China Surprisingly Cuts Interest Rates

China Surprisingly Cuts Interest Rates

  • Posted on: 8 December 2015
  • By: admin

China Surprisingly Cuts Interest Rates

China’s surprise 25 basis point cut in benchmark lending rates on Thursday caught economists and the markets by surprise, and could signal the economy is slowing faster than previously thought. China’s surprise 25 basis point cut in benchmark lending rates on Thursday caught economists and the markets by surprise, and could signal the economy is slowing faster than previously thought

http://www.cnbc.com/id/47719664

 

Why You Should Care

After intentionally seeking to slow its economy to prevent overheating and protect against a real estate bubble, China is now shifting gears in an attempt to reaccelerate growth. We expected this to happen this year as the problems in Europe, a big buyer of Chinese goods, exacerbated the Chinese slowdown. This attempt by the Chinese government to stimulate their economy is of GREAT importance. China is a huge buyer of commodities-oil, gas, cooper, grains, and metals. As the urbanization of the country continues, the maintenance of China’s economic growth is important to all the world’s economies. A shift in focus to accelerate growth out of China can be key to helping the global economy maintain its current growth rate.

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Voters Voice Frustration with State Largess, Voting Against Public Pensions

Voters Voice Frustration with State Largess, Voting Against Public Pensions

  • Posted on: 8 December 2015
  • By: admin

Voters Voice Frustration with State Largess, Voting Against Public Pensions

Voters on three separate initiatives spoke loudly against the continued growth of public pensions and the negative impact rising pension costs are having on public finances. In Wisconsin, Governor Scott Walker withstood the recall bid and now has a green light to continue his battle against public unions, and in San Jose and San Diego, California, Proposition B passed with 66% and 70% of the vote, a true landslide. You can read the language around Proposition B in San Diego at http://www.smartvoter.org/2012/06/05/ca/sd/prop/B/

Why You Should Care

Whatever side of this issue you find yourself on, be prepared for more challenges to public pensions in the near future. According to the San Jose, CA Mayor’s Office, retirement costs now take up more than 20% of the city’s General Fund, and their overall costs for retirement and healthcare benefits has tripled over the last decade, a truly unsustainable situation. 

We have reached a point in this country where we are now forced to make these difficult decisions. Greed on all sides of the ledger, not just public workers, has led us here, but skyrocketing costs around public pensions are now the primary target in the fight against government deficits.

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Why Dividends Matter

Why Dividends Matter

  • Posted on: 8 December 2015
  • By: admin

Below is an excerpt from our research piece "Why Dividends Matter".  The full report can be found under the Research tab at pathlightinvestors.com/why-dividends-matter
 

Let’s start with the basics, what is a dividend?  A dividend is a distribution to shareholders, typically in cash, that allows them to participate in the cash flow and/or earnings of the company they own.  As an owner of a company, shareholders are entitled to share in the profits and a dividend is one way in which shareholders can participate.

At Pathlight, when we analyze businesses for potential investment there are several criteria we require.  One such criterion is a track record of uninterrupted dividend payments.  This record is important to us for several reasons. 

  1. Dividends can be indicative of financial strength and stability
  2. Dividends provide a predictable return and cash flow to the investor
  3. Dividends may rise over time, providing increasing cash flow
  4. Dividends provide a quantifiable valuation methodology

We have long believed that a flaw in most investment management styles is that they are focused on beating a benchmark, rather than achieving specific objectives.  This benchmark competition often reduces the focus on capital protection at the expense of matching peer performance.  Pathlight’s highly defined objectives of Protecting Capital, Growing Capital, and Providing a Rising Income Stream are strongly supported by our dividend-focused investment strategy.

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Question of the Month - Should I Rollover My Old 401K?

Question of the Month - Should I Rollover My Old 401K?

  • Posted on: 8 December 2015
  • By: admin

Question of the Month - Should I Rollover My Old 401k?

Since the average American worker changes jobs 3-5 times throughout their lifetime, it is safe to say that there are quite a few 401k’s still sitting with former employers.  The question is, “what should you do with those 401k accounts?”  Unfortunately, there isn’t one perfect answer--it really depends on the individual.  However, we want to explore the pros and cons of a 401k rollover and give our approach to this subject.
 

These days, many companies offer a 401k plan as an incentive to attract and retain talent.  Participants in the plan make pre-tax contributions and the account can grow tax deferred.  Additionally, 401k plans are often accompanied by employer matches, making them a great way to accelerate one’s retirement savings and reduce taxable income. 

What happens when I leave my job, either voluntarily or involuntarily? 

Most plans allow former employees to remain invested in the 401k plan, but they lose the ability to make additional contributions.  The participant can still make investment changes by buying and selling different mutual funds offered in the plan and the account retains its tax deferred status.  However, one no longer has access to any educational aspects that the plan administrator may offer to current employees.
 

Should  I cash out of the plan when I change jobs?

Unless there is an immediate need for cash, cashing out is something that we advise against.  Cashing out of the plan before the age of 59 ½ will incur a 10% penalty on all funds withdrawn, and all funds will be taxed like earned income at the current tax rate.  If possible, it is best to avoid this option.
 

What are the benefits of keeping my  401k account?

 

One of the main benefits of a 401k is the ability to take a loan from the 401k that is not penalized as long as the loan is repaid within 5 years.  This means that you can access the funds as a down payment on a house, for example, without having to pay the 10% penalty and income taxes.  Some 401k plans eliminate this benefit if you are no longer with the employer however, so retention of this benefit is not guaranteed.
 

What are the benefits of rolling over a 401k into an IRA?

Rolling your 401k assets over into an IRA has a few advantages:

  1. A traditional IRA has the same tax advantages as a 401k account--pre-tax contributions and tax deferred growth. 
  2. Aggregation of your retirement assets into one account to provide more focused and consistent management.
  3. A rollover IRA can be directly managed by your Financial Advisor.
  4. More investment options as 401k plans are typically limited to a small number of mutual funds.  Rollover IRA’s can invest in stocks, bonds, mutual funds, etc.

In dealing with 401k plans, we typically advise clients to move their 401k assets into a rollover IRA as it enables our firm to actively manage those assets in concert with their other investment accounts.  It allows us to easily determine allocation requirements, and to enact changes when the need arises.
 

Whatever you decide to do, it is essential that all of your investments work together to help meet your retirement goals.  If you have the ability, time, and interest to manage many disparate accounts, then leaving your 401k assets where they are can be just fine.  But, if you are like many people, who don’t have the time or desire to keep a watchful eye over their 401k assets (the set it and forget it crowd), then exploring a 401k rollover managed by your Financial Advisor might be the right move.  If you’d like to talk to any of the Pathlight Investors’ Principals about this process, feel free to contact us at info@pathlightinvestors.com or (602) 795-7600.

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Expert's Corner - Upcoming Tax Changes and Their Implications for Selling Your Business

Expert's Corner - Upcoming Tax Changes and Their Implications for Selling Your Business

  • Posted on: 8 December 2015
  • By: admin

Upcoming tax rate changes and their implications for selling your business

For most business owners, selling a company is a once in a lifetime event.  Making sure the sale is as profitable as possible to the owner and those they want to take care of (family, employees, charities, etc.) should be a top priority.  If your time horizon for getting this type of a transaction completed is within the next 24 months, then there are a number of reasons why you should be considering selling before 2012 ends.
 

If Congress does nothing prior to December 31, 2012, federal capital gains rates will increase from 15% to 20%.  Additionally, the healthcare reform legislation enacted by the current administration includes a 3.8% tax applicable to capital gains (and dividends as well as some other forms of income), bringing the total federal capital gains rate to 23.8%.  Depending upon owner-specific tax circumstances, a business owner receiving a pretax gain of $20 million on the sale of their business is facing an additional $1.8 million of taxes payable to the IRS for a deal completed after 12/31/12.  For a business sold in 2013 or beyond the owner needs increase the pretax gain by roughly 12% to offset the tax increase.  This is no small task in an economy growing at something closer to 2% annually.  The 12% increase is needed just to break even from an after-tax standpoint.  It does not include the additional risk associated with running the company for a longer period of time and does not account for the time value of waiting to receive that payment.
 

Additionally, as of January 1, 2013 the tax rate on qualified dividends is scheduled to increase from the current rate of 15% to the ordinary income tax rate which for the highest earners is 39.6%.  Add to this the 3.8% tax mentioned previously and the tax rate on dividends increases to 43.4%.  This tax increase will certainly impact the desirability for owners to distribute money to themselves in the form of dividends which was a popular alternative to selling the business outright in order to achieve additional liquidity from what is typically an illiquid investment (your privately held business).
 

It is important to understand that selling a company typically takes anywhere from 6-10 months and occasionally longer.  Consequently if an owner is hoping to get a deal done in 2012, the window is quickly closing.  Engaging an investment banker to help in this process serves several purposes.
 

  1. The investment banker helps an owner understand what is currently happening in the M&A market and what their company is worth in the marketplace.  This prevents the owner from engaging in a process with unreasonable valuation expectations. 
  2. An investment banker can also help an owner understand all of their options regarding a potential deal.  Aside from selling 100% of the business, a transaction can be structured whereby a majority (but not all) of the company is sold or where the owner sells a minority stake.  In these scenarios, the owner can “take some chips off the table” while still retaining some portion of the company’s equity in order to participate in the future upside.  In 2012, these “chips” can be taken off the table at a preferred tax rate. 
  3. The investment banker also assists the owner in understanding who is included in the potential buyer universe.  Every business owner knows the handful companies they compete directly against and who might be interested in buying their company.  However, an investment banker has the resources and background to reach out to a broader group of buyers that may include private equity groups, industry participants that may not be known to the owner, and potentially international buyers seeking a foothold in the U.S.  Broadening the pool of buyers for your company increases the likelihood of maximizing the value. 
  4. Having an investment banker managing the sale process allows the owner and the management team to focus on running the company.  Seeing a company’s operating performance deteriorate during the deal process is the surest way to have the deal collapse.  The investment banker vets the buyers, ensuring that the owner and management team only spend time with potential buyers who can meet the owner’s desires from both a valuation and deal structure standpoint. 
  5. The investment banker works with the owner to fully understand the owner’s needs and desires for the deal.  In the case of the upcoming tax changes, this can include setting up a process that is tightly defined and designed to maximize the possibility that a deal closes on or before December 31, 2012. 
  6. The investment banker also works with the business owner’s attorney’s, tax advisors, and wealth management advisors to ensure that any deal takes into consideration the specific circumstances of that owner’s tax situation, estate planning goals, and ongoing financial needs.

Please contact Mike Smiggen at William & Henry Associates with any questions you may have.  I can be reached at (602) 553-1103 or by email at msmiggen@williamhenryassociates.com.  

The views and opinions expressed are not those of Pathlight Investors and are intended to be for educational purposes only. Pathlight Investors does not provide advice related to corporate finance and cannot vouch for the accuracy of the information presented. Please contact Mike Smiggen at William & Henry Associates to determine how this information pertains to your specific situation.

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Election Year Market Performing as Expected?

Election Year Market Performing as Expected?

  • Posted on: 8 December 2015
  • By: admin

Election Year Market Performing as Expected?

According to the work done by the folks over at Bespoke Investment Group, there could be a silver lining contained in the recent sell-off of equity markets.  Heading into the U.S. Presidential election, it seems like equity markets are behaving exactly as they should be, and the best may be yet to come.

Why You Should Care

 

Given the terrible performance of equity markets last week we allowed ourselves to experience a slight moment of comfort when we saw the chart below from Bespoke Investment Group.  This chart shows the average annual return cycle of the S&P 500 in a U.S. Presidential election year from 1928-2011 (the red line) and the S&P 500 return so far this year (the blue line).  Notice a similarity? 

 

 

Stocks actually peaked in 2012 on April 2nd, a mere 4 days earlier than the average peak date.  If the trend holds up and we again see a mirror image of the historical average, then stocks should bottom relatively soon and begin a steady march higher as election year promises and election result certainty lift the spirits of investors and businesses.
 

For now though, this is simply a nice coincidence, and past results are of course no guarantee of future results.  Given the level of uncertainty in the world today (European sovereign debt crisis, U.S. fiscal cliff, China slowing…) we surely cannot bank on this historical trend continuing.  But we thought we’d start Monday out on a positive note.

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California Love: State Workers to get Raises even as Governor Seeks Cuts

California Love: State Workers to get Raises even as Governor Seeks Cuts

  • Posted on: 8 December 2015
  • By: admin

California Love:  State Workers to get Raises even as Governor Seeks Cuts

 

As California Governor Jerry Brown seeks a temporary 5 percent pay cut from public employees to fill the largest state deficit in the U.S., many of those same workers are poised for raises next year. Labor contracts covering 140,000 workers grant increases of about 3 percent to top earners beginning in July 2013, according to the Personnel Administration Department. About 34,000 employees became eligible this year as the raises began to be incorporated. Read more in the link below…

 

http://www.newsmax.com/US/ANNOTATED-BGVTTOP-BLCPOLSTL-BNALL/2012/05/29/id/440436

 

 

Why You Should Care

 

Say what you want about the power wielded by CEO’s and bankers,  an equally influential power lies in the unions.  Case in point:  the state of California is facing a 2013 budget deficit of $15.7 billion dollars.  California will spend almost $16 billion more than it takes in; however, more than 140,000 government workers will receive pay increases of 3% this year.  Does that make sense?  Certainly not, but contracts are contracts and union leadership tends to play hardball with respect to compensation changes.  Income for all employed Californians (public and private) averaged $42,578, while state workers made, on average, more than $58,000.  We would not suggest that they are not worth the pay, in particular teachers, police, fire and other necessary services are the backbone of society.  However, we must acknowledge the world we live in. In the Real world, people don’t get raises each year, don’t get lifetime benefits, and can’t retire will full pay for life in their 50’s.  California, Illinois, and a host of other states need to keep that in mind the next time they renegotiate union contracts.

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Over 50% of S&P 500 Companies Yielding More Than the 10-year Treasury

Over 50% of S&P 500 Companies Yielding More Than the 10-year Treasury

  • Posted on: 8 December 2015
  • By: admin

Over 50% of S&P 500 Companies Yielding More Than the 10-year Treasury

Given the turmoil roiling global markets, the U.S. is again being seen as a safe haven as evidenced by the decline in the 10-year treasury yield to 1.74% on May 29th from 2.28% on April 3rd.  But, falling stock prices mean increasing dividend yields for high quality, financially sound companies. Over 50% of the S&P 500 companies now pay dividends that provide a yield that is greater than that of the 10-year Treasury.   http://www.bespokeinvest.com/thinkbig/2012/5/21/10-year-yield-is-less-than-half-of-all-sp-500-stocks.html

WHY YOU SHOULD CARE

At Pathlight Investors we have always been dividend investors as we feel that dividends provide a level of stability for stocks in weak markets and more importantly, provide a rising stream of income for investors as opposed to the fixed interest payments from bonds. 

At this point, 397 companies in the S&P 500 pay a dividend (~79%) and you can see in the chart below from Bespoke Investment Group, that 271 of those companies (~54%) now have a dividend yield that is greater than the yield of the 10-year Treasury on May 29th. 

 

At the end of the day, we would rather bet on the continued success of high quality companies like Coca Cola, Johnson & Johnson, Kraft, and Procter & Gamble that experience temporary stock weakness than bet on debt-ridden sovereign governments that have not even begun to truly address their debt issues.

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Tired of Greece? Don’t Worry, Spain is Coming

Tired of Greece? Don’t Worry, Spain is Coming

  • Posted on: 8 December 2015
  • By: admin

Tired of Greece? Don’t Worry, Spain is Coming

It's the story of the euro crisis: for every problem solved, two new ones emerge. So it is with the recapitalization of Bankia. Madrid's decision Friday to provide €19 billion ($23.78 billion) of new capital to Spain's largest domestic lender is a major step forward in confronting the country's four-year property bust. But it has left the government nursing a number of fresh headaches that it looks increasingly unable to treat on its own.

 

http://online.wsj.com/article/BT-CO-20120528-703234.html

 

WHY YOU SHOULD CARE

 

Much of the investment world and markets are being driven by the fear of the unknown that would come with a European breakup. Furthermore, like it or not, the world economies are highly interconnected and the struggles of Europe can have a REAL effect on global commerce; so much so that Europe’s troubles could drag the U.S. economy down with it. While much of the focus over the last few years has been on the tiny Greek economy full of citizens that don’t pay tax and rely on tourism, olive oil, and wine for revenue, Spain is a legitimate economy. Spain is the 5th largest economy in Europe, which saw rapid growth from a construction boom that would put the U.S.’s to shame. The problem now is that most of that unserviced debt is held by Spanish banks and who knows where else. To be clear, the Spanish banking system cannot breakdown the global financial system, but be prepared for more discussion regarding the need to recapitalize its banks. If history is any guide, bankers and governments have a tendency to overestimate the value of assets on their books and their actual need for capital assistance, so there will likely be more coming. 

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Consumer Confidence at Highest Level since October 2007

Consumer Confidence at Highest Level since October 2007

  • Posted on: 8 December 2015
  • By: admin

Consumer Confidence at Highest Level since October 2007

The University of Michigan consumer sentiment reading for May came in at 79.3, up from 76.4 in April, posting the highest reading since October 2007. http://www.huffingtonpost.com/2012/05/25/consumer-sentiment-may-2012-highest-level_n_1545542.html

WHY YOU SHOULD CARE

Confidence is truly everything. Without it, governments fall, banks go belly up, credit freezes, and economies wither. An individual’s confidence is impacted, both positively and negatively, by many things; whether you have a steady job, whether you feel secure in your current job, whether elected officials are perceived to be making the right choices, and what your home is worth, what your 401k is worth. 

That is why the final May reading of the University of Michigan consumer confidence survey is so encouraging. At 79.3, May’s reading is the highest recorded level of confidence since October of 2007. This reading truly flies in the face of what has been a period of increasingly negative news headlines surrounding debt problems in the Euro zone and mounting fear about the global economy.

Anecdotally, local economies in the U.S. are improving and individuals who are fortunate enough to have a job are seeing activity levels increase. After such a long period of uncertainty, this increase in confidence is a welcome change as we have finally broken free from the doom and gloom of the Great Recession. 

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