Ignore the Noise on Election Night and Focus on This

We expect the Keystone State to be the key to the Presidential election outcome.


Pennsylvania is where the action will be focused on election night and specifically, in the 6 strongest democrat counties. Allegheny, Delaware, Erie, Lakawanna, Montgomery and Philadelphia gave Obama a massive lead in 2012 that Romney failed to overcome in the 50 counties that he won:
Obama's margin of victory was 287,865 over Romney. He build a 716,840 vote advantage in these 6 counties. Philadelphia county alone provided Obama's margin of victory.  



Looking from 2008 towards 2016 reveals Clinton's biggest fear. The Keystone state has been trending in Republican's direction.



Will Hillary be able to turn out Obama's voters in these key counties and provide her the margin of victory (and the Presidency) that Obama enjoyed? Will Trump register enough new Republicans to give his a shot at victory?



During Obama's time in Washington registrations in Pennsylvania have trended away from Democrats:



While our conservative political leanings are no secret, we don't have a prediction on how this will play out. We are skeptical that Republicans can take the state without support from the one million unaffiliated voters that are registered. These voters will be Trumps target in the final month of the campaign and the key demographic that we will be following on November 8th.
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How Long Will 80's Excesses Haunt Us?

Do You Remember the 80's?


Hey Boomers, how much time did you spend in the local shopping mall when you were in high school? Before hipsters camped out to buy the latest iPhone, people flocked to shopping malls in the 80’s like they were a hot new discotheque. Join us at the 1984 grand opening of East Town Mall in Knoxville, Tennessee:



It Wasn’t Always Like This.


Before the mid 70’s, the average middle class family didn’t have access to a credit card. Laws against interstate banking hampered the growth of credit cards. In 1978, the Supreme Court unanimously ruled that a Nebraska bank could offer their credit card to out of state customers at whatever interest rate they set. This effectively ended states’ ability to set usury rates.



Sandwiched between Nixon era stagflation in the early 70’s and the ’82 recession, consumers could barely afford to pay their mortgage. Banks solicited cards nation-wide but consumers still needed an economic incentive to use their newfound purchasing power. Reagan era policies subdued inflation, interest rates began to fall, the economy bust to life and consumers went crazy with their unused plastic cash. Savings rates in the early 80’s were north of 18% so consumers didn’t mind paying 18% interest on credit card purchases.


As the Fed cut rates over the next 30 years, most credit card rates stayed at 18% or more. That didn’t stop consumers from using their plastic but it should have. Big hair, big shoulder pads and even bigger credit card balances flourished as Tom Petty sang "Runnin Down a Dream" (1989).



Flash Forward to 2016




Aeropostale, a mall staple with 800 stores filed for bankruptcy reorganization. This month, Simon Property Group (ticker SPG, owns West Town Mall in Knoxville) and General Growth Properties (ticker GGP), another mall owner petitioned the bankruptcy court. They offered to buy Aeropostale’s bankrupt business for 243 million dollars. Their plan involves closing 570 stores but the company would survive. More importantly, it would give Simon and GGP a chance to make some money instead of leaving another high profile tenant space vacant in their malls.

Mall developers are pushing on a string to save their retail empires and a day of reckoning is looming. Just like their consumers in the 80’s these developers have piled up debt to keep their business going.

During the 2005-2007 real estate bubble, mall developers took on 10 year loans to finance their expansion. Those loans mature in the next few years. The chart below shows only the maturing commercial mortgage backed securities (CMBS) that are already in arrears:



To emphasize the debt problem, lets focus in on GGP’s financials. The company is the second largest mall developer in America. With more than $200 million in cash GGP is on very sound financial footing. At the same time that they were negotiating with Simon to spend 247 million buying Aeropostale, they skipped a debt payment on their suburban Detroit Mall property.

GGP has a $144 million mortgage on the mall and when the interest payment came due in June they skipped it. They are willing to default on the massive debt, which would also free them from the financial cost of renovating the 40-year-old property. A company with the cash to pay their debt is strategically defaulting on a selected piece. With solid companies like General Growth playing this game, imagine how much worse defaults will get for the mortgages that are already in arrears.

To keep this game going would take an epic rebound in our economy. The Federal Reserve has had limited success in manufacturing growth through QE. Congress will remain deadlocked. Will consumers once again break out their plastic to save the malls? Not likely.
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Can the Fed Raise Rates With Construction Spending Tanking?

Yes, on the heels of Yellen's Speech at Jackson Hole and Fisher's jawboning a rate increase. They shouldn't (especially so close to the presidential election).



Last month we highlighted the decline in capital investment from American corporations and the consequences for the manufacturing economy. With this morning's terrible manufacturing activity report, we have confirmation that the manufacturing recession is picking up steam (to the downside). At this early stage, investors still have time to adjust their portfolio exposure and reduce risk. We recommend a healthy dose of cash.
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If these massive universities can screw up their retirement plans, your company could too

Massachusetts Institute of Technology, New York University and Yale were sued last week by employees who claim that they are getting shafted in 401(k) and 403(b) fees. Add Duke, Johns Hopkins, the University of Pennsylvania and Vanderbilt to the list as well. These schools produce the top physicians, inventors and lawyers in the country. Presidents and Nobel Laureates matriculated in their hallowed halls but they made big mistakes in their retirement plans that cost thousands of employees to lose millions in fees and expenses.

They all made similar mistakes:

1. Paid more than one record keeper for the same job.

Duke University (38,000 employees with 4.7 billion dollars invested) paid TIAA, Vanguard, Fidelity and VALIC to provide record keeping services.
Vanderbilt (42,000 employees with 3.4 billion invested) used the exact same vendors as Duke

2. Included hundreds of unnecessary, overlapping investment options.

Duke's plan included 400 options.
Vanderbilt offered 340 investment options.
NYU had more than 100 options for employees.

3. Included funds with unreasonably high expenses and fees.

Despite having billion dollar plans, these universities didn't use their buying power to reduce costs for their workers. High fees compound as employees continue to add to their account and their employer didn't act in their best interest to reign in the costs. Some plans offered annuity options that are notorious for high fees and costly surrender penalties.

4. Kept poor performers in the plan instead of replacing them.

MIT, which is around the corner from Fidelity Investments in Boston favored their neighbor. More than half of the retirement plan investments available to their employees were Fidelity mutual funds.


Vanderbilt and Yale are likely in the most trouble. They recently changed their plans to reduce the number of investment options and consolidated record keeping to a single company. Vandy reduced the investment list from 340 choices to 14 and moved all the record keeping to Fidelity. Johns Hopkins fired two record keepers but still pays three for the same service. Yale employees have 3.6 billion in their retirement accounts in 2015 when the university consolidated to one record keeper and replaced some expensive funds with cheaper alternatives. These moves are an acknowledgement of their past transgressions. It will be up to the lawyers to sort out how much each university will pay to rectify matters.  



The heat bears down on Vanderbilt for neglecting their employees' retirement plan investments.


If these massive, smart institutions can make such expensive errors, it stands to reason that your company probably has some junk in your 401(k) too. The thought of suing your boss isn't a pleasant one and maybe someone else will do it for you. In the meantime, we can help you minimize the cost by showing you what your retirement plans expenses are and how to reduce them. That's the basis of Purpose-Built Planning at LeConte.
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The Decline of Capital Investment in America is Getting Serious


Last month in Monitoring Demand for Discrepancies we observed that Manufacturer's New Orders have turned negative and explained the potential impact on stocks. To continue this theme here is a chart that chronicles the rolling top in Gross Private Investment that has formed over the last 18 months:



When businesses reduce capital investments to this degree and continue being miserly over a multi-year period, it usually precedes a meaningful decline in economic output. This data has been masked by the cheerful jobs reports in July and August but the business spending downtrend is persistent enough to warrant caution.

The strong jobs market has created a massive windfall for the Internal Revenue Service in 2016. I suspect the Feds may use this cash to "help" sustain the economy leading into November. After that:

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The Occasional Necessity of Holding Cash



“…cash allows you to retain wealth with an eye to being opportunistic at that moment that no one wants the things that are now so popular.”

Jim Grant
Grants Interest Rate Observer


Over 30 years of market ups and downs, we have learned the subtle wisdom contained in this thought. Let’s demonstrate this in practice at LeConte Wealth.

Our clients entrust us to make wise investment decisions for them. As fiduciaries, we take this responsibility seriously. This leads us to conduct a global hunt for prudent opportunities. As value-oriented managers, we like to drive a hard bargain before we put client funds on the table.

Most of the time, we can find something, someplace that fulfills our stringent list of requirements but on occasion we walk away with our cash in hand. Either we already have enough allocated to the best opportunities or the opportunities that we find are too expensive and therefore too risky. It’s an uncomfortable feeling to sit on cash when clients pay us to invest it.

We employ a disciplined, fact-based methodology to evaluate our existing investments and any new opportunities that we are considering. If we see potential for decent risk adjusted returns, we buy (or hold what we own). When the prospective risk adjusted returns shrink, we sell down that position or wait before adding a new position. This sounds like boring, common sense stuff that normally just requires a reliable methodology to calculate risk and return. It gets very hard when your rules tell you to sell something when there aren’t many good places to reinvest the proceeds.

Without getting too technical, the LeConte list of “awesome investment” opportunities is shrinking day-by-day this summer.

US stocks are at valuation extremes when we comparing stock prices to actual sales and earnings (not forecast sales and earnings which are terribly inaccurate).

S&P 500 Price to Sales Ratio



Foreign stock opportunities offer better valuations but this is due in part to the artificial stimulus from negative interest rates and Brexit vote fallout. In our equity models, we have used these events to build our foreign allocation at what we view as deep value prices. We are satisfied with our foreign allocation (both is size and composition) so we are waiting for fresh political and economic data before adding more.

Precious metals have been a big win in 2016 and we have pared back this allocation twice to keep it in line with our risk profiles. Finally, global bond markets have performed better than stocks by benefitting from economic uncertainty and negative interest rates. We have trimmed our exposure to lower rated, higher risk bond sectors to lock in the gains.

The profits that we have realized have left us with a lot of cash right now. If markets remain at elevated levels, we will continue to realize gains and build this cash position into the Fall. There are times when the safety and certainty of cash is preferred to taking unknown risks and deploying it.
To invest in most asset classes now you HAVE to be right. There is no margin for error. We find comfort when our actions are tilted towards the minority view of things. Jim Grant also said,

“Successful investing is about having people agree with you … later.”

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