MOODY'S REVIEW

JUNE 1996

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

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

CERTIFIED FINANCIAL PLANNER

REGISTERED INVESTMENT ADVISER

DEPRESSION: If you think you have depression, it is recommended that you get a good diagnosis from a mental health professional, not just your family doctor. It is also suggested that you see a psychiatrist or therapist who specializes in your illness and who should be affiliated with a college, university or referred by one. You may contact these organizations for more info.

American Psychiatric Association, Washington, DC 202 682-6220

National Foundation for Depressive Illness, New York, 800 248-4344

Depression and Related Affective Disorders Association, Baltimore, MD 410 955-4647

American Society for Adolescent Psychiatry, Bethesda, MD 301 718-6502

American Academy of Child and Adolescent Psychiatry, Washington, DC 202 966-7300

International Committee Against Mental Illness, New York, 914 359-8797

BAD MORTGAGES: Adjustable rate mortgages are apparently many times miscomputed by the lenders. The American Homeowners Foundation in Arlington, VA 800 489-7776 will investigate loans. Customers must agree to split any refunds it procures. It says that about 30% to 40% of its customers receive refunds averaging $1,500.



VARIABLE LIFE: (Worth) Variable Universal Life (VUL) insurance allows a policyholder to invest in various mutual funds in an attempt to beat inflation. Of course, there go the guarantees even that will work since, if we have another 1975, much of the money can go bye bye in a short time frame. Other problems are that many life policies do not allow a vast array of equity funds to select from and good asset allocation may not be available. Then you have commissions and expenses and a tendency in these policies for the mortality costs to greatly exceed that available under pure term insurance. The article noted that policies under $100,000 are just not cost effective. They also did this study showing a VUL policy of $200,000 death benefit, $2,000 annual minimum premium for a male 35 years old, non smoker, preferred rating (the best).

Years Policy Annual Avg Return Annual Avg Return

Held Typ whole life(1) Typ VUL(2)

5 Years -8.2% -5.4

10 years 4.4 2.9

15 years 6.0 5.7

20 years 6.7 6.5

Note 1- yield is based on a dividend interest rate of 7.3% over 20 years. Under current investment/ interest rate market conditions, that could be a tad high.

Note 2 assumes a 10% rate of return before fee deductions. Don't expect the same returns of the last 15 years.

Also note that the entire value of the buildup will be included in your estate for estate tax purposes. You can't get this into an irrevocable trust. So VUL seems best for people that will have total estates under $600,000.

WHAT EVERY PERSON SHOULD KNOW FOR EMERGENCIES

LOCATION OF PAPERS

Important papers should be kept in (most cases) a bank's safety deposit box. However, recognize that when one dies, the bank is usually required to seal the box until such time as it receives authority from the court, executor, etc. You may wish to have originals stored where accessible.

Birth or adoption certificates for all family members

Citizenship papers, if any members are naturalized citizens

Marriage certificate

Marriage and divorce certificates for any previous marriages

Physicians Directive

Last will and testament/trust documents

Deed to cemetery plot

Letter of instruction regarding funeral and or donation of body parts.

EMPLOYMENT INFORMATION

Names and addresses of each spouse's employers

Employer's benefit plans in which each spouse participates such as group insurance, pension plan, 401(K), etc.

Spouse's social security number

Location of social security cards

Length of time each has been covered by the social security program

Location of copies of previous year's income tax returns and supporting data or documents for the past three years, including cancelled check for most recent tax payment

Location of current withholding tax forms and receipts from employers

FAMILY DATA

Name, address and place of birth of each spouse's mother and father

MILITARY SERVICE

Service serial number

Dates of entry and discharge

Location of discharge papers

List of veterans benefits received (disability payments, places and dates of any hospitalization, education )

PROPERTY INFORMATION

Location of:

Safety deposit box

Key to safety deposit box

Papers for any owned real estate, including your home- deed, copy of mortgage, title insurance policy, surveys, closing statements, insurance policies, tax receipts, leases, building cost figures

Checkbooks and savings pass books for all bank accounts

Records of purchase and sale for stock certificate and bonds

List of any personal property not located in home or safety deposit box

Automobile title and registration certificates

Notes or loans agreements relating to debts owed to husband or wife

Income tax basis information for each asset

INSURANCE

Life Insurance: Location of policies, receipts of paid premiums, data on any loans made against the policies

Disability insurance: location of policies

Property insurance on house, car, etc.: location of policies, name of agent

Other insurance policies (hospitalization, mortgage, tuition, etc.): location of policies



PERSONS TO CONTACT IN CASE OF EMERGENCY

Person you have designated as children's guardian Close relatives and/or close friends

Executor of your estate Trustees of trusts

Doctor Lawyer Accountant Financial Planner

Clergyman Banker

Stockbroker Insurance (Life)

Insurance (Property and Liability)

Pharmacist Hospital/HMO

BEAR MARKET: No, I don't know when it will happen, but happen it will. And even the good funds could get creamed. Take a look at what some major funds did in the 1987 crash

Fund Loss in 1987 bear market

Fidelity Magellan -36%

Investment Co. of America -28%

Washington Mutual -28%

Vanguard 500 Index -33%

20th Century Ultra -43%

As regards our current market, it's certainly been bouncing around. A SF Chronicle article noted that much of the swings could be due to asset allocation funds who shift huge amounts of money from equities to bonds depending on which way they think the market will turn. I reviewed a number of them and it was quite clear that the consensus of which way the market would turn was almost totally different for each manager. I was never if favor of them to begin with but even have less positive thoughts now.

In another column, the highly regarded economist John Kenneth Galbraith said of the recent run of the market, "There is no question these movements (in the stock market) today are speculative. Particularly in mutual funds, there are far more people buying than there is intelligence". (emphasis mine.) Further, "the market goes up because people see it going up and that affirms their expectations and they buy". It will go down, he says, because some group will start selling, the market will go down and others will start selling.

GOING UP: Medicaid costs are projected to double from $89 billion 1995 by 2003. Medicare's costs of $177 billion in 1995 is expected to double to $280 billion by 2000.

401(k) LIABILITY: Here is an example of absolute company liability. A company had been using T Rowe Price no load, low expense funds for its 401(k) plan. In an employee meeting, the executives said that, in a recent survey, the employees had unanimously agreed to switch to the Putnam funds. The employees turned to each other and asked if they had been surveyed. None had. Now, Putnam is not a bad fund company, but it has loads (though probably waived for 401(k) plans), higher expenses than Price funds and the insidious 12b-1 fee to boot. The employees are now effectively paying money to the employer to run the previously established plan. The company has a mandatory obligation to inform the employees of the true reason for the change- greed (though it need not be expressed that way). Regardless, the company is liable for irresponsible and unethical behavior.

MORE 401(k): Not only are companies at risk for not providing correct info for employees, but some are almost being stupid by providing additional instances for an employee to sue them. For example, Ford Motor Company recently added 50 more funds to its handful of investments because they "didn't want to be sued because the company only offered a skimpy shopping list of funds". Unfortunately, without proper guidance, the additional number of funds increases the risk to EE's almost exponentially because EE's won't understand the overload of info they need to digest in order to use just one fund. In the same WSJ article, John Hancock noted in its 1995 study that 1/3 of respondents thought it impossible to lose money in a bond fund and an additional 10% were not sure. 12% thought it impossible to lose in a stock fund or answered didn't know. They noted that "it's hard to reconcile participants confidence (in building retirement funds) with their lack of understanding of basic investment concepts".

LOADED FUNDS: A recent SF Chronicle article said that loaded funds were coming back as investors were becoming confused about the over 6,000 funds that are offered. In 1992, loaded funds accounted for about 55.2% of all sales dropping to a low of 42% in October 1995. But they rebounded to 47% most recently. I agree with the essence of paying for help, but what distinguishes those people that are bright and pay for help versus the ones that are out to lunch is the difference in paying around 1% for the advice versus paying around 5% for far less sophisticated advice. Looking for advice from a broker is asinine at best since their licensing training on stocks or funds is minuscule. It is far more preferable to pay perhaps 1% to somebody with a CFA or MSFP- those individuals with advanced training. Why pay more to get less?????

BROKERS: According to the non profit organization, Investor Protection Trust, 90% of all investors using financial planners or brokers have never checked to see if their advisers have a disciplinary problem. They offer a free video tape by writing to IPT, 1901 North Fort Meyer Drive, Suite 1012, Arlington, VA 22209. Unfortunately, the issue is rarely disciplinary problems. It's that 99 and 44/100% of all investors never check to see if their adviser really knows anything.

UP OR DOWN: Many recent articles have focused on our solid economic growth and statistics from the Federal Reserve Boards show an expanding GDP. Nonetheless, there still seems to be an undercurrent about the security of jobs overall. I just don't see this comfort with many workers. The SF Chronicle noted that a pollster said the 45% of the workers he surveyed did not expect their earnings to rise in the next six months. He indicated that if job growth was truly that strong, no more than 20% of the workers would have felt they were gong no place. And he has been doing this survey for decades. Further, 1/3 of those who did expect their earnings to rise were looking to higher interest rates and an increase in the stock market for the increase- but not to an increase in their pay. The next few months to the election will be interesting.

MERGERS: The 90's have seen huge mergers in all industries, coupled with major downsizing. Over the long term however, one article asked just how beneficial these mergers will be if they actually reduce competition in the open marketplace. It may not be monopolistic in its formal sense, but the larger companies may simply forestall any smaller entities from even trying. (How about the scandal on TOYS R US?) End result is higher prices and a probably entry by the government to force some companies apart (ATT).

LIFE INSURANCE 2000: Life insurance companies have had tough times as products became far more competitive and commissions had to be reduced. While the boomers need for retirement and investment savings bodes for some possible business, the new increased competition from banks able to sell most anything will hurt them further in their effort to retain market share. But somewhere down the road is a more insidious problem. The cash value buildup in life insurance is exempt from taxation and provides an incentive for people to put extra money into life insurance in order to save. But CD's, mutual funds and the like do not receive such exemption. I think, with continued budget deficit problems in the years to come, the government will finally tax the inside buildup of cash in life policies. Congress will propose this by the year 2000. However, old policies will be undoubtedly be grandfathered.

EUTHANASIA: The issue of physician assisted suicide is one that many of us will face as we get older. I think that, by 2010, the majority of states will have enacted laws allowing its use. Various safeguards, as defined below, have already been instituted to try and avoid any hint of impropriety in the decionmaking process. Most involve leaving out certain procedures to hasten death.

In the Netherlands, euthanasia is still not legal. However, physicians are not prosecuted if they follow certain procedures

However, enacted in 1994, physicians may

Their investigations indicate that are three main reasons for a patient to request euthanasia

Why this commentary? Part should be obvious in that I would end my life in a heartbeat once I determined it was no longer physically or mentally worthwhile to ME- irrespective of what the medical community might state. After all, it is MY life, not theirs. Further,

I DIDN'T COME INTO THIS LIFE WEARING A DIAPER AND I'M NOT GOING OUT OF IT WEARING ONE

DEUNIONIZATION: (Fed Board of Philadelphia) "One of the most notable economic trends of the past 20 years is a dramatic rise in earnings inequality". The disparity appears to be widening and many economists, community leaders, etc. have questioned the reason why it has been and continues to exacerbate. The research has indicated that "deunionization appears to explain between 10% to 20% of the increases in inequality of the past two decades. "Between 1970 and 1992, workers under unions fell from 26% to about 13%. By 1992, union membership had fallen almost 27% from its 1980 level. The changes were due in part to a shift in employment patterns away from traditional blue collar unionized manufacturing jobs toward typically less unionized service sector jobs. The situation does not appear to be reversed in the near future. The downward trend in unionization is unlikely to be reversed significantly. Therefore unless governmental intervention takes place, a noticeable part of the unsettling rise in inequality will remain.

1035 EXCHANGES: It is possible to exchange a life insurance policy or an annuity for another and not be subject to any taxes if one follows the guidelines under IRS rule 1035. But replacing one life policy with another has concerned many state regulators since many exchanges were done primarily to provide a new commission to the agent. Prior to commencing such a replacement, the agent should get a copy of the new RQ (Replacement Questionnaire) from the American College and determine if the replacement is justified. Beyond that is another item that is seldom mentioned in replacements. Each life policy has a two year incontestability period where, if the applicant dies, the life company has a right to withhold proceeds and conduct an investigation of any misstatements or misrepresentations on the application. If no investigation is forthcoming within the first two years, the life insurance company is not allowed the right to contest later on. So, a replacement of a policy reinstitutes a new incontestable period and may place the applicant at risk should anything have been misstated. Further, there is the issue of suicide. Policies do not pay for suicide if committed within two years of issue. The new policy institutes a new suicide clause and does not have to pay for suicide within this new period. This puts the agent at risk for deciding to replace a policy. Life Insurance Selling recommended that all clients be required to formally sign written acknowledgment of the new incontestability and suicide periods. Learn something new each day.

PANIC ATTACKS: Without treatment, panic disorders can be extremely detrimental to a person's social and family relationships and work. About 30% turn to alcohol, 17% turn to self prescribed drugs, about 50% experience clinical depression and about 20% attempt suicide at some point in their lives. Panic attacks typically start in the 20's and women are affected about twice as much as men. They are defined by a sudden rush of fear and a variety of symptoms such as shortness of breath, dizziness, chest pain, numbness, feeling of doom and an urge to flee. "Someone with a panic disorder is often preoccupied with and fearful of any body symptoms and fearful of going into a specific situation" said a psychiatrist. Symptoms may be relieved by breathing, restraining and stimulus awareness. Patients may also benefit from exercise. Said a researcher, "if I had to chose a single treatment to stop or forestall a panic attack, it would be exercise."

Also call 1 800 64- PANIC for free info. All callers receive 20 page book called Understanding Panic Disorder and an Anxiety Disorders resource booklet.

EXPORTS: We are still running a trade deficit and many tend to look at the lack of U.S. exports. But exports are NOT our problem. They have actually risen over the last 30 years (minor glitch in the mid 80's). Many articles focus solely on the service sector- where we undoubtedly have done fairly well- increasing at a nominal rate of 10.5% between 1985 and 1995. But the same pundits dismiss manufacturing exports by saying that we have lost ground considerably to second and third world countries. Wrong! During the same time period, these exports increased at 10.5% clip.- led by computer hardware and all our other technological advances. So why the still high trade deficit? Because as a country, we are still mass importers of all sorts of goods. Sure, some of U.S. jobs/industries are under severe pressure from cheaper labor overseas- making sneakers, for example, is far cheaper in China or Korea. But overall, it's the U.S. productivity that stands out as the best. The U.S. keeps the world going

MAELSTROM COMING: The number of children removed from their families because of abuse and neglect in California has risen 25% since 1988. About half the children in foster care are not reunited with their families. "This is an indicator of the effect of the breakdown of the family" said the Colorado Attorney General. "Any social group that does not have a predominance of stable families is going to have serious problems." This issue, along with recent reports that the number of 14 to 17 year olds will increase by 23% between now and 2005 bodes for what researchers call a "ticking time bomb" for violent crime. The report said that governments should attach much more importance to preventing youths who are at particular risk of becoming criminals. Unfortunately, each generation of teenagers since the 1950's have been more violent that the last.

Another report cited what some thought was true but had not been verified: about 1/3 of all violent crimes in the U.S. are committed by people who are technically "under supervision"- are on probation, parole or pretrial release. Lastly the report concluded that the high cost of building and maintaining prisons actually saves the tax payer money. For every dollar it costs to keep a prisoner, society saves about $2.80 in the social costs of crimes averted.

So why the commentary- outside it's my newsletter? Well for one thing, it focuses on what the economy might be later on and where the money will be going. Maybe it will be worthwhile to invest more in security protection companies, homes in the rural areas (which we have already seen) and personal protection devices- including guns. Maybe a mutual fund will focus on these issues. Could be a winner.

SOCIAL SECURITY: 13% of retirees will be forced to pay a higher amount of social security tax. Follow the steps below (Price Waterhouse). If any negative numbers, use zero.

1. Estimate 1996 social security benefits _______________

2. Estimate 1996 adjusted gross income (exclude taxable social security) and add 50% of the amount on line 1 plus all tax exempt interest ______________

3. Subtract $32,000 from line 2 ($25,000 if single) ____________

4. Subtract $44,000 from line 2 ($34,000 if single) ______________

If line 4 is zero or less, you will not have to pay additional taxes on your benefits and you don't fill out the rest of this form

5 If line 3 greater than line 1, enter line 1 times 0.50 ________________

6. If line 3 is less than line 1, enter line 3 times 0.50 ____________

7. Enter line 1 times 0.85 _____________

8. Enter line 4 times 0.85, plus the lesser of a) $6,000 ($4,500 if single) or b) line 5 or line 6 one should be blank). _________________

9. The lesser of line 7 or line 8 is the amount of your benefits that will be taxed next year. ______________

Taxable Social Security benefits_________________

10. Subtract line 5 or line 6 (one should be blank) from line 9

Additional Benefits Taxed __________________

11. To calculate how much additional tax you'll owe on your benefits, multiply line 10 by your anticipated tax rate. Additional tax ___________

Step 12. If you have any money left, send it to me.

MORE SOCIAL SECURITY: The Associated Press noted that had an individual's money been invested in stocks rather than allowed to languish at the Federal Government, the payouts for highly compensated retirees would have been significantly greater. A 66 year old retiree getting $1,200 a month in social security benefits- the highest available- would have gotten $3,999 a month had his money been invested in the market. For a high wage earner in the 1970's, benefits at normal retirement age would amount to $1,908 under social security, but an amazing $11,729 a month if invested in the market. On the other hand, they tend to show that lower compensated workers would be getting LESS social security payments than current.

LOADS VS NO LOADS: Here's a study by Morningstar of the various ratios between the average load and no load funds as of 5/31/95

No Load Load

Expense Ratio % 1.11 1.62

Price Earnings Ratio 19.98 20.81

Price/Book ratio 3.58 3.88

5 yr. Earnings Growth Rate 14.16 15.63

Technology Weighting % 15.26 17.57

Standard Deviation 3 yr 0.86 0.88

Beta 3 yr 0.93 0.96

They commented on the fact that no loads do not necessarily outproduce loaded funds since so many factors need be considered. True. In fact, loaded funds could outproduce no loads because of their more aggressive stance in almost all areas- see technology percentage. Morningstar ended by stating that the one difference might be the service provided by a broker or advisor. Also true, but remember service by a schmuck is not going to be worth all that much. Why the criticism? Well, it's well known to long time readers. Brokers have never even been taught about investments, suitability or most other areas addressing risk and return, so expecting them to properly select an investment, monitor it properly and suggest rebalancing belies reality. Use someone with advanced designations/degrees.

ATTENTION DISORDERS: Therapists look for these signs

For info on Attention Deficit Hyperactivity Disorder, write to Children and Adults with Attention Deficit Disorders at CHADD, 499 NW 70th Ave. Ste 101, Dept. P, Plantation, FL 33317. Call 800 233-2322 to find a support group in your area.

IPO'S: As I repeatedly state, the purchase of new issues is fraught with risks. Further, the returns are not that great. Sure, you might get lucky with Netscape, but for every one of those, there are 30 that die. Also, the odds of a "regular Joe" being able to buy something like Netscape is relatively remote since all the heavy hitters at a brokerage firm would have already signed up for it. A 1991 study by the University of Illinois of 1,526 IPO's from 1975 to 1984 showed that these stocks gained far less value over three years that a group of similar companies that were already public. Investing $10,000 in IPO's would have brought $13,447 in three years versus $16,186 in the public stocks. That's a 27% difference. The median return- half way between the highest and lowest return- was even worse with a negative 17% return with issues of smaller younger companies doing the worst. Another study by the University of Iowa published in 1995 showed essentially the same results for five year returns of IPO's from 1970 to 1990. IPO's earned an average of 15.7% versus 66.4% of public firms. The median IPO actually lost 39%. The study said that investors gave up $39 billion in potential gains by investing in IPO's versus existing companies with similar capitalization.

BANKRUPTCIES: The WSJ noted that personal bankruptcies has been soaring for the first four months of 1995 and is up 27%. That's almost double what was expected. The reasons are probably what you expect- high debt, downsizing, and medical bills. Could be a potential economic indicator.

FEE BASED ADVISORS: (WSJ) Ask these questions when someone is charging a fee

Do you receive a trailing commission?

Do you receive any other compensation (trips)?

Are you willing to reduce your annual fee to offset the trailing commissions?

Can you recommend funds that do NOT have 12b-1 fees? If not, why not?

Before you became a financial advisor, were you a commissioned salesperson?

What training do you have to manage my money?

GIVENS IS GIVING IT UP: Charles Givens was a fast buck "promoter" of seminars, books and tapes on real estate, financial planning and taxes. He promised a money back guarantee on the costs of his products- some that amounted to $2,500. The Florida State Attorney General said he committed consumer fraud by refusing to honor his money back guarantee. They also said he lied when stating that he had lost and made $1 million three times by using his "system". He settled out of court in Florida, Iowa and Wisconsin. But a San Diego jury awarded plaintiffs $14 million because the advice he offered was harmful or worthless. He couldn't be reached for comment because he was in the Bahamas with part of the hundreds of million of dollars he grossed as a financial guru. Let's be careful out there.

INTERNATIONAL INVESTMENTS: The general sentiment within the investment community is the use of asset allocation and the consideration of foreign funds. As stated in the past, one looks at the correlation of different markets- how much one market's movement is tied to another's. If they are totally independent, then the mix may be good because of the different economics in either country. Years ago, the correlation between the U.S. and many foreign markets was fairly low- maybe around .50 or slightly less. However as the "world became smaller" due to the vast computer and communications network, the market started to move a little more in tandem- perhaps as high as .75 or more. This was somewhat corroborated by a SF Chronicle article that said that well diversified foreign funds do well only because of currency fluctuation- not because of the movement of the foreign stock per se. And when the U.S. falters, so do foreign investment since, when America coughs, the rest of the world gets the flu. They say that maybe these diversified funds reduce risk only when the entire world markets are flat to up. A respected advisor noted that he didn't think there was much sense in using diversified foreign funds. Better to stick at home. So does that mean all foreign investments are out? No, but it tends to indicate that just selective use of certain countries as investments are viable rather than spreading the money all over the place

DOW: as stated previously, the DOW contains just 30 stocks and does not reflect the overall market that well. The stocks are AT&T, Allied Signal, Alcoa, American Express, Bethlehem Steel, Boeing, Caterpillar, Chevron, Coca-Cola, Disney, du Pont, Eastman Kodak, Exxon, General Electric, General Motors, Goodyear, IBM,, International Paper, JP Morgan, McDonald's, Merck, Minnesota Mining and Manufacturing, Philip Morris, Proctor and Gamble, Sears, Texaco, Union Carbide, United Technologies, Westinghouse and Woolworth.

NATIONAL COUNCIL FOR ADOPTION,(NCFA) 1930 17th St. NW, Washington, DC 20009 202 328-1200, hotline at 202 329-8072. Info and publications

BANK SALES: Some class action suits have been filed against several banks for selling unsuitable funds to bank customers. About 200 formal complaints were filed against banks in the first half of 1995. The Texas Securities Commissioner said, "I think that is just the tip of the iceberg." Rules established in 1994 were meant to stop the problems, but a GAO study indicated that just one in three banks and thrifts mentioned the four risks of investing they required. One in five mentioned none.

ERROLD F. MOODY JR.

BSCE, LLB, MBA, MSFP, PhD

2295 W. Ave 133

San Leandro, CA 94577

Phone & Fax 510 352-4127