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Looking for happy signs

Look for happy signs. You won’t find many. Look for unhappy signs. You can find plenty. The heady optimism that we all enjoyed for the first nine months of 2018 has pretty well evaporated. Gone in a flash. Housing is weak. There’s economic war with China. Earnings are slowing because of inflation and tariffs. Estimates for the third quarter earnings are down to 9% growth versus the 20-25% we saw earlier this year. Interest rates are higher.  Fixed interest instruments — like treasurys, CDs, etc. — are now a serious alternative to stocks. Italy could leave the EU. And Brexit is approaching.

No one seems to believe that Trump wants to extend the War with China. The hope is he’ll organize a deal before the mid-terms on November 6. That would probably clinch holding the House and the Senate.

As Don Luskin wrote in his brilliant TrendMacro newsletter today:

Unlike February, the current global equities correction [today] has real causes. We dismiss concerns about Fed tightening. The US mid-term elections are moving in the right direction for continued growth, except that this emboldens Trump to prolong the trade war with China. Every day is another day with tariffs acting as a corporate income tax hike, and every day is another day with China being backed closer to a systemic cliff. It’s a game of pressure, so Trump has to be willing to scare investors or he’s not going to scare China. China is isolated, and will have to make a deal, and we think Trump does want a deal rather than a prolonged Cold War.

I agree.

Our 15% stop loss has been hit for many tech stocks, including Netflix now down 20% from July highs. It could be time to loosen up. To take some profits home.

A deal with China is key.

This is not 2000 or 2008. But it’s not happy days.

Saudi Arabia’s MBS and other despots

Even before the Khashoggi  assassination, I’ve been counseling my readers to stay away from investing overseas. Too many countries are moving to autocracies — one  man rules –including Saudi, Brazil, Turkey, China, Poland, Ukraine, etc. It’s a world-wide trend.

Jared Kushner paid very little taxes

The New York Times Sunday story headlined:

Forms Suggest Kushner Paid Tax Bills of $0

The full story, which explains how he got rich and paid almost no Federal taxes, is here.

Real estate owners can deduct depreciation on their properties. If they play it correctly, the depreciation can exceed their income on the property. Hence no taxes. And when you come to “sell” the property, you can actually exchange it for another property tax-free. That’s called a 1031 exchange. I’ve personally participated in both.

Here are some excerpts from the New York Times article, which explains more:

Mr. Kushner’s losses, stemming in large part from the depreciation deduction, appeared to wipe out his taxable income in most years covered by the docjuments.

He is reporting the losses even though he bought his properties with borrowed funds. In many cases, Mr. Kushner kicked in less than 1 percent of the purchase price, according to the documents. Even that small amount generally was paid for with loans. Mr. Kushner’s credit lines from banks rose to $46 million in 2016 from zero in 2009, the documents show.

The result: Mr. Kushner is getting tax-reducing losses for spending someone else’s money, which is permitted under the tax code. Depreciation deductions are available in other industries, but they generally don’t get to take losses related to spending with borrowed money.

“If I had to live my life over again, I would have been in the real estate business,” said Jonathan Blattmachr, a well-known trusts and estates lawyer, now a principal at Pioneer Wealth Partners, who reviewed the Kushner documents. “It’s fantastic. You get tax deductions for things you don’t pay for.”

One of the only years in which Mr. Kushner appeared to have owed anything was 2013, when he reported income taxes payable of $1.1 million. According to the documents, Mr. Kushner has filed tax returns separately from his wife, Ivanka Trump – a relatively common practice among wealthy couples who want to avoid entwining their complex personal finances.

Mr. Kushner’s father appears to have benefited from the same tax deductions, the documents indicate. The experts interviewed by The Times said Charles Kushner most likely avoided paying federal income taxes from at least 2012 to 2016.

The tax code affords real estate investors great leeway in how they calculate their depreciation – flexibility that often is used to inflate their annual deductions. Among the tactics used by many developers: Their tax advisers prepare studies arguing that much of a property’s value is attributable to things like appliances and parking lots, which under the law can be depreciated more quickly than the building.

Such strategies are almost never audited, tax professionals say. And the new tax law provides even more opportunities for property investors to take larger deductions.

Developers might have to pay capital gains taxes if they sell their properties. But the Kushners, like others in the real estate business, often avoid that tax, too, by using the proceeds of sales to buy more properties within a certain time window.

At least in part because of that perk, the Kushners’ property sales in the period covered by the documents – totaling about $2.3 billion, according to Real Capital Analytics, a research firm – generated little or no taxable income for Mr. Kushner.

Last year’s tax legislation eliminated that benefit for all industries but one: real estate.

Sears filed for bankruptcy.

It’s the parent of Sears and Kmart.

From 1908 to 1940, you could choose from over 400 styles of homes to purchase through Sears, Roebuck and Co. mail-order catalog. You could even buy a house straight from the catalog. Just pick out the home you like.  Sears would deliver it just for you. They sold over 70,000 homes. Many are still standing. From their catalog, a couple of pictures:

Sears was the Amazon of another century.

Now for some good news

Aunt Liesel turned 112 this weekend.

Born in Dietlingen, Germany in 1906. Now living in Chicago. She’s within a handful of years of being the oldest person in the world. She’s number 12 in the U.S.

Favorite New Yorker cartoons this week:

Harry Newton, who follows Aunt Liesel’s formula for long-life: Stay active.

  • Omer Acikel

    I can see how Kushner steering away paying federal tax with real estate business based on depreciating and 1031 exchanges (you need to buy up though) like you mentioned. However, that means his income from his real estate is low, lower than expenses, which means he does not make net income unless he plays tricks to show his income intentionally low. What it looks like he has been expanding his real estate more than collecting rent/income.

  • Maggster2013

    Mr. Newton,

    Long, Long time reader. Could you please comment on Square (SQ) I know it has taken a hit lately and I know about your investment rule for selling. But, I have done my homework and have been in the name for almost 2 years and since I first saw its’ products showing up in my hometown local merchants. Do you plan on buying any shares in the future ( ahead of earnings) or are you out of the name permanently?

    Thank you,