Quote of the Week

“The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.” H.P. Lovecraft

Technical Corner

We are in the thick of it. We are getting battered by the vagaries of the markets. Nothing makes sense because Treasury yields are at, or close to all-time lows, equities are on the rise primarily driven by eight or nine stocks (FAANG), the pandemic laid upon the country, and the Fed is stretching its tentacles into all parts of the fixed-income markets. Corporate bonds, high yield bonds, and mortgage bonds yields are all compressing versus Treasury yields courtesy of the Fed’s intervention to backstop their obvious risk. If we were in one of those concrete trucks, where the back end is going around, it couldn’t be much worse than how we are presently getting knocked around.

US corporate bankruptcy filings are now running at a record pace and are set to surpass levels reached during the financial crisis known as “The Great Recession” of 2008-2009. For companies with liabilities over $50 million, 157 have filed for bankruptcy already this year, and it is predicted that more will follow, perhaps significantly more. Charles Tatelbaum, a Director at the law firm of Tripp Scott, has indicated that reorganizations (Chapter 11 bankruptcies) have only just begun. Just take a look at retail, the travel industry, hotels, restaurants, commercial office space, and the REITs connected to them.

In the retail sector, companies with assets of over $50 million, 24 have filed for bankruptcy, which is triple the amount of last year. Also, check out the energy industry where 33 filings have taken place as compared to 14 filings last year. Look around you and then note the equity markets, as well as the bond markets and the real estate markets given all this bad data, are doing as well as they are.

Thank you, Jerome Powell, the head of the Fed.

Another area that really concerns me is pension funds. 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. The total funding gap for the 143 largest US public pension plans is on track to reach $1.62 trillion this year, significantly higher than the $1.16 trillion recorded in 2009, according to the Equable Institute, a New York based non-profit think tank.

The weak financial condition of the US public pension systems poses severe risks for the living standards of millions of employees and retired workers and the bondholders of these funds. Equable estimates that returns of US public pension plans averaged -0.4 % over the 12-month ended June 30, well below the 7.2% targeted by these plans. This dire performance has contributed to the aggregate funded ratio, asset as a share of liabilities, sinking to 67.9 percent.

The largest share of unfunded liabilities is in New York, California, Illinois, New Jersey, Texas, and Pennsylvania. The total amount of the damage is $693 billion.

Besides state pension funds, I would also be looking at your exposure to the pension funds of the municipalities. It is almost impossible to raise taxes now to meet those obligations as the pandemic sweeps both people and governments off of their feet.

Our historically low-interest-rate environment, engineered by the Fed to keep the country’s borrowing costs at levels just off of Zero, has been the major boon for all of the markets, including the equity markets. When there is no yield available, in almost any sector, then bond money flows into stocks. But when the equity market corrects, which it inevitably will at some point, then “Katie bar the door.”

At some point the cement truck will stop spinning.

Sue’s Thoughts   

Has the Coronavirus kept you home more often than you’d prefer?  Are you serving more home-cooked meals instead of dining out? Is your savings account growing due to little travel and vacations on hold? If you answered yes, you might consider passing on your excess cash to those lucky people on your holiday gift list this coming December. However, before you make someone extremely happy with a big fat check, think about Uncle Sam’s portion of the present: the gift tax.

I just made a gift. Do I have to file a gift tax return?

A federal gift tax return must be filed if any gifts you made during the calendar year were other than:

  • Gifts to your US citizen spouse
  • Gifts to a political organization for its own use
  • Gifts to qualified charities, if no other interest has been transferred for less than adequate consideration or for other than a charitable use
  • Gifts totaling $15,000 (in 2019 and 2020) or less to any one individual, unless you and your spouse are “gift-splitting”
  • Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual

However, you may want to file a gift tax return in certain circumstances even if the rules do not require it. For example, you should consider filing whenever you sell hard-to-value assets, such as real estate or stock in a family business, to a relative. This is because the IRS can claim that transactions between family members were actually gifts in disguise. Disclosing such transactions on a gift tax return means that the IRS has only three years to challenge the value.

If you file a federal gift tax return, you must use Form 709 and file by April 15 of the year following the year in which the gift was made.

The federal gift tax rules are complex. If you believe you have made gifts that might be subject to gift tax, you should consult an experienced tax specialist. Check with your state about its own rules regarding gifts, too.

Copyright 2020 Broadridge Investor Communication Solutions, Inc

 

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These are the opinions of Larry Lof and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the US economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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