Data vs. Narrative

This blog post by Brian Wesbury, chief economist of First Trust Advisors, illustrates that the data do not confirm some of the narratives that the economic media are running with. Instead, the data has been positive and point toward continued economic growth in the US and away from a recession. Wesbury addresses 3 narratives and shows that the data do not support the narrative. Here is a summary of Wesbury’s blog:

Narrative: Tariffs are causing trade uncertainty which will cause the US economy to slow, perhaps into recession.
Fact: US worldwide trade has grown by 16.3% since 2016. Trade with China is down about 12% but trade with Vietnam is up 33% and trade with Taiwan is up 20%. Other countries are picking up the slack due to the drop in trade with China. As Wesbury points out, trade is dynamic.

Narrative: Business investment is weak, meaning the stimulus from the 2017 tax cuts has ended.
Fact: Business fixed investment (including equipment plus structures and intellectual property) has grown at a 4.5% annual rate, and real business investment in equipment only has grown at 3.4%. These do not suggest a slowdown, much less a recession.

Narrative: The jobs report last week was weak and this points to the end of the “sugar high” and a looming recession.
Fact: Private sector job growth was strong. Civilian employment grew by 590,000. Wages and labor force participation grew and initial jobless claims remained low. Again, no indication of a recession.

IMO

I believe the outlook for the US economy is good and that we are not about to be in a recession any time soon. We have a mountain of debt but rates remain low so it is manageable for now. Data in the private sector particularly point to continued growth. This is bullish for stocks as well as for real estate.

First Trust is a leading manager of mutual funds and ETF’s

Janus Henderson Funds

If you have a 401k or other similar retirement account, it is likely that your investment options include mutual funds from any of several mutual fund managers. The largest managers include Fidelity, Vanguard, American Funds/Capital Group, and others. A somewhat smaller player is Janus Henderson Funds. Janus is a survivor and you should feel safe with your money if you opt to allocate some of your retirement account to a fund within the Janus Henderson family of funds.

High-Tech Heyday

Janus was founded in Denver in 1969 (according to its website) and made a name for itself particularly during the “dot com” bubble era of the late 1990s and early 2000s. The Janus Twenty Fund became one of the hottest funds of the era, rising from about $27 in early 1997 to over $90 in March 2000 before doing a u-turn as its portfolio companies tanked (per Yahoo Finance). Janus’ fortunes sagged as the tech sector struggled to recover, yet they continued to grow and round out the stable of funds, and they eventually made it out the other end. Denver’s Janus merged with London’s Henderson in 2017, thereby boosting their combined offerings as well as their capital base.

Today

Go to the Janus Henderson website and you can see the array of products that they have. While not as broad and large as Fidelity, Janus Henderson retains its reputation as a good manager of equities and particularly of tech stocks. While they do offer ETF’s, Janus Henderson is primarily a mutual fund shop. The Twenty Fund was combined into the Forty Fund, which survives today with $13.5 Billion of assets and is the flagship of the company. Its managers, Doug Rao and Nick Schommer, were recently profiled in Investors Business Daily and emphasized their desire to invest in companies with “wide moats”, or well-protected markets and/or high barriers to entry. This sounds a lot like Warren Buffet’s methodology.

IMO

I admire Janus Henderson because it has adapted and survived. Janus could have tanked along with many of the hotshot companies of 20 years ago, but it successfully navigated through the minefield. Janus gained more stability through its merger with Henderson. If you have the opportunity to invest part of your retirement account with the Janus Forty or any of the Janus Henderson family of funds, I believe that your investment will be in good hands.

More Fixer-Upper Tips

I invest in fixer-upper houses from time to time, and someone suggested that I write about some of my experiences with these investments. While I don’t think that relaying fixer-upper war stories would make for interesting reading, I do think there are some general ideas that one should keep in mind when investing in and executing a fixer-upper that aren’t well portrayed in the various fixer-upper television shows.

Have an Edge

There are many stages to doing a fixer-upper:
– Buying the right property in the right neighborhood at the right price.
– Financing the property.
– Deciding how to fix it up and at what cost.
– Selling it.

There are other subsets of these stages. To be successful, you need to have an edge with at least one of these stages. This means you should be better than other people at this particular task. For instance, if you are handy, you might be able to complete some or all of the handiwork yourself at a low cost, and that would be your edge. Or, you might be a real estate agent and you can save money on commission payment at the exit, or you might have access to pocket listings to buy before they are released to the general public. Perhaps you can put your interior design skills and contacts to work to create a beautiful home. It is more difficult to make money if you pay retail for everything along the way, and so you should figure out what your edge is and exploit it.

Be Prepared To Make Decisions

During the fixer-upper process, you will need to be able to make good decisions quickly. I think this aspect is relatively well shown in the television shows. Time is money and so you need to make decisions about colors, styles, appliances, flooring, or whatever, in a rapid fashion. Because, if you hem and haw about your choices, you will hold up the project, and your contractors will get frustrated with you.

By The Book

While it might be tempting to bypass the appropriate approval processes, it is highly recommended that you not do so and instead do everything by the book. Make sure you obtain appropriate association, city, town or county approval to do any work you undertake. If you don’t, it might come back to bite you in a big way. Work that is completed without proper permits will be difficult to sell at the back end. Are you only doing interior work that doesn’t need prior approval? Great, but make sure you don’t need that permit or approval before you start your work.

Keep Your Eye On The Prize

Most importantly, make sure you know what you intend to sell your property for, and back into your ideas and your costs from that end number. If you want to do a master bathroom that will cost $20,000 but you won’t get $20,000 of marginal value from that improvement, then you need to scale back your costs. I believe the fixer-upper television shows don’t do a good job of this aspect of the business. On TV, the sales price always seems to bail out the added or unexpected costs that the investors encounter along the fixer-upper process. It doesn’t always have a happy ending.

IMO

If you keep these ideas in mind if and when you decide to jump on the fixer-upper bandwagon, you stand a better chance of making money. As with anything else, the more you do it, the better you get at it. Start with a smaller project and work up from there. Make contacts along the way that can help you gain your edge. As I have stated before, doing fixer-uppers can be a fun side gig or even a main gig if you find that you have some talent with it.

Fixer-Upper Tip

Investing in a fixer-upper house and then either keeping it to rent or selling it is a good, fun thing to do especially if you are handy and/or have an “in” when it comes to the design or purchase of new wares for the house. If done correctly, one can make a decent living and have an enjoyable business doing fixer-uppers, and it can be an important part of one’s financial plan.

Chip and Joanna Gaines, Stars of HGTV’s Fixer Upper

Chip and Joanna

“Fixer-Upper” on HGTV with Chip and Joanna Gaines is over, and the stars are looking to move on to bigger things with regard to television. They are continuing to run and expand their Magnolia brand in Waco, Texas, and they are transforming Waco in the process. According to this article, tourism and home prices along with it are increasing.

Bad Idea

Although they are talented and have been successful thus far, there is one element of the Gaines’ business plan that I would not recommend: Their homes are setting the high end of home prices in Waco. Although they are trying to bend the curve upward, they are too far ahead of it. According to this article, the average Waco home sells for $215,000. The Gaines’, on the other hand, are selling homes for over $500,000, and even up to $950,000. More power to them if they can fetch those prices, but it is not a good idea to be that far above the market, regardless of how nice the house is or the cachet attached to the Gaines’ name.

Know Your Local Market

Instead, if you are looking to do a Fixer-Upper, you need to make sure you know what your market is. Buy something below the market price and be able to sell it at or close to the market price, factoring in all of the money you plan to spend to fix it up. When you sell the property, don’t stand out with a price that is 2 or 3 standard deviations from the mean. Rather, plan your exit price within 1 standard deviation, and work backward from there. If the acquisition price plus the amount you spend to fix it up results in an acceptable profit for you, then great! If not, don’t buy the house!

IMO

More power to the Gaines’, but don’t do what they are doing and try to reset an entire city market and point it upward in terms of the local economy and housing prices unless you want to establish a brand as they have. Instead, if you are planning to do one-off fixer-upper deals, stay in your lane and fit within the parameters of that local housing market.

Sweep Accounts: Watch Out!

This article from Investors.com highlights a new trend that some brokerages are using now to make more money from your account: Not all sweep accounts are created the same and you may need to make sure your excess funds are being swept into the right account.

Sweep Account

A “sweep account” is an account into which your excess cash is invested in order to earn interest. Typically a sweep account pays a money market interest rate, which is higher than a savings account interest rate. A sweep account that pays a money market rate is more in focus now because, at 2% or even slightly higher, the money market rate is higher than one can get in a longer-term bond. This is what a flat or inverted yield curve is all about.

Be Proactive

The Investors.com article shows that some brokerages – Schwab being the primary example – are not sweeping excess funds into money market funds. Schwab’s sweep account, for example, pays an interest rate of 0.61%, far lower than most other money market funds. Schwab has a money market fund, but if you are a Schwab account holder, you must proactively invest in its money market account. It’s easy to do – just do it through your online portal – but Schwab won’t do it for you. Schwab is not the only firm that does this. Merrill Edge, for instance, has a money market account that is not its standard sweep account.

It Makes a Difference

It makes a big difference if your sweep account pays 1% vs. 2%. Think about big institutions with millions of dollars invested. The extra 1% adds up to big money. For the small investor, the marginal interest you earn may not seem like much, but it is important not to feel taken advantage of. Also, think about it from the brokerage’s perspective: It’s a lot of money to them if they can avoid paying their customers an extra 1% on their deposits.

IMO

I recommend you go into your web portal or look at your statements to see what your excess cash is being swept into, and what the interest rate on that sweep account is. Then figure out if there is another equally-safe money market account available at your brokerage. It may be worth it to transfer your excess cash into the higher-paying account, especially if you anticipate the cash remaining there and if it is equally safe and easy to invest if a better opportunity presents itself.

Diversify Your Dividends

Interest rates are historically low. Granted, you can earn nearly 2% in a money market account, but that rate will decline if and when the Federal Reserve lowers interest rates. Longer-term bond rates are lower, with the 10-Year Treasury at 1.5%-ish. You might look at corporate bonds or a corporate bond fund: LQD, and investment-grade corporate bond fund, yields above 3%, so there is that option. However, the more common alternative to bonds for yield is stocks that pay dividends.

Dividends

With interest rates on traditional debt instruments as low as they are, dividend stocks become more attractive. What you should look for when you look to invest in dividend stocks, in addition to the current yield (the annualized dividend divided by the current stock price) is the opportunity for a hedge against inflation. For instance, the current yield on SPY, the S&P 500 Index ETF, is about 1.8%. If SPY’s price over the next year rises by the rate of inflation, say 3%, when added to the dividend, that is a 4.8% total return for the year, which is much better than you get with a bond, a 1 year CD, or most other traditional savings havens.

Diversify Your Dividend Portfolio

Many dividend-paying stocks are clustered into relatively few sectors. For instance, utilities, real estate investment trusts, large oil companies, and some traditional industrial companies typically pay higher dividends, or at least higher than the average S&P 500 company’s dividend. You might, for instance, buy 4 large oil company stocks – Chevron, Exxon, Shell, and BP all yield from between 4% and 7% – and declare victory on investing in dividend stocks. The problem is, stocks in one particular sector such as large oil companies tend to trade in unison. In my example, if the price of oil declines, your portfolio is likely to decline, and your hedge against inflation will not work out as planned. If oil goes down too much, these companies might lower their dividends, although companies typically make a strong effort at least to maintain their current level of dividends.

Dividend Funds

Regarding portfolio diversification, the typical financial planner might default to recommending mutual funds or ETF’s because they are diversified portfolios of securities. However, with the case of dividends, although there are many dividend funds, I am not a big fan, and I think you can do better on your own by buying individual holdings, as long as you know what you are getting yourself into individually and collectively.

IMO

I recommend that you target a yield percentage and pick a diversified portfolio of stocks that collectively earn that percentage. For example, set a goal to earn a 4% yield on a portion of your portfolio. Then pick stocks that earn 4% on a weighted-average basis. Some will earn more, and some less. The key is to make sure your portfolio is diversified among sectors, which means you should have 10 or more – a finance professor will tell you that you need 30 to be diversified, but you will be pretty well diversified with 10. Other things to watch out for:

  • Try to avoid stocks whose yields look too good to be true. There are stocks out there that yield 10% or more. Typically these are companies that are in trouble, so really high yields are a red flag.
  • Try to avoid master limited partnerships, or MLP’s. If you screen for “stocks that yield more than 4%”, many of your results will be MLP’s. There is nothing wrong with owning an MLP, as it is just a different form of ownership with voting rights different from what you find with stocks. The problem with MLP’s is that tax reporting at the end of the year is complicated because you get a K1 instead of a 1099, which could cause you to delay filing your taxes. The trend now is that companies that were previously structured as an MLP are converting to C-Corporation ownership so as to present investors with a cleaner ownership structure.

Another way to help to put together a diversified dividend portfolio that accomplishes what you want is to contact me and engage my services as a financial planner. I would enjoy helping you achieve your goals!

HIPAA and Mental Health

Recent mass killings in Gilroy, El Paso, Dayton, and Santa Ana have caused us to discuss the state of mental health in this country. The argument is that “we” or “someone” needs to find people who fit the profile of these isolated sociopathic would-be killers before they act. The problem is “we” or “someone” can’t do so, and a principal reason they can’t do so is the Health Insurance Portability and Accountability Act, otherwise known as HIPAA. HIPAA makes it so that the initial cry for help needs to come from the mentally ill person, and not from someone, even a family member, on the outside looking at this mental illness situation and trying proactively to do something about it. If we want a more proactive strategy to search for the mentally ill and those who might fit the mass killer profile, HIPAA needs to change.

Saiorse Kennedy Hill

In addition to the tragic loss of life in the above-named cities, we also recently lost the granddaughter of Robert F. Kennedy. Although the cause of Saiorse Kennedy Hill’s death has not been yet revealed, Ms. Hill had issues while at prep school at Deerfield Academy and wrote specifically about her issues and how HIPAA exacerbated her problems in the Deerfield school newspaper. Those issues included attempted suicide. I refer you to this column by Andrea Peyser in the New York Post. Because of HIPAA, Ms. Hill wrote, nobody at Deerfield had the ability to reach out to her to help her back after a difficult spate.

It is not a stretch to think that a high school-aged girl struggling with mental health issues might be similar to an isolated young man struggling with his own issues and feeling ever more isolated and trying to figure out how he might get even with those who are against him in his own mind. A teacher or a colleague might see this situation developing and want to do something about it. They might confront the person, who might, in turn, tell the person with good intentions to take a hike. “Intervention” sounds like a good idea but it is really hard to pull off.

IMO

All of us who go to the doctor have to sign HIPAA forms typically once every year per doctor. When you do so, though you might take comfort that HIPAA helps you with your own medical privacy, it also in a twisted way contributes to some of the most tragic events in our society. I advocate that HIPAA needs to be revised such that interventions are easier to accomplish because mental health is a growing concern. Health insurance and physical and mental health are an important part of Financial Planning, and so this is certainly an issue that my fellow financial planners should address and advocate.

Dow Down 800

The Dow Jones Industrial Average dropped 800 points on Wednesday, August 14, a day after it rose 400 points. The market is volatile! An inverted yield curve is given as the reason why the Dow dropped on Wednesday. In the past, an inverted yield curve has sometimes preceded an economic recession, which means lower earnings for companies, which means lower stock prices.

My Take

Here are my thoughts about what is going on with the market:

  • The yield curve is inverting because money is being poured into the longer end of the yield curve, and not because rates on the shorter end are increasing. According to the US Department of Treasury, the 10 Year Bond hit a recent high yield of 3.24% on November 8, 2018. The current yield is just over 1.5%, less than half of what it was a scant 9 months ago. By contrast, the 3 Month T-Bill’s yield has dropped from 2.35% on 11/8/18 to 1.91% currently – a much shallower decline in yield.
  • Money is being poured into the longer end of the yield curve because alternatives for yields on government-issued securities worldwide are even lower. Negative interest rates are back. According to Marketwatch, the 10 Year German bond has a current yield of negative 0.7%, and the 10 Year Japan bond has a current yield of negative 0.24%. Interest rates are negative in much of the world (except for the US) because economic growth in these places is extremely weak or non-existent. Large institutional investors see these negative rates and weak growth and figure these other countries aren’t going to grow out of their problems any time soon, and they see that US Treasuries at least have a positive yield, and that the US economy’s rate of growth in the 3% to 4% range far exceeds that of other developed countries, and so they decide it is a good wager to lock in yields for 10 years, even if those yields are half of what they were 9 months ago. This speaks volumes about the future outlook for Europe and the rest of the developed world.
  • Meanwhile, the metrics for the US economy remain good and do not signal an oncoming recession. Despite the 800 point selloff on Wednesday, stock price indexes, which are a leading economic indicator, remain near all-time highs. Unemployment is sub-4%, and workforce participation is rising slightly. Corporate earnings are forecasted to improve, albeit not at the rate they did during 2018.
  • The Federal Reserve has been and remains accommodative, including their most recent 25 basis point cut in rates. Per the Fed, it still has $1.4 Trillion of excess reserves in the system, so money is not tight. In addition, the Fed Funds Rate of 2.25% is about half of the nominal GDP growth rate – a metric some economists look at as a predictive element.

IMO

My point is that this semi-inversion of the yield curve is different than previous inversions that have come before recessions. Most other indicators point toward further growth in corporate earnings and therefore appreciation in stock prices. Moreover, there are other issues in play, such as the China trade issue, that can be solved with some political will on both sides. I believe this semi-inversion will not be followed by a recession within the next 2 calendar years, at least.

Paying for Grandkids’ College

Only a few of my readers that I am aware of currently have grandchildren, but a number of them wish they did. I fall into the latter category. One grandparent I know says, “If I had known how much fun grandchildren are, I would have started with them first!”

How Can I Help With Their College?

One common thought among grandparents is, “How can I help pay for their college education?” Same thoughts as parents have, but perhaps not with the same level of dread. There was an excellent article in a recent edition of the Wall Street Journal that discusses various options a grandparent has. Click this link to read the original article, and then read my two cents worth here below on each of the options presented in the article:

  • 529 Account: This is the best way now, especially if the grandchildren are nearing college age, or at least over 8 years old. Parents can contribute $15,000 per year per grandparent and per grandchild, and they can frontload 5 years of contributions if they want, although this may not be desirable due to investment market vagaries. This means a grandmother and grandfather together can contribute $30,000 per year or $150,000 if they want to frontload 5 years of contributions without triggering Gift Tax issues. I advise not frontloading all 5 years because it is better to invest the contributions over time rather than all at once because you don’t know if you are contributing during a good buying opportunity or not. Most 529 Accounts are invested in target-age funds based on the child’s age and years until they need the money.
  • Direct Payment of Tuition: A grandparent can pay all or part of the grandstudent’s tuition directly. This means the grandparent writes a check directly to the college. The problem with this is that many colleges now want to be paid by credit card all at once, so how mechanically can a grandparent pay for a portion of the tuition? Probably someone will need to contact the college to work out the mechanics, which likely vary from college to college. Another issue to consider: The grandparent really should not write the check to the parent, because of gifting limits. A check directly to the college does not count as a gift, but a check payable to the child or the child’s parent counts as a gift, so there could be issues if the total including the tuition plus other gifts that grandparent gives to any one person exceeds $15,000. For instance, let’s say the grandchild graduates from high school and the grandparent gives them a car for graduation, and then the grandparent writes the grandchild a check for their first semester’s tuition. In this case, the grandparent is generous but not wise because both gifts combined within the same calendar year could easily exceed $15,000.
  • Fixed-Index Universal Life Insurance Policy: This may be the most intriguing option but only if the grandchild is less than 8 years old, because the contribution requires 10 years of aging for the tax benefits to kick in. The grandparent owns the policy but the grandchild is insured, so the cost of insurance is minimal. After being in place for 10 years, withdrawals to pay for tuition are considered loans against the cash value and aren’t taxable and aren’t considered assets that count against a child’s ability to get financial aid on the FAFSA. As in many other endeavors, it pays to plan ahead, and so the best option works if the planning and investing occur 10 years or more before the money is needed.

IMO

These suggestions for grandparents do not contradict with anything that the child or the child’s parents are trying to accomplish to obtain financial aid or to pay for college. My further advice is to make sure the college choice fits with the budget, and to be realistic about what the child wants to achieve with their college experience. With college as expensive as it is now, make sure that you really understand what you are getting into if you choose to go into serious debt to go to your dream school when you might be better served to go to a more cost advantageous place. And, as always. please ask me to help you if you have serious questions about any of this.

Have a Side Gig

Do you work a steady job, make steady income plus maybe a bonus, but you still can’t get ahead or even squirrel away any money in a savings account? If so, you need to consider what you do in your spare time. Perhaps you need to change what you do when you are not at your job such that what you do puts more money in your pocket rather than taking money out of your pocket.

Side Gig

Having a “side gig” that makes you money can take any number of forms. This article from Medium.com suggests some ideas and gave me the idea to write this post. Teach a class on or consult in a field that you have expertise in; buy and manage a rental property – it’s not passive income if you manage it yourself; buy and sell niche products through eBay or Amazon; or write how-to books or manuals about something you know about. These are suggested in the Medium.com article. Other side gigs that might pay you money include some of the following:

  • Drive for Uber or its like. This works if you have an inexpensive car and you like to chat it up with random people.
  • Do you watch Flip or Flop on HGTV? Do you think you have a good eye for properties and perhaps are handy with some things? How about buying a property and doing a remodel and flip rather than a rental? I have written about this before: It can be a fun way to make some extra cash but don’t do it the way that they do it on TV.
  • If you like to travel, consider becoming a personal tour guide and organizing a tour that you run yourself. You may not make much money, but you may at least have some or all of your expenses covered, so at least you won’t spend as much money as you otherwise would have.
  • Generally, take any skill or avocation you have or do and think about how to monetize it. This is not a stretch – we likely have all dreamed about doing something we love to do for a living. Instead, think about doing it as a side gig that pays you somehow.
  • Think about derivative activities. Example: You like to golf or play tennis, but you will never be a pro or earn money directly by golfing or playing tennis (is “tennising” a word?). Instead, derivative activities that might earn you some extra cash might be to write a blog about the pro tour or about your experiences with these activities or to organize tours of interesting golf courses or about rating golf courses.
  • Babysit! If you are an adult, this only works probably if you are a female and really like kids and otherwise don’t have much of a social life. However, there is a real need for babysitters because high school-age kids who babysit are in very short supply.

IMO

The internet and the accessibility of online retail and other channels open up many doors if you are looking for a side gig that pays you some extra cash. Having a side gig is almost like a 2 for 1: Not only can you put money in your pocket, you also don’t spend money you otherwise would have during your spare time. So, if you make $200 with your side gig and don’t spend $200 on an evening out, that’s $400 more you have in your pocket. It’s a great way to work your way out of the issue I stated at the start of this article, which is that it is tough to get ahead with just the salary you make at your day job.