US FlagAugust 1, 2007 Edition


WHAT NOW, WILD DOW? - The market has been on a serious roller coaster ride since our last issue. Just over a week ago, the Dow hovered at the 14,000 mark and last week it suffered its worse weekly loss in four years. Where will it go from here is anybody's guess, but our prediction is that it won't stay where it is today!

ECONOMY PROBLEMS – Many feel last week's market decline was caused by subprime mortgage problems spreading to higher-grade mortgages, the drying up of credit for leveraged buyouts and a series of disappointing earnings results.  High gas prices and the slowdown in the housing market aren't helping either.

DEEP HOUSING PROBLEMS? - The CEO of the nation's largest mortgage lender, Countrywide Financial, revealed that more borrowers with good credit are having trouble paying their mortgages, and the housing market may not recover until 2009. This is a "180" from how housing-industry executives had previously described the market.  Further, he noted that home prices were falling faster than any period since the Great Depression. Bloomberg has a good article on the housing market:  "Franco Is Still Dead, and Housing Is Still Bust." 

SUBPRIME RESULTS, WHO TO BELIEVE? - Federal Reserve Bank of Philadelphia President Charles Plosser says he is not worried that subprime woes are spreading to the broader economy, because there have been no signs of rising delinquencies on prime mortgages. Others say the woes in the subprime mortgage market are spreading to junk bonds and may lead to a correction in the U.S. markets.

SECURITIES JOBS AT ALL TIME HIGHS – While many pundits are saying that the capital markets are leaving the U.S. for "less regulated environments," the securities industry is employing people at record rates. U.S. investment banks have made 97,300 new hires since October 2003. However, we suspect a large number of those hires were made to keep pace with compliance requirements!

SEC RULES ON PROXIES – A divided SEC approved two proposals that will impact how shareholders get directors onto a company's proxy ballots. The move could give investors a greater voice in how public companies are operated by giving them more power over who sits on the board and how executives are paid.

MARKET TIMING FINES – The NYSE has fined Smith Barney, a unit of Citigroup, $50 million for using deceptive market-timing in their hedge funds. Allegedly, Smith Barney made about $32.5 million in gross revenue from 250,000 marketing-timing exchanges from 2000 to 2003. In addition, the Hartford has settled a market timing case with the states of New York, Connecticut and Illinois, agreeing to pay fines of $26 million plus reimburse policyholders.  We don't suppose any of the fines will be paid from all those bonuses handed out to the responsible executives during that period.

LONG ARM OF THE REGULATORS - According to a survey of more than 500 top companies, more companies are cautious about doing business in the U.S. because of the "long reach" of U.S. regulation.  "What stands out in this survey is the level of concern among company directors about their personal liability and subsequent exposure to criminal penalties."  Now that really says a lot about corporate ethics and/or the lack thereof.

OFC LEGISLATION - An optional federal charter (OFC) bill that would give insurers, agents and brokers the option to choose between state and federal regulation has been introduced in the House.  Similar legislation was introduced in the Senate in May.  Best as we can tell, associations affiliated with life insurers appear to support the legislation, while P&C-focused associations appear to oppose it.

IF YOU CAN'T BEAT THEM, JOIN THEM - Insurers have long been uncomfortable with life settlements and their potential impact on the "easy profits" that come from not having to pay death benefits on a certain percentage of their policies.  Expect the life insurance industry to continue lobbying regulators to crack down on the purchase of "stranger-initiated" policies.  In a realization that life settlements aren't going away, however, an increasing number of life companies are purchasing life settlement packages.  "If someone is going to profit, insurers have realized, it might as well be them."

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NEW LEADERS - NAIFA has named John Healy the association's CEO, succeeding David Woods.  Mr. Healy has been president of the American Machine Tool Distributors Association since January 2006.  Over at NAILBA, Jack Chiasson, previously director of conventions and events at NAILBA, has been named the group's executive director.

DONE DEAL - Securities regulators have approved the merger of the regulatory arms of the NASD and NYSE into the new Financial Industry Regulatory Authority (FINRA).  The Financial Planning Association, however, is objecting to the new name, claiming it could "inadvertently lead to consumer confusion" by leading consumers to think that NASD has jurisdiction over investment advisors and financial planners who, instead, are regulated by the states and the SEC.  Response from the NASD..."I would need a degree in psychology to comment on the level of paranoia in this [FPA] press release."

CARRIED INTEREST – Current tax law allows hedge funds and private-equity firms to hold an interest in the funds they manage and thus be taxed at a capital gains rate for their services. Fed Chairman Ben S. Bernanke has weighed in saying that he is worried that ending the so-called tax loophole on carried interest, which would more than double taxes on hedge funds and private-equity firms, would push businesses overseas. "It might not affect their activities, but it might affect their locations."  Recent reports would seem to indicate that the Dems are now wavering on changing the rules for carried interest.

UBS TO PAY $21 MILLION - UBS Financial Services will reimburse 3,000 clients about $21.3 million for "inappropriately steering" them into fee-based accounts. New York Attorney General Andrew Cuomo said, "This major settlement is a win for customers inappropriately pushed into unsuitable brokerage accounts and a warning to the entire industry that customers' interests must come first."

FIRST CHIEF SUITABILITY OFFICER - Allianz is set to appoint what may be the industry's first CSO...chief suitability officer. According to the company, the creation of the "suitability czar" position isn't a response to recent legal and regulatory scrutiny of its annuities. You bet.

AMERICAN GENERAL GONE - AIG Financial Advisors, the second-largest of the network's broker-dealers, will absorb sibling broker-dealer AIG American General Securities next year. AIG also announced in a letter to American General reps that the broker-dealer's president and CEO Andrew Kalbaugh will leave the firm and join Linsco/Private Ledger.

JUNK BOND SALES – After four plus years, the bull market in junk bonds may be coming to an end as the private-equity industry is trying to unload nearly a quarter-trillion dollars of the risky debt. Reason: subprime woes have spooked investors about junk bonds.

GLOBALIZATION BACKLASH – A Financial Times and Harris Poll survey of "rich countries" shows an across the board backlash against globalization among the leaders of the world's largest companies. Large majorities of people in the U.S. and in Europe want higher taxation for the rich and even pay caps for corporate executives to counter what they believe are unjustified rewards and the negative effects of globalization. Apparently, the citizens of rich countries, regardless of how liberal their economic traditions, do not share the view that opening economies to freer trade is beneficial to poor and rich countries alike.

PUBLIC PENSIONS IN HEDGE FUNDS – Many public pensions are investing or considering investing in hedge funds to meet their obligations to fund employee pension benefits. The state of Montana commissioned a study which recommended opening up to other nontraditional investments to keep generating the annual returns necessary to meet its obligation to retirees...about 8%. The investments seem risky, but these state and municipal governments better do something about their unfunded liabilities.

MINIMUM WAGE TO $5.85 - According to the Bureau of Labor Statistics, some 1.7 million people who earned $5.15 or less per hour in 2006 should now be making 70 cents more. Over the next two years, the minimum wage is scheduled to increase to $7.25 an hour. However, businesses are expected to find ways to offset higher pay mandates by eliminating jobs or raising prices on their products, according to reports.

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FEE CHANGES ARE A BIG CONCERN – The courts have basically put an end to fee-based brokerage accounts and now lawmakers and the SEC are suggesting altering 12(b)1 fees. This is causing a bit of discomfort for brokers who built their businesses on mutual fund trail fees and fee-based brokerage accounts. The good news is that "advisory accounts" can still charge fees.

403(b) RULES - The IRS has updated the regulations applying to 403(b) retirement plans.  For a good summary of the new rules from CCH, click here.  If you're really interested, a copy of the complete IRS rule is available here.

U.S. TAXES AND THE GLOBAL MARKET – The U.S. corporate tax code may be making it difficult for U.S. businesses to compete on a global level. That according to a report from (of all sources) the U. S. Treasury. "Maximizing economic growth requires that a tax system raise a given amount of revenue with the least possible interference in economic decisions. Our current system for taxing businesses and multinational companies has developed in a patchwork fashion spanning decades, resulting in a web of tax rules that can harm."  The same could probably be said about our personal income tax system as well.

REAGAN-ERA CORPORATE TAX CLIMATE GONE - Treasury Secretary Henry M. Paulson Jr. said, "As Europe's biggest economies and developing nations around the world move to reduce corporate taxes and gain the benefits for their workers that U.S. workers already enjoy, now is an opportune time, when our economy is in a position of strength, to consider ways our business tax system can be improved."

SHORTCHANGING WOMEN - That's the conclusion reached by the American Academy of Actuaries, which has published an issue brief on "the gender-related differences that can hurt women's Social Security benefit levels and overall level of retirement security."  A copy of the issue brief is available at www.actuary.org. 

THE MAGIC NUMBER – Roger Ibbotson of Ibbotson Associates and a few other gurus have come up with a "simple formula" for determining the percentage of income one should save for retirement.  Their article, "National Savings Rate Guidelines for Individuals," is in the Journal of Financial Planning and contains charts showing what percentage of income should be saved for retirement at a given age, current salary, desired retirement income and the amount already saved. See it at http://www.fpanet.org.

HMO BLITZ AGAINST MEDICARE CUTS – Watch for an all-out advertising blitz by HMOs against a proposed $47 billion cut in payments to private Medicare Advantage plans to help pay for expanding the children's health program. Expect it to be like the Harry and Louise commercials that helped derail Hillary Clinton's universal health plan a decade ago, except that this time around we'll have Sandi, Alvin and Charlotte "fretting over their benefit coverage."  America's Health Insurance Plans (AHIP) is sponsoring the ads, which will be funded by the HMO industry. The group won't say how much the ads will cost, but indicated it will be "a very substantial effort."  Our memories aren't the greatest, but we seem to recall that one of the reasons for making Medicare Advantage plans available was to save Medicare money.  Instead, the program costs more than traditional Medicare and the major Medicare Advantage providers, such as Humana and UnitedHealth, are reporting double-digit profit growth.

BEST AND WORST - According to J.D. Power and Associates, Edward Jones ranked top in their customer satisfaction survey for the third consecutive year.  Coming in last for the second year in a row...Morgan Stanley.  For more information, click here.

BACK IN 2008 - LIFE, the Life and Health Insurance Foundation for Education, has proclaimed its first Disability Insurance Awareness Month, held this past May, a success and will continue the program next year.

SKYROCKETING - According to the Investment Company Institute, U.S. retirement savings reached a record $16.4 trillion in 2006, an 11% increase from 2005 and a 55% increase since 2002.  That's good news!  Learn more about the research at www.ici.org.

CHANGING U.S. WORKFORCE - LIMRA and Unum partnered on a report detailing the changing face of the U.S. workforce and the key issues facing the benefits industry.  More information on the report is available at www.unum.com.

TREASURYS TO REBOUND – Experts are predicting that if the Feds keep the interest rates stable, 2 and 10-year Treasurys could end the year above 5%.

ANNUITY SUITABILITY RULE – NASD Rule 2821 (the proposed rule on the suitability and supervision of deferred variable annuities) has been under scrutiny and in controversy since inception. Basically the rule boils down to four elements: suitability, the time frame for review of the sale by principals at the broker-dealers, written supervisory procedures and a training component for advisors. Hopefully, we will have something definitive soon.

SMALLER LIFE SETTLEMENTS - Milestone Providers has created a process that allows it to settle policies below the typical minimum size limit of $250,000 and will now consider purchasing in-force life insurance policies with death benefits as low as $50,000. The program will be offered to selected individuals 70 years old and older who own term life and universal life policies.

NEED FOR LTC - According to the U.S. Department of Health and Human Services (HHS), about 9 million Americans, now 65 or older, will require long-term care. HHS expects that number to rise to 12 million by 2020. The average annual cost of nursing home care is $74,806, according to Genworth Financial's 2007 Cost of Care Survey. To help consumers make more informed decisions about long-term care insurance coverage, the National Association of Insurance Commissioners (NAIC) offers tips and considerations through its public education program, Insure U -- Get Smart About Insurance, at http://www.insureuonline.org/.

NET INCREASE IN INSURANCE SALES – Celent predicts that online sales of insurance will double by 2011. "While pure online sales currently account for less than 10% of sales, they are growing and will be a major influencer for nearly all sales within five years." 

CAVEMEN GET THEIR OWN SHOW – Not even the Aflac Duck or the Geico gecko have achieved this level of fame. The Geico Cavemen have inspired ABC's upcoming comedy series "Cavemen."

AIRPORT WI-FI SCAM - Many airports and other public spaces offer free wireless (Wi-Fi) connections for the public to log into from their laptop computers, but the BBB says beware. Hackers are now taking advantage of this convenience and setting up fake Wi-Fi connections designed to steal your personal information and files. An investigation revealed that Chicago's O'Hare had 20 ad-hoc networks present that were potentially designed with the intent of hacking into unsuspecting user's computers. Best advice: Never connect to an unfamiliar ad-hoc network...even if the name sounds genuine.