MOODY'S REVIEW

DECEMBER 1995

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

ERROLD F. MOODY JR. BSCE, LLB, MBA, MSFP, PhD

CERTIFIED FINANCIAL PLANNER

REGISTERED INVESTMENT ADVISER

READING: ( Dear Abby) I will quote again from Van Buren "If I could give young people one piece of advice, it would be read, read, read! In reading, you open up new worlds, real and imagined. Read for information, read for pleasure. Our libraries are filled with knowledge and joy, and its all there- free for the taking. The person who does not read is no better off than the person who cannot read". I'll add some comments- the advice is at least as valid no matter what age you are- 40, 55 or 75. I find too many adults who simply don't read anything- particularly in the areas where it impacts their financial health. Some people say they don't have the time, the kids are a chore, the job is stressful, etc. etc. Sorry, if you don't have the time to read and acquire knowledge in the areas that directly impact your life, HIRE SOMEONE THAT DOES.

PENSION PLANS: Americans over 65 receiving employer sponsored plans more than doubled from 18% to 38% from 1962 to 1992.. 51% of employees between 25 to 54 are covered by an employer pension plan.

INTERNATIONAL ECONOMISTS: (WSJ) There seems to be a general consensus that inflation has receded around the world and there is nothing on the horizon to indicate a marked increase in the immediate future. (Don't believe everything you read however. Everyone thought Mexico was a great bet- particularly after the passage of NAFTA- but look what happened there). Anyway, the reasons noted are the sluggish consumer demand, tightening budgets- particularly the U.S. and Germany, and the effects of the strong currencies of Germany and Japan. Additionally, there are the huge pools of cheap labor in China and India and the resulting competitiveness; the ascendancy of inflation fighting central bankers around the world and the speed at which financial markets pummel nations that get out of line.

CONSUMER CONFIDENCE: This is one of the 11 leading economic indicators- meaning that if it goes up, the economy should do so in the future. However, it has lost some of its luster and some economists think of it now only as a coincident indicator (it's happening now) or even a lagging indicator (it showed what DID happen).

PROFILE PROSPECTUS: Arthur Levitt says what we all knew anyway- "investors have not read prospectuses- because it is so filled with disclosure, they have become obscure documents. I view ...the profile prospectus.. as a test actually to determine whether investors will really read a prospectus that is clearly written, well illustrated and not overly long". The profile prospectus is new very short form prospectus they have been working on for some time to make it REAL easy to read a prospectus. Frankly, I'm not sure it will work, but anything to get them to read ANYTHING would be an improvement.

2/66- 8/82: The market did pretty bad then. Over the six year period, the DJIA LOST 1.5% per year. The S&P 500 gained just 0.9% per year (5.1% with dividends reinvested). Treasuries gained 7% per year with far less volatility and without any yearly losses. But small cap stocks did 12.7% (dividends reinvested) and foreign stocks earned around 9%. It effectively shows that asset allocation would have provided a potentially acceptable return without undue risk. That said however, I doubt I would have been in the market around 1974 and for a number of years. All the economic indicators were bad.

WORKPLACE DEPRESSION: (Working Woman) Signs of depression that you can spot among coworkers

1. Decreased productivity

2. Morale problems

3. Lack of cooperation

4. Safety risks, accidents

5. Absenteeism

6. Frequent statements about being tired all the time

7. Complaints of unexplained aches and pains

8. Alcohol and drug abuse

The article suggest that if you think someone is sliding into clinical depression you should first say something like, "your performance has slipped. If it doesn't get better we will have to do something to address it. I know you can do better". If that doesn't work, the managers should initiate another discussion and directly suggest the employee might need help- such as someone in personnel who has a background. Don't moralize, offer a diagnosis or even introduce the idea of an illness. If that doesn't work, they suggest a more emphatic approach to seeking assistance. If the employee complies, the manager should adjust the employees work schedule and make other adjustments for 30, 60 or 90 days. If all that doesn't work, it may be necessary to fire the worker just as you would anyone else who doesn't work out. Many companies are working with outside medical experts in helping employees handle depression. Companies have found that they can reduce behavioral health care costs substantially (one went from 15% of total medical plans costs to 8% in less than 10 years) and retain a valuable employee. Of course it's not all peaches and cream sine managers must spend more time monitoring a troubled employees. Help for managers is available :

Downtime: A Worksite Guide to Understanding Clinical Depression, $69.95 videotape and training manual from Wellness Council of America 402 572-3590

Depression : Corporate Experiences and Innovations, $25 form Washington Business Group on Health 202 408-9320

What to do when an Employee is Depressed, free from National Institute of Mental Health

Answers to Your Questions about Clinical Depression.

LONG TERM CARE: From a recent seminar, here are some vital statistics that you should recognize as you or your loved ones grow older.

Some people still try to reduce assets before needing care so that Medicaid will take over. While it is true that Medicaid will pay the tab, it must be a Medicaid approved facility. That means that the facility your loved one may have to go into may be some distance from the one you would like to use. Further, most facilities will review your financial status to be assured that you can pay the tab without Medicaid. They just don't need the hassle.

SPOUSAL ABUSE: A survey by the Pennsylvania Department of Insurance found that 8 out of 40 insurers consider domestic violence before issuing or renewing insurance. They don't specifically ask but usually find out through medical reports. Some states have already calling any decline based on this to be illegal.

PROBATE: Though probate should usually be avoided- particularly for large estates- it can provide one significant benefit. And that is after a will has been submitted to probate, creditors have only four months (California) to assert claims against the estate. If they are not submitted within that time, they usually are forever barred. Another benefit is if there is an unscrupulous executor. The court can prevent such a person from absconding with the estate's assets. It would also be viable when the executor is unknowledgeable and easily duped into doing thing contrary to the best interest of the court. Now, quite admittedly, the court's are not necessarily that bright either, but the overview might be beneficial.

WRAP ACCOUNTS: Instead of buying stocks willy nilly and paying commissions every time the broker wants you to, you can opt for a wrap account. This is where the broker leads you to a, supposed, super money manager who will group your small portfolio with others and manage them for an annual fee. Unfortunately there have been many problems. First is the fact that the wrap accounts normally charge 2% to 3%- quite a bit more than mutual funds. But the brokers say that they perform a review of you and your risk tolerance and therefore you can feel that more objective service is to be provided. Several problems here. First is the fact that the managers do not provide the overview- the brokers do. Second, brokers were never trained to do this (though they are supposed to determine suitability in every trade anyway) and therefore most clients will never end up with adequate asset allocation. So clients really don't get personalized service at all. Lastly, wrap account reporting documentation has been exceedingly limited and therefore clients do not know what they are really getting. The SEC has focused on that issue, but has yet to determine if more reporting disclosure will be required. But there's the rub. Unless the wrap account provides personalized and individualized service, the wrap account will need to register as a mutual fund- a big headache for the brokerage companies. I think the SEC will make some major changes here.

Financial World noted: "but coming from the very people who cold-call retirees about inverse floating bond, you might consider a few grains of salt before deciding if wrap accounts are your kind of investments".

GNMA's: I don't like Government Mortgage Association Passthroughs either purchased as a separate investment or in mutual funds. Why? Because I have little idea how much and when someone might get paid. Recognize that, as an investor, you get back both principal and interest since GNMA's are pools of mortgages- mostly 30 year mortgages. So you think you will get paid for 30 years. Well that's wrong to begin with (though I bet that no GNMA investor has ever been informed of that issue by his broker) since repayments of mortgages occur all the time in any given pool. In order to figure out when your money might be paid, you need to look at an "FHA speed" available from FNMA, GNMA and Freddie Mac. A WSJ article last year indicated that if interest rates were not changing, the expected maturity was 15.40 years (you could expect your 30 year mortgages to be effectively paid off in half the time). But if rates rose by 1%, refinancing would drop and push the overall maturity to 17.67 years. If rates rose 2%, maturities would extend to 19.23 year. But if rates should fall 1%, many people start to refinance and the maturity would fall to 2.77 years. A 2% drop moves the maturity to just 1.10 years. So instead of projecting payments for 30 years (even the "normal" 15+- years) an investor is now getting almost all their money back in just one or two years and now they have to try to find some other investment that could pay the same high rate. It's called the risk of reinvestment and is a material item in investing with GNMA's. A portfolio manager of GNMA's said, "to be a passive investor in mortgages is a recipe for underperformance."

NAFTA: The North American Free Trade Agreement brings together 360 million consumers and creates a $7 trillion market- the world's largest. The elimination of trade barriers may result in a considerable increase in trade to both Mexico and Canada. The first year of NAFTA was good for the U.S.- increasing exports rather than relocation jobs as some had feared. However, the Mexico devaluation caught everyone off guard (me included) and significantly reduced the current opportunities. I thought Mexico's new president was finally getting things under control when the Peso hit the floor again. I'll try this market again- but not until I see a lot more positive indicators.

MEN vs WOMEN: A recent study showed that men act aggressively when emotions are triggered while women react with words. It simply reinforces what many people thought anyway- though there had been little solid factual evidence to back it up. A neuropsychologist found that the brains of both men and women are essentially the same except for the regions that deal with emotional processing. Women showed more activity in one of the newer and more refined parts of the brain. Men's brains tend to relate to the processing that existed for the era in revolution when reptiles flourished and react to a situation rather than study it. Everything else being equal, I bet it's the reason why many men don't invest that well. They like the danger of the kill (buy) and seldom recognize or analyze the risk. I think you will undoubtedly see many more women in power- perhaps a majority- by the year 2100.

WHAT TO SELL: When you sell a stock or mutual fund, you are taxed on the difference between what you bought it for and what you're selling it for. However, if you purchased shares over many years, the purchase prices paid may vary considerably. If you do not do anything, the IRS infers "first in, first out", or essentially that the first shares purchased were the cheapest and will therefore show the most gain when sold. The best way to reduce tax exposure is to use share identification- you choose which shares you wish to sell. For example, if the current price of a stock was $50 and the first shares you ever bought cost just $10, you would have a $40 taxable gain. However, in 1987, you purchased some of those shares for $75. Why not sell those particular shares and book a $25 LOSS. Admittedly this can be a cumbersome process, so the IRS also allows you to simply divided your entire cost of the holdings by the number of shares. That's called average basis and can usually hold down tax gains somewhat. But one method I was not familiar with till recently says that you divide all the shares into those held long term and those held short term. You therefore specify which shares are being sold (the fund must confirm in writing) otherwise the IRS will assume they are sold from the long term gain side.

ALZHEIMERS: About 10% of the US population over age 65 and 20% over age 75 will develop Alzheimers. After 85, the risk moves to 25% to as high as 45% depending on whose statistics you use. There are currently about 4 million victims in the US today.

INTERNATIONAL INSURANCE: When a foreigner might visit you- say a parent- you may wish to get interim medical insurance. Apparently there are only a few companies that write this type of policy for U.S. citizens traveling or residing outside the U.S. and for foreign nationals while they are outside their home country or U.S. citizens returning to the U.S. from overseas. Not necessarily cheap, but it might serve an interim purpose.

FEDERAL RESERVE BOARD: Most commentary regarding the independence of the FED is favorable- it should not be part of the political process, otherwise who knows how much worse the budget deficit would be. Currently the Governors of the Board are appointed to 14 year terms. They are picked by the President and confirmed by the senate. The President of the Board, however, is elected by the Fed Bank's Board of Directors and approved by the Governor's. Lastly, the FED overs its own operating expenses so it isn't beholden on the Congressional appropriations.

INVENTORY: (Fed Board of St. Louis) A large inventory buildup is defined as unplanned or planned - and had, at least in the past- a significant tendency to signal a potential recession.

Unplanned inventory increases are undesirable and are usually followed by scaled back production or purchases until inventories return to normal. Planned inventory increases, however, contribute positively to economic expansion and do not lead to corrections. The issue is that 1994 inventories increased significantly. Inventory increases before recession usually coincide with increases in the business inventory to sales ratio- but the ratio has been at its lowest in 20 years. So the low inventory to sales ratios suggests in 1994 that the firms have been economizing by maintaining low levels (though increasing) of inventory. Further, new innovations such as just in time delivery allow production to respond faster to changes, thereby minimizing unplanned inventory accumulation. Looks like nothing to worry about. At the current time, my reading tend to indicate a 70% to 75% positive economic condition. That's pretty good. At the best time in the 80's and early 90's, it reached 80% to 85%

INSURANCE POLICIES: If you have lost a policy, contact the American Council of Life Insurance, Policy Search Division, 1001 Pennsylvania Ave. NW, Washington, DC 20004. It's search is free.

ESTATE TAX: (Kiplinger's) The Fed taxes your estate at 37% and up after giving you a $600,000 exemption. But the states may also get in the act. There are three types of state death taxes

1. The pickup tax. All 50 states allow a credit against the federal estate tax- up to a certain amount- for death taxes paid to a state. The pickup tax is the only tax in Alabama, Alaska, California, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Maine, Michigan, Minnesota, Missouri, Nevada, New Mexico, North Dakota, Oregon, Rhode Island, South Carolina, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming. If your estate doesn't owe any federal estate tax, then you won't have a state tax either (this has nothing to do with probate).

And inheritance tax is levied by 16 states- Connecticut, Delaware, Maryland, Montana, Nebraska, New Hampshire, New Jersey, North Carolina, Pennsylvania, South Dakota and Tennessee. The tax depends on who gets what and how much. Property going to a spouse in all states except Delaware and Maryland and, until 1998, Pennsylvania, exempts the first $100,000 of personal property and all real estate. Some other relatives may get some property tax free but then the tax kicks in- the lowest rate for close relatives and the highest rates for non-relatives. (I can be adopted) Your heirs are responsible for the tax but the executor may pay it if there are enough liquid assets (though it would reduce assets to other members- a tricky situation).

The states of Massachusetts, Mississippi, New York,, Ohio and Oklahoma impose an additional tax. A certain amount is tax free to spouses (except Mississippi)- above that you have to pay the state. Massachusetts is dropping this tax in 1996. So if you live there be sure not to die for another month.

FIRST TO DIE: This life insurance has seen limited application so far but its use is catching on. It's great for estate planning purposes, particularly where there are significant assets and one spouse is much younger than another. Instead of the first to die using simply just his/her $600,000 exemption, he/she can opt to include large amounts of property to be taxed at the first death, letting the insurance pay the extra estate tax. It allows any appreciation of that property to be left untaxed at the second to die. This results in a savings on estate tax as well as insurance costs.

It is also viable for small business key person planning. In past years where a business had, say, three partners, each might have had to have his/her own life insurance policy in order to provide sufficient sums for the surviving partners to buy out an estate when the first partner died. Now, only one larger first to die policy need be written- saving considerable money over three individual policies. Some policies have riders that allow the face value to increase as the business's value increases- without evidence of insurability.

It's also good for two earner families. Should either of them die, the survivor gets immediate assistance. Admittedly, both may require insurance, but budgets may not offer this possibility.

First to Die policies should have

ALL FALL DOWN: Many elderly become frail and fall down- causing multi million dollar injuries. But much of that can be avoided. A recent study of 2,328 elderly practicing Tai Chi were able to reduce falls by 13% and reduce injuries by 25%. About 30% of those over 65 fall at least once per year and 10% to 15% of these cause injuries. A 1977 study showed that 6% of all medical care was spent on care of unintentional injuries, mostly from falls. Such injuries are the 6th leading cause of death among the elderly and cost about $4 billion annually. (Majority of falls are due to drinking.)

WHO'D A THUNK: John Templeton, the legendary mutual fund guru actively endorsed John Bennet Jr. of New Era Philanthropy which was nothing more than a billion dollar Ponzi scheme. Templeton even got Bennet on the boards of 2 dozen Templeton funds. Let's be careful out there.

INDEXING: Just a few months ago, Intel Corporation fired all its five money managers and replaced them with index funds. This mirrors substantial research that says average money managers underperform the market- most notably the S&P 500. That is a true statement, but if you can select from the entire universe of money managers, it is possible to find some that have, at least most recently, outperformed the market and use them until economics change. Nonetheless, I still wouldn't put all my money there. Further, I always recommend asset allocation.

REPLACEMENT INSURANCE: Many universal and "vanishing premium" polices written 5 to 10 years ago contain returns based on unsustainable high interest rates. Policyholders are now finding that the policies require more money- from a relatively modest two year increase to as many as 25 or more annual payments. And while an analysis might suggest an exchange of policies, the general statement is that the typical replacement of one policy for another is rarely to the clients immediate advantage.

WELFARE: Want to reduce welfare costs almost immediately while not taking eligible people off the role? Apparently fairly simple per the new rules instituted by New York City. Experienced caseworkers checked each applicant and where they lived. But nearly 50% did not reside at the address they gave- 5.5% did not have an address. Only nine in several thousand who were rejected ever came back to claim they were eligible. They also found that 60% of 18,000 applicants over a three month period lied. Identifying those that did not need full support reduced outlays by 5.5%. Many had other income or were double dipping into other counties. Another new requirement is that any able body worker on welfare must make 40 job contacts over a 45 day period. Those that didn't had to work 23 hours a week for the city. The work requirement alone produced a 27% drop in applications. Unfortunately none of these measures should be new or startling. It's simply common sense that should have been initiated many years ago. We could have seen our budget deficit about half of current amount if more people took responsibility. (Seem like a harsh statement? Not in my business.)

MEDICAL DIRECTIVE: A medical directive may be ordered by writing to The Medical Directive, PO Box 6100, Holliston, Mass, 01746-6100, 800 214-4553. (Two for $6, five for $11). This is similar to a living will- indicating how you wish to be taken care of if something happens to you. However a letter to Dear Abby indicated how easily these may be circumvented by your physician (though getting more difficult) or by the fact that the person to whom you have delineated the responsibility of carrying out your wishes (no tubes, life extending procedures/operations) may be under such emotional stress that they are unwilling to carry out the directive to let you die peacefully. I have identified such problems with clients in the past and am even been selected as the impartial representative to make the clients request to the physician and to be sure they are carried out. So review your directive- will the family member you have selected be able- under a lot of stress- to do what you requested?????

ASSET ALLOCATION: As indicated previously, it is putting assets in different places- U.S. stocks, Foreign stocks, bonds, high yield funds, small cap, etc., etc. But different people have vastly different opinions on how to allocate what. In The August issue of Fee Adviser, six different mangers had Stocks at 46%, 45%, 20%, 55%, 72% and 56%. Bonds ranged form 20% to 60%. That's a huge difference in what I initially thought was going to be more agreement in percentages. That's why you need to do a lot more homework before selecting willy nilly.

SEPTEMBER, OCTOBER, NOVEMBER, DECEMBER, JANUARY: From 1890 to 1994, the average return for September is a negative 1.17%. This is true for both the DOW and S&P 500. Last year I commented on a report that October was also a bad month for securities because many managers make last minute adjustments for end of year reporting (no they actually don't wait until December) and sell their dogs then. A professor a Wharton School of Business did a study which showed that October, over 105 years was a negative 0.42%. This year it was down 0.5%. But a up market starts in November and continues for about six months. Per the Stock Trader's Almanac, since 1950, November has produced average gains of 1.5%. Two different studies show December with 1.8% to 2.06% gains and January even better with 1.5% to 2.14%. (Undoubtedly had to do with the different time frames measured.) Lastly, during the last 13 elections, the market has gained 12%. My only major problem is the HUGE consumer debt. It has grown 30% in the last few years. Also, more debt payment is past due.



MORTGAGE INTEREST DEDUCTION : 44% of this benefit goes to the top 5% of owners. Scrapping the deduction altogether would terminate a $51 billion dollar subsidy and would probably reduce interest rates overall since homeowners would refuse to accept the current rates. They are very obstinate since it is one of the last tax deductions available.

Gross Income % of Households % of subsidy

Under $9,999 18.4 -----

10,000- 19,999 19.1 -----

20,000- 29,999 15.8 1.5

30,000- 39,999 12.2 3.8

40,000- 49,999 9.1 6.3

50,000- 74,999 13.7 22.0

75,000- 99,999 5.7 21.9

100,000- 199,999 4.1 27.6

200,000+ 1.1 16.5

Some say that the loss of deduction would hurt the home market and fewer people would own homes. Perhaps, but take a look at international home owner figures.

% of Home ownership with Deduction

U.K. 68%

U.S. 64%

France 54%

Netherlands 47%

% of Home ownership withOUT Deduction

Australia 72%

Canada 63%

Japan 62%

Germany 39%

WOMEN vs. MEN: A Merrill Lynch study showed that 63% women versus 71% men save money for retirement. When they do save, it is only 1/2 as much. Further, A Working Woman study found that only 28% of women put money into growth- the majority of funds were in money market and other "safe" investments. Another Working Woman study said that of 1,000 women sampled, 96% said they saved for financial independence., However 70% reported not understanding enough about investing and financial planning to make smart decision. Supposedly that's why 54% frequently put off financial decision for fear of making a mistake and that only 48% actually invest on a regular basis to reach their financial goals.

401(k) BORROWING: Many employees have been borrowing from their retirement plans to fund various causes- too much in fact because they don't have enough left to retire upon. If you need to borrow, review this form to see if it's better to take from your 401(K) or your home. 21% took a loan from their 401(k) in 1993, up from 15% in 1988.

1. What is your marginal tax rate ________

2. Subtract line 1 from 100% ________

3. What is the annual interest rate

you would pay on a home loan ________

4. Multiply 2 x 3. The figure is your

AFTER TAX cost of borrowing

5. What is the rate of return on

your 401(k) ________

If line 4 is greater than line 5, borrow from your 401(k)

If line 5 is greater than line 4, use a home equity loan. Of course what #5 indicates is what your 401(k) is earning, not what it could or should. Big Difference.

TV: By the time a child enter the first grade in the U.S., he or she has already spent the equivalent of three school years in front of a TV. Per Dear Abby, "no other country in the world has permitted such unmitigated trash to be aired during the hours children are accustomed to watching". Children that have computers spend less time in front of a TV. By the seventh grade, according to one study of 1,200 families, those children that had computers spent "only" 11.9 hours watching TV while the computerless children spent 12.8 hours per week. In the forth through sixth grades, girls spent 8.9 hours with a computer; boys 7.2 hours. In the seventh and eighth grades boys spent 12.4 hours at a terminal; girls, 11. In high school, it was 12.3 hours for boys; 10 hours for girls. While this is nice to see, the study does not state what they were actually doing on the computer. Was it video games? Trashing on the Internet? Spending just slightly less time in front of a TV but hours upon hours in front of a terminal viewing even worse trash only promotes further concern.



RISK: As stated previously, investors are not necessarily adverse to risk but they are absolutely adverse to LOSS. An 11 year study by the University of Michigan that investigated household finances saw their income drop 50%, at least temporarily due to layoffs, a disabling illness, death or change in marital status. The problem was more severe for women since they were nearly twice as likely as men to fall below the poverty line following a financial catastrophe. It is therefore understandable that many like to keep money in something "safe" when they don't understand the nuances of investing. What is not acceptable is not understanding (or attempting to understand) the nuances of investing when it is the key to financial independence when they retire. Unfortunately few really spend that much time dwelling on their future.

BIG MORTGAGES: So you own a home and want to take out a second. Well, you figure that the bank won't loan more than the standard 80% to 95% maximum loan to appraised value. But how would you like a loan that is 125% to 150% of appraised value? Impossible? Apparently not. If you have other assets- stocks, mutual funds etc. The lender ends up making a real estate AND a personal loan. The rate is above normal and there might also be a 2% fee. Closing is apparently very fast- two weeks. A caveat applies with interest deduction. Since the loan consists of real estate AND a personal loan, the IRS might contest part of the deduction as personal interest.

Other interesting loans are 100% financing for custom home buyers who want to buy their lot and build a special home. One program requires they deposit $5,000 or $10,000 into escrow- then the bank funds the entire loan. The rate on the short term loan is bank prime plus 1%. After construction is complete, a permanent loan at prevailing rates pays off the construction loan plus covers the entire property.

Lastly, here is a unique loan for a business owner who does not want to divulge his entire life and financial history to the bank- absolutely necessary in almost all cases. With this loan- from $203,000 to $1,000,000, the business owner provides essentially nothing. The hitch is that the maximum loan to value is only 60% and the property has to be appraised twice. Also, the buyer pays as much a 3/4% higher interest rate.

CONVERTIBLE BONDS: These might be viable for conservative investors who don't want the movement of the stock market per se but would like to be involved IF their stock really started to move. You therefore buy a bond that can convert into the stock of a company. The bond normally yields less than straight bond. Here are some features:

IMPAIRED RISK ANNUITIES: This bears repeating. If you are elderly and UNhealthy, an insurance company rearranges the payout to reflect a shorter lifetime. One recent example had a 63 year old man with $152,796. Under healthy conditions, the company would have paid $1,130 per month with a life with 10 year certain. But the company had adjusted him to a 68 year old and upped the payments to $1,228- a $98 per month difference. In another example, a 75 year old woman wanted $1,200 per month. If healthy, the annuity would have cost her $167,133. Nut since her health was poor, the company had her as though she was 79 years of age and the annuity cost her $147,122- a savings of $20,000+. Shop around for possible better deals.

WE'RE SOOOOO GOOD!!!: The brokerage houses that push their own funds tout their capabilities in outperforming the market. But Mutual Funds magazine recently noted that they typically underperform the market consistently. Why? Part should be obvious to the astute investor. Their high ongoing fees coupled with front and back end charges significantly reduce the opportunities of beating no load funds. In the five years ending July 19%, the average broker house fund returned 67% versus 75% for non brokerage funds. Over ten years its 194% versus 227%. Other pundits noted that brokerage houses are much more adept in- and interested in -marketing than performance.

Finally, "acknowledging a brokerage house for having the best fund family on Wall Street is like handing out first prize in a tallest dwarf contest: Anyway you look at it, the winner still comes up."

FREDDIE MAC: (SF Chronicle) On July 12th, Freddie Mac (they buy billions of mortgages each year from institutions) changed how it views your finances in regards to getting a home mortgage. In essence, it is telling all the sellers that they should utilize the credit scores developed by the services of FICO or MDS. Using sophisticated formulas, the programs reduce all your personal data and credit history into a numerical score. You probably need a 660 on FICO in order to qualify for a loan- but a 700 or 800 is all the better (scores range from about 400 to 900). (On the MDS scorecard of 1 to 1,300, you want the lowest score.) If you score above 660 on FICO. the lender only needs to do basic underwriting. Between 620 and 660, Freddie Mac will required more extensive work ups on all aspects of a borrower's history. Under 620, probably forget it- buy a tent.

CAPITAL GAINS: The newly passed budget cuts call for a 50% reduction in capital gains for investment held over one year. Someone in the 39.6% bracket would have capital gains taxed at 19.9%. Someone in the 28% bracket would have the capital gains taxed at just 14%. A WSJ article indicated that an investor in the highest tax bracket could suffer a loss of 10% but still end up better by waiting to sell at the new rates rather than selling now. Lower tax brackets could even lose more and supposedly still be better off.

CONFLICT OF INTEREST: Analysts at brokerage firms that determine "sell" orders on the companies they follow may find that the company excludes them and the firm from further underwriting business. The WSJ says that analyst may be excluded from meetings, outing, and conference calls with top executives and their firms may not underwrite business for a period of time. Some analysts cave in and compromise their work. Others may delay a sell signal and use the euphemistic "hold".

FUND MANAGER: A fund manager had this to say about stock picking. "It's critical to avoid one of the great pitfalls in this business, the tendency to say "I made a mistake, so I'm a horrible person". The point being that not all decisions are going to be perfect, so if you find an investment that is not working, change. You're not married to it and no one is going to (or should) think less of you for it (unless you put all your eggs in one basket. Then you can be called stupid). He added, "it's equally wrong to think you walk on water because the market will dunk you quick." That is the major reason I must to do so much research and reading.

STUPID: Nope, not my words this time but from the Cambridge Human Resource Group, Inc, stating that "workers are financially stupid". A survey of 310 human resources executives at corporations revealed that 32% said that personal financial problems were taking a toll on worker productivity and indicated that financial problems and their effect on workers as the most pressing workplace issue that has been overlooked.

INDEXES: (Kiplinger's) Here are some indexes as of August, 1995. The Dow is included since it is what a lot of people focus on, but primarily you look to the S&P.

............One Year Three Years Five Years

S&P 26.0% 13% 12.0%

Dow Jones 29.2 14.4 13.0

Russell 2000 20.1 16.5 12.9

Russell 3000 24.9 13.5 12.5

Morgan Stanley 2.0 13.0 5.0

EAFE*

* International Funds (Europe Australia Far East)

FHA: The Federal Housing Administration loans may be a little more complicated in obtaining than conventional mortgages, but will allow a lower down payment and an ability to carry more debt. With conventional mortgages, you're percentage of income allowable to be spent on housing is 28%; with FHA, it's 29%. Under conventional mortgages, the percentage of income that can be spent on total debt is 36%; with FHA, it's 41%. That's a BIG difference. Additionally, FHA will allow the down payment, as small as 3%, to be totally gifted by a family member or friend. FHA no longer requires a purchaser to include child care costs in the calculation of monthly debt; it now includes overtime, bonuses and part time employment and in April, 1994, it reduced the premium for one time mortgage insurance premium form 3% to 2.25% of the loan amount. If you finance the insurance premium, it is 0.5% of the loan amount.

DIABETES: It has increased three fold since 1958. But as with almost all conditions, they could be severely reduced in severity or completely eliminated by exercising regularly and watching your weight. Per Dr. Eastman of the National Institute of Diabetes and Digestive and Kidney diseases.

BETA: Beta is a reflection of the activity/volatility of a particular stock or fund as compared to an index- such as the S&P 500. Supposedly those stocks showing higher volatility (greater than 1.0) should outproduce the market overall (S&P 500). However studies by Eugene Fama of the University of Chicago, long a proponent of the efficient market- finally said that beta does NOT work. He essentially said that beta is an indication of past results only and should not be used a as a predictor of future results. Essentially, the volatility of a stock and its return are totally separate. I did notice this about 1986 or 1987 when computer studies on funds were first offered. Just because a fund had a low beta did NOT mean it would produce LESS than the S&P 500. If you could find the best stocks within that grouping of beta less than 1.0, it would be possible to beat the S&P 500. But which stocks, which interpretation of economic history is best, which fund manager can do this, ad infinitum? And that's where we still get back to indexing. IF a manager could find these stocks, her/she could make millions more than anyone else. But they are few and far between. Studies have shown that at least 75% of fund managers underperform the market. So what to do? Use some form of indexing as a basic strategy and use other funds that are currently outperforming the market (many tend to do so for at least some period of time). If the economics change, possibly change your funds. If you used no load funds, you can change without front or back end loads (or 12b-1 fees as well) and move to something else better suited to the economics or that is more defensive, if necessary. If you can't do that, buy an index fund solely but be aware of the possibly bumpy ride.

P/E RATIOS: The price divided by earnings is major tool used by analysts to determine if the market might be over or under valued. The historical average is around 14- A Financial World article said that, as of 11/95, it had a mean of 14.7 going back to 1952. If the P/E is, say 10, then it means that prices could increase to the 14.7 average. If the P/E is 20, then prices will probably decrease (or earnings increase) to the historic average. In 1991, it was higher than 26. So where are we now, at least according to FW. About 15.7. So supposedly no "major" problems with that. But also noted previously, the payout on stocks is at a 100 year low of only 2.3%. Problem? Some analysts indicate yes, that is sure to cause a bear market. But the cause is due to a historically low payout ratio of only 38% versus the average of 50% since the 1970's. The high retained earnings (instead of paying out the money as dividends) has been used to buy back shares and to reduce debt- not bad things in themselves. Again, perhaps no major problems. Further, inflation is low and probably going to stay that way. In fact, and as previously mentioned, the CPI may be reduced in itself by the Bureau of Labor Statistics since its method of calculation has been overstated. That could reduce inflation immediately by 1/2% and provide some nice economic news. That's not to say we won't have a correction that could reach 10% (considered normal) but there's nothing on the horizon that shows real bad news for the market.

ERROLD F. MOODY JR.

BSCE, LLB, MBA, MSFP, PhD

2295 W. Ave 133

San Leandro, CA 94577

Phone & Fax 510 352-4127