In The Headlines
SpaceX Contract Advances the Commercialization of Space
NASA has placed an order with private spaceflight company SpaceX for a manned mission to the International Space Station in 2017. The Dragon spacecraft can carry up to seven people in lower Earth orbit. “The authority to proceed with Dragon’s first operational crew mission is a significant milestone in the Commercial Crew Program and a great source of pride for the entire SpaceX team,” Gwynne Shotwell, president and chief operating officer of SpaceX, said in a statement.
Last year, the space agency tentatively awarded a $2.6 billion contract to SpaceX to carry crew to space. NASA’s recent announcement formalizes the deal, which involves SpaceX loading its Crew Dragon spacecraft with astronauts and sending them beyond the stratosphere.
The order is one of two guaranteed missions that SpaceX was awarded in a 2014 contract with NASA. The flights are part of NASA’s Commercial Crew Program, which aims to co-operate with private American aerospace companies to “develop and operate a new generation of spacecraft and launch systems capable of carrying crews to low-Earth orbit and the International Space Station.”
According to NASA, commercial crew launches will “reduce the cost, per seat, of transporting NASA astronauts to the space station, compared to what the agency must pay the Russian Federal Space Agency for the same service.” NASA goal is to wean the country’s space program from its dependence on Russia for sending astronauts into orbit. The space agency plans to award two more private contracts for manned flights to the space station sometime in the future.
Boeing, which is also part of the Commercial Crew Program, received its first official order in May. The company will deliver its CST-100 Starliner to the ISS at a future date yet to be determined. Like SpaceX, Boeing has been guaranteed at least two missions to the space station, but each company could receive a “maximum potential of six missions.” SpaceX hit a big milestone on Friday with NASA confirming on Friday that the Elon Musk-led space cargo business will launch astronauts to the International Space Station by 2017.
“It’s really exciting to see SpaceX and Boeing with hardware in flow for their first crew rotation missions,” Kathy Lueders, manager of NASA’s Commercial Crew Program, said in a statement. “It is important to have at least two healthy and robust capabilities from U.S. companies to deliver crew and critical scientific experiments from American soil to the space station throughout its lifespan.” NASA has yet to decide whether Boeing or SpaceX will be the first to blast off to the International Space Station. Absent the necessary funding by the U.S. government, the space agency said it would have to postpone the commercial spacecraft missions.
NASA said that SpaceX’s Crew Dragon spacecraft and its related rocket passed the initial design reviews and certifications to proceed to the next level of testing, which is needed to show that the spacecraft is safe enough to carry astronauts. The space agency said that a standard mission consists of flying four astronauts to the space station, where they would remain for 210 days. This is a big deal for SpaceX because it previously only launched unmanned spacecraft to the space station to transport supplies. This summer, one of SpaceX’s unmanned spacecraft exploded en route to the space station.
Is the Great Rotation Finally Here?
Remember the Great Rotation? For years, Wall Street strategists have been talking about how the death of the decades-long bond bull market meant a major shift in asset allocation towards equities was just around the corner. Ever so gently, sparingly and delicately, the long-awaited “Great Rotation” may finally be upon Wall Street.
Although in 2014 the trend was clear—the S&P 500 Index rose alongside bond prices—until very recently, very much the opposite has transpired. The price of the US 10-year Treasury note had fallen by 3%, while the S&P 500 rose less than 2%. The open question is the extent to which this has been driven by investors fleeing bonds in favor of equities. And, further, whether investors will begin to pursue such a strategy en masse.
Fundstrat Managing Partner Thomas Lee has taken this narrative a step further, writing that “equities are the ‘new bonds’ in 2016.” Households’ direct ownership of stocks has dropped by $2 trillion since 2007, he notes. “Since 1950, this is the largest liquidation of stock holdings in history, greater than the ‘death of equities’ period from 1979-1989,” he wrote. Equities remain modestly more expensive than average, but valuations in fixed income have become completely divorced from their long-term trend, according to Lee.
“When one thinks about rising rates and higher inflation, doesn’t it make sense bonds cheapen even faster?” he muses, citing a “compelling” argument for equities on the basis of valuation. Lee also offered an ironclad case for why buybacks, a driver of earnings per share growth and share price appreciation since the financial crisis, have surged in popularity. He observed an unusual phenomenon across a sizable share of companies, in which the cost of making dividend payments is greater than the cost of servicing their longer-term debt.
“Our data shows 130 investment-grade companies with dividend yields exceeding their own long-term bond yields (seven- to 10-year maturities). This is really surprising, particularly as the vast majority of these companies are investment grade. Think about this, this is the same entity with both a long-term bond and an equity. All things equal, the bond yield should be higher than the dividend yield (not earnings yield). Of these 130 issuers, they are concentrated in financials, utilities, energy and industrials. There is a major incentive for these companies to borrow money and buy their own equities—creating their own natural buyers.”
He highlighted Wal-Mart as one example of this peculiar development: Given this backdrop, it would be extremely puzzling if these companies were not issuing debt to repurchase shares.
The prospect of rising rates and the healthy number of blue-chip stocks that provide more income than fixed income bonds (though dividends are, of course, subject to change) sets the stage “for a major re-allocation into equities,” Lee concludes, with households potentially rejoining corporations as the “natural buyers” of equities.
The Good News Is . . .
• The number of Americans filing for unemployment benefits fell last week, pointing to a fairly robust labor market. Initial claims for state unemployment benefits slipped 5,000 to a seasonally adjusted 271,000 for the week ended Nov. 14, the Labor Department said. The prior week’s claims were unrevised. Claims have now held below the 300,000 threshold for 37 consecutive weeks, the longest period in years, and are not far from levels last seen in the early 1970s. Claims below this level are usually associated with a healthy jobs market.
• The Priceline Group, a leading provider of online travel and related services, reported earnings of $22.16 per share, an increase of 28.1% over year earlier earnings of $17.30 per share. The firm’s earnings topped the consensus estimate of analysts by $1.05. The company reported revenues of $2.8 billion, an increase of 25.0%. Management attributed the company’s results to strong growth in its Bookings.com unit and an improved gross margin.
• The French industrial gas company Air Liquide said that it had agreed to buy Airgas for $10.3 billion in a deal that would swell the company’s presence in the United States. Airgas, based in Radnor, Pa., is one of the largest United States suppliers of industrial, medical and specialty gases, with 17,000 employees. Air Liquide is also assuming $2.8 billion of Airgas debt. Air Liquide, based in Paris, operates in 80 countries, supplying gases as well as technologies and services. It has its United States base in Houston and has 200 locations, including 140 industrial gas plants and more than 2,000 miles of pipelines.
Guidelines for Health Reimbursement Arrangements (HRAs)
Health reimbursement arrangements (HRAs) are a benefit that some employers offer their employees to help with healthcare expenses. They are a way for companies to reimburse workers for these costs, and reimbursements are generally tax free when used for qualified medical expenses. These accounts work alongside group health insurance plans that comply with the Affordable Care Act (ACA). The plan is often a high-deductible health plan (HDHP), but it does not have to be; the plan can be a PPO (preferred provider option) or an HMO (health maintenance organization). Below are guidelines to help you better understand HRAs. Be sure to consult your financial advisor to determine whether this type of plan is appropriate for your circumstances.
How HRAs work – HRAs are funded entirely with employer money. An HRA is not an account; it is a reimbursement arrangement between you and your employer. You cannot invest the balance and it does not earn interest. If you participate in an HRA, you will not see any deductions from your paycheck. Instead, your employer decides how much it is willing to reimburse you for healthcare costs on a monthly or annual basis. If you still have a balance at the end of the year, it may roll over as long as your employer continues to offer the HRA and you continue to participate, but it may not: That decision is up to your employer, too. To participate in an HRA, you must opt in during your employer’s open enrollment period. If you have a qualifying life event, you can sign up outside of open enrollment. Spouses and children who participate in your employer’s health insurance plan can also be reimbursed through an HRA.
Reimbursable expenses – It is up to your employer to decide which expenses you will be reimbursed for. The expense must be a qualified medical expense listed in IRS Publication 502, but your employer can use a narrower list. In general, you can use an HRA to get reimbursed for qualified medical expenses your health insurance doesn’t pay for, such as medical and pharmacy expenses you must pay out of pocket before meeting your deductible and coinsurance you’re responsible for after meeting your deductible. Eligible expenses include things like visiting the doctor when you’re sick, getting X-rays or having surgery. Some plans even let you use HRA funds for health insurance premiums. Dental and vision expenses usually qualify, too, as do a few over-the-counter items, such as diabetes testing aids, blood pressure monitors and contact lens solution. You can also use your HRA to pay for long-term care insurance premiums. Some HRAs are more limited and you can only use them for coinsurance. Other HRAs only reimburse expenses after you’ve met your deductible. Employers have a lot of flexibility in how they set up HRAs. Employers cannot let you use HRA funds for things the IRS does not allow, though. You cannot use an HRA for over-the-counter medicines unless your doctor has written a prescription for them. You also cannot use an HRA to be reimbursed for costs you incurred before your HRA participation became effective or for costs from a different year.
Reimbursement process – Often, your HRA administrator will be able to verify your claim automatically, but sometimes you will need to submit an itemized bill from your healthcare provider to substantiate your claim. By law, no expense is too small to be reimbursed, but your employer might require you to accumulate a minimum amount of reimbursable expenses before it will issue a check. Your employer chooses how it will reimburse you for qualified medical expenses. You may receive a debit card so you can pay for your expenses as needed, or you may have to pay up front, then request reimbursement. Some plans will reimburse your doctor directly, so you do not need to use a debit card or wait to get your money back. The maximum you can be reimbursed per year is whatever your employer decides. In 2015, the average employer contribution to an HRA was $1,079 for singles and $2,001 for families, according to the Kaiser Family Foundation’s 2015 Employer Health Benefits Survey.
Tax benefits of an HRA – You do not have to report your participation in an HRA on your tax return. The amount your employer is willing to reimburse you for medical expenses through an HRA is not considered taxable income, nor are the actual amounts reimbursed, as long as you put the money toward qualified medical expenses as defined by the IRS and your employer. Exceptions to tax-free distributions apply in a few situations: If your employer pays out your unused reimbursements at the end of the year or when you leave your job, the money will be considered taxable income. Since it is not being used to reimburse you for qualified medical expenses, it is treated like ordinary income.
Determining whether to participate? – HRAs are often offered alongside high deductible health plans. If you prefer a plan with a lower deductible and your employer offers that option–or if there is another plan that better suits your needs– you may not want to participate in the HRA. If your employer’s HRA comes with an HMO and you would prefer a PPO, that is another reason to shop around. Also, if you think your medical expenses will be too low for you to get a meaningful benefit from the plan (or too high for the plan to help you enough), see if your other options offer a better combination of price and coverage. Another consideration is that your employer’s contribution to your HRA might be less than your health insurance deductible, so you will need to make sure you can afford to pay the difference out of pocket. If your employer lets your HRA balance carry over from one year to the next, this feature can make the plan more appealing since it lets you save for a rainy day. If you would prefer a plan that you can take with you if you change jobs, an HSA could be a better choice; HRAs are not typically portable. Again, it is up to your employer. If you are choosing a health plan mid-year because you are a new employee, find out whether you will get the full HRA amount that the company typically gives its employees for the year or a prorated amount based on the remaining time in the year.
1. http://1.usa.gov/1lcS2lD – IRS
2. http://1.usa.gov/1NKkAtP – Healthcare.gov
3. http://bit.ly/1jeMw0H – Investopedia
4. http://bit.ly/1nXhaHq – Society for Human Resource Management
5. http://bit.ly/1P17MFt – Wikipedia