10-Year Party Over for Stocks?

Party Over?

I sold some stock positions the other day in many accounts for individual clients, positions that were declining more rapidly than the benchmark S&P 500 Index, which is now down over 8% over the last month and has lost all its gains for the year. This is not an attempt at short-term market timing. Rather, it is reducing risk during a market decline while we re-think long-term allocations and adjust our holdings from growth to value. Models in 401(k) plans will be adjusted shortly. I’ll explain why below.

Market Correction or Bear Market?

Every so often the stock market declines 5%-12% as a way of wringing out excess greediness and too little respect for risk. Often, this occurs when the S&P 500 gets too far above its long-term moving average, like a hunting dog that gets too far afield and is called back in. I use 15% either side of the long-term average as a pretty good rule of thumb as to whether it is a correction or likely to be a bear market. If a correction, the stock market then resumes its upward march a little more cautiously.

The Way it Was

If I thought that’s what was going on, we would just keep things the same. I don’t think that is what we have here. I think rather it is the end of a long party that started when the stock market announced a half-off sale in March of 2009 and politicians and government banks threw everything they had at stimulating economies and markets. You remember the huge spending increases under President Obama that were continued with President Trump, the Federal Reserve’s strategy of flooding the world with excess money that found its way into stock and bond markets begun by Ben Bernanke and continued with Janet Yellen.

The money from the Central Bank pushed markets higher because with more to spend came more demand. You remember the long stretch of record-breaking low interest rates that far outlived the crisis and caused massive borrowing and thus spending. The result was a tremendous growth in profits for companies from higher sales and lower costs. Add to that stimulus tax cuts and regulatory easing and repatriation of overseas money and you have a tremendous boost for profits and stock prices.

The Way It Is

That was enough to send markets much higher. But, as often happens, when citizens see the market making a lot of money, it becomes more popular and people become willing to pay more for earnings. So, stocks go up because their profits are going up and they go up more because people are willing to pay more for those profits. The second can be measured by what is called the price to earnings ratio, or P/E for short. The stock market recently sold for a P/E of 24. Ignoring the spikes in P/Es that you get in recessions, that 24 P/E last month was only exceeded by the 30 P/E in 1999. In other words, only once in the last nearly 90 years have investors been willing to pay more, and that didn’t end very well, as you remember.

The Way it Will Be

But, as Bob Dylan put it in his offbeat, nasal voice, The Times, They Are a’Changin’. Profit growth for companies is slowing down a lot, from 20%+ growth earlier this year to more like 7%. More companies are disappointing investors so far this reporting season. That growth may come down even more and you may find that we are close to the peak in earnings. Here’s why.

The long run of extremely low, almost free money is over and rates are on their way back up toward normal. Normal is quite a bit higher, and Jerome Powell, the fairly new chair of the Federal Reserve Bank, thinks normal rates may be higher rates than many forecasters are saying, so get set for several more rate increases. My guess is that short rates will go up enough to be higher than long rates, a situation that normally triggers a recession.

At the same time, the Federal Reserve has stopped flooding the world with money. Instead of massively buying bonds, the Fed is letting its bond portfolio shrink. That removes from circulation money people were spending on stocks and bonds. This is often referred to as “taking away the punch bowl.” So, less money for buying stocks and bonds plus higher interest rates.

Higher rates mean less spending on cars and houses and those slowdowns are already evident, but it also means that business costs are going up in many industries and that means lower profits for many companies. Wage inflation and inflation on goods, especially with President Trump’s backfiring trade war with its growing list of tariffs, means costs are going up for consumers and businesses, and that means less spending for both and lower corporate profits. Slowing and even falling profits means stocks and bonds should fall too and with that will come less infatuation with stocks, which means lower prices.


Could the market jump up tomorrow? Sure. It could also accelerate its decline. Day to day, who knows?

Could I just be wrong about the overall theme? It’s possible, but I don’t think so. I didn’t just start doing this yesterday. If I’m wrong, the most likely error is being early. As you know if you’ve been with me for a while, I try to think long-term and in the end, that pays good dividends.

There are other ways to make 7%-10% returns aside from stocks. Real estate, now made much more liquid by what are called interval funds, that is, limited partnerships set up so that they have frequent tender offers (some as often as monthly or quarterly), is one possible way. Another is alternative energy partnerships with long-term leases. I plan to direct more client money to these areas for those clients not already fully invested there. I am looking at other alternatives as well.

Stocks will still have a place, but it will likely be value investing’s time to shine again after ten years of growth investing outperforming it. Small and international stocks will have a place again too, but I’d like to see them much cheaper.

Floating rate and short-term bond funds, which have absolutely been the place to be this year in fixed income will continue to be good holdings for us. Good old cash may get an allocation again. I will also continue to recommend alternative income funds.

There will be some counter-trend rallies in stocks. But, this year’s high fliers still have a good ways to come down before they are bargains again. It will pay to strongly consider what you’re paying for growth.

We Make Money the Old-Fashioned Way

The end of that old commercial, is “we earn it.” This is a time for guidance. This is when a financial advisor is most valuable. The sun is setting on the days of picking low-cost index funds and doing fine. Just like it was easy in the 1990s and tough in the 2000s, then easy in the 2010s, the pendulum has swung back again.

So, I will be meeting with all clients over the next couple months to adjust strategy. If you have any questions or concerns, call me. Thanks.

This entry was posted on Friday, October 26th, 2018 at 11:56 am

How to Avoid Losing the 20% QBI Deduction on Pass-Through Income (New Tax Law)

The new tax law added a limit to the income owners of many kinds of professional corporations (like many medical practices) can earn and still keep the 20% qualified business income deduction this year. For those filing jointly, the phaseout of eligibility starts at $315,000 and ends completely at $415,000 in 2018 income. Losing that deduction will cost them tens of thousands in extra income tax, so many are asking how to avoid that.

They need to lower their taxable income and two ways to do that are to:

  1. Start a cash balance plan and contribute as much as $300,000 a year, sheltering the money in a qualified retirement plan and reporting less income for taxes
  2. If the 401(k) profit sharing plan is not age-weighted with respect to profit sharing contributions, the plan can be modified to allow that. As in the cash balance plan, if there is a significant age difference between owners and staff, the vast majority of the contribution will go to the owners

Of the two, the cash balance plan can be more more efficient in how much goes to the owners, maybe as much as 95%, but the change to the 401(k) is much quicker to do and the deadline for doing this in 2018 is either Sept. 15 or Oct. 15, depending on the structure of the business, so time is very short.

If you’re interested, let me know immediately so we can try to beat the deadline and save you or your partners a great deal of tax.

This entry was posted on Tuesday, August 28th, 2018 at 3:03 pm

The #1 Issue With 401(k) Plans – Nothing Else is Close

What is the #1 issue with the oversight of 401(k) plans? No question, it is APATHY on the part of plan sponsors. Nothing else is even in the ballpark.

In a typical plan, Joe, who’s been the guy providing the plan for years, stops in once or maybe twice a year, bypasses the HR Dept. and goes straight to the owner’s office or sits down with the CEO and CFO, shoots the bull for 30 minutes, talks for 30 minutes about how the plan is doing well and goes home.

His compensation – $20,000 – $60,000 or more for just that plan, just that one hour. Typically, there is no formal, documented process, no real oversight, no meeting minutes taken, no benchmarking of plan costs and no mention of the fact that his fee is 4X what it was 10 years ago for the same level of service and no improvement in the plan. In fact, Joe’s main business is insurance. He doesn’t even get regular continuing ed on retirement plans. Why? His clients never ask about it.

I called a plan last week that had the highest administrative cost of any plan its size in the whole area code. They were paying $200,000 to $300,000 per year more than average. And, while their participant count is up 2X over the last 10 years, the plan fees have gone up 800%, not just on investment management, on everything because it’s a one provider plan, like most are. They’re a sitting duck for a lawsuit or a DOL civil action.

The response of the CFO to that news? A big yawn and have a nice day.

Another plan I know with admin costs 2X what they should be has an 8-fund lineup underperforming relevant indexes by an average of 3%/year over the last 5 years. The doc in charge of the plan’s response? “We’ve had a strong relationship with our guy for 30 years. We’re not interested in talking to anyone.” No wonder their costs are too high.

Think they do required regular benchmarking? Think they know what their costs are? Think they have a sound, documented process for overseeing the plan and the vendor? No, no and no.

I could tell these stories all day long. Participants in both these plans are being harmed. In the second plan, participants are compounding their return 3% a year less than it should be. That’s a shortfall of potentially hundreds of thousands of dollars over a working lifetime for each plan participant. The real problem – their employer’s APATHY.

As a fiduciary, these men are failing miserably, much to the harm of the people relying on them. I’m not a fan of lawsuits, but these men deserve to be sued.

If you are a participant, insist that your plan demonstrate that it does regular benchmarking and takes the responsibilities of a fiduciary seriously. If they are open to it, call me. If they don’t, write the DOL or call a lawyer. Seriously. Don’t let a fiduciary that doesn’t care ruin your retirement and others.

This entry was posted on Friday, August 24th, 2018 at 3:44 pm

Differentiation the Right Way

Differentiation – Maybe instead of telling others that we are different, we ought to show them the difference by not focusing so much on our success as on enabling their success. In the end, we are successful because we contribute to the success of others.

When we make pitches based on how great we are, we are missing an important truth – it’s not about us, it’s about them. Brag or serve – I know which I would choose if I were hiring someone and I know which I want to live out. There’s no fulfillment in boasting, only in valuable service. 

This entry was posted on Monday, August 13th, 2018 at 2:06 pm

Is Your Medical Info on You in Case of Emergency?

Hopefully, you have a will, a medical directive, a health care power of attorney, a general power of attorney, a detailed list of medications, medical conditions and allergies and a list of emergency contacts, all in case you end up in a serious medical situation. I’m guessing that less than half of my clients have these, despite my encouragement and them being critical documents.

The question is – do you have all these on you at all times, easily discoverable, and the information easily accessible by emergency personnel? If you don’t, what good are they in an emergency if you are not able to communicate clearly or at all and the medical personnel don’t how or where to access them? A password-locked phone with that information will not suffice because the EMT will not know your password or whom to contact.

To answer that question indirectly, consider that the 3rd leading cause of death in the U.S. is medical mistakes, more than pneumonia, more than accidents. It sits behind cardiac issues and cancer, and according to MD Magazine accounts for 200,000 – 400,000 deaths a year and a much larger number of complications.

For example, what blood type do you need if you are bleeding profusely? What medical conditions, allergies or meds do you have that might play poorly with a medication given in the ER?  Even you and I don’t often know what medications might be a bad thing or our health profile. For example, someone getting a nitroglycerin tablet for a heart attack when he still has Cialis in his bloodstream can experience a life-threatening drop in blood pressure. Not good. Add a painkiller for the heart attack pain and further interactions come into play.

And, HIPPA regulations may prevent a loved one who needs to know about your situation from being able to get any information at all if they are not listed as being authorized to receive it on a document you carry.

I am recommending that at a bare minimum you have a card in your wallet or purse that lists your medications, allergies, blood type, medical conditions and contact information for your emergency contact and the person named in your health care power of attorney.

You can get a free ICE wallet card by going to https://geticecard.com/ It has a template into which you can briefly enter the information. It will save as a PDF that you can print out in business card size. Being typed is extremely helpful for legibility and to fit in a small space. I suggest you also write in the health care POA contact and then laminate the card at any office supply store for a buck or two so it stays legible.

Even better is a slim little key that will go on your keychain and which has ICE in bold letters, the universal symbol for IN CASE OF EMERGENCY. It is actually a miniature thumb drive that will have your necessary documents for a medical emergency, including a medical directive, doctors’ contact info, the signed paper appointing someone as having POA if you are incapacitated and much more medical detail than will fit on a small card.

Because this is so important, I am sending my clients a USB key with the universal ICE symbol on it. It will have forms pre-loaded for inputting your information. If you are not a client and would like a medical information key, contact me and I will send you one for a nominal amount. You can also save your healthcare power of attorney and medical directive to it. If you don’t have those, please see an attorney quickly. This is not a promotional item. To avoid confusion, my name and company name are not on it. 

With a card in your wallet and more detail on your keychain you should feel confident that emergency personnel will have what they need. Just reply to this email that you would like me to send you one.

A third precaution for my clients is to go to their Cornerstone Investment Services client portal and upload pdfs into a document vault. They can make that folder accessible to anyone that they give the login info to, either the emergency contact and loved ones or written on the wallet card.

This entry was posted on Friday, May 11th, 2018 at 1:36 pm

The POOR Investment Being Recommended Now

One reason the stock market fell sharply last week was new worries about inflation. So, Morningstar and others are recommending that you buys TIPS – Treasury Inflation-Protected Securities.
Their reasoning is that because twice a year, the value of a TIPS is adjusted upward to match the rise in the Consumer Price Index (CPI) and interest is alway paid on the adjusted value or face value, whichever is higher you will always stay ahead of inflation. What could be wrong with that?
I looked at Schwab’s inventory of TIPS this morning. Yields ranged from 0.1% to 0.8%. The latter was on a TIPS maturing in 2029. If you’re happy with interest that is a fraction of a percent above inflation, well go ahead and buy some. You are protecting your money but not getting much else.It is higher than a money market in terms of interest but you can lose money in TIPS.
The bigger problem is that 90% of people will buy a mutual fund of TIPS. That is not generally a good idea. Why?
1) The mutual fund has expenses, even a no-load fund has operating expenses. When those are deducted you may be in the hole. Then deduct fees for your financial advisor or 401(k) expenses.
2) Tips are volatile, not steady in price. In 2008, the best “inflation-protected” mutual funds lost 10-20% while many other bond funds were making money. There was a sharp drop in 2013 of 12-15% and one in 2016
3) TIPS funds generally fall in price when interest rates go up like they are now. Because of an inflation scare this year you would think this year so far would be a good return. But, as of 2/14 the best funds are -2% instead.
4) Inflation protected funds lose money in many years. Look up annual returns on PRRIX, the top performing TIPS fund. 2018 -2%, 2017 4%, 2015 -2.8%, 2014 3.4%, 2013 -9%. Uh, no thanks..After fees, only when inflation is rapidly rising do you really make money.
5) TIPS funds can sell off in stock market panics. See 2008.
Bottom line – TIPS and especially inflation-protected funds are a bad investment most of the time. Buy individual inflation protect securities if all you want is to keep up inflation. But, you should generally avoid the mutual fund or ETF varieties. I have other, better ideas for lower risk income.
This entry was posted on Wednesday, February 14th, 2018 at 12:27 pm

Why Products You Buy Don’t Last

Remington, one the oldest names in the outdoor industry is going bankrupt. This might seem odd because gun makers sold a ton of guns and ammo during the Obama presidency and stocks in that industry did exceptionally well.

Some of you know I write articles for outdoor magazines as a hobby, so I have some good connections there. What I’m hearing is that Remington is going under because over the last couple decades it kept lowering the quality of its product.

One of the things that drives me nuts is that coffee makers and lawn trimmers and such seem to have a life that is continually getting shorter. Our Keurig has to be “spanked” after not very long or it gets gunked up and pours small cups. Our SS electric can opener broke after a year because the critical part was plastic. My power landscaping tools lasted a few years, but I have learned which brands to buy. You feel like when you get 5 years out of a product you did well. That’s sad.

You and I have seen this movie before. It was called Wall Street.

The business of Wall St. that buys out companies it feels are making too little profit and “turns them around” falls under private equity and it is prospering today like never before. Gordon Gecko lives.

The way it typically works is that a private equity firm like Cerberus, KKR, Apollo or Blackstone raises a lot of money by promising investors big returns. The sooner they can realize those profits, the more money the buyout fund general partner can raise and the more fees it can earn.

Here’s how they do that on companies that are already trading on the stock exchanges.

First, they buy enough of the company’s stock to get control. Quickly, they pay themselves back by having the company take on debt, often a lot of debt. So, they love to buy companies that have been reluctant to take on debt before. Since debt payments increase the company’s expenses and lowers profit, they next execute their plan to cut costs,” make the company lean,” i.e. efficient.

That means selling off “underperforming” divisions that don’t generate much cash, which may be the ones in which management has been investing for future growth. Then they cut costs by laying off employees, by moving production overseas, by lowering the cost of the products in any other way they can, like making the candy bar smaller, replacing metal with plastic, maybe by raising machining tolerances to reject fewer parts. If they cut costs enough, they may even lower prices to get more sales.

The consumer, not knowing what is going on behind the scenes, loves it. “Man, you mean I get can get a Remington for that price? I’m buying. What a deal!”

Because the company has taken on debt, called “leveraging up,” when costs start going down because of these “greater efficiencies” the reported quarterly profits soar and start beating expectations, the value of the company in Wall Street’s eyes goes up because of how fast profits are increasing. “They really turned that old company around.” The private equity firm then sells the shares they bought for a large profit, having “improved” the company. A lot of the profits go to the partners in the buyout fund and they do it all over again. They have cost people their jobs, given us all lower quality products, saddled a low-debt company with a lot of debt, started “monetizing” the company’s reputation (essentially selling it as they lower product quality to get more sales at lower prices before consumers adjust their perception of the brand’s falling quality). All for short term profits.

That’s the worst case. In other cases, they may actually improve truly mismanaged companies. And a big part of private equity ($700 billion out of $1.7 trillion) is still to buy companies that have not yet issued publicly traded stock, including young, innovative tech firms that may become the tech giants of tomorrow, e.g. Google and Facebook. I’m talking about when the firms buy out already publicly traded companies.

Here’s what most people don’t know and what concerns me – how much of America they own. Amazon is the 2nd biggest employer in the U.S. with 540,000 employees worldwide. But, buyout firm KKR currently owns companies with total employment of 650,000. The only company with more is WalMart, the retailer of many of these cheaper products.

Buying out companies is now a $1 trillion industry and has become the majority of what private equity firms do as opposed to taking promising companies public. And because it is so profitable, the money keeps pouring in. Apollo just raised the largest pool of money for doing buyouts ever – $25 billion in just one partnership.

So, expect more products with lowered costs. As a whole, America has turned from how it built its dominance in industry, by innovation and high quality and for the most part narrowed that to one area – technology. I might make exceptions for aircraft, vehicles and medical products, including pharmaceuticals. Much of the rest of what we buy is becoming junk. That’s why the majority of individual stocks I buy for clients are in tech and health care.

What companies can you name that are unflinching in their commitment to quality? What companies do you know that are making exceptional products and are not aggressively raising prices?

This entry was posted on Wednesday, February 14th, 2018 at 9:46 am

Your 401(k) Fees Probably Went Up 10-20% in 2017

Your 401(k) account was up 10-20% in 2017? Good, but so were your fees. If costs are paid as a % of plan size, whenever your plan grows, fees grow, automatically.

It’s outrageous. It’s automatic & nearly silent.

You’ll likely never get an invoice. You’ll just get a required disclosure that few CEOs and CFOs ever read carefully. That’s how it works in the vast majority of plans under $25 million.

It’s likely that no other expense you have went up double digits last year.

Even worse, if you have a large share of the plan assets and fees are paid out of participant balances, which is the norm, thousands of dollars in fees came out of YOUR retirement account last year and will again.

Let me help you and your employees by shining a light on your plan costs, including those that are hard to find. I don’t charge for the service and it takes very little of your time. It’s a prudent practice that the DOL says should be done on a regular basis. Not doing it can be a breach of fiduciary responsibility.

Give me a call if you care about fees. 704-698-1040 DaveH@CornerstoneInvestment.com
Dave Hoshour

This entry was posted on Wednesday, January 24th, 2018 at 12:42 pm

Schwab Market Update – Liz Ann Sonders

For my $$, Liz Ann Sonders, Chief Market Strategist at Charles Schwab is better and more interesting than any I’ve heard, though I will always have a soft spot in my heart for Bob Farrell, the legendary market technical analyst who helped me guide my clients in the wild year of 1987.
Ms. Sonder’s are comments about the new year made in early December can be found here https://www.schwab.com/resource-center/insights/content/market-perspective  She should be out with an update next week.
This entry was posted on Wednesday, January 3rd, 2018 at 9:00 pm

Hurry, Deductions & Credits are More Valuable in 2017

The federal tax bill was signed by the president last week, squeezed in just before year-end. That gives you an extremely short window to take advantage of the greater value of losses or expenses this year.

Tax brackets are dropping in January (next week), standard deductions are increasing, the pass-through rate for small business owners is dropping and all those make expenses and capital gains losses much more valuable this year. Taxable investment accounts should take losses this year and time is almost up.

Talk to me, or if you are with another advisor, talk to them advisor ASAP if there are any available losses on taxable investments you can take before Jan. 1.

You should also consider contributing more to charity before year-end or making your normal monthly charitable contributions for January this week instead, when if you’re like most people, your deductions and credits are worth more this year than next.

This entry was posted on Tuesday, December 26th, 2017 at 3:06 pm