FEBRUARY 1995
COMMENTARY ON INVESTMENT AND ECONOMIC ISSUES
ERROLD F. MOODY JR. BSCE, LLB, MBA, MSFP, PhD
CERTIFIED FINANCIAL PLANNER
REGISTERED INVESTMENT ADVISER
OOOHHH, WE SAVED SO MUCH!!: The closings of all the excess military bases were to save us LOTS of money. But of the 67 bases that were to close, 26 either never closed or opened under a new name or function (the Presidio "Park" for example). Estimates of keeping these bases open over the next five years will cost more than $15 billion. The GAO, the investigative wing of Congress (is that an oxymoron?) says that the revenues for property sales are far less than expected from the 120 base closings because 88% of the land was either retained by the Defense Department or transferred to other federal or state agencies. 110,000 of the 192,000 acres of land available at 37 bases was either retained by the Pentagon or transferred. Projected revenues estimated at $4.1 billion were revised to $1.2 billion in 1994. (That's 71% LESS than projected!)
DAMAGES: The U.S. Supreme court is going to decide if investors have the right to get punitive damages- those charges above and beyond the actual damages. The suit was brought by Shearson who lost an arbitration to an Illinois couple for $159,327 in actual damages and $400,000 in punitives. Punitive damages are seldom filed in arbitrations, but when they are, it is usually for a VERY good reason. And that generally is gross misconduct and lack of supervision. Screw 'em.
REAL ESTATE ASSESSMENTS: (CF) While this commentary addresses primarily corporations, recognize that many homeowners should follow their example. It involves taking a hard look at your tax bill and challenging the bill if necessary. Many corporations found that in a time of lowered real estate values, their tax assessments were going up. Many have appealed the bills and got refunds.
National Taxpayers Union booklet "How to Fight Your Property Taxes", 325 Pennsylvania Ave, S.E., Washington, DC 20003 ($2.00);
"Digging for Gold in Your Own Backyard: The Complete Homeowner's Guide to Lowering Your Real Estate Taxes", REI Press, 36 S. Washington St. Hinsdale, IL 60521 ($24);
"Fight Higher Real Estate Taxes and Win" a video for $39.95 from
Better Insights Inc. 800 321-3439.
FOREIGN RISK: (Montgomery Securities, 1993) Standard deviation is
a measure of risk since it shows how much a return deviates from the norm.
The greater the spread, the greater the risk.
Argentina 115%
Mexico 26
Brazil 76
Peru 89
Chile 25
Portugal 25
China 38
Singapore 19
India 38
Taiwan 48
Indonesia 28
Thailand 31
Korea 29
Venezuela 71
IFC Global Emerging Markets 20.8%
MSCI EAFE 20.4%
FEDERAL TRADE COMMISSION: Public Reference Branch, Washington, DC 20580; 202 326-222. Has brochures on preventing credit problems and financial fraud.
FEDERAL RESERVE SYSTEM: Division of Consumer and Community Affairs,
20th St. and Constitution Ave. NW, Washington, DC 20551; 202 452-3693
MEDIAN INCOME: In 1993, the median income of U.S. households was $31,241, down 1% from 1992. Median income means that 1/2 were making more and 1/2 were making less.
REAL ESTATE: Real estate represents about 2/3 of the national wealth- about $50,000 per capita. However over the past several years, total land values have decreased from $6 trillion to $5 trillion (1994).
ANNUITY INTEREST RATES: This is something that you may not have much interest in, but it is info that I need to tag for future reference, so here goes. First, annuities pay interest at many different rates depending on when they got money in, whether they combine it with previous funds, etc. Under a
NEW MONEY PLAN- all of the annuities purchased in a specified period of time- say a year- are managed together. This approach protects those who invested in high interest rate years. Their annuity rates are not diluted by investments made to fund annuities purchased when interest rates were low.
PORTFOLIO RATE PLANS- the portfolio rates paid is based on the overall return on the invested assets of the insurance company. This rate applies regardless of when an annuity was purchased. It treats everyone the same- though it is quite obvious that those who did invest in high interest rate periods are getting "shortchanged".
MARKET VALUE ADJUSTMENT ANNUITIES- this is a way to lock in an interest rate
for a specified period of time- say one , two or three years. At the end
of that period, the annuity rolls over to a new rate for the same or different
guarantee period. Often the annuity holder has the right to surrender the
policy without charge if the new rate is less than the old rate. Some market
value adjustment annuities make an adjustment upon surrender of the annuity
based on the market rates over the time the annuity was held (suffering a
loss if the bonds in the portfolio have gone down in value in the interim).
This can significantly increase the total surrender charge.
REAL ESTATE MYSTERY: According to a survey of 300 recent and prospective
buyers, about 25% are totally lost when it comes to understanding what is
going on. More than 27% said they were most unfamiliar with financing and
loans. Many expressed bafflement over the escrow and closing process. Only
16.3% said they felt confident in their knowledge of the entire home buying
process. So, if you were going to buy a home in the next five years, who
would you use to help you? Sales agent? Nope! Real Estate Broker? Nope again!
Why? Because their knowledge of real estate is limited as well. Further,
they owe an obligation to the seller. (Sorry, they do not work for you!)
Use a buyer's broker. They have saved, per two studies, around 5% for new
buyers over the normal process of a agent or broker since they act
exclusively for the buyer.
CALIFORNIA's OVERBUILDING: (UC Berkeley Center for Real Estate and Urban Economics) California built far too much space in the 80's- averaging about 30 million square feet annually between 1980 and 1990. Since 1990, about 26 million feet has been added in TOTAL- or only 9 million feet per year, with some reverting formerly single tenant or owner occupied buildings over to the for lease stock, rather from new construction. In 1993, there was no net increase in office stock. Office space vacancies are higher in 7/94 than in 1990. Further, statewide absorptions have dropped from over 25 million feet in the 1980's to only 7.1 million feet in the 1990's and only 4.0 million feet in 1993. Even at the absorption rates of the 80's, Los Angeles has over a four year supply and San Francisco has over a ten year supply.
A distinct difference exists however with industrial space. Statewide, industrial vacancy rates are about the average nationally- 7.9%.
NATIONAL OSTEOPOROSIS FOUNDATION: info on how to treat and prevent crippling osteoporosis. 800 223-9994
STATE TUITION PLANS: Didn't expect this, but the IRS lost a case in trying to tax Michigan's prepaid tuition plan. Parents put in money which essentially guarantees to pay for a child's education when he/she matriculates.
GETTING OLDER: (SF Chronicle) Some decline due to aging is inevitable. But at most, only 15% over 65 are classified by gerontologists as frail. The rest, about 26 million, retain their cognitive and creative abilities. In fact, Dr. Lydia Bronte says "there often is a huge growth spurt sometimes after 50. Another Dr. noted that as people get older, they get more and more different from each other. Differences that emerge frequently include a previously undisclosed talent or ability. Researchers believe that certain factors- such as having more time, reviewing life, losing self consciousness- facilitate creativity. Within the context of less self consciousness is the onset of a new boldness and willingness to take risk. One of the myths about old age is that people become more cautious and conservative as they get older. But older people have less fear of being criticized. They are less fearful of doing something creative for the first. time. As one senior said, "I don't mind if people think I'm crazy, doing what I'm do at this age. I think that people who aren't eccentric are apt to be boring".
And new developments- like the extension of the life span, feminism, the aging of baby boomers- encourage it further.
Another recently published longitudinal study indicates that mental acuity and the propensity to create do not diminish inevitably with age. A lot of the decline thought to be normal in the aging process can be slowed or delayed. A doctor noted that the old saying," use it or lose it" is absolutely true.
LIFE INSURANCE: Several years ago when Executive Life went down in flames, S&P and literally every other rating firm were at AM Best's throat for not downgrading the company fast enough. But that doesn't mean that S&P or Duffs & Phelps were any better. A 123 year old Canadian firm was recently seized by regulators. Best had recently downgraded its rating to B++- still called very good. S&P reduced its rating to A+ and Duff And Phleps went to AA-. None correctly determined how bad the problem actually was.
HOW TIMES HAVE CHANGED: A 65 year old today has a 1:4 chance of living till 90. In 1940, the odds were 1:14.
About half the middle aged couples living today have at least two parents still living. compared to just 10% at the turn of the century.
Two thirds of all men and women who ever lived past 65 are alive today.
LEVEL TERM INSURANCE: Just a few months ago I commented on the fact that level term policies- certainly 20 year and possibly 10 year- were going to go up substantially in price if certain regulations by the NAIC (National Association of Insurance Commissioners) were successful in enacting certain laws which would force insurers to set aside large claims reserves. That apparently is not going to happen- at least maybe till 1996, so the good rates for these cheap policies will remain intact for the time being.
AIDS: The AIDS Clinical Trials Information Services 800 874-2572 provides free info about clinical trials and drugs for HIV and AIDS and can refer you to reimbursement program for FDA approved drugs that may not be specifically approved to treat AIDS.
The same type of information is also available from Project Inform, 800 822-7422
DRUGS: If you don/t have insurance and cannot afford the cost of
drugs, ask your doctor to call the Pharmaceutical Manufacturer's Association
800 762-4636.
MULTIPLE SUPPORT AGREEMENT: When several family members contribute
over 10% support to an individual, but no one individual contributes over
50%, then they all can enter into a Multiple Support Agreement where all
but one of the contributors waives his/her right to claim the individual
as a dependent.
CANCER INFORMATION: 800 4Cancer (422-6237) Monday through Friday
from 9am - 7pm has specialists who can search the NCI's Physician Data Query
data base for info on state of the art treatments and clinical trials.
CANDLELIGHTERS CHILDHOOD CANCER FOUNDATION: 800 366-2223 has volunteer
pediatric oncologists and on staff legal experts to help you with health
or disability insurance claims. Free copy of The Candlelighters Guide
to Bone Marrow Transplants in Children by writing to Candlelighters,
7910 Woodmont Ave. Suite 460, Bethesda, MD 20814
CHILDREN'S ORGAN TRANSPLANT ASSOCIATION: 800 366-2682, provides grass
root fund raising for adults or children who need bone marrow or other
transplants and provides an accounting system for donations.
RETIREMENT POLL: Oppenheimer Funds and Money magazine recently did a study on retirement and came up with the following comments. They discovered that based on current savings and investment rates, nearly eight out of ten households will probably have less than half of the annual income they will need to retire comfortably on. There were several myths that were identified of participant's investment outlook for retirement.
1. "When investing for retirement, I should go with the lowest risk investment I can find". Their survey found that almost half of pre retirees think they should take less risk with their retirement assets than with other investments. My comment- while it is true that one might consider less risky assets as they get closer to retirement, pre retirees need to recognize that the historical returns for bonds and cash are dismal at best. Only more aggressive investments- such as stock- can hope to provide the growth necessary to build up he retirement kitty adequately. (Requires constant monitoring however)
2. "Real Estate investments will provide the highest return over the next 25 years." Housing was seen as the second most attractive investment behind stocks. My comment- real estate did exceptionally well in the 70's and early 80's. But the economic cycle for housing- particularly in conjunctions with a significantly lower inflation rate and an older society- probably means that real estate is not going to do better than inflation overall. And if that is only 3% or 4%, that won't provide what is needed. In fact for the past 10 years from 1/1/84 to 12/31/93, residential housing grew at a 4.4% average annualized rate while the S&P 500 index did about 15% (though over a 50 year period it has done about 10%).
3. "Bonds outperform stocks and are therefore a better investments" Almost 1/2 of respondents thought bonds frequently outperformed stocks. My comment- during the mid 80's to 1993, the lowering of interest rates did provide some significant returns in bonds and at a lower risk as well. But the odds of that happening again are slim. Historically and statistically, bonds do NOT outproduce stocks over any significant period of time- though in short, specific time frames, it has happened.
4. "Most stock market investors get wiped out at least once in their lifetime". About half the respondents believe that stock market investors get wiped out at some point in time. My comment- sure it can happen, but about the only way that is possible is by owning a single issue of stock that goes bankrupt. Any reasonably educated investor uses diversification (at least 13 issues) and asset allocation to limit the downside risk. And if you recognize some basic investment technique and pay attention to economics, losing more than 10% in a bad time overall shouldn't ever happen. Further, since 1943, there is no 20 year period where stock have showed a negative return.
5. "It's not important to have a globally diversified investment portfolio". Only 34% of pre retirees thought it important to put some of their holdings in international stocks and bonds. My comment- any major teaching in asset allocation talks about reducing risk overall by using non correlated or randomly correlated issues to offset risk, yet with retaining opportunity for return. International stock investments provide such correlation and potential growth. It might also be possible to use international bonds, but with relatively flat returns, any return can be eroded by currency exchange. I think international bonds should be used sparingly.
6. "I can collect full social security benefits at age 65" More than 2/3 thought they would get full benefits at age 65. My comment- if you are approaching age 65 in the very near future, that is an acceptable statement. However, Congress has changed the age for full benefits of younger employees to 66, 67, etc. It would not be surprising to find other changes in the near future to push the age to 70. People are living longer and healthier and are still capable to participate in the work force. Further, social security simply does not have the funds to make all those additional payments anyway.
7. "I'm not going to need that much money to retire comfortably". More than 2/3 of pre retirees thought they could live comfortably on 60% or less of pre retirement income. My comment- I never used these rules of thumbs since each person, family and budget is totally unique (different manuals have the budget from 50% to 90% of current spending). The only way to objectively determine what you might need is through a very concise budget. I have made up one which is the most complete of anything I have ever seen. You may call me for a copy.
8. "I won't have to support my parents or children after I retire." Most agreed with that statement, but 36% thought they might have to support their children in retirement and 27% thought they might have to support their parents. My comment- children- even those with college educations- have found getting a job to be much harder and many have returned to the parent's nest since it's the only way they can survive. But the real problem is that many elderly parents are moving back in with their children. This will even become a major political issue in the future as the U.S. becomes older.
9. "Inflation is under control so I'm better off with safe investments like CD's or money market funds." Investors still do not comprehend how inflation will erode their purchasing power. 58% of respondents had NO idea how long a 4% inflation would take to cut their purchasing power in half (do you know?). My comment- even with lower inflation, you still need to consider taxes which will reduce the return of CD and money market funds considerably. Only more aggressive and growth oriented investments can stave off the effects of inflation and taxes.
10. "In the end, how well I retire depends mostly on luck". My comment- how long you might live may depend somewhat on luck, but how well you live during retirement is determined by how much effort- mentally and physically- you put into life in the earlier years. Learning about investments (and living for that matter) and how to use them properly is NOT luck.
MEDICAL CARE OMBUDSMAN PROGRAM: helps patients make knowledgeable
decisions about whether to undergo high technology, high cost procedures.
Fees are based on ability to pay. Send a self addressed stamped envelope
to 7200 Wisconsin Ave., Suite 410, Bethesda, MD 20814
NATIONAL BMT LINK: 800 546-5268. This is a clearinghouse of info on Bone Marrow Transplants, including up to date medical reports, a list of attorneys who handle insurance reimbursement cases and a peer support network
NATIONAL CHILDREN'S CANCER SOCIETY: 800 532-6459. Negotiates with insurance companies and hospitals on children's behalf and offers financial assistance for bone marrow transplant expenses.
RETIREMENT LIMITS: Under the GATT requirements, retirement contributions may actually drop. The current limits are indexed for inflation, but GATT requires that they use "rounding" formulas. For example, a 401(k) is currently $9,240, but under GATT's proposal, the limits would be rounded DOWN to the nearest $500 increment. The $30,000 limit on annual contributions to defined contribution plans would be indexed in $5,000 increments.
MEN vs WOMEN: (US News) There is a structural change taking
place in the employment sector. In the U.S., the number of nonemployed- the
total number of registered unemployed workers plus those that are too discouraged
to look for jobs- has doubled since 1970 for men age 25 to 55. In Britain,
France and Germany, it has tripled. Seventy percent of the jobs in Europe
in the second half of the 80's went to women and new entrants to the job
marketplace. In Britain alone, male participation actually dropped from 93%
to 84% between 1973 and 1992 while female participation rose from 53% to
65%. Part of the numbers is due to the fact that more women are willing to,
or want to do just part time work. Females accounted for 85% of British part
time workers, 66% in the U.S. and 91% in Germany. Yet in no OECD country
do more than 10% of the men work part time. Employers have hired- and will
continue to hire more part time workers because of labor costs savings (pensions,
health benefits) and simply because female help does not cost as much (as
least for now). How does this change our future? Women will account for more
and more jobs, but how will they move up in job security and growth remains
an unknown- though it will undoubtedly get better. Unfortunately, many male
workers may be in for a major jolt as they find their unskilled abilities
are worth less and less and they remain or will become simply unemployable.
Job retraining could make a difference, but the cost would be excessive.
Much of the retraining might not be necessary if more males got better educations
at the grade and high school levels. But that might not happen until we see
a restructuring of society back to basic family values. Also, it may be a
long time in coming.
PROGRAM TRADING: By definition it is the simultaneous purchase or
sale of 15 or more stocks valued at a total of $1 million or more.
FINANCIAL ADVISER: The Oppenheimer study also commented on how to
select a financial adviser. They suggested asking a friend, banker, attorney
who prepared your will to recommend someone. WRONG! Why? Because almost all
people getting referrals assume that the person making the referral has done
all the checking on the person being referred and that everything must be
O.K. As it invariably ends up, no one does any checking of the adviser at
all- particularly as it may address educational background, designations
or anything else. They also suggested seeking someone who has passed a series
6 or series 7 exam. WRONG! The knowledge to pass the exams has woefully little
to do with the real world or how to properly judge a suitable investment.
Much greater knowledge and competency is necessary. I have a lengthy article
on "Who Can You Trust, Who Can You Use, Who Knows Anything" that you can
request simply by giving a call. Follow that and you will rarely make a mistake.
PRUDENTIAL: As discussed previously, they agreed to pay back investors who had bought their limited partnerships in the 80's. The original estimate was something like $100 million which rapidly escalated to $350 million. Their exposure to date is now around $700 million in fines and reimbursements and the total exposure is currently estimated at more than $1.1 billion. A.M. Best rating company lowered Prudential's financial strength rating for the first time in 83 years (though it is still very high). Their sales have suffered and about 1,000 brokers have already left their fold. Pru might be able to ride it out because they apparently made an agreement with the U.S. Attorney's office that would avoid a criminal indictment as long as they didn't have any subsequent problems. Pru was accused of fraudulent sales tactics in the sale of more than $8 billion in limited partnerships.
U.S. MANUFACTURING: The U.S. is considered to be an efficient manufacturer. Costs rose just 0.2% in 1992 versus 12% for Japan and Germany. But one fact that I found most illuminating was that the U.S. has 35 PC's (Personal Computers) per 100 employees versus 15 for Germany and 9 for Japan. Never expected to see that much discrepancy.
HASN'T EVEN HIT THE FAN: Prudential is already buying back some tricky
mortgage backed derivative securities directly from small investors- to the
tune of $70 million from 1,000 investors. This includes payment of $10 million
several months ago to cover for losses on CMO's. Pru says that the trader
that provided the CMO's to brokers did not relate the actual dangers and
risks the CMO's had and that once they found out, they fired him. But, I
ask you, where was the knowledge about derivatives at the broker and supervisor
level? Is that to say simply that whatever they are told to sell they simply
do? What about their knowledge of products and ability- or is it always up
to someone else? Could it be they wanted the commission????
RETIREMENT: A pre retirement consulting firm asked retirees what
were their top priories for retirement. 25% said financial planning was first
while 24% said developing additional interests was second. You'd be surprised
how many people have no idea what they will do once retired and end up as
lost souls.
WOMEN: In 1992, they earned an average of $21,440 or about 70.6% of what men earned. About 60% identified stress as a serious problem- particularly for single mothers and women over 40 who hold professional or managerial jobs. Three out of five women said they have little or no chance of advancement.
14% of white women and 26% of minority women reported losing a job because of sex or race.
56% said they knew of female managers who quit because of a stifling atmosphere; 54% said they knew of female managers who left to find a less hostile environment. However 79% said they liked or "loved" their jobs.
The US Department of Labor noted that 59% of working women are in traditionally female, low wage occupations
31% of those making less than $10,000 per year have no sick leave
61% say the have little or no ability to advance
40% of those over 55 have no pension plan
34% of those over 55 have no health insurance.
ARTHRITIS: Want to avoid the crippling effects of arthritis when you get older? Then keep your weight in check. Recent studies have shown that carrying an extra 20 pounds around when you are 20 can boost the chances of getting arthritis by 50% decades later. The extra weight sets in motion a process of steady deterioration that may not be felt until the cartilage finally wears out when a person reaches 50, 60 or beyond.
INDEX: A new government regulation now requires mutual funds must provide information for at least 10 years or the life of the fund if shorter (not new) and compare it against the returns of an index fund (new).
Some indexes are fairly well known such as the S&P and Dow Jones. Your basic growth funds can be compared against those. However there are many other indexes that can be used for the specific funds investment criteria. Here is a review of many (Founders Funds Focus):
Dow Jones Industrial Average: this tracks the prices of 30 large industrial
companies traded on the New York Stock Exchange. They represent only about
2% of the total number on this exchange but comprise about 25% of its value.
The DJIA is price weighted- that is that a high priced stock moves the average
more than a low priced stock. Considering stock splits, dividends, etc.,,
it really is not considered a true barometer of the movement of the marketplace,
though it does get fairly close. But since it is the most well recognized,
at least for now, all newspapers, analysts, commentators and the general
public want to hear its movement first.
S&P 500: This is one of the best leading indicators of what the economy
is expected to do in the future. It covers the 500 largest stocks of the
New York and American exchanges and the NASD Over the Counter Market. It
represent about 80% of the value of the NYSE. The S&P is capitalization
weighted- each stock's price is multiplied by the number of outstanding shares.
This gives better capitalized blue chip stocks more weight in the index
regardless of share prices.
NASDAQ Composite: This index covers all the roughly 3,500 stock traded over
the counter. It uses capitalization weighting and better reflects smaller
and less well capitalized stocks on the NYSE or AMEX.
Value Line Composite: It is an index of about 1,700 NYSE, AMEX and OTC stock
that is unweighted. The component is simply an average of their prices. This
increases the value of the composite in monitoring small and mid cap stocks
since they are not overshadowed by large cap stocks.
Russell 2000: This is a capitalization weighted index of the bottom 2,000
of the 3,000 of the largest capitalized U.S. securities. It is one of the
most widely followed indexes for small capitalization stocks.
Wilshire 5000 Equity: This is the broadest based indicator. It's capitalization
weighted index includes literally all the actively traded U.S. issues.
International Indexes
There are two Morgan Stanley Capital International (MSCI) benchmarks.
The MSCI World Index is a value weighted global average of 1,472 securities
listed on the exchanges of U.S., Europe, Canada, Australia, New Zealand and
the Far East.
The MSCI EAFE Index a market value weighted average but it omits U.S. securities
and represents the stocks of Europe, Australia, New Zealand and the Far East.
Bonds
Lehman Bros has six broad indexes. They include all investment grade (BBB
and above) issues with at least one year to maturity and outstanding par
value of at least $100 million (US Government) and $50 million for all others.
Each index is market value weighted and includes the value of accrued interest.
The indexes range from those measuring a particular bond market sectors such
as Corporate Bond Index or Treasury Bond Index to indexes created by combining
the various sector indexes. For example, the Lehman Brothers Aggregate Bond
Index comprises the Lehman's Government/corporate, Mortgage Backed Securities
and Asset Backed Securities Indexes.
FED NUMBERS: The Federal Reserve in 1992 found that 33.7% of American families had money in stocks or mutual funds- up from 28.6% in 1989
In 1992, 11.2% were in mutual funds vs 7.1% in 1989.
Stocks and mutual funds a counted for 28.2% of all family financial assets in 1992- up from 19.6% in 1989. Part of the change was due to a flat or dropping market in residential housing
The shares in bonds dropped from 11% to 7.7% (primarily due to the lower interest rates).
Retirement plans amounted to 23% of all American family assets compared to 19% in 1989.
Nearly 40% of all families have 401(k) plans, IRA's or employer provided pension plans
57% of families said they saved some money in 1992.
OCTOBER DOLDRUMS: Investors get nervous in October because of major drops in the stock market during this particular month. But a rather obscure reason may be impacting these drops. That's because at the end of a year, a fund needs to report its realized gain by that time. However, if it waited till December, it wouldn't have the time necessary to do the accounting. So it ends up its accounting year in October (any gains after October are applied to the next year). Most importantly, the "accountants" tell the managers that if they have any losses they should book them now (sell them in October) since any losses can be used to offset the taxable realized gains. If funds have a lot of loser that years, the sale of bad stock in October can be extra momentum in driving the market down.
Statistically over the past 10 years funds have sold 13% more stock
in October that any other month- about $20 billion.
ESCROW FUNDS: The Department of Housing and Urban Development has published new rules prohibiting mortgage lenders from padding consumer escrow accounts- collecting more than needed to pay projected future costs. The new rule goes into effect in May, 1995. Many homeowners may find that their payments may actually go down. The basic rule is that whether you are a new or existing homeowner, the lender cannot charge more than 1/12 per month of the combined property tax, insurance and other recurring expenses that "are reasonably anticipated" to be due and payable during the next 12 months. On top of this, the lender is permitted to maintain a cushion as high as two months worth of the estimated total charges to cover unanticipated increases in insurance tax or other coasts. Some lenders are trying to get around this by revising their payments from escrow to happen only once per year instead of the normal twice. That way they can have a LOT more money in the till to make interest on.
REMODELING: The National Association of the Remodeling Industry has a toll free number you can call for remodeling advice and material. 800 440 NARI
FEDERAL INFORMATION: Sounds like an oxymoron doesn't it? Well, anyway, they have this toll free number where you supposedly can ask questions about anything in government- and actually get answers. It's operated by the General Services Administration and researchers have said it actually is pretty reliable and accurate. 800 347-1997
RETIREMENT PLANS: Congress has tried to reduce the use of retirement plans prior to retirement by imposing a 20% holdback of funds if you took the funds yourself instead of rolling them to the new company or to an IRA. For example, let's say you are 50, have $50,000 in a pension plan and are going to another firm. Let's also say that the new firm will accept the monies from your old firm. However, instead of transferring the funds directly to the new company, you opt to get a personal check for the $50,000 and then give it to your new company. That's a NO NO. By law, your old firm will only give you $40,000 ($50,000 minus 20%).(You will get back the $10,000 next year by filing a tax amendment.) In the interim however, you have been taxed ordinary income on the $10,000 that didn't go back in within the 60 day legal limit AND you will be charged an additional 10% penalty for a premature withdrawal prior to 59 1/2. I really thought this law would really stop many people from using these funds frivolously. But a recent article says that for workers from 21 to 50, only 21% to 26% transferred all of their money from a lump sum distribution into a new tax deferred plan.
PRIVATE CARE MANAGERS: For a list of managers, call the National Association of Geriatric Care Managers 602 881-8008 or write to 1604 North Country Club Road, Tucson, AZ 85716
DRUGS: Different drugs produce different results- we all know that. But putting them together with other drugs can reek havoc. The University of Maryland has several free brochures on the use of generic drugs, over the counter medications, vitamin and nutritional supplements, high cholesterol and even one on travel and medications. Send a self addressed stamped envelope to Madeline Feinberg, Director, Elder Health Program, University of Maryland School of Pharmacy, 20 North Pine, Baltimore, Maryland, 21201 410 706-3011
EAT YOUR VEGETABLES: Mother was right after all. Eating carrots is good for your health- maybe even better than anyone thought. Harvard Medical School said that eating spinach, carrots and oranges was particularly healthy. In a study of 87,245 female nurses, those who ate at least five servings of carrots a week had 68% less stroke risk than those that ate the rabbit food only once per month. But their ears got big. (Just kidding)
BUY and HOLD: As some of you are aware, I am not a proponent of the
strict buy and hold theory. Yes, stocks do outperform other assets historically
and statistically, but just buying something, even an index fund, can really
work against you if the economy goes really wrong and you are not paying
any attention. Take, for example, the early/mid 70's. Buying and holding
stocks during that period would have been fraught with grief and lost monies.
A new study by Grantham, Mayo, Van Otterloo & Co. of Boston shows that
when investors buy into the market when the prices are high (we recently
had a P/E ratio of a little over 18) suffered badly- even if they held their
stocks for 15 years thereafter. In other words, they are saying the market
never bailed them out (that's based on a present value of having taken the
money and invested it elsewhere). They took the 1926 to May 1994 stock history
and broke it into 68 ten year periods based on the level of the stock index's
dividend yield at the end of every quarter.
DIVIDENDS: A high dividend yield means a bear market since as share prices fall, dividends remain fairly constant and that boosts the yield. During the serious bear market in 1973/74, prices FELL 50% to 60% on average pushing the dividend yield up to 5%.
On the other hand, a low dividend yield is a sign of a bull market. Share prices top out while dividends rise more slowly. In the current bull market, the dividend yield on the S&P 500 is a low 2.85%. In the past 68 years, there have been 63 quarters, approximately 30% of the time, when the dividend yield fell below 3%.
Research shows that investors who bought into the market during low dividend periods typically earned a rotten 1.6% annual return for the following years when adjusted for inflation.
It basically points out what I always say and teach. Buying anything in a vacuum doesn't work. You need to stay on top of economics in order to get a decent return.
PRIVATE CARE MANAGERS: (SF Chronicle) These may also be called geriatric care managers and they can be hired to help perform difficult tasks when a parent (most cases) would get sick. Ordinarily, a son or daughter might have to take time off from work to try to take care of the elderly parent. The loss of income can be substantial and the emotional strain of dealing with the unknowns of Medicare and Medicaid can be enormous. For hourly fees ranging from $40 to $150, a geriatric care manager can help shoulder the burden for children who live too far away, work too many hours or have too many other family responsibilities to do the job alone. Flat fees can be as low as $45 a month for simply contacting or visiting a senior at home once or twice per month or as high as $1,000 for managing all the affairs of someone on total life support. (Don't confuse this with long term care or having an individual with the senior at all times- that is NOT what they provide.) Geriatric care managers general have a degree in a human services field such as social work or nursing.
"A care manager's first task is to evaluate a senior citizens overall medical, housing, social, emotional and financial needs. Most will make a home visit. They'll also consult with doctors and health insurance representatives."
"The care manager next designs a plan to meet and pay for the senior's needs and try's to organize community resources such as Meals on Wheels, homemaking services, visiting nurses and volunteer agencies".
Some basic questions to ask:
1. Request the candidate's curriculum vitae. Seek people with experience as hospital discharge planners, home health care agency care managers or geriatric social workers
2. Check on the caseload. According to an author on the subject, private care managers usually have case loads of 2 to 10 clients.
3. Is the person on call 24 hours per day. Do they have a pager?
4. Are there any potential conflicts of interest? For example if the manager refers the patient to other services, is there a kickback? What other sources of income does the care manager have?
ORGAN TRANSPLANT FUND: 800 489-3863 assists with community fund raising for organ transplants, including bone marrow transplants
MEDICARE & EMPLOYER HEALTH INSURANCE: If you are a senior and
have both plans available, which pays first, etc? etc? Find out by getting
the booklet titled "Medicare and Employer Health Insurance: How They Work
Together" by sending $2.00 to Medicare Beneficiaries Defense Fund, PO Box
USEI, 1460 Broadway, 8th floor, New York, NY 10036
MUTUAL FUNDS versus INDEX: Studies have shown that using a formula called R squared, 80% of the movement of most mutual funds may be accounted for by the general movement of the stock market.
PENSION MESSES: (AARP) As mentioned previously, the payments from IRA's and pension plans are one the most obscure and difficult areas in all of planning. Here are some further comments to make your life miserable.
First is the issue of putting retirement accounts into living trusts. At 70 1/2, you have to start taking annual distributions based on some complicated formulas using your expected lifetime and possibly that of a beneficiary. After you pass away, the beneficiary is to get the remaining monies over his/her remaining lifetime (simplified for brevity sake). However, if the trust was the beneficiary of the pension funds, the trust is considered to have a zero lifetime and all the retirement assets become IMMEDIATELY taxed. Nothing is left to grow tax deferred- a major, major boo boo.
Next is the use of a Qtip or Qualified Terminable Interest trust. By definition, a Qtip trust is set up by a couple with a certain amount of funds that, when the first spouse dies, the survivor gets income from the assets in the Qtip but has no right to change the ultimate beneficiaries of those assets. It was purposely set up that way (in most cases) so that should the surviving spouse remarry, he/she could not disinherit the children of the first marriage for the benefit of children of the second marriage. The Qtip is required to pay out all income to the survivor each year. But retirement plans, by definition, don't normally do this. They pay out funds based on life expectancy- definitely not the same thing. Therefore, if a plan distributes less that its full annual income to the trust, all the money in the plan is disqualified from the unlimited marital deduction and becomes immediately taxable for estate tax purposes. For example, if one had a $400,000 IRA earning 8%, then $32,000 would have to paid to the trust and then to the beneficiary. But if the IRA was to be paid out over 20 years, then only (roughly) $20,000 would go to the trust then, ultimately, to the beneficiary. By law, this wouldn't work and therefore all $400,000 would become taxable for estate tax purposes.
Another important note is that BOTH the retirement plan and the trust must specify that all the income must be paid out each year.
Pensions distributions require special handling and expertise. Don't
let this item slip by.
SOCIAL SECURITY: If you have never had to call social security in the past few years, you may be in for a surprise. They have fairly good customer service and handle difficult situations with efficiency and empathy. That is except for disability coverage. Though they are trying to fix this, the average time to review a disability appeal has risen from 212 days in 1992 to 327 days today.
DERIVATIVES: (FW) As mentioned previously, Bank of America dumped $70 million into a couple of funds to offset for the losses the funds took because of derivatives. But B of A wasn't the only bank of course. Barnett Bank, Union Bank, Wilmington Trust and Fleet and Northern Trust are others. The total of their money fund losses is about $250 million.
SEC REGULATION: Henry Kaufman recently told Congress about our outmoded regulatory system. "The problem for the financial system is the sweeping changes in the structure of financial institutions and markets have made our overall system of financial supervision and regulation obsolete."
MEDICATIONS: (Aging) For each new regularly scheduled medication, it suggests you ask your Doctor:
1. Why am I taking this medication
2. How long till I can expect to feel better
3. What should I do if I miss a dose
4. How will I know if the medication is working
For medications prescribed on an "as needed " basis, ask
1. How do I determine if I need it
2. What is the maximum does in 24 hours
3. What should I do if it fails to relieve the symptoms or if I experience an allergic reaction
Ask your Pharmacist
1. What are the generic and brand names of this medication
2. Is it likely to interact with other medications I'm taking now or with food, alcohol or cigarettes
3. Does it matter if I take it before or after meals
4. Are there side effects I should watch for
5. Should I follow any special instructions when taking the medications (i.e. taking with meals, observe driving restrictions)
6. Are there any instructions for storing this medication
7. When does the medication expire
INSOMNIA: I thought that this was a problem in itself, but apparently I'm wrong (gasp!). It's a symptom of underlying causes such as depression and psychosocial problems, pulmonary disease, arthritis, prostatic disease, pain, periodic limb movement and sleep apnea.
CENTER FOR DISEASE CONTROL: They publish a pamphlet on adult
immunization. To order write CDC, National Center for Prevention Services,
Division of Immunization, Atlanta, GA 30333; 404 639-3747
AMERICAN LUNG ASSOCIATION: 1740 Broadway, New York, NY 10019-4374;
212 315-8700
CATARACTS: For info write to Cataracts, Box 8547, Silver Spring, MD 20907; 800 358-9295
MEAT & POULTRY: For info on safe food handling and where to report problems, you can call the USDA's Meat and Poultry Hotline at 800 535-4555
NATIONAL SAFETY COUNCIL: 800 621-7615
WAGES: Feeling a little down? Well, that's where a lot of worker's income apparently went- down. It may not have been apparent per se since wages did actually go up in terms of what was received. It's just that when inflation is factored in, the total was a net loss. And while some people argue that the 80's was dominated by the rich getting richer, it was actually a decade of the poor getting poorer. Much of that was due to the elimination of jobs due to technological innovations. Those that benefited the most had a higher education and skills. As one senator pointed out, and I mentioned previously, "many people do not know that they do not have the skills to work in today's technological workplace". And why don't they know? Simple, because they don't read. People that don't read, don't know and will never find out.
M-1 & M-2: The Money Supply percentages of M-1 and M-2 have slowed since 1980 by about 2.5% to 6.1% and 6.7% respectively. At the same time however, average annual real output growth- largely dependent on labor force growth , capital formation and technological advances- has slowed only slightly from 2.8% from 1966- 80 to 2.5% since. Inflation has slowed by 2.3% from an average of 6.5% to 4.2%. Most recently, M-2 has been very very low. I question how you can sustain high inflation with such a low money growth rate. Maybe Greenspan has gone far enough.
OIL: OPEC controls about 75% of the world's oil and non OPEC controls the remaining 25%. Under current conditions, non OPEC countries have about 15 years of reserve life remaining. In order to keep up the 40 million barrels of day demand, non OPEC countries will need to add another $2,100 billion of investment. That may keep prices firm- and going higher in the future.
COMING HOME CHECKLIST: (For Better or Worse, Beverly Kievman) When caring for a patient that is just coming out of a hospital stay, there are a number of questions you need to ask in order to provide comfort to the patient AND the least amount of worry to the caregiver.
WHAT GOES UP............: Many funds promote their great return over a relatively short period of time under the pretense that they could be as good in the next time period. But buying the best fund, as shown in detail last month, is no precursor to future return. For example, if an investor had selected from the top 20 stocks funds in each year during the past decade, he would find on average, that they ranked only 284 (out of 681 funds) the subsequent year. Similarly, an investor who chose from among the top 20 funds from 1972 to 1982 would have found that they ranked, on average, 142 (out of 309 funds) in the subsequent decade 1982- 1992.
Types of stocks also fluctuate. Value stocks posted at 10.8% annual return between December 1991 and June 1994- quite a bit higher than the 5.1% annual return of growth stocks. But from March 1989 to December 1991, growth stocks outperformed values stocks 20% to 12.7%
MONETARY POLICY II: (FED Board of San Francisco & St. Louis) I know you have been waiting on pins and needles for the second part, so here goes. "Monetary policy works by affecting interest rates. Increases in interest rates raise the cost of borrowing and lead to reductions in business investment spending and household purchase of durable goods such as homes and autos. These declines in spending reduce the aggregate demand for the economy's output, leading firms to cut back on production and employment. On the other hand, interest rate declines stimulate aggregate spending and lead to increases in production and employment."
However much it would appear that this change by the FEDS could directly effect and impact the economy essentially the way they wanted, there are four factors that cause problems. First, spending decisions and economic activity depend on real interest rates- that is, market rates corrected for expected rates of inflation. Second, economic activity is likely to be related to both short term and long term interest rates, while the FED most directly controls short term market rates. Third, the FED is interested ultimately in measure of economic performance like inflation, real economic growth and employment. However, statistics on these variables may not be available for days, weeks or even months. Fine tuning without corroborating evidence is difficult, if not futile. Fourth, policy actions taken today will effect the economy only with a significant lag so that policy changes must be made in anticipation of future developments in the economy.
Real Interest Rates: Since it is difficult to measure expected inflation, it is hard to know the current level of real interest rates. And variations in expected inflation can make a big difference. In 1978, the federal funds rate was 7.93%, but inflation was 9.1%- that's a negative1.17% return. The federal funds rate today is 5.25%. If the market expects a 3% inflation rate, then we have a positive 2.25% projected return. "Further, the FED can only influence the level of real interest rates in the short run. Persistent attempts to keep real rates too low will initially generate an economic expansion that will lead to more rapid inflation. As individuals come to expect higher inflation, real rates will tend to adjust back to the equilibrium level. Further expansionary policy would be needed to keep the real rate down, leading to further increases in inflation."
Long Term Interest Rates: Long term interest rates can be expressed as the sum of an expected real return and an adjustment for expected inflation. Long rates essentially tell us what the market's expectations might be about inflation. If rates rise, then inflation is seen as going up- and vice versa. But. like all economic predictions, its not a perfect indication since it also moves with the expected rate of return.
Intermediate guides: In order to guide the economy properly, you need lots of info on a continuing basis. Unfortunately the statistics are reported sporadically. According to the San Francisco report, the FED does not have a single reliable intermediate target that could be used to guide the economy. (An intermediate target is defined as a variable that, while not directly under the control of the FED, responds fairly quickly to policy actions, is observable frequently and bears a predicable relationship to the ultimate goals of policy.) So the FED uses many variables for indicators of the current and future economy. Such indicators that have been proposed are nominal income growth, real interest rates, commodity prices, exchange rates and the price of gold. But since no one indicator is, again, perfect, it uses them all- though in various percentages. Most recently, rules for monetary base (currency plus bank reserves), M2, nominal GDP and the funds rate have all been studied in an attempt to reduce uncertainty. How's it all worked? Well, while sustained growth did flow nicely for about 10 years, 1994 was most difficult and we still are in the unknowns.
The FED Board of St Louis, in a further statement, noted that the effort to equate changes in interest rates with changes in monetary policy have met with frustration since interest rates can be influenced by so many other factors such as credit demand, expected inflation and the pace of economic activity in other countries. A separate factor is the amount of reserves that a bank is required to have on deposit. The Federal Open Market committee has increased the degree of pressure on reserve position six times in 1994. This also does not necessarily correspond to the movement of interest rates.
But after all said and done, there is direct evidence (which almost all would agree to anyway) that both the increase in short term interest rates and the pressure on reserves indicated a considerable tightening of monetary policy.
TRUSTS & ESTATES: The IRS lost a case last year and an appeals court says it is now O.K. for a trust to FULLY deduct fees for investment advice. The IRS contended that the deduction should be deductible only when they exceeded 2% of adjusted gross income.
NASDAQ: The Market for the Next Generation has under fire from the Attorney General for alleged improper trading of stocks. Apparently some brokers steer trades under "payment for order flow" where NASDAQ market makers pay commissions to brokerage firms to steer customers trades to them even though they may not initially offer the best price.
DISABILITY INSURANCE: The typical group policy pays 60% of income.
42% of disability claims to social security are INITIALLY rejected. (This statistic is VERY important since you must keep filing appeals.)
Some companies offer supplemental policies that can increase the amount that disability will cover. Still, it usually will not come close to 100%
Some polices have a problem with an increasing disability (such as arthritis) and partial disability since most disabilities start with an accident. For example, Lou Gehrigs disease, arthritis, etc. may creep up slowly, but never permanently disable. A simplistic definition in a policy may leave out these diseases and potential claims.
Some policies exclude pre existing conditions.
Some companies also do not allow coverage if you are able to work at all.
Some very restrictive plans will only cover disability if you qualify for social security disability- very very difficult and time consuming .
There may also be caps for coverage- in terms of the amount of money or in terms of time of coverage. For example, disability for mental and nervous disorders may only cover for one or two years.
401(k): Of companies with over 5,000 EE's, 96% offer 401(k)'s; firms with 1,000 to 5,000 are at 78%. Only 17% of companies under 100 EE's offer 401(k)'s. Some new plans cost $1,300 for setup and $18 per EE per/yr.
CFO magazine points out that 84% of 401(k) plans offer four or more investment options. GIC's are still the top offering at 84%, then index funds at 63%, balanced funds at 61% and growth stock funds at 54%.
But here is something REALLY new. Two NY firms are allowing retirees
to use their 401(k) money to purchase additional monthly benefits in their
corporate pension funds. Employees can take their pre tax income in an
irrevocable transfer to an annuity which will guarantee a payment for life.
However I find a problem with this. While the firm allows the purchase of
the annuity without commissions or transactions fees, I still bet most of
the retirees don't recognize the inherent problems with using primarily annuities
for retirement- low potential returns and lost liquidity.
INVESTING: WSJ says
1. Remember why you are investing
2. Look at your whole nest egg
3. Think in percentages
4. Invest regularly
5. Rebalance your portfolio
6. Consider taking more risk
DERIVATIVES: Supposedly there are three questions that will be posed in lawsuits regarding failed derivatives:
1. Did the investor have the authority to make the investment- this is really for institutional investors
2. Did the dealer adequately describe the risks
3. Who was responsible- the dealer or the investor- for determining
whether the investment was suitable.
IF YOU KNOW HOW TO READ AND WRITE, YOU CAN THINK. IF YOU KNOW HOW TO THINK, YOU CAN CONTROL YOUR MIND
FREDERICK DOUGLAS
STUPID: I get chastised every so often for calling some one or group
stupid. Here is the definition of stupid from Dear Abby. "Stupid people don't
ask questions; they just go on not knowing." An ignorant person however is
quite different- at least by my definition. They also recognize the problem
(usually through reading) but then they ask the questions to try to get the
answer. That does not guarantee success, but you can rarely fault anyone
for trying. From my own standpoint, I consider my self one of the most ignorant
people you have ever met because I recognize how much there is to know and
how much more I can still learn. I may never reach the level I seek, but
I wouldn't even get close if I didn't try. So, how trying are you?
ELDERCARE: About 25% of the workforce caregivers are forced to take
a step backwards at work. Many of the qualities that make a great employee-
perfectionism, commitment, thoroughness, loyalty- can also draw them in deeply
to the details of elder care. Researchers have found that the ailing elder
might need any of 300 combinations of services in passing from one life stage
to another.
1994: Neither bonds nor stocks did well that year. But here is a surprising statistic- it is the first year since 1974 that both securities declined in value. I did not avoid the loss either- though it never was as much as 5% total. Is that good? Well, let me put a few things in perspective. I don't use derivatives or leverage, so unlike Orange County, I didn't have severe losses (or simply look stupid). I also don't use individual stocks. As stated many many times, the analysis of single issues takes a LOT of time and expertise to master and if it goes wrong, it REALLY goes wrong. For example, General Motors- a well known stock that many people own- lost 45% from its high in 1994. Instead, I use diversified mutual funds with, hopefully, good analytical managers and overall asset allocation. This method should not only give generally acceptable gains and lower risk, but also help avoid/reduce losses.
The value of the asset allocation method can avoid the following. Assume you EXCLUSIVELY used JUST utility funds (or even worse, selected individual stocks). You suffered a loss of 20% or more in 1994. (The utility index was down 21% for 1994. It was the worst loss since 1974.) But proper asset allocation would have tempered that loss considerably by not having all the eggs in one basket. That is further commented upon by a FW article which reinforces my philosophy....."more than 90% of the difference in investor's portfolio returns has been attributable to the asset category they're in and not how well they've selected stocks or bonds. What that says is you don't want to take big swings for the fences, because if you're wrong, it takes a long time to recover. If you're going to try to manipulate your portfolio to take into account what you think is gong to happen to the economy and to asset classes, you want to take pretty small bets".
Anyway, will utilities come back to be an acceptable investment once again? Sure. But that's not the real question. It's WHEN! Recognize that a 20% loss requires a 25% GAIN just to breakeven. That could take years. Also recognize there has been a major restructuring of many utility companies.
1992 and 1993 were the two LEAST volatile markets EVER in the history
of the stock market. 1994 was more the norm. Can you stand the ride? You
can if you understand the nuances of the marketplace and are paying attention.
Otherwise, playing the market without knowledge is a fool's game.
1995: So what's the prognosis for this year? Probably better than last since Greenspan is close to finishing the upward movement in short term rates. That's due to some statistics that show that the economy tends to slow when the Federal Funds rate exceeds the nominal GDP growth. They are about even now. And when the year over year rate of change in the Fed Funds rate begins to slow, long term rates peak. And here's another from FW- During the past 18 presidential terms going back to 1912, the stock market has risen 100% of the time in an Administration's third year. The average increases has been 22% (25% if the President is a Democrat).
Here's some more ammunition for investing. Financial World's 1995 Forecast says that there will be no recession in 1995 and, further, no need to be concerned about the old business cycles we so used to fret with. That's because the cycles are not only different, but longer. We will have a drawn out recovery led by productivity improvements. "Growth is slow, but it's very high quality because it has not been stimulated by artificial fiscal stimulative policies which only means more inflation down the road. It's not being led by consumption". "Investment is a much bigger proportion of growth than normal"
Additionally, most economists expect a worldwide economic recovery at a 3.6% expansion rate versus 2.5% for the U.S. This was reinforced by the CEO of Ingersoll Rand who said that "it's our position that the international markets hold greater growth rates over the next five to ten years than our domestic market" (though Mexico's decline & Japan's earthquake will slow the process).
So it looks like a time to buy stock and maybe a time to buy long term bonds. That said, my continuing pessimistic tone that has been stated since 1984- BALANCE THE BUDGET!!!!!! If there is a serious effort here, we can see growth. But if the political emphasis is solely on tax reduction, we could see an increase in the deficit over the next couple years. That could screw up everything.
BONDS: 1994 was the second worst year for 20 year Treasury's and the worst ever for 5 year notes.
Ibbotson Associates noted that an investor who bought securities mimicking its five year government bond index in 6/54 and thus suffering from bad timing- would have waited 39 years until August 1993 for the index to return to its earlier level. It also noted that the average recovery for bond prices after the start of a bear market is about 14 years compared to about five years for the stock market.
GET THE LEAD OUT: A proposed regulation for home sellers would require all sellers of homes built before 1978- about 2/3 of all homes today- to give buyers a 10 day opt out period before going to closing. It apparently emanated from increased lead in blood levels due to the paint on older homes.
Sellers would be required to provide all would be purchasers a disclosure
form warning of the presence of lead based paint simply because the home
was built before 1978. The law requires that no buyer is to become obligated
to the contract unless the seller provides for a 10 day period to be able
to check out whether there is any old paint that could cause a problem. While
I say that making buyers aware of the problem probably should be mandatory-
and maybe there should be a negotiable element in a sale- the fact that another
governmental agency is being involved with statutes, paperwork, etc., etc.
will do nothing more than put more government on our back. Part of this latter
comment is due to he fact that subsequent studies after the law was written
have shown that lead levels have dropped considerably in the past years due
to low lead gasoline and the banning of lead in food and drink containers.
Further, other studies have shown that proper education and counseling of
homeowners about the hazards of lead based paint have proved very effective
in reducing the levels of lead in children's bloodstream. Lastly the problem
has been effectively identified for low income homeowners of inner city homes
in the Northeast. So why put everyone under the same blanket? Anyway, it's
nice to know our politicians are at work(?).
FREE MONEY!: Assume you bought a home between December 30, 1990 and January 1, 1994, that you had to pay points on the loan (normal) and that part of the points were paid by the seller or builder. Under the old law, points paid by others are not deductible on a residential home. That is until the IRS changed their mind. Now- up until April 30, 1995- these homeowners are able to amend their return for the year that points were paid by others and use them as a deduction that year. Depending on your tax bracket at that time, you could get back $500, $1,000 or whatever without any fear of reprisal. There apparently are hundreds of thousands of people who fit the bill, but there will probably only be a few that will make the request in time. But it is free money for those that fit the requirements. Hurry, hurry, hurry!!!
ORANGE COUNTY: The WSJ noted that many attorneys were guilty of giving
bad advice regarding the $1.7 billion loss due to derivatives (brilliant
observation). As a professor noted, the risks were "like a trustee encouraging
an orphan to borrow money to go to Vegas and play Roulette".
ORANGE COUNTY TREASURER ROBERT CITRON SAID THAT HIS INVESTMENTS WERE BASED ON THE ADVICE OF PROFESSIONAL ADVISERS.
WRONG!!!!
THEY WERE BASED ON THE ADVICE OF PROFESSIONAL SALESMEN
Citron also said that part of the problem was caused by the continuing pressure by supervisors "eager to maximize investment profits". He indicated that there was scant scrutiny by the Orange Board of Supervisors of his risky investment strategy. The Supervisors did require annual reports, but said his comments and writings were were so unintelligible that they simply dismissed them. However, since he was making so much money, they also never further reviewed his portfolio or the inherent risks. Part of the blame must rest there.
But Citron, per a WSJ article, was clearly a victim of a major male disease- testosterone poisoning. As one person said who knew him, "Citron only knew 30% of what he was talking about." Now he says that he wasn't as sophisticated as he thought and was duped into buying unsuitable investments.
As regards Merrill Lynch, they apparently offered to buy back the derivatives in March 1993, though I somehow doubt they were doing it solely for philanthropic measures. Rates at that time were actually still going down (and if they did drop, the derivatives could have made a profit). Further , when rates did rise in 2/94, ML apparently recommended no change in strategy.
Frankly, I think they are all guilty of stupidity brought about by enormous male egos and teeny brains.
1993- GOOD; 1994- OOPS: (WSJ) Here is how some categories compared in returns from the two years.
1994 1993
Asset Backed 0.7 6.9
Eurodollar Bonds -1.2 8.9
High Yield Bonds -1.2 17.2
Mortgage Backed -1.6 7.3
Government Agencies -2.7 10.4
Domestic Bond Index -2.8 10.0
Investors Grade Corp -3.4 12.4
Intermediate Term Treas -3.8 8.2
Preferred Perpetual Stock -5.7 9.8
Convertibles -7.1 18.9
Long Term Treasury -7.5 17.2
30 Year Zero Treasury -18.7 37.2
BANKS: The NASD is considering special regulations for B/D firms
that sell mutual funds in banks. According to American Banker, they would
include guidelines by which banks market investment products, including
advertising practicing and referral fees. Additionally, the OCC, the Federal
Reserve Board and the FDIC are developing rules to protect bank customers
from unsuitable investments. The rules would give customers the opportunity
for redress if they lose money because a purchase wasn't proper for their
needs.
RADIO HUCKSTERS: Years ago I did a national financial call-in radio
show and I was absolutely amazed at the problems people would allow themselves
to get into. Well, one of the nations's biggest talk show hosts- Sonny Bloch-
recently got sued by 280 investors in 33 states because he recommended a
wireless cable system on his program. Bloch says that he is just a paid huckster
and that listeners should recognize that. But listeners still thought he
wouldn't recommend anything that wasn't "above board", paid advertisement
or not. Further, these were unregistered securities (Bloch should have been
able to at least have determined that) and investors lost $9.38 million.
One investor, who dropped in $20 grand said, "we thought he was for the consumer
and whatever he said was gospel." Callers to the 800 number were sometimes
played taped statements by Bloch extolling the investment. He's also a defendant
in another suit because of another of his paid advertisements in "precious
metals" coins had people losing millions as well. Nonetheless, these "investors"
are a bunch of stupid people. Dropping in $5,000 over the phone for a high
risk investment they did not understand on the recommendation of someone
they had never met is just asking to get screwed.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
2295 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127