Welcome to the May newsletter! Today we’re going to cover crypto-currency, inflation, Wells Fargo, and how it all affects your personal portfolio. Let’s jump in!
Summary
The stock market remains in a bull market even as the correction continues. The bond market is in a bear market with interest rates slowly rising and existing bond prices slowly falling. No recession is in sight, and all portfolios remain fully invested. Below, we have an update on the GDP and an explanation of what is going on with crypto-currency.
The Economy
The US nonfarm payroll rose 103,000 in March. This is a relatively low number, but when compared to February’s 326,000,
the two-month average looks very good at over 214,000 new jobs. Wage inflation rose 2.7% in March 2018 compared to a year earlier. The broadest measure of unemployment (U-6) dropped 0.2% to 8.0%, which is very encouraging for Americans working in part-time jobs but looking for full-time employment.
The Bureau of Economic Analysis said first quarter GDP was 2.3% in their Advanced Estimate. On one hand, this is a low number. But, knowing the first quarter GDP numbers from 2009 thru 2017 have only averaged 0.49%, 2.3%, this is a fantastic change for the good.
Nationwide the median sale price for an existing home in March 2018 was $250,400. This up 5.8% from a year earlier.
The Conference Board said its index of Consumer Confidence rose 1.7 points from a month earlier to 128.7 in April (1985=100). In perhaps the most significant development, the percent of Americans expecting their incomes to decline over the next six months fell to only 6%. That is the lowest level since December 2000.
Stock Market
Commentary
We’re maintaining our conservative 2018 S&P 500 Index operating earnings estimate of $152. We’re fine-tuning our price/earnings ratio range slightly to 17 to 18 times operating earnings. Our preliminary estimate for 2019 S&P 500 Index operating earnings is $163. Based on these figures, as investors loose focus on 2018 earnings and begin to focus on 2019 earnings later this year, the S&P 500 Index should begin to trade into the 2,900’s. The close on May 1 was 2,654.
There is no recession in site. Therefore, we do not anticipate a bear market decline of 20% or more going forward.
Recommended Action for Your Stock Portfolio
All portfolios remain fully invested. There should be no selling during a correction. A buy signal might develop. If this happens, Lorenz Financial will make a quick announcement. Until then our recommendation for new stock market money is to dollar cost average. Money can be added to the stock market when the market is down (like it is now).
Advisor Fees
The percentage of assets a client pays in fees to a financial advisor declines as the size of the client’s portfolio increases. The Wall Street Journal reported on March 26, 2018, page R2, the following range of fees vs account size for the typical US advisor. These typical fees are on the left side of the chart below. Compare those fees to the fee schedule of Lorenz Financial on the right side.
|
FEE AVERAGE AS REPORTED TO THE SEC |
LORENZ FINANCIAL | ||
|
Portfolio Size |
Annual Fees |
Portfolio Size | Annual Fees |
|
Less than $500,000 |
1.75% TO 2.00% |
$100,001 to $500,000 |
1.00% |
|
$500,001 TO $1,000,000 |
1.25% TO 1.50% |
$500,001 to $2,000,000 |
0.75% |
| $1,000,001 TO $3,000,000 |
1.00% TO 1.25% |
$500,001 to $2,000,000 |
0.75% |
| Over $3,000,000 | .75% or lower | $2,000,001 to $8,00,000 |
0.50% |
On April 11, 2018, Fidelity Wealth Unit announced a new fee structure starting July 1. For clients with less than $500,000, the new annual fee is 1.5% per year. For clients with more than $5 million, the fee is 0.5% per year. For clients with more than $5 million, Lorenz Financial is currently charging 0.3% per year.
Why pay high fees to be put into expensive mutual funds? Fidelity charges clients $75 to buy some mutual funds! Ugh! At Lorenz Financial we never charge a commission or transaction fee. We’re laser-focused on low cost, diversification and tax efficiency. Call us today for a casual, no cost, no obligation discussion of your financial objectives.
Wells Fargo Update
Wells Fargo’s problems began in September 2016 when authorities fined the firm $185 million for opening millions of bank accounts with their existing customers without their customers’ permission. Now Wells Fargo will pay a $1 billion fine to settle a US government probes into the mistreatment of consumers. This settlement covers the Wells Fargo auto-lending and mortgage units. The bank revealed last year that it had forced unwanted insurance on customers who took out car loans. Wells Fargo was also accused of imposing inappropriate charges for locking in interest rates on new home loans.
In February 2018, the bank was forced by the Federal Reserve to not grow its assets (loans) beyond their level at the end of 2017. In March 2018, the Wells Fargo board of directors gave its CEO, Tim Sloan, a 36% pay increase. Wow! Now in April 2018, the Labor Department has announced it’s investigating whether Wells Fargo has been pushing customers, who have low-cost corporate 401k plans at Wells Fargo, to move their holding into more expensive IRAs at retirement. The federal investigation is also looking into whether customers were encouraged to buy in-house Wells Fargo branded mutual funds in order to increase fees to the bank.
Lorenz Financial strongly encourages everyone with a bank account, credit card, home equity line of credit, personal loan or a brokerage account with Wells Fargo to immediately close all accounts.
Crypto-currency Update
Barclay’s Bank said they believe the combined market cap of crypto-currencies has probably already peaked. Further, they said crypto-currencies hit a collective value close to $800 billion in December and January when prices jumped up. However, since then a sharp selloff has left crypto-currencies with a capitalization of around $260 billion. Critics say crypto-currencies are little more than a Ponzi scheme with no real assets supporting their price other than frenzied buying to be eventually followed by frenzied selling.
Saying Goodbye to California and New York
Since 2007, Texas and Florida (with no state income tax) have gained 1.4 million and 850,000 residents, respectively, from other states. California and New York have jointly lost more than 2.2 million residents in the same time period. IRS data shows in the past three years alone Texas and Florida have gained a net $50 billion in personal income from other states while California and New York have surrendered a net $23 billion. Red states with no or low state income taxes should brace themselves. The Yankees are coming and they’re bringing their money with them.
Bond Market
Commentary
The bear market in bonds continues. Investors should definitely not hold any long-term bonds or long-term bond funds. Long-term is defined as “duration” greater than seven years.
Deficit Plagued Illinois
Illinois is the worst rated state in the municipal bond market as state expenses have far exceeded state revenue for years. Depending on which website is examined, Illinois debt numbers vary, but Lorenz Financial has summarized below a reasonably clear picture of the state’s finances:
- State debt is around $65 billion, mainly General Obligation bonds
- Unpaid state bills have now reached $15 to $16 billion
- State pension liabilities are $130 billion
- Illinois city and county debt is another $80 to $85 billion
Moody’s Investment Service said, “Illinois has increasingly become an outlier as compared to the other 49 states.” The firm currently rates Illinois bonds as Baa3 (barely investment grade) and has a negative outlook on the state’s General Obligation bonds. Thompson Reuters said, “While technically Illinois bonds are still rated investment grade, they are trading as if they are junk bonds.”
Federal Reserve
The Federal Open Market Committee’s next meeting is May 1 and 2. We expect the FOMC to raise the Federal Funds rate another 0.25% at their June meeting. Assuming this rate increase is made, the range of the Federal Funds rate will be 1.75% to 2.00%. Even with this rate increase, short-term rates are still considered “accommodative.” So what rate would be considered “normal?” A normal federal funds rate would be 2% over inflation. Inflation is now at 2% so a normal federal funds rate at this time would be 4%, but Lorenz Financial believes it will be a substantial length of time before short-term rates hit 4%.
US Treasuries
Longer-term US Treasury rates have risen this year as the supply of debt available at auctions has increased. The combination of larger fiscal deficits and quantitative tightening by the Fed are fueling the increase in debt supply. Investors in longer-term Treasuries are demanding higher yields. The 10-year US Treasury yield rose above the 3.0% level in late April hitting the highest level in more than four years. Yes, rates will fluctuate but Lorenz Financial believes the 10- and 30-year Treasury rates are headed higher (meaning lower prices for existing Treasury bonds).
The 10-Year US Treasury as an Economic Indicator
In late April, the 10-Year Treasury’s yield closed above 3% for the first time since 2014. This is a vote of high confidence by investors. They believe that US economic expansion is continuing and that inflation is under control as it has just hit the Federal Reserve’s target of 2%. This is all good.
The 10-Year US Treasury as a Stock Market Indicator
As the 10-Year Treasury’s yield has closed above 3%, some investors have begun to worry that there are too many signs of inflation. Commodity prices are up, especially oil. Personal and corporate borrowing costs are rising. Trade tensions are also increasing. Does this mean corporate profits are as good as they are going to get?
Lorenz Financial does not think so. But, obviously, there is both good news and bad news as the 10-Year Treasury closes above 3%. All investors will review these issues again and again as the 10-Year Treasury approaches 3.5% and later 4.0% down the road.
Inflation
The Bureau of Economic Analysis announced the Personal Consumption Expenditure (PCE) rose in March to 2.0% from a year earlier. Core PCE, which excludes food and energy, rose 1.9% year over year. PCE is the Federal Reserve’s favorite tool to measure inflation.
As measured by the difference between Treasury bond yields and TIPS yield, long-term inflation expectations can be calculated. See the results below.
Treasury Bond Inflation
Maturities Expectations
5 Year 2.10%
10 Year 2.17%
30 Year 2.20%
Recommended Action for Your Bond Portfolio
Our bond market investments remain unchanged. We’re investing only in short-term investment-grade bond funds, intermediate-term investment-grade bond funds, and short-term high-yield bond funds. We’re not recommending any long-term bonds or long-term bond funds. Muni bond funds are not recommended at this time due to the risk of some US cities and/or states going bankrupt. Treasury bond funds are not recommended at this time due to their low yield.