the underlying story is a bit different. During this same 8-day period financial stocks, particularly banks, rallied over +10% and some individual stocks by close to +20%, but many tech companies like Amazon fell by -3% or more. Healthcare and bio tech have also experienced a nice bump up. Bond prices have been knocked down driving yields on the 10-year Treasury bond from 1.88% to 2.35%; right at the 1-year high.

It’s important to note that other than bank stocks making a very decisive move up, none of these numbers are, in and of themselves, eye-catching from an absolute perspective. We have seen most of them in the past 12 months.

What do we see driving this behavior?  Right now we surmise the biggest driver is speculation on the third derivative of policy expectations. It is clearly not investing based on observed facts. Many market participants have made big rotations based on policies President-elect Trump hasn’t made clear, haven’t been implemented and whose effects are just hypotheses, i.e., speculation on the third derivative. Here is a summary of the big themes:

  1. Bank regulations get relaxed or go away so banks are more profitable
  2. Obamacare gets changed or eliminated and capping drug prices is not on the agenda, helping health care and biotech companies
  3. Fiscal stimulus, primarily through infrastructure spending goes up, international trade gets choked off, taxes are lower, all driving inflation and interest rates which helps banks and generally hurts bonds.

Now we don’t argue that these sound directionally right. However, the market movement was quick and in some areas sharp. Quick and sharp are not words often associated with governmental change and therefore we believe the market has over-reacted.

What do we hypothesize will happen over the next 12 months?  Here is a working, third derivative hypothesis, roughly in order of our conviction. It is not precise as we are using the third derivative —  think compass orientation not laser targeting.

  1. We get fiscal stimulus and lower taxes
  2. Rates and inflation rise, but not dramatically
  3. Bank regulations get tweaked not thrown out
  4. The economy improves a bit.
  5. Obamacare gets changed. What’s the effect? See the third derivative, i.e., who knows?

So what are we doing?  We have not been making major investment decisions. As investors, not speculators, we don’t react to quick market moves driven by assumptions from third derivative hypotheses. We are spending a lot of time looking at how we implement our existing overweight positions to technology, healthcare and biotech. We are also looking at financials as a possible overweight. We have been selectively adding to real asset positions due to higher expected inflation and what we believe has been undo pressure on REITs and our infrastructure positions. We have been selectively selling out of some fixed income positions.

What will we be watching? We will be watching measures of economic activity that might indicate a coming recession because we haven’t had one in over 7 years. We will be looking for dislocations in the market to add/rebalance to core positions. We will be listening and looking for real policy statements and activity that give us a better idea as to how those policies will eventually be implemented. We are particularly intrigued to see what happens to US Treasury rates as they will be a good indicator of how the world judges the relative safety of our markets versus all others.

In dealing with the next few years, it will be best to embrace Confucius’ blessing (curse?): “May you live in interesting times,” and to maintain a diversified and carefully monitored portfolio. 

Private Investment Update

As a result of our continued search for investments that can provide true diversification, Nauset recently worked with Calare Properties to present our clients with an opportunity to invest in a multi-use, multi-lessee commercial property in the Boston area. The expected return profile of this private investment is driven primarily by rental income with the added benefit of potential capital appreciation at exit. Calare Properties is a leading commercial real estate investment and management company.

Why we do like this investment? It is ownership in a real business with a real cash flow underpinned by a real asset. It’s actively and professionally managed by a specialized firm with its own capital at risk. As an illiquid investment it isn’t subject to the whims of capital flight from one part of the market to another.

Nauset did not receive any financial consideration from Calare, nor do we promote any private investments. Our clients invest directly in these private investment funds with no sales charge.

Author: Nauset Investment Committee
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Tags: Investment