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Dear ,
Welcome to the May 2012 issue of The Wealth Chronicle! |
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Other than Greece, the Facebook IPO was the big financial story dominating the headlines this month. There was probably more hype to this IPO than any other IPO in American history, evident by 82 million shares changed hands in the first minute of public trading.
The actual IPO was a big letdown. Investors were hoping for a first day pop similar to that which Google and LinkedIn received (and what used to be the norm in the dot-com days); however it did not happen. It was priced at $38 a share. During the first day it got as high as $45, but finished the day slightly above where it started at $38. There are a couple of reasons why we didn't see the spike upwards on day one.
First, a lot of people thought at $38/share (a $100 billion value on the company) was overpriced. Second, under investigation at this time, is that prior to the IPO Morgan Stanley, the lead underwriter on the IPO, revised the earnings estimates of Facebook to the downside. A majority of a stock's price is related to what the company is expected to earn in the future. Companies are always revising earnings both up and down, however the information is public and everyone has access to it. The word is that when Facebook's earnings were revised downward they let their top clients institutions know about it but did not share it with the public.
That wasn't the only controversy surrounding the Facebook IPO; there were technology glitches by NASDAQ on the first day. Investors who placed orders for the stock were left in the dark whether they actually bought it or not. Some investors placed multiple orders because they weren't sure if their first order went through.
Then there is the story of one of Facebook's founders, Eduardo Saverin, renouncing his US citizenship so he could escape paying a big tax bill when he sold his shares.
Another interesting aspect of the IPO is that even after the IPO, Mark Zuckerberg, Facebook's CEO retained majority control (57%) of the company. This is virtually unheard of when a company goes public.
Valuation
Even after all the drama, surrounding the IPO, whether or not to invest in the stock, it all comes down to whether it is cheaply valued or not. Two categories that stocks are usually classified in are "growth" or "value". Facebook would be classified as a growth stock. Growth stocks are probably harder to put a valuation on, because you are trying to predict what the company will do in the future with respect to earnings and revenue growth. Estimates of what the right price for Facebook were came out all over the place, but most people believed that a $38 IPO price was valuing the company too high.
Aswath Damodaran, a well respected NYU finance professor offers a valuation for Facebook of $29/share. To come up with his valuation he used the following metrics: Revenue Growth, Operating Margins, Cost of Growth (as revenue grows, Facebook will find itself under pressure to pay for more growth), High Risk (there is significant risk in the company). There are others who say that a fair price for Facebook shares are between $16 and $20 a share.
However there is tremendous potential with Facebook. If the company can earn $5 billion a year in revenue from just advertising and gaming, such as people building fictitious farms, imagine how big the company can be if it can figure out how to monetize other areas with its 900 million users.
Only time will tell what Facebook's stock will do. They made a movie about how Facebook got started. There was so much drama around Facebook's IPO, I can smell a sequel. | |
Investing in Distressed Properties
Over the past 4 years there have been a lot of attention-grabbing and doomsday-like lines about the housing market similar to these: "Housing Market Crunch", "Mortgage Crisis", Double-Dip Recession." The headlines describe the downturn that the housing market took over the past four to five years. However with the downturn comes opportunity. One such opportunity is investing in Distressed Properties (Foreclosures, Short Sales, and REO's)
Before you can invest in distressed properties, it is important to understand what the different types of properties are available. This article is a primer on foreclosures and short sales.
Foreclosure Basics
A foreclosure happens when the owner of a property falls behind on their mortgage payments. The most popular reason for falling behind on a mortgage used to be a health even that they were unprepared for, however unemployment is currently the major reason. A foreclosure is actually the process the bank takes to obtain the payments due from the owner or take back the ownership of the property.
The Foreclosure Process
Here is the summary of the steps that happen during the foreclosure procedure
- The borrow misses payments and violates the terms of the mortgage. The mortgage goes into default.
- If payments are not made within 90 days of the mortgage going into default, foreclosure proceeding can begin. The lender goes to the County Office and files a notice of default (this is the pre-foreclosure process).
- The homeowner has a period of time to respond to the default notice where they can pay off the default payment and make the loan current.
- If the homeowner does not respond the county posts a Notice of Sale on the home. This notice goes into the local newspapers for a period of time.
- Eventually the county sheriff auctions off the property to the highest bidder
- The highest bidder pays for the auctioned property. The county requires the full payment as soon as 24 hours or as late as 30 days after the auction is complete
- If the property does not sell at auction, the bank retains ownership of the property, which is a real-estate owned (REO) property.
Short Sales
A short sale is a sale of a property in which the proceeds fall short of what the owner still owns on the mortgage. You can negotiate with the bank that holds the mortgage on the property to buy the home at a price that is less than the market value. Banks would prefer not to go through the foreclosure process, nor do they have interest in owning the property.
Let's take a look at an example where an owner (John) of a home is about to go into default. John lost his job and can no longer make payments on the house. The house John owns is worth $350,000 however on the mortgage he owes $400,000. He knows that foreclosure can devastate his credit and is looking for a way out.
As an investor you can negotiate to buy the property from the bank. From the banks perspective a short sale is the lesser of two evils (the other being going through the foreclosure route).
A lot of times distressed properties sell well under market value however in an as-is condition even when factoring in possible repairs, closing costs, taxes, and fees. Investing in distressed properties can be a time consuming and risky endeavor. One thing you have to be careful of are liens on the property. Many liens will get cleared when you purchase a foreclosure, however tax liens are one that will not. And if the owner was not paying the mortgage on the property, there is a good chance that he was not also paying the property taxes.
Here is a blog post from Realtor Patrick Southern discussing investing in real-estate owned (REO) properties.
Next month's newsletter will have an article about what to look for when purchasing an investment property. | |
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May is Disability Awareness Month | |
I help many small business owners and independent contractors put benefits packages together. Usually the first benefit they want to add is Life Insurance. There is nothing wrong with having life insurance and for most people I recommend it. However the benefit that most people don't think to add is Disability Insurance.
Your most important asset is not your home, your car, your jewelry or other asset. It's your ability to earn a living. Think about it: All of your plans for the future-from buying a home, to putting your kids through college, to building a retirement nest egg-are based on the assumption you'll continue to earn a paycheck until you retire. But what happen if those paychecks stopped? That's where disability insurance comes in. It provides an income to you and your family if you are unable to work because of illness or injury.
Most people do not consider disability insurance for two reasons:
1) They live in denial and do not think something will happen to them.
2) They think they will be covered through Social Security, state-mandated Worker's Compensation or employer provided group plans.
There are some holes in taking this approach. For one, you are a lot more likely to become disabled during your working career than you are to die. Over 1 in 4 workers will become disabled before they retire, that's over 25%! Only about 39% of the 2.1 million workers who applied for Social Security Disability Insurance benefits in 2005 were approved. And those who are approved get an average benefit of just $1,064 per month - hardly enough to replace your income. Worker's Compensation covers only work-related disabilities, but according to the National Safety Council, 73% of disabling accidents and illnesses are not work related. Only 36% of full-time employees have access to long-term disability insurance through their employers.
My recommendation: it's never too early to explore your options. If your employer offers disability coverage, take the time to find out if the coverage would be sufficient to meet your income replacement needs in the event of a disabling illness or accident. Another option is to purchase coverage on your own.
May is Disability Insurance Awareness Month, this is the perfect time for a disability insurance "reality check." Take this opportunity to make sure you would be OK financially in the event that a disability keeps you out of work for an extended period of time. |
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Will Social Security be there when it's time to collect? | |
Social Security hit headlines again recently when the 2012 OASDI Trustees Report was released. The report provides information on the health of the Social Security system. As expected Social Security's finances have deteriorated mainly due to the following:
- The slow recovery from the recessing
- Rising disability claims
- A higher-than-expected cost-of-living adjustment in 2012
Summary
In the short term, benefits are not in jeopardy. Although costs have exceeded payroll taxes for three straight years, when you count the other three sources of revenue - interest earned on securities in the Social Security (SS) trust fund, income taxes on SS benefits - the trust fund is still growing. It stands at $2.7 trillion and is expected to grow to over $3 trillion by 2020. Starting in 2021 the trust fund will gradually start to be diminished, and in 2033 is expected to be exhausted. At that time, payroll taxes will be sufficient to pay 75% of promised benefits.
What changed?
In last year's, Trustee report determined that the trust fund would be exhausted in 2036, 3 years later than this year's report. The Trustee's projections are made on the following assumptions:
- Demographic assumptions (fertility rate, mortality rate, immigration, population, and life expectancy)
- Economic assumptions (productivity, inflation, average earnings growth, unemployment, gross domestic product, and interest rates)
Note: The retirement of the baby boom generation is not a factor in the worsening projections. It has long been know that this large generation will one day retire, and this has been factored in the trustees' projections for many years. The recession however has had an impact on the system as more baby boomers lost their jobs and applied for retirement or disability benefits sooner than was expected.
This report may sway people into collecting their Social Security benefits early (before their full retirement age), but I still believe it is advantageous to delay collecting your benefits. However there will always be cases where collecting early is the prudent decision. As for current baby boomers, there is some evidence that the trend toward early filing is starting to reverse. Claims for Social Security benefits have edged down in 2011, the Urban Institute found, after peaking in the wake of the great recession, only 27% of Americans age 62 and older began collecting retirement benefits in 2011 which is the lowest rate since 1976.
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Props to the Girl Scouts for taking the lead and offering more badges in science, technology, engineering, and math (the STEM fields). A Girl Scout Research Institute study showed that 74% of high school girls are interested in STEM, but few girls pursue careers in these areas. Leaders of the Girl Scouts aim to change this by ramping up the troops' exposure to STEM, both through activities and interactions with women working in these fields.
While we are on the subject of Girl Scouts, this is a recent article about my great aunt, Libbie Lindsay and her 87 years involved in the Scouts
Bergen County's AAA rating is reaffirmed
Moody's recently renewed its outlook on Bergen County, NJ's finances as "stable" and upheld its AAA bond retained. Moody's calculated Bergen County's equalized valuation - the worth of all properties within the county - at approximately $161.5 billion.
JP Morgan and their $2 Billion Mistake
Throughout the financial crisis of the past couple of years, JP Morgan has been thought of the Golden Child. They were never mentioned in the same light as some of the infamous companies of the crisis (AIG, Bear Stearns, Lehman, Countrywide, ...) Because of a strong balance sheet they were able to acquire company assets for pennies on the dollar. In May they proved that they are not infallabile. One of their traders nicknamed "The London Whale", had a massive trading bet go against him for a $2 billion loss. JP Morgan earns about that much per quarter. I can imagine how the shareholders feel knowing that Mr Beluga wiped out an entire quarters profits in one shot.
The Obama's Assets
Not exactly Mitt Romney rich, but Barack and Michelle Obama's personal finances are in sound shape. The first couple reported in May that their total assets were between 2.6 million and 8.3 million. The imprecision is due to the broad range on reporting forms. President Obama is still collecting decent royalties from his books, somewhere between $250,000 and $2.1 million. The Biden's financial outlook, by contrast, is not nearly as rich. They reported assets ranging from $233,000 to $776,000.
New Graduates Income
The LA Times produced a sobering article this month claiming that new college graduates who find a job will be earning less than they would 10 years ago. They point to a variety of factors contributing to the 5% decline in wages including two recessions as well as off-shoring and automating that has even impacted white-collar fields such as law and technology. Meantime, college debt is soaring; last year students took out $117 billion in new federal loans, pushing the total outstanding to above $1 trillion. Unlike a mortgage, student debt is virtually impossible to discharge through bankruptcy. Uncle Sam will garnish your paycheck, tax refund, and even Social Security payment from people who haven't paid their government backed loans. |
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Please contact me if you have any questions about the articles above or about your personal or business finances.
Sincerely,
Marc Bautis
Wealth Manager
office: 201-842-7655cell: 201-221-6895
fax: 201-754-9760
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Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation. You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter
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 | | MEET MARC | |
Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts. He is committed and proud to deliver independent advice, always in the interest of his clients.
Marc is the creator of the Retirement Fitness Challenge™, a program designed to be sure his clients enjoy the retirement years as they have always envisioned them. Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits.
Marc is a graduate of Seton Hall University. He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Hasbrouck Heights with his wife Katie and Old English Bulldog, Winnie.
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