Bergamot Asset Management

Bergamot Practice Owner Program Five Pillars Summary

Mon, 06 Apr 2026 21:44:20 GMT

A concise framework for practice owners turning practice success into durable personal wealth

Who this is for
Practice owners with $1M–$5M+ in investable assets (or a clear line of sight via a future transition) who want a coordinated plan that connects practice decisions to personal outcomes.

The framework includes two tracks to match your current stage:

Mid-career track: Focused on optimization, growth, and building optionality.
Senior-career track: Focused on transition timing, deal decisions, and retirement income.

The Five Pillars

Pillar 1: Financial Foundation & Tax Optimization

Mid-career: Build systems to stabilize cash flow and use retirement design as a tax lever.
Senior-career: Organize pre-transaction tax decisions and liquidity planning for after-tax clarity.

Pillar 2: Practice Profitability & Strategic Growth

Mid-career: Improve profitability and build enterprise value to increase owner freedom.
Senior-career: Normalize financials and reduce owner dependence to protect value during transition.

Pillar 3: Succession, Buy-In/Buy-Out & Transition Architecture

Mid-career: Create internal succession paths and governance to ensure future leverage.
Senior-career: Compare offers and timing with an after-tax, lifestyle-based scoreboard.

Pillar 4: Personal Wealth & Retirement Design

Mid-career: Build liquid wealth outside the practice to reduce dependence on a future sale.
Senior-career: Design “paycheck mode” to fund lifestyle with tax awareness after a transition.

Pillar 5: Risk, Legal & Legacy Coordination

Mid-career: Establish baseline protection systems as the practice and balance sheet scale.
Senior-career: Coordinate protection during transition and simplify legacy/beneficiary alignment.

What to expect
Most relationships begin with a diagnostic, then progress to implementation and ongoing coordination.

Next step
The next step is a short Fit Call to confirm alignment and outline what the Wealth & Exit Readiness Checkup would cover for your situation.

DISCLOSURES
The information contained herein reflects the opinion and projections of Bergamot Asset Management LP (“Bergamot”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as legal, tax, investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.

Spring Update – April Showers Bring May Flowers…

Mon, 30 Mar 2026 17:48:46 GMT

“The strongest of all warriors are these two – Time and Patience.”

War and Peace – Leo Tolstoy

Happy Spring to all. After a pretty brutal winter in the northeast relative to the past several years and a challenging market backdrop after three strong years in the market we are viewing the pullback as healthy and with “time and patience,” long term investors will be rewarded.

Quick summary:

A look at the various indices in 2025, before the attack on Iran (2/27/26) and after the attacks through this past Friday (3/27/26):

After a strong 2025 where the S&P 500 was up 16%+ and the Nasdaq 20%+, both indices got off to non-eventful starts where new highs were set but were quickly followed by drawdowns. With the onset of the war in Iran – Operation Epic Fury and the subsequent rise of oil prices, the market in the last week has sold off fairly significantly and has entered “correction” territory (a short-term drop of 10% or more from its recent peak).

What is on our mind? War. The Economy. Inflation. Unemployment. Interest Rates.

While that seems like a lot, many of the concerns for the market are interconnected. Starting with Iran and Operation Epic Fury. On February 28, 2026, the US and Israeli military began attacks on Iran. The obvious reaction to markets was a sharp increase in the price of oil where it went from roughly $60 before the attacks, to roughly $100. This is unfortunate timing as we start to head into peak driving season, as prices at the pump have increased by over $1/gallon, putting further pressure on what is already a challenged consumer, especially those at the lower-income level. Interestingly enough, September futures for oil are priced at $75, so while it does not appear that there is an end in sight in the near term, the market is expecting that this will be mostly “over” by fall.

Unemployment

On unemployment, U.S. companies had the largest number of January job cuts since 2009, but almost 50% of cuts are tied to Amazon (AMZN) 16k, UPS (UPS) 30k, and Dow (DOW) 4500 reports Bloomberg. Other honorable mentions are Nike (NKE) and Peloton (PTON). While companies have the tendency to “blame AI” for the job cuts, we believe at this time, that many of the announced cuts are more of an “excuse” to compensate for some of the over hiring that took place during and slightly after COVID. What is concerning, is that inevitably, we do believe that job cuts from AI will be impactful. Anthropic’s CEO recently warned that “AI-driven white-collar jobs bust” is a significant risk and suggest that up to 50% of entry-level white-collar roles could be automated within five years. We are already seeing the challenges college graduates are facing in finding new jobs. If even a fraction of that 50% occurs, there will be significant implications.

Below is a visual of what was discussed by Anthropic:

The Economy. Financials. Private Credit.

Usually, as financials go (ie bad debt, over leveraging, etc.), so goes the market as debt and lending is “what makes world go ‘round.” Private Credit has been a big growth driver in recent years. It is estimated that the global market has expanded from roughly $375 billion in 2013 to over $2.5 trillion in recent years. What was once considered “shadow banking” has not been as closely monitored by agencies as deals are generally not transacted on the public market but is now a big part of global lending.

Recently, there has been some concern on some smaller companies like Blue Owl and Stone Ridge seeing issues. This has caused “redemption gating” by BlackRock, Apollo, and Morgan Stanley in Q1 2026 and confirms some of the stress: perceived stress initiates redemption pressure, which creates actual stress through forced asset liquidation. There are significant maturities in 2028 to 2031 that potentially compounds refinancing risk. While all the larger companies say that the risk in losses is small and isolated, it is something that bears monitoring.

Real Estate , a category we do not often speak about given the strength in the past decade has seen some mixed data. Some datapoints:

J.P. Morgan moves to offload large CRE loan exposure, including office exposure as part of an effort to reduce balance sheet risk. It is not coincidental that Jamie Dimon has been a big proponent of returning to the office.
Carlyle targeting distressed US Real Estate Equity.
Office-to-Residential conversions face reality check due to constraints in cost, design limitations and feasibility challenges.

Artificial Intelligence (AI) and the Magnificent 7.

AI is the sector that is most scrutinized due to importance in growth for the markets and also the relative sizing in the Magnificent 7 and hence the outsized weight in the major indices. As can be seen below, these companies have made up a big percentage of year-over-year growth and will continue to be so…

One of the interesting things is the amount being spent on AI infrastructure (capex, including NVIDIA chips). The plans for 2026 from some these companies are: Amazon (AMZN) $200b ($45b in stores), Alphabet (GOOGL) $175-185b, Meta (META) $115-135b, Microsoft (MSFT) $145-150b. That is almost $1 trillion and up year-over-year!!! This will be another area to monitor, as the growth in capex spend should moderate in coming years.

Conclusion

While there has been a lot of volatility to start the year, it is healthy to have a little bit of a selloff after 3 strong years in the market. Note, 2025 also started with some volatility because of the tariffs. Oil prices, while currently high, will drop when the war ends, and its contribution to higher inflation (which is reported ex- food and energy) will truly be (I will dare use the word) “transitory.”

Earnings estimates for the S&P 500 for 2026 are roughly $305-310, and north of $350 for 2027. All else being equal, the market is not expensive given the projected growth. Interest rate cuts will still be a tailwind for the market once we get through this oil shock/inflation concern and generally should provide support for the market overall. “Time and patience” will ultimately prevail as the market refocuses on fundamentals and growth.

The information contained herein reflects the opinion and projections of Bergamot Asset Management LP (“Bergamot”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. This communication is confidential and may not be reproduced without prior written permission from Bergamot. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.

Business Owner Financial Independence Scorecard

Fri, 13 Mar 2026 16:58:42 GMT

A 10-Minute Self-Assessment to Identify Your Biggest Wealth Gaps

How to Use This Scorecard

Answer each question honestly. Score yourself 0-2 points per question:

0 = Not in place / Significant gap
1 = Partially in place / Some progress
2 = Fully in place / Confident

Total your score at the end and see where you stand.

Section 1: Business Valuation & Concentration Risk (Max 6 points)

1. I have a working estimate of what my business is worth today. _____

2. I know what percentage of my net worth is tied to the business (and real estate). _____

3. I have a plan to systematically move cash from the business to personal investments. _____

Section 2: Tax Efficiency & Compensation (Max 6 points)

4. My compensation structure (salary vs. distributions) is coordinated with my CPA. _____

5. I proactively plan for estimated taxes and avoid year-end surprises. _____

6. I am confident my retirement plan design fits my business and maximizes tax benefits. _____

Section 3: Risk Management & Protection (Max 6 points)

7. My life and disability insurance coverage is current and aligned with my business value. _____

8. My buy-sell agreement (if applicable) is funded and up to date. _____

9. My family knows what to do if something happens to me (business continuity plan). _____

Section 4: Personal Wealth Building (Max 6 points)

10. I am building liquid wealth outside the business on a consistent, automatic basis. _____

11. I have a clear investment strategy aligned with my goals (not just growth). _____

12. I track my personal net worth and savings rate at least quarterly. _____

Section 5: Exit Readiness & Optionality (Max 6 points)

13. I have a rough timeline and plan for a future transition (even if years away). _____

14. I understand my options: internal succession, strategic sale, or hold and harvest. _____

15. I know what my business would need to be worth (after tax) to fund my retirement. _____

Your Total Score: _____ / 30

What Your Score Means

25-30 points: Strong Foundation - You have most pieces in place. Focus on optimization.
8-24 points: Solid Progress - You are on the right track but have meaningful gaps.
10-17 points: Significant Gaps - Your wealth plan needs structure. Prioritize lowest-scoring sections.
0-9 points: High Risk - Your financial independence is heavily dependent on the business.

Next Step

If you scored below 25, or if any section scored 3 or below, a focused Wealth & Exit Scan can

help you build a clear roadmap. Consider speaking with a financial advisor.

Disclosures: The information contained herein reflects the opinion and projections of Bergamot Asset Management LP (“Bergamot”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as legal, tax, investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.

The 12-Point Physician Practice Owner Readiness Checklist

Thu, 12 Feb 2026 19:25:02 GMT

Vijay Aluwalia, Partner, Wealth Advisor

Are you financially and operationally ready to reduce clinic time or sell in the next 3–7 years?

Category 1 – Personal Financial Readiness
Goal: Could your household function if your clinical income dropped 50%?

1. Clear Household Spending Number:

Do you know your average monthly non-practice spending (home, family, lifestyle) within ±10%?

2. Personal “FI Number” (Financial Independence Target):

Have you calculated the total investable assets you need so your portfolio could support your lifestyle with conservative assumptions?

3. Savings Rate & Cushion:

Are you consistently saving/investing a meaningful percentage of your income (e.g., 20–30%+), and do you have at least 6–12 months of personal expenses in cash reserves?

4. Retirement Plan Optimization:

Are you maximizing the right mix of retirement vehicles for a practice owner (e.g., 401(k)/profit sharing, cash balance, defined benefit), rather than just “maxing out what your CPA mentioned once”?

Category 2 – Practice Health & Dependence on You
Goal: Is your practice a transferrable asset or just your job in disguise?

1. Revenue Diversification & Payer Mix:

Are you overly dependent on one payer or referral source (e.g., >25–30% from a single hospital, group, or payer)?

2. Associate/APP Support:

Do you have at least one other physician or APP generating a meaningful share of patient visits/revenue, or is nearly all revenue tied directly to you?

3. Documented Processes:

Are your core processes (scheduling, intake, coding, billing/collections, follow-up) written and standardized, or reliant on a few “key people” and tribal knowledge?

4. Administrative & Billing Infrastructure:

Do you have reliable billing and collections (internal or outsourced) with:
Claims denial rates and days in A/R monitored regularly,
And minimal “surprises” in cash flow?

Category 3 – Exit & Flexibility Readiness
Goal: Could you realistically negotiate and accept a deal in the next few years if you wanted to?

1. Clear Exit Preference (or Shortlist):

Have you at least ranked your likely exit paths:
(a) Sell to hospital, (b) sell to a group / PE roll-up, (c) internal sale, (d) gradual wind-down?

2. Up-to-Date Practice Valuation Indicators:

Do you have a current sense (within a reasonable range) of your practice’s value based on:
EBITDA, specialty multiples, payer mix, and growth trajectory—not just “what a colleague heard someone got”?

3. Contract, Compliance & Risk Review:

Are your patient, payer, and vendor contracts, employment agreements, and compliance documentation (HIPAA, coding, etc.) in good order and ready for buyer review?

4. Life After Medicine Plan:

Have you considered what your work and lifestyle will look like if you:
Cut back to part-time,
Shift to a different role,
Or fully exit clinical practice in 3–7 years?

Your Practice is Your Largest Asset—Is It Working with Your Wealth Plan?

If this checklist has highlighted gaps in your retirement optimization or "FI Number," consider speaking with a financial advisor to help you integrate your practice’s value into a comprehensive wealth strategy.

Disclosures:

The information contained herein reflects the opinion and projections of Bergamot Asset Management LP (“Bergamot”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as legal, tax, investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.

Late Start, Strong Finish—Retirement Planning for the Healthcare Professional

Tue, 10 Feb 2026 18:40:51 GMT

Jessica Briscoe, PharmD, Wealth Strategist at Bergamot Asset Management

Why Healthcare Professionals Feel Behind

Healthcare professionals invest years in school, residencies, and fellowships — often well into their 30’s before earning a strong income. Add in student loans, long work hours, growing families, and delayed saving, and it’s natural to feel behind compared to peers in other fields.

The Good News: You Have Catch-Up Advantages

High Income Trajectory:  Once training is complete, healthcare professionals typically have stable, above-average earning potential. With additional specialization, income diversification becomes a major advantage. Think about consulting, entrepreneurship opportunities, and administrative roles that bring in additional income without adding major workload or time commitments.

Specialized Retirement Plans:  Access to multiple retirement savings vehicles such as 401(k)s, 403(b)s, 457(b)s, and defined benefit plans like cash balance plans can accelerate wealth building in a powerful way.

In 2026, employee 401(k) contributions are capped at  $24.5K annually, with an additional  $8K catch-up for those age 50 and older. Add in employer contributions—through matching programs, profit sharing, and non-elective contributions—for an annual maximum 401K contribution of $72K .

By contrast, a  Cash Balance plan (a type of pension-style plan) allows much higher contributions. Depending on your age, income, and years to retirement, you may be able to defer well over $300K annually. These contributions not only lower your taxable income for the year—reducing your immediate tax bill—but also grow through the long-term power of compounding within a tax-deferred retirement account. For high-income professionals, this combination can dramatically accelerate the path to retirement readiness.

Late-Career Longevity:  Many physicians and clinicians work into their 60s or beyond, whether in a reduced capacity or a personally-balanced way, giving extra years for saving and compounding.

What steps can you take today to close this gap and build momentum?

Maximize Tax-Advantaged Accounts:  Consider contributing fully to 401(k)/403(b) and IRA accounts; consider Backdoor Roth IRAs for high earners. Take advantage of Cash Balance plans if available.
Use Catch-Up Contributions:  Starting at age 50, IRS rules allow extra contributions — a powerful tool if you feel behind.
Tackle Student Debt Strategically:  Refinancing or forgiveness programs can free up cash flow for investing.
Automate Investing:  Setting up automatic monthly contributions helps you stay consistent despite demanding schedules. Dollar-cost averaging into investments accounts reduces the emotional tug to time the market .
Diversify Beyond Retirement Plans:  Brokerage accounts, real estate, private placements for accredited investors, and practice ownership can build additional long-term wealth.

The most important step to take, however is always the first step.

Potius sero quam numquam— Better late than never.

Disclosure: Bergamot Asset Management LP and its affiliates do not offer legal, accounting or tax advice. The content herein is for informational purposes only and should not be construed as a solicitation.

Fall/Winter Update

Tue, 02 Dec 2025 14:42:42 GMT

"Winter is the time for comfort, for good food and warmth, for the touch of a friendly hand and for a talk beside the fire: it is the time for home." – Edith Sitwell

Happy Thanksgiving to all! We hope you had a nice holiday and were able to spend time with family and friends. As we pass the midway point of the final quarter for 2025, we would like to review what has happened so far this year and, more importantly, what we are focusing on for 2026.

Briefly, the 3 ^rd quarter was solid once again with returns as follows:

The S&P 500 gained 7.79%.
The Nasdaq 100 surged 8.82%.
The Dow Jones Industrial Average rose 5.22%.

The year is solidly in the black for the third year in a row, despite the market concerns earlier this year that included: Deepseek, tariffs, trade wars, government shutdown and global unrest in Ukraine and the Middle East.

Government Shutdown…to be continued. The government shutdown has been temporarily resolved (thankfully before the holidays). The bill passed by Congress and signed by the President funds the government until January 30 with carveouts for SNAP, benefits targeted at women, infants and children, or WIC, the Department of Veterans Affairs and Congress. Those will all be funded through the end of September 2026.

What financial impacts could Americans experience?

Essential financial benefits will continue: The good news is that many core federal services remain operational. Social Security, Medicare, and Medicaid benefits will continue to be distributed. Veterans’ benefits will also remain in place. The Supplemental Nutrition Assistance Program (SNAP) and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) will continue as funds allow. Most IRS operations, including tax filings and refunds, are expected to proceed as well.
Delays are likely in some government services: Depending on the duration of the shutdown, the delivery of some government services may be delayed. These can include federal housing loan approvals through the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), and the United States Department of Agriculture (USDA). The processing and approving of new SBA 7(a) and CDC/504 loans are paused. Key federal data reports — such as those related to employment or inflation — could be postponed.
Federal employees may be affected: Many federal employees are currently furloughed or working without pay. While backpay is typically issued once funding is restored, the uncertainty and disruption can be difficult for those impacted.
Broader economic impact is possible: Short-term government shutdowns have historically had a limited impact on financial markets. However, a prolonged disruption can affect consumer confidence, delay economic data reports, and impact federally supported programs. Depending on shutdown length, this could be especially significant for the Federal Reserve, which meets at the end of October and relies on jobs and inflation reports to guide decisions on interest rates.

While the impacts are pretty widespread, as we experienced, and there is a risk that we re-shutdown in February, the impact for the markets should be short-term in nature, as we saw for what was the longest shutdown in recent years.

What are we thinking about?

Interest Rates. This is a topic we cannot seem to stop mentioning in our newsletters despite every effort to, as it remains one of the keys to providing a “floor” to the market. The current Fed funds rate is targeted at 3.75% - 4.00% down from 5.25% - 5.50% in 2023. With another reduction expected in December, and some analysts targeting it to be below 3.00% by the end of 2026, this will continue to be a tailwind for the market. We hope it leads to broader market strength as the lower rates should disproportionately help capital intensive industries and more broadly the consumer due to lower rates for mortgages, automobiles and other high-ticket items.

Unemployment. Weak employment is one of the key factors that is allowing the Fed to lower interest rates, despite some ongoing fears of inflation. The labor market is showing significant weakness for younger workers, especially recent college graduates.

Another point of weakness is layoffs that are being attributed to AI directly or indirectly, from companies. Some of these include Amazon (14k), Accenture (11k), Intel (21k), and Microsoft (15k). Other layoffs are more general (restructuring/cost-cutting) in nature, such as UPS (46k) and Verizon (13k). What is concerning about the bulk of these layoffs is that a large percentage of them are high paying, white-collar jobs.

Artificial Intelligence (AI). The same way the internet was one of the biggest technological innovations or advances in the past 30 years, Artificial Intelligence (AI) is going to be the biggest technological advancement in the years to come. Hundreds of billions, if not trillions, of dollars are being committed and invested to build the supporting infrastructure and similar to the early 2000s, there is now a lot of conversation about “bubbles.” This chart from Bloomberg about a month ago illustrated best why the concerns are increasing.

Since this was published, there have since been hundreds of billions of additional announcements similar to the one illustrated above.

Anecdotes.

Black Friday sales climbed 4.1%, Mastercard said, surpassing last year’s growth, a sign US consumers are continuing to spend despite persistent economic concerns. But Adobe Analytics expects growth in Cyber Monday sales to ease from last year. - Bloomberg

For years it has seemed no sticker price was too high for American car buyers. Even as average new car prices approached $50,000 this year, dealers fretted more over depleted inventories than losing customers to sticker shock. Those days may be ending as increasingly stretched consumers are starting to draw the line on what they will pay for a new car, according to dealers, analysts and industry data. - Wall Street Journal

The bond market is straining to absorb a flood of new bonds from tech companies funding their artificial intelligence investments, adding to the recent pressure in markets. Since the start of September, so-called AI hyperscalers Amazon, Google, Meta, and Oracle have issued nearly $90 billion of investment-grade bonds, according to Dealogic, more than they had sold over the previous 40 months. - Wall Street Journal

AI music generator Suno closed a $250 million Series C round at a $2.45 billion post-money valuation. The company is expected to generate $200 million in annual revenue. - Music Business Worldwide

Conclusion

As has been consistent for most of the past couple years, there has been a lot of noise in the news that has had moderate short-term negative impact to the markets, however, the strength of investments in Artificial Intelligence has been overwhelmingly positive and driven the market to all-time highs. While we are long term believers in technology, and the value it generally brings to global economies, we are currently more balanced as companies have been spending tremendous amounts of money to build the underlying infrastructure and we wait for the increase in practical use cases of the technology to be more widely adopted.

With estimates for earnings of the S&P 500 targeted to be $305.00 in 2026 and $344.00 in 2027 and additional interest rates expected in 2026, the market is not unreasonably expensive at ~20x 2027 earnings expectations given the 13% targeted growth rate. That being said, it will be important to watch the adoption ramp of AI applications and the broadening impact of lower interest rates to the companies beyond the Magnificent 7 (ie the remaining 493 companies in the S&P 500).

RFK’s Push Towards Making America Healthy Again, but What’s the Impact on our Portfolios?

Wed, 19 Nov 2025 16:55:01 GMT

Jessica Briscoe, PharmD, Wealth Strategist at Bergamot Asset Management

Robert F. Kennedy Jr., as head of Health and Human Services, has made sweeping policy changes that are reaching far beyond the medical community. His moves on vaccines, nutrition, and regulatory structures are not just public health stories — they’re reshaping the outlook for investors in the healthcare and consumer sectors.

The White House’s Make Our Children Healthy Again: Assessment (MAHA Assessment), released on May 22, 2025, revealed key initiatives (1). The focus areas addressing underlying root causes of chronic illnesses in American children included elimination of processed foods and additives, addressing overmedicalization, environmental toxins, and lifestyle factors such as electronic use and lack of exercise.

September marked the deadline for RFK and his team to provide their recommendations to address the issues from the MAHA Assessment (2). The available strategy report lists action items in four key areas—advancing research, realigning incentives, fostering private sector collaboration, and increasing public awareness. Advancing research in a whole-person perspective , the strategy report aims to establish a gold standard in research. Goals include integrating improved technology in electronic health record-keeping (EHR) and wearables through artificial intelligence (AI) into Real World Data Platforms (RWDP) making data-collecting intentionally purposeful, useful, and accessible to researchers. Specific research areas include vaccine injury and efficacy, environmental contaminants (water/air/microplastics), oral health and microbiome, pediatric cancer, among others. Dietary focuses include updating the Dietary Guidelines for Americans , eliminating petroleum-based food dyes, defining and educating the public on ultra-processed foods (UPF), and tightening pharmaceutical and food marketing to children. A focus on food as medicine is another key initiative in MAHA with deregulation on small farming, regenerative agriculture, precision pesticide use, and clean food innovation.

Overall, several high-value, aspirational initiatives have been proposed. Researchers from healthcare and agriculture suggest many of the positions RFK and his team have put forth in the MAHA action plan come from unsubstantiated claims and, although admirable, the strategy to achieve these goals are poorly defined and would be difficult to implement (3).

But how does all this affect our portfolios? Let’s look at some possibilities:

Market Implications

Pharma & Biotech : Vaccine makers like Moderna, BioNTech, and Pfizer, among many others, face pressure with federal contracts canceled (4). Large, more diversified firms may weather the hit over their counterparts that specialize in mRNA products. Alternative investment opportunities could lie in the broader healthcare industry including preventative health, nutrition, and traditional vaccine applications. European and Asian companies may also take up the baton in mRNA research, potentially allowing for more exposure in the international biotech sector.

Food Industry : Processed food giants (PepsiCo, Kraft Heinz) could see margin erosion as regulations tighten. Mandates to eliminate certain ingredients including food dyes, seed oils, and/or synthetic chemicals will lead to reformulations of product recipes therefore increasing total costs. Clean-label and wellness brands, characterized by transparent, short-ingredient lists may see momentum gains. Examples include Whole Foods Market (owned by Amazon), Annie’s Homegrown (owned by General Mills), and Hain Celestial Group.

Healthcare & Insurance : A focus on vaccine policy may influence regulation, access, and/or consumer perception. Hospitals and diagnostics may benefit from greater acute-care demand. Alternatively, an emphasis on preventative and holistic care may increase pressure on insurance companies to cover items not historically reimbursable.

Agriculture & Nutrition : Precision agriculture, AI-driven health research, and food-as-medicine models could attract new investment flows. Top pesticide companies may face a high-risk of being affected through increased litigation and decreased sales. Examples may include companies like Bayer and Syngenta which both use the pesticides glyphosate and atrazine, specifically noted in the MAHA report to cause chronic diseases (5)(6).

In the end, diversification is important. This applies not only to the portfolio as a whole, but also to an individual stock choice. The more diversified a company’s service or product is, the more it may be protected from market shifts.

Disclosure: Bergamot Asset Management LP and its affiliates do not offer legal, accounting or tax advice.  The content herein is for informational purposes only and should not be construed as a solicitation.

References:

(1) Make Our Children Healthy Again. Assessment Report. The White House. May 22, 2025

(2) Make Our Children Healthy Again. Strategy Report. The White House. September 9, 2025.

(3) Smith, R. Health care: RFK: Changing the playing field to notch some MAHA wins. Capital Alpha Partners. June 2, 2025.

(4) HHS Winds Down mRNA Vaccine Development Under BARDA . US Department of Health and Human Services. August 5, 2025.

(5) Bayer Crop Science . Accessed 9/3/25.

(6) Syngenta-US . Accessed 9/3/25.

Physician Burnout and the Power of Financial Well-Being

Mon, 13 Oct 2025 18:22:54 GMT

Jessica Briscoe, PharmD, Wealth Strategist—Healthcare Sector

Burnout among physicians continues to be a significant concern despite recent data showing improvements post-covid. Long hours, administrative burdens from the implementation of electronic record-keeping, and the emotional weight of caring for patients can leave even the most dedicated doctors drained. Lack of autonomy and demands on productivity seem to worsen the situation (1). Interestingly, studies also find women can experience burn-out rates 27% higher than their male physician-counterparts (2). While strategies like mindfulness, exercise, and improved scheduling can help, one often overlooked factor is financial well-being.

Money itself isn’t the cure for burnout, but financial security can provide something equally powerful: freedom.

When physicians take charge of their finances, they create space to practice medicine on their own terms rather than out of obligation. That means more than just saving a portion of your paycheck. It’s about growing retirement accounts , protecting income through insurance , and diversifying your investment profile so you’re not solely dependent on your clinical income. Building streams of income from dividends, privat e placements, real estate, and entrepreneurial ventures can create resilience. These not only provide financial returns but also open doors to meaningful work outside of direct patient care — whether that’s teaching, consulting, or building businesses that serve in new ways.

In short, financial planning isn’t simply about wealth — it’s about sustainability. By cultivating multiple sources of income and planning for the long term, physicians can reduce financial stress, reclaim their sense of agency, and even reignite their passion for medicine.

References:

(1) Shanafelt TD, West CP, Sinsky C, et al. Changes in burnout and satisfaction with work-life integration in physicians and the general US working population between 2011 and 2023. Mayo Clin Proc. 2024;99(2):252–266. doi:10.1016/j.mayocp.2023.11.004

(2) Sanford J. U.S. physician burnout rates drop yet remain worryingly high, Stanford Medicine-led study finds. Stanford Medicine News Center. 4/9/25.

Coming Soon

Mon, 06 Oct 2025 14:41:08 GMT

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Mid-Year Update

Wed, 09 Jul 2025 17:25:01 GMT

“Be like a duck. Calm on the surface, but always paddling like the dickens underneath.” - Michael Caine

I hope everyone had a happy and safe 4 ^th of July weekend. The story of Rip Van Winkle is always one I like to think about in the context of an investors’ portfolio over the long term, as it’s a story of a man that falls asleep and wakes up twenty years later, missing the American Revolution. The other anecdote, or quote, I like is the above, or some variation of it, as it really makes me think about all the things going on beneath the surface and how looks can be deceiving.

CHARTR is one of my favorite resources for charts and tidbits of information. I think they did a good job summarizing some of the key points in the first half of this year…

It has been a little while since we have last written, so we will start with some things we have been following closely, but have NOT really had an impact directly on the overall market as of yet…

Geopolitical Events

Ukraine/Russia. This has been on going now for, unbelievably over 3 years with a constant back and forth of attacks, but neither country wanting to escalate the situation. The war has been fought using primarily conventional weapons or military technology. There is good reason to believe that this just keeps going for the foreseeable future, as negotiations seem futile, and Russia does not seem like it is in any hurry to cease the fighting.

Middle East/Iran/Israel. The attack on Iran by the US caught many experts and investors off guard. After decades of threats and fears of a nuclear Iran, the reaction by the market was also surprising and 20 years ago, likely would have caused the market to correct. Instead, oil prices DROPPED, and the market rallied.

…from geopolitical events, we will segue into Tariffs once again. We wrote about how the Tariffs were calculated in our previous newsletter, and since then there has been a lot of back and forth with regards to raising and lowering them and pushing them out for 90 days so long as the country negotiated in good faith. We are right up at that 90 days and today’s news, and subsequent sell off was that Japan’s and South Korea’s would be “back” at the proposed 25% since no deal has been reached. Given the constant changes in this dynamic, stay tuned. The likely outcome, as with many countries, is that the minimal threshold will be set, and some type of deal will be reached.

Random sidebar…the country with the 2 ^nd largest trade deficit in the first quarter of 2025 with the US is Ireland! The main driver for that is pharmaceuticals, led by GLP-1 treatments (diabetes and obesity drugs).

Aa1, AA+ and BBB (Big Beautiful Bill)

Moody’s downgraded the US government bonds to Aa1 from Aaa in mid-May. They were the last remaining agency that had the US that high. While no means early, as S&P cut to AA+ in 2011 and Fitch did the same in 2023, it does bring focus back to the increase in federal spending and tax cuts that are expected to increase the deficit (estimated by the CBO) by approximately $3.4T over the next 10 years.

Government Debt Levels in the Last 25 Years…

2001-2007: Pre- 9/11 government debt was at $5.6T. This number increased to $9T right before the Global Financial Crisis (GFC) or The Great Recession. Debt to GDP went from 56%  62%. The primary driver for this was increased spending on homeland security, the Iraq war and tax cuts.

2008-2013: Government debt during this period went from $10T to $17T!!! Interestingly, household debt actually DECREASED from $13T to $11T. Increased spending for bailouts and lower tax revenue accounted for this dramatic increase. Wall St. vs Main St. was born.

2016-2019: When President Obama left office in 2017, debt levels were at $20T. In the subsequent 3 years, PRIOR to COVID, under President Trump’s first term, that number increased to $23T.

2020-2024: Multiple COVID Stimuli, a recession and rising interest rates drove debt levels up by unprecedented rates to $35T.

2025: We are now at $36T.

Debt to GDP

Not-so fun fact…

Prior to COVID, interest on our debt was $1b/day. It is currently over $2b/day. The reason for this is two-fold, the combination of higher debt (almost 50% higher) and higher interest rates (from nearly 0% to ~4-5%).

A few points from the Big, Beautiful Bill…

Extends and makes permanent 2017 tax cuts with an increased standard deduction
Increases deductions for seniors on Social Security
Makes permanent write-offs for business interest expense and R&D
Raises child tax credit slightly, raises state and local deductions for people earning <$500k and SALT cap reverts to $10k in 5 years from temporary increase to $40k in 2025
Scaling back clean-energy incentives put in place by the Inflation Reduction Act (IRA)
Starts Medicaid work requirements and drops the provider tax to 3.5% by 2028
Raises the debt ceiling by $5T
Requires states to cut the cost of SNAP benefits

Artificial Intelligence (AI) or Bust

Where to start? Per Sam Altman, the CEO of OpenAI, the evolution of AI capabilities is outlined in five stages:

Chatbots: AI with conversational language skill, similar to basic ChatGPT interactions.
Reasoners: AI that solves problems at a human level, working through complex issues and showing its reasoning. OpenAI’s o1 model.
Agents: Systems that act autonomously and perform real-world tasks without constant human input.
Innovators: AI that generates new scientific knowledge, creates breakthroughs, and develops novel solutions and discoveries.
Organization: The most advanced stage, where AI systems can replicate and manage the complex functions of human organizations.

There has been much ado about “agentic AI” which puts us in Stage 3. As this plays out over the next several years, there will be significant dislocation and opportunity in the marketplace. This is something we will continue to closely monitor to gauge the impact to investment portfolios over the near and longer term.

AI, both directly and indirectly through ancillary innovations, in the last 18 months, has been viewed as the sole long term growth driver for the markets by many investors. We believe we are in the very early stages and believe this will continue to be an evolving opportunity for investors in the next decade. As AI evolves, so will the advances in other sectors like healthcare, “autonomous everything” and eventually robotics, which will aid significantly in the anecdote below…

Anecdote

We have written about demographics in previous newsletters now that Japan and China are in a population DECLINE situation and the potentially negative impact to their economies. We came across this chart and were alarmed that the majority of the developed world was at a fertility rate below 2.1 births per women which means that a population is not replacing itself naturally and hence eventually will be in population decline.

One of the worst situations is South Korea where in 2023 the rate is 0.72, down from 4.5 in 1970. What is potentially taking place there can be best described in this video link: South Korea Is Over . While many other factors come into play, all else being equal, after 2 generations (50 years) at this rate, the population will be ~13% of its current size.

Note: The US has a fertility rate of 1.6, which means in 2 generations we will be at 64% of our current size.

Conclusion

While it seems like there is a lot of chaos at the moment, the market has rallied back to all-time highs, though it continues to be concentrated in the mega-cap technology stocks. The weaker dollar and increased deficit spending has been positive for international markets for now, however we believe if the increased spending does not go beyond defense spending, the spread between US and international markets will narrow as the market will refocus on growth opportunities and the US markets provide a better opportunity for that.

The global unrest still seems isolated with minimal backlash from the wars for now, but we do continue to keep an eye on China and Taiwan as they may feel emboldened to push for an outcome more aggressively given the US’s actions globally.

US debt will remain an issue for years to come as not much has really been done to, at the minimum, try to narrow the deficit, but again, for now, there is not much pushback as we barrel towards $40T in debt. Having a potential tailwind of rate cuts in this situation is also helpful, as we know a big percentage of the interest we pay is driven by the higher rates of the last several years.

Finally, on a more positive note, as we are in the early innings of Artificial Intelligence (AI), there remains a long runway for growth and the new market opportunities it will create. As long as we have a cautious eye towards the social ramifications of what AI brings, it should be a net positive to financial markets and, more importantly, the world as it eventually bridges the social injustices and economic inequities that exist today.

DISCLOSURES

Tariffs…Some Thoughts to Consider

Mon, 07 Apr 2025 19:58:50 GMT

“You keep using that word. I do not think it means what you think it means.”

My favorite movie is “The Princess Bride.” The quote above is from the scene where Vizzini uses the word “Inconceivable” one too many times with Inigo Montoya and Fezzik on what is ironically the “Cliffs of Insanity.” As I am writing this, S&P 500 futures are indicated down another 5% and it feels like we are “on location.”

The Issue: “Reciprocal” Tariffs

While there are multiple definitions for the word “reciprocal” it can mean “operating for both, especially or equally to a similar degree”; or it can be the inverse/opposite…usually it is used to describe something that is similar on both sides.

Source: whitehouse.gov

What has caught investors off-guard is how the tariffs were calculated. The calculation is on 2024 good-trade deficit with a country, divided by the amount the US imported from that country. That result was then divided by 2, which is the “Discounted Reciprocal Tariff.”

So, taking China for example, our trade deficit with them in 2024 was approximately $295b, which divided by the amount the US imported from there, which is 67%. Then, divide that by 2, and you get the 34% the administration calculates as the reciprocal tariff. This will then be on top of the earlier tariffs on China that were announced.

If that does not really make sense as to how it was derived, not to worry, you are not alone.

Recent events...

This is one of the worst two-day selloffs in the past 75 years, with the others being the crash in 1987, the selloff in 2008 during the Great Financial Crisis, and during COVID.

Source: Bloomberg

…while the various indices and style buckets based off Morningstar from the highs and year-to-date are as follows:

Things to consider…

Diversification. Unlike 2022 where bonds declined because of increasing yields, bond yields have declined which has served as an offset to the weakness in equities year to date. Additionally, exposure to non-correlated investments is potentially a good option.

Liquidity. The timing of cash withdrawals and what is being sold to fund those withdrawals is important to consider.

Interest Rates. Part of the thought is that the President would like the Fed to cut rates to reduce the amount of interest we are paying on debt. The Fed being able to cut rates has long been a “put” in our overall thesis of sharp market declines not being sustainable for a long period of time. The one caveat to this now is that, if the tariffs are in fact inflationary, it will pose a challenge for the Fed to cut rates aggressively.

In Summary…

While a fix (recovery) is unlikely to happen as quickly as this damage was done, within 24 hours of the tariff announcement and the market selling off, Vietnam and Cambodia were very quickly negotiating a way to resolve this. It is always difficult to time markets, but after crises, the market has eventually recovered, often aided by a low interest rate environment and usually with focus on industries or sectors that have long term sustainable growth drivers.

One of my other favorite movies is “My Best Friend’s Wedding” and the quote from that movie that always resonates with me is “this too shall pass.”

DISCLOSURES

"Stagflation and Tariffs and Bears! Oh, My!"

Mon, 10 Mar 2025 16:52:15 GMT

“Stagflation and Tariffs and Bears! Oh, My!”

In the Wizard of Oz, when Dorothy, the Scarecrow and the Tin Man are venturing into the dark forest, they discuss what types of animals they might encounter. In fearing this unknown danger, they start singing “Lions and Tigers and Bears! Oh My!”

This fear of the unknown has investors and markets a bit on edge as of late, given the aggressive and unorthodox approach the new administration has been utilizing to carry out promises made during the campaign. We will try to address some of these concerns and, as always, emphasize the long-term view and more of a focus on growth fundamentals, as the market ultimately returns to that.

Concerns.

#1 Stagflation. The Wikipedia definition of Stagflation is the combination of high inflation, stagnant economic growth and elevated unemployment.

While in the very near term, the concerns about tariffs driving prices higher may be valid and the headlines around egg prices due to bird flu are pushing prices higher, there are more prices actually on the decline which we expect to continue, such as gasoline prices, consumer technology, used cars, eating away from home (fast casual and restaurants), clothing, toys and many other food items.

Stagnant economic growth is highly unlikely over the next several years. Again, while there may be a short-term “blip” because of what is going on in government spending because of DOGE freezes and cuts, the long-term growth drivers of Artificial Intelligence (AI) and continuing demographic/wealth shifts in the world are too strong for any sustainable declines.

Elevated unemployment is the one longer term area of concern. DOGE cuts will likely cause an increase in unemployment in the short-term, as will the resetting of aggressive hiring at many companies during COVID. Once a new equilibrium is reached, the concern will be the long-term impact to some higher paying services jobs due to the rapid implementation of AI.

#2 Tariffs. Bluster or a real risk? What is being discussed and what is being implemented seems to vary day to day. The threat is a 25% tariff on imports from Canada and Mexico, and a 10% additional tariff on imports from China. If fully implemented for a prolonged period, these would most likely be damaging to the economy initially and potentially reignite inflation which could create a dilemma for the Fed. That being said, the tariffs are most likely being used as a threat (President Trump has said this as well) to bring countries to the negotiating table. We continue to monitor the situation, but, for now, what the threat is causing is pauses in spending from both the corporate sector as well as the consumer sector.

#3 Bears. Back in July of 2022, the 10-year/2-year yield curve inverted for the first time in this current economic cycle. Historically, this has been a reliable predictor for recession within 6 to 18 months. Instead, the S&P500 rallied approximately 50% amid no signs of a recession. Late last year, the yield curve steepened and now inverted again amidst fears that we are potentially going to have a recession. This whipsawing is causing pause in the market but continues to provide opportunities to lock in at higher rates for longer durations. One thing we are NOT confident about is that this inversion is going to be any more accurate a gauge of recession than the previous inversion.

Growth and Artificial Intelligence.

Since we last wrote about what is most likely the most important driver for economic growth, Artificial Intelligence (AI), there have been some high-profile events in the sector, namely, the release and rise of Chinese AI companies, starting with DeepSeek.

DeepSeek’s launch of its AI model made waves with the coupled assertions of better-than-OpenAI performance developed at a fraction of the cost, but further inspection of the DeepSeek model yields clear evidence that the Chinese researchers largely layered quite-sophisticated algorithms on top of OpenAI technology. The primary implications of this result are twofold – firstly, the entire AI community benefits from the innovative leaps of the Chinese technology which secondly, will actually drive adoption of the new AI reasoning models as they are incredibly expensive even with incorporation of enhanced algorithms. Nvidia’s CEO commented two weeks ago that it would take 100 times more computing power to support next-gen AI that can reason through problems.

In addition to the DeepSeek announcement, investors digested worrisome news regarding Microsoft cancellation of leases for datacenter capacity, which raised questions on whether long-term demand for AI services was overestimated. While the explanations of Microsoft’s AI partner OpenAI securing significant computing capacity through the newly announced Stargate venture with Oracle and SoftBank and significant new commitments to AI buildouts from sovereign governments (e.g. France, South Korea, with more to come) are plausible, it is clear that the successful rollout of AI agents that perform tasks on users’ behalf will be necessary to justify the continued high investments in AI.

Sempra, a large utility with operations primarily in California and Texas, recently gave an insightful perspective on the long-tailed nature of the growth opportunity of the “electron economy”, with AI buildouts as the central driver, “Today, we’re announcing another record five-year capital plan, totaling $36 billion, an increase of 50% over the five-year plan we announced last February. Oncor’s investments over 2025 through 2029 are expected to support diverse growth across our service territory as the region continues to exhibit strong annual premise growth in the 2% range, receive a growing number of interconnection requests from large C&I customers, while remaining a highly desired destination for both business and residential customers to the state. When we look farther out, we believe our growth continues well into the next decade. If current growth trends continue, we estimate investment in our system requiring $55 billion to $75 billion from 2030 to 2034.”

Anecdotes

“We expect Palantir (PLTR) to generate $20b in EBITDA by 2035” (this implies 25% revenue CAGR and 57% EBITDA margins) – BofA Global Research

Revolving credit card balances are $650b, a new decade high. Previous high was ~$550b during COVID with a low of ~$425b in 2021 – Federal Reserve Bank of Philadelphia

Amazon finally surpassed Walmart in sales – Bloomberg

Conclusions.

While inflation has not declined as quickly as some have hoped, we believe it is on the right trajectory. Job growth has slowed and should continue to, and housing sales have also slowed with prices now leveling off, which we believe should allow the Fed to eventually get back on the path to lowering interest rates which should minimize the overall weakness in the market.

With the Nasdaq now officially in correction territory (-10% off highs)…

…and after two strong years in the market the S&P 500 is nearly 6% off recent highs, and down approximately 1.7% YTD (as of March 7, 2025), there are now some opportunities in high quality companies.

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of

great companies with great management at good prices.” - Warren Buffett

The recent slowdown in economic activity would usually allow the Fed to loosen monetary policy, however, the uncertainty around tariffs (and hence inflation) has kept the Fed on pause. As the year progresses and investors get more visibility regarding the impacts of tariffs, DOGE and the geopolitical situation, the long-term growth drivers remain in place and we eventually expect the Fed to cut and the market to rally more broadly, though at more modest rates than the past two years. This continues to make the fixed income opportunity attractive as we expect the current yield, plus potential upside in the underlying value of the bond to be more similar to that of the broader equity markets this year.

DISCLOSURES

January 2025 Insights

Mon, 13 Jan 2025 17:58:17 GMT

“Winners never quit and quitters never win.” – Vince Lombardi

Happy New Year to all! We wish everyone a safe, healthy and prosperous year and hope that 2025 has gotten off to a good start as we look forward to what the year has to bring.

In honor of Quitter’s Day (the second Friday of January when many people abandon their resolutions for the New Year) and the start of NFL Playoffs, we start with this quote. After a nice bounce post-election in the S&P 500, the market has since settled and is roughly flat since November 5, 2024. This newsletter will have a slightly different format to start the year, as we review the year that was and discuss some things to look out for in 2025.

2024 Year in Review

Below are the full year returns of various indices (including dividends) through 12/31/24.

As can be seen from the chart above, the market was once again, led by large cap growth equities, more specifically, the “Magnificent Seven” (Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta Platforms and Tesla). These stocks accounted for more than half of the gains of the S&P 500. It is also important to note that a, traditionally, more diversified portfolio of 60% stocks and 40% bonds was “only” up 11.5%.

While the S&P 500 closed near the highs for the year, unfortunately, the breadth of the rally petered out as the S&P 500 Equal Weight and Russell 2000 (Small Cap) were -4.7% and -7.1% respectively from 11/8/24 till the end of the year.

What are we focusing on in 2025?

Interest Rates.

The 10-year Treasury is now up over 100bp since it’s mid-September low and now sits at (as of 1/10/25) 4.67%. When the rate cut cycle began last year, the expectation was that yields at the end of 2025 would be closer to 3%. With the continued strength in the economy and somewhat stubborn inflation, the consensus expectation is now for only 1-2 cuts by year end, with Bank of America even suggesting zero cuts with a risk towards an INCREASE in rates as the next move.

We are more of the belief that nothing is linear, and while inflation may uptick slightly in the near term, some of the major issues that drove it up significantly have been addressed and expect it to continue to moderate towards the Fed’s goal of 2% over the next 12-18 months.

The Market.

Earnings for the S&P 500 in 2025 are targeted at approximately $275/share which puts the multiple at roughly 21x. With expected growth of 13.6% in 2026, in less than 12 months, the market multiple will be roughly 18.5x which would be (probably not coincidentally) right around the 10-year average of 18.2x. While the market is not “cheap” we would consider it more “fairly valued” based on current growth expectations and therefore, the focus, as it usually is, will be on companies to meet or beat growth expectations for the market to trend higher.

Other Factors

DOGE.

What is a trillion here or there between friends? This will be interesting to monitor as the potential to CUT $1-2T from inefficiencies in the government over the next several years could be very impactful. Below is a small sample of some potential impacts…

Tax Cuts.

There will be several areas to follow here. The expiring tax cuts from the 2017 Tax Cuts and Jobs Act are set to expire in 2026. With the current Republican majority in Congress, this looks likely, including an end to the $10,000 cap on state and local tax deductions (SALT).

Global Unrest.

While hopes are high that the new administration will be able to address the situations globally, there have yet to be significant changes to the conflicts in the Middle East and Russia/Ukraine. Additionally, we should continue to monitor China as their economy continues to struggle.

Debt.

With the national debt at approximately $36T and the new administration expected to continue to add to it, it is now expected to cross the $40T mark by 2026. With the 30-year Treasury right around 5%, the interest expense alone will be $2T (roughly 7% of GDP).

Anecdotes.

China’s population is expected to shrink by ~51M over the next 10 years as the country continues to grapple within enormous demographic headwinds. – Bloomberg

OpenAI planning a “frontal assault on Google” as it considers its own browser and potential search partnerships; OpenAI could power AI features on Samsung devices, dealing a possible blow to Google – The Information

Yields on China’s 10-year sovereign debt hit record lows despite Beijing’s recent stimulus announcements, suggesting growing concern the nation will fail to avoid a deflationary spiral mirroring 1990s Japan. – Bloomberg

The recent pullback in the S&P 500 has it at a fair value relative to its 10-year history. While inflation and stronger jobs growth have crept back as a concern for interest rates, we believe the trend towards normalcy should continue and allow the Fed to eventually get back on the path to lowering interest rates. This will continue to serve as a potential floor for equity markets. After two strong years in the S&P 500, we do expect growth to continue and to broaden out, albeit at a more modest rate, which makes the fixed income opportunity more attractive as we expect the current yield plus potential upside in the underlying value of the bond to be more similar to that of the broader equity markets this year.

DISCLOSURES

We the People of the United States…

Wed, 06 Nov 2024 21:31:08 GMT

“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution of the United States of America.” - Preamble to the United States Constitution

After months of political rhetoric, back and forth accusations and approximately $16b spent on advertising, the results are finally in, and investors can now refocus on policies and the direction of growth for our country. These words should remind us what OUR great country was built on and that we will always find a way to not only succeed, but thrive.

Elections.

With the potential for a Republican sweep, the US Dollar has jumped to a new three-month high, interest rates are up, the price of oil is down and bitcoin surged to a new all-time high of over $75k. Historically, the market has rallied between Election Day and year-end on average...

Below is what RBC Capital Markets believes is the impact of a Republican sweep and if Congress is split:

Interest Rates.

The 10-year Treasury hit a recent low in mid-September of 3.60%. It is currently (as of 11am on November 6) at 4.45%. This rise in yields over the last several weeks was due to the gains President Trump was making in the polls since his policy was thought to add potentially $3T more than Vice President Harris’s to the deficit over the next 4 years. His win punctuated that with the 15bp point we are seeing today. We believe this is potentially another opportunity to again lock in higher rates, as eventually rates will fall as the economy will struggle to sustain growth with rates this high.

Growth.

Previously, we have written about growth areas in the market. Artificial Intelligence (AI) is now a consensus long and while some are arguing that valuations are potentially stretched with real-use cases still somewhat limited, ancillary opportunities still exist. With companies like Microsoft, Amazon, Alphabet and Meta discussing the use of nuclear energy to power AI datacenters, that opportunity is still a decade out and will only be able to satisfy a small percentage of the demand. In the meanwhile, electricity and utilities continue to be a solid opportunity to benefit from this trend.

Anecdotes.

Novo Nordisk stock rose after Wegovy sales beat expectations last quarter, a potential relief for investors after Lilly’s disappointing obesity drug sales last week. – Bloomberg
Chinese Premier Li Qiang expressed confidence that his government can pull off an economic recovery. “The Chinese government has the ability to drive sustained economic improvement,” Li said in a speech Tuesday at the opening of the China International Import Expo in Shanghai. He added that officials had “ample space for fiscal policy and monetary policy,” and reiterated that China would hit its economic growth target of around 5%. – Bloomberg
OPEC+ agreed to delay a production hike by one month, from December until January (it was expected that the December restart would be postponed, but a 30-day delay probably won’t provide a major boost to oil prices). – Bloomberg
Australia’s CPI cooled in Q3 and September (the September CPI tumbled to +2.1%, down from +2.7% in August and below the consensus forecast of +2.3%), although it’s likely the RBA will hold off on immediately cutting rates. – Wall Street Journal

The S&P 500 is at all-time highs. With the elections now behind us, it will be important now to focus on the policies and what the impact of these policies will be to the various investment classes. Historically, corporate fundamentals and economic growth have been the driver for strength in the stock market. Continuing to focus on growth opportunities and being able to quickly adapt to changing situations will hopefully allow us to continue to help our clients achieve their investment goals.

DISCLOSURES

“So it begins.” - King Theoden, The Lord of the Rings: The Two Towers

Wed, 25 Sep 2024 15:07:05 GMT

As we enter the first days of fall and finally have that first interest rate cut behind us, we always ask ourselves, “What next?” This past week, saw a plethora of analysts provide historical performance post rate cuts, so instead of trying to reinvent the wheel, we will share with you a summary of “The Week In Charts.” We are always reminded of that favorite caveat “past performance is not indicative of future performance,” so we will try our best to provide some perspective to these charts and tables.

Interest Rates.

So how does the market perform after the first interest rate cuts and what sectors perform best? These charts and tables were published by Canaccord Genuity Capital Markets. This first chart shows that when the initial rate cut occurs, when the S&P 500 Index is near a high, the market tends to do well over the next 12 months, with the exception being the financial crisis in 2007/2008…

Unsurprisingly, if a recession occurs within 12 months of the first rate cut, one would expect a much more mixed/mediocre performance of the various indices (S&P 500, Nasdaq and the Russell 2000) versus if a recession were to NOT occur within 12 months.

The two worst “with a recession” scenarios took place after the dot-com bubble burst in 2001 and the Great Financial Crisis in 2007/2008. While employment and credit are showing signs of weakness, we do not expect anything near the situation that took place in 2007/2008 as corporate balance sheets are far stronger and the larger banks are less leveraged. The current high expectations for growth towards Artificial Intelligence (AI) and obesity drugs is a bit more similar to the dot-com bubble, however the biggest difference is that today’s companies are highly profitable versus their 2001 counterparts.

So what sectors perform better? Ultimately what the following tables show is that the companies that have growth and can show positive surprises relative to expectations will be the ones that outperform.

Elections.

As most of us are expecting, currently, it is expected to be a tightly contested election for the presidency. That being said, however, we still believe that ultimately both houses of Congress will be divided, and any majority will be by a narrow margin which ultimately will lead to gridlock for any major policies. Historically, gridlock has been broadly positive for markets and with the interest rate backdrop, that should hold this time around. That being said, there are some areas to consider where specific companies or sectors could be impacted:

The Trump Administration: (1) privatize Fannie Mae and Freddie Mac; (2) increase US oil-drilling and defense spending with less M&A restrictions; (3) tariffs.
The Harris Administration: (1) health care insurance pricing concerns; (2) increase scrutiny of Big Banks and Big Tech; (3) renewables and less likelihood of Inflation Reduction Act incentives being repealed.

Anecdotes.

$4.5 Trillion worth of US equity options expire 9/20/24. This is the largest September expiration on record. This is also the 4th largest option total expiration on record (only June 2024, December 2023, and March 2024 were larger). This will unclench the gamma and the market will be able to move more freely (either to the upside or downside) after today.

Source: Goldman Sachs Investment Research

Ally Financial (ALLY) – at a conference the company mentioned: " Credit challenges have intensified ; borrowers are struggling with a high inflation and cost of living, and now, more recently, a weakening employment picture; committed to its 15% ROTC target, but the road is getting harder. Lease gains came in a little bit soft and that put additional pressure on NIM in the quarter. Those factors will likely put 6 basis points to 7 basis points of linked-quarter pressure on the company's net interest margin."

J.P. Morgan (JPM) at a conference the company is guiding Q3 IB fees/trading below estimates, Q3 IB fees are tracking up ~15% Y/Y (below the Street’s ~24% forecast) with trading flat-to-up 2% overall (below the Street’s ~6.3%), and the company warned that the Street consensus for 2025 NII is “a bit too high” given the likely trajectory of rates.

Oil demand growth continues to “rapidly decline”, due primarily to weaker consumption in China (consumption in China contracted Y/Y for the fourth straight month in July), while supply on the rise. – International Energy Agency (IEA)

US homebuilders are facing their biggest credit crunch in more than a decade, with banks cutting lending for residential construction by more than 10%. US banks had $92bn of loans outstanding to fund the construction of dwellings for one to four families in the quarter to the end of June, down from $102bn a year ago. This is the largest year-on-year drop in more than a decade, according to an analysis by BankRegData of the most recent data from the Federal Deposit Insurance Corp. It was also the fifth consecutive quarter in which lending for home construction fell. – Financial Times

In summary, the rate cut cycle in its early stages should provide some downside protection to the overall market as the Fed can become more aggressive if necessary. Our concern over time is as the rate cut cycle matures, investors will be faced with slowing economic growth. This may cause their focus to shift to longer-term concerns regarding the national debt which can only be addressed by raising taxes and cutting government entitlement programs which will make it more difficult to identify and “lock in” higher fixed income opportunities in traditional investments.

DISCLOSURES

Potential Changes to Estate & Gift Taxes in 2026

Wed, 14 Aug 2024 15:14:32 GMT

As part of the Tax Cuts and Jobs Act of 2017, the federal estate, gift and generation-skipping transfer (GST) lifetime tax exemption doubled from $5.49MM in 2017 to $11.18MM in 2018, which has since increased to $13.6MM in 2024 as it is indexed for inflation. For married couples, each spouse has the $13.6MM exemption, which means you and your spouse may give away a total of $27.2MM before paying the federal gift tax.

However, unless Congress acts before January 1, 2026, the exemption will automatically reset to approximately $7MM, significantly reducing tax-free gifts. This reversion could lead to significant tax liabilities for those whose estates surpass the reduced exemption limit. If your assets exceed this threshold, your heirs could find themselves with a hefty tax burden.

Below are a few ways to take proactive measures now:

1. Lifetime giving: A direct gift of cash, securities, investments, businesses, real-estate or any other assets with value up to the lifetime exemption is the simplest strategy.

2. Establishing trusts: The immediate act of giving $13MM to your heirs may have unintended negative implications, which can be mitigated with creation of irrevocable trusts, which can permit withdrawals based on pre-specified schedules and conditions.

If you need further advice or have specific questions, please contact your financial advisor and/or a tax professional to navigate these changes effectively.

Finding Calmness Amidst the Chaos…The Recent Selloff.

Tue, 06 Aug 2024 18:12:21 GMT

As I sat down on Sunday evening to begin writing the newsletter for August, markets in Asia were indicated down sharply. This morning, we woke up to the Nikkei doing this:

So why is this happening and what does this mean to US stocks?

Japan has for many years now had an extremely low interest rate relative to every country in the world. Because of the low rates, investors would borrow in Japan and re-invest elsewhere to get better returns. This was known as the “carry trade.” Last week the Bank of Japan raised rates and it has caused some issues with regards to this trade as a rapid appreciation in the Japanese Yen against the US Dollar created losses and is forcing an unwind of this trade.

Additionally, while the Japanese economy has exhibited signs of breaking out of its multi-decade economic stagnation, the strong rally in the Japanese market to record highs through the first half of the year reflected hopes that have yet to be substantiated. The US and Japanese economies have not been tightly correlated for many years now, therefore we see little fundamental impact to US companies.

Prior to the recent sell off, the S&P 500 and Nasdaq were up significantly year to date, so it is understandable as to why stocks would sell off as, combined with some recent soft economic data from the US, the markets were set up for some near-term profit taking.

Is the Fed behind the curve? The dreaded “R”-word.

We have always been focused on fundamentals and valuations to determine the potential opportunities in companies or the overall market. While there has been a lot of news around a weaker consumer, a weaker employment report and a weaker ISM report, we are nowhere near “Recession” territory versus some of the expectations 12 months ago. In fact, these weaknesses are exactly what is needed for the Fed to stop raising interest rates and start reducing them. The magnitudes of the negatives are somewhat benign and the main growth driver, Artificial Intelligence/Technology, remains intact as Microsoft, Alphabet and Amazon provided strong cloud outlooks on their calls in the past couple weeks.

In summary, while the economy has shown some signs of finally slowing, this will enable the Fed to start reducing rates and should ultimately provide a floor to the stock market. We will continue to monitor the elections and will have more discussion on that in our monthly newsletter next week. Finally, we do not feel the Fed will cut rates in the interim prior to the next FOMC meeting on 9/18, but there will be plenty of opportunity for Fed officials to make “calming” remarks between now and then with the Jackson Hole Economic Policy Symposium on 8/22-8/24, where Chairman Powell will also have the opportunity to calm markets if necessary.

“Summertime and the livin’ is easy…” – Porgy & Bess

Thu, 11 Jul 2024 19:22:44 GMT

We hope everyone had a safe and relaxing July 4th weekend. With the summer now in full swing, heat and humidity included, we have half the year under our belt. While the situation seemed like we were going to cruise into the elections in November, the recent debate has created a little bit of uncertainty. As the saying goes, “Grab your popcorn…!”

Interesting construction fact for the summer:

Elections

For the first time in a long time, we will not lead with commentary on Inflation or Interest Rates (that will be next). One month later, and we now feel more comfortable with our previous statement about it being hard to imagine that Presidents Joe Biden and Donald Trump would be running against each other in November. Despite his defiance, President Biden’s debate performance and subsequent interview have raised more questions about his ability to fulfill his obligations as President. Unfortunately, most of the candidates mentioned to replace him trail in the polls, even to him, let alone to former President Trump.

The Economy (Interest Rates)

Labor markets are finally easing. While the headline number for non-farm payrolls was better than consensus expectations, the beat was primarily driven by strength in government hiring, which is generally not viewed positively. Additionally, the economy is adding part-time jobs while shedding full-time roles.

Growth Concerns?

We have written several times of late about Nvidia Corp. (NVDA) and growth in Artificial Intelligence (AI). Goldman Sachs has been a proponent of this for years as they believed that it would add a full point to global GDP in the next several years. Two weeks ago, they published a report with their Head of Global Equity Research and an MIT Professor posing the question, “Gen AI: Too Much Spend, Too Little Benefit?” In short, the belief is that (1) only a fraction of tasks exposed to AI will be cost effective to automate in the next 10 years (5% of all tasks) and (2) the $1T price tag to develop and run AI technology needs to solve complex problems, which it is not currently able to do. While most of the research team at Goldman Sachs does NOT agree with these views, it is one of the earlier “warnings” backed with some thorough analysis.

Anecdotes

Stock splits…one chart that we would like to highlight as we have received several questions regarding the recent Nvidia Corp. split. We would note that usually a stock splits because, in addition to a high stock price, the company has performed very well fundamentally, so a bulk of the continued performance likely has to do with continued fundamental momentum.

Source: Bank of America Merrill lynch

Apparel retailers are discovering that weight loss is their gain. While blockbuster drugs like Ozempic that lead to significant weight loss have dented demand for diet plans and caused food companies to prepare for people eating less, clothing sellers are finding that millions of slimmed-down Americans want to buy new clothes. – Wall Street Journal
Novo Nordisk A/S plans to invest $4.1 billion in another US factory, plowing more money into its biggest market amid rising discontent over the cost of its obesity and diabetes drugs. The project in Clayton, North Carolina, will double the company’s production footprint in the US, adding 1.4 million square feet of space for the final stages of manufacturing in which Novo’s medicines are filled into injector pens and prepared for consumers. – Bloomberg

In summary, while the S&P 500 continues to grind higher, the breadth of the rally continues to be somewhat narrow. With some weaker datapoints starting to surface in the consumer (we mentioned retail and restaurants in the past), housing prices flattening and employment finally showing some signs of weakening, the market may be due for a pause until there is further clarity around what may become a somewhat chaotic election season in the fall. However, these weakening economic datapoints may allow the Fed to start reducing rates, thus potentially dampening any significant weakness in the overall market.

DISCLOSURES

Spring into Summer

Mon, 03 Jun 2024 20:20:59 GMT

With Memorial Day weekend having just passed, we kick off the unofficial start to summer. While there was a slight scare in April that inflation was returning, that concern has passed and investors have refocused on the economy and fundamentals. Here is a recap of what has happened over the past several months and what we continue to think about regarding the market and potential opportunities.

Inflation and Interest Rates

We cannot seem to get past this topic. There has been a little back and forth over the past several months as to whether inflation is coming back or is slowly subsiding. Our position is that it is gradually coming down, though nowhere near as fast as investors originally hoped for earlier in the year. Looking at the table below from March, most of the categories above where inflation is currently at have seen weakening data points since. Rent and housing increases are slowing if not outright declining now in some regions, and personal care companies and restaurants are reporting weaker profits due to weakening demand, especially from low to middle-income customers.

Where is there Growth?

Artificial Intelligence (AI) is an obvious area of growth led by Nvidia Corp (NVDA), as can be seen from the chart below.

Most investors, casual or professional, are very aware of the returns of Nvidia Corp as it has been the poster child for investing in AI. While we will refrain from offering an opinion on the stock in a public forum such as this, we would, however, like to provide a fundamental framework on how to justify the current value. Previously, we have discussed valuations on stocks. While Nvidia Corp in FY2022 (CY2021) had revenue/earnings per share of $26.9b/$3.80, Goldman Sachs projects in FY2027 (CY2026) the company will have $203b in revenue and $48.46. This would put the stock at a PE valuation just slightly above 20x, which would be considered reasonable for a company that would be a leader in its industry and growing at a high growth rate (See the table below for the Magnificent 7 vs the rest of the S&P 500).

Source: Goldman Sachs Global Investment Research

... other beneficiaries of the growth in AI are Utilities, a category we have highlighted in the past.

As can be seen from the chart, growth in US power demand has been choppy at best. Should the growth in demand be more consistent in the future, as Goldman Sachs is projecting the rest of the decade, utility stocks along with their high dividends could be a solid candidate for outperformance.

Elections

The ho-hum market that is currently focused on inflation data will soon begin to focus on the upcoming election in November. While it is still hard to imagine that the two front-runner candidates will actually be running against each other in November, it is important to also focus on the make-up of the Senate and Congress, as the winner being able to execute their legislative agenda will be equally as important.

Anecdotes.

Retailers begin cutting prices following years of increases in response to cooler consumer demand – Walmart and Target in the last week talked about how they are cutting prices in a bid to drive traffic. – Financial Times

China’s mega banks are urging branch managers to lend to state-owned companies that buy unsold homes, offering a quick show of support for the government’s housing rescue package unveiled last week. – Bloomberg

Walmart is cutting hundreds of corporate jobs and ordering remote employees back to the office. – Wall Street Journal

McDonald’s is looking to launch a $5 meal plan in the US, a sign the company is becoming more aggressive on price to recapture market/mindshare as consumers dial back spending. – Bloomberg

Novo Nordisk is now the biggest company in Europe; its market cap is bigger than the entire Danish economy – Goldman Sachs

The S&P 500 continues to trend strongly for the year, up 11.27% through May 31. The strength continues to be driven by the larger constituents of the index. Growth continues to be rewarded as investors continue to migrate towards companies that can exceed expectations. As we near the elections, we expect the market to pause as the different outcomes will be assessed. Once we get through that, investors will likely refocus on the economy and fundamentals as the hope and anticipation of rate cuts should continue to limit the downside of the overall market.

DISCLOSURES

The information contained herein reflects the opinion and projections of Bergamot Asset Management LP (“Bergamot”) as of the date of publication which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. This communication is confidential and may not be reproduced without prior written permission from Bergamot. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.

Mother Nature, Easter and Stock Pickers vs. Groundhogs

Mon, 08 Apr 2024 14:49:46 GMT

Happy belated Easter to all and we hope everyone is okay from the surprise earthquake that only Californians have really come to expect last Friday. With spring technically here and Easter just behind us, it brings to question one of the most famous prognosticators of the last century. No, not Warren Buffet, but Punxsutawney Phil. Unfortunately, his track record is not quite as strong with only a 39% accuracy rate over the past 140 years. With that level of “success” it gives us stock pickers hope just yet!

The Market

The broader market as defined by the S&P500 was up 10.2% in the 1Q of 2024, while the Dow was up 5.6%. This strength was mostly a continuation of what we saw in the 4Q of 2023 and was once again driven by the larger technology stocks that are associated with Artificial Intelligence (AI). While the Magnificent 7 continues to attract attention, this performance was more focused than previously and was primarily driven by Nvidia (NVDA) +88%, Meta Platforms (META) +42%, Microsoft (MSFT) +14% (Note: Tesla (TSLA) was -30%, and Apple (AAPL) -8%).

We expect that market rally to broaden to companies outside of the Magnificent 7 as interest rate cuts should have more of an impact on the more traditional cyclical growth companies and industrials.

Artificial Intelligence (AI)

Without a doubt, there is growth in this area of the market. The question now is whether actual growth can meet these high expectations. Consensus implies an AI server market of $166B in 2025, which is up from $20B in 2022. To frame this, the AI server market is expected to be 38% larger than the traditional server market in 2025 ($166B vs. ~$120B). While this is a massive departure from historical growth in the server market, which has grown at a CAGR of just 3% over the last 25 years, analysts seem to think this is possible based on addressable markets and real use cases. Since growth is never linear, and these are aggressive growth expectations, there may be an opportunity in the near to medium term, should there be a shortfall versus these very high expectations.

India – The “New” Frontier

We have discussed India and the potential growth the country holds previously. The excitement is driven by the fact that it is the largest population, it is a young and growing population (unlike China, Japan and most of Europe) and that there is still a big gap to fill to get to levels of where China is on a GDP per capita basis.

Anecdotes and the Fed

Continuing from last month, here are several anecdotes and some updated Fed thinking:

Darden Restaurants (DRI), owner of several well-known brands such as Olive Garden, Longhorn Steakhouse and Seasons 52, reported that lower income customers pulling away and eating more at home. This is consistent with what we were starting to see regarding inflation in food prices starting to recede (eating at home becoming cheaper than eating out). - Company Report

Nike (NKE) and Ulta Beauty (ULTA) lowered earnings guidance. Both companies see weakness in future growth. While some of the concerns surrounding Nike (NKE) may be competitive in nature, the slowdown is also indicative of a weakening category and consumer. Ulta Beauty (ULTA) weakness was driven by both sales and margins which may be a harbinger for other retailers to come as the beauty category has been one of the stronger categories for growth in recent years. - Company Report

China’s housing crisis is continuing to worsen despite the recent government interventions, with December new home prices in 70 major cities falling 1.24% Y/Y in January (vs. -0.89% in December) while secondhand prices sank even more. – WSJ

Constrained on all sides, China’s central bank is aiming to squeeze more value out of its policy actions by catching markets unaware with surprise easing aimed at putting a floor under the struggling economy. A record cut to a key lending rate earlier this week announced by the People’s Bank of China was just the latest unexpected move since Governor Pan Gongsheng took office last summer. At a press briefing last month, he shocked with an outsized cut to banks’ reserve requirement ratio. – Bloomberg

With the Fed and the market now projecting three rate cuts for this year despite the recent strong employment data (which we have previously mentioned as lagging), we believe the market is now at an equilibrium where fundamentals will be the driver for further upside in the market. Interest rates staying “higher for longer” will allow investors to “lock-in” higher rates for their portfolios while the upcoming rate cut cycle should provide a potential buffer to any sharp sell-off in the overall stock market.

DISCLOSURES

Compound Interest

Fri, 22 Mar 2024 19:23:00 GMT

Small changes now can lead to large impacts in the future. Compound interest is the interest you earn on interest. Small differences in the present rate can lead to big differences in the multiplier effect down the line.

Happy Presidents Day!

Mon, 19 Feb 2024 20:55:00 GMT

First, a very belated Happy New Year to all. With the recovery of the S&P 500 in 2023, despite the narrowness of it led by the Magnificent 7, 2024 promises to be an interesting year with interest rate increases and inflation likely behind us, the Chinese economy continuing to struggle, recession concerns waning and an election in November. The S&P 500 has started the year +5.54% in a continuation of what we saw at the end of last year, led by NVIDIA Corp (NVDA) + 50.75%, Meta Platforms Inc (META) +36.68%, Amazon.com (AMZN) +13.06% and Microsoft Corp (MSFT) +8.95% (all returns through 2/16/23).

So, what’s on our mind?…

Rate Cuts.

The base case to start the year was an expectation for 6 rate cuts in 2024. With a slightly “hot” CPI for January, the 10-year Treasury increased by roughly 25bp over the past several weeks. The first cut, originally, expected in March, has now been pushed out till what is now likely May. Our position has always been following what the Fed has been consistently messaging, that the rate of change of interest rates will be contingent on economic data. With inflation slowing and GDP still positive, there is no rush for the Fed to lower rates. While we expect the Fed to cut rates later this year, our expectation is for 3 cuts. Below is a chart that shows how various sectors of the market have performed in previous rate cut cycles since 1984:

China and Other International Markets.

China continues to be challenging since the real estate crisis and the crackdown of technology companies over the last 2 years. The problems are secular and will be challenging to address. We have discussed the declining population of China in the past, and the chart on the left shows that despite the end of China’s one-child policy, birth rates have not improved. The chart on the right is equally as concerning as it marks the first time in decades that foreign investment in China is negative.

Japan and the UK are both now technically in recession as they reported their second consecutive negative quarter of GDP. Japan’s contraction is connected to its shrinking population (red flag for China per above) as its population declined by almost 1 million people in 2022, the 14 th consecutive year of contraction. The UK differed slightly as population and wage growth were positive but not able to offset a drop in consumer spending. The rest of Europe is likely not far behind, which ultimately will set up for slowing inflation and rate cuts in the region in the near future.

Elections.

This will be an interesting “wild-card” to monitor as it becomes clearer over the next several months who will be representing each party as the presidential nominee as well as their respective running mates. Also of importance will be the make-up of Congress as that will dictate how much the winner will be able to execute their agendas. In the near-term, the economy should be able to sustain enough momentum into the election with the recent strength and the potential backdrop of the Fed lowering rates. Stay tuned…

Random Anecdotes.

Here is a collection of some interesting random anecdotes that could have impact on different areas of the market:

Novo Nordisk is getting calls from food makers as they face up to the potential threat from its appetite-suppressing drugs. CEO Lars Fruergaard Jorgensen said “scared” food bosses want to know how the treatments work and how fast they’ll roll out. – Bloomberg

UK CPI for Jan modestly undershoots the Street in Jan (core +5.1% vs. the Street +5.2% and headline +4% vs. the Street +4.1%), a relief for markets after the US reading on Tues. – Reuters

Saudi Arabia decided to halt its oil capacity expansion plans because of the energy transition, its energy minister said on Monday, adding that the kingdom has plenty of spare capacity to cushion the oil market. – Reuters

China’s government spending will rise this year, the nation’s Minister of Finance said, as authorities look for ways to bolster domestic demand and help the world’s second-largest economy regain momentum. “We will make sure the overall size of fiscal spending increases to play a better role stimulating domestic demand,” Finance Minister Lan Fo’an said. – Bloomberg

In summary, for 2024 while there is:

Weakness in the US economy with an increase in layoffs and slowing consumer spending
Weakness in global economies with China, Japan and Europe showing weak GDP growth and
Uncertainty in the 2nd half of the year with US elections; the backdrop of slowing inflation and the potential for interest rate cuts around the world should provide support and minimize the downside for global markets and eventually provide for a broader cyclical economic recovery.

The Health Savings Account (HSA)

Tue, 12 Dec 2023 10:00:00 GMT

A health savings account (HSA) is a tax-advantaged medical savings account available to individuals who are enrolled in a high-deductible health plan (HDHP). HSAs can be invested in a manner similar to that of IRAs and have three distinct tax benefits:

Contributions reduce taxable income
Earnings from interest and investment income are tax-deferred
Withdrawals to pay for qualified medical expenses are tax-free

However, the IRS has strict guidelines regarding HSAs… you can open and contribute to a HSA if you:

Are covered by a high-deductible health plan (HDHP) on the first day of the month (please see this link for more information regarding HDHPs)
Not covered by other health insurance
Not be enrolled in Medicare
Not be eligible to be claimed as a dependent on someone else’ tax return

For 2023, the contribution limit to an HSA is $3,850 for individuals and $7,750 for family coverage. Additionally, people age 55 years and older can make catch-up contributions of $1,000 per year. The limits will increase to $4,150 for individuals and $8,300 for families in 2024.

Unlike Flexible Savings Accounts (which also allow individuals to set aside money tax-free to pay for out-of-pocket health care expenses), the amounts in HSAs are not forfeited if not used by year-end; the money will roll forward indefinitely. The funds in HSAs can be withdrawn at any time, however, the withdrawals are taxable with a potential 20% penalty for under-65 individuals if they are not used to pay for qualifying healthcare expenses. After the age of 65, the account owner may take distributions from the HSA for any purpose, without penalty (although income taxes would still be owed for non-medical expenses).

Happy Holidays!

Tue, 28 Nov 2023 18:46:00 GMT

First, we hope everyone had a safe and happy Thanksgiving! As we near the end of the year, this will be our final newsletter as we are scheduling year-end review calls and should be speaking with each of you again shortly. If you have not scheduled the call, please contact us as soon as possible.

The Magnificent Seven vs The Mediocre Market.

We have in the past talked about concentration of the market and how the market is not necessarily a good indicator of the overall health of the market. While last year did show some indications of this, the performance in 2023 was defined by this. Most of us have by now have heard the references to the “Magnificent 7.” It is, more or less, the largest seven companies by market cap in the S&P 500 (sometimes Berkshire Hathaway (BRK.B) ranks 7 th ). The companies in this group are Apple Inc. (AAPL), Microsoft Corporation (MSFT), Alphabet Inc. (GOOG), Amazon.com, Inc. (AMZN), NVIDIA Corporation (NVDA), Meta Platforms, Inc. (META) and Tesla, Inc. (TSLA).

From the charts below, which run through mid-November, we highlight 2 things…

First, the seven largest companies make up nearly 29% of the overall market, the highest in 40+ years. This is important to note not only from a performance concentration standpoint, but also in terms of consideration of how undiversified some portfolios may actually be. This concentration is even more pronounced in growth indices, such as the Russell 1000 Growth.

Second, the chart on the right shows the returns of the Magnificent 7 indexed at 71% versus the remaining 493 companies in the S&P 500 at 6%, which skews the S&P 500 significantly to be +19%.

Finally, on this point, something a little more forward looking…

As can be seen from this, growth prior to COVID was mostly driven by these companies. Post-COVID, sales growth for the broader market (the other 493 stocks) recovered, but going forward is now expected to be minimal. This gap is even more pronounced when analyzing profitability of the companies, as the Magnificent 7 generally have very high gross margins and an ability to lay off employees with minimal impact to revenue, thus showing greater earnings leverage to cost cuts.

Interest Rates.

While still second on the list, the recent decline in rates off highs has provided some relief to the capital markets. Additionally, we continue to see signs of slowing inflation (not quite at the 2% goal yet), weakness in the consumer (weak earnings report) and most importantly, weakness in the employment market. Banks have been continuing to lay off employees as Citibank and Morgan Stanley had very low profile 10% workforce reductions lately, and we are also seeing wage growth slow (as can be seen from the chart below).

This bodes well for the end of the tightening cycle and the focus moving forward will now be when and how fast will the Fed cut interest rates.

China.

It has never been clear as to the quality of the government data that is reported. While it has been negative over the last several quarters, the outlook going forward is “stable at best.” While we have talked about the high rates of youth unemployment and poor demographics/shrinking population as long-term secular concerns, the government has been long working on cleaning up the financial system and technology sector with moderate success. Continued bailouts and stimulus probably put a floor on the negativity in the near-term as does the hopes of some potential thawing of relations between the US and China.

US Population.

This was an interesting chart we came across. While a peak in population is still quite a ways out and likely beyond my lifetime, what was interesting about it is the flattening of the curve within many of our investable time horizons.

While the strength in the market this year has been driven by only a handful of stocks, it has been better to own index funds over mutual funds as many active managers that have diversified portfolios will have found it very difficult to outperform the broader indices given the construction of those indices. The projected growth for the Magnificent 7 over the next several years seems to support the optimism with valuations not being overly excessive. However, if the broader market does not strengthen, and in fact continues to weaken, there will be some risk to those names as expectations are high, therefore we continue to be conservative and take advantage of the higher interest rate environment and the opportunity that exists in fixed income investments when the Fed eventually cuts rates.

We would like to thank all our clients and followers for your continued support. We wish you all a safe, healthy and happy holiday season, and a prosperous New Year and look forward to connecting over the next several weeks. Cheers!

“There is no way to peace, peace is the way.”

Mon, 23 Oct 2023 20:16:00 GMT

With the recent events in the Middle East, the Russian invasion of Ukraine in 2022, the potential for some kind of conflict in Asia with the saber rattling of North Korea and China, in addition to the divide that is taking place in this country, we hope and pray that sooner than later, cooler heads will prevail and that we can focus on addressing the bigger issues that the world is facing.

What else is on our mind?…

Interest rates.

With each monthly newsletter, we hope that we can move this topic down the list of priorities and then finally off it and move on to another topic. Unfortunately, the sharp move in the bond market in the last month leaves it in focus as the 10-year Treasury yield is up nearly 1% to just below 5%. That being said, below is a nice table put together of recent “Fed speak” which points to us being at or near a cycle peak.

China.

The second largest economy in the world continues to struggle. While recent data shows some stabilizing, it is very difficult to put much weight in the government reported numbers when anecdotes continue to be very challenging. Bailouts continue in various segments of the economy, especially within real estate, with Country Garden, China’s largest property developer, essentially defaulting on its debt. This follows Evergrande which at the time was the second largest property developer in China. We previously mentioned the demographic issue of the shrinking population of China over the next decade. Unemployment continues to be an issue. While this chart is from early this summer, we would imagine that the issue of youth unemployment has only gotten worse…

GLP-1.

This stands for glucagon-like peptide 1. This is a type 2 diabetes drug class that is now all the rage as it is now used for weight loss. Companies such as Novo Nordisk and Eli Lilly have seen a significant benefit in their stock prices from this, while other companies, such as medical device companies that are perceived to have benefited from obesity have seen sharp declines. Even Walmart went as far as to say that they have seen a “slight change” in food purchasing habits of people taking Ozempic and other similar drugs. As with most things, the impact is likely somewhere in the middle. While the weight loss is valid, the longer you are on them and the higher the doses taken, the worse the patient feels and most importantly, reimbursement may become more restrictive.

Education.

This is a somewhat random topic, though it is something that has come up in multiple discussions regarding long-term trends and some potential lasting impacts from COVID. The declines are alarming across all categories and is hopefully something that our country will focus on remedying immediately.

RISKS & OPPORTUNITIES

In July, we had mentioned several risks and opportunities in the market. We would like to take the opportunity here to revisit and update them.

Risks.

Higher rates for longer. As we discussed previously, inflation has cooled, outside of the recent increase in oil prices, and we are seeing weakness in some segments of the economy. That being said, the economy has been resilient despite the sharp increase in rates over the past year. Higher rates for longer has now become the base case and the recent increase in Treasury yields has reduced the value of bonds, especially those with longer duration. This increases the risk to…

The Economy. Early in the year, there were concerns that a recession was imminent. That expectation was pushed out to “later in the year, or early next year.” We are now “later in the year” and while a recession is not here, the combination of the higher rates discussed above, with geopolitical issues in the Middle East and Europe, as well as a struggling China, should have investors focusing on this possibility.

Opportunities.

We would focus on…

Longer Duration Fixed Income. Is now finally the time? With the recent rise in yields, we think this is an appropriate time to shift more of the portfolio into longer duration fixed income. The 10-year, 20-year and 30-year Treasury yield is now at approximately 5%. With most of our long-term financial plans post-retirement modeling 3.7%, this is a solid opportunity to lock-in at the higher yield as we continue to expect that the Fed will eventually CUT rates within the next couple years.

The resilience of the economy has been somewhat surprising given the continued rise in rates over the past year and the tightening of lending by the financial institutions. The bank “crisis” earlier in the year with Silicon Valley Bank and Signature Bank shutting down is also a curiosity since rates are HIGHER now than they were then. Employment is starting to loosen, consumer savings is back down to pre-COVID levels and there is much uncertainty geopolitically. These concerns keeps us cautious on equity markets overall, however, with interest rates at 5%, there is at least the opportunity to be “paid while waiting” as investors try to identify the next drivers of growth.

Hello Fall.

Mon, 18 Sep 2023 21:11:00 GMT

“It’s the first day of autumn! A time of hot chocolatey mornings, and toasty marshmallow evenings, and, best of all, leaping into leaves!” – Winnie the Pooh

With the sharp change in temperature this weekend, we can unofficially welcome fall as it is now time for sweaters, the changing of the leaves and in retail, pumpkin spice everything. In finance, it’s a good time to look back at how the year has played out so far and think about how we want to position for the balance of the year, with an eye out for 2024.

So, what are we monitoring?…

Interest rates / Unemployment.

While we continue to reference interest rates in our newsletters, we are confident that the cycle is near the end. There is likely one, maybe two increases left in this tightening cycle. With layoffs discussions sharply upticking to highs we have not seen since 2009, this is one of the key signs for us that a slowdown is imminently upon us…

China / Europe.

China’s share of global GDP is nearly 20%. The post-COVID recovery in China has been lackluster versus the rest of the world, which is especially surprising given the way the country was shut down. Until late last week Chinese economic data has been mostly negative. The property markets continue to exhibit massive problems and the rate cuts being implemented are being viewed as a panic response. Politically, for the first time ever, retired Communist Party elders reprimanded Xi Jinping and also China’s Defense Minister has gone missing. Longer term, there is demographic problem where the population is expected to SHRINK by approximately 60 million people over the next decade. This will create problems such as reducing the size of the labor force (eroding consumption) while requiring increases in spending on healthcare and pensions. While possible that a lot of this may already be discounted by the markets, outside of government stimulus, it is very difficult to see how this is all resolved in the near-term.

In Europe, while the ECB raised rates last week by another 25 basis points, like here in the US, we are likely near the end of the rate increase cycle. With inflation high, but moderating, there are signs of weakness emerging due to higher interest rates and tight lending environment. One example is the Organisation for Economic Co-operation and Development (OECD) warning a wave of bankruptcies that threatens the Eurozone economy.

US Consumer.

Consumer consumption is roughly 2/3 of US GDP. Historically, the consumer has been extremely resilient. While now beyond lapping many of the government stimulus programs, tight lending standards, higher interest rates and the restart of student loan payments are all headwinds for the consumer. While not overly alarming, savings rates are declining and household liquidity is normalizing.

The Markets.

Earnings for the S&P 500 have been extremely resilient given the cost cutting initiatives at the large cap companies and the strength in artificial intelligence. 2023 consensus is roughly $219, while 2024 consensus is at $246. This will continue to support the S&P 500, though the market is not “cheap” at 18x out year earnings, should consensus hold and we have growth in 2025, it is not grossly “expensive” either.

US Debt.

The single largest increase in debt was that of government debt jumping from 102 percent of GDP before the pandemic to 124 percent in the first quarter of 2021. This increase was associated with a large fiscal response to the pandemic recession undertaken by the US federal government, notably through the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act of March 2020 and the $1.9 trillion American Rescue Plan of March 2021.

While this is the elephant in the room, as long as there is long-term economic growth, investors tend to not focus on this so much. Without much growth, the likelihood is that we experience what Japan has over the last 40 years.

Overall, while there is slightly more caution in our view for the markets overall (given some of the items discussed above), similar to what we have said before, we still feel there are excellent opportunities in Utilities (strong demand drivers in Electric Vehicles and Artificial Intelligence/Data Centers) and Long Duration Fixed Income due to the end of the rate increase cycle.

Take Advantage of Highest Interest Rates in More Than a Decade.

Fri, 18 Aug 2023 21:14:00 GMT

Financial advisors typically advise clients to hold enough money in an emergency fund to cover 3-to-6 months of household living expenses, and in some cases emergency funds are set up to cover a year’s expenses. Unknowingly, many families are keeping these funds in checking accounts, which typically pay very-little-to-no interest. In today’s high interest rate environment, these funds can be earning thousands of dollars more annually in interest, while not taking on any additional risk. Here are three sensible options:

1. Buy Short-Term Treasury Bills.

Short-term treasuries, backed by the full faith of the US Federal government, are a very attractive investment – they currently yield slightly more than 5% and interest is not taxed on the state level, which would benefit residents in states such as California, New York, New Jersey and many others. Additionally, short-term treasuries are fairly easily purchased in a brokerage account or a TreasuryDirect account. However, holders of these bills have to be vigilant in reinvesting the money upon maturity. A way to eliminate the need to closely monitor maturities would be to invest in a short-term treasury ETF, such as BIL (SPDR® Blmbg 1-3 Mth T-Bill ETF), but note these investments carry fees (BIL fee = 13.5bp).

2. Move Funds to a High-Yield Online Savings Account.

These accounts are FDIC insured up to $250,000 per depositor and right now, the best high-yield accounts have rates approaching 5%. Be sure to check the account’s minimum deposit and ongoing balance required and if there are any ongoing account maintenance or other fees. These accounts may also have a limit on the number of times that you can move or withdraw money each month. However, if this is your emergency fund, you should not be touching it often.

3. Purchase a Money Market Mutual Fund.

Money market mutual funds typically invest in very short-term (often overnight) maturity debt securities of investment-grade companies, and thus are minimal credit risk, low-volatility investments despite not being insured by the government. Many top brokerage companies – e.g. Fidelity, Vanguard, Schwab, offer money market mutual funds which have very large diversified portfolios (> $50 billion) and currently yields nearly 5%.

“…It’s just right.”

Mon, 31 Jul 2023 19:47:00 GMT

With the S&P 500 at highs for the year up almost 20% YTD and the Fed nearly complete in what has been an unprecedented rate increase cycle, investors have gotten what they hoped for so far…that the Fed got it “just right” and has been able to engineer what is potentially a “soft landing” or even no landing.

Summer Afternoon.

Tue, 27 Jun 2023 14:54:00 GMT

With the arrival of June, we welcome summer. Two other words that do not sound so bad to investors are “positive markets.” As of Friday, the S&P 500 is up roughly 14% year-to-date which brings it approximately 9% off the all-time highs seen in early 2022. During the market decline in 2022, we wrote several times about how the underlying stocks in the market were significantly worse than the overall market appeared. Once again, the performance in the S&P 500 is deceiving.

Market Concentration.

Much is usually written about portfolio diversification. It is still a very important tool in balancing risk and reward and helping investors reach their long-term goals. As seen in the table below, the top 10 contributors (through mid-June) accounted for nearly 90% of the S&P 500’s year-to-date return, while the remaining, roughly 490 stocks contributed a measly 1.4%. This has made the year much more challenging for professional investors as the performance of the market has been highly concentrated (even more so than mentioned in our previous newsletter). What makes this a bit concerning is that this performance was driven by multiple expansion (i.e. positive sentiment) versus an increase in earnings expectations…

…a big contributor to this has been the excitement in Artificial Intelligence (AI).

Artificial Intelligence (AI).

There has been a continued focus in this area of the market and the excitement and hope is warranted as several companies have reported above consensus expectations due to better growth driven by demand for AI products. With the labor costs continuing to be stubbornly high and unemployment still very low, we do believe AI will be an important factor in fighting inflation. Below we came across an interesting table of companies published by Evercore ISI Research that highlighted companies that could be beneficiaries of this trend…some more directly so than others

Debt.

While a government default was averted by an 11th hour deal, no solution was provided to the country’s debt situation. The chart below shows that there likely is not going to be a real resolution to this regardless of who is in office in 2024, but it is something that will need to be addressed by the next president.

The biggest takeaway from this sharp increase in debt is that real GDP has been 1.6% since the Great Financial Crisis while in the 70 years prior to that, it was 3.1%. While the “kick the can down the road” strategy has been moderately successful in avoiding recessions, this slower growth environment has been the price we have paid. The debt issue is something we will address more in depth in the future.

What do we think about the 2H?

One of the recent surveys we read mentioned that 100% of those surveyed believe that a recession is likely in the coming quarters. Consensus has shifted to expectations of a moderate recession as the economy, thus far, has proven to be resilient despite the sharp increase in rates over the last 12 months and the bank crises in March which have significantly tightened lending conditions. With one or two rate increases remaining in 2023 already expected, we start to think about the opportunity in the second half to be driven by the anticipation of rate cuts in 2024. Unemployment is a key focus for the Fed and analysis of the most recent quarterly earnings calls shows a sharp decline in hirings/firings.

So, over the next several months we lean towards longer duration fixed income and while the bar has been set higher for the larger companies as expectations have increased due to AI, we expect the opportunity to be in a potential recovery of the broader market which may not necessarily yield a significantly higher S&P 500, but a more balanced one.

A Collection of Market Thoughts.

Tue, 23 May 2023 18:19:00 GMT

The market has been roughly flat for the past month despite another large bank, First Republic, having to be seized by the FDIC and subsequently purchased by JPMorgan Chase & Co. This continues some of what we saw last month where, despite some of the turbulence, on the surface, things look calm. The VIX, which is a popular measure of volatility, is usually a good contra-indicator. It signals the level of fear or stress in the market and is sometimes known as the ”Fear Index.” It is currently trading at pre-pandemic levels despite a Russian invasion of Ukraine, unprecedented Fed tightening, bank runs, debt ceiling concerns and of course a possible recession. So where does that put us now?

Debt Ceiling.

A red herring is defined as something that is intended to distract attention from the real problem. The debt “fight” itself with the somewhat “artificial” deadline of June 1 st in our mind is somewhat of a red herring. As of this newsletter, the US deficit is nearing $32T. While both sides will continue to posture, the likely outcome is that the limit will be increased another 1, maybe 2 years. The real issue is that at the end of this extension period it will then be around $35T and nothing will have been done to stop the increase in deficit spending.

This is a much longer term problem for the country, as it becomes more and more expensive to service this debt, and that will reduce GDP growth which will have a true impact to upcoming generations.

Recession and the Markets.

M2 is the measure of liquidity in the markets. Historically, when we have seen this drop as significantly as the chart below shows, we have gone into a recession.

Additionally, the Home Depot report supports these concerns as two out of the three reasons cited for the weakness are pretty broad based, namely, deflation in certain products and a broad-based moderation in demand through the quarter. Walmart and Target followed suit and also gave weaker outlooks supportive of the expected weakness in the economy through the balance of the year.

The weakness in the consumer at the lower end is evident and is also shown in the chart below…

While inflation has helped the top line as companies across most industries and sectors were able to raise prices to help offset margin pressure they experienced, we think as inflation cools it will not only hurt top line as prices level off, but also impact margins as they will not be able to reduce costs quickly enough due to labor costs remaining stubbornly high.

Technology/AI.

We have often discussed trying to identify growth sectors as potential areas for investment for the longer term in sectors and for the market in general. One area over the past several quarters that has garnered a lot of attention is Generative Artificial Intelligence (AI). We briefly mentioned ChatGPT previously, and it has become more popular than we expected in a very short period of time as many companies have embraced AI as it is potentially a way to increase operating efficiency for certain tasks, and ultimately can help drive down costs. In these early stages, however, the leaders are larger technology companies and through late April, this chart supports a recurring theme about the concentration of returns being tied to a minority number of companies in the market.

We continue to monitor for additional companies that will be beneficiaries of this trend as we believe it will ultimately transform our everyday lives the way wireless technologies and the internet did. We assure you though, we will continue to write these newsletters and communicate personally and not use ChatGPT to do so.

Financials.

With the “last shoe to drop” with First Republic no longer an independent entity, there should be no additional significant issues regarding bank runs and regional banks due to investment duration imbalances. There will however be lower loan growth as lending standards tighten. One interesting anecdote is Elon Musk warning about slowing growth in upcoming quarters as auto lenders pull back loans. As we mentioned in the previous newsletter, investors also continue to focus on commercial real estate (CRE). With $1.5T US CRE debt coming due in 2025, the area of concern is in low investment grade companies since refinancing at higher rates has the potential to significantly impact earnings at a time when the economy could be in recession. The other concern for CRE and other non-publicly traded assets is what the companies are valuing them on their books as pricing is not always reflective of their true value.

What Does All This Tell Us?

While the market has been somewhat passive with regards to the negative headlines, there is reason to not be overly negative. Many companies have been cutting costs (layoffs and corporates expenses/investments) which provides support to earnings and profitability and thus can help keep market multiples intact. Most importantly, whether it’s later this year, or more likely in 2024, the Fed now has many opportunities to CUT rates and stimulate growth should the economy slow and go into recession and since the market is generally very forward looking and anticipatory, this should mitigate significant downside.

I’ve a Feeling We’re Not in Kansas Anymore.

Mon, 17 Apr 2023 18:10:00 GMT

In the The Wizard of Oz , Dorothy is caught in a tornado, is whisked away from her home and eventually lands in the magical land of Oz where there is a new reality and anything is possible. The last four weeks feel like a tornado just went through the markets. Like a tornado ripping through a town, following its path shows the damage is usually quite significant, however, nearby, where it misses, it does not look like anything happened at all.

Financials.

As the sector that was hit by the “tornado” here is a snapshot of some of the key stocks. Not including the companies that went to “zero” (Silicon Valley Bank and Signature Bank) it is quite a dispersion, with the larger banks being mostly immune and the smaller banks taken the brunt of the decline:

The actions taking by the Fed that we discussed previously seem to have been successful so far in easing investor and bank customer concerns. A sign of this is that in the last week of March, the Federal Home Loan Bank system issued $37b in debt which is sharply down from $304b just two weeks before.

What could be the next area of concern? Analysts are focusing on commercial real estate (CRE). Morgan Stanley estimates that almost a third of the $4.5t US CRE debt is coming due by 2025, with the biggest area of concern being in low investment grade companies since refinancing at higher rates has the potential to significantly impact earnings at a time when the economy could be in recession. Focusing on high investment grade companies, where their cash flows more than cover any debt obligations despite higher interest rates is the preferred option.

Technology.

Not so dissimilar to the Financials, Technology stocks (which are amongst the largest companies in the market) have been a safe-haven, despite negative earnings revisions. This outperformance has made them “expensive” versus recent history.

…additionally, within technology, semiconductors (SOX) which are typically early indicators of a recovery have also been strong despite the recent spate of negatives…

Interest Rates/Inflation.

This continues to move down the list of things we write about. Inflation is moving in the right direction and the impact of the interest rate increases in the last year have been successful in tightening lending and credit (albeit not without causing a little bank scare). Whether there are one or two more increases is mostly irrelevant for markets at this point. The only question that remains is how long is it until the Fed lowers rates.

Recession.

With the recent deposit crisis in the regional banks, tighter lending conditions are likely to impact small and medium businesses (SMBs) disproportionately. With SMBs generating 40% of US GDP and employing 50% of the workforce (while responsible for creating 2/3 of jobs), most industry executives and investors believe that a recession is inevitable. The base case is a recession later this year, or early in 2024. Consensus is calling for a “mild” recession. What we will continue to monitor closely is the potential risk for something deeper or prolonged.

What does all this tell us? "There's no place like home."

Several things stand out as I write this. The main one is, this might be the most anticipated recession in several decades. With that being said, while there may not be significant downside in the market as investors anticipate interest rates to be CUT some time in the next 12 months, the upside also seems somewhat limited as we use market valuations AND upside to growth expectations as our guidepost as to what type of upside there could be. In this “Land of Oz” where the market has been treating bad news as good news, eventually bad news will be treated as bad news which is what puts a ceiling on markets in the near term.

We will end on a positive note. Over the long term, the market is usually positive…

…so while we expect it to be bumpy over the next several quarters, we will “click our heels” and look forward to getting back to a more “normal” reality.

Spring Awakening. March Comes in Like a Lion…

Mon, 20 Mar 2023 11:00:00 GMT

The first day of spring always brings excitement. It is a chance for a new beginning and a fresh start. The flowers start budding, the weather starts getting nicer and the days feel like they are starting to get longer. It also makes me think that golf season is right around the corner. As a recreational golfer, a term I am very familiar with is “mulligan.” For those that do not golf, a mulligan is a do-over or a second chance to hit a shot with no penalty. After the initial attempt of regulators to ease concerns regarding the banking system was somewhat unsuccessful, I am sure they would like a mulligan.

Banks.

For the first time in quite a while, the major headlines for the market are not about interest rates. Unfortunately, banks and the risk of a financial crisis are. We would like to start by saying this is not like 2008 where credit losses and leverage were the driver of the financial crisis. In this situation, it is more one of profitability for the sector as credit generally remains strong. Here is a quick review on what happened last week and where we are today:

Monday 3/13 — Signature Bank (Sunday night) joins Silicon Valley Bank as it is closed by New York State regulators. Despite regulators stating that all depositors (even those with >$250k at the closed banks) will be covered, the banks close down significantly as concerns linger.

Wednesday 3/15 — After a sharp rally on Tuesday 3/15, driven by short covering and hopes of stabilization, concerns regarding Credit Suisse surface and pressure the bank sector once again as fear of contagion reemerges in the market.

Thursday 3/16 — Concerns of a bank run continue for First Republic Bank and consortium of 11 banks (led by J.P. Morgan, Bank of America, Citigroup and Wells Fargo) deposit $30b in uninsured deposits to inject liquidity and provide stability to the bank.

Friday 3/17 — Swiss authorities press for a merger between UBS and Credit Suisse to stem the crisis of confidence in the country’s banking system.

Sunday 3/19 — UBS pays $3.2b to acquire Credit Suisse. The company was valued at $9.5b on Friday. The Swiss National Bank also agrees to offer a $107b liquidity line to UBS.

Interest rates and the US economy.

The sharp increase in interest rates over the past 12 months are what has caused some of the problems the banks are currently experiencing with regards to losses on bond investments that they have to realize to fund client withdrawals. While the economy remains steady and inflation is running slightly above expectations, the Fed will likely slow increases and continue to monitor the data as this tightening cycle nears the end. The focus over the next several quarters will be more of when does the Fed pause and then begin to look to lower rates or ease.

Markets.

One of our thoughts as the past week had us brushing off our playbook from 2008/2009 was the following:

After strong periods in the market, as we have experienced in the past 13 years, there are periods of “lost decades” where the market remains essentially flat overall for an extended time as fundamentals and reality catch up with the previous exuberance. This is something we are mindful of as we continue to focus on the lack of growth opportunities of the various sectors. However, the one driver that does keep us hopeful is the eventual lowering of rates over the next 12-24 months, which the market will try to anticipate, as we have seen already.

Overall, we believe that the issue with the banks should subside over the next several weeks as regulators use their “mulligans” to figure out what will ease investor angst. As we believe that this is a profitability issue, not a systemic issue for the financial system, investors will return to focusing on inflation and growth. The lackluster fundamentals will continue to keep the market range bound and ultimately continued patience will prevail.

Silicon Valley Bank…What Just Happened?

Sun, 12 Mar 2023 19:05:00 GMT

Last week Silicon Valley Bank (SIVB) was closed by regulators and taken over by the FDIC. It is the largest bank failure since Washington Mutual in 2008. Over the next several days we are going to see references to the GFC (Global Financial Crisis) and contagion/systemic (potential of this to spread to others) in the press.

From a high level, Silicon Valley Bank had a disproportionately large amount of deposits during COVID, which was driven by the start-up boom, versus its peers given the nature of its business. During that time, they invested in longer term, low yielding securities as interest rates were low. The sharp increase in rates over the past year, reduced the value of those assets currently (note: if they were able to hold those assets to maturity, they would recoup their loss). Since a good majority (approximately 80%) of their clients are start-up companies (from the venture capital industry), most of their deposits were not FDIC insured (Exhibit 1). Over 97% of their deposits were >$250,000, and it has become more difficult for those companies to raise money given the higher interest rates and more challenging economy. The amount of withdrawals increased sharply over the past several quarters. The bank was forced to sell those assets at a loss in order to fund the withdrawals. The company then tried to raise capital to shore up its balance sheet, but instead caused withdrawals to further accelerate and exacerbate the issue, and thus the vicious cycle ended with them being taken over by the FDIC.

While the speed in which this occurred was a bit alarming, there are differences to what occurred in 2008. Where 2008 was an issue regarding credit losses, this is one more of margin (net interest income) for the banks. So, while there certainly could be issues with other banks, we do not think this will result in the contagion or systemic risk we saw in 2008, as the devil will be in the details with regards to the type of assets the bank has on its books and the type of deposit customer relationship it has.

In hindsight, the rate and magnitude of the Fed interest rates is the largest we have seen since 1980/1981. This almost unprecedented rise in rates will have some impact/shock to the system and experts have been trying to determine what that might be. This is one of the by-products of it. Will there be more? Quite possibly. However, as we get closer to the end of this rate increase cycle, the optimism for rate CUTS in the next 12-18 months will provide support and should keep the market in a trading range over the next several quarters which is consistent with our neutral view on equities overall.

R is for Recovery…or Recession?

Mon, 13 Feb 2023 17:36:00 GMT

With already almost a month and a half behind us in 2023 and the market having bounced nicely to start the year, it is a good time to reassess where we are at, and more importantly, what we think the rest of the year could look like.

Interest Rates/US Economy/Unemployment

This will continue to be front and center as the fight against inflation continues, though we believe we are closer to the end of that battle. We expect inflation to continue to gradually come down and the Fed to have 1-2 more rate increases left in this cycle.

US Consumer. As we wrote last month, consumer spending makes up roughly 70% of the US GDP, so we continue to watch for stresses across the various income demographics as well as the various purchasing categories…

…and while employment numbers in January surprised to the upside, more companies continue to announce layoffs…Disney 7,000 (3% of staff), Dell 6,650 (5% of staff), Zoom 1300 (but 15% of its staff), and Amgen and Johnson & Johnson (though smaller numbers).

Wax on, Wax off. Risk on, Risk off

For over a decade the market has seen a significant shift from active investing to Exchange Traded Funds (ETFs) or similar investment vehicles.

This period has been very challenging for traditional active investment managers in terms of their ability to outperform their benchmarks. A by-product of this has been an “all or nothing” view on the market as well. Many in the industry have used the terms “risk on” and “risk off.” Though there are many market pundits who have been suggesting that this is the year for active management, the returns thus far have shown otherwise. We stumbled upon this chart and wanted to share it with you, as it continues to show the generally binary nature of the market. Basically, the riskiest assets have shown the greatest return, which is almost a mirror image of what took place in 2022.

Patience…being paid to wait.

So what do we favor now? We have often spoken of the market being range bound for at least the first half of the year and we continue to think that will be the case. The range we have discussed has been the S&P500 in the low 3000s to somewhere in the 4200 range at the high end. With the S&P 500 up nearly 7% year to date at 4,090.46 (as of 2/10/23) and the added risk that inflation has a short term re-acceleration, we advocate patience, and with interest rates in various fixed income vehicles ranging from 4 to 5%, investors are being paid nicely to wait for the next opportunity.

Our most recent articles:

A Focus on 2023 — The Potential Ahead

Thu, 19 Jan 2023 02:11:00 GMT

We hope everyone had a great holiday and wish you all a Happy and Healthy New Year to start 2023! With the new year comes resolutions. As we like charts, we figured this would be a good “first chart” to start the year on a slightly light-hearted note.

With the S&P 500 ending 2022 -19.4% and Long Term Treasury Bonds -39.2% (as tracked by EDV), it is definitely a year we would like to put in the rear-view mirror and instead try to focus on the opportunities in front of us in the new year.

Interest Rates/US Economy/Unemployment

While the New Year generally brings hope and optimism to investors, unfortunately the same concerns remain as to when will the Fed stop increasing rates. As we have said previously, a slowdown in the US economy and weakening employment environment, would be the conditions that need to be met for this to occur. With inflation now easing, and US corporate earnings slowing, the focus is now on unemployment. As we see more layoffs announced in the last week from 2 technology bellwethers (Salesforce Inc laying off 10% of its staff and Amazon cutting 18k employees), a slowdown in employment is becoming more apparent.

With an end in rate increases near. The focus will shift to corporate fundamentals and general economic growth. Consumer spending makes up roughly 70% of the US GDP, therefore it is one area that should be monitored closely. While employment is still strong (though weakening) and housing prices are flattening out (and declining slightly in some areas), the savings rate has fallen sharply since the lockdown and are now at a level not seen since 2005.

With this backdrop, we are cautious, as market earnings expectations and valuations do not fully reflect these negatives.

China Reopening

With China finally exiting the zero-COVID policy, after a little “urging” from some protesting citizens, there should be a little relief from some of the pressures this created in both consumer demand and supply chain disruptions. Net-net this should be viewed positively and may help dampen some of the slowing growth being experienced by developing economies as well as improving the inflation situation as millions of workers were confined to their homes and manufacturing was stymied causing many disruptions throughout supply chains worldwide.

Japan

In late December, the BoJ (Bank of Japan) surprised the markets by widening the 10yr JGB yield band from +/-25bp to +/-50bp while maintaining accommodative conditions. While relatively benign on the surface it is something that continues to bear monitoring as the reason was to “improve market functioning.” Additionally, Japan remains one of the last regions to not participate in sharp increases in interest rates, while other developed nations have been aggressive in increasing rates to fight inflation.

Finally, we would like to end with something interesting we came across. We have in the past talked about potential areas of growth in the upcoming decade and one of the areas we have mentioned is Artificial Intelligence (AI). Late last year, a company called OpenAI released a chatbot called ChatGPT. While there is still a way to go, this is by far one of the most advanced released to date. There is a waitlist to sign up now and as we write this, also some chatter that Microsoft is interested in potentially making a $10b investment in the company. We would love to hear your feedback on this. Unfortunately, one thing it could not answer for us is what the market is going to do this year, but we remain optimistic that once the dust settles over the next several quarters, there will be some opportunities for the longer term.

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Tax-Loss Harvesting: Playing “The Glad Game”

Thu, 17 Nov 2022 21:43:00 GMT

In the Disney movie “Pollyanna,” Pollyanna was taught by her father that in “ every situation, no matter how bad it might seem, you could always find something to be glad about if you looked hard enough .” Every day they played “ The Glad Game .”

As we near the end of 2022, with many of the indices and asset classes down more than 10%, an important strategy to consider is tax-loss harvesting. Tax-loss harvesting involves realizing losses on investments that have declined in value to offset capital gains taxes you may owe from gains you have realized in investments that increased in value.

If your capital losses for the year are greater than your capital gains, you may be able to apply up to an additional $3,000 of losses against wage income or investment income. Another option to consider is, if losses exceed $3,000 is to carry them forward indefinitely to offset future gains for federal tax purposes (State tax rules may vary).

A nice example to illustrate the potential benefits of this are:

"John has a $3,000 capital loss for the current year: if his combined marginal tax rate is 30%, he would receive a current income tax benefit of $900. If he is able to harvest a similar loss every year and that tax savings was reinvested back into the market, using a 4% return (the current yield for a Treasury bill), he would have approximately $28,000 after 20 years."

While this strategy does have its advantages, one needs to be aware of the wash sale rule.

Avoid triggering a wash sale

The wash sale rule prohibits an investor from selling an investment for a loss and replacing it with the same or a “substantially identical” investment 30 days before or after the sale. If this type of sale does occur, the IRS does not allow you to write off the investment loss.

For more information, please visit https://www.irs.gov/publications/p550

Something additional to consider...

Tax-loss harvesting is one way to take advantage of losses incurred during down markets. Another thing to consider is gifting. If you are considering gifting stock to heirs and want to be below the tax exemption amount annually, using the depressed price may allow you to give more shares while staying below the exemption amount ($16,000 per Donee). Should the shares rebound, your heir will benefit from receiving more shares and a larger gift.

As always, all investment decisions should be made within the context of your long-term investment objectives and personal goals. Speak to your financial advisor and tax professional to see whether this strategy is appropriate for you.

Bergamot Asset Management

Bergamot Practice Owner Program Five Pillars Summary

Spring Update – April Showers Bring May Flowers…

“The strongest of all warriors are these two – Time and Patience.”

War and Peace – Leo Tolstoy ﻿

Business Owner Financial Independence Scorecard

The 12-Point Physician Practice Owner Readiness Checklist

Late Start, Strong Finish—Retirement Planning for the Healthcare Professional

Fall/Winter Update

"Winter is the time for comfort, for good food and warmth, for the touch of a friendly hand and for a talk beside the fire: it is the time for home." – Edith Sitwell

RFK’s Push Towards Making America Healthy Again, but What’s the Impact on our Portfolios?

Market Implications

Physician Burnout and the Power of Financial Well-Being

Coming Soon

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Mid-Year Update

“Be like a duck. Calm on the surface, but always paddling like the dickens underneath.” - Michael Caine

Tariffs…Some Thoughts to Consider

“You keep using that word. I do not think it means what you think it means.”

The Issue: “Reciprocal” Tariffs

"Stagflation and Tariffs and Bears! Oh, My!"

“Stagflation and Tariffs and Bears! Oh, My!”

Concerns.

Growth and Artificial Intelligence.

Anecdotes

Conclusions.

DISCLOSURES

January 2025 Insights

2024 Year in Review

What are we focusing on in 2025?

Interest Rates.

The Market.

Other Factors

DOGE.

Tax Cuts.

Global Unrest.

Debt.

Anecdotes.

We the People of the United States…

Elections.

﻿ Interest Rates.

Growth.

Anecdotes.

“So it begins.” - King Theoden, The Lord of the Rings: The Two Towers

Interest Rates.

Elections.

Anecdotes.

﻿

Potential Changes to Estate & Gift Taxes in 2026

Finding Calmness Amidst the Chaos…The Recent Selloff.

So why is this happening and what does this mean to US stocks?

Is the Fed behind the curve? The dreaded “R”-word.

“Summertime and the livin’ is easy…” – Porgy & Bess

Elections

The Economy (Interest Rates)

Growth Concerns?

Anecdotes

Spring into Summer

Inflation and Interest Rates

Where is there Growth?

Elections

Anecdotes.

Mother Nature, Easter and Stock Pickers vs. Groundhogs

The Market

Artificial Intelligence (AI)

India – The “New” Frontier

Anecdotes and the Fed

Compound Interest

Happy Presidents Day!

Rate Cuts.

China and Other International Markets.

Elections.

Random Anecdotes.

The Health Savings Account (HSA)

Happy Holidays!

The Magnificent Seven vs The Mediocre Market.

Interest Rates.

China.

US Population.

“There is no way to peace, peace is the way.”

War and Peace – Leo Tolstoy

Interest Rates.

China.

RISKS & OPPORTUNITIES

2. Move Funds to a High-Yield Online Savings Account.

Debt.