Fagan Associates Newsroom

For investors with a long-term time horizon (five years or greater), adhering to a buy-and-hold strategy as it pertains to equities as an asset class is not dead. It never has been. However, for those same investors, adhering to a buy-and-hold strategy as it pertains to a particular security is dead. In fact, we believe that this strategy should never even have had a pulse.

For example, with most major stock indices at or near record high, household names like Bank of America, Citigroup, General Electric, and JC Penney remain more than 75%, 90%, 60% and 75% off their all-time closing highs. Now, that is not to say that at this point in time they don’t merit an investment. However, buy-and-homework or buy-and-monitor always trumps buy-and-hold. Also, keep in mind that every bull market is led by different leaders. Some of the leaders of this current bull market (after all stocks have more than doubled from their early March 2009 lows), let us call them new blue chips, that you might consider for an investment at these levels or on pullbacks include:

In the Consumer Discretionary space, some new blue chips would be Starbucks(SBUX), YUM! Brands (YUM), Dunkin’ Brands (DNKN), and Diageo, PLC (DEO). With over 18,000 stores worldwide, the name Starbucks is almost synonymous with coffee and in addition to providing this “necessity,” it also is a meeting place for business and pleasure. We would look to enter this as an investment on pullbacks. Another name in this industry is YUM! Brands (YUM), operators of Taco Bell, Pizza Hut and KFC, destinations for many Gen-X’ers. In addition YUM continues to expand aggressively worldwide, especially in China. Given the recent selloff in response to a food scare in China, we believe shares can be purchased at these levels. Dunkin’ Brands (DNKN), once a publicly traded company that was taken private and now is public again, is looking to leverage its lock on the coffee at a reasonable price market. In addition, DNKN is expanding its list of available food items as well as specialty and iced coffees. We believe DNKN is a buy at or a little below these levels. Finally, Diageo, PLC (DEO), the British distiller, brewer and bottler of household names including Johnnie Walker, Bushmills Irish Whiskey, Ketel One Vodka, Captain Morgan, Bailey’s Irish Cream and Guinness, is a core “sin” stock holding. Given the run-up in the stock market as well as DEO, we would look to buy on pullbacks.

Nike, Inc. (NKE) is the indisputable leader in the athletic footwear, equipment and apparel industry. NKE offers enough gear to appropriately prepare any athlete or weekend warrior for “competition.” We believe shares of this worldwide leader can be bought at these levels.

Two more of the new blue chips would be Mastercard (MA) and Visa (V). As both are global leaders in electronic transaction and payment processing systems, we believe equity investors would be wise to include one of these giants in their portfolios. After all, we are slowly moving to a cashless society, once dominated by debit and credit cards. Furthermore, MA and V do not assume credit risk as that is left to the underlying banks or other financial institutions. MA and V generally just take a percent of the transaction cost.

At the right price, most likely below current levels, we like retailing giants Amazon.com (AMZN) and Priceline.com (PCLN). Amazon, with its more than 88,000 employees, started off as an online retailer for books, but has expanded into dozens of other categories thereby pushing further and further into the wallets and pocketbooks of global consumers. Meanwhile, PCLN, the online travel company has become the place to shop for hotel reservations, airline tickets and rental cars. This is the leader in online travel.

What would a list of new blue chips be without Google (GOOG), which came public nearly ten years ago and has morphed from a strict search company to one that connects individuals and companies looking for information with that information. No other company provides online advertising results to the number of potential customers like GOOG does. In addition, Google with their Android operating system is looking to push into other areas, including music. We would purchase one-half our intended position in GOOG and wait for a pullback to buy the balance.

How could a company that was started by two friends more than a century ago be labeled a new blue chip? Two words – Harley-Davidson (HOG). Almost bankrupt some time ago, this iconic American brand has reinvented itself and now appeals not only to its albeit stereotypically traditional customers, but now to the middle, upper-middle and wealthy classes alike. Nobody just buys a Harley. There is the gear, the apparel, the bumper sticker, the helmet. Yes, owning a Harley is a way of life. We would recommend HOG at these levels.

Two stocks in the biotechnology field that have run a long way would include Celgene (CELG) and Gilead Sciences (GILD). CELG which specializes in drugs meant to fight cancer and GILD which specializes in drugs that addresses HIV have a current stable of multi-billion dollar drugs as well as stuffed pipelines. Given the run-up, we would look to establish an initial position on five to ten percent pullbacks.

We like Lowe’s Companies (LOW) and Target Corp (TGT) as ways to invest in the continuing rebound in housing as well as the recovering American consumer. With interest rates at multi-decade lows Americans are refinancing their mortgages at a record pace putting more disposable income in their respective pockets. What better way to spend these new found dollars than at LOW and TGT. A declaration of “let’s remodel the kitchen, the living area, the bedroom, or the you name it,” results in more business for LOW and TGT. We would buy these two household names here.

Finally, with the potential of becoming a “new blue chip,” but not quite yet there and with substantial risk, we mention Cheniere Energy (LNG). LNG, which builds and maintains facilities capable of storing and exporting natural gas, is on the cutting edge of the growing energy revolution in the United States. We would buy one-half of our intended position at these levels and look to fill out that position should LNG pull back.

So, there they are, the new blue chips!  Remember to invest with your head and not your heart or stomach!

Given the fact that we are smack dab in the middle of the quarterly earnings season for publicly traded corporations, this past week was filled with noteworthy events and news releases. That said, they were all trumped by a supposed Associated Press tweet on Tuesday, April 23^rd, at approximately 1:07p which read, “Breaking: Two Explosions in the White House and Barack Obama is injured.” Just before the tweet, the Standard & Poor’s 500 was up nearly one percent or fifteen points, a gain that evaporated rapidly over the next three minutes and in the process temporarily destroyed $134 billion of wealth, as investors sold on the news. However, three minutes later, at approximately 1:10p, the Associated Press tweeted, “Please ignore AP Tweet on explosions, we’ve been hacked.” By 1:13p, a mere six minutes after the initial, false tweet, stocks had regained levels prior to the tweet.

Investor reaction to this was apparently swift. Or was it? Many blame the sell off on computer programs that use complex algorithms to continually search the web, news releases, tweets and statuses, for specific words, phrases that contain specific words, or two or more of these specific words appearing within a certain range from one another. Once these algorithms spot what they’re looking for, it triggers a reaction. For example, words that might have been contained with the algorithm(s) and subsequently triggered the computerized response to sell after this tweet could have been the combination of “explosion,” “White House,” “President Obama” and “injured” in the same sentence.

In an article in the Washington Post, reporters Dina ElBoghdaday and Craig Timberg write that this all is made possible by a “new generation of analytical software [that] sifts through hundreds of millions of tweets and other forms of social media for early warnings about news that may move markets, and, in some cases, the programs order trades automatically, without human involvement. In a world where an edge of milliseconds can mean the difference between profit or loss, this software has quietly begun shaping decisions that affect billions of dollars in assets, say traders and Wall Street analysts.”

The accounts of our clients were not affected by this “Twitter Event” as, although many do, we do not employ hard (computer generated) stop orders which are orders to buy or sell a stock once the price of the stock reaches a specified price. Had we utilized this method of investing, many holdings might have been sold. Individuals can protect themselves from being unknowingly prey to an event like this by placing stop-limit orders which is “an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better). The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.” (U.S. Securities and Exchange Commission)

Better yet, as we do at Fagan Associates, try to buy good companies that you trust will appreciate over the long-term and ignore the day-to-day fluctuations of the market as well as the accompanying noise that short-term traders respond to.

With interest rates hovering near multi-decade lows, suffice it to say that there exists a great degree of risk to investing in bonds. However, any investor should be familiar with how their investments function and that is the intention of this column.

There are many different criteria to take into account when considering the purchase of an individual bond or bond fund. Some of these criteria are applicable to both and some only to bond owners. These include who the issuer is; the time period between the date or purchase and the date of maturity; whether or the bond is callable or non-callable; whether the bond is trading at a premium or a discount to par; what the interest rate will be and how often it will be paid. A final determining factor on the suitability of a bond purchase is, quite often, the most important. That is, the taxation of the income received from the bond and upon the sale of the security. It is this topic that we will address.

The vast majority of issuers of bonds can be classified into one of three categories. They

include Corporations, the United States Government and its Agencies; and State or Local

Municipalities.

When you buy an individual bond issued by a Corporation or purchase shares in an

open-ended Corporate Bond Fund, the interest you receive is taxable as ordinary income

in the year in which it is paid. Additionally, should you sell a bond that you originally

purchased at a discount to par value (the price at which the interest rate equals the current

yield), at or above the purchase price you would pay capital gains taxes on the difference.

Conversely, should you sell the bond for a loss, that loss would be a capital loss.

Should you purchase an individual bond issued by the United States Government or one

of its Agencies or an Open-Ended Mutual Fund that invests in these bonds, there is a

difference in the taxation as compared to a Corporate Bond or Corporate Bond Fund. A

Government Obligation, issued as U.S. Treasury Bills, U.S. Treasury Notes and U.S.

Treasury Bonds are taxable at the Federal level, but exempt from State Income Tax. This

also holds true for Open-Ended Mutual Funds. In addition, the treatment upon the sale of the bond or bond fund is exactly the same as a Corporate Bond or Corporate Bond Fund.

The final class of bond that we wish to discuss is one that is issued by a Municipality. A

bond issued by a municipality is tax-exempt at the Federal level as well as in the State in

which the bond is issued. This also holds true with a Municipal Bond Fund. The

income is tax-exempt at the Federal level and tax-exempt for the proportion of the

income derived from bonds issued within your state of residency. For example, should

you own a Municipal Bond Fund that invests in bonds of other states as well as New

York State (your assumed state of residency for income tax purposes), only the income

from the bonds issued by New York Municipalities is tax-exempt at both the Federal and

state levels. All other income is tax-exempt at the Federal level, but taxable at the state

level.

Therefore, when deciding what type of bond bests suits your needs, you must first determine your Federal and State income tax brackets. Generally speaking, those in the 28% Federal income tax bracket would be well served by a Municipal Bond or Municipal Bond Fund. Your State income tax bracket would determine whether to invest in a New York State Municipal Bond/fund or one that invests nationally. Conversely, should you be in a 15% Federal income tax bracket, a Corporate or Treasury bond would be appropriate. Either way, check with your Financial and Tax Advisor for the bond that best suits your objectives. Remember, when investing in bonds, what counts is not what you earn but rather what you keep after taxes!

Despite the recent jitters that the troubles in Cyprus have given our stock market, the underpinnings of the U.S. Economy continue to improve making the tumult of this little Mediterranean Island nation somewhat of a red herring as it pertains to America. Over the past few trading days the Dow Jones Industrial Average has set several new highs while the S&P 500 has come within one percent of its all-time high leading us to believe that at this time the problems in Cyprus are more of a potential catalyst for some profit-taking rather than the potential onset of a more pronounced, longer decline in U.S. equity prices.

At the crux of the issue regarding Cyprus is the fact that their national debt is roughly five times their Gross Domestic Product (GDP), this as compared to 1.1 times in the United States. Furthermore, the banking sector in Cyprus is five times as large as that of the United States relative to their respective GDP’s thereby leaving Cypriot officials little choice as to what would be the easiest avenue available to raise the 5.8 billion euros (approximately $7.6 billion) necessary to secure the total bailout cost coming from the European Union which totals 13.0 billion euros (approximately $17 billion), namely from their depositors.

Given the fact that billons of euros have been deposited into Cyprus banks from wealthy Russians allegedly looking to launder money or at least perhaps escape Russian taxation, the plan was to levy a one-time tax of 6.75% on deposits of less than 100,000 euros (about $130,000) even though deposits are insured up to that amount in Cyprus and a 9.9% tax on those account with greater than 100,000 euros. Unfortunately, Cypriot lawmakers put this plan to a vote and like all politicians looking to be re-elected, voted it down.

The questions is – what does Cyprus, a little island nation with 1.1 million people, whose economy represents approximately 0.50% of the GDP of the European Union and is smaller than that of Panama, Ethiopia, Lebanon and Costa Rica have to do with the United States. As noted within the first paragraph, over the near term (the next quarter) we say, that perhaps after the 20% run-up we’ve seen in U.S. markets over the past six months or so, investors may be more apt to lock in profits and will cite the situation in Cyprus as the reason. Looking a little further out, at this time we also see little cause for concern but would recommend that you continue to monitor the situation, looking for signs that the financial situation in Cyprus is spreading.

Could such a blatant confiscation of wealth happen here? And what if such a tax were announced – wouldn’t this potentially create a run on our banks? Never say never. And yet we would not lose one minute of sleep over the potential for this to occur in the United States.

And what about the Federal Deposit Insurance Corporation, which backstops deposits, generally speaking up to $250,000 per depositor? According to David Barr (New York Times), an FDIC Spokesperson, “in the FDIC’s 80-year history, not a single depositor has ever lost a penny of insured money as a result of a bank failure.” Furthermore, the FDIC is backed by the Federal Reserve.

In our opinion, the financial media has been hyping the Cyprus issue up too much? At this time we believe investors need not worry. We see the potential for some minimal profit taking over the short-term, but expect investors to buy into this pullback and end Q2 marginally higher than where we closed this past Friday. After that, if history is any guide, the market could flatten out for a while.

With the stock market at record highs as measured by the Dow Jones Industrial and Transport Averages as well as the Russell 2000, and the S&P 500 flirting with record highs, we thought it would be a good time to post some thoughts that are currently running through our collective minds.

The stock market has more than doubled from the bottom of the bear market during the first quarter of 2009 and even over the past year has run up nearly twenty percent from its mid-2012 Election Year lows. With this in mind, think back and try to remember what you were feeling at these bottoms. Were you sticking with your investment plan or did you bail out of stocks? Did and do you have an investment plan in order to respond appropriately to market movements or do you respond emotionally, out of fear or greed? If the answer is the latter, take some time to develop a plan of action to help you reach your financial goals.

Are you still spending more time researching the best $35 microwave to purchase rather than how and with whom to invest your life savings? Once again, if the answer is the former, take some time and get familiar with the investment world. Buy some books. Read the daily, weekly and monthly periodicals. You don’t need to become an expert. You just need to become familiar with the industry do’s and don’ts, many of which we have published over the past several years in our column in The Record.

You don’t need to be a hero. Investments should be made in moderation. It is boring, but history will once again prove that it works. Don’t invest more than a small portion of your money in speculative securities and always ask yourself, “what if this doesn’t work out, what happens to my account.” Too often investors see only the upside to a purchase and not the downside. There are two sides to a trade and believe it or not, investments don’t always go up in value. Prepare for negative as well as positive outcomes.

Do you realize that when interest rates rise as they most surely will do over the next few years, the value of bonds decline in value? The reason is simple. Who would pay full value for a ten-year U.S. Treasury note currently yielding approximately 2.00% if in a year from now those same notes are paying 3.00%? Nobody.

More people will run out of the theatre if somebody yells “fire in the lobby” rather than “popcorn in the lobby.” Be careful you don’t listen to all of the doomsayers out there and remember our advice above, everything in moderation. If you think the markets are going to pull back a bit, raise ten to twenty percent cash. If you are bullish, put some of that cash to work. However, very rarely is it wise to go “all in” or all to cash.

Many investors have too much information and not enough knowledge. Too many investors have their fingers on the proverbial trigger (computer keys in this case) who should not even own guns. Perhaps it is better to let some else handle your portfolio.

Why do some investment companies outsource their customer service to distant lands? Get to know your investment advisor. That way, when the market pulls back as it surely will, you’ll be able to meet with them to make certain that your plan is still valid.

Historically the stock market begins its climb during the latter part of a Presidential Election Year (June, 2012) and tops out for a while during the first month of the third quarter of the post-Presidential Election Year (July, 2013). Are you ready for it? Do you have a plan just in case things play out this way?

If so, congratulations. If not, get to it.

Happy St. Patrick’s Day!

Good morning and welcome to the era (actually we hope it is not an era as much a brief moment in time) or sequestration which are mandatory cuts in federal spending brought about by a lack of ability between Republicans and Democrats to compromise and find some common ground on spending.  Ironically, markets moved higher as perhaps investors believed that forced spending cuts are no spending cuts.  Although we don’t disagree with that, we do believe that indiscriminate cuts across the board are not the brightest way to cut spending.  It is like a surgeon with a scalpel looking around for where to place the incision.  Not too bright.  That said, our politicians don’t seem too bright or perhaps their desire to be reelected overcomes their willingness to provide necessary leadership.  Enough said.

Regarding the equity markets, they have come a long way and although we believe that they are headed higher through the balance of 2013 we think that a period of churning is ahead of us for the next quarter or two.  We recommend investing in weakness into large-cap dividend paying stocks as fixed income investors, should they exit bonds (and that remains to be seen) in droves will look for these types of securities.

Be well.

As professionals, each coming up on our thirtieth year in the financial/securities industry, it is disheartening to periodically hear of embezzlement, fraud or some other criminal activity destroying first and foremost the wealth of an individual or a business and secondly the reputation of this industry. That said, like any business, there are those that scheme to take advantage of the unwary and sometimes find at least temporary success. Keep in mind that the VAST majority of men and women practicing in this industry are honest, trustworthy, hardworking individuals. However, as the old saying goes, it take just one bad apple to ruin the whole barrel. However, given the recent conviction of a local investment firm, we thought it timely to write an article, hoping to identify some steps the reader might take to prevent bad things from happening to them.

Step Number One – your monthly statement (or quarterly, if applicable) as well as tax information should come directly from the custodian and not from the advisor. Some examples of custodians are Charles Schwab & Company, Wells Fargo, JP Morgan Chase and Merrill Lynch. If you are receiving this information ONLY from the advisor, this is a red flag.

Step Number Two – the custodian should be different from the broker. Make certain they are not one and the same. As an example Bernard L. Madoff and Bernard L. Madoff Investment Securities were one and the same. Once again, a red flag.

Step Number Three – Generally speaking, invest only in easy to liquidate, transparent, marketable and publicly traded securities. As a general rule, do not invest in private placements or securities whose price you cannot look up online to determine the market value. Do not invest in penny stocks unless you are speculating (like going to Las Vegas). This is not the path to wealth, but to financial ruin.

Step Number Four – Periodically check your account online. This website should be provided and maintained by the custodian, not the advisor. Once again, this provides a firewall that protects your assets. The value will most likely rise and fall with the markets. However, at least you know what is stated on the website as your value is the actual value. Similarly, investments do rise and fall in value. Be wary of those whose value remains static.

Step Number Five – Always make checks payable to the custodian. Never make a check payable to the advisor. Enough said.

Step Number Six – Check for discrepancies. The statement from the custodian should reconcile with that from the advisor. Errors could be genuine or perhaps something less than genuine.

Step Number Six – Be careful of pushy salespeople or those promising high investment returns. We agree with a paragraph in a pamphlet prepared for FINRA (Financial Industry Regulatory Authority, Inc.) by Lightbulb Press that notes “if you’re trying to get rich quick, there’s probably someone out there who’d be happy to sell you a scheme that sounds like the answer to your dreams. Making a killing on a ‘hot’ investment is not key to a successful strategy.”

An interview with Gary Ran from Telemus Capital Parntners appeared some time ago in Barron’s, a popular financial weekly, who noted that during market turmoil it was “hard for investors to stay focused in times like this, just when you need it the most, because there seems to be so much information But information isn’t knowledge.”

Do you mean that all the information that is thrown at us over the internet doesn’t amount to the knowledge necessary to manage our own portfolios? In our opinion, if it is combined with the appropriate educational background, knowledge of how businesses operate, an ability to decipher financial data and the jargon that does along with it, a temperament that is conducive to dealing with turmoil and experience, it certainly does. Otherwise, it may not. The problem arises when an investor discovers that they do not have one or more of these qualities only after it is too late.

For example, let’s say that after coming home from work the day of the “Flash Crash” on August 23, 2011, you turned on your computer and logged on to the internet to check out how the stock market did that day. You would have discovered that the Standard & Poor’s 500, the most widely followed stock index, had rebounded nearly 40 points, but over the past month it had declined from 1,345 to that closing day value of 1,162 for a decline of 13.60%, a drop that resulted in a loss of $34,000 on your portfolio of $250,000.

What do you do? Perhaps you look for some perspective from a trusted source, CNBC and log onto their website. You scroll down to an article entitled “It’s ‘Only Just Begun,’ S&P Fair Value 800-900: Analyst.” You read on and discover that Bob Janjuah, co-head of cross-asset allocation strategy at Nomura Securities, stated in a research note that the bear market “process has only just begun. It will not be a straight line down, but the secular (bearish) trend for risk assets is, to me, now clear and, with hindsight, this bear leg began in Q2 2011.”

Furthermore, Mr. Janjuah notes that “in this world, and using the S&P 500 purely as a risk proxy, I see ‘fair value’ for the S&P down in the 800/900 area. I think we will see these levels trade in the next 12/15 months. And we may even undershoot to levels last seen at the lows of Q1 2009.”

You quickly do a mental calculation and conclude that this implies another 22.00% decline at best and nearly 43.00% at worst. After picking yourself up off the floor, you immediately call your advisor and sell everything.

Was that the right action to take? Forget about whether or not it has been profitable (and as of this past Friday it has not), was it the correct move. In our opinion the answer is no. It is not the timing of the stock market but rather the time in the market that has historically resulted in investors reaching their goals.

In addition, generally speaking, many investors tend to focus too much on the day-to-day fluctuations in the stock market and not enough on their goals and objectives. Finally, some investors mistakenly make “all or nothing” moves. They are either “all in or all out” depending upon the latest news report, earnings hit or miss, political event or analyst comment. Our recommendation when it comes to investing is similar to life, everything in moderation. Work at the margins. If you are feeling a little skittish about the direction of stocks, raise a little cash. If you are feeling bullish about the direction of stocks, then put some of that cash to work.