Investment Insights Podcast: Five things that I learned this week

Rosenberger_PodcastAndrew Rosenberger, CFA, Senior Investment Manager

On this week’s podcast (recorded February 24, 2017), Andy discusses some of the facts, figures, and interesting tidbits we come across.

 

 

shutterstock_9514525

Quick hits:

  • A recent report from the NAHB shows that 78% of home builders report cost and availability of labor as a significant issue.
  • The state with the highest gasoline tax is: Pennsylvania @ 58.2 cents per gallon. Alaska has the lowest tax @ 12.25 cents per gallon.
  • Americans now drive nearly 264 billion vehicle miles per month.
  • The National Safety Council reports vehicle related deaths were up 14% from 2 years ago.
  • Cocoa prices are down 40%.

For Andy’s full insights, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: Five things that I learned this week

Rosenberger_PodcastAndrew Rosenberger, CFA, Senior Investment Manager

On this week’s podcast (recorded January 13, 2017), Andy discusses some of the facts, figures, and interesting tidbits we come across. Quick hits:

  • Families will spend an average of $233,610 per child, from birth through the age of 17.
  • The World Economic Forum’s top five risks are 1) Extreme weather events 2) Large-scale involuntary migration 3) Major natural disasters 4) Large-scale terrorist attacks and 5) Massive incident of data fraud or theft.
  • Student loan debt now tops $1.4 trillion dollars.
  • The currencies of India, Mexico, and Russia are all undervalued to the tune of 25-45%.
  • U.S. oil production is now beginning to increase again.

For Andy’s full insights, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

What to expect from Trump’s tax reform

Andy RosenbergerAndrew Rosenberger, CFA, Senior Investment Manager 

Political biases aside, one can’t deny that equity markets have received the incoming Trump administration favorably. Much of the market optimism has rightly been attributed to a reduction in corporate tax rates which will immediately serve to increase earnings upon implementation. Evercore ISI published an illuminating chart demonstrating the power of lower tax rates. Their chart below demonstrates that companies with the highest tax rates are outperforming companies with the lowest tax rates by 470bps since the election. After all, that makes complete sense given that companies who pay the most in taxes will subsequently benefit the greatest from any cut in taxes.

12-22-16

Yet, when we reconcile market hope versus the reality of what policy will actually be enacted, it’s easy to get lost in all the details. For that, I give tremendous credit to Barron’s which published a well-articulated overview of what to expect, at least tentatively, when it comes to tax reform. I encourage anyone with a subscription to Barron’s to immediately read their article, Advice From Wall Street’s Go-To Tax Man. However, to summarize some insightful points from the article:

  • The number of federal tax brackets is expected to shrink from 7 to 3
  • The top tax rate for individuals would be lowered from 39.6% to 33%
  • Corporate tax rates would be lowered from 35% to either 15% or 20%
  • Most forms of investment income could be treated tax favorably, including interest income which is taxed as ordinary income rates today
  • Many forms of itemized tax deductions would be removed. Mortgage interest and charitable contributions would likely be spared.
  • Small business owners may be taxed at a rate different from individuals. Today, small businesses income is treated the same as if it were ordinary income.

What are some of the implications of these changes?

  • While there is only a week left in the year, investors should try to defer any further capital gains until next year when they are taxed at a potentially lower rate
  • Earnings will go up; valuations, assuming no change in price, will look more favorable
  • Municipal bonds which provide tax free income will be much less attractive on a relative basis. Also, given that municipalities use their favorable tax treatment to raise capital, this may put additional stress on spreads via funding concerns.
  • Corporate spreads, on the other hand, should theoretically narrow given they get more favorable tax treatment
  • Companies with deferred tax assets and individuals with loss carryforwards will see the value of those assets reduced. However, they will be valuable in the form of offsetting gains.
  • Interest deductions may not be tax deductible anymore. This could lead to lower debt issuance, a smaller supply of corporate and tighter spreads.

Many of these assumptions and implications are based on a combination of Trump’s plan and the proposed House plan. While nothing is set in stone and likely won’t be for quite some time, it’s not too early to begin thinking about how these changes may impact an investor’s wealth planning and asset location strategies. Tax management will no doubt continue to play an important role in the wealth management process. But more than anything, lower tax rates will mean more flexibility for financial advisors as they determine how best to structure their client’s asset allocation to meet their long-term goals.

Brinker Capital provides several tax harvesting opportunities to help investors manage one of their largest costs. Contact Brinker Capital to learn more about how our investment solutions may provide greater tax control.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital does not render tax, accounting, or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Brinker Capital, Inc., a Registered Investment Advisor.

The Law of Unintended Consequences

Andy RosenbergerAndrew Rosenberger, CFA, Brinker Capital

History is littered with examples of “unintended consequences” – a term referring to the fact that decision makers (and more importantly, policymakers) tend to make decisions that later have unforeseen outcomes.  I was reminded of such a fact this weekend as my wife and I launched into our annual (and seemingly unending) springtime yard cleanup.   In addition to the mulching, planting, trimming, and other routine undertakings associated with yard maintenance, every year, we spend more time and money than I care to admit trying to rid our yard of the dreaded English Ivy.  As any other homeowner with a similar problem can sympathize with, there is no amount of weed killer, weed-whacking or online product remedies that seem to tackle the problem.  Our English Ivy problem is the unintended consequence of the prior homeowners’ decision to turn their yard into an “English Garden”.

On a much grander scale, unintended consequences pop up everywhere.  Most go unnoticed by the broader public.  As one such example, The Wall Street Journal recently ran an article titled “U.S. Ethanol Mandate Puts Squeeze on Oil Refiners”.  The article highlighted that consumers could see higher prices at the pump due to government enacted mandates that force refiners to purchase market-based ethanol credits.  The original idea was that increasing the amount of ethanol used in gasoline would make gasoline cleaner burning and be better for the environment.  However, since the policy was enacted, two unforeseen issues have unfolded.  First, prices for these ethanol-based credits have skyrocketed in the past few months.  The higher ethanol credit prices mean that refiners will be forced to pass along higher prices for gasoline to the end consumer.  Second, automakers are suggesting that cars and trucks aren’t well equipped to burn the new gasoline blend.  As a result, we have a policy that was intended to produce cleaner burning gasoline which ultimately turned into higher gas prices for a product which most cars aren’t able to use.

consequencesThe reality is that the vast majority of consumers will never be informed of policy misstep.  Only industry experts and select individuals with knowledge of the matter will truly understand the costs involved.  Sometimes; however, unintended consequences have a much more visible impact on the broader economy.  That’s been the case over the past two weeks as policymakers have tried to tackle the banking problems in Cyprus.  If we rewind to last year, Greece was the conversation of topic.  Ultimately, policymakers decided that private sector bond holders should bear the brunt of the losses on Greek debt.  Fast forward to today and we have insolvent Cyprus banks.  Why?  Because Cyprus banks, which were one of the largest holders of Greek debt, were forced to write-down their assets.  So while at the time the policy of having private sector investors take the loss on Greek debt seemed like a good idea, ultimately the unintended consequence was that it would later result in Cyprus banks becoming woefully undercapitalized.

The European Union’s response to the Cyprus banking issue was subsequently just as perplexing.  As initially proposed, depositors, regardless of their size, would be taxed to cover the insolvency of the local banks.  Ultimately, while the policy was later reversed to preserve deposits below €100,000, the sanctity of small deposits suddenly disappeared.  Most market pundits will agree that Cyprus is too small and irrelevant in the grand scheme of things to bring down the European economy.  I worry, however, that the unintended consequence of Europe’s policy response will make depositors in other peripheral countries a bit more anxious when it comes to where they store their money for safekeeping.  After all, one of the tenants within economics is that if two investments have equal return, investors will choose the one with lesser risk.  With interest rates near 0% across the developed world, wouldn’t it make the most sense for depositors to store their wealth in a place with little chance of future default?  While we often like to believe that these matters are completely thought through and weighed carefully by policymakers, unfortunately, this most recent policy decision appears to driven more for domestic political purposes as opposed to European “Union” driven.