U.S. Markets: U.S. large cap indexes were flat to slightly lower, while the technology-heavy Nasdaq Composite and smaller-cap benchmarks managed to close positive. The Dow Jones Industrial Average fell for a second week by losing 64 points to close at 23,358, a loss of -0.27%. The Nasdaq Composite retraced last week’s loss rising 0.47% to close at 6,314. Smaller cap indexes showed relative strength over large caps with the mid cap S&P 400 and small cap Russell 2000 rising 0.82% and 1.19%, respectively, while the large cap S&P 500 fell -0.13%.

International Markets: Canada’s TSX fell -40 points to close at 15,998, along with the United Kingdom’s FTSE which ended down -0.7%. Most bourses on Europe’s mainland major markets followed suit. France’s CAC 40 retreated -1.14%, along with Germany’s DAX which fell -1% and Italy’s Milan FTSE which lost over -2%. In Asia, China’s Shanghai Composite gave up most of last week’s gains by falling -1.45%, and Japan’s Nikkei retreated ‑1.25%. Hong Kong’s Hang Seng closed in the green, managing a 0.27% gain. As grouped by Morgan Stanley Capital International, emerging markets rose 1.1%, while developed markets fell -0.5%.

Commodities: Gold surged over $22 for the week to close at $1296.50, a gain of 1.75%. Silver, gold’s smaller and generally more volatile cousin, jumped almost 3% to close at $17.37 an ounce. In energy, a barrel of West Texas Intermediate crude oil fell just -0.05% to end the week at $56.71, while Brent crude oil fell -1.38% to $62.72 per barrel. Copper, seen by some analysts as an indicator of world economic health due to its variety of uses, fell a second week losing -0.29%.

U.S. Economic News: The Labor Department reported initial claims for unemployment rose 10,000 to 249,000 last week as the number of applications hit a six-week high and exceeded economist’ forecasts of just 235,000. New jobless claims rose in part to a backlog of applications from the areas recently hit by hurricanes such as Puerto Rico and the Virgin Islands. On a positive note, the number of claims remained far below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. The more stable four-week moving average of claims rose by 6,500 to 237,750. The number of people already receiving unemployment benefits, known as continuing claims, fell by 44,000 to 1.86 million. That number is at its lowest level since December of 1973.

Confidence has climbed to an 8-month high among U.S. home builders. The National Association of Home Builders (NAHB) reported its confidence gauge rose two points to 70—its highest since March and the second highest reading since the housing bubble of 2005. Economists had forecast a one point decline to 67. The sub-index that tracks current sales conditions also rose two points to 77, but the gauge of sales over the next six months slipped one point to 77. The NAHB noted in its statement that builder confidence is “a strong indicator that the housing market continues to grow steadily”, but voiced concern about “lot and labor shortages and ongoing building material price increases.”

Housing starts surged in October, rising 13.7% to a seasonally-adjusted 1.29 million—its second-highest level since the economic recovery began eight years ago. In the details of the repot, the Commerce Department noted large double-digit gains in the South and the Midwest (with some of that hurricane-related). Construction of single-family homes, which makes up the largest share of the housing market, increased 5.3% to 877,000 units, while starts for the volatile multi-family housing segment surged 36.8% to a rate of 413,000 units. Building permits, which analysts use as an indicator of future building activity, likewise, increased 5.9% to a rate of 1.297 million units. Single-family home permits rose by 1.9%, while permits for the construction of multi-family units jumped 13.9%.

Confidence among the nation’s small business owners improved as the promise of lower taxes lifted expectations for increased sales and growth. The National Federation of Independent Business’ (NFIB) small business optimism index rose 0.8 point to 103.8 in October; economists had predicted a reading of 105. In the survey, four of the index’s sub-gauges rose, while five declined and one remained unchanged. Quality of labor and taxes remained near the top of concerns among small business owners. The index surged after the election of Donald Trump on expectations of less regulation and lower taxes, as well as a rollback of the Affordable Care Act, but that has yet to materialize. This month, the NFIB noted that “Congress has taken its first cut at tax reform and small businesses are eagerly waiting to see how the developing legislation will benefit them.”

The Federal Reserve reported industrial production jumped a solid 0.9% last month as factory activity recovered following the effects of hurricanes Harvey and Irma. Economists had expected only a 0.5% increase. Manufacturing activity surged 1.3% on the heels of a sharp increase in the production of chemical, petroleum, and coal products. Motor vehicles and metals also reported healthy gains. Over the past year, industrial production has increased 2.9%. With the increase in activity, factories are hiring. Over the past 12 months, manufacturers have added 156,000 jobs—its strongest annual growth since the summer of 2015.

Costs for the nation’s producers rose more than expected last month, driven by an increase in the cost of services, according to the latest reading from the Labor Department. The Producer Price Index (PPI) for final demand increased 0.4% last month, following a similar gain in September. In the 12 months through October, the PPI jumped 2.8%, its largest increase since 2012. Prices for services advanced 0.5% last month, following a 0.4% increase in September. The PPI shows that inflation is building in the “pipeline” of the economy before it reaches consumers. The report from the Labor Department showed steady increases in underlying producer prices, which support expectations of a gradual increase in inflation and will probably keep the Federal Reserve on track for an interest rate hike in December.

For consumers, the Consumer Price Index (CPI) rose 0.1% in October, weighed down by a fall in energy prices as hurricane-related disruptions to Gulf Coast oil refineries were resolved. Stripping out the volatile food and energy categories, core CPI rose a slightly larger 0.2% to a 1.8% annual rate, the Labor Department said. The drop in energy prices in the CPI pushed the annualized rate of inflation down -0.2% to 2% in September. While the 1% drop in energy prices weighed on overall inflation, the rise in the core gauge was relatively broad-based. Housing costs were a significant factor, along with medical care, education, air fares and auto insurance. As with the PPI, the CPI report reinforces expectations that the Fed will raise interest rates in December for the third time this year.

Sales among the nation’s retailers rose unexpectedly last month, as an increase in purchases of motor vehicles and other goods offset a decline in demand for building materials. The Commerce Department reported retail sales increased 0.2% last month, and data for September was revised up 0.3% to 1.9%, rather than the 1.6% previously reported. Economists had expected retail sales to remain unchanged in October. On an annualized basis, retail sales increased 4.6%. Mike Loewengart, vice president for investment strategy at E*Trade noted, “Today’s retail sales numbers are encouraging for the U.S. economy, especially heading into the holiday shopping season. It’s important to keep in mind that these numbers are coming off one of the worst hurricane seasons ever, so the fact that 9 of 13 categories showed increases is a testament to the resiliency of the US consumer.”

International Economic News: To the north, Canada’s economy is booming but few Canadians are willing to give Prime Minister Justin Trudeau the credit, according to a recent poll. While Canada’s economy is currently leading the G-7 in growth, just 25% of Canadians describe the Prime Minister’s performance as an economic manager as “good” or “better”, while 36% call it “poor” or “worse”. The poll, conducted by Nano Research, was a disappointing result for Trudeau. According to the results, Canadians were more focused on rising interest rates and the deficit. In an interview, Nik Nanos of Nano Research stated, “What this survey shows is that there is fundamental disconnect between the macroeconomic reality and micro opinion of Canadians.”

Across the Atlantic, one notable benefit of the Brexit vote appears to be the United Kingdom’s re-establishment of its former trade ties with other Commonwealth nations before it entered the European Union, according to Member of the European Parliament (MEP) Patrick O’Flynn. Mr. O’Flynn noted that Brexit will allow the U.K. to put an end to EU tariff barriers and allow for increased trade with countries such as Australia and New Zealand. In a speech to the European Parliament he stated that it was regarded as a “sort of shame” in Britain that their country threw up tariff barriers against their historic commonwealth partners, and that it was “a wrong that is soon to be righted” as the United Kingdom broadens its economic and diplomatic relationships.

On Europe’s mainland, top investors at the Reuters 2018 Global Investment Outlook Summit stated that money will continue flowing into the bloc in 2018 as the best economic growth in a decade and a tightening of the Franco-German axis at the heart of the 19-member euro zone has de-sensitized markets to European political risks. Investments in the euro zone have had one of their best years since the single currency was established in 1999. The bloc had an unexpectedly brisk pickup in consumer and business confidence this year along with an economy expanding at its fastest rate in ten years. Views remained mixed on the effect of Brexit. Some felt that the vote would bind the remaining euro zone countries together more tightly, while others stated the ultimate result is still unknown. Overall, however, the political mood and economic backdrop is much more optimistic heading into 2018 than at the same time last year.

Is China’s 3 trillion in US dollar reserves actually an economic curse? According to Chinese government advisor Huang Qifan, it is “a major source of the country’s financial problems.” Huang told a forum organized by news organization Caixin that the central bank should stop feeding cash into the Chinese economy as it is fueling asset price bubbles and financial risks. Beijing should entrust its finance ministry to manage foreign exchange reserves and let the central bank focus on making independent monetary policy, Huang said. Huang is deputy director on the financial and economic committee at the National People’s Congress—and one of China’s most outspoken economic bureaucrats.

Japan’s economic growth streak has extended now for a seventh consecutive quarter—its longest streak in nearly two decades. According to government data, gross domestic product increased an annualized 1.4% in the third quarter, while the economy has been expanding overall since the start of 2016. Japanese businesses have benefited from increased global demand and sustained financial stimulus measures from the government and Japan’s central bank. On the positive side, unemployment is at a multidecade low, the stock market is hitting new highs, and persistent wage and price deflation has eased. However, of concern, the pace of expansion slowed from the previous quarter and consumer spending declined. After healthy domestic consumer spending in the second quarter, it was spending on Japanese goods abroad that fueled the third quarter increase. Exports have remained central to Japan’s recovery, helped in part by a weaker yen.

Finally: One of the criticisms of proposed tax breaks for businesses is that businesses probably won’t use the windfall for wage increases or hiring, but rather for continued stock buybacks – which only benefit shareholders (including, of course, the executives of the businesses). To shed light on this behavior, Credit Suisse studied net stock share purchases since the financial crisis of 2008-2009 by businesses, US households, and US financial institutions (mutual funds, ETFs and the like). The conclusion: the corporate sector has been the only net buyer of stocks over this period. In an independent but related study, Societe Generale concluded that virtually all the net debt issued this century has been used to fund stock buybacks. It seems the critics of coming tax relief for corporations have a point!

Remember to have a plan…

and have a great week!

The post What Happened Last Week? Market Review appeared first on Avondale Partners.

by Steve Glasgow, CFA, CIMA, AIF, PRP

Since the results of the presidential election this past November stock markets both here and abroad have been on quite a run. It’s been interesting reading the numerous alternative explanations in the financial press for what has caused the market to go and what might ultimately cause this rally to experience the widely anticipated and “long overdue” correction.

The idea that a business-friendly tax bill is on the relatively near term horizon is widely credited for the stunning rally since Trump’s electoral win. The “miss” by the Republicans on the first pass at repeal and replacement of Obamacare may have slowed that enthusiasm a little, but the market continues its grind higher nevertheless.

A Republican majority in DC may represent a more business-friendly environment than we have had in a while, but that’s probably only a part of the explanation for the extended rally. How much that “business friendly environment” explains higher stock prices is up for some debate. After all, getting legislation passed through a deeply divided Congress is yeomen’s work and we don’t know whether the new administration has learned to be effective at making that brand of sausage just yet.

Brian Wesbury, Chief Economist for First Trust has been optimistic longer than most… and he’s been right so far. Politics is part of the answer, but his thesis is more about productivity and real earnings growth. In his April 10 “Monday Morning Outlook” he writes:

“For the past eight years, the US economy has expanded on a wave of new technology. Fracking, 3-D Printing, composite materials and mapping the genome are huge. Bandwidth, the cloud, apps, smartphones and tablets are bigger.

Technology has never moved this fast. And while some analysts argue that productivity data are not improving, that is really hard to square with near record levels of corporate profits.

Jobs are growing. Incomes are rising. Profits are rising. The stock market is still undervalued. And inflation is on the upswing – not rapid, hyper-inflation – but a steady acceleration in prices is in the cards for the quarters and years ahead.”

His point is a good one. And, as we mentioned- he’s been right in the face of the inevitable pessimism that accompanies any 8-year (and counting) bull market. Lots of prognosticators have been waiting for the next shoe to drop for a long time and their arguments are often persuasive. The point is, the length of the rally doesn’t dictate when it must end; if we see continued prosperity and positive earnings, this rally can keep on going… much as that may sound difficult to believe this far removed from the last major decline.

But…as the old saying goes; “buyer beware!”

Several potential early warning signals are beginning to show. Of course, these are purely anecdotal so they aren’t necessarily harbingers of impending doom, but in the spirit of the reality that history rarely repeats but it often rhymes, the last several months have produced some data points that could be considered a little unnerving to anyone that was paying attention to the markets prior to the last two melt-downs.

• On April 10, CNBC published a note quoting Morgan Stanley’s new Chief U.S. equity strategist: “Morgan Stanley says huge 30% stock surge could be ahead; like 1999, ‘cannot afford to miss it.’ I found this profound since I have been telling folks this market felt like the late 1990’s for the last year. In the second part of this letter – “The Big Picture” – we observe similarly high broad market valuations based on historical earnings. The problem for investors is that risk aversion in those last years before a bust (i.e. going to cash and waiting for the break) can be more psychologically taxing than most can handle. Missing out on a 30% gain makes the most resolute question themselves and often give up on their investment discipline at just the wrong time.
• On the same day, Piper Jaffray analyst Alexander Potter upgraded Tesla to an “overweight” rating, raising his price target by 65% and saying “we sympathize with bears – but their (arguably rational) arguments probably won’t matter.” The most fascinating part of the story? He simultaneously reduced his earnings estimate for 2017 from a gain of $0.42 per share to a LOSS of $4.83 per share! Eerily reminiscent of the days of “alternative valuation” metrics that drove stock prices at the end of the tech bubble, like counting eyeballs and views instead of earnings. Tesla is a stock that hasn’t earned a dime yet, and is still heavily dependent on government subsidies for its existence…maybe they truly change the world, or maybe the optimism is a bit overdone?
• The proliferation of indexing is beginning to signal late cycle investor behavior. In the last 3 years, money flows into Vanguard are 8.5 times all other fund families combined! This represents an unprecedented level of dispersion. We often observe that an index fund is a spectacular tool, but it isn’t necessary a good strategy. Many investors have the two ideas confused and the inevitable effect of that seemingly indiscriminate use of indexing is a narrowing of market leadership; since the election Apple stock alone has accounted for about 10% of the total market gain. While absolute valuations still haven’t reached the crazy heights of the internet bubble, this is the same phenomenon those of us employed in the industry witnessed in the late 1990’s. Active value managers with decades of good performance were forced to shutter operations due to investor demand for growth and index funds, where asset flows continued to inflate cap weighted stocks in the index (dominated by technology names), which in turn attracted even more asset flows.

Interest rates are still hovering near all-time lows putting immense pressure on retirees, pension funds and other investors that historically counted on the relatively safe earnings streams from fixed income investments to finance spending needs. Those investors have been forced to employ strategies that have much higher allocations to stocks at a time when expected returns for stocks are near a cycle low, meaning the risk of loss of principle is high and rising.

Sitting in cash or even “safe” short term bond funds means near zero returns after inflation, but being in stocks brings risks of principal losses that can be insurmountable for many people living off of “systematic withdrawal” strategies from their savings.

At a time when measures of market volatility are languishing at very low levels, while market valuations are simultaneously high it makes sense to take a hedged approach to market exposure. Diversify your investments by both asset classes as well as strategies that can dynamically respond to changing market environments.

Simple math dictates that avoiding 100% of large losses means you don’t need 100% of the gains to grow your account values better than buy and hope. Just be sure that the strategies are well defined disciplines that don’t rely on instinct or emotion. Call us if you want to discuss what that looks like in more detail.

Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice. The investment or strategy discussed may not be suitable for all investors. The S&P 500 is an unmanaged, weighted index of 500 stocks providing a broad indicator of price movement. Individual investors cannot directly purchase an index. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Technical analysis is based on the study of historical price movements and past trend patterns. There are also no assurances that movements or trends can or will be duplicated in the future. In a rising interest rate environment, the value of fixed income securities generally declines.

The post View from Our Window appeared first on Avondale Partners.

UC Berkeley Extension’s Certificate Program in Personal Financial Planning recently recognized Avondale Wealth Advisor David Hale as the 2017 Outstanding Student of the Year. The curriculum, overseen by an advisory board of investment, financial planning and education leaders and taught by working professionals, is a rigorous academic program for financial planning professionals. Areas of focus include Behavioral Finance, Federal Taxation, Employee Benefit Plans, Insurance, Investments, Estate Planning, Retirement Income Planning and Real Estate Investing.

The award is given to one student each year who exemplifies the ideals of the program through academic achievement, dedication, and demonstrated aptitude for real world application of the principles taught.

The program was founded by Tim Kochis out of a desire to mentor exceptional talent in Financial Planning.

The post Wealth Advisor David Hale Earns High Honor with UC Berkeley Extension Program appeared first on Avondale Partners.

— Warren Buffet

Pardon the “shock headline.” You may be thinking that I’m shamelessly trying to garner more readership. And you might be right. However, I also believe that this question of current stock market valuations is a more serious one than many believe. Today, it seems most analysts would scoff at anyone who suggests the market is cheap. And on an absolute basis, they would be right¹.

By most measures (Price to earnings, Price to book, Enterprise Value to EBITDA, and Price to sales) the S&P 500’s valuation hasn’t been this expensive since 2001, according to FactSet. The numbers of researchers, and individuals, who believe the market is expensive and overbought are legion². 11 of 16 Wall Street Strategist forecasts, classic contrarian indicators³, believe the market will end 2017 lower than where it is at this writing⁴.

However, in a recent TV interview⁵, none other than Warren Buffett said this about stock valuations:

“We are not in a bubble territory or anything of the sort…you measure everything against interest rates basically…and measured against interest rates stocks actually are on the cheap side compared to historic valuations. But, the risk always is interest rates go up a lot and that brings stocks down.”

Indeed, it appears the Oracle is correct. When you compare the S&P 500’s valuation to the 10 Year Treasury Yield, you see a different picture. Dividing today’s 10 Year yield of 2.38% by any of the valuation metrics mentioned above puts the S&P’s current value near the low-end of the past 17 years and certainly nowhere near bubble territory⁶.

Why is this important?

It could be suggesting the market has stronger legs than many believe. However, the more important takeaway, in my view, is that it confirms just how much interest rate and inflation risk is embedded into current stock prices. Why? Consider the following:

We know that the Fed’s primary mandates are to promote low and stable inflation and maximum employment⁷. Their long-run inflation target is 2%⁸. They recently told us that they expect to raise rates gradually because inflation is still lower than their 2% objective and the labor market is improving gradually⁹. Moreover, long-run inflation expectations are somewhat low relative to the past 30 years¹⁰.

It appears as though inflation will not be breaking out anytime soon. Knock wood. If so, the question becomes: What will break this cycle? What will cause either an unexpected increase in interest rates or in inflation and inflation expectations?

Enter the 45^th President of the United States. He appears to want aggressive fiscal stimulus¹¹. Specifically:

• $1 Trillion in infrastructure spending
• Large corporate and individual tax rate reductions
• Deregulation, and
• Repatriation of profits that US companies have earned abroad

All of this could boost the economy, perhaps significantly. However, many believe these policies will also increase the national debt and budget deficit substantially. He may also create lasting frictions with our global trading partners. His propensity to micromanage domestic companies could reduce business confidence. In effect, he could produce short to medium-term gain but create problems in the long run¹².

There is also the valid question of whether or not we need stimulus at all right now. Since the 3^rd quarter of 2016, GDP, corporate profits, the composite index of leading economic indicators, and retail sales have all jumped significantly¹³. Yet, Trump’s combined proposals may well be larger than the American Recovery and Reinvestment Act of 2009¹⁴.

In my view, this could boost stock prices for another few years, provided corporate revenues, profit margins, and earnings re-accelerate along with it. My question is: what happens when it is all over? Once the fiscal stimulus has largely subsided, inflation will probably be higher than it is today and the bond market will have to price that in. In this case, what happens to the already high absolute valuations if you begin to remove their embedded interest-rate support? As always, it is anyone’s guess, and at this writing we are pretty far from interest rates being at a level where treasuries could be viewed as competitive with stocks. Still, Warren Buffet’s answer to that question should be understood seriously. Here is a link to the interview.

As always, if you agree, disagree or have any questions, please call or email directly or start a conversation thread over on LinkedIn. Thank you for reading.

Sources/Further Reading

1. Jill Mislinski, Is the Stock Market Cheap? Advisor Perspectives; 3/2/2017
2. Jeff Cox, A Record Number of Investors Think This Market is Overvalued; CNBC, 3/21/2017
3. Richard Bernstein – CEO, CIO Richard Bernstein Advisors; It’s Checkers Not Chess; Insights, January 2017
4. Sam Ro – Managing Editor, Yahoo! Finance; What 16 Strategists Forecast for the S&P 500 for 2017; 12/30/2016
5. Warren Buffett, Interview with Rebecca Quick of CNBC for Warren Buffett Watch series; 2/27/2017
6. Factset
7. US Federal Reserve Board of Governors; Conducting Monetary Policy; Education Series; Page 25
8. US Federal Reserve Board of Governors; Conducting Monetary Policy; Education Series; Page 26
9. Federal Reserve Press Release; Monetary Policy Statement; 2/1/2017
10. University of Michigan, University of Michigan: Inflation Expectation© [MICH], retrieved from FRED, Federal Reserve Bank of St. Louis; 3/29/2017
11. Fact Sheet: Donald J. Trump’s Pro-Growth Economic Policy Will Create 25 Million Jobs; www.donaldjtrump.com 9/25/2016
12. Philip Marey et al.; Trump’s Impact on the Economy; RaboResearch – Economic Research; 1/20/2017
13. FactSet
14. Wikipedia – American Recovery and Reinvestment Act of 2009

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“More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.”

— Ray Dalio, Chairman, Bridgewater Associates

*The Market-Cycle of Emotions:

This is a slightly updated version of my very first blog post. I wrote it in December 2013. At the time, it was my best effort at something timeless. Something that might be useful to people in the years ahead. This quickly became the spirit behind everything I write. Quality over quantity. It also came at a time of fairly intense personal change. My wife and I had both lost our fathers suddenly and unexpectedly that year. Our daughter was born earlier that year and our young family was growing rapidly. The winds of change were gusting. What follows are some lessons I drew from over a decade advising individual investors. I hope you enjoy it.

The holidays are a good time for reflection. What went right this year? What’s working? What went wrong? What’s not working? What could I have done better or differently to create a different result? These are good questions to ask ourselves right now. Often, there may not be one definitive answer. There may just be several possibilities. Regardless, this is a great time to hold the mirror up to our personal and professional lives with the goal of improving our circumstances in the year ahead.

Every year-end, forecasters try and explain why the past year’s stock market performance was so obvious and then they forecast what it will do next year. Most will be wrong about one or both.

Maybe I’m just getting older, but it seems that every year’s summation headline could read:

“Stock Market Turns in Unexpected Performance. Investors Surprised.”

My constant dialogue with clients was, as always, a privilege and a pleasure. Despite the ability to communicate more easily via email, text, IM, and social media, nothing is better than hearing someone’s voice on the phone or seeing them face to face.   I am looking forward to the new year in a big way.

With this in mind, I attempted to create something more valuable than a year-end forecast. Below is my humble creation of 10 investment rules. Things you can use regardless of market conditions. I hope you read them with interest and that you will not hesitate to praise or criticize accordingly:

1. Keep your “nut” low – our economy can be highly cyclical and a key to investing successfully is making sure your standard of living can make it through an economic downturn. You must not be forced to sell your long-term financial assets in order to put food on the table or pay your mortgage because your business has slowed or shut down. If this is you, stop reading now and lower your overhead before the nightfall.
2. Listen to, and invest with, people who have lots of skin in the game and a vested interest in your long-term financial success. If you don’t, you may leave yourself open to conflicts of interest.
3. Don’t overcomplicate your financial planning. Keep your financial decisions boiled down to: “I have a future goal or need. What is the most prudent way to fund it?” The more you deviate from this line of thinking, the more likely you are to overcomplicate things.
4. Don’t fight the Fed! If this isn’t intuitive by now, I can’t help you. The Fed is the single most powerful force in the global economy. Ignore them at your peril. Read their statements and forecasts directly, not regurgitated by the press. If you don’t have time for that, make sure a trusted resource is.
5. You can’t call the top or the bottom consistently – always remember that bull markets climb a wall of worry and bear markets descend a slope of hope. Instead of timing the market, it is better to keep your portfolio robust enough so that you don’t have to worry as much about adverse market fluctuation. This way, you can process volatility as an opportunity when it eventually happens. Before investing, go through this thought exercise – ask yourself “where are we now on the market-cycle of emotions*?” You don’t have to have a definitive answer, because there isn’t one. But at the very least it keeps you aware of the mass psychology that can play a big role in your outcome.
6. Don’t fight the tape! Bull and bear trends persist for longer than anyone thinks they will and herding and fund flows are one of the major drivers of market direction¹. Pay attention to and respect the herd. If you’re surprised the market did so well this year, get in line.
7. Risk tolerance can change with the times – the number of people willing and able to “be greedy when others are fearful” is surprisingly low. The number of people wanting to liquidate shares at the bottom or get more aggressive around all-time highs is surprisingly high.
8. Be skeptical of Wall Street – Massive Government bailouts ensured their survival through the 2008 credit crisis. Studies have shown that their strategist recommendations can be a contrary indicator² and their equity research can have conflicts³. At the very least, get a second opinion before acting on their advice.
9. Know your place and stay humble – the market reflects the views and emotions of millions of individual participants, many of them significantly better capitalized, informed, and connected than anyone reading (or writing) this post. No matter how well-researched your thesis, someone else out there knows the subject better than you and has more money to put to work. This pool has no shallow end.
10. Never underestimate the influence of technology. Technologies we take for granted today were almost inconceivable a decade ago. It will always be this way. Disruption will continue to be the norm. If your business or industry is in the cross-hairs of the next disruption, plan early and accordingly!

Sources/Further Reading:

1. Dong Lou, A Flow-Based Explanation for Return Predictability, London School of Economics, July 2012
2. Richard Bernstein; Climbing the Wall of Worry; Richard Bernstein Advisors; December 2012
3. Ben Lourie, The Revolving Door of Sell-Side Analysts: A Threat to Analysts’ Independence?; Department of Accounting; UCLA Anderson Business School; November 13, 2014

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Warning: This is an opinion piece. And it discusses the election. You may disagree with some or all of it. If so, I’d love to hear from you. Not to try and convince you I’m right or you’re wrong, but to listen and understand what I may be missing.

“Improving the outlook for U.S. workers isn’t about creating millions of minimum-wage jobs. It is about creating sustainable, skilled employment that allows Americans to earn a fair wage with benefits that allows them to pay for housing and food on the table and sustain a middle-class lifestyle.”

To paraphrase Jimmy, a job is only considered a “real job” if it offers current security and lets you chase the American Dream. For what it’s worth, I generally agree. As would the researchers at AonHewitt, who in a 2015 study¹ concluded the top three drivers of employee engagement are:

1. Career opportunities
2. Reputation
3. Pay

In other words, the things most workers want are timeless. Security, esteem, and a brighter future. Is that a shocker? Hopefully not.

However, it needs to be borne in mind when thinking about our election results. It also has direct, short and long-term implications for investors. How? Please read on.

Despite his electoral-college landslide, Donald Trump was elected to the white house by a fairly narrow margin^{2, 3, 4}. His slogan was “Make America Great Again.” Among other things, he declared he would renegotiate trade deals, stop the outsourcing of American jobs, and get aggressive on immigration⁵. According to Pew Research, people who supported Trump overwhelmingly agreed with the following statements⁶:

• That life for people like you is worse than it was 50 years ago
• That free trade agreements have definitely/probably hurt you or your family
• That government is almost always wasteful and inefficient

Many people living in big cities on the coasts cannot relate. In the San Francisco Bay Area, where I practice, many Clinton supporters thought that Trump’s supporters were uneducated, prejudiced, etc. Yet, when we drive through the rural areas that most strongly supported Trump⁷, we see a more nuanced picture. Business is not booming. Unemployment rates are significantly higher than the national average⁸. So are drug overdoses⁹, alcoholism, general mental health problems, obesity, and suicide¹⁰. The desperation is almost palpable.

Why does this matter? Confidence plays a vital role in our economy¹¹. However, in too many parts of our country, that confidence is absent. Why?

Other than the reasons mentioned above, consider the following:

• Many core beliefs on trade, technology, and the power of the Fed held by National policy makers have been strongly challenged, or disproved, over the past 16 years¹².
• Manufacturing as a percentage of GDP is lower than it was during the Great Recession¹³.
• Since January 2000, national manufacturing employment has declined by -28% while total employment has increased +10.5%¹⁴.
• The comparative data is even worse in Michigan, Wisconsin, and Pennsylvania; the three swing states that most narrowly swung the election to Trump¹⁵.

Jimmy Hoffa’s vision of “sustainable, skilled employment” appears out of reach to many Americans. And they’re not happy about it.

In my view, the danger is that this economic situation gets worse, not better. Why? It will be virtually impossible to reverse the course of globalization and outsourcing. Carrier Corp. – the current flashpoint of the outsourcing debate, said as much in their response to Trump’s attempt to fulfill a campaign promise and prevent their Indiana plant from closing¹⁶. So the problem of lost manufacturing jobs in “middle America” will probably continue.

I believe this is serious because it has been shown that scarcity promotes discrimination¹⁶. The other side to this coin, in my view, is that economic abundance promotes greater understanding of cultural and lifestyle choices. The downside is that if this isn’t addressed, what happens given our already-high levels of polarization if we have another recession in the next few years?

It is hard for me to say, but Matthew Gentzkow, Economics Professor at Stanford certainly has a view worth noting¹⁸. He writes that:

“Perhaps the most disturbing fact is that politics has become increasingly personal. We don’t see those on the other side as well-meaning people who happen to hold different opinions or to weight conflicting goals differently. We see them as unintelligent and selfish, with views so perverse that they can be explained only by unimaginable cluelessness, or a dark ulterior motive.   Either way, they pose a grave threat to our nation.”

It is possible this view is a touch hyperbolic. And it is possible that it is not.

Regardless, here’s why all of this matters for investors:

The examples of polarization above are probably analogous to how the winning and losing sides are feeling right now. Those who supported our President-elect are now more likely to be overconfident and aggressive with their portfolios and those who did not support him are more likely to be overly conservative. We discussed this phenomenon a few months ago. It is worth remembering now.

Carl Icahn reportedly left Donald Trump’s victory party early to buy S&P Futures because they were cratering in response to Trump’s victory¹⁹. This is the mentality everyone needs to have. While the crowd was distracted, he was focused on his bottom line. It is easier said than done, but very profitable for those who can do it right.

If you want to address the growing polarization in this country, that is all well and good. However, as an investor, you cannot let your personal politics get in the way of your bottom line. Remember that our country’s system of checks and balances will probably prevent a good number of campaign promises from being delivered. Cooler heads tend to prevail. As investors, we would do well not to forget that.

Sources/Further Reading

1. Ken Oehler, Ph.D., Global Engagement Practice Leader, AonHewitt, 2015 Trends in Global Employee Engagement: Making Engagement Happen
2. Real Clear Politics Election Results – Michigan
3. Real Clear Politics Election Results – Wisconsin
4. Real Clear Politics Election Results – Pennsylvania
5. Linda Qiu, Donald Trump’s top 10 Campaign Promises, Politifact, July 15^th, 2016
6. Samantha Smith, 6 Charts That Show Where Clinton and Trump Supporters Differ, Pew Research, FactTank: News in Numbers; October 20, 2016
7. Real Clear Politics Election Results – California
8. Bureau of Labor Statistics, California Unemployment Statistics Map, by County
9. Phillip Reese, See Where California’s Heroin, Opioid Problems are Worst, Sacramento Bee, August 17, 2015
10. Rural Health – Health Status and Health Behaviors, Stanford University Medicine 2010
11. Sylvain Leduc; Confidence and the Business Cycle; Federal Reserve Board of San Francisco Economic Letter; November 22, 2010
12. Jon Hilsenrath & Bob Davis; Election 2016 is Propelled by the American Economy’s Failed Promises; Wall Street Journal; July 7, 2016
13. St. Louis Fed Economic Database; Value Added by Private Industries: Manufacturing; Updated November 3, 2016
14. St. Louis Fed Economic Database – All Jobs & Manufacturing Jobs; updated November 4, 2016
15. St. Louis Fed Economic Database – All Employees, Manufacturing: Pennsylvania; Wisconsin; & Michigan
16. Carrier Statement Regarding Indianapolis Operations
17. Amy R. Krosch & David M. Amodio; Economic Scarcity Alters the Perception of Race; Department of Psychology, New York University; May 2014
18. Gentzkow, Matthew; Polarization in 2016; Stanford University
19. Beth Jinks & Erik Schatzker; Icahn Left Trump Victory Party to Bet $1 Billion on Stocks; Bloomberg; November 9, 2016

The post Election 2016: It’s the Economy Stupid — Some Takeaways for Investors appeared first on Avondale Partners.

This month will be a guest post. Jason Chang, Founder of Variable Path, Inc. – an information security consultancy, will discuss the value of planning for a data breach. Since cyber security is a topic of growing importance, it is something I want to make sure my clients, colleagues, and friends are all aware of, and able to plan for. I hope you enjoy it. – David Hale

“There are risks and costs to a program of action – but they are far less than the long range cost of comfortable inaction.”   —John F. Kennedy

It behooves us to know how we are going to respond to any emergency. A data breach is no different. The ultimate question is: will we be caught flat-footed? Or will we be prepared?

Breaches are much more than a loss of data, they are a race against time.

Once a breach occurs, you may find that you cannot trust your internal systems, controls, or even personnel. It is a best practice for breached organizations to have a neutral third party experienced at incident resolution waiting in the wings.

Here are 5 things to consider that should make your response to the inevitable data breach more effective:

1) YOUR FINITE TIME

The goal of breach resolution is a fast response. You still have to run your business, plus get enough sleep to be able to make critical decisions quickly. Some of those decisions may be the most critical of your company’s life. You may have a financial war-chest to spend, but you will have limited time. Plus, in your hour of need, consultants’ fees can skyrocket, so your war-chest may not be as big as you originally thought. The bottom line is to re-set your schedule over the next 10 to 15 days. Shelve everything that is non-essential and clear space around you so you can focus on what to do next.

2) ONLY THE MOST TRUSTED

Gather only your most trusted employees. This is one of the most important decisions¹. The worst possible thing you could do at this point is start delegating to an inside threat. Next, determine the capabilities of your staff. This is essential. Which members of your staff can work when, and where. Who can work from on-site, from HQ, in remote branches, over VPN, or off-site. Who can work at night, on weekends, and during standard business hours? 24/7 coverage will be vital to helping you plan your response.

3) WHO YOU GONNA CALL?

We know 911 will connect us with trained professionals when there is an emergency. Problem is, they don’t cover data breaches. Do you know who you can turn to if you suspect you may have a breach? If not, make some contacts ASAP, before a breach happens. When you have limited time to react, it is better to know who you are calling ahead of time.

It is also to your advantage to work out a cost of breach resolution ahead of time. Do not expect a reasonable hourly rate if you are finding a professional at the last minute. Do not use your existing internal IT as your “trusted professionals”, you need specialists that understand how to calculate risk, not generalists that are focused on uptime.

4) SECURE COMMUNICATIONS

Once, you’ve figured out WHO you can trust, now we need the HOW. We need a secured method of communication. SMS/Texting from cell phones is a decent stopgap as long as your phone doesn’t sync to anything on the corporate network. Don’t forget, in this exercise we are assuming that the corporate resources have been compromised. So don’t use Outlook from your phone²! An easy upgrade to your security, download and use a secure “app” for your smartphone communications.

5) INSURANCE

Due to its infancy, breach/cybersecurity insurance is one of the fastest advancing, least regulated, and most misunderstood lines of business insurance. Unlike more traditional lines of insurance, there is no standard coverage or formula. There is a great deal of variance in policies as a result. Your coverage can vary wildly. Policies cover anywhere from 1^st party to 3^rd party liability. Attorney costs, data loss, customer notification, customer loss, PR, civil penalties, government penalties, forensics, damages, breach of trust, and other losses are all part of the formula.

Generally, when it comes to fire, robbery, or life insurance, your insurance company will not pay out if it finds evidence of negligence or fraud. If I have no front door, it is unreasonable to expect to get reimbursed for a robbery. If I lie about breach controls, it may disqualify claiming any insurance payout³. If an accident happened, I would not have the help I was counting on. Many carriers of breach/cybersecurity insurance will not honor claims where reasonable controls have not been established or maintained. So..buyer beware⁴. Pay extra attention to the list of questions you are presented with by your prospective insurer. The complexity of best practice controls varies among insurers.

Bottom Line

In conclusion, businesses with action plans written and shelved will be less operationally and financially impacted by a breach. These are the businesses that will save time and make efficient use of staff and resources to securely lock down the breach in the fastest possible time. While breach insurance cannot replace operational security, it is also worth looking into. By following the best practices that some insurance underwriters promote, you can provide yourself with the best chance that your claims are honored. Together, all these resources may help make the difference between survival, and failure.

Jason Chang, Founder, Variable Path, Inc.

Sources/Further Reading:

1. Brian Lapidus, Managing Director & Practice Leader for Identity Theft and Breach Notification; Data Breach Prevention Tips; Kroll, Inc. 2015
2. IT Research Desk; University of California at San Diego; Security Concerns with the Outlook Mobile App; April 29, 2016
3. Lisa Vaas, We Don’t Cover Stupid, says Cyber Insurer that’s Fighting a Payout; Naked Security; May 28, 2016
4. Press Release, Nearly Half of Organizations Unsure if Cyber Insurance Will Payout for Evolving Email Attacks; Minecast, Corp (symbol: MINE); June 7, 2016

The post The Inevitable Data Breach: How to Make Sure it Doesn’t Take Your Business Down With It appeared first on Avondale Partners.

“Whoever controls the volume of money in any country is absolute master of all industry and commerce.”

“Don’t fight the Fed.” Veterans in the business know these are the most valuable four words in finance. If you are a novice, and want a place to start, take them to heart now. In fact, I am willing to bet that more money has been lost fighting the Fed than in all the bank robberies combined since the dawn of time.

The financial press spills a massive amount of ink and pixels attempting to dissect what the Fed will do next. Then, they attempt to forecast whether or not those actions will help or harm the stock market and/or the economy.

In my view, all of this is a waste of time.

If you want to have a good idea of what the Fed is probably going to do next, just read their short Monetary Policy Statement after every meeting. This will give you as good an indication as any as to what they’re thinking. Even better, it isn’t diluted by a journalist or pundit who may, or may not, properly convey the bigger picture.

With this in mind, the answer to the perennial “Will they hike or not and what does it mean?” question can be summed up in three sentences:

1. They will hike if there is sufficient economic strength in the global economy to support a hike.
2. They want to hike and will be disappointed if economic data isn’t good enough to support a hike.
3. Since current inflation is running well-below target¹, if things get nasty, unconventional policy tools are readily available.

In other words, the “Fed put” is, most likely, still on².

We could debate if this is a good thing in the long run. We could discuss the implications for savers. We could address the implications for “income inequality” and the disproportionate benefits the Fed bestows on asset-owners.

We could even have serious discussions about how the economy may need more aggressive fiscal policy if it is going to achieve true escape velocity^{3, 4}.

Yet in the end, we’d be forced to remember that all of these issues are academic. Even if all are valid.

As investors, all we need to know is that until inflation heats up, to the point where the Fed is prevented from intervening in markets, we can probably continue to buy dips, even if we have to hold our noses before we do it.

What we really need to prepare for, is what happens to our assets once serious inflation shows up.

Before we do that however, we have to remember there are two kinds of inflation. There is “better” inflation and “worse” inflation. “Better” inflation is formally known by economists as “demand-pull inflation.” This occurs when “excess demand in the economy, combined with scarcity of resources, allows producers to increase their prices⁵.” The key point here is that it is driven by demand which by definition tends to mean that consumers and businesses were confident enough in their future earnings prospects that they can justify paying a higher price for the same good or service. According to CFA Institute, this kind of inflation tends to coincide with higher real GDP growth and higher capacity utilization⁶.

The “worse” kind of inflation, is known as “cost-push inflation.” It occurs when “businesses respond to rising costs and must increase their prices in order to protect their profit margins⁷.” The best example of this is the 1970s oil crisis. This kind of environment has historically been bad for stocks⁸.

In my view, we probably won’t see any cost-push inflation anytime soon because the economy isn’t strong enough to support it. I also believe that a little more demand-pull inflation might be just what the doctor ordered for our economy and might even allow the Fed to step completely away from financial market intervention.

This trick for investors, regardless of our opinions on anything mentioned above, is to not be afraid of the Fed’s next rate move. Rather, we should all be afraid of what happens when the Fed can’t do anything other than hike rates aggressively, because global inflation is overheating. Fortunately, it does not look like we are anywhere near that point⁹. However, we should all know what playbook to break out, if and when it happens.

If you have questions on how this affects you individually, please do not hesitate to call (415) 512-8101.

Sources/Further Reading:

1. Jill Mislinski; Little to No Chagne in July PCE Price Index; Advisor Perspectives; August 29, 2016
2. Jon Hilsenrath; Years of Fed Missteps Fueled Disillusion With the Economy and Washington; Wall Street Journal, Aug 26, 2016
3. Jon Hilsenrath; Years of Fed Missteps Fueled Disillusion With the Economy and Washington; Wall Street Journal, Aug 26, 2016
4. Paul A. Laudicina – Chairman, Global Business Policy Council & Erik R. Peterson – Partner. AT Kearney and GBPC Managing Director; AT Kearney Prospects for Achieving Escape Velocity: Global Economic Outlook 2016-2020, January 2016
5. Jacques Lussier, PhD, CFA; Successful Investing is a Process; Bloomberg Press, p.78
6. CFA Institute, CFA Program Curriculum 2017 Level I, Volumes 1-6, p.231
7. Jacques Lussier, PhD, CFA; Successful Investing is a Process; Bloomberg Press, p.78
8. Abderrazak Dhaoui and Naceur Khraief (2014). Empirical Linkage between Oil Price and Stock Market Returns and Volatility: Evidence from International Developed Markets. Economics Discussion Papers, No 2014-12, Kiel Institute for the World Economy
9. Jill Mislinski; Little to No Chagne in July PCE Price Index; Advisor Perspectives; August 29, 2016

The post Fed Rate Hikes: Should We Be Worried? appeared first on Avondale Partners.

“Nothing is more unpredictable than the mob, nothing more obscure than public opinion, nothing more deceptive than the whole political system.”  — Cicero

Here we go again. Another Presidential election year. The circus is in full swing. The Conventions are in the rear view mirror. Now, most of us are looking forward to the food fights, err…I mean the debates.

Regardless of which side you support, these debates promise awesome political theatre. If the Republican primary debate ratings offer any clue¹, we will probably see record viewership for the Presidential Debates². We may even approach the Super Bowl’s ratings³.   And that would be a first, by a country-mile.

While we have no idea which side will win, we can be virtually certain that this election will have an impact on our portfolios. How? Let’s explore…

According to a 2012 University of Miami Study called Political Climate, Optimism, and Investment Decisions⁴:

“Investors believe that financial markets are less risky and more undervalued when their own party is in power…and that individuals increase the market exposures of their financial portfolios when their preferred political party is in power.” This increase in risk-taking leads investors to “earn higher raw portfolio returns when their own party is in power.”

However, what is even more striking is that most investors have no idea that political outcomes impact their portfolios this way. Consider that when formally surveyed, investors claim that the two variables that influence their investment decisions the least are⁵:

1) Political party affiliation and

2) Statements from politicians and government officials

This begs the question: is the confidence gained from supporting the “ruling” political party a subconscious driver of investor behavior? Most likely it is. Obviously, if it is subconscious, our ability to control it is greatly diminished.

According to Pew Research Center, and anyone with a pulse, data strongly suggest that our country is growing increasingly politically polarized⁶. It is not a stretch to think that any investor who supports the winning political party in this Presidential election will gain even more confidence than they would have had their party won ten or twenty years ago.

If this level of politically-driven investor confidence grows right along with polarization, how long before that confidence transitions to overconfidence? It is hard to say at this point. Yet, it is well-documented that overconfidence leads to poor results⁷. If our nations’ politics keep getting more polarized, supporters of the winning side may start exhibiting overconfidence and thus weaker results than their losing counterparts in the not too distant future. I do not think we are there yet, but it is worth keeping an eye on.

Another striking fact is how much better the economy and stock market perform when Democrats hold the Oval Office⁸.

Specifically:

• Since 1900, cumulative GDP is 7.8% higher on average over each 4-year Democratic presidential term⁹
• Since 1900, the DJIA has outperformed by 3%/year under a Democratic president (8.7% vs. 5.7%)¹⁰

Does this mean Democrats are directly responsible for this outperformance? Hardly.

According to Lawrence J. White at the NYU Stern School of Business¹¹, if you remove Herbert Hoover’s term from the republican ledger, the stock market performance gap shrinks dramatically. Also, the Bill Clinton served during the 1990s tech bubble. Despite its strong absolute performance, that market was not a healthy one as it stretched valuations into the stratosphere¹² and the resulting aftermath of valuation contraction lasted almost a decade¹³.

Moreover, which party is “right” and which party is “wrong”, is totally beside the point. We are not pundits, after all. We are investors.

The main point of this exercise is to highlight the common pitfalls related to politics, elections, and investing. It can be challenging enough compounding capital at a sufficient rate to meet goals and objectives. Not paying attention to how politics can impact our behavior as an investor can make things worse. The most successful investors keep a level head, regardless of market or political conditions.

We are approaching the home stretch of this election year. It will only get easier to let it become a distraction. Our main takeaways should be: do not lose confidence unnecessarily should the side you support lose the election this November. Conversely, watch out for taking unnecessary risks should the side you support prevail. And remember this effect is subconscious, so we will have to work particularly hard to maintain awareness of it.

The bottom line is to remember to keep our politics and our investing separated, no matter how easy it may be for them to get commingled.

If you have specific questions about how this election cycle may impact your portfolio, please do not hesitate to reach out. My direct phone is 415.512.8101 and my email is dhale@avondalepartnersllc.com

Sources/Further Reading

1. Howell, Kellan; Donald Trump helps GOP presidential debates break TV ratings records; The Washington Times; March 9, 2016
2. Mirkinson, Jack; Senior Media Editor; Second Presidential Debate Ratings: 65.6 Million Tune In; Huffington Post; October 17, 2012
3. Wikipedia – Super Bowl Ratings Index
4. Bonaparte, Yosef – Unviersity of Colorado at Denver; Kumar, Alok – University of Miami – School of Business Administration; Page, Jeremy K.; Political Climate, Optimism, and Investment Decisions; February 26, 2012
5. Merikas, Anna A – Derre College, Greece; Merikas, Andreas G. – University of the Aegean, Greece; Vozikis, George S., University of Tulsa; Prasad, Dev – University of Massachusetts, Lowell; Economic Factors and Individual Investor Behavior: The Case of the Greek Stock Exchange; Journal of Applied Business Research, Volume 20, Number 4; 2004
6. Dimock, Michael; Doherty, Carrol; Kiley, Jocelyn; Oates, Russ; Political Polarization in the American Public: How Increasing Ideological Uniformity and Partisan Antipathy Affect Politics, Compromise and Everyday Life; Pew Research Center, June 12, 2014
7. Barber, Brad M.; Odean, Terrance; The Behavior of Individual Investors; Haas School of Business, University of California, Berkeley, CA & University of California, Davis, p. 1547
8. Jacobson, Louis; Hillary Clinton says the stock market has done better under Democratic presidents; PolitiFact, August 4^th, 2015
9. Chien, Wen-Wen, SUNY – Old Westburry; Mayer, Roger W, Walden University; Wang, Zigan, Columbia University; Stock Market, Economic Performance, and Presidential Elections; Journal of Business & Economics Research, Q2 2014
10. Gay, Chris; Ask not what the GOP will do for you: Historically, markets do better under Democrats; US News &Y World Report; November 5, 2012
11. Jacobson, Louis; Hillary Clinton says the stock market has done better under Democratic presidents; PolitiFact, August 4^th, 2015
12. Mislinski, Jill; Is the Stock Market Cheap?; Advisor Perspectives, July 5, 2016
13. FactSet Data Systems, Inc.; Trailing 12 month PE ratio for NASDAQ Composite Index, available upon request

The post Politics and Your Portfolio: A Toxic Mix? appeared first on Avondale Partners.

This year the United States will celebrate its 240th birthday! If you’re like most people, you’ll probably celebrate by doing what you always do, and why not? Why should you think of 2016 any differently?

Actually, this is one of those years that is different. Just in case you haven’t noticed, it’s an election year! Regardless how you feel about the candidates, in years like this, the words “being American” take on an entirely different meaning.

During election years, no longer is being an American a passive thing. It’s a choice; a philosophy. Every few years, we make the decision to take part in one of the noblest experiments in the history of mankind: the experiment to determine if men and women can govern themselves. The experiment to choose for ourselves what we can and ought to be, and the experiment to rid ourselves of dictators, kings, and nobles. To settle once and for all that no person has to bow; that no gender, race, or religion should lord over our common humanity.

You see, every election year we choose the people charged with leading us, both at home and abroad. This process says much about who we are as a nation. Think back on your history lessons. Think how rare it is to live in a country that can have complete shifts in power, with a transition that occurs peacefully. Most of the time, I feel it’s easy to take this fact for granted—after all, most of us have never known anything else.

But this process is at the core of what makes us so unique. It’s an amazing thing that our elected leaders set aside their power—not because they don’t want it anymore, but because they understand the greater goal of upholding freedom and independence. This singular phenomenon is the result of more than just laws. It goes beyond even the Constitution. Many governments have laid down similar limits on their chief executive’s power, to no avail.

So what ensures that our leaders don’t abuse those rules? We do; us; you and I. When a massive population of people collectively exercises their rights, there is no power in the world that can stop it.

So what are these rights? Here are a few:

• Our freedom of speech. We exercise it every time we talk politics by the water cooler. Every time a comedian mocks the most famous house in the world.
• Our freedom of the press. We all might brumble about the foibles and biases of the media, but remember what Thomas Jefferson said. “Were it left to me to decide whether we should have a government without newspapers or newspapers without a government, I should not hesitate a moment to prefer the latter.” At no point is our right to a free and open press more important than during an election year.

In spite of all the noise and talking heads, a free and open media remains a chief source of information, so that we can make informed choices. It’s our main provider of context, so that the information we acquire is properly weighed and judged. Whether it’s through newspapers, television, or internet blogs, we never pay more attention to the press than during an election. Thus, we will never exercise our right to a free press more than during a year like this one.

• Our right to assemble. Do we appreciate how rare it is for us to be able to gather and discuss the world we live in? This probably seems so normal today, but for centuries people have had to meet in dark alleyways to share, commiserate, or even conspire. Our ability to organize in support of—or in opposition to—any organization, group, or person is uniquely American.

We exercise this right every time we gather to support one candidate over another, or when we meet in town halls to question our elected representatives. Furthermore, implicit in the right to assembly is the right to association—to affiliate ourselves as we please. Joining political parties or other causes exercises our right to freedom of association.

Now you might be saying to yourself, “We always have these rights no matter what year it is.” And that’s true. They’re guaranteed by the Constitution; twenty-four hours a day, three-hundred and sixty-five days a year; in rain, or sleet, or snow; in good times and bad. But it’s during an election year that the majority of us truly exercise those rights. And it’s those rights that make America unique. It’s for those rights that we declared independence in the first place. And it’s when we exercise them that we’re truly being American.

When you think about being American this Independence Day, remember it really isn’t about sports or food or music or money. It’s not even about the English language. We have those things only because of what America’s truly about: the basic rights we guarantee ourselves; that we guarantee for each other. The rights that men and women have fought for, and died for. The rights that people have sacrificed their lives, fortunes, and reputations to secure. So when we truly exercise our rights, that’s when the word “American” ceases to be a noun, but an adjective. “Being American” means being someone who values and respects my fellow man. “Being American” means standing up for the self-evident truths that free us from the shackles of ignorance.

With all of this in mind, I want to wish you a happy Independence Day. I hope you are able to take a few moments to recognize the historic opportunities available to you, especially during an election year. This is not your ordinary holiday. This is the time we can show we’re American, in word and in deed.

To you and your family, happy Fourth of July. Now go enjoy being an American!

Unseen Battles

There’s more to everyone’s story

We all face stress in our lives, much of it invisible to those around us. A very close friend of mine and his wife thought deeply about this subject and courageously decided to do something about it. They produced a short video message, primarily addressing some of the “unseen battles” of today’s teens.

Take 2 minutes to watch and then share with family and friends… It will be worth your time and effort.

Go To: Unseen Battles- You Tube

Important IRA Rollover Rules

If you are like many Americans, your IRA may be one of your largest assets. When it comes to investing it, you are generally in the driver’s seat. However, before you decide to take an IRA distribution, you will want to understand several important IRS rules that apply to rollovers.

1) IRA One-Rollover-Per-Year Rule – Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual’s IRAs, including SEP and Simple IRAs, as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. Exceptions: a) Trustee-to-trustee transfers between IRAs are not limited. b) Rollovers from tradional to Roth IRAs (conversions) are not limited. This is an important rule to keep in mind because once a second distribution is paid out as a rollover, it is too late. You can’t put it back into an IRA and are likely to face taxes and possible penalties.

2) No Rolling Over A Required Minimum Distribution (RMD) – If you are age 70.5 or over in 2016 and have a Traditional IRA, you will be required to take an RMD. This RMD may not be rolled over to another IRA. Also, the rules state that “the first money out” of your IRA is considered your RMD. Bottom line, if you are age 70.5 or over for the year, you must take your RMD before rolling over any other funds from your IRA. If your RMD is deposited to an IRA, you may be deemed to have made an excess contribution in that IRA which may be subject to a 6% penalty for each year it remains there.

3) No Later Than 60 Days – IRA owners are generally well intentioned when they ask that a check be sent out… “I’m going to put it in my IRA at ___________”. Sometimes they even look to their IRA for short term borrowing. Either of these scenarios can be risky. If the funds do not get returned to an IRA within 60 days, IRS relief for missing the 60 day window is expensive. A private letter ruling requesting an extension comes with a high price tag. Also, there is no guarantee that the IRS will grant you additional time to complete the rollover.

As you can see, there can be a lot of rules to remember. You may be thinking that there must be an easier way and there is. It’s called a trustee-to-trustee transfer. In fact, the above 3 rules do not apply at all if you go with the transfer instead of a rollover. It is critical that this transfer be executed properly. In a transfer, the funds are directly payable from your current IRA custodian to your new IRA custodian. You don’t take receipt of the funds like you could with a rollover. So, before taking a distribution, be sure to discuss the process in detail with a qualified financial advisor.

Behavioral Biases

Flux – a series of changes: continuous change (Merriam-Webster).The world and markets are acting according to definition, so it’s prudent that investors practice as much patience as humanly possible. Here are a few phrases you should not be telling yourself:

Valuations Still Matter

This bull market, which began in March, 2009, continues to test market highs. Some trends are encouraging, others cause concern. As sentiment has improved and valuations have risen, there is a lingering sense that complacency may be on the rise. If we are in the late innings of the profit cycle, it could result in margins and profits not growing much from here. Corporations are having an easier time servicing their debt because interest rates remain at multi-year lows, but when rates do begin to rise, more companies could be challenged to meet their targets and obligations.

Perhaps the biggest concern is that those leading the world’s central banks are in unchartered waters. They seem to be creating the playbook as they go. No one really knows how this will end. As Mohamed El-Erian, chief economic advisor at Allianz SE, recently wrote:

Central banks have become dramatically thrust into the limelight as they have become single-handedly responsible for the fate of the global economy. Responding to one emergency after another, they have set aside their conventional approaches and instead evolved into serial policy experimenters…

What central banks have been experiencing is part of a significantly broader change whose effects will be felt by all of us, our children, and, most likely, their children, too. It is a change that speaks to much bigger and consequential evolutions in the global economy, in the functioning of markets, and in the financial landscape. And the implications go well beyond economics and finance, extending also to national politics, regional and global negotiations and geopolitics.

As always, we hope you find these thoughts informative and that they help to provide you a better framework for future investing. If you have any questions about these topics, or anything else, please give us a call. We’d love to hear from you. 615-312-7130.

The material contained herein is intended as general market commentary. The views and strategies described herein may not be suitable for all investors. Certain opinions, estimates, investment strategies and views expressed in this document constitute our judgement based on current market conditions and are subject to change without notice. The information contained herein should not be relied upon in isolation for the purpose of making an investment decision. This material is not intended as tax advice or an offer or solicitation for the purchase or sale of any financial instrument. Past performance is not indicative of future results.

Phone: (615) 312-7130 Email: jglennon@avondalepartnersllc.com www.avondalepartnersllc.com

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