InSight

Market InSights:

Second COVID-19 Stimulus Niceties and Notes

We have an agreement, which means we can begin to criticize it and plan for the investment and economic effects. The bill is a litany of half measures, no long term solutions, and likely sets up a couple of battles in the next congress. 

Congress punted on evictions, postponing medical payments until early next year, and there is still an ongoing debate regarding the amount it is issuing in direct payments. The looming liability concern for businesses is still being discussed.

Here is what got done: 

Individual payments for many

Easily the most asked about part of the legislation is the direct payment to individuals that begin going out today. The passed version included $600 going to individual adults with an adjusted gross income of up to $75,000 a year based on 2019 earnings.

An increased amount will be going to those that file as heads of households who earn up to $112,500 and couples (or someone whose spouse died in 2020) who make up to $150,000 a year would get twice that amount.

This continuing political battle to raise this number from $600 to $2000 is still going on today, passing with all democrat and some republican support in the house. The senate is questionable as a few Republicans have endorsed the idea, including the two high profile candidates in Georgia – Loeffler, and Purdue.

McConnell has blocked the bill as of 10:20 am as I am writing this article. 

Unemployment benefits

With almost 7% of Americans still unemployed and millions more under-employed, Congress acted to extend multiple programs to help those out of work, albeit at less generous levels than in the spring. Too much of the surprise of those tracking the issue, the final bill doesn’t include the expanded coffers many anticipated and is considered a skinny agreement. 

The agreement would include:

  • 11 weeks, providing a lifeline for hard-hit workers until March 14. 
  • Up to $300 per week (half the amount provided by the original stimulus bill in the spring)
  • Pandemic Unemployment Assistance — a program aimed at a broad set of freelancers and independent contractors — for the same period, providing an additional $100 per week

Better late than never, the expanded agreement is a second band-aid for those Americans that continue to seek employment as employers have halted hiring. The near term negative effect of unemployment cannot be understated. But as we look out to the intermediate (6 months) range seems to hold a fantastic capacity for consumers to unwind pent up spending in short order. The unemployment insurance isn’t expected to be much but will support many Americans who put more and more spending on credit cards in the second half of the year. 

Funds for Child Care, Schools, and Colleges

School budgets have been uniquely impacted by the pandemic and have left their outlook for the year to some impaired:

  • $82 billion for education and education service providers, 
  • That figure includes $54 billion for stabilizing K-12 schools
  • It also includes $23 billion for colleges and universities
  • $10 billion for the child care industry

K-12 schools saw more support than the initial package in dollar terms, and even more than the proposed package in November; however, the funds still fall short of what both sectors say they need to blunt the effect of the pandemic and to support operations in 2021. 

The majority of school districts transitioned to remote learning and as a result, we were asked to make expensive adjustments to accommodate while seeing enrollment drops upend budgets. Colleges and universities are also facing financial constraints amid rising expenses and falling revenue.

Child care centers that are struggling with reduced enrollment or closures will get help to stay open and continue paying their staff. The funds are also supposed to help families struggling with tuition payments for early childhood education. 

Funding for broadband infrastructure

The stress on national broadband has been higher than ever, remote work and education on top of the expanded requirements of technologies like Zoom, have put a major strain on national networks. The legislation includes $7 billion for expanding access to high-speed internet connections. Much of this spending was anticipated in an infrastructure bill, that has been brought forward as a result of the pandemic. Two major points in this part:

  • Half this stimulus is earmarked to cover the cost of monthly internet bills by providing up to $50 per month to low-income families.
  • $300 million for building out infrastructure in underserved rural areas and $1 billion in grants for tribal broadband programs. (Part of another infrastructure bills spending prior to the pandemic) 

Extension of aid for small businesses (PPP)

The bill puts forward $285 billion for additional loans to small businesses under the Paycheck Protection Program. This renews the program created under the initial stimulus legislation and is largely an extension of dollars that were repurposed.

Funding for vaccines and eldercare facilities

The source of concern early in the pandemic and the ongoing requirements to overhaul the elderly care facilities are addressed by this legislation as it sets aside nearly $70 billion for a range of public health measures targeted at elderly care facilities and the distribution of the vaccine. This breakdown includes: 

  • $20 billion for the purchase of vaccines 
  • $8 billion for vaccine distribution 
  • $20 billion to help states continue their test-and-trace program
  • Earmarked funds to cover emergency loans aimed at helping hard-hit eldercare centers.

A ban on surprise medical bills

The Bill supports efforts to help Americans avoid unexpected medical bills that can result from visits to hospitals. The legislation also makes it illegal for hospitals to charge patients for services like emergency treatment by out-of-network doctors or transport in air ambulances, which patients often have no say about. This measure has had some long time support from Democrats and was criticized for not including some provision in the Affordable Care Act. 

Rental protections

One more month of halting evictions is pushed out to the end of January. The Department of Housing and Urban Development separately issued a similar moratorium on Monday that protects homeowners against foreclosures on mortgages backed by the Federal Home Administration. It runs until Feb. 28. This has had several enforcement issues and while the legislation is a fantastic lipservice, the issues of evictions for individuals with a history of rental disqualification from before the pandemic are a continued source of evictions.

The bill DOES NOT include liability protection for business

A criticism by many that Democrats largely held out a provision for liability protection for companies trying to reopen. This element, opposed by labor unions and supported by the national Chamber of Commerce was a sticking point that went without inclusion. The discussion was important because it would allow businesses to follow their local recommendations to reopen to have legal insolation from lawsuits later on. This will continue to be a discussion in congress as a “reopen” is structured and the liabilities for business owners regarding COVID exposures are defined. 

Conclusion:

This gets us through the winter and hopefully the hump of COVID as the vaccine gets rolled out. It still leaves too much for the 2021 congress to cover and cover quickly. What the continued political, monetary, and fiscal landscape reactions look like is still up for debate. The curvature of risk in equities peaks in February (as I write this) so markets are pricing in a 2 month include equities and a political battle come early spring.

More related articles:

Articles
Kevin Taylor

What is an ETF and why do we use them?

Exchange-Traded Funds (ETFs) are a type of investment vehicle that combines the features of mutual funds and stocks. They are funds that hold a diverse portfolio of securities and are traded on an exchange like a stock. ETFs provide investors with a low-cost, transparent, and flexible way to invest in a variety of sectors and factors. One of the main advantages of ETFs is their ability to provide exposure to specific sectors and factors. ETFs can be designed to track the performance of specific sectors, such as technology, healthcare, or energy, or to target specific investment factors, such as value, growth, or momentum. This allows investors to easily allocate their investment capital to the areas of the market that they believe will perform the best, based on their analysis or investment strategy. ETFs can also offer investors greater control over their investments. Unlike mutual funds, which are only priced once a day, ETFs trade on an exchange throughout the day, allowing investors to buy and sell shares at any time during trading hours. Additionally, ETFs provide transparency into their holdings, with most ETFs disclosing their holdings on a daily basis. This allows investors to better understand what they are investing in and make more informed decisions about their portfolio. Finally, ETFs can offer tax advantages over other investment vehicles. Because ETFs aren’t structured as pass-through entities, they are generally more tax-efficient than mutual funds. This is because mutual funds are required to distribute capital gains to their shareholders, which can trigger a tax liability. Investors of ETFs can avoid these capital gains taxes by never selling the underlying fund. So while the companies in the fund may change, the investor never triggers a capital gains event. In summary, ETFs can be an excellent tool for investors who want to access specific sectors and factors, maintain control over their investments, and benefit from tax-efficient investment strategies. With low costs, high transparency, and greater flexibility, ETFs are an increasingly popular choice for individual and institutional investors alike.

Read More »
Investing 101
Articles
Peter Locke

Investing 101

If you’re lucky enough to have previously started investing in your teens consider yourself way ahead of the curve. For the majority of people Investing 101 is for you. Most of us start investing in our mid to late 20s, but for those that start as early as possible can set themselves up for an incredibly lucrative future. Where should you start for Investing 101? There are a couple of places that will have the largest impact on your net worth. If, let’s say you have a summer job and you’re making $5,000-$10,000 a summer or you’re working throughout the year then opening an investment account is a great place to start.  For us, saving anyway in any type of account is great. While we like all accounts for different reasons, we like the Roth IRA the most when you’re young. A Roth IRA is like a bank account with different advantages. It enables you to save money that you’ve already paid taxes on and those savings grow tax free until you turn age 59.5 penalty free. Now we love the Roth IRA because typically when you’re young your income is fairly low so taking advantage of low tax rates is a great strategy.  Since you’ll be in the lowest tax bracket in 2020 (things may change in 2021) then paying taxes now for your money to grow tax free for multiple decades can have a profound impact on your wealth. The reason is called compounding growth. Let’s say you make it very easy on yourself and just buy into the SP500. It’s an index that tracks the 500 largest companies and you can invest in all of them using one investment vehicle. Let’s break Investing 101 down. A stock is a way to own a part of a company. An Exchange Traded Fund (ETF) is a basket of stocks that give investors exposure to typically hundreds of companies. Since you cannot buy an index like the Dow Jones, SP500, or Nasdaq (different indices) directly, you have to buy a vehicle that gives you exposure to them. That vehicle can be a ETF, which is usually a less expensive and passively managed investing vehicle when compared to a Mutual Fund. A Mutual Fund (MF) is a basket of stocks just like an ETF that is more actively managed and usually more expensive way to gain exposure to the same stocks. The difference being whether or not you think someone can actively outperform the index (MF) or you just want general exposure to the index (ETF). You can argue both sides so do what makes you feel comfortable. ETFs and MFs have different tax obligations but this isn’t as big of a concern until you’re in higher tax brackets.  If picking stocks is difficult, you aren’t interested in it, or you just want things to be more simple, investing in ETFs is an incredible way to bring you long term wealth.  ETFs and MFs typically pay what’s called a dividend. This dividend is like a thank you from the company for investing in that company. It’s a cash payment to you, typically quarterly, that you can use to reinvest back into your ETF or MF, a new stock, or whatever else.  Think about your investment portfolio like a business. This is the core to Investing 101. Your business takes money and hopefully makes you money. When you make more money you either spend it on yourself or put it back into the company. When you put it back into the company the company grows and makes you more and more money over time. This is a great way to think about investing in an ETF or MF. Every quarter, without you having to work at all, your fund is paying you and you can reinvest that money to grow your portfolio more and more.  Wealth isn’t created overnight. The secret to wealth is long term saving and investing. Hence, those that have time on their side have the greatest ability to accumulate wealth. So what else should you be thinking about?  After investing in yourself first, think about where else you spend your money. We wrote an article on the difference between erosive and accretive debt. If you find yourself buying lots of clothes, expensive shoes, fancy gadgets, and new cars then you’re not investing in your “portfolio business”. When you stop investing in your business you stop growing. Each time you do this the effect is compounded.  For example, if you invested $1,000 and $100 monthly for 40 years at 9% interest rate (average gain of the SP500) you would have ~$436,000 at the end. But let’s say you invested $1,000 upfront and only $50 monthly over the same time period and same interest rate, you’d have ~$234,000! That is a massive difference for only $50. That could be one meal out for you and your significant other, one new shirt you liked that you didn’t need, a car payment on a new car because you didn’t want a used car.

Read More »
Articles
Kevin Taylor

Can I run a canna-business in an Opportunity Zone?

Like many things in life, the answer here is “it’s complicated” and it’s going to depend heavily on the type of business you intend to operate. Let’s start with the good news as we unfold this potential boon to marijuana investors and store operators.  It was left out of the law in 2017 While traditional ‘sin’  businesses were left included in the list of banned practices inside of opportunity zones, the recent ecosystem of cannabis-based businesses was left out. Some camps argue that because marijuana is still federally illegal, banning the business in the federal tax code would be redundant. Other camps have argued that leaving out the fledgling marijuana business is not an accident. I leave the interpretation and enforcements back in the hand of individual states which are currently choosing their course across the country. Additionally, if the law intended to expressly prohibit these practices it would have been easy to include clear language in their prohibition along with the other “sin” businesses. Its absence, then we feel, puts the interpretation and execution on the part of the states along with their maps and other eligibility determinations the states created. It fits with the goals of the Opportunity Zone scheme It’s hard to deny that the economic development that has accompanied legalization for both recreational and medicinal has been impressive. Cities have seen otherwise defunct warehouses, factories, and industrial storage facilities gain new life in the wake of legalization. Cultivation facilities, infrastructure vendors, fertilizer and chemical businesses, and retail outlets have all sprouted up in places that cities and states have written off as low-economic zones. This organic economic activity marries very well with the state objectives of the Opportunity Zone programs.  The business would still be heavily regulated and approved Given the regulatory environment surrounding the cannabis industry, both the business licenses and the location would be apparent to the state. I think it would be hard to argue that if the business operated with the approval and regulatory oversight regime set up by the state that could somehow void it from participation in the OZ. Everything would be above board with the state  The opportunity set is encouraging Because the industry is becoming far more than just the dispensary, this industry is wrapping its tendrils into several infrastructure needs that are required to make the supply chain work. Many of these businesses operate outside the traditional retail environment that draws so much eyre from municipalities and federal agencies. While the cannabis storefronts are the most visible component of the ecosystem, the most critical is cultivation and storage. These businesses look more like traditional chemical and agricultural supply companies and indoor growth facilities. It’s these businesses that might be able to transcend the negative attention typically associated with marijuana and still be a high profit, high impact role in the industry. Seemingly combining the core infrastructure needs, and the potential tax advantages of an OZ, and avoiding the regulatory and political concerns. This has led investors to believe that supply chain and cultivation operations might be the “safer bet” in this space and that retail might be too similar in operations to liquor stores which are prohibited. The Former Treasury Secretary said an unofficial “no” Treasury Secretary Steven Mnuchin advised in May 2019 that funds that operate in a Qualified Opportunity Zone “should not be used to invest in cannabis” but followed up with no formal direction from the treasury. Similarly, we are left to interpret the opinions of the new Treasury Secretary Yellen who has yet to officially comment on this program. It is my opinion that with bigger “fish to fry” in the wake of the pandemic the treasury will not be looking for more ways to shut down business formation, much less in areas that require the economic development encouraged by the OZ scheme.   Bottom line, we feel that if the regulatory environment is followed effectively, and that there are no policy changes from the IRS or Treasury that the development of cannabis businesses will thrive in this tax environment. But as always, investments that push through the crevices should only be approached by those with the risk appetite for both regulatory, legal, and market-based risks.  

Read More »

Pin It on Pinterest