dsmWealth: July 20, 2023

BY STEVE DINNEN

Mary Riche recalls, unfondly, that when she wanted to buy a car in 1972 she couldn’t even do it in her own name. That didn’t fit well with the lifelong feminist’s notion of women’s equality and empowerment, including in matters of money matters.

Two decades later, a group of grandmothers from Beardstown, Illinois, inspired her to take action. The women had formed an investment club and had chalked up some pretty impressive gains in the stock market. Riche read their book, “The Beardstown Ladies Common-Sense Investment Guide,” and followed in their footsteps to form an investing club here in Des Moines called the S&B Investing Club. (You might think that's "stocks and bonds," but it's actually "stockings and bondage." They've had a sense of humor from the get-go.)

The National Association of Investors Corp. had created the investing club format, which the Beardstown Ladies, S&B and hundreds of other clubs across the nation have used to pool their money and talent to find worthwhile investments.

But money came first. Members were asked to kick in a set amount every month, to build their capital. “I thought I should probably be saving $50 a month, and this seemed like a good way to get me to do that,” S&B member Kathleen Murrin said.

Members were assigned stocks to research and then make recommendations to the club about whether those stocks were worth buying. “We were all learning together,” Riche said.

The S&B club’s first purchase, in 1998, was 50 shares of Johnston-based Pioneer Hi-Bred International. They did well: The seed corn company was bought out just a year later by DuPont.

“We knew Pioneer as an Iowa company, so there was some confidence” in their decision, Riche said. But they questioned that strategy after investing in Maytag Corp. and then watching it struggle and, eventually, get taken over in 2006 at a bargain basement price by Whirlpool Corp.

The club found a new confidence builder in Value Line, an independent investing research firm, whose reports were available for free at the local library.

Over the years, there have been more winners than losers, and members have more than doubled their money. The club has enjoyed some distributions, too. One member used the money to buy a new car. Another put a new roof on her house, and Riche said she repaved her driveway.

The members are older now, and some live only part-time in Des Moines. One member has passed away. So after a quarter century, the S&B club is disbanding and will make its final distributions by the end of the year.

There don’t seem to be any regrets, just good memories. The club has made sense as a financial savings tool. Riche said its members have learned more about finances and money — and more about empowerment.

If you’d like to learn how to start a club of your own, find more information from the National Association of Investors Corp. website at betterinvesting.org.

Comparing the costs of crossing the pond
BY STEVE DINNEN

Airfares to Europe seem pretty reasonable this summer.

Flying with American Airlines from Des Moines to Madrid on Aug. 20 and back on Aug. 30 will cost $790 in coach and about $2,600 in business class, a bit of a bargain considering the season. Delta Airlines will fly you round-trip to London on those same dates for $800 in economy, while United Airlines will charge $2,870 for a business seat. If it’s first class you desire, American can set you up for $6,100 aboard one of its partner British Air’s massive two-story Airbus 380s. It’s a spacious ride on a great plane, but it’s not cheap.

For just $840, Delta will fly you clear to Athens. Business class starts at $3,500 with United. Barcelona seems to be the cheapest business destination from Des Moines, at $2,640.

If you think it costs more to fly from Des Moines than from a major international hub, that’s not always true. Right now Delta will charge $1,260 economy or $4,190 business for a non-stop flight from its Minneapolis hub to Amsterdam. Leaving from Des Moines (and flying through Minneapolis) will cost $850 in economy or $3,350 business. So why not fly DSM?

A long-term danger lurks in financial markets
BY JON SINDREU FOR THE WALL STREET JOURNAL

Contrary to popular belief, financial markets have a long-term bias. This isn’t always a good thing.

There is much talk among investors of a “new regime.” Those words headline BlackRock’s recent midyear outlook, for example, which emphasized how the trends of the past decade — low interest rates and volatility, with bonds cushioning stock selloffs — have reversed in the past two years.
Weirdly, however, one indicator from the era of near-zero rates has remained unchanged: Investors don’t demand much extra return in exchange for locking away their money for longer periods.

This can be inferred from data published daily by the Federal Reserve, which estimates the “term premium” needed for investors to buy 10-year government bonds, rather than stash their money in, say, a money-market fund.

In theory, the yield on risk-free government paper should be equal to the interest rate investors expect on average until the debt is paid back. In practice, this only holds true for short-term bonds. Unless an investor or a market maker is 100% sure that a 10-year bond will be held to maturity, there is a risk that it will need to be sold at an unfavorable time. Without a discount for 10-year paper, giving a yield premium, it would make more sense for investors to roll over 10 one-year bonds.

This term premium has added an average 1.5 percentage points to 10-year yields since 1961. After 2016, though, ultra low rates, quantitative easing and low inflation turned it negative. Even now that inflation has shot up and rates have risen, this anomaly persists: On Monday, the term premium was a negative 0.84 percentage point. This is deeply odd: If anything should make investors wary of long-term assets, it is hawkish and unpredictable central bankers.

Should term premiums return to the historical average, the consequences would be dire for investors. Yields on 10-year Treasurys would jump to 6.1%, and there might be similar effects with global equivalents such as German bunds.

Also, government paper serves as a benchmark for other assets, particularly the debt of blue-chip companies. At constant credit spreads, U.S. investment-grade yields would rise from 5.5% to 7.8%. The S&P 500, which using 12-month earnings forecasts offers a yield premium of 1.4 percentage points over Treasurys, would instead yield 1 percentage point less, undermining an argument for buying stocks at today’s prices.

Is it time to abandon ship? It isn’t so straightforward.

Investors’ guesses about future interest rates aren’t recorded anywhere, so the Fed can’t directly observe the term premium. Its estimates are based on regressions, following a 2008 paper by Tobias Adrian, Richard K. Crump and Emanuel Moench. The results could simply be wrong.
Steven Major, global head of fixed-income research at HSBC, points out that the premium is actually positive if we use a rule of thumb and trust officials’ latest “dot plot,” which shows expectations that U.S. rates will average 3.2% over the next decade. With 10-year Treasurys yielding 3.8%, the implied term premium is 0.6 percentage point.

“The term premium was something invented by bond analysts to bamboozle their clients,” Major said.
Indeed, the Fed’s calculations of the term premium may mostly track the Treasury yield curve, which has been inverted for a year. The two have historically moved in lockstep, and the premium could normalize now that the curve is steepening again. But because this is happening for benign reasons — U.S. inflation cooled to 3% in June — it need not mean scary high yields.

Even if the Fed’s estimates are right, it may be that the financial ecosystem has been forever transformed by big institutional investors with an insatiable hunger for long-term assets, such as pension funds, life insurers and foreign-exchange reserve managers.

Or perhaps it is the fact that since 2008 rate setters have provided careful guidance on future policy that has reduced the perceived uncertainty of holding long-term assets. At times when economists’ long-term rate forecasts, as collected by the Federal Reserve Bank of Philadelphia, are more in agreement, the term premium seems to be lower.

Whatever the explanation, it is hard to deny that 10-year bonds offer scant compensation when 2-year Treasurys yield 4.8% and central bankers retain a hawkish bias.

Though flawed, term-premium estimates capture something real: Markets don’t require much of an incentive to favor long-term investments. This has been so for a decade and remains the case today, as the speed with which money has flowed back to technology firms this year based on hypothetical artificial-intelligence gains has again highlighted.

Whether it happens in a sudden rout or a slow creep, investors can’t dismiss the possibility that, one day, this trend will reverse too.

Bummer: $1.08 billion Powerball winner will get a big tax bill

BY KELLEY R. TAYLOR FOR KIPLINGER

Many people are curious about how much money a Powerball winner actually takes home after taxes, especially with the increasing payout and record-high jackpot amounts like last year's $2.04 billion. Despite the odds of winning being about one in 292 million, there have been frequent instances of single-winning tickets, and the jackpot rolled again Monday.

So, all eyes were on Wednesday night’s Powerball drawing, when a single winning ticket sold in California won the prize. The estimated payout for the drawing was $1.08 billion. According to Powerball, that was the third-largest Powerball jackpot and the seventh-largest U.S. lottery jackpot.

Powerball taxes: lump sum payout or annuity?

The advertised cash value of the Powerball lottery changes with each drawing. For example, the $1.08 billion Powerball jackpot had an estimated cash payout of $558.1 million.

Whenever anyone wins the Powerball lottery jackpot or another lottery prize, they can choose to receive the payout in one of two ways. They can receive the payout as an annuity, which would be paid in 30 graduated payments over 29 years, or they can receive the Powerball money in a lump sum payment. Most lottery winners choose the lump sum payout.

In either case, while billions of dollars (as in the case of the most recent $1.08 billion Powerball jackpot) is a bunch of money and $558.1 million (the cash value of that jackpot) is a huge lump sum, any lucky Powerball lottery winner will also be looking at significant tax bills.

One of those tax bills will be from the federal government and, depending on where a Powerball winner lives, another could come from the state. The amount of tax a winner will have to pay will depend on factors including the payout option that the winner chooses and the applicable state tax rate.

That’s because some states don’t tax lottery winnings. (In the case of the July 19 jackpot, the winning ticket is from California, which doesn't tax lottery winnings.) Other states have tax rates for lottery winnings that generally range from about 3% to almost 11%.

But in any case, once applicable taxes are taken out, the amount of money that any Powerball jackpot winner would walk away with will be much less than the multimillions splashed across lottery news headlines.

Taxes on Powerball: How much do you pay?

If you’re the lucky winner of a massive Powerball jackpot (or if you win other lottery cash prizes from a Powerball or Mega Millions drawing), you will want to take a couple of deep breaths and secure and protect your winning ticket. Then, you will likely want to work with a qualified financial advisor to consider and plan for the various tax implications of winning the lottery.

That's because when anyone wins the lottery, the IRS withholds 24% of the winnings off the top. With a really large jackpot, if the winner opted for the lump sum cash value, they would be subject to federal income tax at the top tax rate, which is 37%. (So after the 24% off the top, that's another 13% for some winners in remaining federal taxes).

For 2023, the top third of the federal income tax bracket applies to single filers who have more than $539,900 in income and joint filers with income over $647,850. Due to inflation, federal income tax brackets have been adjusted upward.

On the state side of things, most states treat lottery winnings as income for tax purposes, and the tax rates vary by state. But the jackpot winner’s state taxes could still amount to a huge sum given the size of the Powerball lottery jackpot.

Even so, tickets are just $2 per play and available in every state except Alabama, Alaska, Hawaii, Nevada and Utah. Hope springs eternal.