HORTER INVESTMENT MANAGEMENT, LLC

Weekly Commentary http://horterinvestment.com/ July 17, 2017

Deutsche Bank Warns Stocks to Plunge Investors beware; one of the biggest banks on the street has just gone on the record warning investors about the stock market. One of the chief economists of Deutsche Bank says stocks may be in for some big loss-es as valuations are too rich and the end of monetary easing may cause a big correction. The bank highlight-ed that the ratio of stock market capitalization to GDP is approaching the highs of 2000 and 2008, a potential warning sign. While hedge fund redemptions were the first warning sign in 2008, it might be dropping credit quality in securitized auto loans this time, warned DB.

FINSUM: This is a pretty scary perspective that Deutsche Bank is offering, but it does echo a lot of re-cent headlines from other firms. We think the market is pretty rich right now, but that trying to time it is a fool’s game, as it could keep on rising for a while yet.

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What causes a stock market crash - and are we heading for another?

The dizzying ascent of global stocks has unnerved City analysts in recent months, as lofty valuations and the pro-spect of interest rate hikes threaten to spark a major sell-off. The MSCI All-Country World Index, a gauge of global stocks, set a new peak last month.

The Dow Jones logged its third consecutive record-high close on Friday, while London’s benchmark FTSE 100 and the German DAX hit all-time highs in June. Even disap-pointing macroeconomic data fails to deter the relentless drive higher in stock markets, as investors continue to pile into stocks with overstretched valuations. Since the immediate aftermath of the Brexit vote, the FTSE 100 has rallied 24pc, rising almost 4pc so far this year, while Dow Jones has gained 20pc since Donald Trump’s US election win.

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Stock market all-time highs, record margin against stock brokerage accounts, rising interest rates, serious North Korean problems, Trump economics…what will be the tipping point to a potential market crash? Only time will tell. -Drew

QUOTE OF THE WEEK

"Buy when everyone else is selling, and hold until everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investing."

- J. Paul Getty

Term of the Week:

Taxes

Taxes are generally an involuntary fee levied on individuals or corporations that is enforced by a government en-tity, whether local, regional or national in order to finance government activities. In economics, taxes fall on

whomever pays the burden of the tax, whether this is the entity being taxed, like a business, or the end consum-ers of the business's goods.

Taking a comprehensive look at the overall current stock market, you can see the chart below representing eight ma-jor indices and their returns through the week ending July 14, 2017. In a truly diversified portfolio, the portfolio’s total return is determined by the performance of all of the indi-vidual positions in combination – not individually. So, understanding the combined overall performance of the indices below, simply average the 8 indices (excluding the BofA Merrill Lynch US High Yield Master II Index) to get a better overall picture of the market. The combined average of all 8 indices is 12.63% year to date.

Taking a comprehensive look at the overall current stock market

Market Perspectives (through 07/14/2017) 60/40 Allocation: 6.82 % YTD (60% S&P 500/40% Barclays US Aggregate Bond Index)

S&P 500: 9.85% YTD Barclays Agg: 2.27% YTD

Global Equities: US equities rose across the board in weekly trading after Fed Chair Janet Yellen pumped the brakes on hawkish rhetoric during her two-day Congressional testimony. US Large Caps out-paced Mid and Small Caps in weekly trading. The Dow Jones Industri-al Average notched a new all-time high while the tech-heavy Nasdaq rebounded from recent weakness to lead the major US indices with a gain of 2.6%. International stocks fared even better, with developed markets up over 2% and emerging markets surging over 5.5% during the week. Fixed Income: Domestic fixed income markets rallied on the propo-sition of slower rate hikes, pushing down the yield on the benchmark 10-Year US Treasury Note to 2.314%. High yield bonds posted strong weekly performance, with the iShares iBoxx $ High Yield Corporate Bond ETF (Ticker HYG) rising back to within striking distance of its 52-week high. The high yield bond market is currently sending mixed signals, with defaults at 2-year lows despite deteriorating credit quali-ty from newly issued bonds. The Moody's US speculative-grade de-fault fell from 4.7% to 3.8% in the second quarter. Moody's antici-pates a year-end rate of 3.1% for 2017. Meanwhile, June saw the highest-ever proportion of so-called "covenant-lite" bonds is-sued. Covenant-lite bonds, which contain weaker investor protec-tions, represented 60% of June issuance. Commodities: Crude oil prices remained range-bound, with West Texas Intermediate rebounding back above $46 a barrel after a larger-than-anticipated inventory draw of 7.6 million barrels. The count of US oil and gas rigs in operation was unchanged at 952 during the week. The tenuous pact between OPEC nations to limit production was tested after Saudi Arabia, the architect of the agreement and the biggest OPEC producer, announced June output exceeded the self-imposed limit. Long-term oil prices could experience further pressure as the US begins to establish its new role as an oil exporter after the

40-year ban was lifted in late 2015. A report from energy research firm PIRA energy forecasted US exports will outpace most OPEC members by 2020, possibly reaching 2.25 million barrels per day. Chart of the Day

With the Dow continuing to trade above 21,000, today's chart pro-vides some long-term perspective by illustrating the inflation-adjusted Dow since 1900 -- there are several points of interest. Take for example an unlucky buy-and-hold investor that invested in the Dow right at the dot-com peak of December 1999. A decade and a half later, the inflation-adjusted Dow is up a mere 28%. That is not altogether an impressive performance considering that 17 years have passed. On the other hand, take the investor who bought right at the end of the financial crisis. The inflation-adjusted Dow is up a signifi-cant 161% from its financial crisis lows -- not bad for a for an eight year investment. Overall, the inflation-adjusted Dow has been trend-ing higher as it closes in on long-term resistance (see red line).

Moderate Risk

HIM #12

100% long treasuries

HIM #9

20% long S&P /80% alternative equity mutual fund

HIM #8

100% QQQ

HIM #22

100% cash

HIM #14 75% cash/50% inverse long bond

HIM #10

100% invested

HIM #15

100% invested

HIM #11

65% (13) stocks/35% cash

HIM #21

15% long real est/75% real estate mutual fund/10% cash

Dow Jones - Week Ending

Low Risk

HIM #7

100% short and intermediate-term treasury bonds

HIM #2

25% municipal bonds/75% municipal bond mutual fund

HIM #1 15% high yield/85% high-yield Mutual fund

HIM #6 10% short duration/75%high yield/10% strat inc/5% deb

HIM #3

29% convertibles /29% dividend equities/14% power shares 14% Income builder fund/14% cash

HIM #20

53% cash/ 47% high yield

HIM #19

50% MBS/50% real estate mutual fund

HIM #23

100% high yield

Current Model Allocations

In utilizing an approach that seeks to limit volatility, it is im-portant to keep perspective of the activity in multiple asset classes. At Horter Investment Management we seek to achieve lower risk with higher returns. More specifically, we seek to achieve superior risk-adjusted returns over a full mar-ket cycle to a traditional 60% equities / 40% bonds asset allo-cation. We do this by implementing global mandates of sever-al tactical managers within different risk buckets.

For those investors who are unwilling to stomach anything more than minimal downside risk, our goal is to provide a satisfying return over a full market cycle compared to the Bar-clays Aggregate Bond Index.

At Horter Investment Management we realize how confusing the financial markets can be. It is important to keep our cli-ents up-to-date on what it all means, especially with how it relates to our private wealth managers and their models.

We are now in year nine of the most recent bull market, one of the longest bull markets in U.S. history. At this late stage of the market cycle, it is extremely common for hedged manag-ers to underperform, as they are seeking to limit risk. While none of us know when a market correction will come, even though the movement and volatility sure are starting to act like a correction, our managers have been hired based on our belief that they can accomplish a satisfying return over a full market cycle, -- while limiting risk in comparison to a tradi-tional asset allocation approach.

At Horter we continue to monitor all of the markets and how our managers are actively managing their portfolios. We re-mind you there are opportunities to consider with all of our managers. Hopefully this recent market commentary is help-ful and thanks for your continued trust and loyalty.

Chart of the Week:

The Chart of the Week shows the seasonality of the S&P 500. The chart shows the per-centage of months, out of all months since 1988, in which the S&P 500 had positive re-turns. As we can see June through Septem-ber have the lowest percentage of positive months, so summer is a struggle and a time for a bit of caution.

Summary

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