Fire Sale

  • High priority: Zach Scheidt and small-business owners
  • Private equity’s “dry powder”
  • Jim Rickards on feds’ evolving antitrust approach
  • Rural America runs off recession (more or less)
  • Ray Blanco on legally tuning in, turning on and dropping out
  • Buh-bye corporate performance reviews
  • Sucks to be a vacuum tycoon

[Before we start the clock today: It’s been coming down the pike for weeks now, and it’s time to let you in on what’s happening.

Due to circumstances beyond our control, we have no choice but to set a firm cutoff for new memberships to our most popular premium trading service — one with a proven track record of consistent big gains since launch more than a year ago.

We’ll talk more as the week goes on about exactly what’s forcing our hand… but suffice it to say that only days remain before we’ll have to shut off access. And we don’t mean for a few days, but rather “until further notice.” Weeks at least, maybe till next year. That means only days remain before the message at this link goes offline for good.]

It’s not just our outraged reader who wrote in from New Jersey last month who’s thinking, I must sell my business before the end of 2020.

“Just last week I hired a broker to help me sell my business,” says an old friend of our income investing specialist Zach Scheidt.

Zach ventured to the outskirts of Park City, Utah, recently to catch up with his friend face-to-face. “John and I have been friends for about 10 years,” he tells us. “I've always admired his work ethic, business sense and passion for life.”

One day earlier this month, “John and I took a scenic hike with another friend of his and spent three hours talking about life, retirement, parenthood, investments and much more.”

Hike

“Scenic hike” sounds like an understatement…

While John considers himself “retired,” he spent the better part of 20 minutes describing joint ventures he was part of, boards he served on, business ideas he’s working on with his kids.

“To John,” Zach tells us, “these different projects weren't work — they’re activities that he’s passionate about and enjoyed spending time on.”

So the bit about hiring a broker to help sell his business? That came as a surprise.

“John worked hard on his business for years. And despite being retired,” says Zach, “I know he loves keeping up with his business and watching the firm grow.

“I asked him, ‘Why would you sell now that the business is practically running itself?’”

Answer: “If I sell the business between now and the end of 2021, I expect to pay reasonable capital gains taxes on my proceeds. But if the Democrats take the White House and the Senate, we could see tax rates shoot even higher. This could cost me and my family a fortune!"

That’s not a political answer to the question per se. It’s just a hard-nosed business decision. It’s also a trend you can’t afford to ignore… and there’s even a way you can play it for profit.

“For many small-business owners, selling a business before higher tax rates kick in is a high priority,” Zach continues.

“And that's true for investors who have positions with large accumulated gains.

“If selling in the next year could help save business owners and investors a small fortune in tax liabilities, it makes sense that we might see selling pressure drive stocks and business valuations lower.

“My friend John is trying to get ahead of that trend by selling his company while he can still get a premium price.”

If he waits much longer, he might find a more crowded field of sellers… and suddenly it’s a fire sale for all these small businesses. Act now before the rush, right?

“As John and I talked about his business, I quickly realized who the buyer would likely be,” Zach tells us.

“John's broker is reaching out to some private equity companies who have the capital and the business skill to take over a firm like John's.

“Today, private equity companies are sitting on more than $2 trillion of combined ‘dry powder’ or cash they can use to buy out companies like John's business. And because of their lucrative business models, private equity companies can make money in both good times and bad in our economy.”

A quick reminder about the three ways private equity firms generate income…

  • “First,” says Zach, “private equity companies charge a management fee for every dollar of their customers’ capital they invest. This management fee typically runs somewhere around 2% per year, providing plenty of reliable cash flow
  • “Second, private equity companies receive an incentive allocation from all their customers’ profits. So when they invest in successful businesses, private equity companies typically get to keep 20% of the profits made for customers
  • “Finally, private equity companies invest their own capital alongside their customers’ investments. So when customers make money, the private equity companies do as well!”

Zach’s favorite name in the private equity space is a publicly traded company — The Blackstone Group (BX). If he had to choose just one stock to buy and hold for the next 20 years, BX would be it. “It’s an excellent investment for building your retirement wealth.”

[Ed note: At the same time, there are plenty of publicly traded firms right now that are also “buyout bait.” Invest in those companies before an offer comes in and you could make a small fortune in no time.

That’s the idea behind Zach’s Buyout Millionaires Club. And from now through Thursday, you can apply a “credit” on your account toward membership in this premium advisory. Learn how to claim it at this link.]

“I’m not sure why the market is so hung up on every stimulus rumor right now, but I suppose it’s a decent distraction from rising virus cases and election gossip,” observes our chart hound Greg Guenthner.

Pelosi… Mnuchin… $2 trillion… $3 trillion… Yawn, stretch.

“If you only watched the news, you would assume the world was coming to an end. But the market has been very accommodating and providing us with some great trading opportunities. To me, this says things aren’t as dire or uncertain as they’re telling us.”

As we check our screens, the major U.S. stock indexes have recovered a healthy chunk of yesterday’s losses. The S&P 500 has added 20 points and sits at 3,447 — well above the 3,200 “support” level that would be any cause for concern.

For the moment, gold is holding the line on $1,900. Silver is up big again at $24.70.

As for the company making the biggest news today, the share price of Google parent Alphabet has scarcely reacted.

In an anticlimactic development we saw coming many months ago, the Justice Department filed an antitrust suit — alleging Google is using “its status as gatekeeper to the internet through an unlawful web of exclusionary and interlocking business agreements that shut out competitors,” as The Wall Street Journal puts it.

As Jim Rickards explained here in January, the litigation reflects an evolution in the feds’ approach to antitrust. Time was that a giant company would get a pass if it seemed that consumers benefited from that company’s monopoly. But is the consumer really benefiting from all of Google’s “free” stuff… if it’s hoovering up as much of the consumer’s data as possible to sell to the highest bidder?

At last check, GOOG shares are down a mere 0.13% as we write. Anticlimactic indeed.

Besides, as Jim said earlier this year, shareholders might be the ultimate beneficiaries. “The government cannot simply take the stock of tech firms without compensation.

“If a breakup is ordered, the stockholder in Google could end up with separate shares in Google, YouTube, DoubleClick and Waymo, among other firms. The combined value of those shares might be more than the value of Google shares alone.”

Which, by the way, is what happened after the breakup of Standard Oil a century ago.

GOOG shares are down 11.5% from their peak in early September. Just sayin’…

For rural America, the recession is over — more or less.

The Rural Mainstreet Index, compiled by Creighton University econ professor Ernie Goss, has now registered six-straight months of increases from its April lows. The October number is 53.2 — finally above the 50 dividing line between expansion and contraction, and the highest figure since January.

Goss compiles the index from a survey of bank CEOs in rural sections of 10 states stretching from Wyoming to Illinois. To be sure, the recovery is not uniform: Over a third of the CEOs report their local economies are still in recession. Meanwhile, eight out of 10 say the worst impact of the pandemic and lockdowns has been on bars and restaurants.

“There are big potential medical uses for legalized psychedelics,” says our Ray Blanco, on the lookout for the next big thing after legalized cannabis.

Several jurisdictions have already decriminalized the use of psilocybin mushrooms — Denver, Oakland, Santa Cruz. The District of Columbia votes next month.

But it’s about more than just a high, Ray says: “The powerful consciousness-altering properties of compounds like psilocybin, LSD, mescaline and DMT come from changes in brain chemistry. Research is showing that they could be potentially very useful for treating severe mental illness like major depression, post-traumatic stress disorder, obsessive-compulsive disorder and much more.

“These properties are spawning not just a new generation of academic research but an emerging group of psychedelic pharmaceutical companies, too. Companies like Mindmed are working with psychedelics like LSD and MDMA to assist patients undergoing psychological therapy. The company has recently applied to uplist to the Nasdaq in the U.S.

“According to some analyst estimates, the psychedelic drugs market could reach as high as over $6 billion in sales by 2027.” And after Ray’s string of successes identifying cannabis plays going back to 2016, you can be sure he’s monitoring this new sector as well.

Here’s one upside to the pandemic and lockdowns — the end of corporate performance reviews.

Or at least major changes to them: “Goldman Sachs and Anheuser-Busch InBev, among other companies, are seeking to make these evaluations more streamlined and transparent,” reports International Business Times. “Their measures are expected to make life easier for both workers and their managers.”

A survey of employers by McKinsey finds 30% of companies altering their review practices in one way or another. A few firms are doing away with reviews altogether, at least for the time being.

“If we don’t have [performance reviews] next year and that goes well, we might not add it back,” Christine Carrillo, CEO of a small firm called Butlr Health, tells The Washington Post.

Good riddance, we say…

“Conducting annual performance evaluations at salary review time is not effective,” wrote the veteran media executive Charles Warner more than two decades ago.

During your editor’s long and undistinguished broadcast career, I attended a management seminar led by Mr. Warner at the University of Missouri in 1996; he’s gotta be getting up in years now, but he’s still teaching part time at The New School university in New York.

My biggest takeaway from that week on the Mizzou campus was the uselessness of annual performance reviews.

“Imagine,” he wrote, “how a professional football player would feel if the only comments about his performance came during once-a-year salary negotiations. He would probably think all the comments about his performance were used to belittle him so the owners could use the criticism as an excuse to pay him less than he was worth.

“The same feelings about once-a-year performance evaluations exist in virtually all companies that use them.”

As an alternative, Warner suggested managers take it upon themselves to conduct performance coaching sessions once every quarter. There’s still a formal, written process to ensure accountability and foster improvement… but it’s more frequent. And three out of four times a year it’s not tied to compensation or the dictates of the HR department. Better for all concerned.

Before we go, a costly case of buyer’s remorse…

BBC News

James Dyson — the Brit behind those pricey but mighty effective vacuum cleaners — is selling his triplex penthouse in Singapore for US$47 million. He bought it only a year ago for $56 million, a Singapore record.

[Of course, more than one wag on the web has observed, “That sucks.”]

The 21,108-square-foot spread sits atop the 64-story Guoco Tower. “The five-bedroom ‘bungalow in the sky’ comes with its own swimming pool, cabana, bar Jacuzzi and entertainment areas. It also has a private elevator lobby and elevator access to Tanjong Pagar MRT station,” reports The Straits Times.

The buyer is the Indonesian-born Texan tycoon Leo Koguan, co-founder and chairman of the privately held tech firm SHI International.

Dyson bought the joint at the same time he moved his firm’s headquarters from Britain to Singapore. No changes there, says a company spokesman: "Dyson remains fully committed to expanding its research and development footprint and other operations in Singapore.”

Meanwhile, Dyson and family will settle into their other Singapore property, a bungalow worth an estimated $38 million.

Hmmm… Might be one heckuva rummage sale coming up in Singapore soon…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. I promise you’re going to get sick unto death of my reminders over the next week that access to our most popular premium trading advisory will soon be shut down indefinitely.

Perhaps you’ve seen my invitation before and thought, Oh, maybe I’ll take ’em up on it sometime. Well, “sometime” won’t exist in another week. If you take me up on the invitation now, you can just skip over my reminders later. Heh…

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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