The New York Times reported yesterday that the average cost of employee health care rose by nearly 8% so far this year, more than twice the rate of inflation and rising far more rapidly than workers’ incomes. Both employers and their personnel are feeling the pinch, and while about 60% of companies still offer health insurance to their people, in comes at the cost of increasing rigidity in wages and salaries. I look for the situation to worsen, with health care costs still floating above all reason, and more and more workers having to do without medical insurance from the job.
Category Archives: Financial Commentary
American Funds spanked with $5M fine
American Funds, that darling of many retail brokers, was fined five million dollars by the National Association of Securities Dealers for rule violations “prohibiting mutual fund distributors from directing trading business to brokers as a reward for selling their funds.” The rule dates from 1973. From 2001 to 2003, American’s parent paid some $98 million in commissions for trading within its mutual funds to brokers; “target commissions” were declared by American and allocated in advance to “top selling retailers” of its funds. In exchange, the NASD claimed, American Funds “expected to have enhanced access to the broker-dealers’ sales staff, and have its funds listed as ‘preferred’ or ‘recommended’ by the retailers…’precisely what the (NASD’s) rule was intended to proscribe.’” The gist of all this is that the brokers in question were being paid extra to push this particular vendor’s products, and that “recommendations” were clearly tainted by self-interested compensation elements. American, of course, is by no means alone in this situation. The lesson? Once again, examine conflicts of interest zealously, and be especially vigilant when commissions (which include fee-based arrangements) form any part of an advisor’s compensation.
Markets Update: Modern Times
It’s been several weeks since my last post, and much had occurred while I was away. What is striking is how little impact some quite grave events – Britain’s foiled airline massacre, and the Israeli/Lebanese abyss-teetering – have had on the markets, notably including the stock, gold, and oil markets. In my view, this only underscores a belief I’ve held for some time: the markets have learned to discount the dastardly risks that seem a hallmark of the dark times in which we live. The sad reality is that horror on even a grand scale has notably little impact on economic activity, and the near-certain prospect of more to come – short of a nuclear event – is wisely shrugged off by investors and other participants. That said, the stock markets have staged a nice little rally in August, bringing us, as of the 8-28 close, to these results, all 2006-year-to-date. DJII, +5.3%. S&P 500, +3.6%. Russell 2000, + 3.9%. And while NASDAQ continues to languish at –3%, foreign (EAFE) keeps soaring, + 10.7%.
Autumn beckons, stocks stir?
As the summer winds down, there’s renewed hope of a typical fall/winter rally, and a powerful finish to the year. Odds are now strong that the Fed is finished raising rates for awhile, and may actually cut them sometime in 2007; the bond markets continue to cheer this. Many stocks’ indexes are at nice mid-year levels, with the DOW up nearly 5% YTD, Small Caps (Russell 2000) up over 4%, and foreign (EAFE) almost 12%. Not so bad, after all.
More Tales from the Boiler Room
A client was recently prospected by a CFP®-holding rep from the securities arm of a major financial institution, who purported to offerfee-based, fiduciary advice in competition with my firm, Camarda Financial. When we pealed back the covers, we found profound lack of disclosures, inappropriate and misleading performance comparisons, offers of commission-paying products infee-basedclothing, and other improprieties. What was presented (and purchased by the client) as a “tax-free 7 day money market account” turned out to be a fairly complicated bond-derivative arrangement that could be liquidated “immediately”, later translated as “just as soon as we find another buyer” for the client’s position. When this was pointed out, the client said “I’d have never bought it if I’d had known that.” The securities rep (read commission salesperson) posted on the trade confirmation was not the CFP® who brought the “idea” to the client, and the client said they had not heard of this rep; his appearance on the ticket confirm is a mystery. When softly questioned, the CFP® claimed all advice was fiduciary and without commission interest. Perhaps in his mind, but the facts might argue otherwise. And the muck goes on…
Summer see-saw continues
Spooked by war and buoyed by Bernanke, the swoon continues for the stock markets, which are complaining loudly of vapors, but, remarkably, still standing. As of the 7-21 close, most markets are close to even, some a bit up, some down. Since the 1st of the year: Dow Jones Industrials, +1.4%; NASDAQ, – 8.4%; S&P 500, -0.6%; Foreign (EAFE), +4.9%; Small stocks (Russell 2000), -0.2%. We note that for most years, fall-spring has been the most profitable period, giving us hope anew, and reminding us of the old ‘sell in May and go away’ saw. Enjoy the beach.
Summer storms for markets
After June rallies that erased much of the second-quarter’s dips, markets have headed lower again through the first half of July, again wiping out 2006’s gains for many indexes. While it is disappointing that the impressive rally with which the year began seems to have sputtered, it is important to remember that for most of us, this merely means that we are close to break-even in most markets for the year, which is not such a bad thing, after all, and not so unusual for the midpoint in a trading year. As we head into the laziest part of the year’s trading cycle, it is good to keep this in mind, along with our hopes for yet another fall rally to drive 2006’s results into the happy end of the record-book.
Tales from the Boiler Room
I was recently required to take some continuing ed, and the online exam contained a number of inaccurate and industry-biased questions and answers, the worst of which was this:
“Your client is interested in hearing about how a permanent life insurance policy can help cover her son’s college education in 12 years. Which selection best explains the basis to this popular use of life insurance?
- Federal law permits up to 10 percent of a taxpayer’s total life insurance death benefit amount to be withdrawn from the policy to cover college tuition expenses.
- Interest realized on the cash value may be distributed to the contract owner for college funding purposes.
- In addition to the premium, a contract owner may pay an extra amount that is diverted to a special tax-free savings account.
- Favorable tax law permits borrowing from the cash value without incurring income tax liability, in most cases.”
The “correct” answer is “4.” But both the question and answer wrongly imply that a life insurance policy is an appropriate funding vehicle for college, when in fact such insurance is only appropriate for funding death benefits. It also wrongly implies a likely “profit” after “only” 12 years. It is sad that such biased study programs are not only approved but actually required by at least the government of the state of Florida.
PE’s plunge, stocks on sale
In yet another indication that US stocks may be ready to run, the “quality of earnings” of stocks seems to be trending up as midsummer approaches, tipping the markets closer toward the bargain category than they have not seen by this measure since 2002 – the worst year of the bear market, and the year before the momentous run-ups of 2003 (which still stand as the best year of the century). Earnings “quality” or “purity” means that the profits come more from the repeatable, core operations of the business, and less from tangential factors like real estate sales or accounting tricks. Coupled with the fact the average price/earnings ratio of the S&P 500 stands now at about 14 – compared with a historical average of something like 18 – this may mean that stocks are getting cheap indeed: the lower PE means you get more earnings per dollar invested, and the higher quality of earnings means the earnings are worth more than they have been in the past – which lowers the effective PE even more. All of this argues for sharply higher prices for US stocks, despite higher interest rates, as Camarda has been expecting since early this year.
Seedy world of IRS stoolies: “Rewards for Rats”
The IRS’s bounty program for those who finger tax cheats, officially known as the Informants’ Claims for Reward Program – and unofficially by at least one US Senator as “Rewards for Rats” – exposes some smelly folds in the dark underbellies of both a society and its government, even whilst garnering praise from Treasury for the volume of errant tax dollars it sucks in. Even IRS admits that most snitches – largely exes and others with revenge on their minds and axes to grind – act out of malice and yield no useful information; in fact over 90% of those informed on turn out to be clean, if not thankful for the interesting journey with the IRS on which their informant set them. Even successful squealers have it rough – very few get anything, fewer still any real money, and all have to wait an average of over 7.5 years to receive their due from Uncle Sam. And most are “treated like skunks at a picnic” even by the IRS, according to another US Senator. For those still tempted to blow the whistle, the T-men are gonna want info, such as the mark’s Social Security, bank account, and other financial assets’ numbers and location, as well as copies of books and records. IRS will try to keep your name out of it, but by no means offers any “ironclad promise” of keeping quiet about the canary. Most of those on whom the dime is dropped will be able to figure the fink anyway, given the specific nature of the evidence you bring against them, so better lock the door. And be advised IRS may take your stuff but disqualify your claim by saying they already had the info. For those who successfully join the ranks of the very, very few who get to wait the best part of a decade to collect a relative crumb? Better remember to report that reward money as the taxable income it is, before someone starts singing your tune…