@theMarket: All Eyes on the Fed
It was a week of chop. That was to be expected, given it was the first week of second-quarter earnings results. While some individual big-name stocks made substantial moves, the overall indexes traded up and down but ended the week about where they started.
It was largely what I predicted would happen. The same will apply to this coming week with all eyes intently focused on the July 31 meeting of the Federal Open Market Committee taking place next Wednesday. Investors expect the Fed to cut the Fed Funds interest rate by at least one quarter percent. Let's hope they do.
In the meantime, aside from earnings announcements, investors were confronted with some bad news out of Washington. After months of waiting, the U.S. Justice Department finally announced that the U.S. government has launched an investigation into the largest U.S. technology companies. Specifically, authorities will be trying to determine if the likes of Facebook, Apple, Google and Amazon are guilty of anticompetitive practices. If they are found guilty, that could lead to antitrust charges.
Actually, I was impressed with how well the markets held up given that the above named "FANG" stocks have been the market leaders for years. The four companies represent a substantial weighting in many of the U.S. indexes, such as the S& P 500 and NASDAQ indexes. While no one knows how long until, or even if, any of the companies will ever be charged, the investigation will cast a pall over the group for some time to come.
So, while investors grabbled with the bad news from this Justice department, over at the U.S. Treasury, Stephen Mnuchin, its Secretary, announced some good news. Both he and the White House's Chief Trade Representative, Robert Leigthizer, are off to China Monday to resuscitate high-level negotiations with their Chinese counterparts on trade.
While traders cheered the China news, my own belief is that talks are going to become even more difficult now that China's Trade Minister Zhong Shan has joined their negotiation team. Shan, while regarded as capable, knowledgeable, and professional, is also considered a "hard-liner." As such, he could make discussions even more difficult and probably will. That might fit into the president's game plan.
It is my own belief that Donald Trump does not want a breakthrough deal announced quite yet. One of the chief reasons investors are expecting the Fed to cut interest rates is the fear that an escalation in the U.S./China trade war would cause havoc with our economy. Until there is a deal, that China threat is hanging over our economy.
Trump is keenly aware of this. The president is also on the record in demanding that the Federal Reserve Bank cut interest rates now in order to grow the economy. But that does not mean a recession is looming in front of us. Friday's second quarter Gross Domestic Product (GDP) report came in at 2.1 percent which was above the expected growth rate of 1.8 percent. While consumer and government spending were strong, business investment slowed.
The probability of a U.S. recession over the next 12 months is less than 33 percent, according to research released by the New York Federal Reserve Bank. As such, the Fed's expected interest rate cut next week (if it occurs) is believed to be little more than monetary "insurance" just in case talks break down, in which case, Trump has threatened to then levy another 25 percent tariff on the remaining $350 billion of Chinese exports to the U.S.
If the Fed does cut rates, we will see what the president's next move will be. Of course, that is not entirely within his control, since China will have an equal say in what kind of deal is struck and when. As for the markets, enjoy the ride, but be aware that some time soon we could see another 5-7 percent pullback.
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The Independent Investor: Make Vietnam Great Again?
Funny things happen when our government starts tinkering with the economy in a big way. Unpredictable results, unintended consequences, and confusion often result. U.S. tariffs on China is a case in point.
Now to hear it from the White House, slapping tariffs on imports from China is going to change the entire equation of how companies do business. As it becomes more expensive to import from China, Donald Trump promised that other foreign countries were going to flock to the U.S. creating more jobs, more tax revenues, and generally become a big part of "making the U.S. great again."
So far, the president is half right. Over 50 multinational companies have announced plans to shift production out of China as a result of the 25 percent tariffs placed on $200 billion of Chinese imports. That trend is expected to accelerate if (and when) the U.S. levies even higher tariffs on China, since President Trump is threatening to add duties on another $325 billion of Chinese goods.
American computer makers such as Dell and HP plan to move as much as 30 percent of their computer notebook production out of China. Apple is assessing a similar move with 15-30 percent of their Chinese production. However, none of those companies intend to bring that capacity back to America. Vietnam, India, Thailand, and other Southeast Asian countries are the intended new centers of this manufacturing.
And it is not just non-Chinese companies that are re-thinking their production strategies. Several Chinese companies are also hedging their bets and shifting their businesses elsewhere, most notably to Vietnam. The Chinese government, in response, is doing all they can to retain and attract companies to their shores. Last month, the Chinese said they would ease restrictions on foreign investment in seven sectors, including the energy area. The financial sector is also an area that the government plans to open up to foreign investment.
Since Vietnam shares a border with China, it has benefited the most from the trade war. It is fast becoming a center for many manufacturers of electrical and electronic equipment. Two of the world's technology behemoths, Korea's Samsung Electronics and Japan's Kyocera, are making printers, smartphones and a variety of other technology products in the country.
The rush to establish new supply chains has been so huge, that it has boosted the GDP of Vietnam last year by almost 8 percent. The country's trade surplus with the U.S. has exceeded $20 billion since 2014,.and last year, it hit the highest level of surplus (almost $40 billion) in several decades.
Vietnam's windfall has not escaped the ire of the Trump Administration. The president has called the country "the single worst abuser of everybody" when it comes to unfair trade. The U.S. Treasury has recently added Vietnam to its watchlist of countries it is monitoring for possible currency manipulation. It is also looking into claims that Chinese exporters are routing their exports through Vietnam, then re-labeling their products with fake "made in Vietnam" labels to avoid the U.S. tariffs.
Vietnam is simply an example of what can happen when governments micro-manage trade and the economy. Our actions have succeeded in making Vietnam great again, something that doesn't sit well with me, a Vietnam Vet.
In response, sure, we can plug the leak in the dike by placing tariffs on Vietnamese imports, but then what? Diverting trade away from Vietnam won't mean more jobs or benefits for America. The tariff trade will simply be re-routed to other countries that can make them for less and have the skilled workers to do the job. Nonetheless, for those without a handle on how global economics and trade truly work, slapping tariffs on countries plays well with Main Street and that's what the president is counting on.
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The Independent Investor: Paid Family & Medical Leave Overdue
Paid family and medical leave are long-overdue in this country
What do the United States, Papua New Guinea and Oman have in common? Those are the only three countries in the world that do not legally obligate employers or taxpayers to pay for maternity leave.
Many American businesspeople will hide behind a knee-jerk response to the above statement: "We are a free-market society," they will argue, "and paid leave is paramount to just another form of socialism."
Good try, but that old argument is no longer based in facts. Free markets have given way to corporate socialism in this country, while corporations are now legally considered to have the same rights as individuals.
As such, individuals have a moral responsibility to protect and care for future generations. They have an obligation to society. Giving paid leave to American workers, not only to deliver and care for their young, but also to provide income during serious medical conditions, cannot be left to the whims (and greed) of our corporate community. As it stands, after decades of waiting, a mere 15 percent of companies have voluntarily instituted paid leave to their workers, according to a 2017 Bureau of Labor Statistic report.
The fact that for the last several years, corporations have banked stupendous profits and now carry more cash on the books than ever before just makes their failure all the more apparent, if not disgusting. To be fair, there are some companies such as Microsoft, IBM, Netflix, American Express, Citigroup and, of course, Berkshire Money Management that do pay for parental and medical leave.
Take my own case as an example. As many readers are aware, I have had some serious medical problems over the course of the last few years. Two knee replacements kept me out of work for about five months. And then there was that bout with prostate cancer in 2017. Not only did the company pay me while I was out, but management sat in the waiting room with my wife throughout my surgeries.
Can you guess how I felt when I returned to work? I have spent the last two years working like a maniac to not only make up for that time loss, but also to show my gratitude for all the company has done for me. And I'm not the only one.
Our compliance officer, Jayne, within her first year of employment at BMM, had her second child, Marigold. Once again, BMM not only paid for 13 weeks of maternity leave, but went the extra mile when Marigold refused to take the bottle. We hired a nanny to baby-sit in the office for weeks and weeks so Jayne could come to work with her child until she was over that hurdle.
"Both my morale and productivity took a great leap forward as a result," Jayne said. "Knowing that both I and my child were so well-supported reduced my worry dramatically and allowed me to work that much harder here."
As of today, only six states — California, New Jersey, Rhode Island, New York, Washington, Massachusetts — and the District of Columbia have passed paid family-leave programs. Massachusetts, which passed their legislation last year has delayed implementation of their program until October 2019.
Their law provides workers with 12 weeks of family leave and 20 weeks of personal medical leave. Workers on paid leave will earn 80 percent of their wages, up to 50 percent of the state's average weekly wage, and then 50 percent of wages above that amount.
The employer pays at least 60 percent of the medical leave contribution required for each employee, but none of the family leave contributions. The worker picks up the rest via a fund which will tax an employee's earnings.
Although the Federal government does have a Family and Medical Leave Act (FMLA) passed in 1993, it only protects the worker from being fired or excluded from a company's group health insurance coverage and then only for a certain time period.
The entire charade of hiding behind some mythical form of capitalism to justify this failure by our nation is inexcusable. Eighty-two percent of participants in a Pew Research Center poll believed new mothers should have paid time off while 69 percent said the benefit should apply to fathers as well.
Of course, simply because the majority of Americans want, even demand, something from their government is no guarantee that Congress or the president will listen. It's campaign season, so let's make this an issue for the candidates.
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@theMarket: Looking Ahead
Will the second half of the year be as good as the first half for the markets?
The S&P 500 Index finished up 18 percent for the six months ending June 30. That was the best first half since 1997. Historically, that kind of return is three times the gains investors can normally expect from the market in an average year. The chance of a repeat performance in the next six months is, at best, remote.
That doesn't necessarily mean this is as good as it gets for stock investors. My near-term target for the S&P 500 Index is somewhere around 3,050, which is a further 4 percent gain from here. From my vantage point, as long as interest rates continue to decline and the Fed stays at least neutral, we go higher.
For the time being, the China trade tariff worries are off the table. As I predicted last week before the G-20 meeting, Donald Trump adhered to his "speak loudly, but carry a little stick" foreign policy. He relented on a number of issues, including holding off on any further tariffs on China, at least for the time being.
While the markets rallied on Monday as a result, they quickly gave back their gains since investors are beginning to learn that not everything that our president says will necessarily be accurate, or when it is, his statements are almost always an exaggeration of reality. The Fed, on the other hand, is a different kettle of fish.
You might ask why the markets are continuing to rise when economic growth here and abroad continues to slow. First, recognize that the economy and the stock market are two different entities. What may not be good for Main Street (slowing employment gains, sluggish business investments, weakening quarterly earnings), in this case, increases the chances that the Fed will cut interest rates as early as this month and that would be good for the markets.
At this point, despite the Fed's refusal to confirm or deny an interest rate cut, the financial markets are convinced they will cut. The odds of a Fed interest rate cut by July 31 have surged to 100 percent. While 72 percent of traders are counting on a quarter-point cut, almost 28 percent of traders are expecting a half-point cut. That in itself is astounding, since the Fed has not cut rates by that much in many years. Over 60 percent of bond traders are also counting on another rate cut as early as September, according to CME Fedwatch.
Whenever the markets are unanimous about anything, I usually feel the hairs on my neck begin to tingle. Given that the stock markets are climbing, based on that interest rate assumption, it behooves the investor to ask what will happen if everyone has it wrong and the Fed doesn't cut? The short answer would be look out below.
And as we close out this holiday-shortened week, remember that when we get back second-quarter earnings season will be upon us. Right now, consensus for second-quarter earnings results for the S&P 500 is a scant 0.2 percent. Third quarter estimates are not much better ( 0.7 percent gains). What is concerning to me is how corporate managements are going to spin the impact of the existing tariffs on their bottom line.
In past quarters, analysts have ratcheted down their earnings expectations to such a low levels that investors were pleasantly surprised when companies announced better than expected earnings and sales guidance. It could happen again, so let's say I am neutral on earnings results until we see how many beats versus misses happen early on.
In any case, it appears the administration is bringing out the Big Guns to pressure the Fed into cutting rates this month. Don't underestimate Trump's ability to influence events in that area. Trump believes that the Fed should be his policy instrument and an extension of his presidential power in the financial arena. He has already threatened to fire, replace, or demote the Fed's Chair, Jerome Powell (his appointee), several times.
In a further attempt at bringing the Fed under his control, this week Trump has proposed two more additions to the Federal Reserve Board, Christopher Waller and Judy Shelton. Both candidates appear to be far less independent than past candidates for the job. One of the two (Shelton) has already expressed a desire to see interest rates in the U.S. at 0 percent within the next year or two. That should be music to the ears of the president.
In any case, enjoy the markets, enjoy the Fourth of July, and I'll see you after the holiday.
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The Independent Investor: Home Equity Can Pay for Long-Term Care
A home equity conversion mortgage (HECM) might simply be a fancy term for a reverse mortgage, but there are an increasing number of advisers and planners who are using them for an entirely different strategic planning purpose.
If you ask most couples in their 60s and beyond what is one of the greatest fears for their future, I'm betting that going bankrupt and/or losing their home and life savings as a result of nursing home bills would be right up there near the top.
We all have horror stories to tell of how one or both spouses needed to go into a nursing home and the costs drained all their assets and then some. Before they could apply for Medicaid, they had to go through everything they own — their home, their retirement and savings accounts — all gone. Only then could they qualify for government assistance, which usually means and ending up on a Medicaid waiting list for a remote, tiny room in a facility for the remainder of their lives.
That, my dear reader, is not the kind of "living the dream" Americans have in mind when they think of their future retirement years. Now, of course, the knee-jerk answer to this ever-present nightmare is long-term care insurance Any financial planner worth their salt will tell the average consumer to buy insurance, but there is lots of downside in following that avenue.
Let's take a 65-year-old couple shopping around for this insurance. For the husband, it will probably cost him double what it will cost his wife: A premium of $4,543.76, while the wife pays $2,825.97. That comes to $7,369.73 per year for the couple. And that is only if their health qualifies them for insurance in the first place. These are not fictitious numbers, but taken from a recent Cross Insurance estimate for these 65-year-old sample customers.
In exchange, you get three years of coverage, with a $5,000 monthly benefit (up to $180,000 total) in home care benefits. You will then have to re-new the policy every three years (most likely at higher premiums), regardless of whether or not you used the coverage. For a retired couple watching their finances, living off Social Security and, hopefully, some retirement savings, that's a fairly high expense. In addition, there are many facilities that charge far more than $5,000 a month for the care they give.
However, over the past few years, a number of financial planners have discovered a way to tap into a retiree's home equity in the event that the worst happens and one or the other of you needs outside care. In its simplest form, a couple (of which at least one must be 62 years of age or older), can take out a HECM, or what amounts to a reverse mortgage. But instead of receiving a standard monthly payment, you elect not to take these distributions until the day you need the money to pay for outside nursing care.
Let's take an example where you own your own home, debt-free, worth $500,000. The mortgage company does an appraisal and determines they will loan you half of the amount in an HECM. Like any mortgage, you will be charged fees (origination fees, third party fees, etc.) which comes to about $17,000 or about 7-8 percent of the loan. Like any mortgage, you are still responsible for paying the taxes on the home while continuing to maintain the dwelling, etc.
Those payments you would normally receive from a traditional reverse mortgage are, instead, accumulated in your account at the mortgage company year after year. Think of them as a credit line, which grows and grows. Every year they accumulate, you are paid a half percentage point per annum above the yearly London Inter-Bank Offered Rate (LIBOR interest rate). Currently, LIBOR is trading at about 4.5 percent, plus the half point that you receive above that equates to about 5 percent. These payments to your account accumulate at this risk-free rate until you use them.
Better still, the underlying worth of your house can go up or down but has no impact on your future payments. The primary risk you take is that LIBOR fluctuates, causing the payments you receive to rise or fall over time.
The payments keep working for you until such a time you need them. At some point, the inevitable may occur. One or both spouses needs some form of assisted living. In that case, you simply direct the mortgage company to begin paying monthly sums. If you want, you could request the reverse mortgage payments correspond with the monthly expense of the nursing home. Best of all, these payments are tax-free.
As long as one spouse remains in the home, the house is still yours until the spouse dies or has not lived in the property for the last 12 months. At that point, the house reverts to the mortgage company. If, in the meantime, you still have equity in your home, your beneficiaries receive the remaining proceeds.
But what if you never need to go into a nursing home? Conceivably, the credit line you have accumulated can grow until it exceeds the value of your home. If so, you simply call the company and ask them to cut a check for part or all of your credit line. The point is that the HECM is your long-term care insurance, but it pays you rather than the reverse. Your spouse keeps the house, the Social Security payments, the retirement savings, etc. just like before.
In my next column, we will examine other uses of a HECM and dig into the details of the long-term care concept. Stay tuned.
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