PIPELINE

     In 1962 The Chanteys, a band in California recorded this song as a tribute to the massive surfing waves in Hawaii. The instrumental song started a wave of surfer music and inspired later groups like the Doors with the heavy reverberating base sound (think "Riders on the Storm").  Pipelines also are a recurring theme in my investment strategy. A pure play on pipelines is the Master Limited Partnership or (MLP). This is an investment that generates income monthly and is tax advantaged because the distributions are considered as a return of capital. MLP's typically own what is called "down stream" assets related to oil production like refining, storage, and transportation. Essentially, they are toll collectors for the movement of fossil fuels much like cars and trucks have to pay a toll to travel some highways. If you think that fossil fuels are soon to be obsolete, then you should not invest in their pipelines. I personally think that oil and natural gas will be around at least as long as me. Another reference to pipelines relates to the pharmaceutical industry and their development of new drugs and therapies which treat disease. The strength of a company's pipeline of new drugs is a measure of its investability. It's very risky to make a bet on a drug that is even in the late stages of development because few drugs in the pipeline actually make it to market. One example of the risks associated with investing in promising new drugs is Biogen (BIIB) whose late stage Alzheimers drug failed to show any patient benefit. The stock was hammered so bad that I couldn't resist buying a few shares on the cheap based on its other proven therapies. My third and final pipeline theme is also related to the drug business. I think of the drugstores as part of the supply chain (pipeline) which is responsible for getting drug therapies into patient's hands. One retail store in particular is working to change the way people receive their health care. I'm talking about CVS which has recently purchased Aetna health care in an attempt to offer a one-shop-stop for most non-acute health care needs. CVS offers minute-clinics in many of its almost 10,000 stores which will complement its health insurance business. They also own a large pharmacy benefit management business (PBM) which allows them to buy drugs at a discount due to the large quantities purchased. Larry Merlo, the CEO of CVS wants to change the face of health care in this country and hopefully bring down the cost so everyone can afford to receive treatments. The stock market has recently punished CVS because they didn't want the Aetna deal to go through. At 70 billion, it was a bitter pill to swallow but long term investors should see great benefit in the future and there is a 3.8% dividend to keep me interested while I wait. I have to admit that I bought CVS too early and I am now in the red but I already have orders in to buy more and average down on my entry price. I am betting on Merlo to do for health care what the last 30 years of politicians couldn't,

A Good Problem to Have

     I recently filed my 2018 taxes and got a huge shock. My tax liability was more than I ever imagined because of the following reasons: 1. I took some gains in long-held stocks during the year, 2. I have been investing in income producing stocks and CD's, 3. Many of my stocks have attractive yields in the 3-4% range, 4. Money market funds are finally starting to produce meaningful income, 5. My return had very little tax-deferring deductions like IRA's, depreciation for rentals, or business income and the deductions (expenses) that go along with it. So what can I do to lessen the tax bite? First, I ran down to my Credit Union and made my 2018 contribution to an IRA. This step alone lowered my Federal and State liability by $1600. Since I had no earned income, I had to study the tax law to find out that I could make a contribution based on my wife's income. Tax law concerning IRA's can be complex, so only trust what you read in official government publications from the IRS. I have been given faulty advice from people in the financial community so always double check to make sure you are complying with existing tax law. As a volunteer tax preparer, I always have a copy of Publication 17 on my computer desktop as a reference, just remember, the taxpayer is responsible for what goes on the tax return. The IRS allows taxpayers to make contributions to retirement plans even after the calendar year is over. You have until the filing deadline (April 15) to make a contribution for the previous year. For tax year 2019, the amount a person my age can contribute has gone up to $7000 for each person. So what can I do to ease my tax burden for 2019? Again, I will max out my IRA contributions for myself and possibly my wife (if she qualifies). Then, instead of investing in bank CD's I will start buying some tax-free municipal bond issues in my state. These bonds are free from state and federal taxation. I will also make sure to offset any gains in stocks with losses in other stocks, (last year I could not find any losing positions that I wanted to part with). Finally, my hobby gardening business will become an income producing activity, complete with deductible expenses like mileage, insurance premiums, and input costs. I don't expect to make any money for a couple of years but that is exactly the point.