January 2010

January 24, 2010 02:00 p.m.
Tough Week for the Markets

One of the difficulties of investing is we never know what will trigger a correction or even something worse in the markets. If these things were obvious, then investors would react before they occurred.

The past week is a good example. Just a week or two earlier it was tough to find anyone who saw imminent danger in stocks. The few pessimists were concerned about longer-term events, but saw nothing immediate that put the market at risk.

Then news came from China that economic growth was too strong. Bubbles and inflation were starting to be worries. Few people noted that since the fall of 2008 China has had the strongest economic stimulus program in the world. There was much focus on actions in the U.S. and Europe, but China should get a lot of credit for pulling the world from the brink of a big depression.

That’s why news that China is worried about its growth being too strong helped U.S. stocks to lose over 5% in three days. Developments in emerging economies generally and China in particular bear close watch.

We’ve believed the world economy and markets are too fragile and subject to declines on relatively small disappointments or changes. That’s why our portfolios are conservatively invested. I don’t know if this is a big correction, a new bear decline, or if stocks will turnaround in another day or two. Stocks seemed to have unstoppable positive momentum until last week, so things can change fast. We continue to manage and reduce risk, rather than embrace it and hope for the best.

Another reason to remain cautious is the return of the yield junkies, or yield hogs as I like to call them. These are investors who seek the highest income yield and overlook the risks that come with the yield. Too often, yield hogs end up losing far more in principal than they gained from the higher income payments. Whenever it is easy for borderline companies to sell their bonds, investors should worry. A subscription might be required to view this article.

In the past we’ve addressed mistakes investors make on a regular basis. Here’s a review of common investors’ mistakes compiled from a new book, The Elements of Investing. I haven’t read it, but this Web article is a good reminder of mistakes to avoid.

Many of you know that there was no increase in Social Security benefits for 2010. Benefits are indexed for inflation, and the Consumer Price Index was negative during the 12 months used to compute the 2010 COLA. Social Security law also says that beneficiaries can’t see their net payments decline because a rise in Medicare premiums outpaces their benefits COLAs. Because of that, many Social Security beneficiaries won’t pay higher Medicare premiums in 2010. But many others will, and they could pay higher premiums than they would have otherwise. It’s a complicated interplay of the two bodies of law that is well-explained here. (Subscription might be required.)

Those of you who have long-term care insurance policies and have owned them for a decade or more may face steep premium increases. Low interest rates, lower-than-expected investment returns, and fewer policyholders letting their policies lapse than forecast combine to push insurers’ costs high. Check the details of why increases are coming and which policies will face them.

Does it make sense for an older homeowner to take out a reverse mortgage and use the proceeds to buy an annuity? I’m certainly not sold on the strategy. But here’s one argument that it’s a good idea in limited circumstances.

January 15, 2010 07:30 p.m.
Expanding Select Utility

In the January issue of Retirement Watch I recommended purchasing Cohen & Steers Select Utility (ticker: UTF), a closed-end fund. On Jan. 1, the fund’s name was changed to Cohen & Steers Infrastructure Fund. The ticker remains the same. Also the same at this point are the fund’s basic portfolio allocation and the managers.

The fund still is 75% invested in utilities, especially electric utilities. Nine of its top 10 holdings are utilities. The fund continues to invest primarily for yield and uses leverage to increase its yield and returns, using about 40% leverage. The fund also uses interest rate swaps to reduce the interest rate risk of the leverage. The new name comes with a broader mandate. The fund always could buy utilities outside the U.S. Now it can invest in companies involved in other parts of a country’s infrastructure that have qualities similar to electric utilities, such as toll roads, water companies, and gas distribution and pipeline companies. The fund also sells at an attractive discount to net asset value.

The fund’s board of directors failed to receive shareholder approval for a merger of the fund with Cohen & Steers REIT & Utility Income fund. The board believes a merger is in the best interests of shareholders and is proposing shareholders vote on it again. We’ll monitor the developments. A merger is fine if it doesn’t materially change the fund’s mandate.

We continue to recommend the fund for its combination of high income and solid returns. Investors who don’t want to buy a closed-end fund should invest in American Century Utilities Income or FBR American Gas Index funds or the ETF SPDR Utilities (XLU).

January 7, 2010 04:00 p.m.
The Worst Decade Ever, and Other Updates

The calendar is an arbitrary way to measure investment returns. Yet, most people do it, and the exercise can be instructive. We just wrapped up not only a year but a decade. So, it is a good time to review recent investment returns.

It shouldn’t surprise most investors that the 10 years ending Dec. 31, 2009 were the worst calendar year decade for U.S. stocks. It also was the only decade with negative returns for the S&P 500. Even the 1930s eked out a small positive return. Don’t think this increases the probability the next 10 years will be good ones. Below-average decades have come in pairs since the 1920s. You can see it all in interesting charts here.

Most people have difficulty comparing their 401(k) plans with others and determining whether their employers offer good plans or not. That could be changing. A firm called Bright Point aims to be the Morningstar of 401(k) plans. This article compares a number of 401(k) plans and lists the best and worst.

The government program to help people who have trouble paying their mortgages gets a lot of criticism. Some say it isn’t helping enough people fast enough. Others say it isn’t fair to those who are paying their mortgages. In this article, economists explain why the program is making things worse than they would have been.

For many years seniors have told me they have trouble finding new doctors or getting non-emergency appointments with their doctors. The Medicare reimbursements rates are just too low for doctors to bother with. This situation will get worse if any existing version of health care reform is passed. Some doctors aren’t even waiting. The prestigious Mayo Clinic announced this week that in Arizona it will stop treating some Medicare patients, because they cost too much relative to the reimbursements the clinic receives from the government. As I said, expect more announcements of this sort.

The Medicare Part D Prescription Drug program has been around since 2006. Academics have studied the program and found some interesting trends. The conclusions are the program is working better than expected and is less expensive than forecast. The elderly are using more drugs than before the program, but they also are saving the system money in other ways because the drugs reduce more expensive care that would have been incurred without them. Yet, about 70% of beneficiaries could have selected a plan that cost them less, about 25% less on average. As we’ve warned against in the past, too many beneficiaries focus on the initial premium when selecting a plan instead of total out-of-pocket spending. Learn about these and other consequences of the program here. (Subscription might be required.)