This week, Kevin from Washington wants to know what Congress has in mind for people who want to throw in the towel on credit card debt. As always, if you'd like to write to us, please include your first name and hometown.
I understand a major revision in the bankruptcy law has been passed by Congress and is now in the Senate. Where can I find a laymen’s description of the revision and how it will affect personal bankruptcies?
Kevin S. — Everett, Wash.
The bill in question, H.R. 975, is monstrously complex (take a gander at this “summary”)
But the simple explanation is that this law would make it harder for individuals to wipe out their debts and start clean. So if you’re a lender, you like the bill. If you’re a borrower, you don’t.
Congress, under the forceful prodding of the financial services industry, has been trying to “reform” personal bankruptcy laws for nearly a decade. Lenders say they need relief from people who abuse the bankruptcy laws by piling up debt and then going to court to get off the hook - over and over. Proponents (including Democratic presidential candidates Sens. John Edwards, Joe Lieberman and Carol Moseley-Braun) say it’s not fair to the people who work hard to pay back their debts to let deadbeats off too easily.
Opponents say the problem is with banks and credit card companies who sell too many credit cards to people who can’t pay and shouldn’t have them.
Either way, the number of bankruptcy fillings continues to grow. In the latest fiscal year, ended Sept. 30, those filings hit a record of nearly 1.7 million - double the 1994 level. The question is: Does that increase reflect the dire financial squeeze of a rotten job market and a weak economy? Or are the laws letting deadbeats off the hook too easily?
So it’s not easy to find impartial descriptions of just what the impact of the law would be. Consumer groups, like the National Consumer Law Center, have a lot of gripes with the latest bill. The National Association of Federal Credit Unions is among those trying to strike a balance.
Despite passage by the House, including support from some 89 co-sponsors and strong support from the White House, the bill was among a number of provisions that never made it to the Senate for a floor vote.
But you can bet that the issue will be back again when Congress returns from recess in January. Until then, look for personal bankruptcy fillings to continue rising.
EARLIER ANSWERS
SEIZE THEIR ASSETS
If these mutual fund companies made their money illegally, why aren’t the assets frozen? If you’re a drug dealer, you made your money illegally and the government takes everything because you made the money illegally, right? So, tell me the difference between the two? And when these companies are found guilty and fined, what about the people who invested in these companies? Do they get their money back? Where does that money go?
Cyndy H., — Milwaukee, Wisconsin
I nominate you to be chairman of the Securities and Exchange Commission. Your way of thinking would go a long way to preventing mutual fund managers from ever stealing from their customers again.
Unfortunately, the SEC is run by lawyers, and they have a way of making things a little more complicated.
First of all, the there’s a big difference between the laws currently on the books that cover securities fraud and those governing the sale of drugs on a street corner. Most securities cases handled by the SEC involve civil, not criminal, charges. When the SEC wants to press criminal charges, they refer the case to the U.S. Attorney’s office in New York.
The SEC almost always, however, slaps fines on people who break those civil laws. When a company settles and agrees to pay it (or fights it and loses in court), that money goes directly to Uncle Sam, specifically the U.S. Treasury Dept. The idea is to make it costly for someone to commit fraud.
The SEC can also ask for “disgorgement” of money that was stolen (known in SEC-speak as “ill-gotten gains”) and then try to give it back to the people who were defrauded. Unfortunately, returning the money to people who were bilked is a little more complicated than giving a stolen wallet back to its rightful owner. How do you prove who lost money? And how much should they get back? With stocks and mutual funds, a lot depends on when you bought and sold and how long you held the shares. The cost of accounting for all those transactions can quickly eat up a lot of the money that’s supposed to go to the fraud’s victims.
When the SEC sets up a “restitution” fund to pay back investors who were scammed, each fund is managed separately. Unfortunately, there’s no Restitution Hotline you can call.
You can, however, go to the SEC’s Web site, where you’ll find a list of current claims being paid to investors. If you don’t see your investment there, call the SEC Investor Assistance line at 202-942-7040 or email them at [email protected]. If that doesn’t work, contact the regional SEC office in your area.
MORGAN STANLEY REFUNDS?
Please advise who I should contact regarding funds I have with Morgan Stanley in Red Bank, N.J. I do not have a lot invested, but the fees I have been charged are not to my understanding.
Anne P. — Parsippany N.J.
In the case of Morgan Stanley, which paid its brokers bonuses to steer investors to high-priced funds without telling those customers, you may be in luck. The $50 million fine the company agreed to pay to settle charges will go into a so-called Fair Fund — all of which will be paid customers who bought “preferred” fund shares from January 1, 2000 through the present.
These shares were not Morgan Stanley funds; they were part of a “partners” program involving 16 other mutual fund companies. Unfortunately, the SEC won’t name those funds because the companies are still under investigation. So how, then, can you know if you qualify for a refund?
For now, you don’t. The SEC has ordered Morgan Stanley to set up a distribution plan, which will then pay investors who qualify. The odds of collecting are pretty good: some 7 million transactions involving about 2.7 million customers are covered by the plan.
(A smaller group of investors, about 7,000, will be eligible to convert higher-priced B shares for A shares. But you only qualify if you bought $100,000 worth of those shares.)
Merri-Jo Gillette, who oversees enforcement actions in the SEC’s Philadelphia office, says the best you can do for now is to contact Morgan Stanley, make sure they have your current address, and then sit tight until the distribution plan is worked out. Since they’ll be handling the distribution, you’ll want to make sure they know where to find you.
FUND MANAGER PAYCHECKS
Is there any way to determine the compensation, direct and indirect, of mutual fund officers and managers of particular funds? That information does not appear in their prospectuses or on their Web pages or any of the annual reports they provide. Does the new House legislation require such disclosures?
Bill — Albany, GA
No, it doesn’t. As you point out, mutual fund investors are completely in the dark when they try to find out how well their fund’s manager is getting paid.
“To me, the really appalling part is that we can’t find out what the manager’s bonus is based on and how much they have in their funds,” said Russel Kinnel, a mutual fund analyst at Morningstar. “We’ll know Congress and the SEC are serious about reforming funds when they start to require this information.”
Apparently, Congress isn’t there yet. The Mutual Funds Integrity and Fee Transparency Act (H.R. 2420), passed by the House this week, makes a half-hearted attempt to address this issue - by requiring funds to disclose how they decided how much to pay their fund managers. But they don’t have to come clean with the size of those paychecks. The Senate is just getting started on its version of the bill, S.1822, which has similar language which talks only about disclosing the “structure” of fund mangers’ compensation.
And even if Congress hears from all of you Answer Desk readers demanding tougher disclosure requirements, any such law has to get past the mutual fund lobby, one of the nation’s most powerful.
“They will be out in full force,” said Sally Greenburg at Consumers Union, “although they’re running for cover now.”
For more on HR 2420, check out the House Financial Services Committee Web site.
ARE MY FUNDS OK?
I’d like to know if any of the mutual funds in my 401(k) plan are under investigation. The record keeper for our plan is Prudential.
Here is a list of the funds: [fund names deleted].
Robin D. — Manchester, NH.
At the moment, it’s impossible to say. The SEC and New York Attorney General’s office have sent warning letters to hundreds of funds saying they may be a target, but until formal charges are filed — let alone proven to be true — you have no way of knowing whether your fund will be dragged into the mess. The risk now is that, if you shift money to a new fund, that fund could end up in the headlines tomorrow.
The SEC says it believes about 1 in every 4 funds may be involved in one of the abusive trading schemes that are the focus of the broad investigation. But since federal regulators were so far behind the curve, Washington has a lot of catching up to do. It may be awhile before it can sift through all the evidence to determine which funds are guilty and which ones aren’t.
If you’re invested in one of the funds that has already admitted they let professional traders profit at the expense of small, long-term investors, you may want to sell your shares just to be rid of the bums. If you’re considering moving your money, but still believe mutual funds are the way to go, the safest thing is to stick to basics. Look for mutual funds with the lowest fees and consistent management (recent changes are a red flag). And avoid funds that have a high “turnover” rate — they drive up fees by moving in and out of stocks.
What is the risk of holding on? If other shareholders bail out of your tarnished fund in large numbers, the fund manager may have to sell stocks faster than they’d like. That means you may get hit with a bigger capital gain that you wanted or expected. And tarnished funds that lose assets quickly will have to spread costs over fewer shareholders, so the your fees may go up. Funds with a bad name will also probably have trouble getting — and keeping — their top performers.
But keep in mind that you’re much less likely to lose a bundle holding a fund that’s the target of the current investigation than you would have lost by holding, say, Enron or Lucent stock. That’s because, for most of these funds, there’s still nothing wrong with the stocks they hold. Even if the fund has to liquidate, it should still be able to raise plenty of cash to pay shareholders.
FINDING FUND FEES
Why, whenever I have a transaction for either a mutual fund or stock, do I buy it for the high price of the day and sell it for the low price of the day. Is the SEC monitoring these specifics or is this something that the government should also look at? Is this another can of worms for the worms?
Duane R — Chicago
The difference in the two prices you’re referring to is the “spread,” and it represents the commission that is paid to the broker who executes your trade. In theory, buyers and sellers could be matched electronically. But as long as the trades are handled by human beings, they have to get paid somehow.
While fees are regulated, they vary a great deal, and high fees can quickly sap your fund of any investment gains. The NASD limits sales loads to 8.5 percent, for example, which is more than many funds are making these days.
The “spread” is one of the most visible fees: You just compare the “bid” (the price you’ll pay to buy a share) and the “ask” (the price the seller gets) and the difference represents a commission you pay. You may pay a “sales load” — the broker’s commission — on the front-end (when you buy) or back-end (when you sell) or both.
But the “spread” is only one of the costs you’ll encounter when you invest in mutual funds. The problem many individual investors have is figuring out just how much they’re paying — and where all these fees are going. That’s one of the ways that New York Attorney General Eliot Spitzer wants the industry to clean up its act — by making it much easier to figure out what you’re paying.
Until that happens, you’ll just have to dig further to find the other fees and expenses buried in the fund’s prospectus — that mind-numbing document written by lawyers that fund companies know you’re just going to throw away.
Each time the fund manager buys or sells a stock in your fund, for example, there’s a commission paid to whoever executed that trade. Funds with high “turnover” — heavy trading of its portfolio — will pay more in commissions that more stable funds. You may also be charged so-called 12b-1 fees for expenses like advertising and marketing — for all that useless junk mail your fund sends you every month trying to get you to buy other funds from the same company.
The list goes on; for details on other fund fees you may be paying, check out the Securities & Exchange Commission’s explanation.
One of the easiest ways to compare funds is to look at the so-called “expense ratio.” Though not all fees are covered, this is supposed to tell you what percentage of the funds assets are being used to pay fees and commissions to the fund manager and the various traders and brokers who get their cut. The higher the expense ratio, the more likely your fund is to lag other funds in its category, because there’s no connection between the level of fees you pay and the funds performance. In this case, you don’t necessarily “get what you pay for.”
AM I TRAPPED?
What do you think of letting victims of the current mutual fund scandal pull their money out (even if it’s an IRA) with no penalties? Otherwise, they are somewhat trapped in a no-win situation.
Donna — San Antonio, Tex.
You can move money from one mutual fund to another without penalty as long as you keep the money within an IRA. Some brokerage IRA accounts let you to buy and sell from a variety of fund families within that account. If your IRA account is “captive” to a single fund family, you can “roll over” the money into a new fund IRA within 60 days and not owe any taxes or penalties.
IRS Publication 590.
My company is forcing its employees to take 6 days vacation in order to affect the bottom line. Many employees must take the time without pay because they do not have enough vacation hours accrued. Did the company break its contract with the salaried employees and revert them to hourly ones? If so, are the employees entitled to be compensation for overtime since their date of hire?
Tres H. — Columbus, Ohio
When looking for answers to legal questions, we usually turn to the lawyers. Unfortunately, that means the answer isn’t simple, but this one may help you to get paid after all.
First off, is the “contract” you refer to a personal services contract? A collective bargaining agreement? If so, you need to check and see if the issue of involuntary, unpaid “vacation” is covered under those agreements.
If not, the question of whether you’re an hourly or salaried worker really doesn’t apply, according James Katz, a Philadelphia labor lawyer. And neither you nor your employer are free to designate you arbitrarily as an hourly worker, and thus eligible for overtime. That status, says Katz, is determined by the Fair Labor Standards Act and depends on a host of job characteristics, including how much you make, your level of skill or education and how closely you are supervised by a manager.
There may also be state laws that apply to the issue of involuntarily, unpaid “vacation.” (We made several calls to the Ohio Dept. of Labor but were unable to get an answer.)
But if you want to get paid for your “vacation,” Katz suggests you try filing for unemployment insurance.
“You can call it what you want,” he said, “but it’s really a layoff.”
You may be ineligible for payment if the waiting period is longer than a week. But it’s worth a try: If your claim is accepted, your employer will have to kick in to cover part of the cost of your claim.
And if you’re successful, it might discourage the company from pulling this stunt again, said Katz.
“If an employer decides to shut down a plant to save money, they may think twice about it if it’s going to increase their unemployment insurance costs,” he said.
I heard that the old $20’s would be unusable. Is this true? Are the old $20 bills still going to be in circulation, or will we have to change any old bills for new ones? If so, do we have a time limit?
Dawn S. —- Denver
Not true. The old $20s are good forever. Over time, the Treasury will pull the old ones out of circulation, but you don’t need to trade them before any set deadline. The average “lifespan” of a $20 bill is about two years, but you’ll no doubt still see them in circulation for years.
What is the average inflation rate for the last five years, per year? Please respond quickly as I need this answer before class in the morning.
Angela R. — Woodstock, VA
Sorry, Angela: we have two rules here at the Answer Desk. We don’t making recommendations on specific investments. And we don’t do other people’s homework. That would be cheating, wouldn’t it?
I WAS TRYING to find information on annual income for the U.S. population. How many people working in the United States of America gross $25,000? Is that information available for a national standard, or is it broken down state, by state?
Kathy R. — Kansas City, MO
You can get these numbers sliced and diced just about any way you want, thanks to the hard-working — and probably underpaid — folks at the U.S. Bureau of Labor Statistics. Their Web site is a marvel of statistical minutiae — good for everything from settling bar bets to asking your boss for a raise.
According to the bureau’s July 2002 survey (the latest comprehensive data available), the average salary of a U.S. worker was $17.18 an hour, and that worker put in 35.8 hours a week on the job. So, if my calculator is working right, our average worker pulled down $31,982.28 for the year. (That figure, of course, doesn’t include overtime or the value of benefits like health insurance.)
As your math teacher may have told you, the average doesn’t tell you that half of all U.S. workers made more, and half made less. That number is the median. According to the bureau, the median paycheck for men who were full-time wage and salary workers was $680 a week, or $35,360 a year. For women, the figure was $530, or $27,560 a year — some 22 percent less than men. (No one ever said salaries are fair. A recent study by a University of Florida professor found that tall people make more than short people; after controlling for gender, weight and age, he found that each inch in height added an average of $789 a year in pay.)
The BLS also serves up wage data state-by-state, and even city-by-city for over 85 areas within the 50 states. There’s a handy calculator that break down wages by occupation, region, and work level.
Work levels - similar to the “GS” scale used to calculate pay for federal government workers - take into account a specific job’s responsibilities using 9 factors. This is extremely useful in comparing how well you’re paid. A news reporter in your area with a “grade level” 10 makes $28.48 a hour, according to the BLS. That same job in New York city pays $31.60 an hour. The numbers can be especially useful if you’re thinking of changing careers or taking a new job in another part of the country.
And even if you decide to stay put, check the data the next time you decide you’re underpaid. If you’re right, you can take the report to your boss and make better case for a raise.
Why don’t we hear in the news about the companies reducing the salaries of their employees? I’ve heard of two such companies in the last month, yet nothing was ever reported on this.
Glenn S. — Suwanee, GA
Probably because those salary cuts are made quietly, meaning the company tells individual workers, but doesn’t make a formal public announcement.
But if you listen carefully to the quarterly earnings reports that are now hitting the news, you’ll hear lots of companies touting their success in “cost cutting” as a key reason for better profits. Much of that cost cutting is wages - whether from outright layoffs or salary cuts.
On average, wages are still rising; as of September 2003, the average weekly paycheck was $523.22 — up from $516.76 the year before, according to the BLS. But that statistic is little comfort to you if your paycheck starts shrinking — or disappears entirely.
EARLIER ANSWERS
THE
Why in the world is our government spending $30 million to advertise new graphics on twenty dollar bills? The national news media will cover the story without wasting all that freaking money. What a crock!
Randy K. — Fresno, CA
Thirty million dollars does seem like a lot of cash, but when you change something as important as the color of money, you need to do at least some hand-holding. That’s why the Treasury and Federal Reserve is going to great lengths to reassure us all not only that the new bills are real - but that the old ones are still good, according to Marsha Reidhill. She’s the Federal Reserve Board’s “assistant director for cash” (what a great job.)
In fact, it sounds like the government got its money’s worth. According to the New Color of Money Hotline, more than 37 million training items (brochures, posters, training videos and CD-ROMS) are being sent to businesses to train people who handle cash. (You wouldn’t want to go into a store to make a purchase and have the clerk behind the counter say, “I’m not going to take that money.”)
It would also defeat the purpose of redesigning the bill (cutting down on counterfeiting) if people who handle cash don’t know what to look for on the new bills. To learn more, check out the Web site about the new $20 bill - which as already attracted some 2 million visitors.
And because some 60 percent of the $650 billion in U.S. currency is held outside the U.S., designers of the new money had to get their message out around the world — in 14 different languages — especially in countries where dollars are widely used like Russia and Latin American countries.
And some of the new publicity was free: the new $20 has already made cameo appearances (playing itself) on “Wheel of Fortune” and “Who Wants to Be a Millionaire?”
Since I am in the game room business, we had already had to change all the money transports in the games. (This is the mechanism in the games that accept the money, commonly know as a bill validator.) The money transports are not cheap will we have to change the validators again with the new bill.
Raymond M. —- Old Mill Creek, IL.
You’re not alone. In 1998, the last time the $20 bill was redesigned, the Postal Service had to replace hardware on all of its 12,000 stamp vending machines. Transit systems had to replace hardware and software for its ticket machines: in Washington, D.C., the bill came to $2.2 million.
This time around, the Treasury began working with vending machine manufacturers and transit systems about a year ago to help them get ready for the switch.
Fortunately, you still have some time. The rollout of the new currency is going to happen gradually, so most people will still use the old $20 bills for some time. (The average life span of a new $20 is about two years.)
And, depending on what you’re selling, it may not even be worth replacing all those validators just for the new $20s. New or old, the $20 bill is doesn’t show up all that much at vending machines. In 1998, the Atlanta transit system, for example, shelled out $21,500 to change it machines fore the new $20s. But they only made up about 3 percent of the bills used at its fare machines.
I have heard that if there was a reading tax on every type of reading material (religion included) that it would raise $800 billion a year. And if we strictly held it to pay the debt, it would help our children. So why do we not bite the bullet and do something with this idea? This example is based on a 5-cent tax per dollar ratio. Are we so uptight that we can’t ask for help from every tax-exempt business, and make the results of the question public?
David B. — Alturas, Calif.
There’s no shortage of ideas about how the government could raise more taxes — just look at the list of recent proposals in your state.) The question most people in California (and the rest of the country) are asking is: Are current deficits the result of government not having raised enough in taxes — or the result of government spending too much money? It’s an old question, and if there was an easy answer, we wouldn’t still be arguing about it.
Still, even the most die-hard tax-cutter will acknowledge that — no matter how much you cut spending — you need some form of taxation if you want to retain some form of government. So what should you tax? The simplest strategy is to tax income (the money that’s missing from your paycheck every week) or spending (the sales tax).
But tax policy turns out to be a very powerful “carrot and stick,” which the government uses to try to influence people’s behavior. Over the years, our tax system has grown to include a variety of incentives (tax breaks for things like home ownership) and penalties (“sin” taxes on products like alcohol and cigarettes are very popular these days). More recently, tax policy has been shaped by companies, industries and interest groups that are willing and able to pay Congressional candidates to give them a tax break. Everyone agrees the system is busted, but no one can agree on how to go about fixing it.
Slapping a tax on reading may sound appealing because it would spread the cost of government so widely — reducing the impact to almost nothing on, say, a “per word” basis. But, for starters, the mechanics might be difficult to work out. Would you tax everything we read? Road signs? What about restaurant menus? (Web sites wouldn’t count, of course.) If just just tax books, would paperbacks be taxed less than hardcover? Why?
Heavy readers, naturally, would bear a much heavier burden than those who get all their information and entertainment from television and movies — regardless of how much the couch potatoes can afford or how much they use government services. How is that “fair”?
And is reading an activity that — by taxing — we want to discourage people from doing? In a world where education is a leading cause of health and wealth, maybe we should change our tax laws to encourage reading.
Which OPEC nation did not raise its oil prices, when the other OPEC nations raised their prices? Why?
Emily (tenth grade student) — Michigan
It may seem like OPEC countries can just raise oil prices whenever they want to — and in a way they do. But oil prices are set every day (every minute, actually) by oil traders in commodities exchanges in places like London, Chicago and New York. (You may have seen pictures of them jumping up and down waving their arms and yelling at each other.) They’re buying oil for people who actually use it. But they’re also betting on where prices will head next — buying and selling contracts to buy oil. And those contracts rise and fall in price based on all sorts of news.
The news traders care about most all boils down to a basic question: Is there more oil out there — or less — than there are people who need it? When there’s lots of oil, and demand is low, it’s harder to sell those contracts — so the price goes down. (Just like trying to sell that Beanie Baby on eBay that everyone already has.) When there’s not enough oil to go around, demand gets bigger than supply, so the price goes up. (If you’ve got something everyone wants — like the last two tickets to a Beyonce concert — you can get top dollar.)
That’s why OPEC meets and decides, several times a year, how much oil each member is going to pump out of the ground. By adding or cutting back on supply, they try to control prices. (Sometimes, just the news that OPEC decided to cut production makes prices jump.) Over time, oil traders watch for government and industry reports showing just how much oil is really out there. Often, OPEC countries don’t do what they say they’re going to do: They’re notorious for “cheating” and pumping more oil than they said they would. And there are all sorts of forces that OPEC can’t control: How cold the weather is, say, or what other non-OPEC countries like Russia decide to produce.
The OPEC country most people watch (and listen to) closely is Saudi Arabia — because it has the biggest pool of oil in the ground and produces the most every day. Most other OPEC countries are already pumping as much as they can, so Saudi Arabia has the greatest influence on the flow of oil. If and when Iraq develops it oil industry, that could change. But that’s a subject for another day.
You know, there is more oil in Alberta, Canada than Saudi Arabia. Why do you go to the bandits to get your oil when you can do business with a reputable country such as Canada?
Don — Alberta, Canada
Actually, that’s not true. According to the U.S. Dept. of Energy, Canada has about 180 billion barrels of proven reserves — compared to Saudi Arabia’s 264.2 billion. The problem is that most of that Canadian oil is in oil sands. It’s much more expensive to get out of the ground than Saudi crude — where you can pretty much get at oil by sticking a pipe in the ground.
Canada is already one of the biggest sources of U.S. energy — especially natural gas. If the U.S. could use those supplies to “replace” Saudi oil, it would have done so long ago. Iraq, by the way, is sitting on at least 112 billion barrels — and probably a lot more because much of it has not been fully explored. (By way of comparison, the Alaska National Wildlife Refuge, if developed, would yield between 9 and 16 billion barrels.)
I am wondering how it is that OPEC is citing falling oil prices for the reason behind them cutting production for the 4th quarter, yet I’m still paying over $2.00 a gallon at the pumps here?
Justin K. — Chicago, Ill.
MSNBC.COM: OPEC can use whatever excuse they want to cut production and force prices higher. But the fact is, oil prices have fallen since the U.S.-led invasion of Iraq in March.
Higher crude oil prices do contribute to higher gasoline prices. But that’s only part of the story: The cost of crude makes up less than half the price of a gallon of gas at the pump. Twelve cents of every dollar goes to marketing cost and profit, another 14 cents pays for the cost of refining (and profit for the refiner.) And you pay, on average, about 28 cents in taxes for every dollar’s worth of gas you buy. (Illinois charges you 48.4 cents per gallon, one of the highest taxes in the nation.)
Gas price spikes also occur when gasoline supplies run low — no matter what crude oil costs. This is especially true in regions of the country that require specially “reformulated” gasoline — designed to burn cleaner and cut pollution. If there’s a shortage of the additive used to make that blend, gasoline supplies get tight and prices go up. To make matters worse in the Midwest, your reformulated gasoline uses ethanol (made from all that corn grown by Illinois farmers) — but most refineries outside the region uses another additive (called MTBE) in their formulations. So if anything goes wrong — a refinery catches fire or ethanol supplies run short — prices in your area go up.
There are a host of other reasons why gasoline prices go up and down. For more information, check out the Department of Energy’s primer on the subject.
Would OPEC’s holding back on production cause harm to electric utilities? How will it effect the value of the stocks?
Gerry — Pittsburgh, Penn.
MSNBC.COM: We have to answer your question with another one: What do you mean by utility? In the old days, one company made power, transmitted it and sold it to customers. Deregulation has split the industry into sub-industries, so higher fuel costs are most likely to hurt only those companies that make electricity. If you own these stocks, you need to check carefully to see exactly what business they’re in.
But even if OPEC succeeds in raising oil prices, the impact would likely be indirect. Though most of the electricity in the U.S. is made by burning fossil fuels, oil is pretty far down the list. The biggest source — which last year produced 1.9 billion megawatts — is coal. Next on the list is nuclear (780 million megawatts), natural gas (686 million), hydro (255 million) and then oil (90 million). (Only 85 million megawatts came from renewables like solar, wind, geothermal and biomass.) Here’s the breakdown on the Dept. of Energy’s Web site
OPEC’s move can have an impact on natural gas prices if higher oil prices prompt energy consumers to switch to gas. But natural gas is no bargain these days, due largely to a shortage of new supplies and the pipelines needed to bring them to market. That squeeze will likely increase — most new electric plants built today use natural gas because of the higher cost of making coal burn cleanly.
If you want to follow the impact of rising and falling energy prices on utilities, you can watch what’s called the daily “spark spread.” This favorite statistic of energy analysts is the theoretical profit margin for a power plant: It’s the difference between the cost of the fuel and the value of the electricity generated. To crunch the numbers, check out the spark spread page on the New York Mercantile Exchange’s Web site.
Where can one find the amount of compensation a CEO and other officers of a corporation receive?
Herb S. —Milwaukee, Wisconsin.
The answer is usually — but not always — available in public documents. Before you go looking, you need to ask a few more questions. For starters, is the company public or private?
For a public corporation — one that sells shares to the public on the open market — most of what you’re looking for can be found in the annual proxy statement that the Securities and Exchange Commission requires every public company to file and mail to shareholders. (Don’t bother with the glossy annual report showing happy company executives and workers, complete with management’s excuses for what went wrong.) The annual SEC 10-K report, which includes other financial data, also has some information on executive compensation, but it’s not as complete. For private companies that are about to go public, this information is required in the registration statement for the initial public offering. Quarterly financial statements, which are not audited, do not have to include executive pay information.
Then there’s the question of what exactly you mean by “compensation.” Just salary and cash bonus? What about grants of stock or stock options? Or interest-free loans? Or free use of the company jet?
Much of these items are covered in SEC regulations; some are not. In the case of perks, for example, these need to be reported only if the total cost to the company is more than $50,000 — or 10 percent of the CEO’s base salary and bonus (whichever is less). As for just what these perks are, the rules say that if any one of them is worth more than 25 percent of the total reported, the company has to come clean. Otherwise, you’ll never know unless the financial press starts snooping.
“Deferred compensation” — the item that made Mr. Grasso’s pay package look so huge — is also reported under these rules, along with any sweet deals regarding how that money is invested. (The big reason for deferring pay is to save taxes.)
To find out how much a specific CEO is getting, go to the SEC’s Web site, where you can look up the filings. (If you own the stock, you should have already gotten a proxy statement — usually in March or April — when you’re invited to the shareholders meeting and asked to fill out a ballot for directors. If you didn’t get one, call the company’s investor relations department and ask why not.) The SEC also has a useful, step-by-step guide to finding the disclosures on CEO’s pay packages and figuring out what they mean.
WHAT ABOUT
When negotiating for an annual cost-of-living adjustment, what would that percentage be?
Lisa S. — Granger, Wash.
You can ask for whatever you want. Tell them if Dick Grasso is worth $140 million, so are you.
But if you want to stick with what the government data suggests, the cost of living — as measured by the consumer price index — is up 2.2 percent for the latest 12 months That’s as of August, the freshest numbers available from the Bureau of Labor Statistics.
The folks sitting across the table may counter that the inflation rate in your region is lower than the national average, but in the Seattle area the number is just about the same.
You can counter with BLS data showing that -- regardless of what the price index shows -- wages are rising more quickly. If you're working in private industry, wages on average were up 3.5 percent over the past 12 months (as of the second quarter of this year.) If your a state or local government workers, you'll be able to make a better argument -- wages there have gone up 4.1 percent over the same period. (Your bargaining adversaries will almost certainly counter that wages have risen much more slowly -- 1 percent or less -- in the latest 3 months recorded by the BLS.)
The "official" Cost Of Living Adjustment -- pegged once a year to calculate how much to raise Social Security checks -- is due out next month. Over the past 25 years, that number has soared as high as 14.3 percent (a nice raise, but raging inflation ate up almost all of it) to a low of 1.3 percent in 1998. Last October, the increase was pegged at 1.4 percent.
In the case of wage data, the BLS also serves up the data sliced by region but they aren't as fresh. The latest data in your area is from Sept., 2002.
Could you explain to me what it exactly means when a stock is overvalued and when it is undervalued? Which one of them is more attractive for investment considerations?
Ana R. -- Santa Monica, Calif.
MSNBC.COM: You always want to go with stocks that are undervalued -- and sell when they're overvalued. The problem is trying to figure out which is which.
"Undervalued" is Wall Street jargon for "cheap." If Costco is selling your favorite new TV for $10 less than the same model at Wal-Mart, you might say the Costco TV is "undervalued" -- the store has attached a value to it that's less than a comparable TV offered by another seller. On the other hand, if someone on eBay is willing to pay $50 more for the same TV, it's "overvalued" on eBay.
The tougher part is figuring out what the "right" value is for a stock. Most investors historically have used a company's earnings power as a measure of its value. If earnings are strong, and going up, chances are good the stock price will too.
So now you're trying to buy a stock with good earnings as cheaply as possible. That's what "earnings per share" data and "price-earnings" ratios are for. It's simply a way to compare how much you're paying for a dollar of earnings from one company to the next. Or one industry to the next. Or one month to the next. Stock prices may change on a daily basis, but the earnings -- the "E" of the P/E ratio -- are fairly easy to nail down (as long as you believe the company's accountants). The "E" represents earnings per share -- the total profit divided by the number of shares out there on the market. The "P" represents the stock's price.
So if you can buy a stock for 10 times earnings when the company's competitors are selling for 20 times earnings -- your stock may be "undervalued." (It also could be priced lower than its peers because its in serious financial trouble -- that's why these terms are so imprecise.)
When your broker tells you he wants you to buy a stock he thinks is "undervalued" -- ask him to explain why he thinks so. The answer could be very illuminating. (And don't buy unless you fully understand -- and believe -- the pitch.)
What is the difference between "gross profit margin" and "markup"?
Tom C. -- Statesville, N.C.
MSNBC.COM: As the folks at Enron and WorldCom demonstrated, these terms can mean pretty much whatever you want them to mean.
Subtle differences in accounting practices used to be reserved for industries that had legitimate reasons for doing things differently. A bank, and airline and a software company keep their books in slightly different ways because of the nature of how they make their money. But the underlying concepts are the same.
"Gross profit margin," for example, refers to a company's profit as a percentage of its total revenues. But the devil is in the details. What expenses are deducted before you get to "profit"? How do you book revenues? Without a national accounting oversight board -- with teeth -- companies have been free to massage these numbers pretty much as they see fit.
"Markup" is more informal. It's usually used to refer to the difference between, say, a wholesale and retail price. If you manufacture office chairs, sell them to dealers for $180 each and they sell them for $200, that's a $20 markup.
MSNBC.COM: Sometimes it's more fun to ask the questions that answer them. Last week, in our response to Eric in Milwaukee, we asked if there was any way to rig our son's computer so he can only play an hour of PC games a day. Apparently, we're not the only parents with that problem. Here's a suggestion from a reader:
We use a program called WatchDog. You can set up privileges on a one-time basis (for good behavior / a project done well) OR daily time limits. You can grant internet privileges or grant access to only specific Web sites. You can block access to your programs (like Quicken). It's great with managing time between siblings too!
A word of caution for the wise: If your child is logged in and she/he is doing homework (e.g. typing in a Word doc), WatchDog does NOT send a 1 minute warning message, it just logs the child off the computer -- this can result in losing any work created since the last save -- AND if it's an unnamed file, IT IS GONE and there's NO backup created by Word because the work wasn't lost due to a power failure.
Mary Beth M. (Mom) -- Houston, Tex.
I have a good friend who's 34, has a good job and is thinking of investing some money. He looked on the Internet and somehow found some company in Florida that he has been corresponding with that is encouraging him to invest in heating oil. They want a minimum investment of $3000.00 for so many gallons. My friend is considering this investment even though it is a lot of money. I told him it sounds pretty fishy to me. I wouldn't invest that much money in a company based in Florida (we live in Oklahoma) over the Internet. I told him if he really wants to do something like that he should learn more about it and find a financial advisor here who should be able to do the same thing. What do you think?
Al C. -- Oklahoma City
MSNBC.COM: Heating oil in Florida? Tell your friend to call me about investing in air conditioners in Alaska. Besides, sending $3,000 to someone you "met" over the Internet is not investing. It's more like buying meat from some guy on a street corner.
But if, by some chance, this company really is "legitimate," it sounds like they're pitching heating oil futures contracts. While perfectly legal, these contracts allow you to buy and sell large amounts of a commodity -- everything from coffee to pork bellies -- with relatively little money. If you know what you're doing, you can make big money on very small moves in the price of the commodity.
But these markets are very complex, dominated by professionals who trade them full-time, have access to research you don't and who've followed them for years. The companies that try to reel in novices like your friend are almost invariably looking for trading commissions and could care less whether you make any money.
And you're right about looking for a local expert: I can't think of a better place than Oklahoma to find someone who knows about oil.
I am the proud owner of a new Design Patent as of May 27,2003, Pat.# D0475090. My question to you is, in your opinion, what would my next step be? I've been receiving all sorts of information from different companies claiming that, if I paid them a fee, they would help find a manufacturer, and some prospective buyers for my product. Is this a scam versus being legit or what? I have obtained various targets for this product that's already in production as we speak, and I'm not sure what's in store next. I welcome your input.
Bennie M. -- Houston, Tex.
MSNBC.COM: My father, who spent much of his career running manufacturing companies, used to say that a consultant is a guy who asks to borrow your watch, tells you the time and then sends you a bill.
There are plenty of companies that troll for business using public databases like the U.S. Patent Office, and some of them may be reputable. So are some of the attorneys who chase ambulances. Or "mortgage insurance" companies that flooded my mailbox after I refinanced.
The question you're asking, which I would be too, is: If these people are so good, why do they need to troll for unsolicited business using mass mailings? (Sounds a lot like e-mail spam, doesn't it?)
You did all the hard work: You came up with the idea (for a new ornamental design for signs, if I read the Patent Office database correctly); you invested in developing it, filing the paperwork, paying an attorney, etc. Now someone is offering you -- what, exactly?
Sure, you may need to hire someone with marketing skills you don't have to expand your patent's use. You may even want to hire a patent lawyer who specializes in licensing ideas like yours. But the old, reliable method of finding these people is best: Word of mouth, networking, maybe even a want ad in the paper.
And, if I'm reading this right, and your patent is already in production, shouldn't you be collecting royalties from the people already using it?
I just read your column and I'm thrilled. I am a 35-year-old with 12 years experience in accounting. I have a B.S. degree in finance. I have wanted to open a daycare center in Carlisle, Penn. for years. I currently work in NYC and live in New Jersey but want to move back home to Pennsylvania, ever since Sept 11th. I realize I don't do anything to help people, and now I want out of the corporate rat race and want to help children and make a difference. How do I get started? How do I get grants or other means to start? I just don't know where to start.
Lisa A. -- New Jersey
Start by learning all you can about how a day care center is run: Staffing, finances, regulations, etc. You may be able to research some of this online or in your local library, but your best source will be to find someone who runs a daycare and is willing to show you what's involved. Try a local church or non-profit center in your area.
If that doesn't work, borrow a friend's kid and visit as many daycare centers as you can find, asking as many nosy questions as you can think of. (Well-run daycare centers are very accustomed to answering lots of questions from nervous parents.)
Fill in as many answers as you can and then come up with more questions: How much does rent cost? What about insurance? Where do you find good providers? How much are they paid? What are the biggest safety issues and how do you handle emergencies? How much do centers charge? What state regulations must be met?
Then, when you've become an expert on running a daycare center, go find a place that needs one back in Carlisle: a church, local government, corporation, etc. (This step shouldn't be too hard -- this country is has a chronic shortage of good day care.) You'll be in a much better position to get funding if you can generate enthusiasm from an existing entity that needs your service.
If you decide to set up independently and go after your own grant (which presents a new round of research), start with the U.S. Small Business Administration's grants page. You should also try your state's Department of Public Welfare. They have a program called Child Care Resource Developers that apparently helps people like you find grants and set up shop. The Bi-County Day Care Administration covering Carlisle is in Williamsport. Give them a call at 570-327-6949 or 1-800-346-3020.
And don't be shy about broadcasting your plans to hometown friends, relatives, former schoolteachers, etc. You never know who might have a good lead. Or an idea for a great name for your daycare center.
Hello. I'd like to create an at home business for the after-hours from my normal job. A simple computer support service, which I go to the customers home to perform a large variety of tasks. Two questions which I can't find an answer to:
1. Do I need to "declare" myself a business with the state if I'm working from my home, or do I just start doing it?
2. What about business related expenses? Can I claim those for such a business?
Eric M. -- Milwaukee, Wisc.
You don't need to file papers with the state, though if you hire others and need to withhold payroll taxes, you should get a tax ID number for the IRS. Otherwise, your Social Security number is all you need.
The only thing the IRS cares about is that you declare your full earnings and that you deduct only legitimate business expenses. The simplest way to do this is to file a Schedule C with your personal income tax return. Here are the interactions, including guidelines on what you can write off as expenses.)
And, while I've got you, is there any way to rig my son's computer so he can only play an hour of PC games a day?
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.
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