You are cordially invited to the Investor Symposium hosted by Matson Money.
When: Thursday, July 31, 2014 – Saturday, August 2, 2014
Where: Horseshoe Casino & Conference Center
1000 Broadway, Cincinnati, OH USA
Speakers Include:
Arthur B. Laffer, PhD: Chief economic advisor to Ronald Reagan
Terrance Odean, PhD: Professor at Cal-Berkley, expert in the field of investor behavior
Lyman Ott, PhD: Expert in the field of statistics, providing validity to Free Market Portfolio Theory
Concert featuring country singer (and former leader of Hootie & The Blow Fish) Darius Rucker
Seating is limited. RSVP by emailing reservations@matsonandcuprill.com. Admission is free to all Matson & Cuprill clients and their guests.
In The Headlines
Is Inflation About to Take Off?
When the Federal Reserve launched its bond buying program to stimulate the economy in 2008, many economic observers were certain it would lead to uncontrollable inflation. What these observers did not understand, however, was that while the Fed can buy bonds and lower interest rates, it is actually private banks that are responsible for creating most of the money in circulation. Theoretically, cheap money should lead to an increased demand for loans, but that is not what happened.
The best metric for understanding this phenomenon is a called the “velocity of money.” Velocity is the rate at which money changes hands in the economy, and it is a good gauge of how the private sector is responding to the Fed’s low interest rate incentives.
The velocity measure plummeted right around the time the Fed embarked on its stimulus, explaining why the U.S. economy has not experienced an uptick in inflation. But according to a recently published research note from Jim Paulsen, chief investment strategist at Wells Capital Management, the trend in money velocity is about to reverse, and inflation will rise along with it.
Paulsen believes that monetary policy will be primarily defined from this point on by when and how fast the velocity of money rises. He gives four reasons why the velocity trend is about to turn around:
1. Bank lending and consumer borrowing are on the rise. Consumer debt rose by $241 billion in the last quarter of 2013, the largest quarterly increase in six years. According to Paulsen, total U.S. bank loans since late 2013 have risen at one of their strongest paces of the recovery.
2. Prices are rising. While overall inflation has been quite tame, commodity prices have been rising quickly in recent months. If this is the start of a much more pronounced rise in prices, it could be a signal that velocity and overall inflation will soon increase as well.
3. Private sector GDP growth has accelerated. Paulsen argues that accelerating economic activity is the best signal of increased money velocity. Though the Commerce Department just revised its estimate of 2013 fourth-quarter real GDP growth down to 2.4% from its previous estimate of 3.2%, the second-half average was still a healthy 3.25%. Furthermore, if you take out the contracting government sector, GDP growth looks even healthier. In the last two quarters, nominal private GDP growth has increased from about 4% a year ago to about 7%.
4. Private-sector money velocity is already increasing. Just as economic growth in the private sector is outpacing economic growth overall, the private-sector velocity of money is outpacing the velocity of the overall money supply.
By stripping out the effects of public sector contraction, the change in velocity in the private sector has already turned positive. And if Washington pivots from the budget-cutting of the past several years, the public sector will soon cease to be a drag on the economy going forward.
Inflation is usually associated with poor economic outcomes. But a small amount of inflation can be a sign that the economy is operating at full capacity and that people are confident. And now there is reason to believe inflation might grow a bit more in the coming months.
Help Wanted: Regional Airlines Struggle to Find Pilots
The regional airline industry is being roiled by a pilot shortage that results from simple math. The cost to complete flight-training programs is high, and the entry-level pay at these carriers is low. How the problem gets fixed is one of the big questions confronting the entire U.S. airline industry.
For years, the large network airlines have exploited the cost difference between flying their own planes and the far-cheaper rates they could find in a marketplace where regional airlines bid against each other for routes. Under what is known as “capacity purchase agreements,” the large airlines handle ticket sales, scheduling, and jet fuel. The regional carriers staff and operate flights, benefiting from the guaranteed income specified by their contracts. If the regional players keep their costs low, they can make decent profit margins. But the agreements also limit how much revenue a regional airline sees, and the arrangement does not guarantee profits—and costs are now rising.
Roughly half of all U.S. flights are now on regional airlines, which carry 22% of passengers. The system worked well until the 2009 crash of a Continental Express regional flight, which led Congress to mandate that all regional airline first officers hold an Airline Transport Pilot certificate. That document requires at least 1,500 flight hours, a huge increase in time and money from the 250 hours and commercial pilot certificate previously required. The crash, near Buffalo, was tied to errors made by pilots and traced to their lack of training and rest.
The low wages for new pilots flying for regional carriers shocked many lawmakers grappling with the aftermath of the 2009 crash. The new law was, in part, an attempt to assure higher salaries because of the need to recruit pilots who had spent the extra money to amass 1,500 flight hours.
The meager economics have prompted regional airlines to begin cutting service and parking airplanes when they are unable to staff cockpits. Even higher pay is not producing an influx of pilots who are qualified under the new rules. Salaries for first officers at regional airlines start at $22,400, according to the Air Line Pilots Association (ALPA), the largest U.S. pilots union. A report today from the U.S. Government Accountability Office found that 11 out of 12 regional airlines have fallen short of their hiring targets in the past year, and pilots overall had an unemployment rate of just 2.7% from 2000 to 2012.
A mandatory retirement age of 65 is also going to pinch the big airlines in coming years, further squeezing the regionals because Delta Air Lines, United, and American Airlines typically hire away experienced pilots when replacing retirees. The four largest U.S. airlines will lose at least 18,000 pilots because of the mandatory retirement age by 2022. More than 60% of American’s pilots will be 65 by 2022, while Delta has almost half turning 65 by then. The Pentagon has also been paying hefty retention bonuses of as much as $225,000 to keep its pilots from retiring, further hindering one traditional source of U.S. commercial pilots. U.S. airlines will hire 1,900 to 4,500 pilots each year over the next decade, according to the GAO report.
Airlines are dealing with turmoil in the regional industry in a variety of ways. Signing bonuses are now common and run as high as $10,000. Some airlines are offering pilots the chance to win iPad tablets just to attend job fairs. Helping aviation students pay their tuition is another way airlines are addressing the pilot shortage. Another regional airline, Great Lakes, is pulling 10 seats from its 19-seat Beechcraft turboprops so its pilots can qualify to fly under different federal rules.
It seems clear that the “help wanted” sign at both the regional and large airlines will remain in place for many years to come.
Sources:
1. http://finance.fortune.cnn.com/2014/02/28/inflation-consumer-debt-bank-loans-and-velocity-all-set-to-rise/?iid=SF_F_River
2. http://www.businessweek.com/articles/2014-02-28/with-pilot-shortage-regional-airlines-search-for-someone-to-pay-rising-costs#p1
The Good News Is . . .
• The Commerce Department reported that gross domestic product, the broadest measure of goods and services produced by the economy, grew at a seasonally adjusted annual rate of 3.2% in the fourth quarter. That was less than the third quarter’s 4.1% pace, but overall the final six months of the year delivered the strongest second half since 2003, when the economy was thriving. A key source of growth in the fourth quarter was higher consumer spending, which grew 3.3%, the fastest pace in three years.
• Home Depot, the world’s largest home improvement retailer, reported earnings of $0.73 per share, a 9.0% increase over year-ago earnings of $0.67. Home Depot’s earnings topped the consensus estimate of analysts by $0.02. The company reported that revenues were $17.7 billion. Management attributed the company’s performance to the continuing recovery in the housing market.
• Toymaker Mattel announced it would acquire Mega Brands for $460 million in cash and assumed debt, adding a suite of construction and craft products to its massive portfolio of brands. Mega is the maker of Bloks building toys and the second-largest company in the $4 billion construction building set category. The company, which also has a large arts and crafts operation, including licenses to use many popular preschool and elementary school characters, had 2013 sales of $405 million.
Sources:
1. http://online.wsj.com/news/articles/SB10001424052702304428004579352472437635350
2. http://www.cnbc.com/id/18080780/
3. http://ir.homedepot.com/phoenix.zhtml?c=63646&p=irol-newsArticle&ID=1903056&highlight=
4. http://www.thestreet.com/story/12461794/1/mattel-builds-portfolio-with-mega-brands.html
Planning Tips
Tips for Stretching Your Retirement Nest Egg
The transition from building a nest egg to spending it in retirement poses a psychological as well a financial challenge. Longevity risk, or the chance you will outlive your money, is the biggest threat to a secure retirement. Below are tips to help you meet the challenge of not outliving your savings.
Delay your retirement – Delaying retirement by even a year or two, can improve your future cash flow significantly. Not only does extra time in the workforce allow you to continue contributing to your individual retirement account (IRA) or 401(k) plan, but it also gives your nest egg the chance to deliver compounded returns longer.
Postpone taking your Social Security – Delaying your retirement means you may also be able to postpone Social Security by a few extra years, which can greatly increase the size of your benefit checks. If your full retirement age is 65 years and six months, for example, you will receive 100% of your benefit by retiring on time. If you hold off until age 67, however, you’ll get 110.5% of the monthly benefit. And by waiting until age 70, you will get 131.5%.
Watch your withdrawal rate – Regardless of how much you have set aside, the key factor that determines whether your savings will last as long as you do is how much you withdraw from your nest egg each year. Consider using an initial withdraw rate of 4-5%, adjusting that figure higher annually to account for inflation.
Put a tax-savvy strategy into play – As a general rule, you should tap your brokerage accounts first, since the capital-gains tax rate may be more favorable than the ordinary income-tax rate you will pay when withdrawing from tax-favored accounts, such as a traditional IRA or 401(k). That strategy also enables your IRA and 401(k) to deliver tax-deferred growth longer. Once your taxable accounts are drained, move to your tax-deferred accounts, including 401(k) accounts and traditional IRAs. The IRS requires taxpayers to begin taking required minimum distributions (RMDs) from their tax-deferred accounts at age 70½, regardless of whether they need the money. Failure to take RMDs, or to withdraw the full amount of the RMD, results in a hefty 50% excise tax on the amount not distributed.
Leave your tax-free accounts, such as your Roth IRA until last. Because these accounts are funded with after-tax dollars, the earnings grow tax-free. There is no required minimum distribution for a Roth IRA, as there is for some annuities, traditional IRAs, 401(k) accounts and other retirement accounts, so it can continue delivering compounded returns. Any unused money left in the account when you die can be passed along to your heirs, who can then withdraw the money tax-free. Thus, Roth IRAs can be a valuable estate-planning tool as well.
Use an annuity – You can liquidate a portion of your portfolio to purchase an annuity, such as a guaranteed lifetime income annuity, which provides guaranteed income for life. However, such products can be costly and complex. You may want to consider an immediate fixed annuity with an inflation protection rider.
Use your house as an income source – If you are house-rich but cash-poor, you may be able to convert a portion of your home equity into income without having to sell or surrender the title. If you are 62 or older, you can receive a lump sum or monthly payment based on the equity in your home. The loan gets repaid with interest when you die, sell the home, or move away.
Sources:
1. http://money.cnn.com/2012/10/12/pf/expert/retirement-savings/
2. https://www.moneyadviceservice.org.uk/en/articles/manage-your-money-in-retirement
3. http://moneyover55.about.com/od/budgetingsaving/a/Lesson-Three-On-Savings-If-You-Fund-No-Other-Account-Fund-This-One.htm
4. http://www.investopedia.com/articles/retirement/06/tips55to64.asp
5. http://www.cnbc.com/id/101412411
6. https://www.fidelity.com/viewpoints/retirement/managing-cash-flow
7. http://www.nytimes.com/2005/10/16/business/yourmoney/16retire.html?pagewanted=all&_r=0
