Wait just a minute...

Before you get all giddy about buying this dip answer this question first: Will the financial circumstances crucial to the stock markets’ 6 ½ year bull move repeat themselves in the future?

Let’s recap events since the market bottomed in March 2009:

  • ZIRP gave corporations an unprecedented chance to borrow cheap money and buy back stock for next to nothing.
  • After reducing the number of shares outstanding through buybacks, corporations then used every accounting trick in the book to boost earnings even as revenue growth stagnated.
  • The Fed printed billions of dollars and before the ink had time to dry they used it to buy up every bond in sight through QE1, QE2, Operation Twist and QE4 etc…
  • Margin debt exploded to record heights and fueled the final push.
  • Finally market breadth has narrowed to a select list of volatile momentum plays that echo Joe Kennedy’s shoe shine indicator.

Which of these factors will accompany the next record high in the stock market? Is the Fed going to reintroduce another round of QE? Will corporations lever up their balance sheets even further to buy back more shares? Can they lay off workers and reduce their expenses to boost earnings? Do margin investors have capacity to borrow more of the house’s money and gamble on NASDAQ momentum names?

Bonus question - Where will we see an increase in consumer demand emerge from that can propel us towards a real, robust, inclusive economic expansion? The economy desperately needs to find someone, somewhere who has the ability to buy (or borrow) and the willingness to do so. Absent this, it’s all smoke and mirrors.  


Who’s your trusted advisor?

“That was difficult, but I made things easier for him,” I thought as my meeting ended.  I’d just spent an hour with a client that had reached the age where he realized he was forgetting important facts and needed my help taking care of medical paperwork related to his beloved wife.

We are currently working with a family to help make sure their sons are ready to start taking over the family business.  Just last week, I’d sat with another client that was experiencing health issues and needed my assistance with helping make business decisions and running the monthly bookkeeping operations.  .

These meetings were different from the normal debits and credits many think about when they think of a CPA or financial planner and a lot different than Accounting 101 I took at Auburn. 

So how did we get here?

These conversations are a byproduct of the trust our clients have in our expertise.  Over the years, we’ve been working with these clients to plan retirement, complete tax returns, and solve various other financial matters.  So when it comes to major life decisions or when life changing events occur, we are often the first people called when guidance is needed.

That brings me to my main thought – What kind of events in your life will require more expertise than you have on your own?  It may be that you’ve been able to handle everything on your own so far. The last few weeks have solidified for me that the time will come when we all need help.  When you need that help, who will you turn to?  We would love the opportunity to start developing that trust with you.  We’ll be here when you’re ready, so please give us a call to get started.


Social Security losing ground to healthcare costs

I recently found an interesting article about the double whammy facing some retirees next year with no COLA adjustment to their monthly Social Security benefit and a potential 52 percent increase in Medicare premiums.  This will only affect those who are not protected by the “hold-harmless” rules, which currently is about 30% of beneficiaries.  Specifically, wealthy beneficiaries whose earnings are $85,000 for an individual or $170,000 for a married couple.

Why is this important to you?  Healthcare costs are rising and strains are already being put on the Social Security system.  This may only be the beginning of this erosion of benefits.  Retirement strategist, Sharon Carson, says “When you combine it all, it’s looking pretty ugly” and “Congress will probably go back to that well again.”  Her opinion is that the income thresholds could very well be lowered in the future which would cause many more retirees to bear the burden of increased insurance costs.  Whether it impacts you now or could in the future, this is an important variable to consider in retirement planning.

How do you protect your retirement future from these changing variables?  You start planning now with a financial planner you trust and will take a conservative approach to Social Security projections.  If you are ready to start down the path to planning your financial future, give us a call.


Living in the High Rent District

When a house sells in your neighborhood, many often look to see what the selling price was.  Depending upon the price per square foot, you might be relieved or a bit unnerved, especially if your house is also on the market.  In real estate the price per square foot is a standard measure of how expensive (or cheap) a house is relative to those that have recently sold.  The higher the price you pay per square foot, the more capital you have to come up with. Conversely, if the price per square foot drops in your neighborhood, it’s great news for the buyer but not for the seller.

In today’s equity markets, the P/E Ratio (a measure of the company’s price relative to their earnings) is at 22 times.   As a reference point, the historical P/E on stocks is 15.6.  Using the same analogy as you do on buying real estate, stocks are more expensive on per square foot basis than they historically have been.  If you have stock exposure in a 401k account or an investment account with your advisor, you’ve seen your assets appreciate over the past 6 years, and you’re now living in the high rent district. 

The challenge is this:  the more expensive the stocks become, the harder it is to project positive forward returns.  If you overpay for something and it declines (and it can decline rapidly), you spend much of your time making that money back rather than earning more on your money.

If someone knocked on your door and offered to pay you 40% more than your house was worth, you probably would consider taking it. Why not consider the same in your investment portfolio?  The equity market is full of buyers if you’d like to sell some of those appreciated assets.  Stock values can decline rapidly without warning and often without reason.   It may be a good time to put some of those assets on the market while prices are still high.


What will it cost the economy to raise rates?

As the Federal Reserve contemplates following through on their year-long promise to raise rates next month, let's analyze the potential effects on three key segments of the US economy - Consumers, Business and the Government.

Public discourse so far has focused primarily on the effect of higher rates on borrowing activity. A few years ago as rates fell to near zero, we compared this Fed growth technique to a broken transmission. The Fed was revving the economic engine but mortgage foreclosures, higher lending standards and high unemployment kept economic activity for Main Street Americans at a standstill. Corporate America garnered the majority of the benefit from the Fed's zero interest rate policy (ZIRP). Big companies have been on a borrowing binge to refinance their debt at lower rates (reducing their interest costs) and use additional cheap money to buy back their stock (which increases "per share" earnings and artificially boosts prices). 

Most corporate treasurers realized the rare opportunity that ZIRP provided them so they extended both the amount and the average maturity of their debt effectively locking a very low cost of capital for a decade or more. These same corporations won't necessarily be forced into borrowing more money if rates go higher. They could for example, simply reissue treasury stock and use the proceeds for growth. Higher rates won't have an immediate impact on their bottom line for a year or more unless they run a consumer driven business. 

Consumers that were hindered by the recession from realizing the benefits of ZIRP have recently seen the tide shift. As QE effectively replenished bank reserves, bankers have again relaxed lending standards and ramped up offers of cheap credit to consumers. This is quite apparent in new car sales. More than a quarter of all new car loan maturities are now longer than 6 years! Even 16% of USED CAR loans are longer than six years. The average car payment is now $485 per month and a 5 year obligation. ZIRP has effectively pulled demand from new car buyers for the next several years into the last 18 months.

It shouldn't be surprising that higher rates would eventually have an impact on automotive sales. Unfortunately this sector is showing signs of fatigue even before the Fed raises rates. With an average selling price of $44,000 Ford's retooled, aluminum bodied F-150 pick-up was expected to be a big money maker. Ford announced incentives of $10,000 in some regions to keep sales moving. Imagine what happens after the Fed starts raising the interest rates and your new car loan costs more. You will have to either extend the length of the loan for even longer, pay more down or pay a higher monthly payment. With that you will have to drive that car for almost a decade to get out of it at a reasonable cost. 

We saved the most interesting and least discussed segment for last. It will cost the United Sates Government the most if the Fed raises rates. Much has been written about our ballooning Federal debt:

We rarely read discussions regarding when this debt will mature and how higher rates might affect the cost when it rolls over. The average maturity of our 18 trillion dollar pile of debt is less than 72 months. Statistically this means that over the next 5 years we will have about 9 trillion dollars worth of debt repriced.

If the Fed raises rates it will force the US Government to pay more as these obligations are refinanced. Last September the Congressional Budget Office published a forecast on debt and interest payments by the Federal Government. They project that higher average interest rates on our debt will more than triple our interest payments from 231 billion last year to 799 billion by 2024. To make matters worse guess who gets the biggest piece of those debt payments? Foreign countries own 47% of our debt so if the CBO is accurate, we will be paying out 375 billion dollars to these foreign debt owners by 2024. You know what we would do if we had to send that many dollars overseas? Devalue it before that day comes. 

We would be foolish to ignore two years of warnings about rate increases from the Fed and not expect action. Yellen and company will likely act if just to salvage the Feds credibility (even if it doesn't make much economic sense). Now that you have a picture of the costs to the economy, you can adjust your portfolio accordingly. Increasing foreign equity and bond exposure sure makes a tremendous amount of sense especially while the dollar is still strong.

Commentary should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Content is derived from sources deemed to be reliable. Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. There are no assurances that a client’s portfolio will match or exceed any particular benchmark.
LeConte Wealth Management is registered as an adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Why the NASDAQ's solo ascent this year is a problem

Through August 18th. The NASDAQ is up 7 1/4% while the other three major domestic indexes (DJI, S&P 500 and Russell 2000 small cap) are stuck in a range of -1.6% to +2%.

This comparison illustrates that after a 6 year long rally, the list of winners is beginning to shorten. The implications are important to understand especially since our domestic market hasn't seen a 10% correction since 2011. Bulls prefer stock market moves that are all inclusive. A rising tide should lift all boats. When that isn't happening it's an indication that investors are becoming more selective in what positions they hold, sell or add to. The margin for error shrinks and corporate mistakes (poor earnings, high valuations product or service issues) are punished more severely. 

When a broad rally begins to narrow the fundamental empirical business statistics become more important than price trends and momentum. We've seen this play out in real time as quarterly earnings were released. This renewed focus on fundamentals also leads corporate leaders to resort to any (legal) measures possible to reproduce good numbers. Despite their efforts reported earnings for the second quarter are down 1% and more telling (because it cant be fudged as easily) revenue dropped more than 3% (factset).

The narrowing breadth of winners comes at a time when overseas, the Chinese market can't find it's footing. Domestically the Fed has promised to raise rates at their September meeting at the same time that politicians will be reconvening to once again take up the debate over raising the debt ceiling (US Treasury Secretary Jack Lew sent a letter to congress last month begging for help on the matter).

The next few months will be filled with enough drama to agitate bulls and bears which will be a good environment to have some cash on hand for bargain hunting.
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