US FlagFebruary 1, 2009 Edition


POLITICAL OPINIONS - Some of you may feel that a great deal of this issue's content is political. Consider this, however...be you Republican, Democrat or Independent, our financial futures are literally "tottering on the brink." To not address these issues with facts and opinions would be a disservice to our readers.

SHARP DECLINE - Gross domestic product fell at an annual rate of 3.8% in the fourth quarter, the sharpest decline in 26 years.  Consumer spending fell at a 3.5% annual rate, with big-ticket spending on durable goods plunging 22%.  Business spending on equipment and software plunged at an annual 28% rate and exports fell almost 20%.  Job losses, meanwhile, continue to soar, with more than 100,000 job cuts announced in the last week of January alone.

"STIMULUS" BILL PASSES – Under the guise of "stimulus" and a Presidential promise of no earmarks, the House has passed President Obama's "emergency" bill that includes the following.  The expectation is that the Senate will remove a number of these appropriations, but time will tell.
  • $200 million to rehabilitate the National Mall.
  • $276 million to fix the computer systems at the State Department.
  • $650 million to repair dilapidated Forest Service facilities.
  • $50 million outlay for the National Endowment for the Arts.
  • $44 million for repairs at the Agriculture Department headquarters.
  • $336 million for sexually transmitted disease efforts.
  • $360 million for new child care centers at military bases.
  • $1.8 billion to repair National Park Service facilities.
  • $276 million to update technology at the State Department.
  • $500 million for the Transportation Security Administration to install bomb detectors at airports.
  • $1.5 billion for a "carbon-capturing contest."
  • $600 million for General Services Administration to replace older vehicles with alternative fuel vehicles.
  • $2.5 billion to upgrade low-income housing.
  • $400 million for NASA scientists to conduct climate change research.
  • $426 million to construct facilities at the Centers for Disease Control and Prevention.
  • $4.1 billion for "neighborhood stabilization activities"...groups like ACORN.
  • $572 million for the Coast Guard for "acquisition, construction, & improvements."
  • $800 million to clean up Superfund sites.
  • $150 million for the Coast Guard to repair or remove bridges deemed a hazard to navigation.
  • $6.7 billion to renovate and improve energy efficiency at federal buildings.
  • $400 million to replace the Social Security Administration's 30-year-old National Computer Center.
One could argue the value to society of any or all of the above.  One could also argue that some of them will result in job creation. The question, however, is to what degree in the shorter term this spending package will help the tens of thousands of Americans who have lost their private-sector jobs, including the 100,000 plus just last week.

WHEN WILL THE STIMULUS PACKAGE "KICK IN"? - An initial Congressional Budget Office analysis found that only $26 billion out of $274 billion (7%) in infrastructure spending would be delivered into the economy by next fall. An update determined that just 64% of the stimulus would reach the economy by 2011.

ECONOMIC OPPOSITION - "Some people are going to oppose President Obama's stimulus package just because they're on a different political team. But when you look at the economic evidence, it sure seems like an economic recovery package that's heavy on government spending and light on tax cuts is just the opposite of what we should be doing right now." Check out "10 Reasons to Whack Obama's Stimulus Plan."

THOUGHT PROCESS - Here is a hint to the thought process behind the economic stimulus package from the "second most powerful person in America"...the President's Chief of Staff, Rahm Emanuel:
"You never want a serious crisis to go to waste. What I mean by that is it's an opportunity to do things that you think you could not do before. This is an opportunity. What used to be long-term problems -- be they in the health care area, energy area, education area, fiscal area, tax area, regulatory reform area -- things that we had postponed for too long that were long-term are now immediate and must be dealt with. And this crisis provides the opportunity for us, as I would say, the opportunity to do things that you could not do before."

MONEY TREE? - Where do we get the money to do this? Just print more? Spending-stimulus advocates claim that government can "inject" new money into the economy, increasing demand and therefore production. This raises the obvious question: Where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Therefore, every dollar Congress "injects" into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.

SOME MORE OPINIONS - One thing we don't have a shortage of is opinions on how we got into this mess and the best ways out!  Here are a variety of interesting opinion pieces:

HOW MUCH IS $1.2 TRILLION? - "All sides agree the plan carries a hefty price tag: It will be paid for with borrowed funds and could swell an already mammoth $1.2 trillion deficit forecast for this year to more than $2 trillion."  Well, it is hard to get your arms around, but $1.2 trillion is enough to pay $4,000 to every man, woman and child in the U.S.

RECOVERY WEBSITE – President Obama and Democratic leaders are hoping to allay concerns about where the money will go by creating a Web site - www.recovery.gov - where the public can track how the money is being spent. This should be interesting to follow.

JOB PREDICTION - Democrats defend their proposal by citing an analysis by economist Mark Zandi of Moody's, who concluded that the stimulus plan would create or save 4 million jobs and keep the unemployment rate 2% points lower than it would be without the package. You might want to write this down for future verification, remembering that the accuracy of economists' predictions these days are right up there with weather forecasters.

FED, FANNIE & FREDDIE - As required by the federal "bailout law," the Federal Reserve will seek to adjust delinquent residential mortgage securities it holds, owns or controls, including the assets it took over as part of its rescue of Bear Stearns and AIG. Concurrently, Fannie and Freddie will shrink their portfolios by 10% a year until they fall to $250 billion each. Fannie and Freddie have been propping up the housing market after private investors fled when the mortgage crisis hit in 2007. The two firms buy mortgages from lenders and either hold them on their books or bundle them into securities. The companies also buy mortgage-backed securities.
 
AGGREGATOR BANK – The first half of the controversial $700 billion program to help banks has already been spent -- mostly on buying up preferred shares of troubled banks. Part of the remaining $350 billion may be used to purchase troubled assets from bank balance sheets and place them in what the Federal Deposit Insurance Corp calls an "aggregator" or "bad bank," similar to the old Resolution Trust Corp (RTC) from the late 1980s. "The amount of working capital you'd expect the government to take into this would be around $3 trillion to $4 trillion."  There is a good chance that removing toxic assets from bank balance sheets could leave taxpayers with a significant tab. RTC needed $124 billion to "wind down." Other options being considered to help stabilize the U.S. banking industry include government insurance on selected troubled assets to help shield banks from future losses and capital injections by the government in exchange for common shares of stock.  There is also some indication that this menu of options will be used on a case-by-case basis to tailor government aid to a bank's unique situation.

FEDS WILL KEEP RATES LOW - The Fed took the unprecedented action of slashing its key rate from 1% to a new, targeted range of between zero and 0.25 percent. Economists predict the Fed will leave rates at that range through the rest of this year.  Here's an interesting article on "The Fed's monetary policy toolbox."  
LITTLE TRUST IN THE FINANCIAL SYSTEM - The first Financial Trust Index says only 22% of Americans trust the financial system, and just 12% trust the stock market. Any wonder why?

SOME TAX CUTS - The stimulus legislation currently offers a payroll tax cut of $500 to individuals who earn less than $75,000 a year, and a $1,000 credit to married couples who earn less than $150,000 a year. Since many of the people who would be eligible pay no income taxes, a cynic might dub part of the cuts as welfare.  The final version may also include an AMT "fix," at least for 2009.

SCHIP PROGRAM - Both the House and Senate have passed H.R. 2, the Children's Health Insurance Program Reauthorization Act of 2009, legislation supported by the President.  Funded by an increase in the federal tobacco tax, the bill authorizes the expenditure of $32 billion over the next 4 years to expand the State Children's Health Insurance Program to an estimated 11 million children from 7 million today.

FPA CUTS - The Financial Planning Association is expected to announce staff layoffs shortly.  The need for layoffs is attributed to the difficult economic climate and declining membership renewal rates.

RULE 151A ADVICE – If you are concerned about how 151A will impact you, here is some advice from the experts. 1) Don't panic, the rule does not go into effect until January 12, 2011. 2) Lawsuits are being filed and there is precedence among courts ruling that index annuities are not securities. 3) The dissenting vote on the Commission laid out the legal faults with Rule 151A.  On the lawsuit front, the index annuity industry has asked a federal appeals court for an expedited review of the SEC decision.

CAN'T SEE THE FOREST FOR THE TREES - This is something we can sure relate to:  "Regulators had an obsessive focus on meaningless rules and exams while big players such as Bernard Madoff got away with fraud and major Wall Street firms precipitated a worldwide financial panic"...read entire article.  

AFFLUENT MORE CONCERNED - Sun Life researchers report that investors using advisors and with $500,000 in investable household assets are getting increasingly concerned about the stock market. The percentage wanting to take fewer risks with investments rose to 17%, from 9%, and the percentage who said they wish they had invested in guaranteed products rose to 12%, from 9%.

STILL SAVING IN 401(k)s – According to Fidelity Investments, the average 401(k) balance plummeted 27% to $50,200, down from $69,200 the year before. Despite this, workers have continued contributing to their 401(k) retirement savings plans. The survey showed that, on average, employees saved $5,600 during 2008, a minor improvement from the previous year. What will 2009 bring? Who knows.

WALL STREET BONUSES DOWN – Wall Street workers received smaller bonus payments this year....about 44% less. In aggregate, Wall Street had about $18 billion in bonuses in 2008 versus $31 billion in 2007. If our company loses money, we don't get bonuses...why should they, particularly when the institutions are receiving federal bailout funds? The President has expressed his indignation but here's the downside...just on the bonus decreases, New York City lost income taxes of an estimated $275 million and New York State will lose nearly $1 billion in revenue. Some quick calculations indicate that the Federal government will get about $4 billion less in taxes.  

BENEFICIARY DESIGNATIONS - A recent U.S. Supreme Court decision underscores the importance of keeping beneficiary designations current.  In the case, a DuPont worker divorced, but never changed the beneficiary designation for his pension benefits.  At his death, the plan paid all benefits to his ex-wife, even though she agreed to give up all interests in the plan in the divorce settlement agreement.  Since the plan's beneficiary designation form had never been changed, however, the court ruled that the plan had a right to rely on the beneficiary designation form.

REVERSE MORTGAGES UP - The number of federally-insured reverse mortgages in 2008 increased by 6.4% over the 2007 total.

MORE PONZI - Nicholas Cosmo, head of Agape World Investments, is accused of operating yet another traditional Ponzi scheme in which previous investors are paid with money supplied by newer clients. We should play the "Monopoly Card" on these people..."Go to jail. Go directly to jail. Do not pass go, do not collect $200."

BRAND YOURSELF TO FIGHT THE BAD ECONOMY - In his new book, Me 2.0: Build a Powerful Brand to Achieve Career Success, author Dan Schawabel provides a detailed four-step strategy for personal branding...how we market ourselves to others. "Ten years ago, in a Web 1.0 world, your brand was hidden unless you were an executive at a leading company or a Hollywood celebrity. Now, with the evolution of the Internet into a Web 2.0 environment, every single person has a voice that can build or destroy their reputation and that of their company in an instant."  You can check out his book, but here is a way to get started. Get a Website and newsletters from The Virtual Assistant for no more then $21.95 per month and as little as $17.95 per month.  

PENSIONS AND LONGEVITY – A MetLife study reveals that relatively few U.S. pension managers are paying attention to longevity risk and early retirement risk. More than 40% of the participants rated meeting return goals as well as asset and liability mismatch as important, but less than 10% rated quality of participant data, longevity risk, mortality risk or early retirement risk as important.

BROKERS TO RIAs - Disenchanted brokers are migrating slowly to independent channels, adding to the coffers of major custodians like Schwab and Fidelity Investments. The breakaway-broker gain represents about 22% of the $60 billion of new assets that all independent advisers brought to Schwab last year.
 
COBRA NOT USED – Reports say only 9% of laid-off workers chose coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) in 2006, primarily due to the high cost. The House Ways and Means Committee marked up a bill that could subsidize the cost of continuing group health coverage for laid-off workers and cut workers' share of the premiums to 35%.

SMALL BUSINESS OWNERS WARY OF SOCIAL SECURITY – ING reports that, when it comes to Social Security, two-thirds of small business owners in this country want the opportunity to manage their own accounts. The report also revealed that, despite the economic downturn and the challenges it presents, small business owners have faith that Social Security will be around in some form when they retire.