November 20, 2023

Whenever financial planners model the sustainability of a person’s retirement asserts, the Big Unknown is long-term care expenses.  These costs are not covered under the Medicare policy—and they are not trivial.  The median cost of a private room is now over $9,500 a month, according to SeniorLiving.org.  The median annual cost of a home health aide is over $50,000 a year.  The Senior Living website provides average costs in different states, and they vary considerably: more than $33,000 a month in Alaska, just over $6,000 a month in Louisiana.

The challenge is that most retirees won’t be plagued by dementia or other handicaps, but an estimated 7 out of ten will spend some time in a facility, and there is no way of knowing which of us may be looking at half a million dollars or more of these unexpected expenses.

The government and state programs can cover some long-term care costs, but the Medicaid coverage only becomes available when a retiree has largely exhausted his or her other financial resources, and anecdotal evidence suggests that the least attractive facilities are the ones that accept government payments. 

Retirees can insure against any future long-term care costs with long-term care insurance, but it might pay to shop early.  The average annual premium for a 55-year-old runs to roughly $3,000; that goes up to more than $50,000 for an 82-year-old.  There’s a calculator showing different premiums and total benefits available in different states at: https://ltcr.com/calculator/.

Some people avoid paying long-term care premiums because the money they’re paying for coverage will be lost if they’re one of the lucky ones who never have to move into a nursing facility or pay for skilled in-home care.  But those same people buy home and auto insurance policies that will cover catastrophic losses, and (thankfully) in nearly all years, the money spent on those premiums doesn’t result in an insurance payout.  Insurance is there for peace of mind.  The real question that people should be asking themselves is: does it make sense to protect against the biggest unknown expense in a retirement plan’s later years?

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Source:

https://www.seniorliving.org/nursing-homes/costs/

https://www.marketwatch.com/guides/insurance-services/long-term-care-insurance-cost-everything-you-need-to-know/

https://ltcr.com/calculator/

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

April 27, 2023

This is your captain speaking…

When you’re on a commercial flight, and the plane is approaching turbulence, the captain comes on the intercom to let you know to buckle up and expect ‘rough air.’  There should be similar warnings about ‘rough air’ in the markets, and this is a good time to offer one.

The market turbulence that we see approaching is a consequence of the debt ceiling  debate—or, rather, the refusal of Congressional leaders to agree to raise the limit on the amount of bonds the government is allowed to sell to finance its operations.  The legal limit on the amount of Treasury debt that the government can issue is periodically raised—and it is always because Congress has already authorized a budget that will exceed the debt limit.

Yes, you read that right.  Congress created a gap between revenues collected and expenditures, and now is threatening not to authorize the payments that were approved.  Don’t try this at home.

Of course, this is a political issue, as are all things in Washington.  Republican leaders, who control the U.S. House of Representatives, believe that their colleagues on the other side of the aisle will be so appalled at the idea of the wealthiest nation on earth defaulting on its fiscal obligations to bondholders, Social Security recipients and government employees that they will be willing to negotiate Republican-proposed spending cuts, including reductions in federal health care, science and education.  Among the few specific proposals is a rule requiring low-income Medicaid recipients to work for 80 hours a month, blockage of the proposed student debt cancellation, and a repeal of a variety of green energy initiatives.  The most contentious proposal would scale back medical benefits for military veterans.

Ironically, the Democratic budget proposal would reduce the federal deficit, over the long-term, by $3 trillion.  But instead of budget cuts, it would raise the highest corporate tax rate from 21% to 28% and impose a 25% minimum income tax on billionaires.  The proposal would also raise the highest tax rate for couples earning more than $450,000 to 39.6%.

How likely is a default?  The U.S. government actually hit its maximum debt ($31.38 trillion) on January 19, and has since been relying on accounting tricks like deferring pension investments in order to keep the doors open and the bond payment checks from bouncing.  We are now on a near-approach to what insiders call the ‘x-date,’ the unspecified time when those measures will be insufficient, and the government will have to start deciding who to pay and (more to the point) who not to pay out of its diminishing resources.  It’s worth pointing out that previous debt-ceiling brinkmanship caused credit agencies to lower America’s credit rating—once the highest in the world.

You can bet that quick-twitch traders, whose activities drive short-term market movements, are carefully watching this dance on the edge of default.  If the government does run out of its ability to pay bond-holders and workers, those traders would most likely retreat to the sidelines, and there would be at least short-term panic among lay investors who would see sharp lurches in the value of their stock holdings.  None of this would affect the actual value of shares of stock (or the value of public companies) in any way, but in the short-term, especially when there are screaming headlines of potential default and dire economic consequences, confidence (or lack thereof) trumps rationality every time. 

You know that, sooner rather than later, both sides will come to an agreement that the U.S. should pay its obligations, and some semblance of normalcy will be restored.  In the meantime, the captain is advising you to fasten your seat belts.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit

https://abcnews.go.com/Politics/biden-rolls-2024-budget-amid-debt-ceiling-showdown/story?id=97711343

https://www.ktsm.com/news/debt-ceiling-showdown-continues-as-republicans-offer-up-new-budget-proposal/

https://www.economist.com/united-states/2023/01/23/there-is-no-easy-escape-from-americas-debt-ceiling-mess

https://www.reuters.com/world/us/tax-cuts-balanced-budget-whats-not-republican-mccarthys-debt-plan-2023-04-21/

https://www.washingtonpost.com/business/2023/04/19/debt-ceiling-limit-republican-plan-explained/

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

April 21, 2023

Tracking inflation these days provides insights in two different areas.  First, of course, are the changes in the cost of every day living.  And second, inflation news has an indirect but powerful influence on the future of interest rates.  If inflation goes up or stubbornly remains above the Federal Reserve Board’s 2% target, then it’s logical to expect the Fed to raise rates as a way to bring it down.  If inflation is trending down in some meaningful way, then we might expect the Fed to hold off and monitor the trend.

The inflation data also factors into how some economists view our near-term economic future.  Whenever the Fed raises rates, its goal is to slow down the economy and pull some liquidity out of the business world, which pushes us all a step closer to a recession.  The dance between cooling the economy and crashing it is delicate and precise—and probably beyond the abilities of mere mortals.

So what are we seeing now?  The core Consumer Price Index—which excludes volatile food and energy prices—rose 0.4% in March after a 0.5% gain in February.    Multiply the average by 12 and you get roughly a 6% annual inflation rate.

So what are the tea leaves telling us?  The current rate is four full percentage points higher than the Fed target, but this represents a slowdown from the 7.5% inflation that the economy experienced the last couple of years.  Economists are expecting the Fed to raise rates, but not dramatically, in its next rate hike window, and then cross its fingers that this will lead the economy toward more stable prices across the economy.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Source:

https://www.advisorperspectives.com/articles/2023/04/12/us-core-inflation-slows-only-a-bit-keeping-fed-on-track-to-hike

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

March 20, 2023

By now you know that the run on Silicon Valley Bank (SVB), and and the bank’s widely-reported inability to pay back its depositors, was followed by well-reported problems with other lending institutions.  The run of bad news has led many laypersons (and depositors in thousands of local and regional banks) to worry that the global banking system is unsafe.

To recap: SVB Financial Group, the parent of SBV, filed for bankruptcy protection a week after the bank was taken over by the California Department of Financial Protection.  Its management team had made unwise investments in long-term Treasury securities that lost much of their value due to rapidly-rising interest rates, causing a number of tech companies to lose confidence in the institution’s viability.  The result was a classic run on the bank by tech firms that had parked enormous deposits.

Following the SVB default, New York’s Signature Bank was closed by New York state regulators to prevent a similar run on its assets, but the problems there seem to have been very different.  Signature had been a significant player in the cryptocurrency world, the first FDIC-insured bank to launch a block-chain based digital payment platform.  Depositors were apparently worried that the bank had invested their money in dodgy digital assets.

The good news is that the Federal Deposit Insurance Corporation stepped in and fully protected all depositors in both SVB and Signature.  These interventions have been loosely described as bailouts, but in fact, the FDIC took over the lenders and plans to sell them to outside (as yet unnamed) buyers.  Taxpayers will not be on the hook for the promised full repayment of deposits both below and above the $250,000-per-account government guarantee.  Shareholders of the two banks stand to lose all of their share value, as the government will use the sales proceeds to make the depositors whole.  That is not the definition of a bailout, where the management team and stockholders would have been prioritized over the depositors.

In the case of SVB, the buyer will inherit roughly $2.2 billion worth of tangible assets, but will have to take on $3.3 billion in outstanding debt.  Meanwhile, the UK arm of the bank has reportedly already been sold to HSBC Corporation in London.  Signature reportedly has more on the balance sheet than depositor liabilities, and its executives have said that the bank has never actually invested directly in digital assets.

In the aftermath of the two headline-grabbing seizures, various federal agencies involved in the banking industry have gone out of their way to reassure the public that their lending institutions are still safe and sound—not always successfully, because the measures that have been announced are somewhat wonky and complicated.  Ripple effects are being felt at Zions Bank in Salt Lake City and First Republic Bank, both of which experienced stock price declines and depositor withdrawals.  Credit Suisse, based in Switzerland but with significant business interests in the U.S., saw its share price drop 30% after panicked borrowers started pulling their deposits out on news of SVB’s troubles. 

The simplest reassurance for depositors is that there is still $100 billion in the FDIC’s Deposit Insurance Fund, which provides an iron-clad guarantee to let people recover up to $250,000 per consumer account no matter what happens to the bank.  The U.S. Federal Reserve has gone further, creating a new Bank Term Funding Program which will make virtually unlimited one-year loans available to other financial institutions should they experience a run on their assets.  Some of those funds will come from the Exchange Stabilization Fund, which has $25 billion on reserve. 

Even if other banks start to teeter, they will have access to funds that would fully pay off their depositors.

Credit Suisse’s safety and soundness was restored when the Swiss National Bank loaned the company $53.7 billion, and the Swiss government basically told the world that it will do whatever it takes to make sure one of its leading companies is protected from insolvency.

And there is evidence that the banking industry will protect its own if necessary.  First Republic was able to immediately pull in a total of $30 billion in new deposits from eleven large U.S. banks, including Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley.  This suggested that the bank is actually on solid footing; those large institutions are not known for making charity investments.

Will all of this restore the eroding confidence in the banking system?  Maybe, maybe not.  But the real question is whether many banks around the country will fail and take the money deposited by thousands or millions of ordinary Americans with them—something the country hasn’t experienced since the systemic banking collapse that the U.S. experienced during the Great Depression. 

The answer to that seems to be a definitive ‘no.’ 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://www.fdic.gov/news/press-releases/2023/pr23019.html

https://www.advisorperspectives.com/articles/2023/03/13/feds-new-backstop-shields-banks-from-300-billion-of-losses

\https://www.nytimes.com/2023/03/17/business/svb-silicon-valley-bank-bankruptcy.html

https://abcnews.go.com/Business/bailout-federal-government-bailout-silicon-valley-bank-signature/story?id=97846142

https://www.cnbc.com/2023/03/12/regulators-close-new-yorks-signature-bank-citing-systemic-risk.html

https://apnews.com/article/signature-bank-fdic-barney-frank-silicon-valley-6ad86262d9945675a42d735b66ace4f2

https://www.cnn.com/2023/03/15/investing/credit-suisse-shares-saudi-national-bank/index.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

March 14, 2023

A Note About Your Portfolio:As most of you are aware, Silicon Valley Bank and Signature Bank failed over the last few days. We decided it would be relevant to go under the hood to see if any of your strategies are impacted by these events.

If you have assets in the following strategies: 

• Red Sky Capital Management (including Quantum Models, KIA Models, NSL Models, Red Sky NOW) has no direct exposure to either of these banks.
• Blue Bell Private Wealth Management (including Hedged and Unhedged Strategies) has no direct exposure to either of these banks.
• First Trust Portfolios (including First Trust All Equity, First Trust Balanced Growth, First Trust Conservative Growth, etc.) have very minimal exposure in certain ETFs.  By this, I mean that there is generally less than 1% exposure in some of their ETFs.

We expect markets to be choppy because of this news.  We ultimately believe that the Fed and FDIC stepping in to make depositors whole is a good thing.  This will help to contain this risk.

Please know that we are on top of this situation and are monitoring the portfolios and their respective positions.

One might be forgiven for thinking that runs on a bank, and banking failures, are a thing of the Great Depression, not something you encounter in modern times.  One would be wrong, thanks to the highly-publicized failure of a once-obscure institution called Silicon Valley Bank (SVB), which collapsed on Friday and was taken over by federal regulators in order to protect the assets of its depositors.  It was the largest failure of a U.S. bank since the 2008 economic crisis.

Is there reason to be alarmed?  Probably not.  Silicon Valley Bank (SVB to insiders) was kind of unique in the banking industry.  Unlike most banks that loan money to local residents, small businesses and corporations, SVB lent to a very exclusive group of companies: tech startups and venture-backed health care companies.  Over its 40 year existence, the bank grew with the tech industry, eventually, right before the collapse, becoming one of America’s 20 largest lending institutions, with $209 billion in total assets at the end of last year. 

Unfortunately, in addition to its loan portfolio, SVB also decided to speculate roughly $21 billion of its assets in long-term bonds which, as most of us know, were not paying very high interest rates—an average of 1.79%.  When interest rates doubled and then rose again, those bonds became much less valuable at exactly the wrong time: when venture capital firms were experiencing their own shortfalls and were drawing down the funds they held at SVB.  The bank announced that it had sold a big part of its bond portfolio at a loss, and also, at the same time, proposed to sell $2.25 billion in new shares of the bank in order to cover those losses.

On this news, some of the venture capital firms decided that it would be safer to move their assets out of SVB, which triggered a disastrous run on the bank.  The bank’s share price went into a free fall, losing 80% of its value in a couple of wild trading days, and California regulators decided they’d seen enough.  On Friday, they moved in to shut the bank down and place it into receivership. 

The Federal Deposit Insurance Corporation guarantees any deposits up to $250,000, which means that most (if not all) of the ordinary people who banked with SVB will be made whole.  But some of the Silicon Valley companies may not be so lucky.  Roku has filed reports saying that it had around $487 million parked at SVB, representing about 26% of its cash holdings.  Gaming company Roblox may have been parking as much as $150 million at the bank.  Rocket Lab USA reported at least $38 million of its assets were there as well.  Those companies, and others, are going to have to wait to see if a buyer steps in and takes over SVB—which is likely, given that the bank has relationships with a coveted clientele.  The alternative is a bankruptcy process that would probably return pennies on the dollar.

The news of an impending takeover sent a wave of anxiety into the markets as investors wondered whether this might be a sign of widespread weakness in the banking industry.  The stocks of smaller and regional banks took a brief and probably short-term tumble in their share prices.  However, the uniqueness of SVB, and its customer base, suggests that this is an isolated event.  Nevertheless, we are likely to hear about a small number of other banks that might have overextended themselves with similar (unwise) investments in long-term loans paying low interest, who were blindsided by the speed of rising rates. 

As you read this, analysts are also looking at whether any of the banks they cover might have put depositor money into cryptocurrencies—whose trading markets went into a still-unexplained turmoil on the SVB news.  Also looking into the whole mess is Treasury Secretary Janet Yellen, who convened a meeting of regulators in order to carefully probe the soundness of the banking system.  The most likely outcome is that the SVB mess is a healthy new examination of risks and exposures, which will give the regulators time to sort out hidden risks before they lead to more collapses.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://www.cnn.com/2023/03/11/business/svb-bank-collapse-explainer-timeline/index.html

https://www.coindesk.com/markets/2023/03/11/usdc-stablecoin-and-crypto-market-go-haywire-after-silicon-valley-bank-collapses/

https://techcrunch.com/2023/03/11/roku-roblox-and-others-disclose-their-exposure-to-svb-in-sec-filings/

https://techcrunch.com/2023/03/10/investor-mark-suster-says-a-handful-of-bad-actors-in-vc-destroyed-silicon-valley-bank/?

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.