How Long Should You Keep Tax Records?

Hold onto your tax documents at least until the time limit for an audit runs out—and keep some records even longer.

By Rocky Mengle, Tax Editor and  Kimberly Lankford, Contributing Editor

April 16, 2019

Once you've filed your tax return, what should you do with all the forms, receipts, canceled checks and other records scattered across your desk? Do you need to keep them, or can you shred them now? The IRS generally has three years after the due date of your return (or the date you file it, if later) to initiate an audit, so you should keep all of your tax records at least until that time has passed. But you should keep some records even longer, and it's also a good idea to hold onto copies of the return itself indefinitely.

SEE ALSO: 5 Ways to Avoid Taxes on Social Security Benefits

Also keep in mind that you might want to keep certain documents around for non-tax purposes. For example, it might be wise to save W-2 forms until you start receiving Social Security benefits so you can verify your income if there's a problem.

Here's a general rundown on how long you should keep certain common tax records and documents.

One Year

Keep pay stubs at least until you check them against your W-2s. If all the totals match, you can then shred the pay stubs. Take a similar approach with monthly brokerage statements—you can generally shred them if they match up with your year-end statements and 1099s.

Advertisement

Three Years

Generally speaking, you should hold onto documents that support any income, deductions and credits claimed on your tax return for at least three years after the tax-filing deadline. Among other things, this applies to:

• Form W-2s reporting income

• Form 1099s showing income, capital gains, dividends and interest on investments

• Form 1098 if you deducted mortgage interest

• Canceled checks and receipts for charitable contributions

• Records showing eligible expenses for withdrawals from health savings accounts and 529 college-savings plans

• Records showing contributions to a tax-deductible retirement-savings plan, such as a traditional IRA

If you're among those taxpayers who no longer itemize deductions on Schedule A because the standard deduction was basically doubled beginning in 2018, you might not need to hold onto as many documents. For example, if you're not deducting charitable contributions anymore, then you don't need to keep donation receipts or cancelled checks for tax purposes.

SEE ALSO: Most-Overlooked Tax Breaks and Deductions for the Self-Employed

Six Years

The IRS has up to six years to initiate an audit if you've neglected to report at least 25% of your income. For self-employed people, who may receive multiple 1099s reporting business income from a variety of sources, it can be easy to miss one or overlook reporting some income. To be on the safe side, they should generally keep their 1099s, their receipts and other records of business expenses for at least six years.

Seven Years

Sometimes your stock picks don't turn out so well, or you loan money to a deadbeat who can't pay you back. If that's the case, you might be able to write off any worthless securities or bad debts. But make sure you keep related records and documents for at least seven years. That's how much time you have to claim a bad debt deduction or a loss from worthless securities.

Ten Years

If you paid taxes to a foreign government, you may be entitled to a credit or deduction on your U.S. tax return—and you get to decide if you want a credit or deduction. If you claimed a deduction for a given year, you can change your mind within 10 years and claim a credit by filing an amended return. You also have 10 years to correct a previously claimed foreign tax credit. For these reasons, save any records or documents related to foreign taxes paid for at least 10 years.

Investments and Property

When it comes to investments and property you own, you'll need to keep some records at least three years after you sell.

Advertisement

For example, keep records of contributions to a Roth IRA for three years after the account is depleted. You'll need these records to show that you already paid taxes on the contributions and shouldn't be taxed on them again when the money is withdrawn.

Keep investing records showing purchases in a taxable account (such as transaction records for stock, bond, mutual fund and other investment purchases) for up to three years after you sell the investments. You'll need to report the purchase date and price when you file your taxes for the year they are sold to establish your cost basis, which will determine your taxable gains or loss when you sell the investment. Brokers must report the cost basis of stock purchased in 2011 or later, and of mutual funds and exchange-traded funds purchased in 2012 or later. But it helps to maintain your own records in case you switch brokers. (If you inherit stocks or funds, keep records of the value on the day the original owner died to help calculate the basis when you sell the investment.)

If you inherit property or receive it as a gift, make sure you keep documents and records that help you establish the property's basis for at least three years after you dispose of the property. The basis of inherited property is generally the property's fair market value on the date of the decedent's death. For gifted property, your basis is generally the same as the donor's basis.

SEE ALSO: 12 Tax Breaks for Homeowners

Keep home-purchase documents and receipts for home improvements for three years after you've sold the home. Most people don't have to pay taxes on home-sale profits—singles can exclude up to $250,000 in gains and joint filers can exclude up to $500,000 if they've lived in the house for two of the five years prior to the sale. But if you sell the house before then or if your gains are larger, then you'll need to have your home-purchase records to establish your basis. You can add the cost of significant home improvements to the basis, which will help reduce your tax liability. (See IRS Publication 523 for more details.) Similar rules apply for any rental properties you own; save records relating to your basis for at least three years after selling the property.

Advertisement

State Record Retention Requirements

Don't forget to check your state's tax record retention recommendations, too. The tax agency in your state might have more time to audit your state tax return than the IRS has to audit your federal return. For example, the California Franchise Tax Board has up to four years to audit state income tax returns, so California residents should save related documents for at least that long.

Options for Addressing a Wayward Child in Your Will

Every family has its challenges. Learn about estate planning options for addressing a beneficiary that may march to a different drummer.

  April 16, 2019

Every family has a skeleton or two in the closet; a grandson with a history of substance abuse; a daughter who married someone careless with money; a ne’er-do-well brother with a string of petty crimes in his past. Maybe your family doesn’t have a skeleton, so much as a black sheep or a child who marches to a different drummer. Maybe it’s a child who struggles with mental illness, or one who simply doesn’t live up to the family’s expectations. You may disagree about any number of things – but you’re still family, and that bond runs deep.

These challenging family relationships make every day a balancing act, leaving you to find just the right mix of support and protection without enabling your loved one.

So what choices do you have when you’re struggling with family dynamics and have some estate planning decisions to make?

Option 1: Leave Them Nothing

Disinheriting someone is more common than you may think, and it’s not just among wealthy families who disapprove of a child’s lifestyle. Some families make the decision to disinherit a successful child in order to dedicate more assets to a disabled sibling or to balance out distributions if one child received more financial support during their lifetime. Those assumptions can prove risky though, as situations can change in unforeseeable ways.

Of course, you don’t always need a reason. If you don’t want to bequeath anything to anyone, you don’t have to. Many people choose to leave their assets to organizations outside the family. It’s your prerogative.

But if you disinherit someone without an explanation or understanding, expect very real feelings of hurt and betrayal, which could be enough for that person to make a claim against the estate when you’re no longer in the picture. If appropriate, explain your rationale in the will so there can be no claims of attorney drafting errors or other grounds to contest the will.

Potential litigation is just one problem that may arise. It’s likely that a family feud will erupt, even if the discord doesn’t exactly come as a surprise. It’s difficult to accept that your family has cut you off. Disinheriting someone could sow resentment that may last generations.

If you ultimately decide this is the path to take, re-evaluate that decision every so often. Situations change. Your loved one may be making strides toward a better life – and you may decide your support can help them stay on the right track.

Option 2: Leave Them Something Outright

Another option is to stipulate an outright gift for your “wild child,” perhaps something smaller than you would have in better circumstances, or make them the beneficiary of a small life insurance policy. The amount may be hard to determine – somewhere between large enough to avoid resentment and small enough to alleviate some of the worry that the gift will be squandered or potentially cause harm. Your professional advisors can help you find that fine line using the specifics of your estate and other beneficiaries involved.

Option 3: Trust in a Trust

When you want to share your wealth with those you love, but you know that outright gifts might enable them rather than help, you may want to consider a trust. If you have a legitimate need for control – such as avoiding giving a drug user carte blanche access to substantial funds – a well-structured trust may offer the flexibility you need to accomplish your estate planning goals without permanently disinheriting someone.

Certain types of trusts allow you to nominate someone to help your beneficiary manage their inheritance. There are costs involved to set up and maintain the trust, but that may seem a small price to pay for the comfort of knowing your loved one will get their inheritance under the right circumstances. Discretionary trusts, for example, leave the assets at the mercy of the trustee and your heir has no legal claim to any assets. But given the proper structure and a well-chosen trustee, the assets can be distributed with your intentions in mind.

Incentive trusts, on the other hand, formalize those intentions and make any distributions contingent on your child achieving certain goals or milestones, say successfully completing rehab or holding a job for more than a year. The point is stipulations can be built in to the trust to encourage more responsible behavior.

Trusts can also be structured to stagger distributions at intervals or certain ages to prevent the child in question from burning through their inheritance. In the meantime, you can ask the trustee to make distributions on behalf of your beneficiary to cover certain health, education and living expenses.

No matter which type of trust you select, it’s important to choose a trustee who will be objective and fair. Often, appointing a professional as the trustee makes it easier for all parties; relatives and siblings won’t get caught in the middle.

While these decisions are challenging, the good news is that comprehensive estate planning has many tools to help a loved one thrive even after you’re gone. Take the time to put in some careful thought, with guidance from professional advisors, attorneys and accountants.

Sources: marketwatch.com; nextavenue.org; theglobeandmail.com; Raymond James research; themckenziefirm.com; yourestatematters.com; thebluntbeancounter.com; cushingdolan.com; Journal of Financial Planning; bravotv.com

Raymond James and its advisors do not offer legal advice. You should discuss any legal matters with the appropriate professional.

Morning Tack - “Melt Up?”

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

VIEW FULL REPORT

I received a lot of questions about Larry Fink’s (CEO of Blackrock) statement on CNBC yesterday when he said, “I think the risk right now is that we have a melt up in the equity market while everyone is under-invested, not a meltdown.” I also got a lot of questions about my statement that, “In bull markets, most of the surprises come on the upside!” That said, my short-term energy indicator still suggests the equity markets are out of gas on a trading basis and need time to rebuild their energy. As often stated, my long-term energy indicator remains highly bullish. And yesterday was another “stall session” (just like Monday’s session) with the S&P 500 (SPX/2907.06) up a mere 1.48 points. Regrettably, my short-term timing work continues to show the stall should extend for a few more sessions. Accordingly, I would not chase stocks right here, yet longer term, I remain highly bullish despite the chants from a number of pundits I saw on CNBC yesterday stating that the stock market is priced for perfection. In my view, nothing could be further from the truth.

Looking at the longer term, I recently received an excellent report from our friends at Federated titled, “2019 Principals for Successful Long-Term Investing."

To wit:

1. Plan on living for a long time and save more for it.

2. Cash is not always king, even when, like now, a lot of people are relying on it.

3. Harness the power of dividends and compounding. Investing in risk assets – and reinvesting dividends – can be powerful moves.

4. Avoid emotional biases by sticking to a plan. Don’t let biases – home-country or otherwise – sway your better judgment.

5. Volatility is normal; don’t let it derail you. See through the noise.

6. Diversification works. Time and again, diversification serves its purpose.

7. Staying invested matters. It’s always darkest before the dawn.

Well said!

As for yesterday, Financials (+1.37%) and Energy (+0.64) were the best performing sectors, which is why we have highlighted them for quite some time. Again, as our pal Leon Tuey writes:

Last week, all the A-D Lines closed at record highs along with the QQEW, XLY, & IYR. What bear market? Today, both the DOW A-D Line and the NYSE A-D Line closed at record highs again. Others will be updated later today. As mentioned, the various market indices, too, will post record highs. Also encouraging is that, globally, the financials are breaking out. Clearly, the bull market has resumed. This sector is not only interest-sensitive, but economy-sensitive. Moreover, next to technology, it's the second biggest weight on the S&P. The breakout augurs well for the equity market.

And then there was this from the astute Lowry’s Research Organization:

The DJIA and S&P 500 staged mediocre rebounds today after yesterday's nominal sell-off. Up Volume was 57% of total Up/Down Volume, Advancers were 54% of total Advance/Decline Issues and NY Comp. Volume remained light at 3.3 billion shares. Buying Power and Selling Pressure were both unchanged, while the Short Term Index rose one point. With the market seemingly stuck in neutral, a short-term overbought condition and ongoing signs of selective strength continue to suggest elevated near-term risk.

The Turnaround Tuesday attempt was disappointing, especially when an expiration week tends to have upward bias. When the equity markets fell during the final hour yesterday, a “V” shaped rally developed after the S&P 500 traded with a 2900 handle (low of 2900.71). That makes the 2900 an important support level today. Participants want to make Wednesday an upward squeeze on expiry call options. The time for the expiry squeeze is down to two days. The market is closed on Friday. This morning, the preopening S&P 500 futures are better by six points at 5:00.

April 17, 2019

 Risk and Disclosure information, as well information on the Raymond James rating system and suitability categories, is available here.

You are receiving this message because our records indicate that you have requested this information. If you no longer wish to receive research from Raymond James, you can unsubscribe here. Kindly include your name and company name in the message. If you wish to unsubscribe from certain categories that you are currently receiving, please include only those categories in your message.

Raymond James Equity Research
880 Carillon Parkway | St. Petersburg, FL 33716 | 800.237.5643

Morning Tack - “Melt Up?”

Q&A: What’s in the Cards for Oil?

Oil prices “will be meaningfully higher in the second half of 2019,” anticipates Energy Analyst Pavel Molchanov.

April 1, 2019      

OPEC and Russia agreed late last year to cut crude production by a collective 1.2 million barrels per day (bpd) for the first half of 2019. Has that happened?

By way of historical background, OPEC generally has a mixed track record for member compliance with its production deci­sions. The smaller oil producers in the group rarely cut production in accordance with the official pledges. However, as a practical matter, only a handful of OPEC countries truly matter when it comes to managing global oil supply. Saudi Arabia is by far the most important, and for the past two years it has played a very proactive role in this regard.

Based on data from the past several months, we estimate that Saudi production in the first quarter of 2019 is tracking to be nearly 600,000 bpd less than in the fourth quarter of 2018. This alone represents half of the total pledged production cut across all of OPEC and Russia. So, it is clear that Saudi Arabia is serious about propping up oil prices – it is not just lip service!

Beyond Saudi action, let’s also bear in mind that several OPEC countries are experiencing organic production declines even without deliberate curtail­ments. Case in point: Venezuela. This country has already had the world’s steepest drop in oil pro­duction since 2015, for purely domestic reasons. Amid the cur­rent political and economic crisis, the national oil company, Petróleos de Venezuela, S.A. (PdVSA), continues to suffer from mismanagement and severe cash flow shortages. Meanwhile, production in Libya and Nigeria is perennially choppy due to recurring violence around oilfields. Looking past this choppiness, the longer-term trend in both countries is downward due to insufficient foreign investment given the hazardous conditions.

The International Maritime Organization (IMO) has set regulations to cut sulfur in fuel used by the marine industry starting in January 2020. How are shipping firms and refiners preparing for this? How do these regulations affect the global oil market?

It is safe to say the oil market, for the time being, is not remotely focused on what will happen in 2020. However, it is important to underscore just how impactful the IMO 2020 policy will be. We estimate it will effectively erase 1.5 million bpd (or 1.5%) of global oil supply, a very meaningful supply reduction. Put another way, this is as much supply impact as what Venezuela has caused over the past four years. Some of this, in fact, will likely be felt toward the end of 2019.

To clarify, the total amount of high-sulfur fuel used in long-dis­tance marine shipping is currently around 4 million bpd. Of this amount, a portion will be processed in newly built units at refineries and another portion will be handled by shipboard scrubbers, which ship owners are in the process of installing. There will be some “cheating,” at the risk of facing sizable fines from regulators, and, as noted earlier, some fuel will simply be rendered unusable.

Another concern, given the dislocations that this may cause, is that some countries could try to back out of the new rules. That, to clarify, is not legally possible because of the binding nature of the underlying treaty known as the International Con­vention for the Prevention of Pollution from Ships. Moreover, the IMO has made it clear that implementation will not be delayed past January 2020.

What’s your oil price outlook over the next 12 months? What wild­cards could derail that outlook?

Oil prices have already bounced back year-to-date from their recent lows but remain well below their 52-week highs. The oil futures curve is relatively flat, indicating minimal upside from current levels over the next five years. We tend to stay away from making short-term (weekly or monthly) com­modity calls, but we are of the view that prices will be meaningfully higher in the second half of 2019.

Our forecast for the second half of 2019 is for WTI to average $70 per barrel and Brent $80 per barrel. Looking out to 2020, we think oil will reach cyclical highs, with WTI averaging $93 per barrel and Brent $100 per barrel. To be clear, such prices would be unsustainably high given the adverse impact on global demand (for example, con­sumers shifting to smaller cars and electric vehicles). That, in fact, is the whole point. We believe that oil prices in 2020 will have to rise to levels that begin to put a damper on demand, in large part because IMO 2020 will create a temporary situation of inadequate supply.

While visibility beyond 2020 is limited, our long-term forecast of $75 per barrel WTI and $80 per barrel Brent reflects a “happy medium” of prices that are high enough to enable the industry to sustain supply growth but not so high as to sharply curtail demand.

As always, there are plenty of wildcards of which we need to be mindful. For example, a sudden spike in the U.S. dollar would, all else being equal, put downward pressure on oil prices. Similarly, a wide-ranging economic slowdown would naturally have a nega­tive effect on demand. On the flip side, there is always the risk of unforeseen supply disruptions, such as what we mentioned ear­lier vis-à-vis Libya and Nigeria. Finally, geopolitical uncertainty swirling around Iran (U.S. sanctions, etc.) could potentially lead to an even higher-impact disruption.

Read the full April 2019
Investment Strategy Quarterly

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.

Stay Focused, Because 2019 Is Breaking Economic Records

Stay Focused, Because 2019 Is Breaking Economic Records

Growth, earnings and confidence suggest a favorable year, says CIO Larry Adam – “especially for investors maintaining a long-term time horizon.”

April 1, 2019       

To read the full article from Chief Investment Officer Larry Adam, CFA, CFP®, CIMA®, see the Investment Strategy Quarterly publication linked below.

Despite numerous headwinds, 2019 is gearing up to be a celebratory year with record-breaking achievements on many financial and economic fronts. In particular, we just toasted the S&P 500 as it celebrated the ten-year anniversary of the secular bull market in March.

Following last December’s worst equity performance since 1933, concerns of an impending recession, tightening monetary policy, and a trade war with China were muted, allowing risk assets to recover from the December 24 lows.

The U.S. economy and various financial markets are poised to achieve historic milestones, some set to take place in the upcoming quarter. Consensus from the Raymond James Invest­ment Strategy Committee is that markets remain favorable, especially for investors maintaining a long-term time horizon. However, given the speed and magnitude of the first quarter rebound, the path ahead is likely to remain challenging.

The U.S. is the beacon of the global economy, with positive growth of 1.9% expected for the year, according to Chief Economist Dr. Scott Brown. Should the expansion continue past June, it will be the longest economic expansion on record.

Robust job growth, healthy consumer spending, elevated busi­ness and consumer confidence, and fiscal stimulus support our positive view. A “patient”, flexible Fed leads us to assign a 25% probability of a recession over the next twelve months.

Brown recently reported that the Fed is on hold for the foreseeable future, reflecting signs of slower-than-expected growth and downside risks. The fed funds futures are pricing in some chance of a rate cut by the end of the year.

Our expectation of a trade agreement between the U.S. and China should supplement growth globally as trade uncertainty fades. In the absence of an agreement, a softening global economy, that currently shows signs of strain, has the potential to spill over to the U.S.

Despite the slowing ascent of equities, with intermittent periods of downward pressure, we remain unwavering in our expectation of a higher equity market by year end. In fact, Managing Director of Equity Portfolio & Technical Strategy Mike Gibbs’ year-end target of 2,946 gives the market a realistic opportunity of returning to record highs. Supporting equities is his expectation of record earnings again in 2019.

Internationally, we favor the U.S. over other developed markets, as those economies continue to exhibit signs of weakness. European Strategist Chris Bailey believes that the Brexit debate is likely to edge towards a sensible compromise that will avoid a 'no-deal' scenario. Mean­while, this May's European Parliamentary elections will see populist parties make further gains although not take control. Looking at emerging market equities, the recent rally is likely to continue, especially if a U.S.-China trade compromise comes to fruition.

Despite healthy U.S. economic growth, record national debt, and a gradual reduction in the Fed’s balance sheet, the 10-year U.S. Treasury yield remains well below 3%. Nick Goetze, Managing Director of Fixed Income Services, expects rates to be capped through the end of the calendar year at 3.00%, due, in part, to the wide disparity between domestic yields and devel­oped world sovereign debt creating very strong global demand at current levels and the lack of inflationary expectations.

With slowing global growth and nascent inflationary fears, yields overseas are likely to remain depressed for the foreseeable future. In fact, the University of Michigan inflation expectations survey for the next five to ten years recently fell to 2.3%, tying the lowest level on record. Managing Director of Fixed Income Research Doug Drabik expects higher interest rates to con­tinue to face major headwinds likely keeping them range bound and low. The 2-10 year part of the Treasury curve seems to be pricing in one to two Fed rate cuts, thus giving the potential to steepen the curve from the current mark. Although the Treasury curve remains flat, the municipal and corporate curves are more positively sloped offering opportunities in the intermediate part of the curve.

Record oil production in the U.S. is expected to continue, with average daily production forecasted to reach approximately 12 million barrels per day (mm bpd) by year end. While this would normally place a cap on oil prices, two market dynamics are sup­portive. First, OPEC production cuts have reduced overall supply. In fact, total OPEC production is at its lowest level since 2015. Second, new global sulfur emission standards taking effect in Jan­uary 2020 will effectively erase as much as 1.5 mm bpd of supply. This, combined with our expectation that global oil demand growth will remain healthy, could allow oil (WTI) to move north of $70 per barrel by the end of the year, according to our energy research team.

Moving forward, it is not feasible for markets to continuously rise or fall, so don’t get caught up in the momentary noise. While records can be broken, we can’t lose focus on what the long-term trends are telling us. Staying disciplined during times of uncer­tainty and times of complacency is an essential characteristic of a successful investor.

Read the full April 2019
Investment Strategy Quarterly

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Fixed income investments may involve market risk if sold prior to maturity, credit risk and interest rate risk. Asset allocation does not ensure a profit or protect against a loss. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services

Morning Tack - “One More Time”

Investment Strategy US RESEARCH | PUBLISHED BY
RAYMOND JAMES & ASSOCIATES

Morning Tack - “One More Time”

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

VIEW FULL REPORT

Yesterday, piqued by my never-ending rant that everybody is looking at the wrong yield curve instead of the real curve of the 3 month T’bill to the 30 year T’bond, I got this email from one of the best portfolio managers I know. Craig Drill (Drill Capital) wrote:

"Doesn’t the investment meaning of a flattening or inverting yield curve depend on WHY it is flattening or inverting? If it is because the Federal Reserve is raising short-term interest rates and reducing credit availability, that is a negative at some point. If, however, it is because long rates are falling because of muted inflation and -0- rates in Germany and Japan, isn’t that ultimately bullish?"

As a sidebar, I would note that despite all the cries that a recession is coming, I would ask if that is the case, why is Dr. Copper (the ultimate recession predictor) acting rather well?

Speaking to ultimately bullish, I cannot get much more bullish than I already am. That said, on a very short-term trading basis, the positive energy flow I was looking for later this week seemed to arrive yesterday as Monday’s “stall,” which my work suggested would last at least another session or two, got blown out of the water early yesterday. Indeed, the D-J Industrial Average leaped over 100 points on the opening bell and then extended that rally to over 250 points by 11:00 a.m. From there, however, stocks peaked and began to fade, yet still managed to leave the senior index higher by some ~141 points on the close. Ladies and gentlemen, we are in a credit boom and a secular bull market that has years left to run. Readers should recall that secular bull markets last 15+ years and DO NOT end because of a mere 20% decline.

Despite yesterday’s fade, the stock market’s internals were pretty good. As Lowry’s writes:

"Although the DJIA and S&P 500 closed well off their highs for the day today, market internals were positive. Up Volume was 79% of total Up/Down Volume while Advances were 74% of total Advancing/Declining Issues."

My monthly indicators still have plenty of internal energy, but in the short run, the stock market’s internal energy, by my pencil, still needs to be rebuilt, despite yesterday’s rally. Regrettably, this still leaves me somewhat non-committal on a near-term trading basis but has NOTHING to do with my long-term secular bull market thesis. And then, as another sidebar, I received this from someone that read my “Trading Sardines” report last Monday:

"Dear Sir, I noticed the sardine parable in your commentary and attribution as anonymous. In fact, I was present when Murray Pezim made the joke with all biblical names of Abraham to Aaron sold to Joseph to explain a whirlwind of activity in junior mining in the early eighties. It was his signature joke, but of course he was friends with Milton Berle and Red Buttons. Just thought you might want to know. Sincerely,Victor"

This morning the preopening futures are flat on no news. 

March 27, 2019 

Risk and Disclosure information, as well information on the Raymond James rating system and suitability categories, is available here.

You are receiving this message because our records indicate that you have requested this information. If you no longer wish to receive research from Raymond James, you can unsubscribe here. Kindly include your name and company name in the message. If you wish to unsubscribe from certain categories that you are currently receiving, please include only those categories in your message.

Raymond James Equity Research
880 Carillon Parkway | St. Petersburg, FL 33716 | 800.237.5643

Morning Tack - “One More Time”

10 Things Your Kids Don’t Want When You Downsize

If you would like a hard copy of any of our newsletters, please let us know and we will happy to provide them.

Investment Strategy From Jeff Saut

Investment Strategy US RESEARCH | PUBLISHED BY
RAYMOND JAMES & ASSOCIATES

Morning Tack - “Road Trip”

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

VIEW FULL REPORT

While traveling up and down the west coast of Florida this week, I could not help but recall the famous line from the movie Animal House, “Road Trip!” as well as the old stock market axiom, “When the going gets tough, the tough go on the road!” Clearly, that's what I did this week, and while I was traveling, the stock market was doing some pretty weird things. In fact, I cannot recall the last time I saw the D-J Industrials down over 200 points and the S&P 500 up some 13 points. That's why, when someone asks me about the stock market, I hardly ever refer to the Industrials but, rather, the S&P 500. Leon Tuey does me one better by saying the stock market is not an index, which is why the Advance–Decline Line is a much better indicator of the overall stock market than any index.

"The quote, 'a picture is worth a thousand words' is attributed to Confucius. That may or may not be true. The attendant chart [page 2], however, tells investors much more about 'the market' than what the S&P-obsessed seers have been telling investors. Most on Wall Street always talk about the S&P as it was 'the market' not realizing that it only contains 500 big cap stocks and it is a weighted Index. On any given day, several thousand stocks are traded in the U.S. and that, is 'the market'

For decades, I've been advising those who really want to know what 'the market' is doing to look at the Advance-Decline Lines. Mathematically, it's simply the cumulative differential of Advances and Declines. Each day, sum up the day's Advances to previous days and sum up the declines to previous days and subtract one from the other. Because of the way it is calculated, in a bull market, over time, the Advance-Decline Line should rise and in a bear market, it should be heading in a southeasterly direction. Accordingly, this indicator tells investors more about the health and direction of 'the market' than any market index. Yet pundits keep talking merrily about the S&P. You would think these folks are trading the S&P minis or the S&P futures and not 'the market.'"

I received many emails about the lunch group's comments on inflation, but I want to highlight the following from blast-from-the-past Albert Wojnilower, Ph.D., who became known as Doctor Doom, while Henry Kaufman was Doctor Gloom, as a result of their dire economic predictions of the stagflation 1970s. From his perch at my friend Craig Drill's money management firm, Al wrote this week:

"If so, why have the Fed and many other leading central banks been chronically over-estimating inflation? Two major sources of inflation in the post-World War II period were rising wage rates and oil prices. Technological innovation has curbed them both. Globalization, spurred by advances in communication, travel, and transport (especially containerization), has exposed Western labor to world-wide competition, sapping the political and economic power of industrial labor unions. As for oil prices, the burgeoning of shale and off-shore petroleum resources outside the Middle East has been holding them in check. Moreover, sharp declines in the cost of solar and wind energy, coupled with improvements in storage batteries and the advent of affordable electric cars, are likely to displace fossil fuels. This would fundamentally alter the costs and uses of energy, with far-reaching repercussions around the globe. Textbooks and economic models that treat inflation as a mainly monetary disorder are obsolescent."

Today is option and futures expiration. When equity futures expire, it is usually more difficult to generate an upside squeeze late in the week. That said, the preopening futures are better by some 9 points as I write at 5:10 a.m.

 March 15, 2019

 Risk and Disclosure information, as well information on the Raymond James rating system and suitability categories, is available here.

You are receiving this message because our records indicate that you have requested this information. If you no longer wish to receive research from Raymond James, you can unsubscribe here. Kindly include your name and company name in the message. If you wish to unsubscribe from certain categories that you are currently receiving, please include only those categories in your message.

Raymond James Equity Research
880 Carillon Parkway | St. Petersburg, FL 33716 | 800.237.5643

Morning Tack - “Road Trip”

Monday, Ten Years Ago...

Frist Trust

Monday Morning OUTLOOK

March 11, 2019

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

It’s March 8, 2009. The market’s down 56% from its all-time high, unemployment is over 8% and hurtling toward 10%, it’s just been reported that real GDP dropped at a 6.2% annual rate in Q4 of 2008, and it feels like the world is coming to an end. You’re tired, exhausted from living through this, and you fall into a deep sleep. So deep, in fact, that you don’t wake up until today, 10 years later.

First thing you do is run to your computer and see the S&P 500 is up 305% since the bottom. You are blown away. No way this could be true! Things were so bad when you fell asleep. Little did you know the S&P 500 bottomed the next day.

So you run over to your friend’s house and knock on the door. Your friend answers, wondering where you’ve been for 10 years! You ask what possibly could have happened to drive the stock market up more than 300%.

Your friend pulls out a list. Let’s call them the "golden geese."

After-tax economy-wide corporate profits are at record highs, up 175% since the bottom, or around 11% annualized growth.

Then your friend tells you about Apple. When you fell asleep, Apple had been selling the iPhone for about a year and a half. Over that period, they sold a record-breaking 17.4 million of them. But since you’ve been asleep, Apple has sold about 1.3 billion of them. Every calendar quarter Apple sells about three times what it sold in that first year and a half.

Then there’s Uber. Your friend tells you how you can press a button on a phone and a few minutes later a car will come by and, before you get in, you know who the driver is, his rating, how much it’ll cost, and how long it will take to get to your destination. All cheaper than a taxi. It seems like science fiction!

You see unemployment is only 3.8% and think it’s a typo, because when you fell asleep it was more than double that.

Your friend shows you a video of a self-driving semi-truck that Budweiser used to carry 51,744 cans of beer from Fort Collins, CO, to Colorado Springs, CO. About 130 miles on I-25 with no driver! Now Amazon is deploying similar trucks.

But what may be most amazing is that that there have been several years over the last 10 that the US has run a trade surplus with OPEC. You wonder how this can be since the US was in an energy crisis when you fell asleep. In fact, oil production had been on a declining trend for about 50 years. Your friend tells you it’s all changed. Since you have been asleep, because of new technology, oil production has more than doubled, from about 5 million barrels per day to around 12.1 million barrels per day. In fact, the US is now the world’s biggest oil producer. Bigger than Russia and Saudi Arabia! The state of Texas, by itself, just surpassed Iran to become the world’s fifth biggest oil producer!

You continue through the list and are more and more blown away. It’s been only 10 years and the world is completely different, for the better! You barely recognize it, so many things have happened that you wouldn’t have even dreamt possible.

And notice, you have no idea who is President, what’s been going on with interest rates, Quantitative Easing, China, or North Korea. You’ve never heard of "AOC" and you missed the whole Greek debt crisis. All you know about are these "golden geese." And that’s all you need to know. The entrepreneur, alive and well, has continued to revolutionize the world over the past 10 years. That’s what has been driving economic growth and the stock market.

Imagine where we will be 10 years from now. Our guess is that it will be better than you can think.

************************************

As a side note, celebrating the 10-year anniversary of the current recovery and bull market is very satisfying to us.

We believed the Panic of 2008 was made significantly worse (trillions of dollars worse) than it needed to be because of overly strict mark-to-market accounting. Forcing banks and other financial institutions to write the value of assets down to fire sale prices based on frozen markets put the whole financial system at risk.

No amount of money from the Federal Government would have ever stopped it. Private investors stopped investing in banks. Markets stopped trading. All because assets were being written down well below the amount of cash they generated.

Quantitative Easing and TARP were both unnecessary, and useless. QE was started in September of 2008 and TARP was passed in October. During the next five months, the S&P 500 fell an additional 47% and financial stocks declined 70%. There is no evidence (unless you value self-proclaimed victories) that either worked.

The market turned on March 9, 2009, when the House of Representatives decided to push the Financial Accounting Standards Board to reverse the damaging mark-to-market rules. The change wasn’t made until April 2009, but the market knew it was coming. The change allowed banks to use cash flows to value investments. And guess what, private investors came back. They invested in banks and other equities and that was the turning point.

While government will tell you that it saved the economy, it didn’t. Once mark-to-market accounting rules returned to the way they were from the late 1930s through 2007, the economy could recover. And that’s exactly what it did. This recovery and the bull market are based on entrepreneurship. It’s not – and never was - a Sugar High.

TARP would have never been enough to save the system because assets would have continued to be marked down. And QE was unnecessary because the problem wasn’t due to a lack of money in the system.

Some members of the Federal Reserve try to compare 2008/09 to the Great Depression, and argue Milton Friedman would have wanted QE. But in the Great Depression, the money supply was declining. It never declined in 2007 or through September 2008, when QE was started. The problems in the system were capital problems, not liquidity problems.

In fact, it is our belief that without those overly strict mark-to market accounting rules, Bear Stearns, Lehman Brothers, WAMU and Wachovia would never had needed to go under.

Thank goodness the rules were changed, allowing the free market and entrepreneurship to once again work the magic that has transformed this great country since its start.

The attached information was developed by First Trust, an independent third party. The opinions of Brian S. Wesbury, Robert Stein and Strider Elass are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index. The Troubled Asset Relief Program (TARP) was a group of programs created and run by the U.S. Treasury to stabilize the country's financial system, restore economic growth, and mitigate foreclosures in the wake of the 2008 financial crisis.

Morning Tack - “Boeing Crash”

Jeffrey D. Saut, Chief Investment Strategist | (727) 567-2644 | jeffrey.saut@raymondjames.com

MARCH 12, 2019 | 8:16 AM EDT

"If there is one thing to be gleaned from the futures market this morning, it is this: the Dow Jones Industrial Average is not 'the market'. When one refers to 'the market', think the S&P 500.”

. . . Briefing.com

If I have heard it once, I have heard a million times from stock market guru Leon Tuey. To wit:

"Many persist in believing that the S&P is 'the market' which it is not as it only represents 500 big cap stocks and it is a weighted index. On any given day, however, several thousand stocks are traded in the U.S. and that is 'the market'. Hence, it's much more important and more informative to watch the Advance-Decline Lines as they reveal the true health of the market.

SHORT-TERM: Last week, the short-term oscillators (daily) registered oversold readings pointing to a bounce this week, and the market is rallying right on cue. Pundits, however, point to the 200+-point drop at this morning's opening. Little do they realize that much of the loss was due to a sharp plunge in Boeing and other airline stocks while Advance outnumbered Declines by a margin of more than 2-to-1 both in New York and on the NASDAQ. In other words, most stocks rallied.

INTERMEDIATE-TERM: As mentioned, in the week of February 25, a consolidation/correction was signaled as the market was grossly overbought, momentum and sentiment deteriorated. Short-term rallies notwithstanding, until a grossly oversold condition is reached, momentum and sentiment improve, further consolidation/correction lies ahead. As noted, the correction will prove to be rotational/time rather than magnitude as in December, fearful of a recession and a bear market, investors liquidated their equities ferociously. Consequently, they are grossly under-weighted in equities and are sitting on a mountain of cash. Now, they are starting to realize that given the Fed's dovish posture, there is no recession and as this begins to dawn, investors will scramble to get back in. Hence, the consolidation/correction is nothing more than a normal reaction to an overbought condition within an ongoing bull market which is healthy. After gaining more the 19% from its December low, the bull is just trying to catch its breath, a well-earned rest.

LONG-TERM: The secular bull market which commenced on October 10, 2008, remains firmly intact. Investors are witnessing the second leg of this great bull market that began in February, 2016 which is always the longest and strongest as it is driven by improving economic conditions caused by the monetary stimulation of years past. Since the first leg lasted nearly seven years, despite the black headlines and the widespread fear, the current leg remains relatively early."

And then there was this from our friends at the astute Lowry’s Research Organization:

"On Monday, the DJIA and S&P 500 rallied throughout the day, adding 0.79% and 1.47%, respectively. The lag in the DJIA was the result of extraordinary weakness in one of its largest components – Boeing (BA). Overall, Demand and the breadth behind the gains were strong, with Up Volume at 83% of total NY Up/Down Volume, while Advancing Issues made up 79% or total Advance/Decline Issues. Further support for Monday’s rally was reflected in Buying Power’s 4-point gain and Selling Pressure’s 4-point loss."

Stock Chart’s, John Murphy, went one further by writing:

"1) TECHNOLOGY SECTOR LEADS TODAY'S REBOUND AND HOLDS ITS 200-DAY LINE

2) SEMICONDUCTORS ARE HAVING AN EVEN STRONGER DAY

3) THE NASDAQ AND S&P 500 REGAIN THEIR 200-DAY LINES

4) THE DOW SHRUGS OFF BIG BOEING LOSS

5) AND IS BEING LED HIGHER BY APPLE, INTEL, AND MICROSOFT

6) MICROSOFT NEARS ANOTHER TEST OF ITS DECEMBER HIGH"

As for me, I have always averred the support level for the S&P 500 (SPX 2783.30) was in the 2700–2730 level and that the December 2018 intraday low of 2346 would NOT be retested. Last week’s pullback stopped at 2722.27; GED! Speaking to crude oil, as Cornerstone Analytics’ savvy Mike Rothman writes:

"Fears of an economic slowdown in China have recently weighed heavily on global oil prices. Demand deterioration leading to a drop in demand might sound like straightforward logic, but February’s Chinese oil usage data paints a completely different picture. Year over year crude demand increased by almost 15%, a staggering 1.78 million b/d for the month. Keep in mind that the per capita oil usage in China is at only 2.3 barrels a person – about one-tenth the usage rate of the US. With coal still accounting for 70% of China’s overall energy usage, we continue to have trouble turning bearish on China’s impact on the global oil balances. In the words of Mike, “it’s strange to see such a preponderance of bearish beliefs that keep getting defied by obvious bullish data.”

Yesterday, the SPX rallied 1.2% above its 200-day moving average, suggesting this rally may have upside “legs.” This year, the Federal Reserve has taken a softer tone, concerns regarding a trade war with China have fallen, and recessionary risks have declined. This more benign backdrop creates the potential for multiples to expand despite uninspiring profit trends. This morning, the preopening futures are marginally higher with no real overnight news.

Risk and Disclosure information, as well information on the Raymond James rating system and suitability categories, is available here.

Strategies for Paying an Unexpected Tax Bill

February 26, 2019

Filing season is underway, and many working Americans are already receiving their refunds – the first since the new tax legislation went into effect. The new law (in conjunction with any adjustments you may have made to your withholding) may mean your refund looks different from years past. So what happens if you were expecting a refund but got an unexpected bill instead?

First, stay calm. Secondly, think strategically about how to pay what you owe, particularly if your money is invested, earmarked for retirement or stashed away in an emergency fund. Lastly, put plans in place to include more tax-mitigating strategies into your financial plan. Doing so can help avoid this situation next year.

If you do find yourself obliged to pay, perhaps you can rely on one of these options to help you settle up with the IRS and keep your financial plan undisturbed and on track.

Actions to Take

Make sure it’s not a mistake. Review your return with your accountant to make sure you’ve included every exemption and credit for which you qualify.

Consider taking out a low-interest rate loan. If you really do owe Uncle Sam a large chunk of change, a securities-based line of credit1 or a home equity loan2 may be a more cost-effective way to pay instead of selling securities that are part of your long-term investment plan. These types of loans can offer quick liquidity and flexibility to help you meet your tax obligation, at competitive interest rates. And you may be able to avoid capital gains taxes that could result from selling appreciated investments.

Carefully select investments that could be sold for additional liquidity. In some cases, selling securities to capture capital losses or rebalance a portfolio is a good idea. Talk to your advisor about securities that could be harvested for capital losses or ones that you can sell to help bring your portfolio back into alignment with your long-term goals. Another possible benefit? Unused realized capital losses may be available to offset future tax bills. Please remember that the process of rebalancing may result in tax consequences.

If Possible, Avoid …

An unfavorable offer in compromise. The IRS may negotiate an offer in compromise (OIC) to help you settle your bill for less than you owe. However, be aware that there are associated costs, including a filing fee.

Paying with a high-interest-rate credit card. This kind of debt can negatively impact your credit score and quickly rack up fees, making it harder to pay down the principal. Even though the IRS also charges interest (federal short-term rate plus 3%), it’s far lower than most credit card companies.

Taking money from your retirement accounts. It’s not a great idea to undermine a long-term plan by withdrawing funds early. You’ll be faced with penalties, as well as additional taxes on the amount you take out, which could mean you won’t have as much to pay your tax bill as you thought. And you’ll have even less for retirement.

Plan Ahead

If you do end up owing taxes, talk to your tax and financial advisors about other ways you can pay the bill without disrupting your investment plan or depleting savings. If you anticipate owing taxes again, you may also want to discuss your withholding amount as well as investment and tax-saving strategies to reduce your liability next year and beyond.

1 A Securities Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from a SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards a SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect LIBOR rates that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s Capital Access account. Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, a federally chartered national bank.

2 Raymond James Associates, Inc., and Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.The proceeds from a home equity loan cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate or Raymond James. The line of credit can be suspended, reduced or terminated in the event of fraud, failure to repay, adverse collateral conditions, or other violation of credit terms. Property insurance is required. Flood insurance is required if property is in a designated flood zone of ‘A’ or ‘V.’

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Products, terms, and conditions subject to change. Subject to standard credit criteria.

Investment Strategy: “National Treasure, National Treasury, National Debt"

Jeffrey D. Saut, Chief Investment Strategist | (727) 567-2644 | jeffrey.saut@raymondjames.com

FEBRUARY 25, 2019 | 7:58 AM EST

Dear Clients and friends, please read the entire report!

I was traveling last week seeing portfolio managers and doing gigs for our financial advisors and their clients. I have been doing such events for much of the past six months. The recurring question from clients is, “What about the national debt?” First, I would point out that when everyone is asking the same question it is usually the wrong question. Yet, last week that question hit its zenith as the media trumpeted that the national debt had traversed $22 trillion dollars. With that, I kept getting the same recurring question at events: “Jeff, the debt to GDP is above 100%. Doesn’t that worry you?” My answer has always been:

I don’t think the debt-to-GDP ratio is the right lens to view the debt issue. In a past life I was a fundamental analyst writing stock-specific research on individual companies. When we researched a company we always looked at assets to liabilities. NOBODY looks at America in that way. I don’t know what the Grand Canyon is worth, but it is worth a lot. I don’t know what the Tetons are worth, but they a worth a lot. Now obviously we are not going to sell the Grand Canyon, but the government has many levers to “pull.” A couple of months ago I was driving from San Antonio to the Hill Country to speak at an event. Along the way I drove by an army depot, with nobody there, that had to be 15 miles long. It brought to mind the fact that the government is selling such properties for big bucks. Indeed, the government has many levers it can pull.

Also speaking to this point, our friend, Riverfront Investment Group’s Doug Sandler, in an article titled “National Debt . . . No Time to Worry Yet,” writes this:

In theory, investors should have one less thing to worry about with the passage of the federal spending bill last week, which averted a second government shutdown. However, true to form, investors replaced the fear of too little government spending with new concerns about too much government spending. Given that the bill’s passage coincides with the federal debt surpassing $22 trillion and now exceeding our country’s gross domestic product (GDP), the concern seems justified. In fact, The National Debt Clock personalizes the $22 trillion figure by reminding us that it equates to about $67,000 per US citizen, or roughly $180,000 per US taxpayer.

As scary as the federal debt appears, we are less concerned for two reasons. First, in our opinion, several mitigating factors make the debt load less precarious than what is reported in the headlines. Second, the ‘warning lights’ that would typically flash before a debt crisis remain unlit. According to the Congressional Budget Office’s (CBO) January 2019 report, roughly $5.5 trillion of the $22 trillion is intergovernmental debt. Intergovernmental debt is the debt that the government owes to itself. For this reason, many economists believe that ‘Federal Debt Held by the Public’, which excludes intergovernmental debt, is the more important measure of the Federal government’s indebtedness. By this measure, the federal debt is expected to grow to $16.6 trillion by year-end. While $16.6 trillion is a big number, it’s 25% smaller than $22 trillion and well below the psychological threshold of exceeding 100% of GDP.

Although it would be highly unlikely, if the U.S. was obligated to put up collateral for its loans, there are plenty of assets it could pledge. A few of the ‘priceless’ assets it controls include prime land (national parks) and buildings, a portfolio of patents, usage rights to digital access, and spectrum and mining rights for energy and minerals.

Lastly and most importantly, the Federal government has the ability to print its own currency, like it did in the years following the Financial Crisis. Since 2008, the Federal government printed over $2 trillion in US dollars and has the ability to print even more. In theory, no country with its debts denominated in its own currency should fail to make good on its debt obligations.

Doug’s conclusion is that warning lights are not flashing. Obviously I agree with Doug, having used the same points as Doug’s 2 and 3. I must admit, however, I have never heard about the intergovernmental debt discussed in point 1, but it is a pretty important point. So, I hope this missive allays concerns about the debt-to-GDP question that I keep getting asked.

Turning to the equity markets, last week the D-J Industrial Average (INDU/26031.81) notched its eighth consecutive weekly gain for the longest weekly upside skein since May 1995. According to our friends at Bespoke:

"Despite lots of economic data weakness both in the US and around the world, earnings have been coming in at a respectably strong pace in the US, and asset markets from Asia to Latin America have been rallying steadily. Whether the explanation is still-cheap valuations, less hawkish central banks, the hopes of positive effects from credit stimulus in China, or possible winding down of trade tensions, there’s plenty of explanations for the ongoing equity rally."

Meanwhile, the Advance-Decline Line for the S&P 500 continues to trade to new all-time highs and as Leon Tuey points out, “The A/D Line is a much better indicator of the strength of the equity markets than any index.” Other breadth metrics are equally as strong. The eight-week rally has caused AAII’s bullish sentiment to rise to 39.32%, which is not all that extreme. However, bearish sentiment has fallen to 25.39%, which is somewhat extreme. The strong rally continues to leave all of the overbought indicators I follow at extreme overbought levels, as well credit spreads are somewhat elevated vis-a-vis credit, which could be a red flag for stocks in the short term (chart 1 below). Interestingly, given all the recession talk, Dr. Copper, one of the best economic indicators, has broken out to the upside in the charts (chart 2 on page 3). And don’t look now, but crude oil has broken out in the charts to the upside (chart 3); buy the midstream MLPs.

The call for this week: Over the weekend Jim Paulsen said, “Last year to be successful you had to find a way to stay appropriately cautious in the face of nothing but optimism. This year you must stay bullish in the face of nothing but pessimism on fears of slowing earnings growth, trade wars, and other threats.” Speaking to earnings, so far of companies reporting 4Q18 earnings 63.8% have beaten the estimates, while 60.1% have bettered revenue estimates. That is not as strong as the past four quarters, but it still is not bad. My indicators that were looking for an energy polarity peak have reversed with the mild stall we have seen and currently are configured again to the upside. I did not expect that, but in this business you take what they give you. As one of my mentors used to say, “It is no disgrace to guess wrong, the mistake is to stay wrong!” My indicators now reflect an upside move without much of a pullback. The pace of the rally should slow, however, following this extraordinary December upside run. This morning the preopening S&P 500 futures are better by some 13 points as I write at 5:17 a.m. because the president has delayed the implementation of further tariffs of Chinese goods.

“For charts associated with this article, please click this link”

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=f255d9a7-4262-4744-8bc5-bbfe7851ce50&mime=pdf&co=raymondjames&id=matt.goodrich@raymondjames.com&source=mail

IMPORTANT INVESTOR DISCLOSURES

Raymond James & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. Raymond James & Associates is located at The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) 567-1000. Non-U.S. affiliates, which are not FINRA member firms, include the following entities that are responsible for the creation and distribution of research in their respective areas: in Canada, Raymond James Ltd. (RJL), Suite 2100, 925 West Georgia Street, Vancouver, BC V6C 3L2, (604) 659-8200; in Europe, Raymond James Euro Equities SAS (also trading as Raymond James International), 40 rue La Boetie, 75008, Paris, France, +33 1 45 64 0500, and Raymond James Financial International Ltd., Broadwalk House, 5 Appold Street, London,  Egland EC2A 2AG, +44 203 798 5600.

This document is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The securities discussed in this document may not be eligible for sale in some jurisdictions. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Investors should consider this report as only a single factor in making their investment decision.

For clients in the United States: Any foreign securities discussed in this report are generally not eligible for sale in the U.S. unless they are listed on a U.S. exchange. This report is being provided to you for informational purposes only and does not represent a solicitation for the purchase or sale of a security in any state where such a solicitation would be illegal. Investing in securities of issuers organized outside of the U.S., including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S., including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and Exchange Commission. There may be limited information available on such securities mentioned in this report. Please ask your Financial Advisor for additional details and to determine if a particular security is eligible for purchase in your state.

The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. Persons within the Raymond James family of companies may have information that is not available to the contributors of the information contained in this publication. Raymond James, including affiliates and employees, may execute transactions in the securities listed in this publication that may not be consistent with the ratings appearing in this publication.

Raymond James ("RJ") research reports are disseminated and available to RJ's retail and institutional clients simultaneously via electronic publication to RJ's internal proprietary websites (RJ Client Access & RJ Capital Markets). Not all research reports are directly distributed to clients or third-party aggregators. Certain research reports may only be disseminated on RJ's internal Proprietary websites; however, such research reports will not contain estimates or changes to earnings forecasts, target price, valuation or investment or suitability rating. Individual Research Analysts may also opt to circulate published research to one or more clients electronically. This electronic communication is discretionary and is done only after the research has been publically disseminated via RJ's internal factors including, but not limited to, the client's individual preference as to the frequency and manner of receiving communications from Research Analysts. For research reports, models, or other data available on a particular security, please contact your Sales Representative or visit RJ Client Access or RJ Capital Markets.

Links to third-party websites are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection of use of information regarding any website's users and/or members.

Additional information is available on request.

Registration of Non-U.S. Analysts: The analysts listed on the front of this report who are not employees of Raymond James & Associates, Inc., are not registered/qualified as research analysts under FINRA rules, are not associated persons of Raymond James & Associates, Inc., and are not subject to FINRA Rule 2241 restrictions on communications with covered companies, public companies, and trading securities held by a research analyst account.

Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analyst Jeffrey D. Saut, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.

Ratings and Definitions

Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold.

In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.

Suitability Ratings (SR)

Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital.

Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program.

High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital.

High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal.

High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal.

Stock Charts, Target Prices, and Valuation Methodologies

Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors, including an assessment of industry size, structure, business trends, and overall attractiveness; management effectiveness; competition; visibility; financial condition; and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences.

Target Prices: The information below indicates our target price and rating changes for the subject companies over the past three years.

Risk Factors

General Risk Factors: Following are some general risk factors that pertain to the business of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product/ service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at raymondjames.bluematrix.com/sellside/Disclosures.action. Copies of research or Raymond James' summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see RaymondJames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643.

U.S. Markets Index Information: U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. The  Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. The Dow Jones Transportation Average is the most widely recognized gauge of the American transportation sector. The Dow Jones Utility Average keeps track of the performance of 15 prominent utility companies. The S&P 500 is an unmanaged index of 500 widely held stocks. The S&P Mid Cap 400 Index is a capitalization-weighted index that measures the performance of the mid-range sector of the U.S. stock market. The S&P Small Cap 600 Index is an unmanaged index of 600 small-cap stocks. The NASDAQ Composite Index is an unmanaged index of all stocks traded on the NASDAQ over-the-counter market. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. The KBW Bank Sector (BKX) is a capitalization-weighted index composed of 24 geographically diverse stocks representing national money center banks and leading regional institutions. The NYSE Aca Biotechnology Index BTK) is an equal dollar weighted index designed to measure the performance of a cross section of companies in the biotechnology industry that are primarily involved in the use of biological processes to develop products or provide services. The NYSE Arca Oil Index (XOI) is a price-weighted index of the leading companies involved in the exploration, production, and development of petroleum. The PHLX miconductor Sector Index (SOXX) measures the performance of U.S.-traded securities of companies engaged in the semiconductor business, which includes companies engaged in the design, distribution, manufacture, and sales of semiconductors. The Philadelphia Gold And Silver Index (XU) is an index of 16 precious metal mining companies that is traded on the Philadelphia Stock Exchange.

Futures: Futures prices are current as of the publication of this report, but will fluctuate. Please contact your financial advisor for updated information.

Foreign Markets Information: The FTSE 100 Index is a share index of the stocks of the 100 companies with the highest market capitalization listed on the London Stock Exchange. The DX (German stock index) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The Bovespa Index is a gross total return index weighted by traded volume and is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Nikkei 225 is a price-weighted index consisting of 225 prominent stocks on the Tokyo Stock Exchange. The Hang Seng Index is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Commodity Price Information: The CRB Index measures the overall direction of commodity sectors. The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when prices overall are rising.

Market Valuation Information: The McClellan Oscillator is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. Technical Analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Price Earnings Ratio (P/E) is the price of the stock divided by its earnings per share. The earnings yield is earnings per share divided by the current market price per share. The equity risk premium is the earnings yield minus the current rate on the 10-year U.S. Treasury note and is the excess return that the stock market provides over a risk-free rate.

Simple Moving Average (SMA) - A simple, or arithmetic, moving average is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods.

Exponential Moving Average (EMA) - A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data.

Relative Strength Index (RSI) - The Relative Strength Index is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Small-cap stocks generally move greater risks. Dividends are not guaranteed and will fluctuate. Past performance may not be indicative of future results.

Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded funds carefully before investing. The prospectus contains this and other information about mutual funds and exchange-traded funds. The prospectus is available from your financial advisor and should be read carefully before investing.

International Disclosures

For clients in the United Kingdom:

For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients. For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom.

For clients in France:

This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in "Code Monetaire et Financier" and Reglement General de l'Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.

For institutional clients in the European Economic Area (EE) outside of the United Kingdom: This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.

For Canadian clients:

This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements.

Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows:

This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.

Morning Tack - “Supply Versus Demand”

Investment Strategy US RESEARCH | PUBLISHED BY
RAYMOND JAMES & ASSOCIATES

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

“Hey Jeff, you mentioned this morning that the equity market’s rise currently may be more about an absence of supply rather than a pickup in demand. Is it also fair to say December low was the opposite? Just want to make sure I am interpreting things correctly. Thanks.”

. . . A financial advisor

I received a number of emails yesterday about this statement in yesterday’s Morning Tack. Most of them read like this:

“Hey Jeff, you mentioned this morning that the equity market’s rise currently may be more about an absence of supply rather than a pickup in demand. Is it also fair to say December was the opposite? Just want to make sure I am interpreting things correctly. Thanks.”

I guess I need to further explain that comment. The selling climax low that ended on December 24, 2018 was one of the worst I have ever seen. It left the equity markets about as deeply oversold as they have ever been. I have explained the reasons for said selling (hedge fund liquidation, mutual fund redemptions, ETFs being sold, tax loss selling, etc.). The selling squall exhausted the sellers (read: no more “supply”). Consequently, even with little in “demand” (read: buyers) the slightest pick-up in potential “buyers” overwhelmed the reduced “sellers (read: supply of stocks). The subsequent rebound rally has been intense, with January being the best January performance in about 30 years. The rally has lifted the S&P 500 (SPX/2737.70) back above its 50-day moving average (DMA) of 2611.66 and is now challenging its 200-DMA of 2741.77. Clearly, the SPX has overshot my near-term trading target of 2600- 2650. However, as we have written earlier this week:

Despite the overbought condition, our work suggests the equity markets can trade higher into mid-February’s energy peak often referenced in these reports. Despite that outlook, we do not trust the overbought condition the equity markets have currently worked themselves into and continue to advise caution on a short-term trading basis. That said, there is now plenty of internal energy in the equity markets to continue the move.

In yesterday’s missive I expanded on that comment by noting:

The equity markets are consolidating to the upside, which is pretty consistent with what my indicators have been telegraphing even though I remain concerned with the overbought conditions of the equity markets. That upside consolidation should be followed by yet another breakout to the upside with a secondary trading target of 2800 – 2820, which should stall into the mid-February energy peak timing zone.

Ladies and gentlemen, if we are going to get a pullback it should come from that energy peak. However, to reiterate my comments since the second 90% upside day of January 3, 2019, we continue to think the December lows will not be retested. As the acute John Murphy, famed technical analyst and author, writes as a headline for a recent blog entry:

WHAT TO MAKE OF THE 2019 REBOUND -- BEAR MARKET RALLY OR START OF A NEW UPLEG? -- S&P 500 NEARS TEST OF 200-DAY AVERAGE AND MAYBE ITS DECEMBER HIGH -- WEEKLY CHARTS ALSO SHOW IMPROVEMENT -- MONTHLY CHARTS, HOWEVER, SUGGEST MORE CAUTION AS BULL MARKET NEARS ITS TENTH ANNIVERSARY.

Obviously, I continue to embrace the secular bull market theme. As my pal Leon Tuey writes:

Many continue to hold the view that a bear market had commenced or that a "cyclical bear market" is in progress. Clearly, they have no understanding of the market’s logic and they confuse the various market indices with "the market." As mentioned, what investors saw was nothing more than a normal reaction to an overbought condition registered in the August/September period. The plunge in the averages was caused by the drop in the heavyweights; the various Advance-Decline Lines, however, just went through a garden variety correction, one of the mildest in this great bull market. Since the seers (and most investors) only pay attention to the market averages and not to “the market," the plunge in the market averages caused widespread fear.

Since Powell backtracked and the People's Bank of China stepped up liquidity injections, global money supply has round-tripped to March 18 levels. Forget earnings or macro. This is why markets have rallied. History shows that buying stocks at or near all-time highs, with stretched valuations, because the Fed is easy while the economy begins an ebbing cycle is a path to ruin (See 1999-2000, 2007-2008). U.S. stocks are extremely overbought on a trading basis and short-term basis. A spirited retreat can appear at any time. However, for the foreseeable future, most traders will continue to buy any and all dips because the Fed Put has been reinstated.

This should end with the mid-February energy peak, but I do not believe the December low will be retested. This morning futures are flat . . .

February 6, 2019

 Risk and Disclosure information, as well information on the Raymond James rating system and suitability categories, is available here.

You are receiving this message because our records indicate that you have requested this information. If you no longer wish to receive research from Raymond James, you can unsubscribe here. Kindly include your name and company name in the message. If you wish to unsubscribe from certain categories that you are currently receiving, please include only those categories in your message.

Raymond James Equity Research
880 Carillon Parkway | St. Petersburg, FL 33716 | 800.237.5643

2008 Myth and Reality

First Trust Monday Morning Outlook

February 4, 2019

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

We’ve written about it over and over, and while many advisors seem to understand, the media, politicians, and many analysts don’t…or won’t. So, we thought we’d try again to explain why so many people don’t understand the nearly ten-year long bull market in U.S. equity values.

Conventional Wisdom places the blame for the 2008 Financial Panic at the feet of Wall Street, and heaps praise on QE, TARP, and bank stress tests for saving the world. It has been repeated so often that even many conservative/libertarian analysts have succumbed to thinking the crises was papered-over by government money and that any day now the “sugar high” will come to an end.

This is why “corrections,” like the US stock markets experienced late last year generate so much fear. There is a cadre of traders, media-types, and just plain old hangers on who can’t wait to be the next Nouriel Roubini and make one great call in a row.

What makes it worse is that the truth is there for the taking, but the conventional wisdom simply ignores it. In Peter Wallison’s book “Hidden in Plain Sight,” he very clearly shows it was Fannie Mae and Freddie Mac who pushed the subprime loan space. Congress and HUD urged mandated that Fannie and Freddie buy more subprime paper, and by 2007 - along with the federal government - they owned 76% of it. Yes, Wall Street is culpable too, but government drove the marketplace. Wall Street simply wouldn’t have been issuing these bonds without Fannie and Freddie’s voracious appetites.

Even Ben Bernanke has argued that subprime loans themselves weren’t large enough to take down the system. He blames derivatives, undercapitalization, and interconnected banks. By his verdict, the government gets off scot-free.

But this completely ignores the role that FASB 157, otherwise known as mark-to-market accounting, played. Mark-to-market accounting forces banks to take a few bids from the marketplace and use those bids to value assets. Cash flow doesn’t matter, underlying asset values don’t matter. And what happened was a disaster. The market for loans froze, and even assets that were still paying on time sold at fire-sale prices.

If a bank owned a pool of 1000 mortgages and 300 of them defaulted (which given the collapse in underwriting standards by Fannie and Freddie wasn’t impossible to expect), then that pool still payed 70 cents on the dollar. But, because the market was frozen, bids fell into the teens for an asset paying 70 cents in cash. FASB 157 forced banks to take the “bid,” push it through their income statement, and subtract the losses from capital. This, in turn, created the bigger problems. There was no willingness to invest in banks when, at any time, they could be wiped out by mark-to-market losses. The fire became an inferno.

This was a capital problem, not a liquidity problem. But, the Federal Reserve started Quantitative Easing anyway in September 2008. Hank Paulson pushed the $700 billion TARP bill through that October. Nonetheless, the market kept falling. The S&P 500 fell an additional 40% after TARP – bank stocks fell 73%. QE and TARP weren’t the cure.

It was March 9, 2009, when Barney Frank’s Financial Services Committee announced a hearing with FASB on this really dumb accounting rule, that the market turned around. Yes, it’s true that the actual rule wasn’t reversed until April, but on March 9th the financial markets realized the change was coming.

What happened after that is recorded for history. The market is up 300%, banks healed, asset values rose, and a “normal recovery” began. New technology – fracking, apps, 3D printing, the cloud, smartphones – lifted productivity and profits, and stocks responded. It was not QE that lifted the stock market; TARP didn’t save the banks.

Unfortunately, because so many Republicans back the government-led version of history, many younger Americans have come to believe that free markets fail, and governments can engineer growth. No wonder there are so many fine young thinkers who seem to back socialism these days. After all, even Republicans support government intervention. President George W. Bush defended TARP by saying we had to “violate free market principles in order to save the free market.”

Nothing could be further from the truth. Either you believe in free markets, or you don’t. The Bush administration and its supporters bowed to the popular, but false, narrative. They have yet to find a way to explain their positions. As a result, socialist tendencies are rising in America.

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

Recession This Year? Don’t Count on It [VIDEO]

Real-time indicators suggest the economy will keep growing in 2019, says Chief Investment Officer Larry Adam.

January 15, 2019

“To view video please click HERE”

Recorded January 9, 2019 with Larry Adam, CFA, CFP®, CIMA®.

10 Themes That Will Dictate the 2019 Markets

What can investors expect from the financial markets this year? Chief Investment Officer Larry Adam offers his perspective.

 January 15, 2019

Last year was challenging for investors, marked throughout by notable market volatility. But that isn’t uncommon for an economy that’s entered the late phase of the business cycle. We’ve enjoyed an unprecedented economic rally since the Great Recession ten years ago – but with monetary stimulus, fiscal stimulus, economic growth, employment growth and earnings growth likely to decelerate in 2019, the credibility of this record-approaching expansion will be questioned.

Below, we’ve provided our views and insights for the U.S. economy and major global asset classes in 2019. The bottom line: the late-cycle environment we envision does not mean the end of the cycle, and this perspective frames our optimistic yet tempered views for the upcoming year.

1.  U.S. Economy Achieving Record Eclectic Expansion

Credibility Challenge: Can the economy maintain its momentum with decelerating monetary and fiscal stimulus?

With little sign of recession, we foresee the current expansion notching record duration in July and continuing to grow – albeit more slowly – at an above-trend pace. Expect 2019 GDP growth of 2.4%.

2.  One Step at a Time for the Federal Reserve

Credibility Challenge: Will the Fed engineer a policy error and overtighten?

We expect the Fed to remain “data dependent” and flexible as inflation is contained and global growth challenges mount. Expect one or two interest rate hikes in 2019.

3.  Increased Volatility Keeping Investors on Their Toes

Credibility Challenge: Investor sentiment will be confronted by a return to a higher volatility regime, which will question the success of the “buy the dip” mentality.

The low probability of a recession and positive performance expectations for most asset classes should provide more opportunities for investors of risk assets as well as ample occasions for active managers to outperform.

4.  Bearing Down on Bonds and Cashing In

Credibility Challenge: Bonds, in aggregate, have struggled as interest rates moved higher and spreads widened. Is the 30-year bond bull run over? Is cash no longer unproductive?

While a healthy economy and “quantitative tightening” should place upward pressure on interest rates, the reset higher in yields and spreads makes bonds only incrementally more attractive. Expect the 10-year Treasury yield to move to 3.2% and the yield curve not to invert. With short-term rates likely to move slightly higher, cash is now a viable alternative.

5.  Minding the (Equity) Gap

Credibility Challenge: Can U.S. corporate earnings move higher without additional tax cuts? Can a continued ascent in earnings outshine “peak earnings growth”?

U.S. corporate earnings should move higher on the back of modest economic growth, solid corporate confidence and buybacks. While earnings growth will decelerate to single digits, 2019 will not be the peak dollar amount for earnings. Higher earnings support our 2,960 S&P 500 target.

6.  Favoring Cyclical Sectors

Credibility Challenge: The significant outperformance of cyclical sectors over the last several years has prompted investors to expect a shift to defensive sectors.

Leverage to economic growth, superior earnings growth, attractive valuations, higher shareholder value dynamics (e.g., dividend growth and buybacks) and less sensitivity to rising interest rates encourage us to be biased to the cyclical sectors – particularly technology, energy, industrials and healthcare.

7.  International Intrigue Emerging

Credibility Challenge: International equity investors have experienced inferior performance (vs. the U.S.) for multiple years, compounded by a strengthening dollar. Will international equities continue to be a drag on portfolios?

While attractively valued, developed international markets will likely continue to struggle to outperform the U.S. as political drama intensifies. We favor emerging markets, particularly in Asia, which could benefit from a trade deal, a less-aggressive Fed and stabilization of the dollar. 

8.  Dynamite Dollar Dynamics Drying Up

Credibility Challenge: Can the U.S. dollar maintain its historically long bull market rally?

A less aggressive Fed, less upside surprise potential for the U.S. economy and the fading of some European political risks favor at least stability for the euro. While the dollar is not expected to weaken significantly, it likely peaked in 2018.

9.  Oil Leaping Higher

Credibility Challenge: Can OPEC rally oil prices after the 40% decline from recent highs?

The pullback in oil prices should begin to reduce U.S. production as producers become disincentivized. Global oil market forecasted to become undersupplied in 2019 due to OPEC cuts and Iran sanctions. Expect oil to rally to $62 per barrel by year end.

10.  Technology: A Sustainable Revolution

Credibility Challenge: The technology sector’s recent correction has called into question the sustainability of its leadership quality.

The recent pullback provides an attractive entry point into a sector that continues to grow its earnings and expand its disruptive forces to almost every sector of the economy.

Larry Adam, CFA, CFP®, CIMA®. All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. The yield curve is a graphic depiction of the relationship between the yield on bonds of the same credit quality but different maturities. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index Past performance may not be indicative of future results

No Sign of Recession

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Talk about destroying a narrative. On Friday, the Labor Department reported 312,000 new jobs in December, with an additional 58,000 from upward revisions to prior months. Recession talk got crushed. The Pouting Pundits of Pessimism claim jobs are a lagging indicator, but the pace of payroll growth starts declining well before a recession starts. In the twelve months ending in June 1989 nonfarm payrolls increased a robust 225,000 per month. In the next twelve months payrolls rose a softer 153,000 per month and then a recession officially started in July 1990. A similar pattern happened before the next two recessions, as well. In the twelve months ending in February 2000, payrolls rose 250,000 per month before decelerating to 137,000 per month in the next twelve months. A recession started in March 2001.

“Click HERE to read more”

This information was developed by First Trust, an independent third party. The opinions of Brian S. Wesbury, Robert Stein and Strider Elass are independent from and not necessarily those of RJFS or Raymond James. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. All investments are subject to risk. There is no assurance that any investment strategy will be successful. There is no guarantee that these statements, opinions or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results .

Dow 28750, S&P 3100

12/31/2018

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Early in 2018 we said the US economy has gone from being a Plow Horse to Kevlar.  Nothing that has been thrown at the economy since – neither trade conflicts nor tweets, not higher short-term interest rates nor the correction in stocks – is likely to pierce that armor.   

 A year ago the economic consensus was that real GDP would grow 2.5% in 2018.  And yes, that was after the tax cuts were passed.  By contrast, we were more optimistic, projecting that real GDP would be up 3.0% in 2018.  If we plug in our forecast for 2.0% real GDP growth in the fourth quarter, the economy will have grown 2.9% for the year.  If, instead, we use the Atlanta Fed’s estimate of 2.7% for Q4, we’d get 3.1% for the year.  Either way, we just about nailed it.

 Now, the same consensus that a year ago suggested the economy would only grow 2.5% in 2018 with the tax cuts is saying the economy is going to slow down to a pace of 2.3% in 2019, in part because of the supposed reduction in stimulus related to those very same tax cuts.  

 Once again, we’re not buying it.  The benefits to growth from having a lower tax rate on corporate profits and less regulation are going to take years to play out.  Companies and investors around the world have only begun to react to the US being a more attractive place to operate.  As a result, we’re forecasting another year of 3.0% economic growth.        

 Further, we expect the unemployment rate to keep gradually falling, as continued job growth offsets an expanding labor force to push the jobless rate down to 3.3%, the lowest since the early 1950s.  Last year the consensus predicted the jobless rate would decline to 3.8% in 2018; we predicted 3.7%.  Right now it’s already 3.7% and we think a drop to 3.6% is likely for December when that report comes out January 4.       

 On inflation, it looks like we’ll finish this year with the Consumer Price Index up about 2.0%, although it would have been higher were it not for what we think is a temporary downdraft in oil prices.  The consensus had projected 2.1% and we had been forecasting 2.5%.  Look for a rebound in oil prices and ample monetary liquidity to help push the CPI gain to 2.5% in 2019, which would be the largest gain since 2011.  

 The tricky part is what to expect from the Federal Reserve in 2019.  Based on our economic projections, and if the economy were the Fed’s only consideration, we could get as many as four rate hikes in 2019.  After all, nominal GDP growth – real GDP growth plus inflation – is up 5.5% in the past year and up at a 4.8% annual rate in the past two years.  Raising rates four times in 2019, which is more than any Fed decision-maker projected at the last meeting in December, would only take the top of the range for the federal funds rate to 3.5%, still well below the trend in nominal GDP growth. 

 But we think the Fed will have a two-part test for rate hikes in 2019.  First, as we just explained, the economy itself.  Second, the yield curve.  We think the Fed will be very reluctant to see the federal funds rate go above the yield on the 10-year Treasury Note and will strive to avoid either an active or passive inversion of the yield curve.  An active inversion would be the Fed directly raising the federal funds rate above the 10-year yield; a passive inversion would be raising the federal funds rate so close to the 10-year yield that normal market volatility could send the 10-year lower than the funds rate.  

 As a result, we think the Fed will want to leave a “buffer zone” between the 10-year and the funds rate of about 40 basis points.  So, for example, if the 10-year yield stays near its current level throughout all of 2019, we could end up with no rate hikes at all in spite of economic conditions.

 Our projection, though, is that the 10-year yield moves higher to reflect more strength and resilience than the consensus now expects.  If the 10-year yield finishes 2019 at 3.40%, as we expect, that would leave room for two rate hikes, maybe three.               

 For the stock market, we expect a soaring bull market, with the S&P 500 reaching the 3100 we projected for 2018 a year ago.  Yes, we know that sounds bold, but our Capitalized Profits Model is screaming BUY. 

 The model takes the government’s measure of profits from the GDP reports divided by interest rates to measure fair value for stocks.  Our traditional measure, using a current 10year Treasury yield of about 2.75% suggests the S&P 500 is still massively undervalued.  

 But if we use our forecast of 3.40% for the 10-year yield, the model says fair value for the S&P 500 is 3100.  And that leaves room for equities to go even higher if, as we think, profits move higher next year, as well.  The model needs a 10year yield of about 4.35% to conclude that the S&P 500 is already at fair value, with current profits.

 The bottom line is that we’re calling for the S&P 500 to finish at 3,100 or higher next year, which would represent a nearly 25% gain from Friday’s close.  The Dow Jones Industrial Average should end the year at 28,750.

 Yes, this is likely to be one of the most optimistic forecasts you see, if not the most optimistic one of all.  But, in the end, we do best by our readers when we tell them exactly what we think is going to happen, without altering our projections so we can run with the safety of the herd.  Grit your teeth if you have to; those who stay invested in the year ahead should earn substantial rewards.    

“Click HERE to read more”  

 Consensus forecasts come from Bloomberg.  This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors.  It is based upon sources and data believed to be accurate and reliable.  Opinions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any security.                      

No Deal In Sight To Reopen The Government

With neither side showing any sign of compromise, the partial shutdown could extend until January, says Washington Policy Analyst Ed Mills.

December 31 , 2018

The government is shut down; the Treasury Secretary is holding a meeting of the “plunge protection team”; press reports provide conflicting accounts related to President Trump’s discussion to fire the Chairman of the Fed; the departure of the Secretary of Defense, General Jim Mattis, has been moved up to January 1; and the State Department’s special envoy to combat ISIS, Brett McGurk, is following Mattis out the door.

Government Shutdown

Parts of the U.S. Government – including the Department of Homeland Security, Treasury, Commerce, and Department of Interior – remain closed following a missed deadline to agree on funding the border wall with Mexico. No deal is in sight and Congress is adjourned through December 27. This shutdown could easily stretch into January as the new Congress convenes January 3. The normal pressure on the personal lives of members of Congress and the president did not produce a deal, and neither side shows any real sign of compromise. There are multiple paths forward but no consensus yet on the most likely resolution. We believe an increase in funding above the $1.3 billion for the construction of metal fencing could give the president enough of a victory to accept the deal.

Plunge Protection Team

Secretary Mnuchin is set to convene the president’s working group on financial markets, a committee that was created in the Reagan administration to monitor the stock market. The meeting comes after Mnuchin held calls with the CEOs of the top six U.S. banks over the weekend. Following these phone calls, he reported that all banks have adequate liquidity and the markets are functioning properly. These actions, while appropriate given the recent sell-off, seem to raise more questions than answers – especially as no one had seemed to raise any concerns related to these issues about which Mnuchin is seeking to reassure the market.

Fed Chair

The Secretary of the Treasury and the president’s Chief of Staff issued statements this weekend that the president will not fire/does not believe he has the authority to fire the Chair of the Federal Reserve, Jerome Powell. There is a debate about the ability of the president to "fire" the Chairman of the Federal Reserve, with question related to the ability to designate and/or appoint a new Chair. The Senate would need to confirm the president’s pick, and indications from the Senate is that there is no support for such an act. The longest-serving Republican on the Senate Banking Committee, Richard Shelby (R-AL), was critical of these reports over the weekend and supports the Fed’s independence. There are also reports that the president’s staff is discussing a potential Trump-Powell meeting. We do not believe the Senate would support any decision of the president to fire Powell, but the uncertainty created by these stories will add to the volatility surrounding each of the Fed’s decisions.

National Security Personnel Changes

Deputy Defense Secretary Patrick Shanahan will take over as acting secretary for departing Defense Secretary Jim Mattis on January 1, two months before his announced departure. Shanahan is a former Boeing executive and has been seen as a supporter of the Pentagon’s focus on procurement during the first two years of the Trump Presidency. It is unusual to have an acting secretary at the Defense Department, as the tradition is for the current secretary to stay on until his replacement is announced and confirmed by the Senate. Adding to the negative national security headlines, the State Department’s special envoy to defeat ISIS, Brett McGurk, also resigned. He is not a household name, but was well-respected in D.C. and his departure raises questions about other potential national security departures in the coming weeks.

February/March Likely Volatile Policy Months

The deadline on China trade is March 1, the Treasury is expected to begin emergency measures to manage the debt limit in March, and the Mueller investigation is expect to release its report in mid-to-late February. We will be monitoring these events to see how much they potentially weigh on the markets.

Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.