In The Headlines
The World Economy Picks Up Steam, Despite Greece and China
You would not know it, given the noise from China and Greece, but the world economy is picking up steam. Morgan Stanley predicted recently a global expansion of almost 4% in the second half of this year, up from 2.9% in the first six months.
The firm says monetary stimulus is taking hold and will even be extended by 18 central banks this year, enough reason for optimism despite the fact that it is also forecasting a protracted slowdown in China and a 75% risk of Greece abandoning the euro. “The strength of domestic demand in developed economies will be the key engine of growth,” Chetan Ahya and Elga Bartsch, Morgan Stanley’s co-chief economists, told clients. “We expect the global economy to continue on the path of gradual recovery.”
At Credit Suisse Group AG, economists are sanguine even as they detect a “faint whiff of panic” over China’s stock-market rout and the mounting prospect of Greece’s exit from the euro. They nevertheless project improvements in the U.S. and Japanese economies alongside strengthening momentum in industrial production worldwide. A third consecutive gain in monthly new orders internationally is supporting their optimism as they reckon it is the best lead indicator of demand for goods.
The upbeat tones stand in contrast to that of the International Monetary Fund, which this week said the world economy will grow 3.3% in 2015, below the 3.5% it estimated in April. Much of that reduction, however, was due to a weak first quarter in the U.S.
Why the potential lack of contagion? For Greece, it is confidence that euro-area authorities can prevent it by using tools such as the European Central Bank’s bond-buying programs in case the country is forced to adopt a new currency. In China, equities still account for just 20% of household wealth so their influence is limited and consumption also plays a smaller role in gross domestic product than elsewhere.
While the MSCI World Index of stocks is set for its third straight weekly decline, Hans Mikkelsen, a credit strategist at Bank of America Corp. points to gauges measuring the outlook for inflation in the next five years as the “key thing” for investors to focus on when determining the future.
“The current situation where long-term inflation expectations are robust—despite the big declines in oil prices—depicts a much better outlook for global growth,” he said.
Citations
1. http://bloom.bg/1TsAMVK – Bloomberg
Proctor & Gamble Unloads Beleaguered Beauty Brands
Procter & Gamble (P&G) is selling much of its struggling beauty business, including the Clairol and Covergirl brands, to Coty as part of its latest streamlining effort. The company is unloading the brands for $12.5 billion in a complex transaction that will allow the world’s largest consumer products maker to focus more on its best-selling brands like Tide and Gillette, while dramatically expanding Coty’s portfolio in non-fragrance products.
The sale is the single-largest divestiture ever by P&G, which last year said it would sell off about 100 brands to focus on 70 to 80 brands, products that were responsible for about 90% of the company’s recent sales and 95% of its profit. In November, P&G announced it was selling its Duracell battery brand to Warren Buffett’s Berkshire Hathaway, a few months after it sold its Iams pet foods to Mars. There have also been other smaller transactions.
Under the terms of the deal, which were confirmed recently after weeks of speculation, brands like Wella, Clairol hair coloring products, and Covergirl makeup will be split off into a separate company that will merge with Coty, a leading fragrance company that is looking to build its business outside of Europe and North American and to broaden its relatively small assortment of skincare, haircare, and make-up products. P&G shareholders will own 52% of all outstanding shares of the combined company, while Coty’s existing shareholders would own the remaining 48%. (The deal, using a mechanism known as a Reverse Morris Trust, was structured that way to avoid the higher taxes involved in an outright sale.)
The beauty brands P&G is selling off have annual sales of $5.9 billion, making the division much bigger than Coty, which Wall Street analysts expect will report revenues of $4.4 billion for the fiscal year that ended in June. P&G will hang on to some beauty brands like Pantene shampoo and Olay facial moisturizes, each of which generates $1 billion a year in revenue.
At the highest levels, P&G executives struggled with how to manage and define the beauty business. P&G’s beauty business—which generated nearly one-quarter of the company’s total revenues in 2014, making it the company’s biggest unit—has been struggling for years. Net sales fell 2% in both 2014 and 2013, according to the company’s most recent annual report. And in the first three months of 2015, that worsened, with an 11% decline, the worst performance of any P&G division.
For P&G CEO A.G. Lafley, who returned to the helm two years ago to replace his own hand-picked successor, the sale continues the shrinking of a company he had aggressively built up, including the beauty division, during his first term as CEO from 2000 to 2009.
Over the past year, the 68-year-old Mr. Lafley concluded that P&G needed to focus more on brands that had clearly defined benefits, and not those whose sales were dictated by fashion trends. “This represents a significant step forward in the work to focus our portfolio on 10 categories and 65 brands that best leverage P&G’s core competencies,” Lafley said in a statement.
Citations
1. http://for.tn/1HRASCx – Fortune
2. http://on.wsj.com/1SbjkCN – Wall Street Journal
The Good News Is . . .
• Total applications rose 4.6% on a seasonally adjusted basis for the week, according to the Mortgage Bankers Association. Mortgage application volume is now 22% higher than one year ago. Applications to refinance loans, which are most rate sensitive, increased 3% from the previous week, but applications to purchase properties grew a more robust 7%. Purchase applications are now 32% higher than a year ago.
• Pepsico, Inc., a leading international food and beverage producer and marketer, reported earnings of $1.32 per share, an increase of 11.0% over year-ago earnings of $1.19. The firm’s earnings topped the consensus estimate of analysts by $0.09. The company reported revenues of $15.9 billion, a 5.1% increase. Management attributed the company’s results to strong sales in developing and emerging markets, and improved gross margins.
• The Centene Corporation, a managed health care company agreed to acquire its rival Health Net in a cash-and-stock deal valued at $6.8 billion, including the assumption of debt. The deal would combine two providers of managed care in the United States, creating a company with more than 10 million members and an estimated $37 billion in revenue this year, the companies said. It would also expand Centene’s scale and give it a larger market presence in the western United States. Under the terms of the deal, Health Net shareholders would receive $28.25 in cash and 0.622 of a Centene share for each Health Net share they hold.
Citations
1. http://cnb.cx/1L6SB9Z – CNBC
2. http://yhoo.it/1HvFs4S – Yahoo! Finance
3. http://bit.ly/1dTksNI – Pepsico, Inc.
4. http://nyti.ms/1em2MuK – NY Times Dealbook
Planning Tips
Tips for Caregiver Tax Deductions
As more baby boomers take on caregiving responsibilities for their aging relatives, it is important to understand the tax ramifications—and benefits—of their financial support. Some caregiving expenses may be tax deductible. Below are some guidelines to help you better understand how these dedications work. Be sure to consult with your tax advisor when considering whether these tax benefits are appropriate for your situation.
How a relative qualifies to become a dependent on your tax return – Relatives are eligible to become a dependent on a caregiver’s tax return if their total income is less than $3,950 a year, excluding nontaxable Social Security and disability payments, and if the caregiver provided more than 50% of the relative’s support. If those criteria are met, caregivers can take a $3,900 tax exemption for each dependent. However, a word of caution is in order. Pensions, interest on bank accounts, dividends and withdrawals from retirement plans are counted as income. Note that most relatives do not have to live in your home to be considered your dependent.
When a caregiver can claim a tax benefit for a dependent’s medical costs – If you claim a relative (a parent, spouse, step-parent, grandparent, sister, cousin, aunt or in-law, for example) as your dependent, you can claim medical deductions if you are providing more than 50% of their support and if your total medical costs represented more than 10% of your adjusted gross income. You must meet the threshold on both counts. If the taxpayer is age 65 or older, the threshold is reduced from 10% to 7.5%. Caregiver tax deductions are not necessarily limited to just relatives. Non-relatives could also qualify, but only if they are part of the caregiver’s household for the entire tax year.
The kinds of dependent expenses that are deductible – The cost for food, housing, medical care, clothing, transportation and even bathroom modifications that are required for medical reasons can qualify for tax deductions. The IRS allows caregivers to deduct the costs not covered by a health care plan for a relative’s hospitalization or for out-of-pocket costs for prescription drugs, dental care, copays, deductibles, ambulances, bandages, eyeglasses and certain long-term care services. Other items include acupuncture, adapters to TV sets and telephones for those who are hearing impaired, smoking cessation programs, weight-loss programs (if it is part of a treatment for a specific disease or condition) and wigs if hair loss is because of a medical condition or treatment. Keep all your records to prove these expenses in the event of a tax audit. If a caregiver works but pays for care for a relative who cannot be left alone, those costs may generate a tax credit.
Multiple siblings claiming a parent as a dependent on their tax form – If more than one sibling is sharing the cost of the parent’s upkeep, only one can claim the parent as a dependent.
Caregivers can use their flexible spending accounts to pay for a relative’s eligible medical expenses – A caregiver’s tax-free flexible spending account (FSA) may be used to cover expenses for both dependent and non-dependent relatives — as long as you are responsible for more than 50% of their support. The FSA is a tax-advantaged account that allows an employee to set aside a portion of earnings to pay for qualified medical expenses. Caps for FSAs were typically set by employers over the years. A $2,500 federal cap is currently in place. The IRS, if permitted by your employer, now allows an annual carryover of unused funds of up to $500, but only for a period not to exceed 2 months.
Citations
1. http://bit.ly/1Jbz6bW – SeniorLiving.org
2. http://onforb.es/1Sggr3w – Forbes
3. http://bit.ly/1aBAbJj – AARP
4. http://1.usa.gov/1HvFI3G – IRS
5. http://bit.ly/1fyWXLN – Bankrate.com
