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U.S. Treasuries, Bonds, and More!!

By Alexander Tecle

Why is it important to keep track of U.S. Treasury interest rate levels? How do they impact interest rates globally?

It is important because the U.S. Treasury yield curve is the first mover of all domestic interest rates and the most influential factor in setting global interest rates. Interest rates on all domestic bond categories rise and fall based on the yield activity within the U.S. Treasury market. In general, investors view the US. Treasury security as the risk-free rate, or least risky security in the global markets. Investors use the Treasury yield-curve (yields for treasuries at all maturities) as an acceptable yield-for-risk benchmark for all bond investments at higher risk levels.

 

How does the Federal Reserve influence the direction and activity of the yield curve?

The Federal Reserve directly affects the short-term side of the yield curve by setting the Federal Funds Rate. The Fed Funds rate is the rate at which banks charge each to lend capital to each other during the overnight cycle. The Federal Reserve also controls the prices of treasuries and other bonds in the market by their open market operations that purchase and sell of bonds by increasing the supply of bonds or reducing the supply of bonds in the market place. This process is called quantitative easing or tightening. At this moment, the Federal Reserve is in the process of tightening monetary policy, which is encouraging the U.S. treasury yield curve to rise and push up U.S. bond yields. This action is quite common in the later part of the economic-cycle after an extended period of economic growth and expansion. Please select the link below to review the current treasury yield environment and U.S. credit yield environment.

U.S. Rates

 

How is the Federal Reserve rate policy different then other central bank around the globe?

 

In developing nations, such as the European Union, Japan, and Australia, the central banks are working cohesively to loosen monetary policy and encourage a relatively low interest rate environment. The European Central Bank, Central Bank of Japan, and others have been engaged in hyper quantitative easing operations to bring the key overnight lending rate into negative territories with the intent to discourage investing into their government bonds and encourage the market to invest into higher risk assets. (Such as stocks, corporate bond, private equity, etc.) The primary motive is that the developed market economies have struggled to produce substantial and prolonged periods of economic growth and expansion. The difference between the progress of the U.S. and Developed-International economic cycles has been a thematic concern for monetary policy makers. This concern has resulted in a divergence of global rate policies amongst global central banks and substantial difference in the price of bonds yields around the world that can be observed rather easily. Select the link below to view developed-international market interest rates globally.

U.K. Rates, Germany Rates, Japan Rates, and Australia Rates.

IRS tax penalty

IRS Tax Penalty

The Internal Revenue Service IRS imposes an IRS tax penalty for different reasons. Some of the most common irs tax penalties are:

Notably, the IRS imposes interest by law. The IRS is powerless to remove interest unless calculated incorrectly. Conversely, the IRS will pay interest to you if they owe you money.

Can penalties be removed?

Importantly, the IRS removes penalties upon the taxpayer can demonstrating reasonable cause. Otherwise, the taxpayer may request a first time penalty abatement, if they have had a good history for the past three years.

If you receive an IRS notice, you should request that the IRS remove the penalties for reasonable cause and for first time penalty abatement. We usually do this while paying the undisputed amount of income tax and interest.

Penalties during an audit

I would not agree to penalties during an audit, especially if the taxpayer had a good history. Do not agree to an audit report that includes penalties. If you have already agreed to penalties, you could re-open the audit.

If you have any questions, please contact us.

Opko

UPDATE: OPKO scheduled to resume trading Friday at 1:15 p.m. EDT.

Opko

Opko Health Inc.’s stock closed down 18% on September 7, 2018. Importantly, Nasdaq halted trading in Opko Health, NASDAQ symbol OPK ($OPK) on September 7, 2018 at 14:34:38 Eastern Time at a last sale price of $4.5835. Meanwhile, nasdaq suspended trading since that time. While this has transpired, hurricane florence bears down on the United States.

Equity Options in OPK

Importantly, September 14, 2018 options are set to expire. The Options Clearing Corporation handles options clearing. The OCC issued a notice #43635 regarding equity option expiration on September 11, 2018. Furthermore, the memo indicates that so long as trading is suspended, equity options in $OPK will not automatically exercise even if they are in the money. Importantly, the holder must provide positive exercise instructions to OCC. If trading resumes, then the options will exercise, as normal.

In the money Options

There are several in the money options relating to OPK. The Sept 14 $5.00 put says it appreciated by 650%. See OPK180914P00005000 and OPK180914P00005500.

The Message from OCC

Hello,

Thank you for using our services. There are a few OCC memos which will help. Hence, the general guidelines memo when a stock halts:

https://www.theocc.com/webapps/infomemos?number=30049&date=201201&lastModifiedDate=09%2F13%2F2014+09%3A48%3A49

Secondly, a specific reference to OPK options in memo #43635:

https://www.theocc.com/webapps/infomemos?number=43635&date=201809&lastModifiedDate=09%2F11%2F2018+10%3A29%3A21

Likewise, please keep in mind, these memos concern Exercise by Exception procedures.

In conclusion, thanks again and I hope this helps.

Conclusion

Finally, make sure you monitor this situation like a hawk to ensure yo do not miss an opportunity.

 

Net Unrealized Appreciation – NUA – 2018

Net Unrealized Appreciation – NUA – 2018

Net Unrealized Appreciation – NUA – 2018 occurs when an individual has invested in company stock within a retirement plan, such as a 401(k). NUA also refers to as a lump-sum distribution involving company stock. The NUA rules are different for 2018 because the tax rates changed.

Why is it Important?

An eligible taxpayer can save a significant amount of taxes by distributing appreciated stock to a taxable account.

Who is Eligible?

A person who separates from service by way of disability, or retirement if older than 59.5.

Please explain further in depth.

Under the typical NUA scenario, a person retiring from their company will have a 401(k) that holds their company’s stock. For example, you worked at FPL or HEICO Corporation for many year. During that time, you or the company acquired company stock in the retirement plan and its appreciated quite a bit. You will have to consider doing an NUA transaction within 1 tax year following the year you retire. For example, if you retire on November 30, 2018, you have until the close of 2019 to do an NUA.

You have three options.

  • (1) You can do nothing and keep your money at the 401(k) as long as they will do business with you.
  • (2) Take a lump-sum distribution from the 401(k) and roll the entire balance into a Rollover IRA, not taking advantage of the NUA.
  • (3) Make a lump-sum distribution from your 401(k). Distribute the shares of the company stock into a taxable brokerage account, and roll over the rest into a Rollover IRA.

Tax Consequences

If you take advantage of the NUA, you will immediately owe ordinary income tax on the original cost basis of the shares. The cost basis is what you paid for it, presumably long ago. Tax is due on the appreciated aspect of the stock when you sell it. The NUA constitutes the difference between the cost basis and the fair market value. the FMV is the exchange traded price, in many cases. If you later sell the company stock, any gain will be taxed as a long term capital gain.

NUA TIP: If there is any after-tax money  accumulated in the 401k, then a portion of these monies could be used to reduce the amount of the cost basis, which will lower the tax bill.

What happens to the stock after the NUA Transfer is complete?

The stock carries its cost basis from the 401k. However, when the taxpayer sells, he or she realizes a gain on the appreciation of the stock above the cost basis. Upon sale or liquidation of the stock, long-term capital gains apply to the sale proceeds at long-term capital gains rates.

NUANCE: The gain on the stock on the date of transfer is treated as long-term capital gain. The law deems it long-term. However, any subsequent appreciation of the stock above its fair market value on the date of transfer is treated as a short-term capital gain until 1 year passes from the date of the lump-sum distribution.

EXAMPLE: Assume a taxpayer distributes NUA stock on April 17, 2019. The stock had a cost basis of $10 and a fair market value of $22. Assume a tax rate of 37%. In 2019, the taxpayer owes ordinary income tax on the stock basis. The tax due is $3.70. The difference between the cost basis and the FMV is $12. This is the NUA. Assume the stock later appreciated to $23. Assume the Taxpayer sold it on April 23, 2019. In such a case, the taxpayer would also owe long-term capital gains taxes on the $12 appreciation, and short-term capital gains taxes on the difference between the $22 FMV on the date of distribution and the $23 sale price. The gain is not subject to the Additional Medicare tax. The custodians report the NUA on Form 1099-R and the subsequent sale on Form 1099-B.

When is an NUA ideal?

The NUA becomes attractive when you hold highly appreciated company stock in your 401k.

There are many IRS rules that govern a former 401k participants eligibility to use of the NUA transfer. It is important to consider these rules before making the decision to take advantage of the NUA transfer election.

Net Unrealized Appreciation – NUA – 2018

Net unrealized appreciation rules

Frank Duke Method

Net unrealized appreciation 401k

A Tale of Two Euro’s

#Euro Zone # Switzerland # Geneva # Rome # Economic Crisis # Paris # London # Swiss Franc

By Alexander Tecle Geneva, Switzerland

A Tale of Two Euros!!

While visiting Europe this week! I’ve met with numerous client’s expressing the same concerns. Why has the EU monetary unit weakened against the USD? Why are the Eurozone equity markets drastically underperforming the US Equity Markets? Why are Euro Zone interest rates so low and the U.S. much higher? It seems like their family businesses are doing better, but why isn’t it reflected in the growth of their personal net worth? My explanation is to them is a that Eurozone business confidence has slowed since the onset of the Trade War between U.S. and the rest of the world. Paradoxically, the same headlines of the Trade War has caused widespread jubilation and growth momentum within the U.S. markets. In fact, the spread between the growth rates in the U.S. and the Eurozone are the largest since 2014. Add to this fact that Europe has seen unprecedented risks to the stability of their banking system due in part by the collapse of the Turkish Lira and to the added strain on Turkish companies to pay back Euro denominated Turkish debt. The contagion was most recently a concern to the stability of Italian banks since many of them were thought to have held Turkish debt on their balance sheets. This created a huge spike in the yields of Italian debt to 3.01%, which also means that prices of Italian debt have fallen. To put things into perspective, the only country with a higher debt yield is Greece, which has since recovered from one of the worst and longest recession to hit a Eurozone country in history and is yielding 4.49% on their 10-yr bond. Conversely, the German 10-yr bond is yields are slightly positive yields around 35bps or .35% and the Swiss 10-yr bond is yielding -14 bps or -.14 %. Many of my clients hold some of their liquid assets in both UK. And Swiss depository institutions, which invest into their respective governments debt. On the flipside of the coin, Italy’s unemployment rate rose to 10.9% from 10.7% in June. Among people aged less than 25 years, the jobless rate rose to 32.6% from 32.2%. I was in Rome and saw it myself. High rates of youth unemployment have fueled a rise in support for the antiestablishment parties that comprise the new government. The eurozone economy entered 2018 on a high, having racked up its most rapid expansion in a decade during 2017. However, growth slowed sharply in the first three months of this year. The key risks to the economic stability of the Eurozone are a continued divergence between of economic growth of Eurozone countries and the United States, continued unravelling of Brexit, Labor Relation issues in France and Germany, and the NeverEnding Story of the Italian Debt Crisis! My last answer and recommendation to my clients was to divest and diversify more of their family’s wealth into a broadly diversified basket of U.S. equities and Bonds and away from their perils of the Eurozone economic outcome. Don’t keep all of your eggs in one continent!

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