Dear Everyone,

Hope you had a wonderful and delicious Thanksgiving and I wish you and yours a Happy Holiday Season and a Happy and Healthy New Year. Now here’s my latest contribution. Enjoy.

HOPE SPRINGS ETERNAL

When selecting managers for our clients’ portfolios, philosophically we’re agnostic in the debate between active and passive management. We consider all managers, but we do end up with a heavy passive allocation. There is a good reason; as in the fable of the rabbit versus the turtle, the turtle usually wins. Here are some interesting conclusions from recent research:

• Morningstar studied fund performance through June 30, 2009 and found that only 41% of actively managed funds outperformed their respective indexes for a three-year period. Furthermore, Morningstar noted that "once the Fama/French factors are taken into account (a more sophisticated way of comparing apples-to-apples), active managers' outperformance relative to the indexes falls materially." By the latter measure, average alpha (i.e., risk adjusted “extra” return) was negative in all nine style categories.

• S&P looked back five years and reported that only 31% of large cap core outperformed the S&P 500 Index. Results were even less favorable for non-US markets, where only 13% of international funds and 10% of emerging markets funds outperformed their respective benchmarks. We often hear that non-US stock markets exhibit greater pricing errors than the US, supposedly offering a target-rich environment for clever stock pickers. The numbers suggest this is wishful thinking.

And remember, not all of the managers who beat the market in the prior three to five years will continue to beat the market in the future.

IT’S NICE TO HAVE COMPANY

Given our balance between active and passive managers, I was pleasantly surprised to see in a Kiplinger’s Personal Finance Reader Poll that when asked, “Do you invest in index or actively managed funds,” 6% responded “Index” and, like E&K, 51% responded “Both Kinds.”

DOING BAD WHILE DOING GOOD

Food for thought. If you have children, especially if you live in Florida or Texas, you’re probably hypersensitive about being sure they’re well protected with sun block before venturing onto the beach. The Week reported that a study led by Dr. Michael Melamed, with Albert Einstein Medical College found that 70 percent of children lack sufficient vitamin D, which puts them at risk for a host of ailments. Dr. Melamed said, “We were astounded at how common it was,” and he added, that ladling out the sunscreen "has only compounded the problem."

LOOKING FOR A JOB

If you or, more likely, one of your kids or grandkids is looking for a new job, from the world of

hiring managers via Plan Sponsor, here are a few more unusual strategies reported by hiring

managers:

• Staged a sit-in in the lobby to get a meeting with the director
• Handed out resumes at a stoplight
• Went to the same barber as the Chairman of the Board and had the barber speak on his behalf

DANGER!

More advice for job hunters; think twice before posting questionable items on social networking sites. According to recent Forster Research as reported in Laptop Magazine, 45% of hiring managers check a candidate’s name on social networking sites. Even more sobering, 35% of employers report finding content online that caused them not to hire a candidate.

YOU HAVE COMPANY

Investment News reports that 69% of Americans suffered sleepless nights and insomnia due to anguish over their finances. Let’s hope that was yesterday’s story.

A FOOL AND THEIR MONEY

“Phony Oscar winner ‘fesses up to $4M investment scam.” This recent headline in Investment Advisor left me shaking my head. The article came complete with a beautiful picture of what looked like a real Oscar. It seems that a Mr. Carrington falsely represented to investors that he was a three time (not just once but three times!) Oscar winner for sound effects design. Turns out, there was not a word of truth in his story. He had the “Oscar” prepared by a local jeweler. What happened to $4 million? Among other personal toys, much was spent on cars – a Lamborghini Murcielago (priced at a modest $360,000), a Hummer H2 and a Mercedes SL 500R.

Although I do feel sorry for the duped investors, how hard would it have been to check on the Oscar claims? The lesson to be learned? Avoiding “too good to be true,” and doing minimal due diligence goes a long way.

MAKES ME FEEL GOOD

Registered Rep magazine, a publication directed at brokerage firm advisors published what it referred to as “eye opening” survey.

When asked who should receive the credit (blame) for recent investment troubles they found:

Wall Street                   27%
Government                 20%
Myself                         18%
My Financial Advisor   5%
Media                          4%
My Financial Advisor’s Firm 1%

When asked about the most trusted financial professional for unbiased advice:

Financial Advisor                  30%
Financial Planner                   20%
CPA                                    18%
Personal Banker                   9%
Attorney                               7%
Online Investment Provider   6%
Mutual Fund Advisor            5%
Stockbroker                         4%
Insurance Agent                    1%

NOT SO EASY

Becoming that trusted professional isn’t so easy. The Certified Financial Planner Board of  tandards reported that of the 6,908 candidates who took the most recent comprehensive CFP exam, only 55% passed. That’s why we’re so proud that all of our eligible professionals hold the CFP mark.

OVER THERE

Money managers in the U.S. manage only 41% of the world’s assets. U.K. managers account for  about 11%, French 9%, Germany and Japan 8% each

GOOD NEWS (SORT OF)

At least if you have college age kids. According to Kiplinger’s the average card-holding student now only carries a balance of $3,173.

MORE GOOD NEWS FROM A DIFFERENT SOURCE

I’ve often bemoaned the lack of responsibility that financial services firms exhibit when problems arise but there are wonderful exceptions. An article in Institutional Investor, reflecting on the $64.8 billion in losses suffered by 15,400 victims of the Madoff Ponzi scheme quoted Jorge Errazuriz, a founding partner of the Chilean management firm Ceflin; “These people turned their savings over to us, and we invested their money with a crook like Madoff. Of course we were going to return all of their capital.” I only wish there were more like him.

OUCH!

According to Pensions & Investments, CalPERS, the California state retirement system (with almost $200 billion in total assets), after taking a $1 billion loss on it’s beta overlay (a “sophisticated’ strategy to goose up returns) decided to eliminate it its $5.7 billion hedge fund portfolio.

A NICE ROUND NUMBER

It would be better to work for Goldman than CalPERS. Bloomberg reports that Goldman Sachs Group Inc., is on pace to top 2007’s record $20.12 billion in compensation. Of course not everyone is so sanguine about that good fortune. Ben W. Heineman Jr., a former senior vice president for law and public affairs at General Electric Co. and author of High Performance With High Integrity commented “Surely there are extraordinarily important uses of capital in a capital constrained society that they might consider rather than just paying themselves sums beyond the dreams of avarice.”

LEARN THE PRESIDENTS

Want a clever way to help your children (or you) remember the names of the 44 U.S. presidents. Go to www.fixxy.com/presidents-morphing.htm (i don’t show this link working) and watch their faces morph from George Washington to Barack Obama.

TIME MAGAZINE DON’T LIKE US

At least not those of us who live in South Florida. They don’t like our politicians “… the Miami- Dade County Commission — a feckless, corruption-tainted body…” or our citizens, “Many Americans find it hard to feel sorry for Valladares and all the other Floridians who pay no state income tax.”

After cutting through all of the invectives, the main point of the story is that South Florida is no longer the sunny growth area of the U.S. Miami-Dade, Broward and Palm Beach counties — lost 27,400 residents between 2008 and 2009. Although not a massive number, the news is still sobering as it is the first net outflow in 63 years. "It's difficult for the working middle class to justify living here," Mike Jones, president of the Palm Beach County Economic Council, conceded to the South Florida Sun-Sentinel. "As much as they may love the sunshine, as you squeeze them out, they may find it in their best interests to move."

LOTS OF MONEY

The headlines in Investment News, another trade publication, reported, “Trade groups spend millions to influence Capital Hill agenda.” Addressing the “big buck” lobbying expenses for the second quarter, examples included the $1.25 million spent by the Security Industry and Financial Markets Association (the lobbying organization for major brokerage firms), the $1.23 million on lobbying by the Investment Company Institute (the arm of the mutual fund industry), and the American Council of Life Insurance ($2 million), I wonder how much of that money was directed at protecting the interests of the client?

I NEVER KNEW

Don’t know about you but I didn’t know that there were places to stay other than traditional hotels. Seems there are micro-hotels and pod hotels. Might not be your cup of tea but they may be just the ticket for you kids or grandkids. American Airlines American Way magazine, writing about “Chic and Cheep” accommodations highlighted two New York City examples. The Jane (www.thejanenyc.com) micro-hotel was described as “outfitted with wood paneling and portholesize windows …But luxury hasn’t jumped ship here-witness the high-thread count sheets and flatscreen TV’s.” Not much space but at a price starting at less than $100 in NYC it may be just the answer. If that’s still too expensive, America’s first pod hotel, the Pod Hotel, starts at $489 (www.thepodhotel.com). I’ll bet they’re better than some of the places I stayed when I was in college and visited the Big Apple.

NO WONDER IT’S SUCH A HOT TOPIC

When asked how much you spent on health care last year, respondents to a CNNMoney.com poll found 42% spent between $1,000 and $5,000, 15% between $5,000 and $10,000 and 7% spent over $10,000.

I’M SURPRISED

As I’ve written on numerous occasions, I do not believe that individuals or advisors should be picking individual stocks; that’s the role of the professional money manager. Turns out I’m not nearly as much “on my own” in that belief as I’d expected. A recent Morningstar survey of Broker/Dealer advisors (the commission world) and Registered Investment Advisors (the fee world) found that only 9% of B/D advisors and 6% of RIA advisors allocate to individual equities.

I’M NOT SURPRISED

The same survey found 12% of B/D advisors allocate to variable annuities; only 2% of RIA’s do. I wonder why?

EASY COME EASY GO

Reputations can be fleeting. Business Week publishes its “Best Global Brands” but it also highlights the Biggest losers. Seems financial services won the Loser contest by a landslide with four of the top five from that sector. Heading the list was UBS with a 50% loss in brand value since 2008 followed by Citi (-49%), American Express (-32%) and Morgan Stanley (-26%). The non-financial biggest loser was Harley Davidson. (-43%). The #1 ranked winner was Coca-Cola closely followed by IBM.

BUT THE DOLLARS KEEP ROLLING IN

Seems good sales skills can trump reputation. On Wall Street reports that the 18,444 advisors at Morgan Stanley Smith Barney generate $671,000/advisor (the 15,008 advisors at Merrill generate $813,008/advisor). It’s those kinds of numbers that keep the brokerage firms chasing big roducers (i.e., reps who generate a lot of commissions). As an example, Registered Rep magazine reports that Smith Barney Morgan Stanley recently upped its recruiting bonus for firstquintile producers to 50% of the brokers trailing 12-month business production. For a broker like the one described in the magazine’s ‘Who’s News” section who left JP Morgan Chase to join Morgan Stanley Smith Barney, his $185 million in client assets that generated $2.6 million of annual commissions and fees 1.4%) would translate to a signing bonus of $6,500,000; that’s a nice pay day.

GOOD ADVICE

As I’ve frequently noted, Money Magazine provides useful and actionable suggestions. A good example is a recent article on “Your Parent’s Money” discussing the issue of helping elderly parents with their financial planning. The story had this useful list of “The Documents You Need.”

• An inventory of assets
• A list of debts and regular obligations
• Financial power of attorney
• Health directives
• A will
• HIPAA authorization for family members
• A brief medical history.
  

Having personally faced this issue I can attest to the value of accumulating these documents in advance of their need.

EVEN MORE GOOD ADVICE

In the same issue, Money listed the 5 Things You Need to Know about 529 Plans.

• Your state’s seal of approval means zilch
• And its tax break may be worth about the same
• Instead focus on expenses
• Broker-sold plans may make you pay twice
• Err on the side of conservatism.
  

AND EVEN MORE MORE GOOD ADVICE

My final Money Magazine tid bit is from an article titled “5 Lessons From the Crash,” and this may be the most important advice of all.

• Asset allocation still works-just don’t expect a guarantee. (I wrote an article on this issue recently for Financial Advisor magazine. If you’d like a copy drop a note to Martinaschramm@evenskykatz.com).
• The world is riskier-and will stay that way - Sad to say, I agree.
• Real diversification is harder to achieve than it looks - And getting harder.
• Recognizing a bubble is hard. Hedging against it is harder. - Money writes “The one sure hedge: a healthy dose of cash…” We’re in the process of investigating potential investment hedges but our five-year mantra which is designed to provide that “healthy dose of cash” remains the core of our strategy. If you’re not familiar with our cash flow reserve strategy, again, drop a note to Martina.
• You can’t time the market but you can time yourself. – I couldn’t agree more; rebalance, revisit and reserve.
  

A VERY BIG NUMBER

Ever wonder how much money governments have ponied up to help pull the world out of a recession? Well, according to Reuters, so far it’s around $2.1 trillion. Inflation anyone? Here’s what money managers Payden & Rygel have to say: “We believe that over the short-term (the next 1-3 years) declining commodity prices and the expanding output gap will exert downward pressure on inflation. But in the longer run, the risk is that expanding debt issuance and the monetization of existing debt may be inflationary.” A concern at the top of our “worry” list.

READY FOR A QUIZ?

From Payden & Rygel’s Q4 report

1. What was the first country to use paper money?

A. China;

B Japan;

C. Egypt;

D. Switzerland

2. What was written on the Fugio cent (the official penny authorized by the Continental Congress on April 21, 1787)?

A. In God We Trust;

B. Mind your Business;

C. Liberty;

D. One Hundredth

3. Which country registered the highest monthly inflation rate in the 20th century?

A. Hungry;

B. Egypt;

C. Germany;

D. Argentina

4. Which is the world’s largest coffee producer?

A. Vietnam;

B. Columbia;

C.  Brazil;

D.  Indonesia

Answers at the end

WELL HANDLED

I’m not a smoker although I may light up a cigar once or twice a year, so it’s not surprising that I’m a bit naive on the subject. Still, I’ll bet not even regular puffers realize how much effort goes into the making of a fine cigar. According to American Way magazine when you light up, you’re the 30th person to hold that same cigar. Those many hands include the field workers, packers, rollers, testers and riddlers (whatever that is). It obviously takes LOTS of effort to put that smelly tube in someone’s hands.

DAVID vs. GOLAITH

I’m often reminding investors that in the financial world, the retail client is the David and David’s likely to lose this battle to Goliath. Not because institutions are necessarily smarter but they do have infinitely more resources. I was reminded of that reality when I saw a full page ad in Information Week magazine (published for technology experts) with the heading “Ask Vanguard how you can achieve the IT career you’ve always wanted.” The ad went on to say “We invest heavily in IT talent and innovation, so we can deliver the best products…” I’ll bet their investment technology is more than most retail investors can afford. Our solution, focus on the policy and hire the Goliaths to implement.

THE REAL MEANING OF “ENTREPRENEUR”

This has been a tough year for everyone but it hit small business particularly hard. Forbes Small Business reports that 94% of small businesses are concerned about saving money, 51% saw their revenue decrease, 55% say their costs went up and 47% said they haven’t paid themselves this year.

DOIN’ GOOD WHILE DOIN’ GOOD

You can get a free 1-day pass to a Disney theme park, if you're willing to do some volunteer work. Disney is offering a free day's admission to 1 million people who complete a day of certified volunteer work in 2010. Volunteers must register online with Disney and must be residents of the U.S., Canada or Puerto Rico. For more information, visit www.handsonnetwork.org.

HISTORY LESSON

Flying so much gives me a great chance to learn new stuff. For example, from the Delta Sky magazine I learned that the Bloody Mary (originally named the Red Snapper) was originated in October 1934 by Ferdinand Petiot, the bartender at the St. Regis in New York.

SAFE, MAYBE NOT

An excellent table in Walter Updegrave’s always excellent Money Magazine column helps remind investors that bonds have risk too. Based on a bond’s sensitivity to interest rates (called duration) here’s how an investor might fare if rates rise 1 or 2%.

MADE ME DIZZY

Years ago, driving in the U.K. (on the “wrong” side of the road), I was introduced to “roundabouts” those intersections with a big traffic circle in the middle. I was mightily intimidated. Getting onto the circle was no sweat but getting off was a different story. I probably went around our or five times before I had the nerve to enter back into the flow. Well, according to a recent Readers Digest article, I may have to get used to them. It seems the average U.S. driver spends 36 hours a year stuck in traffic and roundabouts can both speed up traffic and reduce accidents.

Also, turns out grid lock is not so new. Over 2000 years ago, the poet Juvenal complained about “bottlenecks” of carts in Rome, in 1720 the mayor of London decreed that traffic over the London bridge had to drive on the left side to ease the flow of traffic and in 1879 carriages, horses and handcarts brought New York’s Broadway to a halt for five hours in our first national traffic jam. It’s also not local. In 2008 there was a traffic jam as spacecraft waited to land and lift off at the International Space Station.

TRASH TALK

How much of our trash is recyclable: 80%; How much of our trash do we recycle: 33%. Sixty days - the average time it takes for a can to be recycled and placed back on the store shelf

Who’s tossing out the most (and least) junk worldwide (pounds per capita)?

At the high end, Ireland and Norway tie at 1,764 closely followed by the U.S. at 1,672. In the
middle is Japan at 913 and Mexico at 759. The Chinese seem relatively trashless at 253.

A GRADE THAT CAN AFFECT YOUR WALLET

You’ve probably heard of the FICO score but if you’re like me, it’s mostly a mystery. Unfortunately, it’s also an important determinant of how much you’ll pay for everything from a mortgage to a car loan. Here’s the low down.

35% is based on your Payment History; e.g., when you last made a late payment; how often are you late and for how long?
30% is your outstanding debt; generally the higher the debt, the lower the score
15% is the length of your credit history? Missing a payment on a new debt is worse that missing on a debt you’ve had in place for a decade.
10% is each for new credit (contemporaneous multiple credit requests is a negative) and types of credit (e.g., credit from a national bank provides more brownie points than credit from a local department store).

How much a difference do ratings make? From the FICO web site, here are the current differences in a 30-year fixed mortgage:

FICO Score   APR
760-850         4.560%
680-699         4.959%
620-639         6.149%

You can find more detail at http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

COMING SOON

Business Week says that “Panasonic puts its chips on 3D TV.” Sometime next year the company plans to introduce 3D sets. There are a few others in this sandbox but Panasonic has a deal with 20th Century Fox to promote Avatar, a highly hyped 3D movie due out soon.

A ROUND OF GOLF ANYONE?

A new course in Australia’s Outback sports a 50 mile drive (at least according to The Week magazine). Of course that’s not too hard when you have an 850 mile course to work with. The 71 par course takes three or four days to complete (i.e., if you don’t lose too many balls in wombat holes).

BE VERY VERY CAREFUL

This is from my friend’s IOWA Savings Bank Newsletter, the source of the idea for my newsletter.

“When a charity files for bankruptcy protection, your clients with accounts there will be shocked and harmed. Those with charitable gift annuities, charitable remainder trusts may not get their checks. Donor advised fund balances will be listed as assets of the charity available to satisfy creditor claims. All in all, it is essential to be satisfied from the beginning that the charity selected is reputable, financially strong, and going to be there for your client. Due diligence is required. Some readers of this newsletter undoubtedly represent individuals who placed money with the now bankrupt National Heritage Foundation --- ugly, ugly mess.”

GRACIAS MIAMI!

This one is from American’s in flight magazine. In the late 80’s, a delegation from the Greater Miami Chamber of Commerce visited American Airlines headquarters in Texas. Before 1979 they had never even served the city and a decade later, the operation was still quite small. The Miami delegation made a convincing case, so within a short time; we embarked on our most ambitious route expansion ever. In 1990 American Airlines launched service to 21 new cities in 15 Latin American countries. Today, AA connects Miami to 124 destinations around the world, including 7 in Latin America, two in Mexico, 23 in the Caribbean. Since this fall AA operates 276 daily flights. rom fewer than 300 employees 20 years ago, they now employ 9,000 in the area. Now if they can only get the people mover working so I don’t have to walk a mile or so to my gate I’ll join in the racias.

GO FIRST CLASS

One of the more interesting newsletters I receive is First Class Flyer. It’s directed at frequent flyers and provides monthly tips on how to beat the system. A recent article explained that if you’ve missed the advance-purchase discount of seven days, you should consider looking at First Class Fares, as there might be a surprise waiting there. As an example, an American Airlines first class Dallas – Philadelphia round-trip cost $1,198, while a no-advance economy ticket costs even more $1,258. Or a United first class round-trip from Chicago to Charlotte costs $804 only $40 more than a no-advance economy ticket.

99% ACCURACY

Jason Zweig writes the always worth reading Intelligent Investor column for the Wall Street Journal. His recent contribution on Data Mining is a good example. In it he quotes from a new book “Nerds on Wall Street”, by the veteran quantitative money manager David Leinweber, who dissects the shoddy thinking that underlies most technical timing strategies. For example, considered the annual butter production in Bangladesh and found that over a 13-year period, he this statistic “explained” 75% of the variation in the annual returns of the Standard & Poor’s 500 stock index. Not satisfied with such a poor probability he added in U.S. cheese production and the total population of sheep in both Bangladesh and the U.S., and was able to improve his predictive ability (in hindsight) up to 99% accuracy. “But the entire exercise, he says, is a total crock. The first rule for keeping yourself from falling into a data mine: The results have to make sense. ‘A distressing number of people don’t get that this was a joke’, Mr. Leinweber sighs. Don’t let the joke be on you.”

WHAT’S NEXT?

The Journal looked into the future and found five technologies that, if successful, could radically change the world energy picture.

Space Based Solar Power - Sunlight is reflected off giant orbiting mirrors to an array of photovoltaic cells; the light is converted to electricity then changed into microwaves, which are beamed to earth.

Advanced Car Batteries – In a lithium-air battery, oxygen flows through a porous carbon cathode and combines with lithium ions from a lithium- metal anode in the presence of an electrolyte, producing an electric charge.

Carbon Capture and Storage – Carbon Dioxide is removed from smokestack gases and compressed. It’s then pumped deep under ground and stored in porous rock formations.

Utility Storage – Battery packs located close to customers can store electricity from renewable wind or solar sources and supply power when the sun isn’t shining or the wind isn’t blowing.

Next Generation Biofuels – Algae grow by taking in CO2, solar energy and other nutrients. They
produce oil that can be extracted and added into existing refining plants.

WANT TO SOUND SAGE?

In addition to jokes, Readers Digest is also a treasure trove of pithy quotes; for example:

I have found the best way to give advice to your children is to find out what they want and then advise them to do it. – Harry Truman

Old people like to give good advice, as a consolation for the fact that they can no longer set bad examples. – Francois de La Rochefouclaud

Socrates was a Greek philosopher who went around giving people good advice. They poisoned him. – Anonymous

If stock market experts were so expert, they would be buying stock, not selling advice. – Norman Augustine

ANSWERS – HOW’D YOU DO?

1. In ancient China, coins were often strung together on a rope. Rich merchants found that their strings of coins were too heavy to carry around and, as a result, began to leave their coins with a person they deemed trustworthy. The promissory notes they received in return became the basis for paper money.

2. The coin was reportedly designed by Ben Franklin, who put at its bottom the message “Mind Your Business” as a reminder to its holders.

3. In July 1946 Hungry had an inflation rate of 1.3*1016%, meaning prices doubled every 15 hours. By contrast, Germany only faced a 29,500% monthly inflation in October 1923.

4. Brazil produces nearly one third of the world’s coffee supply. That’s all for now. Hope you enjoyed this edition.

If my NewsLetter is new to you and you’d like to see a copy of the first edition that explained its concept, drop a note or call Martina at martinaschramm@evensky.katz.com or 305 448-8882 # 235. Again, Happy Holiday Season and a Happy and Healthy New Year. And, to ensure a prosperous New Year, don’t forget to have at least a spoonful of black eye peas and a bite of cabbage New Years Eve.

P.S. I’m often asked if I mind your passing on my NewsLetter to friends or associates. The answer is not only do I not mind; I consider it a great compliment. If they would like to be on the mailing list, just have them send a request to martinaschramm@evenskykatz.com.

Cordially yours,

Herald Evensky, CFP®

President

(c) Evensky & Katz

www.evenskykatz.com