Recently, the Fed announced a new monetary policy (QE3) in which the central bank will buy mortgage backed securities and start pumping money into economy. This aggressive monetary policy keeps long-term rates low and may spur activity in housing sector. But with sagging unemployment levels, I doubt how quickly housing sector can bounce back. Once bitten, twice shy.
With recent bad memories, bankruptcies and foreclosures, I suspect the public will respond very slowly to the housing sector even though there are hundreds of houses on the market at rock bottom prices. So will the banks, as they are still cleaning their balance sheets from a glut of unwanted properties. I would rather credit the foreclosed property investors for the recent uptick in the housing sales than the general public.
There is a wonderful book “The Wall Street Waltz” written by Ken Fisher (Forbes Columnist) on real estate cycles. In one of the chapters in his book he concludes from 150 years of data, that real estate prices go through cycles like any other economic cycles. According Fisher, from the peak of the real estate cycle to trough is around nine years and from trough to peak is nearly nine years. Let us assume if the real estate peak was in early 2007, then the bottom of the real estate market may not be until 2016.
If you think this time is different and the Fed is easing its monetary policy, there may still be few more years to go to reach the bottom of the real estate market. There may be pockets of strength in real estate, but I won’t rush to invest in home builders and other real estate related companies. Caveat Emptor.
The biggest event in the fourth quarter is presidential elections. And by end of the year, the Bush tax cuts are going to expire. Long term capital gains tax rates are going to go up from 15% to 20%, and if your annual income is above $250,000 there will be 3.8% surcharge on capital gains. Dividends will be considered as ordinary income.
Market participants may not wait until the election results. Some of them may adjust their portfolios and realize capital gains this year rather than waiting until the last minute. Some companies may even declare one-time cash dividends before the end of the year.
In my opinion fiscal policies, including reduction of fiscal deficits, may do more to dictate future economic recovery than just changes in taxation or relying on monetary policy when interest rates are at zero percent. Oversupply of money into the market may benefit in short run, but will have painful consequences in the long run once inflation picks up speed.
For years Amazon.com (AMZN) has enjoyed a tax exemption on its online sales. From September 15th onwards the state of California joined Texas, New York and other five states in imposing sales taxes on Amazon online sales. The combined population from all these eight states is more than third of the national population. Next year New Jersey and few other states start collecting taxes from online sales. The well anticipated tax change can keep companies like Wal-Mart (WMT) is competitive edge with online retailers like Amazon, and may give second life to lone brick and mortar book companies like Barnes and Nobles and electronics retailers like Best Buy (BBY). But it certainly helps many big retailers like Wal-Mart. If the unfair tax advantage is eliminated people may tend to buy at brick and mortar retailers like Wal-Mart due to free shipping to nearest retail location for pickup and for convenience of sales returns.
Last month the Indian government eased restrictions on foreign retailers; Wal-Mart is now spreading its wings into the Indian market through joint ventures. Twenty nine percent of Wal-Mart’s revenue comes from international sales and revenues at international segment and are growing at a 15% rate, according to a recent earnings statement.
Wal-Mart has about 5,800 international retail stores; out of that Wal-Mart has only fifteen stores in India. The potential to serve more than billion customers in Indian market is tremendous. Wal-Mart financials look impressive and can weather both tough and good times. Recently I included Wal-Mart into my portfolio.
I am a long term investor and most of my funds tied to assets are held for long term; however last quarter I have made few quick runs when short term opportunities with relatively less risk have arrived. Also I adjusted last few days of the September to protect the capital and to address my perceived volatility of the fourth quarter of this year.
Finally, as of October 4th, I have completed two years of managing the Long-Term Value (LTV) portfolio. In two years the cumulative portfolio return was 45.2% (net of advisory fees) versus 27.6% return of S&P 500 (excluding dividends), that is annualized returns of 20.4% (net of advisory fees) versus 12.8% on S&P 500 return. Year to date, LTV portfolio returns were 26% (net of advisory fees) versus 15% on S&P 500.
The index comparisons herein are provided for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors.
The investments discussed are held in client accounts as of September 30, 2012. These investments may or may not be currently held in client accounts.The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
Lakeland Wealth Management LLC is fee-based registered investment advisory firm based in Lakeland, TN offering money management and financial planning services to families, institutions and high net worth individuals. Lakeland Wealth Management adopts fundamental value analysis and tailors the portfolios to fit individual needs, risks and time horizons.
Sreeni Meka is the managing member and investment advisor at Lakeland Wealth Management LLC. Sreeni has twenty years of investment experience in the equities and derivatives markets. Sreeni has worked as a management consultant for big four firms and served at a number of Fortune 500 companies in North America. Sreeni holds a Masters degree in Mechanical Engineering from The University of Texas at El Paso and an MBA degree in Finance from University of Memphis.