Fagan Associates Columns

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!

This time of year, we all have a lot on our minds.  If you are like us, you are still raking leaves and cleaning up the year.  For our family, it is certainly time (and perhaps a little past time) to begin to get ready for the holidays and unfortunately, it will soon be time to retrieve our snow shovels.  As calendar year 2011 draws to a close, it is also time to clean up your portfolio and begin to prepare for next year.  With this in mind, we have put together a small list of some “portfolio chores” that may put more bucks in your wallet in the form of tax savings.  Please note that some of these suggestions only pertain to investments in non-qualified or currently taxable accounts.

Despite the recent rally, as of this writing the Standard & Poor’s 500 remains approximately twenty percent below its record high set back in early October 2007.  For this reason, it is likely that many of our readers have stocks that are well below your purchase price.  However, you may also believe in the long term growth prospects of the investment.  Assuming the investment is in a taxable account (non-qualified), one might double up on the current share balance in an investment, wait thirty days, and then sell the shares he/she initially held.  The benefit would be a deductible loss on the shares you ultimately sold without losing your position in the security.  The risk would be that over the next thirty days, the stock declines thereby increasing your loss due to the additional shares.  Another risk would be that your portfolio becomes too heavily weighted in a particular stock or industry for those thirty days.  Nonetheless, the widely practiced strategy merits a look.  Here’s how it works.  Let’s assume that you purchased 100 shares of General Electric at $50.00 per share.  Despite the climb from its lows to its current prices of approximately $16.00, you have still lost $3,400 in this investment.  According to the “doubling up” model, you would purchase another 100 shares of G.E. at its current price, wait thirty days and then sell your initial shares.  This exercise would enable you to deduct the loss on G.E. up to a limit of $3,000.  It would also not compromise your investment in G.E. over the next thirty days, should the stock begin to move upward.

One thought regarding the above paragraph, take out your calendar year 2010 Federal Income Tax return, look at Schedule D and determine if you are carrying forward any losses beyond the $3,000 limit mentioned above.  If you are, include this in your year-end investment planning.

Call your mutual fund and ask them if they are planning any year-end distributions.  Do not add insult to injury by having to pay taxes on capital gain distributions despite the fact that you are losing money in the fund.  Remember, capital gains declared by mutual funds are taxable despite the fact that you, as an individual, may not have benefited from the investment, and may indeed be losing money.  Furthermore, that capital gain is taxable despite the fact that you may be reinvesting in additional shares.  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 paid.  This information will help you determine what steps need to be taken in order to minimize the impact.

Swap the mutual fund that you are losing money in for a similar fund.  Two thoughts pertain to this statement, the first being that, given the fact that there are over seven thousand mutual funds to choose from, there is always an appropriate alternative for your current fund.  The second thought is more of a reminder.  Remember that your basis for tax purposes in your investment consists of any out of pocket deposits you have made into the fund plus any dividends and/or capital gains that you have reinvested into the fund either during this calendar years or prior years minus any withdrawals you have taken from the fund.  Once again, given the length and depth of this bear market, many investors may be in a position that they are losing money when comparing the current market value of their fund versus their cost basis.

Don’t wait.  Take a couple of hours to clean up your portfolio.  Our guess is that it will be time well spent.  We will be touching on other tax-savings techniques regarding your investments in the coming weeks.

Contrary to what the Occupy Wall Street (OWS) movement is protesting, we believe that there is not enough capitalism in the United States and that all Americans would be better served if the OWS movement picked up and moved their camps to Washington, DC where cronyism is rampant.

Despite the above, let us also state that we believe in much of what the Occupy Wall Street movement initially stood for, which we understand to be a return of the focus of America to the middle class.  From our perspective, more and more, too much wealth and power has been concentrated in the top one percent and that all Americans would be better served if some of the wealth and power in American corporations would be distributed among the employees and shareholders and away from upper management and the Board of Directors.

We also believe that capitalism and Wall Street has many faults.  However, theoretically, these faults should be held in check via regulations a la the somewhat recently passed Dodd-Frank Legislation and Sarbanes-Oxley Act of 2002, as well as many others.  This oversight has been spotty at best, as it appears as if too many of our esteemed Senators and Congressmen have been busy enriching themselves rather than performing their duties.

In an exhaustive study that analyzed 16,000 stock transactions by U.S. House of Representative from 1985 to 1981, entitled “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives,” it was determined that “a portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).”  Within other studies, it has also been determined that U.S. Senators beat the stock market by an average of 12% per year, results that are statistically unheard of when compared to those returned by professionals in the industry.

Despite the immorality of this practice that by the way is not limited to one side of the political aisle or the other, Congressional “insider trading” is not illegal as Congressmen are, in a legal sense, not working for publicly trading companies where they would hold a fiduciary responsibility to the shareholders.

Although undeniably the best system capable of unleashing the potential of its citizens as well as provide personal freedom, we recognize that capitalism is not perfect.  However, we rely on our elected officials to curb those imperfections, one of which is greed.  It is for this reason that we urge all participants in Occupy Wall Street to concentrate their efforts on Washington, DC and urge our political leaders to always act in the best interest of their constituents, putting themselves second.

The Congressional Debt Committee, which concludes this coming Wednesday with its’ recommendations, has that opportunity.  This committee has been charged with reducing the federal deficit by at least $1.2 trillion over the next ten years.  Anything less than that should bring a sell-off in stocks while anything greater should be celebrated.

THE BOTTOM LINE – As the title of a famous Bob Dylan song states, we do believe that “The Times They Are A Changin’” as many of our new elected political leaders, both Republican and Democrat, are dedicated to making changes for the betterment of America and Americans.  However, we urge them to avoid the temptations that we can assume are great and concentrate on the job at hand which is to right the economic and social course of our country and to live up to the oath that they take upon entering office.  Our corporate leaders would also be well-served to look inwards to see where they are letting their fellow citizens and shareholders down.  Oh, by the way, this will pave the way for a major bull market move.

An interview with Gary Ran from Telemus Capital Parntners appeared during late August 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 on August 23^rd 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 immediately 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.  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.