The Cloud Over The Market

On this week’s show, Karl discusses the cloud of tariffs overhanging the market.  But, even with that overhang, stocks managed to gain ground on the week.  Also on the podcast, Karl takes a listener question.

Transcription:

Hey, everybody. Welcome to the Eggerss Report. It’s your investing playbook. Thanks for joining me. We always appreciate it. If you want to get a hold of us, (210) 526-0057 is our telephone number. Our website is eggersscapital.com, E-G-G-E-R-S-S capital.com. And we’re going to see, you’re going to see, lots of good information on there. We like your feedback, so if there’s something that you want to see on there, there’s … Again, we put all kinds of interesting things on there, our articles. We put our podcasts on there, anything that we think can help you.

It’s really broken up into pretty much three sections. Financial planning kind of tells a little bit about what we do in that realm. Investment management, we got some details on what that looks like. And then, financial education, which is really our blog page, which is where all of our articles go, things of that nature, including not only just the articles but any blog posts, any TV interviews, anything like that’s going to be on that blog post.

We’re going to start pretty soon adding some video blogs to there as well. So again, I know many of you have requested video. You kind of learn in different ways from each other. So some people like to read, which is why we also on our podcast, we do transcribe them so you can actually read them. And then, we have audio and video now, so all of these different ways to, again, help you become a better investor, or not just investing but help you just deal with your money a little better. Many people we talked to say, “You know what we like about you? Is that you just give us advice. You never tried to sell us anything. It’s just advice. You’re always trying to find a solution.” And that’s what we try to do. So, some of you obviously have hired us to do that for you, and some of you just come to the blog or come to the podcast and listen weekly or refer friends, and we appreciate that.

So any feedback you get to us, we’re going to take it and we’re going to … some of it we will implement, some of it we may not. And by the way, we’re going to get to a specific email that I received this week of somebody that disagreed with some of my now recent analysis. So, we’re going to get to that. We like to make this a two-way street. We don’t just take positive comebacks, comments and talk about them. We obviously will also talk about the negative things, and let’s talk through the difference of opinion here because there are some conflicting things going on in the markets.

The email I received from one of the listeners, I believe is a longtime listener as far as I can recall. We’ve had some conversations in the past and …. But, this one was very, very negative in terms of the world and what’s going on right now. There’s some truth to some of the things that they said, but there’s also some things I need to address. So, we’re going to do that in just a little while.

Before we get to that. Again, eggersscapital.com. Telephone’s (210) 526-0057. By the way, we have a Facebook page. We have a Twitter account at Karl Eggerss, and I’m proud to say that we did not lose any followers this week. You may be asking, “Well, why would you lose followers?” Well, because remember Twitter, which everybody knew this was an issue. A lot of Twitter accounts are fake. They’re bots. They’re automated. Twitter said, “You know, we’re not going to do that anymore. We’re going to start purging those out and getting rid of those.”

Well, the CEO of Twitter, which full disclosure, we own that stock in our aggressive strategy, have for a long time, the CEO lost 200,000 followers. I think Barack Obama lost 2 million followers, so we have … You know, they’re losing what were fake followers, so their numbers went down. Our followers didn’t change, which means all of our followers are real. We have real people following us, interacting, et cetera. So, but you can follow us on there. We also have one called @ETFcharts if you just want, what it says, ETF charts. And of course, we’re on Instagram, and so lots of ways to connect to us. If you want to email me, Karl, K-A-R-L, @eggersscapital.com.

TariffsSo, we’ll run through kind of what moved this week and also some of the events because it was kind of an interesting week. I mean, the markets did finish higher on the week. It didn’t really feel like it, but we are climbing this wall of worry, aren’t we? I mean, you know, if you look at the Standard & Poor’s 500, for example, this is the highest level it’s been since late January. Doesn’t feel like it, but it is grinding higher as the rain cloud or the cloud of tariffs overhangs the market, right? This market feels like it should be going higher other than the fact that it has a, essentially, a cloud over it or a governor if you will. We know earnings are going up. We know all these things, and yet the stock market has been stuck in the mud for most of 2018, and here we are going into the seventh month. So, it really has been something controlled by tariffs, but it has been grinding higher and we saw the market finish on a basically had a good, reasonably good, up week with some volatility mixed in.

Some of the kind of outliers we did see things like Aerospace & Defense kind oflead the way. We saw some of the foreign stocks come back. Pharmaceuticals had a reasonable week. Technology kind of bounced back. Biotech kind of bounced back. On the flip side of that, the things that got hit, bitcoin, which I had my first inquiry about bitcoin in quite a while, down about seven, or excuse me, almost 9% for the week. Volatility actually went down, some of the things that are hit by tariffs. Oil had a rough time this week. Some of the commodities had a rough time this week. Banks had a rough time this week. But, we also did see a little rotation out of things like … Remember how we were seeing last week utilities, and REITs, and things like that, there’s kind of a rotation in there? We kind of saw that reverse this week, which is a good sign. So, those were some of the outliers.

And of course, we came in on Monday and the president announced a new nominee, new SCOTUS nominee, so we saw that. Nothing really major from that. Obviously, it’s going to move the markets, but we did see the market moved up 300 points as earning season started to kick off. Tuesday, kind of a mediocre day. After the bell, we got the $200 billion of US tariffs on China, that list. So, futures, boom, gave back all of that, you know, gains that we had seen reversed. We go into Wednesday, oil down over 5%. Worst day of the year for oil, more tariffs, more oil coming on line potentially in Libya. Commodities got hit. Just the market was really weak due to those tariffs again. It’s like “Here we go again.” Thursday saw the markets rebound. Friday kind of a mediocre but a little bit of a rebound. So, kind of a back and forth week, but on balance little more positive.

But, it’s interesting as we watched these tariffs, because you know, Trump I think is looking at it as a formula. Well we, you know, we have a trade imbalance, and so to fix that I’m going to move this side of the ledger and move it over to this side by raising taxes on these imports. That can’t fix it, but it’s a little non-capitalistic, isn’t it?

I mean, at the end of the day, people buy from China because it is cheaper, and he’s trying to fix that by doing these tariffs. What’s going to happen, and you’re starting to see it, by the way, but what’s going to happen is there’s repercussions to that. So yes, he may be able to fix that in the short term, but you’re starting to see repercussions. One of the main repercussions, and I’ve talked about it the last couple of weeks, is my fear was companies, executives anticipate what a trade war looks like. Even though what’s been implemented is still small, they anticipate it, and they start holding back. You know what? I’m not going to hire that new employee. I’m not going to spend that money on a new plant just yet. I want to see how this plays out. So, that hesitation can slow the economy down in and of itself, and I think we’re starting to see that.

In fact, I think Jerome Powell, if I’m not mistaken, made that comment on Friday that he’s starting to see that from executives. So, that is a fear that there are … There’s collateral damage here from the tariffs. So in trying to accomplish what you want from a numbers standpoint, there’s other factors. So, let’s see how it plays out, but we are seeing … I think, obviously, President Trump is sending the message, “I’m not messing around. I’m going to do this.” We’ll see if these other countries say, “Okay, okay, okay.” Because, he kind of pushed his way in NATO and they did. They did say, “Okay, okay, okay.” But, are they going to do it on the tariffs and some of the trade war?

You know, whether you call it a spat, a trade war, it’s definitely escalated, and it was getting better for a while, but it’s definitely escalated in the last couple of weeks here again, which caused the whole other little round of selling. But, the market continues to hang in there. We’re going to talk in a little while, by the way, just to give you a heads up, on if you need to take money out from a retirement standpoint, you are getting social security, maybe you are getting a pension, but there’s a gap. That gap each month needs to come from your savings. Where do you get it? Do you get it from your taxable brokerage account? Your ROTH? Your IRA? Your rollover IRA? Where do you get that money from? We’re going to talk about that because, again, as I’ve said in previous weeks, when I meet with clients sometimes that have these situations, I view them as case studies that I can relate to you. I had a very interesting conversation and did some analyses this week for a particular client and wanted to share that with you what that looked like because it might help you to think about those distributions in retirement. We’ll get to that in a minute.

But I did want to talk about this email I received and kind of go through some of these things that were commented on. This email came from a gentleman named Robert. [inaudible 00:11:54] give his last name. But anyways, the email said, and I had gone on a radio show that comes on South Texas every Monday morning, do about a 5-10 minute interview on there, and I usually post those on the blog. So many of you have heard that, and did the interview talking about what’s going on with the economy and so forth and I said clearly, “We are still in a bull market.” Which is interesting, because again, I’m talking about the stock market.

So let me read this email which kind of sounds and reads like a big run-on sentence, so: “Rebuttal to today’s comments. Earnings, jobs, doing well. I disagree.”

Hmm, okay. Well, right there we can disagree. Earnings are doing extremely well. Jobs are doing extremely well, so I don’t know … Even the bears, which are permabears, would say, “Well, it is better now, but it’s as good as it gets.” They change their tune, so we disagree on that.

“Credit card debt, $24 billion in June, $14 billion in May. Not spending earned savings, spending credit limits on cards. Big difference.”

Okay.

“Stock market going up on earnings, cash flow and productivity is missing in action, except for the bad breath of five stocks claiming 47% of the profits.”

Okay. Again, let me read all of it and then we’ll digest some of it that we can get to.

“Money printing is causing the stock market rise due to trillions in stock buy backs, no wage increases to justify higher prices. The market is running up on printed money and tax breaks with no way to pay for them. The GOP will go after what is left of the working people’s social security and 401Ks. Stock buy backs were against the law in the 1980s. I’ve seen this movie before. I am 10% in stocks and 90% in cash until the next credit crisis hits. We also have pending war tension building with China and nobody’s concerned? 48 out of 50 states have underfunded pensions, the spending’s being done out of buy now, pay later mentality. I am bearish, willing to risk another 10% upside to catch the next down draft. I am patient.”

Okay, so obviously probably reads Zero Hedge, which is the most bearish website out there, because that sounds very Zero Hedge-ish, which is, in case you don’t know, a gentleman that apparently was banned from Wall Street, so he has kind of this vendetta out for Wall Street. But look, here’s the deal, and Robert, here’s the deal. I appreciate the email and again, I’ve told him, I’m going to address this on the air.

But here’s the deal: Some of the things you state in here are accurate and I don’t disagree. We’re not 100% in disagreement here. My job, number one, is to tell you my point of view, but number two, there’s a disconnect between some of these issues you’re pointing out and the stock market. There’s a big disconnect there, so in other words, some of these things you’re bringing up have been here for the last, really since the last financial crisis. You could argue some of this is worse now than during the financial crisis. I give you that.

But the stock market has tripled? Quadrupled? Whatever it’s done since ’09. So I can sit around complaining about some of this stuff, or I can say what moves the stock market and do I want to participate in it or not. And if you want to sit out of the stock market, that’s fine. I think those very exaggerated moves of “I’m going to own 90% of my money in cash,” number one, there’s things other than stocks and cash. So if you’re 10% stocks, 90% cash, that’s a very odd asset allocation.

If you want to say, “I don’t want to own stocks, what else is out there?” Plenty of things to invest in, so that’s one comment about that. But I first want to say let’s separate what’s going on with this, that and the other versus what the stock market’s doing. Because again, I’m here to help people make money, not be some economist, because number one, economists don’t know what they’re talking about most of the time and some of these arguments you’re bringing up are things that again, I have heard over the years of people that have been seated on the side lines for years and years and years as the market continues higher and higher.

My job is to tell you when I think the path of least resistance is higher, which I still believe now, and when I think it’s not and many of you’ve been listening well over 10 years and know in ’08 I was extremely bearish. And there’s times since then I’ve been bearish. Sometimes short term, sometimes long term, but we’re in a bull market right now.

So let’s address some of things from a fundamental standpoint, though. You know, it’s saying, “Pending war tension building with China and no one’s concerned.” I’d think a lot of people are concerned. Just because the stock market’s going up doesn’t mean people aren’t concerned. Do you not think we’re concerned about a trade war with China? Do you not think we’re concerned with any type of military conflict with China? Of course we are. Of course we are. I am at least. I can’t speak for any other listeners, but it sounds like you are and I am. We agree on that.

’48 out of 50 states have underfunded pension funds.’ I can’t verify that, but we’ve talked about before, I agree with you that that is a problem, because these pension funds around the country, Dallas, we’ll go to Dallas right off the bat, bankrupt because they used unrealistic assumptions in the return expectations and we have a lot of underfunded pensions. That is a problem, absolutely. No question about it. But what does that have to do in the short term with where the stock market’s going? It doesn’t.

Now, can underfunded pensions snowball into other things like a domino that then domino into something else and then eventually take the stock market down? Yes. But we generally get things in advance that tell us the market’s starting to fall apart, right? It’s like a nut falls off and then the wheel hubcap calls off and we start to see that. That’s how bear markets happen. I don’t know when the next correction’s going to happen, but there’s a difference, as we’ve said and you know this, we’ve said this difference between a bear market and a correction.

Those two things, I’m in agreement with. These things about “Five stocks claiming 47% of the profits.” I think what you were trying to say, and correct me if I’m wrong, you can write me back, but five stocks have accounted for 47% of the gains in the stock market this year, of the S&P. That is correct, but the S&P hasn’t made hardly anything. Neither has the DOW, so that’s not a big deal. If the market was up 30%, that would be a big deal. But you said 47% of the profits. Not the company profits.

So let’s take a look at that, because what we’re seeing is we’re seeing good breadth in the market, meaning how many stocks are participating. And yes, it is true that … And look Robert, here’s the thing, I agree that some of these issues of the indices are a problem, but that’s not an issue that I want to run out of the stock market, that an issue of me figuring out how do I mitigate that risk. So what we’re talking about here, guys, that you guys that are listening in saying, “What’s the deal here with the indices?” Five stocks, you know, the Amazons, Netflix, the Googles, Facebooks, Apples, those companies are so large that they constitute, they are controlling the S&P. So when you see the S&P 500 up or down, it’s because those stocks were up or down. It’s not about some little tiny company in the S&P 500. It’s almost meaningless.

To his credit, what he’s saying is, “Be careful of those.” Okay, well, I don’t need to own those companies. Why don’t I own something else? So it’s not about the S&P. The S&P may be constructed incorrectly, but I don’t have to own the S&P, so that’s not an issue that makes me bearish. That’s just own something different.

“Money printing is causing the stock market rise due to trillions in stock buybacks.” Those are two different issues. Money printing is by the government, which the balance sheets have actually been reduced lately. Stock buybacks, yes, some companies will buy back their stock because if they reduce the number of shares outstanding, it makes their earnings go up. Stock buybacks have been on the increase. Do you know if a CEO’s intention is to buy back their own stock because it’s a good deal and they think it’s cheap? Or are the manipulating the books? You’re assuming they’re manipulating the books, and that’s the only reason the stock market’s going up, and I disagree with that.

If I, the 100% stock holder in Eggerss Capital Management, could buy more of my stock, I feel so comfortable with my stock in my company, I would buy more. I can’t buy more, I own 100% of it. These companies don’t own 100%, but they can go out and buy some. I don’t think there’s anything wrong with that. Now, can it be manipulative? Are there companies doing it for manipulative reasons to buy their stock simply to watch it go up? Absolutely, but I cannot make a blanket statement that they’re all doing that.

Wage increases are going up. He says, “Wage increases don’t justify the higher prices.” Wage increases, justifying the higher prices in the stock market are two different things. Wage increases don’t have anything to do with the stock market. That has to do with inflation, which you’re starting to see pick up.

The GOP’s going to go after what is left of working people’s Social Security and 401ks. I’m not sure where that comes from. Don’t know if the GOP’s going to go after Social Security or 401ks. Where have you seen that? There’s no evidence of that. That’s kind of conspiracy theorist to me. 401ks, I think, are fine. Social Security’s going to be, they’re going to extend the retirement dates. We know that. It needs to be revamped. Totally agree that it needs to be revamped, but don’t know if the GOP’s going to quote-unquote “go after it.” You see this whole email is very, very negative, and it sounds like it’s frustrated, and there is some frustrating things going on that we both agree with that need to be fixed, but again, all I can do is go back in my history, go back on all the work I’ve done, and said, “What makes the markets go up or down?”

There’s lots of things that I would agree with and want to change and wish we didn’t have all this debt, but also, by the way, when you talk about debt, have you talked about the asset side? Well, we have all this debt in this country. Have you looked at the asset side? There’s two parts to a balance sheet. There’s the assets and the debt and the liabilities, so we need to look at both, but there’s lots of things I would change. I wish the country was debt-free. I wish our pensions weren’t underfunded. I wish all that stuff too, but my job’s to help people make money and to do it, make better decisions with their money. That’s my take. Guys, you listening, tell me what you think on some of those topics.

Again, we are not living in a great, perfect, utopia society, and some of these things I think, when you say, “Why aren’t people concerned with the tension with China,” they’re absolutely concerned. That’s why I’ve been saying the stock market has had a, really a governor put on it this year, because we have had, and we have had the tension. That’s what this is all about. I mean, if we were to put a chart of the stock market and label it with every time there were some chatter about tariffs, you would immediately see it drop.

There are people worried about it, absolutely they’re worried about it, but again, I could go and list so many things that the market’s been, and investors have been worried about. Zika virus, Ebola, Greek crisis. I mean, all the stuff you can go back the last few years are debt downgrades. Those were thousands of Dow points ago. Thousands. Will we have another bear market? What if all your stuff that you’re worried about comes true? Will we have another bear market? We may. In fact, we probably will at some point, but I need to start seeing some, my indicators turn down, and I’m not seeing that right now.

Again, this is what makes a market. Right? Robert, this is what makes a market is, you think it’s going to go straight down, so that’s happening. I think it’s not going to go straight up, but I think it’s going up over the next several months, and that’s what makes a market, but I do appreciate the feedback and taking the time to email.

Let’s transition real quick from that to, okay, you’ve gotten money saved, you’ve been accumulating your whole life. Right? You’ve been told, “Save, save, save, save, save.” You get into retirement, and now you say, “Okay, I’ve got Social Security. I don’t have a pension,” maybe. Maybe you do. I don’t know. Maybe a military pension. You’re short $3,000 a month. Where does it come from? Well, needs to come from your savings. Can come from your savings account, your checking account, your brokerage account, your mutual funds, and come from your, whether they’re IRAs, individuals. Where do you take it from?

Couple of factors, and, of course, we would have to analyze your specific situation, but some factors I want you to think about are, number one, what’s your goals? Is your goal to leave the next generation with as few taxes as possible? Then maybe you’d take it out of an IRA to pay less … You pay taxes on it now so that they don’t have to pay taxes on it later if you’re taking out more than you need, but if you … Because, again, if you take it out of an IRA, it’s a smaller IRA you’re going to leave to them that they’re going to have to pay taxes on, so what are your legacy goals?

What kind of tax bracket are you in, this year, next year, and so forth? What kind of tax bracket? If you’re in a low tax bracket, maybe you do want to take it out of an IRA right now at a low tax bracket and pay the taxes now versus later. What about what the assets are doing? This is a really important one. Are the assets, are they in growth assets? I mean, are they stock-oriented? Are they low-productive kind of income-oriented, safer things? Because, again, what you want to do, preferably, is when you’re, need money out of any type of account, is take it from the least productive thing.

In other words, if you have a checking account sitting there with too much money in it, that’s where you’re going to want to take your distribution from. Right? Because it’s not producing anything anyways, and it’s not taxable, so that may be the best place to take it, but what if that’s not an option? You have to look at, what’s the strategy on this particular brokerage account? Do I have capital gains to pay, if I’m going to sell things to get the money, all these factors.

In our client’s situation, we were looking at it, saying, “Okay, they don’t want to, they’re going to leave money to their kids, but they don’t want to do it … They’re not going to set them up. The kids are fine, so they need to pay as little taxes as possible for themselves now.” That would, say, take it from a taxable account, a joint account, an individual account, but that money’s invested, and they have big capital gains in those stocks, so to sell the stocks, pay the taxes, it’s the same as, almost, taking it from an IRA.

Well, what about the IRA? It’s how big are they, what kind of tax bracket are you in? Once we’ve figured all those things out and ran various scenarios, we came up with a game plan to do it. Kind of the order of how you do your withdrawals, it really matters, and it matters from year to year. It depends on the type of returns you’re getting, the type of expectations, all of those things.

When you take the money out and you forecast over the next few years, is it going to change your overall asset allocation? In other words, what if you keep taking out of your growth engine stuff? Now, you look … You go forward about four or five years, and you took out all your stock stuff, and you have way too much in the safe income-producing side of the balance sheet, so to speak, on your investments. That takes planning. That takes thinking ahead and trying to figure out, really, what your tax bracket’s going to be, going forward, taking into consideration your Social Security, right, your pensions, all those different things.

That’s why, when somebody says, “Where should I take the money out,” it is a conversation. It’s not just a very quick, easy answer. It takes some analysis, and so a couple of us get in the room. We get all the facts. We’re changing some things on the screen, running some models, sitting back, thinking about it, and then we finally figure out, “This is the best course of action,” and we move forward and execute it. That’s the way you have to do this, and really, with any financial decision, but especially when you’re taking out money from a retirement account, where does it need to come from?

That’s very important, and I think a lot of people, it can cost them dearly down the road. Maybe they don’t feel a big difference now, but down the road, it could cost them, because they end up paying too many taxes later, or maybe they pay too many taxes now, and they didn’t need to. Something to think about, and again, kind of a little bit of a case study for you of something I ran into this week, which is a common occurrence, but we had a pretty in-depth conversation about it.

Hey, guys, thanks for checking in here on The Eggerss Report. Don’t forget, 210-526-0057, eggersscapital.com is the website. Again, if you want to email me directly for any questions, or comments, or concerns, just like Robert did, again, keep the conversation coming. That’s what this is all about. Karl, K-A-R-L, @eggersscapital.com. Have a wonderful week, and we’ll see you right back here next week on The Eggerss Report, your investing playbook.

This show is for entertainment only, and information provided by the hosts, guests, and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As President and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment, or get yourself a trusted advisor.

 

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