Monthly Archives: November 2019

On this episode, Karl discusses how to prepare for potential volatility in 2020.  There are investments beyond stocks, bonds, mutual funds, and exchange traded funds.

Hey, good morning everybody. Welcome to Creating Richer Lives. My name is Karl Eggerss. Thanks for joining me, I appreciate it. As always, hope you and your family had a great Thanksgiving. I know I did. It was very traditional in the sense of doing the same thing we’ve been doing for the last 20-some odd years it seems like. It’s nice, all the family comes over. We always host at our house, and it seems like everybody brings the same dish. People may even sit in the same place. But as I’ve learned over the years, as my kids get older, they really like tradition. And when you try to change something up, they don’t want to change it up. And so we just continue to do the same thing, and it was great. And I hope yours was too. Very grateful this year and thankful. My mother and my mother-in-law both had some health issues in 2019, and so it was great just to be with them and that they were healthy.

Let’s jump right in here. Don’t forget, our telephone number is 210-526-0057. Our website is And just a reminder, if you’re listening to the podcast, we not only update the podcast on Saturday mornings when it’s released and it goes out on our website, it goes out on iTunes and Spotify, and really a lot of the podcast services, and so if you use a podcasting service it just shows up when it’s released. What I found out though is that a lot of people still like to get notified via email when our podcast comes out. That comes out on Monday afternoons. We send it out in something called Covenant U, and Covenant U is really an educational piece with anything that we have put together on the site and uploaded onto the site each and every week.

So we take anything that’s been posted, whether it’s a blog article, whether it’s a TV interview, a radio interview, a piece that we find educational and think you will too, any of that is distributed out on Monday afternoons. And so that is how our new format has been for the last few months. So if you’re listening to this and you want more information, it’s Covenant U that you will get in your inbox each and every week on Monday afternoons. And just a reminder, Covenant is the sponsor of this show, lifestyle, legacy, philanthropy. And really the goal of Covenant is to unburden clients from the daily cares of financial management. And that can come in a lot of different forms and fashion.

Before we get into my topic this week, just a quick update on the markets. We’re sitting here right now pretty close to all-time highs, obviously Friday pulled back a little bit after the Thanksgiving holiday. But market’s been very resilient. We’ve had overbought conditions from a technical nature I’ve been talking about the last few weeks, and yet the market’s grinded higher and we’ve seen some really important things such as small caps break out. They had been lagging behind and they started to outperform. And so we’re really seeing kind of a broad-based rally. But again, we’re still overbought and I still think we’ll get a pause. Now when a market does not pull back when it’s “supposed to” because it’s overbought, that just means it’s a really, really strong market. And that’s what we’re in right now.

As we move into 2020 will we see more volatility? I personally think we will, and it brings me to my topic today. Because I met a gentleman early this week that said he had a portfolio, he’s retired, living pretty comfortably, and he said, “I’m just concerned that there’s going to be a big pullback next year, and I don’t really know how to prepare for it.” And so we had this discussion. I thought this is something that perhaps you would like to hear in terms of some of the highlights of what we talked about. And first of all, I do think we’ll see more volatility. Here we are, almost in December and with great gains in the stock market this year. In taxable accounts, very few people want to sell stocks and lock in gains and put them on the books for 2019. They would rather put them on the books for 2020, and I think people will do that. And so what they’re going to do is defer those gains. And so there’s a good chance we will see some selling in early 2020 simply for that fact that the folks that wanted to sell in 2019 thought, “I’ll hold off until the new year.”

In addition, we have something very big called the presidential election, and many people are concerned that volatility will pick up. And I think it will, again, depending on how the polls go. And again, regardless of your political stance, as we navigate through this there’s a lot of different opinions, as there usually are coming into an election for both parties, their beliefs and their policies are going to look very different. This year is up there as one of the most bifurcated ones. You have one side that’s looks very different than the other side in terms of the policies. So watch that, as we move along and the poll numbers change, the market is likely to get more volatile. So we talked about this, this gentleman and I, and said, “Look, what can we do?” And this was somebody that was not a client of ours. He was wanting us to look at the portfolio and see what options there were.

And so the first thing I told him is the best hedge is cash, right? I mean if you’re sitting there with cash, that is not going to go down. Cash, meaning money market, savings account, something outside of the stock market or the bond market. That is going to hold up versus the stock market fall. I mean that’s your best hedge. Now there’s problems with that. Doesn’t make a lot of money. You’ve got gains to lock in if it’s in a taxable account, as we just talked about. And the challenging part is you have to buy back in, so you have to get the timing right. So we explored other options, and these were just brainstorming ideas. As we move forward, I’m going to look in the portfolio and see where some holes are and some things that can be plugged, if you will, where there’s leaks in the pipe, and we’re going to try to plug those for him.

And so I wanted to share a couple of things you can do to protect your portfolio. So I would say number one is if you’re going to lighten up, and I wouldn’t suggest that you do that right away, but if you were going to, especially as we move into 2020, look at your IRAs, your Roths, your tax-deferred and tax-free accounts, your 401k’s. That’s the place that you can lighten up, get more conservative, if you will, without the tax consequences. So that’s number one, if you’re going to get more conservative. Now when it comes to getting more conservative, do you do it now? Do you wait until the election? That’s the challenging part. And so you need signals, you need a strategy, and that’s what most people don’t have. They’re either going to sell out now and sit there as the market continues higher or they’re going to wait, and then of course it’s going to be too late. And when they’re at their peak fear, that’s usually the bottom, right? The sell-off’s already happened. So if you’re thinking about getting more conservative, regardless of the timing, yes you can go to cash.

The second thing you can do is obviously, what most people do, is go to fixed income. They go to bonds. What if over time we get a environment where stocks are challenged and bonds are challenged because interest rates are rising? I know we haven’t had that for a long time. And when I mentioned that to this individual, he looked at me like an alien, as if I was an alien, like, “What? Bonds are always a great option for the non-stock portion.” That’s true because of the environment we’ve been in the last 15, 20 years at least where rates have been falling. If we get into a persistent rising-rate environment, which I’m not saying we’re going to get into a hyperinflation, but if we just have rates rising moderately, bonds won’t give you the safety that you have wanted. They could lose money. They may not lose as much money as stocks, but they could still lose money. But fixed income is an option. So he already had some of that.

So then we start looking at things that are nontraditional, right? So this gentleman already had bonds, he had stocks, he had mutual funds, he had ETFs, like most of you do. What else is there? Those are traditional investments. What else can you be doing and adding to the portfolio? And I’ll start with maybe the thing that probably most of you don’t have or don’t have access to or haven’t ever explored, but private equity, investing in a private business. So you’re taking your public money, your stock money, and maybe moving some of it to private equity, a private business, probably better valuations, and that’s something that in this world you may be able to get something at a third of the valuation of what the stock market is giving you. So you’re still in stocks, but you’re getting it at a cheaper valuation.

Now, what’s the negative of that? Liquidity. That’s why public stocks get a bigger premium is because you can sell them anytime you want. You can liquidate them. That’s a huge benefit. Private equity, you don’t get that. You’re in, it’s the roach motel, you check in, you can’t check out until there’s a liquidation event, generally speaking. But that is an option. That’s one way to diversify away from public markets and something away from the political volatility we might get or the volatility due to the politics because the business is still operating, right? The reason the market moves up and down is because it does move on news on a day-to-day basis. So private equity is one thing.

What about, and this is something we’ve talked about for years, but a lot of new listeners, what if you look at private lending or private real estate? Again, you know about public REITs and you know about public bonds. That’s public lending, right? And public real estate. But really public REITs are really just glorified stocks. They move just like the stock market. In fact, sometimes they move more than the stock market. So yes, you’re getting some real estate exposure. But in terms of what your portfolio, how it moves on a day-to-day or week-to-week basis, it really looks just like the stock market. But then when you go in the private real estate market, very different.

Now, what can that look like? That can be a private fund. That can be a private real estate investment trust. It can be your own warehouse. It could be your own rent house. It’s all of the above. Those are private real estate, and that can diversify you away from the market. Again, you’re getting income and you may be giving up some liquidity, but you’re gaining the non-correlation to the stock market. It’s not moving the same as the stock market on a day-to-day basis and the election’s probably not going to affect that. That would be affected by the economy. That’s another animal. We’re talking about reducing volatility because of the stock market.

What about private lending? There’s companies out there that need your capital. We’ve talked about this in the past, but there are a lot less banks nowadays than there were in the early ’90s. And because of that, there is a shortage of lending. So companies need capital, and oftentimes they will come to the private markets for that capital. And you can be that lender. And oftentimes you can get collateral. They will back the loan up with something tangible. So those are out there in individual loans. They are out there in the form of institutional type funds where it’s a basket of loans. There are diversified lending funds that will buy distressed debt. They can even short bonds. They can lend for commercial real estate, to build commercial real estate. All of that can be packaged in a lending fund. Now on the surface it may look like a bond fund, but much less affected by interest rates. So again, if we get in that environment where we’re talking about, they won’t be affected as much. They’re more affected by the credit or what’s going on with the economy. But private lending is another option.

Now private lending can also be non-commercial. It can go on the individual route. In other words, somebody needs a loan to buy a home, a family, and you’re going to provide that financing for them, the home’s the collateral, you’re getting paid interest. And again, unless that couple can’t pay their mortgage or loses their job, you’re going to get that income regardless of what happens with the presidential election. Again, a great diversifier and very, very different than the overall stock market. So you’ve got private lending, you’ve got private real estate, you have individual lending, commercial lending, you got real estate in the form of homes or apartments or buildings or warehouses that you can invest in, you can lend in.

I mean there’s just a huge other market out there in terms of investments. Now all of these things have their pros and cons as every investment does. Stocks and bonds are the most simple. They’re liquid, click a button, get in, click a button, get out. But with that, sometimes you pay premium and sometimes you put up with a lot of volatility that you may not want to put up with. And that’s why we’re talking about these other things. And then we just talked about private equity as well.

Another bucket, liquid alternatives. So alternative to me is really anything outside of the traditional stock and bond market. But in the last several years there are several funds, ETFs, private or institutional type funds. Some of them you may have access to, some you may not. But they’re designed to do something different than the traditional mutual funds. So instead of a large-cap value fund or a small-cap growth fund, these would be a fund that literally move more. They give you more gains when there’s more volatility. So you can see how when there’s more volatility, usually that means your stuff’s probably going down, your traditional mutual funds, ETFs. These would be something that actually may go up during that environment.

Now in a bull market like 2019, they’re going to lag behind. So they’re going to be the ankle weights around your ankles as you’re running a marathon and everybody else’s running past you. That is why there is no free lunch. You either own these things or you don’t. I use them to really outpace my bond portfolio. If I can do that, I’m happy with them. Now, if I need income, that’s a different story because a lot of these don’t pay income. Some feast on volatility. Some go long and short the market. In other words, they say, “We’re going to buy the best stocks and we’re going to short, in our opinion, the worst stocks.” And they put it together and you get a fairly low-volatile fund. So again, there’s all kinds, but if you start adding those in in various pieces, you get a real diversified portfolio.

And I think this gentleman I was talking to, I think he was onto something because if you go back to 2008, which is an extreme example, but if you go back to 2008 many people thought they were diversified because they owned eight mutual funds, 10 mutual funds, they owned bonds, they owned ETFs, they owned international. But everything went down. What didn’t? Cash, right? That didn’t go down. I think treasury bonds did okay. Other than that, a lot of people were in trouble. But if you start adding in things that can actually benefit from volatility and maybe short the market at various times, you can see how it acts as a shock absorber to your portfolio.

Now, how much you do depends on your situation. And as I’ve said, there’s no free lunch so you have to kind of live with it. In other words, if you have 20% of your net worth in non-traditional investments and let’s say some of them are meant to do well during times of volatility and we have no volatility for the next five years, you’re going to underperform. But that’s okay if that’s what your goal is, if that’s what your strategy is. So everybody’s different. So I haven’t proposed anything to this gentleman yet because I haven’t looked at his portfolio. I want to look at it, see how much international he has, how much value he has, how many bonds, how many individual bonds versus bond funds. Which stocks does he have? I’m going to analyze those. I’m going to go through his whole portfolio, tear it apart. It’s like rebuilding the engine.

And then I’m going to look at it and say, “You know what? You know what’d fit nicely in this portfolio as a nice puzzle piece would be this, this and this,” and we round out that portfolio. I’m not trying to duplicate what he’s doing. I’m trying to add value in his life to what he doesn’t know how to do or can’t do. And so part of this is education. And so as we move into 2020, this is a good time to review that. This is the time right now, it’s not November of 2020. Because once the volatility starts, that’s when you really don’t want to do anything unless you’re taking advantage of the volatility by buying low and selling high, which can be challenging. So this is the time to review your portfolio. This is the time to do some stress tests on it, et cetera.

If you need help doing that, Covenant does that each and every day for our clients. We can do it for you. So you just give us a call, 210-526-0057. And our website’s I hope that was helpful to let you know what else is out there, what’s out in the investment world that you may have access to that you didn’t know you did. And you never learned about it because Money magazine doesn’t talk about it. And bald people on TV throwing stuffed animals to the screen, they don’t talk about it. And people that tell you to throw your credit cards in the blender, they don’t talk about it. They just talk about traditional investments, which again should be the core for most people. It should be the core of what you’re doing. It’s the bell curve. Should be traditional investments. I’m all for that. But on the satellite piece, the fringe, the edges, there’s other things out there that you may need to learn about. Because, again, in the next bumpy road, which could be in 2020, it’s something to investigate now.

Well, I hope you guys had a great Thanksgiving, as I mentioned, and have a wonderful rest of your weekend. And we will see you back here next week on Creating Richer Lives, the podcast. Thanks 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 or her individual situation, he/she is encouraged to 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

5-Minute Huddle: Roses (Blog)

November 25, 2019

  • 5-Minute Huddle: Roses (2019.11.22)

By Justin Pawl, CFA, CAIA

In this week’s edition:

  • He Said-Xi Said, update. Some progress, but the recent bill passed by Congress may complicate the matter.
  • Roses. Unconventional monetary policy measures are difficult for Central Banks to give up.
  • Eco Data Update. Manufacturing survey data in Europe is improving, and so is the U.S. housing market.

Last Week Today. Christine Lagarde, in her first major speech as European Central Bank President, echoed her predecessor, Mario Draghi, pushing for fiscal stimulus. A bid to jumpstart the world’s second-largest economy in a way that negative interest rates have failed to do. | Speaking of which, the Organisation for Economic Co-operation and Development called for “bold action” from governments to work together to avoid long-term stagnation of the global economy. The OECD’s updated forecasts include economic growth slowing to 2% in the U.S. in the next two years, 1% in the Eurozone and Japan, and 5.5% in China (down from 6.6% last year). | Reports surfaced that brokerage firm Charles Schwab will acquire TD Ameritrade, creating a firm with combined assets of more than $5 trillion.

Financial Markets. Global equity markets softened last week on a lack of progress in U.S./China trade negotiations. Considering the S&P 500 had risen for six consecutive weeks before giving back -0.3% last week, most viewed the short-term pullback as normal market action. International developed market equities (as measured by the MXEA Index), also ended a six-week winning streak, falling by -0.6%. Long-term interest rates declined over the last week, while short-term rates rose a titch, introducing a modest flattening to the yield curve as traders adjusted their fixed income positions for doubts about a trade deal and weak domestic retail sales data.

He Said – Xi Said, update. China’s top trade negotiator, along with China’s President Xi, expressed some low-level optimism about reaching a trade deal. But…. the U.S. Senate passed the Hong Kong Human Rights and Democracy Act by unanimous consent. The House of Representatives passed it by unanimous consent earlier, creating a veto-proof majority. Passage of this bill could lead to sanctions against China and Hong Kong officials and a review of Hong Kong’s trade status with the U.S. What most investors focused on last week was how this bill could complicate U.S./China trade negotiations. However, over the weekend, China (whose current policy is to pay for corporate secrets) announced it has agreed to raise penalties on IP theft. This change in policy may mean that regardless of whether President Trump signs the Act, a Phase I trade deal could be close at hand.

Roses. Minutes from the Fed’s October meeting, where they cut interest rates for the third time this year, offered little in the way of additional information regarding the future path for interest rates. Against a backdrop of what the Fed views as a strong labor market and inflation near their symmetric 2% growth target, they expressed concern about downside risks “associated with global economic growth and international trade” (I think we’re all concerned with this). Officially, monetary policy “likely would remain” where it is “as long as incoming information about the economy did not result in a material reassessment of the economic outlook.” In other words, after cutting rates three times, the Fed is in a wait-and-see mode.

While rates may be on hold, the Fed is engaged in easing monetary policy via adding liquidity to the system. Following the spike in overnight bank repurchase rates (aka, “repos”) in September, the Fed decided to expand its balance sheet to ease funding conditions between banks.


Sources: and Covenant Investment Research.

While the Fed insists the balance sheet expansion is not Quantitative Easing, “A rose by any other name, would smell as sweet,” this is monetary easing no matter what they label it. Indeed, the Fed’s balance sheet bottomed at about $3.8 Trillion in early September but has since expanded by $260 Billion and is just a touch under where it started this year. With the Fed scheduled to continue purchasing $60 Billion per month in Treasury Bills through the second quarter of 2020, the Fed’s balance sheet could be approaching the pre-2018 level by the time they’re done. Notably, the European Central Bank is injecting €20 Billion per month into its economy, and the Bank of Japan’s balance sheet is expanding as well, leaving only the People’s Bank of China out of the monetary policy easing party. As such, the post-Financial Crisis monetary policy experiment continues.

There are many theories about the long-term impact of elevated central bank balance sheets ranging from calamitous to the new normal. Truthfully, no one knows. The post-Financial Crisis trend toward unconventional monetary policy has not only generated massive central bank balance sheets, but it has flipped the idea of borrowing on its head with countries intentionally adopting negative interest rates… citizens in these countries are paid to borrow money and penalized for saving it. Bloomberg’s John Authers wrote an opinion piece summarizing research on negative rates, which (given the results of the Eurozone and Japan) unsurprisingly finds they do not stimulate growth, weaken currencies, or improve liquidity. In other words, the benefits are difficult to find, and the unwind will be long and painful.

Investors are left to pick their way through these uncharted waters carefully. In a year where none of this seems to matter, and both stodgy fixed income and growth-oriented equities have recorded substantial gains, it’s easy to become complacent. After all, 2019 is a near-perfect mirror image of 2018, in which cash was the best performing asset. Yet, prudent investors will use this time to review their portfolios to ensure they know what they own and why they own it. They will also confirm that their portfolio is adequately diversified to contend with the global crosscurrents that can create unwelcome volatility at any time.

Eco Data Update. A snapshot of important economic data releases from around the world last week:

Euro Area manufacturing sentiment (as measured by the Sentix Index, the red line in the chart below) is turning up; historically, actual manufacturing data has followed shortly after that. However, the Euro Area’s most recent Purchasing Manager Index (PMI) data fell to 50.3, meaning the economy is treading water. We’ll have to wait a bit longer to see if the soft data leads to better hard data.


Source: BlackRock

Housing in the US continues to show signs of a recovery. The National Association of Home Builders Market Index came in at 70 with a good level of respondents reporting improving conditions – up from 60 this time last year. The Census Bureau’s report on Housing Starts and Permits showed that single-family activity is starting to break out to the upside. Single-Family Starts were 936k, highest since January. Moreover, residential building permit applications for October exceeded survey estimates and rose to the highest level since 2007.


Be well, and Happy Thanksgiving to you and your loved ones. I’ll be taking the holiday off from writing, so there will not be a 5-Minute Huddle next week.


Karl Eggerss was interviewed by CBS’s Sharon Ko regarding inherited debt.  When an individual passes away, oftentimes there is confusion as to who is responsible for that debt.  Karl explains.

Sharon Ko:                         When a loved one dies, the last thing you want to be getting is calls from debt collectors. Here’s how to avoid that and what you can do to make sure you don’t leave behind a financial burden.

Karl Eggerss:                      Generally speaking, if somebody signs for the debt, so you know you go to get a loan and either one person can sign on it or two or maybe even three, and those people are responsible for paying that back. And so if somebody signs individually, then somebody else isn’t responsible. Now where people get into trouble sometimes is their parents have passed away and the people that have borrowed the money are passed away. Well, the credit card companies are going to send collectors and they use scare tactics and they’re going to come and call you the child and say, you owe us for this because it was your parents. You don’t owe. You did not sign for that debt. So rarely is somebody on the hook for somebody else’s debt unless they signed the loan.

Now when it comes to, is a deceased person responsible for their debt? The answer is yes. If they had assets. So generally what happens is when somebody passes away, they look at their balance sheet, they look at their assets and their liabilities, and they take the assets and they pay off the debt with it. But if there are no assets there, then the debt usually is forgiven because there’s nobody there to pay it back.

Sharon Ko:                         I think this is a good reminder about life insurance because that can really help when it comes to the debt that a person can face because creditors can’t touch that.

Karl Eggerss:                      Yeah, it’s a good rule of thumb, generally speaking, that if there’s a beneficiary on an account such as a 401k, an IRA or life insurance, the beneficiary gets that money. It does not go to pay off the debt. Now there’s an ethical issue here, but legally speaking, if something has a named beneficiary, that’s who gets the money. It does not go towards the debt. Some people will put the beneficiary as their estate and if they do that, the estate is responsible to pay off the debt.

Sharon Ko:                         And speaking of beneficiaries, make sure that they’re living update that.

Karl Eggerss:                      Yeah, it’s a good thing. Once a year, we always kind of check on in January. It’s just a good start of the new year. You know, people make their new year’s resolutions. This is the time to start thinking about going and checking your beneficiaries. Or you may just have changed your wishes. It could be somebody passed away and they’re not a beneficiary anymore, but it could be that you just changed your mind and you have different beneficiaries.

Usually on a beneficiary form, there’s primary and contingent. Primary as who gets it, but if they’re deceased, it kicks into the contingent ones. But with any of this stuff, there are very complicated extenuating circumstances. And if there’s a complicated situation, always seek out a financial advisor or an attorney because there may be some rules and specific situations-

Sharon Ko:                         Thanks so much to Karl Eggerss.

On this week’s show, Karl interviews Lisa Fullerton, President & CEO of A Novel Idea, LLC.  They discuss how Lisa has managed to run a successful business for almost 20 years and how she balances her work life and her personal life.

Karl Eggerss:                      Hey, good morning everybody. Welcome to the podcast. This is Creating Richer Lives. My name is Karl Eggerss. Just a reminder, you can reach us at (210) 526-0057. You can also go to Of course we post a bunch of stuff on there each and every week. And just a reminder, the podcast comes out on Saturdays. Typically I’ll do a TV interview, airs on Sunday mornings in the San Antonio area on CBS. Our CIO Justin Paul has a blog that he puts out on Monday mornings. And so because we’re putting all that information for you that’s totally free, we thought it’d be easy to just send that to you once per week.

And so if you’re getting that, we call it Covenant U, because it is educational, and it comes on Monday afternoons. If you’re not getting it, go to the website and you can sign up for it and really any of the articles, you can click on them and you’ll see an opportunity there to put in your name and email address and then you’ll get that. And that way it’s a culmination of everything that’s distributed one time per week. But if you want to listen to the podcast as it comes out, you can subscribe to iTunes or Spotify, any podcasting service, and you can get the podcast right when it comes out.

Now before we get into the markets, we do have a guest that’s going to be in studio in just a few minutes. Her name is Lisa Fullerton and she’s the President and CEO of A Novel Idea, LLC, which owns and operates a bunch of Auntie Anne’s and Cinnabon franchises. And I brought her in because Creating Richer Lives is really to help you guys not just in terms of investing or financial planning, but some of you are thinking about starting a business. She’s been doing this 20 years. How has she been successful? Would she franchise over again? Those are things I’m going to ask her and so again, I know some of you are thinking about starting your own business and what are the pros and cons?

So I invited her in and Covenant has had a relationship with her because Covenant and Lisa met through some various philanthropic things we have done together over the years. And so I said, “Why don’t you come on in the studio and tell me about your success of running all these restaurants,” if you will, “And come on in, let’s talk about it and tell others how you got successful, what the pros and cons were of the challenges of being a business owner, especially 20 years ago? And is it easier or harder now?” So we’re going to have her come in the studio in just a few minutes, but before we do let’s do a little bit of housekeeping in terms of the market.

You know the last couple of weeks I’ve been saying that I thought we would be due for some type of pause and we’ve seen a little bit of a pause as the markets are a little stretched in the short term. Of course, we still have impeachment stuff going on. We are still getting trade headlines back and forth. You hear something positive, something negative, markets react, not too much, but we seem to be at kind of a pause. Really the biggest news this week was Charles Schwab buying TD Ameritrade. That was big because in our world, the registered investment advisory world, there are really three places: it’s Charles Schwab, it’s Fidelity and it’s TD Ameritrade. And now you have Schwab buying TD Ameritrade.

And somebody asked me earlier in the week, “If Charles Schwab doesn’t charge commissions anymore how do they even make money?” And I talked about this a few weeks ago, but I thought it was worth repeating. Keep in mind, many of these brokerage houses like a Fidelity, a Charles Schwab, it’s not just a place to trade. We’ve seen those transaction fees come down. They used to be $30, $40, $50 years ago and they’ve come all the way down to zero now. So now that they’re zero, how are they making money? Well, it’s almost a loss leader because what happens is very little of their revenue actually comes from you doing a trade at the discount brokerage.

This is Charles Schwab in particular. They are also a bank. So when you have money in the money market they will lend it out. So they are a bank, so they are making money obviously on lending. So they’re borrowing from you and lending to somebody else at a higher rate, so they make money there. But they also, if you think of Charles Schwab in particular as a warehouse or a distribution center, anytime you go on Schwab and you go to buy a mutual fund, that mutual fund company is paying Charles Schwab to be on their platform.

So Charles Schwab could go on TV and say, “Look, we have this huge library of mutual funds that you can choose from to purchase without any kind of fees.” And that’s because the fund company is actually paying Charles Schwab to be on their platform there. It’s a pay to play system. So Schwab makes a lot of money in that regard, and they also make a lot of money on banking and other services. So they do a lot of other things besides just the transaction oriented type of business of you buying and selling stocks.

But that going to zero is great for consumers, it’s great for us as advisors and that’s the way the industry’s going. But this consolidation going on, Ameritrade got bought by TD years ago, that’s TD Ameritrade, and you’ve had all this consolidation and now you saw Schwab going after TD Ameritrade. That was a big, big move this week, and probably the biggest thing because again the market’s not really doing a lot right now and so we’re looking at other news going on, which that was one that kind of maybe took some people by surprise on Thursday morning, but again, kind of this back and forth.

So things that have been working pulled back a little bit, some things that were working paused and again, let’s see where it goes. Now people are asking me, “Well, what happens with trade?” Well, how much of that is priced in already? If we get a trade deal, is it priced into the market? And the answer is maybe the majority of it is. So let’s continue to watch that and let’s continue to watch obviously economic releases. All right. As I mentioned earlier, we do have a guest. Lisa Fullerton is President and CEO of A Novel Idea. Welcome to the podcast.

Lisa Fullerton:                    Thank you, Karl.

Karl Eggerss:                      This is your first time ever doing a podcast, isn’t it?

Lisa Fullerton:                    It is.

Karl Eggerss:                      Not to make you nervous, we have some listeners that have been listeners for over 10 years.

Lisa Fullerton:                    Thanks for not making me nervous.

Karl Eggerss:                      But as I tell everybody, it’s just a conversation. And the reason I asked Lisa to come in as I just mentioned in the intro, is she is a small business owner that made a leap of faith and has turned it into a success. And I want to talk to her about the challenges because if any of you are listening that have either gone through this or considering starting your own business, this could be very, very helpful for you. So Lisa, again, welcome. And so just for those just joining us, tell me at the very beginning how you got started because you started this in 2000, but you did have a prior life to that.

Lisa Fullerton:                    I did. I had a safe, secure prior life than this. So my background is accounting and finance. I received my accounting degree from-

Karl Eggerss:                      Music to our ears-

Lisa Fullerton:                    Texas State.

Karl Eggerss:                      You see that? Texas State, I’m a Bobcat, yes.

Lisa Fullerton:                    Yes. Well, actually I’m so old it was Southwest Texas State.

Karl Eggerss:                      It was on mine too.

Lisa Fullerton:                    Okay, I’m feeling better already.

Karl Eggerss:                      Yes, we’re both old.

Lisa Fullerton:                    So I got my accounting degree and had worked for other people as their Controller, worked my way up to CFO and then I was a Managing Director for an international behavioral science firm in Austin, Texas. And that firm was purchased by the owner who lived in Vancouver, Canada. So when he originally bought the company he would come to Austin monthly, and then it was quarterly. And then he began to say, “Hey Lisa, would you come to our board meetings in Vancouver?” And so probably after about a year or two of this I realized he’s okay with me handling his business, so maybe this is something I could do for myself.

So I began to look into concepts to see what I thought I could do on my own. And it was then that I realized … I have a next door neighbor at the same time I worked for him who was a waitress and her husband was a mechanic, and they left Austin, Round Rock Texas area and wound up starting Auntie Anne’s pretzels in Lancaster, Pennsylvania. So I began to look into the company as we had left, parted ways and were no longer neighbors, and I began to look at another business model.

I didn’t have a single day I’d ever touched a cash register, had no retail experience, but I wound up having a conversation with Anne’s two daughters who had started and expanded in the Austin, Texas area. And they said, “Hey, if you’re interested in seeing if this is something you want to do, we need a Controller. We need a CFO, we really need some strength in that area.” So I quit my job, I gave a three months notice. My boss thought that I was going to be a lifer and-

Karl Eggerss:                      So the idea was to go work for Auntie Anne’s, not necessarily have your own franchise?

Lisa Fullerton:                    That was my safe leap, right?

Karl Eggerss:                      Yes.

Lisa Fullerton:                    So this was my, I’m not throwing in the towel and throwing my hands up-

Karl Eggerss:                      Was it even a consideration where … I mean, were you thinking that could be?

Lisa Fullerton:                    Yes, that was the ultimate.

Karl Eggerss:                      Got you.

Lisa Fullerton:                    But what they said was, “If you want us to show you the ropes, we grew up in the business. We were 12 and 16 when mom, Anne Beiler started the business. We really need help in the finance area. We’ll teach you the operational side.” So it was a great first step.

Karl Eggerss:                      Sure.

Lisa Fullerton:                    So as I worked for the girls for about a year, they went from 5 stores to 10 stores in one year and realized they bit off more than they could chew. So they started selling off the businesses asking me if I wanted to buy them, and I said no. Being a finance person I actually wanted to pay cost, not market, and I wanted to build that market.

Karl Eggerss:                      Right.

Lisa Fullerton:                    So I went in for an interview with Auntie Anne’s corporate and they said, “Hey, if you don’t want any Austin stores you’re approved awaiting a location.”

Karl Eggerss:                      So they didn’t have any franchises at that time?

Lisa Fullerton:                    Nothing available because the girls, Anne’s daughters had 10 stores in the Austin market and-

Karl Eggerss:                      That was it?

Lisa Fullerton:                    I was living in Round Rock Austin at that time. So less than six months later I got a call that there was a mall available or a location available in North Star Mall in San Antonio. I said, “But that means I have to move.” They said, “Well, you go down and look at it, then you come back and tell us you don’t want to move, but don’t tell us that sight unseen.” So we took a trip to San Antonio. We’re impressed with the mall.

And I said, “Okay, but I have to get financing, I have to sell my home, have to relocate my kids.” And I’d say it was the first leap of real faith that we had, that the doors just kept opening and things kept happening. So before I knew it I was in pretty deep and this was really going to happen. So, threw in both feet and the first three to six months I think I wondered what I had done. I had traded my suits sitting in a gorgeous office in the Austin Arboretum, and now I was working in a mall in San Antonio, Texas.

Karl Eggerss:                      Wow.

Lisa Fullerton:                    I left all things

Lisa Fullerton:                    -Hind familiar family, friends. That was a little overwhelming. That time was a little scary.

Karl Eggerss:                      I bet. We’ll come back to that in a minute. How long before the second, the third, the fourth?

Lisa Fullerton:                    The second location was two years later and the third location was three years later. And then I had some tough life circumstances, took a breather from expanding and then I added two at a time and then I added a co-brand at the airport. So as of date we have opened nine Auntie Anne’s Pretzels or Cinnabons in the San Antonio and San Marcus area.

Karl Eggerss:                      Wow. Now how have you seen … I’m just curious, the trends obviously in fake beef and all these diets and keto and gluten-free and all of this stuff … Have you seen trends change that would affect the business one way or the other?

Lisa Fullerton:                    I do-

Karl Eggerss:                      Because when I walk by them they’re very crowded still.

Lisa Fullerton:                    It’s very interesting. I’ve s-

Karl Eggerss:                      I always ask for extra gluten, by the way, when I go out to eat. And the waiters and waitresses look at me. And so,

Lisa Fullerton:                    But the interesting thing is there has been a very big change in the way that people eat today.

Karl Eggerss:                      Yeah.

Lisa Fullerton:                    But what I’m finding is there’s also a greater dichotomy between people who want to eat farm to market, and then when they fall off the deep end and binge, they really want to fall off the deep end and binge and have chocolate chip ice cream with cookies and, you know.

Karl Eggerss:                      Sure.

Lisa Fullerton:                    It’s very, very sweet and decadent. So I find that people feel we are still a great snack, but we have customers who’ve been loyal the almost 20 years we’ve been open. So this December will be our 20th Christmas season to be serving the residents of Santa Antonio.

Karl Eggerss:                      Wow. Congrats. That’s awesome. So you’re coming up on 20 years. You think back, obviously things have changed in terms of red tape and being a small business owner. I was a small business owner. We both started businesses. What were some of the biggest challenges? Like people listening right now are … There’s some listening that are considering either a franchise or they’re considering just starting their own business. Could you still do it today? What’s changed? What are some of the biggest challenges?

Lisa Fullerton:                    Wow, that’s a good question.

Karl Eggerss:                      Especially again, 20 years, long time, not in the big history. But female-led to, I mean were there any hurdles in that arena or not?

Lisa Fullerton:                    That might be another whole podcast. Actually, let me … I do have a couple of answers to your questions I think most people would find very interesting about what is different today than what was different in 2000.

Karl Eggerss:                      Yeah.

Lisa Fullerton:                    So when I started in 2000, because the food business is very capital intensive-

Karl Eggerss:                      Right.

Lisa Fullerton:                    People would probably not think that to start a quick serve restaurant, which is the industry or the segment of the industry that we are in, it’s a 250 to 300 thousand dollar investment. Now that is leasehold improvements, equipment, franchise fees, start up on your food costs-

Karl Eggerss:                      I wouldn’t imagine … I mean, if you’re not franchised is a dramatically different? There’s still a lot of those costs.

Lisa Fullerton:                    With the exception of the franchise.

Karl Eggerss:                      Yeah.

Lisa Fullerton:                    I would say it’s probably all very much the same cost.

Karl Eggerss:                      But you may spend that on advertising if you’re not using the franchise, right?

Lisa Fullerton:                    Correct. Yeah. And doing a lot of the work yourself.

Karl Eggerss:                      Sure.

Lisa Fullerton:                    But I think one of the toughest things is, is when you’re going to get a loan it’s very hard to get a loan in our industry because banks can attach any of those assets. It’s pretty hard to say the bank wants to attach the loan to HVAC.

Karl Eggerss:                      Right.

Lisa Fullerton:                    Right? So because we are so heavy on the leasehold improvement, it is a very difficult arena to get started in.

Karl Eggerss:                      Yeah and as far as … I know  it wasn’t as if you thought, I’m going to go into the food business. Your path kind of led you there, but knowing accounting, knowing finance, that’s a challenge in business. What is it, 90% or so of first year restaurants and food vendors close down and it’s a low margin business, right?

Lisa Fullerton:                    Very low margin.

Karl Eggerss:                      You need a lot of volume.

Lisa Fullerton:                    You point out two really, really important things that I think are important to let people know. In the food industry, 80% of businesses fail within the first five years. I think one of those reasons are the margins really are so low. If you have a loan, typically you’re doing well if you have a five to seven percent net income at the end of the year. But what people, I think, underestimate is the taxes-

Karl Eggerss:                      Right.

Lisa Fullerton:                    -That you have to pay. So the federal taxes are significant. The franchise taxes are significant. The property taxes are significant. So I always tell people, if you’re thinking about getting into business for at least the first five years, you need to make less than you’ve ever made. So pay yourself reasonably but not excessively. And you’re going to work harder than you’ve ever worked. But I have to say when I started that first one, I never envisioned that we would have nine stores open in this area. And I think because we grew slowly, smartly, and we’re focused on paying off debt and trying to reserve cash that’s really why we never … We’ve been successful and have never really been in a lot of trouble.

Karl Eggerss:                      I would imagine too, there’s economies of scale with nine versus one.

Lisa Fullerton:                    Absolutely. So I found that when we got to three stores, we could hire a regional manager. So the beauty is when I worked the …  I actually worked my first store. I worked the first three years doing …  Working at home, doing all the accounting, finance, food orders, hiring, terminations, scheduling. And then I would work the stores, the closing shift from three to close.

Karl Eggerss:                      Wow.

Lisa Fullerton:                    So I would be up, take kids to school, work from about eight to three, grab the kids from school, take them in, switch, let my husband bring them home, and then I would work the closing shift. So it was 70-hour weeks for the first year.

Karl Eggerss:                      And let’s remind listeners you made that choice.

Lisa Fullerton:                    Yes.

Karl Eggerss:                      Which is amazing.

Lisa Fullerton:                    And that’s what people said, is “what were you thinking?” And I think … Honestly, I think we all probably underestimate the time and energy, the physical resources, the emotional resources, maybe even the disappointments, how much of the work you really need to do yourself. But I do believe that was very helpful and setting a foundation that my staff, who saw me do everything I was asking them to do, realized I had skin in the game.

Karl Eggerss:                      Yeah.

Lisa Fullerton:                    I was not afraid to do anything I was asking others to do.

Karl Eggerss:                      Yeah because that can be a high turnover business, which is a whole ‘nother element of taking time to interview new employees that you know may be working there for the summer or what have you. That’s very challenging. And when you start multiply that times five, seven, nine locations … I mean I’ve got to ask you … You have five kids, three grandchildren. How do you … And by the way, you probably didn’t want to mention this, but I will, very philanthropic, involved in a lot of other things. So it’s not as if you just went in there and hunker down. You were still balancing that and family life and philanthropic, which we always talk about the shows about lifestyle, legacy, philanthropy and you were doing all of those. There’s only 40 hours on a week.

Lisa Fullerton:                    Well, I didn’t sleep many of those in the first, I’d say, three to five years. But I think what was helpful and foundational in those early years was working with the people that I realized had core values that were in alignment with my own. So when I realized those people that felt the same way I did, treated customers the same way I did, had the same work ethic I did, you really invested in those people. And fortunately that paid off because the director of operations for our organization, he was the only 15 year-old we ever hired and he is now a 34 year old director of operations for the company.

Karl Eggerss:                      That’s awesome.

Lisa Fullerton:                    So we have worked together for 19 going on 20 years. So I think when you put your efforts into people that do understand what the core value of the business was … And mind you, in the early years, I knew what those core values were.  I didn’t know that’s what they were called. We didn’t talk about them.

Karl Eggerss:                      Right.

Lisa Fullerton:                    It was in my head, my heart.  I didn’t share that. So it wasn’t until years later, my husband and I worked with a business coach to help us say, “you got to get what’s in your head and heart onto paper and you need to get it out in front of your staff-”

Karl Eggerss:                      Sure.

Lisa Fullerton:                    “And you need to not only have a as a plaque up on the wall, but you need to live in accordance with those core values. You need to use them as part of training, their evaluations, their corrections.”

Karl Eggerss:                      Well, just like parents they’re going to look … The children are going to look at the parents and the parents can have placards on the wall, they can say things, but it’s what do they do? What are their actions?

Lisa Fullerton:                    That’s exactly right. That’s exactly right.

Karl Eggerss:                      By the way, I’m looking around the studio and I don’t see any samples.

Lisa Fullerton:                    Oh!

Karl Eggerss:                      I’m just saying.

Lisa Fullerton:                    Okay, I’ll leave you some free pretzel and Cinnabon cards when I leave here.

Karl Eggerss:                      Okay, that’ll work. Deal.

Lisa Fullerton:                    You can get them at your own leisure.

Karl Eggerss:                      Deal. So, those people listening right now that are considering … And just to spend a couple of minutes talking about franchise or not … Considering even just a small business, whether it’s food related or not, what are the pros and cons, you looking back in the rear view mirror, going to franchising versus doing it on your own?

Lisa Fullerton:                    I really have a lot of respect for people who started a business out on their own and it has their name on the front of the building, but I think the benefit of franchising-

Karl Eggerss:                      Or people like me that used to have their name on the front of the building.

Lisa Fullerton:                    Right. But I understand how sometimes you have to come together with like-minded people-

Karl Eggerss:                      Yeah.

Lisa Fullerton:                    -Because there really is economies of scale. And the reason that Lisa’s pretzels might not be successful is that means that Lisa would have to worry about the recipes, she would have to worry about menu innovation, she would have to worry about technology and that is absolutely rapidly changing.

Karl Eggerss:                      It’s huge.

Lisa Fullerton:                    What register? I’d have to worry about the food suppliers and the vendors. I’d have to worry about-

Karl Eggerss:                      And you had an interesting perspective because you get to see the inside first as opposed to going online saying, “Best franchises of 2019. Oh, I’ve heard X is great, I’ll go give it a try and invest my money,” only to find out it’s not that great. You actually got to see it first and then work from the inside out, which is unique.

Lisa Fullerton:                    And if I could tell you kind of an interesting story about why Annie Anne’s probably resonates with me is it’s personal and I think most of us, when we do what we love and it doesn’t feel like work, then it really isn’t work. So when I was newly married and living in my first home, my next door neighbor was the founder, Anne Beiler and her husband. And so, she was a very, very conservative Amish. They’re an Amish couple. Had a very, very strong faith and she was literally a waitress and her husband was a mechanic. So she used to cut and perm my hair and serve me lemonade in her house back in the early to mid 80s and that’s the … Ironically, that’s the lemonade recipe we serve in our stores today.

Karl Eggerss:                      Wow.

Lisa Fullerton:                    So talk about come full circle.

Karl Eggerss:                      Yeah.

Lisa Fullerton:                    But I think a lot of it is, I knew who she was as a person and I trusted her and I knew what she stood for. And our core values are in alignment. So even today she and her husband are personal friends of ours and have been for 35 years.

Karl Eggerss:                      So that’s worked for you to go the franchise route. For folks who can’t go from the inside out, I guess the due diligence they have to do … Obviously you have to have a passion for whatever you’re going into, but there’s a lot of due diligence on finding out who that … And some of those may not be able to get that type of experience you did.

Lisa Fullerton:                    Correct. Well, so I would say a couple of things. It’s very important that if you are getting into business where you require  foot traffic, stand in front of the location you’re considering and do traffic counts.

Karl Eggerss:                      Yes.

Lisa Fullerton:                    A good capture rate is five to seven percent, so if-

Karl Eggerss:                      I’ve heard the airport’s good.

Lisa Fullerton:                    Yeah, I would take 10 more of those if I could.

Karl Eggerss:                      Yes. Yes.

Lisa Fullerton:                    It’s a very … because traffic is abundant.

Karl Eggerss:                      Captive audience.

Lisa Fullerton:                    That’s exactly.

Karl Eggerss:                      Yeah.

Lisa Fullerton:                    So that’s one, so that you could at least have an estimate of how many customers you could expect to capture. And then if you’ve got an estimate of what each transaction averages, then you could do some estimation about what your revenues could be. Also, be sure that you understand what the expense structure is and those things that are hidden or surprise. So I would ask … I would do my research about other brands and what their expense ratio is so you have a good idea. But the third thing I would tell people is, be realistic about what you’re good at and hire somebody else to do those things. I mean, I’m fortunate that accounting is my love. That’s my background, my expertise. So I love that piece. But marketing, I like it, I enjoy it, but that gets my leftovers. So we actually have a marketing director in our company who handles customer comments. She does field trips. She takes care of catering. So she’s really good at the customer interface piece.

Karl Eggerss:                      The knowing your numbers, I meet a lot of clients who, it’s usually in real estate where they have a real estate investment and I kind of analyze the numbers, and they’re not making as much as they think they are. And I’m going to talk in future podcasts about that because when you really run a lot of the numbers, it’s not as easy as people think, especially if you’re just watching HGTV and think, “I can go do this and flip a house,” or, “I can rent it out, do whatever I want.” Real estate’s got this love around it, and people don’t always do their homework. But it seems like when you’re considering a franchise or not, you’ve got to know your numbers. And there’s certain probably little formulas that every restaurant, every even small business owner really needs to kind of stick to for it to be successful. And you have to know your numbers, I would think.

Lisa Fullerton:                    Well, I think something that you brought up in that question is that I made sure that we were open a full entire year so that I was around for every season. Right? So I may have been successful for six months and thought, “Man, I’m ready to open multiple locations.” But I think until you really get good at your foundation, be careful building too fast. Because it is, the biggest challenge we face today is getting enough people to work. It’s very challenging out there. There’s a saturation of food competition. I challenge you to go look at any strip center and I’ll bet 50% to 60% of what’s in there is food. People now get stuff catered in. So I would tell people, make sure that you know foundationally what you’re doing in a year or two. Don’t overcapitalize. Don’t think that just because you see the money coming in, it doesn’t mean it’s there to be spent. So try to stock away as much as you can and pay down your debt as fast as you can. Those are just some things that worked for us.

Karl Eggerss:                      So, Lisa Fullerton, 20 years now versus 20 years ago, what things, when you look at from the 30,000-foot view, not that you would change necessarily, but as a business owner today, what are you doing different than you were back then?

Lisa Fullerton:                    I’m probably not-

Karl Eggerss:                      And primarily about balance, right? I mean-

Lisa Fullerton:                    Yeah. I think I’m not taking things so personal. I think because I am so deeply invested in my business, my staff, my customers, I have learned not to take myself so serious. And I’ve also learned a little bit about balance by learning, I have to say no. So I get a lot of invitations to come speak. I love those. I sit on several boards. And there’s so many good organizations out there that I would love to contribute to, but I have to be realistic about my time, because if it’s all work and no play, I’m going to have a pretty sour attitude.

Karl Eggerss:                      So you have to learn to say no, not only to work sometimes, but you also have to say no unfortunately to philanthropic things or committees or organizations that you may really want to do. You just can’t over commit because then everybody gets a little bit of Lisa as of opposed to-

Lisa Fullerton:                    Well, and I have a saying that if I can’t commit all the way, then I don’t like to commit at all. So I’m not somebody who feels good about saying that I’ll be engaged in something and then never show up because I don’t think that speaks very highly of me or my level of commitment. And because I believe so strongly and I’m so committed to what it is I invest my time, energy and talents into, I want to make sure I do a good job and represent those people well.

Karl Eggerss:                      Last question, would you do it again? Would you leave again and start your own, knowing everything you went through in terms of the hours, sacrifices, having a franchise, multiple locations, all the red tape, all of that? Would you do it again?

Lisa Fullerton:                    As crazy as it sounds, yes, I would. As hard as some of those times have been emotionally for my family. I mean, there were some years that were really difficult. All those hours worked, just some personal difficulties that transpired during those years, but I think that’s probably made me the person I am today, which is why I can take myself a little less serious. I can say no because I realized, had I known then it would be this good, I probably would have relaxed a little bit more. But I don’t know. Maybe that chaotic, frenetic busyness was what got me to where I am.

Karl Eggerss:                      Yeah, because you think, “If I don’t work the 80 hours this week, then it may not be successful.” And now you’re at a point where, if I don’t, yes, I may leave some money on the table, but it’s not as important as a trip, a grandchild’s baseball game, whatever it might be there.

Lisa Fullerton:                    I’m absolutely there. And another point about leaving money on the table is, I think I’m to the point in my career, or I’m certainly on the downside because I have been in this business for 20 years, and it’s the average life cycle of somebody in our industry is about eight to eight and a half years. So we’re over double the life cycle, and we take a lot of pride in that. But I believe the other important thing is to make sure that you take care of the people who take care of you. So if that means I pay them more to get a little more freedom, that’s also a principle I’ve applied.

Karl Eggerss:                      I’ve seen it at organizations that are startups where they think they start struggling and they start cutting employees or cutting benefits as opposed to themselves first, and those are the workers. Those are the ones moving the ball forward, and it’s sometimes done backwards.

Lisa Fullerton:                    Well, and the hard thing is, you never know, can I do a little price increase to cover this ordinance, this compliance issue, the cost of the compliance, or do I cut expenses? Because no customer ever walks to your counter and says, “You’ve officially charged too much, and I’m not coming back.” It’s more organic than that. You’re just an attrition of customers. So it’s a really difficult … there is no magic elixir. There is no guaranteed formula.

Karl Eggerss:                      When I asked you would you do it again, the last, last question would be, could you do it again today? In other words, if somebody is listening out there, saying, “I want to go that path. I want to start whatever it is today,” are things so different now than they were 20 years ago, or is it just the same? Obviously there’s differences, but can people still start a business with as much confidence now as they could have 20 years ago?

Lisa Fullerton:                    I think the cost of compliance is greater, the cost of labor is greater, but I also think as long as you have technology that can help you replace some of the things that were more laborious when I started, I think that’s an area that we’re going to have to realize some efficiencies. I know even I’m on a leadership advisory council for one of our two brands, Auntie Anne’s Pretzels, and we constantly look at, do we need to simplify the procedure back behind the store? Do we need to change the type of oven we have where it would be more automated? Because it’s all hand-baked, hand-rolled, it is handmade. So you don’t want to give up any of the core of who you are and what you’ve become known for by automation. But we have to keep an eye on the past and what made us successful but continue to keep our eye on the future to say what’s going to keep us relevant today.

Karl Eggerss:                      Yeah. That’s no different than a home builder. They all tell me now, just to even start the home, connecting the local public utilities to the home, all of that, I can’t remember the term they used, from the curb to the house, that cost is so high now that not only is the land cost high but it’s squeezing them. So what do they have to do? Same thing. They have to rely on more technology, more efficiencies and again, economy’s a scale, which is really what you did. So, Lisa Fullerton, a novel idea. Again, a great story. Appreciate you coming in, and you’re always welcome back, with one caveat.

Lisa Fullerton:                    Samples. Thanks for having me, Karl.

Karl Eggerss:                      Thank you. A couple of things Lisa mentioned to me after the interview, off air, that I wanted to share was the fact that she really couldn’t do some of these philanthropic things she wanted to at the beginning because, obviously, new business. And so it was once she was being very frugal at the beginning of the business and was able to save some money, was she able to start giving that back to the community, getting back into the community. And so that was really big for her.

And the second thing she mentioned that I wanted to share is, once she got her staff in place and was able to trust some of those folks, really, they took over as leadership and it freed her up to start doing more philanthropic things and really continue to help balance her life in terms of her kids and things like that. So training that staff and trusting them and having their leadership skills was huge for her. And so just wanted to throw that in as well. All right, everybody, thanks for joining me. I hope you enjoyed that interview. Have a wonderful weekend. And just a reminder, is our website, and our telephone number is (210) 526-0057. Have a great weekend everybody.

Speaker 2:                          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

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.

Hey, good morning everybody. Welcome to Creating Richer Lives, the podcast, and just a reminder, you can always go to, we’ve worked really hard on that site. There’s a place that says, “Start here.” If you just want to get our information, get notified every time we put one of our blogs out, our podcast, a TV interview, a radio interview, any type of article that covers everything from estate planning to financial planning, to investment planning, it’s all on the website right there. You can sign up to get that or if you need our help, because you need help with your financial plan or your estate planning needs or your investment management, you can do that on there as well. Of course, our telephone number, (210) 526-0057 and this podcast is brought to you by Covenant Lifestyle Legacy Philanthropy, and those are things we help people with every day.

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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.

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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.