Market Update: Q2 2020

Well that was an interesting quarter. The second quarter of 2020 brought us the fastest selloff into a bear market in history, which subsequently turned out to be one of the shortest in history. Equities around the world continue to whipsaw investors amid COVID-19 and the resulting fiscal and monetary stimulus packages from governments around the world. In short, the markets seem to be at odds with the economy.

Interest rates have fallen in lockstep and show few signs of rising any time soon. This makes for great refinancing opportunities for borrowers, but poor bond yields for long term investors. These are interesting and precarious times.

Here is this quarter’s market update.

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Your Business is an Investment

Quick anecdote to kick off today’s post.

In a small town in the midwest there are two plumbers: Jim and Jason. Both are 50 years old, and both are married with two kids who will someday go to college.

Jim and Jason are both great at their trade. They are available when needed, charge a fair price for stellar work, and are well liked in the community. They have the exact same number of customers in any given year, and both produce the exact same amount of revenue.

Their interest in building their respective businesses is where they differ. Not from a revenue or growth standpoint, but from an operational standpoint. Hiring & training support staff and new plumbers. Systematizing and building process efficiencies. Jim is hell bent on streamlining his business in an attempt to organize & simplify his work. Jason is uninterested – he cares more about the customers and the work, and doesn’t mind when his professional world is hectic.

Now let’s fast forward 15 years. Jim and Jason have brought in the exact same amount of revenue over the last 15 years. But Jim has been far more efficient with how that revenue has been distributed. He has systems, procedures, and operations built out to where his only duty is jumping in the car and driving out to see his customers. Because of that he’s been free to spend more time with his family, and has packaged his business in a way that’s attractive to buyers. He could sell to his employees or another party, and reap the value of the enterprise value he’s built. The funds will contribute to his lifestyle in retirement.

Jason is ready to retire, but hasn’t been able to squirrel enough funds away to stop working. He’s not been able to delegate much of his work to employees, and has virtually no systems or processes in place. He realizes that in order for someone else to take over his business they would need to spend time – at least a year – working side by side to understand how he has everything set up. Jason’s had to work twice as hard to produce the same revenue as Jim. He’s enjoyed far less time with his family and his health has suffered.

It’s not surprising that a tightly run business creates more value. What is surprising to many small business owners is the fact that failing to tighten up operations could be the difference between capitalizing on years of hard work by selling versus walking away with nothing.

Which gets us to the point of today’s post: your business is an investment.

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A Quick Summary of Coronavirus Related Tax Opportunities

It’s been quite a year so far. Wildfires in Australia, an impeachment trial of Donald Trump, the death of Kobe Bryant, and the Coronavirus pandemic. Oh yeah, and don’t forget that it’s an election year.

Given the roller-coaster year it’s not hard to miss some of the tax planning opportunities that have arisen from the Coronavirus and the resulting stimulus legislation.

To help make sure you don’t leave any planning opportunities on the table, this post will review the top Coronavirus related tax opportunities for individuals.

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The Economy Is Not The Stock Market

So here we are….in the middle of a global pandemic. Unemployment in the US is hovering around 15%. Businesses are struggling to remain viable. Hundreds of thousands of families…probably millions …are concerned they won’t be able to make their mortgage payments.

Yet, the stock market is closing in on all time highs set earlier this year.

How is that possible? What gives?

The party line answers sound something like:

“Stocks prices reflect future earnings, not present earnings”
“COVID-19 is temporary, and our economy will return as soon as it passes”
“The market is just being manipulated by the Fed. All that cash is pumping up the market”

All these are reasonable responses. But they circumvent a very important concept that many of us seem to be forgetting recently:

The economy is not the stock market, and the stock market is not the economy.

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More Updates To the Paycheck Protection Program: The PPP Flex Act

Another week, another round of updates to the Paycheck Protection Program. This week’s revision comes in the form of an entirely new (albeit brief) piece of legislation called the Paycheck Protection Program Flexibility Act of 2020.

The Act is mostly good news for business owners. This post covers what you need to know about the changes, and what the current opportunities are.

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Reflections on the Pandemic So Far

We are currently somewhere around day 60 of our family’s quarantine, and the country is inching closer to reopening. Over those 60(ish) days I worked remotely from home, and held a TON of meetings with clients, colleagues, and others over Zoom. As you can imagine, everyone has handled the last two months a little differently. Some investors are more comfortable with volatility than others.

I had a chance this week to think back on the sentiment in general. How people are doing and feeling. How they’ve handled the last few months. What their financial situation is like right now. And while everyone has handled quarantine and the Coronavirus pandemic differently, there are some trends I’ve noticed across many of my conversations. I thought these trends might make an interesting blog post, so here are a few things that have been on my mind recently.

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How to Get Your PPP Loan Forgiven

We’re now about six weeks into the CARES Act and in round two of the Paycheck Protection Program. The $310 billion allotted to the program in round two is beginning to dwindle, but has lasted longer than most bankers expected.

There could be another round of stimulus that replenishes the program over the next few months, of course. There seems to be widespread effort in Washington to ensure that businesses that need PPP funds are able to get them. Who knows whether that will eventually happen.

For many of the businesses the most pressing question is no longer how they can access the program & obtain funds to keep their operations going. It’s what must I do to have this loan forgiven? This post will cover what we know so far.

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Market Update: Q1 2020

Well here we are….one quarter into 2020, and the risk event we’ve all been waiting for has finally arrived. Volatility as measured by the VIX Index touched all time highs over the first quarter as the Coronavirus spread from China to Italy and the rest of the world.

The stock slide here in the United States was fierce, but a late quarter bounce regained a substantial portion of the lost ground. More ground, in my opinion, than the numbers really support.

From here, small cap and emerging markets are starting to look like wonderful bargains. But without knowing the extent of the economic damage & how long the world will be sheltering in place, it’s difficult to make that argument with too much confidence.

Here’s this quarter’s market update.

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The CARES Act: Implications for Individuals

As I’ve written about on the blog and covered on the podcast recently, the CARES Act is a big piece of legislation. (Remember….the total package is $2.2 trillion!). We’ve covered several sections of the bill and how it might impact you on the blog recently, including a deep dive into the paycheck protection program.

There are also many provisions in the bill we haven’t covered. Specifically, sections relating to stimulus checks, expanded unemployment insurance, mandatory distribution holidays, penalty free retirement account withdrawals, and student loan relief. Coincidentally, all have been commanding a large number of questions from clients of Three Oaks recently.

Like all legislation there is a great deal of gray area in this piece of legislation, especially given the urgency with which it was passed. The IRS, SBA, Department of Labor, and other government entities are scrambling to provide relevant guidance as soon as possible. So while there may appear to be some planning opportunities with regard to the law, it’s entirely possible they’re just a temporary mirage. Nevertheless, here’s what we know now about the CARES Act and how it might impact you as a taxpayer.

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The CARES Act Revisited: Updates to the Paycheck Protection Provision

A lot has happened in the past week. And now that we’ve had an opportunity to read through more details of the Paycheck Protection Provision, it’s become clear that the program’s rollout will be messy. In fact, it already is.

Last week I wrote a post outlining a few of the provisions in the CARES Act meant to provide economic relief to small businesses. What we’ve come to realize in the last few days is that the Treasury Department has a great deal of latitude in how these programs will actually be offered.

For example, the permits the Treasury Department to issue up to $349 billion of loans to small businesses through the Paycheck Protection Program. Businesses with fewer than 500 employees can apply through an SBA approved lender for loans up to either 2.5x their average monthly payroll over the previous year, or $10 million (whichever is less). The bill stipulates that the pay back period for the loans may be stretched out to up to 10 years, with an interest rate no higher than 4%.

Then, early last week, the Treasury Department stepped in and communicated that all loans will have a two year amortization period and 0.5% interest rate. And on Thursday, Secretary Mnuchin announced another interest rate revision to 1%.

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