Tag: Market Update

by Franklin J. Parker, CFA

The Summary

• It is Fed week, and markets see a mere 1% chance of the Federal Reserve raising interest rates this week. Core inflation posted around 2% last week (though figures accounting for everything are still high). The European central bank hiked rates by a quarter-point last week and hinted that more is to come. Of course, it is the commentary from Fed chairman Powell that will push markets around on Wednesday.
  
  
• Lawmakers are struggling to put together a budget plan between now and October 1 that would keep the US government from shutting down. This back-and-forth is considerably less dramatic for investors from the debt ceiling showdown earlier this year. By now, investors have grown used to brinksmanship from politicians and many investors shrug their shoulders on a government shutdown with a “been there done that” attitude. Unless a bill is passed by October 1, nonessential personnel will begin to be furloughed.
  
  
• After an initial run higher, stock markets have traded mostly sideways through the summer. This lack of direction is indicative of the mixed economic picture and, most importantly, the mixed outlook for corporate earnings. Retail sales post later this week, which could give investors some confidence as we move into Q4, and the all-important Christmas buying season. Without the Federal Reserve to backstop markets, it will need to be higher earnings to push stock prices higher. Until then, sideways and choppy markets are probably here to stay.
  

The Details

Should you add private investments to your portfolio?

The short answer is “maybe.” The longer answer has to do with your goals and, primarily, your time horizon.

Liquidity is an added risk when investing in private companies (or funds). Once you have put the money into the deal, you cannot get it back without a liquidity event — in essence, the company has to grow and/or find a way to cash you out.

In public markets, when a company is not doing very well, you can simply sell the stock and recoup some of your investment. In private markets, however, that option is not on the table. When a company is not doing well, very often they will ask their existing investors for more cash to tide things over. Of course, if the company goes under, you will have lost your entire investment.

Liquidity risk adds another risk, as well. For goals which require cash on a specified date — say, to fund your lifestyle for the year or to buy a vacation home — private investments create the risk that those funds are not available when you need them because the company has not yet had a liquidity event.

And, of course, there is the classic risk that the deal fails — a more common occurrence in private markets than in public.

In the end, whether private investments make sense in your portfolio is a function of many variables, all of which will be dictated by your goals and objectives. Without a proper understanding of what you need doing, we cannot have a proper understanding of which investments make the most sense to you.

Chart of the Week

One of the most reliable recessionary indicators over the last century has been the 10-year US Treasury yield minus the yield on 3-month T-bills. As you can see in this week’s chart, when this indicator is negative, a recession is not far behind. What we have seen recently is the longest inversion, and its extremity was only surpassed in the early 1980s. While other data continues to be mixed, this is an indicator that I put some weight in and it is flashing a warning sign. The “recession is imminent” signal is not the inversion, however, it is when this indicator moves back into positive territory. Once that happens, it is probably time to batten down the hatches and prepare for the storm.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• Last week’s job and inflation data tempered investor expectation of the economy. The unemployment rate ticked up to 3.8% and there were about one million fewer job openings than last month. Personal consumption expenditures — the Fed’s preferred measure of inflation — posted lower, and about in-line with expectations. Employment is usually the last economic domino to fall, and if this one is falling a recession may not be far behind. Factory orders reported a decline this month. This week’s data includes another look at the services sector, which is expected to continue its barely-above-breakeven trend, but otherwise this is a light data week.
  
  
• Euro-area GDP posts on Thursday, which will give us another read on the health of the global economy. China has been in a slowdown and is Europe teetering on the edge of recession, but GDP is expected to post at a slight expansion (0.3%). With global economies sputtering, as I have talked about for months now, investors may do well to consider getting defensive. If nothing else, hedging might make sense. As always, your goals and time horizon will govern the risks that are appropriate to take.
  

The Details

Last summer, I was having lunch on the shores of Lake Maggiore in Italy with a few other investment professionals, one of whom I had known for several years. A former CIO for a family office, he had left that gig to start some cryptocurrency projects, including a fund and a venture or two in the non-fungible token (NFT) space.

“Man, I’m excited to ask you something I’ve not been able to get an answer to,” I told him. “I’ve followed bitcoin since 2011, I read Satoshi Nakamoto’s original white paper, and I really think blockchain will be an important piece of the future, but I never did invest.”

“Why not?!” he asked with a smirk. He had made quite a bit of money, and he had only been in crypto for a few years.

[Keep reading at Enterprising Investor…]

Chart of the Week

When a country borrows in a currency they do not directly control, budget deficits and total borrowing becomes a very important consideration for investors. Now that rates have risen at an historically rapid pace, governments in the euro-area are feeling the squeeze. This week’s chart shows the large increase in the numbers of “risky” sovereign borrowers in the Eurozone. As the chart shows, current figures comparable to the debt crisis from a decade ago.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• The AI train continues rolling in markets, albeit at a much slower pace. NVDA — the bellwether of the space — posted stellar earnings, yet after an initial pop the stock began to fall. This is not uncommon as speculators tend to “buy the rumor and sell the news” (as the old saying goes). The broader S&P 500 rally also appears stalled, with prices swinging around in search of a catalyst to move higher or lower. In all, the summer has been a boring place for investors — a fact likely to change through the fall.
  
  
• The Federal Reserve had their annual gathering at Jackson Hole, WY this past weekend. Policymakers offered little new commentary on the path of rates and monetary policy. Markets have priced a 50% chance of one more rate hike in the US this year (and a 5% chance of two more). Looking at Europe, markets have priced a 55% chance of another quarter-point hike in September.
  
  
• The big news this August has been the dramatic economic slowdown in China. After a major developer bankruptcy, missed bond payments from a large wealth manager, and poor economic data (in at least one case Chinese authorities simply stopped publishing the data), investors are wondering how long the global growth train can continue with the world’s second-largest economy slowing so dramatically. Cracks are also beginning to show in the US, especially in commercial real estate markets, with borrowing costs skyrocketing and consumer’s pandemic savings nearly exhausted. All that said, consumers have remained strong, as has unemployment. So long as that is the case, I expect developed economies to continue growing.

The Details

By far the biggest challenge when investing is that we are forced to leave the realm of knowledge.

Knowledge is something we acquire with certainty, and, of course, investing is never certain. When investing, we are forced to combine our knowledge of facts, current events, and the past, with our estimate for probable (and improbable!) futures. These futures are what we use to evaluate risks and rewards, obviously seeking to minimize one and maximize the other. Of course, we can minimize risk by only investing when something is known, but that also means that there is little to no money to be made. When investing, risk is the only things that brings reward.

The key, then, is to build a portfolio of reasonable risks — risks that you can afford to take — and eliminate, as much as possible, those risks that you cannot afford to take. Which risks are reasonable will be informed by your goals, your time horizon, and your financial situation; meaning, of course, that what constitutes reasonable risks for you might well be unreasonable for me.

Personal evaluation of what it is you need doing is the lynchpin of this endeavor. Personalized portfolio execution is then the next requirement.

Because of this knowledge/risk dichotomy, I am extremely cautious of anyone who claims knowledge of what is next. We must always speak in probabilities, a fact that also requires us to stay humble and quickly update our views when we are wrong. You can easily go broke being “right” in this business.

In markets, be wrong and be wrong often, but have a plan for when you are.

Chart of the Week

Much has been made of the amount of borrowing done by the US government, and with good reason. Total dollars borrowed by US Treasury is at an all-time high. What is of most concern, however, is not necessarily the absolute value of dollars borrowed, but rather the cost to maintain that debt. Interest payments as a percentage of GDP have spiked dramatically, from 2.5% to over 3.5%. The speed of that change is historic, but the level has been seen before. The early to mid 1980s saw US borrowing costs move to about 5% of GDP. Of course, that came with considerable economic pain and took a decade to reverse, but the silver lining to all of this is that — for once — we are not in “unprecedented” economic territory.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• Earnings season has (mostly) come to a close, and companies have made about 4% less profit than this time a year ago. This is better than expected, but not good in general, as this is the 3rd quarter in a row of earnings contractions. With markets trending higher, we are seeing valuations get stretched in several sectors (looking at you technology!). On the upside, earnings are expected to turn slightly positive in Q3.
  
  
• This week we see data on retail sales (expected to grow 0.4% month-over-month), business inventories, housing starts, and industrial production. As a preview to retail sales: Target is expected to post its first quarterly revenue drop in six years. As I have mentioned (repeatedly), the economic data is fairly tepid, and markets appear to be range-bound for the time being. A firm catalyst is needed to push markets higher or lower. That may come in the form of a credit event, as there are strains beginning to show, both domestically and globally.
  

The Details

Let’s talk about the “off label” uses of life insurance I see circulating on social media.

On social media I often see some really bad financial advice (TikTok and Instagram seem to be the the main culprits — is anyone surprised?). Often, the facts presented are just plain wrong and would result in big trouble with three-letter agencies, like the IRS and the SEC, if it were followed (please don’t take advice from those videos). More often, however, I see people marketing “off label” uses of life insurance — under headings like “infinite banking” and it’s “rich man’s Roth IRA.”

While there are some legitimate use cases for life insurance as something other than life insurance, there are some things you should know.

1. Incentives. Life insurance often pays a commission to the agent of around 80% to 100% of the first year’s annual premium. The agent, therefore, has a very strong incentive to sell high-premium life insurance (whether it is a good fit for you or not). If you are planning on funding a policy for $10,000/year, just remember the agent is about to make $8,000 to $10,000 on that sale. This drastically changes the quality of the advice you get from these folks. (Interestingly, most annuities are subject to the same perverse incentives).
   
   
2. Costs. Life insurance is expensive when compared to other investment vehicles. Typically, insurers charge both variable fees and fixed fees. You’ll have a set annual fee (typically in the $100s), a “mortality charge” which is the actual cost of the life insurance (typically in the $1000s/year, and it gets more expensive as you age), a “load” which is the commission the agent receives on every premium payment, and then there is usually a monthly assessment for the first 10-years. When you look at the actual amount of cash that gets invested after fees, it is probably much less than if you just invested the money normally and paid the taxes.
   
   
3. Marketing Claims. Let me also dispel some marketing claims these social-media types like to bandy about.
   • “It’s a secret the wealthy use to get (or stay) wealthy.” No. Just no. I work (and have worked) with extremely wealthy people. Off-label life insurance is not a strategy they use for wealth creation or preservation. I have never seen it done because the numbers just don’t make sense.
     
   • “Infinite banking.” Also no. Paying big fees to loan yourself your own money almost never makes sense. There are more efficient ways of accomplishing something similar, like investing your cash and then using a security-secured line of credit with a bank, for example.
     
   • “It’s a rich-man’s Roth IRA”. This one is actually kind of true, but you still run into the cost issue. The idea here is that your investment gains are tax-deferred and when you go to make withdrawals, you actually take loans against your policy’s cash value instead — which are tax free “withdrawals.” Is it worth paying 3x to 5x the fees? Almost always not, but running the numbers might make sense.
     

In the end, I advise extreme caution when using life insurance for anything other than, well, life insurance. The misaligned incentives are enough to make me skeptical, but are also to fuel a massive marketing machine. While there are cases when “off-label” life insurance might make sense, those cases are much rarer than the social media “experts” make it sound.

Chart of the Week

When the Federal Reserve specifically mentions your concerts as an influence on the economy, and the Congress of the United States of America holds hearings on getting tickets to your concert, you know you’ve made it big. This week’s chart is a look at the resale value of Taylor Swift tickets versus other artists. As it turns out, tickets to a Swift concert were one of the best investments to make last year (that is, if you could get them!). Her current (and continually-extended) Eras tour is on its way to being the first $1 billion tour in history, and Swift is herself a breath away from joining the billionaire’s club — one of just a few musicians.

Whether you love her music or hate it, there is no denying that Taylor Swift has become an economic force.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• Most large US companies have reported earnings for the quarter. It appears that earnings have declined just over 5% — not as bad as expected, but still the 3rd quarter in a row of earnings declines. As an aside, about 1 in 3 companies have issued negative guidance on earnings for the year. We also got data on the services and manufacturing sectors last week, both were tepid. Manufacturing continues its contraction while services remained at about breakeven. Of course, the big news was unemployment, which ticked down from 3.6% to 3.5%. Overall, last week’s data deluge was mixed. Consumers remain strong and they are likely to keep the economy afloat a bit longer. Everything else, however, looks shaky.
  
  
• Amazon delivered a big earnings surprise on the back of Amazon Web Services (AWS), demonstrating that they are carving out an important niche in the infrastructure of technology, especially the compute needed to fuel AI, but also in their consumer sales which was the main driver behind sales growth. Apple and Microsoft disappointed investors, although Apple’s new iPhone launches in September. With three quarters of price increases along side an earnings contraction, valuations appear to be stretched. Without a strong catalyst, I struggle to see how this market can push beyond its previous high.
  
  
• This week we see data on inflation, which will be key to gauging the Federal Reserve’s ongoing rate policy. Investors see about a 30% chance of one more rate hike before year-end, and Friday’s data is likely to push that expectation around. Also of interest this week is a read on consumer credit, expected to increase from $7 billion to $13 billion (that is not an unusual move — anything below about $30 billion is pretty normal). As I have said every week for a while now, I am seeing the early warnings of a recession, but I have not gotten the “recession is here” signal. As always, your goals will dictate exactly what you do with this outlook, but caution seems prudent.
  

The Details

Why do we care about market drawdowns? Okay, stupid question, let’s rephrase: how much should we care about market drawdowns?

Most people don’t like to lose money — but why? If we are confident that our investments are high-quality enough to weather a storm and come rushing back, why do we care if they fall in price for a period of time? For over 50 years now, the standard advice in the industry has been somthing like Stay invested no matter what; Don’t worry, it’ll come back; Just buy and hold forever. It is a reasonable thing to say in general, because it is true that a long-term bet on the health of developed economies has been a good bet.

The problem, however, is when you find yourself approaching your financial goal. Once you find yourself needing the money within a short period of time, those market downswings can become a real problem. Of course the market will come back, but will it come back in time for you to accomplish your goal? If your portfolio loses 30% and only moves 15% higher before you need the cash, you have to change your plans. Or, worse yet, if you are taking withdrawals from your portfolio, your portfolio may not come back at all!

The key here is to base this understanding of losses on the math of what you need doing — on your goals — not to base it on feeling. Even though all losses feel excessive, only some losses are actually unrecoverable. Understanding when losses are too much is an analysis we do here at Directional Advisors. And, to help conceptualize the idea, we launched a free tool on the website that you can play with to get an idea of how it works.

Everything in investment management must be done with a mind to your objectives, to your goals. In the end, investments are just tools to get a job done. Let’s make sure we reach for the right one.

Chart of the Week

Population trends over the coming decades is now a major theme now being discussed. With China struggling to replace their aging population, and with the ongoing decoupling of the West from China, there are questions about where labor will be sourced in the future. With a working-age population that is expected to grow from about 750 million to around 1.5 billion over the next 25 years, Africa — though varied and certainly nowhere near as monolithic as China — is standing out as a contender. Might we see a similar scale of wealth-creation and standard of living increases over the next 25 years like we saw in China over the last 25 years?

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• It is Fed week! Markets expect a 0.25% rate hike but see this as the last hike until cuts begin in December/January. Overall inflation has moderated quite a bit, although core inflation has remained stubbornly high, and Fed officials have indicated quite strongly that they do not feel the war on inflation is over just yet.
  
  
• This week is a big week for earnings as we hear from numerous big companies including Google, Microsoft, General Motors, Verizon, Boeing, and MasterCard. Last week’s reports were disappointing, with Tesla and Netflix letting investors down. Overall, the expected earnings decline has increased from about 7% to about 9%. This week will be telling to see if earnings continue to shrink more than expected.
  
  
• We got data on the US services sector this morning (which represents about two-thirds of the US economy) showing the sector is growing more slowly than before — barely growing at all, in fact. Of course this is not the only indicator that matters, but it is an important one. With the yield curve inverted, companies seeing contracting profits, and the Federal Reserve continuing to hike interest rates, I continue to be cautious. The possibility of a soft landing (no recession) is growing, but carries a small chance in my view.
  
  

The Details

Should I invest in _____?

This is, as you can imagine, a very common question that I answer. What you may not expect is that there are two versions of it. The first version comes from clients who see things on social media, or read things in the news, and want to discuss whether it fits in their portfolio.

The second version of this question, however, is more pernicious.

When I am in social situations and people find out that I am an investment advisor, it is not uncommon for them to ask about some hot investment topic. The question should I invest in _____? naturally comes up, and, admittedly, my response ranges depending on the situation. Sometimes I’ll discuss the pros and cons of the idea, sometimes I’ll simply say “I really can’t say without knowing more about you.”

The response I would like to give, however, is this: That question is an indication that you do not have a cohesive investment strategy. If you have a cohesive investment strategy, it will tell you the answer to that question! Should you buy or sell X? Your strategy will tell you. Should you invest in X? Your strategy will tell you.

Hand-wringing over whether you should or shouldn’t do something is a signal to get a cohesive investment strategy. Build one, borrow one, or buy one, but do not go into financial markets without one! That is like going to sea with no idea how to navigate. Don’t do it!

Our strategy at Directional Advisors has been tested, peer-reviewed, and even won an award. If you find yourself without a cohesive strategy, we would be happy to talk through ours with you.

Chart of the Week

This week we look at the market’s current expectations of the Fed’s activity over the coming months. A month ago, markets saw current rates as the peak, right now however, markets see rates moving higher and then beginning to decline into 2024. Since this is the expectation, a change from this path would easily move markets.

All eyes will be on Powell’s commentary Wednesday.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The Summary

• Earnings season is in full swing. Last week, we saw earnings from the major banks, and the overall picture was mixed. Banks have begun to set aside more cash for potential loan losses, though not dramatically so. Overall, the S&P 500 is expected to report about 7% lower earnings than a year ago, making this the 3rd quarter in a row of declining profits. This week we see earnings from some more financials, IBM, and Netflix.
  
  
• Big tech has roared back in the first half of this year, and these companies are now collectively trading at 40 times earnings. To put 40x in perspective: for investors to break even via earnings in the next 10-years, these companies would have to maintain a growth rate of 25% every year for the next 10 years. Valuations like that are very difficult to maintain — that isn’t to say they cannot go higher, of course, but it does urge investor caution.
  
  
• Last week’s inflation figures were generally good news, though it did nothing to allay the expectation for another rate hike from the Federal Reserve. This week we see retail sales and industrial production, both important insights into the ongoing health of the economy. Overall, I am still cautious, and investors may do well to hedge away risks they cannot afford to take.
  
  

The Details

Should you sell your business, and if so, for how much?

Building a business from nothing takes a lot — lots of sleepless nights, lots of long hours, lots of sacrifice of all kinds. Getting to the point where it is up-and-running, not to mention profitable and big enough to sell, is an accomplishment in itself.

If you are considering cashing out and doing something else (retiring or pursuing another opportunity), there are a couple of things you should consider.

First of all, is your business the type of business someone would buy? I have a very simple test for this: does the business run without you? If it does not, then buyers will scarcer. That isn’t to say there is no value there, of course, but to get the maximum price, you should consider scaling the business so that it more-or-less runs without you.

Second of all, having your books together will be critical. Many business owners neglect this because it doesn’t produce revenue, and they have a good sense of what the numbers are in their heads. However, investors/buyers will want to see it on paper! Getting your books together is a great place to start if you are considering a sale.

Finally, how much do you sell the business for? Most business advisors/brokers can give a good estimate of what someone might pay for your business, but that is only half of the equation. What someone will pay for your business is a very important number to know, of course, but how much you need to net in the transaction is also very important. Understanding whether you can maintain your lifestyle is important, but an understanding of how the sale fits within a financial plan can also help your negotiating position.

A very general rule of thumb to help you: think about the amount of income you’ll need to replace after selling the business. For every $1000/month of income, you’ll need to get about $300,000 in sale price for the business. So, for example, if you need $9,000/month of income to maintain your lifestyle, then you’ll need to get 9 x $300,000 = $2,700,000 for the sale of your business. Again, this is a very very rough rule of thumb, but it is a nice mental shortcut when thinking through scenarios.

Obviously, the more fully you understand your financial plan, the more fully you can understand the requirements for the sale of your business. That is something we are happy to help with!

Chart of the Week

Last week’s inflation figures were very encouraging. Headline inflation has dropped to 3.0%, which is coming within the Federal Reserve’s tolerance. Core inflation, while falling, remained stubbornly high at 4.9%. This was enough to give markets confidence that the Fed would continue with at least one more interest rate hike, likely at its next meeting.

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