NEWS/BLOG

Coping with Financial Meltdown

With breaking news virtually every day, commenting on the economy could have been a full-time job and not one I relish. Some so-called experts are advising people not to take a look at their 401-k or other portfolios. I strongly disagree. As we approach the end of the year, it’s a good idea to go over where we stand and see if there some intelligent steps to take.

There are just a few days left to take a tax loss. If you have gains you need to offset, get rid of stocks or funds that have bottomed and haven’t shown signs of recovery. William O’Neill, the founder of Investors Business Daily, stated, in effect, that the real test of whether or not to keep an investment is to ask yourself, “Would I buy it today?” If the answer is “no,” sell it. If you don’t need a tax loss, think twice about selling now. Has the market hit bottom? Some say it has, but no one can spot the actual bottom until after the fact.

You may want to keep some stocks that have lost value, especially those that stand to gain going forward. Look at the sectors which appear to be strong, such as those which stand to gain as infrastructure projects in the U.S. get underway. Biotech firms have also shown strength recently. Some experts are recommending gold futures and gold stocks as a hedge against the dollar.

Closed-end funds have been badly beaten. Many are selling at deep discounts to their underlying net asset value and some with unheard of dividend yields of 20%, 30% and even more. Now more than ever, it pays to be cautious about new investments in CEFs or in mutual funds. Check out their largest holdings and their strategies. For CEFs, you can find more information at etfconnect.com.

Sometimes the smartest move is no move at all. Do your own due diligence, weigh the opinions of others carefully and act only with extreme caution. Good luck. We’ll all need it.

Note: Michael Lewis, who writes more interestingly about finance than just about anyone, has put together a book, comprised of articles from various people including Nobel laureates Paul Krugman and Joseph Stiglitz as well as newspaper and magazine journalists. Included are four major episodes: the 1987 stock market crash, the 1997-98 emerging-markets crash (called “Foreigners Gone Wild”), the dot-com meltdown and finally the current housing/credit/stock market collapse. Each section has an introduction by Lewis, followed by entries written just before everything blew up and finally an analysis of what happened.  It’s called Panic: The Story of Modern Financial Insanity

Lawyers Wanted for Jobs Abroad

Not long ago it was hard enough to transport a legal career across state lines. Now lawyers are being sought for jobs abroad in places like Hong Kong, Dubai and Abu Dhabi. An article in the business section of The New York Times, November 23, 2009, tells why this is happening and where some of the jobs are.

U.S. law firms are increasing their presence overseas. For example, the Los Angeles firm of Lathan & Watkins, has gone from five overseas offices to 14. The New York firm of Weil, Gotshal & Manges has gone from three to nine offices in foreign countries.

Hong Kong saw a 48% increase in the number of lawyers from the 250 largest U.S. law firms from 2007 to 2008. In Abu Dhabi, there was an increase of 144%. Most of the business in Abu Dhabi involves legal advice for government businesses funded by a large sovereign wealth fund.

U.S. citizens working abroad who meet certain conditions do not have to pay taxes on their first $87,600 of earned income. 

Belize: Benefits Running Out?

Belize is a tiny Caribbean nation where English is the official language since it once British Honduras. Living costs are low and there are many good reasons expats choose to live there. One reason is the QRP (Qualified Retired Persons) program, which you can take advantage of if you are at least 45 years of age and if you spend a minimum of two weeks a year in Belize.

That two week vacation could have a significant payoff. The advantages of the Belize QRP program include exemption from any Belize taxes, including income tax, capital gains tax, estate tax as well as import tax on household goods, automobiles, boats and even airplanes.

To be eligible, you must consider yourself retired. What this means is that you are not permitted to apply for a work permit or accept employment in Belize. However, you could operate an international business, an internet business or even start a business in Belize and still consider yourself retired.

There is an income requirement. You must show that you have a minimum of US$2,000 a month in income to support yourself in Belize. Or, you could just deposit US$24,000 into a Belizean bank account.

The bad news is that the program has exceeded its quota of 20,000 QRP retirees, and in a tiny country of about 275,000, this adds up to a lot of expats and a lot of lost taxes. The newly elected UPD government is threatening to end the program. No one know what’s going to happen but the issue will most likely be addressed at the first of the year by the National Assembly. Very likely, anyone admitted to Belize under the present program can keep their benefits. A new program, however, would be far less generous.

Many people will remember that when Costa Rica altered its pensionado program, retirees there weren’t “grandfathered in.” Costa Rica is still a terrific place to live, but it doesn’t offer the tax benefits for retirees that it once did.

For more information and resources for Belize, see our Belize page. 

Behind the AIG Bailout

Founded in China in 1919 by a young San Franciscan named C. V. Starr, AIG grew from a small insurance company to the 18th largest company in the world, offering many types of financial services in 130 countries with a total of 116,000 employees. Most of the phenomenal growth happened under the leadership of Maurice R. “Hank” Greenberg, who joined the company in the early 60s and became successor to C.V. Starr. For more on the history of the company, see Fallen Giant, the Amazing Story of Hank Greenberg.

Insurance companies are largely unaffected by the current crisis because they are required by law to hold reserves against policy payouts, but AIG was also dealing in another type of insurance: credit derivatives which insure debt holders against default. These complex instruments exist beyond the power of regulators and aren’t well understood, even by Wall Street execs. Designed to lessen risk, they ended up having the opposite effect.

With AIG the problem wasn’t on Wall Street, it was in London at A.I.G. Financial Products, or A.I.G.F.P.  At the helm was one of its founders, Joseph J. Cassano, who just happened to be an alumnus of Drexel Burnham Lambert, the junk bond outfit that went under in the 1980s.

Cassano, who resigned from AIG in February of this year, first began trading a form of derivatives known as interest rate swaps, which allow participants to bet on interest rates and thus, in theory, insulate themselves from unforeseen financial events.

About 10 years ago, some J.P. Morgan execs proposed to Cassano that AIG write insurance on packages of debt known as “collateralized debt obligations.” CDOs, as they came to be called, were collections of loans divided into “tranches” and sold to investors based on the credit quality of the underlying securities. Cassano’s unit would offer insurance to financial institutions holding CDOs (and some other products such as bonds) in case of default. These insurance products were known as “credit default swaps” or CDSs. European banks bought similar insurance on bonds they held.

The new business was profitable, almost beyond belief. The London unit’s revenue rose from $737 million in 1999 to $3.26 billion in 2005. Operating income at the unit also grew from 4.2% of AIG’s overall operating income in 1999 to 17.5% of AIG.’s overall operating income in 2005. The profit margin was a whopping 83% in 2005. For the last several years, the average income at the London unit was over $1 million per year.

All this was possible because AIG’s stellar reputation meant that no collateral was required, but this meant, too, obligations that the London unit could not pay would be met by its corporate parent. The staff in London and execs in New York most likely shared an assumption common in the insurance industry, namely that policies bring in premiums and only rarely payout claims. But while other insurance must hold extensive reserves against claims, this type of insurance had none.

Who was buying this new type of insurance? Cassano boasted of having customers from all over the world, including banks, investment banks such as Goldman Sachs, endowments, foundations, municipalities, sovereign wealth funds and, of course, high net worth individuals. These customers were connected to each other in ways too complex to trace, and all stood to lose if payouts were required and could not be met.

By last year, AIG. Financial Products’ portfolio of CDSs was at roughly $500 billion. Cassano boasted that it was generating as much as $250 million a year in income on insurance premiums. In August of last year, Cassano was still calling credit default swaps almost a sure thing. But in the quarter ending September 30, 2007, AIG recognized a $352 million unrealized loss on the credit default swap portfolio.

Was there no supervision? The London unit was exempt from insurance regulation, however, its transactions were reviewed routinely by the U.S. Office of Thrift Supervision. This leaves some questions remaining to be answered.

AIG was on the verge of bankruptcy when the $85 billion federal bailout came through in September 2008. Such a bankruptcy would have been the largest ever with aftershocks throughout the entire world. Many experts believed a worldwide economic disaster had been averted. The next two weeks would prove otherwise.

Where the Past Meets the Future

The colonial district of Panama City has still has bullet pocked buildings and some guidebooks still urge caution, but it’s now an up-and-coming area for visitors, expats and artists. There’s now a special tourist police force to make the area safer. It hasn’t lost its charm, however. Since being designated as a Unesco World Heritage site in 1997, many renovations and restorations have taken place. Hotels, restaurants, galleries cafes and luxury apartments are springing up. Nightlife is lively and getting livelier.

New York, Crime and Cricket

I’ve never been big on summer reading. I believe books are to be enjoyed year round and perhaps more than ever in the winter when there’s less to do outdoors. But in any event I’d like to recommend a novel I enjoyed very much,
Joseph O’Neill’s Netherland.

The hero is a Dutch expat, living in New York just after Sept. 11, 2001, working as an oil analyst for a major investment back (we don’t hear much about that), and becoming involved with cricket and a cricket enthusiast named Chuck, who is from Trinidad. (we do hear a lot about cricket). There’s an appreciation of New York that as rivals Woody Allen’s use of the city in his films. There’s enough about cricket to demystify the game or almost. And there’s a glimpse of small-time criminal activities as well. What happens, however, isn’t nearly as important as the way the story is told and it is told beautifully.

By the way, any Amazon purchase made after clicking on one of our Amazon links helps support our website. Whether you buy this book or read a library copy, as I did, get your hands on it.

Tell us what you’ve been reading as well as sending your ideas on great places to live.

Live Aboard a Cruise Ship

Live abroad or live aboard? There is a difference, of course, although both require an adventuresome outlook. Living aboard usually means having your own boat or yacht, but now there’s talk of living aboard cruise ships. It’s billed a type of retirement, although there’s no reason you couldn’t take your high-tech work gear along.

Here’s how it works. You buy a “residential liner property” consisting one bedroom cabin with a kitchenette and living room and bath, which could be as small as 325 sq. ft.. Prices start at US$16,026.65 for fractional use, which means you get to be there for 1/13 of a year. Or you could simply buy a property for as little as $208,346.42.

Want more space? No problem. There are two decks with luxury accommodations which range from just under one million to over five million. Sizes are from 1,000 sq ft, to 6,100 sq ft. Some have a lanai. For more information, see www.cruiseresortclubs.com/

Naturally, some due diligence is necessary before plunking down your money. We should probably say, too, that we are not affiliated with this outfit in any way.

The Greenback Wallops the Euro

The Chinese chose 8-8-08 as an auspicious day tor the opening of the Beijing Olympics and it was a good day for the U.S. dollar as well. An index that tracks the greenback against the currencies of six countries that are U.S. trading partners climbed 1.6% at 75.72 on Friday, August 8, 2008, reaching a five-month high. That’s a total gain of more than 3% since the recent low on July 15.

This resulted in a sharp slide in energy and other commodity prices, and triggered a rally on Wall Street with the S&P 500 up 2.4%, the Nasdaq 2.5% and the Dow 2.6%. Foreign stocks are not the hedge many had hoped for, and Chinese stocks have been especially disappointing lately. One U.S. sector that seems to be outperforming the market right now is biotech.

The U.S. economy is still not exactly thriving, but it is not in negative territory either. Exports are strong and consumer spending is still positive, offsetting the difficulties in the housing sector and in the credit markets. The U.S. grew at a 1.9% annual rate last quarter.

A Second Look at Panama

Mercedes de Marchena responded to our recent posts on Costa Rica: “Panama is next door, with amazing rain forest, beaches and mountains. The people are friendly and service oriented, and they are efficient. The banking system is first class, they use the dollar as currency and health care is excellent and cheap… Maybe it is time to take a second look at this wonderful, peaceful yet very modern, up and coming place.”

Born and raised in Panama, she now travels there often to visit her mother. “We have an apartment in Panama City and love the cosmopolitan feel of the city. It has changed a lot since I lived there. The bay is being cleaned up and a new road is being built to get from the Corredor Sur into the Casco Viejo, the old colonial city. There are restaurants and nightlife, casinos and luxury hotels. Life is cheaper than in the U.S.or Europe, and the city is so lively. We usually stay there a couple of days before we travel into the interior to go where my mother lives.

“The small city where my mother has lived most of her life is called La Tablas in the Azuero Peninsula. Life there is like it was in everywhere in Panama many years ago. Everyone knows everyone, and people still sit in their verandas and visit. The colonial church dominates the central plaza, and around it are the stores and small restaurants and business. People go there at night to enjoy the coolness after the sun goes down. Life is slow and to be savored.

“Yet you’ll find everything there. Supermarkets are stocked with a wide variety of items and you can also get local produce and fruits very cheaply. You can even have seafood and fish delivered fresh to your doorstep.

“Healthcare is excellent. When my mother had a stroke a year and a half ago, and she received very good care at a large hospital. She had a therapist come to the house for months at incredible low rates ($12/hour) and now has nurse caring around the clock for about $20 a day. You can’t get that anywhere else. Everywhere in Panama, high quality health care is inexpensive.

“Financial institutions and banks work efficiently and are up to world standards. I can send money directly there from the U.S. We got a mortgage for a house we bought there without any problems. Service is superb and you can rely on these professionals.

“About 40 minutes away, there is the town of Pedasi. This even smaller town has world-class restaurants and hotels. Celebrities have discovered this wonderful place, among them, Giles St Giles , the French architect and his wife, who own “Villa Camila” and Prince Maximilian of Liechtenstein, who has a home and lands here… I could go on and on, but I think I need more space!”

Mercedes de Marchena is a free-lance writer now living in Miami after living 20 years in Curaçao, Netherlands Antilles. Read more about her life in the Caribbean at her blog, http://www.expatinthetropics.blogspot.com.  She is also
the author of a book, Such is Life in the Tropics: How Difficult Can It Be to Survive in Paradise?

For more on Panama and some reasons for choosing to live there, see http://liveabroad.com/articles/panama.html.

Canada Deports U.S. Deserter

An American soldier who fled to Canada to avoid being sent to Iraq has been deported to the U.S. where he will face charges of desertion. He had been in Canada three years and was placed in custody after being denied refugee status there. An estimated 200 members of the U.S. military are currently in Canada, but this is the first instance of deportation.

Anti-war demonstrations were held at the Vancouver-Seattle international border crossing and in front of Canada’s Federal Court in Toronto yesterday to condemn the Canadian government’s decision. An estimated 200 American army deserters have sought refugee status in Canada. Nine are facing immediate deportation orders this summer.

Canada has strict immigration requirements. Refugees are admitted, but must also meet certain requirements.

Why Outsource Medicare

You can’t take it with you, that is, you can’t take Medicare with you when you retire outside the U.S.  It stops at the border. Meanwhile, economists warn that the retirement of baby boomers threatens to be a train wreck if not a tsunami.

Professor David C. Warner at the LBJ School of Public Affairs, University of Texas, Austin, has written widely about extending Medicare to retirees in Mexico. This would be of considerable benefit to U.S. citizens who retire there, and in addition – and here’s the big selling point – it would result in considerable savings to the U.S. Government. Dr. Warner has cited cost savings to the Medicare trust as a major benefit. Some say the Medicare trust will be bankrupt by 2040.

The average Medicare beneficiary in the U.S. costs the Medicare fund about $7,500 per year. If that same person lived in Mexico, the same health care services would cost about $4,000 per year.  Dr. Warner has written books such as Getting What You Paid For:  Extending Benefits to Eligible Beneficiaries in Mexico (U.S.-Mexican Policy Reports) and others.

Overall, medical costs in the U.S. are higher than in most if not all other countries. Not only do our healthcare professionals earn more, the administrative costs of insurance companies, PPOs, HMOs, etc. add up. One reason healthcare costs in Mexico are far less is that administrative costs there are lower.

Outsourcing healthcare of some retirees to Mexico, some authorities say, is not so different from outsourcing manufacturing, tech support and call centers to foreign countries. It would eliminate a few U.S. jobs, though not many since there would still be paperwork in keeping track of payments to facilities there. Such a plan would be good for Mexico, too, resulting in an increased flow of money across the border, and in time, more and better medical facilities there.

Scots Warn: Big Crash Coming!

The Royal Bank of Scotland is forecasting a major crash in global stock and credit markets within the next three months! The cause, they say, is inflation. A report by the research department of the bank goes so far as to warn that Wall Street’s S&P 500 index may lose 300 points or more by September.

The report also calls for a brief rally early in July.

We all know, of course, that none of the experts can predict a crash or a rally with absolute certainty. But the S&P, the Dow and the Nasdaq have been falling in fits and starts for the last eight months.

You might want to check out our previous posts, “Seeing Bubbles Before They Burst” and “Time to Let the Dog In.” Or
look into this book by David Wiedemer, America’s Bubble Economy: Profit When It Pops or Peter D. Schiff’s Crash Proof: How to Profit From the Coming Economic Collapse (Lynn Sonberg Books)

Do your own due diligence and be very careful when making investment decisions.

Ireland Says “No” to Lisbon Treaty

Ireland has rejected the Lisbon Treaty, which would have consolidated the European Union’s power and streamlined its cumbersome bureaucracy. The treaty needed to be ratified by all 27 EU members.

The Lisbon Treaty was the result of painstaking negotiations. Among other things, it offered a way of adjusting to the 12 new members added since 2004. It allowed for a full-time EU president and provided for a new foreign policy chief. Also, it called for a change in voting procedures on the European Council so that fewer decisions would require unanimous votes.

Ireland is the only country to put the Lisbon Treaty to a referendum, as required by law. However, it’s no secret that people in various EU countries have no real sense of a European identity and feel remote from decisions being made in Brussels.

One instant effect of the Irish decision is that the euro fell to $1.5301 against the dollar.

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Europe Cuts Back on Solar

You may have found solar stocks volatile lately, but they could become more so, as Spain and Germany make policy decisions regarding the use of solar energy.

Germany is slashing the subsidies that built its solar industry up to $8.8 billion in sales. Homes and businesses there have earned a government-guaranteed price of up to 47 euro cents ($0.74) for each kilowatt-hour of solar power they produce.

If the demand for solar energy in Spain should decrease, the high-flying solar stocks with exposure in Spain could be hit hard. These include CSIQ, STP, SOLF and YGE. On the other hand ELSR and ENER have low exposure in Spain.