Monday, July 29, 2013
Our weekly email is aimed at keeping you up to date on important topics and changes. We hope you find these weekly emails informative and enjoyable. Each week we will bring you important updates and useful information, in an easy to understand format. Enjoy!
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In The Headlines
Facing the Abyss: Fallout from Detroit’s Bankruptcy
In 2009 General Motors and Chrysler zipped through government-sponsored bankruptcies. The final details were negotiated in a matter of weeks. With fewer employees, dealers, brands, and lower debt, both companies got a fresh lease on life. In a stroke, their cost structures had been made competitive and, with their basic engineering and design skills intact, both were re-launched with a much higher probability of success.
Getting the city of Detroit through bankruptcy will take time. Retired city workers are fighting over pensions and health care while local politicians cede power and privileges to bankers and creditors. It is doubtful that any future benefit will emerge from all the pain. So far, no one has presented an economic vision for a prosperous Detroit that seems remotely possible.
Since the riots of 1967, there have been several well-intentioned and solidly financed efforts to restore Detroit to its post-World War II prosperity as America’s Motor City. The city has been unable to stem the forces of industrial decline, dysfunctional government, and depopulation. Today, Detroit features a moderately attractive downtown that is surrounded by acres of decrepit or abandoned housing, abandoned factories, and empty lots. In all, the city has 20 square miles of vacant land, roughly equal in size to Manhattan. There are not enough visitors, commuters, or tax-paying citizens to blunt the perception that Detroit is on the verge of becoming a ghost town.
The vitality of Detroit’s few remaining viable neighborhoods will likely deteriorate as the city lays off employees and retreats farther from essential services like police protection and garbage pickup. The city faces a protracted process of forestalling creditors on the one hand and searching for new sources of revenue on the other, making it difficult to create a positive economic or social environment.
Detroit’s problems have implications far beyond its survival as a viable metropolis. Many investors worry that the city’s bankruptcy could set an unwelcome precedent by making holders of Detroit’s general obligation bonds move further back in the line of creditors, reducing the chance they will get what they are owed. Among the big questions is whether Detroit’s emergency manager, Kevyn Orr, will prevail with his plan to treat some classes of municipal bonds as unsecured debt. This comes atop concern that municipal bond prices, like those of many other bonds, could be hammered by rising interest rates after the Fed reduces its quantitative easing programs that have kept rates low.
As a result, municipal bond prices are falling, yields are rising and some investors are heading for the exits. Since early May, the yield on the 10-year AAA municipal bonds has gone from 1.66% to 2.75%. With these bonds looking riskier, investors have pulled more than $16 billion out of municipal bond funds in the past few weeks.
Millennial Homebuyers Get Spooked by a Mortgage Rate Uptick
Would-be homebuyers have been spooked by a small rise in U.S. mortgage rates, complicating forecasts for builders. The average for a 30-year fixed mortgage moved up from about 3.3% in May to 4.3% this week. Much to the dismay of those builders, younger consumers appear so transfixed by the historically low rates of recent years that they are failing to appreciate how favorably these rates compare to mortgage norms.
Recent surveys conducted by real-estate data company Trulia show that skittish buyers have become more worried about rising rates than they are about surging home prices. Some 41% of respondents cited interest rates as their primary concern, compared with 37% who pointed to prices.
Financing jitters are not just showing up on studies—those anxieties were abundantly evident in a round of reports from big U.S. homebuilders this week. D.R. Horton posted only a 12% increase in new orders for homes from the year-earlier period, less than half the amount expected, while PulteGroup saw its orders drop 12%. Analysts speculated that buyers were trying to pick the low in the pricing and the low in the interest rates.
Executives at homebuilder organizations have tried to downplay the fallout in their earnings, arguing that a lot of things are worse than rising rates; for example a supply shortage and a sluggish economy. They cited slow job growth as the number one drag on the housing market.
What can homebuilders do? Some analysts have suggested that homebuilders try giving their potential customers, especially first time buyers, a history lesson. These buyers are far more likely to balk at interest rates and have little experience with how steep rates can get. After all, they were just a few years old when mortgages flirted with 20% in the early 1980s.
The whole industry would do well to channel every crotchety grandfather who ever started a speech with “in my day,” only with a message that actually proves effective with millennials who might be in the market for a home. If they succeed, financing at 5¢ on the dollar will look like cheap money.
Are MOOCs the Future of Higher Education?
Higher education isn’t typically known for making swift changes to the way it does things. But less than two years after a trio of massive open online course (MOOC) provider startups—Coursera, edX and Udacity—began growing in popularity, every college in the U.S. News and World Report’s national university rankings is now embracing them.
The benefit of MOOCs for universities is two-fold. First, colleges and universities need to offer students the latest types of educational experiences available to keep them engaged. Second, is a desire to broaden their reach to individuals from all over the world.
SUNY and the University of Chicago are the latest in high-profile universities to join the MOOC trend. Harvard and MIT partnered in 2012 to create edX, which says it has enrolled more than 900,000 students from 192 countries in its MOOCs. Professors from Stanford University created the two other largest MOOC providers: Udacity and Coursera.
Not everyone is convinced, however, that colleges should rely on MOOCs to move into the future.
Harvard, which has 16 courses currently available on edX, came under fire recently by some professors for the way the university manages MOOCs. Its current system is based around HarvardX, an on-campus initiative that university spokesperson Michael Rutter said helps professors deliver online courses. Two faculty committees govern it: one to organize classes and the other to research the effectiveness of online-learning techniques.
Several schools are using a methodical approach similar to Harvard’s in their MOOC development. Instead of allowing professors to simply tweak traditional classes and post them online, universities are developing plans for maximizing their outreach. This often results in international exposure for the school.
Lawmakers in California are considering a proposal to allow students to replace some introductory courses with MOOCs in the state’s three higher education systems, which together have an enrollment of nearly 1 million.
Proponents of the plan, including California Gov. Jerry Brown and State Sen. Darrell Steinberg, say it could relieve stress from over-enrolled classes. It passed through the State Senate despite resistance from faculty leaders. Opponents say MOOCs cannot always replicate the engagement students receive in a physical classroom, and that the online classes are not the answer to years of budget cuts that have devastated state universities’ funding. But at the same hearing, Steinberg hinted at a different reason some professors might oppose his bill. He thinks they fear for their jobs.
MOOCs are also becoming popular for adult learning outside of the academic environment. Pluralsight is a company which markets video courses covering a wide range of IT and programming topics created by computer professionals. The company offers the videos to a base of 300,000 users from more than 100 countries. Each customer pays a monthly subscription fee of $30 to watch an unlimited number of classes, and the subscription money is divvied up among instructors based on the popularity of their videos. The company says its 125-plus instructors will take home an average of $40,000 each in 2013.
Some Good News
Everywhere you look, you see nothing but doom and gloom in the headlines. So let’s see if we can find any good news out there…
Here are a few bits of information…
- Starbucks Corp reported earnings of $0.55 per share, up 27.9% from year ago earnings of $0.43 per share, and $0.02 ahead of the consensus analysts’ estimate of $0.53 per share. Revenues were $3.7 billion, a 13.3% increase over the previous year. Growth in revenues and earnings was propelled by a 7% gain in global store traffic, as well as the launch of new products and updates to its food menu.
- Hanesbrands has agreed to acquire intimate apparel maker Maidenform Brands for $23.50 a share, or about $575 million. The price represents a 30% premium over Maidenform’s average closing price during the last 30 days. The all-cash deal has been approved by the boards of both companies and is subject to approval by Maidenform shareholders and regulators. Hanes said it expects the merger to add more than $500 million in incremental annual sales within three years.
- U.S. corporations continue to be flush with cash. Cash held by companies in the S&P 500 set a record in the first quarter of 2013 at $1.093 trillion. Cash levels have set a record for 18 of the last 20 quarters. With 47% of S&P 500 companies reporting, this trend seems set to continue. The reasons for the buildup of cash appear to be lower rates of capital investment, decreased merger and acquisition activity, and a modest level of share buybacks and dividend increases. Technology firms held the most amount of cash, accounting for 41% of the total.
Don’t you ever wonder why the media can’t spend more time focusing on the good news that happens?
Tips for Donating Your Vehicle to a Charity
In the past few years, donating used automobiles to charity has become a way for Americans to help their favorite charities and themselves at tax time. To maximize the benefit for the charity and for yourself, keep these things in mind:
Find a charity that directly accepts car donations. If possible, avoid for-profit intermediary organizations that advertise so pervasively to handle your car donations. These organizations typically keep the vast majority of the dollars created from your donation. Even the most reputable of the agencies that handle these transactions keep nearly 50% of your vehicle’s value. A charity that handles the transaction itself can keep 100% of the profit.
Drive the car to the charity. Worthy charities are going to have to pay someone else to handle a pick-up or a tow. This is another cost that cuts into the amount that gets to that organization’s programs. If you can get the car to them yourself, do it.
Make sure the charitable organization is a 501 (c) (3). While many organizations can claim non-profit status, donations to 501 (c) (4) organizations are generally not tax-deductible. These are political organizations with permission to lobby the government. Make sure your intended recipient has 501 (c) (3) public charity status.
Transfer the car correctly to the charity. Some charities will ask you to leave the assignment of ownership space on the charity donation papers blank, so they do not have to re-title the vehicle. If this is the case, find another charity. If you do not formally sign your car over to the designated nonprofit, you will be held responsible for any parking tickets that are subsequently incurred, or liable if it is used in a crime. Remember, the charity you give the car to will probably not use your car to deliver meals to the needy, but will simply sell it as quickly as possible. When someone buys it from them at auction and does not bother to register that car, it is still yours in the eyes of the law.
Value your car correctly. You cannot deduct the published fair market value of vehicles worth more than $500. Your deduction will be determined once your car is sold and the charity sends you a receipt indicating the exact amount your car garnered at auction. If your car is worth more than $500, you must complete IRS Form 8283 and file it with your yearly taxes.
Know when to use Fair Market Value (FMV) for the vehicle. There are several exceptions which allow you to use the Kelley Blue Book or a NADA guide, but you must use the fair market value, not simply the highest value listed for the year and make of your car. Use the fair market value when:
• Instead of selling the vehicle, the charity keeps and uses it
• The charity makes improvements to the car before selling it
• Your car is sold at a discounted price to a person with a low income
• The car is worth less than $500
Keep good records. Be aware that non-cash donations are one of the most common triggers to an audit by the IRS. You will want to document the value of the car and keep records of it. Remember to always get a receipt when you donate the car. Take pictures of the car and save receipts for new tires or other upgrades to verify its value.
Please don’t hesitate to give us a call if you need help with any component of your financial planning.
Thank you for taking the time to read this week’s issue of “California Educators Weekly Report.” We hope you found it to be insightful as well as entertaining. Please remember that our goal is to provide you with impeccable service. Please feel free to contact anyone on our team should you have questions or would like to discuss your goals or concerns.
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