The privatization of any social program always brings a hot debate between conservatives, liberals and, well, anyone in the middle. Many free market minded individuals think Social Security should be privatized while liberals say no way. Who is right and is it even possible to privatize such a huge chunk of the Federal pie?

First, let’s answer whether or not Social Security could be privatized. The answer is simple, it cannot be and privatization will never, ever happen. Why? Anyone who has been alive for more than 15 years knows that the federal government takes a nice chunk of your paycheck for FICA, basically Social Security and Medicare/Medicaid, but what they do not know, usually, is that the Social Security portion does not go where you might think. There is no actual account for your Social Security benefits instead you build up credits and your payout is determined by what age you retire. The size of your check will vary some depending how long you have worked and who much you put into the system. This is a very 30,000 foot view.

You receive credits into your Social Security account and not a “cash balance” report because there is no cash actually in your account. Believe it or not the government borrows against Social Security assets all the time and gives you an I.O.U. instead – the Social Security Administration is now cashing in some of those I.O.U.’s because they are now broke. You should know this because it means that if the cash flow into Social Security was ever stopped the whole house of cards would come crashing down. In effect, your entitlement program is the largest Ponzi Scheme in the history of scams. It is for that very reason Social Security will never be privatized because all of the lies would be exposed. But, what if we could privatize it?

Is it a good idea to privatize Social Security? That is a complex question and I am inclined to say yes, but with severe limitations. I do not think it is a great idea to put it into an account with only equities because people do dumb things when equities are involved. In my opinion I believe that using a deferred income annuity product would be the best option or some other type of account that has guarantees attached to it. An income Annuity would give the investor much higher lifetime income than you might think. I am also inclined to believe that insurance companies would create a product that would create a greater stream of lifetime income than what Social Security could ever provide.

However, I think some products should never be considered as an investment option. On my list I believe products that involve higher fees should be excluded such as equity index annuities and variable annuities. I am a believer in Variable annuities, but I feel that the current product fees are too prohibitive to make them a suitable option, a new one would have to be created. I am not a believer in equity index annuities, call me crazy but monthly or daily averaging which intentionally lower the rate of return is not a good idea and then throw on caps, yields or spreads and you have a product that is just not good. I am sure someone will disagree with me about indexed annuities, but that is their opinion and I have not seen a product I actually like. Plus when you exclude the dividends for these products it will drastically underperform the market rate of return. In short, these types of insurance products, which I am sure are valuable, are just too complex for a self directed Social Security account and I do not have faith in the government to choose the best products if they were allowed.

I think a hybrid product with a living benefit, which would payout 5% for as long as the owner lives regardless of account value, might be a decent option. They have a lower cost compared to a variable annuity, but provide similar lifetime income guarantees. These accounts also would mandate an asset allocation model that would have to be adhered to or all guarantees are off. Contrary to belief, asset allocation did work throughout the market crisis. Yes, you took a loss even in a diversified portfolio, but a balanced fund only lost 19% and has a standard deviation of 12.7, not bad.

If this were to happen, privatization of Social Security, it would lead to bad products being created since the government has no sense of what is and what is not a good investment for people. It would also lead to great confusion by investors since many have no idea how any type of guaranteed products work or their drawbacks. There is also the possibility that if/when we have another meltdown in the markets the losses incurred by investors would bankrupt insurance companies or whoever is offering guarantees. It is clear that traditional pension funds have not worked, the taxpayer is already making good on those guarantees, which leads me to believe that any type of equity investment options are simply a bad idea.

The only feasible option for privatizing Social Security would be using a traditional income annuity. The risk is manageable and the returns are predictable as well. However, this is all a moot point because it will never, ever, happen simply because if the government did not receive that income from your paycheck they would fold. While I think some investors would benefit from this the larger population would not and the only real winner would be Wall Street, as usual.

I was excited to see The Hartford had turned the corner to profitability, until I realized that they only had positive earnings if you excluded the losses. I am sorry, but that is accounting profits, not actual profits. Without the losses the firm posted a whopping $1.56 per share, but including the losses the firm lost $.79 per share. Of course, no one is going to look under the hood at the balance sheet in the media, so come with me for a ride at looking at an insurance company’s balance sheet.

First, let’s take a look at this statement about these quarters’ results:

“Impairments were $536 million, pre-tax, in the third quarter of 2009. The majority of impairments were related to potential future credit losses on certain structured securities.

Net unrealized losses on investments were $5.8 billion, pre-tax, as of September 30, 2009, compared with $13.2 billion as of December 31, 2008. The improvement was driven by significant spread tightening across virtually all fixed maturity asset classes in the second and third quarter of 2009, partially offset by the implementation of new impairment accounting guidance.“

So, there is still $5.8B in losses on the books, that will have to be realized because everything is catching a bid nowadays. However, what caught my eye was new impairment accounting guidance. That is the fabled market-to-fantasy land issue that we have all been talking about. What would happen if we did not have that rule in place? I am sure you know that that $5.8B would go way up, but that must be good news, somehow.

The firm did not enjoy prosperous growth across its business lines, its P&C business was down pretty much across the board. Its variable annuity business had significant net outflows, its fixed annuities had less than $1B in net inflows. The mutual fund arm of the firm did have strong inflows of about $2.7B, but it is a low profit margin product. Its group benefits did OK with $4.4B and its individual life has margins of about 4%. Overall, it is not that strong of a report in my view as its core business were way down.

If you actually look at the balance sheet there is simply nothing to really like. Every division, except for the P&C division lost money, but had a credit from previous losses which offset the loss and made it a gain. This is a paper gain, not an actual gain at all. For example, The Hartford had a loss of ($323M) in its core life business, but Less: Net realized capital losses of $822M and what do you know, you have a profit of $499M. I know, I am being picky, why argue with a profit, right? Sorry, but a profit is something you earn, not carry forward credits or offset losses. I am not saying that The Hartford’s earnings are not legitimate, but I am saying it is just accounting.

This type of accounting realized losses were on every line of the earnings statement, which makes me think that the $.79 loss is the only number to go with here. I know we are all looking for good numbers and good news, but accounting profits are just that and not real. What happens when you have no more losses to offset anything or the rules get changed, I hope, back to mark-to-market? The Hartford is a good firm and I know they will be fine, but I do not like this quarter’s earnings at all. I do not own any long or short positions in The Hartford and I encourage you to look for yourself at the earnings report and judge it for yourself.

Here is the earnings report HERE

OK, there are lot’s of things we could say about Mr. Cramer, but you know what I kind of like what he does. Before you get the wrong impression I do think he is dangerous and makes some bad calls, i.e. the housing bottom, but he does get people interested in stocks which is a good thing.

Even though I strongly disagree with most of his views he brought up an interesting idea tonight. He says that the government should issue a 30 year bond paying 5% which he shamelessly called the Cramer Bond. The general idea is interesting, but who would give the government money for 30 years only to receive 5%? Now, he did say make it tax free, but still that is betting that inflation will stay below 5%, which it really has never done.

He says you will double your money after 14 years, plus a few months, and they should be offered directly to the public with no fees. All good ideas, but Jim a product already exists like that.

There is a product that is rated AA that guarantees to double your money in 10 years, without taxes until you withdraw the funds. It is not right for college planning, but it is perfect for retirement planning. Not only that it allows you to participate in the market and you could, potentially, do much better than a simple doubling of your money. You have different investment options and a guaranteed fixed account, sounds better than 5% doesn’t it?

There is a catch, there are fees and you have to buy it through a broker. What is it? It is a variable annuity with living benefits. You can choose a guaranteed minimum account balance option or a guaranteed income benefit, but nonetheless it is better than your proposal. I know it is not as sexy as a high tech stock or some other off the wall investment, but it meets the needs of investors, period.

Say what you will about annuities, there simply is no other investment that can do what they do. Yes, you will take a risk through both investments, but that is mitigated through guarantees, but also the risk of the insurer. However, I feel much better about insurers risk than I do about the massive debt being issued by our government. Not only that, inflation will be an issue so 5% is not good enough.

Good idea, one of your better ones, but as usual you miss the obvious. I cannot wait until I get the tell all book written by one of your employees. Should be an interesting read!

Let’s get this straight, employers cut 467,000 increases for June and the unemployment rate jumps .1%? Now, last month we saw 347K, or so, jobs lost in June and the unemployment rate jumped 4 times what it did today.

I find that odd. How can you have radically different numbers with such a different rate of unemployment? We know the deal, the number is whatever the government wants it to be. Regardless, is this another green shoot or are we going to continue with the “employment is a lagging indicator” BS line?

As stated many times before, and what some people just don’t get, is this is a credit problem, not a liquidity problem. Lehman, Bear they went under because no one would lend them money, not because it wasn’t available. Well, wait it wasn’t available to them because of their credit ratings.

You mix the employment numbers with the piss poor economic data that trickles out and you have weeds, not green shoots. Until unemployment is taken care of then this problem will persist.

On another note, we read Zero Hedge and like them. However, no idea why others are throwing them in the middle of this and am upset that they did not even give us any props for trying to go on the show.

Who are we? One guy has 17 years experience in the investment world as an advisor, as a executive at well known firms and as a person who conducts research. Another is a former investment banker at a well known firm. In other words we are not exactly dummies and some say, never heard of you, no shit sherlock you are day trading options we cover broader economic topics and market conditions and annuities. We stay anonymous because we have other obligations and do NOT care about publicity, we just want out message to get out. Plus, if you look hard enough you will see that Mike is a real person. So whatever.

Thank you Huffington Post!

Why is it that people trust the media so much? While I admit that I am an avid CNBC watcher I simply do not understand why everyone trusts what they have to say. They initially came out blasting Obama, but then all of a sudden they embrace his policies, no matter how destructive they are. I was never a believer in media bias until after the election and the bailouts, which GE Capital subsidiary of GE the parent of CNBC received part of, where handed out.

Political bias aside, the real damage the network does is through its pitch men, Jim Cramer, Larry Kudlow and super dip shit Dennis Kneale. Frankly, they are totally clueless about everything that is going on. Cramer calls the bottom of the housing market, a few days before an announcement of further declines and horrible housing data, he used new permit data and saw what he wanted. Kudlow has continually called a rebound in the economy in the face of continuing horrible data. Finally Kneale called the end of the recession as of Thursday based on two data points.

The truth of the matter is that none of these people understood the real problem which was a credit problem, not a liquidity problem. Credit has not really improved and the consumer is in worse shape than ever. Unemployment is not a lagging indicator for this problem, it is a leading indicator and is going to get much worse. The higher the unemployment rate climbs the greater the credit card, foreclosures and auto loan defaults there will be. That is where the problem lies, not with liquidity.
The Fed is not helping matters by not allowing institutions to fail. While no one wants banks to go under and people to lose their jobs it is imperative for the markets, not government to sort things out. Now we have zombie banks that are still under capitalized and not lending money to consumers. Not to mention, which I find embarrassing, is that 45 banks have failed this year, 45 with a trillion in bailouts! Seriously, how can that happen?

We cannot have a consumer based economy that is massively in debt, both consumers and the government, and expect to be the powerhouse we once were. We need manufacturing to succeed which is exactly why China is such a powerhouse, they produce things while we do not. It is a matter of time, as recent news stories have indicated, before the world will seek a new reserve currency. I am not saying the dollar will be dumped overnight, it could happen, but it won’t, rather we will see foreign banks buy short end treasuries and just let them mature, which is what is happening now.

The massive, inflationary, stimulus package has done nothing to create jobs and will fail to put a dent in the unemployment problem. The Fed’s own whisper number is 11-14% for unemployment by next year and the real irony is that the Obama budget was based off of BS numbers of 3.8% GDP growth and unemployment of 9% or so which means much more deficit spending to come.

The Fed is in a pickle, they need long-term rates lower, but they are at zero now and have spent a ton of money buying government debt in the market already. In other words, the only way that long-term rates can decline is through quantitative easing which is monetizing our debt and devaluing the dollar. They know not what they are doing, but Cramer and Co. embrace Bernanke as a hero, seriously? He got us here and did not see the writing on the walls then, but now he’s a hero?
Regardless, the media has been spinning a recovery for months now, why? Clearly no one wants this thing to get worse, however the markets have gone up which means we are all set and things are fine. That is what Cramer and Co. all say at least. What we are seeing here is not a recovery, but a factor of two things.

1. The market had to go up because it was massively oversold, in the short-term.
2. The dollar weakened significantly which is really, really bad, but a boost to equity prices.

This is merely a dead cat bounce, period and to deny it will prove devastating to your portfolio, in our opinion. It is important for you to realize that we are bullish on the US, but we are disciples of the Mises Austrian School of Economics. Based on the teachings that we embrace we see more trouble with the debt being issued, dollar weakness and governments policies. We do believe that the free markets, which don’t really exist anymore, can correct itself, but cannot be left all on their own and needs regulations.

Now, all of the Cramer and Co. will preach a bull market to make us feel better and deny all that has gone wrong and misdirect you into believing what is false. They parade all bulls and few bears on the air to cheerlead, and that is what they are doing, stocks. They pat themselves on the back for writing books that are after the fact and late to the punch. They chastised Peter Schiff and Roubini on the air before the crisis happened, and they predicted it, and now only give them limited air time because they are telling you the truth – things are not good.

Harry Dent is even predicting another leg down, to 5,500 on the Dow, but he is not given any air time. Now, I can understand why as Dow 30,000 never happened, but in his recent book which was written in March of 2008 he predicted exactly what we have seen. Based on what he said and what we know the Dow and markets will sell off starting in July. We say that you should move into protectionist mode again and dump equities and dollar cost average into the market.

Buy ETF’s and annuities. ETF’s give you liquidity to dump the holdings in the middle of the day or whenever, versus mutual funds which make you hold losses through the day. Annuities give you guarantees which you will find useful in the long-term. Hedge dollars with either foreign currency or precious metals, physical metals are always better than buying tracking ETF’s.
Bottom line, this thing is just getting started so get ready for a hell of a ride. We acknowledge we may be wrong, but we have not been so far.

It has been awhile since there has been a post, sorry. Things have been complex in the annuity and financial services industry as a whole. Not only that, but how many times need you read Annuity posts. Therefore, we are changing our format and moving to a more general blog about the markets, financial services and annuities.

We also wanted to comment on some comments about why we dislike index annuities. Many have said that you cannot hate a product based on higher commissions alone. You are correct. Our point about higher commissions is just on aspect of why we dislike these products. The simple fact is that if the company can afford to pay the agent 8%+ in commissions and then pay a “bonus” to contract holders, a potential outlay of between 16 to 20% of capital by the insurer upfront, it is unreasonable to assume that the product is in the best interest of the consumer. Debate that fact all you want, but that tyope of capital outlay comes with strings, period.

This is why we support Rule 151A which requires index annuities to be regulated by the SEC. Sure the SEC has messed up, but that is with hedge funds and not annuity products, where they have done a decent job of regulating the products. Unfortunately, some greedy congressmen are fighting the new rule citing states rights, etc. However, I am sure they are merely receiving campaign contributions to fight the rule rather than actually trying to understand what and why the SEC wants this power.

Blast away, but the fact is that it is the best possibility for insurers to be honest and the product to actually benefit all parties involved instead of the traditional method of only being really good for the agent and the company. Everyone needs to make a living, but stop screwing the little guy and we will be OK. Here is a hint, take care of your clients and they will take care of you.

I know it has been awhile since we have posted, sorry. The market has been a mess, but as you may have read, we knew that for awhile. We called the temporary bottom and were right, but we did not post that it was going to go lower. However, this latest rally is a bear market rally, so don’t get sucked into long-term buying.

Anyhow, we were watching CNBC on Friday when we got all excited when the Power Lunch crew started talking about annuities. FINALLY, some real air time on these products, so we thought. They brought on 2 “experts” one guy against them and the other for annuities, but they were both dolts.

The guy who was against them had no idea what he was talking about. He kept saying 10% commission, spreads, yields and caps, but, for the love of God, they were talking about variable annuities not equity indexed annuities. We agree on indexed annuities they stink and now they will be regulated like Variable annuities, which is cool. Regardless, the guy who was for annuities never corrected this guy!

So there was a yelling match with the anti-annuity guy winning because he yelled the loudest. Oh, how I wish one of us were there, it would have been a blood bath. To make things worse is this guy was an ex-insurance guy who is now, probably, an RIA which is a joke. People, insurance agents sell insurance and usually know nothing about equities, but they do know how to charge a fee and bad mouth insurance companies.

The point is if the pro-annuity guy mentioned some of the selling points like the guaranteed income base during this really low point in the market it would have been a slam dunk. Especially since this market is going to be tough at best or, at the worst, trade back into the 6,000 range. He did none of that which is a shame because variable annuities are a really good buy right now.

Consider this, it took 25 years after the crash of 1929 for the market to reach a new high. This crash was much worse and will probably take equally as long or longer to hit 14,000. The NASDAQ is a great recent example, it has not even come close to reaching its all time high of 1999 – 2000 and that was 10 years ago now. So, investors lost 50%, at least, of their investments and may never make it back again in the near term at least, right?

Wrong, at least if you use a variable annuity product. Most living benefits have a guaranteed income base that says if you do not take out any money we guarantee the base benefit will double in 10 years. Not bad, especially if the market never recovers, but the anti-annuity crowd will strongly disagree with this. They will say that the internal rate of return is only 2% or some other nonsense like that because it is only an income base that is guaranteed to double, not the account value.

That is true, but it is unlikely that the S&P 500 will double in ten years so would you rather have an income base that is worth twice as much in 10 years or would you rather “save” a few bucks by indexing your money and only have 80% of what you already lost? See, these investments are going to give you income, which is the objective of ALL investments you make today. So, yeah I would take a double on my income base over 80% of what I lost any day, not to mention with the step-ups you will probably way outperform the market since you lock in the gains never the losses – which the anti-annuity crowd never mentions.

The point is that variable annuities make sense and to say that a guaranteed income base is a waste of money is self serving. These guys simply want to charge a fee and guarantee nothing versus an insurance company charging a fee that guarantees income for as long as you live. It is about the facts and most people who bash annuities do not have the facts and the folks at CNBC don’t have a clue, especially that On The Money lady who has zero investment experience, but tells us how to invest? OK, that makes sense.

Oh, and Suze, I told you so, but just watch she will roll out with a new book about recovering your investments or some other rudimentary garbage. Although I must confess, she knows how to market stupidity in a grandiose way.

People, get the facts. I know insurance companies are not the greatest things in the world and I am the first to admit the short comings of any product, but man listen to both sides of the story from someone without an agenda.

The market hit its post 10/10/08 lows and closed on them. The Asian markets are getting creamed in overnight trading and a Canadian hedge fund has to liquidate and close 2 funds. This is the perfect storm for short-term trading.

Based on what we see, by the end of the week, but more than likely tomorrow, we will see a close below 8,000. This takes out the temporary bottom we called on 10/10/08 and there is no bottom until 7,500. However, after the new closing lows that we will see by tomorrow or the next day there should be a spectacular rally.

The rally will fizzle and the markets will then form a longer term sideways trading range, probably between 8,000 and 9,500 or 10,000. The good news is the consistent down days could be over in the next few days. There are so many good buys out there right now it is clear that the market is oversold.

Good luck and see you tomorrow as we discuss the talking heads and variable annuities.

We have seen this before, websites popping up over night saying that they are unbiased and the best place to compare annuities. Well, each site that comes along is a broker driven site which directs you to invest in what they feel is the best product.

What is the problem with that? Many, they could steer you into either the highest paying product, for them, or into a product they think is the best product for you, which is still the best product for them to sell you. This has happened again over the weekend, there were a few before this one actually.

While there is one online site that we have some respect for the rest, we do not. The rundown of the last sites that came out were AnnuityHQ and annuity Professor. Each of these sites copied an existing website and one tried to copy our system, only the ratings none of the actual data.

Well the new site claims to grade the contracts based on the COMDEX rating, surrender charges, sub-account quality – very subjective to personal feelings, expenses and a rider “evaluation”. Here is the problem, we looked at their “Top” picks, which are identical to what AnnuityHQ’s top picks because it is the same people, and there is no reason whatsoever that they should be claiming these products as “the best” in the industry.

It is laughable that sales people rate variable annuity contracts and try and tell you what the best contract is. They are SELLING YOU the annuity, it is that simple. This site did not even touch on real world scenarios, maximum costs or current financial risks, which are very different for mere S&P, Fitch or Moody’s ratings.

You have to be careful with who you are dealing with when buying a product. Especially from a firm that is both selling you a product and rating a product. This site gets the triple stinky award for their effort. Plus, they are dangerously close to a real trademark and copyright suit by not only us, but by another website.

Nope, they have not and they will not understand the benefits of variable annuities. This market which has devastated retirement savings has had nothing that has gone up. Even gold has now declined in value, bonds are a no go, especially corporate bonds and stocks have been horrible.

However, a variable annuity with a living benefit has done something that no other investment has done, guaranteed retirement income without annuitization. All the financial writers in the world tell you to buy index funds and to stay away from those bad variable annuities. If you listened to them you would be sucking wind in the S&P 500 with 24% or more exposure to financial stocks – pre-market meltdown – and another 20% or so in technology which as also suffered badly.

Even with reality hitting them right in the face they still deny variable annuities their rightful place as a good investment alternative. They, the financial guru’s, just don’t get it. They do not understand that the Democrats will more than likely take the Whitehouse and Congress which will ultimately raise taxes, specifically the capital gains tax.

A complete Republican controlled government did not do well, spending went through the roof along with other questionable behavior, what makes them think that Democrats will do any better when they have a much stronger history of raising taxes. Actually Obama is the only political candidate that we have ever known to be, possibly, elected on the premise that he is actually going to raise taxes.

Your political affiliation does not matter, all you need to know is what we have been saying about the 15% capital gains tax is correct, it’s going higher. Regardless of who would have been elected taxes would need to be increased given the massive debt the US has, we just never had such stark honesty from a politician who is advocating higher taxes.

So, income taxes will go up for those “wealthy” Americans, we will see what the term wealthy means after the election, and capital gains taxes will go up. This means that all distributions from mutual funds will be taxed higher and it blows the argument right out of the water for the Suze’s, Liz Pullman’s and Scott Burn’s of the world.

Oh, did we mention your retirement income is also guaranteed?