Another day, another data breach
August, 16, 2015
Data breaches at companies and government agencies are increasing at an alarming rate.  In 2014, more than one billion personal records were illegally accessed, up 54% from the previous year, according to Gemalto, a leading digital security firm.

Click here to see an interesting infographic of the major data breaches so far in 2015, which include Home Depot, JP Morgan Chase, Staples, Anthem, and the IRS.  Here in the Northwest, Premera's data breach has affected some 11 million customers.  But, perhaps the most damaging has been the data breach at the US Office of Personnel Management, with unknown assailants hacking into the sensitive background information of 22 million people who had been through OPM security checks.       

Brian Krebs is a noted cybersecurity blogger and he's seen enough.  In a recent article, he provided readers with the following counsel: "I'd strongly advise you to consider freezing your credit file at the major credit bureaus."  This involves asking all four credit bureaus – Equifax, Experian, Transunion, and Innovis – to put a "security freeze" (also known as a "credit freeze") on your credit file.  A security freeze blocks anyone from being able to view your credit file, unless you first unfreeze your file by entering a PIN number that's assigned to you.

What about credit monitoring services?  Well, the problem with them is that they don't prevent ID theft.  They just notify you when ID theft has already happened and then help you through the lengthy process of removing fraudulent activity from your credit records.  Another alternative is to put a "fraud alert" on your credit files, but they only last 90 days.   You can get an "extended fraud alert," which lasts for seven years, but that requires a police report or other official reports that confirm you've been a recent victim of identity theft.

With all the identity theft going on today, can somebody tell me why banks are still sending out blank "convenience" checks in the mail, along with offers of new credit cards?  ID thieves love this stuff, but you can go to www.optoutprescreen.com to stop receiving offers of credit or insurance in the mail, either for five years or permanently (be sure to spell the website address correctly or you'll be hijacked to a bogus site – it's a jungle out there…).


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Dealing with drone damage
August 16, 2015
I was flying my industrial-strength drone up around the twentieth-floor level in downtown Seattle and started to wonder what sort of insurance coverage I would have, if my Q500 Typhoon did some damage (actually, I just have a small model that my dog likes to chase around the yard).  Well, it depends.  Most standard homeowner's policies include coverage for "model and hobby aircraft."  So, bodily injury or property damage to others would likely be covered, while damage to the drone itself would be subject to your property deductible.

However, it's a different story if you're flying a drone for commercial reasons, such as taking aerial pictures of a wedding or a home for sale or maybe a rock video.  In those scenarios, use of a drone for business purposes would likely be excluded and you would need to purchase separate coverage for business use.  Drones are revolutionizing how things are being done in a lot of industries, with new creative uses dreamed up every day; some very cool videos from drones are showing up online, such as those seen at www.dronelife.com.


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The Fed’s fading authenticity

September 12, 2014

Janet Yellen reminds me of Britney Spears singing with assistance from Auto-Tune.  Yellen’s group at the Federal Reserve badly wants us to believe what they’re saying: the economy will finally kick into gear and everything’s OK, therefore consumers should be spending and borrowing more, just like they did before the party ended back in 2008.  Perception management and manipulation of “animal spirits” have been central in the Fed’s multi-year attempts to engineer a genuine economic recovery.  Rising consumer demand was supposed to drive growth in corporate revenues, but it’s not really happening.  To the private sector, the Fed’s song seems woefully out of tune.

Strong consumer spending has shown up in a few places, but look at what’s behind it.  Improved auto sales have relied on subprime lending and 7-year, 0% auto loans, something which may be starting to catch up with the industry -- car repossessions jumped 70% in the second quarter (although the auto-loan default rate is still low at about 0.6%).  Auto manufacturers may back away from further subprime lending, similar to recent events at Conn’s, a Texas-based retail chain that’s been pushing subprime loans for furniture and appliance sales.  In its Q2 earnings report, CONN said bad debt write-offs jumped to a level equal to 10% of its total credit account (!); its stock price immediately dropped 30% on the news.  Perhaps an early warning sign for the auto industry.

Housing is another sector that’s had a healthy rebound off its crisis lows, but ideas of an extended housing recovery are now being tested.  Trends in home sales tend to lead home prices by about six months.  That’s what we saw when the housing bubble blew up: sales started falling in late 2005 and prices rolled over in mid-2006.  In the current mini-bubble, new-home sales rolled over last December and, more recently, the average price of new-home sales dropped by 6% during the May-July period, pressured by rising inventories that are now at the highest levels since October 2011.

Surely, some of the Fed’s vast army of PhDs must be starting to question whether their theories are valid, given what’s been going on in the real world.  In this recent post, two academics at the St. Louis Fed pondered why all the massive QE injections into the monetary base haven’t led to either increased inflation or strong GDP growth.  They concluded that “the answer lies in the private sector’s dramatic increase in their [sic] willingness to hoard money instead of spend it.”

What?  They make it sound like consumers and corporate decision-makers have behavioral problems when the reality is that the private sector is being rational, considering we’ve had to endure two massive asset bubbles since 2000 and are perhaps concerned that six years of QE and zero-interest-rate policies have set us up for another bad financial event ahead.

The stock market will probably push higher, powered by the still-dominant narrative of central-bank omnipotence.  If we’re lucky, the US economy actually does reach escape velocity (which seems especially unlikely for near-recession economies like the EC or Japan).  If we’re not lucky, then the central banks’ grand experiment ends badly as the curtain is pulled away and investors realize what they’ve been listening to has been Wall Street’s own version of Auto-Tune.


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Credit cards: is the Target logo on your back?

February 6, 2014

The security breach at Target was bad enough, affecting some 110 million holiday shoppers. However, the Target episode was quickly followed by news of similar fails at Neiman-Marcus and Michaels Stores. According to some reports, another 1-2 retailers have been hacked, with details not yet divulged. One can only wonder how many mass credit-card frauds are going on undetected at any given moment.

Another more localized ploy is the use of skimmers, devices which can steal credit card information when cards are swiped at point-of-sale retailers and ATMs. In October, Nordstrom said it found a half-dozen of these skimmers affixed to registers at a store in Florida. Skimmers at Nordy's – is no place safe?

Wireless skimmers on gas pumps
Skimmers have also become a popular accessory on gas pumps in the Seattle area. They're easy to install and it's easy to retrieve credit-card information, which is often done via Bluetooth. Although it seems hard to believe, gas stations aren't required to regularly check their gas pumps for skimmers, but legislation on this is supposedly in the pipeline.

At least you can minimize the hassle of getting replacement credit cards by using a two-card system, with one card serving as backup while you wait for your new card to arrive in the mail. If you use autopay to make monthly payments to third-party vendors, use one card exclusively for autopay transactions and the other card for all other transactions. That way, you won't have to re-establish all of your automatic payments every time your credit card gets hacked.     


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Washington's estate-tax loophole

February 6, 2014

The state of Washington has one of the country's most aggressive estate-tax systems, but for now, a major loophole exists. Here's the backdrop. Last year, the exemption for federal estate taxes was increased to an inflation-indexed $5.25 million; during 2014, the first $5.34 million of a person's estate can pass to beneficiaries free of federal estate taxes. As a result of the exemption increase (and other technical changes in federal tax laws), many states eliminated estate taxes altogether. However, eighteen states "decoupled" and have retained old federal rules on estate taxes.

In Washington, estates of up to $2.01 million are currently exempt from state estate taxes; anything above that gets hit with taxes starting at a 10% rate and increasing all the way up to 20% for larger estates. The 20% rate is currently the highest in the country, a fact now inspiring people with large estates to move to other states.

Retroactive dismantling of QTIPs
Last year, the state amended laws which affected previous transfers to marital trusts called Qualified Terminable Interest Property ("QTIP") trusts. For years, married couples have established QTIP trusts, which allowed tax-free lifetime transfers out of a person's estate, while still retaining the ability to provide income to a surviving spouse. However, new laws passed in June 2013 stated that property previously transferred to a QTIP trust will be retroactively subject to state estate taxes, upon the second spouse's death. There will likely be legal challenges addressing the retroactive nature of this legislation, which many view as unconstitutional. But for now, the new laws are in effect, undercutting an estate planning strategy that's been widely used for decades.

The disappearance of state gift taxes
Amid all of the technical changes in federal tax laws that took place last year, one result stands out: gift taxes in states like Washington essentially no longer exist. So, if an estate is larger than the state's $2.01 million exemption and smaller than the $5.34 million federal exemption amount, a person can avoid estate taxes by making lifetime transfers to beneficiaries, with zero gift taxes incurred!

It's difficult to say how long the gift-tax loophole will be available. Some states will take the simple approach of repealing their estate taxes altogether. Other states may create what's called a "gift-in-contemplation-of-death" rule, which means that gifts occurring shortly prior to death would be subject to gift taxes (at the federal level, this "clawback" time period is three years). So far, only two states, Connecticut and Minnesota, have passed laws creating state taxes on all lifetime gifts, regardless of when the gifts occur. No matter what the outcome, given Olympia's aggressive handling of QTIP trusts, it's unlikely the gift-tax loophole will last for much longer.


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Tax surprises ahead?

December 9, 2013

New tax hikes and stock market gains have combined to create a perfect tax storm this year, especially for those with high incomes.

The list of new taxes introduced in 2013 is depressingly long.  There’s a new 3.8% Medicare tax on net investment income for couples with adjusted gross income (AGI) above $250,000 (200k for single filers), which applies to net capital gains, dividends, interest, rents, and royalties.  Phase-out limitations on itemized deductions and personal exemptions are back, following a three-year hiatus.  All this is in addition to the end of a two-percentage-point cut in Social Security tax rates and the introduction of an extra 0.9% of Medicare tax on wages above 250k (200k for singles).

Some of these hidden tax hikes will undoubtedly catch taxpayers by surprise.  But, for investors with stock mutual funds in taxable accounts, the tax bill will be further increased by year-end capital gain distributions.  Mutual funds are required to distribute at least 95% of capital gains realized in a given year and many stock funds will be making hefty taxable distributions.  For example, American Funds estimates that its Growth Fund of America large-cap stock fund will have a cap gain distribution equal to about 7% of the fund’s net asset value.  And more realized capital gain means higher AGI and increased impact from some of the new taxes described above.

What can you do to minimize this year’s tax hit?  High on the list is something called “tax loss harvesting.”  This involves selling stock funds with unrealized capital losses, which can be used to offset capital gains, as well as up to $3,000 of ordinary income.  Other AGI-reducing strategies include maximizing pre-tax contributions to retirement plans and getting income from tax-free municipal-bonds.     


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Electric car sells for 91.4 bitcoins
December 9, 2013

Interesting to see that someone purchased a Tesla last week for 91.4 bitcoins, or $103,000, at a Lamborghini dealership in Newport Beach.  Bitcoins, an encrypted digital currency, were first created in 2009 and are issued every ten minutes, with the rate of bitcoin creation scheduled to drop by 50% every four years until there are 21 million bitcoins in virtual circulation (about 12 million bitcoins exist today). 

Will bitcoins become a more widely accepted currency?  Alan Greenspan thinks not and, in a recent TV interview, recently said, “You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is.”  But, you might draw the same conclusion about the US dollar, after five years of quantitative easing and the government still injecting $85 billion per month into the system.  In many ways, bitcoins look to be a more responsible form of exchange since the number of bitcoins out there will ultimately be capped, unlike normal currencies where governments readily print more to meet their needs. 


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Financial Research has moved!

August 25, 2013

After eight years at the Lake Place Office Center, Financial Research has moved to a new location at Gilman Village in Issaquah. Many of you are familiar with Gilman Village; it's historically been a retail and restaurant destination, but they began leasing space to professional service organizations a few years ago. I spent 5-6 months looking for a new office space and feel very fortunate to have found this new location. New contact information is as follows:

New phone number
(425) 657-0182

New office location
Financial Research, Inc.
317 NW Gilman Blvd, Suite 9
Issaquah, WA 98027

New mailing address
Financial Research, Inc.
PO Box 2168
Issaquah, WA 98027

For driving directions, please go to the Office Directions page on our web site.


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Don’t stockpile your frequent-flyer miles

November 2, 2012

Spend the miles as soon as you can.  That’s the advice of business travel columnist Joe Brancatelli, who warns that major changes to airline frequent-flyer programs will dramatically reduce the value of flyer miles sometime in the next 12 months.  The airlines can change the rules whenever they want and are free to manipulate the value of miles or points, which usually results in decreased values. 

Alaska Airlines did that a few years ago in what was basically a unilateral currency devaluation (at least that’s how I felt about it when it suddenly took a lot more of my precious miles to get a free flight).  And Brancatelli names Alaska as one of the carriers he thinks might be likely to revamp their mileage plans, along with Delta, United, American, and US Air.  So, cash in some miles and get out of the Northwest rain for a while.
 

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QE Unlimited: more quantitative wheezing ahead
November 2, 2012

In mid-September, the Federal Reserve announced another round of quantitative easing, saying it will do whatever it takes and will keep printing money until the labor sector improves (or inflation heats up).  The Fed will start by buying mortgage-backed securities and probably expand to buying Treasury securities before long.  To do that, the Fed creates money out of thin air, by crediting the accounts of the bond dealers at major banks.

Ever since the first round of QE started in 2009, the Fed has increasingly dominated the market for Treasury securities.  Check out this YouTube video created by Stone McCarthy Research Associates.  The video depicts the percentage of Treasury purchases made by the Fed each week.  Watch how the Fed crowds out Treasury purchases made by the private sector.  The darker the screen gets, the more money is being printed.  I can’t wait to see what QE3 will look like.

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Understanding longevity

September 26, 2012

I recently attended the 2012 NAPFA West conference, an annual event put on by the National Association of Personal Financial Advisors.  Held in Portland, the conference had three days of sessions on financial planning and investing.  As usual, some sessions were more interesting than others.  One standout was a heavily-attended session called “Understanding Longevity.”  Of course, how long you live is a key variable when longer-term financial planning is involved.  It affects how much we should save for retirement and decisions such as when to start Social Security benefits.

The session’s main message was that people tend to underestimate how long they’ll live.  A few of the statistics cited were startling.  At age 65, an average 10% of healthy nonsmoking men will live to age 97.  And, if you assume a longevity of 95 years, you’ll be underestimating the lifespan for 13% of men and 20% of women.  On the other hand, 30% of men and 20% of women aged 65 won’t reach 80.  For an educated guess at your life expectancy, go to livingto100.com.


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A few tech tips from NAPFA
September 26, 2012

The NAPFA conference also had its share of technology sessions, with advisors eager to learn about social media, tablets, online file sharing, and how to make sense of it all.  A few cool tips included Pop Phone, a fun retro handset for your smartphone.  Google+ Hangout is a video conferencing program; after South Africa refused to issue a visa to the Dalai Lama, he and Desmond Tutu used it for an October 2011 get-together and had over 150,000 people listening in (watch them trade jokes here).   One speaker ended his session by talking about a water charity he likes, mycharitywater.org.  What’s nice about their website is that you can see what your donation has gone to, with satellite pictures from Google Maps.         


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Is a Grexit ahead?
May 23, 2012

In the last few weeks, renewed talk Greece may leave the euro-zone has buffeted global markets. Recent market declines have been relentless: during the May 3-18 period, the Dow was down 12 out of 13 trading sessions, the worst such stretch since October 1974.

Austerity programs have trashed the Greek economy, which has contracted by 27% in its current recession. Greek politicians are opposed to further austerity measures being demanded by lenders and, if a Greek government can’t agree to the terms of another bailout, the country could run out of money by early July. The next step would likely be what’s dubbed a “Grexit,” in which Greece opts out of the euro-zone.

Contagion in the Club Med
Customers withdrew more than €700 million from Greek banks in a single day last week, fearful that if Greece leaves the euro-zone, their euros will be converted into devalued drachmas. This has led to talk of contagion spreading to countries like Spain and Portugal, where investors feel that, if it could happen in Greece, it could happen in their struggling economy as well.

In particular, Spain has grappled with contagion fears. In recent days, there have been rumors of big withdrawals from Bankia, a Spanish bank that was the result of a merger between seven savings banks. Despite the merger and major capital injections, Bankia continues to be battered by financial losses related to its huge exposure to Spanish real estate.

It remains to be seen whether mass withdrawals of bank deposits outside of Greece are a real threat. What is known is how central banks will respond: they would print more money, led by the European Central Bank coming to the rescue with another installment of cheap bank loans. 


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Goldman Sachs: Greg Smith and the fiduciary debate
April 16, 2012

On March 14, a London-based senior executive at Goldman Sachs, Greg Smith, turned in his resignation by running a scathing op-ed article in the New York Times. The article described a “toxic and destructive” environment at Goldman, one that takes advantage of clients, with the firm’s interests coming first.

Obviously, this is not good PR spin for an investment firm like Goldman Sachs, given the history of the 2008 financial crisis, in which it was one of the Too Big To Fail institutions that pushed the system to the brink.  The reckless behavior was followed by government guarantees and massive bonuses.

MF Global: the missing money
Perhaps Goldman doesn’t deserve to be singled out, especially since we've seen yet another amazing-but-true story unfold more recently at MF Global, the brokerage firm which had $1.6 billion disappear from customers’ accounts in the final days of operation (to date, no one has come forward to say where the money went).  The MF Global story ended on a familiar note, with six-figure bonuses handed out to top executives.

All of this underscores an ongoing debate about the need for better disclosure of the fiduciary duties of those in the financial services industry.  What’s missing are regulations that allow clients to clearly understand when an advisor or investment firm is acting as a fiduciary, which must always act in a client’s best interest, and when the firm’s interests come first.


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Seismic changes in long-term care insurance
April 16, 2012

The long-term care (“LTC”) insurance industry has been through some big changes recently, with insurance companies being impacted by various industry trends.  Low interest rates have undercut expected returns on carriers’ fixed-income portfolios; companies just aren’t getting the investment returns they were counting on to pay off claims.  Also, life expectancies have been higher than expected, increasing claims expenses. 

However, the biggest problem has been low “lapse” rates.  Insurance companies always assume that a certain number of people will stop paying on their policies and, when they do, the reserves already set aside to cover potential claims on those policies are then freed up so they can be used to pay other people’s claims.  But, people are hanging onto their LTC policies for much longer than expected and that’s played havoc with the industry’s models.

Insurance companies are leaving
The result is that insurance companies are leaving the LTC business.  Last month, Prudential announced it had stopped selling long-term care insurance to individuals.  This follows a steady exit of other carriers: MetLife, Guardian Life, and Unum, which recently stopped selling LTC group coverage.

Other companies have responded by increasing the cost of existing policies.  In January, John Hancock made big news by announcing an average 40% increase in premium expenses on in-force policies, which came as quite the surprise to many policyholders who thought they had locked in prices by starting LTC coverage years ago.  Some Hancock policies had premiums increased by as much as 90%; others had increases of as low as 23%.  In particular, policyholders with 5% compound inflation riders are being targeted; carriers feel they can no longer provide a higher level of inflation protection unless fully compensated to do so.

Where does the long-term care insurance industry go from here?   Some analysts believe sales of traditional LTC policies will be completely gone within the next 2-3 years, replaced by hybrid products that combine life insurance or annuities with LTC benefits.



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Is Iceland going loonie?
April 16, 2012

The rehabilitation of Iceland’s financial system has been a bit of a success story.  Although it probably sounded like a good idea at the time, turning a fishing-based economy into one based on investment banking didn’t work out so well and its economy collapsed.  However, unlike countries such as Greece, Iceland allowed its banks to fail, clearing them out of its system.  And a plunging currency also helped Iceland to regain some competitiveness.

In recent months, there have been proposals for Iceland to adopt the Canadian dollar as its currency, replacing the krona.  Moving to use of a liquid currency that’s based on a stable economy?  Maybe not a bad idea.


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Copyright 2012 Financial Research, Inc. ("Financial Research"). All rights reserved. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or other financial instruments. This report is not intended to provide any personal financial advice, tax advice, nor investment advice and it does not take into account the specific financial situation of any specific person. Materials prepared are based on public information obtained from various sources and Financial Research does not guarantee its accuracy. This report may contain links to third-party websites. Financial Research is not responsible for the content of any third-party websites. The inclusion of a link in this report does not imply any endorsement by or any affiliation with Financial Research. All opinions, projections and estimates constitute the judgment of the author as of the date of the report and are subject to change without notice.