Friday, November 15, 2013

Best Buy: All In On Black Friday

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Best Buy: All In On Black Friday

Brian O'Connell Wall Street analysts had a field day last January downgrading retail stocks, especially Best Buy (NYSE: BBY), the investment class's favorite whipping boy heading into 2013.

Well, who's getting whipped now?

The shorts certainly are, betting against a stock that has risen 275 percent so far this year.

Yes, I get the critical thinking involved. Here's a brief laundry list of the main reasons why retail stocks were supposed to be in full retreat this year:

•    The economy was still sour, causing U.S. consumers to pull back on spending.

•    Political bickering throughout the year (see: "government shutdown", October, 2013) would spook consumers, once again causing them to snap their wallets and pocketbooks shut.

•    U.S. energy prices would rise significantly this year, taking valuable spending resources away from consumers obligated to pay higher heating bills and pay more for gasoline at the pump.

•    The end of the payroll tax cut in January would cut into disposable income, leaving fewer dollars for blue jeans and baubles.

But Americans proved resilient in the face of those economic headwinds, and even got a few breaks along the way.

First, consumers batted away the political nonsense going on in Washington, D.C., and spent money anyway. New data show that consumer spending has risen steadily throughout 2013. Also, oil prices have largely been in decline this year.

With weaker headwinds than anticipated, U.S. consumers have stepped up and buoyed retails stocks, with Best Buy at the top of the list.

On January 1, BBY's share price stood at about $12 per share. As of November 15, with Black Friday only two weeks away, Best Buy is trading at $44 per share, sending shivers down the spine of retail short sellers everywhere.

Can Best Buy keep it up?

Yes, it can, and definitely for the short term.

The big box retailer is letting no grass grow under its feet this all-important holiday shopping season, with a slew of deeply-discounted consumer devices, and a slick move to start Black Friday on Thanksgiving Day (the store is opening its doors at 6:00 p.m. on the holiday).

Purists won't like that, even though shoppers will.

Holiday shoppers are expected to be out in force this year. Adobe is forecasting the biggest holiday shopping season ever, with $1.1 billion being spent on Thanksgiving Day; $1.6 billion on Black Friday; and $2.3 billion on Cyber Monday.

With a shorter holiday season, based on the calendar, retailers have had to get more creative to attract shoppers, a task that should prove successful, analysts say.

"This year will be the shortest online shopping season with only 27 days between Thanksgiving and Christmas," says Tyler White, a principal analyst at the Adobe Digital Index, which canvasses retail sales every holiday season. "By comparison, there were six more days to shop in 2012."

He adds: "While online sales are still expected to grow by 12 percent, the shorter season will cut a whopping $1.5 billion in potential online sales from retailers. Typically retailers launch big holiday promotions on Black Friday, a date that moves around each year. As a result, they have conditioned consumers to wait for the best deals and this year there simply won't be as much time to shop. Successful retailers will offset losses by helping early shoppers know that they don't need to wait until Thanksgiving weekend to get the best deals."

Best Buy is doing all that, and in spades.

The retailer has been building up to the holiday shopping season with a bevy of advertisements and discounts, reaching out to repeat customers through social media sites like Facebook (NASDAQ: FB) and Twitter (NYSE: TWTR).

But the real launch point will come when consumers are really ready to buy on Thanksgiving and Black Friday. To grab their attention, the store is implementing drastic discounts. Obviously, Best Buy is counting on the fact that once a shopper grabs a discounted item, they'll keep right on shopping, both at the store and online.

It's a bet that I expect Best Buy to win. Consequently, for a short-term portfolio boost, grab Best Buy through the holidays, and hang on for a wild and profitable ride with the hottest retail stock on the market these days.

Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets.

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The Fed: More of the Same

Benjamin Shepherd As the head of an independent agency subject to little Congressional or executive intervention, the chairperson of the US Federal Reserve wields an enormous amount of power over America's economy.

By and large, the only real check on a Fed chairperson's authority is the requirement that policy be set through the consensus of the Federal Open Market Committee (FOMC). Historically, though, the seven members of the Federal Reserve Board of Governors fall in line with the chairperson, with the only real dissent coming from the five Federal Reserve Bank presidents who also have votes on the FOMC. So what a Fed chair wants, a Fed chair usually gets.

That makes it worth noting that Janet Yellen, the current number two at the Fed and the nominee to replace Ben Bernanke when his term expires on January 31, veritably sailed through her nomination hearing before the Senate banking committee yesterday.

Some lawmakers on the committee aggressively questioned Yellen on what the Fed has done so far to ensure the stability of the nation's banking sector and how the Fed is progressing with writing the new rules mandated by the Dodd-Frank financial reform law. However, there was none of the acrimony that so often marks confirmation battles.

Given the relative conviviality of the hearing, the committee is expected to vote to send Yellen's nomination to the full Senate sometime next week despite the fact that Senator David Vitter (R-LA) has said that he will oppose her confirmation. And with the Senate controlled by the Democrats, several of whom signed a letter recommending her nomination to President Obama, the odds are that we'll have a new Fed chairperson sometime next month.

That's important to our inflation outlook. While she walked a fine line pointing out that inflationary danger lurked no matter what action the Fed took, Yellen also stressed that removing the support of quantitative easing (QE) too soon would be devastating to the economy. She essentially hewed to the Bernanke line, saying that she would only consider ending QE once the unemployment rate fell below 7 percent.

She also asserted that she saw no evidence of an asset bubble forming as a result of QE—many believe that the rapid rise we've seen in equity valuations are largely a result of QE. Consequently, she shows no inclination to change the current course of monetary policy.

There's some inflation in the economy today and by our measures it is well above the government reported 1.2 percent. We're not staring hyperinflation in the face any time soon, but I do believe there's a potentially massive inflationary hangover waiting for us down the road.

My greatest concern at this point isn't just the extremely unconventional nature of the Fed's economic intervention; it's that our central bank isn't the only one in the world going down this primrose path.

Two of the world's other largest economies are also stimulating at a furious pace. The Bank of Japan is pushing trillions of yen into that nation's economy and the European Central Bank's recent rate cut to 0.25 percent leaves the euro zone flirting with a zero interest rate policy. There's a lot more money than just the Fed's $85 billion in monthly asset purchases flowing into the global economy.

This much monetary support pumping through the global economy is entirely unprecedented, so it's tough to believe that central bankers around the world actually have a handle on the potential consequences three to five years from now. It appears that inflation is simply being baked into the cake we've been eating for four years.

I'm not so much bothered by the fact that Yellen looks to be coasting into the big chair at the head of the table—she had a ringside seat for most of the global financial crisis—but by her apparent lack of a stimulus exit plan. When pressed on how she would identify asset bubbles or inflation forming, her response was basically that she would know it when she saw it.

The upshot for investors: Yellen's confirmation, with her prescription for more of the same, means that we should continue to watch for signs of building inflation. When governments print more money, it reduces its value and causes prices to rise as producers need to get more for their product. And in today's interconnected society, when one central bank prints money it impacts everyone. One need only look to the huge run up in many emerging market stocks to see the effect.

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Avoiding Taxes on Your IRA

Bob Carlson

Yes, your IRA could be hit with income taxes, even if it's a Roth IRA. This is nothing new. The potential for an IRA or other qualified pension plan to owe taxes has been in the law for a long time. It hasn't affected many investors, because it is only in the last few years that many investors sought investments other than traditional stocks and bonds and related mutual funds.

Keep in mind that an IRA is a separate taxpayer and is subject to different rules than you are. Most of the time IRAs are tax-exempt and have more favorable rules than you do, but there are a few exceptions.

The trap IRAs are most likely to fall into is what the tax code calls unrelated business taxable income (UBTI). When an IRA earns gross UBTI exceeding during a year $1,000, it must file a Form 990-T and pay income taxes at the corporate tax rates. An IRA also must pay estimated income taxes during the year if the tax is expected to exceed $500. The return is filed by and the taxes are paid by the IRA, not by the owner or beneficiary, and the custodian or trustee of the IRA is supposed to be responsible for filing the return and paying the taxes from the IRA. But the custodian might not receive the Form K-1 reporting the income or might not file the return. As the IRA owner and beneficiary you ultimately bear the cost of any taxes and penalties, so be sure to check with your custodian and coordinate who will file the form and pay the taxes. Most trustees and custodians will charge for filing the return.

The $1,000 limit applies to the IRA, not to each investment in the account. If all the UBTI earned by the IRA during the year exceeds $1,000, the tax obligation is triggered. Also, the $1,000 limit applies to the IRA, not per taxpayer. When you have more than one IRA, each IRA has its own $1,000 UBTI limit.

You want to avoid UBTI, because the IRA owner essentially is taxed twice on it. The IRA will be taxed on the income. Subsequently, the owner or beneficiary will be taxed on distributions of that income. No deduction or credit is available to the owner for UBTI paid by the IRA and the tax is not added to the tax basis of the IRA.

An IRA potentially has UBTI if it does any of the following:

* operates a trade or business unrelated to its tax-exempt purpose,

* receives certain types of rental income,

* receives certain passive income from a business entity it controls,

* invests in a pass-through entity, such as a partnership, that conducts a business, or

* uses debt to finance investments.

Any business is considered unrelated to the exempt purposes of an IRA or other retirement plan. Fortunately, the tax code specifically excludes from the definition of trade or business income interest, dividends, capital gains, and profits from options transactions. Royalties also are generally exempt. Some types of rent are exempt; others aren't.

Controlling a business entity can convert exempt income into UBTI. When an IRA has greater than 50 percent control of a business entity, rent, interest, or royalties paid by the entity to the IRA generally are UBTI.

An IRA is most likely to run afoul of the UBTI restriction when it owns an interest in a pass-through business entity (partnership or limited liability company), because income from these entities is UBTI even if the IRA doesn't own a controlling interest. Master limited partnerships (MLPs) most often trip up IRA owners.

MLPs are traded on major stock exchanges, and many people think of them as being the same as corporate stock. In fact, these are partnership units, and the income and expenses of the partnerships pass through to the owners at tax time. Owners receive K-1 statements each year instead of 1099s to use in completing their tax returns. The K-1 states the amount of UBTI  and other income and expense items attributable to the IRA.

Individuals generally are urged not to purchase MLPs through IRAs, but it isn't illegal to own an MLP through an IRA. Owning an MLP through an IRA or other qualified plan is discouraged because of the potential for the IRA to be taxed and have to incur the expense of filing different tax returns.

Owning an MLP through an IRA creates UBTI and possibly the requirement to file a Form 990, pay taxes, and pay estimated taxes during the year. Once the $1,000 income threshold is crossed, there is no tax advantage to owning MLPs through an IRA. (When MLPs generate more than $1,000 of UBTI in an IRA, some tax advisors recommend taking the easier and cheaper route of reporting any IRA-owned pass through items on the individual tax return instead of taking the time and expense to file a separate return for the IRA. It's not clear this satisfies tax code requirements, and if you choose this route be sure your custodian is not also filing and paying the taxes from the IRA.) Also, remember that UBTI is taxed at corporate rates, not individual rates. That makes holding a large amount of MLPs in an IRA unattractive.

There is another reason to make MLP investments outside of a tax-deferred or tax-free account. Most MLPs already have tax advantages. Their operations generate depreciation deductions or other write offs that make a high percentage of income distributions tax free. These tax benefits are diminished when the MLP is owned inside a tax-favored account. (Though the tax advantages of owning an MLP outside an IRA can diminish after an MLP is owned for about 10 years or so.)

Another time an IRA is very likely to have UBTI is when debt is used to finance investments. Any type of income can become UBTI when debt is used to finance the property that generates the income. For example, if an IRA receives a margin loan from the custodian or broker, income generated by the securities purchased with the loan proceeds would be UBTI. An IRA can own real estate and earn rental income, and that rental income will be tax deferred. If the real estate is financed with a mortgage, however, the rental income becomes UBTI.

What about when an investment that generated UBTI is sold? Suppose, an IRA has a substantial investment in master limited partnerships that generated a few thousand dollars of UBTI each year. The IRA sells the MLPs at a gain. Is the capital gain UBTI? No. Only the business income generated by an investment is UBTI. Any capital gains from selling that investment are not UBTI.

When property that was financed with debt is sold, however, the capital gain from that sale is taxed as capital gains to the IRA. If the MLPs were purchased with margin loans, for example, the capital gains would be UBTI.

The UBTI rules are broad and extensive. You have to be especially careful of debt-financed investments, business ownership, and ownership of pass-through entities. You can find more details in my report IRA Investment Guide: A Road Map for Avoiding the Traps and Penalties for IRA Investments. It's available through the Bob's Library tab at

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