• Briefly Noted
  • Briefly Noted

    Are the Markets Bad for Your Heart?

    Preliminary data suggests there might be a correlation between stock market declines and heart attacks.

    Researchers from Duke University Medical Center studied the relationship between the recent bear market and an increase in the incidence of heart attacks. Using data for the period of January 2008 through July 2009, the researchers found a trend between declining stock prices and an increased number of heart attacks. However, once the data was adjusted to account for seasonality (more heart attacks occur during the winter), the trend was less clear.

    Mona Fiuzat, PharmD, a researcher at Duke and the study’s lead investigator, opined, “We can’t say definitively that there is an association. There is the possibility that there is no relationship.”

    Others think the Duke researchers may be onto something. Dr. James McClurken, chairman of the American College of Cardiology’s annual conference—where the results were released—told the Associated Press that he thought the initial findings (which were not adjusted for seasonal factors) may have “merit.”

    The takeaway for investors is to avoid taking on more risk than they are emotionally or financially able to handle.

    Source: DukeHealth.org

    Changes to Proxy Voting

    Effective at the start of this year, the Securities and Exchange Commission (SEC) changed the rules for how brokers can vote in shareholder elections on behalf of their clients.

    Previously, brokers had the option to vote for non-routine matters, such as the election of directors, in shareholder elections on behalf of their clients without first asking for input or direction about the issues on the ballot. Now, brokers no longer have this discretion. In other words, they cannot vote their clients’ shares without first receiving instructions on how the shares should be voted. This is a key change that means shareholders must take an active role if they want their shares voted.

    The new rules do not apply to a client’s mutual fund or certain closed-end fund holdings. Instead, brokers will retain discretion to vote uninstructed shares in company director elections for such holdings. If you do not want your broker to have this discretion, you can request that they not vote any shares without specific instructions from you.

    For more information on proxy voting, see this issue’s Investor Professor column on page 27.

    Source: SEC.gov

    The Lack of an Estate Tax

    At press time (mid-March), there continues to be no estate tax for 2010. Arizona Republican Senator Jon Kyl and Arkansas Democratic Senator Blanche Lincoln have proposed implementing a 35% tax rate with a $10 million per couple exemption. It is unclear what action, if any, Congress will take.

    The lapse in the estate tax is due to a sunset clause in the 2001 Tax Act. If nothing is done, no estate tax will be charged this year, but next year, a top tax rate of 55% with a $1 million exemption will go into effect.

    A bigger problem may not be the threat of a high tax rate next year, but a legal void that exists this year. Many wills mandate that assets be distributed based on the existence of an estate tax. Some wills request that the largest amount of assets that can be transferred without triggering taxes be bequeathed to the deceased’s children. Others state that the descendants can receive an amount equal to the exemption.

    Since there is no exemption this year, the will could be interpreted as bequeathing either all assets or no assets to the deceased’s children. Obviously, the potential for lawsuits is huge.

    There are also other complications. The value of inherited property is not “stepped-up” as long as there is no estate tax. Heirs must use the original price paid for an asset when they sell it, rather than the value upon the owner’s death or the stepped-up value. The generation-skipping tax (GST) has also been repealed.

    Some state legislatures are moving to fill the legal void by establishing estate taxes that would be valid until new federal laws are put into place. Though conventional wisdom suggests new laws would be retroactive to January 1, 2010, there is no timetable or guarantee that such laws will be passed.

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    Given the legal lapse, members should consult with their estate attorneys to ensure their wishes will be carried out as they intend them to be. Many financial advisors also suggest that individuals who have inherited assets this year set aside an appropriate amount to cover any estate taxes that may be reinstated later this year.

    Corporate Pensions Remain Underfunded

    Though corporate pension plans have benefited from the rebounding stock market, they remain underfunded.
    According to BNY Mellon Asset Management, the funding status of the typical U.S. corporate pension was 85.3% in February, a 1.6 percentage point increase from January. If pensions were fully funded, or close to that level, the percentage would be at or near 100%.

    A drop in funding status due to a bear market is not cause for immediate concern, but if funding remains below adequate levels, problems can develop. The reason is that a pension is a defined-benefit plan: The corporation has agreed to provide retirees a certain level of benefits. If the pension lacks adequate funds, cash will need to be drained from the balance sheet or the company will need to sell additional shares or debt. In addition, earnings will be hurt as the company will be forced to record an additional pension expense.

    Keep in mind that pension liabilities are calculated on an actuarial base and any variance in future market returns and/or lifespans of plan participants can alter the actual contribution required by the company. Investors can find information about a company’s pension liabilities in the annual financial report (filed with the SEC as Form 10-K) or in the exhibits accompanying the report.

    Lower Commissions: A Good Deal?

    The cost of trading got cheaper this year. Charles Schwab cut their flat-fee commission for online stock trades to $8.95, an approximate 30% reduction. Fidelity responded by cutting its fee to $7.95 per stock trade. (Previously, Fidelity had charged between $8.00 and $19.95 per trade.) E*Trade joined in, lowering fees for investors to $9.99 per trade, a $3 reduction. (Active traders qualify for $7.99 per trade pricing.)

    It is not just stock trades that have gotten cheaper. Some brokerage firms, such as Fidelity and Schwab, waive the commissions on certain exchange-traded funds (ETFs). TD Ameritrade and others offer no-fee trades on select mutual funds.

    On the surface, these price cuts sound great. However, nothing on Wall Street comes for free. In the case of the stock commissions, brokerage firms are hoping for both more clients and a higher volume of trades. As far as the mutual funds and the ETFs are concerned, there is likely a financial incentive for the broker to offer free trades on certain funds.

    This is not to say the reduced costs are a bad thing. We favor lower brokerage fees, since every dollar saved is a dollar in your pocket. However, just because a trading commission is reduced does not mean you should trade more. Active trading can result in both a higher total amount spent on commissions and a greater tax liability, both of which would offset the initial savings. Furthermore, bid-ask spreads (the difference between the bid and offer prices) can significantly add to the cost of trading and are expenses incurred separate from the commission fee.

    For ETFs and mutual funds, you should apply the same level of scrutiny to commission-free funds as you would to funds that are not commission free. The $49.99 charged by TD Ameritrade to trade some funds can easily be overcome by buying a fund that generates even a slightly better annual return than one that is commission-free. Also, the expense ratios of commission-free funds may be higher than those that are not commission free.

    If you are considering changing brokers to take advantage of the new lower commissions, you may want to subscribe to Computerized Investing. The latest issue provides a complimentary in-depth comparison of the five online brokerage firms most used by AAII members.


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