Where Trump Tax Cuts Will Help The Most

Fiscal Policy

President Trump’s proposal to cut the corporate tax rate from 35% to 15% could benefit various industries and sectors throughout the country.  U.S. based businesses with a domestic focus would benefit the most including retailers, telecom companies, regional banks, restaurants and health insurers.  Domestic based companies have about a 35% tax because they lack lower overseas operations taxation.  Standard & Poor’s estimates that highly taxed companies could see a 30% increase in after-tax earnings if the top corporate tax rate falls to 15%.

Not only may corporations attain higher profits, but consumers may also enjoy lower prices should some of that profitability be passed on to consumers.

The proposals also include a one-time amnesty rate of 10% for U.S. companies that have an estimated $2 trillion in profits trapped outside the United States.  U.S. companies have been discouraged from bringing these profits back to the U.S. because of the current 35% tax rate. Proceeds from the repatriation of $2 trillion into the economy could result in job creation, manufacturing, and increased dividend payouts for shareholders.

Pass-through businesses stand to see a generous tax reduction under the proposals.  Sole proprietorships, S corporations, limited liability companies (LLCs), and partnerships are considered pass-through businesses.

The proposal has become extremely popular with these entities because they currently employ more than 50 percent of the private sector work force and account for roughly a third of all private sector payroll.


Sources: The Tax Foundation, IRS

 

A Bitter Rivalry

Global Financial Capital
Though for the Week

SYNOPSIS

  • Yale University’s endowment returns have crushed the competition over the last 25 years.
  • Alternative investments are those that are not considered to be traditional investments such as stocks, bonds, and cash.
  • Yale can attribute its stellar performance to its large allocation to alternative investments.

BRAGGING RIGHTS

The Ivy League comprises some of the most prestigious educational institutions in the world. Names like Harvard, Princeton, and Yale conjure up images of future world leaders studying relentlessly to achieve perfect marks.  This is a group of high achievers who are unfamiliar with the concept of “second place,” and they fiercely compete  to be the best at everything.  To this cohort, it’s either the  gold medal or nothing at all, and this even extends to  the performance of their school’s endowment fund.

An endowment is critical to the financial stability of a university because the returns fill the gap between revenue (tuition, etc.) and spending (salaries, etc.).  The more money the endowment generates each year, the more a school can pay to attract better professors, build state-of-the-art facilities, and support research endeavors.

Therefore, endowments are closely followed, but no two schools receive more attention than Harvard and Yale.  This bitter rivalry is the investment equivalent of Ohio State and Michigan, Yankees and Redsox, or even Jimmy Connors and John McEnroe.

The table below compares the average annualized returns of Harvard, Yale, and other endowments to all active balanced mutual funds and an indexed 60% stock/40% bond portfolio. The returns clearly show that Yale’s bragging rights over Harvard have been in full effect for decades. When compared to the rest of the competition, it’s not even close. Yale’s returns are so far above all others that it begs the question of how they have been able to do it. 

AN ALTERNATIVE APPROACH

Any real estate agent will say that the three most important rules of real estate are (1) location, (2) location, and (3) location, because the neighborhood determines most the value of a home. Buy a bad house in a great neighborhood, and you should still do ok.

Similarly, the three most important rules in investment management are (1) asset allocation, (2) asset allocation, and (3) asset allocation. Picking the right allocation explains 93% of long-term returns1, and Yale has done a phenomenal job finding the best neighborhoods.

The chart shows the neighborhoods that Yale’s endowment fund selected last year.  

Source: Yale Daily News

Source: Yale Daily News

Two striking conclusions are evident:

  1. Few Stocks & Bonds:  Yale’s allocation to traditional asset classes is tiny. Only 18% is invested in stocks (4% domestic and 14% foreign) and 8% in bonds and cash.
  2. Lots of Others:  Asset classes not classified as either a stock or bond (red-dotted box) comprises 74% of the asset allocation.

Those other asset classes are commonly referred to as “alternative investments” because they are not considered to be equity or fixed income investments. Without question, these are the drivers of Yale’s massive outperformance.

Screen Shot 2017-05-22 at 3.33.47 PM.png

Now that drivers of Yale’s returns have been identified, let’s go under the hood to see why these asset classes have done so well. The chart below lists three different portfolios based on risk tolerance and compares the risk/return characteristics of each over the last 25 years.  

The conservative portfolio consists of 30% stocks and 70% bonds, the moderate is a 50/50 split between the two, and the aggressive is 70% stocks and 30% bonds. As expected, the conservative portfolio has less risk than the aggressive one but also lower returns over time.

However, when each of these portfolios is adjusted to hold a 50% allocation to alternative investments, all three portfolios benefitted from higher returns and less risk (indicated by the three red arrows).

The reason why we see higher returns comes from the sophistication represented by these alternative strategies. These managers tend to fish in different ponds than traditional stock and bond managers, and their expertise often leads to (1) larger returns over time and (2) a smoother ride for investors.

Risk is lower because these asset classes are often less affected from what tends to drive stock prices down. This increased diversification creates tremendous benefits for those investors who prefer a smoother ride over time.

Simply put, Yale’s large allocation to alternative investments is the reason why their returns have far surpassed its competition and the traditional 60/40 portfolio.

IMPLICATIONS FOR INVESTORS

Access to alternative investments has historically been restricted to institutions and ultra-high net worth investors. Fortunately, these barriers have started to fall, and individuals are now able to invest in these assets just as pension funds and endowments have for decades.

The big hurdle that remains for most individuals to invest in alternatives is perception. Thanks to
the financial media, these investments carry a negative connotation as being riskier than traditional investments in stocks and bonds.

Arguably the most egregious of misconceptions is the hedge fund industry. These investment firms employ complex investment strategies to profit across the entire business cycle or mitigate specific risks. They are run by some of the best and brightest investment managers on the planet, and the table below shows that the industry returns far surpassed the S&P 500 from 1998 – 2012, with around half the annual volatility.

Screen Shot 2017-05-22 at 3.28.37 PM.png

The Sharpe ratio in the far-right column is a measure of efficiency. It divides the excess return above risk-free investments by the annual volatility to measure how much return a manager is generating per unit of risk. A higher Sharpe ratio indicates a more efficient manager, and this hedge fund index delivered 3.6 times more efficient returns than the S&P 500 over this period.

However, since the financial crisis, the media has attacked the hedge fund industry over perceived lackluster returns, fee structures, and large bonuses paid to a select group of high-profile managers. It is as if we cannot go a week without hearing about how some hedge fund has closed or a pension fund fired another manager. The onslaught by the financial media has been relentless.

These stories do nothing but harm individual investors because they paint a picture of hedge funds being the Wild West of the investment world. Nothing could be further from the truth for three reasons:

1. Smoother Ride: Hedge funds aim to deliver more efficient returns, and in doing so tend to give investors a smoother ride over time. Less volatility leads to fewer sleepless nights.

2. Talent: Hedge funds often pay better than traditional asset managers because the strategies are more sophisticated and require the best talent. The intellectual brainpower in many of these firms rival NASA far more than the gunslingers at the O.K. Corral.

3. The Name: Hedge funds get their name because their goal almost always involves hedging some form of risk. Large institutions are not run by incompetent managers, and they would never pay the fees charged by hedge funds unless they were doing their job.

The chart below quantifies the importance of these characteristics by comparing the recovery rate needed to break even for a well-regarded hedge fund index during the financial crisis to the S&P 500.

Since the hedge fund index fell significantly less during the financial crisis, the amount needed to recover was a fraction what the S&P 500 needed to return to get back to even.

Add it all up and individual investors can learn a lot from watching what Yale and other top performing institutions are doing with their money. The level of responsibility that these endowments carry is tremendous, and the notion that some of the most experienced investors overseeing hundreds of billions in assets would gamble away the financial future of the universities they represent is hard to envision.

The bottom line is that Yale University has generated stellar returns over time because those who manage their endowment chose to fish in a different pond than most others, and it is time for investors of all risk tolerances to consider dipping their toes in this water.

 

Consumer Credit Card Debt Hits $1 Trillion

Consumer Finance

As consumer confidence has risen over the past couple of years, so has the appeal to hold debt. Federal Reserve data shows that U.S. consumers now have over $1 trillion on credit cards alone, up 6.2% from a year ago, and is currently the highest amount of consumer credit card debt since January 2009.

 
 

The recent data makes credit card debt the third largest consumer lending category in the industry following auto loans and student loans.

Two variables that economists look at closely are employment and interest rates, which directly affect the ability for consumers to borrow. Economists believe that loosening underwriting standards in various loan categories along with a strengthening employment market could very well offset any interest rate increases.

The credit card business remains among the most profitable in banking as banks can charge much higher interest rates than other loan types, with average credit card rates between 12% and 14%.

Yet, as credit card debt levels have risen, so have reserves for losses as banks anticipate delinquencies to rise. Financially savvy consumers that pay their balances down each month avoid hefty interest charges, but those that don’t, known as “revolvers,” pay average rates of between 12% to 14% and significantly more if they are considered higher risk.


Sources: Federal Reserve

Fixed Income Update

Global Bond Markets

Analysts believe that demographical factors are increasingly influencing the direction of fixed income markets. Even after the fed raised rates this past quarter, along with a series of rate increase expectations, bond yields have reversed and headed lower. The 10-year U.S. Treasury Bond yield fell in April to 2.29%, levels last reached in November 2016.

Volume of investment grade bonds has surpassed the volume of high yield bonds for the first time since 2008, suggesting that sentiment about risk factors in the bond markets may be changing.

An exit from any one of the EU member countries is expected to cause additional negative sentiment and market repercussions in European credit markets as the euro becomes that much more susceptible.

Government bonds from Venezuela reached yields in excess of 20%, as the country bristles with political and economic chaos. It is estimated that Venezuela has roughly $10 billion left in reserves, which is expected to be exhausted fairly soon.


Sources: Reuters, Bloomberg, U.S. Treasury

A Favorite U.S. Export For Foreigners

International Trade

As foreign imports come into question with possible tariffs, certain US exports continue to be in big demand worldwide.

As much as Americans enjoy inexpensive foreign imports, many foreigners enjoy expensive American made products.

U.S. wine makes its way primarily to the UK, Canada, Japan, and Italy, while American beer is most popular in Chile, Australia, Canada, Sweden, and Mexico. U.S. whiskey has become an absolute favorite in Japan, Spain, Australia, and Germany.


Sources: Census Bureau, Distilled Spirits Council of the US

National Parks Contribute Over $34 Billion To Economy

Federal Programs

 
 

As the summer months approach, the National Parks are a destination for tourists all over the United States.  National Parks are part of the National Park Service, which was established in 1916 by President Woodrow Wilson.  Beginning with Yellowstone National Park in Montana and Wyoming, there are 417 parks today covering 84 million acres.

On a recent visit to California’s National Parks, newly appointed Interior Secretary Ryan Zinke made mention of the tremendous activity and economic output the National Park Service is generating. The parks operate under the exclusive control of the Secretary of the Interior.  The 417 parks saw a record 331 million visitors in 2016, contributing $34.9 billion to the U.S. economy.  The economic output is derived from various jobs and industries including lodging, hospitality, retail, transportation, food, fuel, camping fees, and recreational activities.


Sources: U.S. National Park Service

Trump Tax Proposals

Fiscal Policy

The administration of President Trump released its tax proposals in late April. The proposals did vary somewhat from initial proposals presented during the campaign, but adhered to the basic principals of tax reform of broadening the tax base while lowering tax rates.

Markets are anxious because it may take months before there is an indication whether any portion of the tax proposals actually convert into tax legislative law.

Administration officials stated that the reduction in tax revenue generated by the tax cut proposals would be offset through a combination of anticipated economic growth and various broadening measures.

Once the Budget Proposal for Fiscal Year 2018 is submitted by the White House in mid-May, then Congress will begin the deliberation process of the tax proposals.

Affecting most every taxpayer in the country is the standard deduction. The proposal essentially doubles the standard deduction from its current levels, thus simplifying the entire tax process for many tax filers. This is so because the standard deduction is used instead of itemizing expenses in various categories. The Tax Policy Center estimates that those who itemize would fall from 30% to 5%, hence spending less time on identifying expenses to deduct and less of a burden on the IRS.

Ironically, one of the proposals actually hinders homeowners that have expensive homes, primarily in Democratic California and New York. Senators from both states are expected to rebuff the elimination of the state and local property tax deduction, seen as a significant deduction for residents of these expensive coastal states.


Sources:  whitehouse.gov, Tax Policy Center

The Tax Benefits Of Homeownership May Change

Tax Planning

As President Trump’s tax proposals are being unveiled, homeowners are carefully following the possible effects on home ownership. The current tax code provides a number of benefits for taxpayers that own their homes rather than rent. Homeowners have the ability to deduct both mortgage interest and property tax payments from their federal income tax. The possibility of eliminating the deduction of property tax payments may alter the benefits of home ownership for some.

The tax code also allows for the exclusion of capital gains on home sales. Currently the exclusion from taxable income on the appreciation of homes when sold is $250,000 for individuals and $500,000 for joint filers. In order for the exclusion to be effective, the homeowner must live in the home as their principal residence for two of the preceding five years. In addition, homeowners may not have claimed the capital gains exclusion for the sale of another home during the previous two years.

The benefit of property tax and mortgage interest deductions as well as capital gains exclusions tend to benefit higher income earners more. The deductions and exclusions available to all homeowners are essentially worth more to taxpayers in the higher income tax brackets than those in lower income tax brackets.

The difference results largely from various factors: compared with lower income homeowners, those with higher incomes face a higher marginal tax rate and typically pay more mortgage interest and property taxes. They are also more likely to itemize deductions on their tax returns rather than just taking the standard deduction.

Sources: Tax Policy Center, IRS

Reasons to be Bullish

First Trust
Monday Morning Outlook

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Economist

We wish we had a dollar for every time we’ve heard that the bull market in equities is only due to loose money. We have consistently disagreed, arguing that although the Federal Reserve is loose, the bull market is primarily a function of the rebound in profits after the disaster in 2008-09.

The government’s economy-wide measure of profits – the one’s it releases with the GDP reports – was $2.15 trillion at an annual rate in the fourth quarter of 2016, up 9.3% from the prior year and very close to a record high. In turn, given the strong statistical link between the S&P measure of profits and the government’s measure, as well as the robust gains in S&P profits reported so far for the first quarter, we wouldn’t be surprised at all if the economy-wide measure of profits is hitting a record high in Q1.

The gains in profits are a testament to the enduring ability of entrepreneurs in the face of what has been a bipartisan movement toward more government involvement in the economy dating back to the latter couple of years of the Clinton Administration. These include more government spending, new entitlements, and much heavier regulation.

Now it looks like government policy stands a solid chance of becoming a tailwind to growth rather than a headwind, with less regulation on the energy sector paired with respectable prospects for major reforms of Medicaid and Obamacare as well as supply-side tax cuts.

These changes will sustain the growth of corporate profits even in the face of an acceleration of wage gains as the unemployment rate declines. Notice the lack of a negative equity reaction to Wednesday’s Fed statement that sent a clear signal a June rate hike was on the way. Supply-side policies are the way policymakers can break through the Keynesian mindset that labor and capital have to battle it out for the upper hand and that a “tight” labor market must mean weakening profits.

Meanwhile, it looks like France, and, in turn, the EU can continue on a bullish path. Emmanuel Macron, France’s incoming president, has proposed curbs on France’s wealth tax, wants to decentralize corporate bargaining with unions, plans to cut the corporate tax rate to 25% from 33%, and wants to reduce government jobs (through attrition).

The European Union is in dire need of economic reform, to move toward free-market capitalism rather than (democratic) socialism. But the best way to do this is for major countries in the EU, like France, to reform their economies themselves. If some countries move toward freer markets, other countries will have to follow or capital will move toward more freedom, leaving the others behind. Now it looks like one of those countries is on its way.


Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

Protecting Against Pilot Error

Global Financial Capitol
Thought for the Week

SYNOPSIS

  • A survey conducted back in 2015 indicated that 37% fear the stock market and 73% equate buying equities to gambling.
  • Given the events that have transpired in equity markets since the late 1990s, it is understandable to hear that investors feel that the stock market is rigged.
  • Hiring a professional and proper diversification are two ways to avoid costly mistakes

FEAR AND DISTRUST

I flew back to New York City last week and encountered turbulence on the descent towards LaGuardia Airport.  As the plane made its way to the gate, I noticed that the woman next to me was in tears and shaking uncontrollably.  After she calmed down a bit, we began talking and came to learn that she was just a nervous flyer.

The experience reminded me of a survey I read back in 2015, which questioned over 1,200 Americans what scares them the most. At the top of the list were the usual suspects, with 46% fearing death and 49% being afraid of heights (1).

Equities were not far behind, with 37% of respondents fearing the stock market. Furthermore, around 73% consider investing in the stock market to be a form of gambling, and 31% believe that the stock market is rigged (1).

The reasons for investor fears are not overly surprising, as respondents cited the perceived high risks involved. Common responses included, “I’m afraid of losing money,” and, “I don’t have time to watch the market.” Others stated that they don’t trust someone else making investment decisions for them.

Let’s address these concerns one-by-one. First, in no way whatsoever is the stock market rigged. The U.S. equity market is much too large to be manipulated to the point where only a select few profit on a consistent basis.

Second, the stock market is absolutely used as a casino by day traders. Attempting to profit from short-term price movements is no different than rolling dice down a craps table. In fact, it is arguably even more difficult to day trade because it requires a gambler to be right twice – when to buy and then when to sell – on each trade.

However, those investors who focus on the fundamentals of companies and ignore the day-today market movements are not gambling. They are developing an investment thesis and observing its progress over a multi-year period.

The difference may appear to be subtle, but rest assured the two strategies couldn’t be more different. Regarding the “fear” component of the market, the chart below shows the return on the S&P 500 compared to gold, which is often cited as a “safe haven” asset, from 1980 through March 31, 2017.

Even through the madness of the dot-com bubble and the financial crisis, stocks have generated over 2,090%, which is 14 times larger than gold’s 143% return. Furthermore, gold has never paid a dividend, bought back shares, or engaged in any other shareholder friendly activity. It has just sat there like a shiny pet rock, while the S&P 500 has created tremendous wealth for patient investors.

Gold’s paltry return sheds light into the irony of most “safe” assets. Although they may make an investor sleep well at night, their inability to generate attractive returns over time could pose far greater risk to meeting financial objectives than the stock market ever could.

Hence, some may claim that fear of stock ownership is irrational, but I find it to be no different than the nervous flyer sitting next to me.  Consider the following:

  • Bad Events Resonate:  Even though plane crashes are extremely rare, people often perceive air travel as dangerous. The same goes for equities in the sense that fraud and financial crises rarely occur, but when they do they can resonate for decades.
  • Giving Up Control is Scary:  If you have no experience as a pilot, would you ever get in a cockpit?  The same applies to the stock market, so don’t try to do it yourself unless you have the proper training and logged years of experience.
  • Real Risks Aren’t Obvious:  Although turbulence (aka “volatility”) is how most passengers gauge the safety of a flight, pilot error is almost always the cause for crashes. The same goes for managing equity portfolios. Either making aggressive moves and/or panicking in challenging times is a sure path to suboptimal outcomes.

This passenger even admitted to knowing the statistics around flying. She understood the odds of bad things happening were infinitesimally small, but the data provided no comfort. This came as no surprise because during moments of extreme emotional stress, applying logic and reasoning is akin to bringing a knife to a gun fight.

Regarding the survey, I doubt that there is a single respondent who would listen to reason when it feels like their entire net worth is heading to zero. Hence, whether it is rational or not for some to fear the stock market is irrelevant. All that can be done is to best position this cohort to protect themselves against pilot error.

IMPLICATIONS FOR INVESTORS

The chart below shows the relationship between the number of securities in a portfolio (horizontal axis) and the overall risk of the portfolio (vertical axis – “variance” is a fancy word for a measure of risk).

 
 

This chart explains why diversification is so critical. As the number of securities increases, the risk decreases dramatically. If an investor owns 5 stocks and one is in a company that commits fraud, then 20% of the portfolio is exposed to this risk. By owning 50 stocks, only 2% of the portfolio is at risk. Furthermore, while a single stock can go to zero due to several reasons, properly diversified portfolios cannot.

Maintain diversification through economic booms and busts, and an investor should not have to stay up at night wondering when the next Enron or Bernie Madoff will happen. There’s no question that another crisis will occur down the road. These events will catch headlines and boost financial news network ratings just as they have in the past, but timing them is impossible and any attempt to try will only cause more harm than good.

Rather than play a guessing game, I prefer to invest in diversified portfolios that contain built-in protection. This approach takes the timing and risk of pilot error out of the equation.

The bottom line is that a professionally managed, well-diversified portfolio is the best way to help investors cope with their fear of the stock market.

Screenshot 2017-03-13 12.29.31.png

Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC. SEC registration does not imply a level of skill or training.

Help Your Student Protect Themselves

Sending your son or daughter off to college can be very nerve racking for Moms and Dads.  Across the country there is a feeling of vulnerability that a lot of parents experience as they say good bye to having their kids safe and sound under their roofs.  Nevertheless, the college experience simultaneously allows students to begin experiencing more freedoms including managing their time, their finances, and their responsibilities. 

All of these new experiences are an essential part of the maturation process; but they provide greater opportunities for problems as well.  Many times these problems can arise from simple naivety and exposure to things they have never faced before.  There are some steps that Mom and Dad can take to reduce the likelihood their son or daughter will find themselves dealing with issues that can distract them from their studies or, worse yet, haunt them for many years beyond college.

ID theft is a multibillion dollar problem worldwide, and even the most cautious of individuals can be suspect to it.  For a relatively small annual fee, you can get credit fraud protection that will notify you any time there is activity on your credit report.  An unsuspecting 18 year old can be a prime target for these types of thieves to grab their identity and cause major damage before you have any clue.  A regular check of their credit coupled with some protection will go a long way to reducing the chances of this happening.

Going off to college and having a social life that includes eating out, going out with friends, taking weekend trips, going to concerts, and attending games creates memories that will often last a lifetime.  But many times these things come fast and furious and students don’t have the experience to properly manage all these choices or, more importantly, the cost of these choices very well.  Providing your new college student with smaller balances that get replenished more frequently is often a good way to oversee how they are doing on a regular basis.  Ask your student to keep a record and provide you a report of expenses prior to receiving their next installment of funds.

College can be a good time to begin establishing some credit history.  Work with your bank to get your son or daughter a credit card with a $500 to $1500 balance that you have online access to.  Talk with your kids about how the card should be used.  Most importantly, put them in charge of paying it off each month.  These are lesson that are better learned now under your supervision than in a few years when you have no control or access.

As parents we are hopeful that college is a gateway to a successful and productive life for our grown children.  However, all of the learning that will lead to their success doesn’t always take place in the classroom.  Help your kids avoid the financial pitfalls that so many Americans fall into because they just didn’t have the financial education to know better.

Everett Wealth Solutions, Inc. is in the business of helping families through the major life transition of sending their children to college.  For many, it will be the most expensive time of their lives and, if not handled properly, could cost them their retirement.  If you or someone you know needs the help and guidance of a trained financial professional, don’t hesitate to contact Chris Everett, your local College Planning Relief® Licensee.

Remember, you shouldn’t have to choose between your child’s college and your retirement.

Auto Sales May Have Peaked

Auto Sales May Have Peaked
Industry Overview

Low interest rates and aggressive leasing programs have made some fairly expensive cars affordable.  Rather than struggling to get approved for a new home loan or refinance, Americans have instead financed cars, where getting a loan approval has been easier.  The abundance of attractive loans has helped elevate auto sales throughout the country over the past few years. Recent auto sales have been slowing across the country as dealer incentives have become less effective.

 
 

The end of 2016 saw auto loans outstanding reach $1.1 trillion, propelled by continued low interest rates.  Federal Reserve data revealed that the average rate on a typical 4 year auto loan was 4.45% in the 4th quarter of 2016. The same auto loan in February 1982 was 17.05%.

As expensive as some automobiles have become for consumers, an auto loan is the only method of actually affording the pricey cars of today.  Over the years, several automobile companies have established their own financing thus allowing buyers to buy and borrow directly from them.

A growing concern among analysts are the number of auto loans that have been securitized over the past few years.  The ultra low rate environment has created incredible affordability for consumers as well as attractive high yielding securities for risk seeking investors.  An increase in rates may lead to an increase in auto loan defaults as payments become less affordable.

Source: Federal Reserve

Worst and Best Ways to Start Your Day

by Perry Marshall
www.perrymarshall.com

One of the most important things that successful people do is time block. 

The worst thing you can do is spend your entire day reacting to whatever email, phone call, text message, Facebook post or crisis stumbles into your world. That is a recipe for an incredibly busy day that rushes by and at the end of the day you feel you have accomplished NOTHING. (And you're exhausted and broke.)

The best way to operate is to only do certain things at certain times.

Do NOT start your day responding to emails and reacting to stuff. That's a recipe for doing $10/hour work and missing out on all the $1000/hour work, jumping over the dollars to grab the pennies.

Here's a GOOD recipe for executing your day:

  1. WITHOUT your phone, tablet or computer, start your day with a notebook, a cup of coffee or tea, and pray / journal / meditate / center yourself.  This almost never feels like $1000/hour work but trust me, it is. I do this EVERY DAY without fail.  NEVER start your day by reacting to emails or text messages.

  2. Before you shift gears, plan your day.  Plan your goals and questions for the day. Decide what to delegate.

  3. The first thing you should do is the thing that requires the biggest injection of clarity and creativity.  For me it's the writing that needs to get done for the day.  I'm freshest in the morning (as are most people) and for the typical person, the most productive streak in the day is likely to be 8am to 11am.

Please keep in mind, most of us realistically are going to have a 2-3 hour window where we can be super productive.  Rarely are any of us smashingly productive for 10 hours at a stretch - or even 6 hours.  You need to know when that golden 2-3 hours of the day is for you.  That's your prime time.  Set aside the "reactive" stuff for later.

4. The other great choice for a first thing to do in the morning is check your stats and think strategically.  Twice a week my leadership team goes over the stats for the whole entire business - the revenues, the cash flows, everything.  If you're hands-on with Pay Per Click, then your conversion stats, your split tests etc are TOP priority in your business.  You check those stats EVERY DAY.  Do that for 90 days and you'll witness a "miracle" in your business.

Everything I described above is $1000/hour work for an up-and-running small business owner, it's $10K/hour work for a super-successful one, and it's $100/hour work for a person who's just barely getting started. Which is not bad.

THEN after you've done those core tasks, you take phone calls, have appointments, deal with emails etc.

5. Do you like swimming through molasses?  Do you like slogging through a swamp? Do you like it when your brain is clogged and you can't think?  One of the biggest time sucks, energy sucks, attention sucks, creativity sucks is being on Facebook (or really any other media where stuff comes at you from a firehose, like when the TV news is on in the hotel breakfast room and it's CNN.  Eating your breakfast and ingesting mental garbage is the WORST way to start your day).

Delete the Facebook app from your phone and find an accountability partner and resolve with that person to never CONSUME Facebook before 5pm during your day. All that does is feed random "free radicals" into your mental space. 

Whenever you feel that urge to get that "entertainment fix" read something deliberate (that's what the Kindle app is for) or doodle or journal or listen to 5 minutes of a well-chosen podcast instead. 

But do NOT just fling yourself into social media or any form of media outside of your strict control, expecting to get entertained. If you do, you'll get sucked into an argument or a narcissistic "let's see how many people liked my clever post" because that is a total waste of time. 

I say delete FB from your phone because you can still log in through the browser (IF you need to) but it becomes much less tempting to just incinerate 5-10 minutes of your day 10 times per day and fill your brain with free radicals.

Anybody who "wants to be successful in business" or "wants to become business-savvy" - yet "doesn't have time to watch all those videos or read those books or consume those courses" and "doesn't have time to read Perry's 'long' emails" - yet spends 5 minutes here and 15 minutes there and 2 hours and 45 minutes over there on Facebook, is simply LYING to themselves.

You have to time block.

Learning and discovering can be just as stimulating and just as fun as "entertainment" if you train your brain to enjoy being challenged. But you have to be absolutely proactive about it.

In the last several months I've spent maybe over 100 hours ARCHITECTING Facebook ads and literally maybe only 2 hours actually ON Facebook. 

The average American spends 5 hours per day on Facebook.

That's good for advertisers.

It's bad for everybody else.

Including you.

It's good for you if you advertise.  It'll put you in the 5% that control 95% of the attention in the world.  If you're the chef in the kitchen of a restaurant, you MAKE the food. You don't EAT it.

We're not those guys who spend 5 hours in the restaurant eating a leisurely 7-course afternoon meal. Planet Perry members are chefs in the advertising kitchen. We make great dishes, we serve them up and we impress the judges. And we make the customers happy which makes the cash register ring.

Cha-Ching!!!!

Perry

P.S.  Adopt these habits and your whole life experience will change.  Give it one month and watch the transformation.

support@perrymarshall.com

Perry S. Marshall & Assoc
159 N. Marion Street #295
Oak Park, Illinois 60301
(312) 386-7459

U.S. Tax Revenue May 2017

U.S. Tax Revenue
Fiscal Policy Review

With tax season upon us, the Federal government’s ability to tax comes into full force.  The dynamics of tax revenue is a combination of economic prosperity, tax rates, and the existing population of taxpayers.  Ongoing discussions surrounding tax rates have been a focus of how to increase tax revenue.  However, the other two components include economic conditions and the number of individuals paying income taxes.

 
 

As new hires enter the workforce, either out of school or as immigrants, additional tax revenue is derived from their incomes.  As economic conditions improve, companies may hire additional employees and eventually start to issue pay raises.

For the past 40 years federal tax receipts have increased an average of 6.76% each year, including year-over-year decreases in 1983, 2001, 2002, 2003, and 2009.

Sources: CBO, Tax Policy Center

45% of Americans Pay No Federal Income Tax

45% of Americans Pay No Federal Income Tax
Fiscal Policy
April 2017

Disparity of income has been a preponderate subject for politicians and activist groups for sometime, yet in the end, it’s those that earn the higher incomes that pay for the majority of taxes.

An estimated 77.5 million Americans, identified as households, pay no federal income tax. The non-partisan, non-profit tax group known as The Tax Policy Center released income tax data it analyzed for 2015 and found that nearly half, about 45.3% of American households, paid no federal income tax in 2015. The Tax Policy Center estimates that the percentage of Americans that will not pay income tax for tax year 2016 will drop slightly to 44.5%.

Generous tax credits and low tax brackets for low-income earners allow minimal to no federal tax payments. The Tax Policy Center did find that these lower income households did pay their share of state, local, property, sales, and excise taxes.

Federal tax data for 2014 and 2015 showed the top 1% of taxpayers subject to a higher effective tax rate, averaging about 23%, seven times higher than taxpayers in the bottom 50%.

The ultra wealthy, also know as the top 1% of taxpayers, with annual incomes of about $2 million, pay about 44% of all of the federal income taxes in the U.S.

Source: Tax Policy Center/Washington D.C.

Why Was The Market Up/Down Today?

Global Financial Capitol
Thought for the Week

Synopsis

  • Market pundits are obsessed with understanding the short-term movements in equity markets.

  • According to those who follow the daily market moves closely, raising cash to pay taxes was the reason the market fell last Friday.

  • The daily moves in equities are often a mystery, and the explanations conjured by those who claim to have a feel for the market should be taken with a grain of salt.

EXPLAINING THE UNEXPLAINABLE

I overheard a market commentator on television last Friday explain that the stock market was down that day because investors were selling stocks to raise cash so they could pay taxes in the upcoming week.  It’s never fun to be the one who breaks the news that Santa Claus is not real, but I feel obligated to set the record straight when it comes to the accuracy of such commentary.

Market pundits are obsessed with understanding the short-term movements in equity markets. They want to explain why stock prices are rising and falling every moment of the day because those who can provide more color (another word for “insight” on Wall Street) are regarded as having a good“feel for the market.”

However, market participants are not required to submit their reasoning when trading stocks. For those investors who have ever bought a stock online through a Schwab, Fidelity, or another website, no buy or sell order requires you to explain the reason why you are making the trade before you hit the submit button.

Large asset managers will even go out of their way to maintain anonymity by trading in “dark pools,” which are special venues where nobody knows who is on the other side of a trade and activity is kept secret.  Instead, market commentary comes from a mix of sources that are frequently unreliable, such as large trading firms on Wall Street that execute big orders for their clients. These traders move millions of shares every day, which allows them to see the flows up close and personal.

The problem is that since most of the trading is electronic these days, their insight only explains the tiny fraction of trades that are not done electronically or via a dark pool. Most days, it’s just too hard to explain why the market was up or down because that information does not exist in a consistent and/or reliable format.

... no buy or sell order requires you to explain the reason why you are making the trade before you hit the submit button.

Rather than admitting that they do not know why stocks have risen or fallen, a commentator’s only option is to concoct an explanation that seems logical and well- informed but is nothing more than a guess. That way, they remain the market guru and none the wiser.

EXPLOITABLE PATTERNS

On the surface, the observation by this commentator makes a lot of sense. It was just a few days before Tax Day, so selling stocks to pay Uncle Sam is a very logical explanation. The problem is that equity markets rarely operate in such a manner.

The stockmarket is“anticipatory,”whichmeansthatit runs on the expectation of future events. For example, if an investor believes that Apple will sell more iPhones over the coming years, she will buy the stock in anticipation of higher earnings down the road.

Let’s take it a step further. Imagine a stock consecutively rose by 5% on the fourth day of every month and fell by 3% on the last day of the month. At some point, traders would notice this pattern. They would then buy the stock on day 2, sell it on day 28, and repeat every month.

The problem is that easy money does not last for long. Other traders would eventually catch on and copy the strategy, which would then cause the stock price to move on different days. Over time, the pattern would disappear.

The same applies to the commentator’s explanation.
If the market dipped consistently each year leading into Tax Day, then traders would quickly recognize this pattern and act on it. They would sell stocks days before they expected the masses to sell and then buy back when taxes are paid. Over time, the pattern would also disappear.

My goal here is not to criticize the commentator. He may very well be right. I am only offering this counterpoint to show that nobody, despite how smart and well connected they may seem, has the faintest idea as to what drives a $20 trillion stock market on any given day. At best, it is nothing more than an educated guess that can be easily debated.

Lastly, if pundits really knew the stock market well enough to understand what drives the daily movements, there is simply no way these individuals would go on television and divulge their secrets. Instead, they would be trading on this knowledge and spending their downtime buying islands rather than trying to boost their ratings on television.

The good news for investors is that since day-to-day movements in stock prices mean nothing to a long- term investment strategy, market commentary can be ignored with no great peril. Since their information is either wrong or baseless, excluding it from an investment thesis changes nothing.

The bottom line is that the next time someone tries to explain why the stock market was up or down on any given day, no matter how logical it may sound, take it with a grain of salt.

Sincerely,

 

Corporate After Tax Profits Jump

Corporate Finance

Corporate After Tax Profits Jump – Corporate Finance

A measure released by the Commerce Department showed that after-tax corporate profits grew over 22% in the fourth quarter versus the same quarter in 2015. The jump in profits was the single largest increase in nearly five years, deemed optimistic by economists and analysts.

 
 

As the broader economy grew at an increased pace in the fourth quarter of 2016, various sectors and industries may see either a continuance or slowdown depending on any regulatory and economic shifts.

Overall, U.S. companies have plentiful cash, better credit, and lower expenses than they traditionally have had. In addition to existing financial conditions, companies are now operating under the expectation of lower corporate taxes and less regulations as proposed by President Trump.


Sources: U.S. Department of Commerce

Banks Shift Focus From Trading To Higher Rates

Banking Sector Focus

Banks Shift Focus From Trading To Higher Rates

Banks produce revenue a variety of ways, from familiar fees on checking and savings accounts to sophisticated trading of stocks. A traditional model of bank revenue for decades has been the ability to charge customers higher rates than what the cost of funds are. The challenge recently has been the ultra low interest rate environment that has limited banks’ ability to charge more on loans.

 
 

Data released this past quarter by the St. Louis Federal Reserve reveals that the “net interest margin” for banks has started to slightly increase. Economists and analysts view this as a positive sign whereas banks tend to lend more as rates increase while allowing them to earn more as well.

Regulations enacted in 2009 following the financial crisis limited the ability of U.S. banks to profit from trading in bonds, which shifted their focus to profiting from stock trades instead. The problem for banks over the past few years has been that the brokerage industry has become extremely automated, thus driving down margins on equity trading for all major banks and brokerage firms. The onslaught of ETFs and trading algorithms has reduced the demand for individual stock trades that have generated most of the fees.

With the Fed on track to raise short-term rates at least two more instances this year, banks are on track to benefit from a rising rate environment.


Sources: St. Louis Federal Reserve Bank

Government Sachs May Actually Resurrect Glass-Steagall – Here’s Why

Apr 7th, 2017 | By Shah Gilani

This past Wednesday, in a closed-door meeting between the director of President Trump’s National Economic Council and the Senate Banking Committee, the NEC’s Gary Cohn and Senator Elizabeth Warren apparently cozied up on the idea of separating commercial banking from investment banking.

Talk about strange bedfellows.

Gary Cohn, immediately prior to joining the Trump Administration, was president and COO of Goldman Sachs, one of the most powerful and profitable investment banks in history. He was, essentially, a general in the mega-bank oligarchy that many Americans believe directs the U.S. government.

Elizabeth Warren, on the other hand, was a Harvard Law professor who served as chair of the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP), Assistant to the President and Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau under President Barack Obama, was elected Senator of Massachusetts in 2012. She has arguably been the most vocal Big Bank basher in the past decade.

These polar opposites joining forces to dismantle the engine room of crony capitalism seems impossible.

So what’s really going on here?

Here’s what’s happening behind the scenes, what stake the major players have, and how you can make some money betting on the winners and losers…

Why We Ditched Glass-Steagall in the First Place

Cats and dogs didn’t always sleep together.

The Depression-era Glass-Steagall Act legally separated commercial banking from investment banking.

Deposit-taking institutions, about to be backed by a federal insurance plan in the form of the FDIC (Federal Deposit Insurance Corporation) couldn’t underwrite securities or trade them, putting depositors’ money at risk.

This was while investment banks, which would generally take the form partnerships, were free to gamble with their partners and investors’ money.

Eventually, after years of whittling away Glass-Steagall safeguards, the core of the 1933 Act (the separation of commercial and investment banks) was wiped out in the Financial Services Modernization Act of 1999… This was also known as the Gramm-Leach-Bliley Act.

I’ve written extensively about Gramm-Leach-Bliley, how it came to pass, and what it created. But, the short version is that in April 1998, Travelers Group Inc. and Citicorp agreed to a $70 billion merger that created Citigroup Inc., and at the time it was the biggest financial services company in the world.

It didn’t matter that the merger was illegal under Glass-Steagall, since Travelers owned investment banking and brokerage businesses, in the form of Salomon Smith Barney. Citicorp was the holding company of Citibank, an international commercial bank and the largest issuer of credit cards in the world.

The players had their crony capitalist government and shadow-government officials, including then-Secretary of the Treasury Robert Rubin (the former Goldman Sachs CEO), Deputy Treasury Secretary Larry Summers, Chairman of the Federal Reserve Alan Greenspan, and their coterie of paid-off legislators in Congress working on repealing the last vestiges of Glass-Steagall a year later.

Of course, the whole story is fascinating, especially when history reveals how much Robert Rubin made when he left government service for a plum spot in the newly created Citigroup.

The story reveals how mega-mergers created behemoth banks that financed outrageous bets with cheap interest rates courtesy of the Fed, and gambled depositors money and the global financial system to the edge of extinction.

After the debacle, and once she became a U.S. senator, Democrat Elizabeth Warren (along with co-sponsor Arizona Republican John McCain) introduced the 21st Century Glass-Steagall Act in 2013.

According to govtrack.us:

“The 21st Century Glass-Steagall Act (S. 1709, H.R. 3054) would prohibit commercial banks insured by the Federal Deposit Insurance Corporation (FDIC) from acting as or affiliating with investment banks. A commercial bank holds checking and savings accounts and provides loans for customers. These banks are often insured by the FDIC, which provides a safety guarantee for customers of the insured bank called “deposit insurance.” Investment banks, on the other hand, offer financial advice and facilitate the trade of financial assets. Currently banks can perform both commercial and investment activities, and this combination is believed by some to have been a cause of the 2008-2009 financial crisis. In a press release, sponsor Sen. Elizabeth Warren (D-MA) explained that the bill would separate commercial banks from financial institutions that offer investment banking, insurance, swaps dealing, and hedge fund and private equity activities. Proponents of the bill, such as cosponsor Sen. John McCain (R-AZ), have argued that this separation will reduce risk of financial crises and the need for federal bailouts. This will be the second version of the bill. The first was introduced in 2013 and never made it past committee. The bill has been introduced in both the House and the Senate.”

Not only have there been calls for a new Glass-Steagall, Donald Trump last summer, when he was still a presidential candidate, got behind separating commercial and investment banks and the idea was included in the Republican political plank in the fall of 2016.

Needless to say, the big banks are going to fight any attempt to break them up with everything in their arsenals.

But with Gary Cohn and Elizabeth Warren working together – and with the support of the President – they could make the impossible possible.

Here’s How Goldman Would Benefit from Glass-Steagall’s Return

While Elizabeth Warren’s position is obvious, it’s not obvious why an ex-Goldman Sachs crony capitalist would favor breaking up big banks.

Speculation is that Goldman would actually benefit if its biggest U.S. competitors, principally JPMorgan and Citigroup, were to be torn apart. This makes sense on account of the fact that Goldman is still principally an investment bank and the other mega-banks are almost equal parts commercial and investment banks.

To be clear: re-enacting some form of Glass-Steagall would be great for the American economy and for American democracy.

Mega-banks have gotten too big, and too powerful with their vast war chests bankrolling armies of lobbyists and legislators.

Breaking them up would force commercial banks to make more loans, since they wouldn’t be able to gamble with depositors money. It would also endure that investment banks and brokerages could be bankrolled by investors willing to gamble their capital on markets controlled by swashbuckling investment banks.

Of course, there will be winners and losers if the big players are broken up. Big bank earnings, which have been flying high in the years since the financial crisis, could take a hit.

There’d be a ton of money to be made shorting some of the mega-banks I mentioned earlier as their future prospects would be severely dampened from losing big profit centers like trading and investment banking.

We’re going to start to play some of these big banks in my subscription trading services.

We’ll start by positioning ourselves to the downside as profit-taking hits some of the big banks on the heels of their huge run-up, while they’re still reeling from the recent revelation that the impossible is now possible.

We’ll also load up on expected winners – some regional banks and some community banks – as soon as we see movement towards the potential breakup of America’s worst nightmare.

There will be investment bank winners to come out of any breaking apart of mega-banks. Some will be reorganized and so well-capitalized that they’ll become the new leaders in capital markets, and they’ll make for great long-term growth investments.

I never thought I’d see this happen, but I also never say never. If this truly comes to pass, then while I’m cheering it on I want to make a ton of money on what could be an all-around better, safer investing climate in the United States.

Sincerely,

Shah

Market Indices | April 2017

Market Indices /April 2017
(all values as of 03.31.2017)

Stock Indices:

Dow Jones               20,663

S&P 500                     2,362

Nasdaq                        5,911

 

Bond Sector Yields:

2 Yr Treasury             1.27%

10 Yr Treasury           2.40%

10 Yr Municipal         2.26%

High Yield                  5.82%

 

YTD Market Returns:

Dow Jones                 4.56%

S&P 500                    5.53%

Nasdaq                      9.82%

MSCI-EAFE              6.47%

MSCI-Europe           6.73%

MSCI-Pacific            6.03%

MSCI-Emg Mkt       11.14%

US Agg Bond             0.81%

US Corp Bond           1.22%

US Gov’t Bond          0.96%

 

Commodity Prices:

Gold                            1,251

Silver                           18.28

Oil (WTI)                    50.85

 

Currencies:

Dollar / Euro                1.07

Dollar / Pound             1.24

Yen / Dollar                  111.26

Dollar / Canadian         0.75