Failures
Almost all small businesses have suffered due to the Covid-19 pandemic, but some industries— particularly personal services, hotels and restaurants …
Is it Time?
You have worked really hard for your money, so we would never make critical decisions in your portfolio based on worthless information.
Volatility
Some of these stocks have had pretty significant declines, so they may continue to weigh the market down.
Bubbles
Wildly exaggerated stock stories force a de-linking between fundamental analysis and share prices.
Deja Vu?
Now we sit here on September 1st, and there is no “Cavalry” riding to the rescue.
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
