Category: Research Notes

With the election now over and Congress back from Thanksgiving recess, a tremendous amount of time and attention is being spent on the many potential changes to the tax code for 2013 and beyond. With less than a month left in the tax year, there are still many unknowns as to how it all will look come January. To try and help make sense of this tax uncertainty as it relates to one’s investment portfolio and personal finances, we will break it down into two categories: what will happen if nothing gets done, and some reasonable, although still uncertain, expectations.

We were surprised to learn recently that for the first time in its history, the Fidelity mutual fund family now manages more bond assets than stocks. This historic shift reflects a massive, multi-year flow of funds out of stocks and into bonds as investors seek a safe haven from heightened global turmoil and equity market volatility. After a thirty year bull market in bonds, we fear that investors have forgotten the painful lessons of the 1970’s and have inadvertently exposed their portfolios to significant risks they might not understand.

In response to the most widespread, synchronized debt deleveraging since the Great Depression, the Federal Reserve initiated a series of “easing” measures in order to lower the cost of borrowing, boost asset prices and reflate nominal GDP.

As we watch the Facebook saga unfold in somewhat predictable fashion (see HM Payson Research Note: “Facebook: Buyer Beware,” May 17, 2012), we cannot help but notice some compelling values at the other end of the large-cap technology pond. Although widely perceived as a boring – or even dying – destroyer of shareholder value, Microsoft strikes us as one of the more compelling investment propositions in any market sector today.

The sovereign debt crisis in Europe and subsequent worldwide economic slowdown has been the top news story and at the forefront of many investors’ minds for nearly 3 years. Fiscal austerity, likely restructuring of the debt of the peripheral sovereigns, and a reluctance to implement needed structural reforms within the European Union (namely, more centralized control of member country finances) will present a persistent headwind to global economic growth. Yet, in this environment of uncertainty and pessimism, we believe there are excellent investment opportunities; one simply needs to dig a little deeper to unearth them.

We’ll leave the legal analysis of the recent Supreme Court rulings regarding the Affordable Healthcare Act to the pundits on the network news. Our priority is to preserve and grow our clients’ financial assets. In that vein, we continue to find attractive investment values in high quality healthcare companies. Relative to most other opportunities, we believe these investments will perform well whatever form healthcare reform ultimately takes.

Against a backdrop of the extraordinary media coverage of Facebook’s recent IPO, JPMorgan has managed to garner its share of headlines with the surprising announcement of a $2 billion trading loss originating out of the bank’s London offices. When the dust settles, the loss will likely amount to a larger write-down than the initial headline number, but we believe the bank’s capital levels will remain strong and at high levels relative to its peers.

Facebook is the poster child of social networking and one of the most successful young companies of all time. In just eight years, the social media giant has grown from zero to $4 billion in annual revenues with nearly one billion active users. With its global reach and pervasive social impact, it is no wonder we are receiving questions about the initial public offering. Those who know us well will not be surprised to hear we do not intend to purchase Facebook shares any time soon.

While it may seem very painful to hold cash when it is yielding near 0%, it does offer two sources of value. The first and obvious value is that it offers protection against volatility. The second value is perhaps less clear but possibly more valuable. Cash gives investors valuable options.

No question, Monday’s market action was the “real deal”. The S&P posted its sixth worst day in history (down 6.65%) – capping the worst three-day decline since November 2008. Global markets haven’t fared any better; and the rout continued in Asia. Headline-grabbing market declines and volatility can become further self-fulfilling by creating more uncertainty and hand wringing. We hope we can lend some clarity to the current situation and will get a bit more tactical in our advice.