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August showed no real signs of it's historical bent of being volatile.  That said, below we review some items we see as growing areas of concern.

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     In July we asked the question, "Is this the time to add risk?" Clearly if you  bought more stocks (added risk) at the beginning of August, you would have made some money for the month of August.  But, does that mean you would have been right to invest more or simply would you have been lucky?  The key is to understand not simply what the markets did in August, but also why they behaved as they did and what is most likely laying ahead of us.


As of Late.


     In August we completed the first 30 days of what is often calculated to be the most volatile 90 day cycle of each calendar year (August - October).  This year it seems that it came in like a lamb and went out like one too.  There was essentially little volatility to make note of during the month of August, which definitely goes against the grain for this month historically. In fact, for the last 30 years (1988 -2017) the month of August has been the worst month of the year on average for the S&P 500 as well as the DJIA. 

     While we see significant issues continuing to rise, giving us ongoing concerns about the status of rising stock prices, we have not really seen any true breaks in the stock markets here in the U.S.  We have stated our concerns about global economic conditions steadily ( and in some cases significantly) deteriorating throughout many countries around the globe.  To underscore the significance of this deterioration and it's likely impact on U.S. stock prices in the future, we insert this chart, courtesy of our friends over at Pension Partners, Charlie Bilello and Michael Gayed.  

     This chart shows how much stock markets in these respective countries have fallen since reaching their peaks (most peaking in 2018).  Some of these countries have had some serious declines.



     We look at the markets through a global lens to learn as much as possible about many of the trading partners of the U.S.  If it is Lichtenstein who's economy or stock market is pulling back, we might not be as concerned, but when we look at China, Canada, Mexico, Japan or Germany (our five largest trading partners) then their economies can have a significant impact on us.  If it hasn't happened already, we believe these major trading partners will soon begin to have that kind of impact on our economy.  We believe 3Q GDP, which will be reported in October, will show a limited impact occurring on the U.S. economy.  These five trading partners listed have had their stock markets fall on average of -17.4% since they each individually peaked. (A bit of a humorous look at what our trading partners may be doing to us.)

    Many might look at -17.4% as a big negative (and it is in most views), but the most important factor of a -17.4% number is "How quickly did this happen?"  What is the rate of change occurring here?  If we zip back to 2008 and the beginning of the GFC (Great Financial Crisis), many people would have been happy with a current downturn of our trading partners -17.4% rather than the -54.3% beating U.S. stock indices delivered from the peak in October 2007 to the bottom in March 2009.  So, this -54.3% fall took place over 18 months and was actually a rather slow rate of change.

     A key fact to remember is this, "Markets lose money faster than they make it." If we look at the rate of change of this -17.4% drop in our five largest trading partners, it has happened rather quickly.  This is not always the best of scenarios. 

     Another recent situation arose clearly illustrating the speed at which markets can lose money happened in late January into February.  During just 10 trading days, the U.S. stock markets gave investors a jolt and fell just over -12% in that 10 days.  While some may have "yawned" that off, it did take the stock market back 4 months.  Then it took the U.S. stock market from February 2018 till late August 2018 to get back to the previous peak.  This only underscores the idea of the "rate of change" being very important.  The rate of change in that 10 day drop was fast, but the rate of change to regain those losses was much slower as is quite often the case when investments are simply left on their own to drop and regain on their own.


 
The Long-Term View.

    Now that we have had a quick overall view of some of the global areas presenting some causes for concerns, we also want to look at the other end of the spectrum, the U.S. Small Business Optimism Report.  This is a monthly report drawn from data collected from more than 12,000 small businesses. While the report delivers an overall score each month (August was positive overall) it also gives a lot of details delving deeper than overall score.  As the saying goes, "the devil is in the details".  Some of the more notable items we watch are, sales, capital spending, credit available for small business, etc. In August, just 10% reported higher sales for the month, and the number of owners expecting higher sales in the future fell 3 percentage points.  More than half of small businesses reported capital outlays, but that was a drop from July.  Furthermore, only 33% are planning capital outlays in the next 3-6 months.  Based on this, it has slowed and will get slower still.

     To coincide with what we see above, compensation to employees remained unchanged and down from the May compensation.  Employers clearly stated they are tired of paying more and not getting employees that are as qualified as they had in the past.  Another point of concern is that 33% of businesses are not having their borrowing needs met, and 51% are not interested in borrowing money to help their business. 

     Additionally, another item of concern during this time is trading volume.  Trading volume is one of the single best indicators of supply and demand, the oldest and most reliable quick read on business.  Volume is what makes Beanie Babies go up in value or plummet in value.  It is what makes things like bitcoin go up 1331% in 2017 and then fall 54% YTD in 2018.  Below is a quick glance at what is going on with volume as of late.


     
     Over every time frame shown above, the market volume is dropping, which means fewer buyers are moving into markets.  If you notice the 1YAve number, market volume is down.  It is down substantially, but no one seems to be addressing the issue. Like being on the highway, no one thinks about  traffic getting heavy until they have to start riding their brakes. Volume is critically important.


 

 We currently have holdings based on the following in the six models we use most;  

Small Cap Index/Russell 2000  
And we also now have a small portion in a money market.

S&P 500 Index
SMid Cap Growth Index


Electronics Sector Index
Real Estate Sector Index
Utilities - Our newest Position


Japan Nikkei 225 Index
Great Britain 
Long U.S. Dollar 

High Yield Bond Index

Long-Term U.S. Government Bond Index

Tax-Free High Yield Index
U. S. Government Long Term Bond Index


 

We remain watchful. 


Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC

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Capital Research Advisors, LLC, 
4185 B Silver Peak Parkway, 
Suwanee, GA 30024 
770-925-1000 
800 -767- 5364 
All rights reserved

 

 


Mortgages:



     One of the most highly anticipated set of treasury regulations finally were issued on August 9th, 2018.  A local CPA, who works with lots of small businesses, has been kind enough to give us some highlights of this very important tax incentive under the new Internal Revenue Code Section 199A (which replaces with repealed Section 199).  The purpose of this new 20% deduction for certain pass-through entities and sole-proprietorships is to put those type of entity structures more on par with the Corporate entity structure and the preferential 21% Federal tax rate they now enjoy.  However, we’d be remiss in saying it’s that “easy” or achieves that goal in its entirety.  Neither is true. 
 
To that end, “Proposed Regulations” were issued late last week.  There are seven regulations in this series.  Regs. Secs. 1.199A-1 thru 1.199A-6 and 1.163(f)-1.  Please note, these are “Proposed Regulations” that are seeking comment from the professional community.  However, much professional comment has already been solicited, and these regulations are purposed to interpret and expand on a piece of legislation and not to achieve conformity of compliance or to curb abuse like prior issued regulations.  These regulations are fairly written, but they do require interpretation and the assistance of professionals.  Gaining the benefit of this valuable 20% deduction is not a “gimme” that you get just because you are a pass-through entity or a sole-proprietorship.  There are excluded businesses, exemptions to the exclusions, rules to conform to if your business-line isn’t excluded and taxable income thresholds to consider. 
 
A short discussion follows.  In this discussion, the following terms and definitions are important to your basis of a basic understanding: 
  • Specified Service Trade or Business – Healthcare, Law, Financial, Performing Arts, Athletics, Accounting, Consulting, Actuarial (and other excluded businesses that deserve discussion).
  • Threshold Amount - $157,500 (Single) and $315,000 (Married – Joint)
  • Phase-in Range - $50,000 (Single) and $100,000 (Married – Joint)
    • 50% of W-2 Wages, or
    • 25% of W-2 Wages plus 2.5% of “Unadjusted Basis in Assets” (UBAI)
 So, what do these terms mean, and why are they there?  Congress’ legislative intent was that strictly professional service businesses relying on the education and expertise of a person(s) would not get the benefit of the deduction.  This is the reason for the “Specified Service Trade or Business” (SSTB) exception.  As always, with IRS rules, there are exceptions to the exceptions.  One of those is if the related 1040 has less than $157,500 of taxable income (single) or $315,000 taxable income (joint filer) then you get the 20% deduction whether you are in one of the SSTB’s or not.  Once your taxable income exceeds this threshold, your 20% deduction is “phased out” over the next $50,000 of taxable income (single) and $100,000 of taxable income (joint filer) until it is completely phase out at $207,500 of taxable income (single) or $415,000 of taxable income (joint filer).
 
In the regulations regarding these SSTB’s there consists analysis of what constitutes businesses in these excluded businesses.  Consulting our expertise is paramount in this discussion.   Making assumptions can be very dangerous to your tax planning without thorough thought and a full decision process. 
 
What if your business is not an SSTB, well, you in luck, “sometimes”.  Likely, you will get the deduction, “usually”.  But, again, there are issues to consider.  That’s where the last 2 bullet points under the definitions come into play.  Again, if your taxable income is below the threshold amounts, you are golden, the taxable income generated by your trade or business should receive the 20% reduction.  However, once those taxable income threshold are exceeded, we must look to the W-2 wages of the sole proprietorship or relevant pass-through entity (RPE).   A couple of problems exist here: 
  • Self-Employment income from a Schedule C does not qualify as wages for this computation,
  • Guaranteed Payments from an LLC or Partnership do not constitute wages for this computation,
  • Guaranteed Payments or Wages paid to oneself are not eligible for the 20% exclusion. 
So, what does this mean?  Easy, it means, don’t make any assumptions, just like above.  Everybody needs to be careful to make sure they take advantage of these valuable incentives.  And, contacting your CPA, and they should have already contacted you, after 12/31/2018 won’t do any good.  It’s too late then.  Most CPA’s are re-active.  David’s firm at Pro-Fi is pro-active.  They don’t want any surprises come filing time.  They want to do their hard work during the planning stages so you know what to expect. 
 
As stated above, this set of regulations is likely the most anticipated set of regulations to come out regarding the 2017 Tax Cut and Jobs Act (TCJA) also known at the “Trump Act” or “Tax Reform”. 
 
Make no bones about it, this was no act that “simplified the tax code” nor did it allow your tax return to be done on a “postcard”.  For the large majority of small-business owners, whom David’s firm markets toward, tax compliance and minimization just got more difficult, and for them, more interesting.  This is their passion, to help you, the small business owner and entrepreneur, the engine that makes our economy go, maximize your profits by minimizing your taxes (in an efficient manner) so you benefit the most. 

CPA Firm resource, David Johnson, at Pro-Fi Accounting Solutions, LLC.  More articles from David to come. 

 

   

All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information, we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, DQYDJ.com, Streetscape, MarketGrader.com, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker, and http://www.newyorkfed.org/  *This information was obtained from Capital  Research and our internal research.
 

This report/summary is to be considered general in nature, reflects our opinions and is based on our best judgment at the time of writing. All information is deemed to be from reliable sources but we cannot guarantee its accuracy. No warranties are given or implied as to their promise of occurrence in the future or their accuracy. It is the readers’ responsibility to decide if any of our opinions are suitable for their own individual situation, and in what manner to use the information. No specific decisions should be made based on this report. These opinions should not be construed as a solicitation for any service.

     
     

 

 


      


     

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This report/summary is to be considered general in nature, reflects our opinions and is based on our best judgment at the time of writing. All information is deemed to be from reliable sources but we cannot guarantee its accuracy. No warranties are given or implied as to their promise of occurrence in the future or their accuracy. It is the readers’ responsibility to decide if any of our opinions are suitable for their own individual situation, and in what manner to use the information. No specific decisions should be made based on this report. These opinions should not be construed as a solicitation for any service. Past performance does not guarantee future results. The opinions expressed in this piece are those of the author and do not necessarily reflect the opinions of Ceros Financial Services, Inc.

Securities offered through Ceros Financial Services, (Not affiliated with Capital Research Advisors, LLC) 1445 Research Boulevard Suite 530 Rockville, MD

(866) 842-3356 Member FINRA/SIPC

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IMPORTANT DISCLOSURES

All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, Streetscape, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker and http://www.newyorkfed.org/

CaptialResearchAdvisors.com

Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
770-925-1000
800 -767- 5364
All rights reserved







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