Risk on / Risk off...........

Summary of FOMC statement: Bernanke hinting that QE nearing an end, but action remains data-dependent

1.       Change in statement:

a.        Previous: “The committee continues to see downside risks to the economic outlook.”

b.       Today’s statement: “The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.”

2.       Key Bernanke sound bites relating to tapering of QE:

c.        “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,”

d.       “And if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

e.       “If you draw the conclusion that I just said that our policies -- that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy. If the economy does not improve along the lines that we expect, we will provide additional support.”

I wanted to share some of our Chief Investment Officer's comments regarding the current market reaction to the above:

After yesterday's press conference from Mr. Bernanke it is clear that the market is back in risk-off mode but we ask the question why are all asset classes moving in the same direction and on the surface the only safe place to be looks like cash????

  

Mr. Bernanke signaled that should the economy continue to improve then the Federal Reserve will start to taper the Quantitative Easing that we have seen over the past few years or in other words they would slowdown their $85 billion per month bond buying and eventually end the buying sometime by mid-2014. This potential tapering has been talked about since Mr. Bernanke mentioned it at the Senate and Congressional hearings in late May and the markets have seen a pull back since that meeting especially when we look at 10 yr bonds in the US. With his confirmation of such at yesterday's press conference the markets have continued their risk-off activity. However, we ask the question if the economy is improving why are the stock markets declining rapidly???

  

As we are all aware the High Frequency Traders control the markets these days and with stocks in a selling phase these High Frequency players exaggerate the problem. So why the sell-off at all?? Well it's called the carry trade and for those of you that have been around long enough I am sure you will remember the great unwind of the Yen carry trade. Basically Investors borrow money at low interest rates and buy stocks, as interest increase the cost of the carry increases and therefore investors are forced to sell stocks and payback the loans. We expect this unwind to continue for the next few days!!!!!

  

So what is going to happen over the next few months?? Volatility and lots of it!!! What Mr. Bernanke has done here is increase the odds of extreme volatility around economic releases as he clearly noted tapering will be data dependent. We expect that the market is going to be thrown around on a regular basis here as Housing and Employment numbers are improving yet Manufacturing and overall Growth remain subdued. -SJ.

This correction was an overdue and welcome event in my opinion. We've been watching the margin levels of investors continuously increase over the last year, mostly on the back of continued QE... The forced covering will bring asset prices back to more normalized levels, and the potential for long-term fundamental investing can resume.

Hold firm to your disciplines. Be proactive, not reactive. Conviction is key.

Regards.

E

"Since WW2, investors have endured a total of 56 pullbacks, 19 corrections and 12 Bear Markets."  (S&P Capital)

Selling Your Business? Planning is key........

One of the core pillars of our practice is in working with business owners in and around Calgary. We have been assisting them with proper succession planning, valuation, tax savings strategy, pension and income planning, family security, and eventual estate optimization for a number of years now. In preparation for our fall series for business owners, we will be posting articles and tips that cover some of the key aspects of a succession plan, starting today with Estate and Tax:

In many cases, the owner of a small business wants to pass the business on to succeeding generations, typically children. This can be done through a Will when the person dies but the person may want to do this while they are still alive. There can be compelling tax reasons to do this. An 'estate freeze' is a mechanism where ownership passes to the next generation while the owner is still alive. Here are the different types of estate freezes:

Paying Tax Now

Under tax law, if an asset such as a company is transferred to another party, either to family member(s) or another arm's length party, it is considered to be a sale at the fair market value. This can result in substantial capital gains tax in the year of the transfer if the company has increased in value. However, if you transfer now, any subsequent growth is attributed to the new owners.

Use of Trusts

One way to do an estate freeze is to have the shares of a company transferred into a trust with family members as the beneficiaries. You may be able to establish yourself as the trustee and retain control but if the beneficiary of the trust is not your spouse, you will have to pay capital gains tax since the transfer will be as if you sold the shares. Again, tax on any subsequent growth in the shares is the responsibility of the trust and/or the beneficiary.

Section 85 Rollover

In the previous two examples, there may be immediate tax implications by transferring a company to your family now. A further issue that can arise is that the owner will lose control of the company. The Income Tax Act provides a mechanism that allows an effective change of ownership while still enabling the original owner to maintain control of the corporation. This is the Section 85 rollover.

The Section 85 rollover can be a very practical and tax efficient strategy. However, it can also be rather complex in the details and is another area where professional advice is highly recommended.

Situation:

Lori Strong wants to pass her wholly owned company, Lori Inc. to her two children, Sarah 34, and Chris 32. Her shares of the company have a cost of $1 million. A qualified business valuator has determined the current fair market value to be $5 million so the shares have increased in value by $4 million.

Setting up a Holding Company

A Holding Company, Holdco Inc, is set up. Sarah and Chris are equal shareholders and they each buy 100 common shares for $1 per share.

Using Section 85, the shares of Lori Inc, are transferred into Holdco. In return Lori receives preferred shares of Holdco worth $5 million, the fair market value of the Lori Inc. shares. These preferred shares have voting control over Holdco and are retractable at Lori's discretion, which means she can redeem them for $5 million. Lori can choose a transfer value for the shares of $1 million - her cost. Lori will not have to pay any tax on the preferred shares until she eventually sells them.

Since the preferred shares have a set value of $5 million any subsequent increase in the value of the Lori Inc. shares will accrue to the two common shareholders of Holdco Inc., Sarah and Chris.

By doing this, Lori has managed to keep control of the company, deferred any immediate gain, and has passed on any subsequent growth to her children.

One of the important features of the Section 85 rollover is that Lori will have discretion in regards to the transfer value of the Lori Inc. shares. For example, although the shares currently have a fair market value of $5 million, under Section 85 she may be able to transfer the shares at their cost of $1 million, avoiding any immediate tax since the transfer amount chosen ($1 million) is the same as her cost. The children would have a tax cost of $1 million for the assets (the shares transferred) and the owners of Holdco Inc. shares (Chris and Sarah) will not have to pay any tax until they dispose of the Lori Inc. shares in the future.

Your advisor will be able to provide you with additional general information on Section 85 rollovers and how to proceed if it appears that this strategy would be right for you.

Be sure to update any other documentation that may contain information related to your company, such as the information contained in this personal record keeper and personal and financial log book. Share your personal record keeper with your loved ones including your Executor or Executrix. Provide a copy of your personal and financial log book to your financial advisor so that he/she can have a better understanding on how your financial situation is changing.

Once a month I will be putting up key articles on Business Succession Planning in preparation for our fall series of luncheons on the subject.

*Please forward this on to anyone you know who may be going through the motions of selling or succeeding their businesses in the coming years. (*Early planning is key.)

Or, if you have any questions, or if you would like to meet personally to have a discussion, shoot me a message.

Best Regards.

Eric