Dear Friends and Family,

Happy New Year! We all at Katz Family Financial would like to wish each one of you a year of prosperity and health. We are grateful to have clients who are a pleasure to deal with and look forward to serving you in the years to come.
With a new year comes new thoughts. Very often bad news is ignored during good times so some thoughts on 2018 also include some negative ones that are getting few acceptances.

The least concern I see expressed in the market is the significant risk in five very large technology companies and the indexes they distort. These are the FANG stocks [Facebook, Amazon, Netflix, Google] and Tesla. Everyone agrees these are expensive stocks. Most believe they are worth the high prices, and some suggest that they may decline due to market volatility or government scrutiny. I feel alone with my view. I believe all of them have faulty business models that will come back to haunt them. If they fall they will drag down the indexes substantially. More than half the increase in the S&P 500 and Nasdaq indexes in 2017 was due to these five stocks, so a major decline would be unavoidable. The good news is that in the 2000 internet crash the indexes crashed but most non-tech stocks appreciated. With the positive economic background, perhaps that will reoccur.

My second concern is interest rates and the related inflation. The Federal Reserve is running another experiment, raising interest rates AND selling off bonds simultaneously. Never been done before. Here the danger is an avalanche of falling bond prices. As interest rates rise bond prices decline. Some investors sell to avoid further losses. The selling pushes bond prices lower and more investors sell. The highest rate ever was 16.25% for 2-year U.S. Treasury bonds. The bond market appears to be riskier than at any time since 1785. One reason is that the government has moved much of its debt to very short maturities from the longer term normal. This means it is refinancing more debt more often. AND bonds are not reflecting this risk. The high level of debt and the high deficits are also financing challenges.

Third, and further down in importance is Bitcoin. When the game ends and the Ponzi scheme is acknowledged there will be losers. Some of them will need funds to cover their debts and to pay for items they had hoped to pay for with their Bitcoin profits. They will sell stock. How much and what the impact will be is unknown at this point.

Those are the risks we try to contend with in our portfolios. No FANG stocks, no long-term bonds, no Bitcoin. In November 1997 we introduced our strategy of requiring all the following in each security we recommended Safety, Quality, Value and Growth. This approach has worked well for us and our clients.

Katz Family Financial