stocks
Are Mortgage Rates Heading to 6%?
Welp, despite my calls for a reversal, or a correction of sorts, mortgage rates keep climbing higher. The trend is decidedly not anyoneâs friend when it comes to low interest rates. And itâs clear that the current environment is up, up, up, even if conventional data and news tells it should be down, even just… Read More »Are Mortgage Rates Heading to 6%?
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Warren Buffett’s Inflation Plan: Buy, Buy, Buy
Rapidly rising prices are on the radar for virtually everyone in America â even the billionaire class. Indeed, Warren Buffett himself has his eyes on inflation.
Buffett finally whipped out Berkshire Hathaway’s (BRK.B, $318.99) checkbook in a big way earlier this year, spending tens of billions of dollars in a matter of weeks.Â
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All it took was a historically bad start to the year for stocks â or at least, that’s how things would appear at first glance.
But stumbling share prices, while certainly critical, aren’t the whole story here. Warren Buffett clearly has been monitoring America’s rampant inflation, which appears to be a key factor driving his renewed appetite for equities.Â
And make no mistake: Berkshire’s chairman and CEO is hungry.
Berkshire Buys Like There’s No Tomorrow
Buffett has embarked on a shopping spree the likes of which we haven’t seen since the Great Financial Crisis. During the first quarter â¦
- The Berkshire Hathaway equity portfolio scooped up $41.5 billion in net stock purchases in the first quarter. That’s the most cash Buffett has splurged on equities in a quarter since 2008
- The Oracle of Omaha spent another $3.2 billion buying back BRK.B shares.
- Berkshire also announced that it would spend $11.6 billion to acquire insurer Alleghany outright â a deal that should close during the fourth quarter.
True, the market’s terrible start to 2022 no doubt played a starring role in Buffett’s largesse. The S&P 500 tumbled as much as 13% from its all-time high at one point in Q1. Buffett, as patient as any investor when it comes to waiting for bargains, at long last pounced â and did so with surgical precision.
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Buffett put nearly 30% of Berkshire’s massive cash pile to work in equities last quarter. And according to Bespoke Investment Group, almost 80% of his purchases came during the weakest part of the quarter.
That’s remarkable timing.
Contrast that with 2021, when the S&P 500 generated a total return (price appreciation plus dividends) of nearly 29%, or its third best run since 1997. Berkshire, however, used the market’s outstanding performance as a chance to lighten up on stocks. Indeed, the holding company was a net seller of equities in all four quarters of 2021.Â
Suffice to say that Warren Buffett is pretty adept at the whole “buy low, sell high” thing. When investors are fearful, he more often than not gets greedy.Â
Warren Buffett Makes the Most of Inflation
But there’s a second (and perhaps more urgent) factor driving Buffett’s lavish spending on stocks right now: Inflation.Â
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Remember, Warren Buffett rather famously didn’t go shopping when the market lost a third of its value in the pandemic crash of 2020. So while he hasn’t been this active buying stocks in ages â it’s not just because stocks are in a slump.
It’s because of inflation.
When prices are rising at the fastest pace in four decades, cash is trash. That helps explain Buffett’s biggest Q1 binge, says David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business and noted Buffett expert.
Berkshire raised its stake in Chevron (CVX, $162.49) to $26 billion, up from a modest $4.5 billion at the beginning of the year. That’s a big deal. The integrated energy major and Dow Jones Industrial Average stock is now Berkshire’s fourth-largest holding.
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And it’s not like Buffett scooped up those CVX shares when they were on sale. The stock traded at all-time highs in Q1.
In addition to a number of other attractive attributes, Warren Buffett also sees an inflation hedge in Chevron, Kass says. And even if oil prices level off or reverse trend, a stake in CVX is better than sitting in cash and equivalents.
“Chevron has a large stock buyback program and pays a cash dividend of 3.5%,” Kass says. “That makes it a relatively safe cash alternative. Instead of earning essentially zero on Treasury bills, why not earn a dividend yield and a buyback yield that combined probably come in somewhere in the high single digits?”
The same calculus of falling stock prices plus rising inflation can be seen in a number of Buffett’s recent buys.Â
Earlier this year, Berkshire disclosed a series of purchases in Occidental Petroleum (OXY, $59.24). Buffett’s conglomerate is now the integrated oil and gas firm’s largest investor, with 14.6% of its shares outstanding.Â
“Chevron and Occidental, to me, they make a whole lot of sense,” Kass says. “Oil, I believe, is a good hedge against inflation.”
This stocks-down-inflation-up dynamic helps explain the sudden and stark reversal in Berkshire’s balance sheet.Â
When inflation is all but dormant, as it was for more than a decade until last year, Warren Buffett was content to accumulate cash. From 2016 to 2021 â a period in which Buffett bemoaned the fact that relentlessly rising asset prices made it nigh impossible to find whale-sized acquisitions â Berkshire’s cash hoard essentially doubled, from $75 billion to about $147 billion.
Watching the cash pile up, however, was preferable to destroying capital by overpaying for assets in an aging bull market.
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But now, with share prices falling and consumer prices rising, putting cash to work in more attractively priced companies that pay dividends and buy back their own stock is almost irresistible.Â
For example, Buffett bought $600 million additional shares in Apple (AAPL, $159.48) following a three-session decline in the stock in Q1. The iPhone maker recently authorized a $90 billion share repurchase program and disburses more than $14 billion in dividends annually.Â
Or take the case of HP (HPQ, $37.9). Hefty buybacks and dividends â not to mention a cheap valuation â no doubt factored into Buffett’s purchase of a major stake in the computer and printer maker in April, Kass notes.
Topping off Buffett’s buying was an $11.6 billion outlay to outright acquire insurer Alleghany. This Warren Buffett move wasn’t tied to inflation â it just seemed a fruitful way to put more of that cash to work. Kunal Sawhney, CEO of independent equity research firm Kalkine, says Alleghany makes a perfect strategic fit with Berkshire’s extant insurance businesses.Â
Even after Buffett’s Q1 buying extravaganza, Berkshire retains $106 billion in its arsenal of financial firepower. If stocks keep struggling amid intense inflationary pressures, expect Buffett to make even more bold bets and splashy buys.Â
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Why Are Bitcoin and Other Cryptos So Volatile?
Bitcoinâs most defining feature might well be that its price always seems to be rising. In reality, however, the price of Bitcoin doesnât always go up. To get these screaming vertical price increases, there needs to be some death-defying falls as well. Bitcoinâs very volatility makes this popular crypto a tempting investment for some, and […]
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Effective Tax Strategies for the Present and Future
Did you get a surprise when you filed your taxes this year? Itâs common for taxpayers to be caught off guard â either owing more than anticipated or receiving an unexpected refund. Though most taxpayers are relieved once taxes are filed, many have little understanding about how to manage their tax situation to enhance their savings and investment strategies.
Many find the process of managing taxes too daunting and simply react to taxes resulting from savings and investment decisions, rather than implementing strategies to minimize their taxes beforehand.
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 In 2020, many investors overreacted during the pandemic and, fearing market volatility would erase investment gains, sold appreciated investments, subjecting them to increased taxes. Others sold assets in 2021 and incurred taxes because they suspected a proposed tax increase would push capital gains rates from 20% into tax rates of 37% or more, though ultimately there wasnât political support to pass such tax increases. Â
To avoid these types of reactive, knee-jerk approaches to decisions, you need a comprehensive tax strategy in place. Once equipped with appropriate strategies â such as those outlined below â taxpayers can adapt their savings and investment decisions and consider taxes as part of the equation.
Savings and Income Tax Advantages
Planning for taxes is meaningful because they influence other overarching financial decisions, including what we purchase, where we live and work, and when and where we can retire comfortably.  Managing taxes effectively requires looking at short-and long-term factors, primarily around savings and spending, investments and legacy planning.  Often taxes can be lowered depending how much is saved and what savings vehicles are used.  Current income tax rates affect our ability or willingness to save â especially in light of incentives offered by qualified retirement plans. For instance, investing in a 401(k) or an IRA can reduce current taxes and provide tax-deferred investment growth until assets are distributed. Alternatively, a Roth IRA or a Roth 401(k), may result in greater current tax payments but permit tax-free growth and tax-free distributions when funded with after-tax dollars.Â
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Choosing between those alternatives requires looking at the overall situation. An investor in the 24% income tax bracket, for example, who contributes $10,000 to a pre-tax 401(k) plan can save $2,400 in federal taxes, lowering the net overall investment âcost.â A designated Roth 401(k) or Roth IRA, assuming savings at the same $10,000 level, would not provide any current income tax break, but would allow the account owner to later take withdrawals tax-free, provided other parameters are met (e.g., five-year account period and/or meeting other restrictions).
Individuals should compare taxes saved through savings deferral at their current tax rate with those rates likely to apply once tax-deferred assets are to be withdrawn. For example, a married couple or individual with a marginal 24% tax rate who expect to be subject to much higher taxes in retirement (current highest marginal tax rates are 37%), caused by income from a pension or from other sources, may want to pay taxes on income now, and invest the after-tax dollars to produce tax-free distributions later to avoid paying taxes at higher rates. Alternatively, those expecting income to level off or be reduced once they withdraw funds may be better off with a tax-deferred 401(k) allowing them to retain current income.
Naturally, the situation can change over time, so tax-saving strategies should be revised as circumstances change.
Managing Taxable Investment Accounts
Effectively managed brokerage accounts and other non-qualified, taxable accounts may incorporate a prudent tax-loss harvesting strategy coordinated by investment and tax advisers.  Long-term investors can take advantage of lower capital gains taxes from tax loss harvesting when selling investments to cover current expense and withdrawal needs and particularly when buying and selling investments as part of their long-term investment rebalancing to maintain a desired asset allocation and to keep their portfolio diversified. Â
Investment rebalancing usually involves selling appreciated assets and purchasing others at more attractive prices to meet their investment objectives. In the process, selling appreciated assets can increase capital gains taxes. As appreciated assets are sold, investors can find opportunities to also consider selling other investments currently valued at less than their purchase cost, which can be due to temporary market volatility or other reasons related to the individual holding(s). Selling assets at a loss enables investors to capture a tax benefit. In effect, it allows them to offset any capital gains incurred from selling the appreciated assets.
Consider, for example, an investor who purchases individual publicly traded stocks. For simplicity, letâs assume 100 shares of a stock were purchased over one year ago at $200 per share (total acquisition price of $20,000) and are sold at a price of $150 per share, (total sales price of $15,000). Ignoring any cost of the sale, it generates a $5,000 long-term capital loss (long-term only when the position was sold after a one-year holding period) which can be used to offset other current year taxable capital gains when other investments are sold at market prices greater than their cost. In situations where total annual losses from all sales exceed gains â e.g., there are not sufficient gains to completely offset total losses â up to $3,000 of such loss can be used to offset ordinary income in the current year. To the extent losses exceed $3,000, (by $2,000 in the example), investors can âbankâ those excess losses to offset future gains, which can be carried over only until death under the current law and regardless of whether capital gains tax rates increase in the future.
A careful approach to loss harvesting should be guided by tax and investment professionals to avoid mistakes when managing capital gains and repositioning investments. Savvy investors can use volatile market periods to make strategic investment maneuvers, through selling to capture their available losses, and may consider repurchase of the same or similar position (the same position may be acquired only after 30 days to avoid wash sale rules). Complications by way of higher taxes can arise from violating wash sale tax rules that effectively disallow a loss if the same security or securities are repurchased within 30 days across various accounts owned by an investor.
In summary, using a tax-effective strategy that looks through a current and future tax lens can keep your savings and investing decisions on the right path for financial success.
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The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
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Bausch + Lomb IPO: What You Need to Know
Bausch + Lomb, a well-known leader in eye care, is about to hit Wall Street in what investment bankers almost certainly hope will jump-start a weak initial public offering (IPO) market.
Bausch Health Companies (BHC) is a global healthcare stock that develops pharmaceuticals, medical devices and over-the-counter medications, with focus areas in eye health, gastroenterology and dermatology.
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However, to help streamline its operations and pay down debt, Bausch is spinning off its Bausch + Lomb eye care division in what is shaping up to be one of 2022’s most anticipated IPOs.
Bausch + Lomb sells contact lenses, eye drops and even implantable lenses for cataract surgery in more than 100 countries. The division boasts more than 400 products, more than 260 of which came on the market since 2017.
You can thank Bausch + Lomb’s robust R&D arm, which has about 850 employees. The current product pipeline includes more than 100 projects, such as treatments for dry eye, contact lenses to slow myopia, and next-gen cataract equipment.
The focus on innovation has helped to grow the top line. For 2021, division revenues jumped by 10.6% to $3.8 billion â part of BHC’s overall revenues of $8.4 billion, up 5% â and the company flipped from a loss of $17 million to a net gain of $193 million.
“While it faces significant competition from other brands and generic products, the company is highly profitable with strong cash flow, and it has global brand awareness of more than 70%,” says Renaissance Capital, an IPO-focused registered investment adviser.
The Bausch + Lomb IPO will see the company list on the New York Stock Exchange under the ticker BLCO. The offering, expected May 5, should see 35 million shares listed at a price range of $21 to $24 per share. That would see the company raise $788 million at a valuation of $8.2 billion.
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The offering is a breath of fresh air in what has been a lousy year for IPOs. Financial markets platform Dealogic says that more than a thousand companies went public in 2021, raising roughly $316 billion in the process.
However, a weakening environment for stocks in late 2021 and into 2022 cramped the market’s appetite for offerings. Renaissance Capital says just 26 IPOs have priced in 2022 â off 80% from the same point last year.
Expect other potential offerings to keep their eyes trained on the Bausch + Lomb IPO. A favorable reception could get a few more new stocks into the market.