December 6, 2016
Post-Election Tax Strategies
The Investment View from Prescott, Arizona
During the election, Donald Trump railed against some of the existing tax laws. Because he won’t actually become president and be able to direct changes until next year, there is much uncertainty about the actual changes, but if he gets his way there are tax planning opportunities in his platform.
If the number of tax brackets gets reduced and marginal rates lowered as Trump said he wanted, high income tax payers will benefit by deferring income into 2017 and accelerating deductions, including planned 2017 charitable deductions, into 2016.
If the proposal to bump capital gains tax to 20% for all filers becomes reality, taking capital gains in 2016 vs 2017 will be advantageous for all but top bracket payers who already pay 20%.
There was a lot of talk about changing estate taxes, but big changes appear unlikely, so don’t go changing your estate plan just because of the election.
What the Markets Are Doing
The stock markets jumped for joy with the Trump election victory, and barely looked back for the rest of November. The S&P 500 gained 3.42% in November and is up 7.58% for the year through November 30th.
Bonds of all types struggled in November as interest rates spiked dramatically, causing bond prices to plummet. The Vanguard Total Bond Market Fund (VBMFX) lost 2.83% of its value in November alone, wiping out more than a year’s worth of dividends (The fund’s current Yield is 2.32%).
With rates on short-term government bonds now twice the Fed Funds rate, the bond markets are telling us that the Fed will raise interest rates at its meeting this month. This is important, because interest rates affect your life a lot more than the price of Apple stock.
Gold dropped as expected into the gold cycle low in early October, then followed that up with a horrible November. Gold has now dropped over 14% from its July high, and the slide is showing no signs of letting up.
Oil has jumped 14% in only four trading days since November 29th. The reason is that OPEC is calling for production cuts, hoping to squeeze the supply of world oil and push prices back up. I don’t think it will work. OPEC can say whatever they want, but expecting cash strapped producers like Venezuela or oh-so honest Russia to slow down their oil sales in the spirit of cooperation is laughable. OPEC members are notorious for saying one thing and doing another.
Despite reports of strong real estate sales, real estate investment trusts, a favorite of income investors, have dropped an average of over 12% since August 1st. Those losses appear to also be caused by the rise in interest rates.
Slice of Life
I just returned from a 5 week road trip that took me to Denver for some due diligence at our custodian, Trust Company of America, had me doing presentations at Mensa conferences in Chicago and Phoenix, attending a conference in Dallas and making an office visit to business continuity partners in Austin. Add in visits with a couple of clients along the way and it was a busy, yet relaxing time.
On the way home I ran the Rio Grande River road and spent time in Big Bend National Park. You have to really want to get to Big Bend. It is really out of the way, but also really spectacular. Definitely worth the trip.
I know I say this a lot, but I just love the technology that allows me to do my work from anywhere.
Doing Well by Doing Good
Rather than blindly paying income tax, Arizona allows you to direct some of your tax dollars to benefit students through its various Tax Credit programs.
There are several different ways to get these tax credits, in return for donations to public school extra-curricular activities or character programs, contributions to 501(c)(3) organizations supporting the Working Poor, and for donations to a qualified School Tuition Organization for scholarships to private schools.
A tax deduction only returns a percentage of your gift (matching your tax bracket), while a tax credit reduces your tax bill dollar for dollar. If you are in the 25% tax bracket, a credit is worth four times what a deduction is worth.
Some tax payers can take up to two thousand dollars in credits. Consult your tax advisor to see how much credit you can qualify for. The deadline is December 31st. Details are available at the Arizona DOR's website School Tax Credits for Individuals as well as www.lionstaxcredit.org and can make getting tax credits by donating to local charities easy to do
College Classes Coming
Our next college classes will be in February. Stay tuned for details in future newsletters.
What's Going on in Your Portfolio?
You have had a good year in all of your Trust Company of America accounts. Please tell your friends.
I have two primary investment models, Shock Absorber Growth and Flexible Income, and blend these two into Adaptive portfolios for folks in the middle of the risk taking spectrum, allowing me to serve a wide range of investors.
Our Shock Absorber Growth portfolios (SAGrowth) had been in capital preservation mode for over 15 months. This served us well over the past year as this kept your growth portfolio’s price volatility (risk) to less than 30% of the S&P 500 Index’s. Our largest decline in the past 12 months was 3.55%, while the S&P 500 Index lost 12.55% during the year.
Despite spikes in the Index’s price in the wake of the June Brexit vote and the presidential election, SAGrowth has slightly outperformed the Index with much less risk. Tell your friends, please.
But on Election Day – even before the polls closed – the market was saying it was time to move back to pursuing growth, so I “let the clutch out” and moved our growth portfolios into a growth-oriented position. On Election Day, I greatly reduced the hedges and a couple of days later began adding to our stock holdings.
Future Technologies is one strategy used in the SAGrowth portfolio. It focuses on high growth companies in biotech, robotics, nanotech, computer technology and Internet industries and now holds 13 stocks. These include (in order of greatest to smallest gains): Nvidia (graphics cards), John Bean Tech (robotics), Northrup Grumman (robotics and nanotech), Mentor Graphics, Cantel Medical, iRobot, Itron (utility metering solutions), Global Payment Networks, Baxter International (medical equipment), International Game Tech, LogMeIn, MaxLinear (RFID solutions), and Semiconductor Mfg Intl. Future Tech now holds only 14% cash and a very small hedge to cushion market volatility – our shock absorber.
Targeted Growth is a second stock strategy in SAGrowth portfolios that seeks longer term capital gains from companies such as Chevron, Emcor (construction), Facebook, Jack Henry (bank financial payment systems) Microsoft, Netflix, Pool Corp, Visa, Vector Group and an Exchange Traded Fund that holds energy infrastructure stocks (tank farms, pipelines, terminals, etc). The average dividend in this strategy is 3.66%.
These two strategies now make up 85% of Shock Absorber Growth portfolios.
Flexible Income portfolios hold a short-term corporate bond fund, high-yielding energy infrastructure stocks, the Long/Short Treasury strategy mentioned in another article and some cash.
Both growth and income portfolios have a gold strategy that either owns a gold fund or an inverse gold fund. We have been short gold (using the inverse fund) since November 8th, making nice gains as gold went down.
Our two blended portfolios, Adaptive Growth and Adaptive Balance, have been moved to their maximum growth configuration. Adaptive Growth now blends 80% SAGrowth with 20% Flexible Income for growth investors who want to diversify away some risk by holding income investments, too. Adaptive Balance is now 50/50, offering an even lower risk profile while pursuing modest growth.
Municipal bond portfolios were moved to cash in November when interest rate spikes caused muni prices to slide.
If you have concerns or changes in your life circumstances, please call for an appointment to go over the details of your portfolio to ensure that it remains appropriate for you. If you are happy, please tell your friends.
Attention Bitcoin Users!
What we were saying back then
I’ve written about Bitcoin in the past, but I personally know very few active bitcoin users. However, with over 700 subscribers to this newsletter, including quite a few financial professionals, I’m guessing there are more Bitcoin users among my readers than I am aware of, so pay attention if you are one of them!
The IRS recently filed to determine the identity of all Bitcoin users by getting records of Coinbase, the platform for digital bitcoin “wallets.” The IRS wants to investigate Coinbase users for tax evasion.
I’ve expected the government to somehow try to get control of Bitcoin and other digital currencies. It doesn’t make sense that they would stand idly by, allowing people to move money freely and evade the taxes due when bitcoins are traded for a profit.
This move is not just a shot across the bow of Bitcoin users; it is a hostile boarding party.
If you use bitcoins, expect the government to knock on your door, demanding that you declare all purchases and sales of the digital currency, and then collecting a tax payment on any gains, plus penalties and interest, of course.
This won’t end well.
Efficiently Expanding My Services
Over the years I have developed successful systems for identifying increasing risk and offsetting it with hedging techniques. Other money managers have different specialties and over the past two years I have introduced the work of two such managers into your portfolios by subscribing to receive their trading signals.
These managers have the kind of skills you find in mutual fund managers, but they have chosen to instead offer their expertise through hedge funds and private money managers like myself. They are not directly available to a retail investor like you.
I’ve personally known one of these managers for a dozen years, but was introduced to the work of both through the NAAIM Shark Tank a couple of years ago. If you haven’t seen the Shark Tank TV show, it features aspiring entrepreneurs who make business presentations to a panel of "shark" investors, who then choose whether or not to invest. NAAIM is the National Association of Active Investment Managers (I was president of NAAIM in 2008) and our shark tank is an annual opportunity for boutique investment managers to show their talents to our “sharks” who run multi-manager investment platforms.
John McClure, also a past-president of NAAIM, runs a company called ProfitScore that develops and runs cutting edge investment solutions, including a government bond strategy which switches between owning a regular bond fund or an inverse bond fund that will go up when the bond market goes down. John’s strategy has been very successful for us for the past year and a half.
Paul Glance is a retired hydraulic engineer who has programmed trading algorithms based upon fluid dynamics to successfully navigate the gold and oil markets. With Paul’s signals, we go long or short the gold markets, and have outperformed gold itself over the past year that we have been using Paul’s services.
The work of these two managers is partially responsible for the outperformance and low volatility you have experienced in your accounts this year. By adding these two managers, I have lowered risk by creating additional diversification, and I have been able to build more sustainable value for you.
Our Spotlight Strategy - Adaptive Growth
With our Adaptive Growth strategy we strive to provide high total return from a combination of investments from both the equity and income markets with the emphasis on equities.
Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to the strength or weakness of the market, directing exposure in the HCM Shock Absorber Growth strategy to range from 20% to a maximum of 80% of account value. The balance, 20% to 80% is invested using the HCM Flexible Income strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines in which case stock market exposure is quickly reduced.