Breaking Up is Hard to Do
- Breaking Up is Hard to Do For those not old enough to remember, let us first mention that the title of this article is identical to the timeless song written and sung by Neil Sedaka. Quite possibly, it may also be representative of how you invest your hard earned money! Perhaps many of you invest according to a buy and hold strategy, one that works wonders while in the midst of this bull market that began during the latter part of the first quarter of 2009, rights as the U.S. economy was bottoming. However, when the market gets choppy, goes sideways or perhaps head downward, this strategy could create portfolio heartache! What went wrong? Simply put, you fell in love with a particular investment! You let your pride and ego get in the way of making money! When the investment started to decline, you assumed that you were still right and the rest of the world was wrong! You replaced what may have begun as an intelligent decision, with hope! The investment landscape is littered with good ideas gone bad. For example, over the past year we have witnessed boom, busts and sometimes boom again in speculative biotechnology companies, alternative energy plays, emerging market plays, precious metal investments and momentum stocks. Deciding which investment to put your hard-earned money into is only half of the equation. Regardless of the reason behind the volatility, it is nonetheless clear that a plan for selling is the other half. Don’t for a minute think that this only pertains to individual stocks. It can hold true with mutual funds and individual bonds. Times change. Situations change. The viability of a company changes. The competitive position of the United States economy fluctuates. Geopolitical events unravel. Monetary and fiscal policies change. Tax policies change. And on and on and on. Buy and homework has replaced buy and hold. Know what you are buying, why you are buying it and never fill a portfolio with “hopes,” but rather with disciplines for both buying and selling investments! Let is be said, unequivocally, that the moment you decide to purchase an investment, you should establish clear set of rules for the selling of that investment! Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates , Please call 518-279-1044.
- What is Tax Inversion? A topic certain to be divisive leading up to and including this year’s mid-term elections is tax inversion. This is defined by Investopedia as “reincorporating a company overseas in order to reduce the burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.” Here’s how it works – a foreign corporate entity buys an American domiciled company with the shareholders of the domestic company becoming shareholders of the foreign entity. The result would be the relocation of the legal location of the company from the United States to another lower taxed country. It is worth noting that the physical structure and operational structure generally do not change. According to Bloomberg, the recent $54.8 billion deal between U.S. domiciled AbbVie (ABBV) and U.K. domiciled Shire Pharmaceuticals (SHPG) will reduce the effect tax rate of the combined entity from 22% to just 13%, saving the company billions of tax dollars and, according to company officials, making it more competitive abroad. This merger, as well as others over the past several months, has heated up the discussion between Democrats and Republicans as well as between many Americans. In fact this past week the debate was again ratcheted up as President Obama responded to a question by CNBC Senior Economics Reporter Steve Liesman during an exclusive interview. Liesman asked the President: that although not illegal, was the process of tax inversion unpatriotic or un-American? President Obama responded, “… what I’m saying is that companies thrive in the United States in part because they benefit from the best university system in the world, the best infrastructure – although I’d like to see us do a little better on infrastructure. You know, there are a whole range of benefits that have helped to build companies, create value, create profits. For you to continue to benefit from that entire architecture that helps you thrive, but move your technical address simply to avoid paying taxes – is neither fair – not – is it – something that’s going to be good for the country over the long term. And this is basically taking advantage of tax provisions that are technically legal – but I think most people would say if you’re doing business here, you’re basically still an American company, but you’re simply changing your mailing address in order to – avoid paying taxes – then you’re really not doing right by the country – and by the American people.” We agree wholeheartedly with what President Obama had to say regarding this matter. However, we will also note that many individuals move to Florida from New York for tax reasons; many corporations move to Texas from New York or from Texas to New York for tax reasons; many corporations are given tax incentives to move to one state versus another; heck, Warren Buffett’s secretary pays a higher marginal rate of tax than he does and on it goes. The bottom line is that both Democrats and Republicans have blocked meaningful individual and corporate tax reform for perceived political gain and until this stops, tax inversions of one kind or another will continue. We suggest politicians get to work and stop shirking their duties which the recent proposal to outlaw such inversions is such an act. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates , Please call 518-279-1044.
- Fed Chair Janet Yellen - "Noisy Data" The Open Market Committee of the Federal Reserve (FOMC), the body that determines the direction of interest rates, concluded its regularly scheduled two-day meeting Wednesday, June 18th. Voting members decided to keep the target level at which member banks loan excess reserves to each other at between zero and 0.25%. This rate, known as the Federal Funds rate, has been at this historically low level since the Fed, under then-Chair Ben Bernanke, lowered it from a target of between 0.75% and 1.00% on December 16, 2008, in order to stimulate economic growth. Also referred to as easy or accommodative, the current policy was set in place to combat the recessionary spiral the economy was tumbling into during the Fall of 2008 as the housing crisis set in. The above is of note due to the dual mandate that the Fed pursues. As amended by Congress in 1977 the Federal Reserve Act stating that “the Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the economy and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” Here it is in English – the Federal Reserve wants sustainable economic growth accompanied by moderate inflation in order to continually stimulate, but not overheat demand. At the current time this dual mandate allows the Fed to define the sustainable pace of economic growth at a real rate of 2.00% (Nominal of 4.00% less inflation) and an inflation rate of 2.00%. At the moment, in part due to the 2.90% drop in the first quarter which many (including us) view as an anomaly, year-over-year economic growth as defined by Growth Domestic Product stands at 1.50%. However, there exists a conflict on the other side of the dual mandate. Janet Yellen, the current Chair of the Federal Reserve looks closely at the Commerce Department’s Personal Consumption Expenditures index which has risen 1.60% over the past year. In addition to this, the Consumer Price Index, a measure of inflation at the Retail Level has risen 2.10% year-over-year. Therefore, the Fed should be reaching a point where inflation is becoming a concern. However, should the Fed begin to raise interest rates to choke off any inflationary tendencies, conventional thinking is that economic growth will begin to stagnate (even more than it has already!). During her press conference following the FOMC meeting, Ms. Yellen observed that “recent reading on, for example, the CPI index have been a bit on the high side, but I think it’s – the data that we’re seeing is noisy. I think it’s important to remember that, broadly speaking, inflation is evolving in line with the committee’s expectation.” Yellen observes that “the Committee has emphasized that we have the 2 percent objective for, as a longer-term matter, for PCE inflation and we would not willingly see a prolonged period in which inflation persistently runs below our objective or above our objective.” The words “longer-term” and “prolonged” in the preceding paragraph provides Yellen and the Fed with enough wiggle room to keep interest rates low even if inflation temporarily moves above 2.00%. We have noted on many occasions that we think this is an appropriate approach as inflating the economy to a certain extent is the safest way to exit this economic malaise. We also believe that this provides a floor under current stock market levels and that the risk/reward ratio remains skewed in favor of continuing to assume risk in your portfolio. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
- World Cup Fever Once every four years, the US gets gripped by a mild case of World Cup Fever. We stay loosely in touch with results and spend some of our time wondering about Belgium-Ivory Coast while the rest of the world “white knuckles” every set piece and yellow card. Americans tolerate soccer (AKA futbol), while the rest of the world basks in its glow. Why is this? Well, we grow up with baseball, American football and hoops with increasing doses of hockey and lacrosse. Soccer is not engrained in our psyches like it is in Latin America and Europe. Americans find soccer low scoring, boring and hard to understand. American investors can learn something from the rest of the world’s soccer fans. Investing should be like a soccer match, not a basketball game, for the vast majority of average investors. Good portfolios take a while to construct and require patience . Like a well constructed soccer “run,” they oftentimes don’t produce results like a soccer game (some anti-soccer folks would say they NEVER produce results). As a company, we at Fagan Associates emphasize diversification and patience to an extreme, but we feel these attributes enabled investors to weather the calamity of 2008 and enjoy the results of 2013. So, enjoy the soccer, the pageantry and tradition and remember that many times good portfolios can temporarily produce no positive results. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.
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