Quote of the Week

“Develop a passion for learning. If you do, you will never cease to grow.” – Anthony J. D’Angelo

Tech Corner

Another good week in Quad II land. Last week the markets were led by the Nasdaq up +2.71%, with the Dow trailing the indexes at up +0.40%. The out performance of the Nasdaq is typical of Quad II. Small Caps are the place to be in Quad II and the Nasdaq is full of small cap stocks. Quad II is also good for inflation sensitive assets such as commodities. At the moment you can see for yourself when you go the gas station or the grocery store that inflation is trending up. We are positioned accordingly.

U.S. Gross Domestic Product (GDP) grew at an annualized pace of just +2% last quarter, slowing from the prior quarter’s +6.7%. Concerns over the Delta variant slowed demand and the return of workers to the labor force. Automobile sales sliced 2.4% off overall growth as motor vehicles and parts sales plunged -17.6%. Add supply chain bottlenecks to the mix and you can see why growth slowed.

To blame new car sales and broader supply challenges alone would be unfair. Initial estimates were for high single digit growth in the third quarter, and those estimates were reduced consistently. The Delta variant contributed to slowing economic activity by making it riskier for consumers to venture out. Restaurants and other service organizations are having a hard time finding workers, and the labor shortage may have contributed more to the slowdown than sluggish demand.

Growth is expected to bounce back sharply in the fourth quarter. Economists anticipate some improvement in supply chain challenges. COVID-19 cases are declining and we are slowly reaching vaccination milestones. The approval of the vaccine for children in the younger age group should also help. Inventories have also been tapped out for supply in recent quarters. Manufacturers will most likely increase production for immediate sale and to provide adequate inventory for future demand.

We are currently encouraged about the investment future.

Larry’s Thoughts

 Rich Turning to Loans from Their Securities Accounts for Tax-Free Money

I’m sure you have been bombarded on the news programs during the negotiations on “The Build Back America Plan” in Congress about the fact that the rich don’t pay any taxes.

The ultra-wealthy, flush with accumulated assets since the pandemic started, have begun financing their income with “bank of me” margin loans that use securities as collateral.

This move also comes with surprisingly few tax ramifications when executed correctly. Many of the biggest players on Wall Street, including giants like Goldman Sachs, are rapidly growing their lending business, gaining access to a new group of affluent investors in the process.

These borrowing strategies are no different than using a home equity line of credit to access accumulated equity in your house. Rich investors can use a wide variety of strategies to access income by leveraging assets they own without triggering taxes. The simplest form is “borrowing on margin” through their investment accounts.

Let’s say you are Jeff Bezos, the founder of Amazon. You have billions of Amazon stock in your brokerage account. You would simply use the value of your Amazon stock as collateral for a margin loan from your brokerage firm.

So, you would borrow against your Amazon stock to provide you with the income you need for your expenses including the maintenance on your yacht and other necessary expenses to maintain your lifestyle. In theory you never have to pay back to loan. You just have to pay the interest. The interest rate is extremely low. Interactive Brokers will currently loan the money at 0.86%. You also get to keep the Amazon stock in your portfolio to probably continue to appreciate in value.

Under normal circumstances for most investors if you needed to take money from your investment account for income you would have to sell some stocks or bonds and pay capital gains taxes on the realized gains.

Now here is the final kicker, the interest you pay on the margin loan is tax deductible.

Pretty neat, huh?


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These are Larry Lof’s opinions 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 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.

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