Cash Flow Relief through the CARES Act

By Jim Kilgore CFP(R), 2 April 2020

Congress passed the CARES Act to provide emergency assistance and health response for individuals, families and businesses. The CARES Act is providing 2 Trillion dollars in assistance. I am going to cover two ways you can get money for your business as fast as possible through the CARES Act.

Economic Injury Disaster Loans (EIDL)

This is the first line of defense against disasters. These loans have been around for some time, however, these loans have been supercharged to combat the COVID-19 pandemic. Businesses who were substantially affected by the pandemic, who employ less than 500 employees and were in operation on or before January 31, 2020 are eligible to apply. It expands to Sole Proprietors or Independent Contractors.

How do I know if I am “Substantially Affected”?

The CARES act defines substantially affected as business who have experienced, supply chain disruptions, staffing challenges, a decrease in sales or customers or shuttered business.

What is the most amount of money I can ask for?

The maximum loan amount can be up to $2 million.

What can I use the funds for?

You can use the funds for the following:

  1. Payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave
  2. Employee salaries
  3. Mortgage payments
  4. Rent (including rent under a lease agreement)
  5. Utilities
  6. Any other debt obligations that were incurred before the covered period

What are the terms of the loans?

The SBA offers many favorable terms in their EIDLs:

  1. The term is 30 years
    1. Interest Rates are 3.75% for small business and (2.75% for non-profits)
    1. The first month’s payments are deferred a full year from the date of the promissory note
    1. EIDLs less than $200K do not need a personal guarantee

How do I apply?

You can apply for these loans directly through the SBA at www.SBA.gov/disaster. There are no loan fees, guarantee fees, or prepayment fees. Even if you apply and are approved you do not have to take the loan so there is no harm in applying.

Paycheck Protection Program Loan Guarantee

Under the CARES Act Paycheck Protection Loan Guarantee offers one more source. These loans are done through your local lender. This program is offered to small business with fewer than 500 employees and select types of business with fewer than 1500 employees. Self-employed, sole proprietors, freelance, and gig economy workers are also eligible to apply.

How do I know if this program is right for my business?

This program is primarily for those businesses who have experienced a downturn as a result of COVID-19 pandemic and who are still in business and employing people.

What is the most amount of money I can ask for?

The maximum loan amount is $10 million but most business will apply for loans equal to 2.5 times their average monthly payroll costs including healthcare, paid sick leave and other benefits.

What can I use the funds for? You can use the funds for

  1. Payroll Costs excluding amounts for individual with compensation greater than $100,000.
  2. Rent pursuant to a lease executed before February 15th, 2020
  3. Utilities including internet and
  4. Group Health Insurance

Is this loan forgivable without any tax implications to me or my business?

You must maintain the same average number of employees for the first eight-week period beginning on the origination date of the loan as you did from February 15, 2019 -June 30, 2019 or January 1, 2020 to February 15, 2020. However, if you do not meet this requirement the amount forgiven will be reduced. There are additional reductions if you decrease employees’ salaries making less than 100,000 by more than 25% as compared to the previous quarter.

What are the terms of loans?

The SBA offers many favorable terms in their PPP loans:

  1. The term is 10 years
  2. Interest Rates go up to 4%
  3. The first month’s payments are deferred a full year from the date of the promissory note.
  4. They do not need a personal guarantee

How do I apply?

You can apply for these loans directly through your local lenders.

Questions?

If you have any questions on either type of loan or any portions of the loan application process please feel free to reach out to me at jim@401advisor.com or call at 937-782-9971.

Mr. Kilgore is a CERTIFIED FINANCIAL PLANNER™  with 401 Advisor, LLC an independent registered investment advisor. He is also a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor. The views expressed are those of Mr. Kilgore and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.

Successful Retirement Based on Strategy

I have been around the financial advice industry long enough to understand all “financial advisors” are not cut from the same cloth.  There are financial advisors that work for large insurance companies and there are others, like myself, who are independent and offer a wide array of services, not just insurance products.  Now before my brothers and sisters in the insurance industry blast me, understand I have read almost every page of every book written by insurance product industry as well as countless studies by The American College and PhD’s you would all recognize, so I am not ignorant and uninformed about this topic. 

The recent market volatility brings the annuity salespeople out in force, and I know many hard-working people in the industry, and I have a tremendous amount of respect for them.  In fact, I was one of them for a short time when I came into the industry.  But, they use these kinds of volatile times to say, “see, don’t you wish you had an annuity?”

When you come into the industry you are taught how to sell, not how to plan.  They teach you techniques to work on your client’s emotions.  People like security, and volatility is the enemy to those emotions.  Emotions can prompt us to make uninformed decisions based only on the fear of loss. 

I’ve watched this unfold as many of you have due to the recent volatility due to the COVID-19 pandemic.  It is hard to watch an account dwindle by over 30% (based on the S&P 500) in about a month, if that is what happened to you.  Some variable annuities have very high expenses, the investments inside them have separate fees, and they are very complicated products for the average person to understand.  Heck, most advisors that sell them don’t understand them completely. 

It is my belief there needs to be a plan first, and then the implementation stage can begin.  For instance, If there is a gap in life insurance to protect your loved ones, life insurance is purchased to fill that need. 

But when you are investing for retirement and you need to live off that income it is important to make investments that fit your plan for what you want your retirement to look like.  For instance, what lifestyle you want to live and make plans to achieve that.  As a financial planner I take a look at all possible income sources and determine whether those income sources will be enough to cover those lifestyle expenses and if not, I put a plan in place to get my clients to that goal.  Sometimes, that means breaking the news to them, that they need to work a couple of extra years to get there or save more between now and then, but my approach is never to sell a product to them without first understanding all of their financial circumstances as well as any other family circumstances that may be present.  I have heard many “advisors” say, “I already know I am going to pitch an annuity before I even meet the client.” 

Why is a strategy so important? 

When you sit down with a financial planner, who also manages assets, they will look at the total picture.  Annuities have been around for a long time, in fact if you think about it, Social Security is an annuity.  You paid into it, and you get an income you can’t outlive. When social security and other lifetime income streams just don’t cut it, then you must have an investment strategy that fills in the gap.

Annuities are only guaranteed by the issuing company, I’d rather own any (or all) of the dividend aristocrats than an annuity from an AM Best B rated company for SAFETY. The dividend aristocrats are companies that have increased their dividend for 25 or more consecutive years. Getting a raise every year beats a fixed payment any day.

Annuity marketing sells the “payout” rate on immediate annuities, as in “You’ll get an 8% return on investment.” But they don’t tell you 7% of that is return of your own money. Let us calculate the real rate of return before you buy.

The longer you live the more inflation eats into your fixed income sources.  In twenty years, you will often see your buying power go down significantly.  That is why you need a rising income in retirement and that is where an investment strategy built on financial disciple and a strong investment policy is a must.

Dividend growth investing is a great strategy to provide this rising income in retirement.  I am talking about high quality investor friendly companies with a seriously long track record of dividend payments.  Please see the chart 1 below to see the growth of dividends of the S&P 500 from 1976 to 2018.  I believe this strategy coupled with guaranteed life income sources is the superior retirement planning strategy. 

As you can see from the above chart, compared to bonds, a dividend growth investment strategy gives you a rising income over your long-term retirement.  In fact, common convention tells investors to be in bonds during retirement because they are “safer” than equities. 

When investing in stocks for income it’s important to have an accumulation strategy.

Take for example Cisco (Ticker: CSCO).  Cisco is an internet protocol and network infrastructure company.  They have a tremendous amount of cash and a competitive advantage.  In July 2019 they were trading around $57 per share.  I look at this stock as a great value now that it is currently trading at $36.50 per share.  With a current dividend yield of 4.16% and enough cash to pay and or raise their dividend, even during a recession, I rate this high on my list to buy.

As an individual investor, I suggest you look for opportunities like this in the market, or let us do it for you.  For the last couple of years, finding stocks trading at or below their estimated fair value has been hard.  Look at the below chart as it shows a visual on the yield on cost.



The chart above is NOBL, an exchange traded fund that holds Dividend Aristocrats.  Since its inception you can see how it has performed.  All the companies in this fund pay dividends and have a long track record of doing so.  Our investment strategy is that of investing in these kinds of companies so you can see your income in retirement go up, not get nibbled away at over your long retirement by inflation.

Just like buying an apartment building to generate income through rent, these companies generate predictable, consistent income even during tough economic times.  If you owned an apartment and the real estate market tanked, you wouldn’t panic and sell your apartment building would you?  Of course not, as long as you had tenants paying rent every month, you would still get paid.  The same happens when you own high quality dividend paying stocks.

Bill DeShurko, President and Portfolio Manager

James Kilgore, CFP(R)

Ofc: 937.434.1790 Bill@401Advisor.com or Jim@401Advisor.com

More information on 401 Advisor, LLC can be found at 401advisor.com.

This is not a solicitation to invest, but is for information purposes only. Prior to investing an investor should ascertain whether the investment is consistent with their objectives and obtain a copy of the advisor’s ADV Part II which can be found on our web site, or by asking a representative for a copy.

401 Advisor, LLC is a state regulated investment advisory firm, registered under the Investment Advisors Act of 1940. Registration does not involve approval or supervision of the firm or of its practices and policies by the state of Ohio securities commission.

Investing involves risk. *Past performance is not a guarantee of future results.

What You Do, Depends on What you Own

March 23, 2020

Dear Clients and Friends,

After another weekend of COVID-19 news I’m sure we are all on edge as we wait to see what the market has in store for the upcoming week. First and foremost, regardless of my opinion or anyone else’s, no one knows what to expect. This is new. We’ve never seen this before. But what I can say is that I cut my teeth in this business during the 1987 market crash and have been guiding clients since, through the Asian Crisis, junk bond collapse, tech wreck and the 2007 – 2009 Financial Crisis. I’d like to think I have learned a thing or two! Below I’ll outline some of the steps we’ve taken and are prepared to take.

But first, for clients a house keeping note. In keeping with Governor DeWine’s announcement today we will be intermittently working in the office and from home in the coming days. We will not be seeing clients in the office. However, our phones will be forwarded if no one is in the office, and we are well prepared to handle all administrative tasks via email or regular mail. Jim and I will be in constant contact assessing the situation and our investment policies.

It’s All About Strategy

The media would have you believe that the only decision to be made is whether to continue to hold your investments or to sell (and soon I hope, when to buy back in). This is a very simplistic, and in our opinion very harmful for most investors. How one reacts to a market sell off depends on…and no surprise here…on your overall investment strategy. I have preached how important strategy is to the investment process for years, and yet I see very little evidence of it in portfolios we review from outside our practice. A client recently stopped in and asked for advice on his retirement plan. I reviewed what he had and basically said he couldn’t sell it fast enough, even after a very substantial decline. When I looked at the fund’s holdings 8 of its top 10 holdings were in the energy sector, and not the large solid cash flow companies but the smaller debt burdened frackers. I think a couple may end up in bankruptcy. He hesitated as “it did so well last year!” I explained that he did a good job in picking the fund, but failed to develop a strategy, i.e. pick a point to take profits and rotate into something more retirement appropriate. He only implemented 1/2 a strategy!

This is where strategy and timing come into play. We have not sold a majority of our holdings. Why? Because, while no one could predict the COVID-19 breakout, our process identified the energy sector as being financially weak back in February. We sold our energy ETF that we held in some portfolios before the market dropped. We sold financials at the same time. Two of the hardest hit sectors over the last month. We have been focusing what we buy for two years now on high quality high yielding dividend paying stocks. Many companies have increased their dividend payouts for 50 years! These are cash flow rich companies that can weather a downturn. I’m not so anxious to sell quality. We went into this downturn holding quality. Our strategy has been to collect our dividends throughout and and plan ahead for the eventual turn around. We’ll see how we do, but I’m pretty confident in what our accounts will look like in a year from now. We won’t have dividend cutters, we won’t have bankruptcies in our holdings. What we will have will be portfolios full of high quality companies that are back in business as usual mode.

As the crisis has unfolded we have raised a bit of cash in some portfolios. We’ve been short off and on in some, but our big focus is what we do when the market seems to be ready for a rebound. We’ve created two portfolios that we feel can maximize our returns during a recovery without taking on undo risk. We’ll be selling in non-qualified accounts to lock in losses for tax purposes (may as well let the IRS give us a little money back!) and rotating into those “rebound” stocks I mentioned earlier. We’re not just staring at the TV, frozen with indecision as those without an investment strategy are.

What to do Now

Unless you are holding stocks of low quality, high debt companies or junk bonds it’s probably too late to sell now. If you’re not a client feel free to schedule a time to discuss your portfolio, goals and an appropriate strategy for your circumstances.

For clients feel free to call or email with any questions or concerns. We don’t have all the answers but we do have a plan!

And for everybody here is a reason for optimism, an article on possible treatment: https://www.livescience.com/chloroquine-coronavirus-treatment.html

Stay safe.

Bill DeShurko and Jim Kilgore, CFP

Market Volatility

by Bill DeShurko and Jim Kilgore, CFP

“Simply put, our economy is strong, unemployment is at a 50-year low, household income is at a 20-year high, consumer sentiment is near record highs, and corporate earnings continue to impress.” http://www.Zacks.com

Q: So what went wrong?

A: The Coronavirus

The stock market does not like uncertainty, especially uncertainty centers around a question like, “How bad can it get?” More and more experts and market pundits are answering that question with some variation of “Pretty bad?”

While numbers of cases and deaths are really small compared to most annual flu outbreaks, the reaction has been much more radical. Deaths as a percentage of reported infections are relatively high, and with no known cure or vaccine on the horizon many are starting to use the “Pandemic” word. While we have heard of factory closings and quarantines in China, Italy with just 10 deaths reported so far, has quarantined whole towns, cancelled or closed schools, museums, football games etc.

El-Erian, legendary market sage at PIMCO said back at the beginning of February that the coronavirus is going to “paralyze China,” adding that it will “cascade throughout the global economy.” He has been proven right. On Monday he added on CNBC that disruptions from “Shock” events tend to take time to work through the economy. Not the best support when the DOW is dropping 1000 points.

What is Fund Trader Pro’s take?

What we know is that the U S and other countries may soon feel the pinch of a shortage of many products as Chinese production is shut down. Apple and P&G have already warned of an impact to earnings.

Troubling news this week indicates a vaccine is at least months away and could be ineffective.

Quarantines/shutdowns in the U S would be crippling to our economy.

But….

The rebound from pent-up demand could be huge. The caveat to this, which is a big caveat is that the coronavirus could be just the start of an economic snowball. A strong economy can cover many blemishes, the warts will come out if employment is affected.

In other words, we just don’t know. False alarm that blows over or global pandemic? Flip a coin.

Faced with uncertainty we are currently recommending that 401k investors decease their equity exposure. Take 20% to 50% of your holdings and make sure they are already in, or move them to a safe holding. (For our FundTraderPro.com subscribers you will get specific sell and buy recommendations).

At 401 Advisor, LLC we are evaluating and making changes to our holdings as we see necessary. We are very comfortable with holding onto our dividend generating securities, but will continue to look for opportunities to raise cash.

Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore is an Investment Advisor Representative of 401 Advisor, LLC. They are also  registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.

Past performance does not guarantee future results.  There is no guarantee that any investment or strategy will generate a profit or prevent a loss. 

“Lies – damn lies – and statistics”

I love statistics. My favorite book is “Money Ball” by Michael Lewis about how Billy Beane turned around the Oakland A’s baseball team with the help of Paul DePodesta. The two combined to rethink how to evaluate talent – removing the “gut feel” of a scout and replacing it with a new look at the performance statistics that really mattered. Since their system came up with different attributes than most other talent evaluators, they were able to acquire good players “on the cheap”. His team did make it to the American League Championship game, but not to the World Series. But it was still quite a turn around.

But to the point, one thing that Money Ball highlighted is that statistics, by themselves don’t suggest a course of action. Statistics need to be interpreted. What is important or relevant is most times open to debate and still subject to human bias. Thus the interpretation that statistics (and I will qualify with misused statics) are nothing more than damned lies!

For the past several years, and especially last year the financial media and talking heads insist on talking down the economy and raising the specter of the imminent recession/market crash. Had an investor listened, they would have missed out on one of the best years ever in terms of the S&P 500’s return. Despite my more paranoid nature, we stayed pretty much invested throughout the year. I attribute this decision to focusing on the statistics that matter to the market and ignoring those that don’t.

One example is debt. And in this case, I am only talking about consumer debt. Analysts spend a lot of time talking about the volume of debt. With debt levels at record highs, a recession is most certainly around the corner. Instead they should be talking about the number of dollars consumers spend on servicing the debt. And only then, in relation to the dollars available to make those payments. Debt does not become an economy wide problem unless increasing numbers of people can’t make their payments. Below is a graph from the St. Louis Federal Reserve that shows the historic amount of household debt payments as a percentage of disposable income (after tax income).

While the percentage is rising, it is currently near an average level of the last 40 years or so and well below pre financial crisis and tech wreck levels.

What this tells me is that the consumer is pretty healthy. The economy is still nearly 70% consumer driven, and the consumer relies on debt. Debt servicing payments have room to grow, especially if incomes continue to rise.

What Does Matter?

The corollary to the debt is too high argument is that, if interest rates increase rapidly debt service costs will rise and the graph above could start looking ugly soon. Yes, and if monkeys start falling from the skies. I grew up in the 1970’s, the years of double-digit inflation, (inflation is what drives interest rates higher). 90% of economic thought at the time revolved around inflation. Inflation was talked about more than debt is today. I was schooled on inflation. I too am paranoid about the prospects for inflation. But guess what? It is just not on the horizon. Remember one phrase – global capacity utilization. There is just no price pressure on anything that can be manufactured overseas. Country of origin doesn’t matter. And the world is full of unemployed people that will work for a lot less than Americans. The Steve Jobs of the business world will continue to pay sustenance level wages to women and children around the world as long as a sustenance level wage is the only alternative to no wage.

Where we do see inflation is in services. Tradesmen are in high demand and so far, you can’t fly in a plumber from China to remodel the bathroom and then fly them home for less than the cost of the local plumber! But such services are still a small enough part of the overall economy that they haven’t had a major impact on the overall national numbers.

What are we Watching?

In addition to the graph above we have a systematic approach to looking at the economy. A non-emotional statistics driven flowchart of steps taken to interpret data. We look at things that history and economics say really matter. Things like money supply – the biggie! Not the yield curve that everyone else is obsessed with, but the forward yield curve and for the market it’s always all about future earnings.

As we have transitioned into a new calendar year remember too that 2020 is all but in the books for the stock market. While the election process is likely to cause more than normal volatility, the market’s focus has turned to 2021 and that crystal ball is still pretty hazy.

The best advice we offer, is the same advice: Make a plan and stick to it, that way you are not emotionally reacting to the story, and the bad statistics, of the day.

For a plan for your portfolio we are always here to help.

Bill DeShurko, President and Portfolio Manager

James Kilgore, CFP

Ofc: 937.434.1790 Bill@401Advisor.com or Jim@401Advisor.com

Big Changes to IRA’s

At 401 Advisor, we take great pride in making sure investors are aware of legislation that affects their retirement savings and we try to ensure we keep our clients informed in a timely fashion when changes are made that affect them.  Recently a bipartisan bill was passed to help American’s save for retirement and it was signed by President Trump on 20 December 2019.  The bill is called Setting Every Community Up for Retirement Enhancement (SECURE) Act and I would like to take a few moments to review some of the provisions that are designed to positively affect our ability to save for retirement.  I will list below some of the items that apply to a broader group of people.

  • Removing maximum age limits on retirement savings, formerly capped at age 70 ½
  • Raising the required minimum distribution (RMD) age to 72 from 70 1/2.
  • Allowing penalty-free withdrawals up to $5,000 from retirement plans for the birth or adoption of a child
  • Relaxing rules on employers offering annuities through sponsored retirement plans
  • Allowing penalty-free withdrawals of up to $10,000 from 529 education-savings plans for the repayment of certain student loans
  • Revising components of the Tax Cuts and Jobs Act that raised taxes on benefits received by family members of deceased veterans, as well as students and some Native Americans
  • And to raise an estimated $15.7 billion to pay for these changes: removing the stretch IRA estate-planning strategy that permits non-spouse beneficiaries of IRAs to spread disbursements from the inherited money over their lifetime. The new limit will be within 10 years of the death of the original account holder

There are two provisions in here for people approaching retirement to pay close attention to.  The first is the new rule allowing you to invest in your IRA until age 72 now.  People are living longer and as a result are working longer.  Before the new rule, you were prohibited from contributing to your IRA after age 70 ½ even if you were still working.  Second, the bill changed the required beginning date of your RMD to 72.  For the same reason, people are working longer and living longer and delaying the start date of your RMD’s give you a little more time to grow your nest egg before you have to start drawing from it.

So if you turn 70 ½ this year you DO NOT have to start taking your distributions this year.  Now you can wait until 1 April following the year you turn 72.  For example, if you turn 72 in July of 2020, you have until 1 April 2021 to take your first RMD.     

We hope this information has been informative and as always If you have any further questions, don’t hesitate to call the office and ask one of us directly.

Jim Kilgore, CFP®

937-434-1790

TNSTAAFL

by Bill DeShurko

There’s NSuch Thing AA Free Lunch

The free lunch in the saying refers to the 19th-century practice in American bars of offering a “free lunch” to entice drinking customers. Obviously, bars weren’t in the business of giving away their goods. It simply occurred to them that giving away overly salted food was good for their drink business!

Today’s free lunch, or dinner offers have moved from bars to restaurants with financial advisors offering “Retirement Seminars” with pitches for high commissioned investment products or “Estate Planning/Medicaid Planning” with their canned documents that create illiquidity with irrevocable trusts and annuities. I guess if you can resist the pitch there can be a free lunch or dinner. But some poor attendee must be paying as my inbox is filling up with emails from companies that offer canned seminar services “guaranteed to fill a room”!

But I digress. While most people recognize the concept of TNSTAAFL when it comes to free offers, there seems no hesitancy to jump on board the free investment advice bandwagon. With interest rates falling to zero, market volatility on the upswing, and doom and gloom media still preaching recession. How long have they been saying that? I guess sooner or later, (my guess later they will be right, more on that next post). This is fertile ground for just bad investment advice as well as for outright scams.

So let me offer a couple of thoughts for self defense.

  1. TNSTAAFL
  2. Interest rates are fairly orderly. High interest rates accompany higher risk investments. Period. TNSTAAFL.
  3. Remember can’t miss investments like 3D Printing? Did you get caught on the band wagon for this one? In January 2017 The Motley Fool was hyping 3D Systems (DDD) and Stratasys, LTD (SSYS). DDD opened 2017 at $13.63 a share, went as high as (using weekly data) $23.70 in May and is now down to $8.99. Not exactly a wealth builder. TNSTAAFL.
  4. And how many of you, feeling the 401k might be a little shy of where it needs to be to fund that ideal retirement thought you’d get in at the bottom for “weed” stocks? Can’t even begin to name all the sources that were touting Cannabis as THE next big thing. Maybe you even decided to be prudent and go with the biggest provider from Canada, where there are no legality issues. Canopy Growth (CGC) opened on the NYSE on May of 2018 $25.78. Today (10/31/2019) it is trading at $20.06. Instead of money flowing to the legal producers, most pot sales are still of the illegal type as legal regulated pot can’t match the free market prices of the black market. TNSTAAFL.

In summary:

A corollary to TNSTAAFL is IISTGTBTIPI or If it seems to good to be true it probably is.

For you to receive an interest rate return on your investment, someone has to be paying that interest rate, plus a spread to pay the middleman. No One pays a higher interest rate than they have to. High interest rate = high risk. Period

Free investment advice is worth less than you pay for it. As in if you lose money. By the time you hear about the next big thing, the smart money has been made. The big boys are now looking to unload their shares to the mass market to lock in their profits.

We never added weed stocks to our portfolios. We turned down client requests to even buy weed stocks. At 401 Advisor, LLC we have a pretty simple philosophy; there are plenty of companies that are making a profit, have been profitable and we expect to remain profitable. Their stocks do well. Why buy anything else?

If your interested in an investment portfolio based on sound principles give Jim or myself a call.

Bill DeShurko

Bill@401Advisor.com

Jim Kilgore

Jim@401Advisor.com

Office: 937.434.1790

Mr. DeShurko is the Managing Member of 401 Advisor, LLC an independent registered investment advisor. Jim Kilgore is an Investment Advisor Representative of 401 Advisor, LLC. They are also  registered representatives of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.

Past performance does not guarantee future results.  There is no guarantee that any investment or strategy will generate a profit or prevent a loss. 

Market Commentary 09/04/2019

One of the “deadliest” sayings in investing is “This time it’s different”. Many investors and pundits, when faced with data contrary to their current views will rationalize a position by saying those infamous words. As they say as well, “history may not repeat, but it does rhyme.” While the big picture may not repeat, policy decisions and market reactions do. Whether interest rates are changing due to inflation fears, a slowing or accelerating economy, macro dollar policy…the results are the same. Fed tightening (rising interest rates) are never good for the market or the economy. Fed loosening will (eventually) spark an economic boost. The why may change but not the results.

The big picture is not pretty. July and August have been particularly volatile. Volatility is a precursor to bad things to come more often then good. The global economy is horrid with Japan, Germany and the rest of the Eurozone slowing. China is slowing. The U S economy is slowing. Negative interest rates are freaking out Wall Street. As we approach the 12-month point before the election, Democratic rhetoric will pick up citing examples of how bad things are. Trump will tweet back that America is Great Again! Volatility is unlikely to subside. The trend is not an investors friend.

However, let’s put things into perspective.

First let’s look at volatility. Depending on one’s predisposition volatility is just “Wall Street” and can be ignored, or it’s a reason to run for the hills, or the proverbial mattress. Reality is in between somewhere. Extreme volatility is not normal nor is it good. But by following the daily gyrations (so you don’t have to) there are really two major causes of the current volatility. The easiest to tackle is Trump v. China. China or Trump threatens more tariffs and the market is down. Some hope for reconciliation and the market rebounds. The last part being key and really the reason to hold off making portfolio changes. I have no idea how this will play out. Best guess is nothing overly substantial happens until we close in on election day. If Trump looks to be leading strongly in the polls, China will cave. Their economy is weakening. They don’t have elections, they have coups. And bottom line, they are wrong. Nations that want to play with the big boys, must act like the big boys. In hindsight, their admission to the World Trade Organization was premature. They want to have high tariffs on imports and free access to the world’s markets. They want to blackmail companies for their proprietary information. China needs to play by the rules or be kicked back to second world status on the world stage. Here are a couple of interesting articles on the subject: https://www.washingtontimes.com/news/2019/sep/3/deceiving-sky-reveals-how-china-steals-tech-secret/ and here: https://www.mauldineconomics.com/frontlinethoughts/digging-a-hole-to-china

But in the here and now, a trade war with China is not good for our economy either. As we’re about to see, we are not near a recession. I’m not even sure that all areas are slowing. With any positive economic news and a softening on China, this market has a way to run on the upside. Our stance now is that missing out on an upside move is a greater risk than riding out the market volatility.

Below is a chart from www.econpi.com Moving counter clockwise the chart graphs economic data from EXPANSION, (top right quadrant) to DECLINE, CONTRACTION and then RECOVERY. There are only two things to look at. The RED box is the average or mean for all data tracked. It is right on the line between EXPANSION and DECLINE. The GREEN box labeled LD splits out the Leading Indicators, or the more predictive of the data tracked. LD is still in the EXPANSION Quad. The RED rectangle shows where the Mean of Coordinates (MoC), has been at the start of recent recessions. We have a long way to go to get to the recessionary point. All indicators are still well above their baseline, the horizontal line splitting the graph.

At the core of our portfolio management decision tree is “price”. After a rough August most of our models would suggest moving to more conservative holdings or to higher cash positions.  We see this as premature. While many economic indicators are in the DECLINE quadrant, most indicators are compared to year ago stats to try and avoid month to month comparisons that are affected by seasonality. Think back-to-school and Christmas for retail. Remember that a year ago the economy got a big jolt from the Trump tax cuts. As the stimulus wears off, we are naturally slowing down by comparison to 2018. Once we turn the corner to 2020, comparisons will be to a much weaker 2019 and we’d expect the market to react accordingly.

One last word on interest rates. Compared to the stock market, the bond market is a much more orderly market. While there are several variables that affect interest rates, one of the most prominent is risk. A higher risk borrower must pay higher interest rates than a quality borrower. The U S is still the largest and by far, the safest economy in the world. And yet much of the world has lower interest rates than we do here in the U S. This is putting undue pressure on our interest rates. An “inverted” yield curve is a normal precursor to a recession. This time we can hope, is different. Market rates are reacting to abnormal negative interest rates from abroad. If we actually look to be headed for negative rates, all bets will be off. No one knows what will happen then as there is no history to use as a reference.

I hope this helps in such uncertain times. If you have any questions or comments, please don’t hesitate to send me an email: wdeshurko@fundtraderpro.com or bill@401Advisor.com

Service-Connected Disability Income Tax Deduction

By Jim Kilgore (USAF Ret.)

Financial Advisor, 401Advisor, LLC

To my retired veteran friends and friends of service-connected veterans,

If you are retired and receiving above 20% disability rating from the VA you have a possible tax refund due to you. 

In 2016 the Department of Treasury updated IRS Publication 525 (specifically page 18 center column) which explains how retired veterans with a VA rating above 20% can recoup money deducted from their retirement pay. You can either google the publication or go to the IRS website https://www.irs.gov/pub/irs-pdf/p525.pdf. I will add the main points below, here’s what you need to know:

-You should already know your disability pay should not be taxed.

-If you are retired and receive 20% or more in disability pay, your retirement pay should not have been taxed at the standard rate.

-As an example:  A retired veteran with a 70% rating should only have 30% of their retirement pay taxed. 

-A retired veteran with a 90% rating should only have 10% of their retirement pay taxed. 

-You are entitled to recoup that overage according to IRS Publication 525.

-The amount of your refund depends on your individual rating and of course your gross retirement pay.

-The statute of limitations is three years. Accountants can only go back to tax years 2015, 2016, and 2017. If you wait intil filing your 2019 taxes, you could lose the ability to get a refund for 2015. You need to act now.

– Adjustments MUST be mailed in and not electronically filed.

-State refunds will be faster than federal. 

-Veterans will also receive interest on the money from those tax years.

-Provide your accountant or me with copies of your previous tax years (2015, 2016 and 2017); and a copy of the letter stating your VA rating and a copy of your dd214. This can be found on eBenefits at https://www.ebenefits.va.gov/ebenefits/homepage. Once logged on go to Manage tab at the top of the page > Documents and Records > VA Letter > Benefit Verification.

-Our refund is sanctioned through the IRS under IRS Publication 525, specifically pages 17-19.

– For the tax year 2018, and each one going forward, we are required to add the letter verifying your rating and mail the return to the IRS. That’s right; every year going forward retired veterans should get a return.

-A question was asked in the benefits briefing if HR Block or other tax prep companies know about this. When I called the IRS I was told she is among very few accountants/preparers calling to inquire about this benefit for veterans.

-I’ve given this information to several Veterans but several tax preparers are telling the Veteran they don’t qualify. Please don’t believe them!!!! Again, the prerequisite is retired and above 20%.

I want to stress that I know this sounds too good to be true but it is. Don’t automatically think you don’t qualify, don’t allow preparers who are not versed in IRS Pub 525 to tell you that you don’t qualify and please don’t leave this money on the table. 

If you would like me to help you file your amended tax returns with the IRS, I will be happy to work with you to do so. 

If you are a friend or relative of a veteran, don’t assume they are aware of this. One tax preparer we work with, and is familiar with this benefit says he is regularly filing amended returns for thousands of dollars in refunds.

For more information or assistance contact Jim at 937.434.1790 or Jim@401Advisor.com


Mid Year Outlook

As we head into the final month of summer, we head into Wall Street’s traditional slow season. Statistically August and September are two of the worst months of the year as traders partake in their annual migration to the Hamptons.  Add in questions surrounding the strength of the economy and be prepared for the “Bears” to come out with their stock market crash predictions.

However, computers running AI programs ripping off trades that round trip in nano seconds, don’t take vacations. I’m not so sure that their AI programmers accounted for tradition and have programmed in a slow period just because the calendar has turned to August. I’d rather look at some facts. And assume that whatever happens over the next couple of months, some rationality will return in the fall to correct any excess over the next couple of months, whether positive or negative.

The Market

A poplar talking point when election talk heats up, is that the market is not the economy. While stock prices aren’t much of an indicator, company earnings are. If businesses have strong earnings, and expectations that future earnings growth will remain strong there is little chance of an imminent recession, baring the infamous “Black Swan” event, (something completely unforeseen at this time). If you have read this blog or any of my writings prior, you are aware that earnings are everything when it comes to stock valuation. While we use multiple resources for overall money management, Zacks is my go-to for earnings reports and outlooks. Zacks main investment thesis is that companies that beat expectations with their earnings will see the greatest price appreciation. Earnings is their bread and butter. They must be pretty good at it. So, what is Zacks saying about 2nd quarter earnings? Remember the background here is that GDP came in at a tepid 2.1% growth rate, albeit slightly above expectations.

From the www.zacks.com Earnings Trend Report 7/24/2019 (subscription required):

  • While most companies are beating estimates, the tone and substance of management commentary is on the cautious side, with uncertainty about global trade a notable headwind.
  • Total earnings for the 138 S&P 500 members that have reported Q2 results already are up +2.8% on +3.4% higher revenues, with 79.0% beating EPS estimates and 59.4% beating revenue estimates.
  • The earnings and revenue growth pace for these 138 index members is unsurprisingly very weak relative to other recent periods. The proportion of these index members beating EPS estimates is about in-line with historical trends, but positive revenue surprises are modestly on the low side.

I have two positive take aways from the report. First, comparisons are to 2nd quarter 2018 when GDP came in at 3.!% boosted by the Trump tax package. Seeing an earnings decline is not a surprise. 2. Much of the current softness and expected 3rd quarter declines are being attributed to the trade war with China. Transportation and large exporters like Caterpillar have most definitely been affected. The positive? Most naysayers were saying it would be much worse. Between the trade situation and the economy facing a restrictive Fed for the first time in a decade, 2.1% growth was pretty solid.

The Economy

Every week, every month, every year some entity is producing some statistic that market pundits spend a day or two interpreting their meaning in terms of the economy’s direction. Not only are we overwhelmed by the shear number of statistics but determining what is actually predictive and what is not keeps many an economist employed. My go-to for a quick look at the economy is www.econpi.com

They take many of the most meaningful statistics and create a “Mean of Coordinates” (MoC) indicator which is plotted weekly along with its components. They also plot the Leading Indicators average. LD theoretically pulls out only the economic statistics that show some predictive ability as most indicators fall into the “hindsight is 20/20 category”. Finally, this is all put together in a very nice and intuitive graph.

The most recent update from 7/26/2019 is below. You can go to their website for a complete explanation and historical graphs (no subscription required).

Each quad is labelled as to where each indicator lies in the economic cycle. A quick look shows:

  • The red square MoC is in the decline quad – meaning overall the indicators have been slowing. However, it is well above the baseline, meaning the MoC is still showing growth above a baseline or average level. It is well above the larger red rectangle that is labelled as to where the MoC has been during the start of the last two recessions. This is consistent with positive and modest GDP growth.
  • The Green LD box, the leading indicators is still in the expansion quad. Meaning the forward-looking indicators are still leaning toward further economic growth

What’s it All Mean?

As the saying goes, “Hope for the best, but prepare for the worst”. While I don’t expect “the worst” I do expect volatility, primarily in the wrong direction over the next few months. There is little chance of a trade truce with China until after the 2020 election. The Chinese are hoping for a Democratic win and hopes of a reversion to our old policies; remove tariff’s on Chinese imports, while they maintain their tariff’s, illegal trade practices and intellectual theft of our U S goods. There is potentially too much for China to gain from a Democratic win to cave in to Trump now.

Economic indicators and earnings are both showing enough strength to keep this expansion on track. Third quarter economic growth and earnings will likely be anemic. Earnings may dip into negative growth territory, but economic indicators should stay positive. If business outlook turns positive for the fourth quarter expect a solid fourth quarter rally.

What is not being talked about, in terms of the affect on our economy, is our debt. With interest payments rising to the second largest category of Federal expenditures, our economy is being choked off by such a large amount of unproductive spending. In addition, the lack of qualified labor is further choking economic growth. This gets worse as more and more baby boomers leave the work force with fewer unemployed willing to step into the openings. Labor shortages in in transportation, retail and skilled trades are very real.

Steps to Take

For 401k investors, definitely stay the course. But if you are not using our service at www.FundTraderPro.com or through our office www.401Advisor.com do be aware, Fidelity and potentially other Target Date Fund providers have gotten more aggressive in this rising market to capture more gains. Sounds ok except last time they did this was prior to the 2008 – 2009 crash which resulted in some large losses. When the “Pro’s” start doing what they say you shouldn’t do – change your long-term strategy based on short term market conditions, then it could be a sign to worry!

For other investors, now is the time to stress test the portfolio. How is it likely to hold up if the market does crash? If you’re currently an aggressive investor, it may be time to be more prudent and think of the long term. No one ever went broke taking their profits!

Good luck and enjoy the rest of your summer. And for our clients, relax while we watch the markets for you. ffffffffffff


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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