While we anxiously await the vaccine that a great percentage say they won’t take — the market reached all-time highs last week. The preventative stay at home economy, with one in four (25%) workers engaged, has supercharged the gig economy and the Amazon Prime membership. This has come at the expense of local communities and businesses, regarded as less essential and less able to reach customers through the web.

Forced isolation to mitigate the virus’ spread has been a boom for shareholders of the recognizable giants: Amazon’s profits have doubled, followed by Walmart and Target increasing 80%, Lowe’s 74%. Following suit, those stocks have reached record highs along with booming tech and cloud services.

Largely operated on a month to month basis, small business has suffered unsustainable revenue declines of ~30% (vs. 20% in 2008) leading to 20%+ closures. Yelp expects fewer than half of restaurateurs to survive 2020.

The letter ‘K’ has been drafted to symbolize our economic condition, indicating a sharp separation of winners and losers, a sharp contrast to the stock market’s snap-back 50% ‘V’ shaped recovery. Blue collar labor, whose wage gains led during the recent economic uptick (Feb. 2020) now lags, while white collar, with its home office survival option, has held up.

California’s July unemployment rate came in at 13.3%, comparing unfavorably to the ~10% national average. August registered at an improving 8.4% with state numbers due out shortly. Keep in mind these figures don’t reflect the self-employed themselves, only for their employees for which they contribute to the state insurance fund.

Social themes: Exodus from urban to rural. Folks  escaping cities and their burdensome taxes and regulations. With the add of crime/covid accelerants, vacancies are skyrocketing. Expanding high speed broadband has enabled Zoom-casts to become ubiquitous in our daily lives. The spare bedroom has replaced office towers, with spatially limiting elevators, in seamless fashion. Some say productivity has also increased, yet the social/psychological downside must also be acknowledged.

Going forward, Covid will wane while the November election will keep stocks on edge. The market run-up has pushed valuations to extreme. Support as ‘buyer of last resort’ from the Fed last March restored confidence, but nonetheless remains only a band-aid on our economic wound. Give it a year or two to get everyone back on board…and the markets to dodge and weave accordingly.

2020 will not end soon enough.

Of personal note:
Back to the ‘ole laundry building, where my dad had draped a towel over the wounded pipe (see previous e-blast).  Property had been vacant, until recently, when word had it that a woman was seeking space to re-start her dance studio. A deal was struck, with dear mother collecting rent, enabling the industrious owner to create an ‘out-of-home’ activity for both kid’s and parent’s sake, and a bit of profit to boot.  Win-win-win!!  But, state/county says – ‘no can do – outdoor activity only.’  One could argue fifteen kids confined to a 3,000 sq ft. open air building …is NOT indoors.

The blanket application of government agency – is served unfairly.

Rule BI 7.20.20

Dear Clients:

Below is an excerpt from finra.org, one of our regulating bodies:

  • On June 5, 2019, the SEC adopted Regulation Best Interest (Reg BI) under the Securities Exchange Act of 1934. Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.
  • Form CRS, to retail investors. As part of the rulemaking package, the SEC also adopted new rules and forms to require broker-dealers and investment advisers to provide a brief relationship summary,

The intention of ‘Reg BI’ is to apply a ‘standard of conduct’ to brokers similar to that of a ‘fiduciary,’ which legislates that Investment Advisors put clients’ interests ahead of their own. Since we hold separate registrations as a Broker through Oak Tree Securities and as a Registered Investment Advisor, this rule may or may not apply to your accounts or financial relationship with us.

Please get back with any questions or clarifications on this new rule.

Many thanks

Market Fallout 4.23.20

The selling strategy called ‘panic’ employed a month ago, which sucker-punched the market’s 33% decline, is hopefully behind us. Small caps fared worse losing 40%. Optimism and cheap valuations have lifted stocks 28% off their lows (~12% from break-even) as investors began looking forward – rather than down.

Center stage is the ‘back to work’ vs. ‘virus mitigation’ debate, significant with 20M+ unemployed (and rising) and small business gasping. Both health and economics have extreme and life changing consequences, both being tightly intertwined.

A friend’s 40-person catering business in Oklahoma let go all but 5. These things snowball. With the price of oil falling to single digits, for every sidelined rig crew, another two dozen field workers get furloughed.

Brings to mind a learning event growing up. Dad owned a commercial laundry, big machines etc. Water pipe had broken, spraying half the building. Mac, the washer, had run around covering machines and clean linen with plastic…diligently. Pops walks in, sees the fountain and calmly drapes a bath towel over the wounded pipe…neutering its majesty straight down into the drainage ditch. Mac sighed.

A doctor client identified ‘vector control’ as the key for safe keeping elder populations, as their risk is more attributed to the number of ‘personal’ interactions, rather than age. My 94 year old mother needs the bath towel…and our healthy society needs to remove the plastic. For us long term investors we ask, how and when will ‘normal’ return? The clock is ticking….

“The right government policy response is to focus on supporting the small business sector, that have suffered from supply disruptions…  When businesses fail, jobs are lost, and consumer demand that was only postponed earlier gets destroyed permanently.”  Excerpts from Jim Walker: Chief Economist, Asianomics Group Hong Kong, via Forbes Magazine  3.23.20

Human ingenuity is on our side, with the ability to adapt that computer models can’t predict. We are inherently risk averse (well most) with ‘normal’ behavior currently being re-defined.

Although relatively expensive, blue chips (large) with more visible earnings and stronger balance sheets will hold up best while smaller economically exposed sectors will continue to be challenged. International turmoil with China supply chain disruption/withdrawal will become a nightly news event with increasing calls to relocate ‘essentials’ (and more) back to the US.  Globalism has become an expensive lesson, nonetheless one for which we too will adapt.

Financial markets give us the ongoing ability to reflect our risk and emotional sensitivity and apply that to our portfolio. If you have concerns or adjustments you believe necessary, please share your thoughts. Thanks! Looking forward to chatting.


Market Fallout 3.26.20

The financial markets we learned (last week) are made of paper-mache: durable, attractive hanging from the ceiling, but soggy when wet and totally destroyed when struck by a 10 yr old with a stick.

This week, in order to avoid tears, the parent (the Fed) assured everyone there’s enough candy for all (i.e., they won’t let markets go to zero), while holding the jar high (Congress) to pass out such candy just in case.

Currently the market is up 20% for the week.  Shortest bear market in history.

Scolded were the Airlines, having recently repurchased millions of shares with billions of earnings, a mechanism to drive prices higher and their wallets fatter… soon to be broke WITHOUT Federal assistance.

We were also humored to learn making masks (deemed a medical device) is a lengthy approval process via the FDA.

The dark side of Covid is obvious.  The bright side is a cleansing (hopefully) of all things (as tragedies are want to do) that will allow a more efficient and protected society.  China will top that list, as well as dis-functioning financial markets and a more responsive government enterprise.

Not since WW II have we been asked to stop our daily deeds (for a couple three weeks) to focus on the enemy for the greater good.  Then, everything was rationed.  Today, toilet paper.

In the meantime, support your local small business where possible. I PayPal’d (family and friends) four haircuts to my hairdresser. She was very appreciative.

Market Fallout – 3.23.20

Back to the ’87 18% one-day selloff:  

Total value lost = $500B
Total value of transactions = $25B
Q:  Where’d the other $475B end up?      A:  It was never there.
Markets have a limited amount of cash, or liquidity in them. PANIC sends everyone heading for the door, but they discover the door is only so wide. Everyone can’t get out. Thus prices drop dramatically to find willing buyers at ever lower prices.
CALM prevails and normal functioning markets return.

Benjamin Graham > Pioneer – value investment sage (1894 – 1976) – advice that still applies today.

  • “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”  –

I’ve heard this quote a few times, but yesterday it finally made sense. Long term, stocks are valued relative to their balance sheets, cash flow and business prospects. Short term, prices are determined by investors’ immediate needs, emotions (related to both fear and greed) and want for cash.

News of the day:  Congress squabbles on details of the aid package. The Federal Reserve expands its asset purchase program to now include corporate bonds and…

Other initiatives include an unspecified lending program for Main Street businesses…. There will be a program worth $300 billion “supporting the flow of credit” to employers, consumers and businesses and two facilities set up to provide credit to large employers. (See link below)

Once considered the lender of last resort, they have now become buyer of last resort to keep the dis-functional markets functioning.

Market Fallout – 3.20.20

Breaking news: Federal tax returns will be due 7.15.20, with the state likely to follow. Currently, the state is due 6.15.20.

News of legislation to provide direct monetary support for the populace was announced, which includes a ‘rebate’ of $1,200 per person (with incomes of less than $75K).  Also mentioned were programs geared at helping small businesses, including a delay of payment for employer payroll taxes, a delay of estimated tax payments for corporations, and modifications for net operating losses.

Loan guarantees of $208 billion to distressed sectors of the economy, including $50 billion for commercial airlines and $8 billion for air cargo carriers, and $150 billion for other eligible businesses were also introduced.

The market fell ~10% again today with every asset class selling off….a PANIC demand for cash. Personally I think the markets should be closed until the ‘new normal’ (health and economic) is better known (~1-2 weeks.) This type of freefall of all assset classes does historically portended a market bottom.

Good news on potential new treatments, including application of existing drugs (now), antibody therapies (3-4 months), and, of course, a vaccine next year.

Didn’t expect to re-live the ’87 experience (worst one day 18% sell-off.) Fed rate cuts didn’t stop last Tuesday’s 13% $3.5 trillion dollar decline that was exacerbated by President Trump’s comments last week that the…. “wash-out would come in the July/August timeframe.” The term wash-out was mis-understood to mean peak infection rate (expected to come much sooner), which is when we anticipate better days for the market.

The economic effect of ‘stay at home’ orders as well as gathering limits, travel restrictions, and shutdowns of food and drinking establishments is pure speculation. The unknown feeds the market’s fear. Also announced today were the first human injections of a potential vaccine.  ‘Eh’, the market said.

The ’57 flu epidemic was short-term 10% sinkhole, so best guess is a similar decline of 5% to 10%. Shocking, but a small dent when viewed over the long-term. The bounce-back from pent up demand will mirror the downturn. Large companies will sluff off the revenue loss, but smaller and privately held businesses will certainly suffer.

Being negotiated is a ‘fiscal’ stimulus (tax cut) to keep the money flowing. Discussed is a temporary social security payroll cut similar to the 2011 2% reduction as well as direct payments to taxpayers and loan facilities to small business.

How ever the stimulus comes, and the virus goes…faith and trust in our free market system will generate a vaccine and long lives for most affected. This will burn our psyche, similar to what the Great Depression did to our parents and the ’87 Crash did to traders.

-From 2.29.20
“The coronavirus now looks like a pandemic. Markets can cope even if there is big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “But at the moment, no one can tell how long this will last and how severe it will get.”

So, easy to imagine the markets continuing to bump and skid along for a quarter or two, but any sign of a let up in rate of infection will bring a sense of value and money flows back into stocks, and out of the safety of bonds.

Market Fallout – 3.2.20

The sell buttons were pushed hard late Thursday. What seemed to be a moderate down day turned into a water fall event sending the broad averages decisively negative for the year with the S&P 500 standing at a negative/minus 7.5%. The 12% decline from the peak puts the market into an ‘official’ correction (decline of 10% or more), similar in depth to past market sell offs.

The market was due.

This is the CNN Business Fear/Greed Index, determined by a dozen technical indicators that measure market movements. I’m not at all surprised that pandemic fears on business activity translated directly into the sell-off in equities and stampede into the safety of bonds.

Although the economy hums along at a 2%+ growth rate, valuations were stretched from the ~30% run-up in 2019. The introduction of the pandemic sent sell signals into the machines and ‘sell-everything’ orders into the market, reducing prices to more reasonable and historical levels.

December ’18 witnessed a similar straight down market move…that being related to a Federal Reserve destined to kill the economy with higher rates. Reason prevailed with calmer tones and eventually two rates cuts in early year ‘19.

The diversity of the US economy brings both strength and durability. Here locally, owing to a tight labor market and demand for spirits, Napa county’s unemployment rate dropped below 2%. 2%! The tight labor market has driven warehouse wages to $20 – $30 / hour, or $40k – $60k per year. Remarkably, blue-collar wages have experienced the highest rate of growth in the US during the past 2 years (see chart below.)

“The coronavirus now looks like a pandemic. Markets can cope even if there is big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “But, at the moment, no one can tell how long this will last and how severe it will get.”

So, easy to imagine the markets continuing to pump and skid along for a quarter or two, but any sign of a let up in rate of infection will bring a sense of value and money flows back into stocks, and out of the safety of bonds.

The Delta Group – Newsletter Feb. 2019

The Delta Group

A Financial Advisory Firm

Vol. 35, No. 1, Feb. 2019, Eric Drew Dahl & Patti Williams, Editors

The economy performed a remarkable feat, reaching the 4%+ GDP plateau in Q1, a level regarded as folly in our low growth post Great Recession paradigm. Following suit, the unemployment dropped to 4%, a level not seen in 50 years. Labor, steam-rolled by the globalization movement, was invited to the party scoring 3%+ wage gains. And, the market does what?! Pulls a 1987 – 23% one day loss – with a slow motion 20% crash in Q4, throttling investors over a painful ‘when will it stop’ ninety-day period.

The trade war/tariff battle (tax on foreign imports) with China combined with a two-dimensional Federal Reserve committed to higher rates schemes through 2019 torpedoed investor sentiment. Recession anxieties grew as short sellers (selling stock with borrowed funds) and margin calls (forced selling to cover capital shortfalls) drove the market lower, and lower, with final capitulation on Christmas Eve. The Fed, realizing their crystal ball might have a crack, offered a wait and see attitude towards 2019, essentially promising not to be stupid in matters unknown. Markets have rallied since.

Recession fears abated with news of 500,000+ job gains over the past two months, muting nay-sayers. Money poured back into both stocks and bonds (after record outflows in December) driving markets higher to recover over most of their 4 th quarter loss, advancing ~10% for the year. Small caps, having been hit the hardest have rebounded the strongest. Foreign markets continue their struggle.

The US separated itself from economies abroad, getting a boost from less restrictive tax and regulatory policies. Worries that tax cuts would push deficits higher were not realized. Tax revenues were flat, surprising critics. Entitlement spending jumped, a concern on these pages for the past oh 30 years, anticipating the Baby-Boomer’s draw-down on their retirement and health care benefits. Since ‘entitlement’ checks are cut from the Treasury’s general fund, not the ‘Trust Fund’ often quoted, we qualify them as promises, and not guarantees.

-2018 newsletter musings in italicsAbout our economic condition:

…add another 20% to market gains for ‘17. GDP growth… 3%, not seen since 2005,…supported record high valuations along with 10%+ profit growth. After years of political debate, U.S. corporate tax rate was cut to 21%, down from 35%.

Remarkably US GDP touched 4% in the first quarter, job openings surged over 7M+ while unemployment fell to 50-year lows. Wage growth exceeded 3% elevating the fortunes of the middle class. Profit growth touched 20%, boosting stock prices (at least temporarily) to all-time highs. Economically it was a remarkable year, which unfortunately caught the attention of the Federal Reserve and their commitment to ‘normalize’ (raise) rates to pre-Great Recession levels. Suddenly doubts were amplified regarding 2019’s prospects. Markets responded accordingly.

On the consumer side:

Expect further expansion of jobs and bonuses here in the US (see Apple/Exxon) as corporate bottom lines improve. The middle class will get the benefit of personal tax cuts, adding ~$2,700 to the net take home of an $80k income family. Pressured by record low unemployment, rising wages and higher net take home pay propelled holiday spending to record levels.

The Holiday shopping season set records with a 5% increase over 2017, driven by consumer confidence, 3% wage gains and a tax relief bump to take home pay. Housing sales were down, faltering with rising mortgage rates. Prices though continued to climb, with crazed demand from foreign buyers pushing West Coast values higher and higher. Overall record debt levels concern economists, but a corresponding jump in asset values as well as in-line income to debt ratios temper this anxiety.

On the investment side:

Stocks: The major theme of ’17 continues on into ’18. With the Fed’s desire to ‘normalize’ interest rates higher, bond prices as well as other rate sensitive sectors (real estate) have sold off a bit. Growth remains the winning sector ignited by both the tax cuts and an expanding world economy. Investors dismiss caution while embracing historically high valuations expecting corporate bottom lines to catch up.

Small caps lagged in ’17,…outperforming in ’16, a value trade rotation to regain the lead in ‘18 would be a reasonable bet.

Blue chip growth remained the winning sector posting a ‘zero’ gain for the year, while value stocks lost 9%. The big growth drivers (Netflix, Apple, Amazon etc.) took turns in the woodshed, but fared than most. As we stand today, the S&P 500 has recovered the majority of its loss, sitting just ~5% below the October ’18 peak. Smaller companies were less exciting and gravely punished in the liquidity seeking sell off, ending down ~11%. Foreign markets were hurt by a both a strong dollar and faltering growth prospects, losing ~15%. Remaining underweight in the overseas segment paid dividends.

At their worst point in December, valuations were very appealing, measuring ~14x earnings (vs 15x historical average.) The January rebound has raised valuations to ~17x, a decent bargain though caution is prudent. For many reasons, profit growth has fallen from 20%+ in ’18, down to mid-single digits currently. More clarity going forward and/or China trade resolution could spark a move higher, while falling retail sales a signal to send prices lower. Guess is that market volatility will be more subdued. If growth does indeed falter, a Fed rate cut could offer some protection to the downside.

Bonds: Encouraged by 3%+ growth, the Federal Reserve abandoned their zero-rate policy and began a series of gradual ¼ point increases better aligned with a healthier economy.

Good news becomes bad news, especially in the eyes of the central bankers, whose role is to protect the currency and keep inflation in check. A TV pundit critical of the Fed’s arrogance (stupidity) to chase down inflation suggested ‘labor’ was finally getting its due, and justifiably should let the economy run. The Fed’s use of year over year metrics, better suited to academic study, conflict with real-world Main Street economics (job growth, wage gains) that have lagged for decades.

If the Fed remains accommodating, funds will continue to flow into fixed income products.

Foreign: Emerging markets were the winners last year with 40%+ gains after many years of lackluster performance. This offers a great lesson of markets making little sense in the short term but years later with patience brings wealth.

Some reversal. A strong dollar in combination with China trades/tariff tensions dropped markets an average ~20%. Slowing growth rates in China, the emerging market benchmark, pulled the entire segment down. European investment suffered from a strong dollar (~10%) since US currency gains are dollar for dollar subtractions from foreign holdings.

The trade war with China, which started several decades ago, increased intensity with the President adding tariffs to force compliance. China has a weaker

hand to play with declining growth rates and financial excesses in their banking system. I would guess (hope) a quiet ‘saving face’ solution will emerge, but these negotiations can last for years.

Gold: …and continued 8% higher in ’17. Although cryptocurrencies (Bitcoin) now offer a competing ‘off the grid’ money exchange vehicle, metals ignored the new age nonsense, with more gains expected in ’18.

Gold dipped mid-year but recovered most of its loss. BitCoin, the ‘new-age’ upstart crypto-currency (encrypted) was infected by age-old virus aka ‘TulipBulb-Mania’, rising 400% before shedding 75% of its value and thousands of fortune seekers with it. Though lacking any real basis for valuation, BitCoin remains a clever method to avoid the banking system (prying eyes) and so will continue to expand as a functional alternative to cash.

Final thought: History tells us markets are driven to distortions: the DotCom bubble fueled by infinite internet wealth; the real estate bubble by free money lending; and, today, optimism perhaps a few clicks ahead of reality.

Markets drifted higher over the year, but ran square into the Ogres of October, losing ~20% off their highs. Trade tensions along w a Federal Reserve blindly committing to a rising rate schedule through 2019 added octane for short sellers and year-end tax loss selling. Selling begat more selling.

Consolation: The market lived past the ’87 crash, scoring a 17% gain in ’88 while the economy expanded 4%+, reminding us that the stock market is NOT the economy. Following suit, the January bounce is ~19% off the December low, replicating a similar response to a non-recessionary crash. Regardless, Merrill Lynch reports that professional managers hold their largest cash position since 2009. Sentiment, as the data suggests, has been a reliable contrarian indicator.

More reasonable stock valuations will dampen market dramas and should be less intense this year. Thanks to you all owning the knowledge that a long-term vision is more rewarding than short-term panic attacks.

The Delta Group announces the opening of a new office @ 453 Second St. W. in Sonoma, 707.343.1145. In Santa Clara County, our office is 100 S. Murphy Ave., Ste. 200, Sunnyvale. Your assistance in recommending potential new clients would be appreciated. Contact Eric @ 415.640.6770.

Happy New Year! Eric & Patti

Tax Free Income – 401K Roth

June 21, 2018

Last week we shed light on retirement income and the (slight) tax burden related thereto. Because tax rates start at zero, taxes paid on withdrawals are roughly 8% on the first $60K of income. Tax savings on the ‘traditional’ retirement contribution were taken at ~30%+ rate, which makes for a really good deal. 30%+ saved. 8% paid.

Well, what if we add another $60K to our retirement income, for some well-deserved discretionary spending. We double the withdrawal to $120K, and find again that as our income rises, so do tax rates.  

Seems the tax take on the 2nd $60K is 24% (vs 8% on the 1st $60K) and the tax rate
on the last dollar is back to the 30%+ rate we paid while working. Taxes are getting our attention …again!

At this level, tax free income satisfies our retirement goal to keep the tax man in check. Luckily the Roth 401K set up years ago, anticipating higher levels of spending in our golden years, is just the ticket.
We smile. We win.

Conclusion: Do both! Prioritize the traditional, for basic expenses (soap), over the Roth, for discretionary spending (MaiTai’s). Have a different investment strategy for each, e.g., more conservative for the traditional; more aggressive investments for the Roth. How much?

  – Wing-it:  If you’ve been contributing your 401k for 4-5 years, start with a 1-2% contribution to the Roth 401K.
  – Analyze it:  Use a spreadsheet or a slide rule to project values and target ending values 2/3’s Traditional / 1/3 Roth.

The Delta Group employs the magic of spreadsheets to draw a portrait of future based upon wages, savings and estimated growth rates of retirement accounts. Better way to make decisions.

Give a shout-out to Eric @ 415.640.6770 to get your questions answered regarding your personal situation and to discover if an analysis would be helpful.

If you haven’t already read last week’s post “To Roth or Not to Roth.”

To Roth or Not to Roth

June 4, 2018

The Traditional IRA (aka Individual Retirement Account) was introduced in 1974 as a retirement scheme for the masses that would allow a tax deduction for a maximum $2,000 contribution. Accounts were set up with personal discretion at a bank or mutual fund company. Gains were tax deferred.

In 1997 the Roth IRA was created that offered a new twist. Instead of ‘writing off’ contributions, funding was made with ‘after tax’ dollars while withdrawals would be tax free. Roth 401k’s completed the trifecta in 2006 allowing for employee payroll contributions as well.

So, tax me now (Roth) or tax me later (Traditional.) Which is better? Answer: Compare your tax rate while earning vs the total tax take in retirement.

Say, you and your spouse earn $120K with a deductible 401k and standard deduction offsets would have taxable income of $84K, yielding a tax haul of ~$13,500 (11%) with a top combine rate of 31%.

In retirement, this couple tells their advisor they need $5,000 per month ($60K / year) to cover the basics.  He estimates a $65K withdrawal would net $5,000 per month after taxes, or tax take of (only) 8%.

In this fairly common scenario, the 31% saved, 8% paid suggests the traditional tax deductible IRA would be by far the wise choice.

Both types of accounts serve unique retirement income needs. Anticipating the benefits of each is the challenge for which we help clients, and can help you as well. Our fee based practice allows us to focus on these specific issues with minimal time spent but with great reward.

31% saved, 8% paid!  Not a bad deal all told.


One last thing.

If interested in following up, we offer a 30-minute free 
no obligation session tailored to you.

Let us assist you in becoming financially independent.

Eric Dahl – 415.640.6770