ProVise Bullets

  • This month, we sing happy birthday to Apple. It was 30 years ago that Apple introduced its first Mac computer. What was novel then is commonplace today and far less clunky. For those old enough to remember what that boxy looking thing was like, it's hard to believe how far we've come. Speaking of Apple, Carl Icahn bought another $500 million more shares of Apple stock, bringing his total investment to $3.6 billion. As an activist shareholder he is trying to force Apple to buy up to $500 million in a stock buyback program. Apple has indicated that it will spend $100 million in the form of a dividend and/or stock buyback program in the near future.
  • Mohamed El-Erian is stepping down and away from PIMCO which, at one time, was the world’s largest money manager, but over the past several years, and especially last year, has stumbled along the way. El-Erian along with his cohort, Bill Gross, who will remain as Chief Investment Officer…for now, created the term “new normal” several years ago during the midst of the financial crisis. Their forecasts have not been very good, particularly on the equity side. Douglas Hodge, who was the Chief Operating Officer, will become the CEO of the firm and it is suggested that he might even take over the Chief Investment Officer title at the time that Bill Gross eventually steps down. Once again, we come to understand how hard it is to get to the top, but how much harder it is to stay there. The fall is usually not a graceful one.
  • Is Warren Buffett nuts or what? Warren Buffet recently announced that he would be backing a contest that was created by Quicken Loans regarding the NCAA basketball tournament. If you can get the bracket totally correct all the way to the end, Buffett will pay you $25 million dollars annually for the next 40 years ($1 billion), or in the alternative you can take a lump sum of $500 million. At first blush, this seems like a crazy bet, but according to there are nine quintillion different ways to fill out the 64 team bracket. Actually, with the extra game, you could argue that it’s a 65 team bracket. Just how big is a quintillion? A million has six zeroes, a billion has nine zeroes, a trillion has twelve zeroes, but a quintillion has eighteen zeroes! Good luck everyone. Now where did our Powerball lottery tickets go? The odds are better at “only” one in 175 million.
  • The January numbers are in and it was not very pretty with the DOW down over 5%, the S&P 500 down about 3.5%, the Russell 2000 down nearly 3%, and the MSCI EAFE Index down over 5%. Internationally, emerging markets were hit particularly hard. While companies reported 4th quarter earnings results in line with expectations, those results have been dampened as companies continued to lower their expectations on income growth for the year. On the heels of this, a report came out last week that indicated manufacturing in China was down and with rising interest rates in America, investors pulled money out of emerging markets. After the huge run up in the US markets last year and considering that we haven’t had a 10% pullback in the market since June 2011, this decline should not come as a surprise for investors. In fact, we mentioned in our year end Bullets that a 10% pullback could occur at any time. Whether we’re actually there or not remains to be seen, of course, but even if we are there’s nothing in the fundamentals of the economy that should cause a long term concern…at least not at this point. Growth in America is still projected to be higher than last year. In fact, it is projected to be better than most people thought just a few months ago. Although the Federal Reserve continued its cutback in the bond purchases – now reducing it to $65 billion per month beginning in February – this is likely a short term phenomenon that is a negative drag on the market, but a long term positive. America is on a withdrawal program that is needed and appropriate.

The pullback in the market will give investors (individuals, institutions, and corporations) an opportunity to get into the market if they missed a chance to do that previously. As we have spoken on numerous occasions, the most intelligent way to get back into the market if you have a lot of cash to invest is to dollar cost average. On the corporate side, corporations are flush with cash and while the final numbers have not come in, we wouldn’t be surprised to see corporations with more cash than they have ever had in history. As a result, don’t be surprised if the pace of mergers and acquisitions doesn’t pick up this year with technology, energy, and healthcare leading the way. Mergers and acquisitions reduce the number of securities available to investors and, in the case of acquisitions, often will provide fresh cash. Both are positives for the long term health of the market.

In short, don’t panic. Please accept the fact that a pullback of this nature is a normal part of a healthy bull market here in the United States. On an international level, it doesn’t surprise us that the emerging markets are experiencing current pressure. We suggested that the financial crisis first started in the United States and that Europe was a few years behind us and that the emerging markets might be a few years behind Europe. Again, it doesn’t mean that these economies are crashing it simply means they are slowing down, especially in the case of China. Patience rather than emotion generally rewards investors.

  • There’s been a lot of conversation around the data breach that occurred at Target stores during the holidays. This, once again, highlights the old technology of most credit cards used in America where the magnetic strip on the back of the card is fairly easy to hack into in today’s high-tech world. Overseas, many credit card companies have used the EMV (Europay, MasterCard, Visa) standard which puts an integrated chip on the card. These chips are not impossible to hack but they are much more difficult when used in a store. Many credit/debit card users feel that this technology can help protect them, and it can, but perhaps not as much as one would think, especially when the card is used online. In this case, the hacking possibilities will likely remain the same. You’re going to hear more about this technology as the credit card companies should switch to the new standard by August 2015 here in the United States. If they don’t switch at either the bank or retail level, then the companies will be responsible for any fraudulent charges.
  • In what has to be nothing more than a political ploy (and if not that, a total ignorance of how things really work), Representative Thomas Massie (R-Kentucky) has introduced a bill into Congress which would eliminate income taxes on Social Security payments. Social Security payments are not taxable for singles with a provisional income of less than $25,000 but up to 50% may be taxable above this level. For married couples, the threshold is $34,000. If over $44,000, then 85% of Social Security is taxable. During the Reagan years, Social Security first became taxable at the 50% level, and then during the Clinton years it was raised to 85%. Representative Massie suggests that by eliminating the tax it would restore integrity to the program. We fail to see how not taxing Social Security payments adds integrity to Social Security itself. While we agree these thresholds (which haven’t been increased since they were first enacted) should be adjusted upwards, suggesting that Social Security shouldn’t be taxed because it’s already been taxed once simply doesn’t meet the smell test.

First, the Social Security tax is paid 50% by the employee (who of course is taxed during working years) and the other 50% is provided by the employer (which is not taxed to the employee and is deductible by the employer). The average Social Security recipient receives back far more than they put into the program, so Massie’s claim of taxing it twice simply doesn’t hold water. We don’t expect this proposal to go anywhere.

  • You can now follow us on twitter by going towww.twitter.comand follow us at @pro_vise. We will use twitter to supplement the Bullets as the news warrants. We look forward to providing this valuable service.

As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 27 years.

© ProVise Management Group

Read more commentaries by ProVise Management Group