Mid-Quarter Newsletter – June 2021

 

Hear Our Story Video

We’ve been busy capturing some exciting video content these last few months as we prepare to launch a new look on our website. As a firm, we wanted to create a video to give our clients and our community the opportunity to learn more about us: how we began, why we believe in investing in alternatives, how we define our mission of “empowering better investors,” what we think sets us apart as a company, and what our vision is for the future of Morton Capital.

We hope you enjoy this behind-the-scenes look into our company. Click below to meet our leadership team and hear our story.

Watch the video here.

 

Why Is Everyone Talking About Inflation?

Inflation has been a hot topic over the last couple of months. Core consumer prices, which are how much you pay for typical goods and services (excluding much more variable food and energy prices), rose 0.9% last month, the biggest monthly gain since April 1982. The combination of higher labor and material costs is leading to a larger pickup in inflation at a time when governmental policies are supporting faster economic growth. The Federal Reserve has told investors that it will continue to support the economy, with the goal of achieving full employment, so it’s willing to let inflation run “hotter” than before. The question is whether or not these factors will lead to a short-term but temporary bump in inflation or a sustained and problematic increase.

There are several global trends that are helping make the case for higher sustained inflation going forward. For years, globalization had been a force keeping inflationary pressures in check, as manufacturing and consumer goods production moved to emerging economies with cheaper labor. This trend appears to be reversing and many countries, including the U.S., are looking to bring manufacturing jobs back home. Another important global trend supporting inflation is the push toward decarbonization to offset the damage and danger of climate change. Demand for renewable sources of energy will continue to push up prices on base materials like silver, copper, nickel and lithium, as these are essential components to implementing these technologies. A third, and perhaps more important, factor has been the explosion in global debt following the COVID-19 pandemic. The ratio of global debt to gross domestic product (the total value of goods and services in an entire year!) rose to 356% in 2020, up 35% from 2019. For perspective, this ratio only rose 10% in 2008 following the Global Financial Crisis. Given this huge amount of debt, policies have to support higher inflation so that debt burdens can be paid back in future years with cheaper dollars.

As fiduciaries, we must be aware of the risk of higher inflation and its resulting erosion of purchasing power in our clients’ portfolios. We’ve been concerned about increasing inflation for many years now, and have consequently built certain positions into the portfolio that we believe can act as hedges against the depreciation of fiat currencies, which don’t have intrinsic value on their own. For example, our positions in gold and mining companies, as well as our focus on real assets (real estate equity and lending strategies backed by real assets), we believe will remain resilient and maintain their true value in an inflationary environment. In the face of rising inflation pressures and expectations, we’ll continue to monitor the overall landscape and incorporate additional real assets and inflation hedges as we see fit

 

DISCLOSURES
Information presented herein is for educational purposes only. It should not be taken as a recommendation, offer or solicitation to buy or sell any security or asset class, and should not be considered investment advice. Certain investment opportunities discussed herein may only be available to eligible clients and are presented for illustrative purposes only. Past performance is not indicative of future results. All investments involve risk including the loss of principal.

 

What to Expect from an In-Depth Financial Plan

 Here at Morton, creating a financial plan is one of the key steps to our clients getting the most life out of their wealth. But what does creating a financial plan look like for you, our clients? Contrary to what you might think, a financial plan is not something that your advisory team does for you; it’s something that you and your advisory team do together.

Your advisory team will work behind the scenes with Morton’s financial planning team to craft your plan, but it’s only with your participation in the process that we can create a plan that will serve as a road map for your financial success. There are a lot of strategies in financial planning that can help solve issues, but the more information you give us about your financial life, the better we can determine which of those planning strategies are right for you. After all, if you buy a sweater in the wrong size—no matter how beautiful—you won’t be able to wear it. If, however, you spend the time upfront taking your measurements, you’ll end up with a sweater that actually fits you. In financial planning, just like in life, one size does not fit all.
That’s why, over the course of the next several weeks, we’ll be publishing a series of posts on the various components of an in-depth financial plan: cash flow, retirement, insurance, investments, tax, and estate. Our goal is to educate you on what to expect in the financial planning process so that you can fully partner with us: what topics we’ll bring up, what documents we’ll ask for, and why all of this is important to create a full picture of your financial situation.

We believe that committing to doing a financial plan is committing to investing in yourself. The success of your plan is directly impacted by how much time and effort you want to invest in the process. If you make the commitment, we can help empower you to make informed decisions so that you’re in control of your wealth and success, whatever that means for you. Might that be a lofty goal? Yes. Is it worth it so that you can sleep at night and achieve what you want in life? Absolutely. You may still be able to make an ill-fitting sweater work, but don’t you deserve a sweater that fits you just right? Here at Morton, we think so too.

 

DISCLOSURES
Presented for informational purposes only. You should seek financial, tax and legal advice from your professional advisors before implementing any transactions and/or strategies concerning your financial plan.

 

New Podcast: The Ripcord Moment

Our Senior Vice President and Wealth Advisor, Joe Seetoo, recently kicked off his passion project called The Ripcord Moment, a podcast dedicated to empowering business owners through the exit planning process. Each episode of the podcast focuses on the experiences of business owners and their team of advisors who have made the jump and successfully handed off their business to the next generation, existing partners or strategic buyers.

Subscribe to the podcast and listen to the latest episodes of The Ripcord Moment by clicking below.

Also available to listen on Apple and Spotify
Listen to The Ripcord Moment Podcast here

 

Welcome, Brian and Sherry

Brian Mann
Wealth Advisor

What does wealth mean to you?
“Get the most life out of your wealth” have been words to live and work by at Morton Capital for years. Notice how the word “life” comes before the word “wealth”? That’s intentional. I don’t think my definition of wealth has changed over the years—it’s still very much associated with accumulating money. What has changed, however, is that my wife and children have completely transformed and refocused my purpose behind actually building wealth. Now, wealth to me feels much more like a means to an end, the “end” being a life spent using the money I earn on the people and experiences that produce lasting and meaningful memories. I want to continue to go on dates with my wife. I want my children to experience the world. And I want the time and freedom to enjoy the little things along the way. THAT’s my wealthy life.

What inspires you about the work you do at MC?
I’m inspired by the prospect of doing well by doing good and by helping clients uncover what values guide their lives (and investing accordingly). I started my career working at Human Rights First in Washington, D.C., advocating for and defending the rights of immigrants and refugees, so doing good is incredibly important to me. On a daily basis, I have the privilege of speaking with my clients about sustainable and values-based investing, and I’m able to design financial plans and portfolios that allow them to speak with their dollars. At Morton Capital, we’ve been deeply involved in our local communities and charities and offering investments in socially conscious funds for years. True to our mission and investment philosophy, I’m proud that we consistently seek knowledge and resources that allow our clients to pursue these investments at our firm.

What’s a fun fact that most people may not know about you?
I learned to scuba dive in the Philippines but am still terrified of any large marine animals.

 

Sherry Uchuion
Compliance Administrator

What does wealth mean to you?
Wealth is often defined in terms of possessions and the abundance of quantifiable things, but what if we were to consider the unmeasurable aspects of our lives the most precious? To me, wealth has always been about those moments in between: the slow mornings with your family making breakfast, taking the day to be outside with your friends, or having the ability to be present for your partner in times of celebration and times of despair. I have always defined my wealth by how I spend my time, because unlike any other currency, time is one that cannot simply be replaced.

What inspires you about the work you do at MC?
I’m inspired daily by the entire team at MC. The best part of what I do here is providing support so that my coworkers feel confident that they’re delivering the best possible service to our clients.

What’s a fun fact that most people may not know about you?
I was a piano teacher for almost 10 years and I taught students from the age of three years old all the way up to adulthood.

Quarterly Commentary – Q1 2021

Who Controls Interest Rates?

The critically acclaimed news show 60 Minutes debuted in 1968 using a unique style of investigative journalism that was centered around the reporter telling the story (Wikipedia). Almost 53 years later, the show still brings in strong ratings. At Morton Capital, 60 Minutes used to be a hot topic around the proverbial water cooler (really the coffee machine) on Monday mornings, especially when stories focused on the financial markets. The water cooler may have migrated to Zoom, but the show is still a topic of conversation in 2021’s virtual world.

When Jerome Powell, the head of the Federal Reserve (“Fed”), was on the show in early April of this year, it posed a good opportunity to discuss certain trends in U.S. monetary policy. One of the more insightful questions that came up was from one of our newer team members. Having intently listened to our education sessions for several weeks, this team member was unclear as to how Mr. Powell could claim that the Fed was “highly unlikely” to raise interest rates in 2021 when just weeks earlier our investment team had been presenting on the big rise in rates during the first quarter. To address this disconnect between reality and what appeared on the news, let’s first take a closer look at what has happened to the market over the last few months.

 

Stocks Continued Their Ascent While Bonds Took a Hit in the First Quarter

The jump in interest rates that our investment team discussed led to a rare negative quarter for bonds in what was otherwise a stellar start to the year for risk assets.

Stocks continued their tremendous run from the lows of March 2020 as the vaccine rollout and projected economic growth accelerated. While there is certainly basis to be optimistic about rebounding economic growth in the short term, by many historical measures, stocks are in dangerously overvalued territory. Recent stock buying has reached a speculative fervor, with investors pouring into stocks at record levels. In the past five months alone, investors have purchased over $500 billion in stock funds, which is more than they purchased in the previous 12 years combined! The types of stocks being purchased are also more speculative in nature, with trading volume spiking dramatically for more risky penny stocks (stocks that trade under $1) and the performance of technology companies with negative earnings meaningfully outpacing their profitable counterparts.

While these trends in stocks are alarming, they are not necessarily new as speculation and risk-taking have been pervasive in stocks for some time. What was new was the meaningful loss in core bonds. While a 3.4% loss may not seem large enough to be labeled “meaningful,” this is an apt description when compared to the potential return on this investment. The Barclays Aggregate Bond Index, widely considered a broad measure of the traditional, or core, bond market with exposure to both U.S. government and corporate bonds, had an annual yield of 1.1% at the beginning of the year. Therefore, that 3.4% loss wiped out approximately three years’ worth of expected returns for investors. And that loss occurred in just three months, with interest rates increasing by only 0.5% for an ending yield of 1.6%. This 0.5% increase is a big move on a percentage basis but would be considered modest on a historical scale. The below chart tracks the nominal yield of the Barclays Aggregate over time and shows just how small this recent increase was when put in a historical context.

 

What Causes Interest Rates to Change?

So, with the above context, let’s revisit how Fed Chairman Powell could say that the Fed had no intention of raising interest rates while interest rates were already on the rise. While not a widely understood concept, the answer is that the Fed does not have complete control over interest rates. Technically, the Fed only has the ability to set short-term interest rates. It has tremendous influence and can try and manipulate long-term rates, but at the end of the day, long-term rates can be driven by other factors in the broad market.

Let’s explore some of the factors beyond the Fed that impact the direction of interest rates. As a reminder, interest rates are simply the cost of borrowing money from another entity. Low rates typically happen when there is a slow growth economy or even a recessionary environment. In these environments, there will be low demand for borrowing. Businesses will not be eager to expand, and perhaps individuals will not be eager to take on leverage, so rates stay low. So what do banks do? They lower interest rates even further to try to stimulate business and borrowing activity. Governments can also intervene to lower the interest rate targets that they control in an effort to stimulate economic growth.

On the other side of the coin, high rates are typically associated with an economy that is growing quickly. When an economy is strong, there is more demand for businesses to expand and consumers to spend, and this results in a higher demand to borrow. Because of this, banks and lenders can charge higher rates. This is part of the reason why rates have risen in recent months. Forecasts are coming out that economic growth in 2021 may be very strong. While it was expected that economic growth would be positive coming out of the recession we have been in, new expectations are pointing to even stronger growth than previously anticipated.

Another factor that could lead to higher rates is fear of unsustainable debt levels. Our country has been on an unprecedented spending and debt spree to combat the crisis that we have faced. Typically, when a country’s debt levels expand rapidly, as has happened of late, interest rates rise. This is for two main reasons. First, it comes down to the creditworthiness of the borrower. When a country piles on debt to unsustainable levels, a lender or buyer of that debt will demand a higher interest rate to compensate them for the increased risk they are taking on. However, it is almost unthinkable that the U.S. government would default on its debt payments, which leads us to the second reason why interest rates may rise when a country’s debt levels expand rapidly: potential inflation. The U.S. government has both the power of the printing press and the ability to continue to issue new debt to help pay for or refinance old debt. While these powers basically eliminate the possibility of the U.S. defaulting on its debt, the result is increasingly more dollars being printed and increasing debt levels with each passing year. If you are lending money to the U.S. government, this is not a comforting scenario. While, yes, you will get your money back at the end date, or maturity, of the loan, in the time that has passed, how many new dollars have been printed? With all of these new dollars in circulation, the concern is that the value of each of those dollars will erode over time and your future dollars are going to be worth less. Lenders that see this trend should demand higher interest rates to help compensate them for this risk.

 

Should Investors Be Worried about Inflation?

We have never seen fiscal spending and the issuance of new debt anywhere near the scale of what we have seen in the last year. The cumulative price tag for all the COVID-19 rescue packages issued to date is over $5 trillion and there is talk of another $2 trillion infrastructure package and even more stimulus to come. By the end of 2021, U.S. debt will be around $30 trillion, three times the level it was back in 2008.

Not only are debt levels ballooning but the money supply, or amount of money in circulation, has ballooned as well. The below chart tracks the annual percentage increase in dollars that have been created in the last 45 years.

On a historical basis, the annual increases in money supply are almost always above 0% and often close to 10%. The amount of money printed in the past year, however, is unprecedented. This is because the Fed is printing dollars to the tune of roughly $120 billion per month and purchasing our country’s debt to help finance all of the new spending programs. These massive new amounts of dollars filter their way through the economy, and the concern is that inflationary pressure will build. It is pretty simple: more dollars chasing the same assets, goods, and services will result in increased prices. We are already seeing increased asset prices (e.g., stocks and real estate) as a result of these policies, and the risk is that pressures are building so we will see increased prices with goods and services as well.

 

Morton’s Approach to Risk Management

If a 0.5% increase in interest rates can wipe out three years of returns for the broader bond market, what can investors do to protect themselves? As discussed previously, many investors are pouring into stocks because bonds are so unattractive and they have no real alternative. This strategy comes with a completely different set of risks as stocks continue to reach new all-time highs. Many investors need some component of fixed income in their portfolios to hopefully act as a ballast during periods of market volatility and also to act as a source of liquidity. So as much as investors may want to write bonds off completely as being unattractive, that may not be a viable solution for everyone.

At Morton, we have approached the liquid fixed income space with an emphasis on risk management. We can meaningfully reduce or eliminate our interest rate risk by not investing in bonds with longer-term maturities. In some instances, we can even invest in floating-rate bonds, where our returns will increase as interest rates rise. Certain less traditional bond strategies can also introduce different risk and return drivers from mainstream bonds, offering true diversification benefits for a portfolio. These same strategies often come with higher current cash flow as well, which is welcome in this low-interest-rate environment. These more opportunistic strategies are not without risks, but we feel that they are smarter risks than just sticking our head in the sand with long-term bonds and hoping that rates and inflation do not rise.

Our approach is well-suited to a challenging quarter like this last one, where traditional bonds took a big hit. The below chart illustrates the performance of all of Morton’s fixed income strategies for the quarter.

The funds grouped together in green typically target shorter-term, more stable bonds, while the blue grouping represents funds that we consider more opportunistic in nature. As designed, all of our strategies significantly outperformed the index (orange bar on graph) in a period of rising interest rates. Beyond the liquid space, we have also made significant allocations to private lending funds that we feel offer a compelling risk/return profile. When appropriate, we prefer to take on some liquidity risk as a substitute for traditional market risk as we feel this effectively accomplishes our goals of risk management, true diversification, and higher cash flow.

 

You Cannot Control the Wind, but You Can Adjust Your Sails.

This sailing proverb speaks to the current environment and the importance of recognizing both what we can and cannot control. Specifically, the winds of the market and the winds of the economy are circling around in lots of different directions. They are very unpredictable and in many ways are behaving differently from what historical data or norms would predict they should. In this unpredictable environment, it is more important than ever for us to adjust our sails—to manage risk and maintain our calm and resiliency even when the world around us is behaving erratically.

We can adjust our sails by avoiding traditional interest rate risk in our bond portfolios and limiting stock exposure in an environment where prices are being driven by speculation and hope for future growth. There are valid reasons to own stocks, as they could be beneficiaries in certain high-inflation environments, but there are also meaningful risks to stocks, and our focus is on finding investments that fit in with our philosophy and where we can analyze the fundamentals and control a larger number of variables. Integrating alternative assets that align with this philosophy is what we believe builds resilient portfolios for the long term.

Best Regards,

Morton Investment Team

 

Disclosures:

Information presented is for educational purposes only and is not intended as an offer or solicitation with respect to the purchase of any security or asset class. This presentation should not be relied on for investment recommendations. The private investment opportunities discussed herein are speculative and involve a high degree of risk. References to specific investments are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities.

Targets or other forecasts contained herein are based upon subjective estimates and assumptions about circumstances and events that may not yet have taken place and may never take place. If any of the assumptions used do not prove to be true, results may vary substantially from the target return. Targets are objectives, are shown for information purposes and should not be construed as providing any assurance as to the results that may be realized in the future from investments. Many factors affect performance including changes in market conditions and interest rates and changes in response to other economic, political, or financial developments. There is no guarantee that the investment objective will be achieved, and MC makes no representations as to the actual composition or performance of any security.

Although the information contained in this report is from sources deemed to be reliable, MC makes no representation as to the adequacy, accuracy or completeness of such information and it has accepted the information without further verification. No warranty is given as to the accuracy or completeness of such information.

Past performance is no guarantee of future results. All investments involve risk including the loss of principal.

 

Performance figures reflect the reinvestment of dividends and are net of fund fees, but do not reflect the deduction of MC investment advisory fees. Your returns may be reduced by the advisory fees incurred in the management of your account. For example, the deduction of a 1% advisory fee over a 10-year period would reduce a 10% gross return to an 8.9% net return. Performance for the period reflected is due to a variety of factors, including changes in market conditions and rising interest rates.

 

U.S Large Co Stocks:

S&P 500 Index

U.S. Gov’t 1-3 Yr. Bonds:

Barclays U.S. 1-3 Yr. Treasury Bond Index

U.S. Small Co. Stocks:

Russell 2000 Index

 Commodities:

Bloomberg Commodity Index

Developed Int’l Stocks:

MSCI EAFE Index

Emerging Market Int’l Stocks:

MSCI EM Index

Core U.S. Bonds:

Barclays U.S. Aggregate Bond Index

R.E./REITs:           

FTSE NAREIT All REITs

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.

The Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon US Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

The Bloomberg Commodity Index and related sub-indices are composed of futures contracts on physical commodities and represents twenty-two separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Barclays Aggregate Bond Index is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $250 million par amount outstanding and with at least one year to final maturity.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The FTSE NAREIT All REITs Index includes all tax-qualified real estate investment trusts (REITs) that are listed on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ National Market List.

Mid-Quarter Newsletter – March 2021

Congrats to the MC Team!

For the third consecutive year, and ranking #2 on the 2021 list, we feel incredibly honored to be recognized on the prestigious annual Best Places to Work for Financial Advisors list by InvestmentNews.

Each year, InvestmentNews recognizes standout employers in the financial advice industry. These firms, ranging from small practices with fewer than 20 people to large companies with over 700, go beyond offering attractive benefits and perks and create work atmospheres that empower their employees with the skills and confidence necessary to deliver the best possible investment and financial planning guidance to clients.

We are SO PROUD of each and every one of our team members for helping us earn this distinction. Without them, this would never be possible.

Click here to read the full article and explore the list.

 

Revisiting Your Savings Strategy

With many service industries shuttered due to quarantine measures—not to mention the seemingly never-ending stay-at-home orders—the opportunity for spending money has significantly decreased over the last year (though the at-home-entertainment budget might have increased). According to the U.S. Bureau of Economic Analysis, the result has been a record-high savings rate for households with disposable income: the personal savings rate hit 32.2% in April 2020, breaking the previous record of 17.3% in May 1975 (FactSet). Since having fewer opportunities to spend may continue to be the case until the vaccine is fully rolled out, now is a great time to revisit your current savings strategies, especially when it comes to emergency fund savings, retirement savings, and paying down debt.

Read more

 

Untold Truths of Acting in Your Clients’ Best Interest – Interview With Our CIO, Meghan Pinchuk

Our Chief Operating Officer, Stacey McKinnon, recently sat down with Meghan Pinchuk, our Chief Investment Officer, to talk about “Untold Truth # 5 – Don’t just invest with the herd” from Stacey’s industry white paper and why Morton Capital feels investing in asset classes outside of stocks and bonds helps protect our clients.

These types of investments come in all different shapes and sizes and in this interview, Meghan shares how we execute our alternative investment philosophy, including how we source and structure our investments.

They also talk about why it was important for Meghan to build a resilient enterprise when she took over running the firm with Jeff Sarti in 2013, her love for learning, and how the most successful clients are generally engaged, humble, and open-minded.

Click here to read Stacey’s industry white paper on the “Untold Truths of Acting in Your Clients’ Best Interest.”

View more of Stacey’s interviews from the Untold Truths series featuring industry experts such as Michael Kites, Chief Financial Planning Nerd at Kitces.com, and Philip Palaveev, CEO of The Ensemble Practice, LLC, here.

Watch the interview here.

 

The Madness of Crowds

In 1841, Charles Mackay, a Scottish journalist and author, published his study of crowd psychology, called Extraordinary Popular Delusions and the Madness of Crowds. In the first volume of his study, he examined economic mass manias, notably the tulip mania in Holland in the 1630s. Due to a bull market in tulip bulbs, many in Holland abandoned their businesses to grow tulips, trade them, or become tulip brokers. Even banks got involved and started accepting tulips as collateral, thus fueling the speculative bubble. Not long after, the mania collapsed in waves of panic selling, leaving many people financially ruined and shocking the Dutch economy.

Throughout history, there have been many examples of similar mass manias driven by crowd behavior, even in spheres beyond the financial markets. However, in today’s era, social media’s ability to quickly mobilize crowds for a single purpose has introduced a new level of risk. When joining crowds, individuals tend to develop a herd-like mentality. Regardless of their character, intelligence, and education, once in a group, individuals get swept up in the collective mind and may engage in riskier behavior than they otherwise might have on their own.

One recent example of this type of behavior was the price manipulation in GameStop stock earlier this year. This price manipulation was initiated by the r/WallStreetBets Reddit forum, which has over 9 million subscribers and is known for its aggressive trading strategies. In this instance, the crowd had decided that by buying GameStop stock, they would somehow be able to redistribute gains from hedge funds that had profited from betting against the struggling video game retailer into the hands of ordinary people. The power of the crowd caused the price of shares to shoot up by nearly 2,500% in the month of January, at one point trading at a volume nearly twice that of Apple. [1]

What happened with GameStop clearly shows the extent to which the financial markets are susceptible to the mobilization of investment crowds. And while a large group of people can indeed wield enough power to move markets, without investment fundamentals or appropriate risk management backing amateur investors’ moves, their gambling behavior may result in devastating consequences, just as it did during tulip mania nearly 400 years ago.

[1] Yahoo Finance

 

Welcome Lauren and Mollie

Lauren Salas
Private Investments Administrator

Lauren joined Morton Capital in June 2020 as a Private Investments Administrator. Previously, she worked as the Business Operations Coordinator for eight branches of an HVAC distributor in the Northern California region. She graduated from New Mexico State University with a Bachelor of Business Administration in marketing and managerial leadership. She is currently studying for the Series 65 exam. In her free time, Lauren enjoys going to the beach, camping, and traveling.

 

Mollie Privett
Client Service Associate, CFP®

Mollie joined Morton Capital in July 2020 as a Client Service Administrator before moving into a Client Service Associate role on the advisory team. Mollie graduated magna cum laude with a bachelor’s degree in business management from California State University, Long Beach, in 2017. Throughout her roles at prior companies as a Financial Representative and Client Service Specialist, she earned her life, health and disability insurance license, Series 6 license, Series 63 license, and her CERTIFIED FINANCIAL PLANNER™ certification. She is extremely passionate about helping others, solving problems, and communicating effectively. Outside of work, Mollie loves spending time with her family and friends, going to the beach, writing poetry, cooking plant-based meals, and being in nature.

 

MC Team Fitness Challenge For Safe Passage Youth Foundation

Making a healthy impact and supporting the community continue to be main focuses of ours. At the beginning of January, we kicked off our “Get Moving” initiative where our entire team participated in a fitness challenge to raise money for Safe Passage Youth Foundation, a local organization that provides daily nutrition and emergency COVID relief to hundreds of children (grades K-12) and their families. For every workout or outdoor activity each team member completed, MC made a donation to Safe Passage. In all, our team completed over 700 workouts and raised over $3,500. We are grateful for the opportunity to be a part of this wonderful cause in our local community.

Learn more about Safe Passage here.

Quarterly Commentary – Q4 2020

Deus ex machina

One of the few, albeit minor, benefits to an epically challenging 2020 was when blockbuster movies started being released straight to our homes. For example, the new Wonder Woman 1984 appeared on HBO on Christmas Day, offering two hours and thirty-five minutes of escape from reality. We won’t rate the movie in this commentary, but (spoiler alert!) we will say that we were not fans of them bringing back Chris Pine’s deceased character using some silly gimmick in the plot.

This gimmick is also known as a deus ex machina, a Latin term that dates back to the dramas of ancient Greece and Rome. Merriam-Webster defines deus ex machina as a “person or thing that appears or is introduced suddenly and unexpectedly and provides a contrived solution to an apparently insoluble difficulty.” In other words, if you have a problem for which there is no solution, you simply change the rules to fix it. When this device is used in literature or media, it is often unsatisfying and uncomfortable for the audience. We may willingly suspend our belief to enjoy a new world with new rules (e.g., one with a superhuman Amazon running around with a truth lasso), but once the rules have been created for this new world, they should not keep changing every five minutes.

If it is frustrating when this happens in the movies, it is even more disconcerting when it happens in real life. In many ways, it feels like this phenomenon keeps appearing in the modern world of finance as fiscal and monetary authorities keep changing the rules by which the game is played. Some examples include interest rates being held at zero or negative levels or trillions of dollars/euros/yen being printed globally under new monetary theory that fiscal solvency is irrelevant. The extremes of 2020 only exacerbated these distortions of reality and it is tempting to shut your eyes to the manipulations and hope that our government really has found a way to defy the truths of finance. Hope, however, is not a sound strategy. Instead, we need to keep our eyes wide open to the imbalances and risks that exist in our world today. If those in charge keep changing the rules, then we need to be willing to find a different game.

 

Stocks continue defying the laws of gravity and common sense

Most probably would have guessed that a global pandemic would have been negative for the stock market. Not so! Fiscal stimulus, in conjunction with early and sweeping monetary stimulus by the Federal Reserve (Fed), created the easiest financial conditions on record and flooded the market with liquidity, driving stocks higher in 2020. The fourth quarter also saw the introduction of two high-efficacy COVID-19 vaccines by Pfizer and Moderna, as well as prospects for additional stimulus, which propelled risk assets to new heights by the close of the year.

So not only has the market recovered the steep losses first suffered when the extent of the pandemic became apparent in early 2020, but it has since surpassed pre-pandemic levels to a meaningful degree. This is in the face of declining earnings and a great deal of uncertainty about when and to what extent those earnings will recover. To be sure, there have been some “winners” that came out of 2020. The pandemic shock has been transformational for the economy, bifurcating it into “haves” and “have-nots.” This bifurcation has benefited the so called “stay-at-home” sectors of the market, in particular technology, while decimating other sectors such as retail, travel and entertainment. While some of these shifts may prove to be temporary, others will be permanent, and still others have accelerated longer-term trends that were already in place.

At the end of 2020, markets seemed to be pricing in a degree of optimism and certainty regarding the path forward that did not appear to reflect the underlying challenges facing the U.S. economy. In our opinion, uncertainty still remains elevated with respect to both the short-term path of the recovery as well as the long-term transformation of the post-pandemic economy. The discrepancy between stock performance and earnings in 2020 served to only further exacerbate stretched valuations. Also, it is important not to forget about the revolutionary amounts of debt it took to keep things afloat, which we believe will reverberate through future generations. Is this really an environment where it is logical for stocks to be making new all-time highs?

 

Investor speculation adds fuel to the fire

While massive government stimulus has been a major driver of the recovery in stocks, investor behavior has also played a key role. Historically, two main indicators that point to how investors are engaging in more speculative behavior are heightened margin levels and abundant initial public offerings (IPOs). Starting with margin, this is simply debt that brokerages extend to their account holders, using their existing securities as collateral. Past market peaks have tended to coincide with high levels of margin debt. This is not surprising as it is human nature to become greedy when stocks go up and borrow to buy even more stock. Toward the end of 2020, margin debt topped $700 billion, a new high and well above levels that have been seen since the dot-com bubble.

Also consistent with previous market pinnacles, private companies are going public at a heightened rate. As you can see in the chart below, 2020 has had many more IPOs than in recent history.

In a year of a global pandemic, where our economy collapsed in terms of output and we lost 20 million jobs in just a few months, does it make sense that the IPO market was robust? Perhaps it would have been more prudent for companies to take a breather and wait until there was more certainty surrounding their near-term futures. After all, look at the middle of the chart in 2008 and 2009, where IPO activity collapsed. This makes a lot more sense in an economic downturn. But not this time, because despite all the uncertainty, in 2020 investors have been eager to take a chance on pretty much any and all IPOs. It is irrelevant if these companies have earnings; in fact, looking at the numbers you would think it was discouraged since about 80% of these 2020 IPOs had negative earnings.

Far from caring about earnings, speculative investors have pushed these stocks higher, to the point where their valuations often reach ridiculous levels very quickly. An example of a recent IPO in this category is QuantumScape, an up-and-coming entrant into the electronic vehicle battery space. With Elon Musk and Tesla making headlines, this is obviously a very hot area of the market, so it is no wonder that this company attracted investor interest. But despite the company’s exciting potential, THEY HAVE YET TO SELL A SINGLE BATTERY. The technology, while very promising, is not yet proven. So what valuation did investors give this pre-revenue company? Nearly $50 billion. To put that in context, that market cap is roughly double the size of Panasonic, which is the battery maker for Tesla cars. Panasonic has a number of other business lines as well and has been around for decades, but the market likes shiny new toys in this speculative environment, so QuantumScape reached a height of $50 billion before getting slashed back down to a meager $20 billion.

Another hot 2020 IPO was Airbnb, the popular company that allows you to rent a home or apartment online. This was a company that got hit pretty hard with the pandemic and its revenue in 2020 was down a good amount from the year before. Also, on $2.5 billion of sales, it lost an impressive $700 million. This is a company that has never made a profit in a calendar year. Yet it was rewarded with a $100 billion valuation when it went public. To put that in perspective, Starbucks, a truly global brand and moneymaker, has a valuation of a little more than $100 billion. FedEx, a massive company that has done well during this pandemic, is worth about $70 billion. These types of IPO valuations are completely disconnected from reality and reflect a speculative fervor that has seized market participants, not dissimilar from the tech frenzy that gripped markets prior to the dot-com bubble bursting.

 

If you don’t like the rules, then change the game

Most investors need to make their investments work for them over the long term to meet their financial goals. Even for those who have large cushions built-in, it is still prudent to make sure that you can stay ahead of inflation, which we see as being a meaningful risk in the years ahead. So what is the solution when we are faced with an investment landscape that includes massive debt imbalances from government intervention and frenzied investor speculation? Though the situation with traditional markets seems dire, we are not intimidated and instead feel increasingly confident in our approach to portfolio management. Three key aspects to our approach include:

1) With traditional stocks, focus on what you can control.

While our target stock allocations are at their lowest in our firm’s history, this does not mean that we do not own any stocks. There are a number of reasons why stocks are a prudent part of a long-term portfolio, not the least of which is that if the Fed continues pumping money into the system, we could continue to see stocks benefit from asset price inflation. At the end of the day, we do not believe that this is a long-term recipe for success. But the proverbial end of the day could potentially be far off and, in the meantime, stocks can continue to benefit from the tremendous liquidity in the system. One key is making sure that stocks are at an appropriate level in the portfolio given their potential for meaningful volatility. Another key is making sure you maintain diversification and do not allow FOMO (fear of missing out) to push you to overweight the hottest, most overvalued tech stock in the market. Finally, while we cannot control market valuations and performance, there are some attributes of this investment that we can control: namely, fees and tax efficiency. If we access our stock allocations using vehicles with relatively low fees and high levels of tax efficiency, this can help maximize returns for the long run.

2) Take advantage of speculative behavior (safely) when you can.

While we have no interest in being swept up in the speculative fervor of negative-earning IPOs, that does not mean that there aren’t ways to profit from the space. An increasing number of companies are choosing to go public through the use of special purpose acquisition companies (SPACs). SPACs, also known as blank-check companies, are pools of capital raised by a sponsor, such as a well-known businessman or asset manager, with the goal of finding a company to take public. At the onset, a SPAC is funded entirely with Treasuries. The manager that Morton Capital utilizes in this space looks to take advantage of a structural inefficiency that allows investors to participate in the initial jump up in SPAC prices following the announcement of a deal without actually having to own the stock and assume the downside risk. Thus, investors can participate in some of the upside from these SPAC IPOs with the downside being the yield on Treasury bonds. Needless to say, there are quite a few moving parts to this strategy, as well as logistical requirements and minimum sizes. If you are interested in learning more, please contact your Morton Capital wealth advisor.

3) Lend on assets, not to zombies.

The more debt that piles up in the system, the riskier it is to loan money to companies that may be challenged when paying back that debt. The stock market is currently plagued with the highest level of zombie companies in its history (representing around 20% of the largest U.S. companies according to a late 2020 study by Bloomberg). A zombie company is defined as a company that generates insufficient earnings to pay its debt service and has to continually borrow to stay in business. Instead of lending to companies that need a constant supply of cheap debt to survive, our focus has been on making loans on tangible assets. This includes making private loans to companies that are cash-strapped but have real assets that can be sold if the company does not survive. It also includes making loans to borrowers on assets such as real estate, including mortgage loans in both the private and public markets. The key to any strong asset-based loan is how conservatively the manager values the collateral assets that back the loan and what type of cushion the manager leaves to account for any changing values over time. Another preference of ours is to invest in managers that make short- term loans for periods where there is better clarity around the values of the assets. In an environment where traditional bonds offer little reward with plenty of risk, finding managers with expertise in asset- based lending can add meaningful downside protection as well as opportunities for heightened cash flow.

We recognize that these are trying times with a great deal of uncertainty pervading all aspects of life. Instead of being intimidated by the uncertainty in financial markets, we hope that our clients feel empowered by our willingness to look beyond the traditional game, where the rules keep changing, and instead find investments with fundamentals that still make sense. If you have any questions about your portfolio or financial plan, please do not hesitate to reach out to your Morton Capital wealth advisor. As always, we appreciate your continued confidence and support.

Best Regards,

 

Disclosures

This commentary is mailed quarterly to our clients and friends and is for information purposes only. This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain investment opportunities discussed herein may only be available to eligible clients. References to specific investments are for illustrative purposes only and should not be interpreted as recommendations to purchase/ sell such securities. This is not a representation that the investments described are suitable or appropriate for any person. It should not be assumed that MC will make investment recommendations in the future that are consistent with the views expressed herein. MC makes no representations as to the actual composition or performance of any security.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. YTD returns shown are from 12-31-2019 through 12-31-2020 and Q4 returns are from 10-01-2020 through 12-31-2020. Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MC. In addition, MC’s recommendations may differ significantly from the securities that comprise the benchmarks. Indices are unmanaged, and an investment cannot be made directly in an index.

Past performance is not indicative of future results. All investments involve risk including the loss of principal. Details on MC’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

2020 Reflections | Year End Letter

NEW YEAR’S WISHES

As we look back over 2020, this year has turned out very differently than we expected at the start. As the world has slowed down to keep everyone safe, Morton Capital has continued its work to bring an essential service to our clients and community. As you’ll see from the highlights below, we are more dedicated than ever when it comes to our team and our clients. We would like to thank you for allowing us to continue to be part of your story, especially during such a challenging time.

 

MC TEAM AND GROWTH

In 2020, initiatives around hiring, team development, and firm growth continued to be a focus.

  • MC was named one of the Best Places to Work for Financial Advisors by Investment News for the second year in a row. This list highlights the top 75 firms nationwide in the financial advice industry.

  • We implemented our Employee Value Proposition, a commitment by MC and its team members to create an organization full of meaning and purpose and that champions our core values.
  • We launched our Mentor/Mentee program, which pairs team members across the firm to provide support and development around such skills as leadership, presentation skills, and written communication.
  • We held our first Core Values Awards, highlighting team members who exemplify each of our five core values.

  • This year, we began working more closely with Talia Jacqueline of Visceral Impact to help with team development and to teach us about the psychology of communication.
  • MC hired talented new people across several teams, including the advisory, compliance, client service and private investments teams. New hires included:
    • Brian Mann (Wealth Advisor), Mollie Privett (CFP®, Client Service Associate), Thao Truong (CFP®, Associate Wealth Advisor), Sherry Uchuion (Compliance Administrator), Jessica Hull (Client Service Administrator), Cameron Meek (Client Service Administrator), Trent Paddon (Client Service Administrator), Lauren Salas (Private Investments Administrator), and Judy Lee (Private Investments Administrator)
  • Across the firm, leaders met with team members to discuss individual, personalized career path timelines, for a total of 45 firm-wide.

  • Advancements through those career path timelines included:
    • Menachem Striks (Chief Compliance Officer), Sarah Ellis (Client Experience Manager), Dan Charoenrath (Director of Operations), Olivia Payne (Associate Wealth Advisor), Chris Wahl (Associate Wealth Advisor), Benjamin Markman (Trader), Elana Yaffe (Financial Planning Associate), Edward Garcia (Paraplanner), Patrick Garcia (Fund Relationship Manager), Moriah Bowles (Client Service Technical Specialist), Austin Overholt (Client Service Administrator), Kierstan Lewis (Private Investments Administrator)
  • We enhanced leadership development initiatives and the number of team retreats.
  • Two of our team members became new partners in the firm: Wealth Advisor Chris Galeski and Chief Compliance Officer Menachem Striks.
  • Through the hard work and dedication of our team, we were able to add 40 new client households to the MC community. We now manage over 1,000 client households and surpassed $2 billion in assets under management (AUM).
  • Three team members welcomed beautiful babies Aila (Chris Galeski), Anderson (Carly Powell), and Presley (Patrick Garcia) this year.

 

INVESTMENT RESEARCH, FINANCIAL PLANNING, AND WEALTH AND LEGACY PLANNING

We work diligently behind the scenes to source great investment opportunities for our clients. To give you a peek behind the curtain, this year:

  • Our investments team had over 180 calls on new potential investment opportunities.
  • Out of all the new strategies reviewed, we introduced 3 new strategies.
  • Our CIO, Meghan Pinchuk, and our investment research, private investments, and portfolio management teams collaborated on an “Investment Approach” video that highlights the core tenets of our investment philosophy.

Financial planning and wealth and legacy planning are key ingredients to helping our clients get the most life out of their wealth, and we continually work, year after year, to refine and expand our planning offerings. This year, we:

  • Introduced a five-month-long Paraplanner training program to provide a strong foundation for our Paraplanners, both those staying on the Financial Planning Team career path and for those moving along the advisory team career path.
  • Expanded our Financial Planning and Wealth and Legacy Planning Teams to five members.
  • Reviewed and completed over 250 financial plans.
  • Completed over 130 Wealth and Legacy Planning meetings with Wealth Planner Brian Standing.
  • Held 48 education sessions for our team members around estate planning, insurance, tax strategies, and retirement planning.

 

MC IN THE COMMUNITY

Earlier this year, as a result of a company-wide innovation tournament, we formed an internal committee dedicated to pursuing charitable initiatives in the community. Our team members at MC feel passionately about giving back to the community, not just financially but also with our time and energy. Here are a few of our 2020 charitable initiatives:

  • Community Give Back – We were able to help 22 individuals/families with complimentary financial planning advice at a time when many are having to make extremely hard financial decisions.
  • Get Moving Fitness Challenge – In November, we chose Feeding America as the recipient of our first-ever fitness challenge for charity. Every time a team member exercised for 30 minutes, MC donated $5. We are excited to report that our team members were active 532 times, logging more than 250 hours and raising $2,660!
  • Holiday care packages – In December, we collected non-perishables, toiletries, and other supplies to send to the military overseas. We were able to send over 150 holiday care packages this year.

 

INDUSTRY RECOGNITION, ENHANCEMENT, AND EDUCATION

 Education is incredibly important to us at MC, as is enhancing our offering through technology and marketing initiatives. We are also pleased to share below how our firm and team members are making an impact in the financial services industry.

  • Virtual conferences:
    • COO Stacey McKinnon’s “Good to Great” presentation at Bob Veres’s virtual 2020 Insider’s Forum
  • In addition to being featured on industry forums and at conferences, MC hosted our own live webinars for the first time this year.
    • CEO Jeff Sarti and CIO Meghan Pinchuk presented market review webinars over the past four quarters.
    • Our advisory team hosted our six-part “Staying Connected During COVID-19 webinar series.
  • We launched MC’s social media presence, writing hundreds of posts over the course of this year, including advisor-written articles, our This Is Wealth series, and book stack posts of what our team has been reading.

  • To support our increased use of home offices and virtual client meetings, we expanded our technology infrastructure to include Zoom’s cloud-based phone service and the appointment scheduling software Calendly.
  • We updated our reporting process to shift to more on-demand access of portfolio performance through our online client portals rather than traditional quarterly performance reviews.
  • In February, we closed out our popular Financial Bites educational lunch series.
  • Our team members continued to work towards increasing their knowledge by obtaining additional certifications that enhance our offering.
    • Series 65 license (wealth management): Olivia Payne, Benjamin Markman, and Chris Wahl
    • CFP® certification (financial planning): Mollie Privett

Even in such a challenging year, it has been important to us to continue to pursue knowledge and growth to become even better stewards of our clients’ wealth. This year, more than ever, we feel truly grateful for your continued confidence in us and wish you and your family a happy, and healthy, new year.

Here’s to a brighter year ahead.

Your Morton Team

Mid-Quarter Newsletter – November 2020

Year-End Tax Planning

Yes, it’s that time of year again: When it starts to get a bit nippy in Southern California and we have to wear long-sleeve shirts with our shorts and sandals. The time of year when things start to get a little cheerier and we look forward to the promise of a new year ahead (especially after 2020). Yes, you guessed it—it’s time for tax planning!

This year has been an eventful one, to say the least. Amid the social, medical, and political turmoil of 2020, there have been two laws passed that may affect your year-end tax-planning: the CARES Act and the SECURE Act (passed a lifetime ago in January). Let’s take a look at some key opportunities in the new laws, as well as some oldie-but-goodie strategies, to see what’s best for you.

  • Maximize your retirement savings
    • Did you turn 50 this year? If so, you’re entitled to a $6,500 catch-up contribution for your 401(k) plan and an extra $1,000 for traditional and Roth IRAs.
    • If you’ve already maxed out your 401(k) contribution, and your company retirement plan allows you to, consider contributing additional funds to your plan on a non-deductible basis. For 2020, the total contribution limit is $57,000 (made up of your first $19,500 employee elective deferral + any employer matching + any additional contributions you make).
    • If you’re over 70.5 and still working, the SECURE Act increased the age limit to contribute to your traditional IRA to 72.
      • Note, though, if you’re considering making a qualified charitable distribution (QCD), making a deductible IRA contribution may reduce how much of the QCD you can deduct.
    • Take advantage of deductions
      • Charitable deductions
        • The CARES Act increased the limit on charitable deductions in 2020 to 100% of AGI for cash contributions made to public charities.
          • Note: contributions made to a private foundation or a donor-advised fund do not qualify as qualified charitable contributions (QCCs) so the 60% AGI limitation for cash would apply.
        • If you don’t itemize deductions, the CARES Act also permits an above-the-line deduction of $300.
      • Consider a Roth conversion
        • If your income is lower this year—either due to COVID-19 and/or the CARES Act waiver of required minimum distributions for 2020—consider doing a Roth IRA conversion since you’ll already be in a lower tax bracket.
        • The SECURE Act requires that IRAs inherited by non-spouse beneficiaries be distributed within 10 years. Mitigate the tax impact on your heirs by converting funds from a pre-tax IRA to a Roth so the distributions to your heirs will be tax-free.
        • If a Roth conversion is appropriate for you, you can pair it with your QCC to offset the income recognized from converting pre-tax funds into a Roth.

If you’re interested in discussing any of the above strategies further, contact your wealth advisory team now. The last couple months of the year can get very busy with tax-planning requests, so processing times can be delayed at brokerage account custodians. If you and your advisor decide that one (or more) of these strategies is right for you, start early to ensure any transactions are processed by year end. The holidays are going to look a lot different this year, so perhaps a silver lining is the opportunity to be more strategic when it comes to another December tradition—tax planning.

Disclosures: This information is presented for educational purposes only. It is not written or intended as financial or tax advice and may not be relied on for purposes of avoiding any federal tax penalties under the Internal Revenue Code. You are encouraged to seek financial and tax advice from your professional advisors before implementing any transactions and/or strategies concerning your finances.

 

Schwab IMPACT Video & Sharkpreneur Podcast

Featuring our CEO, Jeff Sarti

Our CEO, Jeff Sarti, was featured at Charles Schwab’s virtual IMPACT conference. Thousands of investment advisory professionals gathered remotely to learn about how to think differently about the issues that matter most to their practices. This year Schwab highlighted four firms based on the impact they are making in the industry. In a year that has brought so much change, we are honored to be chosen. Watch the video below as Jeff shares his personal thoughts on serving our clients during these uncertain times.

Jeff was also featured on a recent episode of the Sharkpreneur podcast with host Seth Greene, one of the original sharks from the hit TV show Shark Tank. Jeff discusses Morton’s market outlook given the challenging economy and also explains how our three core beliefs drive our business decisions and empower our internal teams.

To watch Jeff’s video from the Schwab IMPACT conference or listen to his podcast with Seth Greene, click below or visit our Insights page on our website.

Links:

Schwab IMPACT video link:  https://mortoncapital.com/schwabimpactvideo/

Sharkpreneur podcast link: https://mortoncapital.com/sharkpreneur-podcast-featuring-jeff-sarti-growing-to-2-billion-aum/

 

What Does “Money Printing” Really Mean?

In recent years, the term “money printing” has become commonplace with investment professionals, economists and politicians. But what does it actually mean? While the specific execution can be highly nuanced and rather complicated, at its core, money printing is when assets suddenly appear on the balance sheet of the Federal Reserve (Fed), which then facilitates the distribution of those assets to privately held banks. Contrary to its name, money printing doesn’t constitute the use of a physical printing press, but, in our electronic world, just requires the push of a button to make digital assets appear.  To better understand what money printing is and why we should care about it, let’s take a look at money printing in action over the last two global economic recessions.

 

Money printing during the Great Financial Crisis (GFC)

To ensure they can meet their obligations, banks must hold a certain amount of cash as reserves. In 2008, according to the FRED economic database, U.S. banks had very low cash levels (only around 3%!), which meant that, as millions of Americans defaulted on their mortgages, banks didn’t have the cash on hand to remain solvent on their own. The Fed stepped in and essentially created “cash” in banks’ accounts with a few keystrokes. The hope at the time was that this move would shore up bank balance sheets and allow them to start lending again to stimulate the economy. While the first objective was accomplished, the higher level of lending activity didn’t materialize, leading many to cite this example as evidence of how money printing was not economically stimulative or inflationary.

 

Money printing during COVID-19

Over the last several months, the financial media has highlighted numerous ways in which banks are now in better shape than in 2008. However, total debt as a percentage of the gross domestic product in the U.S. economy remains very high. High debt levels make the economy fragile to external shocks—COVID was an example of such a shock. As millions of people lost their jobs and businesses struggled to remain solvent, it quickly became clear that this round of money printing needed to channel money directly into people’s pockets rather than shore up the cash reserves of banks.

To provide the economy with trillions of dollars, the government passed a large fiscal package, which included increased unemployment benefits, stimulus checks and paycheck protection loans. To fund these fiscal outlays, the government had to issue even more Treasury securities, which the Fed stepped in to purchase as the buyer of last resort. Unlike during the GFC, money was poured directly into the economy. As a result, the money supply sharply increased.

The real risk of all of this money printing and fiscal stimulus is that there are now more dollars out there chasing the same number of goods. While money printing may not be obviously inflationary in the short term, it’s essentially adding powder to the inflation keg. Just because it hasn’t ignited yet doesn’t mean that all that extra powder won’t ultimately matter. While some investors may choose to ignore this risk, we’ve turned increasingly to real assets such as real estate and gold to protect client portfolios. Money printing may seem like a harmless push of a button, but its prevalence as the stimulative tool of choice for those in charge makes it especially important to understand and monitor.

Disclosure: This information is for educational purposes only. It should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class. This document expresses the views of Morton Capital and such views are subject to change without notice. Any investment strategy involves the risk of loss of capital. It should not be assumed that MC will make investment recommendations in the future that are consistent with the views expressed herein.

 

Welcome Judy and Cameron

Judy Lee

Private Investments Administrator

Judy Lee came to Morton Capital in March of 2020, after previously working in graphic design, copy editing, and project management for over 20 years. She brings a wealth of experience and organizational skills, having worked in the fields of publishing, product design/manufacturing, corporate/marketing design, and education. Judy graduated with a Bachelor of Arts degree in English from the University of California, Los Angeles. When not at work, she enjoys spending time with her family, collecting children’s books, cooking, watching Dodgers and Bruin sports, and serving at her church.

 

Cameron Meek

Client Service Administrator

Cameron Meek joined Morton Capital in May 2020 as a Client Service Administrator. Cameron is originally from North Dakota, and moved to California to pursue work in the entertainment industry before attending Pepperdine University. She graduated from Pepperdine with a degree in communications. Cameron enjoys spending time at the beach with friends, hiking, and trying new recipes.

 

DISCLOSURE: Your security and privacy protection is important to us. All emails with attachments or the word “secure” appearing in the subject line have been sent with the highest level of security and encryption available to protect your privacy.

Please contact your Wealth Advisor at Morton Capital if there are any changes in your personal or financial situation or any changes in your investment objectives, or if you wish to add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure statement (Form ADV Part 2) discussing our advisory services and fees continues to remain available for your review upon request. All e-mail sent to or from this address will be received or otherwise recorded by Morton Capital in accordance with SEC regulations and is subject to archival, monitoring, or review by someone other than the recipient. The information contained in this e-mail message is intended only for the personal and confidential use of the recipient(s) named above. If the reader of this message is not the intended recipient or an agent responsible for delivering it to the intended recipient, you are hereby notified that you have received this document in error and that any review, dissemination, distribution, or copying of this message is strictly prohibited. If you have received this communication in error, please notify us immediately by e-mail, and delete the original message.

Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Morton Capital) will be profitable. Many factors affect performance including changes in market conditions and interest rates and changes in response to other economic, political or financial developments. There is no guarantee that a particular investment objective will be achieved and Morton makes no representations as to the actual composition or performance of any security.

Mid-Quarter Newsletter – August 2020

Our Investment Philosophy

The last several months have been extraordinary to say the least and there are still so many unknowns in terms of the financial markets, our economy, and what our world will look like post-pandemic. As a firm, we have undoubtedly adapted how we communicate with our team, other business professionals, and our clients. Throughout all of these changes, the element of our business that has stayed consistent is our investment philosophy. At Morton Capital, we’ve always taken a different approach to investing—one that we believe is the best way to provide the returns our clients need for their lifestyle while trying to protect them from the swings of the market. Our beliefs have remained the same since our founder, Lon Morton, started our company almost 40 years ago and we take great pride in carrying on his legacy.

As we continue to communicate virtually, our Investment Team recently created a video that speaks to how we design portfolios to help our clients get the most life out of their wealth. Watch the video to meet the team and learn a little more about us.

Watch our Investment Approach Video here.

 

Financial Advisor Success Podcast & RIA White Paper
Featuring our COO, Stacey McKinnon

Our Chief Operating Officer, Stacey McKinnon, was featured on a recent episode of Michael Kitces’s Financial Advisor Success Podcast. Michael is a well-known speaker, writer, and editor in the financial services industry. In the episode “Scaling an Advisory Firm by Finding New Talent Outside the Financial Services Industry,” Stacey and Michael talked in-depth about how Morton has grown and evolved as a firm in recent years. Stacey touched on our culture of trust initiative in 2017, our non-traditional approach to hiring talent from outside the industry, and the way we’ve restructured our compensation model.

Stacey also co-authored an RIA white paper with the CEO of PFI Advisors, Matt Sonnen, called “The New RIA Workplace.” The industry report explores the changes firms have had to make to their businesses since stay-at-home orders began. It also shares the pros and cons of both office and remote work environments, how leaders and managers are maintaining company culture during these times, and what the office of the future could look like.

Click here to listen to Stacey’s podcast with Michael Kitces and read the RIA White paper here.

 

Why Is Gold Going Up?

Gold is making headlines in 2020, as its performance leads most other asset classes year-to-date and investors are starting to take notice. In particular, Warren Buffet’s recent purchase of a gold mining stock has caught the attention of the media. Those who only think of gold as a “safe-haven” investment have been surprised by its strong performance even as the stock market rallied from its March low. But fundamentally, we believe that gold is not an investment at all. Instead, it’s just another form of money like the U.S. dollar or the Euro. So, if it’s not an investment, what’s driving this big rally in gold? While the answer can be complex, we’d argue that there are two main areas on which to focus when it comes to understanding the price of gold: the money supply and investor sentiment. Read the Full Article here.

 

A Conversation About Change with Chris Galeski
Featuring Retired PGA Tour Player Peter Tomasulo 

Chris Galeski, Wealth Advisor and Partner at Morton Capital, speaks with Peter Tomasulo, retired PGA Tour player and Director of Investor Relations at Lyon Living. In this 30-minute video interview, they reflect on their former sporting careers, life lessons, family, and the triggers and milestones that opened the door for transition and career change.

 

Watch the video!

Mid-Quarter Newsletter – May 2020

The Birth of the Federal Reserve

Global central banks and their unconventional monetary policies have been in the limelight since the financial crisis in 2008. Given the unprecedented actions of the Federal Reserve (aka the Fed) recently, we wanted to give you a closer look into why the U.S. central bank was created and how its mandate came about.

Early attempts to establish a central government bank started as far back as the birth of our country in 1789, but none of those attempts made much headway. By 1860, the need for reliable central financing was clear, as there were nearly 8,000 state banks, each issuing their own paper notes. Thus, the National Banking Act was passed a few years later, which created a uniform national currency and only allowed nationally chartered banks to issue bank notes. The act didn’t, however, create a strong central banking structure. As the industrial economy expanded, the weaknesses of the nation’s decentralized banking system became more pronounced, leading to serious consequences. The 1907 Bankers’ Panic—a three-week financial panic that occurred during an economic recession, where liquidity dried up at local and state banks, causing many of those companies to go bankrupt—fueled a much-needed reform movement.

After six years of debate and negotiations, the Federal Reserve Act was signed into law on December 23, 1913, establishing the Federal Reserve System. Sixty years later, in the early 1970s, unemployment and inflation levels began to rise, reigniting fears of an economic recession. In 1977, Congress enacted the Federal Reserve Reform Act, which explicitly set price stability as a national policy goal for the first time. The very next year, Congress passed the Full Employment and Balanced Growth Act, which established the second policy goal as full employment. Today, price stability and full employment are referred to as the dual mandates of the Fed.

The Fed, along with other global central banks, has responded rapidly and forcefully to the current pandemic crisis. Central bankers clearly want to prevent the pause in economic activity from turning into a permanent solvency crisis and wave of defaults. Many will argue that the Fed’s response goes beyond its mandates—a stance that will be debated for many years to come.


How Business Owners Can Find Opportunities in Chaos
By: Wade Calvert, Wealth Advisor and Partner

While 2020 may seem like a difficult time to be a business owner, there are hidden opportunities to grow in the chaos, especially if you think of opportunity as the ability to make positive changes in your business regardless of what’s going on around you.

Click here to read the article below to learn about five things that every business owner should consider in this environment to capitalize on potential opportunities for growth.


Leadership in a New Workplace
By: Dan Charoenrath, Director of Private Investment Operations

As businesses prepare for a return to work in the coming months, one of the most important questions that every leader must be ready to address is: How do we operate differently to ensure that our people are still engaged and motivated? Beyond questions surrounding how to resume regular operations, we must first consider how we’ll successfully lead our teams through the drastic changes in their work environment. Every person in your organization has been profoundly impacted on an emotional, mental and financial level over the past few months—therefore, it’s unreasonable to expect that we can continue to communicate, direct and inspire them in the same way that we always have. Leading an individual through change can be challenging in and of itself because, by nature, change is uncomfortable for everyone.


Read the full article by clicking here!


New Partners

We are pleased to announce that Wealth Advisor Chris Galeski and Compliance Manager Menachem Striks have become partners at Morton Capital.

 

 

 

 

 

 


Follow Us On Social Media

This year we have focused on updating our social media pages to stay connected as well as provide you with timely tips, videos and advice to help you get the most life out of your wealth. Please click the social icons below to keep up with us on LinkedIn, Facebook, Instagram and Vimeo!

We welcome you to visit our new COVID-19 resources page on our website as well, where you can find trusted and helpful information related to financial planning and replay our entire Staying Connected During COVID-19 webinar series.


Welcome New Team Members: Amber and Benjamin

Amber McBride
Paraplanner

Amber graduated from California State University, Channel Islands, where she studied psychology. She always knew that wherever her career took her, she wanted to help people and solve problems. Before coming to Morton Capital and joining the Financial Planning Team as a paraplanner, Amber worked as a senior paralegal at a law firm specializing in estate planning, trust administration, and tax planning, where she gained nine years of experience. During her downtime, she enjoys traveling, hiking, live orchestral music, and spending time with her family.

Benjamin Markman
Private Investments Administrator

Benjamin Markman joined Morton Capital in July 2019. As a Private Investments Administrator, Benjamin plays a critical role in managing the coordination and administration of a variety of alternative investments. He graduated from the University of Oregon with a Bachelor of Science degree in business administration with a concentration in finance and a minor in economics. Benjamin holds a Series 65 license and is currently studying for the CFA® Level I exam. In his downtime, Benjamin enjoys exercise, playing piano, and chess. 


Oh Babies!

Our MC Family just grew by three! Wealth Advisor and Partner Chris Galeski and his wife, Briana, welcomed a baby girl, Aila Grace, on March 16. Client Service Administrator Carly Powell and her husband, Andrew, welcomed a baby boy, Anderson Eric, on March 27 and most recently, Private Investments Administrator Patrick Garcia and his wife, Pauline, welcomed a baby boy, Presley Grayson, on April 29. We congratulate all three couples on their growing family. Fun fact: this is the first child for each family.

Mid-Quarter Newsletter & Reporting Update – March 2020

Morton Capital Reporting Update

As part of our efforts to provide you with up-to-date information in a secure and efficient manner, beginning in March 2020 Morton Capital will no longer automatically send out quarterly reports.  Clients will still be able to receive reports upon request.

We are making this change because our clients now have on-demand access to current account information, including performance and portfolio balances, via our online portal. We have had widespread adoption of the portal and received positive feedback as to its ease of use and timeliness of information.  In addition to being environmentally friendly, the portal also has important security features such as dual-factor authentication that make it more secure than email or mailed reports.

Please contact your advisory team if you need assistance in setting up or accessing your client portal.


VIDEO: Top Considerations When Selling Your Business

Business owners are often faced with numerous questions: What will become of my business after I retire? Am I financially prepared to retire? Will I be able to protect the financial future of my family during retirement? With roughly 4 million businesses owned by the baby boomer generation and nearly $10 trillion of wealth tied up in those businesses, it’s important to consider an exit planning strategy to help lead to your retirement goals.

Watch our Wealth Advisor and Senior Vice President, Joe Seetoo, as he touches on the first steps business owners should take in order to develop an exit planning strategy. Please click the image below or the following link: https://vimeo.com/395538551


Does the Secure Act Impact Your Financial Plan?

While the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, includes many updates to retirement account rules starting in 2020, we’ve highlighted a few below that could impact your financial plan:

  • Delayed Required Minimum Distributions (RMDs) – Mandatory distributions from your pre-tax retirement accounts are now required at age 72, increased from age 70½. (This only applies to individuals turning 70½ after January 1, 2020.)
  • No Age Limit on IRA Contributions – You can now contribute to your IRA after age 70½ (as long as you’re earning income).
  • Elimination of “Stretch” Provisions for Non-Spouse Beneficiaries – Previously, non-spouse beneficiaries could take distributions from inherited IRAs over their lifetimes; the SECURE Act now requires non-spouse beneficiaries (with some exceptions) to fully empty the inherited IRA within 10 years of inheritance. Since this change will impact your kids’ inheritance, you may have to consider other ways to maximize tax efficiency, such as using your IRA assets to give to charity.
  • Exceptions to this rule include minor children (until they reach adulthood), the disabled or chronically ill, or individuals no more than 10 years younger than the decedent. If you have beneficiaries with special needs, it’s important to revisit your estate plan to make sure these beneficiaries qualify for this exception.

Welcome Edward and Chris

Edward Garcia

Paraplanner

Edward Garcia joined Morton Capital in July 2019 after a career as an educator in both public and private education. In his role as a Paraplanner on the Financial Planning Team, he now collaborates with the advisory team to analyze and help prepare financial plans. He earned his Bachelor of Arts degree in English with an option in writing from California State University, Northridge, and a master’s in education with a specialization in cross-cultural education from National University in San Diego. Currently, Edward is in the process of earning his CERTIFIED FINANCIAL PLANNERTM certification from the University of California, Los Angeles. He resides in Oak Park with his wife and their two daughters, and enjoys traveling, adventures in the great outdoors, and a good book.

Chris Wahl

Client Service Administrator

Chris Wahl joined Morton Capital as a Client Service Administrator in August 2019. With more than six years of experience helping high-net-worth and institutional clients in the financial services industry, he has held various roles in operations, regulatory compliance, and consulting and has extensive trading experience. He uses the skills he has gained to provide excellent service and ensure client needs are met in a timely and efficient manner. Chris earned his Bachelor of Arts degree in marketing communication from California Lutheran University. He has passed the Series 7 and 63 securities exams, and is currently studying for the CERTIFIED FINANCIAL PLANNERTM designation. Outside of work, he enjoys cycling, yoga, and being outdoors with family.


The Great Race of Agoura Hills

We’re very excited to participate as a team in the 35th annual Great Race of Agoura Hills on Saturday, March 28. The Great Race has continuously been a popular family-friendly event in the local community since 1986. Interested in joining our team on race day? To learn more and reserve your spot, visit their website at greatrace.run. Choose from one of their featured race options: Old Agoura 10K, Deena Kastor 5K, Kids 1 Mile (ages 6-12) or Family Fun Run (all ages and strollers too) and don’t forget to select us, Morton Capital, as your team. Once you sign up, we’ll coordinate the race details with you directly and include an MC team shirt for you to wear on race day. We hope that you join us for this fun event!


Financial Bites Lunch Series

Our seventh and final event of our popular Financial Bites lunch series will take place on Friday, March 20, from 12 pm to 1 pm. This session will cover personal lines insurance, where we’ll be breaking down policies that deal with accidents and liabilities to help you understand how you’re covered.
You can RSVP to our last session by visiting mortoncapital.com/financialbites.

Last month, Kevin Rex and Patrice Bening, members of our advisory team, presented on life insurance and long-term care.

Watch the video below by clicking the image or following the link and learn the “when and when not to” rules on buying life and long-term care insurance policies.

Videos to all of our previous sessions are now available to watch on our website. Check out our Insights page to view the presentations or click the following link: https://mortoncapital.com/insights/

Mid Quarter Newsletter – December 2019

No Profits? No Problem!

In the venture capital industry, a “unicorn” refers to a technology startup company that has reached a private valuation of $1 billion. While few and far between in the past, these types of companies are commonplace in today’s market, and, more surprisingly still, most are actually losing money.  Uber, Lyft and Peloton are a few high-profile examples of recent initial public offerings (IPOs) that are not profitable. Of late, the public markets have not been kind to these investments, as they are all trading well below their peak prices (see table below).

The most outrageous example has been the debacle associated with the collapse of the IPO plans for WeWork. A few short months ago, the office rental company was expected to offer shares to the public at a total business valuation of $47 billion. However, in the third quarter, WeWork reported a net loss of $1.25 billion despite having revenue for that same quarter of $934 million! When investors balked at these sky-high valuations, the company was forced to withdraw its IPO, which also led to the downfall of its charismatic founder, Adam Neumann.

Given the run-up in technology stocks in the past several years, it’s obvious that many startups are positioning themselves as tech companies to command these excessive valuations. Most of these companies, however, are not true technology companies. They all use technology to run their businesses, but WeWork is basically a real estate leasing company. Founders, early investors and investment banks have bought into these “story stocks,” resulting in excessively high pricing for these IPOs. Perhaps rationality is coming back to the market as evidenced by the recent poor stock performance of some of these name brands, along with the withdrawal or deferral of other planned IPOs such as with Airbnb. When markets eventually calm down, we’ll inevitably return to a time when profits actually matter more than stories.

How Will Impeachment Affect the Markets?

As we send out this article, it seems highly probable that President Trump will become the third president in U.S. history to be impeached. However, it’s important to note that impeachment does not necessarily mean removal from office. Our seventeenth president, Andrew Johnson, and our forty-second, Bill Clinton, the two previous presidents to be impeached, were not removed from office (Johnson narrowly avoided conviction in the Senate by 1 vote!). As an aside, Richard Nixon actually resigned from office before being formally impeached.

So how is impeachment different from removing a U.S. president from office? Impeachment in the U.S. is the process by which the House of Representatives files charges against a government official, and in any ensuing trial, the Senate would determine whether to convict and remove that official from office. While only a simple majority vote is required by the House of Representatives to initiate impeachment, a two-thirds vote is required in the Senate to convict the president. Based on party lines, the House is likely to vote for impeachment. However, assuming all Democrats in the Senate voted in favor of conviction, 20 Republicans would still have to cross party lines and vote for a conviction for the president to be removed from office.

How this relates to the market

Given the relatively limited information, it’s hard to draw a strong conclusion about how impeachment will impact the markets. The market was up decently during Clinton’s impeachment and down a fair amount around Nixon’s impeachment hearings. However, the economic forces at the time may have had a much larger impact than the impeachment proceedings themselves. More specifically, the Clinton impeachment happened during the tech boom of the late ’90s while Nixon’s hearings paralleled the OPEC oil embargo and runaway inflation of the early ’70s.

Assuming everything follows party lines, it’s likely that President Trump will be impeached but not convicted and removed from office. Since the probability of this outcome is really high, the market has essentially already priced it in at this stage, meaning this outcome will likely be a nonevent for stocks. On the other hand, if there were to be a surprise conviction in the Senate, then we would expect heightened volatility.

Welcome Austin and Milan

Austin Overholt
Private Investments Administrator

Austin Overholt joined the Private Investments Team at Morton Capital in May 2019, and is integral to the team’s alternative investment coordination and information management. He is a Marine Corps Veteran and, prior to transitioning into the financial services industry, was the Associate Director of the OC Learning Center in Westlake Village. Austin earned his Bachelor of Arts degree in communications with an emphasis in business from California State University, Channel Islands, and his master’s from Pepperdine University. Austin lives in Camarillo with his wife, Megan, and their two children and enjoys being outdoors, off-roading, and barbecuing.

Milan Pfeisinger
Research Analyst

Milan Pfeisinger joined Morton Capital in June 2019. He is a research analyst and works closely with the investment team. Milan previously worked as a cost analyst at Warner Bros. Entertainment. He is originally from Austria and moved to the United States to attend college. He graduated from California State University, Northridge, with a Bachelor of Arts degree in economics and a minor in finance. Milan recently passed the Level II exam of the CFA® program. Besides work, he enjoys taking long strolls with his pug, Zorro.

Financial Bites Lunch Series

Our Financial Bites lunch series has been a great success! If you haven’t joined us for any of the previous sessions, we encourage you to attend any of the remaining lunches in the new year.

Our next session, on life insurance and long-term care, on Friday, January 24, touches on the “when and when not to” rules on buying life and long-term care insurance policies.

You can RSVP to any of these events by visiting mortoncapital.com/financialbites.

This past September, Wealth Advisors Joe Seetoo and Celia Meagher presented on budgeting.

Watch the video below and learn everything from what savings/spending strategies you should use to the importance of maintaining a good credit score.

The Six Way Investors Differ

Carl Richards, a CERTIFIED FINANCIAL PLANNER™, author and New York Times columnist, wrote an article comparing the good and the bad behavioral differences of investors. To read the article in full, please click on the below link.

Read Article >

Welcome to the World, Baby Harlowe!

We’re thrilled to announce the newest baby to join the MC family. Associate Wealth Advisor Sarah Ellis and her husband, Justin, welcomed their third baby girl, Harlowe Liv, on November 7. Congratulations to their beautiful family!