The Challenges of Initial Public Offerings

There have been many headlines recently regarding initial public offerings (IPOs) of technology companies.  These headlines tend to generate media buzz and excitement from investors eager to make a quick profit or get in on the next big thing.

The first issue investors face is access to IPOs. In an IPO, the company sells shares to one or more investment banks.  These firms then market the shares to their clients at a slightly higher price known as the Public Offering Price or “POP.”  These clients are typically large institutions rather than retail investors looking to buy relatively small amounts.

We do not have any special access to obtain shares at the POP.  If we did, we would likely receive a small number of shares that we would need to allocate fairly across our 1,100+ clients.

You can look up the prospectus, or S-1 registration statement, for any IPO at www.sec.gov.  If you do this, you will notice that the price and number of shares are blank until the last minute. These are filled in right before the registration statement is declared effective by the SEC and the shares start trading.  You do not know the price while you are reviewing the information to make an investment decision.

When trading opens, the shares may sell for above or below the POP.  It all depends on the supply and demand for shares.  Recent technology IPOs have tended to significantly underperform the overall market.

Some recent companies have come public at valuations of over 100 times trailing earnings, while the market as a whole currently trades at about 15 times trailing earnings.  What does this mean from an investment standpoint?  Mathematically, these new companies must continue to grow at a much faster rate than the overall market for a long time in order to justify their current stock prices.  If there is an earnings disappointment, these high-projected growth companies will tend to fall in price more than a company trading at a more reasonable valuation.

You may love the product, but that may not make for a good investment.  Let’s take the airline industry as an example.  I love the idea that you can get on a plane and go almost anywhere in the world.  But the industry has been plagued with bankruptcies, with many examples of common stockholders being completely wiped out and losing their entire investment.  

How about the auto industry?  I love the product, and everyone has one.  In the early 1900’s in the US, there were thousands of auto manufacturers.  Now there are three.  What are the chances that you as an investor would have picked one of those three?  And two of them went through bankruptcy in the past three years.

In addition, there are many quality companies currently trading at valuations below that of the overall market that have increased their dividends each year for 25, 35 or over 55 years.  While we invest in technology companies, we prefer to focus on established companies with solid balance sheets that have the potential for long-term growth of earnings, dividends or both.

Bill Hansen, CFA

Managing Partner

February 12, 2012

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What Happens After Death

This isn’t a blog about ghosts or spirits reuniting after death, but rather about what happens to your financial accounts after death. When we are notified about a client death we are required to inform the broker immediately and your accounts are “frozen” for trading or removing any assets. The assets stay frozen until they are transferred to their rightful owner.

Retirement accounts pass according to the beneficiary designation. Once a death certificate is provided, the assets can be moved to Inherited IRAs for each beneficiary. The inherited IRA owners must begin mandatory distributions the following year according to their actuarial age (established by the government). However, spouses who inherit retirement accounts may treat them as their own IRAs rather than Inherited IRAs. This means they take required minimum distributions at age 70 ½. Distributions from retirement accounts are fully taxable (except for Roth accounts which are tax free).

Trust accounts pass according to the language in the trust. With a death certificate, they also can pass fairly quickly. All other types of accounts must be moved to an Estate account. The broker requires a death certificate and a Letter of Testamentary from the Executor. The Executor must take the will to the local courthouse and a Letter of Testamentary is given that affirms he/she is the legitimate executor and is authorized to open an Estate account and make disbursement requests. The Executor must obtain an Estate Tax ID to open the Estate account. This is the probate process and it can be somewhat time consuming. An attorney is usually required

The narrative makes it sounds fairly simple, but beneficiaries are usually over whelmed by the process. It is important that people of all ages have their estate planning documents in order and up-to-date. Also, ensure that your Executor knows where your documents are kept. Please contact your advisor if you have questions or would like more information.

Barbara Gray, CFP®

Partner

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Market Update through 01/31/12

as of January 31, 2011        
  Total Return
Index 12 months YTD QTD January
Stocks        
Russell 3000 3.86% 5.05% 5.05% 5.05%
S&P 500 4.22% 4.48% 4.48% 4.48%
DJ Industrial Average 9.12% 3.55% 3.55% 3.55%
Nasdaq Composite 5.30% 8.06% 8.06% 8.06%
Russell 2000 2.86% 7.06% 7.06% 7.06%
EAFE Index* -12.36% 5.25% 5.25% 5.25%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 8.66% 0.88% NA 0.88%
Barclays Intermediate US Gov/Credit 6.47% 1.02% NA 1.02%
Barclays Municipal  14.10% 2.31% NA 2.31%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $98.55    $99.88
Natural Gas    $2.41    $2.48
Gold    $1,749.50    $1,659.50
Euro    $1.31    $1.27

Mark A. Lewis

Director of Operations

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IRA Contribution Rules

The deadline to contribute to your Roth or Traditional IRA for the tax year 2010 is April 17, 2012. You can contribute $5,000 or the amount of earned income for the year, whichever is less. If you’re over 50, you can contribute an additional $1,000.

Your income determines if you qualify for a tax-deductible Traditional IRA contribution, or if you qualify to make a Roth IRA contribution.

Do you qualify to deduct your Traditional IRA contribution?
 If your income is less than the beginning of the phase-out range, you qualify.  If your income is over the phase-out range, you do not.  If your income falls inside the range, you partially qualify.
  Modified Adjusted Gross Income                                         Phase-OutRange
Single, participates in an employer-sponsored retirement plan $56,000 – $66,000
Married, participates in an employer-sponsored retirement plan $90,000 – $110,000
Married, your spouse participates in an employer-sponsored retirement plan, but you do not. $169,000 – $179,000
 
Do you qualify to contribute to a Roth IRA?
Single $107,000 – $122,000
Married, filing jointly $169,000 – $179,000

 

Harli L. Palme, CFA, CFP®

Financial Advisor

 

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Parsec Prize Deadline Approaching

The deadline is approaching for 2012 Parsec Prize submissions.  Our deadline is February 15.  This year we are giving $20,000 each to four non-profit organizations.  You can visit the Parsec Prize page on our web site to learn more about how to apply. 

We plan to celebrate the Parsec Prize award with our 2nd annual Parsec Prize 5k this fall.  This is a great opportunity for the Prize recipients to get more publicity and to get more people interested in their cause.  It’s also an opportunity to raise a little extra money for the Prize recipients.  

Training for a 5k doesn’t take too long, but there’s no time like the present to get in running shape to join us for this event.  Also, there’s still time to encourage your favorite non-profit to apply for the Parsec Prize.

 

Harli L. Palme, CFA, CFP®

Financial Advisor

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Changes Are Good!

Welcome to 2012! Are you ready for a year full of change? I know I am! 2011 was quite a year around our office.

As you are all aware, Parsec began making some changes in 2011. Well, 2012 is going to be even better! We plan to proceed with our electronic report delivery, as we feel this will essentially be a more efficient way for our clients to view and manage their quarterly reports. I won’t ruin any surprises for anyone, but I will inform you that we will be making some vast improvements in the upcoming months. Keep your eyes & ears open! We will be notifying everyone of our upcoming changes very soon!

On a different note, I would like to take a moment to discuss our lifestyles. This past Monday, we celebrated Martin Luther King, Jr. Day. On August 28, 1963 Dr. King delivered a powerful and memorable speech. One quote from his speech was, “I Have a Dream.” The speech delivered was regarding racial equality. As you may agree, this is not the time nor the place to discuss this topic. So, don’t worry, that isn’t where I am going with this. That famous quote can be used in a different context. Why don’t we all take a step back and apply this to our own personal lives? This is the month of January, the time when we are all making our resolutions for the new year. How many of you can honestly say you keep your resolutions all year long? I know I can’t! Most people can’t. So, instead of going for the typical resolutions, I am personally going to pursue a “dream” this year.

For example, some of you may have a dream of earning more income from your investments or your career. Myself, I would like to advance in my career. That is the dream I am pursuing in 2012. Each dream must have a plan. So, make a plan and stick to it. This is the year for change.

Welcome to 2012! Make the best of it!

Samantha Williams, RP

Client Data Specialist

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Market Update through 1/13/2012

as of January 13, 2012        
  Total Return
Index 12 months YTD QTD MTD
Stocks        
Russell 3000 1.63% 2.78% 2.78% 2.78%
S&P 500 2.55% 2.58% 2.58% 2.58%
DJ Industrial Average 8.76% 1.76% 1.76% 1.76%
Nasdaq Composite 0.13% 4.07% 4.07% 4.07%
Russell 2000 -3.26% 3.17% 3.17% 3.17%
EAFE Index* -16.37% 0.19% 0.19% 0.19%
*EAFE index does not include dividends.        
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $99.88    $93.88
Natural Gas    $2.48    $3.12
Gold    $1,659.50    $1,586.20
Euro    $1.27    $1.30

Mark Lewis
Director of Operations

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She’s a Super Frack

Normally, I entertain you with rather dry, technical topics relating to investing and finance. I thought I would change direction dramatically and entertain you instead with a dry, technical discussion relating to geology, in honor of the 374th birthday of Nicolas Steno, “The Father of Geology” (I know about this thanks to Google’s Doodle on the 11th – it’s not like it was on my calendar or something). 

Fracking has been in the news a lot lately, as reports of contaminated groundwater have bubbled to the surface in areas where fracking has been employed. In case you don’t know, fracking is a process wherein oil and gas reservoir rocks are fractured and injected with sand, water and chemicals in order to get more hydrocarbons out of the ground. I just read that they are now entertaining the idea of “super fracking” which sounds like it will be well-received by critics. Oilfield services companies are also trying to refine the current fracking process – one company has actually developed something called “disintegrating frack balls” that turn into powder like an Alka-Seltzer tablet, according to one description. Boom, boom, fizz, fizz, oh what a big crack it is…

Why all the fracking? Basically, energy companies have recovered a lot of the easy-to-get hydrocarbons and are now looking toward reservoirs that are known to contain oil and/or gas, but won’t give up their precious contents quite so easily. Oil and gas are found in sedimentary rocks, which may generally be categorized as sandstone, limestone, or shale. These rocks have varying degrees of porosity and permeability – the former measures the size of the spaces in between the individual grains, and the latter measures how interconnected those spaces are. Sucking oil and gas out of a highly porous and permeable rock will be relatively easy, whereas getting it out of a rock with low permeability will be difficult – the hydrocarbons will remain locked inside the reservoir rock. Shales are notoriously impermeable, thanks to the size and shape of the mineral grains. This is where fracking comes into play – the rock is fractured and the cracks are propped open with a more permeable substance, like sand, which allows the hydrocarbons to flow out of the reservoir and up the well bore. As it becomes harder and harder to find and develop reserves, you can see how technologies like fracking will become increasingly important to energy companies. Still, nobody wants to be able to light their tap water on fire. Hopefully, critics and proponents will be able to find some sort of middle ground, preserving our precious groundwater while enabling energy companies to retrieve the resources we need.

Sarah DerGarabedian, CFA

Director of Research

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Weekly Market Update through 12/31/11

as of December 31, 2011        
  Total Return
Index 12 months YTD 4th QTR Dec
Stocks        
Russell 3000 0.92% 0.92% 12.12% 0.82%
S&P 500 2.09% 2.09% 11.82% 1.02%
DJ Industrial Average 8.46% 8.46% 12.77% 1.58%
Nasdaq Composite -1.17% -1.17% 8.21% -0.51%
Russell 2000 -4.91% -4.91% 15.48% 0.66%
EAFE Index* -14.37% -14.37% 2.86% -1.03%
*EAFE index does not include dividends.        
         
Bonds        
Barclays US Aggregate 7.84% 7.84% NA 1.10%
Barclays Intermediate US Gov/Credit 5.80% 5.80% NA 0.78%
Barclays Municipal  10.70% 10.70% NA 1.90%
         
    Current   Prior
Commodity/Currency   Level   Level
         
Crude Oil    $101.41    $93.88
Natural Gas    $2.98    $3.12
Gold    $1,590.20    $1,586.20
Euro    $1.30    $1.30
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A Subtle Secret about Financial Planning

Considering the time of year this is written, one might expect a financial planning and investment management firm to share virtues of saving and investing. More than likely, most people already know that they should be saving and investing. However, what some may not have considered are the subtle secrets about their personal financial affairs. In fact, if you or your house suffers from this secret, I hope you might consider taking the advice in this blog and making it your New Years resolution.

In many marriages and partnerships, we find that there is one person who is the bill payer and also handles financial matters. In an environment where more and more bills are able to be paid online, we find that there are as many websites and passwords too. As we age, our financial affairs become more complicated, with more account numbers, passwords, and various forms of insurance policies. Thus, our organization and filing system becomes more complicated too. Herein lays the subtle secret: because our financial affairs have become more complicated and the demands for our time and attention have become greater, there is a good chance that a lot of this financial “data” is stored in one’s head. Simply put, there is a good chance that this information is either poorly organized or poorly communicated.

To take this a step further, consider for a moment what happens when the bill-payer passes away and inadvertently did not organize and communicate their financial matters, such as those mentioned above. Now imagine the other spouse trying to find a password, pay a bill, or locate an insurance policy. As you might have figured, it can be extremely challenging. Tragically, we encounter this situation more often than we would like to admit.

Four years ago, I resolved to help my wife by organizing and centrally locating important information like passwords, insurance policies, bills, and our estate plan. For me, the hardest part was knowing where to start. Luckily, I found a really neat organizer called Life.doc and it has been a tremendous help. Essentially, it puts all of our financial matters at our fingertips. During a time of grief and sorrow, the last thing I want for my wife is to have to dig through our filing cabinet and not be able to find something. The process was liberating because I have confidence in knowing she will be able to spend her energy on more important things, such as raising our daughter.

Neal Nolan, CFP(R)

Financial Advisor

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