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5 Ways to Make Good Choices About a Funeral

letters@smartmoney.com (Peter Keating) — Mon, 13 Jul 2009 00:00:00 -0400

Last month I looked at how important it is to consider what kind of care we want to receive near the end of our lives. The next stage, after you or a loved one dies, is often even more fraught with anxiety and stress, making it even harder for survivors to act as smart consumers. Which means there’s no time like the present to learn how to hold a funeral.

Death will always be a difficult business to navigate. Grief-stricken mourners are typically overcome with confusion, regret and guilt, making them vulnerable to predators. Of course, funeral home owners work amid delicate family, financial and legal situations all the time, which is often stressful and never easy. My wife’s Uncle Eddie is one of the good guys, a scrupulous businessman who shows up to summer barbecues in a black suit just in case he gets a call from work—and there are countless others like him.

But government oversight of death care is often haphazard and weak. Some states don’t regulate cemeteries at all; others don’t license or inspect crematoriums. Almost all states regulate funeral homes, but some of the agencies that oversee mortuaries are dominated by insiders. For example, four of the seven members of Arizona’s state board regulating funeral homes are funeral home directors, raising the question of whether its leadership could be sympathetic to mortuary owners. “We have funeral directors who are just as conscious of consumer rights as consumers are themselves,” says Rodolfo “Rudy” Thomas, executive director of the Arizona State Board of Funeral Directors and Embalmers. “But you can do everything correctly and still get a complaint.” The overall result: Many states lurch from neglect to supervision only once a horrible abuse goes public. In Connecticut, for example, when five decomposed bodies turned up in a New Haven mortuary garage in 2001, the state Department of Public Health admitted publicly it had no funeral home investigators and hadn’t conducted the required inspections for nearly a dozen years. Afterward, the state quickly relaunched its oversight program. For its part, the Federal Trade Commission’s Funeral Rule, adopted in 1984, does little more than require funeral homes to give itemized price lists to customers who ask for them; it has not curtailed opaque fees or huge markups.

Moreover, the rise of a funeral-home-and-cemetery complex has made things tougher for consumers. In the 1990s, anticipating the aging of the boomer generation, death-care companies went on spending sprees. They bought funeral homes, driving many independents out of business and compelling others to replicate their sales and marketing practices, which critics deride as “McDeath.” One example: “third-unit target merchandising”—hiking prices for customers who (as people tend to) avoid the two cheapest caskets in a showroom. They bought cemeteries. Several made business deals with religious leaders. Under a controversial agreement with the Catholic Archdiocese of Los Angeles, for instance, Stewart Enterprises was allowed to build and operate mortuaries on the grounds of church cemeteries.

Consolidation drove up funeral prices far faster than inflation. In one example, a woman in Swanton, Vt., reported to Lisa Carlson, author of Caring for the Dead: Your Final Act of Love, that it cost $2,900 to bury her mother in 1993 and $7,100 for exactly the same funeral for her father in 1995. And critics say the corporate cost-cutting has left the death-care business more prone to scandal than ever. Most recently, in April, four grandchildren of deceased Army Col. Andrew DeGraff filed lawsuits totaling $60 million against industry leader Service Corporation International (SCI). They allege that National Funeral Home, an SCI affiliate in Falls Church, Va., left DeGraff’s body to rot in an unrefrigerated space last year, echoing public claims by employees that National Funeral Home improperly stashed hundreds of corpses. “We have begun an investigation, and we will make any changes we need to,” says SCI spokesperson Lisa Marshall. “More broadly, we would argue our size is actually of great benefit to our customers because we provide services like grief counseling and help with travel arrangements.”

Fortunately, there are ways to make good choices even in a time of maximum grief. First, preplan, but don’t prepay. Tell your loved ones exactly how and where you would like to be memorialized and buried or cremated. But decline any offers to pay in advance for a casket or funeral services. In many states there is no requirement for funeral homes to deposit all your money in safe investments or to refund it if you switch venues. And there’s often no guarantee that your investments will pay in full for the casket you choose.

Second, with mortuaries as with anything else in life, shop around. Prices for funerals as well as caskets can vary by thousands of dollars within the same metropolitan area, so don’t go to a particular funeral home just because it’s familiar or nearby. To find an independent funeral home, consult the Funeral Consumers Alliance (800-765-0107; www.funerals.org) or Selected Independent Funeral Homes (800-323-4219; www.selectedfuneralhomes.org). “Funeral providers should work with your family to do whatever you want, and if you’ve got one who’s not comfortable with that, you should move on,” says Selected CEO Rob Paterkiewicz. “But you have to ask.”

Third, know your rights. The FTC’s Funeral Rule does guarantee some basic consumer protections, though almost nobody understands what they are. For example, only 5.2 percent of people in a 2007 Journal of Consumer Affairs survey knew that it’s illegal for a funeral home to refuse to handle a casket bought from an outside vendor. The FTC offers a solid rundown on its Web site.

Fourth, avoid sales pitches for “protective” seals on caskets. Typically, these consist of an inch-thick rubber seal around the opening of a casket and can cost hundreds of dollars. But sealing a body in an airless container leads anaerobic bacteria to multiply rapidly, causing a corpse not only to putrefy but also bloat with gas.

Finally, consider holding a wake as well as a funeral service at your place of worship. Doing so shifts the focus of the memorial from how a body is prepared to more eternal thoughts, reducing the pressure to spend heavily on funeral services.

I can’t tell you what will happen to you when you die. But I can assure you that planning with rationality and confidence, rather than anxiety or guilt, is the best way to pass saved money and good habits to your loved ones.

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8% Returns: The Bond Deals You're Missing

letters@smartmoney.com (Elizabeth O'Brien) — Mon, 13 Jul 2009 00:00:00 -0400

IN THE WORLD OF INVESTING, they went from being a positively boring option to an almost sexy one in a matter of weeks. Municipal bonds, those securities your mom and dad would own and lecture you to buy, toiled in obscurity for decades until the crash made them an almost exciting option for anyone looking for a safe haven. And they remain attractive in today's more encouraging, if still shaky, investment climate as a low-risk product people can own while they're slowly getting back into stocks.

Except for one problem: Investors across the country are discovering that muni bonds -- which can still deliver an aftertax yield as high as 8% in some income brackets -- have become more popular, as well as a lot more complicated and frustrating. Almost overnight it has become nearly impossible for individual investors to get their hands on many top-quality municipal bonds. Even when they can, they're paying higher prices, and many of the bonds no longer have insurance to protect them from a default by the city or town that issued them. And with a new government bond program that favors large institutions, some buyers are feeling the pinch. "It's a market for the other guy, not for us. It makes me feel small," says Delia Fernandez, a financial adviser in Los Alamitos, Calif., who has $20 million under management.

Like many far-reaching changes in the world of investing, the shift in the $2.7 trillion municipal-bond market has its roots in the financial meltdown. Financial planners and bond traders say the combination of the credit crisis and fallout from the government's new bond program has put a big dent in the availability of many high-quality municipal bonds, just as recession-weary investors are fretting about the health of muni-bond issuers. Even as the credit crisis eases, its impact on the muni market continues to reverberate. Several major muni-bond broker-dealers went belly-up in 2008, making it tougher for ordinary investors to buy or sell bonds. But one of the biggest roadblocks has been erected by Uncle Sam himself. The government's "Build America Bonds" program offers states and towns huge incentives to borrow money-but the bonds are hard for individuals to buy and, worse, come without the tax breaks long associated with ordinary muni bonds. The result is that institutions are snapping them up, but mom-and-pop investors looking for tax-free income are out of luck.

Of course, thousands of tax-free muni bonds are bought and sold each day, and investors with well-connected brokers and advisers can still get many of the ones they want-provided they have the required account minimums of several hundred thousand dollars. But for others, the irony in all the changes is that individual investors have long been the backbone of the market, buying some 70 percent of the bonds themselves or through mutual funds. The new problems are all the more galling, some say, because it was these same small investors who helped save the municipal-bond market from a total meltdown last fall. When institutions and hedge funds were flooding the market with muni bonds in a desperate attempt to raise cash, ordinary investors filled the void and bought much of the highest quality debt, says Robert Lamb, professor at New York University's Stern School of Business. Now, as investors try to rebuild their nest eggs, one of their best tools is becoming one of the most difficult to get.

The Municipal Bond - The Friend of the Little Investor

State and local governments have sold municipal bonds ever since New York City kicked things off with a canal bond in 1812. Three decades later the municipal-bond market had grown to $25 million. But it really took off after World War II, as governments sought ways to build new projects and individuals clamored for tax breaks. The idea is simple: Investors who buy bonds are lending cash, for anywhere from one to 30 years, to their local government to build schools, sewers or other big-ticket projects. In return, investors get bonds with a nearly spotless credit history, plus interest payments free from federal income taxes (and state taxes if they live in the state that issued the bond). The higher the investor's tax bracket, the more appealing the bonds become. Because of that tax advantage, municipal bonds historically have offered much lower yields than a corresponding Treasury bond. But today that gap has narrowed, making muni bonds an even better buy. Munis can offer an after-tax yield of about 8 percent. For high-income investors, they could look better still if the top tax rate rises as expected in 2011.

Why bother with individual bonds when you can buy a mutual fund? The reasons are both practical and emotional. Although investors in municipal-bond funds also enjoy tax-free interest, they pay capital gains taxes on bonds the managers sell for a profit. And because fund managers spread the money around many different issues, bond funds never mature. Plus, owning the bond itself gives some investors a sense of pride; they know their money is being used to improve their local schools and roads. Don Barnett, 85, has been buying munis for decades. The retired engineer tries to stick with issues from his home state of Utah. Like other investors he collects the tax-free interest until the bond matures and he gets the original investment back. For Ginger Hatfield, buying individual bonds is something of a family tradition. The 47-year-old software developer from Laguna Beach, Calif., says her father, a bank cashier, found them safer than investing in stocks and urged her to follow in his footsteps.

Now the industry known for being friendly to ordinary investors seems to be stacking the deck against them. It all started, financial planners say, with the financial crisis. Lehman Brothers and Bear Stearns were major players in the muni-bond market, acting as brokers between buyers and sellers of the debt, often holding on to the bonds themselves until they could find the right match. With their demise, no major firms have stepped in to pick up the slack in a significant way, making it harder for planners to find an individual municipal bond for their clients. It has also made it harder to buy and sell the bonds. Justin Krane, an independent financial adviser in Los Angeles, says it now takes a few hours longer for a dealer to offer him a price for a bond he wants to sell.

Even bigger problems were brewing in the market for bond insurance. For years big bond insurers like MBIA and AMBAC sold insurance to states and localities, giving their muni bonds a coveted AAA rating. Investors who never heard of, say, the Froedtert & Community Health hospitals in Wisconsin could take comfort that a big bond insurer was backing the bonds. If the issuer defaulted, investors would get their money back. But bond insurers ran into trouble by selling insurance on risky bonds backed by subprime mortgages. When many of those bonds failed, the insurers had to pay out billions in claims, weakening the companies themselves. As the insurers lost their own AAA ratings, they could no longer guarantee top ratings to others, so many municipalities stopped buying insurance. At its peak in 2005, bond insurance covered 57 percent of all municipal-bond issues. Today only 13 percent carry insurance. Insurance could come in handy now, as the recession batters the nation's bond issuers. Bond fund managers and expert investors, including Warren Buffett, warn that the risk of muni defaults, while still low compared with that of corporate bonds, has nonetheless risen.

For many investors in individual bonds, perhaps the biggest kick in the shins comes from the federal government. In February the Obama administration introduced the Build America Bonds program to help struggling municipalities sell bonds to start projects. Under the program, the feds send the municipality a check for 35 percent of the interest on its bonds. Some states and localities have jumped on the program, selling more than $14 billion in just the first three months of the program. California issued $5 billion worth of Build America Bonds last spring, with coupons of around 7 percent. That state treasurer's office estimates the Build America Bonds subsidy will save California as much as $1.5 billion over the life of the bonds. It's a great deal for the states but not so good for individual investors. That's because unlike with a normal municipal bond, an investor has to pay federal taxes on the interest from Build America Bonds. And the new bonds typically offer 25- or 30-year maturities. While institutions such as pension funds or endowments find that attractive, individual investors often prefer the flexibility that comes with shorter maturities.

What's Next?

No one is proclaiming the death of tax-free municipal bonds just yet, but some experts worry about their future. Critics of the Build America Bonds program say that some federal officials have long felt that investors receive too sweet a deal on tax-exempt muni bonds. The Build America Bonds program is set to expire at the end of 2010, but market participants say it's likely to be extended or even made permanent. Philip J. Fischer, head of municipal-bond research at Bank of America-Merrill Lynch, says Build America Bonds could be a way for the Feds to eliminate much of the tax-favored status traditional muni bonds enjoy.

Alan Krueger, the Treasury Department's chief economist and deputy assistant secretary for economic policy, doesn't exactly discourage that kind of thinking. Indeed, he says the Build America Bonds program is an effort to lower subsidies to individual taxpayers while helping municipalities in their time of need. Krueger says the program is a big success for both institutional buyers and government issuers. But what are retail investors supposed to do? Krueger says they can access Build America Bonds through a mutual fund.

Some investors are doing just that. Others are just fed up with the higher prices, lack of insurance and other headaches and avoiding munis entirely. They are turning, in part, to taxable corporate bonds, says Sarah M. Place, chief executive officer of bond dealer Place Trade. That option doesn't offer all the advantages of owning a muni bond directly. Nor does it provide much sense of civic pride. Unfortunately, Place says, investors don't have much choice. For many people, she says, "the trust is just gone."

How to Buy A Muni Bond: 5 Key Steps

letters@smartmoney.com (Elizabeth O'Brien) — Mon, 13 Jul 2009 00:00:00 -0400

Go longer.

These days, experts say, the yields on longer-dated bonds are more attractive than they are on shorter-term bonds that mature in less than seven years. Investors who hold the bonds until they mature will get all their principal back-and they won't have to worry about rising interest rates temporarily hurting the value of the bond.

Balance risk and reward.

In these nervous times, concerns about the safety of bonds has raised demand for the highest-rated muni debt (a rated general obligation muni bond has failed only once in 30 years). That has made bonds rated just below AAA more attractive, and many pros, including Ron Schwartz, portfolio manager of the $878 million RidgeWorth Investment Grade Tax-Exempt Bond fund, think they are worth the risk.

Keep an eye on the issuer.

State and local governments that issue bonds must file notices of "material events," such as a ratings downgrade on a bond, to an online database called Electronic Municipal Market Access (emma.msrb.org). But the reports aren't always fresh, so Len Templeton, a financial adviser in Chandler, Ariz., and longtime investor in municipal bonds, says investors should check municipalities' own Web sites to study their finances.

Mind the markup.

Though they don't with stocks, brokers do add a markup to the bonds they sell, above and beyond any transaction fees. Electronic Municipal Market Access and the site InvestingInBonds.com offer tutorials on bond pricing, along with recent trade data that shows how much investors paid for specific bonds.

Or leave it to the pros.

Feeling overwhelmed? Municipal-bond funds give individuals broad exposure to tax-exempt bonds for much less than the amount needed to create a diversified portfolio of individual bonds, which planners say could run $100,000 or more. The downside: Investors potentially could pay capital gains taxes on bonds the fund manager sells at a profit.

4 Kinds of Bonds Worth Considering

letters@smartmoney.com (Elizabeth O'Brien) — Mon, 13 Jul 2009 00:00:00 -0400

Treasury bonds and TIPS

Because Treasurys are issued by Uncle Sam, the interest and principal are guaranteed. The downside is that investors pay for that safety with lower yields. The yield on TIPS, or Treasury Inflation Protected Securities, rises along with inflation. Individual Treasurys can be bought directly from the federal government at www.treasurydirect.gov, in denominations as low as $100.

Government agency bonds

Ginnie Mae, Fannie Mae and Freddie Mac issue bonds backed by the payments from mortgages. This might sound dangerous, but since the federal takeover of Fannie and Freddie, their bonds are effectively guaranteed-and their yields are slightly higher than those of Treasurys. Ginnie Maes are also government guaranteed. The Payden GNMA fund (PYGNX) yields 4.3 percent and has an expense ratio of 0.50 percent, or $50 for each $10,000 invested.

High-grade corporate bonds

Some advisers like corporates now because their yields are higher than usual when compared with those of Treasurys. They are not risk-free, but bondholders are ahead of stockholders if the company runs into financial trouble. The Vanguard Intermediate-Term Investment Grade fund (VFICX) has a yield of 5.3 percent and expenses of $26 for each $10,000 invested.

High-yield bonds

Often called "junk bonds," these riskier cousins of high-grade corporates are issued by companies that have to pay higher interest rates to attract investors. Because these bonds are riskier, some experts say it makes sense to let the pros pick the individual bonds. The T. Rowe Price High Yield fund (PRHYX) yields 9.7 percent and has expenses of $76 for each $10,000 invested.

Rewards Programs Adapt to the Recession (Deal of the Day)

letters@smartmoney.com (Kelli B. Grant) — Mon, 13 Jul 2009 00:00:00 -0400

Tough economic times are remaking the landscape of customer-loyalty programs.

Consumer participation in loyalty programs – or incremental incentives that reward repeat business – is up nearly 20% from 2007, according to July research from Colloquy, a market research firm that studies loyalty marketing. A third of shoppers say they’re relying more on such programs to find value in during the recession.

That interest hasn’t necessarily translated into increased sales among businesses. Loyalty only draws customers to the store when they have money to spend, but as the unemployment and personal savings rates have risen, the American wallet has grown tighter. “Upping the rewards isn’t going to entice them to spend more money,” says Randy Allen, associate dean of marketing and corporate relations for Cornell University’s Johnson School. “Lowering the price might.”

As a result, retailers struggling amid the economic downturn are tweaking their customer-loyalty rewards programs — resulting in both new and lost savings opportunities for shoppers.

Like credit-card issuers, retailers are weighing the costs and benefits of loyalty programs against their bottom line. For example, Bed Bath & Beyond (BBY) stopped offering in-store rebates for the Upromise.com college rewards program on July 1. (A spokeswoman for the company said the firm does not publicly comment on its business strategy.) However, Sephora expanded its Beauty Insider program this month to allow shoppers to save up points (one earned per dollar spent) for full-sized beauty products instead of just samples. (For more details on both deals, see the chart below.)

Here are a few changes to watch out for in your favorite retailers’ loyalty programs:

1) High-tech convenience

Retailers are giving consumers more control over how they access discounts. CVS (CVS) began allowing customers to print ExtraCare reward certificates from home last year, instead of just printing them at the bottom of receipts. And Safeway (SWY) rolled out a program this summer that allows shoppers to load digital manufacturers' coupons onto their club card for automatic redemption at the checkout counter.

2) Concierge rewards

Stores looking to protect their profits are adding concierge-type rewards like early access to concert tickets or sporting events via ticket brokers, says Kelly Hlavinka, a partner with Colloquy. It costs the retailer very little to provide such perks, but they may resonate with consumers.

3) Tiered programs

If you’re not a big spender, chances are you’re getting a very different loyalty club experience than someone who is. “Retailers are focusing on the customers that spend money,” Allen says. Best Buy (BBY) recently announced that as of Oct. 31, members in its standard Reward Zone program must redeem points in the year they are earned. Premier Silver members have no such restriction. (Best Buy did not respond to a request for comment.)

4) Expanded partnerships

Cross-marketing — giving rewards on one thing when you shop for another — can be extremely effective, says Hlavinka. Look for partnerships among retailers, like Gulf Oil’s Override.com, which offers discounts on gas when you buy coffee and groceries at partner companies Shaw’s Supermarkets and Dunkin’ Donuts.

Retailer	Changes
Bed, Bath & Beyond	July 6, college savings program Upromise.com announced that as of July 1, Bed, Bath & Beyond had stopped offering program rewards for in-store purchases made with a registered card. However, the firm will double its rewards for online purchases to 2%.
Best Buy	Starting Oct. 31, Best Buy’s Reward Zone program will no longer roll over year-to-year for regular members. Points must be redeemed in the year they are earned, and consumers must make at least one purchase every 12 months to remain in the program. (The change does not affect Premier Silver members, who spend more than $2,500 in a calendar year.)
eBillMe.com	This online marketplace, which lets consumers pay for online purchases through their bank accounts as they would other monthly bills, launched a program in early July that gives shoppers 1% back. Rewards can be redeemed in $10 increments at any store that participates on the site, including Buy.com and ShoeBuy.com.
Emerald City Smoothie	Customers can load cash onto Elite Patron cards — introduced in March – and use it to pay. They’ll get a free 24-ounce smoothie for signing up and earn one point toward rewards for each dollar spent. They can redeem 25 for a free size upgrade or save 60 to earn a free smoothie. Members also receive 10% off retail purchases at participating locations.
Gulf Oil	Dunkin’ Donuts in Vermont, Massachusetts and Rhode Island joined the gas station chain’s Override.com rewards program in June. Customers who spend $20 with a rechargeable Dunkin’ Donuts Card will get 5 cents off each gallon of gas for up to 20 gallons total over the next 30 days at participating Gulf Oil locations. Members can also earn Gulf rewards at Shaw’s Supermarkets; each time they spend $50 there, they can save 10 cents a gallon for up to 20 gallons total over 14 days.
Safeway	The grocery chain announced in late June that its club card members can now virtually attach manufacturers coupons from Shortcuts.com, CellFire and P&G eSaver to their accounts using its coupon link program. Coupons lower the bill automatically when the loyalty card is swiped at checkout.
Sephora	In early July, the cosmetics retailer expanded its program. Previously, shoppers could earn one point per dollar spent, with 100 points redeemable for a product sample. Now, they can also save their points for a full-size product available to members only. Currently, 500 points gets you a Sephora-brand makeup palette valued at $30.

Earnings Cues: Are We on Brink of Recovery? (Pundit Watch)

letters@smartmoney.com (Will Swarts) — Mon, 13 Jul 2009 00:00:00 -0400

A lackluster start to the second-quarter earnings season — with Thomson Reuters forecasting a 36% year-over-year drop in earnings among the S&P 500 — has deepened the rift between those pundits who believe the economy is well on its way toward recovery and those who think the recovery will be a slower, more torturous process.

Bulls suggest that companies that have pared down their inventories will now need to ramp up production in order to meet demand, thus stimulating the economy and the markets. Naysayers, on the other hand, suggest that recent stock market declines — the Dow Jones Industrial Average shed 177 points last week — reflect disappointment among investors who have seen their upbeat hopes dashed by sobering fundamentals, such as the 9.5% unemployment rate, weak retail sales and the limited impact that cost cuts have had on boosting corporate earnings.

Earnings are still less bad, rather than genuinely good, however, and that's not doing much to reinvigorate investors. (Just look at the weak reaction to bellwether Alcoa's (AA) lower-than-expected loss of 26 cents a share last Wednesday.) As we move further into the earnings season, Ed Yardeni, founder of Yardeni Research, believes there will be some pleasant surprises mixed into the gray, but very little evidence of real growth.

"There will be plenty of positive earnings surprises during the Q2 earnings season this month, as there were during Q1," he wrote Wednesday. "It should be the same story: Cost-cutting should boost margins, offsetting some of the weakness in sales."

But at this point, it may be more important to focus on earnings projections for the third quarter and beyond than to dwell on the second-quarter results, said LPL Financial chief market strategist Jeffrey Kleintop. "Market participants expect corporate leaders to express that conditions have started to improve and hold or raise their outlook for earnings in the coming quarters — if they don’t, their stock prices are likely to suffer," he wrote Tuesday. "Specifically, we will be looking for expectations for the third quarter to rise modestly and for the range of high and low estimates to narrow, reflecting improving confidence as uncertainty surrounding the economic outlook fades."

For Bill Gross, managing director at Pimco, the issue isn't how to decipher incoming earnings or future earnings guidance, for that matter, but rather how to recalibrate our expectations as investors and consumers following the credit-fueled binge that spawned the current economic mess.

Gross envisions a "new normal" where growth is slower, profit margins are narrower and asset returns are smaller than in decades past. These revised expectations, along with tougher economic regulations, should substantially inhibit the type of "gorging" on goods and services that consumers and investors had become accustomed to in the past, he wrote in his July commentary.

Yet, in some cases, it's clear that the old way of thinking has yet to entirely work its way out of investors' mindsets. Referring to the market's 40% surge from its March low, Morgan Keegan economist Donald Ratajczak said in a July 6 note, that "the rally started early because of the reversal of fear," then became overoptimistic. We may be back from the abyss, he says, but merely averting disaster doesn't mean there's real improvement. He believes “a saw-toothed advance” will characterize a recovery this autumn.

David Rosenberg, chief economist and strategist at Gluskin Sheff, also took up the bearish case in a Friday note, saying that he sees echoes of the 2002 recession, though this time on a much larger scale.

"We have seen this movie before — a recession dominated by asset deflation, widespread excess capacity and deflation pressures, and then a huge shock that drags the equity market to massively oversold lows," he wrote. "Fiscal and monetary stimulus then ramp up, hopes of a capital spending revival and inventory restocking spring eternal, and risk assets enjoy a significant multi-month rally as earnings and economic projections get revised higher by the consensus community." In his opinion, such a scenario will set the stage for alternating greed and fear among investors, until real fundamentals catch up to and support expectations.

While the worst of the global recession should be over by the third quarter, any recovery will be difficult and slow, wrote Societe Generale global economist Brian Hilliard in the firm's July monthly outlook, published Tuesday.

"Efforts to summarize a view [of the recovery] in simple 'V-', 'U-', 'L-' or 'W-' shapes over-simplify the very complex reality that led to the downturn in the first place," he wrote. " The recovery will be no less complicated, with many medium-term excesses retarding the recovery dynamic."

Stocks Rally Ahead of Financial Earnings (Market Update)

letters@smartmoney.com (Miriam Gottfried,Will Swarts) — Mon, 13 Jul 2009 00:00:00 -0400

News at a Glance

Financial Firepower: Street climbs sharply on sector rally.
Golden Goldman: Fixed income could power results.
Earnings Anticipation: Major names report this week.
Crude Crunches: Oil hits eight-week low.

The Lowdown

Stocks rallied Monday after traders pushed major indexes up on expectations of robust results from the volatile financial sector.

Major indexes finished strong after influential bank analyst Meredith Whitney upgraded Goldman Sachs (GS)to a buy on Monday and said Bank of America (BAC) shares looked cheap relative to tangible book value. Goldman reports Tuesday before the open. She said its fixed income and underwriting businesses will power the quarter. Other Dow banking components Citigroup (C) and JPMorgan Chase (JPM) also report this week. The Dow Jones Industrial Average closed up 185 at 8332. The Nasdaq rose 37 at 1793 and the S&P 500 climbed 22 at 902, its highest close in two weeks.

Other Dow components are scheduled to release earnings reports this week, including Johnson & Johnson (JNJ), General Electric (GE), Intel (INTC) and IBM(IBM). Last week, Alcoa (AA)kicked off the season with a lower than expected loss, but financials will help set the tone for broader quarterly results.

This is also a busy week for economic data. The government's June retail sales report is due out Tuesday.The June readings of the Consumer and Producer Price Indexes, measures of inflation, are scheduled to be released Tuesday and Wednesday, respectively. The Federal Reserve will release the minutes from its last meeting on interest rates on Wednesday.And the June readings on the annual rates of building permits and housing starts are set to be released on Friday.

South Korean's stock market and currency, the won, had their biggest slides since March on news that North Korean leader Kim Il Sung has pancreatic cancer.

Oil prices stabilized after a morning dip, as traders saw few hints of recovery. Crude traded on the Nymex was up 24 cents in afternoon trading, hitting $59.93 at 4:03 p.m..

Corporate News

CIT (CIT) officials spent the weekend strategizing over how to reassure customers and investors that the bank can survive a liquidity crunch. Reports over the weekend that the company had hired lawyers to represent it in a possible bankruptcy filing brought fears to the forefront. The bank is in talks with regulators to find ways to stave off its near-term cash shortage, but it remains unclear whether the government will provide the firm with emergency financing.
Philips (PHG) said it earned $62 million (44 million euros) in the second quarter, down 94% from the year-ago period. The profit surprised analysts who had been expecting the Dutch electronics maker to lose approximately $176 million (125 million euros). REPORT
UBS (UBS) could be required to reveal some, but not all, of the 52,000 names the U.S. government has requested as part of an international tax-evasion case, The Wall Street Journal reported Monday, citing anonymous sources. The bank is in talks with the U.S and Swiss governments to settle the case, which could lead to criminal prosecutions of its U.S. clients.

The Economy

The Treasury budget statement for June hit $94.3 billion, a record for that month, according to the Treasury Department. The budget was expected to carry a deficit of $77.5 billion in June, compared to a surplus of $33.5 billion in the year-ago period. REPORT

The Feds in Business: Look to the Post Office (Tradecraft)

letters@smartmoney.com (Jonathan Hoenig) — Mon, 13 Jul 2009 00:00:00 -0400

If anybody needs a good reason to be skeptical of the government’s newfound commitment to efficiency when it comes to the hundreds of billions of dollars of “stimulus” spending, the Chicago Main Post Office facility provides a very obvious example.

Main Post Office, Chicago

This massive, 14-story building spans several city blocks at 2.7 million square feet. Situated in an ultra-prime downtown location, the advertising potential alone is unparalleled: Tens of thousands of cars pass directly through it every day on the main highway heading into and out of town.

Yet this building has sat completely vacant since 1997 when the post office moved to a new facility across the street, meaning the USPS missed out on capitalizing on one of the biggest booms in commercial real estate in history. Worse off, it wasted a small fortune in the process — a 2006 report by the General Accountability Office found the facility costs the USPS $2 million a year simply to maintain.

Spending $2 million a year on an empty building? That sort of waste would never been tolerated in a profit-seeking firm. To believe somehow the new governmental bureaucracies being created will avoid such misuse is both hilarious and frightening.

Thankfully, the property is finally going up for auction. On Aug. 27, the building will be sold to the highest bidder, regardless of price. Suggested opening bid is $300,000, but given the unique structure has an estimated replacement cost of $300 million, you can expect aggressive bidding.

Suggested starting bid: $300,000

Ironically, the sale could indicate an early bottom for the local commercial real estate market. Because they don’t act out of the profit motive, government entities tend to be awful traders. The Bank of England’s disastrous 1999 gold liquidation at which 395 tons were sold at 25-year lows comes to mind. Gold has more than doubled since then.

After spending $24 million dollars over the past 12 years maintaining an empty building, the USPS’s fire sale presents a historic opportunity for an ambitious developer who, to quote Daniel Burnham, “makes no small plans.”

Income-less Yen Boasts Bid

A few weeks ago I wrote about the danger of buying a security simply because of the dividend. That philosophy applies to stocks -- and currencies as well, where investors too often make the mistake of simply buying the highest-yielding currency, rather than focus on the strongest-performing one.

Stocks Up, Currencies Follow

CurrencyShares Pound (FXB), Euro (FXE), Canadian Dollar (FXC) and Aussie Dollar (FXA) vs. S&P 500 — 3 months

In recent months, most of the high-yielding currency funds, names like CurrencyShares Canadian Dollar Trust (FXC) and CurrencyShares Australian Dollar Trust (FXA) have shown close correlation with stocks. When equities rise, the high-yielding currencies — and most risk assets in general — tend to come along for the ride.

The lone standout? The Japanese yen, tradable for every investor through funds such as WisdomTree Dreyfus Japanese Yen (JYF) and CurrencyShares Japanese Yen (FXY), which despite the absence of an income component, are now breakeven for the year and outpacing the S&P 500 by about 5%.

Stock Picks: BAC Up; CIT Down (Market Movers)

letters@smartmoney.com (Will Swarts) — Mon, 13 Jul 2009 00:00:00 -0400

Bank of America Gets a Bounce from Bargain Hunters

Shares of Bank of America (BAC) got a healthy boost after bank analyst, Meredith Whitney, upgraded Goldman Sachs (GS) to Buy and expressed optimism that the financial-services sector should report strong earnings this quarter.

In an interview with CNBC, Whitney said Bank of America was among the cheapest of the big banks and she expects it to report a strong quarter. Analysts expect Bank of America, which is slated to announce earnings Friday morning, to report a profit of 21 cents a share for the quarter compared with 72 cents a share in the year-ago quarter. While the Charlotte, N.C.-based bank has recovered from its March low of $2.53 a share, it's still down 42% from a year ago, and remains in the crosshairs of critics for its role in the financial crisis.

Investors will have to contend with a vast number of moving parts when trying to decipher the banking giant's results, however. From its buyout of ailing Merrill Lynch to its bad loan write-offs, even the keenest observers are unsure about the company's fundamentals.

"Bank of America’s quarter will be filled with one-time events that may make it impossible to discern what the company is actually earning," Rochdale Securities analyst Richard Bove said in a recent earnings preview note.

The bank faces a special assessment of $900 million from the Federal Deposit Insurance Corporation; mark-to-market hits on its fair value debt of $2 billion; another mark-to-market expense on its counter-party insurance agreements of $1.5 billion; and further costs associated with the acquisition of Merrill Lynch, Bove said in a June 29 note.

Atlantic Equities analyst Richard Staite says today's share run-up is mostly due to bargain hunters looking to take advantage of the company's cheap shares. "[Bank of America] is still regarded as the beat-up stock in the sector, and when there's a bit more confidence in the sector, people are keen to buy the more beaten-up stocks," he says. "It's clearly one of the cheapest banks in the sector on any number of measures."

While Bank of America's consumer and retail banking results are expected to come in weak, the contributions from Merrill Lynch could prove to be surprisingly strong, he says.

"That's quite important for sentiment because it will show that the Merrill acquisition wasn't a total disaster," he says.

Bottom Line: Hold
Stocks of big banks have been pummeled throughout this crisis. While Bank of America's stock may seem cheap, it's still too risky to make an investment decision based on fundamentals.

Bankruptcy Fears Send CIT Group Plunging

Shares of commercial lender CIT Group (CIT) fell 22% in midday trading Monday amid growing concerns about its ongoing liquidity and the likelihood that it will get more government help.

Of utmost concern is that the New York lender, which provides financing to many small businesses, may not get approved for the FDIC’s Temporary Liquidity Guarantee Program (TLGP), which would allow the company to issue debt that's guaranteed by the government. Investors feared that such a rejection could hasten a path to bankruptcy. The company received about $2.3 billion from the government's Troubled Asset Relief Program.

On Sunday, CIT Group issued a statement saying "it remains in active discussions with its principal regulators on a series of measures to improve the company’s near-term liquidity position." It applied to TGLP in January and said it is looking at other financing options beyond the government.

While the possible financial collapse of CIT wouldn't exactly tumble world markets, it would have a vast impact on its roughly one million small-business customers who may not be able to land financing at other lenders.

BMO Capital Markets analyst David Chiaverini wrote Monday that being in the spotlight may worsen CIT's problems.

"With so much newfound attention centered around CIT’s liquidity, we believe a near-term panic may arise that may lead CIT’s borrowers to draw down on their $5.3 billion of unfunded financing commitments. This would exacerbate the strain on CIT’s already precarious liquidity position," he wrote.

Adam Steer, an analyst at the New York capital structure research firm CreditSights, wrote Sunday that last week's debt downgrade by Fitch Ratings to BB- from BB+ and reports that it was hiring law firm Skadden, Arps, Slate Meagher & Flom to prepare for a possible bankruptcy added to the negativity surrounding CIT.

"While we believe that CIT was possibly trying to cruise into its earnings date on July 23, with little further discussion on its possible outcome until then, the company may be gripped with weighing an imminent bankruptcy filing as investor and rating agency patience seems to have worn too thin," he wrote.

Wall Street analysts on average forecast that the company will report a second-quarter loss of $1.11 a share and a full-year loss of $4.05 a share.

Bottom Line: Sell
Bankruptcy fears won't lift anytime soon. Any positive news may help give the stock a brief bump higher, which would provide a great time for investors to jump ship.

Financial ETFs Up on Rosier Bank Outlook (Daily ETF Wrap-Up)

letters@smartmoney.com (Will Swarts) — Mon, 13 Jul 2009 00:00:00 -0400

Market Wrap-Up

Financial stocks led a rally Monday that resulted in a triple-digit gain for the Dow ahead of major earnings reports. The Financial Select Sector SPDR fund (XLF) was among the most heavily-traded tickers, closing up 6.4%.

Major indexes broke out of a see-saw morning after influential bank analyst Meredith Whitney upgraded Goldman Sachs (GS) to a Buy and said Bank of America (BAC) shares looked cheap relative to the company’s tangible book value. Goldman reports Tuesday before the open. Other Dow components, including Citigroup (C), JPMorgan Chase (JPM), Johnson & Johnson (JNJ), General Electric (GE), Intel (INTC) and IBM (IBM), are also scheduled to release earnings report this week.

The Dow Jones Industrial Average closed up 185 at 8332. The Nasdaq rose 37 points to 1793 and the S&P 500 climbed 22 at 902, its highest close in two weeks.

For a detailed rundown on Monday’s trading session see our market story.

Winners

The Regional Bank HOLDRS fund (RKH) was ahead of the pack Monday, gaining 6.6%. The SPDR KBW Bank (KBE) also had a strong showing, rising 6.4%.

Losers

The iPath S&P 500 VIX Short-Term Futures fund (VXX) dropped 3.6% when the index was caught in the financials-fueled upswing. The iShares MSCI South Korea Index Fund (EWY) slipped 2.6% following a report that North Korean leader Kim Jong Il has cancer, news that could increase the potential instability in the region. South Korea's currency, the won, and the Kospi stock index each recorded their largest losses since March.

Tuesday’s Notebook

Earnings and Conference Calls
Altera, Goldman Sachs, Intel, Johnson & Johnson, Levi Strauss, Ocean Power Technologies, Yum Brands

Economic Data
7:45 a.m. ICSC Chain Store Sales Index for July 11
8:30 a.m. June Producer Price Index
8:30 p.m. June Producer Price Index, ex-food & energy
8:30 a.m. June Retail Sales
8:30 a.m. June Retail Sales, ex-autos
8:55 p.m. Redbook Retail Sales Index for July 11
10:00 a.m. May Business Inventories
5:00 p.m. ABC/Washington Post Consumer Confidence for July 11

A look at how the industry's most popular ETFs did on Monday:

10 Largest ETFs
Symbol	Net Assets	Price	52 Week High	52 Week Low	Volume
SPY	63,692	90.1	130.7	68.13	215,493,335
EFA	30,201	44.8	67.84	32.16	19,657,464
EEM	30,793	31.14	43.75	19.12	70,051,266
GLD	NA	90.19	97.24	70.14	8,807,959
IVV	17,692	90.39	130.92	68.24	3,194,685
QQQQ	13,357	35.59	48.32	25.51	126,222,737
IWF	9,442	40.25	55.45	30.49	2,038,182
SHY	7,059	83.91	85	82.52	699,730
VTI	10,157	45.16	65.56	33.75	1,964,998
IWD	7,122	45.89	70.64	34.22	1,791,925

10 Things Your iPod Won't Tell You (10 Things)

letters@smartmoney.com (Noah Rothbaum) — Fri, 10 Jul 2009 00:00:00 -0400

1. “It’s good to be king—but my reign may be coming to an end.”

Since launching the iPod in 2001, Apple has been the undisputed leader in digital music players, owning 70 percent of the market. What has set the iPod apart is not only its hip, user-friendly design but also its companion iTunes music store, the first online audio megamart, offering an ever-expanding catalog of songs for purchase at the click of a mouse. This two-pronged approach has given Apple a huge lead over competitors; so far the company has sold over 120 million iPods and more than 4 billion songs on iTunes. But the iPod’s days at the top may be numbered.

At issue is Apple’s proprietary format, which up until recently has made iTunespurchased music incompatible with other non-iPod MP3 players. According to Chris Crotty, former senior analyst for consumer electronics at iSuppli, such closed systems either move toward compatibility or get surpassed by the competition. Apple has seen the writing on the wall—in January 2009, it unveiled its plan to make it easier for consumers to recode music into the more standard MP3 format. Good idea, according to the experts. “Over time the market prefers open systems,” Crotty says.

2. “Customer service is a privilege, not a right.”

Customer service isn’t what it used to be. According to Ross Rubin, director of industry analysis at the NPD Group, companies across the board are pushing “more self-service” to cut costs. But even so, he says, Apple is “pretty aggressive in terms of the consumer electronics industry.” IPod buyers, for example, get just one call to customer service during the first 90 days of ownership; each one after that will cost you. (If you want more phone time, the AppleCare Protection Plan offers unlimited calls for two years and doubles the one-year warranty.)

So where to turn for free help with your sputtering iPod? You can always visit an Apple Store—if you happen to live near one and don’t mind the wait. But the Web is the real mother lode of information. For starters, Apple’s site offers tons of troubleshooting advice and some quick-and-dirty DIYs. But for more-complex problems, the company has, in effect, outsourced customer service—to its own customers. Sites like iLounge.com and iPoding.com offer tutorials and bulletin boards where users answer one another’s questions and explain tricky repairs. And you get to come back as many times as you want.

3. “If you drop me, I’m toast.”

You’ve seen the ads—hip, young people exuberantly dancing with iPod in hand. But the reality is that the device is delicate. Apple’s edgy designs “tend to be more attractive, but also more fragile” than other players, says industry analyst Rob Enderle.

At the heart of the iPod Classic, for example, is a tiny hard drive that can stop working if it’s dropped or even knocked around. (Fortunately, the Touch, Nano, and Shuffle all use flash drives, which are more resilient.) But it’s not only the hard drive that needs careful handling—the screens on these players have been a source of trouble as well. Apple admits some of its Nano iPod screens were faulty, causing them to crack and scratch too easily, but claims the problem affected “less than 1 percent.” Patrick Destvet, a New York City psychologist, says it isn’t just a Nano problem; the color screen on his new 30- gigabyte iPod Video was scratched up after a month, making it hard to see anything on the device. “Coming from Apple, I didn’t expect this,” Destvet says.

To protect your iPod, invest in a padded case. Apple sells many, including a leather shell; other good covers include the iSkin Claro and Speck Products’ ArmorSkin sleeves. Visit store.apple.com for the best selection.

4. “When it comes to sharing music, we’re still not as flexible as you might think.”

Apple makes it very easy to load your iPod with music—iTunes software is free to anybody who wants it. But once you’ve filled your player with 40,000 songs, it’s not so easy to get them off again. Despite loosening copyright restrictions, Apple doesn’t let you move music from your iPod to another computer or other electronic devices, even though it would be legal to do so.

Fortunately, there are ways to circumvent Apple’s roadblock through third-party software that allows you to move music from your iPod back to any computer. Among the options, both Mac and PC users can download the affordable Music Rescue from www.kennettnet.co.uk; PC users can save a few bucks with iGadget, (www.ipodsoft.com). After downloading the software, you’ll be asked to plug in your iPod so the software can pull the music from your player and save it in your iTunes folder.

5. “My battery life is pathetic.”

The new iPod boasts a robust battery life of more than 20 hours. But if you look at the fine print, Apple admits on its website that “battery life and number of charge cycles vary by use and settings.” The company also warns consumers that you can recharge a battery only so many times before it must be replaced. According to The Rough Guide to iPods, the magic number is 500, depending on use. But according to Enderle, the typical iPod lasts an average of only 300 charges—and it doesn’t matter whether the battery is empty or not when it’s charged. “A cycle is a cycle,” he says.

For a few years Apple simply refused to recognize the problem and recommended that users buy a new player if the battery died. Only after a public outcry—and a class-action lawsuit—did the company develop a battery-replacement program. Now you can send back your ailing iPod and get another for roughly $60, plus shipping. Most likely, you’ll receive a comparable used or refurbished unit.

Better to extend the life of the battery you have. Do this by regularly updating your iPod’s software. Check Apple’s website for the latest version; you can download a free upgrade there. Minimize charging to when the battery is almost drained. And don’t charge your iPod in its protective case, where it can overheat and diminish the battery’s capacity.

6. “I’m destroying your hearing.”

A major selling point of digital music players is that you can tune out the world around you for hours at a time. But as you crank up your iPod to drown out ambient noise, you could be damaging your ears. According to a study by the American Speech-Language-Hearing Association, at full volume an iPod can generate up to 120 decibels, equal to the sound of a jet plane taking off. At that level you’ll begin sustaining permanent hearing loss or tinnitus after just 5 to 10 minutes. The issue is serious enough that a maximum volume setting now comes standard on all new iPods.

“Noise-induced hearing loss is easy to ignore until it’s too late,” says Pam Mason, an audiologist at the ASLHA. Extended listening at 80 to 85 decibels is safe, according to Mason. Roughly speaking, that means you should turn it down if you can’t hear someone talking normally three feet away from you or if the people around you can hear your music. It also helps to invest in a good pair of noisecanceling or noise-isolating earphones. Both types block out ambient sound so you needn’t jack up the volume as high.

7. “I’m out of date before I’m out of the box.”

In the fall of 2005, small-business owner Peter Quinones wanted to replace his iPod but kept hearing Apple was about to come out with an improved model. “I was in a holding pattern,” the Miami resident says. “You don’t want to buy something and find out a week later there’s a new product.” So Quinones waited six months, then bought a video iPod instead of the Nano he’d been considering. His new player worked with the charging cradle in his Mercedes; the Nano wouldn’t have.

All consumer tech companies have shortened their product cycles, adding innovative new features to maintain their competitive edge. But with the iPod, Apple seems to be churning out new versions at an unprecedented rate.

“It can be a nuisance for some consumers,” says Susan Kevorkian, an analyst at IDC, since some of the older accessories, such as speakers or docks, aren’t necessarily compatible with the newer models. Fortunately, Apple has now standardized the docks for the iPod, meaning future models should still work with the one you buy today.

8. “I’ve sparked a crime wave.”

You know a product is popular when it becomes a favorite target of thieves. In New York City, an increase in crime on the subways has been blamed on the iPod, as folks sporting the telltale white earphones are being ripped off in record numbers. But iPod crime isn’t isolated to urban areas. A number of college and high school campuses have experienced a rash of thefts, leading some schools to ban the device. A spokesperson for the Broward County school board in Florida says that district recently restricted the use of iPods and other electronic devices, citing theft and peer pressure to own these items as distractions to learning.

A spokesperson for the Law Enforcement Alliance of America says the iPod is a favorite among thieves because “it’s easy to conceal, it has turnover value on the street, and people are willing to buy one on the black market.” Not to mention, they’re easy to spot: “The white headphones are a giveaway,” he says, “just like flashing a fancy watch.” He recommends other earphones and not using your iPod in dicey areas.

9. “We’ll nickel-and-dime you any chance we get.”

Apple’s first fiscal quarter of 2008 was a record-breaker: The company reported new highs for both revenue ($9.6 billion) and earnings ($1.6 billion). Yet even with these impressive financial stats, the company continues to pile on extra fees for owning and maintaining an iPod.

We’re not talking about the burgeoning iPod accessories market, such as stylish cases and portable speaker systems. No, Apple has begun charging for standard equipment it once included with the cost of the player. Why? “It keeps retail prices down and drives sales volume,” Kevorkian says. Early iPod models shipped with a wall charger and a dock. These “extras” are no longer free. Want to connect your video iPod to a TV? You’ll have to buy a cord separately.

Adding insult to injury, should your iPod conk out after the warranty expires, you could end up paying as much to get it fixed as it would cost you to buy a new one—for example, the standard fee for repairs on a Nano is roughly $20 less than the cost of a new one—and that doesn’t include shipping.

10. “Once you go iPod, you’re locked in for life.”

One of the reasons Apple has been able to dominate the digital music player market until now is that while the iPod can play songs from a variety of sources, music bought online at the iTunes store can be used only on an iPod. That’s because the company developed its own format for songs, called Protected AAC, instead of using the widely compatible MP3. Crotty points out that while basic AAC is an open format, the digital rights management software Apple lays over it—called, ahem, “Fair Play”—renders it incompatible with other players. No other company is legally allowed to make a device that can play songs in Apple’s format.

The company claims AAC has many advantages over MP3, but the format also serves as the lock on the iPod’s closed door—which could lead to its downfall. “They’ve set themselves up as Apple and the iPod versus the rest of the MP3 market,” Crotty says. “Customers may get upset that they can’t move their purchased music.” The tide is already turning in Europe, which, he adds, “doesn’t accept a closed system as a business practice”: The French government passed a law in 2006 forcing Apple to allow music on the iTunes store to work on competitors’ players.

3 Funds That Aim to Offer the World (Screens)

letters@smartmoney.com (Rob Wherry) — Fri, 10 Jul 2009 00:00:00 -0400

This week, the world's most powerful leaders — the Group of Eight — met in Italy to discuss how to handle the global recession. Meanwhile, oil prices plunged, ousted Honduran president Manuel Zelaya tried to regain power of his country and violent protests broke out in China.

Those events aren't the only reasons why the international scene is getting its fair share of the spotlight. Indeed, just as attention-grabbing: fund performance. According to Lipper, the average domestic equity fund gained 6.5% in the first half of 2009; while the typical world equity offering gained 14.7%. Those returns have convinced investors that it may be time to once again send their money to overseas markets in Europe and Asia.

Investors who managed to more than double their returns by investing in an international fund instead of a domestic one were either prescient or just plain lucky. Usually, it comes down to a little of the former and a lot of the latter. But that's a pretty big gamble to make. That's why the mutual fund industry cooked up something called global funds. These offerings invest both in the U.S. and in countries outside its borders. The idea is simple: Give investors a one-stop option that buys stocks throughout the world's exchanges. Investors can then sit back and relax instead of making what could turn out to be a poorly-timed investing decision on, say, Japanese retailers or European banks.

Our fund screen tool lists 2,128 global/international funds. (We'll get to the problem with the labeling of these funds in a minute.) We trimmed that group down to 274 by disqualifying funds that charge a sales load. We then looked for funds with top-tier performance track records during the trailing three- and five-year time periods. The funds also had to charge below-average fees. We were ultimately left with just three funds.

In order to arrive at that final list we had to do a little subjective tweaking. This is where the labeling problem comes in. Tim Courtney, the chief investment officer at Oklahoma City-based Burns Advisory Group, defines global funds as those having around 40% of their assets invested in the U.S. That's a definition that jibes with our thinking and with other experts, as well. But our fund screen tool lumps together global funds that fit our standard with international ones that could allocate much more of their money overseas. To make sure the funds fit that 40% parameter, we personally sifted through them. Anything less than 20% and greater than 50% was knocked out of contention.

Global funds offer investors an easy way to get instant portfolio diversification. And, for beginning investors, or those with smaller account balances, they're also a cheaper alternative to buying several international and domestic funds. "We will use some global funds as an easy way to get access to broad diversification on smaller balances when we don't want to go and buy several funds," says Courtney.

However, some advisors point to the last year and argue that investors need to be more proactive with their retirement accounts instead of relying on a product that is wrapped up neatly for them. These advisors like to actively manage their domestic and international exposure, in order to avoid areas that may be cooling off while taking advantage of others that are heating up.

That point is illustrated in the returns of global funds during the first half of 2009. The average U.S. large-cap fund returned 5.6%, according to Lipper, while the typical international large-cap fund — those that only invest outside the U.S. — gained 7.1%. Meanwhile, global large-cap funds that invest in the U.S. and abroad finished right in the middle of those two groups, gaining an average 6.8%. That middling performance is why some advisors prefer to pick and choose their funds.

Whenever we arrive at a list that has such few candidates we feel compelled to explain where all the competition went. Polaris Global Value (PGVFX) and T. Rowe Price Global Stock (PRGSX) didn't have good enough performance track records at the time. Dodge & Cox Global Stock (DODWX) and Thornburg Global Opportunities (THOAX) haven't reached their fifth birthdays, so they don't have long enough histories for inclusion. (The Thornburg fund also charges a sales load.)

One that made it through, Oakmark Global (OAKGX), is a fund that has made our list before. According to Morningstar, the fund has 39% of its assets in North America, 38% in Europe and Britain and 17% in Japan, with the rest spread throughout areas like Latin America. Top holdings include Oracle (ORCL), Credit Suisse (CS), Bulgari and Intel (INTC). The fund has returned an average annual 2% the last five years, about a half percentage point ahead of a Morningstar global index.

The Criteria: The funds on this week's list are classified as global/international by Lipper. We narrowed down our candidates by looking for those with performance track records during the trailing three- and five-year time periods that put them in the top 50% of their peer group. The funds had to be open to new investors, charge an annual expense ratio under 1.5% and require a minimum investment less than $5,000. Furthermore, the funds had to have around 40% of their assets invested in the U.S. in order to fit our definition of a global fund. As usual, we did not include load funds.

Globe Trotters
Source: Lipper Note: Data as of July 9, 2009
Ticker	Fund	Assets ($, millions)	Year-to-Date Return (%)	3-Year Average Annual Return (%)	5-Year Average Annual Return (%)	Expense Ratio
FWWFX	Fidelity Worldwide	906	0.6	-7.0	1.21	1.21
OAKGX	Oakmark Global	1384	6.5	-6.8	2.00	1.16
USAWX	USAA World Growth	363	2.3	-5.7	2.10	1.24

The Administration's Six-Month Checkup (Ahead of the Curve)

letters@smartmoney.com (Donald Luskin) — Fri, 10 Jul 2009 00:00:00 -0400

We're coming up on the sixth-month anniversary of the Obama administration. The economy it inherited was a real mess. Things have gotten better to the extent that they aren't falling apart as quickly. But Obama's problem is that he was elected as a man of destiny who could quickly and effectively change the world. "Change" was his mandate. An eighth of his term is up, and what has really changed?

I'm going to argue that at least one really important thing has already changed, and changed for the better. And while I oppose the Obama administration in almost every sense, I'm willing to give credit where credit is due. Whatever else you may say about the economy, the Obama administration really has ended the banking crisis.

At the same time, I'm going to argue that the administration — and the Democratic-controlled Congress — has done just about everything wrong. Other than in the realm of banking, the only good thing I can say for them is that they've done so little. The risk is that in the future they will do more.

For investors, the conclusion is somewhat ambiguous. On the plus side, the economic backdrop has improved enormously with the conclusion of the banking crisis. On this basis alone, I believe that the recession and the bear market are over.

The problem is that everything else the administration has done will make the recovery slow and weak. So while the stock market probably doesn't have any serious downside at this point, it probably doesn't have any serious upside either.

So the art of investing for the next several years will probably consist of market timing — picking the tops and bottoms in a narrow and volatile trading range. Long-term investing may be obsolete.

Let's dig deeper into these ideas. First the kudos for the Obama administration for the way it has handled the banking crisis.

The first good thing Obama did was picking Tim Geithner to be Treasury secretary. Remember, I hailed his nomination when it was first made last November, citing his on-the-job training in bank crisis management.

That training paid off. Geithner found an ingenious way to save the banking system without spending a penny of the taxpayer's money.

Shortly after taking office in February, Geithner announced that the top U.S. banks would be subjected to a "stress test" to determine their health and solvency. That was smart — it gave the public confidence that, after a year of ad hoc panic whenever an individual bank got in trouble, the regulators were going to look carefully at all of them and once and for all figure out who was strong and who was weak.

What almost nobody appreciated at the time was a critical detail of Geithner's stress test program. He said that any bank that "failed" the test would be able to get a capital injection from the Treasury. But with an important difference from the capital injections that the banks got from the Treasury under Henry Paulson in October. This time, the capital would come in the form of preferred stock that could be converted into common stock. And the conversion price would be the bank's stock price on Feb. 9, the day before Geithner's announcement.

You probably don't see immediately why that detail is so important. I didn't either at first. But I've come to realize that it was absolutely ingenious. By being willing to convert preferred stock to common at a fixed price — the Feb. 9, 2009 price — Geithner was effectively saying that the Treasury would make sure that no bank stock could ever again trade lower than that price. Why would it? How could it? The Treasury stood ready to buy at that price, so who would sell below it?

What better way to support these stocks, which it seemed were all headed for zero? What better way to stop the speculative raids on these companies by short-sellers?

It didn't work at first. Geither was not effective in communicating the importance of his guarantee on stock prices. But a couple months later when the stress tests were completed, and the details became better known, the stocks of the banks soared well above the February 9 price, even though many of them "failed" the stress tests, in the sense that they were forced to raise new capital.

Was that brilliant, or what? Geithner didn't have to put a penny of taxpayer dollars into capital injections. He just offered a guarantee — and it turned out that what the market wanted wasn't capital, but the assurance of such a guarantee.

Now the brickbats. Compare Geithner's triumph to the abject failure of the stimulus bill enacted at about the same time. At some 950 pages, it's a sure thing that not a single senator or congressman who voted for it read it. Yet they voted for it, and spent $787 billion of your money for absolutely nothing.

For stimulus to work at all — and for it to be cost-effective — it has to be targeted at areas of the economy that are especially weak. Now much of the stimulus money was directed at such areas? Approximately none. How much of the stimulus money has even been spent, however unwisely? Approximately none.

But it was introduced by Obama with such fanfare. Hopes were so high (they were audacious, you might even say). And now with the unemployment rate ticking higher every month, the White House had to send Vice President Joe Biden out to admit that they didn't get it right. Listen to Biden painfully repeat himself on one of the political talk shows last week:

"The truth is, we and everyone else misread the economy."

"And so the truth is, there was a misreading of just how bad an economy we inherited."

"The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money."

OK, nice to finally know what the "truth" is. I guess that means that all that other stuff they said about the stimulus plan was something other than the truth. Maybe, a lie?

With the stimulus bill such an expensive dud, we should be thankful that the Obama administration and the congress haven't been able to complete anything else on their agenda so far. No mortgage "cramdown." No unionization "card check." No "cap and trade" carbon tax. No health care "reform." No tax hikes for "the rich."

At least not yet. The truth — as Biden would say, or might be forced to say someday — is that all these things are terribly antigrowth, because they take incentives, dynamism and flexibility out of the economy. So far the economy hasn't been saddled with these things — and it's still having one hell of a time recovering. Imagine how hard it would be if some of these things actually came to pass.

They may yet. Cap-and-trade and health-care reform are very much live issues. Higher taxes are constantly being talked about. For investors, these are Swords of Damocles hanging over the stock market.

So I'm not a bear. I say buy the dips. Try to catch the bottom of the trading range. And thanks to the Obama administration for solving the banking crisis, so that the March bottom in stocks will likely hold.

But don't overstay your welcome. Sell the rallies. And blame the Obama administration for having to do that. If it weren't for the multiple threats to growth overhanging the market, you could actually become a long-term buy-and-hold investor again. Maybe someday.