Risking Retirement on Selling the Business

Sell the business. That sums up how many small business owners hope to fund their retirement years. They are “significantly less likely” to have diversified retirement assets than employees do, increasing their financial vulnerability as they get older, according to a new analysis (PDF) from the Small Business Administration.

“There is a risk of significant consequences if the business goes bad,” says Jules Lichtenstein, the SBA senior economist who authored it. “There’s a double-whammy if something happens to that company because you’ll lose your income and your retirement assets.”

The findings do not surprise Marcus Newman, a vice president at GCG Financial outside Chicago. He has advised small business owners since 1997 and says he has 500 clients who own businesses with 150 and fewer employees in 38 states. “I can’t begin to tell you the number of times a small business owner tells me, ‘Look around—this is my retirement plan.’ Their idea is that someday in the future there will be a buyer for their business, they’ll sell it and the dollars generated is what they will retire on. But practically, in my experience, more clients go out of business than sell their business.”

The SBA analysis is the first time that retirement savings patterns of individuals who earn a high percentage of their income from a business and hold a high percentage of net worth in business assets have been examined in detail. The report draws on data from the U.S. Census Bureau’s Survey of Income and Program Participation. It was collected from August 2009 to November 2009 and includes responses from 4,773 business owners with fewer than 100 employees and 31,512 private wage and salary workers.

A separate study (PDF) also released this month showed that small business owners expect to retire significantly later in life—at the age of 72 vs. 68—than their wage-and-salary counterparts do; some don’t plan to retire at all.

Lichtenstein’s study shows that the owners of the smallest businesses, those with 25 employees or fewer, are significantly less likely to hold retirement assets and more likely to depend on home equity as their largest asset than are owners of larger companies, whose biggest assets are more likely to be in business equity and in stocks or mutual funds. He was unable to get separate data on self-employed individuals, Lichtenstein says, but he suspects they are even more financially vulnerable in retirement.

Newman’s experience backs that up. “Do you know how many former general contractors and plumbers and electricians are now working the aisles in Home Depot (HD)? Small business owners are not known for planning and putting money away, and many would rather invest in their business because they are entrepreneurial,” he says. Many of his clients who had hoped to sell in recent years have put off retirement indefinitely because they can’t get the price they had hoped to obtain for their businesses.

While many policies have been put in place over the years to encourage small business owners to accumulate savings in specially designed accounts such as SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) plans, those policies have produced only minor gains, the SBA study notes.

The data Lichtenstein analyzed suggests that federal rules may need to be reexamined to help boost retirement savings for entrepreneurs, he says. The Obama administration has proposed new policies to expand retirement savings, including instituting a program of automatic IRAs for the approximately 75 million Americans who are not covered under employer-sponsored retirement plans. Such a program might be usefully expanded to include business owners as well, the study concludes.

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Stocks Await Their Tipping Point

If you really think about it, Fed Chairman Ben Bernanke has this Clark Kent thing going on. By night, he is a soft-spoken family man, more blue collar than blue blood—an academic who carries a Jos. A. Bank charge card. By day, he flexes monetary superpowers, including the ability to conjure up trillions of dollars to buy Treasuries and mortgages.

One thing SuperFed can’t do—at least not directly—is goose the economy and popular confidence by buying stocks. It can, however, do this transitively, by inducing what Wall Street likes to call a “pain trade”—forcing investors out of the perceived safety of risk-lite Treasuries. Then, if all goes as planned, they will find themselves maxing opportunity out of yield-sapped corporate bonds, including higher-risk junk bonds. Bernanke, you see, is making investors grovel for return. And if they grovel long enough, they are bound to finally make that capital-structure leap of faith to the stock market. Retirement-account values will go up. Companies will have more valuable currency with which to make acquisitions. Hiring and consumption could well take heart.

Fifteen years after Bernanke’s predecessor Alan Greenspan famously warned of irrational exuberance in markets, the long-awaited great migration back to equities (following the 2000s’ two growling bear markets) has yet to happen. But if things continue apace, and Bernanke keeps doing what he’s doing, it could take hold any day now.

“We’ve come from financial depths that none of us have ever seen,” says Meg Green, chief executive officer of Meg Green & Associates, an Aventura (Fla.) wealth manager. “As night follows day, though, there’s light at the end of the tunnel. Riding the market waves should become second nature, letting longer-term portfolios travel on an upward trend.”

In the meantime, it’s been all fixed-income, all the time. (Not that stocks have been banished to Vladivostok. The Standard & Poor’s 500-stock index is up 14 percent so far this year, and has more than doubled off its financial-crisis low.) Investors have plowed just under half a trillion dollars into bond funds this year, according to EPFR Global. Thanks in large part to record-low borrowing costs brought on by the largesse of the Federal Reserve and its overseas counterparts, the bond market is putting the finishing brushes on an all-you-can-eat year. Corporate bond sales from the U.S. to Europe and Asia have crossed 2009’s record to reach $3.89 trillion, up from $3.29 trillion last year and $3.23 trillion in 2010, according to data compiled by Bloomberg. In the U.S. alone, issuance also set a record, hitting $1.45 trillion, compared with $1.13 trillion last year.

Amid that feeding frenzy, the extra yield investors demand to own corporate bonds over Treasuries is at a mere 2.23 percentage points, compared with 3.51 at the end of last year, according to Bank of America Merrill Lynch’s Global Corporate & High Yield index. “Junk” is no longer a pejorative.

As the corporate bond market gets its dregs scraped, repeatedly, Wall Street’s capacity to transact the stuff is being strained. An average of $16.93 billion of investment-grade and high-yield bonds traded every day this year, while the value of outstanding corporate bonds rose to $5.72 trillion. Last year’s average daily trading volume of $15.73 billion occurred amid $4.86 trillion of debt outstanding.

Mark Freeman, chief investment officer of Westwood Holdings Group in Dallas, thinks this pigout is primed to relocate to equity markets, which have yet to revisit their records. “A group of investors, which I refer to as ‘bond market refugees,’ have to find a new home in order to meet their income needs,” he says. To underscore how crowded a trade he believes bonds have become, Freeman highlights that the investment-grade universe trades at a price-earnings multiple of 58, while junk bonds change hands at 16 times earnings. He says that “if corporate earnings can show any growth at all next year, which I believe they will, it is very unlikely the Standard & Poor’s 500 index will continue to trade at a p/e of 13, especially given that it has a higher yield and the potential for earnings growth—something bonds cannot offer.” Of the emerging risk-reward calculus, Freeman says: “Given the current environment, bond investors will eventually find high-quality, dividend-paying stocks as an attractive alternative.”

The question is, can the Fed pain trade last long enough—and without a shock that’s out of its control—to push investors en masse into the stock market. For all Bernanke’s superpowers, he’s not omnipotent.

In a Dec. 17 report entitled The “Bond Bubble”: Risks and Mitigants, Fitch Ratings noted that if interest rates were to revert rapidly to early-2011 levels, a typical, 10-year investment-grade corporate bond could lose 15 percent of its market value, while a 30-year equivalent would take a 26 percent hit.

Such a blindsiding—you can actually lose money in bonds?—would spoil the long-awaited rapprochement with equities.

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Newtown Fallout: Cerberus Retreats From Guns

While President Barack Obama and other Democratic politicians clear their throats about proposing new gun control laws sometime next year, the marketplace is responding swiftly to the Newtown, Conn., elementary school massacre.

Dick’s Sporting Goods (DKS), one of the largest retailers in its industry, said Tuesday it is suspending the sale of certain military-style semiautomatic rifles similar to the one used by the Newtown killer. Fox News reported that Discovery Channel (DISCA) has decided to cancel its popular reality show, American Guns.

Less visible to consumers, but no less important, Cerberus Capital Management, a $20 billion private-equity firm based in New York, announced overnight that, under pressure from the California teachers’ pension fund, it will sell its controlling stake in the country’s largest guns-and-ammo manufacturer, a conglomerate called Freedom Group. The semiautomatic rifle used to slaughter 26 people at Sandy Hook Elementary School, 20 of them children, was made by Bushmaster Firearms, one of the companies operating under the Freedom Group umbrella.

The California State Teachers’ Retirement System, which has $751 million invested with Cerberus, said it would review its relationship with the private-equity firm, “given the tragic events last Friday in Newtown, Conn.” Cerberus then followed with its announcement, saying that unloading Freedom Group “allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate” on gun control.

Bloomberg TV’s Tom Keene asked me this morning on his Surveillance program whether this the beginning of something akin to the divestment campaign aimed at breaking South Africa’s apartheid system. That’s a provocative question. The answer is probably no, and the reasons shed light on the nature of the American gun market.

Gun ownership in the United States is not apartheid. Millions of Americans relish firearms and use them for lawful hunting, shooting sports, and self-defense. To many people, guns represent individualism and self-reliance. The U.S. Supreme Court has interpreted the Second Amendment as protecting an individual right to keep a handgun in the home. Forty-nine states allow people to carry concealed guns. A federal appeals court recently said that the sole holdout, Illinois, violated the Second Amendment by prohibiting concealed carry.

The $2 billion American gun industry is not the South African economy. The gun market historically has been fragmented, made up of relatively small companies. It consolidated in recent years, driven largely by Cerberus’s having bought companies such as Bushmaster (as well as Remington, Marlin, and Para USA) in hopes of squeezing redundancies from their operations and selling off the roll-up in an initial public offering. To Cerberus’s frustration, the IPO stalled for reasons that have nothing to do with Newtown. (Finding efficiencies and cross-marketing opportunities turned out to be more difficult than the private-equity gurus anticipated.) Now, Cerberus will use the cover of renewed controversy over gun control—and the suddenly shocked sensibilities of the California teachers pension-fund managers (from whom Freedom Group’s business presumably had not been kept a secret)—to dump a guns-and-ammo play that wasn’t working out smoothly.

There are personal elements in play, as well. Stephen Feinberg, who founded Cerberus in 1992, is an avid hunter and gun enthusiast; his father, Martin Feinberg, lives in Newtown and told Bloomberg News that the shooting was “devastating.”

Cerberus’s move—and the prospect that the companies within Freedom Group will get sold off individually or in small clumps—will return the ordinarily fractious gun industry to something closer to what it looked like a half-dozen years ago. Smith & Wesson (SWHC) and Sturm Ruger (RGR), the two publicly traded gun makers in the U.S., will stand a little larger in relative terms. Glock, Beretta, and Taurus will continue to import guns from, respectively, Austria, Italy, and Brazil (as well as assemble weapons in their U.S. plants). And overall, gun makers will likely enjoy increased sales over the next six to 12 months, as consumers buy additional pistols and rifles out of fear that their favorites might be more difficult to obtain if Democrats succeed in pushing through new restrictions.

There will be additional post-Newtown reaction from retailers and from Hollywood. Wal-Mart (WMT) is a major gun seller. It accounts for about 13 percent of Freedom Group’s sales, for example. The world’s biggest retail chain will doubtless come under pressure from anti-gun activists to curb its firearms sales, and the image-conscious company may follow its more specialized rival, Dick’s.

In the entertainment world, the cable channel TLC has already delayed airing a show called Best Funeral Ever. Violent movie trailers might get postponed or edited. The massacre during a showing of The Dark Knight Rises in Aurora, Colo., in July prompted Warner Bros. (TWX) to pull the trailer for the forthcoming Gangster Squad, which depicted a theater shooting. Later the studio cut the scene entirely.

Whether marketplace behavior will change over the long haul is a different question. Gangster Squad‘s opening was delayed but not cancelled. The film, pitting organized crime killers against police in Depression-era Los Angeles, is now slated to open in theaters next month, and it will still include plenty of gunplay.

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The UBS Libor-Fraud E-mails Are a Gift for Regulators

Just a week before Christmas, the Libor scandal is a gift that keeps on giving. The Swiss bank UBS (UBS) has been fined $1.5 billion and two of its former traders were charged with conspiracy in the United States, while U.K. regulators released a report (PDF) that captures the bank’s employees engaging in routine, casual, and brazen manipulation of what has been called the world’s most important number.

“Libor” is an acronym for the London Interbank Offered Rate, a key interest rate that affects borrowers, small and large, around the world. It’s a measure of how much banks pay to borrow from each other, as measured and submitted by themselves. That self-reporting aspect makes it ripe for distortion, as banks have sought to adjust it by fractions of a point up or down to eke greater profits out of their trading activities. UBS was far from alone in rigging the numbers—in June, Barclays (BCS) was fined about $450 million over Libor-fixing allegations, and its chairman, chief executive, and chief operating officer all resigned.

The report on UBS issued on Tuesday by the U.K.’s Financial Services Authority is an incredible document stuffed with colorful interactions among traders, managers, and other bank personnel—and their counterparts at other companies—as they go about skewing Libor numbers to their benefit. Thousands of wrongful requests were made, the regulators say.

On Sept. 18, 2008, according to the FSA transcripts, a trader wrote this to a broker about six-month Libor rates: “if you keep 6s unchanged today … I will f—— do one humongous deal with you … Like a 50,000 buck deal, whatever … I need you to keep it as low as possible … if you do that …. I’ll pay you, you know, 50,000 dollars, 100,000 dollars… whatever you want … I’m a man of my word.”

Earlier, on March 29, 2007, according to the transcripts, a trader asked a manager for low Libor submissions. The manager replied, apparently in pique: “i dun mind helping on your fixings, but i’m not setting libor 7bp away from the truth i’ll get ubs banned if i do that, no interest in that.” (“BP” stands for basis point, or one one-hundredth of 1 percent.) The trader replied that he didn’t want UBS banned, either, but “any help appreciated.” The submission ended up being two basis points less than it should have been. To recap: manipulating Libor by seven basis points is unacceptable; manipulating it by two basis points is far less a problem.

And in July 2009, according to the report, a broker at another firm chatted with a UBS trader about how not to get caught rigging six-month Libor rates—do it gradually, not all at once. He typed: “if you drop your 6M dramatically on the 11th mate, it will look v fishy.” The trader replied: “don’t worry will stagger the drops …”

Brokers and traders refer to themselves and each other as “SUPERMAN,” “HERO,” and “captain caos,” among other nicknames in the transcripts, as they manipulate Libor rates.

The evidence against UBS is strong enough that its Japanese subsidiary pleaded guilty to wire fraud, a rarity in financial enforcement. Banks usually settle charges with a fine and no admission of guilt. Beyond being highly incriminating, the material in the FSA report is embarrassing. As my Bloomberg Businessweek colleague, Karen Weise, advised when she reported in June on the release of another set of damning Libor documents: When participating in a global fraud, don’t talk about it in traceable e-mails.

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The Case for Apple's Stock Price Falling to $270

Apple has been slumping. In September, the stock hit an all-time high of $705. On Monday morning, it briefly traded below $500 in pre-market trading. (As of 11 a.m. ET, it was back up around $507.) At least one analyst predicts it has much further to fall. Since January, Edward Zabitsky of Toronto-based ACI Research has been arguing that Apple (AAPL) is headed to $270 a share. He now sees the stock reaching that level in 12 months. Zabitsky, who is ranked as analyst tracker StarMine’s top semiconductor and semi-equipment stockpicker, says his bear case for Apple comes down to increased competition; the diminishing appeal of its closed-architecture App Store experience; and questions about management and Apple’s ability to innovate more than a year after the death of founder Steve Jobs.

Here’s his case against Apple.

Competition from Microsoft
Microsoft (MSFT) continues to execute on its efforts to regain relevance with consumers and maintain its dominance of the corporate market. Core properties Office, Skype/Lync, Xbox, and Skydrive are becoming available across multiple platforms. Microsoft’s strategy is to extend its dominance in enterprise, desktop, and notebook computing to tablets and phones.

Competition from Samsung
Samsung (005930) is the smartphone leader. The Galaxy S II and Galaxy Nexus allowed Samsung to gain market share from other Android vendors. Now the Galaxy S III and Galaxy Note II are threatening Apple’s dominance of the high end. Samsung has sold more than 30 million GS3s and 5 million G-Note 2s. Those phones are leading the way to larger displays for video consumption. The G-Note’s multi-window interface is probably Samsung’s greatest UI enhancement to date. The GS3 is a serious challenger to the iPhone.

Web Apps vs. the App Store
The rollout of 4G networks is vastly expanding bandwidth, while advances in Web standards are allowing Facebook (FB), Amazon (AMZN), Netflix (NFLX), and YouTube to take control of their presence on phones. They are using Web apps to avoid the App Store, and consumers are noticing. That iPhone 5 customers unhappy with Apple Maps are easily able to switch back to Google Maps (GOOG) shows that Apple’s grip on the consumer—and its ability to extract high profit margins—is weakening.

Leadership
Management discord in Cupertino, as illustrated by the recent ouster of Scott Forstall, the head of Apple’s iOS software group, is another cause for concern. Apple, Zabitsky argues, must “develop a more unified approach between its Mac and iOS groups. More than a great innovator, Steve Jobs was a unifying force who was able to challenge people to bring their best game.” He says he doesn’t believe the Apple Maps fiasco would have happened under the late founder.

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In a World Full of Risk, Why Are Investors So Calm?

The economy and markets of 2012 sport nearly as many risk factors as a Cialis ad: Four years into full monetary tilt, does the Federal Reserve much know what it’s doing, and should we grow to expect QE6? Can a recessionary, politically scattershot Europe apply a cordon sanitaire around the still very real threat of contagion? What will arrest chronically high unemployment and food-stamp usage here at home? What of that beyond-cliche fiscal outcropping: Do you take your tax hit now, or pray that January turns out OK? All this uncertainty makes you want to snuggle up to the warmth of punitively yielding U.S. Treasuries.

And yet at least one measure is telling us that the overall mood of the market has never been so sanguine. I like to read “Perception,” an indispensable monthly analysis by Leuthold, the Minneapolis asset management and research shop. Of all the jagged, funky charts still getting spooled out in the aftermath of the financial crisis, this one keeps grabbing my attention:

Can it be? Leuthold’s monthly Risk Aversion Index, which bakes together various credit and swap spreads, commodity and currency prices, and relative asset returns to offer a broad gauge of skittishness, is at a record low going back to 1980. That span includes the Crash of ’87, the rolling emerging-market contagions of the 1990s, and the multiple human and financial calamities of the past decade.

Another reading, the JPMorgan (JPM) G7 volatility index, is at lows unseen since peak swell of the private equity bubble, when Blackstone’s (BX) Steve Schwarzman hoarded $40 crab claws and few suspected that Greece’s and Spain’s books were sauteed. (Speaking of a private equity bubble, don’t look now, but it seems like 2012 is staging a redux.)

How does this overwhelming calm jibe with the prevailing uncertainty of our times?

“The so-called Bernanke put—or, more accurately, global central bank put—is suppressing most of the risk and fear gauges,” says Leuthold’s Chun Wang. “And just about all asset classes, risky or risk-free, have been bid up.” Wang finds that low-fear backdrops like this historically last much longer than high-fear ones, and that increasing signs that housing and China are on the mend only add to the general chill-out.

It’s been a paradoxical climate for investors, who have seen the rather unique confluence of low economic growth with double-digit global equity returns—something that normally doesn’t happen in the absence of post-recession relief rallies and/or significant interest-rate declines.

Some are already conflating all this calm with complacency, warning that danger lies ahead.

Myles Zyblock, chief institutional strategist at RBC Capital Markets, worries that the market isn’t sufficiently taking into account the risk of an economic-policy debacle. In a note to clients last week, he plotted the Chicago Board Options Exchange Volatility Index (“the VIX”) against a policy-uncertainty index developed by Stanford University and the University of Chicago. The VIX, wrote Zyblock, appears to be “a coiled spring,” as the performance gap between the index and the policy gauge shows investors are too focused on rising home and car sales, improving unemployment, and other promising indicators, all while giving short shrift to big policymaking hazards. “A predilection for government can-kicking” hasn’t eliminated the risk stemming from the fiscal-cliff negotiations and other policy decisions, he wrote. “And, from our lens, the risk is large.”

In October, at Grant’s Fall Conference, Artemis Vega Fund manager Christopher Cole gave a presentation—contrarian, if you buy today’s calm—entitled “Bull Market in Fear” (PDF). “Imagine the world economy as an armada of ships passing through a narrow and dangerous strait between the waterfall of deflation and hellfire of inflation,” he wrote, in a slide adorned with vivid apocalyptic art. “Our resolution to avoid one fate may damn us to the other.” Cole then channeled Donald Rumsfeld to urge the audience to “hedge unknown unknowns and sell known unknowns.”

Dizzy? Blurred vision? Consult your doctor.

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Citigroup Downgrade Pushes Apple Shares Near $500

Shares of Apple (AAPL), one of the most popular stocks among retail investors and hedge funds alike, broke through a psychological level this morning by falling to $499 in premarket trading. The stock is down 28 percent from its all-time high of $702 two months ago (but it’s still up more than 25 percent on the year).

Some of the movement is due to a Citigroup (C) report, published today, that downgrades Apple to a “neutral” rating over concerns that it has scaled back orders from its Asian suppliers. At least four other banks have lowered their guidance on Apple this month, according to Bloomberg data, although 84 percent of analysts still rate the stock a buy. Fewer than 5 percent label it a sell.

Plenty of Apple bulls still exist—one example being Brian J. White, an analyst at Topeka Capital Markets, who this morning reissued his Apple price target of $1,111 per share. White cited record iPhone 5 sales in China of 2 million, in the device’s first three days in stores.

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