Archive for the ‘Wealth Management’ Category
Friday, September 23rd, 2011
The controversial Affordable Care Act proposes many changes to Medicare including the following to Medicare Advantage:
- Additional Provider Choices
- Providers must limit out-of- pocket costs.
According to the website www.healthcare.gov, Medicare pays insurance companies offering Medicare Advantage over $1k per person than is spent per person in the original Medicare, resulting in increased premiums for all Medicare beneficiaries, including the 77% of beneficiaries who are not currently enrolled in a Medicare Advantage Plan. The new law plans to level the playing field gradually by eliminating the discrepancy. People enrolled in Medicare Advantage plans are still supposed to receive all the guaranteed Medicare benefits, and the law is to provide bonus payments to Medicare Advantage plans that provide high quality care.
Some additional changes intended to positively impact Medicare include the following:
- Increased Medicare coverage for preventative treatments (to begin on or after September 23, 2010)
- Move to an electronic system for medical records (to begin October 1, 2012)
In addition, the Act intends to close the donut hole in Medicare Part D.
- An estimated four million seniors reached the gap in Medicare prescription drug coverage, also known as the “donut hole” in 2010. Each eligible senior received a one-time tax free $250 rebate check.
- The first checks were mailed in June, 2010, and continued monthly during 2010 as seniors hit the coverage gap.
- In 2011, seniors who reach the coverage gap will receive a 50% discount when purchasing Medicare Part D brand-name prescription drugs (last year Part D paid for the first $2,840 in costs and then picked back up after costs exceeded $6,440).
- Over the next ten years, seniors will receive additional savings on brand-name and generic drugs until the coverage gap is closed in 2020.
- In addition, there will be higher Part D premiums for individuals who have income above $85k ($170k for couples).
- Exemptions for higher premiums can be filed at a local SSA office for those who have received a lump sum from their retirement/401(k) disbursement.
Planners should also be aware of the following:
- Early Retirement Reinsurance Program- Under the new law, people who retire between ages 55 and 65 are to be able to continue to receive healthcare coverage from their last place of employment until they are eligible for Medicare due to the $5 billion program to provide financial help for employment-based plans to meet this need. This program is intended to extend until 2014, at which point the Exchanges are said to be in place to make more affordable coverage available to these retirees.
Proponents of the Act say it allows for more people to be able to have access to affordable health care coverage, and will prevent insurance companies from dropping people who get sick or denying people coverage with pre-existing conditions.
Critics of the Affordable Health Care Act say that the costs are too great for the American people as it not only is proposed to raise government spending by trillions of dollars, but also increase health insurance premiums for millions of Americans. In addition, the Act is said to be cutting more than half a trillion dollars from Medicare, which could, in fact, jeopardize care for seniors.
Bottom Line: The Act proposes many changes to healthcare affecting current and future retirees, some of which are already in the works, however, it is difficult to say how our healthcare system and Medicare will be impacted by the Act going forward, as the potential for new leadership to enter the White House nears.
Always Asking, Never Assuming™
Christopher Holtby
Posted in Wealth Management | No Comments »
Friday, June 17th, 2011
Wall Street does not like the term “junk bonds;” they prefer to refer to them as ”high yield bonds.” Junk bonds are debt securities rated below Investment Grade by the three major rating agencies (defined as a Nationally Recognized Statistical Rating Organization such as S&P). Over the last 20 months investors have been investing a significant amount of money into junk bonds in search of yield. With Treasury and corporate bonds experiencing abnormally low yields, investors are getting desperate and greedy for more income.
Below is a table from Oaktree Capital Management, L.P. on the history of junk bond yields and the differences over US Treasury bonds ( 100 basis points is 1%, so 1773 basis points is 17.73%). What is noteworthy is how investor yields are declining and the yield difference compared to US Treasury bonds is also shrinking. This means that junk bond investors are currently taking on more risk and receiving less return.
| |
Yield to Maturity |
Spread vs. Treasurys |
| “Normal” – Dec 31, 2003 |
8.2% |
443 b.p. |
| Bubble peak – June 30, 2007 |
7.6% |
242 |
| Panic trough – Dec 31, 2008 |
19.6% |
1773 |
| Recovered – March 31, 2010 |
9.0% |
666 |
| Shrinking again – April 30, 2011 |
7.5% |
492 |
Junk bonds swing from greatly overvalued to undervalued. The middle ground does not last a long time. From 2005 to 2007, investors in junk bonds focused on the risk of missing opportunities rather than analyzing the junk bond as offering a good balance of risk vs. reward. Then came the financial crisis. Today investors can see evidence of some of the excesses from the bubble years creeping back – payment-in-kind bonds, covenant-lite debt, rising leverage ratios of completed buy-out deals and more leveraged buy-out activity. Although the irrational exuberance exemplified in the financial markets between 2005 and 2007 is not representative of today, in a low interest rate environment investors should be careful not to make “handcuffed” investment decisions (people making decisions on the belief they have no choice.) Investors always have a choice. Additionally, many of the companies that were responsible for leveraged buy-out deals occurring in the 2005-2007 time frame are re-issuing their junk bonds, and these junk bonds are not necessarily being issued on “investor-friendly” terms. Consequently, those deals also find their way into junk bond funds.
Bottom line: Junk bonds are no-longer a “cheap” investment . Investors allocating money into junk bonds in today’s low interest rate environment should be cognisant of what is occurring with private equity restructurings and deals in the leveraged buy-out space.
Always Asking, Never Assuming™
Christopher Holtby
Tags:bonds, CDO, CDS, CLO, credit, dallas, Estate Planning, fee-only, financial advisor, financial planning, investment management, LBO, leverage, north texas, private equity, texas, wealth management
Posted in Investments, Retirement Planning, Wealth Management | No Comments »
Thursday, June 9th, 2011
Investors basically have two choices when investing in commodities: 1) companies that mine, extract or farm commodities and/or 2) the price of the commodity itself in the futures markets. Both have advantages and disadvantages.
The futures markets allow investors or speculators to make or lose money based on the direction of a commodity. The term commodity in the futures markets can vary from US Treasury interest rates or currency rates to oil, corn, iron ore, etc. For purposes of this discussion, commodities will relate to non-financial commodities. Commodities trade on today’s price and prices on various dates in the future. Those prices in the future are sometimes lower or higher than today’s price. When it is higher, anybody invested in a passive commodity ETF can lose money even if today’s price is rising consistently. That is because the commodity ETF investments mature at $100 for example and the commodity has to invest into the future at a higher price of $103, let’s say, thus losing $3 from day one. This occurs even while today’s price is rising everyday. When the future prices are declining the ETF does not have this problem. However, don’t investors invest in commodity ETFs to make money when commodity prices are rising? There are active commodity ETFs which use blackbox strategies to solve this problem but investing with blackbox strategies creates a new set of problems. Hedge fund managers take advantage of the manadatory investments made by passive commodity ETFs each month, manipulating commodity prices to their benefit, which can be detrimental to the passive commodity ETF investor.
Companies who produce, farm, and extract commodities are generally publicly-traded companies where investors purchase their stock. Generally, if the current price of the commodity is increasing, the stock price will increase. However, there are other factors impacting the stock price such as the quality of earnings, the difference between the extraction/production price of the commodity versus the current price of the commodity, and the general interest in commodity companies. The risk for investors is that a 100% correlation does not exist between the increase in the value of the commodity and the increase in the price of the stock.
Since the late 1990′s large pension funds have been investing in passive commodity indices. This was due to a study by Goldman Sachs showing uncorrelated movements between commodity prices and stocks-the great diversifier( source: Index Investment and Financialization of Commodities; Ke Tang and Wei Xiong). Well, 20 years later everybody is doing this type of investing. The commodity futures markets are now being influenced by the “passive indexers.” Stock and commodity prices are now moving closer together. This is a bad diversifier.
Bottom line: Warren Buffet said investing in an investment that does not produce earnings or cashflow is speculative. Speculation is the hope somebody will pay more tomorrow for the same investment you purchased today without considering earnings or cash flow. Although commodities can provide value in a portfolio, as with any other type of investment, it is important to understand the level of risk involved.
Always Asking, Never Assuming™
Christopher Holtby
Posted in Hedge Funds, Investments, Retirement Planning, Risk Management, Wealth Management | No Comments »
Thursday, June 2nd, 2011
Clients have asked me why they should pay an estate planning attorney $2,000 to $4,000 or some similar amount to get their estate plans in order when Legalzoom.com offers a basic Will for $69. What services is an estate planning attorney providing that Legalzoom.com cannot? How complicated is a Will?
Using words to express a thought or to follow instructions is an inexact science. How many people feel Help Manuals are easy to understand? An estate planning attorney has to combine all the goals, objectives and philosophies of a client with all relevant state and federal law, including all applicable state and federal tax law, to create one document. The drafting of the Will is the simple part. Understanding the law and it’s subtleties with respect to the wishes of the client can be quite complicated. However, the most difficult part is providing sound advice, which requires both knowledge and experience.
Legalzoom.com or other do-it-yourself websites require users answer a string of questions using a “decision tree” form of logic. These sites do not offer assistance on a question that would be considered legal in nature. Their documents assume a mother and father with illiquid assets, no special needs children, and harmonious heirs is the same as a mother and father with liquid assets (stocks and bonds), a special needs child and a highly combative family. These do-it-yourself website tools treat all families and situations alike.
Bottom line: Why would anyone be “penny wise and dollar foolish” on an estate planning document? Mistakes can cost hundreds of thousands of dollars or more if the documents are drafted poorly. An estate planning attorney has the ability to tailor estate planning documents to adhere to a client’s unique circumstances, whereas, do-it-yourself websites, such as Legalzoom.com, are unable to provide this level of customization or advice.
Always Asking, Never Assuming™
Christopher Holtby
Posted in Estate Planning, Investments, Legacy Planning, Retirement Planning, Taxes, Wealth Management | No Comments »
Wednesday, November 3rd, 2010
Over the last decade US stock returns have returned slightly less than 0%, on average (iShares S&P500 Index ETF as of 10/29/10). Investors have been re-allocating money to bonds and income producing investments. Real estate, such as Real Estate Investment Trusts (known as REITs) are an example of an income producing investment.
In 2009, roughly $400 million was invested in REITs. Through July 31 of this year, 4x that amount has been invested in REITs (source: Morningstar).
Since REITs are required to payout 90% of their net income, using the traditional P/E ratio metric is not really useful. Instead, the real estate industry uses something called, Funds From Operations (FFO). The FFO provides investors a measuring stick to show how much cash flow a REIT generates. A REIT FFO can paint a rosier picture than might actually exist. For example, divide the REIT stock price by it’s FFO and you will get a better idea of how the market is valuing that REIT, much like a P/E ratio. Morningstar looked a the top 15 holdings of four top rated REIT mutual funds and found the average FFO multiple (REIT stock price/FFO), was 19.1. Looking back over the last decade, that is a high number compared to the average of 15 (source: Morningstar).
The current yield on REIT mutual funds average around 2 – 3%, compared to a 10 Year US Treasury bond, which depending on the day, has a current yield of around 2.5%. The REIT dividend yield relative to the yield of a 10 Year US Treasury bond is hovering below the 20 year average (source: Morningstar). This means you taking more risk (owning a REIT mutual fund) and getting less yield than owning a 10 Year US Treasury bond. The National Association of REITs studied the period from 1992 to 2010. It showed that when the dividend was 4-5% the next 5 years annualized nominal return was 0%. When the dividend yield was 6-7%, the next 5 years annualized nominal return was 12%. This means the returns investors receive on REIT mutual funds, based on historical analysis, depends on the current dividend yield at the time of purchase. Valuation matters.
Bottom line: Managing expectations is a key to success in investing and causes less disappointment in what the future actually delivers.
Always Asking, Never Assuming™
Christopher Holtby
Tags:current yield, dallas, dividend yield, fee-only, FFO, financial planning, fort worth, investment advice, investment services, REIT, texas, US Treasury bonds, wealth managment
Posted in Investments, Wealth Management | No Comments »
Tuesday, September 28th, 2010
Not since the 1930′s has the world seen developed and developing countries either blatantly devaluing their currencies (Switzerland 2009, Japan 2010) or attempting to debase their currencies (US and UK 2010). There is more to this story than most people expect, which I will explore in latter postings.
In the 1930′s, the major countries of the world, based the value of it’s currency against a fixed exchange price to gold. The effect of this policy, in a period of decreasing private demand (another term for a recession or depression), magnified the effects of deflation as the government could not ”print money” due to the gold/currency fixed rate (the central bank could not print money that is linked to a corresponding value of gold). Beginning with Spain (1927) and ending with France (1937), countries de-linked their currencies to gold, allowing the central bank to devalue their currency (i.e. print money). In the US, this allowed the Roosevelt administration to “pump” money into the system as the household and corporate sector demand evaporated. The 1930′s showed that when all countries de-value at once, little was gained in relative international trade competitiveness. The only real result was political tension and foreign-exchange rate uncertainty.
Fast forward 70 years. Today, the daily foreign exchange market of roughly $4 trillion makes moving foreign exchange markets more difficult. Printing money to devalue one’s currency needs to be done in massive amounts. Switzerland gave up the attempt to de-value it’s currency last year after the intervention involved 40% of it’s GDP. There is a struggle between the surplus countries keeping their currencies artificially low and deficit countries choosing to rectify their deficit positions.
Bottom line: Every country cannot have a surplus account because for every net exporting country there has to be an offsetting net importing country. A currency cold war, of sorts, has begun between the surplus and deficit countries.
Always Asking, Never Assuming™
Christopher Holtby
Tags:currency, dallas, deflation, devaluation, fee-only, financial planning, fort worth, government involvement, inflation, texas, wealth management
Posted in International, Wealth Management | No Comments »
Monday, July 19th, 2010
Here is a qoute (found in the Risk Factors section) from a 475 page prospectus, of a very recent REIT offering from XXX XXXXX Multifamily REIT I, Inc.: “Until the proceeds from this offering are invested and generating operating cash flow sufficient to make distributions to our stockholders, some or all of our distributions will be paid from other sources, such as from the proceeds of this or other offerings, cash advances to us by our advisor, cash resulting from a deferral of asset management fees, and borrowings in anticipation of future operating cash flow.”
An investment, theoritically, should pay investor’s based on net revenues from the investment and not based on money paid in or on ”engineered” cash-flows.
Bottom line: Why would an investor be in a rush to recieve payments from an investment if they are not stemming from net revenues?
Always Asking, Never Assuming™
Christopher Holtby
Tags:dallas, fee-only, net revenue, non-traded REITs, prospectus, risk verus return, wealth management
Posted in Investments, Wealth Management | No Comments »
Friday, May 21st, 2010
The world of commodity investing is rife with rumours of Chinese involvement. The blog posting, Internal disagreement with Beijing, describes the ability of China to produce more than it consumes (e.g. steel, cement, fertilizer, soybeans etc.). At the same time, China has imported basic metals to such an extent that those commodities have been on a strong upswing. Investors have been “leaning” on the China story as a reason to invest more in commodities. Another reason to invest in commodities is their non-correlation to stock markets. There comes a point when the financial markets investing in the the commodity markets are out-of-balance. Currently the financial future markets are “almost 12 times the size” of the physical markets compared to 2 times 15 years ago (source: Absolute Return Ptrs). Today, there is a “herd” mentality for commodity investing.
Investors are myopically focused on finding some investment that can help diversify away certain types of risks: deflation, inflation, and sovereign default. These are the most popular high level worries of the day. Diversification is meant to mitigage risks, not eliminate them. When looking for new solutions, investors need to consider all aspects of the solution such as: Who are the participants in the investment? Who are the natural buyers/sellers? Why do such natural buyers/sellers change their mind? How much leverage is in these markets? Have there been new financial products introduced into these markets? What have been the reasons for ups and downs in the past?, and so on. For the current investing public, commodities are a new tool, requiring greater initial due diligence in order to understand the characteristics/personalities of these markets.
The sponsors of Exchange Traded Products (e.g. Exchange Traded Funds, Exchanged Traded Notes) have introduced an avalanche of new products. These products allow investors to gain exposure to commodities. A strong majority of these products have exposure to the futures markets. Futures markets represent the spot price and forward curve prices of commodities (interest rates, currencies and various commodities). Depending on the price relationship between spot and forward prices, an ETF investing in commodity futures will not always have the same return as the underlying spot price returns of the commodity (e.g. oil). When investing in the spot price of certain commodities, investors must accept physical delivery, whereas investing in the futures market does not involve this requirement.
Bottom line: Sometimes commodities are a good investment, sometimes they are not. The why, when and where questions require investors to consider economic, political and financial back-office operational issues. As a miner told me when I worked for Barrick Gold Corporation one summer, “Don’t play another man’s poker game.”
Always Asking, Never Assuming™
Christopher Holtby
Tags:backwardation, commodities, contango, dallas, ETF, fee-only, financial advisor, financial planning, investment management, roll yield, wealth management
Posted in Investments, Wealth Management | No Comments »
Saturday, March 27th, 2010
After reading reports from investment banks, talking to buy-side insiders, and reading a Congressional Oversight Panel Report (http://cop.senate.gov/documents/cop-021110-report.pdf), I’ve listed below some thoughts and issues for all investors to consider:
1) The current theme in Commercial Real Estate (CRE) is for borrowers and special servicers (they deal with servicing problem CMBS loans) to “pretend and extend.” Borrowers want to renegotiate loans and special servicers/banks are reluctant to liquidate loans (capital ratio hit or outright loss recorded). Volumes on liquidations are currently low (source: BarCap).
2) 50% of CRE loans are held by banks/savings institutions (source: BarCap) with $1.2 trillion maturing by 2012 (includes non-construction and development loans). CMBS investments are back-ended in terms of when they mature (2015-2017). The Net Operating Income Debt Yield of less than 10% (especially prevalent in 2015 – 2017) hints that re-financing is under pressure and Net Operating Income on CRE is still declining (deals with fixed rate CMBS securities). Sources: BarCap, Federal Reserve, FDIC SDC.
3) Currently (12/09), hotel, retail and multi-family CRE has seen the largest rise in delinquent loans. For now, office and industrial CRE have delinquency rates 1/3 to 2/3 lower than other CRE sectors. Loans that are floating are showing less pressure in delinquency, and the market is pricing construction vs. stabilized loans much differently (source: Federal Reserve). Currently (9/09), only hotels are experiencing cash flow problems, with longer leases in the other CRE sectors providing some relief (unknown for how long).
Bottom line: The CRE market is moving slowly toward the new reality. Losses are being managed to extend the pain through government involvement via the TALF and PPIP programs, versus short, crisp price adjustments. The CRE market will be dealing with the excesses created during the 2005 – 2007 period for a long time.
Always Asking, Never Assuming™
Christopher Holtby
Tags:bank losses, commercial real estate, CRE, dallas, fee-only, financial advisor, financial planning, investment management, leverage, north texas, PPIP, TARP, wealth management
Posted in Investments, Wealth Management | No Comments »
Friday, March 26th, 2010
As with any other bond, a mortgage bond provides the investor with a return of principal and income. The uncertainty is the timing of the return of principal. The confusion is how the Federal Reserve, Congress and the GSEs (Fannie, Freddie, FHA) are involved in the mortgage market. The risk is the involvement of the Government, which affects mortgage bond prices in a way that is counter to an investor’s expectations for such investments.
Any investment security comprised of mortgages, whether a straight pass-through (common in the 1980s through the mid 1990s) or the more common securitized mortgage bond, has different tranches of either credit quality or maturity prepayment periods. The demand for mortgage backed securities (known as MBS) is highly sensitive to interest payments (if rates go up, prepayments will be slower = bad), as well as swings in the US Treasury market (part of hedging process) and the interest rate swap market (also part of hedging process). Sudden changes in these characteristics are bad for MBS holders. Over the last year, in part because the Fed purchased $1.2 trillion of MBSs, the volatility of these characteristics has been low. Banks and asset management firms have been large buyers of MBSs, and have partly replaced the declining purchases of the Fed over the last 5 months due to flood of investors wanting more bonds in their portfolios. When sudden changes occur (discussed above), which were last seen in 2003, buyers of MBSs experience the sharpest losses as more mature investors rebalance the extension risk (seen as slower repayments) by quickly selling MBSs or Treasuries.
The spread difference between Fannie Mae’s current coupon and comparable US Treasury 30 year bonds is 0.60% (source: FT). In late 2008 it was 2.20%. Because there is a scarcity of comparable AAA bonds, apart from US Treasury bonds, the yield pick-up is enticing for investors. The dynamics of the MBSs are very complicated, with pension funds and insurance companies investing one way, and hedge funds typically creating asymmetric trades, together with the sprinkling in of Fed influences. For example, MBS participants entered into trade swaps to protect against a drop in the Fed’s buying of MBSs by March 2010. These trades assumed that swap rates would increase faster than Treasury yields. This would provide a gain and a hedge against the loss on the MBS portfolio. Yet because MBS spreads have not widened compared to Treasuries, investors, en masse, have been reversing those trades. While this strategy has worked well over the last 10 years, Fed participation in the MBS market has changed everything.
Bottom line: Whether you understood everything written here is not the point. The lessons from history are simple – if you stretch for yield you will most likely be disappointed by the final outcome.
Always Asking, Never Assuming™
Christopher Holtby
Tags:dallas, fee-only, financial advisor, financial planning, investment management, north texas, wealth management
Posted in Wealth Management | No Comments »