March 2, 2021
The Great Toilet Paper Crisis of 2020
In a year of oddities, one of the more curious mysteries of 2020 was why on earth people would feel the need to hoard toilet paper during a Covid lockdown? As crazy as human behavior can become, it just didn’t make much sense.
Mr. Haverly, in 8th grade, may have been the best teacher I ever had. I got to tell him so when I visited him at his home in Henderson, NV about 10 years ago. Mr. Haverly drilled into us the idea that whenever something happens, there is a reason, so look for the reason. Because of that mindset he instilled in me, I kept looking at this toilet paper phenomenon from time to time and finally can shed some light on it.
Few of us think about the difference in toilet paper between commercial buildings and our homes. The quality is quite different, as you may have noticed in commercial venues. The size of rolls is different, too. And, even the supply chains are different since commercial TP is delivered by janitorial companies while home TP is purchased at the grocery store.
What happened in early 2020, that appeared to be the result of hoarding of TP, was simply the result of a shift in usage as most everyone stayed home. Suddenly, there was a huge surge in demand for home TP just because people were at home in far greater numbers.
As an entire population, we are pretty predictable in our usage of TP. As a result, factories were designed to produce just enough TP to meet the projected demand for home TP. Because of the differences in commercial and home TP, the commercial factories had to be retooled before they could shift to production of home TP, and retrofitting factories takes a lot of time. You just can’t buy the parts at True Value. So, as we unknowingly waited, store shelves emptied much to our chagrin.
This dynamic can be applied to most items that flew off of the shelves in March of 2020. The cause was simply a shift in consumption due to more people being at home 24 hours a day rather than 14-16 hours. Eating at home rather than at lunch spots near work is a good example.
Slowly, production was shifted and the crisis waned, as supply and demand have once again gotten back in balance.
Logically, there had to have been an equal oversupply of commercial toilet paper during the home TP shortage, so I suppose we could have used that. But, personally, even if I had understood all of this back then, I would have waited for the good stuff, anyway.
Mark Your Calendars!
Shadowridge Asset Management, LLC and Hepburn Capital Management are now hosting a webinar each month called “Money Matters.” The next webinar will be Thursday, March 11th at 11:00 am (Mountain Time).
You will have the opportunity to listen to a variety of market and financial planning topics from Ryan Redfern, Will Hepburn, Laura Redfern, and Phil Lebkuecher.
Attendance is limited, so please sign up ASAP.
We look forward to seeing you there!
Please note: You will need to have the Zoom app installed in order to attend the webinar.
February 2021 Market Commentary
(By Ryan Redfern, Shadowridge Asset Management, LLC)
February WAS looking to be pretty good for the S&P 5001, being up almost 6% at one point this month. That is, until the last couple of days, when much like January, the market wanted to give back the gains. As of today, we are looking at ending February in mildly positive territory. But, if you take into account the losses from the end of January, we’re only slightly up for the year.
We are just not seeing the broad participation and conviction of all the market sectors to suggest a strong move higher from here. And by our measure, somewhere between 50 to 70% of stock market sectors are currently trending positive, depending on the day. In contrast, a “strong market” has 90%+ sectors trending positive.
But even more interesting is that there seems to be trouble again in the bond market. Most bond market sectors, from treasuries to aggregate bond indexes, seem to be struggling. The only bright spot has been high yield bonds, which have been holding up better as they tend to trade similarly to the stock market.
The volatility of the bond market leads us to think about inflation. When bond yields rise, bonds prices fall. Inflation could create this environment. Then the biggest danger relates to the duration of the bonds: the longer bonds have to maturity, the greater potential for loss as rates rise.
Inflation is its own rabbit hole, which you can go down here. It’s interesting stuff, but there are other metrics and data we find more effective in making investment decisions. If you’ve followed me for a while, you know that I prefer to “follow the money” above all else. Institutions and individuals alike vote with their dollars and that, I believe, is what actually moves the price of assets.
One of my favorite ways to look at market behavior is by using ratio charts – looking at a comparison of two different types of assets or asset classes to find trending behavior. This month, let’s look at the ratio of the S&P 500 and the Long-Term US Treasury bond index. The theory is if this line is rising, then the stock market (risk assets) is stronger than the bond market (safety assets). Whichever is showing strength can give hints as to what direction the market may take in the near term. This chart indicates that the market may continue to head higher in the short term.
Bonds – the bond markets started off the year in negative territory and still can’t quite seem to go positive. The Aggregate Bond Index AGG is down -2.26% Year-to-Date. High Yield was the bright spot, but has now gone negative for the year (FastTrack Data). Today, we are working to shorten the duration of our bond holdings to be ready if the interest rate situation continues to create a problem for bonds.
Sometimes the best course of action is to not play the game at all. In many of our models, we’ve spent more time out of the market than in it this year. Last month I mentioned we were hoping for a buy signal in February. We did get it, but it only lasted for 14 days. We are now back to being cautious in the near-term, but still somewhat optimistic in the longer term. Again, I think we could see another buy signal early in March, but who knows how long that will last. But if the longer-term data doesn’t strengthen soon, we’ll be reducing market exposure and risk to nearly nothing while we wait out the coming storm.
Stay safe out there!!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
Unpleasant Tax Surprises: Social Security
(By Laura Redfern, CFP®, Shadowridge Asset Management, LLC)
Ah, taxes, everyone’s favorite subject! To be fair, I have friends who actually enjoy diving into tax tables and itemizing deductions, which is wonderful! But that is not the majority of people I know.
Our tax system is challenging. Yet, we all must learn to navigate it, to some extent. This is where “knowledge is power” and can help prevent headaches down the road for you.
The Taxation of Social Security Benefits
“My Social Security benefit is taxed??” This is a deflating realization for many people. There is a common misunderstanding that Social Security is a tax-free benefit. You turn it on, and the checks start coming in. Not entirely. If your only income is from Social Security, then yes, you may receive those benefits tax-free. But I observe that these days, many people have more than one stream of retirement income. This is a good thing! But it does affect your Social Security benefit.
Here’s why: Social Security taxation is figured from your “combined income.” This includes income from other sources, like a pension, part-time job, IRA, or other investments. If your “combined income” is below certain thresholds, you may not be required to pay taxes on your Social Security benefit. But those thresholds are pretty low, usually lower than most people desire for retirement income. More info here.
The good news is only up to 85% of your Social Security benefit may be subject to taxation. While that still may be irksome, it’s not 100%. And, as I mentioned earlier, if your income is below certain thresholds, you may be taxed on only 50% of your Social Security benefit, or possibly zero.
What You Can Do
If you are just starting to receive your Social Security benefit (or you are considering it), it could be worth your while to check out the thresholds and think about what other retirement income you may be getting. Plan to pay taxes on your benefit accordingly. I usually advise clients to request the Social Security office withhold money for taxes and send it to the IRS on your behalf (which you can do when you first sign up, or later; more info here. That way you (hopefully) don’t get a nasty surprise when you file your taxes.
Of course, these observations are made in general. Please consult with a knowledgeable tax preparer or Certified Public Accountant about your unique situation.
Have you had an unpleasant tax surprise recently that you wish you had known about sooner? Please let me know! I love to hear about, and learn from, clients’ stories.
What’s Happening in Your Portfolio
Recent market weakness, especially in the technology sector, has caused both Ryan and Will to move some holdings to cash to reduce market risk in the portfolios.
Future Technologies, is now 53% invested and 47% in cash as of March 1, 2021. If the market strengthens from here, I’ll use that cash to buy the current market leaders. If not, I may put some into a hedge to protect some significant gains we have made over the past few months.
Hedging is the act of buying an investment that goes up and down in price opposite to another investment you want to hold. The opposing fluctuations cancel each other out, smoothing out the changes in total value of the portfolio during times of market turmoil. This tactic allows us to protect the value in big gainers rather than sell and trigger the tax.
Flexible Income portfolios remain fully invested in a low volatility corporate income fund that is producing nice returns, even while the bond market in general is declining due to rising interest rates.
Municipal Income portfolios were beginning to come under pressure due to rising interest rates, so those portfolios have been hedged to reduce risk.
And that is how we are staying in sync with this market.
“Mental Floss” Humor
This fun joke came to me in an email two weeks ago…
I was eating breakfast with my 10-year-old granddaughter and I asked her what day is tomorrow?
Without skipping a beat, she said, “It’s Presidents Day!”
She’s smart, so I asked her “What Does Presidents Day Mean?”
I was waiting for something about Obama, Bush, or Clinton, etc.
She replied, “Presidents Day is when the President steps out of the White House, and if he sees his shadow, we have another year of BS.”
You know, it hurts when hot coffee spurts out your nose.
A Slice of Life – Changes
As the late David Bowie said in his hit song, “Ch-ch-changes… turn and face the strange.” There have only been a few times in my life that I felt like maybe I had bitten off more than I wanted to chew, but early February might have been one of those times.
Moving day was mentioned in my last newsletter, and on the same day I moved both my house and my office to my new home and office at 969 W. Rosser Street in Prescott. And just to keep things interesting, two days later we got ourselves a puppy named Frankie.
For a good week Gina and I were ruled by what I call “the tyranny of the immediate,” where something needs to be done right then or everything grinds to a halt. Fortunately, things came under control and the flood of to-do items has become a trickle.
The tiredness, aches and sleep deprivation are now in the rear-view mirror and the new setup feels like home.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2021 William T. Hepburn. All rights reserved.