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


Take the Money & Run…?

Basic Training #2 – 5.11.18

Decision time! I turn 62 in August and will become eligible for an ‘early’ social security benefit. Early brings with it an ~30% haircut in my ‘full’ benefit.

I’ve read many articles with convincing arguments to defer receipt until full retirement (66) given early receipt of benefits brings a lifetime of lower payments. Though never mentioned is that I eliminate the need to tap into my retirement account to cover living expenses!

I reference a certain client who claimed early, kept their IRA intact, and grew their account ~$100k more as a result. These ‘surplus’ funds can now supplement the reduced benefit as needed, while bringing more control over timing and taxation of retirement income through their late 80’s.

Everyone’s breakeven is different as are risk tolerance, personal circumstances, and life expectancy. Low yield, long lived investors would certainly be better off waiting. The possibility of future ‘means testing,’ benefit reduction for high income/net worth individuals is a concern as well.

Take 10 minutes and obtain your benefit estimate online (see link below) and we will be happy to plug your numbers and assumptions into our spreadsheet to personalize your choice.

FYI: ~50% of social security recipients opt for early payment. ‘The time is now’ it seems…for many.

Use this link to get your own social security page:



Quote of the Week:

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.

Jonathan Clements

#Sonoma Strong

Update December 2017

Every year Eric writes a Holiday Poem and we distribute champagne to sing out the old year and celebrate the incoming new year. This year, with the Sonoma/Napa County fires so uppermost in our minds, we felt it more appropriate to help those who have been affected most.

This years poem reflects the memories of the emotional roller coaster of two weeks this past October. Everyone knows someone as the devastation was horrific. Part of this years thoughts are with Missy and Austin Levy who lost everything except that which matters most. Their story follows the poem. We will be helping them recover their livelihood. Please read and help as you are able.

Eric and I thank you for your support and love this year and many years past. We wish you love, peace, and joy as we look toward 2018 with passion in our hearts.

In love and light,

Patti and Eric


Debt Ceiling Follies: Part XII

An Ongoing Dialogue from
The Delta Group
August, 2011

Brother that was close! Debt ceiling raised and the Federal government gets to live another
day. But nobody is happy. The cuts were too small and the revenue gains were to…er,
there weren’t any tax increases.

And for the tax the rich-repeal the Bush tax cuts for fiscal sanity-crowd, here’s the deal.
Let’s not just move the top rate from 35% to 39%. Let’s go all the way. Move it up to
100%. Take it all..!!

Amount collected: $365B projected. Would run the government for five weeks. 35 days.
The monies are not at the top. The money is in the middle. The debate was/is really about
saving the middle class from a national sales tax, much like Europe’s value added tax. As
the national debts rings up trillion after trillion, the choice is between a bad one and a worse

Twenty five years ago, we made a bold claim. Social Security, designed as part of the New
Deal in the 30’s, would go kaput, as do all ponzi schemes. Our annual contributions were
just accounting gimickry, as is the $2.5T trust fund that holds treasury securities the Feds
owes to itself. Because of earlier retirements and higher unemployment, more money is
flowing out than in.

Social Security offers no guarantees, only promises by the government to pay a benefit,
which can change at the whim of Congress. Greece rioted for days on the prospect of their
retirement age getting pushed back to 64 years, from 60. Ours too will eventually drift
towards 70 as these debt ceiling debates take on entitlements.

Eric Dahl

View the e blast as a PDF below

Revenge of the 1% Loan: Part XII

2013 Newsletter

I bet an ole’ college buddy a case of wine that
the “fiscal cliff” nonsense would not be resolved
by year end, thus seeing the return of the preBush
higher tax rates to take effect January,
2013. Since each party has entirely different view
of priorities and necessities of both government
and drivers of the economy,…

Click below to open the PDF version

2013 Newsletter