COMMENTARY ON ECONOMIC AND PLANNING ISSUES

ERROLD F. MOODY JR.

MASTER OF SCIENCE IN FINANCIAL PLANNING

LIFE AND DISABILITY INSURANCE ANALYST 0626414

REGISTERED INVESTMENT ADVISER

WWW.EFMOODY.COM

NO NONSENSE FINANCIAL PLANNING

McGraw Hill

Available in Fall 2003

For the last several months, I have been completing a book on the real truth of Financial Planning. It covers not just the elements of Investments, but Long Term Care, Ethics, Estate Planning, Arbitration, Asset Allocation, Basis, Buy and Hold, Who Can You Trust and much, much more. The industry will not like what I have written. Some of the consumers may not like it either since it will indicate that a lot of what was considered to be easy- investing- takes a lot more effort than they ever anticipated.

EMERGENCY ROOM HOSPITAL READY BAG by the Long Island Alzheimers Association

List of all medications including over the counter meds and vitamins

All diagnoses

All physicians phone numbers

Recent hospitalizations or surgery with dates

Insurance information with copies of health insurance cards

Phone numbers of family or friends to contact to alert to ER visits and/or for assistance

copies of health care proxy and Living Will

Snacks and drinks for loved one

Adult briefs, if needed

Item of comfort or item to occupy your loved one (family photographs, magazines)

Sweater, jacket or lap blanket in case ER is chilly

The LIAF also has a free Safety Program Packet. "The packet contains a Safety Program Universal Symbol for your refrigerator door and a set of forms to be filled out with pertinent medical info on the patient and the caregiver. Should you, as the caregiver, become incapacitated, trained police and and other emergency personnel will recognize the symbol and contact the necessary individuals as designated by the forms. LIAF is a New York organization that may be contacted at 866 789-5423."

THIS IS ONE REASON WHY YOU DON'T BUY A LOT OF INDIVIDUAL NON DIVERSIFIED BONDS. (USA Today) United Airlines investors could potentially lose millions on bonds that the airline issued to fund terminals, hangars and other ground facilities. Concerns about United's reorganization have depressed the tax-free bonds sold in Los Angeles and San Francisco so much that they are trading as low as 20 cents on the dollar

 LONG TERM CARE: An Alliance survey found over 70% of respondents said they are very or somewhat concerned about needing long-term care in the future. However, only 21% have purchased long-term care insurance. This, despite the fact that 68 percent said they think that long-term care insurance is very or somewhat important to the financial security of their family.

But this is a problem for future purchasers- Annual premiums are rising anywhere from 15% to 50%, with Transamerica raising single person policy rates by as much as 84%. Reasons: higher-than-expected claim levels, lower-than-expected lapse rates and poorer-than-expected investment results.

HERE IS WHY LIFE INSURANCE IS SO DIFFICULT: The comment is from National Underwriter, regarding expert witness testimony on life insurance products and companies . "The insurance industry itself contributes to these areas by not having consistent and universal standards regarding policy language, underwriting practices and claims handling procedures.

More telling is this, "But in an industry that does not have universally accepted standards, how does one determine what is generally accepted?"

But that is also the scenario in all areas of planning and securities. I have had many many inquiries on how one establishes him/herself in the industry. Where does one get the necessary residency training in securities? Well, they don't, pure and simple. You pass the licensing exam and then you are taught (or more correctly, told) to sell.

What about financial planning? There is no internship save for going got work for a firm like American Express, Prudential and a few others where you are taught (or more correctly, told) to sell.

Isn't there any place that has an independent and competently internship where you abide by certain standards of knowledge and conduct. Nope. If you go to one firm or agent/broker, you will find a completely different focus and plan than an equally "adept" agent/broker across the street with the same identical (and limited) background. What about CFP' ChFC's and the like. Nope. Everyone has a different focus. How can that be? Don't they all have the same knowledge? Yes, but it is severely limited. What about real life training? There isn't any. There is no residency requirements after a designation. No consistency in product. No consistency in fees or commissions. No consistency in literally anything. There are no practice standards that must be adhered to. No degrees. No ethics.

If you go to a physician, you expect a medical degree. 12 years of residency with very specific guidelines to practice. Licensing by the states. Medical review Board and more.

So what do you get in planning with a designation? You can get the CFP with a six months course (and that is not full time- just a weekend a month).

No degree requirement at all. No formal real life applications of how the limited knowledge is supposed to work.

No residency. No formal practice at all. No consistency in product nor practice.

And no matter what you read, no one has to adhere to the ethics code. As stated repeatedly, the Board will not enforce an ethical violation unless preceded by a legal one.

But the marketing by the entire industry is exemplary.

STATE ESTATE TAXES: (Mellon's Private Wealth Management Group) Most states have had estate taxes on the books for years, but the amount was deducted from federal tax bills. If federal tax on an estate was $1 million, and state tax $200,000, the estate would owe $200,000 to the state and $800,000 to the IRS. So while many executors filed state tax returns, it didn't increase tax bills.

But the 2001 Tax Relief Act, which phases out the federal estate tax, reduces the state tax credit by 25% a year, eliminating it by 2005.

Some states are keeping lower thresholds so they can still get money. Going to cause some elderly to move to tax free states like Florida, Nevada, Alabama.

REAL ESTATE BUBBLE: A recent "Lending Climate in America" survey ,which attempts to gauge shifts in lenders' attitudes toward the economy, reported that 58 percent of the lenders believe the U.S. is in the midst of a real estate "bubble. 70 percent believe that the real estate bubble will affect all real estate markets, not just the residential housing market.

When asked which industries were most attractive to their lending institution, lenders named three that have topped the list for five consecutive quarters—light manufacturing, industrial distribution and service companies. Start-ups and technology were named by more than half of lenders as unattractive industries.

NATIONAL HEALTH INTERVIEW SURVEY'S DISABILITY SUPPLEMENT Highlights from the report, titled "Trends and Differential Use of Assistive Technology Devices: United States, 1994," include:

An estimated 7.4 million persons in the U.S. household population use assistive technology devices for mobility impairments, the most frequent reason for using an assistive device. Almost 5 million people use canes, the single most utilized assistive device.

Another 4.6 million use assistive devices such as back braces and artificial limbs to compensate for orthopedic impairments.

4.5 million use hearing aids, amplified telephones, closed caption television, and other assistive devices for hearing impairments.

500,000 use these devices for vision impairments.

The majority of persons using these devices were over 65 years of age. Sixty-two percent of persons using mobility devices, 69 percent of persons using hearing devices, and 51 percent of persons using vision devices are over 65 years of age.

Use of assistive devices has increased dramatically over the past decade, in part due to the aging of the population but also due to technological advances, public policy initiatives, and changes in the delivery and financing of health care.

LONG TERM CAPITAL: Trades typical of early LTC were, for example, to buy Italian government bonds and sell German Bund futures; to buy theoretically underpriced off-the-run US treasury bonds (because they are less liquid) and go short on-the-run (more liquid) treasuries. It played the same arbitrage in the interest-rate swap market, betting that the spread between swap rates and the most liquid treasury bonds would narrow. It played long-dated callable Bunds against Dm swaptions. Well, on September 2, 1998 they sent a letter to investors saying that the fund had lost $2.5 billion or 52% of its value that year, $2.1 billion in August alone. It totally blew up causing an effective bailout of the U.S. banking system of $3.5 by the FED. Another market neutral fund (buy long/sell short) designed for low volatility and solid returns (chuckle) said, in defense, of the bad fund that "the market did move as it was supposed to do". Per the FED, "in the short run, the marketplace is beset by waves of optimism and pessimism that move expectations irrationally." Make sure you read that since it is now how the market actually works.

JAPAN AND OLD: (WSJ) Japan is wrestling with an unprecedented demographic time bomb. With the average woman bearing 1.33 children, the government projects Japan's population will start declining in three years. By around 2007, the proportion of the population over 65 will have jumped to 20% from 10% in just 21 years, a rate of graying that's nearly twice as fast as any other major nation.

Population pressures will continue to sap the country even if it shakes off its deep banking crisis and a crippling bout of price deflation.

With the world's longest life expectancy -- 85 for women, 78 for men -- Japan's society is aging faster than any other now. But by midcentury, the populations of Italy and Russia are expected to have declined even more drastically. Even China, the world's emerging economic powerhouse and most populous nation, will age rapidly starting in 2010, with the elderly making up 22.7% of the population by 2050, up from 6.9% now, according to the United Nations Population Division.

Such jumps in age, coupled with declines in fertility in virtually every country, have led at least one expert to predict that, after zooming ahead in the next 50 years, the world's population could begin to decline. That marks a reversal of long-held predictions of unsustainable population explosions.

In 2002 there were 3.6 Japanese between 20 and 64 to support each person over age 65. By 2025, when he turns 48, the ratio will fall to just 1.9, and it will still be declining. Among self-employed Japanese, who must make their own pension payments, 29% didn't pay their pension premiums in 2001, compared with just 17% in 1996. Among those aged 20 to 24, 46% didn't pay up. Some economists fear that any further rise in pension-dodging might trigger a collapse in the system unless the government gets more aggressive about collection.

Some economists suggest raising the bar on the definition of "old." If companies extend the mandatory retirement age from the current norm of 60 to 70 later this decade and 75 around 2020, the ratio of pensioners to working-age Japanese would remain below a manageable 20%

DECLINING DEATHS FROM PROSTATE CANCER In the U.S., the prostate cancer death rate had been rising slowly over the years until it reached a peak of 26.7 per 100,000 men in 1991. From then on, though, it's been all downhill. By 1997 the death rate had fallen to 22.5 per 100,000, a 15% decline.

RETIREMENT (AARP) Among American stock owners between 50 and 70, 25% say that their investments have fallen 25% to 50% in value the past two years

Nearly 41 million Americans worked at companies that didn't offer any retirement plan last year. An additional 12 million didn't participate in the plans their companies did offer, according to a Congressional Research Service report.

In early 2000, the median value of retirement savings accounts was $18,000, according to the congressional study. "And that was at the peak of the stock market," .

In 2002, 15% of workers said they had not saved anything for retirement, according to a survey by the Employee Benefit Research Institute. And 27% of workers ages 40 to 59 said they have less than $10,000 saved for retirement.

MULTIPLE SCLEROSIS: MS affects about 350,000 American adults, and experts estimate that as many as 20,000 children in the USA have the disease but are undiagnosed.

COGNITIVE TRAINING (Alice Dembner) Mental decline may, in some cases, be reversible. Mental exercises can improve performance on memory, reasoning and understanding complex topics. A five week program involving computer and pencil and paper training was equivalent of reversing the typical decline over 7 to 14 years. . \Scientists suggest that anyone wanting to stay sharp can stretch the brain suing puzzles, classes in new subjects., etc.The brain does lose cells as people get older, but it also can grow new ones and add new connections.  Good nutrition also help as do multivitamins. Researchers say that about 40% of those 65 and older have some memory impairment due to age.  Two years after the initial training, 73% tested better on speed, 55% on reasoning and 40% on memory.

IMPRESSIVE: (Financial Planning Magazine) - "It used to be that financial advisers could impress even their wealthiest clients with fancy pie charts and colorful asset allocation models." Absolutely true- but they really weren't sophisticated.

"But it takes a lot more to build successful relationships with today's affluent investor. "The whole consulting process is becoming a commodity. "Ten years ago you could have dropped some charts in front of a prospect and it would have looked great. Today is different ... The wealthy investor doesn't want to be treated as a commodity ... they want access to a seasoned professional."

But then they indicate this- "To gain the wherewithal to deal with the affluent, advisers require a knowledge base that extends beyond wealth accumulation into the realm of risk management, tax planning, and estate and succession planning. Acquiring industry-respected designations is a start, as is becoming fluent and conversant in complicated planning issues that illustrate solid evaluation skills acquired through education and training."

Unfortunately, a designation encompassing no more than a semesters worth of work is not even close to the level of sophistication needed by anyone, never mind the wealthy.

MUTUAL FUNDS:  (WSJ) Even though many straggling funds are routinely merged away, taking their records with them, more than 70% of actively managed U.S. stock funds still trailed the S&P 500 in the 10 years ending Nov. 30 according to Morningstar data. The sundry fees and sales charges levied by funds are major contributors to that woeful record along with investors' belief that they can pick stocks or managers that will beat the market over time.

Two professors, [John Freeman of University of South Carolina and Stewart Brown of Florida State,] found that the largest 10% of pension funds [with average assets of $1.6 billion] had average advisory fees of 0.2%, while the largest 10% of mutual funds [with average assets of $9.7 billion] had advisory fees that were 2.5 times those of pension funds. This is just an advisory fee [for managing the portfolio], not the fee for sending out statements and so forth.

1031 REAL ESTATE EXCHANGES: You can defer tax by transferring your gain to another property. A new facet from the IRS allows you to transfer your property into a tenants in common ownership. The transfers are to a single ownership where there are no more than 35 investors, each of whom must have a direct ownership stake proportionately in profits and losses but can't be in business together. That means the TICs structured as partnerships do not qualify.

 MORE INSURANCE: The insurance industry had 66 percent of its investment portfolio in bonds and only 21 percent in the stock market at year-end 2001

ANNUITY CRAP: (Johnathan Clements WSJ 2003) Regarding, "Suppose a 65-year-old woman invested $100,000 in an immediate-fixed annuity. That would buy her monthly income of $613, according to Berkshire Hathaway's Web site (www.brkdirect.com). That's equal to a 7.4% yield, far above the 4% yield on 10-year Treasury notes."

It's totally wrong. If you are getting simply are return ON your money, the yield on a Treasury is fine. But you get your money back.

You do NOT get your money back in an annuity as a lump sum- you are getting part of your capital returned on an monthly/annual basis and reflects part of the monthly payment. There is not an insurance company anyplace that can offer a 7.4% return.

How do you figure the return? It's $100,000= present value (pv); $613= monthly return (pmt). Then you need n= periods of time. How can you figure that when you don't know the actuarial lifetime of a 65 year old woman? Simple, you use standard life tables. Rounding to 20 years and searching for return (i), the actual return is 4.17%- a far cry from 7.4%.

So the annuitant gets the same return as a current treasury and loses the flexibility for the next 20 years in case something goes wrong. That's not good planning at all. In fact, your presentation is a complete distortion of the facts and requires a correction.

As for "according to Berkshire's Web site, a 75-year-old woman who invested $100,000 in an immediate-fixed annuity would get monthly income of $785, equal to a 9.4% yield." Nope again.

The woman has a 12.2 year actuarial lifetime. It ends up at a 2.3% annualized return. She is getting her $100,000 BACK over the 12.2 years (or whatever the company projects). She would have to live "forever" in order to get a true 9.4% return.

If you disagree, consider this. $100,000 over 12.2 years with a monthly payment of $683. Tell me what the true return is?????

I teach this "stuff"- HP12c calculations, annuities, insurance, CFP training, investments, continuing education and run the largest financial planning site designed for consumer protection. I would nail an agent to the wall for doing what you presented- it is deceptive, wrong and will really screw up somebody's retirement life. It's the reason insurance gets such a bad name (most cases deservedly) since the figures have no real life application. Please correct."

Never heard a word.

FROM A JOURNALIST- A global survey of 10 countries conducted by Mercer Human Resource Consulting and Mercer Investment Consulting has revealed widespread weaknesses in the management of defined contribution retirement plans. While plan management practices fulfill minimum regulatory requirements, many fall short of what is needed to meet employer and employee expectations. The areas of weakness include the monitoring of benefit adequacy, qualitative review of investment managers, service standards for administration, and member education. The study also found that the majority of employers do not have written policies or objectively monitor the success of their defined contribution plans. I need to know why companies are not excelling in these areas, as well as recommend steps human-resource managers can take to improve their organizations' management of their defined contribution plans.”

My reply- The primary reason so many fail if that they do not have a clue to the fundamentals of investing. And they deal with brokers/agents/companies that are woefully inept as well. Proof? Brokers et al have never been taught the fundamentals of investing to begin with. Alpha, beta, correlation, diversification etc are not required to be tested- hence those trying to discuss the issues- usually men- tend to focus more on their bravado, ego and arrogance than knowledge.

It won't get better until basic education defines, for example, the true numbers of diversification. It is NOT, "don't put all your eggs in one basket". That is a sophomoric, mundane and generally ineffective presentation that won't help employers, employees, small furry animals or otherwise.

The process can become better through true education. But it will cost money and it is debatable that companies would partake in dispensing proper education in this recession when they wouldn't do it when money was flowing freely. Human Resource people cannot help unless they become astute in the principles of investing. Doubtful that they will.

If you do not know diversification by the numbers, you cannot determine risk. If you cannot determine risk, you cannot determine suitability.

WEALTH IN THE 90'S: The wealth of those in the top 10 percent of incomes surged much more than the wealth of those in any other group. The net worth of families in the top 10 percent jumped 69 percent, to $833,600, in 2001 from $492,400 in 1998. By contrast, the net worth of families in the lowest fifth of income earners rose 24 percent, to $7,900.

The median accumulated wealth for families at the top was about 12 times that of lower-middle-income families through much of the 1990's. But in 2001, the median net worth of the top earners was about 22 times as great.

While income in the top 10 percent of households surged 19.3 percent from 1998 to 2001, income for the bottom fifth of households increased 14.4 percent.

The Fed's report contends that household debt is more benign than it seems. It noted that Americans did in fact borrow more in 2001 than in 1998 but said that their net worth rose even faster.

As a share of total family income, the Fed said, the aggregate debt burden of families in fact decreased to 12.5 percent in 2001 from 14 percent through most of the 1990's.

The percentage of low-income households more than 60 days past due on a debt increased to 13.4 percent in 2001 from 12.9 percent in 1998.

The average income of African-American families surged 20 percent from 1998 to 2000. But for reasons that Fed officials had difficulty explaining today, the average income for all nonwhite and Hispanic families barely increased.

INSURANCE: More than two-thirds of the small and medium-sized commercial property/casualty accounts and 59 percent of the large accounts experienced premium increases between 10 and 30 percent during the last three months of 2002

Forty-nine percent of the small accounts have experienced rate increases of 10-20 percent in the last three months, while an additional 18 percent had premium increases of 20-30 percent. For medium accounts, 38 percent reported premium rates were up 10-20 percent, and 32 percent increased 20-30 percent. Thirty percent of the large accounts had premium hikes of 10-20 percent, and 29 percent saw premiums increase 20-30 percent in the fourth quarter of 2002. An additional 18 percent of small accounts and 11 percent of both medium and large accounts experienced premium increases of 10 percent or less. Only 9 percent of small accounts, 7 percent of medium-sized accounts and 4 percent of the large accounts reported that their premiums did not change in the three months since Oct. 1, 2002, the survey showed.

The premium increases were reflected across all lines of commercial insurance, although even larger increases - in the 30-50 percent range - were more common for commercial property (18 percent of the accounts); construction risks (23 percent); directors and officers coverage (18 percent); and umbrella policies (26 percent).

MEDICARE AND THE ELDERLY: Lower Medicare reimbursements are causing a worsening problem for the elderly, as they scramble to find physicians. Because the Medicare program has reduced the amount it reimburses doctors, many Medicare beneficiaries now have to make as many as a dozen phone calls just to find a physician who is still accepting new Medicare patients. Although the federal government recently increased the amount it pays to hospitals, a 4.4% cut for next year in Medicare payments to doctors is likely to make a bad situation get even worse. 

KNOWLEDGE?: Financial Planning magazine is a mainstay of the business with some valid articles every month. By the same token, and as should be obvious, it is devoted to the marketing of the business and not necessarily embarking upon increasing ethics or legality. That's a point I have addressed regarding them for some time.

But this commentary refers to their columnist Bob Clark who also wrote for Investment Advisor for years. He went to the recent FPA convention. And why was he impressed? Because he was able to see how far the industry had come since two independent advisers were now so financially upscale. One wore Armani suits. Another could now stay at the poshest of hotels. And his highest accolade was for reserved for Ric Edelman who has a lot of assets under management but has never attained even the minimum viable designations. Goes to show you we have a long way to go with professionalism when it is the facades that apparently counts.

ELDERLY (Seigel) the number of workers per retiree in the U.S. will plummet from 3.9 today to 2.2 in 2030, in Europe from 2.98 to 1.70, and in Japan from 2.85 to 1.46. Fifty years ago, by comparison, the U.S. had 7 and Japan 10 workers for every retiree.

HEDGE: Van Hedge Fund Advisors estimates there are 4,600 hedge funds controlling $340 billion in assets, or less than 1% of the $36.6 trillion at work in the nation's capital markets.

But the industry has grown at a 20% clip in recent years as more investors have sought out sophisticated fund managers to hedge the risk of tumbling stocks.

REAL ESTATE: (NY Times) During the last real estate downturn, the average market value for commercial and industrial buildings in Los Angeles, for instance, fell 16.7 percent, to $808,266 from $970,798, as national office vacancy rates rose to 19.6 percent in 1992 from 15 percent at the end of 1988, according to a study by the Public Policy Institute of California in San Francisco.

The vacancy rate in San Jose, the hub of Silicon Valley, nearly doubled, to 19.1 percent in the fourth quarter of 2002 from 9.8 percent in the period a year earlier, as technology companies shrank or disappeared, with about 219,000 square feet of sublease space and 902,000 feet of space offered directly by landlords. In San Francisco, it rose to 19.7 percent from 15.9 percent, with 3.2 million square feet of sublease space and 5.8 million feet from landlords.

Houston, despite years of successful efforts to diversify its economy, had a rise in the vacancy rate to 16.4 percent from 9 percent, with 800,000 square feet of sublease space and 4.8 million square feet offered directly. In Denver, where the economy relies heavily on telecommunications, rates rose to 17.6 percent from 11.8 percent, with a million square feet of sublease space and three million feet of direct space.

Washington and New York remained the healthiest markets. In Washington, government growth kept vacancy rates at 7.9 percent, up only 1.1 percentage points from 6.8 percent a year earlier, with two million square feet of sublease space and four million feet of direct space. In New York, the disappearance of millions of square feet downtown in the terrorist attacks helped keep markets stable. In Midtown, vacancy rates rose to 11.1 percent from 8.2 percent, with 9.1 million square feet of sublease space and 16.1 million feet of direct space.

Already in some cities, office buildings are beginning to decline in value. In Austin, Tex., a city that vigorously pursued high-technology companies through the 1990's, office vacancy rates surpassed 20 percent last year. A report by the City Council's staff last week projected a $75 million budget shortage for fiscal 2003, citing the first decline in assessed property valuations in a decade. The total assessed valuation, the report said, will fall nearly 4 percent, to $49.2 billion from $51.1 billion. The value of commercial property, which makes up 27 percent of the total assessed valuation, will fall 20 percent.

BREAKING THE BUCK: (Morningstar) While sponsors of some regular money-market mutual funds have cut fees as interest rates have tumbled so their investors could avoid losing money, more than 200 money-market "subaccounts" in annuities have posted losses for the year to date because their higher fees haven't been reduced.

The average money-market subaccount in an annuity delivered a slight 0.10% return this year through October, after fees that average 1.83%, according to Chicago-based Morningstar. Meanwhile, ordinary money funds investing in taxable securities returned an average 1.11% through October, after average expenses of 0.61%, according to iMoneyNet Inc. of Westborough, Mass. 

MORE MEDICARE: Here is a THE reason why Medicare HMO's went floundering and why physicians dropped Medicare patients- physicians took a a 5.4% rate cut this year and expect another 4.4% in 2003. It's supposed to hit 17% by 2005.

FRAUD IS THE INVESTORS GREATEST WORRY  (Cox news) The SIA (Securities Industry Association) said that investors opinions about the industry are the lowest since they began surveys in 1995 (not a long time admittedly). They are concerned about accounting fraud and fear that they will lose money in the market. They want punishment for wrongdoers.

So do I. But I don't think it will happen.

HOME OWNERSHIP: Roughly 68 percent of American families own homes, up from 64 percent in 1994 

MUTUAL FUNDS: (Weiss) 90 percent of stock mutual funds reported negative returns in 2002. This marks the third consecutive year that investors have suffered declines in stock funds, averaging losses of 19.22 percent, 12.5 percent, and 4.45 percent in 2002, 2001, and 2000, respectively.

LTC- The average unpaid caregiver spends 87 hours a week taking care of a family member.

PENSION COSTS: (Deloitte & Touche) Pension expenses will rise dramatically this year and cut into corporate profits, driven by the poor performance of pension funds pummeled by the bear market. In a survey of 80 mid-sized and large companies, 40 percent of those who responded said their pension expenses would rise by more than 50 percent in 2003. Another 20 percent expected increases of 26 percent to 50 percent.

HOSPICE: Hospice care has grown into a multibillion dollar industry since the first hospice opened in the U.S. in the 1970s. More than 3,100 programs served roughly 700,000 patients in 2000, and the Medicare benefit, which pays for the majority of hospice services, is expected to reach an estimated $3.8 billion in 2002.

REIT: (SF Chronicle) Commercial real estate has been in the doldrums. . The NAREIT market index is down 7.5% this year. Multifamily REITS are expected to do the worse- shares of apartment-building trusts have fallen 8.5 percent in 2002. Vacancies in apartment buildings, meanwhile, have risen to 10.5 percent this year, from 9 percent at the beginning of 2001. Shopping centers have done the best.- though some expect that they will also falter.

RETIREES (Ernst and Young) a majority of pre-retirees (adults 55 plus who are still working full-time) are neglecting to account for basic economic conditions and lifestyle changes. According to the survey, 66 percent failed to consider market fluctuations or debt repayment needs (loans, mortgage, etc.), 53 percent did not factor in the impact of taxes on retirement investments and 47 percent did not account for inflation. Even more surprising, 81 percent did not consider the possibility of their parents getting ill, and over half did not account for personal illness (54%) or a sick spouse (53%). Additionally, only one-third (33%) expect to spend more than 20 years in retirement.

Only 17 percent of pre-retirees are very confident their monthly income will sustain their desired lifestyle in retirement and only 16 percent are very confident they have enough assets to meet retirement objectives. Those who do not identify themselves as "very confident" say unexpected lifestyle changes (54%) and negative stock market fluctuations (45%) contribute to their lack of self-assurance. Other factors that shake confidence include a feeling that retirement products are too confusing (28%) and that they lack the informed knowledge.

Only 13 percent of pre-retirees say they have changed their expectations as a result of the downturn -- making no financial adjustments and acknowledging and accepting they will have less money to use during retirement.

What would they have done differently-

* Forty-nine percent say they would become better educated about retirement products and services

* Forty-six percent would develop a better budget to determine exactly how much money they would need to live comfortably during retirement

* Forty-six percent say they would plan earlier

*Forty percent would take advantage of employer sponsored programs

* Over one third (34%) would purchase more guaranteed return products

*Nearly a third (31%) would seek counsel from a financial advisor

BUYING STOCKS IN A 401(K): (NY Times) Until recently, brokerage accounts in retirement plans have been limited to small companies. By last year, 11 percent of large companies — those with 5,000 or more employees — included brokerage accounts in their 401(k)'s, according to a survey by the council. That compares with 5 percent in 1997. Self-directed accounts are expected to be offered in nearly one-third of all retirement plans by 2006.

One impediment to the rapid rollout of 401(k) brokerage accounts is fear of corporate liability. Federal regulations protect 401(k) sponsors from liability for losses incurred by participants who make their own investment decisions, but the sponsor is responsible for selecting and monitoring investment managers and investment options.

Just 6 percent of eligible 401(k) participants nationwide have actually opened individual accounts at companies that offer them."

Anybody buying stocks in a 401(k) is almost universally a moron. O.K., that's harsh. Is “stupid” better?

LOTS OF PEOPLE: The Census Bureau notes that there are 284.8 million Americans. There re about 34.8 million over age 65. Older women outnumber men 20.7 to 14.6 million.

 LTC: The number of Americans who have purchased insurance against the catastrophic costs of long-term care has increased more than tenfold in the last fifteen years, according to a survey released today by the Health Insurance Association of America. The study also shows that long-term care insurers have paid out more than $6 billion to cover a wide range of services, including home health care, care in an assisted living facility, nursing home care, respite care and hospice care, including $839 million in benefits paid during 2001 alone.

The total number of long-term care insurance policies sold has grown from 815,000 in 1987, when HIAA began systematically tracking long-term care insurance, to nearly 8.3 million in 2001. More than 1.4 million people purchased a policy during the recent two-year survey period

Although premiums paid for long-term care insurance varied widely based on a number of factors, primarily benefit design chosen and entry age of the policyholder, the HIAA study found that the average premium paid in 2001 remained nearly constant when compared with the average premium paid two years earlier. For example, a basic policy purchased in 2001 at age 65 cost $996 a year, compared to an average annual premium of $1,002 for the same policy purchased in 1999. A policy with similar daily coverage as well as inflation protection and nonforfeiture benefits cost $2,261 in 2001, compared with $2,130 two years earlier.

The total number of policies sold through the employer market passed 1.3 million in 2001, accounting for nearly a quarter of the long-term care market during that year. The average annual growth in this market has outpaced growth in the individual and group association markets, and the federal government recently began offering a long-term care insurance plan to all federal employees, retirees and their families. Based on data reported by survey respondents, HIAA estimates that roughly 70% of all individual long-term care policies sold remain in effect.

LUMBER: U.S. lumber prices have fallen to a 10-year low despite a surge in housing starts, as an increase in imports has led to a supply glut.

 INSURANCE (NAIC) Although most Americans feel they have about the right amount of insurance coverage (67 percent), only 34 percent say they understand the details of the coverage "very well. Bite me. Only 5% could get close to a true understanding. And that might be pushing it. Ever hear of No Lapse insurance. That means you know something about insurance. Otherwise, you don’t. Very simple.

BANKRUPTCY: (Administrative Office of the U.S. Courts) Rising consumer debt propelled personal bankruptcy filings to 1.5 million last year — setting a record.

Consumer bankruptcy filings increased 6% from 2001. The trend improved in the last three months of the year, when filings fell 1.5% from the third quarter.

Personal bankruptcies accounted for the vast majority, 97.6%, of all bankruptcy cases in 2002. Despite several very large, high-profile corporate bankruptcy filings, the number of business bankruptcy filings declined by about 4%, or 1,559 cases, to 38,540 last year.

WHISTLEBLOWING (CFO) More often, those who try to bring to light unethical or illegal practices by their employers are criticized, treated like outcasts, fired, or worse. "It almost always turns out badly for the whistle-blower," says the director of the Emerson Center for Business Ethics at Saint Louis University. "Often they regret it. They lose their jobs, they have family problems, or they're shunted off to the side."

 It's not surprising, then, that the most common reactions of those who discover dubious employer practices are to either leave or look the other way. And while the public has continually asked, "Why didn't anybody come forward?" during the recent scandals, the fact that so few did indicates that systems designed to protect whistleblowers often don't work.

"If you go into it thinking people are going to pat you on the back, you are kidding yourself,"

"The kiss of death for a career is to get a reputation as someone who is not a team player.. "And whistle-blowers usually get labeled as troublemakers."

So why do they do it? Personal ethics and integrity are really the only incentives to come forward."

As some of you are aware, that's what I did years ago and still do today. I have been blackballed and lost hundreds of thousands of dollars that went to illegal planners.

Was it worth it? I really don't know. I do have my integrity. And I would not know 2/3rds of what I know now since I have had to work three times as hard. But the financial success would have been nice.

JERK: Former congressman Edward M. Mezvinsky said he had never expected to get caught and sent to prison for defrauding investors of more than $10 million.

LAWSUITS AND TAX SHELTERS. Sprint's CEO help off taxes on $169 million (yes million) by using a tax shelter. Due to the IRS getting tougher on this crap, he said he could lose the whole thing. Some tax firms are getting sued. Per the NY Times, "Lawyers whose clients have sued Ernst & Young and KPMG in New York, North Carolina and Florida described several common elements in the unrelated cases. In all of the cases, large fees were charged; the customers were not allowed to seek independent legal advice on the shelters or to disclose the arrangements; the deals were pitched as virtually sure things; and the sales pitch began with someone who had a long history as a trusted adviser.

"The plaintiffs in the suits say that the accounting firms should have known that the tax shelters would be disallowed and that the firms put their own financial interests ahead of those of their clients.

TAX SHELTERS: (WSJ) Can you depend on the opinion of the accountant or attorney?: "Many opinion letters about tax-motivated transactions are basically worthless. "They hide the ball within a matrix of boiler-plate recitations of complex regulations, but when you cut through all of the cant, what they really say is, 'this will work, unless it doesn't.' "

Clients often whip out opinion letters when the government challenges their tax maneuvers. If the letter proves to be wrong, you still have to pay the tax, plus interest. But the conventional wisdom is that the letter will protect you from penalties. That isn't always true. You may have to pay penalties unless you can prove you were relying on that opinion with reasonable cause and good faith.

The Treasury has already said it will take steps to limit the ability of taxpayers to rely on opinion letters from lawyers and accountants to avoid penalties arising from shelters.

FAMOUS INVESTMENT ADVISERS- AND A LIAR AND CHEAT AS WELL. Todd Eberhard appeared on "Moneyline" on CNN and other business news programs. A criminal complaint said Mr. Eberhard systematically defrauded clients by using his discretionary authority to make voluminous trades in mutual funds that carry high fees and are generally regarded as unsuitable securities for active trading.

He is also accused of forging client signatures, stealing money through unauthorized transfers and sending false account statements showing clients that they had far more in their accounts than actually existed.

DIVIDEND STOCKS (Weiss) Dividend-paying stocks outperformed their peers in 2002, delivering an average total return of 5.1 percent to investors, compared to a 22.1 percent loss in the S&P 500 Index and a 17.3 percent average loss among all non-dividend-paying stocks, according to Weiss Ratings, an independent provider of ratings and analyses of financial services companies, mutual funds, and stocks. Weiss noted that the 5.1 percent total return generated by dividend-paying stocks was composed of a 3.2 percent average dividend yield plus a 1.9 percent average stock price appreciation during the year. Among the 2,009 dividend-paying stocks studied by Weiss, only 725, or 36 percent, currently receive a favorable (B+ and higher) Weiss Investment Rating.

HOUSES: as of late 2002, the typical house was priced at 3.65 times household income.

CAREGIVING: (National Alliance for Caregiving) 64% (14.1 million) of caregivers of a person aged 50+ are employed full time (52%) or part time (12%)

54% of employed caregivers made changes at work to accommodate caregiving

49% changed their work schedule; went in later; left early ; took time off during the day

11% took a leave of absence

7% worked fewer hours or took a less demanding job

3% turned down a promotion

6.4% quit their jobs

3.6% chose early retirement

60.5% of caregivers are women.

CREDIT CARDS: The average U.S. household had $8,419 in credit card debt in 2002, a whopping 257-percent increase over the average of $3,275 in 1992

IT'S ALMOST WORTHWHILE TO GET SICK JUST SO I CAN GET SOME OF MY MONEY'S WORTH: (Milliman USA) HMOs will raise rates an average of 17% next year. And Blue Cross Blue Shield health plans said on Monday they had added 2.1 million more members in the first half of the year, aided in part by a trend of big HMOs shedding members to sustain profits.

Employers are not exempt either- Next year, large employers will experience the highest annual percentage increase in healthcare costs in a decade, according to preliminary survey results showing a 15% average increase in health benefit costs for 2003.

HEDGE: (USAToday) Once available only to investors with net worths north of $1 million who could invest $250,000, a new breed of hedge funds aimed at the masses allows investors to get in for as little as $25,000. Hedge fund assets have doubled to $600 billion in just four years. There now are an estimated 6,000 hedge funds, double just five years ago.

The ability to short the market, or make money when stocks fall, has helped hedge funds shine during the bear market. The average hedge fund gained 15% from 2000 through the end of 2002, vs. a 33% drop for the Standard & Poor's 500 index, says Van Hedge Fund Advisors. Last year, funds specializing in short selling gained 32%, tops among hedge fund styles and far better than the S&P's 23% decline.

But 800 hedge funds shut down last year, mostly because of insufficient capital. Funds typically charge an upfront management fee of 2% — and then get a 20% cut of the profits."

I think it is almost comical why some use hedge funds. These “investors” note that they lost a lot of money in the past recession and therefore hope to make some of it up by buying risky hedge funds. Joke. Why did they not simply reduce their risk exposure during the downturn and buy some bonds. They would make essentially the same return as a hedge fund with about 75% less risk. Ah, but that might be obvious- heaven forbid.

LOTS OF STUPID ADVISORS: There are about 600,000 Series 7 licensed brokers in the U.S. And millions of stupid people that use them. The fundamentals of investing have never been taught as part of any licensing training to brokers. And these fundamentals are not found on the back of a cheerios box.

ERROLD F. MOODY JR.

BSCE, LLB, MBA, MSFP, PhD

2232 W. Ave 133

San Leandro, CA 94577

Phone & Fax 510 352-4127

EFM@EFMoody.com

MARKET TIMING AT ITS WORST. From an acquaintance of a friend, I was sent  a 25 page third quarter review from Fisher Investments outlining all sorts of statistics, economics and their prognostications. She had bought investments through Vanguard at the suggestion of the Vanguard rep a few years ago. And she has lot her shirt since then. She went to a Fisher seminar and apparently was impressed by these guys that do stock picking. But there is what they had on page 21 of their report: "our portfolios did lousy this quarter....experiencing the largest quarterly losses in our history. The reason is simple- we had become fully invested in equities by the end of May.

"We re-entered the market due to the improving economic outlook, and encouraging monetary backdrop and an extreme measure of low investor sentiment. We maintain our stance  that a new bull market is about to commence." And it goes on.

My reply to this acquaintance: "Ye gods- they are doing absolute market timing and contrarian investing. We still have a significant problem with Iraq, the FED just dropped rates again and inflation went up a lot just recently. Sure, the market will come back. But starting in MAY??? There was absolutely NOTHING to validate investing at that point.

Tell  her good luck. I think she will need it

UTILITY STOCKS: these stocks never deserved their reputation for safety. "As a stand-alone asset, utilities have never been a good deal for widows and orphans, or anybody else, for that matter," argues William Bernstein. over the past 50 years, investors could have matched the return on utilities, but with far less risk, by buying a mix of 30% bonds and 70% in the Standard & Poor's 500-stock index.