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Sweeping benefit cuts may be necessary well before 2035.

Last month, America’s top social program, Social Security, celebrated its 85th anniversary since being signed into law. Today, it’s a program responsible for providing monthly benefits to more than 64 million people, over 7 in 10 of whom are retired workers. Of these retirees, 15.3 million are single-handedly pulled above the federal poverty line as a result of their Social Security income.

In other words, Social Security is sort of a big deal when it comes to the financial well-being of our nation’s retired workforce.

Unfortunately, Social Security is also running on fumes.

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Our nation’s top social program is facing a nearly $17 trillion funding shortfall

For each of the past 35 years, the Social Security Board of Trustees’ analysis examining the long-term outlook (75-year) for the program has estimated that revenue collection would be insufficient to cover outlays. As of the 2020 report, Social Security is staring down a funding obligation shortfall of a whopping $16.8 trillion, and its $2.9 trillion in asset reserves (i.e., its net cash surpluses built up since inception) are expected to be exhausted by 2035.

To be clear, Social Security’s financial troubles aren’t threatening the program’s ability to exist. It currently has three sources of funding, two of which are recurring: the 12.4% payroll tax on earned income and the taxation of benefits. Even if the program’s asset reserves were completely depleted, plenty of money would still be flowing into the program for disbursement to eligible beneficiaries.

However, Social Security’s asset reserves going to $0 wouldn’t be without adverse consequences. More specifically, the existing payout schedule, inclusive of cost-of-living adjustments, wouldn’t be sustainable. Once the program’s asset reserves run dry in 2035, the Board of Trustees estimates that sweeping benefit cuts of up to 24% may be necessary to keep the Old-Age and Survivors Insurance (OASI) Trust solvent over the long term. This means big cuts to the monthly benefits of retired workers and the survivors of deceased workers.

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Social Security’s day of reckoning may come sooner than expected

The possibility of this happening 15 years from now is scary. But what if the Trustees’ estimates were actually optimistic?

Last week, the Congressional Budget Office (CBO) released a nine-page analysis that examined the outlook (predominantly a 10-year look between 2020 and 2030) for all of the major federal trust funds. The CBO expects Social Security to look much worse than the picture the Trustees have painted.

Like the Trustees, the CBO expects Social Security to begin expending more than it’s collecting in revenue in 2021. But unlike the Trustees report, the CBO’s forecast portends a quicker deterioration in the program’s $2.9 trillion in asset reserves. In 2021 alone, the combined OASI and Disability Insurance (DI) Trust, which for simplicity’s sake is known as the “OASDI,” is slated to expend $120 billion more than is collected. By 2030, this annual OASDI outflow will grow to $384 billion.

According to the CBO, the DI Trust will completely exhaust its asset reserves during the 2026 calendar year, while the OASI Trust will deplete its asset reserves during the 2031 calendar year. In other words, we might be only 11 years away from steep benefit cuts for retired workers, rather than the 15 years projected by the latest Trustees report.

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Why, exactly, is Social Security in trouble?

The question that invariably pops up when Social Security’s deteriorating outlook is discussed is how the program got into this mess. Blame is often leveled at baby boomers leaving the workforce, or on lawmakers purportedly dipping their hands in the cookie jar. The former idea is far from the only issue with Social Security, and the latter is a pervasive myth that simply won’t die.

Social Security’s financial woes can be directly traced to a number of macroeconomic trends that often aren’t in the spotlight. A good example would be growing income inequality. Though Social Security’s primary purpose is to provide a financial foundation for low- to middle-income Americans during retirement, it’s the rich that seem to benefit most from the program. Because the well-to-do have little or no financial constraints when it comes to receiving preventative care or prescription medicines, they’re outliving lower-income workers. This allows the wealthy to collect a bigger benefit check for a longer period of time.

Historically low birth rates are another issue. The Social Security program counts on a certain number of births each year to maintain a steady worker-to-beneficiary ratio when future generations of workers retire. But for a variety of complex reasons, birth rates have been precipitously falling for a decade, threatening to lower the worker-to-beneficiary ratio.

Even immigration plays a role. Social Security is reliant on a steady influx of legal migrants into the U.S. to help offset the number of workers retiring. Since most legal immigrants tend to be young, they’ll spend decades in the labor force generating payroll tax revenue for the program. But over the past two decades, the average number of legal migrants into the U.S. has been halved and continues to decline.

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A congressional stalemate dampens Social Security’s outlook

At this point, the only way to avert sweeping benefit cuts would be for lawmakers to pass legislation that would strengthen the Social Security program. The problem is that coming to a consensus on how best to fix Social Security hasn’t been easy.

Both Democrats and Republicans have proposed no shortage of solutions meant to resolve or lessen Social Security’s funding shortfall. Democrats prefer to increase the maximum taxable earnings cap associated with the payroll tax, which would effectively require the well-to-do to pay more into the program.

Meanwhile, the GOP favors a gradual increase to the full retirement age to counter increased longevity. This would result in future generations of retirees either waiting longer to collect their full monthly payout, or see an early claim face even steeper reductions. Either way, it’s designed to reduce lifetime outlays.

Since both parties have a solution that works, neither feels compelled to back down and find common ground with their opposition. Without bipartisan support, all Social Security legislation dies in the Senate, where 60 votes will be needed to amend the Social Security Act.

What lawmakers may not realize is just how complementary their solutions are to one another. For example, the Republicans’ proposal would take decades to realize significant savings, thereby doing little to stave off the program’s near-term cash crunch. But the Democrats’ plan to raise additional tax revenue would effectively resolve near-term funding concerns.

At the same time, the Democrats’ proposal overlooks some of the changing demographics discussed earlier, such as record-low birth rates and lower net immigration. The GOP’s proposal to gradually raise the full retirement age would provide cost savings that are critical to longer-term solvency of Social Security.

Until our elected officials in Washington, D.C., wise up and work together, Social Security’s long-term outlook may well be dicey.

Author: Sean Williams

Source: Fool: Social Security May Run Out of Money Sooner Than Expected

Despite all eyes being on high-growth tech stocks, it’s marijuana that could be one of the fastest-growing industries over the next decade. We already know that tens of billions of dollars are sold annually in the North American black market each year, so it’s only logical that legalizations should steadily move consumers toward legal channels.

Perhaps no cannabis stock has been more popular among the investment community than Canadian licensed producer Aurora Cannabis (NYSE:ACB).

Aurora Cannabis was supposed to be the greatest thing since sliced bread

Why Aurora? At this time last year, Aurora Cannabis was projected to be the world’s leading marijuana producer. It had 15 production facilities that, if fully operational, could yield well over 600,000 kilos per year. Given the size of Aurora’s numerous grow farms, it was expected that the company would be a leader in low-cost production.

Additionally, Aurora Cannabis had a production, export, partnership, or research presence in two dozen countries. Being able to produce so much cannabis, the company looked like a solid bet to land numerous supply agreements.

The investment community was also pretty excited about the onboarding of billionaire activist investor Nelson Peltz as a strategic advisor in March 2019. Peltz’s expertise is in the consumer-packaged foods and beverage space, so it’s long been assumed that he would act as the bridge between Aurora and a brand-name food and beverage company.

Unfortunately, Aurora Cannabis has been a disaster of an investment, and its balance sheet a monumental eyesore. Last week, Aurora’s management team decided it was finally time to face the music and address its balance sheet.

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Aurora Cannabis (finally) confronts its ugly balance sheet

In a press release last Tuesday, Sept. 8, where Aurora Cannabis named its new CEO and pre-announced its fiscal fourth-quarter sales guidance, the company also unveiled a laundry list of impairments that it would be taking. These include:

An up to $90 million Canadian impairment tied to the closure of five of the company’s smaller production facilities.
An approximate CA$140 million charge related to the carrying value of certain inventory.
A non-cash writedown of goodwill and intangible assets (the company didn’t provide a breakdown of each category) that could total between CA$1.6 billion and CA$1.8 billion.

In other words, investors could be looking at Aurora Cannabis taking a writedown of close to CA$2 billion, or twice the company’s current market cap.

These writedowns should not come as a surprise to anyone who’s followed Aurora Cannabis over the past couple of years. I’ve warned time, and time, and time again that Aurora’s acquisitions were grossly overvalued, that the company’s property, plant, and equipment values were far too high given current market conditions, and that inventory would likely face writedowns. All told, the company will have written down around CA$3 billion in total assets this calendar year.

The fact is that this needed to be done, I applaud Aurora’s management team for finally facing the music. The balance sheet isn’t going to be perfect when the June-ended quarter is made official, but Wall Street and investors will be able to wrap their hands around figures that might be in some way tangible.

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Aurora addresses a big concern, but it’s still not worth buying

Back in June, I’d stated that three things needed to happen for Aurora Cannabis to rebuild trust with investors. Cleaning up the company’s balance sheet was one of those three things. Unfortunately, the other two “musts” on that list haven’t yet been dealt with — and for that reason, the company is still worth avoiding.

One factor that still hasn’t been addressed is the company’s rampant share-based dilution, which has been ongoing for what seems like four years and counting. Aurora has made a habit of using its stock as collateral when making acquisitions.

Management has also leaned on selling stock as a means of raising capital. Earlier this year, its board gave the OK for the company to issue up to $350 million (that’s in U.S. dollars) in stock over a 25-month span to raise capital. In a six-year stretch, including the company’s 1-for-12 reverse split enacted in May, which is what kept it from being delisted from the New York Stock Exchange, Aurora’s share count has ballooned from 1.3 million to well over 110 million. Until this share-based dilution slows considerably and the company improves its cash position, it’s not worth investors’ hard-earned money.

Likewise, Aurora needs to find a way to ignite growth in international markets. Though the purchase of cannabidiol-focused company Reliva in the U.S. should somewhat help, the company has got to find a way to generate significant revenue from burgeoning European countries where medical marijuana growth looms strong.

Even with aggressive cost-cutting efforts, it doesn’t look as if Aurora Cannabis is on track to reach recurring profitability in fiscal 2021 (the company’s fiscal year ends June 30). With numerous U.S. multistate operators nearing that turn to profitability, and supply roadblocks still prevalent throughout Canada, Aurora Cannabis should remain out of investors’ portfolios.

Author: Sean Williams

Source: Fool: Pot Stock Aurora Cannabis Finally Faces the Music

It’s easy to build wealth when you own top-notch stocks like these.

Investing in 2020 should really come with a disclaimer. The past six-plus months have been one of the most volatile periods on record, with the benchmark S&P 500 losing 34% of its value in less than five weeks, then regaining everything that was lost (and some) in the subsequent five months. This year has undeniably taught investors how fruitless it is to try to predict short-term market movements.

But at the same time, it’s been a great year for long-term investors to buy into great companies on the cheap. With volatility picking back up over the past week and change, opportunity has come knocking yet again for long-term investors looking to buy into the market’s most unstoppable stocks.

Best of all, long-term investors don’t need to be rich to eventually become wealthy. If you have $2,500 that you can spare, which won’t be needed to pay bills or cover emergencies, you have more than enough to buy the following four unstoppable stocks.

Alphabet

If you can get any sort of meaningful discount on shares of Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), the parent company of Google and YouTube, I strongly suggest you consider taking it.

As you can imagine, Alphabet has been clobbered by the coronavirus disease 2019 (COVID-19) pandemic. As an ad-based business, Alphabet has seen companies of all sizes pull back on their spending, which led the company to report its first year-on-year sales decline since going public.

However, long-term investors would be smart not to read too much into this data. As a whole, GlobalStats finds that Google has accounted for between 92% and 93% of all online internet search (on a monthly basis) over the trailing year. It’s the clear go-to when it comes to search ad placement, which means it’ll boast considerable pricing power during the many long periods of economic expansion.

Alphabet’s cloud infrastructure segment, Google Cloud, is also a stealthy fast-growing segment. It’s no secret that cloud subscription margins are much higher than ad-based margins. With Google Cloud raking in over $3 billion in the second quarter and accounting for nearly 8% of Alphabet’s total sales, it’s going to be responsible for a significant uptick in the company’s operating cash flow in the years that lie ahead.

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Facebook

You don’t have to get cute and find the hidden gem in the social media space. Just consider buying Facebook (NASDAQ:FB), which is far and away the most unstoppable social media presence.

Like Alphabet, Facebook’s business model is driven by ad revenue. But in Facebook’s case, ads make up an even larger percentage of total sales. This means COVID-19 concerns and recent questions about Facebook’s filtering of hate speech have adversely impacted the company’s near-term results.

And yet, despite the worst quarter for the U.S. economy in decades, Facebook still logged an 11% year-on-year sales increase during the June-ended quarter. That should tell you something about how important Facebook and its family of social media assets are to the advertising world.

As of June 30, Facebook had 2.7 billion monthly users, as well as 3.14 billion family monthly active users (family accounts include owned assets Instagram and WhatsApp). There’s simply nowhere else that advertisers can go where they’re going to get access to at least 2.7 billion targeted eyeballs, and Facebook knows it.

Furthermore, the company has only monetized a portion of its assets. The vast majority of current sales are derived from ad revenue on Facebook and Instagram, with Facebook Messenger and WhatsApp not yet monetized in any meaningful way. When the company does monetize these platforms, as well as rolls out additional initiatives beyond Facebook Pay, we could witness sky-high sales growth from a megacap company.

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Teladoc Health

If you’re not closely watching Teladoc Health (NYSE:TDOC), you’re missing the blossoming of an industry giant and a company on the cutting edge of precision medicine.

As the name implies, Teladoc is a leading telemedicine company in the healthcare sector. It was already seeing a boon in businesses well before the pandemic struck. However, keeping sick and immunocompromised people out of hospitals and doctor’s offices has made virtual visits that much more important. After generating $20 million in full-year sales in 2013, Teladoc might hit $1 billion this year, and top $2 billion by 2023.

Additionally, you should understand that telemedicine visits are a benefit to all parties. It puts less time constraint on physicians, provides convenience for the patient, and happens to be cheaper than in-office visits for health insurance companies. We’re really just scratching the tip of the iceberg after Teladoc registered 2.8 million visits during the June-ended quarter.

Also, don’t overlook Teladoc’s transformative cash-and-stock merger with applied health signals company Livongo Health (NASDAQ:LVGO). Livongo gathers copious amounts of data on patients with chronic illnesses and, using artificial intelligence as an aid, sends these folks tips and nudges to incite lasting behavioral changes. What Livongo is doing is clearly working, as the company has delivered three consecutive quarterly profits and continues to double its year-over-year Diabetes member counts.

When combined, this duo will be unstoppable in the healthcare space.

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Visa

It’s rare when payment-processing giant Visa (NYSE:V) isn’t kicking tail and taking names, but when those short periods of time do occur, it’s important for long-term investors to pounce.

About the only way this freight train can be slowed down is during a recession. Visa witnessed gross dollar volume on its network decline in 2009 from the previous year, and it’ll likely face that same fate in 2020 with the coronavirus pandemic briefly pushing the U.S. unemployment rate to levels not consistently seen since the 1930s. But it’s going to be impossible to keep this well-oiled money machine down for long.

Working in Visa’s favor is the fact that its success is tied to U.S. and global economic growth. Even though economic contractions and recessions are a natural part of the economic cycle, periods of expansion tend to last considerably longer than recessions.

Also, understand that Visa’s sole purpose is to aid in the facilitation of payments. Unlike some of its competition, it’s not a lender. The big advantage of staying away from lending is that it means no direct exposure to rising loan delinquencies during periods of contraction or recession. This is why Visa’s gross margin is often at or above 50%.

Visa has the highest credit card market share by network purchase volume in the U.S., and more than doubles the share of its next-closest competitor. It’s absolutely unstoppable in the payments space.

Author: Sean Williams

Source: Fool: 4 Unstoppable Stocks to Buy With $2,500

And it has nothing to do with equity valuations.

It’s been nothing short of a crazy year for Wall Street and investors. The panic and uncertainty caused by the unprecedented coronavirus disease 2019 (COVID-19) pandemic initially sent the broad-based S&P 500 (SNPINDEX:^SPX) lower by 34% in just under five weeks. The 17 calendar days it took for the index to fall from an all-time high into bear market territory, as well as the roughly four calendar weeks it took for losses to total more than 30%, are both records.

However, we’ve also witnessed the most ferocious rally in the history of the benchmark S&P 500. It took less than five months for the index to erase all of its coronavirus crash losses. As of this writing, it still sits higher on a year-to-date basis despite this week’s losses.

Historically, buying equities during periods of correction has proved to be a smart move. That’s because every correction in stock market history has eventually been erased by a bull market rally. If investors are patient enough and diligent about choosing great businesses, operating earnings growth favors equity valuation expansion over time.

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High valuations alone don’t merit a stock market crash

But after witnessing one of the most violent bear market crashes in stock market history and its subsequent snapback rally, I can’t help but feel that Wall Street is set up for disappointment.

Many folks, including myself, have pointed to valuation as a reason to be concerned about a second stock market crash. The Shiller price-to-earnings ratio — a P/E ratio based on average inflation-adjusted earnings from the previous 10 years — currently sits at 33. It has only spent any considerable amount of time above a P/E ratio of 30 on three occasions: just prior to the Great Depression, just prior the bursting of the dot-com bubble, and just prior to the fourth-quarter swoon for equities in 2018. In other words, a Shiller P/E above 30 is usually bad news.

Then again, we’ve learned that valuation can be an arbitrary indicator for game-changing businesses. Dominant players in an industry, like Amazon, Netflix, and Shopify, pay little heed to traditional fundamental metrics and continue to head higher.

Generally speaking, valuation isn’t enough justification for a stock market crash.

This is what a perfect storm looks like for equities

However, that doesn’t mean the stock market gets a free pass. Right now, there are three monumental catalysts that bode ill for equities. Even with an exceptionally dovish Federal Reserve blowing wind in the sails of the stock market, a perfect storm appears to be brewing that could ravage equities in the months ahead.

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A significant decline in share buybacks and dividends

What does a perfect storm look like for the stock market? First, there are significant drop-offs in corporate buybacks and dividends paid. It’s no secret that common stock repurchases have been a key driver of demand for equities over the past decade. In total, Yardeni Research found that cumulative buybacks for S&P 500 companies since Q1 2009 totaled $5.63 trillion through Q1 2020.

But 2020 is likely to produce the lowest level of share buybacks in years. The Federal Reserve put its foot down on big bank buybacks in the third quarter in an effort to ensure that financial institutions shore up their cash positions. Bank of America (NYSE:BAC), which declared a combined $26 billion buyback and dividend program in June 2018, has seen only a portion of its $37 billion buyback and dividend program fulfilled since June 2019. While Bank of America’s dividend is untouched, only some of its nearly $31 billion worth of share repurchases were fulfilled.

We’ve also witnessed dividends being slashed or axed completely. Plunging crude prices have forced some shale producers, and even integrated oil and gas giants (e.g., BP), to cut or halt their dividends. The same could be said for the airline industry, where virtually all airline stocks have suspended their dividends and share repurchase programs.

Without these shareholder perks, demand for equities could slow considerably in the quarters that lie ahead.

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A lapse in stimulus money

Though Wall Street doesn’t seem to care too much about the ongoing impasse in Washington over another round of coronavirus stimulus, it should be concerned.

Despite the stock market showing pockets of strength within cybersecurity, telemedicine, and pretty much anything to do with cloud computing, the heart of the U.S. economy is built around consumption. In fact, around 70% of U.S. gross domestic product is reliant on consumption. Unfortunately, consumption is precisely what’s threatened by the current stimulus standstill on Capitol Hill.

At the end of July, enhanced unemployment benefits ended. The enhancement provided an extra $600 a week to unemployed beneficiaries between April 1 and July 31. Though this extra benefit was never designed to be permanent, it was also given with the assumption that the economic rebound in the U.S. would be swift. It hasn’t been. The July 2020 unemployment rate of 10.2% is higher than it was at any point during the Great Recession, and harkens back to steady double-digit unemployment rates last seen during the 1930s.

These enhanced unemployment benefits, along with the Economic Impact Payments that were sent out in April and May, helped avert rental evictions, home foreclosures, credit delinquencies, and other issues. With these sources of stimulus currently gone, tens of millions of Americans could soon face serious financial crises that will have a profoundly negative impact on consumption.

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A financial sector maelstrom

The final puzzle piece is that the financial sector may come apart at the seams.

While it’s true that financial institutions are much better capitalized than they were entering the Great Recession, bank stocks are going to get hit from both ends once the unemployed and consumers really start to feel the sting of no additional stimulus. On the one hand, the Federal Reserve’s pledge to keep lending rates at or near record lows for the next couple of years will constrain banks’ interest income earning potential. On the other hand, reduced earning capacity will likely cause loan delinquencies to soar in upcoming quarters.

We really don’t know just how bad things could get for banks in the United States. In August, the Mortgage Bankers Association reported that the delinquency rate for mortgage loans on one- to four-unit residential properties rose 386 basis points from the sequential first quarter, constituting 8.22% of all outstanding loans by the end of the second quarter. That’s the biggest quarterly increase since the MBA began tracking loan delinquencies in 1979.

We also entered 2020 with auto loan delinquencies hitting their highest level since 2011, according to the American Bankers Association. Auto loans don’t generate nearly the same financial concern as delinquent home mortgages, but an ongoing rise in auto loan delinquencies could hurt bank bottom lines.

The financial sector is often heralded as the backbone of the U.S. economy. If it falters even more than it already is? Look out below for equities.

Author: Sean Williams

Source: Fool: Stock Market Crash 2.0: A Perfect Storm Is Brewing

A plunging stock market is the perfect opportunity to put your money to work in these high-quality companies.

When the curtain finally closes on 2020, it’ll almost certainly go down as one of the most volatile years on record for Wall Street and investors. The uncertainty created by the coronavirus disease 2019 (COVID-19) pandemic initially sent the benchmark S&P 500 lower by 34% during the first quarter. This was followed by the strongest snap-back rally of all-time, with the broad-based S&P 500 ascending to new heights in less than five months.

But just because the stock market has come full circle in six months, it doesn’t mean volatility has gone away.

Last Thursday’s market meltdown, which saw the S&P 500 lose roughly 126 points, ranked as the eighth-largest single-day point decline in history. Of course, keep in mind that the 3.5% percentage drop doesn’t come close to registering as one of the worst days for the stock market. This move does, however, send a clear message that plenty of economic uncertainty remains, and a stock market crash could occur without warning.

Although stock market crashes can be unnerving in the very short-term, they’re actually fantastic news for long-term investors with dry powder at the ready. That’s because every single stock market correction in history has eventually been erased by a bull market rally. If investors to choose to buy high-quality companies when the stock market trips up, they usually come out ahead in the long run.

While it’s a bit too early to tell whether last week’s turbulence will turn into anything resembling a full-fledged correction, here are three great stocks to considering buying when the stock market does crash.

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Teladoc Health

Get the sticks ready, because it’s time to beat the drum on telemedicine giant Teladoc Health (NYSE:TDOC), once again.

The beauty of healthcare stocks is that, even if they do get caught up in the emotional whirlwind that is a stock market crash, demand for their products and services remains largely undisrupted. Since we don’t get to choose when we get sick or what ailment(s) we develop, cash flow for healthcare companies is pretty steady no matter what’s happening with the stock market.

More specific to Teladoc, it’s been seeing an incredible build in demand for virtual health visits. Yes, COVID-19 has played a key role in Teladoc’s 2020 growth, with visits during the June-ended quarter up an astounding 203% to 2.8 million. But it’s not like Teladoc wasn’t growing like a weed well before the coronavirus pandemic altered our way of life. The push toward convenience and precision medicine vaulted Teladoc’s revenue from $20 million a year in 2013 to $553 million in 2019, long before COVID-19 was declared a pandemic.

Telemedicine is absolutely a pivotal component of the future of precision medicine. It frees up more time for patient-physician consults, provides consultation flexibility for both parties, and is actually cheaper for insurers to cover than an in-office visit. While we’re not going to see in-person trips to the doctor go away, the runway for virtual visits is massive, and Teladoc is still just scratching the tip of the iceberg regarding its potential.

As one final note, Teladoc is in the process of merging with applied health signals provider Livongo Health (NASDAQ:LVGO) in a cash-and-stock deal. Livongo utilizes mountains of patient data and artificial intelligence to send tips and nudges to patients with chronic illnesses in order to help them make lasting behavioral changes. It’s been working wonders for the company’s Diabetes members, and Livongo has already turned the corner to profitability, despite having only a 1.2% share of the U.S. diabetes market. When fully merged, this company is going to be a precision medicine powerhouse.

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AT&T

For more conservative investors who aren’t too keen on the short-term volatility that Teladoc would bring to the table, allow me to suggest buying into telecom behemoth AT&T (NYSE:T).

When you think of a basic-need good or service, the idea of buying food, water, or paying for electricity or natural gas probably comes to mind. But how about our dependence on mobile phones? As technology has improved, access to smartphones and wireless technology has brought costs down, making mobile phones something of a basic-need service for many adults in this country. With AT&T’s business model predominantly based on subscriptions, a stock market crash is unlikely to have much, if any, impact on its wireless network subscriber count.

Also of note, AT&T is rolling out its first wireless infrastructure upgrades in about a decade. This move to 5G networks isn’t going to happen overnight, nor will consumers upgrade their wireless devices all at once. However, this investment in faster download speeds is bound to create a multiyear tech upgrade cycle that’ll fuel the high-margin data component of AT&T’s wireless segment.
Investors shouldn’t overlook the company’s streaming opportunity, either. With subsidiary DirecTV continuing to hemorrhage subscribers due to cord-cutting, AT&T is counting on its streaming offerings, HBO Max, and proprietary networks (TNT, TBS, and CNN), to help draw in paying customers. Management’s goal is to essentially double worldwide streaming subscribers to HBO Max and HBO (on a combined basis) to approximately 80 million by 2025.

Best of all, patient investors are going to get a 7% dividend yield with AT&T, which is one of the highest, safest yields you’ll find. If volatility makes your stomach churn, AT&T is a great stock to park your cash.

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Visa

Another wise idea when the stock market crashes is to buy into payment facilitator Visa (NYSE:V).

As you can imagine, the COVID-19 pandemic has hurt consumer spending and thrust the U.S. economy into its first recession in 11 years. That’s bound to reduce the amount of money that consumers are spending, ultimately hurting the merchant fees that payment facilitators like Visa collect.

But here’s another way to think about this data. During the Great Recession, Visa saw only one year-on-year decline (2009) in terms of gross dollar value traversing its payment network. Between 2009 and 2018, Visa’s share of the U.S. credit card market by purchase volume soared by more than 9 percentage points to 53%, and the amount of purchase volume on its network more than doubled from $764 billion to $1.96 trillion. Visa is the preferred payment processor in the No. 1 economy in the world, which just so happens to be reliant on consumption.

Visa also solely acts as a cashless payment facilitator. While some of its processing peers also act as lenders, Visa does not lend money. This might seem like a poor choice given the ability to double dip on revenue streams during periods of economic expansion. However, it means that Visa isn’t directly exposed to credit delinquencies during inevitable periods of economic contraction or recession. With no need to set aside loan-loss provisions, Visa’s profit margin is pretty consistently at or above 50%.

Furthermore, Visa has a ridiculously long runway with which to grow. A majority of the world’s transactions are still being conducted in cash, which is providing Visa with an excellent opportunity to court new merchants and wage war on cash in underbanked regions like the Middle East and Africa.

Author: Sean Williams

Source: Fool: 3 Great Stocks to Buy When the Stock Market Crashes

Not every marijuana stock can be a winner in the fast-growing cannabis industry.

Marijuana will likely be one of the fastest-growing industries this decade. With tens of billions of dollars sold in the North American black market each year, it’s only logical to assume that, over time, consumers will shift to legal channels in Canada (the first industrialized country in the world to legalize adult-use weed in the modern era) and the United States.

But this growth won’t be without early stage hiccups. For the past 17 months, pot stocks have struggled mightily under the weight of regulatory issues, supply concerns, high tax rates on legal product, and the inability to secure traditional forms of financing. Ultimately, not every cannabis stock is going to be a winner.

As we move headlong into September, three pot stocks stand out as particularly avoidable during this “growing pains” phase the industry is navigating through.

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Aurora Cannabis

Easily one of the most avoidable pot stocks in September also happens to be one of the most popular among millennial investors. I’m talking about none other than Canadian licensed producer Aurora Cannabis (NYSE:ACB).

This issue with Aurora is that the company investors thought they were buying for the long run isn’t the same company they own today. Aurora was expected to be the clear-cut global cannabis output leader with some of the lowest per-gram production costs in the industry. It also had access to more than two dozen international markets, so it was expected that exports would pick up almost immediately. But none of this has come to fruition.

Since the fourth quarter of 2019, we’ve witnessed Aurora Cannabis completely overhaul its operations. It’s shut down five of its smaller cultivation farms, sold off a 1-million-square-foot greenhouse (Exeter), and halted construction on two of its largest facilities (Aurora Sun and Aurora Nordic 2). The company has also enacted layoffs to reduce its selling, general, and administrative expenses. These moves were long overdue. Unfortunately, backpedaling to profitability isn’t the same as steamrolling toward profitability in a fast-growing industry.

The issue for Aurora Cannabis remains the company’s balance sheet. On one hand, it’s had virtually no means of raising capital beyond issuing stock. Its board approved a $350 million at-the-market offering earlier this year, which will continue a theme of ballooning the company’s outstanding share count to fund acquisitions and general operating expenses. In a six-year stretch, Aurora’s outstanding share count has jumped more than 80-fold, and its shareholders are the ones who’ve paid the price.

On the other hand, Aurora’s total assets are grossly overvalued. Just over half of the company’s assets are goodwill, with intangible assets, inventory, and property, plant, and equipment all in need of a proper revaluation.

Despite reporting its fiscal fourth-quarter operating results this month, I’d suggest avoiding Aurora Cannabis.

IMAGE SOURCE: GETTY IMAGES.

Acreage Holdings

While there’s no question that U.S. multistate operators (MSO) have run circles around their Canadian counterparts, not all MSOs are going to be worth investing in. More specifically, I’d suggest keeping your distance from Acreage Holdings (OTC:ACRG.F) in September, and perhaps well beyond.

The story here is similar to Aurora in that early investors bought into one story, which has now dramatically changed. This was supposed to be an MSO that would have a broader presence across the U.S., in terms of retail footprint, cultivation, and processing, than any other MSO. But following the termination of its Deep Roots acquisition and other cost-saving measures, the Acreage investors see today doesn’t stand out from its peers.

As of the second quarter, Acreage had 27 operational dispensaries and the ability to open as many as 71 dispensaries across 15 states. At one time, investors were expecting Acreage to have a presence in close to 20 states, with far more than 71 dispensary licenses. In the latest quarter, this translated into $27.1 million in sales and an adjusted net loss on a pro forma basis of $11.1 million. By comparison, Trulieve Cannabis generated nearly $121 million in sales in its most recent quarter with only 52 operational dispensaries. Although geography plays a role, Acreage Holdings’ sales growth and push toward profitability have been unimpressive.

Another major issue for Acreage is that it’s agreed to be acquired by Canada’s Canopy Growth (NYSE:CGC) on a contingency basis in a now-amended cash-and-stock deal. The contingency being that the U.S. federal government must legalize cannabis in order for the deal to come to fruition. Even if Democratic Party nominee Joe Biden wins in November, and the Democrats manage to take a majority of the seats in the Senate, Biden is no lock to support anything more than decriminalizing marijuana at the federal level.

What’s more, this deal has tied Acreage at the hip to Canopy Growth’s share price. Canopy Growth is in the midst of an overhaul of its own that’s seeing new CEO David Klein shutter millions of square feet of licensed indoor production and cut jobs in order to reduce expenses. As Canopy Growth flounders in Canada, so might its share price, and that of Acreage Holdings along with it.

IMAGE SOURCE: GETTY IMAGES.

HEXO

The third and final pot stock you’d be wise to avoid in September is yet another Canadian licensed producer: HEXO (NYSE:HEXO).

To keep with the ongoing theme, shareholders of HEXO have witnessed their vision of the company completely shift over the past 11 months.

At one time, HEXO looked like a surefire winner with minimal risk. It had signed a 200,000 kilo-in-aggregate deal with its home province of Quebec over a period of five years, and had acquired Newstrike Brands to bolster its annual production capacity to around 150,000 kilos of cannabis. Investors thought they were buying into a company that had plenty of committed cannabis and a clear focus on higher-margin derivatives.

But over the past couple of quarters, HEXO has spent much of its time backpedaling to control its costs. The Niagara facility, which was acquired in the Newstrike deal, was sold for a meager $10.25 million Canadian in mid-June. Meanwhile, the company has shed jobs and reduced operating capacity at its flagship Gatineau campus.

Similar to Aurora Cannabis, HEXO has had little choice but to turn to at-the-market offerings to raise capital. Three weeks ago, it completed a CA$34.5 million at-the-market offering program, with nearly 34 million shares of stock being sold. This constant dilution continues to pressure existing shareholders.

And as the icing on the cake, HEXO has been trading below the $1 continued minimum listing price for the New York Stock Exchange for months. After receiving a delisting notice in April, a coronavirus pandemic-related extension will give HEXO till Dec. 16 to get its share price back into compliance. It’s looking very possible that a reverse split could be on the horizon to avoid delisting.

HEXO is a mess and is best avoided by long-term cannabis investors.

Author: Sean Williams

Source: Fool: 3 Pot Stocks to Avoid Like the Plague in September

The Oracle of Omaha has never been a fan of diversification if you know what you’re doing.

Whether or not you’re a Warren Buffett fan, there’s no doubt that he’s one of the greatest investors of all time. The CEO of conglomerate Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) has grown his net worth from around $10,000 to $80 billion since the 1950s, and has delivered a compound annual return for Berkshire Hathaway’s shareholders of 20.3% since 1965. A $100 investment in Berkshire back in 1965 would be worth more than $2.5 million today.

Buffett’s success is primarily attributed to his ability to spot businesses with sustainable competitive advantages, as well as his persistence to stick with his holdings over long periods of time.

But this only tells part of the story. Buffett’s outperformance is also a direct reflection of his unwillingness to buy into the idea of traditional investment diversification. The Oracle of Omaha doesn’t believe in diversifying if you know what you’re doing. By sticking with companies in industries and sectors he knows very well, Buffett has amassed a long history of outperformance.

As of the closing bell on Thursday, Aug. 20, 92% of Buffett’s more than $240 billion in invested assets were concentrated in just three sectors.

BERKSHIRE HATHAWAY CEO WARREN BUFFETT. IMAGE SOURCE: THE MOTLEY FOOL.

Information technology: 49.33%

The craziest thing about this figure isn’t that information technology made up just 0.43% of Buffett’s invested assets exactly 10 years ago and is nearly half of Berkshire’s portfolio today. Rather, it’s that the entirety of this 49.33% stake is tied up in a single stock: Apple (NASDAQ:AAPL).

In an interview on CNBC’s Squawk Box in February, the Oracle of Omaha stated that “I don’t think of Apple as a stock. I think of it as our [Berkshire Hathaway’s] third business,” behind insurance and railroads.

Interestingly, it wasn’t Apple’s technology ties that initially attracted Buffett to begin building a stake in the company in 2016. Instead, it was Apple’s incredible branding power that got him hooked. One need only look at the lines wrapping around Apple stores anytime the company releases a new iPhone to understand what sort of branding power the company has.

Buffett has also been a big fan of Apple’s CEO Tim Cook, who’s in the process of transforming his company from being product-oriented to service-focused. For multiple quarters, we’ve watched services and wearables grow at a double-digit pace on a year-over-year basis. Services are an especially higher-margin segment that should lead to less revenue lumpiness for Apple over time.

Additionally, the tech kingpin has done a good job of returning capital to shareholders, which the Oracle of Omaha appreciates. Apple has been borrowing at historically low rates to fund aggressive share repurchases, and currently pays out one of the largest nominal dividends in the U.S. at north of $14 billion a year.

Financials: 29.05%

Maybe the biggest surprise here is that Buffett’s favorite sector, financials, now represents “only” 29% of Berkshire Hathaway’s portfolio. The 32.02% financials tallied at the end of June marked a nine-year low, while the current 29.05% represents the sector’s smallest allocation since the market bottom during the first quarter of 2009.

Why the perceived financial sector exodus? I believe there to be two answers.

To begin with, it’s not that Buffett suddenly dislikes bank stocks and insurers, so much as they’ve vastly underperformed the broader market since the March 2020 lows. Top holding Apple has doubled from its March bottom, while money-center bank Wells Fargo (NYSE:WFC) is down 56% year-to-date, and has declined below its March 2020 bottom.

Remember, financials are highly cyclical companies that typically depend on steady economic growth to drive loan activity and higher interest income. During recessions, the Federal Reserve’s dovish monetary policy pushes lending rates down, thereby hurting interest income for the likes of Wells Fargo and its peers.

The second factor that explains the decline in financial sector allocation is that Buffett and his team appear to be consolidating their holdings in the sector. Bank of America (NYSE:BAC) has been a particularly popular add for the Oracle of Omaha in recent weeks. Bank of America is arguably the most interest-sensitive of all bank stocks, and should therefore be among the first to benefit when lending rates start rising again. BofA has also done a solid job of controlling its noninterest expenses by focusing on mobile banking solutions and closing some of its physical branches.

Meanwhile, Wells Fargo has been steadily getting chopped down in Berkshire Hathaway’s portfolio. In addition to unfavorable near-term growth prospects, the company has struggled to move past a fake account scandal that came to head in 2016-2017.

IMAGE SOURCE: KRAFT HEINZ.

Consumer staples: 13.56%

Finally, consumer staples stocks (i.e., companies that provide essential products like packaged food and beverages) have shrunk to less than 14% of Berkshire Hathaway’s investable assets. This marks at least a two-decade low, and is well below the 45.5% allocation given to consumer staples 10 years ago.

Why no love for consumer staples? One explanation might be the relatively low interest rate environment we’ve been privy to now for more than a decade. Consumer staples are usually mature, slow-growing businesses that benefit when value stocks are in favor. However, access to cheap loans has allowed growth stocks to vastly outperform mature businesses and value stocks. As a result, most consumer staple stocks have been running in place for years. As Apple has grown in value as a percentage of Berkshire Hathaway’s portfolio, the allocation given to consumer staples has shrunk.

Another consideration is that Buffett is still feeling the sting from one of his worst investments in recent decades: Kraft Heinz (NASDAQ:KHC). Although the coronavirus disease 2019 (COVID-19) pandemic has reignited interest in some of Kraft Heinz’s packaged foods, it’s doesn’t negate that the company took a more than $15 billion goodwill writedown in February 2019 on its Kraft and Oscar Mayer brands, or that it’s been financially constrained by nearly $29 billion in total debt.

Kraft Heinz was perceived to be a business model that couldn’t be disrupted, but that hasn’t turned out to be the case. As a result, Buffett’s appetite for consumer staples stocks appears to have waned.

Author: Sean Williams

Source: Fool: 92% of Buffett’s Portfolio Is in These 3 Sectors

Though it can be hard to look past the unprecedented disruption brought on by the coronavirus disease 2019 (COVID-19) pandemic, Americans across the country are just 72 days away from heading to their local voting booths or mailing in their ballots for Election Day. As we learned from 2016, a lot can change in a matter of weeks. But as things stand now, nearly all polls suggest that Democratic Party nominee Joe Biden will unseat incumbent Republican Donald Trump for the presidency come November.

While there’s still a lot to be decided — 10 weeks is an eternity in the political landscape — Biden’s lead in the polls has brought his policies into greater focus. In particular, voters and economists are beginning to hone in on Biden’s tax plan, which aims to raise between $3.3 trillion and $3.7 trillion in additional federal tax revenue over the next decade if implemented fully in 2021.

Here are the 12 big tax law changes the former vice president is calling for.

1. An increase in the corporate tax rate

Arguably the biggest change from Donald Trump’s hallmark Tax Cuts and Jobs Act (TCJA) would be the partial undoing of the tax cut passed along to corporations. Under the TCJA, the peak marginal corporate tax rate was slashed from 35% to 21%. Under the Biden tax plan, the corporate tax rate would be increased to 28%. You’ll note this is still well below where it was during the Obama presidency.

Increasing the corporate tax rate to 28% should be responsible for raising roughly a third of the $3.3 trillion to $3.7 trillion in estimated extra revenue over the next decade.

2. A minimum tax on corporate income

Call this the Amazon rule if you’d like, but Biden’s tax plan calls for a minimum tax of 15% on companies with $100 million or more in annual net income that pay little or no federal income tax. In Amazon’s case, carryforward losses from the years where it wasn’t profitable, coupled with the Trump tax cuts, allowed it to report $11.2 billion in profits in 2018 without paying a single cent in federal income tax. Biden wants to eliminate the Amazon’s of the world from using tax loopholes to avoid paying federal tax.

The Tax Foundation notes that this minimum tax is set up like an alternative minimum tax, where corporations will pay the greater of their normal corporate income tax or the 15% minimum book income tax. However, companies will still be allowed to carry net operating losses forward, as well as lean on foreign tax credits.

IMAGE SOURCE: GETTY IMAGES.

3. Double the GILTI tax rate on foreign subsidiaries

Biden’s tax plan would also double the tax rate on Global Intangible Low-Tax Income (GILTI) earned by foreign subsidiaries of U.S. companies. Currently set at 10.5% under the TCJA, the GILTI tax rate would increase to 21%.

The purpose of GILTI, as laid out by the TCJA, was to ensure that multinational corporations didn’t specifically seek out tax havens for their mobile assets (e.g., patents and copyrights) to avoid U.S. taxation. Biden’s plan will simply move the needle further to ensure that the U.S. is getting its fair share of corporate profits being claimed in countries with more amenable peak corporate income tax rates.

4. The imposition of a financial risk fee on large banks

Biden is calling for the introduction of a financial risk fee on large banks (i.e., those with over $50 billion in assets), which was championed initially by former President Barack Obama. This fee would we based on a financial institution’s covered liabilities and would provide the Federal Deposit Insurance Corporation (FDIC) a pool of funds to use when conducting the orderly liquidation of a failed financial institution.

In effect, this fee would ensure that bank customers wouldn’t be on the line for these fees. Instead, a collective group of big banks would pay into a fund each year to cover any FDIC oversight expenses.

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5. An increase of the marginal tax rate for top earners

Biden would like to see America’s richest workers open up their wallets. He’d do this by reraising the top marginal income-tax bracket from 37% to 39.6%. If you recall, the TCJA lowered the top marginal bracket from 39.6% to 37% in 2018.

For the 2020 tax year, this top marginal rate is applicable to earned income above $518,400 for single filers and over $622,050 for married couples filing jointly.

6. Reinstitute the payroll tax on the top 1%

Next to increasing the corporate tax rate, the largest revenue generator would be the creation of a doughnut hole in Social Security’s 12.4% payroll tax on earned income.

In 2020, all earned income (wages and salary, but not investment income) between $0.01 and $137,700 is subject to the 12.4% payroll tax that funds Social Security. Approximately 94% of workers will pay into Social Security this year with every dollar they earn. Comparatively, the other 6% of workers who’ll make more than $137,700 in 2020 will see their income above $137,700 exempted from Social Security’s payroll tax. Between 1983 and 2016, the amount of earnings exempted ballooned from a little over $300 billion to $1.2 trillion.

Under the Biden tax plan, a doughnut hole would be created between $137,700 and $400,000, where this exemption would remain in place. However, for earned income above $400,000, the 12.4% payroll tax would be reinstated. It’s estimated this would raise between $797 billion and $1.04 trillion over the next decade.

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7. Lift the capital gains tax on filers with incomes above $1 million

The rich would also face higher capital gains tax rates under Biden’s proposal.

At the moment, short-term capital gains (assets held for 365 or fewer days) are taxed at the ordinary income tax rate, whereas long-term gains are taxed at 0%, 15%, or 20%, depending on a filer’s income. The 20% rate is applicable to single and married couples filing jointly with earned income above $441,450 and $496,600, respectively, in the 2020 tax year. It should be noted that the Net Investment Income Tax (NIIT) also applies a 3.8% surtax to capital gains for persons and couples with over $200,000 and $250,000, respectively, in income.

Biden’s proposal calls for filers with over $1 million in income to pay ordinary tax rates on their gains, no matter how long they’ve held an asset. This would imply 39.6%, plus the NIIT, for a total tax rate of over 43%.

8. Eliminate the stepped-up basis

To build off of the previous point, Biden wants to put an end to the step-up basis loophole that favors the well-to-do.

A step-up basis refers to the cost basis of assets or property transferrable to an heir upon death. If, as an example, an individual purchased a home for $300,000, but it was worth $600,000 at the time of their death, their heir would pay capital gains on anything over $600,000 if the home was ever sold. This stepping up of the cost basis is a loophole that costs the federal government money, given that it discourages people from realizing capital gains.

If Biden’s proposal were to become law, heirs would not “inherit” a stepped-up cost basis, thereby lifting the collectable capital gains tax over the coming decade.

IMAGE SOURCE: GETTY IMAGES.

9. Limit itemized deductions

A ninth change Biden calls for is a cap on itemized deductions of 28%. This is to say that for each dollar of itemized tax deductions, including charitable contributions, a taxpayer or couple filing jointly would only receive a maximum benefit of $0.28. This 28% limit would hold true even if a filer is paying a higher marginal tax rate.

If this sounds in any way familiar, it’s because the 28% itemized deduction threshold was championed by President Obama in the 2010s, as well as supported by his then-Vice President Joe Biden.

10. Phase out small business income deductions over $400,000

The Democratic Party presidential nominee also wants to see small business income deductions over $400,000 phased out.

As the law stands now, qualified pass-through business deductions, which allows small business owners to deduct up to 20% of their business income under the TCJA, are capped at $163,300 for single filers and $326,600 for joint filers in 2020. However, for individuals and couples earning over these thresholds, an abundance of rules exist that determine whether or not you’re allowed to take qualified business income (QBI) deductions.

Biden’s plan aims to simplify this by keeping QBI deductions in place for those with less than $400,000 in earnings, but phasing out pass-through deductions for those with over $400,000 in earnings.

IMAGE SOURCE: GETTY IMAGES.

11. Institute first-time homebuyers’ and renters’ tax credits

Keep in mind that Biden’s tax plan doesn’t involve simply collecting more money. It also is designed to give folks breaks where he believes breaks are due.

In May, Biden talked up the idea of providing new homebuyers with a tax credit worth up to $15,000. Known as the First Down Payment Tax Credit, it would aid first-time homebuyers in covering the initial costs and fees associated with purchasing a home.

Additionally, Biden wants to provide Section 8 housing vouchers to eligible families so they won’t have to spend more than 30% of their income on rent.

12. Up the existing Child and Dependent Care Tax Credit

The 12th and final change would involve increasing the existing Child and Dependent Care Tax Credit.

Under the TCJA, parents of children under the age of 13 or those who take care of a disabled dependent living in their household are eligible for a credit based on their expenses to care for a child or disabled dependent. This credit is equal to 35% of up to $3,000 in qualified expenses for one dependent or $6,000 for two or more dependents. This effectively means this tax is worth up to $2,100 under the TCJA.

With Biden’s plan, maximum allowable expenses would soar to $8,000 for individuals and $16,000 for multiple dependents, with the reimbursement percentage being adjusted to 50%. In other words, this credit could be worth as much as $8,000 and also include people who have no tax liability.

The makeup of Congress after the November election will have a big say on whether or not Biden’s tax plan has a shot at passing in the Senate. But either way, it’s important to understand how a possible Joe Biden presidency could affect your wallet.

Author: Sean Williams

Source: Fool: 12 Tax Changes Joe Biden Wants to Make

If elected, presidential front-runner Joe Biden has plans for a sweeping overhaul of Social Security.

This has been a crazy year. The coronavirus disease 2019 (COVID-19) pandemic has upended societal norms, pushed the unemployment rate to levels not seen since the 1930s, and tragically cost the lives of more than 160,000 Americans.

But we’re not done yet, because it’s also an election year. In just 79 days, people across the country will be heading to their local voting booth or mailing in their ballots to determine the path this country will take. At stake are all 435 seats in the House of Representatives, about a third of all Senate seats, and the big chair in the White House.

While a lot remains undecided with more than 11 weeks to go until Election Day, polling has consistently shown Democratic Party challenger Joe Biden leading incumbent Republican Donald Trump in the presidential race. This puts Joe Biden’s policies in focus now more than ever before.

Social Security is facing a nearly $17 trillion funding gap

If Biden wins in November, he’ll have a host of issues to immediately tackle, including the ongoing response to the coronavirus pandemic, job creation, and growing the U.S. economy. But don’t overlook perhaps the biggest long-term challenge facing the president: Social Security’s widening cash shortfall.

Every year, the Social Security Board of Trustees releases a report that examines the short-term (10-year) and long-term (75-year) outlook for the program. In each of the past 35 years, the Trustees have cautioned that long-term revenue collection won’t be sufficient to cover outlays. This is a fancy way of saying that the existing payout schedule, inclusive of cost-of-living adjustments (COLA), isn’t sustainable. Social Security is facing an estimated $16.8 trillion funding shortfall between 2035 — when the Trustees anticipate the program will exhaust its $2.9 trillion in asset reserves — and 2094. Benefit cuts of up to 24% may await retired workers as a result.

Something needs to be done soon to shore up Social Security; otherwise, our nation’s retired workforce could be in big financial trouble in less than 15 years.

However, Biden has a plan.

IMAGE SOURCE: GETTY IMAGES.

Joe Biden wants to make some big changes to Social Security

Here are the four main Social Security changes the Democratic Party challenger has proposed to strengthen the program.

1. Increase payroll taxation on high earners

Consistent with the Democrats’ core Social Security proposal, Biden would like to see high income earners pay more into the program.

Currently, Social Security’s 12.4% payroll tax on earned income (i.e., wages and salary, but not investment income) applies to earnings between $0.01 and $137,700. The vast majority — 94% — of all workers fall into this range in 2020, meaning these workers are paying into Social Security with every dollar they earn. Meanwhile, high income earners will see every earned dollar above $137,700 exempted from the payroll tax. It’s estimated that the amount of earnings exempted from the payroll tax nearly quadrupled from a little over $300 billion in 1983 to $1.2 trillion by 2016.

Under Biden’s plan, a doughnut hole would be created between the maximum taxable cap of $137,700 and $400,000, where earned income would remain exempt from the payroll tax. Note, though, that the maximum payroll tax cap increases almost every year on par with the National Average Wage Index. Thus, over time, this doughnut hole would shrink. As for folks generating more than $400,000 in earned income, the 12.4% payroll tax would kick back in on earnings above this threshold.

IMAGE SOURCE: GETTY IMAGES.

2. Provide an enhanced special minimum benefit

Another significant change proposed by Biden would be to beef up Social Security’s special minimum benefit.

As of 2019, the full special minimum benefit for lifetime low earners was $886.40 a month.By comparison, monthly benefits would need to be considerably higher just to be above federal poverty levels.

Although it wouldn’t affect too many retired workers, Biden’s proposal entails setting the special minimum benefit limit at 125% of the federal poverty line. In 2019, 125% of the federal poverty line for an individual was $1,301 a month — so we’re talking about a significant bump in monthly payout for lifetime low wage earners with between 10 and 30 years of work history.

Following this initial adjustment to bring up benefits for low wage earners, payouts would increase on par with the National Average Wage Index in subsequent years.

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3. Boost benefits for long-lived beneficiaries

A third change Biden wishes to implement is an increase in benefits for retired workers who receive Social Security benefits for a long time.

As people age, some of their expenses can soar, including out-of-pocket healthcare costs, transportation expenses, and personal assistance services. Unfortunately, Social Security benefits aren’t growing quickly enough to cover this uptick in late-in-life expenses.

Under Biden’s Social Security proposal, beneficiaries between the ages of 78 and 82 would receive a 1% bump up in their primary insurance amount each year until it reached a full 5% increase in the primary insurance amount. This would provide a modestly larger payout for older beneficiaries that would help to stave off a decline in living standards.

IMAGE SOURCE: GETTY IMAGES.

4. Switch the program’s inflationary tether to the CPI-E

Fourth and finally, Biden has suggested that the inflationary tether for Social Security be changed from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E).

The CPI-W has been the program’s inflationary measure since 1975, and while it’s resulted in a positive COLA in 42 of the past 45 years, the purchasing power of Social Security dollars has been slashed by 30% since 2000. That’s because the CPI-W doesn’t do a very good job of accurately measuring the costs that seniors are contending with. Even though more than 80% of Social Security beneficiaries are seniors, the CPI-W tracks the spending habits of urban and clerical workers, who often aren’t seniors or receiving Social Security benefits.

Under Biden’s plan, the CPI-E would become the new inflationary tether. The CPI-E specifically tracks the spending habits of households with persons aged 62 and up. In theory, this should result in a more accurate COLA each year.

IMAGE SOURCE: GETTY IMAGES.

Biden’s Social Security plan faces significant hurdles
While there’s little doubt that taxing high earners would provide an immediate revenue bump for Social Security, and Biden’s other tactics would support lower benefit recipients, it’s unclear if he’d be successful in getting any of these amendments signed into law.

The biggest hurdle for Biden would be convincing 60 senators to vote in favor of these proposals. Since there hasn’t been a true supermajority for a single party (not counting independents) in over 40 years, all amendments to the Social Security Act would require bipartisan support. Republicans have been pretty adamant that they don’t support increasing taxes on the well-to-do, nor are they fans of the CPI-E. Without GOP support, Biden’s Social Security plan wouldn’t pass muster in the Senate.

There are other nuances, too, that would likely need to be addressed. For example, the CPI-E is an experimental inflationary measure that still needs refining. This means it couldn’t be plugged in as a CPI-W replacement overnight.

Another concern is that raising taxes on high earners won’t, by itself, save Social Security. It would absolutely push the program’s asset reserve depletion date further out, but it wouldn’t resolve other outstanding issues, such as a steady decline in net legal immigration, record-low birth rates, and increasing longevity.

Once again, a lot could happen between now and Election Day. But if Biden were to get the nod as Commander in Chief, he’d be angling to implement a sweeping direct overhaul of the Social Security program — and would face numerous hurdles in the process.

Author: Sean Williams

Source: Fool: 4 Social Security Changes Joe Biden Wants to Make

Berkshire Hathaway’s stake in Apple is worth almost $107 billion.

Over the past decade, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett has faced his fair share of criticism. Whereas the benchmark S&P 500 has gained 197% over the trailing 10-year period, Berkshire Hathaway’s stock has galloped higher by “only” 151%, representing a 46-percentage-point underperformance.

But in Buffett terms, a decade can be a relatively short time frame to gauge investment performance.

Looking back over the Oracle of Omaha’s more than five-decade tenure at Berkshire Hathaway, he’s absolutely crushed the S&P 500 in aggregate returns. On a compound annual growth basis, Berkshire’s return of 20.3% more than doubles that of the S&P 500 (10%) — and that’s including dividends paid. On an aggregate basis, it’s led to a better than 2,700,000% outperformance of the S&P 500.

In other words, suggesting that Warren Buffett has lost his touch or doesn’t have what it takes to invest in today’s market would be a premature to outright incorrect statement. And if you need additional proof, just take a closer look at Buffett’s investment in tech giant Apple (NASDAQ:AAPL).

Apple has grown into a monster position for the Oracle of Omaha

In May 2016, Berkshire Hathaway began building a positon in Apple, which today stands at north of 250 million shares owned, or approximately 5.8% of Apple’s outstanding shares. This position comes with an initial cost basis of $35.29 billion, according to Berkshire’s 2019 annual shareholder letter. However, following Apple’s stellar fiscal third-quarter operating results last week, Berkshire’s stake has swelled to $106.63 billion.

Allow me to put this four-year gain into context. First off, Buffett has made more than $71 billion, on an unrealized basis, by purchasing and holding Apple stock. Mind you, this doesn’t include the dividends his company is receiving, which should total $822.8 million just in 2020. Adding these dividends would push Buffett’s unrealized and realized gain well above $73 billion. In four years, Buffett has made more on Apple than the market caps of 417 out of the 500 S&P 500 companies.

If that’s not a crazy enough statistic for you, how about this: Apple now comprises 45.4% of Buffett’s invested assets. As of this past weekend, Buffett’s 46-security investment portfolio was worth $234.75 billion, with Apple accounting for $106.63 billion. Buffett has never been a big fan of diversification, as long as you know what you’re doing, and it clearly shows with his current investment allocation.

BERKSHIRE HATHAWAY CEO WARREN BUFFETT. IMAGE SOURCE: THE MOTLEY FOOL.

Buffett has zero incentive to sell or pare down his Apple stake

But just because Apple has ballooned to 45% of Berkshire Hathaway’s investment portfolio, and it accounts for a little over 22% of Berkshire Hathaway’s $476 billion market cap, don’t expect the Oracle of Omaha to sell his stake anytime soon.

Back in a February interview with CNBC, Buffett stated that he views Apple “as our third business.” He went on to say that, “It’s [Apple] probably the best business I know in the world. And that is a bigger commitment that we have in any business except insurance and the railroad.” It’s an incredibly strong statement from Buffett that demonstrates his long-term resolve.

You see, Apple is one of the most recognized and valuable brands in the world, which is evidenced by any of its product launches. Anytime Apple launches a new version of the iPhone, consumers line up around the block for their chance to get their hands on it. This almost cult-like following works in Apple’s favor by keeping consumers within its sphere of products and services. This is to say that even if some of Apple’s products and services aren’t successful, they still work to draw in new consumers and keep existing customers within its ecosystem.

Beyond having sustainable innovative and brand-name competitive advantages, Buffett is also very fond of Apple’s management team. Tim Cook has transformed Apple during his nine years as CEO, pushing the company into higher-margin and faster-growing wearables and services, while also taking on debt at exceptionally low lending rates to finance common stock buybacks. Over the trailing five years, Apple has repurchased approximately 1.37 billion shares, thereby lowering its outstanding share count by almost 24%. Buffett is a big fan of Apple’s buyback policy.

IMAGE SOURCE: APPLE.

Apple is holding up its end of the bargain, too

Then again, long-term conviction is just one piece of the puzzle as to why Buffett is up $71 billion on Apple in four years. It also means Apple is holding up its end of the bargain and delivering for its shareholders.

Beyond its aggressive capital return program, Apple should be applauded for its resilience in the face of the biggest economic disruption since the Great Depression. Apple’s sales grew 11% in the June-ended quarter, with the most impressive growth being seen in its high-margin wearables and services segments, which Cook has really been pushing. Wearables and accessory sales jumped close to 17% from the prior-year period, with services revenue not too far behind (a year-on-year increase of 15%). Services are especially important since margins are higher and revenue recognition less lumpy than Apple’s traditional products.

Also key to Apple’s success is the company’s innovation. Though Apple has done an excellent job of growing its streaming and cloud storage services, what’s really exciting is the company’s potential to disrupt digital health monitoring or become a major playing in artificial intelligence (AI). You’re likely already familiar with Siri, but Apple will be using increasing its usage of AI for facial recognition, text translation, and App Library suggestions, among other tasks.

Apple’s latest operating results offer no indication that it’s anywhere near a peak, which means it could grow into an even larger piece of Warren Buffett’s investment portfolio in the months and years that lie ahead.

Author: Sean Williams

Source: Fool: Apple Now Makes Up 45% of Buffett’s Invested Assets

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