Winter 2018
A Message from Ted Gavin
It's been a busy winter here at Gavin/Solmonese. Busy with work, busy with play(ing), just ... busy. Our list of current engagements is taking us to places new and old, and some that might surprise you. For example, did you know we work for healthy companies, too? We are pleased and honored to announce Joe Solmonese, G/S Managing Director - Corporate Engagement, will serve as the transition chair and interim chief executive of Planned Parenthood Federation of America starting in May. Joe will provide stewardship and leadership while the organization identifies and on-boards a new chief executive to succeed longtime president Cecile Richards. This new assignment comes after having completed a successful strategic planning process for the National Partnership for Women & Families - another organization we're proud to call part of the G/S family of satisfied healthy company clients. In addition to guiding organizations through critical thinking and tactical planning, our corporate engagement team is currently working on a new training program to help organizations attract and retain a diverse workforce. We'll be sending you more about this in future newsletters.
Ross Waetzman, G/S Director - CIRA/CDBV, has been hard at work, too. When not auditing loan accounts for a residential homebuilder client, or finding a buyer for Martin Manufacturing, a medical device manufacturer and maker of the patented Chair-A-Table (interested parties should reach out to Ross or me) he's been hard at work gazing into the crystal ball. In this issue of The Next Chapter, Ross gives his outlook for the coming year and the impact of recent tax changes on housing, individual income, job hiring, and personal consumption.
We're full throttle with several new, notable engagements, including expert witness work in several high profile retail cases and Creditors' Committee engagements - plus we've had time to have fun and interact with our professional community. I'm writing this having just returned from my third gig this year at professional events, playing guitar and bass with the Indubitable Equivalents and the NYC-centered The Cramdowns. We love being able to bring entertainment to our industry friends and colleagues - jump to the G/S Gallery below for the pics and videos!
As for me, I'm enjoying the calm before the whirlwind starts next month when I begin my service as President of the American Bankruptcy Institute at this year's ABI Annual Spring Meeting. I hope you join us in Washington, D.C. for best-in-field education, professional marketing, and a final night dinner that I am told will be an event to remember!

The 2018 Outlook
by Ross Waetzman, CIRA, DDBV
Following eight years of economic growth, the restructuring industry has been waiting for the next cycle of downturn. Industry-specific distress continues to drive retail and energy activity, but the broader corporate bankruptcy market remains subdued. Could 2018 be the year of changing tides?

Economic recessions, tracked as periods of declining GDP, drives restructuring cycles. As GDP is a measure of consumption, recessions are essentially periods when nation consumption declines. There are four main components to GDP, but personal consumption expenditures (PCE) makes up 69.1% of GDP. As such, it's no surprise that PCE is the main trigger of recessions and will likely trigger the next downturn.

PCE is largely driven by three forces: jobs/income, retirement portfolios, and housing. Job security and household income are the most influential driver of PCE. Unemployment is historically low at 4.1% and 0.5% lower than the natural equilibrium rate. Coupled with a tax cut expected to benefit most Americans, income alone will not drive PCE reductions in 2018.

The second driver of PCE is retirement portfolio values. The average annual five-year S&P 500 return is over 12.0% and expectations are for market highs to continue in 2018. In comparison to the market's long-term return of 9.8%, such returns will not curtail PCE. The exception is retirees reliant on fixed income securities, which have suffered from low interest rates since 2008. Again, this impact should be minimal on PCE.

The last driver of PCE is housing, which is a large saving mechanism for Americans. The US Census Bureau reports the average American's net worth of $194,226 at age 65. However, home equity values are approximately $150,305 or 78% of this worth. Naturally, spending decisions are impacted by home values.

Home prices are expected to change with the new tax laws. Of homes in the fourteen most expensive housing markets, approximately 7.5% of homes are impacted by new mortgage interest deductions (MID) laws. Home prices in this segment are expected to fall 4.0% to 4.75% as a result.

The impact on PCE from tax changes is likely to be minimal. First, any adverse impact will be to a wealthier consumer less sensitive to higher taxes. Further, reduced demand for expensive housing will be partially offset by increased demand for less expensive houses. As final consideration, consumption could fall from the MID elimination for second mortgages (e.g., HELOCs). However, credit from other sources is available to credit worthy borrowers so any impact to PCE should again be negligible.

In fact, the 2018 economy looks robust for both personal consumers and businesses (with the latter continuing to post record profits and benefit from reduced taxes). However, a hot economy can fuel inflation and rate hikes by the Federal Reserve.

These conditions are driving expectations for three to four rate increases this year. As of March 2, Fed Fund Futures imply expectations for rate hikes at 83% in March, 69% in June, 46% in September, and 29% in December. Expectations are growing: a September hike was not even a notable probability last month.

In closing, 2018 will bring higher rates. The Fed will design these hikes to both restrain the economy and to prepare for the next recession. Higher rates will act as gravity to prices and spending alike. The result should be a moderate reduction in PCE and uptick in filings during the second half of 2018. Expect this trend to accelerate in 2019, with real potential for a recession following in the near future.

Ross Waetzman has over 20 years of professional service experience advising companies as well as their lenders and equity holders on matters of financial and strategic significance, both out-of-court and in bankruptcy. He is a Certified Insolvency & Restructuring Advisor and has been awarded the Certification in Distressed Business Valuation.

Our Gallery
Cycle For Survival, New York, NY - Ross Waetzman, Jeremy VanEtten, Ted Gavin, Anne Eberhardt, Joe Solmonese

Premium Seating Sixers Meet the Team, Philadelphia, PA - Mario Mastil, Ben Simmons, Stan Mastil

State Bar of Wisconsin Bankruptcy, Insolvency, and Creditors' Rights Section Retreat, Kohler, WI - Indubitable Equivalents with guest trombonist Hon. Michael Halfenger

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