JULY 1996
COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR. BSCE, LLB, MBA, MSFP, PhD
CERTIFIED FINANCIAL PLANNER
REGISTERED INVESTMENT ADVISER
AND IN THIS CORNER: Trying to determine which way the economy is going and whether inflation is a factor has become more and more difficult (it was never easy though) due to the fact that certain indicators like money supply, commodity prices and capacity utilization no longer are solid indicators of which way the economy will turn. Some economists have more recently utilized the NAIRU or the Non Accelerated Inflation Rate of Unemployment. The NAIRU is the point at which the labor market reaches full capacity. When employment is pushed beyond full capacity by expansionary monetary policy, the economy overheats and inflation picks up. Greenspan was obviously looking at this issue (among others) in late 1993/early 1994 since he raised interest rates to stop the supposed inflation. But perhaps the economy will suffer as a result since some economists say high rates kill the economy in the future (rates impact the economy perhaps nine months after the ups or downs). So far it hasn't happened since 1996 has been O.K. But the election and the persistent budget deficit bothers me a lot and 1997 may be a problem.
Another key is interest rates. But probably the thing to do is read and decipher
all that's available and then take a consensus. It seems to have worked well
in the past for me since there is no overemphasis on any one predictor that
can go south quickly. Generally speaking, the economy seems to be poking
along quite well primarily because inflation has stayed low. And Greenspan's
recent reelection is a good thing. But remember we haven't had a major correction
in years.
OLD BRAINS: It is truly amazing the number of new studies
on the elderly that completely erase old "rules of thumb". For instance,
the old position that we lose millions and millions of unreplaceable brain
cells as we get older may not be true. New research indicates that the loss
of brain cells is relatively small and largely confined to certain areas.
Otherwise, we can continue to use it at almost full capacity up through the
age of 90. From age 20 to 70, we do lose about 10% of brain mass but the
elderly may simply substitute one area of the brain for another to accomplish
the same purpose. A research likened it to a young person who is able to
strike out a batter with a fastball. The older pitcher may not have the same
fastball, but has more experience and finds other pitches that strike out
the batter anyway. (However, see Elderly Scams, page 2, that shows that many
elderly aren't using the cells for anything more than head stuffing.)
MORE OLD STUFF: Another study of 20,000 elderly people age
65+ shows that there is a smaller and smaller percentage of old people unable
to take care of themselves. (Don't be fooled by statistics though. Since
there are so many MORE elderly, the number who do require care is still going
up.) As medical science has improved and as Americans are taking better care
of themselves, fewer are developing the chronic illnesses and disabilities
of the past. The study by the National Institute on Aging said that the elderly
may not be quite the drain on the economy as anticipated- at least as they
might need the services of Medicare and Medicaid. Because this shift started
in 1982, it is estimated that the declining disability rates have saved Medicare
$200 billion. But remember, if you do live longer, you need a LOT more money
to cover for the expanded lifetime.
BIG FAT SURPRISE: More than 1/3 of all overweight American men and 41% of women say that they never exercise at all. Among non overweight, the statistics are 26% for men and 28% for women.
BANK INTEREST RATES: Here is another reason why bank interest
rates for consumers are low and will probably stay that way. It has to do
with the Depository Reserves required to meet legal obligations to pay currency
to depositors who demand it or who order payments to third parties. These
reserves resulted from the bank failures of the 1930's. However banks are
now holding $10 BILLION more in reserves than is necessary to pay creditors.
That's not necessarily bad per se, but the money is not being invested- hence
is a drawback to offering higher rates to depositors. Such reserves have
been growing quite a bit from 1982 to 1993 with a small downtrend to current.
ELDERLY SCAMS: The elderly regularly get scammed by phone artists
saying they have won lots of money but need to send some "minimal" amount
up front. After they lost that money, other scam artists call up to say they
can get their money back- for another up front fee. Remarkably, even with
all the press, the recovery room scams have increased 450% from 1993 to 1994.
The amount of money lost in 1995 was TWICE that lost in 1994. Some elderly
are senile, have Alzheimers or simply are incapable of not thinking clearly.
But the others are just plain stupid- a fact that most of the press is unwilling
to state. Being realistic, most people at 75 are still alert, active, able
to function and THINK. But they do stupid things at 75 because they were
stupid at 55 and stupid at 35. These people could think/read throughout their
life but decided not to. Yes, you blame the scam artists. But the elderly-
and all people- have to take some responsibility themselves by reading and
doing more research at all ages.
OUT OF CONTROL: (SF Chronicle) The article said your mutual fund account was out of control if you have no plans for allocating your assets and
PRESCRIPTIONS: The RX Med Express Prescription ensures that its members
receive the lowest prices on their medications. An article in Answers says
that RX Med Express can save on brand and generic medications 70% of the
time. You must use a pharmacy accepting the card. It costs $5.00 with no
renewal fees. When you get a prescription, a computer checks to see if the
best price is offered. What I found to be most interesting is that the check
will also review potential conflicts with other medications. That's invaluable.
PROGNOSTICATIONS: The WSJ does a review of how well economists did
on their prognostications the year previous. It ends up that almost all were
wrong- though some were at least headed in the right direction. For my
standpoint, I tend to try to have FEW ideas or directions myself. I simply
condense what "all" analysts are saying and then focus on the consensus.
If at least 60% say the economy is going to be good, I'll stay in the market.
When it's 50% or below, the prognosis is probably not good and I get out.
Ego is not very good when doing investments.
NASD LIMITS: The National Association of Security Dealers is trying
to change some compensation practices. Some brokers are being rewarded for
selling a particular fund in order to get a trip. The NASD says that that
might be an unsuitable fund that was being pushed just for the trip- a potential
conflict of interest. (Oh really!) They are attempting to get the trips or
other compensation based on the sale of all funds within a
family in order to reduce such conflict.
SCREWED: The following is the unfolding of how a client lost money at a national brokerage firm. It is a prime example of how clients are mistreated and, finally, simply beaten to the point that they accept a settlement in order to avoid at least another years' worth of frustration and mental anguish.
Muffy Foonman (not her real name) had entered the stock market several years ago at another brokerage and had purchased a couple of individual stocks. These were clearly unsuitable for her since she neither had the background or skills to understand the risks she was taking (unsystematic risk). (If you don't know this risk as compared to systematic risk, you don't know investing in securities at all.) These were absolutely inexcusable sales by the broker, but the norm in the business. In any case, she transferred her account to a broker "friend" she knew. (Another flaw- don't use friends for investing unless they are highly qualified) The broker knew she didn't have much money- in fact had been told the money she wanted to use was from a recent inheritance. Further, she had no other savings. But Muffy "trusted" her broker (another flaw) and bought some stock from him. It was a technological stock and she thought she knew what she was getting into since she her job was in that field. (A joke. She had no idea how to value a company. She wouldn't know P/E ratio or book value from a waffle.). Her broker got her to buy another stock, but that's only two stock. That's inadequate diversification and a huge risk, but what the heck, the broker and the firm were making money, so what did they care. When the stock went up, broker friend suggested that Muffy go on margin- effectively increasing her already high risk by about 50%. (The risk at this point is about 40% extra over the market because of a non diversified portfolio; another, say 40%, for a beta of 1.4 and an additional 50% for margin. That's about 294%s MORE risk than being in the S&P 500. And this for someone that did not really have any discretionary funds and no savings.) The stock subsequently plummeted and she lost about $30,000 from her initial investment. She was devastated. She had tried to get the broker to sell, but he kept stalling her with talk that it would go back up, don't worry, etc., etc. In desperation to figure out what to do after she had lost almost everything, she called a business columnist at the San Francisco Chronicle who said that if anyone could help her, it was me. I decided to help her since what they did to her was wrong.
I checked several attorneys since discussions with the manager of the ---- ------- office went essentially nowhere. They did offer $14,500 since they recognized some area of responsibility. In my mind that was a joke, but in pure business terms, it was a great offering by them. Why? Because with such a small case, most securities attorneys won't even bother with the case. Further, even if it did go to arbitration, it is doubtful that she would get as much as $25,000 and the attorney would take a third. (The reason that arbitrators might not give all back is that 1. they do require some responsibility on the part of the customer and 2., NASD arbitrators have very little understanding of risk- or even of securities trading. So there always the possibility she could get even less.) (Laws and rules do not have to be fair or fairly enforced- just a fact of life.)
I finally located an attorney that used to work for ---- ------ (now
acting for the consumers) and said he could get it done quickly. No soap.
It went on and on and she kept getting more frustrated and emotional- to
the point of hurting her mental health. Finally, I just said take what you
can get and be finished with it. She did and, I submit, so do many other
claimants since the system can chew them up for months, if not years. The
small investor is woefully unprepared to enter the stock market with individual
securities. Unfortunately, so are the brokers but you'd never know it by
their marketing. The firm prevailed in this issue since they knew how to
work the system. But I submit it was unethical. However, ethics is not taught
to brokers. Let's be careful out there.
BLACK and BLUE: As we all know, IBM (Big Blue) has had its problems
during the past few years. But part of that may be recognized in the faulty
decision making- at least as evidenced by some of its recent decisions regarding
the use of "financial planners" for its employees. It has hired IDS to help
do some of its planning for retirees. That seems to me like putting the fox
in charge of the chicken coop. Here's some comments from a past IDS broker,
"we were almost forbidden to deal with anyone unless they bought a financial
plan. Yet, we all knew deep down, that the "Financial Plan", reasonably priced
at $350 to $500 was a loss leader; a smoke screen, if you will, to justify
the sale of proprietary commissionable products. How could any self respecting
"plannee", after seeing a 60 to 80 page handsomely bound report showing a
clear need for more insurance of all types, say NO? What's more, without
IDS mutual funds, they would surely end up as bag people with uneducated
brats". And from a past IDS broker, he indicated that he had been one of
the few "long term" planners with the firm- FOUR years. And most of the IDS
brokers were in their first job as brokers. Frankly, I think the selection
by IBM of these people is indicative of most human resource professionals
(and most investors for that matter). They haven't a clue as to what makes
a good investment professional or financial planner and refuse to do the
proper research to find out. They are impressed by marketing skills without
seeing the limited expertise. I also believe that IBM will suffer some liability
exposure in the future to the use of unknowledgeable brokers.
401(K): According to a financial services consultant firm, mutual
fund companies now control about 37% of the 600 billion in 401(K) plans versus
30% by insurers.
DOGS/CATS: SPAY/USA is a program that offers referrals to vets who
offer low cost neutering and spaying. 800 248-SPAY
PROBLEM LOANS: (FED Board of SF) There is a certain percentage of
bank loans that are non performing. But the ratio has dropped considerably
since the recession of 1991 while outstanding loans increased about 25% from
April 1993 to January 1996. On the surface, that seems good that fewer loans
are in default, but is it due to the better economy and the risks are still
there, or is it due to the better underwriting of the banks? We probably
won't know until the next recession. On the other hand, consumer loans have
shown an INCREASE in defaults going from 1.78% in the fourth quarter of 1994
to 2.09% in the fourth quarter of 1995. I'm still not happy with the underlying
currents of employment.
JAY GOLDINGER: Perhaps you never heard of him, but he was considered
a guru in the financial arena (primarily bonds) and was actively quoted by
every major financial paper in the US. The guy could do no wrong. He "understood"
even the most complex derivative structure. Sure he did. Well the SEC is
investigating him because he lost millions of dollars of customer funds due
to, apparently, risky and unauthorized trading in futures and options. He
also, apparently, bet on higher interest rats in late 95 and they, unfortunately
for him, went down. The loss was estimated by the WSJ article at $100 million.
This is similar to scenario on Sonny Block- the radio guru who told thousands
upon thousands of his listeners where to invest money. Unfortunately he sold
some scams costing them millions. His son ratted on him in court. Isn't this
fun?
ELDERLY ABUSE: The National Center on Elderly Abuse said that 241,000
cases of elderly abuse were reported last year. But they also say that's
perhaps only 1/4 of what happens. Therefore it is estimated that between
700,000 and 1,100,000 abusive problems exist each year. Much is passive abuse-
not physically hurting someone- but not helping them either.
JOBS: A recent Business Week article noted that about 79% of workers
are concerned about losing their jobs and 66% feel that the American dream
is fading. Well, that's not news to me since I have said that for some time.
Admittedly a good part of the blame is on corporate big wigs who are effectively
insulated from the real world and are using downsizing indiscriminately.
On the other hand, many workers looked for a free ride after their "probationary"
period was up. Most did not increase skills or knowledge and were prime to
lose jobs when the industries changed or new more knowledgeable workers came
into the marketplace. One noted example was computers. Many did not want
to bother with them. As a result, many of these people are out of work and,
even with retraining, will not see the high level pay they once had.
SOME MORE DYING: After all the commentary about death and dying,
it is notable that in early March the 9th District Court of Appeals upheld
the right of terminally ill patients have a "constitutional right to a dignified
and humane death and that that right outweighs the states interests in keeping
them alive. "A competent terminally ill adult, having lived nearly the fill
measure of his life, has a strong liberty interest in choosing a dignified
death rather than being reduced at the end of his existence to a childlike
state of helplessness." "The individuals interest in making a vital decision
is compelling indeed for no decision is more painful, delicate, personal,
important or final than the decision how and when one's life should end"
Unless reversed, this judgement will allow the recently passed Oregon law
on assisted suicide to be upheld and will create ballots in many other states
as individuals recognize they don't have to linger in pain and degradation.
PAYING THE PIPER: Brokerage firm Piper Jaffray was ordered to pay
a $1.9 million fine for failing to tell investors about the risky derivatives
used in its portfolios. About 7,000 Midwest retirees lost $120 million between
1991 and 1994. Piper Jaffray must now hire a consultant to review its mutual
funds sales practices.
LONG TERM CARE, 1994: About 1.4% of those between ages 65 to 74 were
in long term care facilities; 6.1% between 75 and 84 and 24.5% for those
over 85- mostly women. A woman born today has a 1:3 chance of living to age
92.
NATIONAL INSTITUTE OF CHILD HEALTH AND HUMAN DEVELOPMENT: (NICHD)
301 496-5133
MURDERERS: Commented on previously is the fact that more and more
unsupervised teenagers will cause a turmoil in society that is unheard of
in past years. Here is an idea of how bad it is now. Over the past decade
the number of young murderers in the U.S. has tripled to 26,000. The National
Center for Juvenile Justice indicates that juvenile arrest for violent crimes
will more than double by the year 2010. You thought things were bad now?
Just wait a few years. It'll be a lot worse. But you might be able to make
money by focusing on these companies that provide security measures, bullet
proof vests and glass, private reform facilities and the like. We're going
to need a lot more of them.
BUYER'S BROKERS: There are significant legal and financial implications
on the purchase of real estate depending on who is representing you and where
their fiduciary obligation lies. A buyer's broker should exclusively represent
the buyer. Check your Realtor Board and the organizations listed below
Buyer's Broker Registry, 800 729-5147 has over 700 agents it can
refer.
Real Estate Buyer's Agent Council, 800 648-6224 offers an accreditation
program for buyer's agents called the ABR (accredited buyer representative).
Information and referrals
American Homeowner's Foundation, 800 489-7776, offers
referrals
National Association of Exclusive Buyer Agents, 800 986-2322, provides
referrals to its membership.
Buyer's Resource, 800 359-4092 is a brokerage franchise that will
provide referrals to its offices.
EMERGENCY TAGS: Medic Alert charges a $20 one time fee for its metal
tag which includes a name, medical information and a call collect number
for a central office. 800 ID ALERT.
A plastic tag is free from Life saver Charities, PO Box 125-BH&G,
Buena Park, Ca 90621. Free with SASE but they could use a donation.
SELL, SELL, SELL: Years ago, a WSJ statistic indicated that brokers
offered about 17 buy orders to one sell order. Obviously the ratio declined
after the 87 crash and some brokerage analysts- in a study from 1989 to 1991-
said the ratio was now 7 buy recommendations to every sell. Should you pay
attention to what a broker suggests you do? Apparently not with buy orders
since a recent study showed that their buy orders don't do that well. However,
if a broker should ever tell you to sell, it apparently really means
you should do so. Dartmouth's Amos Tuck School of Business Administration
review of 14 of top Wall Street brokerage firms showed that buyorders beat
the overall market by 2.4% in the month starting 2 days after the analysts
call. That's barely enough to cover commissions. After that, they tended
to match the market. But stocks that had a sell lagged behind the market
by 9.2% during the six month period starting two days after the analysts
call. So, it doesn't make much sense to pay attention to analysts buy orders,
but it does make a whole mess of sense to react to their sell recommendations.
The study also showed a problem with the efficient market theory that says
that the market processes information so rapidly that it is almost immediately
incorporated into a stock's price. A stock's continual drop shows inefficiency.
SELLING A HOME: Here are several tips that will enhance your home's appeal when you have open house. Some come from an article in the SF Chronicle, but much is from my past experience in selling real estate and teaching many courses.
First Impressions Count- Make sure the outside is presentable. Have the landscaping presentable. I suggest hiring a local high school kid and plant a whole mess of pansies or other flowers that you can buy from K-Mart real cheap. Colors and flowers do wonders. And though I don't like spending money needlessly when selling a house, if your house needs painting, DO IT- even the whole house if necessary. The cost of a thousand or two can be "bought back" many fold. SFC also suggested wiping the finger marks off the door; make sure your sprinkler system won't wet anyone.
Inside Appearance. Make sure everything is neat and clean, vacuumed and dusted. They suggest depersonalizing the home- take out trophies, religious pictures, family portraits. The goal is to let them visualize how THEIR house will look.
CHILD ABUSE: The National Committee to Prevent Child Abuse (NCPCA), PO Box 2866, Chicago, IL, 60690, 800 55-NCPCA. It suggests several steps to stop child abuse
1. Report any activity where you suspect child abuse or neglect. I know a lot of people don't like to get involved, but a child's life may be at stake here.
2. Advocate for services to help families. Parenting programs, health care and the like are mandatory to maintain healthy children and families.
3. Volunteer at a child abuse program.
4. Help a family, friend, etc. that is having problems with parenting
5. Recognize that you yourself may have problems and seek assistance
when it gets overwhelming. Remember, your child's life, health and happiness
may be at stake
BUYING DECISIONS: A study by the Plexus group said that a manager's
decision to buy added 0.67% to the fund's short term return, but average
sell decision subtracted 1.08%. Seems illogical but they indicated that the
human element entered into the equation since they are "natural optimists,
fund managers are better at sensing when a stock is improving than when it
is decaying". And selling a weakening stock can hurt the price further.
ATTENDS: This is a product for incontinent seniors. Proctor and Gamble
has much free information for caregivers of incontinent parents. 800
ATTENDS.
CHANGING PHYSICIANS: (Kevin Boyd) I certainly wish I had read this
before.
CARETAKERS: If someone is home bound and being taken care of by friends, it might be a good idea for each person to keep a running diary of food, medications, phone calls, mood swings etc., etc so that subsequent sitters or nurses know what has happened previously. Great idea for many situations.
PAIN: Many men believe that they must endure pain, but it's also undoubtedly why we live shorter lives- we're stupid. It is not a noble virtue- living with pain- and can lead to complications. The Palo alto Medical Association noted
The US Agency for Health Care Policy and Research suggested these guidelines.
So why the commentary? Taking care of a patient costs money. The
faster and better you get well, the more money you'll have overall and the
less demanding my job is in keeping you solvent and happy.
HARD TO BELIEVE: The International Center for the Advancement of
Scientific Literacy did a survey of 2,006 people regarding their knowledge
of science. LESS THAN HALF- 47%- knew that the earth rotated around the sun
once a year. 20% think it circles once per day (Choices were one day, month,
or year). 20% said the sun revolved around the earth. Help me, Lord!
LONG TERM DISABILITY: Only about 25% of companies offer long term
disability as part of their employees disability plans. Yet one in seven
workers in the U.S. will become disabled for five years or more before age
65. Only 41% of companies with 100 or more employees have long term disability
compared with 82% that have medical insurance and 91% that have life
insurance.
THIS IS REALLY BAD: The Soviet Union got democracy, but at an extensive
price. Economic and social disruption dropped male life expectancy from 64.4
years in 1989 to about 57.3 years today- a lot due to self destructive behavior
like drinking. The marriage rate dropped 20% between 1991 to 193 and the
birth rate dropped 12%.
MARGIN: Normally associated with individual stock purchases, it is
the ability to borrow on the increase in your account primarily so you can
buy more stock. It's a form of leveraging- it's a from of gambling since,
if the stock goes down, you not only can lose your original investment, but
have to come up with more money to pay off the loan. Most investors with
margin accounts do not understand the restrictions or inherent problems primarily
because the broker does understand them either. But what we are seeing is
a lot of mutual fund accounts using margin due to the euphoria of past years.
According to a SF Chronicle article, mutual funds represent about 10% of
the $4 billion in outstanding margin loans at Schwab. When the market changes,
you see a lot of grief and subsequent filings for unsuitable practices against
brokers and brokerage companies.
STRESS: A Certified Social Worker and Director of New York's division of Plaza Nurses Agency has a free guide of problem solving and stress reduction tips for those involved with caring for sick and frail elderly. Call 516 887-1200, Ext 253 to be put on the mailing list. His initial suggestions are
LIVING WILLS: (Answers) Living wills state how you would like to die (fishing, thank you) and is a mandatory element in proper estate planning. A Penn States study indicated that women often handle a family's affairs in the last days of a relative's life and that a living will would ease the burden.
The study also indicated that the living will can reduce family anguish and assure health care decisions previously discussed by the family.
Fifty percent of 1,227 survivors said that the death of their loved ones was UNEXPECTED. Only 42% told researchers that a doctor had told either the patients or someone close to the patients that he or she was dying in the last days of life. Only 34% indicated that the patient spoke as thought they knew they were dying. (Though that might not be a major statistic in itself. many dying people don't want to increase the burden on survivors and may purposely not saying anything to avoid making the survivors suffer more). Only 9% of elderly decedents had signed a living will as of 1986.
HOSPICE CARE: (Answers) Hospice returns the natural process of dying to the home or home like setting, amid familiar surroundings and the comforting presence of family. Hospice focuses on caring for the whole person, restoring dignity to the final days. Any terminal illness is appropriate for hospice are. Anyone who receives Medicare Part A can qualify for hospice care and pays for all covered costs under the following conditions
Medicare will pay for two 90 day periods and one additional 30 day period and an unlimited number s of extensions if re-certified terminally ill. (Patients can be asked to pay %5 of costs for outpatient drugs or $5 per prescription and 5% of the Medicare rate for hospice care- though most hospices usually cover these costs. The individual costs include
Survivors have stated that the care shown them was tremendous and
continued even a year after death. death. The nurses/volunteers should be
canonized. For info, call the National Hospice Organization at 800
658-8898.
JOBLESS RATE: Our employment rates have gotten better, but here are
some statistics for Europe. It might be a precursor as to which countries
to invest in. Nonetheless, the jobless rate has increased to 11% from 5.3%
in 1979. Of the 15 countries in the European Union, only two have less jobless
rates than the U.S. (5.6%). They are Luxembourg at 3% and Austria at
4.9%
Denmark 6.4%
Netherlands 7
Portugal 8
United Kingdom 9.1
Germany 9.1
Sweden 9.6
Belgium 10
Greece 10
France 11.6
Italy 12.4
Ireland 14.5
Finland 16.7
Spain 22.5
CORRELATION: This is not a static issue since an article in the recent
Business Week indicated that there has been a recent decoupling of foreign
country securities movements to the U.S. in the first half of 1996. Used
to be that the U.S. long bond was a very good indicator of what would happen
in certain markets, but that has changed, It may therefore be an indication
that the use of single country funds or emerging markets might do well.
"Investors now appreciate that emerging market stocks are more likely to
move independently of one another, and that it is harder for an entire market
to get rocked by a speculative move based on general economic news, either
in the developed world or in the emerging market itself". It indicates that
these markets may be worthwhile now, but I didn't do so well in them the
past 1 years so I'm not ready to crawl back yet.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
2295 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127
E-mail EFM@Juno.com