MOODY'S REVIEW

MAY 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

COMPLAINTS: (Sec) Investors' complaints went up about 10 percent, to 13,599 in 2000 from 12,463 in 1999. Among those, complaints related to brokers' sales practices rose to 4,476 from 4,152, reversing a five-year decline. I can tell you it will be a lot higher in 2001 now that the market has declined.

INTERNATIONAL DIVERSIFICATION: (NY Times) A new study noted, "investing abroad for Americans is nowhere near as good an idea as conventional wisdom dictates." David Bowers the chief global investment strategist at Merrill Lynch now suggested that investors limit their exposure to just 5% down from 33% in the past. Nicholas P. Sargen, global market strategist   of J. P. Morgan Chase, recently lowered his allocation guideline for foreign stocks to 10 percent to 15 percent. Jeremy J. Siegel, a finance professor at the Wharton School jeremy J. Siegel, noted "It is very comforting when there is a crash and you have something that isn't going down in another market, but foreign equities won't give you that."

Why? "The performance of foreign stocks is much more highly correlated to that of Wall Street. Since the 1980's, the economic policies of Western nations have been more aligned than ever before.

Over the last six years, the United States stock market has risen 190 percent while those of the rest of the world, taken together, have climbed just 37 percent. In the fall of 1993, the correlation between the performance of the American market and the rest of the developed world's markets was as low as 0.145, according to Merrill Lynch. That was the smallest correlation since 1979, when it was as low as 0.07.

The figure moved generally higher, however, later on. In 1995, it was more than 0.3, and in 1997, more than 0.5. Then the correlation surged, to 0.787 by the end of 2000, the highest level since the mid-1970's. The Ibbotson data shows that the correlation between emerging markets and the American market rose to 0.66 at the end of last year. It had been as low as 0.18 in 1992 and 0.19 in 1993.

The correlation between European and American markets has been higher over time, and has risen again recently. At the end of last year, it was 0.687, up from 0.451 in mid-1997 and an average of 0.418 in 1981.

Japan, the major market that has often had the least correlation to the United States, has also shown a mini- trend toward following Wall Street's lead. Its correlation was 0.49 at year- end, compared with an average of 0.18 in 1982.

Based on the Ibbotson data, the correlation between stocks and government bonds has reversed in the last four years. In 1997, the average correlation was 0.49, near its high in the 1970's. At the end of last year, it was 0.12, with an average for the year of 0.17."

"The mystery of government is not how Washington works but how to make it stop."

Hubert Humphrey

HEALTH CARE COSTS: (E News) "A Tower Perrin survey predicts a 13% increase in health care costs for 2001. This is the highest percentage increase since the survey began over 10 years ago and marks the second consecutive year of double-digit increases. Worse, 90% of those polled expect double-digit increases to continue over the next few years. Major causes: rising costs of prescription drugs (up 20%), with help from carriers keeping a sharper eye on bottom line profitability. Copies of the 2001 Towers Perrin Health Care Cost Survey are available by calling 1-800-525-6741."

BAD BANK LOANS (NY Times) 60 percent of domestic banks tightened terms for lending to larger companies recently, and 80 percent of foreign banks imposed stiffer terms for customers seeking commercial and industrial loans. Lending standards have become stricter because the economy has slowed from its previous blistering pace. A slowing economy raises the risk that firms and individuals may be unable to repay loans if profits and incomes falter.

Some economists have said that bank lending standards became too slack the last several years and that tightening loan conditions would be a healthy development.

DIABETES: (Centers for Disease Control and Prevention) Diabetes in the United States rose by about 6% in 1999 in what the government called dramatic evidence of an unfolding epidemic. Cases rose sharply across almost every demographic category. The rise is blamed largely on obesity, which was up a startling 57% from 1991 and which you have read about here repeatedly. The share of the adult population diagnosed with diabetes jumped from about 6.5% in 1998 to 6.9% in 1999, the CDC said. The obesity rate increased to nearly one in five Americans (20%) - up from just 12% in 1991. Last August, the CDC reported that diabetes jumped 33% nationally, to 6.5%, between 1990 and 1998. The rise crossed races and age groups but was sharpest - about 70% - among people ages 30 to 39. CDC director Jeffrey Koplan said the effect on the nation's health care costs will be overwhelming if the trends continue. And it is also for this reason that I have stated that it is a reason why long term care premiums will increase in the future.

DIVERSIFICATION (WSJ) As identified in the 2001 Investor's Guide, a study led by professors John Campbell of Harvard and Burton Malkiel of Princeton shows that, "The number of stocks needed to obtain any given amount of portfolio diversification has increased" in recent decades. It determined that the volatility of individual stocks has more than doubled since 1962, although the stock market as a whole is not much more volatile because the stocks often offset each other. A portfolio once required 12 stocks (I used 13 in my teachings) to properly diversify and track the S&P 500, but the reducing correlations pushed that to 50. A WSJ article noted that a University of Nevada article says that investors need up to 100 stocks to stay within 5% of average portfolio risk. Research by CooperNeff show investors need 350.

This merely reinforces my comments that individuals cannot pick stocks whether it is 15, 100, or, quite obviously, 350. Also note that the purchase of just  a few conservative stocks- utilities for example- may have worked for awhile but blew up in many a retirees face during the recent energy crisis. You need to utilize asset allocation if you wish success over longer periods of time. But it is NOT simply using a computer strategy designed by a 30 year old computer "whiz" who read one brochure on investing.

HEALTH INSURANCE (HIAA) nearly three out of four workers (74 percent) were offered health insurance by their employers and more than three out of five (63 percent) received coverage through their jobs.

* Eighty-eight percent of family members who live with an insured worker receive employment-based coverage.

* 13.6 million of the 17 million uninsured workers were not offered health insurance coverage by their employers.

* Lower-income workers, especially those who work part-time, are both less likely to be offered health coverage and less likely to accept it if it is offered.

* Small firms are much less likely to offer coverage than large firms, and their workers are less likely to accept coverage when it is offered.

* Women are more likely to decline coverage than men but they are less likely to remain uninsured when they do decline it.

* Coverage matters: the uninsured spend less than half as much on health care as all other people.

MORE DIABETES: In the United States alone, more than 10 million people have been diagnosed with diabetes and at least another 5 million Americans may have the disease and not know it.

STILL TOO HIGH? (USA Today, WSJ) In October 1990, at the start of the greatest bull market in Wall Street history, the P-E of the Standard & Poor's 500 index was 11.7. That's more than 50% below the current 25+ P-E. At the end of 2000, the average P-E on the Nasdaq composite was 127. The S&P has a P-E of 23.4 based on estimated earnings for the next 12 months. Among the 50 largest stocks in the Standard & Poor's 500, almost half lost 20% of their value last year. By contrast, since 1963 just five of these top-tier stocks have lost that much in a year, on average. Ten of the 50 biggest stocks lost 20% in a single day last year, almost 11 times the historic average. In each of the past three years, an average of eight of the 50 stocks in the Standard & Poor's 500 sporting the highest dividends dropped 20% or more in a month. The average was four a year in the previous 17 years. They averaged 5% two decades ago, but now they are down to 1.6%, the lowest ever. Of corporate bonds rated investment grade, an unprecedented 3% fell 30% or more in price last year.

VERY BAD NEWS FOR THE ELDERLY: (NY Times) The rising costs of prescription drugs are driving up the premiums of insurance plans that supplement traditional Medicare and include drug coverage. In New York, Empire HealthChoice, the largest Medigap drug insurer, said it would raise premiums 31%.  The American Association of Retired Persons raised premiums for Medigap drug coverage 10% in New York. Medigap drug coverage increased 16% late last year in Arizona and 14.2% in Ohio. In Illinois, Life Investors raised Medigap drug rates by 20% and Monumental Life increased drug rates by 26%. About 12 million Americans older than 65 have drug coverage through employer retiree plans, 4 million are covered by Medicaid programs for low-income people, 560,000 have Medigap policies and 12 million more have no drug insurance. Medigap coverage is offered in 10 standard varieties. Two of the Medigap plans cover drugs up to $1,250 a year and one, the most expensive, covers drugs up to $3,000.

I DON'T WANT TO DIE!: (Insure.com) "Why Men Die Younger," a study published in February 2001 by the Society of Actuaries, concludes that the hormone testosterone "plays havoc biologically and behaviorally with men's bodies," leading to diseases and risk-taking behavior that are more common among men than women. Estrogen, the female hormone, tends to increase longevity for women. The greatest difference between male and female mortality rates occurs at age 22, when testosterone levels for males are traditionally highest. In the former Soviet Union, women live 13.8 years longer than men. In the United States, however, women outlive men by 5.7 years, down from 7.8 in the mid-1970s.

The study found that men die younger from 66 of 72 causes of death considered, including cancer, diabetes mellitus, heart disease, infections, strokes, and pulmonary disease. Only six causes of death had higher female mortality rates: Alzheimer's disease, asthma, breast cancer, kidney infections, pregnancy/childbirth, and rheumatic fever." I will die from advanced fishing.

JAPAN: I have said this for years- Japan just can't get going. Though I also admit that in the early 90's, I thought they could get it together. That's why pure indexing may not work since the EAFE index had to include a good section of Japan. Due to the fact that Japan has been down so long, I truly wonder how it can reach its former prominence. That is partly due to the huge number of elderly that the government will need to take care of. The situation is more grave than here- though the Japanese family orientation does suggest better care by the immediate family and can constrain some governmental costs.

POOR BUDGETING: (NY Times) "Overspending and undersaving are indeed American characteristics that economists struggle to explain. The mainstream argues that people save as much as they can, voluntarily, and that if taxes are reduced, people will save a substantial portion of the windfall. Corporate America could then tap those savings to finance investment in, say, computers, making the economy grow.

Behavioral economists say this reasoning is flawed. They contend that despite their best intentions, most people spend almost all of any income that comes their way. Instead of rationally balancing spending and saving over a lifetime, people are indebted from youth to old age, the behaviorists find." See further comments herein

EMOTION: (NY Times) "Nothing gets more support that the stock market responds not to corporate reality, but to moods of investors- their herd behavior, their overestimation of their investing skills, their reluctance to sell a falling stock and acknowledge a loss, and their gambler's view that the stock market gains are like house money: it can be left on the table for more action."

LTC: From an agent, "I understand Aegon (parent company of PFL and many others) has requested a 30% across the board rate increase on a "prior" block of an earlier generation of PFL product from all state insurance dept's. They are supposedly marketing all new PFL product sales of their current product line through another of their companies and requiring all currently licensed agents to recontract through that company.

What's to stop them from repeating this action in 5 or so years again...and claiming "no rate increase history" to new product buyers? They own a lot of companies and could conceivably continue this practice for decades. I am very concerned about companies that operate on the fringes of deception. Does any exist here, in your opinion?"

My reply, "My opinion is that the second and third tier companies will have substantial increases in the future. The current law allows them to.

Even the first tier companies have the right and somewhere down the line I think they will have to increase blocks of policies as well as the cost of care escalates faster and greater due to the numbers of obese people. They will require more personal care and more medications. You might try looking at some of the 10 pay policies. They cannot raise rates.

In terms of deception- sure, it exists all the time. And, why not? If Clinton can play all the games and just get a slap on the wrist, what is to stop anybody else? A caustic comment, I admit, but a real life one nonetheless."

SURPLUS????: (NY Times) Even if the most optimistic fiscal projections prove true, the surplus will be gone within 20 years, leaving the government -- and, we as taxpayers -- facing intense financial pressure. As the 76 million baby boomers grow old and members of the previous generation live longer, the costs of their government-provided retirement and health benefits will surge, threatening to plunge Washington back into a long period of budget deficits and rising debt. The Congressional Budget Office estimated last year that the amount of money needed to fully finance those two programs, plus Medicaid, would jump to 16.7 percent of gross domestic product in 2040, from 7.5 percent now. If the government made all those payments, the national debt, which is expected to fall from 34 percent of gross domestic product today to zero in a decade or so, would balloon by 2040 to 62 percent.

MONEY MARKET FUNDS AND BREAKING THE BUCK: (NY Times, Bruce Bent, Reserve Funds) "Investors tend to overlook the potential for risk in money market funds.""Companies are buying garbage in their money market funds........ this is a pattern......... and the public should be made aware of it." Several fund complexes have bought the troubled paper from their funds, or bought letters of credit to guarantee repayment. Breaking the buck is a long time term used to reflect when a money fund drops the share price below $1.00 because of losses in their paper. Some might remember Piper Jaffrey and Bank of America in the early 90's. BofA had to ante up $64 million to keep the share price whole.

"Defaults prompted the Securities and Exchange Commission in 1991 to limit the amount of lower-rated commercial paper that funds may hold to 5 percent of assets. Moreover, investments in the paper of any one issuer are limited to 5 percent of a fund's assets, if that issuer is top-rated, and to 1 percent otherwise." Most companies buy short term paper and government obligations- very secure. But "Crane estimates that money funds hold $644 billion of it, which amounts to 43 percent of the $1.5 trillion total United States commercial paper market."

"The largest holders of commercial paper are the American Express Cash Management fund, which has 91 percent of its assets invested in commercial paper; TD Waterhouse Investors Cash Management, 88 percent; and the PaineWebber Cash fund, 81 percent."

So is it all gloom and doom and should you be unnecessarily worried? I think that as long as you are in a major fund, the fund will make sure it covers any losses- at least for the time being. If they let the shares fall, there will be a mass exodus from ALL money funds. I don't think any fund is going to allow that. I do know of one very small fund about 10 years ago that broke the buck, but its impact on the entire market was negligible.

MORE RISK (NY Times) The U.S. Treasury auctioned what may be the last issue of 30-year Treasury bonds. Therefore few government bond funds will have Treasurys. Without Treasurys to depend on, government-bond funds will have to buy securities that are a bit less secure, such as municipal bonds, so-called agency bonds and mortgage-backed securities.

RUSSIAN POPULATION GOING DOWN: It stood at  145.6 million in 2000 and could fall by 2.8 million by 2005.

BEHAVORIAL ECONOMICS (NY Times, LOUIS UCHITELLE) "If the behaviorists are correct, shares of companies on the New York Stock Exchange are overvalued and the Dow Jones industrial average has further to fall. And if the behaviorists prevail, the mainstream view of a rational, self-regulating economy may well be amended and policies adopted to control irrational, sometimes destructive behavior. Twenty-five years of deregulation might lose its appeal.

When people expect money but have not yet received it, they are capable of planning, quite rationally, how much of it to spend immediately and how much to save. But when the money actually arrives, willpower breaks down and -- barring locked-in paycheck deductions -- the money is often spent right away. The phenomenon is called "hyperbolic discounting," an economist's way of saying that a bird in hand is worth not two in the bush, but more like six or seven.

GOOD PLANNER?: From a reader, "I interviewed a planner who appears to meet much of the criteria mentioned in your literature and in our discussions.She is a CFP along with having MBA. During our initial interview she discussed not only investments,but insurance,living trusts,etc. However,the one thing I'm apprehensive about is her method of compensation.There would be an initial hourly fee,but after that she stated there would be no more fees because she would be investing in "C" shares of mutual funds. She stated the mutual fund would compensate her and there would be no hidden charges to me such as front end or back end charges. Would you please give your opinion and any advice?"

My reply, "You are buying commissionable products from a broker. I do not have a problem with subsequent charges for ongoing planning but the C shares represent managed funds that will also have a very high expense load. They will include (I am almost sure) a 1% ongoing 12b-1 fee along with other management expenses that will drive the costs to (probably) around or over 2.5%. That is excessive.

You should be using no load funds primarily because the internal fees do not exceed somewhere around 0.4%. A S&P 500 index fund is even lower at about 0.25%. You can add on a 0.75% or so management fee if you want ongoing analysis- not a bad thing. Secondly, although the MBA is valid, the CFP is still very weak on insurance and estate planning. Regardless, neither the MBA nor the CFP provides real life planning elements. They are both theoretical presentations. Admittedly that may not be a major issue with you but I suppose I'd like to know whether she is doing the planning or it comes out of a software package. Most tend to use computer programs. I admit that most consumers like them because they put out good "looking" material including colored charts and graphs but I have not liked them because they are internally biased towards the loaded funds that someone wants to sell. Specifically, they are usually written for very generalized applications. That may not be a problem for you but I do not know your entire situation that well.

Here is some further independent commentary on loaded funds and the current impact of different fees: (I only included a small part of the article)

"There is no official consensus as to which type of shares is the most economical to buy. Owning A shares does put a fixed amount of money to work for you right away. But with B shares, less of it goes to work for you over time. But it would seem obvious that, for long term investors, A shares are a better bet than C shares - when the expense costs will always be higher than the A's or B's. And it certainly would not pay to buy the A class shares of a fund, only to sell out a year later.

Edward O'Neill, a finance professor at Auburn University, has made a study of the various mutual fund share classes. He points out that the confusion caused by the incomprehensible cacophony of sales charges can lead to "blatant adverse incentives" for brokers to act against the best interests of their clients."

I think you need to look elsewhere. I think you have a salesperson."

He later replied, "I thought that was the case.I guess what is confusing to me is that she said there would no front or back end loads, that there would be no hidden fees or expenses. One last question, what do you think of Worth magazines list of top planners, as her name is on that list?"

My response, "You hit a sore spot with me regarding Worth's top planners. Since 1994 the list has included a large percentage of planners who are acting illegally in California since they are not licensed by the state. The same thing is true of Texas, New York, Mass and about 15 other states. I therefore find the selection to be based more on who they know rather than what they know.

Worth was made aware of this but has refused to do any due diligence (all they have to do is check state statutes). Doesn't seem to be too much integrity left. And that's evident by her lack of acknowledging what she would be getting in fees. The load is embedded in the cost of the fund."  

CHASING RETURNS: "Investors" think they can get better returns by switching funds whenever they see the next article on what will beat the market. Does the turnover work? (Financial Enews, Phoenix Investment Partners) Holding periods are declining as more investors pursue big stock market gains rather than sticking with a longer-term diversified financial plan. The end result is that they're buying high and selling low, resulting in 20% lower returns on average during three-year holding periods throughout the past decade.

VARIABLE ANNUITY SWITCHES. (WSJ) The SEC is going after brokers who exchange an annuity to another in order to generate another commission. "The motivation for some exchanges is principally to line the broker's pocket, and not in the best interest of the investor. Variable annuities offer beefy commissions, as much as 8%. Sales agents typically receive between 50% and 90% of that. In general, the commissions are about twice those paid by the average mutual fund charging a "load." A consulting firm estimates that at least a quarter -- and possibly as much as 40% -- of all new variable-annuity sales stem from a 1035 exchange, or switch letter.

BONDS (Morningstar) over the last 5 years, the Vanguard Total Bond Market Index Fund, which mimics the Lehman Brothers Aggregate Bond Index, has outpaced an astonishing 91% of all high-quality taxable U.S. bond funds.

CONSUMER CONFIDENCE: "In January the index of consumer confidence posted its steepest drop in 10 years, largely because people expect the economy to be worse off in six months than it is today. And this month it is down again, according to the Conference Board, a research group in New York that surveys people about their attitude toward the economy.

The gap between people's opinion about the current climate and their expectations for the future was wider than it had ever been in the 34 years the Conference Board has conducted its poll. "

MORE MEDICAID SPENDING (Kaiser Commission) "Medicaid spending could grow by up to 10% in the near future because of rising healthcare costs, particularly prescription drugs, the eroding impact of Medicaid managed care, wage pressures in the healthcare industry, the use of supplemental financing programs and enrollment increases."

On a per-enrollee basis, Medicaid expenditures rose by 6.8% to $3822 in 1998. By contrast, spending per enrollee grew an average of 5.9% per year from 1995 to 1997.

Higher prescription drug spending was one of the primary factors driving expenditures upward in 1998, the report notes. Overall Medicaid spending on outpatient drugs climbed 14.8% in 1998.

Meanwhile, declining enrollment (off 0.5% to 200,000 people) and cutbacks in disproportionate-share spending helped limit total spending growth in 1998 to just 5.2%.

Medicaid spending continues to grow at a slower pace than private sector healthcare spending, which is mounting at double-digit rates."

Nonetheless, these increases will get larger as more and more elderly are added to the ranks. Same thing with Medicare.

UNINSURED: Reuters- Compared with other primary care patients, low-income uninsured patients have a considerably higher prevalence of mental disorders, researchers report in the January issue of the Journal of Family Practice.

STOCK OPTIONS: Long time readers might remember that early last year I commented about a dot com guy that had exercised some options and had a huge tax bill. Of course, the stock, at the point of exercise was far above the option price. But then his stock fell to almost nothing. And he did nothing while it dropped. Now he had a tax bill but no money. Nothing he could really do.

The NY Times just commented about this: investors generally incur taxes when they use their options to buy stock. Even if the stock price plummets, the tax bill remains unchanged. Whether through bad luck, mismanagement, market restrictions, ignorance or greed, many people failed to sell enough stock to cover the bill. They treated paper gains as real and even borrowed against them. And they presumed that when tax time came, the money would be there.

Some people discovered that even dumping their shares would not erase their taxes because of the tax treatment on their type of options. For others, the problem was a complex tax called the alternative minimum tax. But a chunk of the loss could have been avoided with put options.

BUYING ON MARGIN. Mark Hulbert estimated that your chance of getting a margin call is as high as one in eight during your first year.

DO MOST PEOPLE HAVE WELL- DEVELOPED PERSONAL SYSTEMS OF ETHICS? (NY Times) That may not be so. "It's a mythology that there are all these autonomous principled thinkers walking around organizations," said Linda Klebe Trevino, a professor of organizational behavior at Pennsylvania State University. "It's just not true."

But staying in an organization that has values that clash with your own does not make you unethical. Even if you stay after claiming to have priorities that might have signaled your departure, no ethical breach is made.

What you do sacrifice if you stay under those circumstances is your integrity, said Laura P. Hartman, a professor of business ethics at DePaul University in Chicago. "And then people aren't going to trust you," she added."

If your values clash with your organization's -- whether you are on an island or in Washington -- and you have previously made it clear that, being the person of principle that you are, you would never stand for such policies or behavior, then you should leave. You should go not because it is unethical to stay, but because your integrity depends upon it." That has been my position with the CFP Board of Standards. It "markets" the highest integrity and ethical standards yet will not enforce ethical violations. As the attorney said to me five years ago when I had filed ethical complaints, "we will not enforce an ethical violation unless preceded by a legal one." When I analyzed some Board statistics in years past, the number of ethical violations they would pursue- such as lying about the courses taken for continuing education- was statistically insignificant.  Literally every suspension or revocation involved a guilty verdict in a court of law, arbitration, by the SEC or similar. Until such time, you can retain your designation and practice in any manner so desired. But that's not ethics. Ethics starts where the law leaves off. And you cannot practice without a license and call your self ethical. Right now I am acting as a witness against a CFP who did market timing on gold with almost all  the assets of a novice investor. Hard to believe. He was an officer in the ICFP, has a series 24 and had to have known what he was doing.Another is against a nationally known CFP who flipped so many life policies for an elderly couple that it was even hard for even the most jaded to fathom. It is clearly my contention that ethics and integrity is severely limited in the brokerage, insurance and planning industries. And I have the documentation to prove it. Let's be careful out there!

IRS AUDITS: (NY Times) The chance of an individual tax return's being audited last year was less than one in 200, down from one in 112 in 1999 and one in 60 in 1996. For taxpayers who make more than $100,000, and who pay 62 percent of all individual income taxes, the audit rate last year was slightly less than one in 100, down from one in 50 in 1998 and down from one in 9 in 1988. Audits of corporations also fell, by nearly 13 percent from the record low in 1999. Over all, the I.R.S. examined, either in a limited procedure or a thorough audit, a total of 617,765 tax returns, down two-thirds from the 1.94 million returns audited in 1996.

The IRS has fewer auditors now but they indicated that even as the ranks would grow, they might use the auditors and tax collectors to go after abusive trusts, many of them run by people who claim that the tax laws are a hoax and others by promoters who help Americans hide income through offshore bank accounts.

Lastly, there have been numerous people who have emailed about the ability to avoid taxes overseas. Nope- you can make it more difficult for a creditor to enforce a claim. But not to avoid taxes.

ARE THE LAYOFFS THAT INJURIOUS?: (NY Times, Labor Dept.) Despite the attention companies attracted recently with their announcements of plans to eliminate about 140,000 jobs, American businesses managed to add a net total of more than 200,000 employees in January. Over the last seven years when the number of announced layoffs rose, unemployment actually tended to decline, though the relationship was not strong enough to be significant.

What I found most interesting and enlightening is this- Except in the midst of a severe downturn, the many new jobs the economy is constantly creating almost always outnumber old ones being destroyed. This is often true even within many companies themselves." The public feels that the company announcements mean gloom and doom. But, "The ignored parts of these announcements are that companies are hiring while they're doing it."

OOPS: S&P reports that the number of failed U.S. insurers increased to 56 in 2000 from 40 in 1999...of the 56 insurers, five were life, 31 were P & C, 17 were health, and three were title companies. Bet the same thing is happening now.

HEDGE FUND RETURNS MAY NOT BE THAT GOOD: (NY Times) AQR Capital Management contends that, because many hedge funds own illiquid securities -- stocks and bonds that trade infrequently (or not at all in the case of private-equity investments such as venture capital), their performance statistics are off. When you adjust for these holdings, hedge funds on average are riskier and track the market more closely than they first appear.

These lightly regulated investment pools for wealthy individuals and institutions returned an average of 4.85% last year, according to CSFB/Tremont Hedge Fund Index, trouncing every stock index (though lagging bonds). And they purportedly did it with lower volatility than the market overall. Over the past five years through the end of January, hedge funds have returned an annualized 14.65%, lagging the Standard & Poor's 500-stock index's 18.36% return.

But the returns may be over valued since statistical studies show that hedge funds don't price certain holdings accurately. So they reran the data using a well-established statistical trick that attempts to properly value illiquid securities. The result? The trio found that the average hedge fund captured 84% of the market's rise. So if the market rose 15%, hedge funds in turn got a 12.6% lift because of that rise. In other words, any excess return was only due to the the 16% that was non correlated.

It is unclear- if not impossible- to determine what portion of hedge-fund assets are in stocks and bonds that don't trade much. As for private equity, about 10% to 15% of hedge funds invest in these securities, typically putting about 5% of their assets in them, according to one independent expert.

AGING IN THE UNITED STATES: (Bureau of the Census) In 2020, one of six Americans will be 65 or older - 20 million more seniors than today. Individuals 85 and older, currently numbering 3.5 million, will double to 7 million by 2020 and double again to 14 million by 2040. The Census Bureau report states that persons aged 85 and older are more likely to need nursing home care than any other age group. While only 1% of persons aged 65 to 74 and 6 percent of persons aged 74 to 85 lived in a nursing home in 1990, 24 percent of persons aged 85 or more lived in a nursing home in 1990.

Recent estimates indicate that the cost of a year's stay in a nursing home averages nearly $50,000, and in many major cities the cost is significantly higher.

Respondents to a recent survey sponsored by HIAA indicated that providing tax relief would be the most important step that government could take to encourage them to plan for future long-term care needs.

And from "Seniors Housing and Care Journal" (previously the "NIC Review") produced by NIC and the Johns Hopkins University. (2000, Vol. 8, No. 1, pps. 34)

"[G]iven the large estimated costs of long term care, there is little likelihood that any new national long-term health insurance program will be established, and the only national action that could be expected is the passage of legislation that will create some form of further tax incentive to encourage individuals to purchase private LTC insurance."

I am aware that they refer to tax incentives at purchase. It is my contention that the receipt of benefits will also be specifically stated to be tax free or certainly fitting within 7.5% of AGI. The initial tax benefits are a nice touch but it would easily defeated by a huge tax bill when one became disabled.

ASSISTED LIVING: A recent study of assisted living and nursing home residents with private insurance showed that for assisted living residents with private insurance, the daily benefit paid 88% of the incurred cost (Cohen and Miller, 2000 The Use of Nursing Home and Assisted Living Facilities among Privately Insured and Non-Privately Insured Disabled Elders. LifePlans, Inc. U.S. Department of Health and Human Services. Washington, DC.)."  

THIS WAS REALLY BAD!: Nasdaq, down 60%. The Dow Jones Industrial Average, down 45%. The Standard & Poor's 500-stock index, down 48%. That was the debacle in 1973/74. It took until 1982 for stocks to reach their previous high.

COMICAL: Worth published the past returns on their suggested portfolio. It was down 44.4% in the last 12 months and mirrored the NASDAQ debacle of a 42.5% loss. The S&P was down 4.4%. Now I am not adverse to tech but any "adviser" that suggested a pure tech portfolio was merely doing momentum investing and should be fired. But that is what I have said about the editor's for a long time.

MEDICARE: In 1997, Medicare spent $214 billion on health care. There are 72.6 million Americans over age 50.

IPO's: Remember all those IPO's that everyone wanted at the beginning of last year (NY Times): On average, stocks that quadrupled the first day they traded have since fallen 91 percent. Stocks that tripled have lost 87 percent and those that doubled are down 83 percent. But those that did not even double are down just 66 percent. Some of the companies have already failed; others are hanging on with dubious chances of raising additional money from the capital markets. None have proven to be a great investment; most now look horrible.

Only three of the companies are now selling at more than they sold for on the first day of trading, and only four are valued above their offering prices.

OLD: "In 2020, one of six Americans will be 65 or older - 20 million more seniors than today," notes the HIAA/AARP letter. "By 2040, individuals 85 and older (the group most likely to require long-term care) will more than triple to over 12 million."

HIAA released an updated report showing that a 100 % above-the-line tax deduction for consumers purchasing private long-term care insurance would provide annual Medicaid savings of $3.5 billion to $3.8 billion. Additionally, the report shows significant Medicaid savings in 10 key states with the largest %age of elderly Americans.

According to HIAA's report, New Jersey would realize Medicaid savings of $2,626 for each person with long-term care insurance, while New York would save $2,357; California $1,935; Pennsylvania $1,657; Illinois $1,494; Ohio $1,435; Michigan $1,186; Florida $1,096; Texas $1,063; and North Carolina $952.

INSTITUTIONALIZATION OF THE MARKETPLACE: Why such a change from past history where some managers had been able to outperform the market? It's the institutionalization of the entire marketplace. Forty years ago, institutions held less than 10% of the outstanding shares and individuals held more than 90%. Now, however, institutions- pension funds, mutual funds and insurance companies- hold more than 50% and have split up their shares of ownership quite dramatically from the 1970's. And according to two professors, "big investors act differently than individuals".

DYING:  14 medical associations, including the American Medical Association, and the Joint Commission on Accreditation of Healthcare Organizations have signed on to a set of core principles for end-of-life care.  

Core principles for end-of-life care

Respect the dignity of both patient and caregivers..

Be sensitive to and respectful of the patient's and family's wishes..

Use the most appropriate measures that are consistent with patient choices..

Encompass alleviation of pain and other physical symptoms..

Assess and manage psychological, social and spiritual/religious problems..

Offer continuity (the patient should be able to continue to be cared for, if so desired, by his/her primary care and specialist providers.))

Provide access to any therapy that may realistically be expected to improve the patient's quality of life, including alternative or non traditional treatments..

Provide access to palliative care and hospice care..

Respect the right to refuse treatment..

Respect the physician's professional responsibility to discontinue some treatments when appropriate, with consideration for both patient and family preferences..

Promote clinical and evidence-based research on providing care at the end of life..

Source: Christine K. Cassel, MD, and Kathleen M. Foley, MD, "Principles for care of patients at the end of life: an emerging consensus among the specialties of medicine," Milbank Memorial Fund, New York, N.Y., 1999.

FRAUD: (AP) - Medicare program losses - money wasted through fraud, mistakes and other problems - inched up to $13.5 billion in 1999 after falling for three consecutive years, government auditors reported.

The figure means that nearly 8 cents out of every dollar paid by Medicare last year was wasted. The program paid out $169.5 billion last year.

TAX QUALIFIED VERSUS NON TAX QUALIFIED AND THE DIFFERENT INTERPRETATIONS POSSIBLE: Under a cognitive impairment trigger, the individual would not be eligible for benefits under a qualified policy until he/she required continual supervision. That same person would only need supervision(but not necessarily continual supervision) under a non qualified policy.

Those needing assistance with activities of daily living will need to be in such bad shape as to need both hands on assistance and standby assistance in order for benefits to be triggered under a qualified policy.

IF YOU BOUGHT A TAX QUALIFIED POLICY, I HOPE THE AGENT EXPLAINED THAT TO YOU.

POPULATION OVER 85 YEARS (figures in the millions)

3.5           3.7             3.8              4.0

1994        1996          1997           1998

EXERCISE: a new study suggests moderately paced, sustained activities promote weight loss more effectively than brief, high-intensity health club workouts based on  the "no pain, no gain" mantra. Walking, bicycling, even climbing stairs during TV commercials can contribute to weight loss if performed consistently.

ANNUITIES (Forbes) Less than one-half of one percent of annuity contracts are terminated because of death or disability. For annuities with the costly insurance feature, it would apply in a minuscule number of terminations. For all intents and purposes, this is an unnecessary and expensive feature.

COUGH, WHEEZE: Women now account for 39% of smoking-related deaths, a proportion that has more than doubled since 1965.

MIB:  16 million people's medical records are  contained in files warehoused by the Medical Information Bureau (MIB). Once you are on the file due to some ailment, you can never get off (though you can write if there is an error). That's also why you can't lie on a life policy and expect to get coverage. They all contact MIB to see if anything has been placed there. MIB provides more than 600 insurers with medical information and may now include health insurers who also want to exclude those that lie on an application.

CAREGIVER CARE: A landmark study in the Journal of the American Medical Association recently revealed that caregivers are at a dramatically higher risk for illness triggered by prolonged stress than the population as a whole.

ALZHEIMERS- Previous articles indicated that the average victim dies in 5, maybe 7 years. (My uncle took 7+ years; my mother is at 5 years). New info indicates that such people die in 3 years. The data did not include those that died so quickly after getting the disease.

The median expectancy is now 5.7 years between the ages of 65 and 74;4.2 years between 75 and 84 and 2.75 years for those over age 85.   

DRUGS: Four million Americans abuse prescription drugs, frequently becoming addicted to stimulants, pain killers or sedatives in what experts say could become a public health crisis.

CARE: In the year 2000, 40% of all functionally dependent (requiring some form of care) Americans will be less than 65 years old. Married couples have a 70% chance that one of the spouses will require care.  

SMALL BUSINESS TAX BITE- The repeal of the installment sales method of accounting for accrual method taxpayers. When a small business is sold to a buyer making payments over a period of time, the seller must report and pay capital gains tax on the entire purchase price, even though the seller hasn't received all the money from the buyer