The Decline of Capital Investment in America is Getting Serious

Last month in Monitoring Demand for Discrepancies we observed that Manufacturer's New Orders have turned negative and explained the potential impact on stocks. To continue this theme here is a chart that chronicles the rolling top in Gross Private Investment that has formed over the last 18 months:

When businesses reduce capital investments to this degree and continue being miserly over a multi-year period, it usually precedes a meaningful decline in economic output. This data has been masked by the cheerful jobs reports in July and August but the business spending downtrend is persistent enough to warrant caution.

The strong jobs market has created a massive windfall for the Internal Revenue Service in 2016. I suspect the Feds may use this cash to "help" sustain the economy leading into November. After that:


The Occasional Necessity of Holding Cash

“…cash allows you to retain wealth with an eye to being opportunistic at that moment that no one wants the things that are now so popular.”

Jim Grant
Grants Interest Rate Observer

Over 30 years of market ups and downs, we have learned the subtle wisdom contained in this thought. Let’s demonstrate this in practice at LeConte Wealth.

Our clients entrust us to make wise investment decisions for them. As fiduciaries, we take this responsibility seriously. This leads us to conduct a global hunt for prudent opportunities. As value-oriented managers, we like to drive a hard bargain before we put client funds on the table.

Most of the time, we can find something, someplace that fulfills our stringent list of requirements but on occasion we walk away with our cash in hand. Either we already have enough allocated to the best opportunities or the opportunities that we find are too expensive and therefore too risky. It’s an uncomfortable feeling to sit on cash when clients pay us to invest it.

We employ a disciplined, fact-based methodology to evaluate our existing investments and any new opportunities that we are considering. If we see potential for decent risk adjusted returns, we buy (or hold what we own). When the prospective risk adjusted returns shrink, we sell down that position or wait before adding a new position. This sounds like boring, common sense stuff that normally just requires a reliable methodology to calculate risk and return. It gets very hard when your rules tell you to sell something when there aren’t many good places to reinvest the proceeds.

Without getting too technical, the LeConte list of “awesome investment” opportunities is shrinking day-by-day this summer.

US stocks are at valuation extremes when we comparing stock prices to actual sales and earnings (not forecast sales and earnings which are terribly inaccurate).

S&P 500 Price to Sales Ratio

Foreign stock opportunities offer better valuations but this is due in part to the artificial stimulus from negative interest rates and Brexit vote fallout. In our equity models, we have used these events to build our foreign allocation at what we view as deep value prices. We are satisfied with our foreign allocation (both is size and composition) so we are waiting for fresh political and economic data before adding more.

Precious metals have been a big win in 2016 and we have pared back this allocation twice to keep it in line with our risk profiles. Finally, global bond markets have performed better than stocks by benefitting from economic uncertainty and negative interest rates. We have trimmed our exposure to lower rated, higher risk bond sectors to lock in the gains.

The profits that we have realized have left us with a lot of cash right now. If markets remain at elevated levels, we will continue to realize gains and build this cash position into the Fall. There are times when the safety and certainty of cash is preferred to taking unknown risks and deploying it.
To invest in most asset classes now you HAVE to be right. There is no margin for error. We find comfort when our actions are tilted towards the minority view of things. Jim Grant also said,

“Successful investing is about having people agree with you … later.”


The Economic Reality of America (facts vs. political hyperbole)

Republicans and Democrats have both held conventions, presented their candidates and painted their picture of America today. The next 100 days is certain to be a wild and crazy ride. If one candidate builds a polling lead the other side will hit back hard and ugly. Truth is the first casualty of war and it will be so of this election cycle. Facts don't lie but most politicians do. To remedy this, we have assembled some facts to help you understand where our economy stands. Maybe this will help you choose a candidate that can address these problems.

Since George W. Bush's time in office household income has been stuck in a downward spiral. The financial rewards of Quantitative Easing By he Federal Reserve during Obama's time in Washington enriched upper class asset holders but never made it down to the middle class:

During Obama's two terms in office housing costs have skyrocketed, The median home price in America this year is over $300,000:


Investment Lessons from a Mission Trip to Quantico

Have you ever served in the Marine Corps? If so, you and the rest of our armed forces volunteers are my heroes. Last week the college and career group from my church, East Maryville Baptist returned to Quantico Marine base in Virginia to conduct a summer camp for elementary kids who live there. With help from four of our college students, I ran the soccer portion of the camp for 50 high-energy but extremely polite kids. Temperatures were over 90 each day and you can’t play soccer in the shade. It was an exhausting but rewarding week.

Each day we commuted by bus onto the base from Stafford, Virginia where a local church hosted our group. As we entered the vast 55,000-acre military campus on our first day, I noticed a large LED street information sign that flashed, “Altered traffic pattern, UXO removal program under way”.

After day 2, I became curious to find out about “UXO” and a google search on my phone pulled up a fascinating history. From the 1930’s through the 1940’s, much of the north end of the base was used for artillery training. As time passed and war subsided, the base developed into the elite command and training center that is modern day Quantico. Housing and schools were erected to serve a population that now numbers more than 12,000 military and civilians working on the base.

Across the street from the Crossroads school where we conducted our camp was the location of the old Russell school, which was demolished to make way for a new one. After demolition, they discovered old, rusted shells left over from the 30’s when it was an artillery range. Some mortar rounds were still live “unexploded ordinance” or UXO. They closed the road each night to search for and remove any UXO that they found. The most common munition they encounter is the 4.2-inch mortar. When they located UXO, they cordoned off a 300-yard area for safety and called technicians in to conduct controlled detonations.

removing UXO at Quantico VA

It was a little concerning that live munitions were buried 150 yards from our camp location but we were too busy sweating to give it much thought.

As I drove home at the end of the week I had time to reflect on my proximity to something so deadly and how unaware that I was to the danger. I realized that investors can fall prey to the same circumstances in their investment portfolio. When was the last time you looked for antiquated, rusty and even dangerous investments in your portfolio that need to be removed and detonated by an expert?

In your portfolio, “danger” comes in the form of risk. We use modern technology to measure, understand and monitor the risk of every single investment that our clients hold, even if it’s in their company retirement plan or at another financial institution. There is no excuse for not knowing how much risk you are taking, individually and collectively with your financial future. You’ll feel the impact when you least expect it.

Your antiquated investments are the expensive broker-sold mutual funds, annuities and “house brand” products that you first started investing in years ago. Upgrade these holdings before the costs rot out a hole in your financial plan. You have ample access to modern, low cost exchange traded funds that are more tax efficient. You can find alternatives that will cut your fund related expenses in half if not more.

If you need help figuring out what is “dangerous” and “rusty” in your portfolio, call us for a complimentary evaluation. We have decades of experience in identifying these mortars in your investment account.

Monitoring Demand for Discrepancies

We have highlighted our concerns about end-user demand weakness before. As Yellen and others have touted rosy forecasts of a surging economy, we have questioned their evidence for such optimism. The key area we monitor for confirmation is demand from real people for goods and services. If the economy is going to improve, someone has to have the resources (cash or credit) and the desire to buy stuff.

The Fed can disrupt or delay prudent financial decision-making through their actions. When they did QE, it created a temporary environment for public companies to issue cheap debt and use the funds to buy back stock. This is penny-wise and pound-foolish and we have pointed out why in previous posts (here and here). The Fed played this hand to great effect from 2009 to 2014 and then left the stock market to flat-line as it searches for the next growth fix. 


Do you have an extra $250,000 to pay for healthcare in retirement?

A recent CNBC article asks the question whether $245,000 is enough to cover healthcare costs in retirement. Let that number sink in for a second. Especially, when you consider the article goes on to project those same healthcare costs up to $367,000 using the Medicare Board of Trustee’s estimate of inflation. That’s even before considering that “high-income beneficiaries” have to pay a higher percentage of the total cost of Medicare premiums. High-income beneficiaries are considered to be individuals with Modified Adjusted Gross Income of greater than $85,000 and married couples above $170,000. Currently, beneficiaries pay about 25% of the cost, but high-income beneficiaries will pay 35, 50, 65 or 80% of the cost depending on their level of income.

How much do you have saved for retirement? In your plans, have you allocated more than $250,000 to the cost of health insurance?

If not, what impact will an expense of this level have on your retirement? If the projections are correct, a quarter of a million dollar expense in retirement could derail any plan that’s not properly accounting for such expenses. As the article states, this expense could cause a detrimental impact to your yearly income at a point when going back to work is no longer a viable option. Don’t let this be your retirement picture.

If healthcare is going to be such an impact on your retirement, what other major expenses are not covered in your retirement plan? One of the core pieces of our financial planning process is to identify the specific expenses that your retirement could hold. We help you evaluate your current situation, your goals and desires, and your retirement years to create a financial plan than can hopefully withstand whatever life throws at us.

We can help you make sense of these complicated issues. Do you have questions about your retirement plans or need help figuring out how much healthcare will cost for you? Get an answer by sending us a question:

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