What We're Watching

The Impact of Low Oil Prices

By Niklas K. Oskarsson

Following the sharp, almost 50%, decline in West Texas Intermediate (WTI) prices in the back half of last year, prices have stabilized and mostly fluctuated around $50/barrel year to date. The lower price level is positive both for global economic growth and for domestic growth. Stateside, the net benefit to GDP growth is estimated to be 0.2% for each $10 oil price decline, thus, translating into an almost 1% boost to GDP growth assuming prices stay at the current level. Globally, most developed countries and emerging Asia stand to benefit while the Middle East, Greater Russia, and parts of South America will face headwinds.

More specifically, the Eurozone with its low production level is well positioned to take advantage of the price decline as long as the Euro does not collapse. Since mid-2014, the Euro has depreciated by about 20% versus the US Dollar dampening the positive oil price effect since US Dollar denominated imports become more expensive. China and India are other major beneficiaries of the oil price decline. Recent studies indicate that several of the major oil net exporting countries, including Saudi Arabia, Russia, Norway, and Venezuela, may enter recession this year if oil prices stay low.

Historically, the stock market has performed well following a sharp oil price decline. According to Strategas Research Partners, over the last 30-years the S&P 500 has on average returned 23% in the 12-months following a 30% or greater decline in oil prices, with the cyclical (Materials and Consumer Discretionary) sectors leading the way and the defensive (Utilities and Telecommunication) sectors lagging. Since the 2014 oil price decline episode was not associated with a US recession but instead started in the sixth year of the economic cycle and with equity valuations already in fair value territory, we suspect the stock market move will be more muted this time around.

In the second half of this year we expect oil prices to push higher as stronger global growth boost demand and as production, especially on the unconventional side, come offline. Over the last four years US shale oil production has increased by around 4 million barrels/day and at the current price level capital investment is being cut back. With a one year depletion rate of 75% for many of the shale wells, the lack of new investments could quickly translate into reduced production. A wild card to this outlook is the June 5, 2015, OPEC meeting. In the two months following the last meeting, on November 27, 2014, oil prices declined by 37%. Now that OPEC has made it clear that their primary focus is to defend their market share rather than to support prices, we don’t foresee any sharp price reactions if they again decide to keep their production level unchanged at the June meeting.

The information based here represents the judgments and opinions of the management of Virginia Global Asset Management and not intended as financial advice.

 

Retirement Planning

How Much Money Do You Need to Retire? – Part 2 of 2

When many of our clients are 5-10 years from retiring, they often ask us, “will I have enough money to live 

David Kenerson

David Kenerson

on during retirement?” Here are the steps we recommend to help you determine if you have saved enough cash to live comfortably when you step out of the work world.

We discussed the first step of this process here. Now, let’s walk through the final steps in this calculation.

 

Step 2 – Calculate the nominal amount you will need to cover your expenses.

  1. Determine when you will retire. How many more years will you be working?
  2. Assume a standard rate of inflation. We recommend using 3% annual inflation.
  3. Take your expected current dollar needs found in #1 above and compound this number by your selected inflation rate for the number of years until retirement.
    • (Multiply the net amount you calculated in Step 1 by 1 plus the inflation rate expressed as a decimal figure,
    • Take that answer and multiply it by the same amount again for each of required number of years until you retire(e.g. 106.09 x 1.03 = 109.270; $109.27 x 1.03 = etc.)

Example – You need $100 in today’s dollars 5 years from now. Your chosen inflation rate is 3%. The table below shows how many dollars will equal today’s $100 dollars at 3% inflation after each year:

Start End of Yr. 1 End of Yr. 2 End of Yr. 3 End of Yr. 4 End of Yr.5
$        100.00 $        103.00 $        106.09 $        109.27 $        112.55 $        115.93

 

This table tells us that in five years you will need a nominal amount of almost $116 for every $100 you spend today if the inflation rate runs at 3%.

Step 3 – Determine your Sources of income outside of your personal portfolio.

  1. Contact the Social Security Office and get an estimate of your social security payments at your expected retirement date.
  2. Contact any source of pension(s) to get an estimate of your pension at retirement.
  3. Note the amount of cash income you receive from any rental properties.
  4. Total your expected income for items 1-3.

Step 4 – Subtract your projected expenses at retirement from your Social Security, pension, and rental income at retirement.

  • If your total is positive, you don’t need to worry – your income is greater than your expenses. Congratulations!
  •  If your total is negative, your portfolios – IRA’s, 401k plans, profit-sharing plans, and portfolios held outright – must produce.
  •  Add up your total investment portfolios. If you earned 3%, 4%, or 5% on today’s portfolios, would any of these incomes be enough to offset the shortfall of social security, pension, and rental property income and cover your expenses? If they are sufficient then, again you probably are okay.
  • If your total is not sufficient to cover your expenses, you will need either to consider increasing your investment returns to such a rate that your portfolio (by your retirement date) will grow to a sufficient size to cover your expenses or plan to cut your expenses at retirement in such a way that the available income covers those expenses. Seeking higher returns implies taking greater risks: you will want to consult your investment advisor to determine whether obtaining such returns is feasible and most importantly can be done within your tolerance for risk!

Planning for your retirement future can be a daunting task, but if you follow these simple steps and plan accordingly, you can expect that your retirement years will be the most stress-free, relaxing, and fun years of your life.

If we can assist you with your retirement planning, please contact us at david at virginiaglobal.com or (757) 962-7976. 

 

Retirement Planning

How Much Money Do You Need to Retire? – Part 1 of 2

David Kenerson

David Kenerson

When many of our clients are 5-10 years from retiring, they often ask us, “will I have enough money to live on during retirement?” Here are the steps we recommend to help you determine if you have saved enough cash to live comfortably when you step out of the work world.

Step 1. Determine your monthly financial needs today by examining your expenses.

Go through your checkbook and allocate your expenses among the following categories, using an Excel spreadsheet or another simple organizational tool to record the expenses.

  • Housing – What are your monthly mortgage payments? Monthly utilities? Cost for home repairs and cleaning services? Yard equipment and maintenance? Pool equipment and upkeep?
  • Automotive – What is your monthly cost for insurance? Fuel? How much do registration fees and licenses cost? What’s your annual average for car maintenance and repair?
  • Personal – How much do you spend per month on clothing, personal care products and services (hair cuts, dry cleaning, manicures, laundry service, etc)?
  • Food and Drink – What is your average cost for groceries each month? Alcohol? Home care products like furniture polish, kitchen cleaner, etc?
  • Entertainment – On average how much do you spend per month for movies, concerts, travel, etc?
  • Second Home – What are the costs above for your second home, if applicable?
  • Taxes – What is your average federal income tax each month? State tax? Local tax? Social Security and Medicare taxes? (Use last year’s tax return for figures and then divide by 12 to get the monthly cost.)
  • Gifts – On average, how much do you spend on gifts each month?
  • Medical – What is your monthly cost for doctor and dentist visits? Medications? Medical devices (glasses, hearing aids, etc.)?
  • Hobbies – What do you spend each month on items related to your hobbies such as sewing, fishing, gardening, etc?
  • Charitable Gifts – What is your monthly average for charitable giving – including cash and checks?
  • Miscellaneous – What else do you regularly spend money on but that isn’t included in the categories above?

2.      Add any monthly credit card charges from all your credit cards to the total above.

3.      Total all the columns.

4.      Deduct expenses you won’t have during retirement.  If your expenditures look to go down after you retire, you might consider using a percentage of your current spending – i.e. 70% of your current monthly expenditures.  Think carefully here though because while you might spend less money, for example, on gas for your commute, you may spend more on things like travel or hobbies.

5.      The net total is what you can expect to spend per month in retirement in today’s dollars. (Keep in mind that today’s dollar will not be worth as much tomorrow.)

Come back next week for Part 2 of how to calculate your needed retirement totals.

What We're Watching

Paying Attention: the 3-D Printing Industry

By Niklas K. Oskarsson and David R. Kenerson, Jr.  

3-D printing is a fast evolving industry with high margins serving a wide range of customers. Current printer prices range from around $300 for home devices to six digit price tags on high end industrial machines. We expect the industry to grow roughly at a 30% annual clip through the end of the decade with the leading firms generating gross and net margins in the 50% and high single digit ranges, respectively, over the next few years. Slicing the major players revenue streams into three segments, we foresee their printing materials producing the best margins going forward since the companies are effectively reducing competition by eliminating printer warranties if materials from other manufacturers are used. Within the print on demand segment we suspect the industry leaders will find it more challenging to defend their margins since these services can easily be replicated by any store with 3-D printers. Finally, we also anticipate the competitive landscape to tighten within the printer segment as Hewlett Packard and other major corporations enter the industry.

Having said that, with the entrance of large cap, cash flooded technology companies, specu-lative take over premiums may creep into the existing pure players’ valuations and it may also raise the overall awareness of the industry. Moreover, the fact that firms such as Siemens, GE, and Boeing are already using 3-D printers to produce anything from turbine parts to fuel nozzles adds credibility to the industry as a whole and hints at its potential to become a real disruptive force.

Until the printing speed accelerates and material costs come down, we don’t expect additive manufacturing (3-D printing) to challenge subtractive (traditional) manufacturing for mass produced products. Instead, we anticipate additive manufacturing utilization to rise significantly within the prototype, one-off, replacement, low volume, and customized part type of production. As a result, the end markets best suited for 3-D printing are the healthcare, aerospace, and automobile parts industries. 3-D printing eliminates, for example, the need to store old model replacement parts for automobiles and airplanes. Within healthcare, already more than 90% of all hearing aid shells are 3-D printed and in the dental field braces and crowns can now be 3-D printed. Knee and hip components are also being 3-D printed and scientists forecast that the actual printing of human organs may only be a decade away.

Other important benefits of 3-D printing are that it reduces the need for retooling of machines, minimizes the percentage of the original raw materials that are turned into scrap, and can improve the quality of the products produced. According to GE, the subtractive (cutting and drilling) manufacturing process it previously used to produce certain metal parts required almost 2.7 times more raw material inputs than their current additive manufacturing techniques. The company also estimates that it is able to make parts that are five times more durable and significantly lighter using 3-D printing machines than previous manufacturing techniques.

It’s worth keeping an eye on this growing industry, and the companies that enter the market.

 

The information based here represents the judgments and opinions of the management of Virginia Global Asset Management and not intended as financial advice.

Trusts

Simplifying Your Life Using a Revocable Living Trust

by David R. Kenerson, Jr. and Niklas K. Oskarsson

The Nature of a “Trust:”  

You can create a trust in your will that comes into being only at death, or you can create one while you are living.  You can make it revocable or irrevocable, and in this case we are talking about creating a revocable trust for your own benefit.  And because you are creating it during your lifetime it is known as a Revocable Living Trust.

A trust is a set of instructions given to the Trustee or Trustees whom you will name in the document, that tells them how to manage the property and who is to receive the benefit of the property and when.

You can name yourself as trustee, and in addition you might name your spouse or one or more children as a co-trustee(s), or as successor trustee(s). We prefer using a co-trustee designation so that if you become unable to act as trustee, your co-trustee can continue to act without a hitch, or a letter of resignation.

During your lifetime, a Revocable Living Trust for your benefit allows you to treat the property in it just as though you owned it outright outside the trust. You can take all of the income as well as the principal for your own needs whenever you want in such amounts as you want.

Benefits:

With proper drafting, your co-trustee can provide for you in the event you become disabled or unable to act by paying your bills, providing spending money for groceries, and taking care of you in all the ways you would take care of yourself.  Not only should your trustee have the power to pay money to you, but also to “apply” or use the funds for your benefit by being authorized to pay others for your benefit.

Since you have control over all the property in the trust as trustee and since you have the power to revoke the trust, all the income and taxable capital gains are going to be taxed to you on your income tax return.  That is no different than if you owned the property outright.  The good news, though, is that your trust will not need to file its own tax return until after your death.

Some lawyers have said, “why bother” with a revocable trust when a power of attorney will do just as well.  That is true in some cases, but not all.  As co-trustee of a brokerage account, one has greater ease of management and transfer of the brokerage account assets, than one does using a power of attorney.  Many institutions do not recognize someone else’s (i.e. not drafted by the institution) power of attorney.  However, the co-trustee can do so with ease, assuming the account was opened with the co-trustee as a named account holder.  So one benefit of having a co-trustee is the ease and facility of administration of your property.

It is quite possible to transfer your tangible personal property (clothing, furniture, etc.) to your trust and to transfer your residence to it as well.  If all assets have been transferred to the trust, its administration occurs without hitch at death.  There is no waiting for probate, i.e. for the will to be approved by the court; there is no rehiring of the investment advisor with a whole new set of papers, etc., and control over funds with which to pay funeral expenses and current bills is immediate.  The nuisance value is considerably less.  The trust will then pay any expenses of last illness, lawyers fees etc. and can distribute the decedent’s tangible personal property to the surviving spouse or children – who can then themselves make gifts to charity of the things they don’t want.

Possible Drawbacks:

The common arguments against doing as we suggest are that one incurs the cost of drafting the revocable trust perhaps long before death.  However, our experience suggests that drafting a will and revocable trust will cost marginally more or the same as drafting a testamentary trust.  The cost is not so much in the drafting but in the time spent with the client understanding their objectives and asset picture and working through the desired provisions of the trust with the client – something needed in both cases.

The second argument is that one incurs transfer taxes in transferring the residence, which might be sold before your death in any event and these can amount to several thousand dollars.  Our thought is to keep the title in joint name with the right of survivorship until the first spouse dies.  Then, it may make sense to transfer the house to the trust.

Thus, we think the benefits in terms of the ease of administration and your care, warrant consideration of using a revocable living trust.  The final benefit is that in the process of putting it in place, you will be organizing your affairs so that others can take over easily.

The information based here represents the judgments and opinions of the management of Virginia Global Asset Management and not intended as financial advice.

European Finance

The United States of Europe: A Work in Progress

by David R. Kenerson, Jr. and Niklas K. Oskarsson

In 1993, when the European Union was formed between 12 countries, much was made of the possibility that the countries of Europe might become one unified government.  When – six years later – the Euro was introduced as common currency between 11 of those countries, those speculations gained new energy.

Now, Europe is working on centralizing the oversight of banking and the provision of a European wide guarantee of bank deposits, and institutions have been created to bail out governments that may suffer debt crises in the future. Thus, we – now in 2014 – see a gradual trend toward the creation of European-wide institutions that suggest ultimately the formation of a United States of Europe, a trend many people would say has been ongoing for over 20 years.

The Benefits and Challenges of the EU and the Euro

In forming the European Union, Europe agreed to facilitate cross border travel, employment, and transfer of goods. It also began setting common standards for construction and the manufacture of certain goods such as electrical equipment. As a result manufacturers could manufacture one version of a product instead of many.

Then, the formation of a currency union in the Euro reduced transaction costs from converting various currencies and simplified cross border accounting.

The strength of a country’s currency is a function primarily of four things:

·         its relative economic growth rate,

·         its relative inflation rate,

·         its financial soundness,

·         and its relative political stability when compared with other countries.

The Euro’s value is a balance between the values of the currencies of the “weaker currency countries” (e.g. Italy, Portugal, Greece, etc.) and the “stronger currency countries” (e.g. Germany and the Netherlands), and as such, it has had major benefits for all concerned: the weaker currency countries have had a stronger currency in the Euro – which has allowed them to import goods more cheaply than they could otherwise. It has also helped reduce inflation.

The stronger currency countries, who now have a “weaker currency” in the Euro, have also benefited from having more competitive exports from a price standpoint.  For example, Germany benefited significantly by it sales of equipment to Greece: German goods cost less than they would have (because most believe the Euro is “cheaper” than the old Deutschmark), and the Greeks could buy more than they otherwise had been able to do.

The disadvantage of the common currency is that the economies and cultures of the various countries vary greatly and labor flexibility differs widely. Therefore, some of the weaker currency countries can no longer compete effectively with Germany, for example.  However, in the Euro system, they are unable to devalue their currency in order to compete on a relative price/cost basis. Therefore, the market place can only express its dismay with the policies of a government by selling its country’s bonds – which we saw in the European debt crisis of 2010-2012.

Europe’s Response to the Challenges

To address these disadvantages, the European Union is taking steps –  centralizing banking oversight, providing a European wide guarantee of bank deposits, and the creation of bail-out systems to help governments in trouble.

These steps continue the gradual trend toward the creation and unification of European institutions that suggest ultimately the formation of a United States of Europe.

 

 

The information based here represents the judgments and opinions of the management of Virginia Global Asset Management and not intended as financial advice.