Sniffed Links - Melt

Unless you follow financial news you may have missed Jeremy Grantham’s latest viewpoint white paper. Grantham is highly respected in the financial world and his latest “warning” certainly caught the eyes of financial media. His warning is two fold. He things a “melt up” in the market may occur followed by a large “melt down”. He backs up his thesis very well. One of the things we have harped on when discussing bubbles with clients is there typically needs to be a period of euphoria before even considering something a bubble (see crypto currencies for example). Since this bull market has been met with so much skepticism the euphoric period has remained elusive. I have mentioned some anecdotal evidence of euphoric tendencies so maybe Grantham has a point. Could the “melt up” be 30%? 50% Who knows. One of the keys to making it through the next downturn, however, is to enjoy the gains leading up to it.

Bracing Yourself for a Possible Near-Term Melt-Up

10 Things Investors Can Expect in 2018

Some good news, for once

This Is the Data Snapchat Doesn’t Want You to See

TSP Missed Out on Emerging Market Boom in 2017

Sniffed Links - Pot

A few articles this week to start off the new year. Of note is the marijuana article. I share this as a reminder that a “sure thing” doesn’t exist. Is the legal wed market huge? Yes. Is it easy to make money in it? No and it may get harder. Investing in a “sure thing” doesn’t always mean money will be made. Economics of an industry plays a big role in investor success and an industry, sector or business can thrive without investors seeing large returns.

2017 Was a Technically Unusual Year

Legal Weed Isn’t The Boon Small Businesses Thought It Would Be

Why You Need a Classified Email Address

Market Commentary - January 2018

While bitcoin and cryptocurrencies are dominating the headlines lately, the S&P 500 is doing things it has never done in its history. In my 15 years in the industry I can't recall a run like we have had where every day is a repeat of the prior with new daily record highs in conjunction with record low volatility. Baring an enormous sell off the last week of December (I'm writing this On December 20th), the S&P 500 is going to set and break many records. Here are just some...

  • The S&P 500 is on pace to finish 2017 without a single down month. You may be asking when was the last time that happened? NEVER. Even further, one has to go back to October of 2016 to find the last negative monthly return.
  • The worst peak-to-trough drawdown in 2017 has been 2.8% while the average intra-year drawdown is ~16%. Even more stunning, the S&P 500 hasn't experienced one 2% move up or down close in all of 2017!

The Federal Reserve increased interest by .25% in December and projected three hikes in 2018 and the markets rallied even harder.  In years past, a mere mention of the words "rate hike" lead to panic and heightened volatility but today it's interpreted positively as it equates to a healthy and growing global economy. The markets seem to find the "good" in every piece of news. 

Geopolitical tensions continue to rise but even this risk is being brushed off.  It's interesting to watch how quickly sentiment changes as going into 2017 there was a cautious tone and analysts were anticipating extreme volatility. Even the most bullish analysts were calling for the S&P 500 to end 2017 in the 2,300 to 2,450 range. This goes to further solidify our opinion that trying to time markets should be avoided.

So what does all this mean for 2018? Well, in short, nothing. While these records are impressive, they are in the past and don't mean much going forward. While the global economy is growing and "major" tax reform is here, the question is how much of this have markets already factored in? It goes without saying that steady gains with low volatility are optimal for any investor, but not realistic long term. While the last fourteen months have defied the odds, I would not expect this going forward. If history is any guide, stock market volatility tends to accelerate after a one to two year dormant period and quite often market corrections start when it's least expected and when the economy seems to be humming along. 

Have a safe and happy New Year!


Sniffed Links - Reactions

Not much to share in the way of links this week. We’ve been reading stuff on the new tax code and getting our thoughts organized around it. Also I may not send anything out next week. Christmas Break.

I do however want to share something I have been ruminating on. I don’t want to leave the possible last post of the year on a negative note but I do want to briefly describe some thoughts on the markets as a whole. We have started to see investors starting to get bored with great returns. This scares us. Whether it is crypto currency, individual stocks or some other “investment” it seems people are now looking beyond the double digit market returns in search of something with more pizzaz. It is scary how much this reminds me of 2004-2007. Is this the spark of what could be the next market downturn? Possibly. It also could be the spark but the fire could be a year or so away. We don’t have to have a reaction to this feeling. We just have to acknowledge it. In the meantime we keep taking the great market returns and watch what happens with everything else.

The Great College Loan Swindle

Why you can’t cash out pt 1: Why Bitcoins price is largely fictional

Sniff Links - The Force

I have my Star Wars tickets. It has become a holiday tradition I quite enjoy. When I opened my writing app this week I was shocked I had only saved one link so I added some Star Wars related links I read.

6 Ways Uniform Dressing Changed My Life

How the women of 'The Last Jedi' make 'Star Wars' a Force

The Last Jedi: The Best Star Wars Movie Since 1980?

ISS astronauts won’t miss out on ‘Star Wars: The Last Jedi’

Sniffed Links - Mania

Bitcoin has gone full mania level and may continue its meteoric rise. It could go to 40k. Or it could crash to 1k. No one knows. On a scale from 1-10 my knowledge about crypto currency, smart contracts and blockchains is probably a 5 and that’s probably better than the average Bitcoin “investor” (speculator is a better term here). And I don’t know nearly as much as I would like and not quite enough to invest. Most money going into Bitcoin is not for investment. It’s for speculation and that’s fine. The trouble is many speculators of late probably don’t realize the difference. Either way, the technology behind all of this very intriguing and something I am learning more about. I think the future investments lie there.

Understand the Blockchain in Two Minutes

Bitcoin, Ignorance, and You

Amazon is so good at keeping prices low, it's changed how economists think about inflation

Beware the Parade of Annual Stock Market Forecasts

Kid’s Sports Leagues Have Turned Into a $15 Billion Industry

Market Commentary - December 2017

I attended the Evidence based investing conference last week and was able to listen to some of the best and brightest in our industry. 

They keynote presentation was given by Scott Galloway, Professor of Marketing at NYU and he spoke about digital advertising/marketing. One of the most startling takeaways was just how powerful the FOUR are (Google, Apple, Facebook & Amazon). In 2012, these four companies had market capitalization of $751 billion, equal to the size of Turkey's GDP. While today their market capitalization is $2,371 billion, equal to the size of India's GDP! Remember, India's population is approximately 1.324 billion. The way the world consumes has changed and by 2020 over 30% of searches will no longer involve a screen! They will come in the form of Alexa, Siri and Google Voice.

  • The rest of the conference was focused on evidence based investing. Below are just some of my notes. I left the more analytical stuff out.
  • There is a big misunderstanding between economic and stock market fundamentals. The stock market rarely follows economic fundamentals in the short term and can persist for years. In short, stop trying to time the market based on the fundamentals of the global economy.
  • Volatility has come to a screeching halt as more people control a larger share (%) of the equity market vs. 10 years ago and the push to indexing and passive investing has largely replaced individual stock selection/day-trading which tend to be more volatile. 
  • Bitcoin was mentioned several times. The common theme was if you invest in it be prepared to lose it all. Introduction of government regulation or taxes could potentially cut the value by a third overnight. Until daily price fluctuations slow down, it is not a viable replacement for any currency. 
  • There are now over 110 hedge funds focused on cryptocurrency investing vs. 26 at the end of 2016. Too much speculation and this is fueling a massive bubble.
  • Commodities are the most "hated" investment (comparable to Emerging Markets from mid 2011 to end of 2015). Given central bank involvement in manipulating interest rates trying to time when to invest in commodities is extremely difficult as they tend to outperform in period of high inflation.
  • Emerging Markets are still "cheap" on a valuation basis compared to the United States and Europe with lower P/E and lower debt to GDP ratios. Emerging markets are becoming less reliant on commodities after the 2015 crash and placing higher emphasis on technology and manufacturing.
  • Tensions between China and United States are beginning to flair up and come 2018-2019 could lead to a major trade war.
  • Machine Learning/AI Investing has many worried. While it creates more options and variables with big data sets, initially it will be dealing with a very small sample size which can't be back-tested with much accuracy.
  • Internal investment fees will continue to decline over the next decade 


Here are some other facts I found interesting…

  • Women now control more than half of US personal wealth!
  • 1/6 queries entered into Google have never been asked before. 
  • Google and Facebook own 103% share of future digital advertising growth 
  • In 2016, Google advertising revenue compared to ad spend is larger than any single country in the world minus the United States.
  • More American households (58%) are Amazon prime members than voted in 2016 election (55%)
  • Apple's profit in 2016 ($45B) was nearly equal to Microsoft, Intel, IBM and Oracle combined! ($48B)
  • Since 2008, Walmart has paid $64B in corporate income taxes while Amazon has paid $1B.
  • Commodity Index has an annualized return of 2% the last 20 years with volatility of 14% while S&P500 has an annualized return of 10% last 20 years with the same level of volatility.

Sniffed Links - Cornucopia

I hope everyone had a great Turkey Day and indulged in a lot of food. I sure did. A couple extra links this week but some really good reads. Non of the links are related to this weeks biggest news stories which are spread amongst many genres. North Korea tests another missile, Matt Lauer fired for sexual harassment, Tiger Woods returns to golf for his 4th post-back surgery comeback attempt, and Bitcoin gets volatile. The market seems to not be worried about the North Korea news. The Bitcoin story is something to watch as after Thanksgiving there was a dramatic increase in the number of accounts opened on some of the crypto exchanges and now a decline is occurring so a lot of new owners may be getting pummeled.

The Year of Living Dangerously

Saudi Arabia’s Arab Spring, at Last

Filial laws put kids on the hook for parents' health-care costs

Mail-Order CRISPR Kits Allow Absolutely Anyone to Hack DNA

12 Secrets of FedEx Delivery Drivers

Sniffed Links - Mindfulness

A couple of times a year I block out all my reading time for a week to focus on knocking out a few books in a given subject. This has been one such week. I have tinkered around with meditation apps for a couple of years but I can’t really say they have helped me. So, I decided to review my list of books to read and see what I had saved regarding the subject of meditation and mindfulness. Below are the four books I read and a couple of others I plan to get to soon.

I always feel guilty tackling a subject that isn’t directly related to financial planning but a common theme I have come across from many great investors and leaders is some sort of mindfulness practice. I have long held that stoicism is important in helping people make investment decisions. Mindfulness fits into this as well.

The further away we get from the last major market decline the harder the next one will be to stomach. Guiding clients and ourselves through this will be as important as it was in 2008. It will be important as ever for advisors to make evidence based decisions with a sense of mindfulness and stoicism.

Real Happiness: The Power of Meditation

The Happiness Track: How to Apply the Science of Happiness to Accelerate Your Success

10% Happier

The Subtle Art of Not Giving a Fck: A Counterintuitive Approach to Living a Good Life

The Joy of Living: Unlocking the Secret and Science of Happiness

Breathe: The Simple, Revolutionary 14-Day Program to Improve Your Mental and Physical Health

Sniffed Links - Thank You Vets

Sniffed Links - Tax Changes

We will have more details and further discussions with clients in the coming months but more details of the new tax plan are emerging. It looks like there will be big changes with mortgage interest deductions and business tax rates. There appears to be no changes to 401k and retirement accounts.

Ara is at the Evidence Based Investing Conference so look for details in his next market commentary.

Here are this week’s links...

The Morningstar Mirage

What is a Credit Report and Why is it Important? - LifeLock

Anger is temporary madness: the Stoics knew how to curb it | Aeon Ideas

Scott Galloway Discusses Four World-Conquering Companies

The Increasing Importance of the 401k

Market Commentary - November 2017

In our April commentary we discussed how markets may have been driven higher in part because of the potential for tax reform. Since then, markets have continued to drift higher with no formal tax reform plan in place. While we wait for the details lets discuss "tax breaks" and the impact on the economy in general.

Currently the national debt exceeds $20 trillion and the 2017 fiscal year ended with a buget deficit of $666 billion. The national debt has been climbing as many government sponsored programs continue to experience higher outlays. Social Security and Medicare combine for about 40% of federal spending and this is only expected to increase. These are alarming numbers and it's estimated that President Trump's proposed tax cuts would add an additional $1.5 trillion to the deficit over the next 10 years

Will economic expansion accelerate enough to offset the additional deficit?

Here is how a reduction in taxes is suppose to work...The cuts unleash investment and innovation which leads to more jobs, higher income and rapid economic expansion which help lower the deficit. There are many factors to measure the effectiveness of tax cuts but research done by Robert J. Barro and Charles J. Redlick found that historically cutting the average marginal tax rate on Americans by 1 percentage point raised the next year’s per-person economic output by about 0.5 percent. While positive, the concern is it's not enough to offset the additional deficit and could end up bloating the deficit even further. Others state that tax reform disproportionately benefits the wealthy and corporations, not the average taxpayer. In 2012, Kansas enacted tax reform and significantly cut rates with the hopes of economic expansion. Unfortunately the results showed that job growth, small business formation and overall economic growth lagged. This is not to say that tax cuts were the sole root of the problem, but it does show that a positive correlation of lower taxes and higher economic growth isn't always the case. In fact, we have experienced increased job growth in periods of both tax increases (Clinton, Obama) and tax cuts (Kennedy,Reagan). Factors such as age demographics, technology and normal economic cycles play a large role in shaping an economy. It should be stated that lowering taxes itself does not guarantee economic expansion as people could choose to work less to earn the same income.

Proponents of tax cuts argue that new business creation, which is considered to be the lifeblood of the U.S. economy is faltering in part because of high taxes and increased regulation. The numbers show new business creation is at a 40 year low. Starting a business is a risky and costly venture and proponents argue that without incentives such as lower taxes, write-offs on new capital purchases and less regulation, individuals are less inclined to take the steps necessary to start companies. It is argued that "wealthy" taxpayers pay more tax when marginal tax rates are slashed which means lower income earners bear a smaller share of the tax burden. It is also argued that private businesses use capital more efficiently than the government and tax revenues could rise even in the face of tax cuts as experienced in the 1920's. You can even point to a recent example where Indiana lowered state income taxes and corporate rates in 2013 and experienced a significant drop in unemployment (3.5%) and boost in GDP to 4%. 

As you can see, tax reform is not an exact science and several factors shape an economy. The answer (as we often remind you) is probably somewhere in the middle but finding the right balance proves to be difficult. We think the government should look into alternate options with Social Security and Medicare benefits to help balance the budget but those are touchy subjects and would take time to hash out. While much of the attention is on tax reform, the bigger issue in our opinion is the Fed and ECB which are going to be attempting an unwinding of their balance sheets while raising rates. Financing a growing deficit with an increase in rates is a risky proposition unless economic expansion quickly follows. One thing is for sure, the economy will not thrive or collapse on tax reform alone. 

Sniffed Links - 401 Hey!

I feel like we need to address the news this week regarding potential changes to retirement accounts and the deferral limits. First, we don’t think the amount you can put in your 401k is going to drop to $2,400/year. This was reported to be in discussions. I doubt this happens. But there is a chance we could see a decrease in the maximum amount. This is a one way for the government to help to try and fund their tax cuts. We’ll see how it shakes out but if they amount is reduced it just means you will need to save elsewhere. You may not get as much of a tax break but there is no law that says you can’t save in a taxable account or do a non-deductible contribution.

A weird week of links. Nothing about investments.

Never Walk By a Mistake

Carnival Scam Science - YouTube

Time to Check Pay Statements Regarding FEGLI

Sniffed Links - Frothy

The “market top” rhetoric has really picked up steam this week as the DOW stormed to new highs. The market certainly feels “frothy”. We get the feeling a lot of traders may be looking for reasons to sell but just can’t pull the trigger (which is probably a good thing). I think part of the reason the market has stayed so resilient is the possibility that a lot of the outside “noise” is ignored by quants and their algorithms (again, probably a good thing). How can the market keep going up? Maybe because everything that makes humans feel like the world is in a bad place is completely ignored by the robots. I talk a lot about stoicism and investing. Robots are pretty darn stoic. As artificial intelligence advances, however, there could come a time where the robots take into account all the things they currently ignore (i.e. politics, natural disasters, etc.). What happens when the robots are no longer so stoic?

The Coming Software Apocalypse - The Atlantic

Gotcha! Social Security Benefits Rising 2% In 2018, But Most Retirees Won't See Extra Cash

Perceived Value vs. Actual Value

Fed’s Williams Says Economy Is Stronger Than It Looks

Long Read: The War To Sell You A Mattress Is An Internet Nightmare

TSP Withdrawal Bill Up for House Vote

Q3 2017 Highlights

I highlight a lot of notes while reading. I try to make the time to actually review them each quarter. Here are some of the hand picked ones I thought you may find useful from last quarter.

May 25, 2017 at 08:12AM No? or Yes, Yes? | Meb Faber Research - Stock Market and Investing Blog 

Indeed, so many people have jumped on the passive index bandwagon that there are now more indexes than stocks! 

It’s basic fiscal Darwinism – when some groups are charging 0% and you’re charging 0.9%, you’re not going to survive. (Note to financial advisors: this fee destruction is referencing pure asset management. We’ve said for a long time if you offer additional value added services you can we worth that 1% and your weight in gold, but the value is not in the asset management side…) 

May 30, 2017 at 08:17AM Buying Happiness & Well-Being With Cash-On-Hand Reserves 

Except a recent research study by Ruberton, Gladstone, and Lyubomirsky finds that maintaining a healthy level of cash-on-hand (or at least in a checking or savings account) appears to improve our feelings of financial well-being and life satisfaction. And the relationship holds up even after controlling for income, spending, and other investments, as well as age and employment status. In other words, no matter how much total wealth and income we have, we’re just not as happy unless it’s also accompanied by a healthy pile of cash (or at least, a sizable and readily available bank account). 


June 5, 2017 at 08:15AM Thinking Through a Change an Asset Allocation 

Any sort of diversification is going to look foolish from time-to-time and it’s even harder to stick with at market extremes when certain investment styles or asset classes are doing particularly well. How many advisors do you think have been asked questions about Bitcoin in recent weeks after the run-up we’ve seen in cryptocurrencies? 


June 8, 2017 at 08:23AM The questions we hear all the time 

The questions we hear all the time goes back to that uncertainty issue: What’s the Federal Reserve going to do? How many rate hikes this year? Where’s the Dow going to be in 12 months? What’s your favorite stock pick?

All those questions are things that you as an investor simply are not going to be able to answer with any degree of accuracy—it’s really a crapshoot. And so, rather than guessing, wasting a whole lot of psychological emotion and energy on it, why not just recognize—and, again, it’s with great humility—recognize what we do know and what we can’t know—and try to adjust accordingly. This leads quite naturally to a portfolio that is balanced and robust enough to withstand the regular market turmoil.

Over the past 20 years, how many market booms and busts have we seen? There was the dot-com boom and bust; the 2008–2009 financial crisis. There have been several 20% pullbacks over the past few years. That is simply the normal state of affairs for U.S. markets. Investors must understand that volatility is part of investing; if you learn that truth about markets, it won’t surprise you when it finally arrives and it shouldn’t disrupt your sleep too much

June 9, 2017 at 05:40AM QOTD: The Financial Pain Equation 

Acknowledge, allow and accept. This advice will help you to endure the inevitable pain caused by the next bear market. Experts in the centuries-old practice of meditation have a formula for suffering.

S = P x R. The amount of suffering you experience is equal to the actual Pain (P) times the mind’s Resistance (R) to the pain. So, S = P x R. The idea is to stop resisting the pain to lessen it. Since anything that is multiplied by zero equals zero, you see where this is going.

The quicker you realize market corrections and bear markets are not “bugs” in the financial system, the happier you will be. Acceptance of these facts is critical to creating your own form of Advil for financial pain, without the ulcer inducing side effects.


Sniffed Links - Charity

I’m traveling today so I queued up this week’s links ahead of time. Let’s home no major market news happened overnight. The link about the Red Cross is infuriating but similar to reports in the past. This week’s links.

Don't Try to Predict the Next Recession - Bloomberg

Wall Street Regulator Is Also an Investor—With Meager Returns

This is why I NEVER donate to the Red Cross: Texas Official After Harvey: The ‘Red Cross Was Not There

Spending Too Much? Here is What to Do

Sniffed Links - Tax

The proposed tax reform plan looks like it will indeed impact many of you. We’ll have more about it in the coming months as we know more after the final bill is signed. Our job isn’t to comment on the political or socioeconomic effects of the proposal but rather to determine what effects it will have on individual clients. High level it looks like we may be looking at only 3 tax brackets, repeal of the estate tax, repeal of the the Alternative Minimum Tax and a decent reduction on taxes paid by many freelancers and self-employed clients. We’ll have much more on this in our next client newsletter and in the coming months.

This is so good…The Worm Has Turned | The Daily | L2

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds

JPMorgan explains what could cause the next financial crisis

Market Commentary - October 2017

Cryptocurrencies are all the rage with the kids these days. With its newfound popularity, many are asking if it should be part of their portfolio. Truthfully it is a case of "fear of missing out". A lot of people know someone or know someone who knows someone who "made a fortune" on Bitcoin. First, understand that the person who made money on a cryptocurrency is just lucky. They bought an expensive lottery ticket and scratched off a winner. It is the wild west right now in the cryptocurrency game. People are gambling like crazy and there is likely a good amount of fraud occurring as well. There are just too many of these currencies popping up and its actually quite scary to see how much people are pouring money into something they don't understand.

Created in 2009, bitcoin (ethereum and bitcoin are the most relevant currencies in this space) was the first decentralized cryptocurrency and it's important to remember that eight years is a microscopic period of time in the investment world. While it's performance lately has been nothing short of breathtaking, over the past five years its daily annualized volatility is ~86%. That alone would panic most investors to sell. The stats show that since August 2010, the S&P 500 has declined 5% or more 15 times while bitcoin has suffered negative returns in ten of those corrections with an average return of -2.8% and a median return of -5.7%. It's important to remember that volatility tends to be higher in the earlier years as there is a limitedtrack record but daily price movement of 10%+ are very common.

The opinions on cryptocurrencies range wildly. Just recently, JPMorgan CEO Jamie Dimon critized bitcoin comparing it to Tulip mania and went as far as calling it a fraud. These are pretty harsh comments from one of the top Wallstreet CEO's. Keep in mind many banks aren't fans of cryptocurrencies as they cut out the middle man in transactions (mainly banks). A few analysts are calling for bitcoin prices to hit as high as $5,000 in 2018 and as high as $20,000 by 2022. These wide predictions underline the extreme volatility in cryptocurrencies. We actually think Dimon's comments are accurate regarding some of the recent cryptocurrencies to pop up offering ICO (Initial Coin Offerings).

The fact is for cryptocurrencies to actually become usable currencies they cannot have the type of volatility they are having. One of the reasons your local grocery store will not offer Bitcoin any time soon is they don't want to sell you volatility they are having. One of the reasons your local grocery store will not offer Bitcoin any time soon is they don't want to sell you a carton of eggs in the morning and have the Bitcoin you bought them for drop in value by 50% by the afternoon. Currencies can't work that way. In order for Bitcoin to be taken seriously the whole reason why people are buying it right now (hopes of dramatic increases) has to end. 

At present, investing in cryptocurrencies should be viewed as pure speculation and not part of your core portfolio. Does this mean cryptocurrencies won't succeed over time? Of course not, no one knows as it is still very early in its history, but given its limited history and wild volatility consider it gambling which is fine as long as you understand this isn't something you should be doing with your core retirement.

As an aside, this video is worth watching and we agree about the Blockchain being the sustainable story here.

Sniffed Links - Cash

Not many links this week. Just one actually. The last week of the quarter is a busy one and we are also preparing for our mock compliance audit in early October. Which is ironic given the recent news last week of a hack at the SEC. As I have said before, hacks are just an inevitable part of life these days. On another “compliance” and regulator related matter, the wife and I just finished the first season of Ozark on Netflix which features Jason Bateman as a financial advisor turned money launderer. I always found the anti-money laundering training we have to go through a bit of a joke. It’s like having a anti-stabbing people training. It kind of goes without saying that you shouldn’t launder clients money. The training basically consisted of “do not take bags of cash from clients”. So if any of you were thinking about bringing a bag load of cash to your next meeting, please leave it at home.

Hack at S.E.C. Provides Warning for Other Regulators