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 November 15, 2007
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TIP OF THE ICEBERG?
– We don’t know about you, but we find the dollar amount of
reported and projected subprime losses to be breathtaking.
Citigroup’s reported losses are in the $20 billion range and cost
chairman and CEO Charles Prince his job. Merrill Lynch is facing
losses of $25 to $30 billion, costing chairman and CEO Stan
O’Neal his job. Morgan Stanley may face losses of $6 billion and
the list goes on. Some predictions peg bank losses worldwide from
subprime mortgages at as much as $400 billion, with at least one in
four risky home loans going into default.
SUPERFUND STATUS
– The proposed structured investment vehicle (SIV) buyout fund
that was initially brokered with the Treasury Department's backing hit
some snags over the last two weeks, but the “superfund” is
apparently back on track. After reaching an agreement on the
structure, prime movers Citigroup, Bank of America and JPMorgan will
begin to sign up other banks for the $80 billion fund aimed at buying
distressed mortgage assets. More information on the
“superfund” is available from Bloomberg.com.
KNEE JERK OR A REAL PROBLEM
- Analysts aren’t sure if the recent stock sell off is simply a
reaction to continued credit-market problems or if it signals broader
problems for the economy. The bulls say the major indices are still
crowding all time highs, the bears say “winners” are few
and far between and we confirm our prior prediction that the market
will continue to rise and fall.
IPO RETREAT -
Broad declines in the stock market have stopped some initial public
offerings. One casualty is Symetra Financial (formerly part of Safeco),
which decided to postpone its IPO due to the current credit crunch.
BIG GLOBAL GROWTH BUT TROUBLE AT HOME
– Many hope that global growth will be enough to revive slumping
U.S. stocks. However, the bears say that enormous write-offs at several
big banks, combined with the Fed’s warning of slower growth, may
mean the time is here for a big fall.
BIG BANK WRITE DOWNS
- Morgan Stanley, Citigroup, Merrill Lynch and others have announced
huge write-downs on subprime-mortgage-related assets. Analysts predict
that the total will exceed $60 billion to $70 billion in
mortgage-linked assets over the next few months. The SEC is looking
into whether U.S. banks practiced sufficient disclosure in regard to
subprime mortgage investments.
MERRILL LOSSES – Already facing subprime-mortgage losses in the $25-$30 billion range, The Wall Street Journal
reported that Merrill Lynch “has been hiding its mortgage losses
through deals with hedge funds.” The SEC is expected to
investigate.
SILVER LINING?
– If there’s a silver lining to the subprime mortgage mess,
it may be the need to focus attention on updating the regulation of
financial institutions. Several Washington policy makers spoke at
SIFMA’s annual meeting earlier this month. For an overview
of their remarks, click here.
In addition, current NYSE CEO John Thain (soon to be named Merrill
Lynch's new CEO) shared his thoughts on changes needed to support U.S.
markets, as summarized by Reuters.
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NASDAQ NEWS
– Reports are that in order to expand in the fast-growing
equities option business, Nasdaq has agreed to buy the Philadelphia
Stock Exchange, which operates the third-largest U.S. options market,
for about $650 million.
HELP WITH NAIFA DUES
– Northwestern Mutual announced that it will reimburse its reps
for the national portion of their NAIFA membership dues.
“Our industry is under constant threat and Northwestern Mutual
recognizes that a strong NAIFA means a strong industry.”
LEANING TOWARD KENTUCKY
– Observers of the municipal bond case now before the Supreme
Court expect the Court to rule that Kentucky can continue to tax
out-of-state municipal bonds, while choosing not to tax in-state bonds.
LIQUIDITY INJECTION
– In a further effort to resolve the credit crisis, the Feds
pumped $41 billion in liquidity into U.S. financial markets, marking
the largest injection in six years.
FUTURE OF “THE RATE”
- Federal Reserve Chairman Ben Bernanke is still speaking about
inflation and no rate decreases. However, investors believe he will be
forced to cut the prime in December due to slow growth.
WEAK DOLLAR – Bloomberg.com has a couple of interesting articles about the weak U.S. dollar. “Weak U.S. Dollar May Be ‘Checkmate’ for the Fed”
discusses how slower growth/higher inflation may not be an either/or
proposition but, instead, the U.S. economy may be facing both. “Paulson Becomes Boxed-in by ‘Strong’ Dollar Chant”
explores how Treasury Secretary Henry Paulson is under increasing
pressure to more forcefully defend the U.S. dollar.
LAWSUITS ON LOANS
– As expected, lawsuits over subprime loans are beginning to fly.
New York State has sued First American for its role in an alleged
home-value-inflation scheme. In turn, Washington Mutual is being
sued over clams that the bank pressured First American to inflate the
appraisal values. In addition, The New York Times
reports that “New York attorney general Andrew M. Cuomo has
subpoenaed Fannie Mae and Freddie Mac as he expends his investigation
into what he calls ‘widespread’ collusion between real
estate appraisers and lenders, including Washington Mutual, to inflate
home values.”
VISA PAYS $2.1 BILLION TO AMEX
– The Supreme Court ruled that Visa and MasterCard violated
antitrust rules by barring their member banks from offering their
customers credit cards that could be used on rival payment networks.
Now Visa will have to fork out $2.1 billion to its credit card rival
American Express to settle what is believed to be the largest antitrust
settlement ever.
RECORD PRODUCTIVITY
- In a report offering comfort to the inflation-wary Federal Reserve,
U.S. worker productivity rose at the strongest pace in four years in
the third quarter, pushing labor costs down.
WHAT?
– This is from Financial News Online and defies reason.
“According to investors with knowledge of the hedge funds,
Paulson & Co., Harbinger Capital Partners, Scion Funds, Balestra
Capital and Peloton Partners have all made significant gains by betting
on the subprime-mortgage meltdown. Paulson & Co., for example,
turned an investment of nearly $500 million at the beginning of 2007
into almost $3.6 billion through a type of insurance that started
paying out when subprime-mortgage securities started losing
value.” Is that insurance or gambling?
BLAME THE RATING COMPANIES
- Moody's, Standard & Poor's and Fitch are emerging as the
scapegoats for the meltdown of securities linked to mortgages. If you
advertise yourself as a rating source for bonds and they collapse on a
massive scale, you should have some liability.
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FINRA AND DEFERRED VARIABLE ANNUITIES
- The Financial Industry Regulatory Authority has provided guidance on
the new rule governing deferred variable annuity transactions (Rule
2821), including the steps registered reps and registered principals
must go through when recommending a deferred VA, firm supervisory
procedures and firm training programs. The new rule will become
effective on May 5, 2008 and the guidance is available in FINRA
Regulatory Notice 07-53, available by clicking here.
HOUSING TO RETURN TO 1997 LEVELS
- John Talbott, who predicted the current housing slump and has
published several books on the housing market, is predicting the start
of a five- to seven-year cycle that will push home values back to 1997
levels. Further, he predicts bad news from the housing market will
continue to negatively impact the stock markets.
TARGET: BABY BOOMERS
– FINRA has launched an advertising campaign aimed at baby
boomers, “a demographic that its research shows lacks confidence
in their investing knowledge and is eager to better understand their
investment options.” Read more about the campaign at www.finra.org.
BANKS VERSUS BROKERS
- Banks are facing serious competition from brokerages for trillions of
baby boomers' retirement dollars. "It's no secret that, on the
retirement front, banks have underperformed over the past couple of
decades as compared to brokerage firms, asset management firms, mutual
fund complexes and independent financial advisors. However, the
marketplace for retirement financial services remains extremely
fragmented, presenting an opportunity for banks to gain share by
building off the strength of their existing customer
relationships.”
BUFFETT TO TESTIFY
– The “Oracle of Omaha,” Warren Buffett, is expected
to testify at a Senate Finance Committee hearing on the federal estate
tax. In the past, Mr. Buffett has been supportive of continuing
the estate tax.
COLI REPORTING
- The Internal Revenue Service has issued temporary regulations needed
to implement new corporate-owned life insurance reporting
procedures. A copy of the temporary regulations is available here, while you can review a copy of the proposed rulemaking here. The temporary regulations went into effect on November 13.
HALF OF GDP
– According to predictions from the Congressional Budget Office,
if federal laws stay the way they are today, total spending on health
care could increase to 49% of gross domestic product in 75 years, up
from 16% this year.
FAMILY BUSINESS SURVEY – Click here to review the results of MassMutual’s 2007 American Family Business Survey.
One interesting finding of the survey: family businesses are most at
risk for financial troubles centered on the lack of formal succession
planning and preparation, and the personal financial issues of family
business owners.
AMT –
The House has passed legislation extending alternative minimum tax
relief for another year, together with extending the deductions for
state and local sales tax and college tuition, as well as tax-free
payouts from IRAs to charities. In order to pay for continuing
these tax breaks, the House bill includes a provision that would
increase income tax rates on private equity managers, venture
capitalists and some real estate investors. While extending the
tax breaks is popular, coming up with a way to pay for it isn’t,
so don’t expect the bill to pass the Senate in its current form.
NURSING HOME COSTS
– MetLife has released their 2007 survey of nursing home and
assisted living costs, with the former increasing about 3% and the
latter remaining essentially unchanged. A copy of the survey is
available at MetLife’s Mature Marketing Institute.
THUMBS UP: FIXED ANNUITIES
– According to a MassMutual study, including a fixed income
annuity as part of a retirement income strategy “yielded greater
long-term wealth for an investor — along with more income
security — than a portfolio of equity and bond investments alone,
even in an ‘up’ market.” More information on
the study is available at www.massmutual.com.
BANK IT
– What would you do with an extra $100,000? According to a survey
by Financial Freedom Senior Funding, a reverse-mortgage lender, 55% of
queried seniors say they would put the money into a savings account or
CD. The survey allowed for more than one answer and other popular
options were pay off debt (48%), give some to charity (41%) and invest
the money in conservative, low-risk investments (41%).
LINCOLN EXITS TV BUSINESS
– Lincoln National is shedding the old Jefferson Pilot
communications business. The company will sell its three television
stations and its sports syndication business to Raycom Media for $583
million and its three North Carolina radio stations to Greater Media
for $100 million. Hope Raycom continues to cover SEC football!
BROKERS COULD LEAVE
– A surprise effect of the decline in value of the stocks of the
large financial services firms could be broker migration. Reason:
Many wirehouse brokers have “golden handcuff” deferred
compensation plans tied to the value of company stock. The less
valuable the stock, the less brokers are locked in.
BOOMER PARENTS AND PLANS
– According to AARP, many boomers have discussed future living
arrangements with their parents (about 70% of the females surveyed),
but only 40% have actually started to plan. Now this is a sales and
service opportunity. If you haven’t already done so, subscribe to
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A PERSONAL PENSION PLAN?
- At a time when guaranteed pensions are disappearing and people are
increasingly worried about inflation, inflation-adjusted annuities may
be a great answer. An individual invests a lump sum, pays an upfront
fee and receives payments that continue as long as the person lives,
with a guarantee the payouts will increase enough to cover any rise in
inflation. Does sound like a personal pension plan, doesn’t it?
LTC BUYERS GETTING YOUNGER
- The American Association of Long Term Care Insurance reports that the
average age of U.S. buyers of long term care insurance may have dropped
below 60 for the first time. The average age is now about 58 and that
is down from 67 in 2000.
LONG TERM CARE BOOK
– Timed to coincide with Long Term Care Awareness Week, Genworth
Financial has produced a new book on the future for long term care in
America. The book, The Future of Long Term Care in America, is
available here.
LIFE AGENTS MORE POPULAR THAN STOCKBROKERS
– A LIMRA survey of Americans with incomes over $75,000 shows
that only 16% would turn to a life insurance agent for advice, while
36% say they see accountants and 29% use financial planners. The least
popular group was stockbrokers with just 8%.
TRUE LOVE MEANS PLANNING AHEAD
– This article from MarketWatch is subtitled “ten ways
husbands can help their wives survive widowhood” and here are the
10 ways:
1. Delay retirement
2. Start a business together
3. Cover health-care costs.
4. Talk.
5. Fund a spousal IRA
6. Delay taking Social Security
7. Consider buying a deferred annuity
8. Look at asset titles, beneficiary.
9. Social network
10. Call in an expert.
That’s all 10 of them. Let’s hope the “expert”
has enough sense to recommend what should be #1 on this list. Have
adequate life insurance!
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