October 2007 Archives

From the Sunday Star Tribune:

Q: You discussed single premium immediate annuities. How do they compare
with charitable annuities that pay interest increasing with age and have tax advantages? Paul

A: Last week, I did go into the reasons why many retirees should at least consider adding single premium immediate annuities to their portfolio. While certainly not for everyone, an immediate annuity can bring financial security to monthly cash flows.

The same goes for charitable gift annuities. Indeed, a charitable gift annuity is a three-for-one investment: You support a charity. You get some nice tax breaks. And you can set up a steady stream of income for life.

That said, there are many financial and emotional factors to consider before buying a charitable gift annuity and similar financial arrangements (such as a charitable remainder trust and a charitable lead trust). Top of the list are the many estate planning issues to think through, from the financial to the emotional. It’s also important to realize that the decision is irrevocable. You can't wake up one morning and say to yourself, oops, I made a mistake. That's why in most cases sensible philanthropic financial planning requires professional guidance.

Still, the time spent researching the product and seeking out professional advice can be worth it. The idea of a gift charitable gift annuity in the U.S. dates back to 1843 when a Boston merchant donated money to the American Bible Society in exchange for a flow of income. The concept has since evolved into the booming planned giving business as the economy has become vastly wealthier and charitable giving ingrained in society.

In essence, you make a charitable gift of cash, stocks, or other property and you get a tax deduction for your contribution. You get in return a fixed lifetime payout from an annuity. The charity keeps the remaining principal when you die. With the annuity, the two main choices are immediate (receive payments right away) and deferred (payments kick in at a specified future date). What most charities will pay comes from standard rates published by the American Council on Gift Annuities. How much you’ll receive is a factor of how much you invest, your age at the time of purchase, and whether the payments go to you alone or to you and your spouse (or another annuitant). For example, if you go to the gift annuity website at Abbott Northwestern Hospital Foundation you'll see that at age 65 the annuity will pay 6% a year on one life and 5.7% for two lives (ages 65 and 67). The comparable figures for an 85 year old are 9.5% and 8.1% (ages 85 and 87), respectively. Since the annuity pays a return on both principal and interest, only part of the income is taxable.

You can learn more about gift annuities and other comparable planned giving choices at the American Council on Gift Annuities website (www.acga-web.org). Most large charitable organizations, such as the American Cancer Society (www.cancergiving.org) Abbott Northwestern (www.abbottnorthwestern.com) and the University of Minnesota (www. http://www.giving.umn.edu/), and Minnesota Public Radio (www.mpr.org: full disclosure, I work at MPR), offer good planned giving primers on their websites.

Q: My husband and I are young and in college...in debt up to our ears. We are pursuing several majors between the two of us, and by the time we finish in three or four years, will have about $100,000 of student loan debt. A year from now, our non-student loan debt will be paid off, freeing up about $1000 a month. With these funds, would it be best to start paying off our student loans or to start saving for a house?... Ariane

A: Wow. My immediate reaction is that you and your husband are industrious and well-educated and your financial prospects will burn bright once you enter the job market. Your college degrees are going to pay off. It's a safe bet that both of you will good careers. For now, I would set aside the question about saving for a down payment on a home for now. There's a season for everything, and a place to own may be a bit down the road. First, let's get through college and make the transition to the job and career market.

With that in mind, I wouldn't turn my finances into an either/or question. It's great that the only debt you'll have is student loans. I wouldn’t use your extra cash flow to start paying down those loans but to limit how much you two need to borrow to finish your education. I would also take some of that cash and build up savings.

The reason for the savings cushion in your circumstances is twofold: First, the transition from college to job can be expensive and, second, to give the two of you maximum flexibility when it comes to considering what job to take. For instance, career opportunities might lead you to consider moving to another city or state. That's not cheap. The job you get might require that you own a car (or turn in that beater that works around college) or acquire a new wardrobe. With savings both of you will have the financial resources to make the right decision. And once you graduate you'll start repaying those student loans.

I would then let everything shake out for awhile. Take the time to figure out what your cash flow is going to be and get a sense of where your careers are going. Once you have a handle on what your jobs pay, what are your promotion prospects, and how your monthly living expenses add up, you can then start deciding how aggressively to pay down those student loans. You'll also discover that a two-income couple with no debt other than student loans will qualify for a good mortgage surprisingly quickly. Good luck.

Good piece by Clive Crook in the Financial Times on the future of American unions. Here's the money quote:

A new road for American unionism

The late Rudiger Dornbusch, ever a fount of economic wisdom, was fond of the maxim, protect the worker not the job. Unions are wired to ignore that good advice. Their leaders' power and pay is bound up with the existence of particular jobs. They are institutionally opposed to creative destruction and economies need a lot of that to thrive. But if workers, not jobs, are to be protected, governments do need to step in. The list is familiar, and has a strongly Democratic flavour: more generous employment subsidies for the low-paid, high-quality education, universal health insurance and help for workers who fall victim to restructuring.

Mike Mandel at Business Week has a very important post on new numbers from the Bureau of Economic Analysis on his blog.

The Bureau of Economic Analysis took a big leap into the 21st century today. The agency released a new set of figures on R&D spending and how it affects the economy, a big improvement on what it has done in the past. As the BEA says,

Current national economic accounting treatment does not separately identify the contribution of R&D and many other intangible assets to U.S. economic growth. The satellite account, or experimental format, provides a means to illustrate the impacts of adjusting the treatment of R&D activity in the national economic accounts. The current release is part of BEA's long-term efforts to improve its measures of intangibles in the economy.

Mandel then highlights three aspects:

1) First, the new figures show that the R&D contribution to growth was much bigger in the second half of the 1990s--the New Economy years--than in the preceding 30 years (measured as investment).

3) Finally, the new data dramatically increases the contribution of the pharmaceutical industry to the growth of private industry and to total value-added of private industry.

I'll be participating in a panel on Kids, Values and Money tomorrow. If you're in town, I hope to see you. I haven't quite figured out how to get files into the blog. You can download the file yourself at Download file.

But here's a brief summary:

Money, Values and Your Children

on Tuesday, October 2, 2007
From 6:30 p.m. - 8:30 p.m.
At the Hennepin County Ridgedale Library
12601 Ridgedale Drive
Minnetonka, MN 55305

The Financial Planning Association of Minnesota is hosting a panel discussion featuring Nathan Dungan of Share, Save, Spend; Mick Endersbe of College Planning University and Chris Farrell, economics editor for American Public Media's personal finance show Marketplace Money. The moderator for the evening will be WCCO-TV news anchor Terri Gruca.

The topics discussed will include -

*Financial Values and education for children
* Save and pay for higher education
* Manage the family's overall financial household in today's challenging environment

Andrew Lo is a finance economist and quant jock at MIT. I follow his work closely, and check in on his website every once in awhile to see what he is up to. (I'm currently rereading his paper on the Adaptive Market Hypothesis.) I got a good chuckle out of this post on his website.

I'm sure not a quant....

How To Tell If You Might Be A Quant

12. And finally, if you've gained or lost more than 20 pounds over the last three months, haven't slept more than four hours a night since returning from your July 4th vacation, and you actually find these jokes funny, you might be a quant.

This is the best defense of why the President should have signed rather than vetoed the SCHIP legislation. It's posted on Greg Mankiw's blog. Mankiw also has a defense of the President's position that comes from inside the White House. I didn't find it convincing, but check it out, too.

Furman on SCHIP
On my invitation, Brookings economist Jason Furman, a frequent adviser to Democrats in Congress and on the campaign trail, offers his response to the White House's view of SCHIP:

Jason

Last Wednesday, we held at an educational seminar at Minnesota Public Radio for people who are in domestic partner relationships. The auditorium was full. The audience and their questions terrific. And the panel was truly engaged. The panelists were Ruth Hayden, a financial consultant and educator, Ross Levin, founding Principal of Accredited Investors, Inc, and Ann Viitala, an attorney in private practice and editor and a contributing author of "Estate Planning for Non-Traditional Families Deskbook". I moderated the session.

If you are interested, you can listen to the seminar at here.

There are a lot of personal finance issues for unmarried couples considering our system of managing and inheriting assets and money is really desgned around married couples. Among the topics we covered:

Planning as a process to strengthen relationships

The basics, from creating a will to beneficiaries of retirement accounts

Prenups and postnups for domestic partners who have the option of getting married; domestic partner agreements for people who are prohibited from marriage, or who choose to not marry

Health care issues and the need for health care directives

Negotiating fair financial agreements while in love - rather then after

Revocable trusts as a planning tool to care for loved ones and beyond

How to own a home together

Estate planning issues, from gifts to death

The latest Star Tribune column.

Q: Greetings Oh Money Manager! We are both 53, with my husband planning to retire from a state job in 2 years... We pay our credit card in full every month. We are old school in wanting to have our home paid off before Tim retires. I did not do a good job of saving for college for our 2 sons. We have been splitting school costs with our oldest (a senior at the U of MN) the past 2 years, having completely covered his 1st year at Stout. Our youngest is at UW-Madison. We would like to cover our youngest for his 1st year too, and actually do more for both of them.-wanting them to know the value of a dollar too- though they are very thrifty. I am also looking at probably $5000.00 worth of cement work and a new kitchen and family room floor. Would the best thing to do be take out a 2nd mortgage on our home?... should we live dangerously and not get a fixed rate?... Thanks. Ann

A: Greetings. You have a lot going on. A looming retirement. Two sons in college. Home renovations. The desire to pay off your mortgage. So, before I get to the specifics of your question, I want to emphasize that goals and investments need to be prioritized.

You may have already done this, but the first thing I would do is use the next two years to prepare for retirement. You're both young. What do you want to do for the next three decades or so? What do you want your lifestyle to be? Will you start a second career?

One guiding principle for thinking these issues through is the life you live currently. Think about the activities you love now. Then figure out how you can continue doing versions of those pastimes and live those values in retirement.

The next two years is also a good time to play with financial figures. A reasonable rule-of-thumb to start off with is that you'll need 70% to 90% of your pre-retirement income to fund your later years. But whether you will need more or less depends on what you want to do. Some people may need only 60% of their pre-retirement income if they own their own home outright, their idea of a good time is to take long hikes or bike rides, their tax bite declines, and many work related expenses disappear. Someone else may need to 120% of what they earned before retirement if their tax rate goes up because they have done so well in their retirement savings plan, and their goal is to travel to all the exotic spots in the world they dreamed of visiting but couldn't find the time with the twin demands of kids and work.

I think it's terrific that you want to help out your sons with their college education. One thought is to hold off until they graduate. Then you can always help them pay off their student loans at that point. In other words, figure out your retirement plans, build your savings, and then when they graduate help with paying off those student loans (or maybe a son might prefer that you help him by investing in an entrepreneurial venture).

The general rule on home renovations is that you'll recover only about 40% of the cost of any work done, with kitchens and bathrooms having the highest return on your money and luxuries the least. Still, you can get years of pleasure out of a remodeled kitchen and family room. Once you've made priorities with investments and decided how to handle college investments, then a home equity loan can be a source of money for home repairs and renovations. I prefer fixed rate home equity loans so you won't get hit hard by rising interest rates during the life of the loan.

Last, deep in the soul of every homeowner is the desire to own their place outright. There is nothing wrong with that. But I would make sure that your overall portfolio is well diversified, and that you have your financial blueprint in place before taking that step.

Q: We NEED to invest in our house, right now. (roof, water damage, + ) The house is completely paid for and has more than tripled in value since we bought it. Is borrowing from a retirement account, (with an obligatory repayment schedule) in order to pay interest to ourselves a valid idea? Is it a Good Idea?? Thanks. Robyn.

A: I can't say that borrowing against your retirement savings plan is a "Good Idea". Yes, I've heard the mantra that you are borrowing from yourself and you repay yourself. But I don't think the finances are there.

Briefly, here are the details. Loans can't exceed 50% of the value of your account up to a maximum of $50,000. You usually have five years to pay off your loan, although you can get longer years if the money was borrowed for a home purchase. The interest rate you pay is usually the prime rate plus one or two additional percentage points. Your loan is repaid through automatic payroll deduction.

The drawbacks include if you leave work to go to another job or simply lose your job, most plans will required you to pay off the loan within 30 to 60 days. Otherwise, the government will consider the loan an early withdrawal and you'll pay a 10% penalty, plus income taxes on the amount you withdrew. You'll also pay Uncle Sam some extra money since you're borrowing pretax dollars and repaying it with after- tax dollars (and then you'll pay taxes on these same dollars again in retirement). But the biggest penalty, however, is that your retirement savings aren't compounding.

In general, I think it makes more sense to refinance your mortgage, establish a home equity line of credit, or take out a home equity loan to make home repairs. I’d run the numbers to see which one works out best for you.

Q: My wife has completed roll overs to Fidelity for 3 of her retirement funds. When she tried to roll over her fund from a former employer, she was told she could only roll over 20% first year, 10% each subsequent year. Is this legal?.... Kim

A: Yes, it's legal. The law gives employers a lot of discretion in the withdrawal rules when it comes to 403(b)s. The terms are all laid out in the plan document. I would ask for a copy and check it out on your own. One reason for the restriction may be the agreement your company struck with the firm managing the 403(b). I would still set up a rollover IRA, and then make every year a direct institution-to-institution transfer (really trustee-to-trustee) to your rollover IRA. This way you avoid any tax complications.

Last night, my teenage son recited the famous first paragraph from A Tale of Two Cities. He's reading it for class. I chuckled while he said the words with flourish, but it also it struck me that the paragraph captures much of today's discussion of the economy, society, and globe.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
-- Charles Dickens, "A Tale of Two Cities"

If Hollywood remakes the 1967 classic, The Graduate, the advice to Benjamin might be "federal government" instead of "plastics." As a way to attract young talent to public service, a new law cancels the remaining interest and principal payments for U.S. government employees with 10 years' service and 10 years of payments on federally-backed student loans. The benefit isn't limited to government workers, however, It extends to a lengthy list of other "public service" jobs, including law enforcement, public defender, nursing and child care.

Steve Henn touched on this for Marketplace Money last week. The Wall Street Journal has a story about it today.

Now, my guess is that private employers won't be far behind. "Student loan forgiveness is the next big thing," says Mick Endersbe, a financial consultant and head of College Planning University LLC, a company that works with financial planning professionals. I can't see GE, IBM, Intel and other companies standing idle while the government snaps up the best and brightest. And it's quite an enticing perk given that the median student debt level for holders of a college four-year degree is $19,300, according to the College Board. And nearly a quarter of graduates of private nonprofit colleges and 14% of public universities carry a debt burden of at least $30,000.

We got this question the other day....

Why can't I move part of my 403b (BlackRock) into an IRA (to have better choices e.g. Vanguard)? My employer now only uses AUL, so if I'm going to make a change, it must be from BlackRock to AUL. This doesn't seem right!.... I know I sound skeptical.. but these are our retirement accounts, and it feels like options are limited, and everyone wants a piece of one's humble retirement nest egg!.... Lynn

Problem is, despite all the talk about an ownership society, you really don't get to make much of a choice. Your employer makes it for you. Yes, you can take the plan with you when you leave. But, in essence, you have to make difficult choices with the limited menu of options offered by your employer. In some cases that's good; in many cases it's bad. But we are a long way off from an ownership society.

This is ridiculous. Lawmakers and lobbyists are pigs at the trough, as this Washington Post story makes clear: Getting Around Rules on Lobbying, Despite New Law, Firms Find Ways To Ply Politicians.

At the beginning of the year, American Radio Works producer Sasha Aslanian and I did an hour-long documentary called Imperial Washington. We "pulled" it after several weeks because ethics reforms passed in D.C. made some of the charges out-of-date. Well, Congress and lobbyists are up to their old tricks. Here are some excerpts from the piece. Sad to say, the basic thrust holds.

CF: We're here at Reagan National Airport and members of Congress can just drive here, park their cars for free and get on an airplane. It's nice, convenient and cheap.

Members even have their own elevators...

We also noted how well of members of Congress are compared to the average citizen when it comes to basic benefits.

But there's more than automatic pay raises. Members also enjoy a good health care plan and a gold-plated pension. Retired Members even get cost of living adjustments to their pensions, a benefit fewer than one in ten private sector pensions offer. Members and their staff have their own health club.....

Sepp: you run into a situation where they become so insulated, so isolated that they fail to make public policy that is truly in the interest of tax payers.....

This is my speculation, and I think there is something to it.

I wonder if members of Congress aren't susceptible to what business historian Richard Tedlow calls the "derangement of power." He used it to describe very successful corporate chieftains. They're surrounded by people who make sure they don't have to deal with many of the minor annoyances of life.... like standing in line for postage stamps. Members can send mail for free.

And they're actually exempt from some of the pesky laws they pass for the rest of us....

And here is the kicker to the piece:

Still, hurrying past those free parking spots at Reagan-National Airport on my way back home, I couldn't help but wonder. What if members of Congress didn't get those good pensions or that premium health care plan? Would things be different for the rest of us? Would a less imperial Washington care more about the half of the American workforce with no pension? Would a less-privileged Congress care that 16% of Americans--mostly children--go without health insurance? I think they might. I really do.

Okay, shutting down an activity plagued by abuse is worthwhile. But in thinking over the past hour--hidden perks, slick lobbying campaigns, the plush travel--I'm struck how much of what goes on comes down to shadows and sunlight. Shadows, because members of Congress and lobbyists alike prefer keeping the average voter in the dark, husbanding information. But with more sunshine--putting everything out on the Internet, embracing openness, disclosure-- voters can decide whether activities pass the smell test. Power and privilege abhor sunshine. That's why Justice Louis Brandeis call "sunshine the best disinfectant".

Big banks are largely blaming their earnings woes on subprime mortgages and leveraged buyout loans gone bad. True enough. But it also appears that their basic consumer banking business is deteriorating.

Take Citigroup, the biggest U.S. bank. About one-half of its write-down largely stems from subprime-related losses. Okay. But the other half comes from its consumer banking business: Home-equity loans, mortgages, and credit cards. Credit crunch or no credit crunch, subprime or no subprime, Citi's basic consumer banking business isn't doing so well these days.

That leads me to this press release from a national California Credit Union service organization, FSCC. According to a press release:

"As of today [October 18], millions of credit union members have access to check depositing kiosks at 2,000 7-Eleven stores nationwide. Financial Services Centers Cooperative, Inc (FSCC), the nation's leading credit union shared branch network, announced today that credit union services will be delivered through approximately 2,000 advanced financial self-service kiosks, which are owned and operated by Cardtronics, Inc., and located in 7-Eleven store locations across the country."

And these are no-fee ATM machines.

I think this services like this bode ill for banks, and I expect many more similar initiatives. Banks have raised their fee income--from ATM charges to bounced checks--too high. The competition now has plenty of room to undercut the banks, putting additional pressure on their bank earnings.

What should be done to protect the American Dream? That's the question being asked in an American Public Media initiative. You can share your thoughts thoughts on health care, immigration, taxes and other issues at http://marketplace.publicradio.org/americandream/ You can click on any number of ideas to see what others are thinking about.

Here's a stunning number, thanks to Sam Stovall, chief investment strategist for Standard & Poor's Equity Research Services. A comparable drop to the 1987 crash in the Dow today would equal a fall of 3,165 on the Dow. Yes, you read that right.

Whenever I look at historical levels for equity prices, I always remark, "Were they THAT low?"--this says a lot for being a long-term investor. Back at the end of the third quarter of 1987, the Dow Jones industrial average (DJIA) was 2,596, which makes the magnitude of the Oct. 19 decline of 508 points all the more sobering. With the DJIA at 13,896 as of the end of the third quarter of 2007, a 22.6% decline--what the DJIA experienced on Oct. 19, 1987--equates to a drop of 3,165 Dow points today. Since then, however, the DJIA has posted a compound annual growth rate (CAGR) of 8.7%.

You can read the full piece here.

I did an hour-long broadcast on Minnesota Public Radio about Black Monday with host Gary Eichten and Ross Levin, a CFP and president of Accredited Investors, Inc. It was a lot of fun. You can listen to it here.

According to College Board, the annual cost of attending a four-year private college jumped 3.9% to $32,307. That's the biggest inflation-adjusted increase since 2001. The figure includes tuition, fees, and room-and-board.

For public four-year colleges, the inflation-adjusted increase was 3.8% to an average of $13,589. That's for in-state student tuition.

I love it when something I say sparks a reaction among listeners. Last week, Marketplace Morning Report host Scott Jagow and I talked about the future of Social Security. Basically, I don't think we have (much) of a fiscal problem with Social Security. The real fiscal issue is Medicare and Medicaid. And those two federal programs are really part of a much larger healthcare financing conundum facing the country.

Anyway, my comments outraged Gary North. here's his reaction on LewRockwell.com.

For a very different perspective from North's, check out the blog of Dean Baker, co-director of the Center for Economic and Policy Research in Washington D.C. And some of the most thoughtful reform writings on Social Security come from Andrew Samwick, economist at Dartmouth University. He's helpfully gathered in one place on his blog all his writings on Social Security reform, too.

A small group of journalists met with Citigroup chairman and former Treasury Secretary Robert Rubin yesterday. Walter Mondale, former Vice-President and Ambassador to Japan, hosted the session. It's impressive how much these men have accomplished in their lifetime. Rubin was in to give a speech for the law firm Dorsey & Whitney.

A couple of highlights from the conversation with Rubin:

He believes the Federal Reserve Board does face a risk when the central bank does cut its benchmark interest rate once again. The reason is the move could spark a plunge in the value of the dollar, which is already down sharply in the world currency markets.

The credit market turmoil ,and weakening economy is why the federal government should run a sound fiscal policy. It's not clear that monetary policy will be highly effective in the current environment. If the federal government were running a surplus, fiscal policy could play a much bigger role underpinning economic activity..

For the first time since the early 1970s he's seeing a large group of the really affluent interested in Democratic party policies.

In Greenspan's book, the former central banking maestro is very bleak on the outlook for inflation in his forecast to 2030. Rubin isn't concerned about inflation, however. He thinks the global supply of goods and services will keep downward pressure on inflation. The counterforce would be if there is a sharp decline in the value of the dollar or if America put up a series of protectionist barriers. .

Independent of short-term views, there are a lot of challenges facing the American economy and society. Health care. Education. Fiscal imbalances. Global warming. Displaced workers. Everyone of these issues is difficult. Is our political system up to making these difficult judgments? (I think he's pretty skeptical that you can get the kind of bi-partisan compromse that needed to address each of them.)

He defended the controversial $80 billion "super-SIV" plan spearheaded by U.S. Treasury Secretary Henry Paulson and three giant banks, Citigroup, Bank of America, and JPMorgan Chase. (Here's the basic idea: The $80 billion fund will buy highly complex and illiquid structured investment vehicles or Sivs. SIV sell short-term debt to buy mortgage securities, and profit from the spread between low interest rate commercial paper and higher interest rate mortgages. Problem is, with all the turmoil in the mortgage market, and uncertainty about the value of the mortgages, SIVs aren't finding any buyers for their commercial paper. The fear is that SIVs will be forced to liquidate their holdings in a firesale, harming the global capital markets. The super-SIV is designed to prevent such a firesale and the prospect of another credit crunch.) Rubin said that there is about $300 billion in SIVs and about $200 billion is at risk. The remaining $100 billion is held by well capitalized banks, like Citigroup. He says the right analogy is that the SIV is to prevent a "run on the bank."--although its really a run on the capital markets. It's a way to avoid the problem of assets sold at panic prices.

Derivatives. He is truly worried about the derivative market. He believes that there has been an exponential increase in financial engineering that hasn't been tested by adversity. He isn't worried about hedge funds being over-leveraged, however.

Liquidity is psychological, not monetary. The past three years or so there was a systemic underestimation of risk. Markets have short memories.

Short-term, the biggest risk is the impact on American consumers from high world oil prices, soft housing market, tighter credit conditions. He thinks the economy will slow, but still skirt a recession. Still, can't rule out the risk of a recession.

Long-term, the global economy going through a transformation of historic proportions. The emergence of China, India, and other emerging economies. It's equivalent of the emergence of the U.S. economy, or maybe even as big as the rise of the Industrial Revolution, as former Treasury Secretary Larry Summers has suggested. Non-Japan Asia to become the center of the global economy over the next 25 years.

A risk of increased protectionism in this country and around the globe. Troubling, the rise of protectionism in the U.S. about China.

Globalization will continue to put wage and job pressure in the U.S.

Broad participation in growth is critical to growth. American people will support the policies if they benefit from it. Need to continue trade liberalization with a powerful domestic agenda.

The politics are difficult. People who support trade don't support the domestic agenda. And people who support the domestc agenda don't support trade.

There is growing concern about consumer spending. High-yield expert Martin Fridson has put together an intriguing chart that lists junk bond companies highly sensitive to consumer spending. He then ranks them by a leverage ratio, a simple gauge of a company's financial wiggle room. Fridson believes that a "major corporate failure in the consumer sector could have wide repercussions for the high yield market as a whole."

I'd keep a close watch on these companies.

This list ranks 26 issuers by their by leverage ratio, that is, total debt divided by annual EBITDA (earnings before interest, taxes and depreciation).

Leverage Ratios of Consumer-Sensitive Companies

Rank Issuer Industry Leverage Ratio

1 Ford Motor Automotive 12.81
2 Trump Ent. Gaming 9.98
3 Six Flags Leisure 9.11
4 Toys “R” Us Non-Food & Drug Retailers 8.97
5 Rite Aid Food & Drug Retailers 8.69
6 Dole Foods Food-Wholesale 8.30
7 Station Casinos Gaming 6.72
8 Constellation Brands Beverage 6.40
9 Smithfield Foods Food-Wholesale 5.30
10 Harrah's Operating Gaming 4.92
11 Goodyear Tire & Rubber Auto Parts 4.85
12 Wynn Las Vegas Gaming 4.82
13 Boston Scientific Pharmaceuticals 4.62
14 Jostens Holdings Consumer Products 4.41
15 Royal Caribbean Cruises Leisure 4.39
16 TRW Automotive Auto Parts 4.22
17 Host Marriott Hotels 4.13
18 Mohegan Tribal Gaming Gaming 3.65
19 Supervalu Food & Drug Retailers 3.31
20 Lear Auto Parts 2.95
21 Tyson Foods Food-Wholesale 2.90
22 MGM Mirage Gaming 2.74
23 General Motors Automotive 2.46
24 Levi Strauss Apparel/Textiles 2.28
25 Delhaize America Food & Drug Retailers 1.85

It's a slamdunk in the opinion of Wall Street: The Federal Reserve Board will cut the central bank's benchmark interest rate when the Federal Open Market Committee meets on October 31st. The reasons for the Halloween-day cut are obvious. Weakness in the housing market. Oil approaching $100 a barrel. Poor earnings reports from financial institutions. Tightening credit conditions. Worries about a retrenching consumer.

Still, I wonder if the Fed might surprise the markets by staying its hand for now. The reason is the declining value of the dollar on world markets. The fall in the dollar is a global wildcard. So far, it hasn't caused any real problems and it has shored up U.S. multinational exports.

Nevertheless, a rate cut carries the risk of sending the dollar swooning, an event that would unsettle the global capital markets and perhaps even spark panic selling of dollar-denominated assets.

I think the judgment behind whether to cut rates or not by the Fed is a closer call that Wall Street believes.

James Hamilton, economics professor at the University of California, San Diego and blogger, offers up this chart on the high price of oil. I recommend reading his post: "$90 a barrel: Is it time to start worrying about the oil price shock of 2007?"

I just got this message from Sibson Consulting, the benefits consulting firm. It's more disappointing news on the wage front:

"Budgets for employee "merit" salary increases will again be modest in 2008, according to Sibson Consulting. Projected increases for next year are 3.9 percent for executive staff, 3.9 percent for exempt white collar workers and 3.7 percent for non-exempt employees - all at the same levels of pay increase as for 2007.

"'Although there is much talk about pay for performance, merit increases are treated as across-the-board increases in many companies," observes Jim Kochanski, senior vice president at Sibson Consulting. "Many managers don't like to differentiate as to employee performance and use a small salary increase budget as a reason not to," he says."

"Related to this salary environment is employee dissatisfaction with how their job performance is managed. A recent Sibson survey with support from WorldatWork found that a large majority of employees do not trust their organization's performance management system and have little or no coaching and performance feedback from their bosses."

Oi Veh....

This item comes from Ricardo Hausmann, a guest blogger on the site of Professor Dani Rodrik. For anyone intersted in development economics Rodrok's blog is a must read.

Good news on the gender gap front

similar story emerges when we look at labor force participation. In 2005, women represented on average 40.3 percent of the in a sample of 200 countries. The graph below shows the percentage of the labor force composed of women in 2005 in the horizontal axis and the change of this variable the 1990-2005 period. While 78 countries show declines, including Egypt, Turkey, Sudan and Georgia, 122 countries show increases, many of them quite substantial, including Iran and Libya... .

The National Association of Insurance Commissioners is a sleepy agency of state insurance regulators. Their track record isn't exactly stellar. But I got this email from them yesterday on annuities. The warnings and suggestions are good.

Read the fine print. Look carefully at the annuity you are considering.

Check the interest rate, find out how quickly the annuity will grow in value and when you can reap its benefits. Some annuity rates can change over time, so make sure that you understand the difference between the guaranteed minimum rate, the current rate and any first-year or so called "bonus" rates. Also make sure you know whether the annuity is tax-deferred, meaning that you will not have to pay taxes until you receive payments from the annuity.

Try before you buy. Many states have "free look" laws that give you a set number of days — typically 30 to 60 days — to review an annuity contract after you buy it. You can back out of the contract at any time within the "free-look" period; a refund is required to be issued within an allotted time period, as stated in your contract. Take advantage of this review period to make sure you understand what you are purchasing.

Don't get caught by surrender charges. Withdrawing your money from an annuity before it has matured might subject you to fees, known as surrender charges, as well as other administrative fees and acquisition costs. There could be high penalties if you make a withdrawal prior to the maturation date provided in the policy. Be sure you are aware of these provisions so that you don't inadvertently incur such costs.

Don't judge a financial professional by title alone. Designations such as "certified senior adviser," "certified retirement financial adviser," "chartered senior financial planner" and "certified financial gerontologist," might seem to imply expertise in providing investment advice to senior citizens. However, such titles don't always guarantee that the financial professional actually has specialized knowledge or education in that area. Ask them what the designations mean to them and what they had to do to earn them. Ask them if they have ever lost or given up a designation and, if so, why.

Ask for help. Many people have been harmed by annuity scams. If you are concerned that you might have been misled by a fake company or fraudulently sold a misrepresented product, call your state insurance department to get assistance and/or to file a complaint. You can file a complaint directly with your state insurance department via the NAIC’s Web site at www.naic.org/cis/fileComplaintMap.do.
www.naic.org/cis/fileComplaintMap.do.

Check the insurance company's credit rating. Through resources such as Standard & Poor's, A.M. Best Co. or Moody's Investors Services, you can see whether the annuity company you are considering has a solid credit rating. An "A+++" "AAA" rating is a sign of strong financial stability.

Check the NAIC’s Consumer Information Source (CIS). The NAIC provides a database for consumers to research an insurance company's financial information and complaint data. The information in the CIS is supplied voluntarily by state insurance departments. Not all states provide the data, nor are all companies listed within the directory. The CIS is available at www.naic.org/cis/index.do.www.naic.org/cis/index.do.

Stop. Call. Confirm. All consumers should verify that they are dealing with a licensed agent when purchasing an annuity by following three simple steps. The NAIC recommends (1) STOP before signing anything or writing a check; (2) CALL your state insurance department; contact information is available at www.naic.org; (3) CONFIRM the agent offering the annuity is legitimate and licensed in your state.