InSight

Financial Planning Dentist
Investment With

InSight

Menu

Market InSights:

Tesla added to S&P500

Today is the last day that Tesla will not be part of the S&P. S&P Dow Jones Indices has announced Tesla’s addition Friday after the market close. Tesla will officially trade as a member of the S&P 500 by the time the market opens on Dec. 21. Today’s buy of Tesla at the market close will likely be the biggest buy order ever.

This means Tesla joins the S&P at today’s closing price, the volatility is already high because it is also the quadruple witching quarterly options expiration.

Some highlights you should know about TSLA’s inclusion:

  1. The addition of Tesla will cause the largest rebalancing ever of the S&P 500 ever – Tesla is the 9th largest company by market capitalization. Because most of the investments that track the SP500 are weighted by market cap, they will be adding more TSLA than anything else. It will represent about 1.5% of the index going forward. 
  2. The liquidity for Tesla will increase, as these passive funds enter the space, the access to TSLA will increase. Both to borrow and trade the access to TSLA should see some much needed liquidity.
  3. This will stabilize the historically volatile stock. The swings both directions on Tesla have been pretty epic over its lifespan. Expect that to temper somewhat. This won’t change Elon’s flagrant tweeting, or the inherently volatile relationship this company has with investors, but over time, such a large holding from passive tools like SPY will bring the range down on its intraday swings. Inversely, TSLA will start to bring its price instability to bear on the SP500 adding to its aggregate volatility.
  4. If you own exposure to U.S. Large Cap ETF’s and mutual funds, you will own more TSLA going forward. There is nothing you need to do to get the exposure. If you already own the TSLA stock outright, it is adding to the exposure. It’s likely time to rebalance.
  5. The SP500 will get a shot in the arm on the P/E ratio – expect this to jump suddenly, there is nothing wrong with the readout, TSLA’s PE (today) is close to 1300. Meaning you have to pay $1,300 for every dollar TSLA earns. Before today the PE on the broader SP500 was 37 (already high) and expect the bellwether that is Tesla to cause that further distortion. This inclusion may permanently impair any comparisons you or your broker has made to the PE of the SP500.
  6. Inclusion of TSLA, will cause some forced selling of other names of make room. Fund will have to make room for Tesla, and will push out 1.5% from the other names to make room.

The closest similarity we can draw is when Yahoo was added. It too was not a member of an S&P small or midcap index prior to its inclusion and had a similar rush to buy when it was included in 1999. As a reminder, this was considered the beginning of the “tech bubble” by many. Yahoo stock rose 50% between the announcement and its entry into the index at the time. 

Some funds have been adding to the TSLA position, in anticipation of this inclusion, but many passive funds are not allowed to until today, as close to the close as possible.

More related articles:

Boulder Investment Experts
Articles
Kevin Taylor

USA’s Credit Rating Downgraded – What it Means for the Economy and Lessons from the Past

USA’s Credit Rating Downgraded – What it Means for the Economy and Lessons from the Past The U.S. has had its 2nd downgrade in 12 years Equity and debt markets and the broader economy are highly correlated to the strength of U.S. Creditworthiness Politics and Debt Debates are wearing on credit agencies’ willingness to underwrite poor behavior and political infighting In a surprising turn of events, the credit rating of the United States has been downgraded to AA+ from AAA, a rating the U.S. has held at Fitch since 1994, signaling a potential cause for concern in the country’s financial stability. The downgrade comes as a result of several key factors that have raised worries among investors and financial experts. Expected Fiscal Deterioration: The downgrade reflects concerns about the future financial situation of the US over the next three years. Experts fear that the government’s ability to manage its finances may deteriorate, potentially leading to a higher risk of defaulting on its debt. Growing Debt Burden: Another significant issue is the increasing debt burden that the US has been facing. The government has been accumulating more debt, which raises questions about its ability to repay the money it has borrowed. Erosion of Governance: Over the past two decades, there has been a steady decline in the quality of governance in the US. This is evident in the way the government has repeatedly struggled to reach agreements on the debt limit, leading to last-minute resolutions. Such instability erodes confidence in the government’s fiscal management. The consequences of this downgrade could be far-reaching, impacting various aspects of the economy. One potential concern is that it might lead to a lack of confidence in US bonds, which are essential for the government to borrow money. If investors become skeptical about the government’s ability to pay back its debts, they may demand higher interest rates on US bonds, making it costlier for the government to borrow money. The US government’s deficit, which is the amount by which government spending exceeds its income, is expected to increase. In 2023, it is predicted to reach 6.3% of the country’s total economic output (GDP), which is quite high compared to previous years. By 2025, it might even widen further to 6.9% of GDP. Moreover, the level of debt compared to the size of the economy is projected to rise over the forecast period, reaching 118.4% of GDP by 2025. This level of debt is significantly higher than what is considered safe for countries with strong financial standings. One potential consequence of the downgrade is the risk of a mild recession in the US economy. Tighter credit conditions, weakening business investment, and slower consumption could lead to economic growth slowing down. This, in turn, may impact job opportunities and the overall well-being of the population. To address these issues, the US Federal Reserve has been raising interest rates. While this can help control inflation, it may also make borrowing money more expensive for businesses and consumers. The Federal Reserve faces the challenge of balancing economic growth with the need to manage inflation. It is important for the US government to take swift and effective action to address these financial challenges. Failure to do so could lead to more difficulties in the future and potentially impact the financial stability of the nation. Despite the downgrade, the US still possesses some strengths that support its financial standing. Its large, advanced, and diversified economy, coupled with the US dollar’s status as the world’s primary reserve currency, provides the government with exceptional financing flexibility. In August 2011, a similar event occurred when Standard & Poor’s (S&P) downgraded the credit rating of the United States from AAA to AA+. This had significant effects on financial markets and the overall economy: Market Turmoil: The downgrade triggered widespread market turmoil. Stock markets experienced sharp declines, and investors panicked as they worried about the stability of the US economy and its ability to repay its debts. Increased Volatility: Financial markets became more volatile in the wake of the downgrade. Investors became uncertain about the future, leading to wild swings in asset prices and increased risk aversion. Higher Borrowing Costs: The downgrade led to increased borrowing costs for the US government. As investors perceived the risk of holding US government debt to be higher, they demanded higher yields on US Treasury bonds. This, in turn, increased the interest payments that the government had to make on its debt, putting additional strain on the budget. Impact on Consumer Confidence: The downgrade had a negative impact on consumer confidence. When people see negative news about the economy, they become more cautious about their spending and saving habits, potentially leading to decreased consumer spending, which is a significant driver of economic growth. Weakened Dollar: The US dollar, which had long been considered a safe-haven currency, faced pressure due to the downgrade. As investors sought safer alternatives, the value of the dollar depreciated against other currencies. Impact on Global Markets: The downgrade had ripple effects on global financial markets. Many countries and institutions around the world hold US Treasury bonds as part of their investment portfolios, and the downgrade caused concern about the stability of these holdings. Political Fallout: The downgrade also led to political fallout within the US. It intensified debates and disagreements among policymakers about how to address the country’s fiscal challenges and reduce its debt burden. It’s worth noting that while the 2011 downgrade had significant short-term effects on financial markets, the US economy eventually recovered. However, it serves as a reminder of the importance of fiscal responsibility and prudent financial management to maintain investor confidence and economic stability. Addressing the challenges posed by the downgrade requires swift and effective action by the US government. Measures to control debt, improve governance, and foster sustainable economic growth are essential to restore investor confidence. Despite the downgrade, the US still possesses strengths, including a large and advanced economy, and the status of the US dollar as the world’s primary

Read More »
August 1, 2023 No Comments
Articles
Kevin Taylor

Tax Mitigation Playbook: Allowable closing expenses in 1031 Exchanges

Selling and buying a home is full of fees, expenses, and individual line items that can confuse the process and generate much of the closing paperwork. When selling or purchasing an investment property in a 1031 exchange process, certain selling expenses paid out of the sales or 1031 exchange proceeds will result in a taxable event for the exchanger. The IRS is very clear about many of these costs of selling a property, for example, routine selling expenses such as broker commissions or title closing fees will not create a tax liability.  Inversely most operating expenses paid at closing from 1031 proceeds will create a tax liability for the exchanger. The IRS, over time and in several notes, instructions and guidelines has made the following clear: Allowable closing expenses for IRS 1031 exchange purposes are: Real estate broker’s commissions, finder or referral fees Owner’s title insurance premiums Closing agent fees (title, escrow, or attorney closing fees) Attorney or tax advisor fees related to the sale or the purchase of the property Recording and filing fees, documentary or transfer tax fees Closing expenses that result in a taxable event are: Pro-rated rents Security deposits Utility payments Property taxes and insurance Associations dues Repairs and maintenance costs Insurance premiums Loan acquisition fees: points, appraisals, mortgage insurance, lenders title insurance, inspections, and other loan processing fees and costs To reduce the taxable consequences of these operating, financing, and other closing fees, try to: Pay security deposits, pro-rated rents, and any repair or maintenance costs outside of closing, or deposit these amounts in escrow with the closing agent. Treat accrued interest, prorated property tax payments, or security deposits as non-recourse debt that the exchanger is relieved of on the sale of their old property, which could be offset against the debt assumed on the replacement property. Note: this would only work if mortgage debt is obtained on the replacement property purchase that exceeds the mortgage debt paid off on the sale of the relinquished property. Match any prepaid taxes or association dues credited to the investor against the unallowable closing expenses listed on the settlement statement. Check with your tax advisor prior to the closing to review the closing settlement statements to determine if there is an opportunity to avoid a taxable transaction in your 1031 exchange. It’s possible that an exchanger has a long-term loss carry forward or non-recognized passive operating losses that could offset the taxable amount. Please note that all material provided in this newsletter is for informational purposes only and the author is not providing legal, tax accounting, or other professional services. The accuracy of the information provided as it pertains to your situation is not guaranteed. Please seek professional consultation if legal, tax accounting, or other expert assistance is required.

Read More »
July 18, 2022 No Comments
mindfulness
Articles
Kevin Taylor

Meditation, Mindfulness and Money: 4 ways to channel mindfulness into your money

If you’re looking for some broader answers to the ‘universal question’ I’m not your guy and this is not that article. But I will say that after years of thinking the transcendental was not for me, I’ve changed. If it was real, here and now, I would investigate it for legitimacy. If it was ethereal and spiritual it was for guru’s, theologians, monks and priests. But that has changed for me. I now see mindfulness as a tool that has a very real way of actualizing my intentions, and meditation is the gateway to getting in touch with that.  The deliberate focusing of your mind is no more than coaching it to react in a particular way. Drawing from techniques that are metaphysical (more controllable) and shaping the physical (less controllable). So, to cut through the chaos of daily life, and getting your mind thinking about money, or more broadly wealth is no more difficult than coaching it to think more deeply about your family, career, or your other passions.  Visualize your financial goals Players and coaches have for decades now taught visualization as a method for success. Mindfulness allows the player to be mentally prepared for a situation, before they are called on to act in that moment. To see their options and take advantage of opportunity by running through a situation and potential variables. This speeds up decision making ability and allows people to react faster and with a better sense of how a decision reflects the hope of a game plan. They do this to focus the mind on their desired outcome, before the situation arises. Visualization can similarly help you premeditate the outcome you’re seeking for you and your family’s financial future. It is rarely a lack of opportunity that hinders success, but a failure of recognizing that opportunity in the moment it exposes itself. Having coached your mind to see and react to risk and opportunity is something that you mind can be coached into understanding before the opportunity presents itself. Get real about your finances By taking time to reflect and gain comfortability with your financial situation you can become more intimate and realistic with your expectations. By carving out time to reflect on your situation, the calmness of the moment can help you define more achievable outcomes. This is not to say you shouldn’t expect an extravagant life, but to help you control the resources at your disposal and become capable of mastering the decision making process in front of you.  Through meditation you can calm down otherwise erratic parts of life and focus your mind with greater intention. You can isolate the parts about your financial life that bring you joy and contentment and ready your mind to make decisions that have often been the result of emotion or reaction. Deliberately bringing your mind into focus brings clarity to the more important aspects of your life. Mindfulness about your past Meditation can be used to deliberately shape the way you react to a situation. Using mindfulness it can also be used to relive and relearn from events in your past. Taking time to re-feel how a situation in your past affected your present is a way of coaching your mind to learn from those events. By using the emotions which drive so much of our decision making and combining that with the more deliberative parts of the brain, you can combine the events of your past into the reactions you hope are part of your present.  Imagine if you isolate a single event from your past that shaped your current relationship with money. Reflecting through meditation the events that have caused your current understanding of your financial situation and the history you associate with the subject. You can then reimagine the events and outcome from your past. Learn from that very visceral event, and reshape how you would have rather reacted. The goal is not to relive financial missteps that you cannot get back, but to coach your emotional reptilian brain to cede the lead to your primate and more deliberative brain. By reflecting on the emotional drivers in a meditative process you can recognize the leading indicators events and avoid them in your current situation. Discover your money beliefs though mindfulness By channeling meditation time towards your money habits you can have a more complete and intimate relationship with money. Meditation helps you uncover the person you want to be in life, to shape and imagine how that person thinks and reacts to help define what that person’s intentions about money are. We all hold certain money beliefs, usually as a reaction to our emotions with money and lifestyle. One you begin spending even small amounts of time focusing your mind on money and your relationship with it, you’ll find the beliefs you have about money change. Channeling a deliberate intention into your beliefs will develop more positive money reactions, and those reactions will evolve in habits. This process enshrines the positive money outcomes you desire, into tactical decisions you can control. For many this transformation can happen in the way they save which is one of the leading indicators to financial success. They can transform the way they think and transform the way cash flows through their household flow from “income – spend = save” to “income – save = spend.” This shift in the belief that saving is more pressing then spending is not the natural state for most people, until they gain that more intimate and purposeful mindset around the value of saving. Conclusion Becoming more purposeful with your actions and ultimately your money begins with mindfulness. This mindfulness can be the result of focused meditation on the subject. Reshaping to the way you feel about and react to investment situations, market performance, and risk. Finding time to be deliberative about money allows you to cultivate your reaction to your money and better develop the fiscal life you want.  

Read More »
December 15, 2020 No Comments

Pin It on Pinterest