Post & Comment {10.30.19}

This is a newer feature I added over the summer where I respond with a brief comment to something I've seen in the news or online.  The headline question I've highlighted.

The NCAA will allow college athletes to profit from names images and likenesses.  

About time!  I've always found it absurd that a college chemistry major on scholarship could make money working part time in a lab while players and whole programs get into trouble for relatively small amounts of money being exchanged, often without the programs knowing it happened.  The start of a massive unfairness being fixed.

The President will be impeached.

The movement to impeach the President keeps slogging through the House of Representatives.  My own guess is that those odds have moved a bit back in his favor this week with last week's headlines out of Syria.  I'm going to start laying informal odds on this and right now I'd guess the odds are less than 30%.  Last time I wrote this column I'd have likely given his odds at 35%.  It's really hard to impeach a President.  Also it should be hard to impeach a President.

The President will win reelection. 

Also hard to say and here I'll also start to lay odds.  My guess is this is a 50-50 race right now.  Most will depend on whom the Democrats nominate.

On the stock market.  

Probability would suggest higher prices over the next six months or so given what we know today.  Earnings season hasn't been as bad as many have predicted, stocks have not moved up much over the past 18 months or so and there seems to be a bit of optimism creeping into the investment community.  Also you have very favorable seasonal patterns now for stocks.  Of course there's much that could change my opinion on that.  Markets seem to be tethered to trade talks with the Chinese and any suggestion that these might fall off the rails could change this analysis.  Also excitement might be dampened depending on who starts to emerge as the Democratic front runner.  Time will tell.  Also this is not a recommendation to buy securities.  It is simply an observation.  You need to make your own analysis, talk to your own advisor or better yet hire me before you make any investment decisions based on what you read here or any other place.  This observation has as much of a chance of being wrong as right.  In short, you're on your own!

On the World Series.

I love baseball and what should be it's highlight of the year is virtually unwatchable because it takes way to long to play a game!  Last night's game was relatively short at around 3.5 hours.  Most playoff games this year have averaged around 4 hours to play.  That's way too long!  Baseball fix this!

Back Friday.

Taxes-Who Pays What?

The definition of what it takes to be really rich keeps going higher.  You now need to make in excess of half a million dollars a year to be counted in that elite group of households.  According to  an article on Bloomberg.com that's up 7% adjusted for inflation from a year ago.  On the other hand roughly $42,000 gets you in the top 50% bracket.  The table below as well as all the information  in this post comes from that article and shows where you might fit in on an AGI basis.

On the other hand per the table below the top 50% of taxpayers pay almost all of the income taxes.  Note that this data probably doesn't include payroll taxes, FICA and the like.  According to the article, the top 1% earned 21% of the country’s income, and paid 38.5% of federal individual income taxes. The top 1% paid a greater share of income tax to the U.S. Treasury than the bottom 90% combined (29.9%).

The article also notes that the income tax brings in about half of all Federal revenues.  Overall, the IRS data show the U.S. collected $1.6 trillion in income taxes from 143.3 million taxpayers reporting a total of $10.9 trillion in adjusted gross income in 2017, the most recent year available.  Through 2017 the data shows that the average tax rates paid have increased in recent years.  Somebody in the top 5% of all taxpayers, somebody earning in excess of roughly $209,000 in 2017,  paid an average tax rate of 23.7% vs. 20.8% in 2008.

Note however that this IRS data don’t reflect the tax overhaul signed by President Donald Trump at the end of 2017. The law lowered individual income tax rates while eliminating many deductions and slashing the rate on U.S. corporations to 21% from 35%.  It will be interesting to see in a year or so how this has changed who pays what.

Back Wednesday.

Link:  Bloomberg.com: "Americans Now Need at Least $500-000 a Year to Enter the Top 1%."

It's Been Wet In The Farmbelt

It started raining in the middle part of America at the end of last winter and never really stopped.  The map above shows how much of the Mississippi watershed has seen significant precipitation above average this year. Sure the rains slacked off a bit in the summer months but much of the Midwest and upper plains states never really had that prolonged period of heat and dryness that often characterizes summer.  Even the areas that did see that kind of weather have seen the rains come back this fall.  It's rained so much up here that all of the great lakes are full to bursting.  Most on average are nearly three feet above historic levels and estimates are that these levels will continue rising into 2020.  

The article from Politico that shows the chart above has several others that display other results from  the rains this year.  I'll let you click on the link to the article below if you want to check out this and their other graphs on what's happened in the Farmbelt.  It's also an excellent article about climate change out on the farm.  My interest today though is simply on what did not happen.  What didn't happen is a whole lot of acreage didn't get planted.  The wet weather meant that farmers in many parts of the country were late getting their crops into the field or didn't get those crops planted at all.  The article states that 19.6 million acres of corn, soybeans, wheat etc. didn't get into the ground.  A lot of what did get planted went in late, which will likely lead to reduced yields and farmers praying for a longer patch of warm weather into the fall.  

Expect to see this situation picked up more in the press in the coming weeks.  That's especially true if Mother Nature brings winter on earlier than normal.  Despite what you may read, I wouldn't panic on this news as there should not be food shortages or any of the more dire things you might see in the press.  Expect though to pay more at the store for certain things as the year progress.

Back Monday.

Link:  Politico.com: "Im Standing Here in the Middle of Climate: Change How USDA Fails Farmers."

Millennials Will Save Us From A Recession

You're going to hear me start talking quite a bit more about the demographic tidal wave that's been building with what social scientists call the Millennial Generation.  If you've been reading me at all this year then you know that Generational Change is one of the key themes I factor into my investment portfolios.  Tony Dwyer, the chief market strategist over at Canaccord Genuity, seems to be in my camp on what he believes millennials are going to bring to the table.   I haven't read Tony enough to understand whether or not he thinks their coming of age is as big a long-term positive development as I think it's going to be but I do know he thinks they have the ability to help stave off a recession.  According to Tony:

"{Millennials} are turning 30. They’ve had 10 years to be in the workforce. They’ve had 10 years to build a credit score. They’ve had 10 years to meet a significant other and get prepared to build a household. We’re seeing this behavior show up in this millennial demographic which should help buffer the economy from a more significant slowdown.’

I think the demographic shift these young kids are bringing about is more significant than what happened when us baby-boomers entered adulthood.  We'll talk about this more in the future.  These kids and the generation right behind them are on the cusp of something that in my opinion hasn't been seen before.  They are smarter, better educated, in aggregate more serious about things then we were at their age and for the most part better informed.  They are also more tolerant then preceding generations.  

By-the-way Dwyer has a market target for next year that closely mirrors what I think we can see next year as well.  You can read up on that and his take on millennials at the link below.

Link:  Market Watch.com:  "No Recession?  Thanks Millennials!"

Two Quick Notes

I'm involved in a series of meetings and conference calls today and I'll have something a bit more specific in the next few days {believe it or not it's an article about the weather}.  However, everybody who has money invested with some outside firm, should read this article about Ken Fisher and his marketing juggernaut firm that is Fisher Investments.  Fisher came under fire in the past few weeks for some alleged inappropriate comments at a conference.  That's led to scrutiny of both Fisher and his company.  I know nothing about Fisher other than his face and his firm are all over the internet and TV with adds.  I can't say whether his advice is good or bad or what level of personalization investors get from putting their money with him.   I'll have more to say about this in the coming weeks but I suggest you go read what these folks say it's like working at his firm.  I am a bit of a skeptic that one gets much personal investment advice or care when a firm gets that big unless you have very large dollars invested with them.  However, I don't know anything about the firm so again I urge you to go read the article and judge for yourself.

Also on a quick note so far from my perch it seems that earnings season is coming in better than expected.  It's early but so far we're seeing more that seems to be good than bad.  

It Will End In Tears

I said the other day that I believe the only way the story ends in Hong Kong will be with tears.  I'm not making a political statement or trying to pick a side but simply bowing to the facts on the ground.  Whether it ends with a political settlement or something worse, the reality is that China is not going to let Hong Kong go in the direction that a majority of the protestors would wish.  All may not be lost in Hong Kong as there could still be some sort of face saving settlement that allows both sides to stand down.  Also my guess, and it is only a guess, is that the Chinese government would prefer to avoid violence.  Perhaps then there can still be an accord that finds room for compromise that satisfies the majorities on both sides.  However, the dreams of the most ardent dissidents are likely to be dashed.  From my perch it is unlikely that any government would ever give them all they are asking for, here or over there.

Apparently, somebody over there agrees with me.  Go read this opinion piece posted recently in the South China Morning Post. "China Would Rather See Hong Kong Lose its role as a Financial Gateway Than Ever Cede Political Control."  I know nothing about the writer but I'm guessing that article had to have been vetted by a higher political authority before it was posted.  It also seems to me like a level headed assessment of what the political authorities in China might be thinking.

Again I'm not making any political statement.  This blog is about money and markets, not my opinions or preferences.  As such, I am just looking at what I believe will be the reality of the situation and trying to strip emotion from actual events.    Those in Hong Kong hoping for support from groups and governments supporting democracy will likely find those hopes displaced.  Beyond words, a few marches and perhaps a few token sanctions no aid will be coming.  Hong Kong simply won't be worth that much to these other places at the end of the day.  

Back Wednesday.

Fall Market Trends To Keep An Eye On

By Christopher R. English, President of Lumen Capital Management, LLC

Fall is in the air, but Wall Street isn’t enjoying the season as much as most. In fact, the mood on Wall Street is about as sour as I can remember in a very long time. Market commentators and pundits are increasingly worried about a recession, if not in 2020, at least by early 2021. Then there are worries about China, the president’s political problems, and the upcoming elections. Many of these issues have impacted stocks for a while now. Let’s dig a bit deeper to see if we can make some sense as to what’s going on.  

Why So Glum?

Given the economic, interest rate, and fundamental backdrop, stocks are likely fairly valued in 2019, although there is probably still potential for some gains as we near the end of the year. Concerning a recession, we need to accept that at some point we’re going to have a contraction in economic growth. I am still not yet convinced it will happen next year. I have said this before, but it bears repeating: it is hard for me to contemplate us having a recession while unemployment remains at levels not seen since the 1960s, and while the scope of technological advancement remains so robust. Markets have experienced a profits recession in the last two years as earnings have remained flat, which has also led to a relatively flat market in the last 20 months or so. If that’s the worst we’re going to see as we’ve been in this period of sluggish growth, then things don’t seem so bad.

Stock Predictions

We are at a point in time where earnings expectations for stocks flip over into 2020, and in a few months, we’ll start looking out at 2021. Right now, expectations are for corporate earnings to recover in 2020 with profit growth for the S&P 500 in the 10-12% range. Wall Street analysts are traditionally optimistic about earnings out that far, so it’s likely those numbers will be paired back as 2020 progresses. Still, if we have 6-8% earnings growth, then I think the potential is there for stock advancement in the 6-8% range next year. Throw in a nearly 2% dividend yield for the S&P 500, and you see a total return potential that could be around 10% next year if certain things pan out. Of course, things can change drastically and there’s no guarantee that stocks will increase that much. Also, as I’ll discuss a bit later, I believe much of those potential gains will show up in the first half of 2020.

Trade Issues, Again

One of the reasons the markets have been so volatile this past year or so has been global trade issues, perhaps none more important than our quarrel with China. Simply put, we are going to have to come to grips with the fact that the Chinese have become a strategic competitor to the United States and, by extension, most capitalistic, democratic societies as well. I use the term competitor because it places the Chinese in a role that is not an enemy. China has a view of the world and their place in it that is different than ours. It is less an issue of ideology than one of culture. Whether their competing view of things will become more dominant or attractive to other societies is something that is going to play out in the coming decades. What we are experiencing now is a reordering of the world’s geopolitical order. It does not necessarily lead to war, as many fear, but these events will probably take some time to straighten out.

Along those lines, I will repeat my belief that in the current environment, a trade deal with the Chinese, or at least a meaningful one, is a low-probability event. In my opinion, the political class in both China and the U.S. view each other as that strategic competitor more than a reliable trading partner. As such, we probably won’t see the Chinese willing to give up enough for the Trump administration to come away with a comprehensive deal before next year’s elections. That’s not to say we won’t see something before we all vote in 2020, such as a deal on agricultural products, but it won’t be in China’s strategic best interest to give up on technology transfers or limit market access to U.S. companies. Our volatile but otherwise flat market is likely reflecting this “no trade deal” viewpoint as well as the impact of that on world growth.

Then There’s Trump…

President Trump’s political problems seem unending and won’t be covered here except as to how they affect markets and investing. First of all, I would caution us all to not get too worked up over the day-to-day headlines. “Headline risk” is the ability for an event, news headline, or even the rumor mill, to influence the price of a stock, sector, or broader market. We’ve seen several examples of this recently, most notably the current impeachment inquiry in the House of Representatives over whether or not the president withheld funds for Ukraine unless they agreed to investigate Joe Biden’s son. As these things play out, political pundits on both sides are the first to jump and scream about the alleged atrocity the other side committed. Whatever the allegations are, and no matter whether they come from the right or the left, these are almost always defined in a “death to the Republic” manner. Trump may be in hot water over his call with Ukraine, but investors are better served by reviewing all of the evidence and seeing how this will play out in the coming months than blindly assuming it will negatively impact their portfolios.

Traders, particularly those of the algorithmic type, get all itchy over headlines. However, most of us don’t adjust our portfolios by the minute, so this type of thing is usually best ignored until hard evidence is presented that supports that today’s headlines are telling the truth. Investors who make hasty decisions based on inflammatory news stories may wind up with a case of seller’s remorse in the coming months. I already think the President is going to have a tough time getting re-elected next year, so if I were the Democrats, I’d hold all this in reserve and go at him if he wins in 2020. However, there is a sizable group within the opposing party that wants to get rid of Mr. Trump and that passion may prevail in the coming weeks. I think it’s better to wait until we’ve seen how this pans out before we decide if this is significant to our long-term market outlook. 

I am often asked why the economy and markets have done well under President Trump. The reason for this is that whether you like them or not, the current president’s policies have been seen as market-friendly. However, when reviewing all of this, a more nuanced picture begins to emerge. This administration has seemed to be singularly focused on creating jobs and growing the economy. We have the lowest unemployment in two generations and GDP growth will likely come in around 2% for this year. If that’s the case, then it’s likely we’ll have averaged GDP around 2.75% for the first three years of the president’s term. That’s lower than the administration has touted over the years but better than the Obama era averages. The president passed a comprehensive rewrite of the U.S. tax laws and lowered taxes for millions, not just the rich. In the process, though, we have added billions to the federal budget deficit, and only time will tell how that will play out. Also, the economy has run into significant headwinds this year, most notably on trade-related issues. These will not be going away as the calendar ticks into 2020. In terms of the stock market, the S&P 500 is currently up about 40% since President Trump was elected back in 2016, excluding dividends. Most of that gain came between his election and late January 2018. Since that time, the S&P 500 is up slightly under 4%. We also experienced a 20% correction in the last quarter of 2018.  

Of course, some factors could limit market gains next year, and there is also a high probability that any advance will be front-loaded into the first six months of 2020 as Wall Street focuses on the presidential elections in November. The likelihood of the president being reelected will probably depend on whom the Democrats nominate. A centrist candidate would decrease Mr. Trump’s reelection chances, while a candidate in the Bernie Sanders/Elizabeth Warren wing of the party would likely raise the odds of Mr. Trump staying in office. It is unlikely that a Sanders/Warren candidacy would be viewed positively by the Wall Street community, and there is a significant possibility of market headwinds should it look like that wing of the party is advancing or has a solid chance of being elected. One final political notion to consider is that centrist Democrats and independents that become alarmed at the prospect of a left-of-center Democratic nominee might cast about for someone considered more electable. In that vein, you may start to hear Hillary Clinton’s name bandied about as an alternative. Expect the buzz around her to increase if the more centrist candidates falter in the coming months. Such a candidacy this late in the game is probably a long shot, but stranger things have happened in politics. However, all of this is far in the future, and we should first watch how the Democratic primaries play out next spring. 

A Word On Treasury Yields

Finally, in terms of the markets, I have pointed out repeatedly in the past 10 years about the relationship between dividends and treasury yields. Right now the yield on the S&P 500 is just slightly under 2%. Furthermore, the dividends that make up that index will likely compound at a 2-5% clip over time. The current rate on the U.S. 30-year treasury yield is close to 2%, while the 10-year rate hovers around 1.50%. If you invest today in a 10- or 30-year bond, you are saying that you have so little confidence in American growth during those future time periods that you’re willing to accept a rate of return that is unlikely to beat the real rate of inflation over those years. Equities or equity-related investments will be volatile, but I think I’ll take the bet that their rate of return will beat bonds hands down over a 10- to 30-year period going forward. As always, we’ll wait to see, and hopefully I’ll be around in 30 years to find out if I’ve won that wager!

Any Questions?

As always, we are here for you. If there’s a change in your situation or if you want to discuss any concerns that are weighing on your mind, reach out to me at 312.953.8825 or by email at lumencapital@hotmail.com. 

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

The information contained here is taken from sources deemed reliable but cannot be guaranteed. Mr. English may, from time to time, write about stocks or other assets in which he or other family members has an investment. In such cases appropriate disclosure is made. Lumen Capital Management, LLC provides investment advice or recommendations only for its clients. As such the information contained herein is designed solely for the clients or contacts of Lumen Capital Management, LLC and is not meant to be considered general investment advice.

*Long ETF’s related to the S&P 500 in both client and personal accounts.  I reserve the right to change these investments without verbal, written or electronic communication at any time.

Post & Comment {10.15.19}

This is a new feature I added over the summer where I respond with a brief comment to something I've seen in the news or online.  The headline question I've highlighted.

On Filing Taxes.

Today is the actual "Tax Day".  Today is when we finally put tax season 2018 to bed as it's the day that folks who filed extensions back in April need to finally "fess" up to Uncle Sam.  In this day and age it involves pretty much anybody who's receiving a K-1.  What I'd do is establish two actual tax days.  The first would be in April for anybody filing a 1040ez.  The rest of America I'd give till October 15th.  Nobody, however, is going to listen to me on this so we'll just have to continue muddling along.

The President will be impeached.

Unlikely at this time but the odds may have moved a bit against him in the past week over his erratic decisions in Syria.  

On Hong Kong.

I believe there's only one way that story ends and it will likely be in tears.

On the market's rebound.

Stocks have staged a recovery from early October lows.  This mover has taken us back to the upper middle of the trading range we've been stuck in for months.  Probability would suggest we're going to need something more to power us through the resistance that's been in place a few percentage points higher.  Maybe earnings season will provide that.

On Illinois pension issues.

By one measure the total combined pension debt in Illinois is 203 billion.  My back of the hat calculation makes that about $15,750 for each resident in the state.  The city of Chicago enacted a series of tax hikes in recent years and still saw its pension liabilities rise from $23 billion dollars to $30 billion.  This is another story that likely ends in tears as eventually a combination of inability to find new tax revenue and taxpayer revolt is going to force a change in the system.  From my perch it's only a matter of time.  If you are a state or municipal employee in this state you need to understand this and calculate a likely reduction in future pension benefits or obligations into your financial planning.  This is especially true if you're under 40 right now.

Back Thursday unless events dictate otherwise.

In The Things Are Getting Better Department

Regular readers of this blog will note that I've not been in the economic doom and gloom camp these past few years.  While I've always said growth has slowed from the torrid pace we saw in 2017 and early 2018, I wasn't then and am still not in the camp that a recession has to inevitably follow from what we've been seeing.  I don't know if we're done with this slow growth phase but I think the probability of economic contraction, at least in the immediate future is probably not that great.  

In that vein go read at the link below the analysis of the 2018 report on income and poverty in the United States.  It will give you an economic reading much more positive than what you often hear out of the press.  Hard for me to believe the economy is in danger of contraction when many of the data points I see remain positive.  I'm not wedded to this position and if the facts change then so will I.  But the data to me isn't supportive of a recession in the immediate future and this report is an example of why I may be more positive than most regarding the economy.

Link:  "The Economic News From the Census Bureau is Very Good."

I will try to post Tuesday and Thursday next week if my schedule permits.  

Looking Ahead

Part of Blackrock's view of the upcoming 4th quarter:  Go read the whole thing here.

Geopolitics have come to the fore as a major driver of markets and the global economy, just one of the investing themes for 2019 we discuss in our Q4 Global investment outlook. Here are five forward-looking takeaways from the piece.

1. Trade disputes and geopolitical frictions have become key drivers of the economy and markets. U.S. trade policy is increasingly unpredictable. Recent geopolitical volatility – including attacks on Saudi oil infrastructure–underscores this message.

1. Persistent uncertainty from protectionist policies is denting corporate confidence and slowing business spending. Yet we still believe the economic expansion is intact, supported by dovish central banks and a robust U.S. consumer. This suggests moderate risk-taking will likely be rewarded – even as recent events reinforce our call for a greater focus on portfolio resilience.

1. We expect more Federal Reserve rate cuts, but believe markets are pricing in too much monetary easing. The European Central Bank materially exceeded market expectations on stimulus, launching a broad package with a combined impact that should be greater than the sum of its parts.

1. We do not believe monetary policy alone is a cure for the fallout from global trade tensions. Supply chain disruptions could deliver a hit to productive capacity that fosters mildly higher inflation even as growth slows. This complicates the case for further policy easing.

1. Overall, we favor reducing risk amid the ongoing protectionist push. We prefer U.S. equities for their reasonable valuations and relatively high quality; and the min vol and quality factors for their defensive properties. We like EM debt for its coupon income. We are overweight euro area sovereigns: a relatively steeper yield curve brightens their appeal even at low yields. And we see government bonds as important portfolio stabilizers.

Blackrock is one of the world's largest asset managers with trillions of dollars under management, mostly through their ETF division iShares.  Thus, their opinions are worth listening to.  Not sure what I think about their position on government bonds for individuals but everybody is allowed their own opinions.   

As I said last week, I'm dealing with a bit of a family issue.  Nothing very serious thank God but it is something that may force me to keep a more erratic schedule with this blog.  I will try to post Wednesday and Friday this week but hope all understand if I can't keep to that schedule.

Chart Talk {10.03.19}

It's been awhile since we've taken a look at a bigger picture chart of the market.  Today's chart is a weekly chart of the S&P 500's ETF, SPY.  It comes to us from Stockcharts.com although the annotations are mine.  I needed a view of the S&P 500 that's not as marked up as my regular charts tend to be.  What I'm showing you is an amplification of something I said last Friday.  I noted the following about the stock market under President Trump:

"In terms of the stock market, the S&P 500 is currently up about 40% since the President was elected back in 2016, excluding dividends.  Most of that gain came between his election and late January 2018.  Since that time the S&P 500 is up slightly under 4%.  We also experienced a 20% correction in the last quarter of 2018."

The gain I was discussing last week can be seen in the two blue circles on the chart.  The lower one shows where the market was when the President was elected and the higher circle shows where the market topped out back in early 2018.  That's the 40% gain I was talking about.  If you look at that circle and then the one farthest to the right then you can see the tepid gains we've experienced since then.  You can also see by comparing that other red circle going back to last year to the one furthest two the right that stocks have basically treaded water in the last 12 months.

Markets like this are why we think the dividend component to our ETF strategies is important.  Markets can tread water or even decline for certain periods of time but the dividends that are paid out our yours to keep and do with as you wish.

I am experiencing a family issue that may keep me out of the office for the early part of next week.  If I have to be gone then I will be posting again mid-week.  

*Long ETF’s related to the S&P 500 in both client and personal accounts.  I reserve the right to change these investments without verbal, written or electronic communication at any time.

Asset Returns

Asset returns through 9.30.19 via Capital Spectator.  A passive unmanaged, market-value weighted index of all the major global asset classes {excluding cash} would have returned 14% this year and about 4% over the past twelve months.

Back Thursday.

*Long various asset classes mentioned above via ETFs in client and personal accounts.