• Mike V.

Weekend Reading


Barron’s: How, and Why, to Build a Social Security ‘Bridge’ With Your 401(k)


Most Americans should employ a Social Security “bridge” using their retirement-plan assets to delay claiming until age 70, when benefits max out, according to new research that comes as the first wave of workers dependent on 401(k)s begins to retire. Assets in 401(k) accounts should be used to provide automatic monthly income for retiring individuals ages 60 to 69, roughly matching what they would be receiving from Social Security, according to the white paper titled “How Best to Annuitize Defined-Contribution Assets?” from the Center for Retirement Research at Boston College. By front-loading withdrawals from 401(k) plans and individual retirement accounts until age 70 with a so-called bridge strategy, many Americans will be able to delay collecting Social Security benefits until they can claim the maximum. For each year that a person delays claiming up to age 70, his monthly Social Security check increases 7% to 8%. The average retiree who can go without Social Security until age 70 would increase his monthly check by more than 50%, the paper says. Using a mathematical model incorporating mortality statistics, market risk, and “consumption shocks” such as major health-care expenditures, the authors concluded that for almost all Americans, the bridge option is the most-efficient use of retirement assets. To help seniors employ a bridge strategy, 401(k) plans and IRAs should have front-loaded withdrawals to retiring people ages 60 to 69 as the default option for account management, Munnell says. Though seniors should have the right to opt out of this provision, even after payments have started, she adds. “Some people think it should just be an option in 401(k) plans,” Munnell says. “I personally think it should be a default, but even as an option, it would say to people, ‘Listen, you don’t need to claim the minute you retire. You can make those two separate decisions.’ ” The authors point out that many newly retired Americans are reluctant to draw down their 401(k) or IRA balances to support themselves, fearing they eventually will run out of money or be unable to cover end-of-life health-care costs. With that money set aside, they claim Social Security benefits immediately upon retiring or simply work until they become eligible to claim benefits at age 62, the authors report. Only 5% of men and 7% of women defer claiming Social Security benefits until age 70, according to the paper, and 35% of men and 40% of women claim benefits at age 62. In 2017, the median claiming age was 64 for men and 63 for women, the authors say.

The authors acknowledge that many Americans lack the financial resources to delay claiming until age 70, and for seniors facing serious health problems, claiming early might be the right move. But for those who can afford it, the bridge option makes sense because it allows retirees to essentially buy more Social Security income by waiting. And that income is superior to commercially available annuities because it is indexed to inflation, the paper says. “What comes out of this paper is that the best way to buy more guaranteed income is to defer claiming Social Security,” Munnell says. “Not everybody can defer their benefits, but the paper is arguing that people’s first choice should be to use their 401(k) to enable them to buy this inflation-adjusted annuity through Social Security.”

Contact VIMA to run a comprehensive SSI analysis.


Barrons: Fiat Chrysler-Peugeot Deal Could Be a Winner


Will a combined Fiat Chrysler Automobiles and Groupe PSA thrive in an automotive future filled with electric drivetrains and autonomous vehicles? Assuming the proposed marriage clears political and regulatory hurdles, the Italian-American and French auto manufacturers both should benefit in the long term. But they’ll still face daunting challenges. In the short term, Fiat Chrysler investors look as if they’ll do better than PSA shareholders. The biggest positive for both companies: “The name of the game for the global automotive industry is economy of scale. The more that you can commonize vehicles, the better off you’re going to be, as far as your total cost structure,” says Morningstar analyst Richard Hilgert, who is bullish on the deal. A prescient report by UBS analyst Patrick Hummel last spring, when the companies first seriously discussed a deal (later torpedoed by a failed mating dance involving Fiat Chrysler and Renault), projected annual savings of three billion to 6.6 billion euros ($3.34 billion to $7.35 billion) from full integration. The companies are shooting for €3.7 billion. Peugeot’s emissions expertise should reduce the tab for helping Jeeps meet tough new pollution limits in Europe, where Fiat Chrysler sold a bit more than a million vehicles last year, compared with PSA’s 3.1 million for all its brands. The French company also has more modern vehicle platforms than Fiat Chrysler and is ahead of it in electrification. Combined, they’d have more money to develop e-vehicles and self-driving cars.

For PSA, the biggest benefits include gaining a ready-made launching pad—Fiat Chrysler dealerships—for its long-coveted return to the American market, which it fled more than a quarter-century ago. And although the all-stock linkup is being cast as a merger of equals, the French concern would hold more power, with Peugeot boss Carlos Tavares becoming CEO, and PSA holding six of 11 board seats. John Elkann, Fiat Chrysler’s chairman and a member of Fiat’s founding Agnelli family, will have the same title at the new company. Tavares, a tough, driven executive viewed by many as one of the auto industry’s savviest leaders, has helped PSA improve the quality, profitability, and attractiveness of its vehicles. More relevant to the merger, he’s been able to meld different industrial cultures, quickly making GM’s former chronically money-losing German-British Opel/Vauxhall unit profitable after Peugeot acquired it in 2017. PSA’s strength in Europe will bolster Fiat Chrysler there. In turn, Fiat Chrysler’s financial power—it reported robust quarterly earnings of $2.2 billion Thursday, before one-time charges produced a $200 million net loss—will be a boon for PSA. Both are players in Latin America, but markets there have been weak in recent years.

Under the deal, the new company’s shares will be split 50-50 between the two stockholder bases. Arndt Ellinghorst, an Evercore ISI analyst, argues that, after all balance-sheet, operating, stock-market value, and profitability factors are considered, PSA is paying about a 20% premium for Fiat Chrysler. Longer term, investors from both sides should gain. Ellinghorst sees the new company’s margins, based on earnings before interest, taxes, depreciation, and amortization (Ebitda), hitting 12.5% in 2021 and 12.7% in 2022, versus 11.7% and 11.1% for PSA and Fiat Chrysler, respectively, last year. As part of the transaction, Peugeot is expected to distribute to shareholders its €2.75 billion stake in Faurecia, an auto-parts maker, according to The Wall Street Journal, while Fiat Chrysler holders would get €5.5 billion from a special dividend and the sale of its Comau automation and robotics unit.

On the negative side, Hilgert observes: “Each of the countries that [Peugeot and Fiat Chrysler] operate in is looking at their company as a national champion, so they want to

protect the manufacturing footprint within each of their countries.” Forget about boosting efficiency by curbing employment or shuttering unneeded factories in France or Italy. In addition, the U.S.-Canada-Mexico trade pact that will replace Nafta has rules aimed at boosting U.S. vehicle content and protecting American jobs. Another problem is that both companies are weak in China, the world’s biggest market. Hilgert thinks that “Jeep has a pretty good shot in China. I’m not so confident on the Peugeot side.”

Perhaps the biggest challenge: French cars never were popular in the U.S.; Peugeots had a reputation for quirkiness and unreliability. (Fittingly, Columbo, the clever but clueless hero of the classic 1970s’ TV detective series, drove a ratty Peugeot convertible.) Today’s Peugeots are light years ahead of yesteryears’, but so are all other cars. Fiat Chrysler has had little success in peddling Italian Alfas and Fiats to Americans. Betting that it will do better with French Peugeots looks like a long shot, especially with a global auto downturn seemingly unfolding.


Bloomberg: China Car Sales Keep Falling as Peak Season Fails to Deliver


China’s car-market gloom continued in October as the traditional post-holiday demand peak failed to materialize, leaving automakers with few easy answers to attract buyers back to showrooms. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles dropped 6% from a year earlier to 1.87 million units, the China Passenger Car Association said Friday. The decline was the 16th in the past 17 months, with the only increase coming this June as dealers offered large discounts to clear inventory.

The period known as “Golden September, Silver October” is typically strong for carmakers as consumers like to make big-ticket purchases during the harvest season. Not this year though, underscoring the depth of the historic slump the car industry is mired in. Demand in the world’s biggest car market has been hurt by a slowing economy that’s made consumers curb spending. Measures by the government to boost consumption have yet to help, leaving automakers’ profitability challenged and prompting industry insiders to predict mergers and market exits. Global carmakers such as Volkswagen AG and Honda Motor Co. have weathered the slowdown better than some other international brands, which are sputtering along with cheaper local companies due to the cooling demand. Deliveries of local brands fell 12% in October, the PCA’s secretary general Cui Dongshu said. Chongqing Changan Automobile Co., a local partner of France’s PSA Group, said last month it plans to sell all of its shares in a 50-50 joint venture after the assembler sold fewer than 4,000 DS cars last year in the country. China’s hundreds of aspiring electric-vehicle makers are also struggling to convince buyers that it’s worth paying higher prices than opting for cheaper gas guzzlers. Electric-car sales fell for three straight months through September, as the government -- after spending billions of yuan to nurture the industry -- scaled back subsidies. The PCA said Friday that deliveries of new energy vehicles to dealerships slid 45% to 66,000 units last month.

Warren Buffett-backed BYD Co., the country’s biggest maker of new energy vehicles -- all-electric, fuel-cell and plugin hybrid cars -- last month reported an 89% slump in third-quarter earnings and warned profit could fall as much as 43% this year. BAIC BluePark New Energy Technology Co., China’s biggest maker of all-electric automobiles, also forecast a 2019 loss in a grim earnings update.

China’s Vehicle Inventory Alert Index stood at 62.4% last month, the second-highest level this year, signaling dealers face rising operational pressure, according to the China Automobile Dealers Association. A reading above 50% indicates high inventory. Amid the gloomy picture, the silver lining lies with makers of luxury cars and Japanese brand vehicle makers such as Honda, which had a 6.5% sales gain in China last month. Sales by Volvo Cars surged 27% in October to 11,083 units, according to the company. Industrywide sales of luxury brands rose 14% last month, according to the PCA.


Bloomberg: VW Considers Sharing Autonomous-Car Tech to Defray Costs


Volkswagen AG is open to sharing future autonomous-vehicle systems with other manufacturers as it races to catch up with the likes of Waymo LLC in cost-intensive technologies that could transform the way people and goods move, according to an executive at the German automaker. Joint projects beyond a deal with Ford Motor Co. signed in July -- that includes a $2.6 billion investment in its U.S. peer’s affiliate Argo AI LLC -- could help spread out costs more widely, said Alexander Hitzinger, VW’s senior vice president for autonomous driving. “We do have to catch up in some fields but we’re not massively far behind here, and as VW group we can really generate very large economies of scale,” Hitzinger told Bloomberg on the sidelines of a press briefing in Hamburg. “And this will be a scale game,” he said. VW’s efforts to develop robotic cars date back more than a decade to tests hosted by the Defense Advanced Research Projects Agency, or DARPA, in the U.S. But the industrial giant’s unwieldy corporate structure -- with operations scattered across 12 automotive brands and 122 factories worldwide -- led to fragmented development that allowed quicker rivals to take the lead. The division will have offices in Germany, Silicon Valley and China to attract top talent and develop highly automated driving systems -- so-called Level 4 autonomy -- that can be scaled up for commercial production starting around 2025.


Bloomberg: Morgan Stanley Sees Market Returns Tumbling Over Next 10 Years


A weak environment for economic growth and inflation, paired with low bond yields, portend anemic returns from a typical stock-bond portfolio over the next decade, according to Morgan Stanley. A traditional fund -- split 60% in equities and 40% in fixed income -- will see an annual gain of just 2.8% over that time, about half the average over the last two decades, the firm’s strategists estimate. That’s based on the S&P 500 Index returning 4.9% per annum and 10-year Treasuries handing investors 2.1% a year for a dollar-denominated investor. Not only will the returns be below what investors are used to but lower sovereign-bond yields will dampen the ability of fixed-income securities to offset large declines in equities, they said. “The return outlook over the next decade is sobering,” according to strategists including Serena Tang and Andrew Sheets. “Investors face a lower and flatter frontier compared with prior decades, and especially compared to the 10 years post-GFC, when risk-asset prices were sustained by extraordinary monetary policies that are in the process of being unwound.” The assessment comes with a caveat that low return expectations in the past didn’t materialize as central-bank intervention pushed up asset prices. The analysts see the

U.K. having the highest return potential for equities, followed by emerging-market shares.

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