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The Meydenbauer Group Launches its

Longevity Luncheon Series

By Tama Borriello and Ben Pawlak 

Have you thought about how you want the next phases of your life to be as you get older?  We think about this subject all of the time.  As many of our current clients can attest, thoughtful planning, both financially and for personal fulfillment, can shed light on the balance between enjoying life to the fullest when you are at your healthiest and planning for ever increasing life spans.

Over the past twenty years, we have found that our favorite part of creating a life-centered investment plan for our clients are the stories of lives well-lived in alignment with personal and family values.  Lives full of fun and adventure.

We've also witnessed many creative approaches to the idea of retirement both for personal fulfillment and financial reasons.  Unlike generations before us, “retirement” has changed from a sedentary and relatively short period to an entirely new stage of one's life.

With that in mind, The Meydenbauer Group has been hosting our longevity luncheons and classes with local experts on everything from Medicare planning to maximizing how to navigate each stage of retirement and even finding a retirement mentor.'  If you have any questions please email Diane Manterola, Senior Registered Client Associate or call (425) 646-4871 to coordinate.


Navigating Concentrated Stock Positions

By Ben Pawlak and Paul Capeloto

On July 26th, Facebook's valuation declined by over 20% in one day as their earnings disappointed the market.  A few days before, Amazon reported earnings above market expectations and the stock rose to an all-time high.

We have been hearing from many of our clients involved with both companies, explaining to us they have a high percentage of their net worth tied up in company stock.  They are inclined to hold the stock because it has done so well in the past, why would it not do so in the future?

Every investment decision comes down to one element:  how much risk are you willing to accept?  If you hold a highly concentrated position and you do not sell any of it, then you are accepting the fact you can create significant wealth if the company succeeds and have little wealth if it does not.  But with many technology stocks near all-time highs, we suggest you take a different course.

This recommendation comes from our past experience with Microsoft.  Microsoft hit an all-time high in 1999.  We remember talking to clients about lowering their concentrated positions, particularly if they had an upcoming cash need.  In virtually every case, these holders believed the stock would go higher and did not sell.  When it started to decline in price, they believed the stock would get back to where it was at year-end and then sell.  In essence, now they would sell at where it was.

Fast forward to 2016 when Microsoft finally topped its 1999 valuation.  That was a very long sixteen years for these people.  Now, will that happen again with Amazon, Microsoft, Facebook and Alphabet (Google)?  We don't know but here is what you should consider:

  • Identify your upcoming cash needs.For example, do you want to buy a house in the next few years?If so, consider selling some of your stock now and set the proceeds aside.

  • Once you have your set aside, then identify your risk tolerance level; are you willing to take the extreme risk of your net worth tied up in one stock? If so, you have nothing more to do and we hope you are worth many millions. But...

  • If you want to lower your risk, consider selling a certain percentage every 90 to 180 days (perhaps 10% to 15%?) and invest in a more diversified portfolio.This would help you create a long term portfolio.

The one thing you want to avoid is: making a sell decision after your stock has fallen.  Odds are you will feel terrible selling below the high of the stock but using the Microsoft example above, those people who sold Microsoft 20% below the high still came out way ahead of those who did not for the next fifteen years.  Point is, identify a price where you say no more and unemotionally step aside from part or all of your holding.

We can help you navigate these rough waters through planning.  Please let us know if we can help.



2018 Second Quarter Newsletter


Since our missive of last quarter, there have been many surprises to write about:

First up, the strength of the U.S. dollar versus other currencies.  It was widely believed by us and others that the U.S. dollar would decline in the second quarter as foreign economies picked up steam.  However, just the opposite has occurred.  European growth has stalled and the European Central Bank has backed away from previous comments about when they would raise interest rates.  Since higher rates give a stronger currency, this torpedoed the Euro, especially as U.S. rates continue to go up. 

A by-product of the strong dollar is oil, which is bought in dollars.  Starting the year, oil was expected to stay around $55 per barrel, now it is above $70 (Source: U.S. Energy Information Administration Short-Term Energy Outlook). Since oil is bought in dollars, emerging markets have the hardest time with this dollar increase as they have to convert their local currency to dollars to buy oil.

Consequently, international and particularly emerging market stocks are under-performing versus the S&P by about 10%.

Second, we appear to getting into a trade war.  We are in unchartered territory with this issue but from our research, if we impose tariffs on about half of billion in goods with equal retaliation from our trading partners, gross domestic production (GDP) which is now growing at about 3% could be cut to 2.5% or lower(Source: GIMF simulations. Maurice Obstfeld, IMF); this is a large move for this indicator.  June global stock markets have been reacting poorly to this development.

The larger issue which we cannot judge at this time is what it does to long term investment confidence for corporations.  For example, will Mercedes Benz build more plants in the U.S. if those SUV's built in the U.S. and imported to China are slapped with a tariff?  It does not take a lot of uncertainty for companies to postpone spending.  More importantly low tariffs have allowed a very efficient global supply network to form.  All of this is now up in the air.

We believe that at some point in the next few months the tit-for-tat will become less onerous and trade war pressures will ease, allowing the markets to resume an upward trajectory.  But it is a real risk should it escalate from this point.    

Third, the U.S. economy is strong and historically when that happens the “value style of investing out-performs the growth style of investing.  Value in this case is represented by categories such as industrial, financial and consumer discretionary stocks.  But that has not happened as few mega cap tech companies are dominating the markets.

Our first thought on this development was:


While not exactly the same, our group feels there are similarities popping up that are beginning to remind us of 1999.  For example, 1999 was all about tech stocks with extreme valuations.  Tech represented over 25% of the S&P 500, which made the S&P 500 trade at 32 times earnings (Source: Bespoke Investment Group).  While the S&P 500 is trading at a much more reasonable P/E for 2019 of about 16, if you look under the blanket, you see that ten stocks (Amazon, Microsoft, Alphabet (formerly Google), Netflix, Facebook, Apple, MasterCard, Visa, Adobe and NVIDIA Corp represented 122% of the S&P 500 return for the first six months of the year.  Put another way, 490 stocks when combined declined 22%!  (Source: Goldman Sachs Global Investment Research)

This disparity is why growth stocks in the Russell 1000 growth index are up 7.25% and Russell 1000 value is down 1.69%. (Source: Wells Fargo Investment Institute) That disparity (8.94%) is quite surprising given that the economy is growing.  Why is this so?  Simply put, investors do not believe the rosy scenario for corporate earnings from analysts and growth stocks earnings are considered bullet proof at the moment.  This is why our current market environment reminds of us 1999.

From our point of view, we see the following:

  • The U.S. economy is in a “goldilocks” scenario which is positive for U.S. equities.“Goldilocks” is a scenario of full employment and low inflation.Full employment allows consumers to spend more.This should bolster corporate earnings, hence analysts bullishness.

  • At some point in 2019 or 2020, the Federal Reserve will raise interest rates to a point where lending becomes too expensive and that will be when the economy flips.Most feel the chance of recession one year later is high.

  • If the economy flips, then earnings should decline and stocks follow.On the other side, the Fed to avoid a recession may go back to quantitative easing (QE) which would lower interest rates to stimulate the economy and stocks.Could short term rates, which have gone from 0% to 1.75% in two years, go back to 0%?Some think so.

This viewpoint is backed up with valuations.  As noted above, The U.S. stock market at 16 times next year's expected earnings could actually be considered cheap as that would be the lowest valuation in the last two years. 

Remove the ten stocks named above and the P/E is even lower.  But, markets need to broaden out; ten stocks cannot hold the torch forever.

Putting all this together, we really are not sure what to expect but historically, valuations dictate markets and valuations are not high.  But a broadening out of stocks participating in an upswing is needed to make this happen.  We believe this will occur and provide a boost to stocks.  International stocks are now reacting to the U.S. dollar.  We believe it may stay strong for a while longer but should begin to decline later in the year, boosting international stock markets. 


Since our last missive, trade war concerns have exploded on the scene and created new uncertainties in the global stock markets.  We still believe this year will be OK but how we get there is anyones guess.  We would look to lighten up on stocks if the S&P 500 nears 3,000 (now 2,700), until then no changes.


The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Statistical information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Index performance is presented for informational purposes only and is not intended to represent any specific investment. It is not possible to invest directly in an index. 

Paul A. Capeloto, Managing Director - Investments
The Meydenbauer Wealth Management Group
of Wells Fargo Advisors


Responsible Values for Our World and Your Pocketbook

By Tama Borriello

Is it possible to invest in socially responsible growth while keeping your investment plan healthy and growing?

Socially Responsible Investing (SRI) can be a profound solution for those that care deeply about the environmental and social sustainability of the world, yet also need to responsibly plan for their own financial future. 

Effective socially aware investing has evolved from just investing in “feel-good” companies to actively engaging with all types of corporate leadership in pursuit of positive change.  Many socially aware fund managers are taking the the tact of working with corporations directly to document the positive financial results of lowering environmental impacts and having happy employees.  Several recent studies have hinted that companies with diverse leadership have better long-term performance and that companies that are considered the best employers also tend to have consistent stock returns over time.

For those concerned with the impact of fossil fuels on our environment, most active SRI funds initially screen out such companies.  The next step of choosing to reward good corporate behavior through research, education and collaboration is where real change begins to occur.  Recently, one SRI manager was able to meet directly with a Fortune 500 company to illustrate to them the fiscal advantages of changing fuel sources.  The corporate leadership team was open to the meeting and interested in the results as it was an issue that impacted their bottom line.

Corporations will continue to seek to maximize their profits and efficiency while taking the cost of environmental and social impact into the equation if shareholders continue to make their voices known.  More and more, corporate behavior is becoming part of the calculation when evaluating future profits and investment potential for traditional investment managers as well. 

Socially responsible managers have a renewed focus on illustrating that investing consistently with one's values is also consistent with sound investment and retirement planning.   There has been an increasing awareness that the screening process that filters for corporate citizens with environmental and social goals often tends to equate to high performing companies that merit long term investment ownership.

Just like any well-planned project or retirement, one can meet personal and financial goals by doing the homework on SRI Managers and creating a thorough and disciplined personal investment plan.  This includes evaluating performance and impact track records of socially responsible investment companies that share one's values and practice transparency.  At the end of the day, one can vote with their money for responsible practices for our earth and human kind while planning for a healthy retirement.


Spring Training Overview

By Sean McGowan

Spring training 2018 was a busy time with our clients spread out amongst many teams across the Cactus League. It was wonderful hearing how offseason training went and how excited all our players are for this summer.  I spent time helping clients plan for in-season expenses and busy travel schedules as well as deposits and cash flow. Once the opening day starts, these players don't have time to come up for air; that's why planning is so important.  The Meydenbauer Group wishes our guys in the game an exceptional year of baseball!


The Most Important Financial Decision for Millennials

By Ben Pawlak

Over the course of my career, I have met with many Millennials regarding their investment planning.  Ironically, I have had pre-established biases regarding millennials despite being one myself.  We have all heard stereotypes calling my generation entitled, lazy and idealistic.  I truly thought this would be the case when I started meeting with people my own age (33) and younger, but I have found that we are no more likely to be these things than other age groups I have met with; especially when it comes to money. 

Millennials I have met with come prepared with a good handle on their current financial state.  They usually worry about the same things as older generations such as debt, not investing enough, buying a home and family planning. 

The one thing that really jumps out to me as different from the previous generations is that Millennials want to get to specifics first.  We want to know how we stack up to our peers.  Are we saving enough for our age?  What is a good percentage for someone my age to put into my 401(k)?  How much should I be putting toward student loans vs. saving for a down payment on a house? 

The first thing I always say is; the most important thing for young investors is simply this: be in the habit of saving.   It can be overwhelming with all of the financial advice that comes at us from different sources such as our parents, friends, YouTube, etc.

Because I get a peek behind the curtain of generations of people who have reached retirement in different ways, I can tell you that the single biggest differentiator is that those that have reached financial freedom in retirement were in the habit of saving from a young age.  They put money away and invested it.  It's that simple.  So whether you're saving $50/month or $5,000/month it's a good start.


2018 First Quarter Newsletter

Well, 2018 has started out with a bang as volatility is front and center for the first time in two years.  The S&P 500 has had over thirty 1% moves this quarter yet when all combined, the index returned   -.8 of 1% so the ups and downs pretty much offset each other.

At the end of January, the S&P 500 was up about 7.5% and at quarter end it was down.  Why?

The markets are squarely focused on four things at the moment:

  1. Rising interest rates; how many Federal Reserve increases remain?

  2. Are valuations appropriate given the level of interest rates?

  3. Will technology stocks continue to lead the markets?

  4. Is there going to be a trade war?

The Federal Reserve (Fed) increased the Fed Funds Rate by .25 of 1% on March 21st.  The majority of investors believe there are three or more increases in 2018 and two in 2019 and perhaps 2020.  It appears the Fed wants this rate at about 3.5% in a couple of years (now at 1.75%).   Since most variable lending rates change with the Fed Funds rate, you can get an idea what may be coming up for lenders; things may get a whole lot more expensive to borrow in the near future. 

How do these rates play into today's valuations?  Of interest, is an Investment Strategy report from Global Investment Strategy a division of Wells Fargo Investment Institute, Inc. on the correlation of  S&P 500 valuations versus the ten year Treasury Note interest rate  as they directly compete for the same investment dollar.  This hypothetical relationship is for the last eighteen years. With the ten year Treasury Note rate now at 2.69% and the S&P 500 at 2,641:

If the ten year Treasury                    Then the S&P 500

Note yields:                                         should be at:

2.8%                                                      2,837

3.0%                                                      2,735, down 3.6%

3.2%                                                      2,640, down 3.5% (about where we are now)

3.4%                                                      2,552, down 3.4%

3.6%                                                      2,469, down 3.3%

3.8%                                                      2,391, down 3.2%

4.0%                                                      2,318, down 3.0%


Based on this, stocks are not expensive right now.  There are of course many metrics to use for valuations but our point is this is not 2008 – 2009 in our opinion.

Looking forward though, if the Fed Funds rate does get to 3.5% in two years, odds are the ten year Treasury Note will yield more than 3.5%.  So, if the projections above are accurate, this may become a problem in 2019 and 2020. More on this later. 

(Please note this information is hypothetical and does not represent actual performance or performance that may be achieved going forward. It is for illustrative purposes only.  Such information has limitations because it cannot take into account all factors that influence earnings growth or fluctuation in yields.  The S&P 500 is considered representative of the overall stock market.  It is unmanaged and not available for direct investment)

But, what if the ten year Note interest rate shown above does not increase?   You may remember in an earlier missive, we wrote about how the bond market through the difference between the two and ten year Treasury Note rates were implying caution for investors as the “spread” as it is known was narrowing.  A that time, the spread was about .6 of 1%, at quarter end, it was .49 of 1%, the tightest spread in ten years.  A narrowing spread implies an economic slowdown is expected.

When the spread went to .6 of 1%, it was because the interest rate on the two year note was increasing more than the ten year, indicating an expanding economy.  Today, it is the opposite; in the last two weeks, the ten year note rate has gone down about .15 of 1% (it is still higher than year-end) while the two year rate has remained flat.  When the ten year goes down, bond investors believe the economy will contract in the future and the Fed at some point will have to REVERSE course and start easing rates, making today's rates attractive.    

If the two – ten rate inverts (ten year yields less than the two year), well, this indicator has been very accurate at predicting a recession within the next eighteen months or so.  Stocks do not react right away but in due course and not in a good way.

Neither of these scenarios is favorable for stocks if one of these actually happens.  As long as the Fed is raising rates, odds are that one will occur.       

One of the reasons stocks did so well early in the year was the leadership of the tech sector.  Through March 13th, the tech sector was up approximately 13% for the year.  Now it is up only about 3%.  If tech rolls over, there is currently not another sector anointed to carry the load.  Historically, the markets need a sector to lead it.  We do not know if tech fills that roll in the future but its decline adds more market uncertainty.

Regarding a trade war, history shows no country gains when this occurs.  What people do not realize is trade wars are very inflationary.  In simple terms, if tariffs increase the price of an import, the consumer will pay more.  You might protect jobs in the U.S. but the risk of demand declining because of higher costs may mitigate the number of jobs saved.   

This is decidedly negative, but we think the rhetoric is way above fact and do not think this will be a game changer for the markets this year.

In summary, there are now headwinds for markets that did not exist a year ago and the markets are paying attention to them.  We do not however believe these headwinds are currently strong enough to derail the markets this year.  But, we suggest you get ready to play defense in the future.  We are.

Paul A. Capeloto, Managing Director - Investments
The Meydenbauer Wealth Management Group
of Wells Fargo Advisors


Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.


Money Market Mutual Funds a Good Option in the

Current Interest Rate Environment?

By Paul Capeloto

With the Federal Reserve (the Fed) currently raising its short term interest rates (federal funds rate), are money market mutual funds (MMF) a good option for your portfolio?

Perhaps the better question is: what is a MMF?  A MMF is a type of open-end mutual fund that focuses on capital preservation and invests in short-term, high-quality U.S. dollar-denominated securities that generally mature in 13 months or so.  Like all mutual funds, MMFs are sold by prospectus.  They invest  in high quality, short term debt securities such as U.S. Treasury Bills, commercial paper, and other short-term investments issued  by the U.S. government, U.S. corporations and state and local governments. MMFs available to retail investors seek to maintain a stable net asset value (NAV) at $1.00 per share although there is no guarantee they will be able to do so and pay interest that generally reflects short-term interest rates. 

With the federal funds rate now at 1.75%, many prime MMF's, that is, MMFs that invest in corporate securities, are now yielding over 1.5%.  Each time the Fed raises the federal funds rate, MMF rates tend to follow.  With the Fed targeting a federal funds rate of 3.5% by 2020, you can get an idea where MMF rates may go.

As interest rates rise, bond prices fall. This will cause a decline in NAV of a bond fund (it will not lower the value of an individual bond if held to maturity).  So upcoming you may have a combination of bond funds declining in value (the longer the fund maturity, the greater potential for a decline in value) and a MMF's yield increasing while it seeks to maintain a stable NAV at $1 per share.

In this case, investing in a MMF may be an investment choice for you to consider.  If you believe interest rates may increase, it may be a very viable investment option at this time.

We give no opinion on the funds to consider as your risk tolerance and asset allocation will dictate your choice of MMF.



Play Ball!

by Sean McGowan

It's that time of year again when I pack my bags and head south to go and speak with some of the young hopefuls for the new baseball season.  Two magical words:

Spring ball.

“It's like the first day of school.  Wondering who the new kid is; did you get new sneakers; are you going to be the best at tetherball?”

The guys get to work the kinks out and refocus for what is one of the hardest mental professional sports that spans 162 games in a regular season.  Players have nicknamed MLB's season, “The Grind”.  It reminds me of how we spend each week as a team finding the best way to achieve the goals of our clients and build that winning plan.

Spring is when the coaches start building their “portfolio” of players.  Like our asset allocation process, they look to blend players and attributes together to build the best performing team for the long haul season.  Players are like ETF's (Exchange Traded Funds) in that they each play a part, but do different things for the team. Coaches troll through the players looking for the best fit at each slot in their lineup to make the most competitive team they can.

For players it's more like a showcase to show mental fortitude, temperament, physical attributes and fire. They work the whole off-season lifting, running, throwing and hitting to make their stock go up. The excitement is there, but they need to stay even keel to show they are there for the long haul and can make a positive difference for the team.

Stay tuned for updates from Sean on his trip.


2017 Fourth Quarter Newsletter

So much for our prediction at the end of 2016 for a single digit stock market return!  We are in a “goldilocks' investment environment as of this writing.  This has resulted from a business oriented president who significantly lowered the corporate tax rate is repealing many costly corporate regulations, leading to a surge of corporate earnings.  Add in a pick-up of virtually every economy in the world and you had a recipe for a great year in stocks. 

We believe there is another reason the stock market did so well and that has to do with the bond market and low inflation. One would expect with an expanding economy and the unemployment rate below 5% you would have higher inflation and therefore, interest rates.  But, this did not happen.

Inflation increased ever so slightly in 2017.  The ten year Note rate is unchanged from last year (2.45%).  There are many explanations as to why but the reasons may not carry over to 2018 as major inflation components such as increasing wages (the labor pool has shrunk, will businesses have to pay more?) and energy (prices are increasing) appear on the horizon.

The Federal Reserve (FED) is indicating three rate increases next year in anticipation of higher inflation. This would increase the three month treasury Bill to above 2%.  The question then becomes what happens to longer dated bonds?

Of particular interest, the entire spectrum of bond yields is compressing. For example, the interest rate differential for certain debt is:

  • 3 month and 30 year Treasury: 1.3%

  • 2 year and 10 year Treasury   : .6 of 1%.

  • Junk bonds and 10 year Treasury: 3.5%

  • The “spread” as it is called is the narrowest in years for all three of these indicators and a yield curve with little difference indicates the bond market continues to believe an economic slowdown is becoming more likely in the future.     

There may be some reasons for this narrow spread:

  • The ten year rate is the highest in the developed world, drawing a significant amount of foreign buyers, which helps keep rates low.

  • Central bank monetary policy is accommodative (they continue to buy bonds, lowering the supply) to keep rates low.  Only the FED is reducing bond buying, the European Central Bank and Bank of Japan are still in the game.

If this artificial bond buying disappears or is reduced, then a more normal interest rate situation may occur. For example, when the economy is growing at 3% and the unemployment rate is about 4%, the ten year Treasury Note should be yielding 4.5% to 5%. If this were the case, we think a fair amount of money would leave the stock markets for the no risk rate of return the ten year Treasury Bond would offer.

So, how does all this work with a great stock year?

Since the interest rate is so low, an argument being made is: even though the U.S. stock market at a P/E of 20 looks expensive, when compared to the bond yield of 2.45%, stocks are historically NOT overvalued. For 2018, estimated earnings of $153 per share put the 2018 U.S. P/E at 17.6 and that is a very reasonable figure given where rates are. Source: Barron's - What Inflation Could Mean for the Market - December 30, 2017

If the FED increases rates in an orderly manner and the stimulus program is enacted adding another boost to earnings, stocks could continue to do well.

But if inflation increases more than expected causing the FED to increase rates quicker than expected and earnings do not continue to increase at a fast clip, then all bets are off.  

Across the pond however, things are a bit different.  Both the ECB and BOJ are still practicing monetary easing, which keeps rates artificially low, allowing stocks to get a higher valuation.  We believe this is where best stock values will be for the foreseeable future.

Paul A. Capeloto, Managing Director - Investments
The Meydenbauer Wealth Management Group
of Wells Fargo Advisors

The opinions expressed in this communication are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates.




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