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Monthly Insights | 2019.10

A wise owl
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Market Recap

Our outlook was “Cautious” last month, and that proved accurate, with the House of Representatives raising the impeachment discussion. That further added to the noise in the market.

However, the biggest impact in the market was largely unseen, and many people learned a new term; “Repo market”. Long story short, the Fed had to intervene on one of the major pieces of plumbing in the banking system, to the tune of over $75 billion per day. This lowered repo rates (which had spiked to roughly 10%) back to a normal range again. 

Had they not done so, we would have been in for a nasty bout of ugliness that would have made last December’s market volatility look peaceful by comparison.

The key takeaway is that the Fed acted quickly and decisively. This is very good news for investors despite what the news media may say about their other, more visible, activities. In-depth repo market article here.

Market Outlook

Our Outlook remains “cautious”, but with some new factors: 

  1. Impeachment. These processes tend to be highly political and divisive, with an unpredictable effect on the market.
  2. Labor market. We are still at historic highs, but look for job openings to drive the market in one direction or another.
  3. The EU. The German Manufacturing PMI fell to 41.4 in September, its lowest since 2009 and signaling a strong contraction. Brexit is facing something of a constitutional crisis as the fight goes to uncharted areas.
  4. The ECB. Last month, the European Central Bank lowered interest rates even further below zero. This has caused some banks to pass on negative rates to customers – in effect, customers will have to “pay” to have a checking account. The result will be even weaker EU banks and even lower growth in the region. Here’s Bloomberg on negative interest rates.
  5. IPOs. WeWork pulled their IPO due to a fall in valuation of roughly 80%. Peloton lost 9% on its first day of trading. This suggests that markets are getting wise to “growth at all costs.”
  6. The Mideast. No-one wants a war, but apparently everyone wants a fight. Last month’s refinery attacks in Saudi Arabia demonstrated a new style of drone warfare. Risk premiums in less stable parts of the world will adjust, and various prices will reflect that. The interactions between the US and Turkey may cause significant unforeseen effects beyond the region.

The movie has changed from Rocky to Game of Thrones on both the political and economic fronts as people position themselves for big changes.

Quick Tip

401(k) and 403(b) Rollovers usually can be done in a short phone call. The process we advise clients on is as follows:

  1. Get your 401K provider’s phone number handy (if it’s at Fidelity, their number is 800-835-5097 )
  2. Tell them that you want to closeout your account with a “custodian transfer” to wherever your IRA is at (they might call that a “direct rollover”)
  3. Do not withhold any taxes (because none are due if you follow this process).
  4. They may ask if you’ve read the “Tax Notice”
    • Here’s a link to Fidelity’s Special Tax Notice.
    • This document is simple, it basically says if you cash the check, that you have to pay tax (but you’re transferring it directly, so you don’t )
    • They will drag out the process for several weeks or months if you answer “no”, so read the linked document and save yourself that pain.
  5. The check should be made out to “(your custodian), FBO (your name)”.
    • For example, “Charles Schwab & Co., FBO George Washington
  6. When you get the check, do not cash it – take it or mail it to your new custodian

For a more detailed look at the process, see this link about rolling over your 401(k) in a single phone call. Several 401(k) provider phone numbers are at the bottom of that article for easy reference.

Words of Wisdom

“Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat.”

― Charles T. Munger, 
Charlie Munger: The Complete Investor