MOODY'S REVIEW

AUGUST 2000

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

ERROLD F. MOODY JR.

MASTER OF SCIENCE IN FINANCIAL PLANNING

LIFE AND DISABILITY INSURANCE ANALYST

REGISTERED INVESTMENT ADVISER

WWW.EFMOODY.COM

Diversification: This will screw up all stock portfolios- though most people have never had a clue to what they were doing in the first place. (Burton Malkeil, Bloomberg) Individual stock volatility has increased. From 1965 to 1985, it took a portfolio of about 20 stocks to reduce excess standard deviation to 10%. (You actually have to see the chart as identified in Investments by Bodie, Kane and Marcus and the more recent in Bloomberg's wealth Manager. The chart shows the level of diversifiable risk closing rapidly between 10 and 15 stocks with a slightly greater reduction at 20. Hence you might understand my use of 13 stocks as reflecting proper diversification. However that is also assuming that the stocks were not all in the same arena- random correlation.) But a new study from 1986 to 1997 indicates that in order to achieve a comparable level of risk one would now need 50 stocks instead of the 20.  

You need to recognize that it is NOT the MARKET'S volatility that has actually increased- actually it has stayed relatively flat for decades. It's just that the absolute change in daily movement- say 200 points- seems so much bigger than in the past. But with the DOW/S&P indexes so high, the relative movement is not that much different than in the past.

So what is going on?? "Declining correlations allow the volatility of the market portfolio to remain the same even if there is an increase in the individuals stocks volatility". In essence, as I look at the chart, in order to get the same diversification as you used to get with the  13 stocks I recommended, you now need about 40.

IDIOT: (WSJ) A 40 year old "investor" gets an Email about investing in Energy. Goes to their WEB site. Is impressed because it "looks professional". Invests $120,000. Loses it all. About 600 investors lost $10 million. IDIOTS.

Apparently they all were impressed by the WEB site. Folks, if you buy Microsoft FrontPage (A WEB editing program) for $150, you can make a WEB page "dance" in just one day. Never invest money via a page on the Internet. Further, do your homework with anyone that promotes an investment.  

RAINING CATS AND DOGS: SPAY/USA is a program that provides referrals to vets who offer low cost neutering and spaying. 800 248-SPAY. They have a program called Start Targeting Once Percenters where they'd like to get 1% of pet owners to spay or neuter their pets. It could stop the needless killing of 6 MILLION cats and dogs each year. Call the number and get referred to a low cost center.

MEDICAID OPTING OUT- "Kelley Schild, administrator of the Floridean Nursing and Rehabilitation Center in Miami, Fla. told a congressional panel that her family-owned facility is reimbursed a flat rate of $87.04 per day for residents receiving Medicaid, while the actual costs for residents can reach as high as $133, resulting in a daily loss of $45.95 for those residents. Schild said her facility copes with the disparity between actual costs and Medicaid reimbursement rates by managing the mix of Medicaid residents to private pay patients which pay more and subsidize the cost of care. Nationally, over two-thirds of their residents are on Medicaid, but Medicaid often pays less than the cost of providing the care.

Now tell me- do you want your loved one to go to a Medicaid ward? If you have no money, the issue is moot. But if you do, buy a long term care policy.

FEE VERSUS COMMISSION: Ticker magazine had a recent request for info on where the fee plus commission planning business was going. Unfortunately, almost all journalists have missed the big picture. Most fee planners are unlicensed and either don't know much about risk management or don't care. They therefore avoid it like the plague or simply do it wrong. On the other hand, many commissionable brokers sell insurance products like crazy- usually the wrong product at the wrong price to the wrong people for the wrong purpose. What to do? In California and 20+ other states, they have licensed Insurance Analysts who are licensed with extensive experience.

DO YOU HAVE AFTER TAX MONEY IN A 401(K)?: It can happen and, if so, you might get some "free" money. Assume you are 70 ½ and have rolled a 401(k) of $300,000- which includes $40,000 of after tax contributions- to an IRA. But when you rolled, you only put in the before tax money of $260,000. Now you are required to take a distribution based on a lifetime- which we will say is 26 years. That's $10,000. But an IRS private letter ruling said that since his after tax contribution ($40,000) exceeded his first two years of required withdrawals, they would count for that required distribution. But the excess would not count as an offset in future years.

WHAT A RIPOFF. You can call Weiss Rating Services at 800 289-9222 and for $49 they will get you a "customized" report "based on their individual circumstances and state of residence." A formal review of this is illegal in California so I called to find out what they are doing. Their customized report includes a list of the best prices in the area along with a rating of the company. Overall, that's pathetic. Certainly the rating is important, but price has very little to do with what you get. Hey, for absolutely $0 I could have showed you one of the cheapest policies being offered from a "highly rated" company. Problem is, literally all of the seniors would have gotten screwed because the terminology within the contract severely limited claims. There are about 140 companies offering long term care- there are about 10 major companies that you could use effectively. But even with the best, unless you understand the nuances of the contract, it is caveat emptor. For example, tell me what the term SEVERE means in a tax qualified policy. Secondly, Assume you had a tax qualified policy that paid $50,000 and had a separate AGI of $50,000. How much is taxed? Assume the same scenario with a non tax qualified policy. How much is taxed? These are the real issues that need to be addressed.

Clones are people two

CIVILIZED SOCIETY??: Nearly two out of every five women in the United States have been physically or sexually assaulted during their lifetimes.

ANYTHING ELSE WRONG WITH ANNUITY SALES? Well, in 1996, nearly 1/3 of the $111.4 billion in retail sales of variable annuities were INSIDE IRA's. If you count the other annuities purchased in other retirement accounts, roughly ½ of sales were within existing tax shelters. While also legal, there is something wrong with the all the government and private organizations that allow this unethical activity- though most recently there have been several law suits against insurance companies and the SEC has put up a web site cautioning investors about the extra costs. But the scenario continues. At a recent seminar, the B/D simply suggested you tell the client about the difference (you have got to be kidding- no agent would EVER explain all the issues) and then go ahead and sell. Frankly, I think the company will face a law suit of their own later on. Paying extra when you already get tax sheltering is absurd

DEPRESSION:

Being Condemned to Life

William Styron

REVERSION TO THE MEAN: Warren Buffets commented about how there are fewer stocks that he finds "valuable" (he is a value investor)- particularly in view of his declining returns. That may simply be a reflection of a reversion to the mean over the last few years. Don't know what "reversion to the mean" means? If not, then you shouldn't be buying individual stocks cause it's obvious you don't know what you re talking about with investments. And you probably don't know how to pick a proper mutual fund asset allocation either.

Reversion to the mean, by definition for investing, suggests that whenever a fund or manager outproduces the market that, over time, the returns will start to drop reflect historical norms.

MORE BAD ANNUITIES: Here's a real gem that shows you what goes on in the industry to sell you stuff you don't need. One of my students was saying that his company suggested the sale of a variable annuity instead of a straight mutual fund because the annuity would bypass probate. True statement except it cost the purchaser probably thousands more and it still says nothing about the lack of the step up in basis at death. In other words, it's a load of crap but goes on every day. Admittedly probate can be expensive and time consuming but there are legal and effective ways around it. It certainly is not a reason for purchase.

ELDER ABUSE. In 1996, 225,000 reports of elder abuse were filed in California. But it is estimated that they represent only 1/14th of actual cases.

"Nishiki Okimoto died yesterday. He was one of the primary engineers who worked on the original VCR. His funeral service will be at 12:00...

12:00...

12:00...

12:00..."

Dennis Miller

HE AIN'T HEAVY: (NY Times) .... An article on the NY Times references the use of the weighted S&P 500 index versus the weighted Wilshire 5000 (which actually is closer to following about 7,200 stocks). The point being the weighting since it ends up that 80% of the Wilshire is correlated to the S&P 500 since the major companies are simply so much larger. "....as much as 80 percent of the Wilshire's value is in companies that are also part of the S&P 500. This striking overlap means that an investor who may think he is getting stakes in a healthy portion of small and midsize companies is actually looking at a quite meager side dish."

And the returns should be relatively close due to that correlation- and they are: Checking the returns for the Vanguard Total Stock Market and the Vanguard Index 500 show they are very close.

ARBITRATION: Smart Money had a commentary about how arbitration favors the "big guy" by noting that "the SEC hasn't exercised the kind of proactive oversight of the NASD to make sure the arbitration process is a fair process for investors." Further, "there is not guarantee of speed, since brokers can drag out the process by stalling on producing documents. Plus, arbitration proceedings are off the record so brokerages can play hardball with investors without risk to their public image." As to that part, I have seen it at work with some of the largest firms when a woman, who was obviously emotionally distraught over her loss and her involvement with the legal system, was jerked around where the firm knew they could get their way. And they did. Anyone who thinks the little guy gets a fair shake is a few bricks short (assuming they were actually wronged- not all are).

More recently, I watched an elderly couple lose a case where they had been sold almost exclusively high risk, long term illiquid investments for their retirement. He was an immigrant with a high school education- she only with grade school education.

Lastly, "arbitrators are paid $400 a day to sit on a panel creating an incentive to render decisions and awards that don't hurt their chances to being selected again." I can directly relate to that since, when I did arbitrations, I judged the actions based on what should have been taught. No problem with the other arbitrators, but I was quickly persona non grata with the defense attorneys (the big firms) who used their option of getting rid of one arbitration without question. I was the one and then rarely did arbitrations again. If you want to avoid arbitration, do a LOT of homework on your adviser before using them.

MORAL HAZARD: By definition, a moral hazard describes any situation, though usually a financial one, in which risky behavior is encouraged because risk takers believe they will be bailed out of mistakes by a third party. The NY Times noted that investors who went into Russia, Indonesia and South Korea "badly misjudged the situation in all those countries, lost money when economic meltdowns occurred, then stampeded for the exits. That put all the countries in a squeeze. After all, it's hard to keep food stocked in stores and an economy moving ahead when nobody will lend you more money. So the International Monetary Fund and the United States Treasury Department both advocated lending fresh funds to these nations to get them over the hump and back onto the happy track of prosperity."

We also had the real estate debacle of the 80's and one which I think is clearly indicative of transactions at home- Long Term Capital.

A more extended note was "Home ownership in areas like Malibu and Laguna Hills, Ca. "People who might otherwise avoid building homes in such areas because of the risk of fire and mudslides or in hurricane-ravaged parts of the East Coast might do so anyway because their home insurer picks up the tab if their house is destroyed."

Some say simply avoid all moral hazards- but that is not being realistic. However an economist noted, ".....it is often the case in financial crises that those who triggered the crisis don't pay at all; average citizens do."  

"Wise men talk because they have something to say; fools, because they have to say something."

Plato

CHEATING: Here is yet one more reason I am so appalled at the lack of ethics in everyday lives. From the Orange County Register- "More than two dozen San Diego State University students got F's for cheating on a test. The class? Ethics. Twenty-five students in Management 356 -- about a third of those enrolled in the afternoon session of the business ethics course -- were caught using answers to a quiz last month."

Someone had to "teach" these kids in years' past that cheating was acceptable in our society. Sure it was the parents fault, probably some teachers as well. But we all share the blame in letting unethical activities happen without standing up. You can obviously rationalize that this was someone else's kid/someone else's neighborhood, whatever. But maybe this kid will marry your daughter/son. Now how happy do you feel? And what about their kids??

Q: How do you keep your husband from reading your e-mail?

A: Rename the mail folder to "instruction manuals".

FAMILY: In a survey by Columbia University and the National Institute of Health, ''Loving family relationships'' was ranked as important or very important by 99% while financial security was a point behind at 98%. In third place was religion and spiritual life at 86%. 82% of 500 adults rated a satisfying sex life as important or very important. Job satisfaction was last in the survey, rated as important or very important by only 79%.

ADULTS AND CHILDREN: Average parents spend six hours per week shopping and only 40 minutes playing with their children. (Consumer Credit Counseling Service). So never ask why 8, 12, 13 year old kids kill. If that is all the attention kids get, then you can also understand why the suicide rate is so high. And you can also understand why the rate of cheating in our high schools and colleges is so high- and increasing. And you can also understand why ethics and morals in my business- and many others- is so low. It's low at the adult level.

HEPATITIS: Researchers from the Veterans Affairs Medical Center and the University of New Mexico found that the number of cases of liver cancer increased from 1.4 per 100,000 people between 1976 and 1980 to 2.4 per 100,000 between 1991 and 1995, with the cancer more than twice as common in black men than in white men (El-Serag/Mason, NEJM, 3/11 issue). The American Cancer Society's Michael Thun said, "This is one of several lethal tips of the iceberg of the chronic hepatitis epidemic. Four million Americans are estimated to be infected with hepatitis C, 1% to 5% of whom will develop liver cancer.

YOUNG TERROR- from 1987 to 1997 there has been a 60% increase in violent crimes by teenagers.

MARKET TIMING (Individual Investor) "Virtually none of the great money managers believes in market timing. On the other hand, there is a whole industry out here that promulgates it. But studies have shown that to make more money with market timing than using a simply buy and hold strategy, you'd have to make the right market timing decision 67% of the time. If you can be right 2/3rd's of the time, learn to play Blackjack. You're going to have a lot more fun and make a lot more money".

REAL ESTATE BROKERS: Is your real estate broker REALLY working for you? A multi university study (Penn State, University of Texas and Florida Atlantic) of 21,235 houses between 1993 and 1995 showed that brokers get 3.1% MORE when they sell their own property. And it doesn't take any longer to do it either. The study said that,"on average, broker's houses were listed 3% HIGHER than the rest of comparable properties".

I have stated for years that the standard "get an estimate of value from three independent brokers" was effectively valueless. (Remember, I even wrote continuing education classes in real estate). And while I do not involve myself in the field as much as previous, on a recent sale, I had the seller get an independent appraisal of the property from a qualified appraiser. I do admit that these are not perfect either, but at least I can review a report and add or subtract as I deem necessary. Further, they can be used as a bargaining tool if someone lowballs the price.

It is also the reason that a buyer's broker may be viable for purchasers. Previous studies have shown that they can save up to 5% over "standard" purchases

Think about this- 3% on a $100,000 is $3,000 that you may never see. Worth doing your homework?????

"The intelligent man finds almost everything ridiculous, the sensible man hardly anything."

Goethe

MEDICAID PLANNING?? The reduction of Medicare has forced long term care providers into new "strategies". From LTC Bullet- "The financial squeeze gives nursing homes an incentive to turn away residents whose care is funded by Medicaid, the federal and state program for the poor, in favor of privately insured residents, who can afford to pay more...."

HEDGE FUNDS: A presidential task force is recommending that hedge funds be required by law to disclose financial information now deemed private. Can you make money in a hedge fund? Sure! Do I use them? Nope. Why? Risky. Too risky? Well, the fund the government was making reference to- Long Term Capital- was partly run on the formulas by two recent Nobel laureates and the government had to "bail" them out to the tune of $3.6 billion in order to avoid a potential meltdown of the U.S. banking system. Anyway, they are truly only viable if you have more than $1,000,000 that you are willing to risk.

Age doesn't always bring wisdom.

Sometimes age comes alone.

YOUTH VIOLENCE: Surgeon General David Satcher called for a comprehensive program to combat youth violence calling it a public health problem because it is preventable and predictable. 13 children are fatally shot every day in the United States.

A FIRE-RESISTANT GEL - developed by a firefighter who noticed a disposable diaper was the only thing that survived after a house fire - is being touted by experts as the greatest invention in firefighting since the hose and pump.  

"I think that God in creating Man somewhat overestimated his ability."

Oscar Wilde

HEALTH INSURANCE: (KMPG/Kaiser) The percentage of small companies offering health coverage to workers dropped from 59% to 54% over the past two years. Health insurance costs rose 5.2% for small businesses between 1997 and 1998.

OH MY GOD: (Demography) Regular church worshipers live 10% longer than those who never attend services- about 7 years.

TALKING DRUGS: Talking to your kids about drugs actually works. A report by Partnership for a Drug Free America indicates that teens who received strong anti-drug messages at home were 42% less likely to use drugs than teens whose parents ignored the issue.

401(k) ESOP: Maintaining large amounts of employer stock in a 401(k) is not only a refutation of diversification, but usually stupid as well. However, ESOP's are designed for ownership of employer stock. If you combine both, employers must allow employers with 10 years of service who have reached age 55 to move 25% of the company stock to a more diversified position. In the 6th year, you could shift another 25%. If the plan is NOT an ESOP, an employer could require an employee to hold matching contribution stock until retirement. But an employer might be in breach of a fiduciary obligation if the stock went south in the interim since the allocation clearly breaches any basic diversification. But there is maybe 1 CEO out of 500 (maybe even 1,000) that even knows what proper diversification actually is. Do you know? How many stocks must you have in a portfolio in order to insulate it from unsystematic risk? (You should know if you read the first [paragraph of this newsletter)

UP AND DOWN: Cyclical industries make up about 40% of the Standard & Poor's 500 index.

"Most of what happens (with stock picking) is more justified by hope -- and perhaps a little greed -- than by experience"

Patricia C. Dunn

STOCKS AND BONDS: Money Mag had some valid comments on the two- I have followed with some of my own comments

1. Stocks may not always outperform bonds. True- statistically, in all six thirty year periods since 1831 stocks have beaten bonds. But there have been shorter periods where bonds have beaten stocks- 1973/74 is a fine example- and you should always be vigilant. Previous studies at Solomon showed that a probability for bonds outperforming stocks has been as high as 21% over 30 years and about 15% over 40 years. I am a long term investor. But I am not a stupid one. And while I won't use a stock return over 10% regardless of what the market has done the last 10/15 years, other studies show that over the rolling 10 years periods since 1926, "stocks have fallen short of the 10% benchmark about half the time and more than 25% of the time over 40 years periods". Of course, they didn't have Greenspan.

The article further noted that the Leuthold Group has shown that investors received 6.9% average when the P/E ratio was over 21 the next three years and 4.8% for the next 10 years. True, but they didn't have Greenspan.

2. Small Cap Stocks don't necessarily best large caps. I have done commentary upon commentary on this for several years. What was interesting in more recent research was that researchers had actually undercounted the losers- those stocks that NASDAQ has delisted. They dropped 55% in value once they were delisted.

3. Value stocks don't earn more than Growth- Some may be able to pick the best, but from 1978 to 1999, value mutual funds underperformed growth funds by more than 1%. One researcher noted that once you eliminate the January effect and the small cap value stocks- there is NO difference. Fama and French did some lengthy analyze on the subject and stated that value stocks actually do better and discount other commentary. But what was most chilling was the statement from Fama that "both large and small value stocks alike outperform their growth counterparts over the long run, although he allows that it may take a very long time- as much as 30 years." Read that again. If you are putting your eggs on a 30 year timer, you might die before they hatch.

4. Asset Allocation does NOT determine 90% of your return. True, it references variability. Further, the Brinson study didn't mean you kept your balance static forever. A subsequent report by Ibbotson and Kaplan noted that asset allocation explains 90% of the variations in return, 100% of the actual returns and 40% of the difference in returns from plan to plan. Well, that doesn't help much. But let me boil this down. If you don't know what diversification is by the numbers as it relates to unsystematic risk, your odds of analyzing individual stocks (or using market timing) is so limited that all the numbers anyone does on your portfolio is ludicrous. Asset allocation studies can provide all sorts of numbers, but it only depends if you know the relevance. If you do, you may have a slight degree of benefit in stock picking- if not, read some books.

  "Few things are harder to put up with than the annoyance of a good example."

Mark Twain

AIDs: It infects nearly 6 million people worldwide each year

CHILDREN: One-third of the children whose parents fail to pay child support live in poverty

INFLATION AND UNEMPLOYMENT: The NY Times noted how some changing economic fundamentals have been missed by economists- such as the 1990's low inflation AND low unemployment rate. With what went on from the 1960's to the late 80's, literally every economists thought that unemployment could not be less than 5%- most were higher at 6.5% to 7%. Now it's about 4.5% and still seems to be dropping.

"Professors Alan Krueger and Robert Shimer of Princeton and Lawrence Katz of Harvard estimate that the natural rate probably fell by about 1 percentage point, in part because of the aging and growing stability of the labor force and the rising use of temporary workers by employers." (Note the word, "probably".)

Greenspan even said in July that "My forecast is that (the historical unemployment rate), which served as a very useful statistical procedure to evaluate how the economy was behaving, over a number of years, like so many types of temporary models which worked, is probably going to fail in the years ahead as a useful indicator."

Someone once said, show me your friends and I will show you your future.

Brian Crane

DISABILITY: (HIAA) "Mental and nervous conditions comprised slightly more than 8 percent of claims and claims dollars paid out in 1996 under group long-term disability coverage containing limits on the duration of benefits

For disability insurance policies with no limits on the duration of benefits, the percentage of group disability insurance claims in 1996 resulting from mental and nervous conditions increased dramatically - to 14.6 percent, a 70 percent increase. The corresponding percentage rate of increase in claims dollars resulting from mental and nervous disorders increases is even more dramatic - to 20.3 percent, a 145 percent increase, or more than twice the rate of increase in claims. 

More than three out of every five claims for mental and nervous conditions for group disability insurance benefits in 1996, under plans with benefit duration limits, were due either to depression or anxiety. More than half of all psychiatric disability claims dollars for policies with no limit on mental and nervous benefits were for diagnoses of anxiety.

For 1996, the overwhelming proportion of disability claims for mental and nervous conditions were for psychiatric conditions, compared to substance abuse conditions. For group long-term disability policies with benefit durations, 97.8 percent of such claims were for psychiatric conditions and 2.2 percent were for substance abuse. For group long-term disability policies without benefit durations, 97 percent were for psychiatric conditions and 3 percent were for substance abuse."

"In theory, there is no difference between theory and practice;

In practice, there is."

Chuck Reid

MEDICARE TAXES: "Congressional Budget Office figures showing that raising the Medicare payroll tax to 2.02 percent, from 1.45 percent, would keep Medicare's hospital insurance trust fund in balance through 2025. Someone making $40,000 a year would pay an additional $228 a year, or 62 cents a day. "( UCLA's Center for Policy Research on Aging) "Ninety percent of all long-term health care services are paid for by the government -- Social Security, Medicare and predominantly Medicaid. What will happen to our health care system when the baby boom generation nearly doubles the elderly population by 2030? The answer is both obvious and startling. The cost of Medicaid for home health and nursing home care will skyrocket to $120 billion in 2007, according to HCFA. The approaching tidal wave of aging baby boomers will push the financially squeezed Medicaid program into bankruptcy. It is clear that the present long-term care financing system under Medicaid will not be able to withstand the demographic demands that will more than double the number of its elderly beneficiaries. Nearly one in two Americans will require long-term care at some point in their lives."

LONG TERM CARE: The Health Care Finance Administrations National Health Expenditure Projections for 1997- 2007 state the average annual projected increase in Home Health Care at 8% and Nursing Home Care at 6.1% for years 1999- 20003.

INVESTING IS "EASY": "Investors understand why Michael Jordan can score 50 points and they can't, but not why they can't match the record of professional fund managers. They think if somebody can make 30% a year in stocks, they should also."

The last statement needs further commentary. Most fund managers can't beat the market. So, now, individual investors are going to try and beat the market that even the professional rarely attain.

And lastly in regards to assets allocation, "we know that asset allocation works, but many investors still spend their time worrying about what mutual fund to buy or which manager is better. The real questions are "what percentage of my investments should be in growth stock versus value. And how much should I invest in small-caps, international stocks and bond".

Two cannibals were eating a clown for lunch.

One turns to the other and says- "does this taste funny?"

ALTERNATIVE MEDICINE: INCREASINGLY EMBRACED BY HMOS: "A study reports that 67% of all HMOs cover at least one form of non-traditional medicine, with 65% of those surveyed offering chiropractic care and 31% acupuncture. The survey, conducted by National Market Measures, Inc. between Nov. 1998 and Jan. 1999, also shows that 38% of HMOs provide alternative care in response to patient demand, the same percentage that say they offer the services because of legislative mandates and legal requirements. The split is fairly even between HMOs that believe alternative medicine would have a minimal (30%) or positive effect on the bottom line  (21%), and those that believe alternative medicine would add to total costs (49%). HMOs surveyed said acupuncture (36%), acupressure (31%), massage therapy (30%) and vitamin therapy (27%) were the therapies most likely to be added over the next two to three years"

MORE ARBITRATION: A securities attorney notes that a "stock broker can never be successfully sued because an investment which he recommended, in good faith, with full disclosure, did not prove to be profitable. NYSE Rule 405 requires that a firm use due diligence to learn the essential facts relative to every customer and every order. Article III, Section 2 NASD Rules of Fair Practice requires a member to have reasonable grounds for believing that a recommendation is suitable for the customer based on other securities holdings, the customer's financial situation and his investment needs. It should be further noted that slightly less than 50% of all customer claims that go through an arbitration hearing are actually won by the customer."

I know I have addressed this above, but it is fair warning to consumers that he is effectively right- but for all the wrong reasons. The assumptions are,  first,  "in good faith" is effectively a fraud within the industry. The entire industry knows that brokers have never been taught the fundamentals of investing so, to use the term "good faith" is ludicrous. As far as "due diligence" is concerned- anyone suggesting to me that the simplistic customer form showing a certain income and assets along with four/five boxes of risk- conservative, aggressive, speculative, income, tax sheltered- as properly addressing what is needed to define what a consumer should do is patently lacking. If we also imply that "investment needs" are addressed by the simplistic forms provided by Scudder, Vanguard, Fidelity, American Express and the like, and you have all the reasons why consumers don't win that many awards. They perceive knowledge of the fundamentals of investing by securities reps that have never been provided in securities licensing- or anything later. You never buy insurance from an insurance agent, stocks from a stockbroker or do financial planning with a financial planner. There are far more knowledgeable people. It just takes more time and effort to find them. Too much work?? Well, it's your money.

CAREGIVING: A study in Health Affairs finds that the market value of informal care provided to sick or dependent adults by family and friends was nearly $200 billion in 1997, dwarfing the $83 billion spent on nursing home care and $32 billion spent on formal home care.

MONEY: The amount of the Federal tax dollar that goes to defense- $0.19. The amount that goes to education and other services- $0.05

"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly."

Woody Allen

WEALTH: (Prof. Edward N. Wolff, a New York University)  "Four out of five working-age Americans essentially have no wealth, except for equity in their homes, while in 1997 the top 1 percent owned 48.6 percent of all financial assets like stocks and bonds. That is the greatest concentration in the nation's history. The most important division among today's retirees is between those who own their own homes and those who don't: homeowners retire with an average net worth of $115,000, while nonhomeowners have $800. Baby boomers are expected on average to live a bit more than 17 years after reaching age 65, with those with more money enjoying better health and longer lives because of generally better medical care and diet and more healthful life styles.

NATIONAL INHALANT PREVENTION COALITION: Are your kids at risk?  800 269-4237

"How to Raise your I.Q. by Eating Gifted Children"

Book title by Lewis B. Frumkes

CASH BALANCE PLAN DEFINITION (NY Times) "A cash balance plan is a retirement program in which benefits build uniformly year to year, so that a vested employee (usually one with five years of service) can switch careers or retire early without a penalty. The benefit is usually paid in a lump sum, which can then be rolled over into a self-directed individual retirement account and continue to grow. Most traditional plans would simply freeze such a worker's benefits at a certain monthly level -- to be ravaged by inflation -- until the worker reaches retirement age.  

The formula determining a worker's share simply assumes that each year a percentage of pay is contributed to an account, which earns 5 percent or so, depending on short-term interest rates. Usually a quarterly statement shows a worker's balance in the pool, which is paid out if the worker quits after vesting.

The company invests that pool of assets and, if it earns more than the 5 percent, can keep the difference -- much like a traditional plan.  Cash balance plans look somewhat like 401(k) plans, but there are important differences. Employees have no say in how the plan, or their part of it, is invested and their return is limited to the 5 percent or so the plan pays. Also, employees must be vested to get the money."

NURSING HOME STAFFING: "The GAO surveyed government inspection reports from July 1995 to October 1998 for the nation's 17,000 nursing homes that receive federal Medicare and Medicaid money. More than a quarter of nursing homes have health and safety violations that harm residents or place them at risk of death or serious injury Among the most frequent violations: inadequate attention by staff to prevent residents from developing bedsores and lack of supervision or special equipment such as alarms to prevent accidents."

The analysis of the data from three States demonstrated that after controlling for case mix, staffing thresholds exist below which quality of care may be seriously impaired. The thresholds were at staffing levels that were above staffing ratios for a significant percentage of facilities. In addition, the analyses suggested that minimum levels may reduce the likelihood of facilities. In addition, the analyses suggested that minimum levels may reduce the likelihood of quality problems in several areas, but higher "preferred minimum" levels existed above which quality was improved across the board. These levels are outlined below.

Staff	Minimum/Staff Level	Below Standard
Aide	2.00 hrs/resident day	54%
RN and LPN	.75 hrs/resident day	23%
RN	.20 hrs/resident day	31%
	Preferred Minimum Level
Aide	2.00 hrs/resident day	54%
RN and LPN	1.00 hrs/resident day	56%
RN	.45 hrs/resident day	67%

AL-ANON FAMILY GROUP HEADQUARTERS, 1600 Corporate Landing Parkway, Virginia Beach, VA 23454-5617, 800 344-2666, Al-Anon, and Alateen for teenagers, offers help for friends and families of alcoholics

OBESITY: Researchers have shown that a one hour reduction in watching TV reduced the odds of obesity in teenagers by 15%. Further, the main ingredient to forestalling obesity is exercise.

CAREGIVING: Researchers indicate that 25.8 million Americans spend an average of 18 hours per week caring for an ailing relative. At a "wage" of $8.18, that would have cost the health care system an additional $196 billion annually. Total spending for nursing home care costs $83 billion per year and for formal home health care at $32 billion. The Clinton administration wanted to add some tax credits for caregivers. Nice thought, but none of the politicians were able to do anything with Medicare and Clinton's requested addition of prescription drugs that would have added $20 billion to Medicare's costs while it is going bankrupt.

FURTHER COMMENTARY ON BROKER EDUCATION: John Ramsay, deputy general counsel for NASD regulation, acknowledges that "people do not learn everything they need to know just from Series 7." But he adds that the NASD anticipates that investment professionals will continue to learn on the job -- and continuing education is a part of every broker's job."

It ain't happening. And it ain't happening for new brokers or for old brokers. They are not being forced to read or learn any of the material that is offered at any university level.

MEDICAID PLANNING: "One of the most powerful planning strategies to qualify for MediCal involves a Court Order. This planning strategy is very effective for married couples when one is in a nursing home. A document known as a Petition is filed with the Court. The Petition asks the Court for an Order directing the spouse in the nursing home to support the spouse at home. The Court may order the spouse in the nursing home to transfer assets and/or income to the spouse at home. This procedure may enable the spouse at home to retain all of his or her assets and/or income and qualify the spouse in the nursing home for Medi-Cal."

Possibly true in many jurisdictions of California and other states. But did you also read the GAO study above that? The state WILL provide care but at what cost to your loved one???? The legal validity of the above petition is if the institutionalized spouse was going in on Medicaid anyway due to the limited assets. I suppose that shifting assets so that the at home spouse had a better life might be viable. But most of the time it is an attempt to pass on more assets to beneficiaries instead of paying for the higher level of care. And the attorneys love to promote the game since they get THOU$AND$ in fees.

WOMEN: According to "The Women's Millennium," U.S. women are a growing and substantial consumer group.

o Women represent 43% of U.S. citizens with assets of $500,000+.

o 20% of working wives earn more than their husbands.

o Women own 8 million businesses doing $2.3 trillion in annual sales.

Please send me one.