Client Note August 2020

September 3, 2020

August saw the S&P500 gain approximately 7% on the month, making 5 positive months in a row; and the last 9 of 10 days have closed.  Over the past few hours today, September 3, the S&P 500 has fallen 3.5%.

While the equity markets pressed on in their upward trajectory, gold fell just over 1% and long dated bonds saw a decline of just over 5%, while the broader bond market fell less than 1%.  Combine the various asset classes and our average moderate portfolio for August was flat to slightly up on the month.

Looking ahead, valuation on the market have become extreme-ier than normal as analysts forecast full earnings recovery plus some.   The Forward P/E ratio, the price you pay per $1 of earnings is just under 23x.   This compares to 19x in January 2018; 26x in 2000; and a mild 15x in 2007.   The economic recovery has been V-shaped.  The most recent high-frequency economic data coming in is showing a reduction in the pace of growth coming out of the second quarter.  That is, the right side of the “V” is getting rounded off and is lower than before the pandemic shut down.  This general lower level of economic activity will likely persist well into 2021 as localized covid-19 outbreaks and continued travel restrictions prevent the hardest hit areas from recovery.  Fuel usage by airlines is off by 55%, July 2020 compared to July 2019.

Gold and bonds have been in an extended sideways consolidation going back and forth in about a 6-7% range since mid-June. Staying over $1900/oz is critical.  Rates/bond prices are likely to remain range bound but may see a test of recent highs (approx. +4-5%).  Today’s stock selloff may mark the beginning of the pre-election volatility.  And if we see a total 7-10% correction should give us the opportunity to look at more individual names again, using the large cash position that we have.  Either way the election goes, once settled, should be constructive, as the market dislikes uncertainty.

Fortunately(?), the S&P500 has a very tight relationship to the Fed’s balance sheet which went from $800billion in 2007 to $2.2trillion end of 2008.  The Fed’s balance sheet continues to rise to $4.5trillion by end of 2014, after which was a gradual decline to a low of $3.7trillion in August of 2019, just before the recent dollar funding crisis in September 2019.  Over the past year, the balance sheet grew from $3.7trillion to   $7trillion recently.  The Fed added $3.7trillion over 6 years to get prices back up after the Great Financial Crisis; and now has added again, $3.3trillion, most over the past 6 months, to keep asset prices high.  I see no reason why the Fed or other central banks would choose to even hint at reducing support for markets.

The need for central banks to continue to “add liquidity/support” to financial markets is, at its core due to lack of savings, which flows from income (for individuals) or profits (from corporations).  Without natural savings from the economy, new money must come from central bank “balance sheet expansion”.   Which dovetails into the idea that low rates beget low growth.  An extended period of exceptionally low (even negative) rates has resulted at best, in below average economic growth.  Longer term, rising aggregate income from higher interest rates (someday) and increase in aggregate incomes should support longer term growth and healthy stock prices.  In the medium term we need to be aware of and take advantage of, larger swings (up and down) in the markets until that takes hold again.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note July 2020

After a brief pause in June, financial markets continued their climb, trying to get to even on the year.  Of the major indexes, only the tech-heavy NASDAQ has managed to make new all-time highs.  The discrepancy across indexes is significant.

Off its all-time high             year to date price return

The Dow:                              -10% (Feb 2020)                                  -7%

S&P 500                                 -4% (Feb 2020)                                 +1%

Russell 2000 (small cap)    -12%   (Jan 2020)                               -10%

NASDAQ                                  -3% (July 2020)                                 +20%

EAFE (Eur/Afr/Far East)      -15%  (Jan 2018)                                 -8%

 

Inside the NASDAQ, the top “6” holdings are Apple, Microsoft, Amazon, Facebook, Alphabet A shares and Alphabet B shares.  These 5 stocks make up 44% of the index.  What this means is that only a handful of stocks, in one sector, are keeping the overall indexes up.  One can say, “so goes tech, so goes the markets”.    US mega cap growth/tech has been the only game in town.   More recently tech has weakened against the rest of the market.   If tech loses it dominance without another sector or two to take the reins, equity markets will have a bumpy second half 2020.

Portfolios I manage continue to do very well.  Gold is in the news a lot recently.  Over the past 15 months, gold has dramatically outperformed equity markets, and climbed 65% since November 2018.  The last 15% of that has come in the past two weeks.  Trimming and taking profits is on the schedule for August.   The individual stocks I choose from time to time have become a mixed bag.  IRBT and APRN recently reported significant upside earnings surprises, only to be sold off hard.  I am seeing this in several areasIts feeling like a ‘sell the news’ kind of market.  After a 50% climb since the March lows, its not inconceivable that stocks will take a breather.  Perhaps even give back some as we adapt to living with Covid19.     Clients can probably observe the steps I have taken to reduce exposure and take some profits, so that if/when we get a correction, it should not be too painful.

July 30, 2020 has the potential to be a historic day.   GDP for the second quarter 2020, covering March 30 through June 30 will be released.  Current estimates are to see a contraction in US GDP of -30%.  This would be the worst quarter since Dec 1946 and sets up the worst year since then as well.  While this is widely known to people who follow it, I am sure it will be a shock to some, and widely covered in the financial press.   In addition, all the tech stocks mentioned above will report earnings.  They will all be very profitable, but if this is indeed a ‘sell the news’ market, beware.  Microsoft already reported on July 22, beating estimates, and was sold off by 6%, recovering only a part of that decline this past week.

The economy is not coming back as fast as hoped and is already showing signs of levelling off.  Roughly 10% of our economy has disappeared (hospitality/tourism).   As long as the Fed promises, and CONTINUES to inflate the monetary base, financial markets can remain elevated However, if a small correction gets out of hand, the Fed has little influence in the very short term—and not much new to offer.  .  The real economy however will not come back without greater spending from consumers and businesses—either through earned wages, or stimulus, or loans/credit.

 

Adam Waszkowski, CFA

Growth & Income Portfolio Update

Here is a link to an overview of the NAMCOA Monthly Needs Portfolio™, whuich is an actively managed equity long portfolio with an objective of providing long term capital appreciation and dividends.  NAMCOA 06-30-2020 2nd Q 2020

The Portfolio adheres to a simple strategy of investing in a weighted portfolio of 25 stocks consisting of sectors that the average consumer spends monies on each month. Even though the portfolio has some companies with retail distribution, the portfolio is not weighted to that sector and is not focused on the retail end, but is mainly made up of manufactures, processors, and service providers for each one of the sectors selected. The Portfolio focuses primarily on U.S large-cap value stocks, but can invest in mid to small cap equities and foreign companies as well. The portfolio does not use any leverage.

Here is a link to the Portfolio Managers ecomonic outlook: Growth and Income – Portfolio Outlook 7-17-20

For more information, contact Walter Hester at whester@namcoa.com 

Happy 4th of July!

We know the past couple of months have been challenging for us all, but hopefully this independence day weekend will help bring some joy into the lives of you and your loved ones. Stay safe and have a great weekend!

As always, we’re here to answer any portfolio questions or discuss your planning needs. Click here to contact us or simply call us at (800) 477-5525 to set up an appointment with one of our investment advisor representatives or financial planners.

Happy Fourth Of July from the Naples Asset Management Company Team!

Client Note June 2020

As we close June and the first half of 2020, financial markets continue their rebound from the first quarter’s corona-crash.  In very volatile markets there will be many “best/worst X since Y”.  The close at 3100 on the SP500 reflects the best quarter in the sp500 since 1987, with a gain of 19.9%.  After a 36% decline off the all-time high and subsequent 40% gain, puts the SP500 at -4% year to date and -9% below the all-time highs.  Our average moderate portfolio gained almost 15% for the quarter and is up 4% on the year.  While further upside is possible but in the short term, US equity markets are in a downtrend since June 23.  On a larger time, frame, we have downtrends since June 8 and off the highs on February 19thGetting over 3200 should open the door towards 3400+, but if we lose the 3000 level, my medium-term outlook will change.  Our individual stocks continue to do very well.

International equities continue to sorely lag US equities.  European shares gained 2.5% on the month, and currently sit at -14% year to date.  Japan gained 1% and China ebbed 1.6% on the month and both fall well short of the SP500 at -7% and -9%, respectively, year to date.  Emerging markets were the winner on the month at +6% but also have made far less progress recovering post-crash, coming in at     -11% year to date. We sold the last bits of emerging and international equities towards the end of the month.

In credit markets, treasuries have dominated over all other areas of the bond markets.  The long bond/20-yr treasury ebbed by 2.25% during the month, is flat for the quarter and up a massive 20% for 2020.  Even with equivalent maturities, treasuries are outpacing investment grade and junk bonds by 5% and 17%(!) respectively.  The investment grade corporate bond etf, LQD is up 5.1% ytd, while junk bond etf, JNK is -7.7% ytd.   This disparity is due to the rapid credit deterioration seen during this severe recession.  Given this, and spike in covid19 cases, its unlikely rates will rise appreciably in the near term.  Our long treasury position was reduced late March at slightly higher prices.

Economic data released in June continue to show improvement over the April/May shutdown (naturally).    The pace at which the economy would rebound after reopening is a hot topic.  We are seeing rapid improvement in some areas but the estimates versus data are showing extremely poor forecasting ability by economists in the short term.  I am watching year over year data to see how much rebound we are getting.  If July and August data show similar growth as May and June, we could see 90% of more of the economy back by Labor Day.  The trend of economic recovery is far more important than the level.  Ideally, we will trend higher and higher until full recovery.   At the end of July, we will get the first read on GDP for the second quarter.  The Atlanta Fed current estimate has risen to   -36%. 

Looking forward, the recent spike in virus cases has opened the door to the risk that the re-opening of the economy will be slowed, as we are more likely to see county or regional shutdowns.  Continued support from the Fed and continuation of stimulus programs are critical.  A bit higher in equities may provide some momentum to get to 3400 and Fed intervention can keep rates low.

Adam Waszkowski, CFA

IRS Announces CARES Act RMD Relief

If a retiree took a required minimum distribution but is having second thoughts in the wake of COVID, they are now able to roll it back.

The Internal Revenue Service announced Tuesday that anyone who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts can take advantage of the CARES Act RMD waiver for 2020.

The 60-day rollover period for any RMDs already taken this year has been extended to August 31, 2020, to give taxpayers time to take advantage of this opportunity.

The IRS described the change in Notice 2020-51 (PDF). The Notice also answers questions regarding the waiver of RMDs for 2020 under the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act.

The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020. This waiver does not apply to defined-benefit plans.

Exempt from certain rulesIRS Logo

In addition to the rollover opportunity, an IRA owner or beneficiary who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by August 31, 2020.

The notice provides that this repayment is not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.

The notice provides two sample amendments that employers may adopt to give plan participants and beneficiaries whose RMDs are waived a choice as to whether or not to receive the waived RMD.

The RMD waiver provided by the CARES Act is similar to the 2009 RMD waiver provided by section 201 of the Worker, Retiree, and Employer Recovery Act of 2008.

Understanding Tax-Deferred Exchanges

rainbow over NYCA new education piece designed for Accredited Investors, on Understanding Tax-Deferred Exchanges was released today by DST Investments, LLC.

To view or download, click here.

DST Investments, LLC is a Registered Investment Adviser (RIA) that specializes in only DST Transactions.  DST works to solve portfolio and 1031 business problems, takes a consultative approach to every client engagement, and find actionable solutions that will help the client achieve the best business or portfolio outcome.

Taking a fiduciary approach to DST transactions allows us to pursue a course of action that will better align the interests of the client.   For more information, contact Al DiNicola, MBA  adinicola@dst.investments

Can a Second or Vacation home qualify for 1031 Exchange?

Back in February of 2008, the IRS established guidelines for determining whether a vacation home qualifies for a 1031 Exchange. 

Revenue Procedure 2008-16 sets forth the safe harbor guidelines as follows:

RELINQUISHED PROPERTY

  • The holding period for the vacation home is at least 24 months immediately before the exchange;
  • For each of the two 12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  • The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

REPLACEMENT PROPERTY

  • The holding period following the exchange is at least 24 months;
  • For each of the two 12-month periods, the vacation home is rented to another person at a fair rental for 14 days or more; and
  • The homeowner limits his use of the vacation home to not more than 14 days or 10% of the number of days during the 12-month period that the vacation home is rented at a fair rental value.

When contemplating an exchange, one of the most common questions real estate investors ask is: Will my mixed-use vacation property be eligible for an exchange?

Thankfully, the answer to this question is “yes.”Instead, like other revenue procedures issued by the IRS, is a guideline intended to supplement the agency’s interpretation of Section 1031.  If taxpayers follow this procedure, the IRS should not challenge the vacation home’s eligibility as relinquished property. Abiding by this document will mean avoiding a legal challenge, but this doesn’t mean going outside the bounds of 2008-16 will necessarily result in a failed transaction.

What Rev. Proc. 2008-16 is saying is that the IRS will not challenge the “holding requirement” of Section 1031 if taxpayers follow its guidelines. The potential issue that could be presented by vacation homes is the holding requirement. That is, there could be a dispute over whether such property satisfies the requirement that relinquished property must be “held for” investment.  If taxpayers disobey Rev. Proc. 2008-16, the holding requirement may still be met, but the issue can only be resolved on a case-by-case basis. It is not a quantitative requirement, as we know, but a qualitative one, and it demands an individualized analysis by the court. The language and appearance of the procedure may seem authoritative, but accountants should be aware that it is not a set of strict rules.

Despite the confusion the above may seem to cause, the guidelines are straightforward: For vacation homes used as relinquished property, taxpayers should own the property for at least 24 months prior to the exchange. For replacement property to be used as a vacation home, it should also be held for a minimum of 24 months.These ownership periods are referred to as “qualifying use” periods, which operate just before the exchange (for relinquished property) or just after it (for replacement property). In other words, if a taxpayer owns a relinquished property vacation home for five years, only the 24 months immediately preceding the exchange constitute the qualifying use period.Taxpayers must rent the home at a fair market value for at least 14 days in each of the two 12-month time segments which make up the 24-month qualifying use period.

Also, their personal use of the home cannot exceed the greater of 14 days or 10 percent of the total days the home is used as a rental during each 12-month segment. These guidelines apply to both relinquished and replacement property. Thus, the IRS is making it clear that the holding requirement will not be contested should these guidelines be observed.DST Investments is a registered investment advisor that specializes in DST 1031 Consulting services. For a complimentary consultation, please visit us at www.DST.investments or email us at support@dst.investments.

 

 

 

 

DST Investments Launches News Service

DST Investments, a Registered Investment Adviser (RIA) which specializes in only DST transactions launched a dedicated news site to help accredited investors find educational materials and unbiased updates related to the DST Market Landscape.

DST Investments works to solve portfolio and 1031 business problems, as a fiduciary, and takes a consultative approach to those in need of a 1031 or DST transaction.   This allows us them to pursue a course of action that will better align the interests of the client

For more information, contact Al DiNicola, MBA  adinicola@dst.investments  or visit www.DST.investments.