January 2, 2018
The Investment View from Prescott, Arizona
In my inbox recently was a report from Zacks Investment Research and their take on the new tax package. I will note that Zacks has not been a fan of President Trump, which I think adds credibility to their view.
"Sadly, there's been a lot of partisan bickering about whether it's a good deal or not. But politics aside and focusing just on the impact for stocks, it's definitely a win for the market.
“Corporate tax rates will be cut to the lowest level in 68 years, going all the way back to 1949. It also provides incentives to repatriate accumulated profits from overseas (estimated at more than $2.5 trillion dollars).
“And what will businesses do with all of those profits? Plenty! There's no doubt some of that will go to stock buybacks. But with the US suddenly becoming one of the most business friendly countries in the world, you will see massive new corporate investment. This includes relocating foreign operations back to US soil; building new plants to expand; and the purchase of new equipment and technology to see it all through.
“All of this economic activity means more new jobs. And with more jobs comes a stronger consumer, which means more consumer spending. That, of course, is good for business, and the whole virtuous circle is reinforced, leading to decades of new prosperity.
JOBS LOST - An analysis of 97,500 mergers and acquisitions of companies that occurred across 68 countries around the world between 2004-2016 estimates that with a maximum 20% top corporate tax rate in place (instead of the current 35% top rate) that the United States would have retained 4,700 domestic companies that instead became foreign-owned over the 13-year period (source: Ernst & Young).
"As for the individual tax cuts, the vast majority of filers will see a benefit. And with more money in people's paychecks as early as next February, you should see already robust consumer spending increase even more. And since 70% of economic activity is tied to consumer spending, that's another boost for the economy."
I recently read a report that CBS News provided a vivid example of how families will benefit. They interviewed three families about how they expected the tax bill to affect them. Then they had a CPA tell them, on camera, what they would actually be paying in taxes next year.
The three families said from what they had heard on the news they either expected to be paying more in taxes or to not save any money. It turned out that all three families would pay less under the new tax law than under current law.
A North Carolina single mother with an income slightly under $40,000 who didn’t think she would be affected will keep about $1,300 more per year thanks to the new tax cuts.
Two college teachers in Rhode Island with a joint income of over $150,000 a year thought they would pay more taxes, but they will actually pay about $650 less under the new bill.
The biggest surprise in the CBS report was the impact the tax cuts would have on a California couple with three children, a small business, and earning an income of approximately $300,000. The family believed that because California is a high-tax state, that capping state and local tax deductions would really hurt them. Instead, the Tax Cuts and Jobs Act will save them nearly $13,000 in taxes.
The CBS analyst concluded "every one of the families will have more money in their pocket next year."
I’m no tax expert, but I’m thinking you will, too.
I try to not bug you about matters that you have asked me to take care of for you, but it is important that we occasionally review your circumstances and investment portfolio to ensure that you understand what I am doing for you, that you are comfortable with my work and the strategies I am employing on your behalf are still appropriate for your life circumstances.
If your life circumstances have, or will soon change, if you would like to see the details on a strategy, or review anything else about your portfolio, please call the office to arrange a time to talk, either in person or on the phone.
The number is 928.778.4000
Watching the bitcoin bubble grow is like watching a clown car at the circus wreck in slow motion. The car has been launched in the air, so most of its parts are still in place, but just wait!
Last month I said that bitcoin, by far the largest crypto-currency, was at $10,000. Well it almost hit $10,000 again, but from the wrong direction. In the past 30 days bitcoin ran up to $19,597 before dropping to $12,616 in just 5 days.
Here is the current price chart of bitcoin as of this writing on Dec 28th:
Next is a price chart of the Nasdaq Index in 2000 at the end of its tech bubble.
Notice any similarities in these two charts? Charts of bubbles all look the same. The Nasdaq went on to lose 89% of its value over the next two years. Any bets on how low bitcoin will go when its bubble bursts?
I’ve read several articles this week by bitcoin promoters that contend that bitcoin is a store of value. What a joke! How much value was stored in the 5 trading days I just mentioned? Another bitcoin trader says he uses fundamentals for his decision making. To me fundamentals are quaint ideas like company earnings or book value, both of which bitcoin will never have. But many readers take these articles as gospel. The hucksters are really at work on bitcoin, so buyer beware!
Modern Trader Magazine quoted professional investor Dominic Marella as saying “Buying bitcoin on a lot of the current exchanges is like buying a Rolex from someone on the street.”
I’ve warned of the bitcoin bubble about to burst, but there are other ways to lose with bitcoin. Modern Trader posted some fun facts about bitcoin, including the fact that 64% of bitcoins have never been used.
Scott Diamond, a bitcoin consultant, estimates that perhaps half of those never used bitcoins are frozen forever due to mishandled or lost encryption keys by their owners. The anonymity that bitcoin owners like to point to can be a two-edged sword. If you need help with a transaction there is none.
In 2016, someone accidentally sent $137,000 in bitcoin instead of $5 with no way to retrieve it. Fat fingers? Ouch!
I’m not aware of any of my clients who own bitcoin, but my advice to them would be sell now and put the money into gold, instead. (facetious)
Although this is being written on December 28th to accommodate holiday schedules, it is fair to assume that the S&P 500 stock index is going to post a banner year in 2017 with solid double digit gains. The EAFE - a main index for stocks in Europe, the Far East and Asia - has done even better as Europe finally is showing signs of dragging itself out of its long recessionary economy. 2017 has been a good year for stocks.
The bond market continues to sputter after a decent beginning to the year. The Vanguard Total Bond Market Fund (VBMFX) which follows the broadest bond index is down .73% from its peak in September, 2017 through the close on December 27th, and that includes dividends collected. Furthermore, it is down .57% from its highs in July 2016. Clearly, bond owners are struggling to just break even since interest rates began to rise 18 months ago.
Gold has turned up after hitting a major cycle low a few weeks ago. Newsletter writer Tom McClellan (www.mcoscillator.com) is suggesting that this may be a good year for gold due to his cycle analysis insights. Inflation is finally up over 2% for the first time in 6 years. Whether this mild inflation will give gold a tail wind like it did a few years ago is uncertain, however.
The housing markets remain strong, and although changing tax deductions for home interest and property taxes may change the rate of growth in the housing market, I don’t believe it will be enough to derail the momentum in this important industry.
I read recently, that according to the Commerce Department, each one-tenth of one percentage point increase in our GDP (e.g., 2% growth moving to 2.1%) due to a rise in manufactured goods translates into +80,000 new American jobs. Let’s hear it for a recovering economy!
Oil markets are reacting to strong demand for energy caused by rebounding economies around the world, with oil prices rising to above $64 for the first time in several years.
The USA imports 22% less oil than it did just a decade ago according to the Department of Energy. Oil imports averaged 7.9 million barrels a day in 2016, down from 10.1 million barrels a day in 2006. Total petroleum exports from the United States have quadrupled over the last decade, rising from 1.3 million barrels a day in 2006 to 5.2 million barrels a day in 2016. This not only keeps US dollars here, out of the hands of oil sheiks who are not our friends, but will reduce our dependence on outside countries during any national security crises.
Our Shock Absorber Growth model recovered from the sharp dip during the last few days of November and the first few days of December as institutional money began moving out of some of the tech stocks that we had done so well with. The selling was short lived, and we have posted some profits since then, but it will result in a down month for growth portfolios, the first down month in the past 6. Still, Shock Absorber Growth and Adaptive Growth (80% growth) portfolios had a good year with solid double digit gains after all fees and expenses.
I took the change in tech stocks as an opportunity to sell some of our biggest winners and bank the double or, in one case, triple digit gains we had made in the past year or more. In the past two weeks I have begun putting that money back to work for you, keeping us close to fully invested.
The Flexible Income model is undergoing some changes designed to make us less reliant on interest sensitive investments, while still focusing on income oriented investments. I have recently added a small amount of high dividend stocks to capture the dividend income without the interest sensitivity of bond funds. I have also added an emerging market bond fund and a global real estate fund to add income without so much reliance on US interest rates.
Our Municipal Income strategy has defied the headwinds of rising interest rates and outperformed the Vanguard Total Market Bond Fund during 2017, through December 27th.
Unlike a lot of pundits, I don’t make predictions about what the stock market will do or when it will hit a big number because I consider those predictions to be reckless for a hands-on money manager. Making a prediction triggers a psychological phenomenon called anchoring, which if the market moves differently than the prediction calls for, can cause an investor to stay in an investment long after it should have been sold.
But I will say I see no big problems in the market place and no price bubbles (unless you are a bitcoin speculator), so as long as the Fed continues to raise interest rates slowly, I think there is potential for the strong market we are enjoying to keep running for quite a while at least.
- Shock Absorber Growth is our 100% growth portfolio.
- Flexible Income is our 100% income portfolio.
- Adaptive Growth Portfolios are currently allocated with 80% Shock Absorber Growth and 20% Flexible Income.
- Adaptive Balance is 50/50 between growth and income.
When you are dissatisfied and would like to go back to your youth, think of Algebra...
Tax Tips for Arizona Newcomers will be held on January 31st from 2:00-4:00 pm at Yavapai College. Call the college at 717-7755 to register for class #WS18-130. Cost is $35
Fundamentals of Investing for Retirees will begin on February 7th and run for 3 Wednesdays through February 21st, from 2:00-4:00 pm. Call the college at 717-7755 to register for class #WS18-137. Cost is $45
With our Shock Absorber 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 in 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.
Click here to read more about Shock Absorber Growth.
I spent a nice day with my son, Matt, and his family on Christmas day. He has always wanted to be a counselor, but did not have the masters degree required to call himself that. However, now he was just hired to work at a rehab house in Prescott, so his dream is coming true without an expensive shingle. Funny how things always work out.
Of course the grandkids, Malorilyn, age 6 and Caleb, age 3 continue to delight.
I had a wonderful trip to the Spider Ranch, a 50,000 acre outfit 35 miles northwest of Prescott to visit good friend Gail Steiger and his wife Amy, two of the most interesting people I have had the privilege to know. Gail is a soft-spoken, working cowboy and also a world class videographer with some of his work appearing on PBS. Gail also likes to trade stocks, so we have a lot in common despite living such different lives.
Amy, also a working cowgirl, is one of the better up and coming writers I have run across. Her rich prose puts you right in the middle of life on a working ranch while she gently weaves her plots. Her autobiographical short essays in her latest book, Ordinary Skin: Essays from Willow Springs, intimately conveys the beauty of the rough country she works cows in, the fellowship of working cowhands, the self reliance that makes cowboys seem so unique these days, the privations of camping in the wilderness for days on end and her deep love for Gail. Amy writes under the name Amy Auker Hale, and her books are available on Amazon or at Peregrine Books in Prescott. They are well worth a read.