Category Archives: financial guidance

A different tax saving strategy

Tax loss harvesting allows people to reduce their taxable income by selling securities that have gone down in value. Capital losses can be used to offset ordinary income or to offset realized capital gains.

But if an individual dies with a capital loss that they have not used, the person who inherits these securities may not be able to use these losses.  There is a way to use these capital losses if it’s done right.

For example, If Joe buys a stock for $200 and it declines to $100 and then gives it to daughter Sue, her cost basis is $100 (the value when he gifts the stock). If she then sells it for $100 she cannot claim a loss.

However, if Joe gave the stock to wife Mary who then sells it for $100 she can claim a loss of $100 (the original cost $200 – $100 = $100 loss).

This is a quirk written into the tax code -Section 1015(e) – specifically designed for gifting of depreciated assets to a spouse.

This example only works if the assets are gifted before death. If Fred dies with the depreciated stock the tax cost basis is its value as of the date of death.

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Stay Invested: Economy Looks Good

One of our favorite economists, Brian Wesbury, Chief Economist of First Trust, offers this advice:

The current recovery started in June 2009, 105 months ago, making it the third longest recovery in U.S. history.

The longest – a 120-month recovery in the 1990s – saw real GDP expand an annual average of 3.6%. The current recovery has experienced just a 2.2% average annual growth rate – what we have referred to as “plow horse” economic growth.

That’s changing. In particular, the labor market is gathering strength. In February, nonfarm payrolls rose 313,000, while civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 785,000.

Hourly wages rose a tepid 0.1% in February, but in the past six months, average hourly earnings are up at a 2.7% annual rate while the total number of hours worked is up at a 2.6% annual rate. Total earnings are up at 5.4% annual rate in the past six months, which is faster than the trend in nominal GDP growth the past few years.

New orders for “core” capital goods, which are capital goods excluding defense and aircraft, were up 6.3% in the year ending in January, while shipments of these capital goods were up 8.7%. Sales of heavy trucks – trucks that are more than seven tons – are up 17.4% from a year ago.

The pace of home building is set to grow in the year ahead, in spite of higher interest rates or the new tax law limiting mortgage and property tax deductions. In the fourth quarter of 2017, there were 1.306 million new housing permits issued, the highest quarterly total since 2007.

A better economy also means higher interest rates, but this doesn’t spell doom. Housing has been strong despite rising mortgage rates many times in history. In fact, both new and existing home sales were higher in 2017 than they were in 2016 in spite of higher mortgage rates.

Yes, the new tax law will be a headwind for homebuyers and builders in high-tax states, but it’s going to be a tailwind for construction in low tax states like Texas, Florida, and Nevada. Housing starts have increased eight years in a row. Look for 2018 to be the ninth.

In the past two months, both ISM surveys – for Manufacturing and Services – have beaten consensus expectations. The US economy is not going to grow at a 3.0% pace every quarter, but all this data suggests that our forecast for an average pace of 3% growth this year is on steady ground.

The bottom line is that the U.S. economy is accelerating, not decelerating, and the potential for any near-term recession is basically zero. Corporate earnings growth, and forecasts of future earnings, have accelerated, and our 2018 year-end forecast for Dow 28,500 and S&P 500 3,100 remain intact. Even with higher interest rates! Stay invested.

Have questions? Contact us.

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Clear Skies Ahead

Brian Wesbury of First Trust:

You know the old saying about every cloud having a silver lining? Well, if you listen to some of the financial press, you’d think their motto was that clear skies are just clouds in disguise.

Friday’s GDP report showed the economy grew 2.5% in 2017, an acceleration from the average rate of 2.2% from the start of the recovery in mid-2009 through the end of 2016. Notably, what we call “core” GDP – inflation-adjusted GDP growth excluding government purchases, inventories, and international trade – grew at a 4.6% annual rate in the fourth quarter and was up 3.3% in 2017.

However, some pessimistic analysts were calling attention to a drop in the personal saving rate to 2.6% in the fourth quarter, the lowest level since 2005. The pessimists’ theory is that if the personal savings rate is so low, consumers must be in over their heads again, so watch out below!

But this superficial take on the saving rate leaves out some very important points.

First, consumers don’t just get purchasing power from their income; they also get it from the value of their assets. And asset values soared in 2017 as investors (correctly) anticipated better economic policies. The market cap of the S&P 500 rose $3.7 trillion, while owner-occupied real estate looks like it increased about $1.5 trillion. That could be a problem if we thought stock market or real estate was overvalued, but our capitalized profits approach says the stock market is still undervalued and the price-to-rent ratio for residential real estate is near the long-term norm, not wildly overvalued like in 2005.

Second, the tax cut that’s taking effect is going to raise after-tax income. According to congressional budget scorekeepers, the tax cut on individuals should reduce tax payments by $189 billion in 2019, which is equal to 1.3% of last year’s after-tax income. So, consumers are going to be able to save more in the next few years, even if we don’t include the extra income that should be generated by extra economic growth.

Third, the personal saving rate doesn’t include withdrawals from 401Ks and IRAs, many of which are swollen with capital gains. So, let’s say a worker contributed $5,000 of their income into a 401K at the end of 1988 and kept that money in the S&P 500 ever since. Today they can withdraw more than $97,000 and spend it. When calculating the saving rate, the government counts every penny of that spending while not counting a penny of it as income. As the population ages and spends down wealth they’ve already made, the saving rate tells us less and less about the saving habits of today’s workers.

Sometimes good news is really just good news. Unfortunately, some analysts can’t look at clear skies without imagining clouds.



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Market Shakeout

Following a virtual non-stop rally in the stock market since the beginning of 2017, we are not particularly surprised that the stock market should stop and take a breather. What many people find disconcerting about this sudden drop is it’s steepness and breadth. We have not been exposed to a decline this steep for quite a while.

Some commentators actually blame good economic news for the market drop, claiming that a robust economy has triggered renewed inflation fears, which they assert will lead the Federal Reserve to raise interest rates faster than expected.

Our view is that there is nothing fundamentally wrong with the economy, or with an increase in interest rates which has been widely anticipated. Long-time market observers have seen this movie before, it’s just been a long time since we last saw it. From what we have been reading, some large institutions are employing trading systems that trigger large sell orders at certain levels in the market, which in turn causes a cascading series of further drops.

On a fundamental level, the stock market responds to the economy, and we see no indications that anything has changed since the start of the year. Hiring is up, wages are rising, and millions of people are getting bonuses that they haven’t seen in years. Take-home pay will go up for millions more Americans beginning this month. Lower corporate tax rates should lead to higher corporate profits which should lead to higher stock prices. Still other corporations that have billions of dollars parked overseas, like Apple, are bringing a lot of that money home and are promising to invest it in the U.S. economy.

While the recent free-fall in the Dow has been spectacular, the markets have been abnormally placid for about eight years now. A healthy market sees run-ups and pull-backs, and in recent memory the pull-backs have been on the maximum order of maybe 3% total. While we certainly prefer the markets always go up, the reality of long-term market history is that to have corrections on the order of 5% – 10% in the midst of a bull market isn’t unprecedented or even that unusual. We don’t think this pull-back signals the end of the bull market run, but rather that we might be getting back to a more historical norm.

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Market Commentary by Bill Miller

Here are some selected comments by highly regarded portfolio manager Bill Miller:

The year 2017 surprised most pundits in several ways. It was the only year since good records have been kept where stocks were up every single month. It was the lowest volatility year on record. It had no correction of even 3%, which was unprecedented. Economic growth accelerated globally as the year progressed and the US economy enjoyed a couple of quarters of 3% growth.

Earnings grew double digits. Stocks were up over 20%, and the OECD indicates that the 45 largest economies in the world are all growing, something not seen in over a decade. The consensus appears to be “more of the same” in 2018. Strategists and investors generally are bullish on the economy, most also seem to be bullish on stocks.

There is growing concern that the great bond bull market that began in late 1981 is over (this is surely correct in my view), but divergence on what that might mean for stocks…….

In the Barron’s Roundtable, several commented that rising rates could compress valuations if yields went above 3% and that stocks could end the year down. I think that is wrong.

I believe that if rates rise in 2018, taking the 10-year treasury above 3%, that will propel stocks significantly higher, as money exits bond funds for only the second year in the past 10, and moves into stock funds as happened in 2013. Stocks that year were up 30%, mostly as result of that shift in fund flows. …

I think we are also likely to see inflation begin to stir, perhaps in a year, as labor force slack and excess manufacturing capacity both decline. Finally, I think the effects of the tax cut are only partially in the stock market. The market appears to have discounted the earnings boost to companies whose profits are mainly domestically sourced. It is not clear that a potentially material pickup in consumption has made its way into stock prices.

Many US companies have already announced special bonuses to employees or increases in their minimum wage as a result of the business tax cut and the ability to repatriate the trillions of cash currently held overseas. The employees getting such bonuses likely have a marginal propensity to consume approaching 100%.

Very little will be saved; almost all will be spent, which could add significantly to growth. I think we could print 4 quarters of 3% growth or better of real GDP. If inflation hits the Fed’s target of 2%, that would imply 5% nominal GDP growth. In a “normal” world 10-year rates would tend to be around the same as nominal GDP, yet another reason to be wary of investing in bonds.

Overall, I continue to think, as I have since the financial crisis ended, that the path of least resistance for stocks is higher.


Saving and Retirement

The Center for Retirement Research (CRR) at Boston College, found that 52 percent of working-age U.S. households are at risk of being unable to maintain their standard of living in retirement. Many recognize the possibility of a shortfall but 19 percent do not. Contributing factors include increased life expectancy, declining Social Security income replacement, and the shift from pensions to defined contribution savings plans. Older Americans are entering retirement carrying more debt. According to a paper by the Retirement Research Center at the University of Michigan, more Americans between ages 56 to 61 are carrying more debt than any time in recent history. Another retirement problem receiving increasing attention is the social isolation of retirees, which has been deemed a risk equal to or greater than major health problems such as obesity.

Studies about retirement savings plan contributions indicate a lack of participation by many American workers. A study by the PEW Charitable Trusts found that 25 percent of millennial adults participate in employer-sponsored defined contribution retirement plans versus 40 percent of Generation X and 43 percent of baby boomers. Stated another way, a large majority of millennials have no retirement savings plan.

If you are concerned about having the money to retire, call us.

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Avoiding Bad Advisors

Some good advice from SeekingAlpha:

The elephant standing in the room in all discussions of financial advice is the unethical advisor who offers bad, or not good, advice. Many commentators prefer not to dignify such people with the term “advisor.” I completely agree that the gulf is wide between these folks and those who genuinely possess advisory credentials; the trouble is that they typically call themselves advisors and they often give advice – it’s just that such advice is conflicted!

At their most extreme, bad advisors are the sharks sitting down in a Long Island boiler room pushing some pump-and-dump microcrap to widows lacking a companion to speak with. They talk about how their stock (or any other money-making device) is poised to shoot for the moon, and try to make you feel stupid for not handing over everything you’ve got.

Most people can recognize such wolves in sheep’s clothing, but seniors are not infrequently taken in, not because of their age certainly, but because of the growing problem of cognitive impairment such as Alzheimer’s and the like. A major national survey conducted two years ago by Public Policy Polling on behalf of nonprofit Investor Protection Trust found that nearly one in five Americans aged 65 and older had been victims of a financial swindle.

It is relevant to point out that a good financial advisor is often the first line of defense against such predators, as are adult children with sufficient awareness of the issue and, increasingly, doctors now trained to check for signs of financial exploitation when treating patients experiencing cognitive decline. It is also critical to note that a big source of vulnerability is the lack of awareness (of seniors and their adult children) of such decline.

Beyond the outright looting of bank accounts and the like, there are advisors who, on their own initiative or as a result of pressure from their firms, operate like used-car dealers are reputed to do; that is, they try to “put you in” a product today. And the firms we’re talking about, it is important to note, are not just large full-service brokerage firms that have been embroiled in past scandals, but also the discount brokerage firms of saintly reputation that are associated in the public mind as pro-consumer. Here’s a quote from an article by Bloomberg’s Nir Kaiser, citing a recent Wall Street Journal report:

Fidelity representatives are paid 0.04% of the assets clients invest in most types of mutual funds and exchange-traded funds,” but they earn 0.1% on investments that “generate higher annual fees for Fidelity, such as managed accounts, annuities and referrals to independent financial advisors.”

I think the above quote gets to the nub of the problem of unethical advice. Anyone who has any interest other than the client’s best interest should be automatically disqualified from offering you advice. The reason is simply that the person cannot be trusted. Maybe he is generally an upstanding citizen but the day you need his advice, he’s got a big bill to pay at home and convinces himself, first, that the product that will put the biggest jingle in his pocket is just the thing you need. Or, maybe the advisor faces no personal financial pressure whatsoever, but faces pressure to “perform” at work, and wants to keep his job. A 2015 survey from whistleblower securities law firm Labaton Sucharow found that nearly one in five financial industry respondents felt that financial services professionals must at least sometimes engage in illegal or unethical practices.

Such pressures exist in every field, but perverse incentives increase where large sums of money are involved. Many honest advisors seeking to break away from what they see as a conflicted corporate environment have undertaken fiduciary responsibilities, banded with an organization that imposes ethical standards and very often set up their practices as registered independent advisors, or RIAs. These are all good ideas, and favor good advice, but it bears mentioning that there are honest advisors outside of this framework, and that this framework doesn’t guarantee honest advice. Ultimately, it is incumbent on every individual who could benefit from professional financial advice to hone his own ability to detect integrity or the lack thereof, and to find an honest and capable advisors whose advice will help them succeed beyond the cost they are paying for the service.

Getting financial guidance is more important than ever, but be careful who you take advice from.  If you have questions, feel free to ask us.

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Can you answer these basic money questions?

The NY Post published an article Most Americans can’t answer these 4 basic money questions.   They questioned “Millennials” and “Boomers” to see who were most knowledgeable about investing.

Here are the questions – see how well you do.

  1. Which of the following statements describes the main function of the stock market?
    A) The stock market brings people who want to buy stocks together with people who want to sell stocks.
    B) The stock market helps predict stock earnings
    C) The stock market results in an increase in the price of stocks
    D) None of the above
    E) Not sure
  2. If you had $100 in a savings account and the interest rate was 2 percent per year, after 5 years, how much do you think you would have in the account if you left the money to grow?
    A) Exactly $102
    B) Less than $102
    C) More than $102
    D) Not sure
  3. If the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year, after 1 year, how much would you be able to buy with the money in this account?
    A) More than today
    B) Exactly the same as today
    C) Less than today
    D) Not sure
  4. Which provides a safer return, buying a single company’s stock or a mutual fund?
    A) Single company’s stock
    B) Mutual fund
    C) Not sure
    D) Not sure



The correct answers are

  1. A
  2. C
  3. C
  4. B

If you had trouble getting the right answers you could benefit from the guidance of a good RIA (Registered Investment Advisor).

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A prediction for 2018 from Brian Wesbury of First Trust

Last December we wrote “we finally have more than just hope to believe that this year, 2017, is the year the Plow Horse Economy finally gets a spring in its step.” We expected real GDP growth to accelerate from 2.0% in 2016 to “about 2.6%” in 2017. Our optimism was, in large part, based on our belief that the incoming Trump Administration would wield a lighter regulatory touch and move toward lower tax rates.

So far, so good. Right now, we’re tracking fourth quarter real GDP growth at a 3.0% annual rate, which would mean 2.7% growth for 2017 and we expect some more acceleration in 2018.

The only question is: how much? Yes, a major corporate tax cut (which should have happened 20 years ago) is finally taking place. And, yes, the Trump Administration is cutting regulation. But, it has not reigned in government spending. As a result, we’re forecasting real GDP growth at a 3.0% rate in 2018, the fastest annual growth since 2005.

The only caveat to this forecast is that it seems as if the velocity of money is picking up. With $2 trillion of excess reserves in the banking system, the risk is highly tilted toward an upside surprise for growth, with little risk to the downside. Meanwhile, this easy monetary policy suggests inflation should pick up, as well. The consumer price index should be up about 2.5% in 2018, which would be the largest increase since 2011.

Unemployment already surprised to the downside in 2017. We forecast 4.4%; instead, it’s already dropped to 4.1% and looks poised to move even lower in the year ahead. Our best guess is that the jobless rate falls to 3.7%, which would be the lowest unemployment rate since the late 1960s.

A year ago, we expected the Fed to finally deliver multiple rate hikes in 2017. It did, and we expect that pattern will continue in 2018, with the Fed signaling three rate hikes and delivering at least that number, maybe four. Longer-term interest rates are heading up as well. Look for the 10-year Treasury yield to finish 2018 at 3.00%.

For the stock market, get ready for a continued bull market in 2018. Stocks will probably not climb as much as this year, and a correction is always possible, but we think investors would be wise to stay invested in equities throughout the year.

We use a Capitalized Profits Model (the government’s measure of profits from the GDP reports divided by interest rates) to measure fair value for stocks. Our traditional measure, using a current 10-year Treasury yield of 2.35% suggests the S&P 500 is still massively undervalued.

If we use our 2018 forecast of 3.0% for the 10-year yield, the model says fair value for the S&P 500 is 3351, which is 25% higher than Friday’s close. The model needs a 10-year yield of about 3.75% to conclude that the S&P 500 is already at fair value, with current profits.

As a result, we’re calling for the S&P 500 to finish at 3,100 next year, up almost 16% from Friday’s close. The Dow Jones Industrial Average should finish at 28,500.

Yes, this is optimistic, but a year ago we were forecasting the Dow would finish this year at 23,750 with the S&P 500 at 2,700. This was a much more bullish call than anyone else we’ve seen, but we stuck with the fundamentals over the relatively pessimistic calls of “conventional wisdom,” and we believe the same course is warranted for 2018. Those who have faith in free markets should continue to be richly rewarded in the year ahead.

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