Oak Street Advisors

Apples and Oranges

2014-04-02T10:52:00.000-04:00

“Those who cannot remember the past are condemned to repeat it” George Santayan

Apple has been a phenomenal company since its inception, but has not always been a good investment. For those too young to know and those whose memory has failed them it is helpful to take a brief look back to help understand what the future might hold.

The early years when desktop computing was just beginning was a great time to own Apple. The MacIntosh Operating System. Released in 1984, set Apple apart from the competition. It was easy to use and intuitive at a time when the Microsoft DOS required users to memorize and type arcane command line instructions. The processing of images and the application to the print/design world made it a big hit and allowed Apple to charge premium prices for the machines they manufactured.

Then along came Windows OS, released in November 1985, which allowed PC users to work with a simpler interface. Microsoft never manufactured computers so their objective was to put the windows product on as many machines as possible and collect a royalty for each installation. The race to sell machines was over quickly as the competition among manufacturers in Windows land continuously led to better and faster machines at lower and lower prices. Apple’s market share plummeted, and even as they maintained higher margins on the machines they did sell, their share of market dwindled as did the price of Apple shares.

Apple’s next big hit the ipod, introduced in January 2001, finally gave the company relevance again. Apple created and totally owned the category. But with the music player market becoming saturated, Apple needed another big innovation to keep the company’s momentum moving forward.

Apple introduced the iphone in June of 2007 literally inventing the modern smart phone, and again chose to keep the IOS proprietary. As the sole manufacturer of an item Apple invented, Apple has enjoyed out-sized profit margins and first to market leadership. But as with all tech products, the lifespan of any innovative product is extremely short and seems to get shorter with each new product. Google’s Android OS for smartphones, released in September of 2008 is once again a software solution buy a non-manufacturing entity who profits solely from installation royalties. In fact the Apple lawsuits against Samsung are eerily similar to the Microsoft lawsuits of years past, as Apple attempts to protect its supremacy from competitor looking to upset their applecart.

At each step in their history Apple has chosen to be a manufacturer and rely on branded sales of their products rather than open the doors for others to add value and participate in the profits. It is hard to wall off any area of technology for very long and once again Apple is losing market share to competitors at a rapid pace.

To keep the price of Apple shares climbing the company has now come to rely on dividend distributions and share repurchases, which while benefiting shareholders in the short term, do nothing to create future value.

The talk of the investment community has focused on Apple developing a television type product that everyone hopes will be like previous Apple reinventions, creating a totally new experience and a totally new category. Perhaps they can. Apple has certainly had more than their share of world changing technological breakthroughs. But if they don’t it is entirely likely Apple could end up much like Microsoft, a company with a large cash hoard and no real idea of where to maximize the value of that cash. I am not willing to give up on Apple today, but I would suggest they should be watched with a skeptical eye.

US Debt Downgrade – Let’s Get Real!

2011-07-27T10:52:00.000-04:00

The topic de jour on the cable ‘news’ outlets is a possible downgrade of United State Treasury debt. Granted the antics in congress are sophomoric at best and certainly cause for concern, but to worry much about a possible downgrade of US debt is even more absurd.

First, the ratings agencies have a woeful track record of actually making any calls with respect to bond ratings of publicly traded companies. Where was S&P and Moody’s when Ernon collapsed? Why did so much toxic mortgage debt that led to the credit crisis in 2007 and 2008 receive a AAA stamp of approval from these same agencies that now threaten to downgrade US Treasuries? Why were the ratings agencies asleep at the wheel when AIG went so deep in the red that the US Government had to step in and bail them out? It is hard to see how these agencies have any credibility left. Perhaps this is just their way of inserting themselves into what is basically a political discussion, or maybe they have been wrong so often they feel a need to generate publicity for themselves.

Secondly, the US debt problem is not one of the ability to pay, but rather a political posturing for an upcoming election. Take a look at the following chart of countries that currently have AAA ratings for their sovereign debt.

Countries with AAA rating

	GDP (Billions)	Public Debt	Public Debt as % of GDP
United States	$ 14,720.00	$ 8,670.00	58.9%


Australia	$ 889.60	$ 199.27	22.4%
Austria	$ 332.90	$ 234.36	70.4%
Canada	$ 1,335.00	$ 453.90	34.0%
Denmark	$ 204.10	$ 88.99	43.6%
Finland	$ 185.40	$ 89.73	48.4%
France	$ 2,160.00	$ 1,814.40	84.0%
Germany	$ 2,951.00	$ 2,213.25	75.0%
The Netherlands	$ 680.40	$ 439.54	64.6%
Norway	$ 276.40	$ 131.84	47.7%
Singapore	$ 292.20	$ 299.21	102.4%
Sweden	$ 354.00	$ 144.43	40.8%
Switzerland	$ 326.90	$ 130.76	40.0%
United Kingdom	$ 2,189.00	$ 1,674.59	76.5%
Total Ex US	$ 12,176.90	$ 7,914.27	65.0%

You should note that the United States GDP is greater than the GDP of all other AAA rated countries combined. The US debt as a percentage of GDP is less than the weighted average of all the other countries and is about the midpoint of this group.

Now ask yourself which of these counties you would trust more than the US to lend your money to. Some on this list are just too small. Those in the European Union have their own debt woes via the weaker partners in the EU (Portugal, Ireland, Greece, and Spain) and there is some concern about the stability and permanence of the Euro itself. Some say China is the next world economic power. But even after a decade of break neck growth, the GDP of China is yet only a third that of the US. Besides who would trust their money to a state controlled economic system where wealth can be wiped out by fiat and true economic growth is questionable.

Finally, consider what alternatives a global investor has. There is not enough liquidity for the global economy to function without the US. Regardless of what the rating agencies threaten the US dollar and by extension US Treasuries, have always been and will likely continue to be for the foreseeable future, the de facto safe haven of the world. There is no country with the economic or military might to unseat the United States at the present time. When the going gets tough, everyone still turns to the United States as a refuge and looks to the United States for leadership. If US debt were downgrade to AA it would make no difference whatsoever. In the long run, all other debt is valued in relation to US debt. Sure maybe there would be a week or two of confusion, but in the end, regardless of the ranting of debt ratings agencies investors have voted with their pocketbooks that the United States is the premier credit on the face of the planet, and that should be enough.

Financial guidance without conflicts of interest

2011-07-21T10:49:00.002-04:00

The Chicago Tribune has an excellent article on the different standards of care investors can expect from their financial advisors. You can read the article here.

Tell Your Life Story On Proust

2011-07-20T11:02:00.002-04:00

I have written several times about leaving your heirs the gift of the life lessons you have learned. More valuable than mere possessions the love and experience you can pass on to the next generation can now be captured and shared privately at a site named Proust.

I hope you will check it out for yourself and maybe make use of it.

OTC Medical Supplies You Can Still Buy With Your FSA or HSA Account

2011-07-15T09:44:00.003-04:00

January of this year brought new restrictions on what over the counter medical supplies were qualified purchases for Flexible Spending Accounts and Health Savings Accounts, but there are still many items that qualify. These included:

Bandages and first aid kits
Contact lens cleaning solution
Eye drops
Motion sickness medications
Pregnancy test kits
Sunscreen with SPF 30 or greater

Free Credit Score

2011-07-14T11:03:00.002-04:00

Beginning July 21 if you are declined credit or do not receive a lenders best rate for a loan the lender must send you a free copy of the credit report it used to make it's lending decision. For more info see the NYT article.

Adding A Third Dimension to Bond Analysis

2011-07-13T14:06:00.003-04:00

A paper I wrote "Adding a Third Dimension to Bond Analysis" was recently selected for publication in the Journal of Financial Planning. In the paper I describe how a bond varies in value over its lifetime and how to construct a bond price curve using a spreadsheet program. Although the paper is technical in nature and intended for a professional audience I though my readers might be interested in the concepts presented in the paper. I have included a link to the article here, and you can access the spreadsheet and download a copy to your computer here.

Where Did My Tax Payments Go?

2011-04-26T13:02:00.002-04:00

April 18th has passed and unless you filed for an extension you have no paid your taxes for 2010. Ever wonder where all that money goes? Check out the web site Where did my tax dollars go? to find out.

Saver's Tax Credit: Incentive to Save for Retirement Now

2011-03-09T10:47:00.001-05:00

The Saver's Tax Credit was permanently enacted by the Pension Protection Act of 2006, but has been available sense 2002 under the economic growth and tax relief reconciliation act of 2001 (EGTRRA). This tax credit is an excellent opportunity for moderate-income households to save for retirement while lowering the amount of taxes they pay.

The Saver's Tax Credit not only assists moderate-income households to begin saving for retirement, but it also gives an incentive for recent graduates who are entering the work force to do so as well. Formally known as the "Retirement Savings Contributions Credit," the credit applies to the following qualifying contribution plans:

401(k) employer plans
SIMPLE and SEP plans
Government 457 plans
Traditional and Roth IRAs

Those who wish to participate in the credit must fulfill the following qualifications:

Eighteen years of age
Cannot be counted as a dependent on another person's return
Cannot be a full-time student
Cannot have been a full-time student for five or more months of the year

As of 2010, the following income limitations and corresponding filing statuses for are credit are:

Married filing jointly: Up to $55,000 annually
Head of Household: Up to $41,625 annually
Single, married filing separately, or qualifying widow(ers): Up to $27,750 annually

The rate given on the credit will depend on income-level and filing status, but range from 10% up to 50% and have a maximum contribution amount that can be applied to the credit of $2,000. This tax credit helps moderate-income households to save money on their taxes while still planning for the future. As this credit helps numerous households, it can be very beneficial to young adults who otherwise would not be saving for retirement. The cost of living throughout history has consistently increased and the majority of individuals begin saving for retirement too late in their lives. Those who are able to should take advantage of this great opportunity.

- Sara Hoy

Mortgage Delinquency Rates

2010-11-08T13:55:00.003-05:00

Mortgage Greed Will Bite Banks Again

2010-10-27T13:38:00.002-04:00

The foreclosure mess has served as a decoy to the real problem faced by the big banks in America. At the height of the real estate bubble banks and their mortgage origination arms were greedily issuing mortgages to just about anyone who could fog a mirror. The reason - fees. The mortgage originators collected their fees upfront which padded the pockets of shareholders and themselves through the payment of outrageous bonuses.

Now the dogs are back to bite them. The loans were mostly packaged and sold to individual investors, institutions, and even Freddie and Fannie. When the loans were sold they were warranted by the banks and investment firms to meet certain underwriting standards. They have fallen woefully short and now investors are beginning to exercise their right to 'put back' or make the banks repurchase the loans that did not meet the warranted standards.

Here is a great piece written by John Mauldin of Millinium Wave Advisors that points to the enormity of the problem. John writes " Anyone who owns stocks in banks with relatively large MBS exposure is not investing, they are gambling that the losses will not be more than management is telling them"

This is scarier than any Halloween ghost or goblin.

New Age Philanthropy

2010-06-24T13:05:00.003-04:00

In the sector of charitable giving a new trend is emerging. This trend pools together the resources of the middle income class and has become for the second largest recipient of charitable funds in the United States behind only the Red Cross. Since the mid 1990's Donor Advised Funds have flourished into a dominant force in philanthropy and continue to grow as more money managers and investors become aware of their simplicity, flexibility, and low cost.

Donor Advised Funds (DAFs) are just that, individuals give money or assets to a charity or sponsorship organization who sets up a Donor Advised Fund account. That account is then invested in options offered by the specific organization that the donor has chosen. From this account, donors can make grants of $50 or more to specific organizations or causes that are important to them. While this seems basic, there are many choices to be made in creating, investing, and continuing this charitable account. But first, I will explain WHY you should consider setting up a DAF if you're looking to make charitable donations.

Simplicity

The first major advantage DAFs have over private foundations is the simplicity of setting up the fund. For donor advised funds, a simple agreement between the sponsoring organization and the donor is all that is needed to create the account. This method is much easier than applying for IRS tax-exempt status, filing all required tax reports, and maintaining compliance with all the rules that apply to charitable foundations.

Low Cost

Another positive aspect of the Donor Advised Fund is the low cost to create it. Needing as little as a $5,000 in initial contributions those who wish to donate even on a modest scale can get involved in charitable giving. Further, grants to individual charities can be made in increments of as little as $50.

Flexibility

Flexibility is the foundation of the Donor Advised Fund. When choosing a specific plan with a sponsorship organization there are many various investment options to select from. The plans range from broad investment choices, where donors are allowed to choose their own investment portfolios- to basic mutual fund choices offered by the sponsor, and finally to the option of pooling together mutual funds to invest. Only rarely are donors offered no investment choice at all but in these situations the sponsoring organization chooses and manages the investment options for the donor.

In the past most donors have contributed through private foundations often set up by the individuals themselves or through a third party. There are many benefits in doing so: up to 30% of cash contributions can be deducted and 20% of all other assets can be written off as well.

However, the up and coming DAF has joined the race and offers even more bang for your buck as well as less hassle than is involved in giving through private foundations. Offering a write off of 50% of initial cash contributions and a 30% write off of other assets contributed, the Donor Advised Fund trumps the private foundation in terms of tax breaks, as well as potentially reducing estate taxes since more of your assets are donated to the fund.

Take a Few Hours and Unlock Some Cash

2010-03-30T11:35:00.001-04:00

Here's an excellent idea from the New York Times writer Ron Lieber.

Today, we introduce an interactive checklist to give you some ideas. It includes things you should do each year, like rebalancing your investments, and others that you might have to do only once or, at most, once in a while, like raising your insurance deductibles. The checklist is a living document and one we hope to improve over time, so please send us feedback from the link on its home page.

You can read the full article here.

Will You Be My Fiduciary

2010-02-23T12:54:00.003-05:00

Seldom have I read a blog post that I wish I could share with the entire world, but Tara Siegel Bernard, writing on 'Bucks' over at the New York Times just laid one down that I have to share with you. Her post titled 'Will You Be My Fiduciary' and the article that she wrote to go along with it deserve your attention. Tara posts a simple fiduciary pledge that you can at least use to start an important conversation with your advisor. While many wont sign it and some have legitimate reasons for not signing, it gives you a chance to learn why and have a hard conversation about what is in your best interests. I've posted the pledge below, but please read Tara's entire post here.

The Fiduciary Pledge

I, the undersigned, pledge to exercise my best efforts to always act in good faith and in the best interests of my client, _______, and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interest, which could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all fees I will receive as a result of this transaction and I will disclose any and all fees I pay to others for referring this client transaction to me. This pledge covers all services provided.

X________________________________

Date______________________________

Still Time to Save on 2009 Taxes

2010-01-27T09:43:00.003-05:00

Okay, it is well past the end of the year but here are a couple of ways you can still reduce that '09 tax bill.

If you itemize you can deduct contributions made in January and February 2010 to the Haiti relief efforts on your 2009 return if you like.
Deductible Traditional IRA contributions
Self Employed still have time to establish and fund a SEP (Simplified Employee Pension)

Holy Cow! They're finally catching on!

2009-12-22T13:33:00.005-05:00

Recently Registered Rep Magazine posted an article 'Forget Stock Market Gains , It's Best to Avoid Losses' Well, it's about time!

The article features a mutual fund company that is just now figuring out what we have known all along, the math of investment losses makes preserving capital the most important task facing individual investors. Maybe soon they will realize that folks don't buy stock because they enjoy getting proxy notices, we buy stock in hopes of actually making money, and if the market stinks we want to take our marbles somewhere else to play.

If you lose 10% it takes just over 11% to be back to even. That kind of gain is quite common for the S&P. If you suffer a 20% loss you need a 25% gain just to be even, years where the S&P rise 25% are rare. If you suffer a 50% loss it takes a 100% gain just to get back to even, the S&P will take years to achieve the double you need for that. It is easy to see that avoiding really big losses is the key to investor heaven.

But rather than put together a mutual fund that is fighting the last war, investors would do better to learn to recognize the warning signals that the markets exhibit and be prepared or even expect that you'll need to sell any investment from time to time.

Roth IRA Conversion Alert

2009-09-11T14:00:00.002-04:00

If you converted all or a part of a Traditional IRA to a Roth IRA in 2008 you may have an opportunity to recoup the income taxes you paid when making that conversion. But you must act before October 15th of this year.

If you made a conversion to a Roth IRA in 2008, the value of the securities you converted have probably gone down. This means you paid taxes on money you no longer have. You should consider "recharacterizing" that Roth IRA conversion back to a Traditional IRA. Recharacterization is the IRS lingo for canceling the conversion and it helps you in a couple of ways. First, you can get a refund of the taxes you paid on the converted IRA funds and secondly, you can redo the conversion 31 days later, potentially producing even more tax free income.

To learn more see the entire article from Ed Slott in this months Financial Planning magazine.

TARP Could Be Watershed For Taxpayers

2009-08-19T14:31:00.002-04:00

Banks have been repaying the loans they received last fall at a steady pace. The treasury department has received their principle and 8% interest from over 30 banks. Additionally, the treasury has made some tidy profits on the stock warrants the received as part of the bailout package. Some of the big profits for the government include $950 million from Morgan Stanley, $340 million from American Express, and $1.1 Billion from Goldman Sachs.

Is it possible that the TARP program could pay for itself and provide extra fund to cover some of the other items in the stimulus package?

Stay tuned!

Maximize the Benefit of a Losing Variable Annuity

2009-07-17T11:13:00.004-04:00

I had the chance back in the 01-03 bear market to help some clients with variable annuities maximize the benefits of investments that had gone sour, and just this past week ran across another opportunity to help a potential client with this same strategy. Here is what to look for:

You purchased a variable annuity that has lost value.
The death benefit of your annuity is calculated based on a dollar for dollar reduction for withdrawals.

Here is how this strategy works:

Let's say you originally put $100,000 in the annuity and the value has now dropped to $70,000. The death benefit of this annuity equals premium payments less withdrawals on a dollar for dollar basis. You withdraw most of the money from your annuity, leaving only enough to keep the policy active. Let's say you must leave $5,000 in the policy so the insurance company can't cancel the contract. That means you withdraw $65,000 from the policy and move that money elsewhere to recover as the markets recover. Your death benefit on the annuity falls from $100,000 to $35,000 refecting this withdrawal.

What you have done in effect is to create a synthetic paid up whole life insurance policy that will pay out one day to your heirs. Meanwhile your remaining value can be invested to create even more wealth and income for you and your heirs.

This opportunity may also apply if you have a 403b plan that utilizes group variable annuities.

This strategy will not work if the death benefit of your policy is calculated on a pro rata basis, and the insurance industry has caught on to this ploy so most new policies have a pro rata calculation. So before you exchange an old annuity or just give up on it check to see if there may be a better way to skin that cat.

Understanding Money Supply and the Federal Reserve

2009-07-08T10:29:00.009-04:00

I have to disagree with the talking heads I've seen on television recently, warning investors of hyper inflation. According to these 'experts' a serious bout of inflation is imminent due to the tremendous injections of liquidity by the Federal Reserve. I believe these pundits are overlooking one of the most basic factors in economics and I fear some of the talk is more politically motivated than financially motivated. While it is true that the Federal Reserve has been pumping money into our economy, the important thing these pundits miss is the 'why'.

There are two components to the effective money supply in the US economy. One is the amount of cash flowing through the economy, and the second is the velocity of the cash flowing through the economy. Of the two, the velocity of money is the more important.

If you studied economics is college you will recall that the velocity of money is normally a function of bank reserve requirements, which are set by the Fed. Simply put, if the reserve requirements are set at 20% then each dollar does the work of five dollars (100/20). If the reserve requirements are set at 10% then each dollar does the work of $10 (100/10).

I say under normal conditions because what we have seen during this credit crunch is anything but normal. Usually banks lend as much as they are allowed to lend based on the reserve requirements. That is how they make profits. However, because of loose lending standards in the past and questionable reserves, lending in our economy has slowed to a virtual crawl. Couple this decreased lending with increased reserve requirements for non bank financial entities such as Merrill Lynch, Morgan Stanley, and Goldman Sacks and you have created a serious speed bump for the velocity of money in our economy.

As lending contracts, the velocity of money in our system contracts. Because velocity is usually a multiplier of the physical currency in circulation any contraction in velocity reduces the effective liquidity in our economy many times.

The Federal Reserve's policy of providing liquidity to our ailing economy is not currently inflationary, it is simply an attempt to offset the slowing velocity of money. Without this infusion of liquidity there is a real danger of deflation, which is much harder for the Fed to fight than inflation. It is easier to slow the economy down than it is to speed the economy up.

The Federal Reserve will need to be vigilant as the economy eventually improves. The liquidity injected into the system could become inflationary as the velocity of money through our economy accelerates. But that won't occur until the credit crunch abates, which is a problem we would all like to see come sooner rather than later. Until then investors should not be overly concerned with inflation. Coming to the party too soon is nearly as bad as staying too late.

Cash for Clunkers

2009-06-26T14:27:00.002-04:00

Have a kids car that your ready to trade in? That old clunker in he driveway could bring big bucks under a new government program aimed to stimulate the economy and clean the environment.

Get a credit from Uncle Sam to trade. The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

* Your vehicle must be less than 25 years old on the trade-in date
* Only purchase or lease of new vehicles qualify
* Generally, trade-in vehicles must get 18 or less MPG (some very large pick-up trucks and cargo vans have different requirements)
* Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in
* You don't need a voucher, dealers will apply a credit at purchase

For more info go to cars.gov

Wall of Worry

2009-05-05T09:58:00.002-04:00

It is said all bull markets begin by climbing a wall of worry. You haven't heard that phrase used in the media recently, so let me be the first to bring it out of the closet and dust it off. The market seems to be gaining strength in spite of the poor state of the economy. Remember the market is a predictive mechanism, not a reactive one. The market is telling us that all the best minds in the world of finance believe the economy will be doing better in about six months. Look for a Merry Christmas in 2009. You are probably to scared and shell shocked to step in here, but you should at least be getting your toes wet.

Overload

2009-03-24T10:11:00.002-04:00

Feel like everything is moving too fast sometimes? You may be right.

Lots of data, very little wisdom.

Bits from around the Web

2009-03-09T14:35:00.001-04:00

Break Up for Hartford Financial? - The Hartford Financial Services Group, currently embroiled in dealing with financial losses and ratings downgrades, reportedly is negotiating a possible sale of its life insurance and annuity operations to Sun Life Financial Inc.

The Conflicts of Interest in Not Being a Fiduciary; Hang Charlie Merrill In Effigy? - The story told at The Big Picture yesterday is about the Merrill reps who do the right thing for their clients at the reps’ own expense; to be more specific, it’s the story of two “stock jockey” partners who turned bearish early last year, moving about 75 percent of their client assets into money market funds (AUMs were, combined, over $300 million, according to the story). As a result, their combined gross production dropped to “under $1 million” from over $3 million. Their branch manager informed them that, as a result, in 2009, their payout on the grid would drop to 30 percent from 43 percent. Ouch!

Dividend Payouts Decline - Last year was the worst ever for dividend reductions among Standard & Poor's 500 stock-index companies. In the final three months of 2008 alone, $15.9 billion worth of S&P 500 dividend payouts were whisked off the table.

Miss the Ten Worst Days - If you miss an equal amount of the best and worst days, you outperform buy and hold regardless of how many days you miss! This has wide-ranging ramifications for us.

Average Is Not Normal

2009-02-11T11:31:00.003-05:00

Here is a great slideshow from Slideshare, that was posted by planner Carl Richards on Behavior Gap. Take a few minutes for a really great lesson in investing.

Average Is Not Normal

View more presentations from Carl Richards. (tags: behavior gap)