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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

CONTENTS
Our Investment Outlook ……………………………….
Falling Off the Presidential Cycle? ……………………..
Year-End Financial Planning Considerations …..
Cheviot’s Graphical Interlude …………………………
Credits and Disclosures …………………………………

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3
4
7

OUR INVESTMENT OUTLOOK

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.

FALLING OFF THE PRESIDENTIAL CYCLE?

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.

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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
3.8%

4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%

2.9%

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

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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.

YEAR-END FINANCIAL PLANNING

CONSIDERATIONS

In addition to investment management, we

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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

ON THE NEXT TWO PAGES…

…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

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1994 1996 1998

2000 2002 2004

2006 2008 2010 2012 2014 2016

2018

Interest Rates in the United States

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17.5
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%
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1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

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

1960
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1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

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32,000
28,000
24,000
20,000
16,000
12,000
8,000
4,000
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220
200
180
160
140
120
100
80
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Growth of the Stock Market in the United States

1975

1980

1985

1990

1995

2000

2005

2010

2015

Producer Price Index for All Commodities

1975

1980

1985

1990

1995

2000

2005

2010

2015

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

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

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-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

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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 31st 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

Contributions

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.

CREDITS

Darren C. Pollock, David A. Horvitz, Jim
Whiting, and Scott Krisiloff, CFA authored this
issue of Investment Values.

DISCLOSURES

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,

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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:

Integrity:

Put the client first in everything we do.

Liquidity:

Invest in securities that can be bought or sold quickly
and inexpensively.

Flexibility:

There are no lock-up periods; clients may access their
funds at all times.

Affordability:

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

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