In the markets this week, concerns over Coronavirus continued to be front and center. Not surprisingly caution (finally) took hold amid varying views on the longevity and severity of the impact, including reports of cases in South Korea and Iran. In a counter programming attempt, the White House, through Larry Kudlow, indicated it was “not an American story” subsequent to the Saint Louis Fed comments stating there is a “high probability” that the outbreak will be a temporary shock. While it’s become commonplace for the government to talk from both sides of its mouth, the issues I find in the actual data indicate caution is warranted.
While the slowing manufacturing output is likely a result of supplier delays with the virus, more concerning to me is that for the first time in the Trump presidency the key economic driver of the US economy – the services sector – fell into contraction territory, albeit fractionally. For good measure, don’t ignore the corporate warnings due to the virus led by the likes of Apple. One contrarian surprise being Caterpillar – although this could be strictly relief that the perceived end of the trade war is nigh.
Complicating any analysis is oil pricing and whether any strength is the result of production cuts, increased demand or refinery maintenance – or some combination. There remains an ongoing debate among traders as to whether the market is tilting bullish or bearish. So no raging indicators one way or the other are visible.
Reinforcing my concerns are two measures being implemented by China. The first subsidized loans to key companies that are helping prevent and fight the epidemic. These rates are as low as 1.32% of which foreign companies, such as 3M are eligible. The second could be the shock that does make this an American story. China has issued more than 1,600 force majeure certificates to shield companies from legal damages arising from the coronavirus outbreak. The riddle then potentially becomes, “When is a contract not a contract …?” Keep in mind that next week’s economic data is mostly pre-virus.
In the midst of tax season the initial results look promising. As many remember, I groused last year (quite a bit) over Trump’s tax cuts actually being an increase. We decided to accelerate taxable RMDs in 2018 to lower our 2019 tax bracket. To ensure my calculations were correct, I did not modify any withholding rates. The strategy worked as a refund for 2019 is forthcoming. I’m still a few weeks away from reporting my final tax percentage rate but do know it’s lower year on year. And yes – unlike candidate Bloomberg I can and do use Turbo Tax, a product of Intuit which is one of my portfolio companies. I did have to smile from the priceless, national advertising they received.
Another element of my consolidation strategy is taking form. I have decided to eliminate ETFs from the equation. Although there are things to like about them, the downside (for me) is fluctuating payout rates with regression to the mean, partly a result of changes to the underlying components. Basically, I see minimal upside potential while conceding there is associated risk mitigation I’m giving up. The upside (hopefully) is a slightly higher return in pure equities. I expect to be fully divested by mid-year distributions.
Here’s hoping February is shaping up as a good month for us all!