Monthly Archives: November 2019

On this morning’s Trey Ware Show, Karl & Trey discussed the new highs in the stock market and why China needs a trade deal more than the U.S.

Trey Ware:                         We broke 28,000. Are you nervous about that at all, Karl?

Karl Eggerss:                      You know, I think some of the good news regarding the trade, regarding just a lot of good stuff going on, I think some of that’s priced in and so as I’ve been saying the last week or so, I think we could see a pause. Even if we get a trade deal kind of officially done, I could see a pause in the stock market, but the thing that happens, Trey, is every time the markets go up to these big new levels, 26,000, 27,000, 28,000, it draws more people in. It makes more people say, “You know what? Maybe I was a little too cautious, a little too bearish”, and so they buy.

Let me tell you something about this trade deal real quick. China came out with more economic news last week, more economic reports that virtually almost all of them missed what analysts were expecting. China needs a trade deal to get done now, like yesterday.

Trey Ware:                         One of the things about this, too, is that… I was doing some study on this over the weekend. The stock market is looking at where we’re going to be months from now, not where we are today, but where we’re going to be months from now. They’re pretty positive about this and also, based on what Jerome Powell had to say last week with employment, we’re in the best unemployment picture that we have had and unemployment numbers are going to go down even more he said. That’s all really, really good news, especially stock market is largely based on the consumer, and the consumer is in a really good position when everybody’s working.

Karl Eggerss:                      Well, you bring up an excellent point about the… Wall Street and investors in the stock market are always looking forward, so when you think you know something you don’t because everybody already knows it. What we’re looking for is what’s going to happen in the next few months, and what’s happened around the fact that the stock market is going up probably tells you that the economy may be actually getting better, especially in places like Europe, where it’s been struggling. We’re starting to see some small positives out of Europe. Now, things aren’t gangbusters everywhere, but again, any little improvement when things have been pretty negative, investors jump on that and that’s what we’re seeing with stocks going up right now.

Trey Ware:                         Very cool. Thank you, Karl. Appreciate it. Have a good week.

Karl Eggerss:                      You, too. Thanks, Trey.

Trey Ware:                         You bet. That’s Karl Eggerss from Check him out.


by Justin Pawl, CFA, CAIA


(Entry #10 in a series on Behavioral Finance)

The results of an election. The 9th inning home run to win the game. The stock a friend told you was a sure thing falling by 50%. Each time is different, but in situations like these in our lives, most people hear themselves saying, “I knew it all along.”

Of course, we didn’t really know it all along. We only felt that way once the event had happened. This phenomenon is what psychologists call hindsight bias, and it’s the tendency for people to see events that already occurred as being more predictable than they were before they took place.

There is in-depth research available on this topic as it’s one of the most widely studied behavioral biases today. There are three types, or levels, of hindsight bias:

  1. Memory Distortion – People have imperfect memories, and our brains fill in the gaps with information that confirms what we now know to be true. For example, people regularly fail to recall earlier opinions or judgments about an event that are counter to the outcome. “I said it would happen.”
  2. Inevitability – Our belief, after the event has occurred, that the event was inevitable. “It had to happen.”
  3. Foreseeability – Misplaced self-confidence that we could have foreseen the event. “I knew it would happen.”

In isolation or combination, these facets of hindsight bias cause people to assume the outcome they ultimately observe as the only outcome that was ever possible. The flip side is that people underestimate uncertainty in general, and specifically the outcomes that could have materialized, but did not, with specific events.

Regardless of the details behind hindsight bias, the reality is that hindsight bias prevents people from learning from their experiences. After all, if you think you “knew it all along,” why would you examine your decision-making process for coming to that conclusion?


Source: Josephine Elia

As you can imagine, hindsight bias can be brutal when it comes to investing successfully:

  • When an investment does well for none of the reasons envisioned initially, hindsight bias can cause investors to rewrite history (and their investment thesis) to conform with the positive developments. As such, the events are mistakenly viewed as predictable, which leads to false comfort in one’s predictive powers resulting in excessive risk-taking.
  • Likewise, when an investment does poorly, hindsight bias causes investors to forget other situations in which their forecasts were wrong because it’s embarrassing and/or difficult to admit errors. Instead, they chalk-up the loss to “bad luck.” This self-deception makes the investor feel better in the moment, but it also prevents him from doing the hard work of examining his decision-making process. Thus, he becomes susceptible to making the same mistake in the future.

As the two examples above highlight, hindsight bias works against you in both winning and losing investments. It’s pervasive, but it’s addressable. Similar to the previous bias we discussed, representative bias, an effective strategy to rooting out hindsight bias, is to use an investment diary to record your investment thesis and expected outcome. Examining variances from your initial written expectations can uncover systematic forecasting errors in your process. Another useful approach is “to consider the opposite.” That is, think about outcomes that didn’t happen but could have happened. This exercise isn’t easy, but it’s effective because it forces us to counteract our typical inclination to disregard information that doesn’t fit with our beliefs (or in this case, facts).

By Justin Pawl, CFA, CAIA


Inside this week’s edition:

  • Shipping Sinks.  Declining cargo volume at two U.S. ports reflect impact of trade war.
  • Credit Cracks.  Recent losses in the CLO market bay be a harbinger for high yield investments.
  • Bright Note.  Global growth bottoming?

Last Week Today. Domestic economic data releases skewed weak. | The headline October retail sales report showed a month-over-month rise of +0.3% (vs. +0.2% consensus), but keep in mind the bar was low as retail sales in September were down -0.3%, and ex-Autos, retail sales for October only rose +0.2% (vs. +0.4% consensus). | The Producer Price Index (PPI) was weak across the board for October. The PPI is known as the “inflation pipeline” because it represents prices paid by wholesalers and manufacturers further up the value chain from the end consumer. We remain firmly in the camp that dis-inflation, not inflation, is what the Fed should be focused on and monetary policy remains too tight. | Speaking of which, the Atlanta Fed’s GDPNow forecast for Q4 annualized real growth in the economy plummeted from +1.0% to +0.3%.

Financial Markets. U.S. and international equities rose for the sixth consecutive week. Here at home, the Dow and S&P 500 each rose about 1% for the week, breaking through round number levels (28,000 and 3,100, respectively) and recording new highs. The Nasdaq rose +0.8% to a new high as well. Developed international stocks barely kept their winning streak alive, rising a modest +0.1%, while emerging market equities slipped -1.5% dragged down by China’s -3.3% decline. Bond yields reversed their sharp upward move of the last few weeks, as the yield on the 10yr Treasury bond declined -0.11% to 1.83%. The commodity complex was mixed, but generally positive led by precious metals (Gold +0.6%, Silver +0.9%) and WTI Crude, which after last week’s gain of +0.8% is now +6.5% MTD at $57.72 per barrel. For more detail on weekly, MTD, and YTD financial market performance, click on the table below.








Shipping Sinks. At the two busiest entry points for Pacific trade, imports at the Los Angeles and Long Beach ports dropped 14.1% from a year ago. Activity at these ports are a good indication of how the US/China trade war is impacting global commerce. The Wall Street Journal suggested the decline in imports is related to inventory stocking that took place in advance of the tariffs that were enacted in September. Yet, others are not so sure as some of the business may have been permanently transferred to domestic producers. Resolution of the trade war would provide the answer, but for now it remains an unknown.

The chart below illustrates a few data series, but focus on the blue line. Note the steep year-over-year decline in the number of California Mega-Port Inbound Containers which is now at a level last seen when the global economy was finding its feet following the Financial Crisis.


Credit Cracks. Losses in the high yielding, but riskier segments of the Collateralized Loan Obligation (CLO) market are sending a cautionary signal for those reaching for yield.

CLOs are a fast-growing segment of the credit markets, dominated by institutional investors, but poorly understood by the general public. A CLO is a single security backed (or “collateralized”) by a pool of debt. Often the collateral consists of corporate loans with low credit ratings. The manager of a CLO sells stakes in the CLO called “tranches” of debt and equity to fund the loan purchases. Interest and principal payments by the corporations on the loans is then used to pay back the investors in the CLO according to the priority of the CLO tranches. As illustrated in the chart below, debt tranches that are more senior in the CLO (e.g., AAA and AA) receive payment priority. But, due to their payment priority, they are considered less risky, and investors in these tranches are paid a lower interest rate than the riskier BB and B tranches that are more likely to be impacted by loan defaults.



Yes, CLOs resemble the mortgage-backed securities (MBS) that imploded during the Financial Crisis and that Warren Buffet called “financial weapons of mass destruction.” For those that don’t remember, MBS were bundles of subprime mortgages that credit agencies rated as investment grade debt, but later brought the global financial system to its knees when housing prices fell. While CLOs resemble MBS, CLOs are actually more stable, and even during the Financial Crisis very few defaulted. That’s not to say they’re not risky, as CLO prices declined precipitously during the Financial Crisis and those that sold their positions sustained significant losses. The relative stability of CLOs and the high interest rates paid on the riskier debt tranches (some of which are around 10% per year) has fueled interest from government pensions, hedge funds, and other yield-hungry investors. Indeed, the CLO market has doubled in the last three years to $680 billion on the back of institutional investor demand.

However, last week the Wall Street Journal published an article about how some of the riskier CLO securities have given back nearly all their year-to-date gains in the last few months. Companies are running out of cash to pay back their loans, cutting off the cashflow used to make interest payments on CLO bonds.


Source: Citigroup

This situation is important to monitor because CLOs play a critical role in acquiring loans issued by low credit quality companies. According to the article, CLOs bought more than 60% of newly issued loans from these companies in the last few years. If investor demand for CLOs wanes, then CLOs will have less capital to purchase loans, which in turn will drive up financing costs for companies issuing low credit quality debt.

CLO performance also has implications for investors in high yield debt. Many of the same companies that issue leveraged loans purchased by CLOs, also issue high yield debt (note that the loans purchased by CLOs are generally secured by assets of the company and senior in the capital structure to high yield debt, which is generally unsecured). Though high yield bonds continue to perform well this year, continued weakness in CLO performance may serve as a warning about the ability of these companies to meet the interest and principal payment requirements on the high yield debt they’ve sold to the market.

Thus far the issues in CLO-land have yet to spill over into the broader market, but this is worth keeping on your radar. Leveraged loans and high yield debt are higher in the corporate capital structure than equity (i.e., publicly traded stock) and if investors come to believe that companies cannot pay their debts, stock prices of these indebted companies will suffer.

Bright Note. Recognizing that much of this week’s missive highlights troubling signals, I wanted to better balance the blog and end on a bright note, or at least a potentially positive sign. In the chart below, the dark gray line is a six-month forward indicator of the global business cycle developed by Capital Economics, a well-known economic research firm. Capital Economics, combines data from the Organisation for Economic Co-operation and Development with its own proprietary data to forecast turns in the business cycle. If Capital Economics is correct, and they are not alone in this view as other independent research supports it, the effects of central bank easing this year is finally is kicking in to stimulate economic activity and global growth is bottoming.


Be well,


Often quoted, but often misunderstood, the Dow Jones has been around over 100 years and is used as a gauge of the health of the overall stock market.  But, is it the best representation?

Sharon Ko:                         We see and hear about it a lot, the Dow Jones Industrial Average. While your eyes may glaze over and it’s not something you necessarily understand or are interested in, but it does matter. Here’s a crash course on the Dow.

Karl Eggerss:                      So the Dow Jones is a stock index. So back in the late 1800s, I think 1896, Charles Dow, who it’s named after, he was trying to figure out a way to help people figure out how is the overall stock market doing. And so he put together 30 companies, called them the Dow Jones Industrial Average, and said these 30 companies are a good representation of the entire US economy at that time. And so he came up with a point system and said, we’re going to monitor this over time, and that tells you generally how the stock market’s doing.

Karl Eggerss:                      Now over the years, they’ve taken out companies, they’ve added. It’s a point system, so literally what they do is when you see a stock that’s trading at $100 per share or $50 per per share, each of those companies is given a certain number of points it contributes to the Dow Jones. The higher the price of the stock, the more points it gets in that index. So literally when you see 27,000, it’s an addition of all the points of only 30 companies. Since that time when it was created, over the last hundred years, there’s lots of, it’s called an index, there’s lots of indexes now, or indices. All of these are meant to give you an idea of how the overall stock market’s doing in any particular day, month or year. So if it says the Dow Jones is up 10% this year, that means on average maybe a lot of stocks are up about 10% this year.

Sharon Ko:                         How can 30 companies give an accurate, or I guess a great snapshot of the health of the economy?

Karl Eggerss:                      Well, it’s an excellent question and that’s why a lot of people don’t use the Dow Jones as a barometer anymore because it is only 30 companies. So they will use something, probably the one that’s more popular is the Standard & Poor’s 500. And if you look on the news every day, you’ll see the Dow Jones, you’ll see the Standard & Poor’s 500 and you’ll see the Nasdaq. They’re all three different indices, they have three different baskets of stocks in them, but to your point, 500 companies has got to be a better representation than 30. And it is, however, each of those indices are calculated differently.

Karl Eggerss:                      For example, the Standard & Poor’s 500 is calculated by the size of the company, not necessarily the share price. Whereas the Dow Jones, as I mentioned, it’s calculated purely off of the points or the price per share, and so two different methodologies. At the end of the day, they don’t vary too much at the end of the year. If you were to look, for example, from January 1st to December 31st, if the Dow Jones is up 25% you may see the Standard & Poor’s up 27 or 23. It’s going to be within the ballpark, but I think that’s a valid question. Why not use one that has more companies? There’s even one called the Wilshire 5,000, which is 5,000 companies. And so again, you can look at that and see what’s the overall stock market doing.

Sharon Ko:                         So at the end of the day, should the average person worry about the Dow and, for example, when it comes to their 401K?

Karl Eggerss:                      It’s a good gauge to see are you in the ballpark of what the market is doing. So, for example, if you had a whole portfolio of stocks and your portfolio was down 10%, and yet the Dow Jones was up 10% at the end of the year, you would say, “Well, why is that up 10% and I’m down 10%? Something may be owning the wrong stocks.” Now because it’s at 27,000, people ask all the time, “How much higher can this go?” And there is no limit. In fact, if it just continues on the trajectory it’s been on since 1896, it just continues that path, it would be at Dow 100,000 in just 23 years. And most people can’t fathom that, but remember the percentage it goes up right now, these are bigger numbers than they used to be. When the Dow was at a 100, if it doubled, it went to 200. Now if it doubles, it goes to 54,000. So someday, probably in our lifetimes, God willing, we will see Dow 100,000.

On this episode, Karl discusses why things aren’t always as good or as bad as they seem.  When doing your investment research, use multiple sources.

Also, evidence is mounting that China needs a trade deal more than the U.S.

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All right, speaking about the election, a week ago we, a half ago I was in San Diego for a conference. I was with a lot of the top advisors in the country and a lot of thought leaders there, a lot of professionals, people tied to Washington and I mentioned this in an interview earlier in the week and before we get into kind of what the market’s doing, the reason I’m talking about this now as we just talked about how estate taxes, a lot of things are contingent upon who gets in or stays in the white house. The general consensus is that the possible outcomes for president are so radically different from one another that we need to watch the poll numbers for Elizabeth Warren specifically, because of her ideas that are very, very different from President Trump’s and a lot of them are very different from Joe Biden’s.

The consensus again, from some of these folks I was talking to is that we probably will see a Biden, Trump ticket and there’s of course some people that could still enter the race, but if you watch Elizabeth Warren’s numbers as they go up, you might see the stock market get more turbulent because she probably won’t be very friendly to the stock market given some of her views. Now, if you’ve watched the polls, she slid a lot lately as she’s been attacking some of the billionaires and there’s been … If you haven’t followed this, Leon Cooperman has been in a war on TV, on Twitter, going back and forth with her talking about the amount of money he’s given away. So it’s very interesting to watch.

Of course you’ve heard Bill Gates did it a little more tactfully than Leon Cooperman, but there is a war going on and her … She believes her base is saying, “All of us. It’s kind of the … I feel your pain speech from President Clinton. I feel your pain. Look at all these billionaires are keeping all the money, they’re not giving it to you.” But that doesn’t seem to be resonating. And you’re seeing her pull numbers drop. But watch that because a lot of folks believe … We’ve been talking about recession potentially, that that was a risk for 2020. Well, watch the election because that is a big risk in terms of volatility for the stock market because the views are different. And remember if you’re a CEO, if you’re allocating the capital, you need to know what the rules of the game are going to be in order to plan. And it’s very difficult to know that a year from now what those rules may or may not be.

Now having said that, for those of you listening that say, “Elizabeth Warren is my gal, she’s the one I want to run for President.” Or if you’re somebody saying, “I can’t believe that she’s being considered for the presidency.” Even if she got in elected, the thought is that she can’t get some of these things through, they’re more radical than most would want. And so she will have to come more to the center. But watch that, that is a risk of volatility for the stock market in the future. Again, regardless of her views, the point is that the views of her are very different from what’s already in place. That’s what we’re talking about is a change in direction regardless of who the two people were, regardless of whether they were Democrat or Republican. The fact that they’re polar opposites is really what Wall Street might get in a tizzy about because again, there’s change, uncertainty, so watch that as we move along, especially as the market is starting to run here. Do we get a rally up until the end of the year?

Now, speaking of that rally, let’s talk about what happened this week and then we’re going to get into where are we currently. Monday we saw the Hong Kong protest really pick up, heated up again, ton of violence. We haven’t really seen that kind of violence in a few months and the stock market was really under pressure at the Open, I think partially because of that. You’ve got this trade war with China, that looks like it’s progressing in terms of a deal getting done, phase one. And we have the issue in Hong Kong and so there’s a lot of people believing that President Trump is ignoring some of that because he wants to get a trade deal done.

Kind of like the NBA, LeBron James got a lot of heat a few weeks ago. Most of the week was pretty flat. In fact, the Dow Jones finished exactly flat on the day on Tuesday. How often does that happen? But the market, even at that point seems to be a little overbought, continues to be. Wednesday CPI came out, so the consumer price index inflation came in a little bit hotter than expected. So inflation seems to be percolating … Or is it percolating? Percolating, percolating, and the market was pretty mixed that day. Jay Powell, of course, head of the Federal Open Market Committee spoke, and then we heard news late in the day that the trade deal had run into a snag and markets finished kind of mixed. I put on Twitter this literally a little animation of a ping pong match going back and forth because we saw the trade deal run into a snag and the future sold off a hundred points. And then of course Thursday you hear Larry Kudlow say, “They’re really, really close now to a trade deal,” and the market would go back up.

Again, don’t try to trade the trade deal, virtually impossible, but markets still kind of kind of choppy. A lot of weaker data came out Wednesday night from China and China needs a deal, this is getting more and more clear. If you look at the economics in the world, the Eurozone, you’re starting to see what we would call green shoots. There is some positive stuff happening in the Eurozone. The US of course, we saw on Friday retail sales were pretty weak. And so we’re still getting mixed signals here, and I’ll explain why I think the Dow was up 220 points and crossed over Dow 28,000 for the first time on Friday.

If the US has mixed, the Eurozone already had it’s kind of rough batch in is maybe seen some green shoots. China though, is continuing to get weaker and weaker. I mean, almost every economic piece of data that came out on Wednesday night from China was much weaker than expected. So watch that. And of course we also had more impeachment talk and I was asked earlier in the week did I think that had a impact on the stock market? And I would say the answer is no. Because again, you’ve got the House, you’ve got the Senate. So could President Trump be impeached? Yes. Could it lead to anything? Probably not. Again, and Wall Street’s telling you that, look at the evidence, look at the stock market going to record highs.

Now as I mentioned, weaker retail sales on Friday, but the Dow was up 220 points, closed above 28,000 why is this? Because the Fed may be back in play again. Remember that it seemed like they may be done with this Fed rate cutting cycle, but when we get weaker data like retail sales, all of a sudden investors go, we want more. Of course President Trump is out there saying, Keep cutting, keep cutting, keep cutting,” because he knows a Fed cutting is a good thing for the stock market. Investors love the Fed cutting interest rates.

So that’s probably why you saw this. But I will say over the past week you have seen really the rally has been fairly weak underneath the surface. I mean despite records we still … When I say weak underneath the surface, what I mean is if you look at the internals, if you look at the number of stocks going up, if you look at the sectors participating, the … Really just the intensity behind the rally, it has been getting weaker and weaker. And if you look at the market from a technical perspective, we may be starting to roll over a bit. And again, that’s based on a lot of different things that are hard to describe in a podcast, easier to show somebody.

But if you just go back and look at the market from even this year, we’ve kind of made higher lows, okay picture that and higher highs. So it looks like this kind of zigzag pattern that’s going from the lower left of your screen to the upper right. And we seem to be at the upper edge where we’re due for a pullback here. Now, I don’t believe this pullback is the pullback. I think that it could be a time to actually look at reallocation if you’re over allocated stocks. Remember, we’ve had a good bond sell off recently as far as bonds go. If you’ve been watching that, it’s not a bad time to probably buy some bonds and shave some of the profits from your equities, if you’re over allocated. So this isn’t a time to change allocation, there’s no easy trade here, but it seems like over the next few weeks we could see a pause at the very least, in the stock market and a minor pullback at best.

And again, nothing too dramatic. I’m not seeing long-term indicators negative, but things aren’t always as good as they seem, they’re not always as bad as they seem. And in fact, Casey Keller in our office, our chartered financial analyst that we’ve had on several times over the years, he likes to keep some of these gloom and doom and kind of exuberant type of articles and check back with them a year later, two years later. Really interesting. For example, if you go back to … Oh, December of 2018, if you go back to January, 2016, if you go back to 2011, these times where the markets were really under some turmoil or they’re just racing up, what’s being said at the time? What indicators are being looked at? One he brought to my attention today, that was exactly a year ago. It was the Goldman Sachs bull bear market risk indicator.

A proprietary basket of indicators, I suppose that Goldman Sachs puts together. And this was literally November 13th of 2018 it says, “According to Goldman Sachs, it’s indicators at 73% marks the highest readings since the 1960s and early 1970s which, with few exceptions is consistent with returns of zero over the following 12 months. A reading above 60 signals that returns will be lower.” This was published in 2018 remember, their reading was 73% and a reading over 60 has led to returns that were subpar and zero at best and usually worse. The Standard and Poor’s 500 since that came out is up approximately 17% in the past year.

So it’s not to pick on that particular indicator, there’s probably several of these, but it’s interesting to look at because when something like this comes out, there was probably 10 more, but we saved some of these because really to be an effective money investor or money manager or advisor is you’re looking for easy trades or low hanging fruit or things that are fat pitches if you will, and that’s rare that they’re there, but usually they’re there at extremes where you see pessimism rising, you see or you see confidence really high.

The peak of 99, when you have the 90 year old calling you saying, “Get me more IPOs, get me more tech stocks,” that’s a warning sign. Just like get me out of the market, go to cash. And we’ve seen both scenarios over our careers and this was one that we saw a year ago and it felt like … I mean it’s a clear picture when you look at it, you go, “Yeah, this is a time we should … There’s no way the market’s going higher.” And yet it’s up approximately 17% since that time. Now again, it works both ways. It’s not just about the doom and gloom and the fear out there. There’s plenty of folks who make a career of putting stuff out on Twitter and there’s also the opposite. Don’t worry about it, markets never fall, just buy and Hold. Neither one of those is correct.

Again, I remind you from 1964 to 1982 the Dow Jones did nothing and with a lot of inflation, Great Depression, Dow Jones went down over 90% how about from the peak of the dot-com bubble all the way until I think, maybe 2012 returns were flat, so markets don’t always go up. Yes, they go up over the long-term, but there are periods to adjust, there’s periods to get more conservative. There’s things to do, but when you start to see some of these articles or indicators, that’s why we consume of lot of data. We do a lot of research on sentiment, on what’s going on and make our own decisions because if you follow one person, if you follow one indicator, you’re bound to be wrong.

Take a lot of things into consideration when you’re thinking about changing your allocation, and remember your allocation goes back to really the financial plan. What are you trying to do? Because what you’re trying to accomplish, what you’re spending your money on, whether it’s giving it away or your lifestyle, as we’ve talked about, that’s very different than your neighbors. Your allocation probably should be different as well. What I’m talking about as generalities of if the stock market is way undervalued or way overvalued or people are ultra-bullish or ultra-bearish and those types of articles were probably very prevalent in November of ’18 because the market was kind of in a free fall, especially in December. So for a month it looked like that indicator was spot on and then you fast forward 12 months later and it wasn’t.

And again, I could cherry pick a lot of different ones. I’m not picking on that indicator. What I look for is a lot of these things together and then also look at what else is going on. At the time in December of ’18 while scary, if you go back, we were talking about adding to equity positions as it was falling because the fear was so great. And now not to say we have the opposite at all because we still have people doubting this rally, but we are starting to kind of go up, but the quality of the rally in the short term is kind of slowing down. Again, if you notice here too, what’s interesting is you heard this week about Trump tax cuts 2.0 and we know the 1.0 tax cuts did more for corporations and and had a bigger impact and we’re still feeling the impact then individuals.

But, it’s no secret that Trump wants a trade deal done. It wouldn’t surprise me if he stalling a bit because he’d rather get one done in probably April, May, June, then to get one done today because the elections around the corner at that point, why does he want lower interest rates? He wants the Fed to keep cutting, more stimulus. And he also wants tax cuts. So now you’ve heard tax cuts 2.0 there was hint this week, Larry Kudlow mentioned it. He kept talking about the Reagan tax cuts and the two brackets, the 15 and the 28 so look for something like that to be proposed that hey, we’re going to make the tax code simpler, we’re going to have a couple of brackets, maybe three brackets. And so all those things, they want to be lining up just in time for the election, so you’re hearing a lot of that type of chatter now.

And look, if I was running for president, I’d probably be doing that stuff too. But that’s what we’re dealing with right now, so the stock market’s anticipating, investors are anticipating some of that. And you’re seeing this run up and seasonally, which you know, I loosely pay attention to from mid-October until the end of the year is typically good and we’re getting that run and every time it makes a new high and every time people see on the news, the Dow Jones is over 28,000, if they’re sitting in cash, it makes people say, “Maybe I should put more money in.”

And so let’s watch to see, do people let their guards down? Is there overconfidence? And that could happen as we enter the new year. And especially as I said, look, the quality of the rally this week was not very good and I’ve been very bullish. But the quality of the rally this week was not good. And so let’s watch over the next few days to see, and again, we’re not trying to time the next few days. This is about being tactical in terms of do you take some off the table because you need to buy more bonds or if you had cash to put to work, do you do it today? Or do you wait for better prices? That’s what this is about and that’s what I try to help you with each and every week to really optimize those dollars from an investment standpoint.

We saw a big run in bonds back in … Oh, I think it was late August, early September, bonds just went parabolic in August, meaning interest rates went straight down, you remember that? That was a time to take some profits on bonds or if you were … Again, if you looking to buy bonds to wait. Now is probably not a bad time. Stocks are kind of in that period right now where I think deferring new buys is probably more optimal than not.

Now, if you’re somebody that’s averaging in or you’ve got 100% cash and you want to just average in over the next several weeks and months, fine. You may not want to get too cute with it, but just telling you what I see, which are things are stretched in the short term, and remember, even if a trade deal gets done or buy, keeps waiting for that, the market’s pricing some of that in as we speak, and so if we get one, don’t be surprised if we see a buy the rumor, sell the news where we’ve already priced that in and we actually get a sell off once something is announced, who knows?

All right, that is going to be today’s show. Don’t forget, our telephone number (210) 526-0057. If you have a friend or colleague or spouse, somebody you want to share this information with, feel free to do that. We are on all the podcasting platforms, we’re on iTunes, we’re on Stitcher, we’re on Spotify. A lot of people listen on Spotify, now Overcast, there’s not an excuse. Or you can just go on the website and go to you click on it, you can listen to it right on the website and you can read it, as I’ve mentioned. You can read it while you’re at work and then nobody knows you’re actually reading the podcast and getting some good information and you can multitask, I’m not saying to not do your work. I’m just saying to multitask. That’s what we teach here. All right, have a good weekend everybody. Take care.

Please remember the past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices LLC, Covenant, or any non-investment related content will be profitable. Equal, any corresponding indicated historical performance levels be suitable for your portfolio or individual situation or proved successful. Moreover, you should not assume that any discussion or information serves as the receipt of, or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above the his her individual situation. He, she is encouraged consult with a professional advisor of his, her choosing. Covenant is neither a law firm, nor certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at

On the Trey Ware Show this morning, Karl & Trey discussed how politics over the next few months could affect the stock market.

Trey Ware:  So there’s no doubt that there’s interesting things happening with our economy and the stock market. And let’s get Karl Eggerss in here,, is joining me on the Stevens Roofing Newsmaker Hotline for another Monday discussion about where we’re headed with our money this week. Where are we headed this week, Karl?

Karl Eggerss: Well, you know, we’ve got a lot of things going on. Obviously the Hong Kong protests are turning violent once again, probably the most violent we’ve seen in months, and that’s weighing on the stock market this morning. And I think over the next few days, maybe a couple of weeks, we might see a little pause in the stock market because we have seen a tremendous rally. We’re sitting near all time highs, but we have President Trump speaking this week, kind of give an update on what’s going on with the trade war so to speak. And we’ve had some positive news out of that. Let’s see if he confirms that.

And then secondly, we have Jerome Powell, the Fed president, basically coming out and saying, you know, are they kind of giving a signal whether they’re going to continue to cut interest rates or not. So those are big things coming up. So, I would suspect we see some type of pause here at the very least for the stock market. But it’s been a tremendous run on the back of better economic news, and again, trade improvement, because we for the longest time thought this wasn’t going to happen. And now we’re starting to see that there are some positive developments coming up.

Trey Ware: And jobless rates for African Americans, Hispanics and Asians are at all time historic lows. The unemployment gaps between both blacks and whites has shrunk a lot. It’s not just that the job market has been good for minorities. It has been historically good.

Karl: Eggerss: It’s tremendous.

Trey Ware: So will the impeachment, the impending impeachment of President Trump, will that have an effect on the stock market? Are they going to freak out over this? And will the Democrats be responsible for destroying the prosperity that we have going on right now, particularly for blacks and Hispanics?

Karl Eggerss: I think because of what you said about the Senate, being that this won’t be able to get through, that obviously I don’t think this will have an impact on the stock market. I think the bigger thing to watch, Trey, it’s not a political statement, if you watch Elizabeth Warren’s numbers, that’s the thing Wall Street is worried about the most-

Trey Ware: Very concerned.

Karl: Eggerss Elizabeth Warren. Not Joe Biden. Watch her numbers versus Trump and versus Biden. If her numbers go up, the stock market, I believe will have more volatility.

Trey Ware: Thank you Karl. Appreciate it very much. And he’s right on the money with that. They do not want an Elizabeth Warren presidency.


By Justin Pawl, CFA, CAIA

Inside this week’s edition:

  • Special Note. To our military veterans and their families, we thank you for your service, your sacrifice, and your bravery. While our country is wrestling with many important issues internally, we are forever grateful to our men and women in uniform, who throughout our country’s history have united to selflessly confront enemies of the state seeking to constrain or purge the freedoms that Americans enjoy.  #Heroes.
  • Last Week Today. A summary of news impacting financial markets and the economy.
  • Financial Markets. A rundown of last week’s action.
  • Taxes Bite. The effect of repealing the 2017 corporate tax cuts.
  • Bulls on the Run. Surprising level of market enthusiasm at one financial powerhouse.


Last Week Today. Saudi Arabia began the process for its highly anticipated initial public offering (IPO) of Saudi Aramco, touted as the world’s most profitable company. The IPO will consist of only about 1% of the company’s shares, and they will initially be limited to trading on the Saudi stock exchange. Estimates of the valuation range from $1.2 trillion to $2.3 trillion, but what’s a trillion dollars between friends? For examples of why valuation matters, please see Uber, Lyft, and WeWork. | German Industrial Production fell by 0.6% in September, the 11th consecutive monthly decline. | U.S. Economic data releases last week were mixed, but the hand-off from Q3 to Q4 was not particularly strong. The Atlanta Fed’s GDPNow model is currently tracking U.S. growth of about 1.0% in Q4.

Financial Markets.  Global equities marched higher as news on the trade front tilted positively, and U.S. corporate earnings generally were not as weak as forecast. The Dow, S&P 500, and Nasdaq rose about 1% apiece, with all three benchmark indices ending the week at new highs. The emerging markets index posted a gain of 1.5% for the week, buoyed by China’s 3.1% rally. Developed international stocks joined the party but were a little late, posting a gain of 0.5% on the week. As good as the rally is in stocks, lately fixed income markets are getting more attention as rates on the 10-year Treasury bond climbed 0.23% last week, which doesn’t sound like a lot, but fixed income instruments are a different animal than equities. At the beginning of September, the yield on the 10-year was less than 1.5%, but it has since “backed-up” to 1.94%. Talk has shifted from “when will the 10-year bond yield break 1%” to “when will the 10-year rise above 2%.” The rise in interest rates has been uneven – short-term rates have risen less than longer-dated maturity bonds – as a result, the yield curve is no longer inverted as shown in the following graph.


Source: Bloomberg, L.P. and Covenant Investment Research

For a summary of weekly, month-to-date, and year-to-date financial market performance, click on the table below.



Taxes Bite. While the Presidential election remains a year away, Wall Street is already handicapping likely market impacts based on different outcomes. It’s far too early to accurately predict who might win the election as the Democratic Party has not even decided who will run. However, with several of the leading Democratic candidates making corporate tax reform a plank in their campaign platforms, it’s worth taking a look at market implications should the 2017 Tax Cuts and Jobs Act be reversed.

The best piece on this topic I’ve seen thus far is from Goldman Sachs Investment Research. To recap, the 2017 tax cuts reduced the headline corporate tax rate (including State, Federal, and local taxes) for the S&P 500 from approximately 39% to 26%. However, most corporations use tax incentives, tax credits, and other lawful means to reduce their effective tax rate, such that the effective tax rate following the cuts dropped from an estimated 26% In 2017 to 18% in 2018. The 8-percentage point decline in taxes translated into a 10% increase (i.e., $13) in earnings per share (EPS), according to the research (see chart).


Sources: FactSet, Goldman Sachs Global Investment Research

Goldman’s researchers estimate that if the 2017 Tax Cuts and Jobs Act is jettisoned, each 1% increase in taxes will reduce earnings by slightly more than 1%. Moreover, to the extent that higher corporate taxes negatively impact economic activity (as one would expect), every 1% change in real (inflation-adjusted) U.S. GDP growth results in a 3% change in EPS. So, assuming the effective tax rate increases from today’s 18% level back to the 26% level of 2017, forecasted earnings for the S&P 500 would decline by $21 from $185 to $164 (as illustrated in the chart below). Interestingly, $164 is the S&P 500’s earnings per share for the trailing twelve months ended June 30th of this year.


Sources: Goldman Sachs Global Investment Research

Suffice to say that if corporate taxes are revised to back up to 2017 levels, an 11.3% decline in expected earnings will not be viewed favorably by investors. Unless you can make a case that the Price-to-Earnings multiple will rise, stocks would re-rate lower (i.e., prices will fall) because future cash flows are a critical input in stock valuations. For those who like low corporate tax rates, the good news is that tax law changes require the consent of both the Senate and the House of Representatives. Thus, a sitting President with a new approach to taxes is not sufficient to alter existing tax law, he or she must also convince Congress.

Bulls on the Run. I spent the last couple of days at a major East Coast investment firm, meeting with some of their best and brightest. The overwhelming sentiment is one of optimism, if not outright bullishness, about the markets. One of their technicians shared that Q4 2018, when the S&P 500 experienced a peak-to-trough decline of about 20%, was the market “recession”, resetting the market for the next leg higher. Indeed, his view is that we are only about half-way through a secular bull market.  Secular bull markets typically last about 20 years, so he believes this market has a lot of room to run.

In a similar vein, one of the sector strategists who views markets through a purely statistical lens made the case that stocks resemble an “early business cycle market.” As such, traditional value-oriented and cyclical stocks (e.g., financial and industrial sectors of the market) are the places to invest as the U.S. and global growth improve in 2020. The same analyst shared a statistical model showing that it’s been very rare historically when both the European Central Bank and the Federal Reserve simultaneously cut interest rates (as they have done this year), but when they do the S&P 500 gains an average 22% over the next 12 months (vs. the 8% long-term average return). The last analyst suggested that international and emerging market stocks should outperform U.S. stocks over the next five years. Of the five meetings, only one of the team members expressed caution stating his team sees more downside risk than upside in financial markets. His conclusion, and recommendation, given the multiple levels of uncertainty, is to diversify portfolios as much as possible by taking numerous small bets.


So, what’s Covenant’s take on all this? We are not calling for a recession next year. Still, we are less enthusiastic about the growth prospects for the U.S. economy, and we believe the probability of recession is elevated (believe me, we would not be disappointed to be proven wrong on this forecast). We generally agree that value-oriented and international stocks look attractive because valuations of these groups are cheap, and their underperformance relative to their counterparts is at historic levels. International stocks would benefit disproportionately from improved global trade and given their low valuations compared to their U.S. cohorts, the set-up for sustained outsized returns vs. U.S. stocks look good. For example, even on the technician’s chart who believes we are only half-way through the bull market, the high-end of the expected return range for the S&P 500 is 7% per annum, which is well below the 11.5% annualized return over the last ten years.

While we’ve been overweight U.S. stocks for several years, we’re looking to increase our allocation to international stocks once we see some sustained positive signs out of Europe. For example, the new European Central Bank President, Christine LaGarde, convincing Germany to consent to fiscal stimulus in the Eurozone would represent an excellent start. Over the last ten years, favoring international stocks (even as valuations were compelling) over U.S. stocks, has been a “widowmaker trade.” We’re not looking to call the bottom, or even catch the first 10-20% of the move. There have been several false breakouts amidst misplaced optimism about international stocks over the last decade resulting in subdued performance for those that chased it. As such, we would be content to catch the last 80% of the move.

Be well,


Karl Eggerss​ joined Sharon Ko on CBS this morning to discuss properly diversified investment portfolios.

Sharon Ko: This morning, let’s talk about how to get your investments going. Diversifying your portfolio is key to a financially secure future. Here’s more on why it’s important and how to start.

Would you have to have maybe a little bit extra cash, have some money in your savings account to be able to maybe start investing in stocks, bonds, precious metals? There’s so many different options.

Karl Eggerss: Yeah, that’s a good question, because I think at the beginning, the first thing you’ve got to do is build up your emergency fund. You know, if something happens to your job or you need a new set of tires or the air conditioner in your house went out, those are big ticket items that maybe you didn’t budget for. So that’s where your rainy day fund or your emergency savings comes into play. Once you’re past that, the next thing you’ve got to do is yes, start investing. One of the things people have to realize when you’re building a portfolio, small or big, is that not everything has a lot of liquidity. Not everything has a lot of safety, and not everything has a lot of growth. If you have more time, five years, 10 years, or 20 years, more than that, investing in stocks is a great vehicle and through mutual funds, through exchange traded funds, which are just baskets of stocks, so it spreads the risk. That’s something that’s going to probably earn the most over the longterm.

So if you’re not going to touch the money for a while, that’s your best return on investment a lot of the time. Adding in things like real estate over time, adding in bonds, which are a little more safe and a little more secure over time, especially as you come closer to retirement, because the closer you come to needing that money, that’s when you have to get a little more conservative. And again, all these things move differently. That’s really the key. When stocks are going down, sometimes bonds go up. When gold’s going up, maybe real estate is going down. And so again, the idea is to have a diversified portfolio that is fairly stable over time and can grow and really beat inflation. Because as we’ve talked about over the last several weeks, people’s costs today are not going to be the same as they are 20 or 30 years from now. The costs are going to keep going up, and it’s important, the whole reason you’re investing is to beat inflation. It’s to keep up and keep your purchasing power up so that when you do retire, you can go do the things you want to do.

Sharon Ko: So that’s key, right? You do it before you need to.

Karl Eggerss: Absolutely. Because what you’re relying on is compounding. The power of compounding is huge. You know, you take a dollar and double it, then that new dollar is doubled and doubled and doubled, and it really starts to snowball and becomes a pretty large sum of money.

On this episode, Karl discusses whether or not this rally can continue and the big change in interest rates.  Plus, cyber security is on the rise and Karl shares some valuable tips on ways to protect yourself.

Hey. Hey. Good morning, everybody. Welcome to the show. This is Creating Richer Lives. This show is brought to you by Covenant Lifestyle. Legacy. Philanthropy, and of course at covenant we are always trying to unburden folks from the daily tasks of financial management, and our goal is to really help you figure out what to do with the money you have accumulated. Some of you are in the process of accumulating. Where do those dollars go the most effective? From a growth standpoint, obviously trying to reduce taxes as much as possible, but the Lifestyle. Legacy. Philanthropy, very important, because, again, you can spend it, you can give it away to kids or grandkids, or you can give it to charity. Our job is to help you figure out which of those you want to do or all of them. Right? To talk through that and then to effectively position yourself to accomplish that, and that’s what we do each and every day at Covenant.

All right. Our telephone number, (210) 526-0057, if you need help in that arena. Of course, our website I’ve Been traveling all week. I don’t know why I did this, but I flew … Get this. I flew from San Diego to Atlanta, then from Atlanta to San Antonio. Don’t ask me why I booked it that way, but needless to say, I arrived a very, very, I’ll say early in the morning and then turned around and had to go out the next day again somewhere else. So, it’s been a busy week, and because of that flying and touching dirty armrests and all of that, my throat’s a little scratchy this morning, but bear with me. We will get through this. Look, we’ve got a really busy week going on or a busy week we had. I’m going to spend some time talking about that, because we have some big developments this week. I’m also going to spend some time talking about cybersecurity.

One of the trips I was just recently on, I was at a Schwab IMPACT Conference out in San Diego, which all the top advisors around the country are there and a lot of thought leaders. We’re getting information from cybersecurity experts, from Charles Schwab. You know, some of these folks used to work for the FBI, and so they know what’s going on. I’m going to share some of the tips. I’ve kind of consolidated some of the the tips and thoughts and put my own spin on it, and I’m going to share those with you today, because there’s a lot of stuff going on, and you have to be aware of it, because a lot of it is just prevent defense on your part. All right.

But first of all, let’s get to the markets. We saw positive trade news, right? We know that we saw some positive economic news, but we’re seeing some really interesting things. For example, we’re seeing international stocks have really been outperforming since August, and they continue to do so on probably easier … a deescalation of the trade tensions, tariffs being rolled back, things of that nature. But we also saw interest rates move up this week. Now, interest rates crossed a pretty important threshold. You know, we’ve been in a downtrend really since the fall of ’18, and here we are in the fall of 19, approaching the winter, and we’ve been making lower, and lower, and lower highs, from around 3.2% all the way down. But we broke out this week, technically speaking, and we’re now above 1.9% on a 10 year, so everybody’s watching will we break 2% on the upside, and it’s quite possible.

That’s going to happen in pretty short order. But it’s interesting, because the yield curve is no longer inverted, and it’s also, on top of that, what’s interesting is that not only is it not inverted. It’s normal again. You don’t have some of these kinks in it, and it’s quite different than even a month ago. So, the market is telling us that perhaps we should look forward to perhaps some improvement in the economy coming up. We know manufacturing’s been weaker. We’ve talked about the last few weeks watching the consumer, watching how many hours they’re working, all of those things, but the stock and bond markets may be telling us a little bit of a different story, that we’re looking maybe in the rear view mirror. Maybe it’s the things we don’t know, and things may be improving. So, interest rates went up, so bonds obviously got got hit this week. They have clearly broken trend. So, let’s see if this continues or not.

We have the positive trade stuff going on and then some positive economic news. Look, stocks have done very well this week, and we’re at new highs, close to new highs or at new highs really, but some of my term indicators are showing that we may be getting a little tired on the upside. If you look at some of the rallies in the last few days, you look under the hood, it’s been a lot of of churning, not a lot of overall leadership. So, it would not surprise me here to see us pause, if not pull back a little bit. Now, these aren’t warning signs like last fall. These are simply if you have new dollars to put to work, maybe you defer, depending on your situation, just to see if you get some better entry points. But the bears have been proven wrong. Everybody thought that we have to go down. We have impeachment, right? That’s there. Lot of geopolitical risk, but yet, as we’ve broken out to new highs, it’s caused a little bit of a panicky buying for those folks that are under invested.

Again, we have the calendar on our side. The markets typically do well for the rest of the year, so it’s quite possible we continue to run, but there’s a lot of positive things going on. You know, look at transports making a new highs. You look at international stocks participating once again. You look at financials doing really well, primarily because of the yield curve steepening. These are all really good things. I’m just saying in the short term we could be getting a little exhausted, especially if you look at some of the sentiment indicators that are still negative in terms of flows, but if you look at some of the put/call ratios, things of that nature, they’re a little stretched the other direction. We actually have kind of the extremes, and again, that may sound a little confusing, like wait a second. I thought that we were seeing negative flows.

We are still, so to me we still don’t have the people participating by buying calls and puts are positioning themselves for higher prices, and that can be a worrisome thing, because they’ve already bought. But the sentiment overall has been fairly negative, as we’ve been saying, and that’s a good thing. We need more people being converted from doubters and not believing the rally to come over to the side of believing it. I still think that can happen over time, but there’s no question in the last few days we’ve seen a little bit of a a pause, saw a little … nothing major. Again, take this with a grain of salt, but things are a little stretched to the upside here, so it would not surprise me to see a little bit of a pause, but again, take a look at interest rates. Interest rates are really important. Breaking above 1.9, and then 2% may be coming up in short order.

Now, when I was at the Schwab Conference, I got to listen to some of the best speakers out there in terms of being insiders in Washington DC, insiders into cybersecurity, all of that. The general consensus is that the House may move forward with impeachment, but the Senate probably can’t do. It doesn’t have enough people to flip. So, that’s why I don’t think you’re seeing the market really react to that. The biggest concern from some of these Washington insiders, and this isn’t a political statement, this is just truth, is Elizabeth Warren, because she has such radical beliefs against things that are going on right now, that that could cause some turbulence. So, if you see her poll numbers rise, and you see President Trump’s fall, and you see Joe Biden’s fall, that could lead to some 2020 volatility, and that would not surprise me in one bit.

Now, this particular gentleman did believe that we probably will see a Biden versus Trump, and you’ll probably see Biden go after a minority female on his ticket, which kind of reminds me of what John McCain did with Sarah Palin. If you recall, it’s kind of like I’m an old dude. I’m going to go get a young dudette. And that’s Biden. People believe you he looks like a grandpa. Therefore, he’ll balance it out by going to get a minority woman. We’ll see if that’s the case.

That may not affect anything, but this gentleman still believes that Biden will get the Democratic nomination, but if Warren spikes up in the polls, that could cause some turbulence. Now, if she did get into the White House, he believes she’d have to move to the center. So, a lot of the stuff people are worried about would never really happen, but that fear could cause some turbulence, and especially if we do get some type of blow off top, inn other words, if the market just keeps running through the end of the year, it’s quite possible it sets us up for a potential, you know, more volatile period in 2020.

Let’s move over to the cybersecurity. A couple of things going on with this, and this is extremely important you understand some of this. Some of the top things we’re seeing are fake financial websites and emails coming in. So, for example, Schwab said they do something like 100 fake Schwab accounts. They thwart them, like a hundred a week or some kind of crazy number. So, what’s happening is you get an email from a financial institution, doesn’t have to be a Charles Schwab. It could be a fidelity. It could be a Wells Fargo, any place. You get it. It looks legit, and it’s a sense of urgency. You must do something now because your account’s been compromised. So, you are going, “Oh my gosh. This is scary.”

So, it has a link, and you click on it, and it asks you to fill things out. Now, the things it’s asking you to put in there are things like your name, your social security number, but then they ask things like your phone password. Well, who …? Institutions don’t do that. Who would want your phone password? Again, I just looked at the number. It is. It’s 100 a week that … fake Schwab websites. So, all these institutions are dealing with the same thing. It’s not just Charles Schwab. Every financial institution is subject to this. So, you get an email. Here’s the key to these institutional emails that are from financial institutions. There’s usually a misspelling. If you hover over the link, it will tell you the actual URL, and a lot of them will end with RA, .RA, which is Russia. So, if you simply saw that, you would know it’s fake.

But even if you click on it, asking you to put all that information in is generally not what these companies do. So, that’s one area is in the the financial aspect, that’s one big area that they’re seeing a lot of fraud. Also IRS, government agencies emailing you, telling you to do stuff or calling you. The IRS doesn’t call people, that I know of, and they usually send letters. So, you’re seeing a lot of government … Again, when you hear these things, you’re scared, so you tend to act. That is the flaw. So, they’re seeing it with IRS. They’re seeing it with romance, so online dating sites. Of course, many of these profiles are fake. They actually showed some pictures, which was fascinating, of fake people that are being used in profile pictures. They’re computer generated, and they look real.

What happens is you get in an online relationship with somebody, and it goes literally months, if not years, building trust. Then after the trust is gained, there is an emergency, a medical emergency, and they ask for gift cards. What’s crazy about this is the numbers that are reported of these are artificially low, because a lot of people that get caught up in a romance scam, once they realize they’re scammed, they don’t report it, so these are only the ones we know about. There’s a tremendous number out there of ones that are not reported, because people are too embarrassed.

Then the third one that they’re seeing is the technical support. So, victims get a pop-up on their computer, your computer has been compromised. Click on here to essentially fix it. There’s a phone number. You get on the phone. They say, “Yes. There’s a serious problem.” They give you a link, and guess what? They have gained access into the computer. “We’ll fix it for you. Pay us some money. We’ll fix it,” and now they’re in your computer. That happens a lot. So, financial institutions and government agencies, romance, and technical support, those are the three big ones.

There’s also things like phishing emails, not fishing with an F, phishing with a PH. They’re, again, these emails that can be coming from the institution. So, we talked about the Schwab ones or any other financial institute. Look at all your emails and always be suspicious first, right? Be suspicious first. Don’t open attachments. That’s kind of obvious. If you do have an attachment, call the person that emailed you and say, “Did you send me an attachment?” That’s good practice. But these always have a sense of urgency. There’s something wrong, you know, with with your account, what have you, and they’re there getting you to do something. They’re creating that sense of urgency.

Then, again, hover over the link, as I mentioned. Now, remember some of the from names can always be changed to whatever, so it may say from Wells Fargo, from fidelity, from TD Ameritrade, from Fifth Third Bank. The name is irrelevant. Anybody can put any name in there. It’s the URL address. Again, that tells you, when you hover over it, where it’s from. Then, again, look for unusual words, bad grammar, et cetera, and use spam filters. A lot of those won’t even make it into your inbox if you have proper spam filters set up.

Now, I’ve kind of compiled five steps for safeguarding your accounts. This is a different subject. We were talking about phishing. There’s also vishing which is voice phishing, so where institutions call you, blah blah, blah. Some folks use a combination of this. “Hey, we’ve been trying to get ahold of you. We’ll email you.” But think about this. This is five steps that I’ve come up with for safeguarding your financial accounts.

Number one is pretty obvious. Change your login credentials pretty frequently, especially your password. I would probably do that at least once a quarter. Yeah. Don’t use password123. In fact, get a password manager. I’ve mentioned this in the past. I use one. Highly, highly effective to use a password manager, because it’s going to generate long, complicated passwords that nobody would be able to guess, but they may guess your dog’s name. They may guess your birthdate. So, a password manager, you have one password. It can sync on your computer, your phone, and it generates these passwords that are very complicated. Great thing to have. Great investment.

Two factor authentication. Most of you probably know what this is. You can enable it on almost any financial website. Two factor authentication is where once you put your password in, it doesn’t just let you in your account. It sends you a text. You may have a key fob, which generates a random number that lasts for 30 seconds. You have to punch in something else, in addition to your password, two factors, the password and the number it’s going to text you, or the phrase, or what have you. That solves a lot of issues, a lot of issues, and you can turn it on. If you go into the settings on your financial institution for your mortgage, auto loans, brokerage accounts, usually it’ll say, “Do you want us to enable this?” It’s a little bit of a pain, but say yes. Again, say yes. It’s very important to do that.

Another thing is add activity alerts. I know on my credit card, they send me a text every time. It’s not a text. It’s really at the app sending it to me every time my credit cards you used, where it’s used and how much, every single time. There’s been occasion where I go, “What is that?”, and I have to question it. Then the fifth thing I would say is freeze your credit. This is a really interesting one. Especially if you’re retired and you’re not going out and borrowing more money, you can call the credit agencies and freeze your credit, because that’s one of the ways that people obviously take your identity is using credit, and you can freeze it. If you ever need to get a loan in the future, you can unfreeze it. So, that’s something you definitely should do.

The other thing I want to mention with emails, I talked about emails a few minutes ago, one of the things that this gentleman that used to work for the FBI recommended was, “How many of you,” and he asked us this, “are changing or, excuse me, deleting your emails right from your inbox?” Most of you would say, “I do that.” “How many of you are deleting the deleted? Do you go into your trash and delete those as well?” Probably half of you. Here’s where he got most of the audience. “How many of you are going into your sent box and deleting that?” Why is that important? Your sent box is where you’re doing your documents for your closing on your property, right, for when you bought your house or an investment property. You may have emailed documents, your travel plans, account information, personal information, stored passwords, work documents, pay stubs, calendar events, your 1099s nines, your copies of your IDs. I mean, all this stuff is in our emails. If somebody gets into your email, man, they can really put a lot of puzzle pieces together and steal your identity. So, it’s important to do that.

Also, if you are sending information, usually if you’re doing a mortgage or something like that, they’re going to require you to do a secure site. That’s something we do at Covenant. If we send documents, we will always send them securely, and we always send a link out to people when we know we’re receiving documents. Now, we don’t always get them securely, because folks send them to us. We can’t control. We try to do that. We send them a link. Use it., You basically deposit your documents into this secure vault, and then we have a link to go get it. Many CPAs do that, kind of standard practice, and I would suggest you do the same, but emails where a lot of rich information is stored that bad guys and gals can get.

Those are some of the big things going on. Those are some of the safeguards in terms of accounts, and I kind of jumped around a little bit, but I wanted you to know what things are out there right now. Some of this you may know, but it’s always a good reminder, because, I mean, just the two factor authentication, changing your passwords regularly, not clicking on links, and then be very cautious and curious when you get an email from an institution. If you have a question, just go straight to their site, right? Go to their site. More than likely, what you got emailed about, if it was valid, it would be on there somewhere/ You can call them. You can dig into it without clicking on the link.

So, I hope that was helpful. I know it’s not something fun to talk about, but very, very important, because I tell you what, if you’re dealing with all of that, you’re not listening to the podcast, right? You’re having to get your identity back and all that. A lot of this is just preventable. In fact, they said something that was really fascinating. You may be on a list. If you’ve been scammed before, you may be on a list where they know you are a vulnerable person, and they sell your name and information to somebody else that can use it again and again in different forms and fashions. With technology changing as fast as it is and people being trustworthy, there’s a lot of elderly abuse, but it’s across the board. There’s no age discrimination on this.

So, I hope that was helpful. Hey. Just a reminder. If you need our help, (210) 526-0057 is our telephone number. We would love to help you out. Feel free to share the show. I’m going to go get me another cup of coffee. All right. Have a good weekend, everybody. Take care.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and/or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content, will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful.

Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at

By Justin Pawl, CFA, CAIA

  • Last Week Today – A summary of news impacting financial markets and the economy.
  • History Rhymes – Parallels between the 1990 and 2010 decades.
  • Pregnant Pause – The Fed signaled it’s on hold.
  • Employment Report – Big headline, but weak under the hood.
  • Bulls – A couple of indicators show the stock market has room to go.

Last Week Today. The European Union extended the Brexit deadline from October 31st to January 31st. | Economic data out of China showed continued slowing with the manufacturing PMI falling for the sixth consecutive month to 49.3 (near the 2015 low) and the service PMI falling -0.9 to 52.8 (2016 low). | The Federal Reserve cut interest rates but signaled it’s done for now (more on this below).

Financial Markets. Stocks pushed higher last week on positive U.S./China trade sentiment and corporate earnings coming in above already low expectations. The S&P 500 and Nasdaq closed at new highs, gaining 1.5% and 1.7%, respectively, and the Dow closed within a whisker (0.04%) of a new record. International stocks generally paced their U.S. counterparts. However, the major indices such as MSCI All Country World Index (ACWI) and MSCI Europe, Asia, and Far East (EAFE) indices remain well below new record levels. Through last week, 75% of S&P 500 companies had reported Q3 earnings, with 55% of firms beating consensus estimates and only 11% missing. Thus far, S&P 500 earnings per share are on pace to decline by approximately 1% year-over-year, which is better than the 3% decline that was expected coming into the Q3 earnings season. Interest rates rose on the week and, following the Fed’s rate cut, the yield curve shifted flatter as much of the inverted portion of the curve un-inverted. For a summary of weekly, month-to-date, and year-to-date financial market performance, click on the table below.


History Rhymes. In the mid-1990s, the stock market set record after record during a decade-long bull market propelled by a strong economy. The Fed and Alan Greenspan made a couple of mid-cycle interest rate cuts when the economic data showed some cracks in the labor market. It was during that decade that President Bill Clinton was impeached by the House of Representatives on the grounds of perjury and obstruction of justice. Fast forward to this decade. Last week the Fed cut interest rates for the third time (something Fed Chairman Powell once referred to as a “mid-cycle adjustment”), and the House of Representatives voted for a formal impeachment inquiry of President Donald Trump. While the economy is not growing at the vigorous rate of the 1990s, we are in the midst of the longest U.S. economic expansion in history. Why do I point this out? Because clients have asked if financial markets will suffer if President Trump is impeached. My response is that there may be some short-term volatility around the hearings, or if there is an actual impeachment, but investors care more about future corporate earnings than anything else.

Pregnant Pause. The Fed cut rates for the third time on Wednesday to the surprise of…. well, no one. Yet, the Fed’s associated statement and Chair Powell’s press conference afterward implied that the Fed’s on hiatus for a while. Specifically, the Fed’s policy statement removed the phrase “…will act as appropriate to sustain the expansion.” The absence of that phrase was interpreted as hawkish by the market, which sold off modestly shortly after the Fed’s announcement.

During his post-announcement press conference, Fed Chair Powell confirmed the Fed’s reluctance to move further, setting a high bar for another cut. In response to a question asking what it would take for the Fed to cut rates again, Powell responded “So, you ask what it would take – you know – to move, and as I mentioned, we’re going to be watching all factors, and if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. But that what it would take. A material reassessment of our outlook.”

The Fed Funds rate now stands at 1.75%, and as I related last week, with the neutral interest rate (the rate that is neither restrictive nor accommodative) at about 1%, the Fed’s action is not accommodative, just less restrictive. Please don’t take my word for it; the market is clearly expressing that monetary policy is too tight based on inflation-linked instruments. The blue line (representing medium-term inflation expectations) in the chart below shows inflation expectations for the next five years have not touched the Fed’s 2% target this year. These medium-term inflation expectations rose early in the year when the Fed indicated they would cut interest rates. But have fallen since, as the Fed has not acted aggressively enough to kick-start economic activity to a level where inflation is expected to rise to the Fed’s target. Longer-term inflation expectations (shown by the red line) are slightly higher, but following a similar downward trend characterized by lower highs and lower lows.


I also related last week that during our quarterly Investment Committee meeting, we discussed that crucial leading indicators of an economic slowdown are beginning to flash increasingly yellow. This week brought more squishy economic data, with the possible exception of the employment report, which we’ll discuss below. Given this backdrop, our view is that the Big Brains at the Fed are taking an awfully big risk by stepping back now as the effects of their ill-fated December 2018 rate hike haven’t even worked their way through the economy yet.

Employment Report. The employment report was met with a giant sigh of relief as economic data leading up to this report was relatively weak. The Bureau of Labor Statistics reported total nonfarm payrolls increased by 128,000, well above expectations of around 80,000 new jobs. Interestingly, interest rates didn’t move much higher in anticipation of growing inflationary pressures despite the booming jobs number, as would be expected. Our sharp-eyed resident economist, Sean Foley, pointed out the following:

  • The outsized “birth/death” fudge factor used by the Department of Labor (DOL) to “estimate” jobs created by new business formations.  The DOL assumed that 274K jobs were created by new small business births in October.  Prior to this October, the 10-year average adjustment for October was 167K. So, the difference added 107K “jobs.”
  • The job mix was poor, with about 61K jobs added in leisure/bars of the 128K total.
  • Weak wage growth (as expected with a weak job mix).
  • A report that is not consistent with other fairly reliable data (both hard and soft).
  • Even with possibly inflated numbers, the employment growth trend is still slowing both on a 6MA basis and YOY.

So…. a great headline jobs number that is a lot weaker when you look under the hood.


Bulls. The economy and the stock market are different animals. Yes, recessions generally cause equity markets to fall, but not all recessions look like the Financial Crisis, where nearly every asset declined simultaneously. For what it’s worth, while we are concerned about the health of the economy, based on the economic data we are seeing, we don’t expect that the next recession will be anything more than a garden-variety contraction. What’s interesting is that even as interest rates have risen over the last couple of weeks and stocks have hit new highs, stocks don’t appear overvalued relative to interest rates. Indeed, the difference between the earnings yield on the S&P 500 (the inverse of the price/earnings multiple) and the 10-year U.S. Treasury yield is 3.8%. Compared to a long-term average of 3.5%, equity prices could move higher and remain fairly valued if interest rates stay at these levels or move lower. It’s also worth noting that the dividend yield on the S&P 500 (1.87%) is higher than the 1.73% yield on the 10-year Treasury bond, typically a bullish indicator for future equity returns.



Sources: Computstat, I/B/E/S, Goldman Sachs Investment Research, and Covenant Investment Research.


Be well,