Thinking about taking some chips off the table?

I recently had a conversation with a good friend who was contemplating liquidating his entire portfolio because of fear that the incoming Trump Administration would do something rash, or just plain stupid, that would torpedo the market. You might remember that was my initial gut reaction election night when I posted “Ladies and gentlemen we have a Black Swan!” To be clear I was not recommending selling anything. I was simply saying that we were in for some significant downside. This was not a partisan comment but it was based on the theory that the President-elect was very unprepared and unpredictable, and that the market, hating uncertainty, would bolt lower. Boy was I wrong. The market rocketed upward, seemingly taking as “in-the-bag” an unbridled world of free-market capitalism, unfettered by regulation and bolstered by tax cuts and huge new infrastructure spending … voila, a fait accompli. Of course, none of this is an accomplished fact, and Mr. Trump has not changed his predictability spots.

I believe we are in a secular bull market

Inane tweets aside, I continue to hold this belief. Suffice it to say the road higher will not be straight up, nor will it be free of significant, scary declines. It is the nature of markets to have set-backs. Since I’ve been involved no matter how steep or severe the declines, they have never represented the END OF THE WORLD. Jeff Miller, in this week’s “Weighing The Week Ahead” post, quotes Ben Carlson on the topic of trading to avoid these pitfalls:

“Far more money has been lost by investors preparing for corrections, or tying to anticipate corrections, than has been lost in corrections themselves.”

Obviously, there are downsides to the positive “Trump effect” we’ve seen. The Congress, despite the fact that both houses are now Republican, will probably not be a rubber stamp for Mr. Trump. Ergo, his promised agenda is not a fait accompli. Then there is the usual black swan crisis that appears out of nowhere … the vexation of every new administration. Finally there is the strong potential for a conflict-of-interest controversy over the presidents’s business holdings … lots and lots of moving pieces here.

Even with all of the above, plus the potential for future international intrigue and conflict, Eurozone problems, higher rates, China problems, etc., I still believe the U.S. equity market is a good place to be invested longer-term just based on the fundamentals. I will not go into the details of my positive case in this post. I have been making it for the past four years in kortsessions.com. At the web site there is a complete archive of anything that I have written. You are welcome to check it out at your leisure.

We’ve had a great run this year

Regardless of my bullish long-term thesis, I have taken some chips (trimming positions slightly). I just wanted to increase my short-term comfort level, also to prepare to take advantage of future opportunities. This is what I advised my friend to do who was mulling “selling it all”. I told him to get his equity position to a level where he could sleep at night; but not to sell it all. Bottom line is that you have to be comfortable with the risks that you are taking or you should not be involved.

If  you do want to do some trimming, when do you move … this year or next?

If you are a high tax-bracketed investor ($415.050 –single to $466,950 joint net taxable income), your capital gains tax rate is 20% (it is 15% for most everyone else). If you want to take a $100,000 capital gain, your tax liability will be $20,000 (or  $15,000, if you are in the lower bracket). We know that it is a Trump administration goal to cut taxes. Maybe if you wait until January 2017 you can snag another 5% ($5000).  Should you wait?

If you were set on taking the gain anyway, probably not. 

• “Do you feel lucky … ” (Clint Eastwood-“Dirty Harry”). With uncertainty and volatility surrounding the market and generally timid investors (one foot in the door and one foot out, ready for a quick escape) we could easily see the market drop 5% or 10% any time, even before year-end. All it takes is one “unpresidented” tweet.
• In fact any sharp weakness could have others pulling the trigger on trades that they hoped to carry into 2017. This would include institutional investors who are praying the market holds together until the closing bell on December 30, so they might book a better year performance-wise. Be aware that there are many people asking the same questions that you are.
• Forget the market … security or sector risks could also derail your planned sale. What happens if the security or sector you are planning to sell gets hit with negative publicity?
• Finally, there is absolutely no guarantee that the capital gains tax will be changed next year, especially if corporate taxes become a focus. Couple this with any normal corrective activity and you might find paying that extra $5000 this year to be a  good idea.

Now for some questionable advice from our friends at CNBC

“Don’t worry about stocks in the week ahead (Dec 19), but soon …”

“Stocks could see a pullback in the New Year, but for now analysts say the market could ride the Santa rally higher into year end as traders look forward to Dow 20,000. “

“I think we’ve gotten an early Christmas. I think really what we’ve already seen can be regarded as the Santa rally. We could still see more [gains]—not surprisingly, because who wants to sell out and guarantee they see a higher tax rate than if they sold next year?”-Sam Stovall, chief investment strategist, CFRA

Christopher did not predict when the market could start to waver. “We do believe that people will ultimately have to deal with some disappointment about the Trump administration and the pace of policy, but having said that, we do think that reflation is real,” he said.

These are excerpts from an article where Paul Christopher, Global Market Strategist at Wells Fargo Investment Institute is quoted extensively. His advise is don’t sell yet. Wait until later in the year and early next (when everyone else wants out), then sell. I hate to dissillusion Paul, but the smart guys already see that big fat pitch coming. It is amazing that the stuff that CNBC airs claims to pass for investment wisdom. You just can’t make this stuff up.

Should you take some chips off the table?

I think you should do what’s best for your individual circumstance, that which makes you most comfortable. You should do this remembering  the admonition:

“Far more money has been lost by investors preparing for corrections, or tying to anticipate corrections, than has been lost in corrections themselves.”

What do you think?

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.