Roth IRA Conversions

Do Your Own Homework

Shipping Rates Fall

Commodity Price bottom?

Credit Card Panic

Outlook: Money In

Bailouts

It now seems everyone in the United States is working to get a bailout.  It all started with Wall Street; the Treasury and Federal Reserve have injected, or “lent”, $500 billion to $1 trillion to Wall Street to stabilize the financial system.  It is questionable if the money was well spent.  When Congress passed the TARP bailout program, we warned that the bailout program of buying bad Wall Street investments would fail and suggested that the money be moved out into the rest of the economy instead.  This week, Treasury Secretary Hank Paulson stated that they were changing the TARP (troubled asset relief program) to make injections in the banks and move the rescue program over to support consumer lending.  This is what they should have done in the first place.  We need to get the money out into the economy outside of Wall Street.

After $1 trillion has been spent to rescue Wall Street, the rest of the country is lining up for bailouts.  We just had a $300 billion bailout of Citigroup, the second biggest bank in the United States, as it continues to rain down money from the Treasury and the Federal Reserve.  The new hopefuls include the Big 3 auto makers (General Motors, Ford, and Chrysler), auto parts makers, TV networks, cell phone companies, General Electric, Detroit, Atlanta, and Philadelphia, soon to be followed by Chicago.  Next in line are the insurance companies and finance companies.  As I write this, Hartford insurance is trying to qualify to be a bank so it can get a bailout.  Medium term this will result in higher interest rates, inflation and a lower US Dollar.

We have made receiving a bailout far too easy, with no consequences, and now everyone wants to be bailed out.  Let’s take a look at what England did with their bailout program.  In order to get the funds from the Bank of England, the bank’s top CEO had to resign.  In addition, the company had to stop making dividend payouts to shareholders.  The capital came with warrants with reasonable interest rates and that were convertible into the company stock; there was a lot of pain involved for the company.  Herein lies the problem—in the UK, a bailout was very painful for the company.  In the United States, the bailout program is painless.  Therefore, everyone now wants a bailout.  The US bailouts come with low interest rates, minimal stock dilutions, and no strings attached.  Therefore, companies watching the process are plotting to get a bailout themselves rather than considering themselves lucky to not need to request one.  We have turned the United States into a country that allocates capital to its weakest companies instead of what we have done for 225 years—allocate capital to the strongest.

Insurance Companies

We have received a number of questions on the insurance companies’ financial problems.  The problems with the insurance companies appear to be the result of selling annuity contracts with guarantees attached to them.  Now that the stock market has plunged, some companies are in financial trouble and need to raise capital.  When I listened to the Hartford Insurance 3^rd quarter earnings conference call the other day, I was amazed at how many times Wall Street analysts used the words “do not understand” in regards to their finances and annuity problems.  Subsequent to the conference all, the stock quickly sold off from $20 to under $10 per share and then to under $5.  This has resulted in the absurd situation of Hartford buying a very small bank in Florida for $10 million so they could qualify for the TARP government bailout money.  Lincoln National Life and Genworth Financial Insurance Company quickly followed suit so they could get Federal bailout money as well.

We believe that some insurance company annuity guarantees will fail and customers will have losses.  We believe that most of the problems in the insurance companies reside in the annuity units.  Most insurance companies are regulated by the states.  If we have a failure of an insurance company, state regulators will move in quickly to protect policy holders in other units such as life and property casualty.  When AIG had problems recently, the Federal Reserve stepped in with a bailout of over $100 billion.  If that had not occurred, the states would have stepped in to protect the policy holders of the insurance units from the mistakes made in the financial and derivatives units.  The bottom line is that if your insurance company fails, the states will move in to protect the policy holders.  Where annuities could have a problem is that the money could be restricted from withdrawal and any guarantees could be lost.  If an insurance company fails, your assets with the life insurance firm could be guaranteed up to a maximum of $100,000 protection; this applies to the cash value.  The guarantee does not include annuity guarantees with the policy.  Therefore, only the present value of a variable annuity is protected and only up to $100,000.

Roth IRA Conversions

Under the Obama administration, taxes are sure to go higher for people making higher incomes.  Many Democrats have never liked the Roth IRA because the government loses the ability to tax it in the future.  There is still time to convert your Traditional IRA into a Roth IRA.  Both the Traditional IRA and the Roth IRA grow tax free; the difference is that in a Roth IRA, the distribution is not taxed when you take money out.  When you take a distribution from a Traditional IRA, though, the money is taxed as ordinary income.  When you convert the Traditional IRA into a Roth IRA, you will pay the income taxes at conversion.  Going forward, any money you take out of the Roth IRA after conversion is tax free for retirement.  Therefore, you can lock in today’s low income tax rates by converting and when you need money for retirement, it is tax free.  In many cases you can convert to a Roth IRA and keep the same investments after you make the declaration and pay the taxes.

In order to convert a Traditional IRA into a Roth IRA, you must have an adjusted gross income of less than $100,000 so there are some limitations.  Converting a Traditional IRA into a Roth IRA is a good idea if you are over-weighted in qualified or retirement plans.  Converting will give you some tax-free discretionary income to spend without moving your income into a higher tax bracket.  If taxes are increased, you still pay no taxes on the Roth IRA distributions.  In addition, there is no required minimum distributions (RMD) at age 70 ½ like that of a Traditional IRA.

Do Your Own Homework

Nothing makes a difference in investing like doing your own homework on stocks, bonds, or mutual funds.  Great investors listen to different ideas and people, then take what they learned and do their own research.  If you hear about a good mutual fund, look it up on investment websites or go to www.morningstar.com for an analysis.  Find out what the fund invests in and if it is right for you.  Most websites will have the expenses and track record as well as some of the top holdings in the fund.  Next, take a look at how it will fit into your 401k or investment portfolio.  If the fund is a large cap growth fund and you are already over-weighted in that sector, pass on the idea or decide on a similar fund to sell.  Always look at your plan or investment account with an eye on how the fund will fit into your investment strategy.

Homework is also the key to a stock idea—never invest blindly!  Most financial websites have good stock research; Yahoo Finance does a great job.  The company’s website will often have presentations you can review and links to look at the last quarter’s financial results.  Ask yourself, ‘are they making money?  What are their debt levels?  What about the outlook?’  These are all good questions to answer.  The first two questions we want to know here at MaxOut Savings Advisors is 1) what are the earnings estimates and 2) how much debt does the company have?  Friends are also a good source of information on companies to check and see if they come up with anything you might have missed.  In the end, the research will often prevent bad investments.  If the investment goes down anyway, you can also be assured that you did your homework.  There is nothing worse than jumping into an investment and losing money simply because you did not do your homework.