Goldman Sachs has a new kind of fund it is offering, and we thought advisors might like to hear about it. In what are being called “tax-eating” funds, Goldman is offering the opportunity to invest in “opportunity funds”. These special funds, which are provided for in the new tax code, are designed to promote investment in low-income communities. Interestingly, the funds are deferred from capital gains tax until 2026, so clients can move their capital gains into these funds and shield them from taxes. Doing so will ultimately result in a 15% reduction in capital gains taxes on the original gains, and 0% taxes for any gains on the opportunity funds themselves.
FINSUM: Goldman Sachs has been doing this kind of investing for years, and now the tax change has really put wind in its sails. Seems like it may be worth looking into.
Retail has been doing great lately and may be poised to continue its gains. However, the best way to play the sector might not be to buy retail stocks. Instead, consider buying real estate stocks that would gain from retail’s success. With that in mind, Barron’s has run a piece choosing seven real estate stocks that will benefit from retail’s growth: Simon Property Group, Link REIT, Brixmor Property Group, Public Storage, and Mid-America Apartment Communities.
FINSUM: Make no mistake, these are deeply contrarian bets given the challenges mall and other retail REITs are facing. That said, if the strategy works, it may do so in a big way.
One of the important elements of last year’s tax changes that has not been covered much by the mainstream financial press is the way in which the new tax code proves a big boon for REITs. That big gain is that the effective tax rate on REITs has been slashed from 37% to just 29.6%, a big move downward. One REIT industry expert summed up the changes this way, saying “Now, REITs have even more of an advantage over fixed-income products … Seventy percent of REIT returns have historically come from income, so any relative pickup in income is a big benefit for investors”.
FINSUM: This seems like a big help to REIT investors, and it couldn’t have arrived at a better time given that rate rises will inevitable hurt REITs a bit.
Fed minutes released yesterday showed that the Fed was closer to raising rates than many expected, which is lifting expectations that the central bank could hike before the end of the year. Three members wanted to raise rates immediately, but they were held off in a “close call”. The big consideration is the job market and whether it had strengthened enough to push inflation towards the Fed’s 2% goal. However, the other two considerations are harder to measure—the market’s preparedness for a hike, and how the US election might affect the economy. On the first point, the Fed even explicitly discussed the market’s odds that it would hike in September, a point that does not always show up in Fed minutes. The market thinks there is about a 65% chance the Fed will hike by the end of the year, but November looks unlikely because the meeting is the week before the presidential election. But depending on how that goes, it could prove a big hindrance to a hike.
FINSUM: The only election situation in which we think the Fed will still hike this year is a Clinton presidential victory and a Republican congressional victory. Markets would react mutedly or favorably to that, which would not scare off the Fed. In any other scenario, which seems less likely right now, the Fed would likely be derailed.
Source: Wall Street Journal
In what could be a very worrying sign for the US economy, food prices are plummeting at their most consistent rate since 1960. Food prices have fallen for 9 straight months, and in some places in the country, a typical food basket costs 5% less than this time last year. At Aldi, for instance, eggs cost just 99 cents a dozen. “It starts to border on irrational pricing … People are lowering prices just to draw traffic, without thinking about their margins”, said a commentator from Bloomberg Intelligence. The industry seems to be suffering from a mix of strong competition and lower margins at the same time as consumers are growing more price sensitive.
FINSUM: While consumers have powered this recovery, at least in food they seem to be tightening their purse strings. What does this say about future corporate earnings? We are not very optimistic.
The world’s biggest fund managers feel under pressure to prove that they can meet a huge surge in investor redemption requests. Big managers like Vanguard are increasing their credit lines with banks in preparation of possible mass outflows of investor Dollars that could occur during a market plunge. Vanguard has recently increased its credit line to $3 bn, a $200m increase over last summer; the company oversees $3 tn in assets. Franklin Templeton has also set up a big credit line, to the tune of $2 bn. While the managers say it is a sensible approach to dealing with investor redemptions, regulators are increasingly worried about such credit lines because of their ability to create systemic risk in a crisis.
FINSUM: This is a very eye-opening story as it shows that big managers are growing more fearful of big investor redemptions, and at the same time, systemic risk is again increasing.
Source: Financial Times