Update 8-13 - Sheaff Brock Investment Advisors, LLC

PAGE 1 (We know the layout is goofy, but work with us) MARKET UPDATE Here is a snapshot of our proprietary short-term “market ming” risk signal. This is a back-tested signal that a empts to show when the stock market is ge ng “toppy”, and likewise when the market may be bo oming. At our core we are long-term bulls, but there are people who like to try to trade with a short-term bias; and this is made for them. Also this would have waved many a red flag in 2008 and 2009, poten ally saving several dollars for us all. August 2013
10401 North Meridian Street Suite 100 Indianapolis, Indiana 46290 317‐705‐5700 or 866‐705‐5700 shea rock.com “Maybe I’m in the gap between the two trapezes.” Coldplay, Every Teardrop is a Waterfall When the black line crosses up though the red that is a bullish signal which raises the green flag. When the black line crosses down through the red it is a signal of risk in the market which raises the red flag.
In this issue: The green and red boxes reflect the prior changes in the flag color. The green flag came out on July 15th.  Will the market catch us, or let us fall?
Our STARS por olio follows this signal.  Dolla Dolla Billz Ya’ll
Will the market catch us, or let us fall?
 Portfolio Comments
INVESTOR STOCK MARKET Date of publication 7/24/13
Below is the chart the smart dudes reference. The green line is the GDP of the US, right now about $16 trillion. The orange line is the capitaliza on of the Wilshire 5000 (Add together the stock market value of the biggest 5000 companies in the US). We know what happened here and here EE-GADS!! Prior letters posted at sheaffbrock.com in the newsletters tab
Christy Libby Wally Jody Ron Deb Jim Dave Paul Eric Teri Angie Sheaff Brock Investment Advisors, LLC (SBIA) obtains data from reliable sources such as Thomson Reuters, The Wall Street Journal, and Morningstar, but SBIA does not guarantee the accuracy or
completeness of third party information, nor does SBIA assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and
opinions are subject to change without notice and are for general information only. Past performance does not indicate future results. Composite returns are gross of fees, net of commissions, and
include the payment of dividends which are held in money market funds pending reinvestment in other portfolio securities. Returns include all accounts of reasonable size that are substantially
invested in accordance with said style. The securities mentioned in this report can be, and often are, owned by clients and employees SBIA. Clients and prospective clients should understand that
there is no assurance that capital gains made in the past will continue. There is always the chance that market conditions or portfolio performance may deteriorate in the future, and clients may
experience real capital losses in their managed accounts. Portfolios are compared to the performance of various indices although the portfolio, which contains much fewer positions, may not reflect
the securities making up these indices. None of the indices may be an appropriate comparison index as our managed accounts may own companies not represented in the benchmarks. All clients of
SBIA who desire to participate in option transactions receive the option disclosure document, titled Characteristics and Risks of Standardized Options, which outlines the purposes and risks of
option transactions. Despite their many benefits, options are not suitable for all investors. Individuals should not enter into option transactions until they have read and understood the risk disclosure
document which can be obtained from their broker, any of the options exchanges, or OCC. There were no other strategies employed to obtain the results portrayed other than those strategies
disclosed in the Sheaff Brock Investment Advisors, LLC Form ADV or other disclosure brochure. Regarding the Auer Growth Fund: You should carefully consider the investment objectives, potential
risks, management fees, and charges and expenses of the Fund before investing. The Fund’s prospectus contains this and other information about the Fund, and should be read carefully before
investing. You may obtain a current copy of the Fund’s prospectus by calling 1-888-711-2837 or visiting www.sbauerfunds.com. Past performance is no guarantee of future results. The investment
return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
As of this wri ng the stock market has launched investors up gracefully into the upper reaches of the circus tent. The saucer-eyed crowd
below (many of them naysayers who are content to sit in their seats, searching through their Cracker Jack looking for the prize) has mostly missed the beau ful launch, but now watch intently. Many in the crowd are sure the investor in the picture above will not be caught and shortly come tumbling down. Even though the investor has been caught many mes, they watch the trapeze show thinking this me
will be different. During the last 5 years when the investor has missed the catch, there has been a net to catch the investor. Recent falls have been scary for a li le while, but ul mately Mr. Market caught them again. However the crowd remembers the big fall from 2008
and 2009 and are sure the flying investors will fall to the floor again, any jump now; so they sit, watch, and wait, feeding on unhealthy investments like golden colored co on candy, bonds with nega ve nutri on, and bank CDs that when you open the wrapper, there is nothing inside! For investors there are a lot of reasons to be concerned, geopoli cal
events, the dodo birds in Washington, earnings reports, the Dow at 15,500, and rising interest rates. Lately some smart dudes with a bunch of le ers a er their names have been poin ng out that today’s market looks a lot like 2000 and 2007. They point out that the total capitaliza on of the stock market is higher now than GDP...which has only happened twice before. You guessed it, in 2000 and in 2007.
Talk like that makes those of us currently launched into the wild blue
yonder a bit sweaty in the palms and nervous about missing the outstretched arms of Mr. Market. Forbes points out one of two major flaws of this comparison, in that it completely ignores the fact we live in an increasingly globalized world. Companies “headquartered” in the US are less and less dependent on just the US economy, so measuring their value vs. just the US GDP is missing much of the story. For example, Coca-Cola sells about $1 billion of fluids every week, but only 40% of those sales are inside the US. So why should the value of Coca-Cola be compared to what they sell in just 43 hours of a week and not on what is sold in the whole 168 hours? The second flaw will be corrected within a few days ± of you reading this. That is because the GDP figures will be restated by the government all the way back to 1929 to include the impact of “intellectual property”. Right now there is li le immediate “GDP” assigned to some of the highest-paid and most valuable members of society; researchers who develop computers, 3D printers, nanotechnology, blockbuster drugs, or producers of blockbuster movies, music, so ware or websites. The GDP will move up due to the fact that the US economy is more knowledge and informa on based; and influenced more by iPad designers, Steven Spielberg, and the Google guys than by the guys who assemble washing machines or nail 2x4s together. MARKET UPDATE PAGE 1 (We know the layout is goofy, but work with us) Here is a snapshot of our proprietary short-term “market ming” risk signal. This is a back-tested signal that a empts to show when the stock market is ge ng “toppy”, and likewise when the market may be bo oming. At our core we are long-term bulls, but there are people who like to try to trade with a short-term bias; and this is made for them. Also this would have waved many a red flag in 2008 and 2009, poten ally saving several dollars for us all. August 2013
10401 North Meridian Street
Suite 100 Indianapolis, Indiana 46290 “Maybe I’m in the gap between the two trapezes.” Coldplay, Every Teardrop is a Waterfall 317‐705‐5700 or 866‐705‐5700 shea rock.com When the black line crosses up though the red that is a bullish signal which raises the green flag. When the black line crosses down through the red it is a signal of risk in the market which raises the red flag. In this issue: The green and red boxes reflect the prior changes in the flag color. The green flag came out on July 15th.  Will the market catch us, or let us fall?
Our STARS por olio follows this signal.  Dolla Dolla Billz Ya’ll
Will the market catch us, or let us fall?  Portfolio Comments
Below is the chart the smart dudes reference. The green line is the GDP of the US, right now about $16 trillion. The orange line is the capitaliza on of the Wilshire 5000 (Add together the stock market value of the biggest 5000 companies in the US). We know what happened here and here Date of publication 7/24/13
EE-GADS!! Prior letters posted at sheaffbrock.com in the newsletters tab
Christy Libby Wally Jody Ron
Deb
Jim Dave Paul Eric Teri Angie Sheaff Brock Investment Advisors, LLC (SBIA) obtains data from reliable sources such as Thomson Reuters, The Wall Street Journal, and Morningstar, but SBIA does not guarantee the accuracy or
completeness of third party information, nor does SBIA assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and
opinions are subject to change without notice and are for general information only. Past performance does not indicate future results. Composite returns are gross of fees, net of commissions, and
include the payment of dividends which are held in money market funds pending reinvestment in other portfolio securities. Returns include all accounts of reasonable size that are substantially
invested in accordance with said style. The securities mentioned in this report can be, and often are, owned by clients and employees SBIA. Clients and prospective clients should understand that
there is no assurance that capital gains made in the past will continue. There is always the chance that market conditions or portfolio performance may deteriorate in the future, and clients may
experience real capital losses in their managed accounts. Portfolios are compared to the performance of various indices although the portfolio, which contains much fewer positions, may not reflect
the securities making up these indices. None of the indices may be an appropriate comparison index as our managed accounts may own companies not represented in the benchmarks. All clients of
SBIA who desire to participate in option transactions receive the option disclosure document, titled Characteristics and Risks of Standardized Options, which outlines the purposes and risks of
option transactions. Despite their many benefits, options are not suitable for all investors. Individuals should not enter into option transactions until they have read and understood the risk disclosure
document which can be obtained from their broker, any of the options exchanges, or OCC. There were no other strategies employed to obtain the results portrayed other than those strategies
disclosed in the Sheaff Brock Investment Advisors, LLC Form ADV or other disclosure brochure. Regarding the Auer Growth Fund: You should carefully consider the investment objectives, potential
risks, management fees, and charges and expenses of the Fund before investing. The Fund’s prospectus contains this and other information about the Fund, and should be read carefully before
investing. You may obtain a current copy of the Fund’s prospectus by calling 1-888-711-2837 or visiting www.sbauerfunds.com. Past performance is no guarantee of future results. The investment
return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
As of this wri ng the stock market has launched investors up gracefully into the upper reaches of the circus tent. The saucer-eyed crowd below (many of them naysayers who are content to sit in their seats, searching through their Cracker Jack looking for the prize) has mostly missed the beau ful launch, but now watch intently. Many in the crowd are sure the investor in the picture above will not be caught and shortly come tumbling down. Even though the investor has been caught many mes, they watch the trapeze show thinking this me will be different. During the last 5 years when the investor has missed the catch, there has been a net to catch the investor. Recent falls have been scary for a li le while, but ul mately Mr. Market caught them again. However the crowd remembers the big fall from 2008 and 2009 and are sure the flying investors will fall to the floor again, any jump now; so they sit, watch, and wait, feeding on unhealthy investments like golden colored co on candy, bonds with nega ve nutri on, and bank CDs that when you open the wrapper, there is nothing inside! For investors there are a lot of reasons to be concerned, geopoli cal events, the dodo birds in Washington, earnings reports, the Dow at 15,500, and rising interest rates. Lately some smart dudes with a bunch of le ers a er their names have been poin ng out that today’s market looks a lot like 2000 and 2007. They point out that the total capitaliza on of the stock market is higher now than GDP...which has only happened twice before. You guessed it, in 2000 and in 2007. Talk like that makes those of us currently launched into the wild blue yonder a bit sweaty in the palms and nervous about missing the outstretched arms of Mr. Market. Forbes points out one of two major flaws of this comparison, in that it completely ignores the fact we live in an increasingly globalized world. Companies “headquartered” in the US are less and less dependent on just the US economy, so measuring their value vs. just the US GDP is missing much of the story. For example, Coca-Cola sells about $1 billion of fluids every week, but only 40% of those sales are inside the US. So why should the value of Coca-Cola be compared to what they sell in just 43 hours of a week and not on what is sold in the whole 168 hours? The second flaw will be corrected within a few days ± of you reading this. That is because the GDP figures will be restated by the government all the way back to 1929 to include the impact of “intellectual property”. Right now there is li le immediate “GDP” assigned to some of the highest-paid and most valuable members of society; researchers who develop computers, 3D printers, nanotechnology, blockbuster drugs, or producers of blockbuster movies, music, so ware or websites. The GDP will move up due to the fact that the US economy is more knowledge and informa on based; and influenced more by iPad designers, Steven Spielberg, and the Google guys than by the guys who assemble washing machines or nail 2x4s together. PAGE 2 Dolla Dolla Billz Ya’ll Our short-term ming model shown at the top of page 1 is bullish, although this bull run is ge ng long in the tooth. 2013 has been a “Honey Badger” stock market; it just doesn’t care about interest rates, earnings shor alls, European quicksand, the sequester, a slowing China, Egypt and Syria, high oil prices, or Fed “tapering”. The Honey Badger market just keeps plowing ahead. You can see in the returns table that finally people are ge ng paid to take risk. For several years investors were paid handsomely to sit in the crowd on their comfy pile of bonds and earn a big fat return. Unfortunately, this year si ng on the comfy bonds has sounded like a Whoppie Cushion. However, a er several years of fits and starts, growth stocks have finally started to show some life. The second quarter was par cularly strong for several of our por olios. Last month’s le er explained why we feel the S&P 500 should trade between 1600 and 1900 in the next year or so (currently it is at 1700). What is driving Honey Badger to just keep going forward? Part of the answer is dolla dolla billz ya’ll. PAGE 3 Por olio comments Put Income This is an op on overlay that sits on top of an exis ng holding of a stock, of bonds, or mutual funds. We use the collateral value of the holding to enable equity puts to be wri en and generate income. The design of the por olio is to earn an addi onal 4% to 6% per year in income over-and-above the income from the underlying holding. Sound confusing? Here is an example: You have $500,000 of municipal bonds at Merrill Lynch earning a 4% yield and want to keep the bonds. Or maybe you re red from a company and have a lot of shares of the company’s stock with a low basis you will never sell. The bonds, or shares of stock, are moved into a new account and held. You keep ge ng the interest or dividends sent out to you and we don’t touch the bonds or stock. We then use the collateral value of the bonds or stock to sell puts on high quality equi es. We have around 15 posi ons on companies like Apple, Exxon, Phillips 66, Amgen, and IBM. If you don’t understand how selling puts works, go to SHEAFFBROCK.COM, click on Bo om line is there is a lot of money sloshing around looking for a VIDEOS, and then on OPTION OPPORTUNITY PUT INCOME video. It home that might produce some return. Banks pay nothing, bonds is a 3 minute explana on of the strategy. To some people it seems are nega ve for the year, alterna ves have lost their appeal, hedge like a bit of a sausage factory, and we will agree some mes there funds are struggling, and so a lot of folks are willing to commit a li le are a lot of moving parts. But it ain’t rocket science and it is an to stocks when prices pull back. Unlike the previous few years, this effec ve way to earn extra income. We don’t try to shoot the lights year when prices have pulled back 3% to 5%, a slug of buyers have out as all we are trying to do is earn an extra 4% to 6% per year. In appeared which has mi gated the downdra s. And it is a BIG slug of the first half of the year our average account earned about 2% net of buyers with dolla billz falling out of their pockets. fees. Investors like Warren Buffe have been doing this for years. In According to the recent Federal Reserve’s Flow of Funds report here fact do a Google search of “warren buffe selling puts” and many ar cles will pop up. is what is si ng in cash equivalents: Households are holding US companies hold
Banks are holding
TOTAL $9.1 trillion $3.5 trillion $2.1 trillion
$14.7 trillion And that doesn’t even count the ins tu onal dough in underperforming hedge funds or private equity. The graph on the front shows the capitaliza on of the whole market is between $17 and $18 trillion. So if just 20% of the sloshing cash eventually went into equi es, that alone would drive up prices by 16% = Dow 18,000. The has been talk of a “great rota on” out of esoteric investments and bonds and into tradi onal equi es. This is especially true of giant ins tu ons where their wagons are loaded with hedge funds. Last year hedge funds delivered 8.3% vs. a 16% return in stocks. In 2013 hedge funds have earned 4.5% vs. 13% for US stocks. Bonds made a li le last year and have lost a li le this year. So it is en rely plausible some of the underperforming money will find its way into stocks. There is another couple trillion in hedge funds and something like a gazillion in bonds. Add it up and there is almost the same amount of money invested in stocks as there is in cash or underperforming assets. them with the Quadrix® fundamental scoring system and only buy
the stocks with a score of 80 (out of 100) or be er. Below you can
see how well the Quadrix® 80 or be er stocks have done.
Best of America Growth This is new and we are really excited about it. Super stoked actually. This por olio will have the best 40 or so growth stocks in America and we feel may be the best performing por olio we offer. Here is the process: Start with the Investor’s Business Daily IBD 50 list and the New America list as the star ng point. Investor’s Business Daily started the New America list in 1998. New America stocks are young, fast growing, entrepreneurial companies and below is how it has done. Quadrix® 80 or be er +400% In the month of June the bond market took a drubbing and basically shaved off the return made in the first 5 months of the year. All of our fixed income por olios had short dated bonds or preferred stocks that will most likely be called within 4 years. Interest rates moving higher will probably prevent a client making any more than
the current interest on almost any bonds. But if you want a fairly predictable yield-to-call of around 6% for the next few years, just hang ght.
Dividend Growth and Income This has been a steady-as-she-goes rock of a por olio; bea ng the index, and nearly all other dividend driven funds and ETFs for some me now. Even in the rising market the por olio yield is s ll 4% and 21 out of the 22 companies have raised their dividend in the last year. As this is being wri en the average por olio is up 20% for the year. This month we added a new stock, Wynn Resorts (WYNN).
Wynn is a resort casino operator that caters to the high end traveler. Steve Wynn ran Mirage Resorts, built the Bellagio, and then started
And then we will only buy the stocks with a strong rela ve strength his own company building his first property in 2005. The company of 85 or be er. The buy list will be updated weekly. So by blending now has revenues of over $5 billion per year and Steve and his famithe killer lists from Investor’s Business Daily with stringent fundaly have a lot of skin in the game since they own about 20% (20 milmental screens, and then only buying the stocks moving up NOW, lion) of the shares. Today 70% of the company’s profits come from we believe will give us the best of America. Some of the companies
their Chinese property in Macau and they are currently building a that make it through the screens are household names like Hertz, second Macau property. In 2011 the stock peaked at over $160 and Kroger, and Goodyear Tire. Some are not well known, like Generac a couple of weeks ago we bought WYNN at just under $127. The or Illumina. But as a group they are impressive with earnings up 34% stock pays a regular dividend of $1 per quarter which is a yield of this year, sales up 28%, and return-on-equity of 35%. 3.1%. But, in 6 of the last 7 years they have also paid an extra yearend dividend. Last year the extra dividend was $7.50, bringing the Star ng in August we will start morphing the Best Ideas and Upside annual yield up to nearly 9%! We feel the stock could go to $160+ in Plus clients into this growth por olio, and also start offering it to the next year which would be a 30% including dividends. others. Did we men on we are really stoked about this? S&P 500 +35% Yield
Thru
Q2
2013
2012
2011
2010
2009
Core Plus - High grade and high yield bonds
4.6%
0.50
10.13
6.05
9.56
18.02
Preferred Income - Preferred stocks
7.0%
0.94
10.45
7.11
12.70
36.70
High Yield Bond
7.0%
0.80
14.83
3.66
13.06
Put Income - Income from the sale of puts
4.0%
2.12
7.94
7.49
4.80
Covered Call Income
7.0%
6.90
11.56
-10.25
Dividend Growth & Income - Dividend paying stocks
4.0%
15.73
13.38
4.93
STARS - Technical allocation / market timing
1.0%
3.84
20.38
Best Ideas - All cap stocks
0.9%
16.07
12.60
Bulls of the Dow - 10 strongest of the Dow 30
2.4%
17.99
Upside Plus - Small and mid-cap
0.3%
Auer Growth Fund
Alternative - Metals, foreign currencies, commodities
Style
Income
Growth and
Income
Timing
Growth
Impressive. Then in 2003 they started the IBD 100 list, which was their top rated growth stocks. For eight years they updated the list weekly and from 2003 through 2010 the IBD 100 went up 150% vs. 25% for the S&P 500. The problem with the IBD 100 list was there were too many very small companies on it, so in 2011 they changed the list to the IBD 50 in order to focus more on larger companies. It is the list of the 50 top-rated growth stocks in IBD’s database with strong fundamentals showing strong rela ve strength. In the twoand-a-half years since incep on the IBD 50 is up 43% vs. 33% for the S&P 500. Year-to-date 2013 the spread vs. the market is even be er, +28% vs. 18%. We then take the two lists and further screen High Yield Bond and Preferred Por olios Alternative
Portfolio
2008
2007
2006
40.95
-17.20
4.53
10.83
19.32
24.46
-28.49
2.30
12.44
21.18
29.73
30.33
-12.62
9.66
19.51
-4.70
10.30
21.10
-36.00
13.70
13.20
7.83
10.51
9.09
18.49
-24.13
9.62
12.57
16.80
7.70
-4.90
20.80
19.10
-37.30
12.00
11.70
0.0%
25.04
2.25
-15.87
9.39
36.52
-53.25
1.5%
-5.95
9.74
-5.94
2013
2012
2011
2010
2009
2008
2007
2006
15.1
26.5
-37.0
5.5
15.8
6.5
5.9
5.2
7.0
4.3
Index
S&P 500
2.0%
13.8
16.0
2.1
Morningstar Covered Call Index
——
6.1
5.1
-2.8
Barclays Aggregate Bond
2.4%
-2.4
4.2
7.8
DB Commodity Index
——
-9.4
3.5
-2.1
Composite results are in black print and start with the first full year of client results. Composite is made up of all representative accounts which have been long-term relationships and been
invested closely to the commensurate model portfolio. Returns are time weighted and size weighted, are GIPS® compliant, although not GIPS® audited. Composite returns are asset weighted
using beginning period market values. Performance results include the cost of brokerage commissions
but exclude management fees and the impact of income taxes. For the STARS and Bulls
of the Dow portfolios, returns prior to 2013 are back-tested results and are in blue. Average account size in aggregate is $480,000.
PAGE 2 Dolla Dolla Billz Ya’ll Our short-term ming model shown at the top of page 1 is bullish, although this bull run is ge ng long in the tooth. 2013 has been a “Honey Badger” stock market; it just doesn’t care about interest rates, earnings shor alls, European quicksand, the sequester, a slowing China, Egypt and Syria, high oil prices, or Fed “tapering”. The Honey Badger market just keeps plowing ahead. You can see in the returns table that finally people are ge ng paid to take risk. For several years investors were paid handsomely to sit in the crowd on their comfy pile of bonds and earn a big fat return. Unfortunately, this year si ng on the comfy bonds has sounded like a Whoppie
Cushion. However, a er several years of fits and starts, growth
stocks have finally started to show some life. The second quarter was par cularly strong for several of our por olios. Last month’s le er explained why we feel the S&P 500 should trade between 1600 and 1900 in the next year or so (currently it is at 1700). What is driving Honey Badger to just keep going forward? Part of the answer is dolla dolla billz ya’ll. PAGE 3 Por olio comments Put Income This is an op on overlay that sits on top of an exis ng holding of a stock, of bonds, or mutual funds. We use the collateral value of the holding to enable equity puts to be wri en and generate income. The design of the por olio is to earn an addi onal 4% to 6% per year in income over-and-above the income from the underlying holding. Sound confusing? Here is an example: You have $500,000 of municipal bonds at Merrill Lynch earning a 4% yield and want to keep the bonds. Or maybe you re red from a company and have a lot of shares of the company’s stock with a low basis you will never sell. The bonds, or shares of stock, are moved into a new account and held. You keep ge ng the interest or dividends sent out to you and we don’t touch the bonds or stock. We then use the collateral value of the bonds or stock to sell puts on high quality equi es. We have around 15 posi ons on companies
like Apple, Exxon, Phillips 66, Amgen, and IBM. If you don’t understand how selling puts works, go to SHEAFFBROCK.COM, click on Bo om line is there is a lot of money sloshing around looking for a VIDEOS, and then on OPTION OPPORTUNITY PUT INCOME video. It home that might produce some return. Banks pay nothing, bonds is a 3 minute explana on of the strategy. To some people it seems are nega ve for the year, alterna ves have lost their appeal, hedge
like a bit of a sausage factory, and we will agree some mes there funds are struggling, and so a lot of folks are willing to commit a li le are a lot of moving parts. But it ain’t rocket science and it is an to stocks when prices pull back. Unlike the previous few years, this effec ve way to earn extra income. We don’t try to shoot the lights year when prices have pulled back 3% to 5%, a slug of buyers have out as all we are trying to do is earn an extra 4% to 6% per year. In appeared which has mi gated the downdra s. And it is a BIG slug of the first half of the year our average account earned about 2% net of buyers with dolla billz falling out of their pockets.
fees. Investors like Warren Buffe have been doing this for years. In According to the recent Federal Reserve’s Flow of Funds report here fact do a Google search of “warren buffe selling puts” and many ar cles will pop up. is what is si ng in cash equivalents:
Households are holding US companies hold
Banks are holding
TOTAL $9.1 trillion $3.5 trillion $2.1 trillion
$14.7 trillion And that doesn’t even count the ins tu onal dough in underperforming hedge funds or private equity. The graph on the front
shows the capitaliza on of the whole market is between $17 and $18 trillion. So if just 20% of the sloshing cash eventually went into equi es, that alone would drive up prices by 16% = Dow 18,000. The has been talk of a “great rota on” out of esoteric investments and bonds and into tradi onal equi es. This is especially true of giant ins tu ons where their wagons are loaded with hedge funds. Last year hedge funds delivered 8.3% vs. a 16% return in stocks. In 2013 hedge funds have earned 4.5% vs. 13% for US stocks. Bonds made a li le last year and have lost a li le this year. So it is en rely
plausible some of the underperforming money will find its way into stocks. There is another couple trillion in hedge funds and something like a gazillion in bonds. Add it up and there is almost the same amount of money invested in stocks as there is in cash or underperforming assets. The cash and money in underperformers is the net under the equity investor. them with the Quadrix® fundamental scoring system and only buy the stocks with a score of 80 (out of 100) or be er. Below you can see how well the Quadrix® 80 or be er stocks have done. Best of America Growth This is new and we are really excited about it. Super stoked actually. This por olio will have the best 40 or so growth stocks in America and we feel may be the best performing por olio we offer. Here is the process: Start with the Investor’s Business Daily IBD 50 list and the New America list as the star ng point. Investor’s Business Daily started the New America list in 1998. New America stocks are young, fast growing, entrepreneurial companies and below is how it has done.
Quadrix® 80 or be er +400% In the month of June the bond market took a drubbing and basically shaved off the return made in the first 5 months of the year. All of our fixed income por olios had short dated bonds or preferred stocks that will most likely be called within 4 years. Interest rates moving higher will probably prevent a client making any more than the current interest on almost any bonds. But if you want a fairly predictable yield-to-call of around 6% for the next few years, just hang ght. Dividend Growth and Income This has been a steady-as-she-goes rock of a por olio; bea ng the index, and nearly all other dividend driven funds and ETFs for some me now. Even in the rising market the por olio yield is s ll 4% and 21 out of the 22 companies have raised their dividend in the last year. As this is being wri en the average por olio is up 20% for the year. This month we added a new stock, Wynn Resorts (WYNN). Wynn is a resort casino operator that caters to the high end traveler. Steve Wynn ran Mirage Resorts, built the Bellagio, and then started And then we will only buy the stocks with a strong rela ve strength his own company building his first property in 2005. The company of 85 or be er. The buy list will be updated weekly. So by blending now has revenues of over $5 billion per year and Steve and his famithe killer lists from Investor’s Business Daily with stringent fundaly have a lot of skin in the game since they own about 20% (20 milmental screens, and then only buying the stocks moving up NOW, lion) of the shares. Today 70% of the company’s profits come from we believe will give us the best of America. Some of the companies their Chinese property in Macau and they are currently building a that make it through the screens are household names like Hertz, second Macau property. In 2011 the stock peaked at over $160 and Kroger, and Goodyear Tire. Some are not well known, like Generac a couple of weeks ago we bought WYNN at just under $127. The or Illumina. But as a group they are impressive with earnings up 34% stock pays a regular dividend of $1 per quarter which is a yield of this year, sales up 28%, and return-on-equity of 35%. 3.1%. But, in 6 of the last 7 years they have also paid an extra yearend dividend. Last year the extra dividend was $7.50, bringing the Star ng in August we will start morphing the Best Ideas and Upside annual yield up to nearly 9%! We feel the stock could go to $160+ in Plus clients into this growth por olio, and also start offering it to the next year which would be a 30% including dividends. others. Did we men on we are really stoked about this? S&P 500 +35% Yield
Thru
Q2
2013
2012
2011
2010
2009
Core Plus - High grade and high yield bonds
4.6%
0.50
10.13
6.05
9.56
18.02
Preferred Income - Preferred stocks
7.0%
0.94
10.45
High Yield Bond
7.0%
0.80
14.83
3.66
13.06
Put Income - Income from the sale of puts
4.0%
2.12
7.94
7.49
4.80
Covered Call Income
7.0%
6.90
11.56
-10.25
Dividend Growth & Income - Dividend paying stocks
4.0%
15.73
13.38
4.93
STARS - Technical allocation / market timing
1.0%
3.84
20.38
Best Ideas - All cap stocks
0.9%
16.07
12.60
Bulls of the Dow - 10 strongest of the Dow 30
2.4%
17.99
Upside Plus - Small and mid-cap
0.3%
Auer Growth Fund
Alternative - Metals, foreign currencies, commodities
Style
Income
Growth and
Income
Timing
Growth
Impressive. Then in 2003 they started the IBD 100 list, which was their top rated growth stocks. For eight years they updated the list weekly and from 2003 through 2010 the IBD 100 went up 150% vs. 25% for the S&P 500. The problem with the IBD 100 list was there were too many very small companies on it, so in 2011 they changed
the list to the IBD 50 in order to focus more on larger companies. It is the list of the 50 top-rated growth stocks in IBD’s database with strong fundamentals showing strong rela ve strength. In the twoand-a-half years since incep on the IBD 50 is up 43% vs. 33% for the S&P 500. Year-to-date 2013 the spread vs. the market is even be er, +28% vs. 18%. We then take the two lists and further screen High Yield Bond and Preferred Por olios Alternative
Portfolio
2008
2007
2006
40.95
-17.20
4.53
10.83
19.32
24.46
-28.49
2.30
12.44
21.18
29.73
30.33
-12.62
9.66
19.51
-4.70
10.30
21.10
-36.00
13.70
13.20
7.83
10.51
9.09
18.49
-24.13
9.62
12.57
16.80
7.70
-4.90
20.80
19.10
-37.30
12.00
11.70
0.0%
25.04
2.25
-15.87
9.39
36.52
-53.25
1.5%
-5.95
9.74
-5.94
2013
2012
2011
2010
2009
2008
2007
2006
15.1
26.5
-37.0
5.5
15.8
6.5
5.9
5.2
7.0
4.3
Index
S&P 500
2.0%
13.8
16.0
2.1
Morningstar Covered Call Index
——
6.1
5.1
-2.8
Barclays Aggregate Bond
2.4%
-2.4
4.2
7.8
DB Commodity Index
——
-9.4
3.5
-2.1
Composite results are in black print and start with the first full year of client results. Composite is made up of all representative accounts which have been long-term relationships and been
invested closely to the commensurate model portfolio. Returns are time weighted and size weighted, are GIPS® compliant, although not GIPS® audited. Composite returns are asset weighted
using beginning period market values. Performance results include the cost of brokerage commissions
but exclude management fees and the impact of income taxes. For the STARS and Bulls
of the Dow portfolios, returns prior to 2013 are back-tested results and are in blue. Average account size in aggregate is $480,000.