The Meridian Blog Bogus Takedown

george-orwell-truth-quoteMy website just came back online after being down since last Friday, why? An overzealous annuity sales company and a hosting company that has an utter disdain for their clients.

What started out as a small pain in the rear, has turned into a huge waste of time and resources at an extremely inopportune time given the volatility in the markets.

In December of last year I made a post that brought to light an industry practice of incentivizing insurance sales agents with trips to fancy places (Italy) and Visa gift cards for selling certain products. The offending company, The Annuity Store, had sent me an e-mail, unsolicited mind you, and I simply posted it informing the public of what is going on behind the scenes when they are being sold something.

Eight months later my website is shut down because The Annuity Store filed a DMCA Copyright complaint against me for posting the e-mail they sent me. Posting an unsolicited e-mail to draw attention to a practice the public should be aware of is protected speech. I responded to my host provider – Go Daddy – and even filed a counter-compliant. Go Daddy still shut down my entire website for parts of four days cutting off one of my primary vehicles for interacting with the public and clients. Go Daddy did this despite having no evidence that I actually violated any copyright.

It turns out that Go Daddy is famous for this, or rather “infamous” as this article relates. Go Daddy simply shuts you down with no due process. The Annuity Store new they didn’t have a legal case, so they tried to stop the information from getting out by using a backdoor, hoping that I’d just remove the content instead of fighting it. They’ve obviously not spent much time researching who I am.

I finally got my service restored this morning, though I’m not entirely sure why. I was told just minutes before it was restored that it would be 10 – 14 days. Then a few minutes later I got an e-mail saying the complaining party withdrew their complaint…

I’ll be changing hosting companies for sure and working to continue to expose the insurance industry.

Scott Dauenhauer, CFP, MPAS, AIF

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Rent or Buy?

images-7If you read articles that offer budgeting advice, you might see an item that says you shouldn’t spend more than 25% of your income on housing costs.  These days, that advice doesn’t apply.

Why?  According to the latest report from Zillow Group, which tracks rental housing affordability, the typical renter making the median income in the U.S. spent 30.2% of her income on a median-priced apartment.  This is the highest rate since Zillow started keeping statistics in 1979.  The average from 1985 to 1999 was 24.4%.

The rise appears to be driven by greater demand for apartments and rental units.  In the second quarter of this year, due to strict lending standards, the U.S. homeownership rate fell to the lowest level in almost five decades, forcing a greater number of people into the rental market.  However, those fortunate enough to obtain mortgage loans appear to be much better off than renters. With today’s low interest rates, homeowners are paying, on average, 15% of their income in mortgage payments, well below the historical average of 21%.

Zillow found that rents were least affordable in Los Angeles, where residents were paying 49 percent of monthly income. The share in San Francisco was 47 percent, 45 percent in Miami, and 41 percent in the New York metro area.

Sources:

http://www.bloomberg.com/news/articles/2015-08-13/renting-in-america-has-never-been-this-expensive

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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The Deficit Shrinks Again

US-budget-deficit-shrinks-faster-than-expected

You might remember some years back when the U.S. budget deficit was one of the biggest political issues on the campaign trail.  Yet this year, after one Republican debate and a lot of jockeying for political position, the subject seems to have gone away.  Why?

The most probable reason is that the U.S. has retreated from an unsustainable budget mess much faster than anybody anticipated.  In 2009, when the U.S. government was stimulating the world out of the Great Recession, the government’s shortfall came to $1.4 trillion, dangerously close to a red line of 10% of the economy, as outlined in “This Time It’s Different,” an analysis of government deficits around the world since the Middle Ages.  Today, the projected deficit is lower by nearly $1 trillion: the fiscal year ending in September is expected to close out with a $425 billion deficit, more than $150 billion lower than economists expected at this time last year.

It might be harder for politicians to generate public outrage at a deficit coming in so far from the alleged tripwire: this year, the shortfall is projected at a much more manageable 2.4% of GDP.

The bad news in all this is that tax revenues for the first ten months of the fiscal year topped a record $2.7 trillion, almost 8% higher than the revenues collected over the first ten months of 2014—and most of it came out of the pockets of consumers like you.  Individuals paid $1.3 trillion of the total, about five times more than corporations paid ($266 billion). Estate and gift taxes brought in an additional $16 billion.

Where is the money going?  Roughly $738 billion was sent to Social Security recipients and $477 billion paid the medical costs for Medicare recipients. Another $496 billion went to defense spending and $398 billion is allocated to health spending. Roughly $209 billion went to net interest on our debt—Treasury bond and T-bill payments to investors and pension funds.

Sources:

http://www.calculatedriskblog.com/2015/08/the-shrinking-deficit.html

http://www.forbes.com/sites/kellyphillipserb/2015/08/13/tax-collections-hit-record-highs-with-no-dip-in-spending/2/

http://www.nytimes.com/2015/08/13/business/economy/us-budget-deficit-rose-in-july-but-8-year-low-is-expected-for-year.html

https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/49892-Outlook2015.pdf

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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Devaluation Panic

Screen Shot 2015-08-16 at 7.50.34 PM

Investors across the globe were sent into a panic recently when the Chinese Central Bank devaluated the nation’s currency, the yuan. The U.S. market lost more than 1% of its total value, oil prices fell and global shares plummeted on news that China decided to make its currency two percent cheaper than it was before.

You actually read that right. Headlines raised the prospect of a global currency war, and there were hints in the press that nations might resort to trade barriers, which would slow down global trade in all directions. If you’re following the story, you probably didn’t read that the Chinese yuan, even after the devaluation, was actually more valuable against global currencies than it was a year ago in trade-weighted terms. Nor that China actually intervened in the global markets to make sure the devaluation didn’t go any further in open market trading.

The background for the devaluation is China’s slowing economic growth and its recent stock market volatility. The country is on track for a 7% growth rate this year—three times the U.S. rate, but sluggish by recent Chinese standards, and quite possibly unacceptable to the country’s leaders. You probably already know that the Chinese stock market climbed to impossibly high levels earlier this year and then fell just as far in a matter of weeks. As you can see from the accompanying chart, the Chinese government marched into the chaos with a heavy hand, outlawing short sales, banishing hedge funds to the sidelines, suspending margin calls and even buying stocks directly in an effort to put a floor on prices. The theory was that the devaluation was part of this intervention, since it would make exports cheaper and boost sales, raising profit margins of those companies whose stocks were recently free-falling.

 

A more nuanced view of the situation is that the recent depreciation is a small step to keep the yuan’s value in line with those of its peers, not a dramatic shift in exchange-rate policy or a part of the Great Shanghai Market Panic. Indeed, if you look at the accompanying chart, you can see that China’s percentage of world exports has been steadily growing for this entire century, without any need to add the stimulus of a weaker currency.

A scarier scenario, which nobody seems to be talking about, is that China’s endgame goal is to make the yuan the reserve currency for global trade—replacing the U.S. dollar. China is already lobbying to join the list of reserve currencies recognized by the International Monetary Fund. The new exchange rate is more in line with basic economic fundamentals, strengthening the argument that the yuan is not under the total control of an interventionist central government. But so long as China imposes strict limits on the amount of its currency that can flow into and out of the country, and attempting to manipulate its own stock market, this will be a difficult argument to make.

Sources:

http://www.economist.com/news/finance-and-economics/21661018-cheaper-yuan-and-americas-looming-rate-rise-rattle-world-economy-yuan-thing?fsrc=scn/tw/te/pe/ed/yuanthingafteranother

http://www.bloombergview.com/quicktake/chinas-managed-markets

http://finance.yahoo.com/news/global-markets-china-devaluation-hits-165238168.html

http://www.bloomberg.com/news/articles/2015-08-13/china-citigroup-agree-there-s-no-need-for-big-yuan-devaluation

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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Renewable Controversy

Screen Shot 2015-08-07 at 9.00.31 AMIf you live in West Virginia or somewhere near its border, you probably aren’t in favor of the new climate change initiative announced by President Obama this week.  The actual proposal was quite modest: it would require carbon emissions from the power sector to drop by 32% from 2005 levels by 2030, up from 30% before the announcement.  But that slight change equals 870 million tons of carbon dioxide pumped (or not) into the atmosphere.

Much of the decline will come from coal-based power, which is by far the biggest source of carbon emissions among all the power plant fuels.  Independent analysts say that by 2030, coal’s share of U.S. electric generation will fall from 39% down to 27%.  The gains will come in oil, suddenly plentiful natural gas and a retooling nuclear energy sector, but also potentially from renewable energy sources—and the President cited studies which show that innovation in the renewables sector can save consumers money in the long run.

As it happens, the political war over whether global warming is (or is not) the result of carbon pollution has held the U.S. back in renewable technologies, to the point where it is now lagging far behind other nations.  As the chart shows, renewables make up just 13% of total U.S. electricity generation, and if you look at the right-hand chart, you can see that Brazil, Canada, Germany and even China and Russia are well ahead of the U.S. in the percentage of electricity that comes from renewable sources.  The President’s modest initiative is likely to be challenged by Congress, and you can bet that with partisan gridlock, the U.S. is not likely to move up in the rankings any time soon.

Sources:

http://www.cnbc.com/2015/08/03/obama-unveils-clean-energy-plan-amid-legal-threats.html

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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Territorial Default

Screen Shot 2015-08-07 at 8.28.33 AMYou’ve probably read that the island territory of Puerto Rico formally defaulted on its municipal debt obligations over the weekend—an unsurprising event that has been expected by insiders for more than three months.  What did surprise everybody was the fact that the Puerto Rican Public Finance Corporation (PFC) found a way to make a partial payment on its $58 million in interest obligations—even if the amount was only $628,000.

Going forward, the situation is rather bleak.  The Moody’s credit rating service has noted that, according to the debt contracts, interest payments can only be made if and when the PFC has appropriated funds for them.  Since the PFC has not done so, there appears to be no legal requirement for Puerto Rico to pay the debt, or any legal recourse for bond holders.

A number of mutual fund companies are probably wishing that they had read these contracts more closely before buying a big chunk of the territory’s $70 billion in debt on behalf of their shareholders.  Puerto Rican muni bonds were once considered to be the Swiss army knife of the muni world, since they qualify as tax-exempt in all 50 U.S. states and therefore can be placed into any state-specific muni fund portfolio.  They also paid significantly higher interest than most states were offering—between 9% and 21% right before the default on 20-year issues, as high as 5% on 2-year notes.  The national averages among all U.S. states are closer to 2.85% and 1%, respectively.

How much of the default are you, personally, on the hook for?  Very little to none at all unless you’re invested in broker-sold Oppenheimer funds.  Oppenheimer manages nine of the ten funds with the greatest exposure to these daredevil investments—$5.1 billion according to the Morningstar mutual fund analysis service.  The other fund with high exposure is the Franklin Double-Tax Free Income Fund, which currently has about 60% of its shareholders’ money tied up in the Puerto Rican fiasco.  Ten of Wells Fargo’s 14 municipal bond funds have also wagered on Puerto Rico’s debt, as have 20 of Eaton Vance’s 27 muni funds.

As mentioned, the default is not exactly a shock.  Puerto Rican bonds, once sold as high-rated paper, have been sliding down the ratings scale for years, causing losses for investors all along the journey.  A $5 million class action lawsuit was filed against the brokerage firm UBS as far back as 2013, alleging that older investors were urged to take out loans in order to load up on risky Puerto Rican bond funds that brokers touted as safe and secure.  An estimated $500 million was ultimately borrowed to buy into the mess, and investors in those funds suffered at least $1.66 billion in losses when the suit was filed—two years before the recent downgrade.

Meanwhile, the Vanguard and BlackRock organizations eliminated their small positions in the territory late last year.

Sources:

http://www.msn.com/en-us/money/markets/moodys-says-puerto-rico-has-defaulted/ar-BBlmOUz?ocid=ansCNBC11

http://puertorico.municipalbonds.com/bonds/recent/

http://www.fmsbonds.com/Market_Yields/index.asp?so=bing&kw=muni%20bond%20rates%27&ad=753035947&ty=search&mt=e&st=muni%20bond%20rates&dt=c&utm_source=bing&utm_medium=cpc&utm_term=muni%20bond%20rates&utm_content=753035947&utm_campaign=Municipal%20bonds%20Rates

http://www.cnbc.com/2014/02/08/redemptions-force-us-mutual-funds-to-unload-puerto-rico-debt.html

http://blogs.wsj.com/moneybeat/2015/06/30/puerto-ricos-crisis-deals-a-blow-to-municipal-bond-funds/

http://www.nytimes.com/2015/08/04/business/dealbook/puerto-rico-decides-to-skip-bond-payment.html?_r=0

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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Bear in the China Shop

Screen Shot 2015-08-07 at 8.17.18 AMChina’s stock market appears to be back in free-fall, despite the Chinese government’s efforts to control stock prices and stem the panic. The chief culprit appears to be leverage: investors last year and in the first half of this year borrowed billions in order to buy stocks on margin, offering little or no collateral except the shares themselves. As prices fall and stock values drop below the level of debt, it triggers margin calls from the lenders, which forces investors to sell at any price, further depressing prices, causing more margin calls in a downward spiral whose bottom is not easy to see from here.

A recent report said that the volume of these margin loans dropped by 6%, or $23 billion over the past five trading days, which implies that there is still $383 billion more that could be called over the next months or years, an alarming 9% of the roughly $4 trillion in total market value on the Shanghai market.

But leverage is only part of the problem. The CSI Information Technology Index, a mix of high-tech names in China similar to the Nasdaq in the U.S., is still trading at around 75 times earnings, while Nasdaq’s PE is closer to 30. If the two indices were to normalize, it would imply that Chinese stocks could drop an additional 60% in value before the current bear market has run its course—and that’s assuming the debt situation doesn’t cause the market to overshoot on the downside.

One complication in the situation is the fact that, since late last year, foreign investors have been allowed to invest directly in Shanghai-listed stocks. Savvy market traders with years of experience in these death spiral events have been making program trades which bet on further drops. Chinese regulators recently suspended 34 U.S.-based hedge fund accounts from trading, including the Citadel Fund, and short selling is now totally forbidden.

Meanwhile, the economic fundamentals in China aren’t looking good. The Caixin China Manufacturing Purchasing Manager’s Index recently fell to levels which indicate economic contraction, and industrial output is at the weakest level since November of 2011. You don’t often see a market rally when an economy is sliding into recession, so at these valuations, you aren’t likely to find many bulls left in the Shanghai China shop.

Sources:

http://fortune.com/2015/08/03/china-looks-for-scapegoats-in-continued-stock-market-decline/

http://fortune.com/2015/06/29/china-stocks-crash-into-bear-territory-as-margin-calls-bite/

http://www.ft.com/intl/fastft/242222/china-overtake-japan-stock-market-cap

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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