It Doesnt Take a Weatherman….

Volatility Continues

2018 is sizing up to be a very volatile year.  Including today, there have been 11 2% down days this year.  There were 0 in 2017, 0 in 2006, and 11 in 2007.

The major indices are currently holding their lows from late October and Thanksgiving week, approximately 2625 on the SP500.  The interim highs were just over 2800, a 6% swing.

The big question of the quarter is if the highs or lows will break first.  Volume today is extremely heavy, so if the markets can close in the top half of todays range, that should bode well for the next few days.

Looking at the big picture, the 200- and 100- day moving averages are flat, the 50 day is sloping downward.  We see the longer term trend is flat while the short term trend is down.  The 50 day and 200 day are at the same level and the 100 day is near 2815.   The averages are clustered together near current prices while the markets intraday are given to large swings in both directions.

Concurrent news topics are the recent good news item of a 90- day trade war truce, and the bad news topics are the problems with Brexit, and the arrest of the vice-chairperson of Huawei, China’s largest cell phone maker.  She is a Party member, daughter of the founder who is also a Party member and has close ties to China’s military.  Maybe not the best person to arrest if one is trying to negotiate a Trade Truce.

My forecast from late 2017 was for large swings in market prices and we have certainly seen this play out.  When compared to past market tops, 2001 and 2007, one can plainly see plus and minus 10% moves as the market tops out then finally breaks down.  Its my opinion that a bear market has likely started, and we have a few opportunities to sell at “high” prices, and get positioned for 2019.

Fundamentally while employment and earnings are good, these are backwards looking indicators.  These are the results of a good economy, not indicators it will persist.  Housing and autos are slowing; defensive stocks are outperforming growth stocks, and forecasts for 2019 earnings range from 0% to 8%, a far cry from 2018’s +20% earnings growth rate.

So, what to do?  Is it more difficult to ‘sell high’ or ‘buy low’?   One is fraught with fears of missing out, the other fears of further declines.   Selling into market strength and perceived ‘resolutions’ to our economic headwinds might be the best bet.  Especially considering the chart below, where in 2019 the global Central Banks will be withdrawing liquidity until further notice, while the Fed insists on raising rates further.

cb balance sheets QT

Keeping Pace with Inflation

Inflation has been called the silent killer of wealth. It’s rarely discussed and many dollar picretirement income strategies ignore it completely. But over time, the steady increase in the cost of living can have a profound negative effect on your standard of living in retirement.

How inflation destroys wealth

As this chart shows, even at a modest rate of inflation, your spending power could decline by nearly 40% over the next 20 years.inflationNo one knows what the future may hold for inflation, but we do know that the Federal Reserve aims to keep the rate between 1% and 3% per year, and it has reached double digits in the 1950s, 1970s and 1980s.

Happy Thanksgiving !

Please note our office will be closed on Thursday, November 22 and Friday, November 23, 2018 in observance of the Thanksgiving holiday.  Normal operating hours will resume on Monday, November 26, 2018.

Feel free to contact me should you have any questions or if you have specific needs that require special attention.  You can reach me at 239-287-3789 or via email at pmcintyre@namcoa.com.

Have a safe and happy holiday!

 

Due Diligence for Commercial Real Estate Transactions

Due diligence usually refers to the time after signing a contract that the buyer has to inspect the property and make a decision whether they want to buy the property or lease the property or otherwise go forward with the transaction.

It’s important during due diligence period that you gather all of your information. You have to get your inspections done, you have to get your environmental inspections done, you have to gather all the documents that relate to the property, you have to do your zoning checks and you generally have to be one hundred percent certain that you are going to go forward with this deal.

If you don’t gather all that information, when due diligence expires, your deposit money may become non-refundable. Before due diligence expires, you can still walk away. It’s what’s also called a Free Look Period. It’s important to have a good broker and a good team of professionals around you to conduct all of these inspections, gather all of the documents, tell you what everything means and advise you whether you should go forward or not. A good broker will quarterback all of these players and make sure that everything is done timely and keep you on track.

The scope, intensity and focus of any due diligence investigation of commercial real estate depends upon the objectives of the party for whom the investigation is conducted.

A  “Due Diligence Review” will address issues important to the Seller, Developer and Lender including:  

  • WHAT IS CONSIDERED TO BE “THE PROPERTY”Bank Property
  • PURCHASE PRICE & OTHER CONSIDERATION
  • TITLE
  • SURVEY
  • BUILDING INSPECTION
  • THIRD PARTY SERVICE AGREEMENTS
  • ZONING
  • EXISTING LEASES
  • PURCHASER FINANCING
  • ENVIRONMENTAL ISSUES

IRS Provides Guide for New Tax Law

Last week the Internal Revenue Service (IRS) issued a new publication to help taxpayers learn about the recent tax reform law and how it affects their taxes.  The IRS estimates they will need to create or revise more than 400 taxpayer forms, instructions and publications for the filing season starting in 2019 — more than double the number of forms it would create or revise in a typical year.

While the 2018 Tax Cuts and Jobs Act includes tax changes for both individuals and businesses, this publication  —  Tax Reform Basics for Individuals and Families— is specifically geared to individual taxpayers. According to the IRS, the publication breaks down the law in easy-to-understand language and highlights the changes that taxpayers will see on their 2018 federal tax returns they file in 2019.

Specifically, the new guide provides important information about:

  • Increasing the standard deduction
  • Suspending personal exemptions
  • Increasing the child tax credit
  • Adding a new credit for other dependents
  • Limiting or discontinuing certain deductions

IRS Tips to Prepare for 2018 Federal Tax Filing

Federal Income Withholding

What You Need to Know

  • Due to tax changes in the Tax Cuts and Jobs Act, many taxpayers’ withholding went down in early 2018, giving them more money in their paychecks in 2018.
  • You may receive a smaller refund – or even owe an unexpected tax bill – when you file your 2018 tax return next year, especially if you did not adjust your withholding after the withholding tables changed.Other changes that affect you and your family include increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, adding a new credit for other dependents and limiting or discontinuing certain deductions.

What You Need to Do

  • Use the IRS Withholding Calculator to perform a paycheck checkup to help you decide if you need to adjust your withholding or make estimated or additional tax payments now.
  • Use your results from this calculator to submit a new Form W-4, Employee’s Withholding Allowance Certificate, to your employer.
  • Make estimated or additional tax payments if the withholding from your salary, pension or other income doesn’t cover the 2018 income tax that you’ll owe for the year. Form 1040-ES, Estimated Tax for Individuals also has a worksheet to help you figure your estimated payments.

To download IRS Publication 5307, Tax Reform Basics for Individuals and Families, Click here.

Market Volatility–October

I believe we’re seeing a large repricing of growth expectations. The one time tax reform boost will wear off into next year, and higher borrowing costs, fuel costs are reducing discretionary income. 

In addition there is a great deal of leverage in the markets which will exacerbate declines. 

Often, at the end of bull markets/beginning of bear markets we will see relatively large price movements, 6-12%, down and up. I believe this correction has a good chance of bottoming or at least slowing in the immediate term, and  it’s bounce back could be half the decline, maybe more, which will be several percentage points. 

 

Focusing on keeping portfolio declines to the single digits while raising cash to be able to redeploy later can aid longer term returns–one has to have cash in order to buy low!   There is a very large amount of ‘bond shorts’ in the market which could set up a large ‘short squeeze’. Bonds were positive today. This is reminiscent of other recent periods when many bond speculators saw bond prices move very rapidly against them (UP) as they rushed to cover their deteriorating short positions.

 

Inflation scare is not the culprit here as inflation rates are slowing in several areas.  Something recent is that with the Fed raising interest rates, the yield, on 1-year and longer bonds is greater than inflation,  a positive “real rate” which is new to this economic cycle and takes a lot away from the ‘bonds dont pay so buy stocks’ argument.  The Fed further reiterated that it currently plans to continue to raise rates through 2019–even though we have already raised rates MORE than in past rate-raising eras.  I will have a chart of this in my Observations and Outlook this weekend.

Please reach out to me with any comments or questions.

 

Adam Waszkowski, CFA