Déjà vu all over again?

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Many investors who kept their portfolios in stocks throughout the financial collapse of 2008 seem to have recovered by now.

It looks as though it all worked out in the end – as long as you had the time.  The problem is that some were not so fortunate.   I can think of several people right off the top who were planning retirement in 2008 but because of the losses in their retirement plans, are still working today.  One person in particular was my neighbor who was planning on retiring when she reached 30 years of service at her company in Worcester.  She now has 37 years of service, has downsized to a new house that will shorten her commute and no plans to retire.  Her current plan of working till the end might seem a little extreme and perhaps is, but it demonstrates the extent of the trauma created by the economic collapse of 2008.

Today’s market reminds me, in some ways, of another bull market moment in 1999 when the market hit new highs.  That run culminated with what amounted to be a great opportunity to re-construct investment portfolios to best preserve the gains of the prior years.  Some did and some did not.  My conversations in 2003 with those who did not were laden with misgivings and regret.

Where do we stand today?  Could this be a moment when we should apply the lessons of history?  Or . . . is it different this time?  The recent volatility in the market suggests uncertainty.  One thing is for certain though – volatility hurts returns.  This is a great time to take a close, hard look at your investments relative to your retirement needs.

 

Dwight Davenport

Principal, Vodia Capital, LLC

March Jobs Report

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One major economic headline took the news on Friday just as all were preparing for the weekend religious double-header of Passover and Easter.  Namely, the jobs figure for March was surprisingly weak with just 126,000 new jobs created.  On top of downward revisions for January and February, it was a very weak quarter for creating new employment opportunities.

This is in the context, however, that we had the same aberration last year at this time when Q1 2014 saw a drop in GDP because of the weather.  This year, it might have been the same with a colossal amount of snow in the Northeast and cold weather across the nation.

The other headwind was the strength of the US dollar which was on a tear all of last year.  At elevated levels, it left our exporters in a difficult spot as our goods became much more expensive to foreign consumers.

If this slowdown in jobs does not worsen, it could be a good thing for the US economy.  There is discussion that it might delay the Fed’s plans to raise interest rates, and with a slower growing US economy the dollar could weaken from these highs.  Both of those factors ultimately feed better long-term growth.

The economy is a cycle that ebbs and flows, each of these states providing possible benefits if the overall structure is sound.  But with all such data, time will tell as well look to spring and thaw from this snow season.

 

David Matias

Managing Principal
Vodia Capital, LLC

Building Wealth Outside of the Estate

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Previously, we briefly outlined the three basic types of life insurance, tax treatment and uses of cash value. Today we will look at one of the most important and powerful estate planning strategies one can use – The Irrevocable Life Insurance Trust (ILIT).

The ILIT is one of the most commonly used tools in estate planning. ILITs are designed to take ownership of the life policy outside of a person’s gross estate. By removing policy ownership from the insured’s gross estate, policy proceeds avoid estate taxation. This means that for every dollar of insurance proceeds received, a dollar will be available to meet post death financial needs. By contrast, personally owned insurance is generally includible in the gross estate. A portion of every dollar may be consumed by estate taxation of the policy proceeds themselves. Only a portion will go towards the intended use of the policy proceeds. Owning life insurance in a properly drafted ILIT is one of the most powerful asset leveraging strategies available.

The strategy is not just for the very wealthy. It plays an important role in a variety of estate-planning objectives such as:

  • Equalizing the estate for heirs
  • Protecting assets from liens and creditors
  • Providing for control of assets after the distribution of the estate
  • Bequests to charities
  • Business continuity and succession plans, and
  • Providing cash for the settlement of estate transfer liabilities

How does an ILIT work?

An ILIT is created to take ownership of a life insurance policy. Trustees are established to oversee that it is administered properly. In order for the life insurance death benefit’s proceeds not to be included in the insured’s estate, the trust must be irrevocable. This means the terms of the trust generally cannot be altered, amended or revoked by the insured. The beneficiaries and their shares must be set at the time the trust is established. If there is uncertainty as to who the beneficiaries should be, or what their shares should be, then an irrevocable trust may not be appropriate.

If the grantor wishes to exert control over the trust assets after his or her death then it’s a good idea to make the trust itself the beneficiary of the policy. In this way the terms of the trust dictate the distribution of assets as per the grantor’s wishes. The ILIT also provides asset protection for beneficiaries if they are ever confronted with litigation, creditors or lien holders because the property held in ILITs is not considered to be the property of the beneficiaries.

The ILIT strategy is a worthy consideration for families who want to build, distribute and control the distribution of wealth outside of their estate. It is imperative to work with an advisor who has experience with ILITs to make sure the strategy is set up accurately and administered properly. Please contact me if you want to learn more about the strategy.

 

Dwight Davenport

Principal, Vodia Capital, LLC

 

 

The Supply Side of Oil

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After a brief rally at the end of January/beginning of February, oil prices are back at lows not seen since 2009 and the height of the Great Recession. With US production continuing to rise, now above 9 million barrels/day and storage volume at levels not seen in 80 years, the glut appears to continue.

The data behind the trend is quite interesting, however. Global production breaks down into three main groups: OPEC nations, Non-OPEC/Non-U.S., and the U.S. Of the three, only the U.S. is showing any sort of increase in production. OPEC was down slightly in February thanks to unrest in Libya and Iraq, and the Non-OPEC/Non-US figures are below 2014 levels. Note that the Saudi’s, with a third of OPEC production, is almost at full production and little room to compensate for further disruptions in the OPEC nations.

So the swing producer right now is the U.S.. Oil supply could change quickly, however, because of this. Active oil rigs in the U.S., the measure of future oil production in the US, is down by half in just a few months. With an inherent delay in production slowdown because of increased well efficiency, we won’t know the impact for many months.

And this does not take into account the impact of lower prices on demand.

It promises to be an interesting year for commodities. Oil prices are a wildly unpredictable dynamic… and one that will likely cause more disruptions in the financial markets this year.

 

David Matias

Managing Principal
Vodia Capital, LLC
 

Sources for data: Bloomberg.com and Cornerstone Analytics

Apple is ‘Healthier’ Than Ever

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Apple came out with their December 2014 quarterly earnings this week, and the numbers are impressive.  They sold 74 million phones over the holidays – or 34,000 phones every hour, 24 hours a day and generated $18 billion in profit for the three months.  This is a record for Apple (as well as every other company on the planet) with a revenue figure of $74.6 billion that is staggering against the backdrop of death cries for Apple from a year ago.  They are not just surviving, they are healthy and thriving.

For comparison, Google and Microsoft generated a combined $43 billion of revenue last quarter.  Apple beat that with its iPhone sales alone, with iOS accounting for nearly 80% of all mobile e-commerce sales during the holiday season.  With increased revenue per phone on the iPhone 6 Plus, Apple’s gross margin is nearly back to 40%, dropping ever more cash to the bottom line.

It is exciting to see Apple survive the transition from Steve Jobs to Tim Cook, who has assembled an impressive team to re-mold Apple after the death of its co-founder and spiritual guide.  With the advent of Apple Watch and an array of health apps this year, a lot of investor expectations will ride on these products to diversify their revenue base away from the iPhone.  While it is not critical to Apple’s continued success, with plenty of available market share in phones and computers, it would help drive more investors to the stock.

In a period of epic storms and calamitous drops in commodity prices, it is one piece of goods news that is quite welcome.

 

David Matias

Managing Principal
Vodia Capital, LLC

Gilead Under Pressure?

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Gilead Sciences (GILD) is back in the news last week after pharmacy benefit manager Express Scripts granted approval solely to AbbVie to be the provider of their new hepatitis C (HCV) treatment Viekira Pak. AbbVie has struck a deal with Express Scripts to provide an unspecified discount for its therapy. Reaction to the news had Giliead’s stock plunging over 20% to $86 from $108 as investors headed for the exits before recovering to $96 this week. Analysts are stating that Gilead must now strike a discount deal of their own and offer a lower price for their most recent HCV therapy Harvoni.

Will Gilead be forced to “play ball” and cave to pricing pressures? In my view, their “no comment” response to that question suggests a definitive “no.”

Currently, Gilead has two anti-viral 12 week therapies for HCV; Harovani and Sovaldi. Harvoni is a single pill therapy taken once daily and Solvaldi is a two-pill combination with Ribovirin that is taken twice per day. The cost is $94,500 and $84,000 respectively and both therapies cure HCV genotypes (GT) 1, 2 and 3. With the side effects from Ribovirin, and the far higher likelihood of developing drug resistance when patients fail to take all the pills as prescribed, a single-pill solution is always a far superior treatment.

By contrast, priced at $83,000 AbbVie’s Viekira Pak is a 4 to 6 pill therapy which is also administered for 12 weeks but only treats GT 1. With the more limited application, and the significantly greater number of pills the patient needs to keep track of, the Gilead solutions are far superior. If Express Scripts limits access to the Gilead solutions, this puts doctors in an ethical bind.  Will they now be forced to deny treatment to a patient who is GT 2 or 3 because Express Scripts won’t pay for treatment of a non-GT 1 patient?

An estimated 3.9 million people in the US have HCV (170 million worldwide) 75% of whom are GT 1. Express Scripts has 30% of the US prescription market and an estimated 30% of them are part of the formulary which restricts their choices. This will shave about 10% from Gilead’s US market and boost AbbVie’s sales in the US. Globally, however, Gilead’s Harvoni and Sovaldi are likely to thrive because of their wider application and ease of use. With analysts projecting global HCV therapy sales of $10.9 billion (and likely far more as diagnosis improves), Gilead stands to dominate the global HCV therapy market.

 

Dwight Davenport
Principal, Vodia Capital, LLC

Volatility can be a Tricky Thing

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This time it took only 10 trading days. Last time, in November, it took 30 days, and over the summer it took 44 days. In each case, this is the amount of time it took for the Dow Jones Industrial Average to regain all the losses from its stumble. (If you have a subscription to the Wall Street Journal, they talk about this whipsaw volatility in depth:  http://goo.gl/zpamFw)

While the first half of December is typically a time of selling in the stock market for tax reasons, and the second half usually sees a rally of around 2%, the sharp volatility we experienced has been increasing as the year goes on. One explanation is the lack of market-beating returns by mutual fund managers: 85% of which have failed to beat the market this year.  What we saw in the rally last week is a rush to get some last minute “alpha” in the hopes of catching up.

Another large pool of equity managers is the hedge fund community. Depending on which index you use, they are up as a group by only 2% this year (according to Bloomberg), to aggregate losses in most categories (hedgefundresearch.com). Either way, that is a large pile of money looking to explain why they have not made much money this year.

We were spoiled with a rapid rise in US stocks the past few years. That rise is causing significant fractures in the institutional money world. Going forward, we are likely to see increased volatility like we saw in December. Keep in mind, during 2008, we saw single-day stock market losses that equaled the entire market gains from the first 9-months of this year (8 percent in each direction)…  Volatility can be a tricky thing.

 

David Matias

Managing Principal
Vodia Capital, LLC