Issue 03 - March 2013

Spring Greetings

Happy March!

We hope you are as ready as we are for Spring to hit! Don’t forget to set your clocks this Sunday.

It has been lovely to see many of you recently, and we look forward to getting together with the rest of you due for a review after the first quarter.  The first part of this year has brought some sad and/or trying news for some of our client family as well as some weddings, births and celebratory news for others (or for some, both). We are honored to have you share your lives with us, and to be allowed along for the ride.

Speaking of rides, the investing world continues to be an intriguing arena.  The topics for this newsletter will be the Sequester as well as the usual updates on various equity spaces.

In addition, we will be hosting our first conference call for our secondary market non-traded REIT’s. The call will be on Tuesday, March 19th at 11:30 AM (MST).  We will be sending out a call-in number via email as the date gets closer, but please jot down your questions and bring them to the call!

And now we will get into Brian’s fascinating world of economic events and stock market related positioning.


The “sequester” is basically a group of spending cuts to the Federal Government’s budget that took effect on March 1, 2013.  This was part of the bi-partisan debt ceiling compromise that was agreed to in 2011 and created the big “fiscal cliff” event for January 1st of this year.  That 2011 agreement included automatic tax increases and spending cuts in an effort to move closer to balancing the budget.  The tax increases were dealt with just prior to the January 1st deadline but the sequestration of spending cuts was delayed to March 1st.

Many people are worried that the sequester cuts could hurt our economy.  This is a valid concern, as reduced government spending and increasing taxes do act as a drag in any economy.  However, we also have to be realistic about our government debt and work to keep that from getting out of control.  It’s all about finding the right balance…no one knows the exact formula for the best outcome, but if we continue to grow the debt as quickly as we have been in recent years, then we will eventually default on our bonds.  And if we try to cut too quickly, we risk driving the economy into recession or depression, which in turn leads to less tax revenue and compounds the problem.

In total, the sequester cuts in their current form should total about $1.2 trillion over the next 10 years (about $85 billion in 2013).  According to the Washington Post, the cuts are evenly split between domestic and defense programs, with half affecting defense discretionary spending (weapons purchases, base operations, construction work, etc.) and the rest affecting both mandatory (which generally means regular payouts like Social Security or Medicaid) and discretionary domestic spending. Only a few mandatory programs, like the unemployment trust fund and, most notably, Medicare (more specifically its provider payments) are affected. The bulk of cuts are borne by discretionary spending for either defense or domestic functions.

Most mandatory programs, like Medicaid and Social Security, and in particular low-income programs like Temporary Assistance for Needy Families (TANF, or welfare) and the Supplemental Nutritional Assistance Program (SNAP, or food stamps) were exempt from the sequester…let’s take a look at the cuts for 2013:

  • $42.7 billion in defense cuts (a 7.9 percent cut).
  • $28.7 billion in domestic discretionary cuts (a 5.3 percent cut).
  • $9.9 billion in Medicare cuts (a 2 percent cut).
  • $4 billion in other mandatory cuts

So, the total cuts for 2013 are about $85 billion.  And with a federal budget of about $3.5 trillion, the cuts represent about 2.5%.  The sequester cuts discretionary spending across-the-board by 9.4 percent for defense and 8.2 percent for everything else. But no programs are actually eliminated.

We think that the current sequestration cuts, along with the tax increases implemented in January are a prudent step in the right direction.  Congress may agree to change where the cuts come from, but hopefully they will not reduce the amount of the cuts.

Healthcare REITs:

As we have mentioned before, we think this is an interesting investment space.  Our thinking is to follow the spending from the baby boom generation, and as they age, the demand for healthcare related facilities should continue to rise.

Below is a graph of births in the US from 1940 to 1980


If you add 65 years to the start of the baby boom in 1946, you get 2011.  So we have really just began an extended period of significant increases in the number of people in the age 65+ demographic.  Stated another way, each year for the next 16 years we will set a record in the US for population in the 65+ category, barring a catastrophe.  In fact, if life expectancies continue to go up, we will likely be setting these “aging population” records for many more years than that.


Apple shares continue to struggle, but as a company, it seems that Apple is still doing well.  In the most recent report on smartphone market share (below), you can see that Apple’s iPhone gained market share in the period of November to January.


Keep in mind that stocks will frequently go thru periods when the performance of the stock doesn’t match the performance of the company.  This has a lot to do with future expectations and the actions of the institutional investors (mutual funds, pension funds, endowments, etc).  In the example of Apple, it’s very possible that the institutional investors had too much exposure to Apple.  Many have held Apple since 2009 (& earlier), when it was trading below 100.  If they had 2% of their fund in Apple at 100 in 2009, then during 2012 when Apple was at 600, they might have 10%+ of their fund in Apple just from the growth.  And if you have many institutions trying to reduce their exposure to Apple, each owning millions of shares, it’s going to take some time to sell those shares.

Our take continues to be that Apple is still doing well in the US, will continue to innovate and will continue to expand internationally.  If true, their stock price could recover soon, but it’s always difficult to predict the short-term movements.

That about wraps it up for this newsletter.

Have a wonderful weekend!

Brian and Abby