In The Headlines

Tensions in Ukraine Spell More Fallout for the Russian Economy

Signs of Russia’s growing economic distress became clearer, as the Central Bank unexpectedly raised interest rates for the second time since March, while Standard & Poor’s (S&P) lowered the country’s debt rating from BBB to BBB- which is one notch above junk.

In lifting the benchmark borrowing rate from 7% to 7.5%, the Bank said it was acting to cool inflation that is now running above 7%. But, according to economist Tim Ash of Standard Bank in London, “It has nothing to do with inflation. It’s all about signaling that the Central Bank is shoring up its defenses to strengthen the ruble and stem the flight of capital from the country.”

Whether the Bank can achieve those goals looks doubtful. The ruble, the second-worst-performing currency among developing countries this year, has continued to lose ground against the dollar. A tense standoff between Russia and Ukraine has been under way for months, a crisis that shows few signs of abating. Last month, Russia took control of Ukraine’s Crimea region, a move considered illegal by many in the international community. Ukraine and western countries maintain that Russia is trying to destabilize parts of eastern Ukraine. S&P noted in its downgrade announcement, the standoff over Ukraine could spur further capital outflows, which have already exceeded $50 billion during the first three months of the year. Ash predicts the total could reach as much as $200 billion by year’s end.

With Russian companies and consumers facing higher borrowing costs, the rate hike will depress an economy that is already in danger of tipping into recession. And continuing political uncertainty over Ukraine means that foreign companies “…will not invest in Russia’s real economy, they’ll just stall their investment [and] inflation is likely to remain relatively high” Ash says. How high inflation may go is estimated to be above 7% this year. In a note to clients of Capital Economics in London, emerging-markets economist Liza Ermolenko writes, “This is the result of Russia’s deep-seated economic problems—in particular, the fact that wages have been growing well ahead of productivity.”

And the West is still mulling over placing tougher economic sanctions on Russia. President Obama, traveling in Asia, is planning a conference call with European leaders to discuss whether to expand the limited sanctions now in place. Secretary of State John Kerry warned that Russia was running out of time to avoid expanded sanctions. “If Russia continues in this direction, it will not just be a grave mistake, it will be an expensive mistake,” he said.

Lars Christensen, chief emerging-markets analyst at Danske Bank in Copenhagen, characterized the capital flight as “…a pretty permanent exodus from Russia…” that will be very difficult for the Russian Central Bank to fight. The Central Bank, he said, “is very much between a rock and a hard place. They frankly seem quite desperate in their actions.”

The Marijuana Wild West Show

The increasing social and legal acceptance of marijuana has some investors wondering about ground floor opportunities in an industry that seems poised to become huge. And there might be some, but only for the stouthearted. Despite being legal in one form or another in nearly half the states, the federal government still classifies marijuana as a Schedule I narcotic, putting it in the same criminal league with heroin. So for the time being, risk and uncertainty abound, and many banks, accountants, and suppliers are skittish about working with marijuana-oriented businesses, be they medical-marijuana clinics or big, well-capitalized biotech outfits. Both of these factors mean higher costs and a clouded future. Most public companies in this market are in their infancy, and some are marginal.

There are a few exceptions. Recently, Morgan Stanley initiated coverage of GW Pharmaceuticals, a British biotech firm that trades on the Nasdaq. That announcement, plus favorable comments by TV investment pundit Jim Cramer, has sent the company’s shares soaring. GW’s business is based on cannabinoids, chemical compounds found in marijuana and hemp, as well as in the human body. They can also be produced synthetically. The company’s main product, Sativex, was developed to treat symptoms of multiple sclerosis, cancer, and neuropathic pain. The firm has another product, Epidiolex, which is aimed at alleviating the symptoms of epilepsy in children. The company is also researching drugs to treat Type-2 diabetes. Jeff Reeves, the editor of InvestorPlace.com, has called GW the most legitimate marijuana stock available to investors. But he cautions that it still has the risk profile of a biotech company in its early stages.

Most of the other public companies in the marijuana market trade for pennies, and tend to be as opaque and problematic as any penny stock. The Benzinga 420 Marijuana Index has fallen by more than 50% since its peak in March, largely due to regulatory action against a couple of these firms. The drop in the Index may also be due to a realization that, despite the legalization of marijuana in many states for either recreational or medical use, it will be a long time before the industry achieves stability. Three examples serve to underscore that point.

Shares in GrowLife, which sells products and services to marijuana growers, resumed trading on Friday after the SEC had halted trading for two weeks. The stock proceeded to plummet by 60% before recovering slightly. The SEC cited “…questions that have been raised about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in the common stock.” The company’s market cap has shrunk to around $185,000. It lost $21 million in 2013.

In late March, the SEC also halted trading for several days in Advanced Cannabis Solutions (ACS), a Colorado company, due to questionable stock-trading activity among affiliates and shareholders. ACS leases space and equipment to marijuana growers and offers consulting and support services.

Cannabis Science, another ostensibly pharma-focused firm, released its 2013 annual report last week in which it expressed “…substantial doubt about our ability to continue as a going concern.” Not a surprising development, given its accumulated deficit of more than $87 million and its reported revenue over the preceding eight years of $126,000.

This situation will doubtless change, as attitudes quickly evolve. Recently, National Public Radio (NPR) reported that retired Supreme Court Justice John Paul Stevens, 94, is calling for legalization of marijuana, comparing the situation to the prohibition of alcohol in the 1920s and 1930s. “I think in time that will be the general consensus,” he said. For investors, it is a question of how much time will be required before the industry represents a legitimate opportunity in every sense of the word.

Sources:
1. http://buswk.co/1h3RjL9 – BusinessWeek
2. http://cnnmon.ie/1nSXkz0 – CNN Money
3. http://bit.ly/1lkGdGz – Fortune

The Good News Is . . .

• The Commerce Department said durable goods orders for March increased 2.6% as demand rose across all categories. Durable goods are products intended to last three years or more. Orders for February were revised upward to 2.1% from the previously reported 2.2% increase. The report fits in with other data such as industrial production, retail sales, and employment that have suggested the economy gained steam after a difficult first quarter.

• Dow Chemical Co., a global supplier of specialty chemicals, advanced materials, agricultural products, and plastics reported earnings of $0.79 per share, a 14.5% increase over year-ago earnings of $0.69. The firm’s earnings topped the consensus estimate of analysts by $0.08. The company reported that revenues increased to $14.5 billion. Management attributed the company’s performance to increased sales in its Performance Plastics segment, as well as sales gains in China.

• Zimmer Holdings agreed to acquire Biomet Inc., in a cash-and-stock deal valued at $13.35 billion, including debt. The deal will bring together the second and fourth largest providers of orthopedic products, giving the combined company scale as it competes with firms such as Johnson & Johnson, and absorbs the medical device tax levied as part of the Affordable Care Act. The two companies have combined sales of $7.8 billion

Sources:
1. http://www.cnbc.com/id/101609854 – CNBC
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://www.dow.com/investors/earnings/2014/14q1earn.htm – Dow Chemical
4. http://nyti.ms/1tRw8EQ – NY Times Dealbook

Planning Tips

Innovative Strategies for Using Life Insurance

Normally, we think about life insurance as a means to pay a lump sum death benefit to heirs when we die. Below are other, innovative strategies for using life insurance.

Provide liquidity – You can use insurance as a cash stand-in for assets. Most people connect liquidity with whole life, which builds up cash value that the insured can borrow against. But even term policies can provide liquidity on death. The head of a family business can insure him-or-herself to enable distribution of the worth of the business to children who do not join the company. For example, business partners can purchase insurance policies that will allow one partner’s heirs to, in effect, buy themselves out of their portion of the business.

Replace wealth – Life insurance can also be used for wealth replacement. In its simplest form, successful investors can pay for a policy that will cover the estate taxes on their holdings. This spares his or her survivors from having to contend with selling investments while they are grieving, or when selling is disadvantageous, in order to satisfy the taxman. More complex strategies include pairing a life insurance policy with an instrument like a charitable remainder trust, which allows investors to donate an asset to a charitable cause while drawing the income that the asset generates. With some of that income, the investor buys a life insurance policy to restore to his or her heirs the amount the charity receives, preserving both the tax deduction and the wealth.

Maximize a pension – Life insurance can cover a financial shortfall in retirement income. You can plan your pension or Social Security benefit with a life insurance policy in mind. Knowing that your spouse will get an insurance payment on your death frees you up to maximize your benefit.

Cover a grandchild’s college costs – An older couple who want to contribute to help cover college costs for their grandchildren can take advantage of the annual tax-free gift of $13,500 to each child. But if they are worried they will not live to complete their program, they can insure themselves for the total amount, and know their wishes will be carried out whether they write the last check themselves or leave it to their children.

Taking care of dependents – Your spouse might need to be protected from the loss of your income, even if you are retired. When you die, your spouse’s income is likely to be affected. Pension payments might stop, Social Security income can decrease, and annuity payouts might also cease, or getting at the remaining benefits might prove expensive. It is important to look over the conditions attached to the income your spouse receives upon your death. The right life insurance policy can ensure that, when you pass, your spouse can make up the shortfall that comes with the loss of income from sources tied to your lifespan.

Sources:
1. http://bit.ly/1jp6crP – protectmyid.com
2. http://bit.ly/1mqFVxq – healtit.gov
3. http://1.usa.gov/1qVAqsA – consumer.ftc.gov
4. http://bit.ly/1jYyhcE – privacyrights.org
5. http://1.usa.gov/QqhaGA / – oig.hhs.gov

Please don’t hesitate to give us a call if you need help with any component of your financial planning.