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The Cure

September 28, 2022

 

My goodness; stocks are taking a terrible beating these days.  From the way the market is behaving, one might think that some of the world’s largest and most profitable companies are suddenly becoming dramatically less valuable.  Are they all laying off workers, slashing prices, closing factories and declaring imminent bankruptcy?

 

If this is sending you to anxiously scan the headlines, don’t bother; none of that is happening.  Stock prices have never been a precise indicator of what companies are worth.  They are a very good indicator of what people are willing to pay for their shares, and right now there seems to be more sellers than buyers.

 

Why?  The reasons for bear markets are seldom rational—which, of course, is why bear markets end and stocks return to (and always, in the past, have surpassed) their original highs.  What’s happening right now is not unlike what happens when one of our children is diagnosed with an illness, and the remedy is a daily dose of some awful-tasting medicine.  The illness, in this case, is inflation, which absolutely has to be cured if we are to experience a healthy economic life.  Few things are worse than having the money you’ve saved up deteriorate in value at double-digit rates, which is precisely what has been happening this year.

 

The cure, which any child will tell you can sometimes be more unpleasant than the illness itself, is the U.S. Federal Reserve raising interest rates, which is its way of reducing the amount of cash sloshing around in the economy.  Rising consumer prices, just like rising stock prices, come about when there are more buyers than sellers.  Reducing the available cash reduces the number of buyers in relation to sellers (ironically, both in the consumer marketplace and on Wall Street), and finally slows down the inflation rate to manageable levels. 

 

We can already see how this works in the housing market, where, just a few short months ago, multiple would-be buyers were bidding against each other to pay more than the asking prices.  As mortgage rates have risen, the frenzy has completely dissipated.  The process takes longer in the consumer marketplace at large, but you can bet it’s working behind the scenes.

 

Doesn’t less spending mean less economic activity?  Doesn’t that lead to a recession?  The answers, of course, are yes and maybe.  But at this point, a recession might not be all bad for the economy.  Recessions act like a cleansing mechanism, exposing/eliminating waste and inefficiency, ultimately creating a healthier economy when we come out the other end.

 

So right now we’re taking our medicine, and boy does it taste awful.  We are also, collectively, suffering an economic illness.  Anybody who has come down with a bug and taken medicine to cure it knows that the former unpleasantness doesn’t last forever, and therefore neither does the latter.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Source:

 

https://www.nytimes.com/2022/05/14/business/inflation-interest-rates.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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No Fed to the Rescue

September 16, 2022

 

With two consecutive quarters of negative GDP growth, high inflation and markets that have persistently delivered bearish returns, the hope was that the U.S. Federal Reserve was busily looking for a way to execute a ‘soft landing’—meaning, basically, a return to modest economic growth, higher market returns and lower inflation.  It now seems clear that that is not the Fed’s plan.

 

In a recent speech in Jackson Hole, WY, Fed Chair Jerome Powell announced that he will do whatever it takes, pretty much to the exclusion of economic growth and better market returns, to drive inflation down to the 1.8% annual goal that has been recent Fed policy.  He said, bluntly, that “reducing inflation is likely to require a sustained period of below-trend growth.”  Translated, that means higher short-term bond rates and an indifferent attitude toward more economic pain.

 

The speech even seemed to be attacking the nation’s historically low 3.5% unemployment rate, the lone bright spot among a lot of otherwise grim economic statistics.  Powell surprised many economists by asserting that, in his view, the labor market was “clearly out of balance” because the demand for workers exceeds supply. 

 

Overall, the speech seemed to hint at another jumbo 75 basis point increase in the Fed Funds Rate later this month.  If (when) that happens, it will grab headlines, but it might not be the most significant growth-slowing measure the Fed will be taking.  The U.S. central bank is also accelerating the process of selling off the Treasury and mortgage bonds on its balance sheet, doubling the monthly sales from $47.5 billion to $95 billion.  It’s important to note that when the Fed was buying these bonds, the so-called QE (quantitative easing) buoyed the stock market.  The opposite, called quantitative tightening (QT to some), might have the opposite effect.

 

Most of us know that the economy will eventually recover from its current doldrums, and the Fed’s current policy will ease up as inflation declines.  What we’re seeing now is the inevitable ‘pay the piper’ moment where the bill comes due from the enormous (and, of course, unsustainable) stimulus that the Fed injected into the economy to end the Great Recession and, not so long afterwards, to pull the country out of the Covid-driven downturn.  The hope now is that it won’t be long before the Fed decides that the piper is paid off, and once again prioritizes growth and profitability in the economy.

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Sources:

https://www.advisorperspectives.com/articles/2022/08/31/powell-abandons-soft-landing-goal-as-he-seeks-growth-recession

https://www.advisorperspectives.com/articles/2022/08/31/the-fed-is-about-to-go-full-throttle-on-qt-fear-not

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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NOT-Transitory Inflation

July 15, 2022

 

For much of last year, the economists at the U.S. Federal Reserve Board confidently told the public that the rampant inflation we were experiencing in the U.S. was ‘transitory.’ 

They were wrong, and increasingly so as time goes on.  This won’t surprise anybody who has been shopping lately, but economists were shocked to discover that the inflation rate rose 9.1% annualized in the month of June.  You would have to go back to 1981 to find a higher rate.  And the usual culprits of the war in Ukraine—food and energy prices—were not the only reason for the cost of living increase.  If you took out those two parts of the inflation calculation, the rate was still 5.9% overall.  The Federal Reserve’s ‘target’ is 2%.

So far, the U.S. Consumer Price Index measure of inflation is running around 8.6%—that is, it costs roughly 8.6% more to fund a normal lifestyle today than it did at this time last year.   This is part of an international trend; the UK is looking at 11% overall price increases, and the Eurozone is experiencing an 8.6% inflation rate.  South Korea’s 6% annual inflation rate is the highest in 24 years, and even Japan, which has flirted with deflation for the past 30 years, is seeing prices rise 2.5%.

How long will this last?  Nobody knows.  The Fed seems committed to driving U.S. inflation down with a series of aggressive interest rate hikes, but with prices rising everywhere else, one wonders how effective this will be.  But perhaps we can take comfort that our cost of living increases are markedly lower than what people are experiencing in Turkey (78% year-over-year), Argentina (60.7%) and Sri Lanka (54.6%).

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

Sources:

https://www.nytimes.com/live/2022/07/13/business/cpi-report-inflation

https://fortune.com/2022/07/09/inflation-rates-around-the-world/

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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The Fed and the Bear

June 21, 2022

 

By now, you know that the U.S. Federal Reserve Board raised the so-called Fed Funds rate by three quarters of a percent—the largest increase since 1994.  You may also have heard that the size of the increase took everybody by surprise—a list that includes economists, pundits, journalists and professional investors.  The news drove the markets, already teetering on the edge, into bear market territory—defined as a 20% drop from previous highs.

 

The stated reason for the rate increase is to squeeze inflation out of the economy.  The logic is somewhat complicated, but the simple explanation is that inflation occurs when too much money chases too few goods.  Raising rates will make it more expensive to borrow, diminishing purchasing power on credit, which could (eventually) result in less borrowing, which could (eventually) slow down consumer spending.

 

But of course, consumer spending is a huge component of economic growth, so less spending will slow down the entire economy—at a time when it has already recorded a full quarter of negative growth.  And by making borrowing more expensive, the central bank is also reining in corporate spending, which is another contributor to economic growth.  In fact, some economists believe that the economy was running ‘hot’ for the past decade, because companies could fund their operations with cheap money, and unprofitable companies could stay afloat because they could always borrow enough to get by.  The almost-free money allowed ‘distressed’ companies to rack up $49 billion in obligations that might need to be structured or face default.

 

If you look at the bigger picture, the American economy has experienced something quite extraordinary: more than four decades of falling interest rates, until they finally fell down to zero (short term) or near zero (longer-term) and had no more room to fall.  The Fed action has built on a reversal of that trend, sending mortgage rates to their highest level in nearly 14 years. 

 

If you want to second-guess the Fed economists with their Ph.Ds, you might wonder whether curbing inflation is worth the collateral damage of negative economic growth, diminished consumer spending and reeling investment markets where confidence in the future is shaken.  Their answer is likely to be that sooner or later they had to take away the punch bowl that led to the economic equivalent of drunken excesses—the stock market boom, meme stocks, special purpose acquisition companies, soaring housing prices, the alarming rise in the cost of living.  They might have been more gentle about it, but we all know that economic booms eventually lead to busts, which weed out unprofitable or poorly-run companies and ultimately deliver a healthier economy and, for investors, provide opportunities to buy stocks at a discount. 

 

The Fed has challenged all of us, whether we run companies or manage our monthly budgets, to endure a painful transition that was probably inevitable, and take our medicine all at once rather than gradually over a longer period of time.  Yes, the medicine tastes terrible right now.  Let’s hope it provides the cure that the U.S. central bank is hoping for, and that this will lead us into the next economic expansion and a new bull market.

We hope that you and your family are safe and well. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Sources:

https://www.washingtonpost.com/business/2022/06/19/fed-rates-economy-markets/

https://www.nytimes.com/2022/05/14/business/inflation-interest-rates.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Perspective - Stocks are Fairly Valued

 
 

 

June 16, 2022

 

In an effort to keep you informed about the current market and economic environment, we are sharing this short video from Brian Wesbury. Brian is the Chief Economist of First Trust Portfolios. First Trust is one of our strategic partners that many of you are familiar with.

We hope this seven minute video is timely and gives you some context around what is happening in the market and the economy.

Click here to watch the latest Wesbury 101: Stocks are Fairly Valued

 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives. 

 
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Reflections on Yet Another Downturn

April 26, 2022

 

The stock market suffered an ugly downturn on Friday.  Chances are, you knew it was coming.  In fact, so did we.

Come again?  Pretty much everybody knew that sometime, someday, probably before long, stocks would take a weird, unexpected plunge.  The fact is, they do this more often than we realize; one-day drops of more than 2.8% have occurred 20 times since February of 2018 (down 4.6% on Feb. 5, down another 4.15% on the 8th).  Make that 21 after Friday.

The trick isn’t knowing that there will be a market free-fall sometime in the (probably) near future; the trick is knowing exactly when.  Many prognosticators had a feeling that stocks would go into a long-term free-fall after that disastrous few days in the spring of 2020, when people were just realizing that Covid was going to be a thing.  After the markets rewarded buy-and-hold investors, many were pretty sure the markets were going to plunge when President Trump was impeached the first time, and then the second time.  There’s a whole cadre of pundits who make a great living by predicting that some kind of investing or economic catastrophe is just around the corner, and they offer this prediction over and over again until one day (surprise!) they turn out to be right.  

If you knew that there would be a 2.8% market drop on, precisely, April 22 of this year, then you had something worth talking about, and we wish you would have shared this information with us beforehand.  The fact that none of us could predict the date or time is significant; it means that these market moves are completely predictable in that we know they are going to happen, and unpredictable in that we never have any idea beforehand when the hammer will fall.

But that’s also good news.  Just as experience tells us that the markets are going to drop periodically, it also tells us that they tend to recover to new highs later on.  Neither of those rather vague predictions are terribly exciting, but the second one is the one that is going to make you money in the long run.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA

President

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

Sources:

https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average

https://www.cnbc.com/2022/04/21/stock-market-futures-open-to-close-news.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Inflation Fears

April 19, 2022

 

The headlines are kind of alarming: last month, the U.S. inflation rate spiked to the largest increase since December of 1981.  The Commerce Department’s basket of consumer products was 8.5% more expensive in March than it was a year earlier.

Before anyone becomes too alarmed, they should know that half of that increase came at the gas pump, the aftermath of the energy disruptions associated with the ongoing war in Ukraine.  Since then, gas prices have come down a bit, and there is no good reason to imagine that the pain at the pump is permanent.

More problematic is the rise in grocery prices, which are also impacted by the war.  Both Russia and Ukraine are exporters of wheat; whenever supplies decrease, assuming constant demand, prices rise.  Bread and a host of other food products suddenly become pricier. 

Airline tickets are becoming more expensive because airlines are no longer begging people to take the Covid risk of flying.  Airlines are paying more for fuel than they were a year ago.  And manufacturers are still dealing with transportation bottlenecks.

None of this helps us understand why egg prices are up over 11% from last year, and the Easter ham that many Americans prepared over Easter weekend jumped up 14% in cost.

Is there an explanation?  Part of the reason economists fear inflation is the mindset that it creates.  When workers and companies see prices going up, they prepare for it by demanding higher wages and higher prices for their products.  Barbers and massage therapists ask for a few dollars more for their services, and then a few dollars more because everybody else has raised prices—and so it goes.  Suddenly—and nobody knows exactly where or how we cross that threshold—inflation becomes a self-fulfilling prophecy.  And these cycles can be very difficult to stop.

The bottom line is that we are expecting inflation to be with us for quite some time.

Happy Spring!  We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Sources:

https://www.npr.org/2022/04/12/1092414592/the-rate-of-inflation-made-its-sharpest-spike-since-1981

https://www.advisorperspectives.com/articles/2022/04/13/u-s-producer-prices-jump-11-2-from-a-year-ago-the-most-on-record

 

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Reflections on the Downturn

March 9, 2022

 

Let’s imagine for a moment that on your daily walk to work, your normal route takes you past a pawn shop that is known to display expensive jewelry.  Over the past couple of days, you’ve noticed that the jewelry on display has been marked down—for reasons that you don’t really understand.  All you know is that, in the past, these times when the jewelry went on sale were quite temporary and, in fact, in the past the prices were far more likely to go up than to go down.

The store also buys jewelry from the public, and over the same recent time period, the prices it is willing to pay have been declining as well.

The question is: would you pick this time to sell some of your own jewelry, or to buy some while it’s temporarily on sale?

You can apply this same thought experiment to on-sale items at the clothing rack or in the grocery store, and the answer is always the same: your inclination would be to buy when things are on sale, and to sell (if you happen to have something) whenever the prices go back up.

The peculiar thing about this thought experiment is that whenever you’re talking about jewelry, or clothing, groceries or pretty much any everyday item in the marketplace, the response is obvious.  But when we’re confronted with exactly this same situation regarding stocks, ETFs or other investments, the immediate inclination is exactly the opposite. 

Why should that be?  Psychologists have had a field day exploring the ideas of herd mentality and recency bias and a lot of other mental shortcuts (psychologists call them “heuristics”), but nobody has ever managed to explain why our instinctive reaction to price movements in investments should be different from our instinctive reaction to virtually everything else in the global marketplace.  We know that fear plays a role, but how rational is that fear when every market decline in history has been followed by subsequent record highs?  We know that fluctuations in our net worth are tied to our sense of well-being, but why should we feel less confident when the paper value of our holdings is 2-3% lower today than it was yesterday?  Do we feel that much more confident when the markets are UP 2% or 3%?

Years ago, after Microsoft stock had risen from practically zero to astronomical heights, a financial journalist interviewed a few people who had become wealthy by holding on to their Microsoft investment for two full decades.  The first surprise was how few of them there were; many people had been given stock grants during the company’s early years in business, and others had invested in this hot company with a promising new operating system.  But most of them had cashed out at the first, or second, or third dip, long before the real money was made.

The second surprise was how all of these now-wealthy stockholders told the same story: that there were many times when they had to grit their teeth and avoid the temptation to sell the stock of a company that was increasingly dominating desktop software.  Every bump in the road was, to them, a strong sell signal, which required a certain fortitude to hang on.

The lesson in all this is that all of our brains are wired to be dysfunctional investors.  Now that the markets are becoming unpredictable and stocks are going on sale, all the tendencies to make bad decisions are being triggered.  If the same thing were happening at the grocery store or in that pawn shop display, we’d all be cheering this nice (albeit temporary) opportunity. 

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Crypto Leak in the Sanctions

March 4, 2022

 

The question that you are hearing most often about the Russian military invasion of Ukraine is: how effective will the coordinated financial sanctions be in persuading the Russian leadership to back off?  Will the Russian oligarchs be stripped of their wealth, and rein in their leader?

 

The most painful sanctions that have been imposed on Russia’s leadership include seizure of their assets in Western banks—and there is talk about seizing super-yachts and private aircraft as well.  Real estate holdings may be next. 

 

But Russian oligarchs have had a lot of time to prepare, having benefited from inside knowledge that their leader was likely to proceed with the shocking invasion of its democratic neighbor.  Yes, they have an estimated $340 billion of wealth that is sitting in sanction limbo right now at various Western institutions.  But the wealthy Russian leaders appear to have been quietly squirreling away a nice chunk of their wealth in a place where the West is powerless to touch it.

 

In fact, the Russian government itself has estimated that its wealthiest citizens have now accumulated $214 billion worth of various cryptocurrencies—roughly 12% of the global total.  Those assets are out of reach of the global banking system.  They are not completely anonymous, but some experts have noted that sophisticated crypto holders can set up a web of wallets with different addresses across several exchanges, which make it very difficult to tie transactions back to a particular individual.  And several crypto exchanges are not based in jurisdictions that support the sanctions.

 

Of course, the complicated part of this plan is eventually converting crypto holdings back into fiat currencies, since most business entities still don’t accept bitcoin for their services.  Western nations can prevent the exchanges from making these conversions—or, once they are made, that money can finally be traced and seized.  The oligarchs’ plan seems to be to keep the anonymous assets in safe storage and wait for the sanctions to ease a year or two from now—which might not work if the Russian invasion succeeds and the sanctions become permanent. 

 

Meanwhile, it should be noted, bitcoin—the most visible of the cryptocurrencies—has seen its value decline by nearly 50% since last November.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source:

https://worldcrunch.com/business-finance/russian-oligarchs-crypto-sanctions/bitcoin-boom-in-moscow

https://worldcrunch.com/business-finance/russian-oligarchs-crypto-sanctions/bitcoin-boom-in-moscow

https://www.ndtv.com/business/how-crypto-may-help-russia-and-its-billionaires-go-around-sanctions-2788483

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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War in Europe?

February 4, 2022

 

For most of us, it’s a little hard to believe that Europe might soon be plunging into another war.  But the prospect is hard to ignore now that Russia has sent 100,000 soldiers and massive amounts of tanks, fighter jets, missile launchers and other military equipment right up to the borders of the sovereign nation of Ukraine—following up on years of simmering military intervention that has claimed the lives of Ukrainian soldiers on a daily basis. 

 

Lest anyone think that Russia is incapable of brazenly conquering another country’s territory in this day and age, it is helpful to remember that it sent in its ‘little green men’ (later conceded to be Russian soldiers) to annex the entire Crimean peninsula from Ukraine right after the 2014 winter Olympics.  Russia has also assumed military control of the Donbas region east of the Ukrainian city of Donetsk, under the pretense of ‘protecting’ Russian-speaking citizens there.  In an ominous sign, Russia has reportedly been handing out hundreds of thousands of Russian passports to Donbas, which would offer a pretext to argue that those visitors ‘need to be protected.’

 

Nor, as most articles have reported, are all the military ‘exercises’ being conducted on the eastern border; in fact, there has been substantial troop movement to the north and northeast of Ukraine, which could signal a multi-pronged attack on the country.

 

Or it might not.  The Kremlin has denied that there is any plan to attack anybody in the region, and maintains that the massing of troops from Belarus and elsewhere is simply a training exercise—albeit a highly unusual one.  And political analysts have pointed out how awkward it would be for Chinese President Xi Jinping if Russia were to launch an invasion while Vladimir Putin was attending the Winter Olympics as Beijing’s special guest.  There is speculation that Russia is simply using the threat of invasion as a bargaining chip to prevent any expansion of the NATO alliance, or that an invasion would stop once Russia had conquered the coastline between Donbas and Crimea. 

 

Finally, military analysts have pointed out that, for all the belligerence and blustering, Putin’s Russia has been extremely shy about direct military confrontations in cases where the enemy is capable of fighting back—and with U.S. aid, the Ukrainian military definitely has the capacity to inflict painful damage on any invasion force.  Putin seems to have a knack for manufacturing crises and then resolving them in ‘benevolent’ gestures, rather than risking the political consequences of large losses of soldiers’ lives.

 

What does all this mean to us sitting safely on the far side of the ocean?  If there does happen to be an invasion, we can expect a certain amount of panic in the markets, due to the threat of economic destabilization and uncertainty that such a shocking development would trigger.  An invasion could disrupt Ukraine’s agricultural production, which is surprisingly important to the world’s food supplies.  It is estimated that Ukraine farmers account for about a sixth of the world’s corn exports. 

 

There would also be some as-yet-unmeasurable impact on world energy supplies.  Russia supplies about 30% of the European Union’s natural gas, which could be interrupted, raising global energy prices including here in the U.S.  An invasion would almost certainly be followed by severe economic sanctions, which means Russia’s ability to export oil could be hampered or even crippled.

 

Perhaps most importantly, all of us—as citizens of the world and as investors in what we always hope will be a peaceful and productive economic community—would feel less comfortable about the global political environment if we were to witness the brazen invasion of one European nation by another.  The threat of war is unsettling enough; a real one, playing out on the evening news, would be undeniably scary.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Sources:

https://www.cnn.com/2022/01/28/europe/ukraine-russia-explainer-war-threat-cmd-intl/index.html

https://www.brookings.edu/blog/order-from-chaos/2020/03/17/crimea-six-years-after-illegal-annexation/

https://www.cnn.com/2022/01/28/europe/ukraine-russia-explainer-war-threat-cmd-intl/index.html

https://www.cnn.com/2022/01/29/europe/russia-ukraine-global-implications-cmd-intl/index.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Bear or no Bear? Does it Matter?

February 1, 2022

 

In U.S. stock market history, bear markets—defined as a drop of 20% or more for a broad market index—happen roughly every four years and eight months.  With the recent month of January being down in the markets, we may be in the early stages of a new one.

 

Or we may not—and that, of course is the problem.  It is very easy to see these market downdrafts in retrospect, but impossible to know when one is occurring, or to predict them in advance.  Nor can we know how far down they’ll take us or when the recovery will begin.

 

Some of the longest declines were triggered by major geopolitical events—such as the attack on Pearl Harbor that pulled the U.S. military into World War II (a 308 day downturn, nearly a year), and Iraq’s invasion of Kuwait in 1990 (108 days).  The terrorist attacks of 2001 and the North Korean missile crisis of 2017 also triggered market declines.  In 2008, the collapse of Wall Street speculation nearly brought down the entire global economy.  More recently, in 2020, the emergence of a major global pandemic caused a rapid decline which was, as most of us remember, followed by a precipitous rise in market values that has continued through the end of last year.

 

At the moment, it’s not easy to see a major catastrophic trigger that would cause investors to race for the exits, but there have been other bear markets where a bull market simply ran out of steam—a recent example is the bursting of the dot-com bubble in 2000.  The hardest-hit investors in that period were all crowded into the latest craze—tech stocks—and the tech-heavy Nasdaq index didn’t recover its former value until 2015.  The lesson there was not trying to time the market but to maintain the discipline of diversification despite the temptations of rising valuations.

 

Which brings us back to the possibility that we’re entering a bear market today.  Taking another look at history, since 1929, the average duration of these 20%+ downturns is 21 months—and it is just as impossible to predict these durations as it is to predict the downturns to begin with.  The Covid-related downturn in 2020 is a terrific example of how unpredictable the recovery can be.  The pandemic news didn’t change from February to April 2020, but the markets recovered anyway, and were not discouraged through the ensuing political drama, the Delta and Omicron variants, and the highest inflation rate in decades.

 

The most important historical fact is that every bear market in U.S. history has been followed by new highs.  Since 1950, we have experienced 53.8% up days in the market and 46.2% down days, and the magnitude of the positive days has exceeded the magnitude of the downdrafts.  The champion investors always have some cash or cash-equivalents in their portfolios, which lets them buy when the markets go on sale—which is perhaps the best way to view bear markets: as an opportunity to buy valuable stocks at a discount.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Sources:

https://www.investopedia.com/terms/d/dotcom-bubble.asp

https://www.thebalance.com/u-s-stock-bear-markets-and-their-subsequent-recoveries-2388520

https://www.kiplinger.com/slideshow/investing/t052-s001-8-facts-you-need-to-know-about-bear-markets/index.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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The End of the Buying Spree?

January 14, 2022
 
You might be reading about the internal debate at the Federal Reserve Board about when and how to ‘shrink its balance sheet,’ which will (articles tell us) have some mysteriously negative impact on the U.S. investment markets. But what are they actually talking about?
 
The Fed is, of course, the U.S. central bank, which is granted unlimited purchasing power, and which also can make unlimited funds available to banks in the form of (generally low-interest) loans. These powers were fully deployed during the market downturn in 2008-9, when the reckless real estate bets by the major brokerage firms very nearly toppled the global economy. Then came Covid. The Fed acted as the major buyer of U.S. Treasury securities, which effectively held down their rates (it bid competitively on the low end) and also purchased massive amounts of mortgage-backed securities from Freddie Mac and Fannie Mae, which, in turn, buy loans from banks, which makes housing credit more readily available and has had the effect of driving down mortgage rates.
 
You can see from the graphic linked here that the Fed has ramped up its buying spree in the past couple of years, to the extent that it now owns an extraordinary $8.7 trillion worth of bonds overall, including more than 22% of all U.S. government bonds outstanding. But the interesting part is how this has disrupted the normal market forces of supply and demand. 
 
Meaning? A normal bond buyer (that is, everyone except the Fed) wants to get the highest rate possible, so there is usually an equilibrium among greedy and less-greedy buyers where the auction ultimately delivers a fair price, usually some percentage over the current inflation rate. At today’s 6.2% rate of inflation (over the last 12 months), that would imply a 10-year Treasury bond yield somewhere in the 7-8% range, which would allow for a small profit over inflation. But with the Fed putting in bids way below what most investors would be willing to accept, the actual yield, today, is below 1.5%. This is why you will hear dark muttering from some economists that the Fed is interfering with the natural workings of the marketplace.
 
So what does this have to do with the Fed ‘shrinking its balance sheet?’  If the U.S. central bank were to stop buying Treasuries altogether, it’s possible—even probable—that government bond rates would jump many multiples of where they are today, to the point where investors were once again earning a fair return after inflation. If the Fed were to go further, and actually start selling off its massive bond holdings, it would flood the market with bonds, potentially creating a massive buyer’s market where the buyers could set the prices—which could drive rates even higher.
 
But how would that affect the equities markets? In two ways. First, if investors could buy safe, totally secure returns of, say, 8% a year, wouldn’t they be motivated to shift at least some of their holdings from volatile stocks to risk-free bonds? If that triggered a major selloff in stocks, it would create a new buyer’s market, where stock buyers can wait for stocks to drop to more attractive prices before jumping in to buy the dip.
 
The other impact would be on the U.S. government debt, which currently stands at a record $28.43 trillion. What happens if the government is paying 7% on that debt instead of 1.5%? The debt would quickly spiral out of control, alarming taxpayers and potentially (certainly?) leading to higher tax rates.
 
Of course, Fed economists are highly aware of their potential impact on the government’s debt and investment markets, and are motivated to tread very lightly. The most recent announcement unveiled plans to scale back purchases by a minuscule $30 billion a month  Reducing the balance sheet, it seems, actually means increasing it less rapidly than in the recent past, gradually buying fewer and fewer government securities while holding what the Fed already owns to maturity. It’s probably going to take a very long time to unwind an $8 trillion balance sheet, but it’s not out of the question that even a modest step in that direction will spook investors who are carefully watching to see how this drama plays out.
 
Sincerely,
 
Edward J. Kohlhepp, Jr., CFP®, MBA
President
 
Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Founder & CEO
 
 
Sources: 
 
This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 

 

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Take or Delay?

November 12, 2021

 

Most American workers who have at least 10 years of work history will be able to start taking Social Security benefits as soon as they reach age 62.  But should they?

 

Some years back, there was considerable debate about whether a person was better off receiving the monthly checks early and investing them in the markets, or waiting until full retirement age (currently age 67)—or, alternatively, waiting until age 70 and receiving even higher benefits. 

 

Today, that debate has largely gone away.  Most advisors recommend waiting, if you can, at least until full retirement age and, even better, holding off until age 70.

 

Why?  The problem with most of those older calculations was that they were assuming that the U.S. investment markets would follow historical long-term averages—which, as I think most of us have seen—is not guaranteed.  What IS guaranteed is that the Social Security benefits will rise with each and every year that a qualified recipient waits to start taking them.  For persons born after 1943 (that is, pretty much everybody who is qualified to take Social Security benefits), the “delayed retirement credit” is a whopping 8% a year.  Yes, that means that each year you wait means that the monthly check will be 8% higher than it would have been before.  You will not get that kind of guarantee from the investment markets.

 

The Social Security Administration offers a calculator on its website which shows the percentage of your normal retirement age benefits you would receive depending on what age you start taking your monthly checks.  For a person born in September of 1960 who decides to turn on the Social Security benefits at age 62, the benefits represent 70.42% of the checks that same person would have received if he or she had started taking benefits at age 67.  By waiting until age 70, the same person would receive 124% of the so-called “primary insurance amount.”

 

But there’s more to the story than simply larger checks.  Social Security is the only guaranteed source of retirement income that is protected against inflation, which means offering protected purchasing power.  Those larger checks become proportionately larger depending on the inflation rate.  That is not the case with annuity checks and most pension accounts—where the amount received will be less valuable with each passing year.

 

Of course, there are always questions about Social Security’s solvency.  The Social Security Trust Fund has been projected to run out of money in 2033, which wouldn’t mean a total loss of benefits, since working taxpayers would still be paying into the system.  In a worst-case scenario, those payment amounts would cover 78% of today’s projected benefits.  But it seems unlikely that Congress would fail to shore up a system that currently delivers benefits to 69.1 million voters.  In fact, the Social Security Enhancement and Protection Act was recently reintroduced in the U.S. House of Representatives; among the provisions is a 5% increase in monthly benefits for all beneficiaries who have been retired for 20 years, and bolstering the Trust Fund by phasing out the Social Security payroll tax cap, which currently applies only to wages up to $142,800.  In addition, the payroll tax rate would gradually rise from the current 6.2% to 6.5%.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://www.ssa.gov/oact/quickcalc/early_late.html

https://www.cnbc.com/2021/08/19/bill-in-congress-aims-to-keep-social-security-beneficiaries-out-of-poverty.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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QCDs to the Rescue

November 5, 2021

 

When the 2017 Tax Cuts and Jobs Act raised the standard deduction for taxpayers to $24,000 for couples ($12,000 for singles), and lowered individual tax rates, an unintended consequence was the reduction in the tax benefits of making charitable donations.  Fewer taxpayers were itemizing, which means their donations didn’t count as deductions.  Itemizing taxpayers—including people who intentionally raised their level of giving in order to cross the standard deduction threshold—found that the lower brackets reduced their tax benefits. 

 

The Urban-Brookings Tax Policy Center has estimated that the law reduced the marginal tax benefit of giving to charity by more than 30 percent and raised the after-tax cost of donating by about 7 percent.

 

Some taxpayers, however, are able to avoid these limitations.  How?  As most of us know, people age 72 and older who have individual retirement accounts (IRAs) are required to take required minimum distributions (RMDs) out of their account(s)—and those percentages increase with age.  If they’re charitably inclined, and perhaps otherwise frustrated by the new tax rules, they can take their distribution in the form of a qualified charitable distribution (QCD).  The distribution would be a direct transfer to the charitable organization of their choice, up to a limit of $100,000.

 

How does that benefit them?  If the QCD is made directly to the charity, it is not counted as income for federal tax purposes—and therefore reduces the income that the taxpayer has to include on the 1040 form.   In effect, the QCD gives back the full charitable deduction that was otherwise lost to the tax reform writers.

 

Due to a quirk in the law, IRA owners as young as age 70 1/2 can make QCDs, even though they aren’t required to take RMDs until age 72.  Why would someone take a distribution before he or she has to?  Once again, for someone who is charitably inclined, the QCD brings back the full charitable deduction.  And some taxpayers might want to reduce the size of their IRA before they have to start taking distributions, in order to lower their future income to fit into lower tax brackets.

 

If a taxpayer and spouse each have IRAs, each can make their own qualified charitable donations.  And the option is not limited to IRA owners.  IRA beneficiaries—that is, people who have inherited IRAs, and have to take out the money within 10 years, can also make QCDs if they choose. 

 

Finally, taxpayers who make the full $100,000 donation direct to a charity can also make further donations out of their IRA.  But in those cases, only the first $100,000 will come out without any tax consequences.  The remaining amount will be treated as a taxable distribution, which would then qualify for a normal charitable deduction if the taxpayer itemizes deductions.

 

We hope that you and your family are safe and well. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Sources:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

https://www.taxpolicycenter.org/briefing-book/how-did-tcja-affect-incentives-charitable-giving

https://www.irahelp.com/slottreport/your-qcd-questions-answered

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Inflated COLA

October 21, 2021

 

Reports from the Federal Reserve, which sets interest rate policy in the U.S., have famously told us that the current inflation that we’re experiencing is “transitory” despite a lot of data that might seem contradictory.  (Has anybody seen gas prices lately?  Has anybody tried to buy a house in this market?)  The current labor shortage is leading to higher wages, which usually find their way into the prices of goods and services, and the government has been printing money (mainly by issuing bonds and extending credit) at rates never seen before.

 

Add to this a new data point, one that will be welcome to many retirees.  The Social Security Administration, which relies on annual inflation data to set its cost of living increases, has just announced that Social Security benefit checks will be 5.9% higher in 2022 than they were this year.  This is the largest increase since 1982, when inflation was still rampant from the “stagflation” economic era.  To put that into perspective, Social Security’s cost of living (COLA) increase has averaged 1.65% over the past decade.

 

The average retiree received $1,565 in monthly Social Security benefits this year, and that will go up $92 a month, to $1,657.  The AARP tells us that this will be nearly all the income received by 25% of seniors in America, and many more rely on these checks to pay for a large part of their retirement expenses.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source:

 

https://www.usatoday.com/story/money/2021/10/13/2022-social-security-cola-benefits-rise-5-9-amid-inflation-surge/8424187002/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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Default in China?

October 8, 2021

 

 

It’s only getting sporadic press coverage, but a lot of fixed income insiders are talking about the possible default of a giant real estate developer in China.  If you’ve seen the term “Evergrande” in a headline, this is what they’re discussing.

 

The short version of the story is that Evergrande is a big company, with 200,000 employees worldwide.  It owns more than 1,300 projects in more than 280 cities across China, including apartments and residential and commercial properties, investments in electric vehicles, a theme park (Evergrande Fairyland), a bottled water producer, grocery and dairy product companies, and an artificial island with malls, museums and amusement parks.  The company also happens to own a soccer team and is in the process of building the world’s largest soccer stadium.

 

All of this would not be news except that the company now seems to be having trouble paying its lenders.  This is not totally uncommon in China, where it’s not hard to find huge residential complexes and office towers that were built on speculation and now sit empty.  Empty buildings, needless to say, are not generating the cash flow to pay interest on their construction loans, and the Chinese system is not averse to walking away from bond obligations.  A number of state-owned companies defaulted on a record $6.1 billion worth of bonds between January and October of last year. 

 

Analysts estimate that Evergrande’s current liabilities total $310 billion, owed to creditors, suppliers, and even homebuyers (for their down payments on buildings that were never built).  The company has $700 million in payments due through January, and the money is not there.  Because of its size, Evergrande is hoping that the Chinese government will be forced to step in and require its creditors to restructure the loans; already, the government appears to be organizing a creditor’s union among the nation’s banks.  Shares of Evergrande stock are down roughly 85% so far this year, and the company’s credit ratings have been repeatedly downgraded.

 

The concern is that an Evergrande bankruptcy, and subsequent default on $300 billion of bonds, could trigger the same kind of global crisis that the bankruptcy of Lehman Brothers caused in 2008, when it defaulted on $600 billion of assets.  A real estate crash in China would be equivalent to a stock market crash in the U.S.; real estate holdings account for nearly 60% of Chinese household investments, compared to roughly 33% in the U.S.  Real estate construction activity also accounts for 30% of China’s GDP.  Thousands of Chinese investors own unfinished apartments, and millions of construction workers are in danger of being stiffed for their labors. 

 

Chances are, this is not the last you’ll hear about the Evergrande bankruptcy.  But the odds are also good that the Chinese government—which can print unlimited amounts of currency—will find a way to avoid a global catastrophe.  It’s not unreasonable to expect the creditor’s union to find a way to restructure, possibly liquidate, and sweep the whole mess under a carpet before it causes further embarrassment to the Chinese leadership.

 

We hope that you and your family are safe and well. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Sources:

https://kraneshares.com/evergrande-explained/

https://www.cnn.com/2021/09/24/investing/china-evergrande-group-debt-explainer-intl-hnk/index.html

https://www.cnn.com/2020/12/09/economy/china-debt-defaults-state-companies-intl-hnk/index.html

https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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What if We Don’t Raise the Debt Ceiling?

September 29, 2021

 

The news media, in its coverage of the Congressional debate over raising the debt ceiling, has alarmed its readers and viewers with terms like “government default” and “global financial crisis.”  But if there is a government shutdown looming in our future, what is the most likely outcome for investors?

 

First, there is no question that the government debt levels are remarkably high based on historical norms.  The government owes almost 29 trillion U.S. dollars, around 1.7 trillion more than at this time last year.  Raw numbers aren’t a perfect way to compare current vs. past debt levels, since the U.S. economy (and therefore, tax revenues) have grown dramatically.  But if we measure government debt as a percentage of the U.S. GDP, the current numbers are still somewhat alarming.  The long-time record debt was 119% of U.S. GDP in 1946, at a time when the government had ramped up the printing presses and issued bonds to pay for the costs of World War II.  (Total debt that year: $269 billion.)  For most of the 1960s and 1970s, debt-to-GDP dropped back into the low 30s, before creeping up again, reaching 50% in 1988 and never looking back.

 

Debt to GDP eventually breached the 100% level in 2014, but the biggest jump came in 2020, when the debt-to-GDP figure rose from 107% to roughly 130% of GDP in the span of 12 months.  Bottom line: today’s debt levels are in record territory.

 

It’s interesting to note that the largest owner of U.S. Treasury securities is not any foreign country, but the Social Security Trust Fund ($2.9 trillion), followed by the nation of Japan ($1.28 trillion), the nation of China and the U.S. Military Retirement Fund ($1 trillion each) and the Office of Personnel Management & Retirement ($955 billion).  Mutual funds and private investors are holding about $3.8 trillion collectively.

 

There are several reasons to wonder whether the current debt is as alarming as the numbers look in isolation.  First, interest rates are so low that the government isn’t paying much for the privilege of borrowing investors’ dollars.  And is it so terrible that the government is making secure bond investments available to the public (and its in-house agencies)?

 

But what if we DO have a government shutdown next month?  What would be the consequences? 

 

One would be the suspension of Social Security checks—which might not be the ideal political message for recalcitrant Republican Senators and Representatives to send to their retired voters.  Nonessential government agencies would be shut down, including National Parks and the economists who collect government statistics.  Government employees would be furloughed.

 

But if we look at past shutdowns, they are all temporary blips, soon forgotten.  The debt fiascos of 2011, 2013 and 2018 were all resolved and everybody was made whole; there is not going to be a permanent wholesale default on government obligations this time around either.  And most meaningfully, none of the past exercises in brinkmanship impacted long-term equity returns; indeed, the S&P 500 rose during the 2018 shutdown.

 

So the biggest danger is short-term: that the alarming media coverage might spook timers and traders, who could go on a short-term selling rampage before realizing that the government taking a week or two off didn’t really depress actual underlying value of U.S. companies.  And, of course, an actual shutdown is unlikely in the first place.  The games Congress is playing is looking like a terrific example of much ado about nothing (we hope).

 

We hope that you and your family are safe and well.  Stay calm and try to have a bright and beautiful Fall!

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Source:

https://www.advisorperspectives.com/articles/2021/09/23/history-shows-stock-market-disregards-debt-limit-shutdown-talk

https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124https://www.quora.com/Are-salaries-in-the-US-significantly-higher-than-in-Europe-If-so-why

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Government Bonds Around the World

September 9, 2021

 

There is absolutely no question that, from a historical standpoint, yields on U.S. government bonds are terrible.  10-year Treasuries that were issued at 1.25% a year are now yielding 1.297%, which is not terrific when the inflation rate is somewhere between 6% and 7%.  If you go shorter term, 5-year Treasuries are trading at a yield of 0.788% a year, and 2-year Treasuries are offering a somewhat less-than-generous yield of 0.215%.

Those yields look stingy from a historical standpoint; just a couple of years ago, the 10-year Treasury rate was over 3%, and before the Great Recession you could have locked in 5% rates.  But if you compare U.S. rates to what the citizens of other countries are getting, the American bond market looks positively generous.

Consider, for instance, investors in German bonds, whose 2-year, 5-year and 10-year bonds were issued at 0% rates; the government promised nothing more than that it would give you your money back at the end of the term.  The 2-year bonds are trading at prices equivalent to an annual yield of roughly negative 0.738%, which is better than the negative 0.724% for 5-year bonds.  Buy 10-year German government bonds on the open market and you can expect to lose only 0.464% a year. 

European bonds in general are less-than-generous for their investors these days.  Two-year Spanish government bonds, which were actually issued at positive yields, are now trading to yield negative 0.684%; the 5-year bonds are yielding -0.419% and you can eke out a +0.219% annual return if you go out ten years.  Dutch, Belgian, and French bonds are similarly yielding negative returns across all maturities up to 10 years, while investors in Italian, Swedish and Portuguese bonds would have to go out ten years in order to get a positive return on their investments.  Of the major developed nations, only Australia is offering yields comparably ‘generous’ to what the U.S. is offering.

If you’re shopping for higher yields, maybe you could consider Venezuelan 10-year government bonds, which are posting an unusually high 46% annual yield—which barely beats the 45% yield offered on Argentinian 10-year government bonds.  Of course, then you would have to contend with Venezuela’s 9,986% annual inflation rate (down from 14,291% last year), which means the Venezuelan Bolivar is collapsing in real time, and your bond investment would be worthless in roughly a year.  (At today’s exchange rate, you can buy just under 403 billion bolivars with a dollar.  Five dollars will get you more than 2 trillion.)  Argentina’s currency is devaluing at a comparably more modest rate of ‘just’ 47% a year, which might eat away at the returns offered by the country’s bond investments.

We can complain that our government bond investments are losing money to inflation today, and the complaint certainly feels justified.  But investors in other countries actually have more to complain about than we do.

We hope that you and your family are safe and well!

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://www.wsj.com/market-data/bonds/governmentbonds

https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

http://www.worldgovernmentbonds.com/

https://worldpopulationreview.com/country-rankings/inflation-rate-by-country

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

 

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Tax Proposal Consequences

September 1, 2021

 

Despite the alarmist articles you might be reading in the press, most people won’t be affected very much, if at all, from the tax proposals that are percolating through Congress.  If the bills pass in their current form, then individuals who make less than $400,000 a year won’t see any increase in their ordinary income or capital gains rates, and husband and wife taxpayers with less than $7 million—or maybe $10 million—in net worth still won’t have to worry about paying federal estate taxes.

But the proposals are creating some challengers for certain taxpayers, which would have to be planned for.  Individuals who are earning more than $452,700 a year, and joint filers reporting more than $509,300, are looking at a top marginal tax rate of 39.6% on income above that amount—up from today’s 37%.  For them, it makes sense to shift income, if they can, from 2022 into the 2021 tax year. 

People who are selling a business, or selling a home or investment real estate with a lot of appreciation, could be facing an even bigger challenge.  For taxpayers who report $1 million in adjusted gross income in any given year, the Biden proposal would raise the tax rate on capital gains—that is, on appreciation at sale above the purchase price—from today’s 20% to the ordinary income rate, which would be 39.6% plus a net investment income surtax of 3.8%. 

Who would report $1 million in adjusted gross income?  Small business owners who are planning to sell their firms might experience a one-time event where they pop up over that threshold—and find themselves paying more than double the amount they expected to Uncle Sam on the transaction.  Similarly, anyone who has a highly-appreciated real estate investment might breach that threshold, and some homeowners, if they combine the sale of an expensive house with the rest of their income, could find themselves with an unpleasantly unexpected tax bill.

There are ways to plan for this.  The easiest is, if the sale is imminent, to have it take place this year, under today’s 20% capital gains rates.  If that isn’t feasible, the business owner or real estate investor could negotiate an installment sale, where only a part of the money is received each year, over a period of years, keeping the total income below the $1 million threshold.  But these things have to be planned for now, before the new law takes place—and, of course, the complicating factor is that until the law is passed, nobody knows exactly what it will contain.

A proposal which is not in the Biden tax plan, but has been put forth by Bernie Sanders and others, is a reduction in the estate tax exemption—that is, the amount that people can leave to their heirs at death, or by gifting, without having to pay federal estate taxes. Today, the exemption (and the gift tax exemption and generation-skipping tax exemption) is a whopping $11.7 million per individual—$23.4 million for a couple, which is obviously well above most peoples’ net worth.  The Sanders tax plan would reduce that amount to $3.5 million per individual; others are proposing a reduction to $5 million.  Even if no bill is passed, the current estate and gift tax exemption will “sunset” in 2026, resulting in a reduced exemption of between $6 million and $7 million.

Most couples have less than $7 million or $10 million to pass on to their heirs.  But for an individual who has, say, $10 million in various investment accounts, planning for the federal estate tax suddenly becomes a bit complicated.  Suppose that person wants to take advantage of today’s high gift tax exemption.  Should he give away $8 million, and keep $2 million for living expenses in retirement?  If/when the estate tax exemption drops, that would expose the remaining $2 million to a 40-45% estate tax, since that taxpayer would have used up the new (reduced) exemption amount.  The only way to avoid estate taxes altogether would be to give away all of it to heirs, meaning that the retiree would have to depend, for living expenses, on the kindness of the children receiving those assets.

Or take the case of a couple which has $15 million in assets.  Suppose they decide to each gift $5 million to their kids, and live on the remainder.  If they do that, and the exemption goes down to $5 million, they have each used up their exemption and exposed the remaining $5 million to estate taxes at some point down the road. 

Is there a better way?  Either the husband or the wife could gift the whole $10 million (still comfortably under today’s $11.7 million gift tax exemption), and the couple would preserve the other person’s (reduced) $5 million exemption to be used to avoid estate taxes at the second person’s death.  What if the person NOT making the gift is the first to die?  The reduced exemption amount would still be ‘portable,’ meaning that the other spouse would “inherit” it and use it to avoid estate taxes upon death.

Once again, there are techniques to address these issues for people who are troubled by a reduced estate tax exemption.  One is a spousal lifetime access trust—a SLAT in the estate planning vernacular.  One spouse would gift assets to an irrevocable trust that would provide income to the other spouse for life, with the remaining assets, at the spouse’s death, going to the heirs—outside the estate.  Each spouse could gift substantial assets to the other under SLAT arrangements and potentially eliminate the estate tax problem altogether, but this can be tricky; the gifts and trusts cannot be reciprocal, or the estate planning advantages would be challenged by the IRS.

Once again, it is important to remember that most people will sail through these tax law changes, whatever they may be, whenever they are passed, without feeling much if any effect.  But for some, the new tax laws will pose some vexing challenges—what financial planners call ‘planning opportunities.’

We hope that you and your family are safe and well!

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Sources:

https://www.investopedia.com/explaining-biden-s-tax-plan-5080766

https://taxfoundation.org/joe-biden-tax-plan-2020/

https://presidentialwm.com/blog-2020/an-ugly-sunset-what-will-happen-if-the-tax-cuts-and-jobs-act-expires/

https://www.kiplinger.com/retirement/estate-planning/601544/federal-estate-tax-exemption-is-set-to-expire-are-you-prepared

https://www.cnbc.com/2021/06/01/bidens-proposed-39point6percent-top-tax-rate-would-apply-at-these-income-levels.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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The Eternal Olympic Boondoggle

July 30, 2021

 

What’s more eternal than the famous Olympic Eternal Flame?  Eternal cost overruns by Olympic sponsoring nations.

 

By all accounts, the Tokyo Olympics are extremely unpopular among Japanese citizens, and the reasons have nothing to do with the resurgence of COVID in that country.  The events are taking place with no live spectators allowed in the seats while medals are handed out and world records are broken, which is surely annoying.  But the real irritation is cost.

 

Hosting such a major gathering, and constructing the athlete village, arenas and other venues for 67 different types of sporting events, from baseball fields and bicycling tracks to equestrian arenas and synthetic kayaking rivers, is extraordinarily, indeed monumentally, expensive.  The prize for most money ever spent to host an Olympic event goes to Russia’s Sochi winter Olympics, which reportedly cost just under $22 billion.  London’s summer Olympics cost an estimated $15 billion of taxpayer dollars; Brazil spent an estimated $13.7 billion on the 2016 Rio Olympics, and every Olympic host from 1992 to the present has spent at least $2 billion of public money—often much more.

 

The 2020 Tokyo summer Olympics, delayed to 2021, has broken all records, costing the Japanese government (and, by extension, its citizens) an estimated $28 billion.  Part of the cost was the inevitable one-year delay, which added roughly $2.8 billion to the final tally.  But like virtually every other Olympic bid, the Tokyo event was estimated to cost far less than it eventually did; the Japanese bidding committee proposed to spend just $7.3 billion when they were awarded the event back in 2013. 

 

There are several lessons here.  One is that if your local officials are thinking about contending for the privilege of hosting an Olympic spectacle, you should think about drafting an opposing petition.  Another is that, if your local officials succeed, don’t believe any of their cost estimates.  The citizens of Montreal learned that lesson the hard way, when their 1976 construction costs came in 720 percent over budget.  Barcelona, in 1992, reported 266% cost overruns, while Russia’s Sochi Olympic construction costs ran 289% over the initial estimates.

 

But of course, the host city still has those newly-constructed venues, which are surely worth some decent fraction of the cost of building them.  Right?  As it turns out, the fancy ‘bird’s nest’ stadium built in Beijing, and similarly extravagant venues in Sarajevo, Athens and Rio, are now crumbling and largely forgotten—or, at least, the government hopes they are fading from their citizens’ memories.  The same fate may or may not happen to the city of Tokyo, but given the enormous cost of hosting games that will proceed without spectators, one might forgive the citizens of Japan for deeply resenting their part of the “bargain.”

 

We hope that you are enjoying your summer and staying safe.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source:

https://www.statista.com/chart/5424/the-massive-costs-behind-the-olympic-games/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Inflation and Social Security Benefits

July 22, 2021

 

Every year since 1975, the Social Security Administration has automatically adjusted its benefit payments upward to account for inflation; the goal is for the payments to keep pace with the cost of living that recipients are experiencing.  For the past decade, these inflation adjustments have been pretty modest, as you can see in the chart.  In 2009, 2010 and 2015, there was no increase, and many of the other raises were 2% or less. 

 

That could change in the coming year, as a result of higher inflation.  In June, the Consumer Price Index rose 5.4% from a year earlier—the largest gain since 2008.  Extrapolating from the first six months of inflation data, the Senior Citizens League has estimated that the Social Security cost-of-living adjustment for 2022 would be at or about 6.1%—which would be the largest one-year increase since the bad old high-inflation days of 1983.

 

Social Security increases are tied to the CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers.  Some economists believe that the CPI-W tends to undercount the cost of living increases that many people experience, and that is especially true for seniors, whose budget is more closely tied to housing and health care costs, and less to food, apparel, transportation and recreation. 

 

A new bill in Congress, the Fair COLA for Seniors Act of 2021, proposes to change Social Security’s measure of inflation from CPI-W to CPI-E, the Consumer Price Index for the Elderly, which the Bureau of Labor Statistics has been calculating since 1985.  This shift, endorsed by the Biden Administration, would have resulted in a 1.4% upward adjustment last year (vs. the 1.3% figure used by the Social Security Administration), a 1.9% increase in 2020 (vs. 1.6%), 2.8% in 2019 (vs. 2.6%), 2.1% in 2018 (vs. 2.0%), and a much bigger increase in 2017, from 0.3% up to 1.5%.  Comparing the two measures of inflation over time, economists estimate that over 25 years, the CPI-E cost adjustments would push benefits 5% higher than the existing CPI-W index increase calculation that we use today.

 

The Social Security Administration has published a lengthy analysis of the differences in the various inflation measures, and its analysis suggests that, even though healthcare costs are weighted more heavily in the elderly CPI statistics, the prices actually paid by the elderly for health care, medications and hospital costs may be different from the general population calculations of inflation that are embedded in CPI-E.  Also, as the homes owned by the elderly increase in value, their out-of-pocket payments for property taxes and insurance premiums may be more volatile than they are for their younger peers.  Beyond all that, every one of us is different, with different lifestyles, so our individual CPI—whatever index is used—is likely to be different from whatever number is published month to month, year to year. 

 

We hope that you are enjoying your summer and staying safe.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://www.ssa.gov/oact/cola/colaseries.html

https://www.cnbc.com/2021/07/14/social-security-cost-of-living-increase-for-2022-may-be-largest-in-decades.html

https://www.ssa.gov/policy/docs/ssb/v67n3/v67n3p73.html

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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New Tax Proposal Summary

 

May 21, 2021

 
Our colleagues at Blue Bell Private Wealth Management have put together a summary on Biden’s Infrastructure Plan. With their permission, we are sharing it here. Keep in mind these numbers may change. 
 
The recent tax proposal from the Biden Administration has made headlines as a way to help pay for the near $2.3 Trillion dollar infrastructure plan. While this is still just a proposal and many of the details remain fuzzy, we wanted to provide you with a summary of some of the changes that have been reported.
 
  • The top individual federal income tax rate would increase from 37% to 39.6%.
xxxxxxxxx - The income threshold is currently around $525,000 for individuals and
xxxxxxxxxx $628,000 for joint filers.
 
  • Increase the corporate tax rate from 21% to 28%. A 15% minimum tax would apply to corporate book income. 
 
  • Long-term capital gains and qualified dividends would be taxed at the ordinary income tax rate of 39.6% on income above $1 million and eliminates step-up in basis for capital gains taxation.
xxxxxxxxx - This is believed to be $1 million for joint filers.
 
  • Imposes additional social security taxes on wages or self-employment income over $400,000.
xxxxxxxxx - The current wage cap of $137,700 would remain in place but those
xxxxxxxxxx making more than $400,000 would pay additional tax into Social
xxxxxxxxxx Security.
 
  • The Biden proposal could expand the estate and gift tax by reducing the exemption amount to $3.5 million (per individual) and increasing the top rate for the estate tax to 45%. Biden would consider eliminating step-up in basis for inherited property.
xxxxxxxxx - The current exemption is $11.7 million per individual or $23.4 per couple.
 
  • Retain the current like-kind exchange rules for taxpayers earning less than $400,000. Taxpayers with income greater than $400,000 will be ineligible for capital gains deferral.
xxxxxxxxx - This would eliminate the current 1031 exchange for those making over
xxxxxxxxxx $400,000.
 
Keep in mind that this is still all a proposal with the final details still not worked out. We will continue to keep you updated as more details are released and discuss planning opportunities should they arise. 
 
Remember: Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 
 

Sincerely,

 Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://taxfoundation.org/joe-biden-tax-plan-2020/

https://rsmus.com/what-we-do/services/tax/federal-tax/president-bidens-tax-plan.html

 

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What’s Taxable? What’s Not?

August 12, 2020

 

People are receiving money from all sorts of sources these days: unemployment compensation because they’re out of work, government stimulus checks, bartered services with other service providers—and how do you know what is taxable, and what is not?   A recent article outlines different types of compensation and whether you should include them on your tax return.

 

The first: unemployment compensation.  You may be surprised to learn that unemployment insurance payments, even if they stem from the pandemic fund, have to be reported as taxable income.  Future legislation may change that, but for now: taxable.

 

The value of free services you received, even if you bartered for them, is also taxable.  So is jury duty pay: taxable as ordinary income.  Prizes received must be reported as ordinary income using the fair market value of the item received—a surprise to contestants on game shows.  Alimony is a mixed bag.  For divorce decrees prior to 2019, the money is taxable to the person who receives it, and deductible to the person who pays it.  For divorces taking place after January 2019, alimony is neither deductible by the person who paid it nor deemed additional income by the person receiving it.

 

Not taxable: the stimulus checks themselves, child support payments, and life insurance proceeds.  The article also notes that any income you might have received from illegal activities—including the fair market value of anything you stole on the date you stole it, should also be included on your tax form.  We’re going to go out on a limb and assume that provision doesn’t apply to you.

 

As always, it’s best to consult with your CPA about any tax advice or specific questions you have about your personal tax situation.

 

We wish you all continued health and safety as we continue to navigate this pandemic.  Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

 

Source:

 

https://tips.resourcesforclients.com/T74ctGwcsp3d/5467

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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The Depth of the Recession

August 7, 2020

 

The current recession officially started in the first quarter, with a 5% decline before the country was slammed by the COVID-19 pandemic.  But the pandemic has definitely made itself felt in the economy.  Most of us, by now, saw that the U.S. economy’s second quarter lost (according to the headlines) 32.9% of economic activity—the worst single-quarter drop since World War II.  By way of perspective, the previous record was a 10% drop in 1958, and the worst of the Great Recession saw an 8.4% annualized GDP drop in the fourth quarter of 2008.

 

What was NOT widely reported is that this is an annualized figure, meaning that the economy would actually lose roughly 33% of its total only if all four quarters declined at that same rate.  The actual economic shrinkage was 9.5%; that is, the overall economy in the second quarter was 9.5% smaller than during the previous quarter.

 

And you probably didn’t see it reported that economic activity actually began to rebound in May and June, after a disastrous March and April.  Factory production and construction appear to be rebounding, although travel and leisure, including airline travel and visits to amusement parks, continue to struggle.  The unemployment rate has also fallen, from nearly 15% in April to 11.1% currently.  However, it should be noted that today’s unemployment rate is higher than it was at any time during the Great Recession.  The last week in July marked the 19th consecutive week in which initial jobless claims totaled at least 1 million.

 

This is not an attempt to sugar coat the current recessionary environment; the chart speaks for itself.  We have experienced slow economic growth in the years since the Great Recession, and now growth has turned decisively negative as the country deals with shutdowns, social distancing and increased hospitalizations.  States like Florida, Texas, California and Arizona may have to reimpose lockdown orders to stem the out-of-control spread of the virus, and some other states that have largely escaped the worst impact could suddenly become coronavirus victims. 

 

But we should not ignore the positive data in the midst of the downturn.  Congress is debating another bailout package for families at risk, and the Bureau of Economic Analysis reported that disposable personal income and the savings rate both jumped in the second quarter.  In fact, the personal savings rate has risen from 9.5% in the first quarter (already an unusually high number for Americans) to 25.7% in the second quarter.  This suggests that the CARES Act relief worked as intended. (See our previous newsletter about this very topic here).

 

Other figures have nowhere to go but up.  Consumer spending contracted at almost exactly the same rate as the economy (down 34.6% annualized) over the second quarter, and investment in new housing dropped 38.7%.  Both are now rising again, though whether that continues may depend on the next stimulus package.  The inflation rate dropped 1.9% in the second quarter as companies cut prices to boost sales.

 

It is impossible to predict whether the worst of the economic devastation caused by the pandemic is behind us.  There seems no question that other countries have done a better job of containing the virus than we have in the U.S., and we all know that economic recovery will depend on getting people safely back to work.  This downturn will leave a permanent scar on many businesses and workers, and nobody expects the economy to get back fully on its feet until we find a vaccine that provides herd immunity.  But it also seems unlikely that the rest of the year will be as downright depressing as what we experienced in March and April.  Reports of U.S. economic demise are almost certainly premature.

 

As always, we wish you all continued health and safety as we continue to navigate this pandemic.  Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

https://www.npr.org/sections/coronavirus-live-updates/2020/07/30/896714437/3-months-of-hell-u-s-economys-worst-quarter-ever

https://www.forbes.com/sites/robertberger/2020/07/30/gdp-plunged-329-heres-why-it-matters/#73eaaf975943

https://www.marketwatch.com/story/economy-suffers-titanic-329-plunge-in-2nd-quarter-gdp-shows-and-points-to-drawn-out-recovery-2020-07-30

https://www.cnbc.com/2020/07/30/us-gdp-q2-2020-first-reading.html

https://www.bloomberg.com/news/articles/2020-07-30/u-s-economy-shrinks-at-record-32-9-pace-in-second-quarter

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Stimulus Spending

August 4, 2020

 

You’ve probably seen the debate over the second round of stimulus checks that are being delayed now due to a certain amount of squabbling in Congress.  Some economists say that this next payment will be an important lifeline to many families, and that the checks will stimulate the economy.  Others have said that the money is simply put in the bank and never gets to the economy at all.

Who’s right?

It turns out the U.S. Census Bureau’s Household Pulse Survey for June 11-16 includes actual data on how the CARES Act $1,200 ($2,400 to married couples; an extra $500 per child) checks were spent, collecting 73,472 total responses and extrapolating across the entire population of 160 million recipients.  The government agency estimates that 59.35% of households used the stimulus check to pay expenses, and another 13.32% used it to pay off debt.  Only 11.98% said they have or would use the money to add to their savings.  So the first thing that tells us is that the stimulus checks were, to at least some extent, a lifeline to 88% of households, and superfluous to about 10% of wealthier recipients.

Of those 127.8 million households (projected) who used the check mostly for expenses, 52.3 million spent at least a portion on rent, and another 40.6 million spent a portion on a mortgage payment.  91.3 million spent at least part of their check on utilities.  23.3 million spent some of their stimulus funds to pay down credit card or other debt, including student loans.  The conclusion: many Americans used the government money simply to keep a roof over their heads.

When asked about other expenditures that might have stimulated the economy, the survey found that 55.72% of households spent some of the payment on food, 14.16% on clothing, 39.5% on household supplies or personal care products, and just 5.52% on household items.

The survey found that, in aggregate, 70.81% of households that make less than $75,000 a year spent their check mostly on expenses.

Another survey, conducted by economic professors at the Columbia Business School and the University of Chicago’s Booth School of Business, looked at real-time spending data from a nonprofit that helps people create budgets via an app.  They found that those in the lowest income group, who earned less than $1,000 per month, spent about 40% of their checks in the first ten days.  Those who earned more than $5,000 a month, meanwhile, spent closer to 20% of the check in that brief period. 

The group’s report found that most of the money was spent on food, household items, bill payments and rent—but interestingly, compared with past stimulus payments, recipients spent about three times as much on food, including restaurant takeout delivery.  Meanwhile, people receiving stimulus checks were much less likely to spend on durable goods like electronics, furniture or cars.  The conclusion is the same: the “stimulus” appears to have been more of a lifeline than a boost to U.S. consumer expenditures.  The researchers concluded that the increase in unemployment insurance might have had a larger effect on consumer spending per dollar than the stimulus.

As always, we wish you all continued health and safety as we continue to navigate this pandemic.  Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Sources:

 

https://www.forbes.com/sites/jimwang/2020/06/25/how-are-americans-spending-stimulus-checks/#16703fe8e311https://insight.kellogg.northwestern.edu/article/stimulus-checks-spending-data-2020-coronavirus-covidhttps://www.marketwatch.com/story/the-no-1-thing-americans-are-spending-their-stimulus-checks-on-even-more-than-splurging-in-costco-walmart-and-target-2020-05-23

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Record-Low Mortgage Rates

July 31, 2020
 
When people look back on the tumultuous 2020 economic landscape, they might pause a moment to check out home mortgage rates. Over the last three months, these rates have managed to achieve five (!) all-time lows. Currently, Freddie Mac, which buys mortgages from banks, reports an average 3.03% rate on 30-year fixed-rate mortgages, and there is a chance that we could see rates below 3% between now and the end of August. 
 
You can see the remarkable downward trend in mortgages from late 2018 through the end of June on this chart, and then the light-blue-shaded part of the chart shows projected rates going forward. Compare these rates to 18% fixed-rates back in the early 1980s, or 5% as recently as 18 months ago. You can take the projections with a grain of salt (nobody knows what will happen next week or next month, much less out to the end of the year), but it’s pretty clear that today’s 3% rate is pretty extraordinary. 
 
Does that mean that most people should be refinancing their home loans? That depends on a number of factors, including their current mortgage rate and how long they expect to own their house. But it may be worth exploring!
 
As always, we wish you all continued health and safety as we continue to navigate this pandemic. Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients.  
 
 
Sincerely,
 
Edward J. Kohlhepp, Jr., CFP®, MBA
President
 
Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Founder & CEO

Source:

https://themortgagereports.com/32667/mortgage-rates-forecast-fha-va-usda-conventional

https://fred.stlouisfed.org/series/MORTGAGE30US

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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Our Post-COVID Society

June 30, 2020

 

Fast Company magazine asked six experts to predict how our economic landscape will be changed—perhaps forever—by the COVID-19 pandemic that we are all experiencing now.  Sarah Miller, executive director of the American Economic Liberties Project, says that the pandemic has exposed the extreme (some would say dangerous) market power of Amazon in retail sales, and how Facebook and Google have monopolized advertising.  (The plight of Amazon warehouse workers has particularly caught her attention.) 

 

Her prediction: growing awareness of this and other market concentrations will lead voters to ask their elected representatives to pause mergers and look more closely at how trade agreements benefit the largest corporations and entrench their power.

 

Demond Drummer, executive director of New Consensus, believes we might see changes in how the government and public institutions make investments in the economy.  Last February, it was hard to make the case that we needed a jobs program in this country, even though many Americans were stuck in low-wage positions.  Post-COVID, he expects to see a focus on the quality of jobs rather than the raw unemployment number.  In addition, the fact that so many Americans lost health insurance when they were laid off by their employers suggests that we will see increasing voter demand for universal health care. 

 

Beyond that, Drummer envisions more infrastructure projects around clean energy and more companies manufacturing at home rather than outsourcing to Asia and Latin America.

 

David Autor, professor of economics at MIT, foresees major changes in the hospitality industry, driven by what he sees as a permanent reduction in business travel.  With more comfort with Zoom meetings, he adds, workers will be spending less time in offices, which means fewer people eating lunch at metropolitan restaurants.  As a way to jump-start the economy, Autor proposes that the government spend 10% of GDP on a Marshall plan to rebuild American infrastructure, invest in schools, and make the unemployment insurance system more comprehensive, by adding new skills training.

 

Rebecca Henderson, an economics professor at Harvard Business School, sees government spending as the hero of the economic meltdown we are experiencing, and thinks that there will be a newfound realization that government should be a solution, rather than a demonized impediment to economic growth.  In addition, a newfound interest in addressing environmental damage and economic inequality will lead to new labor market policies and what Henderson calls “appropriate regulation.”

 

Former Presidential candidate Tom Steyer, founder of NexGen America, says that the pandemic has exposed what was hidden before: the under resourced black and brown communities that bore the brunt of the disease.  He envisions new government policies that will provide equal access to high-speed internet, retraining and rescaling low-wage workers.

 

Economist Stephanie Kelton at Stony Brook University says that healthcare will finally be disconnected from employment as a result of 40 million lost jobs.  She proposes that the budget deficit grow as big as it needs to get to heal and repair and rebuild a new and better economy.  She says: “The last thing I want is to watch everything come apart and then pick up the pieces and try to reassemble them exactly the way they were assembled before.  You want to put it together differently: You want to build better, build smarter, build safer, build stronger, build more resilient.”

 

None of these people claimed to know the future, but the common thread is that they want the medical, social and economic crisis that we are experiencing now to lead to something better.  It will be up to all of us to define “better” as we rebuild our lives and economy.

 

As always, we wish you all continued health and safety as we continue to navigate this pandemic.  Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source:

https://www.fastcompany.com/90506269/6-experts-on-how-capitalism-will-emerge-after-covid-19

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Will the Market Maintain its Buoyancy?

June 25, 2020

 

The U.S. stock market has been rising steadily, apart from yesterday’s hiccup, for the last couple of weeks, floating at right about where it was before the COVID pandemic began to assert itself on American shores.  We have had stronger-than-expected retail sales, and not quite as many people were unemployed as economists predicted.  The economy is far from robust right now, and a recession formally began in February, yet many are predicting (without actual evidence) that there is “a V-shaped recovery” in our future.

 

This happy outlook ignores the fact that coronavirus cases are once again on the rise in most states, an estimated 20 million Americans are unemployed, 122,000 U.S. individuals have died from the pandemic, and there is civil unrest in cities and towns throughout the country.  There may be additional lockdown measures if the spike in new cases is not quickly arrested.

 

So which case should we listen to?  Right now, some economists believe that the only thing keeping business and the economy afloat has been massive amounts of borrowed taxpayer money sent out to the business community, plus equally-massive intervention by the Federal Reserve, which has recently taken the previously-unthinkable step of using its reserves to buy individual corporate bonds.  People who are bullish on the stock market are betting that Congress and the Fed simply will not let stock prices collapse.  People who are bearish believe that companies have become some degree less valuable due to the lost quarter of productivity, earnings and future diminished sales as people have less to spend.  And as those lower earnings reports come out for the next quarter, price/earnings multiples will spike, and you will see headlines about how the stock market is more expensive than it has ever been.

 

The discouraging truth is that nobody knows which argument is right.  The quiet chatter among financial professionals is the best strategy is to stay the course. We realize the upside does look increasingly fragile.  Without a working crystal ball, there may not be a better long-term strategy than that.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Sources:

https://finance.yahoo.com/news/stock-market-news-live-june-16-2020-222206832.html

https://www.washingtonpost.com/business/2020/06/09/what-record-stock-market-gains-tell-us-about-us-economic-recovery-not-much-it-turns-out/

https://www.washingtonpost.com/business/2020/06/09/what-record-stock-market-gains-tell-us-about-us-economic-recovery-not-much-it-turns-out/

https://www.nytimes.com/2020/06/08/business/recession-stock-market-coronavirus.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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Why China’s Takeover of Hong Kong Matters to Us

June 15, 2020

 

While most of us are distracted by the street protests around the U.S., something similar has been going on in Hong Kong for years, and there are signs that the protesters in the semi-autonomous city are losing in their efforts to stop the communist Chinese regime from taking over.  Most recently, Beijing’s highest representative body in Hong Kong, called the Liaison Office, insisted that it was not subject to Article 22 of the city’s constitution, which guarantees an independent government for the city and the region.  Instead, the Liaison Office asserted that, contrary to the plain text of the city’s constitution, it had “supervisory powers” to administer Hong Kong and its political affairs.

 

This move could have significant implications for the U.S. economy, because it endangers Hong Kong’s ‘special status’ under U.S. law.  If Hong Kong is no longer an autonomous political and economic entity, then the U.S. could well decide to treat it as simply a part of the Chinese economy—and that would mean an end to Hong Kong’s low preferential tariff rate, reverting it to the trade war tariffs that the U.S. has imposed on China as a whole. 

 

Today, more than 1,300 American companies have business operations in Hong King, including nearly every major U.S. financial firm.  According to the State Department, roughly 85,000 U.S. citizens live and work in Hong Kong, representing American companies.  If the Trump Administration revokes special status, it could lead to an exodus of those firms, and an expensive relocation to cities like Singapore.  It would also anger the Chinese leadership, and lead to another round of trade wars between the world’s two largest economies.

 

As always, we wish you all continued health and safety as we progress into the next phases of reopening the country during this pandemic.  Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Please contact us if there is any change in your financial situation, personal situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of your account(s) or modify existing restrictions. 

 

Sources:

https://www.ft.com/content/bf08a177-9631-48e5-b542-18bf5b15faf4

https://www.reuters.com/article/us-usa-china-hongkong-trade-explainer-idUSKBN22Y22Z?taid=5ec86f64bbdff20001f19406&utm_campaign

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Lower Rates, Little Impact

 

June 9, 2020

 

During times of economic crisis we read that the Federal Reserve Board has “cut interest rates,” or “lowered the Fed funds rate.”  But what does that actually mean to you and me?

 

The chart tells an interesting story; it shows the Fed funds rate—the rate that the Fed charges banks when they take out virtually unlimited short-term loans from the Fed or each other—rising steadily from around 2004 to late 2008.  After the brokerage industry suddenly took the global economy to the edge of bankruptcy, you see the Fed dramatically lowering its discount rates to the banking industry, down to essentially zero for the next eight years.  Then there was a very cautious period when the Fed governors started raising rates, until the COVID-19 virus started tanking the markets.  Now we’re back to zero again.

 

So the first thing to know is that the banking industry—particularly the banks affiliated with the largest wirehouse firms—can borrow as much money as it wants without paying any interest.  Try to get the same deal from your local bank.

 

This low discount rate has a number of real-world consequences.  One is that the brokerage and banking firms can lend money at a profit (basically anything above zero percent) to companies that need to borrow.  Theoretically, that will boost the economy.  However, both in 2008-9 and now, banks were leery about lending to businesses in an uncertain economy.  They can still lose money, after all, if the borrower goes bankrupt and defaults on the loan.

 

For consumers, there are small impacts.  One is that credit card rates are down from a high of 17.85% last July, when the Fed started cutting rates, to a three year low of 16.46% today.  If you think that’s a very incremental decrease compared with the magnitude of the Fed moves, well, you’re right.  And the economic impact is diminished further, since banks are making credit cards much harder to obtain in this uncertain environment.

 

Finally, mortgage rates are slightly lower today than they were a year ago; Bankrate says that the average 30-year fixed rate is down to 3.55%.  Yet again, however, banks have stopped offering many of their refinancing options due to the shaky economy, making it hard for homeowners to obtain this rate.

 

We wish you all continued health and safety as we progress into the next phases of reopening the country during this pandemic.  Please note that our firm will continue to hold virtual client meetings only in order to prioritize and protect the health of our clients. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source:

https://snip.ly/yq9gdl#https://www.cnbc.com/2020/04/29/fed-holds-rates-near-zero-heres-what-that-means-for-you.html

 

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Key Provisions of the CARES Act

Distributions can be waived in 2020 for Inherited Accounts, 401(k)s, and IRAs.

April 3, 2020

 

Recently, the $2 trillion “Coronavirus Aid, Relief, and Economic Security” (“CARES”) Act was signed into law. The CARES Act is designed to help those most impacted by the COVID-19 pandemic, while also providing key provisions that may benefit retirees.1

 

To put this monumental legislation in perspective, Congress earmarked $800 billion for the Economic Stimulus Act of 2008 during the financial crisis.1

 

The CARES Act has far-reaching implications for many. Here are the most important provisions to keep in mind:

 

Stimulus Check Details. Americans can expect a one-time direct payment of up to $1,200 for individuals (or $2,400 for married couples) with an additional $500 per child under age 17. These payments are based on the 2019 tax returns for those who have filed them and 2018 information if they have not. The amount is reduced if an individual makes more than $75,000 or a couple makes more than $150,000. Those who make more than $99,000 as an individual (or $198,000 as a couple) will not receive a payment.1

 

Business Owner Relief.The act also allocates $500 billion for loans, loan guarantees, or investments to businesses, states, and municipalities.1

 

Your Inherited 401(k)s.People who have inherited 401(k)s or Individual Retirement Accounts can suspend distributions in 2020. Required distributions don’t apply to people with Roth IRAs; although, they do apply to investors who inherit Roth accounts.2

 

RMDs Suspended. The CARES Act suspends the minimum required distributions most people must take from 401(k)s and IRAs in 2020. In 2009, Congress passed a similar rule, which gave retirees some flexibility when considering distributions.2,3

 

Withdrawal Penalties.Account owners can take a distribution of up to $100,000 from their retirement plan or IRA in 2020, without the 10-percent early withdrawal penalty that normally applies to money taken out before age 59½. But remember, you still owe the tax.4

 

Many businesses and individuals are struggling with the realities that COVID-19 has brought to our communities. The CARES Act, however, may provide some much-needed relief. Contact your financial professional today to see if these special 2020 distribution rules are appropriate for your situation.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Under the CARES act, an accountholder who already took a 2020 distribution has up to 60 days to return the distribution without owing taxes on it. This material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Under the SECURE Act, your required minimum distribution (RMD) must be distributed by the end of the 10th calendar year following the year of the Individual Retirement Account (IRA) owner's death. Penalties may occur for missed RMDs. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and children of the IRA owner who have not reached the age of majority may have other minimum distribution requirements.

 

Under the CARES act, an accountholder who already took a 2020 distribution has up to 60 days to return the distribution without owing taxes on it. This material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act, as long as you meet the earned-income requirement.

 

Accountholders can always withdraw more. But if they take less than the minimum required, they could be subject to a 50% penalty on the amount they should have withdrawn – except for 2020

Citations.

1 - CNBC.com, March 25, 2020.

2 - The Wall Street Journal, March 25, 2020.

3 - The Wall Street Journal, March 25, 2020.

4 - The Wall Street Journal, March 25, 2020.

 

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Be on Alert and Stay Vigilant - Phishing, ransomware and cyber scams!

March 20, 2020

Cyber criminals are capitalizing on the interest and hysteria created by the global Coronavirus/COVID-19 crisis.  Fraudsters do not take time off, in fact, many prey on fear and urgency to fool unsuspecting victims.

Just today, Ed Sr received an attempted ransomware email threatening to “infect your entire family with coronavirus if you do not pay this ransom now!” 

Be on guard for the following:

  1. Any message attempting to create a strong sense of urgency to take a particular action.
  2. Any message that pressures you to do something.
  3. Any website or link that claims to track or map the outbreak.
  4. Any domain name (@domainname.com) or web link with any variant of "Coronavirus" or "COVID-19"

Our IT Company has provided us with the following link to check URLs (web address) for signs of suspicious behavior: 

VirusTotal

You can copy and paste the email address from a suspicious email in the Search box.

Many of you have heard about the federal government distributing funds to individuals. There is no plan in place at this moment, but the FTC has issued a warning, please follow this link https://www.consumer.ftc.gov/blog/2020/03/checks-government.
 
Remember the government will not call to ask for your Social Security number, bank account, or credit card number. Anyone who does is a scammer.
 
Here's an awesome summary from Brown University Computing & Information Services, with additional information and links to other authoritative sources: https://it.brown.edu/alerts/read/covid-19-related-phishing-attempts

Additional information can be found here :
https://www.consumer.ftc.gov/features/coronavirus-scams-what-ftc-doing

Be cautious. Be smart.

Your team at Kohlhepp Investment Advisors, Ltd.

 

Source: EmberIT, Blue Bell Private Wealth Management

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IT’S TIME TO TALK ABOUT MY FEELINGS

March 18, 2020

 

I am writing this newsletter from my home office because my wife and I are in self-imposed isolation.   We are not sick, but we recognize we are in the vulnerable demographic group.  We are trying to protect ourselves and mitigate the virus circumstances by “social distancing.” 

Typically, a major part of our job is to “remove the emotion” from the conversations about your finances and investing.  Money is emotionally charged.  Likely by now, you’ve heard it from us and many other sources, reacting emotionally to the markets is usually a recipe for disaster.

Well, I’m going to do something a bit different today.  I’m putting emotion into this conversation.  I’m going to tell you how I’m feeling about all of this. Because the truth is, we all have the emotions.  So let’s talk about them, and then I’ll tell you what I’m doing to work through them:

I still have PTSD from the recession and markets from October 2007 through March 2009.  This was the worst time of my professional career and threw me into a temporary depression.  That was the only time that I can remember it being difficult to wake up and go to the office every morning. (In case you didn’t know, I LOVE what I do.) It wore me down. After recovering from the recession and the stock market’s deep declines, I never thought we would have to face anything like that again.

Now, here we are in a “bear” market (a decline of at least 20%), as well as a global pandemic.  I am now planning for the work-optional part of my life, with a little more time off, and a little more golf.  Thus, I have the same fears as any retiree or prospective retiree.  None of us want to see serious or even mild declines in our portfolios.  However, I know from personal experience (50+ years) that we must invest for the long term and not just one, or a few years.

As an advisor it is my nature to shoulder the weight of this market volatility not just for myself, but for all of my (our) clients.  That’s a lot!  This (the stock market & COVID-19) isn’t just a threat to our portfolios but to our personal health as well.  That’s scary! 

I feel all of that – the fear, the anger, the stress, the worry – and I let it sink in…

 

So what do I do? 

 

This is how I get past it – I let the logical/rational/left part of my brain work through it this way:

This is not the same as 2007 to 2009.  We will get through this!  How do I know that?  We’ve survived ALL of the downturns that have come before!  100% of them.  In fact, we thrived after they ended!  I’ve prepared for this with my own portfolio, and we’ve structured our clients’ portfolios to survive and thrive!

This reminds me of the time my wife and I were on vacation in Maui, Hawaii.  We drove the “Road to Hana”; little did we know that it is one of the more dangerous roads in the world.  It is a 62-mile winding road with 620 turns, many of them hair pin.  Even though it was scenic, we were nervous and anxious the whole time.  An experience like this feels like it will never end when you are living through it, just like the recession and market declines of 2007 to 2009, and just like today’s Coronavirus and bear market.  Well, the drive did end. We were happy we did it because of the beautiful sights and the memorable experience, but we were relieved to get back to a smooth highway.  Today people will be much happier when the markets return to a “smooth highway”.  And we will return to that, even though we don’t know when!

One of the keys is “not to sell low” because you lock in those losses forever.  Schools are closing, sports are suspended, cities are declaring states of emergency, businesses are starting to work remotely.  The news will get worse and corporate earnings will come under pressure.  None of these gut-wrenching declines ever feels good.  In my 50+ year career I have experienced quite a few.  The best way to achieve long term financial success is to stick to the game plan!  Two years from now when we look back, I truly believe we will be saying that “2020 was the year of the virus, and 2021 was the year of the recovery.” 

I can’t take the emotion away, but please know that I understand because I am feeling it too.   What I can do is listen and guide you.  I hope my story resonates with you.  Please lean on us and call if you have questions.

A client of ours responded to one of our newsletters last week with a very poignant statement: 

Don’t touch your face and don’t touch your IRA!

She says she can’t take credit for it, but it’s certainly worth passing along!

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

A reminder on the current operation of our firm:

We at Kohlhepp Investment Advisors, Ltd. are taking the proper precautions to protect ourselves and our clients, and we continue to focus on the wellbeing of our clients, associates and business partners. This includes the decision to suspend in person meetings and only hold virtual meetings – phone or video conference – for the foreseeable future. If you feel you have a need to physically stop in the office, please call first.

Our office is fully operational and our staff is working remotely. Based on what we know at this time, we do not have concerns about our ability to conduct business as usual. 

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Taking the Plunge

March 12, 2020

 

Despite a nice recovery day on Tuesday, it now appears that the investment markets are in full panic mode, the result of the World Health Organization declaring the Covid-19 virus to be a global pandemic.  Traders on Wall Street are selling at virtually any price, which is causing the markets to drop into bear market territory.

 

The long bull run that started in March 2009, and set many records along the way, is now officially over.  May it rest in peace; we will all remember it fondly.

 

It is almost impossible to keep a rational perspective in the middle of a herd that is stampeding toward the exits, and this particular stampede can fairly be described as one of the worst in market history.  Michael Batnick, director of research at NYC investment manager Ritholtz Wealth Management noted, this is the fastest bear market ever; that is, the fastest that the U.S. stock market has experienced a decline of 20% or more going back to 1915.  The average number of days from peak to a 20% decline is 255, and the median is 156.  The recent market selloff reached this dubious achievement in just 17 trading sessions.  By contrast, the fabled 1929 market downturn took 36 sessions.

 

The Covid-19 pandemic (as it is now known) should first be considered a health issue, and everybody should do what they can to protect themselves and their families from the spread of the disease.  It should go without saying that your health is more important than your portfolio.

 

Is your health at risk?  The World Health Organization has published information which suggests that the Covid-19 virus in China was more deadly, on a percentage basis, than the Spanish flu epidemic that raged across the world in 1918-1920.  So far, it has been more deadly than cholera, much more than swine flu or hepatitis A.  On the other hand, reports indicate that the elderly and people with pre-existing health issues are far more likely to die of the corona virus than younger and healthier people, and the death rate outside of China has been roughly half of the Chinese experience.  More testing will be needed before we know the full extent of the infected population and the morbid statistics for those who ARE infected.

 

But once health precautions are taken, it is appropriate to address the potential for losses, and how best to navigate the market conditions.  There are news reports that the U.S. government will propose a payroll tax cut, and possibly also bailouts of key publicly-traded companies in the travel and entertainment industry.  The Federal Reserve Board has cut a key interest rate by half a percent—a dramatic move that seems not to have had more than a one-day impact on market sentiment.

 

Historically, bear markets have been less impactful than their bull market counterparts, as you can see from the accompanying chart click here.  Of course, you could argue that a global pandemic is different from a housing market crash.  Research analysts at Goldman Sachs took a look back at “event-driven” bear markets; that is, market declines that were not driven by an economic recession, but instead were triggered by things like war, oil price shocks or an emerging-market crisis.  They found that the average event-driven bear market resulted in a 29% decline—on average.  The report notes that we have never before entered a bear market due to a viral outbreak, but in the past, bear markets triggered by “exogenous shocks” have recovered their previous levels within 15 months.

 

There is some good news for many investment portfolios: during the downturn, 20-year Treasury bonds have gained 24% in value, as bond yields have fallen to record lows.  The 10-year Treasury yield experienced its biggest weekly drop since December 2008.  This performance, so directly counter to stock movements, explains why it is so necessary to hold diverse investments in a portfolio.

 

The harder conversation is about market timing.  Most people understand that it is impossible to time the market without a working crystal ball.  But this is easily forgotten when the daily headlines announce that your net worth is falling by 4-7% in a single day, when the stock portion of your portfolio has fallen by 20% in record time.  The natural question is: should I get out now and avoid more of the same?

 

There is only one rational answer to this question: it has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish.  The best strategy has, in the past, been to ride out the downturn and experience the subsequent upturn—which may come tomorrow, next week, next month or next year. 

 

Make no mistake: bear markets like the one we have just entered pose a real danger to your future financial health.  There is a real danger in selling at the bottom and then missing out on the recovery.

 

We at Kohlhepp Investment Advisors, Ltd. are taking the proper precautions to protect ourselves and our clients, and we continue to focus on the wellbeing of our clients, associates and business partners.  This includes the decision to suspend in person meetings and only hold virtual meetings – phone or video conference – for the foreseeable future.  If you have a need to physically stop in the office, please call first.

 

We are here, the office is open – fully operational and fully staffed.  If the situation escalates, we have the capability to be fully remote and are prepared to do so with no interruption to our operations.   Based on what we know at this time, we do not have concerns about our ability to conduct business as usual. 

 

Be smart. Be safe.  We will be in touch.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Sources:

https://theirrelevantinvestor.com/2020/03/09/the-fastest-bear-market-ever/

https://finance.yahoo.com/news/coronavirus-and-trump-are-causing-stock-market-panic-and-investors-are-powerless-195953674.html

https://www.bloomberg.com/news/articles/2020-03-11/coronavirus-a-pandemic-who-says-in-urging-governments-to-act?

https://www.marketwatch.com/story/goldman-sachs-analyzed-bear-markets-back-to-1835-and-heres-the-bad-news-and-the-good-about-the-current-slump-2020-03-11?siteid=yhoof2&yptr=yahoo

https://www.marketwatch.com/story/boring-bonds-turning-into-best-investment-of-the-year-as-treasurys-see-returns-north-of-20-2020-03-06?siteid=bigcharts&dist=bigcharts

https://www.bloomberg.com/news/articles/2020-03-11/virus-is-at-bear-stearns-moment-and-may-get-worse-summers-says

Source: First Trust Advisors L.P., Bloomberg. Returns from 1926 - 2019

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5 Things to Remember During These Times

March 10, 2020

One of our strategic partners, Blue Bell Private Wealth Management, with whom many of our clients are invested, sent out this newsletter yesterday. The perspective and sentiment of Kohlhepp Investment Advisors, Ltd. is aligned with what is stated here, so we are partnering with them to deliver this message to you:

 

Stocks dropped roughly 7% not long after the market opened yesterday. That triggered the first of three circuit breakers designed to give market participants a chance to regroup during moments of extreme volatility.

 

It is no secret that news of the coronavirus has created mass uncertainty through the stock market, most of which is surrounding the economic slowdown as a result of the virus. If you watch the news regularly, it may seem like this is the end of times. We are here to remind you of a few things about long-term investing.

 

1. Your financial, investment and retirement plan is probably not going to change

Disturbing or disrupting your long-term plan or radically changing your portfolio makes no sense. Selling today would mean locking in permanent losses. If you did, you would be transferring the proceeds to an asset class (i.e. a money market) that yields close to zero.

 

2. Nobody called this

Plenty of people had been calling for a recession this year but they are the same people who have been calling for a recession every year. A perfectly correct economic or market call, that cannot be repeated in the future, is worth just as much as no call at all.

 

3. All in or all out are terrible strategies

Investors cannot afford to miss the 25 best days in the market, or your returns are wiped out. The catch is that the 25 best days are frequently mixed in among the 25 worst days. Unfortunately, you can’t have the ups without the downs and anyone who promises you otherwise is not telling the truth. It is impossible to "time" the markets.

 

4. Why don't we just sell everything and wait this out?

Eleven years ago today, in March of 2009, the stock market reached its nadir during the financial crisis and stopped going down. If you had polled people that day, most would not have agreed that we had seen the bottom. The economic headlines were not improving. Within 3 months, the stock market had climbed 41% from that March low. Even with the market increase, many investors still were not sure that we had seen the last of the decline. There were still people years later that had gone to cash and still hadn’t gotten back into equities. They missed out on a tremendous rise in the stock market and the commensurate increase in their portfolio.

 

5. Reducing risk should be part of your plan

Having an effective hedging strategy can help reduce the effects of volatility over the long-term. We believe it is important to protect against the downside without giving up too much upside. This has been and will continue to be a part of our investment strategy.

 

Conclusion

The worst thing that you can do now is panic. Financial decisions based on emotions have proven time and again to be detrimental to investors. Investing for the long-term will benefit those who are patient, disciplined, and have a plan. The best way to achieve the goals we've talked about together is to stay the course.

We remain vigilant in reviewing your portfolios and we are committed to your goals.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source: Blue Bell Private Wealth Management

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives. 

 

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The Pandemic: What We Know So Far

March 2, 2020

 

The COVID-19 virus has been reported in the national press as either a political or an economic story, but it is neither.  It has been compared to the 1917-18 Spanish Flu that infected an estimated one-third of the human population and killed an estimated 50 million people, even though we are now in a very different medical world, even though the Spanish Flu occurred during a major, brutal world war. 

 

As citizens, investors and (so far) healthy individuals, what do we need to know about this new pandemic?

 

COVID-19 (formally SARS-CoV-2) is a respiratory virus, caused by a new type of coronavirus (in the same family as the virus that causes the common cold) that was first detected in Wuhan City, Hubei Province, China, and has now been detected in 57 locations nationally, including fewer than 100 in the United States.  One of its primary features is how contagious it is; the virus can live for hours in a dormant state on surfaces (like a doorknob) after an infected person touches them.  It is spread through the air in microscopic droplets when people breath, cough or sneeze.  The Center for Disease Control recommends that people who have the virus wear a mask to protect others, but have said that wearing a normal facial mask doesn’t prevent people from getting the disease.

 

In most cases, the symptoms of the disease appear within five days, but there have been reported cases of a 14 day incubation period.  Because people can be contagious for up to two weeks before they show symptoms, the virus is very hard to quarantine.  This became more evident when it was discovered that a dog had been infected, meaning that it’s possible for animals to transmit the disease back and forth with humans.  The International Journal of Infectious Diseases, studying the COVID-19 cases from the Diamond Princess cruise ship that reported 355 passengers who contracted the virus, calculated that each person who is infected with the disease, on average, will infect 2.28 others.

 

As of Friday, there were 83,774 reported cases worldwide, and 2,867 fatalities.  The World Health Organization officials have recently increased the risk assessment to the highest (“very high”) level of risk assessment in terms of spread and impact. 

 

Reported illnesses have ranged from mild to severe.  Researchers from China’s Center for Disease Control have recently released the clinical findings of more than 72,000 cases reported in mainland China.  The overall death rate is 2.3%, but different populations are far more likely to suffer fatalities than others.  An alarming 14.8% of patients 80 and older died from the disease, and 8.0% of patients aged 70-79.  At the other end, 81% of the cases in the study were classified as mild, meaning they did not result in pneumonia or resulted in only mild pneumonia. 

 

Fatality rates for children 0-9 years old so far is zero, and the rates are not high for people in younger age ranges: 10-39 years old (0.2%), 40-49 (0.4%), 50-59 (1.3%) and 60-69 (3.6%).

 

There may be a vaccine on the way, though it is uncertain how soon.  China’s Clover Biopharmaceuticals is partnering with GlaxoSmithKline on a protein-based coronavirus vaccine candidate called COVID-19 S-Trimer.  The University of Queensland in Australia announced a vaccine candidate, and globally, at least 10 other vaccine initiatives are under way.  Treatments for people who have already contracted the disease are as yet unproven.  An antiviral drug called remdesivir, manufactured by Gilead Sciences, is being tested on 700 sick patients in Wuhan.  A drug called Kaletra, produced by AbbVie to treat HIV, is also being tested.

 

From an economic standpoint, any industry where people gather together in large numbers is being impacted.  That means airlines and the travel/tourism industry generally, plus conferences.

 

The other impact is related to supply chains.  China’s quarantine efforts have reduced manufacturing in the country where many global companies have outsourced their manufacturing and assembly activities.  Hong Kong is already in a recession, and The Boeing Center at Washington University in St. Louis has estimated a $300 billion impact on the world’s supply chain that could last up to two years.  Lower demand from Chinese buyers has caused a decline in oil prices.

 

Prevention efforts and quarantine efforts are certain contribute to the economic slow down.  Japan’s Prime Minister Shinzo Abe has ordered all schools closed in Japan for the next month, and officials there are concerned about the possibility that the 2020 Summer Olympics could be curtailed or cancelled.  South Korea has shut down numerous educational institutes including elementary schools in Seoul.  In Italy, the Lombardy and Veneto regions (total population: 50,000) have been locked down in quarantine procedure following an outbreak in the town of Codogno.  U.S. technology companies have expressed worries about disruption to their production in facilities in China, and a February 27 Goldman Sachs forecast suggested that American companies will experience zero earnings growth (Note: this does NOT mean zero earnings) in 2020.

 

The most important thing to know about the new pandemic is that we actually don’t know what the impact will be—on our health, on our nation’s economic health, on our portfolios.  We do know that the U.S. securities markets are down 11-12% from their recent highs, based on what can only be described as panic selling by the traders who make up most of the volume on the exchanges.  That means stocks are cheaper to buy now than they have been, and dividends are higher, as a percentage of share price, but whether that panic will continue, or not, we simply cannot say.

 

Please understand that we are monitoring the situation, with an understanding that, historically, trying to time the market or make bets based on guesses about the future has been a losing strategy.  Our most important wish is that you and your family stay healthy.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

 

http://www.cidrap.umn.edu/news-perspective/2020/02/study-72000-covid-19-patients-finds-23-death-rate

https://www.cdc.gov/coronavirus/2019-ncov/about/share-facts.html

https://www.cdc.gov/coronavirus/2019-nCoV/summary.html

https://www.forbes.com/sites/leahrosenbaum/2020/02/20/when-will-there-be-a-vaccine-for-the-new-coronavirus-everything-you-need-to-know/#4cf628fc5025

https://hub.jhu.edu/2020/02/27/trump-johns-hopkins-study-pandemic-coronaviruscovid-19-649-em0-art1-dtd-health/

https://www.health.harvard.edu/blog/as-coronavirus-spreads-many-questions-and-some-answers-2020022719004#q2

https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

 

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The Coronavirus & Your Portfolio

February 28, 2020

 

Wuhan, a city in China with a population of more than 11 million people, was not known to most Americans before several weeks ago.  Now we know that it is the epi center of the outbreak of the Coronavirus.  Initially, it was thought that the virus could be confined to China.  But since then the outbreak has spread globally to many countries including Japan, Italy, South Korea, Iran, and the U.S.  Some cities and countries are restricting travel and preparing for the shutdown of schools and businesses for long periods.  It has becomes apparent that this virus will impact mostly China’s production and GDP, but also other countries as well.

Some experts predict that the number of infections will peak in the next several months and dissipate by summer as the weather warms up.  However, no one really knows.  And the CDC indicates that it could take 12 to 18 months to test and produce an efficacious vaccine.

We urge you to monitor reliable information sources such as the CDC and the World Health Organization for the latest updates.

Economic activity is being affected and fear has crept into the markets.  This has turned to panic in the last 5 to 6 days with the major averages dropping about 11%.  This, in and of itself, is not unusual.  In most years, even when the market is positive, there is an average intra year pullback of 12 to 14%.

SO WHAT SHOULD YOU DO?

  • Do not watch the news shows all day long.  They concentrate on the headline stories which cause the most consternation.

 

  • Be aware that your portfolios are structured to withstand declines such as these – remember our “Bucket Strategy”.

 

  • Do not bail on the markets.  Remember, our plans and portfolios are built for the long term, not just 3 months, or even one year.

 

  • Allow us to do the worrying for you!

WHAT ELSE?

  • We are now in “correction” territory – a decline of more than 10%.  Corrections are normal every several years.

 

  • Focus on the market fundamentals, which we believe remain positive.

 

  • Volatility is likely to continue for a while.

 

  • The Coronavirus will have a short-term effect on the economy and corporate earnings, some industries more than others, e.g., airlines.

 

  • Financial success is achieved by focusing on long term goals and not letting short term disruptions derail us from our objectives.

 

  • We have great medical care in the U.S.

 

We are here for you.  If you are in a fearful state, call us.  We don’t believe you need to change anything in your portfolio.

We are confident in the future of the equity markets and our country!

Spring will be here soon!  I am sure we will all welcome it.

Sincerely,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Quote: “In investing, what is comfortable is rarely profitable.”  Robert Arnott

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The Secure Act of 2020

January 2020

 

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is now law. With it, comes some of the biggest changes to retirement savings law in recent years. While the new rules don’t appear to amount to a massive upheaval, the SECURE Act will require a change in strategy for many Americans. For others, it may reveal new opportunities.

Limits on Stretch IRAs.The legislation “modifies” the required minimum distribution rules in regard to defined contribution plans and Individual Retirement Account (IRA) balances upon the death of the account owner. Under the new rules, distributions to non-spouse beneficiaries are generally required to be distributed by the end of the 10th calendar year following the year of the account owner’s death.1

It’s important to highlight that the new rule does not require the non-spouse beneficiary to take withdrawals during the 10-year period. But all the money must be withdrawn by the end of the 10th calendar year following the inheritance.

A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and child of the IRA owner who has not reached the age of majority may have other minimum distribution requirements. 

Let’s say that a person has a hypothetical $1 million IRA. Under the new law, your non-spouse beneficiary may want to consider taking at least $100,000 a year for 10 years regardless of their age. For example, say you are leaving your IRA to a 50-year-old child. They must take all the money from the IRA by the time they reach age 61. Prior to the rule change, a 50-year-old child could “stretch” the money over their expected lifetime, or roughly 30 more years.

IRA Contributions and Distributions. Another major change is the removal of the age limit for traditional IRA contributions. Before the SECURE Act, you were required to stop making contributions at age 70½. Now, you can continue to make contributions as long as you meet the earned-income requirement.2

Also, as part of the Act, you are mandated to begin taking required minimum distributions (RMDs) from a traditional IRA at age 72, an increase from the prior 70½. Allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income.2

The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020. For these taxpayers, RMDs will become mandatory at age 72. If you meet this criterion, your first RMD won’t be necessary until April 1 of the year after you reach 72.2

Multiple Employer Retirement Plans for Small Business.In terms of wide-ranging potential, the SECURE Act may offer its biggest change in the realm of multi-employer retirement plans. Previously, multiple employer plans were only open to employers within the same field or sharing some other “common characteristics.” Now, small businesses have the opportunity to buy into larger plans alongside other small businesses, without the prior limitations. This opens small businesses to a much wider field of options.1

Another big change for small business employer plans comes for part-time employees. Before the SECURE Act, these retirement plans were not offered to employees who worked fewer than 1,000 hours in a year. Now, the door is open for employees who have either worked 1,000 hours in the space of one full year or to those who have worked at least 500 hours per year for three consecutive years.2

While the SECURE Act represents some of the most significant changes we have seen to the laws governing financial saving for retirement, it’s important to remember that these changes have been anticipated for a while now. If you have questions or concerns, reach out to your trusted financial professional.

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 - waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf  [12/25/19]
2 - marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [12/25/19]

 

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Prosperity for Some

July 23, 2019

 

You’ve probably heard, either through tweets from a certain President or in the press, that the U.S. economy is humming along at a healthy pace.  Stock indices are breaching record highs, unemployment statistics are near record lows and the economy is growing at nearly a 3% annualized pace. 

So American workers should be happy with their newfound prosperity, right?

The problem is not the economy, per se, but the unequal distribution of its recent largesse.  A recent Gallup poll found that a remarkable 40% of Americans say that amid one of the greatest—and now one of the longest—economic booms in U.S. history, they are either running into debt or barely making ends meet.  Only 25% of employed households report that they are saving enough for retirement; 18% admit that they have saved nothing at all.

Gallup’s survey is conducted each April, and the news this year is not all bad.  The percentage of Americans rating the economy “only fair” or “poor” has dropped significantly since the 2016 version of the survey.  Digging deeper into the data, the Gallup researchers found that 49% of respondents have at least one immediate worry—such as, for example, paying their rent or mortgage, or being able to make minimum payments on their credit cards.  Another 14% have no immediate financial concerns, but worry about whether they will be able to pay for normal healthcare or afford the medical costs due to a major illness or accident.

How would this play out in the next electoral cycle?  The researchers note that most of the financially anxious people report voting primarily Democratic, while those who have few worries are largely Republican voters.  But people who are worried about healthcare costs are split evenly down the middle, which means healthcare issues will be front and center in next year’s elections.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA

President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source:

 

https://news.gallup.com/opinion/polling-matters/260570/despite-economic-success-financial-anxiety-remains.aspx

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Who Pays in the Tariff Wars?

 

May 14, 2019

 

Global stock markets have been spooked by the escalating trade disputes between the world’s two largest economies: China and the United States.  And there is no evidence that the dispute is about to be resolved.  On Friday, U.S. President Donald Trump raised tariffs on $200 billion worth of Chinese goods, and began taking steps to tax nearly all of China’s imports.  The new tariff levels are an unprecedented 25% of the value of the Chinese goods coming into the U.S., raising the costs of seafood, luggage and electronics.  China, meanwhile, has placed tariffs on nearly all of America’s exports into the Middle Kingdom, including agricultural products.

 

This is not the first trade dispute the U.S. has engaged in since the Trump Presidency; steel and aluminum products coming from abroad were hit with tariffs and import duties early in the presidency, followed by various other measures.  The stated idea was to reduce the U.S.’s trade deficit with the rest of the world; however, the overall United States trade deficit with the world increased 1.5% in March to $50 billion.

 

But many taxpayers seem to be confused about how tariffs work.  The President has said that American tariffs on Chinese products are bringing in unspecified “billions” to the U.S. government.  That may be true, but the source of those “billions” is not China or Chinese companies.  Importers pay the import taxes when the items they’ve purchased overseas cross the U.S. border.  With import taxes as high as 25%, it is all-but-guaranteed that the price of these items will be higher when sold to American consumers. 

 

If the importer—which might be a manufacturer who has components manufactured abroad or a retail company like Wal Mart—decides to absorb some of the tariff cost, then that shows up in lower profits for the American company.  So when an American consumer buys an iPhone, the cost might go up $160—which is the additional amount that would be paid to the U.S. government.  Or Apple Computer could eat the cost and reduce its overall earnings by 24%.  The same is true with goods like vacuum cleaners, electronics, computer monitors and power adapters.

 

There are arrangements where the importer and exporter negotiate for the exporter to pay the tariff—the term for such an agreement is DDP, or “Delivery Duty Paid.”  But once again, the tariff raises the cost of the item, and the ultimate bill comes due to the consumer who buys the product. 

 

So ultimately, U.S. tariffs on imported items, shipped from China or any other country, represent an additional tax directly on the wallets and purses of American consumers—or on the earnings of American companies that decide to absorb some of these costs. 

 

There may be additional economic impacts, such as what American farmers—particularly those who grow soybeans—are now experiencing.  When the cost of American products go up due to retaliatory tariffs imposed by China, Chinese consumers and importers can go to different markets, where they can buy items that are not burdened by the costs of import duties.  Chinese importers have shifted their purchases of American crops to South America, which has long sought a foothold in the world’s largest consumer market.

 

Wouldn’t that work the other way around?  One issue is that many Chinese companies are government-owned or government-supported, so during an escalation of trade war conflict, the government of the most populous nation on earth will do what the American government will not: stabilize sales by subsidizing prices or making up for losses while the negotiations continue.

 

Most economists believe that tariffs impede global trade and the health of the global economy.  And tariffs create uncertainty about whether companies can rely on existing supply chains or sources of manufactured items that go into their final products, like mobile phone devices and automobiles.  This is why the imposition of additional tariffs, and the threat that they will continue into the future, is spooking the investment markets.  The U.S. Treasury is definitely getting fatter as a result of American tariffs on Chinese goods.  The question that stock market analysts and traders are asking is whether this is good for the American consumer and the U.S. economy as a whole.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Sources:

 

https://www.msn.com/en-in/money/news/trump-increases-china-tariffs-as-trade-deal-hangs-in-the-balance/ar-AABaJJF

 

https://www.usatoday.com/story/news/politics/2019/05/09/donald-trump-white-house-continues-trade-talks-china-past-deadline/1150788001/

 

https://uktradeforum.net/2017/09/28/who-pays-tariffs-anyway/

 

https://www.yahoo.com/finance/news/3-reasons-why-china-apos-111113176.html

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Is a New Social Security Fix at Hand?

Is a New Social Security Fix at Hand?

 

March 21, 2019

 

We’ve been hearing for years that the Social Security trust fund will run out of money in 2034, and a close reading of the Social Security Administration’s Trustee Report projections (https://www.ssa.gov/oact/TRSUM/) show what this would mean.  By that time, based on estimates of the number of people earning an income in the workforce, the numbers of Social Security benefits recipients still alive, and the amount of income, overall, that the workers will be earning, payroll taxes will account for about 77% of the existing benefits—indexed for projected inflation.  In other words, if we don’t fix the system between now and then, by 2034 the government will be taking payroll taxes and turning around and paying this money back to the Social Security beneficiaries, and that money is projected to equal about 77% of today’s benefits.  As more people retire and live longer, the ratio of workers to beneficiaries is expected to gradually decrease, meaning that 77% will become 76%, then 75% and gradually shift downward barring an influx of new workers or unexpected mortality among the elderly.

 

Chances are, there will be a fix of some sort between now and 2034.  But what will it look like?  200 Democratic co-sponsors in the U.S. House of Representatives have recently signed on to an expansion of Social Security that would keep the trust fund solvent—and the payments coming—for at least the next 75 years.  

 

What are they proposing?  The new bill, which is unlikely to pass Congress until/unless the Democrats take control of the Senate, would address one of the anomalies of the payroll tax, that it stops at $132,900 of annual income (currently).  That means a person earning $132,900 pays 6.2% of her income, while a person earning $266,000 pays 3.1%, and a person earning over $1 million pays just .77% of total income in payroll taxes.  The legislation would, just like today, stop collecting payroll taxes temporarily at $132,900 (adjusted each year for inflation), but resume those taxes on all income over $400,000.  It would also gradually raise the 6.2% tax rate to 7.4% by 2042.

 

In return, all Social Security beneficiaries would receive a 2% increase in benefits, and the benefits would go up a bit faster each year, using the CPI-E index for inflation, rather than chained CPI.  (Much of the difference is that the CPI-E calculation is more sensitive to medical inflation and other costs that disproportionately affect seniors.)  Higher-income seniors would also get a bit of a tax cut; that is, less of their Social Security benefits would be taxed, using a complex change in an already-complex formula.

 

Not in this proposal, but worth considering, is allowing the Social Security trust fund to invest at least some of its assets in equities, which normally appreciate much faster in value than the current “assets:” promissory notes backed by Treasury bills.  Look for a healthy debate on the solvency of Social Security in the next election cycle.

 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source:

https://www.morningstar.com/articles/918591/will-the-big-social-security-fix-include-expansion.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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The Perfect Pundit Interview

January 2019

 

Chances are, you’ve already heard or read endless predictions about… everything.  The direction of interest rates.  Market returns and whether the markets will go down or up.  When the next recession will hit.  The movements of the cryptocurrency markets.

 

If the market gurus were being honest, they wouldn’t give us definitive answers to any of the questions that are posed to them.  Does anybody really have a working crystal ball?  If they did, would they share what they’ve seen in it?

 

A recent article in the financial services press offered up some realistic answers to the questions that financial journalists and cable tv hosts typically ask.  Here are some examples:

 

Are stocks overvalued?

 

We don’t know.  All we know is markets go up over time.

 

What are the signs I should look for that predict a market correction?

 

There are none.

 

What’s your view of [this headline] on Bloomberg or CNBC?

 

It justified my view that not watching Bloomberg or CNBC should have been one of my resolutions this year.

 

What do you think of what the technical analysts are saying about the near future?

 

The only thing I know for certain about technical analysis is that it’s possible to make a living publishing a newsletter on the topic.

 

What do you think of Jim Cramer’s opinions about the market?

About the same (actually slightly worse) than the flip of a coin, without the attitude.

 

Wells Fargo is now positive on gold.  Should I buy gold?

 

Gold might take off or tank.  The opinion of Wells Fargo about some event in the future is no better than yours.  Personally, I would like to see Wells Fargo “turn positive” on ethical behavior toward its employees and clients.

 

Are stocks vulnerable to another pullback?

Yes.  They always are.  The problem is that no one has the expertise to tell you when market corrections will occur, although many love to imply that they do.

 

Do you have an investing goal for 2019?

 

Make your investing about as exciting as watching paint dry.  Leave the excitement to others.

 

 

Source:

https://danielsolin.com/investing-answers-you-wont-see-in-the-financial-media/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

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Shutdown Economics

January 24, 2019

 

A full month into a historic government shutdown, after 800,000 government workers have missed their second paycheck, two things are clear: 1) Economists and political pundits had no expectation that the impasse would past this long; and 2) the impact on the U.S. economy cannot be calculated with precision.

 

Many of the reports you may have read probably failed to note that the shutdown only impacts 7 out of 12 yearly appropriations.  Still receiving funding, under an earlier resolution, are Energy & Water, the Legislative Branch, Military Construction and VA, the Department of Defense, and Labor, Health & Human Services.  Together, they represent 75% of discretionary government spending, and are fully funded through September 30, 2019.

 

That famously leaves 800,000 federal workers on furlough, although roughly half of them are still at work because they were deemed to be “essential.”  Ironically, the budget impasse instantly terminated a pay freeze for certain government workers, so, for example, Vice President Pence has received a $10,000 annual pay increase, as did a number of the Trump Administration’s political appointees.  The cost of the raises is estimated to be more than $300 million over ten years.

 

At the other end of the spectrum, workers with the Transportation Security Administration are still on post at airports, as are air traffic controllers—working without pay.  But others were deemed inessential.  Many food inspections performed by the Food and Drug Administration have ceased, and the SNAP program—aka food stamps—is about to expire because February’s benefits have not been funded and 2,500 retailers cannot renew their EBT debit card licenses.  School lunch and breakfast programs will stop operating in February as well.

 

Zillow, the real estate database firm, has estimated that federal workers not receiving paychecks owe $249 million in mortgage payments and $189 million in rent payments—all due this month.  But even people who are simply trying to buy a home are shut out because new applicants for FHA loans are not able to communicate with the agency.  In addition, the U.S. Department of Agriculture, which provides loans for people buying homes in rural areas, is not processing those requests that land on unoccupied desks. 

 

Some 1,150 landlords who provide subsidized (affordable) housing for low-income Americans are not receiving their subsidy payments, and another 500 contracts will expire at the end of January.  As a result, as many as 100,000 low-income tenants could face eviction.

 

Economists have been trying to model the impact of so many workers not spending money as they normally would, plus a shutdown-caused slowdown in the housing market, and an interruption in the flow of actual government statistics due to furloughed economists.  Most Wall Street analysts initially thought that 0.05 percentage points would be shaved off the American Gross Domestic Product (GDP) for every week the shutdown goes on.  But by adding in the loss of revenue to federal contractors and third party companies that are paid by one of the shut-down agencies, government economists now believe the GDP reduction is closer to 0.13 percentage points every week.  That means the 30-day (and counting) shutdown has already knocked 0.25 points from first quarter GDP, with no clear end in sight.

 

If you can ignore the human costs of not receiving a paycheck, not receiving food stamp assistance, a subsidized school lunch or not being able to get a home loan, then this is not a great catastrophe for the U.S. economy.  But there is a nontrivial chance that economic growth will turn out to be negative in the first quarter, in small part due to the shutdown, and that could spook the markets into believing that the economy is heading into recession. 

 

 

Sources:

http://fortune.com/2019/01/03/the-government-shutdown-us-gdp/

https://www.businessinsider.com/government-shutdown-senior-trump-administration-officials-get-raises-2019-1

https://www.businessinsider.com/government-shutdown-how-the-partial-closure-affects-average-americans-2019-1#the-approximately-40-million-people-who-receive-snap-benefits-also-known-as-food-stamps-will-only-be-able-to-get-the-benefit-through-february-if-the-shutdown-continues-7

https://www.businessinsider.com/government-shutdown-2018-social-security-checks-still-paid-2018-1

https://www.businessinsider.com/government-shutdown-federal-workers-mortgage-rent-payments-housing-2019-1

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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TURBULENCE AND VOLATILITY AND WHAT’S NEXT!

December 21, 2018

 

Volatility will always be around on Wall Street, and as you invest for the long term, you hopefully learn to tolerate it.  Rocky moments, fortunately, are NOT the norm.

Since the end of World War II, there have been dozens of Wall Street shocks.  Wall Street has seen more than 50 pullbacks (retreats of 5 – 9.99%) in the past 73 years.  On average, the benchmark fully rebounded from these pullbacks within two months.  The S&P has also seen 22 corrections (declines of 10 – 19.99%) and 12 bear markets (drops of 20% or more) in the post WWII era.

Even will all those setbacks the S&P has grown exponentially larger.  During the month WWII ended (September 1945), its closing price hovered around 16, YES 16.  At this writing it is above 2500.  Those two numbers communicate the value of staying invested for the long term.  This current bull market has witnessed five corrections.  It has risen more than 300% since its beginning even with those stumbles.  Investors who stayed in equities through those downturns watched the major indices soar to all-time highs.

Bad market days shock us because they are uncommon.  If pullbacks or corrections occurred regularly, they would discourage many of us from investing.  A decade ago in the middle of the terrible 2007-09 bear market, some investors convinced themselves that bad days were becoming the new normal.  History proved them wrong.

As you ride out this current outbreak of volatility, keep two things in mind. One, your time horizon: you are investing for goals that may be 5,10,20 or more years into the future.   One bad market week, month, or year is but a blip on that timeline and in unlikely to have a severe impact on your long run asset accumulation strategy. Remember that there have been more good days on Wall Street than bad ones.

LET’S ASSESS LATE CYCLE RISKS AND OPPORTUNITIES.   AND WHAT DO WE SEE AHEAD IN 2019:

  • The U.S. economy will slow, but not stall.   We expect GDP growth to slow to 2 to 2.5% next year.
  • Central banks (The Federal Reserve, the Bank of Japan, and the European Central Bank) will continue to tighten monetary policy and raise interest rates.  Just this past week the Fed raised rates 0.25% and indicated they will likely raise rates twice, but NOT three times in 2019
  • U.S. Equities:  earnings growth will slow although it will remain positive.  Earnings will still be the main driver of returns.
  • The unemployment rate will likely continue to decline from 3.7%, its lowest level since the early 50s.
  • Inflation should remain at a level close to 2%.
  • Consumer sentiment is negative.
  • Trade tariffs still present a hurdle and need resolution.
  • The international markets have promise, but look murkier than the U.S.  We are continuing to watch BREXIT.
  • It is important to stay invested even though it appears we are in the late innings of the bull market.
  • A possible government shutdown (see our previous newsletter on this topic). 

Even with all of this volatility, the major indices (Dow and S&P) are down only 6 to 8% at this writing.  This is NOT another 2007-8-9, although more volatility could still be ahead.

THE MOST IMPORTANT ISSUES TO REMEMBER ARE THE FOLLOWING:

  1. You are invested in a diversified portfolio, not all equities.
  2. Your portfolio is not the market.
  3. We have planned your portfolio carefully to weather markets like this.
  4. Sudden volatility should not lead you or us to exit the market. If you react anxiously and move out of equities in response to short term downturns, you may impede your progress toward your long term goals.

If you have any questions about the markets, or your portfolio, please call. 

We wish you and your family a very Merry Christmas and a Happy New Year!

 Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

These are the opinions of Edward Kohlhepp and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal

 

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Shutdown Metrics

December, 2018

 

We are told that one reason stocks have been going down lately is the threat of a government shutdown, which seems almost probable if the President’s recent statements are to be taken at face value.  The U.S. President is on record as embracing a government shutdown on Friday, December 21 unless he receives full funding for his border wall with Mexico.  This seems unlikely, so it might be time to ask: If the government shuts down, what is actually likely to happen?

 

An article on the ZeroHedge website offers some news that might surprise most of us.  First: government shutdowns have been more common than we might realize.  In all, there have been 20 government shutdowns since October 1, 1976:

 

October 1-10, 1976

October 1-12, 1977

November 1-8, 1977

December 1-8, 1977

October 1-17, 1978

October 1-11, 1979

November 21-22, 1981

October 1, 1982

December 18-20, 1982

November 11-13, 1983

October 1-2, 1984

October 4, 1984

October 17, 1986

December 19, 1987

October 6-8, 1990

November 14-18, 1995

December 6, 1995 - January 5, 1996

October 1-16, 2013

January 20-22, 2018

February 9, 2018

 

The article notes a few things to remember.  First, Congress can avoid a partial shutdown by passing another continuing resolution—following the continuing resolution in September that temporarily funded 7 out of 12 total appropriations into December.  If the President were to veto that resolution, then a two-thirds majority in both the House and Senate could override the veto.

 

What about the other 5 of the 12 appropriations?  Those—Energy & Water; the Legislative Branch; Military Construction and VA; the Department of Defense; and Labor, Health & Human Services—represent 75% of discretionary government spending—basically 75% of the money spent that is not related to Social Security, Medicare or other entitlement programs.  Those programs are fully funded through September 30, 2019. 

 

So what appropriations would the shutdown actually impact?  The seven that still have to be authorized are Agriculture; Commerce, Justice and Science; Financial Services and General Government; Homeland Security; Interior and Environment; State and Foreign Operations; and Transportation and HUD. 

 

What would be the economic impact of this potential partial shutdown?  The report estimates that for every day of a full shutdown, American GDP is reduced by 2.4 basis points, or 0.024%.  But since only 25% of the government would be inoperable, the impact in this case would be about 0.008% per day. 

 

Put another way, each month would reduce American economic growth by about half a percent.  That, of course, is unlikely to happen.

 

What have the markets done during past government shutdowns?  The data show that the average market move for the S&P 500 index, in the week of a government shutdown, is down 0.06%—which I think most of us would regard as virtually unchanged.  The two weeks during and after a shutdown, the markets averaged down 0.13%.  More interesting is the fact that the one-week data shows that only 47% of the time did the market go down.  More interesting still, in the month after the shutdown, the average price move was UP 0.25%.

 

Nobody is saying that a government shutdown is good for stocks, or that shutting the government down is a great way to shake the market out of its current tailspin.  But it probably isn’t a good idea to panic about the market impact of a shutdown either.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source:

 

https://www.zerohedge.com/sites/default/files/inline-images/19%20govt%20shutdowns.png?itok=UIGSm3fB

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Cybersecurity Alert: Marriott Breach Affects 500 Million

December 16, 2018

 

Hotel chain Marriott announced a massive data breach last week affecting 500 million hotel guests. The breach affects customers who made reservations at Marriott or Starwood properties between 2014 and September 2018, during which time hackers had unauthorized access to a private database. Marriott acquired Starwood properties in 2015 which includes hotel brands such as W Hotels, Sheraton Hotels, Westin Hotels, and more.

 

The breached database held guest info such as names, addresses, phone numbers, e​mail addresses, passport numbers, birth dates, arrival and departure information, and communication preferences. At this point, Marriott is unsure if payment card information was affected.

 

What should you do?

 

In response, Marriott is offering affected customers a free year of WebWatcher which monitors the Internet for your personal information. In addition to this program, you should freeze your credit if you have not done so already. Thanks to a federal law passed in September, you can freeze your credit for free at all three of the big credit bureaus: Equifax, Experian, and TransUnion.

 

If you used your Marriott or Starwood password for any other account, be sure to change those passwords immediately.

 

If you have not already, sign up for text alerts on the credit card you used at Marriott. Text alerts will notify you anytime a charge is made. This is a good way to monitor your credit card for fraudulent purchases. You can set up these alerts with your credit card company directly.

 

Also be on the lookout for phishing emails. Scammers may create fake messages appearing to be from Marriott to gain more of your personal information. Marriott has stated that any legitimate emails will not contain any attachments or requests for information.

 

Be alert. Be smart. 
 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Source: Savvy Cybersecurity, Horsesmouth, LLC

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives. 

 
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Prosperity - Not for All

 

November, 2018

 

America is at sailing along at peak prosperity, with the stock market having boomed for 10 years and the last recession coming in the previous decade.  Unemployment is at a 20-year low.  There are arguments about which President is responsible for this great news, but most Americans are prosperous.  Right?

 

Apparently not.  The nonprofit Center for Financial Services Innovation polled more than 5,000 Americans, and concluded that, in the midst of this unprecedented economic prosperity, only 28% of Americans could be considered “financially healthy.”  That is calculated by examining spending, saving, credit and other indicators.  It is defined as not having an unhealthy amount of debt, an irregular income and sporadic savings habits.

 

The survey found that an astonishing 17% of Americans are “financially vulnerable,” meaning they struggle with nearly all financial aspects of their lives.  Some 44% of respondents said their expenses had exceeded their income in the past year, and they had to use credit to make ends meet.  Another 42% reported having no retirement savings at all.

 

Other research supports these conclusions.  The website bankrate.comincludes a report saying that only 29% of Americans have six months or more of emergency savings, and roughly the same amount say they have none.  The Federal Reserve and the Federal Deposit Insurance Corp data suggests that the median American household holds just $11,700 in savings.

 

Sincerely, 

Edward J. Kohlhepp, Jr., CFP®, MBA
President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source: 

https://www.marketwatch.com/story/only-3-in-10-americans-are-considered-financially-healthy-2018-11-01

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 


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Pullbacks Galore

November, 2018

Nobody knows why the S&P 500 index declined more than 11% in October; the largest decline since, well, earlier this year.   

But experienced investors know that these declines are not unusual.  Since March 2009, the U.S. stock market has seen 23 pullbacks greater than 5%; eight greater than 10%.  You can see all of them on the accompanying chart; on average, these pullbacks have lasted 42 days and dropped prices by 9.3%.  And this is during a very long bull market! 

Interestingly, the S&P 500 today isn’t the same as it was back when the current bull market began; in fact, there are only 337 stocks remaining in the index that were included on March 9, 2009.  A small number—just 38 of them—accounted for much of the runup in the index, each gaining more than 1,000%. Most of the big gainers were technology stocks.   

Is there a lesson here?  Alas, we can’t extrapolate the short-term future from these statistics.  When stocks go on sale, it is often difficult to determine whether they will become even better bargains in the days ahead. 

Sincerely, 

Edward J. Kohlhepp, Jr., CFP®, MBA
President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources: 

https://theirrelevantinvestor.com/2018/10/30/a-top-or-the-top/ 

https://pensionpartners.com/the-5-kinds-of-bounces/ 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 


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Stocks Go On Sale Again

 

October, 2018

 

If you’re the kind of person who like to worry, then October has given you plenty of stimulus.  After yesterday’s 3.1 percent drop in the popular S&P 500 index, the index has lost 8.8% in this month alone, wiping out all the gains that we’ve enjoyed this year, putting the index in negative territory.  The once-soaring Nasdaq Composite Index of technology companies tumbled 4.4% on the same day.

 

In times when the markets are dropping, even if they haven’t hit correction territory yet (that would be a 10% drop), the media needs to find a narrative, and you hear all sorts of theories.  Corporate earnings have nowhere to go but down.  The tariffs are slowing down economic activity.  Interest rates are rising.

 

All of that is true, but none of it has anything to do with why the markets are falling.  The only true headline, and one you will never read, is that stocks are falling because some people are losing faith in their investments and selling out to bargain hunters.  Sometimes this activity feeds on itself; when people see the market falling, they, too, begin to panic.

 

The stock markets periodically deliver losses for reasons which are not always obvious even after the fact.  Bear markets are a normal part of investing, and this is actually a good thing, because it allows real investors to periodically buy stocks at discounted prices.  Research has shown that there is a gap between the return that most investors get from their stock investments and the actual returns delivered by those stock investments.  This is, of course, because they sell this or that fund before it goes up, or sell out and then wait to get back in until the market has gone up past where they sold.  Getting the full return of the markets is relatively easy: just hang on during those periodic downturns.

 

But those downturns are terribly painful, right?  Take a look at this chart, created by First Trust Corporation, which shows the bull and bear markets since the Great Depression.  Notice that the downturns have been sharp but relatively brief, while the up-markets have been protracted and generous.  This has been the pattern up to now, and there’s no reason to think it won’t continue, unless you believe that the millions of people who go to work each day for their corporate employers are somehow destroying value instead of creating it.

 

You don’t need an explanation for why markets go down in order to benefit from them.  You just need the ability not to startle when the herd of investors suddenly makes an unexpected dash for the exits—to, as Warren Buffett once said, be greedy when others are scared, and scared when others are greedy.

 

Worry about the downturn if you want, but know that worry is the precursor to being scared.  And if you see somebody predicting where the markets are going to go from here, if they’re not wearing a wizard’s hat and gazing into a crystal ball, it’s probably best to turn off your attention.

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Sources: 

https://allstarcharts.com/stock-prices-falling-perfectly-normal/ 

https://www.bloomberg.com/news/articles/2018-10-23/asia-stocks-look-mixed-as-late-u-s-rally-falters-markets-wrap?utm_campaign=socialflow-organic&utm\

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 


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Beware the Bears

 

September 20, 2018

 

If you’ve been paying attention to the financial news lately, you’re probably seeing a lot of ominous predictions—and they’re usually backed up by some ominous headline.  The most simplistic are saying that the bull market has now lasted ten years, so therefore it’s about to come to an end—as if bull markets come with a time limit.  Others, equally simplistic, are saying that the market has reached a new high, and, well, don’t markets fall from their all-time highs?  This ignores the fact that more than 70% of the time, a new high is followed by another new high—and ultimately, so far in history, every new high has eventually been surpassed by the next one.

 

The more credible predictions are based on the fact that the U.S. debt is exploding, or that the U.S. is experiencing an expanding credit bubble in the government, corporate sector, and also—perhaps for the first time—the youngest workers with their crushing student loans.  The Fed is committed to raising interest rates, which will make all that debt more meaningful somewhere down the road.  And then we have the meltdown in Turkey, the potential consequences of reckless trade wars on the global economy, and the flat yield curve that is in danger of inverting.

 

The most important thing to know about all this is that there is no economic consensus that the U.S. or the world economy are about to plunge into recession in the next six to 12 months.  None of these simplistic arguments or ominous headlines, separately or together, add up to an imminent market meltdown or fire sale of the stocks that you’re holding in your portfolio.  That, of course, doesn’t mean that a meltdown couldn’t happen tomorrow, but it could just as easily happen one, two or three years down the road.  And it’s helpful to remember that various pundits have been predicting a major pullback constantly over the past nine years of bull market returns.  Anybody who was spooked by these pundits would have missed out on significant gains. 

 

This is more of the same noise, albeit with somewhat scarier headlines in the background.

 

Interestingly, the indicator that is taken most seriously in economic circles is the inverted yield curve.  We aren’t there yet, but the bond markets are certainly moving toward one of those rare times when two-year Treasuries are yielding more than 10-year bonds.  Every recession since 1977 has been preceded by a yield curve inversion.

 

But is this cause, effect or coincidence?  A recent article by Laurence Siegel, Director of Research at the CPA Institute Research Foundation, acknowledges that inverted yield curves have been a pretty good predictor in the past.  But he says that in the present marketplace, there is, as yet, no pressure coming from the things that a recession corrects: high inflation, high levels of debt, rich stock market valuations (though we may be moving in that direction), and tightness in the labor market. 

 

A yield curve inversion affects the supply and demand for capital, which can have impacts on the economy which could cause a recession.  It discourages banks from doing what they were made to do: borrowing short and lending long to viable businesses that are expanding.  In the past, there may have been a more direct cause and effect than there is today.  Today, banks can turn to hedge funds and a variety of other lenders who will allow them to borrow short at reasonable rates.

 

The bigger point is that recessions are inherently unpredictable.  If we had a reliable way to predict them, we would already be in them, because companies, knowing the time and date of the recession, would pull back in anticipation of it, and simply bring it on more quickly.  The same is true of major market pullbacks; if you, or I, or anyone else knew when it was going to happen, we would already be running for the exits, triggering the pullback prematurely.

 

Bottom line: we don’t know when or where the pain will come; we only know THAT it will come.  And we know with some certainty the direction of the next 100% movement in the markets.  That may be enough.

 

 

Sources:

 

https://www.ft.com/content/58d1ce9c-b5a2-11e8-bbc3-ccd7de085ffe

 

https://www.advisorperspectives.com/articles/2018/08/20/dont-be-fooled-by-the-yield-curve

 

 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.


 


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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
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