Archive for the 'economy' Category

A Productive Use of Time

A book review by Jim Kilgore CFP® and Bill DeShurko

There are thousands of books on the market aimed at individual investors who are attempting to go it alone and invest on their own.  Whether that be for retirement or some other financial goal, investing is a challenge… because the market does not always go up!

In Why Bad Things Happen To Good Investments, William Hepburn walks the reader through some of the most important concepts to understand regarding investing and managing risk.  He explains why buying a basket of stocks, mutual funds, or ETF’s and holding them forever does not always have the intended result and gives many examples where an active investment strategy can be superior to the buy and hold strategy.

We are in the business of investing and financial planning and we have read hundreds of books on investing over the years.  Mr. Hepburn’s writing style is such that anyone can read this book and understand the concepts he is trying to teach.  The book truly is written to the amateur investor looking to educate themselves on how to do it wisely.  Mr. Hepburn does not use a ton of heavy math and statistics and he is still able to explain things concisely. That said, there is much information in here for the experienced professional and individual alike.

Jim: One of the quotes I really enjoyed from the book was the following “There is an old saying on Wall Street that bulls can make money and bears can make money, but pigs and sheep get slaughtered.  The way to protect yourself from these emotional risks is to have systems and the discipline to stick with them.”

I think my favorite part of the book is how Mr. Hepburn explains to the reader over and over how Wall Street says one thing to the individual investor about how to invest, but does something entirely different with their own money.  If for no other reason, you need to read this book about how Wall Street does not have your best interest in mind, but rather their own. (Bill: especially if you think you are learning anything useful from watching the “business” news channels all day!)

Chapters 16 and 17 on Hedging and stops are invaluable to helping an individual investor and professionals alike limit the downside in their portfolios and is worth the price of the book by itself.

Bill: I’d also add that I first met Mr. Hepburn at an investment conference back in the 1990’s when you were a pariah in the industry if you recommended anything but buy and holding Morningstar ranked 5 star mutual funds. Well before that strategy was debunked, Will was a leader in the field of active portfolio management in the independent investment advisor arena.

As investment professionals, we highly encourage both do it yourself investors and those working with advisors to read this book. We don’t think you’ll be disappointed. Remember:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

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. 

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.

“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

Investopedia Q & A

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WILLIAM DESHURKO’S ANSWERS
How can a nontraditional college student gain more income to provide for a brighter future?
Well you could try and win the lottery, search www.ancestory.com for an unknown rich relative, or marry rich. Rule those out and your best alternative is to get that degree… Read More
Are qualified dividend paying stocks a reliable source of passive income for retirement?
Yes…Yes…and Yes!!! Not only are taxes lower on dividends then an IRA withdraw, but think of it this way; if you take regular distributions from a mutual fund within your IRA,… Read More
Does rolling over 401(k) funds to an IRA for charitable contributions satisfy my RMDs?
Regardless of the purpose, you can always roll over a 401(k) plan investment into a rollover IRA without paying taxes. Since the money is not taxed at this point and remains… Read More
How would rolling over my 401(k) to a Traditional IRA affect my contribution limit for 2017?
Rolling over a 401(k) plan account will have no effect on the amount you can otherwise contribute to a regular or a Roth IRA. Congratulations, you have a nice start on… Read More
Should I hold on to a temporarily suspended stock?
Well, if its been suspended, you don’t have much choice! Once the stock begins trading again, you will need to make that decision. My suggestion is to do as much… Read More
What should we do with two mature IRA CDs?
I see some form of this question all the time, and it is confusing. An IRA is not an investment, it is a tax designation that applies to virtually any… Read More
I received a lump sum pension when I retired. Can I roll this lump sum into a 401K or IRA?
You can roll it into an IRA and defer taxes until you make withdrawals. If you already received the money, you have 60 days from the receipt to deposit it… Read More
Are penny stock mutual funds a solid aggressive investment?
You assume that an “aggressive” mutual fund will make you more money than a less aggressive mutual fund. Why? Aggressive means more risk. Risk means there is an increasing possibility… Read More

Dividend Investing

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401 Advisor, LLC specializes in building client portfolios using dividend paying stocks due to their long term history of providing superior returns over non dividend payers. I recently contributed to an article posted by U S News on their web site. The article highlights warning signs that a stock may be cutting their dividend in the future.

Opening Remarks for 2015

TOW

I recently had a conversation with a client about the strategy for his account in 2015. He indicated that since the market is at an all time high, he expects the market to crash by the end of summer as the Fed raises interest rates. And he would like to adjust his holdings accordingly.

Many of you are probably nodding your head in agreement with this sentiment.

However, please let me remind everyone, that if it was that simple and obvious to predict the economy, let alone the market with that much accuracy there would be many more rich people walking around than there are today! The only thing that is certain, is that what seems “certain” rarely is!

Case in point is a part of an email I received from Fuller Treacy Money, their comment of the day. For those who want the short version it is this: the article sites two economists from Harvard. They are very well known and respected economists. They have nearly opposite opinions.

The point I hope is obvious, if such esteemed economists with the same background, see the world so differently, how can any of us, without the resources and time to study these things as professionals do, be so sure that our opinions will be the ones that in fact pan out in the year ahead?

We just don’t know what the future holds and the best investment strategy is to listen to what the market tells us as we go along, use tried and true investment strategies, and always be aware…and have a strategy…for when things do change!

Below is the piece from Fuller Treacy.

A standing-room only crowd packed a hotel ballroom on Jan. 3 to hear…Professors Lawrence Summers of Harvard University and Robert Gordon of Northwestern University in Evanston, Illinois, defend their views.

“Just because we have 5 percent growth doesn’t mean we are out of the woods,” Summers, a former Treasury secretary and senior White House official, told the American Economic Association meeting in Boston, alluding to the U.S. economy’s pace of expansion in the third quarter.

He rattled off a variety of reasons for caution. Among them: the risk of financial bubbles, the difficulties the Federal Reserve may face in raising interest rates back to more normal levels, and continued excess capacity in Japan and Europe.

Summers also compared the euro area’s situation today with that of Japan in the late 1990s, before it slipped into a deflationary funk, and warned that the U.S. could be in for an extended period of a “dismal growth rate below 1-1/2 percent.”

Fellow Harvard professor Greg Mankiw took issue with that gloomy prognosis as far as the U.S. is concerned. In particular, he highlighted the improving labor market, where unemployment is at a six-year low and wages have begun to rise.

“We are returning to normalcy,” said Mankiw, who is also chairman of the economics department at Harvard in Cambridge, Massachusetts and a former chief White House economist.

Market Commentary

In the real world study of schizophrenia known as the stock market some of you (ok probably about all of you with a life) may have missed this news over the weekend:

“This past weekend, China printed their September Import and Export data, and brother did it surprise everyone with how strong these two components were. September Exports rose 15.3% VS a year ago, and Imports rose 7% for the same time frame. The consensus was for 12% and -2 respectively, so not only did Exports and Imports kick some tail and take names later, they beat the forecasts! I think that this data is good proof in the pudding that China will show a recovery in the economy in the 3rd QTR, and really improve in the 4th QTR.” The Daily Pfennig

Why is this important enough to warrant a blog post? Because the “market” can’t decide whether to panic over the economy being too good – and the Fed raising interest rates soon, or whether to panic because the global economy is so bad that a slowdown will cross onto our shores and deflate our record high corporate earnings that have kept this market rally alive.

While Europe is still the big question, the prospect of a further slowdown of the Chinese economy has also spooked commodities and the industrial sectors. Maybe with some optimism that Chinese growth has bottomed we can put a floor on the market and end the current selloff.

As I have mentioned many times, it’s best to make your investment plans before events happen, taking the emotions away from decision making. I noted earlier that we began building our “arc” months ago. We have raised substantial amounts of cash in our Dividend and Growth managed portfolios – in the 35% range. And have about 20% cash in our Growth portfolios. Even if the markets turnaround from here, many stocks have seen fairly large selloffs and I have a shopping list of discounted equities that I am ready to buy.

On a side note, OPEC led by the Saudi’s, has continued to produce oil at their previous pace despite a global slowdown in demand. Normally you can count on the Saudi’s to cut production to prop up prices. This time however they have chosen to keep the pedal to the metal so to speak and maintain production. Why the change in strategy? Because they feel that by lowering the cost of a barrel of oil they will slow down the growth of U S and Canadian production which they see as a threat to their economy. What goes around…comes around…

Even more ironically, with gas prices dropping by about $.50 a gallon over the last year, the average driver is saving about $100 a month at the pump. By giving the U S consumer a little extra spending money, the Saudi’s have done what our own politicians are incapable of – creating a policy to help out us poor working stiffs in the middle class!

Investors.com quote

Here is a link to an article, Biotechnology ETFs Show Rebust Health In August I was quoted in posted at investors.com – the online publication of The Investor’s Business Daily (IBD). Short article focusing on two of the hottest market sectors, biotech and solar/green energy. My take is that it is mainly a consequence of a “risk on” market attitude that comes from global central banks jointly adding money into their respective economies. “Don’t fight the Fed” is particularly appropriate when multiple Fed’s are all pursuing the same easy money policy. Especially now that the ECB has decided to join the party.

Fed Policy and the Market

Below is an excerpt from our Monday report from Sterne Agee, (emphasis added):

“Fed Chair Janet Yellen gave a balanced assessment of the labor market in her keynote speech at Jackson Hole last week, according to Standard and Poor’s Economics. She said there is no “simple recipe for appropriate policy.” She indicated that the economy is improving and that the FOMC now is questioning the degree of slack, and repeated that faster progress toward the employment and inflation goals could speed up rate hikes. She also reminded us that if progress is disappointing, then the accommodative stance could remain intact longer. In other words, the Fed remains data dependent.

 What does all this mean for the timing of the exit from zero interest rates? We still think it is likely to come sometime in the second quarter of 2015.

During the next round of rate increases, investors appear to be fairly confident that equity prices will hold up, theorizing that an improving economy…should help support, if not boost, share prices. In addition, they point to two prior Fed tightening periods in which the S&P 500 held up remarkably well.”

Now let me translate. The consensus amongst Wall Streeters is that rates will increase in the second quarter of next year. This is a case where perception is far more important than reality as this could change if the economy progresses or regresses at a faster pace than anticipated. So “Data dependant” means that moderately bad economic news – the economy is growing, but at a slower pace than expected, will continue to be good news for the market as that would lessen the odds of a near term rate increase. But really bad news, as in recessionary news, or really good news (faster economy = faster rate increases) will be bad news for the stock market. In other words, we are in the bad news is good news market cycle.

Without extreme news, expect a continuation of the stock market rally from here into the end of the first quarter of 2015. The key to a rally continuation will come from first quarter 2015 earnings results. The question will be if an accelerating economy and theoretically rising sales can offset rising pressure on wages and rising costs from interest expenses.

401 Advisor, LLC’s position in our Dividend Income Plus strategy is currently 100% invested, with a rotation to what we deem to be higher quality issues. While the media focus is on the middle east and  domestic turmoil, the real issues are Europe’s economy heading to recession, and China’s aggression in the far east. We’re invested…but nervous with the bailout plan in place.

“The time to build an arc is when the sun is shining.”

The stock market is reaching new highs while the economy seems to be sputtering along. This has created an environment that has led Brian Nelson, CFA of Valuentum Securities appropriately using a baseball analogy during the baseball All Star Game and Home Run Derby to say, ” If there is an environment more difficult to hit a pitch out of the ball park, I don’t think I’ve seen one.”

My take is similar. The economy is improving and I don’t fear a rise in short term interest rates from the Fed. I’m in the camp that we need modestly higher interest rates to encourage banks to lend. On the other hand, while I don’t see any reason for a market correction, we are definitely due a routine 10% – 20% correction. What I am afraid of is that conditions exist such that an innocuous 10% correction could quickly become a full blown sell off – and very quickly.

And thus we have decided to start building our “arc.” My intent is to stay fully invested within the parameters of our investment models. However, we are definitely rotating our stock holdings into quality holdings. We’ve sold some of our higher yielding but lower quality investments and have sought out low cost, dividend growing cash flow kings that have proven they can weather a storm. We have backtested our holdings against several market scenarios and feel very comfortable should we get a surprise on the down side. At the same time, if the market continues its trek up, I think we will be well rewarded for holding low priced quality stocks.

This is when being “small” works to our advantage. With slim pickings in the markets for stocks that meet our stringent criteria, I am happy to hold 15 – 25 non-correlated stocks in a portfolio and not be forced to own hundreds of issues like a mutual fund.

I recently described my portfolio building process in an article for horsesmouth.com, a subscription site for financial advisors. A copy of the full article has been posted in the Library section of this web site.


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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