Updating the Model Portfolio (from thestreet.com)

Kass: Updating the Model Portfolio
Doug Kass
07/27/09 - 12:01 PM EDT

This blog post originally appeared on RealMoney Silver on July 27 at 8:38 a.m. EDT.
In late April, I initiated the Kass Model Portfolio, intended to represent the general construction of a long-only model portfolio with a six- to 12-month investment horizon. My hypothetical portfolio depicts an overall equity weighting and positioning relative to S&P 500 industry benchmarks and weightings.

As I did in calling for a generational bottom in early March, I am again adopting a variant and unpopular view, but this time it is a more negative call. It is important to emphasize that in my March call, I expected a resurgence of economic and investment optimism during the summer to be followed by a multiyear period of weak investment returns. Specifically, I expected a mini production boom and an asset allocation away from bonds and into stocks to be embraced and heralded by investors, who would only be disappointed again in the fall as it becomes clear that a self-sustaining economic recovery is unlikely to develop.

Today's opening missive has another major change in our model portfolio, with a further increase in the cash component of the portfolio from 29% to 43%. I am further reducing both equity and credit exposure after a huge run in both asset classes.

As I see it, the bull market argument is that we are exiting the recession just like the many that preceded the current one. Consequently, corporate profits will exceed consensus forecasts in tandem with:


the resumption of revenue growth (seen in three months of improvement in the leading economic indicator, signs of stabilization in housing, etc.);

the record fiscal stimulation;

an export-led Asian recovery; and

the operating leverage associated with productivity gains achieved through draconian cost cuts and influenced by tame wage inflation.
Besides productivity being underestimated the bulls, further argue Say's Law of Production -- that it is business that drives consumer incomes and spending. Finally, the bullish cabal argues that the high-tax health and energy bills introduced by the President have been recently set back as the blue dog democrats and the liberal leadership are already battling.

The bear market argument (that I now endorse) is that we are seeing nothing more than a second derivative recovery and that owing to a temporary replenishment of inventories, the economy is only getting less worse (or getting better from a depressed level). From my perch, the ingredients for a durable and self-sustaining recovery are missing. An economic double-dip grows more likely in a climate of corporate cost cuts, which elevates jobless rates and leads to continued pressure on personal consumption expenditures. The bears reject Say's Law of Production and view consumer incomes and spending as driving business.

Importantly, the economic downturn of 2007-2009 has already been different this time in scope and duration. For example, unlike the other post-depressions/recessions of the last century, we have already witnessed two consecutive quarterly drops in nominal GDP. As well, the 20-month-old recession has resulted in a near 4% drop in real GDP vs. drops of between 2.5% and 3.0% in the mid 1970s and early 1980s recessions. The U.S. economy came out quickly from those prior downturns, with recoveries to new peaks in economic activity taking only three or four quarters.

My view, however, is that it is different this time: The typical self-sustaining economic recovery of the past will not be repeated in the immediate future for 10 important reasons that will come to the fore:


Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

The credit aftershock will continue to haunt the economy.

The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.

While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

Commercial real estate has only begun to enter a cyclical downturn.

While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

Municipalities have historically provided economic stability -- no more.

Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.
As I wrote last week, the most disturbing feature of the current business environment is the manner in which corporations are beating estimates. While it enhances the present profit configuration, it has the potential for a long and negative tail to the future. Cost-cutting, like another man's bread, will line the corporation with profits but, in the fullness of time, will not fill the belly of the consumer who is the victim of the realignment of expenses. Costs cuts have a finite life, and, as such, produce an inherently lower quality of earnings and a less positive lever to P/E multiples than does the classical cyclical improvement in top-line or sales growth.

Given the unusual nature and the severity of the downturn, it is hard for me to see anything typical about the domestic economy's rebound compared to previous recovery periods. I do not see the disproportionate role of housing and credit in the prior decade being replaced by anything similar as a growth lever in 2009-2011. Already job losses are unprecedented and cost-cutting's impact on unemployment will exacerbate pressures, acting as a greater drag in the years ahead. Meanwhile, other (nontraditional) headwinds -- such as the likely growth-inhibiting public tax policy, less available credit and an intrusive public sector's interference on the private sector (with attendant regulatory costs and burden) -- will weigh heavily on the economy. So will bloated budgets and poor planning, which have left municipalities in disarray, raise unfamiliar cyclical challenges.

My contacts with corporations are universally more downbeat than the optimism expressed by investors recently. Many in my hedge fund cabal say that this input from the industry is not unexpected, as company managements universally failed to see the coming downturn. This is a fair response, but I suppose they could be right for a change!

For now, the animal spirits are in force. Shorts are covering, and the longs are joining the ever more vocal and growing bullish chorus in the face of the enemy of the rational buyer -- namely, optimism.

In summary, my model portfolio's high cash position reflects a less optimistic view of the sustainability of corporate profit and economic growth as well as a renewal of excessive optimism in sentiment and a move toward more elevated valuation levels (which are not supported by the profit picture I foresee).


S&P Weighting Recommended Weighting Rationale for Weighting
Technology 18% 8% Business spending will remain subdued, and the sector is now overowned
Financials 13% 7% The risk of a double-dip augurs poorly for credit metrics
Energy 13% 5% Commodities, like energy products, are vulnerable to a slowdown
Health Care 13% 5% Government intervention threatens pricing
Consumer Staples 12% 5% Exposed to generic trade-down as consumer weakens
Industrials 10% 5% Shallow and uneven economic recovery remains a headwind
Consumer Discretionary 9% 4% Accumulated job losses and wage deflation weigh on consumer
Materials 4% 2% Shallow and uneven economic recovery remains a headwind
Utilities 4% 2% Exposed to a further spike in interest rates
Telecom 4% 4% Secular prospects remain strong
Total equities 100% 47%
Credit 0% 10% Opportunistic
Total exposure 100% 57%
Cash 0% 43%




Finally, I have included a shopping list of individual stock candidates (by sector) that could be considered in the aforementioned Kass Model Portfolio.


Technology: Previous selections Apple (AAPL Quote), Cisco (CSCO Quote), Research In Motion (RIMM Quote) and Oracle (ORCL Quote) are now fully priced and have been dropped from my buy list. Qualcomm (QCOM Quote) had a disappointing quarter and is also out. Remaining are Microsoft (MSFT Quote) and Dell (DELL Quote).

Financials: I'm dropping SunTrust (STI Quote), Regions Financial (RF Quote), Legg Mason (LM Quote), State Street (STT Quote), Berkshire Hathaway (BRK.A Quote) and Weingarten (WRI Quote) (convertibles). I added JPMorgan Chase (JPM Quote). Remaining are Bank of America (BAC Quote), Prudential (PRU Quote), MetLife (MET Quote), Hartford (HIG Quote), PNC (PNC Quote), Cohen & Steers (CNS Quote), SL Green (SLG Quote) (convertibles), Chubb (CB Quote), Loews (L Quote), National Financial Partners (NFP Quote) (convertibles) and SLM (SLM Quote).

Energy: I'm dropping extended integrated oils and several oil service companies and keepng Transocean (RIG Quote) and select master limited partnerships.

Health Care: I'm going with select depressed HMOs, a true contrarian play!

Consumer Staples: Remaining are Procter & Gamble (PG Quote), General Mills (GIS Quote) and Unilever (UN Quote).

Industrials: I'm keeping 3M (MMM Quote), PPG (PPG Quote) and Union Pacific (UNP Quote).

Consumer Discretionary: I have dropped Wal-Mart (WMT Quote), Nike (NKE Quote) and Starbucks (SBUX Quote). Remaining are Home Depot (HD Quote), Lowe's (LOW Quote), Disney (DIS Quote) and eBay (EBAY Quote).

Materials: I'm dropping BHP Billiton (BHP Quote), and only Freeport-McMoRan Copper & Gold (FCX Quote) remains.

Utilities: Duke Energy (DUK Quote), Dominion Resources (DRU Quote) and PG&E (PCG Quote) remain.

Telecom: The model portfolio continues to hold Verizon (VZ Quote) and AT&T (T Quote).

Credit: I added SLM debt to the other select bank loans/debt and high-yield debt.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

At the time of publication, Kass and/or his funds were long MSFT, DELL, BAC, JPM, PNC, MET, PRU, HIG, CNS, CB, WRI (convertibles), SLG (convertibles), NFP (convertibles), SLM (straight debt), RIG, HD, LOW , DIS, EBAY and FCX, and short JPM calls, PNC calls, MET calls, PRU calls and HIG calls, although holdings can change at any time.

More on MLPs (from Barrons)

MONDAY, JULY 27, 2009
SPEAKING OF DIVIDENDS



Good Going, Partners
By SHIRLEY A. LAZO



MASTER LIMITED PARTNERSHIPS -- THE SUBJECT of a Barron's Follow-Up -- pass most of their profits along to their unitholders as tax-deferred distributions. MLPs typically invest in energy assets, and their units have taken a beating from the gyrations in oil prices. But they still make money, and four of them energized their dividends last week.

The Big-Board-listed quartet, which sport yields of 7% to 9%, are Sunoco Logistics (ticker: SXL), El Paso Pipeline (EPB), Holly Energy (HEP) and Western Gas (WES).

With 2008 revenue of more than $10 billion, Sunoco is by far the largest of the group. It was created by Sunoco (SUN), the big energy company, when it transferred most of its pipeline, terminal and storage assets to the partnership.

Despite lower crude-oil prices, which pushed second-quarter revenue down 61%, profits at Sunoco Logistics handily beat Wall Street's expectations. As a result, it declared a cash distribution for the second quarter of $1.04 per common partnership unit, 11.2% above the 2008 second quarter's payout and 2.5% over last quarter's $1.015. Yield: 7.42%. The distribution is payable Aug.14 to unitholders of record Aug. 7. The ex-dividend date is Aug. 5. Disbursements have been made since 2002, and this is the 24th increase in the past 25 quarters.

"Our strong second-quarter performance is a combination of stable cash flows in our base business, along with crude-oil-market opportunities resulting from a cantango [meaning futures prices are above spot prices] market structure," said Sunoco Logistics' CEO, Deborah M. Fretz. "Our conservative balance sheet and access to liquidity have us well positioned to further expand our business platform," she added.

Second-quarter net climbed to $66.6 million, or $1.74 per diluted limited-partner unit, 30% above the figure in the corresponding 2008 stretch. Revenue totaled $1.29 billion. Analysts, on average, had been expecting Sunoco to earn $1.49 on $1.17 billion.

The improvement came from more lease acquisitions, increased crude-oil pipeline and storage revenues, and benefits from the November acquisition of the MagTex refined-products pipeline and terminals system, plus significantly lower costs. Distributable cash flow in the quarter surged nearly 25% from the level a year earlier, to $71.8 million. Debt outstanding at June 30 came to $860.3 million.

The units set a 52-week high of 56.60 June 16. ValuEngine thinks that Sunoco "exhibits attractive volatility, momentum and risk" and therefore rates it a Strong Buy. Citigroup recently upgraded the MLP to Buy from Hold and raised its price target to 60. Sunoco's 52-week low is 27.62.


El Paso Pipeline sweetened its dividend to 33 cents per unit, for a 7% yield. That's an increase of 12% from the year-earlier distribution and 1.5% above the 32.5 cents paid in this year's first three months. El Paso has enriched its payout every quarter since its 2007 initial public offering.

The partnership, with 2008 revenue of $141 million, was formed by El Paso (EP) to own and operate natural-gas transportation pipelines and storage assets. The units currently trade around 19, and their 52-week range is 21.80 to 11.72. Goldman Sachs last week upgraded El Paso to its Conviction Buy list with a price target of 22, deeming recent weakness unjustified.

Holly Energy, which was formed by Holly Corp. (HOC) to acquire, own and operate refined-product pipeline and terminal facilities, added a penny to its payout, bringing it to 78.5 cents per unit, for a yield of 8.88%. Holly now has upped its distribution every quarter since becoming a public partnership in July 2004. The units change hands close to their 52-week high of 37.33; their 52-week low is 14.93. Goldman has downgraded Holly to Neutral, citing valuation.

Western Gas gathers, compresses, processes and transports natural gas for its parent, Anadarko Petroleum (APC), and others. It also raised its quarterly cash distribution a penny, to 31 cents per unit. Yielding 7.25%, its units hit a 52-week high of 17.15 Friday -- nearly double their 52-week low of 9.

Getting Back What You Lost (NY Times)

July 26, 2009
Up 40%, but Still Feeling Down
By JEFF SOMMER
DEAR Shareholder:

While we are not satisfied with our performance in the last quarter, we are happy to report that we didn’t lose as much money as the average stock mutual fund.

That wouldn’t be a very sexy sales pitch: mutual fund managers don’t typically phrase their shareholder letters quite that bluntly.

But the truth is that for most investors, it’s more important to avoid big losses than to rack up big gains. That may seem a milquetoast approach, but in the miserable market of 2008 and early 2009, minimizing losses was the best that most people could do. And because of the ugly math of investing, it has been extraordinarily difficult to recover from big declines.

“People often don’t understand why they are still in a deep hole, even after they’ve had a year of great returns,” said John Bogle, the founder of Vanguard and the creator of the first index mutual fund. It is because when your portfolio shrinks substantially, you need an enormous gain, in percentage terms, to climb back to where you started. This is part of what Mr. Bogle (citing Justice Louis Brandeis) calls “the relentless rules of humble arithmetic.”

Here’s how the math works:

Suppose you lost 40 percent in 2008 — roughly the decline in the Standard & Poor’s 500-stock index. One dollar at the start of the year would have been worth 60 cents at the end. Then say that after that loss, you posted a gain of 40 percent (the rough increase in the S.& P. 500 from its March low through the middle of July). That’s a spectacular return.

Time to celebrate? Not really.

A 40 percent gain on 60 cents is 24 cents. Your original $1 is now only 84 cents — you’re still down 16 cents.
Mr. Bogle did some calculations based on the assumption that you invested $1 in the S.& P. 500 at its peak. By March this year, the index had dropped 57 percent, reducing your dollar to a mere 43 cents. After a 40 percent gain, your little stash was worth only 60 cents. Even worse, he said, is the “exponential factor” in losses and recoveries. If your initial investment fell 50 percent, you would need a 100 percent gain to return to the starting line. If you lost 75 percent, you would need 300 percent.

Although stocks tend to outperform bonds over the long haul, gains that big are hard to come by. And that, in a nutshell, is why it’s better to avoid big losses in the first place.
Hersh Cohen, chief investment officer of ClearBridge Advisors, a Legg Mason subsidiary, says he believes in this philosophy wholeheartedly. “Make sure you don’t get killed on the downside,” he said. That’s more important, he said, than “worrying about the upside.”
Mr. Cohen has managed the Legg Mason Partners Appreciation fund for 30 years, over which he has beaten the S.& P. 500, according to Morningstar. The fund has returned 11.9 percent annualized, compared with 10.9 percent for the index and 10.4 percent for the average large-capitalization stock fund. (For the last 14 years, he has co-managed the fund with Scott Glasser.)

Last year was “the worst in my career in 40 years of managing funds,” Mr. Cohen said. Partners Appreciation lost 29 percent, and he said he “went home depressed about it every night.” Still, that performance was much better than the overall market and a vast majority of stock mutual funds.

MR. COHEN focuses on companies with “superior balance sheets” and rising dividends. At the moment, in his estimation, those include Wal-Mart, Travelers, Johnson & Johnson, Cisco Systems and Berkshire Hathaway.
Mr. Cohen holds a doctorate in psychology — a background he calls most helpful in “market extremes.” He says he tries “to act on extremes — but to act the other way,” cutting back when the market is euphoric, and increasing his bets when others panic “and stuff is being given away.”

For his part, Mr. Bogle has reduced the risk of big losses by diversifying most of his own portfolio into safer fixed-income holdings — 80 percent of it — which, he said, is appropriate for his age. He is 80 and holds index funds, and while he remains bullish for the long term, he said that by being cautious he has enjoyed a “consistently good night’s sleep over the last few years.”

Deadline for Lehman Brothers Claims is September 22, 2009

Making Claims in the Lehman Brothers Bankruptcy:

The deadline for filing of proofs of claims against the Debtors has been established as September 22, 2009 at 5:00 p.m. Eastern Time for all claims

Obtain proof of claim forms from http://chap11.epiqsystems.com/LBH

Questions about the process can be directed to EPIQ BANKRUPTCY SOLUTIONS at
646 282 2500 or via their website www.epiqbankruptcysolutions.com/contact.htm

Home Prices in Your City (Bizjournals.com)

Changing home prices in the Top 100 metros

bizjournals - July 16, 2009

Metro Peak year for housing prices (1st Q only)
Change in housing prices since peak
1-year change in housing prices (1st Q, 2008-2009)
5-year change in housing prices (1st Q, 2004-2009)
10-year change in housing prices (1st Q, 1999-2009)
Population (2008)

Akron, Ohio 2006 -3.23% -1.22% 3.12% 22.12% 698,553
Albany, N.Y. 2008 -0.33% -0.33% 42.45% 93.38% 853,919
Albuquerque 2008 -2.94% -2.94% 41.83% 63.37% 845,913
A'town-Bethlehem, Pa. 2008 -4.73% -4.73% 32.93% 78.95% 808,210
Atlanta 2008 -1.65% -1.65% 12.18% 46.95% 5,376,285
Austin 2009 - 1.49% 32.88% 75.34% 1,652,602
Bakersfield, Calif. 2007 -34.89% -22.80% 14.24% 73.01% 800,458
Baltimore 2007 -6.72% -6.44% 41.79% 114.20% 2,667,117
Baton Rouge, La. 2009 - 1.16% 34.39% 61.80% 774,327
Bethesda-Frederick, Md. 2007 -11.71% -7.86% 29.09% 114.96% 1,176,401
Birmingham 2009 - 1.08% 24.40% 52.82% 1,117,608
Boston 2006 -8.36% -3.66% 6.68% 95.29% 1,884,659
Bradenton-Sarasota, Fla. 2006 -31.93% -16.12% 9.01% 74.24% 687,823
B'port-Stamford, Conn. 2007 -6.95% -5.31% 19.61% 89.45% 895,030
Buffalo 2009 - 3.29% 22.19% 43.01% 1,124,309
C'bridge-Newton, Mass. 2006 -5.77% -2.61% 7.27% 81.81% 1,482,478
Camden, N.J. 2007 -5.33% -5.06% 32.44% 96.21% 1,250,569
Charleston, S.C. 2008 -3.19% -3.19% 40.49% 101.98% 644,506
Charlotte 2009 - 0.39% 26.59% 48.09% 1,701,799
Chicago 2007 -5.22% -4.89% 20.13% 69.20% 7,990,248
Cincinnati 2008 -0.77% -0.77% 9.36% 33.54% 2,155,137
Cleveland 2006 -3.78% -1.53% 1.27% 21.13% 2,088,291
Colorado Springs 2007 -1.76% -1.70% 14.99% 49.96% 617,714
Columbia, S.C. 2009 - 1.32% 24.14% 52.34% 728,063
Columbus 2008 -0.42% -0.42% 8.00% 32.05% 1,773,120
Dallas 2009 - 2.21% 16.40% 46.15% 4,226,003
Dayton 2008 -0.51% -0.51% 6.24% 21.63% 836,544
Denver 2009 - 0.80% 7.87% 56.54% 2,506,626
Detroit 2006 -22.15% -11.47% -19.80% 6.13% 1,949,929
Edison-N. B'swick, N.J. 2007 -7.79% -5.30% 24.88% 116.57% 2,325,224
El Paso, Texas 2008 -2.32% -2.32% 42.33% 64.97% 742,062
Fort Lauderdale, Fla. 2007 -32.28% -23.79% 10.78% 93.84% 1,751,234
Fort Worth 2009 - 3.11% 17.22% 44.63% 2,074,003
Fresno, Calif. 2006 -30.78% -20.34% 7.60% 84.12% 909,153
Gary, Ind. 2008 -1.67% -1.67% 17.75% 37.16% 702,458
Grand Rapids 2006 -5.57% -3.96% -0.40% 25.02% 776,833
Greensboro 2009 - 0.27% 13.95% 34.58% 705,684
Greenville, S.C. 2009 - 2.23% 22.66% 44.01% 624,715
Hartford 2007 -3.24% -3.12% 22.28% 76.58% 1,190,512
Honolulu 2008 -4.75% -4.75% 54.45% 115.46% 905,034
Houston 2009 - 3.83% 26.36% 64.86% 5,728,143
Indianapolis 2008 -0.38% -0.38% 8.36% 27.23% 1,715,459
Jacksonville 2007 -12.54% -9.67% 31.84% 96.29% 1,313,228
Kansas City 2008 -1.13% -1.13% 11.03% 46.48% 2,002,047
Knoxville, Tenn. 2008 -0.03% -0.03% 30.38% 58.36% 691,152
Lake County, Ill. 2007 -4.22% -4.11% 14.67% 54.64% 876,918
Las Vegas 2007 -38.25% -29.52% -2.42% 40.51% 1,865,746
Little Rock, Ark. 2009 - 1.91% 22.87% 45.77% 675,069
Long Island, N.Y. 2007 -7.83% -6.10% 22.41% 132.34% 2,863,849
Los Angeles 2007 -24.38% -16.58% 22.86% 116.14% 9,862,049
Louisville 2009 - 0.14% 15.26% 42.69% 1,244,696
McAllen-Edinburg, Texas 2009 - 1.47% 18.64% 42.68% 726,604
Memphis 2008 -0.82% -0.82% 13.90% 30.63% 1,285,732
Miami 2007 -29.81% -25.39% 22.53% 107.79% 2,398,245
Milwaukee 2008 -1.83% -1.83% 20.88% 61.07% 1,549,308
Minneapolis-St. Paul 2007 -7.14% -4.92% 8.50% 74.63% 3,229,878
Nashville 2009 - 0.00% 29.32% 51.93% 1,550,733
New Haven, Conn. 2007 -5.64% -4.36% 22.81% 87.88% 846,101
New Orleans 2007 -1.21% -1.12% 30.54% 67.67% 1,134,029
New York City 2007 -6.34% -5.64% 30.00% 121.58% 11,696,649
Newark 2007 -7.03% -5.74% 25.28% 103.64% 2,121,076
Oakland 2006 -26.17% -14.96% 6.07% 92.54% 2,504,071
Oklahoma City 2009 - 1.88% 23.04% 54.57% 1,206,142
Omaha 2008 -0.50% -0.50% 10.88% 35.11% 837,925
Orlando 2007 -21.63% -14.97% 33.47% 92.12% 2,054,574
Oxnard-T. Oaks, Calif. 2006 -28.80% -16.52% 3.66% 93.57% 797,740
Peabody, Mass. 2006 -8.95% -4.34% 4.07% 81.99% 736,457
Philadelphia 2008 -2.41% -2.41% 34.94% 99.67% 3,892,194
Phoenix 2007 -23.27% -17.34% 32.82% 80.20% 4,281,899
Pittsburgh 2009 - 1.08% 17.59% 46.85% 2,351,192
Portland, Ore. 2008 -5.81% -5.81% 44.93% 78.41% 2,207,462
Poughkeepsie, N.Y. 2007 -8.93% -7.05% 18.78% 104.09% 672,525
Providence 2006 -10.58% -6.78% 11.90% 104.98% 1,596,611
Raleigh 2009 - 1.16% 25.16% 45.29% 1,088,765
Richmond 2008 -3.01% -3.01% 41.19% 88.46% 1,225,626
R'side-S. Bern., Calif. 2007 -38.97% -28.33% -1.17% 77.10% 4,115,871
Rochester, N.Y. 2009 - 1.64% 14.73% 33.60% 1,034,090
Sacramento 2006 -30.97% -15.11% -1.82% 81.54% 2,109,832
Salt Lake City 2008 -4.80% -4.80% 45.88% 61.15% 1,115,692
San Antonio 2009 - 1.68% 33.24% 63.27% 2,031,445
San Diego 2006 -25.67% -13.79% 0.64% 99.96% 3,001,072
San Francisco 2007 -11.73% -8.20% 20.76% 103.76% 1,770,460
San Jose 2007 -15.59% -11.74% 17.48% 86.70% 1,819,198
S. Ana-Anaheim, Calif. 2006 -24.87% -13.93% 12.64% 107.40% 3,010,759
Seattle 2008 -6.66% -6.66% 43.01% 94.59% 2,559,174
Springfield, Mass. 2008 -2.54% -2.54% 24.56% 84.69% 687,558
St. Louis 2008 -1.04% -1.04% 18.97% 60.37% 2,816,710
Stockton, Calif. 2006 -49.66% -31.22% -21.78% 40.34% 672,388
Syracuse, N.Y. 2009 - 1.16% 25.90% 57.37% 643,794
Tacoma, Wash. 2008 -6.87% -6.87% 45.63% 94.41% 785,639
Tampa-St. Petersburg 2007 -21.64% -13.93% 23.48% 92.67% 2,733,761
Toledo, Ohio 2007 -4.95% -3.86% -0.55% 23.44% 649,104
Tucson 2007 -12.63% -9.80% 36.04% 83.10% 1,012,018
Tulsa 2009 - 2.10% 17.61% 44.77% 916,079
Virginia Beach-Norfolk 2008 -4.02% -4.02% 55.23% 119.98% 1,658,292
Warren-Troy, Mich. 2006 -18.27% -9.00% -14.72% 9.72% 2,475,181
Washington 2007 -15.23% -9.98% 29.86% 117.51% 4,181,729
West Palm Beach, Fla. 2006 -31.31% -20.20% 10.31% 89.30% 1,265,293
Wilmington, Del. 2008 -3.59% -3.59% 33.51% 89.58% 695,708
Worcester, Mass. 2006 -10.58% -5.49% 5.28% 83.40% 783,806

SOURCE: bizjournals

A Fresh Look at Variable Annuities (from the Wall Street Journal)

JULY 22, 2009

Long Derided, This Investment Now Looks Wise

Thanks to Guarantees, Variable Annuities Paid Even When Stocks Didn’t
By LESLIE SCISM

One of the best investments of the past decade was one of the most derided: the variable annuity. But investors who want in on the action now are in for a shock, as the juiciest deals have disappeared from the market.

Variable annuities, a tax-advantaged investment account that holds a type of mutual fund, are sold by insurers, and most offer some form of investment guarantee for an additional fee. For years, they were attacked for being too expensive. Why pay for a guarantee to protect against a stock-market decline, the argument went, when stocks continued their inexorable march upward?

From Loathed To Loved
Guaranteed-minimum variable annuities have turned out to be a smart buy for many investors. Here are some key considerations:

The issuer is on the hook to make up for investment losses. Investors can’t withdraw the guaranteed amount in a lump sum. It is paid out over years.Investors should buy from insurers with high ratings.Then stocks plunged, and variable-annuity guarantees no longer looked expensive. In fact, insurers, in a move to build market share, had underpriced many of them. Suppose an investor owned a variable annuity that tanked in value last year. No matter. Under the most-generous contracts, insurers pledged to pay customers lifetime retirement income based on past market gains in their underlying funds, plus minimum annual increases in years the market is sluggish or down.

Because of such guarantees, many holders of variable annuities actually saw their accounts increase 6% or more in value last year, when the Standard & Poor’s 500-stock index dropped nearly 39%.

“When I watch friends bemoaning the market, I feel guilty saying anything, actually,” says Amy White, a 67-year-old retired accountant in Dallas. She and her late husband invested hundreds of thousands of dollars in variable annuities early this decade, and their funds rose as the market neared its 2007 peak. While they fell last year, the guaranteed amount—on which Ms. White’s retirement-income checks will be based—is still more than double the invested amount.

“I know that I’m doing quite well,” she says, while her friends are “experiencing real pain.”

An estimated $300 billion of these retirement-income guarantees are outstanding, compared with $3.7 trillion in stock mutual funds.

Variable annuities still have some notable drawbacks. Among the biggest: There is no lump-sum option for cashing out the guaranteed amount. Instead, the higher guaranteed amount is payable by the insurer over time, with 5%-a-year payouts common for those in their 60s when they start receiving checks. If you cash out all at once, you get only the shrunken sum that remains in your funds. Another concern: The insurers have to stay healthy enough to cut all those checks.

So far, though, it is the issuers’ stockholders who are getting the raw end of the deal. To meet their annuity obligations, the roughly two dozen insurers who dominate the field have boosted their claims reserves, which has hurt earnings, and have raised fresh capital, which dilutes existing shareholders. Hartford Financial Services Group Inc. and Lincoln National Corp., two big issuers of variable annuities, also have accepted money from the U.S. government’s Troubled Asset Relief Program.
Variable-annuity sales were down 27% in the first quarter, as stock investments of many sorts took a dive. Those buying typically are in their 60s, says Thomas Hamlin, a top broker at Raymond James Financial Inc., though 40- and 50-year-olds are increasingly interested. “People are sick of sliding back down to the base camp after they felt like they were about to put their flag in the top of the mountain,” Mr. Hamlin says, and the guarantees are the investment-world equivalent of “rope and ice spikes.”

The guarantees are no longer as sweet, yet what is still for sale is “better than the alternative: mutual funds with no downside protection,” says Mr. Hamlin.

In scaling back the products, many insurers are reducing the size of the minimum annual boosts to the guaranteed income base—or the value of the underlying investments combined with any investment gains and minimum annual boosts. For instance, the “Accumulator” variable annuity of AXA SA’s AXA Equitable Life Insurance Co., a year ago offered an income-base guarantee calculated with a 6.5% minimum annual-growth factor, while the new version uses 5%. Many also are reducing the annual withdrawal payouts by about one percentage point, while fees are up about a fifth of a percentage point, according to Milliman Inc.

Some formerly big players have suspended sales of guaranteed variable annuities entirely. Of those still available, MetLife, like AXA Equitable, promises to boost the income base by 5% a year in most states, if there aren’t investment gains greater than that on contract anniversary dates. Ohio National Life Insurance Co. also has an offering with a 5% minimum annual income-base boost, and 6% versions still for sale in some states.

Around since the 1950s, variable annuities originally were pitched for their tax-deferred buildup of investment earnings; they’re akin to 401(k) plans in that taxes are paid as the money is withdrawn. Insurers in the 1980s began tossing in a “death benefit”: If your underlying funds perform badly, your heirs will receive at least your original principal, less withdrawals.

Critics included Moshe Milevsky, a finance professor at the Schulich School of Business at York University in Toronto, who crunched data in the 1990s and concluded that consumers were being “grossly overcharged.” At the time, variable-annuity fees approached 3% of the account balance, more than twice that of a typical mutual fund.

His findings were widely circulated among consumer advocates, financial commentators, regulators and plaintiff lawyers. One of the big beefs has been that many insurers pay big commissions to salespeople, which may encourage them to push the products regardless of their suitability, including to many elderly people who would need access to their money during periods when surrender penalties apply.

In recent years, the landscape has shifted. In a bid to cash in on baby boomers’ fears of outliving their savings, insurers were adding “living benefits”—investment guarantees that kick in while the owner is still alive. So two and a half years ago, Prof. Milevsky updated his research, making an about-face: “Some insurance companies are not charging enough,” given the cost of risk-management instruments that insurers can buy to protect themselves, he wrote in 2007 in Research Magazine.

Some on Wall Street, seeing a bargain, bought annuities for their personal portfolios. Consider Colin Devine, an insurance-stock analyst at Citigroup Global Markets. He has been bearish on some insurers as stock investments because of the guarantees, even as he owns guaranteed variable annuities from MetLife Inc., Lincoln, ING Groep NV, Manulife Financial Corp.’s John Hancock Life Insurance Co. unit and Pacific Life Insurance Co.
Prof. Milevsky recommends that individuals who lack old-fashioned pensions put a portion of their savings into the products to create personal pension plans. Even with the cutbacks, “overall, I still believe that these products make sense for individuals approaching retirement,” he says.

Many in the industry are eager to see consumers’ response to John Hancock’s newly launched “AnnuityNote.” The investor’s money is invested in an indexed stock and bond portfolio. After five years, the contract guarantees a 5%-a-year lifetime withdrawal based on the total amount invested or the value of the fund investments at the fifth contract anniversary, whichever is higher. There is no automatic income-base boost in bad market years. Total annual fees: 1.74%.

Such streamlined guarantees are expected to proliferate. Just this week, MetLife introduced “Simple Solutions,” to be sold through banks, which similarly locks in investment gains annually but promises no minimum income-base boost.

Erin Botsford, president of Botsford Group in Frisco, Texas, used to be an “anti-variable-annuity person,” but became a convert after the tech-stock crash. Advisers often focus on performance and fees, she says, when the client really wants to know: “Where should I invest my hard-earned savings in order to ensure I can have a comfortable retirement that I cannot outlive?”

Write to Leslie Scism at leslie.scism@wsj.com

Beware Title Insurance Fees ( from WSJ )

JULY 21, 2009 Title-Insurer Fees Draw Scrutiny

By JAMES R. HAGERTY
The U.S. title-insurance industry faces increasing pressure from regulators to justify the fees charged to consumers for ensuring they have clear ownership of their homes.

For most people, title insurance is just another mysterious fee they must pay when they buy a home or refinance a mortgage. Unlike some of those fees, though, title charges aren’t negligible. They range from several hundred to several thousand dollars—and last year totaled more than $10 billion for the title industry. Lenders insist on the insurance to protect them against the possibility that a taxing authority, another creditor or a disgruntled heir may have a claim to the property, among other risks.
As falling home prices tempt more people back into the housing market in some parts of the country, politicians and regulators are raising questions about whether they may be paying too much for this protection. “There’s no transparency,” Delores Kelley , a state senator in Maryland, said in an interview. She introduced legislation that created a commission to study the title-insurance industry in Maryland. That panel is due to make recommendations about possible regulatory changes by December.

In Pennsylvania, Attorney General Tom Corbett earlier this year successfully campaigned against a push by the title industry for increases in regulated rates. New Mexico’s legislature this year enacted a law that will allow price competition among title insurers, previously required to charge standard prices set by the state insurance regulator. That kind of fixed-price regime continues in Texas.

A bigger potential threat to title insurers comes from the Obama administration’s proposed Consumer Financial Protection Agency. The new regulator would oversee a wide variety of financial products, including title insurance, which is now regulated mainly at the state level. That would open the door to more federal oversight.

Rather than shopping around, most people accept title-insurance choices made for them by a real-estate agent, mortgage company or builder. Cathy Pearson, an elementary school teacher who recently bought her first home, in San Clemente, Calif., says she accepted as “a given” the title insurer chosen by real-estate agents involved in the transaction. Like many buyers, Mrs. Pearson didn’t feel she had time to question all the details.

Yet people advising home buyers often have conflicts of interest. Some real-estate brokers, mortgage firms and builders own firms that act as agents for title insurers. Federal and state laws bar title insurers from giving kickbacks to real-estate agents, mortgage firms or others for funneling business toward a particular title company, but enforcement is spotty. In recent years, regulators have fined title companies for various alleged violations of laws against inducements to steer business toward a title agent. The inducements have included entertainment, trips and help with marketing.

Typically, 80% or more of the premium goes to the title-insurance agent, with the rest going to the insurer. Agents often handle the task of searching through and analyzing public documents, sometimes going back many decades. But in many states, consumers pay separate fees to the agents for that research, on top of the premiums.

Charges vary widely around the country. In Texas, for instance, the current cost of basic title coverage for a $250,000 home-purchase loan is $1,644. That is supposed to include the cost of searching for and examining title records and related tasks, Texas insurance regulators say, but they warn that title agents sometimes tack on unjustified fees. In Iowa, the costs of similar coverage—including fees for lawyers and title researchers—range from around $500 to $800. Unlike the rest of the nation, Iowa has a state agency that provides title insurance.

The industry so far has fended off a class-action lawsuit, filed in early 2008, charging title insurers with illegally fixing prices at unreasonably high levels in New York state. A U.S. District Court judge for the eastern district of New York dismissed that suit last month. It has been appealed to the U.S. Court of Appeals for the Second Circuit.

The American Land Title Association, or ALTA, a trade group for insurers and agents, rejects suggestions that title insurance is overpriced. “Nobody’s getting rich” selling title insurance, says Kurt Pfotenhauer, the ALTA’s chief executive officer.

The ALTA opposes the Obama plan to include title insurance as a product to be regulated by the proposed consumer-protection agency. “Regulation of local transactions by Washington bureaucrats is a recipe for frustration and malfunction,” says Mr. Pfotenhauer.

State regulators are striving to show they are on top of the issue. A working group of the National Association of Insurance Commissioners is devising plans under which title insurers and agents would provide financial data to help regulators determine whether premiums are reasonable. The working group is also looking at ways to help consumers shop effectively for title insurance.

Jack Guttentag, a finance professor emeritus at the University of Pennsylvania’s Wharton School who provides mortgage advice on the Web site www.mtgprofessor.com, advises home buyers to shop for title insurance online and to do so early in the home-buying process. When refinancing, borrowers should make sure they are getting the discount for title insurance that often applies on such transactions, says Mr. Guttentag.

The pressure on title insurers comes at a time when they are struggling to adapt to the plunge in transactions that has accompanied the housing bust. The four biggest title insurers—units of Fidelity National Financial Inc., First American Corp., Stewart Information Services Corp. and Old Republic International Corp.—all reported losses for 2008. Together, they account for more than 90% of the market. They distribute their insurance through thousands of title agents nationwide.

The big title insurers may face more price competition. Entitle Direct Group Inc., of Stamford, Conn., last year began selling title policies online. Timothy Dwyer, chief executive officer and founder of the company, says Entitle aims to undercut other insurers by at least 35%.

Printed in The Wall Street Journal, page D1

CIT Group Tender Offer (news release)

As the first step in a broader recapitalization plan, CIT has commenced a cash tender offer for its outstanding Floating Rate Senior Notes due August 17, 2009 (the “August 17 Notes”) for $825 for each $1,000 principal amount of notes tendered on or before July 31, 2009. Lenders in the Term Loan Financing have agreed to tender all of their August 17 notes. Additional details of the tender offer are described below. The Company and the Term Loan Financing steering committee will work together on the balance of the recapitalization plan, which is expected to include a comprehensive series of exchange offers designed to further enhance CIT’s liquidity and capital.

Details About the Tender Offer

As part of the restructuring plan, CIT has commenced a cash tender offer for its outstanding Floating Rate Senior Notes due August 17, 2009 (the "August 17 Notes”), upon the terms and subject to the conditions set forth in its Offer to Purchase dated July 20, 2009 (the “offer to purchase”) and the related letter of transmittal (the “Offer”). Pursuant to the Offer, CIT is offering to purchase any and all of its August 17 Notes for $800 for each $1,000 principal amount of outstanding August 17 Notes tendered and not validly withdrawn prior to 12:00 midnight, New York City time, at the end of August 14, 2009 (unless extended by CIT). Holders who validly tender their August 17 Notes prior to 5:00 p.m., New York City time, on July 31, 2009 (unless extended by CIT, the “early delivery time”), and who do not validly withdraw their tenders, will be paid an additional $25 cash for each $1,000 principal amount of outstanding August 17 Notes tendered by the early delivery time. Tendered August 17 Notes may be validly withdrawn at any time prior to 5:00 p.m., New York City time, on July 31, 2009 (unless extended by CIT), but not thereafter. Holders of August 17 Notes accepted in the Offer will also receive a cash payment equal to the accrued and unpaid interest in respect of such August 17 Notes from the most recent interest payment date to, but not including, the settlement date for the Offer.

The Offer is conditioned upon, among other things, holders of August 17 Notes tendering and not withdrawing an amount of August 17 Notes equal to at least 90% of the aggregate principal amount of August 17 Notes outstanding (the “Minimum Condition”). The Minimum Condition may be waived by CIT and the Term Loan Financing steering committee. If the Minimum Condition is satisfied or waived, CIT intends to use the proceeds of the Term Loan Financing to complete the Offer and make payment for the August 17 Notes. There can be no assurances that the restructuring plan or the Offer can be completed successfully.

Morgan Stanley & Co. Incorporated and BofA Merrill Lynch are the Dealer Managers for the Offer. D.F. King & Co., Inc. is the Depositary and Information Agent. Persons with questions regarding the Offer should contact Morgan Stanley & Co. Incorporated toll free at (800) 624-1808 or collect at (212) 761-5384 or BofA Merrill Lynch at (980) 388-4813, Attn. Debt Advisory Services. Requests for documents should be directed to D.F. King & Co., Inc. toll free at (800) 758-5880 or collect at (212) 269-5550.

Individuals interested in receiving future updates on CIT via e-mail can register at http://newsalerts.cit.com

Carbon Trading for Profit (Wall St & Tech)

Is Carbon Trading the Next Big Thing?

By Penny Crosman

Jul 19, 2009
URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=218501208



The fledgling U.S. carbon credit market, currently a $100 million-plus business, is poised to skyrocket if The American Clean Energy and Security Act of 2009, which recently was passed by the House, makes it through the Senate. The bill would limit, or "cap," the amount of carbon emissions that companies can produce each year.

Under the bill, sponsored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), firms that produce more greenhouse gases than they're allowed would be able to buy credits from companies that have produced fewer emissions than they're allotted, creating a large market for carbon credits. President Obama has estimated that more than a half-trillion dollars' worth of carbon credits will be auctioned in the first seven years after the bill is enacted.

The United States was the first country to introduce a cap-and-trade scheme. The 1990 Clean Air Act Amendments established an emissions trading system to reduce emissions of sulfur dioxide (SO2) from fossil fuel-burning power plants. According to Randy Warsager, director of green products at CME Group, the SO2 market was challenged last year by an unfavorable court decision, but it has been rebuilding slowly.

A voluntary market currently exists for carbon credit trading, primarily through regional initiatives such as the Regional Greenhouse Gas Initiative (RGGI), which covers Maine, New Hampshire, Vermont, Connecticut, New York, New Jersey, Delaware, Massachusetts, Maryland and Rhode Island. In the RGGI's latest auction in June, 30.8 million allowances were sold for $3.23 each, which raised more than $104 million for the 10 Northeastern states to invest in energy-efficiency and renewable energy programs. (Each allowance represents a ton of carbon that electric plants can release.)

Profiting From the Environment

Citi is among the investment banks that have been moving forward in the environmental products space. Garth Edward, the firm's director of environmental markets, began trading environmental products with the introduction of the EPA's NOx Budget Trading Program, a cap-and-trade program that the EPA created in 2003 to reduce emissions of nitrogen oxides (NOx) from power plants and other large combustion sources. For the past few years Citi has focused primarily on CO2 trading, which has been driven by the European Union's emissions trading system. "This is where the bulk of liquidity is, most of the capital flow that drives emission reduction projects around the world," Edward notes.

Growth in market activity and the capital deployed in environmental products has been strong, primarily because of cap-and-trade legislation, according to Edward. "Where you have a step forward in legislation such as the EU emissions trading system, the voluntary agreements in Japan and the Waxman-Markey legislation, that's the kind of process that starts creating compliance requirements on end users and incentivizes service and technology providers to provide solutions," he says.

Despite the projected growth in environmental markets, Credit Suisse recently cut back its New York-based carbon trading team; Carbon Finance, a newsletter dedicated to the global markets in greenhouse gas emissions, reported that half the team will depart early next year as part of a de-emphasizing of the business. According to the Carbon Finance report, going forward Credit Suisse will focus on environmental trading on behalf of its clients, which are mostly European. (Credit Suisse did not respond to Carbon Finance's nor to Wall Street & Technology's requests for an interview.)

Meanwhile the primary U.S. exchanges involved in carbon trading are the Chicago Climate Exchange (CCX) and the Chicago Mercantile Exchange (CME). The CCX trades allowance and offset contracts that each represent 100 metric tons of CO2 equivalent. The Chicago Climate Futures Exchange, a subsidiary of the CCX, trades RGGI futures and options contracts. The CCFE reported record trading volume for June 2009 -- it traded 133,175 contracts versus its previous record of 132,319 in April.

The CME -- along with partners Evolution Markets, Morgan Stanley, Credit Suisse, Goldman Sachs, J.P. Morgan, Merrill Lynch, Tudor Investment, Constellation Energy, Vitol, RNK Capital, ICAP and TFS Energy -- has applied for CFTC approval for a Green Exchange, on which it will trade all the environmental products it already trades on its commodities exchange.
Europe's BlueNext, an environmental exchange that's 60 percent owned by NYSE Euronext, plans to open an office in New York "very shortly," according to Keiron Allen, the exchange's marketing and communications director. It plans to start trading contracts within the RGGI market by the end of the year, Allen reports, adding that the exchange intends to compete with the U.S. environmental exchanges. "It will be a race to see who gains critical mass first," he says.



The European Experience

In Europe, cap-and-trade rules similar to those outlined in the Waxman-Markey bill have been in effect since 2005; carbon credits are traded on the European Climate Exchange (ECX), BlueNext, Nord Pool (the Nordic Power Exchange) and the European Energy Exchange (EEX).

BlueNext trades European Union Allowances, the carbon emission allowances used in the European Union Emissions Trading Scheme, and Certified Emission Reductions, which are carbon credits issued under the rules of the Kyoto Protocol, which is part of the United Nations Framework Convention on Climate Change, an international environmental treaty with the goal of reducing greenhouse gas concentrations in the atmosphere. BlueNext trades an average of 5 million tons' worth of carbon emissions a day. Its 100 members (buyers and sellers on the exchange) are carbon-emitting companies, financial firms with their own trading desks and carbon credit aggregators that act as brokers.

BlueNext's model is different than most other carbon exchanges, Allen says, because it uses a delivery-versus-payment system rather than a clearing system. "In a delivery-versus-payment system, there's zero counterparty risk," he contends. "If you sell contracts, you've got to put them into your account on the exchange first. And if you want to buy something, you have to put money in your exchange account first. Each party knows the other's got the right amount of money or contracts." Allen adds that in BlueNext, trades are physically settled within 10 or 15 minutes, versus the more typical T+1, T+2 or T+3 for commodities settlement.

The European carbon market has been growing quickly; the U.S. market still is in its infancy. Trading activity in the European Emissions Trading Scheme grew by 54 percent in the first quarter of 2009 compared to Q4 2008, reaching $28 billion, according to Carbon Finance. This represented 84 percent of the world's carbon market in terms of value and 78 percent of its volume. Carbon trading in the U.S., on the other hand, made up only 3.7 percent of the trading volume and 1 percent of the value of the global carbon market. According to CME's Warsager, though, "We're hoping to build some market share [in the U.S.] as we move forward with the Green Exchange."

The CME isn't the only institution hoping to capitalize on carbon credit trading in the U.S. But what are the barriers to entry to this new market? At Evolution Markets, a White Plains, N.Y.-based voice brokerage for environment and energy products, the trading floor is as noisy and chaotic as any commodities trading room. According to firm spokesman Evan A. Ard, the technology required for carbon credit trading is no different from the technology required to trade other commodities.

Jubin Pejman, VP, Americas, for Trayport, whose energy commodities trading and order matching software is used by 13,000 traders and many investment banks and utilities in Europe and the U.S., agrees that carbon futures trade like any other type of futures contract. "You have hedge funds speculating, you have industrials buying them, you have brokers," he says. "At any futures exchange around the world, it's the same type of breakup. From a technology standpoint, there's a matching engine, there's risk management, there's margin management, there are counterparties, there's clearing. BlueNext, for example, looks very much like other futures exchanges."



BlueNext's Allen, however, points out one big difference between carbon emissions contracts and other commodities: "If you've got a spot market for oil or grain, you physically deliver that oil or grain to the buyer," he explains. "You don't roll up in a giant truck and deliver 15,000 tons of carbon dioxide."

Regional carbon futures contracts in the U.S. tend to be processed manually or through voice trading. "Europe is about 10 years ahead of the curve as far as technology for energy emissions trading," Trayport's Pejman says. He explains that large European financial firms have their own carbon trading platforms; smaller entities turn to third-party solutions such as Trayport's platform.

But, Citi's Edward says, in terms of technology and compliance, carbon trading should not be difficult for many U.S. firms because emissions trading in the U.S. has been around for more than a decade. The same IT processes, management systems, accounting systems, and even risk management and hedging systems will work under the new carbon credit trading scheme, he points out. "We're not introducing something that's conceptually dramatically new and untried in the U.S.," Edward notes.

BlueNext's Allen says the exchange will publish a how-to book by the fourth quarter to help small and medium-size firms get involved in carbon trading. (Hearing this, Trayport's Pejman jokes that the book will be made out of Styrofoam.)

The Future of U.S. Carbon Trading

Even as firms build out their carbon credit trading capabilities, the market is expected to reach significant levels fairly quickly. President Obama has predicted that about $646 billion worth of carbon credits will be auctioned in the first seven years of the mandatory cap-and-trade system in the U.S.; others have suggested the number could be two or three times that. To the novice onlooker, this would suggest a healthy rate of carbon credit market growth.

But Citi's Edward demurs. "The actual volume of allowances issued is not necessarily what drives liquidity and price," he says. "It is the ambition of the target that drives activity."

According to Edward, the U.S. experience may mirror the EU's emissions trading system, which, he says, is similar in size in terms of covered installations and required emission reductions. "The EU turns over close to a half-billion dollars' worth of allowance transactions a day, so that may be a reasonable expectation for the U.S.," Edward comments.

The Waxman-Markey bill currently would take effect in 2012; the Senate may postpone this start time to 2013. Still, "We'd expect trading to take place far in advance of that first compliance year," Edward says. "That's the normal case with environmental trading systems -- companies that dispatch power generation or refineries need to hedge in advance their emissions exposure; they need to lock in the margins around running their plant, and that requires them to buy the allowances in advance." If the first compliance year is 2013, Edward says, he would expect early trading to begin in 2010.

Trayport's Pejman notes that once the legislation is passed, there will be a race to the market. "Whoever is already in production will have a tremendous advantage over those that are scrambling to get ready," he asserts.

But what if the Senate doesn't pass this bill? "That would change everybody's plans," BlueNext's Allen concedes. "I like the Woody Allen joke: 'How do you make God laugh? Write down your plans.' "

Investing for Income: MLPs (WSJ)

JULY 18, 2009
Master Limited Partnerships Have Benefits, Risks
By KELLY GREENE

I am semiretired and have started to invest using a self-directed IRA. I also have started to invest in Master Limited Partnerships, mostly pipeline companies, within my IRA. The yields are very nice, and the share values appear to be increasing. It seems that MLPs are too good to be true. There must be a downside. Do you have any suggestions on the downside risks?

—Rick Herbold, Hingham, Mass.

Some financial planners are using, as the reader above is, master limited partnerships, or MLPs, to diversify retirees' portfolios, provide dividend income and try to hedge against inflation. And, yes, there are risks involved.

MLPs are typically limited partnerships that are publicly traded on a U.S. securities exchange. (You can invest in limited partnerships that aren't publicly traded, but the four experts we interviewed didn't recommend doing so.) As of last November, the U.S. MLP market was valued at more than $100 billion, according to a report by Standard & Poor's. You can read it online at www2.standardandpoors.com/spf/pdf/index/MLP_Primer_Nov2008.pdf.

Many MLPs are in the pipeline business, which may protect them somewhat from the energy industry's volatility. "You get paid for the volume going through the pipe, so the cost of the gas doesn't affect you," says Steven Stahler, a certified financial planner in Baton Rouge, La.

James Shelton, chief investment officer of Kanaly Trust Co. in Houston, started buying MLPs last fall. "The yields are still very attractive, and a lot of these MLPs are below highs they reached a year ago," he says.

Mr. Shelton favors three MLPs: Kinder Morgan Energy Partners LP, Enterprise Products Partners LP, and Plains All American Pipeline LP. "We're looking for these 9% stable yields where the dividend is going to grow over time."

Mr. Shelton says he avoids MLPs with "significant commodity-price risk in their business models."

As for the downsides, in throes of the credit crunch late last year, many MLPs fell in value amid fears that they could lose access to capital needed for expansion. So, if lending tightens further, MLPs could take a hit. What's more, if the economy worsens, "that theoretically could reduce the demand for the energy products [the projects] are transporting," Mr. Shelton says.

Also, some smaller MLPs are traded thinly. "When you need to move it, you're going to suffer a pretty significant decline," Mr. Shelton says.

When held in taxable accounts, MLPs provide some attractive tax advantages. Because of its structure, an MLP gets to pass its depreciation of assets and expenses through to investors, who may be able to use the pass-through expenses to reduce or eliminate the tax on the income received from that particular investment, Mr. Stahler says.
But you would lose that tax advantage by holding MLPs in a tax-deferred individual retirement account, and you have to pay ordinary income tax on any distributions you eventually take, says Ed Slott, an IRA consultant in Rockville Centre, N.Y.

And if an MLP investment generates what is known as "unrelated business taxable income," which is likely, the IRA has to file a separate tax return and pay any tax involved from assets in the account, Mr. Slott says.

There are two possible fixes.

First, you may want to consider converting your traditional IRA to a Roth so that you don't have to pay income tax on future earnings (subject to Roth holding rules). However, your account could still be subject to unrelated-business income tax, Mr. Slott says.

Another solution would be to make future investments in "closed-end" funds that invest in a number of publicly traded MLPs, says Mr. Stahler, who has used such funds for retired clients with large IRAs. Such funds aren't subject to the unrelated-business income tax, but still could benefit from potential returns. One example is Fiduciary/Claymore MLP Opportunity Fund, which was yielding more than 8% earlier this week.

Write to Kelly Greene at kelly.greene@wsj.com

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

How to Create the Next Bull Market ( WSJ Opinion)

OPINION
JULY 15, 2009
The Bernanke Market
We won't get real growth until Congress and Treasury get policy right.

By ANDY KESSLER
I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.
Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.
Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.
Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

Latest Downgrades to Junk - Fallen Angels (Bloomberg, WSJ)

‘Fallen Angels’ Jump to Third-Highest Monthly Total, S&P Says


By Megan Johnston

July 13 (Bloomberg) -- Fifteen companies lost their investment-grade ratings in June, the third-highest monthly tally since 1987, according to Standard & Poor’s. With rankings for two additional issuers cut to junk status, the number of “fallen angels” climbed to 60 this year with a combined debt of $209.2 billion, S&P analysts led by Diane Vazza in New York said in a report today.

The tally of borrowers downgraded last month to junk, or below BBB-, ranks behind the 19 issuers cut to junk during the Asian financial crisis in December 1997 and the 17 whose credit ratings were reduced in March, S&P said.

The largest fallen angel this year is CIT Group Inc., the New York-based commercial lender that has been unable to persuade the government to back its bond sales, with $38.2 billion in rated debt, S&P said.

Moody’s Investors Service slashed CIT’s credit rating four levels to B3, from Ba2, and said the ranking may be cut further because of the company’s “inadequate progress” toward improving its liquidity, according to a statement today.

An additional 75 issuers with combined debt of $255.2 billion are at risk of losing their investment-grade ratings, S&P said.

“Not surprisingly, many of the sectors represented on the potential fallen angel list -- such as consumer products, forest products and building materials -- show a high preponderance of negative bias,” the S&P analysts said in the report.

To contact the reporter on this story: Megan Johnston in New York at mjohnston17@bloomberg.net

Last Updated: July 13, 2009 14:12 EDT



Standard & Poor's said the number of issuers downgraded to speculative grade last month was the third highest monthly tally since it started keeping track of the figure in 1987.

Fifteen entities were cut to junk territory in June, and with two more added so far this month, the year-to-date tally has jumped to 60 issuers, with rated debt of $209.17 billion affected.

Finance companies lead this year's so-called fallen angels with 10 so far, followed by banks at nine and utilities with six.

S&P said 75 issuers currently exhibit fallen-angel potential - entities rated BBB- either on watch for downgrade or with a negative ratings outlook. Those firms have $255.22 billion of rated debt. Banks still lead the list of companies vulnerable to being cut to junk, with 15 companies, followed by consumer products and insurance with eight apiece and utilities at six.

Struggling U.S. commercial lender CIT Group Inc. (CIT), which could soon file for bankruptcy protection, tops the list as the largest fallen angel so far this year based on debt volume, with $38.19 billion in rated debt.

Besides CIT, other new fallen angels include insurance holding company Ambac Financial Group Inc. (ABK), French auto maker Renault SA (RNO.FR) and U.S.-based bank holding company Whitney Holding Corp. (WTNY).

The Republic of Hungary is the largest potential fallen angel this month, S&P said, with $53.99 billion in rated debt.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com

When to take Social Security? It can pay to wait (NY Times)

July 11, 2009
Collect Now, or Later? Timing Your Social Security Benefits
By TARA SIEGEL BERNARD
Collecting Social Security as soon as you are eligible is a tempting proposition — but experts agree you should try to resist if you can.

The majority of people don’t follow that advice, choosing instead to start benefits early. Why wait to collect what is rightfully yours?

That logic may sound reasonable now. But in reality, the bigger risk is that you will live to a ripe old age. You can claim Social Security any time from age 62 to 70, but the longer you wait, the larger your monthly check. And many people come out ahead if they wait at least until their full retirement age, which is different from the day you stop working for good. For people born 1943 to 1954, full retirement age is 66, and it creeps up for younger people.

What do you stand to lose by taking benefits early? Take those who are set to receive $1,000 a month at their full retirement age. If they sign up for benefits at age 62, they will collect only $750. But if they wait until 70, they will earn extra credit and receive up to $1,320 a month — nearly a third more.

At first glance, it seems that everyone should wait until they are 70. But that is not the case. The answer depends on many factors, including when you stop working, how much you have in savings, whether you are healthy, whether you are married or single and whether your spouse earns more — or less.

It may be impossible for some households to wait because the breadwinner has lost a job or is no longer able to work. And planners agree that it is smarter to collect earlier if it will prevent you from accumulating debt.

But if you can wait, think of the money you aren’t receiving during that period as a payment of sorts for an annuity that will pay a higher, guaranteed stream of income later, if you live a long time (or at least longer than your savings last), financial experts say.

“You can’t buy an inflation-adjusted annuity for anywhere near the cost of delaying Social Security,” said Henry Hebeler, a retired Boeing executive who created AnalyzeNow.com, a Web site that offers retirement advice and calculators.

For people who choose to defer benefits until age 66, it generally takes about 12 more years to collect as much as if you started getting checks at 62. So you break even, so to speak, about age 78, according to Avram Sacks, a Social Security law analyst for CCH, a tax and accounting information service. “If you are in good health, and you expect to live to 78 or longer, then the advantage goes to the person who waits,” he says. “But that’s assuming we’re all prophets and we know what’s going to happen tomorrow, and we don’t all know.”

And that is why financial advisers recommend planning for a long life. Here are some strategies to consider before signing up.

SINGLES Figuring out when to collect is easier when you do not have to worry about how your actions will affect a spouse. It usually pays to wait until your full retirement age if you can support yourself until then. (This obviously does not apply to people who are already in poor health and probably won’t live past 78, give or take a couple of years. People who are still working should also defer.)

Though many experts will tell you to delay as long as you can, waiting from 66 until 70 may not be optimal for some singles. “The reason is that they will have consumed too much of their savings in those extra four years to be able to offset the savings loss with higher Social Security payments within their lifetime,” said Mr. Hebeler, who has also written three books on retirement. “It’s surprising, but that’s what the analysis shows.”

Consider a single person with $200,000 in savings returning 5 percent a year. Instead of taking Social Security at age 62, she withdraws $19,000 annually until she turns 66. Her savings will last until age 94, but she will still have $21,000 a year in Social Security benefits. If she claimed at 62, her savings would run out at age 87 and she would be left with only $16,000 a year in Social Security.

For people with significant savings who expect to live well into their 80s, it may make sense to wait until 70, Mr. Hebeler added.

If you have already started receiving benefits, but wish you had waited, you are allowed to give it all back and start over. But this gets complicated. You will probably have to pay back more than what you actually received each month, since Medicare premiums and income taxes may have been deducted. Married people can do this, too, but some advisers caution against it.

MARRIED COUPLES Planning is more complex for married couples because there are age differences, varying retirement dates and earnings and other factors to consider. In many cases, the higher-earning spouse should delay his or her benefits until age 70, while the lower earner begins to collect at age 62. This ensures that the surviving spouse will end up with the maximum amount of benefits for the rest of his or her life. Even if the higher earner died before age 70, the survivor’s benefits would be bumped up to what the deceased spouse would have gotten, said Lesley J. Brey, a fee-only financial planner in Honolulu.

But once the higher earner hits full retirement age, there is a way for the lower earner to potentially get a bigger check by qualifying for spousal benefits. The higher earner can “file and suspend,” or file for benefits but immediately suspend them — it is perfectly legal and allows the lower-earning spouse to get up to half the higher earner’s benefits, while the higher earner’s benefits continue to accrue.

“This is the way to get the most out of the system without jeopardizing the longevity insurance aspect, which is the most important component,” Ms. Brey said. “You want the last survivor to have the highest possible payment. However, you get cash flow, which reduces the amount you have to withdraw from other sources and you don’t have to guess when anyone is going to die.”

But if the couple can afford it, should the lower earner wait until full retirement age? “It doesn’t matter because the goal is to get the most money for the person who lives the longest,” Ms. Brey said.

Married people with similar earnings may also consider another strategy. Here, one person claims spousal benefits at full retirement age and switches to his or her own, and presumably higher, benefits later, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College.

To get a more precise idea about how to maximize your benefits, go to the Social Security’s retirement estimator, which uses your actual earnings record in its calculation. (Click on “create scenarios” to how retiring at different ages affects benefits). AnalyzeNow.com offers calculators that will help determine the best time for singles and couples to take Social Security.

If figuring it all out on your own proves too difficult, have a financial planner run the analysis for you. “It is worth it,” Mr. Hebeler said, “to spend the money.”

Working, Medicare and Social Security - When You Need to Sign Up (from WSJ)

How to Navigate Medicare if You're 65 and Working

By KELLY GREENE

I am currently employed full time and have been with the same employer for more than 10 years. My employer pays 100% of my health coverage. I will be 65 in September and know that I must make a decision regarding Medicare as soon as possible. But I don't know if I have to sign up. I have no plans to retire. Do I sign up for Part A or Part B? I don't know how that interacts with my present health coverage.
—Angie Bradford, Charleston, S.C.

I am continuing to work and have a health savings account. I will turn 65 in September. I am told I will incur a penalty if I don't enroll in Medicare Part A. But if I do enroll in Part A, I can no longer contribute to my HSA. Do you know an answer to this?
—Peggy Boehm, Indianapolis

As long as you are still insured through your job or your spouse's, there is no penalty for delaying Medicare coverage when you become eligible at age 65. But you need to make sure your coverage will stay the same when you turn 65.

Medicare has four parts: Part A, which mainly covers hospital care; Part B, covering outpatient care including doctor visits; Part D for drug coverage; and supplemental policies that generally pay uncovered bills.
There isn't a charge for signing up for Part A, as long as you have worked for at least 10 years in Medicare-covered employment, so in most cases you should take it. (More on that below.)
If you enroll in Social Security, you generally are enrolled in Part A automatically when you turn 65. But if you aren't collecting Social Security yet, you need to sign up for Medicare Part A at some point in the window of three months before your 65th birthday through the three months following your birthday. There is enrollment information at socialsecurity.gov. If you sign up for Social Security, you should get a copy of the Medicare handbook, "Medicare & You," in the mail shortly before you turn 65. If you don't sign up for Social Security, you can download the handbook from medicare.gov or request it by calling 800-633-4227.To decide whether to take Part B, which has a monthly premium of at least $96.40 this year, you need to find out how your employer-sponsored coverage works with Medicare. If your employer insurance would become secondary to Medicare, you generally should take Parts A and B. If your employer coverage remains primary, you generally wouldn't need Part B. There isn't a penalty for waiting to sign up for Part B until your employer-sponsored insurance ends. (There is a special enrollment period in that case, described in the Medicare handbook.)
As for Part D, which is drug coverage, you need to find out from your employer whether your coverage is what Medicare considers "creditable." (Such coverage, according to Medicare, "is expected to pay, on average, at least as much as Medicare's standard prescription drug coverage.") If your coverage is creditable, there isn't a penalty for waiting to sign up until after your coverage ends (as long as you meet Medicare's deadlines for doing so).
Health savings accounts, the subject of the second question above, let people with high-deductible health-insurance plans save pretax money to cover medical costs, invest the assets in the meantime, and pay no taxes on withdrawals as long as the money is used for qualified medical expenses. It is true that if you sign up for Medicare, you can no longer contribute, says JoAnn Laing, head of Information Strategies Inc. in Ridgefield, N.J., which runs HSAfinder.com.
So, if you want to continue contributing to an HSA after age 65, you shouldn't sign up for Medicare Part A (or any other parts). You are allowed to delay enrollment in Part A if you also delay Social Security, Ms. Laing says.
Make sure your employer will let you keep your plan. Group health plans of employers with at least 20 workers have to do so, Ms. Laing says.

Write to Kelly Greene at kelly.greene@wsj.com

Do Tax-Free Bonds Make Sense for You ? Depends on Income (from investinginbonds.com)

TAXABLE EQUIVALENT YIELD FOR MUNICIPAL BONDS 2009 FEDERAL TAX BRACKETS

Municipal Bond Default ( Bloomberg )

Subprime Finds New Victim as Muni Defaults Triple: Joe Mysak


Commentary by Joe Mysak



May 30 (Bloomberg) -- The amount of municipal bonds that have defaulted this year is already more than triple what it was for all of 2007.

And who could doubt there's more bad news on the way?

So far this year, $736 million in municipal bonds have defaulted. That doesn't necessarily mean they didn't pay investors; they may have just drawn down reserves. That's what happens just before they stop making payments to bondholders.

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the ``Distressed Debt Securities'' newsletter, published in Miami Lakes, Florida.

That $736 million is nowhere near the record for municipal bond defaults, to be sure. The record year, if you're counting, was 1991, when almost $5 billion went bust. That's still small potatoes compared with what happens over in the corporate-bond market, where $36.6 billion blew up in 2006, and almost $24 billion in 2007.

But wait a minute: Municipal bonds never default, do they? Or at least this is how they are perceived by individual investors, right?

We're probably going to see a lot more munis default this year and in the years to come, because of the subprime crisis and maybe, just maybe, because of the high price of a barrel of oil.

New Residents

The hangover from the collapse in real-estate prices is going to be a boom in so-called dirt-bond defaults.

These are bonds sold by municipalities to build the infrastructure for housing developments, and are backed by the taxes paid by all the new residents who are going to move in. If no residents move in, or too few do, the bonds aren't repaid.

Of the 30 bond issues that have defaulted so far this year, more than half are from issuers in two of the states that have figured prominently in all tales of the housing bust: 10 in Florida and seven in California.

Consider the $50 million in special assessment bonds sold by the Monterra Community Development District in Broward County, Florida, for example. On May 7, the district disclosed that it had tapped its $1,279,200 reserve fund for $1,211,727.11.

You can just stop right there and know that this story is bound to be a sad one.

These particular bonds were sold by the district in 2006 in a limited offering. The bonds were unrated, and sold in minimum denominations of $100,000. The bonds carried a 5.125 percent coupon due in 2014, and were priced to yield 5.198 percent.

Remember Colorado
The Monterra development is located in Cooper City, which is about 20 miles north of Miami and has a population of almost 30,000. Of the 10 Florida bonds that defaulted this year, all were sold by community development districts, and all within the last four years.

The big jump we are going to see in the number of such municipal bond defaults this year won't be limited to Florida and California, but will include all those places where the high tide of real-estate mania has now receded.

This isn't an uncommon phenomenon after housing busts. In the past, the damage was usually confined to certain states where the boom was craziest, such as Colorado in the 1980s.

More bondholders are going to be affected this time around because the housing collapse is more national rather than regional or isolated, and because of the relatively recent development of so many ``exurbs,'' as chronicled, for example, by New York Times columnist David Brooks in his 2004 book, ``On Paradise Drive.''

Three-Hour Commutes

These are the suburbs beyond the suburbs, where Americans have moved to enjoy the good life, commute (usually) be damned. Not too long ago, the newspapers seemed to be filled with stories about people who gladly commuted two and even three hours each way for affordable real estate. Most people knew actual examples of such hearty souls. I wonder how much gasoline at $4-plus a gallon will dent the growth, and tax base, of such communities.

It's not just the price of gasoline that is going to make the nation's many far-flung communities less attractive. On May 28, Bloomberg carried a story detailing how the increase in the price of jet fuel was causing airlines to curtail service throughout the country.

Maybe we'll have to reconsider this whole flight-from-the- coasts idea that got such attention a few years ago.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

Last Updated: May 30, 2008 00:01 EDT