Four More Months (At Least), And What I Did On My 60th Birthday
As I write this three days before Christmas, the uptrend in stock prices we’ve been touching on for most of this year continues its relentless ascent, with almost all major indexes making new all-time highs on December 18. We’ll detail below why the party is not likely over, despite rampant optimism and some speculation.
In addition, yours truly joined the Sexagenerian tribe on November 9 (you do have to look up the definition!). Yes, I turned 60. But what I did for my birthday was pretty unconventional (though not for me!). Hopefully, you’ll enjoy the story.
Finally, we’ll touch on the Tax Cuts and Jobs Act of 2017, which is the most sweeping tax legislation since the Tax Reform Act of 1986, and will be signed into law by President Trump in coming days.
Four More Months (As The Bull Market Lives On)
As we have stated in past commentaries, bull markets in stocks rarely top out at the same time as momentum does. And though we will show below a growing divergence in the new highs data, the majority of other breadth/momentum studies are continuing to register new peaks, right along with prices. According to a study published by our friend Doug Ramsey of the Leuthold Group, there have been 16 bull market peaks in the last 100 years, and only 2 of the 16 topped out coincident with peaks in momentum.
There just aren’t any serious warning flags yet, as earlier this week, only the Dow Jones Utilities Average (out of 7 other indicators, including the S&P 500, Russell 2000 and NYSE Advance/Decline Line) was showing a divergence, thanks to a rising trend in bond yields. Below is the progression of less participation as measured by the number of stocks making new highs, which now dates back one year.
| Date | # of New Highs | Level of NY Composite Index |
| 12-08-16 | 490 | 11,149 |
| 6-02-17 | 339 | 11,718 |
| 10-3-17 | 304 | 12,302 |
| 11-29-17 | 304 | 12,561 |
| 12-18-17 | 263 | 12,785 |
The above is typical behavior as a bull market matures, and this would be a more serious condition right now if it was accompanied by multiple warning signs, but they really are not that prevalent yet. No indicator is perfect, but the NYSE Advance/Decline line has historically peaked 4 to 6 months in advance of prices, and it just made another new high.
In his work, Ramsey found some surprising data. The median price gain from the market’s momentum peak to its final price high was +18.4% taking place over a median span of 60 weeks. So, except for the two cases where price and momentum peaked simultaneously, the shortest period to a peak was 21 weeks. Hence, our headline of Four More Months.
Granted, 16 cases is not statistically significant, but it is all we have to go on, and the bottom line is that almost 90% of the time, there are significant divergences in momentum at the final peak. I’d rather bet with 90% odds than 10% odds. Prices SHOULD be higher in April than they are now, but if they are, it is likely that there will be further selectivity, especially if interest rates continue to rise.
I do think the Federal Reserve Board is going to continue to raise interest rates quite cautiously in 2018, but there is no way to know where the tipping point will be for the stock market. The stock market will tell us by the way it is acting. So, no matter one’s political stance or if you think the new tax legislation will be harmful or helpful, the stock market is acting pretty well right now, and has been since early November of last year.
As a result, all of our tactical equity models remain bullish so our equity allocations remain at 100%, along with our high yield corporate bond exposure, where our model has been on a BUY signal since January 3 of this year. The last 14 months have been a great example of why it is important to trust your process and not get caught up in the noise of opinions. We’ll have more on that in January’s update.
What I Did On My 60th Birthday
Baseball has been, and still is, a big part of my life. I started at 8 in Little League, with two years of varsity in high school. At College of Sequoias in Visalia, I decided I probably wasn’t quite good enough to play pro, and then decided I wanted to work in pro baseball on the business side. That was the main reason I chose to attend Cal State Fullerton and major in Sports Administration. I knew Fullerton was an emerging baseball power with a really good business school, and they were 6 miles from my favorite team the California Angels, which is where I ultimately wanted to work.
That plan worked perfectly, as it turned out. I interned for Coach Augie Garrido at Fullerton in 1978, then joined the Angels as a PR intern, and landed a full time position with them in August 1979 as Assistant PR Director. That lasted until December 1981 when I joined E.F. Hutton as a stockbroker trainee and left baseball employment.
But the passion for the game never left, so at 31 in 1988, I started playing regularly in the Men’s Senior Baseball League, which was REAL baseball, with spikes and all. In my second year, I made the All-Star Game (voted on by other teams) and started in the outfield at UC Irvine where the game was played. But in 1989, I met my future wife, and all of a sudden, playing every Sunday afternoon for about 25 weeks in a row isn’t so cool to the girl you’re dating. So, I stopped. For nearly 14 years (I did start playing men’s ice hockey in 1993, but that is another story).
Then in 2002, I decided I wanted to go to Angels Fantasy Camp just once, especially because I knew almost all of the instructors, as I had worked with them while with the Angels. That experience got me interested again, and as a result of Fantasy Camp, a bunch of guys from Orange County banded together and started their own league, getting permission to use the Angels’ exact uniforms and the whole bit. They are called the Halo Baseball Club, and you would not believe the professionalism and organization of this great group of men.
The teams play all of their games at Fullerton Junior College, use wood bats, have experienced umpires at each game and a trainer (hey, these guys are old). I have played somewhat regularly for the past 10 years or so, but decided to take last year off and see how I felt about it. I was only playing about once per month, which was plenty for me and being mindful of our family, but it is hard to get into a rhythm with hitting and throwing when you play once a month.
This year, I decided to give it one more shot, but for the first time I ever, my playing was beset by injury. In May, I pulled my left calf pretty badly, and then after re-habbing it for over two plus months, did the same thing in my very first game back in August. I was quite fortunate I did not tear my calf and require surgery, but this got me to thinking that maybe it was time. Time to stop. But, I wanted to go out on my terms. So, I once again began to rehab my calf with physical therapy with a purpose in mind, which was to scrimmage with the Titan Baseball team one last time.
Backstory–my involvement with Cal State Fullerton has been growing during the last 14 years, both with the Finance Department and the Baseball team, and I’d previously scrimmaged twice with the team in the past few years, getting to face several of our top pitchers. And that’s what I wanted to do, one last time. So, I laid out my thoughts with our head coach, Rick Vanderhook, and put together a plan to get acclimated to the speed of playing with 20-year-old Division 1 baseball players, a team that is consistently one of the best in the nation.
A week before my birthday, I spent five hours practicing with the guys. Stretching, baserunning drills, infield, the batting cage, live batting practice, the whole thing. For those of you who may think baseball is a slow game, you are wrong. The speed of the game on the field and in the batter’s box at the college level and above is exceptionally fast, and immensely detailed. It is why the players who can slow the game down in their minds and let their physical tools take over are successful.
On my birthday, I participated in another five hour practice, which concluded with a four-inning game. The picture below was taken with our entire team and coaches before we started that practice.
I did not play in the game that day, but my team lost the game, and the losing team had to run “stadiums,” which is a drill where you start at the bottom of the soccer/football stadium and run up the steps all the way to the top, as fast as you can. In this case, though, because there are no seats on one side of the stadium, the “steps” are about 3 feet high. So, I ran with the guys. We had 5 reps but I could only last 3. One of our guys, Jake Pavletich, told me I really needed to stop because I probably was going to puke. So I did. No, I didn’t puke! I listened to Pav and stopped.
This was all in getting me ready for Saturday’s full on practice and scrimmage, where I played four innings at first base and got to face pitchers Colton Eastman and Blake Workman, who are shown with me below on the left and right.
To give you some perspective, Colton will be entering his junior year at Fullerton and is a pre-season 2nd team All-American as picked by Collegiate Baseball, while Blake is one of our top relief pitchers. The team is coming off its 2nd appearance in the College World Series in the last three years, and is ranked 12th in the nation coming into the 2018 season, after finishing 7th in the nation last year.
Colton and Blake did me no favors—we competed against each other, and they were throwing their normal stuff, which is in the upper 80s and low 90s on the radar gun. Unfortunately, I did not win either battle, hitting a fly ball down the left field line against Colton which was caught in foul territory, followed by a really good at bat against Blake, hitting a line drive to our left fielder, Chris Prescott.
All in all, it was a tremendous two weeks, doing something that I took pretty seriously, knowing that I could hold my own, and grateful for the wonderful relationships I have with our coaches and players. Thanks guys. I wear our uniform with much Titan Pride.
But my “competitive” days are over. As my wife Michelle stated, “Bob, don’t quit your day job.” Yes, I realize I’m more valuable to all of you at my desk, doing what I do, but heck, one can dream. If Donald Trump can be President, why can’t I be the oldest designated hitter in baseball history?
The Tax Cuts And Jobs Act of 2017
There is a large amount of information that has already been written about this sweeping legislation, so we are only going to highlight the key areas and changes. If you are that interested in all of the details, feel free to email us at bkargenian@tabr.net and we’ll be happy to forward an outstanding 32-page summary that we’ve come across in one of the publications we subscribe to.
First, the corporate tax rate is being slashed from 35% to 21% and is permanent, making the United States pretty much equally competitive with the rest of the world. There is a lot more complexity regarding the changes for individuals, which will expire after 2025. For now, all of the changes are good for the next 8 years.
Federal tax brackets are being reduced, with the top rate being lowered from 39.6% to 37%, so the vast majority of taxpayers will see a reduction in their marginal rate. In addition, the alternative minimum tax was nearly eliminated, now only applying to singles earning greater than $500,000 and couples over $1 million. The estate tax exemption has doubled, to $11.2 million for individuals and $22.4 million for couples with portability in their estate plans.
So, going forward, estate planning in terms of any worries about paying estate taxes will be irrelevant for about 99.7% of the population. It doesn’t mean one should not have a trust document or wills, or power of attorneys and health care directives, which are all part of an estate plan.
However, many deductions were eliminated or reduced significantly, while the Standard Deduction was increased to $12,000 for individuals and $24,000 for couples. For those in high tax states such as California, New York and New Jersey, it remains to be seen if the reduction in tax rates is enough to offset the elimination of these deductions.
They include a $10,000 cap on deducting state income tax or property taxes, and a mortgage deduction limited to $750,000 of principal applied to new mortgages taken out after December 15, 2017 (existing loans are grandfathered). In addition, going forward, interest on home equity loans will no longer be deductible.
All in all, these changes would appear to harm the residential real estate market in the upper price ranges, say for homes valued at greater than $1.5 million, but I’m not so sure. Homes at that value and above are quite common in Northern and Southern California and parts of New York, New Jersey and Connecticut, but they really are not common in the rest of the United States. In addition, if one was buying a $2 million home and needed to take out a loan for greater than $1 million, my reaction might likely be—perhaps that person doesn’t have a balance sheet that can support buying such a home.
There were a few other tidbits that were notable. The treatment of alimony is reversed under the new law. For all divorce agreements after December 31, 2018, alimony payments will no longer be deductible to the payor, nor reportable to recipients. In addition, the use of 529 savings plans was expanded, to allow for the payment of private elementary and secondary (high school) expenses (up to $10,000 in distributions per student each year). This includes both public, private and religious schools.
Personally, I don’t think that is such a big deal, as the beauty of the 529 plan is to allow the tax-free compounding for college. If you start taking money out of a plan to pay for middle school or high school, you are eliminating much of the advantage of compounding over time, because those funds would not be in the plan for long and you would have to be even more careful about allocations and risk.
Miscellaneous Itemized Deductions Repealed
I am making special note of this, since a number of clients do take advantage of this deduction, where they have been able to deduct investment advisory fees, tax preparation fees and unreimbursed business expenses. Well, it is gone. So, for those clients where we have been deducting all fees from their joint account or Trust account to cover fees for their IRA accounts, this will be a useless strategy going forward. We’ll be contacting all of those who are affected to properly get permission to change to the normal default provision, which is simply to deduct fees from each account accordingly.
As this legislation was being negotiated and written about, I had this inkling that it wasn’t necessarily going to be beneficial for many of our clients who have incomes of $125,000 and greater, especially those in California and New York. But, I really don’t know because each case can be different. To really find out, you’ll need to have your accountant run a simulation side by side, and go from there.
On a more general basis, partner Steve Medland came across a really helpful calculator in an article from the New York Times, so we are providing that link below to any of you who may be interested.
https://www.nytimes.com/interactive/2017/12/17/upshot/tax-calculator.html
At this juncture, about the only thing I feel sure about in regards to the tax legislation is that it is going to keep our friends in the accounting and tax areas very busy.
Material Of A Less Serious Nature
When four of Santa’s elves got sick, the trainee elves did not produce toys as fast as the experienced ones, and Santa began to feel the pre-Christmas pressure. Then, Mrs. Claus told Santa her mother was coming to visit, which stressed Santa even more. When he went to harness the reindeer, he found that three of them were about to give birth and two others had jumped the fence and were out, heaven knows where. Then, when he began to load the sleigh, one of the floorboards cracked, the bag fell to the ground and all the toys were scattered around. So, frustrated, Santa went in to the house for a cup of apple cider and a shot of rum.
When he went to the cupboard, he discovered the elves had drank all the cider and hidden the liquor. In his frustration, he accidentally dropped the cider jug, and it broke into hundreds of little glass pieces all over the kitchen floor. He went to get the broom and found the mice had eaten all the straw off the end of the broom.
Just then, the doorbell rang, and irritated Santa marched to the door, yanked it open, and there stood a little angel with a great big Christmas tree. The angel said very cheerfully, “Merry Christmas, Santa. Isn’t this a lovely day? I have a beautiful tree for you. Where would you like me to stick it?”
And so began the tradition of the little angel on top of the Christmas tree.
By the way, Santa has already given me a great present. Somehow, he gifted to my SF 49ers what appears to be a franchise quarterback in Jimmy Garoppolo. There’s hope in the Bay Area once again, to have a relevant pro football team!
We thank you for the trust you place in all of us at TABR, and wish you and your family a Merry Christmas, Happy Hanukkah and Happy New Year.
Below is Steve with his wife Kim, along with son Conrad, and daughter Audrey.
And here is me with wife Michelle, daughter Caroline, and son Adam.
Sincerely,
Bob Kargenian, CMT
President
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