US FlagDecember 1, 2007 Edition


WILD DOW – Early last week, recession fears and an ongoing scarcity of credit drove the stock market down 10% from recent highs. Then rumors of a holiday rate cut from the Feds created a rally later in the week. If you read all the articles we see, you might just be forced to agree with experts who are saying things like, "There's a substantial risk of recession." and "The problems are deeper and broader than what the interest rate medicine can address."

MILD DOW – According to Fed Chairman Ben S. Bernanke, "Economists are extremely bad at predicting turning points, and we don't pretend to be any better." However, the Federal Reserve and most private economists are holding firm to views that the U.S. economy can avoid a recession, despite some evidence to the contrary. 

DECEMBER RATE CUT – Hints being dropped by Fed officials all seem to point to a December rate cut.  Time will tell.

HOUSING – Sales of existing homes fell 1.2% in October to a record low.  Prices also fell, while the inventory of homes for sale increased.  Meanwhile, Bloomberg reports that Treasury Secretary Henry Paulson “is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers.”  Click here to read the complete article. 

SCRAMBLE FOR CASH – Financial firms are scrambling for cash as they look to external sources of capital.  So-called sovereign funds, state-run investment funds based in the Middle East and Asia, are stepping forward, buying $37 billion in shares in Western financial companies this year.  Recently, Citigroup sold up to 4.9% of itself to the Abu Dhabi Investment Authority for $7.5 billion.

THE NEXT SCANDAL? – According to an article in Fortune, “The failure by banks to properly inform shareholders of their potential losses is perhaps the biggest scandal of the credit crunch that began this summer.”  Read the entire article here.  

SUPERFUNDERS - Bank of America has apparently taken the lead in recruiting smaller banks to help fund an $80 billion superfund aimed at bailing out the short-term-debt markets. BlackRock, 50% owned by Merrill Lynch, has been appointed to manage the fund, which was formed by several major banks with the support of the Treasury Department.

BLAME GAME - Nobel Prize-winning economist Joseph Stiglitz is blaming the current economic mess on former Federal Reserve Chairman Alan Greenspan. Stiglitz said Greenspan pushed out too much equity, supported tax cuts and encouraged borrowers to take out variable-rate mortgages. Greenspan says he had "no regrets" and that the housing bubble was not a product of his Fed policies.

SUBPRIME LOSSES MAY EXCEED $400 BLN - Goldman Sachs is now predicting that losses from subprime exposure could total $400 billion -- four to eight times greater than previously predicted. Earlier predictions were considered a large but manageable number, but Goldman further believes the crisis could curtail lending and deliver up to a $2 trillion hit to the economy.

SLOW TRAIN WRECK – One observer describes the subprime industry mess as “one of the slowest-moving train wrecks we've seen."

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MARKET DOWN, BONUSES UP – This may not be hard to believe, but it is hard to swallow. Firms in the securities industry will pay a record $38 billion in bonuses this year, even as shareholders record their worst year since 2002.  That’s an increase from the 2006 bonus pot of $36 billion.  Meanwhile, shareholders have lost $74 billion in equity this year. Split between 186,000 employees, the average bonus works out to $201,500 per person. 

WELCOME ABOARD, JOHN! - Merrill Lynch will give incoming Chairman and CEO John Thain a cash bonus of $15 million for fiscal year 2007. Merrill Lynch said in its filing with the SEC that the cash award recognizes that Thain will not receive a 2007 bonus from his prior employer, the NYSE.

LAWYERS LOSE TOO - The collapse of the subprime mortgage and credit markets has forced New York law firms to cut associates for the first time since 2001. Many large law firms have dismissed senior salaried associates who worked on mortgage-backed securities and partners may also face some belt tightening. Don’t worry too much about the attorneys because bonuses in the six-digit range will still be common.

POSTPONED IPOs - Thomson Financial reports that the number of initial public offerings that have been pushed back in Europe and the U.S. has hit record levels. So far, the count stands at 67 IPOs in the U.S. and 15 in Europe for the fourth quarter. 

BILLIONS FOR FANNIE AND FREDDIE - According to some analysts, the plunging stock prices of Freddie Mac and Fannie Mae may require the firms to raise billions of dollars in capital to survive the credit crisis. Most likely approaches to raise the money are through the issue of preferred shares and cutting of dividends.

HEDGE FUNDS GOING DOWN – The Man Group, the world’s biggest listed hedge fund manager, predicts that 10% of hedge funds will go out of business this year. The credit crisis will also make it harder for hedge fund start-ups, with a drop of close to one-third in new fund launches.

DOLLAR AT RECORD LOW – A 14-year low in housing starts in October and speculation that an ongoing housing market slump will force the Fed to cut interest rates again, pushed the dollar to a record low against the euro.

CREDIT SWAPS? – Analysts believe that a big upswing in “credit swaps” in the past two weeks is a harbinger that subprime-mortgage losses will force big investment banks and brokerages to default on their debt. What is this? Are they playing “Pass the Trash?” 

PRINCIPLE-BASED COMPLIANCE – We may not be a “key player,” but we sure agree with others within the financial-services industry recommending that more principles-based rules be adopted in order to help “reduce onerous regulation and ramp up U.S. competitiveness.” We aren’t sure about the international impact, but we’d like to see a reduction in the reliance on weird rules versus common sense.

NEED ANOTHER ATTORNEY? - A chief compliance officer for a major Michigan IMO is facing child molestation charges. We had an inkling those compliance folks were strange, but we think this one needs a new attorney. His current lawyer told the industry press, and we aren’t lying here, "(My client) categorically denies the allegations against him. We look forward to exposing these two young men in court."

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NAILBA CONFERENCE - NAILBA 26, which took place November 15-17 in Orlando, was an incredibly successful industry event featuring more exhibitors and attendees than any previous NAILBA event.  Over 1,400 attendees participated with 130 exhibitors showcasing their products in 158 booths. Additionally, 23 companies supported NAILBA 26 even further through taking advantage of the sponsorship opportunities. “NAILBA: The Voice of Independent Brokerage Distribution” was adopted as the new tagline for the association.

TREASURIES SOAR - Fueled by ongoing fears about the economy and a looming recession, investors continued to pour money into U.S. Treasuries, prompting the biggest rally in government debt since 2002. A survey of economists predicts no recession before the end of 2008, so Treasury investors may have to wait for a payoff.

UL/VUL PREMIUMS SOAR – LIMRA International reports that universal life premiums were 23% higher in the third quarter than they were in the third quarter, 2006, while variable universal life premiums were 55% higher.  Reasons given:  COLI and private placement sales, together with expansion into new distribution channels, such as wholesalers.

COSUMER CONFIDENCE DOWN - Increasing gasoline prices, falling home sales and instability in financial markets have pushed the Consumer Confidence Index down for the fourth consecutive month, approaching its lowest level in two years.

DESIGNATION UPDATE – The National Underwriter reports that the NAIC “might want to consider creating a model that would govern use of producer credentials.”  Regulators are also starting to take a closer look at designations aimed at marketing LTC insurance and Medicare Advantage plans to the elderly.

EMPLOYEE BENEFITS – Prudential has issued a report titled “Employee Benefits: 2007 and Beyond,” which points out the need for workers to better understand their disability income needs.  Click here for a copy of the report.  

SENIOR SUITABILITY – FINRA has posted a free podcast on senior suitability considerations, available by clicking here.  

403(b) MODEL LANGUAGE – The IRS has released Revenue Procedure 2007-71 in which it releases guidance, including model plan language, for administrators of school Section 403(b) tax-sheltered annuity plans.  The revenue procedure is available here.  (Note:  VSA subscribers can find a copy of the 403(b) model plan language in Specimen Documents).  

DELAYED REFUNDS – If you’re expecting a refund for the 2007 tax year, expect it to be delayed.  Why?  The gridlock in Congress on extending alternative minimum tax relief.

ON CHEATING AND CHARITY - "Congress is not happy and has instructed the IRS to take a closer look" at charitable deductions. According to an internal audit of the IRS by the Treasury inspector general for tax administration, questionable giving is running rampant. During the first nine months of 2006, taxpayers took deductions of about $1.8 billion in non-cash gifts that lacked documentation. Experts suggest you exercise the utmost caution if you are doing any chartable giving with the sole intent of reducing your tax burden.

HEALTH POLICY RESCISSION – A California health insurer is being sued for rescinding health insurance policies after issue. The insurer, Health Net, is accused of canceling policies when it finds that applicants for individually underwritten policies have given incomplete information on their applications. We always thought that an insurer had the right to protect itself from fraudulent and incomplete actions of the insured.  

529 FOR GRANDKIDS – Here is something you can give your grandchildren for Christmas that can't be swallowed, won't be recalled and doesn't contain excessive amounts of lead. The gift of a 529 plan probably won't make your grandchildren squeal with joy on Christmas morning. But years from now, when they graduate from college debt-free, they'll thank you.

FIXED ANNUITIES EQUAL SECURITY - A new study released by MassMutual, which gauged the performance of different asset allocations, shows that adding fixed income annuities to portfolios may increase overall income security and long-term wealth for retirees. According to the study, portfolios would perform best if they used three asset classes — equities, bonds and fixed income annuities — rather than the traditional plan comprised of only bonds and equities. Further, a guaranteed income in retirement equates to wonderful peace of mind.

ADVISOR? GET YOUR SERIES 65 – We heard a strong case made at NAILBA that anyone (especially life insurance agents) who seeks to provide financial planning advice to clients better get a Series 65. The Uniform Investment Adviser Law Examination, widely referred to as the Series 65 exam, is designed to qualify candidates as investment adviser representatives.

DONOR-ADVISED FUNDS RISING - According to the National Philanthropic Trust, assets in donor-advised funds increased substantially last year and the number of new accounts jumped 7% to 107,250. Fidelity, Schwab and Vanguard have charitable funds that have grown over 40% in the last year. 

WILL IMPORTANT BUT IGNORED - Bankrate.com finds that while the vast majority of Americans think it’s important to have a will, only 63% aged 50 and over have one.

SPECIAL NEEDS CHILDREN - The Hartford recently launched a series of educational brochures and presentations for planners, brokers and other professionals who are working or want to work with special needs families. Get a copy at http://www.hartfordinvestor.com.

WIDOWS WANT ADVISORS - According to The OppenheimerFunds 2007 Women & Investing Survey, nearly half (40.5%) of widows say they rely on financial advisers for investing advice, more than double any other female demographic. Further, widows are the least likely group to rely on no source of investment information. Married and co-habitants are as likely to rely on co-workers, friends, and relatives for investment advice as they are their spouse or a financial professional.

BUFFETT ON ESTATE TAXES - Warren Buffett urged Congress to maintain the estate tax, saying that plans to repeal the tax would benefit a handful of the richest American families and widen income disparity in the United States. Mr. Buffett said that in the last 20 years, tax laws have allowed the “superrich” to become richer. Well, we recommend an Irrevocable Life Insurance Trust (ILIT) to pay those taxes with “discounted dollars.”

MUTUAL FUND/INSURANCE HYBRID – Investment News reports that “as early as next year, retirees may see a new hybrid investment product that blends mutual funds with insurance guarantees, possibly signifying an alliance between the two industries.”  The objective is to provide guarantees in mutual funds without the cost and complexity of a variable annuity.

AGING AND RETIREMENT IS GLOBAL CONCERN – According to a Hartford survey, Americans aren't the only ones who are worried about retirement. 80% of Americans over age 50 are concerned about whether they will have enough money during retirement. Corresponding percentages are 65% in South Korea, 66% in England, 69% in Germany and 87% in Japan. 

SAFE SHOPPING - Bankrate.com provides five ways to shop online safely this Christmas season:
1.    Shop at stores you know.
2.    Investigate the company.
3.    Don't make your purchase on a shared computer.
4.    Don’t use a debit card and use only a credit card.
5.    Be suspicious.

PEOPLE DO WHAT PEOPLE SEE - John Maxwell, who has written several great books on management and leadership, just released an update that warrants mentioning: "The Law of the Picture: People Do What People See." Good leaders are aware that others do what they do. And they always keep in mind that:
1. Followers are Always Watching What Leaders Do
2. It's Easier to Teach What's Right than to Do What's Right
3. We Should Work on Changing Ourselves Before Trying to Improve Others
4. The Most Valuable Gift a Leader Can Give is Being a Good Example

GET YOUR SHOT - National Influenza Vaccination Week is ending on Dec. 2, so get your shots. FYI, according to the Centers for Disease Control and Prevention, in a given year, an average of 5% to 20% of the U.S. population gets the flu, more than 200,000 people are hospitalized for flu complications and 36,000 die from the flu.

GUM AND HEART DISEASE CAMPAIGN - Aetna Inc. and Colgate-Palmolive are teaming up to tell consumers about the link between oral health, strokes, diabetes, heart disease and other health problems. Aetna will be using Colgate toothbrushes and toothpaste samples as “give away” items to increase awareness.