Week of August 24, 2020
If you have any exposure to pension funds, meaning your pension income depends on their health, you should pay close attention to the deteriorating condition of many of these funds.
V, W?
Wall Street is projecting a “V” shaped recovery. I disagree.
Insurance Company Disputes
Our process is to buy those investments at the low end of the range.
Takes No Talent
Success also requires ‘execution.’
Changes to Health-Care Spending
It appears to me that the Fed is playing the role of the Little Dutch Boy, sticking a finger in the holes in the dike as they appear.
Are Not? Or R0
The real fact is that most markets aren’t up this year.
Coronavirus Scams
I will explain the reason, and want you to know that there are no added costs of this trading to you.
IRS Deadline
July 15 Due Date Approaches for Federal Income Tax Returns and Payments
6/29/2020 Updates
Why do I think the house is on fire as far as the markets are concerned?
Jobless
Rehiring and worker recalls associated with large scale reopening efforts was always a certainty.
Market Madness
The Fed in its history has never done that before until now.
Interesting Times
As Warren Buffet famously said: “In the short run the stock market is a voting machine and in the long run it’s a weighing machine”
Gold
Because Gold is now in the middle of the range, …
The S & P 5
Well, consider the fact that the S&P 500 is just 10% below its all-time high, set in February. Then compare that to the fact that the average component stock is still 21% below its high. Now, do you see the disconnect?
COVID Scams
Everything I have read says most epidemiologists are horrified by America’s rush to reopen the economy and abandoning much of the social distancing that has helped contain the virus.
Americans Chipping Away At Their Debt
Americans have been chipping away at their debt, but very slowly.
More on the Crisis
Perhaps more important is the tension between the technocracy and opposing classes
R&D
Depressions are economic events not created by economic forces
Oil and More
This is a common occurrence known as a “bear market bounce.” It has happened in the last two recessions of 2000-2002 and 2008-2009. Then the markets crashed to down -50% in 2000-2002 and -57% in 2008-2009 from top to bottom.
Cascading Crises
The problem is that 70% of our economy is consumer related.
4/6/2020 Market and Real ID Updates
I hope that the recovery is fast and furious, but right now, the effervescent hope of a “V” shaped recovery is not a high probability scenario.
3/30/2020 Market Update
Based on the current data, we are in a stock market collapse.
Bad News Alternative
This is not over. The economy is at a near dead stop.
Days of COVID-19
Monday night, the Fed opted for its 2nd panic rate cut in less than a month since the U.S. stock market made an ALL-TIME-HIGH.
Volatility and the Virus
Week of March 9, 2020 Quote of the Week “Opportunities are usually disguised as hard work, so most people don’t recognize them.” – Unknown Technical Corner Last week was the most incredible week I have ever seen since I started the practice in 1986. The S&P…
Independent Living: A Decision Not Often Regretted
Old age is a very special time not granted to everybody. It is a gift. It depends on our genes, enough money to become educated and stay healthy, and luck.
It’s Not Too Late!
The markets are selling off big time today (Monday) which is being blamed on the spread of the coronavirus or the new name for the virus, COVID-19 virus.
Wuhan Coronavirus
I believe that global growth is likely to slow down noticeably in the first quarter as consumer demand and production are curtailed in China.
TRACED?
Don’t answer calls when you don’t recognize the phone number.
Sweeping Retirement Plan Changes
However, the one constant is that in the long run, the markets will be driven by the direction of the economy.
2020 Annual Financial To-Do List
Quote of the Week “It is certain, in any case, that ignorance, allied with power, is the most ferocious enemy justice can have.” – James Baldwin, American Novelist Technical Corner I am writing this as of the market close on Monday. The equity markets started off hot this year, continuing the trend at the end of 2019. As you know, we have been in a conservative allocation and just recently we extended the duration on our bond portion of the portfolio. Last Friday and today (Monday), the equity markets have experienced a big sell-off. We recently re-positioned ourselves with a longer duration on the bond portion of the portfolio (approximately 50%) because of the slowing of the economy and disappointing S&P 500 corporate earnings so far. This change in duration has paid off handsomely so far. Just today, something I read really caught my eye. I’m sure all of you are aware of the Coronavirus or the Wuhan virus that started in Wuhan China and is spreading rapidity throughout China. It is a highly contagious respiratory virus that has killed people at a relatively high rate. It has spread to the rest of the world, including the United States. It is especially deadly to the elderly and those with compromised immune systems. I certainly hope that it is contained soon. It is estimated by a person whose opinion I respect to cost over $40 billion at this point in economic damage. If it is not contained who knows what the cost could be. I have two charts to show you. The chart below shows the rapid decline in the 10yr U.S. Treasury rate since January 21st. As of the market close today, the yield dropped another tenth of a percent. This is a big move downward in such a short period of time. Unfortunately, or fortunately, depending on where you stand, this drop has been very good for our long duration bond portions in the portfolio. As I stated above, we lengthened the duration because of a slowing economy and disappointing corporate earnings not even considering the effect of the virus. The next chart shows what happened to U.S. 10yr Treasury rates during the Ebola outbreak in 2014. Interest went from 3.00% down to 1.40%. This created a huge appreciation in the value of the 10yr Treasury bond during that period. Remember, when interest rates decline, bond prices go up. I certainly hope for everyone’s benefit that the spread of the virus is contained. Fortunately, the Ebola virus was contained successfully to small parts of Africa. The Wuhan virus has already spread to the whole world. This will have an economic effect on the world’s economy. The big news for the U.S. economy is coming out on January 30th when the fourth quarter GDP (Gross Domestic Product) comes out. I am expecting a very disappointing growth number. If that happens our positions in U.S. Treasuries, REITs, Utilities, and gold should benefit. Tom’s Thoughts Annual Financial To-Do List Things you can do for your future as the year unfolds. What financial, business, or life priorities do you need to address for the coming year? Now is a good time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider: Can you contribute more to your retirement plans this year? In 2020, the contribution limit for a Roth or traditional individual retirement account (IRA) remains at $6,000 ($7,000, for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA: singles and heads of household with MAGI above $139,000 and joint filers with MAGI above $206,000 cannot make 2020 Roth contributions.1 Before making any changes, remember that withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.2 Make a charitable gift. You can claim the deduction on your tax return, provided you itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you need to document it. Even small contributions need to be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the Internal Revenue Service (I.R.S.) does not equate a pledge with a donation. If you pledge $2,000 to a charity this year, but only end up gifting $500, you can only deduct $500.3 These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your strategy. See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to legitimately write off expenses linked to the portion of your home used to exclusively conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.4 Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,550 contribution for 2020, if you are single; $7,100, if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.5 If you spend your HSA funds for nonmedical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not
Can you Stretch?
So far, the markets are off to a good start this year.
Education Tax Credits and Deductions
Quote of the Week “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” – Warren Buffet Technical Corner Major indexes closed near fresh all-time highs last week as the U.S. and Iran took a step back avoiding further escalation in geopolitical tensions. Iran retaliated to the recent killing of its general by striking against U.S. military bases in Iraq, but there were no casualties, Mr. Trump then softened his comments. As a result, oil declined 6% on the week, recording its worst weekly performance since July of 2019. On the economic front, the December jobs report marked a slowdown in job gains. In the chart below, job growth last year slowed from 2018. Wage growth also has started to soften. The overall economy is also slowing rather rapidly. Projections for fourth quarter GDP are all over the lot. The Atlanta Fed is projecting +2.00 % and Hedgeye is predicting +0.03%. That is quite a spread, so we will have to wait until January 30 for the official report. We are re-allocating the portfolios this week. Conditions have changed and may probably change even more after the GDP report comes out at the end of January. The biggest change is that we are selling our position in Short-term Government bonds and Tips to extend the duration to longer-term U.S. Treasury bonds. The reason we are extending the duration is to take advantage of declining interest rates which should happen if the GDP report comes in showing little or no growth for the fourth quarter. We are also selling our small positions in Canada and Coco. We are adding Global bonds and Gold Miners and keeping our positions in REITs, Utilities, precious metals, and energy. Stephanie’s Thoughts Education Tax Credits and Deductions For parents and students trying to manage college bills and student loan payments, the federal government offers education-related tax benefits. The requirements for each are different, so here’s what you need to know. American Opportunity credit The American Opportunity credit (formerly the Hope credit) is a tax credit available for the first four years of a student’s undergraduate education, provided the student is attending school at least half-time in a program leading to a degree or certificate. The credit is worth up to $2,500 in 2020 (it’s calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses). The credit must be taken for the tax year that the expenses are paid, and parents must claim their child as a dependent on their tax return to take the credit. To be eligible for the credit, your income must fall below certain limits. In 2020, a full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. One benefit of the American Opportunity credit is that it’s calculated per student, not per tax return. So parents with two (or more) qualifying children in a given year can claim a separate credit for each child (assuming income limits are met). The mechanics of claiming the credit are relatively easy. If you paid tuition and related expenses to an eligible educational institution during the year, the college generally must send you a Form 1098-T by February 1 of the following year. You then file Form 8863 with your federal tax return to claim the credit. Lifetime Learning credit The Lifetime Learning credit is another education tax credit, but it has a broader reach than the American Opportunity credit. As the name implies, the Lifetime Learning credit is available for college or graduate courses taken throughout your lifetime (the student can be you, your spouse, or your dependents), even if those courses are taken on a less than half-time basis and don’t lead to a formal degree. However, this credit can’t be taken in the same year as the American Opportunity credit on behalf of the same student. The Lifetime Learning credit is worth up to $2,000 in 2020 (it’s calculated as 20% of the first $10,000 of qualified expenses). The Lifetime Learning credit must be taken for the same year that expenses are paid, and you must file Form 8863 with your federal tax return to claim the credit. In 2020, a full credit is available to single filers with a MAGI below $59,000 and joint filers with a MAGI below $118,000. A partial credit is available to single filers with a MAGI between $59,000 and $69,000 and joint filers with a MAGI between $118,000 and $138,000. Unlike the American Opportunity credit, the Lifetime Learning credit is limited to $2,000 per tax return per year, even if more than one person in your household qualifies independently in a given year. If you have more than one family member attending college or taking courses at the same time, you’ll need to decide which credit to take. Joe and Ann have a college freshman and sophomore, Mary and Ben, who are attending school full-time. In addition, Joe is enrolled at a local community college taking two graduate courses related to his job. Mary and Ben each qualify for the American Opportunity credit. Plus, Mary, Ben, and Joe each qualify for the Lifetime Learning credit. Because the American Opportunity credit isn’t limited to one per tax return, Joe and Ann should claim this credit for both Mary and Ben, and then claim a Lifetime Learning credit for Joe. Joe and Ann can claim both the American Opportunity credit and the Lifetime Learning credit in the same year because each credit is taken on behalf of a different qualified student. Student loan interest deduction The student loan interest deduction allows borrowers to deduct up to $2,500 worth of interest paid on qualified student loans. Generally, federal student loans, private bank loans, college loans, and state loans are eligible. However,
Our Management Process
Quote of the Week “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” – Mark Twain Technical Corner Please read Larry’s Thoughts this week. It is important because I am explaining our process for managing your money. U.S. stocks declined modestly last week, taking a breather after a sharp rally at year-end and a new record high on the first trading day of the year. Concerns over rising tensions between the U.S. and Iran emerged on Friday following the U.S. airstrike in Iraq that killed a prominent Iranian general. The heightened geopolitical risk in the Middle East led crude oil prices to rise 3% following the news which was good for our energy position. Oil reflated another +2.2% last week and is +12.5% in the last month which is a confirmation that inflation is increasing which is good for our current positions. Remember our positions in Utilities, REITs, energy, TIPs, and gold should all benefit from inflation increasing. Meanwhile, the economy is continuing to slow and wages are going up. This is the recipe for lower corporate earnings. If the economy is slowing that means lower top line revenue for corporations is declining. Combine that with rising wages, the corporate profit picture is continuing to deteriorate. If corporate profits continue to decline and wages continue to rise, eventually stock prices will start to decline. What can’t go on forever, won’t. One interesting fact that I heard the other day is that the Wilshire 5000 which represents the entire stock market is close to setting a new all-time high in relation to earnings. The ratio of the total value of the Wilshire 5000 to the earnings of the index is at 15 to 1. That means for every dollar of earnings there is $15 of value. The top of the market at the beginning of 2000 was 17.5 to 1. We all know what happened in 2000 to 2002 when the stock market lost 50% of its value. The normal average is 9 to 1 which means the current market is 66% over valued as compared to normal using this yardstick. This is a simplistic illustration and many more factors go into stock market values, but it is concerning. The Institute for Supply Management Manufacturing (ISM) just came in at a 127-month low of 47.2 and marking the fifth month of sub-50 misery. Any read above 50 means expansion and any read below 50 means contraction. Current production, new orders and employment all remain mired in contraction, falling sequentially while sitting at or near cycle lows. Meanwhile Industrial Production marked the third consecutive month of negative year-over-year growth confirming the capex-industrial recession domestically. We are still looking at a fourth quarter GDP of + 0.30% vs the third quarter GDP of +2.1%. We are still maintaining our conservative positions. Larry’s Thoughts Starting off 2020, I want to pull back the curtain and explain how we invest your portfolios. First, a little history will be informative. We have been a data driven firm since 2005. Our computer-based process has used “trend following” as our primary tool. Trend following is just as it says. We used software to recognize investment trends and if the trend is up, we invest and if the trend is down, we avoided that asset. This process worked very well until October of 2018 when the markets declined fast and deep. In my entire career I have never seen such a fast and steep drop. Because of the very nature of trend following, a period of time must elapse to recognize a change in the trend. Trend following didn’t work during that October because the time frame was too short to give us a signal to exit the stock market. We were doing VERY well from the beginning of 2017 to the start of the month of October in 2018. Because trend following by its very nature was unable to recognize and act on the decline in October, we ended 2018 performing in line with the market returns for the year. Because I don’t know if we will get a repeat of October 2018 again, I started to look for an alternative. I believe I have found one. We are now using a company called Hedgeye. If you are curious, I encourage you to visit their web site at Hedgeye.com. They have over 80 people employed with over 40 analysts. The difference is that Hedgeye Is a Macro “meaning big picture” advisor which means they are tracking inflation and growth which determines what economic sectors we should be invested in. They divide the economy into four quadrants based on the direction of inflation and growth. Asset classes perform differently based on different economic environments. This sounds very simple; however, the analysis is quite complicated. The following chart shows the four different quadrants as per inflation and growth. Quadrant I and II are good for investing in the markets, Quadrant III is not as good for market investments as I and II, but with the right allocation decisions it is OK. Quadrant IV is the “death knell” for equities and where we go to safety and invest in high quality bonds. The next chart shows which asset classes to own or not own in each of the four quadrants. Hedgeye is forward looking vs trend following which is somewhat backward looking in order to see if a new trend is developing and thus can be late in giving us a signal. I don’t think we will experience an October of 2018 again. Of course, I can’t guarantee any future returns, but I feel we have a better source of investment analysis.
Converting Savings to Retirement Income
2019’s final edition of Your Money / Our Thoughts Quote of the Week “We make a living by what we get, but we make a life by what we give.” – Winston Churchill Technical Corner U.S. stocks rallied slightly last week to a fresh new high. Bank of America came out with a prediction last week of a “stock market melt up”. I am sure that they were basing their predication on three issues that have dominated the market narrative for most of 2019. Issue number one is the “phase one” of a new trade deal with China easing fears of further trade escalation. The agreement, which has not yet been finalized, includes China making agricultural purchases from the U.S. or otherwise known as the “bean deal” plus some tariff relief. The “agreement” really doesn’t lower the tariffs already in place except for the lowering of the latest tariff increase from 15% to 7.5% on a small portion of the overall trade with China. I think this is just a deal to get a deal. The damage has already been done to the old trade arrangements with China. Also, this deal still does not give American businesses any real guidance as to expanding capital expenditures on hiring and plant expansion. Issue number two is the U.K. prime minister, Boris Johnson, received a strong mandate after his party won the majority in the general elections, which reduces some of the political uncertainty as the country negotiates its exit from the European Union. Every economist that I have read says this should be an economic disaster for the U.K. Issue number three is the Federal Reserve (Fed) left interest rates unchanged last week, signaling a pause through 2020. I think the Fed is behind the curve and should lower interest rates because the dollar is too high in comparison to other currencies around the world. Remember, with a strong dollar, our goods and services are less competitive, so will sell less in competition with other countries. With the recent headlines like “Melt up” and “Buy High and Let It Fly” (Barron’s) what could possibly go wrong? Well, let’s count the ways. According to Hedgeye, the fourth-quarter GDP is now forecast to come in around +0.39%. Corporate earnings for S&P 500 companies are expected to be negative for the fourth quarter. Stock valuations are stretched due to the market value increase and declining earnings. Industrial production is down and the “PMI Bounce” hopes ran into a no-bounce Market PMI of 52.5 in December. U.S. retail sales dropped to a 7-month low as per the U.S. Retail Sales Control Group. I certainly don’t know what the future will bring for the markets. As Yogi Berra says, “Predicting is hard, especially about the future”. But this is setting up as 1999 and we all know what happened from 2000 to 2002. So, we are going to maintain our cautious positions and take advantage of inflation-sensitive investments such as REITs, Utilities, Energy, Gold, and TIPs. Next year in Larry’s Thoughts I will be explaining in detail the investment system we use to manage your assets. I wish everyone a Happy Holiday Season. Sue’s Thoughts The last time I penned the “Thoughts” section, I mentioned that my husband had recently retired. It’s been about six months now, and since then, I look at expenses very differently. I’ve always tried my best to be frugal, or a cheapskate as my kids would tell you, and I am more so now! It’s a relief that I am still able to contribute to our savings while we figure out this retirement gig! The following article offers some strategies for living off your savings in your retirement years. Converting Savings to Retirement Income During your working years, you’ve probably set aside funds in retirement accounts such as IRAs, 401(k)s, or other workplace savings plans, as well as in taxable accounts. Your challenge during retirement is to convert those savings into an ongoing income stream that will provide adequate income throughout your retirement years. Setting a withdrawal rate The retirement lifestyle you can afford will depend not only on your assets and investment choices, but also on how quickly you draw down your retirement portfolio. The annual percentage that you take out of your portfolio, whether from returns or both returns and principal, is known as your withdrawal rate. Figuring out an appropriate initial withdrawal rate is a key issue in retirement planning and presents many challenges. Why? Take out too much too soon, and you might run out of money in your later years. Take out too little, and you might not enjoy your retirement years as much as you could. Your withdrawal rate is especially important in the early years of your retirement, as it will have a lasting impact on how long your savings last. One widely used guideline on withdrawal rates for tax-deferred retirement accounts that emerged in the 1990s stated that withdrawing slightly more than 4% annually from a balanced portfolio of large-cap equities and bonds would provide inflation-adjusted income for at least 30 years. However, more recent studies have found that this guideline may be too generalized. Individuals may not be able to sustain a 4% withdrawal rate, or may even be able to support a higher rate, depending on their individual circumstances. The bottom line is that there is no standard guideline that works for everyone — your particular withdrawal rate needs to take into account many factors, including, but not limited to, your asset allocation and projected rate of return, annual income targets (accounting for inflation as desired), investment horizon, and life expectancy. 1 Which assets should you draw from first? You may have assets in accounts that are taxable (e.g., CDs, mutual funds), tax deferred (e.g., traditional IRAs), and tax free (e.g., Roth IRAs). Given a choice, which type of account should you withdraw from first? The answer is — it depends. For retirees who don’t care about leaving an estate to beneficiaries, the answer is simple in theory: withdraw money from
Name That Beneficiary!
Quote of the Week “If the world were perfect, it wouldn’t be.” – Yogi Berra Technical Corner Last week the markets were headed for a negative return until the jobs report came in much higher than expected and pulled the return for the week up to slightly positive. The report was up 266 thousand jobs. Of that 266 thousand jobs, about 50 thousand were the result of the General Motors strike being settled and its workers going back to work. We also got a positive revision of 41 thousand jobs collectively for the months of September and October. On a rate of change basis, you usually see the anomalous rise during periods of fiscal stimulus. When the rate of change in job growth peaks it’s a one-way road of deceleration lower until you see a recession. We did have an unprecedented late cycle stimulus via the tax cut and the cut in the Fed’s interest rate which has pushed business and consumer consumption forward. We are reaching a level in which job growth and subsequent rising incomes will start to affect corporate profits. With the projected GDP growth for the fourth quarter to be only a positive 0.49%, revenue for businesses will decline. With employee costs rising, profits will have to come down. I believe once Wall Street sees the declining corporate profits results, which will be reported in January and February of next year, growth stocks will be in peril. At some point, all of the above will come to a realization. Because I can’t tell you when it will happen, we are maintaining a conservative position. Larry’s Thoughts I came across this article a while ago and I fully agree with the author’s message. No beneficiary designation for an IRA? Here’s what can happen If you have an individual retirement account, do you recall filling out a beneficiary designation form? That’s the document that allows you to direct the IRA custodian to transfer your IRA to people you name in the form. The custodian is the institution that holds your IRA assets for you. Do you recall reading the custodian’s IRA agreement? If you have a copy in your file (you should), you might want to dust it off and look it over. Here’s why: In that document, you will find provisions that take over in certain instances, such as if you fail to designate a beneficiary. As I give you two examples, think about how these provisions might affect you. A major institution that has custody of about 10 million IRAs has the following provision: “If the [IRA owner] had not by the date of his or her death properly designated a Beneficiary . . . or if no designated primary or contingent Beneficiary survives the [IRA owner], the [IRA owner]’s Beneficiary shall be his or her surviving spouse, but if he or she has no surviving spouse, his or her estate.” This type of provision is not uncommon. It gives the institution the authority to transfer the IRA when the owner dies if there is no beneficiary designation on file. A married IRA owner’s IRA would pass to his or her spouse, which would allow for continued tax deferral. Unlike non-spouse beneficiaries, a surviving spouse has the option of transferring the IRA into his or her own IRA. What would happen to an IRA owner who is single? An unmarried IRA owner’s IRA would pass to his or her estate under this custodian agreement’s default provision. The result may not be what you want if you would like the IRA to be inherited by a niece, nephew, child or grandchild. If an IRA transfers to an estate, the IRA loses its connection to a person for “stretch” purposes (keep in mind that an IRA is an “individual” retirement account). That is, tax deferral can be lost quickly, a topic for a later column. Other agreements are more flexible. Check out this one, for example: “If there is no Beneficiary designation on file with the Custodian, or if no primary or contingent Beneficiaries survive the Participant, the Custodian shall distribute the Account in the following order of preference: “(i) The Participant’s surviving spouse, if any “(ii) The Participant’s children, if any, in equal shares per stirpes “(iii) The Participant’s estate” I like this provision much more than the first one. It works better for both married and single people who have children or grandchildren. “Per stirpes” comes into play when a child predeceases the IRA owner; the grandchildren (the deceased child’s children) inherit the share the deceased child would have received had he or she been alive when the IRA owner died. Again, these provisions come into play if your custodian does not have your beneficiary designation on file. I would strongly suggest that you double-check by calling your IRA custodian for a copy of what they have on hand. Or you can fill out a new beneficiary designation —just make sure your custodian places the designation on file. Otherwise, the default provision of the custodian agreement will apply. Also, be sure your beneficiary designations are kept in a safe place. Julie Jason, JD, LLM, a personal portfolio manager (Jackson, Grant of Stamford, Conn.) and author, welcomes your questions/comments (readers@juliejason.com). “No beneficiary designation for an IRA? Here’s what can happen.” Mercury News, 12 Aug 2019, https://www.mercurynews.com/2019/08/12/no-beneficiary-designation-for-an-ira-heres-what-can-happen/. Accessed 10 December
RMDs
Quote of the Week “In the stock, a bargain is not a bargain if it remains a bargain.” – Marty Whitman Technical Corner Last week the markets hit a new all-time high on Thursday but sold off Friday with the Dow down 112 points. Today (Monday) the markets are selling off again with the Dow down 267 points which is the worst down day since October 8th. Stocks are being pulled lower by a disappointing U.S. Manufacturing Survey (ISM) data report that pointed to a fourth straight month of contraction for the sector. The ISM index unexpectedly declined to 48.1 in November. Readings below 50 reflect business conditions worsening. The report wasn’t encouraging, especially if you look at the new orders component. Construction also came in on the downside. Adding to the jitters in the last few days are higher U.S. stock valuation levels, which can make the market prone to sudden and fast corrections. The economy has been in what we call Quadrant III, which is characterized by growth slowing and inflation rising. If history is any guide, stock markets have always topped out in Quadrant III. With the economy slowing as reflected by the declining GDP, trade tensions, and with stock market valuations stretched, I wouldn’t be surprised if we are either at a top or nearing a top in the stock market. Now is not the time to take on risk chasing the markets. As a result of the changing conditions of rising inflation and slowing, we have made some changes to the portfolio. We are still maintaining our high dividend positions in REITs, and Utilities plus we are still holding a position in precious metals. Due to inflation increasing we have shortened the duration of our bond exposure. With inflation increasing we have probably seen the lows in long-term interest rates for a while, so we are now invested in short-term U.S. Treasuries and TIPs which are inflation protected U.S. bonds whose interest rates rises with inflation. Continuing on the rising inflation theme, we have taken a new position in Energy and Canada. Energy has been down for quite a while, but is now rallying off its lows. The position in Canada is also inflation themed due to the large energy exposure in Canada. The last change we made was taking a small position in Cocoa. The Cocoa market is rising due to disease in the Cocoa trees in Africa where we get most of our Cocoa. It doesn’t appear that there is going to be a decline in the demand for chocolate in the future, especially during the Holiday Season. The one thing I consider most in portfolio designs is not to take risk when the economy is declining. I do not under any circumstances want to ruin anyone’s retirement. There will be a time when the economy starts to expand. Then we will consider growth investing in the stock market like we did in 2017 and the first three quarters of 2018. Lisa’s Thoughts Required Minimum Distributions What are required minimum distributions (RMDs)? Required minimum distributions, often referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans after you reach age 70½ (or, in some cases, after you retire). You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal penalty. The RMD rules are designed to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The purpose of the RMD rules is to ensure that people don’t just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, required minimum distributions generally have the effect of producing taxable income during your lifetime. Which retirement savings vehicles are subject to the RMD rules? In addition to traditional IRAs, simplified employee pension (SEP) IRAs and SIMPLE IRAs are subject to the RMD rules. Roth IRAs, however, are not subject to these rules while you are alive. Although you are not required to take any distributions from your Roth IRAs during your lifetime, your beneficiary will generally be required to take distributions from the Roth IRA after your death. Employer-sponsored retirement plans that are subject to the RMD rules include qualified pension plans, qualified stock bonus plans, qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also subject to these rules. If you are uncertain whether the RMD rules apply to your employer-sponsored plan, you should consult your plan administrator or a tax professional. When must RMDs be taken? Your first required distribution from an IRA or retirement plan is for the year you reach age 70½. However, you have some flexibility as to when you actually have to take this first-year distribution. You can take it during the year you reach age 70½, or you can delay it until April 1 of the following year. Since this first distribution generally must be taken no later than April 1 following the year you reach age 70½, this April 1 date is known as your required beginning date. Required distributions for subsequent years must be taken no later than December 31 of each calendar year until you die or your balance is reduced to zero. This means that if you opt to delay your first distribution until April 1 of the following year, you will be required to take two distributions during that year — your first year’s required distribution and your second year’s required distribution. Example(s): You have a traditional IRA. Your 70th birthday was December 2, 2018, so you will reach age 70½ in 2019. You can take your first RMD during 2019, or you can delay it until April 1, 2020. If you choose to delay your first distribution until 2020, you will have to take two required distributions during
What in the World is Going On?
Quote of the Week “Always go to other people’s funerals, otherwise they won’t come to yours.” – Yogi Berra Technical Corner U.S. stocks reached another record high, rising for the sixth straight week, the longest streak in two years. While trade negotiations remain fluid, the prospect of a limited trade deal between the U.S. and China has been the key driver of the market rally over the past month. Global economic data remains mixed, with softer October retail sales and industrial production in China, but firmer than expected eurozone GDP decline that is starting to slow in its descent. As I have said before, it would surprise me if there will be a limited trade deal with China. As I read the issues, the hang-up still is the issue of China requiring U.S. companies doing business in China to share their technology with China. Plus, China still wants to steal our technology, subsidize Chinese companies to compete against our companies, and at any time manipulate their currency. U.S. stock market valuations are stretched, and economic indicators are still going in the wrong direction. Hedgeye, the company we use to allocate your portfolios, is now projecting 0.31% growth in the GDP for the fourth quarter, down substantially from the third quarter. Larry’s Thoughts What in the World Is Going On? The yield curve inverted recently. The definition of an inverted yield curve reflects a scenario in which short term debt instruments have higher yields than long term instruments. Typically, long term bonds have higher yields than short term bonds. An inverted yield curve is often seen as an indicator of an impending recession. In real terms, the interest rate on the 2-year U.S. Treasury note has exceeded the interest on the 10-year U.S. Treasury bond. The inverted yield curve has preceded six out of the last six recessions. The lead time from when the yield curve inverts and a recession starts is between nine to 22 months. Certainly, this indicator is a warning of falling growth. But there are some other fundamental leading indicators that are also meaningful. The following are some indicators that I find pertinent. The financial and retail sectors started underperforming the S&P 500 before the 2007 market top, and they are doing it again. Financials peaked in February 2018 and have largely underperformed ever since. The retail sector peaked in July 2018 and has underperformed even more so since. Retail Sales Control Group is down again in October by 0.40%. Amazon has underperformed the S&P 500 since June 2018 and is down 5.7% over the last six months. RV sales peaked in 2017 and have accelerated down 20% year over year into 2019. RV sales also led the October 2007 top and January 2008 recession by almost two years, which should put the recession starting in 2020. The Consumer Discretionary sector has also been underperforming the Consumer Staples sector since June 2018, meaning consumers are increasingly buying what they need, not what they want. Consumer confidence has continued to rise since 2014, while GDP growth peaked and has been steadily declining. Those two have rarely diverged that long. Yet, consumer sentiment from the Michigan Survey has dropped from over 100 to 95 in the last few months. Elsewhere, there are other reports of high-end consumer spending falling, including real estate in the hottest areas from London to Manhattan to San Francisco. High end auto purchases are getting record discounts. There are many other indicators such as Industrial Production, Manufacturing Production, Corporate Earnings, on and on that are falling. Obviously, no one can predict the future, but the indicators are trending down while the stock market is going up. As an old friend told me once, “what can’t go on forever, won’t.” Please Note: There will not be an edition of Your Money / Our Thoughts next week. We wish you and yours a very pleasant Thanksgiving.
Are You Curious?
Quote of the Week “What do you plan to do with the rest of your wild and precious life? It is never a waste spending time with someone you love.” – Unknown Technical Corner Stocks extended their recent gains, finishing higher for the fifth straight week. Treasury yields climbed to their highest level in three months. This rise in yields has hurt our portfolios since our great month in August, where yields hit their low. Remember yields often times trend higher when the stock market is trending higher. I will say that a portfolio manager we use and I respect says that yields should drop substantially next year which would be good for the way we are positioned. The make up of our portfolios is mostly bonds, so we have been giving back some of the August gains. When yields decline, bond prices rise, and when yields increase bond prices decline. We have moved from Quadrant 4 to Quadrant 3 for the economy recently. Quadrant 4 is when growth is slowing and inflation is declining. This is the worst quadrant for the stock market and the best for bonds. Quadrant 3 is growth declining and inflation increasing or in other words, Stagflation. History has shown that the stock market usually tops during Quadrant 3. We have gotten a buy signal on the Energy sector due to increasing inflation, so we will be lightening up somewhat on bonds and adding Energy this week to the portfolios. Hedgeye, our main source of investment information, is predicting a 1% growth rate for the GDP in the fourth quarter of this year, which is down from 1.9% growth for the third quarter of this year. The prediction is that we will remain in Quadrant 3 for the final quarter of this year and the first quarter in 2020. Then according to their data driven algorithms we will slip back into Quadrant 4 in the second quarter of 2020 and possibly move to a negative GDP. A lot can happen between now and then, but we are remaining conservative as stock market valuations are stretched to the upside. I don’t want to chase the stock market and put your assets at risk of a sell-off. There are just too many things that could go wrong over the next year or so. When we get a green light that the economy is starting to bottom and expand, we will move back into the stock market. Larry’s Thoughts Recently I read an article in the Arizona Daily Star by Bill Nordbrock, who is the vice president of community relations or SCORE Southern Arizona, a nonprofit that offers free small business counseling and mentoring by appointment. I have always felt that successful people have a strong sense of curiosity. I hope you enjoy his opinions. I think he is “right on” with his thoughts. The following appeared in the October 28, 2019 edition of the Arizona Daily Star as the Biz Tip of the week. BY SPECIAL TO THE ARIZONA DAILY STAR Most children are inquisitive and they ask a lot of questions. For some reason, as people mature they begin to accept things. They neglect the sense of wonder they once had. Maintaining a sense of curiosity as an adult can be beneficial in many ways. The most brilliant minds in history had one thing in common. They were curious people with an insatiable appetite to know more. Certainly the quest for knowledge will make you smarter. In addition, curious people are always thinking and their minds are active. The more you use your brain, the stronger it becomes. Over time, curious people tend to be better problem solvers. They see solutions that most people do not. Curious people do not accept how things appear on the surface. They are always looking for better ways. Sometimes this quest for improvement leads to improved productivity. Sometimes it exposes amazing new opportunities and innovations. Curious people tend to be better listeners, too. They have a genuine interest in learning from the people around them. This interest is noticeable and it is appreciated. They also ask interesting questions, which spark engaging discussions. As a result, curious people tend to have stronger relationships. What physiological effects does curiosity have on the human body? Several studies have shown small amounts of dopamine are released in the brain when curios people solve a problem or discover something new. Dopamine has been shown to reduce the risk of Alzheimer’s, Parkinson’s and depression. Healthy levels of dopamine are vital for concentration, motivation, productivity and confidence. As a result, curious people tend to be happier and healthier. How do you increase your curiosity level? Become interested in people around you. Ask questions, listen and learn from them. Make a conscious effort to explore things you are not interested in. Find something you take for granted and ask yourself ‘why?’
When a Loved One Dies
Quote of the Week “If you want to grow old as a pilot, you’ve got to knowwhen to push it and when to back off.” – Chuck Yeager Technical Corner U.S. stocks climbed to fresh record highs after the October jobs report showed that the economy added more jobs than expected despite the negative impact from the GM worker strike and the loss of temporary U.S. Census jobs. On the surface, this report tends to look good. But if you look under the hood, most of the jobs created were in the service sector and especially in the hospitality area, which are generally lower paying jobs. Manufacturing jobs that are higher paying continued to decline. The Federal Reserve cut interest rates for the third time this year and signaled a pause in lowering rates to assess economic conditions. While economic growth has slowed, as the third quarter GDP estimate showed last week (from 2.0% to 1%), the forward looking GDP growth rate as estimated from the software we use is growth slowing to 1% growth in the fourth quarter. This is not good. We will know more in January of next year. Our software has the economy moving into a period of stagflation in this quarter. This is signaled by growth continuing to slow and inflation increasing. This is a time to be cautious. Because inflation is increasing, we will be taking a position in energy soon. We will maintain our other positions as they tend to do well in this type of environment. As the jobs report hinted that the economy is expanding, the economic picture was not all rosy. In fact, consumers looked like the only highlight, with business investments and exports subtracting from third quarter growth. In contrast to consumers, business sentiment has been notably downbeat, reflecting weakness in manufacturing. Also released last week was the IHS Purchasing Managers’ index, a measure of sentiment in the manufacturing sector. It was softer than expected and continued to show signs of contraction in goods production. We see manufacturing as a key pocket of weakness with the tariffs being the primary cause. Just think about it; if you were a manufacturer, would you be planning on expanding production with the uncertainty of what Mr. Trump will do next? The “China Deal” isn’t going to solve the underlying problems of China stealing our technology or China hacking our corporations. All it will represent is China buying more soybeans and pork from U.S. farmers. The damage has already been done to world commerce. Tom’s Thoughts Death of a Family Member Checklist This is not one of the cheeriest of subjects. Realistically, however, it is one that will confront all of us at some time. Accordingly, the following checklist (prepared by Broadridge Investor Communications Solutions, Inc.) may be helpful in attending to those matters that must be addressed when the time arises. Some of the following tasks may have to be completed by the estate’s executor. Initial tasks Within 3 to 9 months after death Within 9 to 12 months after death If your loved one was a veteran, you may be eligible for burial and memorial benefits. Call 1-800-827-1000 to find the nearest VA regional office. Duplicate copies of marriage and birth certificates are available at the county clerk’s office where the marriage and births occurred. Veterans and the next of kin of deceased veterans can submit an online request for separation documents and other service personnel records via eVetRecs, a service available through the National Archives at archives.gov. If there is no one authorized to open your loved one’s safe-deposit box, petition the probate court for an order to open. Do not be hasty when settling your loved one’s estate. Important decisions need to be made regarding distributions, which must be made in compliance with the will and applicable laws. Seek an experienced estate planning attorney for advice. If your family member didn’t already make final arrangements or leave final instructions, go to www.funerals.org for some helpful information about funerals, burials, and memorial services. How Lof Advisors can help Many of the tasks on this checklist involve accessing important documents. Lof Advisors has implemented an electronic document vault service that is complimentary to clients and their families. The service allows us to securely store important client documents and to retrieve them when needed. To find out more give us a call at 520-881-2523.
