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Cut Spending or Go For Broke?

admin — Tue, 15 May 2012 00:00:26 +0000

It is pretty much impossible to avoid talking about Europe this week. As you know, many European countries have been living beyond their means. Just like individuals, the only solution is to cut spending or earn more money. The countries and institutions that were financing these deficits were pushing debtor countries (Greece, Spain, Italy, France) to significantly cut spending. These governments were beginning to make responsible decisions (e.g. raising the retirement age for social security). Unfortunately, the citizens of those countries decided that they did not like the medicine and voted the incumbent politicians out of office. In the case of France, they voted in someone who told them what they wanted to hear.

There is a school of thought that says if you cut government spending too much you will cause a recession and collect less tax revenues. So, some politicians are promoting even more borrowing in order to grow their economies out of this mess. The question is how long will investors lend to these European countries and what happens if (or when) no one will bail them out? Time will tell. In the meantime, the stock market does not like the uncertainty and many equity indexes have given back half or more of their gains earned in the first quarter. For the long term investor this situation should spell opportunity. Have a great week.

Facebook & Investing in IPO’s

admin — Mon, 14 May 2012 23:55:26 +0000

When we decided what was newsworthy this week, it came down to the Facebook IPO or Europe. Europeans decided that they prefer retiring at age 50 with full salary for the rest of their lives better than austerity and fiscal discipline. Am I the only one who didn’t see that one coming? So yes, we decided Facebook was the better story. The IPO pricing range looks like it will be $28 – $35 per share, which will value the company at $80 to $95 billion dollars (about $65 billion less than Google’s current valuation). Facebook’s initial valuation is actually less than most of us were expecting. This is encouraging for IPO investors as it could result in a big pop opening day. Facebook may be the most highly anticipated IPO of all time. If you can secure shares at the IPO price it probably makes sense to allocate some of your aggressive capital towards the company. However, getting your hands on IPO shares will be tough (if not impossible). Underwriters will be receiving the majority of shares and will be allocating them only to their highest net worth clients.

All that being said, investing in Facebook is not a “no-brainer”. Revenues in the last quarter slowed significantly and expenses doubled. Mark Zuckerberg, to put it nicely, is a control freak. As a result, investors will have little say (some might call it “no say”) at the newly public company. Buying a high flying IPO once it starts trading publicly is normally a bad idea. Most IPO’s investors lose money. Linked In was considered one of the more successful IPO’s. That stock doubled from its IPO price but then came crashing back to earth (falling 50%). You may see that same thing happen with Facebook, so if you’re lucky enough to be holding IPO priced shares, the prudent measure would be to take some off the table if you see a big initial pop. The prospects for Facebook definitely look promising but everything has a price. Don’t get caught in the euphoria and party like its 1999. We will be watching this one closely and yes if we are part of the lucky few who are allocated some shares at the IPO price we will take advantage of that for our clients.

Residential Real Estate Hitting Bottom?

admin — Mon, 30 Apr 2012 20:08:24 +0000

We like to comment on the residential real estate market every once in a while as it touches every client in one way or another. Prices nationwide are at their lowest levels in the past 10 years but the numbers indicate that we are close to hitting bottom. Prices only fell 2 percent in February from the same period a year ago. That was the smallest year over year decline since the expiration of the homebuyer tax credit in May 2010. Some markets such as Phoenix have already turned the corner (5 consecutive months of price increases).

In many of the hardest hit areas, investors are now buying as many homes as they can get their hands on (at full listing price). In addition, new legislation and court cases against banks for improper foreclosure practices “robo-signing” has slowed down the rate of foreclosures. For example, Nevada passed Assembly Bill 284 last October and foreclosure filings have dropped over 90 percent since then. This may prove temporary but realtors are now seeing bidding wars again.

One last thought – don’t expect a sharp recovery in the housing market. There are still plenty of problems including a shadow inventory of pent up foreclosures, many “would be” sellers and buyers who can’t get out of their current underwater mortgage, and tight credit. In summary, the worst seems to be over but the recovery will take some time.

Financial Planning for Professional Athletes

admin — Mon, 23 Apr 2012 20:50:52 +0000

We frequent write about stocks, bonds, real estate, valuations and all sorts of investment insights and advice. However, the biggest thing that determines whether someone ends up wealthy or poor is how much they spend in relation to how much they earn. Society is always amazed that high income people frequently end up broke. Sometimes it is due to bad investments, but more often it is due to over spending and a lack of budgeting. This is even more important for people whose earnings vary (salespeople or the self-employed) and those who may have a short career (celebrities and pro athletes). If this is your situation, you should work with your financial advisor to figure out an appropriate emergency fund and a sustainable level of spending.

On a related note, we are proud that one of our clients, NFL star Levi Brown, is becoming recognized for his financial responsibility and prudent decision making. Levi, along with our own Robert Luna, was featured in a story about the financial challenges of professional athletes in the AZ Republic this past Saturday. The story was then picked up by the USA Today as well as several other papers. Click here to read the article.

Emancipation Day & Tax Planing 2012

admin — Tue, 17 Apr 2012 06:08:58 +0000

Yes, this year the tax deadline is Tuesday, April 17th since the 15th was on Sunday and Monday was Emancipation Day in the District of Columbia. Thanks to this unusual holiday, which celebrates the end of slavery, taxpayers across America have been liberated from the tax man for an extra day.
2012 (unlike 20111) may be an exciting year for tax planning. For example, the federal estate and gift tax which is currently $5 million per person is scheduled to revert back to $1 million per person at the end of this year. Therefore, if you are planning to give away millions of dollars, you may want to do that this year.

Also, if the Bush tax cuts expire at the end of this year as scheduled, tax rates will increase for every bracket, long-term capital gains will be taxed at 20 percent instead of 15, and dividends will be taxed at ordinary income rates instead of the current preferential rate (maximum 15 percent).

So, the bottom line is you may want to recognize capital gains this year vs. next. You may also want to push income into 2012 instead of 2013 (e.g. ROTH conversions). We predict a lot of last minute tax maneuvers as soon as it becomes clear which provisions of the bush tax cuts will survive, if any. No one expects to know the answer to that until after the presidential election. Call if you have questions. We are ready to assist.

Normal Corrections & Chasing Performance

admin — Tue, 17 Apr 2012 06:06:07 +0000

The markets went from having a great first quarter to 4 consecutive down days. Not to worry, minor corrections like this are normal and market fundamentals still look pretty good. Companies are much stronger and more profitable than they were at the previous market peak (2007). For example, the companies in the S&P 500 (on average) are valued at less than they were in 2007, even though net income of those companies are up over 22 percent, cash reserves are up over 49 percent, and revenue per employee is up 11.4 percent.
Also, here is some interesting trivia on chasing the hot stock of the moment: The # 1 and # 2 performing stocks YTD in the S&P 500 (through the close of trading Friday, March 30th, 2012 ) were ranked # 487 and # 488 (out of 500 total stocks) for all of calendar year 2011. The # 1 performing stock for all of calendar year 2011 was ranked # 500 YTD (last place) through the close of trading on Friday, March 30th).

The Apple Effect

admin — Tue, 03 Apr 2012 00:24:52 +0000

We just completed the best first quarter in the stock market since 1998. I think the most remarkable story over the past 3 months is the amazing performance of Apple stock. Apple began the quarter as the most valuable company in the world and then shot up another 50 percent! What many people don’t realize is the impact that Apple has on the rest of the market. For example, in the fourth quarter of 2011 the S&P 500 rose 6.6 percent. However, if you subtract out Apple, the 500 company index would have only increased 2.8 percent.

Another interesting statistic: S&P 500 companies registered an increase in profit margin of .05 percent in the 4th quarter, unless you exclude Apple, in which case the other 499 companies (on average) saw their profit margins shrink by 2.2 percent.

The biggest “Apple effect” that we see is on the NASDAQ index. Many people are surprised that the tech heavy index is up over 18 percent YTD. What they typically don’t realize is that Apple is responsible for about half of that increase. Apple represents 20 percent of the index even though it is only one of 100 companies represented.

In other news, check out our esteemed colleague, Robert Luna on the Fox Business channel, this Weds 4/5/2012 9:00 am PST, 12:00 EST. Robert will be the in-studio guest for the entire hour. Knock ‘em dead, Rob-o!

The Impact of Higher Gas Prices

admin — Mon, 26 Mar 2012 22:15:08 +0000

Over the past week, two different people told me that interest rates were increasing due to tensions in the Middle East. We like to dispel myths in this newsletter, so we want you to know that the increase in interest rates had nothing to do with the Middle East. Interest rates are starting to rise because the economy is stronger and people have less fear. Therefore, investors are starting to move out of “safe” assets like bonds. As bond prices fall, interest rates go up.

However, back to the previous point about the tensions in the Middle East. Although there is no correlation to interest rates, the Middle East has a direct impact on gas prices. The average price for a gallon of gas nationwide is now $3.89, an increase of over 60 cents per gallon since the beginning of the year. For every one cent increase in gas prices, Credit Suisse estimates that the U.S. loses $1 billion annually in consumer spending. This will prove challenging for retailers if prices stay high or go even higher.

Every time gas prices get to this level, there is a loud chorus of “drill baby drill”. You may be happy to know that there has been some progress on that front. The U.S. currently only imports 45 percent of the oil we use, down from 60 percent in 2005.

Is the Bull Market in Bonds Over?

admin — Tue, 20 Mar 2012 00:49:52 +0000

Is the 30 year bull market in bonds finally coming to an end? Last week we saw a significant rise in bond yields (which means that prices fell). One week certainly does not make a trend. However, the two primary reasons that bond prices reached 40-year highs have lost steam lately. The first reason bond prices were so high is that many investors were too scared after the Great Recession to own stocks and moved into bonds instead. That is starting to change as the economy is showing strength and stocks are holding and adding to their gains. The second reason that bond prices got so inflated is that the Fed bought massive amounts of bonds in order to keep interest rates artificially low. A recent statement from the Fed is being interpreted by investors as a warning not to expect a new round of bond buying. As a result the yield on 10 year govt bonds shot up from 2.03 to 2.3 percent last week.

In other news, the American dream appears to be alive and well. Forbes came out with their list of the World’s Billionaires and Sara Blakely is a new member. Who is she? She is a 41 year old former door-to-door fax machine salesperson, who founded Spanx. For those of you who do not already know, Spanx makes body slimming undergarments. In the past decade she parlayed $5,000 in savings into a company valued at over $1 billion. Have a great week.

Good Time for Optimism

admin — Tue, 13 Mar 2012 18:30:48 +0000

This is a good time to be an optimist. For the past few years it has been challenging to find positive economic stories and trends but that has now changed. The good news seems to be stacking up. Last week’s big story was that we added 227,000 jobs in February. That was the third month in a row of 200,000 or more new jobs. This morning we found out that retail sales just had their biggest increase in 5 months. In addition, productivity growth is through the roof, earnings of U.S. corporations have been growing steadily and companies are flush with cash.

Last year corporate earnings grew at double digits but the U.S. stock market was flat and international markets were down. That was mostly because of concerns about European debt. However, there is even positive news on that front. Greece successfully restructured a large chunk of their debt and borrowing costs for Italy and Spain have decreased from over to 7 percent (on 10 yr bonds) a few months ago to just below 5 today.

Naturally, there are always the pessimists who can tell you all the potential problems out there. They sound convincing and have successfully predicted 11 of the past 2 recessions. However, the biggest risk may be missing the next bull market (which started 3 years ago) and losing purchasing power to inflation by sitting in cash or low yielding govt bonds.