Author: Swan Asset Management

Covestor model: Hedged Equity, Christian Agape Hedged Equity and International Hedged Equity

Disclosures: Long BAX, NVS, JNJ, SPXU

The jobs report for June showed no improvement in employment conditions.This report follows a similarly lackluster report for May. Dormant job growth has also been confirmed by withholding taxes, which leveled off along with new job creation.  Economic growth stalled, and may be slipping backward now that fiscal and monetary stimulus has practically ended.

As the short-term effects of stimulus faded, the National Labor Relations Board displayed a hostile attitude toward private capital by denying Boeing its use of a new plant in South Carolina.  Absent public sector support for the economy, which has not produced lasting benefits and may even be detrimental, private capital appears the only source of growth. If it remains unwelcome, economic growth will continue to be elusive.

In a slow-growth environment, we believe an emphasis on more defensive and higher yielding positions are the best course of action. The market now trades at levels with limited upside opportunity and meaningful downside risk. It follows that a cautious investment approach is warranted. Our normal preference for profitable, well capitalized businesses is heightened in weak economic periods where most stocks are fully valued.

The healthcare sector is one source of more defensive investments that can help insulate portfolios by providing attractive levels of income.  In Christian Agape Hedged Equity, Baxter International (NYSE: BAX) yields 2% as of 7/9 and helped preserve capital during the May-June correction.  For International Hedged Equity, Novartis (NYSE: NVS) yields 3.21% as of 7/9 and also maintained value over that volatile two-month period.  Likewise, in the Hedged Equity model, Johnson & Johnson (NYSE: JNJ) yields 3.37% as of 7/9 and held its value during the recent market sell-off.

Along with positions in ProShares UltraPro Short S&P 500 (ETF) (NYSE: SPXU) that hedge each model, these steady businesses generating higher-than-market income contributed to stable performance during a choppy market.  We believe they will continue to bring stability to each model’s performance if the S&P steepens its descent.

Best regards,

J. Steven Smith, CFA

Managing Director

Sources:

"Employment Situation Summary" US Department of Labor. http://www.bls.gov/news.release/empsit.nr0.htm