Bob Carlson

The civil disturbances in Egypt and probably change of government are occupying the attention of most in the financial world today. The events are changing views on several key issues. Here are some ways the events, especially when coupled with similar events in Tunisia and other Middle East nations, are changing views.

1. Emerging markets aren’t the same as developed markets. In the last couple of years many investors were adopting the idea that the developing markets were close enough to being developed and were good substitutes for developed markets. The notion was attractive because of the higher growth rates in many emerging economies and the slow growth in the developed world. Recent events show emerging countries still are subject to political risk, and political events in one emerging country adversely affect stocks in other emerging countries.

2. Such problems are likely to spread. These are not political or religious uprisings. We’re not seeing a repeat of Iran’s Islamic Revolution. The problem is many of these countries have about half of their population under the age of 30, and unemployment in that group is very high. Egypt’s under-30s are reported to have a 20% unemployment rate. A large, unemployed population of young adults is not a good condition.

3. Governments will take more steps to bring down the prices of agricultural commodities. Food has to be affordable in emerging nations, and recent price increases make it unaffordable to many people.

4. Watch out for commodity prices. Political unrest coupled with efforts to tame inflation could burst commodity prices.

5. Investors could reverse the big trades of the last year. They could sell emerging country stocks, commodities, and foreign currencies, bringing their money back to large U.S. companies and the dollar. But on the other side of that trade, many emerging economies are commodity-based. Political unrest could reduce production, thereby raising prices of some key commodities.

Last week on our investment webinar (replays will be available soon on www.tjtcapital.com) I was asked my view on the recent declines in tax-exempt bonds. We’ve been following these developments closely on this blog. I stated I thought the sell off was overdone. There are some states and municipalities in financial trouble. But they’re in a minority, and even most of the deeply troubled ones won’t default on their general obligation bonds. I think general obligation bonds of most states and localities are safe, and there are good deals because some still have yields above those of treasury bonds even before factoring in the tax break. As often happens quality gets sold with the trash in a panic. I also stated I would avoid most revenue bonds and any others that depend on the revenue from a particular facility or activity.

I can’t take credit for it, but the tax-exempt market is bouncing back. A key tax-exempt ETF gained 1.2% last week. We can’t sound the all-clear yet and say the bottom has past, because investors continue to make net withdrawals from tax-exempt bond funds. This could put selling pressure on the market for a while.

In the two investment webinars I’ve one recently one question keeps coming up. (Recordings  are available at www.tjtcapital.com about 10 days after the original webinar.) The question is how can the government say inflation is low when commodity prices obviously are rising at rapid rates? Brett Arends of The Wall Street Journal gives three reasons to doubt the accuracy of the government inflation data. (A subscription might be required.) One reason is the government changes the data regularly. You can get a different view of the inflation rate at Shadow Government Statistics.  Another reason is the government data is backward-looking. The commodity price increases could show up in the CPI down the road. The third reason is all the dollars the Fed created have to be going somewhere and should show up in prices at some point.

I’ll throw in two more reasons. The CPI assumes about 40% of the average household’s monthly basket of purchases includes housing. Housing prices have been stable or falling, and that offsets a lot of other price increases. The other reason is services make up a large part of the CPI basket. Those also have been stable or falling and can be offsetting commodity price increases.

Finally, businesses report problems passing commodity price increases to consumers. They’re maintaining profit margins by being more efficient and productive, producing more with fewer employees.

The Wall Street Journal’s most read story online at least at one point yesterday was this article on when to get the best airfare prices online. (A subscription might be required.) The worst days to buy are on the weekend. Prices tend to be highest with few sales. Experts quoted in the article say a big reason is that the employees in charge of this stuff aren’t at work on the weekend. The best prices usually are available on Tuesday, with Wednesday coming in second.

Rick Seaney, chief executive of FareCompare.com, studied three years worth of airline prices and concluded that 3 p.m. Eastern time Tuesday was the best time to buy. “That’s when the maximum number of cheapest seats are in the marketplace,” he said.

A daily check of fares in 10 different markets for the past two weeks showed that the average of the lowest prices offered in those markets was often mid-week, while weekends were higher priced. In the days studied, there were no “mistake fares” at ridiculously low prices that could skew results.

In most retirement planning projections, to meet your goals your portfolio has to double in the 10 years before retirement. That’s the view of financial planner Michael Kitces of Pinnacle Advisory Group of Columbia, Md. That’s simply the inverse effect of compound returns. Compounded returns are magical when there’s steady growth. But when you are counting on steady positive returns, that means the portfolio growth in the later years is due almost entirely to the returns. By that time your portfolio has increased to the point that your contributions are very small contributions. As I’ve shown in past issues of Retirement Watch, when you start investing young, market returns will account for 70% or more of your final portfolio value. But that means if portfolio returns are not positive during the last 10 years, your portfolio won’t meet your goals.

That’s why I’ve long recommended that a core, long-term portfolio needs to be properly diversified, not the diversification of a traditional portfolio. Traditional portfolio diversification isn’t true diversification. It relies heavily on positive stock market returns. To counter this, I developed a portfolio I call the “hedge fund” mutual fund portfolio. Most of the funds in it have low correlations with major stock market indexes and with each other. That means fairly steady, positive returns over time, few big losses, and most importantly, a portfolio that does not depend on a bull market in stocks. To meet your retirement goals, you need true diversification in your portfolio with assets that do well in different economic environments.

There are two big mistakes many people make in their retirement (or post-career) planning. One is to underestimate inflation and its effects during your silver years. The other mistake is to underestimate life expectancy, or longevity. For example:

A Society of Actuaries survey in 2005 found two-thirds of retirees underestimate the average life expectancy at their age, with 42 percent doing so by five years or more. The Social Security website has a life expectancy calculator and other tools for estimating government retirement benefits.

Longevity increased considerably during the last half of the 20th century. While most forecasters expect that to continue, there is a qualification to the forecasts, and that is the increase in obesity. The improvements in longevity from reduced smoking and from cancer deaths could be offset by diseases due to obesity. But if you avoid that problem, living longer is likely to result in higher medical expenses, especially for long-term care.

In any case, there is a good chance that even as Americans live longer lives, they will spend more years disabled, needing expensive care. That’s already happening: Though deaths from heart ailments or cancer have declined, deaths from Alzheimer’s disease have increased, from 49,558 in 2000 to 74,632 in 2007, according to the CDC. “The longer you live, the higher the risk” for Alzheimer’s, Besdine says, noting the disease has no good treatments. “What we want to do is extend the nondisabled part of old age.”

This is an interesting article on longevity, its many sides, and planning steps you need to consider: save more, buy annuities, and delay Social Security.

Older Americans in general have a reputation for being frugal and avoiding debt. That is changing, and it appears that credit card debt is damaging the retirement plans of a growing number of the silver generation. A financially secure retirement can quickly unravel after unexpected medical bills, gifts for the grandchildren, and unexpected increases in regular expenses. More seniors are using credit cards to make up the difference and then finding they don’t have enough money to make more than the minimum payments.

No wonder growing numbers of the elderly have or want jobs. A report from the Sloan Center on Aging and Work at Boston College found that 30 percent of workers over age 55 have more credit card debt than retirement savings; 41 percent have as much. A majority of older Americans face the very real possibility of starting retirement in the red.

There are options for seniors who have credit card debt or are worried about falling into the trap.

And as the balances pile up, the elderly cope in a number of ways. Some, like Mr. Freedman, permit their adult children to step in, while others seek outside counsel in an effort to preserve their independence. Some elderly debtors are trapped in limbo, too proud to ask for help but too strapped to pay off the debt.

As a last resort, filing for bankruptcy is an option. The best advice, of course, is to avoid putting anything on a credit card that you won’t pay off as soon as the monthly statement arrives.

One of the best ways to avoid being a victim of fraud is to study frauds that have occurred. There’s an entertaining and informative account at fortune.com, entertaining if you weren’t a victim.

In hindsight, it seems obvious that a savvy cybercriminal would target HELOCs [home equity line of credit]. From 1998 to 2007, the percentage of homeowners with HELOCs jumped from 10.6% to 18.4%. Credit balances soared. All the information a scammer needed was available online. The trick was cobbling it together. Onwuhara taught himself how.

Using ListSource, a direct-marketing company, he’d collect mortgage information on married couples with million-dollar homes. They qualified for high HELOCs. He’d find lease or loan papers through public databases and pay sites, then use Photoshop to grab homeowners’ signatures off documents. Next, he’d build a profile of the victim by paying for a background search through skip-tracing sites. That would give him birth dates, Social Security numbers, names of relatives, previous addresses, employment histories, and more. To get a mother’s maiden name he would use Ancestry.com.

The good news is that the victims of the identity theft were made whole by the banks that were duped. The banks were the ones who suffered the losses.

The Financial Crisis Inquiry Commission created by the President issued its report today. The 10 members of the commission didn’t agree on one explanation or narrative. The six Democratas making a majority of members concluded the crisis was avoidable and  blamed a wide range of people and institutions. A three-person minority of Republicans and a fourth Republican separately told different stories:

A 27-page dissenting report by three of the Republican-appointed commissioners offers a strikingly different view, arguing that the cause of the crisis went beyond U.S. regulators and companies.

“It’s a story that focuses heavily on economics, focuses on a global credit bubble, a housing bubble contributed to by U.S. policies, but recognizes there were housing bubbles in other countries as well,” said Keith Hennessey, one of the GOP appointees and a former top economic aide to President George W. Bush. “What other people in our view get wrong is not when they point out problems in U.S. policy, but when they say problems in U.S. policies are sufficient to explain the crisis.”

The fourth Republican-appointed commissioner, Peter Wallison, released his own dissenting opinion, blaming the crisis on the U.S. government’s promotion of homeownership via quasi-governmental mortgage giants Fannie Mae and Freddie Mac.

Wallison, a fellow at the American Enterprise Institute, criticized the panel’s work as biased.

I take some abuse from a few insurance sellers whenever I write about indexed annuities, which I’m told I no longer should call equity-indexed annuities. I wrote about them most recently a few months ago. My general view is like all investment products they’re appropriate in the right circumstances, but too often they are sold to someone who doesn’t understand them and for whom they probably aren’t appropriate.

You don’t have to take my word for it. A Wharton School Professor says:

“These contracts have really high hidden fees,” said Smetters, a former U.S. Treasury Department economic policy official. “That’s why they’re terrible ideas for older people even though they’re peddled to them.”

Here’s a comment from another professor:

Indexed annuities tend to underperform a lower-risk strategy of rolling over CDs, “because of the high cost embedded in these things,” said William Reichenstein, professor of investments at Baylor University in Waco, Texas.

Read the entire article. It’s worth your time.