US FlagJanuary 15, 2008 Edition


WARNING: There is not a lot of economic good news in this issue. Remember, we don’t create this stuff. We just report to you what others are saying. However, there is one bit of good news! The Virtual Assistant (VSA) will launch its 2008 edition this weekend with huge improvements to the “look and feel” of their point-of-sale material. Check out some below:
 CITIGROUP TO WRITE OFF $18.1 BILLION – In announcing some of the worst quarterly results in its history, Citigroup announced a nearly $10 billion quarterly loss, a writedown of $18.1 billion and a 41% cut to its dividend.  The loss, attributed to credit and subprime losses, was much worse than Wall Street had anticipated.  The company took the occasion to also announce that it was receiving a $12.5 billion infusion from investors in Kuwait, Singapore and the state of New Jersey.  While there was speculation that Citi would also announce large job cuts, that ax is yet to fall.

SOVEREIGN WEALTH FUNDS - Citigroup and Merrill Lynch, together with UBS and Bear Stearns Morgan Stanley, are looking to foreign governments for additional investor capital. Major reason: U.S. housing-market woes. The "clean slate" strategy being pursued by Merrill Lynch, Citigroup and others is aimed at drawing a line under the six-month-old credit crisis, and in so doing, dramatically reshaping the ownership of the American financial industry.  The GAO has begun examining the sizes and types of investments sovereign wealth funds are making in American markets, as well as the oversight of those funds.  Depending on the outcome of the GAO investigation, Congress could propose legislation if it finds that the funds pose a threat.  Here’s an interesting Bloomberg article on sovereign funds.  

BAD YEAR FOR INVESTORS IN WALL STREET – Check out the loss of share value in just five major financial giants in 2007: Citigroup, ($135 billion); Morgan Stanley, ($40 billion); UBS, ($40 billion); Merrill Lynch, ($34 billion); and Bear Stearns, ($10 billion). That is a $259 billion loss for companies who are giving advice on investing to others. But that’s okay, they still gave out nice year-end bonuses!

SPEAKING OF WHICH... – The House Oversight and Government Reform Committee has asked former CEOs Angelo Mozilo (Countrywide Financial), Charles Prince (Citigroup) and Stanley O’Neal (Merrill Lynch) to testify regarding their compensation and severance packages.  All three stand to make tens of millions of dollars while their respective companies suffered billions of dollars in subprime losses.

BANK OF AMERICA BUYS COUNTRYWIDE – BOA will pay about $4 billion in stock for troubled lender Countrywide. "Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers.” However, others feel that BOA is taking a big risk with the purchase.

CORPORATE RETIREMENT PLANS HEALTHY – Here is a glimmer of good news. According to Employee Benefit Assets, the majority of large corporate retirement plans are financially healthy. Assets in defined benefit plans and defined contribution plans increased during 2006 by 9% and 11%.


BANNER YEAR – In some more good news, mutual funds reached record levels of growth by the end 2007, with asset levels hitting $13 trillion, a gain of about $1.8 trillion from the beginning of 2007.

RECESSION INDICATORS – Reports show that spending has decreased at every socioeconomic level...raising speculation that spending has protected us as energy prices rose and housing prices fell. S&P 500 companies are predicted to have a 9.1% decline in fourth-quarter earnings.

GOLDMAN SACHS PREDICTS RECESSION – Nearly 50% of Wall Street economists are forecasting a recession for the U.S. in 2008. Count Goldman Sachs with the bears...they are predicting recession and advising their fund managers to “overweight health care, consumer staples, energy and utilities and to underweight consumer discretionary, financials, industrials, materials and information technology.”

MERRILL DOESN’T JUST PREDICT - Merrill Lynch has become the first major investment bank to announce that the U.S. is in recession. "According to our analysis, this [recession] isn't even a forecast anymore but is a present-day reality."

STARK OUTLOOK – Fed Chairman Ben S. Bernanke sees a bleak picture for the economy and promises to take "substantive additional actions" if necessary.  Many believe the Fed will cut its rate by .5% to 3.75% this month, with rate cuts continuing into the future.  There are those who believe that attempting to minimize the pain now may lead to greater pain in the future.  Here’s a Bloomberg perspective on the subject.  

BIPARTISAN EFFORT NEEDED TO AVOID RECESSION - The New York Times believes that bipartisan support will be necessary if we are to avoid a recession. "If conditions deteriorate even further, the White House and Congress would need to act quickly. That means they need to start talking now, before things turn grave.”

JUST HOW MUCH CAN THE FED DO? – This is a question that many people are now asking. The only recession fighting tool available to the Federal Reserve is the prime interest rate. Further, the Fed must “remain vigilant on the inflation front and be prepared to act as necessary to avoid the risk of undermining public confidence in the central bank's commitment to price stability."  So if cutting rates doesn’t work or can’t be done, what is next and who does it? We don’t know, but we’re concerned that if bipartisan effort is required as suggested above, it may be a long time coming.

HERE IS THE ANSWER...STIMULUS PACKAGE – The President is considering using his State of the Union address as a platform for introducing an economic-stimulus package aimed at propping up weak parts of the economy. "In terms of any stimulus package, we're considering all options, and I probably won't make up my mind as to whether or not I lay one out until the State of the Union." 

CREDIT INDUSTRY HAS MORE PROBLEMS THAN SUBPRIME - Financial Times predicts more problems in the credit market, including credit cards. "If this had been a mere subprime crisis, it would now be over. But it is not, and nor will it be over soon."

USA NOT AAA? – Moody’s says that the U.S. could lose its triple-A credit rating (that it has held since 1917) within a decade if we don’t take "radical action to curb soaring health care and Social Security spending." You might also want to add government pensions and retiree health benefits to the group needing “radical action.”

INFLATION FEARS – Some evidence indicates that we are in for a period of increasing inflation. However, with the possibility of recession and the economic and political ramifications thereof, you can bank on a .5% reduction in the prime.

STAGFLATION? - Stagflation is described as inflation and a slowing economy. The economy has continued to expand in recent months, even as a set of indicators has analysts predicting a potential recession. Analysts expect an answer to the "what's next" question in short order, with either a new source of growth emerging to counteract slumping home sales and rising oil prices, or with the economy finally stumbling into a recession and maybe “stagflation.”

READ MY LIPS - Despite uncertainty about growth, President George W. Bush believes the country's markets are "strong and solid". Bush's comments came after he was briefed by economic advisers and as he called on Congress to not raise taxes. "If the foundation is strong yet indicators are mixed, the worst thing that Congress can do is raise taxes on the American people and on American businesses," Bush said. 

AEGON COMPLETES MERRILL DEAL - Merrill Lynch and Aegon have finalized their strategic relationship with Aegon completing its acquisition of Merrill's life insurance units for $1.25 billion in cash.
FEATURED TEXT
ADVISOR OR BROKER? - According to a study commissioned by the SEC, investors do not generally understand the difference between brokers and financial advisors. However, for the most part, they are satisfied with the services they receive.  The report from the RAND corp. is available at www.sec.gov.

BROKER OR ADVISOR, LET THE CUSTOMER CHOOSE – This from Jane Bryant Quinn, “The Financial Planning Association beat the stockbrokers in the name-calling contest. It sued over whether brokers could call themselves investment advisers and run your money for a fee. A federal appeals court said no. A stockbroker is a salesperson, not an adviser. If you want advice, you should turn to someone trained to give it. What did you get from that turf war? With luck, a better shot at sound investment planning. On the downside, you may wind up paying higher fees.”

FINRA RULEBOOK UPDATE – The SEC is asking FINRA to consolidate the industry rulebook ASAP in order to give smaller firms a break on some rules that don't apply to them. Sure would be nice if there were some specific rules for all compliance officers. It is amazing how differently they can interpret what is “in compliance” for their producers.

EXPANSION OF MORTGAGE RELIEF - The administration is considering an expansion of a previously proposed mortgage-relief initiative. The new measure would allow the mortgage industry to expand the program to cover prime-rate as well as subprime-rate borrowers.

WEALTHY TURNING TO MONEY MARKET - Market turmoil has many wealthy investors opting for money market funds. This may mean they are positioning to swing money quickly when market opportunities arise or it could mean they just don’t know what else to do.
 
FIVE-FOLD INCREASE IN BOND DEFAULTS - Moody's predicts that the global default rate on high-yield, high-risk bonds will jump fivefold by the end of 2008. These Moody folks are just a big bundle of good news!

CFA AND P&C INSURERS – The Consumer Federation of America issued a report claiming that “the U.S. property/casualty insurance industry systematically overcharges policy holders and underpays on claims.”  The National Association of Mutual Insurance Companies replied...”absurd.”  Click here for more information on the CFA study.

HOW DO YOU RANK? – As a taxpayer that is.  Click here to see how your income stacks up against your fellow citizens. 

SS DISABILITY – As yet another indication of the importance of disability income insurance, the Social Security Administration is mired in a backlog of SSDI claims approaching 600,000.  In fiscal year 2006, 30% of claims that went through determination hearings took 600 days or more.  Anyone counting on Social Security disability benefits to see them through an accident or illness is gambling on a system that’s currently in disarray. A copy of the GAO report is available at www.gao.gov.  

FREE CREDIT REPORT - Federal law gives everyone the right to order a free credit report every 12 months from the three major nationwide credit reporting agencies: Equifax, Experian, and TransUnion...but only about 20% do so. However, some Internet sites are offering “free” credit reports with the purchase of additional credit watch services. The only official channels to make a request for a free annual credit report are online at www.annualcreditreport.com, by calling 877-322-8228, or by filling out the Annual Credit Report Request.

SELLING HSAs? IT WORKS - Celent reports that small businesses in areas where producers are active in promoting health savings accounts are more likely to adopt HSA programs than small businesses in other regions are. Kind of a no brainer, but it sure should indicate that this market is wide open for additional penetration.

MEDICAL TOURISM – Medical tourism is a new medical strategy of seeking medical care in countries where care (including travel!) is cheaper than in the United States. While only about 10% of health insurance carriers offer this benefit, experts say to expect more to follow.

HEALTH INSURANCE PRICE WAR! - After enduring years of premium hikes, small business is being courted by carriers eager to make deals. Reason: the overall market for health insurance is flat and carriers are battling each other for market share. 

MDRT ELIGIBILITY FOR 2009 - The U.S. production requirement to qualify for the 2009 MDRT is $87,900 in eligible commissions, or $175,800 in eligible premiums or new money invested, about an 8% increase. To qualify for Court of the Table, agents must produce 3 times the amount required for initial MDRT qualification requirements. That's $263,700 in eligible commissions or $527,400 in eligible premiums. For Top of the Table, it is at least 6 times the initial production requirement, which comes to $527,400 in eligible commissions or $1,054,800 in eligible premiums. Further, at least 50% of the production amount must come from sales of individual or group life insurance; accidental death and dismemberment insurance; annuities; disability income insurance; long term care insurance; critical illness insurance; and pension products written by life insurance companies.

PENSION DISCONNECT - Employee Benefits Research reported last year that 62% of Americans said they expect to receive income from a traditional pension. The disconnect is that just 41% of workers said they or their spouse are enrolled in such a plan.

BIG BLUE FREEZE – IBM, whose reputation for providing great benefits was once legend, has frozen all of its pension plans effective January 1, 2008. Importantly, Big Blue's freeze was not because the company is in financial trouble or because its pension plan is underfunded...but it will save the company a bunch of money. Expect the IBM move to open the door for other large corporations to follow suit.

RETIREE HEALTH INSURANCE - A new federal regulation allows employers to reduce or eliminate health benefits for retirees when they turn 65 and become eligible for Medicare. While the regulation has been denounced as discriminatory by AARP, it could help slow the deterioration of employment-based health insurance. Not sure what impact it will have on the nearly bankrupt Medicare program.

BANKRUPTCY LAW REVERSAL? - In 2005, Congress passed a new law making it harder for people to file for bankruptcy. The number of bankruptcies declined in 2006, but surged by nearly 40% in 2007 and is expected to go higher this year.  The issue is gaining plenty of attention on Capitol Hill, where leading Democrats are proposing to roll back the landmark bankruptcy law.

STAYING ON TOP OF FINANCES – Here are six quick ideas to help you and your clients stay on top of your 2008 finances: set goals, organize financial information, consolidate your accounts, cut down on credit cards, automate your financial transactions and see a financial professional.

OLDEST BOOMERS SET - A MetLife Mature Market Institute reports that the average member of the 1946 birth group has an annual income of $71,400, a home with a value of $297,900, and household net worth, excluding home value, of $257,800.  Further, most do not have financial advisors, do not plan to use reverse mortgages, and, unless they already own stocks, bonds, annuities or long term care insurance, they have few plans to buy those products.