April 1 Market Insight Discussion with Doug and Mike

TRANSCRIPT:

Mike: Thanks everybody, I want to welcome you to the Doug and Mike show. Also known as the HCM fireside chat. The first thing I want to do, considering how the world is sort of unfolding in front of our eyes. Is recognize everybody who continues to go to work in high risk areas. So that our lives can go on pretty much as normal as possible.

Health care workers, grocers, pharmacist, first responders. These are all special people that are taking over the top risks for us to pretty much carry on as normal. So, we want to recognize them. As far as this call goes, like last week, we're going to hold the call to 30 minutes. We're going to have some updates that have occurred since last week's call, financially, a little discussion in the markets and so forth, and then answer your questions. Don't forget if you do have questions, the info box that is in the invitation is how you get them to us. And with that, let's get started.

So, the first thing I would like to do is start with some good news and, remember that we want to be respectful of all the suffering and things are going on. But this is a financially related topic, remember, that's our perspective. And the good news is you simply can't drop $2 trillion into the economy and not have a meaningful portion of that ultimately find its way back into financial assets. We have a good model for that in the 2008-2009 financial crisis. So, from a long-term perspective, that money will ultimately, or a good portion, of that money's going to funnel its way into stocks and so forth. So that's a very good long-term indicator. The yin for that yang, or the bad news is that that may take a while. And, that's because, at least in the short term, there seems to be some resistance to accepting all the uncertainties. Around the business areas, the social areas, the economic and the market related consequences of all the realities that we're seeing unfold in front of us.

Because these things are likely to get worse before they get better, there is likely to be more fear and more emotional decision making by investors. As result of all that, we think that the valuation metrics could be lower for a while. This conclusion we think is reinforced by the fact that a lot of government assistance that's going to be going to companies is going to have strings attached to it that could complicate their capital structures. So that's going to keep pressure on valuations for a while as well. Quite frankly, we're concerned that not all of this has been priced into the market yet.

As a result of all that, we continue to maintain our conservative posture in our advanced and defend portfolio. Those are the portfolios that received tactical adjustments, and of course, our strategic portfolios get regular rebalancing. Whenever the market volatility gives us an opportunity to do that.

As far as the market activity goes, since last week's call, things have played out pretty much the way we discussed. There was a bit of a sugar high following the central bank announcement, the signing of the cares act, and then the big quarterly rebalancing. There was about three quarters of $1 billion that went into equities at the end of the last week,

the beginning of this week, just the very end of the quarter, in institutional funds, pension funds, endowments, things of that nature. But that process is now pretty much completed itself. So now we're kind of back to the reality of things. So that's sort of a snapshot of where we are just over the last week.

What I wanted to do was touch on the two most popular questions that we're getting regarding the cares act, that relate primarily to HCM clients. And then Doug will jump in and have some comments about the markets, and then we'll tackle the questions that have come in.

The two big things, with regard to the cares act, focus on the stimulus payments. Everybody's anxious to know, if they're going to get a check, and if so, how much and, when it's going to arrive. The other big planning opportunity that's presented itself is the suspension of required minimum distribution. Anyone who's receiving an RMD you know you have income that's forced onto your tax return, whether you want it or not. That drives your tax liability up, it can make Medicare premiums more expensive. There are a lot of ways that that can impact you. That's basically been taken away for this year, so that opens up a lot of planning options. So we're going to talk about those two things.

First of all, with regard to the stimulus payments. Unless somebody gets phased out, which I'll talk about in a minute. Every person, let's say most taxpayers, will receive a $1,200 check. A married couple would get two checks, so $2,400. If you have children living in your house that are under the age of 16, you get $500 for each of them. Those are basically the rules, but there are phase outs. If you make more than a certain amount of money, you'll lose 5% of the benefit as you go through the phase out periods.

So, for example, single taxpayers, that would include married filing separately and qualifying widower or widowers. The phase out begins at $75,000, and if your adjusted gross income gets to $99,000, you don't get any benefit. For taxpayers who are considered a head of household, that phase out goes from $112,500, I believe, to $146,500. Married couples phase out between $150,000 and $198,000.

Everybody gets a check. If you're considered a high-income taxpayer, which involves the phase out, then you slowly lose that benefit. The way this is going to be measured is based on the tax return that you filed most recently. Your 2019 tax return, if the service already has that, they will look at your AGI on that return to determine whether or not you qualify. If you haven't filed that yet and that return is on extension, because I think, as everybody knows, April 15th has been pushed off now until the middle of the summer. They'll use your 2018 tax return, but in either case, they're going to refer to an AGI number on that return. But the reality is this benefit is a 2020 benefit. They're simply using those previous year’s tax returns as a measure to sort of prime the pump and get these benefits out. Why that's important, is that if you did not qualify for a benefit based off your 2018 or 2019 tax return, whichever one is referenced for the benefit, you may still qualify if your facts will get you under those phase outs in 2020. The reason I point that out, is that's a financial planning opportunity to manage income in order to get into a qualifying zone.

Another thing to be aware of, is that if you qualify based on the return that was filed and the facts turnout in 2020 that you did not qualify. So, let's say for example, you're a toilet paper salesman and you were just eking along the last couple of years, but this year you're going to make $1 million. You'll receive your stimulus check because your income qualified in previous years. But even though your income is above the phase out in 2020 you do not have to give the money back. That's sort of a win fall for people. So again, it's just something to look at from a planning perspective, to see if there's an opportunity for planning there.

In terms of how the money will come in, the fastest money is going to come via electronic deposits. The treasury intends to put that money into the same accounts that you would receive your electronic refund, if in fact that's how you receive your refunds. If you receive social security, you'll have a direct deposit account, the money will go in there. If you don't have either of those electronic deposit accounts, then you'll receive a check by mail. And, of course, that's going to take longer. The electronic deposit should start in the next week or two. The physical checks sometime by early to middle May. I think that covers that part of it.

Obviously, if you have closed the bank account recently, or if you've moved so that your last known address to the services isn’t the one where you received mail now. That could create some complications that are going to have to be squared away.

The other big thing that I wanted to touch on, and this is a big planning opportunity for people who are in this situation. If you're receiving required minimum distributions, if you're getting them you know what they are. Those are for people who have retired and reached 70 and a half or, 72 under the new rules, they've been suspended. That creates a planning opportunity because the required distributions force you to recognize ordinary income on your tax return every year.

And of course, that's going to drive up your AGI for purposes of these tests we've just talked about. It also can put you in a higher tax bracket. It can make your Medicare premiums more expensive and it can squeeze out the opportunity of doing Roth conversions, which is a great family wealth planning tool.

So, by not having the required distributions forced on you, there's a lot of flexibility in that area. The one we're looking at most specifically, of course, are the Roth conversions. That’ll be something that would be important to talk to your advisor about. So those were the two big things I wanted to touch on right off the bat.

Now Doug, it is your turn.

Doug:  Okay. Can you hear me Mike?

Mike:  Yes, I can.

Doug:  Okay. Great, thanks. So, the first thing I wanted to touch on before we get into the market related stuff. I want to go ahead and acknowledge, our operation staff, our trading staff, and our marketing staff. I'm sure that their job is much easier, under normal circumstances. When everybody's in the office and it's easy to kind of, walk down the hall and ask somebody for something specifically. But they've all done a tremendous job adjusting to this new reality that we've had and have been outstanding in maintaining the level of service that we provide clients. In no particular order here, Maureen, Kevin, Laura, Kimberly, Lauren, Di, Mary Anne, Kathy, Dan, and Matt. Thank you very much. We certainly appreciate it, Mike, myself and the advisors. With that said, let's jump into a market related. items here.

Mike touched on a little bit, at the beginning of the call, about what we've seen over the past week. I don't want to rehash it too much, I just want to point out a few things. Based on everything that we'd seen, we were at a very oversold condition on the market. We certainly expected some kind of reflexive rally based on that. You had the pension rebalancing coming in, you had the stimulus denounce. I don't know that anybody expected it to be over 20% but, at any rate that's what it was. To give you some context though, about what that might mean. I think that the thing that's on everybody's mind right now is the bottom end. Is this a new bull market? I think the wall street journal came out and said, the bear markets over, we're in a new bull market. Which looks a little silly after today, but nonetheless. In the 2000-2002 bear market, there were three separate rallies of greater than 20% inside of that hold drawdown. Each one of them failed, and the lows were retested again. In the 2007-2009 bear market, there were two separate instances where you had a 20% rally inside the total bear market.

While it feels good to see green and to see this kind of rally. I think it's really hard to say that we're not going to see additional volatility going forward. I would say it's highly probable that we may not have seen the bottom yet. The main reason for that, I think, and we've touched on this before, was the fact that we're now entering the phase where you're going to start to see economic numbers hit the tape.

The first one we got was the Javas claims last week. Now, if you read the market insight, we talked about this quite a bit just because it was such an odd day. But, the jobless claims number came at 3.3 million. The wall street consensus was for around 700,000, and the highest firm that I saw had at 2.5 million. There was some conjecture about, was it priced in, and whatnot. I don't want to get into the specifics of that. I'd recommend that you read our market insight. It touches on that a little bit more, but the point is, 3.3 million unemployment, or initial jobless claims, that is a massive number. It's five times bigger than the largest one that we've seen since the data set started in 1967.

There's another one that's coming out tomorrow morning that's expected to be higher. In the initial one, there was only 80,000 people from New York that claim. Yet, they're department of labor has stated that they've received over a million phone calls by people trying to figure out how to claim unemployment. That number should go up, pretty significantly. When you see those types of numbers start to come in and you're starting to grasp the demand destruction and what this the social distancing exercise is really all about. In addition, you had a Dallas manufacturing survey that was expected to be negative 10, it came in at negative 70. I had one of the advisors tell me that they had to pull up the chart to look at it, and they had to change the scale on the graph because negative 70 was so far below any of the numbers that they'd seen, that it almost didn't fit.

I think as more of these economic data points start to come in, you're going to start to see a little bit more clarity around what fair value might be. Even at this point, I'm not quite sure that analysts have done a decent job of projecting this. I was on a conference call last night with a very well-respected bond manager, and he had a list of six reputable wall street firms and their GDP forecasts for 2020. Amazingly, only one of them had a projection that was greater than negative 3%, and it was actually two firms that had a projection that was less than negative 1%.

Now, to put some context around this. In 2008, we had back to back quarters of negative seven and a half and negative four and a half. Ironically, GDP growth never went negative in 2000. You know, if we're using 2008 as kind of a comparison here, to believe that we're only going to have negative 1% GDP growth, with the economy basically shut down. In this manager's words, it seems almost impossible for that to happen at this point. Not saying it can't, but it's going to be very hard at this point to avoid something like that. I think these reports, along with earnings that are coming out, is going to allow this haze of uncertainty to clear a little bit. And hopefully give us an idea of what fair value might look like.

Then once we start to see that, we can then analyze what are the points, or what are the sectors, or the investments that we think provide the best opportunity. What's the timeline on that? I think everybody wants it to be right away. Unfortunately, I don't think it's a process that's going to happen overnight. It's going to take some time. It's probably going to result in much more volatility that than what we're seeing. But, at some point, I think; I don't think, I know, that we will get through this and we will come out the other end of this with a little bit of a stronger economy, so to speak.

When that time comes though, we will be ready to aggressively re-risk portfolios. We will make sure that everyone is aware of how and when we're going to go about doing that. So, that's my remarks right now.  Mike, if you want to get to the Q and A, we can get started.

Mike:  Perfect, we do have several questions. As I said, we'll do as many as we can, and if we run out of time, we'll reach out to you individually to address that. The first one, Doug, this is probably for you. It could be either of us, but you can take it.

How confident do you feel with ETF’s that we have now with respect to being positioned to come out of this slowdown?

Doug: I'm fairly confident in the fact that ETF’s will be a useful vehicle to gain or participate in any kind of rally that we would see. ETF’s as a product have grown in popularity. They're extremely cheap, they're extremely liquid, and they track markets extremely well. The only other areas that I would think that maybe you could get some more bang for your buck is if you went with a highly concentrated ETF product, or a highly concentrated mutual fund. But that also comes with some significant risks too. I'm sure when the time comes, we will evaluate those. But if it comes tomorrow, and we make no changes, I'm very confident that we will be able to participate using those products.

Mike: I would add that the ETFs are broader-based diversified products. We've migrated to them almost entirely away from mutual funds because it's, as Doug pointed out, much less expensive. Which obviously helps, the overall portfolio.

But also remember that there we have three individual stock portfolios that we manage. A dividend growth portfolio, a socially responsible portfolio, and a growth portfolio. Those all have individual securities in them, which allow us to be more laser focused when we make security selection. We think of them as working together. The ETFs allow us to pick up more market exposure in a hurry, broad based. The individual stocks obviously let us target in on very specific companies and qualities.

Next question. With the severe drop in oil, do we foresee a majority of the energy companies cutting their dividends to preserve cash? Also, what does your crystal ball tell you about the bottom for the price of oil?

Doug: Well, I've seen reports, believe it or not, that have shown a prediction that oil will actually go negative. You may hear that and say, that's impossible, but it's in a scenario where producers would basically pay people to store the oil that they're producing. Now, I'm not insinuating that that's going to happen.

I think the most important thing to know about the energy sector is there is the best of breed companies. That are bigger in capitalization, more diversified in their business. Now granted, energy is still their main business, but they're diversified in the ways that they use it. There are some cuts and some recapitalizations, but we still feel okay owning those for the time being where we do own them. I think it's in the smaller names, the EMP, the wildcat drillers, the deep oil drillers. Those are the areas still where I think that those investments are basically a lottery ticket right now. They have to continue to pump oil just to stay open. And by doing that, they're putting excess supply into the market. As I said, supply comes on in the market, without a demand to meet it, the price just continues to go lower and lower. You saw two companies today in the energy space that the declared chapter 11 bankruptcy. I'm sure there's going to be more. Where oil is going to bottom, I'm not going to give it a definite price. What I will say is if you want to play in that space, just make sure you're owning the highest quality that you can.

Mike: Okay, here's one that came in. This is just going to take a second, but I do want to get to it. I'm going to ask part of it.

Do you know anything about the website for 1099 filers? I'm an independent contractor and under the new system what are the rules? Also, regarding the benefits for paying rent, does that apply to my business?

Independent contractors are entitled to unemployment. The website is, you could probably Google it, but if the person who asked has a pencil. It is, unemployment.ohio.gov/ that's unemployment.ohio.gov/. That's how you get there. If you have complications dealing with that, feel free to reach out to your advisor. We're more than willing to help you get through that.

In terms of paying for office rent, yes, there are the stimulus loans that are forgivable, if you meet the criteria, also cover rent. The bulk of them have to go for payroll and so forth, but some of that would also cover rent as well.

We just have one or two minutes left.

Are RMD’s for inherited IRA’s also suspended?

 We think the answer to that is yes, the act does not specifically break out inherited IRAs. What the act says is all required minimum distributions. The statute puts inherited IRAs and pretty much all retirement plan IRAs in different places. Because in one case, you're the account owner and the other case you're the beneficiary. That might be more information than you wanted. However, this is something we're still trying to get to the bottom of. As I read the statute, it's not clear. Commentators right now are not in agreement, but by far and away, clearly the act says all required minimum distribution. So that's the opinion now, but we're going to get a firm answer on that.

And it looks to me like we are out of time, so we'll handle the rest of the questions. I want to say thanks to everybody for tuning in. Also, the offer we've made in the past, if you know somebody that needs some help with all this stuff, have them reach out to us. We'll be more than happy to help, there are no strings attached. This is a time when we all need to help each other. So again, thank you much for tuning in. If need be, and it appears it will, we'll see you next week, same time, same station. Thanks everybody. Bye. Bye.