June 1, 2010 Edition
Memorial Day 2010
A day of remembrance for those who have died
in our nation's service
Arlington National Cemetery
GULF OIL MESS – This is a pretty emotional topic in South Louisiana and we can only hope that the oil flow is stopped soon and a better job can be done of keeping the oil out of the wetlands. Financially, every American has a stake in this. About 35% of the nation's seafood comes from the Louisiana coast and so does a similar amount of domestic oil production.  Some additional information:
 WILL THE REFORM BILL PREVENT THE NEXT CRISIS? – "The Senate passed a financial reform bill with the aim of stopping future crises before they start. The bill addresses several leading causes: crazy lending practices, risky bets by banks, inflated credit ratings on junky assets and an inability to wind down collapsing financial institutions. Will it prevent the next crisis? Even proponents of the legislation concede it might not. The Senate bill -- and a similar House measure -- would do much to make the financial markets safer and fix many of the problems that arose. But it falls short of fundamentally changing the way that financial institutions do business."  Here's a Wall Street Journal article on the legislation, including differences between the Senate and House versions.  

NAIFA HAPPY WITH "STANDARD OF CARE" - The National Association of Insurance and Financial Advisors says it is happy with the Senate version of the Wall Street Reform and Consumer Protection Act's treatment of fiduciary responsibility. Life agents were concerned that new rules would have limited them to selling products from one company, or a few companies. The standard-of-care provision is likely to require the SEC to study the issue, develop regulatory proposals and report back to Congress in 18 months.

DON'T GET COMPLACENT - The House version of the reform legislation contains a more stringent standard-of-care provision that is supported by the White House.  The issue remains to be resolved by a House-Senate conference committee.

FINRA PROPOSING MORE REGULATIONS - FINRA is floating a proposal to impose registration requirements on some "back office" supervisory positions through a new "operations professional" registration category that would include a new qualifying exam.  Is this a good idea?  We don't know, but we do wonder whether it's not simply more "regulations on top of regulations."  A lot of crises could probably be averted or minimized if the government capably enforced the regulations already in place.  Instead, when there is a crisis, the knee jerk reaction appears to be to impose yet more regulations.

U.S. DEBT BLOWS PAST $13 TRILLION - The U.S. national debt has passed the $13 trillion mark.  As of six months ago, it stood at $12 trillion. The larger the debt grows, the faster the U.S. government's interest payments pile up, which helps explain why USDebtClock.org jumps hundreds of thousands of dollars in less than a minute. Whose fault is it? "The Republican concept is if you cut taxes, miraculously revenues always appear to cover expenditures. Democrats believe they can spend whatever they want and anything that smacks of 'we're spending too much, the government is inefficient,' is some sort of heresy."  Change is needed...neither of these philosophies works over time.  
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NO SYSTEM MALFUNCTION - Commodity Futures Trading Commission and the SEC say they have not found evidence of erroneous activity or system malfunctions that led to the recent market "flash crash."  So what happened?  Apparently, there is no single cause, but rather a confluence of events. Personally, we find the "fat finger" theory more comforting. 

GLOBAL ECONOMY IMPROVING - According to Treasury Secretary Timothy Geithner during talks with China, the global economy is recovering more quickly than expected. "Don't believe I'd of told that one, Timothy."

THE NEW CULTURE WAR: FREE ENTERPRISE VS. THE GOVERNMENT - "America faces a new culture war. This is not the culture war of the 1990s. It is not a fight over guns, gays or abortion. Those old battles have been eclipsed by a new struggle between two competing visions of the country's future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise -- limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose. It is not at all clear which side will prevail." See this important and eye-opening article at www.washingtonpost.com.

SOCIALISM COMMENT - "Good idea, wrong species."

FED GETS CLEAN BILL FROM CBO - Congressional Budget Office estimates say Federal Reserve programs to support the financial sector have been a bargain for taxpayers. The so-called fair value subsidy measures the cost of the risk the central bank has assumed at just $21 billion and the subsidy probably understates the good that came out of Chairman Bernanke's interventions in the economy. The Fed's balance sheet is now a record $2.4 trillion and the Fed will probably transfer record earnings in excess of $70 billion to the Treasury Department this year.  For more information...Bernanke: the taxpayer's best friend.  

TREASURY MAKING MONEY - The Treasury Department sold 1.5 billion of the 7.7 billion shares it holds in Citigroup, earning $6.2 billion. The government authorized Morgan Stanley to continue selling Citi shares under a pre-arranged deal. "We are pleased that Treasury is making significant progress in profitably selling its common shares in Citi."

63% NOW WANT TO REPEAL "IT" - A new Rasmussen survey shows support for repeal of the new national health care plan has jumped to its highest level ever...63% of U.S. voters. Currently, just 32% oppose repeal. Rasmussen now categorizes its surveys by Political Class and Mainstream...67% of Mainstream voters believe the plan will be bad for America, 77% of the Political Class disagree and think it be good for the country. A problem with surveys such as this, however, is that they don't reveal what the negative responders would propose to address the health care access and financing issues facing the U.S. 

UNCONSTITUTIONAL? – As expected, the administration asked a federal judge in Virginia to dismiss the state's lawsuit alleging Congress overstepped its constitutional bounds with the new health care reform law, saying that the law is well within the scope of the Constitution's Commerce Clause. Virginia, together with more than a dozen others states, argues that requiring people to buy health coverage or pay a fee exceeds federal powers limited by the Constitution's 10th Amendment. The cases are likely be determined by the Supreme Court.

WE TOLD YOU...$165B UNION BAILOUT - A Democratic senator is introducing legislation for a bailout of troubled union pension funds.  If passed, the bill could put another $165 billion in liabilities on the shoulders of American taxpayers. The bill, which would put the Pension Benefit Guarantee Corporation behind struggling pensions for union workers, is being introduced by Senator Bob Casey, (D-Pa.), who says it will save jobs and help people. Part of the legislation is to help pay for underwater teacher plans. (Note, you might want to take a stiff drink or a valium before viewing the two links below.)  Check this NYT study on public union retirement in New York State at Top Recipients of Public Pensions in New York.  To see why we the taxpayers are footing the bill, go to www.opensecrets.org.
   
DEATH OF WALL STREET GREATLY EXAGERATED – Some think that financial reform will "kill" Wall Street, but not the Wall Street Journal. They say that analysts are estimating that "it could cut the profits of major financial institutions by roughly 20%, but that's until the firms come up with new lines of business or figure out a way around the regs."

PRIVATE VS. PUBLIC PAYCHECKS – USA TODAY reports that paychecks from private business shrank to their smallest share ever of personal income in U.S. At the same time, government-provided benefits from Social Security, unemployment insurance, food stamps and other programs rose to a record high. Those records reflect a long-term trend accelerated by the recession and the stimulus and is not sustainable. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all.  A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.  According to a U.S. News article, 6 Strains on Your Financial Future, there will be fewer government jobs in the future and, "if you rely on any government service, do contingency planning and make backup plans in case it disappears."  

401(k) DISCLOSURE RULE - Under a new rule that the Labor Department is expected to approve this summer, brokers who work with retirement plans would have to disclose that they are not acting as fiduciaries and to provide plans with detailed information on their services and compensation.  This could prove a boon to RIAs, who do act as fiduciaries while collecting fees similar to those brokers charge.  Click here for an Investment News article providing more detail on the potential implications of the 408(b)(2) rule.  

HSAs GROW BUT - According to America's Health Insurance Plans (AHIP), ten million Americans are now covered by Health Savings Accounts...a 25% increase from last year. (Check out Why You Should Get a Health Savings Account from U.S. News).  There are, however, some gloomy prognosticators who believe provisions inside the health reform act could spell the end of HSAs.  The new law requires insurers to charge enrollees of the same age the same average premium, regardless of health status, which may lead to massive adverse selection.  Healthy people will gravitate to less-comprehensive insurance (HSAs). If premiums for comprehensive plans spiral upward and health care proves more costly than projected, supporters may be desperate for new revenue and call for the elimination of both HSAs and high-deductible health plans on the grounds that those products are causing the market to unravel.   

PLAN AHEAD - If you plan on selling your primary home and expect the gain to exceed $250,000 if you're single/$500,000 if married, the gain may be hit by the new 3.8% Medicare surtax that takes effect after 2012.  The outcome may be even worse if you're selling a second home that doesn't receive the home-sale tax exclusion...the entire gain could be hit by the surtax.  Something to keep in mind if a home sale is in your future...it may pay to sell prior to the end of 2012.

STRIKE NOW - If you're considering refinancing your home mortgage, now might be the time.  Anxiety over the European financial crisis has global investors snapping up Treasury bonds, which they view as safer.  As a result, Treasury yields have fallen, taking mortgage rates down along with them to near record lows.  This may, however, not last long.  If investors grow more confident, they're likely to shift money out of government bonds, making mortgages more expensive.

INDIVIDUAL HEALTH – According to The National Business Group and Hewitt, about 35% of U.S. consumers with health insurance say they would consider buying insurance on their own if they could get comparable coverage for a lower price, but 47% said they plan to continue to use employer-sponsored health coverage in the next 3 to 5 years.

MARKET VOLATILTY – A survey by optionsXpress reveals 90% of retail investors foresee market volatility remaining at or above its current level over the next three months. However, no one reported they expected to die because of it.  

GOLD...BOOM OR BUST - Speculators are buying gold faster than the world's biggest producers can mine it as analysts forecast a 27% rally that may extend the longest run of annual gains since at least 1920. Big holders are George Soros and John Paulson, who have accumulated a record 1,938 tons, eclipsing all but four of the biggest central-bank holdings. It is worth noting that both of these billionaires profited mightily in the last financial crash. However, others are saying gold may be reaching its "busting" point

OIL TAX TO PAY FOR OIL SPILL - Responding to the massive BP oil spill, Congress is preparing to quadruple — to 32 cents a barrel — a tax on oil used to help finance cleanups. The increase would raise nearly $11 billion over the next decade. The tax increase is part of a larger bill that has grown into a nearly $200 billion grab bag of unfinished business that lawmakers hope to complete before Memorial Day. Great, those taxes will not be paid by Big Oil, but rather by individual taxpayers via increases in the price of oil, gas and product transportation.

AFFLUENT STILL INVESTING – An HSBC survey reports that while 56% of affluent Americans lost value in their portfolios, mutual funds still account for 25% of their portfolios, individual stocks stood at 17%, cash at 16 percent, retirement products at 14% and real estate 10%. These percentages are essentially the same as they were prior to 2008.

401(k) BALANCES UP – Fidelity reports the average 401(k) plan balance at the end of the first quarter was up 40% from the prior year. That is good news, but the average account balance was just $66,900. That is not enough money on which to retire.

SALES UPS AND DOWNS - According to LIMRA, first quarter 2010 individual life sales were up 10% over the first quarter of 2009, with universal life sales up 17%.  The Insured Retirement Institute (IRI) reports annuity sales fell almost 7% from the fourth quarter 2009 to the first quarter of 2010...$47.4 billion compared $50.9 billion. Fixed annuities sales were down a whopping 51.9% from a year earlier, but variable annuity sales dropped by only 1.5%.

RETIREMENTOLOGY - Or "the new language of retirement planning."  This new book (available from FT Press) proposes a new way to thinking about how we should spend, save, borrow and invest in the post-meltdown era and includes some memorable terms:
  • Equimortis: dangerous condition of relying on home equity to fund retirement
  • Bingefy: justifying a big-ticket purchase just because you were previously frugal
  • Kinphobia: fear of having to tap into retirement savings to support extended family
  • Ohnosis: realizing you should have started planning for retirement years ago
  • Finertia: paralysis brought on by trying to comprehend contradictory, overwhelming and confusing financial information
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