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Trade War

Is It Time to Worry About a Trade War?

On March 1, 2018, President Trump announced that the U.S. plans to impose tariffs on steel and aluminum imports. Markets around the world were shocked by the news, with major U.S. indices declining more than 1 percent just when it looked like they were recovering from the February downturn. Why did markets react so strongly? Is this a more serious threat going forward? In a word, yes.

First, let’s define what’s going on and why it matters.

A closer look at tariffs

The good. Tariffs are a charge on imports—essentially, a tax. Say a ton of steel costs $100. The 25-percent tariff Trump proposed would require the seller to pay $25 to the U.S. government. That would, in effect, mean the seller has to choose between selling the steel for $75, raising the price to $125 to net the same amount, or doing something in between. Practically, sellers will raise prices. This is the desired outcome, as it will allow producers here in the U.S. to sell their products for higher prices. Therefore, these tariffs are good for the steel and aluminum industries.

The bad. The problem is that they are bad for anyone else that uses steel or aluminum, such as car manufacturers, builders, and the energy industry. Their input costs have just gone up substantially. According to a UBS analyst, Ford’s costs just went up by $300 million, while GM’s went up by $200 million. Other companies will be similarly affected.

Companies like Ford and GM will have two choices here:

  1. They can raise prices, which will start to push up inflation; or
  2. They can eat the higher costs and make less money.

Either way, this is bad for the stock market, as it plays out across the economy. Both higher inflation and lower profits make stocks worth less—hence, the market reactions around the world.

Waiting for the world to react

These are only the first-order effects, of course. The next shoe to drop will be how other countries respond. If we are lucky, they will take legal action through multilateral bodies such as the World Trade Organization, which will result in negotiations. If we are unlucky, they will start imposing retaliatory tariffs of their own, targeted to cause maximum pain to the U.S. economy. We don’t know what those will be. But we can be quite sure they will be designed to hit the U.S. economy as hard as possible, in order to force us to remove the tariffs. This is how trade wars start, so it will be critical to watch those responses.

The next set of effects will be geopolitical. When you look at the actual sources of steel and aluminum imports, Canada tops the list. By angering and damaging our closest neighbor—at the same time as we are trying to renegotiate NAFTA—the possible damage just increases.

The net effect of the tariffs, then, will be economic damage, higher inflation, and greater geopolitical uncertainty. On the corporate side, it will be lower profits for the vast majority of companies. On the consumer side, it will be higher prices for many goods and, likely, lost jobs in export industries. That is why this issue is worth watching closely.

Pay attention, but don’t panic

That said, there is a real possibility that this is either a trial balloon or a negotiating tactic. The U.S. has tried to impose tariffs before, only to pull back as the costs became clear. Trump’s announcement is not the same as actual action. This could all pass away, particularly as the rapid market response shows very clearly the potential costs. It is too early to be overly concerned, but we should definitely pay attention.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

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 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

Authored by Brad McMillan, managing principal, chief investment officer, at Commonwealth Financial Network®.

 © 2018 Commonwealth Financial Network®

Division of assets

Dividing Retirement Assets at Divorce

For many couples, retirement assets represent a significant portion of net worth. During a divorce, in order to split assets equitably, most couples divide the benefits available in their employer retirement plans and the money they invested in their individual retirement accounts.

Court-ordered division of assets

The rules for splitting accounts are unique to each type of retirement account, but one rule is uniform: To avoid current taxation, the division of the retirement accounts must be done as a result of a court-ordered property division, divorce, or separation agreement.

  • Qualified domestic relations order (QDRO): Before a traditional pension, 401(k), 403(b), or 457(b) plan can be divided, a document called a QDRO is needed. A QDRO is a court order that tells the retirement plan administrator how to divide the retirement assets. In the QDRO, the employee is referred to as the participant spouse, and the recipient of the assets is called the alternate payee. In lieu of a QDRO, some employers prefer to provide their own standardized form for court approval.
  • Transfer of account incident to a divorce: IRAs, including traditional, Roth, SIMPLE, and SEP accounts, can also be divided by a court order. The term for dividing an IRA or nonqualified annuity between the IRA owner and the former spouse is a transfer of account incident to a divorce. Note that without the specific direction of a court-approved settlement, a transfer of part of an IRA to a spouse or former spouse will trigger taxes. The IRA owner, not the former spouse, is responsible for the taxes and any penalties due.

Separating the benefits

Retirement plans. As noted above, prior to making any changes to a participant spouse’s plan benefits, employers require a QDRO document, signed by a judge. Before the QDRO is written and issued, it is a best practice to talk with your or your former spouse’s retirement plan administrator about plan requirements. Once the QDRO is written, it takes a court order to make corrections or changes.

Depending on individual plan rules, benefits may separate immediately (the separate interest approach) or at the participant spouse’s earliest retirement eligibility (the shared payment approach).

  • With the separate interest approach, the alternate payee’s benefits are assigned immediately but may not be accessible until a later date.
  • With the shared payment approach, benefits for the alternate payee are available only when they become available to the participant spouse.

IRAs. Practices and requirements among IRA custodians differ. The key to a successful transfer is to have a settlement agreement that clearly specifies the accounts to be transferred. Under Internal Revenue Code Section 408(d)(6), this transfer is intended to be tax-free.

There are two basic ways to split up an IRA. The most common method of transfer is to segregate the assets into a new IRA for the former spouse. Alternatively, a check can be cut to the recipient spouse, who has 60 days to open his or her own IRA to avoid taxes.

Additional important details regarding QDROs

Employer plans can be categorized as defined contribution, like the popular 401(k) plans, and defined benefit, commonly called pensions. A defined contribution plan has readily ascertainable account balances. These are usually split shortly after a divorce has been finalized.

A defined benefit is typically paid as a monthly benefit at retirement. With the separate interest model, the former spouse is treated as an employee, and benefits are paid until his or her death. With a shared interest model, benefits usually stop at the participant spouse’s death, even if the former spouse is still alive.

A former spouse qualifies for a survivor annuity only if the QDRO clearly provides it and the retirement plan can accommodate it. If the plan cannot provide survivor benefits to a former spouse, or if the former spouse’s claim ends at the participant spouse’s remarriage, the former spouse may consider life insurance as an alternative means of income.

If the QDRO specifies payout instructions not offered by the retirement plan, it cannot be honored; however, the QDRO can require early retirement benefits for the alternate payee even if the participant spouse chooses to delay retirement.

Unlike an alimony award, retirement plan property settlements are not generally severed when a former spouse remarries.

Tax issues

QDROs. Which party is responsible for taxes? It depends on whether a separate account has been set up for the former spouse or whether monies are paid out of the participant spouse’s benefits. With separate accounts, each party is responsible for his or her own taxes. With shared benefits, all taxes are paid by the participant spouse.

Note that a QDRO-ordered distribution to a child or other dependent is always taxed to the participant spouse.

One of the advantages of a QDRO is that the 10-percent penalty does not apply for early withdrawals from a 401(k), 403(b), or 457(b) plan made to a former spouse who is younger than 59½; however, the mandatory 20-percent withholding tax does. To avoid the tax on monies intended for IRA rollover, elect a direct transfer to the new IRA custodian.

Divided IRAs. Remember that an informal or mediated agreement between spouses to divide individual IRA assets is not recognized by the IRS and will result in taxes. Also, unlike with QDROs, a divorce does not qualify as an exception to the 10-percent early withdrawal penalty for IRA distributions prior to age 59½.

Special situations

The former spouses of military members may receive up to 50 percent of the military member’s retirement pay if the couple was married for at least 10 years. Because the military uses the shared benefit model, benefits to the former spouse begin only after the military member elects retirement. Benefits continue until the retiree’s life expectancy, unless the retiree elects a survivor benefit plan. The survivor benefit can be lost if the former spouse remarries before age 55.

 State, local, and municipal retirement systems offer fewer options for dividing marital assets. The retirement plans of some states do not allow the assignment of benefits, even to a former spouse.

Other types of government retirement benefits are the Federal Employees Retirement System (FERS) and the Civil Service Retirement System programs for federal retirees. The correct term for the division of assets of federal retirees is not QDRO but Court Order Acceptable for Processing. FERS also uses the shared benefit model, so a rollover to an IRA is unavailable.

Social security is available to former spouses who were married for more than 10 years. The rules for receiving benefits as a former spouse are the same as for current spouses. For example, if a former spouse reaches full retirement age, he or she will receive the higher of his or her own work-related benefit or 50 percent of the worker’s full retirement benefit. At the worker’s death, the former spouse can receive up to 100 percent of the decedent’s social security benefit, reduced for the former spouse’s early retirement. These benefits are available even if the worker remarries or if the former spouse remarries after he or she turns 60. Payments to former spouses do not reduce the worker’s or the current spouse’s benefits.

Nonqualified annuities can be divided between divorcing spouses without triggering taxes, based on the instructions of the court-approved settlement document. Because each insurance company has its unique requirements, it is wise to communicate with the carrier before the final divorce decree. You may find that existing surrender charges will be applied.

Many executives also participate in nonqualified deferred compensation plans. Because a nonqualified plan is not subject to ERISA rules, a QDRO is not used to set aside benefits for the former spouse. A division of the assets of the nonqualified deferred compensation plan will not shift the tax liability to the former spouse.

Stock options also pose challenges in property division. The date chosen for determining asset value is crucial. Value can differ widely, depending upon whether it is based on the date of the initial separation, the date on which the divorce was finalized, or the date of option vesting.

Consult a professional

Because valuing and dividing a couple’s assets is complex, consider bringing in a third-party professional such as your financial planner or a Certified Divorce Financial Analyst (CDFA). Experienced with valuing retirement plans and employee benefits, a CDFA professional can act as an advisor to your attorney or as a mediator for you and your former spouse to help in pursuing an equitable settlement.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

The Role of Financial Planners: Lessons from Nashville

Yesterday, I was down in Nashville speaking at the Financial Planning Association’s national meeting. It was an interesting time! Speaking with the young man at the coffee shop, our conversation went something like this: “I’m from Alabama.” “How did you get here?” “Like everybody else, music.” Clearly, this is a one-industry town, from the convention center (the Music City Center) to the signs for the Grand Ole Opry.

Admittedly, I don’t know much about country music. But from what I understand, quite a bit focuses on hard times—working folks getting stuck with the kind of misfortune that happens every day but who keep going despite the pain. That old joke comes to mind: if you play a country record backwards, you get rehired, your girl comes back, the truck starts up, and the dog comes back to life. If you think about it, all of these things, and worse, happen to everyone—and we all need to get through them. Sometimes, it helps to know others face the same pain and have persevered. That’s what I understand about country.

The soundtrack of our lives

Given that, it makes sense that the financial planners are here. Our job, essentially, is to help people plan for—and get through—some of life’s toughest challenges. Most of us do it without guitars (although I know some terrific Commonwealth musicians), but the soundtrack of people’s lives is just the same.

It’s easy to get lost in the glitz and flash of Nashville. And here in the financial industry, we certainly have our high-profile people. But the core of both is the same: helping people get through the story of their lives and helping them keep going and do better. Just as with country music, there’s money and glitz. But the bones are about real people and real problems.

In many ways, we are in a boom. The market is at all-time highs, plus job growth and confidence are strong. Things are good. While we certainly have concerns, for many people the actual problems are those of success. It is easy to get excited about the market highs, the money we are making, and so forth.

Enjoy the good times, prepare for the bad

But the most important things to remember are that the good times will not always be there, that tough times are always not too far off (in one way or another), and that our job—indeed, the reason for our profession—is simply to plan to ride those out. To use the good times to prepare for the bad times.

That doesn’t sound all that exciting and, in the glitz of Nashville, maybe not that much fun. It is, however, what we do.

This lesson was, frankly, not what I expected to take away from this trip. It is, however, a powerful takeaway for me and, I hope, for you. Indeed, I learned quite a bit during the Q&A session after my talk, much of which will no doubt show up in future posts. I always get a lot out of speaking with advisors, and this time was no exception.

 

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

Authored by Brad McMillan, CFA®, CAIA, MAI, chief investment officer at Commonwealth Financial Network.

© 2017 Commonwealth Financial Network®

Equifax security breach tips

INFO SECURITY ALERT: Equifax Breach Affects 143 Million Consumers

INFO SECURITY ALERT: Equifax Breach Affects 143 Million Consumers

By Matthew Lang, Lang Investment Services.  Monument, CO 719-481-0887

Last week, news broke that Equifax, one of the three major credit bureaus, suffered a massive database breach. It’s estimated that the information of 143 million consumers was compromised, including:

  • Social security numbers
  • Dates of birth
  • Addresses
  • Driver’s license numbers
  • Credit card information (for approximately 209,000 consumers)

The good news is that many Equifax executives sold their stock shares after they knew what happened, but before the public knew…..whew….now we can all rest easy knowing they won’t miss the loan payments on their yachts.  However, for the rest of us who may be negatively affected by having some of our most valuable information exposed, here are some steps to take to protect your personal info.

Due to the high potential impact of this breach, I recommend taking the following steps:

 1) Determine whether you may have been affected. Through the Equifax self-service portal, you can quickly determine whether your information may have been compromised. Enter your last name and the last six digits of your social security number, and you’ll find out whether Equifax believes you’ve been affected. This process takes only a couple of minutes.

2) Enroll in Equifax’s credit monitoring and identity theft protection. Equifax is now offering one free year of TrustedID Premier, its credit monitoring and identity theft protection product, to all U.S. consumers, even if you aren’t a victim.

Once you enter your information in Equifax’s self-service portal, you’ll be given the option to enroll in TrustedID Premier. Click Enroll, and you’ll be provided with an enrollment date. Be sure to write down this date and return to the site on or after that date.

For more information, visit the Equifax FAQs page regarding the incident.

3) Be wary of e-mails that come from Equifax. Because of the high number of victims, Equifax is notifying only the 209,000 consumers whose credit card information may have been affected via postal mail. Do not trust e-mails that appear to come from Equifax regarding the breach. Attackers are likely to take advantage of the situation and craft sophisticated phishing e-mails.

4) Monitor your accounts for suspicious activity. Equifax’s free TrustedID Premier service can help you monitor your credit—but be sure to monitor your other important accounts for any suspicious activity.

5) Go to the other credit companies, Transunion and Experian, and initiate a credit freeze.  You will need to unfreeze your credit when you apply for loans, but as long as you keep track of the PIN it is easy to unfreeze and refreeze your credit when needed.

6) Get a copy of your credit report.  Most states require the credit agencies to offer a free copy of your credit report at least once a year.  I would suggest getting a copy of and checking for accounts you don’t recognize.

 We all know that hackers are always working the online world trying to steal your data.  Identify theft is rampant all over the world.  No matter what we do, most of us will at some time be exposed to a data breach, but all we can do is try to protect ourselves.  Equifax is not the first or the last company which will be hacked, heck, even the IRS was compromised a couple years ago.  I hope no one has negative repercussions from this event, but if any of us do, then we can just take it one step at a time.

 

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

 

Investing during troubled times

Investing in Troubled Times: Navigating North Korea, Harvey, and Irma

Presented by Matthew Lang, Lang Investment Services.  Monument, CO.  Serving Investors for 19 years.

The past few weeks have been unusually turbulent. North Korea has tested what is reportedly a hydrogen bomb and launched a missile over Japan; as a result, the U.S. is openly considering war. Hurricane Harvey has been the most damaging storm ever, devastating both Texas and Louisiana. And now we have Hurricane Irma, the most powerful Atlantic storm in history, approaching Florida. Given these events, there are certain questions that investors should be asking themselves. That is, should we be doing something different? If so, what?

Indeed, these questions do require a response. What that response should be, however, depends on an analysis of what has actually changed in the economy and financial markets as a result of these events. So, to decide what we should be doing, let’s take a look at what those changes have been.

Has there been meaningful change?

Despite recent events, the situation with North Korea has been ongoing for decades—this is just the most recent phase. What has actually changed is not that major. A bigger bomb and somewhat better missiles do not put the U.S. at direct risk. In many ways, and regardless of media coverage, this is just a continuation of where we have been for some time.

As far as hurricanes Harvey and Irma, there certainly have been consequential effects on people’s lives. Bigger picture, though, major storms are a regular feature of American history (just think of Sandy and Katrina). Despite the damage they cause, they do not change the economy in a meaningful way. So as bad as Harvey was, and as bad as Irma may be, at the national level they should not result in significant changes.

And how did the markets—which respond to economic forces rather than human tragedy—react to the North Korean situation and the storms? Just as you might expect, they remained steady. In fact, U.S. markets remain close to their all-time highs, supported by strong economic and earnings growth.

What does the past tell us about the future?

To get an idea of whether the economy is likely to change going forward, we can look at the past to review how previous wars and storms have affected markets. Let’s start with wars.

A war with North Korea would be devastating for South Korea and Asia as a whole, but it would have limited effects here in the U.S. In the past, wars have typically resulted in initial declines in the markets. On average, however, markets were up just three months later. As for ongoing effects on the economy, war has typically boosted economic growth, largely due to increased government spending. We certainly can’t rule out a worse experience this time. But history suggests that, as investors, we have no need to panic just yet.

The same can be said for the effects of natural disasters. Of course, they will be devastating to local residents and economies—Houston will be years recovering from Harvey, as New Orleans was from Katrina. But at the national level, the effects are usually short lived, with an initial decrease in economic growth and employment due to the damage and disruption. This is usually followed by a recovery as the rebuilding process gets underway. In this case, the damage and the recovery period are likely to be longer than usual, with two of the worst storms in history hitting within days of each other. But the basic story should end up being the same. In fact, the recovery in Houston has already started as damage is assessed and repairs begun.

While every war and natural disaster is different, and tragic for those most directly affected, we as a country have gotten to be very good at picking up the pieces and moving on. Remember, the U.S. has actually been at war for more than a decade in Afghanistan, and the economy has continued to grow. Hurricanes Sandy and Katrina were devastating, but we moved on and recovered. As long as the base economy remains sound (which it is), the country and the financial markets remain well positioned to ride out the damage.

Should investors be worried?

I said at the start that recent events require a response, and they do. Please consider donating to the victims of the storms, and prepare yourself mentally for more worries from the North Korean situation. You should expect dramatic coverage of all this from the media. You should not, however, confuse emotional responses with what you should be doing with your investments.

Despite the very real problems created by the geopolitical situation and the hurricanes, the U.S. economy and financial markets remain in solid condition and are likely to stay that way. There will be a time and a reason for worrying about our investments. But what we have right now does not meet those conditions. Let’s respond in a way that addresses the real problem, rather than being tricked into doing something we will later regret.

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

Authored by Brad McMillan, CFA®, CAIA, MAI, chief investment officer at Commonwealth Financial Network.

© 2017 Commonwealth Financial Network®

Distinguishing between signals and noise

Distinguishing Between Signals and Noise

I have written about this concept before, but given some conversations I’ve had recently, I think it’s a great time to revisit it. When trying to understand both what is happening and (ideally) what is going to happen, we need to be able to identify what is important—and what is not. In other words, what signals should we pay attention to—and what noise should we ignore?

Economic and market signals

There are several key indicators that investors need to pay attention to, in my opinion.

For the economy, what really matters are jobs, consumer and business confidence, and whether the Federal Reserve is stimulating. These are the real signals, which is why I track them every month, most recently on Tuesday. While you can learn from some of the other data, much of it is just noise.

For the markets, we need to understand when we’re heading toward a bear market. The important signals here are recession, oil prices, the Fed (again), and valuation levels. In this case, we also have to look at more immediate indicators, such as trend lines and changes in debt levels, but again this is what and why I track them monthly, most recently yesterday.

Putting the noise in perspective

When you focus on the signals—which helps you get the big picture right—you can keep the other data (i.e., the noise) in perspective. In a presentation I’ve been giving for some time, I point out that over the past several years, we have been worried about both a strong dollar and a weak dollar, a rising China and a collapsing China, high oil prices and low oil prices. In each case, if we looked at the longer-term data, there was nothing to worry about—and so it proved. While each of those trends was worth watching, they were not part of the core signal.

Today’s economic concerns are turmoil in Washington, DC, North Korea, and the Middle East. The second two speak for themselves; I am over 50 and can’t remember a time when we have not had problems with both North Korea and the Middle East. As for Washington, DC, the concerns may be real, but from an economic perspective, history suggests that they simply won’t matter that much.

Today’s worry points for the markets are the low level of the CBOE Volatility Index, occasional small dips, and the underperformance of individual companies. Each of these, for various reasons, simply has not been indicative of trouble in the face of the positive signals.

Keep calm and carry on

With strong job growth, high consumer and business confidence, and a Fed that’s still adding vodka to the punch bowl, the economy is likely to keep growing for some time. With improving corporate earnings, high investor confidence, and low interest rates, the market fundamentals remain sound—and so, very likely, will the markets.

That’s not to say this will always be the case. It won’t. Again, though, by identifying what matters—the signals as opposed to the noise—you will be better prepared to make the right decisions when the time comes, and not before.