Interview: Changes to the federal tax code
>> a presidential commission nearing a september 30 deadline to propose changes to the federal tax code and those changes could spur savings and boost economic growth. steve reports from washington.
>> the market has enjoyed a tax advantage over other investments since 1997. that’s when congress effectively made most sales of primary residences tax-free. now a presidential panel is considering lower taxes on all sorts of investments which would erode the edge owned by real estate. since 1997 congress aloud couples to sell homes where they lived for two years and take up to $500,000 in gains tax-free. taxes on the sale of second homes also were reduced twice since 1997 to rates as low as 5%.
>> i believe that that 1997 tax cut was the most important driving force behind the boom we have seen in housing.
>> the median home price has increased by almost 70% since 1997 buoyed by low mortgage interest rates. mortgage interest is deductible for taxpayers that itemize. only a third of americans itemize. the panel may consider replacing the mortgage interest deduction with a tax credit. that would be more beneficial to lower income americans who do not have enough deductions to itemize.
>> we have never assumed it would be a given that, of course, they won’t do anything to the mortgage interest deduction because they’re always saying that could be changed at the margin. but change is a more likely outcome than scrapping.
>> gould says the panel may consider repealing the deduction for interest on home equity loans and reducing the $1 billion cap on mortgages that can qualify for tax incentives. whatever the panel proposes, some oerbs expect congress to retain some of the corner stones of the current tax code.
>> i just really do look at the charitable contributions, state and local tax deduction, mortgage deduction as sacred cows. unless we have a major wholesale reform, i expect them to still be in tact at end of tax reform.
>> the tax panel must weigh any changes that reduce the tax edge for housing against president bush’s instruction that the panel recognize the importance of homeownership.
>> and with all that in mind, let’s now look ahead to the housing data we have coming out this week. existing home sales figuress due out tomorrow expect to show homes in july sold at 7.25 million annual rate t.would be down but still close to the record pace of existing home sales we saw in june. that was when low interest rates helped bolster the housing boom. those interest rates mean that home mortgage rates remain near a four-decade low. sales have been boosted by the fact that the economy has been creating jobs and incomes have been growing. put it together and early summer sales sent prices on existing homes to an all-time high. we’ll watch the price points as well. then on thursday, we get data on new home sales. the report forecast to show homes built at an annual rate of 1.3 million in july and like existing homes, new homes have been selling at a record pace. in june, new single family houses were sold at an annual rate of 1.374 million. the median price of those new homes was down 5.5% to more than 214,000. the latest round of housing information comes as some economists and realtors say the housing market may be nearing a peak and that many buyers are having to stretch too far in order to pay inflated home prices. the national association of realtors, for example, earlier this month said housing affordability is at a 14-year low and real estate brokers and some markets say houses are staying on the markets longer and the number of unsold homes has been increasing. heading into the final time-out of the hour and then we’ll come back and get you caught up on world and national headlines. and today’s “biggest mover.” a look at the rise in natural gas prices. that and much more next on “after the bell.”
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Interview: Portfolio Manager
>> news after the bell from the insurance company marsh & mclennan. they’re saying the chief financial officer, senior vice president will leave the company. she plans to step down as chief financial officer of marsh and will resign in march 2006. the company will begin searching for her successor. again, marsh losing the chief financial officer in march 2006. the company saying that she’ll step down march 2006. as for the shares, keep in mind, down about 16% so far this year. so that story breaking for us after the bell today. in the meantime, intel is preparing for its developers forum. that event begins tomorrow. it will include product news, new chip design, launch dates, all of which could help set the tone for the company’s third quarter profit outlook. so far this year, intel shares have gained more than 11%. is this the time to buy or would investors be paying a premium? let’s ask tim allen, portfolio manager. he helps oversee more than $5 billion including shares of intel. he joins us from seattle. tim, good afternoon.
>> good afternoon, ellen.
>> are you anticipating hearing from intel tomorrow?
>> i don’t think i have peculiar expectations. i’m curious to see if they’ll pull a rabbit out of the hat. there’s been speculation because apple made a decision to switch to the intel architecture that intel has some special secret sauce that hasn’t been divulged yet. i have no particular insight into whether that will happen. i’m curious to see what will happen.
>> in terms of your current view about intel, share vs. been moving higher. up 11.4% so far this year. have you been sitting tight, have you been adding? what have you been doing with the shares?
>> i think it depends on price quite frankly. the stock began the year in the low 20’s. they delivered a good first quarter. and expectations began to increase and stock got as high as 28 or so at which point we are less enthusiastic. so second quarter earnings, which i thought were pretty good the stock backed off and got below $26. the market misread that. the market expected acceleration for growth in the second half. it was a little overblown. but look at intel, if they earn 1.50 this year, that’s something less―just about a market multiple. the stock probably grows faster than the s&p 500. at the current price it’s moderately attractive. if it were $22, we would describe it as extremely attractive. high 20’s toward 30 it would be much less attractive. depends on the price given that the company’s position in the world is pretty well defined. go ahead.
>> i was going to ask in terms of the current c.e.o. how that is working out for you as an investor. have you been happy with the progress you have seen so far?
>> i have been happy with the company recently. i don’t know if it is peculiar to the new c.e.o. like a lot of technology companies, microsoft included, intel made a decision to recognize the fact that its growth rate isn’t what it once was while return on capital is extraordinarily high. the company’s decision to accelerate the stock repurchase, they bought $5 billion in stock so far through june 30 this year. so i don’t know if that’s a decision that the c.e.o. made or whether board level but i am happy that intel, among other technology companies, has recognized it has a great core business and generates an awesome a.cash and that given the growth rate is lower, one of the best ways to put it to use is buy back stock.
>> when you look at your entire portfolio, how does technology play into that right now, meaning how attractive is technology in general as an investment?
>> well, we’re market weight in our large cap product. at times we go sometimes overweight and sometimes underweight. it seems like the market overall for the large technology stock is doing a decent job of discounting the growth prospects. there was disappointment in second quarter earnings announcement. it didn’t show acceleration and guidance wasn’t increased. that reflects a fact that going forward the growth rate in the technology sector may be more like 7%, 8%, 9%. it will not revert to the 1990’s. sometimes investors become disenchanted with that and maybe the stocks fall off and that’s when you buy them. when people believe those growth rates are attainable and valuations reflect them, we tend to go below market weight. soy think right now on average the market is doing a pretty accurate job of discounting what the growth prospects are in the technology business. and discounting the fact that these companies, a lot of the largest companies have extraordinary core business which generate awesome returns. it’s a recognition that for a lot of the large companies, the growth rates are not what they once were.
>> tim allen of wentworth as we look ahead to tomorrow when intel has the developers forekwreupl. we’ll have headlines as they become available tomorrow. in the meantime, housing and tax investment in the united states. it may soon change. we have details straight ahead.
