Thought Leadership Series: Protecting your Assets from Pandemic Scams and Threats

June 29th, 2021

On Tuesday, June 15th First Long Island Investors held an online web seminar for clients and friends of the firm to discuss the very important topic of protecting yourself from pandemic scams and threats. Carrie Kerskie is the president of Kerskie Group LLC which offers identity theft prevention and restoration services through her VIP Managed Identity Membership program.

The session was structured as a conversation between Carrie and Brian Gamble who is a Vice President of Wealth Management at FLI and in addition to his investment work, heads our technology function. 

Q: Given the pandemic, can you share with us what you are seeing in terms of scams?

A:  The same way legitimate businesses came to a screeching halt early in 2020 due to the COVID-19 pandemic, so did the organizations the bad guys were using to launder money.  So, they had to pivot as well and used some of the things the Federal government had put in place as relief as places to hide.  The government put in place the CARES Act, expanded unemployment benefits, small business loans, and Payroll Protection Program (PPP), etc. For just $0.75 you can buy someone’s name, address, date of birth and social security number online.  With this information, the scammers started filing fraudulent unemployment, PPP and EIDL (economic injury disaster loans) claims.  This is happening even to people who are retired.  Someone can file a claim with your information and get money from the government.  The bad guys would go so far as to file business claims using the names of people who weren’t even business owners because they were able to manufacture fake business incorporation documents, bank documents, etc. 

In addition to these specific scams, overall there is an increase in email, phone and text scams.  Data breeches too.  Everything has seen an uptick.  I believe this is a result of bad guys taking advantage of a situation where there is a lot of fear, confusion, and misinformation. 

Q:  How has the landscape for fraudsters and scammers shifted?  What are bad guys doing to target individuals and businesses?

A:  Starting in 2019 we began to see an individual’s ID being used for money laundering.  This is done when a bad guy opens a bank or brokerage account with your information and then moves money in and then back out.  I have a client who got a letter from a bank and almost threw it out but decided to call the bank.  She found out there was both a checking and savings account with her name, and each account had roughly $30,000. We dug further and found 15-20 other accounts (PayPal, Venmo, Robinhood, banks, etc.) and then spent months closing them all with the client.  Having accounts open in your name that are fraudulent can cause issues with the IRS because banks have to file a SARs report for any activity that looks suspicious and that information goes to the FBI.  Imagine if they think you are involved with money laundering.

Q:  Following up on that, how did the client not know the accounts had been opened?  Were they not monitoring their credit reports? 

A:  Great question.  Credit monitoring is extremely useful, but it does not cover everything because not everyone pulls credit.  Banks use systems  such as EWS (Early Warning Services).  The individual referred to above had been monitoring her credit and her credit report was clean.  Virtual banking definitely does not check credit because those organizations are not under guidance of federal banking laws. 

It’s important to understand that unfortunately not all identity theft can be prevented.  No ID protection exists that would stop the PPP, unemployment, or EIDL fraud we discussed earlier.  But there are things you can do. 

New account fraud can be mitigated.  This is when someone uses your identity to apply for a new credit account (mobile phone, loan, or mortgage).  You can avoid this by putting a credit freeze in place.  A credit freeze is free for life, as mandated by federal law.  Basically a freeze says your credit report cannot be shown to a new creditor.  It doesn’t stop someone from trying, but stops them from being successful.  This can be set up online, phone, or mail.  (I don’t recommend mail.)  A credit lock is also offered by the credit bureaus and does the same as a freeze, however you are entering into an agreement with a bureau and could be giving up some of the rights afforded by a credit freeze.  I strongly recommend you do not use a credit lock or a fraud alert and stick with the credit freeze.  You have to set up a credit freeze with each bureau and there are many.  Equifax, Experian, TransUnion are the big three.  Innovis has become more popular recently and NCTUE is used heavily by the utility industry. 

Q:  Have you seen any uptick in property fraud?

A: No, except for the sale of insurance to protect yourself.  That’s a scam.  Ignore it if you see it.  There is a nationwide program that allows you to register your name and all variation (e.g., James, Jim, Jimmy) with the local courts office.  Once you are registered if there is a change to land records you can get alerted.  No need to pay money for this service.  Use the free version through your county courts office.  This program has different names in different states with the most common being a property alert, property fraud alert, or risk alert. 

Q:  How else can people protect themselves?

A:  First, the USPS.  If you set up an online account with the United States Postal Service you can sign up for informed delivery which every day will email with the images of the first-class mail coming to you. This allows you to monitor for mail theft. (Yes, this still happens.)  Additionally, it informs you of a change of address.  (It is easy to change address by just going to a post office).  With Informed Delivery activated in a USPS account, a letter goes to each of the new and the current address and if you see that someone fraudulently changed your address you can stop it. 

The IRS has a program which was started when there was a lot of tax fraud, called IP PIN (identity protection pin).  This program is now open to all taxpayers.  You sign up at IRS.gov and it provides you with a PIN number to include on your tax return.  Without the correct PIN the return is rejected.  The IRS sends a new PIN each year in November/December for the next tax year.

Q: Shifting to the online space, we are always hearing about data breeches and what not.  What are some tips?  Things to do/not to do?  How to limit exposure if there is a data breech? 

A:  There are so many things to talk about here, but let’s focus on some of the most important, including:

  • Check out as a guest if the website is not a frequent place you shop.  One less account to worry about and then they do not store your credit card number. 
  • For those sites where you do shop often (Amazon, EBay, etc.) you want to make sure the password is unique.  You can create an account, but I still recommend you do not store your card information and just type it in each time. (Some websites might require you to store a credit card on file.)   
  • Passwords.  This could be the topic of a whole separate session, but here are the key things.  The longer the password, the stronger the password so try to make passwords a minimum of 12-14 characters.  One tip is to use a phrase instead of a word.  Maybe a line from a song.  Then add upper/lower, numbers and/or symbols within.  Swap some letters in the phrase out as necessary to meet the website’s requirements.    
    • Don’t recycle passwords and that means don’t use the same on multiple sites.  Recently 3.2 billion user names and passwords were discovered online.  The bad guys will do credential stuffing which means they will blast the userid/password combination at anything and see where they can get in.  Banks, Amazon, Venmo, etc.  Don’t make their lives easy.
    • Being realistic, people cannot have a different password for every website/app they use.  I recommend that you prioritize – bank, brokerage, credit card are sensitive – use unique passwords.  If you have some sites where you are doing less and they have no sensitive information of yours, you could recycle a password.  For most crucial – definitely have separate, unique passwords.
    • Change passwords 1x per year.  An easy way to remember is to change them all on your birthday.  Also, if you think a password has been compromised, change it.  When in doubt, change it.
    • This can all be a hassle, but if it’s easy for you then it’s easy for bad guys.  Privacy and convenience don’t live in same space.  More of one, less of other.  Bad guys will move on to an easier target if they are not getting anywhere with you. 

Q:  How do you recommend keeping track of passwords?  We all know a sticky note on the screen is bad, but what is good? 

A:  Yes, a sticky note is bad and so is a piece of paper under your keyboard or on the bulletin board.  If you want to use the pen and paper method, that is OK, it just needs to be in a locked cabinet where the key is nowhere near. You need to protect that document.  If it’s out for someone to take a picture of it, then it is definitely not secure.  I don’t recommend a spreadsheet or document, even if it is password protected. 

Online password managers are a good idea, if you do your research and use a good one (I use one).  You need to make sure there is both encryption at rest and encryption in transit.  Encryption at rest means that your information is encrypted when it is being stored on the server in the cloud.  Encryption in transit means that as the data is being pulled from the cloud to your device it is encrypted on the way and cannot be intercepted and stolen.  Regardless of which password manager you use, look for encryption at rest and encryption in transit.  Don’t fall for the hype of military grade encryption and don’t go with a free service. 

Additionally, you do not want to store your passwords in the browser because what happens if computer is compromised?  What happens if you fall for the IT support phone scam that has you go to a website and click on a link to remote access software?  Those things give bad guys complete control of your device from anywhere.  You go to bed, they go into your computer and log into everything you have – banks, paypal, venmo, etc.

Q: What about two-factor authentication?   

A:  Two-factor authentication (often written as 2fa) is great.  It requires at log in that you have two things:  something you know and something you have.  What you know is your user id and password.  What you have is a code that comes via email or text.  The default for many is text because when this started people felt it was safer, but not anymore.  If you have an option, get it emailed.  If not, then the code over text is ok. 

The bad guys have started to try and get around this by calling your mobile phone company and giving them your info (that they bought for 75 cents).  Then, they tell the phone company that they have a new SIM card and ask for everything to be switched over.  This includes incoming and outgoing calls and texts.  Now bad guys initiate a password reset and the code gets sent to them because they have access. This is called SIM swapping.  We are not seeing tons of it now, but it is still happening.  To protect yourself you can call your mobile company and add extra security like a PIN and/or extra security questions. 

Speaking of that, when you create a PIN, don’t use a number related to you.  Birthday, anniversary, street address, social security number, etc.  They are all a bad idea.  Use random numbers.  And, for security questions I’ll share a trick I got from a client. It’s called one-off method – answer as if you are one of your kids, or someone else. Use them as your answer key.  E.g. hospital born in – not yours, but the person who is your answer key.  It is enough of variation that bad guys cannot look online and find it.  Often people put inadvertently provide their security questions on social media by participating in polls, surveys, and “let’s get to know each other” posts.

Q:  You mentioned phone scams, text scams, and remote software scam.  (We know remote software was set up for good reasons, but now it is being taken advantage of.)  What else are you seeing?   

A:  For years we have talked about phishing emails and how to look out for them.  Now we are seeing a few things.  COVID-19 has people home, using personal devices for work, and nervous.  The bad guys are preying on all of this.  When it comes to text scams things are changing.  Until recently texting was seen as only for your inner circle – friends, family, etc.  So, bad guys shifted to areas of trust which was text messages or what is called smishing.  The bad guys want you to click on a link or call a number.  If you were not expecting it, delete it.  Don’t respond.  Be careful. Validate or eliminate.  If you can’t validate, then delete.  If legit, they will find another way to contact you.

Phone scams have been around as long as phones have been around.  A few years back there was the fake IRS phone scam from India which before busted was taking in $100,000 per day.  They can be a huge cash cow and that’s why they will continue to do it.

We no longer tell people to watch for a specific scam, but rather to focus on trends.  There are three red flags that all scams have.  (1) Sense of urgency- do this right now.  Pay a bill, etc. (2) Severe consequence – fines, jail, family sent away, etc. (3) Demand a specific action – e.g. Amazon support scam is go to a website and download software.  Most are buy gift cards.  Businesses and federal agencies do not ask you to buy gift cards.  If you hear gift cards – hang up.  There is no need to be nice, because they will not be nice to you. 

If you want to confirm legitimacy, go to company’s website and get the customer service number and call to validate.  Don’t do a quick Google search.  Go to the main website to find the phone number.  Most of time they will say they don’t know what you are talking about because it was a scam.  Validate or eliminate. 

Another thing is to never believe caller ID.  They can make it say whatever they want.  Often the bad guys will use your local area code or a number 1-2 digits away from your number.    

Q:  Carrie, you have given us a lot to consider.  What is the one thing you want people to walk away from today with?

A:  I probably have 30, but if I had to pick one it would be to question everything.  You can’t trust anyone in the digital age.  Too easy to hide real identity.  Think of motive. If I do this, what could happen?  Then move to validate or eliminate. 

At the end of the session, there was time for participants to send in questions.  Many of those were requests to elaborate on something above and therefore responses have been incorporated above, but those that were different are summarized below. 

Q:  What is your impression of authenticator apps?

A:  They are a great tool, but be careful.  Try them on non-crucial accounts first.  Most are tied to your device so if your device breaks and you get a new one, it may not move over.  Make sure you know how to use it the right way.  Have a backup, always good to have a backup but keep that under lock and key. 

Q:  With respect to the credit freeze discussed earlier, how do you turn it off?  And should everyone do that or only once you have been compromised? 

A:  Everyone should put a credit freeze in place.  The only exception would be if you know you need to apply for credit in the immediate future (e.g. car lease is up) then wait and do it after that.  Once you have a freeze in place you can lift it online or by calling the credit bureau.  It can be done quickly, even instantaneously in many cases.  If you know you are going to be applying for credit, lift it 24 hours before and set it to be lifted for 7-10 days in case back office operations needs something.  Then, when those 7-10 days are up, it will go right back in place.  If you lift the freeze by using the bureau’s online sites it is instant. But by giving yourself a day or two will help in the event the website is down. You can ask the creditor who they work with and only lift that one. 

Q:  What about VPN connections.  When should those be used and are they needed? 

A:  In my opinion, a VPN is not needed at home for regular home use if you have a secure router.  Obviously, with more people working remotely they are using a company defined VPN to log into their office systems.  Many of the free VPNs were created out of Russia and China and now all your info is bouncing off their server.  Look at the reviews and look where company is based before you use.  If you are at hotel or whatnot and on free Wi-Fi, then use VPN.  But, better to use data plan and not free Wi-Fi. Or go buy a hotspot and use that. 

Q:  Is it recommended to pay an identity-theft protection service that offers to audit and fix your credit profile or your online presence, etc.?

A:  No, most of the victims I have helped came to me after their identity theft protection service wouldn’t or couldn’t help them. These services CANNOT protect you. They can only tell you AFTER something has already happened. Being proactive as opposed to reactive is a better approach. With clients, we take a proactive approach by implementing a proven prevention process I have developed after working with victims for 15 years.  

Q:  How do you auditing or fixing your online presence?

A:  It depends on what you expect. In my experience, it is impossible to remove something from the internet forever. It might disappear for a short time only to reappear later. Now if you are looking for a service to evaluate your digital footprint, I have a strategic partner that does this and does it well.

Q:  What was the website for getting notified about home title changes?

A:  It depends on your county. In most counties, the free service is offered through the Clerk of Courts office or the office responsible for managing official land records.

Q:  What about phone app permissions?

A:  Both app permissions AND phone privacy settings should be reviewed and adjusted regularly. I offer private online classes on how to adjust privacy (permission) settings AND app settings on iphones. I do not use other types of mobile phones for security purposes. However, there are numerous online videos on adjusting phone app permissions for Android and other phones.

Before wrapping up, Brian Gamble shared what FLI does to protect data for our clients.  He shared that we have an information security program that is designed to protect user information, which includes secure email and our document portal, as well as regular user training.  We also follow best practices for network security that utilizes two-factor authentication and strong passwords.  In addition, since your assets are custodied at independent third party custodians, you get the additional security protections that those firms have in place as well as checks and balances between FLI and the custodians.

Carrie’s presentation was quite informative.  If you would like additional insight you can visit kerskie.com and/or subscribe to Carrie’s podcast –Privacy Mentor.  You can also reach her at ck@kerskie.com.

About our speaker:

Carrie Kerskie is the president of Kerskie Group LLC, founded in 2001 in Naples, Florida. Kerskie Group is the leading private investigation agency focused on identity theft prevention, restoration, consulting, and corporate training. She is also the host of the Privacy Mentor podcast.

Through her private investigation agency Carrie worked with thousands of victims for more than fifteen years. These cases enabled her to view identity theft, fraud, and cyber threats from all angles.

Being a highly sought-after national lecturer, author, and consultant on the topics of identity theft, fraud and cyber threats, Carrie is the author of two books, Your Public Identity; Because Nothing is Private Anymore and Protect Your Identity. She is a media favorite and was featured in numerous publications such as Consumer Reports, Huffington Post, KrebsOnSecurity.com, and MarketWatch. She appears regularly on NBC, ABC, and FOX.

The views expressed by Carrie Kerskie are hers and not those of First Long Island Investors, LLC.

April 27th, 2021

March 31, 2021

“Investing money is the process of committing resources in a strategic way to accomplish a specific objective.” – Alan Gotthardt

The first quarter’s stock market performance reflected optimism for recovery from the pandemic which in turn suggests hope for economic recovery.  The rollout in the U.S. of three vaccines with high efficacy fueled investor interest in equity markets.   This optimism was further stoked with the economic stimulus of the COVID-19 relief package passed in December 2020 infusing about $900 billion into the economy followed up by the new Administration’s American Rescue Plan, which promises to add another $1.9 trillion to our already recovering economy (see charts below).

Emboldened by positive reported earnings for the fourth quarter (reported during the first quarter) released by the vast majority of companies in the S&P 500 Index, that equity market index reacted with a 6.2% gain and set new records.  The Dow Jones Industrial Average as well as the Russell 2000 Index (small-cap index) and the NASDAQ all made gains.  All FLI equity strategies enjoyed gains during the first quarter following the gains in the fourth quarter.   However, what was decisively different was the performance of value-oriented companies as opposed to growth-oriented companies (more on this later).  The striking performance of cyclical, financial, and energy companies suggests that an already recovering economy (aided by record stimulus from Congress and a Fed adhering to its commitment to maintain low short term interest rates) was the fuel for higher equity markets and that investors are anticipating a significant economic recovery and  a return to more “normal” conditions.  (The 10-year U.S. Treasury yield increased to 1.74% and most FLI bond portfolios were flat or somewhat decreased in value.)

The charts on the following page depict some of the positive economic data for GDP growth, employment growth, manufacturing recovery, consumer confidence, and personal savings:

These charts suggest that between economic growth fueled by government stimuli, growing employment, a resurgence in manufacturing, and the strength of the consumer a robust economic recovery is underway!  It should have legs given the support from Washington, D.C., which is now beginning to discuss a possible physical and social infrastructure bill earmarked at about $2 trillion.  If passed, this could result in about $8 to $9 trillion dollars of government spending on COVID relief and infrastructure (physical, social, and green).  An amazing but scary amount, representing more than 30% of GDP and pushing our national debt to more than $30 trillion.

We believe it is for the reasons above, that value stocks are beginning to outperform growth stocks as depicted in the following chart:

Fortunately, we at FLI offer our clients both growth- and value-oriented equity strategies and recommend that each client have a diversified asset allocation including both styles of equity investing.  In addition, modest changes were made to several of our strategies to incorporate more value and economically sensitive stocks (financials aided by a steepening yield curve in particular) to give our clients more exposure to this developing trend. This is not to say that growth companies such as Microsoft, Amazon.com, Mastercard, Facebook, Alphabet, Visa, and others will not continue to perform well. All of these companies reflect earnings growth from secular growth trends.

Of course, we continue to rely on growing earnings to be our beacon.  The following chart projects earnings growth for the S&P 500 Index which should give some support to current and future valuations:

The above chart would suggest that earnings growth is on the rise given all of the factors that have already been mentioned led, in our opinion, by a reopening of much of the economy aided by the pent up needs of consumers, manufacturers rebuilding depleted inventories, fiscal stimuli from the government, increased liquidity (money growth), and the maintenance of low short-term interest rates by the Fed.  However, one unknown factor that is being discussed by the current Administration is the raising of corporate income taxes to help pay for the various relief acts and the recommended infrastructure programs.  One such proposed rate increase would raise the corporate tax rate from 21% to 28%.   If this were to be enacted, it could reduce after tax earnings for the average company in the S&P 500 Index by an estimated 6% to 8%.  This of course would hurt earnings and is not reflected in the chart above.  This is far from law at this point, but it or something close to it is a distinct possibility.  A potential negative at 28% is that it would make our corporate tax rate greater than that of China and many European countries.

Talking about tax increases, there is also the suggestion that high-net-worth individuals are not paying their fair share and numerous individual tax increases are being discussed.  These could include increasing the maximum rate on ordinary income to 39.6%, increasing both the capital gains and dividend tax rates to the individual rate of 39.6% (plus the ACA tax of 3.8%), and various changes to the estate tax system.  However, to be fair, some or all of these increases would only impact those households making $400,000 or more in some cases, and over $1,000,000 in others.  Of course, this is all conjecture at this point, but it is what the current Administration is suggesting to Congress.

The road to passage of the above proposed both corporate and individual tax increases will not be easy.  There is the slimmest majority in both the House and Senate.  Already some Democrats in the House have gone on record that they will not agree to a tax package of increases unless there is the reinstatement of the full deduction for state and local taxes (SALT).  In addition, the Minority Leader in the Senate, Mitch McConnell, has said the Republicans will fight this “every step of the way.”  This lack of bipartisanship is nothing new.  All we can do is wait and see.

On balance, we enjoyed a positive first quarter led by our flagship Dividend Growth strategy.  Strategies that were more value-oriented did better than growth-oriented strategies, but all were positive.  The uncertainty from a growing mountain of debt and the potential for inflation and the higher interest rates might result in some volatility at times.   The worry about COVID-19 variants and infection rates are also some things we must watch carefully as they could delay a robust reopening of the economy.  Additionally, the proposed tax increases, both corporate and individual, are something to be reckoned with if enacted as proposed. 

There seems to be a lot to cheer with the first quarter’s market performance and the positive economic outlook going forward.  However, as always, there are several areas of risk.  We consider the impact of significant debt to be one, potentially higher interest rates needed to quell potentially higher inflation sooner than later, disruptive tax increases to be another, and the possible spiking of COVID-19 (should it happen) to be yet another major concern.  So what do we do?  As our quote states, investors, guided by FLI, are on a mission to allocate financial resources to diverse strategies designed to make a reasonable return over the long term by investing in solid companies characterized by durable earnings growth, a long-term stream of dividend increases, and/or reasonable valuations.  Financial quality, strong management, competitive advantages, good governance, shareholder friendliness, and in many cases secular growth trends are characteristics that we look for in the companies that we own, either directly or through our outside managers.  Our goal is to make reasonable appreciation over the long term while trying to somewhat mitigate risk.  Of course, each client’s asset allocation is customized to reflect their individual situations.

As we enter this second quarter, I remind you to please continue practicing those habits that will keep COVID-19 at bay and get vaccinated if you have not already (please consult with your doctors as I am only a JD not an MD).  Recognize that we are emerging from a horrible period of time because of COVID-19, but the companies and strategies (including real-estate related investments)  that we invest in have done relatively well given the circumstances of these past twelve months.

Please call upon us for any of your wealth and investing needs.  Enjoy the spring, we hope with more, but careful, personal freedom.

Best regards,

Robert D. Rosenthal

Chairman, Chief Executive Officer,

and Chief Investment Officer

February 24th, 2021

2020 was a most unusual year and the COVID-19 pandemic as well as a new administration taking office will have vast impacts on 2021 and beyond. On February 11th the First Long Island Investors team reviewed the economic and investment landscape with an eye towards the future in a web seminar.

February 17th, 2021

December 31, 2020

“Invest for the long haul.  Don’t get too greedy and don’t get too scared.” 

-Shelby M.C. Davis

We achieved strong performance in the fourth quarter and for the years 2019 and 2020.  Our thought piece, which was recently issued, described many of the factors that contributed to our performance.  These include substantially increased liquidity from both the Fed and Congress; closure on an election met with much anticipation; the early but inadequate distribution of two efficacious vaccines; a strong rebound in the economy; and continued low interest rates and low inflation—all of which gave investors cause for optimism.  At the same time, concerns still abound from the ravages of the spreading coronavirus, the upcoming legislative and regulatory changes from the new administration, the recent attack on the Capitol and the impeachment of President Trump, as well as somewhat stretched equity valuations in general (as well as some valuations for IPO’s and Bitcoin that do not make sense to us).

Our quote puts in perspective the view we believe investors should have looking forward.  “Don’t get too greedy” suggests to us that returns could be muted in the near future recognizing that substantial gains have already been made in anticipation of a growing economy coming out of the pandemic.  If hyper stimulus is achieved by the Biden administration it is possible that equity gains can continue.  However, valuations, which have been somewhat dependent on low interest rates, could see pressure if rates were to go up from all of the stimulus and inflation that is likely to result therefrom, as well as the heavy debt burden the country faces.

Our quote also reminds us to not be too afraid.  As we invest in select high-quality companies with either substantially growing earnings or growing dividends from solid business models, time is on our side.  Even if the pandemic delays some improving results for our companies, we believe our investments have the ability to continue to make progress over time.  We believe we will achieve reasonable returns or even better over time. 

Maintaining a prudent and diversified asset allocation with the primary focus on our defensive and traditional strategies remains a prescription for long-term success, in our opinion.  Patience has always been required for successful investors.  Additionally, given the stated concerns, both economic and political, we continue to urge all clients to retain a buffer of cash or very short-term high-quality bonds to give comfort if there is a bump in the road.  Investment history suggests that the patient investor reaps rewards while being pretty much fully invested if they can give their advisor, First Long Island Investors, the gift of time.

We continue to be cautiously optimistic as we await new policies from the Biden administration and the defeat of the COVID-19 pandemic with ramped up vaccinations from two vaccines with more on the immediate horizon.  As we have said many times in the past, never bet against America!

Best regards,

Robert D. Rosenthal

Chairman, Chief Executive Officer,

and Chief Investment Officer

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results. Partnership returns are estimated and are subject to change without notice. Performance information for Dividend Growth, FLI Core and AB Concentrated US Growth strategies represent the performance of their respective composites. FLI average performance figures are dollar weighted based on assets.  

The views expressed are the views of Robert D. Rosenthal through the period ending January 29, 2021, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such.

References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC.

Copyright © 2021 by First Long Island Investors, LLC. All rights reserved.

January 19th, 2021

2021: Our Thoughtful View – January 14, 2021

“Invest for the long haul.  Don’t get too greedy and don’t get too scared.” 

-Shelby M.C. Davis

2019-2020

In assessing the future, one can learn from the immediate past.  2019 was a year of financial optimism fueled by improving earnings, in part due to ongoing benefits of recent tax reform, low unemployment, low interest rates, and deregulation.  The result was a strong year in most traditional asset classes with the laggard being the average hedge fund investment.  Our clients did well following a diversified asset allocation tailored to their individual goals, but in all cases with an underweight to fixed income and heavier allocations to our defensive and traditional equity strategies.  Meanwhile, beneath the surface, wealth and income inequality simmered.

2020 was a year to never forget.  It started with great optimism based on record low unemployment, low interest rates, rising personal incomes, an accommodative Fed, and a rising stock market.  However, early on, commencing in March, we and the entire world were confronted with a global pandemic emanating from a region in China that has foisted on us sickness and is approaching a death toll not seen for the last hundred years (other than HIV/AIDS), as well as the economic impacts of such.  As the extent of this pandemic became better known lockdowns forced business closures; hospitals became inundated; and unabashed fear led to unimaginable number of deaths and a downward spiral of global stock markets (e.g. the S&P 500 Index fell 34% from its peak just prior to the pandemic).  A recession/near depression was forced on our economy and others around the world as governments and medical professionals struggled to find treatments and vaccines for this unknown virus.

Enter the words “warp speed.”  With accelerating speed our equity markets declined in the February-March period.  Office real estate and many retail and restaurant locations became empty, planes and hotels had utilization drop by upwards of 90%.   Unemployment rose to almost 15% at the peak.  Oil usage plummeted and spot oil pricing at one point was negative!  The key thing to remember with all of these disastrous circumstances is that they were self-inflicted by our federal and state governments, trying to deal with this unknown and hideous virus.  The financial crisis of 2008/09 was dwarfed by the economic and human despair caused by this pandemic.

Enter the words “warp speed” yet again.  In the spring, the Federal Reserve and the Federal Government took unprecedented and bold actions to bolster the financial system through monetary policy (expanded the balance sheet by three trillion dollars) and the government (in a bipartisan manner) acted to pass the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and other programs which infused more than three trillion dollars to individuals, businesses, hospitals, and local governments.  This was followed up in very late December with another nine hundred billion dollars which has yet to be distributed.  These monetary and fiscal actions dwarf the actions taken by the Fed and the Federal Government during the financial crisis of 2008/09.  

Growth in Money Supply

The U.S. government also initiated a ambitious partnership between government and private businesses called “Operation Warp Speed” to provide for the seeding of pharmaceutical companies to create therapies and vaccines to conquer this virus as well as other public-private sector partnerships to develop and administer new methods of testing, domestically manufacture personal protective equipment (PPE), build temporary hospitals, add ventilators, etc.  The intention was great but something of this magnitude was bound to have inefficiencies and political discourse, both of which were experienced.  But hope sprang eternal and a vaccine was developed through Operation Warp Speed by year-end (an unimaginable record) and the development of certain therapies gave both our citizens and businesses hope for the future.  The following charts depict the course of employment, gross domestic product (GDP), monetary growth, and the S&P 500 during 2019-2020 which demonstrates the violent downturn and miraculous economic recovery:

Civilian Unemployment Rate (SA)
US Real GDP 
(QoQ, Actuals and Estimates)
US Money Supply 
(M2, SA, $Trillions)
S&P 500 Earnings
(Actuals and Estimates)

These charts demonstrate both the economic volatility as well as the unprecedented resilience of the domestic stock market and our economy.  Of course, not all stocks reacted with such a rebound as growth-oriented shares led the market by a wide margin (given our bias to growth, almost all of our strategies delivered double digit appreciation).  Certain sectors of the equity markets (Energy and Financials) were significant laggards.  Interest rates dropped to record lows, so today cash and quality bonds offer little or virtually no return — in most cases (money markets and U.S. 10-year Treasuries) provide a negative return after inflation.   2020 ended with the S&P 500, Dow Jones Industrial Average, and NASDAQ setting new records.  Who would ever have thought that was possible?  But the prospects of vaccines, therapies, record amounts of monetary relief and stimulus from the government, and the Fed’s expanding balance sheet provided the impetus for these mind boggling results.

However, during the course of the year, political division, an upcoming Presidential election, and civil unrest prompted by the heinous murder of George Floyd in Minneapolis led to numerous peaceful and many tumultuously violent protests throughout the country.  Cries for a political solution to wealth inequality were important to many of the Democratic candidates for various offices.  The fear of socialism became the common fear of those on the right of the political spectrum.  Finally, in a Presidential election besieged with controversy, former Vice President Joe Biden was elected President.  The President-elect has promised a more progressive approach to many of the country’s challenges.

What Do We Know As We Commence 2021?

The horrors of COVID-19 remain with death counts being a daily reminder.  The infection rate in certain parts of the country is growing coming out of the holiday season.  Yet there is reason for optimism based on:

1. The emergency use authorization of two vaccines, as of this writing, with an efficacy of 94 and 95%.  Operation Warp Speed is delivering on its promise of 300 million vaccine doses with the first delivered by January 2021.  In fact, they beat that initial delivery target and vaccines started being given out in December 2020.  However, the administering of the vaccines has been disappointing based on both federal and state inefficiencies.

2. The flood of liquidity from the Fed and stimulus from Congress continues to bolster financial markets. Stock markets hit records, IPO’s achieved incredible valuations (unreasonable to us), Special Purpose Acquisition Companies (SPACs) achieved record “blank check” sums of money, and cryptocurrency appreciated by over 300%! (Not our cup of tea.)

3. Unemployment continues to come down (albeit some people have left the workforce) and businesses have adapted to these draconian circumstances by innovating products and delivery systems.  We expect this will boost profits and profit margins for many companies.  S&P 500 earnings are projected to achieve pre-pandemic levels this year and exceed them in 2022.

4. The latest round of relief, $900 billion just approved and reluctantly signed by President Trump (who at the last minute sought higher direct payments), should be a bridge to struggling individuals and businesses while vaccines help to return our economy to normal.

5. The Fed has promised to let the economy run “hot” until full employment is achieved through low interest rates and Fed purchases of debt instruments.

Where Does This Leave Us?

There is much optimism that lies in the hope that the virus will succumb to massive numbers of people being vaccinated sometime this year. A “new normalcy” will evolve during the course of the year and we believe that our economy will continue to recover robustly.  Many market pundits are optimistic that another positive year for the stock market is possible.  This is based on increasing corporate earnings, GDP growth, improved employment, continued low interest rates, and new business startups to replace many of those that failed through no fault of their own.  In addition, the Fed just conducted another surprise stress test for major banks and they all passed!   It is quite possible that loan loss reserves taken in prior quarters will be returned as higher profits in 2021.   We believe that all of these factors will in time take place.

Yet another characteristic of the last several years that has not been focused on — our national debt which will now approach a concerning level of $28 trillion dollars. At least eight trillion resulting from the tax cuts of 2017 and roughly three trillion in additional debt for the needed relief and stimulus from the pandemic.  This is a reality that needs to be thought out and brought under control.  Our best guess is that both tax increases in the future and inflation will be needed to stem the tide and reduce the effective cost of this level of debt.

We would be remiss in not again mentioning our concerns regarding the speculation that seems to be surrounding IPO’s, SPACs, P/E’s for certain public companies not supported by earnings or earnings growth, home price appreciation, and the overall market optimism that prevails despite the suffering that continues to plague us.  Additionally the big unknown, which could impact these assets and other asset classes is the new policies of President-elect Biden and his progressive agenda.

The run offs in Georgia earlier this month resulted in a slim margin in which the two Democrat candidates were elected in what has been a red state for quite some time.  The consequence of these two elections results in a tie in the Senate. When there is a deadlock on votes the tie is broken by the vote of the President of the Senate, the Vice President of the United States.  In this case, that will be Vice President elect Kamala Harris, a Democrat. This could lead to a more progressive changes resulting in higher corporate and individual taxes as well as possible expensive policies on climate change (the Green New Deal) could impact corporate earnings and consumer spending.  Infrastructure and immigration changes could also be possible.  Additionally possible major changes to our medical delivery system could take place leading to fears of a single payer system.  However, a moderate Democrat Senator, Senator Joe Manchin of West Virginia, has indicated that he will not support such transformational moves by progressive Democrats. This situation requires close scrutiny by us if this should lead to major tax and regulatory changes impacting investors.

Additionally, less consequential from a financial standpoint, but more shocking from a political and moral standpoint, was the riot and breaching of our Capitol last week after a speech/rally led by President Trump. This mass gathering boiled over and attempted to stop the constitutional congressional vote to confirm the states certification of the election of Joe Biden as President and Kamala Harris as Vice President. The Capitol was ransacked, congressional members were moved to secure locations and/or hidden for protection, and five people died.  Fortunately, later that day, the business was completed and the election was certified.

However, it is alleged that President Trump fomented the rally that led to this atrocity. Democrats have impeached the President as the Vice President refused to remove him from office under the 25th Amendment (which would have required a vote of at least half of the President’s cabinet) and the President has not resigned.  Now (as of January 14, 2021) we await a trial in the Senate, likely after President Biden is sworn into office.  If this plays out, the divided country will continue to suffer from extreme political discourse.

The impeachment in the House of Representatives and subsequent trial in the Senate as well as how an evenly split Senate will impact the legislative agenda (amongst COVID and other things) hangs over us as Americans and investors.  We will be watching all of this closely and will report to you as it impacts our approach and advice as your wealth manager. 

Where Do We Stand?

After two years of robust gains for our clients’ portfolios, despite most recently a horrific global pandemic, civil unrest, and a politically divided country, it is hard for us to be too optimistic about gains this year despite the many positive factors outlined throughout this lengthy writing.  We do believe that corporate America will be more efficient; consumers are more adept at how they purchase goods; there is pent up desire to return to normalcy and all that goes with it.  This could lead to increased velocity of money from pent up savings by consumers.  The declining dollar will benefit some of our multi-national companies leading to an earnings tail wind that has not existed for several years and can somewhat mitigate proposed corporate tax increases like those being suggested by the incoming administration. 

So, it is fair to say there are a lot of moving parts to this investment puzzle.  For those reasons we cite our opening quote.  Invest for the long haul while not being too greedy or too fearful as set-backs in equity markets and real estate are common factors of long-term investing.   Collectibles might be a safe haven while offering appreciation opportunity (Google “art returns during recessions”). This time is no different for hoping for reasonable returns over a five-year time frame driven by earnings and dividend growth.  The obvious “below inflation” returns from cash and bonds make us shy away from them other than as a buffer for each client to keep them sleeping at night.   Appropriate levels of cash and bonds of shorter duration will be client dependent.   Our defensive and traditional strategies still, in our opinion, offer long-term appeal tailored to each client’s risk appetite.  We continue to think high quality in every asset class we invest in.   Our preference for U.S. investing remains with modest allocations to other parts of the world.  This bias to quality and the U.S. is what has helped us to achieve meaningful appreciation for our clients last year, despite what turned out to be the “exogenous event” that we cited in last year’s thought piece that could derail the best of investment plans as the result of some unknown event.

Stay safe, wear a mask, get vaccinated (consult your own physician as I am only a JD not an MD), socially distance, and wash your hands.  We appreciate your loyalty and confidence in our team. We look forward to when we can meet in person again!  However, we remain available to you by phone, email, video call, etc. to always guide you in your wealth management needs.

We hope you will join us for our web seminar on February 11, 2021 at 11AM EST where we will dig deeper into many of the items covered here as well as take questions from attendees. 

Best regards,

Robert D. Rosenthal

Chairman, Chief Executive Officer,

and Chief Investment Officer

The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance.  Actual results may differ materially.  Past performance statistics may not be indicative of future results.  The views expressed are the views of Robert D. Rosenthal through the period ending January 14, 2021, and are subject to change at any time based on market and other conditions.  This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such.  References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.  Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC.

FLI average performance figures are dollar weighted based on assets. 

All performance data presented throughout this communication is net of fees, expenses, and incentive allocation through or as of December 31, 2020, as the case may be, unless otherwise noted.

FLI believes the information contained herein to be reliable as of the date hereof, but does not warrant its accuracy or completeness.  This communication is subject to modification, change, or supplement without prior notice to you.  Some of the data presented in and relied upon in this document are based upon data and information provided by unaffiliated third-parties and is subject to change without notice.

NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.

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