Fagan Associates Newsroom

Ever since word spread that Facebook was filing to become a publicly traded company, we have been receiving many requests soliciting our opinion.  Given the fact that it will be three to four months prior to Facebook trading, it would be premature to weigh in with an opinion.  Many questions still remain.  However, there are some known facts that we will weigh in on.  They include.

According to the Registration Statement (Form S-1) filed with the Securities and Exchange Commission, Facebook had 845 million Monthly Active Users (MAU) as of December 31, 2011 as compared to 608 million MAU one year prior for an increase of 39%.

Facebook had 483 Daily Active Users (DAU) as of December 31, 2011 as compared to 327 million DAU one year prior for an increase of 48%.

Facebook had more than 425 million MAU who used mobile devices as of December 2011 an area of their business that is one of the fastest growing.

Facebook users generated an average of 2.7 billion Likes and Comments per day during the three months ended December 31, 2011 and uploaded more than 250 million photos per day.

Revenue at Facebook increased by 88% to $3.711 billion during calendar year 2011 from $1.974 billion one year prior and by 2,325% from $153 billion during calendar year 2007.

Expenses at Facebook increased by 98% to $2.711 billion during calendar year 2011 from $1.368 billion one year prior and by 831% from $291 billion during calendar year 2007.

The net result when comparing revenue increases at Facebook relative to increases in expenses is a profit margin of approximately 27%, slowing from prior years but nonetheless healthy by most standards.

Approximately 12% of the revenue Facebook generated during calendar year 2011 was from its’ relationship with gamemaker Zynga (ZNGA).  This revenue is from direct advertisements purchased by Zynga as well as sales of their virtual games.

Facebook shares currently trade in a private market for approximately $30 per share, which would imply a market capitalization of approximately $75 billion, more than the Walt Disney Company, General Motors and Nike.

Should Facebook come public at a market capitalization of $75 billion, it will therefore be trading at nearly 19 times revenue, this as compared to Apple and Google, which trade at approximately five times revenue.

When Facebook becomes public, co-founder Mark Zuckerberg will maintain his iron grip on the company with a 28.4% outright ownership and 57.0% of the voting rights.

Rather than bore you to death with more data, let’s just take a wait-and-see attitude regarding our opinion on whether or not the shares are worth purchased.  It has yet to be determined how many shares Facebook will ultimately issue and at what the issue price will be.  Keep in mind that if this Initial Public Offering is like the vast majority of others, nearly 90% of the shares will be taken by large institutions and insiders with the general public getting the balance.  Demand will certainly exceed supply so the first trade will most likely be WAY above the initial public offering price.

We will keep an eye on this popular Initial Public Offering as its trading debut nears.

Shortly after its regularly scheduled meeting regarding Monetary Policy the Open Market Committee of the Federal Reserve, Chaired by Ben Bernanke issued a press release that stated that “the committee decided today to keep the target range for the federal funds [the interest rate at which member banks borrow from each other from the reserves held at the Federal Reserve] at 0 to ¼ percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

This was somewhat of a surprise and tacks on nearly one year from a somewhat recent press release from the Fed which put the end of this accommodative interest rate policy somewhere in mid-2013.  The released noted that “while indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated.  Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.  Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.”

Some analysts are cautious regarding the length of time that the Fed will keep interest rates low, concerned that the Fed foresees a slowing of the current pace of economic growth while others believe that this historically accommodative interest rate policy will ultimately fuel inflation.  We believe that the truth is somewhere in between as the Federal Funds rate along with market rates will remain low at least through the balance of 2012.  After that, the pace of economic activity will determine the direction of interest rates.  Why bother predicting interest rates through 2012?  The further out you travel in time, the foggier even the Fed’s crystal ball becomes.

What to do now?  For those that are borrowing, lock in historically low interest rates now.  Refinance your mortgage, refinance your credit cards and if needed, purchase a new automobile at or near zero percent.

For those that have saved, be very wary of longer-dated bonds and bond funds.  The best days for bonds are well past.  Purchase bonds that will mature in a maximum of eight years.  In fact, we might even consider trading in longer-dated maturities for these noted immediately above.  Be careful of stretching for income, even in the stock market, in the form of drastically overweighting utilities or consumer staples as dividends will become less attractive should interest rates begin to rise.  Along with some allocation to dividend payers, look for investments with secular growth stories such as Nike or Apple Computer.

Finally, be nimble.  All recommendations and plans of action are subject to change.  The Fed has given you an idea of where they “think” the economy and interest rates are headed.  However, the further one projects out there more variables are involved and therefore the more room for error.

It used to be so much easier—5 for ’05 or 8 for ’08.  Twelve for ’12 is certainly a lot of ideas.  However, the current news and upcoming events on the table, namely the problems with the Euro, the U.S. Labor and Housing Markets, the Presidential Election and the Olympics, we have plenty of resources.

1.      Occupy Wall Street will feel like renaming itself Occupy White House midway through the year.  This is not either liberal or conservative thinking.  It’s just that people are and will continue to be fed up with politics as usual.  This will keep the market on edge for the majority of the year.  Currently, we expect that by the close of 2012, the S&P 500 will reward patient investors with a total return (capital appreciation plus dividends) somewhere in the upper single digits, let’s call it 8.00% to 10.00%.

2.      Stay short.  It sounds like it should be a Randy Newman song, but we’re talking interest rates here.  We believe rates are headed somewhat higher here (FINALLY).  Thus funds like Payden GNMA (PYGNX), Double Line Total Return (DLTNX) and MetWest Total Return (MWTRX) do a good job of balancing the quest for returns with risk management.

3.      Medals and ballots.  We get treated to the Olympics and an election in2012.  Nike should be a winner but with it hovering around $100 it isn’t inexpensive.  Broadcasters and advertisers also should do well.

4.      A time and a place.  International funds have grossly underperformed their domestic counterparts.  We believe there is value in making investments internationally.  Perception is very negative and must be overcome.  This will take time.  Nevertheless, we own shares of Diageo (DEO) the spirits maker as well as companies with a majority of their revenue coming from outside the United States such as McDonalds (MCD), Intel (INTC), Mastercard (MA), Conoco Phillips (COP) and General Electric (GE) and would look to incorporate mutual funds such as Harding Loevner Emerging Markets Fund (HLEMX), the Tweedy Browne Global Value Fund (TBGVX) and the Sextant International Fund (SSIFX) as the year unfolds.

5.      Start big, end small.  (This is our Atlanta Falcons impression.)  We favor large cap over small cap but as it becomes clearer the economy is on the road to recovery, small caps could begin to outperform. Look for the Adirondack Small Cap Fund (ADKSX) as well as Baron Asset (BARAX) as the year progresses.

6.      Unleash the inner karma.  What does this mean?  As with 2011, calendar year 2012 will be a year that alternately makes you smile, makes you cry then makes you wonder.  It will be important to remain calm during market meltdowns as well as realistic during up spikes.  An Exchange Traded Fund that might help you survive these Maalox moments is the S&P Dividend ETF (SDY) whose objective is to invest in companies that have INCREASED their dividend every year for at least the past twenty-five years and currently sports a yield of nearly 3.25%.

7.      Energy shines. “Black gold, texas tea”!!  China, India and Brazil will continue to consume larger amounts of commodities, but energy will be the commodity that is the most in demand, whose price, relative to other commodities, will be most predictable. For those reasons, Conoco Phillips (COP), Exxon Mobil (XOM), Chesapeake Energy (CHK), Northern Oil & Gas (NOG), and National Oilwell Varco (NOV) fit the bill.  For those who wish exposure in the sector on a broad, more diversified basis, the SPDR Energy Exchange Traded Fund (XLE) makes sense.  Conoco Phillips sports a particularly healthy dividend (3.7%) and is more than 10% from its 52-week high.

8.      Where’s the beef? Money markets and short-duration Certificates of Deposit will become increasingly less attractive.  Over the past few years, investors have flocked to these investments, with many most likely running FROM the volatile stock market rather than TO these rather paltry yielding investments.  We believe investors will grow weary of these meager 1.00% returns during 2012 and accept more risk for potential returns.

9.      Return of the dinosaur.  Even the average Joe can facebook, use twitter and access his/her favorite blogs.  We believe that some of the major tech winners of 2012 are going to be big, established companies with hordes of balance sheet power. Consider Intel (INTC) or Microsoft (MSFT), for example, they sport dividends of 3.30% 2.80%, respectively and have billions of dollars on their balance sheets ready to be cagily invested.  Compare this to ten-year U.S. Treasury Notes at 1.92%.  Apples to Oranges, but nonetheless investments to consider.

10.   Exhaustion.  Americans (never a patient lot to begin with) will declare the end to pessimism and negativity by simply going out and spending.  We saw the first signs of this around the holidays.  Be aware this will benefit YUM Brands (YUM), McDonalds Corp (MCD), Deckers Outdoors (DECK), and Cabelas (CAB).  The desire of Americans to enjoy their lives, be optimistic and forward thinking will finally win out over the darkness that has held this country in its grips since the 2008s real estate meltdown.

11.   Real estate and the job markets will rebound.  Well, at least they won’t head further down.  We are beginning to see signs of stability in the worst hit property markets of Florida, Nevada and California as well as more consistent growth in the labor market.  Despite the underlying warts, the U.S. Unemployment Rate nonetheless is now officially 8.4%.

12.   By the end of this year, banks will eventually be good investments.  This is a sector that requires patience as well as caution.  We are just beginning to dip our toes into this pool.  However, with many U.S. banks, including J.P. Morgan Chase (JPM), PNC Bank (PNC), FNB Bank (FNB) and First Niagara (FNFG) sporting long-term track records of relatively low percentages of non-performing loans, these should begin to make their ways back into favor.

This article is the last of a four part series that pertains to year-end financial planning.  The articles have appeared on consecutive Sundays during December in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared December 11^th, “Year-End Tax Planning for Shareholders of Mutual Funds” which appeared December 18^th, “Year End Tax Planning – Charitable Giving which appeared last Sunday, December 25^th and finally, this article entitled “2011 Review – 2012 Preview.”

Calendar year 2011 was one was one which stymied the vast majority of investors, both professional and individual alike, as both found themselves whipsawed by domestic as well as international political, corporate, and geopolitical events as well as what mother nature had to throw at us in the form of the Spring Tsunami in Japan and Hurricane Irene which ravaged the Eastern Seaboard of the United States.

Indeed the past year was much like a roller coaster that at times, churned your stomach and prompted you to grab for the Maalox.  However, like a roller coaster, the year ended where it started as going into the final day of trading this past Friday, the Standard & Poor’s 500, excluding dividends, was up a grand total of 0.43%.  All in all, we consider calendar year 2011 a success!

A success you might say?  To this we respond with a resounding “yes!”  Quite simply, in addition to the two events noted above, consider what investors went through on the “Comet” ride.  Consider the Arab uprising in the Spring which began in Egypt and then swept through Saudi Arabia, Libya, Syria, Tunisia, Yemen, Bahrain, Algeria, and then leapt overseas morphing into the nonviolent Occupy Movement here in the United States.  This was just the beginning.  Investors were on the edge of their trading seats as our elected officials in their infinite wisdom and knowledge passed deadline after deadline regarding the raising of the debt ceiling back in late July and early August prompting a first ever downgrade of the “triple A” credit rating of the United States by Standard & Poor’s.

While these events were taking place, the European debt crisis simmered on the back burner through much of the Spring and early Summer only to move to the front as rioting in Greece occurred when politicians began to discuss the implementation of budgetary austerity measures.  This discussion pushed the yields on Greek sovereign debt to nearly 60% which, like a contagion, spilled over into other European countries sitting on the Mediterranean Sea, notably Italy and Spain.  It was only through measures taken by global Central Bankers that at least temporarily stemmed this contagion by adding liquidity into the financial system.  Although this will buy Europe time, it does not solve the issue of solvency.  One reason why we consider this year from an investment perspective a success is because when you look around you, unchanged isn’t bad.  The French Stock Market fell approximately 17% last year while the German, British and Swiss bourses slipped approximately 15%, 8% and 6%, respectively.

There’s a country song by Rodney Atkins which states “if you’re going through hell, keep on going.  Don’t slow down.  If you’re scared don’t show it.”  That is exactly what the United States did during 2011 because although the housing and labor markets have remained in the doldrums since the recession began in 2008, we are exiting calendar year2011 in better shape than we entered it as housing inventories are being worked off and jobs have begun to be created.  All in all the economy has weathered many body blows, but remains on the upswing.  That is a plus.

For the reasons noted above, we are happy investment returns have been flat for 2011.  However, the real question is what will calendar year 2012 bring.  In a nutshell, we currently believe calendar year 2012 will bring more of the same as 2011 in terms of volatility and “Maalox Moments,” but with a bias to the upside.  Furthermore, we believe if we are wrong it will be because this outlook will have been too conservative.  There is a real potential for a recovery in the manufacturing sector as more companies are returning jobs to our shores, a recovery in the housing market for reasons noted above and an energy boom.  However, the wild card remains our elected officials.  Will they take the necessary steps to rein in spending on entitlement programs such as Medicare, Medicaid and Social Security without compromising this slow, but mounting recovery or will they continue to take the easy way out, passing the buck until after next year’s Presidential Election?  A balancing act between temporary stimulus and long-term spending discipline is paramount if we are to right the U.S. Economic Ship.  If this occurs, we believe the stock market is in for more than double digit gains in 2012.  That said, we put this likelihood at less than 50% resulting in our more cautious outlook outlined earlier in this paragraph.

Best wishes for a Happy, Healthy, and Prosperous New Year!

This article is the third of a four part series that pertains to year-end financial planning.  The articles will appear on consecutive Sundays during December in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared December 3^rd; “Year-End Tax Planning for Shareholders of Mutual Funds” which appeared last week; this article and finally “Investment Portfolio Re-Balancing for the New Year” which will appear next Sunday.  Following this series, we will immediately provide readers with a Review of 2011 and our Investment Outlook for 2012.

Given the nature of our business, in our opinion the most obvious and effective way to give to a charitable organization is through a gift of appreciated stock.  This is a win-win situation for both the taxpayer and the charity.  The taxpayer can deduct the market value of the stock on the date of the gift and the charity gets the donation.  Furthermore, by donating the appreciated stock rather than selling the stock and donating the cash proceeds, the taxpayer also avoids any capital gains tax.  Please note that this only will work with appreciated securities within taxable accounts.  Should you hold a stock that has depreciated in value, it is generally wise to sell the stock and donate the cash proceeds.  Utilizing this method, the taxpayer can write off the capital loss up to current IRS limitations.

Readers will note that the above paragraph does not pertain only to appreciated stock, but rather to all appreciated assets, including bonds, mutual funds and real estate.

The Pension Protection Act of 2006 allowed taxpayers age 70 ½ to exclude from adjusted gross income qualified charitable contributions up to $100,000 per year from either a traditional or Roth IRA and despite the fact that required mandatory distributions were suspended for calendar year 2009, this legislation was extended through 2011.  Prior to the passing of this legislation, a taxpayer would have to first withdraw the money from his IRA and then make the contribution.  Many times this withdrawal resulted in the taxation of the Social Security Benefits of the taxpayer, reductions in property tax assistance and reductions in other government sponsored programs.  This law allows the taxpayer to circumvent this step thereby eliminating the prior pitfalls noted in the preceding sentence.  Additional benefits to rolling over the IRA distribution directly to a qualifying charity is that this donation qualifies toward the owner’s minimum required distribution, but does not count toward the IRA owner’s maximum 50% cash contribution limit as a percentage of their adjusted gross income.

One final way to get into the charitable giving mood this holiday season is through gifts of life insurance policies.  To accomplish this transfer, the current owner must name the qualified charitable as either the new owner or the irrevocable beneficiary.  If the owner does one of these then he/she is able to obtain a tax deduction on the present value of the insurance contract or his/her accumulated premium payments, whichever is higher.

As always, please be sure to check with your tax advisor prior to making any sizable charitable contributions.

This article is the second of a four part series that pertains to year-end financial planning.  The articles will appear on consecutive Sundays over the next four weeks in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared last week, this article, “Year-End Charitable Bequest Planning; and “Investment Portfolio Re-Balancing for the New Year.”  Following this series, we will immediately provide readers with a Review of 2011 and our Investment Outlook for 2012.

Prior to identifying those areas that can help you reduce your taxes regarding your mutual fund holdings, it is prudent to briefly review the IRS rules surrounding capital gains and losses, in general.  If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income.  The balance can be carried forward, indefinitely.  An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss.  Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are taxed at either zero percent for those taxpayers that are in the 10% to 15% marginal tax brackets or at 15% for those in the twenty-eight percent bracket.  Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income.  For most taxpayers, the rate is twenty-eight percent for the Federal Government.  In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.

Number one, call your mutual fund and ask them if they are planning any year-end distributions.  Keep in mind that capital gains declared by mutual funds are taxable regardless of whether you receive them in cash or reinvest in additional shares.  Furthermore, there is no economic benefit to the distribution.  It is the same as getting four taxable quarters in return for your non-taxable one dollar bill.  Upon calling, should you learn that your mutual fund is intending to declare a capital gain, find out how much it will be on a per share basis and on what date it will be declared.  This information will help you determine what steps, if any, need to be taken in order to minimize the impact of this declared gain.

Second, swap the mutual fund in which you have a taxable loss for a similar fund.  Please note that your adjusted tax basis consists of your initial contribution to the fund plus any subsequent out-of-pocket contributions as well as any reinvested dividends or capital gains declared during prior calendar years less any withdrawals.  Regardless of what others might say to the contrary, given the fact that there are over eight thousand mutual funds to choose from, there is always an appropriate alternative to your current fund.  Do not think that your fund is “the best” or “one of a kind.”

Be certain to check with your tax advisor prior to making any year-end portfolio transactions. 

Good luck, pruning your portfolio for tax savings makes dollars and cents!

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.

This article is the first of a three part series that pertains to year-end financial planning.  The articles will appear on consecutive Sundays over the next four weeks in “The Record” and include, in order, this article, “Year-End Tax Planning for Shareholders of Mutual Funds; “Year-End Charitable Bequest Planning” and “Investment Portfolio Re-Balancing for the New Year.” Following this series, we will provide readers with a Review of 2011 and our Investment Outlook for 2012.

One of the least time consuming and most profitable tasks one can assume during December as it pertains to their investment portfolio is to attempt to offset realized capital gains with capital losses in your portfolio.  Thus far, calendar year 2011 has been a rollercoaster ride.  Despite this volatility the S&P 500 remains only approximately one-quarter of one percent from where it started.  That said and given the level of volatility investors have witnessed over the past several years, it stands to reason that it would be prudent to examine your gains and losses, both unrealized and realized.  Finally, keep in mind that this article applies solely to shares of that are held in a non-qualified taxable account (not an IRA or pension plan).  Investors who sell these shares would claims the gain or loss on Schedule D of Federal Filing Form 1040.

Please note the following important IRS regulation that pertains to Capital Gains and Losses.  If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income.  The balance can be carried forward, indefinitely.

An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss.  Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are generally taxed at either zero percent for those taxpayers that are in the 10% to 15% marginal tax brackets or at 15% for those in the twenty-eight percent bracket.  Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income.  For most taxpayers, the rate is twenty-eight percent for the Federal Government.  In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.

One final consideration prior to executing a stock or bond trade for tax purposes would be to determine if, by executing this trade, a wash sale would result.  A wash sale exists when the transaction results in a loss and a “substantially identical security” is purchased within thirty days.  If this should occur, the tax loss created by the sale would not be deductible.  Please note that should the wash sale result in a gain, the gain is taxable.

As an aside, never forget that it is always prudent to consider the impact of selling a stock upon your portfolio.  Simply put, it is seldom wise to make a transaction solely for the purpose of saving money on your tax return!

A sale or sales of appreciating and/or depreciated securities represent only one tactic an investor can deploy when tax planning at year end.  Furthermore, please note that this decision must be made in conjunction with and in full knowledge of the resulting impact on your other investments, such as mutual funds.  Be certain to check with your tax advisor prior to making any year-end portfolio transactions!