February 15, 2010 Edition

JOBS NUMBER ONE, FOREIGN DEBT NUMBER TWO - President Barack Obama said that the economic recovery will only come when more Americans are employed and we are borrowing less from other countries.

SMALL BUSINESS DEPRESSION – At least the President recognizes that there is no such thing as a jobless recovery, but the latest feedback from small business is not reassuring. The annual poll of members of the National Federation of Independent Business (NFIB) found that "small-business owners entered 2010 the same way they left 2009 -- depressed." These are the businesses that account for 48 million jobs, or 44% of all private nonfarm employment.

BIG BUDGET/BIG DEBT – Well, reducing the amount we need to borrow as a priority of the Administration is belied by the latest budget. It will, over the next 10 years, allow $45.8 trillion in new spending and create an additional $9.1 trillion by raising taxes on 3.2 million small businesses and upper-income taxpayers. Yes, that would be taxes on the actual job creators of our country.  Meanwhile, some politicians and bureaucrats are in complete denial. "We've got to spend our way out of this recession," declared House Majority Whip James Clyburn, D-S.C as the Office of Management and Budget named the 2011 budget, "A New Era of Responsibility."

LEGAL AND MORAL PLUNDER - "When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that justifies it." Frederic Bastiat

NEW INFLATION TOOL - The Fed needs to somehow withdraw trillions of dollars of economic support without damaging the economy or allowing inflation to flare. The new "tool" was in a little noticed provision in TARP that allows the Fed to pay interest on money that the banks "park" at the institution.  The plan is if inflation becomes a threat, the Fed could raise the interest rate, giving banks an incentive to park even more cash rather than lending it.  Click here for more information from IBD on Mr. Bernanke's statement.  

NO EXIT PLAN FOR FANNIE AND FREDDIE – The WSJ reports Fannie Mae and Freddie Mac now represent an essentially unlimited bailout liability with a mandate to keep Americans in their homes. The U.S. has no system in place to tackle a failure of its largest financial institutions. "In essence, rather than rebuild the entire system that created the housing bubble, which Fannie and Freddie were at the core of, the Obama administration is using the carcass of it to effect changes in economic policy until long-term structural reforms can be thought out and passed. 'We're making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could,' said Freddie's CEO."

GOVERNMENT WORKERS – Business for gun dealers, pawnshops and bankruptcy lawyers has been pretty good of late, but government work is booming.  According to USA Today, the percentage of federal civil servants making more than $100,000 a year jumped from 14% to 19% during the first year and a half of the recession. At the beginning of the downturn, the Transportation Department had one person making $170,000 or more a year; now it has 1,690 making that. The New York Times reports that state and municipalities have added 110,000 jobs since the beginning of the recession, while the private sector has lost 6.9 million. In 2008, benefits for public employees grew at a rate three times that of private employees.

PAULSON AND "THE ORACLE" AGREE – At a recent meeting, Former Treasury Secretary Henry Paulson and billionaire investor Warren Buffett, from different sides of the political spectrum, expressed support for the U.S. government's aggressive steps in 2008 to keep the nation's banks and economy from a complete meltdown. Paulson, treasury secretary under Republican President George W. Bush, called the credit crisis of 2008 "a doozy," one whose scope he never foresaw. Long supportive of Democratic causes, Buffett said "I really did gain an appreciation for the fact that he understood what was going on and that he understood what needed to be done," Buffett said, referring to Bush. Paulson quoted Bush as saying, "If money isn't loosened up, this sucker could go down."  Both men expressed a belief that taxpayers will recover every cent paid out to banks and may even see a profit.

DEBT LIMIT NOW $14.3 TRILLION - The national debt is expected to strike the current limit of $12.4 trillion by the end of this month, so the Senate has approved legislation to increase the limit $1.9 trillion, to $14.3 trillion.  A debt ceiling that high is equivalent to about $45,000 for every American.

2010 DEFICIT...$1.56 TRILLION - This year's deficit will reach $1.56 trillion, or 10.6% of the economy and the highest percentage since World War II. What would it take to balance the budget? Believe it or not if we just returned to the spending level of 2007...that would do it!
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UNCOMPENSATED CARE - According to the New York Times, "the cost of doing nothing in Washington translates into tens of billions of dollars each year in medical bills that go unpaid by patients with little or no insurance. Nationwide, the cost of unpaid care for hospitals, which includes charity care as well as money that could not be collected from patients, was around $36 billion in 2008. It is expected to spiral higher." A related article in WSJ says, "Hospital stocks have dropped as much as 20% from their January peaks," a portion of which is due to the fact that a health overhaul would have reduced uncompensated care, which makes up more than 20% of revenue for some hospital operators.

BIPARTISANSHIP NECESSARY - President Barack Obama appealed to lawmakers from both parties to come together on "the pressing challenges" facing the economy, including deficit reduction and job creation. Obama also said congressional leaders have discussed, and are often in agreement, on restoration of fiscal responsibility. "For us to solve this extraordinary problem that is so many years in the making, it's going to take the cooperation of both parties. It's not going to happen in any other way." We agree and bipartisanship should start with balancing the budget by simply returning to the spending level of 2007.

BIPARTISAN JOBS BILL - The Senate Finance Committee has unveiled a bipartisan jobs bill draft that seeks to encourage businesses to hire by providing Social Security payroll tax exemptions and income tax credits.  The bill would also temporarily relax funding requirements for single-employer and multiemployer pension plans, extend increased unemployment benefits limits and the 65% COBRA health insurance subsidy through May 31.

ALL GREEK TO ME - Fear about debt in Greece proved to be big enough to sway the U.S. stock market last week. "Investors are now focused on which governments are overleveraged." Sovereign-debt problems are expected to increase borrowing costs in Europe.

THERE IS SOMETHING ABOUT MARY - The Financial Industry Regulatory Authority will review claims its management is overcompensated after the brokerage-industry regulator paid former CEO Mary Schapiro $3.26 million in 2008. Schapiro, 54, received a $937,961 salary from FINRA in 2008, a bonus and incentive compensation worth $1.75 million and other pay totaling $565,995, as well as a "defined-benefit plans" payment of $7.2 million. She makes $162,900 a year at the SEC.

U.S. CREDIT RATING AT STAKE - Moody's Investors Service said the U.S. faces a debt-growth situation that is "clearly continuously upward" and warned that its triple-A credit rating might come under pressure. "Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple-A government bond rating."

GLOBAL ACCOUNTING RULES - Executives at the Big Four accounting firms believe the nation's plan to shift to global accounting standards could face significant delays and that the process could become extremely politicized. "The next six months are going to be defining, The key is what the [SEC's] position is going to be."

SOCIAL SECURITY, NEXT BAILOUT? - The bank bailout is winding down but another huge bailout is starting...the Social Security system. A report from the CBO shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits. Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.

UNIONS, NEXT BAILOUT? – Some want a federal bailout of pension funds for defined-benefit pension plans, which are often secured by...unions. The House has a pending bill to provide pension fund relief for these defined-benefit pension plans. It puts the taxpayers on the hook, if the companies can't pay off on the union-negotiated contracts.

BIG AND GETTING BIGGER – Here are some facts for your reading pleasure:

  1. The federal government is 25% of our total economy (GDP). This is compared with an average of 20.7% of the GDP during 1970 - 2009.
  2. If you include the cost of state and local government, the total cost of government is almost 40% of our GDP.
  3. Since 2008, the cost of our federal government has increased by one-fourth.

OBAMA ADMINISTRATION TAX PROPOSALS - Click here for a summary from the National Underwriter on tax proposals in the administration's 2011 fiscal year budget. One provision would indirectly tax the inside buildup of corporate-owned life insurance by "disallowing a proportionate amount of deductible interest expenses for unrelated borrowing."

THE BUSH TAX CUTS – Many support allowing President Bush's tax cuts to expire, but winning public support by portraying the tax increase as reducing the nation's record budget deficit may be difficult. One reason it will be a "hard sell" is that the Bush tax cuts of 2003 actually resulted increased revenue. Check it out at www.usgovernmentrevenue.com.

LEADING THE FIGHT - According to Bloomberg, life insurance companies have led the fight to eliminate a proposed new standard that would make brokers more accountable to their clients by holding them to a new fiduciary standard.  Insurers and banks may prove successful in their lobbying efforts...the Senate is considering eliminating the fiduciary standard for brokers from its financial reform package.  One issue that's probably not going away is the fact that investors don't understand that brokers currently do not have the same accountability as investment advisers.  

CONSUMER FINANCIAL PROTECTION AGENCY - Christopher Dodd, chairman of the Senate banking committee, is teaming up with Sen. Bob Corker, a first-time Republican senator, hoping to speed up approval of the overhaul of financial regulations. However, Corker opposes creation of the standalone Consumer Financial Protection Agency. "Everybody knows that a free-standing agency is a nonstarter."

INTERNET SEARCH – A digital marketing firm, comScore, reports that online searches for life insurance information climbed to 16.6 million queries last year, up 15% from last year.  "As more Americans utilize the Internet to research life insurance policies for themselves or family members, it is increasingly important for insurers to have a strong brand presence online. Now more than ever, the Internet is playing an important role in this complex financial planning decision and insurers are experiencing varying degrees of success at meeting online consumers' needs."

INSURERS & AGENTS TRUMP BANKS - According to a recent survey by Forrester Research, insurers and agents are better advocates for customers than banks.  "Forrester's research continues to point to the significance of customer advocacy -- the perception by customers that a firm does what's best for them, not just what's best for its own bottom line. Each year, our data shows that consumers who rate their firms high on customer advocacy are more likely to consider their firms for additional products. Customers who rate their firms low on customer advocacy are most likely to say they intend to switch firms in the next year."

GOOD ADVICE - Here's some good advice from the National Underwriter on how to handle the current estate tax situation...Tips for Advisors on Estate Tax Uncertainties.  

DON'T COUNT ON IT - There has been some speculation that Congress might suspend minimum distribution requirements again for 2010.  According to Investment News, don't count on that happening.  Instead, work with your older clients on how to best manage their retirement investments assuming minimum distribution requirements must be met in 2010.

DANGEREROUS SWEETNERS – No, we aren't talking about Sweet 'n Low here, but rather large bonuses and other compensation "sweeteners" used to attract new registered reps and/or retain existing ones. The new FINRA rule on arbitration claims and disclosure rules could do considerable harm to an advisor's reputation.  Experts warn broker-dealers and registered reps not to resort to inappropriate sales practices to "validate" extra compensation. If this triggers an arbitration claim, his or her reputation may take a big hit.

VALENTINE LINE - A Life and Health Insurance Foundation for Education survey says that 64% of men polled and 76% of women would give up celebrating Valentine's Day altogether in exchange for greater financial peace of mind. The LIFE "Insure Your Love" public awareness campaign wrapped up on Valentine's Day.  However, when life insurance is being bought for love, you can always say, "Life insurance is a lot better that flowers or candy on Valentine's Day...the proceeds will express your love forever."

GENWORTH EXPANDS AARP OFFERINGS - Genworth is now marketing the My Future, My Plan LTC product line to members of AARP in most states. The plans include home care, assisted living and nursing home options.

SALARY BUDGET – A survey by The Conference Board found that polled employers expect to increase 2010 salary budgets only about 2.8%...very close to the overall U.S. inflation rate which is projected to be about 2.6%. The projected salary budget increase is the lowest level recorded since it began tracking the indicator 25 years ago.

RAPID REFUND RIPOFF – In the next few weeks, millions of Americans will take advantage of "instant refunds" of the taxes they over paid via deductions in 2009. In fact, some "tax payers" will actually be getting "refunds" in the form of earned income tax credits. Check these numbers: Refund coming is $1,500, taxpayer elects an "instant refund" of $1,427, tax preparer gets the check in a few days and pockets the $73...a return of about 82% on an annual basis.

ALLSTATE TO CUT AGENTS – Reports are that Allstate could shed 20% of its agents in the coming years. It appears that the 2008 loss of market share is even being laid at the door of profitable agents. The third quarter of 2009 saw a drop of 2.2% in net premiums written compared to the prior year. Why would a company get rid of profitable agencies? We suppose it is because they can.

LIFE APPS UP! - According to MIB, U.S. life insurers received more requests for individual coverage last month than they did in January 2009...up 1.2%. Volume fell 2.5% for applicants ages 0 to 44, but ages 45 to 59 increased 2.5%, and applicants ages 60 and older rose about 15%.

SAVINGS UP, RISK TOLERANCE DOWN - Allianz reports that the savings rate has increased from close to 0 before the recession started to an average of about 4.6% in 2009 and efforts to replace lost wealth could increase the rate to more than 6%.  Good news for sellers of annuities as well as sellers of mutual funds and stocks, plus the decreased level of risk tolerance could make annuities more attractive.

CASH FOR APPLIANCES - The $300 million 'Cash for Appliances' program is funded by the government's American Recovery and Reinvestment Act and is similar to other federal programs like Cash for Caulkers and Cash for Clunkers. Consumers are eligible to receive rebates on new, energy-efficient appliances such as refrigerators or washing machines. The rebates vary by state, type of appliance, and level of efficiency, but are only available on appliances with the Energy Star logo. Some states have already launched their rebate programs, with other state plans expected to begin in the coming months.

IMOS AND 151A - According to a recent study by Advantage Compendium, 75% of independent marketing companies (IMOs) would have no way of receiving index annuity commissions if Rule 151A becomes effective. Of 51 IMOS, just six had or were planning to form their own securities operation and only a few served as a branch of a third party broker/dealer or advisor.

NY "BIG I" WILL SUE STATE - The Independent Insurance Agents & Brokers of New York will sue to stop a New York Insurance Department producer compensation regulation from going into effect. Under the new rule, agents and brokers will be required to disclose if they will be compensated by an insurer as a result of the sale; the fact that compensation could vary based on the volume of business done and additional information regarding compensation.

TAX THE TARPIES - Sherrod Brown, D-Ohio, introduced a bill that would levy a 50% tax on bonuses in excess of $25,000 paid to executives at companies that received aid through the Troubled Asset Relief Program. The revenue would fund a direct-lending program at the Small Business Administration. "If a big firm that received taxpayer help is now paying out massive bonuses, they should be able to help American small businesses expand operations and hire new workers." Sounds good but any bets that the tax will ever be enacted, much less really used to help small business?

SEC TO REVIEW 12(B)-1 FEES - SEC Chairman Mary Schapiro is preparing to reevaluate 12(b)-1 fees that are collected by brokers. "The problem is that investors may have no idea these fees are being deducted, what services they are paying for or who they are ultimately compensating."

VAT INEVITABLE? - The gigantic deficits the Administration is projecting are appalling, and they provide a chilling look at our future: America is hurtling towards a fiscal trap that is forcing us into the only option we'll have to restore budgetary sanity: A Value-Added Tax. The VAT has never gotten much support in the U.S. for two reasons. First, it's a regressive tax: Low-earning families pay a bigger portion of their incomes than the wealthy. And second, it has fueled the rapid growth of government in France, Germany, and even Japan. In fact, no other country spends the kind of money we're planning to spend without a VAT. Also expect a 20% VAT proposal in the UK.

MADOFF AND SOCIAL SECURITY – This could be funny if it were not true!
BERNIE MADOFF SOCIAL SECURITY
Takes money from investors with the promise that the money will be invested and made available to them later. Takes money from wage earners with the promise that the money will be invested in a "Trust Fund" and made available later.
Instead of investing the money Madoff spends it on nice homes in the Hamptons and yachts. Instead of depositing money in a Trust Fund the politicians use it for general spending and vote buying.
When the time comes to pay the investors back Madoff simply uses some of the new funds from newer investors to pay back the older investors. When benefits for older investors become due the politicians pay them with money taken from younger and newer wage earners to pay the geezers.
When Madoff's scheme is discovered all hell breaks loose. New investors won't give him any more cash. When Social Security runs out of money they simply force the taxpayers to send them some more.
Bernie Madoff is in jail. Politicians remain in Washington.



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