Have a great week everyone.

Lifetime Annuities

New Lifetime Annuities in 401(k) Plans Could Cut Advisors Out of the Picture

  • As many of you know, annuities’ fee structures and sales practices are some of my least favorite thing about the finance industry.
  • Like many things in finance, the core idea behind annuities is good (de-risking savings) but warped incentives and a lack of transparency end up leading it astray.
  • The entrance of low-cost annuities that can be folded into 401k plans help remove some of the perverse incentives.
  • The winners here are the insurance companies, 401k providers, and middle-class clients saving for retirement. The losers are financial advisors that haven’t adapted to a fee-only operating structure.

Exerpt from Einstein's Refridgerator: And Other Stories from the Flip Side of History

Einstein’s Refrigerator and Other Stories from Flip Side Of History

“The U.S. Air Force estimates that there are between 2,500 and 3,000 bird strikes to their planes alone each year. This produces a large amount of damage, estimated to cost the service between $50 and $80 million annually. Occasionally, these incidents can also result in human death. …
Clearly, something needed to be done to reduce this damage. Although the exact origins of the Rooster Booster are difficult to trace, it appears that the device first became popular during the Vietnam War in the early 1970s. The military’s F-111 aircraft was equipped with terrain-following radar, which allowed the plane to see the problem here. If you’re zipping along at a low altitude, you are going to smash into a large number of birds and cause a lot of damage. As a result of this damage during the Vietnam conflict, as well as normal nonmilitary flights worldwide, aircraft builders started to test their designs for resistance to bird strikes.

Well, what better way is there to test for bird impact damage than to shoot a real bird at high speed at real aircraft?

In reality, they could shoot any bird at the test designs. They could use ducks or turkeys (and they do). One would guess that swans and pink flamingos could also be used, but this would anger many people. Let’s face it, when it comes to choosing a bird, the lowly chicken becomes the prime candidate. Chickens are cheap and common, so they are ideal for the bird test. Now before you start screaming about cruelty to animals, I should point out that the testers use dead birds. you know, carcasses. The birds were on their way to someone’s dinner table, but instead they took a detour to become a projectile in the Rooster Booster. Yes, these are heroic chickens. They didn’t just become someone’s meal — they helped to save a life (unfortunately it was not their own).
Apparently, the majority of these chicken cannons work off compressed air. Unfortunately, birds don’t make tight seals with the wall of the cannon, so the bird is placed in a container called a sabot, a French term meaning ‘shoe.’ When the gun is fired, the sabot (which is typically made from balsa wood, foam, or fiberglass) is mechanically stripped away by blades and the bird becomes a dangerous projectile.

There are strict guidelines when it comes to using the Rooster Booster. First, the bird must weigh either four pounds (military testing) or eight pounds (FAA testing). Second, the bird must be thawed (fresh or thawed, not frozen as some strange stories floating the Net seem to report). Third, the bird must be unplucked — it must be as realistic as possible. The chickens are loaded into their sabot and fired from the gun (actually anything big enough to shoot a chicken should be called a cannon) at a very high velocity. Different guns are capable of shooting at different speeds, but they all seem to be around 125 to 180 miles per hour. There are reports of higher speeds of 500 miles per hour or more, but it’s hard to ascertain whether they are realistic numbers or not. The chickens are shot at various components of the aircraft. Generally, these targets tend to be windshields, fragile wing components, and engines.

The testing of the engines is one that needs to be seen to believe. All new engine designs must pass this ‘chicken ingestion test’ (and other tests) in order to receive FAA approval. When the chick hits the fan, so to speak, it disintegrates almost immediately. Shredded feathers and body parts seem to fly in all directions. Certainly sounds disgusting, but it’s better than the turbine blade doing the same and bringing and end to many human lives.”

New JPM Guide to the Markets is here...

Guide to the Markets by J.P. Morgan

  • Earnings versus multiple growth (pg 7)
    • Similar to a topic we touched on in our quarterly outlook, earnings growth has been so strong that the market P/E actually contracted over the past year.
  • Value versus Growth dispersion (pg 10)
  • Low population growth- how will this impact the economy’s natural rate of growth going forward? (pg 21)
  • Cycles of US equity outperformance. US market’s don’t always outperform! (pg 45)
  • Historic discount of Int’l equities versus US equities and versus historic (pg 46, 47)
  • Pg 53 for a laugh… I can’t wait to see those green house gas emissions decline on a nice straight line between 2030 and 2060
  • The longer the holding period- the greater your chance of success! (pg 63)
  • Just by owning your home you can beat the average investor… (pg 64)
  • Pg 68. With low bond yields, pension fund return assumptions have dropped dramatically. In the early 90’s the average S&P 500 co’s pension assumed returns around 9%. Today they are expecting just over 5.5%.
    • Somehow state and local governments are still expecting 7.25%! How can they do this with bond allocations earning 0-2%?
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