Nationwide Survey Long Term Care Costs (So Fla Bus Journal)

Wednesday, October 28, 2009, 10:01am EDT
Miami outpaces nation in long-term care costs
South Florida Business Journal - by Brian Bandell

The average cost of nursing home care and assisted living increased by 3.3 percent in 2009 with the costs of long-term care in the Miami area once again exceeding the national average.

According to a survey by the MetLife Mature Markets Institute, the national daily cost of a private nursing home room is $219 this year, up from $212 in 2008. That compares to $225 in Florida and $235 in Miami.


The most expensive state for nursing home private rooms was Alaska at $584 a day. Louisiana was the cheapest at $132 a day.Nationally, the average monthly cost for assisted living increased to $3,131, from $3,031 in 2008. In Florida, the average was comparatively low at $2,768 a month. But it was up to $3,220 a month in Miami.

Assisted living costs ran the highest in Wilmington, Del. At $5,219 a month and were the lowest in North Dakota at $2,041 a month.
“While the Consumer Price Index decreased overall during the past year, costs for medical care are 3.3 percent higher, which parallels our findings on long-term care,” Sandra Timmermann, director of the MetLife Mature Market Institute, said in a press release. “The change in pricing methods at some assisted living communities may be another factor, a warning to consumers to carefully compare prices at all long-term care service facilities by considering both the base price and the add-ins for additional services."

The report also looked at adult day care services daily costs. In Florida, the average price was $61 a day. Miami came in at just $49. Both were lower than the national average of $67 a day.


Full report at http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-market-survey-nursing-home-assisted-living.pdf

 

Tax Advantaged HIgh Yield MLPs (from WSJ)

HEARD ON THE STREET OCTOBER 26, 2009
The Investments for These Taxing Times

By LIAM DENNING

Worried about a depreciating dollar, rising taxes and stingy investment yields?

Try Master Limited Partnerships. MLPs are listed partnerships that typically invest in hard assets like oil and natural-gas pipelines. They pay no corporate tax and offer investors high cash distributions, most of which is tax-deferred.
And their recent performance is hard to beat. Since the collapse of Lehman Brothers, the Alerian MLP Index has actually made a slight gain, compared with losses for the S&P 500 and the wider energy sector. This is even more impressive when you consider the MLP sector's Achilles' heel. MLPs paid out an average of 72% of their funds from operations after interest charges in the second quarter, according to CreditSights. That doesn't leave much money to invest in growth, leaving MLPs reliant on liquid capital markets -- precisely what was missing this past year.

The thaw in financial markets eases this pressure, as does the likelihood that the energy MLP sector's current capital expenditure cycle likely peaked last year.

All that previous infrastructure construction tees up future growth. Yves Siegel of Credit Suisse estimates the sector is currently yielding 7.8% and should boost distributions by 5% this year, offering juicy total returns in the range of 8%-12%.

The most attractive prospects are MLPs like Boardwalk Energy Partners that are heavily weighted to natural-gas transportation assets. These should benefit from long-term growth in demand for the fuel. And since their income is tied more to fees for pipeline capacity than throughput, they're insulated from the current weakness in natural-gas demand. With interest rates on the floor, you could do worse than seek refuge in a pipe.

Write to Liam Denning at liam.denning@wsj.com

Printed in The Wall Street Journal, page C8

Commodity Plays on Electric Cars: Lithium

MONDAY, OCTOBER 12, 2009
COMMODITIES CORNER


Hybrids Drive Lithium Miners
By SHANE ROMIG | MORE ARTICLES BY AUTHOR
Lithium, the next big thing for car batteries, spurs mining plays

THE PUSH TOWARD ELECTRIC-CAR development in the U.S., Europe and Japan is fueling a mad dash to lock in lithium-mining rights high in the Argentine, Bolivian and Chilean Andes. Lithium is a key ingredient in the batteries that fuel electric and hybrid cars, and nowhere is there so much of the light, charge-holding metal as in the South American mountain range. What's more, as much as 90% of the world's known lithium brine -- in which the metal is in a relatively accessible dissolved state, rather than locked in stone -- is said to be in the region's salars, or salt lakes, in Argentina's Puna Plateau.
Already, well over half of the world's lithium output comes from mines in Chile and Argentina run by Sociédad Quimica y Minera de Chile (ticker: SQM); Chemetall Foote, a subsidiary of Rockwood Holdings (ROC); and FMC (FMC).While the U.S. has pledged $2.4 billion in stimulus spending on advanced battery technology, companies from Japan, Korea and China have been busy courting Bolivia's President Evo Morales to lock in supply deals from the Salar de Uyuni salt flats. In June, a consortium of Japanese companies, including Mitsubishi (MSBHY), Sumitomo (8053.Japan) and Japan Oil (9074.Japan) made a preliminary proposal to begin mining lithium, but Bolivia says it wants to see more domestic processing on-site before it will consider granting concessions. And in August, South Korea's state-run Korea Resources Corp., or Kores, said it had signed a memorandum of understanding with Bolivia's state-run miner, Comibol, to jointly study lithium-mine development.
THE RACE IS HOTTEST IN ARGENTINA. Dozens of junior exploration companies and speculative investors are betting big on the lithium-brine deposits there. New York-based research firm Hallgarten & Company analyst Christopher Ecclestone recommends taking a long, speculative position in two lithium leaders in the region, Orocobre (ORE.Australia) and Latin American Minerals (LAT.Canada). "They're pure-play," he says. Farthest along is Orocobre, which hopes to start construction on its Olaroz project in 2011. Latin American Minerals has locked in the rights to 93,000 hectares and is currently analyzing the results from a sampling program. Australia's Admiralty Resources prepped the massive Rincon project, but a Cayman Island-based entity controlled by the Sentient hedge-fund group snapped it up last year for the fire-sale price of around $27 million.
With expectations for booming demand, lithium users are banking on the South American miners. "While demand for refined lithium should continue to increase as electric-vehicle penetration improves, we expect supply to easily keep up," says Aimee Gordon, a spokeswoman for rechargeable-battery maker Ener1 (HEV). But some worry that a flood of new suppliers rushing to get lithium to market may pressure prices. (Lithium is not yet traded on a commodities exchange.)
In fact, Chile's SQM on Sept. 30 announced it was cutting prices for lithium carbonate and lithium hydroxide by 20% for new supply contracts to "accelerate demand recovery." That doesn't faze Orocobre's chief executive, Richard Seville, who says: "I don't think there is any risk of oversupply, as most of the projects [being talked about now] won't end up going into production."
________________________________________
SHANE ROMIG is a reporter for Dow Jones Newswires in Buenos Aires.
________________________________________

Investing in Water (Hard Assets Investor)

Water: The Ultimate Commodity
Written by HardAssetsInvestor.com
Sunday, 04 November 2007 19:07

We all need water to live. As useful as oil, copper and corn may be, we could get by without them for a while. But water? Water is a necessity. And for some, this makes it the ultimate commodity.

People invest in commodities for a lot of reasons: for diversification; as a way to play growth in the developing world; because they think demand growth will outstrip supply.

By those metrics, water may be the ultimate commodity investment. Demand for water is steady and never-ending, meaning water investments should not be correlated with broader economic developments. Meanwhile, history shows that as economies develop, citizens will demand more and more water to support richer lifestyles, making water an interesting play on countries like China and India. And finally, the world is in a silent water crisis, with rising demand set against limited supply; a classic commodities squeeze.



Water Crisis

The world currently faces a water crisis of both supply and demand.

We're taught to think that there's plenty of water: 75% of the earth's surface is covered with it. The problem is, most of that water is useless: 97% is seawater, 2.5% is frozen in the ice caps, and just 0.5% is fresh and available for use. Worse, much of what remains is contaminated, polluted or otherwise degraded, and not fit for consumption.

On the demand side, water needs are growing ... fast. The world's population growth provides an underlying pressure on demand, while growth in the developing world accelerates that demand curve dramatically.

Meeting this global crisis from a fixed supply will involve massive expenditure, and it will be the companies that clean, support, supply, reuse and save water that will benefit from this flow of capital.

Supply

As if the problem of a fixed supply were not enough, there are three further major supply problems affecting the world's water situation.

First, the distribution of existing water resources around the world is horribly uneven: 60% of the world's fresh water is located in just nine countries. And unlike many commodities, water isn't portable; it simply doesn't make economic sense to transport water from (say) Canada to (say) China; water, even if its value rises tenfold, is simply too voluminous.

Second, where water is actually available, it is often not available in a suitable form. It may, for instance, be either too hot or too old, or, perhaps, too dirty or too salty. Increasingly, it's also too polluted; in the U.S., the gasoline additive MTBE has rendered a significant percentage of wells unfit for human consumption.

Third, in developed countries, where water is generally available as needed, the infrastructure supplying it is old and decaying. Estimates of how much a country like the U.S. must spend upgrading its water infrastructure over the next 20 years measure in the billion.

Demand

Population growth and economic growth are the two biggest drivers of demand. On the one hand, as population numbers increase, so does the demand for potable water. On the other, as economies grow, so does the demand for water for use in both agriculture and industry: the richer people get, the higher they live on the water food chain. The U.S., for instance, is the world leader in water consumption per capita, largely because we live such a rich, luxurious lifestyle.



Water: The Business Activities

While the case for investing in water, as a theme, is compelling, the question remains of how actually to go about making such an investment.

Unfortunately, unlike many other strategic commodities, water is not yet traded on any exchange. Indirect investment, therefore, remains the only option available to investors; that is, investment in those companies in a position to provide solutions to the water crisis. Estimated by some already to be worth $450 billion a year[1], the water and water treatment industry is predicted to grow to some $650 billion in the next 20 years.[2]

The current major investment options are:

Utilities

The job of water utilities is to deliver the actual water to the consumer. Most water in the world is delivered through utilities.

In the U.S., there are a number of large such companies, for example California Water Services Group (NYSE: CWT) and Aqua America (NYSE: WTR), and myriad small ones. Continued consolidation and rising water values are the key to profits in these markets.

Historically speaking, water utilities have provided consistently strong returns, and these companies remain respected as steady, low P/E and high-yield stocks.

In addition to the current crisis, the further privatization of public water utilities globally will also offer established utilities the opportunity for water utilities to grow their businesses.

Water Treatment

The greatest innovations in the water industry are to be found in the field of water treatment. The three most important technologies are:

Wastewater treatment (whether industrial or domestic) - a market worth more than $200 billion a year - with such players as the French companies Veolia and Suez and the U.S.-based NALCO.
Filtration and chemical treatment, with pure-plays like Calgon Carbon and the involvement of such large entities as ITT and General Electric.
Desalination, an arena in which, again, General Electric plays, together with others such as Dow Chemical and Singapore's Hyflux.
Each of these sectors has a key role to play in solving the water crisis, and each will benefit from efforts to solve the crisis.

Infrastructure

Currently a $50 billion sector, infrastructure companies make their business from making and supplying equipment - for example, valves, pumps and pipes - and servicing the water utilities - for example, digging wells and irrigation canals. In addition, there are companies that both make and supply the systems to actually monitor, measure and meter water use ... increasingly important as the value of water grows.

Once again ITT and General Electric are to be found in this space, but so, too, are a number of smaller specialized companies based both in the U.S. and Europe, such as Badger Meter - a leading provider of residential water meters.



Investing In Water

Companies active in the business of water can be categorized not only by activity, but also by their structure.

The behavior of the small, specialized, often technology-based, companies can be akin to that of any other technology stocks. In contrast, companies like Suez and Veolia are essentially just huge utilities, and behave according. Finally, large conglomerates like General Electric are also major players in the market.

Although there has been considerable consolidation, across its breadth the industry remains highly fragmented, with some very large players and a slew of mid-size and smaller players. As a result, and with the large role that conglomerates play, developing a coherent water-themed investment strategy is challenging.

There are now, however, several water-sector tracking indexes available to help address just this issue: the ISE Water Index (HHO), the Palisades Water Indices (PIIWI and ZWI) and the S&P Global Water Index (SPGTAQUA). Backtested data on each of these stocks shows water has been a strong-performing theme already; moreover, water stocks have had only a weak correlation to the S&P 500, and have been negatively correlated with other commodities, making them a strong diversification option for new portfolios.

These indexes are currently ‘investable' through four different exchange-traded funds, or ETFs: First Trust ISE Water (FIW), Powershares Global Water (PIO), Powershares Water Resources (PHO) and Claymore S&P Global Water (CGW).



Conclusion

Water is the most important commodity in the world, and it is a commodity ‘in crisis.' As the world's population grows, and as the emerging markets develop, ever more water is needed and commensurately less is readily available. For companies that find, extract, clean, supply, reuse and save water, business opportunities are, therefore, set only to multiply. Consequently, for investors, water as a theme, commodity and a sector provides a unique and exciting investment opportunity.





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[1] "The Global Water Market: A Slow Business With Pockets of Action." Global Water Intelligence. Issue 10, Oct 2007. 30 Sept 2007

[2] Water and Waste Water Markets Worldwide Increase to Over 650 Billion US $ by 2025. More High Tech. Helmut Kaiser Consultancy. 12 Jul 2007. 30 Sept 2007 http://www.prlog.org/10023705-water-and-waste-water-markets-worldwide-increase-to-over-650-billion-us-by-2025-more-high-tech.html

Investing in Food (Barrons)

MONDAY, OCTOBER 19, 2009
UP AND DOWN WALL STREET



A Whiff of Reality By ALAN ABELSON


.........What especially piques his interest in ag is that voracious consumer of everything, China. And, more specifically, that nation's likely problems in securing enough grain to meet the explosive growth in demand it's destined to experience in the years ahead. For, Dylan notes, as countries become more industrialized, which is happening by leaps and bounds in China, their citizens' consume more protein. In particular, rising incomes and urbanized lifestyles invariably lead to higher meat consumption, which, of course, means higher grain demand.
China, he points out, has 22% of the world's population (which is one heap of a lot of mouths to feed) but only 8% of the planet's arable land and 7% of its water. It has been losing nearly 1,400 square miles to desert every year, and industrialization has been taking an increasingly big bite, as well.

Meanwhile, water is becoming a major headache, and one needn't be an old farm hand to know that it's tough to grow anything, even cactus, without H2O. Using World Bank data, Dylan reports that half of China's cities face water problems, most of its fresh water comes form Himalayan glaciers, which have been disappearing (climate change, anyone?), and tillers of the soil are being forced to drill for new sources that frequently prove unsustainable.

All of which underscores the likelihood that China will need huge imports of grain to satisfy inexorably rising demand. However, global grain inventories hover around record lows, despite bumper harvests the past two years, and agricultural markets remain tight, Dylan observes, highly sensitive to virtually any kind of disruption.

The simplest way to invest, Dylan offers, is one of the grain indexes or ETFs. That approach has the advantage of being the purest way of gaining exposure, provides liquidity and, as a bonus, if you're worried about the long-term consequences of recent easy money and stimulus and all that, rates as a decent inflation hedge.

Personally, he prefers investing in equities and, further, in the equities of companies "whose business is to boost agricultural productivity." While he allows as he's aware of the advantage of buying indexes, he shies away from doing so because "you risk being saddled with a load of stocks whose business models you don't understand or whose valuations you don't like. So rather than buying the universe of agricultural stock, why not instead buy the value stocks within that universe?"

He has a few straightforward rules on how investors should uncover those value stocks. To wit: The shares of a company whose operations earn only the cost of capital isn't adding any value and should sell no higher than book value. A stock should trade at a discount to book if its operations return less than the cost of capital because it is destroying value. And a stock of a company with a very high return on equity should see that high return capitalized by the market at a premium to book value.

Any commodity bull market, he reflects, "is in its essence a bottleneck, and mankind has a good track record of figuring out ways around such bottlenecks." So buying companies whose business is to boost agricultural productivity, and buying them on the cheap, he believes, will furnish decent returns regardless of what happens to grain prices. Obviously, if commodity prices go up, so, as night follows day, will returns.

Adorning Dylan's analysis is a table listing various agriculture-related stocks, their return on equity and book value. He rates them according to how far the stock is from what he considers fair book value. The half dozen cheapest include Golden Agri-Resources of Singapore, Chaoda Modern Agriculture of Hong Kong, Yara International of Norway, Incitec Pivot of Australia, Global Bio-Chem of Hong Kong and Agrium of Canada. All are burdened by a slug more debt than the rest of the list, but their average return on equity is 25%.

The home team (in this case the U.S.) is represented by Bunge and Archer Daniels Midland , both selling at a discount to "fair book." Somewhat pricier is Mosaic , and even more so -- we'd say deservedly -- is Monsanto .

Tax Changes for 2010 - Tax Free 1035 Exchange (Smartmoney.com)

The Tax Guy by Bill Bischoff
Published September 30, 2009

Swapping Annuities Tax-Free

Barely a year since the Dow Jones Industrial Average marked its largest single-day drop in history, the memory of watching their savings evaporate still makes many folks shiver. It’s no surprise that interest in annuities is on the rise. These investments tout guaranteed income in retirement and, in the case of variable annuities, even promise market gains without the risk.

Tax-wise, the advantage of investing in annuities is you don’t have to report any of the accumulated income on your tax return until you actually receive a payout.

But when you surrender an annuity contract (or turn it in for cash), the general rule says you must report the entire difference between the cash received and your basis in the contract as ordinary income – at a federal tax rate as high as 35%. (Your basis equals your investment in the contract minus any basis included in earlier payouts. If you haven’t received any payouts, your basis equals your entire investment.) To add insult to injury, the income from surrendering an annuity before age 59½ will generally get socked with a 10% penalty tax, too. This unfavorable treatment will apply even to a variable annuity with accumulated stock and mutual fund gains that would have been taxed at low capital gains rates in a taxable brokerage firm account.

One way to get a tax-free deal is to exchange your existing annuity contract for another one. Why would you want to do that? Maybe you’re unhappy with the expense charges built into your current annuity and have found one with lower costs. Or you changed your mind about the type of annuity that best fits your needs. (Whatever your reasons, keep in mind that taxes are just one factor to consider with annuity swaps. For example, a tax-free exchange may not make financial sense if your current annuity still has surrender charges built in. So it’s best to run this decision by an independent financial advisor.)

Here’s what you need to know about swapping annuities without taking a tax hit.

The Basics
Section 1035 of the Internal Revenue Code allows you to exchange one annuity contract for another without triggering any taxable income. Note, however, that there must be an actual exchange of contracts for this tax-free treatment to apply, meaning that no cash should be passing through your hands. If you simply cash out the old contract and use the money to buy the new contract, it’s treated as a taxable surrender of the old contract.

Also, the old annuity contract and the new one must both be payable to the same person.

Even when you successfully arrange for a tax-free exchange, the insurance company that issued the old contract may send you (and the IRS) a Form 1099-R that reports in Box 1 the total amount paid out from the old contract. However, if the old company knows you made a tax-free exchange, Box 7 of the Form 1099-R should show Distribution Code 6 (indicating you made a tax-free Section 1035 swap). If the old and new contracts are both from the same company, there's no requirement to issue a Form 1099-R.

Exchanges Qualifying for Tax-Free Treatment
You can make a tax-free exchange of an annuity contract issued by one company for one issued by a different company.

You can also make a tax-free exchange of one type of annuity contract for another -- say a garden variety fixed annuity for a variable annuity or vice versa.

You can even make a tax-free partial exchange of one annuity contract for another contract by arranging for a direct transfer of a portion of the balance from the old contract to purchase the new contract. However, if you only exchange part of the old contract and cash out the rest, the cash-out part of the deal will be a taxable transaction. If you’re interested in making a partial tax-free exchange, please don’t pull the trigger before consulting with your tax adviser. (Tell him or her to check out IRS Revenue Procedure 2008-24 for the government's guidelines on how to accomplish a partial tax-free exchange.)

Starting in 2010, tax-free treatment will also be allowed for an exchange of an annuity contract for a qualifying long-term-care contract. That’s something to keep in mind for next year.

You’re also allowed to make a tax-free exchange of a life insurance contract for an annuity contract, but it’s a one-way street. You can’t make a tax-free swap of an annuity contract for a life-insurance contract. That would be treated as a taxable surrender of the annuity contract.

Taxes in 2010: Retirement Limits Stay the Same

Retirement Plan Contribution Limits to Remain Unchanged in 2010

The Internal Revenue Service has decided to keep contribution limits for 401(k)s, IRAs and other retirement accounts unchanged in 2010, rather than lowering them, as some had feared due to negative inflation. The Labor Department reported Thursday that the consumer price index has fallen 1.3% over the past 12 months.

Thus, the maximum amount workers can contribute to their 401(k) is still $16,500 with an additional $5,500 permitted for those 50 and older. IRA contributions remain at $5,000 for those under 50 and at $6,000 for those 50 or older.

Tax Changes for 2010 - Tax Free Long Term Care Annuities (Smart Money)

Long-Term-Care Annuities to Go Tax Free

Published October 13, 2009 Consumer Action by Diana Ransom

THINK SHELLING-OUT FOR your own home-health services, an assisted-living facility or nursing-home care may be in your future? Good news: Come New Year’s Day, these services can be yours tax-free.Thanks to the Pension Protection Act of 2006, starting Jan. 1, 2010, you’ll no longer have to pay federal income tax on an annuity’s proceeds — if you use those proceeds to pay for long-term-care coverage. That means that the chronically ill or disabled will no longer have to rely solely on a regular long-term-care insurance policy or Medicaid to fund their medical and non-medical care.
Considering that long-term-care costs are expected to reach $300,000 a year by 2030, up from $75,000 currently — and Medicaid only covers up to 75% of long-term-care costs — this is a welcome change, says Carl A. Friedrich, an actuary and principal at Milliman, a consultancy in Lake Forest, Ill. “The very fact that Congress enacted this legislation indicates a growing awareness by regulators that there is a fundamental need for long-term-care insurance,” he says. “Through this provision they’re trying to create better tax incentives to enable the industry.”
Although long-term-care annuities will soon look a lot more attractive, they’re not for everyone. By definition, annuities expire after a certain amount of time – whatever the length of the contract is. If you are sick for more than three years (called extended long-term care in the industry), a regular long-term-care insurance policy would be a better fit because that policy will pay indefinitely. Before you snatch up either, have a look at the following positive and negatives associated with long-term-care annuities:

The positives:“Beyond their newly favorable tax status, long-term-care annuities offer the flex appeal of having long-term-care coverage, but, if you don’t need it, you can get your money back,” says Jesse Slome, the executive director of the American Association for Long-Term Care Insurance in Westlake Village, Calif. In regular long-term-care insurance policies, payments are forfeited to insurance companies even if services aren’t utilized. But with an annuity, unspent funds belong solely to the account holder and can eventually be withdrawn. Those funds may also pass to beneficiaries in the event of death.
Long-term-care annuities also provide the ability to generate tax-deferred gains. This is a benefit particularly for those currently in high tax brackets who plan to be in lower brackets when they begin drawing down their accounts. And although gains used to pay for long-term-care needs will be tax-free starting Jan. 1, gains that don’t fund such services are still subject to tax upon withdrawal.
If you’re too ill to qualify for a regular long-term-care insurance policy, you might have an easier time getting coverage through a long-term-care annuity because there are fewer hoops to jump through. For instance, to qualify for a long-term-care annuity from Genworth Financial you have to fill out age and health status applications. But they ask you fewer insurability questions and there are no medical underwriting requirements, says Warren Jaffe, a long-term-care product development leader at Genworth.
The negatives:
The main drawback on long-term-care annuities is the length of coverage. If you don’t deposit enough upfront, your coverage may not last during an extended long-term-care situation.
Here’s how it works: Let’s say you deposit $50,000 into an annuity and you want $100,000 of long-term-care coverage for two years. That gives you just over $4,000 a month for 24 months. And although your long-term-care insurance will kick in after your $50,000 deposit is depleted, it cuts off at $100,000. So if you need further coverage, you’re out of luck with these types of accounts, says Slome. “If you have a long claim — outside of three years — you’re going to wish you had a traditional long-term-care policy because the typical annuity will not be anywhere close to sufficient,” he says.Jaffe from Genworth says that extension plans are available. However, they cost extra. The range is based on age and the selections chosen in designing your long-term-care coverage benefits, he says.
People who can’t afford to tie their money up for too long had better look for shorter-term bets. That’s because surrender fees — the penalty for tapping your cash too early — kick in on withdrawals within the first five to 10 years of owning an annuity, says Friedrich.
You’ll also need to have between $75,000 and $150,000 just lying around to get coverage in the first place, says Friedrich. Unlike purchasing a regular long-term-care insurance policy, in which you pay for coverage in monthly payments, buying an annuity with a long-term-care rider requires you to pay a lump sum upfront. “If your deposit amounts to less than $50,000, it’s not going to provide a very meaningful long-term-care benefit,” he says.

Stocks that Benefit from a Weak Dollar (Investopedia)

Stocks That Benefit From A Weak Dollar
Posted: Oct 12, 2009 09:23 AM by Sham Gad

There's a lot of talk today about the future of the dollar. If left unchecked or without an appropriate exit strategy, our massive stimulus programs will have a crippling effect on the value of the dollar. It's simple economics: if you increase supply without a similar increase in demand, the price of your product drops.


What to Consider
Exporters benefit when their home currency weakens relative to the rest of the world because their trading partners can now buy their product for less. This is why China's currency has been undervalued for years. The Chinese government does not let the yuan float freely, which leads many to cite that as the reason China's exports are so incredibly cheap.

Oil and gold also benefit from a weak dollar. Gold is often perceived as a safe haven during periods of asset devaluation. Oil benefits because it's priced in dollars. As we've seen with the oil price over the past few months, that indeed seems to be the case.

Quality Always Matters
So commodity businesses that have pricing power and U.S. companies that do brisk business abroad benefit from a weaker dollar. But let me go on record as saying over the long run, it's not beneficial for a country to continually suffer from a weak currency. In the case of the U.S., that rings even more true since the greenback is regarded as the world's premier currency.

Nonetheless, major oil companies like ConocoPhillips (NYSE:COP) and ExxonMobil (NYSE:XOM) that have substantial operations abroad will be OK. And since a weak dollar also benefits the price of oil, the majors doubly benefit. Construction and engineering firm KBR (NYSE:KBR), a debt-free $3.6 billion company, does a bulk of its work overseas. And because the bulk of KBR's work comes from government agencies, the company continues to prosper as best as one can during a recession.

Foreign Investing
Another option is investing in businesses located outside the U.S. that earn money in other currencies that are likely to strengthen against the U.S. dollar. But such a move poses some risk because the other currency must appreciate and the company needs to maintain its profitability. So while the Japanese yen has gotten stronger against the greenback lately, many Japanese businesses have a tough time of it.

Nations like Brazil and Australia, which are rich in commodities, are expected to resume a healthy GDP going forward. Up north in Canada, you have commodity giant Teck Resources (NYSE:TCK), which does business all over the world and has the Canadian dollar as the functional currency.

Bottom Line
The market rally continues to propel shares higher, including those mentioned above. It's never wise to make any investment based solely on a single macro bet, especially if the prices aren't bargains. But if the dollar does continue to weaken long-term, then businesses with characteristics like those above will benefit.

Why Dollar Down, Stock Market Up ( WSJ opinion)

OPINION OCTOBER 7, 2009, 9:06 P.M. ET

The Weak-Dollar Threat to Prosperity

Measured in euros, U.S. per capita GDP is down 25% since 2000.
By DAVID MALPASS
If you want to know why the dollar has been falling this week and gold hit a new high, look no further than the weak jobs numbers last Friday and the weak communique issued over the weekend at the G-7 meeting in Istanbul. Deploring "excess volatility and disorderly movements in exchange rates" isn't exactly a ringing defense of the greenback. And 9.8% unemployment convinced markets that monetary policy will remain loose regardless of dollar weakness.

Bond buyer Bill Gross of the Pimco fund summed up the situation nicely in a recent CNBC interview. Asked whether low interest rates will weaken the dollar, the influential allocator of global capital said: "I think that's part of the administration's plan. It's obviously not announced—the 'strong dollar' is always the policy, so to speak. One of the ways a country gets out from under its debt burden is to devalue."

On the surface, the weak dollar may not look so bad, especially for Wall Street. Gold, oil, the euro and equities are all rising as much as the dollar declines. They stay even in value terms and create lots of trading volume. And high unemployment keeps the Fed on hold, so anyone with extra dollars or the connections to borrow dollars wins by buying nondollar assets.

Investors have been playing this weak-dollar trade for years, diverting more and more dollars into commodities, foreign currencies and foreign stock markets. This is the Third-World way of asset allocation.

Corporations play this game for bigger stakes, borrowing billions in dollars to expand their foreign businesses. As the pound slid in the 1950s and '60s and the British Empire crumbled, the corporations that prospered were the ones that borrowed pounds aggressively in order to expand abroad. Though British equities rose in pound terms, they generally underperformed gold and foreign equities. At the end of empire, the giant sucking sound was from British capital and jobs moving offshore as the pound sank.

Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create. This was the lesson of the British malaise, the Carter malaise, the Mexican malaise of the 1990s, Yeltsin's Russian malaise through 1999 and the rest. No countries have devalued their way into prosperity, while many—Hong Kong, China, Australia today—have used stable money to invite capital and jobs.
The more the dollar devalued against the yen in the 1970s and '80s, the more Japan gained share in valued-added manufacturing, using the capital from weak-currency countries to increase productivity. China is doing the same now. It watches in chagrin as the U.S. pleads with it to strengthen the yuan, adding productivity fast with the dollars rushing its way in search of currency stability.

If stocks double but the dollar loses half its value, who beyond Wall Street are the winners and losers? There's been a clear demonstration this decade. The S&P nearly doubled from 2003 through 2007. Those who borrowed to buy won big-time. Rich people got richer, seeing their equity bottom line double. At the same time, the dollar's value was cut nearly in half versus the euro and other stable measures. Capital fled, undercutting job growth. Rent, gasoline and food prices rose more than wages.

Equity gains provide cold comfort when currencies crash. From the euro perspective, the S&P peaked at 1700 in 2000, finally reattained 1100 in the 2007 bubble, fell below 600 in March and now stands at 700 (see nearby chart). With most of the market capitalization of U.S. stocks held by Americans, the dollar devaluation has caused a massive decline in the U.S. share of global wealth.

Measured in euros (a more stable ruler than the ever-weakening dollar), U.S. real per capita GDP is down 25% since 2000, while Germany's is up 4% and tops ours.

The solution is a strong U.S. jobs and wealth program. It has to include stable money, a flatter, more competitive tax structure, spending restraint, and common-sense bank regulation so small business lending can restart. Treasury has to rapidly lengthen the maturity of the national debt and take steps to protect the Fed from market losses on its long-term debt holdings.


Instead, Washington's current economic program pushes capital away by weakening the dollar, threatening higher tax rates, borrowing short (the Fed's near trillion-dollar overnight debt, Treasury's mounds of bill and note issuance) to lend long (mortgages, student loans, entitlements), doubling down on government subsidies, and rechanneling bank loans to governments and big businesses instead of the small business job-growth engine.

It's possible global bond vigilantes will call Washington's bluff, reducing their bond purchases until we stop devaluing and restart job growth, which is the ultimate source of tax revenues to repay our bond debt. This would create a Volcker moment when the U.S. might tighten even as the economy slowed (as then Fed Chairman Paul Volcker did back in 1979).

But the accepted outlook is the almost-as-gloomy new norm. If all goes according to current plans, the dollar devalues slowly and bond buyers come back for more even as national debt heads toward $15 trillion. World living standards grow faster than ours, as does global wealth. The Fed chases inflation as the dollar sinks, but not so fast as to stop the recovery. More capital moves abroad, leaving U.S. unemployment too high too long.

A better approach would start with President Barack Obama rejecting the Bush administration's weak-dollar policy. This would invite capital and jobs to come back before interest rates have to rise.

Mr. Malpass is president of Encima Global LLC.

Info for GM Bondholders (Wilmington Trust)

Q:What is Wilmington Trust’s role?
A:Wilmington Trust is the successor Indenture Trustee to Citibank NA under two separate Indenture
agreements with General Motors, one dated November 15, 1990 and the second dated December 7, 1995.
Q:What is an Indenture Trustee?
A: An Indenture Trustee is the party under the contract that represents the rights and responsibilities of the
bondholders.
Q:What is a successor?
A: A successor in this situation is Wilmington Trust, who succeeded Citibank NA as the original Indenture
Trustee.
Q:What is an Indenture?
A: An Indenture is a contract underlying the bond issue and is between General Motors and the Indenture
Trustee.
Q:What are the securities, including rate, maturity, and CUSIP numbers, which are affected?
A: See attached listing below. *
Q: As a holder of General Motors debt am I going to get paid?
A: As a bondholder you will be represented by Wilmington Trust Company as Indenture Trustee.
Payments made to bondholders will be determined through the bankruptcy process and communicated
to you by Wilmington Trust as Indenture Trustee.
Q: How much will I be paid?
A: As a bondholder you will be represented by Wilmington Trust Company as Indenture Trustee.
Payments made to bondholders will be determined through the bankruptcy process and amounts paid
to bondholders will be communicated to you by Wilmington Trust as Indenture Trustee.
Q: How am I going to get paid?
A:When distributions are available Wilmington Trust as Indenture Trustee and its agents will pay the
holders of record for the securities directly via wire transfer or other method of distribution.
Q: Do I need to file a proof of claim?
A: As a bondholder you will be represented by Wilmington Trust Company as Indenture Trustee. This will
include the filing of necessary documents in the courts, including proofs of claim.
Q: As a bondholder, what do I need to do now?
A: At this time there is no action required on the bondholder’s part. Lines of communication remain open
between the bondholders and the Indenture Trustee and the Indenture Trustee will communicate on a consistent
and equal basis with all bondholders.
General Motors Bondholders
Frequently Asked Questions
Q:What are the next steps?
A:Wilmington Trust Company as Indenture Trustee will work closely with the bankruptcy court, the committees
that are formed, and the company, communicating with the bondholders as necessary and appropriate.
Q: How do I stay in touch with you?
A:Wilmington Trust as Indenture Trustee is creating a distribution list and will provide communications as
appropriate.
Q: Does Wilmington Trust hold any General Motors debt directly?
A:Wilmington Trust does not directly hold any debt of General Motors and has no direct credit exposure to
General Motors.
Q:Who is the General Motors Stock Transfer Agent?
A: Computershare is the stock transfer agent and they can be reached at 800 331-9922.
**Issue Name CUSIP# Outstanding Indenture Date Closed Date
GM Corp 9.40% Debs due 7/15/2021 370442AN5 $299,795,000.00 11/15/1990 7/22/1991
GM Corp 8.80% Notes due 3/1/2021 370442AJ4 $524,795,000.00 11/15/1990 3/12/1991
GM Corp 7.40% Debs due 9/1/2025 370442AR6 $500,000,000.00 11/15/1990 9/11/1995
GM Corp Medium Term Notes AG3 37045EAG3 $15,000,000.00 11/15/1990 7/22/1991
GM Corp Medium Term Notes AS7 37045EAS7 $48,175,000.00 11/15/1990 12/21/1990
GM Corp 7.75% Disc Debs due 3/15/2036 370442AT2 $377,377,000.00 12/7/1995 3/20/1996
GM Corp 7.70% Debs due 4/15/2016 370442AU9 $500,000,000.00 12/7/1995 4/15/1996
GM Corp 8.10% Debs due 6/15/2024 370442AV7 $400,000,000.00 12/7/1995 6/10/1996
GM Corp 6 3/4 Debs due 5/1/2028 370442AZ8 $600,000,000.00 12/7/1995 4/29/1998
GM Corp 7.20% Notes due 1/15/2011 370442BB0 $1,500,000,000.00 12/7/1995 1/11/2001
GM Corp 7.25% Q Int Bnds due 4/15/2041 370442816 $575,000,000.00 12/7/1995 4/30/2001
GM Corp 7 1/4 Sr Notes due 7/15/2041 370442774 $718,750,000.00 12/7/1995 7/9/2001
GM Corp 7.375% Sr Notes due 10/1/2051 370442766 $690,000,000.00 12/7/1995 10/3/2001
GM Corp 7.25% Sr Notes due 2/15/2052 370442758 $875,000,000.00 12/7/1995 2/14/2002
GM Corp 4.50% Series A Conv Sr Debs 370442741 $1,150,000,000.00 12/7/1995 3/6/2002
GM Corp 5.25% Series B Conv Sr Debs 370442733 $2,600,000,000.00 12/7/1995 3/6/2002
GM Corp 7.375% Sr Notes due 5/15/2048 370442725 $1,115,000,000.00 12/7/1995 5/19/2003
GM Corp 7.375% Sr Notes due 5/23/2048 370442BQ7 $425,000,000.00 12/7/1995 5/23/2003
GM Corp 8.375% Sr Debs due 7/15/2033 370442BT1 $3,000,000,000.00 12/7/1995 7/3/2003
GM Corp 6.250% Series C Conv Sr Debs 370442717 $4,300,000,000.00 12/7/1995 7/2/2003
GM Corp 8.25% Sr Debs due 7/15/2023 370442BW4 $1,250,000,000.00 12/7/1995 7/3/2003
GM Corp 7.125% Sr Notes due 7/15/2013 370442BS3 $1,000,000,000.00 12/7/1995 7/3/2003
GM Corp 7.50% Sr Notes due 7/1/2044 370442121 $720,000,000.00 12/7/1995 6/30/2004
GM Corp 1.50% Series D Conv Sr Debs 370442691 $1,500,000,000.00 12/7/1995 5/31/2007