C h e v i o t va l u e M a n a g e M e n t , llC

“The study of history, while it does not endow with prophecy, may indicate lines of probability.” – John Steinbeck

Issue Number 132, October 2019


Our Investment Outlook ……………………………….

Falling Off the Presidential Cycle? ……………………..

Year-End Financial Planning Considerations …..

Cheviot’s Graphical Interlude …………………………

Credits and Disclosures …………………………………








As the U.S.-China trade war raged on, markets

domestically and abroad gyrated and made little

progress during the third quarter. Slowing global

growth caused central bankers to further ease

monetary policy (Europe’s central bank lowered

interest rates deeper below zero) in an attempt to

bolster economic activity and financial markets.

The U.S. Federal Reserve (the “Fed”) lowered rates

in July and September and another quarter-point

rate cut is possible before year-end.

Low interest rates motivated numerous com-

panies to borrow funds – even if more capital was

not needed. Berkshire Hathaway, already boasting

a war chest of approximately $125 billion in cash,

issued $4 billion worth of bonds in Japan. The 10-year

Berkshire I.O.U. promises to pay its Japanese lenders

the paltry rate of 0.44% per annum. With such a low

hurdle rate of investment for Berkshire, this move

underscores the notion that it is better to borrow

when you
want to rather than when you need to.

As of when we went to print, the threat of

impeachment looms over the Trump Administration.

Having weathered prior investigations during

President Trump’s term, the markets are looking

past impeachment fears with considerable calm.

For better (as U.S. citizens) or worse (as financial

market historians), there are very few historical

parallels from which to draw. From the onset of

President Nixon’s impeachment to the date when

he resigned, the U.S. stock market declined by 13%.

During President Clinton’s 14-month impeachment,

stock prices rose by 28%. This sample size of two

is insignificant and how markets will respond to

a potential impeachment of President Trump in

coming months is unknowable. The direction of the

economy and actions taken by the Fed regarding

interest rates and by the Trump Administration

regarding the trade war are likely to be far more

meaningful drivers of market behavior.

Should the global economy continue to drift

lower and if the trade war goes unresolved in the

near term, market prices could decline, providing

us with worthwhile buying opportunities. This

potentiality is why our portfolios are well-balanced

and prepared for a multitude of economic outcomes.

We prefer not to be greedy in this environment but

rather to be prepared to make long-term commit-

ments to high quality companies – and only when

offered to us at intelligent prices.


Adam Smith’s 1776 tome on economics, The

Wealth of Nations, contains many enduring pillars

of economic thought. Notably among them is Smith’s

notion that a capitalist economy is predicated on

individual financial self-interest, which is not only a

phenomenon to be expected, but an influential eco-

nomic force. The metaphor Smith uses to describe

this was that of an “invisible hand” guiding the

behavior of each individual. When viewing eco-

nomic history and the business cycle in the U.S.,

Cheviot is in its 35th year of serving investment clients throughout the U.S. We deliver personalized investment and financial management

expertise to simplify our clients’ complex financial lives. Our firm’s investment objectives are to protect and increase our clients’

wealth through safety-first investing. Included within our investment management services is the creation and ongoing oversight of

personalized solutions for retirement planning, estate planning, education funding, and numerous other areas of financial importance.

Cheviot is a completely independent financial advisory firm. We put our clients first in everything we do.


a similar politically-motivated “invisible hand”

emerges which is important to understand and

consider as part of a larger framework for making

investment decisions.

There is a certain rhythm to the U.S. economy’s

ebbs and flows dating back nearly 100 years. Since

1930, growth in U.S. GDP averages less than 3% per

year during the first two years of a president’s term.

In a president’s third and fourth years in office, the

average annual rate of growth jumps to nearly 4%.

The pattern of strong growth entering an election

giving way to weaker growth in the first couple

years of one’s term – and repeating itself over time

– is more than mere coincidence.

for First 2 Years vs. Last 2 Years of a

Average Growth in U.S. GDP

President’s Term, Since 1930












Years 1 & 2

Years 3 & 4

In the first months and quarters after an

election, presidents often enact – or at least attempt

to – a great many new policies that differ from

those of the prior administration. Many of these

changes take time to be implemented, others are

simply proposed, but, in this period of time, cor-

porate leaders are left waiting for greater clarity

regarding the impact on their businesses made by

these changes. Such uncertainty regarding new

laws causes executives to postpone decisions about

expansions and other business plans, resulting in

a slowdown in economic growth.

By years three and four, with the fog of uncertain-

ty clearing, presidents focus on further improving

the economy. Softness in years one and two make


economic stimulus packages easier to pass and, with

some help from the Fed, the economy regains its

footing in years three and four. Historical evidence

indicates presidents capitalize on this pattern.

Says Jeremy Grantham, investor, market histo-

rian and student of the presidential cycle: “What

moves the dial on Election Day, is the shift in employ-

ment six months up to the election. A year before, it

doesn’t matter. It is all forgotten. Six months before

the election, you’ve got to have a strong looking

labor movement with strong labor results. And to

do that, you’ve got to stimulate the economy a year

or 18 months ahead of that to get the lag effect. And

that’s what presidents do.”

In notable contrast to previous presidents, the

Trump Administration has thus far used a different

playbook. It enacted pro-business legislation

immediately upon entering office. It then lowered

corporate and personal income tax rates for the

majority of Americans. This fiscal policy was highly

stimulative to the U.S. economy, boosting growth

in 2018, the second year of the president’s term.

GDP growth in the U.S. climbed for six consecutive

quarters since the Trump Administration took office,

finally leveling off in the third quarter of 2018.

This growing U.S. economy allowed the Fed

finally to lift interest rates from the ultra-low,

crisis-era levels where rates were held for nearly

a decade. That, coupled with the beginning of

President Trump’s trade war with China, caused

global economic activity to slow. In the U.S., GDP

growth continues to trend lower since its mid-2018

high. In the first half of 2019, U.S. economic growth

measured 2.46% – the lowest of the three years of

this presidential term, stair-stepping down from

2.80% and 2.52% in years one and two, respectively.

(This also compares unfavorably with the historical

year three presidential average of 4.11% but does not

factor for global economic conditions.)

Manufacturing job growth in the U.S. is also well

below the gains achieved in the first two years of

the Trump Administration. In this year’s first half,

manufacturing jobs have been lost in nearly half

of the country, including swing states Wisconsin

and Pennsylvania. Industrial production in the

U.S. has contracted for two consecutive quarters, a

decline not seen since 2016 – just when the teetering

manufacturing economy helped sway many voters

to consider the allure of then-candidate Trump’s

economic promises.

Unlike President George H.W. Bush’s time in

office when he raised taxes and the Fed hiked

interest rates near the end of his term, leading to

an economic slowdown which harmed his chances

of re-election (recall James Carville’s reminder to

candidate Bill Clinton during the 1992 campaign: “It’s

the economy, stupid”), President Trump continues

to apply tremendous pressure on the Fed to stimu-

late the economy. He asks the Fed not just to lower

interest rates to zero but to administer quantitative

easing, a stimulative measure reserved for the worst

of economic crises. Jay Powell, the Fed Chairman,

has “no guts, no sense, no vision,” says Trump, also

referring to him as an “enemy” of the U.S.

The effects of raising or lowering interest rates

often work with a considerable lag, so – with the Fed

lowering rates twice in the past few months and more

cuts potentially on the way – there remains time for

growth in the economy to accelerate before the 2020

election. Furthermore, the Trump Administration

can at any time soften its stance and consummate

a trade deal with China, as almost any deal will

remove the uncertainty hanging over businesses

today, probably unleashing business activity and

potentially elevating stock prices. We expect Trump

to make a deal well in advance of the 2020 election

but, of course, China must also agree to any such

deal. And China certainly understands that tough

and ongoing negotiations with the U.S. could prolong

economic softness in the U.S. – just when Trump

most desires a strong economy.

In general, the political machinations that affect

the economy are difficult to predict. And while

there is often an underlying desire on the part of

an incumbent president to spur economic growth

leading up to an election, there remain numerous

other variables whose understanding is crucial to

successful long-term investing. We at Cheviot ana-

lyze a mosaic of economic and financial data to help

us navigate markets. It is important that your hard-

earned savings be invested prudently in companies

that can weather political and economic cycles.



In addition to investment management, we


frequently help our clients with other important

areas of their financial lives. These matters include

retirement and estate planning, charitable giving,

insurance advice, and more. Because we are ded-

icated to providing personalized financial advice,

the below recommendations are broad overviews

whose finer points we would be glad to further dis-

cuss with you. As clients, you are always welcome

to contact us with specific financial questions, no

matter how big or small.

Make Charitable Gifts

Most gifts to qualified charities are tax-deduct-

ible. Donating before year-end allows the taxpayer

to deduct the donated amount in the year of the gift,

provided they do not take the standard deduction

when filing their taxes. Rather than donating cash,

consider donating securities that have appreciated.

By donating shares of highly appreciated stock,

for example, the donor receives a deduction in the

amount of the full fair market value of the security

as of the date of donation. This has the dual benefit

of avoiding capital gains tax on the appreciated

amount of the investment and preserving cash that

would otherwise have been donated. Additionally,

-Continued on Page 6


…We share a small sample of graphs that we

believe paint a broad picture of U.S. economic

activity and sentiment. Graph 1, Average Leading

Economic Indicators, compiles ten important

economic data points, including those related to

manufacturing, employment, and consumer sen-

timent. Graph 2, Interest Rates in the U.S., illus-

trates the peaks and valleys of short-term interest

rates over time. Graph 3, Real Interest Rates in

the U.S., depicts the level of short-term interest

rates adjusted for (or after) inflation. Graph 4,

Growth of the Stock Market in the U.S., portrays

the long-term increase in U.S. stock prices and often

reflects sentiment toward the economy. Graph 5,

Producer Price Index for All Commodities, shows

the long-term march higher and periodic setbacks

in price for a compilation of various commodities

used throughout the U.S. and the world. Graph 6,

Ratio of U.S. Federal Debt to U.S. Gross Domestic

Product, describes the level of U.S. Government

debt relative to the size of the U.S. economy.

Average Leading Economic Indicators for the United States

1984 1986 1988 1990 1992


1994 1996 1998

2000 2002 2004

2006 2008 2010 2012 2014 2016


Interest Rates in the United States











































































Real Interest Rates in the United States [interest rates minus the rate of inflation]












































































Growth of the Stock Market in the United States










Producer Price Index for All Commodities










Ratio of United States Federal Debt to United States Gross Domestic Product












-Continued from Page 3

the same quantity of shares that were donated could

also then be purchased with a new – and tax-friendly,

higher – cost basis.

As an alternative to donating directly to a char-

ity or to multiple charities, donors can establish

and donate to a Donor-Advised Fund (DAF). This

fund acts as a repository for donated assets to be

distributed to qualified charities at a later time. The

donor receives a tax deduction for the full amount

donated to the DAF in the year in which the funds

are donated, even if the DAF distributes the funds

over a period of years.

Make Annual Gifts to Family Members

(or Others)

The 2019 annual gift tax exclusion is $15,000. This

gift amount can be given to as many individuals as

you like, without reducing your lifetime gift and estate

tax exemption. The gift is tax-free to the recipient,

and, while not tax-deductible to the donor, the funds

reduce the value of donor’s estate and subsequent

estate taxes at death. No gift tax return is required

to be filed for gifts that do not exceed $15,000.

Make Large Inheritance Gifts Over the Next

Few Years

The gift/estate exemption base increased in

2019 to $11,400,000 per individual. (Couples can

give double that amount since each person can

contribute the new maximum). This means that

estates can pass assets to heirs without additional

estate taxes under the lifetime limit mentioned

above. Because this law is in effect until 2025 (at

which time the gift/exemption base could revert to

a lower number), individuals with very large estates

should consider taking advantage of the current law.

For such individuals, it may prove wise to transfer

some wealth in the next few years in case this tax

law becomes less favorable in the future.

Harvest Capital Losses Against Taxable Gains

At Cheviot, we do not advocate allowing taxes

to dictate investment strategy. However, we will

examine opportunities in the portfolio to offset

realized capital gains and the taxes due on them.

For example, an investor in the highest tax brack-

et who sells a stock for a gain within one year of

having purchased it will owe roughly 50% of that

gain in federal taxes and state taxes. But by selling


an equivalent amount of a losing stock, the investor

can eradicate the gain and have a resulting tax bill

of $0. If capital losses exceed capital gains for the

year, up to $3,000 of those realized losses can be

used to offset ordinary income (or $1,500 for married

taxpayers who file separately). The remainder can

be carried forward to offset gains in future years.

Don’t Spend Your HSA Dollars (If You Don’t

Have To)

Among the many benefits of a Health Savings

Account is that the tax-deductible contributions do

not need to be spent before the year’s end. In fact, the

money can remain in the account and continue to

grow tax-free and be withdrawn tax-free when used

for qualified medical expenses. Additionally, there

are no required minimum distributions (RMDs)

from Heath Savings Accounts, so if you are able

to delay spending the funds, you can secure many

years of tax-free compound growth. This can con-

tinue throughout life, even while the IRS is forcing

accountholders to make withdrawals from their

IRAs after 70½ years of age. An HSA is perhaps the

most tax-advantaged savings tool there is, so – if you

are eligible for an HSA – be sure to contribute the

maximum amount allowed before the end of 2019.

If You’re 70½ or Older, Don’t Forget Your RMDs!

After age 70½, one must take minimum required

distributions from traditional IRAs (including roll-

over and SEP-IRAs) and 401(k) accounts (in most

cases). Failure to take the required minimum dis-

tribution by December 31
st could subject investors

to penalties as high as 50% of the undistributed

amount. Cheviot can calculate and facilitate taking

RMD withdrawals. Call on us for help.

Refinance Variable Rate Debt

For a number of reasons discussed over the

years in this letter, interest rates have once again

touched historic lows. Because of this, now is the

time to refinance or pay off loans that have a vari-

able rate in danger of rising. A fixed rate may be

slightly higher than current variable rates, but in the

long run, fixed rates today could be substantially

lower than variable rates in the future, creating

considerable savings in borrowed interest. A fixed

rate may be slightly higher than current variable

rates, but in the long run, fixed rates today could be

substantially lower than variable rates in the future,

creating considerable savings in borrowed interest.

Reduce Taxable Income by Making Retirement


One of the biggest changes made last year to

the tax code was the rolling back of long-standing

deduction rules, with the standard deduction being

nearly doubled to $12,200 for individuals and $24,400

for married couples. The higher amount will certainly

incentivize many to forgo itemization for the more

attractive standard deduction. Individuals whose

charitable giving and other deductions exceed the

new higher amounts, will continue to itemize, though

there are more restrictions on what qualifies. State

and local tax deductions are now capped at $10,000,

and only the interest attributable to mortgages of

$750,000 or less (originated in 2018 or later) is deduct-

ible. Individuals that foresee large state and local

tax bills or have (new) mortgage balances greater

than $750,000 should strongly consider maxing out

retirement plan and HSA contributions to reduce

taxable income. One could even consider negotiat-

ing with their employer to reduce their salary and

commensurately increase the amount the employer

is contributing to their qualified retirement plan.

(This also saves both parties payroll taxes.)

For all Cheviot clients, we are happy to discuss

with you any of these and any other financial

planning strategies.


Darren C. Pollock, David A. Horvitz, Jim

Whiting, and Scott Krisiloff, CFA authored this

issue of
Investment Values.


Founded in 1985, Cheviot Value Management, LLC specializes

in providing investment portfolios with the long-term goals of

growth of capital and income production over time. Included

within the management of a client’s investments, Cheviot Value

Management, LLC also provides financial planning advice

including potential strategies related to tax considerations, estate

planning, insurance coverages, philanthropy, and next generation

preparation. While not a professional tax or legal advisor,

Cheviot Value Management, LLC assumes no liability for any

tax or legal advice given. Cheviot Value Management, LLC offers

such suggestions with the expectation that they will be further

examined by a tax or legal professional.

Client assets are allocated principally among the following

asset classes: equities (common stocks), fixed income (bonds) and

money market funds (“cash”).

Investment holdings are subject to change. It should not be

assumed that recommendations made in the future will be

profitable or will equal the performance of securities in this

newsletter. The specific securities identified and described do

not represent all of the securities held for advisory clients,


and the reader should not assume that investments in the

securities identified and discussed were or will be profitable. The

information contained herein is based on internal research derived

from various sources and does not purport to be statements

of all material facts relating to the securities mentioned. The

information contained herein, while not guaranteed as to accuracy

or completeness, has been obtained from sources we believe to be

reliable. Opinions expressed herein are subject to change without

notice. Cheviot Value Management, LLC or one or more of its

officers may have a position in the securities discussed herein and

may purchase or sell such securities from time to time.

Cheviot Value Management, LLC may alter its current

investment positioning and strategy as market conditions change

or are perceived to change. Differing client needs may require the

ownership of different investment securities or differing amounts

of similar investment securities. Differing client needs may

also require the addition or disposition of investment securities

according to changing client needs.

Certain statements included herein contain forward-looking

statements, comments, beliefs, assumptions, targets, and opinions

that are based on current expectations, estimates, projections,

assumptions, targets, and beliefs of the members of Cheviot Value

Management, LLC. Words such as expects, anticipates, believes,

estimates, projects, targets, and any variations of such words or

other similar expressions are intended to identify such forward-

looking statements.

Past performance is no guarantee of future results. Any investment

in marketable securities has the possibility of both gain and loss.

Results will vary among client accounts. The actual return and

value of an account will fluctuate and at any point in time could be

worth more or less than the initial amount invested.

The quarterly letter of Cheviot Value Management, LLC,

Investment Values, is intended to be a source of educational

information to the clients of Cheviot Value Management, LLC

about investments and related topics. Comments about specific

securities or asset classes are NOT intended to be recommendations

that readers purchase or sell such securities or make investment

in such asset classes. Nothing in this quarterly report should be

construed as an offer to sell or a solicitation to buy an investment

security. Any comments related to individual securities are solely

intended to explain to clients why such securities may have been

or may be purchased or sold within a diversified portfolio such as

the portfolios of investment clients of Cheviot Value Management,

LLC. Comments about securities not held in portfolios managed

by Cheviot Value Management, LLC are purely for educational

purposes and are not intended to be recommendations to purchase

or sell such securities. Securities mentioned in Investment Values

may be purchased or sold at a later date.

Cheviot Value Management, LLC never takes custody of client

assets. Assets are always held in the account holder’s name(s) at a

third-party financial institution. The custodian of record is required

under law to regularly provide separate account statements from

those received by Cheviot Value Management, LLC. Clients may

access their investment portfolios directly through the custodian’s

website or via the website of Cheviot Value Management, LLC. No

personal or financial information of any client will be disclosed

by Cheviot Value Management, LLC without the permission of

the account holder or unless Cheviot Value Management, LLC is

required to do so by law.

Copyright © Cheviot Value Management, LLC. All rights

reserved. Reproduction in whole or in part is not permitted

without advance written consent. Requests for permission

to reproduce any portion of the contents of this quarterly

letter may be emailed to contact@cheviot.com or mailed to

Cheviot Value Management, LLC, 9595 Wilshire Blvd.,

PH 1001, Beverly Hills, CA 90212.

C h e v i o t va l u e M a n a g e M e n t , llC

Investment Management • Retirement Planning • Taxation Mitigation • Charitable Giving

Estate Planning • Insurance Advice • Risk Management • Retirement Benefits

Today, Cheviot Value Management is one of the oldest independent investment advisors in Los Angeles.

Its founder, Frederic G. Marks, was an experienced business attorney with a bird’s eye view of the struggles his

clients faced when investing their hard-earned savings. Repeatedly, he witnessed his clients incurring losses

or being mistreated – sometimes without knowing it – by financial services professionals. Since its founding

in 1985, Cheviot’s mission is to provide financial peace of mind through careful investing and thoughtful

financial advice. Unlike what Fred witnessed elsewhere in the financial services industry for so many years,

his goal for Cheviot was to put the interest of the client ahead of all else.
Just be helpful.

We begin, in Fred’s words, by helping clients avoid “uninformed speculation under the guise of invest-

ment.” Based on the teachings of legendary investors Benjamin Graham, his most famous student Warren

Buffett, and his business partner, Charles Munger, Cheviot seeks to own high quality investments for its

clients (and members of the firm right alongside them). Our approach aims to produce a more stable growth

trajectory, with less volatility than occurs in the stock market. This helps our investors sleep well at night

and enjoy greater long-term success.

Cheviot’s Purpose:

Why Cheviot?

We give our clients peace of mind through safety-first

investing, long-term growth, and a steady stream of

retirement income. Cheviot prides itself on meeting

the long-term financial goals established with our

clients and on providing attentive and personal service.

Four principles on which Cheviot was founded:


Put the client first in everything we do.


Invest in securities that can be bought or sold quickly

and inexpensively.


There are no lock-up periods; clients may access their

funds at all times.


Invest for the long-term, minimizing all costs and taxes.

We have decades of independent and unbiased

experience, serving clients since 1985.

We invest for ourselves and our families the

same way we invest for our clients: We “eat our

own cooking.”

We do not sell any investment “products” nor are

we affiliated with any other financial service com-

panies that do. There are no hidden fees.

We have been recognized by the financial industry’s

leading publications including, Barron’s, Bloomberg,

The Wall Street Journal, Money Magazine, Fox Business,

and the Business News Network.

We maintain well respected credentials in the

financial industry, including the Certified Financial

Planner (CFP®) designation.

We treat our clients in the way we would desire

if our roles were reversed.

9 5 9 5 W I L S H I R E B LV D. , P H 10 01, B E V E R LY H I L L S , CA 9 0 212

w w w. c h e v i o t . c o m ( 310 ) 4 51- 8 6 0 0 c o n t a c t @ c h e v i o t . c o m


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