Advice for Savvy Retirement Planning

Snapchat Stock

Snapchat parent company Snap Inc. (SNAP) initiated their public offering on Thursday amid a flurry of interest in their stock. According to their IPO documents filed Thursday, Snapchat lost roughly $514 million dollars in fiscal year 2016.

Company Founder and CEO, Evan Spiegel, indicated that it is possible that they “may never achieve or maintain profitability,” due to the financial effort involved in re-investing in their business.

Snapchat StockIn their filing, SNAP indicated that “We began commercial operations in 2011 and for all of our history we have experienced net losses and negative cash flows from operations. If our revenue does not grow at a greater rate than our expenses, we will not be able to achieve and maintain profitability.”

The loss of $514 million in 2016 comes against revenues of roughly $400 million. So they are still losing FAR more than they are bringing in on an annual basis. Despite increasing revenues from $58 million in 2015 (compared to a net loss of $372 million), their losses continue to widen.

By comparison, when Facebook launched their IPO in 2012, the company was already profitable, to the tune of $1 billion a year (against a $100 billion+ valuation for it’s IPO).

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About Robert Henderson and Lansdowne Wealth Management

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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What Happened to Facebook Stock?

Facebook18 Bucks!? Since the initial public offering of Facebook stock, the price has dropped precipitously, from a starting point of $42, to a new low point today of $18.40 (as of this writing). To get an idea of the IPO process itself, you can refer back to the article I wrote on the Facebook IPO process back in February.

Why Did Facebook go Public Anyway?
As I wrote in my previous Facebook article, there are a number of reasons for companies to go public. In Facebook’s case, they had plenty of cash for operations, didn’t have debt to restructure, and the founder wasn’t retiring. The primary reason was to “cash out” the hundreds of private equity holders – namely employees – that had been promised a public offering to monetize their shares.Mark Zuckerberg

Selling it to Main Street
Before we get to the price slump, it’s important to understand the parties involved in the IPO process. It’s a complex exercise, but to keep things simple, we’ll boil it down to the IPO company (FB) and the underwriting consortium. In this case, the lead underwriting firms consisted of Morgan Stanley Smith Barney, Goldman Sachs, and JP Morgan. There were another 30 or so investment banks hired into the consortium to help sell the shares to the public. The role of the underwriters is to essentially get the shares to market by selling them to institutional (Wall Street) and retail (Main Street) clients.

“UnLike”
OK, speed-round – here it is in a nutshell:

Facebook needs to cash out their employees and owners, so they hire the big brokerage firms to take them public;

Big brokerage firms do everything they can to pump up Facebook to the public in order to create “buzz” and get the maximum stock price at the point of the IPO. The underwriters get a percentage of the “take”, so the more shares they sell at a higher price, the higher the fees to the brokerage firms;

Moments before Facebook stock is set to go public, Facebook executives reveal to the brokerage firms that their revenue and profit forecasts are not as optimistic as they once thought. FB and brokerages are forced to cut forecasts, and amend their S1 filing (a required SEC document). However, the analysts at the brokerage firms reveal this new (material) information mostly to their largest and preferred investors (a no-no);

Facebook quietly increases the number of shares available for “common” investors to buy, while at the same time existing shareholders of then-private FB stock increase the number of shares they plan to SELL when the stock goes public. Several large, institutional investors reduce the number of shares they plan to buy. This is peculiar, since one would expect the “smart money” investors to be big buyers;

FB stock opens for trading and promptly loses $4 off its stock price on the opening day. Subsequent days see additional losses and investors are perplexed as to what is happening. Facebook continues its “death spiral”, dropping all the way to $18 over the course of the next 3 months. Stock losses are exacerbated by continued selling by insiders;

In order to save face and keep the stock price elevated, Morgan Stanley (lead underwriter) becomes the single largest buyer of FB shares, with 8 of the top 9 mutual funds in the nation that hold FB stock being managed by Morgan Stanley. Investors in Morgan Stanley mutual funds left holding the bag on substantial price drop.

Facebook Stock

Facebook Stock Price Since IPO


So Why is Facebook Not Performing Better?
Quite simply, Facebook is having a hard time turning their hundreds of millions of users into revenue-generating customers. Most FB users take advantage of the free services of Facebook. Only a minority of businesses use the service to place ads or buy value-added services.

The majority of Facebook’s revenue comes from banner ads being sold to advertisers. This has become problematic, because, as Facebook has acknowledged, more and more users are utilizing smartphones to access the FB portal, and it is virtually impossible for Facebook to run banner ads on mobile devices.

Now the single greatest challenge for FB is to find a way of generating substantially more revenue from their users. It is doubtful that most users would ever agree to pay for use. And it is also doubtful that mobile advertising will ever become a reality in any material way. The most likely outcome is that Facebook will find a way to sell demographic user information to 3rd parties. Of course, this is pure speculation at this point, but all indications point in this direction.

The Bottom Line
FB is currently generating just north of $4B a year in revenue. The stock was originally priced at the IPO as if it had the potential to become a $25B+ company over a relatively short period of time. As reality set in, it became clear that it will be a challenge for Facebook to become a $10B company, let alone a $25B company.

There is much more to come over the next few months, as there are an additional several hundred million shares that can be sold on the open market (by insiders) between now and the end of the year. Fortunately, CEO Mark Zuckerberg has indicated that he plans to sell none of his shares during this period, other than amounts necessary to cover his tax bill for the IPO.

This will be one of the most closely watched stocks over the coming months, so strap in for a bumpy ride!

Robert Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

Sources:
Daily Finance
WSJ
FastCompany
Yahoo!Finance

A Wild Ride on Wall Street: Where Do We Go From Here?

Ben BernankeA Mid-Month Update
It’s certainly been a wild ride in the markets lately. After a virtually uninterrupted 6-month stock market rally that began in October of last year, and culminating at the beginning of April, we may now be witnessing a topping-off point. Certain sectors such as the real estate (investment) sector have made an equally steady march upwards during the last half-year. And despite the economic and fiscal monsoon unraveling in Europe, international markets have contributed their share of growth in global portfolios.

So what has apparently climaxed at the end of March, sidestepped and danced a bit in April, has now taken a decidedly negative turn in May. The question that has developed is whether this is a temporary setback or a more far-reaching trend.

All Is Not Well
In recent weeks and months, our concern for the state of the market has increased dramatically. The positive 6-month momentum notwithstanding, conditions in the market and the economy have deteriorated significantly – to the point where we may be headed back into another recession.

The Economy & Unemployment
There is a number of factors that lead to our evaluation of current conditions. First, the economy. There is a confluence of factors, which individually would not be cause for alarm, but taken in tandem creates a scenario which can only point in one direction. Much has been made about the slow, steady decline in the national unemployment rate. Though this is technically an accurate observation based on current measures, it is masking the larger issue beneath the surface. Political posturing leading up to the presidential election seems to be masking the fact that unemployment may be a bigger problem than it appears. Take for example the average duration of unemployment benefits (see chart below): Prior to 2009, the longest average duration of unemployment benefits (post-WWII) was in 1983 at approximately 21 weeks, with the 60-year average duration hovering around 12 weeks of benefits. Today, the average duration of benefits stands at 39 weeks, nearly double the previous all-time high. And this number is down slightly from a few months ago when the average exceeded 40 weeks.

Unemployment Duration
To further complicate the unemployment picture, individuals that have become discouraged and either dropped out of the labor force, or chose to retire early (either forced or voluntary), has risen by 2.4 million people in just the last 12 months. Additionally, the number of Americans working part-time due to economic reasons (can’t find full-time work, or slow work conditions), and those that are now under-employed has not improved in any meaningful way in the last 12 months.
The final death-blow to the labor picture is that wage-growth has actually been in decline the last five years, with the rate of growth declining from nearly 4% five years ago to just under 2% today.

Corporate Earnings
Currently, many of the bright market forecasts from so-called “experts” relies almost singularly on the fact that recent corporate earnings have been nothing but spectacular since 2009. Stock prices generally rely on a measure known as the “price-to-earnings” ratio (P/E) to establish price ranges, with the numerator being the stock price, and the denominator being the earnings of corporations (or single corporation). While it may appear at first blush that P/E’s are within a reasonable range right now, what most fail to realize is that corporate earnings (as a % of GDP) fluctuate over time, and that we are now in uncharted territory.

Let’s look at the numbers. In post-WWII history, corporate profits have generally ebbed and flowed between a low of 4% and a high of 8%, with the mean falling somewhere just shy of 6% (these are rough numbers). Even during the hey-days of the Technology Bubble in the 90’s, corporate profits peaked at just below 7% of GDP.

Fast-forward to today, and we are looking at a profit margin of just under 9%, after bouncing off 10% briefly, which is unprecedented in history. If you look at the drivers of corporate profit margins, the concern becomes even clearer. The biggest drivers of profits are Corporate Investment, Dividends, Government Savings, Foreign Savings, and Household Savings. At times, these drivers will swing profits one way or another. When savings from those three entities (Govt, Foreign investors, and Households) are positive, it is a drag on profits. When those entities are spending (the opposite of saving), it generates profits. Traditionally, Net Investments in corporations have been the largest driver of profits (blue section in chart). However, as you can see from the following chart (provided by GMO, LLC), the Fiscal Deficit has been the single largest driver of corporate profits (shown in red). Essentially, government intervention has almost single-handedly supported the stock market since 2008. (As a side-note, “Gov’t Savings” should not be confused with direct Gov’t Spending. The Savings figure incorporates many factors such as transfer payments, taxation, investment, and of course direct spending)

Corporate Profit Margins
So let’s ask ourselves these questions: what do we expect to happen next? If the Fed decides on another round of quantitative easing, are we simply kicking the can down the road to ruin? After all, had the first three rounds of fiscal “Red Bull” not been administered (after various other forms of stimulus, such as TARP), where would we be today? Will the Fed continue with another round? Who is going to pay for it in the end? If the Fed ultimately decides to end their stimulus programs, what happens to the drivers of Corporate Profits? Look again at the chart. What’s going to replace that thick red section if the Federal Government decides to finally tighten its belt? Note the substantial drop off in corporate investment beginning around 2008. Should we expect a dramatic increase in investment over the next few years? What would prompt that?

The worst case scenario is upon us. Millions of Americans are clamoring for the government to clamp down on excessive spending. At the same time, they are out picketing the excessive profiteering of corporations and the supposed under-taxation of the wealthy. Yes, we as Americans are eating our cake fast and furious. So while the federal deficit may remain elevated for some time to come, at some point, the government spending spree will stop, their printing presses will shut down, and corporate profits will quickly erode. When this happens, the stock market will quickly evaporate with it.

Unfortunately, there are no easy options. No simple fix. As the severity of the situation becomes more obvious, and time runs out with federal intervention, markets will begin to react. Then the drum beat of Hope and Change will quickly dissipate.

Portfolio Impact
As I shared with clients late last week, we lowered our allocation to “risk” assets in a meaningful way early last week. My expectations are mixed. As will always be the case in both bull and bear markets, short-term fluctuations will frequently occur (both positive and negative). These are unavoidable, and we would never suggest short-term timing strategies as an attempt to out-maneuver the whims of the markets. However, as our time horizon expands, we can more readily forecast potential long-term future returns. Given that current economic and market conditions are among the worst we have seen in the past 50 years, our outlook is not positive, hence our decision to reduce risk-on investment allocations.

We have not completely eliminated equities from our portfolios. Although conditions have deteriorated, negative conditions (or over-valued conditions) can persist for quite some time before markets respond. So leaving a modest allocation to global equities across multiple asset classes (small, mid, large, etc.) seems most appropriate at this point. The bulk of the portfolios have been spread among various fixed-income asset classes (global bonds, high yield, mortgage backed, short-duration, etc.). We have also significantly reduced our exposure to longer duration U.S. Treasuries (due to depressed interest rates and the potential for those rates to rise and negatively impact prices).

Should conditions further deteriorate, we will consider further lowering our exposure to risk assets.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.