Some international funds worth perusing

International markets seem to have awakened after a long, long nap. These funds have excellent returns and positive alpha — which means they have done better than might be expected, given the risk they take.

Bear in mind that you’re taking on stock-market risk as well as currency risk, which is one reason why I don’t generally advocate huge international positions. But if you’re in the market, this is a decent place to shop. And, yes, there’s a paywall here, but it’s for a good cause.

By the sweat of your brow

“By the sweat of your brow
    you will eat your food
until you return to the ground,
    since from it you were taken.”

One of the enduring mysteries of the U.S. tax code is why the system is harder on those who earn their income by the sweat of their brow as opposed to those who get money from their investments.

The tax code’s main purpose, of course, is to fund the activities of the government, and Americans have been having a lively discussion about the proper scope of government activities and how to pay for them for more than 200 years.

Over the years, however, the tax code has been used to encourage certain behaviors and discourage others. In its current incarnation, for example, we give deductions for contributions to some retirement savings accounts, because that’s a good thing. We levy tax penalties on early withdrawals from retirement plans, because that’s often a bad thing.

There are plenty of things to argue about with these types of tax incentives. What is curious, however, is the favorable treatment of investment returns over ordinary income. Currently, for example, employment income is taxed at a maximum 39.6%, while long-term capital gains are taxed at a maximum 20%.

Ostensibly, the lower tax rate for capital gains – the difference between your purchase price and sales price on a winning investment – is to encourage investment. As such, it has some merit: Congress cut the capital gains rate from 28% to 20% in 1982, and the stock market took off. (On the other hand, Congress returned the capital gains rate to 28% in 1987, and the stock market generally rallied until 2000).

Nevertheless, we as a nation tend to encourage hard work and look down on those who work as little as possible. And here we come to a paradox between the admiration for hard work and the tax code. Consider this comparison of two people, each with $300,000 in income, presented by Ben Steverman of Bloomberg.

Our first taxpayer is an emergency room surgeon. The other plays video games all day, thanks to his inheritance.


Now, as with all things taxable, there are some important caveats here. One is that under current law, if the heir’s parents gave him his capital in their will, the estate is liable for taxes under estate tax law. (Heirs don’t pay estate taxes.) That said, it’s unlikely that the parents paid estate tax: It doesn’t kick in until $11.2 million for a couple and $5.6 million for a single individual. About 11,300 estate tax returns were filed for people who died in 2013, of which only 4,700 were taxable, fewer than 1 in 550 of the 2.6 million people who died in that year, according to the Tax Policy Center.

This is largely an investment blog, so it’s useful to point out that lower corporate taxes in the new tax bill means that companies are more likely to increase dividends, buy back stock, or increase merger and acquisitions. All told, it’s hard not for investors to like the bill, because it will help returns from the money you earn while you sleep. But we’re a country that admires hard work. In the end, however, even with a tax break, those who earn their living by the sweat of their brow still wind up paying more.


Quarters, dimes, and bitcoins

Bitcoins have soared to nearly $3,000 apiece at a speed that most certainly is the tragic arc of a bubble. When is the best time to buy a currency? When it’s new or, at the very least, extraordinarily cheap. Here’s a small example.

Back in the Cretaceous period – ok, 1964 – the government announced that dimes and quarters, then 90% silver, would be made of copper coated with nickel, starting in 1965. (Half dollars of 40% silver were minted until 1970.)

Image result for standing liberty quarterWhile the government had changed coin design from time to time, it hadn’t fiddled with the composition of silver coinage before. In 1964, it wasn’t uncommon to find silver standing Liberty quarters in your pocket. They were a beautiful coin designed by sculptor Hermon Atkins MacNeil and were minted from 1916 through 1930. They were replaced by the familiar Washington quarter.

My mother, at the time, saved as many silver quarters and dimes as she could: I still have them. Coin dealers call them “junk silver,” because they are too worn to have any real value as collectibles. Nevertheless, they are 90% silver. How did they fare as an investment?

Not too badly. As of June 10, each silver quarter would be worth $3.11, if you melted it down and sold it for its silver content. That’s a gain of 1,144% over the years, handily beating the 691% cumulative rise in inflation since 1964.

We certainly weren’t in a position to stash gold coins. My mom was a high-school secretary, and my dad was a government worker. Also,  the U.S. didn’t make gold coins, and hadn’t since the Great Depression. And private ownership of gold was illegal until January 1, 1975.

One could argue that we could have done better in the stock market, and that’s true, with one itty-bitty problem: Most stock investments available to the public were pretty awful, laden with outrageous fees and commissions. The Vanguard 500 Stock Index fund was just a twinkle in Jack Bogle’s eye. (As a side note: The fund’s current $3,000 minimum initial investment was the equivalent of $23,577 back in 1964).

One big boost to silver’s price, at least in 1964, was that the government had a significant interest in keeping silver prices low: If silver broke $1.29 an ounce, the Treasury would face a wave of redemptions from silver certificates. At $1.29 an ounce, people could melt their silver coins and sell them at a profit. (As an interesting historical fact, U.S. silver coins had ridges, or reeding, on their edges so you can tell if people have shaved a bit off the side. The tradition continued through the later, less valuable copper-nickel coins.) In any event, the government was the main player in the silver market, and so we acquired our silver at an artificially low price.

While Bitcoin may be in its infancy, it’s by no means cheap, especially since it has no intrinsic value. You can melt your silver and make a nice sculpture, if you’re so inclined, Image result for frankensteinor use it for weird electrical experiments. Even dollars, while primarily an intellectual construct, have the backing of the U.S. government and every other government in the world, at least indirectly.

Back in 2011, you could have bought a bitcoin for $1. After a brief surge to $31, bitcoins fell back to $2. By design, the number of bitcoins is limited, so at least in theory, they will retain some of their value – unless, of course, a new shiny internet object comes about. And at the moment, there are about 100 cryptocurrencies available. I can’t imagine people collecting them. At least with my dimes and nickels, I can think of my mother and smile.

Cheap won’t always save you

I keep hearing that emerging markets are historically cheap, and that if you don’t like the high stock valuations in the U.S., you should add emerging markets to your portfolio. There are lots of reasons to add emerging markets, but being a panacea for high U.S. prices is not one of them, as I explain in my most recent column for InvestmentNews.

Rockets’ red glare, redux

When you live near Washington, as I do, the military is never far from your mind. As I mentioned in this post, Fort Washington, which failed to defend the area in 1812, was not far from my home when I was growing up. You can’t drive down any street in Northern Virginia without running into a historical marker about the Civil War. The Pentagon, Arlington National Cemetery and the World War II Memorial are an easy drive from here.

One of Fort Washington’s guns. 

Back in July 2015, I noted that defense stocks seemed like a decent investment idea, given the enormous amounts of money the nation spends on the military — currently $619 billion. I’m happy to report that the two aerospace & defense ETFs mentioned in the post,  iShares US Aerospace & Defense (ITA) and SPDR Aerospace & Defense (XAR), have risen at an annualized 13.94% and 11.14%, respectively, since I published the post. The Standard & Poor’s 500 stock index has risen at a 6.92% pace.

Before I do a victory lap in a shiny new F-35, however, I should note that timing is everything. Before the election, SPDR Aerospace & Defense (XAR) lagged the S&P 500, rising at a 2.11% pace, vs. 3.32% for the S&P.  iShares US Aerospace & Defense (ITA) faredm s0mewhat better, gaining 6.05%.

Hey kids! Let’s go to the Civil War reenactment! It will be fun!

The stocks have popped because of the incoming administration’s pledge to increase military spending. Betting on what any administration can and will accomplish is, of course, a risky bet. Congress isn’t in a particularly spend-y mood, even given the election results. And judging from Mr. Trump’s objections to the cost of a new Air Force One (actually two, and it’s only Air Force One when the president is in it), some penny-pinching may be in the future for defense as well as the rest of government.

At least a fairly major increase in military spending has already been built into defense stocks. The iShares offering now sells for 21.56 times its past 12 months’ earnings, while the SPDR fund sells for 22.37. (The latter fund tends to have more small-cap stocks). The S&P 500 is at 19.86 times earnings, which is well above its average of about 16.

Could they go higher? Sure. Americans don’t object to defense spending the way they do to social spending. And everyone seems to remember that the massive spending in World War II helped push the nation out of the Great Depression. (This was a massive government spending program that we still haven’t paid off, but never mind.)


The cemetery at Gettysburg. 

Bear in mind, however, that you need two conditions to make a profitable war. First, of course, you have to win it. (Ask Germany and Japan). Second, it’s best not to fight it on your own ground. (Ask France.)  The best use for a cannon is not to use it at all.