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Episode 034 – Key Reversal

 

Rick:                 Welcome to Market Insights from Southwest Investments. I’m your host, Rick Zich. Joining me today is going to be Bart Schannep. He’s going to be talking about something maybe a little esoteric from what we normally talk about because this is maybe a little bit more technical.

We’re going to talk about a key reversal. You can see that I don’t always put the date on our webcast here, but I put it today because this marks a point that might be interesting for us to all keep in mind, May 18^th 2020. We’re going to be talking about a key reversal. Here we go. Bart, why don’t you dig into some of the insights here and tell us about a key reversal.

 

Bart:                 Thank you, Rick. Yes, this is a little esoteric, but hang with me here. What I’m talking about today is, on Thursday May 14^th, it appears that we had a nice key reversal. A key reversal is a reverse of a short-term trend. This is almost a little bit what a trader might use, but it gives hope to people who are watching the market on a day-to-day basis to see when a short-term trend might be coming to an end.

In this case, a bullish key reversal is when the price of the market or any index has been going down for a few days. On a key reversal day, the index goes down farther than the most recent lows, but during the day turns around and comes back up and closes at a higher level.

Now, you can certainly have that on the bearish side where a trend is on the rise. Each day the market seems to be going higher and higher. Then on a bearish key reversal day, you can see that the market goes up higher during the day, turns around and closes at a lower level. A lot of times, especially if these days have good volume, it is an indication that the short-term trend is reversing itself.

Well, last week we had a few down days in a row. Some of them were pretty good days driving the index, whether it’s the S&P or the Dow or the broader U.S. stock market index, down more than three percent, which has a lot of different people who watch the market nervous. Seeing on Thursday that we had a key reversal, it was hopeful Friday was going to be an up day. Well, it was a ho-hum day, but it did end up being up.

Now here it is today, May 18^th, and we had the stronger day that’s following through. Key reversals are something to watch for. Again, it’s a short-term. We are not traders. I’m not recommending it as a trading strategy, but for those people who are watching the market on a day-to-day basis, whether it’s getting optimistic by the day or pessimistic by the day, when you see a key reversal, it generally means things are turning around.

 

Rick:                 Thanks, Bart. I think that’s important for many of our clients to know. Sometimes when we talk about things, we don’t necessarily talk about the specifics of us watching the markets in that sort of way. We have our set portfolios that we create for certain individuals, and we just let those portfolios run.

We are not in this as short-term traders, but it is important for us to watch these things and keep them in mind when we’re making decisions on portfolios. We’re, like I said, watching the market. Sometimes we can get discouraged when things are not going as we expect, but this is a very important point, this key reversal. Hopefully it’s an indication that can give us hope going into the future. Hopefully next week we’re going to see continued ups. That will probably take us into a different trading range.

Thanks so much for giving us that insight, Bart. I appreciate you showing up and enlightening us with a little bit of information about key reversals. Thank you for joining us on our webcast this week. We look forward to seeing you each and every week.

If you do have comments or anything else that you would like to say about the webcast, please feel free to fill out a ‘contact us’ form and send it in. We’ll be sure to read it and take a look to see if we can answer these questions right online. Thanks again for joining us. We look forward to seeing you next week. Thanks so much.

Episode 033 – Cash Poor

 

Rick:                 Welcome to Market Insights from Southwest Investments. Today we’re going to be talking about something that I know many of you would be interested in because quite a few people want to be rich, but what is rich? One of the things that I have found very difficult to explain, I have an accounting background in addition to finance, and there is a very distinct difference between being cash rich and paper rich.

What we’re going to be talking about today is Elon Musk. Elon recently in the news has been talking about selling off all of his physical possessions and what that’s going to do. We’re going to dig into what that actually means because there are many people that are stock rich that they own a lot of companies, but in the end, that really doesn’t mean anything unless they can turn that company into something and make a sale to someone.

I think we’ll talk about that in maybe a future webcast because, not to get into too many details, but basically sometimes those companies that are sold by the owner are purchased by, let’s just say some sort of a financing company. I don’t want to dig into and name anybody, but basically what happens sometimes is they take on a lot of debt.

We hear this in the news of companies being burdened with debt. It’s because of some sort of buyout of the existing ownership. Well, that’s what’s happening. That owner is moving from being stock rich to cash rich.

That’s the dream of every American that is in business, to be able to sell their company. Everyone wanted to be bought by Google at some point because Google had all the money to do things. We’re going to be talking about those things. Bart Schannep is going to join me to explain what this ‘cash poor’ means and why Elon Musk is in this predicament.

 

Bart:                 Thank you, Rick. It’s good to be on again and good to see you. Yes. Elon Musk is a unique fellow, but the situation he’s in is not unique, especially to entrepreneurs. It’s called being cash poor. What does that mean? Okay, Elon Musk owns Tesla, the car company, SpaceX and a number of other assets. His net worth is estimated to be around $39 billion with a B.

The problem is that’s what he owns. That’s what it’s worth, but he spends all the money he has, and he has no cash. It’s been in the news and confirmed by various media that he is selling all of his assets that he can. He is selling his houses. He has multiple houses. He’s selling all of his belongings, trying to raise cash so he can simply live.

He owns stock, absolutely, but much, if not all of it is restricted, meaning because he’s the owner or restricted meaning that because he’s the owner he can’t sell it, or the shares that he can sell, he’s afraid to let go because he may lose controlling interest of his companies. He is retaining ownership of his companies and is probably moving into a rental.

Unbelievably, a 39 billionaire is selling houses so that he can move into a rental that he can afford to live in. Now, we’ll see how long this lasts. As I say, he’s a unique fellow. He’s currently suing California, his city in California because of the COVID-19 stay-at-home orders that his factories can’t work if everyone’s required to not be at work. He’s suing the city that he’s in, Alameda, and he is seriously looking at moving out of California. Now, we’ll see how that goes.

I am surprised that Tesla that survives to a great extent to federal tax rebates on buying these battery cars has now established a factory in China, which means U.S. taxpayers are supporting his factory in China. Now as he looks to other states, California may be upset that they gave him a lot of tax breaks to be there in the first place, so a little trauma and drama. We’ll see where it goes.

 

Rick:                 Thanks a lot, Bart. Interesting perspective and evidently not an uncommon situation for entrepreneurs, like you had said and as I explained a little bit earlier in the broadcast here. I find it always very interesting explaining the difference on cashflow because that’s really what it is. For you accountants out there, that’s what we’re talking about, cashflow versus the income statement. Very, very different things and essentially very difficult to really conceptualize.

Thanks Bart for your insight on that. I appreciate you joining us this morning. Thank you for joining us as well. We appreciate you coming, watching the show, giving us your comments and interesting takes on what we have to say. Keep those comments coming. I appreciate it, and we’ll see you next week.

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Episode 028 – Rebalance.mp4

This is Market Insights from Southwest Investments, where we dig into current events and how they affect the markets but also how they might impact your financial future.

 

Rick:                 Welcome to Southwest Investments Market Insights webcast. I’m your host, Rick Zich. With me today is going to be Bart Schannep. Bart’s going to dig into some things that we talk about every time you come in for an annual rebalance or an annual review of your account.

Basically what we’re doing is we’re identifying which funds, which mutual funds, which ETFs have performed really well and might have brought your account out of balance. We want to bring it back into balance. Bart is going to dig into what that really means and what’s behind that. Bart, I appreciate you joining us today. Why don’t you dig into some of those things?

 

Bart:                 I certainly can, Rick. Thank you for having me on. The easiest way for me to explain rebalancing is think in terms of, well, here’s a good example. Say you’re dropped on an island and there are only two companies you can invest in. You can invest in an umbrella company or a golf course company. The only other piece of information you have is that it literally rains every other day.

Okay. You get there. You land, and you invest equally into each company. First day, rains like crazy. The umbrella company goes up. Second day, dry, no rain. The umbrella company goes down, but the golf course company goes up. Next day and vice versa. What you can see is your money would eventually or essentially just move up and down with what’s happening.

With rebalancing, let’s say it rains like crazy. The umbrella stock goes up. The golf course stock goes down. At the end of the day, take your profits from the umbrella company and buy more cheaper golf course stock. The next day, dry as a bone. Everyone’s out playing golf. The umbrella stock goes down. The golf course stock goes up, but you now have more shares because yesterday you were able to buy cheaper shares.

Well, now that the weather’s nice and everyone’s playing golf, you can sell some of your profits, take some of your profits out, sell some of your expensive golf course stock and buy cheaper umbrella stock. Instead of day by day your portfolio going like this, because you keep taking profits from the winners and adding to the losers, you can make your portfolio climb like that. That’s the best way for me to describe rebalancing.

Now, after that it gets a little more difficult. Do you rebalance? In the real world, we’re not using just two stocks, golf course and umbrella. We’re using broader based asset classes, large cap US, small cap US, international bonds. Maybe commodities are mixed in there, even money market.

When you get the proper mix of assets for you, for your risk tolerance, then do you rebalance annually, semi-annually, monthly, weekly, even daily if you’re a day trader? Well, we have found that from a historic standpoint, statistically the best is annually. Now, we certainly cheat when people add money or need to take money out. We’ll rebalance at that time. Otherwise, in a static world, the best bet is probably for us, we believe, annually.

Other people disagree. It should have nothing to do with time, should have to do with if one of the asset classes gets more than one percent out of whack, three percent, five percent, 10 percent. There’s no magic number, just a number, a percentage out of whack, then you should rebalance.

There is a flaw in that that if one of your investments, one of your asset classes tears off on a run, you maybe haven’t given it enough movement to really make a difference. That’s what we find with rebalancing. It isn’t necessarily about trying to improve performance, although with my golf course and umbrella example, you can see it does help with performance, but the other main thing is reduction of risk.

In reducing risk, what you’re doing is you’re protecting. You’re keeping yourself from having too much assets in the wrong category at the timing that maybe such a category takes a real beating. You control risk by not letting any asset class get too large. What it does is it also gives you something to do. Yes, that’s what I said, something to do. We are hardwired to do the wrong thing at the wrong time. When the markets go down so steeply, people feel like they have to do something.

I’m going to borrow this. Warren Buffet’s mentor, Benjamin Graham, once said that the active rebalancing simply gives investors something to do. It lets them blow off some of the energy, bleed off some of the energy that when people feel like things are going bad and I’ve got to do something, okay, then let’s rebalance.

Let’s move out of whatever asset class maybe did the best and add more to the asset class that did the worst because we’re at least buying something cheaper so that when the normal state resumes, that which we bought at a cheaper price will give us the reward. That’s rebalancing in a nutshell. I hope this helps.

 

Rick:                 Well, it certainly did, Bart. That, I think, broke it down really, really simple for those that come into the office and maybe just want a little bit more information about what a rebalance actually does. I appreciate that insight on there.

One of the things that I would also like to talk about is that as you watch these videos, don’t be afraid to go into our contact page and send us any questions that you have about this. I’d be happy to bring it up on the next webcast or just send you the answer directly so that we can make sure that you’re being taken care of. Please, feel free to go ahead and send us that information. I appreciate you being here and look forward to seeing you again next week. Thank you so much.

Rick Zich:          This is Market Insights from Southwest Investments, where we dig into current events and how they affect the markets, but also how they might impact your financial future.

 

Welcome to Southwest Investments. I’m your host, Rick Zich. I’m an advisor here, and joining me is Bart Schannep. Bart, welcome to the show.

 

Bart Schannep:  Thank you, glad to be here.

 

Rick:                 You know, we kind of rely a lot of your information that you’ve provided here at the company, and one of the most interesting things that we’ve talked about recently is this thing called modern monetary policy, is that.

 

Bart:                 Modern monetary policy, yes.

 

Rick:                 Let’s dig into that.

 

Bart:                 OK. First of all, number one, it’s not modern. It is Keynesian. This is the economic philosophy of debt, or spending more than the government has to keep the economy afloat during recession or tough times.

 

Rick:                 Keynesian kind of lost favor, is that why we’ve changed the name?

 

Bart:                 Yes. Keynesian definitely has lost favor. Now, that doesn’t mean we haven’t stopped borrowing money. We just borrow money in good times and bad times. Even though our economy, up until recently, has been very strong and very profitable, the government still borrows way more than they, you know, we spend way more than we bring in, and so the government continues to borrow.

 

Well, with the stimulus packages having to do with offsetting the economic impact of the coronavirus, two trillion, which may morph into six trillion, was the first stimulus. I don’t know how much the second stimulus was supposed to be. When you just put trillions of dollars, you tend to lose the number value quickly.

 

Rick:                 Yeah.

 

Bart:                     But instead of going out and borrow all that money, the thought now is to implement modern monetary theory, or policy, which would be, simply, printing the money.

 

Rick:                 This is not new.

 

Bart:                 No.

 

Rick:                 Number one, because, obviously, Keynesian brought this out.

 

Bart:                 Yeah.

 

Rick:                 Most recently, this is something that has happened with Japan.

 

Bart:                 Correct, correct. The Bank of Japan is, acts essentially, as the Federal Reserve of Japan.

 

Rick:                 Here like.

 

Bart:                 Yeah. There equivalent. What they’ve done is, when they ran into a problem of their upper limits borrowing too much money, and, in effect, risking the creditworthiness of the country, they have been quietly printing more money. What did that do? Nothing. It worked in their favor. Why is that? Because their economy was growing, and in a growing economy, even though you think, OK, more currency, more cash, in the same economy leads to inflation. That’s the definition of inflation, too much money chasing too few of goods, but if the economy is growing, you might not notice it.

 

Rick:                 A good example of something that is totally opposite of that, I can recall when my wife went to Zimbabwe, she got, like, a quarter-trillion note. It was a crazy number.

 

Bart:                 Right.

 

Rick:                 That was because their economy was failing.

 

Bart:                 Correct.

 

Rick:                 They were printing money, and printing money, and printing money.

 

Bart:                 But not expanding their economy.

 

Rick:                 But not expanding.

 

Bart:                 And not growing, and so because of that, yes, that’s right. In a closed-circuit, in a closed box, more paper currency drives up inflation. If the economy is faltering or shrinking, it really drives up inflation.

 

Rick:                 Right, so here we are.

 

Bart:                 So here we are. Granted, we’re still in the coronavirus situation, but as we move on and move beyond and get back onto a growth pattern, we may be able to print our way out of this problem. Now, the feds have a target. They’re looking for two, two-and-a-half percent inflation. That’s what they consider a healthy level of inflation. You get more than three percent, starts getting a little more problematic.

 

Rick:                 That’s right.

 

Bart:                 But that two, two-and-a-half percent’s a sweet spot. That’s where the feds are aiming. They have not been able to get that inflation.

 

Rick:                 They’ve been saying this for years.

 

Bart:                 Yes. Well, the problem is, the two drivers of inflation in the U.S. economy are labor prices and energy. Both of those have not been a problem. Labor prices have been fairly steady. Only up until about the last year has it started to rise, and energy has been going down. So.

 

Rick:                 Yeah, as of late, oil prices.

 

Bart:                 Well.

 

Rick:                 Are negative.

 

Bart:                 Yeah, that’s right.

 

Rick:                 For many, but.

 

Bart:                 Negative, yeah, never mind real recent.

 

Rick:                 Right.

 

Bart:                 But, so, how are we going to get out of this problem? How are we going to borrow all of this money? We’re not. We’re just going to start printing it.

 

Rick:                 Very good. Well, thanks so much Bart for sharing that insight. It’s definitely an interesting way of looking at it, and we’ll see if it comes true. Thank you for joining us this week. We look forward to seeing you next week.

This is Market Insights from Southwest Investments, where we dig into current events and how they affect the markets but also how they might impact your financial future.

 

Rick:                 Welcome to Southwest Investments. I’m Rick Zich, your host. I’m a manager and financial advisor here at Southwest Investments. Joining me is Bart Schannep. How are you doing Bart?

 

Bart:                 I’m doing terrific. Thanks for having me on.

 

Rick:                 Excellent. I’ve been going back to some of the videos that we’ve been doing. One of the most popular and things that we’ve received the most feedback from is the one that we had about unintended consequences. Remember that?

 

Bart:                 Yes.

 

Rick:                 That was a lot of fun. Let’s do another one because I’ve got a really interesting one.

 

Bart:                 Part two?

 

Rick:                 Part two.

 

Bart:                 Okay.

 

Rick:                 Unintended consequences part two.

 

Bart:                 Bring it.

 

Rick:                 Alright. Here are the two things that have been happening. Number one, the government increased unemployment benefits to the people that have been furloughed because of the whole COVID-19. The amount that they increased it by, this isn’t what they increased it to. What they increased it by was $600 a week, which is about $15 an hour, which is what the Democrats think the minimum wage should be. That’s what it’s been increased by, so it’s pretty good for people.

 

Bart:                 Well, that’s pretty good. However, as we learned from not just the most recent recession but how we relearn about every recession is the more lucrative you make unemployment benefits, the longer people remain unemployed.

 

Rick:                 That leads us to this next thing. That was part one of this thing. The Republicans in this relief package wanted to make sure that businesses also got support. We got the employees getting the support through the unemployment, increased unemployment. Now the businesses are getting this paycheck protection program, PPP. A lot of people are hearing about it, heard about it, how it ran out of money in two weeks.

 

Bart:                 Right.

 

Rick:                 This is where a company can get a loan from the government through the SBA, Small Business Administration and that it’s a portion. There are some calculations.

 

Bart:                 It’s a ratio.

 

Rick:                 Exactly. The really good thing about this is that if you use it to pay wages to employees that have been either furloughed, laid off, whatever the case might be, you bring them back, and you can then ask the government to basically give that money for free.

 

Bart:                 Right.

 

Rick:                 You don’t have to pay it back.

 

Bart:                 Right.

 

Rick:                 That’s fantastic. Businesses are loving this. Tell me the problem.

 

Bart:                 Well, if you don’t bring them back, it’s a loan you do have to repay, but it’s only at one percent interest.

 

Rick:                 That’s right.

 

Bart:                 What you’ve got is you’ve got companies that can take that cash and either use it as a super low loan or it can work out that if you’re getting free labor from employees, that increases your profits.

 

Rick:                 That’s right. Now, the one other thing about that is if you’re increasing profits, you’re increasing taxes. The government is really getting a lot of that money. I shouldn’t say a lot of the money back. They are getting some of the money back.

 

Bart:                 Yes they are.

 

Rick:                 There are quite a few unintended consequences in this whole thing that wasn’t necessarily thought of all the way through because all of this legislation got done in roughly three weeks.

 

Bart:                 Right, during the scariest times when the virus was the scariest.

 

Rick:                 Absolutely.

 

Bart:                 Yes.

 

Rick:                 Very interesting things. Thank you for joining us today. If you have any comments about this, I’d love to hear them again. Go ahead and send us an email. Visit us on the website. We look forward to seeing you next week.

Rick Zich:                  Welcome to market insights. I’m your host, Rick Zich, and with me today, Bart Schannep.

 

Bart:                           Good morning, Rick.

 

Rick Zich:                  Good morning. How you doing this morning doing this morning?

 

Bart:                           Doing great.

 

Rick Zich:                  Fantastic. Fantastic, you know, today we’re doing one of those unique things that we do that is not necessarily tied to a specific moment in time. But I think it’s pretty relevant. And that has to do with ripple effects.

 

Bart:                           Yes.

 

Rick Zich:                  So different decisions that are made. And so right now, we just happen to be in a very specific type of space and time that we’ve had lots of things that have been canceled.

 

Bart:                           Disruptions.

 

Rick Zich:                  Disruptions, things like that.

 

Bart:                           Yes. And one of the worst parts of this disruption, it’s invisible. Right?

 

Rick Zich:                  That’s right.

 

Bart:                           Okay. So we’re not talking about a – we’re not talking about a war. We’re not talking about, like the airborne oil embargo where there literally was no gasoline. We’re not talking about that. We’re talking about an enemy that’s invisible, the Coronavirus and the ripple effect that it has had on our economy which ties into our business, but our lives, our very lives.

 

Rick Zich:                  Absolutely.

 

Bart:                           And so a prime example of that is weddings.

 

Rick Zich:                  Weddings happen all the time.

 

Bart:                           Think of all the weddings that have been hopefully just postponed, or truncated to video only, which some have, or are truncated just to just the parents are the smallest possible group of people possible versus the effect on people’s lives in the economy had it gone through full-blown.

 

Rick Zich:                  That’s right. So if we think about what is all included in the wedding, you’ve got where they’re having the wedding and that’s two spots.

 

Bart:                           The venue.

 

Rick Zich:                  The venue, so, so they might have a church. They’ll go to maybe a church first, depending upon you know, your particular situation. Then you have the venue.

 

Bart:                           Where you have the reception, right.

 

Rick Zich:                  You are paying a pastor even though it might be at a church so there’s money. They’re the venue, how many people are in the venue that are being paid? Employees.

 

Bart:                           How much food? How much booze, the stamps that go out on the invite?

 

Rick Zich:                  The stationery.

 

Bart:                           The stationery, for the invites, the – everything across the board. I mean, even the honeymoon, the cruise ships, the airlines to get to the cruise ship or whatever you’re doing.

 

Rick Zich:                  The Uber driver.

 

Bart:                           Right? And so even people who are postponing it, are they going to still do the same big today? Or are most people going to do a small private wedding now? And do a reception later?

 

Rick Zich:                  That’s right.

 

Bart:                           So it’ll be a less to do. So this rippled through the effect of the economy. And unfortunately, the people who get hurt the most are the lowest paid, the low pay wage earners, the people who are the servers, the people who are helping to present the food, the drinks, the event, they’re the ones that get short shifted. So this is – this has been a real double whammy of the Coronavirus, socially imposed isolation and when you think of, even if things get back or when things get back to normal, the airlines have still been paying finance fees on their airplanes that nobody’s flying on. The cruise ships are still paying finance charges on the cruise ships that nobody’s on.

 

Rick Zich:                  Absolutely.

 

Bart:                           The people who sell diamonds [crosstalk][00:04:20] have held – they’ve held all that inventory during this quiet time. So the good news is things will get back to normal. And we all hope that it gets back to normal as soon as possible and comes back roaring strong.

 

Rick Zich:                  And the contrary to that also Bart just to continue just for a second is that we have also had some changes happen because of these kind of disruptions. I think that the online videos and those kind of things like what you said they might do an online video on there. Those businesses are doing good except it was really unexpected.

 

Bart:                           And how many employees does that really run?

 

Rick Zich:                  Very, very small. Those businesses were already running. So they might have been increased their business. But it’s not helping like you said. The lowest rung of the people are still greatly impacted. They’re not doing additional hiring or things like that. So for someone to say that, yes, it’s shifted only to a certain extent.

 

Bart:                           Right.

 

Rick Zich:                  Only, yeah, for only a small amount. So I think it’s fantastic information. Thanks so much for bringing that up. I appreciate you sharing that insight. And I’m sure that we will have many more to come. So please check back with us again. Visit the website for new and interesting articles. And I hope to see you again. Thanks so much.  

This is Market Insights from Southwest Investments, where we dig into current events and how they affect the markets but also how they might impact your financial future.

 

Rick:                 Thank you for joining us. Today is April 20^th 2020. Joining me today is Bart Schannep. Bart, welcome.

 

Bart:                 Thank you Rick. Good to be here.

 

Rick:                 Fantastic. One of the things that has happened today, it’s the end of the day today. Normally we do these in the morning, but today is interesting. We’ve been able to take it in the afternoon, and we notice some really interesting things on oil.

 

Bart:                 Right.

 

Rick:                 It has made a dramatic impact on the market today. Let’s dig into some of those details.

 

Bart:                 Absolutely. On Friday I saw in the paper that oil hit an 18-year low in price. Then I saw on Saturday we hit a 22-year low on oil in price.

 

Rick:                 Today it was really interesting as well. Now, granted today was very unique because it was the last day of the month, so the contracts today really are maybe overemphasizing price, but it got really low, down to $5 at one point a barrel.

 

Bart:                 A barrel. That’s unbelievable. It didn’t seem like it was all that long ago it was $100 or more a barrel. Time flies when you’re having fun or paying for gas at the pump. I will tell you what’s going on is just before the coronavirus hit, there was a push-me-pull-you argument between Saudi Arabia and Russia over oil.

It’s the supply and demand of normal general economics. You want supply and demand to be somewhat on par with each other, but if supply increases, demand prices fall. That’s what’s been happening. Well, Saudi Arabia asked Russia to reduce their output of oil, and Russia said no and insisted that Saudi Arabia reduce their output of oil. Saudi Arabia said no, and then it just became a pushing match.

Well, it didn’t end well. It ended with Saudi Arabia throwing up its arms and saying that they have decided they are going to pump as much oil as they can. Now, the big elephant in the room is the United States. We’re the largest consumer of oil, but we are now also one of the largest producers of oil.

 

Rick:                 That’s only relatively recently as the shale…

 

Bart:                 Fracking.

 

Rick:                 Fracking has come up.

 

Bart:                 Whether you like in favor of fracking or not makes no difference. It’s a big mover in the world’s economy.

 

Rick:                 It has a price point.

 

Bart:                 It does have a price point. There’s a breakeven point.

 

Rick:                 Right.

 

Bart:                 Saudi Arabia has the lowest. Well, with Saudi Arabia pumping oil like crazy, they filled eight tankers with 40 million barrels of oil that are just about to hit the U.S. Louisiana or Texas coast. When those 40 million barrels come onboard in the United States, we don’t really have any place to put it.

 

Rick:                 That’s the real key right now. The demand for the oil…

 

Bart:                 Has dropped dramatically where if we’re all staying at home, then we’re not on airplanes. We’re not driving cars. We’re not driving trucks. Okay. Transportation is the main use of oil in our country. We’re not using it as much, nearly as much. Demand is down dramatically.

Local producers are still producing oil, and now we’ve got all this other oil that’s been paid for coming over from Saudi Arabia. It is going to flood the U.S. market with oil. We are awash in oil, no place to put it and at the moment, no demand for it. Quite a conundrum.

 

Rick:                 To finalize, the demand has dropped so dramatically. We had Saudi and Russia oversupplying.

 

Bart:                 On top of our own.

 

Rick:                 On top of our existing amount.

 

Bart:                 Supply.

 

Rick:                 That is where the prices are being driven, supply and demand.

 

Bart:                 Supply and demand.

 

Rick:                 Thank you so much, Bart, for that information. We hope that you enjoyed it. Please like us on Facebook and come to our video page to check out the latest that we’ve got. Thank you so much.

Rick:                 Thank you for joining us in Market Insights from Southwest Investments. I’m Rick Zich, your host. Joining me today is Bart Schannep. Bart, welcome to the show.

 

Bart:                 Glad to be here, thank you.

 

Rick:                 Awesome. We have… It’s one of those things where when we got bad things happening, the first thing that you do is you stop doing those things that are creating the bad thing, like the analogy of “When you’re in a hole, stop digging.”

 

Bart:                     Right.

 

Rick:                     Let’s dig into some of the things that are happening now and what we think is going to help stop them and where we’re at. Let’s dig into it.

 

Bart:                 Right. This is the situation. We are in really unprecedented times. You figure we have an unprecedented global crisis, which led to a global market meltdown, which has led the central banks and fiscal stimulus around the world to really amp up, which has now led to a rally as investors are starting to perceive that there’s a light at the end of the tunnel.

Now, we didn’t dig this hole. This happened to us, right? This pandemic, this virus. When it first hit, it led to the fastest decline, 35 percent decline, fastest decline in the stock market since 1933.

 

Rick:                 It was like three weeks. It was very fast.

 

Bart:                 Boom, very fast.

 

Rick:                 When we talk fast, traditionally in stock terms, the stock market, fast is maybe a few months, but when we’re talking fast, this is fast.

 

Bart:                 It was followed by the fastest 25 percent gain measured in days right after that. We do believe that we are in a short-term bear market inside of a much longer secular bull market. We believe that the economy, which was very strong before, had this massive stumble, this complete shutdown across the world. It is our hope that the recovery will be, if not U-shaped, maybe even closer to V-shaped quicker in coming back. Well, how does that happen?

 

Rick:                 Real quickly before you get into that as far as U shape and V shape because that’s one of those jargon terms that sometimes we might think of. When you think of the V shape itself, that’s how quickly it went down. It didn’t go down in a slope like a really wide V. It went down fast, and we’re expecting it to go faster.

 

Bart:                 So far we’re about halfway up and about just as steep in up as the decline was.

 

Rick:                 Right.

 

Bart:                 We’ll see what happens moving forward from here, but this is what we can see. In the world of investing, one of the things that investors focus on is rate of change. When we had the pandemic, and we all know the facts. It was coming out roughly at 100 percent more contagious than the standard flu. We had no immunization for healthcare workers to be able to do anything about it. One of the first places it hit was both China and Italy, and they had a bunch of deaths very quickly.

 

Rick:                 It scared a lot of people.

 

Bart:                 That scared the wits out of everybody. Okay. Now what we’re seeing is we’re seeing that rate of change slow down. Normally investors look for rate of change, the rate of change to be modified, whether it comes to earnings growth, sales growth, money supply, you name it.

Well, now it’s, “Okay, how many infections? How many deaths?” Okay. Well, Italy declining in both those. How many infections, how many deaths in Spain, the other country that seemed to be so seriously hit? Down. Now we’re seeing the same in New York City and in Seattle. Now, we still have a lot of people getting the infection, and deaths are following, but our projections. You figure the modeling that they’ve been using had projected 90,000 people dying in the U.S.

 

Rick:                 Significantly higher amount than we’re seeing now.

 

Bart:                 That was last week’s.

 

Rick:                 These things are happening fast.

 

Bart:                 This week, now it’s only 60,000. What is next week and what is the following week? We don’t know, but we do see the curve is flattening. Not everywhere, okay, but Louisiana, Colorado, Delaware, Iowa, Kansas, Mississippi, Missouri, Montana, North Dakota, Ohio, Oregon, Vermont, Washington and Washington DC.

Okay. Well, that’s how things start to get better because they have to get better somewhere. If they’re starting to get better there, I know that New York has been the hardest hit. They have not flattened yet. They’ve not flattened their curve yet, but it’s perceived that as news starts getting less bad, that’s what helping defeat the market.

Now, we’re going to get a lot of bad news coming. All the backward looking indicators, we’re going to start seeing reports on how lousy car sales were, housing starts, sales of durable goods, retail sales, you name it. Those are all going to come out bad, but those are all the things that have happened.

 

Rick:                 That’s right. That’s right. Stock prices are not necessarily what happened.

 

Bart:                 Right.

 

Rick:                 The terminology is they get priced in.

 

Bart:                 Right. The market knows all these bad things happened.

 

Rick:                 That’s right. It’s already in the past.

 

Bart:                 It’s already in the past. One of the reasons the market’s been moving forward or up direction is because although the GDP is expected to take a significant hit, it’s not expected to be a permanent hit. That’s what we’re there looking forward to. The market has been pummeled. The market has recovered halfway. Getting back to the other half will be following news getting less bad, less worse. That’s what we’re looking forward to.

 

Rick:  Thank you so much for joining us. We look forward to seeing you next time around. Thanks.

Episode 035 – End of a Bull Market.mp4

Rick:                 Welcome to Market Insights from Southwest Investments. I’m your host, Rick Zich. Joining me today is going to be Bart Schannep. What we’re going to be talking about today is recapping this spectacular bull run that ended with the COVID-19 pandemic.

People tend to follow either the Dow Jones or the S&P, Standard and Poor’s index. We’re going to be discussing specifically the returns of the S&P 500 and recapping this most recent bull market and its dramatic run that it’s had. Bart, why don’t you get us into some of those details?

 

Bart:                 Thank you, Rick. Yes, I don’t think we need to play the dirge just yet, but we certainly did see the end of a spectacular bull market, the bull market that began on March 10^th 2009. Now, as a formal definition, a bull market starts at the lowest point of the previous bear market. That’s the beginning of the up.

In other words, if the market is digging itself in a hole, that’s when the market stops digging the hole. From then, since March 10^th 2009 until this COVID-19 virus hit, and in this case the market topped out on February 19^th 2020, so just shy of 11 years. The S&P 500 as the broadest base U.S. market index had a total gain of 529 percent or 18.3 percent annual compounded rate of return, which is a terrific bull market.

We are now in a bear market. We’ll see how long this lasts. We hope we’ve already seen the bottom, but we’ll see. If we have, that’s the start of the next bull market. What’s important is being in the market. Had you joined or had you invested six months after the bottom when maybe you felt better about things, your average annualized rate of return will have dropped to 14.4 percent.

Had you been early by six months, your return would have been reduced to 11.6 percent average annualized rate of return. These calculations are all based on a company called BTN the Research. Nobody has perfect vision. Nobody knows when the bottom is, but it’s a good lesson on being in the market, making sure you’re in the market.

Unfortunately, what that frequently means is going against our better interest and buying when things are scary, or more specifically, when things are the most scary. That’s my tidbit for today, my statistics for today. Thank you.

 

Rick:                 Well, thanks so much, Bart. It is very interesting. Number one, certainly that was a very good run for us all. Many investors really ask about the long-term average, and for some reason 12 percent is kind of stuck in their head for that number.

While it’s stuck in their head for that number, over the past few years, we had almost 11 years providing 18 percent interest. I mean, not interest but 18 percent returns per year as an average annualized rate of return. That’s just very, very hard to come by. That’s why this bull market is rather extraordinary.

Let’s obviously hope for more like it. We don’t know what this is going to be taking us into with the COVID-19. This is an interesting time, and I really look forward to seeing what’s going to be happening. Thank you Bart for sharing that insight.

Thank you all for coming and watching our show again, joining us on the webcast. If you do have any questions, again, please feel free to fill out our ‘contact us’ form. Hopefully I will be able to read some of those on our webcast  in the future. We just look forward to that input. Thanks so much for joining us again. We look forward to seeing you next time.v

Thank you for joining us at Southwest Investments for Market Insights. Joining me today is Bart Schannep. Bart, welcome to the show.

 

Bart:                 Thank you, glad to be here.

 

Rick:                 Today, or I should say in the past, we’ve talked a little bit about how the CARES act has affected companies and the overall economy. Let’s dig into individuals.

 

Bart:                 Yes. Let’s focus on individuals. There are a lot of moving parts in a lot of the legislation talking about loans, both forgivable, non-forgivable, different taxes that may be forgivable, what industries might be focused on, that sort of thing. Let’s dig into what does it mean to the average person.

 

Rick:                 Awesome.

 

Bart:                 There are a lot of numbers. Let me just read over what we’re looking at. Obviously people know about the recovery checks for U.S. individuals with adjusted gross income of under 75,000 each or 150,000 in joint returns. They’re going to get money. They’re going to get money per person. They’re going to get including money for kids, covering kids.

There is a phase out where if you make too much money you start to get less of it. Sure enough, if you’re over 99,000 per person or 198 filing joint, it fades out completely, and nothing’s coming.

 

Rick:                 Typical with all taxes that we deal with, there are rules upon rules that are going with this, how many kids you have, how much income you make. I don’t think that’s terribly difficult to understand, but you just need to be watchful.

 

Bart:                 It’s also approximated. What you’ve got is the government’s doing the best guess they can. Adjusted gross income based on what they think your 2019, whether you filed or not, your 2019 taxes. If they don’t have that, they’ll look at your 2018 tax return.

 

Rick:                 That’s been a really prominent question that I have heard from a few people calling in.

 

Bart:                 How do they know?

 

Rick:                 How do I know? I lost my job.

 

Bart:                 Right.

 

Rick:                 What do we do? Our response has been, “File as quickly as you can for your taxes.”

 

Bart:                 Right, right. The other thing has to do with required minimum distributions. Now, we’ve talked before about how required minimum distributions got pushed back to age 72, but now regardless, everyone is free to not have to take a distribution in this year, 2020.

What really affects more people is the waiving of the 10 percent penalty for early withdrawals, assuming, and this is a broad base, assuming you need the money either because you contracted the virus, your spouse or a dependent contracted the virus or you experienced financial consequences because of the virus. This—

 

Rick:                 That could be maybe a hospital bill. Is that what we’re thinking?

 

Bart:                 It could have been your income went down because you were quarantined, that you were furloughed, that you were laid off, that you’ve had reduced hours, that your business closed. It starts getting pretty broad based there, that’s right.

Any money you do take out, you can spread the tax payments on it over a three-year period. That’s going to be another confusing thing that people are going to have to keep track of. What is nice is over that three-year period, if you’re able to put money back in, you can redeposit it back in.

 

Rick:                 Kind of like a rollover. Is that what we would consider it?

 

Bart:                 It’s almost like it’s against the law to have a loan against an IRA, but it’s pretty much if you can put it back over a three-year period, it’s like borrowing the money.

 

Rick:                 Got it, got it.

 

Bart:                 From businesses, defined benefit plans are able to push back into next year. These are all changes that affect the average person, that are worth noting. It is the government trying to help. My guess is it’s going to help a lot of people.

 

Rick:                 Well, I think that’s going to be, like you said, helpful for a vast majority of the people that are out there. For us, at least we now have this information to relay to not just our existing clients, but also I think it’s important for this to get out to as many people as possible because it is a lot of different rules that have come about in a very quick time period. They changed it quite a few times as it went through.

 

Bart:                 These are unprecedented times. Everyone’s trying to do the best they can.

 

Rick:                 You got it. Well, thank you so much, Bart, [music plays] for joining us and explaining some of these things. If you do have more questions, feel free to go onto our website. Our email address is on and [Inaudible] [05:25]. Give us a call. Let us help you. Thanks so much for joining us.

Welcome to Market Insights from Southwest Investments. Joining me today, Bart Schannep. Bart, welcome to the show.

 

Bart:                 Thank you. Good morning.

 

Rick:                 I was going to take you out to lunch and buy you lunch.

 

Bart:                 Wow. That’s going to be rare, okay.

 

Rick:                 It’s free to you, right?

 

Bart:                 No. That probably means you want something.

 

Rick:                 There you go. There’s no such thing as a free lunch, right?

 

Bart:                 No. There is no such thing as a free lunch.

 

Rick:                 However, in the news we’ve got Morgan Stanley. We’ve got these bigger behemoths, if we want to call it that, are buying up free online trading companies.

 

Bart:                 Right.

 

Rick:                 What’s going on with that? Like we said, there’s no free lunch.

 

Bart:                 That’s right.

 

Rick:                 Where are they getting the money?

 

Bart:                 Alright. I’m referencing an article. The E-Trade deal reveals the new rules of the investing game. This was in the Wall Street Journal, the Saturday/Sunday edition, February 22^nd. What we saw recently was that E-Trade was recently purchased by Morgan Stanley. Now, E-Trade is one of the firms that highlights free online trading. Okay. If there’s no such thing as free, then how is it they’re offering that?

Well, it’s all about trying to gather your assets. E-Trade does offer free online trading. There are some restrictions, but basically it’s free to anybody. How do they afford that? How is that possible? Well, they hide their income. Their income is soaring. By what means? Well, primarily one is money market. Any time you leave excess cash in the account, it sweeps into their money market. Well, their money market only pays between one hundredth of one percent.

 

Rick:                 That’s 0.00.

 

Bart:                 Well, it’s 0.01 percent.

 

Rick:                 Percent, right.

 

Bart:                 Right. Up to a quarter of one percent depending on how much you have in it.

 

Rick:                 That’s less than a bank.

 

Bart:                 Yes.

 

Rick:                 Right now a bank, and we’ve always told clients that we’ve spoken to that usually you only want to put very, very short-term money into your bank. Let’s invest in maybe a little bit higher performing.

 

Bart:                 Right. You have standard money markets currently paying around one and a quarter percent. You have high-yield money markets paying two percent. Okay. Well, E-Trade is putting their money at two percent and giving you a quarter of one percent. They’re keeping the difference.

 

Rick:                 That would make up a little bit of the money that they’re…

 

Bart:                 Wait, there’s more.

 

Rick:                 Alright.

 

Bart:                 The other thing they’re doing, and it’s not just them. Schwab does the same. Other firms are doing the same. That is that they are making their investment recommendations in their own proprietary funds, mutual funds that they own and run. Think in terms of Vanguard. ETFs that they own and run and other investments that they’re in fact creating where they are able to collect the fees that normally would go to an outside provider.

 

Rick:                 The trading fees and their management fees.

 

Bart:                 The trading fees and the management fees, exactly. That doesn’t mean all house brands are bad. No, some could be perfectly good performers, but the reality is are you getting the house brand because it’s the best or because that’s how they get paid? The worst offender, and this is somewhat new on the market, structured notes. Let’s talk about structured notes.

 

Rick:                 Are we going to get into my favorite thing, annuities, as well? Is that…

 

Bart:                 A lot of annuities use the same philosophy. It’s all based on what’s termed structured notes, meaning you’re not really investing in a stock or a bond.

 

Rick:                 Okay.

 

Bart:                 You’re investing in a derivative thereof.

 

Rick:                 Derivative.

 

Bart:                 That’s what you own, a derivative thereof.

 

Rick:                 Which means you don’t have it.

 

Bart:                 You don’t really have it.

 

Rick:                 Okay.

 

Bart:                 You just have the promise of what it will/will not do. That promise is only backed by the issuer of that, but the issuer, generally it’s a bank. The issuer gets to collect upfront fees of anywhere from one to four and a half percent. Plus, because it’s a complicated…

 

Rick:                 Four percent? That’s a good return just right there.

 

Bart:                 They collect, not you.

 

Rick:                 Oh, they are getting it. They’re getting it.

 

Bart:                 Your dollar just went to 96 cents.

 

Rick:                 Alright.

 

Bart:                 On top of that…

 

Rick:                 You mean if I put in $1,000 I’m not getting $1,000 from my investment?

 

Bart:                 On paper it looks like 1,000, but no. They’re collecting anywhere from one to four and a half percent.

 

Rick:                 Got it, okay.

 

Bart:                 On top of that, because it’s so complicated, they then also in their fees charge you to price it. The pricing, the promise.

 

Rick:                 I already know what the price is. I just paid it—

 

Bart:                 No, you know what you invested in. Yes, but it goes up and down, but only they know that because it doesn’t trade on the market. They get a fee for calculating that. Now, if you want out early, well, now that is going to cost you.

 

Rick:                 You need to be in for a certain amount of time.

 

Bart:                 Certain amount of time.

 

Rick:                 That’s given upfront and you know how much.

 

Bart:                 Right.

 

Rick:                 Okay.

 

Bart:                 Then at the… It’s a fee to get out early. Then when it’s time to get out, nothing actually really matured. They then create the market of what the get-out price is.

 

Rick:                 What is it based on?

 

Bart:                 Their promise to pay. Their promise to pay. When you hear the term ‘structured notes’ and the general theme is you participate in the market up to a certain level. If the market goes down, you’re protected to a certain level, but really, how is that possible?

Only by people using, companies using derivatives, putting it together and possibly selling or leveraging some of those same underlying investments in other products. The same investment might be utilized in multiple products at the same time, betting up or betting down. Who’s collecting the fee on that? Not you.

 

Rick:                 Got it. It is similar to what I was talking about my other favorite product being annuities that it’s very complicated. There are a lot of things going on at once. It’s difficult to explain to the actual end client what they’re actually getting.

 

Bart:                 Exactly.

 

Rick:                 There are a lot of promises being made as far as what they’re going to get, but it is only a promise.

 

Bart:                 The big fear is if things go bad, if things go really bad, how good is the promise?

 

Rick:  I guess that’s the risk that they’re taking. Well, thank you so much, Bart. I appreciate you explaining to us a little bit about those zero-commission trades that we’re all hearing about in the news all the time. Thank you for joining us.

Rick:                 Welcome to Market Thoughts. I am Rick Zich, an advisor here at Southwest Investment Advisors. Joining me is Bart Schannep, cofounder and president of Southwest Investments. How are you doing Bart?

 

Bart:                 I’m doing terrific.

 

Rick:                 Time is money.

 

Bart:                 Yes it is.

 

Rick:                 Prove it.

 

Bart:                 I can easily prove it.

 

Rick:                 Alright, very good.

 

Bart:                 Alright. When we’re talking with younger clients, the main thing we keep beating into them is time is money. They have an asset that I don’t have. They have an asset that no one can buy more of, and that is time. When we talk about how do you end up being financially independent, how do you end up being financially comfortable, it all comes down to investing early and often. Early is all about time. It allows money to grow.

I’ve got a really good example to show. Here you can see if I started for 10 years and saved $1,200 a year for 10 years straight, but my friend Rick here didn’t, he procrastinated, he would have to invest not 1,200 a year but $1,550 a year for the next 30 years if I did nothing more for us to end up pretty much even., for us to end up at the end of 40 years, assuming that the money was able to grow at a decent rate.

Here we only used eight percent. We did not calculate in taxes nor the cost of transaction, but simply a simple eight percent compounding. You can see we both end up at around 189,000.

 

Rick:                 Time is money. Actually, I had to spend a lot more money, $46,000 compared to 12. I invested almost four times the amount of money just because I started 10 years later. That’s all.

 

Bart:                 The earliest people can start saving, the younger they are, the more time it has for that money to compound.

 

Rick:                 Thank you very much, Bart, for that insight. That was really, really helpful. Thank you for joining us. [Music plays] We hope that you come and look at a few more of our videos to give you just great information to help you on your investment path.

Rick:                 Hi. Welcome to Market Thoughts. I am Rick Zich, an advisor here at Southwest Investment Advisors. Joining me is Bart Schannep, cofounder and president of Southwest Investments. How are you doing Bart?

 

Bart:                 I’m good Rick.

 

Rick:                 Excellent, excellent. I was speaking to a client the other day. I was going to be recommending a bond ladder, and the lights went out. Not a clear understanding about bond ladders. Why don’t you dig into bond ladders for us?

 

Bart:                 Well, it’s been a long time since people have been buying bond ladders. In an interest rate environment like we’ve had for quite a few years now of interest rates falling, it’s always made sense to simply buy the longer bond maturities to lock in the rates as rates kept falling. Well, now we’re at the point where interest rates are very, very low. Now, we’ve said this before. How low can they go? It’s amazing how low they can go.

 

Rick:                 That’s right. We weren’t expecting two cuts this year but there’s…

 

Bart:                 No, but here they are.

 

Rick:                 Yes.

 

Bart:                 Now, where are interest rates going to go from here? Well, really only one of two directions, either stay the same or go up. How does one position oneself with a fixed income portfolio in a rising interest rate environment? A timeless strategy is to use a bond ladder.

As an example, you can see on the screen. If we were to take a $50,000 portfolio and divide into five $10,000 bonds maturing in one year, two year, three year, four year and five year, as you can see on the left of your screen, interest rates, and I know the interest rates that are being shown are not available in today’s world. It’s simply for demonstration. What you can see is the longer you go out, the higher the rate of return.

Then as the first bond matures, as the one-year bond matures, we then buy a new five-year bond. The next year, when that 10,000 matures, we then buy a new five-year bond. Well, what happens? Well, over time, we end up with the five-year bond yield and yet we have a bond maturing in one year, two year, three year, four year and five year.

In other words or in simple terms, at the two-and-a-half-year mark is our average maturity and yet getting the five-year yield. The advantage of doing a bond ladder in a rising interest rate environment is every time you buy a new bond, you’re buying it at hopefully after rates have risen. You keep buying better and better returns.

 

Rick:                 Well, thank you for that insight, Bart. I really appreciate it, and I’m sure our clients do as well. Thank you for joining us. We hope you enjoyed this explanation of bond ladders. We look forward to seeing you next time.