Category: Finding Benjamin

April 15, 2024

Copper is quickly becoming a critical metal in the transition towards renewable energy and electric vehicle infrastructure. While the industry projects tremendous growth in demand for copper, the supply of copper has faced challenges. Pricing dynamics and improving margins will create new production and opportunities for investors to capitalize on the current imbalance. 

Projected Growth in the Copper Sector 

Recent projections indicate a robust expansion in the copper sector in the coming years. With the increasing adoption of renewable energy technologies such as solar panels, wind turbines, and electric vehicles, the demand for copper is expected to soar. Demand for copper is projected to surge, driven primarily by the rapid growth of renewable energy infrastructure and capacity.   

BloombergNEF, March 2023 

Copper’s Crucial Role in Renewable Energy 

Copper is the lifeblood of the renewable energy revolution and is vital in transmitting, distributing, and storing electricity generated from renewable sources. From conducting electricity in solar panels and wind turbines to facilitating energy storage in batteries, copper is indispensable to the functioning of clean energy systems. This also includes replacing existing inefficient grid infrastructure. The current grid runs inefficiently; according to a report done by Inside Energy, we lose between 2.2 and 13.3% of energy in transmission and distribution. The role copper will play is to enable material upgrades to a more innovative and efficient grid. 

Moreover, as governments worldwide commit to ambitious climate targets and transition towards carbon-neutral economies, the demand for renewable energy technologies is set to skyrocket. This increased adoption of clean energy solutions will further fuel the demand for copper, making it a critical commodity in the fight against climate change. 

Rising Production Likely to Meet Demand for Copper Over Time 

We anticipate that industry leaders will invest in expanding their production capacities and improving operational efficiencies to meet the growing demand for copper. Today, the cost of producing copper ($2.41/ pound) is well below the Spot price ($4.34/ pound), implying an 80% profit margin.  Despite current projections, increasing profit margins will likely spur more excellent production and discoveries across the industry.  See below from Bloomberg New Energy Finance 9/1/2022. 

As such, we believe they are well-positioned to capitalize on the opportunities presented by the burgeoning renewable energy sector. 

Seizing the Opportunity in the New Power Fund 

In light of the projected growth, current supply shortage, and significance of the copper sector in the renewable energy transition, we have added a copper position to our New Power Fund. On March 28th, we added a 4% position in the COPX exchange-traded fund (ETF) to the New Power Fund. This ETF owns some of the world’s most influential public copper mining companies, including Lundin Mining, Southern Copper Corp, Ivanhoe Mines, and Freeport McMoran. In addition, COPX is distinctive because it represents companies enabling a change to renewable energy and upholding ESG (environmental, social, and governance) standards. The addition of COPX represents another step in our reconstruction project with the New Power Fund to double down on climate solutions securities. Investing in copper now presents a timely opportunity to participate and benefit from transitioning towards a cleaner, more sustainable energy future.   

Please feel free to contact us if you are considering an investment in the New Power Fund, which is open to new accounts of $100k or more. 

Regards, 

 

Cooper Jones 

New Power Fund Analyst  

April 10,2024

Life as we know it changed dramatically—socially, politically, and economically—with the global pandemic. Yet, investors have not adapted to many of the new realities created during this time. Frustrations will continue for those waiting, wanting, and hoping for a return to the good ‘ol days when inflation could be tamed with a few simple rate hikes.

Today’s Inflation is a Secular Thing

You might take a second to re-read our latest blog post, “Mission Accomplished” which was posted on January 22^nd.  In that post, we asked rhetorically if the mission of defeating inflation was indeed “accomplished,” as the Fed and the media seemed to suggest.  Now, four months later, the Federal Reserve is inserting reasonable doubt daily as to their intentions to drop interest rates at all in June considering the recent rash of HIGHER inflationary reports. Today, employment is rising; wages are rising, and household wealth and company revenues are all rising.  To be clear, the US economy is still doing fine in aggregate and especially fine for the very wealthy, who own 89% of all assets in the United States. ( *Seems almost strange to use the word “United” these days, doesn’t it?).  Taylor Swift, as the Time Person of the Year represents peak Consumption and Spending.  And $6 Billion spent chasing a 4-minute view of the total solar eclipse tells me we still have too much money chasing too few goods, The very definition of inflation.  Investors and the financial media are marveling at the fact that the most extensive and shortest period of extreme rate hikes in the history of the Federal Reserve has not caused a recession.  It will eventually!  But today, in true 70’s style, it seems more likely that we are heading towards the next inflation leg higher (see chart below from Crescat Capital).  Investors and the entire real estate industry, who are hoping for a big bond rally (lower rates), could be in for a longer wait.

Unfortunately, a new round of inflation would also be quite bad for stocks as expectations for a continuation of the bull market are squarely relying on lower prices and lower rates. Barrons notoriously pins the tail on the bull with their magazine covers in true contrarian fashion.  2024 is setting up to be the transition year where we see peak spending, consumer and investor confidence, peak earnings and peak economic growth.  In short, not bullish for future stock returns.

Let’s unpack the sources of inflation as evidence that the new environment is here to stay.

We must understand that the sources of inflation today are not something that can be controlled by monetary policy (i.e. lowering interest rates and/or reducing the Federal balance sheet).  Inflation of the type we have now comes from five sources most of which have accumulated over the last three to four decades. They are as follows in no particular order.

1. Deglobalization and Nationalization Themes

Countries are putting up walls, tariffs, and barriers to trade as a sense of nationalism emerges aimed at labor protection.  This is a relatively new phenomenon that is politically and racially motivated with very little economic basis.  Recent wars over territory and resources are also destabilizing and bad for business.  Deglobalization is inflationary by nature, but thankfully, this is the least sticky of the inflationary sources.  Strong and healthy leadership would reach across borders to find cost efficiencies wherever and whenever.  I was encouraged to see Janet Yellen make a recent trip to Chile to help secure favorable trade with its Lithium producers.  The article is here.

2. Out of-control Global Fiscal Spending, Stimulus, Debt, and Deficits

Many have described the last 16 years as the most undisciplined period of monetary and fiscal spending in history.  Since 2008, the annual federal budget for spending has increased from a little over $1 Trillion to over $7 Trillion as of last month.  All of this spending has come from borrowing.  Consequently, the level of public debt has also ballooned to over $34 Trillion with net interest payments projected to exceed the total costs of Social Security and Medicare by 2030 and defense spending by 2028.  In plain speak, our Federal Government is spending far more than it receives in tax revenue (called a Deficit) using debt and freshly printed US dollars to fill the gap.  There is no Republican or Democrat willing or able to actually reduce Federal Spending because to do so would threaten over 15% of our country’s GDP!  It’s totally out of control, totally unsustainable, and yes, totally inflationary.

3. Wages are Permanently Higher

While avoiding the hot political buttons, I think this is a good thing and a long time coming.  Wages have historically not kept pace with underreported increases in the costs of living, and we have now embarked on a journey to find that rare and almost extinct animal called The Livable Wage.  Right or wrong, it’s happening.  California recently increased the minimum wage for fast food workers from $16 to $20/ hour, up from $7/ hr. just 10 years ago. Like it or not, trends in California work their way from west to east over time. Only the poorest states with the highest unemployment rates will keep their non-competitive wages in the years to come.  Eventually, labor will migrate to higher-pay states when a recession hits, but wages will not come down.  It’s important to note that wage increases can stabilize, leading to lower inflation as a rate of change, but make no mistake, this still leaves us with permanently higher costs for all things labor intensive.

4. Climate Adaptation

We posted a recent article on our New Power Fund page about the rising costs of homeowners’ insurance in areas of the country that are now regularly battered by hurricanes, wildfires, floods, and other “extreme” weather events.  After more than a few years, insurers are now pricing in the true risks or simply dropping coverage altogether.  Here’s the article. Climate change is now being priced into our economy and it ain’t cheap.  Utility costs are up nearly 20% year over year, most of which comes from climate adaptation efforts.  Again, this is not a variable that can be solved by the Federal Reserve lowering interest rates by a few basis points.  This is a lifetime challenge that will bring a lifetime of higher costs.

5. Commodity and Natural Resource Shortages

Finally, for those of us who have kept a watchful eye on the imbalances between supply of and demand for commodities, we have arrived at a tipping point.  Commodities have notoriously long lead times to pull the raw materials from the earth and craft them into a usable resource for energy, building, infrastructure, technology, transportation, etc.  Today, we have enormous demand for raw materials and energy, but we have also massively underinvested in the production of commodities for the last two decades.  Lowering interest rates will not magically solve the global shortage of raw copper ore for instance.  In recent months, commodities of all types, including oil, base metals, precious metals, rare earth metals, uranium, agriculture, timber, and especially copper, have all shot higher, in many cases out to new highs.  These are input costs for nearly every tangible item in the world and these costs are not yet reflected in any current inflation numbers.  We can also add housing to the list of shortages and of course, persistently high costs of shelter are over 40% of the Consumer Price Index, our inflation index du jour.  Shortages of any sort create inflationary pressure, and more are on the way from commodities.

All in, the stage is set for inflation to remain sticky, strong, and persistent despite what you might hear about “Mission Accomplished” by the Fed and the Financial media.  While there are plenty of differences between now and the 70s in terms of the drivers of inflation, the same stair-step pattern seems to be playing out.  Today’s “higher than expected” CPI report confirms (again).

The 70’s pattern

and now

Investor Implications

              There are important implications for investors.  Where do we put our hard-earned capital such that it will continue to work as hard as we do and hopefully stay ahead of real inflation – let’s call it 5% just to be conservative.

Since 2021, regular readers have heard me talk about The Big Three investment themes and these should really be the foundation of any portfolio until further notice.

The Big Three are:

True Value – Lean into true value like stable incumbent companies paying higher dividends and conducting share buybacks, as well as those trading at subpar industry prices with high free cash flows, strong revenues, and healthy profit margins.  There are many that fit this description, but you won’t find them in the technology or financial sectors. Small caps are very cheap relative to large caps, but selection is key as small caps, in aggregate, still have poor cash flows and high debt.

Internationals/ Emerging Markets—Lean into Japan, European value, Latin America, Mexico, and India. All are far cheaper than the US stock market and offer compelling growth stories. Their economies are just now recovering from recessions or very high inflationary cycles, making emerging markets look especially compelling as a group.

Commodities (including Gold and Silver) – See above!  Supply and demand imbalances have created a new multi-year commodity bull market which started in November of 2020.  2023 and into early 2024 were pullback years for commodities offering us one of the most attractive (re) entry points I have seen in many years.   Little known fact:  Commodities have outperformed the S&P 500 by almost 2:1 since November 2020, even with the correction of the last 12 months!  Commodity bull markets in the 1910s, ’40s, and ’70s each lasted a decade or more.

A couple of rules and guardrails on these themes.  First, they do not all work together at the same time.  Be patient and buy pullbacks within each theme.  And second, it’s not wrong to diversify away from these themes to some degree.  It’s fine to hold some mega-cap tech or your favorite AI stock.  It’s fine to carry a few tiny bond or Bitcoin positions to dampen portfolio volatility.  It’s also fine to do a little stock picking if you are so inclined.  But the core of your entire investment portfolio should be anchored in the big three above.

In addition, investors at large are still expecting a normal business cycle to occur, and the current environment is likely to challenge those assumptions.  In a normal expansion phase of the business cycle, the economy grows, stocks and commodities rise, and bonds give way.  That’s where we are today. In a contractionary phase, demand dries up, the economy begins to shrink, stocks and commodities fail, and bonds take the lead.  However, during persistently high inflationary cycles, the business cycle is highly skewed.  Specifically, during the contractionary phase, inflation beneficiaries, like commodities, continue higher, stocks experience bear markets, and bonds do very little to provide safety.  There is evidence that we are approaching this phase.  Wise and aware investors would consequently skew portfolio allocations towards inflation beneficiaries or hard assets and away from financial securities like large-cap stocks and Treasury bonds.  In this scenario, many investors could be caught off-side with their current allocations.

Other implications are more in the warning camp.  Today, I still see far too much concentration in mega-cap technology, too much money sitting in non-interest-bearing checking and savings accounts, and too much hope regarding the future of the bond market and associated securities.  I also see a great deal of complacency in simply owning the S&P 500 or the Nasdaq 100 as investible indices (SPY or QQQ).  These indices have had an incredible run, but these are not the times or places to get complacent, given record-high valuations and pending risks.  Picking up nickels in front of a steamroller is a phrase that comes to mind.

Thank you for reading. I honestly wish the best to all as we move through this new investor environment. Clients of All Season should rest assured that we have already made the necessary changes to their portfolios. Please do reach out if you need help. We are happy to evaluate your personal situation and help you get aligned properly if necessary.

Regards,

Sam Jones

President, All Season Financial Advisors.

March 30. 2024

The landscape of global investment is undergoing a significant transformation, with a growing emphasis on sustainable and environmentally responsible practices.  

Clean Energy: A Sector in Transition 

The clean energy sector is gaining momentum, driven by a combination of technological advancements, regulatory support, and shifting consumer preferences. Renewable technologies such as solar, wind, and hydroelectric power have emerged as viable alternatives to traditional fossil fuels, offering cleaner and more sustainable solutions to meet energy needs. 

The clean energy sector operates within a complex market environment, characterized by fluctuating prices, regulatory uncertainties, and technological disruptions. Despite some of the volatility in this sector, there are common trends that can be taken advantage of. 

Price Dynamics in the Clean Energy Market 

One notable aspect of the clean energy sector is how closely the pricing dynamics reflect the diverse competitive landscapes and challenges faced by various renewable technologies. Solar, wind, electric vehicles (EVs), and batteries each encounter distinct hurdles, yet despite these differences, many securities within this sector exhibit commensurate price changes. This indicates that the sector responds to common factors, despite the individual nuances of each technology. 

For instance, fluctuations in government policies, technological advancements, and global economic conditions can impact the competitiveness and profitability of companies across different clean energy subsectors. While the challenges may vary – from intermittency issues in wind and solar to supply chain constraints in EV batteries – the overarching trends in the market often influence the performance of clean energy securities. 

Understanding these interconnected dynamics is crucial for investors seeking to navigate the clean energy market effectively. By recognizing the commonalities in price movements and the underlying factors driving them, investors can make more informed decisions and capitalize on opportunities for long-term growth and value creation within this rapidly evolving sector. Below, we have included a chart showing a variety of clean energy ETFs. The important aspect of this chart is looking at how, although the ETFs represent different technologies, price changes move similarly. It should also be noted that the sector has pulled back over 80% since the end of 2020.  

 The Bespoke Report, May 15, 2024 

 Riding the Wave of Growth 

Despite the inherent volatility and uncertainties among investments, engagement in the clean energy sector has demonstrated remarkable resilience and growth. In fact, data reveals that investment in renewable energy has grown at an annualized rate of 42.5% in real terms since 2020, underscoring the increasing investor confidence and market momentum in this space.  

The Bespoke Report, May 15, 2024 

 This impressive growth trajectory is driven by several factors, including the declining costs of renewable technologies, supportive government policies (think of the Inflation Reduction Act), and growing public and corporate awareness of climate change. As the world shifts towards a low-carbon economy, opportunities abound for savvy investors to capitalize on the transition to clean energy. 

Seizing Opportunities in the Market 

We believe now is an opportune time to consider allocating investment capital to the clean energy sector. Growth in overall engagement and sector investment, with a pullback in prices, offers a compelling entry point. Despite some of the inherent risks, the sector offers high-growth investment prospects with low price barriers to entry. Moreover, the strong market fundamentals, coupled with ongoing demand for renewable technologies, provide a solid foundation for long-term growth and sustainability. The New Power Fund is a separately managed account dedicated to investing in clean energy, climate solutions, and transformational technologies. We are seizing the current opportunity by deploying cash to new positions in this sector. Please feel free to contact us to discuss your interest or current situation. 

Best Regards, 

Cooper Jones

New Power Fund Analyst 

March 15,2024

I talk to investors every day; some are clients, some are not.  Inevitably, opinions and expectations are offered.  I try to stay quiet, listen, and absorb the vibes.  Why?  Because the markets are really just a voting machine governed by investor sentiment driving prices in both directions.  What I take away from the vast majority of conversations today is a strong sense that investors are not very Street Wise.

Ecuador 

As a family, we traveled quite a bit with our young boys.  In 2013, we went to Peru to see Machu Picchu, which is just an amazing adventure, by the way.  We took the stunning Hiram Bingham glass-top train ride from Cuzco to Aguas Calientes, then climbed the ancient stone staircase for 2 hours through the jungle to the sacred city of Machu Picchu.  The boys were 8 and 10 years old and gobbled it up.  I highly recommend the trip and am happy to provide details for anyone considering the destination.  Peru was, and continues to be, a very poor country, especially the further you get from Lima.  Massive shanty towns, shoeless children, and a heavy-handed government that uses drinking water as a means of controlling the population (like shutting off your water).  We made it a point to expose our boys to less developed parts of the world to gain perspective and appreciation for what we have as relatively wealthy Americans.  After Peru, we traveled toward Ecuador to a small oceanside town where Ernest Hemmingway apparently spent his winters fishing and writing.  From the airport, we arranged to have private transportation pick us up because, at the time, taxis were known to rob their passengers, especially gringos.   As we entered a small dusty village along the way, we found that the road was blocked by trash can-size rocks.  A shirtless man with a small orange flag tied to a stick waved us onto a side road.  No bueno.  Around the corner, it became clear that we were being robbed.  Heated words between our driver and the bandits, a serious request for as much cash as we had on us, and we were allowed to pass without additionally losing our luggage, passports, and other valuables.  The boys were wide awake, alert, scared as they should be.  I was sweating bullets in full fight-or-flight mode.  

We arrived at our destination, light by only a few hundred US dollars, but grateful not to be in a ditch face down.  We were lucky.  Conversations with the boys for the next week or so were about bad people and why they steal or what we could have done to prevent this from happening?  I even remember a little pointed anger: “Why did you bring us to this place?”.    To this day, the boys probably don’t remember much about Macho Picchu or Peru or Ecuador, but they could tell you in gross detail about that day on the trip from the airport and how it felt to be vulnerable, afraid, and at risk in a very visceral way.    

During future trips to Argentina, Chile, Costa Rica, and Mexico, it was clear that the boys were much more aware of “other” people, how they looked at you, and how they acted.  How are we going to get there, and is it safe?  Should you wear an Apple watch and bright clothes with BIG AMERICAN brands?  Probably not.  Wallets and phones in the front pocket, out of sight.  By yourself at night? Of course not.  Lock the doors, yep.  In short, they became street-wise, not afraid to travel but watchful with a simple and healthy survivor’s instinct for judicious risk-taking.   

FOMO 

For context, the sentiment I see today regarding housing and the financial markets is not surprising.  The last time we had any event that invoked any sort of real fear was 2008, and before that, 2000.  Since then, we have had mini bear markets and mini corrections of 10-20%, but nothing really lasting in time or of any magnitude that might shake your tree.  2008 was a long time ago and way past the zone of modern memory.  So, let’s say that you are in your mid-30s and graduated college in 2010.  Your memory and experience with everything from real estate to stocks is just up and to the right.  Gains on top of gains, on top of compounding home equity with sub 3% mortgages.  Frankly, you have never been “robbed” by the market in any way and, therefore, would naturally have no respect for what could happen or the fear that comes with dramatic loss.  In other words, you simply have no set of experiences that would create any real sense of risk.   

I thought this annotated chart from Bespoke might be appropriate to show within that context. Looking at a rolling 10-year percent change chart of the S&P can be a little shocking.   

For example, if one were to have made significant investments in the basic S&P 500 index anywhere from 1998 to 2000, one would have seen a total return of negative -50% through the middle of 2009 (10 years).  The same thing happened between 1960 and 1974, but the rolling 10-year return was only -20%.  These things happen.  These are long, painful periods of time with cumulative negative returns, and they tend to change attitudes about risk rather permanently.  It seems somewhat obvious that the rolling 10-year performance of the S&P 500 peaked in 2019 and is now headed back toward the zero line, setting us up for another one of those true generational buying opportunities.   

Since 2008, we have had exactly one micro recession in the US economy in the year 2020 following the pandemic that was so short, many didn’t even know it happened. Unemployment rocketed higher during that time amid COVID lockdowns, but we returned almost immediately to sub 4% about thirty months later with pockets full of “stimi” checks and bulging household savings.   

So, we’re pushing 16 years since the US economy has given us any reason to be Street Wise – Wall Street Wise, Real Estate Wise, Anything Wise.  Quite honestly, street-wise investors would be stashing cash right now and cheerleading for a much-needed deep correction to buy great companies at discounted prices, especially younger investors with a long-term horizon.  Want to buy Nvidia? Be my guest, but how about at a price that starts with a 5, not a 9? (The current price is $926/ share).  Factually, our greatest returns are generated not following periods where stocks are trading at all-time highs but from those deep lows where fear of losing, despair, and doubt dominate the headlines.    

Today, we are at the opposite end of the psychology pendulum.   Among those who have enough choice and dollars to invest, roughly half of the country’s sentiment is predominantly one of FOMO – Fear of Missing Out.   Where is the next rocket ship?  Why didn’t I put everything into Bitcoin or Nvidia?  Damn it!  Next time, I’m going to get a ride… to the moon!  There is unbridled confidence behind putting a majority of your net worth in the S&P 500 as an investible index with an embedded expectation of 12-15% annualized returns.  Maybe revisit that Rolling 10-year performance chart above?  S&P 500 total return since 12/31/2021 is now just a bit over 5% or the same as any money market fund. 

 

Real estate has also been incredibly rewarding for nearly 30 years – on the back of falling interest rates.  This was the topic of our recent Finding Benjamin podcast- What they won’t tell you about housing.  

Anyone who has owned a home, over the last 20 years, has built up incredible wealth and equity.  Why would we not feel the urge to own even more real estate with the purchase of a second home when our experience has been nothing but green lights and a higher net worth.  Perception is reality of course. 

Personally, I’ve had my financial teeth kicked in enough times to have that survivor’s sense of when current risk and future reward just don’t match up.   On the contrary, I feel like a great many investors are unfortunately destined to learn some Street Wisdom that will no doubt shape their perspectives about risk-taking, perhaps for the remainder of their lives, just like that van ride in Ecuador.  

To be clear, I have no idea if we are heading into a bear market, recession, or something nasty in real estate.  I am simply calling out when I see too much false confidence and reckless spending among investors and consumers at large, and I mean too much, like on a Great Gatsby scale.   

I don’t know; maybe it was that woman coming out of the restaurant last night. 

Oh my God, Oh my God, Oh my God, did I tell you I’m going to Vienna to see Taylor Swift!!!!!!! 

Screams of joy…. And fade to black. 

Becoming Street Wise 

Let’s end on a constructive note.   

Investing is actually pretty easy most of the time.  We can and should have anchor positions in any of the broad-based low-cost Index ETFs using simple rebalancing and periodic tax loss harvesting disciplines.  Roughly 30% of our client’s investment dollars are invested this way.   

But there are clearly times when investors should balance out their index market exposure and expectations with a different strategic approach.  This is one of those times.  We use the term “Strategies” a lot in our shop because we believe that your money should be diversified not only by your holdings but by your very approach to building wealth.   Our clients should have confidence knowing that we are making these changes across portfolios now. 

Lean Into Shareholder Yield and Value 

Consider how you measure success with investing.  For most, it’s really a simple measuring stick of your investment balance. A rising balance equals success, right? Fair enough.  But there are other ways that our investment dollars can help support you financially.  Think about what your stocks or funds provide you in the way of shareholder yield, which is a combination of share buybacks and dividends.  The vast majority of stocks and stock index funds out there provide almost no shareholder yield; it’s all a game focused on price appreciation – aka growth.  The yield on the S&P 500 as an index is 1.45% currently, close to the all-time lows.    

Alternatively, our Multi-Asset Income model kicks out 9.3% annualized dividends, which are paid monthly in most cases.  This week, we will receive 14 dividend checks as free cash flow from our 42 positions, regardless of what happens to the markets.  If you are looking for a Street Wise strategy that cares less about growth and more about consistent, near-double-digit income replacement, this is an option.  To be clear, your balance may not move up as much or be in sync with growth-type investments, but that’s not the objective.  The objective of this approach is to lean into a strategy that does not depend on rising prices as much as consistency of income. When prices also turn higher, as they did in 2020 and 2021, the total returns compound quite nicely, just like a rental property but without property taxes, broken toilets, and troublesome tenants! Sorry for the shameless advertising.  

Generally, this would be the time to also lean toward value managers who can compile a pool of companies generating high free cash flow, profit margins of over 15% and price to sales ratios well below 10.  Most investor money is now highly concentrated in companies that have almost no “value” if one is using these metrics. Have you seen the free cash flow from Microsoft and Apple? 

Here’s another Street Wise idea. 

Consider The Alternatives 

I think the last time I felt this way was 1999.  Alternative asset classes like real estate, gold, commodities, emerging markets and tactical trading strategies were clearly the most hated of all things at that time, just like today.  Of course, these very groups went on to earn double digit, even triple digit returns while the broad US stock indexes plummeted over 50% through March of 2003.   

The table certainly seems set here for alternatives in many forms to begin outperforming any of your basic stock index ETFs.  Last week, gold bullion (GLD) decisively broke out of a trading range dating back to 2011.  This is perhaps the most meaningful macroeconomic event of the last decade, and it received almost no press over the weekend.  Amazing.  We own gold and gold miners and have started accumulating positions in silver.  Speaking of…  Tactical trading strategies are also a good addition now. They can be found in ETF form or generally through separate account management, like our All Season, Worldwide Sectors, and Gain Keeper strategies. Know when to hold ‘em, know when to fold ‘em.   

Consider Future Climate Change Impacts 

I thought this was a fascinating article from Forbes, and I encourage you to read it. 

Climate Change is a Financial Threat to Your Retirement 

Real estate in select coastal areas in states like Florida, S. Carolina, and California is approaching the status of “uninsurable.”  They have been hit by hurricanes, floods, and mudslides so often that insurers simply will not carry them any longer.  How marketable is your house when you go to sell if you can’t get home insurance or the premium cost is so high that it swamps your monthly payment, no pun intended?  Insurance providers are suddenly huge profit centers as premiums are sharply on the rise.  They are very good at quantifying the risk of loss and charging customers commensurately.  We bought KIE (insurance ETF) as a new theme position in our Worldwide Sectors strategy last September.   

Climate change is factually and quantifiably adding risk to select companies, asset classes, and industries that are heavy carbon polluters.  Others are beneficiaries of these changes.  The SEC is forcing all public companies to disclose and quantify their known climate and carbon risks in their quarterly earnings reports.  Make no mistake, shareholders recognize these risks now, just like any other, and are quickly moving toward industries and sectors that are less exposed.  Should we be surprised that traditional fossil fuel companies are struggling again despite their attractive valuations and healthy dividends?  I’m not.  Investment strategies like our New Power fund are clear beneficiaries of these changes toward a cleaner, carbon-neutral world while strictly avoiding companies subject to climate change risk.   

Control the Things You Can Control 

like spending, OMG, OMG! 

It would be wise to consider your financial situation if you suddenly lose your $250k job.  How much debt are you carrying? Multiple car payments? Who will pay your mortgage and your kid’s private school education? What kind of reserves do you have for THAT rainy day?  Controlled spending, limiting debt, and positive day-to-day savings habits are, quite honestly, the most impactful things you can do to improve your financial independence.  It is not how much you make but how much you save that creates wealth over time.  The markets are largely out of your control.  Your income is also largely out of your control whether you are self-made or work for the man.  Personal finance is difficult if you tend to be an undisciplined person, so perhaps the first step is to do a little self-reflection and get help if you need it.  Discipline is a learned habit, and it must be nurtured, reinforced, rewarded, and practiced daily.  Make your bed every day, right? 

That’s it for this week.  Let’s keep it real. 

 

Good chat 

Sam Jones 

President, CIO – All Season Financial Advisors 

 

March 11, 2024

The New Power Fund (NPF) is currently undergoing a remodeling process, and this transition is happening at the perfect time. Please read on to learn about the future plans for NPF and to discover how we are enhancing its appeal to clients who are eager to invest in a genuine climate solutions strategy.

The Last 20 years

The New Power Fund is celebrating its 20th anniversary and has been consistently outperforming its benchmark, the Powershares Clean Energy Index (PBW), by a significant margin. However, the fund’s original strategy of investing in pure plays in the renewable energy sector has proven to be financially speculative, volatile, and subject to resistance from the fossil fuel industry. To minimize the risk of the strategy, the fund started including companies that fit with ESG (Environmental, Social, and Governance) metrics in 2013. The belief was that ESG metrics would provide a broader framework for investing towards a climate solutions objective. But the water was murky surrounding the collective standards of the many “ESG ratings” and the fund found itself uncomfortably far from its original objectives. Thankfully, in recent months, the SEC and several other regulatory bodies are moving strongly to mandate that public companies provide full disclosures and quantify of all known climate risks as well as expected carbon emissions.  Subsequently, the fund decided to reconstruct its strategy in late 2023 with the aim of maintaining performance while focusing exclusively on companies that have a clear objective of climate responsibility.  We are grateful that the new regulatory metrics will give us more clarity and breadth of opportunity in our security selection process.

The NEW New Power Fund

The New Power Fund has recently made a strategic decision to concentrate its investments solely on climate solutions. In line with this objective, the fund has also introduced a new logo to represent its new direction. To ensure its stability and returns, the fund will no longer rely on investments outside of this objective. Instead, it will allocate investments across three sleeves, with the exact proportions yet to be determined.

• Transformers
• Innovators
• Players

Let’s start by discussing the Transformers sleeve. This sleeve comprises companies that are shifting towards sustainable business practices, products, or services, and those that provide technologies to facilitate this transition for others. For instance, consider one of our latest investments, Waste Management (WM). WM is a well-established company that has witnessed significant growth, both financially and as a business model. However, it’s no longer solely focused on waste diversion but has emerged as a leader in methane capture from their landfills that fuel their Compressed Natural Gas (CNG trucks) and is now installing solar arrays over mature landfills.  You can read all about it HERE.  This is the perfect example of a Transformer; this is a company that is shifting their business model to become a closed loop ecosystem as well as move the needle away from fossil fuel energy sources.

Looking at the second sleeve: Innovators. These are companies that have been publicly traded for 2-4 years, targeting emerging technologies and potential “game changers”. Aris Water Solutions (ARIS) is a wonderful example of a company that has recently been added to the New Power Fund. Aris is a relatively new company but is already exhibiting solid financials. As of this quarter, Aris has 22% year-over-year revenue growth, 142% growth in earnings per share, generates $183M in free cash flow and is still trading at a 40% discount to the market’s current valuation. As a business, Aris is responsible for the recycling and reuse of wastewater generated from oil and gas drilling operations. Aris is working to eliminate the need for freshwater resources from the oil and gas industry! In our minds (and on paper), this is the kind of company we could see having incredible returns while maintaining an “eco-friendly” business model, providing a real solution to an otherwise dirty business.

Moving on, let discuss the final sleeve which is called Players. This section will focus solely on companies that are directly involved in renewable energy, electrification of transportation, building efficiency, as well as broad, clean energy-focused ETFs. One company that we are particularly excited about is First Solar (FSLR). It is a top-tier manufacturer and global installer of Solar PV for utilities, commercial and industrial customers. Moreover, it is currently trading at a deep discount.

We believe that the allocation of assets across the three sleeves is optimal for several reasons. Firstly, the objective of this investment strategy is not only to outperform the benchmark, but also to keep the portfolio’s risk level within the boundaries of the broad US stock market. Secondly, this allocation can be effective because our new holdings are predominantly non-cyclical. Below is an illustration of the current sector distribution, where we have almost 70% of this fund invested in non-cyclical sectors (sensitive) companies.  Non-cyclicals, just like they sound, tend to be less sensitive to the directional trends in economic cycles.  As you can see, we are heavy in industrials and technology which are quite necessary now for everyday needs.

Finally, our three sleeves provide us with the chance to invest in climate solutions from different perspectives. Some of our companies are incumbents, established stable companies that are transitioning towards becoming environmentally friendly. Others are on the cutting edge of emerging technologies, while some are purely dedicated to climate solutions. With this range, we can ensure that we have all our bases covered!

Why Are We Doing This Now?

Fact: The Clean Energy sector has experienced a decline of approximately 80% since its peak in 2021. However, this presents an opportunity to invest at a low point in a sector with immense growth potential. As awareness of the need for climate solutions increases, companies across various industries, including oil and gas, chemical, and manufacturing, are realizing the importance of adapting and committing to environmentally responsible practices. Stakeholders are pressuring them to transform and be more sustainable, leading to significant changes in their operations. What an awesome opportunity to double down on our own commitment with our investment dollars!

What’s Next?

We are currently in the process of reorganizing our investments in the New Power Fund. This involves selling off our previous holdings and replacing them with new ones. The process is expected to take several months to complete, but so far, we are making good progress. Since November 2023, our results have been excellent. The architectural planning for the Fund is complete, and we are excited to finish the remodel. Looking forward, we will provide further updates as progress is made. Stay tuned and feel free to contact us directly if you have any questions or are interested in the New Power Fund. Visit www.NewPowerFund.com for more information.

Regards,

Cooper Jones

New Power Fund Analyst

 

January 22, 2024

Every new year in the markets tends to bring a new set of leaders, laggards, and themes.  I always find it helpful to just observe any changes as they unfold in the first 30 days to help guide my thoughts, challenge my assumptions, and shed my own backwards looking biases as needed.  Portfolio management is an art and a science that mandates a certain level of flexibility, humility, and a constant reminder that our emotions are our worst enemy.  For this update, let’s look at what has changed in terms of intermarket action from late 2023 and perhaps more importantly, what relationships have stayed the same.

The Three Horseman?

Bespoke Institutional Research has highlighted the importance of the Three Horseman in the financial markets.  These three variables have arguably been the most important influences on which sectors, asset classes and themes dominate the markets.  They are as follows:

The trend of the US dollar

The trend of the yield on 10-year US Treasury bonds

The price of Oil

Now if you hadn’t noticed, the vast majority of gains generated from stocks in 2023, happened in the last 60 days of the year.  We were all grateful of course to finish strong.  But it’s important to recognize that these gains occurred because the condition of all Three Horseman simultaneously reversed course in a favorable direction.  Specifically, from late October through the end of the year we saw:

The US dollar fall -4.5%

The yield on the 10-year US Treasury bond fall -23.9%

The price of Oil fall – 22.4%

Taken together as a team, these three variables effectively reflected an expectation of falling inflation.  When all three fall in unison, we understand that inflation expectations are falling.  Conversely, when all three rise in unison, we understand that inflation expectations are rising – and are still a threat to the economy.

Unfortunately, in the first 20 days of 2024, all three seem to be forming a new higher base and are starting to trend higher again.  Quickly, our mind begins to ask that hard question.

Is inflation coming back in earnest or did the market simply get ahead of itself in late 2023?  Honestly, we don’t have a clear answer yet.  For now, we are assuming the later case but remain watchful of the former.

Sectors, like Real Estate were clearly the best performers from the lows of late October, ripping higher by 27% in less than 60 days; but so far, the market is “digesting” these gains and real estate is down over 7% in 2024.  Similarly, internationals had a fantastic run in late 2023 but like real estate, they are digesting those gains now as the US dollar is trending higher again.  Oil is marginally higher so far in 2024, so of course we see the Dow Jones Industrial Index and Dow Transportation Index falling.

In short, the market ecosystem is responding to the trends in the Three Horseman again: All up in 2024 so far.    But we are approaching a critical moment for these trends with important ramifications for investors.

I have shown this chart in the past and will bring it forward again, courtesy of Crescat Capital, who has very high conviction that we are nearly approaching a second wave of inflation, like the pattern from the 70’s.  Our conviction is not so high, and we will let the data guide us.  But the risk is real, and we’ll be watching the Three Horseman closely in the next several weeks.

 

 

 

 

 

 

 

 

 

Crescat suggests that the primary forces and drivers of inflation are still present and persistently out of the Federal Reserve’s control.  We presented these non-monetary drivers of inflation at our annual meeting last October:

• • Deglobalization/ Nationalism/ Geopolitical instability
  • Climate adaptation and mitigation
  • Long term underinvestment in raw materials and commodities.
  • Unsustainable levels of global government debt and fiscal deficits.

*I would probably add one more – persistently high costs of housing which account for over 40% of the Consumer Price Index in the US now.

It seems the market and the Fed have proclaimed victory over inflation.  I am not yet convinced, neither is the bond market and they say bond money is the smart money.

I am reminded of young president George Bush standing on the deck of the USS Abraham Lincoln Aircraft Carrier declaring victory over his 3 month old war in Iraq on May 2^nd, 2003, with his infamous “Mission Accomplished” speech.  Oh my.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The War in Iraq was not over by a long shot and raged on until the official end on December 15^th, 2011 – 8 years later!

Bonds and Stocks; Friends or Frenemies?

From 1982 until early 2021, stocks and bonds moved in opposite directions which gave birth to the magic of the 60/40 portfolio (60% stocks/ 40% bonds).  Make no mistake, this condition was all a fabrication of our own Federal Reserve who have used the Federal Funds rate and monetary policy to effectively support the financial markets, and the economy to a lesser degree, when times get tough.  Historically, when stock prices fell, the Fed dropped interest rates and bond prices rose.  Consequently, the mix of the 60/40 portfolio created a smooth ride for investors:  Up and to the right, no real volatility, no worries, investor bliss.  But history shows that this 40-year cycle is an unnatural and unsustainable condition. Discerning investors are beginning to recognize that the relationship between stocks and bonds changed in 2021.

Consider the correlations between stocks and bonds in different time periods.

1968-1981 (70’s Inflationary period)              Positive  .42 

This means that stocks and bonds were positively correlated, both moving in the same direction during inflationary periods.  There is no diversification benefit when correlations are positive.

1982 – 2021 (40 years of investor bliss)                   Negative  .32

This means that stocks and bonds moved in opposite directions providing excellent diversification benefits.   Enjoy the 60/40 magic carpet ride!

2021-2024                                                    Positive   .35

Back to no diversification benefit

Last 12 months                                           Positive   .42

Back to the 70’s??????

Stock prices and bond prices are still moving in the same direction.  Mission Accomplished?  Not yet.  What’s the point?  The point is that investors now have a few uncomfortable realities to contend with.

1. 1. Bonds are no longer a safety net for stocks.  They do not yet add value to a portfolio in terms of dampening volatility and they don’t yet pay enough income beyond cash or a money market to justify a permanent or normal size allocation.
   2. We need to consider other asset classes or portfolio strategies that can replace the traditional role of bonds (more on this in a minute).
   3. Higher portfolio volatility is expected and normal until we have a formal economic recession.
   4. A 100% stock portfolio is not a tolerable option for most, especially considering today’s very high valuations.

Big Opportunities

          Despite what you might feel and hear, there are still very rich opportunities for investors in this environment. A few thoughts on this front.

1. 1. Stocks are factually trending higher, pushing out to new highs in some cases, so we need to remain invested in stocks and avoid the temptation to hide in cash with our stock money. In fact, the first 20 days of 2024, has provided an orderly pullback for those interested in adding to their equity positions.
   2. Small caps are still far more attractive than large caps and tend to perform better when inflation is falling, as it is now.
   3. Relative valuations and growth rates strongly favor these countries looking forward:
      • Brazil/Latin America
      • Hong Kong
      • India
      • Spain
      • UK

*The United States and Japan remain the most overvalued countries in the world by a wide margin.

1. 4. The Presidential cycle still seems to be in force. “Election years” (2024) tend to be a little weak in the first half but finish strong, followed by a healthy “Post election year” (2025). So, while volatility is to be expected now, it is rare to see more than a garden variety correction in the broad US stock market in the next 24 months.  Given the stakes of our pending election, we should all give this pattern much more room for error!

 

 

 

 

 

 

 

 

 

 

Alternatives to Treasury Bonds

          This gets tricky and honestly falls outside the domain of most investors’ knowledge and comfort zone.  Our firm has expertise and experience with strategies that do not depend on Treasury Bonds or falling interest rates to generate reasonable portfolio total returns over time.  Here are five ideas without getting too deep in the weeds.

1. 1. Tactical trading strategies – These strategies can trade away stock market risk either through dynamic asset allocation or relative strength analysis as a means of controlling portfolio volatility.
   2. Alternative asset classes – These are things that have low or negative correlation to stocks and bonds. Things like precious metals, perhaps Bitcoin (now that the SEC has approved public consumption), hard assets and commodities or specialty strategies like covered calls, mergers and acquisition funds.
   3. High dividend paying securities, preferred securities, REITS, credit funds and other hybrid income producers.
   4. Stock picking strategies – Believe it or not, stock picking is back! Select value managers are earning their keep offering both high returns with limited downside volatility.   Think Berkshire Hathaway.
   5. Cash and Money Market funds paying 5% – Yes, this is still a viable option to bonds for as long as cash rates are higher than bond rates!

I’ll close with one critical observation looking back at the last two years, since the highs in late 2021.  Lots of investors got excited about the market action in 2023.  Yes, the markets were up in 2023 but can we say Mission Accomplished?  We mostly saw a healthy recovery from the losses in 2022.  A 60/40 portfolio is still down a little over 5% in total return from January of 2021 to present.  My sense is that we are in a different market environment now.  One in which we need to work a little harder and be a little less complacent with our assumptions about what has worked well in the past in terms of portfolio allocations.  Remember, the Mission of creating wealth and defending it is never accomplished.

Stay tuned!

Sam Jones

 

 

November 30, 2023

We are moving on to review our flagship investment strategy called All Season, the brand of our firm and our longest standing investment program with an inception date of 12/13/1997 managed by yours truly.   It’s my baby and everyone loves their baby.  I’m going to describe the All Season strategy in the context of a solution to investor grievances, specifically one brought to me in full color by my eloquent college roommate back in May of 2021.  He is very wealthy, is on a first name basis with powerful people in DC and was famed to be the speech writer for Al Gore as his first gig out of college.  I keep an email from him on my desk as a reminder.  The All Season strategy directly answers the question of “WHY” we do what we do for investors.  Specifically, the strategy gives wealthy investors what they actually want from a wealth manager, not what they are sold.

My College Roommate’s Words of Wisdom

“I’ve worked with every kind of wealth manager over the years and have watched the industry pretty closely.  Started with Fidelity in their managed funds program and have since used Merrill Lynch, Goldman Sachs, Credit Suisse, and UBS.  My overall take is pretty dismal.  My broadest view is that the industry of wealth management is one of the greatest marketing machines capitalism has ever created.  My own experience is kind of silly from a distance but repeated all the time.  The things I needed most – thoughtful financial planning and scenario planning has been really hard to find.  I continue to search for smart investment management with a careful focus on the tax implications of the management; a sophisticated and active understanding of economic cycles and the willingness to crisply move to meet macro changes in the economy and the corresponding impact on types of assets.  I promise you, this package is really, really hard to find.”

Enter the All Season Strategy…

We built “All Season” as a strategy that would adapt to all stages of the business cycle with dramatically lower costs, full transparency, and daily liquidity for individual investor accounts.   I often describe “All Season” as a dynamic asset allocation strategy – like a hedge fund for individuals without all the high fees and illiquidity.  The strategy offers investors a top down approach that “crisply moves to meet macro changes in the economy and corresponding impact on types of assets.”  In short, the strategy goes where it needs to go, overweighting and underweighting asset classes based on our current position in the business cycle.  These types of changes are not that frequent believe it or not.  After all, the business cycle tends to move rather slowly over time.

Principles behind the methodology of All Season are simple and logical:

• The economy moves through a cycle of expansion and contraction (see below).
• Asset class performance is dramatically and persistently different in each stage of the business cycle.
• We can improve on both risk and returns by overweighting and underweighting our investment allocations if we properly align our holdings with the current stage of the business cycle.

Graphically, this is the business and market cycle (Pring Turner Six Business Cycle Stages) with oversimplified guidelines for when to overweight and underweight stocks, bonds, and commodities.

 

 

 

 

 

 

 

 

 

 

 

Easy right?   Not really.  In practice, each stage differs in duration and magnitude by variables that are considered non-systematic; The behavior of the Federal Reserve, global pandemics, war, politics, etc.  Still, the methodology has solid roots and is well worth the effort in terms of the productivity of your investment capital over time.

Let’s look at Treasury bonds over the last 3 years as an example.  Clearly, all evidence in early 2020 pointed to a rapidly growing economy on the back of $7 Trillion in Covid relief stimulus spending.  Remember those days?  Inflation was ripping higher, the Fed was queuing up to raise rates and US Treasury bonds had just gone parabolically higher in price with yields sitting at zero.  At that moment in time, we didn’t need to be a genius to recognize that we were in Stage 4 above.  The evidence was overwhelming.  The model would suggest selling bonds or at least reduce exposure to short term maturities including cash and money markets.  All Season carried almost no bond exposure from April of 2020 until October of 2023.  During this time period, long term bonds fell 41%.  Now, as we described in our October 9^th, update “The Last Dance”, we have rebuilt our bond position as the business cycle is clearly moving back to Stage 1 (Buy Bonds!).  We are heading into Economic Contraction and the evidence is again overwhelming.  Long term bonds are already up strongly (+11.50%) since the October 19^th low and outperforming the stock market.

Again, the evidence is overwhelming if one is willing and able to look at the data objectively.  The index of leading economic indicators (LEI) has been falling for 19 consecutive months.  Note that the index tends to bottom just as the economy actually falls swiftly into recession.  We are here!

 

 

 

 

 

 

 

 

 

The methodology behind All Season stands the test of time and will continue to generate very high risk adjusted results for as long as we have economic expansions and contractions.

Highlights

All Season is providing our investors with stability and growth over time net of all fees – See the green shaded area below with unfortunate benchmarks for comparison.

At a high level, All Season has delivered the following:

Positive returns in 71% of all quarters

Returns with less than 50% of the volatility of our stock benchmark (ACWI)

A correlation coefficient of .079 to the bond market (AGG) meaning the strategy DOES NOT DEPEND on a falling interest rate environment to generate returns like so many investment solutions out there.

Consistent, healthy, and boring.  Just what we want with our investment capital!

How Does All Season Fit Into Your Portfolio?

All Season can be a core holding representing a majority of your portfolio for select types of investors and investor accounts:

• More conservative investors who are not comfortable with market volatility (bonds or stocks).
• Investors with tax deferred accounts where trading does not create short term taxable gains.
• Investors who are looking for a compliment to a more passive index model or concentrated stock positions.
• Most importantly, investors who do not feel compelled to beat a designated benchmark.

The Comfort of Tribalism

I want to expand on the last bullet point above for a moment.  A benchmark is really just a measuring tool used by our industry as a means for investors to judge their investment portfolio performance.  We feel like we have failed if we don’t beat the benchmark on the way up but we never seem to feel any sense of success when we beat the benchmark on the way down (by losing less).  Why is that?  The reason is tied to an unfortunate emotional reality; Our need to belong to a tribe.  The tribe is the benchmark which theoretically represents our peers.  If the tribe is suffering, we’re ok suffering too.  Misery loves company after all.  If the tribe is thriving, we want to be thriving too.  Emotionally, it’s incredibly challenging to feel different, alone, outside the comfort of the tribe.  The very top performing investment managers over time, (Warren Buffet, George Soros, Sir John Templeton, Peter Lynch, John Neff) know that the greatest investing success regularly comes from opportunity outside the tribal walls.

Unfortunately, every psychologist would agree that the vast majority of individuals would rather fail spectacularly within a crowd, than try to succeed all on our own.  Consequently, you begin to see why the financial services industry preys on this human emotion and need to belong.

In reality, your benchmark should be your own personal financial needs for growth, income, stability.  The planning process identifies your personal target rate of return over time, not any benchmark.   Your investments returns are there to support your lifestyle and provide financial freedom.  Benchmarking and tribalism do not serve you, especially when they reduce your financial freedom.  The All Season strategy does not play the tribal comfort game.  If benchmark performance is important to you, we have passive index strategies that will impress you.

The Solution

In my many years in this business, I do see the merit of diversifying an investment portfolio not by holdings but by methodology.  We can and should certainly have a portion of our portfolio in a strategy like All Season.  This strategy will keep you in the game, keep your emotional and physical capital intact when the tribe is suffering!  Likewise, we can and should have exposure to the tribe and own market indexes passively.  We want to feel like we are thriving when the tribe is thriving.  The magic is in the mix between the two worlds and our individual blend can be dialed to our needs.  In our shop, we have 9 investment strategies, four of them are tied to the passive index investing methodologies.  The other 5, like All Season, are there to satisfy your proud individualism.

Looking Forward

The table is certainly set to benefit investors who have a healthy allocation to more dynamic asset allocation strategies in 2024.  All Season has lagged the US stock market in 2023 which is why I will be personally adding to my All Season strategy account balance at year end with my annual retirement contributions.  Sadly, I suspect most investors will be looking for ways to add to their large cap growth (aka Technology) investment strategies because this has been the source, the only source of gains in 2023.  From a rebalancing, financial planning, valuation, and logic perspective, this is of course exactly the wrong thing to do now.  Buy low, sell high right?

Please stay tuned for our next Strategy Insights update as we complete the line up throughout December.

P.S. Charlie Munger R.I.P.

Charlie Munger was a brilliant investor and will be missed by all.  My lasting memory of Charlie will always be his dismissive attitude toward everything that Wall Street seemed to love at any given moment.  He was the essence of discipline and always true to the value based, Berkshire methodology.  He leaves our world and investors in Berkshire Hathaway with a cool $160B sitting in cash waiting for something big enough and “valuable” enough to deserve their investment.  Take note.  I will miss Charlie as a lighthouse of common sense.

Sincerely,

Sam Jones

 

November 27, 2023

All Season Financial Advisors

Year-End Planning Checklist for Financial Success

As we approach the end of another year, it’s crucial to reflect on your financial goals and make strategic decisions to optimize your financial situation. Our Year-End Planning Checklist is designed to help you navigate through important considerations, taking into account the income, contributions, deduction limits, charitable giving advice, and year-end retirement plan deadlines for December 31^st,  2023.  With input from our capable team of wealth management partners, we offer this year end planning checklist to help make your complicated financial life easy.  Get your highlighter out, print and post it on the fridge, and pass this on to your friends and family.   As always, please feel free to reach out to our team with any questions.

1. Review Your Financial Goals:

• • Assess your progress and financial goals via your E-Money planning portal.
  • Identify any changes in your personal or financial situation that may impact your goals.
  • Be prepared to communicate these to us at your next meeting. Write them down now!

2. Investment Portfolio Analysis:

• • Conduct a comprehensive review of your investment portfolio with our team.
  • Discuss any significant life changes that may impact your risk tolerance and investment strategy.

3. Tax Planning:

• • Review your tax situation to identify potential opportunities. We can offer a great deal of customized advice via our AI-driven tax planning software (Holistiplan), if you are willing to share previous years’ tax returns.
  • Let us help you evaluate capital loss carry forwards and potential tax-loss harvesting opportunities to offset gains before year end.
  • Consider maximizing contributions to tax-advantaged accounts, such as IRAs and 401(k)s, keeping in mind the updated contribution limits for 2023.
    • 401(k): $22,500 (plus $7,500 catch-up contribution for those aged 50 and older)
    • IRA (Traditional and Roth): $6,500 (plus $1,000 catch-up contribution for those aged 50 and older)
    • SIMPLE IRA & SARSEP: $15,500 (plus $3,500 over age 49 catch-up)

• • Make your HSA (Health Savings Account) contributions by year end: $3,850 for individuals and $7,750 for families (plus $1,000 catch-up contribution for those aged 55 and older)

4. Charitable Giving

• • Consider the impact of your charitable contributions on your tax situation.
  • Review the updated charitable giving limits for 2023 and explore tax-efficient giving strategies.
    • Cash Contributions: Up to 60% of adjusted gross income (AGI)
    • Non-Cash Contributions: Generally, up to 30% of AGI
    • Explore gifting appreciated securities to maximize tax benefits.

• If over 70 and ½ use the qualified charitable distribution rule to make charitable contributions up to $100,000 per year from your IRA to a charity without paying tax on the withdrawal. An additional benefit applies if the taxpayer is 73 or over in that it even qualifies as a required minimum distribution.
• Advice:
  • • Consider itemizing your deductions and batching multiple years of giving. Contribute the lump sum to a donor-advised fund in order to exceed your annual standard deduction ($27,700 for MFJ and $13,850 for Single filers).
    • Document and keep records of all charitable contributions for tax purposes.

5. Retirement Plan Deadlines:

• • Retirement Plan Contribution Deadlines for 2023:
    • 401(k) and 403(b): Employee contributions must be made by December 31, 2023.
    • Solo 401(k): Employee contributions must be made by December 31, 2023. Employer contributions can be made until the tax filing deadline, including extensions.
    • *Traditional IRA and Roth IRA: Contributions can be made up to April 15, 2024, for the 2023 tax year.

6. Educational Funding:

• • • If you have children or grandchildren, review and contribute to 529 education savings accounts within limits before December 31, 2023. States offer various income tax deductions for contributions to 529 education savings accounts

Remember, your team at All Season Financial Advisors is here to guide you through these considerations and help you make informed decisions.

We wish you a prosperous and financially healthy new year!

Your Team at All Season Financial

Sam Jones           Registered Investment Advisor

Kristi Sullivan    Certified Financial Planner

Dustin Nelson    Certified Public Accountant

Scott Colby          Certified Public Accountant

Dan Mong          Estate Attorney

Merry Balson     Estate Attorney

November 13, 2023

Create Wealth/ Defend It – According to Morgan Housel

You may not have heard of Morgan Housel, the 33-year-old, best-selling author of Psychology of Money.  If not, you’re probably way into fiction, not that there is anything wrong with that.  Morgan has recently launched a podcast which I would encourage everyone to follow on your favorite audio streaming service. He is an excellent storyteller, researcher and observer of human financial behavior serving up much needed basic financial literacy to those who are relatively new to the sport.  In today’s update, I will lean on one of his more timely posts regarding “Getting Rich vs. Staying Rich” which we sympathize with via our company tag; “Create Wealth / Defend It”.  In my long history in this business, this may be one of the most important moments to consider the delicate balance between these two opposing forces.

The Pod

As a shareholder of Spotify (SPOT), I like the service and listen to several podcasts a day.  Here’s a link to “The Morgan Housel Podcast” on Spotify but you can search for it by name on any service.

The Morgan Housel Podcast – Getting Rich vs. Staying Rich

What I would like to do for this update is apply several of Morgan’s key points to today’s market environment.  The extremes and bifurcated nature of today’s market is something we have not seen since the 70’s and in some cases since the 40’s.  We are truly writing new chapters in the economic textbooks (is that a thing anymore?).  With history as our guide, investors need to be aware of this situation as extremes such as these tend to mean revert not gradually, buy very suddenly.  There are 38 market days remaining in 2023.  During these final days, we expect current extremes to maintain a tax loss as selling pushes losing sectors and asset classes down while the creamiest of the cream stays frothy right into 2024.  But on January 1^st,  2024, the race begins again.  The score is 0-0 and investors are free to buy AND sell based on forward looking opportunity and risk as they see it.  38 days.

I’ll frame this discussion with quotes from this episode and weave in current market conditions.

“Past success cannot be relied on to repeat indefinitely.”

Indeed!  You have also heard the standard industry disclaimer, “Past performance is no guarantee of future returns”.  Not a new concept.

What success is being relied upon in today’s market?

I will give you $1 for every person who believes that the “Magnificent 7” stocks (Facebook, Apple, Amazon, Netflix, Google, Tesla, Nvidia) will underperform the broad US stock market for the next 5 years.  I might owe you $5. Said another way, the past success of the Mag 7 is being relied upon indefinitely by nearly all investors, the media, and the Wall Street sales machine.  It would be downright foolish, overly bearish and unpatriotic to suggest otherwise.

Other relied upon past success comes from the concept that an investor should simply own the mighty S&P 500 index which is magically up 15% YTD while the rest of the market sits on the sidelines.  Why own anything else?  Isn’t the S&P an index of 500 stocks?  Why diversify?  If you can’t beat em, join em?

In 1999, I was the president of the National Association of Active Investment Managers.  I stood in front of a conference room of 200+ risk managers and marked the moment in history by opening with a recent quote from Abby Joseph Cohen of Goldman Sachs.

“There has never been a worst time in history to be a risk manager” – Said Abby

We all had a good chuckle three years later when the S&P 500 and Nasdaq fell 52% and 75% respectively in the first of several historic bear markets.  Neither of these indices made a new high for 13 years.  In 1999, it certainly didn’t seem like it, but we were clearly ending a long period of “Creating Wealth” and moving into a long period of “Defending Wealth”.

Today the S&P 500 is mighty indeed but only so by way of the same Mag 7 stocks that have driven nearly 80% of all gains YTD.  Factually the average stock in the US market is up only 2.36% YTD through November 10^th according to Bespoke.  The largest 100 non-dividend paying stocks are up almost 9% while the 100 highest yielding stocks are down almost as much.  Small caps are down over -4% in aggregate YTD.

Did I mention we have a few extremes it the market today?

In short, this is a moment to consider the balance of risk and relative opportunity.  Looking forward, it is safe to say that leadership will change, and money will flow out of overvalued high-risk assets once they begin to experience more downside volatility.  And if history repeats, that same money will quickly flow into lower risk assets offering investors safety, dividends, interest and rising prices.  This is not a call to stick your money in the mattress and hide.  We are simply pointing to obvious extremes and giving all of our clients a better understanding for where we are, and are not, looking to generate returns in 2024.

“Compound interest only works if you give an asset years of growth.”

The benefits of compounding come from long term holds yes,  but real compounding leverage is a function of dividend, income or share buyback type reinvestment combined with price growth.  If I buy 100 shares of a stock and it goes up, great!  But if I reinvest the real cash dividends of that same stock and my 100 shares becomes 150 shares, and it all goes up, then we see compounding in full force!  Dividend payers have been hammered in 2023 (see above) due the Federal Reserve’s tightening cycle.  Now they are done; now rates can stabilize. Now we are seeing a peak in rates.

Today, wise investors might consider sifting through the wreckage of the high dividend payers keeping in mind that tax loss selling period is upon us.  In the last few weeks, we have initiated entry level positions in deeply oversold large cap stocks paying extraordinary dividends in our Multi-Asset Income strategy.

Walgreens (WBA)            9.39% dividend yield trading down 71% from its high in 2015.

3M (MMM)                       6.54% dividend yield trading down 54% from its high in 2018.

Verizon (VZ)                     7.47% dividend yield trading down 40% from its high in 2020.

We have 24 more names on the buy list but currently waiting for prices to stop falling and the end of tax loss selling.  Here’s a hard fact for you.  From 1968 to 1982, an investor’s total return from owning the S&P 500 index, came exclusively from dividends and interest.  If we are repeating the past to any degree, why would we not reach for higher dividends now that they are dramatically higher and easy to find?  For the record, the dividend yield from owning the S&P 500 index is just 1.62% and falling.

Outside of high dividend payers, we have been talking at length recently about the extreme relative underperformance, but real value found today in small caps, mid-caps and internationals, especially emerging markets value.  As we slide faster and faster toward recession, Treasury bonds, municipal bonds, investment grade corporate bonds, municipal bonds, REITs and preferred securities should also begin to contribute to the stability and modest growth of any portfolio.  Today, these are all just a drag on portfolio performance and a source of frustration for all.  Should we chuck them all?  Capitulate and buy the S&P 500? Buy even more Tesla?  Of course not.   Smart investors remain disciplined, diversified and recognize temporary oversold and overbought extremes for what they are.  Fear of missing out can be just as strong as fear associated with losses.  Both cause bad behavior and this is clearly a time to manage your emotions and lean into fact.

“A financial plan is only useful if it can survive reality.”

Let’s finish with this important concept.  Morgan talks about planning for plans to go wrong.  How do we do that?  How can we plan for something that we can’t anticipate? Enter the magical world of probabilities.  Our financial planning software packages, E-Money Advisor and Money Tree, do a respectable job of factoring in things like inflation, spending, income, debt, education costs, planned purchases, etc.  Like any planning software, they can project your finances out into the future based on the impact of these variables and give you a picture of your available capital all the way to your death.  But of course, this is a moving target.  Inflation was 2% forever.  Now it’s probably twice that, maybe permanently.  That fact alone can dramatically change the math of your projections.  Then there are the various assumptions made regarding market rates of return embedded in your assumptions.  If market returns are above average, projections look wildly optimistic.  If they are below average, the outcomes are not so favorable.  What about unforeseen health issues or support for an adult child?

In today’s financial world, I see one enormous factor that has the capacity to disrupt planning assumptions regarding your net worth and that is the value of your real estate.  Real estate prices have appreciated more than 50% nationwide in the last four years.  This success is not reliable indefinitely – see above.    Everyone who is looking at a net worth report is likely to be looking at a wildly inflated number when real estate values are combined with investment account values.   While projections do not typically include the value of real estate, it is human nature to factor in “net worth” in our spending and investment decisions.

My reality check message is pretty simple.  Be very careful about your decisions and assumptions made with regards to real estate prices and current value of your homes.  Examples might include a decision to take out a Home Equity Line of credit while perceived equity is high or buying out a partner in a commercial real estate venture.  Perhaps you need the assessed value of a home to come in high in order to close a contract to sell.   Today’s real estate prices are highly susceptible to any increase in supply for as long as mortgage rates stay where they are.  Any planning done when all markets are experiencing these types of extremes needs a wide buffer to account for the unaccountable.

I’ll leave it there for this week.  Please do follow Morgan Housel on his podcast.  He’s sensible at a time when very little makes sense.

Regards to all,

Sam Jones

 

 

 

November 8, 2023

Last week I planned to highlight our New Power strategy in this week’s strategy insight, but realized that we have many more client assets invested in our long-standing Worldwide Sectors strategy.  Let’s hit this one first so we can weave in some current holdings and some rather serious considerations as we approach year-end.

Strategy Description

Ripped fresh from our website, this is our description of Worldwide Sectors which is approaching its own 25-year anniversary in January of 2024.

The primary objective of the Worldwide Sectors strategy is to produce consistent, growth-oriented returns over a complete business cycle using individual stocks and ETFs, with lower correlation to the MSCI All Country World Index benchmark.

Worldwide Sectors will produce its best returns in market environments in which there is broad participation and leadership. This strategy has three distinct investment sleeves of approximate equal weightings: Thematic, Domestic and International.  Within each sleeve, selection criteria favor securities with attractive valuations and positive relative strength to peers.

Worldwide Sectors is an all-equity strategy that attempts to remain fully invested in all market conditions and will at times experience full stock market volatility.  Investors will experience both short- and long-term capital gains over time.  Consequently, Worldwide Sectors is more appropriate for tax advantaged/ retirement account registrations.

Ok, so that’s what Worldwide is and the basic framework for the guts of the strategy.   There are several reasons why I like Worldwide Sectors and why it remains one of our longest standing equity strategies.

“Themes” are Persistent and Secular

Themes used to be called Sectors, thus the historical name, Worldwide “Sectors”.  But Thematic investing is a new and improved version of sectors with ETFs and other funds widely available that offer investors a way to capture mega trends.  BlackRock does an excellent job educating investors on the primary megatrends below.  In fact, they have a 19-minute video on the subject if you care to cuddle up with your favorite drink for some financial literacy.

https://www.youtube.com/watch?v=mtxiJWjN2SE

 

 

 

 

 

 

 

As BlackRock illustrates in the video, thematic investing offers investors a more targeted discipline than owning just any broad market index but eliminates single stock risk at the same time.  Today, Worldwide Sectors is participating in all five megatrends with current ownership positions as follows:

Technological Breakthrough:

SPDR Communications ETF – XLC (50% allocated to Meta and Alphabet)

I Shares Software ETF – IGV (Big positions in Microsoft, Adobe, Salesforce, Oracle)

Global X Cyber Security – BUG

Microsoft (our one and only stock position for double exposure)

Demographics and Social Change

ARK Genomic Revolution – ARKG (new position! Big in Exact Sciences and Crisper)

Rapid Urbanization

Global X US Infrastructure – PAVE

Climate Change and Resource Scarcity

Rydex Commodities mutual fund

Rydex Precious Metals funds

*Looking to add clean energy ETFs ASAP

Emerging Global Wealth

I Shares Brazil – EWZ

I Shares Latin America – ILF

I Shares India – INDA

I Shares Taiwan  -EWT

I Shares Saudi Arabia – KSA

I Shares Emerging Markets Dividend – DVYE

Today we have a US stock market that is cosmetically up on the year, but you have likely heard the truth by now that only mega cap technology is up and up big.  Of course, Worldwide has exposure to technology as you can see above, but we certainly don’t have 100% of assets in “Technology Breakthrough” because that would be foolish and reckless.  In fact, Technology is the theme that we are poised to reduce in size and take profits in the coming weeks as we find other themes to be far more attractive given recent relative performance and valuations.

Internationals/ Emerging Markets Offer Value

Another reason I am so passionate about Worldwide Sectors is the “Worldwide” sleeve.  See above, our exposure to emerging markets is pronounced and justified not only because it fits the mega trend of emerging wealth outside of the developed world but also because this is where we see value across the universe of investment options.

Stay with me as I take a short detour in talking through expected 7-year returns.   Jeremy Grantham, co-founder and Chief Investment Strategist of GMO LLC is famous for his 7-year forecasts by asset class.  He is also the ultimate curmudgeon.  His firms’ analysis has a way of proving right over time but is often seen as wildly out of sync with the markets year by year.   In Jan of 2021, I presented the GMO 7-year forecast and received plenty of feedback that this forecast was way too bearish.  After all, how could stocks AND bonds be projected to fall at the same time.  Unheard of!  Well, we know what happened in 2022 – Exactly that.

 

 

 

 

 

 

Remember this is a rolling 7 year forecast not an annual forecast.  Let’s see where things stand today compared to this forecast looking back from January of 2021 to present.

US large caps                      + 17%                       Way higher than forecast

US small caps                     -16%                         Way lower than forecast

Internationals                    – 4%                          Lower than forecast

Emerging markets           – 18%                       Way lower than forecast

US Bonds                             -14%                         Way lower than forecast

Emerging bonds               -17%                         Way Lower than forecast

TIPS                                       -7%                            Lower than forecast

Thus far, the old man seems to be off track.  Outside of Large Cap US stocks (aka Technology), every asset class is tracking far worse than his 7-year average expected returns.  Here’s the latest from GMO.

 

 

 

 

 

 

 

Now if we believe the GMO 7 year rolling forecast is good and has a long track record for accuracy in dictating expected asset class returns, which it does, then we can derive several things from the change in expectations over the last couple years coupled with real actual returns dating back to 2021.

In the next 5 years:

1. US and international bonds are likely to have a very strong period of outperformance.
2. International stocks, especially Emerging Markets should outperform dramatically.
3. US large caps are likely to underperform badly while US small caps may do well.

Don’t shoot the messenger because I know and appreciate how much the world has invested emotionally and physically in large cap technology right now.  We are bound only by our failure to imagine a different future than the one we live in today.  Someone important said that once.

Worldwide Sectors has a dedicated 30% allocation to Internationals and emerging markets.  Thus far, it’s been a bit painful as the strategy in aggregate is barely up in 2023 while the S&P 500 is up almost 13% due exclusively to a handful of large cap technology stocks.  In the next 5 years, I think it’s going to work out just fine as all asset class returns revert back to what good ole Jeremy suggests.

I’ll leave it there.  I can see your eyes rolling back in your head.  I am wildly excited with the design and discipline of Worldwide Sectors despite recent performance.  The strategy has a long track record of outperforming our benchmark, the All-Country World Stock index (ACWI), net of all fees and doing so with lower correlation and volatility. This a keeper for any investor looking for a thoughtful, managed,  stock allocation dedicated to value and thematic investing.

Thanks for reading!

Sam Jones

November 3, 2023

Year End Investment Strategy Insights – Multi-Asset Income

With imperfect consistency, we try to give our clients a peak under the hood of each of our various strategies as we approach year-end.  Our intent is to answer that pesky question; What are you doing with my money?  Let’s dive in starting with Multi-Asset Income, our creation born in the depths of COVID in March of 2020.

Multi-Asset Income (aka MASS Income)

Before I get into it, let me state plainly that any performance numbers referenced in these discussions is based on internal data and the use of real tracking accounts held since inception of each strategy, net of any and all fees.  Each clients’ true experience with any of our strategies is a function of timing of entry, additions, withdrawals, etc.  This discussion is for educational purposes only with data believed to be accurate and true but unverified or audited by any third party at this time.  We do not provide performance numbers in any public form outside of these strategy insights.  Each of our clients is provided with 24/7 access to their accounts including true performance data generated quarterly from our third-party provider,  Orion Advisory Services.   I’ll leave it at that.  On with the show.

MASS Income has done actually what we would expect in this type of environment.  For comparison purposes, I’ll put the (unofficial) results up against several relevant benchmarks.  These are total returns net of any and all fees.  Let’s first look at losses since the tippy top on December 31, 2021, to Tuesday, October 31^st, 2023.

MASS Income Strategy                                  -20.22%

US 20 Year Treasury Bond (TLT)                  -40.85%

Lehman Ishares Aggregate Bond (AGG)    -15.27%

*Vanguard REIT Index (VNQ)                       -32.78%

*The Vanguard REIT index (VNQ), has the highest correlation to our MASS Income strategy just for reference.

Cold comfort I know because I have the majority of my personal investment net worth in the MASS Income strategy.   On the upside, the strategy has delivered an average annual total return since inception of 6.10%/ year including recent losses.  Not great but not terrible.

Let me back up the tape as to why we created MASS Income in March of 2020 and talk through the design, intended purpose, and perceived benefits to investors.

Why MASS Income?  Why Now?

MASS Income was designed to offer our clients a high dividend alternative to Treasury bonds and pure common stocks which at the time paid next to nothing in dividend yield or interest and carried historically high valuations.  Effectively we wanted to build a strategy that had strong total return ingredients with low correlation to both stocks and Treasury bonds. Treasury bonds in March of 2020 were perhaps the least attractive asset class on a fundamental basis of any investible security in the world.  US Stocks were, and are still, unattractive from a valuation basis and continue to pay historically low dividends in the aggregate.   MASS Income, by design is oriented toward hybrid type securities that offered both growth and high dividends without relying on Stocks or Treasury bonds.  These hybrids include the relatively unknown and misunderstood worlds of preferred securities, closed end funds, High Income ETFS,  mortgage REITs, equity REITS, CLO’s, Master limited partnerships, Business Development Companies (BDC), secure lending and credit funds.

Our view of economic conditions back in March of 2020 was simple and clear;  Inflation was coming fast, and we wanted to offer something that would generate income above rising inflation rates.  We wanted to take advantage of a side of the security’s market that could even benefit from higher rates.  Imagine a security that sits on the lending side of the table during a period of rising rates.  These securities generate higher cash flows with inflation, as they are able to charge borrowers higher and higher rates.  These are BDCs, secure lending and bank loan funds and they have all performed as expected – up and to the right!   REITS and preferred securities on the other hand have been smashed during the Fed’s relentless fight against inflation with 11 rate hikes.

In sum, the design of MASS Income is to offer a fully diversified portfolio of securities that generates 7-9% in annual dividend income across 35-45 different securities.  We intend to stay fully invested in all markets and price action of the underlying securities is really a secondary concern to consistent dependable income generation.  We describe the strategy as a winning alternative to owning real rental or income properties.  MASS Income will generate higher annual dividends, plus growth potential, 100% liquidity of capital with 24 hours’ notice and no transaction costs.  Compare that to buying a rental property now at today’s prices and borrowing rates with a 6% commission + your time + taxes + tenants + toilets!

When we started MASS Income in March of 2020, the dividend yield was just over 6%.  Today, MASS Income is generating an estimated annual yield (Dividends and Income) of 9.25% with the vast majority paid monthly.  Wow.  Read that again if you need to.   After nearly three years, we also observe that 40% of total income is received as qualified dividends, taxable at long term capital gains rates.

In March of 2020, I messaged to all that we would never see mortgage rates at then current levels again, in our lifetimes.  Mortgage rates then were near 2.5% for a 30-year fixed rate.  I will tell you with high confidence that you will never see an entire portfolio of securities generate an aggregate yield approaching 10% again in your lifetime.  Seriously, not in your lifetime.   At the same time, we are now seeing the prices of the underlying securities in the portfolio trading at discounts to par, down 25-40% from the highs in 2021.  Now that the Federal Reserve has completed their rate hiking cycle, we are already seeing prices jump.  MASS Income is our best performing strategy in our entire line up, over the last two weeks, as smart investors snatch up these discounts in sync with the Federal Reserve’s new pivot in monetary policy.

I am shamelessly recommending that any of our clients hold and continue adding to the MASS Income strategy now, as a means of generating dividends far above inflation with real potential for price improvement from these depressed levels.  This is a true buy the dip opportunity.  High earners beware, this is not a tax efficient investment strategy and best applied with qualified retirement funds.

Next up… The New Power strategy.

Until next week.

Sam Jones

 

 

 

October 30, 2023

Where Does Risk and Opportunity Exist in Your Life?

When I first started in this business in 1994, I honestly looked at wealth only through the lens of investments.  As an asset manager, my thought process was singularly focused.  If I could make big returns and keep them over time, then I would have wealth.  Done!  But 30 years later, I realize that wealth accumulation comes from risk management across many areas of your financial life.  The condition of “the market” is a daily firehose of noise these days drawing our attention away from other variables in our lives where we can have larger control and positive impact on our financial futures.   Let’s take a moment to look at the spectrum of where risk (and opportunities) exist in our lives.

Behavioral Economics

Ok, let’s get this out of the way.  Market risk and opportunity are legitimately one of the primary tools used in our quest for wealth accumulation.  Managing the balance between risk and opportunity in the financial markets by way of our 9 different investment strategies is one of the primary value propositions we offer our clients.   Most of the financial services industry is made up of salespeople disguised as brokers or reps who sell products to investors and do little to no management of those assets once they are invested.  “Set it and forget it” is an industry mantra.  Sometimes that works, but in my 30 years of experience, when bear markets inevitably roll through, that strategy turns into Set it – lose it and sell out at the lows.  We are witnessing capitulation selling in the markets now if you hadn’t noticed.  Conversely, regular readers know that we became very defensive in our risk managed strategies in September by raising cash, buying gold, short positions, commodities, reducing our stock allocations and eliminating all corporate bonds.  Please Re-read “The Last Dance” post on October 9^th for more details.   And now, after a waterfall 10% decline, many are hitting the panic button.  Wealthy people rarely manage their own money because they know they are prone to making these behavioral errors.  They hire someone who has the experience and knowledge to make tough decisions for them at the right times.  Sometimes those decisions involve avoiding overhyped and overvalued sides of the market.  Sometimes those decisions involve buying asset classes that everyone hates.

Humans are not designed for investing success.  We are mentally programmed to seek safety/shelter and avoid pain/danger.  However, the most successful investors over time are those that literally do the opposite of consensus opinion by actively allocating investment capital to unloved sectors, asset classes and stocks.  Since it’s Halloween, let’s dress up as a contrarian and see what we can see.  I’ll give you two ideas.

Small caps!

Small caps have been beaten down badly since 2021.  Consequently, the market hates small caps.  No surprise.  Rising interest rates are tough on companies that tend to survive on borrowed money.  But if we believe that rates are peaking now (as we do), then we might consider the potential in small caps.  Valuations are less than 1/3 of their large cap growth brothers.  In fact, according to Bespoke the ratio of small caps to the Nasdaq (home of large cap growth) has only been this extreme once in the last 40 years.

That time was the high peak in 1999.  Those of us who were managing money then, remember clearly that small caps outperformed large caps and the Nasdaq by nearly 60% over the next few years.  Today we have the same extreme situation that should serve as an early warning to sell large cap growth or buy small caps, maybe both. We’ll wait for those trends to emerge but we are clearly keeping an eye on this.

Treasury Bonds

               Today, you would find it difficult to find anyone recommending Treasury bonds.  After all, they have lost 20-50% over a span of three years.  With the gubbermint in disarray over the budget, a cumulative deficit of $1.7 Trillion and $34 Trillion of outstanding debt, who would want to effectively loan more money to the US of A?   Treasury bonds are perhaps the most hated of all asset classes now.  But value has returned in this space with rates now at 5% on a 10-year Treasury, especially as we slip closer toward recession when bonds tend to be the best performing asset class.   If Treasury bond rates simply move DOWN to the current inflation rate of 3.5% over the course of the next 12 months, that move would represent a 25% gain in price.  I like the sound of that especially knowing that we have a well-oiled printing press of the world’s reserve currency  – the US dollar.  Are we heading toward slower growth, or recession?  Yes, at least according to 18 consecutive months of declines in the Leading Economic Index (LEI).  GDP was just reported at north of 4% strangely but it should follow the LEI down into 2024 as it has done historically.

 

 

 

 

 

 

 

 

 

We are actively adding to our bond positions in our risk managed strategies.  As I write today 10/27, bonds are up, commodities up, gold up, and stocks are down (again).

Investing against consensus opinion is very tough but very often the right way to make consistent, low risk, returns over time.  The point is that most investors are prone to bad behavior like buying high and selling low.  It’s human nature.  Market risk and opportunity are always present but the difference between success and failure is how we respond to each with our investment capital.   If you have the time, energy, knowledge and desire to make these choices, go for it.  If not, hire someone with a proven long-term track record.

Cyber Security

Cyber security is as much of a threat to your financial future as anything out there.  I wish we had the time and capacity to offer some much-needed home security training in password protocols, what to look for with email phishing attempts, and setting up multi factor authentication on all financial sites.  I could finally put my masters in Information Technology to use!  Every year we thwart a serious attempt from bad guys who have hacked into one of our client’s email accounts asking us to move money or change the address of record on accounts.  We have protocols and cyber security procedures in place to identify and prevent these attempts.  All Season uses Right Size Solutions as a real time technology partner who monitors all traffic to and from our organization and can provide threat response 24/7.  No one can guarantee full security, but we can do our very best to minimize access and control damage if and when it happens.  We would strongly recommend that you spend some time learning how to use a Password Manager – we like Lastpass.com !  We would strongly recommend that you avoid clicking on any hot links coming to you in email unless you are quite confident in the sender and have verified their “from” email address.  And never, never, never give confidential information to someone who calls you and says your credit card or bank has been compromised – hackers love to pose as cyber security professionals!

Taxes

This is an area of financial opportunity that I have come to enjoy.  They say there is nothing more certain than death and taxes.  Bunk.  Taxes are not certain and can be managed.  This is a clear area of opportunity for most that is in your control and carries direct financial benefit.  Here’s an example.

Did you know that if you can get your income below $116,950 year for MFJ filers, your long-term capital gains tax rate could be zero % (sounds like zeee row)?  Here’s a scenario outlined in our January Solutions Series on the Secure Act 2.0.

 

How can you get your income below $116,950?  Great question. You can get there by being retired of course, or perhaps doing some charitable giving at year end to slide under the line.  You can use a deferred comp plan, profit sharing plan or cash balance plan to reduce your taxable income if that’s an option.  You can maximize your deductions.  You can chip away at your IRA account balance early so your required distributions (RMDs) post 70 years old aren’t huge.  You can make sure that your taxable investment accounts are passively invested and not generating short term capital gains taxable as income (but do actively manage your retirement accounts!).

Again, if you don’t want to read tax code for fun on the weekends, feel free to work with our tax planning partners and software to help you minimize your taxes each and every year.  This is in your control and directly helps build your wealth over time.

Financial Planning

For years, I didn’t really understand financial planning.  It seemed like an overused label for financial services salespeople. But I have come to appreciate the real value behind regular planning.  I’ll give you an example.  If you are approaching Medicare, it’s important to pay attention to your income in the two years prior to avoid paying extra premiums.  Medicare is means tested with a two year look back to income.  MFJ filers making more than $206k will pay premiums.   Again, careful income planning can help save money and build wealth.

Much of the opportunity and risk control in planning comes from projection work where we look into the future of your cash flows and balance sheet factoring in practically all aspects of your financial life.  Those include, incomes, expenses, home values, debt, rates of return on your investments, inflation, taxes, even budgeting for things like a car, a second home or long-term care down the road.  We can run your “plan” against all types of market conditions to see how much you are projected to have at death leading to discussion about legacy planning and gifting strategies.  There is much to do here that can help answer critical questions like:

• Will I outlive my money?
• Can I afford to buy a vacation property?
• How should my assets be invested to make my plan work?
• To what extent can I help my adult children financially?

Most of all, clients who go through the planning process and have a clear idea of what they can and can’t do from a spending perspective, find themselves much more at peace about the future.  The process of building your plan is manageable but does take some effort on your side.  We need to gather a lot of information from you, put it all in one digital space, ask questions, evaluate, ask more questions and then put together your financial plan.  It’s a real thing that lives and breathes and needs to be updated annually.  I have found the whole process to be useful, valuable, and it ultimately helps build wealth as well as any of the issues above.

As always, we’re here to help you solve these puzzles with our team of wealth management professionals, working in collaboration toward your benefit.  Today, I see a lot of energy focused on things that are largely out of our control like the markets, the Federal Reserve, wars and politics.  How about spending more time on the things that we can directly control to help manage risk and find opportunities.

Wealth Transfer Solution Series Coming in 2024

This seems like an opportune moment to announce our upcoming Solution Series starting in 2024.  The series is targeted to families that need help, organization, education and training on how to pass wealth efficiently from one generation to the next.  Naturally, this will appeal to those designated as Executors for parents’ estates and/or those designated with a Power of Attorney.  The series will be hosted by each of our Wealth Management Partners offering advice and guidance from their respective fields and delivered quarterly.  Stay tuned for more detail.

Have a great week!

Sam Jones

October 23, 2023

These are the days that test all of our patience as investors.  These are the days when we feel compelled to act to stop the pain and avoid the long list of unknown negative things that can happen to our wealth.  Bear markets chip away at our confidence through magnitude and duration of losses, sometimes both.  Needless to say, historically, these are also the moments when real opportunity develops for the next multi year bull market higher.  I find it very helpful during these phases of the market cycle to simply read our emotional state, acknowledge it and work to get ourselves in the right frame of mind.   Let’s do that.

These are some of the emotions and questions you might be asking yourself now.

Why Do I have Anything Invested in the Financial Markets?

Indeed, when cash, money markets and CDs are paying 5% thanks to the Fed’s most aggressive rate hike cycle in history, there is a higher comparative bar of demands for your investments at risk.  As of the close last Friday, the S&P 500 is still down -11.5% from its highs at the end of 2021.  How about bonds?  The Lehman Aggregate bond index is down over -17% from its highs, not in 2021, but August of 2020.  That’s more than three consecutive years of losses in what has been the safest side of the financial markets for decades!  The list of sectors and asset classes that are negative by 4-5% YTD is long.  Meanwhile opportunities to make money in 2023 have been highly concentrated in just a few names that are now giving up ground as well.  Why invest at all?

Several very good reasons:

1. The Fed is ending their rate hike cycle now and the bond market should become a more productive asset class from here.  By more productive, I mean far outperform cash and money markets for the foreseeable future.  Current yield is the best predictor of bond returns and today a 10-year Treasury bond is paying nearly the same rate as the highest cash rate.  However, as recessionary pressures grow, we will also see Treasury bonds rise in price to add to the total return.  Bonds will outperform cash from here.  We added to our 10-year Treasury Bond position today across several strategies this morning.

2. Stocks have historically outperformed cash and bonds. This is a simple fact.  Over time, especially any time period longer than 5 years, stocks have moved up and to the right earning 7-8% on average with positive returns at least 93% of all years  (see chart below).  These are naturally incredible odds of success.  Note that even over any 6-month period, stocks have gone up 70% of the time  I don’t know of any opportunity out there that offers such a high natural probability of “winning”.

And now dear investors, now prices and valuations have reset significantly since 2021 and the probabilities are quickly increasing that we will see an end to this multi-year bear market and the beginning of a new multi-year bull market in the next 6 months.  If bonds find a lasting bottom right here, right now, then stocks may be doing the same.   You must remember that stock prices reflect  the future.  How much of a recession is priced into stocks, select sectors and asset classes?  Quite a bit!  As I mentioned in last week’s Red Sky Report “40% off”, we already have some generational buys developing now.   Historically, gains off of any bear lows will be far higher than “average” historical returns.  Also remember, if you find yourself wanting to sell all to cash now, you might be locking in losses and have the equally difficult decision of when to get back in.   From our seat, this is an incredible time to rebuild (rebalance) a fully diversified portfolio of stocks, bonds, commodities and alternatives as we discussed last week.

 

 

 

 

 

 

 

 

3. Interest on cash and money markets are peaking.

Just when you thought it was safe to go to cash and earn an easy 5%!  With the Fed effectively ending their rate hike cycle having successfully contained runaway inflation, we should see the yields and interest on cash and money market rates begin to taper and eventually fall in 2024.  The same goes for lending rates, bank loans and private credit funds.  These are the days when these types of safe instruments look and sound great but make no mistake, these are the peak days for yields on cash.  Certificates of Deposit (CDs) could make sense for money that wants to live permanently in cash because you can effectively lock in these peak yields for years.  However, please re-read above.  Bonds and stocks outperform cash over nearly all time periods.  CD’s also have penalties for early withdrawals.  For those who missed our annual meeting presentation, this is what inflation has done over the last 12 months.

 

 

 

 

 

 

 

Again, if history repeats, we should all expect to see the interest on cash and money markets,  follow the same path lower, well into 2025.

I’m Tired of Losing Money (or not making money)

We are all tired of losing money.  This is a bear market, and it is what it is.  We are tired of risk; we are tired of politics and wars and the Federal Reserve and the media.  You are in good company believe me.  Losing money with your long-term investment capital is part of the game as markets simply do not go up in a straight line.  I struggle to find anything that is trading above the 2021 highs with the exception of a few stocks and maybe commodities.  It is no wonder we all feel this way and I am truly empathetic to all.   Our active, risk managed strategies, like All Season, Gain Keeper and Income strategies are doing an admirable job of controlling portfolio volatility to less than ½ of their benchmarks.  Controlling volatility helps you sleep at night but does not mean you won’t still experience some losses of course.  The goal is to get to the end of this bear market cycle with the following:

• Your emotional capital intact, ready to buy or deploy cash when the time is right.
• Your financial capital intact or in a “recoverable” position

Age is also an important consideration with risk and investing of course.  We are encouraging our retired clients or those living off their investment accounts in some form, to adopt the two-bucket approach we described in previous updates.  The two-bucket approach allows for a cash bucket to carry two years or more of living expenses beyond other sources of income like social security, rents, etc.  Meanwhile, your growth and income bucket can be left alone to weather bear markets, grow and generate income to replenish you cash bucket when needed.  The two-bucket approach effectively allows you to emotionally separate your needs for cash today from the anxiety of watching your investment balance go up and down.

Younger clients have it easy and can simply look for discounted opportunities like we have developing now, to allocate excess savings from earned income to investment accounts.  Buy low, accumulate shares at discounts, pay attention to taxes, avoid selling much of anything and keep your 20-year goggles firmly in place.  Easy!

That’s it for this week.  Just a little much needed pep talk. 😊

This time will pass, and returns will come again.  Patience is critical now.

Thank you for your continued trust and confidence,

Sam Jones

 

October 16, 2023

40% Off Rack

I went shopping at our local outdoor store this weekend.  They were having their big pre-Winter sale.  I found something very special on the 40% off rack that felt like foreshadowing and opportunity all at once.

 

 

 

 

 

 

 

 

 

Socks

Yes, I found these on the 40% off rack and wow was I excited.  The shop had racks and racks of expensive socks for sale but here in a small basket, I found these Darn Tough , good American socks at 40% off.  No other styles, no other brands, no other colors,  just Darn Tough American socks at 40% off.  This of course was no accident; it was a sign.

I had to wonder, does the shop hate America?  Was there something wrong with these or maybe people just don’t like the look?  Darn Tough is my favorite brand of sock.  They are made in Vermont with a LIFETIME guarantee, no questions asked.  I have never returned a pair because they last forever, made of high-quality Merino wool and just the right thickness.  Full retail is $23 for a single pair of these gems, and I was thrilled to get them for $13.80.  As I walked proudly through the weight room this morning, the compliments and my patriotic pride grew.

But my socks also made me think about market opportunities.

What else can I buy for 40% off in the financial markets?

Turn Fear Into Opportunity

Last week, I talked about the Change of Seasons that is clearly occurring in the markets across all asset classes.  We are shifting into a stagflationary environment.  On Friday, Gold, Silver, Commodities and Energy had one of their best single day performances in several years.  This of course reflects the sticky inflation that we all know and feel.  At the same time, on the same day,  bonds of all types outperformed stocks which reflects the growing weakness in the economy.  How strange that inflationary and recessionary asset classes could rise together…. unless you begin to see, understand and respect the reality that we are entering a stagflationary environment.  Then it all makes sense. Keen market watchers and asset allocators have seen the inflationary sectors outperforming dramatically since last 2021.  But now they are laser focused on the bond market to confirm that the US economy is indeed slipping into recession as it prices in the lagging effects of the Fed’s 11 rate hikes.  If history repeats, we should see bonds find a bottom here and provide some much-needed portfolio ballast against your value, dividend, and high free cash flow stock portfolio (right?).  Bonds are still a trade, but this would be the logical place and time for bonds to rise in price and to see interest rates fall to some degree.  Our allocations to bonds are small and temporary but they do deserve a place at the table now.

When I look across the landscape of stocks as potential investments, I see a bifurcated market.  I see a few overbought and overvalued sectors like technology bubbling around the highs but struggling to move higher now.  I don’t really find anything attractive about any of the broad market indices like the S&P 500, but we’ll still hang on for easy market exposure while the trend is our friend.  Frankly, the vast majority of stocks in the markets today have been in a steep and destructive bear market since late 2021.  As we know, 7 stocks called the Magnificent 7, have held things together in select indices in 2023 but really masked the on-going bear market occurring in the other 493 stocks (in the S&P 500).

But looky here!

The 40% off rack is now filling up!  40% off is a huge discount for anything really.  At the same time, one could argue that anything on the 40% rack is undesirable, broken, or odd in some way.   But today, I looked through the 40% (or more) market rack to see what I could find.  Junk is junk but I was looking for sectors, individual companies, countries, and asset classes that have been good to investors over the decades.  I was looking for long term quality in the bargain bin right next to my good American socks!  Here’s what I found that is now priced 40% or more below the highs in 2021.

• Telecom companies like Verizon, 8.48% and AT&T , 7.34% –  dividends anyone?
• Dows stocks like 3M (MMM), Boeing (BA) and Disney (DIS)
• Mega theme sectors like clean energy (ICLN, TAN) and Biotech (XBI)
• Oversold banks (KRE, KBE, BAC and C)
• Mortgage and equity REITS paying 8-11% dividends
• The retail sector (XRT)
• China and Chinese Technology (MCHI and KWEB)
• Silver Miners (SIL, SLVP)
• Long term US Treasury bonds

I know, I know this doesn’t feel like the stuff you want to bring home now but of course, these are the very things that deserve our attention, especially when they turn higher!  This is some off-season shopping, like buying a pair of skis in August.  Regardless, this is not investment advice and please do NOT run out and buy these today.  I am simply pointing to the hard facts that there are more and more attractive opportunities showing up on the 40% off rack.  This is not a leadership group by any means but when something is on the 40% rack, we know a few things.

First, we know that most, if not all, knowable risks in these sectors, countries, stocks, have already been priced in to a large degree.  Do you remember the movie, “The World According to Garp” with Robin Williams?  Williams is meeting with a realtor to look at a house to buy and a small plane crashes into the home at that very moment.  He gets up off the ground and says, “I’ll take it.  This house will never be hit by a plane again!”

Second, we know that good companies like Disney, Boeing, even 3M are staples in our economy.  They are not going away, and they generate $Billions in annual earnings and revenue every year.  This is the domain of Buffett who tends to buy big established cash cows selling at deeply depressed prices.  In fact, I think I will encourage my kids to consider these names and others for their Roth IRAs now with their 30-year goggles firmly in place.

Finally, on this rack, I see a lot of passive income that is higher than inflation (telecom and REITS) and I see quite a few sectors that are non-correlated to US stocks or bonds.  These are things like clean energy, Silver, China and biotech.  Remember, during periods like this, we want to force ourselves to look for opportunities outside of your basic US stock and bond index ETF options.

Young Investors Get Ready

Bear markets are deceptive and serve one purpose. That purpose is to create long-term value by eventually forcing as many investors as possible to sell out at the lows in fear and capitulation.  Personally, I have been through two of the most devasting bear markets in history outside of the Great Depression.  They are rough to say it plainly.  What we have seen since 2018 are a series of three mini bear markets in stocks (20-26%) and a very significant full and complete bear market in long term US Treasury bonds (now down 50% from the high in 2020).  What we did not see at the most recent lows in October of 2022 was the type of indiscriminate selling and capitulation that typically accompanies the end of a bear market.  Consequently, the potential for a wash out below 3500 on the S&P 500 is still very real to complete this bear market cycle and set the stage for a new multi-year bull market. But young investors should look at this market as an incredible gift.  How lucky are you to potentially buy stocks, or even the stock market as a whole at 40-50% off?  Anyone in their thirty’s or younger has been living in a world where opportunities have been squandered by older generations who vote entitlements, make laws and set policies favoring the old and wealthy.  We collectively have handed our younger generation a land of unaffordability, in housing, food, transportation, education, energy, travel and leisure.  If history repeats, young investors will have some incredible opportunities to buy long term investments at deeply discounted prices.  I’m starting to see those opportunities develop now thankfully.  Is it too much to ask to offer them a viable future?

Find opportunity in fear and buy Darn Tough America (socks) at 40% off.

Have a great week.

Sam Jones

 

 

 

October 9, 2023

The Last Dance

Last week was big for the financial markets.  An event, or series of events, occurred all in one week, that one could accurately describe as a true change of seasons.  These things do not just happen out of the blue.  They build slowly, discretely, often in the face of widely held beliefs.  And then, the moment arrives when it becomes clear to those of us who are domain experts in cycle work, that a turn is upon us.  For most of the last 6 months, investors convinced themselves and financial media spread the word that a recession was not in the cards, not possible, soft landing and so forth.  With the cumulative events of last week, there is now little doubt that the US economy will be solidly in recession in the first half of 2024.  Consequently, for investment strategies with a dynamic methodology, we have the next few weeks, maybe a month, to make a few changes to your asset allocations.  This is the time to prepare for new asset class leadership and a relatively swift rotation among winners and losers as we head fast into 2024.

Annual Meeting Presentation Key Points

It was a pleasure to see so many of our clients and our complete Denver area wealth management team at the Wellshire Golf Course for dinner and entertainment this week.  Zoom meetings are never an adequate substitute for in person events and we are always glad to host this 22-year-old event.  Thank you to everyone who made it special.

Much of the content of our presentation is especially relevant to this update so I’d like to highlight a few key points made in the session.

*If you would like to receive a copy of the 2023 Annual Meeting presentation please reach out to Kris Dickey at kris@allseasonfunds.com or by calling us at (303) 837-1187.

#1. Higher volatility is the new norm.

This picture pretty much says it all.  What has become obvious to all is that portfolio volatility, both up and down, is increasing and has been since 2018.  In the last five years, we have experienced three bear markets in stocks in excess of 20%.  We have also witnessed the US Treasury bond market fall for three consecutive years losing an average of -7.65% per year from the peak in August of 2020 to last Friday.  The 20-year Treasury bond has flat out crashed and yes that word is appropriate considering the loss of 46% (-17%/ year of the last three years).  Retail investors probably don’t feel the outright pain of those bond market losses as much as larger institutions, but they do feel the increase in portfolio volatility when the “safe” side of your portfolio (bonds) loses more than your stocks.  It would be smart for all of us to remember this moment because this is the direct result of the Federal Reserve’s multi year period of near zero interest rates while simultaneously spraying $Trillions into the economy as “stimulus”.

 

 

 

 

 

 

 

 

 

 

 

 

#2.  Add Alternatives for Higher Returns and Lower Risk

We talked through the benefits of carrying alternatives in a portfolio in order to increase returns and lower risk (or control volatility).  Alternatives are traditionally things that have little to no correlation to stocks or bonds; Things like commodities, gold, hedging and tactical strategies, even real estate when the time is right.  We described this as Asset Allocation 2.0, but this concept is not new.  The same thing occurred in the 70’s and early 80’s. During these years, investors learned how to hedge and clearly recognized the value of risk management and a more dynamic approach to portfolio management.  But sadly, that recognition takes years to settle into the mass of investor psychology and for good reason.  Simply owning a standard blend of stocks and bonds has been a rewarding and carefree experience for most of the last decade.

 

 

 

 

 

 

 

 

If history repeats, then alternatives should earn a rather permanent place in your portfolio.  Today, our Flagship All Season strategy has reduced our stock exposure to 50%, reduced our Bond exposure to 20% and increased our “Alternatives” exposure to 30%.  Over time and especially as we move closer toward a true Stagflationary environment (Inflation with a Stagnant Economy), we expect the results of this allocation to speak for themselves.  Statistically speaking, owning alternatives in any portfolio throughout history has actually produced impressive results.  Consider this study from JP Morgan from 1989- Q1 of 2023.

 

Notice the recommended asset allocation mix in the very top pie chart for higher returns and lower risk (volatility).

50% stocks

20% bonds

30% Alternatives

Sound familiar?

#3 Inflation is sticky – The Stagflation Playbook

               This is the last but most important takeaway from our annual meeting presentation.  The headline goes with a tag line that reads Inflation is sticky…. And the Fed can’t do much about it by raising rates.  These are the real drivers of inflation across the globe.

 

 

 

 

 

 

 

 

As you walk through these self-explanatory catalysts behind secular inflation, ask yourself which of these will be solved by the Fed raising interest rates?  I’ll save you the analysis.  None.  Here’s the important take away.  Inflation of the type we have today, is likely to remain high and higher than desired even when we slip into recession in 2024 (hint).  This again is called Stagflation and it’s a condition we have experience here in the mighty U S of A in the late 40’s and again in the 70’s.

Asset allocation 2.0 would therefore dictate that we “stick” with some inflation beneficiaries among our alternative allocations.  At the same time, we should prepare our investment portfolios for what is now becoming inevitable and that is a recession in the first half of 2024.

Change of Seasons

As I mentioned in the preamble, there are certain moments in market history when we become aware that the tide has turned or on a more timely basis, when the season has changed.  Last week was all about brilliant colors, long sleeve t-shirts and shorts, sunny, awesome.  My wife Sarah in fall Camo last weekend here in Steamboat Springs, CO.

 

 

 

 

 

 

 

 

This week, all leaves are down, temps fall below 30, break out the winter jackets.  And just like that the season turns, gradually, slowly , then all at once.

Last week, several important events occurred that are consistent with a top in the economic and market cycle.

• We saw a potential top in the energy sector (not necessarily all commodities).
• We saw the defensive sectors like Utilities and Healthcare suddenly rise from the ashes. Consumer Staples should be next.
• We saw the bond market complete an exhaustive, waterfall decline in price and spike in yields. This is a natural event that occurs at the top of every economic cycle paving the way for recession.
• We saw a jobs report that was anything BUT strong considering it showed a LOSS of 22,000 full-time jobs and a rise of 126,000 part-time jobs.
• We continue to see the stream of economically sensitive reports like factory orders, shipping rates, credit card and auto payment delinquencies, consumer confidence, falling new home sales, corporate bankruptcies, all pointing to an economy that is simply contracting. The evidence is overwhelming.

Martin Pring, the author of The All Season Investor, and the name sake of our firm, offers this clear chart to illustrate my point.

 

 

 

 

 

 

 

 

 

 

 

 

One can read this chart from left to right showing when we should overweight/ underweight stocks bonds and inflation sensitives in our portfolios depending on where we are in the economic business cycle. Each stage of a real business cycle varies in length and magnitude but the sequence of events repeats.

The US bond market topped in April of 2020 – Stage 4

The US stock market topped in December of 2021 – Stage 5

Inflation sensitives (like energy) may have just topped – End of Stage 6

Today, there is a high likelihood that we are shifting from Stage 6 on the very right-hand side all the way back to the beginning which is Stage 1.  Stage 1 marks the beginning of economic contractions (aka Recessions).  So, what does that mean practically speaking for investors.  Darn it Sam, get to the point!

• This is that time when we want to reduce, but not eliminate, inflation beneficiaries.
• This is the time to reduce stocks to an amount that we can hold through a complete recession.
• This is the time when we want to rebuild our Bond positions, yes that means US Treasuries.
• This is the time when we want to shift to internationals expecting the US dollar to fall.
• This is the time to start bottom fishing for stocks among oversold financials, REITS, banks, utilities, healthcare, and consumer staples sectors.
• This is a great time to rebalance your passive index portfolio which is no doubt light on bonds and heavy on stocks.

All Season Clients* – We do all of this for you of course.

The Last Dance

I named this update the Last Dance for a reason. October and the last quarter of the year tend to be good for stocks.  During the 4^th quarter, I expect we will see the following:

• A quick recovery in stocks from the July-Sept sell off that ultimately gives way to the longer-term bear market in place since December of 2021.
• Bonds should form a bottom here and begin rising stronger than most would expect.
• Commodities and inflation beneficiaries should participate in the year-end rally but lag, especially as we close in on January.
• Internationals should rip higher if the dollar begins to sell off.
• Economic reports will continue to come in weaker than expected this quarter.
• We will see a peak in corporate earnings this quarter.
• We will see a peak in employment and wages.
• We will see real estate prices fall as supply finally arrives.
• There is a high probability that the Fed is done raising rates.

This is the last dance.

I’ll leave you with a note of optimism for the future. Every multiyear bull market is born out of a recessionary environment.  Stocks tend to bottom almost exactly halfway through a recognized recession and the returns from those lows are robust in the neighborhood of 20-30% in the first 6-9 months.  Since 2018, we have not been able to sustain back-to-back years of gains without a great deal of price drama and massive support from the Fed.  A complete recession will give our markets a real chance to rise dramatically over multiple years, with real value at every turn.  Our job between now and then is to preserve principle, keep our risk management goggles firmly in place and make a move to the other side with our emotional and physical capital intact.

I realize this has been a frustrating year for all investors with diversified, risk managed investment strategies. I do wish we had been able to capitalize on more of the relief rally over the last 12 months, but we stick to our disciplined methods, rain, or shine.  From the highs in 2021, we are no better and no worse than the best of the US stock index – down about 10%.  But what happens next as we complete the full economic cycle, is what separates the field.  As our company tag line says, Create Wealth, Defend It.

Best of luck to all investors!

Sam Jones

September 27, 2023

As we work through our fall client reviews, I often hear the same set of questions and have the same or similar discussions.  With that in mind, it seems appropriate to use this update as a means of daylighting these conversations, concerns, questions for everyone’s benefit.  This is a highly emotional time for all investors and I hope we can help guide and set expectations a bit.  We will be discussing and presenting more detailed information on these subjects at our upcoming annual client meeting on October 4^th in Denver.

Q and A

Question #1:

Help me understand – Are we going to avoid a recession like I seem to hear on the media?  Will we have a soft landing?

Answer:

There is some good news and some bad news on this front.  Bad news first.

We are seeing growing evidence that inflation is actually bottoming now and heading higher again after falling from the high of 9% one year ago .  One of the better sources of inflationary data comes from www.truflation.com.

They show that inflation has successfully fallen from over 9% to as low as 2.3% but the rate appears to be climbing again from the lows in July and August.

 

 

 

 

 

 

 

 

While we might applaud the Federal Reserve for aggressively fighting inflation, albeit terribly late to that war, we also need to recognize that ultimately, the sources of inflation are not something the Fed has control over through monetary policy.  These sources of inflation are very sticky, durable and quite difficult to reverse directionally.  Many are still creating great concern at the Federal Reserve.

I will be talking specifically about these sources of inflation at the upcoming Annual Client meeting at the Wellshire Country Club on October 4^th. 

The concern of course is that we are beginning our next stair step higher on what continues to look like the long and formidable decade of the 70’s.  Stocks remained range bound from 1965 – 1982 including four bear markets of 20-40% each.  Today, we have seen three bear markets in stocks of at least 20% each since 2018 (3 of the last 5 years).  It seems somewhat obvious that we are repeating the 70’s style inflation cycle.

The good news is that we may not have a formal recession or at least not something that impacts the entire economy in widespread fashion.  Employment is still strong, wages are high, commodity prices are high, real estate prices are high, and the cost of my breakfast burrito is insanely high!

 $18!  Seriously?

What I see with strong evidence is that the more cyclical segments of the economy are already in recession like luxury goods, technology hardware, sporting goods, discretionary items, consumer retail, and travel. Other areas that command our steady payments like energy, streaming services, insurance, food, housing, rents, services, are still strong almost riding the wave of higher prices.  The strong sides of the economy are really inflation beneficiaries while the weak sides of the economy are suffering badly from inflationary pressures. So, it depends on who you ask whether we are going to have a recession or not.  Some would say “Yes, my company is already deeply in recession!”  Others would say, “Absolutely not, we can’t keep up with demand”. Inflation can be worse than any recession for many.

In sum, in true 70’s style, there is a tug of war between inflation, which is winning at the moment, and recession, which could still become a bigger force as we move through time.  If history repeats, we end up with a draw of sorts, called Stagflation (Inflation AND recession).  I believe we are getting there quickly.

Question #2:

They say inflation is running at 3.67%.  Why does it still feel like everything is still so expensive?

Answer:

As I indicated in Question #1, the things we need are still rising at almost double-digit rates on a year over year basis.  Things we want, that fall into the discretionary pool, are seeing modest falling prices year over year.  Stagflation!   Take a look at the breakdown of August CPI numbers.  The areas in Blue are showing rising prices while those in Green are showing falling prices. Very interesting!  Spend some time with this.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As I’ve said for the last decade, our measures of inflation are highly skewed toward consumer goods and literally exclude things like housing (+7.8%) and food (+ 6%) and energy (actually up 11% year over year now).  So yes, our current and rising cost of living is not represented well by current inflation numbers reported as the Consumer Price Index.  Our advice:  Control the things you can control, like your spending, saving, incomes, debt and taxes.  We’ll work hard every day to make sure your money is as productive as possible given market conditions.

Question #3:

Where are you (ASFA) looking for investment opportunities now?  What is working?

The answer comes back to the 70’s playbook for what made money and what did not.  As I’ve told regular readers in the past, I keep a list of the sectors, asset classes and themes that did the best in the 70’s period of persistent high inflation with bouts of recession mixed in.  Here’s the list (and I’m sure you’re tired of seeing it).

• Commodities – A new super cycle of commodities began in late 2020. Since then, commodities are up 87% versus stocks, up 19% and bonds DOWN -14%.  We have full exposure to commodities across multiple investment strategies. Buy the dips for the foreseeable future.
• Value and high dividend paying stocks – Till I’m blue in the face. Let’s highlight Berkshire Hathaway (BRKB), our largest holding in the All Season strategy.  Berkshire Hathaway represents the essence of value and dividends for those who understand Buffett’s discipline.  The markets began favoring value over growth styles in November 2021.  From that time Berkshire Hathaway is up over 26%, while most “Growth” funds like the I shares S&P Growth ETF (IVW) are down -15% to date.
• Natural resource ETFS, Closed End Funds and MLPs – MLP are Master Limited Partnerships that invest in natural resources and raw materials. Like most of the inflation trades, these funds and stocks are up over 70% since 2021.  MLPs in ETF form like ALERIAN MLP ETF (AMLP) are also up 40% since late 2021 but pay out over 9% in annual dividend interest.  Buy em, hold em and collect $200 as you pass GO.
• Cash – Yes, a higher than average cash position is also fine as long as that money is earning a high yield. High yield in today’s market is around 5%/ year and available via any money market mutual fund, T-Bill or short term Treasury bond.  Cash can be an investment, but usually not a long-term investment.
• Treasury Bonds – But only for a trade. I believe we are approaching that time and place where there is a reasonable opportunity to buy basic 10-year Treasury bonds. They are unnaturally oversold and paying nearly 4.5% interest with growing recessionary threats out there.  Again, US Treasury Bonds are only a trade and not to be bought and held through this whole cycle.
• Internationals – Critical investors might have noticed that international stocks have been marginally outperforming the US stock market since late 2021. Again, this comes down to value as International markets are priced at less than ½ of the US market by almost all metrics.   I expect the performance difference to widen dramatically in 2024.

We will cover this topic at our annual meeting at the Wellshire Country Club on October 4^th! 

Question #4

If the government shuts down at the end of September, will that have a negative impact on the markets?

No, we have had 20 government shutdowns in modern history and the impact on the S&P 500 from beginning to end has been 0.0%.

Question #5:

Are real estate prices going to crash if rates stay this high (or higher) and people can’t afford a mortgage?

Answer:

My sense of gravity and belief in mean reversion says yes, but crash is a harsh word.  I would suggest that a more reasonable description is Deep Freeze.  You have heard and felt the hard facts surrounding real estate and mortgages since the Fed embarked on the most dramatic increase in rates in history (fact).  The impact has been a cliff drop in sales but not so much in price, at least not yet.  Falling sales are tough on one set of our economy and those are real estate agents, mortgage brokers, title companies and everyone associated with a real estate transaction.  I am interested to find out how much of our economy and wealth is tied up in the real estate transaction industry.  I’ll bet it’s a large number considering the National Association of Realtors is the largest lobbying group in DC, spending $84 Billion in grease money in 2022 alone according to Zippia.com.  In the 70’s, real estate prices basically flatlined for almost 14 years while mortgage rates climbed into the teens by 1982.  No one is going to move unless they have to, especially if they need a bigger house and another mortgage.  We will see more supply come on the market as those who failed to lock in long term mortgages are forced to sell or foreclose when their notes are due.  They will be frozen out of the housing market and go back to renting. Other housing supply will come from aging baby boomers looking to downsize with no mortgage but will have to accept less than they want to attract a buyer – possibly much less.  Most will opt to stay frozen in their great big homes, with lots of empty rooms. Finally, home builders will work to meet the demand for homes but building costs are still on the rise making them ultimately unaffordable for most.

It seems pretty obvious that we’re in for a long period of no growth, sideways at best, deep freeze trends in residential real estate.  National home prices over the long term tend to track back to the Consumer Price Index just as they did from 2006 through 2012.

 

 

 

 

 

 

 

 

 

 

 

I expect the same this time without the dramatic drop in prices of 2008/09.  How long will it take for the CPI and HPI lines to converge?  Glacially long.  Our best advice?  Get comfortable.  Learn how to fix up your own home to save money. Settle in for the deep freeze.  Enjoy the process and the joy of learning how your house works.  I installed all new porch lights on our house last weekend.  Super fun.

 

That’s it for this Q and A session.  Again, we’ll be covering a lot of this type of information at our upcoming meeting on October 4^th. There will be dinner, drinks, the company of your peers and our entire Denver area based wealth management team!

Keynote Speaker – David Hansen, Senior Economist for the Colorado Legislative Council.

We hope to see you there!

Sam Jones

 

 

 

 

September 5, 2023

Wealth Accumulation 101

Labor Day weekend marks the beginning of the school year for younger households so let’s take this moment to head back to the school of basic personal finance.  It is important to understand the very purpose of wealth.  For today’s report, I’m going to start by exploring the very purpose of wealth and then borrow heavily from the work of Scott Galloway (aka Prof G) and his newest book, The Algebra of Wealth, to provide a healthy framework for how to accumulate wealth inside and outside of the financial markets.  Timeless wisdom for everyone to remember.

The Purpose of Wealth

I begin each of my semester high school classes posing this question;  What do you think is the purpose of wealth in any capitalist society?  Of course, there is no single answer.  But most students quickly reply … So, we can buy stuff!  Indeed!  But let’s root down into that idea and really discover the very human need that is met when we accumulate wealth.  The answer is choice.

Wealth  = Personal Choice

When we think about a “rich” person, we think about someone who has everything, has nice things, can do what they want, when they want, how they want, where they want.  Most rich people, not all, tend to signal their wealth through very public displays like luxury cars, houses, boats, clothes and other measures of consumption.  They send their kids to elite colleges not because they are materially better (honest truth) but because these schools signal wealth and exclusivity.  But really, rooting in, we find that such displays of wealth are displays of ultimate choice.  Wealth brings optionality to every aspect of our lives in a good and desirable way.  While seemingly wasteful spending is an unattractive behavior to some, it is simply an exercise in personal choice to another.

The choices we make each day generally to fall into three categories.

Things we MUST do

Things we SHOULD do

Things we WANT to do.

Sleep, spending, reading, personal fitness, working, vacationing, visiting with friends, etc.  Everything fits nicely into one of these three boxes every day.  Wealth has the effect of shifting more of our day into the WANT box and away from the MUST and SHOULD boxes.  When we have no wealth, our WANT box is light and tends to be empty, meaning we are not doing things we want to do because we don’t have the financial freedom to do so.

Ok, so let’s get into best practices for wealth accumulation (hat tip to Scott Galloway’s fine work)

Focus

I had an interesting conversation with a remote worker this summer.  He was bragging that he could surf all day and just come in every 30-40 minutes to check his phone tucked under a towel on the beach and still be credited with “working” all day.  Personal opinion – remote work is not going to last much longer if this continues.  Rest assured that employers know clearly who is working remotely and who is “remotely” working.  When the time comes to cut the workforce, the decisions will be easy.

A person who is serious about wealth accumulation is going to work in a focused and non – distracted way for 8-10 hours a day.  They will persistently grind for years especially in the time of early career development.  Remember wealth brings choice but we must create lasting wealth first, right?  I will address the issue of work/life balance in relation to time in a minute.  Bear with me on this thread.

Following a personal talent or passion is great but be clear that we still need to focus that talent on an industry, company or market that will leverage those talents into wealth.  I love to garden and have talent here, but this is not going to be a wealth accumulator for me and will remain forever in my hobby house.

Galloway says to focus on building your skills, degrees and personal certifications early in life.  Get it done!  I couldn’t agree more.  You will not do it later I promise.  Degrees matter, college matters, certifications open doors for you when employers are comparing candidates.

Finally, focus on sectors of the economy that have legitimate potential.  Today, I still hear too many young people thinking they are going to make it big as an influencer on You Tube or some other nonsense.  Influencers are not going to be a thing.  Advertising as a business model, is already on life support and our digital media platforms (Facebook, Netflix, Disney and others) are absolutely saturated with content.  But AI is going to be a thing. Technology solutions to climate change are going to be a thing.  Caregivers to an aging world population are going to be a thing.  Internet of Things (IOT), Biotech, Genetics, Cyber Security, Energy Transition and infrastructure engineers will all be BIG things.  Career work is everywhere but not all pay well.  Focus and apply your talents and interests toward relevant and growing industries that will naturally have high compensation potential.  Be deliberate and thoughtful about your choices-  Think about it, plan for it, execute it.  My door is wide open to any young people struggling with career choices.  Happy to chat any time… really any time.

Stoicism/ Discipline

I can already hear the screams of “Boomers!!!”  I am factually not a Boomer as I was born in 1967 but I do share Professor Galloway’s belief in Stoicism as a standard of behavior.  Personally, I would suggest that discipline is really the driving behavior we’re after, but stoicism and discipline are really twins when it comes to personal finance.  Living within your means seems like a lost art as we all tend to get caught up in the war of outspending each other – whether we can afford it or not.  Living within our means literally translates to spending less than you make every week and every month.  The net result is savings, and those savings must be invested productively and working just as hard as you do every week and every month.

As a point of fact according to CNN in 2022,  only 50.3% of Millennials are earning more than their parents on an inflation adjusted basis.  This is a trend that has been steadily  declining since the early 1940s when more than 90% of children earned more than their parents.    But earnings are only part of wealth accumulation.

 

Stoicism in financial markets also takes the form of disciplined investing with a long-term strategy rather than repeatedly flaming out with a magical day trading strategy in your Robinhood account.  Factually only 5% of day traders make money over any length of time.

Do you know how to make a small fortune trading options? 

Start with a large one!

Today, we are constantly tempted to deviate from our plans, to chase the latest, hottest theme, reaching for a faster, bigger, better return on our capital.  In the last 5 years, we have serially witnessed investment frenzies in marijuana stocks, crypto currencies, Special Purpose Acquisition Companies (SPACs), and now we find ourselves in the grips of the Artificial Intelligence (AI) frenzy.  Each of these themes has sucked in a great deal of investor capital… and destroyed it.  Will AI buck the trend and prove to be the game changer that everyone believes? It seems possible, even likely, but be clear that at this moment, we are witnessing another frenzy and very little money is actually made and retained once the frenzy becomes obvious.

Anecdotally, clients have recently asked why our risk managed investment strategies have lagged the markets in 2023, specifically select indices like the Nasdaq 100 or any other technology only benchmarks.   They lag because we remain stoic and disciplined in our risk management methodologies and we’re proud of it.  These strategies maintain an appropriate mix of asset classes including stocks, bonds and now a full-size position in commodities and internationals.

In today’s market, a stoic and disciplined investor would have only a modest, even minimal exposure, to most of the mega cap technology companies found in the Nasdaq 100 despite very recent performance.  But wise investors would remember that these names are still down the most since the peak in late 2021 when we said goodbye to our last positions held in the mega cap technology trend.  Risk management is a practice of allocating capital to areas of the market with the most attractive risk to reward characteristics and most of these lagged big techs in the first half of 2023.  However, value-oriented investments are already coming back now in the second half of the year, and we remain quite confident that our risk managed strategies will continue to generate high risk adjusted returns for our clients especially in 2024.  This is a critical time and place to avoid temptation and stick with your discipline.

Stoic and disciplined wealth accumulators also remain diversified not just with their investment portfolios but in all financial decisions.  As an in-house rule of thumb, we coach our clients not to have more than 10% of their investment capital exposed to any one company or stock.  If you are lucky enough to have one of those lottery type wins with a 3000% gain, do yourself a favor and work to trim that thing back to 10% over time, taking gains off the table, even it means paying some of your growing long term capital gains tax bill annually.  But diversification is not just about investments.  Think about your career and where you invest your savings.  If you are a real estate agent and you invest only in real estate with your savings, then you are not diversified.  Your income and the fate of your real estate investment results rise and fall  together with real estate cycles.

Personally, I love the idea of diversifying income streams across non-related sectors of the economy, but that is pretty tough as we tend to be good at just one thing at a time.  When I was 24 years old,  a good neighbor invited me to participate in his new coffee shop and co-working space in downtown Longmont Colorado.  He only needed another $5,000 to get it started and I happened to have  saved about $5,000 at the time.  I thought this was a great idea to get involved in a small business outside of my own work.   We wrote up a promissory note where he would pay me 20% of profits for 5 years and then repay the $5,000 at that time.  By his estimates, I would double my money in five years.  Sounded great!  In year two, the coffee shop closed permanently, and my neighbor sheepishly tried to pay back the note counting out small stacks of 10 and 20 dollar bills on my porch every month.  A painful experience all around.   He returned about $2000 in total if I remember right.  At that point in my life, I did not even remotely have enough capital available to consider such a thing.  Stay diversified and avoid concentrated financial bets on anything.  As Scott G says, this is your personal Kevlar against the high probability of unfavorable outcomes.

Time

Time is a powerful wealth accumulating tool if we really understand the incredible power of compounding.  I won’t beat the dead horse here but let’s all remember that starting early with our saving and investing has a far greater impact on our wealth than trying to catch up later with a higher savings rate.  Consider this handy chart from JP Morgan’s Guide to Retirement.

 

We should all strive to be Susan who smartly saves a total of $50,000 in the first ten years of her working life and ends up with more than twice the wealth of her peers who started later and tried to catch up with higher savings amounts.  Compounding works incredibly well when time is on your side.

Earlier I mentioned the issue of Work/ Life Balance. Let’s say that maintaining a work/life balance is important to us.  I completely but conditionally, respect that choice for the benefits of mental health, relationships, life experiences and happiness.  But there is a consequence to every decision.  In most cases, those who choose a career with a healthy work/life balance often forego higher incomes in earlier career years.  Having more savings and investments at an early age allows compounding to work to your advantage as the chart above illustrates.  Again, no judgement but be aware that the ultimate wealth accumulation is directly a function of time.  Starting to save later with less capital really just creates bigger challenges down the road when you really want to pursue some life balance (aka retirement).

Last thought on time and wealth accumulation.  Dividend paying investment strategies with reinvestment of dividends to additional shares, provides an automated way to embrace compounding to its fullest.  Cash dividends paid monthly or quarterly, form a drip of new investments back into additional shares of the very thing that is creating the dividends.  Our shares pay dividends that become more shares that create more dividends and so forth as the great compounding machine winds up our wealth.  Our MASS (Multi-Asset Income) strategy currently has an incredibly high dividend rate of 11%/ year.  These dividends are reinvested in shares of securities that are also trading at a steep and discounted level thanks to the Federal Reserve smashing prices with 11 rate hikes.   Think of the dividends, the reinvestment potential into discounted shares and the compounding that is happening with that dividend yield over a 20-year time frame.  I apologize for the infomercial but oh my, we believe this is an exciting opportunity for wealth accumulation.  We’ll be covering this and other unique opportunities in the current market environment at our upcoming annual dinner on October 4^th.  Please RSVP soon if you plan to attend!

Happy September to all , my favorite month of the year.

Cheers

Sam Jones

July 31, 2023

This seems like a perfect moment to educate our readers about the realities of market volatility.   Today’s update will focus on this evergreen subject followed by a highlight of our Gain Keeper Variable Annuity strategy which is now breaking out to a new all-time high.  I’ll finish with an important notice regarding our view of Macro – Economic changes happening now.

The Merciless Math of Losses

This is one of those timeless graphics that I keep in my lecture material for my high school financial literacy class.  Not many people really understand the math behind portfolio losses and recovery percentages.  For instance, why is it that Facebook lost -76% from the all-time highs in 2021 to the lows in 2022, is up +266% from those lows, but still sits -15% below the highs.  How is that possible?

Simple math would say -76 + 266 = 190 right?  Facebook should be trading way out at an all-time new high, right?

Well, no, because we are dealing with percentages and the loss of investment capital, not straight numbers.  Let’s break it down to a simple example.  Let’s say I give you $100, you go to Vegas, and you come home with $50.  That is a 50% loss of capital.  Now, how much of a percentage-based return does it take to get back to $100?  9 out of 10 people would quickly answer  – You need to make 50% to get back to your break even of $100.  Unfortunately, that is just bad math.

$50 + $X = $100

X = $50

$50 represents a 100% (not 50%) return on our remaining capital of $50.  If we lose 50%, it takes a 100% return just to break even!  Now consider the parabolic and merciless math of losses chart below.

It is sort of amazing to me how many companies with Billions, even Trillions of Market capitalization (value of all outstanding stock) lost more than 70% in 2022.  Tesla (-73%), Meta/ Facebook (-76%), Netflix (-73%).  Many of the Covid Unicorns lost 80-95% in 2022!  Looking at the chart above, a 90% loss needs a 900% gain just to break even.

Best Practices for Managing Portfolio Volatility

 We all make mistakes and experience losses with our investments.  This is the nature of business.  Trying to avoid losses altogether is not recommended.  You will spend a crazy amount of time and effort doing so and discover that your performance is very poor over time.    Smart investors understand this reality and work to control, respond or even capitalize on losses when they come.  Most of the old guys (and gals) in this business will tell you to keep your losses small if possible and capitalize on volatility (aka losses) to your advantage.  Here are some of the best practices.

1. Harvest bigger losses for taxes and reinvest immediately.

This is a big one but only applicable to investments held at a loss in TAXABLE accounts.  Let’s say we bought Peloton at the very height of the Covid scare in late 2020 and have subsequently watched the stock fall -94% to the current lows. Ouch!  In a taxable account, a smart investor would sell the position and bank that capital loss as a credit against income (up to $3k/yr.) or offset future realized capital gains.  Capital losses can be carried into future tax years indefinitely or until they are used up.  The proceeds of that sell can and should then be reinvested in another speculative growth name of your choice in order to hold that space in your investment portfolio.  It’s not wrong to own speculative stocks, just keep your allocation size small and appropriate for you!  In a tax deferred account like an IRA, we are sort of stuck with the position and might wait 10-15 years for the stock to recover or move it to something with better prospects for sustained growth.

2. Limit your Portfolio Volatility by maintaining diversification and appropriate asset allocations.

Hopefully we all know about this best practice, but rarely do I see it effectively maintained.  One of the hardest things for investors is to take profits on a position that seems to just go up and up and up.  Mega Cap technology names have sucked in so much investor money that the top 7 names represent over 40% of total market capitalization in the US stock market today.  No one is selling because the experience of being overweight Mega Cap Tech has been so rewarding looking backwards.  What I see today are way too many portfolios that have 40-60% allocated to Tesla, Amazon, Apple and Microsoft and the remainder in a mix of stock index funds that have the very same names in the top 10 holdings.  This is not a diversified portfolio.  What I regularly see are portfolios that are way out of balance and typically don’t own asset classes that have little or low correlation to their stock holdings.  It is critically important that we work to maintain diversification and that means owning things that ZIG when other parts of our portfolio ZAG.  You may or may not have noticed that bonds and stocks are now positively correlated since we entered the New Environment in 2020 (please read last week’s RSR).  Now US Treasury bonds and US stocks ZIG and ZAG together in the same direction at the same time.  No Bueno!  Meanwhile Commodities are becoming a new and welcome source of true diversification  – More on this in a minute.  The point is we all need to weed and replant our investment garden periodically and make sure we don’t have too much or too little in our prescribed portfolio asset allocation holdings.

3. Add to your investment portfolio at lows.

This one also seems obvious but so rarely followed as a best practice.  We try, you know we try, to tell you when it is a good time to add to your investment portfolios.  In the current market recovery, we have seen three great windows to do so in October of 2022, December of 2022 and again in March of 2023.  When I look at volume figures for the market, I see nothing but quiet selling at these three intervals with very little net new buy side trades coming into the market.  Now, the market is up 20-30% off the lows and the buy side volume is really picking up.  In fact, in the last two weeks, we have seen some of the heaviest inflows into stocks in several years.  Investors are buying high because there is a perception that risk is gone, recession is not going to happen,  prices are going higher, and the Fed has whipped inflation.   But, given earnings, interest rates, valuations and the new 5% risk free rate on money markets, even the most bullish of market analysts are saying the S&P 500 could go as high as 4700 by the end of the year.  Today the S&P 500 is trading at 4566.  So, we’re talking about maybe 2.9% higher from here?  It is safe to say that there will be a better time to add to your portfolios than right now if one is looking for opportunities to buy low.   Personally, I have found that any stock market environment trading more than 15% below the highs is a signal or trigger for me to identify new investment money and start looking for entry points to add to my investment portfolio.    Today, the US stock market is roughly 5% below the all-time highs.  The strategy of adding to your portfolio at deeper discounts works incredibly well but does take some guts and some discipline.  Undisciplined investors sell at the lows and move to cash in fear.  This is devastating to your portfolio and wealth accumulation over time and yet it happens time and time again.

Gain Keeper Annuity Within 2% of All Time New Highs

In the context of our discussion on managing volatility, I want to take a second to highlight our long-standing Gain Keeper variable annuity strategy at Nationwide.  We run this investment strategy inside a variable annuity which offers investors unlimited tax deferral outside of a retirement account with after tax dollars (please inquire for more details).  2022 was a losing year for nearly all asset classes including US stocks down -19% and US treasury bonds down -16%.  Our Gain Keeper annuity also had a negative return of -7.04% net of fees.  7% is a relatively easy loss to recover from (see above) and it won’t take more than a few more days for this strategy to nose out to a new all-time high.   Gain Keeper attempts to remain fully invested but this is a strategy that can go where it needs to go in order to find true diversification, overweight opportunities and underweight obvious risk areas of the market.  This is one of our longest standing dynamic asset allocation models that uses all of the methods described above as a means of limiting losses and capitalizing on market volatility.  Today we are less than 50% in stocks and have recently sold down our bond allocation to build an overweight allocation to commodities and gold.  A great investment strategy is built and run with great design and execution.  Gain Keeper proves to be a strategy for All Seasons once again!

Change in Macro-Economic View

Admittedly, in March of 2023, it seemed fairly obvious to us that a recession, perhaps a very hard landing recession, was in the works and treasury bonds were offering a very attractive entry point.  The Fed did their thing to curb inflation and successfully brought inflation back to the current 3% level  – from 9% last June.  Naturally, we would expect recession to follow such a move and we still believe that outcome is inevitable.  Unfortunately, treasury bonds have gone nowhere and here’s the twist.  By many measures, it appears that inflation is now bottoming again and even poised to push higher lead by commodities and other inputs.  Oil is now back above $80!  Copper just made an all time new high.  Timber and agriculture commodities are making a run at the old highs again.  And industrial metals are attracting some very large inflows from institutional investors.  I found this article from Global X very compelling regarding the underinvestment and rapidly rising demand for metals at the center of the clean energy transition to electric vehicles.   Please do take a few moments to understand this profound change in demand for raw materials that is happening regardless of our position in the economic cycle.

https://www.globalxetfs.com/ten-questions-about-the-disruptive-materials-at-the-center-of-the-clean-energy-transition/

Additionally, Crescat Capital, who offers some of the best macro research out there, suggests we are now in the trough of the next wave HIGHER in inflation like that of the 70’s.  That would be quite a shock to global stock markets that are just now ringing the inflation death bell and expect the Fed to start dropping rates soon.

We take our clues from the market leadership and it is noteworthy that commodities are one of the best performing asset classes since the end of June.  Is this the next wave higher in a rally that began in 2020?  Perhaps we should not be so quick to assume that short term interest rates will come down.  Perhaps instead we might remain open to the possibility that long term interest rates RISE from here and eventually solve the inverted yield curve conundrum the hard way.  Darwinize your portfolio!

Stocks can continue to do well if inflationary pressure and catalysts continue as they have been for over two years.  Our job is to own those groups, styles and investment themes that have pricing power and continue to thrive and survive.  Macro-econ is a dismal science, but it can help to set the stage for decisions we might make regarding our allocations and security selection.  The markets are telling us a story that conflicts with investor expectations and the drumbeat of the financial media.    These are important moments to watch and respond to what IS happening, not what we expect WILL happen.  Stay tuned.

That’s it for this week.

Health and happy family reunions to all!

Sam Jones