Editor’s Note: Welcome to our week-long special series! Our editors for both the Sovereign Investor Daily and Winning Investor Daily are looking ahead to 2018 and providing their insights into what they believe will be the big movers and shakers for the new year. They are also looking at critical steps you can take to preserve and grow your wealth. Happy reading! — Jocelynn Smith, Senior Managing Editor

Most people know the 1967 World War II film The Dirty Dozen … at least by name. It’s become shorthand for any set of 12 things that can be advantageous to do, even if they seem a bit disreputable.

The IRS, for example, publishes a Dirty Dozen list of tax scams every year. It includes both scams perpetrated against taxpayers, and those perpetrated by taxpayers against the IRS.

For my final Sovereign Investor Daily article of 2017, here’s my Dirty Dozen list of tax steps you can undertake before December 31 to wring the maximum amount away from Uncle Sam before the law changes in 2018.

Every one of them is a direct consequence of the Republican Party’s looming federal income tax changes. And every one of them is perfectly legal.

Let’s start with a review of the structure of the new federal income tax system — good and bad.

On the plus side, as of Friday last week, the GOP tax plan included lower marginal tax rates for all income brackets, at least until 2027.

All else being equal, that will reduce most people’s taxes at first:

In addition, owners of pass-through businesses such as limited liability companies (LLCs), partnerships and S corporations will now be able to deduct 20% of their profits from their personal income taxes, up from 17% at present.

For example, if your LLC earns $100,000 in profits, $20,000 of that will be tax-free. The remaining $80,000, plus whatever you draw in salary for yourself, will be taxed at the rates above.

The increase in the standard deduction will result in far fewer households itemizing their deductions. Currently about 30% of households do; under the GOP plan only 5% would do so, since the standard deduction would be higher. Many lower-income households will benefit from the higher standard deduction.

Make Hay While the Sun Shines

That’s the good stuff. But for many of us, the news isn’t all good.

Above all, the combination of the elimination of the personal exemption, a cap of $10,000 on deductions for state, local and property (SALT) taxes, and a limit on mortgage interest deductions will mean that many households — especially in high-tax states — will end up paying more tax.

Nevertheless, this creates simple tax moves that you can undertake between now and the end of the year. They are all based on the principle that if you maximize your itemized deductibles now, lowering your 2017 federal income tax bill, you’ll come out ahead … because you won’t be able to deduct them in 2018.

If you anticipate that your itemized deductions in 2018 will be less than $24,000, you won’t benefit from itemizing.

But if you prepay some of 2018’s deductible expenses now — adding them to your 2017 itemized deductions and reducing your federal income taxes this year — you’ll be able to benefit from them one last time. For example:

1. Give more to charity before December 31. (Note that if you’re thinking about donating stocks to charity, and you own different lots of the same company’s stock, donate the most valuable lots this year. Under current law, you can donate the shares that have appreciated the most to get the largest charitable deduction. Under the new law, you will have to sell the shares first in, first out.

2.  Prepay your 2018 property taxes in full. (Under the final version of the tax bill, you are unfortunately not allowed to prepay 2018 state and local income taxes, but property taxes are fair game.)

3. Prepay next year’s mortgage interest.

4. Prepay any outstanding student loans.

5. Prepay medical expenses that you know you will incur next year, such as a scheduled procedure.

6. If you live in a state that charges sales tax on automobile purchases up front, buy a car before the end of 2017 so you can add that tax to your 2017 itemized deductions.

The same logic also works in reverse. For example:

7. Since you’ll face a $10,000 cap on SALT tax deductions next year, if you live in a high-tax state like New York or California, try to move some future earnings into 2017, boosting your SALT taxes — and thus your itemized deduction — for 2017.

8. Similarly, if you expect to get an annual bonus early next year, ask for it to be prepaid in December.

9. If you’re a consultant or on retainer, see if you can get clients to prepay some of next year’s invoices now to boost your 2017 earnings.

There are also some more arcane strategies you can adopt:

10. If you’re planning to undertake a 1031 swap in 2018 for something other than real estate — say, business equipment or artwork — do it now. From 2018, 1031 swaps will be limited to real estate only.

11. If you’re thinking of converting a traditional IRA into a Roth IRA, run the numbers to see if you will be better off doing it before the end of 2017 to increase your taxable income, which you can offset with some of the itemized deduction strategies above. (Bear in mind that you can do a Roth conversion even if your income exceeds the cap for Roth contributions.)

12. For the pièce de résistance, consider converting yourself into a limited liability company. Depending on your income level, you could double your tax savings by quitting your job today and returning tomorrow as a paid consultant.

Remember, these are all perfectly legal.

But I’d go ahead and look for an experienced tax attorney anyway … after all, with the train wreck that’s headed our way because of this hasty change to the federal income tax law, we’re all gonna need all the help we can get in 2018.

Kind regards,

Ted Bauman

Editor, The Bauman Letter

In this exciting NEW VIDEO, Wall Street legend and former multibillion hedge fund manager Paul Mampilly pulls back the curtain on the biggest investment opportunity in the market today. What insiders are calling “The Greatest Innovation in History,” this revolution will mint more millionaires and billions than any technology that came before it. Right now, the current market for this technology is just $235 billion, but given how fast this technology is moving experts predict it will soar to $19 trillion by 2020. But 8,000% growth is just the beginning—and now’s your chance to get in on the action. [CONTINUE TO VIDEO]

Source: Banyan Hill 

I’m a natural contrarian … and today, I’m going to contradict myself.

Last week, I wrote that it’s imperative to plan your future based on value, not price.

But prices matter too, especially in the short term. For example: Is bitcoin so valuable that it deserves a price of $11,000?

Are U.S. corporations worth so much that they deserve the second-highest Shiller price-to-earnings (P/E) ratio in history?

Do those corporations deserve a price-to-sales ratio 75% above its historical average?

In all three cases, the prudent answer to the question is no. The prices of bitcoin and stocks are out of line with their value.

But I’ve been saying “no” to another price-related question for the last nine years … and prudence tells me it’s time to change my answer.

It’s time to get ready for consumer price inflation. Are you?

Looking for Inflation in All the Wrong Places

For nearly 10 years, I’ve listened in frustration as people, who should know better, predict that central banks’ “quantitative easing” (QE) policies would produce consumer price inflation … and of course, the fabled “dollar crash.”

No inflation. No crash. Just as I predicted.

Why not?

Monetary theory says that the average level of prices is set by the total money supply divided by the real output of the economy. If money supply grows faster than output, inflation ensues.

Given the big gap between the growth of the economy and the growth of liquidity, we should have inflation.

But contrary to the misleading slang term, central banks don’t “print” money. Instead, they create reserves for the commercial banking system.

Money is only created when banks make loans against those reserves — say, $10 lent out for every $1 in new reserves.

If those loans aren’t forthcoming — or if they go to something other than consumption or investment — there’s no new money in the real economy, and no inflationary pressure.

At least not in the consumer economy.

Inflation Staring Us in the Face

What the dollar-doomsday crowd didn’t get is that QE is a peculiar sort of liquidity.

QE involved central bank purchases of bad debt held by banks from the pre-2008 housing bubble. Taking those debts off the banks’ balance sheets had the effect of boosting their reserves.

Of course, banks could have used this improved position for consumer or corporate investment loans. That’s what the politicians and bankers kept telling us.

That would have created more real-world money, and increased consumer inflation.

But, in the case of lending, supply doesn’t create its own demand.

With interest rates at historic lows, banks didn’t go out of their way to lend money (except where they could jack up lending rates, like credit cards and auto loans.)

On top of that, consumers were deleveraging, paying down old debt instead of buying new stuff. New regulations made it harder to get “liar loans.”

On the other hand, weak consumer demand meant corporations had no interest in borrowing to fund investment. In fact, corporations used the financial crisis to cut costs — firing workers and foregoing investment — which boosted their profit rates and gave them loads of cash, even as sales were flat.

So where did all that cash go? What about the QE money? What happened to inflation?

Here it is:

Since QE money wasn’t going to Main Street, it went to Wall Street instead. The average annual return of the S&P 500 is 7%, net of dividends. Since 2009, it’s been about 15.5%.

There’s your inflation, folks.

I Predict Inflation … Both Kinds

Things have changed since 2009. The economy is growing at 3% and nearly at full employment. After a decade of trying to claw it out of Wall Street and corporate coffers, ordinary people are finally starting to get their hands on some disposable income.

Accordingly, seasonally-adjusted consumer inflation just hit 2.0%, the Fed’s target.

Given that, here’s what I predict:

1. Tax cuts will fuel inflation, not investment. There is already talk of workers at U.S. corporations demanding the wage increases promised by President Trump and the GOP. More money in the consumer economy will increase demand, leading to more hiring, and thus wage inflation. Wage inflation will lead to price inflation, and vice versa.

2. The Fed will raise interest rates more rapidly than it would have without the tax cuts. But it will be under intense political pressure to limit those increases to keep the economy hot. Fixed-income investments will continue to perform poorly, even as your cost of living rises.

3. Gutting the Consumer Financial Protection Bureau (CFPB) will lead to more reckless lending, and thus more money in the real economy, adding fuel to the inflationary fire.

4. The enormous firehose of cash from slashed corporate tax cuts, tax cuts at the top of the income ladder and repatriation of foreign profits will continue to push the most dangerous inflation of all — the stock market bubble — to new heights. Until, one day, it doesn’t.

Inflation, weak fixed income performance and a growing asset price bubble. Are you ready for that?

If not, you need to consider a safer strategy now.

Kind regards,

Ted Bauman

Editor, The Bauman Letter

In this exciting NEW VIDEO, Wall Street legend and former multibillion hedge fund manager Paul Mampilly pulls back the curtain on the biggest investment opportunity in the market today. What insiders are calling “The Greatest Innovation in History,” this revolution will mint more millionaires and billions than any technology that came before it. Right now, the current market for this technology is just $235 billion, but given how fast this technology is moving experts predict it will soar to $19 trillion by 2020. But 8,000% growth is just the beginning—and now’s your chance to get in on the action. [CONTINUE TO VIDEO]

Source: Banyan Hill

“What’s the stock market?”

If you’ve ever had a kid, you’ll know my preteen daughter wanted an answer now. Not three seconds from now. NOW.

Under such enormous pressure to impart professional expertise to my offspring, I told her it’s where people buy and sell shares in companies. Inevitably: “What’s a share?”

Eventually she had interrogated me to her satisfaction. But now I had questions.

Every day, I use the S&P 500 as a shorthand for “the stock market.” Like most major indexes, the S&P 500 is weighted by the value of each company’s total shares outstanding. That means it assigns a proportionate weight to each of its constituents with giants like Apple Inc. (Nasdaq: AAPL) having the greatest influence on the index.

But why, Daddy?

That means SPY, or any other traditional index-tracking ETF, is skewed toward moves in mega-cap stocks.

Why should we consider that top-down approach to be “the stock market?” And what would happen if we didn’t?

Playing With Weights

Over the past decade, investors have been pouring money into index-based ETFs. These typically hold the stocks in the underlying index, ranked by their size.

But did you know that most of the time, the largest stocks tend to perform worse than the average stock in their sector? Historically, the biggest firm in any given sector underperforms the average stock in that sector by 3.5% a year over time.

Scaled up to the level of an entire index, that discrepancy means you might be missing a lot of gains if you stick with plain-vanilla ETFs like SPY.

What happens if you change the weighting of the stocks in an index?

The chart below shows the normal S&P 500 (black line) compared to an index that weights each company equally (red line) — i.e., 0.2% to each company regardless of size.

From 2013 to July this year, the equal-weighted index beat the S&P 500 almost all the time. In fact, if you’d invested $10,000 in an equal-weighted index ETF in 2003, you’d have earned 33% more than a conventional ETF like SPY by now.

Equal-weighted indexes like the Guggenheim S&P 500 Equal Weight ETF (NYSE: RSP, above) have been around for a while. But now someone wants to go even further and launch a reverse-weighted ETF.

Even Stranger Things: The Upside-Down ETF

The Reverse Cap Weighted U.S. Large Cap ETF (NYSE: RVRS) launched last week. It holds all the components of the S&P 500 but flips their weighting, so that the proportions of its components are determined by the inverse of their relative market capitalization. Apple is the largest stock in the S&P 500, but it is the smallest component of the new fund.

By contrast, the smallest stocks in the S&P — Navient Corp. (Nasdaq: NAVI), Chesapeake Energy Corp. (NYSE: CHK) and Patterson Cos. Inc. (Nasdaq: PDCO) — are the largest components of the fund. Combined, they are worth just 0.4% as much as Apple.

In back testing, this “upside-down” ETF outperformed both the normal S&P 500 and an equal-weighted model over the last 10 years.

What’s It For?

If you follow the ETF industry as I do, you’re probably tempted to think that the guys who design these things are running out of ideas. C’mon … an upside-down ETF?

But the back testing figures don’t lie. Both the equal-weight and the reverse-order ETFs beat the market over time.

But that’s the operative term: over time. ETFs like the new reverse-weighted RVRS are designed to take advantage of known relationships between variables over longer periods. RVRS outearns conventional indexes because, as I said above, large caps typically underperform smaller caps over time. The reverse is therefore also true.

Respect the Fourth Dimension

Allocating part of your portfolio to a proven, time-based strategy like alternative-weighted index ETFs is essential. The tested long-term relationships underlying them practically guarantee they will beat the market. They won’t win every month, but they’ll safely generate excess returns over time.

But there’s another strategy using time-tested statistical relationships that can achieve that same level of safety with even greater returns over time. It’s called the Smart Moneysystem, and it’s part of my monthly Bauman Letter newsletter.

Besides the underlying mechanics, the big difference between the Smart Money system and these alternative-weighting ETFs is that Smart Money beats the S&P 500 over time … and in the short term. For example, the Smart Money system is up 24% this year versus just 16.7% for the S&P 500.

Over the last 10 years, Smart Money’s returns were 125% higher than the S&P 500. That’s waaaay higher than the excess gains from the alternative-weighting ETFs.

So, if you’re interested in achieving solid, safe, long-term gains that beat the market, by all means play with alternative-weighting ETFs.

But if you want to do that and make serious money, follow the Smart Money system.

Kind regards,

Ted Bauman
Editor, The Bauman Letter

It’s not silver or platinum. It’s not aluminum, nickel or lithium, either. But this “magic” METAL is found in everything from cars to airplanes, smartphones and computers, even batteries and cosmetics. It even has the power to fight diabetes, depression, weight loss and cancer. It’s worth billions, even trillions. But here’s the problem—this metal is disappearing. The world’s reserves are quickly being sucked dry. But a group of geologists have just struck the motherlode, and the one company behind it could earn investors an absolute fortune as they solve the greatest commodity crisis in human history. [FOR MORE INFORMATION CLICK HERE]

Source: Banyan Hill 

On October 19, 1987 — 20 years ago last Thursday — the Dow Jones Industrial Average (DJIA) lost nearly a quarter of its value in a few hours.

Back then, that was 508 points. A similar drop today would be almost 6,000 points.

Imagine that, if you will … if you dare.

On that day, traders watched in horror as wave after wave of selling ratcheted the index downward. Like a ball bouncing down a hill, each wave seemed faster and bigger than the last.

They looked at each other blankly, since none of them seemed to be doing any of the selling. They weren’t … computers used by big institutional investors were executing automated trades based on incoming price data.

In 1987, market technology was in its infancy. Today’s computerized trading is as far ahead of that as an F-35 Lightning II is ahead of the Wright Brothers.

Should you be worried? Yes … or no … it all depends on how you use today’s technology.

Do you do it the market’s way … or my way?

Warning Signs

On Wednesday, October 14, 1987, the DJIA dropped 3.8%. It fell another 2.4% the next day. On Friday, the DJIA fell another 4.6%, on record trading volume.

All eyes were on Monday.

Now, a 10% drop in three days is significant. But it’s always worse when markets end the week down. Depending on how after-hours options trading goes … and events over the weekend … traders are often poised to sell on Monday morning.

Black Monday began with a wave of selling in the Hong Kong market. Normally, London-based bargain hunters might have counteracted this, but the Great Storm of 1987 had led London’s markets to close early on Friday; most traders were told to stay home on Monday. With nobody on watch, the London FTSE 100 had fallen over 136 points by 9.30 a.m.

That was all the newfangled computers installed at large U.S. investors needed to initiate selling orders. “Portfolio insurance” algorithms started short-selling U.S. stocks and index futures.

As other computers detected this, they started selling automatically as well. The few algorithms that were programmed to suspend trading did so, decreasingly liquidity and increasing the speed of price drops.

U.S. markets soon recovered, but those who had sold in a panic on Black Monday lost a great deal of money.

Lessons Unlearnt

Black Monday wasn’t the last time algorithms have been blamed for sudden market drops. Here are some of the more prominent examples:

• The August 7-10 “quant quake” of 2007. Funds specializing in algorithmic investment strategies suffered massive losses.
• In the “flash crash” of May 6, 2010, the Dow dropped 9% and the S&P 500 fell 7% in just 30 minutes, as bids and offers for stocks moved far away from previous levels — in some cases leaving bids down as low as a penny and offers as high as $100,000.
• On August 24, 2015, the S&P 500 plummeted 5% and the Dow dropped by 6.7% in just five minutes after the opening.

How Now?

In every one of these cases, researchers have blamed the “stampede effect” of automated algorithm-based trading systems. Unattended programs designed to cut losses reinforced each other in a downward spiral that only ended when humans intervened.

Such systems now account for more than 75% of U.S. stock market volumes. One reason is that much trading now occurs in penny intervals.

That makes trading less lucrative for market makers, who profit by playing the “spread” between the highest bid to buy and the lowest offer to sell. As they have retreated from the market, algorithms have stepped in to replace their essential liquidity-providing function.

The shift to automated trading now includes actively managed mutual funds. In March, BlackRock announced it would fire human traders and rely more on stock-picking algorithms, triggering other traditional asset managers to follow suit.

Not All Algorithms Are Created Equal

Computers now manage trillions of dollars in global stock markets. But there are two ways to use them.

The first way is as I’ve described above. Big institutional investors use automated algorithmic systems because they reduce costs and the time-wasting “friction” of human decision-making. Trades can be executed in milliseconds by the millions, generating tiny profits from each that add up to a lot.

The other way is the way we use algorithms in trading services such as Alpha Stock Alertand the Smart Money portfolio in my Bauman Letter.

In those services, we use algorithms to remove only one part of the human role in trading: emotion. We make a zen-like commitment to let the rules call the shots. Empirical back testing shows that this a true market-beater — excess gains of 600%, even 900% are possible over time.

But the Alpha and Smart Money algorithms incorporate three things that the big boys don’t.

One is a hedging strategy that tells us to short the market before it corrects.

The second is algorithms that include fundamental and sentiment analysis at the company level. Using those, we don’t sell just because a stock goes down along with the market. We keep otherwise healthy positions because we know they will rebound, as markets always have after a crash.

But the third feature of our systems is the most important: Computers running our algorithms may make the calls, but we — humans, not computers — push the button to trade. Always.

That way, when a true “black swan” event arises … one that no algorithm can possibly predict … we can step in before it’s too late.

Consider it the best of both worlds.

Kind regards,

Ted Bauman
Editor, The Bauman Letter

It’s not silver or platinum. It’s not aluminum, nickel or lithium, either. But this “magic” METAL is found in everything from cars to airplanes, smartphones and computers, even batteries and cosmetics. It even has the power to fight diabetes, depression, weight loss and cancer. It’s worth billions, even trillions. But here’s the problem—this metal is disappearing. The world’s reserves are quickly being sucked dry. But a group of geologists have just struck the motherlode, and the one company behind it could earn investors an absolute fortune as they solve the greatest commodity crisis in human history. [FOR MORE INFORMATION CLICK HERE]

Source: Banyan Hill