Posts tagged ‘Obamacare’
What’s Important? Moving on Beyond Politics…
On a daily basis we turn on the TV or read about Democrats screaming at Republicans, or vice versa. Despite screams from the opposition, a Democratically-led Congress was able to successfully push Obamacare through the House and Senate in 2010 in a partisan fashion. The Republicans, however, were unable to jam repeal Obamacare legislation seven years later – at least on their first attempt.
While many Americans who sit at the opposite end of the political spectrum continue to scream at each other until they’re purple in the face, data indicates it is the Independents who are controlling the outcomes of elections. More specifically, a recent Gallup poll shows that 43% of voters identify as political independents, while over the last decade the percentage of voters identifying themselves with the traditional parties of Democrats and Republicans have declined to 30% and 26%, respectively.
It is true, President Trump potentially has a very limited party majority window before next year’s midterm elections. While Republicans do currently have an advantage over Democrats, as I’ve stated before, there are more important issues than these political ones, especially when it relates to your finances.
Whether the discussion revolves around healthcare, tax reform, defense spending, or immigration, the amount of influence you as a voter have on the political outcomes pales in comparison to the amount of control you ultimately have over your personal financial situation. As I’ve written in the past (see also Getting to Your Number), creating a secure financial plan will impact your long-term monetary success much more than senseless cheering or screaming for Obamacare’s long-run success or failure.
More critical than focusing on politics, the importance of calculating your budget, income sources, time horizon, and risk tolerance should be higher priorities. Everybody’s personal situation is different, therefore it is essential to explore a variety of other essential questions, including the following:
- How many more years do you plan to work?
- How much income will you need in retirement?
- What is your expected return on investments, given your asset allocation?
- How much debt do you presently have, and what are your plans to reduce it?
- What are the probabilities of you gaining an inheritance, and at what estimated value?
- Do you have an estate plan in place?
- Do you have children, and if so, what are your educational goals, and what type of inheritance or financial support are you looking to provide your children?
Since every investor’s situation is unique, there are plenty of other items to investigate. Politics is a state of mind, so don’t let the vicissitudes of Washington DC affect your long-term financial well-being.
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.
Betting Before the Race Starts
The spectators, myself included, are accumulating economic and political information as fast as it’s coming in and placing bets on different horses. Since Election Day, wagers on stocks have pushed the Dow Jones Industrial Average higher by more than 1,400 points (+7.8%) to almost 20,000. The current favorites have names like the banking sector, infrastructure, small caps, commodities, and other cyclical industries like the transports. The only problem…is the race has not even started.
Rather than place all your wagers before the race, when it comes to the stock market, you can still place your bets after the race begins (i.e., the presidency begins). So far, many bets have been made based on rhetoric emanating from the presidential election. Nobody has ever accused President-elect Trump of being short on words, and ever since the campaign process started a few years ago, his gift of the gab has led to many provocative claims and campaign promises. But as we have already learned, actions speak much louder than promises.
The walls of Trump’s pledges are already beginning to collapse, whether you interpret the shifts in his positions as softened stances or pure reversals. Examples of his position adjustments include recent comments regarding the maintenance of Obamacare’s preexisting conditions and universal care access components; immigration policies for illegal immigrants and his protective wall; or promises to lock up Hillary Clinton over her email scandal. The main point is that words are only words, and campaign promises often do not come to fruition.
The President-elect’s definitely has a full plate before his January 20th Inauguration Day, especially if you consider he is responsible for naming his White House and the heads of 100 federal agencies before his swearing in. But this only scratches the surface. When all is said and done, Trump will be making roughly 4,100 appointments, with 1,000 of those needing Senate confirmation.
While we sit here only one month after Trump won the presidential election, he has not sat on his hands. Trump has already made a significant number of his Cabinet announcements (click here for a current tally), with the much anticipated Secretary of State announcement expected to officially come next week.
From an investment standpoint, it makes perfect sense to make some adjustments to your portfolio based on the president-elect’s economic platform and political appointments. However, any shifts to your portfolio should be measured. For example, Hillary’s tweet heard around the world regarding skyrocketing pharmaceutical prices had a significant negative impact on the pharmaceutical/biotech sectors for many months. Expectations were for a more lenient and pharma-supportive administration to take place under Trump until excerpts from his Time magazine interview leaked out, “I’m going to bring down drug prices. I don’t like what has happened with drug prices.” Subsequent to his comments, the sector swiftly came crashing down.
As I have also pointed out previously, although Trump and the Republican Party have control of Congress (House & Senate), the make-up of the Republican majority is limited and quite diverse. I need not remind you that many of Trump’s Republican colleagues either campaigned against him or remained silent through the election process. What’s more, many fiscally conservative Tea Party members are not fully on board with a massive infrastructure bill, coupled with significant tax cuts, which could explode our already elevated deficits and debt loads.
Suffice it to say, there remains a lot of uncertainty ahead, so before you risk making wholesale changes to your portfolio, why not wait for the President-elect’s actions to take shape rather than overreact to fangless rhetoric. In other words, you can save money if you wait for the race to begin before placing all your bets.
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.
2014: Here Comes the Dumb Money!
Before this year’s gigantic rally, I wrote about the unexpected risk of a Double Rip. At that time, all the talk and concern was over the likelihood of a “Double Dip” recession due to the sequestration, tax increases, Obamacare, and an endless list of other politically charged worries.
Perma-bear Nouriel Roubini has already incorrectly forecasted a double-dip in 2009, 2010, 2011, and 2012, and bond maven Bill Gross at PIMCO has fallen flat on his face with his “2013 Fearless Forecasts”: 1) Stocks & bonds return less than 5%. 2) Unemployment stays at 7.5% or higher 3) Gold goes up.
Well at least Bill was correct on 1 of his 4 predictions that bonds would suck wind, although achieving a 25% success rate would have earned him an “F” at Duke. The bears’ worst nightmares have come to reality in 2013 with the S&P up +25% and the NASDAQ climbing +33%, but there still are 11 trading days left in the year and a Hail Mary taper-driven collapse is in bears’ dreams.
Source: Scott Grannis
For bulls, the year has brought a double dosage of GDP and job expansion, topped with a cherry of multiple expansion on corporate profit growth. As we head into 2014, at historically reasonable price-earnings valuations (P/E of ~16x – see chart above), the new risk is no longer about Double-Dip/Rip, but rather the arrival of the “dumb money.” You know, the trillions of fear capital (see chart below) parked in low-yielding, inflation-losing accounts such as savings accounts, CDs, and Treasuries that has missed out on the more than doubling and tripling of the S&P and NASDAQ, respectively (from the 2009 lows).
Source: Scott Grannis
The fear money was emboldened in 2009-2012 because fixed income performed admirably under the umbrella of declining interest rates, albeit less robustly than stocks. The panic trade wasn’t rewarded in 2013, and the dumb money trade may prove challenging for the bears in 2014 as well.
Despite the call for the “great rotation” out of bonds into stocks earlier this year, the reality is it never happened. I will however concede, a “great toe-dip” did occur, as investor panic turned to merely investor skepticism. If you consider the domestic fund flows data from ICI (see chart below), the modest +$28 billion inflow this year is a drop in the bucket vis-à-vis the hemorrhaging of -$613 billion out of equities from 2007-2012.
Will I be talking about the multi-year great rotation finally coming to an end in 2018? Perhaps, but despite an impressive stock rally over the previous five years in the face of a wall of worry, I wonder what a half trillion dollar rotation out of bonds into stocks would mean for the major indexes? While a period of multi-year stock buying would likely be good for retirement portfolios, people always find it much easier to imagine potentially scary downside scenarios.
It’s true that once the taper begins, the economy gains more steam, and interest rates begin rising to a more sustainable level, the pace of this stock market recovery is likely to lose steam. The multiple expansion we’ve enjoyed over the last few years will eventually peak, and future market returns will be more reliant on the lifeblood of stock-price appreciation…earnings growth (a metric near and dear to my heart).
The smart money has enjoyed another year of strong returns, but the party may not quite be over in 2014 (see Missing the Pre-Party). Taper is the talk of the day, but investors might pull out the hats and horns this New Year, especially if the dumb money comes to join the fun.
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.
Take Me Out to the Stock Game
This article is an excerpt from a previously released Sidoxia Capital Management complementary newsletter (October 1, 2013). Subscribe on the right side of the page for the complete text.
The Major League Baseball playoffs are just about to start, and the struggling U.S. economy is also trying to score some more wins to make the postseason as well. In 2008 and early 2009, the stock market looked more like The Bad News Bears with the S&P 500 index losing -58% of its value from the peak to the trough. The overleveraged (debt-laden) financial system, banged by a speculative housing bubble, swung the global economy into recession and put a large part of the economic team onto the disabled list.
Since the lows of 2009, S&P 500 stocks have skyrocketed +152%, including an +18% gain in 2013, and a +3% jump in September alone. With that incredible track record, one might expect a euphoric wave of investors pouring into the stock market stadium, ready to open their wallets at the financial market concession stand. Au contraire. Despite the dramatic winning streak, investors remain complacent skeptics, analyzing and critiquing every political, economic, and financial market movement and gyration.
Unfortunately, as stock prices have scored massive gains, many market followers have been too busy eating peanuts and drinking beer, rather than focusing on the positive economic statistics in the scorebook, such as these:
15/16 Quarters of Positive GDP Growth:
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| Source: Crossing Wall Street |
Precipitous Drop in Unemployment Claims: The lowest level since 2007 (7.5 million private sector jobs added since employment trough).
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| Source: Bespoke |
All-Time Record Corporate Profits:
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| Source: Ed Yardeni |
Financially Healthier Consumer – Lower Debt & Higher Net Worth:
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| Source: Scott Grannis |
Improving Housing Market:
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| Source: Scott Grannis |
While you can see a lot of financial momentum is propelling Team USA, there are plenty of observers concerned more about potential slumps and injuries emanating from a lineup of uncertainties. Currently, the fair-weather fans who are sitting in the bleachers are more interested in the uncertainty surrounding a government shutdown, debt ceiling negotiations, Syrian unrest, Iranian nuclear discussions, Obamacare defunding, and an imminent tapering of the Federal Reserve’s QE bond purchasing program (see Perception vs. Reality). The fearful skepticism of the fans has manifested itself in the form of a mountain of cash ($7 trillion), which is rapidly eroding to inflation and damaging millions of retirees’ long-term goals (see chart below). The fans sitting in the bleachers are less likely to buy long-term season tickets until some of these issues are settled.
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| Source: Scott Grannis – $3 trillion added since crisis. |
The aforementioned list of worries are but a few of the concerns that have investors biting their nails. While there certainly is a possibility the market could be thrown a curve ball by one of these issues, veteran all-star investors understand there are ALWAYS uncertainties, and when the current list of concerns eventually gets resolved or forgotten, you can bet there will be plenty of new knuckle-balls and screw-balls (i.e., new list of worries) to fret over in the coming weeks, months, and years (see Back to the Future I, II,& III). Ultimately, the vast majority of concerns fade away.
Yoooouuuuuu’rrrreee Out!
The politicians in Washington are a lot like umpires, but what our country really needs are umpires who can change and improve the rules, especially the silly, antiquated ones (see also Strangest Baseball Rules). The problem is that bad rules (not good ones) often get put in place so the umpires/politicians can keep their jobs at the expense of the country’s best interest.
When umpires (politicians) cannot agree on how to improve the rules, gridlock actually is the next best outcome (see Who Said Gridlock is Bad?). The fact of the matter is that deficits and debt/GDP ratios have declined dramatically in recent years due in part to bitter political feuds (see chart below). When responsible spending is put into action, good things happen and a stronger economic foundation can be established to cushion future crises.
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| Source: Scott Grannis |
There is plenty of room for improvement, but the statistics speak for themselves, which help explain why patient fans/investors have been handsomely rewarded with a homerun over the last four years. October historically has been a volatile month for the stock market, and the looming government shutdown and $16.7 trillion debt ceiling negotiations may contribute to some short-term strike-outs. However, if history proves to be a guide, stocks on average rise +4.26% during the last three months of the year (source: Bespoke), meaning the game may just not be over yet. With plenty of innings remaining for stocks to continue their upward trajectory, I still have ample time to grab my hot dog and malt during the 7th inning stretch.
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 TSLA, PBI, 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 the information to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Uncertainty: Love It or Hate It?
Source: Photobucket
Uncertainty is like a fin you see cutting through the water – many people are uncertain whether the fin sticking out of the water is a great white shark or a dolphin? Uncertainty generates fear, and fear often produces paralysis. This financially unproductive phenomenon has also reared its ugly fin in the investment world, which has led to low-yield apathy, and desensitization to both interest rate and inflation risks.
The mass exodus out of stocks into bonds worked well for the very few that timed an early 2008 exit out of equities, but since early 2009, the performance of stocks has handily trounced bonds (the S&P has outperformed the bond market (BND) by almost 100% since the beginning of March 2009, if you exclude dividends and interest). While the cozy comfort of bonds has suited investors over the last five years, a rude awakening awaits the bond-heavy masses when the uncertain economic clouds surrounding us eventually lift.
The Certainty of Uncertainty
What do we know about uncertainty? Well for starters, we know that uncertainty cannot be avoided. Or as former Secretary of the Treasury Robert Rubin stated so aptly, “Nothing is certain – except uncertainty.”
Why in the world would one of the world’s richest and most successful investors like Warren Buffett embrace uncertainty by imploring investors to “buy fear, and sell greed?” How can Buffett’s statement be valid when the mantra we continually hear spewed over the airwaves is that “investors hate uncertainty and love clarity?” The short answer is that clarity is costly (i.e., investors are forced to pay a cherry price for certainty). Dean Witter, the founder of his namesake brokerage firm in 1924, addressed the issue of certainty in these shrewd comments he made some 78 years ago, right before the end of worst bear market in history:
“Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished.”
Undoubtedly, some investors hate uncertainty, but I think there needs to be a distinction between good investors and bad investors. Don Hays, the strategist at Hays Advisory, straightforwardly notes, “Good investors love uncertainty.”
When everything is clear to everyone, including the novice investing cab driver and hairdresser, like in the late 1990s technology bubble, the actual risk is in fact far greater than the perceived risk. Or as Morgan Housel from Motley Fool sarcastically points out, “Someone remind me when economic uncertainty didn’t exist. 2000? 2007?”
What’s There to Worry About?
I’ve heard financial bears argue a lot of things, but I haven’t heard any make the case there is little uncertainty currently. I’ll let you be the judge by listing these following issues I read and listen to on a daily basis:
- Fiscal cliff induced recession risks
- Syria’s potential use of chemical weapons
- Iran’s destabilizing nuclear program
- North Korean missile tests by questionable new regime
- Potential Greek debt default and exit from the eurozone
- QE3 (Quantitative Easing) and looming inflation and asset bubble(s)
- Higher taxes
- Lower entitlements
- Fear of the collapse in the U.S. dollar’s value
- Rigged Wall Street game
- Excessive Dodd-Frank financial regulation
- Obamacare
- High Frequency Trading / Flash Crash
- Unsustainably growing healthcare costs
- Exploding college tuition rates
- Global warming and superstorms
- Etc.
- Etc.
- Etc.
I could go on for another page or two, but I think you get the gist. While I freely admit there is much less uncertainty than we experienced in the 2008-2009 timeframe, investors’ still remain very cautious. The trillions of dollars hemorrhaging out of stocks into bonds helps make my case fairly clear.
As investors plan for a future entitlement-light world, nobody can confidently count on Social Security and Medicare to help fund our umbrella-drink-filled vacations and senior tour golf outings. Today, the risk of parking your life savings in low-rate wealth destroying investment vehicles should be a major concern for all long-term investors. As I continually remind Investing Caffeine readers, bonds have a place in all portfolios, especially for income dependent retirees. However, any truly diversified portfolio will have exposure to equities, as long as the allocation in the investment plan meshes with the individual’s risk tolerance and liquidity needs.
Given all the uncertain floating fins lurking in the economic background, what would I tell investors to do with their hard-earned money? I simply defer to my pal (figuratively speaking), Warren Buffett, who recently said in a Charlie Rose interview, “Overwhelmingly, for people that can invest over time, equities are the best place to put their money.” For the vast majority of investors who should have an investment time horizon of more than 10 years, that is a question I can answer with certainty.
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) including BND, but at the time of publishing SCM had no direct positions 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.
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