The Best News You May be Missing

I am the lone conservative in my family. I also subscribe to the NY Times, a high quality paper that I find aggressively and pervasively anti-Conservative. While I find that very annoying, I read it anyway because I want to be informed.

If you are a liberal, I encourage you to do the same from the other side. If you’re not, you should also listen up.

Many people assume the Wall St Journal to be a boring digest of financial news for those in the industry. While the third section is on markets and finance, the WSJ is actually a very rich source of fairly balanced news reporting and the main section is a wide-ranging news section.

The editorial section frequently has sizable op-eds from the liberal side while the paper’s editorial board puts out some of the best-written and best-documented editorials from a conservative perspective. It is always the top left editorial on the next to last interior page of the front section.

That provides some badly needed balance to the NY Times, Washington Posts and NPRs of the world – media outlets of high quality but strong anti-Conservative animosity that makes them difficult for conservatives to consume.

It seems like nearly everyone today takes in only their side’s view of the world, reinforced by their friends’ matching views, so we have two widely separated groups that don’t talk much, don’t understand each other and don’t think highly of each other’s views.

The WSJ, while definitely conservative, is much closer to the middle than the others I mentioned and a mile closer to the middle than Fox News.

The Wall St Journal has a $1 offer for 2 months of digital access or 12 weeks of both digital access and paper delivery for $1/week.

See… and take in some intelligent conversation from the other side.

I thought today’s op-ed section was particularly good, so you might start today.

This entry was posted on Monday, June 29th, 2020 at 8:54 am

Market Update

Back into the Black, Temporarily?

As of the start of this week, many of my clients were in the black for 2020 and nearly all the rest were down some single digit percentage for the year. That is due to good fund selection by focusing on funds favoring large growth companies, good timing on buying some beaten-down high-quality stocks and good stock selection on those purchases. It is also helped by diversification into non-stock market investments that did not go down nearly as much as did stocks, though they have not recovered as quickly either.

But, just as the S&P 500 index, a major barometer of large stocks, got back to breakeven for the year, we are starting to see some profit-taking. This should not surprise anyone. What is surprising is how fast that index erased a major downturn (known as a bear market). It took less than 60 days, by far the fastest stock market recovery from a bear market ever. Of course, the downturn was remarkably fast too.

Why has the Market Been so Strong?

So what has made the stock market go up so much since late March? It seems ironic that it should happen as unemployment numbers that were around 4% in February, soared to 14%, and by the Labor Department’s admission, if they had been correctly reported, would have shown 17% unemployment. Those are numbers you and I probably never thought we would see in our lifetime, numbers far worse than even 2008-2009, numbers that seem straight out of the Great Depression of the 1930s with its long soup lines, widespread bankruptcies and countless other woes.

The answer from many people is that the stock market is a forecaster, looking ahead at least 6-12 months and that it reacts to what investors believe will happen that far out. That may be part of the answer, but another major component is that the Federal Reserve has again flooded the world with newly created money, money it creates by buying bonds with its blank checkbook. That money goes to banks in a process that is mysterious to most investors, but it is the major reason, in my opinion, that the stock market went up so much after 2008 and has done so again in 2020.

That money is designed to be loaned by banks and spent by corporations and individuals to bolster the economy. But, when economic uncertainty is high and corporate chieftains are unwilling to spend, and when stocks are rising at the same time, much of that money finds it way into buying stocks and other investments. I am certainly not complaining, nor are clients.

Who’s Afraid of Debt?

At the same time, the U.S. Treasury is borrowing an additional $3 trillion dollars this year to pay for the stimulus packages passed so far, with talk of another package on the way. For perspective, the IRS collected $3.5 trillion in taxes last year while the federal government spent $4.4 trillion. Of course, tax revenues will be lower this year due to lower personal income and corporate profits, so that gap will widen a lot; then add to it however many trillions we eventually spend on stimulus with no revenue to pay for it. So, in one year, after essentially mandating a huge recession, the government in an attempt to soften the blow is going to spend somewhere between $7.5 and $10 trillion and probably collect less than $3 trillion.

Who Buys All This Debt?

Who buys all this debt? Most people think China, but that is far from correct. China is the U.S.’s largest creditor, but it only holds 5% of U.S. debt, according to Investopedia.

I’ve written this before, but the largest holder and buyer of U.S. debt by far is…wait for it…the U.S. government. Specifically, it is the Federal Reserve, once again bringing out that blank checkbook. As of May, the Fed owned nearly $7 trillion in U.S. government securities and it is buying more as fast as it can.

How long can this go on? As long as the Fed wants and the U.S. can afford to pay the interest on the debt. Don’t ever doubt that keeping that interest rate extremely low is a major reason why the Fed has promised to keep interest rates low. And even if the interest needing to be paid every year is skyrocketing, for the time being, other countries are doing the same thing and nobody seems concerned yet that spending far exceeds income. Don’t try this at home.

What’s Ahead?

States are unwinding their restrictions at an uneven and confusing pace depending mainly on the governor’s party affiliation, and people are coming back to formerly “non-essential” stores and jobs, hair salons (women are thanking God) and some restaurants. Flights are still 80% below capacity but on the way back up, and students are expecting to start school early in many places.

I do think there is a good bit of pent-up demand but that there are a lot of people who are going to take it slowly. And of course, 1/6 of workers have been without a job, though not totally without income. Not all of those will have jobs to come back to this year and that will certainly dampen consumer spending by quite a bit for the next few months and probably for a couple years or more. That’s why the best performing sectors of the market this year have been largely non-recessionary – tech, health care and energy (bouncing back from super-low oil prices.)

I do think the pullback today could be several percent for the overall market and double-digit percentages for the hottest stocks. We’ll have to see how things develop.

This entry was posted on Thursday, June 11th, 2020 at 10:41 am

Extreme Volatility

Extreme Volatility

Why is the stock market falling or rising 5% and 10% in a day over and over? Is it panic selling?

Yes and no. Some people are selling because they believe the economy is going into free fall and corporate profits will fall a lot. Others are selling because it is now just about certain that we will have some sort of recession. Still others are wanting to sit on the sidelines because there is so much uncertainty as to severity and time. Some are selling because they are trying to protect what they have.

Computer Selling

But others are selling because computer algorithms tell them to sell when selling is heavy and to buy when buying is heavy. These sellers have lots of money to work with and they are making volatility worse, much worse.

Now, computer-generated heavy selling is as old as the 1987 drop in the market. Back then, they called it portfolio insurance and it didn’t protect anyone, just the opposite. But today, an incredible amount of the volume on the stock exchange is computer-driven.

Consider this. Trading volume on Black Monday, 1987 was 604 million shares, a record-shattering number. In 2018, the average daily trading volume was 547 billion shares, nearly 1,000 times the volume. Meanwhile, the U.S. population is 33% higher. You tell me how much computers dominate Wall St. Just remember, computers don’t write their own programs, and what the traders behind these programs are often trying to is profit very, very short-term, sometimes even in milliseconds.

Opportunistic Buying

Thank God, there are still sizable investors like mutual funds that still invest long-term. Warren Buffet is still making money and not by the millisecond, and you can place a high-odds bet that he is buying now because that’s been his strategy – buy when the market is down. Good strategy.

If you’re already fully invested, consider replacing some positions with others that might have more potential because they’ve been oversold. Think about oil companies, home builders, airlines, cruise lines, REITS, health care, banks and various other industries that have some quality stocks on sale for 50-80% off. Be careful to buy high quality businesses with solid financials. Some that had so-so dividends have terrific dividend yields now that their stocks have dropped. I make no specific recommendations online, just my thoughts as someone who’s been around awhile.

This entry was posted on Sunday, March 22nd, 2020 at 12:32 am

Privacy & Control

Ever posted a picture of yourself online? Chances are your face is now in the files of Clearview Facial Recognition, a  company that has software that allows police to track down criminals. That’s a good thing, but it is built using a database of many millions of pictures from Facebook and all sorts of websites where people innocently posted pics as a way to share their life with “friends.” That software and database means any subscribing institution can track you wherever you go, whether you have a criminal history or not.

The central banks of numerous countries from Sweden to China are testing national digital currencies and the idea has also been floated for our Federal Reserve. It would speed up payments and give the Fed more control over the effectiveness of its monetary policy. Another upside is the possible shrinking of black market currency exchange used by criminals. The downside? Every dollar you spend and where you spent it would be in a government database. No wonder the Wall St. Journal ran an article recently about how governments all over the world are scratching their heads over why so much paper money has disappeared from circulation in recent years.

You are already known in amazing detail because of the advertising revolution created by Google in which all your searches, website visits and purchases are tracked in order give a great deal of insight into who and where you are, something advertisers covet, hence Google’s tremendous success. But, it also means that digital privacy has virtually become an oxymoron.

There is a lot of talk about socialism in America today and its egalitarian promise necessarily means increased government control, which has been the trend for several decades now. Whether or not you support that is not the issue, the issue is that political correctness is being increasingly and more harshly enforced as government extends its reach.

The Bible very clearly predicts that there will come a time when it will not be possible to buy or sell without proof that you support a certain world government that will be overtly hostile toward biblical Christianity. I can very easily foresee a time when Christians could be shut out of the public marketplace, even tracked down and imprisoned. That may not be as far off as most assume, especially given that as the divide between liberal and conservative has swiftly widened, public attitudes toward evangelicals have been rapidly worsening and the price of holding those beliefs rapidly increasing.

There are measures you can take to minimize your digital footprint, but it is probably too late now. Technology can be a wonderful thing but its effectiveness is agnostic toward the purposes for which it is used. That will at some point in the not very distant future mean big trouble for some law-abiding citizens, and many will be surprised at the speed at which it arrived.

This entry was posted on Monday, February 24th, 2020 at 9:14 am

DOL – Meeting Your Fiduciary Responsibilities

The Dept of Labor, which oversees retirement plans, publishes a brochure entitled Meeting Your Fiduciary Responsibilities, i.e. those that come along with oversight of a retirement plan. While the DOL has published a lot and there is a lot to keep up with, this is a pretty simple and straightforward introductory brochure that I highly recommend as a starter.

You’ll see that anyone that has a say in how the plan is managed or who is hired is a fiduciary with attendant responsibilities and liabilities. It matters not who signs the 5500 form or who does the research, everyone with a vote is a fiduciary, so all who do should read this.

Pay particular attention to:

pg. 3 – Limiting Liability
pg. 5 – Hiring a Service Provider
pg. 6  – Monitoring a Service Provider

You’ll notice that the DOL, like all government agencies and auditors is big on documentation. In the DOL’s case, special emphasis is put on the oversight process and reasonable fees.

If you’d like help on understanding your responsibilities, how best to go about that and how to properly document it in order to stay on DOL’s good side (a good idea), let me know.
This entry was posted on Tuesday, January 21st, 2020 at 2:10 pm

Student Loan Debt – The Latest Financial Bubble in a Series

More facts from a WSJ article on student debt. The average student loan balance for a graduate with a degree in Dance from New York University is $96,000. About 30% of student loans are in income-based repayment plans with another 20% in forbearance and another 10% past due.
The rate at which student loan debt is being paid off is 1%/year. Most will be defaulted on, written off under various programs or forgiven. About 12% of those in income-based repayment programs are seeing their loan balance grow even as they pay based on their income.
When people choose what to default on – a house, a car or a student loan – they choose not to lose the house or car, instead they go into an income-based repayment plan on their student loans.
Student loan debt is a burden to many adults, a huge drag on the economy, and a large and growing cost to the government whose involvement has largely enabled the explosion in debt. For any other consumer product, basic economics would have put an end to this long ago.
That a college degree has contributed to the economic betterment of many is beyond dispute. Should we make college free? We could. I guess it depends on how big you want government to be.
For nearly 20 years now the federal government has borrowed between a trillion dollars and half a trillion dollars every year, one of the many distortions tied to super-low interest rates. At some point it will become a very serious problem, especially if we opt for another national good by providing health coverage for everyone.
In a series of financial bubbles, government debt will be the last and biggest, but that is another story. Meanwhile, there are people running for office and more promises to be made.
This entry was posted on Wednesday, August 21st, 2019 at 10:27 am

Facebook’s New Cryptocurrency Could Work

Bitcoin was an experiment that didn’t quite work, mainly because the value fluctuated so that no one knew quite what they were really getting paid. But Facebook’s recently announced Libra may have solved that problem with tying it to a basket of popular international currencies.
Facebook and its partners, some of the biggest financial companies in the world have clearly done a good job of thinking through how to make a digital currency work and it really does have a chance of succeeding as a ubiquitous international currency that saves merchants a lot of credit card fees and does the same for many of the world’s citizens without a bank account who pay high fees to send money via Western Union or other means.
Here’s a video that does a good job of explaining how Libra works and why it may be the future of money. How Libra Works (see link on the CIS FB page)
Here’s a link for those not on Facebook.
This entry was posted on Friday, June 21st, 2019 at 3:48 pm

SEC Drops the Ball on “Regulation Best Interest”

Advisers working for registered investment advisory firms like mine have long been held to a higher standard of care for clients than those that work for brokerage firms, banks and insurance companies and are paid by commissions. I am proud of the higher standard and have had it written explicitly into my client agreements for years on all client accounts, not just retirement plans or retirement accounts.

After the Fiduciary Rule put out by the DOL a few years ago that applied only to retirement accounts was struck down in court, the SEC had a chance to do what Dodd-Frank instructed it to do nearly 10 years ago – investigate conflicts of interest and their costs and come up with a better set of requirements to protect clients. You may know that the DOL rule was really crafted because the SEC failed to put anything together within a reasonable time.

So now the SEC is finally out with its best interest rule. Alas, “Regulation Best Interest” requiring compliance by June 2020, is a weak effort, ground down by continued intense pressure from brokerage and insurance firms (hopefully, you learned a long time ago not to be fooled by the titles of legislation and regulations).

Brokerage firms will have to shelve the sales contests that have been a staple for so long and can no longer require their brokers to sell only the firm’s proprietary products. And, they must provide clients with a “relationship description” including conflicts of interest. But, I’ll tell you in advance what that will look like – another boring disclosure document that the client won’t read – “Just sign here.”

And, while the SEC proudly announced that all advisers will have to put the client’s interests ahead of their own, it then proceeded to essentially say that if the financial person sells products for commissions and only incidentally provides investment advice, they are not advisers and are not held to the best interest standard. There’s the loophole through which you can drive just about the whole commissioned financial services industry. Victory! for Wall St. and the insurance industry, or so it is said.

Ask yourself why it is so hard for many of the big financial companies to agree to act in the clients’ best interest. Then ask yourself why aside from lots of expensive advertising and mainly intelligent and winsome salespeople anyone would choose to deal with them instead of an independent investment adviser that does put client interests first, not only because it is the law for registered investment advisers, but because most of us believe it is the right way to do business.

It’s a shame the SEC, who had the mandate and the ability, caved again to money and power and fell short of the protection it could and should have given investors.

This entry was posted on Thursday, June 6th, 2019 at 4:12 pm