Friday, December 6, 2019

Weekend Reads

Quantum Economics

Today’s economists may think that’s [inductive reasoning] what they are doing, but they often aren’t. They begin with models that purport to include all the important variables, then fit facts into the model. When the facts don’t fit, they look for new ones, never considering that the model itself may be flawed.

Furthermore, as I have shown time and time again, they assume away reality in order to construct models that are in “equilibrium” with themselves. This is supposed to give us insight into the reality that has been assumed away. 


Comparing Capital Gains Tax Proposals by 2020 Presidential Candidates

In less than two months, voters will cast their choice in the Iowa caucus to begin the process of selecting the next Democratic presidential candidate. The candidates currently in the top 3 polling positions—former Vice President Joe Biden, Senator Elizabeth Warren (D-MA), and Senator Bernie Sanders (I-VT)—have all proposed sweeping changes to the tax code, especially the taxation of capital gains and dividends.

Class-Warfare Taxation, Government Spending, and Economic Growth

Arthur Okun was a well-known left-of-center economist last century. He taught at Yale, was Chairman of the Council of Economic Advisors for President Lyndon Johnson, and also did a stint at Brookings.

In today’s column, I’m not going to blame him for any of LBJ’s mistakes (being a big spender, creating Medicare and Medicaid).

Instead, I’m going to praise Okun for his honesty. Is his book, Equality and Efficiency: The Big Trade Off, he openly acknowledged that higher taxes and bigger government – policies he often favored – hindered economic performance.

More Americans Want Bigger Government, But Not Socialism

In September and October, Gallup conducted in-depth surveys on Americans’ views on the role government should play in our lives. The result was that most Americans believe the government should do more to solve problems and make our lives better. In short, most Americans want bigger government.

The problem is, they don’t want higher taxes to pay for it. And for now, at least, a majority doesn’t believe socialism is the answer. There is a lot of interesting information to be gleaned from the latest slew of Gallup polls released in November.

Job Numbers Higher, Unemployment Rate 3.5 Percent

Nonfarm payrolls (chart) jumped by 266,000 jobs month-over-month (m/m) in November, compared to the Bloomberg forecast of an 180,000 increase. The rise of 128,000 seen in October was revised to a gain of 156,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 254,000, versus the forecasted gain of 178,000, after rising by 163,000 in October, revised from the 131,000 increase that was initially reported.

Note: Job numbers include 50,000 GM workers who returned to work. 

The unemployment rate dipped to 3.5% from October's 3.6% rate, where it was expected to remain, while average hourly earnings were up 0.2% m/m, below projections of a 0.3% increase, but October's initially-reported 0.2% rise was adjusted upward to a 0.4% gain. Y/Y, wage gains were 3.1% higher, versus estimates of a 3.0% pace, and versus October's upwardly-revised 3.2% increase. Finally, average weekly hours remained at 34.4, matching estimates. 

Today's upbeat Labor Report followed yesterday's unexpected drop in jobless claims to aid sentiment as employment data continues to be a key to watch for any signs of a breakdown in the bifurcation in the economy between weak manufacturing/capex and stronger services/consumption.

The University of Michigan's Consumer Sentiment Index rose to 99.2, above the consensus of 94.7 to 97.5 and higher than November's 96.8 level.


Thursday, December 5, 2019

SPY ETF Closing Price

Tuesday, December 3, 2019

Markets Turn as December Opens

As I write this, the market is down (DJIA) about 325 points, or 1.2 percent. After a loss of 268 yesterday, this is the largest decline in more than two months. The decline is reportedly a reaction to weaker manufacturing data and Trump's remarks on a trade deal.

I've been talking about this possibility for longer than that. See What Do I Do Now, from Sept 24; This Pattern Is Another Warning Sign, Nov 2;  and of course, some advice in general portfolio management for any market: What should my investment strategy be right now if a recession is imminent? or Have a Smart Trade Plan Before You Invest.

Many brokers and advisors and other "experts" on portfolio management prescribe the buy and hold, yet reallocate, method. This involves deciding on a mix of investments, for example 60 percent stocks and 40 percent bonds (or fixed income). Then on a regular basis, you re-balance the portfolio to maintain that ratio.

There are studies that show this is a valid method that creates higher annual returns over a long-term period, such as 30 years. If you have 30 years until you plan to retire, it might be worth your benefit to explore this theory of portfolio management.

But if you are at least 50 years old and thinking about retiring, or have already retired, this is not for you. If the market tanks, you can't wait six to 10 years for the market to break even. If you're using your portfolio to supplement your retirement earnings, if your portfolio's value sinks 50 percent, how would this affect those draws?

I have written several articles over the last year about this. You can start with this on from last January: Beware Your Broker. You can then browse the posts from this year on the blog archive list at the right.

Sunday, December 1, 2019

Have a Smart Trade Plan Before You Invest

When you buy a stock, it’s likely because you sense an opportunity. But how often do you establish the parameters for making profits? How will you know when to get in or out of a trade?

These are questions you should ask yourself before entering a trade. Creating a step-by-step trade plan—a blueprint for how to build positions and reshape them as conditions warrant—can help you develop a disciplined approach to your trading.

Before beginning any trade plan, perform a quick self-evaluation:
  • Are you buying a stock for fundamental or technical reasons?
  • Which investing style do you prefer (e.g., growth or value, trend or countertrend)?
  • Determine your view of market sentiment: Is momentum generally tilted up or down?
Once you have your bearings, and you’ve identified a list of stocks or exchange traded funds (ETFs) based on your research analysis method—fundamental, technical or both—you’re ready to embark on the actual planning. Here are five key steps to help you create a smart trade plan:

Know your time horizon

How long do you plan to hold a stock? What purpose will it serve in your portfolio?

Your trade time frame depends on your trading strategy. Generally speaking, traders fit into one of three categories:
  • Single-session traders are very active and are looking to gain from small price variations over very short periods of time.
  • Swing traders target trades that can be completed in a few days to a few weeks.
  • Position traders seek larger gains and recognize that it often takes longer than a few weeks to achieve them.
Determine your entry strategy

Once you have a list of stocks and ETFs you’re considering, look for entry signals—for instance, divergences from trend lines and support levels—to help you place your trades. The signals you employ and the orders you use to make good on them hinge on your trading style and preferences.

Trading is risky. A good trade plan will establish ground rules for how much you are willing to risk on any single trade. Say, for example, you don’t want to risk losing more than 2–3% of your account on a single trade, you could consider exercising portion control, or sizing positions to fit your budget.

Here’s a scenario: A trader with $150,000 in total capital is interested in a stock trading at $67 a share. This trader’s maximum budget per trade is $15,000, or 10% of the account. That means the maximum number of shares of this stock the trader can buy is 223 ($15,000 ÷ $67). Let’s say the trader’s risk per trade is 2%, meaning the trader wants to lose no more than $3,000 of his or her total $150,000 on the trade. Dividing that sum by 223 shares reveals how much the stock can drop per share ($13.45), establishing a stop price for limiting losses ($53.55). The trader may never have to use this stop order, but at least it’s in place if the trade moves the wrong way.

Review your trade performance

Are you making or losing money with your trades? And importantly, do you understand why?

First, examine your trading history by calculating your theoretical “trade expectancy”—your average gain (or loss) per trade. To do this, figure out the percentage of your trades that have been profitable vs. unprofitable. This is known as your win/loss ratio. Next, compute your average gain for profitable trades and average loss for unprofitable trades. Then, subtract you average loss from your average gain to get your trade expectancy.

A positive trade expectancy indicates that, overall, your trading was profitable. If your trade expectancy is negative, it’s probably time to review your exit criteria for trades.

The final step is to look at your individual trades and try to identify trends. Technical traders can review moving averages, for example, and see whether some were more profitable than others when used for setting stop orders (e.g., 20-day vs. 50-day).

Sticking to it

Even with a solid trade plan, emotions can knock you off course. This is particularly true when a trade has gone your way. Being on the winning side of a single trade is easy; it’s cultivating a continuum of winning trades that matters. Creating a trade plan is the first step in helping you think about the next trade.

Wednesday, November 27, 2019

Advice Worth Taking

Year-end is rapidly approaching, which means it's time to review your investing or trading rules. Below, I have some time-honored advice that may help. Both Dennis Gartman and Bob Farrell are legendary traders, and they kindly shared the rules they’ve found most helpful.

Both these guys are traders, rather than investors, but a lot of the advice is helpful regardless of the long-term strategy you use.

NEVER, EVER, EVER ADD TO A LOSING POSITION: Adding to a losing position eventually leads to ruin, remembering Enron, Long Term Capital Management, Nick Leeson and myriad others.

TRADE LIKE A MERCENARY SOLDIER: As traders/investors we are to fight on the winning side of the trade, not on the side of the trade we may believe to be economically correct. We are pragmatists first, foremost and always.

MENTAL CAPITAL TRUMPS REAL CAPITAL: Capital comes in two forms... mental and real... and defending losing positions diminishes one’s finite and measurable real capital and one’s infinite and immeasurable mental capital accordingly and always.

WE ARE NOT IN THE BUSINESS OF BUYING LOW AND SELLING HIGH: We are in the business of buying high and selling higher, or of selling low and buying lower. Strength begets strength; weakness more weakness.

IN BULL MARKETS ONE MUST TRY ALWAYS TO BE LONG OR NEUTRAL: The corollary, obviously, is that in bear markets one must try always to be short or neutral. There are exceptions, but they are very, very rare.

"MARKETS CAN REMAIN ILLOGICAL FAR LONGER THAN YOU OR I CAN REMAIN SOLVENT:" So said Lord Keynes many years ago and he was... and is... right, for illogic does often reign, despite what the academics would have us believe.

BUY THAT WHICH SHOWS THE GREATEST STRENGTH; SELL THAT WHICH SHOWS THE GREATEST WEAKNESS: Metaphorically, the wettest paper sacks break most easily and the strongest winds carry ships the farthest, fastest.

THINK LIKE A FUNDAMENTALIST; TRADE LIKE A TECHNICIAN: Be bullish... or bearish... only when the technicals and the fundamentals, as you understand them, run in tandem.

TRADING RUNS IN CYCLES; SOME GOOD, MOST BAD: In the “Good Times” even one’s errors are profitable; in the inevitable “Bad Times” even the most well researched trade shall go awry. This is the nature of trading; accept it and move on.

KEEP YOUR SYSTEMS SIMPLE: Complication breeds confusion; simplicity breeds elegance and profitability.

UNDERSTANDING MASS PSYCHOLOGY IS ALMOST ALWAYS MORE IMPORTANT THAN UNDERSTANDING ECONOMICS: Or more simply put, "When they’re cryin’ you should be buyin’ and when they’re yellin’ you should be sellin’!"

REMEMBER, THERE IS NEVER JUST ONE COCKROACH: The lesson of bad news is that more shall follow... usually hard upon and always with worsening impact.

BE PATIENT WITH WINNING TRADES; BE ENORMOUSLY IMPATIENT WITH LOSERS: Need we really say more?

DO MORE OF THAT WHICH IS WORKING AND LESS OF THAT WHICH IS NOT: This works well in life as well as trading. If there is a “secret” to trading... and to life... this is it.

CLEAN UP AFTER YOURSELF: Need we really say more? Errors only get worse.

SOMEONE’S ALWAYS GOT A BIGGER JUNK YARD DOG: No matter how much “work” we do on a trade, someone knows more and is more prepared than are we... and has more capital!
PAY ATTENTION: The market sends signals more often than not missed and/or disregarded... so pay attention!

WHEN THE FACTS CHANGE, CHANGE! Lord Keynes... again... once said that “ When the facts change, I change; what do you do, Sir?” When the technicals or the fundamentals of a position change, change your position, or at least reduced your exposure and perhaps exit entirely.

ALL RULES ARE MEANT TO BE BROKEN: But they are to be broken only rarely and true genius comes with knowing when, where and why!

Bob Farrell was a widely followed genius at Merrill Lynch. Wall Street people still speak of him reverently. Some of the greatest traders and investors I know referred to his rules on a frequent basis, and I suggest you do the same. Here are his rules with commentary from MarketWatch’s Jonathan Burton.

1. Markets tend to return to the mean over time

By "return to the mean," Farrell means that when stocks go too far in one direction, they come back. If that sounds elementary, then remember that both euphoric and pessimistic markets can cloud people's heads.

"It's so easy to get caught up in the heat of the moment and not have perspective," says Bob Doll, global chief investment officer for equities at money manager BlackRock Inc. "Those that have a plan and stick to it tend to be more successful."
Excesses in one direction will lead to an opposite excess in the other direction

2. Think of the market as a constant dieter who struggles to stay within a desired weight range but can't always hit the mark.

"In the 1990s when we were advancing by 20% per year, we were heading for disappointment," says Sam Stovall, chief investment strategist at Standard & Poor's Inc. "Sooner or later, you pay it back."

There are no new eras -- excesses are never permanent

This harkens to the first two rules. Many investors try to find the latest hot sector, and soon a fever builds that "this time it's different." Of course, it never really is. When that sector cools, individual shareholders are usually among the last to know and are forced to sell at lower prices.

"It's so hard to switch and time the changes from one sector to another," says John Buckingham, editor of The Prudent Speculator newsletter. "Find a strategy that you believe in and stay put."
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

This is Farrell's way of saying that a popular sector can stay hot for a long while, but will fall hard when a correction comes. Chinese stocks not long ago were market darlings posting parabolic gains, but investors who came late to this party have been sorry.
The public buys the most at the top and the least at the bottom

Sure, and if they didn't, contrarian-minded investors would have nothing to crow about. Accordingly, many market technicians use sentiment indicators to gauge investor pessimism or optimism, then recommend that investors head in the opposite direction.
Fear and greed are stronger than long-term resolve

3. Investors can be their own worst enemy, particularly when emotions take hold.

Stock market gains "make us exuberant; they enhance well-being and promote optimism," says Meir Statman, a finance professor at Santa Clara University in California who studies investor behavior. "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."

After grim trading days, it's easy to think you're the patsy at this card table. To counter those insecure feelings, practice self-control and keep long-range portfolio goals in perspective. That will help you to be proactive instead of reactive.

"It's critical for investors to understand how they're cut," says the Prudent Speculator's Buckingham. "If you can't handle a 15% or 20% downturn, you need to rethink how you invest."
Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Markets and individual sectors can move in powerful waves that take all boats up or down in their wake. There's strength in numbers, and such broad momentum is hard to stop, Farrell observes. In these conditions you either lead, follow or get out of the way.

When momentum channels into a small number of stocks, it means that many worthy companies are being overlooked and investors essentially are crowding one side of the boat. That's what happened with the "Nifty 50" stocks of the early 1970s, when much of the U.S. market's gains came from the 50 biggest companies on the New York Stock Exchange. As their price-to-earnings ratios climbed to unsustainable levels, these "one-decision" stocks eventually sunk.

Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend

4. When all the experts and forecasts agree -- something else is going to happen

As Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"

Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

5. Bull markets are more fun than bear markets

No Kidding

This is not the first time, nor will it be the last, when I bring these rules to your attention. I suggest, when you are feeling particularly bullish or disastrously bearish, pull up this post and reread it.

Saturday, November 23, 2019

Week in Review

I don't always do a week in review, but I thought it would be helpful to take a look at what's going on. (It's easy for individual investors to create their own week in review. Use the Economic Calendar, sign up for market reviews with your broker, and visit web sites such as CNBC, Yahoo Finance, Forbes, Seeking Alpha, Market Watch, etc.)

Markets Finish Session Higher, Fail to Post Weekly Advance

The U.S. equity markets finished the last trading session of the week modestly higher, but failed to post gains for the week, as the omnipresent uncertainty swirling around a U.S.-China "phase one" trade deal that has hampered conviction all week tempered some upbeat news on the manufacturing front and some mixed retail sector earnings reports. Markit's manufacturing and services sector reports came in stronger than expected, and the University of Michigan's Consumer Sentiment Index was unexpectedly revised higher.

Jobless Claims Indicate Slower Growth

The risks of marginally slower payroll growth in November as well as an incremental rise in the unemployment rate are the indications from initial unemployment claims which, in data that track the sample week of the monthly employment report, came in at a higher-than-expected 227,000 in the November 16 week. Comparisons with the sample week of the October employment report show a 9,000 increase in claims with the 4-week average, at 221,000 in the latest week, up nearly 6,000. The 221,000 4-week average is the highest since June.

Leading Indicators Signal Slowing Growth

The index of leading economic indicators continues to signal slowing growth going to into year end and next year. The index fell 0.1 percent in October and follows a revised 0.2 percent decline in September and another 0.2 percent decline in August. Weakness in manufacturing components has been the persistent theme in the slump with easing in labor strength also a negative factor for the index.

Existing Home Sales Jump

Favorable mortgage rates together with high levels of employment are giving housing, a sector that had been flat, a strong lift going into year end. Existing home sales rose 1.9 percent in October to a 5.460 million annual rate, lifting the year-on-year gain to 4.6 percent. Recent reports have been the best since early 2018.

Single-family resales jumped 2.1 percent in the month to a 4.870 million rate with year-on-year change at plus 5.4 percent. Condo resales came in steady at a 590,000 rate but, in contrast to the larger single-family category, are down 1.7 percent on the year. The median price for single-family sales, at $273,600, is 6.2 percent higher than a year ago with the median condo price, of $248,500, up 5.6 percent.

Market Warning Signal Still Valid

On Nov 2, I discussed high-yield bonds sending the stock market a warning sign. This continues to indicate a possible correction in the market. Note that HYG just formed a “lower low” on the chart. And that’s after a number of lower highs since the peak in late October. This signals the trend is shifting into more bearish action. We may not be there yet, but it's something to watch closely.

It looks to me that if HYG closes below $86.20 anytime over the next few sessions, then we’ll have a decisive breakdown from that pattern and junk bonds will be headed lower.

And, if junk bonds head lower, then the stock market should follow close behind.

Friday, November 22, 2019

Seven Facts (or Myths) About Investing

Putting money in the market and hoping for the best. Most advisors will tell you that. I have actually been told that by a financial advisor, that I should always be fully invested. I did not hire him. I actually don't need a financial advisor. Neither do you if you learn the principles.

Phil Town presents the following video on facts and myths about investing.

He asks the following questions, and provides some insight. Well worth the 12 minutes.

1. True or False? The stock market always goes up in the long run.

2. True or False? Those few people who beat the market in the long run only do so because they have either studied hard or have above-average IQs.

3. True or False? Real estate does not need to be part of everyone's portfolio.

4. True or False? Risk and reward in the stock market are related. If you want a higher return, then you must be willing to take more risks.

5. True or False? The best way to offset the risk of investing in the stock market is to diversify across a large number of stocks.

6. True or False? A broad market mutual fund is the best choice for a low-risk retirement account like a 401(k) or an IRA.

7. True or False? Almost no one beats the market in the long run.




Notable Quote

Jim Geraghty, writing for National Review:
Marco Rubio’s “Common Good Conservatism” and other conservatives expressing more skepticism of the free market are all fascinating, but I remain unconvinced that you’ll have a lot of success trying to fix cultural problems with federal government policy solutions. We’ve got serious and worsening troubles: addiction, suicide, cycles of despair, forgotten communities, isolation, and alienation. But if your plan is to turn to government to fix it, you’re ultimately trusting the same institution we trusted to provide medical care to veterans. The federal government has a lot of good people working for it, but they’re mostly stuck in structures and cultures that incentivize the status quo, punish risk-takers, minimize accountability and disregard efficiency. Could we change that? Maybe, but it won’t be easy, and it won’t happen quickly. The problems we face weren’t created in a small office in a federal building Washington, and they won’t be fixed there.

Thursday, November 21, 2019

Become a Better Money Manager


From my point of view -- or as they say, IMHO -- none of the above "reasons" -- I'd like to call them "excuses" -- are valid for not having retirement savings. All of them can be overcome by following basic financial principles. The following are time-tested principles, which have been repeated over and over again. What most people lack is the willingness to actually do them, rather than just think about them. 

1. Set SMART financial goals

The first step toward achieving your financial goals is to set parameters against which you can measure your progress. That means ensuring your goals are Specific, Measurable, Achievable, Relevant and Time-bound, or SMART.

Using the SMART approach will force you to be more precise about what you want to achieve and give you less room to make excuses should you fall short. Here’s an example to get you started:

Vague goal: Contribute to my 401(k) each month.

SMART goal: Contribute 5% of my salary to my 401(k) each month in order to receive my employer’s full matching contribution.
  • The goal is specific: If you don’t already know your employer’s matching percentage, ask your Human Resources department.
  • The goal is measurable: You can easily see whether you’re having enough deducted from your paycheck each month to get the match.
  • The goal is likely achievable, since it’s a small percentage of your pay and can be automatically withheld.
  • The goal is relevant, as retirement savings is among the most important financial issues anyone will face.
  • The goal is time-bound because you’ve committed to contributing a specific amount each month.
Be sure to take the time to actually write down your SMART goals, which will form the basis of your financial plan. Research has shown that creating a written financial plan is more effective than simply thinking or talking about your goals. Indeed, more than two-thirds of people who have a written financial plan say they feel financially stable, whereas just 28% of those without a plan feel the same way, according to recent surveys.

2. Turn your goals into an action plan

With your SMART goals firmly established, now it’s time to look at your goals individually, ranking them in order of priority and assigning a price tag to each. This helps you see how much money you’ll need each month to achieve all your goals.

If, once you’ve tallied up your goals, any of them seem unattainable, take a step back and reassess. For example, maybe you should consider a less-expensive house or giving yourself more time to save for the down payment. Perhaps you should investigate other ways to help fund your child’s education, such as grants, loans, and scholarships. Or maybe you need to take a closer look at how to reduce your monthly expenses.

The key here is to have manageable goals that you can stick to. Even if they seem more modest than you might want, trust that having goals—and a written financial plan—will help you make more progress than you would otherwise.

Be sure to root your plan in realistic assumptions, as well. For example, how much can you expect to earn on your retirement portfolio each year? How much will a four-year college education cost, on average, by the time your child is ready to enroll? Historical rates are a good starting point for such projections, as are retirement and college savings calculators. In the case of stock market returns, however, past performance may not be indicative of what you can expect in the future.

It can also be useful to look at different scenarios when making your projections. If you can reach your retirement goal with your current contributions and a 7% annual return on your investment portfolio, for example, it might be good to look at how a 6% return would affect your situation. If even a slightly smaller annual return would leave you far short of your goal, you may want to consider upping your savings target to account for that possibility.

3. Make regular commitments to stay on top of your finances

Organizing your financial goals and clarifying your financial plan isn’t going to help you keep your New Year’s resolution unless you stick to your plan over time. One good way to do that is to create a detailed quarterly schedule of money-related tasks. Here are some of the things you might put on the checklist for each month or, at least, each quarter: Portfolio review, taxes, health care, credit reports, etc. 

For more information on financial planning, see Does Financial Planning Help?

Tuesday, November 19, 2019

Just for Fun: Most Popular Grocery Stores

There are some 36,000 grocery stores in the United States. (Thanks to free market capitalism). While some are smaller, independent stores or specialty outlets that focus on groceries from a certain area, Americans tend to buy the bulk of their food at large regional or national chains. Regional chains like Hy-Vee, Albertsons, or Publix may be a staple in some parts of the country, but they are completely unknown in others.

I live in Texas, so I wasn't surprised that H-E-B was listed by WallStreet 24/7 as the most popular. H-E-B started around the turn of the 20th century and is based out of San Antonio. I would probably vote for Albertsons, but they are a tad more expensive.

On my recent trip to Michigan, I did shop at a Meijers, which is supposedly the most popular grocer in that state. Meijers is like a WalMart supercenter. I found it interesting that when checking out, the person ringing up your groceries also had to bag them. I made the comment that she didn't have any help, since I would expect it based on my experience in Texas. At this particular store, they never have an extra person bag groceries, she said. As you would expect, it takes longer to get out of a Meijers than our local H-E-B, which normally has a checker.

You can view the most popular for all 50 states here.

New Retirement Legislation Stuck in the Senate


A sweeping new retirement bill is working its way through Congress that is aimed at helping the country overcome its retirement savings crisis. That’s what many lawmakers in Washington envision with the Setting Every Community Up for Retirement Enhancement Act of 2019 – better known as the “SECURE Act.” The far-reaching bill includes 29 provisions aimed at increasing access to tax-advantaged retirement accounts and preventing older Americans from outliving their assets.

The SECURE Act includes numerous new retirement account benefits including making it easier for small businesses to set up retirement plans such as 401(k)s that will be less expensive and easier to administer. Many part-time workers would be eligible to participate in employer retirement plans under the bill. And the SECURE Act would also push back the age at which retirement plan participants must take “required minimum distributions” (RMDs) from 70½ to 72. These are just a few of the new benefits included in the SECURE Act.

The sweeping new legislation passed overwhelmingly in the House of Representatives in May but has since been bogged down in the Senate for reasons I will share below. While most of the new retirement provisions in the SECURE Act are welcome additions, unfortunately not all of them are. One provision, for example, would require retirement account heirs to pay taxes on their inheritance in 10 years instead of over their remaining lifetimes as is the case now.

While the SECURE Act, if passed into law, would be the most sweeping retirement legislation in decades, most Americans apparently know little or nothing about it.

The Retirement Savings Crisis in America

The fact that there’s trouble brewing in the US retirement system, which requires most workers to supplement Social Security with personal savings, has been widely acknowledged. According to data from the US Bureau of Labor Statistics published in 2018, only 55% of the adult population participate in a workplace retirement plan of any kind. And even those who do are often woefully behind when it comes to investing part of their paychecks.

The wealth management giant Vanguard, for instance, revealed early in 2019 that the median 401(k) balance for those ages 65 and older is just $58,035. That is a fraction of the savings needed to fund a retirement which could last 20-30 years! The SECURE Act aims to encourage employers who have previously shied away from these company-sponsored retirement plans, which can be expensive and difficult to administer, to start offering them.

The SECURE Act would tweak a number of rules related to tax-advantaged retirement accounts. Here are the major provisions of the Act, assuming it is passed by the Senate:
  • Make it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%.
  • Provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment.
  • Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
  • Encourage plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations.
  • Push back the age at which retirement plan participants must take “required minimum distributions” (RMDs), from 70½ to 72.
  • Allow the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually).
“With passage of this bill, the House made significant progress in fixing our nation’s retirement crisis and helping workers of all ages save for their futures,” Rep. Richard Neal (D-MA) said in a statement after the bill sailed through the House in May.

Most financial planners support the SECURE Act and consider it a step in the right direction toward solving the nation’s retirement saving crisis. Most favor raising the age for taking required minimum distributions from 70½ to 72, thus giving people a little more time to save for retirement.

Likewise, most agree that reducing the number of hours that employees are required to work in order to sign up for 401(k)s, including part-time workers if they qualify, is a good idea. Most also favor adding flexibility to 529 accounts, which could be used to repay some student loans under the bill. That’s a good option for parents who may have funds remaining in an educational savings account and want to help a child who has already graduated.

One Potentially Serious Knock on the SECURE Act

Let’s say you have an IRA or a retirement plan that you want to leave to your children in a tax efficient manner after you are gone. If so, you need to be concerned about one new provision in the fine print of the SECURE Act that could cost them dearly.

Non-spouse beneficiaries of IRAs and retirement plans are required to eventually withdraw all the money from its tax-sheltered status, but the current law allows them to minimize the amount of their required minimum distributions by “stretching” them over their own lifetimes. This is called a “Stretch IRA.”

Distributions from a Traditional Inherited IRA are taxable, so the longer your beneficiaries can postpone or defer them (and hence the tax), the better off they will be. The bad news is that the government wants its tax money, and it wants it sooner rather than later.

The big change buried in the SECURE Act is a small provision that changes the rules that currently allow your beneficiaries to take distributions and pay the taxes on them over their lifetimes. Under the SECURE Act, your non-spouse beneficiaries must withdraw all of the assets and pay taxes on them within 10 years.

You might be thinking this is not a really big deal because you expect your heirs will withdraw the money within 10 years anyway – and in many cases that may be true. But let’s say your heirs don’t need or want to take the money so quickly, and instead want to delay the distributions – and the taxes – as long as possible.

In addition to delaying the taxes, keep in mind that this money is presumably invested wisely and is compounding annually – tax-deferred. Let’s say your kids inherit your IRA or other retirement plan when they are in their 50s, and they only take the required minimum distributions; the remainder of the money could increase significantly if they let it compound and don’t take it until they need it – under current law.

Note: the discussion above is purposely oversimplified, so be sure to discuss this with your retirement planner, CPA and/or legal counsel before acting upon it.

The SECURE Act is Currently Tangled Up in the Senate

Despite the SECURE Act’s overwhelming support in the House, it may take time before the Senate even gets to vote on the bill. In early July, PlanAdviser, a retirement benefits consultant, reported that two Republican Senators – including Ted Cruz (R-TX) – were holding it up. According to a Washington, DC source, Cruz was trying to tweak the section on 529 accounts so that parents can use them for home-schooling expenses as well.

In October, PLANSPONSOR, another benefits consultant, said the bill has been sitting "in something like legislative limbo." Along with Cruz, two other Senators – Mike Lee (R-UT) and Pat Toomey (R-PA) – had reservations about some technical points. Yet the consultant remains optimistic that the bill could still get unanimous consent in the Senate, or get through by being attached to a broader bill with bipartisan support.

Even with only a few Senators standing in the way, passage of the bill could take a lot longer. Without unanimous consent, the bill would have to go through the committee process, followed by floor debates and subsequent votes. And if Senators succeed in changing some of the bill’s language, the House would have to vote on the newer version as well. It remains unclear how long all that might take.

The question is whether the SECURE Act will get passed this year or next? Congress only has a couple of weeks left in the current session and according to Majority Leader McConnell, there is a long list of priorities that needs to be passed this session. A spokesman for McConnell reportedly said last week that the SECURE Act might well be delayed until next year.

The bottom line: While it’s still possible that the SECURE Act may go through some minor changes, the bipartisan support behind the legislation means it’s likely to end up passing in the Senate, too – either just ahead or in early 2020.

While the SECURE Act is not a panacea for our retirement saving crisis, it is widely agreed it’s a step in the right direction, with the one exception discussed earlier. While the SECURE Act may be a step in the right direction, it will not solve our retirement savings crisis. That will only be solved if Americans start saving more, period, with or without the new legislation.

Sunday, November 17, 2019

Economic Perspectives Update

Retail sales increase modestly

Retail sales increased 0.3% in October, nearly reversing a similar drop in the prior month, and above the consensus of 0.2%. Individual categories were mixed. Vehicle and gas station sales increased 0.5% and 1.1%, respectively. Excluding these two categories, sales were up a modest 0.1%. While online sales continued to advance, up 0.9%, apparel dropped 1.0% and restaurant sales fell 0.3%, down for the first time this year. The two home-related categories (building materials and furniture) also pulled back, suggesting some potential weakness in housing demand.

On a y/y trend basis, retail sales were up 3.8%, which is weaker than where they were in mid-2018, but better than earlier this year. Our measure of discretionary retail sales and its core increased 4.9% y/y and 5.5% y/y, respectively, also stronger than earlier this year. This suggests that the pullback in consumer comfort over the past several weeks has not impacted consumer demand. The trends in retail sales, which account for about 1/3 of consumer spending, support a continued moderate pace of economic growth.

GM strike weighs on industrial production

Industrial production dropped 0.8% in October, down in three of the past four months, and by the most since May 2018. This was worse than the consensus of -0.5%. Due to the GM strike, vehicles output sank 7.1%, the most since January. Industrial production ex-vehicles was down 0.5%, as output growth across most sub-sectors weakened. Manufacturing ex-vehicles was down 0.1%, led by durable goods. Utilities output fell 2.6%, while mining fell 0.7%. Core industrial production, which excludes vehicles, energy, and high-tech, fell 0.2%, led by materials.

On a y/y basis, industrial production fell 1.1%, the most since October 2016. Manufacturing output shrank 1.5% y/y, down for the fourth straight month and by the most since May 2016. Utilities contracted 4.2% y/y. Mining output eked out 2.7% y/y growth, a fraction of the double-digit pace in 2018 and early-2019.

With the GM strike idling capacity, the utilization rate fell 0.8 ppt, the most since March 2009, to 76.7%, its lowest level in more than two years, and worse than the consensus of 77.0%. It was 3.1 ppt below the 1972-2018 average, indicating excess capacity which tends to be disinflationary. Separately, our Inflation Timing Model picked up six points to -2 last month, a level that is historically consistent with moderate disinflation.

Import prices decline 

Import prices fell 0.5% in October, a steeper decline than the consensus of -0.2%. It was led by a 2.9% slide in fuel prices, mostly petroleum. But nonfuel import prices also fell, down 0.2%, led by nonfuel industrial supplies and materials (mostly unfinished metals). On a y/y basis, import prices sank 3.0%, the most since July 2016. Prices from most trading regions declined, reflecting the strength of the U.S. dollar.

Source: Ned Davis Research

Laughter Is the Best Medicine

Dan Mitchell, from his blog International Liberty, pointed me to Babylon Bee, a site for political satire.
Laying their cards on the table with the midterms approaching, the nation’s Democrats have united to send a clear message: socialism is America’s only hope of ending the current nightmare of economic prosperity. 
“We’re living in a hellscape—but there is an escape,” 2020 presidential hopeful Joe Biden said... "democratic socialism is what’s going to free us from our horrific, flourishing, present conditions. You do the math.” ...“Kill anyone who disagrees!” Maxine Waters bellowed from the background.
OK. That's funny. And the site spares no one, poking fun at Libertarians:
The U.S. government announced Monday it will be adopting more libertarian policies going forward, including lower taxes, greater support for civil liberties, and a drastically decentralized federal government, “if all the libertarians will agree to just shut up and stop complaining for like one freaking second.” 
The announcement was issued in the form of a joint statement by the executive, legislative, and judicial branches of the federal government, and is contingent upon libertarians “chilling out a bit” and immediately ceasing from posting memes stating “Taxation is Theft” and “End the Fed” every single second they’re on the internet. …At publishing time, libertarians from across the country had refused to dial down the rhetoric even a little bit, calling the compromise “the greatest travesty since the British raised taxes on tea.”
As well as the news media:
Airports around the world are reporting record revenues after introducing a long-awaited feature: the ability to turn off CNN on television sets in their terminals.
For just one quarter, you can turn off CNN for a full fifteen minutes while you're waiting for your flight, leaving you with the "far superior" experience of just staring at a blank screen. 
"At long last," said one man waiting for his flight at LaGuardia as he dropped a few dollars' worth of quarters into the "Turn CNN Off" slot. "Honestly, I might fly more now." He's not alone: airports expect a 426% uptick in traveling over the holidays as flyers no longer have to worry about having the droning words of CNN hosts pounded into their heads for hours on a layover.
We need some humor. Laughing at ourselves in this time of really stupid political rhetoric is just what the doctor ordered.

Friday, November 15, 2019

Economic Perspectives Update

PPI annual inflation continues to moderate 

The Producer Price Index (PPI) for final demand rebounded 0.4% in October, the most in six months, and above the consensus of 0.3%. It was led by a 0.7% rise in goods PPI, the most since March, as energy prices spiked 2.8%, while food prices advanced 1.3%. Services PPI rose a more modest 0.3%, led by trade margins. PPI for final demand ex-food and energy increased 0.3%, also above the consensus of 0.2%.

Despite the notable monthly increase, annual inflation pressures weakened. On a y/y basis, the PPI for final demand slipped to 1.1%, the slowest pace in more than three years, while PPI ex-food and energy eased to 1.5%, the least since February 2017. Both peaked in 2H 2018 and have been on a downward trend since then. Moreover, intermediate producer prices were lower than a year ago across most stages of the production flow. Falling pipeline pressures suggest continued low PPI inflation in the near-term.

Jobless claims up, consumer comfort down 

Initial claims for unemployment insurance spiked 14,000 last week, the most since April, to 225,000, a five-month high. The consensus was for a 4,000 increase to 215,000. The four-week average of claims picked up 1,750 to 217,000, a four-month high. This is still a very low level compared to history, and indicates that labor markets remain tight. But we are watching this trend closely for early signs of changes in labor demand.

The weekly spike in claims likely weighed on consumer attitudes, with the Bloomberg Consumer Comfort Index falling 1.1 points, down for the fourth straight week, to 58.0, its lowest level since February. The four-week cumulative decline was the biggest since May 2012. All three index components fell, led by worsening views on the state of the economy. The longer-term trend of comfort, as measured by the 52-week average, has also leveled off, following a steady ascent over the past three years. This could weigh on retail sales growth in the upcoming holiday shopping season.

Budget deficit on a widening path 

The federal government posted a budget deficit of $134.5 billion in October, up 33.8% from a year ago. The Office of Management and Budget projects the deficit will reach $1.045 trillion in fiscal year 2020. Indeed, on a 12-month total basis, the deficit is already at $1.018 trillion, representing 4.8% of GDP, the biggest gap since May 2013.

The 12-month total federal outlays increased 7.5% y/y, while receipts picked up a more moderate 3.3% y/y. Notably, health expenditures rose 6.6% on a smoothed y/y basis, the most since March 2017, which was separate from the 6.2% y/y increase in Medicare outlays. Net interest spending growth was still in the double-digits at 14.5%, while its share of total outlays was 8.3%, near its highest level since September 2008. Corporate income tax receipts rose 5.3% on a smoothed y/y basis, up for the first time since December 2017, as the impact of tax cuts wears off.

Source: Ned Davis Research

How Much Do You Pay In Cell Phone Taxes?

A typical American household with four wireless phones paying $100 per month for taxable wireless service can expect to pay about $260 per year in taxes, fees, and surcharges–up from $229 in 2018.

Nationally, these impositions make up about 21.7 percent of the average customer’s bill–the highest rate ever. Illinois has the highest wireless taxes in the country at 31.2 percent, followed by Washington at 28.8 percent, Nebraska at 28.1 percent, New York at 27.7 percent, and Utah at 25.6 percent.

Since 2008, average monthly wireless service bills per subscriber have dropped from just under $50 per line per month to $37.85 per month–a 24 percent reduction. However, wireless taxes have increased from 15.1 percent to 21.7 percent of the average bill–a 44 percent increase.

Taxes, fees, and government surcharges on wireless consumers increased from 19.1 percent to 21.7 
percent between 2018 and 2019–a 14 percent increase in the tax rate. The disparity between taxes on wireless voice services and general sales and use taxes grew between 2018 and 2019 as the increase in taxes on wireless voice services outpace the increase in general sales and use taxes, which only increased 1.2 percent.

Most of the increase in the wireless tax burden is due to a very large (36 percent) increase in the Federal Universal Service Fund “contribution rate.” Wireless carriers are required to pay this surcharge on all charges for interstate telephone service.

At the end of 2018, more than 67 percent of low-income adults had only wireless for their phone service, and 57 percent of all adults were wireless only. Excessive taxes and fees, especially the very high per-line charges like those imposed in Chicago and Baltimore, impose a disproportionate burden on low-income consumers. In Chicago, taxes on a family with four lines of taxable wireless service paying $100 per month are more than $500 per year–about 43 percent of the bill.


Wednesday, November 13, 2019

The Best Run States

Wall Street 24/7 concluded its most recent study on which states are the best and worst run, from a fiscal perspective.

You can view the entire list here. I will highlight Texas and California, because those two states get compared quite frequently, as well as having amusing stories appear, such as California Governor Newsom Gavin's claim that most of California's homeless came from Texas.

As you'll see, there isn't that much difference between the two largest states (in population): Texas at 29.2 million and California at 39.8 million.

9. Texas
> 2018 unemployment: 3.9% (25th highest)
> Pension funded ratio: 76.1% (22nd highest)
> 1 yr. GDP growth: 4.0% (5th highest)
> Poverty rate: 14.9% (11th highest)
> Moody’s credit rating and outlook: Aaa/Stable
Texas has one of the fastest growing economies in the United States. In the last year, the GDP of Texas expanded by 4.0%, well above the comparable 2.9% national growth. Texas also has the equivalent of 19.7% of its annual budget saved in a rainy day fund, more than all but two other states. Fiscally well managed, Texas is one of only 15 states with a perfect triple A rating and a stable outlook from Moody’s.
Compared to other states, those that are fiscally well managed and otherwise, the Lone Star State does not saddle its residents with a heavy tax burden. The state government collects the equivalent of $1,893 per resident annually in taxes, the third smallest tax revenue per capita among states and well below the $2,900 national average.
14. California
> 2018 unemployment: 4.2% (14th highest)
> Pension funded ratio: 68.9% (24th lowest)
> 1 yr. GDP growth: 4.3% (2nd highest)
> Poverty rate: 12.8% (25th highest)
> Moody’s credit rating and outlook: Aa2/Stable
California has the equivalent of 17.5% of its annual expenditures saved in a rainy day fund, a larger share than all but three other states and more than double the 8.3% average across all states. California also has one of the fastest growing economies in the United States. Between 2017 and 2018, California’s GDP grew by 4.3%, the second largest economic expansion among states, trailing only Washington state. Over the same period, the U.S. economy grew by 2.9%.
Despite the rapid GDP growth, California’s 4.2% jobless rate is slightly higher than the 3.9% national average. Still, by some measures, California is able to aid more of its unemployed residents. Of the more than 741,000 unemployed state residents, 45.6% receive UI benefits, well above the 27.4% national average.

Corporate Profits and Market Value

Gary Halbert reports:

With the major stock indexes hitting new record highs last week, most analysts agree that stocks are overvalued. Stock prices are, after all, driven in large part by corporate profits, and after-tax corporate profits have been mostly sideways since 2015 as you can see below. This raises the question of whether the current record stock prices are justified.


As you can see above, the last time this metric got so out or whack was in 1999-2000, and we all know how that ended. The S&P 500 lost 49% in the 2000-2002 bear market. Most bullish analysts who are aware of the current disparity between prices and after-tax profits argue that this time is different because interest rates are near historical lows.

Others point to significant changes in corporate accounting rules and unprecedented share buybacks in recent years to justify the current disparity. I would caution, however, that both the accounting changes and the share buybacks are artificial and finite in nature.

While no one knows how long this disparity can continue, I would argue that most investors are not aware of this huge gap between after-tax profits and the latest record high prices.


From Gary Halbert's Between the Lines: Democrat's "Wealth Tax" -- A Giant Invasion of Privacy

U.S. Economic Perspectives

Small Business Optimism Edges Up 

The NFIB Small Business Optimism Index edged up 0.6 points in October to 102.4. While the index peaked at 108.8 in August 2018, it remains elevated by historical standards and suggests that business conditions are still favorable. 

Eight of the ten NFIB components advanced last month, led by plans to increase capex and inventories. Small firms also plan to increase hiring in the next three months, but current job openings eased, touching their lowest level in nearly a year. Part of it was due to the tight labor market conditions, as a near-record high 53% of respondents reported difficulty finding qualified applicants. As a result, worker compensation plans picked up. But firms likely plan to pass that cost increase onto consumers, as price plans also advanced. The earnings trend weakened slightly, but the near-term outlook for real sales growth edged up. 

Labor quality topped the list on small businesses’ most important problems, with 25% of respondents, close to the survey high of 27%, citing it as their biggest problem. 

OECD U.S. CLI Points to Below-Trend Growth
The OECD U.S. Composite Leading Indicator (CLI) fell another 0.1 point in September to 98.8, its lowest level since November 2009, and below 100 for the tenth straight month, as the outlook for growth remained stuck in the below-trend territory. The CLI posted its 17th straight decline, the longest losing streak since April 2016, which was amidst the previous global economic slowdown. On a y/y basis, the CLI was off 1.7 points, near its steepest y/y decline since August 2009. 

Weekly Retail Sales Mixed
The Weekly Retail Chain Store Sales Index rose 1.8% last week, and was up 4.3% y/y, the most since April. But the Redbook same-store chain-store sales edged up only 0.1% in the first week of November, below the target of a 0.9% gain for the full month. Sales were up 5.0% y/y, also below the target of 5.8% y/y. Redbook noted that the official holiday shopping season (between Thanksgiving and Christmas) is six days shorter this year compared to last year, which may have an impact on the sales growth numbers.

Source: Ned Davis Research

Sunday, November 10, 2019

Economics Recap

Better (or higher) than expected:
  • ISM Services Index for Oct: 54.7 vs. 53.5 est
  • Unit Labor Costs for Q3: +3.6% vs. +2.0% est
  • Initial (weekly) Jobless Claims: 211k vs. 216k est
On Target:
None

Worse (or lower) than expected:
  • Factory Orders for Sep: -0.6% vs. -0.4% est
  • Trade Balance for Sep: -$52.5B vs. -$52.4B est
  • Markit Services PMI: 50.6 vs. 51.0 est
  • Job Openings and Labor Turnover Survey (JOLTS) for Sep: 7.024M vs. 7.062M est
  • Nonfarm Productivity for Q3: -0.3% vs. +0.9% est
  • Consumer Credit for Sep: $9.5B vs. $15.6B est
  • University of Michigan Consumer Sentiment for Nov: 95.7 vs. 96.1 est
  • Wholesale Inventories for Sep: -0.4% vs. -0.1% est
Trade data released this week showed that the US/China trade war resulted in a decline of 4.9% in US imports from China, while US exports to China declined 10%; probably a key factor in why both sides seem to be more willing to try to get a deal signed. While optimism has grown about the phase-one trade deal, President Trump said the US has not agreed to roll back any existing tariffs. Trade advisor Peter Navarro did confirm that postponing the already scheduled December tariffs is a possibility however.

Elections Have Consequences

Pelosi cautions 2020 Dems over liberal proposals: 'You must win the Electoral College'

Speaker Nancy Pelosi (D-Calif.) issued a stern warning to the 2020 Democratic primary field that progressive policies that might fire up the party’s liberal wing could prove damaging in the general election.

Sanders' immigration plan: Halt deportations, abolish ICE, welcome 50K 'climate migrants,' give welfare to all

Sen. Bernie Sanders, I-Vt., on Thursday released a sweeping immigration plan that would impose a moratorium on deportations, "break up" existing immigration enforcement agencies, grant full welfare access to illegal immigrants and welcome a minimum of 50,000 “climate migrants” in the first year of a Sanders administration.

Britain's Free Health Care: Waiting List Grows to 4.4 Million

The NHS waiting list has hit another record high with almost 4.4million people now waiting for routine treatment.

For a third month running the figure has risen to a new high, increasing by a quarter of a million people between February and May alone.

Other statistics also revealed by NHS England today show the number of A&E patients stuck on trolleys waiting for an inpatient bed has increased by 70 per cent in a year.

Democratic Tax Policy Proposals

Recently, several of the presidential candidates and other prominent Democrats have suggested a number of different tax policy proposals, including wealth taxes, mark-to-market taxation, a VAT, additional taxes, increased income tax rates, and increased gift and estate taxes. Read more...

How To Trigger A Global Recession In One Easy Step: Ban Fracking

So, what would happen if America’s next president were to make good on a promise to ban fracking? We know the answer.

Enthusiasms for alternatives aside, solar and wind combined supply less than 2 percent of world energy, while 54 percent still comes from oil and natural gas. Many analysts have pointed to the domestic jobs and revenues that will be lost were America to shut down fracking. But that’s the least of it. Far more significant: removing that quantity of fuel from world markets would trigger the biggest energy price spike in history, and a global recession. Read more...

Senator Warren’s “Nutty Idea” to Tax Unrealized Capital Gains

But let’s set that aside and focus on Senator Warren’s radical proposal.

Because the idea would be such a nightmare of complexity, I joked in the interview that the Senator must own shares in firms that do tax accounting.

That’s not a novel observation on my part. Earlier this year, the Wall Street Journal opined why this was a bad idea. Not just a bad idea, a ridiculously foolish idea. Read more...

Mining the Green New Deal

Glaringly absent, at least so far, from the Green New Deal conversation is any mention of the supply chains needed to support this massive industrial effort. And make no mistake, a massive industrial effort is precisely what would be necessary. Wind turbines, solar panels, electric vehicles, grid-scale lithium-ion batteries and a new electricity grid are machines and commodities that require immense manufacturing capacity and a vast variety and quantity of raw material. Read article...

Saturday, November 9, 2019

Inventories Decline, Sentiment Up Slightly, Shipping Still Weak

Wholesale Inventories Decline 
Wholesale inventories dropped 0.4% in September, the most in nearly two years, and worse than the consensus of -0.3%. It was led by a 0.9% decline in nondurable good inventories, mostly in farm products, drugs, and petroleum, partly reflecting lower prices of those goods. Wholesale sales were unchanged. The inventory-to-sales ratio held at 1.36 for the fifth straight month, its highest level since May 2016. It had spiked since mid-2018, as the U.S./China trade war intensified and businesses accumulated inventories ahead of expected tariffs. With some talk of tariff rollback as part of the phase-one trade deal between the U.S. and China, we could see some reversal in the wholesale inventory build-up. If this is indeed the case, it would lead to better alignment between demand and supply, but could be a short-term drag on GDP growth (through a negative contribution from the inventory component). While still very early in Q4, the GDPNow Model is tracking just 1.0% real GDP growth for the quarter, with -0.5 ppt contribution from inventory investment.

Consumer Sentiment Up Slightly 
The Reuters/University of Michigan Consumer Sentiment Index ticked up 0.2 points in the preliminary November survey to 95.7, contrary to the consensus of a same-size decline to 95.3. Consumer expectations rose 1.7 points, its third gain in a row, but current conditions flopped 2.3 points. Sentiment peaked in March 2018, but remains elevated and range-bound longer-term, which suggests that consumer spending will continue to support the ongoing economic expansion. Nevertheless, the y/y momentum in sentiment has weakened, implying a slower pace of real GDP growth ahead.

Cass Shipping Index Contracts Again
  • Consistent with disappointing housing starts (down -1.8% YTD) and lackluster auto sales (down as much as -4.8% in April and -1.2% YTD), spot pricing in transportation has declined dramatically.
  • Airfreight volumes in Europe continue to suggest that the region’s economy continues to cool.
  • Asian airfreight volumes were essentially flat from June to October 2018, but have since deteriorated at an accelerating pace.
  • Even more alarming, the inbound volumes for Shanghai have plummeted. This concerns us since it is the inbound shipment of high-value/low-density parts and pieces that are assembled into the high-value tech devices that are shipped to the rest of the world. Hence, in markets such as Shanghai, the inbound volumes predict the outbound volumes and the strength of the high-tech manufacturing economy.



Source: Ned Davis Research, Cass Information Systems

Thursday, November 7, 2019

Worrisome Drop in Consumer Comfort

A Worrisome Drop in Consumer Comfort 
The Bloomberg Consumer Comfort Index fell 1.9 points last week, its third decline in a row, to 59.1, its lowest level since April. All three index components fell, extending the sizeable drops in the previous week. The three-week cumulative decline in comfort was the biggest since May 2012. Comfort deteriorated across all regions, all demographic groups, and most income categories. The decline is disturbing, as it may translate into weaker consumer spending growth ahead of the holiday shopping season. This is important because consumer spending has been one of the strong pillars of this expansion, in contrast to outright declines in capex this year. For now, however, the longer-term trend of comfort, as well as other measures of consumer attitudes, support an ongoing economic expansion.

Jobless Claims Decline 
Initial claims for unemployment insurance fell 8,000 last week to 211,000, below the consensus of 215,000. The four-week average of claims edged up 250 to 215,250. Both the headline and the smoothed number of jobless claims remain close to their lowest levels since 1969, as businesses hold on to their workers in a tight labor market. As long as layoffs remain low, the risk of recession will also be limited.

Used Vehicle Values Fall Y/Y 
The Manheim Used Vehicle Value Index ticked up 0.3% in October from the previous month, but it dropped 0.4% from a year ago, posting its first y/y decline since January 2017. It suggests downward pressure on the CPI for used cars and trucks over the next few months

Source: Ned Davis Research Group (Note: I'll try to post news like this more often. I get reports every day...)

Tuesday, November 5, 2019

The Uncertainty of the 2020 Elections and Possible Market Turmoil

Presidential campaigns are filled with policy proposals. Go to any candidate’s website and you can see a raft of proposals on all sorts of topics. Some get lots of attention—think “Medicare for All” or the “Green New Deal.” What all of the big ideas in this campaign have in common is that they will cost money. Lots of money.

1. Medicare for All. $34 to $52 Trillion over 10 years. This is $3.4 to $5.2 Trillion per year.

2. Green New Deal: Some estimates are $93 Trillion or $9.3 Trillion per year.

3. Student Loan Forgiveness: $1.6 Trillion

4. Free College: $2.2 Trillion

5. Expanding Social Security: $1.1 Trillion

6. Upgrading Infrastructure: $1 Trillion

Total cost per year: $12 to $15 Trillion. 

That's on top the current annual deficit which runs about $1 Trillion per year.

To pay for their proposals, most of the Democratic candidates have plans to increase taxes. It’s how they go about it that differs.

Most want to repeal the Trump tax cuts, including Elizabeth Warren. But she said the middle class won't pay a dime more in taxes, so I'm not sure how that works. 

All of them, in some form or another want to tax the "rich" to pay their "fair share." I can't find a definition for these two terms anywhere. It's what you think it means, I guess. But you can see who pays taxes from this article "A closer look at who does (and doesn't) pay U.S. income tax."


Some call for higher payroll taxes. Others call for a VAT, or value added tax, which is pretty much the same as a sales tax. Both would be middle class tax hikes.

Several candidates have also endorsed raising the capital gains tax rate to match ordinary income tax rates. That’s the one that investors should pay the most attention to. Under current law, taxpayers pay either 0%, 15%, or 20% taxes on long-term capital gains, depending on income. Treating long-term capital gains as ordinary income would be a significant tax increase for almost all investors.

Another category is what is known as “mark-to-market” taxes on wealthier taxpayers, which includes a tax on unrealized gains. Senator Ron Wyden, a Democrat from Oregon, unveiled a proposal earlier this year that would levy a tax on unrealized gains, as if the assets had been sold during the year. It’s a complicated proposal that is aimed at millionaires and billionaires, and a lot of details still need to be worked out. But the taxing of unrealized gains, even if it affected a relatively small percentage of the population, would be a fundamental change in how investments have been treated for decades.

Finally, there are the wealth tax proposals, essentially a surcharge on wealth. The two most prominent advocates are Senator Warren and Senator Sanders, both of whom have announced plans for an increase in taxes on the ultra-wealthy.

But in general, they want to tax the rich, as well as raising taxes on corporations. But if you follow every wealthy nation that has embraced high welfare spending, including Sweden and Denmark, everyone pays more in taxes. In Sweden for example, a middle class family earning $75,000 pays about 60 percent of their income in taxes. While college and health care are free, the government rations the quantity of services. Not everyone goes to college and there a long waiting lists for health care.

Currently, federal spending figures for 2020 through 2029 sit at $57 trillion, or 22.5 percent of GDP. Taking into account progressive promises, federal spending could rise to between $105 trillion to $149 trillion during the same time period – to as much as nearly 59 percent of GDP.

Taking every dollar earned by people with incomes above $200,000 would not be enough to pay for the proposals that have been floated. A flat tax rate of 100 percent on those with incomes of $1 million or more would not even raise enough to eliminate the current federal deficit.

My guidance for investors is to not get overly caught up in any of these proposals. It is three months before the first votes in the primaries and caucuses will even be cast. There is not unanimity among Democrats on any of these proposals. All will be heavily debated, and if they do make it into the Democratic platform, they’re likely to look far different than they do today. All are very much dependent, of course, on the election outcome. And none will be in play until 2021 at the earliest.

For all these reasons, investors should not overreact. There will be plenty of time to study the details and form a strategy that is right for you, if and when these proposals move from the idea stage to actually becoming legislative proposals that are being considered in Congress.

Sunday, November 3, 2019

Weekly Update from Ken Moraif

When Ken speaks, I listen. He changed my entire investment philosophy many years ago (2009) and my portfolio has doubled in size.

Below is his weekly video update. You can sign up for his market alerts, which are free on his website: Retirement Planners of America. He also has a weekly podcast, which is basically his radio show that airs in select markets (Dallas, Austin, Phoenix).

I also highly recommend his book: Buy, Hold, and Sell.


Note: I have visited both his Dallas office (for a comprehensive portfolio review) and his Austin office, now that I've moved from the frigid warrens of DFW for the tropical climate of Austin. I found their approach to managing clients to be a relaxed, non-pressured environment with ethical-driven concerns for their clients. I am not currently a client, because I was told by an advisor that he couldn't do anymore for me than was doing for myself. That's honesty. I'm sure at some point in the future I will become a client. 

Is Your 401(k) Recession Proof?

From Phil Town at Rule #1 Investing


Saturday, November 2, 2019

This Pattern is Another Warning Sign

High-yield bonds are sending the stock market a warning sign. This is not a prediction, but a leading indicator. Just because it's happened in the past, doesn't mean it will happen in the future.

Yes, the S&P 500 made a new all-time highs on Wednesday and Friday. Yes, the Fed’s easy money policy is helping to boost stock prices. Yes, President Trump wants a higher stock market. And yes, we are entering a seasonally bullish period for stocks.

And, if high-yield bonds were making new highs along with stocks this week, then I’d have to wipe the bearish egg off my face and concede that the stock market isn’t in as much trouble as I thought.

The action in high-yield bonds tends to precede the action in the stock market by anywhere from two days to two weeks. So, it’s notable that while the S&P was posting a new all-time high on Wednesday, junk bonds were falling (see down arrow on chart below).

And, by the look of the following chart of the iShares iBoxx High Yield Corporate Bond ETF (HYG), junk bonds look vulnerable to a much more serious decline.

HYG Daily Chart

The red vertical lines indicate beginnings of reversal in the price of HYG. They preceded by days/weeks a reversal in the S&P 500, shown in this daily chart of the S&P 500 index futures (which tracks the S&P 500).

ES Contract Daily Chart

While past performance never guarantees future events, it behooves us to pay attention. So this isn't the time to buy the market. If you're currently invested, consider holding. But put in some stop orders to protect yourself. If you're not invested, just be patient.

While I can't offer specific investing advice, because I don't know your situation, or investing plan (you do have one, right?), for my own portfolio, I'm 50% in equities and 50% in money markets. I'll take my own advice and just hold right now. See how things play out in the next few weeks. 

Thursday, October 31, 2019

What should my investment strategy be right now if a recession is imminent?


While you could be in cash 100 percent right now, you would not have any earnings on your investments. In fact, you’d be losing about 2 percent annually due to inflation. So that’s not a very good strategy.

While it is probable that there will not be a recession in the next few months, if we created a strategy that assumed the worse, we might miss the opportunities for some great earnings in the meantime.

So this is what I recommend as an overall strategy:
  1. Have a written investment plan that outlines your risk tolerance and how you will allocate your resources. For example, if preservation of capital is the overriding goal, go heavy on money markets and bonds. Or if your risk tolerance (or you are young), go for high-growth investments, or at least those that have the potential, such as small caps, or something along those lines.
  2. Most stock broker’s web sites will let you design your portfolio based on these factors. Schwab offers customized wizards to design a portfolio based on your age and risk tolerance. Even if you are not a client, you can access a lot of information on Schwab’s website. Start with 3 ways to build an all ETF portfolio.
  3. Always have an exit strategy, because you never know when the market will turn. Normally, the stock market will begin a downward leg into a correction or bear market before a recession actually is formally announced. Use stop orders to automatically exit your positions and sweep the funds into money market funds.
  4. Learn how to hedge your portfolio, if you think this is right for you. Again, Schwab has some advice on this: How to hedge your portfolio.
  5. Part of your investment plan should be continuing education that covers different investment topics. The more you know, the better investor you will become. I try to read at least five or six books a year on investing, economics and history. And I subscribe to different newsletters for different perspectives.
I only cite Schwab because I happen to be a client. Other brokerage firms such as Vanguard and Fidelity offer the same type of information and services.

The buy and hold strategies that you hear about are not what I recommend. Read Ken Moraif’s book Buy, Hold, and Sell, to get you started with this philosophy. Why would you hold during a bear market and lose 50 percent of your portfolio’s value?

One of the key things to remember is that most of the “prophets” and talking heads of the media are just noise. Learn enough to make your own decisions.

Trading / Investing Tips

  • Fundamentals tell you what to buy. Technicals tell you when to buy.
  • Stick to your system of entry and stops religiously.
  • Use stops and stick to them.
  • When euphoria kicks in, that’s usually a local top.
  • Much of the trading-related news & social media troll boxes are noise. Ignore them.
  • Trades should end in 3 ways: Big Win, Small Win, Small Loss
  • Repeat after me. “The trend is my friend.”
  • Don’t scalp the counter-trend.
  • Keep a trading journal. Determine flaws. Eliminate them.
  • If you open a trade based on a high time-frame signal, don’t self-sabotage and close that trade based on a much lower time-frame signal.
  • Good sleep, proper diet & exercise are just as important for trading as they are for most things in life.
  • Don’t get chopped up trying to trade/scalp sideways price.
  • Expect consolidation after large price movements, not continued volatility.
  • All indicators are using the left side of the chart to try and predict the right side of the chart.
  • Chart the exchange with the most volume.
  • Most traders lose a significant number of trades when starting. Those who are most successful are persistent.
  • Trade your own account. Don’t let others trade it for you.
  • Agree with the ideas, not the people who supply them.
  • Don’t be married to any one asset class, position, or idea. Constantly reevaluate for flaws.
  • If you’re winning a lot, someone else is losing more.
  • A big loss will ALWAYS be more emotional than a big win.
  • You need a large sample size to determine if you are a winner or a loser. Variance happens to everyone.
  • No one strategy is a holy grail. Use multiple signals and find confluence prior to entry/exit. Use what you like and toss the right.
  • Trading tools can get sharper or duller. Don’t be afraid to brush up on concepts you’ve already mastered.
  • Look at everything as a number and not money. Always look to be increasing that number.
  • Start trading using high leverage and small position sizes. This tests the quality of your entries.
  • Fear, uncertainty, and doubt (FUD) are great drivers for panic buying and selling.
  • After a big winning or losing trade, step away and regather your emotions.
  • If you’re getting emotional in a losing trade, then your position size is too high.
  • Stop trying to rationalize everything. Trade the chart that is in front of you.
  • There will always be early bears and early bulls. Being right is more important than being early.
  • Zoom out first. Zoom in later.
  • On the way up, stocks look cheap. On the way down, they look expensive. Don’t let the market play with your mind. Stick to your trading plan.


Weekend Reads

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