2009 january mike on markets by karen bosso

Mike on the Markets winter‘09

Vol III, Iss I

Whine and Peas This quarter‘s newsletter should at least make you think… How many other Stockbrokers out there are going to tell you that dividend stocks may not be right for you? Or bother to take time to rant about double standards in our legal system? Or give you a snazzy trading card of a modern-day villain? Or make wine recommendations for when all else fails? There‘s a reason other advisors don‘t do these things—-which probably has something to do with wanting to attract new clients, but hey, I‘m here to help.

So in this issue I pick (fairly) on dividend stocks, politicians, rich golfers, and a sleazy money manager. On a positive note, Albert Einstein contributes on pg. three

and our really old friend Heraclitus on p. five. You‘ll find plays on Peace/Piece/Peas throughout, a majorly belated Seasons Greetings, and the BOL Corner going all Zen. And a pyramid. I‘ve always wanted a pyramid.

Mike Bosso Financial Advisor

I also have some informative and nice things to say about investments, but you‘ll just have to read the newsletter to find them.

Wishing you all a very Happy Beginning of Baseball Season,

New Office Address FBR Wealth Management 8050 SW Pfaffle St., Ste. 100 Tigard, OR 97223

Mike

Bailout Wine: When All Else Fails San Francisco custom vintner Crushpad is offering a futures contract at U$39 per bottle on its ‗07 Napa Cabernet. For every 100 point drop in the Dow between your date of purchase and August 14, 2009, your final price will be discounted by U$2 per bottle. You can find more information on this unique hedging strategy at the website below. http://bailoutwine.com/site/Default.asp

Office 503-595-1662 Toll Free 877-421-9991 Fax 503-595-1666 Cell 971-212-9464 mike@teamfbr.com

Glossary investor (in·vest’·ur) n.

One who purchases and holds assets in hopes of achieving capital gain or cash flow. May be feeling glass half-empty these days.

Disclosure Mention of this wine is for educational purposes only, does not address the entire topic, and should not be considered investment advice, a solicitation, or a recommendation to take up the drink. Futures Contracts are not suitable for all investors, particularly the underage or faint of heart. All investments and alcoholic beverages involve risk, including the possible loss of inhibition along with your invested principal. Past performance is NOT a guarantee of future results; tolerance typically increases. All transactions carry costs, some more than others. For more specific information on investment risks, you should consult the offering‘s vintner. Prior to implementing any strategy, taxpayers are urged to pour a glass, then seek the advice of their tax advisors. As far as I know I am not licensed to sell this product in any state.

oenophile (ē’·nuh·fīl) n.

One who possesses a special love of, or fondness for, wine; including collecting and drinking. No longer mutually exclusive with investing. Glass half full kind of person.

Delay Your Distribution As you may be aware the Worker, Retiree, and Employer Recovery Act of 2008 was signed by President Bush on December 23, 2008. This is important news for retirees who have reached the age of 70 1/2. It is important because it suspends the IRS Regulation that requires you to take a minimum distribution ("RMD") in the tax year 2009.

Should you choose to take advantage of this exemption, I will need to know as soon as possible.

Please note – for those clients who have monthly or quarterly withdrawals: If you‘re RMD is paid out on a monthly or quarterly basis we need to advise the companies (that have custody of your accounts) that you wish to suspend these payments.

New business cards coming soon. So, change this in your little black book when you get a minute. All office phone numbers remain the same FOR THE TIME BEING and I still live in Sweet Home. My cell is still the best way to contact me and will probably never change…

Sometimes that‘s comforting.

Inside 2 Dividends 3 Rule of 72 4 Green & Peace Portfolio Rx A Great Pyramid 5 BOL Corner Rant/Rave 6 Trading Cards Bernie Madoff

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Dividends: A Piece of Your Own Money, or More?

A candid look at the ins and outs of dividend paying stocks.

confess: I watch CNBC so I know what news the world is hearing. If nothing else, it warns me what my clients might call me about in the morning. One of these shows, of course, is Mad Money with Jim Cramer. Kudos to Cramer for at leasttrying to make more palatable a topic most folks find pretty dry and chewy. Lately though, I‘ve found that some of those words could give bellyaches you can do without. Particularly the sound bites he‘s been dishing up about dividend paying stocks.

I

Right up front: I like dividend paying stocks. I like them for several reasons, few of which are the ones he‘s been touting. I‘ve covered this topic before, but it‘s been awhile. Since it‘s showing up in the media I want to help inform my current clients on the subject. And since so many folks are shopping around for new investment advisors these days, I hope it sheds some light for all those friends with whom I just know they share my newsletter.

First, I‘ll debunk a few of the reasons someone might give you for buying dividendpaying stocks. Followed up by a few of their better points.

Myth 1 Since the dividend ―pays you‖ 12%, even if the stock drops, you‘ll make money. –or— you‘ll always be making 12%, so you‘ll be OK…

Busted!

This one I‘ll have to bust up into several pieces.

1) First, since a dividend reduces the stock

price by the dividend amount, you‘re not making any money at all. You‘re receiving back a portion of your original investment.

Then you get the privilege of paying taxes on the return of your own money almost as if it were a gain, which it definitely is not. You do pay a lower rate on dividends than you do on capital gains, but it‘s taxation nevertheless.

2) Secondly, the Dividend Yield figure itself can be misleading. a) Dividends are declared in dollars and cents and when someone converts it to a percentage, what you usually hear is the annual rate; for a quarterly dividend you‘d have to divide by four. Our 12% example means you get 3% each quarter.

Myth Busters ...questioning conventional wisdom.

Busted!

Yes, you will own more shares, however…..

Using the Rule of 72 (see sidebar, p. 3) to estimate returns based on dividend reinvestment is seldom accurate. Because stock prices fluctuate, your actual return could vary quite significantly either up or down.

Busted Again!

Reinvesting high paying dividend stocks while the market is falling may actually accelerate loss rather than protect you from it. For instance, you could‘ve reinvested your Lehman Bros. dividends all the way down to zero. Or Freddie Mac. Or Fannie Mae. Or Bear Stearns. Or Washington Mutual. Every time they paid out a dividend, they depleted capital and lowered their own stock yield. their price. Which brings me to...

A Dividend is not a true Repeat: A Dividend is not a true yield. Myth 3 A company paying a high dividend is autoA stock price is reduced matically a strong company. by the dividend amount Busted on the X-date Admittedly, this comes down to your defib) Dividend Yield is calculated as a percentage ratio of the dividend amount to the stock price. So a larger dividend and a decreasing stock price inflates the yield figure. This can make the stock appear more attractive than it really is, if dividend yield is your sole factor for choosing to buy it. Eventually, when/if a stock price starts to go up again, these yield percentages will start to decrease.

3) Furthermore, the quoted rate is based on the last dividend paid. Since then, the board may have approved a new higher or lower rate, but until the new dividend is declared and paid, the old rate will still be the one in use. Keep in mind also, dividends aren‘t a sure thing. They‘re approved quarterly and can go up, down, stay the same, or go away entirely.

Myth 2 By doing a DRIP (Dividend ReInvestment Program), your investment will double in X years because you will own more shares…

nition of ―strong.‖ One way you could choose to look at it is this: My general belief is that if you‘re not growing, you‘re dying.

And the profits being returned to shareholders in the form of dividends could have been used to innovate and grow the company.

Doesn‘t make it a bad company, maybe just one on sabbatical from new and better ideas.

Regrouping, perhaps. But in the securities world, it‘s mighty hard to do both Growth and Income well at any given time.

Myth 4 By doing ―dividend capture‖ you can grab the dividend and get out of a stock before the price drops— you don‘t have to hold onto it.

[ CONTINUED ON PAGE 3]

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The Rule of 72 is a rule of thumb (credited to Albert Einstein) that investors use to approximate the time it takes for money to double at a given rate of return. It states that if you divide the number 72 by any given rate of return, the answer you get is the time it takes for money to double at that given interest rate (assuming you can get the same rate each year and it is compounded annually). For example, if you earn 10% on your money it would double in 7.2 years (72 divided by 10 = 7.2). The value 72 is a convenient choice of numerator, since it has many small divisors: 1, 2, 3, 4, 6, 8, 9, and 12. It provides a good approximation for annual compounding, and for compounding at typical rates (from 6% to 10%). The approximations are less accurate at higher interest See: http://www.investopedia.com/ask/answers/04/040104.asp rates. for more info. and examples of this handy tool.

DIVIDENDS...

CONTINUED FROM PAGE 2

Busted!

Dividend Capture Programs (DCPs) are the biggest bad taste I‘ve gotten from Cramer.

DCP just isn‘t a viable strategy in mediocre markets, let alone the recent crummy ones.

Because in order for DCP to work, a stock has to be on an upswing.

DCP is the process of buying a stock to reap the dividend and then selling it after the XDate. What‘s an X-date? Not a an online dating service, but a good question since it‘s the crux of the issue. The X-Date is the day on which the stock price is reduced by the dividend amount. In easy numbers, that means if you have a $100 stock paying a $10 dividend, on the X-Date the stock price is automatically adjusted and will open trading at $90.

Here‘s where you‘d want to sell, but what if the stock drops on trading, say 10%, before you can get out of it? Now you own an $81 stock. And if you had that stock in a taxable account, you‘d also have to pay a 15% tax on that dividend, bringing your net dividend ―payout‖ down to $8.50. Meaning you now have $89.50 of your original $100 instead of the $90 (assuming the same 10% drop) you would have had if the stock had never paid a dividend to begin with. Sounds like a half-a -percent loss to me. Which adds up in round lots. Even more after trade costs to get in and out of the capture program.

that paid dividends, first of all had some earnings and were just returning some of You‘re being paid to wait. their profits. They were at least perceived to be more stable. The theory being, earnBusted! ings=profit=steadily increasing stock Semantics. It‘s more accurate to say, ―You‘re price=long term stability=a lower risk incrementally being given back some of your investment. That‘s the theory anyway. At investment in exchange for staying invested in the very least, you can that company.‖ say the company has This may feel Back in the Day some history. less risky for some investors, Dividends were created for foun$ If you use dividends and that‘s OK as ders and active owners; it was the long as they un- only way, at the time, to reward solely for income purposes: derstand what‘s a. You don‘t have to their massive risks of time and actually happenliquidate your equity ing. money. position. b.

You probably don‘t care as much what In my humble opinion, the only good reason the stock price is doing as long as the to buy a stock is that you believe it will individend doesn‘t get reduced. crease in value. If you don‘t, then you ‗re c. Dividend Yield (cash flow) is typically typically better off just keeping your money higher than bonds or CD‘s. in cash until you change your mind or find a different stock you believe will increase in $ At least it‘s not money going to the value. Because if it doesn‘t go up, then for all CEO. of the reasons mentioned above, you stand to I THINK WHAT‘S GOING ON WITH lose money.

CRAMER, and others, is this: The industry is seeking almost any way to bring some That said, in this current chaos, a lot of folks method back to the market madness. Tryare finding themselves still holding onto drastically reduced stocks. It could be that com- ing to find ways to make money for our panies are trying to show they care about clients. their shareholders. Maybe they‘re trying to The dividend discussion is multifaceted, instill confidence by showing they can use and there are as many different perspectives revenues for dividends rather than having to use it to pay down debt, which most compa- on it as there are people. Which is why nies still have plenty of. Personally, I‘d you have to know your own situation and rather see them pay down some of that debt needs before embarking on any investment strategy. or do a stock buyback instead.

Myth 5

Points to the Positive $ Dollar Cost Averaging.

If you believe a stock will recover, doing a DRIP is a cheap and easy way to dollar cost average. $ Historically, companies

The more you understand about the nuts and bolts of investing, the less anxious you‘ll feel about your investments. We‘ll share some common lingo so you‘ll know what the heck I‘m talking about and I can explain things more deeply and clearly. It‘s all about feeling smarter and safer in uncertain times. Win-win. M

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Green Peace

Peace Symbol Turns 50 Originally conceived as a symbol for the British nuclear disarmament movement, its shapes are a stylized rendering of the semaphore flag symbols for “N” and “D.” From there, it passed through the counterculture to become a generic symbol for peace.

Later in life, its creator wished he’d inverted it with “arms up” in celebration, rather than down in despair as originally envisioned, but other factors probably made this particular version stick. DaVinci Code fans will love this explanation. See website below.

WHIRLED PEAS

pe cu la S

ial ot en t ar dP /R ew

The hardest part of this collection, not surprisingly, was finding companies and ETFs that derive little or no revenue from defense spending. The ones I chose all claim to avoid defense spending and sales where possible. Stating that, technically even US Treasury bonds could be construed as defense related, since some of that revenue may be used for military spending. Like any investment, each investor must know their own tolerances.

Peace

PBW

Wilderhill Clean Energy ETF

KR

Kroger

PZD

Cleantech ETF

JNJ

Johnson & Johnson

GE

General Electric

MSFT

Microsoft

FSLR

First Solar

HNZ

HJ Heinz

ENER

Energy Conversion Devices, Inc.

DIS

Disney

KLD

KLD Select Social Index ETF

KLD

KLD Select Social Index ETF

DSI

KLD 400 Social Index ETF

GOOG

Google

PEP

Pepsico

JWN

Nordstrom

WFMI

Whole Foods Market, Inc.

WFMI

Whole Foods Market, Inc.

A Great Pyramid

Portfolio Rx

At one point or another we have all heard of the investment pyramid (sometimes referred to as a risk pyramid). But do we know why the pyramid model is so apt? Because after thousands of years of erosion from sand, wind, and war the great pyramids of Egypt are still standing. Sure, the sphinx has lost a nose, but she still looks pretty good for someone her age. That‘s the condition we want strive for in our financial lives—the ability to weather any storm.

Variable Annuities

tiv e

(+ )

A perfect recipe for beating the winter doldrums.

Art Gems Metals Options Commodities Exploration Venture Capital

I have had many requests, including from my lovely wife, for true green investment avenues. So please find below companies that appear to be making the effort as well as exchange traded funds (ETFs) built around the stocks of such companies.

Green

http://www.canada.com/ottawacitizen/news/ story.html?id=45259489-d63e-4570-b45366c72e19e668&k=14340&p=1

th row

First off let me say that these are not investment suggestions, recommendations or ideas. As many of you know, I am not a true green or social investor. I concern myself first with making my clients money. But all things being equal, I‘ll choose a socially responsible company over one that isn‘t whenever possible.

Equity Partnerships Investment Real Estate Variable Universal Life Insurance Growth Stocks and Mutual Funds

(-)

Ri sk

The past year has proven to me the necessity of revisiting the pyramid. I take a great deal of responsibility both personally and professionally for the performance of my clients‘ portfolios. And based on what I‘m told, my investment advice always takes the pyraSale of Covered Options ~ GNMA e mid concept into consideration. But I also know that sometimes things get overr u c Corporate Bonds ~ Municipal Bonds Se looked or held close to the vest, particularly in the early stages of the advisor-client Residence ~ Retirement Plans Conservative Equities: relationship, which is normal. Those who‘ve worked with me for awhile know Utility Stocks, Convertible Bonds, Balanced Funds that I don‘t do pressuring, arm-twisting or guilt. It‘s not my style and creates United states Government Notes and Bonds ion t feelings we can both do without. But from here forward, let‘s all try to be a und Savings ~ Treasury Bills ~ Fixed Annuities Fo aware of what needs to be considered before we make changes to your portMoney Market Funds and Accounts folio. I believe we‘ll all feel more confident for having done so.

Traditional Life Insurance (cash value) G

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BOL* Corner If anyone that made less than $1,000,000/year or had a net worth that didn‘t start v.. To speak or with a B got caught shopliftwrite in an ing from the local market, or angry manner walked in to a bank and robbed $5000.00 they

By Mike Bosso would be spending some time in Jail. $50 billion dollar con-artist Bernard Madoff, however, is under house arrest, with federally paid-for security guards watching TV and eating Bon Bons.

CEO‘s who have essentially collapsed our financial system, while draining Billions of dollars in compensation while cooking the books aren‘t spending time doing community service at the local soup kitchen either. They are playing golf and explaining to Congress that they aren‘t bad guys and it‘s the fault of the collapsed real estate bubble that they themselves created. People that bought houses they couldn‘t afford, are getting loan modifications and still not paying their mortgages, while people that have been paying their mortgages can‘t get refinanced at these new lower rates because the equity is down on their house due to the falling home prices caused by the people that are getting loan modifications and foreclosures. It took 12 years to get O.J. Simpson behind bars for a crime that had nothing to do with killing his wife. The Red Sox didn‘t make the Series and the Raiders went 5 and 11. Those last two may not seem important in the true scheme of things, but for some of us they are devastating.

Rant

wishing you Light, Peace, and many Lucrative RETURNS in this New Year.

Mike

The opposite is beneficial; from things that differ comes the fairest attunement; all things are born through strife. Heraclitus (540-480 BCE)

Rave

Our son lost his basketball game last night, forgot his lunch today, and when he gets home I have to remind him that company‘s coming and he hasn‘t cleaned his room in a month.

v.. To speak or write with enthusiasm

I know this is ridiculous since he‘s only 14, but there‘s an example of one American who is not paying much attention to the economic news. He doesn‘t want to pay attention other than to know if his account is up or down. The

By Karen Bosso kid‘s got other things on his mind. He just wants to live his life (OK, maybe tomorrow he will), go about his business, and play ball. Money talk makes him feel ―icky.‖ And this is someone whose day-to-day life is even more directly affected by the economy than a lot of folks‘. Even if it‘s just by what kind of mood his father‘s in when he comes home from school.

When we write this newsletter, regulations require us to examine and present both sides of any given issue. While we don‘t always like it, there‘s probably good reasons for it. By airing out both sides, you get the best of both worlds instead of being dictated to by one extreme or the other. Then a person has choices. Choices make us feel we have some control. Feeling in control gives a body a sense of peace. Peaceful revolution is why we have a two party system in the U.S. It might be why there‘s an American league this and National league that, but what do I know since I don‘t follow sports?

And I don‘t like following money news any more than your average 14 year old. My guess is that a lot of people feel the same way or else we might have avoided some of these problems by virtue of our collective ranting. We do need to be informed, and some ways of getting there are less boring and painful than others. Mike and I promise to do our part to help. Like I said last issue, he actually likes that stuff. And I like to do what I can right here to make it more palatable for us normal people.

Anything to keep down the icky feeling.

Those words on the left really are Mike‘s and his title really was ―Rant.‖ When he sent them to me, I thought, ―Hmmm. That’s a tad negative for Mikey,‖ but I didn‘t edit them, because I think they illustrate a point.

There are things going on out there to rant about. And the messes he‘s ranting about are affecting the whole world as we‘re finding out—much to the chagrin of how most of us would like to feel about being Americans. So now we‘re mad and we‘re disgusted, and maybe a little embarrassed. I think we need to admit all that and rant about it ‗til the cows come home. It‘s the only way effective change will happen.

I promised there‘d be two sides. Here it is: There are always things going on to rant about. Be it corporate greed, government incompetency, a losing season, or facing a filthy bedroom. A look at the other side in this instance might tell us, ―At least now they‘re rooting out the problems,‖ or ―Maybe I could start writing letters to my congressman,‖ or ―From now on I‘ll learn more about where exactly my money is.‖ Balance it out…I don‘t think peace comes from a black or white view, but in recognizing both sides and then moving on.

When he read what I wrote here, he called me ―Miss Airy-Fairy Goodness and Light.‖ Which is the really funny part, if you only knew me. Talk about your opposites.

Peace lanterns in Hawaii

*The old firm called their assistants Branch Office Administrators or BOL’s.

As far as the newsletter editor is concerned, BOL stands for Broker’s Old Lady.

A donation has been made in the name of our valued clients to Heifer International.

Llamas and Goats and Chicks, Oh My! http://www.heifer.org

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Bernard Madoff “One Big Lie”

Trading Cards

Unless you’ve been cryogenically frozen since December 12th, you’ve probably heard about Bernie “my-name’s-on-the-door” Madoff, the individual accused of perpetrating the largest securities fraud in history on his hedge fund’s investors. What would a set of trading cards be without the occasional arch nemesis? orn April 29, 1938 in New York City, documents.

Bernard Lawrence ―Bernie‖ Madoff, was 50 BIL-lion Dollars... arrested Dec. 11th by the FBI and His firm, Bernard L. Madoff Investment Securicharged with a single count of securities ties, LLC was uniquely positioned to carry off the fraud. One Big Count, liable for a maxifraud because it was acting not only as a Market mum penalty of 20 years in prison and maximum Maker (see below), but as its own (unregistered) fine of $5 million.

Advisory, its own Broker-Dealer, and its own Clearing Firm. Functions generally carried out by Madoff allegedly told his two sons that the wildly different entities to provide important checks and successful hedge fund run by his asset management balances. This set-up allowed Madoff to sell his firm was a giant Ponzi scheme and ―one big lie.‖ nonexistent product to later investors, bank the They turned him in. His firm‘s assets were frozen proceeds to pay previous investors, and print his and a receiver appointed to handle its liquidation. own statements.

B

Madoff‘s pitch was that he used a complicated strategy called ―split-strike conversion‖ which involves buying stocks and hedging them with options. The strategy itself is accepted practice and can be sound, but others were unable to replicate his incredibly steady returns using the numbers Madoff provided in necessary public

Founded in 1960, Madoff‘s firm was instrumental in setting up the NASDAQ stock exchange and he served as its Chairman in the early ‗90s, no doubt contributing to his ability to manipulate the system so steadily for so long. In fact, one of the most enduring questions is: How was he able to fool so very many people who should have known better?

The firm was investigated by the SEC and others eight times in 16 yrs., twice in recent years, with some emphasis on the mingled business practices

What is a Market Maker ?

A broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds.

Japanese Peace Lantern.

The Nasdaq is the prime example of an operation of market makers.

There are more than 500 member firms that act as Nasdaq market makers, keeping the financial markets running efficiently because they are willing to quote both bid and offer prices for an asset. http://www.investopedia.com/terms/m/marketmaker.asp

described above. ―No evidence of fraud‖ was found. The SEC has since vowed to look into the relationship between Madoff‘s firm and his daughter Marcia‘s firm Cohmad which was housed in the same building. Investigators are also considering the marriage of Madoff‘s niece Shana to SEC attorney Eric Swanson.

The melee of regulators, authorities, attorneys, allegations, and alleged players is byzantine in its complexity. Recently released lists of affected investors run to over 160 pgs. Victims included charities, celebrities, and other hedge funds, the last of which are definitely in the ranks of those that should have known better.

Also peculiar was the number of people willing to put such large percentages of their portfolios into a single investment. At least three suicides have been attributed to losses sustained in theMadoff spectre.

Tremendous amounts of coverage are available for those who want to know more. The NY Times and the Huffington Post both have entire sections dedicated to the story as it unfolds.

Securities offered through Pacific West Securities, Inc., Member FINRA/SIPC Advisory Services offered through Pacific West Financial Advisors, Inc., a Registered Investment Advisor Clearing services offered through Pershing, LLC, a subsidiary of the Bank of New York Mellon Please note that the mention of stocks in this publication is a not recommendation to buy or sell those stocks. Indexes are unmanaged groupings of stocks used to approximate general stock market performance. You cannot invest directly into any of these indexes.

Certificates of deposit offered subject to change and availability. FDIC insured up to $250,000 through Dec. 31, 2009 and $100,000 thereafter. Minimum deposit required. Periodic interest payments may not be reinvested in the certificate of deposit. Certificates of deposit sold prior to maturity may result in an uninsured capital loss.

The comments contained herein are for general educational purposes only, do not address the entire topic, and should not be considered investment advice, a solicitation, or a recommendation. All investments involve risk, including the possible loss of invested principal. Past performance is NOT a guarantee of future results. Security transactions involve trade costs. For more specific information on investment risks, you should consult the offering‘s prospectus. Prior to implementing any strategy, taxpayers are urged to seek the advice of their tax advisors.

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