MOULTON WEALTH MANAGEMENT INC.

“MOLTEN HOT” MINUTES SPECIALIZING IN RETIREMENT AND TAX PLANNING Your Picture DONALD HereJ. MOULTON CFP®, RFC

1220 N. MULLAN ROAD SPOKANE, WA 99206 509-922-3110 www.moultonwealth.com

RIAL R. MOULTON CFP®, CPA/PFS, RFC

Week Of May 9, 2016

IN OUR TACTICAL PORTFOLIOS… Provided by Moulton Wealth Management, Inc.…

WARNING – OUR BEAR MARKET SELL INDICATOR SIGNALED ON JANUARY 15, 2016. AS SUCH WE HAVE ESSENTIALLY EXITED THE EQUITY MARKET IN OUR CLIENTS’ ACCOUNTS!! PLEASE READ FURTHER FOR ALL THE DETAILS.

B

alance Sheet Bear Market or Debt Bubble – which do you think is more catchy?

We’ve talked for some time about the growing debt bubble around the world. Not only have countries and their respective Federal Reserves created massive debt, so have corporations. And it may be starting to unwind. For background, corporations have issued record debt due to historically low interest rates and a Federal Reserve hell bent on handing them money. What the Fed had hoped, was companies would take the proceeds from all this debt and invest in plants, equipment and people – in other words, use it to build their businesses. And although some of that has certainly happened, it doesn’t appear to have been the most common use of that debt. Instead it was predominantly used to buy back stock shares and increase dividend payouts. This creates two major problems. Problem number one is ‘massaged earnings’. Remember, corporations announce earnings as “Earnings per Share Outstanding”. Therefore, if I’m a CEO due a large bonus based on gains in “Earnings per Share Outstanding” I can either increase earnings so that each share outstanding receives more; the preferred way to add to earnings. Or if that fails, I can decrease the number of shares outstanding by issuing debt and using the cash to buy the _________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

UP COMING SEMINARS. CALL FOR DATES AND TIMES BRING A GUEST  02:00 PM – MAY 26TH – QUALITY INN NORTH – SPOKANE  11:00 AM – MAY 17TH – HAMPTON INN - RICHLAND

CALL 509-922-3110 TO RESERVE A SEAT! shares back and make them no longer “outstanding”. Let’s look at the math. If my company made $1 million in profits and I had 100,000 shares outstanding I would show earnings of $10 / share outstanding ($1,000,000 earnings / 100,000 shares). However, if I am having trouble increasing earnings, I can issue debt and use the money to decrease the shares. Let’s say my earnings actually dropped to $900,000 but I was able to buy back 15,000 shares of stock; my Earnings per Shares Outstanding just increased to $10.59 / share outstanding ($900,000 earnings / 85,000 shares)! Isn’t my company doing great? Earnings are rising (sort of) and I get my big fat bonus (absolutely)! The real downside to this smoke and mirrors earnings increase comes down the road because the debt and associated payments are all too real. If I had invested in plant, equipment and people, I would (hopefully) have increased revenue streams by more than the increased expenses from the added debt payments. Therefore my company becomes more profitable in reality – not just on paper. But by buying back shares, I’ve not really accomplished anything of substance from a revenue perspective but I have increased expenses with the added debt payments. Eventually falling “real” earnings could make it difficult to make those debt payments. And if you read last week’s letter, you know that earnings are falling. Of course, you’d expect it to show up first in the worst hit areas – currently that’s the oil industry. On the following page is a summation of the oil patch bankruptcy filings for the first four months of 2016. Notice the Total Debt is not cumulative. In other words, it didn’t increase from $32,000,000 to $280,000,000 from January to February (which would have been bad enough). Each of those numbers are separate for the companies filing in that month – including the almost $15 billion in debt for the 11 companies which filed bankruptcy in April.

_________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

January 2016 February 2016 March 2016 April 2016

New Bankruptcies 3 6 7 11

Total Debt $32,000,000 $280,000,000 $1,840,000,000 $14,920,000,000

Avg. Debt Per Company $10,666,667 $46,666,667 $262,857,143 $1,356,363,636

In all of 2015, energy bankruptcies totaled 42 with combined debt of $17.2 billion. In the first quarter of 2016, energy bankruptcies total 27 with combined debt of $17.1 billion. Earlier we said it created two major problems. You see the first. The second comes next. When a company goes bankrupt, their debt is normally “secured” by assets of the company so that lenders can get back some portion of what they are owed by liquidating assets. (The same as your mortgage is secured by your house.) The amount of that “portion” depends on many factors such as the value of the company’s assets, how many lenders are involved, total debt outstanding, etc. When a company takes on debt and instead of using it to invest in plant, equipment and people, uses it to buy back stock, it adds nothing to the liquidation value because by definition when the company goes bankrupt the stock is essentially worthless. That’s the problem with secured debt. There is also unsecured debt which falls down the “liquidation pecking order” so that the lender may get back nothing. Why would anyone lend without security? Because in the world of seemingly unending, Fed induced, zero interest rates, companies compete for the borrowers and money is cheap so it’s treated as such. Of the $17.2 billion in bankruptcy debt in 2015, $7.9 billion was unsecured. Of the $17.1 billion in bankruptcy debt in the first four months of 2016, $12.9 billion is unsecured. Makes one wonder which banks are getting most nervous. Balance Sheet Bear Market or Debt Bubble? As we mentioned on the radio show Saturday, there is a struggle going on between fundamentals – earnings, debt, the slowing economy (you know, capitalism) - and Federal Reserves around the world (you know, central planning). The Federal Reserves can seemingly print money endlessly and throw it this way and that, and so far it’s been effective at propping up the stock market. It’s not been so effective at juicing the real economy. However, like all central planned economies, it will ultimately have to work in a capitalist world, and if history is any guide, capitalism will eventually win. So what happens when the Fed has lost its ability to manipulate after having pushed us so far out on the limb? Remember when there was so much fear that Japan was going to own the U.S. during the 1980’s? We then found that its government had been ‘helping’ companies and adding massive debt. Japan’s Nikkei stock market is still down over 50% from its market _________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

peak at the end of 1989. That’s over 26 years ago. How long is your long term investing horizon? We maintain our discipline and follow our system. We feel confident it will help us participate in further advances should they prove significant. But more importantly, it will help minimize the impact of a serious bear market when it comes. It’s not what you make that matters, it’s what you keep. Have a plan, work the plan, and most important, stick to the plan. Benjamin Graham, Warren Buffet’s mentor and teacher, once said the following…

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” Investors are currently voting. Investors will eventually weigh. We maintain an open mind but so far are not moved from our defensive stance.

If we can help, call our office now and set up a no obligation review. Time may not be your friend. We think investing today must include a defensive strategy and system. It’s this system that helps us decide when “enough is enough” and that it is time to protect your portfolio. If you don’t have a system you should consider it now. Regardless of what happens over the next week, month or several months, stocks are overvalued in our opinion and eventually they will reset with a significant market decline. Remember, we have a feature on our website: www.Moultonwealth.com to help you measure your risk tolerance. The problem with trying to decide how much risk to take is we all want to be aggressive when the market is going up, but conservative when it’s going down. That’s why a sell discipline is important. However, the first line of defense is always our allocation. This new approach to measuring risk gives an absolute number by making investors trade off gains and losses. Just click the button to see where you stand. On to this week’s data… _________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

Stocks recorded their 2nd week of losses, although a rally on Friday limited the declines. The tech-heavy NASDAQ trailed the large-cap indexes and the small cap Russell 2000 was also relatively weak. For the week, the Dow Jones Industrial Average gave up just 33 points (0.19%), closing at 17740. The NASDAQ Composite declined -0.82% to end the week at 4,736. LargeCaps showed relative strength over their smaller brethren as the S&P 500 large cap index declined -0.4%, while the S&P 400 MidCap index fell -0.61%, and the SmallCap Russell 2000 tumbled -1.43%. Utilities, traditionally a “defensive” sector, rose for the week as the Dow Jones Utilities Average gained +0.74%, and Transports fell -1.69% mirroring the weakness in the energy sector. In international markets, Canada’s TSX fell -1.79% as a stronger Canadian dollar weighed on the market. Markets were down across the board in Europe as the United Kingdom’s FTSE fell -1.86%, Germany’s DAX declined -1.68%, and France’s CAC 40 dropped -2.88%. In Asia, China was the leader by limiting its fall to only -0.85% on the Shanghai Composite Index while Japan’s Nikkei fell -3.36% and Hong Kong’s Hang Seng plunged 4.54%. In commodities, the industrial metal copper plunged -5.7%, reversing the gains of the last two weeks. Precious metals took a break from their recent rallies as Gold fell -$5.20 to $1,289.70 an ounce and Silver fell -2.15% to $17.50 an ounce. Oil also retreated -3.1% or $1.43 to $44.56 for a barrel of West Texas Intermediate crude oil. In U.S. economic news, the U.S. economy added a weaker-than-expected 160,000 jobs in April as the unemployment rate held steady at 5% according to the Labor Department. It was the smallest gain since last September. However, a positive detail in the report is that hiring in high-paying sector appears to have broadened out, helping to raise average hourly earnings by +0.3% on the month and +2.5% from a year earlier. In a separate report from payroll processor ADP, private sector employers added 156,000 jobs last month, down from 200,000 in March - the smallest ADP gain in 2 years. Both the Labor Department’s and ADP’s reports missed analyst expectations widely. After the weakest stretch of economic growth in 3 years, an increase in income and employment tax receipts to the fastest rate in 6 months is a positive sign. Over the past month, federal income and employment taxes withheld from paychecks rose +4.5% from a year ago, according to the Treasury Department. This is the best year-over-year growth in tax receipts since early November, and more than double the rates from February and March. In U.S. manufacturing, ISM’s manufacturing index declined a point to 50.8 last month, weakening but still in the expansion (>50) area. Economists had predicted a lesser decline to 51.5 amid less-than-stellar reports on regional manufacturing activity last month. The number largely reflected excess inventories which may weigh on future production. On a positive note for manufacturing, the U.S. dollar has continued to lose ground versus other currencies. That will make U.S. exports cheaper in foreign markets. New orders remained the strongest point of the data at 55.8, a decline of 2.5 points from March. _________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

Construction spending rose +0.3% in March according to the Commerce Department. Private construction rose +1.1% from February and +8.5% from a year ago. New single-family home construction came in flat, but multi-family construction jumped +5.6%, up over 34% from this time last year. In Canada, the Canadian dollar’s relative strength over other developed nations’ currencies appears to have come to an end after the Loonie suffered its steepest 2-day slide in 15 months. The country’s trade deficit widened to a record in March, sparking concern over the economy’s rebound. Weakness in the early part of the week pared the currency’s gain to +7.6% this year, dropping it to the 3rd best performer among G10 countries after the Japanese yen and Norwegian krone. The Eurozone’s April Purchasing Managers’ Index (PMI) reading on manufacturing came in at 51.7, up +0.1 point from March. The services sector was unchanged at 53.1, according to Markit. For the major economies, Germany was at 51.8 on manufacturing, but services slumped to an 11-month low of 53.6. France was at a new 12-month low of 48, and at 50.2 in services. Retail sales for March fell -0.5% over February, up +2.1% year-over-year. In the United Kingdom, there were fears of stalling economic growth as Britain’s vast services sector slowed down. Analysts say the services sector was hit by the slump in global trade and the nervousness ahead of the June referendum on whether to stay in or leave the European Union. A carefully watched survey of the UK’s largest sector businesses showed activity slumped in April to its slowest rate in over three years. In Germany, President of the European Central Bank Mario Draghi fired back at German critics of the ECB’s easy-money policies. ECB officials stated that Germany itself is partly to blame for the ultralow interest rates that are harming savers and pensioners. In a speech last week Draghi stated that low interest rates were a symptom of an underlying economic problem—the compression of investment returns globally due to an excess of savings. Mr. Draghi said, “Our largest economy, Germany, has had a surplus above 5% of GDP for almost a decade.” In China, recent research suggests the economic future of China may not be as bright as hoped because of the nation’s aging population and its low fertility rates. HSBC global economist James Pomeroy notes that China’s older citizens will stall economic growth and add strain to government spending. The country’s median age is projected to be over 40 in eight years and that it will be another 10+ years before China becomes a rich nation again, Pomeroy writes. Japanese Prime Minister Shinzo Abe stated he was ready to respond to excessive currency moves if needed, adding that he may raise the issue of foreign exchange volatility at a meeting of G7 leaders in Japan later this month. With the yen strengthening about 12% this year versus the dollar, Abe told reporters in London that “the exchange rate must be stabilized” and that Japan would “carefully watch these movements and as necessary we _________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

would need to respond.” Japanese exporters suffer the most from a rising currency, a bad situation for an export-oriented society. Finally, late 2011 was the dawn of the “Robo-Advisor” age. Robo-Advisors were going to quickly take over from flesh-and-blood human advisors, especially for millennial clients who are supposedly more comfortable with a smartphone app than with a face-to-face advisor relationship. Wealthfront and Betterment were the premier players, both heavily funded by venture-capital investments. But a funny thing happened on the way to that destination: the Robo-Advisors have begun to falter, fresh venture capital money has become scarce, and their growth rates have far undershot their grand plans. New similar offerings from Schwab and Vanguard have put further pressures on the Robo-Advisors, to the point where the total lifetime revenue potential of new clients is less than the estimated cost of new-client acquisition – an obviously unsustainable situation. Early on, the growth prospects looked good. After about 2 years both Wealthfront and Betterment had over $500 million in assets under management and within 5 years of inception each had exceeded $2 billion. But the latest data suggests that Robo-Advisor growth rates are falling rapidly, to just 1/3rd of their levels of only a year ago, as the chart below illustrates. No doubt Robo-Advisors are here to stay, but their predicted quick dominance over human advisors seems to have been wishful thinking.

GET A PHYSICAL!

We invite you to attend a seminar and come in for a “financial physical”, even if you think your current approach is fine. Much like going to the doctor for a physical despite feeling great, you want to make sure any negative issues you may not be aware of are caught early and addressed. For example…  Have you addressed your investment process and adjusted it for what is going on in the world? _________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

 Do you need a process to help manage losses during the next bear market?  If not, what are you waiting for?

LISTEN TO RIAL AND DON’S RADIO SHOW, “YOUR MONEY MATTERS”, EVERY SATURDAY MORNING AT 8:00 AM ON KXLY RADIO CHANNEL 920 AM IN SPOKANE AND AT 9:30 AM ON NEWSTALK RADIO CHANNEL 870 AM IN THE TRI-CITIES AREA OR LISTEN LIVE AT WWW.NEWSTALK870.AM AGAIN AT 9:30 EACH SATURDAY MORNING… At the bottom of the 2 0 0 7 - 2 0 0 9 bear market the S& P-5 0 0 index returned to levels last seen in 1 9 9 6 . The drop didn’t retrace only a few months or even a couple years. We discuss many of these issues on the weekly radio show and invite you to listen.

WEEKLY FOCUS – THINK ABOUT IT Provided by Moulton Wealth Management…

“The conference wants a specific recommendation from me. I guess ‘Get out of the stock market’ isn’t clear enough.” (Sohn Conference May 2016) --Stanley Druckenmiller – hedge fund manager

Yours truly,

Rial R. Moulton, CFP®, CPA / PFS, RFC Certified Financial Planner™ professional

Donald J. Moulton, CFP®, RFC Certified Financial Planner™ professional

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added. Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. Yahoo! Finance is the _________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

source for any reference to the performance of an index between two specific periods. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Consult your financial professional before making any investment decision. Some of the information is provided by PEAK©. You cannot invest directly in an index. Past performance does not guarantee future results. Investments in securities do not offer a fixed rate of return. Principal, yield and / or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.  To unsubscribe from the “Molten Hot” Minutes please reply to this e-mail with “Unsubscribe” in the subject line, or write us at 1220 N. Mullan Road, Spokane, WA 99206. http://www.visualcapitalist.com/bankruptcy-mayhem-oil-patchchart/https://twitter.com/ReformedBroker/status/727934499317764103 other sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; W E Sherman & Co, LLC)

_________________________________________________________ Securities and investment advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.