The 10 Money Moves to Consider Before 2010 Expires Did You Give Holiday Gifts to Co-Workers? You Might Be in Luck on Taxes.
By JENNIFER OPENSHAW
New Year's Eve is almost here, but don't let that stop you from making some important money moves now, before Dec. 31, so you can reap the benefits in 2011.
Michael Casey says that with New Year's Eve almost here, you will want to consider these important money moves before year end to reap benefits in 2011.
.1) Take investment losses. The end of the year is a great time to review your portfolio and your asset allocation. If you have a dog of a stock or mutual fund that you want to eliminate, it is often a good idea to do it by Dec. 31.
The losses you take can offset the gains you have realized on other stocks or funds and help reduce your tax bill.
For example, say you sold your Apple stock and made $10,000. But you have a poor-performing fund relative to other options that, if you sold it, would result in a $5,000 loss. When taken together, the losses from selling leave you with a net taxable gain of $5,000, far less than had you not sold the investment dog.
2) Max-out your retirement accounts. Many companies have reinstated their 401(k) matching contribution after wiping it out during the recession. But even if not, your 401(k) is still one of your top savings vehicles, and you should fund it as much as possible by year-end. The maximum contribution in 2010 is $16,500 plus $5,500 for those 50 and older.
3) Check your paycheck withholding. The new tax law means your take-home pay next year likely will be higher, thanks to lower Social Security taxes, which for most workers will be cut to 4.2%, from 6.2% now.
So, make sure you aren't having too much or too little withheld. Too much means Uncle Sam is earning interest on your money (though you will get a refund) and too little means you will have a tax bill.
While it is always a good idea to review your withholding annually, the new changes make it even more important. You should also review your withholding if you are an individual or couple with multiple jobs, are having children, getting married, getting divorced or buying a home, or are someone who typically winds up with a large refund at the end of the year.
4) Deduct holiday gifts up to $25 for business. Did you give any holiday gifts to co-workers, vendors, or prospective customers or partners? If so, you will want to keep those receipts since you will be able to deduct up to $25 for such gifts.
This means the $25 for those gourmet chocolate pretzels or toward tickets to the theater would actually run you about $17 out-of-pocket, depending on your tax bracket.
Also, you will want to include anything deductible for your holiday party so long as it had a business purpose.
5) Give to a relative and reduce your tax bill. We have written before about all the ways grandparents or simply those who have some extra wealth can help others, especially someone trying to close the college funding gap.
Give the gift of education or something else worthwhile while you are alive and you will not only reduce your taxable estate, but you will enjoy seeing it put to use.
You can give up to $13,000 a year to someone if you are single ($26,000 if married) without facing gift taxes. If you contribute to a "529" college-savings plan, however, you can front-load your gifting and give up to five times that amount in one year—that is $130,000 if you are a couple—without facing a gift tax. Nice.
6) Donate to a charity. 'Tis the season to give, and if you have been one of the lucky ones who did better financially than you expected, maybe you are up for sharing more of it. You can give cash or stock to a charity, but what's better?
If the stock is worth more than you bought it for, you are usually better off donating it to charity instead of selling it. That allows you to avoid the capital-gains tax on the profit. For example, say you bought 100 shares of a stock at $10 per share and they are now worth $30 per share.
If you donate the stock to charity, you won't have to pay the capital-gains tax on the $2,000 in profit. If you have had the stock for at least a year, you will also be able to deduct the fair-market value of it on your taxes, as long as you itemize.
On the flip side, if the value of the stock is less than you bought it for, you will probably want to cash it first so you can deduct the loss.
Of course, donating money is usually deductible (as long as you itemize). And if you are donating your services, remember that only mileage, not your time, is deductible.
7) Make an estimated tax payment early. If you didn't pay enough to the federal government last year, you may face an even bigger tax bill come April 15. For instance, maybe you didn't have enough taxes withheld from your paycheck or you made a chunk of money on an investment. If you pay estimated taxes, consider paying by Dec. 31.
8) Pay January's mortgage in December. Similarly, making a mortgage payment early will increase your mortgage deduction for 2010.
Perhaps all the talk about possibly eliminating this valuable deduction might spur you to move on this one.
9) Enroll in your employer's flexible-spending account. These accounts allow you to sock away up to $5,000 (the maximum amount varies by employer) on a pretax basis, much like a 401(k), to cover out-of-pocket health-care costs. Also, find out whether your employer offers a similar benefit for child-care expenses.
Open enrollment is typically the only time to make changes to your plan and that is usually in November. However, you may be able to make changes if you have experienced a "qualifying life event," such as a marriage or divorce, a new child, a change in your employment or you go on family medical leave.
10) Contribute to your IRA. While you have until April 15 to fund your IRA, whether a Roth or traditional, getting it done before then will leave you with one less thing to worry about.
At a minimum, get the paperwork done to open an account if you don't have one already. The maximum you can contribute is $5,000 and an additional $1,000 for over-50 retirement savers for a total of $6,000. And don't forget your nonworking spouse—you can save for him or her, too.
Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved
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What is going on with municipal bonds? The End of BABs (Build America Bonds) (from WSJ)
Muni Bonds Continue to Tumble
A Rush to Sell Build America Bonds Before They Are Gone.
By Romy Varghese and Kelly Nolan
Of DOW JONES NEWSWIRES
Prices of municipal bonds fell sharply for the second day Tuesday, driving yields on long-term bonds to the highest points in more than 18 months, as investors worried about the impact of the end of a federally subsidized borrowing program.
The yield on a closely watched index of high-grade, tax-exempt 30-year muni bonds rose to 4.84%, its highest level since March 2009, according to Thomson Reuters Municipal Market Data. The yield on 10-year bonds climbed to 3.24%, the highest since June 2009. Yields move inversely to prices.
.The market took a hit Monday as well, as the expiration of the Build America Bond program by the end of the year looked increasingly likely.
An extension of the program, which provides a 35% interest-rate subsidy from the federal government on taxable bonds issued by municipalities, on Monday wasn't included in legislation introduced in the U.S. Senate that continues Bush-era tax cuts.
Since the government started the BAB program in April 2009 as part of its economic stimulus, more than $165 billion of these bonds have been sold, accounting for about 22% of all new municipal debt, according to data from the U.S. Treasury Department.
Many municipal-bond market participants expect that, without BABs, state and local governments will issue more tax-exempt bonds next year and may overwhelm investor demand for that debt. This would force states and cities to raise their rates to attract buyers.
About $100 billion in long-term tax-exempt bonds would return to the market next year, estimated Robert Nelson, managing analyst at Municipal Market Data.
"With the loss of leveraged buyers of municipal bonds in 2008, there has been a dearth of demand for long maturity munis--this is where BABs came in and diverted this issuance to the taxable market," Nelson said. "Now without BABs the market is left to deal with the same supply/demand imbalance that plagued munis in 2008 and early 2009."
He added that long-term yields have generally returned to the same level seen at the outset of the Build America Bond program last year.
States with some of the lowest credit ratings have been especially battered by the recent muni-market turmoil.
The spreads on Illinois 10-year maturity general obligation bonds grew from 1.60 to 1.90 percentage points from Nov. 1 through Monday above a benchmark triple-A bond with the same maturity, according to Municipal Market Data.
Spreads on California general obligation bonds increased from 0.97 to 1.30 percentage points over the same time frame.
Meanwhile, municipal borrowers are plowing into the market with BAB deals in the last few market days of the year.
"We are hitting the market as quickly as we can because it's only going to get worse," said Harold Downs, treasurer of the Metropolitan Water Reclamation District of Greater Chicago.
Because of the market conditions, the water district is shrinking the size of its bond sale this week from $500 million to $280 million, he said. Most of the offering is BABs.
The Metropolitan Water District of Southern California is planning to sell $250 million in BABs this week, moving up part of a $450 million deal it had originally scheduled for the spring, said Brian Thomas, the water district's assistant general manager and chief financial officer.
"I think the market is still favorable if you look back over the last 10 years, but if you look compared to a month ago, it's a much more difficult market," Mr. Thomas said.
Higher yields may ultimately help stabilize the market by attracting buyers, said Dan Solender, director of municipal bond management at investment firm Lord Abbett in Jersey City.
And amid the volatility, some analysts are encouraging investors to buy municipal bonds from creditworthy issuers. Munis are now offering higher yields than U.S. Treasurys of comparable duration, which is the inverse of the usual relationship, noted Dan Loughran, senior portfolio manager at OppenheimerFunds. "Prices in the municipal bond market may continue to be volatile in the near term, but we believe relief is likely waiting in the wings once the New Year gets underway," he wrote in a report.
—Jeannette Neumann contributed to this article.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@dowjones.com
A Rush to Sell Build America Bonds Before They Are Gone.
By Romy Varghese and Kelly Nolan
Of DOW JONES NEWSWIRES
Prices of municipal bonds fell sharply for the second day Tuesday, driving yields on long-term bonds to the highest points in more than 18 months, as investors worried about the impact of the end of a federally subsidized borrowing program.
The yield on a closely watched index of high-grade, tax-exempt 30-year muni bonds rose to 4.84%, its highest level since March 2009, according to Thomson Reuters Municipal Market Data. The yield on 10-year bonds climbed to 3.24%, the highest since June 2009. Yields move inversely to prices.
.The market took a hit Monday as well, as the expiration of the Build America Bond program by the end of the year looked increasingly likely.
An extension of the program, which provides a 35% interest-rate subsidy from the federal government on taxable bonds issued by municipalities, on Monday wasn't included in legislation introduced in the U.S. Senate that continues Bush-era tax cuts.
Since the government started the BAB program in April 2009 as part of its economic stimulus, more than $165 billion of these bonds have been sold, accounting for about 22% of all new municipal debt, according to data from the U.S. Treasury Department.
Many municipal-bond market participants expect that, without BABs, state and local governments will issue more tax-exempt bonds next year and may overwhelm investor demand for that debt. This would force states and cities to raise their rates to attract buyers.
About $100 billion in long-term tax-exempt bonds would return to the market next year, estimated Robert Nelson, managing analyst at Municipal Market Data.
"With the loss of leveraged buyers of municipal bonds in 2008, there has been a dearth of demand for long maturity munis--this is where BABs came in and diverted this issuance to the taxable market," Nelson said. "Now without BABs the market is left to deal with the same supply/demand imbalance that plagued munis in 2008 and early 2009."
He added that long-term yields have generally returned to the same level seen at the outset of the Build America Bond program last year.
States with some of the lowest credit ratings have been especially battered by the recent muni-market turmoil.
The spreads on Illinois 10-year maturity general obligation bonds grew from 1.60 to 1.90 percentage points from Nov. 1 through Monday above a benchmark triple-A bond with the same maturity, according to Municipal Market Data.
Spreads on California general obligation bonds increased from 0.97 to 1.30 percentage points over the same time frame.
Meanwhile, municipal borrowers are plowing into the market with BAB deals in the last few market days of the year.
"We are hitting the market as quickly as we can because it's only going to get worse," said Harold Downs, treasurer of the Metropolitan Water Reclamation District of Greater Chicago.
Because of the market conditions, the water district is shrinking the size of its bond sale this week from $500 million to $280 million, he said. Most of the offering is BABs.
The Metropolitan Water District of Southern California is planning to sell $250 million in BABs this week, moving up part of a $450 million deal it had originally scheduled for the spring, said Brian Thomas, the water district's assistant general manager and chief financial officer.
"I think the market is still favorable if you look back over the last 10 years, but if you look compared to a month ago, it's a much more difficult market," Mr. Thomas said.
Higher yields may ultimately help stabilize the market by attracting buyers, said Dan Solender, director of municipal bond management at investment firm Lord Abbett in Jersey City.
And amid the volatility, some analysts are encouraging investors to buy municipal bonds from creditworthy issuers. Munis are now offering higher yields than U.S. Treasurys of comparable duration, which is the inverse of the usual relationship, noted Dan Loughran, senior portfolio manager at OppenheimerFunds. "Prices in the municipal bond market may continue to be volatile in the near term, but we believe relief is likely waiting in the wings once the New Year gets underway," he wrote in a report.
—Jeannette Neumann contributed to this article.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@dowjones.com
Social Security Payback Loophole Eliminated
Wednesday, December 8, 2010
Mark Lassiter, Press Officer For Immediate Release
News Release
SOCIAL SECURITY SSA Press Office 440 Altmeyer Building 6401 Security Blvd. Baltimore, MD 21235 410-965-8904 FAX 410-966-9973 Social Security Publishes New Rule Revising Withdrawal Policy Rule Also Limits Voluntary Suspension to Prospective MonthsThe Social Security Administration today published final rules, effective immediately, that limit the time period for beneficiaries to withdraw an application for retirement benefits to within 12 months of the first month of entitlement and to one withdrawal per lifetime. In addition, beneficiaries entitled to retirement benefits may voluntarily suspend benefits only for the months beginning after the month in which the request is made. The agency is changing its withdrawal policy because recent media articles have promoted the use of the current policy as a means for retired beneficiaries to acquire an "interest-free loan." However, this "free loan" costs the Social Security Trust Fund the use of money during the period the beneficiary is receiving benefits with the intent of later withdrawing the application and the interest earned on these funds. The processing of these withdrawal applications is also a poor use of the agency’s limited administrative resources in a time of fiscal austerity -- resources that could be better used to serve the millions of Americans who need Social Security’s services. Although the new rules are effective immediately, the agency is providing for a 60-day public comment period. The agency will consider any relevant comments received and publish another final rule to respond to comments and to make any appropriate changes to the rule.
Social Security recommends that comments be submitted via the Internet. To view the new rule or to comment, visit the Federal eRulemaking portal at www.regulations.gov and use the Search function to find docket number SSA-2009-0073. ###
Best and Worst Places to Retire (Marketwatch)
Dec. 9, 2010, 3:03 p.m. EST
The 10 worst states for retirees
Commentary: Taxes, weather take glitter off golden years
By Robert Powell, MarketWatch
BOSTON (MarketWatch) — Plenty of folks are aware of the best states for retirees. But what are the 10 worst states in which to spend your golden years?
People of Illinois, California, New York, Rhode Island, New Jersey, Ohio, Wisconsin, Massachusetts, Connecticut and Nevada — you probably already know the answer.
The list, with Illinois leading the pack, comes from website TopRetirements.com. According to John Brady, president of TopRetirements.com, the 10 states earn this dubious distinction largely because of three factors: fiscal health, taxation, climate. See the worst-state rankings at TopRetirements.com.
Worst retirement states Illinois and California top the list of the worst states to retire to, according to TopRetirements.com. As for fiscal health, six of the 10 worst states for retirees on TopRetirements.com’s list were among those just identified by a Pew Center for States report as being in “fiscal peril.”
The report, "Beyond California: States in Fiscal Peril," showed that “some of the same pressures that have pushed California toward economic disaster are wreaking havoc in a number of other states, with potentially damaging consequences for the entire country.”
Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin joined California as the 10 most troubled states, according to Pew’s analysis.
Of note, TopRetirements.com’s Brady suggested that retirees and would-be retirees might want to avoid states in fiscal peril because these locales might be expected to face decreasing services and increasing taxation.
Topping his website's list, Illinois’s fiscal health could be the worst of any state, observed Brady. “It even borrowed money to fund its pension obligations,” he said. As for California, he said the Golden State — though it does have a warm climate — is expensive and its finances are in disarray. What’s more, he added, it has paid some bills with vouchers.
New York wasn’t mentioned as being in fiscal trouble by the Pew Center, but it does have “very high taxes, including property taxes.” In fact, Brady said New York has the second-highest tax burden and fifth-highest per capita property taxes. Plus, he said, the Empire State has a “dysfunctional state legislature.” As if that wasn’t bad enough, it’s terrifically expensive to live in New York. The only benefit to living in New York, he said, is that pensions are exempt from income tax.
As for Rhode Island, Brady said it’s probably the worst-off state in the Northeast from a financial viewpoint. It also has high taxes, though he noted that the state does boast some great places to live.
New Jersey, according to Brady’s analysis, has the highest property taxes in the U.S., as well as the highest total tax burden of any state, as reported in a 2008 Tax Foundation report. Plus, New Jersey has serious pension-funding issues, Brady noted. States with the greatest tax burdens after New Jersey were New York, Connecticut, Maryland, Hawaii, California, Ohio, Vermont, Wisconsin and Rhode Island, joined by the District of Columbia.
According to Brady, Ohio has high taxes and high unemployment (9.9% in October). Plus, it has cold winters.
Of the 40 largest cities in the United States, Milwaukee has the coldest winter weather, based on normal daily temperatures, according to Current Results, a website that tracks weather trends. The lakeside Wisconsin city’s daily winter mean temperature is 24.1 degrees Fahrenheit. But fellow Great Lakes metropolis Cleveland is the fourth-coldest U.S. city, with a daily winter mean temperature that’s not much higher at 28.4 degrees Fahrenheit.
Wisconsin, as noted, is doubly cursed in these rankings as a high-tax state with cold weather. Plus, it has high property taxes. The only good news, at least for those to whom it applies, is that the Badger State doesn’t tax military pensions.
In a related survey, USAA and Military.com announced this week that Waco, Texas, tops the first-ever "Best Places for Military Retirement" list. In its report, USAA and Military.com focused on U.S. communities that offer “a high quality of life and help maximize military retiree benefits as service members manage their ‘first retirement’ from the armed forces and begin planning their ‘second retirement’ from civilian life.” Other places on that list included, in order, Oklahoma City; Austin, Texas; College Station, Texas; Harrisburg, Pa.; San Angelo, Texas; Madison, Wis.; Pittsburgh; New Orleans; and Syracuse, N.Y.
New England had two other states on Brady’s list of worst places for retirees: Massachusetts, which has high taxes including high property taxes and a very high cost of living, and Connecticut, which has the third-highest tax burden of any state as well as high property taxes. “It has some terrific places to live, but the cost of living is very high,” he said of Connecticut. What’s worse, the Nutmeg State taxes Social Security.
States with the highest cost of living in the third quarter of 2010 were, in order, Hawaii, Alaska, California, New Jersey, New York, Connecticut, Rhode Island, Maryland, Vermont and New Hampshire, according to a Missouri Economic Research and Information Center analysis. The District of Columbia also makes the list. Read the analysis, which noted among other things that Missouri had the eighth-lowest cost of living in the U.S.
Ironically, the 10th-worst place to retire is the one state where it’s easy to find a cheap place to live: Nevada. As many know, Nevada is presently the home-foreclosure capital of the world. In fact, the Silver State continues to lead the nation in terms of foreclosure filings per household, with one filing for every 79 homes, according to RealtyTrac. Yes, the state is having financial problems, but the good news for retirees living there or contemplating a move there is that it doesn’t have an income tax — at least not yet.
Of course, not everyone is smitten with Nevada as a place to retire. Money-Rates.com published in September its list of the 10 worst states for retirees. That site, which examined such factors as crime rates, climate, longevity and economic conditions, including taxes, job opportunities and cost of living, found the worst states for retirees were, in order, Nevada, Michigan, Alaska, South Carolina, Maryland, Tennessee, Ohio, North Carolina, Missouri and Arkansas.
Does any of this mean you shouldn’t retire to these poorly ranked states? According to Brady, the answer is no. “Every individual has to consider his or her own criteria for selecting a list of the worst or best states to retire,” he said. “The best way to start your individual list of best or worst states is to rank, or at least think about, your most important criteria.”
In his study, Brady focused mostly on fiscal health, taxation and climate. But according to Brady, the full list of factors to consider when searching for a state in which to retire includes: taxes; climate and topography; crime; fiscal health of the state; recreation; transportation; health care; cost of living, including housing; education, including college; cultural resources; susceptibility to natural disasters; proximity to friends and family; and fitting in socially, politically and religiously. And of those, taxes might be the most important. Retirees are affected in different ways by taxes, he said. For instance, the taxation of pensions and Social Security might be better or worse in different states. Ditto, sales taxes.
Property taxes can vary widely, as well. For instance, Brady said, property tax can be one of the biggest bills for retirees and it’s a category of taxation that’s not progressive. You might not have any income, but you will still get taxed on the full value of your house, he said. Of note, some states do have programs to help seniors control their property taxes. Inheritance and estate taxes are also to be considered, though he said such taxes might be viewed as the tax tail wagging the state-of-residence dog.
Choosing the best state in which to retire depends on many individual factors, and in truth, said Brady, “For any two people, the 10-worst-states-for-retirees list might be a good list for one person, but not for [the other].”
Robert Powell is editor of Retirement Weekly, published by MarketWatch
The 10 worst states for retirees
Commentary: Taxes, weather take glitter off golden years
By Robert Powell, MarketWatch
BOSTON (MarketWatch) — Plenty of folks are aware of the best states for retirees. But what are the 10 worst states in which to spend your golden years?
People of Illinois, California, New York, Rhode Island, New Jersey, Ohio, Wisconsin, Massachusetts, Connecticut and Nevada — you probably already know the answer.
The list, with Illinois leading the pack, comes from website TopRetirements.com. According to John Brady, president of TopRetirements.com, the 10 states earn this dubious distinction largely because of three factors: fiscal health, taxation, climate. See the worst-state rankings at TopRetirements.com.
Worst retirement states Illinois and California top the list of the worst states to retire to, according to TopRetirements.com. As for fiscal health, six of the 10 worst states for retirees on TopRetirements.com’s list were among those just identified by a Pew Center for States report as being in “fiscal peril.”
The report, "Beyond California: States in Fiscal Peril," showed that “some of the same pressures that have pushed California toward economic disaster are wreaking havoc in a number of other states, with potentially damaging consequences for the entire country.”
Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin joined California as the 10 most troubled states, according to Pew’s analysis.
Of note, TopRetirements.com’s Brady suggested that retirees and would-be retirees might want to avoid states in fiscal peril because these locales might be expected to face decreasing services and increasing taxation.
Topping his website's list, Illinois’s fiscal health could be the worst of any state, observed Brady. “It even borrowed money to fund its pension obligations,” he said. As for California, he said the Golden State — though it does have a warm climate — is expensive and its finances are in disarray. What’s more, he added, it has paid some bills with vouchers.
New York wasn’t mentioned as being in fiscal trouble by the Pew Center, but it does have “very high taxes, including property taxes.” In fact, Brady said New York has the second-highest tax burden and fifth-highest per capita property taxes. Plus, he said, the Empire State has a “dysfunctional state legislature.” As if that wasn’t bad enough, it’s terrifically expensive to live in New York. The only benefit to living in New York, he said, is that pensions are exempt from income tax.
As for Rhode Island, Brady said it’s probably the worst-off state in the Northeast from a financial viewpoint. It also has high taxes, though he noted that the state does boast some great places to live.
New Jersey, according to Brady’s analysis, has the highest property taxes in the U.S., as well as the highest total tax burden of any state, as reported in a 2008 Tax Foundation report. Plus, New Jersey has serious pension-funding issues, Brady noted. States with the greatest tax burdens after New Jersey were New York, Connecticut, Maryland, Hawaii, California, Ohio, Vermont, Wisconsin and Rhode Island, joined by the District of Columbia.
According to Brady, Ohio has high taxes and high unemployment (9.9% in October). Plus, it has cold winters.
Of the 40 largest cities in the United States, Milwaukee has the coldest winter weather, based on normal daily temperatures, according to Current Results, a website that tracks weather trends. The lakeside Wisconsin city’s daily winter mean temperature is 24.1 degrees Fahrenheit. But fellow Great Lakes metropolis Cleveland is the fourth-coldest U.S. city, with a daily winter mean temperature that’s not much higher at 28.4 degrees Fahrenheit.
Wisconsin, as noted, is doubly cursed in these rankings as a high-tax state with cold weather. Plus, it has high property taxes. The only good news, at least for those to whom it applies, is that the Badger State doesn’t tax military pensions.
In a related survey, USAA and Military.com announced this week that Waco, Texas, tops the first-ever "Best Places for Military Retirement" list. In its report, USAA and Military.com focused on U.S. communities that offer “a high quality of life and help maximize military retiree benefits as service members manage their ‘first retirement’ from the armed forces and begin planning their ‘second retirement’ from civilian life.” Other places on that list included, in order, Oklahoma City; Austin, Texas; College Station, Texas; Harrisburg, Pa.; San Angelo, Texas; Madison, Wis.; Pittsburgh; New Orleans; and Syracuse, N.Y.
New England had two other states on Brady’s list of worst places for retirees: Massachusetts, which has high taxes including high property taxes and a very high cost of living, and Connecticut, which has the third-highest tax burden of any state as well as high property taxes. “It has some terrific places to live, but the cost of living is very high,” he said of Connecticut. What’s worse, the Nutmeg State taxes Social Security.
States with the highest cost of living in the third quarter of 2010 were, in order, Hawaii, Alaska, California, New Jersey, New York, Connecticut, Rhode Island, Maryland, Vermont and New Hampshire, according to a Missouri Economic Research and Information Center analysis. The District of Columbia also makes the list. Read the analysis, which noted among other things that Missouri had the eighth-lowest cost of living in the U.S.
Ironically, the 10th-worst place to retire is the one state where it’s easy to find a cheap place to live: Nevada. As many know, Nevada is presently the home-foreclosure capital of the world. In fact, the Silver State continues to lead the nation in terms of foreclosure filings per household, with one filing for every 79 homes, according to RealtyTrac. Yes, the state is having financial problems, but the good news for retirees living there or contemplating a move there is that it doesn’t have an income tax — at least not yet.
Of course, not everyone is smitten with Nevada as a place to retire. Money-Rates.com published in September its list of the 10 worst states for retirees. That site, which examined such factors as crime rates, climate, longevity and economic conditions, including taxes, job opportunities and cost of living, found the worst states for retirees were, in order, Nevada, Michigan, Alaska, South Carolina, Maryland, Tennessee, Ohio, North Carolina, Missouri and Arkansas.
Does any of this mean you shouldn’t retire to these poorly ranked states? According to Brady, the answer is no. “Every individual has to consider his or her own criteria for selecting a list of the worst or best states to retire,” he said. “The best way to start your individual list of best or worst states is to rank, or at least think about, your most important criteria.”
In his study, Brady focused mostly on fiscal health, taxation and climate. But according to Brady, the full list of factors to consider when searching for a state in which to retire includes: taxes; climate and topography; crime; fiscal health of the state; recreation; transportation; health care; cost of living, including housing; education, including college; cultural resources; susceptibility to natural disasters; proximity to friends and family; and fitting in socially, politically and religiously. And of those, taxes might be the most important. Retirees are affected in different ways by taxes, he said. For instance, the taxation of pensions and Social Security might be better or worse in different states. Ditto, sales taxes.
Property taxes can vary widely, as well. For instance, Brady said, property tax can be one of the biggest bills for retirees and it’s a category of taxation that’s not progressive. You might not have any income, but you will still get taxed on the full value of your house, he said. Of note, some states do have programs to help seniors control their property taxes. Inheritance and estate taxes are also to be considered, though he said such taxes might be viewed as the tax tail wagging the state-of-residence dog.
Choosing the best state in which to retire depends on many individual factors, and in truth, said Brady, “For any two people, the 10-worst-states-for-retirees list might be a good list for one person, but not for [the other].”
Robert Powell is editor of Retirement Weekly, published by MarketWatch
What the GM bondholders get from the IPO (Detroit Free Press)
Posted: Nov. 15, 2010
In GM IPO, stakeholders could walk away with billions as stock hits the market this week
Some will see billions as stock is released to public this week
By CHRISSIE THOMPSON
FREE PRESS BUSINESS WRITER
This week, General Motors' stakeholders will see some cash. Finally.
If all goes as planned, GM will price its initial public stock offering on Wednesday, and the stock will hit the market on Thursday morning with new owners.
As trading begins, owners such as the U.S. Treasury will walk away with billions of dollars in exchange for releasing their GM stock to the public.
But that doesn't include GM bondholders -- many of whom are Detroiters who supported the home team years ago through their investment portfolio.
During GM's bankruptcy last year, the bondholders were given a 10% stake in the new GM. But they won't actually receive the shares until the liquidation of the cast-off portion of the old GM that is still in bankruptcy. That's expected to take three to six months, according to an insider from a firm that's a major bondholder.
Until then, GM's bonds will continue to trade. And starting this week, so will the stock -- with everyday Joes like Kris Trexler eager to get a piece from the stock's first public owners.
Trexler, a Los Angeles film and video editor, said he cried when he turned in the EV1 electric car that GM canceled a decade ago. He's now one of the consumer advisers testing a Chevrolet Volt for three months -- and he already has a Volt on order for when the test ends.
"After driving this car ... I can't think of any reason I wouldn't buy some stock," Trexler said. "This company is back, and they've proved it to me."
Old GM bonds guarantee shares of new GM stock
"I've been holding them for years. What's another couple of months?"
That's the strategy Northville's Frank Drew says he's using for his General Motors bonds. The bonds, with a face value of about $150,000, are now trading at about a third of their original value. But once the part of the old GM still in bankruptcy is liquidated, Drew will get GM stock. His bonds will be put in a pool with about $37 billion worth of bonds and other unsecured claims, and 10% of GM's 1.5billion common shares will be issued to bondholders proportionately to the value of their bonds.That stock will be Drew's to do with as he wishes -- just as it will be for the buyers of GM's stock when it hits the market Thursday, 16 months after the company exited Chapter 11 bankruptcy.
GM is planning to sell up to 419.75 million common shares and 69 million Series B preferred shares to hedge funds, money managers and long-term investment firms. Those firms will then trade the stock on the New York and Toronto stock exchanges.
The automaker set a target range for the common shares at $26 to $29 each, but GM is expected to raise that range early this week by no more than a few dollars, according to two sources familiar with the situation. As executives finish their road show presentations to investors in North America and Europe, they're gauging the interest of the all-important long-term investment firms. GM needs those firms to hold stock for months, or even years, to keep it stable.
By all accounts, demand for GM stock is strong, likely enough for every possible share to sell. And the recent market improvements only help. The Dow Jones Industrial Average has gained about 500 points in the last month, and more than 1,000 in the last two months, closing Friday at 11,283.
Probable buyers include GM's Chinese automaker partner SAIC and investment funds from the Middle East.
That could create controversy for the IPO's largest seller, the U.S. Treasury, which is planning to use the sale to lower its stake in GM from 60.8% to slightly more than 40%. The treasury has said that some foreign investors would be allowed, but consumer advocate and former presidential candidate Ralph Nader cosigned a letter last week to President Barack Obama, urging him to suspend the IPO, partially because of the need to keep investment in the U.S.
Nader was also concerned that the government plans to sell part of its stake at a loss. The government needs to average $43.67 per share to break even on its $50-billion investment in GM, above the likely range. The treasury is hoping GM's stock will grow in value over the coming months and years so it can make more money when it sells the rest of its shares.
An increase in stock price is likely, said a person from a firm that owns a large number of GM bonds. The firm expects GM's stock to quickly reach the mid-$30 range the bond trading currently implies. And by 2013 or 2014, the person said, the firm expects the stock to hit $60 to $70 each, as long as GM fulfills executives' predictions that the company will make $11 billion to $13 billion annually before interest and taxes in an average sales climate.
GM bondholders will also receive warrants to buy more stock by either 2016 or 2019. Bondholders will be able to receive that extra stock by paying either $10 or $18.33 per share, which will count as revenue for GM. The warrants will take bondholders' total share in GM to 23.85%.Contact Chrissie Thompson: 313-222-8784 or cthompson@freepress.com
In GM IPO, stakeholders could walk away with billions as stock hits the market this week
Some will see billions as stock is released to public this week
By CHRISSIE THOMPSON
FREE PRESS BUSINESS WRITER
This week, General Motors' stakeholders will see some cash. Finally.
If all goes as planned, GM will price its initial public stock offering on Wednesday, and the stock will hit the market on Thursday morning with new owners.
As trading begins, owners such as the U.S. Treasury will walk away with billions of dollars in exchange for releasing their GM stock to the public.
But that doesn't include GM bondholders -- many of whom are Detroiters who supported the home team years ago through their investment portfolio.
During GM's bankruptcy last year, the bondholders were given a 10% stake in the new GM. But they won't actually receive the shares until the liquidation of the cast-off portion of the old GM that is still in bankruptcy. That's expected to take three to six months, according to an insider from a firm that's a major bondholder.
Until then, GM's bonds will continue to trade. And starting this week, so will the stock -- with everyday Joes like Kris Trexler eager to get a piece from the stock's first public owners.
Trexler, a Los Angeles film and video editor, said he cried when he turned in the EV1 electric car that GM canceled a decade ago. He's now one of the consumer advisers testing a Chevrolet Volt for three months -- and he already has a Volt on order for when the test ends.
"After driving this car ... I can't think of any reason I wouldn't buy some stock," Trexler said. "This company is back, and they've proved it to me."
Old GM bonds guarantee shares of new GM stock
"I've been holding them for years. What's another couple of months?"
That's the strategy Northville's Frank Drew says he's using for his General Motors bonds. The bonds, with a face value of about $150,000, are now trading at about a third of their original value. But once the part of the old GM still in bankruptcy is liquidated, Drew will get GM stock. His bonds will be put in a pool with about $37 billion worth of bonds and other unsecured claims, and 10% of GM's 1.5billion common shares will be issued to bondholders proportionately to the value of their bonds.That stock will be Drew's to do with as he wishes -- just as it will be for the buyers of GM's stock when it hits the market Thursday, 16 months after the company exited Chapter 11 bankruptcy.
GM is planning to sell up to 419.75 million common shares and 69 million Series B preferred shares to hedge funds, money managers and long-term investment firms. Those firms will then trade the stock on the New York and Toronto stock exchanges.
The automaker set a target range for the common shares at $26 to $29 each, but GM is expected to raise that range early this week by no more than a few dollars, according to two sources familiar with the situation. As executives finish their road show presentations to investors in North America and Europe, they're gauging the interest of the all-important long-term investment firms. GM needs those firms to hold stock for months, or even years, to keep it stable.
By all accounts, demand for GM stock is strong, likely enough for every possible share to sell. And the recent market improvements only help. The Dow Jones Industrial Average has gained about 500 points in the last month, and more than 1,000 in the last two months, closing Friday at 11,283.
Probable buyers include GM's Chinese automaker partner SAIC and investment funds from the Middle East.
That could create controversy for the IPO's largest seller, the U.S. Treasury, which is planning to use the sale to lower its stake in GM from 60.8% to slightly more than 40%. The treasury has said that some foreign investors would be allowed, but consumer advocate and former presidential candidate Ralph Nader cosigned a letter last week to President Barack Obama, urging him to suspend the IPO, partially because of the need to keep investment in the U.S.
Nader was also concerned that the government plans to sell part of its stake at a loss. The government needs to average $43.67 per share to break even on its $50-billion investment in GM, above the likely range. The treasury is hoping GM's stock will grow in value over the coming months and years so it can make more money when it sells the rest of its shares.
An increase in stock price is likely, said a person from a firm that owns a large number of GM bonds. The firm expects GM's stock to quickly reach the mid-$30 range the bond trading currently implies. And by 2013 or 2014, the person said, the firm expects the stock to hit $60 to $70 each, as long as GM fulfills executives' predictions that the company will make $11 billion to $13 billion annually before interest and taxes in an average sales climate.
GM bondholders will also receive warrants to buy more stock by either 2016 or 2019. Bondholders will be able to receive that extra stock by paying either $10 or $18.33 per share, which will count as revenue for GM. The warrants will take bondholders' total share in GM to 23.85%.Contact Chrissie Thompson: 313-222-8784 or cthompson@freepress.com
The True Cost of Waiting (from trulia.com)
Dangers of Analysis Paralysis
The cost of overthinking finances | Inman News
The cost of overthinking finances
Mood of the Market
By Tara-Nicholle Nelson, Tuesday, November 9, 2010.
Inman News
Recently, I read the pithy but powerful business inspiration book, "Rework," by Jason Fried and David Heinemeier Hansson, the founders of small business software company 37signals. The book is formatted into mini-chapters with provocative titles, including a couple that put me in mind of this column's current series of mindset-shifting recommendations for Americans around money matters.
One, ASAP is Poison, reminded me of the much-needed mindset shift away from instant gratification. Another, Inspiration is Perishable, "inspired" me to think of the Conscious Bookkeeping approach to your relationship with money, including transforming your monthly budget into a "map of intentions," renaming the staid, standard expense categories by what they really mean to you, rendering it much juicier and more likely that you will honor your own values and intentions with your dollars.
But the third "Rework" chapter that got my money mindset gears shifting was this: Planning is Guessing. The American obsession with books and television shows on retirement planning belies the truth that 43 percent of Americans have less than $10,000 in retirement savings -- and 27 percent have less than $1,000, according to the Employee Benefit Research Institute's 2010 Retirement Confidence Survey.I know a number of very smart people who have waited a very long time -- procrastinated, actually, to get serious about their financial planning -- not only for retirement, but also for big-ticket purchases like homes and children.
We procrastinate because we don't think we have enough money to save, so we put it off until that someday when we make more, not realizing that as we make more, most of us also spend more, so the surplus for savings never magically appears unless you intentionally create it.
We procrastinate because we don't think we have the time in our daily schedules for financial planning. We procrastinate because we fear what we don't understand, and we don't understand how to approach large dollar amounts, projections and investment accounts.
And we also procrastinate because we are overly confident that we have many years ahead to plan.
So, the book's "Planning is Guessing" mantra can be useful to those of us who procrastinate at financial planning in two different ways. First off, knowing that all planning is a form of guessing can extract some of the intimidating fear factor out of the process, and in that way, help activate us out of procrastination.
Your financial plans aren't boring, set-in-stone treatises that lock you into a certain way of life -- they're just guesses about what your future might look like that can help you set yourself up to have funding for the things you may want to do in years to come.
In discussing the implications of Planning is Guessing, the book's authors suggest that in business, much of the long-term planning that goes on should be eighty-sixed entirely and immediately swapped out for action. Even erroneous action and course correction is better, under the Planning is Guessing belief system, than simply planning and planning and planning.
And I agree -- if you can include managing and largely eliminating large impulse purchases in your immediate action plan, it is better for you to immediately activate your 401(k) or set up an automatic deposit of even 5 percent of your income into an automatic savings account today, with no planning at all, than it is to wait for three years until you think you have enough cash to make it worth your while to meet with a financial planner. (Of course, 10 percent would be better.) Pay off a credit card with your next paycheck -- no planning necessary.
The best approach may be a hybrid one: setting forth your vision and intentions for both the short and long term on paper. Calendar some time to set up an income and expense plan that prioritizes what's important to you. The earlier you plan for retirement and other major financial goals, the better -- but if you're struggling with that, just start doing things that further those goals. Now.
If you're struggling to get in motion on your financial planning, consider this: We humans hate the idea of losing money, more than we love the idea of making it -- this is a phenomenon behavioral economists call myopic (i.e., shortsighted) loss aversion. However, we also often commit the financial logic error of underestimating opportunity costs -- the money we miss out on by our actions (or inaction, in this case).Financial expert Manisha Thakor explains, "Assume Jane starts saving at 45 years old, because she spends her money on grooming in her 20s and on her children in her 30s. Joe, on the other hand, starts saving at 25 years old. Each saves $5,000 a year, with an average 7 percent annual growth until they are 65 years old. Joe will have $1 million at age 65, while Jane will only have $200,000 -- the head start gives Joe five times as much cash as Jane!"OK, so 7 percent seems high, but it is a hypothetical that proves a critical point: Jane incurred opportunity costs of $800,000 by failing to start saving money at the time Joe did. Note: the loss was not incurred by failing to plan -- it was incurred by failing to save. Delayed action to further your financial future -- whether saving for retirement, emergency fund, children's college or a home -- is actually costing you money.
"Planning is guessing." So get over it, and get on with it -- and if you can't do that, just do something you know will benefit your financial situation. And do it now.
Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
The cost of overthinking finances | Inman News
The cost of overthinking finances
Mood of the Market
By Tara-Nicholle Nelson, Tuesday, November 9, 2010.
Inman News
Recently, I read the pithy but powerful business inspiration book, "Rework," by Jason Fried and David Heinemeier Hansson, the founders of small business software company 37signals. The book is formatted into mini-chapters with provocative titles, including a couple that put me in mind of this column's current series of mindset-shifting recommendations for Americans around money matters.
One, ASAP is Poison, reminded me of the much-needed mindset shift away from instant gratification. Another, Inspiration is Perishable, "inspired" me to think of the Conscious Bookkeeping approach to your relationship with money, including transforming your monthly budget into a "map of intentions," renaming the staid, standard expense categories by what they really mean to you, rendering it much juicier and more likely that you will honor your own values and intentions with your dollars.
But the third "Rework" chapter that got my money mindset gears shifting was this: Planning is Guessing. The American obsession with books and television shows on retirement planning belies the truth that 43 percent of Americans have less than $10,000 in retirement savings -- and 27 percent have less than $1,000, according to the Employee Benefit Research Institute's 2010 Retirement Confidence Survey.I know a number of very smart people who have waited a very long time -- procrastinated, actually, to get serious about their financial planning -- not only for retirement, but also for big-ticket purchases like homes and children.
We procrastinate because we don't think we have enough money to save, so we put it off until that someday when we make more, not realizing that as we make more, most of us also spend more, so the surplus for savings never magically appears unless you intentionally create it.
We procrastinate because we don't think we have the time in our daily schedules for financial planning. We procrastinate because we fear what we don't understand, and we don't understand how to approach large dollar amounts, projections and investment accounts.
And we also procrastinate because we are overly confident that we have many years ahead to plan.
So, the book's "Planning is Guessing" mantra can be useful to those of us who procrastinate at financial planning in two different ways. First off, knowing that all planning is a form of guessing can extract some of the intimidating fear factor out of the process, and in that way, help activate us out of procrastination.
Your financial plans aren't boring, set-in-stone treatises that lock you into a certain way of life -- they're just guesses about what your future might look like that can help you set yourself up to have funding for the things you may want to do in years to come.
In discussing the implications of Planning is Guessing, the book's authors suggest that in business, much of the long-term planning that goes on should be eighty-sixed entirely and immediately swapped out for action. Even erroneous action and course correction is better, under the Planning is Guessing belief system, than simply planning and planning and planning.
And I agree -- if you can include managing and largely eliminating large impulse purchases in your immediate action plan, it is better for you to immediately activate your 401(k) or set up an automatic deposit of even 5 percent of your income into an automatic savings account today, with no planning at all, than it is to wait for three years until you think you have enough cash to make it worth your while to meet with a financial planner. (Of course, 10 percent would be better.) Pay off a credit card with your next paycheck -- no planning necessary.
The best approach may be a hybrid one: setting forth your vision and intentions for both the short and long term on paper. Calendar some time to set up an income and expense plan that prioritizes what's important to you. The earlier you plan for retirement and other major financial goals, the better -- but if you're struggling with that, just start doing things that further those goals. Now.
If you're struggling to get in motion on your financial planning, consider this: We humans hate the idea of losing money, more than we love the idea of making it -- this is a phenomenon behavioral economists call myopic (i.e., shortsighted) loss aversion. However, we also often commit the financial logic error of underestimating opportunity costs -- the money we miss out on by our actions (or inaction, in this case).Financial expert Manisha Thakor explains, "Assume Jane starts saving at 45 years old, because she spends her money on grooming in her 20s and on her children in her 30s. Joe, on the other hand, starts saving at 25 years old. Each saves $5,000 a year, with an average 7 percent annual growth until they are 65 years old. Joe will have $1 million at age 65, while Jane will only have $200,000 -- the head start gives Joe five times as much cash as Jane!"OK, so 7 percent seems high, but it is a hypothetical that proves a critical point: Jane incurred opportunity costs of $800,000 by failing to start saving money at the time Joe did. Note: the loss was not incurred by failing to plan -- it was incurred by failing to save. Delayed action to further your financial future -- whether saving for retirement, emergency fund, children's college or a home -- is actually costing you money.
"Planning is guessing." So get over it, and get on with it -- and if you can't do that, just do something you know will benefit your financial situation. And do it now.
Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
Quantitative Easing: Greed Kicks In (Bloomberg News)
Stocks Beat Junk by Most Since 1999 Amid Fund Flight
By Bryan Keogh and Lynn Thomasson - Nov 15, 2010
U.S. stocks are returning more than junk bonds after trailing them for a decade, valuations have fallen to a record low compared with credit -- and investors are pulling more money than ever out of equity funds.
The Standard & Poor’s 500 Index rose 17 percent including dividends since June, compared with 10 percent for the Barclays Capital U.S. Corporate High Yield Index. The equity gauge is on pace for its biggest six-month gain against the bond index since 1999, data compiled by Bloomberg show. At the same time, the more than 120 percent rally in junk bonds since 1998 has left them more expensive than ever versus stocks, based on earnings yields measuring annual profits as a percentage of price.
“People have pushed the trade too far,” said Peter Sorrentino, who helps oversee $13.8 billion at Huntington Asset Advisors in Cincinnati. “The next step is to move from fixed instruments into stocks.
Junk bonds have so little premium right now. It’s like the last chapter where people are finally going to capitulate.” Individuals are ignoring the advice, pulling $55.3 billion from stock mutual funds since the end of June after $11 trillion was erased from U.S. equity values between October 2007 and March 2009. Third-quarter withdrawals came as the S&P 500 rose 11 percent, the first time a three-month advance failed to spur investments, according to LPL Financial Corp. in Boston.
Favoring Stocks
Huntington, PNC Wealth Management and Goldman Sachs Group Inc. say stocks will beat speculative-grade debt as the economy improves. S&P 500 per-share earnings are poised to rise 37 percent in 2010, the biggest increase in 22 years, estimates from more than 10,000 analysts tracked by Bloomberg show.
Futures on the S&P 500 expiring in December rose 0.1 percent to 1,196.4 at 9:37 a.m. today in London.
The benchmark index for American equities fell 2.2 percent to 1,199.21 last week as profits from Cisco Systems Inc. in San Jose, California, and Burbank, California-based Walt Disney Co. trailed analysts’ estimates. S&P 500 earnings that beat forecasts more than 70 percent of the time have helped push the gauge up 7.5 percent this year, data compiled by Bloomberg show.
Stocks remain cheap compared with bonds even after the rally. Debt rated below Baa3 by Moody’s Investors Service and BBB- by S&P pays an average yield of 7.25 percent, compared with an earnings yield of 6.64 percent for the S&P 500, data compiled by Bloomberg show. That’s the smallest gap since the Barclays index began in 1991.
‘Overweight’ Rating
Goldman Sachs in New York advised clients last month to begin raising the proportion of equities they own relative to debt, citing the expanding economy. The world’s most profitable investment bank lowered its rating on investment-grade corporate bonds to “neutral,” saying they were likely to return next to nothing while equities gain 14 percent over 12 months, according to an Oct. 15 note to clients.
Junk bonds, which Goldman rates “overweight,” will likely trail stocks, offering returns greater than 10 percent in the coming year, according to credit strategist Alberto Gallo.
“It’s going to be harder for high yield to outperform stocks over the next 12 months,” he said in an interview. “We already had two years in a row where high yield did better.”
Investors should be buying stocks that “look like bonds” with international sales, below-average debt and growing dividends, said Chris Hyzy, New York-based chief investment officer at U.S. Trust, a Bank of America Corp. unit overseeing $339.9 billion in client assets.
‘Sweet Spot’
“That’s the sweet spot for a balanced investor looking to reallocate from excessive ownership of fixed income,” he said. “High yield is fairly valued. We expect the gap between the earnings yield on equities and fixed-income yields to close considerably in the next 12 to 18 months.” Shares of retailers and technology companies such as J.C. Penney Co. and Motorola Inc. have surged since June 30, outperforming their bonds in a reversal of the first half, when equities slumped and junk rallied.
Department-store chain J.C. Penney in Plano, Texas, has returned 47 percent since June 30, compared with a gain of 0.02 percent for its senior unsecured debt, rated Ba1 by Moody’s and BB+ at S&P. That contrasts with the first six months, when shares fell 19 percent and the debt rose 7 percent.
Motorola, the second-largest U.S. mobile-phone maker, has surged 23 percent this half, five times the 4.2 percent gain for its debt. In the first six months, Schaumburg, Illinois-based Motorola’s bonds returned 16 percent, while its stock lost the same amount.
Rental Cars
Avis Budget Group Inc. shares rallied 38 percent since June 30, while the company’s bonds returned 11 percent. Year-to-date, the bonds of the rental-car company have risen 16 percent, compared with 3.6 percent for the stock.
“If I had to add money into a portfolio, I’d add it into equities,” said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees $105 billion. “Stock valuations remain attractive. The earnings prospects continue to be positive. We’ll likely get back to an economy which is expanding in the early part of 2011.”
While the S&P 500’s advance has restored $2.15 trillion to market values since July, shares are getting cheaper compared with profit forecasts. Income growth that analysts predict will top 13 percent in each of the next two years means the index is trading at 12.5 times 2011 earnings and 11 times projections for 2012, data compiled by Bloomberg show. The S&P 500’s average price-earnings ratio since 1954 is about 16.5, the data show.
Quantitative Easing
At the same time, the Fed’s so-called quantitative easing policy to buy as much as $600 billion of Treasuries has pushed down government bond yields that are the benchmark for corporate borrowing and mortgages. Rates on junk fell to a 5 1/2-year low of 6.97 percent on Nov. 9, from 9.5 percent five months earlier and a record 23 percent in December 2008, according to the Barclays Capital index.
“Quantitative easing is extremely supportive of equities in the short term,” said Lucette Yvernault, who helps oversee the equivalent of about 7 billion euros ($9.5 billion) at Schroders Investment Management Ltd. in London. “The detrimental impact of the QE is that investors don’t necessarily reinvest in the U.S. economy, but instead fuel more growth in emerging markets.” U.S. earnings may keep rising as more executives than ever increase forecasts compared with those lowering them. EBay Inc., United Parcel Service Inc. and 196 other companies raised profit estimates above analysts’ projections last month as 130 firms cut them, the biggest gap since Bloomberg began tracking the data in 1999.
Greed Kicks In
The S&P 500’s earnings yield averaged 5.6 percent through the last bull market that ended Oct. 9, 2007, according to data on reported profit compiled by Bloomberg. Using estimated income, the index yields 7.1 percent, 0.2 percentage point less than the average for speculative bonds tracked by Barclays.
“The greed will kick back in, and that’s what will propel the equity markets,” Huntington Asset’s Sorrentino said.
While stocks have beaten bonds in the past 4 1/2 months, investors have fared better this year with fixed-income securities. The Barclays measure of junk bonds has returned 15 percent since Dec. 31, double the advance in the S&P 500.
Investors piled about $190 billion into U.S. bond funds this year through Oct. 31, a pace that would surpass last year’s record-setting $214.1 billion, according to Cambridge, Massachusetts-based research firm EPFR Global. Clients pulled about $56 billion out of equity funds and $74.6 billion in 2009.
Flows into junk bonds fell to $1.7 billion in October from $3.35 billion in September, the most all year, provisional EPFR data show. That brought the total to about $8.6 billion as of Oct. 31, compared with $19.9 billion in 2009.
“Ultimately the Fed will succeed,” said Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., which manages $677 billion. “It’s just a question of how well they will succeed and how long it’s going to take for them to convince people to take money out of the mattresses and start putting it to work.”
To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net.
To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net; Nick Gentle at ngentle2@bloomberg.net.
By Bryan Keogh and Lynn Thomasson - Nov 15, 2010
U.S. stocks are returning more than junk bonds after trailing them for a decade, valuations have fallen to a record low compared with credit -- and investors are pulling more money than ever out of equity funds.
The Standard & Poor’s 500 Index rose 17 percent including dividends since June, compared with 10 percent for the Barclays Capital U.S. Corporate High Yield Index. The equity gauge is on pace for its biggest six-month gain against the bond index since 1999, data compiled by Bloomberg show. At the same time, the more than 120 percent rally in junk bonds since 1998 has left them more expensive than ever versus stocks, based on earnings yields measuring annual profits as a percentage of price.
“People have pushed the trade too far,” said Peter Sorrentino, who helps oversee $13.8 billion at Huntington Asset Advisors in Cincinnati. “The next step is to move from fixed instruments into stocks.
Junk bonds have so little premium right now. It’s like the last chapter where people are finally going to capitulate.” Individuals are ignoring the advice, pulling $55.3 billion from stock mutual funds since the end of June after $11 trillion was erased from U.S. equity values between October 2007 and March 2009. Third-quarter withdrawals came as the S&P 500 rose 11 percent, the first time a three-month advance failed to spur investments, according to LPL Financial Corp. in Boston.
Favoring Stocks
Huntington, PNC Wealth Management and Goldman Sachs Group Inc. say stocks will beat speculative-grade debt as the economy improves. S&P 500 per-share earnings are poised to rise 37 percent in 2010, the biggest increase in 22 years, estimates from more than 10,000 analysts tracked by Bloomberg show.
Futures on the S&P 500 expiring in December rose 0.1 percent to 1,196.4 at 9:37 a.m. today in London.
The benchmark index for American equities fell 2.2 percent to 1,199.21 last week as profits from Cisco Systems Inc. in San Jose, California, and Burbank, California-based Walt Disney Co. trailed analysts’ estimates. S&P 500 earnings that beat forecasts more than 70 percent of the time have helped push the gauge up 7.5 percent this year, data compiled by Bloomberg show.
Stocks remain cheap compared with bonds even after the rally. Debt rated below Baa3 by Moody’s Investors Service and BBB- by S&P pays an average yield of 7.25 percent, compared with an earnings yield of 6.64 percent for the S&P 500, data compiled by Bloomberg show. That’s the smallest gap since the Barclays index began in 1991.
‘Overweight’ Rating
Goldman Sachs in New York advised clients last month to begin raising the proportion of equities they own relative to debt, citing the expanding economy. The world’s most profitable investment bank lowered its rating on investment-grade corporate bonds to “neutral,” saying they were likely to return next to nothing while equities gain 14 percent over 12 months, according to an Oct. 15 note to clients.
Junk bonds, which Goldman rates “overweight,” will likely trail stocks, offering returns greater than 10 percent in the coming year, according to credit strategist Alberto Gallo.
“It’s going to be harder for high yield to outperform stocks over the next 12 months,” he said in an interview. “We already had two years in a row where high yield did better.”
Investors should be buying stocks that “look like bonds” with international sales, below-average debt and growing dividends, said Chris Hyzy, New York-based chief investment officer at U.S. Trust, a Bank of America Corp. unit overseeing $339.9 billion in client assets.
‘Sweet Spot’
“That’s the sweet spot for a balanced investor looking to reallocate from excessive ownership of fixed income,” he said. “High yield is fairly valued. We expect the gap between the earnings yield on equities and fixed-income yields to close considerably in the next 12 to 18 months.” Shares of retailers and technology companies such as J.C. Penney Co. and Motorola Inc. have surged since June 30, outperforming their bonds in a reversal of the first half, when equities slumped and junk rallied.
Department-store chain J.C. Penney in Plano, Texas, has returned 47 percent since June 30, compared with a gain of 0.02 percent for its senior unsecured debt, rated Ba1 by Moody’s and BB+ at S&P. That contrasts with the first six months, when shares fell 19 percent and the debt rose 7 percent.
Motorola, the second-largest U.S. mobile-phone maker, has surged 23 percent this half, five times the 4.2 percent gain for its debt. In the first six months, Schaumburg, Illinois-based Motorola’s bonds returned 16 percent, while its stock lost the same amount.
Rental Cars
Avis Budget Group Inc. shares rallied 38 percent since June 30, while the company’s bonds returned 11 percent. Year-to-date, the bonds of the rental-car company have risen 16 percent, compared with 3.6 percent for the stock.
“If I had to add money into a portfolio, I’d add it into equities,” said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees $105 billion. “Stock valuations remain attractive. The earnings prospects continue to be positive. We’ll likely get back to an economy which is expanding in the early part of 2011.”
While the S&P 500’s advance has restored $2.15 trillion to market values since July, shares are getting cheaper compared with profit forecasts. Income growth that analysts predict will top 13 percent in each of the next two years means the index is trading at 12.5 times 2011 earnings and 11 times projections for 2012, data compiled by Bloomberg show. The S&P 500’s average price-earnings ratio since 1954 is about 16.5, the data show.
Quantitative Easing
At the same time, the Fed’s so-called quantitative easing policy to buy as much as $600 billion of Treasuries has pushed down government bond yields that are the benchmark for corporate borrowing and mortgages. Rates on junk fell to a 5 1/2-year low of 6.97 percent on Nov. 9, from 9.5 percent five months earlier and a record 23 percent in December 2008, according to the Barclays Capital index.
“Quantitative easing is extremely supportive of equities in the short term,” said Lucette Yvernault, who helps oversee the equivalent of about 7 billion euros ($9.5 billion) at Schroders Investment Management Ltd. in London. “The detrimental impact of the QE is that investors don’t necessarily reinvest in the U.S. economy, but instead fuel more growth in emerging markets.” U.S. earnings may keep rising as more executives than ever increase forecasts compared with those lowering them. EBay Inc., United Parcel Service Inc. and 196 other companies raised profit estimates above analysts’ projections last month as 130 firms cut them, the biggest gap since Bloomberg began tracking the data in 1999.
Greed Kicks In
The S&P 500’s earnings yield averaged 5.6 percent through the last bull market that ended Oct. 9, 2007, according to data on reported profit compiled by Bloomberg. Using estimated income, the index yields 7.1 percent, 0.2 percentage point less than the average for speculative bonds tracked by Barclays.
“The greed will kick back in, and that’s what will propel the equity markets,” Huntington Asset’s Sorrentino said.
While stocks have beaten bonds in the past 4 1/2 months, investors have fared better this year with fixed-income securities. The Barclays measure of junk bonds has returned 15 percent since Dec. 31, double the advance in the S&P 500.
Investors piled about $190 billion into U.S. bond funds this year through Oct. 31, a pace that would surpass last year’s record-setting $214.1 billion, according to Cambridge, Massachusetts-based research firm EPFR Global. Clients pulled about $56 billion out of equity funds and $74.6 billion in 2009.
Flows into junk bonds fell to $1.7 billion in October from $3.35 billion in September, the most all year, provisional EPFR data show. That brought the total to about $8.6 billion as of Oct. 31, compared with $19.9 billion in 2009.
“Ultimately the Fed will succeed,” said Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., which manages $677 billion. “It’s just a question of how well they will succeed and how long it’s going to take for them to convince people to take money out of the mattresses and start putting it to work.”
To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net.
To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net; Nick Gentle at ngentle2@bloomberg.net.
The Sleep at Night Portfolio: Make Your Own Pension (WSJ)
New ways to create a gold-plated pensionBY ELEANOR LAISE,
The Wall Street Journal
The Wall Street Journal — 10/30/10
The financial crisis has given some investors a case of pension envy. In an era of volatile markets, the idea of steady, guaranteed payments for life holds obvious appeal.
The problem, of course, is that investors are less likely than ever to get that kind of deal from their employer. Companies tend to be freezing their pensions or closing them entirely, rather than beefing them up. About a third of today's Fortune 100 companies have frozen or closed a pension plan since 1998, according to consulting firm Towers Watson.
But that doesn't mean investors can't set up their own. New tools are emerging to help investors fashion portfolios that mimic the steady payments generated by the pension plans of yore.
The trick: to focus more on constructing a portfolio to cover future expenses—not just maximize returns—and to rethink old retirement-planning rules of thumb, such as a "safe" portfolio withdrawal rate of 4% annually.
Financial firms and advisers are catering to the demand for pension-like portfolios. New bond-based products can be tailored to produce income to pay living expenses for a period of, say, five or 10 years, leaving a significant chunk of the portfolio to invest in higher-growth assets with long-term potential. Some target-date mutual funds, meanwhile, are aiming to match their investments to the expenses investors face in retirement.
The new strategies often mean heftier helpings of bonds and inflation-fighting investments like real estate and commodities. While bigger bond holdings can mean lower returns, the approach also can give investors the confidence to stick with the more volatile stock investments in other parts of their portfolio, advisers say—reducing the chance they will sell shares at a market bottom.
When investors know that a few years' worth of basic expenses are covered by safe, high-quality bonds, "they can sit back and worry a whole heck of a lot less" about stocks' ups and downs, says Joe Chrisman, director at wealth-management firm Lourd Capital Management, which uses a pension-style approach with clients.
The most painful part of the process may be simply saving more. Since the financial crisis, "there's been a much greater recognition that the markets are not going to rescue everyone," says Timothy Noonan, managing director at Russell Investments. Building a secure retirement "is not a function of going and finding higher returns."
The pension approach seems to work: Over the long term, defined-benefit pension plans have outperformed 401(k) plans by roughly 1 percentage point annually, according to Towers Watson.
Small investors can't—and shouldn't—invest exactly like pension plans, though. For a pension plan acting on behalf of many beneficiaries, with people entering and retiring each year, the age of an individual worker makes little difference. But a person investing on his own must tone down portfolio risk—and generally accept lower returns—as he approaches retirement.
Pension plans also can buy into some investments that most small investors can't access, such as hedge funds and private equity, and get better deals on fees.
That isn't to say pension plans have some magic formula. Many suffered big losses in 2008, for example, though overall they held up better than 401(k)s, according to Towers Watson.
Neither type of retirement plan provides the perfect answer, says Zvi Bodie, a finance and economics professor at Boston University School of Management. "We need to combine the best of both."
Annuities may seem the simplest solution for investors seeking a steady income stream. One approach: Buy an immediate annuity that provides for basic expenses, leaving other parts of the portfolio to cover nonessentials. A number of firms now are working to marry funds with annuities within 401(k) plans.
Still, many advisers suggest investors first consider the greater flexibility, and often lower costs, that can come with a do-it-yourself approach.
A homemade pension plan starts by acknowledging that people, like companies, have a balance sheet with both assets and liabilities, advisers say. The liabilities include the money you will spend on food, shelter, travel and other expenses. Yet advisers and money managers traditionally have focused mostly on the assets, trying to maximize investment returns for a given level of risk.
Pensions, by contrast, are more likely to employ liability-driven investing, choosing particular investments to match their future expenses. Investors can do this, too—by buying long-term bonds, for example, to match payments to be made decades from now.New tools can help people size up future expenses. At goalgami.com, a free calculator launched earlier this year by financial-planning technology firm Advisor Software Inc., people can enter information on their income, assets, debt and long-term goals like real-estate purchases. Taking a lifetime view of the "household balance sheet," rather than a single snapshot, the tool analyzes whether future sources of cash will pay the bills and cover other retirement costs.
Most people want to maintain their standard of living in retirement. So if you have just retired and live comfortably on $100,000 a year, you want that income to keep up with inflation as long as you live, says Tom Idzorek, chief investment officer at Morningstar Inc.'s Ibbotson Associates.
A "laddered" portfolio of Treasury inflation-protected securities, or TIPS, can help. Investors who buy TIPS that mature in each year of retirement ensure a steady income stream that rises with inflation and matches spending, Mr. Idzorek says.
Ibbotson in recent years has been designing target-date fund strategies with retirement liabilities in mind. It has built two sample portfolios—one using traditional asset allocation and one with a liability-focused approach—that have roughly the same allocations to stocks and bonds. But the liability-focused portfolio allocates roughly 28% to assets that can act as inflation hedges, including commodities and real estate, versus about 16% in the traditional portfolio.
Since people are likely to spend their retirement money in U.S. dollars, they also can more closely match their assets with their liabilities by investing more in U.S. stocks and bonds as they approach retirement, Mr. Idzorek says. In the sample portfolios, the liability-focused approach devotes only about 8% to non-U.S. holdings, versus about 18% in the traditional portfolio.
The liability-focused portfolio's expected return, 5.9%, is only slightly less than the 6.4% expected in the traditional portfolio, according to Ibbotson.
Of course, given the recent bond rally, it can be pricey to match many years' worth of retirement expenses with TIPS and other bond investments. Asset Dedication LLC, a Mill Valley, Calif., money-management firm, aims to address that by building custom bond portfolios to produce precisely the income to cover client expenses for a given number of years, leaving plenty to invest in higher-growth assets.
The firm's Defined Income product, launched this year, invests in certificates of deposit, TIPS and other high-quality bonds and holds them to maturity. Bulking up on fixed-income might seem counterintuitive right now. But by holding bonds to maturity and then rolling them over, the strategy can capitalize on higher yields later.
If a client wants to spend $50,000 in each of the next five years but also wants to buy a vacation home in year three, the account can help plan for that, says Mr. Chrisman of Lourd Capital, which uses the Asset Dedication program and other liability-driven strategies with clients.
Mickey Patrick, 57 years old, says his do-it-yourself pension allows him to stop worrying about short-term stock-market swings. Mr. Patrick, a technology manager in Houston, earlier this year started investing most of his individual retirement account in TIPS, CDs and other high-quality bond holdings. Though several financial advisers had told him to keep most of the money in stocks, Mr. Patrick determined that the account needed to cover only about one-fourth of his retirement spending, since a pension and Social Security would provide the rest—and therefore he didn't need to take that much risk.
"They said I was crazy," Mr. Patrick says. But while he used to check market moves daily, now "I don't worry at all about it," he says.
People who are focused on matching investment assets with retirement "liabilities" challenge some conventional retirement-planning wisdom. One rule of thumb says investors should have a stock allocation equal to 100 minus their age. (A 40-year-old, for example, would keep 60% in stocks.) But Boston University's Mr. Bodie says risk-averse investors, even younger ones, might want to put most of their money in safer assets.
Bob Kirchner, 63, a retired economist in Fort Washington, Md., has found that a liability-matching strategy reverses the traditional planning process. Instead of first deciding to put, say, 50% in stocks, he says, it's "let's get all this safe stuff lined up first," leaving stock decisions for later. He now has more than half of his portfolio in TIPS.
Liability-driven investing also involves rethinking the "safe" portfolio-withdrawal rate. Many advisers say retirees can withdraw 4% of their initial retirement balance a year, adjusting annually for inflation. But while the 4% spending rule is rigid, the investments tend not to be. Someone might automatically spend a preset amount, disregarding the fact that his portfolio has gained or lost, say, 30% over the past year. With the 4% rule, "there's a chance you'll wind up with nothing, and there's a bigger chance you'll leave quite a bit," says William Sharpe, a professor of finance, emeritus, at Stanford Graduate School of Business.
A bill introduced in Congress last year would require 401(k)s to show participants a projected monthly retirement income based on their current account balance, instead of just a simple lump sum. Russell Investments is developing tools to help financial advisers look at similar metrics for clients' portfolios, says Russell's Mr. Noonan.
If investors can look at their progress in terms of their personal goals rather than market events, Mr. Noonan says, "it's easier for them to remain invested when the market is doing scary gyrating things."
--------------------------------------------------------------------------------
Copyright © 2010 Dow Jones & Company, Inc. All Rights Reserv
The Wall Street Journal
The Wall Street Journal — 10/30/10
The financial crisis has given some investors a case of pension envy. In an era of volatile markets, the idea of steady, guaranteed payments for life holds obvious appeal.
The problem, of course, is that investors are less likely than ever to get that kind of deal from their employer. Companies tend to be freezing their pensions or closing them entirely, rather than beefing them up. About a third of today's Fortune 100 companies have frozen or closed a pension plan since 1998, according to consulting firm Towers Watson.
But that doesn't mean investors can't set up their own. New tools are emerging to help investors fashion portfolios that mimic the steady payments generated by the pension plans of yore.
The trick: to focus more on constructing a portfolio to cover future expenses—not just maximize returns—and to rethink old retirement-planning rules of thumb, such as a "safe" portfolio withdrawal rate of 4% annually.
Financial firms and advisers are catering to the demand for pension-like portfolios. New bond-based products can be tailored to produce income to pay living expenses for a period of, say, five or 10 years, leaving a significant chunk of the portfolio to invest in higher-growth assets with long-term potential. Some target-date mutual funds, meanwhile, are aiming to match their investments to the expenses investors face in retirement.
The new strategies often mean heftier helpings of bonds and inflation-fighting investments like real estate and commodities. While bigger bond holdings can mean lower returns, the approach also can give investors the confidence to stick with the more volatile stock investments in other parts of their portfolio, advisers say—reducing the chance they will sell shares at a market bottom.
When investors know that a few years' worth of basic expenses are covered by safe, high-quality bonds, "they can sit back and worry a whole heck of a lot less" about stocks' ups and downs, says Joe Chrisman, director at wealth-management firm Lourd Capital Management, which uses a pension-style approach with clients.
The most painful part of the process may be simply saving more. Since the financial crisis, "there's been a much greater recognition that the markets are not going to rescue everyone," says Timothy Noonan, managing director at Russell Investments. Building a secure retirement "is not a function of going and finding higher returns."
The pension approach seems to work: Over the long term, defined-benefit pension plans have outperformed 401(k) plans by roughly 1 percentage point annually, according to Towers Watson.
Small investors can't—and shouldn't—invest exactly like pension plans, though. For a pension plan acting on behalf of many beneficiaries, with people entering and retiring each year, the age of an individual worker makes little difference. But a person investing on his own must tone down portfolio risk—and generally accept lower returns—as he approaches retirement.
Pension plans also can buy into some investments that most small investors can't access, such as hedge funds and private equity, and get better deals on fees.
That isn't to say pension plans have some magic formula. Many suffered big losses in 2008, for example, though overall they held up better than 401(k)s, according to Towers Watson.
Neither type of retirement plan provides the perfect answer, says Zvi Bodie, a finance and economics professor at Boston University School of Management. "We need to combine the best of both."
Annuities may seem the simplest solution for investors seeking a steady income stream. One approach: Buy an immediate annuity that provides for basic expenses, leaving other parts of the portfolio to cover nonessentials. A number of firms now are working to marry funds with annuities within 401(k) plans.
Still, many advisers suggest investors first consider the greater flexibility, and often lower costs, that can come with a do-it-yourself approach.
A homemade pension plan starts by acknowledging that people, like companies, have a balance sheet with both assets and liabilities, advisers say. The liabilities include the money you will spend on food, shelter, travel and other expenses. Yet advisers and money managers traditionally have focused mostly on the assets, trying to maximize investment returns for a given level of risk.
Pensions, by contrast, are more likely to employ liability-driven investing, choosing particular investments to match their future expenses. Investors can do this, too—by buying long-term bonds, for example, to match payments to be made decades from now.New tools can help people size up future expenses. At goalgami.com, a free calculator launched earlier this year by financial-planning technology firm Advisor Software Inc., people can enter information on their income, assets, debt and long-term goals like real-estate purchases. Taking a lifetime view of the "household balance sheet," rather than a single snapshot, the tool analyzes whether future sources of cash will pay the bills and cover other retirement costs.
Most people want to maintain their standard of living in retirement. So if you have just retired and live comfortably on $100,000 a year, you want that income to keep up with inflation as long as you live, says Tom Idzorek, chief investment officer at Morningstar Inc.'s Ibbotson Associates.
A "laddered" portfolio of Treasury inflation-protected securities, or TIPS, can help. Investors who buy TIPS that mature in each year of retirement ensure a steady income stream that rises with inflation and matches spending, Mr. Idzorek says.
Ibbotson in recent years has been designing target-date fund strategies with retirement liabilities in mind. It has built two sample portfolios—one using traditional asset allocation and one with a liability-focused approach—that have roughly the same allocations to stocks and bonds. But the liability-focused portfolio allocates roughly 28% to assets that can act as inflation hedges, including commodities and real estate, versus about 16% in the traditional portfolio.
Since people are likely to spend their retirement money in U.S. dollars, they also can more closely match their assets with their liabilities by investing more in U.S. stocks and bonds as they approach retirement, Mr. Idzorek says. In the sample portfolios, the liability-focused approach devotes only about 8% to non-U.S. holdings, versus about 18% in the traditional portfolio.
The liability-focused portfolio's expected return, 5.9%, is only slightly less than the 6.4% expected in the traditional portfolio, according to Ibbotson.
Of course, given the recent bond rally, it can be pricey to match many years' worth of retirement expenses with TIPS and other bond investments. Asset Dedication LLC, a Mill Valley, Calif., money-management firm, aims to address that by building custom bond portfolios to produce precisely the income to cover client expenses for a given number of years, leaving plenty to invest in higher-growth assets.
The firm's Defined Income product, launched this year, invests in certificates of deposit, TIPS and other high-quality bonds and holds them to maturity. Bulking up on fixed-income might seem counterintuitive right now. But by holding bonds to maturity and then rolling them over, the strategy can capitalize on higher yields later.
If a client wants to spend $50,000 in each of the next five years but also wants to buy a vacation home in year three, the account can help plan for that, says Mr. Chrisman of Lourd Capital, which uses the Asset Dedication program and other liability-driven strategies with clients.
Mickey Patrick, 57 years old, says his do-it-yourself pension allows him to stop worrying about short-term stock-market swings. Mr. Patrick, a technology manager in Houston, earlier this year started investing most of his individual retirement account in TIPS, CDs and other high-quality bond holdings. Though several financial advisers had told him to keep most of the money in stocks, Mr. Patrick determined that the account needed to cover only about one-fourth of his retirement spending, since a pension and Social Security would provide the rest—and therefore he didn't need to take that much risk.
"They said I was crazy," Mr. Patrick says. But while he used to check market moves daily, now "I don't worry at all about it," he says.
People who are focused on matching investment assets with retirement "liabilities" challenge some conventional retirement-planning wisdom. One rule of thumb says investors should have a stock allocation equal to 100 minus their age. (A 40-year-old, for example, would keep 60% in stocks.) But Boston University's Mr. Bodie says risk-averse investors, even younger ones, might want to put most of their money in safer assets.
Bob Kirchner, 63, a retired economist in Fort Washington, Md., has found that a liability-matching strategy reverses the traditional planning process. Instead of first deciding to put, say, 50% in stocks, he says, it's "let's get all this safe stuff lined up first," leaving stock decisions for later. He now has more than half of his portfolio in TIPS.
Liability-driven investing also involves rethinking the "safe" portfolio-withdrawal rate. Many advisers say retirees can withdraw 4% of their initial retirement balance a year, adjusting annually for inflation. But while the 4% spending rule is rigid, the investments tend not to be. Someone might automatically spend a preset amount, disregarding the fact that his portfolio has gained or lost, say, 30% over the past year. With the 4% rule, "there's a chance you'll wind up with nothing, and there's a bigger chance you'll leave quite a bit," says William Sharpe, a professor of finance, emeritus, at Stanford Graduate School of Business.
A bill introduced in Congress last year would require 401(k)s to show participants a projected monthly retirement income based on their current account balance, instead of just a simple lump sum. Russell Investments is developing tools to help financial advisers look at similar metrics for clients' portfolios, says Russell's Mr. Noonan.
If investors can look at their progress in terms of their personal goals rather than market events, Mr. Noonan says, "it's easier for them to remain invested when the market is doing scary gyrating things."
--------------------------------------------------------------------------------
Copyright © 2010 Dow Jones & Company, Inc. All Rights Reserv
Big New Bounty Program for Whistleblowers ( Boardmember.com on Dodd - Frank Financial Legislation)
October 28, 2010
Opening the Floodgates: The Dodd-Frank Whistleblower Provisions’ Impact on Corporate America
by Doug Clark, Wilson Sonsini Goodrich & Rosati
During Corporate Board Member and NYSE Euronext's Annual Boardroom Summit audit committee peer exchange, the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) excited discussion and concern. That’s not surprising, as a fair amount of government activity focused on Dodd-Frank is presently in the works. In October, the Securities and Exchange Commission (SEC) will report to Congress concerning its whistleblower bounty program, as well as the establishment of its own whistleblower office. In November, the SEC will propose rules to establish a Whistleblower Incentives and Protection Program and will appoint the head of the new whistleblower office. That sound you hear is the sound of our government growing. [1]
The corporate world should watch the evolution of this bounty program closely. To help set these developments in context, this article provides some background and thoughts about the future.
A Short Summary: Dodd-Frank requires the SEC, in any action in which it levies sanctions in excess of $1 million, to compensate whistleblowers who provide original information with between 10 to 30 percent of the amount of the sanctions. [2] Is This New News? Part I: Kind of. The SEC actually has had a bounty program in place for more than 20 years. This original bounty program rewarded whistleblowers for information leading to the recovery of a civil penalty from an insider trader, a tipper, or someone who controlled an insider trader. The bounty was limited to 10 percent of a civil penalty exacted pursuant to a court order. The decision to award a bounty, and to whom, was within the sole discretion of the SEC (as it will be under Dodd-Frank).
This bounty program was a fairly well-kept secret, as the Office of Inspector General (OIG) noted in a March 29, 2010, report: “[T]he Commission has not received a large number of applications from individuals seeking a bounty over this 20-year period. We also found that the program is not widely recognized inside or outside the Commission.” [3]
In fact, the OIG determined that between 1989 and 2009, the SEC had paid a total of seven bounties to five claimants amounting to less than $160,000 and had denied five bounty applications. Consequently, the OIG made a number of recommendations to improve the bounty program, including coming up with a communication plan to raise the profile of the program, posting an application form on the SEC website, and developing specific criteria for awarding a bounty. The OIG also suggested that the SEC incorporate best practices from more successful Department of Justice (DOJ) and Internal Revenue Service (IRS) bounty programs, both of which are discussed below.
For purposes of this discussion, the old bounty program is just an interesting reference point. The Dodd-Frank mandate to the SEC is broader and more lucrative for whistleblowers. The Whistleblower Incentive and Protection Program to be implemented by the SEC will not be limited to insider trading and will not cap bounties at 10% of a civil penalty. It’s also apparent that the new bounty program will not be a secret inside or outside the Commission.
Is This New News? Part II: Anyone outraged at the concept of our government paying whistleblowers for reporting unlawful activity might be surprised to find out that it’s been going on for a quite a while and that it’s a big, lucrative business. Two federal bounty programs stand out and are worthy of discussion.
The False Claims ActThe False Claims Act, 31 U.S.C. § 3729, et seq., generally creates liability for persons who make false claims to or defraud the government in order to receive money from the government. For example, a defense contractor who knowingly submits a false invoice to the government for payment would run afoul of this act. Section 3730 permits a whistleblower – called a relator in False Claims Act jargon – to bring an action for the government. The procedure for initiating and maintaining such an action, called a qui tam action, is complex and beyond the scope of this article. Where the government proceeds with an action brought by a whistleblower, the whistleblower is entitled to at least 15 percent and up to 25 percent of the proceeds of an award or a settlement. If the government declines to proceed with the case and the relator proceeds with it and obtains a recovery, the whistleblower is eligible for a higher percentage.
The False Claims Act, once known as the “Lincoln Law” was enacted in 1863 to address government contracting fraud during the Civil War. It was substantially amended most recently in 1986 (note that the old SEC bounty program went into effect in 1989). Since 1986, according to DOJ statistics, qui tam lawsuits have returned more than $15 billion to the government and have generated $2.5 billion in awards to whistleblowers. That’s real money, and it has attracted real plaintiff law firms to represent whistleblowers in qui tam actions. Needless to say, the SEC’s old bounty program did not spawn a thriving plaintiffs’ bar.
Early indications are that the plaintiffs’ securities class action and qui tam bar are acutely interested in the Dodd-Frank whistleblower provision. For example, one of the leading False Claims Act plaintiffs’ firms has created a portion of its website for this opportunity, as I’m sure others have. [4] In addition, a reference to the Dodd-Frank whistleblower provision has worked its way into the standard press releases seeking plaintiffs for securities class actions. One does not have to be an economist to see the direction in which this is heading. Plaintiffs’ lawyers follow the money, and they smell money in this new law.
Tax Fraud CasesIn 2006, the IRS seriously entered the whistleblower field with the passage of the Tax Relief and Health Act of 2006. The whistleblower provisions of that act offer a bounty to those who provide the IRS with information about tax underpayments of $2 million or more, with whistleblowers eligible for up to 15 to 30 percent of the amount recovered by the IRS. The program is young, but statistics for 2008 are illustrative of the kind of traction a whistleblower program can get in its early days: In that year alone, the IRS received 476 whistleblower complaints alleging tax underpayment by 1,246 taxpayers. It’s not clear how much money whistleblowers yielded from those complaints. [5]
It is not beyond belief that the whistleblower office the SEC will give birth to this month will administer a program that could generate a similar or greater number of complaints. The impact on the SEC’s Enforcement Division and Corporate America will be tremendous. More on that below.
What About My Hotline?: The Sarbanes-Oxley Act of 2002, passed in reaction to the spate of corporate scandals (Enron, Worldcom) that preceded the spate of corporate scandals that spawned Dodd-Frank (Countrywide, Bear Stearns, Lehman Brothers), required public company audit committees to establish procedures for “confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.” [6] Public companies faithfully complied, and it became a routine part of audit committees’ lives to review, examine, and investigate anonymous complaints. Most companies set up a hotline that employees could use to report potentially fraudulent activity.This provision of Sarbanes-Oxley worked. Employees registered complaints and Audit Committees considered them and, in many instances, retained counsel and experts to investigate them. Companies did not set up bounties, however, and are poorly positioned to compete with the SEC’s promise of a 15 to 25 percent cut of any potential fine. Let’s say you were a well-intentioned employee of a publicly listed company and are distressed when you learn that high-ranking employees at your company are bribing government officials in foreign countries. Do you call the audit committee hotline and sleep the sleep of the righteous? Or do you contact the SEC’s brand spanking new whistleblower office and, perhaps someday, sleep in Gstaad after a day on the slopes? In 2008, the SEC reached a settlement with Siemens AG for violations of the Foreign Corrupt Practices Act (FCPA) and obtained a $350 million disgorgement of profits. Feel free to pause and do the arithmetic. It is not unreasonable to assume that the Dodd-Frank whistleblower provisions will largely render moot the Sarbanes-Oxley audit committee procedures.
FCPA—Where the Real Money Is: Having mentioned the FCPA anecdotally, it’s appropriate to bring the point home. Pursuant to the FCPA’s anti-bribery provisions, it is unlawful for any issuer, domestic concern, or person acting in the United States to offer anything of value to members of a foreign government, international organization, or political party for the purpose of: (1) influencing duties; (2) inducing them to use their influence to affect a foreign government’s or agency's decision; (3) obtaining or retaining business for anyone; or (4) directing business to anyone. Fines and penalties for violating the FCPA tend to be higher than fines for violations of other aspects of the securities laws. The reason for that is simple: The fines are driven by the profits a company makes by virtue of the wrongful conduct. The SEC has made it clear through its public statements that it intends to focus on investigating and taking action on violations of the FCPA. More importantly, the SEC has made the point clear through its enforcement program. In 2010 alone, the SEC concluded 12 FCPA investigations and assessed monetary penalties totaling more than $360 million.Putting aside the Goldman Sachs settlement of $550 million this year for alleged unlawful activity relating to the financial crisis, these numbers are staggering compared to standard SEC settlements. Settlements in more typical SEC enforcement matters relating to insider trading and false financial reporting this year ranged from $20,000 to $28 million. While whistleblower activity under the new regulatory regime will be robust in all areas, the FCPA will be the belle of the ball.
You Can Be a Whistleblower: So can I. Anyone can. Renowned Enron whistleblower Sherron Watkins was an Enron employee and perhaps that created a perception that whistleblowers and corporate employees are one and the same. That’s not an accurate association, however. Dodd-Frank defines whistleblower as follows: “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” [7] This is drafted broadly enough to encompass, for example, forensic accountants poring through public filings for perceived inaccuracies. Could a competitor or customer become a whistleblower? Sure. Anyone can be a whistleblower, assuming they can dredge up information or an analysis indicating a violation of the securities laws.
Obvious Statements about the Future: Although the SEC has work to do to flesh out the Dodd-Frank whistleblower provisions, for the first time the agency has the benefit of a significant incentive program for people to identify corporate wrongdoing. The infrastructure and rules the SEC puts in place to implement the law will be modeled after the successful DOJ and IRS bounty programs. There will be hundreds of whistleblower complaints to the SEC annually, and the Division of Enforcement and the new whistleblower office will be under a severe burden to handle them all. Numerous investigations will ensue, prompting companies to respond to the SEC investigations and, in some cases, initiate audit committee investigations about the allegations. Follow-on class and stockholder derivative actions may be filed in reaction to SEC investigations.
Lastly, at some point in the next year or so, it is quite likely that the SEC will announce a substantial bounty payment arising from the Dodd-Frank whistleblower initiative. Then, the floodgates will truly open.
[1] See www.sec.gov for more information about the SEC’s Dodd-Frank implementation program and rulemaking/comment process.
[2] To see the Dodd-Frank text, go to http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html.
[3] See http://www.treas.gov/tigta/auditreports/2006reports/200630092fr.pdf.
[4] See http://www.phillipsandcohen.com/CM/Custom/Whistleblowers-for-SEC.asp.
[5] http://www.irs.gov/pub/whistleblower/annual_report_to_congress_september_2009.pdf
[6] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 §301, 116 Stat. 776 (2002)
[7] http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html
Topic tags: audit committee, corporate governance, Dodd-Frank Wall Street Reform and Consumer Protect Act
Opening the Floodgates: The Dodd-Frank Whistleblower Provisions’ Impact on Corporate America
by Doug Clark, Wilson Sonsini Goodrich & Rosati
During Corporate Board Member and NYSE Euronext's Annual Boardroom Summit audit committee peer exchange, the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) excited discussion and concern. That’s not surprising, as a fair amount of government activity focused on Dodd-Frank is presently in the works. In October, the Securities and Exchange Commission (SEC) will report to Congress concerning its whistleblower bounty program, as well as the establishment of its own whistleblower office. In November, the SEC will propose rules to establish a Whistleblower Incentives and Protection Program and will appoint the head of the new whistleblower office. That sound you hear is the sound of our government growing. [1]
The corporate world should watch the evolution of this bounty program closely. To help set these developments in context, this article provides some background and thoughts about the future.
A Short Summary: Dodd-Frank requires the SEC, in any action in which it levies sanctions in excess of $1 million, to compensate whistleblowers who provide original information with between 10 to 30 percent of the amount of the sanctions. [2] Is This New News? Part I: Kind of. The SEC actually has had a bounty program in place for more than 20 years. This original bounty program rewarded whistleblowers for information leading to the recovery of a civil penalty from an insider trader, a tipper, or someone who controlled an insider trader. The bounty was limited to 10 percent of a civil penalty exacted pursuant to a court order. The decision to award a bounty, and to whom, was within the sole discretion of the SEC (as it will be under Dodd-Frank).
This bounty program was a fairly well-kept secret, as the Office of Inspector General (OIG) noted in a March 29, 2010, report: “[T]he Commission has not received a large number of applications from individuals seeking a bounty over this 20-year period. We also found that the program is not widely recognized inside or outside the Commission.” [3]
In fact, the OIG determined that between 1989 and 2009, the SEC had paid a total of seven bounties to five claimants amounting to less than $160,000 and had denied five bounty applications. Consequently, the OIG made a number of recommendations to improve the bounty program, including coming up with a communication plan to raise the profile of the program, posting an application form on the SEC website, and developing specific criteria for awarding a bounty. The OIG also suggested that the SEC incorporate best practices from more successful Department of Justice (DOJ) and Internal Revenue Service (IRS) bounty programs, both of which are discussed below.
For purposes of this discussion, the old bounty program is just an interesting reference point. The Dodd-Frank mandate to the SEC is broader and more lucrative for whistleblowers. The Whistleblower Incentive and Protection Program to be implemented by the SEC will not be limited to insider trading and will not cap bounties at 10% of a civil penalty. It’s also apparent that the new bounty program will not be a secret inside or outside the Commission.
Is This New News? Part II: Anyone outraged at the concept of our government paying whistleblowers for reporting unlawful activity might be surprised to find out that it’s been going on for a quite a while and that it’s a big, lucrative business. Two federal bounty programs stand out and are worthy of discussion.
The False Claims ActThe False Claims Act, 31 U.S.C. § 3729, et seq., generally creates liability for persons who make false claims to or defraud the government in order to receive money from the government. For example, a defense contractor who knowingly submits a false invoice to the government for payment would run afoul of this act. Section 3730 permits a whistleblower – called a relator in False Claims Act jargon – to bring an action for the government. The procedure for initiating and maintaining such an action, called a qui tam action, is complex and beyond the scope of this article. Where the government proceeds with an action brought by a whistleblower, the whistleblower is entitled to at least 15 percent and up to 25 percent of the proceeds of an award or a settlement. If the government declines to proceed with the case and the relator proceeds with it and obtains a recovery, the whistleblower is eligible for a higher percentage.
The False Claims Act, once known as the “Lincoln Law” was enacted in 1863 to address government contracting fraud during the Civil War. It was substantially amended most recently in 1986 (note that the old SEC bounty program went into effect in 1989). Since 1986, according to DOJ statistics, qui tam lawsuits have returned more than $15 billion to the government and have generated $2.5 billion in awards to whistleblowers. That’s real money, and it has attracted real plaintiff law firms to represent whistleblowers in qui tam actions. Needless to say, the SEC’s old bounty program did not spawn a thriving plaintiffs’ bar.
Early indications are that the plaintiffs’ securities class action and qui tam bar are acutely interested in the Dodd-Frank whistleblower provision. For example, one of the leading False Claims Act plaintiffs’ firms has created a portion of its website for this opportunity, as I’m sure others have. [4] In addition, a reference to the Dodd-Frank whistleblower provision has worked its way into the standard press releases seeking plaintiffs for securities class actions. One does not have to be an economist to see the direction in which this is heading. Plaintiffs’ lawyers follow the money, and they smell money in this new law.
Tax Fraud CasesIn 2006, the IRS seriously entered the whistleblower field with the passage of the Tax Relief and Health Act of 2006. The whistleblower provisions of that act offer a bounty to those who provide the IRS with information about tax underpayments of $2 million or more, with whistleblowers eligible for up to 15 to 30 percent of the amount recovered by the IRS. The program is young, but statistics for 2008 are illustrative of the kind of traction a whistleblower program can get in its early days: In that year alone, the IRS received 476 whistleblower complaints alleging tax underpayment by 1,246 taxpayers. It’s not clear how much money whistleblowers yielded from those complaints. [5]
It is not beyond belief that the whistleblower office the SEC will give birth to this month will administer a program that could generate a similar or greater number of complaints. The impact on the SEC’s Enforcement Division and Corporate America will be tremendous. More on that below.
What About My Hotline?: The Sarbanes-Oxley Act of 2002, passed in reaction to the spate of corporate scandals (Enron, Worldcom) that preceded the spate of corporate scandals that spawned Dodd-Frank (Countrywide, Bear Stearns, Lehman Brothers), required public company audit committees to establish procedures for “confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.” [6] Public companies faithfully complied, and it became a routine part of audit committees’ lives to review, examine, and investigate anonymous complaints. Most companies set up a hotline that employees could use to report potentially fraudulent activity.This provision of Sarbanes-Oxley worked. Employees registered complaints and Audit Committees considered them and, in many instances, retained counsel and experts to investigate them. Companies did not set up bounties, however, and are poorly positioned to compete with the SEC’s promise of a 15 to 25 percent cut of any potential fine. Let’s say you were a well-intentioned employee of a publicly listed company and are distressed when you learn that high-ranking employees at your company are bribing government officials in foreign countries. Do you call the audit committee hotline and sleep the sleep of the righteous? Or do you contact the SEC’s brand spanking new whistleblower office and, perhaps someday, sleep in Gstaad after a day on the slopes? In 2008, the SEC reached a settlement with Siemens AG for violations of the Foreign Corrupt Practices Act (FCPA) and obtained a $350 million disgorgement of profits. Feel free to pause and do the arithmetic. It is not unreasonable to assume that the Dodd-Frank whistleblower provisions will largely render moot the Sarbanes-Oxley audit committee procedures.
FCPA—Where the Real Money Is: Having mentioned the FCPA anecdotally, it’s appropriate to bring the point home. Pursuant to the FCPA’s anti-bribery provisions, it is unlawful for any issuer, domestic concern, or person acting in the United States to offer anything of value to members of a foreign government, international organization, or political party for the purpose of: (1) influencing duties; (2) inducing them to use their influence to affect a foreign government’s or agency's decision; (3) obtaining or retaining business for anyone; or (4) directing business to anyone. Fines and penalties for violating the FCPA tend to be higher than fines for violations of other aspects of the securities laws. The reason for that is simple: The fines are driven by the profits a company makes by virtue of the wrongful conduct. The SEC has made it clear through its public statements that it intends to focus on investigating and taking action on violations of the FCPA. More importantly, the SEC has made the point clear through its enforcement program. In 2010 alone, the SEC concluded 12 FCPA investigations and assessed monetary penalties totaling more than $360 million.Putting aside the Goldman Sachs settlement of $550 million this year for alleged unlawful activity relating to the financial crisis, these numbers are staggering compared to standard SEC settlements. Settlements in more typical SEC enforcement matters relating to insider trading and false financial reporting this year ranged from $20,000 to $28 million. While whistleblower activity under the new regulatory regime will be robust in all areas, the FCPA will be the belle of the ball.
You Can Be a Whistleblower: So can I. Anyone can. Renowned Enron whistleblower Sherron Watkins was an Enron employee and perhaps that created a perception that whistleblowers and corporate employees are one and the same. That’s not an accurate association, however. Dodd-Frank defines whistleblower as follows: “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” [7] This is drafted broadly enough to encompass, for example, forensic accountants poring through public filings for perceived inaccuracies. Could a competitor or customer become a whistleblower? Sure. Anyone can be a whistleblower, assuming they can dredge up information or an analysis indicating a violation of the securities laws.
Obvious Statements about the Future: Although the SEC has work to do to flesh out the Dodd-Frank whistleblower provisions, for the first time the agency has the benefit of a significant incentive program for people to identify corporate wrongdoing. The infrastructure and rules the SEC puts in place to implement the law will be modeled after the successful DOJ and IRS bounty programs. There will be hundreds of whistleblower complaints to the SEC annually, and the Division of Enforcement and the new whistleblower office will be under a severe burden to handle them all. Numerous investigations will ensue, prompting companies to respond to the SEC investigations and, in some cases, initiate audit committee investigations about the allegations. Follow-on class and stockholder derivative actions may be filed in reaction to SEC investigations.
Lastly, at some point in the next year or so, it is quite likely that the SEC will announce a substantial bounty payment arising from the Dodd-Frank whistleblower initiative. Then, the floodgates will truly open.
[1] See www.sec.gov for more information about the SEC’s Dodd-Frank implementation program and rulemaking/comment process.
[2] To see the Dodd-Frank text, go to http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html.
[3] See http://www.treas.gov/tigta/auditreports/2006reports/200630092fr.pdf.
[4] See http://www.phillipsandcohen.com/CM/Custom/Whistleblowers-for-SEC.asp.
[5] http://www.irs.gov/pub/whistleblower/annual_report_to_congress_september_2009.pdf
[6] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 §301, 116 Stat. 776 (2002)
[7] http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html
Topic tags: audit committee, corporate governance, Dodd-Frank Wall Street Reform and Consumer Protect Act
Which States Have the Least Taxes (Bankrate.com)
Check out Bankrate's 2010 Tax Guide Interactive Map
When is the GM IPO? After the Election (WSJ)
Official White House Briefing: "Fact Sheet on Obama Administration Restructuring of General Motors"
Treasury Provides Further Guidance on GM IPO
AUTOS SEPTEMBER 21, 2010
China's SAIC Expresses Interest in Buying GM Stake
By SHARON TERLEP
DETROIT—Interest by China's biggest auto maker in possibly buying a stake in General Motors Co. this fall raises the dicey issue for the U.S. government over foreign investment in the Detroit company.
SAIC Motor Corp., which has built cars with GM in China since the 1990s, hasn't decided whether to participate in GM's initial public offering but has expressed an interest in doing so, people familiar with the matter said.
GM declined to comment about SAIC. The Chinese auto maker said only that it is closely watching the GM offering. SAIC's interest was first reported by Reuters news service.
The issue of foreign investors buying GM shares in the company's IPO is a thorny one for the U.S. government, which is eager to unload its 61% stake in the auto maker.
The Treasury is likely to seek out large institutional investors to buy blocks of GM stock at a set price. Such "cornerstone" investors typically commit to holding their stock as a show of confidence, which can help draw other investors. In exchange, cornerstone investors sometimes get a favorable deal on the shares. Several U.S. investors have expressed an interest in buying a stake in GM, including potential cornerstone investors, according to a person familiar with the situation.
The larger the group of cornerstone investors, the easier it would be for the Treasury to sell a big chunk of its GM stake in the IPO. GM and the banks underwriting the deal are pushing for the biggest possible investor pool to increase the size of the offering. The IPO will likely involve shares held by the Treasury, a union-managed retiree trust fund and Canadian governments.
But the Treasury also is worried about the political reaction if non-U.S. investors, such as sovereign-wealth funds or a Chinese company, are allowed to acquire a significant stake in GM after U.S. taxpayers spent $50 billion to assist the company through bankruptcy reorganization.
"Critics will publicly blast the Obama administration for using taxpayer money to fund foreign ownership in an American icon," said Morningstar automotive equities analyst David Whiston. Yet restricting foreigners from buying stock in the IPO would be impractical since the shares would be available on the public market, he said.
Indeed, the Treasury, in an effort to maximize the share price and establish a solid shareholder base, said last week that all investors will have access to GM shares. The statement also said, however, that no single investor or group of investors would receive "a disproportionate share or unusual treatment."
GM plans to begin pitching the IPO to investors immediately after the Nov. 2 midterm elections, which could keep the IPO separate from campaign politics. The goal is to conduct the offering before the end of the month. GM Chief Executive Dan Akerson said last week that it will likely take years for the U.S. government to unload its entire stake.
Mr. Akerson, who took over as CEO Sept. 1, has been more pragmatic about the IPO than was his predecessor Edward E. Whitacre Jr., who pushed the Treasury to unload as many shares as possible as quickly as possible. In contrast, Mr. Akerson last week acknowledged the importance of Treasury getting the best possible share price, even if means the government continues to hold some shares for some time.
China's auto market, the world's biggest, is a key source of strength for GM.
The auto maker's sales in China rose 19% in August from a year earlier while the U.S. and European markets struggled. The auto maker's partnership with SAIC has been central to GM's success in China and is expected to continue to play a major role.
Such joint ventures also are an important platform to reaching other fast-growing, emerging markets. GM and SAIC are teaming to expand in India, for example.
Write to Sharon Terlep at sharon.terlep@wsj.com
Treasury Provides Further Guidance on GM IPO
AUTOS SEPTEMBER 21, 2010
China's SAIC Expresses Interest in Buying GM Stake
By SHARON TERLEP
DETROIT—Interest by China's biggest auto maker in possibly buying a stake in General Motors Co. this fall raises the dicey issue for the U.S. government over foreign investment in the Detroit company.
SAIC Motor Corp., which has built cars with GM in China since the 1990s, hasn't decided whether to participate in GM's initial public offering but has expressed an interest in doing so, people familiar with the matter said.
GM declined to comment about SAIC. The Chinese auto maker said only that it is closely watching the GM offering. SAIC's interest was first reported by Reuters news service.
The issue of foreign investors buying GM shares in the company's IPO is a thorny one for the U.S. government, which is eager to unload its 61% stake in the auto maker.
The Treasury is likely to seek out large institutional investors to buy blocks of GM stock at a set price. Such "cornerstone" investors typically commit to holding their stock as a show of confidence, which can help draw other investors. In exchange, cornerstone investors sometimes get a favorable deal on the shares. Several U.S. investors have expressed an interest in buying a stake in GM, including potential cornerstone investors, according to a person familiar with the situation.
The larger the group of cornerstone investors, the easier it would be for the Treasury to sell a big chunk of its GM stake in the IPO. GM and the banks underwriting the deal are pushing for the biggest possible investor pool to increase the size of the offering. The IPO will likely involve shares held by the Treasury, a union-managed retiree trust fund and Canadian governments.
But the Treasury also is worried about the political reaction if non-U.S. investors, such as sovereign-wealth funds or a Chinese company, are allowed to acquire a significant stake in GM after U.S. taxpayers spent $50 billion to assist the company through bankruptcy reorganization.
"Critics will publicly blast the Obama administration for using taxpayer money to fund foreign ownership in an American icon," said Morningstar automotive equities analyst David Whiston. Yet restricting foreigners from buying stock in the IPO would be impractical since the shares would be available on the public market, he said.
Indeed, the Treasury, in an effort to maximize the share price and establish a solid shareholder base, said last week that all investors will have access to GM shares. The statement also said, however, that no single investor or group of investors would receive "a disproportionate share or unusual treatment."
GM plans to begin pitching the IPO to investors immediately after the Nov. 2 midterm elections, which could keep the IPO separate from campaign politics. The goal is to conduct the offering before the end of the month. GM Chief Executive Dan Akerson said last week that it will likely take years for the U.S. government to unload its entire stake.
Mr. Akerson, who took over as CEO Sept. 1, has been more pragmatic about the IPO than was his predecessor Edward E. Whitacre Jr., who pushed the Treasury to unload as many shares as possible as quickly as possible. In contrast, Mr. Akerson last week acknowledged the importance of Treasury getting the best possible share price, even if means the government continues to hold some shares for some time.
China's auto market, the world's biggest, is a key source of strength for GM.
The auto maker's sales in China rose 19% in August from a year earlier while the U.S. and European markets struggled. The auto maker's partnership with SAIC has been central to GM's success in China and is expected to continue to play a major role.
Such joint ventures also are an important platform to reaching other fast-growing, emerging markets. GM and SAIC are teaming to expand in India, for example.
Write to Sharon Terlep at sharon.terlep@wsj.com
Miami Herald: Low Cost Marketing Tips for Small Business
Posted on Mon, Sep. 20, 2010
Marketing help just clicks away
BY TASHA CUNNINGHAM
Tasha@BizBytes101.com
1. Twilert. This is a Twitter app that allows you to receive e-mail updates of tweets that contain keywords related to your business. Other apps like TweetDeck let you do the same thing, but Twilert sends the updates directly to your e-mail in-box so you can view them when it's convenient for you.
2. Slide Rocket. Slide Rocket is a free online tool for creating slick, professional Flash-enabled presentations that can showcase your products and services. It's like turbo-charged version of PowerPoint. You can share your presentations instantly on YouTube and Flickr and track the number of people that view your presentation using Slide Rocket analytics.
3. Click Tale. With pricing plans that start at free, Click Tale is an essential tool that lets you learn more about how your visitors interact with your website. You can record snapshots or ``movies'' of your customers' browsing sessions and get detailed information on how they use all areas of your site. You can use the data you collect to improve their customer experience while on your website.
4. Trackur. Trackur is a tool that allows you to monitor what people are saying about your brand on social blogs, social networks, and online forums.
5. iKarma. Based in Jupiter, Fla., this reputation management tool allows you to compare customer comments, review products and services and get customer referrals that help you manage your brand's online word-of-mouth.
6. BrandDoozie. This do-it-yourself online tool allows you to create professional marketing materials in minutes including business cards, logos, brochures and flyers. It's free to create your materials and just $19.99 when you're ready to download and print them, saving you thousands of dollars in design costs.
7. Shoutlet. With this tool, you can distribute, track and manage your social media marketing campaigns across different social networks at once, saving your business time and money.
8. Later Bro. This service saves you time by allowing you to post-date Facebook and Twitter updates. You can plan, create and schedule updates for delivery to your customers at a later date.
9. PRLog.org . This service is completely free and lets you distribute press releases about your company to blogs, search engines and news sites. It's a great way for a cash-strapped entrepreneur like you to get the word out about your products and services.
10. Pitchrate.com . This free service will help you maximize your public relations and marketing efforts by connecting you with journalists who write about topics related to your business. It also offers free guidance on how to get publicity and a regular free ``PR Happy Hour,'' a series of conference calls that let you interact live with marketing and PR experts to ask questions and get advice.
Check out BizBytes101.com for more must-have marketing tips.
Read more: http://www.miamiherald.com/2010/09/20/v-print/1830154/marketing-help-just-clicks-away.html#ixzz106K1TL48
Marketing help just clicks away
BY TASHA CUNNINGHAM
Tasha@BizBytes101.com
1. Twilert. This is a Twitter app that allows you to receive e-mail updates of tweets that contain keywords related to your business. Other apps like TweetDeck let you do the same thing, but Twilert sends the updates directly to your e-mail in-box so you can view them when it's convenient for you.
2. Slide Rocket. Slide Rocket is a free online tool for creating slick, professional Flash-enabled presentations that can showcase your products and services. It's like turbo-charged version of PowerPoint. You can share your presentations instantly on YouTube and Flickr and track the number of people that view your presentation using Slide Rocket analytics.
3. Click Tale. With pricing plans that start at free, Click Tale is an essential tool that lets you learn more about how your visitors interact with your website. You can record snapshots or ``movies'' of your customers' browsing sessions and get detailed information on how they use all areas of your site. You can use the data you collect to improve their customer experience while on your website.
4. Trackur. Trackur is a tool that allows you to monitor what people are saying about your brand on social blogs, social networks, and online forums.
5. iKarma. Based in Jupiter, Fla., this reputation management tool allows you to compare customer comments, review products and services and get customer referrals that help you manage your brand's online word-of-mouth.
6. BrandDoozie. This do-it-yourself online tool allows you to create professional marketing materials in minutes including business cards, logos, brochures and flyers. It's free to create your materials and just $19.99 when you're ready to download and print them, saving you thousands of dollars in design costs.
7. Shoutlet. With this tool, you can distribute, track and manage your social media marketing campaigns across different social networks at once, saving your business time and money.
8. Later Bro. This service saves you time by allowing you to post-date Facebook and Twitter updates. You can plan, create and schedule updates for delivery to your customers at a later date.
9. PRLog.org . This service is completely free and lets you distribute press releases about your company to blogs, search engines and news sites. It's a great way for a cash-strapped entrepreneur like you to get the word out about your products and services.
10. Pitchrate.com . This free service will help you maximize your public relations and marketing efforts by connecting you with journalists who write about topics related to your business. It also offers free guidance on how to get publicity and a regular free ``PR Happy Hour,'' a series of conference calls that let you interact live with marketing and PR experts to ask questions and get advice.
Check out BizBytes101.com for more must-have marketing tips.
Read more: http://www.miamiherald.com/2010/09/20/v-print/1830154/marketing-help-just-clicks-away.html#ixzz106K1TL48
Obamacare Alert - Insurance Changes This Week ( State of Florida)
Insurance Consumer Advocate Urges Floridians To Learn About Health Insurance Reforms That Take Effect Sept. 23
Terry Butler, Interim Insurance Consumer Advocate
Many consumers have been confused about or unsure as to when many of the reforms in the Patient Protection and Affordable Care Act (PPACA) will take effect. Some of the reforms do not take effect until 2014 or even later. However, on Thursday, September 23, 2010, many very important PPACA provisions will go into effect and the Office of Insurance Consumer Advocate urges Floridians to be aware of and take advantage of the changes.
The most important changes will ensure that consumers are able to retain coverage and remain covered regardless of their circumstances. While the following provisions take effect next week, some policyholders may not be able to take advantage of all of these new provisions until policy renewal, which for many employees in group plans is in January.
The benefits that will be effective on September 23, 2010, are as follows:
Currently, most health insurance policies have provisions stating that the maximum the insurer will pay during the life of the policy is $1 million or maybe $2 million. In addition, they have a maximum the insurer will pay in any calendar year, usually around $250,000. As of this Thursday, insurers will be prohibited from limiting the amount they will pay over the lifetime of the policy. However, until 2014, plans will still be allowed to have an annual limit on coverage payments.
All health plans will be prohibited from dropping consumers from coverage just because they get sick.
Children under the age of 19 with pre-existing medical conditions will no longer be denied coverage by employer plans or new plans in the individual market because of their pre-existing condition.
New private plans will be required to cover preventative services and neither copayments nor deductibles will apply to the cost of these services.
All new plans will have to provide consumers with two levels of appeal when the plan denies payment for medical services. The first level would be a review by the plan itself. The second level would be an independent review process in which an outside group of medical experts review the claim to determine whether the plan followed its own rules in denying the claim.
Employer health plans will be prohibited from establishing any eligibility rules for health care coverage that have the effect of discrimination in favor of higher wage employees.
Health plans will be required to allow young people to remain on the parents’ health plans up to their 26th birthday, provided that they do not have access to coverage on their own plan.
Consumers will have more freedom of choice in the selection of their physicians.
Consumers should contact their insurer or their employers’ benefit administrator to obtain any additional information regarding changes to their specific policy.
As more information is available and additional changes become effective, the Office of the Insurance Consumer Advocate will generate advisories regarding their effect on consumers. More information regarding the PPACA can be found on the website of the Insurance Consumer Advocate at http://www.myfloridacfo.com/ica/federalhealthcare.asp.
The Insurance Consumer Advocate is appointed by Florida CFO Alex Sink and is committed to finding solutions to insurance issues facing Floridians, calling attention to questionable insurance practices, promoting a viable insurance market responsive to the needs of Florida’s diverse population and assuring that rates are fair and justified.
Terry Butler, Interim Insurance Consumer Advocate
Many consumers have been confused about or unsure as to when many of the reforms in the Patient Protection and Affordable Care Act (PPACA) will take effect. Some of the reforms do not take effect until 2014 or even later. However, on Thursday, September 23, 2010, many very important PPACA provisions will go into effect and the Office of Insurance Consumer Advocate urges Floridians to be aware of and take advantage of the changes.
The most important changes will ensure that consumers are able to retain coverage and remain covered regardless of their circumstances. While the following provisions take effect next week, some policyholders may not be able to take advantage of all of these new provisions until policy renewal, which for many employees in group plans is in January.
The benefits that will be effective on September 23, 2010, are as follows:
Currently, most health insurance policies have provisions stating that the maximum the insurer will pay during the life of the policy is $1 million or maybe $2 million. In addition, they have a maximum the insurer will pay in any calendar year, usually around $250,000. As of this Thursday, insurers will be prohibited from limiting the amount they will pay over the lifetime of the policy. However, until 2014, plans will still be allowed to have an annual limit on coverage payments.
All health plans will be prohibited from dropping consumers from coverage just because they get sick.
Children under the age of 19 with pre-existing medical conditions will no longer be denied coverage by employer plans or new plans in the individual market because of their pre-existing condition.
New private plans will be required to cover preventative services and neither copayments nor deductibles will apply to the cost of these services.
All new plans will have to provide consumers with two levels of appeal when the plan denies payment for medical services. The first level would be a review by the plan itself. The second level would be an independent review process in which an outside group of medical experts review the claim to determine whether the plan followed its own rules in denying the claim.
Employer health plans will be prohibited from establishing any eligibility rules for health care coverage that have the effect of discrimination in favor of higher wage employees.
Health plans will be required to allow young people to remain on the parents’ health plans up to their 26th birthday, provided that they do not have access to coverage on their own plan.
Consumers will have more freedom of choice in the selection of their physicians.
Consumers should contact their insurer or their employers’ benefit administrator to obtain any additional information regarding changes to their specific policy.
As more information is available and additional changes become effective, the Office of the Insurance Consumer Advocate will generate advisories regarding their effect on consumers. More information regarding the PPACA can be found on the website of the Insurance Consumer Advocate at http://www.myfloridacfo.com/ica/federalhealthcare.asp.
The Insurance Consumer Advocate is appointed by Florida CFO Alex Sink and is committed to finding solutions to insurance issues facing Floridians, calling attention to questionable insurance practices, promoting a viable insurance market responsive to the needs of Florida’s diverse population and assuring that rates are fair and justified.
Floating Rate Loan Funds (Morningstar)
Five Senior Loan CEFs for Your Radar
Five Senior Loan CEFs for Your Radar
By Cara Scatizzi | 08-13-10
Senior bank loans are typically extended to below-investment-grade companies, which can translate to higher interest-rate payments for banks and investors. After a bank lends the money, it sells the loan as a security to investors and passes the interest payments to investors. Such bank loans are structured to produce yields higher than comparable bonds and also to mitigate certain risks that accompany fixed-income investing.
Senior loans are often short term and have floating interest rates. This reduces interest-rate risk for investors because, as interest rates rise, the short-term floating rates on the loans can be reset quickly to reflect higher rates. Conversely, if interest rates are falling, the floating rates will reset to echo lower rates, which means investors cannot lock in high interest rates with this type of security.
In addition, these loans are secured by cash or assets and are considered "senior." This means that, in the event of bankruptcy, these obligations are the first to be repaid. There is no guarantee of any payment after a default, but because the loans are senior and secured by assets, historically, investors have received $0.75 to $0.80 per dollar in such situations.
Investing in closed-end funds, in general, has many benefits. First, CEFs can use leverage in an effort to enhance performance and distributions. CEFs are also required to distribute income to investors. In addition, CEFs often sell at discounts to net asset value, which means investors can achieve "yield enhancement." Finally, there is an added benefit of diversification. Specific to senior bank loans, CEFs hold hundreds of individual bank loans of varying credit quality and maturity. If one or a few of the companies default on their bank loans, it will most likely have a small effect on the overall portfolio. However, bankruptcy is not the only way for a senior loan to lose value. Deterioration of the individual company's credit can cause a loan to fall in value.
There are 19 senior bank CEFs and only one does not use leverage (the newly created Blackstone/GSO Senior Floating Term Rate (BSL). The remaining CEFs use leverage in the form of debt and preferred shares, which is regulated by the Investment Act of 1940. In addition to senior loans, these types of CEFs also invest in corporate bonds and cash. Ten of the 19 senior loan CEFs trade at a discount to net asset value, which offers investors a yield enhancement via their discount.
Investors seeking the higher income that senior bank loans can offer should be aware of the risks to their underlying capital. The group produced volatile returns in 2008 and 2009, as would be expected given the changes in interest rates, the inherent volatility of leverage, and the turmoil in the credit markets. The average senior loan CEF has gained 0.19% annually over a five-year period, is down 2.97% annually for the latest three-year period, and is up 6.5% in the year to date.
A Closer Look: Five Senior Loan CEFs
Discount /Premium (%)Distribution Rate at Current Price (%)1-Yr Distribution Change (%)Leverage Ratio (%)
Highland Credit Strategies (HCF) -2.1 8.68 0 23.6
Nuveen Senior Income (NSL) +2.4 6.92 19 36.5
Nuveen Fl Rate Inc Opps (JRO) -0.6 6.63 24 36.5
Nuveen Floating Rate Inc (JFR ) -3.9 5.56 24 35.6
LMP Corporate Loan Fund (TLI) -5.8 5.17 20 52.0
The table above lists five senior loan CEFs that, in our opinion, look attractive. Exclusion from the above list does not reflect our dissatisfaction with a fund. Instead, these are the five that have caught our attention at the moment. None of the listed CEFs have decreased distributions in the last year and four of the five have increased the distribution at least once over the last year. In addition, none of them uses return of capital to synthetically boost stated yields.
Highland Credit Strategies (HCF ) has a distribution rate of 8.7%. The fund has not increased the distribution in the last year, but while 13 of the 19 funds in this category decreased distributions, HCF did not. The fund came out of the gates in 2007 and performed poorly, as might have been expected given the credit-market environment at the time. The fund has lost 10.8% per year since inception. However, in early 2009, the fund replaced the portfolio-management team with two new managers, who have outperformed their peer group over the one-year (HCF gained 21.9% versus the peer group's gain of 20.2%) and year-to-date (HCF is up 7.95% versus 6.55% for the peer group) periods. HCF holds 63% in bank loans, with the remainder in low and non-investment-grade corporate bonds and equities. Its largest holding (7.3% of the portfolio) is a holding company for venture healthcare companies. Finally, HCF has a leverage ratio of 23.6%.
Nuveen Senior Income (NSL) is one of three highlighted funds from Nuveen. All three funds are managed by Gunther Stein. NSL is selling at a 2.4% premium to NAV but still offers a 6.9% distribution rate. The fund increased the distribution twice in the last year for a total increase of 19%. In 2009, the fund gained 111% in net asset value (versus the peer group, which gained 76%), during which the fund's share price jumped from a 12% discount to NAV to a 17% premium to NAV in the final four months of 2009. Since inception in 1999, the fund has gained 5.3% annually. 86% of assets are held in bank loans with the remainder in high-yield corporate bonds, convertibles, and cash. The largest sector concentration is media, at 11% of assets. The fund has a 36.5% leverage ratio.
Nuveen Floating Rate Income Opportunities (JRO) has a 6.6% distribution rate and has boosted its distribution twice in the last year for a total increase of 24%. The fund invests 87% of its assets in senior loans and the remainder in junk bonds, cash, and a very small portion in common stock. The current leverage ratio is 36.5%. The fund has performed about as well as the peer group, with the exception of 2009, when the fund outperformed with an impressive NAV gain of 113%. Since inception in 2004, the fund has gained 4.1% annually. Historically, the fund has traded at a discount to NAV (its three-year average discount is 8.04%), but 2010 has proved a volatile year for JRO's premium and discount. In April 2010, the fund shot to at a historically high 9.46% premium, only to drop to a discount of 6.75% in late May. Currently, the fund sells at a slight 0.60% discount to NAV.
Nuveen Floating Rate Income (JFR) has a current distribution rate of 5.6% and is selling at a 3.9% discount to NAV. The fund has increased its distribution twice over the last year for a total increase of 24%. JFR has a current leverage ratio of 36.5%. In 2009, JFR gained 101% and in 2008 the fund lost 50.1%, still slightly beating the peer group. Since inception in 2004 the fund has gained 3.71% annually. JFR holds 86% in bank loans of mostly low credit quality, though 7% of its holdings are bonds rated AAA.
LMP Corporate Loan Fund (TLI) has the lowest distribution rate of the highlighted CEFs, but it is still attractive on an absolute basis. In addition, the fund is selling at the largest discount (5.8%) of the funds listed, making it even more attractive. TLI has increased its distribution twice in the last year for a total increase of 20%. The fund holds 93% in bank loans, with the remainder in corporate bonds and short-term debt. TLI has a relatively high leverage ratio of 52%. Since inception, TLI has gained 4.5% annually. In 2008, when the average senior bond CEF lost 51%, TLI lost 44%.
Cara Scatizzi is a closed-end fund analyst at Morningstar.
Five Senior Loan CEFs for Your Radar
By Cara Scatizzi | 08-13-10
Senior bank loans are typically extended to below-investment-grade companies, which can translate to higher interest-rate payments for banks and investors. After a bank lends the money, it sells the loan as a security to investors and passes the interest payments to investors. Such bank loans are structured to produce yields higher than comparable bonds and also to mitigate certain risks that accompany fixed-income investing.
Senior loans are often short term and have floating interest rates. This reduces interest-rate risk for investors because, as interest rates rise, the short-term floating rates on the loans can be reset quickly to reflect higher rates. Conversely, if interest rates are falling, the floating rates will reset to echo lower rates, which means investors cannot lock in high interest rates with this type of security.
In addition, these loans are secured by cash or assets and are considered "senior." This means that, in the event of bankruptcy, these obligations are the first to be repaid. There is no guarantee of any payment after a default, but because the loans are senior and secured by assets, historically, investors have received $0.75 to $0.80 per dollar in such situations.
Investing in closed-end funds, in general, has many benefits. First, CEFs can use leverage in an effort to enhance performance and distributions. CEFs are also required to distribute income to investors. In addition, CEFs often sell at discounts to net asset value, which means investors can achieve "yield enhancement." Finally, there is an added benefit of diversification. Specific to senior bank loans, CEFs hold hundreds of individual bank loans of varying credit quality and maturity. If one or a few of the companies default on their bank loans, it will most likely have a small effect on the overall portfolio. However, bankruptcy is not the only way for a senior loan to lose value. Deterioration of the individual company's credit can cause a loan to fall in value.
There are 19 senior bank CEFs and only one does not use leverage (the newly created Blackstone/GSO Senior Floating Term Rate (BSL). The remaining CEFs use leverage in the form of debt and preferred shares, which is regulated by the Investment Act of 1940. In addition to senior loans, these types of CEFs also invest in corporate bonds and cash. Ten of the 19 senior loan CEFs trade at a discount to net asset value, which offers investors a yield enhancement via their discount.
Investors seeking the higher income that senior bank loans can offer should be aware of the risks to their underlying capital. The group produced volatile returns in 2008 and 2009, as would be expected given the changes in interest rates, the inherent volatility of leverage, and the turmoil in the credit markets. The average senior loan CEF has gained 0.19% annually over a five-year period, is down 2.97% annually for the latest three-year period, and is up 6.5% in the year to date.
A Closer Look: Five Senior Loan CEFs
Discount /Premium (%)Distribution Rate at Current Price (%)1-Yr Distribution Change (%)Leverage Ratio (%)
Highland Credit Strategies (HCF) -2.1 8.68 0 23.6
Nuveen Senior Income (NSL) +2.4 6.92 19 36.5
Nuveen Fl Rate Inc Opps (JRO) -0.6 6.63 24 36.5
Nuveen Floating Rate Inc (JFR ) -3.9 5.56 24 35.6
LMP Corporate Loan Fund (TLI) -5.8 5.17 20 52.0
The table above lists five senior loan CEFs that, in our opinion, look attractive. Exclusion from the above list does not reflect our dissatisfaction with a fund. Instead, these are the five that have caught our attention at the moment. None of the listed CEFs have decreased distributions in the last year and four of the five have increased the distribution at least once over the last year. In addition, none of them uses return of capital to synthetically boost stated yields.
Highland Credit Strategies (HCF ) has a distribution rate of 8.7%. The fund has not increased the distribution in the last year, but while 13 of the 19 funds in this category decreased distributions, HCF did not. The fund came out of the gates in 2007 and performed poorly, as might have been expected given the credit-market environment at the time. The fund has lost 10.8% per year since inception. However, in early 2009, the fund replaced the portfolio-management team with two new managers, who have outperformed their peer group over the one-year (HCF gained 21.9% versus the peer group's gain of 20.2%) and year-to-date (HCF is up 7.95% versus 6.55% for the peer group) periods. HCF holds 63% in bank loans, with the remainder in low and non-investment-grade corporate bonds and equities. Its largest holding (7.3% of the portfolio) is a holding company for venture healthcare companies. Finally, HCF has a leverage ratio of 23.6%.
Nuveen Senior Income (NSL) is one of three highlighted funds from Nuveen. All three funds are managed by Gunther Stein. NSL is selling at a 2.4% premium to NAV but still offers a 6.9% distribution rate. The fund increased the distribution twice in the last year for a total increase of 19%. In 2009, the fund gained 111% in net asset value (versus the peer group, which gained 76%), during which the fund's share price jumped from a 12% discount to NAV to a 17% premium to NAV in the final four months of 2009. Since inception in 1999, the fund has gained 5.3% annually. 86% of assets are held in bank loans with the remainder in high-yield corporate bonds, convertibles, and cash. The largest sector concentration is media, at 11% of assets. The fund has a 36.5% leverage ratio.
Nuveen Floating Rate Income Opportunities (JRO) has a 6.6% distribution rate and has boosted its distribution twice in the last year for a total increase of 24%. The fund invests 87% of its assets in senior loans and the remainder in junk bonds, cash, and a very small portion in common stock. The current leverage ratio is 36.5%. The fund has performed about as well as the peer group, with the exception of 2009, when the fund outperformed with an impressive NAV gain of 113%. Since inception in 2004, the fund has gained 4.1% annually. Historically, the fund has traded at a discount to NAV (its three-year average discount is 8.04%), but 2010 has proved a volatile year for JRO's premium and discount. In April 2010, the fund shot to at a historically high 9.46% premium, only to drop to a discount of 6.75% in late May. Currently, the fund sells at a slight 0.60% discount to NAV.
Nuveen Floating Rate Income (JFR) has a current distribution rate of 5.6% and is selling at a 3.9% discount to NAV. The fund has increased its distribution twice over the last year for a total increase of 24%. JFR has a current leverage ratio of 36.5%. In 2009, JFR gained 101% and in 2008 the fund lost 50.1%, still slightly beating the peer group. Since inception in 2004 the fund has gained 3.71% annually. JFR holds 86% in bank loans of mostly low credit quality, though 7% of its holdings are bonds rated AAA.
LMP Corporate Loan Fund (TLI) has the lowest distribution rate of the highlighted CEFs, but it is still attractive on an absolute basis. In addition, the fund is selling at the largest discount (5.8%) of the funds listed, making it even more attractive. TLI has increased its distribution twice in the last year for a total increase of 20%. The fund holds 93% in bank loans, with the remainder in corporate bonds and short-term debt. TLI has a relatively high leverage ratio of 52%. Since inception, TLI has gained 4.5% annually. In 2008, when the average senior bond CEF lost 51%, TLI lost 44%.
Cara Scatizzi is a closed-end fund analyst at Morningstar.
How to Recognize the Next Bull Market ( Futures Magazine)
Four stages of a bull market and how to profit - Financials - Futures Magazine
More money is likely made from bull markets than any other market condition. Understanding how to invest during these periods is key to long-term success. First, a simple definition: A bull market is a congestive market composed of an extended period of time in which the stock indexes continue to register higher highs. It is composed of four periods. Two of those four periods are relatively easy to identify, while the first and fourth periods are a blending of the bull and bear cycles and are more difficult to spot.
These periods are often difficult to define clearly because they are normally rife with conflict. The cycles never change from black to white or white to black, but rather evolve in stages of gray. One of the skills of reading the market is to be able to interpret this gray as it develops and to identify the actual reversal points before they become clear to the general public.
Although they often look orderly in retrospect, bull markets are less clear as they unfold. They take two steps forward and one step back. Bull markets normally stagger around with little discernible direction. During the bull cycle, 90% of all stocks will slowly follow the 100-day moving average north. The problem is that they tend to check out every side road and rest area in the process. Although bull cycles occasionally develop strong trends, they are normally identified by continuation patterns.
Scaling outward helps. Just like a bear market, these markets can be confirmed by observing an 18-month simple moving average (see "Riding the bear," Futures, June 2009). This occurred in the present cycle in October.
Period one
The first period of a bull market is marked by little, if any, public confidence and quiet accumulation by professionals. It is nearly impossible to identify this stage as it is happening. However, good fundamentals, improving earnings and bargain prices mark this as a period of accumulation by value buyers and institutions.
As this period develops, traditional reversal patterns in individual equities begin to appear. The average price is low and even the good stocks are cheap. Also, the price/earnings (P/E) ratios of the indexes are low. A few strong stocks now begin to break out of their sideways patterns. At the same time, isolated weekly and monthly highs occur as prices begin crossing their 100-day moving averages.
On balance, price action is dull and volume is low. While the violation of the 18-period moving average may have indicated a turning point in the overall market, it is not a guarantee that a particular stock will rebound soon. Many former market darlings will lie dormant for years.
Leading money managers now begin their accumulations based on the fundamentals. Because disillusionment with the market is the general temper of the public, good buying opportunities are abundant. Many companies with solid business strategies and strong competitive positions within their individual sectors offer real potential for price appreciation. Because most of those who found themselves in desperate need to sell have already done so, the supply is somewhat diminished. Therefore, to get strong stocks, traders now have to start giving higher prices to acquire them. Caution is still driving the bus.
Nevertheless, although values are good and the institutions are pursuing quiet accumulation, the public will not be back into stocks until they reach much higher prices. Most of the bottom pickers were slaughtered on the way down, and the reality is that there are only a limited number of players left.
Most people consider price as the determining factor that indicates the end of a bear market, but it really is time and fundamentals. For this reason, bottoms take much longer to form than it does for tops to collapse. Nowhere is this more apparent than in the opening stage of a bull market, and this is why it is hard to tell when you are in the first stage of a bull cycle and not in a bear market rally.
If you are looking for individual stock picks during this period, it is a good idea to watch for ones with good P/E ratios and return on equity values as they cross their 200-day moving averages.
Period two
In the second stage of a bull market, stock prices have been rising for several months and the mark-up is ready to commence in earnest. Market-leading equities are beginning to violate their 200-day moving averages. This is the time to buy the dips and ride the rallies higher.
Market newsletter writers and television pundits to the contrary, there is no magic in picking stocks in this period. In fact, you can pretty much select any stock and it will appreciate — the only question is by how much. If you are looking for individual stock picks during this period, it is a good idea to prospect the new highs found within the most-active lists.
Because money follows rallies, greed has been rekindled and more people are starting to think of the stock market as a wealth generator. Now there is competition by the public for a reduced supply, and accumulation is forcing prices higher. Some market participants are starting to show some impressive profits due to having bought early and simply holding. However, the larger public does not join the party just yet. Keep in mind that bull cycles take time to develop.
Market leaders are now rising to the top and the media loves them. Mutual fund inflows are increasing once it is apparent that the market is recovering. The Dow Jones Transportation Index now clearly reverses. It all comes down to markets being driven by liquidity and nothing else. Rallies are not caused by inflows, but rather inflows are the result of rallies — and rallies are the result of a series of higher highs. All of this is another way of spelling "greed."
Remember that it is not public demand that causes rising prices but the rising prices that cause public demand. The conclusion of this period is often marked by a significant retracement as the market pauses to catch its breath. However, too much greed is present for prices not to continue rising. As this retracement occurs, it is time to remember that bases must be built for the bull cycle to continue. Things are now getting in line for the third stage. Greed is driving the bus.
Period three
During this period, stock prices advance at a phenomenal rate. Cocktail parties are full of people with "hot tips." Most of the market participants are looking for easy money and little attention is paid to the underlying fundamentals of the larger market.
P/E ratios begin to achieve ever-higher levels, but that is immaterial. New stock market experts look upon all traditional fundamentals with disdain. Historical experiences are scorned, and the mantra of the day is that "it is different this time." New books about how to make millions in the stock market are common and fundamentals really do not seem to matter to anyone anymore.
About now, an initial public offering (IPO) craze hits the market. During period three, a plethora of new companies are formed to satisfy a public’s insatiable appetite for stocks of all kinds. The reason behind this is simple: There is more money to invest than there are shares available to sell.
In addition, a merger-mania also develops and buy-outs run rampant through corporate finance. The availability of leverage funds makes this possible. In other words, many companies are enjoying bloated stock prices to aid in the facilitation of any acquisition that might arouse corporate interest. As long as companies can convince others that their stock prices are valid, acquisitions are easy. Public relations and spin are now driving the bus.
Many leading issues actually will reach their highs during this period. They will then reverse long before the overall market shows any inclination to do so. This always leads to the last stage of a bull market and distribution begins. The professionals start to distribute some of the shares that were acquired in period one.
Period four
The main factors that have been leading the market to period four — and the coming market collapse — have been uneducated speculating and unrestrained leverage, both of which were aided by easy credit. This is finally becoming apparent to even the most unsophisticated market participants. Period four is rife with conflict and confusion. Slogans such as "if you would have put $10,000 in the market 50 years ago and never sold, you’d be a multi-millionaire today" are now common.
The market develops a theme. These themes culminate into an obvious bubble as the market seizes upon the theme and then goes slightly mad with it. These bubbles float on a sea of easy credit and greed and are rabidly pursued by the public as they dump ever more money into it.
We can go back over market history for hundreds of years and we will find bubble after bubble. There is one about every 20 years or so. These bubbles always are connected by corrective recessions or depressions but like the phoenix, a new bubble always springs forth from the ashes of the old as a new theme develops.
There has been the technology boom, where any company that had "tech" in its name was viewed as an instant path to riches. Then came the "nifty 50" where buying any of 50 blue chips stocks was considered a guaranteed path to wealth. The "conglomerate boom" was so volatile that it became the main concern of the academia that America was going to end up with only five to 10 public companies. Then came the "Internet boom" where all of the stores in America were going to close and people were going to buy everything, including their cat’s food, off of the Web. This incomplete list is to say nothing of the several real estate and commodity bubbles that connected them.
Normally, a bull market’s resolution is not the result of some cataclysmic occurrence or the result of a mature market, as the uninitiated tend to believe. It is the simple result of the inability to keep more and more money coming into the market. In other words, the market suffers from a shortage of players.
This is a period of high volume, high volatility and extreme vacillation. Profits achieved during period two and three have confirmed the belief of most investors that the bull market will continue forever. For these, the start of the upcoming decline is viewed as a gigantic buying opportunity. The truth is, those who see the lower prices as bargains are now the only ones sustaining the bull market. As prices continue to creep lower, the professional traders continue to sell into every rally. Clowns are driving the bus.
The market now begins to eat its own tail, effectively destroying any chance of the bull cycle continuing. We see many market-leading stocks react several points from their previous tops and then not retrace. Their race is obviously run. The best advice: When the press becomes euphorically bullish, but the cumulative advance/decline lines on the weekly chart of the indexes do not concur, tighten your stops, reduce your exposure and tread carefully.
The Tacoma Narrows
Anytime prices begin to print irrationally and your oscillators won’t behave, it is a head’s up to be careful. Extreme vacillation of price usually indicates that something is badly out of balance. Therefore, be wary of any market that seems unwilling to print decent charts. If a market won’t settle down and behave, the likelihood is that it is coming apart. Vacillation of the larger market indicates that something is seriously wrong. It is just that it is not widely apparent, at least not yet.
Whenever you see extreme vacillation in the larger market, it is a good time to remember the story of the Tacoma Narrows Bridge. In 1939, a bridge was built across the Columbia River at a place known as the Tacoma Narrows. Its purpose was to connect Portland, Ore., and Tacoma, Wash.
Unfortunately, the engineers never took the wind sheer of the river into consideration when they designed the bridge. After it was completed and in use, the wind forces created by the Columbia Gorge would whip the bridge up and down and side to side violently, eight to 20 feet at a time. In other words, the bridge was unstable. Although the bridge did not immediately fail, it should have been obvious to anybody who saw it that something was not right.
Nevertheless, it did not make much difference to the public. Despite the obvious weakness of the bridge, people continued to drive on it, walk across it and get their pictures taken while standing in the middle of it as it gyrated wildly above the river. They did this for over four months knowing full well that something was amiss. Fortunately, no one was killed in 1940, when the wind finally twisted the bridge badly enough that it broke up and fell 100 feet into the Columbia River.
As an interesting aside, starting with the year 1900, the length of the average bull cycle has been 40 months and three weeks, which is probably close enough for land mines and hand grenades. It should be noted that during a bull market, approximately 90% of all stocks follow the 100-day moving average higher.
Aubrae DeBuse has been engaged with the markets off and on since 1959 and is presently a proprietary trader for a family foundation.
More money is likely made from bull markets than any other market condition. Understanding how to invest during these periods is key to long-term success. First, a simple definition: A bull market is a congestive market composed of an extended period of time in which the stock indexes continue to register higher highs. It is composed of four periods. Two of those four periods are relatively easy to identify, while the first and fourth periods are a blending of the bull and bear cycles and are more difficult to spot.
These periods are often difficult to define clearly because they are normally rife with conflict. The cycles never change from black to white or white to black, but rather evolve in stages of gray. One of the skills of reading the market is to be able to interpret this gray as it develops and to identify the actual reversal points before they become clear to the general public.
Although they often look orderly in retrospect, bull markets are less clear as they unfold. They take two steps forward and one step back. Bull markets normally stagger around with little discernible direction. During the bull cycle, 90% of all stocks will slowly follow the 100-day moving average north. The problem is that they tend to check out every side road and rest area in the process. Although bull cycles occasionally develop strong trends, they are normally identified by continuation patterns.
Scaling outward helps. Just like a bear market, these markets can be confirmed by observing an 18-month simple moving average (see "Riding the bear," Futures, June 2009). This occurred in the present cycle in October.
Period one
The first period of a bull market is marked by little, if any, public confidence and quiet accumulation by professionals. It is nearly impossible to identify this stage as it is happening. However, good fundamentals, improving earnings and bargain prices mark this as a period of accumulation by value buyers and institutions.
As this period develops, traditional reversal patterns in individual equities begin to appear. The average price is low and even the good stocks are cheap. Also, the price/earnings (P/E) ratios of the indexes are low. A few strong stocks now begin to break out of their sideways patterns. At the same time, isolated weekly and monthly highs occur as prices begin crossing their 100-day moving averages.
On balance, price action is dull and volume is low. While the violation of the 18-period moving average may have indicated a turning point in the overall market, it is not a guarantee that a particular stock will rebound soon. Many former market darlings will lie dormant for years.
Leading money managers now begin their accumulations based on the fundamentals. Because disillusionment with the market is the general temper of the public, good buying opportunities are abundant. Many companies with solid business strategies and strong competitive positions within their individual sectors offer real potential for price appreciation. Because most of those who found themselves in desperate need to sell have already done so, the supply is somewhat diminished. Therefore, to get strong stocks, traders now have to start giving higher prices to acquire them. Caution is still driving the bus.
Nevertheless, although values are good and the institutions are pursuing quiet accumulation, the public will not be back into stocks until they reach much higher prices. Most of the bottom pickers were slaughtered on the way down, and the reality is that there are only a limited number of players left.
Most people consider price as the determining factor that indicates the end of a bear market, but it really is time and fundamentals. For this reason, bottoms take much longer to form than it does for tops to collapse. Nowhere is this more apparent than in the opening stage of a bull market, and this is why it is hard to tell when you are in the first stage of a bull cycle and not in a bear market rally.
If you are looking for individual stock picks during this period, it is a good idea to watch for ones with good P/E ratios and return on equity values as they cross their 200-day moving averages.
Period two
In the second stage of a bull market, stock prices have been rising for several months and the mark-up is ready to commence in earnest. Market-leading equities are beginning to violate their 200-day moving averages. This is the time to buy the dips and ride the rallies higher.
Market newsletter writers and television pundits to the contrary, there is no magic in picking stocks in this period. In fact, you can pretty much select any stock and it will appreciate — the only question is by how much. If you are looking for individual stock picks during this period, it is a good idea to prospect the new highs found within the most-active lists.
Because money follows rallies, greed has been rekindled and more people are starting to think of the stock market as a wealth generator. Now there is competition by the public for a reduced supply, and accumulation is forcing prices higher. Some market participants are starting to show some impressive profits due to having bought early and simply holding. However, the larger public does not join the party just yet. Keep in mind that bull cycles take time to develop.
Market leaders are now rising to the top and the media loves them. Mutual fund inflows are increasing once it is apparent that the market is recovering. The Dow Jones Transportation Index now clearly reverses. It all comes down to markets being driven by liquidity and nothing else. Rallies are not caused by inflows, but rather inflows are the result of rallies — and rallies are the result of a series of higher highs. All of this is another way of spelling "greed."
Remember that it is not public demand that causes rising prices but the rising prices that cause public demand. The conclusion of this period is often marked by a significant retracement as the market pauses to catch its breath. However, too much greed is present for prices not to continue rising. As this retracement occurs, it is time to remember that bases must be built for the bull cycle to continue. Things are now getting in line for the third stage. Greed is driving the bus.
Period three
During this period, stock prices advance at a phenomenal rate. Cocktail parties are full of people with "hot tips." Most of the market participants are looking for easy money and little attention is paid to the underlying fundamentals of the larger market.
P/E ratios begin to achieve ever-higher levels, but that is immaterial. New stock market experts look upon all traditional fundamentals with disdain. Historical experiences are scorned, and the mantra of the day is that "it is different this time." New books about how to make millions in the stock market are common and fundamentals really do not seem to matter to anyone anymore.
About now, an initial public offering (IPO) craze hits the market. During period three, a plethora of new companies are formed to satisfy a public’s insatiable appetite for stocks of all kinds. The reason behind this is simple: There is more money to invest than there are shares available to sell.
In addition, a merger-mania also develops and buy-outs run rampant through corporate finance. The availability of leverage funds makes this possible. In other words, many companies are enjoying bloated stock prices to aid in the facilitation of any acquisition that might arouse corporate interest. As long as companies can convince others that their stock prices are valid, acquisitions are easy. Public relations and spin are now driving the bus.
Many leading issues actually will reach their highs during this period. They will then reverse long before the overall market shows any inclination to do so. This always leads to the last stage of a bull market and distribution begins. The professionals start to distribute some of the shares that were acquired in period one.
Period four
The main factors that have been leading the market to period four — and the coming market collapse — have been uneducated speculating and unrestrained leverage, both of which were aided by easy credit. This is finally becoming apparent to even the most unsophisticated market participants. Period four is rife with conflict and confusion. Slogans such as "if you would have put $10,000 in the market 50 years ago and never sold, you’d be a multi-millionaire today" are now common.
The market develops a theme. These themes culminate into an obvious bubble as the market seizes upon the theme and then goes slightly mad with it. These bubbles float on a sea of easy credit and greed and are rabidly pursued by the public as they dump ever more money into it.
We can go back over market history for hundreds of years and we will find bubble after bubble. There is one about every 20 years or so. These bubbles always are connected by corrective recessions or depressions but like the phoenix, a new bubble always springs forth from the ashes of the old as a new theme develops.
There has been the technology boom, where any company that had "tech" in its name was viewed as an instant path to riches. Then came the "nifty 50" where buying any of 50 blue chips stocks was considered a guaranteed path to wealth. The "conglomerate boom" was so volatile that it became the main concern of the academia that America was going to end up with only five to 10 public companies. Then came the "Internet boom" where all of the stores in America were going to close and people were going to buy everything, including their cat’s food, off of the Web. This incomplete list is to say nothing of the several real estate and commodity bubbles that connected them.
Normally, a bull market’s resolution is not the result of some cataclysmic occurrence or the result of a mature market, as the uninitiated tend to believe. It is the simple result of the inability to keep more and more money coming into the market. In other words, the market suffers from a shortage of players.
This is a period of high volume, high volatility and extreme vacillation. Profits achieved during period two and three have confirmed the belief of most investors that the bull market will continue forever. For these, the start of the upcoming decline is viewed as a gigantic buying opportunity. The truth is, those who see the lower prices as bargains are now the only ones sustaining the bull market. As prices continue to creep lower, the professional traders continue to sell into every rally. Clowns are driving the bus.
The market now begins to eat its own tail, effectively destroying any chance of the bull cycle continuing. We see many market-leading stocks react several points from their previous tops and then not retrace. Their race is obviously run. The best advice: When the press becomes euphorically bullish, but the cumulative advance/decline lines on the weekly chart of the indexes do not concur, tighten your stops, reduce your exposure and tread carefully.
The Tacoma Narrows
Anytime prices begin to print irrationally and your oscillators won’t behave, it is a head’s up to be careful. Extreme vacillation of price usually indicates that something is badly out of balance. Therefore, be wary of any market that seems unwilling to print decent charts. If a market won’t settle down and behave, the likelihood is that it is coming apart. Vacillation of the larger market indicates that something is seriously wrong. It is just that it is not widely apparent, at least not yet.
Whenever you see extreme vacillation in the larger market, it is a good time to remember the story of the Tacoma Narrows Bridge. In 1939, a bridge was built across the Columbia River at a place known as the Tacoma Narrows. Its purpose was to connect Portland, Ore., and Tacoma, Wash.
Unfortunately, the engineers never took the wind sheer of the river into consideration when they designed the bridge. After it was completed and in use, the wind forces created by the Columbia Gorge would whip the bridge up and down and side to side violently, eight to 20 feet at a time. In other words, the bridge was unstable. Although the bridge did not immediately fail, it should have been obvious to anybody who saw it that something was not right.
Nevertheless, it did not make much difference to the public. Despite the obvious weakness of the bridge, people continued to drive on it, walk across it and get their pictures taken while standing in the middle of it as it gyrated wildly above the river. They did this for over four months knowing full well that something was amiss. Fortunately, no one was killed in 1940, when the wind finally twisted the bridge badly enough that it broke up and fell 100 feet into the Columbia River.
As an interesting aside, starting with the year 1900, the length of the average bull cycle has been 40 months and three weeks, which is probably close enough for land mines and hand grenades. It should be noted that during a bull market, approximately 90% of all stocks follow the 100-day moving average higher.
Aubrae DeBuse has been engaged with the markets off and on since 1959 and is presently a proprietary trader for a family foundation.
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