Posts tagged ‘Financial Planning’

Recovering from the Coma

cpr

The patient, the U.S. economy, is sick and remains in a coma. Although the patient was never healthier six weeks ago, now the economy has fallen victim to a worldwide pandemic that has knocked the global economy on its back. On the surface, the physical impact of coronavirus on the health of the 330 million Americans seems relatively modest statistically (4,394 deaths vs. 45,000 estimated common flu deaths this season). However, in order to kill this insidious novel coronavirus, which has spread like wildfire across 200 countries, governments have been forced to induce the economy into a coma, by closing schools, halting sporting events, creating social distancing guidelines, instituting quarantines/lockdowns, and by shutting down large non-essential swaths of the economy (e.g., restaurants, retail, airlines, cruises, hotels, etc.). We have faced and survived other epidemics like SARS (2003-04), H1N1 (2009-10), MERS (2012), and Ebola (2014-16), but the pace of COVID-19 spreading has been extraordinarily rapid and has created dramatic resource drains on healthcare systems around the world (including New York with approximately 75,000 cases alone). The need for test kits, personal protective equipment, and ventilators, among other demands has hit the U.S. caregiving system especially hard.

Given the unique characteristics of this sweeping virus, U.S. investors were not immune from the economic impact. The swift unprecedented downdraft from all-time record highs has not been seen since the October 1987 crash. And although the major indexes experienced an illness this month (Dow Jones Industrial Average -13.7%; S&P 500 -12.5%; NASDAQ -10.1%), the nausea was limited in large part thanks to trillions of dollars in unparalleled government intervention announced in the form of monetary and fiscal stimulus.

Healing the Patient

While the proliferation of the viral outbreak has been painful in many ways from a human and financial perspective, the beneficial impact of the medicine provided to the economic patient by the Federal Reserve and federal government through the Coronavirus Aid, Relief, and Economic Security (CARES) act cannot be overstated. The measures taken will provide a temporary safety net for not only millions of businesses, but also millions of workers and investors. Although last month many investors felt like vomiting when they looked at their investment account balances, gratefully the period ended on an upbeat note with the Dow bouncing +20% from last week’s lows.

Fed Financial Fixes

Here is a partial summary of the extensive multi-trillion dollar emergency measures taken by the Federal Reserve to keep the financial markets and economy afloat:

  • Cut interest rates on the benchmark Federal Funds target to 0% – 0.25% from 1% – 1.25%.
  • Make $1 trillion available in 14-day loans it is offering every week.
  • Make $1 trillion of overnight loans a day available.
  • Purchase an unlimited amount of Treasury securities after initially committing to $500 billion.
  • Purchase an unlimited amount of mortgage-backed securities after initially committing to at least $200 billion.
  • Provide $300 billion of financing to employers, consumers, and businesses. The Department of the Treasury will provide $30 billion in equity to this financing via the Exchange Stabilization Fund (ESF).
  • Establish two lending facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
  • Create the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses, including student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA).
  • Expand the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) to include a wider range of securities.

Corona CARE to Country

Here is a limited summary of the sprawling $2.1 trillion bipartisan stimulus legislation that was recently passed by Congress (see summary and table below):

  • Direct Payments: Americans who pay taxes will receive a one-time direct deposit of up to $1,200, and married couples will receive $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples, and phase out completely at $99,000 and $198,000, respectively.
  • Unemployment: The program provides $250 billion for an extended unemployment insurance program and expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay. It also extends UI benefits through Dec. 31 for eligible workers. The deal also applies to the self-employed, independent contractors and gig economy workers.
  • Payroll Taxes: The measure allows employers to delay the payment of their portion of 2020 payroll taxes until 2021 and 2022.
  • Use of Retirement Funds: The bill waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to roll it back in.
  • Small Business Relief: $350 billion is being earmarked to preventing layoffs and business closures while workers need to stay home during the outbreak. Companies with 500 employees or fewer that maintain their payroll during coronavirus can receive up to 8 weeks of financial assistance. If employers maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.
  • Large Corporations: $500 billion will be allotted to provide loans, loan guarantees, and other investments, these will be overseen by a Treasury Department inspector general. These loans will not exceed five years and cannot be forgiven. Airlines will receive $50 billion (of the $500 billion) for passenger air carriers, and $8 billion for cargo air carriers.
  • Hospitals and Health Care: The deal provides over $140 billion in appropriations to support the U.S. health system, $100 billion of which will be injected directly into hospitals. The rest will be dedicated to providing personal and protective equipment for health care workers, testing supplies, increased workforce and training, accelerated Medicare payments, and supporting the CDC, among other health investments.
  • Coronavirus Testing: All testing and potential vaccines for COVID-19 will be covered at no cost to patients.
  • States and Local Governments: State, local and tribal governments will receive $150 billion. $30 billion is set aside for states, and educational institutions. $45 billion is for disaster relief, and $25 billion for transit programs.
  • Agriculture: The deal would increase the amount the Agriculture Department can spend on its bailout program from $30 billion to $50 billion.

cares act

Source: The Wall Street Journal

Patient Requires Patience

As we enter the new 30-day extension of social distancing guidelines until April 30th, there is good news and bad news for the patient as the economy recovers from its self-induced coma. On the good news front, their appears to be a light at the end of the tunnel with respect to the spread of the virus. Enough data has been collected from countries like China, S. Korea, Italy, and our own, such that statisticians appear to have a better handle on the trajectory of the virus.

More specifically, here are some positive developments:

  • Peak Seen on April 14th: According to the IMHE model that the White House is closely following, the number of COVID-19 deaths is projected to peak in two weeks.

curve project cases

Source: IHME

  • Testing Ramping: The United States definitely got off to a slow start in the virus testing department, but as you can see from the chart below, COVID-19 tests are ramping significantly. Nevertheless, the number of tests still needs to increase dramatically until the percent of “positive” test results declines to a level of 5% or lower, based on data collected from South Korea. In another promising development, Abbott Laboratories (ABT) received emergency approval from the FDA for a rapid point-of-care test that produces results in just five minutes.

tests per day

Source: Calculated Risk

  • Closer to a COVID Cure: There are no Food and Drug Administration (FDA)-approved therapies or vaccines yet, but the FDA has granted emergency use authorization to anti-malarial drugs chloroquine phosphate and hydroxychloroquine sulfate to treat coronavirus patients. Patients are currently using these drugs in conjunction with the antibiotic azithromycin in hopes of achieving even better results. Remdesivir is a promising anti-viral treatment (also used in treating the Ebola virus) manufactured by Gilead Sciences Inc. (GILD), which is in Phase 3 clinical trial testing of the drug. If proven effective, broad distribution of remdesivir could be administered to COVID-19 patients in the not-too-distant future. Another company, Regeneron Pharmaceuticals (REGN), is working on clinical trials of its rheumatoid arthritis antibody drug Kevzara as a hopeful treatment. In addition, there are multiple companies, including Moderna Inc. (MRNA) and Johnson & Johnson (JNJ) that are making progress on coronavirus vaccines, that could have limited availability as soon as early-2021.

Darkest Before the Dawn

It is always darkest before the dawn, and the same principle applies to this coronavirus epidemic. Despite providing the patient’s medicine in the form of monetary and fiscal stimulus, time and patience is necessary for the prescription to take effect. As you can see from the chart below, the median total deaths projected is expected to rise to over 80,000 deaths by June 1st from roughly 4,000 today.

deaths curve project 2

Source: IHME

The physical toll will exceedingly become difficult over the next month, and the same can be said economically, especially for the hardest hit industries such as leisure, hospitality, and transportation. Just take a look at the -93% decline in airport travel versus a year ago (see chart below).

travel numbers

Source: Calculated Risk

The closure of restaurants, retail stores, and hotels, coupled with a cratering of travel has resulted in a more than a 1,000% increase in Americans filing for unemployment payments (see chart below – gray shaded regions correspond to recessions), and the unemployment rate is expected to increase from a near record-low 3.5% unemployment to a staggering 10% – 30% unemployment rate.

unemploymen claims

Source: Macrotrends

The spread of the incredibly debilitating COVID-19 virus has placed the economic patient into a self-induced coma. The financial and physical pain felt by the epidemic will worsen in the coming weeks, but fortunately the monetary stimulus, fiscal emergency relief, and social distancing guidelines are pointing to a predictable recovery in the not-too-distant future. Financial markets have survived wars, assassinations, recessions, impeachments, banking crises, currency crises, housing collapses, and yes, even pandemics. Each and every time, we have emerged stronger than ever…and I’m confident we will achieve the same result once COVID-19 is defeated.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, MRNA, JNJ, and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in ABT, REGN or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 1, 2020 at 4:44 pm 1 comment

Missing the Financial Forest for the Political Trees

forest

In the never-ending, 24/7, polarizing political news cycle, headlines of Ukraine phone calls, China trade negotiations, impeachment hearings, presidential elections, Federal Reserve monetary policy, and other Washington based stories have traders and news junkies glued to their phones, Twitter feeds, news accounts, blog subscriptions, and Facebook stories. However, through the incessant, deafening noise, many investors are missing the overall financial forest as they get lost in the irrelevant D.C. details.

Meanwhile, as many investors fall prey to the mesmerizing, but inconsequential headlines, financial markets have not fallen asleep or gotten distracted. The S&P 500 stock market index rose another +1.7% last month, and for the year, the index has registered a +18.7% return. As we enter the volatile fourth quarter, many stock market participants remain shell-shocked from last year’s roughly -20% temporary collapse, even though the S&P 500 subsequently rallied +29% from the 2018 trough to the 2019 peak.

Why are many people missing the financial forest? A big key to the significant rally in 2019 stock prices can be attributed to two words…interest rates. Unlike last year’s fourth quarter, when the Federal Reserve was increasing interest rates (i.e., tapping the economic brakes), this year the Fed is cutting rates (i.e., hitting the economic accelerator). Interest rates are a key leg to Sidoxia’s financial four-legged stool (see Don’t Be a Fool, Follow the Stool). Interest rates are at or near generational lows, depending where on the geographic map you reside. For example, interest rates on 10-year German government bonds are -0.55%. Yes, it’s true. If you were to invest $10,000 in a negative yielding -0.55% German bond for 10-years starting in 2019, if you held the bond until maturity (2029), the investor would get back less than the original $10,000 invested. In other words, many bond investors are choosing to pay bond issuers for the privilege of giving the issuers money for the unpalatable right of receiving less money in the future.

The unprecedented negative-yielding bond market is reaching epic proportions, having eclipsed $17 trillion globally (see chart below). This gargantuan and growing dollar figure of negative-yielding bonds defies common sense and feels very reminiscent of the panic buying of technology stocks in the late 1990s.

negative yield crop

Source: Bloomberg

At Sidoxia Capital Management, we are implementing proprietary fixed income strategies to navigate this negative interest rate environment. However, the plummeting interest rates and skyrocketing bond prices only make our bond investing job tougher. On the other hand, declining rates, all else equal, also make my stock-picking job easier. Nevertheless, many market participants have gotten lost in the financial trees. More specifically, investors are losing sight of the key tenet that money goes where it is treated best (go where yields are highest and valuations lowest). With many bonds yielding low or negative interest rates, bond investors are being treated like criminals forced to serve jail time and pay large fines because future returns will become much tougher to accrue. In my Investing Caffeine blog, I have been writing about how the stock market’s earnings yield (current approximating +5.5%) and the S&P dividend yield of about +1.9% are handily outstripping the +1.7% yield on the 10-Year Treasury Note (see Going Shopping: Chicken vs. Beef ).

Unless our economy falls into a prolonged recession, interest rates spike substantially higher, or stock prices catapult appreciably, then any decline in stock prices will likely be temporary. Fortunately, the economy appears to be chugging along, albeit at a slower rate. For instance, 3rd quarter GDP (Gross Domestic Product) estimates are hovering around +2.0%.

Low Rates Aid Housing Market

Thanks to low interest rates, the housing markets remain strong. As you can see from the chart below, new home sales continue to ratchet higher over the last eight years, and lower mortgage rates are only helping this cause.

new home sales

Source: Calafia Beach Pundit

The same tailwind of lower interest rates can be seen below with rising home prices.

house prices

Source: Calculated Risk

Consumer Flexes Muscles

At 3.7%, the unemployment rate remains low and the number of workers collecting unemployment is near multi-decade lows (see chart below).

weekly unemploy

Source: Calafia Beach Pundit

It should come as no surprise that the more employed workers there are collecting paychecks, the more consumer confidence will rise (see chart below). As you can see, consumer confidence is near multi-decade record highs.

con con

Source: Calafia Beach Pundit

Although politics continue to dominate headlines and grab attention, many investors are missing the financial forest because the political noise is distracting the irrefutable, positive effect that low interest rates is contributing to the positive direction of the stock market and the economy. Do your best to not miss the forest – you don’t want your portfolio to suffer by you getting lost in the trees.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

 

 

October 1, 2019 at 3:36 pm Leave a comment

Politics & Your Money

Congress - Capitol Building

Will you be able to retire, and what impact will the elections have on your financial future? Answering these questions can be a scary endeavor. And unless you have been living in a cave, you may have noticed we are in the middle of a heated U.S. presidential election campaign between Donald Trump and Hillary Clinton. Regardless of which side of the political fence you stand on, the prospects of your retirement are much more likely to be impacted by your personal actions than by the actions of Washington politicians.

Even if you despise politics and were living in a cave (with WiFi access), there’s a high probability you would be overloaded with detailed and dogmatic online editorials from overconfident Facebook friends. Besides offering self-assured predictions, these impassioned political pleas generally itemize the top 10 reasons your favorite candidate is a moron, and another 10 reasons why their candidate is the greatest.

Your friends’ opinions may have pure intentions, but unfortunately, rarely, if ever, do their thoughts alter your views.  A reference from a recent Legal Watercooler article summed it up best:

“Political Facebook rants changed my mind…said nobody, ever.”

 

Nearly as ineffectual as political Facebook opinions on your politics is the ineffectual influence of presidential elections on your finances. For example, over the last four decades, stock prices have gone up and down during both Republican and Democrat presidential terms. The picture looks much the same, if you analyze the fiscal performance of conservatives and liberals since 1970 – debt burdens as a percentage of economic output have risen and fallen under both political parties. No matter who wins the presidency, many investors forget the ability of that individual to affect change is highly dependent upon the political balance of power in Congress. If Congress holds a split majority in the House and Senate, or the opposition party commands the entire Congress, then the winning presidential candidate will be largely neutered.

Rather than panic over a political loss or celebrate a candidate’s victory, here are some tangible actions to improve your finances:

  • Organize. Typically individuals have investment and saving accounts scattered with no cohesive accounting or strategy. Get your financial house in order by gathering and organizing all your accounts.
  • Budget. Spend less than you take in. Or in other words…save. You can achieve this goal in one of two ways – cut your spending, or increase your income.
  • Create a Plan. When do you plan to retire? How much money do you need for retirement? What asset allocation and risk profile should you adopt to meet your financial goals?

If you have difficulty with any of these actions, then meet with an experienced financial professional to assist you.

Politics can trigger very emotional responses. However, realizing your actions have a much more direct impact on your finances than political Facebook rants and temporary elections will benefit you in achieving your long-term financial goals.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds and FB, but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 23, 2016 at 10:41 pm 4 comments

Cleaning Out Your Investment Fridge

moldy cheese

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2016). Subscribe on the right side of the page for the complete text.

Summer is quickly approaching, but it’s not too late to do some spring cleaning. This principle not only applies to your cluttered refrigerator with stale foods but also your investment portfolio with moldy investments. In both cases, you want to get rid of the spoiled goods. It’s never fun discovering a science experiment growing in your fridge.

Over the last three months, the stock market has been replenished after a rotten first two months of the year (S&P 500 index was down -5.5% January through February). The +1.5% increase in May added to a +6.6% and +0.3% increase in March and April (respectively), resulting in a three month total advance in stock prices of +8.5%. Not surprisingly, the advance in the stock market is mirroring the recovery we have seen in recent economic data.

After digesting a foul 1st quarter economic Gross Domestic Product (GDP) reading of only +0.8%, activity has been smelling better in the 2nd quarter. A recent wholesome +3.4% increase in April durable goods orders, among other data points, has caused the Atlanta Federal Reserve Bank to raise its 2nd quarter GDP estimate to a healthier +2.9% growth rate (from its prior +2.5% forecast).

Consumer spending, which accounts for roughly 70% of our country’s economic activity, has been on the rise as well. The improving employment picture (5.0% unemployment rate last month) means consumers are increasingly opening their wallets and purses. In addition to spending more on cars, clothing, movies, and vacations, consumers are also doling out a growing portion of their income on housing. Housing developers have cautiously kept a lid on expansion, which has translated into limited supply and higher home prices, as evidenced by the Case-Shiller indices charted below.

case shiller 2016

Source: Bespoke

Spoiling the Fun?

While the fridge may look like it’s fully stocked with fresh produce, meat, and dairy, it doesn’t take long for the strawberries to get moldy and the milk to sour. Investor moods can sour quickly too, especially as they fret over the impending “Brexit” (British Exit) referendum on June 23rd when British voters will decide whether they want to leave the European Union. A “yes” exit vote has the potential of roiling the financial markets and causing lots of upset stomachs.

Another financial area to monitor relates to the Federal Reserve’s monetary policy and its decision when to further increase the Federal Funds interest rate target at its June 14th – 15th meeting. With the target currently set at an almost insignificantly small level of 0.25% – 0.50%, it really should not matter whether Chair Janet Yellen decides to increase rates in June, July, September and/or November. Considering interest rates are at/near generational lows (see chart below), a ¼ point or ½ point percentage increase in short-term interest rates should have no meaningfully negative impact on the economy. If your fridge was at record freezing levels, increasing the temperature by a ¼ or ½ degree wouldn’t have a major effect either. If and when short-term interest rates increase by 2.0%, 3.0%, or 4.0% in a relatively short period will be the time to be concerned.

10 yr

Source: Scott Grannis

Keep a Fresh Financial Plan

As mentioned earlier, your investments can get stale too. Excess cash sitting idly earning next-to-nothing in checking, savings, CDs, or in traditional low-yielding bonds is only going to spoil rapidly to inflation as your savings get eaten away. In the short-run, stock prices will move up and down based on frightening but insignificant headlines. However, in the long-run, the more important issues are determining how you are going to reach your retirement goals and whether you are going to outlive your savings. This mindset requires you to properly assess your time horizon, risk tolerance, income needs, tax situation, estate plan, and other unique circumstances. Like a balanced diet of various food groups in your refrigerator, your key personal financial planning factors are dependent upon you maintaining a properly diversified asset allocation that is periodically rebalanced to meet your long-term financial goals.

Whether you are managing your life savings, or your life-sustaining food supply, it’s always best to act now and not be a couch potato. The consequences of sitting idle and letting your investments spoil away are a lot worse than letting the food in your refrigerator rot away.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 4, 2016 at 8:00 am Leave a comment

Want to Retire at Age 90?

sleep sit 90

Do you love working 40-50+ hour weeks? Do you want to be a Wal-Mart (WMT) greeter after you get laid off from your longstanding corporate job?  Do you love relying on underfunded government entitlements that you hope won’t be insolvent 10, 20, or 30 years from now? Are you banking on winning the lottery to fund your retirement? Do you enjoy eating cat food?

If you answered “Yes” to one or all of these questions, then do I have a sure-fire investment program for you that will make your dreams of retiring at age 90 a reality! Just follow these three simple rules:

  • Buy Low Yielding, Long-Term Bonds: There are approximately $7 trillion in negative yielding government bonds outstanding (see chart below), which as you may understand means investors are paying to give someone else money – insanity. Bank of America recently completed a study showing about two-thirds of the $26 trillion government bond market was yielding less than 1%. Not only are investors opening themselves up to interest rate risk and credit risk, if they sell before maturity, but they are also susceptible to the evil forces of inflation, which will destroy the paltry yield. If you don’t like this strategy of investing near 0% securities, getting a match and gasoline to burn your money has about the same effect.

negative bonds apr 16

Source: Financial Times

  • Speculate on the Timing of Future Fed Rate Hikes/Cuts: When the economy is improving, talking heads and so-called pundits try to guess the precise timing of the next rate hike. When the economy is deteriorating, aimless speculation swirls around the timing of interest rate cuts. Unfortunately, the smartest economists, strategists, and media mavens have no consistent predicting abilities. For example, in 1998 Nobel Prize winning economists Robert Merton and Myron Scholes toppled Long Term Capital Management. Similarly, in 1996 Federal Reserve Chairman Alan Greenspan noted the presence of “irrational exuberance” in the stock market when the NASDAQ was trading at 1,350. The tech bubble eventually burst, but not before the NASDAQ tripled to over 5,000. More recently, during 2005-2007, Fed Chairman Ben Bernanke whiffed on the housing bubble – he repeatedly denied the existence of a housing problem until it was too late. These examples, and many others show that if the smartest financial minds in the room (or planet) miserably fail at predicting the direction of financial markets, then you too should not attempt this speculative feat.
  • Trade on Rumors, Headlines & Opinions: Wall Street analysts, proprietary software with squiggly lines, and your hot shot day-trader neighbor (see Thank You Volatility) all promise the Holy Grail of outsized financial returns, but regrettably there is no easy path to consistent, long-term outperformance. The recipe for success requires patience, discipline, and the emotional wherewithal to filter out the endless streams of financial noise. Continually chasing or reacting to opinions, headlines, or guaranteed software trading programs will only earn you taxes, transaction costs, bid-ask spread costs, impact costs, high frequency trading manipulation and underperformance.

Saving for your future is no easy task, but there are plenty of easy ways to destroy your savings. If you want to retire at age 90, just follow my three simple rules.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in WMT or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 16, 2016 at 11:00 am 1 comment

Investors Take a Vacation

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 3, 2015). Subscribe on the right side of the page for the complete text.

It’s summertime and the stock market has taken a vacation, and it’s unclear when prices will return from a seven month break. It may seem like a calm sunset walk along the beach now that Greek worries have temporarily subsided, but concerns have shifted to an impending Federal Reserve interest rate hike, declining commodity prices, and a Chinese stock market crash, which could lead to a painful sunburn.

If you think about it, stock investors have basically been on unpaid vacation since the beginning of the year, with the Dow Jones Industrial Index (17,690) down -0.7% for 2015 and the S&P 500 (2,104) up + 2.2% over the same time period (see chart below). Despite mixed results for the year, all three main stock indexes rebounded in July (including the tech-heavy NASDAQ +2.8% for the month) after posting negative returns in June. Overall for 2015, sector performance has been muddled. There has been plenty of sunshine on the Healthcare sector (+11.7%), but Energy stocks have been stuck in the doldrums (-13.4%), over the same timeframe.

Source: Yahoo! Finance

Chinese Investors Suffer Heat Stroke

Despite gains for U.S. stocks in July, the overheated Chinese stock marketcaused some heat stroke for global investors with the Shanghai Composite index posting its worst one month loss (-15%) in six years, wiping out about $4 trillion in market value. Before coming back down to earth, the Chinese stock market inflated by more than +150% from 2014.

Driving the speculative fervor were an unprecedented opening of 12 million monthly accounts during spring, according to Steven Rattner, a seasoned financier, investor, and a New York Times journalist. Margin accounts operate much like a credit card for individuals, which allowed these investors to aggressively gamble on the China market upswing, but during the downdraft investors were forced to sell stocks to generate proceeds for outstanding loan repayments. It’s estimated that 25% of these investors only have an elementary education and a significant number of them are illiterate. Further exacerbating the sell-off were Chinese regulators artificially intervening by halting trading in about 500 companies on the Shanghai and Shenzhen exchanges last Friday, equivalent to approximately 18% of all listings.

Although China, as the second largest economy on the globe, is much more economically important than a country like Greece, recent events should be placed into proper context. For starters, as you can see from the chart below, the Chinese stock market is no stranger to volatility. According to Fundstrat Global Advisors, the Shanghai composite index has experienced 10 bear markets over the last 25 years, and the recent downdraft doesn’t compare to the roughly -75% decline we saw in 2007-2008. Moreover, there is no strong correlation between the Chinese stock market. Only 15% of Chinese households own stocks, or measured differently, only 6% of household assets are held in stocks, says economic-consulting firm IHS Global Insight. More important than the question, “What will happen to the Chinese stock market?,” is the question,  “What will happen to the Chinese stock economy?,” which has been on a perennial slowdown of late. Nevertheless, China has a 7%+ economic growth rate and the highest savings rate of any major country, both factors for which the U.S. economy would kill.

Source: Yardeni.com

Don’t Take a Financial Planning Vacation

While the financial markets continue to bounce around and interest rates oscillate based on guesswork of a Federal Reserve interest rate hike in September, many families are now returning from vacations, or squeezing one in before the back-to-school period. The sad but true fact is many Americans spend more time planning their family vacation than they do planning for their financial futures. Unfortunately, individuals cannot afford to take a vacation from their investment and financial planning. At the risk of stating the obvious, planning for retirement will have a much more profound impact on your future years than a well-planned trip to Hawaii or the Bahamas.

We live in an instant gratification society where “spend now, save later” is a mantra followed by many. There’s nothing wrong with splurging on a vacation, and to maintain sanity and family cohesion it is almost a necessity. However, this objective does not have to come at the expense of compromising financial responsibility – or in other words spending within your means. Investing is a lot like consistent dieting and exercising…it’s easy to understand, but difficult to sustainably execute. Vacations, on the other hand, are easy to understand, and easy to execute, especially if you have a credit card with an available balance.

It’s never too late to work on your financial planning muscle. As I discuss in a previous article (Getting to Your Number) , one of the first key steps is to calculate an annual budget relative to your income, so one can somewhat accurately determine how much money can be saved/invested for retirement. Circumstances always change, but having a base-case scenario will help determine whether your retirement goals are achievable. If expectations are overly optimistic, spending cuts, revenue enhancing adjustments, and/or retirement date changes can still be made.

When it comes to the stock market, there are never a shortage of concerns. Today, worries include a Greek eurozone exit (“Grexit”); decelerating China economic growth and a declining Chinese stock market; and the viability of Donald’s Trump’s presidential campaign (or lack thereof). While it may be true that stock prices are on a temporary vacation, your financial and investment planning strategies cannot afford to go on vacation.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

August 3, 2015 at 10:51 am Leave a comment

Why Buy at Record Highs?  Ask the Fat Turkey

 

Turkey Stuffed

This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (December 1, 2014). Subscribe on the right side of the page for the complete text.

I’ve fulfilled my American Thanksgiving duty by gorging myself on multiple helpings of turkey, mash potatoes, and pumpkin pie. Now that I have loosened my belt a few notches, I have had time to reflect on the generous servings of stock returns this year (S&P 500 index up +11.9%), on top of the whopping +104.6% gains from previous 5 years (2009-2013).

Conventional wisdom believes the Federal Reserve has artificially inflated the stock market. Given the perceived sky-high record stock prices, many investors are biting their nails in anticipation of an impending crash. The evidence behind the nagging investor skepticism can be found in the near-record low stock ownership statistics; dismal domestic equity fund purchases; and apathetic investor survey data (see Market Champagne Sits on Ice).

Turkey-lovers are in a great position to understand the predicted stock crash expected by many of the naysayers. As you can see from the chart below, the size of turkeys over the last 50+ years has reached a record weight – and therefore record prices per turkey:

Source: The Atlantic

Source: The Atlantic

Does a record size in turkeys mean turkey meat prices are doomed for an imminent price collapse? Absolutely not. A key reason turkey prices have hit record levels is because Thanksgiving stomachs have been buying fatter and fatter turkeys every year. The same phenomenon is happening in the stock market. The reason stock prices have continued to move higher and higher is because profits have grown fatter and fatter every year (see chart below). Profits in corporate America have never been higher. CEOs are sitting on trillions of dollars of cash, and providing stock-investors with growing plump dividends (see also The Gift that Keeps on Giving), $100s of billions in shareholder friendly stock buybacks, while increasingly taking leftover profits to invest in growth initiatives (e.g., technology investments, international expansion, and job hiring).

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit 

Despite record turkey prices, I will make the bold prediction that hungry Americans will continue to buy turkey. More important than the overall price paid per turkey, the statistic that consumers should be paying more attention to is the turkey price paid per pound. Based on that more relevant metric, the data on turkey prices is less conclusive. In fact, turkey prices are estimated to be -13% cheaper this year on a per pound basis compared to last year ($1.58/lb vs. $1.82/lb).

The equivalent price per pound metric in the stock market is called the Price-Earnings (P/E) ratio, which is the price paid by a stock investor per $1 of profits (or earnings). Today that P/E ratio sits at approximately 17.5x. As you can see from the chart below, the current P/E ratio is reasonably near historical averages experienced over the last 50+ years. While, all else equal, anyone would prefer paying a lower price per pound (or price per $1 in earnings), any objective person looking at the current P/E ratio would have difficulty concluding recent stock prices are in “bubble” territory.

However, investor doubters who have missed the record bull run in stock market prices over the last five years (+210% since early 2009) have clung to a distorted, overpriced measurement called the CAPE or Shiller P/E ratio. Readers of my Investing Caffeine blog or newsletters know why this metric is misleading and inaccurate (see also Shiller CAPE Peaches Smell).

Don’t Be an Ostrich

denial

While prices of stocks arguably remain reasonably priced for many Baby Boomers and retirees, the conclusion should not be to gorge 100% of investment portfolios into stocks. Quite the contrary. Everyone’s situation is unique, and every investor should customize a globally diversified portfolio beyond just stocks, including areas like fixed income, real estate, alternative investments, and commodities. But the exposures don’t stop there, because in order to truly have the diversified shock absorbers in your portfolio necessary for a bumpy long-term ride, investors need exposure to other areas. Such areas should include international and emerging market geographies; a diverse set of styles (e.g., Value, Growth, Blue Chip dividend-payers); and a healthy ownership across small, medium, and large equities. The same principles apply to your bond portfolio. Steps need to be taken to control credit risk and interest rate risk in a globally diversified fashion, while also providing adequate income (yield) in an environment of generationally low interest rates.

While I’ve spent a decent amount of time talking about eating fat turkeys, don’t let your investment portfolio become stuffed. The year-end time period is always a good time, after recovering from a food coma, to proactively review your investments. While most non-vegetarians love eating turkey, don’t be an investment ostrich with your head in the sand – now is the time to take actions into your own hands and make sure your investments are properly allocated.

Investment Questions Border

 

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own a range of positions in certain exchange traded fund positions, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

December 1, 2014 at 1:49 pm Leave a comment

Time for Your Retirement Physical

This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (October 1, 2014). Subscribe on the right side of the page for the complete text.

As a middle-aged man, I’ve learned the importance of getting my annual physical to improve my longevity. The same principle applies to the longevity of your retirement account. With the fourth quarter of the calendar year officially underway, there is no better time to probe your investment portfolio and prescribe some recommendations relating to your financial goals.

A physical is especially relevant given all the hypertension raising events transpiring in the financial markets during the third quarter. Although the large cap biased indexes (Dow Jones Industrials and S&P 500) were up modestly for the quarter (+1.3% and +0.6%, respectively), the small and mid-cap stock indexes underperformed significantly (-8.0% [IWM] and -4.2% [SPMIX], respectively). What’s more, all the daunting geopolitical headlines and uncertain macroeconomic data catapulted the Volatility Index (VIX – aka, “Fear Gauge”) higher by a whopping +40.0% over the same period.

  • What caused all the recent heartburn? Pick your choice and/or combine the following:
  • ISIS in Iraq
  • Bombings in Syria
  • End of Quantitative Easing (QE) – Impending Interest Rate Hikes
  • Mid-Term Elections
  • Hong Kong Protests
  • Tax Inversions
  • Security Hacks
  • Rising U.S. Dollar
  • PIMCO’s Bill Gross Departure

(See Hot News Bites in Newsletter for more details)

As I’ve pointed out on numerous occasions, there is never a shortage of issues to worry about (see Series of Unfortunate Events), and contrary to what you see on TV, not everything is destruction and despair. In fact, as I’ve discussed before, corporate profits are at record levels (see Retail Profits chart below), companies are sitting on trillions of dollars in cash, the employment picture is improving (albeit slowly), and companies are finally beginning to spend (see Capital Spending chart below):

Retail Profits

Source: Dr. Ed’s Blog

Capital Spending

Source: Calafia Beach Pundit

Even during prosperous times, you can’t escape the dooms-dayers because too much of a good thing can also be bad (i.e., inflation). Rather than getting caught up in the day-to-day headlines, like many of us investment nerds, it is better to focus on your long-term financial goals, diversification, and objective financial metrics. Even us professionals become challenged by sifting through the never-ending avalanche of news headlines. It’s better to stick with a disciplined, systematic approach that functions as shock absorbers for all the inevitable potholes and speed bumps. Investment guru Peter Lynch said it best, “Assume the market is going nowhere and invest accordingly.” Everyone’s situation and risk tolerance is different and changing, which is why it’s important to give your financial plan a recurring physical.

Vacation or Retirement?

Keeping up with the Joneses in our instant gratification society can be a taxing endeavor, but ultimately investors must decide between 1) Spend now, save later; or 2) Save now, spend later. Most people prefer the more enjoyable option (#1), however these individuals also want to retire at a young age. Often, these competing goals are in conflict. Unless, you are Oprah or Bill Gates (or have rich relatives), chances are you must get into the practice of saving, if you want a sizeable nest egg…before age 85. The problem is Americans typically spend more time planning their vacation than they do planning for retirement. Talking about finances with an advisor, spouse, or partner can feel about as comfortable as walking into a cold doctor’s office while naked under a thin gown. Vulnerability may be an undesirable emotion, but often it is a necessity to reach a desired goal.

Ignorance is Not Bliss – Avoid Procrastination

Many people believe “ignorance is bliss” when it comes to healthcare and finance, which we all know is the worst possible strategy. Normally, individuals have multiple IRA, 401(k), 529, savings, joint, trust, checking and other accounts scattered around with no rhyme or reason. As with healthcare, reviewing finances most often takes place whenever there is a serious problem or need, which is usually at a point when it’s too late. Unfortunately, procrastination typically wins out over proactiveness. Just because you may feel good, or just because you are contributing to your employer’s 401(k), doesn’t mean you shouldn’t get an annual physical for your health and finances. I’m the perfect example. While I feel great on the outside, ignoring my high cholesterol lab results would be a bad idea.

And even for the DIY-ers (Do-It-Yourself-ers), rebalancing your portfolio is critical. In the last fifteen years, overexposure to technology, real estate, financials, and emerging markets at the wrong times had the potential of creating financial ruin. Like a boat, your investment portfolio needs to remain balanced in conjunction with your goals and risk tolerance, or your savings might tip over and sink.

Financial markets go up and down, but your long-term financial well-being does not have to become hostage to the daily vicissitudes. With the fourth quarter now upon us, take control of your financial future and schedule your retirement physical.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in IWM, SPMIX, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

October 4, 2014 at 10:05 am Leave a comment

The Only Thing to Fear is the Unknown Itself

Picture1

 

Martin Luther King, Jr. famously stated, “The only thing we have to fear is fear itself,” but when it comes to the stock market, the only thing to fear is the “unknown.” As much as people like to say, “I saw that crisis coming,” or “I knew the bubble was going to burst,” the reality is these assertions are often embellished, overstated, and/or misplaced.

How many people saw these events coming?

  • 1987 – Black Monday
  • Iraqi War
  • Thai Baht Currency Crisis
  • Long-Term Capital Management Collapse & Bailout
  • 9/11 Terrorist Attack
  • Lehman Brothers Bankruptcy / Bear Stearns Bailout
  • Flash Crash
  • U.S. Debt Downgrade
  • Arab Spring
  • Sequestration Cuts
  • Cyprus Financial Crisis
  • Federal Reserve (QE1, QE2, QE3, Operation Twist, etc.)

Sure, there will always be a prescient few who may actually get it right and profit from their crystal balls, but to assume you are smart enough to predict these events with any consistent accuracy is likely reckless. Even for the smartest and brightest minds, uncertainty and doubt surrounding such mega-events leads to inaction or paralysis. If profiting in advance of these negative outcomes was so easy, you probably would be basking in the sun on your personal private island…and not reading this article.

Coming to grips with the existence of a never-ending series of future negative financial shocks is the price of doing business in the stock market, if you want to become a successful long-term investor. The fact of the matter is with 7 billion people living on a planet orbiting the sun at 67,000 mph, the law of large numbers tells us there will be many unpredictable events caused either by pure chance or poor human decisions. As the great financial crisis of 2008-2009 proved, there will always be populations of stupid or ignorant people who will purposely or inadvertently cause significant damage to economies around the world.

Fortunately, the power of democracy (see Spreading the Seeds of Democracy) and the benefits of capitalism have dramatically increased the standards of living for hundreds of millions of people. Despite horrific outcomes and unthinkable atrocities perpetrated throughout history, global GDP and living standards continue to positively march forward and upward. For example, consider in my limited lifespan, I have seen the introduction of VCRs, microwave ovens, mobile phones, and the internet, while experiencing amazing milestones like the eradication of smallpox, the sequencing of the human genome, and landing space exploration vehicles on Mars, among many other unimaginable achievements.

Despite amazing advancements, many investors are paralyzed into inaction out of fear of a harmful outcome. If I received a penny for every negative prediction I read or heard about over my 20+ years of investing, I would be happily retired. The stock market is never immune from adverse events, but chances are a geopolitical war in Ukraine/Iraq; accelerated Federal Reserve rate tightening; China real estate bubble; Argentinian debt default; or other current, worrisome headline is unlikely to be the cause of the next -20%+ bear market. History shows us that fear of the unknown is more rational than the fear of the known. If you can’t come to grips with fear itself, I fear your long-term results will lead to a scary retirement.

 

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 21, 2014 at 1:13 pm 3 comments

Rise of the Robo-Advisors: Paying to Do-It-Yourself

Battery Operated Toy Robot

Robots and computers are taking over our lives. We see it in areas of our daily living, including the use of digitally driven cars, cell phones, automated vacuums, and electronic self-serve kiosks at the grocery store. And now robots have come into our investing and financial lives in the form of robo-advisors. With a few clicks of a computer mouse or taps on a smartphone, investors are hoping to find their way to financial nirvana.

What sites am I talking about? Here is a brief, albeit rapidly growing, list of popular robo-advisor sites:

Not all of these robo-sites invest individuals’ money, but nevertheless, there are several factors contributing to the upsurge in in these financial advice websites. For starters, there is a whole new, younger demographic pool of savers who have grown up with their iPhone and shop exclusively online for their goods and services. Many of these financial sites are trying to fill a void for this tech-savvy group looking for a new app to bring wealth and riches.

Another factor contributing to the rise of the robo-advisors is a function of the 2008-2009 financial crisis and the explosive growth of the multi-trillion dollar exchange traded fund (ETF) industry. Many baby boomers who were planning to retire were hit brutally hard by the financial crisis and subsequently asked themselves why they were paying such high fees to their advisors for losing money. With the stock market now increasing for five consecutive years, some investors are gaining confidence in pursuing other lower-cost solutions to their investments outside of the traditional human advisor channel.

Too Good to Be True? The Shortcomings

On the surface, the proposition of clicking a few buttons to create financial prosperity seems quite appealing, but if you look a little more closely under the hood, what you quickly realize is that most of these robo-advisor sites are glorifying the practice of doing-it-yourself (DIY). After conducting some due diligence on the various investment bells-and-whistles of these robo-sites, one quickly realizes individuals can replicate most of the kindergartener-esque ETF portfolios by merely calling 1-800-VANGUARD  – without having to pay robo-advisor fees ranging from 0.15% – 0.95%. More specifically, Wealthfront and Betterment use 6-12 ETF security portfolios, integrating many Vanguard funds and other ETFs that can be purchased with a click of a mouse or phone call (without having to pay the robo-advisor middleman). A cynic may also point out these robo-investment sites are nothing more than expensive life-cycle funds that could be replicated at a fraction of the cost.

Despite the sites’ transparency preaching, filtering through robo fee and performance disclosure can be frustratingly tedious too – good luck to the novices. For example, Betterment claims to have created a superior performance track record, despite a hidden disclosure stating the results are manufactured from a computer back-test. The transparency pitch seems a little disingenuous, and I wonder how many of the new robo-site users are also aware of the extra underlying ETF fees? But when marketing a new high-cost start-up, I guess you need to fabricate a fancy chart and track record when you don’t have one. Underlying the robo investment sites is a disparate, hodge-podge of studies anointing Modern Portfolio Theory as the holy grail, but readers of this blog know there are many failings to pure quantitative strategies implemented by academics (see LTCM in Black Swans & Butter in Bangladesh).

The concept of DIY is nothing new. One can look no further than the impact Home Depot (HD) has had on the home improvement industry. In addition, there are plenty of individuals who choose to do their own income taxes with the help of software technology (i.e., Intuit), or those who forego hiring an estate planning attorney by using off-the-shelf legal documents (i.e., Legal Zoom). Many industries in our economy inherently have penny pinching DIY-ers, but despite current and future inroads made by the robo-advisors, there will always be individuals who do not have the capacity, patience, or interest to search out a DIY investment solution.

After watching the stock market rise for five consecutive years, taming investment portfolios may seem like a simple problem for internet software to solve, but experienced investors (not academics) understand successful long-term investing is never easy…with or without technology. The reality of the situation is that when volatility eventually spikes and we hit an inevitable bear market, these robo-sites will fail miserably in supplying the necessary human element to facilitate more prudent investment decisions.

While the rising robo-advisors may have many investment advisory shortcomings, I will acknowledge some appealing aggregating features that provide a helpful holistic view of an individual’s finances (see Mint). Also, these sites are forcing investors to ask their advisors the important and appropriate tough questions regarding fees, compensation, and conflicts of interest. However, in spite of the short-term, blossoming success of the robo-sites, investing has never been more difficult. Investors continue to get overwhelmed with the 24-7, 365 news cycles that proliferates an endless avalanche of global crises via TV, radio, Twitter, Facebook, and the blogosphere.

While a younger, less-affluent DIY demographic may flock to some of these robo-advisors, the millions of aging and retiring baby boomers ensures there will be plenty of demand for traditional advisors. Experienced independent RIA advisors and financial planners, like Sidoxia, who integrate low-cost ETFs into their investment management practices stand to benefit handsomely. Those advisors/sites offering simplistic, commoditized ETF offerings with no wealth planning services will be challenged. While I may not lose sleep over the rise of the robo-advisors, I will continue to dream of a robot that will lower my taxes and win me the lottery.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (including Vanguard ETFs), AAPL, but at the time of publishing SCM had no direct position in HD, TWTR, FB, Legal Zoom, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

May 18, 2014 at 12:55 pm 5 comments

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