MOODY'S REVIEW

JUNE 1997

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

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

MASTER OF SCIENCE IN FINANCIAL PLANNING

REGISTERED INVESTMENT ADVISER

WWW.EFMOODY.COM

DOWNSIZING 1: The loss of jobs is in every newspaper, in the news every night and effects thousands of people- even those with a job since they feel insecure about their future. So, does the corporate downsizing work? According to a Business Week article and the Wharton School, the "benefits are elusive". While financial restructuring was viable, the use of organizational restructuring had little, if any, positive effect on earnings or stock market performance. On the contrary, 70% of reporting companies noted serious problems with morale, mistrust of management and greater disability claims. Some employees are successfully suing for wrongful discharge. If all this is true, then why was there a report in March for a 15 month record of an announcement of 50,182 job cuts? Well, some articles have pointed out that CEO's of companies that have done downsizing have received substantial bonuses. They couldn't be related could they??? Nah!

DOWNSIZING 2: These comments are from Greenspan's testimony earlier this year. "In 1991 at the bottom of the recession, a survey of large firms indicated that 25% feared being laid off. In 1996, despite the sharply lower unemployment rate and the tighter labor market, the same survey found that 46% were fearful of job layoff."

That's one of the main reasons that you haven't seen surges or inflationary pressures on job wages. Workers want security and have given up wage gains for longer term employment contracts. But, "at some point, the tradeoff of subdued wage growth for job security has to come to an end. In other words, the relatively modest wage gains are a temporary rather than a lasting phenomenon because there is a limit to the value of additional job security people are willing to acquire in exchange for lesser increases in living standards."

Why has some of these job changes happened? Greenspan put the job climate into focus very succinctly by stating that "one possibility may lie in the rapid evolution of technologies in the workplace. Technological change almost surely has been an important impetus behind corporate restructuring and downsizing. Also it contributes to the concern of workers that their job skills may become inadequate. No longer can one expect to obtain all of one's lifetime job skills with a high school or college diploma. Indeed continuing education is perceived to be increasingly necessary to retain a job. The more pressing need to update job skills is doubtless also a factor in the marked expansion of on the job training programs, especially in technological areas, in many of the nation's corporations".

YIELD SPREAD: When you look at returns on various instruments, you also look at the risk you are taking. For example, and as mentioned frequently, I do use high yield funds to generate income. Is the risk greater than Treasury's? Yes. But the spread has narrowed to just 3.25% in mid March meaning that the marketplace- at least in my interpretation- does not see a significant economic risk in high yield funds. That said, they will still a faster tumble than Treasury's if and when rates rise. Another interpretation is that it is not worth the extra risk in using high yield bonds since Treasury returns are so close in return to higher risk bonds.

LIVING LONGER: (WSJ) Researchers used to think that if you extended life by five years, four would involve debilitated health. Not so. 24.9% of the elderly in 1982 were unable to perform cooking, bathing or dressing themselves. In 1994, that had declined to 21.3% and represented about 7 million elderly. If the 1.5% drop stays true, it could help Medicare stabilize itself for the next few decades since there would be so much in savings.

RETIREMENT REPORT: The American Society of CLU and ChFC's study on retirement planning did note that more people were using equities to fund retirement planning, but I submit that was more due to the market than a conscious effort to seek what historically has been the better investment. Nonetheless, 42% said that they used banks savings accounts to build up and accrue the kitty. Also, most people do not comprehend that they will live for quite a long time after retirement and are not putting sufficient monies away for about 20 years of life after age 65.

What is unfortunate, in my mind, is that people are still relying on the wrong people to help them with retirement advice. 40% used friends and family associates; 21% used employer's benefit specialist, 20% a financial planner, 20% used themselves; 13% a life insurance agent; 12% an accountant; 10% a banker; 9% stockbroker and 7% an attorney.

DEATH: This comes from a commentary by Michele McCormick titled "We let Dad die with dignity" where she and her mother agreed to let her father die in peace. She said "in America today, death is considered unacceptable. No matter how serious the illness, how profound the injuries, how poor the quality of life will be, we struggle to protect and preserve each life at all costs. And just as strong as our wish that life not end is the desire to separate ourselves from any responsibility for such an event."

"There is no more wrenching decision that to choose death for another. No matter if the dying person has signed a living will or how inevitably death looms, it is indescribably difficult to make such an irreversible decision."

As her father went further and further into unbearable suffering without any hope of recovery, they both hoped that he would die quickly- or that the doctors would let him. Unfortunately not. A nurse said-"your living will has little force here. If your father stops breathing, he will be resuscitated and put on a respirator. If you attempt to interfere, you will be physically restrained."

Did you read that last part? A loved one is dying. The person has always expressed a wish to not live in pain and suffering when the diagnosis is terminal, but the staff would only continue the unending suffering in a vegetable existence. So they immediately contacted the lead doctor and got a DO NOT RESUSCITATE order. They turned off the machines. "Dad died quietly and with great DIGNITY."

I recently had one client do the same and is currently "just putting one foot in front of another" since this is the second time she has been widowed. The loss is greater yet since both these men were her best friends. But she also knows she did what they both wanted since they had openly discussed medical directives. Yes, time will heal this wound, but it just takes so doggone long.

Dying- and putting one in a nursing home- are two of the most excruciating issues that we will ever face. Trying to stay unemotionally detached is impossible. But if you prepare yourself for the inevitable, perhaps suffering on both sides can be reduced.

CONSUMER ATTITUDES: The PHOENIX company has a study done each year that provides insight to the consumer/employee psyche. While this one was in early 1996, the one comment that stands out is that the survey revealed "the growing awareness that they must shoulder a greater level of responsibility for turning their financial dreams into reality". The main difficulties were somewhat like the past- obligations for their children's education- but some are relatively new- the care of elderly parents. Also notable from this group of 1,000 respondents with average incomes over $40,000 was that 47% of parents in their fifties were providing support for children over the age of 21. Up to 1/3 said they would help their children buy a car.

As regards retirement, many showed lower amounts of pensions, less reliance on social security and fewer expect an inheritance. Most felt that they had to rely more on their own savings and their income production past age 65. Unfortunately, the amount they were saving would produce only about TWO THIRDS of what they will need for their expected retirement.

PROBLEM BEHAVIORS: (CRC) It's sometimes the little things that make a difference in caring for someone with Alzheimers. For example, instead of saying would you like to sit over here and have a snack, just use "come here", "sit down" and "here's a snack". Using just one command or question at a time might make the task easier to comprehend to someone having difficulty in comprehension.

STOCK MARKET: Yes the market is still doing well, the budget deficit is being addressed and inflation is staying low (the major factor in my mind). But underlying all that is very high credit card debt, personal bankruptcies and about 46%+ of the middle income workers feeling apprehensive about their jobs But I learned back in 1983 or so NOT TO FIGHT THE TAPE. If the market wants to go up, so be it and I will go along for the ride. And my positive confidence level is about 60 to 65 out of 100. Only when literally every analyst is below 60 do I REALLY get worried. So you may want to get on board.

INVESTING FOR NON SUCCESS: I am going to provide a limited treatise on a major element of investing since it is paramount to retirement and estate planning- BASIS. I stress this in every class I do, since, without this understanding, you can NEVER do either one correctly. The essence of such commentary is that certain assets do NOT get a step up in basis at the date of death where other assets do. First of all, basis makes reference to tax basis. Essentially, anything above your current tax basis is profit that is taxed. If you had a mutual fund that you purchased for $5,000 and sold it for $15,000, you would be taxed at the long term capital gain rate on the appreciation of $10,000 (I am purposely excluding any dividend and capital gains distributions). But things change when you die. In the next example, we'll assume you owned a mutual fund, real estate or a business asset as your own property. We'll also say that each was purchased for $25,000 and were each worth $250,000 when you died. They went to your beneficiaries. So, what is the basis of the properties received? Or in other words, how much would the beneficiaries be taxed on if they sold the property then? NOTHING! That's because the basis moves upward to the value at the date of death- $250,000. Subtract $250,000 adjusted current basis from the sales price of $250,000 and the gain is $0.00.On the other hand, take an annuity purchased for $5,000 that grew to $15,000 and you took all the money out. The basis was $5,000 (money previously taxed)- but the gain of $10,000 would be taxed as ordinary income- universally higher than the long term capital gain. The worst is yet to come. Assume the same assets of a mutual fund or other assets had been held in the traditional tax deferred accounts of a 401(k), Keogh, IRA or similar. They would (normally) have no basis to begin with since they were entered into a tax deferred account, but the problem if they were passed on to beneficiaries, is THERE IS NO STEP UP IN BASIS AT THE DATE OF DEATH. The $250,00 value at death would come out all as ordinary income. Assuming a tax rate of 30% to the beneficiaries, that amounts to a $75,000 tax. And sometimes it can get worse. If you have too much in these accounts, the government can initiate an additional excise tax of 15% (in abeyance till year 2000) . Also, do not forget estate taxes on anything over $600,000. These rates start at 37%. Worth did a study of how such taxes have increased on such accounts.
Date of Death Combined Estate and Success taxes on estate over $1.2 million Marginal and Combined success and income tax rates on retirement assets above $1.2 million
1982 0% 39.2%
1984 43 69.8
1988 43 69.8
1997 53.3 85.4





You have got to do very careful retirement and estate planning to keep such exposure to a minimum.

DEFINED BENEFIT VERUS CONTRIBUTION: (BW) Defined benefit pension plans account for 2/3 of all employer based pension and retirement savings, but 401(k) and defined contribution plans are growing at a rate of 12.5% annually versus 7.5% for defined benefit programs.

BUDGET DEFICIT: Yes I know the politicians are talking about balancing the budget, but look at this from the Treasury Department- it reported that the nation's outstanding debt was $5.348 trillion which was UP $246 billion from last year's debt of $5.102 trillion. The politicians had been telling us it had actually declined over the last 12 months. And they say we'll finally get out of the hole by about 2002, but a good portion of that optimism is based on a solid continuing economic expansion. Not only is that a crystal ball, but it also means that they will probably not do the tough restructuring on Medicare and other entitlement programs. So when we do have a recession, these programs will remain out of whack and just ready to escalate beyond acceptance once again.

JAPAN: This might give you an idea of how bad things got. Commercial land prices in Tokyo dropped from a peak of $285,000 per square meter in 1990 to about $57,000 in early 1997.

MSO: (BW)And more medical info. This is another new managed care entity called a Management Service Organization. They're privately held entities where ownership is usually split 50/50 between hospitals and doctors.

VITAMIN SUPPLEMENTS: You should take vitamins particulary if you are

ELDERLY WORKERS: This dovetails with many retirement reports. If the older workers are not going to properly save for retirement, then what will they do? Keep on working, that's what. And that will cause some major restructuring in itself. A BW report noted that if (since) industry must keep older workers, they will have higher salaries to pay, higher costs for medical care, more absenteeism, etc. According to one pension consultant, medical costs for the 50 to 54 old workers is three times that for those between ages 30 to 34. And if these workers do work longer, they take away opportunities from the younger workers who need to learn skills. So you will end up with lower paid and lower skilled workers who finally do enter the jobs once the jobs become vacant.

HEART DISEASE: In some classes, I ask what are the two diseases that are the major cause of concern for women. Almost all get breast cancer, but many miss heart disease. According to U.S. health statistics, about 233,000 women died in the U.S. from heart disease in 1992- about 6 times more than died from breast cancer (43,000). But only 1/3 of women in a survey knew there were at a higher risk for heart disease.

PPM: Well, we got HMO, PPO, etc., etc. but now we have PPM- Physician Practice Management. What's this? It is essentially a corporation that buys a doctor's practice who then signs a long term agreement for 30+years. The doctor still "works for him/herself" but gives up 15% to 20% of revenues to the PPM that reorganizes the back office operations to become more cost efficient (savings of 10%- 15%+ have been accomplished). All the various doctors work together on the PPM board. Suggestions are made regarding fees charged by each member to bring them "all in line", but they are not forced to do so. The main thing is that the doctors have complete control on practicing medicine- there are no managed care edicts telling them what to do. So they remain autonomous, are within a group atmosphere to gain efficiency of scale regarding nonmedical procedures, and might possibly compete with an HMO- at least possibly the "for profit entities."

INDEX ANNUITIES: As indicated previously, I think these are so convoluted that hardly anyone can ever figure out just exactly what return you will get given "X" circumstances. At least with the S&P 500, it's almost perfectly clear. You get the return minus a small charge for expenses. But as an article in Investment Adviser noted in regards to indexed annuities, "their complexity can make calculating and disclosing the equity component a headache." "These are extremely complex financial instruments" that do not include dividend returns in their calculations. So that further erodes the total return potential.

They did note, however, their slick sales pitches will make these the hot sellers for 1997. About 25+ insurers have put products on the market to date with many more ready to come on line. So should you bother (though the answer is already preordained by my commentary?) Look, if someone hasn't entered the market by now, after some of the most major gains of this century, they are so far out to lunch that they would never, never, never even remotely grasp the fundamentals of this investment. In other words, NO!

IDIOT EXPECTATIONS: (IA 1996) a survey by Louis Harris and Associates showed that 29% of those surveyed felt that during the next ten years, the stock market would do BETTER than the 14% returns of the past decade. IDIOTS. Another 56% said it would be the same 14%. STUPID. 14% said the returns would be lower. Very Good analysis. And 2% said they didn't know (that's still O.K.). The survey went on to note that 23% did not expect a drop of 20% or more in the next 10 years- even though there has been a 20% decline on an average of every five years since the end of WWII. For those of you who say we have a profoundly different economy- true. But so did Japan and looked what happened to it. It hit a high of 38,915 in its market in 1989 and has dropped 63% of its value by the end of August 1992. It's only moved a little to 20,000. No question that the U.S. economic structure is better, but I remember when they said old prices would always go up, buy only real estate, etc., etc. Pay attention to history and pay attention to current economics.

LOWERED EXPECTATIONS: This will endear me to just about nobody, but it tends to clearly explain the ludicrousness of the previous commentary from investors on perceived returns as well as the reason why great numbers of people get screwed in the marketplace. They simply do not possess the intellectual skills to be able to understand what in the world they are doing- assuming they made an effort to begin with.

Years ago when people did what I thought were clearly illogical and ridiculous activities, I would ask myself, "don't they understand, can't they see???" Well, the answer is, alas, NO! Unfortunately for them- they actually THINK they posses the skills to logically and competently understand what they are doing- only to be deceived by this ineptness. How can I prove it? The 1992 National Adult Literacy Survey. Here are many of the findings that correspond to five levels of literacy pursuant to its definition, "an individual's ability to read, write, and speak in English and compute and solve problems at levels of proficiency necessary to function on the job and in society, to achieve one's goals, and to develop one's knowledge and potential". The National Adult Literacy Survey measured competency against three levels- prose literacy, document literacy and quantitative literacy.

Prose literacy- those with competency can locate information, find all information, integrate information from various parts of a passage of a text, and write new information related to the text.

Those measured in the survey were graded against a score of 500. Level 1 participants could consistently perform just level 1 requirements, but none of level 2. Level 2 could perform both 1 and 2, but not consistently do number 3. And so on. The scores:

Level 1 scored from 0- 225 and represented 21% of Americans or about 40 million of the total 191 million U.S. population.

Level 2 scored form 225 to 275 and represented 27% or 52 million Americans. At this point you can see that 50% of all Americans performed at the lowest two levels of literacy.

Level 3 scored from 275 to 375 and 32% or 61 million Americans performed at this level.

Level 4 scored 325 to 375 and covered just 17% of the U.S. population or 33 million

Level 5 scored 375 to 500 and covered a minuscule 3% of the population or 6 million.

Document literacy means that people can locate information, repeat the search as many times as needed to find all the information, integrate information from various parts of the document, and write new information as requested in appropriate places in a document.

Level - 23%

Level 2- 28%

Level 3- 31%

Level 4- 15%

Level 5- 3%

Quantitative literacy means that people can locate quantities, repeat the search as many times as needed to find all the numbers, integrate information from various parts of a document, infer the necessary arithmetic operation, and perform arithmetic operations. The scores were quite similar

Level 1- 22%

Level 2- 25%

Level 3- 31%

Level 4- 17%

Level 5- 4%

The survey by the U.S. Department of Education's National Center for Education Statistics estimated that 21% to 23% of the adult population over the age of 16 had only rudimentary reading and writing skills.

The study noted that while 25% to 28% of respondents were proficient in level, "their repertoire was still quite limited". Individuals in levels 1 and 2 "were apt to experience considerable difficulty in performing tasks that required them to integrate or synthesize information from complex or lengthy texts or to perform quantitative tasks that involved two or more sequential operations and in which the individual has to set up the problem. Surprisingly, the approximately 90 million people did not necessarily see themselves "at risk". 93% to 97% or respondents in level 2 described themselves as being able to read or write English "well" of "very well".

The summary noted that in our technological society "growing numbers of individuals are expected to be able to attend to multiple features of information in lengthy and sometimes complex displays, to compare and contrast information, to integrate information from various parts of a text or document, to generate ideas and information based on what they read, and to apply arithmetic operations sequentially to solve a problem/"

"The results of this and other surveys, however, indicate that many adults do not demonstrate these levels of proficiency. Further, the continuing process of demographic, social and economic change within this country could lead to a more divided society along both racial and socioeconomic lines."

In any case, there is the substantiation for the fact that at least 80% of the populace simply lack the competency to understand the investments placed before them. What you say? After all, only 50% were in the lower levels of 1 and 2. Certainly those in level 3 could understand what the risk reward limitations were of an investment. Possible true, BUT ONLY IF THEY MADE THE EFFORT. Hardly anyone I have ever know has bothered to read a prospectus. Invariably they simply trust the "adviser" to tell them what to do. And invariably the adviser got a commission. So that may not work well. O.K., maybe they used a fee only planner. But that counts only if they also had read a prospectus. And don't get mesmerized simply because someone does fee work. A twit doing fee only planning is still a twit,

CAREGIVER TIPS: (Family Caregiver Alliance)

1. Try to understand the limitations of the disease and just how well the person is able to communicate with and to you- the major problems being senile dementia and Alzheimers. Try to accept what the person has become, certainly not an easy task.

2. Reassure the ill person as much as possible through touching, soothing tone of voice and manners, simple words and gestures. They may not know who you are, but the kindness should show through. Also remember that every so often the brain "clouds" do clear and they need to know you still care.

3. Probably on the major reasons for adult abuse is that the family member loses control through the simple frustration of having to deal with the problems hour after hour, day after day. The best thing to try and do is to recognize that you are not in this alone. Contact your Area Agency on Aging for assistance. Use other family members and friends where possible to give you a break from the monotony. They can help you stay in control.

4. Don't try to always to correct the person when they are confused. If they think there in Scotland 20 years ago, you might ask them "what's it like, who are your friends, etc." It probably won't do any good to try to correct them anyway and perhaps you can establish a dialogue and further communication. Again, it comes back to accepting what the person has become and working within those confines.

CAREGIVERS: Here are some statistics from the California Caregiver Resource Centers Assessment database, 1990- 1992

1. The typical caregiver is a 59 year old woman with a household income of $20,000 to $25,000 (1992 dollars). She has been caring for her husband with Alzheimers for five years.

2. 51% of the caregivers are women and 36% are adult children. The largest groups are wives (37%), adult daughters (29%), h

Husbands (14%) sons, (6%), parents (5%) siblings (3%) and others (6%).

3. 47% of caregivers under the age of 65 also work outside the home. 18% under age 65 had to quit their jobs in order to provide care. Another 18% had to reduce the number of hours worked.

4. Caregivers provide an average of 93 hours of care per week

5. 27% said they get NO help from friends or family.

6. 66% of the caregivers in the survey showed signs of depression

WHO DO THEY CARE FOR?: The caregivers typical brain impaired "patient"

1. Male, 71 years old, married and suffering from Alzheimers for five years

2. More of the brain impaired adults under care are male (54%) than females (46%).

3. 78% are 65 years and older and at least half (51%) are 75 years of age.

4. Alzheimers is the most common affliction (38%) followed by stroke (23%), non specific dementia (11%), Parkinson's disease (8%) and traumatic brain injury (8%).

NUMBERS, NUMBERS AND NUMBERS:

Average social security benefit for retired workers:

1976- $2,698

1996- $8,688

Percentage of retirees who rely on social security for half or more of their income- 66%

Percentage of the elderly who would fall below the poverty line without social security benefits- 54%

Number of baby boomers who will turn 65 between 2011 and 2029- 76 million

Number of workers per retiree in 1960- 5.1

Projected in 2020- 2.4

Year that social security trust fund will begin to lose money - 2012

Year it will be completely depleted - 2029

Percentage of Americans who are almost deliberate in their refusal to deal with retirement- 19%

Percentage of young adults who believe that social security will exist when they retire- 28%



INFLATION, LABOR, DOLLAR AND OTHER ECONOMIC STUFF: (Federal Reserve Board Monetary Policy Objectives) In the overview of February 1997, there were some very relevant remarks that are valid several months later. Here are some

DOLLAR: The increased value of the dollar over the last 18+ months has kept the import of non oil product prices low and has also helped to dampen inflation pressures. But recognize that what goes up comes down and it has dropped a lot most recently- though nothing I am currently concerned about.

EXPANSION: "The expansion almost surely would not have lasted nearly so long had monetary policy supported an unsustainable acceleration of spending that induced a buildup of inflationary imbalances." Absolutely agree. The best friends the Americans have had in the last 15 years have been Volcker and Greenspan.

FIGURING OUT MONEY: In the 80's, everything hinged on the movement of M-1 as the precursor of the economic direction. When that proved unreliable, the FED's (and literally everyone else) moved to M-2. But the FED went on to say, "unfortunately, because the monetary aggregates were subject to aberrant behavior patterns of the early 1990's, they are likely to be of only limited help.

From 1960 forward, M2 was reasonably predictable. M2 velocity- nominal income divided by the stock of M2- tended to vary directly with the difference between money market yields and the return on M2 assets. ..... But for several years in the in the 1990's the velocities of M2 and M3 exhibited persisting upward shifts that departed markedly from these historical norms. Most recently, the patterns have returned to more normalcy.

So what was that all about and should you care? Well, its another factor in determining the direction of the economic marketplace. You simply can't really talk about an economic outlook without addressing the movement of money. I usually refer to the graphs from the FED Reserve Boards. So should you.

One of the more interesting comments from the Summary Report was "the economy performed impressively in 1996 and members of the Board of Governors and the Reserve Bank presidents anticipate that 1997 will bring further appreciable economic expansion with relatively low inflation. And half way into the year, it looks pretty good- save for the fact that I think there is some underlying cause for concern about inflation in 1998.

DECLINE, CORRECTION, PANIC?: The Wall Street Journal had these descriptions that aptly described what kind of situation the market might be in.

Routine Decline: This was described by a 5% decline in the market and happens, on average, about three times per year. (That's not been the case during the 90's. 1991, 92 and 93 were the three least volatile years in the entire market's history.

Correction: a 10% decline that happens about once per year- though the last time was about 6 years ago.

Severe Correction: a 15%+ correction and there have been about 15 in the last 50 years

Bear Market: a 20%+ decline. The last major one was in 1973/74 when there was about a 45% decline

Panic: a bear market or correction compressed into just a few weeks

Crash: a decline of 20%+ in a day or just a few days

CALIFORNIA DEPARTMENT OF INSURANCE:

Recently, the legislature's auditor said that the $100 million dollar agency has delayed investigating thousands of complaints and has "significant deficiencies" in the way it handles funds. The report ended by stating "because the department exhibits these shortcomings, we are concerned that the department has limited effectiveness in meeting the public's need for protection from unlawful or unfair practices by insurance companies."

NON NATURAL OWNERS: This also applies to annuities. One is able to get the tax deferred treatment under annuities, but only if there is a natural- a live- person as owner. Non natural owners do not get the favorable tax treatment. Some exceptions apply and they are:

Charitable organizations and pension plans

CROSSOVER BONDS: A High yield bond is rated below BBB and is euphemistically classed junk. BBB bonds are investment grade. Some bond are rated BBB by one company and BB by another. They're caught in the middle but since they do have at least one BBB rating, they are able to lower interest costs. Some analysts say they should also do well if the economy runs into difficulty. This is also called the "5B" market.

FEE & COMMISSION VERSUS FEE ONLY: This is a big issue throughout the country with a lot of people focusing solely on fee only as the way to go. First, understand that 95% all of my work is on a fee basis. Does that mean it's the only way to conduct business? No and this is why. As defined above, many people must consider insurance. Yes, you can buy no load insurance, but you cannot buy no load Medigap or long term care insurance. Nor can you buy the cheapest life insurance in the United States without a commission. What it also means is that, in certain states including California, you must have a special license in order to charge a fee for life insurance advice. It requires, currently, about five years worth of experience and a minimum of 176 hours of study time. No fee only planner I have met, nor any advisor in NAPFA has such a license and therefore all are working illegally in this state. Secondly, most of these people have a dismal knowledge of this intricate area and usually bypass its review or do a completely sophomoric job. Therefore, you may not end up adequately covered. Thirdly, if they did offer long term care advice, you will not only pay a fee for illegal and probably incompetent advice, but pay a commission to a separate agent selling the policy. As such, clients are charged a fee PLUS a commission- something that I believe is an incomplete disclosure to the client who anticipated not paying any commissions at all. I asked the CFP Board of Standards for a ruling on such lack of disclosure, but never even received an acknowledgment. (Also be aware that the selling of advice is only slightly dissimilar to selling with a commission. It is still sale of a service- albeit a poor one if the planner doesn't know anything- and in no way elevates a fee planner to a higher status. I agree that fees limit the exposure of conflict of interest, but a twit charging a fee is no better than a twit charging a commission.) Let's be careful out there.

WHEN TO SELL STOCKS: As I repeatedly state, you should not buy stocks unless you know how and under what conditions you will sell them. A new book by Phillip Fisher, "Common Stocks and Uncommon Profits" talks about 3 possibilities.

1. When a mistake was initially made in the purchase. Maybe the analysis was just plain incorrect, inputted figures were wrong, etc. In that case, just cut your losses and get out.

2. The company has deteriorated and prospects look bad for any type recovery. Fisher normally focuses on a decline in management. "Smugness, complacency and inertia replace the former drive and integrity".

3. The only other reason is where a prospect becomes available that clearly outshines the stock held. But he cautions that essentially, the grass may look greener on the other side of the fence but, upon closer inspection, may also contain crabgrass that was not initially apparent.

4. That's his total philosophy with selling a stock. And while it is viable for the consumer who has lots of discretionary income, it fails the test of real life for the bulk of us working stiffs who don't have "extra" funds when something really goes wrong. And it that context, take a look at what happened in the mid 70's. Equities lost 40% of value. There is NO WAY the average consumer would have felt comfortable with a loss of that much of an investment that might have occurred at retirement, or when the kids were going into college, or when a parent or spouse just died. These real life people need as much solidity with their investments as possible. If the market turns down 10%- O.K., fine, they have to live with that. But to watch the market slowly but consistently erode without doing anything is to dismiss the underlying psychology of the human animal. PEOPLE ARE FAR MORE LOSS ADVERSE THAN THEY ARE RISK ADVERSE. Yes, almost assuredly the market will return- but they can't afford to wait the roughly 12 years it took in the 70's just to break even with the same money had it been invested in Treasury instruments. Theory is fine, but it has to be put into focus for the majority of the real life conditions.

BEAR MARKET: (BW) Of the 7,900 stocks traded on March 31, 1996, nearly 3,600 had declined by mid March of 1997. Further, according to the S&P, 50% of all stocks declined in from December 31, 1996 and March 31, 1997.

Those that have done well focused on large cap stocks- and I have certainly seen that since small caps have not done well at all for some time. Again, according to the S&P, 62% of the 1,100 stocks traded on the NASDAQ system (the most active of the NASD stocks) have been flat or down since last year. But of the NY Stockexchanges 2,600 stocks (which are larger in size), only 34% were down. What does that mean for us? A difficult investing period, that's what. Sure some can say that if we have a decline that some good buys will be available. But in what? Small Cap? I'm not sure anymore since new studies have almost shown that the gains in small caps were an anomaly.

ALZHEIMERS: Four million Americans currently have Alzheimers and it kills about 100,000 annually.

S&P 500: The 500 stocks accounts for just 7/10% of the stock market's total capitalization.

MEDICAID AND MY FATHER: This is a tough article for me to write. My father is almost 81 years of age and has been in the hospital about 70 times since age 65 for a vast array of what can go wrong with the human body. He was recently diagnosed with lung cancer and underwent a major operation. Then he was in the hospital recuperating for four weeks before he was sent home. I have a difficult time in trying to rationalize the (probably) $25,000+ it will cost society to pay for an extended life of a very elderly person who has been very sick versus the same amount of money that could turn the lives around for countless numbers of children. What would you do in the same situation if you were that age and had a major disease? And how should society ration the money when it is obvious that thousands of children live in poverty??

ARBITRATIONS: I have recently acted as an expert witness for a couple of plaintiffs against two of Americas's largest brokerage firms. Really sad. Here's what happened in one case (shortened for brevity's sake). The broker "wrote" an article in a local newspaper on a regular basis. He got clients from it since they assumed- and he told them- that he wrote them. The plaintiff was recently divorced and on full disability was sold a GNMA fund just before the high rates of 1994. She also transferred about $150,000 of a tax free investment she got in the divorce settlement. First of all, she was in the 15% tax bracket, but both the broker and the firm said they had no responsibility for previously purchased investments. In other words, the broker has no duty to inform you that what you currently hold is unsuitable. That's not only absurd but is ethically bankrupt. If a broker has no responsibility to review past investments to determine suitability, it's nothing more than a false excuse to sell you something. Anyway, he sold her $75,000 of a GNMA which subsequently tanked when the interest rates moved upwards. Now this broker focused almost solely on the fact that GNMA's are guaranteed. True, but only to the repayment due to foreclosures on the property- not on the movement of the underlying principal due to interest rates changes. Unfortunately, very few people really understand what these investments will do given movements in rates. The kicker with GNMA's is that they can be fine in a stable market but can really hurt an investor when rates rise or drop. For example, when rates drop, regular bonds go up in value. So in the late 80's, early 90's I made about 12% to 14% in various bond funds. GNMA's made only about 6% -7%. Some funds show that since the NAV stayed "stable" on their GNMA funds, it was great. But that is deceptive since, in present value terms, they actually LOST money as compared to similar investments.

When rates rise, bond funds can get hammered and the NAV can really drop. (A 2% rise in rates can drop 30 year treasuries over 21%). But so can GNMA's- and they did for this investor as well. So GNMA's can end up bad on both sides of a moving market. Not exactly a great investment that is almost universally touted by the industry as safe and conservative. Anyway, this totally unsophisticated investor who did not understand any of this got panicky in the bad market and sold out all the funds and suffered over a $20,000 loss. Did she get any money. No! Why? Because I believe the arbitrators still did not understand the true issues (And I must blame myself if I was unable to get those across properly).

It is a sad commentary that the client, broker and firm were all dumb as rocks, but the responsibility for suitability and understanding of an investment falls solely on the broker and firm with an unsophisticated investor. Firms MUST provide solid education to their brokers but since investment basics are not demanded by the NASD, I have to say that the lack of ethics and knowledge will remain constant.

THE NEW ECONOMICS: This was noted in a March business Week, and referenced elsewhere herein. The article noted that the business cycle has changed radically and now focuses on technology. Presently there are about 9 million workers in the tech sector and BW says technology has a greater multiplier effect on the economy than the standard manufacturing has had in the past. After all, look at what has happened- we have had exceptional growth, good employment but without the inflation as before (though I must admit I seem to be more inclined to give a large credit to Volcker and Greenspan). So, can the boom in technology continue? Well there have been a lot of pundits that keep saying that households will not buy more PC's. But that might not be the point. The prices have come down so much that household's that could NOT afford one are potential buyers. BW forecasts that the sales of PCs will increase by 17% in 1997. Yes, many will be cheaper, but then you need more paper, more printers, more modems, etc., etc.

ANNUITIES: Long time readers know I don't care much for annuitization of money since you invariably lose control of the funds. A company has come up with a product that allows you access to your funds if you happen to be in good health. But there are surrender charges of 6% for the first few years. And the monthly payments are 10% to 15% less than regular annuities.

MENTORS:

ABC's Children First mentoring hot line at 800 914-2212. Information and brochures

Points of Light Foundation, 800 879-5400

One to One, 2801 M St. NW, Washington, DC 20007. Send a self addressed stamped envelope for a brochure and other information.

MEDICARE UNASSIGNED PAYMENTS: This means that the physician has NOT agreed to accept the Medicare payment as full payment and can charge more than the Medicare Approved amount- though not greater than 15% in 1996 and certain states have enacted their own limits.

The law also requires that a physician who does not take assignment for elective surgery must give a written statement if the cost will be over $500.

COMMISSIONS, COMMISSIONS AND MORE COMMISSIONS: Mentioned previously, this is another nail in the coffin regarding the use of brokers overall. A Cornell University and Dartmouth Study said that stocks recommended by Wall Street firms that alsounderwrote the stocks declined by 18% within two years of being offered as IPO's.



DIABETES WARNING SIGNS: Diabetes impacts over 16 MILLION Americans especially Blacks, Hispanics, Native Americans and the elderly. Over 100,000 cases are diagnosed each year. It is the FOURTH leading cause of death by disease in the United States. Over half the people with diabetes do not realize they have the disease. Here is a little "quiz" you should take to determine your risks.

1. If your weight is at least 20 pounds heavier than that recommended for a medium sized person, give yourself 5 points

2. If under age 65 and little or no exercise during the day- 5 points

3. Between the age of 45 and 64- 5 points

5. If you had a baby over 9 pounds- 1 point

6. You have a brother or sister with diabetes- 1 point

7. You have a parent with diabetes- 1 point

If your score was 3- 9 points, there is a low risk for diabetes now. If you score 10 or more, see your doctor NOW.

SICK, BUT FUNNY: A psychiatrist was sued by his patient's insurance company for treating the woman for multiple personality disorders- 120 of them that included Satan, angels and a duck (a duck?)- and then billed her insurance company $300,000 for GROUP therapy.

ERROLD F. MOODY JR.

BSCE, LLB, MBA, MSFP, PhD

2295 W. Ave 133

San Leandro, CA 94577