November Updates

Some various notes for clients…

• Fee receipts are in your vault folders (client portal see link below) for those of you billed by account and not directly via Square.

• I have put together a state by state tax guide for MA “tax refugees” which can be found here: State by State Tax Guide for MA Refugees

• I am working through tax forecasts and year end planning for you - some of you I have completed others still in various processes.

• I plan to take a semi vacation the last 2.5 weeks of December to spend some more time with the kids. I will be available for urgent matters but hope to finish up all of your planning needs by December 12.

• I’d like all clients to update data and connections in the planning software. Can you take sometime to do that? It would help a lot > Link to client portal.

Thank you!

~Chrix

Bonds - Haven't Had This Problem in a Long Time

With rates at zero %, there was nothing to be done the past 10 years. But now with somewhat investible bond yields in the market, I actually have to start thinking about researching and choosing individual bonds, and about their tax implications to each individual client.

For 15 years, the bond discussion was easy > avoid them or ride the trend of lower Fed rates as bond values increased as yields dropped. There was nothing much to think about. Many bond funds engaged in levered returns (they borrowed short term money at low rates, say 1.5%, to buy more longer term bonds yielding 3%). And no one cared because low rates were here to stay.

However with the introduction of the rising cost of living across the board since 2021, The Fed has had to pull out its tightening gun and raise interest rates to calm down a hyperactive economy and fast increasing prices.

The “Problem”

Now I have a real problem. It’s easy to shift bank money to short term government bonds - we should all be doing this for the most part. Banks are behind the curve and their CD and money market rates are way below short term US government securities in yield. WAY below. So that’s easy - plus, many might benefit from the fact that US government bond interest is free from state income tax where CD interest usually is not.

The hard part come though as I look across the bond market and seem some BBB corporate bonds yielding 8%. With a return range of 4.5%-8% for various investment grade bonds, I can now entertain the idea of some clients having a mostly bond portfolio as their plan’s REQUIRED return is now achievable with current bond rates. So I have to do some real, actual bond planning now!

Furthermore, there are the tax implications. Depending on the bond and the client, I can choose from corporate bonds that are fully taxable, to US bonds that are state tax free to municipal bonds that can be state and federal tax free.

Don’t get me wrong I am not really complaining. This is a GREAT problem to have. I am actually hoping that rates go a bit higher especially for longer term bonds. Then I can choose from all kinds of options, including inflation indexed bonds and mix in a few stocks and commodities and create much more defined portfolios for clients. And maybe like one client who started accumulating savings bonds in the 1970s and 1980s, and has earned 10%+ for 30 years on the government, I can put clients in some great bond portfolios.

We can only hope!*

By the way, If you have cash hanging around doing nothing and we haven’t discussed this yet, call me.

*Of course this means inflation is likely staying high and stocks are in trouble.

Playing Good Defense

For anyone who is an American football fan (nod to the ‘other"‘ football, ie soccer) you have likely heard the saying that defense wins championships. And it has proven mostly true. Even teams with what are commonly thought to have great offenses (eg any Tom Brady team) the defense has been pretty good when they’ve won.

When I think of all offense, I think of “Air Coryell” the passing heavy offense of the 1970s San Diego Chargers and their coach Don Coryell whom some consider The Godfather of the west coast offense popularized by the SF 49ers. Despite all of their success (4 division titles), they did not win a Super Bowl. Defense is important. And on the other side, we have an extreme example of defense winning Superbowls with mediocre offenses - The Chicago Bears 1986 team (vs the Patriots) and the NY Giants with Eli Manning, twice (also against the Patriots - ouch) . Not sure how manning got MVP in a low scoring game - it should’ve gone to the Giants defense for stopping Tom Brady and Randy Moss’ touchdown machine.

Same in Investing

I think this is a good analogy in investing. All of the great investors and traders have good defense. Fundamental investors like Warren Buffet and his acolytes focus on having a “caring of safety” when they invest - that simply means in their opinion, the company is worth a good chunk more than the price they paid based on their deep analysis. And depending on the company, that margin could be (again in their opinion) 25-40% or more.

Traders use stop losses so that if a trade goes against them, they sell at a small loss and reanalyze. Their methodology is that if they keep losses small and follow a good plan, their winners will outpace their losers even with a less than 50% success rate per trade.

Same in Financial Planning

In planning, playing good defense includes the basics such as sufficient liability insurance, estimating taxes fairly well and using proper legal documents in the proper places - such as an LLC to separate a business venture from your personal finances.

2022 and Beyond is the Era of Defense

I believe that going forward good defense will trump good offense. What does that mean? It means that in the extreme, when I run across a retired client with 20% of the retirement funds in bitcoin, and big chunks in other aggressive investments, with no diversification for rate hikes, inflation or earnings declines/valuation contractions, I get worried. More interestingly, depending how things go, I may have a problem I have not had in 15-20 years - and that problem is how to manage income and taxes in an active bond portfolio.

Many of my clients are excellent savers and can accomplish their long term goals with a long term target rate of 7%. You can bet big that if I can get clients 7% in government bonds, I will advise a significant shift in that direction. I cover the bond market ‘problem’ in another ARTICLE.

Bottom line, whether it’s grabbing bonds and locking them in when rates are attractive, or moderating investing expectations by using strategies that earn respectable returns without a history of large drawdowns and diversifying for changes in interest rates, currencies, recession etc, having a good offense is fine and can win some divisions (ie win some decades), but having a good defense seals the championship and wins the lifetime game.

Thanks for reading!

This article reflects my opinion and my best thinking. It is not gospel but it’s what I am doing.

2022 Mid Year Letter

We certainly live in interesting times. But, as many times as a news service or article will say that we live in the most (insert adjective here) time in history, I often think, well that’s an exaggeration!

Do you live in dangerous times? Perhaps but compared to various points of human history? Not even close. This isn’t gangs of New York or a time of war and the draft. Do we live in financially turbulent times? Of course but this is no Great Depression. Can you sell your stocks in a split second and move to safe treasury bills almost instantly? Yes.

Do I mean to. downplay our current troubles? Of course not. I just want us all to use perspective. I get that people have to sell newspapers and headlines need to be outrageous to get your attention. However, I prefer to read a good book and think issues though more deeply (my current book is HERE).

More Prudence, Less Blind Optimism

We benefited from some easy times the past 10 years, The everything bubble. Instigated by easy money policies, the everything bubble pushed up prices of not only stocks, but electronic fake money (ie crypto currency), art work, real estate (House prices should not have grown THAT fast), PDFs masquerading as art (NFTs) etc. Semiconductor stocks, are one specific mundane example of the everything bubble - when I got into this business, semiconductor/chip stocks traded at 8xs earnings - meaning, if the stock earned $2 per share, it was a $16 dollar stock (8x2). Magically however, in the land of Fed money printing and endless bailouts, these stocks trade at 20-40 times earnings! if all things return to equilibrium, as I believe they eventually do, what does that say for the valuations of chip stocks?

There are many other side effects (unintended consequence/trade off, etc?) from money printing. One unfortunate side effect is that when we input costs (like commodities) rise - and push through inflationary price increases on products we buy, the end user (us) doesn’t see price cuts when those same input costs fall back down. Let me give you an example: if you like Chipotle Mexican Grille and you order a burrito with avocado - you’re ordering a meal whose input costs had gone up dramatically this past year. Chipotle then raised prices - but now that input prices are declining a bit, it’s likely Chipotle won’t cut prices > resulting in permanently higher inflation for us. Bad for us, good for corporate profits (so we must make sure we own stocks if we are going to vote for money printers!).

(rant starts here) That being said, it doesn't matter if the Fed slows down price increases with higher interest rates - we will NEVER go backward on prices (outside of a depression). Which is seriously painful for most people. Side note: perhaps we all need to think about whether our politicians think it’s ok by us if they keep borrowing and spending. because it means life gets very expensive. Not right away but eventually. Furthermore, if rates were to rise a few more percent, our national debt ($30 Trillion) interest will be 3xs our defense spending ($30 trillion x 6% = $1.8 T annual debt interest) meaning at the same time life is getting very expensive, government has to cut spending tremendously -likely on some important programs - to cover interest costs. This is third world country stuff and it’s sad that we are approaching it.

My point is that what the market gives, it takes away. We need to behave like most investment ideas could actually be too expensive at the current time. We need to be prudent. Just because stock prices have fallen 20-50+% (depends on sector) in the past 8 months, does not mean things are now cheap. So therefore, our approach must be one of realistic expectations in an inflationary/rising rates environment. Though I am not sure if the Fed can raise rates too high - like Volcker did in the 1970s/80s - because 4-5% is enough in this highly financilized environment to crash things. But I also don’t think inflation just goes away next year as the Fed starts printing money again (that’s what many people think).

That being said, I and many others expect a rally (in fact as I write this, the market has rocketed off of Jerome Powell’s words of tempered rate hikes). Even with a rally, I think big picture presents choppy market where individual ideas will outshine the performance of the entire index. And it wouldn’t surprise me if we get a rally followed by one more big drop in markets. There are signs of recession, and the Fed is not in position to fix it this time. They have to raise rates to fight inflation at the same time our economy is slowing - when they’d usually be lowering rates to support the economy. You know I’ve said this for years but to be more blunt, the Fed is a disaster. Incompetent book educated technocrats that they are - are now stuck - they went to the money printing well too often and now they are forced to raise rates in a recession. Remember these are the same guys who were printing $1.5+ trillion of dollars last year as inflation rose to 10% - insanity.

Themes and Some Random Thoughts

What I am thinking in terms of investing themes:

• if we can get 5-6% yields we should start grabbing them. Maybe rates move higher and we add more at higher rates and roll over the previous holdings as they mature. But with recessionary pressures, the higher rates I’d like to get on government bonds may not happen. Therefore 3-5% return guaranteed is something I want to accumulate.

• Nuclear is back and we want to be involved. Our current primary involvement is indirectly through Sprott Inc which manages a uranium ETF. I will add other key exposure here too.

• Cash flow is important - a “long/short” approach works as companies that will never earn real cash are shorted and companies earning good cash/paying dividends/buying back shares are bought. The Calamos Long Short Fund is our exposure there.

• Earning returns in all market types will be important - hence grabbing good yields, and doing strategies that can work in all markets like “Merger Arbitrage.” We have exposure through a Merger Arbitrage and “event driven” funds.

• Energy is important - people who think we will be all electric in 5 years have no clue of the reality. This is not going to happen. And in fact, the drive (no pun intended) toward electric has driven lithium prices up over 300% in the past 18 months. This is not how you replace oil. Furthermore, the copper needed for this electric revolution is equal to more than we currently output globally. And FYI most copper mines have been open a while. There aren’t too many new major discoveries and certainly governments are getting in the way of developing new resources for the electric economy, so I’m not sure how it is going to happen. And think about this - there are currently 1.2 BILLION people with no electricity. Another 2-2.5 BILLION people have unreliable or expensive energy. You know what they want? What you have - a fridge, AC, a car, internet. This won’t be supplied with solar. Therefore, gas and oil and the development of these properties is key. We have exposure in energy.

• Metals are important as are other commodities. Sprott being a financial firm that focuses on natural resources also gives us exposure to gold, silver, platinum, palladium, uranium and other commodities. I plan to add more exposure here as we need copper, nickel, lithium, cobalt, iron ore and more for electrification.

• Real estate - prices may come down but the need for housing is real. We currently have exposure to northwest Florida real estate through the St Joe company. I will look for more real estate opportunities - not just at homebuilders and mortgage companies - but companies with undervalued real estate on their books. Side note: if I can find good ideas, water rights will be a HUGE area to invest in.

• Health care innovation - it’s a marvel watching our health care technology industry. It’s an area I think will continue to grow through all kinds of economic conditions. The problem is I am not amn expert researcher in medical ideas. So I defer to a good fund - The Eventide Healthcare and Life Sciences Fund which focuses on cutting edge medical tech that can ethically change lives.

Other random thoughts -

We must keep an eye for more tax increases at least until midterms. I am a fan of gridlock because the less these people do, and the more they have to deliberate to gain consensus, the less dangerous they are to all of us. I am hoping for a hopelessly divided congress. You know that advice that says “don’t just do something, stand there!” - I like that advice for politics, picking scabs and other things better left alone.

Charitable Intentions - thank you for those of you that filled out my charity questionnaire a few months ago. As I begin tax strategizing for this year into our tax forecast sessions, that will help me craft your strategy better. For those of you with bigger charitable plans, I have discussed Donar Advised Funds. Here is more information on those: DONOR ADVISED FUNDS.

Thankfulness and Our Annual Gift to FriendshipWorks - 2021 Version

December is upon us!

I am not ready for cold weather, but thankfully I have a remedy for that. And not so ready to spend less time playing with the kids in the nice weather. My son is still at the age where I stand a chance on the soccer field with his friends (I am an amateur) but I am predicting by next year, I’m toast. I won’t have any chance.

That being said, I am thankful for the time I had during a nice summer and a very beautiful early fall season. i hope yours was as enjoyable as ours.

Now the purpose of this post/message.

As you may remember if you have been part of our community for more than a year, we make a gift to FriendshipWorks (learn more about them HERE).

They are also starting a monthly giving program called Best Funding Friend (“BFF” get it?:). So I will give our usual gift (in lieu of cards to everyone) but also start a monthly giving program with them.

Other Items - Going to Hawaii

We have a 3-week trip planned to Hawaii starting December 15 to January 7. Any housecleaning items that need to be addressed here before year end I am working on. However everything appears to be under control and things I can handle via phone/email. My goal is to reduce the amount of time I spend in winter. I have been spoiled by living in California.

Items of Interest:

I shared this great YouTube video explaining how scammers work with the clients. If any of you have ever been hit with scammers, you know this is how they operate. However the video shows the entire behind the scenes process. Here it is again if you missed the other email: Glitter Trap Catches Phone Scammer

Here is a great article on how to think about giving kids allowances. It helped me out a lot. if you are struggling with the internal debate of whether you should give allowances, or make payment tied to household chores etc, this is a good article: Allowance tips for parents

IRA/401k RMDs - Some of you have accounts I can not see. If they have RMDs that need to come out of them, get that done before December 31, and give the company some time to process it!

Year end thoughts on the tax/estate law changes:

Some of the more onerous parts of the Build Back Better (Build Back Broke?) legislation like the IRS monitoring everyone’s personal bank accounts, were removed. I like to think my open facebook letter to my Congresswoman helped but I think everyone was upset about that. Other than massively increasing the number of “revenue agents” that will be running around and auditing us, I am not super worried about the effects of this bill immediately upon most of you.

If you have any questions or thoughts on this, let me know. As I write this, it looks like the market avoided a plunge with a stick save (hockey term).

Turkeys stalk our neighborhood (I think this neighbor feeds them!)