Posted on Monday, December 29, 2008 - by Henry Walter
Year-end Transactions; RMDs; Pipelines; the Madoff Affair


***A reminder. Three trading days remain to make year-end adjustments that will be recorded in 2008.

•Harvest tax losses – see posting on this site on November 30 for details.

•Pick up bargains as others dump stocks to harvest their own tax losses. Only time will tell if these are real bargains. See below for a suggestion.

•Make other year-end adjustments if necessary.

•Double check that you have taken the required minimum distribution (RMD), if required. Here is a quote from the IRS Web site: An account owner must take the first RMD for the year in which he or she turns 70 ½. However, the first RMD payment can be delayed until April 1st of the year following the year in which he or she turns 70 ½. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.

*** While on the subject of RMDs, Congress recently passed a bill that will suspend, for 2009 only, the rule that requires people over 70 ½ to withdraw a minimum amount from their traditional IRA each year. The bill was signed by the president on December 23rd. The Treasury Department confirmed that it will not make any changes to the minimum distribution requirement for 2008 which the AARP, among others, had been pushing for.

The advantages of this option are two-fold. If you don’t need to take part or all of your RMD in 2009, you can wait for the market to recover. Your wait can be as long as two years - 2009 and until just before the end of 2010. In most cases you will also save taxes in 2009, although if Congress boosts the taxes on high income taxpayers it might be advantageous for them to take some distribution in 2009. If you need the cash flow provided by the RMD, this suspension does not help, but you could consider taking only part of the normal RMD.

This suspension applies to IRAs and employer-provided qualified retirement plans, although for the latter, the employer must be willing to modify the plan. The above is based on preliminary reports. After the bill is signed and 2009 arrives, there will be clarification of all of the rules and regulations.

*** It is amazing to us that investors are willing to lend money to the Treasury for 10 years at a yield of 2.13%. If you are looking for better yields for a small portion of your allocation to fixed income, Zacks Investment Research suggests you consider quality energy infrastructure MLPs, in other words pipelines. Here is a list of their buy-rated names, all investment-grade credits with comfortable distribution coverage levels.

Enterprise (EPD) yield 10.38%
NuStar (NS) 10.75%
Energy Transfer (ETP) 10.56%
TC Pipelines (TCLP) 12.36%
Kinder Morgan (KMP) 8.98%

All investments entail risk. Here is how Morningstar summarizes risk for KMP. “We think the primary risks facing Kinder Morgan are regulatory because regulators set the rates it can charge its customers. The company occasionally faces lawsuits related to leaks and spills in its vast pipeline network, regardless of whether the spill was the fault of Kinder Morgan or a careless construction crew. Making an acquisition with poor returns is also a risk, as well as spills and other environmental concerns.” There are also unique tax implications. One way to circumvent this is to use KMR, which pays distributions in kind, in place of KMP. As always, consult your financial advisor before you do anything.

*** Finally, we would like to quote Byron King, a geologist, lawyer, co-editor of Outstanding Investments, and Navy veteran, on the Madoff Affair.

“So it makes me wonder. How bad is it out there? How many other Ponzi schemes are there besides Madoff’s? How many more financial psychopaths are ginning up fake account statements? How many little old ladies are there out there who think they have money in an account, but it’s all just some big scam? How many more bad banks? How many bad brokerage houses? How many more bad companies with bad stock? How many more bad government entities with bad finances and worse bonds? How many bad pension funds?”

Scary.

Regardless, we wish you a Happy and prosperous New Year.

Posted on Wednesday, December 24, 2008 - by Henry Walter
Statistics and Comments on the Investment Scene


*** The SPIVA scorecard compares the performance of U.S. mutual funds and the benchmark indexes. In other words, it measures how passively managed funds compare to actively managed funds. SPIVA stands for Standard & Poor’s Index versus Active. Here are the results for the five-year period ending June 30, 2008:

The S&P 500 outperformed 68.6% of actively managed large-cap funds
The S&P 400 outperformed 75.9% of actively managed mid-cap funds
The S&P SmallCap 600 outperformed 77.8% of actively managed small-cap funds
The S&P Global 1200 outperformed 70.1% of actively managed global equity funds
The S&P International 700 outperformed 86.5% of actively managed int’l funds
The IFCI Composite outperformed 73.9% of actively mgd emerging markets funds
Domestic bond index funds outperformed 75% of actively mgd domestic bond funds
Emerging-market bond funds was the only category where a majority of active managers beat the benchmark.

If you think you can pick active managers who will beat the indexes over time, good luck. If not, SIP includes 4 index funds in Tier II, and for those with their money elsewhere, there are plenty of index funds, both mutual and ETFs. Just make sure expenses are low. In SIP, the S&P 500 index fund’s expense ratio is 2 basis points.

*** This is the time of the year when Wall Street strategists forecast what will happen to the stock market in 2009. Here are the expected percentage changes from the current S&P 500 level, as gathered by Bloomberg. Note that their success in 2008, shown in parenthesis, leaves much to be desired. We can’t resist an editorial comment. These guys get paid big bucks for doing this?

David Bianco at UBS +47.2% (-48.1%)
David Kostin at Goldman Sachs +24.6% (-47.3%)
Jason Trennert at Strategas +24.6% (-46.2%)
Andrew Garthwaite at Credit Suisse* +18.9% (-46.4%)
A Committee at Citi +13.3% (-47.3%)
Kevin Gardiner at HSBC +13.3% (-48.1%)
Richard Bernstein at Merrill Lynch +10.4% (-42.1%)
*Mid-Year Forecast

*** “The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding.” William Poole, former president of the St. Louis Fed and now senior fellow at the Cato Institute in Washington, said in an interview with Bloomberg Television. Poole is also a contributor to Bloomberg News.

*** Kodak has at least one friend. Barron’s Dimitra DeFotis notes that the brutal bear market has left 80 stocks, or 16% of the S&P 500, trading below $10 a share (Barron’s 12/15/08, page 34). Screening for companies likely to increase earnings per share in 2009, and weeding out the dangerously debt-encumbered, he came up with 11 that could surprise investors by rallying in the year ahead. His list includes Motorola, Starbucks, Southwest Airlines AND Eastman Kodak. As we write, EK is at $6.30. In early 1997 it was near $95.

*** David Walker was Comptroller General of the U.S. from 1998 to 2008, and now the executive director of the Peter G. Peterson Foundation, an organization dedicated to the idea that America should live within its means. He was featured in a documentary called I.O.U.S.A. warning about the problems we will face if we don’t get our house in order – financially. If you get a chance be sure to see it. In a recent speech he argued, “Rome fell for at least four reasons, and please listen carefully: A decline in moral values and political civility at home, an overconfident and overextended military, fiscal irresponsibility by the central government and inability to control one’s borders. Does that sound familiar?”

*** “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.” Sir John Templeton, 1994

*** Clearly, consumers and businesses are overextended, and no amount of stimulus can prevent the de-leveraging process from running its course.

Posted on Monday, December 15, 2008 - by Henry Walter
The Secret to Wealth; A Ponzi Scheme; Macromavens


The Secret to Wealth
– We ran across a Web site that claimed to know the secret to wealth, and, of course, we were interested. So here it is.

The Secret: Spend Less Than You Make.

That’s right. This is the one secret that no one wants you to know because it hurts the economy. If you save money that means there is less money circulating around the street buying washers, dryers, refrigerators, big screen televisions and X-boxes. The more you save – the less the credit card companies make. It is in NO ONE’s interest, but your own, to save money and now you know why it is such a closely guarded secret.

The same site lists and discusses The 10 Immutable Laws of Money. Check them out. Google the title in italics.

A Ponzi Scheme
– Last Thursday (12/11/08) Bernard Madoff, a former NASDAQ chairman, was arrested and charged with cheating investors out of an estimated $50 billion. As details emerged, here is how the Ponzi scheme operated, according to the Wall Street Journal.

•Wealthy individuals and institutional investors put money into the initial $17 billion fund. Mr. Madoff then leveraged the $17 billion into more than $50 billion. Not disclosed to investors was that virtually all the money was lost!

•To maintain the appearance of solvency, generous returns to initial investors were paid on a regular basis using funds from new investors.

•The scheme collapsed when investors sought to redeem about $7 billion, more than remained in the fund.


Here are some of the amazing details revealed as this fraud unravels.

•There were multiple red flags. For example, Harry Markopolos, an industry executive, wrote to the SEC that Madoff Securities was the world’s largest Ponzi scheme, and pursued his allegations over the last nine years with both the New York and Boston offices of the agency. Apparently the SEC dropped the ball especially since Mr. Madoff had had serious problems with the agency in 1992-3. We also note that Mr. Madoff’s investment advisory business wasn’t registered with the SEC until 2006.

•Seemingly sophisticated investors were duped, including a number of hedge funds who will have a lot of explaining to do about their lack of due diligence.

•He marketed to extremely rich people. He belonged to a half-dozen golf clubs and there were people just joining these clubs to get into his fund, presumably because of the high and steady returns. Often such investors make relatively easy marks because Madoff’s pitch was, “You’re special, you can get something other people can’t get.” And he refused to take money from some wealthy investors which added to his allure. In those circles, he was known as a “money-management legend”.

•As the scheme unravels we will probably learn about many other sophisticated victims. There are already rumors that a lot of Swiss investors were duped.

The recent allegations that Marc Dreier defrauded investors of $380 million, pales next to the $50 billion Madoff affair. Mr. Dreier founded Dreier L.L.P., a prominent 250-lawyer firm on Park Avenue in Manhattan.

Look for a rash of law suits. Have investors learned anything from this scam? Maybe in the short-term, but further into the future there will be other Ponzi schemes and the resulting victims to write about.

Yes, Virginia, there maybe Ponzi schemes in Rochester, New York, so remember the old axiom, if it sounds too good to be true, it probably is.

MacroMavens
– We have been a long term fan of Stephanie Pomboy, an economist, who founded MacroMavens in 2002 after 11 years working with Ed Hyman and Nancy Lazar at the ISI Group. So we were delighted to see her interview in today’s Barron’s (12/15/08). What we like about her is that she tells it like it is, she doesn’t pull punches, and she is usually right. Here are a few of the highlights.

Pomboy, whose Manhattan firm analyzes macroeconomic themes and their investment implications, remains bearish. In the short run there could be a rally in risky assets and a sell off in Treasuries. But the economic deleveraging has barely begun, and that’s her longer-term thesis.

She thinks that either we are going to pay for our policy sins via higher interest rates or a weaker dollar. For an economy as levered as much as the U.S. is, the former choice is not an option. So a weaker dollar is the natural valve.

She thinks we got into the current mess as a result of the asymmetric practice of capitalism where, as long as everyone is succeeding, it is a wonderful thing – but the moment someone fails, we need to revert to socialism.

She likes hard assets, gold in particular.

All in all, we found this a valuable article. To read the full article Google “Barron’s:Forecast: A Long, Cold Winter”.