InSight

Market InSights:

When does a Bear look like a Bull? (Pt. 1)

Four things to avoid and four things to embrace when the Bear turns into a Bull.

 

A Bear Rally is a short, swift, updraft in stocks that can end as quickly as it began. Here are the four signals to avoid.

Markets will routinely go through bouts of extreme buying during a bear market. There are several fundamental and technical reasons why markets “rally” at these times amid broader weakness in the market. The market this time has just come off its 4th bear market rally of the 2022 selloff.

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All Four Bear Rallies

These “false” turnarounds can be frustrating to the casual observer. A feeling that the market is random and chaotic can lead people to become frustrated during these moments of euphoria, only to be quickly rebuffed by another violent selloff.

At some point, these turnarounds stay intact and the Bear market rally is seen for what it is, the beginning of the next bull.

Here are some of the important topics to keep in mind to determine if we are looking at a new Bull, or another Bear.

Markets are Money with Emotion – Bear Rally (4)

If markets were perfectly logical they would be rather dull. If smart people reached the same conclusion regarding the future value of dollars (inflation), corporate revenue (earnings), and cost of capital (debt) then the auction that is the market would see a very narrow band of trading. But, it’s not, there is a maelstrom of emotion that accompanies markets and this market is no exception.

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Bear Market Rally Four

The rally from the June lows, to the most recent selloff, started at the Fed meeting in June and ended in mid-August (Bear Rally 4). The “Dovish Pivot” was the culprit – the belief that a small part of Jerome Powell’s update in June was dovish, and the “feeling” that the rate hiking cycle would come to an end sooner. This was both a fundamental shift in markets and an emotional one. One that we at InSight, didn’t share. We either didn’t hear this new dovishness, or we didn’t believe in it. 

This Bear rally was an abrupt reversal of the trend based on emotion, which you might assume is not a reliable and lasting reason for markets to change course, and you would be right. These good times were quickly brought to an end with more commentary from fed chairs and economists in August and were fully doused by Powell’s speech on September, 21st.

Trading markets on emotions is hard, and for that, we look for momentum to confirm our emotions and use the MACD reading to understand when emotional buying has turned into momentum buying. We try not to fight the momentum in markets.

The “Narrow” rally – Bear Rally (2)

When markets turn around, it happens quickly, and no one wants to “miss out” on the bottom. This causes abrupt buying at symbolic (not fundamental) levels or in single stocks or sectors. Some stocks serve as a bellwether for markets, Trains, Chips, and Logistics companies can tell us when the market is healthy and the supply chain orderly. But when one group of stocks march higher alone, it is likely a false rally and they will routinely be brought back with the border market.

The US Technology Index registered a bear market on March 14 when it closed down 19.8% from its peak on Nov. 22. The index then zipped higher, gaining 17.3% as of March 29 before resuming its downward trend. The index lost 27% between its March 29 close and its June 16 low.

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Bear Market Rally Two

There was a “buy the dip rally” in a Bull Market for well over a decade. So, traders and investors have been conditioned to buy up markets trading on lows. Markets registering short-term (1 and 3 month lows) have been quickly reversed since the financial crisis.

The great financial crisis ushered in an era of seemingly unlimited accommodation from the Fed and every dip was met with more and more liquidity from investors and the government. Operating in unison, the market drawdowns were short, and bull rallies were profitable.

The Bear Rally (2) of this cycle was met with no such injection from the Fed and the rally petered out when traders ran out of money. This reversal was confirmed as the market headed lower from Bear End (2) into Bear Start (3). A lack of dry powder meant there was less capacity to continue buying up the market. 

There was no confirmation in the rest of the market, and it was proof that while technology is the most important sector in the SP500, it alone cannot fix weaknesses in other market sectors.

Oversold conditions cause “snapbacks” – Bear Rally (1)

Beware of Oversold conditions that cause bear-market rallies. This is also known as a bear trap, a sucker’s rally, or a “dead cat bounce.” Frequently bottoms are found when conditions on the Relative Strength Index (RSI) reads “oversold” so traders and investors misinterpret these as bottoms, especially early in a bear market. The Bear Rally (1) is a good example of this:

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Bear Market Rally One

A phenomenon in bear market rallies is the snapback or dead-back bounce. When stock prices deteriorate so quickly, the oversold conditions are met, and the traders look to profit off the short-lived really to come. Oversold conditions are routinely bought up quickly – but they are quickly reversed when the longer trend catches up with the short-term trend. Oversold, or overbought conditions are usually reached when a chart favors the bias of a daily trend over a weekly trend. 

Rallies based on “oversold” conditions very rarely last longer than a couple of weeks. 6-15 trading days at the most, before the more powerful long-term trend, exerts its pressure over the short term.

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Using a Delaware Statutory Trusts (DST) with 1031 Exchange Investments

Delaware Statutory Trusts (DSTs) are extremely popular with 1031 exchange investors. In addition to the tax mitigation aspects of the 1031 itself, they allow investors to diversify the make-up of an investment portfolio, access new buildings and investment types, and easily scale up or down the size of their real estate portfolio. 1031 exchange investors favor DSTs due to the fact that it can be difficult to identify a replacement property within 45 days and in most cases, the DST can accept the exact balance investors are looking to replace a part of the 1031 Exchange. What is a Delaware Statutory Trust? The name will usually confuse new investors. The “Delaware” in Delaware Statutory Trusts is simply a component of the law being initially conceived and developed in Delaware. A common state for incorporation and legal standing. The use of the DST structure helps keep the title clean in connection with ownership by many co-investors. It separates the investor holding title individually into a holding in a new trust where the investor is the beneficial owner. The trustee of the trust can take actions on behalf of the trust beneficiaries (i.e. the DST investors/owners) which does not require agreement by all. Why invest in a DST? Few investors have the requisite net worth to own a 30-story office complex and keep the real estate exposure for their portfolio in line with their risk expectations. That is where the use of DSTs comes into play. A DST is attractive to an investor who desires access to a single property or portfolio of high-value, high-quality real estate asset(s) that may not otherwise be available to them due to size or service constraints. A DST puts the management and ownership of a real estate venture into a manageable box for most investor types. Collecting income, managing taxes, and maintaining the risk are all far easier in the real estate space through the DST structure. The investor receives a deeded fractional ownership in the property in a percentage based upon the equity invested. Is a DST like a REIT? It has some characteristics of a REIT or Real Estate Investment Trust but is different, including the fact that it is often, but not always, just a single property. In addition, the owner of REIT shares holds a partnership interest in the underlying real estate investment. Partnership investments do not qualify for 1031 exchange investments, even if the underlying asset consists of real estate. How does the DST provide income? Similar to the other real estate investments, DSTs generally pay monthly or quarterly an amount based on the excess rent over the property expenses. This includes any mortgage payments so as the debt service is paid, the equity ownership of the investor shifts as well. The Return on Equity (RoE) varies from deal to deal based on the specifics of the property, the building type, and financing goals. With most deals, the sponsor knows the net rent that can be expected and can give the investor the anticipated return for the term of the investment. How long does the DST operate? Most DSTs have a well-defined expectation for liquidation of the asset. The asset’s holding period varies and is prescribed in the beginning, but most have an intermediate time frame. Usually, 3-7 years and the investor shares in the same percentage basis the appreciation in value upon sale of the property. How does the liquidation work? This final stage of a DST is a complete liquidation of the Real Estate assets. This is also part of the investor’s stake in the holding. This can increase the overall annualized return by a couple of percentage points and is paid out in cash upon liquidation. While most investors seek out real estate for the prospect of a current and predictable income – tax mitigated capital appreciation as part of the real estate investment is typically the larger portion of the total return of the investment. Who can buy into a DST? The manner in which DSTs are marketed to the public has a lot of characteristics of sales of securities. Over time, the SEC decided to regulate them as actual sales of securities. So, although a DST interest retains the nature of real estate ownership, with some exceptions, they are regulated. They are typically brought to market for syndication by large well-known sponsors, although they have to be acquired through a Broker, Registered Investment Advisor, or a licensed Financial Advisor. The DST structure usually, if not always, requires the investor meets the Accredited Investor standard as the offerings are listed through the Reg D issuing process. Typically, the broker or advisor will vet all offerings of the sponsors with whom they have an agreement and that level of due diligence is a benefit to the investor who is unlikely to have the wherewithal to review the investment as closely.

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Cash Flow: 6 Successes For Your Dental Practice (2/2)

Continued from Cash Flow: 6 Successes For Your Dental Practice (1/2) A cornerstone of any business is having a mastery over your revenue and cash flow. Lucky for our dentist clients, they have a fantastic capacity for inflow, but disproportionately high outflows from expenses and taxes. Analyzing your accounts receivable and operating activities is an intrinsic part of our income analysis process. The best leading indicator for the success of your practice and of your financial plan. Bring forward revenue There are several lending and credit schemes that will allow dentists to bring forward revenue instead of waiting for insurance and clients to pay. These can be a fantastic value add for your clients by helping them flatten out the payments and keep on your treatment plan. These lending and payment systems keep you from being the bank and put the money into your practice faster with little interruption or time on your part.  We don’t recommend any single group for offering these services, but find that dentists that enable their clients to have access to a trusted partner are able to keep their patients on track and stabilize inflow to their practice.  Diversify your inflows Even by having all of the above and doing everything you can to normalize the revenue of your practice, hiccups can still occur that are outside of your control. Changes to insurance coverages, business partners, and economics have always caused displacement of cash flow for dentists. Clients that have a good understanding of both their practice and non-practice cash flow are capable of weathering these changes.  Clients who have worked through the P.E.A.K Process® know exactly what their cash flow health looks like for both the practice and their personal assets and how much risk is associated with getting income from a single source. Most people don’t have the luxury of determining their own income like dentists we work with. So knowing exactly the source and vitality of profit from several diversified sources becomes helpful for practices that may be working through tight cash flow from expansion, contraction or transition.  Work with a dental financial advisor to analyze and provide action items to improve your cash flow  You have to be preemptive when it comes to monitoring your cash flow. Dentists often prefer to delegate cash management to one of the employees at their practice so they can have more time to care for their patients. This may however not be an effective way to manage or maintain a steady cash flow. Having a good understanding of your cash flow, its relationship to your practices financial health, and how dependent you are personally on the steadiness of that flow will make a measurable difference in the trajectory of your financial plan. Clients that use the P.E.A.K Process® CFP®’s at InSight understand your cash flow habits and provide a better understanding of the in’s and out’s of your practice. Dental financial advisors analyze, estimate, and help you predict your income over time. We find ways to better maximize your efforts, and discuss ways to better utilize that knowledge in your financial plan. This intimacy will help you plan on how to preempt any shortfall. Or, to broaden your current capacity to generate revenue into long term and diversified vehicles for cash flow generation.  Our CFP’s analyze your cash management habits but suggest ways to improve your cash flow and also find tax reduction strategies. We find opportunities you may not know about.  Invest in yourself and your practice, and we will help guide you through what you don’t know you should know to get you closer to financial freedom.

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The Wizard of OZs: What you should know about opportunity zones.

What is a Qualified Opportunity Zone Property? The 2017 Tax Cuts and Jobs Act created special tax incentives for those willing to risk their own capital to improve and develop the real estate in traditionally underinvested sections of the country called opportunity zones. The goal was to raise long term capital by incentivizing investors that historically wouldn’t invest in these types of opportunities due to the inherent risk. They’re designed with the purpose to benefit the denizens of those locations and investors looking for sizable tax incentives to commit capital. The Qualified Opportunity Zone program is the solution that provides that tax incentive for private, long-term investment in economically distressed communities. What makes it a Qualified Opportunity Zone (QOZ)? The definition for this type of zone is “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” The process for designation of the OZ is pretty straight forward. All 50 states are allowed to submit a list of blocks of low-income tracts across their state based on census data. The Treasury then approves their inclusion in the program or not (most were approved). Plans are now in place with municipal and state governments to commit to projects that bring new construction projects into these areas. What are some unique risks you should be familiar with before you invest in an OZ? Market Liquidity – the markets for these investments are immature. There is a sizable pool of available capital for investment, but most of it is from long view institutional investors. The long term, committed and disciplined capital on the ask side, and the insurability for most investors in this space supplying the bid likely means that the spreads widen and limit overall liquidity for investors. Vehicle Liquidity – The types of vehicles offering exposure to this space are limited, largely non traded REITs. These agreements have a very long view of the investments and capital and few offer the liquidation windows and frequency temperamental investors might be used to. Asking yourself what kind of liquidity and income requirements do you have in your investment plan is more important than ever. Investors seeking income starting day 1 may need to find investments that reflect that and will see their upside limited as a result. Those seeking to “time the market” through this development will be frustrated by the duration of these investments.  Investment Risk – investment in “economically-distressed communities” carries a very unique risk that the investment will not perform on par with other parts of a city or market. Their unique performance risk with these investments will never go away, simply put you are buying into a major turnaround story in some parts of the country that may never come. This is mitigated by a few factors, the managers selecting and overseeing the projects are more important than ever. Picking the right project, with the right builder, in the right neighborhood is more important than ever.  Intent – why are you committing capital to these projects? Is it only for income? Are there parts of the country that have an emotional connection to their success? Is this a good attribute or a negative? I think it’s important to have a real honest sense of purpose in these investments. Not only to help understand and mitigate the risks involved but to help you price in the purpose of this investment. More and more people want to know that the dollars they are investing are being used for societal benefit, but make sure you are handicapping that expectation appropriately. Tax – The tax benefit for OZ’s has a pretty long ark, and the year over year benefit changes over time. Before you enjoy the tax benefits afforded here you should confirm a couple of assumptions. First, that your tax liability is ample enough to enjoy the full benefit, second, that your tax strategy for the next decade marries well with the long term requirement of this investment and third, there are no alternative strategies for a similar tax benefit with less inherent risk. Confirming these three elements of taxation and its accompanying strategy is an essential step for your CFP and CPA before you should consider the upside of this program.  Statutory Risk – the Tax Cuts and Jobs Act (TCJA) is current law, and planning for current law is not the issue. Tracking and making sure this new tax strategy stays intact going forward should be on an investor’s mind and having a plan of action if and when conditions change is part of the monitoring process for both your entire plan and this specific investment. Laws change and this opportunity is set to expire 12/31/2026.  Regulatory Risk – as I said before, the inclusion of a region in an opportunity zone is pretty straight forward, but the regulatory requirement for maintaining that acceptance by the U.S. Treasury is still important. Making sure that the project, builder, and fund all stays focused on the regulations that keep it inside the tax purview is eminently important. Selecting a manager that is versed in the regulations and will do the property due diligence to stay in the lane is important. The risk is the loss of the tax benefits you have likely priced into your expectations.  Opportunity Zones have the ability to be truly transformative for communities and investors. A fantastic marriage of social benefit, long term capital investment, and tax benefit make for an appealing place to see a reasonable return. But taking advantage of this program for non-institutional investors is going to have a few parties you should consult to confirm the investment is right for you: a CFP to confirm that this investment works in your personal financial plan a CPA that understands the full tax benefits of this investment an estate plan that can accommodate the long duration of this type of an investment an investment manager that understands and mitigates the risks as best as possible an investment advisor that helps

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