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Bungie Monday 

Financial Markets Commentary
August 24th, 2015
  

About DAVID EDWARDS

President

  
David is the president, founder and portfolio manager of Heron Financial Group.  David was previously associated with Morgan Stanley, JP Morgan Securities and Nomura Securities. 
  
David holds a BA from Hamilton College and an MBA from Darden Graduate School of Business, University of Virginia.  
  
David includes sailboat racing among his hobbies, races frequently in Oyster Bay, LI and in regattas around the Eastern Seaboard, Florida and the Carribean.

About HERON FINANCIAL GROUP, LLC

 

Heron Financial Group is a Registered Investment Advisor serving individuals and families across the United States, Europe, Asia and Latin America.

 

Our clients are corporate executives, managing partners of law firms and consultancies, Wall Street professionals, owners of businesses, and heads of families.

 

Our purpose is to clarify and simplify the means by which our clients will achieve their financial goals.

 

Client relationships range from $500,000 to $10 million in assets.

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US stocked dropped 5.3% on the open with the Dow Industrials shedding 1089 points in 5 minutes.  By mid day, the decline was a mere 0.9%.  Many investors took that rally as the last opportunity to get out of stocks, so selling pressure returned in the after noon, leaving the major averages down 3.9% on the day, 9% over the last three sessions, down 6.8% on the year and down 11.3% from the record high set May 12th.
 
Officially a correction, but could this selloff become a bear market?
A correction is defined as a decline of 10% from a previous high; a bear market is a decline of 20% or more. We say, "no bear market."  Bear markets result from:
  1. Highly over valued stocks, as we saw in 2000
  2. Severe bank stress caused by over leverage, as we saw in 2008-9.
 
Neither of these factors is significant right now.
 
By the Morningstar Fair Value model:

 
Stocks were on the high side of average over the last two years, so relatively hard to make money.  In 2011, stocks were grossly undervalued, so easy to make money in 2012.  As of now, stocks are back in undervalued territory, about 8% undervalued.  In 2000, stocks were overvalued by a record 110%.  That's what allowed the NASDAQ to fall 75% over two years.
 
Ever since 2009, banks have had little opportunity to take on investment risk.  The firms that are at risk right now are hedge and mutual funds who blithely bought up emerging market debt in recent years chasing yield.  Those markets are illiquid right now.  Depending on redemptions those funds may well have to dump positions as deep discount, which only acerbates the problem.
 
Meanwhile, average investors are terrified.  CNN Money produces a helpful "Fear & Greed" Index.


 
As of this afternoon, the index was at the limits of extreme fear:
 

 
As we have seen in year's past, this index is a pretty good contrary indicator.  The last time the index looked this bad was October 2014 - two month later the S& P 500 was 11% higher.

As always, please call with questions and concerns.

 

 

                                                        Yours sincerely,

                                                

                                                         David Edwards
 
                                                        Heron Financial Group, LLC

 

 

The HERON FINANCIAL GROUP Financial Markets Commentary is published following month end and whenever market conditions require comment. The views expressed in this letter represent HFG opinion and strategy as of the date published and can change at any time upon receipt of new information. Data quoted in this letter are from sources deemed reliable, but no guarantee of such data is implied.

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