Quote of the month:
“When it comes to your investments, you remember the quality long after you forget the price.”

"OUR FUNDS DON’T PAY TO PLAY"

With the ongoing investigation of mutual fund companies and broker/dealers, we feel the need to report to you that unlike many brokerage firms we do not take money or favors from any mutual funds we represent, including the American Funds, for “shelf space”.

In case you haven’t kept up with what is happening in the industry along these lines, mutual fund management companies, in order to get representation with various large broker dealers, had to pay money other than commissions to the broker dealer in order to get them to encourage their brokers to sell their particular funds.

Our independence and freedom is something that we do not care to sell. By playing by the rules, we can objectively invest money our clients have entrusted to us.

As in all businesses, clean-ups need to occur periodically. It is now being done in the mutual fund industry and we are very pleased with it. We would encourage the SEC and the NASD to crack down on market-timers, late traders, and anyone else who knowingly violates laws that are designed for the benefit of the long term investor. We appreciate your continued business and we will promise you our continued diligence for you, our client.

SCANDAL UPDATE…THE SCORECARD

Here is the latest information on some of the fund groups as compiled by Morningstar that have been touched very closely by mutual fund scandals. You’ll see some comments by Morningstar editors, but most of the comments are from us.

One Group
The Latest: One Group has settled its case with the regulators but it has made some improvements. The fund will end soft dollar deals, add a chief compliance officer who reports to the fund’s board, and institute redemption fees for two funds that did not have them before. This mutual fund company that is distributed by Bank One brokers also said it will reveal fund managers’ holdings in their funds. They also will include manager compensation structure; they will provide quarterly disclosure of proxy votes, and disclose fees in dollar terms.

Morningstar’s opinion: “Fees initiatives go above and beyond most reforms advocated in Washington and send a clear signal that One Group is aiming for a higher standard in winning back investors’ confidence.”

Omega Securities opinion: It’s great that this group of money managers has come down to doing things that should have been done when the funds were first brought to the market place. We do not worry too much about them because their management is inferior to what we provide. If you have bank management for your assets, you should run, not walk to our offices!

Janus
The Latest: Janus hasn’t settled timing charges with regulators yet. They plan to return $31.5 million to funds and shareholders harmed by market timing arrangements. In addition, Janus is beefing up corporate government and taking steps to waylay market timers.

Morningstar’s opinion: “We are encouraged by the changes in Janus. We want to be sure that all key players who set up timing deals are gone before lifting our “consider selling” recommendation.”

Omega Securities opinion: Isn’t it funny that almost all of the funds that have had big trouble are No-Loaders. Janus? Forget-‘em. We have.

Invesco
The Latest: The SEC and Elliott Spitzer have accused Invesco and its CEO, Ramon Cunningham, of fraud for allowing market timing in the firm’s funds.

Morningstar’s opinion: “We recommend that investors consider selling Invesco funds because Cunningham and other key people are still in charge of Invesco. Invesco says they allowed only “good timing” but we are not buying it.”

Omega Securities opinion: Same song, third verse.

AllianceBernstein
The Latest: Alliance has agreed to cut its expense ratios and CEO, Lou Sanders, sounded almost like Jack Bogle, in talking about the need to change the firm’s culture and do right by shareholders. (Maybe this guy used to work at American Funds.) Alliance has now settled charges with regulators and agreed to pay a sizeable restitution to shareholders. They have also agreed to key reform, such as independent boards that will have their own staff to support their research efforts.

Morningstar’s opinion: “This signals a remarkable transformation at Alliance. We are still sifting through the personnel changes and will have the firm on our consider selling list until then.”

Omega Securities opinion: We have a number of Alliance funds held by clients here at Omega. We haven’t seen anything to make us suggest that those funds be sold because of staturatory illegalities. We believe that Alliance merging with Bernstein is a positive move on all sides. We tell our clients to hold on.

Alger
The Latest: James Connelly, Jr., the former vice president of Fred Alger Management, became the first fund company executive to be put behind bars. He was sentenced to 1-3 years in prison for tampering with physical evidence related to the late trading and market timing that went on at Alger. We wonder if all this would have happened if Fred Alger had not been killed on 9-11 in the terrorist attack. (Incidentally, does that attack still infuriate you as much as it does us?)

Omega Securities opinion: We have very few clients holding Alger. You might consider selling if you have it.

Strong Group
The Latest: Founder Dick Strong resigned his position as CEO and put the company on the market. (Former investment banker, Kenneth J. Wessels has taken over as chairman and CEO.)

Morningstar’s opinion: “We continue to recommend that investors consider selling.”

Omega Securities opinion: Please, please deliver us from Strong Funds!

Federated
The Latest: Federated has admitted to allowing market timing and late trading in its funds.

Morningstar’s opinion: “Don’t send the firm new money.”

Omega Securities opinion: Well, they never were real good money managers in the first place. So, if you sell, hand it to someone who has high ethics, a strong company culture, and who can also manage money.

Putnam
The Latest: Putnam dismissed nine more employees for improper mutual fund trading. None of the nine employees dismissed managed money, but they should have known what they were doing was wrong.

Morningstar’s opinion: Don’t send them new money.

Omega Securities opinion: We have inherited a number of Putnam accounts, and our suggestion is take a look and see which of the Putnam funds you have. Probably it would not be wise to liquidate any Putnam funds at this stage because of the scandals.

WHAT PRESIDENT BUSH DID NOT SAY

While the State of the Union address pretty much geared in on tax cuts and the war on terror, there is one thing that we do not believe the president spent enough time on, and that is “The Next Tax Cut”.

As near as we can tell, there are two plans in the works. First, a lifetime savings account, which will allow individuals of any age and any income to contribute up to $ 7,500 a year. Interest and investment income would accumulate tax free and withdrawals can be made at any time, for any purpose, without a tax penalty.

The second, a retirement savings account, would be similar to a Roth IRA but much more powerful. Like current IRA’s, withdrawals would not be permitted until a certain age is reached. Interest and investment income would grow tax free and withdrawals would also be tax-exempt. But here is the kicker: the new account would more than double the contribution to $ 7,500 a year, per individual, and has no income caps for eligibility. (Currently, to be eligible for a Roth IRA, joint income can not exceed $160,000.)

From this corner, it looks like these accounts attempt to create an “ownership society” which will help sell the idea of reforming social security. What? You mean the government actually wants to put some personal responsibility for retirement on to the public? You bet.

According to a recent article in the Wall Street Journal, there are other reasons to expand tax exempt savings. Anytime something is taxed, less of it is produced. Just as taxing labor income (as is done through the income tax) results is less labor being offered; taxing savings results in less savings and investment.

"NOW…DOES THIS MAKE SENSE?"

It is almost ridiculous when you realize that if you save money you have to pay taxes on the money in the year you earned it, and then year after year on the returns generated by that money. As we stated above, a country that taxes savings, will produce less savings and, no surprise, might find itself with drooping savings rates. The Wall Street Journal points out that capital formation will suffer and growth will not be as robust as it might have been absent the tax on saving.

Of course the song on the opposite side of the church consists of lyrics of class warfare, calling the new savings accounts “giveaway to the rich.” And as usual, this critique is bogus. The incontrovertible economic fact is that the higher level of national savings generated by the new accounts will benefit everybody.

LOOKING BACK ON 2003

Thanks to the USA Today, here is a partial list of notables that we lost in the last year: Charles Bronson, 81, one of our favorite actors who starred in the Death Wish movies, of pneumonia on August 30th…Art Carny, 85, actor, was Jackie Gleason’s pal in The Honeymooners…June Carter Cash, 73, country music singer and wife of Johnny Cash on May 15th. Johnny passed from this world at age 71 on September 12th…Catherine Hepburn, 96, who needs no introduction, on June 29th…Gregory Peck, 87, from natural causes on June 12th.

And on the political side, Danial Patrick Moynihan, 76, scholar and politician and a four term senator on March 26th… William Roth, 82, former US Senator who was responsible for the Roth IRA of a heart ailment on December 13th… Paul Simon, 75, former US Senator from Illinois on December 9th…Strom Therman, 100, former congressman and segregationist. The oldest and longest serving senator in history on June 26th…

In the literature and media, Robert Bartley, 66, former editorial page editor of the Wall Street Journal with cancer on December 10th…David Brinkley, 82, one of the first stars among TV anchors on June 11th…Fred Rogers, 74, cultural icon and host of the children’s show, Mr. Rogers Neighborhood on February 27th… Others that passed, J. Paul Getty, Jr., 70, philanthropist, son of oil tycoon on April 17th…

And in sports, Bobby Bonds, former San Francisco Giants outfielder and father of Giant’s slugger Barry Bonds on August 23rd…Larry Dobey, 79, Hall of Fame player for the Cleveland Indians and Chicago White Sox, the second black player in the major leagues on June 18th…Tex Schramm, 83, former president and general manager of the Dallas Cowboys on July 15th…and last but not least, one of our favorites, Warren Spahn, 82, Hall of Fame pitcher, who won more games than any left-hander in history on November 24th.

OUR OPINION (ALSO)

Occasionally, our local newspaper, The Fort Worth Star Telegram, uses articles from the New York Times or Washington Post and other similar publications on their opinions and editorial page. We decided in this issue of Opinions and Facts, we would use one from the Wall Street Journal, which we solely agree with. We, of course, do not have their permission, so please, nobody call them and tell on us!!!

There’s $500,000 for a water taxi in Pittsburgh, $225,000 for the Wheels Museum in New Mexico, and $100,000 for “streetscaping” a tony Salt Lake City neighborhood. In the cholesterol-subsidy category is $2 million to market specialty Wisconsin cheeses and goods. Alaska alone, home of Senate Appropriations Kingpin Ted Stevens, got 296 earmarked expenditures.

Among cutting-edge research grants are $450,000 to study ‘Sudden Oak Disease Syndrome’ and $90,000 for an olive fruit fly study…in France. Some lucky folks at the University of Hawaii bagged $200,000 to produce ‘Primal Quest,’ a film about Kalahari Bushmen who pursue their prey until either man or animal drops from exhaustion. Which sounds a lot like the appropriations process.

Congress is now entering a brave new budget year, with President Bush promising to restrain spending, for a change. Word is that his budget proposal, due soon, will cap domestic non-defense discretionary spending growth at 1%, except for homeland security, which will grow by 10%. Congressional veterans know what that means: All of those earmarks will have to be stuffed into the homeland security basket.

Unless, of course, Mr. Bush breaks type and exercises his veto power. Failing that, we see that this year’s omnibus bill contained $500,000 of the University of Akron to finance its ‘Exercise in Hard Choices’ program – a simulation of the federal budget process. Maybe Congress should enroll.”

(Someone told us that was also a sizeable grant to the National Cowgirl Museum here in Fort Worth. Please…say it’s not true.)

That’s our take. Yours is welcome.

"But Mr. and Mrs. Boomer, You Better get with it and Start Saving!"

There is no doubt about it, our people must prepare for retirement.  Ten years from now, more than $190,000 is the amount that will be needed to provide just medical care, not counting retirement benefits.  Today we know that normal, regular IRA contributions are down.  And Americans saved just 1% of their disposable income last year (U.S. Dept. Commerce).  We’ve come to the conclusion that saving must be encouraged by our government.  Tax breaks, and cooperation with the private sector is a must. 

"Pass it Please. And Sign it, Mr. President"

There is a bill before the House of Representatives today which would not tax capital gain distributions on a mutual fund until that fund is liquidated.  Basically, this is a deferral of capital gains taxes which means better growth and more encouragement for people to save.  So, rather than having to sell mutual fund shares to pay taxes, shareholders can take advantage of the uniqueness of mutual fund investing which has to do with the long term thinking and allow the investor the same long term view that, hopefully, money managers have.  And a recent study shows that deferring the capital gains distributions will actually increase the tax revenues to the government down the line.

"If Congress won’t do it, maybe the Free Market will."

While we at Omega have only used variable annuity contracts in areas where they fit; perhaps, one answer would be the lowering of the expense factors of these vehicles by doing away with any backend penalties if an individual needs to liquidate early.  In order to reduce these expenses, the high first year acquisition costs (commissions) would need to be cut.  Lowering the expenses would be another reason, (along with tax deferred growth) for the legitimate securities industry to be attracted to this insurance product.

Incidentally, there are some companies that have these benefits in their annuities today. 

OUR OPINION - Immigration: revisited

It seems that the Washington Post, a fairly liberal newspaper, has picked up on a great concept concerning the future lack of workers providing goods and services to the parade of Baby Boomers coming into our midst by 2010.  A Post editorial in May of 2005 applauds immigration legislation introduced by Sens. John McCain (R-ARIZ) and Edward M. Kennedy (D-Mass.)  While it doesn’t directly address the future workers problem, this legislation is not the first and probably won’t be the last attempt to bring about a realistic comprehensive national immigration policy, which would provide workers not only to pay Social Security taxes and replace the Baby Boomers who are retiring, but also provide able workers to produce the goods needed by future generations.  And among other things, the bill would allow illegal immigrants already here to regularize their status, but not easily.  They would have to apply for citizenship and after paying a hefty fine they’d have to stay employed for a prescribed period and pay back taxes. 

In our opinion, this is probably something that would not pass since it would require recognition of wrong doing.  According to the Post editorial, there are 10 million illegals in our country today.  That situation must be rectified. 

This bill resembles the policy that President Bush outlined more than a year ago, which should attract his support.  Also, politicians in Border States are demanding a change.  According to the editorial, smuggling and trafficking have contributed to lawlessness and a real sense of crisis along the border.

The Post editorial continues by saying, “There are legitimate concerns about the long term impact of a law such as this on American workers.  However, experience has shown that immigration creates jobs and growth over time, and countries with low immigration such as Japan aren’t exactly an advertisement for their policies.”

Legal workers are much easier to assimilate than illegals and the proposed bill requires would-be citizens to know English and civics.  The Post ends by saying, “This is a case where common sense and hard nose security concerns point in the same direction, and this bill could lead the way.”

One of our partners pointed out that finally the Washington Post has caught up with our Opinions and Facts and is applauding sensible change in immigration policies! 

Next thing you know the New York Times will agree with the Wall Street Journal!  Social Security and a National Health Policy is important, but on that third front burner sits mmigration Reform.

That’s our take… yours is welcome.