Most people are happy that 2020 is coming to a close, and for several obvious reasons. Though I obviously didn’t enjoy all of the bad things that happened in 2020, I did enjoy how our country adapted and made the best of a bad situation. Our ability to adapt resulted in stock market indexes that are at or near all time highs despite all the bad that happened in 2020, and that is an accomplishment.

My Outlook for 2021

Interest rates are low and will continue to be low during 2021 and beyond. Rates may bump up a bit potentially at the longer end of the yield curve but you won’t make money investing in bonds during 2021. As a result, I think we need to re-think the “60/40” portfolio. Instead, investors should look to holding a certain amount of cash in their bank accounts, perhaps in a money market account, that they can access easily. Investors will earn almost as much in money market accounts as they will in other more sophisticated bond investments. If you can swing it, consider holding a year or more worth of your living expenses in a money market account. If you spend $200,000 per year, then put that into a money market. Call your bank or brokerage firm ahead of time to make sure you are getting the best money market rate that you can.

Invest The Rest

Once you have a sufficient cash reserve, then go ahead and invest the rest. I recommend a mixture of ETFs so that each investment you make is inherently diversified. Look at an S&P 500 Index ETF as the basis, and then potentially look at sector ETFs, including the tech-heavy Nasdaq 100 ETF. Consider emerging market or other international ETFs – there is an argument that the US dollar is headed lower, which will be good for international holdings. By investing in ETFs, including within fund families at firms such as Vanguard or Fidelity, you can diversify and still avoid paying high fees. Consider also dividend ETFs if you need current income, because your current return on dividend ETFs will be greater than the current return on bonds. I believe investors should overweight stocks as long as interest rates remain in the low range where they currently reside.

Geopolitical Issues

The coronavirus vaccine, continued economic recovery as a result of the vaccine, and the latest stimulus bill (depending on its final form) are all bullish for stocks. Stock indexes had a great run in 2020 especially after late March, but I believe the stock rally still has some legs. Internationally, Britain and the EU have reached a post-Brexit trade agreement, which will be good. Agreements between Israel and several Muslim countries are a good thing. Iran is becoming more and more isolated as a result of these agreements, so that remains as a threat, but there never is a time when there isn’t some kind of threat. I don’t see Iran striking out on its own without backing from other Muslim states. It will take all of 2021 to occur but the whole world will benefit from the coronavirus vaccine. Economies worldwide will recover, though likely at different rates. All of this will be bullish for economic activity and bullish for stocks.

Alternatives

Inflation hawks have been warning investors about looming inflation for years and it hasn’t happened yet. That said, deficit spending by governments worldwide is inflationary, if standard economics textbooks are to be believed. Will the trillions of dollars that governments have spent to keep their economies afloat finally cause the inflation predator to rear its ugly head? I believe inflation could be slightly higher but not significantly so. As a result, investors should slightly overweight their holdings of real assets such as gold, commodities, and especially residential real estate. Consider also Bitcoin, which is not a real asset but has been acting as an inflation hedge.

IMO

You may be wary of investing in stock indexes right when they are at or near highs, but consider what your investments might look like 3 to 5 years hence. Stocks may have their issues in the short term but have almost always outperformed in the long term. Don’t take any flyers on bubble stocks such as TSLA or hot IPOs such as DoorDash right now – wait and see how these shake out for a bit. If you miss some profits, oh well, but those profits will have been due to the greater fool theory rather than fundamental improvement. Stay diversified in stock ETFs and you should be rewarded during 2021.

Happy New Year and Welcome 2021!!

I have written a couple of posts before about Tesla. I thought it would have severe obstacles ahead of it especially as other car companies brought their own electric cars to the market. I thought it was overvalued prior to Covid. Now I think its recent performance is insane. There is no justification for TSLA to be the 6th or 7th (depending on how you view it) most valuable publicly-traded company, with a market cap of nearly $600 Billion, and worth more than the next 9 auto companies combined. Only if TSLA outperforms its most optimistic projections might this valuation make sense.

Covid Is Bad For Cars

Why am I not a TSLA bull? For a number of reasons. Let’s start with the environment for new car sales. Covid and the resulting changes in the way we work can’t be good for future new car sales. People aren’t driving nearly as much. They are working from home so they are not driving to the office. Shopping opportunities are limited so they aren’t driving to go shopping. Families with multiple cars are considering whether they will continue to need multiple cars. The US population is getting older and retired couples are more likely not to have multiple cars. The China market is growing for Tesla so they do have that trend in their favor, but most other trends point to slowing car sales instead of increased sales. In looking for a catalyst to have propelled TSLA from under $100 in March 2020 to $640 today as I write this, I don’t see it in the potential growth in the new car market.

Move Toward Electric Cars

There is an argument that if a car buyer wants an electric car, they will want a Tesla and will likely not look at another brand of electric car. Other electric car brands have had real difficulty in catching on and sales projections have not been met. Tesla’s market share of the electric car market is over 80% in the US, but Tesla is less than 2% of the new car market inclusive of gasoline cars. So, if Tesla retains its 80% EV market share and is able to grow its overall market share to 10%, then perhaps you have an argument for growth, but not to the extent that TSLA has already performed. Governor Newsom’s recent mandate that 100% of all car sales in 2035 in California must be zero emission vehicles points toward an increase in EV sales, but we will see how well Newsom’s mandate will be enacted, especially since it was a mandate and not a law and since he will likely be gone from the scene by 2035.

S&P 500

Now TSLA has been moved into the S&P 500 Index. However, guess what? TSLA has underperformed in the days since it has been added to that Index. Perhaps the buy-up occurred prior to the actual inclusion on the Index, and investors will dump TSLA now that its inclusion is complete. We will see, but perhaps this is an instance of buy on the rumor and sell on the news.

A Bubble

I can view TSLA’s 2020 performance only as a bubble propelled by major money chasing momentum plays. There has been no catalyst resulting from Covid or from anywhere else in 2020 that has caused TSLA to be fundamentally worth nearly $600 Billion. There are no traditional metrics that make sense. Perhaps I am showing my age here but if you are long TSLA here you are risking a lot. Jump off now before everyone else does.

There are a number of reasons why you should strongly consider converting part or all of your traditional IRA or 401k accounts into a Roth IRA. The Covid shutdown economy this year adds to the list.

Here are some the reasons to do a Roth Conversion:

• If your investment portfolio is in a loss position this year, any tax hit you incur as a result of the Roth conversion would be offset by the investment losses. This looked like an appealing aspect of the weak stock market earlier this year but as the year has gone on and the markets have recovered, there probably aren’t as many investment losses to be taken advantage of.
• If you have been laid off or your Adjusted Gross Income for 2020 will otherwise be lower than expected, then perhaps the income that you book by doing a Roth conversion may not hurt you as much this year and may not cause your taxes to increase substantially. You can “take advantage” of this off year in your own income by paying taxes now on your traditional retirement fund cash and thereby minimize taxes you might have to pay at a later date during your retirement.
• Speaking of which, you might have read that there will be a new President next year. As a result of the new administration, and as a result of the explosion in government spending in 2020 in an effort to keep the economy together as a result of the coronavirus economy, do you believe your taxes going forward are more likely to go up or go down? If you agree that taxes are more likely to go up, then it is advantageous for you to convert your IRA to a Roth now rather than later at a higher tax rate.
• Roth IRAs have no Required Minimum Distributions and are not taxable to the owner if the owner has held the Roth account for at least 5 years. (Roth 401k’s do have RMD requirements). Compare that with traditional IRA and 401k accounts, which are taxable as ordinary income and which have strict RMD requirements. Though it is more painful (tax-wise) to do a Roth at the front end, the Roth is much better at the withdrawal end.
• You don’t have to convert 100% of your traditional retirement account at once. You can stage your conversion over a number of years, or just convert a part of it and leave the rest alone.
• If you are over 59 1/2 years old, you don’t have to pay the 10% penalty on the portion that you convert – just ordinary income on that part.
• You don’t have to pay the IRS from your traditional retirement account money. In other words, whatever your traditional retirement account balance is pre-conversion, it can be the same balance after you convert it to a Roth, as long as you have enough money elsewhere to pay the additional taxes you incur by doing the conversion. Keep in mind, converting a traditional retirement to a Roth IRA is equivalent (from a tax perspective) to withdrawing the money from the traditional account, meaning it is treated as ordinary income to you.
• Do some analysis prior to converting. Look at the Federal and State (if appropriate) tax tables. If, by doing a conversion, you force yourself into a significantly higher tax bracket, then don’t convert, or convert a smaller amount.
• Unlike setting up or contributing directly to a Roth IRA, there are no income limits on doing a Roth conversion. This “backdoor” way of having a Roth IRA is explicitly legal because it raises more money for the IRS in the short term.

IMO

If you are heading into retirement, and especially if you are over 59 1/2 years old, you should certainly analyze and strongly consider doing a Roth conversion. I am afraid that taxes will have to be raised significantly in order to pay for what government has had to do to keep the economy from imploding this year. Any tax money you can spend now that saves you from spending money when you need it in retirement is a good idea.

“It’s always darkest before the dawn” was most recently uttered in pop culture by Florence and the Machine. With the coronavirus vaccine now approved and in initial distribution now at the same time as coronavirus infections and hospitalizations at an all time high in the US, it seems we have a “darkest before the dawn” situation now. How do you think the new vaccine will affect the US and World economies in 2021 and beyond? Without a doubt the effect will be good, but how good? And what does it mean for your financial goals?

For Fixed Income

If you agree that the vaccine will be a good thing and that economic output and metrics will improve as a result, that is not good for fixed income. Improved economic output likely means higher interest rates which means lower bond prices. Because the US Fed has indicated it will keep short-term interest rates low for likely the next 2 years, look for longer-term interest rates to rise and therefore look for the yield curve to steepen. With the 10-Year US Treasury rate currently at about 90 basis points, look for it to move to between 2% and 2.5% by 12 months from now. Are you busy now refinancing your house? Good idea, because mortgage rates should also be up by a similar 120 basis points or more in a year. Investment grade corporate bonds, currently in the low-2% range, should be in the high 3%’s, which isn’t a big stretch because that’s where they were during early 2019. My recommendation is to underweight fixed income and to stay short-term on what fixed income you do have. If you are a borrower (i.e. mortgate) then its a great idea to lock in now for the long term. If you are a lender (i.e. fixed income investor), then not such a good idea to lock in now.

For Alternatives

This to me is the biggest question mark. Will inflation return or not, and if so how much? While there is debate now as to whether or not Gold is an inflation hedge, historically it has been considered as such. If you buy that argument, then investors seem to be hedging their bets as to how inflationary the fiscal and especially the monetary policy reactions to the pandemic economy will turn out to be. Oil has been rallying for the past 2 months and copper and lumber have also been strong, all of which indicate stronger future economic activity and as well higher inflation. All that said, inflation hawks have been out there before and have been wrong in the past. I think a balanced portfolio should have some exposure to inflation-leveraged assets and an investor should slightly overweight their exposure in this area. Perhaps look at inflation-protected TIPS, or Google “Inflation ETF” and read about ETFs that are inflation-protected. If you own real estate, either in your home or through a rental property, then you may consider that you are already properly positioned against the inflation threat. Bitcoin? It has been very strong but I’m not sure Bitcoin’s strength has been a reaction to higher inflation or a reaction to a concern about the ability of world governments to survive and to continue to govern post-pandemic.

Equities

The vaccine is bullish for equities. However, has the run-up we have had in equities since late March 2020 already captured the upside reflective of the improved post-pandemic economy? Said another way, is the upside already priced in at current equity prices? I don’t believe so, and I do believe there is more upside to be had by being invested in equities. My reasoning is the TINA argument – there is no alternative. Because I see interest going up especially at the longer end and with mortgages and corporate bonds, I see investors moving out of the fixed income sector and increasing their exposure in the equities space. Corporate earnings, especially among the biggest companies and including the FAANG stocks, should be strong and should continue to improve. I believe investors should overweight equities. Though their returns may or may not be in the double-digits, they will likely exceed what they might earn in fixed income.

IMO

Even though the run-up in equities since March has been strong, I believe the rally has more legs. I also see longer term interest rates going up and therefore I believe investors should overweight equities. Look also to invest such that you might benefit from higher inflation. Refinance your mortgage now if you are looking to do so and haven’t already done so. With the coronavirus vaccine now at the very start of being administered, let’s hope that the vaccine rollout works, not just for our portfolios but for all of humanity.

DoorDash IPO’d Wednesday and it was a smashing success. Not only did DoorDash price its IPO 13% higher than they had forecast and raising about a half a $ Billion more than they thought they would, but the stock then rose by 86% once it went public. Its close at $189 and change meant that its market cap was $72 Billion at the close on Wednesday, or about the same as Colgate-Palmolive and larger than General Motors. Outstanding for a company whose business is transporting hot food that they don’t cook themselves to your front door.

Too High?

Does it stretch reality to consider that a food delivery company is worth more than GM? This article from Yahoo Finance makes the bearish case. DoorDash lost $667 Million in 2019 and posted a loss of $149 Million through the first 3 quarters of 2020 even though the environment for its service was in full sail due to the pandemic. Will the advent of the vaccine mean the downwind gust will ebb and become more of a gentle breeze? Will a vaccinated population quickly revert back to its pre-pandemic ways and go back out to restaurants en masse? Or will a sizeable portion of pre-pandemic restaurant patrons stay at home, if not permanently than at least more often than they used to? And, if so, will it be enough such that DoorDash can become profitable? It’s hard to envision how and when DoorDash will turn a profit if they can’t do so in 2020.

Not High Enough?

The food delivery market is fragmented among DoorDash, UberEats, Postmates, GrubHub, and a number of smaller players. The Yahoo Finance article sees this market fragmentation as problematic, but it could be an opportunity for a well-capitalized DoorDash to snap up market share by acquiring smaller players. DoorDash bought smaller competitor Caviar last year and now has a 45% market share in home food delivery according to this article.

Another opportunity for DoorDash is that the percentage of people who order home food delivery is still relatively small – somewhere between 6% and 20%, and probably around 10%. Some customers prefer to pick up their food themselves, and some restaurants have their own delivery services rather than farm out the task to a third party like DoorDash. If DoorDash performs, perhaps it can grow its own market.

IMO

All new tech IPO’s have their skeptics. I believe there is a good and growing market for food delivery in the US and my own experiences with DoorDash have been good: the food arrives on time and hot. That said, the current valuation reflects the most optimistic of sales and profit projections. A number of recent IPO’s, including Uber and Lyft, followed a pattern of a strong IPO followed by poor subsequent performance for several quarters, followed by strength as the economy recovers from the pandemic lockdowns. Look for a similar pattern for DoorDash: several quarters as the business matures and DoorDash’s performance catches up with these lofty initial projections. Don’t buy now but watch to see how DoorDash and the home food delivery market plays out.

Perhaps you read last week that Salesforce is buying Slack for over $27 Billion. That’s nice, but why should you care? Because the acquisition (assuming it is completed) is another step in the direction of employers allowing their employees to work remotely including from home. It helps to solidify this work from home economy that was spawned by the pandemic. The ramifications on the work from home economy are significant and could be fatal to ancillary businesses related to the “traditional” office workplace.

Slack

Slack’s main software product allows employees of the same company to communicate with one another in a better way. It advertises itself as a replacement for traditional email, but Slack is much more than that. In addition to video calling, Slack allows workers to work together by sharing documents such as spreadsheets or slides so that they can work collaboratively on a project. Rather than sitting in a conference room at the office, workers using Slack can be anywhere that has good internet access and meet together with people on their team to hash out a set of slides that they need to complete in preparation for an important meeting. This type of Slack-enabled workforce collaboration is how the US economy didn’t totally collapse during the pandemic and the various shutdowns and it is how the economy (per GDP figures) has recovered as strongly and as quickly as it has.

Salesforce

Salesforce’s main product is customer relationship management software, so much so that its stock exchange ticker symbol is CRM. Since the focus of Salesforce’s software tracks the order and sales process between companies and is thus more of a business to business product. Slack, therefore, does not compete with Salesforce’s current software but there should be some synergies insofar as Salesforce’s current customers could also be potential Slack customers if they aren’t already. What Salesforce brings to Slack are more resources: money, people, and an existing customer base. Slack could grow its sales substantially more as part of Salesforce than they could as a stand alone company because Salesforce has more money to put toward sales growth.

Microsoft Teams

Slack competes directly with Microsoft Teams and it isn’t a fair fight because Teams is included in the Microsoft Office package whereas Slack is a stand alone product from a stand alone company. Slack’s advantage is that it is considered to be superior to Teams but they can’t compete with the behemoth Microsoft. Enter Salesforce, which though it is not on the level of Microsoft is much bigger than Slack ($200 Billion market cap vs. $27 Billion). Now Slack will at least have a fighting chance of staying in the ring in its battle with Teams for the market for collaborative office working software.

Why This Matters

This matters because now, with Teams and a bulked-up Slack battling for the market, it means that more companies will get comfortable with the idea that their employees can be productive working from home and that the trend will grow. What does that mean for landlords who own office buildings, especially Class B or C buildings? What does it mean for vendors who cater to the downtown office worker lunch business? It can’t be good for downtown ancillary businesses. Don’t look to load up on the stocks of office REITs. On the other hand, if you live (and now work) in the ‘burbs, this work from home trend could be good for local neighborhood retailers, especially once the vaccine is administered yet people are still working from home. What about the price of oil, and hence the stock of oil producers? If people aren’t driving to work, then they aren’t buying gas. If they aren’t buying gas, then maybe they don’t need their own car, and maybe they can share a car. That’s not good for the auto makers. However, if your work from home situation leaves something to be desired, perhaps you are looking to upgrade your existing abode or maybe buy a new one. That speaks well for home builders as well as the Home Depots of the world, especially if mortgage rates remain low, as is expected.

IMO

I am not saying that Salesforce’s acquisition of Slack is going to cause the office market to collapse along with General Motors. I am saying that the proposed transaction is a sign that indicates that work from home is a trend that will remain in place even after everyone is vaccinated from Covid. Don’t go bargain hunting right now for stocks tied to a return to the work at the office economy because even though it may look like a bargain now, it could look even worse a year from now.

Since May 2020, the US Dollar, as measured by the Dollar Index futures contract, is down about 10%, while the price of oil (West Texas Intermediate Crude) is up about 43%, gold is up about 5%, the S&P 500 is up about 34%, and Bitcoin has about doubled. The housing market has remained strong as well. Has it been a coincidence that the dollar has declined while all of these other asset classes have grown stronger? No it is not a coincidence. In fact, part of the reason why many asset classes have grown is because the dollar has declined.

What Happens When the Dollar Declines

When the US Dollar declines, it costs less for foreigners or foreign countries to purchase US goods and US assets. What appears to have happened is that foreign institutional investors have bought heavily in the US stock market over the past 6 month, enticed by the performance of US large cap stocks in particular. Aiding in this trend has been low US and worldwide interest rates and the US Fed’s open admission that rates should remain low for the next several quarters. That means that these foreign institutional investors who once may have allocated a higher percentage of their portfolios to US bonds are now allocating more to US stocks in search of higher returns. That means more demand for stocks, and when demand increases with supply remaining the same, the price will go up. All this is not to take away domestic investors and their own engine behind the increase in US asset prices, but that in combination with these changes in the behavior and actions of foreign investors as a result of the decline in the US dollar’s value have combined to fuel the rally we have seen in these non-bond asset classes.

Why the Dollar is Declining

The Dollar Index measures the dollar against a basked of international currencies. These are mostly the other major currencies around the world, such as the Euro, Yen, Pound, and other majors. As such, it is a relative valuation and not pegged to any specific other asset such as gold. Low interest rates in the US have played a part in the dollar’s decline, as has the US’s continued issues with the pandemic. According to this recent Wall Street Journal article, the dollar has declined in the past month or so because it is perceived that international economies, which have been even harder hit by the pandemic than has the US economy, will recover at a steeper pace with the imminent Covid vaccines than will the US economy. This is not to say the US recovery will be weak, rather that the recovery in international markets will be at a steeper percentage than the US recovery. My point is that the dollar’s value is relative and not absolute, so we should not be concerned that the dollar’s recent decline is indicative of a pending implosion in the US economy.

IMO

The title of the WSJ article that I referenced in the previous paragraph is “The Dollar Is Weak. Investors Bet It Will Slide Even More.” When I read a headline like that, my intuition is that the opposite will happen. If you are thinking that the dollar’s decline is the “all clear” signal you have been waiting for and that you should jump on the stock market bandwagon, my advice is, “not so fast.” Often when a strong consensus in the stock market establishes itself, the situation changes and the trend either ebbs or reverses. Personally, I am long in the stock market but not just because I expect the dollar to continue to weaken. Instead, I believe US corporate earnings will continue to improve in no small part because interest rates remain low together with the upcoming vaccine. It will be a bumpy ride but if you remain long for the long ride you likely will be rewarded.

As you may know or may have deduced from your reading or from your social media, today is Giving Tuesday. It is a mostly undisputed good thing to give your money or your time to a qualified charity. You can deduct your contributions on your tax return if you give enough and you help out the less fortunate at the same time. Especially this year, if you are well-off while so many others are in bad financial shape, your charitable contributions can be even more effective.

How Much Should I Contribute?

If you are currently well-off and remaining employed, perhaps your good fortune has you thinking about how much you should give or about how much you might be able to increase your giving over what you contributed last year. There is no right answer, but there are rules of thumb and situations to consider.

Percentage of Your Income

The first consideration is to think about how much your give in total as a percentage of your income rather than a gross dollar amount. Some religious people “tithe” 10% of their income to their church. That’s very generous and on the high side of what most people give. According to this article from last year on Marketwatch, taxpayers donate about 2% of their income to charity. If you haven’t focused on the percentage of your income that you have donated, go back to your tax returns from the past couple of years and do the calculation. Then, if you have donated less than 3% to 4% of your income in prior years, consider increasing your donations to 4% this year. Even if you aren’t meeting the 10% tithe standard, at least you will have given more this year and you will feel better about yourself. Also you will have taken more of a top-down approach to your giving, which is a way of taking more control of your financial life.

Standard Deduction

Taxes are another consideration. Perhaps you like to donate because you can deduct your contributions on your tax returns. That’s great, but the bar to do so is higher now due to changes in the tax law. The standard deduction in 2020 is $12,400 for single taxpayers and $24,800 for married filing jointly. That means unless your total itemized deductions exceed $12,400 (for singles), you are better off not itemizing and instead taking the standard deduction. The most common itemized expenses are mortgage interest (limited to $750,000 of mortgage balance) and property taxes (limited to $10,000). If you own a home and have a mortgage on it, you should first add your interest and your property taxes. $12,400 minus that sum is the amount you need to give to charity such that it makes sense for you to file a Schedule A and itemize your deductions. Even if you do itemize, you don’t get a dollar-for-dollar reduction on your tax bill for every dollar you donate to charity. If you don’t itemize, you can still take a charitable deduction of up to $300, which is nice but shouldn’t affect one’s thinking. My point is that you should give to a charity because you like what the charity does and you want to donate to its cause, not because you want the tax deduction.

Limits on Giving

If, on the other hand, you are overly generous, there are limits on your ability to deduct your contributions. In 2020 you can deduct up to 100% of your Adjusted Gross Income as a result of the CARES Act, which is up from 60% previously. This is likely a temporary thing that is likely to be reduced with a new Democratic administration and the need to increase tax revenues to to the exploding federal budget deficit. Look for the 100% of AGI to be reduced. Those who work for a living probably aren’t concerned with giving 60% vs. 100% of their AGI, but retired people who are wealthy but have limited AGI may have an issue with this.

Required Minimum Distributions

Some people donate to charity through their retirement accounts. If they are subject to Required Minimum Distributions, they can satisfy their RMD requirements by donating their required amounts directly to qualified charities and thus not pay current income tax on their retirement account distributions. There are two new issues with this strategy this year. The first is that RMD’s are suspended this year as a result of the CARES Act. The second is that the age threshold for RMD’s has changed from 70 1/2 years old to 72 years old. These changes mean there will likely be minimal charitable giving through use of this tax law vagary likely until 2022. However, the government needs money, and so this issue may also be subject to change over the next several months.

IMO

My advice is to give and give because you want to give, not because the tax law allows you some benefit. Take a top-down approach based on how much of your overall income you donate to your various charities. Try to make an effort this year to increase your giving because this is such a hard time for so many. Participate in the spirit of giving that Giving Tuesday represents.