- What constitutes a reasonable pull-back in the market? This is an essential question to be able to answer when identifying a good entry point into the market.
- How the current low rate environment will force more people into high-yielding securities, with or without tax increases.
- Why costs of maintenance and operations are so essential when determining whether or not that large ticket item is affordable. The costs go beyond what you see upfront.
- An updated portfolio performance table.
A not so random observation…This weekend I was looking at how the S&P 500 has behaved year-over-year based on where the index start at the first trading day of the year. Since 2002, the S&P 500 has always spent part of the year in the red. By this I mean that the price of the index fell at some time during each year below its adjusted close on the first trading day of the year.
The anomaly to the trend noted above is our current year, 2012. So far the index has yet to break into negative territory. It came close during the May-June sell off, but failed to close below where it began on the first trading day of the year. We still have over a month left in the year…I suppose anything can happen.
Master Limited Partnerships (MLP) have sold off heavily since the post-election market decline. The market fears that their favored tax status will be adjusted. Either the high yields that these stocks currently carry will be depressed or investors in such companies will be hit with higher tax rates. That’s the fear. What will the reality be? Who knows. Friday saw a significant amount of buying activity in many MLPs.
If you have not come across the latest monthly installment by Bill Gross, you certainly will want to give it a read (linked below). Bill does a great job this month providing a stark dose of macro economic reality. It’s better to know what you’re up against than pretend what you’re up against isn’t there. Since the discussion is focused on a ‘big picture’ centric view of the U.S. economy, it is relevant to investor or non-investor.
Three key takeaways from Bill’s October column…
- The U.S. has federal debt/GDP less than 100%, Aaa/AA+ credit ratings, and the benefit of being the world’s reserve currency.
- Studies by the CBO, IMF and BIS (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years.
- Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline.
Some folks in California were hoping that Facebook would usher in a new dot-com stock boom to northern California’s Silicon Valley and surrounding region (Remember the late 90’s?). A few days of trading out from the Facebook IPO and it appears this will not be the case. The talk of a sudden rush of new State tax revenues sparked by a new social media prosperity looks like a very, very long shot.
The entire situation is sad. Years after increasing anticipation about Facebook’s IPO, the stock fell flat and then started to roll down the hill. California, caught between a fiscal rock and hard place, saw a glimmer of hope in this heavily anticipated IPO and now realizes this opportunity is gone.
If the loss of public confidence in government and our financial system was not bad enough, we now have the most publicized IPO in recent memory, if not in history, look as if it was set up by some shady Chicago mobsters from 60+ years ago.
Rather than Facebook being the goose that laid the golden egg, it looks as if Facebook is the goose that laid the rotten egg. I suppose this could be chalked up as an example of why I like to tell people looking for investment advice to invest in companies like Pepsi and Phillip Morris…
My Take: Most people (maybe?) have already filed their tax returns, so this information (bel0w) might seem a little late, but it is not. I strongly believe that people do not realize that they have the ability to deduct up to half of your adjusted gross income (term defined below) through donations to charities (non-profits). This is huge in that the Federal government allows you to direct your otherwise taxed dollars to a cause of your choice. If you really care about a cause and know of a non-profit that is doing work in that area, you should seriously think about giving to the organization. It’s a win-win situation for you and them. You can give and lesson your tax burden, while you support the cause you care about.
I’m linking to a web page that provides a very good overview of the current rules and limitations that concern tax deductions and charitable donations. Once you are armed with this knowledge, then when you see a cause that you might want to support, you can make a more informed decision regarding your ability to contribute. Many people see non-profits asking for a donation as a losing proposition…at best it is seen as a way to get someone to stop bothering you. This isn’t true. If you have an actual interest in the non-profit or don’t like to see so much of your taxes go to the Federal government, then maybe you’re at the doorstep of a great opportunity.
Note: Adjusted Gross Income (AGI) is calculated as your gross income from taxable sources minus tax-expempt items like qualified medical expenses and retirment plan contributions. You can find your AGI on page 1 of your Federal tax return. You might also here AGI referred to as net income.
What you will find inside….
- What large emerging market has a very low percentage of its population living in an urbanized area and how you can invest in its infrastructure development
- How China skews their urban/rural statistics
- What industries are guaranteed to see growth throughout this decade and what companies are sitting pretty
- An updated model portfolio performance table
- How it might be harmful to your financial health to argue for an increase to a particular tax
If you’re the least bit familiar with Master Limited Partnerships (MLPs), you know that they have a funny quirk to them; they annual provide you with a strange tax form called a K-1 schedule and at times can require you to pay taxes to the states the MLP operates in. If these factors pose enough trouble to drive you away from such an investment, an alternative exists.
The reason why MLPs are quite popular is because over the past 15 years the group has averaged a 17% annual gain. This is enticing to many investors, especially investors looking for regular income distributions, since MLPs are known for their large dividend yields.
How do you get in on this class of investments that has performed well overtime without the tax filing problems? As you may have guessed, a few Exchange Traded Funds (ETFs) exist that hold a basket of MLPs. Being an owner of an ETF is straight forward with the regular 1099 form arriving at the end of ever year.
The two main MLP based ETFs are the Alerian MLP (AMLP) and the JPMorgan Alerian MLP Index (AMJ) (this one is actually an exchange traded note.) .They both carry a .85% annual expense ratio. The AMLP fund currently boasts a dividend yield of nearly 6% and the AMJ fund at nearly 5%. Since AMLP’s inception around September 1, 2010 until July 15, 2011, the fund has actually lagged AMJ by about 7% in per share price performance.
In addition investors will also receive instant diversification by investing in either fund. The cost of this advantage is that you will forgo the higher yields you could obtain in you shopped for a few specific MLPs to purchase.
Being that funds exist to capture the benefits of MLP investing, no investor should feel that they cannot take part in this arena for fear to fax complications. MLPs often provide some of the more stable returns in the market because their businesses lines often focus on key components to economies around the world. For instances, it’s very common to find an MLP owning a large amount of oil or gas transmission pipelines in a certain geographic region. They may never take ownership of the fuel, but the line they own generates revenue, since it must be used for transportation.
If MLPs sound interesting to you, I’d start with the funds listed and then either consider other funds or identify specific companies to invest in.
Note: I did not cover a couple other tax reporting ramifications that might impact you when choosing to invest directly in an MLP or with an MLP fund. Consult your tax adviser for more information.
If you’re an income investor or even a growth investor, American Tower (AMT) should be a stock that has your attention. AMT is a company that leases wireless communication towers. From cell phone service to radio and television, they own 37,000 of the towers you see across the land enabling our communications infrastructure to function.
While I think the company is in a great industry that will continue to grow as we become more connected (especially internationally), an interesting event is set to transpire later this year. AMT is planning to convert itself from a regular corporation to a Real Estate Investment Trust (REIT). This would mean they would not be taxed as much at the corporate level and be required to pay 90 of its taxable profits as dividends.
As a REIT, AMT would be a very interesting investment. As the country expands into developing countries, you cannot ignore that there is a significant growth story to possibly be had, yet if AMT is a REIT and most of its money (90%) is being paid out as a dividend, can the company continue expanding as it has?
I’ve noted before that one problem some REITs have when growing is that they cannot retain enough of their earnings to finance their desired expansion. Sometimes this causes dilution of the stock’s shares because new shares will be issued to raise capital. The S&P currently maintains a BB+ credit rating on AMT, which isn’t all that bad (The better the credit rating the less you must spend to borrow money from lenders.).
If the change to a REIT occurs it will be interesting to see how investors react. This would be an obvious draw for income investors, but what will be the reaction of investors looking to gain more on the growth side? My guess is that the investors looking for more intensive growth will be gone by the time the potential conversion occurs. Therefore, the news will bring more buyers looking for investments paying regular dividend distributions.
A few days ago a news story broke that the SEC had requested tax-documents from AMT from 2007 to the present. I’m not sure if this is some regular procedure that occurs when a company is converting to a REIT or if it should be a yellow flag. In either case, it provides investors a point of information to look forward to finding more information out about in the future, if there is an issue. Otherwise, the next big news should be the REIT conversion.
Disclosure: No Position
Economists predict that American households will have to contribute an average of $1,398 per year to fulfill pension promises, according to a new study…READ MORE
My Take: If the graph below and the information in the linked article are correct, then we’re most likely going to have some serious adjustments in the country sooner than later. Assuming pension problems create some serious problems for State governments, expect a period of time short or extended where heavy amounts of uncertainty exist in the market. Uncertainty makes people nervous and thus brings about sell offs.
Remember to continue to think defensively when investing. I’m not a chicken little type, but it’s important to have a plan for good and bad weather. How will you respond if the market takes a sharp dive? Where will you want to look for shelter? Where will you want to look for oversold opportunities?