Tax Reform: Good For Shareholders,,,As for the Rest of the Country..?

As I (and I was most certainly not alone) it seems the vast majority of the cash coming back to the US because of tax changes will result most dramatically in an increase in stock buybacks and increased dividends. Economists may be divided on the impact in terms of new plants and equipment and jobs,,,but most of the the money is alreadt showing up in stock buybacks and dividends. This is definitely good for the stock market giving it a further support.

From the NYT  (my bolds)

Trump’s Tax Cuts in Hand, Companies Spend More on Themselves Than on Wages

President Trump promised that his tax cut would encourage companies to invest in factories, workers and wages, setting off a spending spree that would reinvigorate the American economy.

Companies have announced plans for some of those investments. But so far, companies are using much of the money for something with a more narrow benefit: buying their own shares.

Those so-called buybacks are good for shareholders, including the senior executives who tend to be big owners price.

• 
  
  
  

  ...in 2005, when a one-time tax holiday allowed companies to repatriate money on the cheap. That plan, championed by President George W. Bush, was sold as a way to get American companies to invest more in the domestic economy.

  Some $300 billion came back to the United States that year. But economists estimated that as much as 92 percent of it may have been paid out to companies’ shareholders — mostly in the form of buybacks.

  Studies have shown that the tax change lifted companies’ stock prices but did not expand their American work forces.

  Until the early 1980s, the practice of buying shares with corporate money was considered borderline illegal because it was thought to potentially open the company up to charges of manipulating share prices.

  But in 1982 the Securities and Exchange Commission adopted a rule that gave the green light to most share repurchases, as long as they followed certain rules.

  
  

  “We have some causal evidence that because of short-termism companies are doing some stock repurchases that maybe they shouldn’t do,” said Heitor Almeida, a professor of corporate finance at the University of Illinois at Urbana-Champaign. “And maybe that’s causing them to reduce investment.”

  
  
  
  
  

  A version of this article appears in print on February 27, 2018, on Page B1 of the New York edition with the headline: Tax 

Endowments and Pension Funds...It Seems They Never Learn

Many years ago I taught a course in a not for profit MBA program on investing for not for profits. In the course we examined the "Yale model" which was admired for impressive results by adding large amounts of alternative investments" such as venture capital and hedge funds. At the time I taught that most endowments --particularly those with smaller staffs than Yale --would be much better off with a simple indexing strategy. In fact in more recent years the Yale endowment's performance fell behind simple indexing.

Despite the fact that this "sophisticated strategy" of incorproating alternative investments  proved more volatile, riskier, less liquid and more expensive..many endowments persist in following this strategy

 I incorporated into the class a unit on "what happened to endowments in the 2008 financial crisis which highlighted the results for endowments during that period--the very types of markets where hedge fund investors claim they will outperform. Many endowments suffered large losses on their portfolios which included hedge funds and other alternative investments. Some of these were both leveraged and included derivatives connected to the real estate industry. Many of the endowments didn't really understand the investments but were no doubt impressed by the presentations of the managers and recommendations of their consultants . The consultants have an incentive to regularly bring in new "creative" strategies to justify their fees.

Not only did the endowments and pension funds find that they had large losses they found that they did not have liquid investments. Many of the funds they invested in had long "lock up" periods meaning the money could not be withdrawn at will. This led many of the endowments with the need to sell their more liquid and conservative investments to meet liquidity needs.


It seemed in recent years that some other major pension funds had soured on the high fees and middling results of hedge funds and moved most if not all of their portfolios to low cost indexing. Calpers the largest pension fund in the US. Already in 2015 it announced a move to indexing its massive portfolio. The Illinois state pension fund one of the largest in the country did the same as did other major pension funds

The experts at some of the largest pension funds were moving to catch up with individual investors who were already moving large portions of their portfolios to indexing, But the trend is far less extensive than the massive movement of individual investors to passive investing.


It seems that for many pensions and college endowments "they never learn". Every time there is a new "alternative investment" some of the endowments and pension funds become investors.. Often this is the result of recommendations of "expert consultants" or the slick presentations of Wall Street salespeople. Neither group has an incentive to recommend indexing..such a strategy would literally put them out of business.

And the results are not surprising: some of these exotic investments will prove to be more volatile than conventional instruments and rather than the hedge funds providing some actual "hedge" against negative market movements...they magnify the losses.

This time around the big movements in volatility based products and the huge losses on derivative products  hit some pensions and endowments with big losses including Harvard (again !) and the state of Hawaii. I wont be surprised if we see more names added to the list.

WSJ (my bolds)

Pensions and Endowments Gambled on Market Calm, Then Everything Changed

More recently, some of these investors also made big, unpublicized wagers seeking to benefit from what had been an unusually long period of low volatility, according to pension-fund consultants and others who deal with these intuitions. The strategies, often involving the writing of complicated options contracts, were for years a source of easy money. Markets hadn’t been so calm since the 1950s.
Among those making such bets were Harvard University’s endowment, the Employees’ Retirement System of the State of Hawaii and the Illinois State Universities Retirement System.

More recently, the army of consulting firms that advise pension funds, such as Wilshire Consulting, has recommended some public-pension-fund clients write put contracts. As recently as 2013, hardly any public pension funds used this strategy, according to Wilshire Consulting President Andrew Junkin. He estimated more than 60 of the nation’s more than 6,000 pension funds now do.
A growing number of Wall Street firms have been selling volatility-related strategies to pension funds and other big investors. Neuberger Berman’s U.S. Equity Index PutWrite Strategy sells puts on stock indexes. Part of the value of a put relates to the volatility of underlying stocks. By selling the puts, the fund aims to generate steady income in stable markets.
In a document prepared for an Illinois pension, the firm argued that behavioral biases in financial markets mean investors “ultimately overpay for protection.” The Neuberger Berman options products have attracted about $3 billion over the past two years.
But the strategy suffers losses when stocks fall. So far this month, the fund has lost 4.37%, through Feb 12, though that tops a loss of 4.52% for its benchmark, a mix of puts on stock indexes and compares with a 5.90% loss for the S&P 500 through that date.
The Neuberger Berman products have outperformed their benchmarks in recent years and the firm notes the price for the puts rises when markets tumble, making the fund a lower-risk way to invest in stocks

Given the large volume of trading in these instruments more and more endowments are taking it seems quite likely there will be more stories like this in the future.

And despite the fact that the massive money flow from active to passive investing by individual investors ..some were drawn to the short volatility trades because of thei large profits due to leverage...and suffered massive losses when things reversed,

And the NYT reports that despite the moves by Calpers and some others there are still plenty of endowments allocating significant assets to "alternative investments" despite their dismal record compared to a basic index allocation:(my bolds)

It’s official: Returns for college and university endowments for the 2017 fiscal year are in, and while they averaged a respectable 12.2 percent for the year, over the last decade they have underperformed funds offering a simple 60-40 or 70-30 stock-fixed income allocation.

With their average returns dragged down by the weak performance of hedge funds, venture capital and private equity, you would think endowments would be fleeing these so-called alternative investments, which are costly and mostly illiquid, as some large pension funds have done.

On the contrary, endowments are holding firm, or even adding to these holdings. Last year, alternative investments accounted for an average of 52 percent of endowment assets — over 60 percent in the largest endowments — the same percentage as two years ago, according to the annual Nacubo-Commonfund study of endowments.....

Five-year averages suggest the magnitude of the gap: The average endowment had annualized five-year returns of 5.9 percent. A 60-40 mix returned 8.2 percent, and a 70-30 mix returned 9.2.

Not surprisingly an official from Vanguard quoted in the article was puzzled (to say the least) at the persistence of he use of "alternatives".

The best explanation is that "hope springs eternal as an official of the Commonfund group that surveys endowments noted:

We’re not seeing any changes in portfolio alignment or investment philosophy even though the indexes have clearly outperformed both managed funds and hedge funds. There’s still this belief that alternatives will provide some measure of outperformance.”

He noted that endowments of more than $1 billion, which tend to have high allocations to alternatives, did on average outperform the 60-40 mix (but not the 70-30 mix) over the most recent five-year period.

Jeff Schwartz, Markov’s president, agreed. “We’re talking about true believers in the value of alternatives,” he said. Many endowment managers, he added, “aren’t completely objective.”

Among those strong unobjective believers include the managers of endowments at the largest endowments in the country at Ivy League Universities such as Harvard,Yale and Columbia. There may be much that is impressive about the level of the academics at those Universities. But individual investors would be much smarter investors if they keep it simple rather than following the lead of those investment managers.

Just Because This Advice Gets Endlessly Repeated Doesnt Make it Right

Sure enough the two recommendations for investors are being proferred again despite the face that in up and down markets, volatile and less volatile these expensive strategies have a dismal record of outperforming indices.

Below are 2 "tips" that have a poor record of outperforming index instruments from a recent nyt article.

5 Tips to Weather a Turbulent Stock Market

Wealth Matters

.....Pick individual winners. With wild swings in the markets, active investment managers — those who buy and sell individual stocks instead of allocating money to an investment fund that tracks an index — say their skills are more in need now.

They argue that stocks are going to begin to show differences and that their skills at stock selection will keep investors’ portfolios from being dragged down with an entire index. In other words, in a market where everything isn’t going up, selecting the best individual companies makes more sense.

....Find alternative strategies. Alternative investments are the province of investors who are willing to sacrifice access to their money for higher returns. But when markets were posting double-digit gains, they became less attractive.

Hedge funds, in particular, earned a bad reputation for the high fees they charge to manage money on top of taking a share of any profits. Some sophisticated institutional managers, like the California Public Employees’ Retirement System, announced in 2014 that it was getting out of hedge funds because they were too expense and complex.

But financial advisers and money managers are arguing that in a volatile investing environment, investors should reconsider hedge funds and other alternative assets like private equity, private debt and real estate. Their returns, they say, are less correlated to the fluctuations of the stock and bond markets and thus provide a steadying force.

 

60/40 Portfolio ? Mind the Duration

A very common simple portfolio allocation used by many investors is 60% stocks 40% bonds. The most basic of these allocations would be 60% of a broad market index in stocks and 40% in a broad bond market index. This rationale is that stocks should produce volatile but positive long term returns and the bonds lower returns but less volatility.

This strategy has worked wonderfully over the last decade producing a total return of  93.6% with almost half the volatility of the S+P 500 which returned 125% . Note the extent to which the 60/40 portfolio limited losses and volatility during the huge stock market drop of 2008.

60/40 vs S+P 500 Jan 2 2008 to Jan. 2018

Total Return 60/40 portfolio (green) vs S+P 500 (blue)

Total Return and Volatility 60/40 (Green) vs S+P 500 (blue)

But that was during a period of a massive fall in interest rates engineered by the Federal Reserve with the additional headwind of traders who saw the market as a one way bet. It may not work as well going forward.

This period of "quantitative easing" was unique in the history of the Federal Reserve. Not only was it keeping short term rates low through its historical tool of the short term federal funds rate, it also purchased longer term securities in its policy of quantitative easing pushing down the rates of  longer term bonds.

Policy has been reversed with five 1/4% rate increases since 2017 the most recent in December. WSJ reported that

 Officials penciled in three quarter-point rate increases for next year, as they had in September, and two such increases each in 2019 and 2020



10 year chart Federal Funds rate showing the impact of the change in policy last year..reversing ten years of easing.

Long term chart Federal Funds rate

Here is a chart of the ten year Treasury bond for the past tens years which clearly shows the impact of quantitative easing and the Fed's"winding down"which began in 2017

Long term chart 10 year treasury bond yields

What does all of the above mean for your 60/40 allocation?

Watch the duration. Duration is related to but not the same as maturity. Duration is a measure of a bond prices sensitivity to changes in interest rates. The longer the duration the greater the movement in price. For instance a 1% change in interest rates means a 2% change in the price of a 2 year bond and a 10% change in the price of a 10 year bonds.

A simple way to change the allocation to shorter term bonds would be to swap the total bond index BND for BSV a mix of short term and long term corporate bonds.

The duration of BND the aggregate bond ETF is 7 years contains 40% Treasury Bonds 21% Mortgage backed securities and virtually the rest in corporate bonds

 BSV an ETF that is a mix of  short term corporate and Treasury bonds and corporate bonds with a duration of 2.8 Years

As interest rates have risen particularly since the beginning of the year the different impact on the two ETFs is clear:

graphs of returns BND blue BSV in Green

Total Return BSV vs, BND

Total Return and Volatility BSV and BND

Looking across categories a swap for vgit intermediate term treasury bonds which have a duration of  for vgsh would cut duration from 7.6 t0 2 years 

A swap from vcit intermediate term invest grade corporate bonds to vcsh would cut duration from  7.6  to 2.8 years

A swap from Jnk high yield bonds to sjnk short term high yield would cut duration from 6.5 to 2.1 years

Duration can be reduced even further by using a floating rate note ETF where the interest rate is reset much more frequently as the interest rate floats. For example:

FLOT a floating rate ETF has a duration of .13 years. It has had a +.4% return ytd

TFLO is a floating rate ETF tied to US Treasury securities with a duration of .01 years and a return of .25% ytd

If You Think The Stock Market Has Been A One Way Bet..Take a Look at Long Term Bonds

The long term bond market has been in a massive rally (decline in yields) for the past 10+ years.

Yields hit record lows in late 2017 before moving up of late/

• With yields near record lows
•  The Federal Reserve in tightening mode for the first time since the unusual measures of easing after the financial crisis, s
• Some hints of inflation, 
• And a massive increase in the Federal deficit and government borrowing needs

It's not hard to see that a move up in bond yields could create quite a bit of volatility in the financial markets.

10 year Treasury bond yields...(prices move inversely to yield)

It's also hard to see how any rational long term investor would have accepted yields on long term Treasury bonds locking in a rate of 2.25% or less. Which means many of the buyers of these bonds were buying them as trading positions including leveraged positions.

Price graph of the Ten Year Treasury Bond ETF (TLH) for the past ten years. It has been virtually a one way bet since the Fed reserve started its quanitative easing after the financial crisis. Not hard to see that a reversal of Fed policy would create violent changes in price.

Still Overvalued ?

I argued earlier in a post that the market  was not significantly overvalued based on forecasted earnings and economic growth. I still believe my argument holds and that returns for the year for the SP 500 would be around 7-9%..not bad considering the gains of the last 2 years.

The decline in stocks has led to a huge decline in p/e ratios based on forecasted earnings.Should earnings exceed forecasts or companies increase dividends and buy backs it would be another positive for the market.

Below is S+P 500 P/E ratio via bloomberg 

"It's Going to Be A Stock Picker and Market Timers Market'"

No doubt after the recent fluctuations in the stock market we wil hear again that the conditions are those in which active managers will  outperform their passive benchmark.

Standard and Poors regularly publishes its SPIVA report comparing the results of actively managed funds vs, their index benchmarks.

Based on the numbers below..it seems the odds are against outperformance by those stock pickers and market timers.is quite slim.

Risk Parity and Market Fluctuations Here's What the Creator of the Strategy and a Critic Said in 2015

Rau Dalio head of Bridgewater Associates denies claims tht the risk parity strategy that it pioneered was responsible for large market swings that occurred in August 2015.

FT Sept 16, 2015


In ts paper, Bridgewater said the exact strategy pursued by risk parity funds varied, but indicated that other volatility-targeting strategies and investment vehicles were a more likely culprit for the turmoil than risk parity. It also stressed that its All Weather fund did not adjust allocations according to spurts in volatility. “We also understand that some managers tend to sell assets when prices fall and buy them when prices rise because they believe that changes in volatility will persist, and volatility tends to rise when prices fall,” the paper said. “We do the opposite because we want to rebalance to achieve a constant strategic asset allocation mix.”
 AllianceBernstein wrote in a report before the turmoil that it was concerned at the industry’s potential to fan the flames of a broader downturn. “Should correlations turn positive, with stocks and bonds declining at the same time, the risk contribution of each one would rise. Managers would then have to sell both to maintain their risk targets. In other words, selling begets selling,” the AllianceBernstein report said

5 year chart below..note moves in fall of 2015 and again at the beginning of 2016....and how with a longer term view they were basically "noise"

Automated Tax Loss Harvesting

Both of the largest robo advisors advertises that they use automated tax loss harvesting in which they take short term losses and then buy equivalent securities thus taking short term capital gains losses that can be netted against future gains. Wealthfront says it does this through "direct indexing" i.e. trades of individual stocks. Of course each time you book one of these losses it is not a free lunch. The cost basis is lowered so the potential tax liability is higher.

I have absolutely no idea how well these robo advisors executed their strategy on Feb 5. But with a swing between highs and lows of in excess of 6% it must have been quite complicated. During the rest of the week the swings between high and low were in excess of 4% except for Feb 6.

3 month chart of  S+P 500 ETF:

Is a Target Date Fund Really the Best Choice for You ?

Many investors have chose a one fund fits all choice for their retirement savings: a target date fund. In fact they are the default choice for many 401k plans.

These funds contain a mix of a globally diversified index fund and a bond index fund. But a closer look at these funds particularly in a period of rising rates may show that "autopilot" may not be the right choice.

Take for example the Vanguard target retirement 2030 fund. According to Vanguard:

Vanguard Target Retirement Funds offer a diversified portfolio within a single fund that adjusts its underlying asset mix over time. The funds provide broad diversification while incrementally decreasing exposure to stocks and increasing exposure to bonds as each fund’s target retirement date approaches. The funds continue to adjust for approximately seven years after that date until their allocations match that of the Target Retirement Income Fund. Investors in the funds should be able to tolerate the risks that come from the volatility of the stock and bond markets. The 2030 fund invests in 4 Vanguard index funds, holding approximately 75% of assets in stocks and 25% in bonds. You may wish to consider this fund if you’re planning to retire between 2028 and 2032

Here is a one month chart of the fund vs the vanguard S+P 500 index fund (VFINX)
through Feb 5 

charts via bloomberg

And here is a description of the target 2020 fund


Vanguard Target Retirement Funds offer a diversified portfolio within a single fund that adjusts its underlying asset mix over time. The funds provide broad diversification while incrementally decreasing exposure to stocks and increasing exposure to bonds as each fund’s target retirement date approaches. The funds continue to adjust for approximately seven years after that date until their allocations match that of the Target Retirement Income Fund. Investors in the funds should be able to tolerate the risks that come from the volatility of the stock and bond markets. The 2020 fund invests in 5 Vanguard index funds, holding approximately 55% of assets in stocks and 45% in bonds. You may wish to consider this fund if you’re planning to retire between 2018 and 2022.

and a chart.vs the vanguard S+P 500 index fund (VFINX) one month through Feb.5

These funds are performing virtually identically to a portfolio that would be 100% S+P 500 yet they are designed--or investors expect-- that they will be less volatile and perform better in a sharp stock market downturn than an all stock asset allocation.

So what's going on ? The bond allocation in these funds is composed of a single index fund: the Vanguard aggregate bond index fund. That fund is a mix of bonds and has a duration of 6.1 which means that the value of the index will fall 6% when interest rates rise by 1%. That number represents total return (price change +interest earned) Clearly with the current rise in interest rates and an expectation continuation that this will continue the bond part of this portfolio and thus the fund could have some unpleasant returns.

The achilles heel of these funds is that although they reduce the exposure to the stock market in the overall stock/bond allocation of the fund to make it less subject to stock market risk...it does not make any adjustments to reduce volatility within the bond holdings of the fund.

How could such a risk reduction be accomplished ? Even using the basic stock/bond allocation of the fund the level of risk in the bond market part of the allocation could be reduced by shortening the duration of the bond allocation either by adding to or replacing the current holding with a short term bond fund. One example might be the Vanguard Short Term Bond Index Fund (VBISX) which has a duration of 2.7 years. Other funds or ETFs could further modify the overall duration of the bond allocation,

Another strategy might be a "ladder of individual CDs or bonds extending over several years.An alternative to that option would be the use of bulletshares ETFs which would give a diversified portfolio within each maturity,

Market Volatility is Tough For Robo Advisors to Handle

via Investment News

Robo-adviser websites crashed as market slid

Wealthfront, Betterment websites went down Monday, cutting clients off from accounts

By Bloomberg News   |  February 5, 2018 - 5:47 pm EST

Robo-advisers haven't had much experience with market routs. When confronted with one on Monday, they struggled.

The websites of two of the country's biggest robo-advisers — Wealthfront Inc. and Betterment — crashed as the S&P 500 Index sank 4.1%.

Complaints quickly spread across Reddit and other internet sites from people who had trouble logging onto their accounts. "Really?" wrote @jlpatel23 after he received a message from Wealthfront saying its site was down.

The glitches represent a setback for a niche of the financial market industry that has been booming of late as people have become more comfortable making investment decisions without speaking to human advisers.

Wealthfront acknowledged in a statement that its clients lost access to their accounts for "a short period of time today" and said it's working to ensure that "clients don't experience this again."

Betterment didn't immediately respond to requests for comment. Back in June 2016, during the Brexit fallout, Betterment had told users that it instituted a "short delay in trading" to protect its users from a "potentially erratic market." No such statement was issued by the company in this case.

_________________________________________________________________

This is particularly worrisome not only because a similar glitch occurred during a the last major one daymarket move (7 months ago). But also because it calls into question the actual structure and implementation of the activities of these providers.

These robo advisors are neither platforms for individuals to conduct trading nor are they regulated mutual funds. Thus they don't follow under the same scrutiny. They are registered investment advisors who almost  never implement strategies that involve short term trading. Yet they manage assets in a manner at times potentially more akin to a  a hedge fund with short term trading based on an algorithm..but don't have the same transparency.

They have also grown extremely quickly to assets under management in the area of $10 billion but have minimal experience in executing their market strategies in the financial markets.

The Perils of Tax Loss Harvesting

A key selling point of the robo advisors is that constantly review accounts for "tax loss harvesting opportunities' done on an ongoing even in some cases intraday basis. In order to do this a firm would need to have extremely sophisticated monitoring and trading capabilities Each account would need to be examined for individually (since there would be virtually endless permutations of cost basis and purchase date) and then thousands of buys and sells.

Given that these companies' systems were overwhelmed in simply keeping the client interface up and running it seems doubtful the necessary computer firepower to do that tax loss harvesting would be in place.

Furthermore the tax loss harvesting on a day like yesterday would have likely had little real economic benefit. Over the course of the day for instance there would have been "opportunities" to sell to harvest short term losses in accounts that made purchases in periods since the beginning of 2018, Upon the sale a new purchase of an "equivalent security" would need to be made. 

Later in the trading day security would have dropped furhter with a new "opportunity to tax harvest" with another paired trade. This would have to be executed across a range of ETFs that cover the same asset classes, At the end of the day there could have been 10s if not hundreds of trades across a portfolio composed of 10 or more ETFs in a portfolio from Betterment. 

At the end of all trade trading an investor could be left with a large number of short term capital losses, or a simply a large number of transactions which had the end of the day accomplished nothing as gains offset losses. 

If there were net losses on the accounts it is possible that for a larger investor  the losses would be larger than the $3,000 that is deductible each year. Those losses would be carried over to the next year and based on Betterment's explanation of its strategy it would be equipped to manage harvesting of the losses carried forward to maximize.

Furthermore if the market recovers from the levels at which some of the purchases were made the accounts now hold shares at a lower cost basis and higher potential tax liability than if nothing was done at all.

And then there is the issue of transaction costs. Each time a tax loss harvesting trade is made there is a buy and a sell and thus a spread paid on each trade. These costs on dozens if not hundreds of trades in an account could easily eat into whatever tax benefit might theoretically exist for the strategy. 

There is an additional unseen cost of slippage. The tax loss harvesting strategy is based on executing the two trades without a discrepancy in movement in the market. For example to be done correctly and seamlessly the sale of one total market etf that is down 1% should be offset by another total market etf when it is also down 1% if not there is what is called "slippage" and the strategy has not been optimized.

For Wealthfront the trading challenge is even greater. Their strategy of "direct indexing" means that in place of ETFs in several asset classes it owns individual stocks. And in their "tax loss harvesting" they will execute hundreds is not thousands of trades in an individual portfolio on a day like yesterday. And of course the issues of spreads and slippage are far greater than in the case of Betterment.

The challenges outlined above would be massive for a large well established investment firm with decades of experience creating portfolio management systems and large staffs of professionals with technical and market experience. And even in the case of those firms we have seen major "glitches".

Both Betterment and Wealthfront have grown to around $10 billion each in assets under management in a very short period of time. Their staffing comes almost exclusively from people with not experience in the financial markets and asset management.

Wealthfront and Betterment addressed the outages although Wealthfront did not address issues related to their complex "direct indexing strategy". And of course it is impossible to know what transactions costs or slippage were encountered.

Wealthfront admits in a statement that its clients couldn’t access their accounts, but only for a brief period of time Monday, and that the firm is working on a fix to prevent this sort of outage from happening again, Bloomberg writes.

A Betterment spokesman, meanwhile, tells the news service that the robo’s clients had trouble logging in for around 30 minutes yesterday afternoon, but that account activities such as rebalancing and tax loss harvesting went on uninterrupted. Vanguard’s spokeswoman tells Bloomberg that only “some” of its clients “may have” run into “sporadic difficulty” getting into their accounts online and over the phone. And a Schwab spokeswoman tells the news service its clients had delays logging in for just a few minutes, due to increased demand.

As I was Saying ...

In my post dated Feb 1 written before the market close I wrote

As for the publicly traded companies...even the top performers Apple Microsoft and Facebook (Amazon is a bit of a different case)they are not only veteran companies. They have large profits, and billions of cash their earnings have strong growth and when bring the cash home will most likely engage in dividend increases, stock buybacks and acquisitions. In fact some of the largest tech stocks including Apple, Oracle, and Intel trade at a valuation discount to the overall market.

All of this is a far cry from the triple digit p/e valuations and large string of ipos of companies with no profits at all and weak business plans that characterized the tech bubble of the late 1990s.

After the close we got earnings reports from Facebook, Apple and Alphabet (Google) showing that despite the rise in these stocks the situation is far different than that of the late 1990s.when earnings of so many Nasdaq stocks was minimal or even non existent.

from the WSJ

Tech Giants Power to New Heights

Apple, Alphabet and Amazon.com report record results; Apple’s profits top $20 billion for first time

Three of the biggest tech companies reported record quarterly financial results on Thursday as they extended their dominance over swaths of the global economy.

Apple Inc., AAPL 0.21% Alphabet Inc. GOOGL -0.05% and Amazon.com Inc. AMZN -4.20% —with a combined market value of more than $2 trillion—all boosted growth by broadening their reach into new areas.....

Two of the other largest tech companies by market value— Microsoft Corp. and FacebookInc. —reported record sales a day earlier. Revenue at Microsoft rose 12% to $28.92 billion as its cloud-computing division continued to grow, while Facebook’s revenue jumped 47% to $12.97 billion.

Those companies are the five most valuable in the U.S. by market capitalization, the first time a single industry has occupied that position in several decades, according to S&P Capital Inc.

"It's different this time" is often a phrase with dangerous consequences. But compared to the tech bubble of the late 1990s it clearly is "different this time"

The Good News is That When These Crash It Will Have Little Impact on The Overall Market

WSJ reports that brokerage firms are seeing a large increase in new account openings, Many of these investors are drawn in because of interest in cryptocurrencies and cannabis stocks,

Lured by Market Records and Hot Bets, Individual Investors Finally Dive In

Discount brokerages report surging trading volume, particularly among younger clients, in part due to interest in cryptocurrencies and cannabis

After retreating from the market in recent years, investors have piled into stocks in recent weeks. They put $33.2 billion into global stock mutual funds and exchange-traded funds in the week through Wednesday, the biggest inflows for any comparable stretch going back to 2002, according to Bank of America Merrill Lynch. Further demonstrating an increasing euphoria, investors have put almost $258 million combined into 10-day-old ETFs that buy companies that have invested in blockchain, the technology behind cryptocurrencies.

At Ameritrade—among the first to give retail clients access to bitcoin futures—new account openings hit a record at the end of its latest quarter, driven by a 72% rise in new business among millennials. Chief Executive Tim Hockey said in an interview that most of the influx of younger, first-time investors was due to interest in the highly speculative areas of cryptocurrencies, including bitcoin, and cannabis.

“It’s all correlated,” said Mr. Ryan, as the 35-year-old-and-younger crowd wants to get in on the bull market before it ends and is more versed and interested in cryptocurrencies and “pot” investments than older investors.

The head of etrade reportsL

 Mr. Roessner said about a 10th of daily average revenue trades—a key metric for brokerages—has so far this month been blockchain- or pot-related.

CNBC reports

Investors rush into new 'blockchain' ETFs, pouring in $240 million in a single week

• Amplify Transformation Data Sharing ETF leaped to $164.9 million Wednesday from just $2 million a week ago.
• The Reality Shares Nasdaq NexGen Economy ETF multiplied just over nine times in a week to $86.27 million.
• "It is rare for new ETFs to pull in such a large amount of cash," Todd Rosenbluth of CFRA writes in an email, "but there has been pent-up demand for a thematic approach to gain exposure to Blockchain."

I have little doubt that these stocks fall into the category of shooting star" stocks. Stocks that generate lots of buzz and deal with a technology or product with lots of buzz (like cannabis).

And bitcoin, is neither a security, a currency or even a metal regarded as precious for 100s of years..also with an industrial use.

The government of India was the latest to make this clear:

“The Government does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate use of these crypto-assets in financing illegitimate activities or as part of the payment system,” Jaitley said Thursday in his 2018 budget speech. “The Government will explore use of block chain technology proactively for ushering in digital economy.”

The news likely contributed to a 6.5% drop in Bitcoin’s value over the last 24 hours, leaving the most popular virtual coin at the $9,625 mark.

Bitcoin, which briefly neared $20,000 in early December, has had a dreadful time since then, partly thanks to regulatory moves against it in South Korea. Its slide made cryptocurrency investors $44.2 billion poorer in January alone.

As for the stock market itself and cannabis stocks in particular...

The comparisons to the tech and dot.com bubble are, in my view misplaced.

The dot,com bubble was characterized by a wave of initial public offerings with the sponsorship of major "reputable" brokerage firms. And these firms at the time did not have a restriction on engaging in research, trading and underwriting of the same securities..and often the research turned out to be merely materila to promote the ipo.. The research and underwriting functions can no longer be combined at the same time. A large propostion of he companies going public in the dot.com boom  had no track record or cohesive business model, profits or even revenues.

In the current environment there has actually been a dearth of ipos. Many of the most highly vallued dot.com type companies such as airbnb,dropbox and uber have not gone public. These companies are "unicorns" valued at $1 billion or more based on their venture capital funding, But they have resisted going public likely because their valuation when they go public would not be at much of a premium if any to their current valuation as private companies.

As for the publicly traded companies...even the top performers Apple Microsoft and Facebook (Amazon is a bit of a different case)they are not only veteran companies. They have large profits, and billions of cash their earnings have strong growth and when bring the cash home will most likely engage in dividend increasses, stock buybacks and acquisitions. In fact some of the largest tech stocks incuding Apple, Oracle, and Intel trade at a valuation discount to the overall market.

All of this is a far cry from the triple digit p/e valuations and large string of ipos of companies with no profits at all and weak business plans that characterized the tech bubble of the late 1990s.

And the investments in these companies are either outside the traded equity markets (cryto currencies) or a tiny part of the market's capitalization (blockchain and canabis). It would take a far larger market capitalization for these stocks for a crash in these sectors to take down te overall market.

In fact given the accelerating earnings growth it is quite likely that the valuation of the market measured by p/e could fall or remain the same even with a single digit gain this year. And a gain of 7 -10% after the double digit gains of recent years shouldnt be disappointing to the long term investor. Those that are late to the party but investing in broad indexes may be late to the party but not necessarily about to take large losses in a market crash.

If the younger investors are opening accounts to buy cannabis and blockchain stocks it could lead to a painful lesson. They are at a time when they could hold a long term portfolio with a relatively large allocation to global stocks. They have time to ride out short term market movements and benefit from the benefits of long term compounding. Instead they are putting what should be money invested broadly through an index instruement into speculative portfolios concentrated in two sectors.