It’s nearly impossible to miss the news of rising 10-year treasury note yields. What is easier to miss is the explanation of why the yields are increasing so rapidly and what that means to us as investors.

Let’s start with the WHY. As the economy starts to recover, there is an increasing expectation of inflation. As the risk of inflation increases, interest rates are pushed higher. Despite the resulting what we hope will be short-term volatility and pain, there are definitely positives and negatives for rising interest rates as we think about our portfolios. Regardless, we should keep the rising interest rates in perspective. Today’s 1.5% treasury yield seems so high, but it’s still close to the recent era historic low – well below where it was two years ago. It’s the rapid rise from about 1% at the start of 2021 to the current level which is creating the angst. I’m old enough to remember Jerome Powell saying that the Fed has no immediate plans to raise its benchmark interest rate or to reduce its bond purchases, but clearly investors are not as sure as he seems to be.

Now let’s look at happens when interest rates increase. The most obvious result is that bond prices go down. You can see that in your treasury notes and in your bond funds. Short term bond funds, which many of you own as a back-up cash reserve, have definitely been impacted, but less so than the bond funds which hold longer duration bonds. Of course, the monthly interest payable on all bonds will also increase, but that will take a moment to happen and even longer for us to see it.

The less obvious result is that most equity prices have also dropped rather precipitously in the last few weeks. The exception has been “economic re-opening” companies (think Disney) which have taken a beating in the last year. Many of these re-opening companies are in the Dow which is why the Dow has so greatly outperformed the tech-heavy NASDAQ in the last few weeks. Big picture, what is happening is that as interest rates increase, we as investors look hard at the equities in our portfolios and often decide that the risk premium associated with already very high-priced equities just isn’t worth it right now, because we can get an improved return on a presumably safer bond investment. Tech has been particularly hard hit because the prices in the last year have increased significantly. Think Apple, Microsoft, Tesla.

The observation that bond and equity prices have come off their highs while the economy is improving so quickly is certainly disconcerting, but history and economics suggest that this can be a relatively short term reset. We all hope.

So now the obvious question is “you said there is good news, where is that part again?”

• Some industries do better with rising interest rates. Banks for example can do well because they make higher profits on loans. Bank and financial services companies have been good this month so far. Some energy companies have also done well because oil prices tend to go up with inflation. So those of us that held onto those Exxon shares through what was a terrible 2020 might be feeling a little better. For now.
• Our cash reserves in those high yield savings accounts or short term bond funds will eventually deliver a better return. Might be almost time to look for those coffee cans of $10 bills buried in the back yard. It’s about time.
• Many of us own TIPs which are adjusted twice per year for inflation. There hasn’t been much movement in these over the last 18 months but if the current trends continue, it is likely that there will be a bump in the principal value of the existing issues in July and newly issued TIPs will be at higher coupon rates. All good here.

Bottom line, stay the course and remember why we have these diversified portfolios.

As you know, we often say that we don’t invest in things that we do not understand or can’t explain – and there are many of those! But since some of you have asked about Bitcoin and many of us actually own a little in our S&P index funds (thanks to Elon Musk and Tesla) we decided it was time to learn a little and share a little. For you cryptocurrency experts out there, I apologize in advance for what I get wrong here!

Spoiler alert – we still aren’t recommending that anyone liquidate their retirement accounts or even dig up those dollar-filled coffee cans in the backyard in order to buy Bitcoin.

What is it?

Bitcoin is what is known as a “cryptocurrency”. It is actually a system of owning and transferring “bitcoins” to pay for goods and services or to collect currency in exchange for goods and services. Simple, right? Bitcoin has actually been around since 2009. It emerged after the financial crisis because it doesn’t require the use of a bank or a banking system – which were at risk in 2009. There is no governmental oversight or regulation, which can be good or bad, depending on your perspective.

As of today, February 23, the value of 1 Bitcoin is $47,408 USD. IT IS HIGHLY VOLATILE. Bitcoin has value because it is limited in supply – as all currency should be. More on this later.

Bitcoin works a lot like VENMO or any online bank, although there are a few big differences. To participate, a user first installs a “bitcoin wallet” on phone or computer. This installation generates a Bitcoin address which then generates actual Bitcoins, which I think of as virtual $47,000 coins. The user gets a public “key” which he shares with his commerce partners and a private “key” which he keeps safe and sound. I think it’s bad to forget this “key” as it’s then not possible to access the bitcoins. The bitcoins themselves are purchased via a Bitcoin Exchange or Bitcoin ATM!

After a transaction is completed, it is recorded in a Blockchain which feels like a massive checkbook register – but one that is actually used. The blockchain stores all the transactions in the blockchain and then updates the balances in the individual user wallets. This confirmation and encryption process presumably guarantees that the Bitcoins are only used once. In truth, because the value is so volatile, most users are investing in Bitcoin vs paying with Bitcoin. But that too is starting to change.

Users like Bitcoin for transactions because the use does not require ID or a bank so it can be used by the security or privacy conscious or in parts of the world where banking systems are underdeveloped. The currency transfers are fast and always available.

Where does Bitcoin come from?

I said earlier that Bitcoin is limited in supply. So, could the Defense Production Act be used to just make more? I don’t think so – at least not yet. New Bitcoins are Mined into existence by following an agreed upon set of rules. Simply, these rules have to do with finding the solution to a very complex mathematical problem. That solving process unlocks a set amount of Bitcoin, which keeps the supply limited. Math wins. Again.

Why Now?

If Bitcoin has really been around for 12 years, why are we just now hearing so much about it?

• Tesla bought $1.5Bn in Bitcoin stock. And is talking about starting to accept it as payment for its cars.
• Some cities, banks and companies (MasterCard) have announced plans to at least explore the potential benefits and risks to their businesses.
• There has been a lot of interest by retail and institutional investors – along with the creation of cryptocurrency ETFs.
• The pandemic has shifted transactions of all types to on-line.
• It’s seen as an inflation hedge, much like gold or silver.
• But likely the biggest reason: It’s a cultural phenomenon with its own social media push, vocabulary and even preferred purchases. Lambourghinis are reportedly a preferred purchase of Bitcoin zealots. Skeptics say that it’s gambling vs a real solution to a real problem.

Interesting to learn about, but we are still not suggesting that any of you should go stock up! As I said, most of you already own a little in Tesla shares, S&P 500 Index funds or Baron Opportunity. No doubt that some of the recent market volatility is driven by Bitcoin volatility. By the time, this Blog post goes up on March 1, today’s $47,408 USD value will likely be ancient history. But we have no idea whether it will be much higher or much lower!

P.S. On a lighter and more important note, Pfizer has now confirmed the expected news that Marci and I both got the real deal in their vaccine trial in August/September! Mom and dad are also now fully vaccinated. We are ready to see you in person when you are vaccinated and ready to see us!

An early February Yahoo-Harris poll said that 9% of Americans bought GameStop shares in January. The same poll revealed that 24% of Americans bought GameStop or another “viral stock” in January. The other viral stocks included the likes of AMC Entertainment and Blackberry, among others. The average investment was $8535. Men in the 18-44 age group were the most likely demographic group to participate. The majority planned to hold the shares less than a month and bought the shares in a brokerage account which was less than a month old. GOOGLE search records revealed that more people than ever before googled “how to buy stock” in the days prior. Hm….

The trading frenzy was sparked by talk on the social media Reddit sub-platform r/wallstreetbets. No one really knows why this happened. Was it boredom, Covid exhaustion, social media frenzy about making a quick buck or some extra cash from stimulus checks or not going out to eat? Or was it a bit of all these things? The good news for small investors: some made lots of money and learned a little about the stock market. The bad news for small investors: some lost a lot of money and learned nothing. What happens to the industry, something we all care about, remains to be seen.

So what really happened, or is perhaps even still happening? Let’s peel it back a little more….

GameStop owns video game stores, mostly in malls. In Aug 2020, the share price was $4 and the total value of the company was $280 million. In January, a few hedge funds decided that GameStop was overvalued and decided to “short sell” shares, which is a common practice of hedge funds.

“Short selling” occurs when an investor “borrows” shares of a stock and then sells these shares which he doesn’t actually own. The investor hopes that the stock will go down in price so he can then buy shares at a lower price, return the borrowed shares and pocket the profit. Now this is all good, until the shares instead go up in price. Now the investor has to buy the shares at the higher price (In this case a much higher price) in order to return the borrowed shares.

In this case, someone on Reddit noticed the short selling of the GameStop shares by the hedge funds and enlisted an army of Reddit loyalists to start buying the shares, which of course drove the share price higher. In this case, the price shot up to as high as $480/share (from $4/share in August) and the company value rose to $33.5 billion from the August value of $280 million. The hedge funds then had to buy the shares at up to $480/share so they could return the ones they sold at $4. Of course, this all also led to a very complicated mess at trading platform Robinhood, details about which I will spare you.

Fast forward to today, the stock is volatile but not anywhere near how it looked two weeks ago, and the criticism and blame is rolling in on all sides. Who knows what will happen? But as we all know, what goes up, goes down.

One more thing…. Some of you who do options trading might have had moments of unrest as you watched this saga unfold, so I want to explain how what we are doing with you is different, to put your minds at ease: The GameStop situation involved the purchase of “uncovered calls.” In other words, the buyers were “uncovered” – they didn’t own the shares they were selling. When we sell calls with you, they are “covered calls” – you always already own the shares you are trying to sell. The worst case with covered calls is that the share price doesn’t get to the pre-determined strike price and you keep the shares – and the income from the sale of the call. Best case is that you sell your shares at the pre-determined strike price and also get the income from the sale of the call. Of course, there are also times when the share price goes up beyond your strike price and you leave a little money on the table! All are ultimately good outcomes!

Next up: Bitcoin, et al

We are so happy to share photos of Mom and Dad getting their first doses of the Moderna vaccine a few weeks ago! Also loving the stories and photos of your own vaccinations – keep them coming!

P.S. For those of you who are following our Pfizer vaccine trial journey, Marci and I are 95% confident that we both got the real thing back in August and September, but we have not yet gotten official word from Pfizer. That’s expected in the next few weeks so we will confirm then!

P.P.S. See you soon! We will be ready to meet in person when you are!

Happy New Year once again! We have three important administrative items for you today:

Roth IRA Contributions (and yes, you can still do for 2020)

The eligibility “phase-out” AGI (adjusted gross income) has been increased for 2021

• For taxpayers filing jointly, the phase-out AGI range has been increased: $198K to $208K (from $196K to $206K in 2020)
• For single/head of household taxpayers, the AGI phase-out range has been increased: $125K to $140K (from $124K to $139K in 2020)
• The maximum contribution remains at $6000 ($7000 for taxpayers over 50)
• Remember that you can make 2020 Roth IRA contributions until April 15, 2021. Let us know if you want to do this, so we can advise how to provide instructions to Ameritrade to ensure the contribution is applied to the correct year.

2020 1099’s from Ameritrade (we know you can hardly wait)

As usual, 1099’s will be available in waves

• The documents should be posted online on January 14, February 4 and February 11. Accounts with real estate funds will likely be in the last wave.
• The mailed copies should be received 5 to 7 days after the online posting
• There will be the usual rounds of corrected 1099’s for weeks and months
• You will not get a 1099 from IRA’s of any type unless you took a distribution or withdrawal

Required Minimum Distributions (RMDs) are at record breaking levels

• Your 2021 RMD is based on your IRA account value at the market close on 12.31.2020. As you probably remember from two weeks ago, despite what was the 2020 market rollercoaster, the end was pretty darn good.
• You got a year older in the last year – and your RMD as percentage of your account value goes up every year
• Many of you did not take a RMD in 2020 since the CARES Act removed the RMD requirement so your account balance got even higher – hopefully.

You can take your RMD’s in cash, shares or charitable contributions. Some states (like NC) require state income taxes to be withheld, regardless of which distribution option you select.

It is not yet clear whether RMD’s will actually be required for 2021 (although we have heard that the government needs tax revenue, so it’s likely that they will be required in 2021). If you do not need the cash right now, we advise waiting until path forward is confirmed. We will work with you individually on the process here.

As always, we are happy to help with any of the above!

As promised earlier in the month, we are now going to re-introduce you to Roth IRAs, but this time, as great financial gifts for your lucky and hard-working children or grandchildren. As I said earlier, there are very few investments which grow tax free, but 529 plans and Roth IRAs do just that!

Many of you are familiar with Roth IRAs, but for those of you that are not, here is a brief overview:

Roth IRAs were created by the Taxpayer Relief Act of 1997 to help Americans save for retirement. These IRA’s have become enormously popular in the last 20 years but there are some important considerations:

• The dollar contribution limits are the same for Roth IRAs and traditional IRAs. Eligibility for a Roth IRA requires “earned income,” subject to an income cap which is not present for traditional IRAs.
• Contributions are made with after-tax dollars, unlike those in traditional IRAs or most company sponsored retirement plans
• Because the contributions are made with after-tax dollars, the contributions can be withdrawn at any time, without tax or penalty. This might be important for young investors like your children or grandchildren who might need the money they invested before retirement
• Unlike traditional retirement plans, the earnings can also be withdrawn tax-free, subject to owner age and account duration rules, and there is no requirement for distributions to begin at 72 years of age

As I said above, there is a requirement for the Roth IRA account holder to have “earned income” in order to be able to contribute BUT the actual contribution can be funded by anyone (YOU in this case) as long as the dollar amount of the contribution does not exceed the owner’s earned income or annual maximum allowed.

Head spinning? How about an example? You have a 19 year old grandson who worked over the summer stocking shelves in the middle of the night for Kroger. He earned $2000 and will receive a W-2 from Kroger. I am guessing he probably can’t invest this $2000 in a Roth IRA because he is saving every penny for college, BUT you can fund it for him. You have until April 2021 to make this 2020 Roth contribution. We will help you understand eligibility requirements and then help you actually pull this off.

Want to read more about Roth IRA’s?  See attached link. https://www.investopedia.com/terms/r/rothira.asp