ProVise Bullets

ProVise Management Group, LLC, an SEC Registered Investment Advisor

PROVISE BULLETS ©

(June 15, 2009)

• When it comes to estate planning, most financial planners go out of their way to make sure clients have all of the basic documents such as Living Trusts, Pour Over Wills, Powers of Attorney, Health Care Surrogate Forms, and Living Wills.  For larger estates, other documents might be needed such as Irrevocable Life Insurance Trusts, Family Limited Partnerships, Charitable Remainder Trusts, etc.  But how many advisors talk to their clients about their “cyber-life”?  What does that have to do with estate planning?  Given the growing financial aspects of the Internet, it could mean a lot.  Who knows the passwords to your bank accounts, brokerage accounts, etc.?  What about Facebook, Twitter, Plaxo, and many others?  Have you left a list of all of your passwords somewhere or with someone?  Do you have a trusted family member who has this list?  Do you have a lockbox or safe at home, or a safety deposit box at the bank with this information?  There are some electronic lockboxes that are also available, and you can name “beneficiaries” to these just like you can do for other assets.  In any event, people who use the Internet on a regular basis and who have password protected accounts, both financial and non-financial, should plan for someone to be able to clean up this part of the estate at death.

• Who would have thought that after 100 years a company as big and powerful as General Motors would find itself in bankruptcy?  There is no use trying to place blame – there’s plenty to go around; management’s, dealers’, consumers’, labor unions’, the government, etc.  This company was once so important to the American economy that in 1953 Charles “Engine Charlie” Wilson, then President of GM said, “What’s good for the country is good for General Motors, and vice versa”.  This was later paraphrased by the Little Abner comic character, General Bullmoose, “What’s good for General Bullmoose is good for the world”.  Throughout the Bullets, we will share some thoughts regarding this monumental event, but we urge everyone to look past the GM situation to the much broader context of what all of this might mean.

The focus has been on the labor unions and the benefits they have extracted over the years.  Their strikes have been precise, have always been crippling, and for the most part have led to significantly higher benefits.  Some of those benefits were a little difficult to fathom - like workers receiving over-time, even though they did not work 40 hours.  The United Auto Worker’s Union (UAW) was once 1.5 million members strong and now  has just below a half a million members.  Its relevance has decreased dramatically over the past 30 years, along with its membership, at least outside of the auto industry.  Today, the union owns 55% of Chrysler and 17.5% of GM, mostly through their retiree health plan.  When you are the majority owner of Chrysler and a significant shareholder in GM, do you go on strike against yourself?

 

In brokering the GM bankruptcy, President Obama got the UAW to agree to a wage freeze and a “no strike” clause until 2015.  Apparently, the UAW figures that by then, the company will either be dead and there won’t be anything to strike against, or it will be back on its feet going strong and they will then have the ability to strike if they chose. 

 

This all gets a little cumbersome because, if the union is unable to come to an agreement with the management that will be selected by the government (the government now owns 60% of GM), the government could actually force the union members to go back to work for a cooling off period.  In other words, a major owner (the union) could strike against management and at the same time, the majority owner could actually force them back to work.

If the union fails to realize that things have changed significantly and they continue to focus only on protecting jobs, we fear that, as time goes along, the profitability (if any) of a new GM will not be nearly as significant as it might have been.  In fact, rather than emerging from bankruptcy as a new company with new opportunities, GM could emerge simply as the old company with a lot of band aids and be so badly wounded that it never has a chance to survive with any type of quality after bankruptcy.  Can you say, “Merger with Ford”?  The big lesson here is that the union, which still plays an important role for many American workers, needs to understand that the world is much different in the 21st century than it was in the 20th century.

From management’s standpoint, a series of missteps over the years led to GM’s slowly shedding long-time automobile lines like Oldsmobile.  They should have seen the “writing on the wall” and reacted decades ago.  Unfortunately, they wanted to keep things as they were, not as they were going to be.  Management certainly shipped a lot of jobs overseas, especially to China, where labor costs were significantly lower.  While the union blames management for abandoning the American worker, and perhaps part of that it true, the fact is that management is beholden to the shareholders and shareholders demand profits.  One of the biggest costs in the assembly of an automobile, even in the age of modernization, is the cost of the labor – particularly those costs associated with taking care of retired workers.  This overwhelming fixed cost per car was simply burying GM and other car manufacturers which caused them to move the work overseas to find the best labor rates.  It sounds like good business practice.  The fact is, many foreign automobile manufacturers were actually moving plants and jobs to the United States at the same time.  How were they able to do this?  They were not saddled by 80 to 100 years of negotiations with labor unions.

At each step along the way, for the most part, management resisted building more fuel efficient vehicles.  Honestly, in many ways, American consumers (except during the times gasoline prices are very high), preferred the big gas guzzlers to the smaller, fuel efficient cars – at least until the last 10 years or so.  GM had a jump start on an electric vehicle and brought out the model in 2000.  Unfortunately, it fell flat on its face.  Rather than scrapping just the car and moving forward with its lofty technological lead, GM decided to scrap the entire concept, opening the door for Toyota to leap ahead with the development of the Prius.  GM hopes that its Volt car, due out late next year or in 2011, can help recapture some of “green” market. 

The list of mistakes made by management throughout the years goes on and on.  Fast forward to 2005 when it became evident to many that GM was in a downward spiral leading to a black hole.  Had it filed for bankruptcy in 2005 when the economy and GM were both much stronger, it might have been able to restructure in such a way that the government would not be such a large shareholder.  Bond holders would not be losing so much, and the impact on the jobs would not have been nearly as great.  Why?  The economy was much stronger in 2005 than it is in 2009.  As a result, a lot of the bad things that eventually played out would likely not have occurred or at least would not have been as severe.  The same could be said going forward.  The lessons for management are numerous, but managing from a point of arrogance never seems to work in the long-run.

In the bankruptcy filing, the government is going to invest $30.1 billion in addition to the almost $20 billion it has already given to GM.  The Ontario and Canadian governments are contributing another $9.5 billion, and will also be shareholders in GM.  GM will likely sell its “good” assets to a new company.  Those “good” assets include the Chevrolet, Cadillac, Buick, and GMC brands and they will likely leave behind the “bad” assets in the bankrupt company.  Assuming GM can come back to profitability and drive its stock price up, the government (and thus taxpayers), as a major stockholder, could see some portion of their investment returned to them.  This is a significant part of President Obama’s long-term plan.  He says he wants to get out of the automobile business quickly.  This is good news because the federal government is not very adept at running efficient businesses.  To the President’s credit, the government intends to hire executives from the public sector to run GM rather than “government officials”.  We shall see how much meddling they do with their 60% stock ownership. 

A couple of years ago GM sold 51% of GMAC, its financing arm.  This hurt GM’s sales efforts, as credit began to tighten.  Rather than having the flexibility to lend money in this tightened market, the new managers of GMAC followed the lead of others and made it very difficult for consumers to get credit.  It has been reported that one in four car buyers have been turned down for credit by GMAC over the past six months.

While we will follow the GM story over the next couple of months, you can expect a lot of books to be written about the downfall of GM and of course, depending upon the point of view of the author, different parties are likely to be named as primarily responsible for the downfall.  As we said, there is plenty of blame to go around and the real question now is whether those competing forces will be able to join forces to build a bright future for the reconstituted GM.

• The GM fiasco has spilled over into other areas like the Dow Jones Industrial Average, which kicked GM out after 83 years.  It is being replaced by Cisco Systems, which certainly gives the Dow a larger technology bent than it had in the past.  At the same time, however, Citigroup was also ousted, replaced by Travelers Insurance Company.  The irony here is that Citigroup had acquired Travelers and was its parent company for a number of years and was spun out several years ago.  Thus, the Dow is swapping one financial company for another.

• Well, it finally happened.  The newest “derivative” is a stock that has been trading on the London Stock Exchange since December and is up 24% since its opening.  The company is Juridica Investments which is managed by a Chicago firm called Juris Capital, which gets its money from two hedge funds.  What do they do?  They invest in lawsuits.  That’s right.  Many plaintiffs don’t have enough money to pursue a lawsuit and as a result attorneys are sometimes reluctant to take on the case without some reasonable opportunity of being paid…enter Juridica Investments.  They will put up the money for lawsuits which they believe will be successful.  You better have a really good case, because in the last year, Juridica made only 17 “investments” of the roughly 120 cases they reviewed.  By putting up the money, Juridica participates in the awards granted should the plaintiff win.  Needless to say, this raises several potential ethical issues, including who the attorneys are really representing.  Nonetheless, it’s simply another way to make an alternative investment.

• It’s the middle of June 2009 – do you know where your $17,000 in federal benefits is?  It is estimated that in 2009 every U.S. household will be receiving $17,000 in benefits from the government.  This could come in the form of Social Security, Medicare, Medicaid, food stamps, unemployment insurance, tax credits, etc.  This is the highest percentage of benefits since 1929, the first year the government even kept records of this type.  When you translate this into actual income, it means that one in every six dollars is coming from the government.  (Source:  USA Today)

• Although HSAs are likely to come under fire this summer as the Senate begins debates on health care reform, it’s good to know that the IRS anticipates an increase in the deductible contributions for 2010.  For family coverage, the contributions will rise to $6,150 and for single plans to $3,050.  People born prior to 1956 will be able to put in an additional $1,000.  In order to qualify for an HSA you must have a high deductible, so the deductibles will increase as well, going to $2,400 for a family plan and $1,200 for a single plan.  Correspondingly, the out of pocket costs will rise, going to $5,950 for single plans, and $11,900 for family plans. 

As always, we encourage you to give us a call if you would like to discuss anything further.  We will visit again soon.

RAY, KIM, ERIC, BRUCE, and LOU

©6/15/09 ProVise Management Group, LLC

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