Sunday, February 28, 2010

Insider Buying: Bullish Signal For the Stock Market?

I thought this note from this morning's New York Times was interesting.

Peter Lynch - the great Fidelity stock manager - used to say that insiders would sell for lots of reasons (estate planning, taxes, etc.) but they would buy for only one reason (because they thought their company's stock was undervalued).

This article would suggest that he was on to something:

February 28, 2010

More Often Than Not, the Insiders Get It Right

CORPORATE insiders are sending fairly positive signals about the market.

When stocks began to fall in mid-January, insiders cut back on sales of their companies’ shares and increased their purchases, according to David Coleman, editor of the Vickers Weekly Insider Report.

That adds up to at least a “neutral” stance, he wrote to clients, and implies that the recent decline won’t turn into a full-blown bear market.

But, as a market indicator, how reliable are the sell-and-buy decisions of insiders like corporate officers, directors and big shareholders?

While these insiders have a long history of correctly anticipating the market’s direction, they haven’t done all that well in the last few years. As a group, insiders failed to recognize the top of the bull market in October 2007, and didn’t anticipate the depth of the decline that followed.

After these missteps, have insiders’ trades outlived their usefulness as a basis for market timing?

Probably not, says H. Nejat Seyhun, a finance professor at the Stephen M. Ross School of Business at the University of Michigan, who has studied the behavior of corporate insiders for many years. In an interview, Professor Seyhun said that insiders were not infallible, and that their recent failures were hardly their first misreading of the market’s direction.

But since 1975, the earliest year he has studied, insiders have been correct far more often than they’ve been wrong, and this is still likely to be the case, he said.

And there is no evidence, he added, that insiders have lost their ability to tell when their own companies’ stocks are undervalued. In the late 1970s and early ’80s, for example, he found that the average stock bought by an insider outperformed the overall market by three percentage points in the 50 days after the purchase.

For the most recent 10-year period in his sample, through 2008, the comparable 50-day advantage for the insiders was 3.3 percentage points. That’s striking because it includes the bulk of the 2007-9 bear market.

Given the variability of the year-by-year results, Professor Seyhun cautions that it’s not clear whether insider purchases are more profitable today than they were 30 years ago. But, he argues, his results show that insiders by no means are losing their touch.

Though the professor’s analysis extends only through 2008, data collected by the Vickers Weekly Insider Report show that even though the insiders missed the bear market, they can nevertheless take credit for anticipating the market rebound that began a year ago. Leading up to the market’s low in March 2009, for example, insiders as a group behaved more bullishly than they had in more than a decade.

Consider an indicator that Vickers calculates each week, representing the ratio of the number of shares that insiders sold over the previous eight weeks to the number they bought. That ratio dropped to as low as 0.45 to 1 in the weeks just before the bear market ended. That was the ratio’s lowest level since December 1990, at the beginning of the great ’90s bull market.

The more recent low, of course, was followed by a 10-month rally in which the Standard & Poor’s 500-stock index gained some 70 percent.

By November, in contrast, this sell-to-buy ratio had risen as high as 5.21 to 1, according to Vickers, more than double its long-term average of around 2.5 to 1. That signaled to Mr. Coleman that the market was vulnerable to a decline — and, indeed, the market did start to fall in mid-January. At its lowest point, the S.& P. 500 was down nearly 9 percent from the mid-January high.

But in recent weeks, insiders have been cutting back on sales and increasing their purchases. As a result, the sell-to-buy ratio has fallen back to 3.52 to 1, according to Vickers.

Though that is still higher than the long-term average, the trend suggests to Mr. Coleman that the recent downturn is likely to be “only a near-term correction.” He said that his firm was “increasingly optimistic about the future performance of the overall markets.”

Had the sell-to-buy ratio increased in the wake of the market’s pullback, Professor Seyhun added, we would have had reason for worry. It would have meant that insiders had no confidence that their shares would be recovering anytime soon, he said.

“Fortunately, and at least for now,” he said, “insiders are not exhibiting such eagerness” to sell.

Health Care Costs

This morning's Boston Globe carried the first of a two-part series on the horrendous effect that rising health care costs are having on municipal budgets.

What a mess!

What really caught my eye was the chart accompanying the article. Just look at how high a percentage of total budgets that health care costs comprise in municipalities across the state.

No wonder everyone is unhappy - tax rates keep going up, but services are being reduced, due to promises made years ago.

Special report

Runaway health costs are rocking municipal budgets

But there’s no will or willingness to roll back benefits granted in palmier times

By Sean P. Murphy Globe Staff / February 28, 2010

Elizabeth Debski spent eight years as Everett’s city planner, before losing her job in 2006 when a newly elected mayor installed his own team.

But Debski did not leave City Hall empty-handed. In addition to her pension, Debski, at 42, walked away with city-subsidized health care insurance for life. If she lives into her 80s, as actuarial charts predict, taxpayers could pay more than $1 million in all for her family’s health care benefits.

That’s not to say Debski manipulated the system. She simply took what she was owed under a municipal health care system whose generous benefits and colossal inefficiencies are crippling cities and towns across Massachusetts.

A six-month review by the Globe found that municipal health plans, which cover employees, retirees, and elected officials, provide benefit levels largely unheard of in the private sector. Copays are much lower. Some communities do not force retirees onto Medicare at age 65. Many citizens on elected boards - some after serving as few as six years - receive coverage for life, too.

As medical costs across the board rose over the past decade, municipal health care expenses exploded, draining local budgets and forcing major cuts in services, higher property tax bills, and billions in new debt.

“It has got to be dealt with,’’ said Richard Fortucci , the chief financial officer in Lynn. “Or we will all go bankrupt.’’

The cost of municipal health care more than doubled from fiscal 2001 to 2008, adding more than $1 billion in all to city and town budgets, according to state Department of Revenue data. A Globe survey of 25 communities found that they now devote, on average, 14 percent of their budgets to health care, up from 8 percent a decade ago. Somerville, for one, spends $20 million more annually than it did 10 years ago, now devoting almost 20 percent of its budget to health care.

So far, with powerful labor unions resistant to giving away hard-won benefits and a lack of political will in the state Legislature to force changes, efforts to overhaul the system have fallen short.

To be sure, many municipal employees, elected officials, and retirees are paying a greater percentage of their health premiums than ever. Still, almost all of the increase in municipal health care costs in the past 10 years has been shouldered by taxpayers, who are subsidizing plans that are often superior to their own.

Saturday, February 27, 2010

Interesting Article on Choices

Whenever I go on vacation with my family, one of the most "stressful" times of the day always seems to revolve around where to eat dinner. This seems odd, I know, since the whole point of going on vacation is to enjoy a break from a regular routine, and try a variety of different dining experiences - but there it is.

Turns out that behavioral scientists have been studying this phenomena for some time. There was an article about this in this morning's New York Times; I've excerpted a couple parts, but the full link can be found below:

February 27, 2010

Too Many Choices: A Problem That Can Paralyze

TAKE my younger son to an ice cream parlor or restaurant if you really want to torture him. He has to make a choice, and that’s one thing he hates. Would chocolate chip or coffee chunk ice cream be better? The cheeseburger or the turkey wrap? His fear, he says, is that whatever he selects, the other option would have been better.

Gabriel is not alone in his agony. Although it has long been the common wisdom in our country that there is no such thing as too many choices, as psychologists and economists study the issue, they are concluding that an overload of options may actually paralyze people or push them into decisions that are against their own best interest.


Research also shows that an excess of choices often leads us to be less, not more, satisfied once we actually decide. There’s often that nagging feeling we could have done better.

Understanding how we choose could guide employers and policy makers in helping us make better decisions. For example, most of us know that it’s a wise decision to save in a 401(k). But studies have shown that if more fund options are offered, fewer people participate. And the highest participation rates are among those employees who are automatically enrolled in their company’s 401(k)’s unless they actively choose not to.

This is a case where offering a default option of opting in, rather than opting out... doesn’t take away choice but guides us to make better ones, according to Richard H. Thaler, an economics professor at the Booth School of Business at the University of Chicago, and Cass R. Sunstein, a professor at Chicago’s law school, who are the authors of “Nudge: Improving Decisions About Health, Wealth and Happiness” (Yale University Press, 2008).


..... one way to tackle the choice problem is to become more comfortable with the idea of “good enough,” said Barry Schwartz, a professor of psychology at Swarthmore College and author of “The Paradox of Choice” (Ecco, 2003).

Seeking the perfect choice, even in big decisions like colleges, “is a recipe for misery,” Professor Schwartz said.

This concept may even extend to, yes, marriage. Lori Gottlieb is the author of “Marry Him: The Case for Settling for Mr. Good Enough” (Dutton Adult, 2010). Too many women — her book focused on women — “think I have to pick just the right one. Instead of wondering, ‘Am I happy?’ they wonder, ‘Is this the best I can do?’ ”

And even though we now have the capacity, via the Internet, to research choices endlessly, it doesn’t mean we should. When looking, for example, for a new camera or a hotel, Professor Schwartz said, limit yourself to three Web sites. As Mr. Scheibehenne said: “It is not clear that more choice gives you more freedom. It could decrease our freedom if we spend so much time trying to make choices.”

529 Plans

Even though I have two children - and one who is already in college - I have always been a little wary of 529 plans.

I have several concerns:

First, the cost of many plans is pretty high (sometimes well north of 1%);

Second, the investment choices often are limited;

And, third (and most importantly), there is not necessarily a guarantee that the funds will actually be available when needed. What if the market is down at the time money is needed for a tuition payment? For example, what if a parent needed funds in early 2009, when the market was off more than 50% from the levels in the fall of 2007?

None of these concerns, by the way, are necessarily fatal. I have several clients who have put money aside for young grandchildren in Vanguard 529 plans (my preferred provider due to their low costs). If you have a long enough time period (more than 10 years) it seems like a pretty good bet that a gift today will offer considerably more money a decade from now.

Today's Wall Street Journal had a column about 529 plans that indicated that I am not alone in my concerns (I have edited the article; full link is below):

'529' Plans: Why So Many Flunk Out

After posting dismal results during the market downturn, operators of "529" college-savings plans have been cutting expenses and adding lower-risk investment choices in hopes of making their plans more attractive.

The changes are welcome. But they only go so far to improve a savings option that seems to have promised more than it delivers.

[GETGO] Mark Matcho

Inherently, saving for college is challenging because we only have a fixed number of years before the bill is due. So no matter how disciplined we are, timing and luck will play a big role. But that often is ignored by investment firms and state and federal policy makers, who have pushed 529 plans as the answer to soaring tuition costs.

Investors use after-tax dollars to fund 529 accounts, which typically offer a range of funds and other products. Distributions and earnings are tax-free, as long as they're used for higher education.

Here are some common sales promises about the plans—and the starker reality:

529s are a simple way to save for college.

Hardly. Every state offers its own plan, and many offer multiple plans. Within each plan, you may have more than a dozen different investment combinations to choose from, including conservative, aggressive and moderate options that vary widely based on your child's age. Altogether, says Joe Hurley of, there are more than 3,000 possible investment options.

The tax breaks on 529 plans are lucrative.

True, you won't pay federal taxes on investment gains if the money is used for college expenses—but that is a meaningful benefit only if you have meaningful gains. People who invested their 529 money in stocks in the last two or three years may still have losses right now and wouldn't owe taxes anyway. And with a top capital-gains tax rate of 15%, you need to record impressive gains for your tax savings to be significant.

529s are a good fit for everyone.

The longer you wait to save for tuition, the less valuable stock and bond funds are. If you start socking away money regularly before your child is out of diapers, you will have 15 to 20 years to weather the natural volatility of markets and build up decent savings.

But if you start when your child is 12 or older, you have little time to recover from a bad stock market—and we have seen a few lately.

529s are the best college savings option.

Arguably, the best way to save for college is to set aside money regularly, starting as soon as possible, and to mix up your investments. If you plan to save a lot, a 529 plan should be part of the mix. But since it is fairly inflexible—-you can only change your investment choices once a year, for instance—you also may want to buy some municipal bonds, designate some of your regular investments for tuition and keep a college savings account.

Friday, February 26, 2010

I'm Not Sure How I Feel About This...

...but it does seem to be something that is getting a lot of press.

From today's New York Times:

Branding and the 'Me' Economy

CAMBRIDGE, MASSACHUSETTS — For Benjamin Franklin, it was “early to bed and early to rise.” For Dale Carnegie, it was the dictate “to do and dare.” For Stephen Covey, it was seven simple habits.

The gospel of self-improvement has taken varied forms throughout history and is perhaps America’s most successful export. But in the digital age, the idea of improving yourself is under siege by a similar-seeming but utterly different gospel: that of self-branding.

The Internet-connected class worldwide faces growing pressure to cultivate a personal brand. Ordinary people are now told to acquire what once only companies and celebrities required: online “findability,” thousands of Google hits and Twitter followers, a niche of their own, a virtual network of patrons, a personal Wikipedia page and dot-com domain.

“The Internet has forced everyone in the world to become a marketer,” said Dan Schawbel, a personal-branding guru and the author of “Me 2.0: Build a Powerful Brand to Achieve Career Success.” (Mr. Schawbel, 26, has more than 100,000 Google listings for his name, 70,000 Twitter followers and a self-styled niche as the “personal branding expert for Gen-Y.”)

The rise of the personal brand reflects changing economic structures, as secure lifetime employment gives way to a churning market in tasks. It suggests a new unscriptedness in institutions as we evolve from the broadcast age to the age of retweets. It augurs a future in which we all function like one-person conglomerates, calculating how every action affects our positioning.

The personal-branding field traces its origins to the 1997 essay “The Brand Called You,” by the management expert Tom Peters. But only with the rise of easy-to-use social-media tools has one-person brand management become practical. Columbia University and other institutions now teach it; training firms peddle it in India and China; Microsoft has sought to bring its precepts to the poor; PricewaterhouseCoopers this week announced a Personal Brand Week, providing free online tips for college students.

What distinguishes personal branding from other self-cultivation is its emphasis on reputation over talent, on “explicit self-packaging,” as the scholars Daniel Lair, Katie Sullivan and George Cheney have observed: “Here, success is not determined by individuals’ internal sets of skills, motivations, and interests but, rather, by how effectively they are arranged, crystallized, and labeled.”

As personal-branding experts see it, they are merely responding to new economic realities. It is no longer enough, they say, to join an organization and ride its brand for decades. Companies are outsourcing aggressively; globalization is creating and destroying industries more rapidly than before; the Web is fostering job-hopping; the recession is throwing millions on the street.

In this new world, personal branders argue, self-packaging rules.

Think You Want to be a Hedge Fund Manager?

Steven Cohen is one of the largest hedge fund managers in the world. SAC Capital is widely known in the industry not only for its terrific returns but also its rapid-fire trading style.

If memory serves, it used to be that SAC represented 2% of the total volume of shares traded on the New York Stock Exchange.

The financial rewards of working at a hedge fund can be, of course, unbelievable, but the pressure can also be enormous.

There was a recent article in Bloomberg on Cohen and his investing operation. I have included a link to the entire article below, but I thought I would show an excerpt from the piece about what its like working at SAC:

Cohen, who lives on a 14-acre (6-hectare) estate in Greenwich, Connecticut, which he bought for $14.8 million in 1998, allowed a reporter to visit his offices in Stamford. He declined to comment for this article.

Though Cohen attends more golf and other outings than he once did, most days the balding, blue-eyed, stocky investment manager does what he knows best: He trades. He has a perch in the middle of the Stamford floor, and his bets account for about 10 percent of profits -- down from more than 50 percent 10 years ago.

He doesn’t like noise, so the phones on the floor don’t ring; they light up. He prefers jeans and sweaters to suits and looks more like a tax accountant on casual Friday than a trading titan running a $12 billion hedge fund firm.

Picasso to Warhol

Near the trading floor hang pieces from Cohen’s extensive art collection, which includes works by Vincent Van Gogh, Pablo Picasso and Andy Warhol.

Cohen maintains the temperature on the trading floor at 69 degrees Fahrenheit (21 degrees Celsius) to make sure no one dozes. If a portfolio manager or analyst can’t answer a question about a stock, Cohen is likely to lash out. “Do you even know how to do this f---ing job?” is a standard barb, current and former employees say.

Portfolio managers make money, or they’re fired. They usually last about four years.

Bullish Comments on the Economy

I went to go see Ken Hoexter yesterday, who is a very good transportation analyst at Merrill Lynch.

I have followed Ken for years. I like his approach: he is very data-driven, and relies on company analysis and the data to drive his stock recommendations rather than "gut feel".

Ken had upgraded the group about a year ago, and if you had followed his advice you profited handsomely.

In any event, his comments yesterday were surprisingly bullish on both the economy and his stocks in particular (I say "surprising" since most analysts seem to be pretty gloomy). As it turns out, he just sent out his weekly piece, so I thought I would pass along a portion which describes his thoughts (I have added the highlighting):

  • Carloads and tonnage highlight recovery
Rail carloads were up 7.3% year-over-year this week (to
732,350) and truck tonnage was up 5.7% for January,
continuing a trend of steady, but increasingly robust freight
transportation data. The data suggests that the stranglehold
of the 4-year freight recession has been surpassed, with
tonnage up for a second consecutive month for the first
time since September 2008. We increased our rail targets
on the strength of better than expected rail carloadings
(volumes were running 200 bps faster than our target, and
we noted a bias for further upside potential given the
ongoing strength in volumes). We are also encouraged by
the breadth of the rail commodity rebound, which is driven
by chemicals, autos, metals, export coal, domestic
intermodal, and 'less worse' than expected utility coal
declines. Alternatively, UPS noted that retail, health care,
and tech volumes were leading the rebound, leaving the
machinery portion of industrial production a bit out of the
loop, and thus keeping pressure on weight per shipment (a
factor it looks to turn upward before margins can regain
prior heights).

Thursday, February 25, 2010

Bullish on Defense?

Earlier this week I went to see Doug Harned of Bernstein. Doug follows the Aerospace and Defense group.

I've always liked Bernstein research. Their analysts seem to spend an extraordinary amount of time getting to know their companies and industries. While their stock recommendations do not always work out (whose do?) I always walk away from their meetings with a little more information.

So I was surprised to hear how positive Doug was on the defense sector. But, after hearing his explanation, I am tempted to say that I might have to change my opinion.

Up to now, here was my thought on the group: With the Iraq war winding down, and with the scheduled plan for withdrawals of at least a portion of the US military in Afghanistan, it seems logical that defense spending would be a likely target for budget cuts, especially in the era of trillion dollar fiscal deficits.

But Doug sees it otherwise. He said that no one in the military expects their budgets to be cut. Here's why: the age of our military equipment is as old as it has been in decades. For example, according to Doug, the average age of our aircraft is 25 years. Even allowing for the 60 B-52 bombers (which date back to Vietnam war days) this is extraordinary old.

The stress on, say, the F-18's (which have been flying for 25 years) has begun to show on the equipment, even with proper maintenance. Moreover, the older planes are much more vulnerable to new missile technology that is already available in Asia.

Thus, programs like the F-35 are not just desirable, but necessary.

He went on. If you believe that our only possible enemies are al Qaeda, then perhaps you don't need to spend so much on defense. On the other hand, if you want to maintain a superior military to the Chinese or Russians (which virtually everyone in Washington wants), you need to keep spending.

This is why the Obama budget calls for a larger percentage increase than any of the budgets in the Bush years.

Then there is the threat of cyber attack. Our infrastructure in general - and military in particular - have become heavily reliant on the Internet and satellite communication. Any serious cyber attack on these areas could have a devastating affect on our military (note the reaction of the US government to the recent cyber attack on Google). Serious funds need to be spent in this area to safeguard our systems.

Interestingly, the leaders in protecting military cyber security are names like Lockheed Martin and General Dynamics. Companies like Raytheon and L-3 also do work in this area, but Doug argued that they are less important than the existing defense companies.

And yet the relative valuation of the defense stocks stands at its lowest relative multiple since the end of the Vietnam war.

Put another way, Doug said, where else can you find a high quality group of companies whose revenues will almost certainly grow for the next few years trading at historically low relative multiples - and where the consensus seems to be leaning in the opposite direction?

I need to do more work in this area, but I think that Doug might be on to something.

More on Bonds

The overwhelming consensus remains that interest rates are going to move significantly higher - it's just a question of when. Thus, the "smart money" says to keep your maturities nice and short, wait for interest rates to rise, and then extend.

So that's what the world is doing. If you look at yields on shorter maturity bonds in both the taxable and tax-exempt markets, they are incredibly low. For example, high quality municipal rates do not reach 2% until 2017.

Put another way, investors would rather lock in a total of 10% return for the next 6 years (admittedly tax free) than risk either longer maturity bonds or (gulp) stocks.

All of this in the midst of the following:
  1. Fed Chairman Bernanke reiterated his feeling yesterday that short term rates will stay low for an "extended period of time";
  2. Bank lending has declined at the fastest rate since 1942 (when we were in the midst of World War II, and there was nothing for consumers to buy);
  3. New home sales reached levels not seen since 1963;
  4. Every recent inflation data point released in the last few weeks indicate that prices are low, and possibly heading lower;
  5. With the exception of government spending, every segment of the economy is still paying down debt. Deleveraging economies typically don't see soaring interest rates;
  6. Nearly $4 trillion is stashed in money market funds yielding essentially 0%. How long before the "pain" of no returns begins to hit savers?
As we all know, Greece is going through a major financial crisis, and there is more and more talk of a soverign debt default. Today's Bloomberg indicates that Greece is considering issuing 10 year bonds at a spread of 364 basis points above comparable (and safer) German bonds (this spread is narrower than a month ago, by the way).

However, this would put the yield on near-bankrupt Greece government bonds at around 6.75%. Long maturity US Treasury bonds are yielding anywhere between 3.70% (10 years) and 4.65% (30 years). Unless one believes the credit of the US government is heading the way of Greece (which I don't), what is the market saying about the future?

I continue to believe that the risk to investors is for lower, not higher, interest rates. When all of the high coupon debt that was issued a few years ago starts maturing this year, wait for the "sticker shock" when investors try to replace those coupons.

One final note: it used to be that the shape of the yield curve was an excellent predictor of future economic activity. The steeper the curve, the most positive the outlook, or vice versa.

With the curve at record steepness, does this imply a much more robust economic recovery than anyone is expecting?

Interesting Idea on Health Care Reform

From Tom Kuntz in today's New York Times:

February 25, 2010, 6:38 am

A 19th Century Idea for Health Reform


Today’s idea: To get healthy young Americans into the insurance pool, pay them bonuses if it turns out they’re correct in their belief that they won’t get sick, say two academics.

Health | Floundering health-care reform plans in need of new ideas? Writing in Regulation magazine, Tom Baker and Peter Siegelman offer an old and nearly forgotten one.

They suggest copying the wildly popular “tontine” life-insurance policies of the mid-1800’s, which paid a bonus if the insured happened to outlive the policy’s term. The writers think that applying the same concept to health coverage would, consistent with behavioral economics, entice the all-important, uninsured “young invincibles” into the insurance pool and reduce costs for everyone:

DESCRIPTION Young, “invincible” — and here to save the day?

The simplest arrangement would award the bonus to those who did not consume more than a threshold value of medical care during a three-year period, potentially excluding preventive care. … Ordinary health insurance provides a tangible benefit only when you need health care. Tontine insurance pays a cash benefit when you don’t use it, as well as covering your medical expenses when you do. As such, tontine insurance is structured to be maximally attractive to those who have an overly optimistic assessment of risk.

True, the authors note, tontines (named after an Italian banker) were outlawed in life insurance in 1905, after a political scandal stemming from all the cash they generated. Thus tontines were victims of their own success, the authors say, but there was nothing intrinsically wrong with them as insurance products. [Regulation]

Wednesday, February 24, 2010

Hard to Believe that Rates on Longer Maturity Bonds will soar if the Fed is "On Hold"

Bernanke Forecasts Long Period of Low Interest Rates

Jim Lo Scalzo/European Pressphoto Agency

Ben S. Bernanke presented the Fed’s semiannual monetary report to Congress on Wednesday.

Published: February 24, 2010

WASHINGTON — Ben S. Bernanke, making his first appearance before Congress since the Senate confirmed him last month to a second term as chairman of the Federal Reserve, reaffirmed on Wednesday that short-term interest rates would remain exceptionally low — near zero — for “an extended period.”

In presenting the Fed’s semiannual monetary report to Congress, Mr. Bernanke did not waver from the Jan. 27 statement of the central bank’s key policy making board, or from a Feb. 10 statement in which he explained to Congress the strategies for gradually reducing the vast sums that banks hold in reserves at the Fed.

“Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” Mr. Bernanke said in a prepared statement.

Mr. Bernanke predicted that the economic recovery would remain slow. Much of the pickup in growth late last year, he said, could be attributed to companies reducing unwanted inventories of unsold goods, making them more willing to bolster production.

Political Obstacles to Pension Reform

My previous post (shown below) provided some data showing how we're all living longer (good news!). The number of years that people will spend in retirement has increased significantly.

Unfortunately, most of the retirement systems across the world are not set up to reflect this reality. While no one seems to disagree "the numbers" favor changes, popular opinion is strongly against any reasonable solutions (see health care debate).

Anyway, just look at the reaction to the proposed change to the Spanish retirement system, printed from today's London Times:

Tens of thousands protest across Spain at Zapatero’s pension reforms

Barcelona protest

People in Barcelona protest against government plans to increase the retirement age

Tens of thousands of protesters took to the streets across Spain last night in the biggest test of the country’s Socialist Government, which is under pressure.

With a general strike threatened in the summer, the two biggest Spanish unions staged protests in Madrid, Barcelona, Valencia and Alicante.

The Union General de Trabajadores (UGT) and the Confederación Sindical de Comisiones Obreras (CCOO), are planning to stage 57 protests in other parts of the country until next week.

Unions are angry about the Government’s proposed pensions reforms which would extend the legal retirement age from 65 to 67.

José Luis Rodríguez Zapatero, the Spanish Prime Minister who recently came under pressure from financial markets to introduce measures to bring the country out of recession, now finds himself threatened by his political allies in the unions.

The protests are the first time that Mr Zapatero has faced street unrest since he came to power in 2004. Leading members of the Prime Minister’s party took part in the protests, a sign that his popularity is dwindling.

Union anger has been mounting because Mr Zapatero changed tack in an effort to convince financial markets that his Socialist Government was serious in its efforts to recover from the worst recession in decades.

Spain’s rising debt has led to concerns that it could follow in the footsteps of Greece, whose budget crisis prompted the European Union to place it under scrutiny.

Mr Zapatero announced reforms of the labour laws which have been criticised by employers in an effort to reduce unemployment which is nearly at 20 per cent.

In another move, designed to cut the deficit which accounts for 11.4 per cent of Gross Domestic Product, Spain introduced an austerity package to save €50 million (£44 million) over three years.

The pension reform was created to ensure that the social security system remained viable. The reform has not proved popular. A recent poll in the newspaper El Pais showed that 84 per cent were against the move.

Cándido Méndez, the president of the UGT, said that he saw “no point of agreement” over the retirement plan.

However, Angel Gurria, the secretary-general the OECD, said that the reforms were essential if Spain wanted to reassure nervous financial markets it is committed to reviving the economy and cutting the public deficit.

Here's One of the Reasons that Governments are Facing Huge Deficits

From The Economist.

This trend, of course, also presents a challenge for investors: What's the best way to make sure you have sufficient assets in retirement?


Golden years

Time spent in retirement has sharply increased

Feb 23rd 2010 | From The Economist online

AS GOVERNMENTS try to tackle huge structural budget deficits, one means of attack is to delay paying state pensions by gently raising the official state-retirement age. Protests are expected in Spain on Tuesday February 23rd against an official plan to lift the retirement age by two years to 67. Official retirement ages have failed to keep pace with rising life expectancy, making pensions increasingly unaffordable. In practice many people in the rich-world OECD countries retire several years early, which lets them enjoy, on average, some 19 years in retirement before death. Spaniards should spare a thought for the previous generation; those who became pensioners in 1970 could expect to survive for less than a decade.


Social Media and Television

I don't know about you, but I usually don't have a computer in front of me when I'm watching TV. However, it seems that more and more people do, and it is actually increasing TV viewership according to this morning's New York Times.

Water-Cooler Effect: Internet Can Be TV’s Friend

Published: February 23, 2010

Remember when the Internet was supposed to kill off television?

This year's Super Bowl, won by the New Orleans Saints, was the most-watched television program in United States history.

That hasn’t been the case lately, judging by the record television ratings for big-ticket events. The Vancouver Olympics are shaping up to be the most-watched foreign Winter Games since 1994. This year’s Super Bowl was the most-watched program in United States history, beating out the final episode of “M*A*S*H” in 1983. Awards shows like the Grammys are attracting their biggest audiences in years.

Many television executives are crediting the Internet, in part, for the revival.

Blogs and social Web sites like Facebook and Twitter enable an online water-cooler conversation, encouraging people to split their time between the computer screen and the big-screen TV.

The Nielsen Company, which measures television viewership and Web traffic, noticed this month that one in seven people who were watching the Super Bowl and the Olympics opening ceremony were surfing the Web at the same time.

“The Internet is our friend, not our enemy,” said Leslie Moonves, chief executive of the CBS Corporation, which broadcast both the Super Bowl and the Grammy Awards this year. “People want to be attached to each other.”

Tuesday, February 23, 2010

Energy/Natural Gas Update

I just attended an analyst lunch for Total, the large French integrated oil company. I thought would summarize a few of their thoughts in the context of what has been going on in the energy sector, especially natural gas.

Replacing oil reserves is becoming much harder. Total used to have one of the highest replacement rates among the majors (around +7% growth per annum) but now they expect production growth will, at best, be around +2% until 2015.

They're not alone - all of the majors are going to more expensive parts of the world, dealing with unsavory and corrupt governments, to try to secure more oil, but with limited success. Even in places like Iraq - which is trying to ramp production up to 12 million barrels per day from their current 1 million barrel (Total, by the way, doubts that they will be able to accomplish this) - is only offering the majors $1.50 per barrel as their cut of the oil price for their help in drilling.

(When you ask Total: Why bother for $1.50 per barrel? They respond that they have no choice - either they participate now, or they will be excluded in the future).

So all seem to be moving towards natural gas. Unlike oil, natural gas is currently in plentiful supply. However, as the majors look towards the future, they believe that gas supply will gradually tighten, especially if oil prices remain $60 per barrel or higher.

Over the weekend Schlumberger announced the purchase of Smith International, which was their move towards more natural gas exposure. Exxon bought XTO a few weeks ago, and will be the largest natural gas producer in the world once the deal closes. And Total announced a major joint venture with Chesapeake towards the end of last year.

The risk to all of this, of course, is if the demand for natural gas doesn't materialize. There have been several occasions over the last 20 years when the promise of natural gas seemed limitless, only to have prices crash. This time, however, the majors obviously don't believe this is the case.

From an investment standpoint, this seems to offer some support to those companies with either natural gas exposure or have significant existing oil reserves (e.g. Chevron, Occidental, Devon).

For more perspective, here's an article in yesterday's New York Times blog :

Behind Schlumberger’s Smith Deal: A Big Gas Bet

February 22, 2010, 12:24 pm

Schlumberger’s $11 billion takover of a smaller rival, Smith Industries, seems to be a big bet on unconventional natural gas production in the United States.

In making the deal, Schlumberger is apparently hoping that Smith’s reputation and extensive domestic network will help position it as the top player in an increasingly hot sector of the oil patch, fending off the likes of Baker Hughes.

“There is I don’t think any doubt that long-term shale gas is going to be one of the big new energy sources both in the U.S. and overseas,” Andrew Gould, Schlumberger’s chief executive, said in a conference call with analysts on Monday. “Smith’s capacity to serve that market in North America is of great interest to me.”

With big oil companies like Exxon Mobil and Total, as well as a handful of private equity firms, spending billions to buy up unconventional leases around the country, the demand for more drilling is obvious. But the flood of new natural gas on the market could squeeze margins to unprofitable levels, making Schlumberger’s 18 percent premium for Smith look a bit rich.

“It may not be the best financial return in the oilfield at this point in time,” Mr. Gould said, “but long term, what we can learn in that market is extremely interesting”

A deal between Schlumberger and Smith had been rumored since last summer, when Baker Hughes acquired BJ Services for $5.5 billion. BJ derived about 81 percent of its 2008 revenue from an oil service technique known as pressure pumping, used in unconventional natural gas wells.

Both BJ and Smith also make use of a technique known as fracturing to obtain unconventional reservoirs, including “tight” or low-permeability sandstones, coal-bed methane and gas-bearing shale. Much of that production is focused in the United States in natural gas reservoirs in Texas, North Dakota and the Rocky Mountains.

Smith is a leader in drill bit technology needed to burrow down into shale, which could be highly valuable to Schlumberger.

“Schlumberger’s claims that Smith gives it greater exposure to the U.S. shale does make sense, at least to some degree,” Doug Sheridan of EnergyPoint Research, which conducts customer satisfaction surveys for oil field service companies, told DealBook. “Through its leadership position in bits and bits related technologies, Smith has considerable knowledge of what works and does not work when drilling shale wells.”

It seems like every other week there is another major shale field discovered which could bring billions of cubic feet of gas to the market. High natural gas prices first spurred this rush into shale earlier this decade and it has continued even as prices have dropped significantly, on the hopes that increased natural gas demand will justify more and more drilling.

But the expensive and crude fracturing technique is expensive and time-consuming. While it is still profitable to drill for unconventional gas at current prices of around $5 per one million British thermal units, there isn’t much room for error. Even a slight drop in gas prices would make shale fields unprofitable.

“I don’t think that the actual optimum technology set for producing shale gas has yet been defined — at the moment, we are doing it by brute force and ignorance.” Mr. Gould said. “As we get better at identifying the sweet spots in shale reservoirs, drilling will systematically become more important.”

The United States is expected to rely more on natural gas for its power needs, as it is cleaner than coal. But carbon-cap legislation has yet to take effect, raising questions about whether the anticipated rise in natural gas demand will materialize. Many producers that depend heavily on natural gas left the country after prices spiked in the middle part of the last decade, meaning that the new demand needs to come from the more fickle residential and commercial sectors.

Cyrus Sanati

Monday, February 22, 2010

Municipal Market Update

This is a little more of a "bond geeky" post, so if the thought of municipal bonds makes you yawn, please feel free to ignore this note.

Just as in the taxable bond market, the slope of the yield curve (i.e., the difference in yields between shorter maturities and longer maturities) remains steep. However, unlike the taxable market, the most "expensive" part of the yield curve can be found in the 5 year maturity range.

This week's municipal bond research piece from Citigroup dated February 19, 2010 talks about the relative values that can be found in the municipal area.

The reason I have attached it is twofold. First, in my opinion, Citi produces first-rate muni research. And, second, they tend look at the market the way that I was trained to do; namely, comparing the relative yield of municipals versus Treasury yields. While I realize there are numerous other ways to analyze muni bonds, for me simplicity usually wins out.

Here's the excerpt:

The yield curve in the muni market steepened modestly this week, with long-term yields up modestly while the intermediate sector held firm. With Treasury yields edging somewhat higher, high-grade muni yields as a percentage of Treasury yields continued to drop. This is particularly the case in the shorter intermediate range, where high-grade yields appear to be unsustainably low and unattractive.

5-year triple-A munis as a percentage of Treasury yields, for example, are currently at 61.7% -- break-even versus Treasuries for investors in the 38.3% marginal Federal tax bracket. In our view, this is the least attractive point on the muni curve: the ratio versus Treasuries is 71.4% on one-year paper, and 76.1% on 10-year paper.

While ratios on longer maturities are by no means high by historical standards, this is consistent with our thesis for the past several months: supply/demand conditions are likely to push muni yields as a percentage of Treasury yields very close to all-time historical lows, all along the yield curve.

The problem in the 3-5 year range, in particular, is that they are already at or near these lows. As we noted last week, the slope of the muni yield curve remains quite steep in the 5-10-year range, with 10-year AAA paper yielding 148 basis points more than 5-year issues.

The reasons for the low yield ratio in the 3-5-year range, in particular, are not difficult to discern:
  • New issue supply in that range tends to be relatively modest;
  • A historical source of supply in that range, advanced refundings which create pre-refunded paper, have been relatively slow;
There continues to be a virtual avalanche of investible funds leaving low-yielding cash/near cash, seeking a home that is not too risky, and not too far out on the yield curve. An obvious "home" for a significant portion of this cash is shorter maturity high-grade munis, and there simply isn't enough paper to go around without pushing yields down to unattractive levels.

LinkedIn Update

Since some of you may be reading this after seeing my profile on LinkedIn, I thought this article might be interesting. It came to me via Twitter, and was actually published at the end of last year on the Wall Street Journal blog.

One note: Imagine having a 60% sales growth in one year - and being considered lagging your competition!

LinkedIn Wants Users to Connect More

Amid Threat From Rivals, Business-Networking Web Site Takes a Page from Facebook's Playbook

If LinkedIn Corp. wants to avoid being swamped by social-networking giant Facebook Inc., it will have to convince users like Jackie Nejaime to log in more often they do now.

Ms. Nejaime, a San Francisco real-estate agent, uses LinkedIn to stay in touch with her 183-person network, check out job prospects and see if someone might be interested in one of the homes she's selling. But she typically logs in only a few times a month because she says the site lacks features.

"I would like to get more use out of it," said Ms. Nejaime "I just don't know how." By contrast, the 47-year-old says she uses Facebook every day to touch base with friends and professional contacts.

It is up to LinkedIn's chief executive, Jeff Weiner, to give people like Ms. Nejaime reasons to spend more time on LinkedIn, which is mostly used by professionals to post their resumes and by corporate recruiters looking for talent.

Dave Getzschman

LinkedIn CEO Jeff Weiner wants to give people reasons to spend more time on LinkedIn, which is primarily used by professionals to post resumes.

Mr. Weiner, 39, a former senior executive at Yahoo Inc., took over LinkedIn a year ago with a mandate to reinvigorate the six-year-old business. While LinkedIn's membership has continued to surge, reaching 53.6 million at the end of November from 31.5 million a year ago, it has been dwarfed by Facebook, which has surpassed 350 million members.

More importantly, the amount of time people devote to LinkedIn is a fraction of the time people spend on some other social sites. Visitors spent about 13 minutes on average at LinkedIn during October, while Facebook users logged about 213 minutes and MySpace users spent 87 minutes, according to research firm comScore, which measured the behavior of global users 15 years and older.

LinkedIn is "not really a community as much as a collection" of names, said Brigantine Advisors analyst Colin Gillis. "They are definitely in danger of losing the business-networking market."

While Facebook doesn't specifically target the professional market, hundreds of companies, such as Ernst & Young and EMC Corp., use the site to highlight their firms and recruit new candidates, said a Facebook spokeswoman. Special groups for lawyers, accountants, engineers, sales people and other professionals have cropped up all over Facebook as well.

One of Mr. Weiner's solutions is to take a page from Facebook's playbook. He recently opened LinkedIn's site to third-party developers so they can create applications that will draw professional users to the site when they aren't looking for work.

For example, software maker SAP AG has written an app that allows certified SAP developers to highlight their credentials by adding a "badge" to their LinkedIn profiles. A recently announced partnership with micro-blogging service Twitter Inc. enables LinkedIn members to link their Twitter accounts to their LinkedIn profiles.

LinkedIn expects other developers will target specific interest groups. For example, a developer might build an app that enables lawyers to highlight their case histories on their profiles. Unlike Facebook, which includes games, LinkedIn said all apps for its network must be professionally oriented. Submissions will be approved on a case by case basis.

"The more relevant those experiences the more likely our membership will be to engage in those experiences," said Mr. Weiner, adding that LinkedIn has already received requests from 1,500 developers for access to the site's programming interfaces.

Some analysts downplay the risk LinkedIn faces from sites like Facebook and highlight the recent growth the company has seen outside the U.S. market. Piper Jaffray analyst Gene Munster said the "clear delineation" between social and professional networking affords LinkedIn a fair degree of breathing room.

The privately-held company says it turns a profit from ads and recruitment services, though it won't disclose its profit or revenue. And while LinkedIn says it made "significant" infrastructure investments over the past year, it still has most of the $100 million it has so far raised from venture capital investors.

LinkedIn is also poised to announce a series of subscription "packages," specially priced memberships that provide not-yet-disclosed products and services designed for job hunters, small-business owners or other groups. The company didn't provide details, but suggested that some new third-party apps might only be available to premium subscribers.

Other partnerships are aimed at making LinkedIn more useful when members are working outside the network. For example, Microsoft Corp.'s upcoming version of Outlook will allow users to see people's LinkedIn profiles when they are sending or receiving. Overlapping users will be able to sync their Outlook and LinkedIn contact lists, as well as use Outlook to expand their LinkedIn networks.

Mr. Weiner acknowledges that driving membership growth, while at the same time increasing the number of apps they can use to communicate with each other, poses significant challenges. Key among them is to develop the right privacy tools so users can control who they share information with. Another challenge is to ensure that users aren't overwhelmed by a blizzard of irrelevant content.

Bank Lending Continues to Contract

This article from the Telegraph in the U.K. was actually published last week.

Authored by Ambrose Evans-Pritchard (what a great British name!), it notes that for all of the talk about building inflationary pressures due to Fed policy, the opposite seems to be occuring.

Not only is bank lending dropping, but monetary velocity is also declining, which essentially means that the Fed has flooded the banks with liquidity that is being used only sparingly.

I continued to believe the investment implications are for deflationary, not inflationary, pressures, with interest rates moving lower later this year.

Here's an excerpt, with the link below:

US bank lending falls at fastest rate in history

Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.

US Federal Reserve - US bank lending falls at fastest rate in history
US Federal Reserve - US bank lending falls at fastest rate in history

David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said.

Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.

The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken.

Sunday, February 21, 2010

Will the Use of eMail Decline?

From the blog "Social Times":

Report: Facebook and Twitter Slowly Replacing EMail?

email overload vs wiki 2009 saw a tremendous increase in usage of Social Media sites like Twitter and Facebook, and could easily be termed as the Year of Social Media. This growth in the usage of social and collaboration platforms has led the enterprises to seriously consider using social platforms for business collaborations, according to Mark R. Gilbert, research vice president at Gartner Research.

Due to this increased use of social tools both inside and outside corporate firewalls, and the changing demographics (i.e. within a few years majority of users entering the workforce would belong to the Facebook age and would continue to communicate with colleagues via Facebook and Twitter), Gartner predicts that by 2014 20% of business users will be using social networking services for communication instead of emails.

Gartner claims that Social networking will prove to be more effective than emails in real time communications, such as informing colleagues about status updates, or expertise localization within a business. This is an area which is already well covered by services like Twitter and Facebook. However, users currently use the status updates to inform others about personal activities. This would change over time, and users would be using updates for business communications as well. This new usage pattern would make companies build internal social networks and/or allow business oriented use of personal social accounts.

“The rigid distinction between e-mail and social networks will erode. E-mail will take on many social attributes, such as contact brokering while social networks will develop richer email capabilities,” said Matt Cain, research vice president at Gartner. “While email is already almost fully penetrated in the corporate space, we expect to see steep growth rates for sales of premises- and cloud-based social networking services.”

Another important prediction by Gartner states that “By 2012, over 50 percent of enterprises will use activity streams that include microblogging, but stand-alone enterprise microblogging will have less than 5 percent penetration.” This would certainly be well received by enterprise-level social networking software providers such as IBM, Microsoft, Cisco, Jive Software, Mindtouch and Socialtext – and microblogging services like Socialcast and Yammer.

Splitting Retirement Assets in Divorce

Interview with divorce attorney in yesterday's Wall Street Journal.

Excerpt below; full link at bottom.


Splitting Up Nest Eggs

Battles over retirement assets increasingly are the most contentious—and error-filled—part of divorce

If you or someone you know is heading toward, or already embroiled in, a divorce, the term can make your eyes glaze over: qualified domestic relations order.

For an ex-spouse, though, those four words can spell the difference between a secure or perilous financial future.

A QDRO, as it's called, helps divide a couple's retirement assets in the wake of a divorce. Such an order, for instance, would permit the custodian of a 401(k) to make payments to the former spouse of an employee.

As straightforward as that might sound, a QDRO is about much more than dividing dollars. A retirement plan will need a court order to carry out your wishes, and those wishes had better be spelled out in painstaking detail. What's more, retirement accounts are frequently the largest asset in a divorce proceeding. Given the precarious health of such accounts in the wake of the recession, every penny becomes critical.

"The stakes are higher now, which means negotiating a divorce is that much harder," says Emily Widmann McBurney, a lawyer with the Atlanta firm of Davis, Matthews & Quigley and an expert in QDRO law.

To learn more about divorce and dividing retirement assets, we visited Ms. McBurney in her office. Here are excerpts from the conversation:

Handle With Care

THE WALL STREET JOURNAL: Are QDROs part of most or all divorce proceedings?

MS. MCBURNEY: A good share of them—about half. In many families, a retirement plan is the only big financial asset. So, in those cases the parties often will need a QDRO, if there aren't other assets to divide.

WSJ: What are, or what can be, the consequences of neglecting or mishandling a QDRO?

MS. MCBURNEY: The consequences can be dire.

The process seems simple on its face. The parties will say, "We want to be fair, [so] we'll divide everything half and half." But the devil is in the details. The way you divide retirement assets can be very different.

WSJ: What's a good example?

MS. MCBURNEY: Let's say a wife and husband were in mediation in the summer of 2008, and they had a 401(k) with $100,000 in it. And what they meant to do was divide that account in half—where each spouse receives 50%—and adjust the account for earnings and losses from the day the two made this deal until the day it actually gets done.

But if what was written in the agreement says, "The wife gets $50,000," several months later, after the market collapsed, that would take on a whole new cast and a whole new argument. Because now the wife would say: "It says right here: I get $50,000." And the husband would say: "Well, I didn't say you get 100% of the account; that's the whole value of the account now."

I've even had cases where someone had to pay money out of their pocket under those circumstances, because they had agreed unwittingly to a dollar amount without anyone anticipating that those values would drop so dramatically.

Find an Expert
WSJ: What are the biggest mistakes attorneys make with QDROs?

MS. MCBURNEY: First, people don't differentiate, or even understand, what kind of retirement plan they're dealing with. There are defined-contribution plans—a 401(k) is the best example—and defined-benefit plans, which people usually think of as a pension. Each has its own issues and traps.

For example, I see a lot of agreements that say: "The parties will equally divide the husband's pension. The wife shall receive 50%, plus or minus earnings and losses from the date of the divorce forward."

Well, a pension doesn't have earnings or losses; there's no account with your name on it that's invested in the markets. So, while the attorney is putting all this irrelevant information in the QDRO about earnings and losses, they've taken their eye off the ball. They haven't asked: "What kind of surviving-spouse benefit is the wife going to receive?" If the QDRO doesn't say anything about that—and if the husband dies before pension payments begin—the wife might not get anything.

Another huge mistake is failing to understand the difference between qualified and nonqualified retirement plans. Qualified plans, like 401(k)s and traditional pensions, fall under federal regulations and can be divided between spouses by means of a QDRO. But nonqualified plans—which typically are reserved for upper-level employees and go by names like "supplemental executive retirement plan" or "excess benefit" plan—as well as stock options, restricted stock, [and] deferred compensation aren't subject to the same federal regulations and aren't subject to QDRO rules.

So lots of people make arrangements to divide up retirement benefits, and then they find that they have a nonqualified plan that is not allowed to make payments to anyone other than the employee.

WSJ: What's an example of that?

MS. MCBURNEY: In one case, the attorney didn't notice that the vast majority of the money was tied up in a nonqualified plan, and the divorce had one of these vague settlement agreements that just said the husband and wife were going to divide the retirement assets in half.

Well, the QDRO worked for the qualified portion of the assets, and the [husband's] retirement plan paid, let's say, $80,000 to the former wife. And she sat around and thought, "Hmmm, I wonder when I'm going to get the other $2 million I thought I was going to get?"—and it never came.

She finally got in touch with the [retirement] plan, and they said: "That other money—that's all nonqualified; you can't do a QDRO for that. You're never getting that money." And so that led to litigation.

WSJ: Does such litigation typically fail?

MS. MCBURNEY: It's not so much that litigation always fails. It's that you just never want to end up there. Litigation generally means that something has gone terribly wrong in drafting and/or executing a QDRO or settlement agreement, and both sides are spending lots of money on attorneys, post-divorce, which shouldn't be necessary.

Good Timing
WSJ: What are the most important lessons you've learned about QDROs?

MS. MCBURNEY: I am a naturally optimistic person. But with QDROs, I guess I've learned to have a healthy dose of pessimism.

Often in a divorce, there's this sense: "I'm tired of dealing with all this money stuff; it's going to work itself out." Something like: "Oh, over time we'll divide up our bank accounts."

But [dividing retirement assets] is not the same thing as signing over a bank account. It's an order that has to be entered by the court and approved by the [retirement] plan. And it's an annoying and complicated process. I'll be the first to tell you that it's shocking how complicated it is. But that's the reality.

And so there's a certain resistance that I see, where people think: "Oh well, it will sort itself out. I'll deal with that later." And later may be too late.

Mr. Ruffenach is a reporter and editor in the Atlanta bureau of The Wall Street Journal and the editor of Encore. He can be reached at