Value? It All Depends

TV's original Antiques Roadshow still beats the U.S. version – maybe because ours places more emphasis on striking it rich.

As one of the experts on the UK Roadshow demonstrated, questions of value get complicated. The same old desk or set of chairs has at least four values.

The lowest (this number is for the eyes of the tax collector) is probate value. Next, in theory more realistic, auction value. Double the auction value and you have what a dealer will ask, retail value. Finally, somewhere atop retail value, insurance value.

All four values can be rationalized as correct for their purpose.

Probate value assumes a seller under pressure ("Must sell to settle estate") and buyers unwilling to shell out for anything less than a bargain ("I'm not really into Hepplewhite").

Auction value must be correct because it reflects the market, but the auction market can be zany. Some items go for two or three times pre-sale estimates, others go unsold.

Retail value reflects the added worth of all the study, expertise and leg work that dealers provide their clients. At least that's what dealers say.

Insurance value seems the mirror image of probate value. Here, the potential buyer may be desperate to replace his missing Jasper Johns flag painting, but who wants to sell him one?

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Reputable experts in the world of art and antiques advise us to avoid buying for investment rather than for the desire to own something worth having. The happiest homeowners, these days, may be those who followed similar advice.

Good Beats Innovative

Scott Berkun is writing about technology and related gadgets, but providers of financial services can learn a thing or two: "If your competitors are mediocre, the merely good can seem exceptional."

“Mortgage Modification” Leads to Tranche Warfare, then Court

Wall Street started moving to Greenwich and Stamford in Connecticut after 9/11. Staff had an easy commute from Grand Central; honchos got to live near their Greenwich megahomes. Recent arrival: Royal Bank of Scotland's massive new trading arena.

Reporter Teri Buhl has the good luck to cover the Greenwich and Stamford goings-on. Here she offers a close-up example of why the subprime mortgage mess is so difficult to clean up: Tranche warfare goes to court.

Stories such as this reinforce the notion that there are two types of people: Those who admit they don't understand derivatives and liars.

Bring Back the Original Estate Tax!

The modern estate tax, introduced in 1916, imposed rates ranging from 1% on estates over $50,000 (that would be estates over $1 million or so in today's dollars) to 10% on estate value exceeding $5 million (about $100 million in today's dollars.)

Why not try it again? The rules could be fairly simple, in part because the low tax rates wouldn't justify elaborate, costly tax planning. The persistence of community property might require a 50% marital deduction for marrieds in common-law states; charities would scream if there wasn't a charitable deduction. Otherwise, every estate over $1 million ought to be able to pay the low rates. And the U.S. Treasury would not fare too badly – most estate tax is (or was) collected from the estates of the truly rich.

Would bringing back the original estate tax leave the estate-planning profession in tatters? Probably not. It was the introduction of the 1916 tax that led Charles Ives to invent estate planning.

No Action on Estate Tax Until Thanksgiving?

Estate planner Lawrence Brody is bugged by Congress, he tells the WSJ Financial Adviser blog. "We are in a place today where we haven’t been for 100 years: we have no federal estate tax."

Brody exaggerates only a little. The U.S. has taxed estates on and off since 1797. However, Americans died tax free from 1902 until the modern estate tax was enacted in 1916.

Will Congress reinstate the estate tax retroactively? "It doesn’t look like they will get around to deciding that until after the November elections." Yikes!

Leading or lagging indicator?

I know that employment is a lagging indicator of economic recovery and growth, but what about state tax revenues? TaxProf Blog: State Tax Revenues Fall for Fifth Consecutive Quarter. Note that the California revenue free-fall seems to have ended. I'm surprised at the drop in Texas.

“Like a Credit Card With That Roth Conversion?”

Banks market wealth management to the Haves. Banks market credit cards to the Have Nots. Until now.

Starting today, new rules require banks to make certain credit card fees more visible and limit the imposition of others. The credit card industry could lose $12 billion or more in annual revenue, according to an estimate in this WSJ story.

Result, according to The New York Times: a new push to market credit cards to the Haves. The new target market will be big spenders who pay their bills on time – affluents who are willing to pay for rewards programs, concierge service or other perks.

At best, this marketing turnabout suggests new opportunities for selling both cards and investment services to the affluent.

At worst, banks could alienate present and prospective investment customers by going upmarket with what has become a customer-unfriendly financial product. "You're going to see a lot more tricks in terms of fees," Robert Manning, author of "Credit Card Nation," told the WSJ.

Let's hope for the best.

Investment Management Pitch, 1960s Style

When the Dow hit 1,000 in the mid-1960's, many investors – and quite a few investment managers – figured it would just keep on going up. This ad from February 1966 reflects that optimism.

Also reflected, an all-to-human failing. Every copywriter learns that italics rarely should be used for emphasis. But once in a while the urge becomes overwhelming. This ad must have been one of those times.

Cool cars, though. And, yes, guys did wear their belts that high.

Rabbi Accused of Blackmailing Hedge Fund

You can't make this stuff up. The guy supposedly blowing the whistle on insider trading is already "inside."

Smoke Signals From the Fed?

Subhead on front-page story in today's New York Times: "Rate Increase Telegraphs to Banks That Era of Cheap Money Is Waning."


Telegraph? Do your teenagers know what the telegraph was?

The Times meant Twitters, right? Or should it be Tweets?

Postscript: Somebody still gets telegrams. The updated article at nytimes.com notes that stock prices plunged around the world.

Wealth & Personal Finance in The New York Times

This special section in the Times includes an article on why disclaimers are a timely topic. (Timeless tip: "It is unrealistic to expect a spouse to disclaim to your children from a previous marriage ….") Also discussed, carryover basis: "It is possible (though not entirely clear) that carry-over basis applies only to assets sold in 2010…."

The Welcome Return of 401(k) Matches

At The Washington Post, Michelle Singletary reports a rare bit of good news: restored 401(k) matches:

Eighty percent of companies that suspended or reduced their company matches in 2009 say they are planning to restore it this year, according to Hewitt Associates, a human resources consulting and outsourcing services company.

An analysis by Hewitt last spring found that companies could, on average, save more than $1,500 per employee each year by suspending the 401(k) match ….

Even AARP, which used to be called the American Association of Retired Persons and is a huge advocate of retirement savings, announced last March that it was suspending contributions to its employees' 401(k) plans. Although it achieved a savings of about $7.2 million, the organization reinstated its match last month.

Could the on-again, off-again nature of employer matches lead employees to be more casual with their own contributions? Or will employees recognize that the only reliable source of retirement wealth is themselves?

Some employers, Singletary notes, will make amends by adding new bells and whistles to their plans, such as automatic portfolio rebalancing.

Should Investors Watch the Calendar?

According to 60 years of data analyzed by Robert Henkel of Weyland Capital Management, last month's decline in the stock averages bodes ill for the rest of the year.

With 60 years of price data from the S&P 500 averages — from January 1950 through December 2009 — we found that the January market movement was a good indicator. When January returns were positive, the average return for the rest of the year was plus 12.3 percent. That covers both up and down years. On top of that, if stocks moved up in January, there was an 89 percent chance of the market going up for the rest of the year (from February through December).

A down January Effect also told a story. When the January S&P 500 index turned down, the average return for the rest of the year was minus 0.8 percent. And the probability of the market being up for the whole year was only 52 percent.

As this chart reveals, stock returns do show remarkable differences when sorted by month. Before air conditioning, perhaps the stock market's summer slump made sense. Other factors must contribute to the seasonal and monthly variations.

Investors shouldn't worry too much about what month it is, writes Henkel. The more useful question: "What day of the month is it?"

Are Banks Lovable?

Having trouble answering that question? Go directly to Understanding Derivatives at jumbojoke.com.

Part-Time Fiduciaries: The Back Story

For much of the 20th century, Wall Street's herds of brokers handled investment transactions, marketed securities underwritten or packaged by their employer and offered "incidental investment advice."

How did we arrive at today's broker, typically doing business as quasi-fiduciary for a fee? The New York Times provides an informative time line. It starts in 1934, when Congress gave the SEC authority to oversee brokerage firms.

New Orleans notes

I'm just back from attending a conference in New Orleans.  My father and I began a short vacation there Super Bowl weekend, which also meant we were present for the Saints parade Tuesday.  Our hotel was right on the parade route down Canal Street.

There's been some recovery since Katrina.  There was a lot of energy, and the city was very full.  Mardi Gras is more than Fat Tuesday, that's just the finale.  They have 50-odd parades in the weeks before.  The parades make for lots of traffic jams, but even during ordinary business hours New Orleans seems to strain under the weight of traffic.  The cry of "Who dat?" was ubiquitous, and of course everyone was thrilled to win the Super Bowl.  That weekend we had trouble getting into the high-end French Quarter restaurants, all the reservervations were long gone. 

When we went for beniets for breakfast Monday, we waited half an hour for a table and another half hour for service.  So business seemed good.

On the other hand, on Tuesday, when the weather was chillier, there were plenty of empty tables for the same beniets.  By Monday and Tuesday, those same high-end restaurants had plenty of tables for walk-ins.  We took a bus tour of New Orleans. The Garden District shows no signs of Katrina damage any longer, but we also went to the Ninth Ward.  A great many houses there look like they should be promptly knocked down.  Some of the houses that have been reclaimed and restored have preserved the building inspectors' marks, spray painted on the front of the house. A new mark of honor, of survival.

At the conference, it happens that we heard from Mary Matalin and James Carville.  They were a treat, though not quite as cantankerous as I expected.  At the close of his remarks, James dropped his pundit persona to give a sincere and heartfelt thank you to the assembled bankers and brokers, for holding their convention in New Orleans and so making a contribution to its recovery. 

I would like to go back soon.  But next time I'd prefer to avoid Mardi Gras season.

A Cautionary Estate Tax Tale

From Remember the Estate Tax? It's Still gone in U.S. News and World Report:

A client in Oklahoma died in January, [Jack Nuckolls of BDO Seidman] says, and had actually changed his will to anticipate the 2010 elimination of the estate tax. In many large estates, the traditional way of minimizing estate taxes has been to create a trust and place $3.5 million of assets -- the decedent's exclusion -- into that trust. That trust would not be taxed. The rest of the estate would go into a family trust and avoid taxation until the death of the surviving spouse. With no estate taxes, the Oklahoma person didn't need to shelter that initial $3.5 million because there is no estate tax. But in providing all his money in a single family trust, Nuckolls says, it looks like his estate will be exposed to higher Oklahoma state estate taxes than if the second trust had been established. Further, by not leaving anything to the spouse directly, this estate may not be able to qualify for the $3 million spousal exclusion on capital gains taxes. "It seems like we could be wasting $3 million," Nuckolls says.

On the incentive effects of high taxation

Wealthy people have been leaving New Jersey at an alarming rate, reports WSJ.com. The trend apparently can be traced to 2004, when New Jersey hiked the top income tax rate on the rich by 40%.

Maryland had the same experience. I believe that it was Walter Wriston who said, "Capital goes where it's wanted, and stays where it's well treated."

Living Rich for Valentine's Day

For $1 million, the Emirates Palace hotel offered the truly romantic (and truly rich) a seven-day Valentine's idyll. Private butler, chauffeured Maybach. dinner on a yacht – and, of course, camel racing.

Darn, wish I'd known sooner!

Street Art

Museums and auction houses don't have a monopoly on interesting art. As you will see in Pavement Art, a slide show from The Telegraph, sources of visual stimulation maybe found lying on the floor or sidewalk.

The slide show rates mention here because one of the works, detail at right, was created for The Money Store (cheque cashing and payday loans). The coins and bag are painted; the gilded girl is real.

Update
Who wouldn't want an investment manager who keeps them out of trouble when the going gets rough and stormy? Nobody. That's why lighthouses so often figure prominently in the advertising of financial institutions. While you're visiting the Telegraph slide shows, stop to admire Gary Martin's terrific set of photos, The Lighthouses of Michigan.

1970: Two Views of Women

In 1967 Muriel Siebert battled her way to a seat on the New York Stock Exchange. In the fall of 1968, Yale College welcomed its first female undergraduates. The Wall Street old guard must have felt like the world was coming to an end.

Some financial institutions adapted better than others, judging from these two ads from 1970.

U. S. Trust, mindful that women controlled a growing portion of the nation's personal wealth, welcomed them as clients, offering to help with the investment complexities of the Go-Go Years. (Congenerics???)


Chase Manhattan chose to side with the old guard, commiserating with the father who had no male heirs to carry on the business. (Let's see, Meg Whitman was about 13 at the time.)

Estate Tax Legislation Snowed In

In the good old days, before air conditioning, "less government" happened every summer because Washington, D.C. was too darn hot. Now it's snow that closes things down in the winter. The House of Representatives is taking snow days the rest of this week, to be followed by a vacation next week.

Senate leaders are working on the jobs bill, and last night it looked like an estate-tax extension might be tacked on in order to attract Republican supp0rt. No such luck. This morning Senator Reid announced the bill would not include an estate-tax fix.

Must Rich Investors Keep It Simple?

Burton G. Malkiel has a message for high-net-worth investors in the new book he's written with Charles Ellis: KISS.

Keep it simple, stupid! Stick to a sensible allocation of index funds.

Whoa there! Isn't the lure of double-digit returns from hedge funds and other alternative investments essential when you're marketing investment services to the wealthy?

The lure seems necessary. But the above-market returns are questionable. As this Breaking Views column in the NY Times notes, "hedge fund index returns still flatter the average fund …."

One index, for example, shows the average hedge fund beating the annual return on the S&P by about four percentage points since 1990. Almost nobody, including Malkiel, believes it. The index tracks only funds that choose to report their returns, and survivorship bias is a real problem because hedge funds die at twice the rate of mutual funds:

Based on Mr. Malkiel’s studies and other academic work, hedge fund investors should probably assume that reported industrywide returns are really as much as four percentage points lower, which makes hedge fund managers look much less special.

O.K. Let's suppose the well-heeled investor who puts money into the average hedge fund will get no more than a market rate of return. Couldn't investing in hedge funds still be a win-win proposition?

• Managers of hedge funds win because they make umpteen times the bucks earned by overseers of index funds.
• Investors in hedge funds win, on average, because they receive a market rate of return plus bragging rights.

Nobody ever scored points at the club by boasting, "My investment guy knows somebody at Vanguard. He got me into a couple of index funds."

Even if hedge funds don't beat the market on average, surely they pay social-networking dividends.

More Treasure in Michael Crichton's Estate?

"Pirate Latitudes," the swashbuckler found on the late Michael Crichton's hard drive, got mixed reviews. No matter, at the moment the posthumous work ranks at 151 among Amazon's best-selling books. Possibly more important for Crichton's estate, Steven Spielberg has picked up the movie rights.

Crichton left treasure of another sort as well. He got to know a number of well-known artists and acquired several of their works. From his friend Jasper Johns he bought "Flag,"1960-1966. In May "Flag" – shown below – and three other paintings owned by Crichton will be sold at Christie's. No estimate yet on how much the four works might bring, but a few years ago another notable painting by Johns changed hands for $80 million.


Collectors have long been advised that fine art should be bought for art's sake, not as an investment. Yet in recent years that advice might have applied to a wide range of human creations. ("Don't buy that Collateralized Debt Obligation as an investment. Buy that CDO only if you really want to live with it.")

Great art doesn't always go up in value. Fashions change. But the good stuff generally retains some value. One believer in art as a store of value is Asher Edelman. See The Art World's Gordon Gekko in The Wall Street Journal. Edelman's new art-financing venture will go beyond lending. For a fee, it will guarantee would-be sellers a certain minimum price when they send art to auction.

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When trust officers settle estates, they learn something every wealth manager needs to know. That ancient Caddy in the barn or the antique toys in the attic may be worth more than most of the stocks in the deceased's portfolio. Value is independent of the reason for which an asset was acquired.

Perhaps we should make a rule: Don't call yourself a complete wealth manager unless you've served at least five years in a bank trust department!

The Trusts and Estates Decade is Starting Strong

A survey by WealthCounsel and Trusts and Estates shows many estate planning attorneys have high hopes for the 2010's. Of those surveyed, four in ten expected their estate planning business to grow by at least 20 percent over the next five years. Three in ten expected growth of 25 percent or more.

Art and “Irrational Exuberance”

Back in 1956, a year we posted about recently, the architect for Chase
Manhattan's new headquarters in New York's financial district must have felt Wall Street could use some culture. Alberto Giacometti was commissioned to create a set of sculptures for Chase Manhattan Plaza. Giacometti never completed the project, but eventually he did have bronze casts made of the components he was most satisfied with.

One of those bronzes, Walking Man I, sold at a Sotheby's auction in London on February 3 for the equivalent of $92.5 million – $104.3 million including fees. That's a new world record – the highest price ever fetched by a work of art at auction.

Sotheby's expected the Giacometti to bring around $20-$30 million. See? Despite the pale and sickly stock market, irrational exuberance is alive and flourishing.

Should any work of art be worth the kind of money usually associated with bonuses at investment banks? As Julie Bloom reports in the NY Times, that's a question much debated.

Death and (State) Taxes

In Where Not To Die In 2010. Forbes offers an interactive map highlighting exemptions and rates for death taxes in 19 states.

The Super Bowl Indicator

Stocks guaranteed to rise this year, writes Mark Hulbert, tongue firmly in cheek.

The good old Super Bowl Indicator posits that bulls will romp on Wall Street in years when a team with roots in the old NFL wins. Both the Colts and the Saints claim such roots, so it's win-win for the stock market – in theory.

As for who will win Super Bowl XLIV, this blog remains officially neutral.

One hint: Bet you never heard anyone singing, "When the Colts go marching in."

Is the Estate Tax Lapse Good for Estate Lawyers?

"The lapse is creating new demand for a specialty that has slowed in recent years," writes Lynne Marek. Yet estate lawyers may be hustling for nothing:

Max Gutierrez, a Morgan, Lewis & Bockius partner in San Francisco, laments that some clients will end up rearranging their plans only to have those changes become obsolete or prove needless if Congress acts this year. "It's going to create a windfall, but I hate to take money from clients for no real purpose," he said.

U.S. Treasury Secretary Timothy Geithner has called for the estate tax to be reinstated retroactively.

A Wealth Manager Called Church House

The Economist reports on efforts to launch new (plainer and simpler) competition for the U.K.'s wounded megabanks. Richard Branson's Virgin Money will build its venture on a private bank called Church House Trust. According to the Church House web site, Virgin is acquiring only Church Street's banking operations, not its wealth management units.

The web site is worth a visit to admire its clean design and sometimes expressive (though not always proof read) text. Black-and-white photos and assorted quotations provide decoration. Here's one quote:


Note the succinct sales pitch for family office service. And give Church House extra credit for "We take a particular pride in not inflicting the tyranny of voicemail on telephone callers."

Bipartisan Investment Advice

Objective investment advice can't always beat the benchmarks, but it can help investors avoid losses stemming from their emotional instinct to make the wrong moves.

Buying high and selling low has been shown to shave a point or more off the returns realized by mutual fund investors. In The New York Times, Mark Hulbert observes that political leanings also seem to be a factor. According to a recent academic study, Democrat investors tend to hold more domestic stocks and assume more risk when their party is in power. So do Republican investors, when their party takes over.

What's more, both Democrat and Republican investors tend to trade more frequently when their party is out of power.

What investors need, it seems, is advice that's not only objective but nonpartisan.