JUNE 1995
COMMENTARY ON INVESTMENT AND PLANNING ISSUES
ERROLD F. MOODY JR. BSCE, LLB, MBA, MSFP, PhD
CERTIFIED FINANCIAL PLANNER
REGISTERED INVESTMENT ADVISER
PAIN: Paraphrased from Pain Relief, 1994 by Jane Cowles.
Here's a short list of what your or your loved one's rights are when faced
with pain. Before even this however, have a serious and no nonsense discussion
with your doctor about how he feels about medicating pain overall. Some doctors
still refuse medication for acute pain- even in times of terminal illness-
so be sure he/she will treat the problem as you wish. Also recognize that
acute pain can easily distort reality, so you may wish to have a trusted
friend or relative know your desires and be willing to carry them out through
a living will or other written document. You have the right to:
MEDICAID/MEDICAL: If a spouse goes into a nursing home and
Medicaid must pay the bills, the at-home spouse is able to keep the main
residence, a car, personal belongings and half of the couples financial assets
per law- as high as $75,000 in New York and California and as low as $15,000
in other states.
CALIFORNIA INSURANCE DEPARTMENT and MEDICARE SUPPLEMENT INSURANCE
COUNSELING: Consumers Services Division, 3450 Wilshire Blvd., Los
Angeles, CA 90010. 1-800-927-4357
ARBITRATION: Bear Stearns recently lost a case where it
showed that brokerage firms could be held liable for not disclosing to clients
that the stocks their brokers sell were not being recommended
by the firm's analysts. The client had purchased $730,000 shares of a company
that analysts had shown as a "hold" (that's a pseudonym in the industry for,
"it sucks") while the broker was touting it as the next Home Depot.
HIGH DIVIDENDS: (Barrons) Commented on previously, if you buy the
stocks with the highest divided returns and hold them for a year and then
simply replace with the 10 stocks (doesn't work with more) that were currently
paying the highest dividend yield, the returns beat the S&P averages
over the past three, five and ten year averages.
Year 10 dividend DJIA S&P
stocks
| 1983 | 38.73% | 25.65% | 22.51% |
| 1984 | 7.64 | 1.08 | 6.27 |
| 1985 | 29.48 | 32.78 | 32.16 |
| 1986 | 32.08 | 26.92 | 18.47 |
| 1987 | 0.61 | 6.02 | 5.23 |
| 1988 | 26.14 | 15.95 | 16.81 |
| 1989 | 26.53 | 31.71 | 31.49 |
| 1990 | -7.58 | -0.40 | -3.17 |
| 1991 | 34.25 | 23.91 | 30.00 |
| 1992 | 7.86 | 7.44 | 7.60 |
| 1993 | 27.30 | 16.80 | 10.10 |
| 1994 | 4.10 | 4.90 | 1.3 |
Annual 10 dividend DJIA S&P
Return stocks
| Three year | 3.7% | 8.7% | 4.4% |
| Five year | 13.5 | 9.9 | 7.4 |
| Ten year | 16.9 | 14.6 | 13.0 |
Here was the list from 1994 and the change for 1995
Stock Dividend 1/1/95 Total return
Yield Price 1994
| P. Morris | 5.7 | $57.50 | 18.7 |
| JP Morgan | 5.3 | 56.00 | -15.1 |
| Texaco | 5.3 | 59.75 | -2.6 |
| Exxon | 4.9 | 60.75 | 0.8 |
| Chevron | 4.1 | 44.50 | 6.7 |
| Woolworth | 4.0 | 15.00 | -37.4 |
| Sears* | 3.5 | 46.00 | -10.2 |
| Kodak | 3.4 | 47.75 | 11.2 |
| DuPont | 3.3 | 56.00 | 20.1 |
| 3M* | 3.3 | 53.25 | 1.4 |
| Merck | 3.1 | 38.00 | 14.3 |
| United Carbide | 2.6 | 29.25 | 34.6 |
*- Merck and United Carbide were substituted by Sears and 3M for
1995.
WEIGHT LIFTING: You have probably noted the extended commentary on weight lifting as a healthy activity for the elderly. Well, here is another report. The Human Nutrition Research Center on Aging at Tufts University said that post menopausal women who trained intensively on exercise machines twice weekly for a year built up their bones, increased the size and power of their muscles and improved their balance. Of the women who trained, they had an average increase in bone density of 1% versus a loss of 2.5% for the women who did not train. The trained women showed an increase in leg and back muscles of 35% to 76% above the non trained. Their balance also improved 14%. Additionally, the trained women had an appetite for more training, spontaneously increasing their training schedule by 27%. The non trained groups slacked off by nearly that much.
A related article also noted that Americans need to increase their
calcium intake in order to build and maintain healthy bones.
APPRECIATION/DIVIDENDS: Since WWII, 60% of the stock market's return
has come from appreciation, the rest from dividends
IMMIGRATION: This is a touchy area but certainly inescapable to address since Proposition 187. Some may remember commentary from my April 1992 Newsletter, "FW noted that current immigration laws have vastly lowered the skills of immigrants. "the emphasis of the law... has been almost entirely on family reunification. So you are importing more children and older people, rather than workers, and that lowers the level of labor skills." A professor commented on the lower skills by noting that immigrants in the 50's had a higher education than the native Americans so they adjusted well. But since the 70's, immigrant skills have declined. "Add in the wider cultural gap and more immigrants land in ghettos and can't get out." US News also commented further that the continuing introduction of unskilled workers will simply makes us feed and care for these new immigrants since our needs have changed from manual labor to more highly skilled and literate workers due to our new technological age of manufacturing and service industries. The article candidly states that we should adjust our quotas from the Asian, Caribbean and Latin American immigrants (who tend to have very large extended families, to a higher allowance for European immigrants who tend to have not only a higher education and skill, but significantly lower family members.
Of course, the main source of this new commentary (and let's exclude racism as an issue) is the simple cost. Illegal immigrants ARE breaking the law and ARE costing the U. S. taxpayers about $8.4 billion per year (Wharton School). The article noted that, "if you measure the standard of living in terms of living space per person, food, and access to television, the standard of living in a California jail is higher than that in many Latin American villages"
The objective analysis states that the U.S. economy cannot keep paying
more and more money for this (and admittedly many other problems or issues)
without an extensive overhaul of government (which may come to some degree)
or major tax INCREASES in order to reduce the deficit. Since we are opting
for decreased government and tax DECREASES, there is no alternative but to
downsize the immigration numbers and change the policy as well.
$5.00 HOME APPRAISALS: When selling a house, it has been generally
accepted that you should get three estimates of value from three local Realtors
and base your selling price accordingly. (First of all, having been in the
business years ago and having done appraisals for banks, I find that methods
used by real estate agents to be sophomoric and the values determined to
be quite debatable and possibly of little value. I always suggest that one
pay for an outside formal appraisal. Admittedly they are not perfect, but
it sure beats getting numbers from people who want to sell you something.)
There is a service from the United Homeowners Association in Washington,
DC that, for $5.00, will give you the sales dates, selling prices and the
addresses of as many as 12 houses in the neighborhood that changed hands
within the past five years. It's available in California, Massachusetts,
Rhode Island, central and southern Florida, metropolitan Detroit and in the
metro areas of Colorado and Ohio. Of course, the homes are undoubtedly of
different styles, bedrooms, amenities, sold over widely different time frames,
etc. but for $5.00, I'd give it a shot.
PUNITIVE DAMAGES: The SEC urged the Supreme Court to reverse a lower
court ruling that had prevented an investor from receiving punitive damage.
The SEC's stance seems to reflect the agency's increasing concern with the
rights of individual investor. The SEC chairman said that "fundamentally
the same remedies should be available in industry proceedings as can be obtained
through the courts."
USE IT OR LOSE IT: Research has shown that many elderly can preserve
their mental function and even enhance it into their ninth or tenth decade
of life. .....Life long mental exercise can nourish growth of new connections
called dendrites and synapses. Such growth can, in effect, cushion the brain
against developing early symptoms of aging- even in those that are vulnerable
to Alzheimers. A study of 678 elderly nuns shows that those with the highest
educational and intellectual life suffer the least for symptoms of Alzheimers.
An autopsy on a 102 year old nun showed severe plaque- a sign of advancing
Alzheimers- yet she retained all her mental faculties till her death.
A doctor noted that there is a misconception out there that aging means disease. Also that the memory loss of normal ageing is not very profound. There's a slowing, just like turning an old computer. It works just as well but takes a little longer. And there are other things that continue to grow, like vocabulary, all your life.
Another doctor noted that with training and exercise, people in their 70's and 80's can sharpen mental skills, such as spatial orientations and inductive reasoning, that had previously lapsed. And lastly, he noted,
"People go to the gym and work out their muscles and bones, but what
about their brains? Keeping the mind firmly moored throughout aging is going
to be a high issue with yuppies because old age is where they are going to
be hanging out."
CAREGIVERS: (Ethics on Call) "When someone goes into a home instead of an institution, it is usually presumed that a family member will be primarily responsible for the person, or will serve as a secondary support to the paid care provider. Statistically, the great likelihood is that person will be female, and equally likely, will receive no compensation for what can be virtually a full time job. As all who have done it know, this work can require an extraordinary commitment of time and energy. Eighty percent of these unpaid caregivers devote and average of four hours each and every day, seven days a week, to caring for their elderly charges."
I cannot strongly urge you enough to recognize the enormous physical
and emotional toll it can take on any person and to try to plan a way around
it as much as possible. For the women- life is to short to become a martyr.
Consider a long term care policy. They are not that expensive. They're
particularly beneficial when the time really comes to put an elderly person
in a home and to let go.
RESTRAINTS: (Ethics on Call) This book was published in 1992 and
some efforts have been made to reduce the amount of restraints used on the
elderly in nursing homes. Nonetheless, the statistic is important in recognizing.
"According to the joint House/Senate Committee on the elderly, well over
half the people in long term care in this country are kept under some form
of restraint. Research has shown that of the nearly one half million Americans
who are restrained with belts, vests, and jackets, at least two hundred of
them will die choking death this year." Minnesota studies have shown that
fully 1/3 of nursing home patients younger than 70 were given chemical restraints
to make them easier to manage. In 1987, Congress said that physical restraints
can only be used if dong so will enable the resident to attain or maintain
the highest level of mental, physical or psychological function. As a result
of the law, the number of patients under sedation was reduced form 66% to
12%. Patients have become more alert and social, their muscle tone and mobility
has improved and family visits and nurse and patient moral has all risen-
all without the necessity of adding more nurses. But all nursing homes are
not the same, so be sure to check your local facility to see what they are
doing.
DO NOT TRANSFER: You have a right (assuming mentally competent) to
request that if something major should happen to you, that you do not wish
to be transferred to a hospital where some possible aggressive measures may
bring you "back to life"- but only to live in the never never lingering world
of pain and lack of dignity. Of course, it is not be considered when you
have broken and arm or something like that. So the following questions identified
by Ethics on Call should be asked when an elderly person requests a DNT:
Is it appropriate medically? Does it reflect clinical depression? Does it
seem to be a well considered, consistent decision? Does this person seem
at peace with himself or fearful? Does he want to be transferred for comfort
care, but not for life sustaining interventions?
EFFECTIVE COUNSELING OF THE ELDERLY: Paraphrased form the American Bar Association Commission on the Legal Problems of the Elderly-
VEGETATIVE STATE: In 1990 10,00 people were being kept alive in a
persistent vegetative state by medical technology. The AMA estimates that
70% of us will face the choice of connecting a loved one to a life support
system. The AMA also noted that only three vegetative patients have recovered
and none had been unconscious longer than 22 weeks.
MONEY GROWTH: (New England Economic Review) M-1 and M-2 represent
money supply. M-1 is defined by the sum of currency held by the nonbank public,
demand deposits, other checkable deposits and travelers checks. M-2 is M-1
plus overnight repurchase agreements by all commercial banks, overnight
Eurodollars issued to U.S. residents by foreign branches of U.S. banks, small
time deposits and general purpose and broker/dealer money market mutual funds.
Generally, a 1% point decrease in money growth yields a 1% point decrease
in inflation and nominal interest rates in the long run. The simplicity of
the monetary prescription for lowering rates is lost when using an interest
rate instrument, however. In order to slow inflation, the FED must
first raise nominal interest rates, then lower them. An economist
note that, "we cannot say with any confidence how much of an increase in
rates is required to lower the inflation rate 1%."
FHA: The Federal Housing Administration limits it's loans to certain
ceilings. But it is now raising its loan amount in high cost metro areas
to $152,362. In non "high cost" areas, the limit is $77,197. They may rise
more this year since Congress has tied the FHA limits to the conforming loan
limits set by Fannie Mae and Freddie Mac, both which package mortgages from
lenders and repackage them to investors. In high cost areas, the FHA mortgage
may be 75% of the conforming loan limit ($203,150) in 1994 or 38% in other
areas.
LUTHERAN BROTHERHOOD: (Kiplinger's) Out in the west, you may not have ever heard of this securities firm. Yes, that's right, it's an broker/dealer firm exclusively working with Lutherans. A similar group is the Aid Association for Lutherans (AAL). Both sell insurance and provide communal services to the members of the Lutheran church, numbering about 12 million. They both have loaded mutual funds that are sold exclusively to those members. So do they do well? Nope! Almost all the funds in both families are below average in three and five year total returns.
AARP does the same thing by promoting its highly marketed name to its members. But it's effectively nothing more than a Scudder fund on which it collects 10% of the management fees.
If you feel your religion or retirement organization is all you need
for financial advice, be my guest.
ALZHEIMERS: Said one caretaker- "I can't conquer it. I'm powerless, I can't get my mother to listen, to understand. I feel like I'm being sucked into some vortex. It's like being caught in some large, uncomfortable storm, like a tsunami or hurricane."
SO WHERE DO WE GO FROM HERE?: As clients are aware, I spend at least half my time reading (it's the ONLY way to stay on top of what is happening and should be evidenced by material covered in this newsletter for the past eight years). As regards investments, if the general consensus of all the experts is positive (60%), then I think it wise to be in the market. During parts of 1985 to 1993, it was as high as 85%. Today, it's about 65% to 75%. Admittedly, there are problems- are we going to have a smooth landing to the economy or will steeply increasing unemployment cause a potential recession? Some pundits about the budget deficit reduction do, correctly, point out that with reduced government spending, certain markets will decline and the stock market could suffer. Further, that interest rates will reach further lows hurting fixed income investments. True, but a real budget will do more over the long term for corporate growth than anything we have seen in decades.
There is also some caution about dividends. Historically when the dividend yield is low- under 3%, it does not bode well for stocks. But I think a lot of corporate profits are being plowed back into the company for expanded growth and may not be a problem.
So for the time being, go for it!
NURSING HOME REFORM ACT: Some of the rights of the 1987 act areas follows
ICU's: In 1992, intensive care units consumed $14 to $20 billion
per year- one fifth of all hospital resources and 1% of the nations gross
national product
EMPLOYABILITY: (WSJ) "The idea that if you worked hard, the company
took care of you is dead" we're told. Has anything replaced it? "the only
thing you can rely on is your ability to end up where the invisible hand
of the economy want you to be " It's called "owning your own employability"
and it's a scary feeling that no matter what your position or education,
you just might be next at losing your job.
MUTUAL FUNDS: More money went into stock mutual funds in 1992/93
than in the previous 52 years. WSJ says that a lot of that money came from
small investors who didn't- and in many cases still don't- know what they
were buying. Most of the people who went into mutual funds in the last few
years are really not investors- they're savers. The article noted that many
investors clearly did not know what they were doing. Households between 1985-1994
increased their holdings of riskier assets such as stocks and bonds from
33.5% of their savings to about 55%, the highest level since 1966.
OPEN YOUR EYES: The No Load Fund Analyst says, "investors can't afford
to close their eyes and trust that a guru will manage a fund brilliantly
forever".
COUNTRY CLUB INVESTING: This is a real dandy and involves a bunch of "investors" who met the promoter of an investment at their golf club. So, since they had something in common- trying to inflict pain on a small round object- they let their guard down when he suggested investing in his second mortgages. (It's called affinity scams by state regulators- getting comfortable with someone simply because you have some esoteric activity in common). Dozens of investors lost over $100 million and the guy finally left the country (with the money of course) when state regulators found some problems. One man lost $2 million alone. One widow lost her entire life savings of $73,000. The attorneys are also filing against accountants, attorneys and banks who supposedly "aided and abetted" the fraud.
The SF Chronicle noted that the scam worked so well because he was "friendly, charming, smiling and had a lot of friends" and won over a lot of investors playing golf. (Ask yourself this, did that represent sufficient reason to invest? Where was there any talk of competency?). A club member also noted "he was just a warmhearted person whom one would never believe would fit into that kind of con category".
As I repeat ad nauseam, never give money to anyone unless you check
them out. The real kicker is that his license to conduct real estate was
revoked in 1992. Anyone who had any brains could have called the Department
of Real estate and found that out. No one did any homework. Now they can
watch $100 million flush down the toilet.
MUTUAL FUND PERFORMANCE: Per Weisenberger, since 1939, only 24 funds have been around the entire period. Was it because they were so good? Nope! Only 7 managed to outpace the S&P 500.
RARE DISORDERS: National Organization of Rare Disorders, 800 999-6673
is a central clearinghouse for info on 5,000 rare diseases.
REASONABLE GROUNDS: Under Dearborn's Financial Institutes training material for Investment Adviser's and its section on "Making Unsuitable Recommendations to and Transactions for Customers" it states that "a sales rep must always consider the customer's individual financial situation and investment objectives when recommending a transaction in any security. Failure to make a reasonable inquiry about the financial needs of a customer is unethical and prohibited under the Uniform Securities Act". Further, "protecting customers includes ensuring they are fully informed about their investments, have access to the information they need to make good investment decisions, and receive value for the commissions and markup paid to brokers and dealers". "Every investment should be fully explained, and the explanation should includes a discussion for the investment's risks. At no time should customers own an investment which could put them at risk beyond their financial capacity".
Is this really done? Nope. Why? As stated repeatedly in the past,
brokers are not further trained to identify what they need to do to properly
understand the APPLICATION of the law. Ergo, even those that may attempt
to provide suitable investments simply lack the skill to provide the proper
application. Therefore, you are apt to get screwed by the most well meaning
agents (we'll assume that the commissions and conflict of interest is
immaterial). Bottom line, never buy insurance from an insurance agent or
stocks from a stock broker.
FOREIGN BONDS: (WSJ) Experts are wondering whether foreign bond funds
are worth the effort. In truth, if you have read my previous comments, they
really don't make much sense- even for short term instruments. First, bonds
are limited in return anyway since they cannot get a huge amount of appreciation
unless interest rates fall precipitously. Secondly, the currency exchange
might work against you- via Mexico's devaluation- and thereby negating any
gains.
ESTATE PLANNING: Assume you are wealthy and want to pass $1 million
to your grandchildren. However, if you have already used up your unified
credits (the tax offsets allowed by law), you get killed by taxes and hardly
have anything left to give. For example, you'd have to pay gift tax on the
transfer which would amount to $410,000 in taxes. Oops. Then you'd have to
pay another 55% for the generation skipping tax and you lose another $550,000.
Big OOPS. So taxes whacked off $960,000 and you only give them $40,000. Can
you do better? Well, you can set up a multi generational trust where you
use second to die life insurance. You can still gift up to $20,000 per year
without gift tax (man and wife jointly contributing) and purchase a $1,000,000
policy. Further, each person has a $1 million generation skipping transfer
tax (GSTT) credit that is similar to their regular $600,000 exemption on
regular estate tax. So each year you can simply use up $20,000 of this GSTT
credit. If a couple did this for 10 years, they would have used up $200,000
of their combined $2 million in GSTT credit, none of their unified credit
and have $1 million that would pass to future generations. The money usually
cannot remain in trust forever, but most States allow funds to accumulate
for a time of the life of the last current beneficiary to die plus 21 years.
That's a long time and the growth of the funds can be enormous. And since
the example only used just $200,000 of the GSTT credit, think how much might
the value might have been if the full $2,000,000 of credit had purchased
up to $15 million of insurance.
QUALIFIED PERSONAL RESIDENCE GRIT: Under old GRITS, a grantor could
put property in to a trust for future generations and indicate a time when
the assets would pass out of the hands of the clients. Since the future interest
in a property is less valuable than having the property in hand now, they
could calculate a gift tax obligation at a discounted value. But the new
tax law stopped that in its tracks by requiring that the future interest
be the same as the present interest- except for a personal home. So assume
a homeowner has a $1 million house that he puts into a GRIT for 10 years.
At the end of that time, the ownership would pass to the designated
beneficiaries- we'll say his children. And if you had a federal discount
rate of 7.5% (varies according to interest rates in the economy), then the
present value of the future interest would be $480,000- which is under the
allowed unified credit of $600,000. Further, the home might have appreciated
to $1.5 million- so quite a bit of appreciation was not taxed as well. Of
course not all is peaches and cream since the parent/homeowner has lost control
of his home at the end of 10 years (or whatever) and must now rent from the
kids- not always an acceptable alternative. Also, the kids get a basis only
equal to the original purchase price of the house and may have to face
significant taxes later on. This would have been avoided by simply receiving
the property at death since property gets a full step up in basis at that
time.
INFLATION: Marty Zweig says that..."when you look at the numbers
closely, in periods when inflation has been moderately high- say above 3%
to 5%- stocks have not done that well at all. Generally stock gains were
made when inflation was relatively low, usually between minus 3% and 3%".
If Greenspan is/has been successful in low inflation,
then............................
SIGN ME UP: Here's a letter being sent to "investors". "...That means
you can replace any of your low yield IRAs with a more profitable but still
relatively safe wireless cable investment. Many of our current customers
took substantial positions with us after comparing their actual IRA return
of 3 to 5 percent to our 400 percent projected return. They simply did their
homework, looked at all the facts and decided that the investment was as
safe as any around It just happens to have a higher return". People bought
this. They knew nothing about cable TV but were impressed by a 400% annual
return. They were also stupid as a sandpile.
MORE INDEXES: (Mutual Fund Forecaster) People are familiar with the
S&P, Dow Jones and possibly the Wilshire and a few others. Here are some
more definitions
1. Total Return Index is an equally weighted index of all NYSE listed stock. The TR index is updated each day by adding to its value the average percentage change of every NYSE stock during the day. It's available on Quotron.
2. Trend Change Index measures whether the market's performance today is better than it was yesterday. For example, if the Total Return index was down yesterday but up today, then the trend change index would be positive
3. Final NYSE Tick indicators whether the last price change of a stock was up or down. If, for example, the most recent change for 1,000 NYSE stock was up while 600 were down, then the net index would be a positive 400. Positive readings at the end of the day tend to be followed by a positive market the next day.
4. DJIA last hour change. This is similar to the above- though it involves far fewer stocks overall.
5. DJIA Close/Range Index is an analysis of the Dow's daily high and low. If the Dow closed the day in the upper half of the high low price range for that day, then it should carry over to the next day.
6. Advance/Decline ratio measures the performance of every stock on the NYSE. However, it is only interested in whether the stocks rise or fall- not the magnitude.
7. Up/down volume is similar to the advance decline. But instead of whether stocks went up or down, it simply shows whether the volume of stocks trading up was greater than the volume of stocks trading down.
8. Short term trading index relates the average trading volume of declining stocks to the average trading volume of advancing stocks.
9. Seasonality indicator relates to three specific trading days during
the year. If they are positive, then the prognosis for stocks may be go.
First, the market tend to rise across a five consecutive trading day period
each month, consisting of the last trading day of the month plus the first
four trading days of the ensuing month. Second, the market has a upside bias
in both of the two trading sessions preceding a market holiday closing-
Christmas, New Years, etc. Third, the market rise on a Friday at a greater
frequency that any other day. . If any one of these components are in effect
tomorrow, then the seasonality indicator is favorable. If none of these three
conditions is in effect tomorrow, the odds are less than 50-50 that the market
will be up tomorrow.
The supposed odds are
Bullish Forecast
Daily Indicator Indicator Today Probability of
rise tomorrow
Total Return up 68%
Trend Change positive 66
Final NYSE positive 74
DJIA Last Hour up 64
DJIA close/range upper half 67
Advance/decline above 1.0 69
Up/down volume above 1.0 69
Short Term Trade below 1.0 67
Seasonality favorable 63
Bearish Forecast
Daily Indicator Indicator Today Probability of
drop tomorrow
Total Return down 63%
Trend Change negative 55
Final NYSE negative 58
DJIA Last Hour down 56
DJIA close/range lower half 59
Advance/decline below 1.0 60
Up/down volume below 1.0 64
Short Term Trade above 1.0 64
Seasonality unfavorable 53
HIGH P/E's: When the Price Earning ratio is high for a long time,
it tends to move back to more common ground. Or, put another way, a highly
popular stock will not be good in the long run. A study by Lord, Abbett &
Co. showed that there have been only two periods in the past 56 years where
high P/E stocks have outperformed low P/E stocks for more than a year at
a time: from June 1969 to June 1972 and June 1986 to June 1992.
MOTHERS AGAINST DRUNK DRIVING: 660 Airport Freeway, Ste 310, Hurst,
Texas 76053, 817 268-MADD
PROPERTY INSURANCE: The Oakland, Malibu and Laguna fires really brought
out the chinks in fire and property insurance. An article in the Daily Review
stated that of the 268 houses lost in the Malibu fire, only one has been
rebuilt. And only three have been rebuilt in Altadena where 115 burned to
their foundations. Much of the problem stems from undercoverage and lack
of an understanding or review of the policy originally purchased. The big
problem hitting a lot of people is that the policies do not cover to rebuilding
a home to new- and far more expensive- building codes. One example comes
from Altadena. To replace the original glass in rebuilding a 3,300 square
foot home would cost $17,000. But to meet new building codes enacted since
the old home was built 23 years ago, it would now cost $58,000. And seismic
and other hillside precautions would add another $45,000. Most of the older
policies also do not cover for testing or survey costs.
MORE PRU: In trying to shape a new PRU for the 90's- certainly different
from the scarred remains from its limited partnership debacle of the 80''s,
it's president said it had fired all of its executives that were involved
in the offering of these unsuitable investments. Well, not only did it not
fire any, they actually promoted one in 1992. The SEC is now investigating
him after he became ensnared in a regulatory investigation of alleged sales
abuses at the firm. Yes sir, PRU is solid as a rock- or maybe more like,
dumb as a stone.
WHAT MAKES A CHAMPION: Excerpted in part from an article by former karate champion Joe Lewis.
"What does it mean to grow old? What does it mean to age?
Let me tell you a story about my father. I remember him about the age of 50. Even then, he could work harder than- and outdo- men half his age. He believed in working hard regardless of whether he was sick or injured. So my four brothers and I grew up in a tough farm family, guided by the principle that physical strength and endurance are the key to survival.
And long afterward, when I turned 50, I got into the ring and spared four or five rounds with some young kids and found it quite easy to run them out of gas.
I also happen to have a 62 year old friend who can wrestle non stop for a full hour. I have seen folks 70 and over who can press their body weight. And I know members of the Santa Monica Track team at ages 48, 49, 50 who can still run 100 meters in 10 seconds flat. The trouble with most of us is that we're conditioned to start surrendering inside once we get between 50 and 60. Our values and interests start to change, and it no longer matters so much who's king of the hill, especially since we know it is unlikely to be us.
But why flush your skills and talents down the drain just because you're a little older. There's something in each of us- call it spirit, an essence, energy, confidence, heart, guts, backbone, intensity, spunk, inner motor or just plain refusal to give up. If you let this part of you begin to go to sleep, it will begin working on taking the rest of you to your grave.
I have found that each of us has an inner rythym or gift, and often a great deal of it never even gets touched.
We have to learn to live with fear, whether it's fear of death, fear of failure or just plain old fear of being laughed at because we're competing with folks half our age. Common sense and a little reflection make it plain that none of this means a thing.
When you are old, you can still be a winner, because winning truly means being the best of what you are, doing the best that you can do, regardless of what anybody else has to say.
YOU DON'T GIVE UP.
NEVER GIVE UP. NEVER.
WORTHLESS STOCK: Hopefully this won't happen to you- though with
some limited partnerships, you may already be experiencing it. You are able
to claim a loss for a worthless stock but ONLY if the stock is entirely
worthless. The loss deduction is not allowed simply because the stock
is no longer traded on a market and is "practically" worthless for all intents
and purposes. Also, a stock is considered worthless on the last day of trading
in the calendar year and that is the year you must claim the loss. So if
the IRS contests a loss by saying the stock actually became worthless several
years ago, it may be too late to claim a refund.
MUTUAL FUNDS MAGAZINE: the July issue contains the following article
I wrote.
POINT: Paying a fee for incomplete advice is stupid. And that is
the only type of advice that a broker with just a licensing background can
provide.
As an instructor in the various licensing courses, I have never taught
much useful info to licensees for years BECAUSE IT IS NOT REQUIRED TO PASS
THE EXAM. The securities industry has fostered a huge fraud on the public
by implying that registered representatives (or as they are euphemistically
titled, "financial consultants" or "vice presidents", have adequate knowledge
through licensing to address the minimum financial concerns of an investor
and could properly analyze an investment. They cannot and their supervisors
cannot either.
Let's review what the licensing course requires. The Series 6 course
takes 2 1/2 days. One would logically surmise that since there are over 5,000
mutual funds, I would have to spend some reasonable time discussing risks
(diversification, S&P return, etc.) and explain some of the characteristics
of various funds- for example what a high yield bond or small cap fund is,
how it works, when to use it, what are the risks, factors to look for and
so on. WRONG! The amount of time in reviewing mutual fund characteristics
is approximately 20 minutes. That's all in 2 1/2 days. There is NO definitive
discussion on diversification, asset allocation, correlation. Ludicrous.
But I do instruct them, which is required to know for the exam, that you
need to have $100,000 and 100 investors to begin a mutual fund. The 26 course
is more "advanced" since I adjust the teaching to indicate one does not need
the 100 investors all at once but has 90 days in which to get them. Boy,
that's useful stuff! Now, obviously, I do provide some valuable information,
but the insight needed to advise and protect investors is sorely missing
since officers in the NASD have stated that an understanding of beta,
diversification and other major elements of risk is advanced training and
won't even require it for securities arbitrators (letter on file). The
instruction for both exams is absolutely inadequate as it relates to the
real world of understanding and utilizing mutual fund investments since I
provide NO APPLICATION. There's no examination or class discussion of
suitability- the major issue in arbitrations. There is no commentary on ethics-
and if you saw and heard what I see and hear from the industry, you'd absolutely
want this included. And until this year there were NO CONTINUING EDUCATION
REQUIREMENTS EVER.
I warn students that they are exposing themselves to significant
financial and legal liability in that they needfar more comprehensive training
to reach any level of competence. But this type of training probably won't
happen (unless you want to say that sales training from a mutual fund supplier
provides it- big joke) since- and I have been told this privately by industry
reps- that substantially increased knowledge and ethics would reduce sales
and no firm will allow that. And spare me the commentary about "experience"
making up the difference. A broker with 20 years of experience may have simply
taken one year's worth of incompetence and repeated it 20 times. Because
of that general attitude and the pervasive sales focus in the industry, I
am hesitant to believe that the new minimal education requirements will
materially improve the industry's attitude and overall performance- at least
initially.
I DO believe fees for professional service and
competentadvice on investment selection and financial planning and monitoring
are valid ( I even act as a financial advisor and select and monitor investments
for brokers). Those with advanced designations- most notably the CFP, ChFC
and CFA- and some degrees (business, economics, financial planning, etc.)
can provide value. Investors should use the highest level of knowledge and
experience within that group AS A MINIMUM. They have shown a commitment to
their work. But using a commissionable fund, stock, partnership, etc. based
on the recommendations and "expertise" of a "standard" broker having just
a series 6 licensing background (series 7 provides little, if any, additional
background for mutual funds) who knows effectively nothing about risk, reward,
suitability, historical returns, beta , alpha and literally all the other
basic attributes of investing is just asking to get screwed (most notable
at banks selling mutual funds).
Admittedly some loaded funds do very well- outproducing no loads- and a broker may be lucky for awhile in finding and using some. But most brokers are never subsequently trained or attain the background necessary to truly understand what they are doing or the risks involved. Therefore, in the vast majority of cases, investors using a no load fund by themselves (assuming highly competent) or through a knowledgeable advisor, should outproduce, at least in a risk adjusted return, the results from a "standard commissionable" broker.
That's your real difference between loads and no loads.
CAPACITY UTILIZATION AND INFLATION: The more the economy grows, the
more it must use of its full capacity to produce. In theory, when total demand
for goods and services presses against supply constraints, companies frequently
raise their product prices and hire more workers, bidding up wages and lowering
the unemployment rate. Capacity utilization in late 1994 was 0.1% above the
previous high of 84.8% achieved in March 1989. Also, full employment has
been estimated to have not less than a 6% unemployment rate- though the
government may use a range between 5.5% and 6% overall. (That's up from a
previous 1985 limit of 4%.) In October 1994, unemployment fell to 5.8%. Given
a normal lag time of one to two years before the effects of inflation are
felt, it would have meant- without the 1994 federal intervention in increasing
interest rates- that we could have expected some definite move upward in
inflation either in 1995 or certainly in 1996. Theoretically, employment
growth needs to drop to 1.5% per annum versus the 2.4% in late 1994. We're
seeing a slowdown now.
INTEREST RATES: Here is another statistic that dovetails with the
above. There is generally a 13 month lag between the onset of Fed tightening
and the arrival of an economic slowdown. Greenspan started the rise in rates
in February 1994. We are definitely slowing down.
MEDIGAP INSURANCE: Last year congress initiated a law that stated
that there were only 10 Medigap policies that could be sold and that there
couldn't be any double selling of policies by agents. It was a very restrictive
law and very good for the elderly. So what happened? Congress lifted the
ban on doubling of policies. Congress said sales could happen as long as
consumers were given adequate written documentation about how the policy
overlaps Medicare. Under old law, an agent who sold a policy that overlapped
Medicare was subject to a fine of $25,000. Another stupid twist to the law
is that the disclosure must indicate that the policy DOES overlap- but CANNOT
indicate HOW. So many elderly are now going to be buying, unwittingly of
course, extra polices just for cancer or other dread diseases that are
unnecessary if they have a Medigap policy.
ILLITERACY: (Marcia Kaplan, SF Chronicle) "Each year over 700,000 graduate from high school unable to read their high school diploma. The US. Department of Education says that 20% of American adults are functionally illiterate. Functional illiterates can read words but they cannot comprehend their meanings, synthesize information or make decision based on what they read. And marginally illiterate people feel most comfortable receiving information in a visual format, relying more on television than print for information.
At the same time that American's skills are declining, entertainment, computer and telecommunications companies are creating new, technologically advanced methods to amuse and educate us. (However) in the excitement about the information superhighway, businesses are ignoring a troubling fact- a substantial number of Americans are not intellectually capable of using their technologies.
.....Any business that sells a products or services that require a user's ability to exercise cognitive skills will face a shrinking market.
No other industrialized country treats literacy with such contempt as the United States."
There's more to this well written article. Too bad hardly anyone
will read it.
JUNK BONDS: Junk bonds by themselves are conspired risky investments. So why do I use them? Because if you understand the risks, they are not all that bad. Secondly, if used in context with other investments, they (as well ss other investments) can actually reduce risk. How is that possible? Well, let's consider statistics for the stock market. From January 1988 to March 1994, the standard deviation (volatility) was 3.6% per month. For a portfolio made up of 70% stocks and 40% bonds, the standard deviation dropped to 2.8% (negative correlation- they don't move the same way for the same reason at thesaem time).
But with 60% stocks, 20% high grade bonds and 20% high yield bonds, the standard deviation dropped further to 2.6%. Correlation between high yields and government bonds is only 0.2. With investment grade bonds, it is slightly higher at 0.4.
Over the past five years, corporate high yield funds have returned
12.70% versus 7.85% for corporate bonds and 7.47% for government bonds. Obviously
there are several issues to address when using these, but I have done so
for close to ten years and think that they can be a viable part of most
portfolios.
REMEDIAL: An average of 40% of the students entering college are
not yet ready for college math and English courses and must take remedial
classes.
MEDICARE: Here are some statistics (SF Chronicle)
Percentage of Medicare beneficiaries by income
Below $25,000 78%
$25,000 to $50,000 18
More than $50,000 5
Percentage who are women 57%
(Not surprising since there are more of them and they live longer)
Percentage of Medicare dollars spent in the last
year of life 20
Average annual expense on health care, age 65 and older $2,803
Biggest expense Home care
Percentage who were satisfied with Medicare services 89
Proportion of beneficiaries receiving home health services in 1982
40/1,000
1992 70/1,000
Percentage of Medicare population over 80 10
Percentage of same in managed care 7
HOW TO FIX MEDICARE: The following was excerpted from the WSJ in 1993- one in every seven dollars spent on health care is spent during the last 6 months of life. Another study stated that 28% of the Medicare budget is spent during the last year of line- somewhat in line with the 20% shown above- and the bulk is spent in the last 30 days.
To balance the Medicare budget, "simply" adjust the care for terminally
ill people. Provide for more hospice care instead of life sustaining measures
for those that will die within a few months anyway. While most Americans
say that every person "deserves" life prolonging care, to do so for those
in an irreversible condition seems unwarranted. Further, we just can't afford
it. Better to give full care for those that can be helped than to continue
very costly procedures for those that have no future. Cold, you say? Possibly,
but at least economically realistic.
RULE OF THUMB: Many elderly lose their homes through numerous scams
but in Los Angles they have severely reduced these by requiring that all
parties on real estate transactions not only to record the document but their
THUMBPRINT as well. Obviously the unscrupulous don't want to advertise who
they are so they are apparently going to other areas. Seems like a good idea
that should be instituted everywhere.
ERROLD F. MOODY JR.
BSCE, LLB, MBA, MSFP, PhD
2295 W. Ave 133
San Leandro, CA 94577
Phone & Fax 510 352-4127