Remington, one the oldest names in the outdoor industry is going bankrupt. This might seem odd because gun makers sold a ton of guns and ammo during the Obama presidency and stocks in that industry did exceptionally well.
Some of you know I write articles for outdoor magazines as a hobby, so I have some good connections there. What I’m hearing is that Remington is going under because over the last couple decades it kept lowering the quality of its product.
One of the things that drives me nuts is that coffee makers and lawn trimmers and such seem to have a life that is continually getting shorter. Our Keurig has to be “spanked” after not very long or it gets gunked up and pours small cups. Our SS electric can opener broke after a year because the critical part was plastic. My power landscaping tools lasted a few years, but I have learned which brands to buy. You feel like when you get 5 years out of a product you did well. That’s sad.
You and I have seen this movie before. It was called Wall Street.
The business of Wall St. that buys out companies it feels are making too little profit and “turns them around” falls under private equity and it is prospering today like never before. Gordon Gecko lives.
The way it typically works is that a private equity firm like Cerberus, KKR, Apollo or Blackstone raises a lot of money by promising investors big returns. The sooner they can realize those profits, the more money the buyout fund general partner can raise and the more fees it can earn.
Here’s how they do that on companies that are already trading on the stock exchanges.
First, they buy enough of the company’s stock to get control. Quickly, they pay themselves back by having the company take on debt, often a lot of debt. So, they love to buy companies that have been reluctant to take on debt before. Since debt payments increase the company’s expenses and lowers profit, they next execute their plan to cut costs,” make the company lean,” i.e. efficient.
That means selling off “underperforming” divisions that don’t generate much cash, which may be the ones in which management has been investing for future growth. Then they cut costs by laying off employees, by moving production overseas, by lowering the cost of the products in any other way they can, like making the candy bar smaller, replacing metal with plastic, maybe by raising machining tolerances to reject fewer parts. If they cut costs enough, they may even lower prices to get more sales.
The consumer, not knowing what is going on behind the scenes, loves it. “Man, you mean I get can get a Remington for that price? I’m buying. What a deal!”
Because the company has taken on debt, called “leveraging up,” when costs start going down because of these “greater efficiencies” the reported quarterly profits soar and start beating expectations, the value of the company in Wall Street’s eyes goes up because of how fast profits are increasing. “They really turned that old company around.” The private equity firm then sells the shares they bought for a large profit, having “improved” the company. A lot of the profits go to the partners in the buyout fund and they do it all over again. They have cost people their jobs, given us all lower quality products, saddled a low-debt company with a lot of debt, started “monetizing” the company’s reputation (essentially selling it as they lower product quality to get more sales at lower prices before consumers adjust their perception of the brand’s falling quality). All for short term profits.
That’s the worst case. In other cases, they may actually improve truly mismanaged companies. And a big part of private equity ($700 billion out of $1.7 trillion) is still to buy companies that have not yet issued publicly traded stock, including young, innovative tech firms that may become the tech giants of tomorrow, e.g. Google and Facebook. I’m talking about when the firms buy out already publicly traded companies.
Here’s what most people don’t know and what concerns me – how much of America they own. Amazon is the 2nd biggest employer in the U.S. with 540,000 employees worldwide. But, buyout firm KKR currently owns companies with total employment of 650,000. The only company with more is WalMart, the retailer of many of these cheaper products.
Buying out companies is now a $1 trillion industry and has become the majority of what private equity firms do as opposed to taking promising companies public. And because it is so profitable, the money keeps pouring in. Apollo just raised the largest pool of money for doing buyouts ever – $25 billion in just one partnership.
So, expect more products with lowered costs. As a whole, America has turned from how it built its dominance in industry, by innovation and high quality and for the most part narrowed that to one area – technology. I might make exceptions for aircraft, vehicles and medical products, including pharmaceuticals. Much of the rest of what we buy is becoming junk. That’s why the majority of individual stocks I buy for clients are in tech and health care.
What companies can you name that are unflinching in their commitment to quality? What companies do you know that are making exceptional products and are not aggressively raising prices?
Your 401(k) account was up 10-20% in 2017? Good, but so were your fees. If costs are paid as a % of plan size, whenever your plan grows, fees grow, automatically.
It’s outrageous. It’s automatic & nearly silent.
You’ll likely never get an invoice. You’ll just get a required disclosure that few CEOs and CFOs ever read carefully. That’s how it works in the vast majority of plans under $25 million.
It’s likely that no other expense you have went up double digits last year.
Even worse, if you have a large share of the plan assets and fees are paid out of participant balances, which is the norm, thousands of dollars in fees came out of YOUR retirement account last year and will again.
Let me help you and your employees by shining a light on your plan costs, including those that are hard to find. I don’t charge for the service and it takes very little of your time. It’s a prudent practice that the DOL says should be done on a regular basis. Not doing it can be a breach of fiduciary responsibility.
Give me a call if you care about fees. 704-698-1040 DaveH@CornerstoneInvestment.com
The federal tax bill was signed by the president last week, squeezed in just before year-end. That gives you an extremely short window to take advantage of the greater value of losses or expenses this year.
Tax brackets are dropping in January (next week), standard deductions are increasing, the pass-through rate for small business owners is dropping and all those make expenses and capital gains losses much more valuable this year. Taxable investment accounts should take losses this year and time is almost up.
Talk to me, or if you are with another advisor, talk to them advisor ASAP if there are any available losses on taxable investments you can take before Jan. 1.
You should also consider contributing more to charity before year-end or making your normal monthly charitable contributions for January this week instead, when if you’re like most people, your deductions and credits are worth more this year than next.
Why All the Excitement Over Bitcoins?
Bitcoins are maybe the most unique and potentially revolutionary financial instrument to come along in a very long time. While to many people they are an esoteric, extremely complex instrument they have only barely heard of and don’t understand, millions of people around the world have opened accounts recently to buy and sell them and the price has skyrocketed in 2017, up 16 times since January.
Coinbase, www.coinbase.com, a large bitcoin exchange that only began in 2012, this week had 13.3 million users according to CNBC, an increase of 300,000 users in the last week alone. That 13.3 million users compares to 10.6 million active brokerage accounts at Charles Schwab, one of the leading U.S. investment firms https://www.cnbc.com/2017/11/27/bitcoin-exchange-coinbase-has-more-users-than-stock-brokerage-schwab.html. This year, the price of a bitcoin is up from just under $1000 in January to just under $17,000, prompting a lot of recent news. The Wall St. Journal and Barron’s have run recent large articles, even front-page articles last week. This might be a little more than a fad.
Private Currencies – Really?
What is a bitcoin? Is it currency? Is it an investment? It is both. Where does it gets its wildly fluctuating value, up 16X since January? Well, that raises the basic question of what a currency is and how its value is set.
In the U.S. any person other than a bank can create a currency. Yes, Virginia, it’s true, the government need not issue a currency, approve it or regulate it, though it can regulate or outlaw it. In fact, according to Wikipedia, there are currently over 4,000 currencies in use in 35 countries. The value of the currency depends on what people would exchange for it. Two people could agree to use Monopoly money as currency between them if they wanted to.
The price would be literally whatever the people who accept it as payment say it is. Does that really mean that I can arbitrarily say your dollar is only worth 50 cents? Yes, it does, but since other people would likely trade more than I would for it, you’ll deal with them instead and my 50 cents offer won’t be accepted. The value will be what you can get, and because there are so many buyers and sellers, the value of a dollar is very closely agreed upon today.
That’s how bitcoin and other electronic or “cryptocurrencies” work. The available supply of bitcoins is set by a promise not to issue any more and the price is what anyone accepting it agrees it is. The more people that want to buy it, the higher the price, and people have been lining up by the millions around the world.
Bitcoin exchanges, of which there are a great number, keep track of transactions, which are all electronic and whatever the last trade was at is the price. Exchanges are set up to facilitate buying and selling because most buyers and sellers do not know each other. That is the idea of a stock exchange too, but those are heavily regulated, much more centralized, pricing is much simpler, and no one is doing any “mining,” a complex process I don’t have space to cover here.
Because buyers can shop many different places and the transactions are actually between individuals, not so much institutions as yet, the price varies, sometimes significantly, especially between countries. However, as volume has exploded, the variations are becoming smaller. There is no official price or index, but some larger exchanges, of which Kraken is the largest, are being quoted. Any that price goes up or down as more or less people demand it. After all, the supply is fixed. You can see a list of larger U.S. exchanges at https://www.bitcoin.com/buy-bitcoin
You cannot buy bitcoins at Schwab or Merrill Lynch or any bank, only through an exchange like the ones listed here https://www.bestbitcoinexchange.io/. The vast majority of this is done online. While it can be done in person, I would be very careful there, the commissions are 5% or more and these are transactions between individuals, not a store you walk into. Think Craigslist, but with trading currencies you barely understand.
Having said that, there are now bitcoin ATMs. To find one, see https://coinatmradar.com/state/34/bitcoin-atm-north-carolina/
You can even buy the bitcoins in your IRA at https://bitcoinira.com/ although I almost hate to write that because I think this is much too speculative for retirement savings.
Please note that nothing in this article is a solicitation for you to buy or sell bitcoins or any other cryptocurrency or invest in any exchange or related business. I have no financial or other interest in bitcoin exchanges or any company or product related to them and I have not exchanged any bitcoins as of this date (December 13, 2017).
So, what do you actually have when you exchange dollars for bitcoins?
Well, “on 6 August 2013, Federal Judge Amos Mazzant of the Eastern District of Texas of the Fifth Circuit ruled that bitcoins are “a currency or a form of money” (specifically securities as defined by Federal Securities Laws), and as such were subject to the court’s jurisdiction. In August 2013, the German Finance Ministry characterized Bitcoin as a unit of account, usable in multilateral clearing circles and subject to capital gains tax if held less than one year” (Wikipedia https://en.wikipedia.org/wiki/Private_currency accessed 12/13/2017).
I was surprised to learn that you can buy regular products with bitcoins at Microsoft, Expedia, Overstock and you even buy gift certificates to Amazon, Kohl’s, Home Depot at https://www.egifter.com/bitcoin/ and the list is exploding.
Security is Critical
Bitcoins are digital money only. kept it in your digital wallet, either online, on your phone, computer or offline hard drive. They can be hacked or stolen or lost if you forget the password to locate it but there are security measures you can take such as encryption, multi-factor ID and storing it offline on your hard drive. If you buy bitcoins, talk to the exchange about security measures and read up and keep up.
If the idea of purely electronic currency seems ridiculous, remember that you probably spend 99% of your dollars electronically with a debit or credit card or online payment and that your paycheck or other payment may be done via auto-deposit. Your stocks and bonds are bookkeeping entries, not paper certificates and your interest is credited as an entry in your account bookkeeping. Not much in the way of money today is carried in physical form. I rarely carry more than $50, though with an ATM I can turn electronic entries into paper bills.
Futures Contracts on Bitcoins
Bitcoin valuation seems to be a matter of rapidly increasing demand which is driven partly by increasing acceptance of it as payment and by the perceived endorsement of it by financial institutions that have started to look at ways to make money on this. It is very noteworthy that two futures exchanges, the CBE and CBOE are just now starting to trade futures contracts on bitcoins, which is the eyes of some, legitimizes bitcoins and to others gives them the ability to hedge their bitcoin investments by using futures contracts. It also opens the door to products like ETFs that can be bought and sold in traditional investment accounts, although the SEC has not to this point approved any product applications.
Reasons for Demand Growth
Why would anyone give anything for a bitcoin? For several reasons.
- Because others will, and that is the most basic reason why any currency has value.
- As a speculative investment. In other words, when they see that its price has skyrocketed, they are buying, hoping it goes up more. After all, not many people knew about it until recently, the supply is fixed, and millions of people are opening accounts and buying it.
- Mainstream retailers are starting to accept bitcoins as payment
- Futures are now available on the futures exchanges like CME and CBOE. This helps to legitimize it and also might make it more stable as the capability grows to hedge trading positions.
- Large financial institutions like Morgan Stanley are starting to invest
- The amount issued is fixed by a promise never to make any more available than are currently out there. People like that because they’ve seen the consistent decline in value caused by governments issuing more of their currency, making it less valuable. That has been the appeal of gold over the years and really for any physical asset like a particular painting or even real estate. They’re not making any more of it. People call that a store of value.
- It is decentralized, owned and traded by people all over world and not issued or controlled by any government, though several outlaw its purchase or use for purchases.
- It is hard for governments to trace transactions. That makes it ideal for money laundering which has triggered regulation to fight that, but many people that are not drug dealers or arms merchants like this feature too. For this reason, some governments have outlawed cryptocurrency trading.
- People in some countries have trouble with their government limiting available investments or how much currency they transfer outside the country. The anonymity and difficulty of tracing transactions helps get around this. This is why it is so popular in China.
- The idea that this is the future of monetary transactions using blockchains, the vehicle by which cryptocurrencies are linked, secured and verified, will become a widespread platform for how currencies and trading are handled
- Excitement around something so revolutionary and yet so basic and the amount of money that some have made
I actually have serious concerns about the security of digital currencies and the ability to just simply lose your money because for example you forgot the password to your digital account on your hard drive.
Can the value of cryptocurrencies like bitcoin also go down? Absolutely. It fluctuates in value continually.
So, Is it the newest version of a speculative investment bubble like the infamous South Sea tulips? Is this 2008 on steroids?
Actually, I think this is potentially much more like the tech bubble in 1999. That’s the last time I saw rocket launch-type price charts like Bitcoin’s. Back then, if you remember, everyone was talking about and making money on tech stocks. People were quitting their jobs to be day traders. The multiple of earnings for which NASDAQ companies sold went from 20X earnings to 190X. That did not end well, as many tech stocks lost 70-80% of their value over the next few years. In fact, I’ve never seen a chart like bitcoin’s that did not have its mirror image on right side, with very steep losses, though I have to admit that I’ve never seem a chart as dramatic as bitcoin in 2017.
When prices go nearly straight up, buyers are buying with little to no understanding or commitment, they are just buying because a lot of money has been made in a short time and they want in on it. If the price rolls over and heads down, they sell for the same reason, it is just going down and they are losing money fast.
That’s the risk now. It is impossible to know how many of those 300,000 new accounts last week were “fast money” as opposed to people who were buying the concept of a digital currency for the reasons I listed above. I have to think it is the majority, maybe the vast majority. Do we really need a digital currency, and if so, will the demand be so strong that the price going from $961.79 to $16,590 today is reasonable? I don’t think so.
Long term, there may be enough gathering critical mass, regulations and hedging using futures that cryptocurrencies have staying power. It is not out of the question that we could actually be watching a revolution in the world’s financing of trade. Bitcoin, or something related, may be the next step in the evolution of currency, the ultimate means of exchange and investment.
There has been talk for a long time of an alternative to the U.S. dollar as the world’s reserve currency. The idea of a basket of currencies has often come up and the main appeal is diversification, the lowering of risk by getting away from the fortunes of any one issuer having a dramatic effect on pricing. A widely accepted cryptocurrency could accomplish that.
At the same time, it could become the ultimate financial threat, an electronic currency so pervasive that if you are not digitally connected, you cannot buy or sell. Those familiar with the biblical prophecy that no one could sell or buy without a certain mark on the hand or forehead might easily see the connection between the necessity to be digitally connected to access their money and authoritarian control of that permission. In fact, it doesn’t take biblical prophecy to see that.
This is the high tech, digital, rapidly evolving Wild, Wild West of money and “investing,” a West that is being settled at an amazing pace, one that could only exist in the time in which we live. Of my clients, I would guess that most, especially older clients, will not buy cryptocurrencies and that the whole idea mystifies and scares them.
Right now, you’re on your own if you want to buy them. Do a lot of research and be careful. Ask lots of questions, read up and keep up. Software and websites are changing at a lightning pace and the nuts and bolts of how things are tracked and valued using blockchains and mining is much more complicated than what I have had space to go into here.
Again, please note that this article is descriptive and educational only. It is not a solicitation to buy or sell bitcoin or any other cryptocurrency and I have no financial interest in any bitcoin exchange or product at this time, nor do I own any cryptocurrencies as of December 13, 2017, although I do not rule out that at some point I might buy bitcoins for myself. At this time, I have no immediate plans to do so.
Congratulations on a nice growth in retirement plan assets in 2016 and 2017.
Now, how much did your fees go up?
If you have a single provider for your retirement plan and your plan assets are under $25 million, chances are very high that your plan fees went up at exactly the same rate as your plan growth. So, if your plan assets, including salary deferrals, matches and investment growth net of fees went up 20-30% or more during 2016-2017, your fees very likely went up 20-30% or more too. Ouch!
Worse, with a single plan provider, costs most likely went up, not just on the investments, but on record-keeping, custody, fiduciary services and administration too – even without an increase in service.
In a 2% inflation world, doesn’t 20-30% seem, “Just a little outside” of reasonable? Would you expect the recipient of that big increase to bring it to your attention so you could put an end to it? One would hope so, but…probably not.
How about looking into switching to a plan provider where most plan costs are fixed? That way, you can really celebrate when your plan grows. As an Accredited Investment Fiduciary and Professional Plan Consultant with decades of experience, I can show find ways to get your plan costs under control. Dave Hoshour AIF PPC 704-698-1040 Cornerstone Investment Services
Recently, the Wall St. Journal, the most wisely read financial newspaper in the U.S. ran a long research article very critical of the Morningstar rating rating system that awards funds 1 to 5 stars. The ratings are very widely followed and are the basis for a great deal of investment into mutual funds, from individuals to professional investment managers to institutional investors.
What the Journal found was that of the funds Morningstar rated 5 stars, only 14% were 5 stars five years later and that there were more of them rated 5 years later as 1 star than 5 stars. They quoted Morningstar as saying that the star rating was never intended to be predictive. But, it would be hard to argue that they are not used that way or intended to be used that way.
So, how should we take that? Is Morningstar worthless? Worse, does it actually increase the chances of faring poorly?
First, I have noticed myself the tendency for funds that carry high performance through the current year to stumble the next year. For that reason, I consider short-term data to be not that useful.
But, the Morningstar database allows advisors like myself to get a great deal of data about a fund. It tells us how volatile it is likely to be, how consistent it has been in the past, what style the fund has, how it tends to correlate with different factors, whether there is a new manager, if the manager is significantly invested in his own fund, the stewardship of the fund family and a number of more esoteric bits of information that I find useful.
Here’s a chart in that WSJ article that I think is very instructive.
Yes, funds from every rating tend to on average converge in future performance, with most of the convergence happening by the 3rd year. But, just as importantly, the average rank of each star rank group stays the same. The 5-star group remains the top group and the 1-star group stays the lowest group on average. Amazingly, the same is true for all five groups.
Second, the 1 through 3-star group tends to keep dropping in relative performance but the 4-star group not so much and the 5-star group tends to keep its relative outperformance.
Those who have seen how performance converges to the mean are not surprised by all this. But, the study actually vindicates the ranking system. The only thing it really says is that the confidence in how every fund will perform in the future has been too high for many investors.
This is why I so value consistency of returns, both in actual results and in style. The group of funds that stays consistently better than its peers is not a large group, hence the strong move toward indexing, especially with ETFs.
I have my own ideas on how best to predict that. I would like to see more studies that look at factors like team management of funds vs star managers and the effect of lower expenses on predictability. The frequency with which a fund has stayed in the top two half for fees and performance should be another positive factor. The effect of being bought by another firm or having a manager change, especially in a star manager system, should be generally negative if past performance had been very good.
Bottom line – the Morningstar rating system is still relevant, though not as predictive as people not paying close enough attention might have believed. Morningstar data has also greatly improved transparency and lowered fees. Future study would be very helpful on determining what other factors help predict good future performance. And, since the star groups as wholes keep their relative rankings, you are usually better off with a 4 or 5-star fund than the others.