MOODY's REVIEW

JUNE 2001

COMMENTARY ON INVESTMENT AND PLANNING ISSUES

ERROLD F. MOODY JR.

MASTER OF SCIENCE IN FINANCIAL PLANNING

LIFE AND DISABILITY INSURANCE ANALYST

REGISTERED INVESTMENT ADVISER

WWW.EFMOODY.COM

2+2= 10,000: This is an actual question I received. "I have $20,000.00 and the bank pays me interest of 5.05%. When I do my calculation.

$20,000.00 x 5.05 = $101,000.00

So I would earn $101,000.00 per year in my account and if I waited 20 years to take it out. When I do my calculation.

$101,000.00 x 20 = $2,020,000.00

So my question if this is right because I am 21 and in twenty years can seriously consider retiring at an early age of 41."

And he/she will probably breed.

MEDICAID NURSING HOME CARE. The president of the Virginia Health Care Association said almost none of the state's nursing homes are making any profit and some are starting to declare bankruptcy. He noted about Virginia's $78/day reimbursement rate (47th lowest in the country), "How many hotels can you stop at and get a room for that? And we provide not just a room but 24-hour nursing care and meals and therapy and activities."

They note that they have "low wages and poor staff retention." That universally translates to poor care.

YOU GOTTA GET THE MONEY. The SEC has suffered a sharp drop in some government collections of illegal gains from stock swindlers and other scam artists who victimized investors. Since 1995, the SEC has recovered about $1.69 of every $10 owed by financial violators. Collection efforts are often thwarted by scammers who have gone broke or have hidden or transferred assets.

This is not the real fraud. It is the fact that the SEC has never required the fundamentals of investing ever be taught to brokers and the subsequent risk of incompetence identified to "investors". But it is debatable that it would even help most of the people who lost money since they are the type that would never do any reading to protect themselves but just focus on somebody they "trust".

CAUTION: Do not dry pets or children in this machine.

Clothes Dryer Warning

WORKMAN'S COMP GETTING CHEAPER: (National Academy of Social Insurance) Benefit payments as a percentage of payroll declined by 35 % between 1992 and 1997 (but rose slightly in 1998), while premiums declined by 38 % between 1992 and 1998.

EXERCISE: (NY Times) Only about a quarter of the population is getting enough exercise, and that percentage barely budged from 1990 to 1998.

"People understand better now how to control their weight than historically. The information has grown, but we're yet getting fatter over time. Something other than ignorance must be driving the trend." Yea, it's called french fries. Delicious, delicious french fries.

AIDS: One in 9 South Africans are infected with AIDS.

MORONIC: (NY Times) "In its first attempt at defining what constitutes a recommendation from an online brokerage firm, the (NASD) association published guidelines for deciding when the firms must decide whether a purchase is suitable for a particular customer. Before making recommendations, brokerage firms must assess suitability based on several factors including a customer's age, net worth and appetite for risk." 

This statement is crap. I have no qualms with age and net worth, but the sophomoric comment on appetite for risk is a breach of any fiduciary obligation at any level. It is irrelevant what someone wants or would like to do as regards suitability. It is what they NEED or MUST do  to accomplish the goal identified. That said, the investments still needs to be focused into a fundamental investment pyramid. If that is violated, the investment can be deemed to be unsuitable no matter what it might do over a short term scenario.

The NASD and SEC have never required the fundamentals of investing ever be taught to brokers. There is no way that they can offer any comment that truly reflects an interest in suitability.

MANAGED VERSUS INDEX: Actively managed stock funds held up better than the broad Wilshire 5000 stock index during the 1987 stock-market crash as well as during the 18.7% decline in the Wilshire from December 1980 through July 1982. But the study also showed the Wilshire 5000 index beat the average stock fund during the stock-market downturns of 1973-74, 1990 and 1998.

LONGEVITY: (Examiner) Women now live 30% longer since 1920 to 79 years; men increased 26%. The number of deaths during childbirth decreased an amazing 99% since 1900.

Overall lifespan did not change much till late in the 1980's- averaging about 19 years. "Excluding infant death, expectancy about the time of Christ was 25 to 30 years in rural areas but only about 15 to 20 years in the cities." By 1900, the life expectancy had moved to 40 to 45.

MAKE MONEY, DON'T PAY: (IRS) the number of tax returns showing adjusted incomes of more than $200,000 and no tax liability reached 1,467 in 1998, the highest number since the agency began keeping the statistic in 1977. They say a lot has to do with the use of tax scams such as the off shore trusts they recently cracked down on.

INTERESTING: The House Ways and Means Committee approved the Death Tax Elimination Act of 2001, H. R. 8. This bill would reduce federal estate taxes beginning in 2002 and would repeal them by 2011. Once repeal is complete, inherited assets would carry forward the tax basis they had when the individual who died acquired them. Heirs would owe capital gains taxes on that increase in value if the asset is sold. (BAD!) Under current law, the tax basis of the decedent's assets are stepped-up to fair market value on the date of death or six months thereafter. The new rules regarding basis would not apply to the first $1.3 million of gain, or to the first $4.3 million in gain if the heir is a surviving spouse (GOOD)!

WAKEUP: (AP) Americans are sleep-deprived workaholics, with only about a third sleeping the recommended eight hours a night, and about 40% say they have trouble staying awake on the job. The 2001 Sleep in America poll of 1,004 adults found that 63% get less than eight hours a night and about 31% get less than seven hours.  Part is due to the work week- The average work week was 46 hours, while 38% said they worked 50 hours or more a week.

WEALTH: Since much of the wealth lost since the market's peak a year ago was created only in the 16 months prior to that peak, it was too short-lived to affect the behavior of more than a relatively small group of tech entrepreneurs and stock speculators.

SWEAT LIKE A PIG!: The Agriculture Department issues new guidelines that said Americans should sweat for 30 minutes almost every day.  One third of Americans are overweight by 20 pounds or more.

Well, it won't work. Just like trying to get people to read- and that's even harder. At least when you lose weight or tone up, you can see the difference. But with reading, no one notices if your brain looks better. Hence, if it doesn't make a physical difference, it just won't happen.

LAYOFFS: I was wondering that the layoffs were happening very quickly. Per Wharton, ""What's interesting about this downsizing, for example, is that it's happening so much more quickly than it would have years before in equivalent circumstances," says Wharton management professor Peter Cappelli, director of the school's Center for Human Resources. "Companies are taking the initiative in laying off workers even before they are experiencing any real shortfalls in their business." The reason, Cappelli says, is that companies "want to send signals to the investment community that they are on top of things, that they can move quickly and be responsive" to changing market conditions."

And interesting- "it's pretty well-known that companies announce more layoffs than they actually carry out - another sign that they are playing to the investment community. " And the media will tend to focus on headline grabbing stories, like Lucent laying off 20,000. What you don't see is that 500 other companies hired 40 people each. Hiring tends to happen more slowly over a longer period of time, whereas downsizing can occur very rapidly. So it's easier to see the downsizing and harder to see the hiring, even though you know it's going on because the unemployment rate remains low."

P/E RATIO: Many market watchers believe that despite short-term price fluctuations, stocks will trade at average P/E ratios over the long term.  Though Jeremy Speigl states, " I would say a P/E of 20 now would be equivalent to a P/E of 15 over the past 50 years."

PROBLEMS: (USA Today)• Mortgage delinquencies have surged to their highest level since 1992, according to the Mortgage Bankers Association, which said that 4.54% of mortgage loans were at least 30 days overdue in the fourth quarter of 2000. The problem is especially acute among lower-income borrowers: The delinquency rate for FHA mortgages shot up to 10.46%.

• Personal bankruptcy filings rose to an annual rate of more than 1.4 million in the first quarter, after averaging about 1.2 million a year throughout 2000, according to figures from Economy.com.

• The American Bankers Association said credit card delinquencies rose in the final quarter of 2000 to 3.34% of all accounts, from 3.21% in the previous quarter. Though that increase is modest, analysts expect fresher data will show the problem has worsened.

• Consumer debt soared at an unexpectedly rapid 10.5% annual rate in February, according to the Federal Reserve. Analysts said it was possible that consumers went on a spending spree. But they said it is just as likely that credit card holders hit with huge home heating bills minimized their credit card payments and let a lot of debt slide forward, incurring big interest charges.

• The Fed's measure of consumer debt payments in the final quarter of last year climbed to its second-highest level since the Fed began monitoring it in 1980, as household debt payments rose to 14.29% of disposable income, just less than the record 14.38% in the last quarter of 1986.

ON LINE BROKERS AIN'T COMING BACK FOR A LONG TIME: (WSJ) Amid the market boom of 1999 and 2000, when online-stock-trading systems sometimes crashed under the weight of ever-increasing volume, Web brokers spent millions of dollars to add capacity. But in the current bear market, investors are staying away in droves, and the firms are struggling with serious overcapacity.

And if you look at the legal side of a securities sale, they never should have been as large as they are. Why? Because the sale of a security MUST be suitable to an investor- whether it is done through a full service organization or on  line. However, the bulk of individual trades are unsuitable. That's not an opinion, that's a statement of fact. Here is your clue. Assume you were going to buy a "conservative" stock with a beta of 0.8. You have defined "a" risk of investing in that company. Now, what is "the" risk for the investor. If you understand that, you understand suitability. If you do not, you don't have a clue to investing. (it involves diversification by the numbers)

HORRIFYING. Child abuse costs the U.S. $94 billion every year or $258 million per DAY. That's $1,462 per person per year.

SHUTTING DOWN: The bear market has caused some 40 mutual funds to shut down already in 2001, 15% more than in the same period in 2000 when there was a record 225 closings. Also, only 57 funds were added to fund-tracker Morningstar's database vs. 253 during the same period in 2000.

WARNING: This vehicle is not equipped with anti-lock brakes.

Shopping Cart Warning Sticker

MARGIN CALLS: Arbitration cases and complaints to the Securities and Exchange Commission are up sharply from investors who are furious about the way brokers liquidated their portfolios or demanded more collateral. Last year, margin sellout complaints to the SEC jumped 133% over 1999. The pace has continued this year, with 100 complaints through March 15.

Margin-related arbitration cases also have been on the rise. In 2000, there were 284 cases, up 173% from a year earlier. In the first 2 months of the year, there were 57 cases, on track to surpass last year's pace.

Last year, margin sellout complaints to the SEC jumped 133% over 1999. The pace has continued this year, with 100 complaints through March 15.

Analysts state that the margin agreements are very clear what is required and what a broker is allowed to do. That, as far as I am concerned, is absolutely true. If a consumer has taken on margin "suitability", it's too bad if the stock was sold out underneath them. The contract allows that. But the issue is "suitable". Did the customer really know what margin meant? Bet at least 95% did not and in 90% of the cases the use of margin was unsuitable for their situation. Also bet that 95% of brokers are also effectively clueless on margin.

SO DO YOU WAIT TO GET BACK IN? (Merrill Lynch) "Since 1960, stocks have started heading higher roughly 10 months before an upturn in corporate profits. Investors who waited for profits to turn would have gotten back into the market 42% above the low, missing out on big gains."

Here's a revealing snapshot of S&P 500 performance following "Negative Return Years"

1977: -11.50% The following 3 years: +39.14%

1987: -9.73% The following 3 years: +33.43%

1990: -6.56% The following 3 years: +37.83%

1994: -1.54% The following 3 years: +85.38%

JAPAN: I would have bet money that this would never have happened, but "falling exports are hurting Japan's economic growth, driving the nation into stagnation that is likely to last for some time." It has been inconceivable to me that a nation poised to be the leader for this century could have screwed up so badly and then maintain the same scenario year after year. Exports have long been the driving force behind Japan's economic growth. But the recent slowdown in the United States has hurt Japanese exports.

And, actually, I don't make bets with investments. It's just cold reading and it the reason why I never used a Far East index fund.

SICK: Dr. Heymann found that 76% of poor working adults, aged 25 to 75 and in the bottom quarter of family incomes, did not have paid sick leave at least some time from 1990 to 1996. That included 45 percent who lacked paid sick leave the entire time. Among working adults not defined as poor, 55 percent lacked paid sick leave at least some of the time, including 24 percent who lacked it the entire time. Children tend to demand the most attention of workers accounting for 42 percent of workers' time off to provide care, compared with 15 percent to care for parents, 12 percent for spouses, 7 percent for grandchildren and 24 percent for other family members.

Demands to provide care increasingly conflicted with work. Forty-seven percent of lower-income and 41 percent of middle- income working adults said they provided one to four hours of unpaid assistance a month to elderly parents or in-laws. For workers in the top quarter of income, the figure was 27 percent.

THERE WILL BE A LOT MORE TAX CHEATS: (NY Times) "The I.R.S. took civil court action in 641 cases against recalcitrant taxpayers last year, down from 2,519 in 1992.  audit rates are also down sharply, to one in 204 for taxpayers with incomes of more than $100,000, not adjusting for inflation, from one in 9 in 1989. The I.R.S. took action in 1998 in only one of every six cases where its computers showed income from employers and others that was not reported on tax returns, down from pursuit of almost two-thirds of such cases in 1991.

Correction notices, which ask taxpayers to explain discrepancies in their reports, or to pay additional taxes, were sent to 1.4 million taxpayers last year, down from 4.8 million in 1991

Actions to seize property from taxpayers have all but halted, the study said, falling to 174 last year from more than 11,000 in 1991. Criminal prosecutions have fallen by half since 1992, to about 50 cases a month. The drop in I.R.S. efforts to enforce the tax laws is not limited to individuals. Last year, the I.R.S. audited 31 percent of the largest corporations, down from 55 percent in 1992"

Yes, the IRS did need to be more respective of an individuals rights instated of threats and intimidation. They also need to be more knowledgeable.

OH PLEASE, NOT AGAIN (FSO) PaineWebber is being sued by investors who claim they were misled into buying life insurance policies rather than individual retirement products. PaineWebber may have hidden the fact the "Provider" product was actually life insurance. If so, PaineWebber could face charges under the federal Racketeer Influenced and Corrupt Organizations (RICO) Act.

MUTUAL FUND PURCHASES (FSO) Investment News reports that "sales to new customers now account for just 5% of an average fund company's growth, down from 21% five years ago."

FIRST TIME INVESTORS: Novices could be hurting foreign market involvement (WSJ) because individuals in Europe have invested in stocks for a much shorter period, and have less experience with the market's ups and downs. As a percentage, fewer Europeans invest in stocks than do Americans. (9.7% of Germans now own shares directly and 13.7% through mutual funds, compared with about 50% of Americans who are in the market).

One significant difference is that the Europeans now have to rely more on their own savings for retirement since they no longer can depend on the government to provide those huge retirement packages starting in their 50's. ". Individuals are increasingly saving for retirement, rather than relying on the government and their company pensions to take care of them. And fiscal belt-tightening ahead of the launch of the euro has meant historically low interest rates in many countries, making bonds less attractive compared with stocks."

MYOPIC RISK AVERSION: (NY Times and Paul Samuleson) To gauge whether you suffer from myopic risk aversion, consider whether you would be willing to play a game in which you win $200 if a coin flip comes up heads and lose $100 if it comes up tails. If you are like most everyone else, you would decline because you would feel the $100 loss more than the $200 gain.

But imagine that you are given 100 chances to play the game. Now you are probably willing, because the odds are excellent that you will come out a winner after so many flips. The key to being willing to play is focusing on all the flips as one game rather than as 100 individual games.

To test whether it is an accurate description of investor behavior, Professor Thaler teamed up with three psychologists -- Amos Tversky of Stanford (who died in 1996), Daniel Kahneman of Princeton and Alan Schwartz of the University of Illinois at Chicago. They constructed an elaborate simulation of the decisions that one must make over a lifetime about one's relative allocation to stocks and cash. One set of subjects in their simulation could check how they were doing every month. Another group did so every year, and a third group only once every five years.

Just as the theory predicted, investors who looked at their performance most often had the lowest average equity exposure. Particularly noteworthy was the fact that these frequent checkers not only reduced their stock exposure immediately after a loss, but also had lower average equity exposures during all subsequent months,

But access to the Internet gives "investors" the opportunity to view their portfolio at all times. A survey conducted in January by Intuit/ Quicken.com found that 91% of online investors checked their portfolios' worth more than once a month. In fact, 13% checked it more than once a day."

I look at the market everyday but only to gauge direction as may be reflected by economics. I am rarely concerned about the movement of a fund as long as the fund is still sound. I have no interest in individual stocks since I do not use them at all. Neither should you.

FARM ESTATE PLANNING: I have said this before, but a lot of farms that actually faced estate taxes did so primarily because the sons and daughters did not wish to continue the operations. There was no one to pass the estate to. The NY Times noted that the American Farm Bureau Federation, said it could not cite a single example of a farm lost because of estate taxes.

Of all estates, only the richest 2 percent of Americans pay estate taxes. That amounted to 49,870 Americans in 1999. And nearly half the estate tax is paid by the 3,000 or so people who each year leave taxable estates of more than $5 million. But only 6,216 taxable estates in 1999 included any agricultural land and equipment. The average value of these farm assets was $440,000, only about a third of the amount that any married couple could leave untaxed to heirs. What is more, a farm couple can pass $4.1 million untaxed, so long as the heirs continue farming for 10 years.

For every human problem, there is a neat, simple solution; and it is always wrong

H. L. Mencken

FALLEN COMPANIES: A study from 1985 by Thomas W. Watts, Internet infrastructure analyst at Merrill Lynch of the trading of 1,900 publicly held companies spanning the technology sector, found that of those companies whose stocks had fallen to single digits, only 3.4 percent rebounded to $15 or higher within the next year. Most of those that didn't bounce back in the first year never did.

Watts said he got the idea for the study from individual investors who repeatedly told him that their former stock market darlings, down as much as 90 percent from their highs, looked cheap. (It's just like the guy discussed on the next page who wanted to hold onto to his bad positions because they were "sure to come back" or where he just couldn't pull the trigger to take the loss.) But the rebound just doesn't happen. Part was due to this: "many professional money managers, like those in charge of mutual fund portfolios, are barred by their firms' bylaws from buying stocks under $10. That keeps a powerful group of buyers out of these shares."

Many investors may be secretly hoping that their low-priced companies will be taken over by other concerns. But Watts pointed out that so-called strategic buyers were more likely to wait until a troubled company went into bankruptcy. At that point, the buyer could get the company's assets at even lower prices.

Of the 437 companies that became one-digit wonders in 2000, only five have come back in 2001. That is 1.1 percent. Read that again.

Companies face the best odds of rebounding during periods just after major downturns in the overall market and there is no question that the market has fallen sharply in recent months. After the 1990 recession, for example, 9 percent of low-priced stocks recovered substantially and following the Russian debt crisis in the autumn of 1998, 5.4 percent of such shares rebounded.

But Watts added that the 1999 surge in the Nasdaq, when 11.3 percent of low- priced stocks recovered, has distorted the historical data. Excluding that explosion, which carried many weak companies along with the strong, the average recovery rate for the entire 15-year period would have been 2.9 percent, not 3.4 percent.

This is a very important study that simply reinforces the emotionalism of investing. There IS a reason why some companies tank- and stay tanked. Contrarian investing is valid in some instances (isn't that a form of value investing anyway?) but don't count on it for all your allocation.

SUPERVISORS: The ranks of workers under the level of surpervisor includes 75 percent of the nation's 132 million work force.

NURSING SHORTAGE IS GETTING WORSE: (NY Times) Hospital administrators and nurses expect the shortage to worsen. Enrollment in nursing programs is declining even as the population ages. The average age of nurses is rising. The U.S. Bureau of Labor Statistics projects that by the year 2020, the nation will have 20% fewer registered nurses than it needs. An average of 3,000 fewer nurses graduated from baccalaureate programs, according to studies by the American Association of Colleges of Nursing.

"The nursing shortage is one of the dominant issues in health care today. "In some cases the problem is so severe that hospitals have had to shut down nursing floors and cancel surgeries. This crisis has the potential to create a disaster scenario in terms of the quality of care."

In many hospitals, nurses say they are required to take care of 10 or more medical and postsurgical patients at a time, and those patients are often seriously ill. They complain of injured backs after lifting heavy patients (read that again) and of risky accidents with contaminated needles.

The average nurse salaries have hardly changed since 1992, according to a report in February by the Bureau of Health Professions in the federal Department of Health and Human Services.

The American Association of Colleges of Nursing in Washington said that enrollment of nursing students in entry-level bachelor's degree programs fell by 2.1 percent in the fall of 2000, the sixth annual drop. The lower enrollments mean the average age of nurses is rising. The health professions bureau says the average age of the 2.6 million registered nurses is 45.2 years and rising. In 1980, 52 percent were estimated to be under 40, compared with 31.7 percent currently. And only 18.3 percent of nurses are under 35, compared with 40.5 percent 20 years ago.

What's it all mean? Health care costs MUST account for increased costs for more nurses- so health care premiums WILL increase year after year not even accounting for technology. Long term care costs will also increase from this and the fact that it takes more than just one nurse to deal with more and more fat and fatter people. There has been a 50% increase in obesity in just the last seven years. 61% of Americans are overweight. 50% of Europeans are overweight.

INDEXING: (Morningstar) From the end of 1985 through the end of 2000, the Vanguard Index 500 fund, the largest of the stock index funds, gained an average of 15.8 percent a year. Of the 534 stock funds tracked by Morningstar that have been around that long, only one in 5 have performed better. An even smaller portion -- 3 of the 534 funds -- have performed better with less relative risk.

I hoped you REALLY paid attention to the issue of risk. Many many funds that beat the S&P- take JANUS for example- were taking a LOT of risk. (Do you know what happened to JANUS? The manager quit and an internal memo in the fund company said that they should not look for gains in any fashion as they had seen in the past).

EMOTIONAL INVESTOR: No guts, no money: Several months ago I got a frantic call from a successful businessman in Texas who had invested hard earned in all types of "investments" by all types of people who clearly had one thing in mind- commissions. He desperately wanted help and after several discussions, he sent me his questionnaire. I sent the proposal which he found acceptable. But when the market took another tumble late last year, he absolutely panicked. Although he had terrible allocation, he felt if he sold anything, he would have to admit a loss. He simply could not emotionally face the loss- even though it already existed on paper. He wants these bad investments to go back to where they were.

I told him the story of my sister who ended up with lots of Digital stock when my brother in law died. He had bought it in drips and drabs from $30 and it had reached $200. But they never paid attention. The company did worse and worse and the stock was only $54 at the date of death. But she was emotionally attached to the company though it was D rated at the time.  I could not get her to do anything. It went all the way down to $16 a share. Never really did much after that and then the entire company was sold.

People who become emotionally involved with their investments are almost doomed to failure- at least reduced returns. He now will leave an unmitigated mess to his wife when he dies- and he already had admitted to this. Sad.

WORKER HEALTH CARE IS GOING UP (USA) "We're in an inflationary period in health care like the late 1980s, and we've already moved everyone into managed care. Now we have to figure out the next best thing."

The point with that comment is that managed care did drive down excess costs- but there are no more excess costs left. The article noted that workers are definitely going to share in more costs. A lot more.

Just as job training helps workers adapt to the spread of computers and technology throughout the economy, so does financial literacy help improve standards of living for consumers.

Greenspan

The above comment is something that I have stated for years and years- but it is not being done. Greenspan noted there is a "need to accumulate the appropriate knowledge on how to use new technologies and on how to make financial decisions in an informed manner."

"Just as we have recognized how critical it is to demystify technology and to increase workers' comfort and familiarity with the new tools required for their success, so should we work to educate consumers on evaluating the broad array of products offered by financial service providers and to empower them to make the choices that contribute to their overall well-being."

FRAUD, FRAUD, AND MORE FRAUD. I have made known the fraud I have seen with all types of trusts that supposedly allowed one to sell stocks, real estate, whatever and not pay any taxes whatsoever. They would "support" the viability because they had not been audited by the IRS. Still fraud

The Internal Revenue Service acknowledged that the agency had not paid enough attention to tax frauds that were being promoted among high-income people by hundreds and perhaps thousands of con artists.

Tax fraud experts said that instead of moving swiftly to shut down Web sites promoting fraud under the consumer protection laws, the I.R.S. works under cover, and it takes several years before indictments are obtained. By then many people have been drawn into the swindles.

MMMNA: The minimum monthly maintenance needs allowance for community spouses has increased to $1,451.25. The states must begin using the new figure no later than July 1, 2001. The maximum monthly allowance remains $2175 until the end of the year.

DEPRESSION: Most professionals today believe that depression and other disorders of the mind affect almost half of all adults in North America. 

STROKE: The causes should be obvious but are caused by - Hypertension, heart disease, cigarettes, too much alcohol, drug abuse, abnormal blood/fat levels, lack of exercise, and being overweight.  

ALZHEIMERS: The surge of baby boomers getting Alzheimers will overwhelm Medicare in the next couple decades. Up to 14 million are estimated to be affected. 40% of those age 80 have Alzheimers.

STOCK OPTIONS: A journalist asked if there was a fiduciary obligation to provide employees the required expertise to understand their stock options- particularly while the officers and directors were using sophisticated methods to protect their backside as the market slipped.

My reply, "The issue may start with a review of what has happened with 401(K) plans when employers started offering those. The Department of Labor- which "oversees" such plans- said that employers had a fiduciary obligation IF they provided investment advice. Employers have taken the position that if they just give the employee basic information on how the product works, that is probably sufficient.

Unfortunately, and as I was clearly aware, employees don't have a clue to investing and have done many, many things wrong. They have asked for further information/advice and the DOL has acquiesced somewhat. However the entire scenario is still fraught with problems since the employers do not want to pay for outside professional assistance in providing education because they can usually get the classes done for "free" through the vendor of the product. But these are sophomoric at best and useless at the worst.

My position has always been that if you offer a product to the employees, it is the responsibility of such employer to clearly indicate how it works and the risks involved. Simply trying to avoid the issues altogether is ludicrous. The 401(k) plans were able to do this for awhile as the market was going up and up- but it is the same scenario for the stock options. Nobody was concerned about the risks if the market goes down since "it was never going to do so". The fact that such a risk was not properly explained as well, as the offsetting strategies that could be utilized, is unquestionably a breach by the employer- even if they did use an outside vendor to supply certain knowledge. After all the employer hired the vendor and still had an obligation to select entities that were competent.

The ultimate responsibility, in my mind, is if the employees were made completely aware of how the options worked and the associated risks. If this was not done, the employee may have a definite cause of action against the employer.

But it will take a carefully crafted straight forward analysis- otherwise a jury won't understand all the complicated strategies.

401(k): (Spectrem Group) Only 16% of 401(k) participants currently have investment advice services available to them. The study also shows that 56% of participants with access to additional info have never attempted to use them, either because they already have outside advisers who handle their assets or simply have no desire to try the service yet.

Yet for those who did use the services, the report said 40% of participants sought information through independent financial planners, while 20% used mutual fund representatives and another 18% said they used brokers.

MORE DRUGS: (Boston Globe) With HCFA estimating that spending on prescription drugs will reach $366 billion and account for 14% of total medical costs by 2010, two sides are forming on the debate over drug costs: those who see costs as a threat to patients without drug coverage, as well as to Medicare and Medicaid, and those who argue that rising pharmaceutical costs simply indicate a shift in how health care is provided. Explaining the latter argument, Frank Lichtenberg, professor of finance and economics at Columbia University, said, "It's a mistake to just focus on the costs [of drugs]. We need to also focus on the benefits -- increased longevity, improved quality of life, and reductions in total medical expenditures." He added, "It might make sense to spend more on drugs if it reduces total medical spending." Nonetheless, many states are considering legislation to control prescription drug costs.

CIVILIZATION??: Commercial sexual exploitation of children is growing, despite promises from more than 120 countries to halt abuse, pornography and sex tourism, according to children's rights workers gathered in Bangkok.

LOOKS LIKE AN EPIDEMIC: More than one in five high school boys have taken a weapon to school in the last year

ABOUT TIME : An Oklahoma district court has ruled that viatical investments are securities under state law. If this ruling holds, it will provide a legal precedent for other states to put the sale of interests in life insurance polices under greater scrutiny.

GO TO CHURCH, GIFT MONEY, TRUST THE ADVISERS, BEND OVER. (WSJ) Yes I know this is cynical- but it clearly addresses affinity scams and the fact that people don't do enough homework. Church members of the Lutheran Church- Missouri Synod gave donations to the church in return for annual payments. The Foundation's adviser purchased risky mortgage backed securities which lost tens of millions of dollars starting in 1998. Several Lutherans filed suit against the foundations seeking class action status on behalf of hundreds of donors and thousands of beneficiaries. The site alleges "reckless investment scheme". The adviser says that no one said anything while the proceeds produced exceptional returns year after year. Only when the proceeds drop did they get "concerned". (Does the Orange County debacle ring a bell?) The investments were effectively hedging on the movement of interest rates. They bought $100+ million of CMO strips that accounted for 40% of the foundations portfolio. The adviser said he notified the foundation committee at every step of the investments and that they clearly understood the risks. Bite me.

The absurdity of that rationalization is galling in view of the fact that literally no one understands CMO's (and only a few more know diversification). Ask Merrill Lynch how well they did with these in the late 80's. Ask anyone- including me- if they can give a definitive statement as to how a specific tranche of a CMO would work. Not a bleeding chance.

The suit alleges that the foundation had made a massive wager on interest rates via securities that were so complex that they could not be deciphered by anyone of the investment committee. (Does the debacle of Orange County ring a bell?) The B/D that sold the investments to the church says that they are free from guilt since the "know thy customer rule" was not designed to protect registered investment advisers.

Legally, perhaps true. But a goat could become a registered investment adviser in some states. O.K., I admit that is being facetious. Nonetheless, the registrations is in no way indicative of competency even with individual stocks. After all, and repeated ad nauseam here, if you do not know diversification by the numbers, you don't have a clue to investing. And an RIA does not have to know ANY of the fundamentals of investing. For those that don't like that, too bad because it is the absolute  truth. The fundamentals of investing have never been taught- and are not now- as part of licensing training for brokers or supervisors.

The entire industry is guilty of misrepresentation to the public. The problem is that no excuse will ever help these elderly get back the lives they had. No amount of, "it was someone else's fault" will eliminate the emotional stress. Trust is nice in a church- or just about anywhere else. But a dollar bill knows nothing about trust. It doesn't care if you are a man, woman, black, white, small furry animal, atheist, the Pope, whatever. It demands unemotional competency at all levels. If you do not give it that respect, it can come back and haunt you.

STOCK PICKER: The NY Times has an article that says, "The market belongs to the stock picker." In other words you cannot depend on an entire sector or the market to move in unison. But then they go on to say, "The problem is which stock pickers to believe. The credibility of Wall Street securities analysts, a major source of investing advice, has plunged along with the stocks they once touted. And there is a glut of free information about stocks -- on the Internet in particular -- making it all the more difficult to distinguish fact from hype."

The point being that if it was possible to know which stock would be better than another, every one would focus on that stock. Someone will unquestionably find some good bets- but was it luck or skill? No way to know. And as stated, human beings cannot pick stock.

"Alan Greenspan, the chairman of the Federal Reserve, has publicly leaned toward the view that the nation's economy is in a temporary, inventory-led correction, and that sustaining consumer confidence, but not necessarily holding up the stock market, is the key to preventing a longer downturn."

LTC: Nursing home care costs an average of $55,000 a year, but 80 percent of the people who need that level of help are in their own homes, being cared for by family members, professional nurses or community groups.

LTC: The risk of needing long term care is about 2 in 5. The Department of Health and Human Services Executive Board on LTC Insurance discovered that a person over 65 is estimated to have more than a 43% risk of entering a nursing facility during his/her lifetime.

PROPERTY INSURANCE: Last year was the second-most-costliest for insurance companies around the  world, as commercial buildings and houses took a battering. Worldwide disasters added up to $100 billion and cost companies $28.6 billion,  the most since the $33 billion reported in 1992, the Swiss Reinsurance Co.

The interesting thing about this is pure statistics. Based on pure numbers, insurers are able to "determine" how much of a loss to expect. Yet the last decade has seen more losses than the last three decades combined. It's the same with investments. You look at past history as a guide to the future- but also recognize that changes can bring radical alterations to all the history. See the Philips curve for example.

ANNUITY: Annuity companies could be in trouble (LIMRA) "Big, unexpected increases in either the average or the maximum lifetime could cause annoying problems for annuity issuers. Many insurers already use mortality tables that extend to age 120 to set prices for products with lifetime payout features. But the "new" tables are based largely on adjustments to data collected for a 1983 table."

Such tables show much shorter actuarial lifetimes and much shorter payout periods and much lower reserves and at a time when there are much lower interest rates. Many companies will HAVE to consolidate since they will not be in a financial condition to continue. Mark my words.

ELDERLY CARE: Elderly Americans spend on average 19 % of their total income on out-of-pocket medical expenses annually, with more than half of these payments going toward prescription drugs and dental care, according to a forthcoming study in the Journal of Gerontology.

PHILLIPS CURVE (NY Times) Long time viewers have no doubt read my comments about ratios no longer viable- dividend yield, some P/E ratios, etc. and specifically including the Philips curve which is the "ratio" of unemployment to future inflation. Here is some further commentary: "Today, however, the Phillips curve is missing. All of a sudden, economists are a lot less useful as forecasters. For as it stands now, economists' forecasts of economic growth, unemployment and inflation are no longer projections based on historical patterns but, instead, pure guesses based on gut feelings about when, how and if the Phillips curve will return."

Interestingly enough to me, "the Phillips curve has not worked well outside America. Only in the United States has there been a relatively stable natural rate of unemployment to serve as a reliable indicator of when demand pressure is about to raise inflation. Elsewhere, the causes of rising inflation have always been too complex to be summarized by simply comparing unemployment to even a semistable natural rate."

DEMENTIA: (National Association of Health Underwriters) Of the elderly population, 5 to 6 % have dementia- severe impairment of cognitive functions (e.g., thinking, memory and personality). Alzheimer's disease causes about one-half of these cases; vascular disorders (multiple strokes) cause one-fourth; other dementias are caused by heart disease, infections, toxic reactions to medicines, alcoholism and other rarer conditions. Most Dementias are not reversible.