No Place to Hide

The Dow Jones Industrial Average (DJIA) sold off 665 points yesterday.  It didn’t matter whether or not your portfolio was diversified. Stocks and bonds both fell last week. This is a market theme that I have warned about often over the last few years. Even a Treasury bond, which was once considered a low risk investment, offers little safety in this market.

Last week the S&P 500 dropped -3.88% and the iShares 20+ year Treasury Bond ETF (TLT) fell -3.04%. TLT is now down a staggering -5.54% since the start of the year. Even after the stock market loss last week, the S&P 500 is still up 3.22% for the year. Many Wall Street analysts speculated that the rise in interest rates caused the sell-off, while other analysts suggested that a few large companies released disappointing earnings reports. Another reason could be as simple as stocks became overvalued. The cause for the sharp drop in bonds and stocks is that both asset classes became less liquid as new buyers stepped aside.

Over the last decade, there have been many structural changes to the bond market. There are no longer as many bond dealers that hold bonds on their books. In the past, these dealers would buy and hold bonds, which would help to stabilize bond prices. The first question that you should ask yourself before making any new investment is what will be the liquidity when you go to sell.

There is one portfolio that I reviewed which can help serve as a good example of how a lack of liquid can turn a conservative investment into a speculative one. This portfolio consisted of all convertible bonds. There were many individual convertible bonds and a convertible mutual fund. The convertible mutual fund was sold to this investor as a very conservative investment. The marketing department of this investment company cooked up the idea that this mutual fund had better downside protection and offers an above average dividend. Nothing could be further from the truth. I could make a strong argument that a technology fund has lower risk than this convertible bond fund. Here is the chain of events that could cause this mutual fund to implode if bond markets become illiquid.

The first mutual fund holders that redeem this below-average mutual fund will sell at the highest bond prices. If selling continued, this fund would go into a death spiral as the portfolio manager is forced to sell it’s concentrated convertible holdings into an illiquid bond market. The other mutual fund owners left in this fund will begin to see the large losses as the portfolio sells its illiquid holdings. As even more fund owners realize that the fund is trailing all the other convertible bonds funds, they will begin to sell. I guarantee that this convertible bond fund portfolio manager will do their best to limit losses by first selling the most liquid bonds first. The remaining mutual fund owners will be stuck with all the illiquid holdings. This is how a mutual fund can end up last in its Morningstar category.

This is an extreme example of how liquidity can become a concern if interest rates begin to rise. Liquidity events have a way of moving from asset class to the next. In the coming months, one of the biggest risks to all assets will be how orderly the sell off is in the bond market, if interest rates continue to rise.


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Welcome to President Trump’s New Economy

The title in Jim Cramer’s blog sums up the current market environment, “It Has Never Been This Good”. This title might actually be an understatement given the market returns over the past year and the markets refusal to fall more than 1%.  I wrote a blog immediately after the election titled, President Donald Trump: Game changer. My outlook was that the Trump presidency would increase the level of risk in investors’ portfolios, but also the potential for higher returns.

Cramer’s blog summarizes the current rally well, “I can’t stress that this takeaway is like dry tinder for whatever is thrown on to it — lower corporate taxes, increased bonuses, repatriated capital, rising commodity prices, increased auto sales, more technology spending, new pipelines, less regulation.” President Donald Trump gave an interview on Friday from the World Economic Forum in Davos and he thinks that the U.S. GDP growth rate could reach 4%. He went on to say that the cut in regulations are just as big as the tax cuts. If U.S. GDP surprises above 4%, then stocks may still be undervalued.

I continue to believe that the Trump presidency has increased the level of risk in investors’ portfolios, but also the potential for higher returns. As market valuations continue to rise, so does the potential for loss. I explain to my younger clients that this bull market might not be the best for them over the long-term. As an investor, you would rather have prices lower and rise after you have accumulated wealth and are closer to retirement. Future returns could be diminished in the years ahead because valuations are at the high end of historical averages. If these record stock prices are supported by much higher corporate earnings, then all of those investors waiting for a correction will continue to be disappointed.

Many financial advisors employ gimmicky sales tactics, such as showing past performance or presenting sales and marketing literature showing 20% returns.  I do my best to educate my clients and not sell them on historical performance.  I help my clients make decisions based on the potential for returns given the level of risk in their portfolios. We are entering a period in the market cycle where investment risk for houses, stocks, bitcoin, cash, preferreds, bonds, Euro’s, Yen, oil, and about every other asset have never been so high. High asset prices are the mark of President Trump’s new economy. There is a potential for high returns, but there is also substantial risk if U.S. GDP does not meet President Trump’s lofty expectations.

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Measuring Returns vs. Other Advisors

A client called me this week and told me that his last financial advisor asked to see my portfolio and returns from last year.  My client asked me what I thought about this sales tactic. I had never put much thought at all about another advisor calling my clients. I think more about markets and portfolio management. I assume that this advisor was probably hoping that I held too many bonds in 2017 or that I missed the bull market for this client.

Unfortunately for this advisor my investment returns supported my positive outlook on the markets. I don’t document investment returns for marketing literature purposes because it would be a full-time job. I can quickly calculate an investment return for a client, but I don’t share the results with the public. I’ve seen too many advisors lose everything and entire firms go bankrupt if their return calculations were incorrect. This is not a business risk that I want to take. But, for this one time, I wish that I could show the return.

This advisors’ sales tactic of trying to recoup lost business is meaningless to me. He can keep calling all the clients that he lost to me every year and ask to see my returns. I’m sure my clients will keep telling him no. If another client who fired him had decided to show him my portfolio, I’m sure he had another sales trick up his sleeve to scare my client into moving the portfolio back to him.

I believe that investment returns alone tell you nothing about how well your portfolio did. What matters most is how much investment risk did you take to achieve your return? If your portfolio returned 18% but held 25% in low risk investments, how does that compare to a 18% return which held 100% in risky investments? At the very core, this is the difference between our investment philosophies. How does this advisor even define a risky investment? He might show you the volatility or standard deviation of past returns and I would present to you a balance sheet or cash flow statement. Since his firm manages money using model portfolios selected by the home office, he will have all the fancy sales literature full of worthless statistics in his presentation.

These statistics do not capture risk. A good question to ask an advisor like this, is what was the volatility of the stock market at the height of the market crash in 2009? The S&P 500 was at its lowest point of 672, but the value was the cheapest in a decade. This advisors’ home office was showing volatility statistics at the highest level on record. Annuities sales became very popular at this type of brokerage firm when markets crashed. An annuity purchased in 2009 at the market low missed the ensuing +300% return over the next decade.  Now, at the top of the market, annuity sales have dropped significantly when volatility is at its lowest point ever and stock valuations are at the peak in over a decade.

The secret of the investment business is that you don’t know how good a financial advisor is until after you give them money. You probably won’t know how good they are until after a full economic cycle. If it so happens that another advisor gets your ear and tells you a story about how wonderful their returns have been, you should immediately be on guard and ask them about portfolio risk. Risk is the engine for return and the goal of any investor is to take the least amount of risk to achieve the highest level of return. I look forward to this time next year when this advisor calls my client back and asks them how they did in 2018. All of my clients can be confident that I will strive to be that advisor who can invest well after I receive the money and not settle on past returns.

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The Game Rules are Changing II

The endless 24/7 negative news cycle of politics and markets can be exhausting. This week’s news was no different than last weeks. The stock market set new records, and market commentators warned that stocks were on the verge of a crash. I hope the same news happens again next week!

As I began to write a commentary about this week’s events, I realized that I was writing the same exact post that I wrote back on August 6, 2016. That post was titled Game Rules are Changing, and it was similar to what happened this week. There were warnings from market guru’s Bill Gross and Jeffrey Gundlach that you should “sell everything”, and Warren Buffett was pounding the table to buy stocks.

On Wednesday, Warren Buffett was asked on CNBC about current market levels, and he said that tax reform wasn’t baked into the markets. This comment caught the markets by surprise and the Dow Jones Industrial Average (DJIA) subsequently rallied another 400 points. If you took Buffett’s advice back on August 6th 2016, you would have made a ton of money, and if you listened to Gundlach and Gross you would have made nothing.

I’m with Buffett that stocks will beat bonds over the long-term and that the old rule of thumb that retirement savers should subtract their current age from 100 to determine the percentage of stocks that they should own, no longer works. For instance, a 65-year-old should have 35% of their portfolio in equities. I continue to believe that today’s generation of baby boomers needs to own more stocks. However, you need to own the right investments, and that’s my job to find them for you.

Back on August 6, 2016, I was adjusting all of my portfolios away from bonds and into equities.  I am still in favor of financial and technology stocks because of the possibility that interest rates might start to rise. In that post I wrote, “I continue to believe that the major risk is in the bond market and also holding too much cash. The value trap is in sectors that offer no growth and high dividends. Utilities and REITs are two areas that I’m avoiding.”

Those two sectors have trailed other sectors. This trend has recently accelerated for the Utilities Sector SPDR Fund (XLU), which is down -8.19% in the last month and down -4.59% year to date. The Vanguard REIT Index Fund ETF (VNQ) is down -5.27 YTD. In only the first two weeks, the S&P 500 (SPY) is already up 4.14%. The year has started out with a clear warning to investors chasing higher yields – AVOID INTEREST RATE SENSITIVE ASSETS. These investments could begin to look more attractive if the sell-off continues.

I hope that I can write again a year from now about how Gundlach and Gross were wrong and Buffett was right on the money. At some point, there will be a pullback, but this drop might be the buying opportunity for those investors that missed the bull market because they listened to Gundlach and Gross in the first place.

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2018 Market Outlook

The stock market guru’s have written some very bullish market outlooks for 2018. GMO’s commentary was the most bearish. Jeremy Grantham, who has been called a perma-bear (always bearish), warned that the market is in the final phase of a bull market. He believes that the stock market has entered the speculative phase, which will ultimately lead to a 50% crash. The Dow Jones Industrial Average just crossed 25,000, and it is newsworthy because the pace of the last 1,000 point move was the fastest in history.

As always, Jim Cramer is very bullish on stocks. He said that we are not in a bull or bear market, but called it a beast market. Companies now have a major incentive to grow their business in 2018. With the corporate tax rate dropping from 35% to 21%, there is going to be even more money spent on capital expenditures. Bob Doll, who is Nuveen’s chief equity strategist, predicts that many companies will increase capital expenditures over stock buybacks.  Global expansion should continue, and U.S. GDP growth has a very good chance of reaching 3%, and unemployment is on pace to the lowest level in nearly 50 years. With the unemployment rate already at historical lows, businesses are going to have a hard time finding qualified workers. This, in turn, would cause in increase in wages, which will lead to higher inflation. If higher inflation doesn’t cause interest rates to rise then Jeremy Grantham will be correct in his forecast of the market melting up before crashing.

Another market outlook that I look forward to reading every year is from Bryon Wien. Bryon is vice chairman of Blackstone Advisory Partners, and his predictions mirror Jeremy’s. He predicts that, “U.S. economy has a better year than 2017, but speculation reaches an extreme and ultimately the S&P 500 has a 10% correction. The index drops toward 2300, partly because of higher interest rates, but ends the year above 3,000 since earnings continue to expand and economic growth heads toward 4%.” He also believes that inflation will become an issue and interest rates will rise. He added that energy prices are headed higher because of continued world growth and unexpected demand.

I’ve maintained a very positive outlook on equities and I have largely avoided fixed income bonds. I’ve been waiting for the past three years for interest rates to rise, but they haven’t budged. This has been good news for my clients. I believe that artificially low interest rates are the reason why the stock market has been vertical since the election. The economy was already doing well before the election and the “Trump Bump” added another 10-15% to market returns. Love him or hate him, President Trump’s legislative victory on tax reform is largely responsible for the recent market gains. My outlook hasn’t changed because it’s a new calendar year. I’m continuing to avoid fixed income bonds until interest rates rise.  As always, I prefer investments in the Financial and Technology sectors, but for the first time, I have added new investments that I believe will do well in a higher inflationary environment. I also expect a pause in the market at some point as the S&P 500 has set a record for consecutive months without a loss and it’s the longest streak without a 3% correction.

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Supercharged Economy

The tax bill is signed and complete. Below are two links that provide a thorough review of how tax reform might impact your finances – I added a Fox News link for my Republican clients, and a CNN Money link for my Democratic clients. If you’re an independent, then you’re out of luck because there is no unbiased news.

This year will most likely go down as the first time in history that the stock market hasn’t experienced a negative month. There has already been a new record for the longest period without the S&P 500 falling 3%.

The market naysayers have had a very difficult year in 2017. I hope that they have even worse of a year in 2018. As we enter the tenth year of a bull market, investors have grown concerned about when the next bear market will strike. The challenge going forward will be predicting how the economy will be impacted by tax reform.  This tax package will not lower taxes for everyone and will raise taxes for many families in the middle-class, especially those living on the coasts.

Even though the stock market has been on an upward trajectory, a new poll released on Monday by Gallup, surveyed that 51% of people do not approve of how Trump is handling the economy as president, while 45% say they approve. The only explanation for the low results of this poll are that not enough people are invested in the stock market or were holding too much cash in 2017. I’m sure that most small business owners would give President Trump much higher approval ratings on the economy. Overall, the approval rating of how President Trump is doing in the White House remains very low. This particular poll had 59% of people not approving of the job that he is doing in the White House. If you’re a Trump supporter, then you probably don’t believe any of these polls.

The positives of this tax bill are that companies will repurchase shares and increase dividends. Other companies will raise wages and increase capital expenditures. The labor market is already very tight and corporate profits will be much stronger in 2018. The best investments, if you could make them, would be in “pass-through” businesses (companies not incorporated). The owners of shareholders of S-corporations, LLCs, and partnerships have the most reason to celebrate this holiday season. The wild card next year will be if these businesses hire and reinvest in their businesses. I believe that they will because there is now a major incentive to make even more money in the Donald Trump economy. I just hope that the bond market continues it’s hibernation and doesn’t wake up to the fact that economic growth is about to get supercharged.

The biggest negative in this tax package is limiting the property tax and mortgage deductions. How this ultimately impacts home prices and the economy is anyone’s guess. The National Association of Realtors’ believes that house prices could drop substantially for luxury homes. Many other people believe that this tax package was a corporate giveaway. The upcoming midterm elections could be cause of anxiety for investors in 2018. Another unintended consequence of tax reform might be higher interest rates and higher inflation. I believe that this is the biggest risk to the stock market in 2018. The combination of these two powerful forces are the enemies to investors.

I’ve maintained a higher allocation to stocks throughout 2017 and have mostly avoided bonds. I prefer holding investments that will benefit from a strong U.S. economy. This corporate tax cut is going to result in companies reporting record profits in 2018. I continue to favor high quality companies in the technology and financial sector. Even after very strong returns in 2017, I’m still finding many new investment opportunities.

Happy Holidays to you and your family, and cheers to a prosperous New Year.

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The Bullish & Bearish case for holding Bitcoin

There are many different types of investment risks. I thought a good exercise would be to apply the different investment risks to Bitcoin. This is not a recommendation to buy or sell Bitcoin. It is not considered a security and the SEC does not regulate it (yet).

Bullish case for holding Bitcoin


  • Inflation risk – This is the risk of losing your purchasing power because the value of your investment doesn’t keep up with inflation. Bitcoin has a limited supply of 21 million coins, which is one of the main reasons why the price continues to rise. 80% of all bitcoins have been mined. If there was an announcement that another 100 million Bitcoins were being offered, the price would crater (this won’t happen).  There is no better inflation hedge than an “asset” with limited supply and increasing demand. To date, Bitcoin has been the perfect hedge against central bankers printing money and keeping interest rates too low.


  • FOMO risk –The Fear of Missing Out risk reaches its climax when investment returns are the largest. An unheard of 2,100%+ return in one year can do psychological damage to people in search of easy money created out of thin air. Warren Buffett calls Bitcoin a mirage. Many people have gotten rich with a small amount of money. There is a story of a pizza delivery driver accepting payment in Bitcoins back in 2010. If he held on to the Bitcoins, he would be worth over $100 million. People can do some crazy things when FOMO risks peak. State regulators have commented on people maxing out credit cards and taking second mortgages to buy Bitcoins. Some people have also sold their houses to buy bitcoins.  FOMO risk takers have been well compensated. As Bitcoin keeps rising, there will be more home equity lines taken out, until the FOMO risk suddenly transforms into the fear of losing everything (FOLE) – I just made that one up. 🙂


  • Disruption risk – If global currencies are getting disrupted by virtual money, then you better hedge against your U.S. dollar weakening. For instance, if a Venezuelan citizen converts his or her Bolivar into Bitcoins, and their money goes up 3,000%, then there has been a global wealth redistribution. This is a good reason why third world countries and people with low standards of living are flocking into Bitcoin. The astronomical rise in Bitcoin is due to international buyers, especially the Japanese.


Bearish case for holding Bitcoin


  • Liquidity risk – This is the risk of selling and getting a fair price when you want to sell. Bitcoin has 100% potential loss of liquidity.  If everyone heads for the exits at the same time, it’s safe to say you won’t be able to log into your Coinbase account to sell. It has been very common for wallets and exchanges to freeze withdrawals with only limited volatility. A run on the banks was common when there was a fear that banks were running out of cash. I’m 99.9% confident that there will be a run on the exchanges at some point. Even if Bitcoin appears to stabilize in price and consolidate over time, the risk will not disappear. The poor Thanksgiving turkey always has a great year of feeding up until the holiday.


  • Concentration risk – Most of the crypto-currencies are held by a very few fortunate people. If they decide to sell to “diversify” into real money, those buyers who are late to the party will be the ones that suffer the greatest losses. The lucky few that were early are the ones that will sell first to the late comers who do not believe that they are putting their hard earned money into the biggest bubble of all time. The later comers will have no idea why their money will evaporate overnight when the Bitcoin millionaires covert to real currency all at the same time.


  • Political risk – Central bankers around the world are warning about holding Bitcoin. At Janet Yellen’s press conference, she called bitcoin a highly speculative asset, not a stable store of value, and it is not legal tender. I believe the SEC at some point will step up and begin to regulate trading on the exchanges or ban credit card payments for Bitcoin. They are well aware of the abuse and wild west trading environment where any thing goes. The amount of criminals that have been attracted to this wild west type of trading environment increases the probability that this will not end well.


  • Credit risk – Bitcoin has no intrinsic value and doesn’t pay interest. The credit risk is a 100% loss because Bitcoin is worthless. The only thing backing Bitcoin are the largest holders of Bitcoin. They support the price and manipulate the market price. They have programmed computers, which are called bots to continuously buy and sell. If you had billions to lose in Bitcoin and there were no rules in place, you would make sure the price appeared safe. As long as there is public demand, the larger holders can make more money. As soon as the general public gets smart and comes to their senses that this is the greatest scam of all-time, then the bubble will stop inflating. The miners of Bitcoin who run the network need a high price to afford their electric bill and to buy new equipment. One bitcoin transaction now uses as much energy as your house in a week.


Nuveen Asset Management’s Bob Doll said on CNBC this week that a cryptocurrency crash could have a spillover effect into markets. I’m in complete agreement with him that, “the longer bitcoin mania goes, and the bigger it gets — the worse it is for the stock market.” I never thought that I’d sell stocks because of Bitcoin, but it is a new possibility in 2018. The government has been non-existent in stepping up regulation of Bitcoin and if Bitcoin crosses the $1 trillion threshold in market cap, it might be too late to police it. Over time, I believe the conversation will change to Bitcoin being a systematic risk to the entire global economy. If there are more and more people who prefer to hold non legal tender currencies over legal currencies, then capitalism and the stock market will have real problems.

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Bitcoin – Trapped inside of a Bubble

I wonder if Warren Buffett would trade $1B in Berkshire Hathaway stock for $1B in Bitcoin? He wouldn’t even trade $100 for $1B in Bitcoin. Bitcoin is blowing up into one the largest bubbles ever. Bitcoin is not regulated, there is no recourse, no protection from fraud, and trading is subject to severe market manipulation. There are even limits for making deposits and withdraws, and fees for the transaction costs are excessive. If the SEC had been regulating Bitcoin, many of the traders would be in jail.

As a registered investment advisor, there are strict rules that I follow to know my client. By law, I need to know if they are on a terrorist watch list, and if they are who they say they are. In the world of Bitcoin, you have no idea who is on the other side of the trade. These rules have made it impossible for Wall Street firms to get involved. That is up until now.

The Chicago Board of Exchange is going to be offering future contracts on Bitcoin.  These same brilliant financial wizards were the ones who about 15 years ago, decided it was a great idea to package subprime mortgages and sell them off to investors who were seeking higher returns. In the end, Wall Street almost financially bankrupted the country. These same mathematic genius types are about to get involved in a bubble that is even worse than subprime. At least subprime had an underlying collateral. Bitcoin has no value, can’t be valued, and is worth less than a subprime loan taken out by someone going through bankruptcy! Bubbles are a means to transfer wealth from a person who bought early to the next speculator who wants to sell it even higher.  This is not financial advice to either buy or sell Bitcoin. I’ve written often that Bitcoin could go to $100,000 or $100. Bitcoin was up another 80% in a matter of days. Coinbase, which serves as the digital wallet for Bitcoin, has become the most downloaded app on Apple’s iTunes. If you want to buy Bitcoin, I would not talk you out of it. I’ve never advised a client to buy or sell it.

Most of the speculators buying Bitcoin have no idea what they are actually buying. The financial press reporting on the topic of Bitcoin has been terrible. What the press fails to realize, is that all the new Bitcoin millionaires and billionaires are trapped inside of this giant bubble. They can’t get their money out fast enough. They now need the public’s help to cash out. This by the very definition is a Ponzi scheme.  Coinbase, which is the most popular digital wallet, allows you to only deposit or withdraw up to $15,000 a week. Imagine having $100 million dollars and you can only take out $15,000 a week. Warren Buffett would be older than Yoda at around 1,400 years before he could withdraw his $1 billion.

There are over 1,300 crypto currencies. The press only reports on Bitcoin but there are over 1,300 coins and they are also in bubble land. The market caps of these coins are in the hundreds of millions and billions. There is actually a huge bubble and inside the bubble there are 1,300 other micro bubbles. If you need a good laugh, check out for the new coins that are about to be launched. I’m laughing out loud, but they are laughing all the way to the bank. The founders of these make believe coins are making upwards of $5 million each launch. There isn’t even a product. This is very similar to the dot-com bubble when companies would make millions if they changed their name to have .com at the end of it. Many companies changed their name to .com just to go public, so that they could raise even more money. In Bitcoin land, there is no SEC regulations and none of the facts are verified.

There was one new coin that was cutting out the grocery store and you could use digital coins to buy directly from a distribution center. This coin was close to raising $20 million. Once the coin is launched, it goes onto an exchange. On this exchange, everyone can speculate on the next price of this coin.  Many of these coins with ideas even worse than the grocery store have risen from $20 million and are now into the billions. It’s an incredible wealth transfer that has been created. The trouble is that the owner of the $1B in worthless coins is cashing out. For those coins to be sold inside of the Bitcoin bubble, the founder has to sell his made-up currency and buy Bitcoin. The worthless coins inside of this giant bubble are sold when Bitcoin is bought. This is helping to increase the price of Bitcoin.

This week as Bitcoin rose from $10,000 to almost $19,000 all the other crypto-coins were crashing. It was a massive flight to safety as speculators inside of the bubble were trying to protect their profits. Most of the 1,300 coins dropped over 50% in two days, but the financial press missed this part of the story. All of the sellers of the coins were buying Bitcoins this week. The following day, all of the Bitcoin holders started to rotate their coins back into the other currencies. The second most popular crypto coin is called Litecoin. This coin is now up 70% in the last 24 hours! The market cap of this coin moved from $4B to $7B in 24 hours. Two years ago the price of this coin was around $1.5 (a cup of coffee) and on December 8th, it rose to $170 (a fun night out). It could go to $1,000 or back to $1.5. The scary part is this bubble is not even close to ending unless the public realizes that this is a giant Ponzi scheme or the Federal Reserve wakes up to the fact that millions of people now prefer holding crypto-coins instead of dollars. This bubble dwarfs the size of the Madoff ponzi scheme. It is truly out of control and there is nothing to stop it.

I am closely monitoring this bubble because it is starting to impact other real financial assets.  It might have already negatively impacted the price of gold, which is down over 5% in the last few months. The Bloomberg Commodity index (DJP) was down 3.30% last week. This has been no impact on the investments that I hold for my clients but it is a risk worth watching. Another concern is, if millions of Americans are loading their credit cards up on Bitcoin, then this robs the economy of real purchases. The appreciation of Bitcoin is also very inflationary and is creating immediate wealth. On the other hand, it also has the potential to destroy wealth and slow consumer spending. If you are interested in learning more about Bitcoin, please feel free to give me a call. I can help explain all of the other technical information behind Bitcoin such as mining, blockchains, and ICO’s.

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Greed has returned

Since the election last November, the Dow Jones Industrial Average (DJIA) has rallied from 18,000 to 25,000. This extraordinary move is nothing compared to the 1,000% rise in Bitcoin from $1,000 to $10,000+ over the same period. The investing atmosphere has become speculative. Warren Buffett’s famous quote is very applicable to current market conditions, “Be fearful when others are greedy, be greedy when others are fearful”.

Even though I’ve become a bit more fearful, I’m still very positive on corporate earnings for U.S. companies next year. Tax reform should help to boost U.S. GDP growth in the next few years. I believe that the stock market is still underestimating the tax saving windfall for many U.S companies. Now what the management of these companies do with the tax savings is the wildcard. I’ll write more on this subject if tax reform is passed.

Bitcoin fever has infected the nation. CNBC and other financial news outlets are parading analysts on TV to predict the next move in Bitcoin. There is no difference between the dot-com bubble when analysts were predicting the opening price of a worthless IPO and an analyst predicting Bitcoin rising to $40,000 next year. Many of these technology IPOs were opening up over 100% higher and subsequently moving even higher. I wrote a few months ago that Bitcoin could rise to $10,000 or fall to $1,000. It’s impossible to predict the price of anything that can’t be valued. Bitcoin is a bubble that could continue to grow exponentially or fall back to $1,000. Since Bitcoin can’t be valued, I resort to the greater fool theory. A Bitcoin buyer hopes that the next greater fool will come along and magically take the price higher. If you’re asking yourself, “Can I still get in on this, or is it too late?”, you might have been infected.

The investors who own the most Bitcoin are the ones making the most outlandish predictions. These fortune tellers are “anchoring” higher prices to make people believe it’s still early. If enough people “believe” that Bitcoin is worth $40,000, then new Bitcoin buyers will put their hard-earned money (real money) into a fake currency. This is nothing more than a giant wealth transfer machine from millions of small bitcoin holders into the pockets of the large bitcoin holders. All of the Bitcoin are concentrated in a few accounts. 1% of Bitcoin holders own 78% of all the Bitcoin. Some very smart people figured out that since they can go to jail for counterfeiting real money, they could create a new currency and excite people to transfer real money into it.

There were over 100,000 new Coinbase accounts opened during the Thanksgiving holiday. The leading search on Google last week was how to buy Bitcoin with a credit card. As a financial planner, I cringe when I read that many young people are trading Bitcoin with credit cards. The Federal Reserve is not regulating Bitcoin even though it’s their job to help protect people from themselves. For now, there are no implications to your investments, but it is a sure sign that the investing public’s mood is feeling greedy.

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Current View on the Markets

The S&P 500 just set an amazing record. This is the longest time that the US stock market has went without dropping 3%. The streak started around the time of the presidential election back on 11/7/2016. Since then the volatility has all but disappeared. This year the S&P 500 index has closed lower 1% or more only four times—the fewest for a full year since 1964.

My outlook hasn’t changed much from the first quarter of this year.  I wrote back in March that I was focusing on investing in innovative companies that were developing autonomous vehicles, social media, the cloud, and artificial intelligence. I had one eye on Washington, and the other on corporate cash flows. The right call over the past 8 years has been to invest in high quality businesses that are either generating high cash flows, paying dividends, buying back shares, and/or growing revenues. When this formula stops working, then I’ll reevaluate.

I decided not to write a second quarter or third quarter outlook because my views haven’t changed much. Here is a quick summary of the trends that I have written about often this year.

Mickey Drexler, the former CEO and current chairman of J.Crew couldn’t have summed it up better this week. “Things have been miserable in retail, The last two or three years have not been fun whatsoever. The trend of consumers changing how they now shop from their phones and computers is showing no signs of slowing.

According to FactSetone-seventh of the nearly $4.2 trillion in global ETF (exchange-traded fund) assets are in funds tracking the benchmark U.S. equity index. Passive funds now own an average of 17% of each component of the S&P 500, whereas passive ownership was “a rounding error” a decade ago. ETFs will continue to scoop up corporate shares and remove supply, which has helped to take stocks higher.

Two weeks ago GM and its self-driving car unit Cruise Automation  deployed a fleet of autonomous vehicles in New York City, making it the first company to launch a test program in the hectic urban environment. I expect that self-driving technology will be required in all vehicles within the next 10 years.

Here is a quote from a newsweek article this week, “world-renowned physicist Stephen Hawking has warned that artificial intelligence (AI) has the potential to destroy civilization and could be the worst thing that has ever happened to humanity.” In the meantime, it’s a safe bet that investors are going to make a ton of money investing in it.

Tech giants Apple, Amazon, Facebook, Google, and Microsoft, are monopolies that are generating huge amounts of cash flows. They are disrupting the economy with new innovations, which has been rewarding to investors. If you follow the money, it would lead you to these companies.

Consumers are cutting the cords. This quarter Comcast lost 125,000 video subscribers and Charter’s pay-TV dropped by 105,000, reflecting the broader trend of Netflix and other streaming companies luring away traditional cable customers.

According to WSJ, investors have been excited about emerging markets across the globe this year. An average of $24.4 billion has flowed into emerging-markets stocks and bonds this year, according to data from the Washington-based Institute for International Finance.

Interest rates are so low that there has not been much of an appreciation in prices. I’ve avoided bonds and prefer other investments that offer higher returns.

A well-known bank analyst reported that banks are swimming in so much excess cash that they don’t know what to do with it. Most banks have been returning cash to shareholders in the form of rising dividends and share buybacks. The largest U.S banks are now buying back shares at a greater rate than many cash rich technology companies.  I expect that this pace of buybacks and dividend increases will only increase over the next few years.

As we head into 2018, there are many structural growth drivers in place that will cause an upside surprise to current GDP estimates. We are in the middle of a boom period that will cause many economists to revise their GDP forecasts higher. My risk to this outlook is that central banks have been slow to tighten monetary policy. Other significant risks to this forecast include a rise in oil prices, interest rates increase, tax reform doesn’t pass, or inflation returns.  I will continue to focus on the above trends. I will update you on them and any new trends that emerge and how I’m investing in them in the coming year.

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