Here are some other recent questions from Answer Desk readers. As always, if you’d like to write to us, please include your first name and hometown.
AID FOR BUSINESSES?
Is there a place to send donations for the War on Iraq -for soldiers’ needs and humanitarian aid and reconstruction? Would donations help businesses that may be hurting during a prolonged war?
Kathy — Mineola, New York
MSNBC.COM: The United Service Organizations has a long history of supporting the U.S. military. It’s a private charitable group endorsed by the government. And there are a number of relief efforts underway to help provide humanitarian aid to Iraq. Here’s a Web site that keeps track of what some of the major groups are up to.
As for helping businesses that may be hurting, I’m not aware of any group coordinating charitable donations from the public. And I’m not sure it’s such a good idea. In the case of the airlines, Congress may eventually offer aid (i.e. your taxes) because of devastating financial impact of deep travel cutbacks due to war. Because the airline industry is critical to the rest of the economy, it makes sense to prevent it from falling apart.
There may be a few other industries that require similar government relief. The terror insurance bill comes to mind, though some critics believe the insurance industry essentially got a handout based on overblown fears about the need for insurance. Even since the law was enacted, most companies have decided to go without it.
The case for providing relief to most other businesses is harder to make. How would you determine whether the war has harmed a specific business? General economic conditions have been pretty lousy since last year: who can say the war is to blame for hurting a specific business? Who would decide? And how much financial relief would be appropriate?
As painful as it is to see people laid off, the idea of subsidizing failing businesses has gotten other economies in deep trouble (Japan is a good example.) There likely will be companies forced out of business because of the war. But it’s awfully hard to determine which ones deserve relief and which ones don’t.
OIL-FOR-FOOD FUNDS
Does the UN get a commission on the Iraqi oil-for-food program?
Glenda R. — Dyer, Indiana
MSNBC.COM: It depends what you mean by “commission.” The U.N. handles proceeds from the sale of Iraqi oil and uses those funds to pay for goods and services provided by the U.N. and other contractors. So, while there’s no provision setting aside a cut for the U.N., some of the money is clearly being used to pay U.N. expenses.
But figuring out exactly where the money goes is harder than reading one of Enron’s financial statements. For one thing, billions of revenues from Iraqi oil sales have been diverted to illegal “surcharges” imposed by the Iraqis and other oil smuggled to neighboring countries in violation of U.N. sanctions.
Since the oil-for-food program was set up in 1995, the U.N. says it has approved about $44 billion worth of contracts for humanitarian supplies and equipment. According to the U.N. Web site, almost $27 billion of that has been delivered to Iraq, while another $10.1 billion worth of supplies and equipment are “in the production and delivery pipeline.” There’s no further public accounting of where this stuff is.
The U.N. also says about $5.6 billion worth of those contracts are not funded because of an “oil revenue shortfall.” Those 2,755 contracts include food handling ($986 million); agriculture ($859 million); housing ($830 million); electricity ($563 million); telecommunications and transportation ($540 million); water and sanitation ($514 million); food ($426 million); health ($410 million); education ($408 million). But according to David Phillips at the Council on Foreign Relations, the U.N. has $12.9 billion in left over proceeds from oil sales sitting in an account waiting to be dispersed.
One more reason for the U.N. and U.S. to move as quickly as possible to turn over the sale of Iraqi oil to the Iraqi people.
EUROPEAN FRIENDS
Would you please be so kind to instruct me on the present breakdown of the sources (countries) the U.S. currently gets its oil from? I’m getting e-mails from my friends in Europe telling me we get 1/3 of our oil from Iraq.
Cindy W. — Provo, Utah
MSNBC.COM: Your European friends are mistaken, according to data from the U.S. Dept. of Energy. Of the nearly 12 million barrels per day the U.S. imported in 2001 (the latest data available) some 778,000 barrels of that came from Iraq. Since then, Iraqi production has slowed.
Of the roughly 75 million barrels per day of oil consumed every day around the world, the U.S. uses roughly 20 million barrels per day. According to the data, our biggest source of oil is Canada, followed closely by the Saudis (who are likely the biggest source today due to increased Saudi output.)
So Iraqi oil represents about 6 percent of U.S. imports and about 3 percent of total U.S. consumption. The statistic your friends are referring to, I believe, is that about one-third of the oil that Iraq produces is shipped (through third parties per U.N. sanctions) to the U.S. At roughly 2 million barrels per day, Iraq is not a big producer; its oil infrastructure is in terrible shape. But it is sitting on billions of barrels of proven reserves, and many oil analysts believe there’s a lot more there that hasn’t been found yet.
Though your friends may be wrong about the data, they’re correct that oil has played a starring role in the public drama surrounding the global debate about how to deal with Saddam — including longstanding French and Russian opposition to U.S./British efforts to crackdown on Iraq by tightening sanctions. France and Russia have long-term agreements with Saddam to develop oil and are owed billions by his regime. Once the regime changes, those agreements and debts will be left up in the air. So French and Russian opposition to war, while cloaked in humanitarian ideals, has a lot to do with oil too.
The U.S. strategy to “liberate” Iraq’s oil (a plan developed by oil industry veterans like Bush, Cheney, Rice, et al.) could also wind up breaking OPEC’s control of oil prices. The idea is that while the Iraqis currently pump a relatively small portion of global supplies, they have the potential to pump much, much more. To do that, they’ll need to spend billions developing their oil fields and will need the expertise of U.S. oil drillers and producers. (The battle over those contracts may not play out on cable television, but it will be fierce.)
If a pro-U.S. Iraq pumps enough oil fast enough, it could bust OPEC’s production limits and help lower prices. That’s the plan. It remains to be seen, though, whether the regime that replaces Saddam is “pro-U.S.” enough to make it work.
WHAT’S UP WITH GAS PRICES
Concerning gas prices going up, in consideration of things that are “anticipated” over in Iraq and not yet happening, why do prices of gas and natural gas have to go up? Where are U.S. oil reserves? Why does America have to import so much crude oil?
Laura G. — Huntersville, North Carolina
MSNBC.COM: The threat of war is only one of many reasons oil and gas prices have gone up recently. Crude oil prices are up sharply because traders — and users — of oil are worried that a war could cut off supplies. Once the threat of war subsides, crude oil prices may slide back down.
But bitter cold weather gets the blame for most of the recent rise in energy prices — including natural gas. Refineries can only produce so much heating oil and gasoline; the extended cold weather in the U.S. and Europe has created a spike in demand, which pushes prices higher. And no matter how much oil is in the ground, it can be pumped out only so fast. If demand for oil rises beyond the maximum production capacity of the producing countries, oil companies dip into storage. When those inventories get too low, that also pushes prices higher.
So, since the price of crude oil makes up about half the cost of a gallon of gasoline, higher oil prices mean higher gasoline prices. Here’s more on why gasoline prices are rising.
As for U.S. reserves, the answer is: we’ve used them up. The oil industry got started in this country over 100 years ago, and we’ve been pumping crude oil out of the ground in the U.S. longer than any other oil-producing country. Unfortunately, once it’s gone, it’s gone.
And after exploring for oil in the U.S. for decades, we’ve looked under just about every rock that might contain more. There are a few undeveloped pockets left — like the Alaska National Wildlife Reserve — but they only represent a drop in the bucket. The U.S. consumes about 20 million barrels of oil every day, but produce less than half that from U.S. reserves.
So we import oil from countries that have much more than we do. Saudi Arabia, the world’s biggest producer, has proven reserves of about 264 billion barrels; U.S. reserves are less than one tenth of that. (Iraq’s reserves, by the way, are estimated at 112 billion barrels.)
To guard against a sudden shutdown of oil supplies, the U.S. government has set up something called the Strategic Petroleum Reserves (by pumping oil into underground salt caves) that holds about 600 million barrels. But if we had to rely solely on those supplies, they’d be used up in a matter of months.
MAKING GASOLINE
Just how many gallons of gasoline can be produced from a barrel of oil?
Donald H. —Bothell, Washington
MSNBC.COM: According to the California Energy Commission, you get about 20 gallons of gasoline from a 42-gallon barrel of crude oil, but some refiners can squeeze out a bit more. The rest becomes diesel, heating oil, jet fuel, kerosene, etc. Here’s how it breaks down.
FORECASTING RATES
This month, my girlfriend and I purchased a new townhouse believing that it would be a smart long-term investment for us. Instead of paying rent each month, we’d be building equity by owning the home. With rates low, we figured that now would be a decent time to get in. However, since it is a new construction, we cannot sign the mortgage and lock into rates until 60 days before the finish date. Since we live in Pennsylvania, where we have been hit with a winter of cold weather and lots of snow, the builders have been unable to break ground so far. Their expected finish date is in October, and we are curious as to what the interest rate forecast is for the foreseeable future. We have received some conflicting advice on this topic, some have said the rates will remain low, others have told us they will skyrocket by then. I understand it is difficult to correctly predict this, but any information would be helpful.
Rich G. — Willow Grove, Pennsylvania
MSNBC.COM: Here’s our favorite interest rate joke:
Einstein dies and goes to heaven, but his room isn’t ready, so he has to share one for awhile.
“Here’s your first roommate,” says St. Peter. “He has an IQ of 180!”
“Great!” says Einstein. “We can discuss advanced physics!”
“And here is your second roommate. His IQ is 130!”
“Wonderful!” says Einstein. “We can discuss world events.”
A third man steps up to shake Einstein’s hand.
“I’m your last roommate and I’m sorry, but my IQ is only 80.”
Einstein smiles and says, “So, where do you think interest rates are headed?”
(Bada-boom.)
Predicting the future course of interest rates is not just difficult, it’s impossible: long-range weather forecasting is more reliable. The problem is that there are so many unpredictable economic forces that can push rates higher or lower.
Some of those forces are the result of mob psychology — like investors dumping stocks and buying bonds, which can drive rates lower. Some of the forces are the result of policy decisions made by the Federal Reserve Board — raising and lowering official bank lending rates or moving piles of cash in or out of the money supply. If you figure out how to predict what the Fed will do, please let me know: that would be a big news story.
About all you can say at the moment is that rates are historically very low, which means the odds are greater that they’ll go higher from here. But it’s anybody’s guess how long before that happens. Rates could stay low for years. In Japan, for example, the central bank’s official discount rate had been less than 1 percent for years.
It’s true, as a general rule, that rates tend to head higher when the economy is growing rapidly, because demand for money helps push up the price of borrowing it. So until the U.S. economy recovers, most people expect rates to remain low. Most forecasters don’t expect to see the U.S. economy begin humming again until at least early next year — but then they’ve been calling for a recovery for nearly two years. On the other hand, if the economy gets worse, interest rates could go even lower.
If you must speculate about rates, don’t forget to factor in the impact of war. If the U.S. invades Iraq, moves quickly to build a new government, and the stock market recovers, a lot of money could flow out of bonds into stocks, pushing bond prices lower and interest rates higher. Then again, post-war conflict could drag on for years. That could further hurt the dollar, forcing rates higher if the U.S. decides it needs to be propped up.
So, here’s the official Answer Desk forecast: rates will go higher, but we don’t know when. And they may go lower first. Or they’ll just stay the same.
Take your pick.
TIME FOR ANNUITIES?
My parents are 73 and 71, they have watched their assets decline in a number of accounts; mainly Stocks and mutual funds. They also have money in Money Market accounts and passbook savings accounts. The stocks and mutual funds have taken the biggest hits. The money market and savings accounts are paying less than 2 percent — before taxes. My parents both have IRAs that are tied to stock and CDs. After determining how much money they would need on a monthly basis, would it be prudent to transfer some of this money to a Fixed Annuity? The insurance company will bonus them an immediate 10 percent plus the current guaranteed minimum rate of 3 percent. They are aware of the surrender charges and the features and benefits of an annuity. They are at the point of their life where they don’t want to worry about the fluctuation of the market and how it will affect their money.
Roger D. — Columbus, Ohio
MSNBC.COM: Annuities can be useful for the reasons you’ve cited. But there are other ways to generate “worry-free” income without giving up the use of your money for good — which is what happens when you turn it over to the insurance company.
Yields on annuities are historically low right now, along with yields on other investments, which means if you buy an annuity now, you’re locking in that low yield. There may be some tax advantages to an annuity, but given your parents ages and the fact that their money is in IRAs, those advantages may not apply. You should see your accountant about that.
By way of comparison, the 30-year Treasury bond is currently yielding about 4.8 percent. It’s likely that bonds will lose value if interest rates rise again. But if guaranteed income is the goal, you would still have locked in that 4.8 percent return no matter what happens to the bond. (That’s not true of bond mutual funds, which can and do lose value if they buy and sell the wrong bonds.)
You also have to consider that the money you take out of stocks now will lock in the losses from the market’s recent drop. Some of those losses could be useful in offsetting taxable income, but only up to $3,000 a year. No one knows where the stock market bottom is or will be. But if and when the market recovers, you may wish you hadn’t locked in those stock losses by transferring money to an annuity.
If you decide to go with an annuity, there are a number of Web sites that can help you get the best terms. Try immediateannuity.com,annuityscout.com or annuitynet.com for starters.
BIWEEKLY MORTGAGES
We have recently re-financed and have now received mail asking us if we want to sign up for a program to pay our mortgage payments every two weeks instead of monthly. I understand that this will pay the mortgage off quicker, partly by making extra payments. What I want to know is: are these programs and the companies that run them trustworthy and reputable? Are there down sides? Basically, since we can afford it, is this the way to go?
Bill K. — Half Moon Bay, California
MSNBC.COM: Biweekly payments can cut overall interest payments — the faster you pay off your principal, the less interest your lender will charge you for the remaining balance. The question is whether you have the cash flow to do this. Instead of 12 monthly payments, you make 26 biweekly payments — which means you’re making the equivalent of 13 monthly payments a year.
An alternative is to make sure your mortgage comes with no pre-payment penalty, and then just make an extra monthly payment once a year — or whenever you can afford to. This will also help you pay off your mortgage “early” and save interest. But you can adjust your payments based on your particular financial situation over time. (It also requires a bit more discipline than signing up for a biweekly payment plan, but that’s the flip side of the flexibility you’ll be gaining.)
And if it comes down to a choice between paying off a credit card balance or making that extra mortgage payment, go for the credit card balance. With credit cards rates approaching 20 percent for many holders, you’ll save a lot more interest paying it off first.
WHO’S A DEPENDENT?
My father passed away recently, now my mother is living with me, can I claim my mother as a dependent on my taxes?
Joe — Franconia, Pennsylvania
MSNBC.COM: According to the IRS a person must meet five criteria to be claimed as a dependent:
Member of Household/Relationship - the person must be a relative or live in your household all year.
Joint Return- the person can’t file a joint tax return with someone else, except to claim a refund of all tax withheld.
Citizenship- the person must be a U.S. citizen, resident or national, or a resident of Canada or Mexico.
Gross Income - the person must have less than $3,000 of gross income unless he or she is your child and is under 19 years of age, or a full-time student (5 months of the year) and under age 24.
Support- you must have provided over half the person’s total support, including food, clothing, shelter, education, medical expenses and recreation.
BANKRUPTCY MARKDOWNS
I own 3,000 shares of Kmart (lucky me). As I watch the prices fall to almost nothing, I keep reading shareholders will lose everything when Kmart emerges from bankruptcy. How does that work? If Kmart is able to pull out and start showing a profit will I still lose the value of my shares or will they rise with the company as (if) they start to show a profit after emergence?
Steve M. — Indianapolis, Indiana
MSNBC.COM: Unfortunately, the question of profits and ownership are two different issues.
When a company like Kmart files for bankruptcy protection, they’ve usually run out of money to pay the bills and run up big debts along the way. The law allows them to stop paying those bills (store rents, underfunded pensions, interest on debts, goods from their suppliers, electric bills to keep the lights on, etc.) and negotiate an overall plan to pay off debts and start over.
One way they pay off those debts (since they have no more money) is to trade that debt for stock. Another way is to get new investors to put up money in return for a piece of the company (more stock). To do this, they create a “new” company and issue “new” stock to pay debts and raise new investment. The “old” shares in the “old” company — the ones you own — are essentially worthless. They represent ownership in a defunct entity.
So why isn’t Kmart stock trading at $0? It turns out, an internal company investigation is alleging that former Kmart executives looted the company as it was sliding into ruin. A federal grand jury is now looking at the matter. If, as seems likely, the company sues to try to recover money from those former executives, you might be entitled to a small piece of it. But it won’t come close to making up for shareholders losses in a company that had a market value of $6.7 billion in 2001.
HAPPY RETURNS
What is the difference between “yield” and “rate of return” when evaluating an investment’s performance?
Dianne T. — Seattle, Washington
MSNBC.COM: The only measure you really care about is how fast your investment is growing, and how much of that money you get to keep after taxes and inflation. There are a lot of terms used to describe this, but figuring it out is pretty simple. 1) Look at what your investment is worth today. 2) Subtract what you paid for it. 3) Subtract what you owe in taxes if you sell. 4) Divide by the number of years you owned the investment. 4) Factor out inflation.
“Rate of return” generally to the payoff you get without factoring out inflation. (Adjusting for inflation gives you the “real rate of return.”) You may also hear the phrase “total return” applied to stock investments: that usually means the increase in a stock’s value combined with any dividend payments.
“Return on Investment” and “Return on Capital” are measures used by companies to figure out how well they’re putting their shareholders money to work. These are widely followed, but the math gets pretty complicated and you have to look at exactly how the numbers are arrived at. “Yield” is a slightly different animal: it generally refers to the fixed payoff from an interest-bearing investment like a bond. It’s not the same as the “interest rate” because it depends how much you paid for the bond.
For example, if you buy a bond with a “face valve” of $1,000 and a “coupon rate” of 5 percent, that bond will pay you $50 a year, before taxes. When first sold for $1,000, the “yield” is also 5 percent.
But if the market price of that bond falls to $900, it still pays the same $50. Now the “yield” — the amount you’re getting for each dollar you invested — goes up to 5.56 percent ($50 divided by $900). That’s why some bond traders quote the price of a bond in percentage terms: once it’s traded in the open market, that’s all the next buyer cares about.
YEAR-END “GIFTS”
How much money do you suggest giving as a Christmas gift to service people: newspaper, childcare, mailman, etc.?
Wendy B. — San Diego, California
MSNBC.COM: Christmas “gifts” for those who provide services really fall into the category of tipping or year-end bonus. But usual the 15-percent rule for restaurant tips doesn’t really work for the holidays. (What amount do you pay 15 percent of?)
Still, just like waitresses and cab drivers, doormen and newspaper carriers don’t expected to make a living on their base salary. (That’s probably why people who rely heavily on tips themselves seem to have less trouble doing the math when it’s their turn to tip.) So those of us who rely on their services should expect to kick in a gratuity — even if you never see a bill.
Some people tip according to the quality of service performed, and that’s certainly a good place to start. If the newspaper ends up in the bushes more than it ends up on the doorstep, you’re on fairly solid ground if you decide to tip on the light side or not at all.
Others tip in advance to improve the quality of service they expect in the future. If you want your doorman to keep an eye on deliveries and chase away salespeople, a Christmas gift helps remind him how much you value all of his good work.
But a lot also depends on how much you value the service being performed — especially if the going wage falls far short of the mark. Childcare workers, for example, are among the lowest paid workers in the service industries. But I can’t think of a more important job than the one devoted to taking care of my kids.
It’s also fair to take into account just how much of that worker’s time was devoted to the services you enjoyed. You might give a caregiver who works fulltime in your home a year-end bonus worth two week’s salary (which, after all, comes out to 4 percent.) But the mailman who stops at your house once a day probably isn’t expecting another weekly paycheck from each stop on his route. A batch of homemade cookies might do the trick.
INHERITING BENEFITS?
My dad recently passed away. After working a lifetime without ever using the resources available to him from unemployment Insurance, are those years of untapped benefits available to my Mom? If not, where do all those thousands of dollars he was forced to set aside end up ?
Mike C. — Orlando, Florida
MSNBC.COM: First off, sorry to hear about your Dad.
Unemployment insurance is just that: it’s an insurance policy, managed by state governments, that pays a fixed amount (usually less than your salary) in the event you lose your job. The premiums, paid by workers and their employers, go to pay claims filed by other people who lose their job. One way to think of it is like car insurance: if your Dad owned a car for 10 years, paying insurance premiums each year, and never had an accident, you can’t get the premiums back. And you can’t transfer that coverage to your Mom, or collect on a damage claim for an accident that never happened.
It may not seem fair that people who work all their lives should have to pay to support people who are out of work. But the idea behind the system is that you pay a small amount for the peace of mind of knowing that if you do lose your job, you’ll have something to support you while you look for work.
Your Mom is entitled to another important benefit: Social Security, which works more like a savings account. All the money your Dad contributed during his working years went to an account that your mom is now entitled to. The good news is that Social Security contributions are much bigger than unemployment insurance premiums. So the amount of “lost” unemployment contributions is pretty small.
WIND POWER
I am wondering if our nation and economy is capable of moving quickly and smoothly toward renewable energy before 2010. The Bush Administration seems to be giving lip service to the idea of hydrogen economy. It still not costly enough invest in renewable energy. I hate to think of what the economy is like when it is costly to do something.
I was talking to my father and he seems to think farm tractors would be good starting point for fuel cell technology because the wind energy in places like Iowa could allow farmers to generate their own fuel. It could save the family farm.
Energy prices never seem to go down. These costs weigh down on business and household incomes. Fossil fuels are expensive to subsidized, expensive to protect and ecological bad.
Neil D. — Coralville, Iowa
MSNBC.COM:Your father is definitely on the right track. Hydrogen sure looks like the front runner to replace fossil fuels as an energy source in this century — largely because pure hydrogen turns to water — no pollution — when you burn it. But there’s a major, often-overlooked obstacle to hydrogen: you can’t pump it out of the ground, you have to strip it from water, and that takes electricity. So before we all start zooming around in hydrogen fuel cell-powered cars, we have to figure out how to generate the electricity to make all that hydrogen. Burning more fossil fuels in electric power plants gets us right back where we started from.
Wind power is a good candidate, but there’s nowhere near enough of it to replace fossil fuels. So no one in the energy industry — even the greenest proponents of renewable resources — believes wind and solar power can replace fossil fuels as a source of electricity any time soon. But whatever role renewables play in the long term, the windswept plains of the U.S. farmbelt will be a fertile source of power. Check out the Dept of Energy’s map of average annual wind power potential.
Despite the upheaval it created in the nation’s electricity markets, deregulation created a few overlooked benefits. One big one is that most states now require large power companies to buy electricity from even the smallest producers. So even a few wind turbines — if the wind is steady enough — can provide a reliable revenue stream to farmers in economically depressed parts of the country that have been all but abandoned.
For more on how to get started, visit the American Wind Energy Association’s Web site.
GOT A QUESTION?
Ever wonder what a P/E ratio is and why it’s so important? Are you confused about the official definition of a recession? And just what the heck is a derivative? We’re here to give you the answers. MSNBC.com’s weekly feature “The Answer Desk” helps you make sense of business, the economy and investing. So send along your questions to [email protected] and we’ll try to get you the answer. (Please include your home town with your question; we’ll only include your first name if we use your question.)
Any question is fair game, with one exception: no questions about specific investment recommendations, please — we’ll leave the stock picking to the “pros.”
Each week, we’ll take some of the most-frequently-asked questions and answer them here. We may not be able to answer every question, but over the weeks and months we will provide a comprehensive resource for you, explaining some more puzzling aspects of business and finance.
You can mail in questions at any time and then check this column every Friday for the answers.
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