Wall Street Braces for a Rate Hike

By Tirthankar Chakraborty

Timing a Fed rate hike is no doubt tricky. But if you ask the market participants, they are almost certain that Jerome Powell led Federal Reserve will increase its benchmark rate by 0.25%, at the conclusion of the FOMC meeting on Mar 21. They further anticipate the Fed to continue their hawkish stance this year, on the back of a healthy labor market and steady rise in inflation.

With the Fed set to raise rates for the first time this year, expect financials, technology and home improvement suppliers to benefit. Home builders and utility players, on the other hand, could lose from the Fed’s rate decision.

Fed Set to Hike Rates for the First Time in 2018

At the conclusion of the FOMC meeting, the Fed will issue a rate decision. Market pundits consider a quarter-percentage point rate hike a near- certainty. The futures market is already indicating 100% chance of a rate hike, culminating into the sixth rate increase since December 2015. Market participants also widely expect the Fed to project four rate hikes this year. So far, a maximum of three rate hikes are expected for the year.

But why we are expecting a hawkish Fed? This is because the current economic backdrop paints a rosy picture, especially, when you consider steady rise in wages, record low unemployment rate and upbeat consumer confidence levels. The Trump administration, in the meantime, has decided to add extra stimulus in the form of tax cuts and deregulations.

Perhaps the even more crucial factor for the Fed to hike rates is hotter-than- expected signs of inflation. Recent signs indicate that inflation is tilting toward the central bank’s 2% annual target. Needless to say, the near-term inflation expectations have climbed this month to the highest level in three years. Thus, the Fed is likely to reiterate its January’s statement that inflation “will move up this year.”

Winners & Losers in a Rising Rate Environment

With an overwhelming majority of observers seeing an imminent rate hike with more to follow this year, certain sectors stand to gain, while some will suffer.

Winners: Asset-Sensitive Banks

Banks are definitely the go-to rate trade. As a general rule, higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

National banks like the Bank of America Corporation BAC are very much rate- sensitive and have consistently seen earnings jump from a quarter-point rate hike. In the year-to-date period, the SPDR S&P Bank ETF (KBE) generated steady returns of 4.2% on increasing expectations of a rate hike this month.

Winners: Insurers

Very few companies are rooting for a rate hike as much as those from the insurance industry. And why not? The relationship between interest rates and insurance companies is linear and straightforward, meaning the higher the rate, the greater the growth.

Insurers derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a rise in Fed fund rates and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should also benefit from a higher rate environment.

As of the last filing, the top three holdings of the SPDR S&P Insurance ETF (KIE), Validus Holdings, Ltd. VR , XL Group Ltd XL and Everest Re Group, Ltd. RE have soared 44.6%, 58.1% and 18.2%, respectively, so far this year on rate hike expectations.

Winners: Asset Managers

Brokerage firms and asset managers advantage immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.

Notably, a wealth management firm like The Charles
Schwab Corporation SCHW has said time and again that each quarter point increase in rates generally adds to interest revenue, much of which flows directly to pre-tax profits.

Winners: Technology & Home Improvement

Other than the broader financial sector, technology firms also stand to gain from a rate hike. Interest rates correlate with an economy that is getting stronger day by day. And a stronger economy could easily boost the bottom lines of smartphone makers like Apple Inc. AAPL and Samsung.

Rising rates may also compel would-be home buyers to stop searching for new houses and instead look for improving their existing ones. Sesha Dhanyamraju, CEO of Digital Risk added that “remodelers and home- improvement suppliers benefit from a rising-rate scenario.” Thus, home improvement majors Lowe’s Cos. L and Home Depot HD stand to gain the most.

Losers: Home Construction

But, with the Fed expected to hike rates, the average American will bear the brunt of higher borrowing costs. This is surely a dampener to real estate activities.

James Cassel, chairman and co-founder of the investment banking firm Cassel Salpeter in Miami added that if rate hike happens, losers might include “construction-related businesses, like homebuilders.”

Losers: Utilities

Investing in utilities won’t be a good idea in a rising interest rate scenario. Utilities are capital intensive business and the funds generated from internal sources are not always sufficient to meet their requirements. Hence, these companies have high level of debt loads. Low interest rates will help them pay off debts and book profits.

But higher interest rates along with an increase in the debt level, for that matter a steep debt/equity ratio, impact the credit ratings of these utility operators. If the credit ratings go down, a company will find it difficult to borrow funds from the markets at reasonable rates, leading to a rise in cost of operations.

The industry’s bellwether ETF, Utilities Select Sector SPDR (XLU), has yielded a negative return of 4.9% in the year-to-date period on rate hike concerns.

Will You Make a Fortune on the Shift to Electric Cars?

Here’s another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It’s not the one you think.

Click here to view the original article.

Wall Street Braces for a Rate Hike: Who Wins, Who Loses

By Tirthankar Chakraborty

Timing a Fed rate hike is no doubt tricky. But if you ask the market participants, they are almost certain that Jerome Powell led Federal Reserve will increase its benchmark rate by 0.25%, at the conclusion of the FOMC meeting on Mar 21. They further anticipate the Fed to continue their hawkish stance this year, on the back of a healthy labor market and steady rise in inflation.

With the Fed set to raise rates for the first time this year, expect financials, technology and home improvement suppliers to benefit. Home builders and utility players, on the other hand, could lose from the Fed’s rate decision.

Fed Set to Hike Rates for the First Time in 2018

At the conclusion of the FOMC meeting, the Fed will issue a rate decision. Market pundits consider a quarter-percentage point rate hike a near- certainty. The futures market is already indicating 100% chance of a rate hike, culminating into the sixth rate increase since December 2015. Market participants also widely expect the Fed to project four rate hikes this year. So far, a maximum of three rate hikes are expected for the year.

But why we are expecting a hawkish Fed? This is because the current economic backdrop paints a rosy picture, especially, when you consider steady rise in wages, record low unemployment rate and upbeat consumer confidence levels. The Trump administration, in the meantime, has decided to add extra stimulus in the form of tax cuts and deregulations.

Perhaps the even more crucial factor for the Fed to hike rates is hotter-than- expected signs of inflation. Recent signs indicate that inflation is tilting toward the central bank’s 2% annual target. Needless to say, the near-term inflation expectations have climbed this month to the highest level in three years. Thus, the Fed is likely to reiterate its January’s statement that inflation “will move up this year.”

Winners & Losers in a Rising Rate Environment

With an overwhelming majority of observers seeing an imminent rate hike with more to follow this year, certain sectors stand to gain, while some will suffer.

Winners: Asset-Sensitive Banks

Banks are definitely the go-to rate trade. As a general rule, higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

National banks like the Bank of America Corporation BAC are very much rate- sensitive and have consistently seen earnings jump from a quarter-point rate hike. In the year-to-date period, the SPDR S&P Bank ETF (KBE) generated steady returns of 4.2% on increasing expectations of a rate hike this month.

Winners: Insurers

Very few companies are rooting for a rate hike as much as those from the insurance industry. And why not? The relationship between interest rates and insurance companies is linear and straightforward, meaning the higher the rate, the greater the growth.

Insurers derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a rise in Fed fund rates and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should also benefit from a higher rate environment.

As of the last filing, the top three holdings of the SPDR S&P Insurance ETF (KIE), Validus Holdings, Ltd. VR , XL Group Ltd XL and Everest Re Group, Ltd. RE have soared 44.6%, 58.1% and 18.2%, respectively, so far this year on rate hike expectations.

Winners: Asset Managers

Brokerage firms and asset managers advantage immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.

Notably, a wealth management firm like The Charles
Schwab Corporation SCHW has said time and again that each quarter point increase in rates generally adds to interest revenue, much of which flows directly to pre-tax profits.

Winners: Technology & Home Improvement

Other than the broader financial sector, technology firms also stand to gain from a rate hike. Interest rates correlate with an economy that is getting stronger day by day. And a stronger economy could easily boost the bottom lines of smartphone makers like Apple Inc. AAPL and Samsung.

Rising rates may also compel would-be home buyers to stop searching for new houses and instead look for improving their existing ones. Sesha Dhanyamraju, CEO of Digital Risk added that “remodelers and home- improvement suppliers benefit from a rising-rate scenario.” Thus, home improvement majors Lowe’s Cos. L and Home Depot HD stand to gain the most.

Losers: Home Construction

But, with the Fed expected to hike rates, the average American will bear the brunt of higher borrowing costs. This is surely a dampener to real estate activities.

James Cassel, chairman and co-founder of the investment banking firm Cassel Salpeter in Miami added that if rate hike happens, losers might include “construction-related businesses, like homebuilders.”

Losers: Utilities

Investing in utilities won’t be a good idea in a rising interest rate scenario. Utilities are capital intensive business and the funds generated from internal sources are not always sufficient to meet their requirements. Hence, these companies have high level of debt loads. Low interest rates will help them pay off debts and book profits.

But higher interest rates along with an increase in the debt level, for that matter a steep debt/equity ratio, impact the credit ratings of these utility operators. If the credit ratings go down, a company will find it difficult to borrow funds from the markets at reasonable rates, leading to a rise in cost of operations.

The industry’s bellwether ETF, Utilities Select Sector SPDR (XLU), has yielded a negative return of 4.9% in the year-to-date period on rate hike concerns.

Will You Make a Fortune on the Shift to Electric Cars?

Here’s another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It’s not the one you think.

Click here to view the original article.

Setting Up Shop in the Sunshine State

By Laura Cooper

More private-equity firms are sprouting up in Florida as sponsors branch out on their own.

The number of firms in the state has climbed steadily over the past several years, according to Cassel Salpeter & Co., a Miami investment bank that tracks the growth of private-equity firms based in Florida.

The number of such firms rose to 56 in 2017, up from 47 in 2016 and 27 in 2010, according to a report by the bank that cited data from PitchBook Data Inc.

James Cassel, chairman and a co-founder of the bank, said private equity’s presence in the state is increasing, in part, because investment professionals from large Florida-based firms such as H.I.G. Capital and Comvest Partners are striking out on their own.

Hidden Harbor Capital Partners, for example, was launched about two years ago in Fort Lauderdale, Fla., by founders who previously held positions at H.I.G. or Comvest.

Mr. Cassel said perceptions about starting firms in Florida have changed over the years.

“There was previously a concern of how to staff these firms,” he said, adding that firms had been concerned that people would be inflexible about moving to Florida from other states with historically more robust private-equity activity.

“It [will] be interesting to see what happens this year with the tax bill impacting individuals,” he said. “I think more people are considering moving down to Florida for lower tax rates.”

In addition to H.I.G., Comvest and Sun Capital Partners, a number of homegrown firms dot the state. New entrants in the past several years include Hidden Harbor, Three20 Capital Group, Canopy Capital Partners and 777 Partners, according to data collected by Mr. Cassel.

Although time will tell whether more private-equity firms find Florida a favorable place to put down roots, there is no question that the state is experiencing more private-equity activity. Deals have been on the rise in the state in the past several years, according to PitchBook data featured in the report. In Florida, private-equity deal flow last year remained strong for the fourth year in a row, with 259 Florida deals—including add-on acquisitions— completed in 2017, up from 256 deals in 2016.

Click here to view the original article.

Plan now for the potential ‘long-term’ impacts of the tax cuts and new tariffs

By James S. Cassel

Should we make long-term plans based on the notion that the tax cuts are permanent? Although the personal tax cuts have an expiration date, currently the corporate cuts are permanent. Alternatively, should we assume that at some time we will realize the deficit is unsustainable and have to take proper measures to tame this lion? What Congress gives, Congress may take away.

At some point, Congress will have to face reality and govern by raising taxes on the richest among us, as well as cut expenditures for social programs and entitlements programs — all of which may be politically unpalatable and tough medicine. What if the projected growth assumed in connection with the tax cuts fails to materialize, generating the anticipated taxes? Are the new tariffs on steel and aluminum going to hurt us, start a trade war, and increase inflation due to higher material costs? At some point, this will keep us all up at night, if it does not already.

The following is some practical guidance based on our experience guiding middle- market business owners through all types of economic cycles:

  • Save as much money as you can now. Planning for retirement will depend more on your individual planning than on government programs. Social Security and Medicare might not be as untouchable as some would like to believe. Medicare, for example, continues to raise premiums to recipients. At some point, the age to receive Social Security will need to increase again, therefore delaying access to benefits for some. Past proposals have protected people close to retirement age.
  • Consider selling your business or a majority stake now. It is prudent to diversify. If the lower tax rates are temporary, you are probably better off selling sooner, and taking advantage of the lower tax rates and more desirable pricing. Rising interest rates, potential inflation, and potential trade issues with the recently enacted tariffs could diminish the profitability — and therefore the value — of your business.
  • Consider how you structure agreements. It is probably better to require more payments upfront where appropriate. This way, you can enjoy the lower tax rate if rates go up. From a tax standpoint, the structure of your agreements is very relevant. Seeking good counsel is always important.
  • With increased inflation as the economy strengthens, and as a result of the new tariffs and a possible trade war, you may want to secure longer-term supply agreements to ensure stable costs. Airlines have done this successfully with fuel costs. Since new tariffs have been put on steel and aluminum, you need to consider how this will affect your business and that of your suppliers. There is a lot of uncertainty around a possible trade war that might have many unintended consequences. Other countries will not sit idly by. Tariffs on steel and aluminum will hike costs of many products — for example on cars and potential steel used in the construction industry — and spur increased inflation. There are already rumblings from foreign countries to increase tariffs on products that might be exported from the U.S. If you are a target of foreign tariffs, consider whether it is prudent to move all or a portion of your production offshore.

With so much uncertainty surrounding the longevity and impact of the tax cuts and the effect of tariffs, middle-market business owners should work with qualified experts to assess their business needs and develop appropriate plans to protect their best interests.

Click here to view the original article.

Cassel Salpeter & Co. Represents Systems 2000, Inc in its Sale to Serent Capital

Cassel Salpeter & Co., a middle-market investment banking firm providing financial advisory services, represented Systems 2000, Inc. (“Sys2k”) in its sale to Serent Capital.  The acquisition will enable Serent Capital to broaden its portfolio of system-of-record software businesses and automobile technology investments.

The Cassel Salpeter team, led by President and Co-Founder Scott Salpeter and Vice President Marcus Wai, supported Sys2k through the closing of the transaction.

Sys2k is a SaaS business that provides a mission-critical dealership management system for the specialty vehicle market. With over 350 customers throughout the U.S. and Canada and a strong recurring revenue base, the Sys2k platform is highly regarded due to its true multi-company, multi-location system offering full DMS capabilities across all departments of a dealership.

Carl Sconnelly, Sys2k’s founder and former President and CEO said, “The Cassel Salpeter team helped guide me throughout the sales process from marketing and LOI negotiation through to due diligence and closing.  The complexity of the Transaction combined with the vigorous due diligence process was made much easier with their help and resulted in the ideal outcome for me and the Company. The support provided by the Cassel Salpeter team was invaluable and I couldn’t have asked for a better outcome.”

“It was a pleasure working with the Sys2k team to find the best fit to take the company to the next level of its growth trajectory.  We believe Sys2k to be a highly attractive investment to Serent Capital given their ownership experience with SaaS based businesses and potential synergies with their other portfolio companies,” said President and Co-Founder Scott Salpeter of Cassel Salpeter & Co.

Ira Rosner, Jordan Schneider, and Ashley Hamilton with Holland & Knight provided legal representation to Sys2k.  Carl Erhardt, Elliot Franklin, and Lori Bibb with Morris, Manning & Martin, LLP provided legal representation to Serent Capital.

About Cassel Salpeter & Co.

Cassel Salpeter & Co., LLC is an independent investment banking firm that provides advice to middle market and emerging growth companies in the U.S. and worldwide. Together, the firm’s professionals have experience providing private and public companies with a broad spectrum of investment banking and financial advisory services, including: mergers and acquisitions; equity and debt capital raises; fairness and solvency opinions; valuations; and restructurings, such as 363 sales and plans of reorganization. Co-founded by James Cassel and Scott Salpeter, the firm provides objective, unbiased, results-focused services that clients need to achieve their goals. Personally involved at every stage of all engagements, the firm’s senior professionals have forged relationships and completed hundreds of transactions and assignments nationwide. The firm’s headquarters are in Miami. Member FINRA and SIPC. For more information, visit www.CasselSalpeter.com.

About Sys2k  

Sys2K is a premier provider of Powersports, Bus, Marine, Automotive, Class 8/Heavy Duty, and RV dealership software. Sys2K’s Infinity software is a fully integrated, Windows-based DMS that features modules including CRM, F&I, Parts and Service, Payroll, Accounting, Rental, Advanced Reporting, as well as offering Premium Websites, Cloud Hosting, and Mobile Apps. Founded in 1984, Sys2K prides itself in developing the highest-quality software solutions for the dealership environment. For more information, visit www.sys2k.com.

About Serent Capital

Serent Capital invests in growing businesses that have developed compelling solutions that address their customers’ needs. As those businesses grow and evolve, the opportunities and challenges that they face change with them. Principals at Serent Capital have firsthand experience at capturing those opportunities and navigating these difficulties through their experiences as CEOs, strategic advisors, and board members to successful growing businesses. By bringing its expertise and capital to bear, Serent helps growing businesses thrive. For more information on Serent Capital, visit www.serentcapital.com.

Private equity deal flow up in Florida

Sys2k has been acquired by Serent Capital

  • Background: Systems 2000, Inc. (“Sys2k”) is a SaaS business that provides a mission-critical dealership management system for the specialty vehicle market, including RV, marine, auto, heavy duty trucks, bus and emergency vehicles. With over 350 customers throughout the U.S. and Canada and a strong recurring revenue base, the Sys2k platform is highly regarded due to its true multi-company, multi-location system offering full DMS capabilities across all departments of a dealership.
  • Cassel Salpeter:
    • Served as financial advisor to the Company
    • Ran a limited sales process, contacting 19 specifically targeted financial and strategic buyers
  • Challenges:
    • Management required guidance and support to satisfy due diligence requests due to small size and limited resources
  • Outcome: In March 2018, Sys2k was 100% acquired by Serent Capital, broadening their portfolio of system-of-record software businesses and automobile technology investments.