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

TOO MANY: In 1986 there were 25 companies offering 45 different annuity contracts. Now there are at least 65 companies offering 450 products.

ALZHEIMERS: The number of Alzheimers will triple in the next decade. This will totally cripple Medicaid and Medicare. And caregivers.

COLLEGE (USA Today) Students attending four-year public colleges and universities in 49 of the 50 states will feel the pinch of tuition hikes ranging from 1.7% in Montana to 39% in Arizona. Only Mississippi kept tuition at 2002-03 levels.

Sallie Mae, the country's largest provider of guaranteed loans, granted $6.8 billion in student loans during the first half of 2003 — compared to $5.6 billion in loans issued during the same period in 2002.

IRAs: IRA rollover money has increased form $20 billion in 1980 to $2.47 trillion in 1999.

CAREGIVERS:

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 employed caregivers are women.

DECISIONS, DECISIONS: (Mark Lepper, Stanford psychologist) Here is why the human being can't pick mutual funds- or a lot of other stuff. Ask someone to pick a chocolate from a plate of six. Later, ask him to choose one from a plate of 30. Statistically, he'll say the chocolate from the plate of 6 is better. Why's that? It's not too many choices but too little information about what you are missing. People like having a lot of options but only if they have enough information to make sure they haven't left something better on the plate.

Think about this- there are over 10,000 funds.

IT AIN'T YOUR GENES: roughly 90% of people with severe heart disease have one or more of four classic risk factors: smoking, diabetes, high cholesterol and high blood pressure.

THIS WILL MAKE A BAD SITUATION ALL THE WORSE: Officials say they expect to cut Medicare payments to doctors by 4.2 percent next year. "Physicians want to keep treating Medicare patients, but there comes a point where it is just not economically reasonable,"

HOT AND COLD (NY Times) In a recent experiment, Loewenstein tried to find out how likely people might be to dance alone to Rick James's ''Super Freak'' in front of a large audience. Many agreed to do so for a certain amount of money a week in advance, only to renege when the day came to take the stage. This sounds like a goof, but it gets at the fundamental difference between how we behave in ''hot'' states (those of anxiety, courage, fear, drug craving, sexual excitation and the like) and ''cold'' states of rational calm. This empathy gap in thought and behavior -- we cannot seem to predict how we will behave in a hot state when we are in a cold state -- affects happiness in an important but somewhat less consistent way than the impact bias. ''So much of our lives involves making decisions that have consequences for the future. ''And if our decision making is influenced by these transient emotional and psychological states, then we know we're not making decisions with an eye toward future consequences.'' This may be as simple as an unfortunate proclamation of love in a moment of lust or something darker, like an act of road rage or of suicide.

PENSIONS: Underfunded pension liabilities at troubled U.S. companies doubled this fiscal year, and could exceed $80 billion with airlines accounting for nearly a third of the deficit. And yet the market continues to rebound.

The Pension Benefit Guaranty Corp. also told Congress its deficit has grown to $5.7 billion mid year. The deficit for the entire fiscal year ending Sept. 30 last year was $3.6 billion. This gives the U.S. agency less money to bail out any troubled company retirement plans.

Many experts believe that the quasi-public Pension Benefit Guaranty Corporation (PBGC) may require a massive bailout by US taxpayers.

Fine- but where would the money come from??

GETTING OLDER: By 2030, 20 percent of the population, or 70 million people, is expected to be 65 years or older, compared with almost 13 percent, or 36 million today. Retirees will take $670 billion from their investments for living expenses in 2012, up from $134 billion in 2001

RETIREMENT: within the next five years, 70-80 percent of all airline pilots will retire and by 2005 – just two years from now – 50 percent of all federal workers will be eligible for retirement. That will be part of bigger trend in which 76 million baby boomers are scheduled to retire, while only 44 million “GenX’ers” will join the workforce.

WHAT A CUT UP: Per the American Society of Plastic Surgeons, approximately 6.6 million Americans had plastic surgery in 2002.

401(K): the average 401(k) account lost only 7.9 percent of its value in 2002, even though the average stock fell by 22 percent.

Why such a small loss? Most accounts are so small that new contributions made up for the falling values of older investments. Among the 15.5 million accounts studied, the average balance at the end of 2002 was a too-small $39,885. About 16 percent of investors' assets were in their companies stock.

JOBS: The number of married-couple families in which both husband and wife were employed fell by 368,000 to a 2002 annual average of 28,873,000. It was the first decline recorded since the Bureau of Labor Statistics issued its initial report on the employment characteristics of families in 1993. The average number of households in which neither spouse was employed grew by 235,000 in 2002.

CAREGIVER BURNOUT: (Dr. M. Ross Seligson) Being able to cope with the strains and stresses of being a Caregiver is part of the art of Caregiving In order to remain healthy so that we can continue to be Caregivers, we must be able to see our own limitations and learn to care for ourselves as well as others.

It is important for all of us to make the effort to recognize the signs of burnout, In order to do this we must be honest and willing to hear feedback from those around us. This is especially important for those caring for family or friends. Too often Caregivers who are not closely associated with the healthcare profession get overlooked and lost in the commotion of medical emergencies and procedures. Otherwise close friends begin to grow distant, and eventually the Caregiver is alone without a support structure. We must allow those who do care for us, who are interested enough to say something, to tell us about our behavior, a noticed decrease in energy or mood changes.

Burnout isn't like a cold. You don't always notice it when you are in its clutches. Very much like Post Traumatic Stress Syndrome, the symptoms of burnout can begin surfacing months after a traumatic episode. The following are symptoms we might notice in ourselves, or others might say they see in us. Think about what is being said, and consider the possibility of burnout.

Feelings of depression.

A sense of ongoing and constant fatigue.

Decreasing interest in work.

Decrease in work production.

Withdrawal from social contacts.

Increase in use of stimulants and alcohol.

Increasing fear of death.

Change in eating patterns.

Feelings of helplessness.

Strategies to ward off or cope with burnout are important. To counteract burnout, the following specific strategies are recommended

Participate in a support network.

Consult with professionals to explore burnout issues.

Attend a support group to receive feedback and coping strategies.

Vary the focus of caregiving responsibilities if possible (rotate responsibilities with family members).

Exercise daily and maintain a healthy diet.

Establish "quiet time" for meditation.

Get a weekly massage

Stay involved in hobbies.

By acknowledging the reality that being a Caregiver is filled with stress and anxiety, and understanding the potential for burnout, Caregivers can be forewarned and guard against this debilitating condition. As much as it is said, it can still not be said too often, the best way to be an effective Caregiver is to take care of yourself.

SPLIT DOLLAR REGS: If the executive owns the policy, the employer's premium payments are considered loans to the executive, on which the executive must pay the employer market-rate interest or be taxed on the difference between the market rate and the actual rate.

 If the employer owns the policy, the executive is taxed on the economic benefit received from the executive's interest in the policy cash value and current life insurance protection.

HEALTH COSTS: (Kaiser Family Foundation and the Health Research and Educational Trust) The typical health plan for a family of four costs $9,068 a year, a 13.9 percent increase from last year, according to an annual survey by the

Employers, particularly large corporations, still pay the bulk of that cost - 73 percent on average. Nonetheless, over the past three years, the employee's share has risen an average of nearly 50 percent, to $2,412 a year.

EFFICIENT FRONTIER: David Loeper of Financeware.com noted that , "the only thing "proved" by the Brinson Hood  and Beebower study is that pension funds are diversified. The only way r-squared could have been low was if pension funds ignored the prudence of diversification and concentrated their assets in non diversified portfolios or radically timed the markets.

The results of the study have been misinterpreted to mean that the asset classes you hold, regardless of whether they are diversified or not, are the driving forces of your investment results. It has been held out mistakenly as the "proof" that Modern Portfolio works.

To create an efficient frontier, a mean variance optimizer is applied to risk, return and correlations of asset classes. Lately, schotastic optimizers running Monte Carlo simulations have been used for "better" asset allocation optimizations for the optimization to be valid and prudent. One needs to have a high confidence level in all of the inputs to the optimizer.....that is..... risk, return and correlations between asset classes. One slip up on the  estimates and the resulting efficient frontier can put us squarely in inefficient territory. Having studied this for the past years,   I am almost of the opinion that the way most optimizers are run in practice is nearly a contrary indicator of future portfolio efficiency. That has to do with the inputs, not the formulas and the reality of our inability to accurately forecast risk, return and correlation. "

My comment- the reason that so many people have lost money is the wholesale reliance on people who place wholesale reliance on MPT as a static format. As stated here and in my book, worldwide, national and local economics keep changing- hence the reason why I provide so much commentary to this specific area. As this changes, certainly so does risk. You might be able to determine that if you are astute. Part and parcel is the what might be the change in the rate of return. That can only be guessed at- but sometimes it falls into place when you simply view interest rates and how the FED will probably act. Next- and an almost impossibility- is how the correlation of various asset will interrelate with each other. That is more than a guess and the reason why adjustments are so precarious.

So some say  just stay the course and be done with it. I disagree and the best real life example is 2000 forward. To just stay put and lose 40% or more is ludicrous. To keep putting money into the market- via the (wrong) dollar cost averaging- is also absurd. That you may not be totally correct in the movement of each and every asset when the economic world goes topsy turvy is better than being totally wrong.

I do not advocate market timing- trying to hit the highs and lows. But a blind focus on staying the course is almost as bad. A review and understanding of investing fundamentals is mandatory. But so is a consistent analysis of economics and adjusting as necessary. You adjust for risk first and foremost. You will get most of the returns of the best of the market- but not always. For example, in the 90's I used the S&P 500 which, at times, held as much as 29% in tech. But I refused to do any more tech.

In the alternative, you will miss most of the lows- but not always. For example, in 2000, I was still in the market when the tech market melted. But in short order, I had most of my clients totally OUT of equities and stayed there until this year.

Perfect? Of course not. Reflective of risk. Yes- and that, I believe, is the duty of a professional.

MORE TAX SHELTERS:(WSJ)  A tax shelter, known as "lease-in, lease-out," or LILO, was so egregious that it became the emblem of the government's battle against tax shelters in the late 1990s, frequently cited by Treasury Department officials who were seeking new legislation to crack down on abuses. In a LILO transaction, a corporation typically would lease a major public facility, such as a subway or a town hall, then lease it back to the public authority that owns and operates it. That allowed the corporation to take advantage of big depreciation deductions associated with the structure.

YET ONE MORE REASON WHY I DID NOT HAVE CHILDREN:

Institution 2003-04 tuition* Increase from 2002-03

University of Arizona $3,593 39.0%

University of California $5,437 30.0%

Oklahoma State University $3,748 23.9%

Texas Tech University $4,745 22.7%

Iowa State University $5,028 22.3%

* Based on in-state tuition and fees; Source: National Association of State Universities and Land-Grant Colleges

FINANCIAL LITERACY: (Greenspan) Improved education of Americans in the area of financial literacy is critical if the country is going to combat financial fraud.

Greenspan said the financial marketplace has grown increasingly complex since the era four decades ago when all Americans needed to know was how to write a check and open a savings account.

He said this increased competition was good for consumers but with the larger array of choices came a need for more financial education so that consumers can make the best choices and avoid falling victim to unscrupulous practices.

"Consumers empowered with the information to make educated financial choices are less susceptible to fraud and less likely to become entangled in financially devastating credit arrangements,"

IS THIS TRUE?: In late 2003, the Federal Reserve has said it expects to keep interest rates low for a "considerable period."

One result of this unusual commitment is that the Fed's target federal-funds rate, at 1%, sits three percentage points below the 10-year Treasury note yield. In market parlance, the "YIELD CURVE" is exceptionally steep; over the previous 50 years, the spread averaged 0.84 percentage points.

Why is it so steep? Partly because investors aren't sure about the Fed's commitment. Many economists think the Fed won't raise rates for a year or two, but futures markets see a possible rate increase in nine months or so.

IT'S ALL ABOUT THE MONEY- (Forbes) The average net profit margin at publicly held mutual fund firms was 18.8% last year, blowing away the 14.9% margin for the financial industry overall; the S&P 500's average was only 3%. This in a business that owes $2.1 trillion of its nearly $7 trillion in fund assets to a very easy sale--tax-deferred retirement plans.

And here's to stupidity- The nation's 95 million investors in mutual funds are overwhelmed by the competing claims of 8,300 funds. They often are clueless about how to win at a fund game on which their financial futures depend: Despite clear evidence to the contrary, 84% believe higher fees buy better performance, according to an academic study last year.

The mutual fund business grew 71-fold (20-fold in real terms) in the two decades through 1999, yet costs as a percentage of assets somehow managed to go up 29%. The recent market doldrums have caused a slip in assets to $6.8 trillion, prompting the industry to plead poverty--and foist yet more fee hikes on investors. MFS Capital Opportunities lost 25% of investors' money in 2001 and another 30% in 2002. In April it raised fees $0.05 per $100 invested to offset the smaller base over which to spread expenses.

As far as breakpoint sales- Nearly a third of fund investors eligible for quantity discounts on sales commissions haven't been receiving them, a study of 43 brokerages found. The average discount missed: $364.

Funds are sold, not bought. If they were bought by rational investors the low-cost, buy-and-hold index funds would have a much bigger share of the business. As it is, chasing after hot funds and short-term performance has yielded poor returns and big tax bills. Half a century ago funds held stocks for an average of five years; today the average holding period is 11 months. All told, for the average taxable investor, taxes, fund expenses and sales commissions eat up 3% of equity funds' assets each year

I THINK I WILL COMMIT A CRIME- Current law and federal policy do not prohibit fugitive felons and parole or probation violators – those who have not been convicted of a crime involving a Social Security program – to serve as representative payees. Currently over 3,000 fugitive felons are believed to be acting as representative payees for Social Security beneficiaries, dealing with an estimated $19 million annually.

The Congressional Budget Office estimates that $525 million will be paid in benefits directly to fugitive felons over the next 10 years if this practice is not halted.

TIME TO INVEST?: In the early part of this year, it was almost anyone’s guess as to where the economy might go. Then we got some very strong productivity numbers, surging to over 8% this last quarter. Consumer sentiment is high and spending has been strong as well. Along with other factors, I did opt to have most investors move to various equities. Good move? Well, I think the economic scenario might get even better. Although some of the retailers are still concerned, I think you are apt to see strong Christmas spending. I certainly did not say that last year.

MORTGAGES: From 1992 through first quarter of 1994, about $1.1 trillion worth of mortgages were refinances. From 2000 through 2002, the total was $2.7 trillion.

In the 1990-91 recession, consumption fell 0.4%. In the 2001 recession it rose 2.1% even while real disposable income rose just 0.1%. So spending was kept high even while income growth stalled. Part of the reason: refinancing and cash-out refinancings put more money in consumers' pockets.

Recognize this volatility- Over the past two years, mortgage rates moved a quarter percentage point in a single day only once. Over the past three weeks, it's happened eight times.

Here's the likely source: Holders of mortgage-backed securities can use treasuries to hedge their portfolios. Treasuries help them lengthen or shorten the average age of the cash flows in their portfolios and protect them against prepayment from refinancing. In general, when mortgage rates fall, increasing the chances of prepayment, MBS holders buy treasuries for this protection. When mortgage rates rise, decreasing the prepayment rate, MBS holders sell.

This wasn't a problem when mortgage refinancing was a rare option. Now, the value of mortgage-backed-security debt has exploded relative to treasury debt. According to John Lonski of Moody's Investors Service, the ratio of MBS to treasuries was 67% in 1993. Now its 175%. That means huge swings in treasuries when mortgage rates move because more MBS holders are buying and selling relatively less in treasuries.

A half-percentage point increase in mortgage rates could force the sale of $300 billion in treasuries.

the average size of a loan has risen substantially. It now stands at $166,000 for an agency loan, one conforming to standards of Fannie Mae or Freddie Mac. Back in the early 1990s, the average value was $100,000.

The larger the loan, the more sensitive the holder is to smaller changes in interest rates. Before a borrower might have required a full percentage point move to make refinancing worthwhile. Now a half percentage point move will do.

U.S. TREASURY RELEASES REVENUE RULINGS TO STEM THE INAPPROPRIATE USE OF LIFE INSURANCE AND ANNUITY CONTRACTS: (Tony Steuer) The Treasury and the IRS have issued rulings (2003-91 and 2003-92) aimed to curtail the use of insurance and annuity contracts for tax avoidance. The ruling targets the practice of "wrapping" the contracts around other types of investments. Life insurance and annuity contracts receive favorable treatment under the Internal Revenue Code, including deferring tax on the investment earnings of those contracts, because they serve important goals, specifically providing life insurance protection or a means of saving for retirement. These arrangements seek to defer tax on the investment earnings of those contracts. The Treasury Department believes that these life insurance contracts and annuity contracts are purchased primarily as a way to avoid current taxation on investment earnings and not for life insurance protection or a means of saving for retirement.

They got that right.

RETIREMENT (NY Times) In a nationwide survey of 500 people aged 35 to 55, and with household annual incomes of $50,000 to $125,000, more than half said they expected their primary source of income in retirement to be their employer-sponsored plans. Other, less significant sources included personal savings, Social Security and inheritance.

The difficult economy and stock-market losses in recent years have forced many of them to re-evaluate the age at which they will be ready to retire. The average age at which respondents would like to retire is 55, but a majority do not expect to be financially prepared to do so until they are nearly 62.

"Boomers are finally realizing that they will have to work longer than they ever thought."

Terribly sorry about all that, but any boomer than thinks they understand the numbers with retirement have got a screw loose.

CARS: AUTO insurance premiums show no sign of leveling off as rates increased an average of 13% since 2002. The Insurance Information Institute (I.I.I.) expects a 6% increase in auto rates for 2004. Reasons: Rising costs of medical care,   vehicle repair, jury awards, automobile theft and fraud.

EXPECTED: (Census bureau) The 2002 bad economy sent 1.4 million more people into poverty last year. Nearly half of the newly impoverished were children

MOST INSURERS WILL NOT COVER FOR THE FULL VALUE OF YOUR HOME (WSJ) all but a few insurers will pay claims only up to a certain maximum percentage above the insured value stated in the policy. State Farm and Allstate, for instance, will pay up to 120% of the insured value. If your policy was written for a $200,000 home that would cost $300,000 to replace, those companies would cap their claim payments at $240,000.

every $1,000 increase in a home's insured value causes the premium to rise about $4.

IS IT TIME TO TAKE THE KEYS AWAY? (Michael Plontz) Caring for a loved one requires walking a fine line. We want our loved one to maintain as much freedom as possible while staying as safe as possible. One of the difficult decisions to make―, keeping the previously mentioned goals in mind, is whether to let your elderly loved one get behind the wheel of his or her vehicle.

According to a WebMD article entitled “The Car Key Decision,” one in eight drivers in America today are over 65 years old. One in five drivers will be over 65 in 25 years. That makes this issue a big deal.

Per the Insurance Institute for Highway Safety, 12 states now require that older drivers renew their licenses more often than younger drivers. In Illinois, drivers 75 or older must take a road test each time they renew. Also, they must renew every two years starting at age 81, and once a year after 87. A similar bill in California last year brought about the typical politically correct opposition who called the bill “ageist.” Ultimately the references to age were deleted.

One thing remains certain. It is not an easy subject to approach with a loved one, but concern for their safety overrides that. The main concerns for older drivers are cataracts, decreased reaction times, and loss of peripheral vision. There are operations now that can fix these eye problems. Reaction times can also be improved. Computer training sessions on making quick driving decisions can improve reaction times by sometimes 40% or greater. These programs are not yet widely available, but others are. The 55 and Alive class given by AARP helps sharpen seniors’ driving skills.

However, there comes a time when most loved ones must be persuaded to give up their keys. While some give them up easily, most need persuasion by their doctor and you. If more drastic measures need to be taken, social workers, police officers, and the Department of Motor Vehicles may be enlisted to help. By filing a hazardous driver report with the DMV. They will revoke the license, and most people will comply--some with bitterness. This approach may appeal to the loved one’s respect for authority figures.

This is by no means an easy issue or an easy task, but when the safety of your loved one is at stake, all the stops must be pulled out.

RENTERS INSURANCE: nearly two-thirds of those living in U.S. rental properties are currently risking severe financial loss by going without renters insurance.

TOOTHY CRITTERS: National Institute of Dental and Craniofacial Research, the rate of toothlessness has dropped 60% among adults aged 55-64 since 1960.

RICH AND POOR: Even were you living on just $91 a year, there are more than 219 million people in the world subsisting on less. And if you make $20,000 a year, you’re in the top 7.7% of this planet’s richest people

MARKET TIMING: (NY Times) Two finance professors, Jason T. Greene of Georgia State University and Charles W. Hodges of the State University of West Georgia, analyzed the price that longer-term investors in foreign funds had paid for market timers' pursuit of such strategies. Armed with a database of fund inflows and outflows from 1993 to 1998, the professors calculated that market timers in foreign funds had earned an average of more than $1 billion a year at the expense of long-term investors. For the average long-term investor in foreign stock funds, that meant a reduction in annual returns of about 0.5 percent.

COLLEGE CREDIT CARD DEBT. 78% of college students have their own credit cards today, up from 11% in 1998, with an average of five cards per student and an average debt load of about $3,400.

Three quarters of students use their student loans to pay credit card bills instead of tuition and 3 out of five freshmen have maxed out their credit cards by the end of their first year.

TEACHERS, 403(B) AND 457- (Dan Otter) EGTRRA allows teachers to contribute $12,000 a year to a 403(b) and $12,000 a year to a governmental 457(b), which has traditionally been offered to state and local government employees. In many cases 457(b) plans were also made available to educators. Teachers have always been allowed to contribute to both plans, but prior to EGTRRA they were limited to the total aggregate amount of the 457(b), which was only $8,500. Instead, savvy educators contributed only to the 403(b), where they were allowed to stash up to $11,000.

Catch-up fever: Up to $41,000

As great as contributing $24,000 a year is, it's the catch-up contributions that make educators want to kick up their heels. Bear with me -- the following gets a little wild, but it's well worth the effort.

Governmental 457(b) plans contain a special "catch-up" allowance called the "final three-year provision" for those approaching retirement (assuming they haven't contributed the maximum amount in prior years). This provision, which used to limit participants to an additional $15,000 over a three-year period, now permits up to 200% of the elective deferral limit, or $24,000 in 2003. This catch-up provision kicks in during the three years prior to "normal" retirement age (as defined by the plan).

Example: If a worker will reach normal retirement age by 2009, he or she can take advantage of the final three-year provision in years 2006, 2007, and 2008

MERRY CHRISTMAS

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

those who qualify can defer $12,000 to the 403(b) plus $24,000 to the 457(b) for a total deferral of $36,000.

Additionally, anyone age 50 or older can contribute an additional $2,000 (in 2003) to the 403(b). This means a worker could conceivably make $38,000 in contributions during 2003.

Note that the 457(b) also allows workers age 50 or older to make catch-up contributions. However, participants who take advantage of the final three-year provision cannot also take advantage of the age 50 catch-up provision under the 457(b) plan.

The 403(b) has its own additional catch-up provision called the "15-year rule." This special catch-up provision allows participants to increase their annual contribution by $3,000 more than the current $12,000 limit (as of 2003). To qualify, workers must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and cannot have contributed more than an average of $5,000 in previous years.

Contributions made under the 15-year rule cannot exceed $3,000 per year, up to a $15,000 lifetime maximum (under current rules). Add that to the aforementioned $38,000, and a worker could make a whopping $41,000 in contributions during 2003. It is highly recommended that you consult a tax or investment professional (such as TMF Money Advisor) before taking advantage of any of these provisions.

HAPPY NEW YEAR