THIS IS MY 151st BLOG ON UNDERSTANDING MONEY
TOOLS
December, 2018
In this blog we will cover a potpourri of things. Why? Many useful things I have never covered, or have not in
years. And two, I have a lot of
time on my hands after getting a Staph infection from a hospital operating room
while having a hip replacement done.
Let’s begin with stocks again. If you start a corporation, and you should with most
business start-ups to protect yourself legally, think things through as to
where you want to go. You will
have the “Articles of Incorporation”.
You need to decide on how many ‘authorized shares” you should have. If you are a small independent company
a small amount of stock is fine.
If you think you may build into a large company and someday “go public”
through an “initial stock offering” better have millions of shares of stock
available. (Here a good lawyer and accountant will render advice.) From the authorized shares you will
“give out” stock, “issued stock”, up to the authorized limit or hopefully far
under as some day you may want to issue more to a key employee, “stock options”
for employees and a signing bonus for new employees joining your company.
If I am looking at investing in a public company I look at
the number of outstanding shares of stock, or “what is in the float”. The “float” is the amount of stock in
the market that trades. A tightly
held stock may not trade many shares each day, even though there may be a
significant amount of issued shares.
However, a small float may create volatility in trading if someone buys
or sells a large amount of shares.
Conversely, a large float should not vary in price as much, and perhaps
give you more peace of mind on stability.
I love the government on figures. A month ago things were
great; just ask our government on figures and our media on news/business
coverage. All of a sudden, the markets start tanking as I have been waiting for
2-3 years, and we are talking perhaps recession in 2020. With rational thinking
you know things don’t happen this quickly. Could that 2020 be a controversial presidential election
year, of course?! Are we in a
“bear market” as many indicate? I
will say we are in a “normalizing market” after stocks going up 330% in 10
years, which is abnormal. With
that rise in appreciation don’t you think it was a bit unusual when our Gross
Domestic Product (GDP) only rose an average of 2% growth per year?
There are so many variables that effect or affect the
markets. Don’t believe most of the
ones you hear on the news. The government stated that in the 3rd
quarter of this year GDP was 4.3%, now this past week it was downsized to
exactly 3.4%. Could it mean that
we have a dyslexic bean counter in Washington? (Please read my last blog, 150, for more insight.)
There are also many things concerning the world markets that
are happening here in the US. It
is all “cause” and we will feel the “effects”. Over the weekend, December 22 and 23, Treasury Secretary,
Steve Mnuchin, called the 5 or 6 largest US banks to check on their liquidity
and capital requirements to see 1) if we were going to have another banking
crisis, and 2) to see if the Feds could loosen further credit to companies and
consumers. In my eyes we have gone
beyond normality in debt, both government and private sector. I don’t think we will experience a
banking crisis, but the next recession will involve corporate debt and not
being able to pay back loans from money borrowed since the Great Recession of
2008-2010. This will also include
a significant economic downturn worldwide. There really is not one country in the world without
problems at the moment; perhaps excluding Switzerland and Austria, both small
countries that can control situations.
I’ve found over the years people in foreign countries are
more aware of what is happening here than most Americans. 50% of our stock and bond sales over
the past couple of months are from foreign investors. They watch our ballooning debt, politics and policies. America has the ability to cover debt
two ways: print more money and tax the people and corporations; both
detrimental to a well run country.
With the significant downturn in world markets we must
remember that “fear” is a greater emotion than “greed”. Greed was the emotion driving the
markets the past 10 years. We
reached “stagnation” in the business cycle curve, the next phase is down, thus fear already has set in.
Over the past few days president Trump said he is willing to
step in with the “Plunge Protection Team”. Not kidding, this exists. Ever heard of it?
Probably if you are young, or have not read my previous blogs, the
answer is “no”. In October, 1987,
during president Reagan’s term in office the market tanked, worse than
now. President Reagan determined
the government should have the ability to step into the markets and stop
trading, or “buy in” stock. He
called this the Plunge Protection Team signed into Act on March 18, 1988. Of course, this is against “free
market” and follows Keynesian economics, which Reagan was supposedly
against! It’s okay if the markets
go up, but not down!
We also have a co-mingling of authority right now with the 3
branches of government. Quick
test. Name the 3 branches of
government……I hope you got the question right! They are the Executive (President), the Legislative
(Congress and Senate) and the Judicial (Supreme Court, Judges and Courts). As divided political positions enter
into the picture the strict division of each of these branches is
compromised. It should all be
“nonpartisan”; currently it is not.
Each day the news/media and the government, including
President Trump, blame the problems on various things that really are not to
blame. To a degree, not working in
concert for the good of all Americans, is a big problem.
Tariffs? We had
them at one time, we won’t beat the Chinese in this game. The Chinese run an “autocratic”
government controlled by the Communist Party. Because of that structure they can move much more quickly
than our Democratic system bogged down by the 2 party political agenda.
Frankly, I see little that can be accomplished over the next 2 years because of
all the internal fighting.
The halting of more money in the budget to keep our
government running…over The Wall?
Actually, I believe in a very controlled and regulated system for
entering this country like we had when my grandparents entered through Ellis
Island. I am not sure that a Wall is the answer. Where there is a will, there
is a way! The “illegals” will find
a way to enter. Don’t stop the US
government and payroll checks over $5 billion when we toss around trillions of
dollars in wars, and consider billions in gifts to countries around the world
as immaterial.
The Federal Reserve raising interest rates by Jerome Powell,
head of the Fed Reserve appointed by President Trump. I feel it has little to do with the economy looking forward,
but more to do with being able to sell our bonds (needing a higher interest
rate) and the ability to lower the prime rates when a downturn and recession
occurs.
The “Trump Bump” was a bogus falsehood so Wall Street could
promote the “Bull” in the stock market.
This was a true showing of “perceived value” versus “real value”. The truth is that tax cuts helped big
corporations and the wealthy, not so much for the middle class and has little
effect on the economy. The future
outlook for the GDP is now 2% for 2019 proving my point. That “little Trump bump” raised the DOW
average 7,000 points, ridiculous!
Bottom line here is that there are many issues at hand, none
easy to resolve.
The question comes up as to what I would have done with
investments over the past 6 months.
If you read my blogs I indicated that we should at some point have a
major correction, and that we most likely were in the “stagnation” part of the
economic/business curve because we couldn’t break through price points. I am not in the stock and bond markets
and sit quite illiquid, which I wish I wasn’t. The whole emphasis would be to
maximize gains and hedge potential losses, thus turning stocks and perhaps
bonds into cash without getting hurt.
On long-term capital gain stocks, held over 12 months, I would have sold
and paid my 15% tax (20% over $425,800).
I would have kept prime “staple” company stocks pay8ng dividends. The
key is to sit with cash now. I think this downturn and possible recession will
extend through 2020. Analyzing my
portfolio, or with my advisor, I would look at short-term held stocks and hedge
them through vehicles I informed you about in previous blogs. Short-term tax consequences can be up
to 37% over $500,000. (Also, get
advice from your personal accountant.)
You need to look at your mutual funds. Do they hold stock in tax-exempt areas of the world like
Black Rock Funds do? How many
stocks long-term and short-term?
What is the funds average hold time? How much volatility might you be exposed to with more of a
downturn? Are they in the
“northwest quadrant” on a risk/reward basis (this is Beta versus Risk; look it
up)? If you don’t have this
information you can get it from your fund, or through your investment
advisor. We are entering a time
when cash will be king to re-enter quality markets. Adjust your portfolios, get rid of the junk and use your
losses against gains.
Never “assume” anything! Good luck!
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