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Posts Tagged ‘market conditions’

by Jill Johnson, Vice President, The Corundum Group

As 2012 rolls on, we continue to watch the economy with rapt attention. This election and the handling of the pending “fiscal cliff” will both be very telling as to where markets and the global economy will head in coming years.

Congress is operating in an almost continual state of gridlock, and one of the most severe impacts of the stalemate will be felt when and if a series of planned tax increases and spending cuts go into effect the first day of 2013.

Few would argue that the shock of going off this fiscal cliff, as it is being called, would be easy for our economy to absorb.  Among the changes are the expiration of the Bush-era tax cuts, the Obama payroll-tax holiday, emergency unemployment benefits, and the reversion of exemption levels for gift and estate taxes.  The New Year will also see the introduction of new taxes to support the recently passed healthcare law.  When you look at all these factors you can’t help but hope for teamwork in Washington. Election outcomes will impact this whole scene as well as the following chart shows.

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The uncertainty around the fiscal cliff causes us to remain wary and has likely contributed to the sluggish pace of recovery we experienced during the second quarter.  According to a survey of small business leaders conducted by the US Chamber of Commerce, 90% are concerned about the impact the fiscal cliff will have on their business growth. Nearly three-fourths of the respondents believe the recent healthcare law makes it harder to hire more employees. Global factors are also contributing to a fear of the unknown, fueled by economic challenges that continue to impair most of Europe and a slowdown in China.

Chart Source: RBC Global Asset Management, CBO, GS, RenMac, BoAML, DB, Eurasia Group, ISI. Note: Figures and scenarios are rough estimates. * Bush tax cuts for households with <$250K in income, Alternative Minimum Tax patch, tax extenders package. ** Original targeted debt ceiling cuts, old stimulus expiration, overseas military draw-down.

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Contributed by Steve Schneider, President, CB Insurance

ImageEntrepreneurs invest their personal capital to start and build businesses. They write personal checks to make payroll, to fund equipment expenditures, and pay operating costs. They put their own money at risk in hopes of an acceptable return on their capital. Historically, investment risk taken by the successful entrepreneur has been rewarded by increased profits and a long-standing business venture. Those who opened businesses were lauded for their propensity and willingness to incur risk and for their commitment to community and growth.  

Not so much today. In this political season, entrepreneurs are painted as greedy or labeled as Wall Street “fat cats” In reality, most entrepreneurs across the USA are Main Streeters, like you and me. They sit across from friends and neighbors in local churches and restaurants. They get up each morning to work another day–to make a product or provide a service, train or manage staff, attempt to smartly grow a business, and to participate in and enrich a community. Each day across our country, entrepreneurs incur risk and employ others with no guaranty; only the hope of their own success.

On January 1, 2013, the financial success these entrepreneurs seek–the economic reward they pursue by putting personal capital at risk—will be severely diminished. Ordinary income tax rates for many small business owners in the highest tax bracket will increase by over 10%. A new 3.8% Medicare Tax (Obamacare) will be applied to certain investment income, such as dividends and interest income. Capital gains on investments will be taxed at a rate 30% higher than in 2012. Income derived from stock dividends will be taxed as ordinary income, rather than the current 15% tax rate – a whopping +400% increase for those in the highest tax bracket.  All this after the company itself has paid up to 35% of its income in corporate taxes. 

So what’s the big deal? Those doing well should “pay their fair share,” right? We can always debate whether tax rates of 40% income, 35% corporate, 23.8% capital gains, 40% dividend income, and 55% estate (death) are “fair.” The question today is: “Would you write a personal check to start a business, knowing that almost half of what you earn over time will go to the federal government in the form of taxes?”  Or stated another way, “Would you invest your own money to grow a business and employ more people and take more risk, knowing that upon the sale of your business the increased value derived from your investment and sweat equity will be substantially taxed, and, to add further insult, that upon your death more than half of the remaining value might also go to Washington, rather than to your heirs?” 

If you are curious why the unemployment rate remains stubbornly high, why GDP growth is anemic, and why many of our best and brightest college graduates remain unemployed, you need only put yourself in the position of an entrepreneur and ask – “Would I write that check?”

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Contributed by Steve Schneider, President, CB Insurance

This year has been a catastrophic one – and who pays for all of the damage and destruction we have been inundated with from Japan to Joplin?

Recently, one of our national insurance carriers announced a second quarter loss of over $350 million,  much of which was driven by the devastating storms of this past spring.  Total losses incurred by this company alone from these catastrophes were well over $1 billion, with an active hurricane season projected for the coming months.  Other insurance carriers have reported similar loss trends.  So how will this impact YOUR insurance renewal costs in the future?

A few pundits are predicting large increases, particularly in property lines of coverage and workers compensation.

We don’t share this broad-brush view for three simple reasons.

  1. Insurance carriers and reinsurers continue to sit on large capital reserves, even after said storms, earthquakes and floods.
  2. Competition is increasing with new players in the market, including small regional insurance companies, which continue to hunt for market share at the expense of large national carriers thus keeping rate increases in check.
  3. The demand for insurance, as measured by increases in client sales, payrolls and higher limits purchased, remains muted by our economic malaise.

Ultimately we see large amounts of capital chasing smaller and fewer insurance clients, which basic economics tell us will stunt significant increases in rate over the coming quarters.

Carriers are reporting roughly a 2% average rate gain, and while we will advocate on behalf of our clients for a better outcome, those insureds with poor loss history, poor risk management practices, or those located in storm-prone areas will likely face unpleasant renewal negotiations this summer and fall.

And my hedge – all bets are off should this hurricane season turn really ugly or we see the economy slip back into deep recession.

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Contributed by Scott Yeoman, CEO, Central Bank & Trust

At the end of March the U.S. Government announced with some degree of fanfare that the Troubled Asset Relief Program (“TARP”) was positioned to earn the U.S. Treasury, and hence U.S. Taxpayers, a profit of $24 Billion.  The TARP program was much politicized, frequently criticized and very much misunderstood by most people – in large part because it was a complicated program perceived by most as a bailout for fat cat bankers (thanks, President Obama).

At its core, TARP amounted to an emergency loan for those banks that participated in the program.  Being in the business of making and collecting loans, most banks diligently honor their commitments and repay their obligations – just like most individual and business borrowers do – so it is no surprise that the banking industry has repaid their TARP funds ahead of the required payment schedule.  All in all, TARP kept the dominoes from falling off the table and helped restore some stability when it was most needed.  An investment in the banking system was a sound investment for the government in the crisis of 2008 and is a solid investment for private investors in normal times.  But I fear the definition of “normal” may take longer to define.

While the government recovered a profit on TARP, its political reaction to the banking crisis, a.k.a. the Dodd-Frank legislation, is where the lasting costs of the crisis will surface.  Dodd-Frank is a massive, comprehensive reform bill that aspires to cure all the perceived troubles of the financial services industry.  Some of the more obvious consequences of the bill already evident in the market include (more…)

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Contributed by Steve Condon, President, CB&T Wealth Management

This Sunday we will witness the NFL Championship game as Aaron Rodgers and the Green Bay Packers take on Ben Roethlisberger and the Pittsburgh Steelers in Super Bowl XLV.

With the 4th quarter of 2010 now in the rear view mirror and four quarters of what looks to be some pretty super football on the horizon, I thought it appropriate to talk quarters.

Quarters:

  • Since 1990 the best performing quarter for the S&P 500 each year is the 4th quarter, which generated a positive average return of 4.9%.
  • Likewise, ratings for the Super Bowl increase each quarter with the highest number of viewers hitting in the 4th.
  • Earnings for S&P 500 companies were projected to be up 25% in the 4th quarter of 2010 vs. the 4th quarter of 2009.
  • The Dallas Cowboys, in Super Bowl XXVII, set a record for 4th quarter points with 21 to close out a crushing 52-17 win over Buffalo.

The 4th quarter can be critical.

The last Super Bowl appearance by the Steelers in 2009 required a 4th quarter miracle.  The Steelers were up 20-3 late in the 3rd quarter when the Cardinals staged a comeback and jumped ahead 23-20.  With 35 seconds left Roethlisberger threw a game-winning touchdown pass to give the Steelers the victory. After the game head coach Mike Tomlin stated it simply: “Steeler football is sixty minutes”.

Investing is the same way; the best results come when you are in it for the long-term. And with sound strategy you won’t have to rely on a last-minute Hail Mary play to pay for retirement. Focus on the good old-fashioned basics of offense and defense by creating a diversified asset allocation considerate of your time horizon and risk tolerance. Once you’ve got that squared away, you can enjoy the game and let Mr. Roethlisberger worry about 4th quarter miracles.

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Contributed by Steve Schneider, President, CB Insurance

For the first time in two years, we are seeing some improving trends with the sales and payrolls reported by our clients.  That’s good news after several quarters of severe declines.  While some clients continue their downsize, many we talk with are now planning for at least some growth in their business in 2011, while still keeping a strong eye on expenses.  We think the hiring of new employees on average will be limited, due to continued economic risk (and increasing health care costs), but expect some upward pressure on salaries for key employees who have weathered the storm.

Indeed, Travelers Insurance just reported sales and payroll growth over their small and mid-sized business insurance portfolio for the fourth quarter of 2010.  There is no doubt that chronic high unemployment will continue to be a drag on this recovery, but trends seem to indicate improvement from the low points of late 2009 and early 2010.

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Contributed by Steve Schneider, President, CB Insurance

Hunker down?

Ours is a unique vantage point.

We have the privilege of talking with clients and prospective clients from a myriad of industries – all pushing through a difficult economic climate.  Most are hopeful, others not so much.  A popular business “strategy” as of late seems to be hunker down and wait.  Waiting for the upcoming election, waiting for valuations to drop, waiting for valuations to rise, but waiting.

However, some recent conversations have led me to a series of entrepreneurs who are taking a different approach.  These business people have surveyed the environment and decided that NOW is the time.  They are contractors who have redirected their business into areas not before considered; accountants and auditors who are preparing for better times; young first-time business owners who have found a unique and exploitable niche from which to build a company.  Risks?  Yep.  Fear of the unknown?  You bet, but they are moving their businesses forward, and from these companies will spring our next generation of Colorado Springs business leaders.  It’s important for all of us who own and manage businesses here in town to take encouragement from, and to support where we can, these locally-owned companies.

In the not too distant future, said firms will be our customers, vendors, competitors, but most importantly, job and wealth creators.  We could use a lot more of that right now.

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