May
19
The Baby Boomers are doing some serious retirement planning these days.
Just one problem. They forgot to plan for their parents.
They may be 55, but their parents now need their children more than ever before.
I have many clients that have at least one parent with Alzheimer’s disease — often in their 80s or 90s. The Boomers face many social, physical and mental challenges with their parents. These can be very difficult on their own.
In addition, there are several financial challenges that arise that must be faced and in every case, intergenerational or cross-family financial discussions are the key to a positive outcome.
Here are four challenges to deal with and possible solutions:
1. We saved for our retirement, but didn’t plan on paying for everyone else’s as well.
Every retirement planning discussion should include the following question: “Are your parents and in-laws likely to be a financial burden, fairly independent, or are you expecting a meaningful inheritance?”
While many people have a hunch about it, they really need to have a better handle on it, as it is key to their own retirement plans. In my firm, we recommend that, if possible, they have a conversation with their parents that starts with: “We are doing some personal retirement planning, and we were asked a question about our parents. We don’t need to get into huge detail, but we wanted to have a discussion about whether we might need to provide some financial support to you or whether we thought there would be a meaningful inheritance. (Wait for laughter to stop.)”
It is possible that this question will have a pretty short response and won’t go further, but in most cases it does open the door to a more complete discussion.
2. Why are we responsible for Mom and Dad? What about your brothers?
Sometimes life isn’t fair. There is always someone who shoulders more of the load. It doesn’t stop just because Mom is getting old and needs support.
Support for older parents is both in terms of time and energy, and also can be in terms of money.
In many cases, women in particular have to retire early and give up an income to look after parents. This in itself could affect their retirement plan. Should they be entitled to get paid by the parents? Should they get a larger inheritance?
In an ideal world, the child that provides most of the caregiving is not in need of any compensation, and the parents can pay for any needs that arise.
In the real world, sometimes there does need to be some financial compensation for all of the time that one child puts in. With siblings, you will likely never get full agreement on these arrangements. It is usually something that should be co-ordinated between the caregiver child and the parent, and other siblings should be notified of the facts. It isn’t a vote.
3. We should have had the insurance discussion sooner.
If you are 45 years old, do you know what insurance coverage your parents have? Do they have critical-illness insurance, long-term care insurance, individual life insurance, joint first-to-die, joint last-to-die life insurance? Did their insurance coverage expire at 65 or 75?
The reality is that this is your business. All of these insurance policies, other than joint last to die, will have an impact on your parents’ financial well-being. They may mean the difference between them being able to look after themselves financially or require your financial support.
This conversation is also a good eye-opener for the 45-year-old — and it may raise some opportunities.
Opportunity No. 1: It may be too late for your parents to be properly set up due to health issues, but now is the time that you should be ensuring that living benefits like critical-illness insurance, in particular, is explored.
Opportunity No. 2: If one of your parents is in reasonably good health — even if they are 75 years old — taking out a life insurance policy on a parent may be an important part of your retirement plan. I know this may not seem right at first glance, but if the 45-year-old is going to have to look after the parents financially, it can impair his personal retirement plan. If his insured parent dies in 20 years, the son will receive a tax-free insurance payout at age 65 — a perfect time from a retirement perspective. In many cases, the return on investment of this type of insurance policy can be 7%+ on an after-tax basis.
4. Do Mom and Dad have powers of attorney in place? What about their will?
Once again, what might not be considered your business can quickly become your most important business. They should have a power of attorney over personal care. This provides guidance on who can make medical decisions on the patient’s behalf, if he is unable to make his own decisions. It usually deals with items like whether you want doctors to make ‘heroic efforts’ to save your life, or not.
There should also be a power of attorney over property. This gives someone the ability to sign documents on another person’s behalf. Without it, many necessary financial transactions and decisions will happen at a snail’s pace.
As for their will, do you know where to find it? Has it been looked at in the past 20 years? Are the executors of the will up to date? Have the named executors died 10 years ago? These issues could become a nightmare for the survivors if they aren’t reviewed and clarified.
I believe the most important issue here is opening up the lines of communication with older parents. It is important to position the conversation in terms of your own personal planning, and addressing questions that you need to answer to complete your plan.
As the Baby Boomer children, you need to have these conversations with your parents. It will benefit everyone in the long run — and there is no day better than today.
Financial Post
Ted Rechtshaffen is president and chief executive of TriDelta Financial, a firm that provides independent financial planning and
investment advice.
       
From:Financial Post | Business » Personal Finance
May
19
NEW YORK – Tracy Repchuk’s three children are still in grade school, but she’s already got college funding figured out. The Repchuk kids are 14, 15, and 16 and when they head off to college in a few years, here’s how much their parents will be chipping in: Zero.
Not because they are being punished for something: Tracy calls all three wonderful, outgoing and well-adjusted. And not because the family is strapped for cash: Tracy, 47, is an author and social media strategist, and her husband David Repchuk is a mobile solutions developer.
‘It’s their life, not mine’
Instead, the financial tough love is simply the way the Burbank, California, resident was brought up, and she sees it as the best way to foster the self-reliance that will pay dividends for the rest of their lives.
“I’ve told my children that if they’re interested in college, it would be their responsibility to pay for it,” says Repchuk. “This wasn’t a surprise announcement, since I’ve felt this way forever. It’s their life, not mine.”
It may seem a tad harsh, but Repchuk certainly isn’t alone in letting children fend for themselves once they’re grown. According to a new study from the University of Michigan-Ann Arbor, 62% of young adults (between the ages of 19 and 22) are getting some kind of financial help from their parents — which means 38% aren’t getting a dime.
Drill down further into the numbers, and just 35% of those kids ages 19-22 are getting tuition assistance. Sometimes that’s because parents don’t have any money to give, and sometimes it’s because their offspring are no longer in school by that point.
But other times, parents could potentially afford to help, but don’t. “We did three waves of interviews, ending in 2009,” says Patrick Wightman, the study’s lead author. “Over the course of the recession we saw even higher-income families cutting back on their financial support.”
It’s not surprising that some parents are turning off the spigot. According to the Department of Agriculture, which tracks expenditures, the inflation-adjusted bill for raising a child up to age 17 these days (not even including college costs) is almost US$ 300,000 for every single Sophia and Samuel.
Given the horrific state of savings in this country — 49% of Americans aren’t chipping in to any retirement plan at all, according to financial-services trade association LIMRA — it’s hardly shocking, and perhaps highly necessary, that parents should be thinking about themselves first. As we’re told on airplanes before every takeoff: In case of emergency, put on your own oxygen mask first, and only then help out your kids.
But even among those with the financial wherewithal to pay for their kids’ college, there are some who just don’t believe in the message it passes along. Without any skin in the game, the thinking goes, young adults won’t truly understand the value of their education — or the value of a dollar.
“I worked, received scholarships, and took out loans,” says Nerina Garcia, a psychologist and assistant professor at the New York University School of Medicine. “It made me more responsible and work harder at school, because I knew I couldn’t flunk out; it would cost me too much. Now I plan to do the same for my 10-month-old daughter.”
Of course, these are trying economic times that we live in, and college is less affordable than it was when many of these opinionated parents did their coursework.
Tuition is already at record highs and rising: The average student who takes out loans is graduating with around US$ 23,300 in debt, according to data from the Federal Reserve Bank of New York. While median incomes have stagnated over the last 20 years, tuition and fees have shot up 130 percent, according to the College Board. If your attitude towards your children is “sink or swim,” it’s entirely possible that some kids may drown.
Also, don’t think that just because parents aren’t footing the bill, that kids will magically be granted even more financial aid. Almost all students in their late teens or early 20s are still considered dependents, so parental incomes and assets will still factor into the equation.
If mom and dad aren’t contributing any money at all, it’s the student who’s going to have to come up with the difference — by dipping into any savings they might have, working part-time while pursuing their degree, or taking costly loans.
FIRST, DO NO HARM
Here are some guidelines for handling the tricky subject of tuition help while sticking to your parental principles:
— Don’t torpedo financial aid offers. Even parents who aren’t going to contribute should fill out what’s called the Free Application for Federal Student Aid (FAFSA), which is basically the gateway to all federal grants and loans.
If parents don’t intend on chipping in? “It doesn’t matter,” says Joe Hurley, founder of Savingforcollege.com. “The parents’ assets and income must be reported on the FAFSA.”
If they don’t fill it out, the student won’t get any federal financial aid, and their options become very narrow. In that case, their only shot at federal aid is if they’re officially classified as an “independent student” — which is highly unlikely unless they’re already married, have a kid, or are over age 23.
— Get creative. There are ways to give your kids a running start in life, without necessarily writing them a blank check. When children attend college in their hometowns, some parents let them stay at home rent-free for a while. That frees up the kids’ cash flow to be earmarked for other necessities like tuition or books, without putting a dent in the parents’ own savings. Or reserve the right to help out with student debt later on, after your own retirement-savings goals are further along.
— Find the right balance. College financing isn’t necessarily an either/or proposition. With an obligation to cover a portion of their education, kids will learn the value of the dollars coming in and going out, without being totally crushed by financial burdens.
“We contribute when and what we are able,” says Jacquie Whitt, co-founder of Adios Adventure Travel and mom to 21-year-old college student Keenan Whitt Linsly. “But should college students contribute to their own education? I would have to say ‘Hell, yes!’ Our son chooses to work and contribute, and we support his efforts. It’s good for him. It’s good for everyone.”
© Thomson Reuters 2012
       
From:Financial Post | Business » Personal Finance
May
19
(Third in a series. See part one: “Please, Sir, May I Have Another?” and part two: “How Wireless Hype is Hurting America.”)
After decades of demanding and getting rate hikes and tax breaks in return for promising to deliver broadband internet access to schools, libraries, hospitals and every home and business in their territories, Verizon is now making it clear that it is no longer expanding FiOS, its fiber optic cable service.
So what did they accomplish? What did they build? And how much did it cost? Verizon claims that the company spent $ 23 billion dollars in rolling out FiOS since 2004. (See, for instance, this message from Tim McCallion, President of Verizon’s West Region.) That’s a lot of money.
But as I stare at a decade’s worth of Verizon annual reports, I notice something odd. Where, exactly, is that $ 23 billion? Specifically, where are the construction budgets to support this claim?
This chart shows Verizon’s construction budgets for 2000 through 2011, taken directly from the Verizon annual SEC-filed reports. It also shows an imaginary “FiOS Bump” — about $ 3.8 billion dollars per year in addition to the baseline that should have been spent annually over a six-year period if the company had really been paying out $ 23 billion dollars for the construction. But the numbers show no bump in construction for FiOS; no major increases in capital expenditures in general. In fact, Verizon, on average, spent more on construction from 2000 to 2004 than from 2005 to 2011.
Another way to look at it is this: Construction budgets for wireline services historically equal about 20 to 25 percent of revenues. One could reasonably expect that building out a $ 23 billion network over seven years would lift that percentage to well over 25 percent a year.
But it didn’t happen. From 2000 to 2004, construction amounted to 22.2 percent of wireline revenues. From 2005 to 2011, it was only 19.7 percent. That’s actually a $ 5.9 billion reduction in construction spending in those latter years, compared to what would have been spent had they just continued spending at the same ratio as during the earlier period.
This chart compares revenue and construction costs for wireline services from 2000 to 2011, in millions of dollars..
So How Did FiOS Get Built?
Whatever amount Verizon did spend on FiOS — and obviously it was a not insignificant amount — would therefore appear to have come out of the standard construction budgets that were supposed to be used to upgrade the lines that most Americans are still using for their phone service: the Public Switched Telephone Networks, or PSTN. It would seem that customers, including seniors, low income families, minorities and municipalities have been funding the construction of a cable service through the hefty monthly fees they pay for a dialtone and ancillary services. In some states this is actually illegal.
If Verizon did actually spend $ 23 billion, then it appears to have come at the expense of the traditional maintenance and upgrades of the utility plant — and the PSTN got totally hosed. At the very least, prices for basic phone service should have been in steep decline as one of the major costs, construction, was dramatically lowered.
Instead, Verizon was also getting rate increases specifically to pay for FiOS. For instance, Verizon persuaded New York officials to increase rates for “fiber optic investments,” where the only service that could use the fiber optic service was Verizon’s FiOS.
For instance, when New York State Department of Public Service Commission Chairman Garry Brown announced the approval of a $ 1.95 a month rate hike for residential phone lines in 2009, he said “there are certain increases in Verizon’s costs that have to be recognized.” He explained: “This is especially important given the magnitude of the company’s capital investment program, including its massive deployment of fiber optics in New York. We encourage Verizon to make appropriate investments in New York, and these minor rate increases will allow those investments to continue.”
Of course the states weren’t told that everyone would be charged extra for a service that only some people were going to get. In New Jersey, for instance, Verizon made a firm commitment to rewire the entire state with fiber optics — capable of 45 Mbps in both directions. It was supposed to be 100 percent completed by 2010. Instead, Verizon claims to have “passed” 1.9 million homes, representing 57 percent of the households in its territories — but “passed” may or may not mean that they can actually get service.
Insult to Injury: Verizon Abandons FiOS for Wireless
What has become clear is that Verizon is going to stop deploying/upgrading the wired networks and is instead going to put its money in wireless. As a result, places that don’t have FiOS now will never get higher speed services and cable competition from Verizon.
A N.J. state commission report from June 2010 saw this coming, and noted:
“While it is possible for Verizon to extend service throughout its authorized territory, to an additional 155 municipalities in the state that are not included in its current application of 369 towns, Verizon has indicated it will now concentrate its capital expenditures, expected to be between $ 16.8 billion and $ 17.2 billion in 2010 on its wireless telephone network. Further FiOS expansion will be limited to increasing penetration in those communities where FiOS is currently available, according to the company.”
(The $ 16.8 and $ 17.2 billion are the companies’ total annual construction budgets, not New Jersey only.)
But as we discussed in our previous article, wireless is simply not a substitute for wireline services, especially broadband or cable service.
So, in New Jersey, one of the states I know best, here is the sequence of events: Verizon (in 1993) get changes in state law that allows them to collect billions of dollars in extra charges and tax perks in exchange for upgrading the utilities. Then, Verizon doesn’t roll out the fiber optic network until 2006 — which is a cable service, but which uses the same construction budgets that were allocated to do the utility upgrades. Then Verizon cancels FiOS, and does not upgrade the utility, leaving no upgrades of the current infrastructure in the state to compete with cable. Instead, Verizon now has its local-service customers paying for wireless upgrades, while more or less abandoning the wires and stranding millions of customers in New Jersey.
So what, at the end of the day, did all that ratepayer money actually pay for? Well, the massive excess profits were used to increase executive pay, pay for investments and losses overseas in hundreds of subsidiary companies, create massive foundations that try to buy off non-profits, and to fill war chests used for lobbying and campaign contribution. It’s clear the money didn’t go into upgrading the Public Switched Telephone Networks, where it was supposed to bring everyone a fiber optic future.
America is 15th or 33rd in the world in broadband, depending on which international or research group you believe. The failure to properly upgrade the PSTN, and the con of FiOS expenditures, has cost a large swath of America — from Massachusetts through Virginia and the old GTE territories, such as parts of California — a generation of technology, innovation and GDP growth.
From:The Blog
May
19
By Talbot Stevens
Borrowing to invest, or leveraging, is certainly one of the most controversial and poorly understood topics in all of financial planning. Although the situation should improve with the federal government’s financial literacy campaign, most of us were not taught about managing money.
For advanced investment strategies like leveraging, the lack of information, and misinformation, makes it even more difficult for both investors and financial advisors to objectively understand if, and how, leverage can be used responsibly as part of a financial plan.
One of the common myths is the view that all debt is bad. Ironically, many Canadians have no problem borrowing at expensive, non-deductible interest rates of 19% or more, to buy personal stuff that depreciates 20% to 40% per year. This type of “bad debt” should be avoided like the plague, as it is guaranteed to hurt you financially.
One of the common myths is the view that all debt is bad
Last year, the private banking division of a Canadian bank revealed that 46% of their high-net-worth clients used leverage as an investment strategy. Yes, the wealthy often use “good debt” to borrow at low, near-prime interest rates to invest in things like businesses, real estate or the stock market, which generally increase in value over time. But leveraging is not restricted to those who already have lots of money.
Even the government recognizes the difference between “good debt” and “bad debt” with its tax policy. To encourage “good debt” and increase economic activity, borrowing for investments that have the potential to produce income is generally tax deductible. Borrowing for “bad debt,” of course, is not.
Occasionally, there are stories in the media about investors who have lost lots of money using leverage.
These serve as valuable cautionary tales about how greed combined with a lack of understanding can result in very costly “life lessons.” Before the market crash of 2008, the greed of some financial advisors to increase commissions and the greed of clients looking for big returns produced a dangerous combination.
If leveraging has a bad reputation, it has been earned. In the past, there was too little focus on client-first practices, too little regulation, and too little understanding of when and how leveraging should be considered.
The good news is that I believe we have entered a new Leveraging 2.0 era, one that is a much safer environment for everyone who contemplates borrowing to invest. Regulators have provided clear suitability guidelines for leveraging, and are holding financial planning companies accountable for enforcing them.
Financial advisors and their firms have learned that weak training, policies, and supervision of leveraging are bad for clients and their business.
The two 50% market crashes in the last 12 years have also helped both investors and financial advisors learn the cold, hard fact that leveraging implemented irresponsibly is much worse than none.
There are many leveraging strategies, with varying levels of risk and complexity. In this safer Leveraging 2.0 era, responsible leveraging means only considering responsible strategies, responsible amounts and responsible timing.
Almost all of us use vehicles to get us where we want to go faster. But what is the downside of using this strategy? Not only is there a financial cost, we can get hurt badly, or even killed. Like using a vehicle, leveraging is a strategy that can either help you or hurt you, depending on how it is used. Also like a vehicle, the strategy is very powerful, which means that returns can be magnified a lot, and more so in the negative direction. Because of this, it is essential to fully understand how to use the strategy carefully, responsibly, with all of the appropriate guards and precautions in place before you get in the vehicle.
The critical question to start assessing leveraging objectively is this: If you only drive or leverage carefully and responsibly, can you be confident that the strategy will help you instead of hurting you? Think about this, deeply. If you’re not committed to this approach, please stay off the road.
You don’t have to use the more powerful and dangerous strategies of vehicles or leveraging to get where you want to go more quickly. You can choose to walk and stick to safe, guaranteed investments. Or you can use a bicycle to go a little faster and invest in unleveraged equities and accept moderate long-term risk. If you do choose the much faster and riskier strategy of borrowing to invest, for your sake leverage responsibly or not all. Understand how to use the concept with confidence before you start.
Talbot Stevens is a financial speaker and author of Dispelling the Myths of Borrowing to Invest. TalbotStevens.com.
       
From:Financial Post | Business » Personal Finance
May
19
Amid pressure from the nation’s largest grain association and “significant feedback,” the CME Group Inc. backed off a proposed plan to extend trading hours in grain futures and options, but only by one hour. The amendment, which still has to be approved by the U.S. Commodities Futures Trading Commission before the Sunday start-up date, reduces the originally planned 22-hour electronic trading day to 21 hours.
CME Group’s expansion of electronic trading hours comes just weeks after its competitor, IntercontinentalExchange, began around-the-clock trading of grain products.
The National Grain and Feed Association has voiced concern over the extended hours, claiming there was insufficient time to close out and reconcile floor-trading activities and perform the required accounting and other back-office functions before electronic trading reopens.
In addition, the association and grain traders object to electronic trading at 7:30 a.m., when major U.S Department of Agriculture crop reports and other data are released. The group says the availability of electronic trading during the release of the reports could lead to “extreme volatility.”
“We look forward to continuing to discuss with the CME Group, other exchanges and other parties possible ways to address industry concerns about USDA reports being released during market hours,” said Randall C. Gordon, acting president of the National Grain and Feed Association.
Next month, CME Group plans to change the way grain futures contracts are settled by using prices from both the pit and from electronic trading.
With the news of extended trading hours in the grain and soybean complex and plans in June to incorporate both electronic trading and pit prices in daily price settlement procedures in, a growing number of traders on the floor are questioning the intent of the exchange.
Next month, CME Group plans to change the way grain futures contracts are settled by using prices from both the pit and from electronic trading.
“I would like to know if the exchanges are taking into consideration all the market participants,” said Greg O’Leary, owner of GX Trading.
Traders contend the exchange is concerned about retaining high-volume algorithmic traders in light of stepped-up competition from ICE.
“There is a feeling that the exchange [CME] has abandoned its original purpose… that they are driven solely by stock price and thus become beholden to the high-frequency traders, who provide “an enormously huge revenue stream,” argued Kelly King Taylor, who is an independent floor broker.
Two organizations have sprung up in protest of the CME’s proposals — protectagfutures.com and savethefloor.com.
The exchange initially planned a transition to the new settlement procedures for both grains and livestock futures in March and then in April but that plan was met with strong opposition from floor traders and the aforementioned groups.
“Initially when electronic trading started, it gave all players access to the marketplace with a computer, argued Heather Koch, director of protectagfutures.com. “It wasn’t supposed to be this mathematical model determining food prices.”
This article was first published at www.medillmoneymavens.com.
From:The Blog
May
19
A pilot project by a Harvard behavioural economist in one of India’s most backward districts finds the poor creditworthy.
A few years back, a research team led by Sendhil Mullainathan, a behavioural economist who teaches at the Harvard University, wanted to offer the poor at one of India’s most backward districts (Ganjam, Orissa) a fair but commercial alternative to the usurious local moneylender. Guess where Mullaianthan and Co looked to for learnings? The local moneylender!
They saw moneylenders often make small, short-term and even interest-free loans to cover emergency loans. Borrowers needed this tap of emergency funds, and were therefore obligated to take other high-interest loans offered by money lenders. This access to emergency loans prevented borrowers from defaulting.
That’s how important emergency loans are for the rural poor, that too for those in economically desolate areas. What makes it tough for them is banks, if they are indeed present there, and micro-finance institutions don’t exactly have products that can help during an emergency.
Mullainathan’s Ideas42, a social science R&D lab at Harvard, and the Chennai-based IFMR Trust subsequently set about running a pilot programme with the following features. The emergency loan had a one-month term with a maximum amount of Rs 2,000. Elaborate credit histories weren’t required. No collaterals. A customer of Dhanei KGFS, a financial service provider from the stable of the IFMR Trust, with a positive balance and no loan overdues was eligible for the loan.
The verification process was to be done only after the loan disbursement. And the loan was available 24X7. A 2% interest was charged, compared to 3-5% charged by professional moneylenders. Such a rate made the lending viable.
That pilot got over last year and subsequently a similar programme was tried out in Thanjavur, Tamil Nadu. There are two key takeaways from all this.
One, the poor are creditworthy. About 98% of those who took the emergency loan in Orissa repaid. Mullainathan would in fact go as far to say that “the poor are creditworthy, often more so than mass-market consumers, when you have the right loan product and you build a relationship with them.” Significantly, uncollateralized lending does work for the poor.
Two, as my colleague Sanjay Vijayakumar understood during a recent visit to a Thanjavur KGFS branch, what works for the poor in rural Orissa need not work in rural Tamil Nadu. The emergency loan down South had a lukewarm response.
Why is that? The answer to this by SG Anil Kumar, CEO of IFMR Rural Channels and Services, takes us not only to the expected argument about the relatively developed physical infrastructure down South but also to fascinating insights into how the meaning of ‘emergency’ can change as a result.
In Tamil Nadu, Anil Kumar says, emergencies are mostly related to health, taken care by the presence of an emergency response service such as 108.
In Ganjam, on the other hand, he says, an emergency situation need not be unforeseen. It can even mean non-availability of liquidity. So, it’s an emergency for a household when the electricity board is ready to cut the power connection because of non-payment of dues.
Being a behavioural economist, Mullainathan uses precisely such insights, rather than established economic theories, to address the problem. For instance, he has over the years shown that psychological tools can be used for everything from attracting people to a loan to evaluating touchy topics such as racial discrimination. The latter was one of the reference materials used by Steven Levitt and Stephen Dubner in their blockbuster Freakonomics.
Mullainathan says, “The poor have low income, but it is also volatile. As a result, their ability to make a loan payment on time is also highly volatile. However, their willingness to repay can be very high when there is a long term relationship, particularly one that provides future access to loans.”
KGFS now wants to use the insights from the emergency loan pilots to offer credit limits to its customers.
From:Economic Times Blogs
May
19
As the euro zone crisis intensifies and global markets reflect investor concerns, we ask ourselves, is a Greek exit from the euro on its way? Crucially, preparations have already begun to protect shareholder interest, companies are robust and policy in the U.S. and China aims to maintain the upward momentum. To protect client capital, proactively positioning portfolios has been key. International exposure and dividend yields offer attractive opportunities.
A ‘Grexit’ on its way?
All eyes once again are focused on Greece. An inability to form a government has led to a renewed fear that the country could exit the euro and the wider European Union. Although only a small contributor to European economic output as a whole, contagion is the real risk. Concerns of further losses for external holders of Greek debt and a more widespread break-up of the euro have driven equity market weakness.
A self-perpetuating situation, investors are demanding more to lend to the likes of Spain and Portugal, driving their debt burdens to unsustainable levels. Furthermore, disappointing data from the U.S. and China over the last few days have further added to the uncertainty.
…but preparations are underway
However, preparations have already begun to protect shareholder interest. German and French banks, which were the largest holders of Greek debt, have been aggressively reducing their positions. Some, for example, have cut periphery debt exposure by as much as half since 2010. Banks in the UK have been making provisions since at least November when the Financial Services Authority’s top regulator, Andrew Bailey, told banks: “We must not ignore the prospect of the disorderly departure of some countries from the euro zone.”
On the corporate side, interesting anecdotes have highlighted the proactive nature of company management in the face of this turmoil. Last year, for example, Tui, one of Europe’s largest travel companies, was reported to have requested to reserve the right to pay in a new Greek currency should the country exit from the euro. Corporate balance sheets are robust, holding more cash than long term averages, dividend yields and the potential for merger and acquisition activity once the macro outlook starts to improve can offer an attractive upside.
Finally, although wavering slightly, the U.S. still successfully avoided falling back into recession. Keenly aware of both external and internal risks to growth, Chairman of the Federal Reserve, Ben Bernanke has made it clear he is not afraid to utilise further tools to protect economic growth. Especially with an election this year, policy is likely to remain accommodative. With respect to emerging markets, despite the recent wobble and an inevitable cooling of economic growth, with an estimated one billion of the population to join the consumer class by 2030, the long-term case remains strong.
Proactive portfolio positioning prudent
To protect capital, proactively positioning portfolios has been key. Reducing direct European exposure as Europe’s southern members showed severe signs of economic stress from an asset allocation perspective and via underlying fund managers has proved prudent. Fund managers have been able to maintain a zero weighting to Greece and a substantial underweight to the likes of Portugal and Spain relative to benchmark.
As equity markets reached new highs in the first quarter of this year, the substantial rally in share prices in the face of continued structural problems within the Euro zone, was a sign that the risk of a downward correction had increased in the short term. Caution was of course well-founded. A move to lock-in profits and redeploy capital to alternatives and property for a more attractive risk/return potential and hedge against inflation has been supported.
Assets which will help portfolio performance during these volatile market times are good quality companies with strong balance sheets paying an attractive level of dividends. Furthermore, in times of slow economic growth and persistent inflation, strong franchises with pricing power for protected market share and the ability to pass on increases in supply costs to the customer are very desirable attributes.
International exposure and dividend yields offer attractive opportunities
Looking forward, a resolution of key issues in Europe is required to gain confidence to add to equity exposure. Structural reform, greater fiscal consolidation, a focus on growth and long term support are required for stability in the region. At the same time, with a medium to long-term time horizon, it is more important to focus on the geographical location of a company’s revenue streams than where it is headquartered. Investor overreaction can offer buying opportunities with share price corrections providing attractive, cheaper entry points to high quality firms. Furthermore, the yield from dividends these companies pay out can provide a valuable income stream. With many investors holding back capital, the flow of money back into markets, buying into sell-offs at lower levels, could dampen these downward moves and provide a level of support. Therefore, although volatility could continue and market direction remains difficult to determine, it is possible to navigate the turmoil.
From:The Blog
May
19
We each have our own favorite memories from the Olympic Games — whether it be Jessie Owens demonstrating the absurdity of Adolf Hitler’s racist notions, gymnast Nadia Comaneci’s perfect “10″s, Kerri Strugg’s valiant vault on a sprained ankle to win gold or Michael Phelps’ eight gold medals. This summer the world can once again look forward to breathtaking athleticism and triumphant and emotional moments that can only come from the collective shared global experience that are the Olympic Games.
More than an example of global cooperation, athletic excellence, courage and determination, the Olympic Games have brought us one of the greatest demonstration of ethics and integrity, when, in 1964, Italian bobsled driver Eugenio Monti was faced with the choice between doing what was expected or doing what he knew was right.
When the Winter Olympic Games opened that year in Innsbruck, Austria, the favorites in the four-man bobsled were the Austrians and the Italians. But in the first heat, Canada broke the Olympic record and posted a substantial lead. During that record-breaking run, however, they damaged the axle on their sled. Facing disqualification, Team Canada reached the top of the track to find its sled upside down. Monti had instructed his mechanics to fix it. Canada went on to win the gold medal.
Later in the same games, Italy was again favored in the two-man bobsled event. Great Britain recorded the fastest time after their first run. However, similarly to the earlier incident, their sled was damaged — a bolt attaching the runners to the sled had sheared off. Monti completed his run and had the needed bolt removed from his own sled and attached to the British bob. Great Britain took home the gold.
Returning home, Monti was lauded by some and vilified by others. His response was simple: “Nash didn’t win because I gave him the bolt. He won because he had the fastest run.”
Four years later Monti brought home gold medals in both the two-man and four-man bobsled events, yet his place in Olympic history ought to be defined not by those wins — but by the way he played the game. Monti understood that doing well and doing right are intertwined, even when it is not required or expected (or even understood).
Every day organizations make decisions like the one Monti faced — do what is required by law (or convention) or dare to demonstrate the courage and true leadership by going above and beyond. It is a strategic decision because it defines who they are.
From a strategic perspective, businesses can forgo the “quick” or “easy” wins or they can rise to the level of true leadership recognizing that an organization’s reputation is derived from its behavior, not its words. And while cynics will say that public relations is nothing more than putting organizations in their best possible light, corporate leaders are realizing that in going the extra step, and engaging in transparency, openness and disclosure, they reveal the true character of their organization. Like Eugenio Monti, organizations that allow this model will find that they win not only on the playing field, but the hearts and minds of their customers and stakeholders as well.
After all, just ask yourself …
- For whom would you rather work or have your loved ones work?
- From whom would you rather purchase?
- Whom would you welcome into your town?
From:The Blog
May
19
Received wisdom has it that public expenditure levels in any economy are determined by economic and demographic parameters.
Thus, you would find higher expenditure on health and primary education in a country/state that has a higher percentage of its population in the younger age groups. However, recent literature on the determinants of expenditure allocation suggests political factors play a major role in influencing expenditure.
To anyone following the intricacies of coalition politics at the Centre, this is not particularly insightful. The clout enjoyed by Chandrababu Naidu under the NDA government, of the DMK under UPA-I and now of Mamata Banerjee under UPA-II, is there for all to see.
But anecdotal evidence is one thing; research is a different ball game altogether. By corroborating and sanctifying anecdotal evidence, it gives it new legitimacy. And this is precisely what has been attempted by a recent paper by the National Institute of Public Finance and Policy (NIPFP). The paper looks at the link between political factors and expenditure allocation among Indian states to see whether the allocation is significantly influenced by government-specific political characteristics.
Coalitional governments are usually perceived as weaker governments as such governments often fail to make and implement stricter fiscal policies due to various reasons such as multiple party interests, lack of majority, disagreement among multiple decision-makers, and are subject to interest group capture at various levels.
Since the future of coalition governments is relatively uncertain compared to single-party governments, such governments are expected to end up with myopic fiscal policies, which may be undesirable from the long-term perspective.
Ideologically, left-wing governments do not seem to be much concerned about the long-term fiscal and economic outcomes. Similarly, the literature on electoral cycles predicts that fiscal policies change just before the year of election and become redistributive kinds.
The literature on fiscal illusion predicts that policymakers assume that voters overestimate the benefits of current expenditure in short run and underestimate the future tax burden that will be needed to finance current expenditure. Hence, just before the year of election, the incumbent political parties are expected to follow more of populist political tactics and the budgetary composition is expected to be shifted more towards current expenditure.
The authors take five types of political determinants – government fragmentation, strength of the opposition, majority of the government, ideology of the government and electoral cycle – into account and develop three sets of hypotheses linking political determinants with expenditure allocation.
They conclude that political determinants explain the variations in expenditure allocation across the Indian states significantly even in the presence of the traditional determinants. Per-capita income and population size are the only control variables that remain significant for all categories of expenditures.
Fiscal space matters only for current and total expenditure. Among the demographic characteristics, poverty rate emerged significant only for capital and total expenditure, whereas dependency rate was not significant.
Contrary to expectations, the electoral cycle does not seem to be playing a significant role in influencing public expenditure though the rise of coalition governments is one of the major driving forces underlying increased public spending by states in recent decades. The ideology of a government also seems to be contributing significantly to this increase, but mainly through increasing current expenditure.
The authors argue that in the era of competitive politics and coalition government, where governments are seen to be playing redistributive tactics throughout their tenure of governance, years just before election are no more treated differently.
Well-supported governments are found to be associated with increasing capital expenditure, whereas government spending on investment are found to be declining in the presence of a weaker opposition. Results on fiscal space suggest that additional revenue only boosts public consumption, not public investment.
As research finally catches up with practical wisdom, one could well sigh as say, “So what is new?”
(Political Determinants of the Allocation of Public Expenditures: A Study of the Indian States, Bharatee Bhusana ash and Angara V Raja, March 2012)
From:Economic Times Blogs
May
19
Which is better for an economy: millions of future jobs and trillions of future dollars, or a few people making a quick buck today by selling out their country? For decades America’s 1 percent-backed conservatives have chosen the latter course, and we can see the results all around us. Now the Obama administration has imposed stiff tariffs on Chinese solar panels because China was “dumping” — selling below cost — to drive American manufacturers out of business. Will conservatives support their country and our companies or will they continue to side with our country’s competitors?
U.S. Imposes Stiff Tariffs
The Commerce Department yesterday concluded that Chinese solar panel companies are “dumping” product — selling below the cost of production — into the U.S. market, and imposed stiff tariffs. According to the New York Times‘ “U.S. Slaps High Tariffs on Chinese Solar Panels”:
The United States on Thursday announced the imposition of antidumping tariffs of more than 31 percent on solar panels from China.
… The antidumping decision is among the biggest in American history, covering one of the largest and fastest-growing categories of imports from China, the world’s largest exporter.
Industry of the Future
Again and again technology revolutions come along and disrupt economies. Countries that jump on new technologies are the countries that win the industries and jobs and revenue. This is how the United States became the world power that it is was. Railroads, steel, automobiles, airplanes, electronics, semiconductors, computers, the Internet, pharmaceuticals, biotech and software are a few examples. And in every case our government helped these new industries get off the ground. When these industries took root the payoff was enormous.
Green energy is one such technology of the future. Producing solar panels, wind turbines, etc. will bring millions and millions of jobs and trillions of dollars, and several countries are competing to win a share of this new industry.
China is fighting hard for those jobs and dollars. They are being smart, and they are also pushing past the limits of the rules. From the New York Times story:
Alan Price, a partner who heads the international trade practice at Wiley Rein, the law firm representing the United States companies in both the solar and wind cases, said that China posed a particular threat to America’s developing green energy sector.
“China’s method is straightforward: it sets forth industry-specific Five-Year Plans and then uses all forms of national and local subsidies and other governmental support to quickly transfer jobs, supply chains, intellectual property and wealth, to the permanent detriment of U.S. and global manufacturers,” he said. “China’s ability to ramp up and overwhelm an industry is unique and particularly devastating with new and emerging technologies, where global competitors may be less established and can be knocked out more easily and quickly.”
To compete for a share of this new industry we need to be proactive. We need national efforts to develop the industrial commons, or ecosystem, that will foster green-tech industries. We also need government policies that promote a market for these products until they take hold, just as our defense industry did for aircraft and other new technologies. And we need to enforce the rules for international economic competition, which is what has happened with the tariff decision.
Decision Not Political
The New York Times story points out that this was not a political decision by the Obama administration,
The American decision was made by civil servants in a quasi-judicial process that is heavily insulated by law from political interference and does not represent a deliberate attempt by the Obama administration to confront China on trade policy. But that distinction has been largely lost in China, where the solar panel issue has been one of many causes embraced online by the country’s vociferous ultranationalists, who put heavy pressure on Chinese officials to respond forcefully to perceived snubs to China.
The rules say that if a country is dumping, then we must impost tariffs. The Commerce Department investigated and concluded that China has been dumping so they had no choice. If we do not enforce trade rules, they are meaningless and countries that cheat gain an advantage, driving out the honest players. That is how cheating, accountability and enforcement work. (Hint: this also applies to banking fraud laws.)
In the case of solar-panel tariffs, we were losing companies and jobs and facing losing the possibility of losing the entire industry to China. From “Tariffs On Chinese Solar Might Help Prevent The Next Solyndra“:
You have probably heard about a solar-energy company named Solyndra, but probably what you have heard is a bunch of negative, conspiratorial, anti-alternative-energy, anti-Obama stuff from the corporate/conservative spin machine. The real story is that our government is trying to help us capture some of the new green energy industry that will create the jobs of the future. But China is, too. And China doubled down, and then quadrupled down on government support. They even directly subsidize their companies so their products cost less. This helped put Solyndra out of business. But the Obama administration is doing something about it.
China cheats, and we don’t usually do anything about it. They let companies pollute, don’t do much about worker safety, pay low wages, and make people work long hours. So-called “free trade” lets companies cost us more than 50,000 factories in the Bush years, and millions of jobs. And it empowers companies here to tell their workers to shut up and behave and accept wage and benefit cuts, or they’ll send their jobs to China, too. We continue to just let China take jobs, factories and industries because powerful interests, like Wall Street, make tons of money off of it.
So the decision is made, our country is engaging in the economic war that has been underway against us. Will our country’s conservatives take our country’s side?
Solyndra, Chevy Volt And The Anti-Green Propaganda Campaign
Oil-backed conservatives have been waging a campaign to discredit green energy, trying to stop government efforts to move us away from dependence on oil and coal. (Please click the links.)
They have used the failure of solar-panel manufacturer Solyndra — partly due to Chinese dumping — to paint green tech in general as a bad investment. They have even tried to turn the public against the Chevy Volt, claiming that it “ran out of juice in the Lincoln Tunnel” when it actually just kicked over to the gas-engine charger, and that the car is “flammable” because on test battery got too hot — as compared to cars that run on gasoline! (Gasoline car-fire data at the link.)
These anti-dumping tariffs change the dynamics of this oil-backed anti-green campaign. Now when conservatives slam Solyndra or the Chevy Volt and otherwise join in this anti-green-energy campaign they are taking China’s side against American companies at a time when the country is engaged in economic conflict. This presents a tough choice to the conservative movement: Do they continue to accept oil and coal company funding and side against their country and support China, or will they return to their pro-American roots and side with their country in a time of conflict?
Installers Hit Hard?
Low prices from trade-cheaters are always attractive. But if we want a slice of the jobs, factories, industries and economy of the future we have to fight back when our competitors cheat.
The solar-installer industry is worried they will be hit hard by this because prices for solar panels could increase sharply. According to BusinessWeek‘s “U.S. Solar Tariffs on Chinese Cells May Boost Prices“:
The tariffs “will increase solar electricity prices in the U.S. precisely at the moment solar power is becoming competitive with fossil fuel generated electricity,” Shah said in a statement. “This new artificial tax will undermine the success of the U.S. solar industry.”
[...] The U.S. decision to impose import duties on Chinese solar panels will raise their price to $ 1.11 per watt, according to calculations by Bloomberg New Energy Finance, a London-based researcher owned by Bloomberg LP. That price is 17 percent higher than the current spot price of non-Chinese panels.
Forbes‘s article “Solar Installers Caught In Cross Fire Of Escalating China Trade War” states:
On Thursday, the U.S. Commerce Department issued a preliminary decision levying steep tariffs against Chinese solar manufacturers, finding they illegally dumped cheap photovoltaic cells on the American market. But the companies that install those solar panels on residential and commercial rooftops — and which have benefited from a 75 percent plunge in photovoltaic prices in recent years — are split over the impact of the tariffs on their burgeoning business.
The government could remedy the impact on domestic customers and installers several ways, including:
- by using the new tariffs to fund tax credits and other incentives that help homeowners and businesses make the move to solar power,
- by imposing a large “carbon tax” that is refunded on a per-capita basis. This would mean high users of carbon-based fuels would pay in, the revenue is divided up evenly to everyone over 21 and paid out with a monthly check, and people could use this money to both cover their own added energy expenses and to purchase solar and other alternative energy products to lower their carbon-energy footprint,
- and by setting a national renewable energy standard, requiring power producers to use a certain percentage of solar, wind and other alternatives, creating more of a market for green tech.
Oil And Coal And “Buggy-Whip” Technologies
Of course the oil and coal companies will continue to fight this shift from their “buggy-whip” technology, and will use their tremendous influence over our government to try to hold off the inevitable. But the tide is shifting. The fact that China is fighting so hard and putting so much investment into this sector shows its value to the world economy in the future. The fact that our government is responding shows that we have a chance to win a share of the jobs and revenue that green tech promises to bring.
This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
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From:The Blog
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