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Equifax and Credit Protection, Blog from Matthew J Mulholland

On Friday, September 8th, Equifax (NYSE: EFX) announced a “cybersecurity incident,” where the birth dates, credit card numbers, and Social Security numbers for approximately 143 million U.S. customers were released to malicious hackers. With the U.S. population at an estimated 323.1 million, 4 out of every 9 Americans were affected.

Exposed users are at risk of having their identity stolen, with the possibility of risking financial loss. The Federal Trade Commission estimates that up to 9 million Americans have their identities stolen every year (before this unprecedented privacy leak).

Equifax claims to have discovered the breach on July 29th, with workforce solutions president Rodolfo Ploder, U.S. information solutions president Joseph Loughran, and CFO John Gamble Jr. selling a combined $1.7 million in shares in the trading days following the discovery. 

In the uproar following the announcement, Equifax established a resource that allows you to check if you were affected. Attached to that resource was an agreement that by utilizing the website, you (the consumer) relinquish your right to sue Equifax directly, or participate in a class action lawsuit. Alternatively, you can use this chatbot to assist in suing Equifax, or you can wait to participate in a class-action lawsuit that will most likely be established in the upcoming months.

Unfortunately, you, as a consumer, are subject to the safety standards of the Consumer Data Industry Association, a trade organization representing the four national traditional consumer reporting agencies, Equifax, Experian, TransUnion, and Innovis. While these four companies help determine your overall creditworthiness and track your repayment history and behavior, they are for-profit with no government affiliation. You, as the consumer, don’t get to choose which of these agencies get access to your data, so you can’t insure individually against any one of their data breaches.

Because of this, our team at Hotaling recommends you check your credit report immediately and individually enact credit freezes at each of the four agencies.

While many credit reports are advertised with catchy jingles on primetime television, the only site that is endorsed by USA.gov is www.annualcreditreport.com. This site does not ask for credit card information, nor do they provide any service beyond providing your credit report. The US Government requires that the three major credit agencies give you a free copy of your credit report every year.

Freezing your credit prevents the use of your credit report by anyone. This means new credit cards and loans are immediately rejected due to inability to access credit scores. The freeze itself comes with a small cost (usually around $10 but varies state by state). In order to resume normal credit-seeking activities, a small fee (also usually around $10 but varies state by state) unlocks the credit report, either for short times or permanently. Four states (Kentucky, Pennsylvania, Nebraska, and South Dakota) mandate that these credit freezes fall off after seven years automatically.

Below are the individual links (with supplemental material) to begin these freezes.

Equifax Freeze Link:
(Equifax is allowing anyone to freeze their credit for free for the next 30 days)

Experian Freeze Link: (Experian State Fee Info)

TransUnion Freeze Link: (TransUnion State Fee Info)

Innovis Freeze Link: (No Charge!)


Matthew J Mulholland, Investment Advisor, Hotaling Investment Management, LLC


Blockchain & Cryptocurrency, blog from Matthew J Mulholland, Investment Advisor

It seems like everywhere you turn, someone is posting about Bitcoin, Ethereum, or blockchain in general, but like most people, I merely thought of this as a passing tech gimmick. Since starting at Hotaling, I wanted to find some way to make my mark on our client base, so as the resident millennial, I figured that the fledgling world of cryptocurrency would be a great place to start.

Cryptocurrency is a broad term to describe any digital, encrypted asset that serves as a medium of exchange. While concepts of cryptocurrency date back to the end of the 20th century, the term truly caught on with the invention of Bitcoin in a paper published in 2008 by the pseudonymous Satoshi Nakamoto in 2008.

In the paper, the author lays out a plan for a fiat currency build around “block chain”. Blockchain is an algorithmic way to securely and openly maintain a list of records. Ownership history is stored through a public record attached to the individual asset (the bitcoin), and the public record is adjusted every time the asset changes hands. These changes are then distributed throughout the entire network. Through this peer-to-peer storage and the NSA-created, one-way encryption algorithm known as SHA-256, the more widely adopted the currency, the more secure the blockchain. The supply of bitcoin is also controlled through this open-end encryption, as new blocks are only created as users are able to crack parts of the algorithm through a process known as “mining”. Instead of pick axes and hard hats, customized computers with multiple GPU (Graphics Processing Units) attempt to verify the blockchain. Successful attempts slowly decipher new blocks, and the discoverer is subsequently rewarded with new Bitcoins. While the most common usage of GPU’s has been for high-end video gaming, miners have found that these chips are better at doing many simple calculations (which is required for mining) than CPU’s, which traditionally do most of the labor in a home PC.

A change is coming to the Bitcoin encryption technology on August 1st, 2017. The change, called “Segwit2x”, increases the block size, as well as having many other stabilizing effects. Market participants are divided on whether or not to begin utilizing this code in their mining, with the dissidents believing this change will lead to a corporatization of bitcoin. They want to retain bitcoins status as a libertarian currency, which differentiates itself from Ethereum, a similar blockchain-based currency whose price has surged in 2017 due to its more corporate-friendly approach. If a majority of miners do not adopt this new technology, Bitcoin would split in two after August 1st, with a SegWit-only bitcoin, and a duplicated non-SegWit compliant bitcoin. Such a deviation is almost certainly bound to increase volatility in the already volatile cryptocurrency.

While investors may be enticed by the exorbitant returns in the currencies themselves (Bitcoin up ~140% YTD, Ethereum up ~15,000% YTD), the volatility and liquidity of these currencies makes them too risky for direct investment for most clients. However, there are many other ways to profit off the recent surge of interest in these currencies, if you believe this trend to continue. The surge in mining requires many more graphics cards to be sold, so a long position in the leading providers of these cards, could act as a proxy for Ethereum/Bitcoin. The surge of interest in these cards has left suppliers with limited inventory. Chipmakers with larger scale production already in place are in a better situation to profit from this short term burst of interest.

Click link to learn more about Matt Mulholland


The Accelerating Change of the Retail Landscape, blog from Jean Rosenbaum, CFA, Portfolio Manager

The recent announcement by Macy’s that they will be closing 100 stores is a rational reaction to the changing retail dynamics. For professional store shoppers like my mother-in-law, the news was quite unwelcome! However, the reduction of a high cost infrastructure is likely to continue as consumer buying habits change.  This trend will ultimately be positive for sales and earnings growth longer term, but getting there could be quite painful for management teams and shareholders.

The price action of the various retail segments foreshadowed these changes. While we have all known Amazon (the ecommerce powerhouse) has significantly outperformed the S&P 500 since going public, the stocks of store based retailers have only recently begun to underperform the S&P 500.  Investors have been well rewarded for embracing fundamental change in retail.  The Bespoke “Death by Amazon” index, which includes a number of traditional retailers, is down close to 28% vs the S&P 500 over the last two years, while Amazon has outperformed the S&P by almost 200%.  The changing landscape is also impacting the mall operators.  An index of mall REITs is down 34% during the same timeframe as their customers, the retailers, have begun to struggle in terms of sales.

The stock performance of the “Death by Amazon” index foreshadowed the significant weakening of fundamentals for the group. While the stocks peaked in 2015, fundamentals did not peak until 2016.  In early 2016, same-store sales growth began to slow and EPS growth turned negative in mid-2016.  Sales and earnings growth could remain a challenge for some time as the move to e-commerce has not been fully embraced.

Online sales frequently have lower profitability, limiting the retailer’s ability to offer free shipping without putting significant pressure on margins. Store and online inventory systems may not be integrated, causing retailers to invest in duplicate inventory.  IT infrastructure to meet the demands of the increasingly mobile consumer base may need further updates.  Solving these problems requires higher capital spending. Profitability will remain under pressure as lower margin online sales become a higher percent of the business.  Supporting online sales while carrying an increasingly less productive store base creates a very challenging situation for management teams that are being asked to increase sales and earnings.  

The rationalization of the store base is a logical response. This trend will ultimately be a positive for store based retailers in the long term as they work to stabilize and ultimately grow earnings.  However, the transition period could be painful due to higher capital spending requirements and to pressure on profitability.  Some retailers may be unable to adapt and will go bankrupt.  Mall operators face “collateral damage” as retailers reduce their square footage and pay lower rent, leading to potential cash flow problems.  Fundamental change is difficult for managements and shareholders, but by focusing on the winners, shareholders can be rewarded with significant outperformance.

Low Interest Rates – Good today, but bad tomorrow?

Low Interest Rates – Good today, but bad tomorrow?

Blog by Jean M Rosenbaum, CFA, Hotaling Investment Management, LLC


Borrowers typically find low interest rates very attractive because it reduces the amount of money they have to repay to their lender. Think about the impact of lower interest rates on your mortgage or your auto loan!

Savers on the other hand, find them less attractive as lower interest rates means lower earnings on their savings such as bank deposits, CDs or bonds. Have you seen the rates on bank “interest” checking and savings accounts?!

While a brief period can be positive for consumption, an extended period of low interest rates can cause some long term problems. The longer rates remain low, the more difficult it will be to generate income and savings needed for future consumption.  The lower rates mean lower earnings for pension funds which rely on investment gains to meet their obligations.  Insurance companies may also find it increasingly difficult to meet their obligations as the return on their investment portfolios continues to fall below previous assumptions.  When the obligations for these firms were first established years ago, the assumption was the investment portfolio would grow and in some cases, the growth is critical to their ability to meet the future obligations.  This situation could result in individuals receiving less money (or even no money) from sources they had previously believed were secure. 

Taking this a step further, many European debt instruments are yielding negative rates. Negative interest rates means that investors pay to hold debt obligations as opposed to a positive rate environment where investors get paid to take risk and hold the debt of another entity.  In the case of an investment portfolio that holds negatively yielding instruments, the investment portfolio will shrink!  These companies cannot abandon the bond markets as they are regulated by their respective governments.  The basic operating assumption of these organizations is that they can take in money and then generate a positive investment return and meet or exceed their obligations.  This assumption has now been turned upside down as investment returns are meager at best.

The low interest rates helped consumption at a time when the sales of consumer durable items (houses, cars, etc.) were at very low levels. These sectors have recovered, but the ongoing environment of ever lower rates could cause more serious long term damage.  Workers that have entered retirement may need to find a new source of income which could be very difficult.  New workers will need to save even more money than expected to counteract the inability to generate a positive return or accept greater risk and/or volatility in their investment portfolios.  With one part of the population saving more and another receiving less income, the outlook for consumption growth looks difficult.  The economy could remain in a slow growth or even deflationary environment due to the “medicine” that has been used to try to counteract the problem of low economic growth.

Why is the high yield bond market struggling with liquidity concerns?




Why is the high yield bond market struggling with liquidity concerns?

Blog from Jean M. Rosenbaum, CFA, Portfolio Manager

Hotaling Investment Management, LLC

The high yield market has been in the news recently due in part to its lack of liquidity. The increasingly poor liquidity situation was brought to the forefront by Third Avenue’s decision to halt redemptions in its Focused Credit Fund mutual fund. (Open end mutual funds provide daily liquidity to investors so the inability to withdraw funds has caused concern among investors in the asset class.) The liquidity concerns come from 3 primary sources – the fund itself, the energy sector and the regulatory environment.

The first problem lies with the fund itself. The fund invested in assets which were illiquid. Providing daily liquidity from such an asset base is possible only if the fund is growing. Once the fund stopped growing, the inability to sell assets impaired its ability to provide liquidity.

The second problem is the financial stress in the energy sector. The energy sector has become a larger part of the high yield market in recent years. Investors were happy to fund these cash flow negative companies in a high and rising commodity price market. Once the oil and gas prices began to weaken, investors became increasingly concerned about the ability of these companies to service their debt. Default rates, which are at cyclical lows, are likely to rise.

The third problem is related to the post-Financial Crisis regulatory environment. New regulations are changing the way bonds are traded. The bond market is an “over-the-counter” market.   Unlike stocks, bonds are not on an exchange. Bond trading had been facilitated by an investment bank’s use of their own capital to create market liquidity by buying and selling securities, engaging in what is called proprietary trading. Following the financial crisis, new regulations limit the ability of investment banks to engage in proprietary trading, thus limiting their ability to create a liquid bond market. The limitation on proprietary trading, while put in place to safeguard the banking system by limiting the size of the balance sheets, has had the unintended consequence of severely limiting bond market liquidity.

Over time, market liquidity will return as the challenges of moving an over-the-counter market to an exchange are solved. The problem is most acute for active bond traders and for other investors that require liquidity and need to sell their bonds. Recent market events could be the catalyst to force market participants to solve the trading gridlock.

Image by By Svilen.milev