Week of February 12, 2018

Quote of the Week

“Money will buy you a fine dog, but only love can make it wag its tail.”  –  Richard Elliott Friedman

Technical Corner

Last week was one of the worst weeks for the markets we have had in over two years. The Dow was down 5.21%, the S&P 500 was down 5.16%, and the NASDAQ was down 5.19%. This drop included Friday’s strong rally. For the year as of Friday’s close, the Dow is down 2.14%, the S&P 500 down 2.02%, and the NASDAQ down 0.42%. Fortunately, our portfolio for most clients is up for the year. This is due primarily to our approach of using mathematical algorithms embedded in the software we use to manage assets.

On Thursday of last week, I had a phone conversation with an asset manager for whom I have a great deal of respect. She brought up three market issues that I will explain. First, one thing to watch for is the level of the VIX. The VIX is a measure of volatility. She said that if the VIX gets above 50, it should correspond to about an 8% drop in the markets. We have experienced around a 10% drop from the highs for the year. The VIX got up to 55 last week and now sits at 49.03. Therefore, this is a moderate danger sign.

Second, she said that when the market started to decline the short sellers began to come out. When you sell a stock short, you are selling first and hoping to repurchase it at a lower price. Because there was an increase in short selling, that put downward pressure on the markets. It appears that the short selling abated on Friday when the market rallied during the last hour of trading. I think many short sellers do not like going into the weekend with a short position open and probably covered their short positions by buying the stock back, thus creating the rally late on Friday.

Third, the thing really to watch for is a drying up of credit. During the crash in 2008, a lot of people bought the toxic mortgage packages on margin meaning they borrowed money to make the purchase. When the mortgage market started to collapse, they got margin calls. The credit markets dried up when that happened so people could not borrow money to meet the margin calls. Therefore, they had to sell stocks and bonds to get the money to meet the margin calls. That caused the markets to go down in an ever-accelerating decline as more and more people were forced to sell if they were also buying stocks on margin. The good news now is that there is no pressure on credit or liquidity.

I personally think the markets are also suddenly worried about the staggering increase in the projected Federal deficit going forward because of the just passed Tax Cut and the proposed budget compromise in the House and Senate. Our deficit is projected to be over one trillion dollars per year going forward. The hope by the Republicans is that the tax cut will stimulate the economy and thus increase tax receipts. Time will tell. Remember the famous Yogi Berra quote: “Predicting is hard, especially about the future.”

The UPI for the S&P 500 remains the same at 18 out of 100. This is a good indicator for the market going forward. Our allocation for most clients remains the same: 85% equities, 0% bonds, 10% alternatives, and 5% cash.

Tom’s Thoughts  

Preparing Heirs

Are your heirs ready for an inheritance? Many people today have taken steps necessary to prepare their estates for heirs. But, have they prepared heirs for their estate? Will, trusts, beneficiary designations are all put in place to provide a smooth transition of wealth to heirs. That is the first half of the transition process. The second half is preparing the receivers of the wealth to deal with the effects of the asset transfer.

The Institute For Preparing Heirs in their whitepaper “Going Beyond The Money” (copyright 2014) puts it this way.

 “We are in the midst of the largest intergenerational transfer of wealth in history. According to Boston College Center of Wealth and Philanthropy, the conservative estimate calls for $41 trillion to pass from one party to another over the course of 50 years. The good news is that more individuals and families will be seeking help and advice from knowledgeable advisors on how to successfully share their wealth with those they love and care for. The bad news is that over time many (70%*) wealth transfers are not successful. Ruptures in family harmony, derailed lives, increased conflict, and depletion of resources (due to, for example, treatment of addiction, divorce costs, foolish investments, etc.) erode the money successfully stewarded to the next generation.”

It is important to consider family dynamics to assure that assets pass to individuals who are prepared for all that an inheritance encompasses. Having family meetings to talk about what will happen both before and after an estate is in transition is a good place to start the preparation process. The purpose of these meetings is not to discuss the amount of the estate. Rather, the purpose is to address family dynamics, head off any obstacles to a smooth transition and to promote the cohesiveness of estate into the future. Lof Advisors is ready to help clients set up and facilitate having a family meeting.

*Vic Preisser & Roy Williams, “The Future of Estate Planning,” Trust and Estate Magazine June 2010

By the Numbers

CORRECTIONS AND BEARS – In the 50 years from February 1968 to February 2018, the S&P 500 has had 19 declines of at least 10% but less than 20% or once every 2.6 years, including last week’s10.2% drop through Thursday 2/08/18. A correction is defined as a stock market decline of at least 10% but less than 20%. In the 50 years from February 1968 to February 2018, the S&P 500 has had 7 declines of at least 20% or once every 7.1 years. A bear is defined as a stock market decline of at least 20% (source: BTN Research). Michael A. Higley, BTN 02-13-2018

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These are the opinions of Larry Lof and Stephanie Mayoral 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 U.S. 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. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Laurence Lof Financial Advisors, LLC are not affiliated. Laurence Lof Financial Advisors 4757 E Camp Lowell Drive Tucson AZ 85712     [email protected]


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