So much to say, so little time for organizing thoughts! First and foremost, we wish you a happy & healthy 2013. Next, we apologize to those of you who wound up in line at the post office trying to retrieve a “postage due” mailing from us with a pen in it! Two separate postal workers assured us that the proper postage was applied to the envelope, but apparently some post offices disagreed.
This year brings a couple of goals for HFS (including our standard “Happy Clients” target). For those of you in our secondary market non-traded REIT’s, we are working toward implementing bi-annual conference calls which you can log on to and become informed on all the different investments you are currently in. More to come on that.
We don’t know if any of you have noticed, but our poor website has been woefully neglected for the last year. Stay tuned as HFS gets a face-lift and a new look. These procedures take time so look for it around March.
The holidays for us came with a healthy dose of the flu so we have been a bit behind on quarterly reports and we are sorry for the delay. Enclosed please find your statement and a copy of your invoice. We have included a holdings report so you can see what investment is in each account.
It’s time for many of you to have an Annual Review so let’s get in touch to schedule that if necessary. And finally, if you have not yet made your IRA Contributions, you can make a check payable to TD Ameritrade and mail it to our office any time prior to April 10th.
And now over to Brian for the really dry stuff…
We are sure that most of you are aware that congress came up with a last minute compromise to avoid/delay going over the fiscal cliff. However, the compromise was mostly on the revenue or tax side and included a two-month delay of the automatic spending cuts. Here are some of the key provisions as reported by cnbc.com:
- Raises $620 billion in revenue over 10 years through a series of tax increases on wealthier Americans.
- Permanently extends tax cuts enacted in 2001 under former Republican President George W. Bush for income below $400,000 per individual, or $450,000 per family. Income above that level would be taxed at 39.6 percent, up from the current top rate of 35 percent.
- Above that income threshold, capital gains and dividends tax rates would return to 20 percent, from 15 percent.
- Caps personal exemptions and itemized deductions for income above $250,000, or $300,000 per household.
- Raises estate tax rate to 40 percent for estates of more than $10 million per couple, up from the current level of 35 percent.
- Includes a permanent fix for the alternative minimum tax.
- Extends unemployment insurance benefits for one year for 2 million people.
We believe that the market is interpreting this as a pretty good compromise on the tax revenue side of things. We also believe that the institutional investors would like to see an extension of the debt ceiling, along with some spending cuts – hopefully enough to make a difference, but not so much, so quickly that it causes the economy to go into recession. Everyone’s interpretation of the “right amount” of spending cuts is a little different, but clearly, doing nothing on the spending side would be bad for our ballooning deficit.
It’s been a rough couple of months for Apple stock, though we do believe that they had a pretty good holiday season. There are several reasons why the stock has done poorly:
- Worries over a potential “fiscal cliff” capital gains tax increase. The capital gains tax has been at 15% since 2003, and investors knew that it was likely to go up to at least 20% on January 1st. Since Apple has gone up so much over the past few years there were a lot of investors holding large capital gains in their Apple stock, which only becomes taxable in the year that the stock is sold. By selling at the end of 2012, those investors can pay 15% instead of the new rate.
- Worries over Apple’s profit margin. Apple introduced a few new products in October, which have a lower price point and a lower profit margin. As a result, investors fear that even if sales are good, the earnings of Apple might suffer.
- Worries that Apple’s new iPhone 5 is not selling as well as investors had hoped.
Since Apple is the largest company on the stock exchange, there are always rumors about the company circulating around Wall Street. Many times these are confirmed, refuted or explained by the company, but normally not until they publicly report at the end of each quarter. They will report their quarterly earnings next Wednesday, January 23rd, so it will be interesting to hear directly from Apple and get the real story. We feel that Apple’s sales and earnings are still doing very well, but whether or not they can exceed the market’s expectations is hard to predict.
At its current cost of around $500/share, Apple is trading at a very attractive price. The market in general, as measured by the S&P 500, is trading at a price to earnings ratio (P/E ratio) of about 13. Apple’s current P/E ratio is about 10.3 and if you look at next year’s projected earnings, the ratio is about 8.8. There are a lot of factors to consider, but generally speaking, the lower the P/E ratio, the less expensive a stock is. And the faster a company is growing, the more investors are willing to pay, which means that the P/E ratio will normally be higher for a fast growing company.
Google, for example, is one of Apple’s competitors and is projected to grow at about the same rate as Apple (around 20%) for the next couple of years. However, they are trading with a P/E ratio of about 18, which is about 80% higher than Apple. This means that Apple has a lot of upside if they can meet or beat their earnings projections…and it also means that if Google falls short, they have a lot more downside risk. Only time will tell, but we still like Apple as a long-term investment.
Many non-traded REITs had appraisals towards the end of the year and we generally saw them go down a bit. Normally this might be concerning, except for the fact that FINRA (the financial industry regulatory agency) is putting pressure on the REITs to use more conservative appraisals.
As an example, let’s look at Inland American, which is the largest non-traded REIT on the market with over $12 billion in assets and about 900 properties. They reported increases in their net income as well as a higher occupancy rate, but their appraised value went from $7.22 to $6.93. The company said that the industry is being pushed to use a more conservative appraisal method and also mentioned that the traded REITs are generally trading at 8 to 10% above this appraisal method. This could drive down prices on the secondary market, and should not necessarily have any effect on the ultimate liquidation or IPO price.
That about concludes this update. As always, please call us with any questions, comments or concerns. We appreciate your business and hope you are still awake after reading this.
Brian and Abby