Tài liệu Smart Money (2009-04) docx

It may not rebound until the global economy stabilizes, but it’s helped make Brazilian stocks cheap, says Audrey Kaplan, lead manager of the Federated InterContinental fund.. You don’t

3 Stocks Ready to Jump How to Buy a House 10 Things the IRS

APRIL 2009

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SPECIAL REPORT PROTECT YOUR MONEY

60 The New Bond Boom With high yields and lower risk, many pros

think once-boring bonds might be a better buy than stocks Five bond funds for rocky times by Daren Fonda with Elizabeth O’Brien

2 Where to Stash Your Cash The amount of cash in banks and

money-market funds is way up, but interest rates are way down The new calculus has sent investors on a desperate hunt for higher yields

by Janet Paskin with Elizabeth O'Brien

Time to Buy Gold? Ordinary Americans are scooping up gold coins

as fast as the government can make them We examine whether the precious metal is worth all the fuss by Elizabeth O’Brien

0 Sizing Up the Little Guy While many of Wall Street’s biggest firms

struggle, regional brokerages smell opportunity and are wooing brokers and clients alike But who are these smaller fries, and what can you expect from them? by Roya Wolverson

Before Your Parents Say “I Do” Again As life spans increase, Americans are more likely than ever to marry a second spouse And that means more fights between kids and stepparents over the family estate by Brad Reagan

2 Ten Things the IRS Won't Tell You If you think your taxes were

complicated last year, just wait till you try to sort out the trials and tribulations of 2008 Here’s what you need to know by Jason Kephart

(continued on page 4)

APRIL 2009 SMARTMONEY 3

CONTENTS

streetsmart

13 Portfolio Play

Stocks that may score big if

the dollar slumps again

15 Fund Watch

Brazil, India and China may

rebound faster than anyone,

but should investors jump in?

16 The Comer Office

The CEO ofa major coal-

power-plant operator talks

global warming

20 ETF Watch

Bear-market ETFs’ tax bite

22 Sector Watch

Master limited partnerships:

a way into energy?

23 Fund Insider

New funds signal an era of

fear-based investing

24 Buy/Sell/Hold

Which airline stocks are ready

for takeoff, and which aren’t

tax rates by James B Stewart

The New Retirement

The little-used Roth IRA

could be the best option

for people approaching retirement by Peter Keating

‘Smart Ideas National franchises are

expected to boom during this recession Should entrepreneurs give them a

look? by Dyan Machan

‘Stock Screen The stock market, home prices, jobs What we're

seeing is a return to normalcy

by Jack Hough

Tough Customer

Allegion of Kleenex box designers is working hard to save you from that fistful of paper napkins by Anne Kadet

Some new computers boast

4S Hotel within a Hotel

Private pools Roped-off beaches VIP restaurants More resorts are adding separate mini-hotels onto existing properties—and these days they’re offering some of the best deals for vacationers,

48 How Green Is Your Gadget?

Apple claims that its new MacBook uses one-quarter

the energy of a 60-watt lightbulb We put itand some

other self-proclaimed energy-saving devices to the test

54 Driving Force

Toyota’s new Venza is like automotive comfort food: filling, but not flashy Will boomers bite?

56 Smart Consumer Homebuying without a bank Plus: New iTunes pricing,

and a rundown of tax breaks for tumultuous times

Hearst Business Communications, Inc., general partners), 959 Eighth Ave., New York, NY 10019, and Dow Jones Se Compas

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Investments in

THIS ISSUE

AIM Developing Markets

Cal-Maine Foods (CALM) 41

Companhia Vale do Rio

Doce (RIO)

Continental Airlines (CAL)

Dodge & Cox Income

(DODIX)

Duke Energy (DUK)

Energy Income & Growth

Southwest Airlines (LUV) 24

Spectra Energy Partners

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APRIL 2009

we turned to Dr, Jerry Webman, chief economist

for OppenheimerFunds He has advice for how investors can size up corporate bonds

and Treasurys Watch our interview with Dr

Webman at www.smartmoney.com/ty,

Going for the Gold

Thinking about investing in precious metals? Buying gold can be an attractive hedge

during uncertain times But if you’re mainly

used to investing in equities and funds, it can also be tricky to get started Read our

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EXCLUSIVE COLUMNS

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

TRADECRAFT COMMON SENSE DEAL OF THE DAY STOCK SCREEN AHEAD OF THE CURVE

A brazen hedge fund SMARTMONEY Ourconsumer reporter A former Wall Street Our trend watcher

manager lets you magazine’s Pulitzer looks at everything adviser shows how explains how the

in on the finer points Prize-winning editor from the best airline individuals can use economy, politics and

of trading at large offers weekly deals to ways to lower stock screens to make the markets converge to

market insight your utility bills their own picks affect your investments APRIL 2009 SMARTMONEY 7

SmartMoney’s Stock-Picking Tournament

Compete for a chance to

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VEN WITH ALL THE ATTENTION and debate they have

drawn, the economic stimulus plan and bank bailouts can’t

change one very important fact of life for investors: Buying stocks carries a risk And risk is not too popular these days

After last fall’s debacle, it’s no surprise that Americans are on a mad

dash away from it

What is a little surprising, or disturbing, is the degree to which

this is happening We don’t think of ourselves as a nation of savers

But according to the most recent figures, each month we're socking

away $100 billion in money-market funds—enough to buy Gold-

man Sachs and Bank of America, with change to spare Indeed,

in 2008 Americans moved almost three times as much money as

ever before from stock and bond funds into money funds It makes

you wonder: Are we heading for a sea change as a nation, moving

away from making our money grow and toward a stick-it-under-

the-mattress mentality?

For as long as you pick up this magazine, you'll know where

we stand on that strategy Stockpiling cash as a primary investment

strategy won't help you reach that comfortable retirement you’ve

dreamed about, especially at today’s stingy interest rates But as our

cover shows, we know where your heart is right now—very under-

standably, you want to protect your money So this month we offer a

special package of stories on this topic We tell you where to put your

cash We explain how bonds can make your portfolio grow fairly

safely and nicely And we look at the pros and cons of buying gold,

always at least an option for those worried about the markets

The package, which starts on page 59, was assembled by an

eight-person team of editors and reporters and runs 17 pages in all

We hope it helps in these difficult times and that you'll sleep a little

better knowing you're doing your best to keep risk at bay

JUST WHEN IT LOOKED LIKE REGIONAL brokerage firms might

gain ground on their bigger but troubled rivals, along came the news

that Stanford Financial is having headaches of its own, facing gov-

ernment allegations of massive fraud Who do we trust now? Ever

since the crash, smaller firms have been trying to woo frustrated

investors with promises of more personalized service and maybe

some better picks to boot In “Sizing Up the Little Guy” on page 80,

staff reporter Roya Wolverson looks into how the Davids measure

Letters

You didn’t gloss

over the true

“Parents in Crisis” (February)

was truly a remarkable article

Beverly Goodman didn’t gloss over the true facts of

her mother possibly running

out of retirement money

or of the author possibly

having to make up the difference (if she could)

Davip WEISER Hernando, Fla

The Whole Problem

Iread “Growth Slows, but

Mackey Doesn’t” (Corner

Office, February) But Tam in

total disagreement with Whole

Foods CEO John Mackey

lama customer of Whole Foods, albeit not a happy one

On more than one occasion,

Ihave had to ask more than two employees where a specific item was located At our local chain, whenever I ask an employee where something is, they take me by the hand to the proper place I believe the main reason for the sliding sales at Whole Foods is simply poor management

stabilize the real estate market

Stewart mentions an approach that involves bringing

mortgage rates down, and I

agree this seems like the most logical option we have This solution also would stimulate

the economy and, probably

most important, slowly

increase job opportunities and get our economy back in the right direction more efficiently than trying to hike up the

prices of homes

NICOLE KIRKPATRICK

San Diego

Don’t Blame the Renters;

Blame the Landlords Itseems that some people

are blaming the renters for structural problems with

their rental homes (“Tension

Over Tenants,” February)

Where do they get this idea?

Renters are only required

to keep their home clean and

maybe mow the lawn and shovel snow Maintenance

is the responsibility of the

landlord Frankly, if

people are upset about

siding falling off a home or landscaping not being performed, they should take

it up with the deadbeat

landlords, not with the renters

Lisa FaRINO Seattle

Click Here to Find Your Match What “10 Things Your Online

Dating Service Won’t Tell

You” (February) really doesn’t

tell is that the key to success

is approaching Web-world romance with real-world

expectations Sure, people lie online, but they also lie in

bars, at church and everywhere else you’re “supposed” to

meet a spouse The online

ability to screen out unsuitable candidates beforehand makes

the online dating services a

tremendous value, and most

cost less per month than

what you'd spend on one bad

)

date Years of online dating

brought me several enjoyable relationships and finally

marriage to the love of my life,

whom I never would have met offline Maybe I beat the odds,

but I always thought that the

rewards of online dating made

ita gamble well worth taking

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streetsmart

PORTFOLIO PLAY

How to Play The Dollar

We looked for stocks that would bat a thousand if the dollar returns to its

long term slump By Daren Fonda

WHAT'S A FEW TRILLION AMONG FRIENDS? Add up the Obama ad-

ministration’s plans to save the economy, from the stimulus package to

the bank bailouts, and you're talking in excess of $3 trillion to shore up

the country’s financial system and create more jobs But even ifall that sy? a

money works its magic and gets the economy growing again, there could wy

be a long-term casualty of issuing so much debt: the U.S dollar

Even before the latest bailout plans were unveiled, confidence in the ì

dollar was slipping as America’s budget deficits and national debt—now

$10.7 trillion—ballooned Since last summer, the buck has staged a bit

of acomeback, rising 15 percent against a basket of major currencies as investors bought Treasurys ina flight to safety But now that the markets

havea handle on the government's stimulus plans, pressure

on the buck could resume, says Eugenio Aleman, senior

economist with Wells Fargo Investors tend to dump

currencies of countries that issue so much debt “And the dollar could get pounded,” he says, if foreign

investors lose faith in America’s ability to repay

streetsmart

Our Picks

These foreign stocks have

U.S.-listed shares and could get

an earnings boost if the dollar

falls against their home currency

Unilever (UL, $20)

MARKET VALUE: $61.7 billion

2008 SALES: $59.3 billion

2009 PRICE/EARNINGS: 14

This Anglo-Dutch consumer-goods giant has

12 brands with more than $1 billion in annual

sales, including household names like Lipton

tea, Dove soap and Hellmann's mayonnaise

Much of its growth is in emerging markets,

which could take a hit this year, says Jefferies

International analyst Simon MarshallLockyer

But the stock trades at a discount to its peers

and hasa 8.7 percent dividend yield

Qiagen (QGEN, $17)

MARKET VALUE: $3.4 billion

2008 SALES: $893 million

2009 PRICE/EARNINGS: 19

Drug companies, labs and

use this Dutch firm's molecular diagnostic

tools, test kits and research instruments The

firm makes the only FDA-approved DNA test

for HPV, the leading cause of cervical cancer

Qiagen is also developing new technologies in

molecular diagnostics and gene therapy And

sales to customers in academia and government

labs have historically been recession-resistant,

notes Robert W, Baird analyst Quintin Lai

Companhia Vale

do Rio Doce (RIO, $16)

MARKET VALUE: $80.8 billion

2008 SALES: $39.1 billion

2009 PRICE/EARNINGS: 10

The commodities bust has taken its toll on

this Brazilian mining giant, the world's largest

producer of iron ore Shares are down 51

percent over the past year, and analysts

expect 2008 earnings to fall 26 percent, to

$10.8 billion But the company has cut back

production at its highest-cost mines, and the

stock should rebound when the glabal economy

recovers, says Audrey Kaplan, lead manager of

the Federated InterContinental fund

ions it now owes

One way to profit off a weakening buck is to buy U.S companies that get

the bulk of their revenue abroad A weakening dollar helps multination-

als like Procter & Gamble (PG, $51), since their foreign earnings are worth

more when converted back to dollars

Foreign stocks can also be a good op-

tion; their earnings get a boost when their currency gains against the dollar

David Darst, chief investment strategist

of global wealth management for Mor-

gan Stanley, recommends a 14 percent allocation to foreign stocks Compa- nies such as Novartis, British American

Tobacco and Nestlé generate much of

their earnings in foreign currencies, he

says, and the dollar’s slide would benefit shareholders

Other pros see bargains in devel- oping economies whose currencies and stock markets have plunged The

Brazilian real, for instance, is down

25 percent against the dollar since last summer It may not rebound until the global economy stabilizes, but it’s

helped make Brazilian stocks cheap,

says Audrey Kaplan, lead manager of

the Federated InterContinental fund Kaplan likes big exporters like the min-

ing giant Vale (RIO, $16) “This is the

best opportunity to get into these shares,

in five years,” she says And if the real

drifts down? At least a vacation in Rio

will get cheaper (For more on Brazil

and other emerging markets, see “Glob-

al Bargain Hunting,” page 15.)

Still, trying to profit off any cur-

rency is never easy, and some experts think the dollar may even strengthen

in the near term It remains the top re-

serve currency for the world’s central banks, which hold more than $2.7 tril- lion in dollar reserves And other coun-

tries may be in worse economic shape

and have to launch their own massive stimulus packages, which could keep

their currencies down too, says Aleman That’s why it may be best to avoid bet- ting directly against the buck with an

exchange-traded fund based on a single

currency Instead, international funds

or foreign stocks are an option Global

firms with rising foreign sales will likely

see shares rise when the economy stabi-

lizes, and they could get a tailwind if the dollar resumes its losing ways 8

APRIL 2009

Brazil, Indiaand China may rebound faster than

the rest of the world, but should investors jump in?

HE SUPERPOWERS NEEDED TO save the world from this global recession

don’t include the ability to leap tall buildings in a single bound, nor do

they involve building an arsenal of weapons The heroes of this scenario

are nations with little debt, lots of cash and millions of people willing to

shop And this time around, the U.S appears to be little more than a sidekick

‘The global financial crisis that nearly destroyed many developing economies in

1997 also gave them an incentive to get their house in order Brazil, for instance,

implemented stricter banking regulations, shrank its deficit and focused on re-

ducing its dependence on the U.S India and China have made similar strides, As

a result, these countries are better positioned to weather today’s crisis than mo

developed nations, analysts say China, for example, is building roads and trains

into the hinterlands, which will help develop a middle class and offset slowing

APRIL 2009

demand from the West Plus, China can more than pay for its infrastructure projects with the $1.6 trillion it has in cash and bonds

What’s more, nearly 80 percent of the

world’s population (much of that, youth) lives in emerging countries As those young-

sters age they'll be buying mobile phones,

homes and many other products, just as

Americans are retrenching and saving, says

David Riedel, president of emerging-markets research specialist Riedel Research Group

That spending is significant: 31 percent of

India’s population is under 14, Riedel adds

That’s 354 million future shoppers

You don’t have to look past last year to see that emerging markets are still risky: The

MSCI Emerging Market index plunged 54

percent, laying waste to the notion that these economies are no longer tied to those of the developing world But for the first time in 27

years, says Josephine Jiménez, manager of the

Victoria 1522 fund, she is finding firms trad-

ing for less than what they would fetch at a

liquidation sale: “It’s a huge treasure chest.”

Some countries show more promise than oth-

ers, so investors might want to consider a

diversified fund with a seasoned manager, like

AIM Developing Markets (GTDDX) Mat-

thews Asia Pacific Equity Income (MAPIX)

regularly lands at the top of its category, and

Templeton Emerging Markets (EMF) has legendary foreign investor Mark Mobius at the helm and no sales load

-Reshma Kapadia YOUR BEST BETS

Brazil has improved its financial health and is largely self-sufficient in food and energy Commodity firms could benefit from plans to build infrastructure

India has just 7 percent of its economy

reliant on exports anda young

population just beginning to spend

China is prodding its citizens to

spend more By 2015, half of China's households will be considered middle

class, up from a third this year

SMARTMONEY 15

Duking It Out

Over Pollution

Why the CEO of one of the nation’s biggest

operators of coal power plants is sticking his nose

in the global-warming debate By Reshma Kapadia

greenhouse gases: Duke CEO Jim

Rogers The 61-year-old former utility regulator has called for caps on carbon emissions and wants Duke itself to reduce its emissions by 80 percent by the year 2050 Rogers says that's not as strange as it sounds, even for a company with 14 coal plants scattered across the Carolinas and the Midwest As the anticarbon parade gets under way in Washington, he says

he can either try to stop it or “jump in front” and help shape the outcome Rogers finds himself trying to keep

his Charlotte, N.C., company ahead

of the game on a number of fronts Analysts say that since taking the

reins at Duke in 2006, he has helped improve the balance sheet, giving the

company the financial strength to ride

out the credit crunch and continue

to pay a generous 6 percent dividend He's also worked to maintain good relations with the folks who set Duke's

utility rates—regulators in North

Carolina, South Carolina, Ohio, Indiana

and Kentucky But he may have a

harder job meeting the company's goal

of boosting income by an average

of 5 to 7 percent a year through 2013,

In 2008 Duke's earnings slipped almost 2 percent, to $1.21 a share, as

revenue rose nearly 4 percent, to

$13.2 billion This year the company expects earnings to be flat, as recession-plagued customers cut back

on energy use “We're tightening our

streetsmart

belts?’ says Rogers, who has frozen merit-pay increases and put limits on new hiring

In the long run, an even bigger concern may be how Washington comes

down on the carbon issue Indeed, as President Obama follows through on his

promise to combat global warming, just about every utility's future rests on how

the government will regulate emissions Duke, which gets about 70 percent of its

electric output from coal, essentially wants free “allowances; or permission to

continue polluting for a period of time as it works to cut its carbon output Some

environmentalists prefer to auction the allowances to the highest bidder—a move

that could stick companies like Duke with huge costs

Rogers, who likes to assign his favorite books to top executives and then pepper

them with questions about them, recently sat down with SmartMoney to answera few

questions himself, such as how the utility plans to pay for its costly investments, why

he tries to listen to even his fiercest critics, and how he manages to sleep at night

@ What impact has the recession had

‘on your service area?

We see demand for electricity falling,

primarily in industrial and residential

customers We have yet to see com-

mercial parts of the business reduce

demand Worst case is that demand in

2009 will be slightly under 2008

When was the last time you saw two

consecutive years of falling demand?

In the Midwest we haven’t ever experi-

enced it, and in the Carolinas, not since

2000 and 2001

@ You've already cut spending because

of the capital markets What happens if

they stay tight beyond 2009?

Capital is the lifeblood of our industry

If credit continues to be tight in 2010,

we will scrutinize our spending and

look for ways to reduce it consistent

with the availability of money

What's up on the policy front?

The next two years will fundamentally

transform our approach to environ-

mental and energy policy—from the

way we think about it to the way we

invest in it When you listen to the presi-

dent talk about where we are going, I

can’t think of acompany that is as well-

positioned to execute on contemplated

public policy becoming reality We have

APRIL 2009

nuclear plants, energy-efficiency proj-

ects, coal gasification for carbon cap- ture and sequestration, and wind and solar investments

@ You're also building a new coal plantin North Carolina Doesn't that run counter to your talk about reducing carbon?

I would call it a bridge plant to the

low-carbon world We can shut down

older, higher-emitting plants that are not retrofitted and produce electricity

with lower carbon intensity because of

improved efficiencies We don’t view

thatas the solution, and I wouldn’rcall that clean coal in terms of addressing CO) But it’s one of the cleanest plants that exist today

@ But why build one at all? Why not do more to improve efficiency and reduce demand?

You have to be careful to not frame the debate as either/or Every one of the

options—coal, nuclear, wind, solar—

needs technological advances to be a contributor in a low-carbon world You can’t take any off the table

With the recession shifting priorities and even the best companies having trouble borrowing money, how are these technologies going to get the financing to get off the ground?

Our industry should tell the administra- tion to view this asa joint partnership

We will make investments in transmis- sion, smart grids and renewable energy

It shouldn’t use taxpayer money Per-

haps the government can provide bonus depreciation or tax credits to stimulate

private investment, but we will raise the

money, and our investors will fund this

All we need is a clear road map and

the regulatory underbrush to be cleared out—like getting eminent domain to

build transmission lines

Blt's ironic to hear a coal-based utility position itself as part of the solution

Tlooked at our 2050 scenario, and the a-ha moment for me was that virtually

all our existing power plants would be

GENERATING PROFS

EST 2009 SALES: $13.5 billion EST 2009 INCOME: $1.59 billion EST 2009 EPS: $1.25

2009 P/E: 12 MARKET VALUE: $18.7 billion

COMMENTS: The slowing economy

has dented growth, but Duke still aims to increase profits and dividends over the next five years

Over the past three years, Duke shares have outperformed the

SMARTMONEY 17

streetsmart

'WIND POWERand other

clean-energy sources are a

big part of Duke's future

THE CORNE

aia

retired by then, With each one I get a

blank sheet of paper What drives me is

redefining the business, and helping our

communities become the most energy-

efficient in the world, and decarbon-

izing our supply I believe [can do that,

and I can make money doing that

@ How do you pay for this?

It’s going to take a huge educational

effort with Americans to understand

“Yes, we can be cleaner, but it’s not go-

ing to be cheap or easy.” In the short

term it’s going to be more expensive,

but in the longer term it is going to put

our economy on better footing

@ You've been a big proponent of so-

called cap-and-trade regulation to limit

greenhouse gases But there is talk

the allowances could be auctioned

off, a potentially onerous outcome for

companies like yours

A 100 percent auction would be dev-

astating to people who rely on coal

Building coal plants was part of our

national policy, and to punish people

for carrying that out would be wrong

It’s all about fairness

| heard you ignored your staff and

went to a talk by climate scientist

18 SMARTMONEY

James Hansen, who has criticized you for building new coal plants

I would rather spend time with critics

than my friends to get a deeper appre-

ciation of their views and help shape

decisions in the direction I want to go

And I sometimes wish they would see

my point of view

You're a Teddy Roosevelt buff What lessons have you taken from him?

ve had a quote from him since I was

18 years old It’s about the man in the | arena, fighting the fight and daring to

do great things even if he fails

@ Utilities have typically been seen

as defensive stocks Given the

uncertainties and the changes on the

horizon, can you still make that case?

People buy our stock for the dividend

There’s a good probability we could

see a policy evolving that if a company does green things, then maybe the tax

advantage for its dividend would be

kept I'd be getting more dividends to you at a lower tax rate That lets me

attract more capital, which allows me

to invest more in green,

What keeps you up at night?

Nothing I take Lunesta @

Pay Day

Which CEOs are earning their

pay and which, well, aren't? We weigh in on pay packages that stand out—for better or worse

Kabat recommended that the board and

executives at the Cincinnati-based bank forgo bonuses and pay increases in 2008-perhaps

too little too late, considering the troubled regional bank is taking $3.4 billion in government funds and its shares have fallen

from $28 to less than $3 in under a year A

spokesperson noted that most of Kabat's pay was long-term compensation, not salary

NDERPAID y VINCENT PALAGIANO CEO, DIME COMMUNITY BANCSHARES

PAY: $1.1 MILLION

Includes base salary of

B $665,600, plus stock and other

compensation

Even though New York-based Dime Savings bank was approved to receive a $77 million government injection, the bank turned down

the handout Palagiano said in a statement that

the bank is well capitalized and never invested

in subprime real estate loans or collateral underlying mortgage-backed securities that would be considered subprime -Dyan Machan

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Bear-market ET Fs wer ea bummer in 2008

Now they've become a tax liability

HERE'SAN undeniable appeal to

investments that promise to make

money when the market drops

Perhaps that’s why so-called short

ETFs have attracted $9 billion, When the

market goes down, these exchange-traded

funds are supposed to rise But in the recent

crash, some investors who used the ETFs

to bet against the market were shocked to

find they lost money anyway—and took

anasty tax hit, too

Short ETFs—also called bear or in-

verse—use complicated futures and de-

rivatives to provide the opposite return

(or even two or three times the opposite

return) of an index It can be tempting:

Who doesn’t want to be up 30 percent

when the market is down 10 percent?

Noto fast Last year, when most ma-

jor indexes fell by double digits, several

bear-market ETFs also lost big The MSCI

Emerging Markets index fell 54 percent in

2008, so you might think the double-short

ETF that tracks it would have gained 108 percent Wrong: It lost 25 percent The Dow Jones U.S Real Estate index fell 43

percent last year; ProShares’ double-short

real estate ETF fell 50 percent

Don’t blame us, says ProShares Chair- man Michael Sapir “It’s the math.” The

funds match the opposite returns of an in-

dex on any given day, but the results com-

pound daily, So even if the index is down

over, say, a two-week period, an investor

who held on through daily ups and downs could lose money That’s why Sapir and other ETF execs say their products are for sophisticated investors and daily traders

“Joe Buy-and-Hold? Please don’t invest in our funds,” says Direxion Funds’ Market-

ing Director Andy O’Rourke “They're

because of the leverage used in these ETFs,

investors are often saddled with higher

short-term capital gains taxes, even if they

don’t sell any shares Ugh, says Morning-

star strategist Paul Justice If you’re still

tempted, he says, trade the short ETFs daily Or find a bear mutual fund that in- volves less complicated math

credits and calculations Most people are familiar with the so-called marginal rate—also known

as your income-tax bracket But that doesn't tell the whole story; your effective rate is the tax you

20 SMARTMONEY

your effective tax rate, or the percentage of income claimed by Uncle Sam

actually owe, That's because our progressive tax system is based on a blended rate of tax brackets:

The first $8,025 an individual earns is taxed at 10 percent, the next $24,525 is taxed at 15 percent,

and so on until you reach the top bracket of 35 percent Plus, some income—like capital gains and dividends—is taxed at an even lower rate Want to know your personal bottom line? Divide the amount you paid in taxes by your taxable income, The result, expressed as a percent, is

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streetsmart

Energy Investors

Partner Up

Unsure about the price of oil, some investors see

master limited partnerships as a way into energy

HE ONLY THING MORE JARRING than oil prices hitting an all-time high

of $147 a barrel is the whipsaw speed at which those prices can fall 75

percent, as they have in recent months No wonder investors have been

shying away from energy stocks recently Savvy portfolio managers,

however, have been increasingly drawn to a much overlooked way of investing

in energy without worrying about the price of oil and enjoying a fat dividend to

boot: master limited partnerships, or MLPs

More specifically, it’s pipeline MLPs that provide the most bang for your buck

These firms own and operate storage facilities and the pipelines used to move oil

and gas across the country Growth in this part of the energy business should be

fairly stable, analysts say, because the firms are paid through contracts based on

how much oil they move, not whether a barrel costs $147 or $47 That translates

into a steady stream of cash, creating “double the income and growth with a

22 SMARTMONEY

lot less risk” than other income-producing

investments, says David Schulte, managing

director of MLP specialist Tortoise Capital

Advisors Over the past five years, MLPs have trounced the S&P 500, with the 50 largest

partnerships gaining 25 percentas the broad

market fell 19 percent

Perhaps the most intriguing aspect of MLDPs is the way they’re structured Because

they’re partnerships, not corporations, they

pay out most of their cash to shareholders—

and lately that means yields of 4 to 9 percent With Treasury bond yields at their lowest lev-

elsin years and companies slashing dividends

at the fastest pace in 50 years, these pipeline partnerships stand out, says John Cusick,

Oppenheimer’s MLP analyst

Those big payouts do present some tax headaches Because the distribution isn’t tech- nically a dividend—it’s considered “return

on capital”—about 20 percent of it is taxed

as regular income, and not at the lower 15 percent rate usually applied to dividends (The remainder is not taxed until the shares

are sold.) Plus, shareholders must pay taxes

in all states the pipelines cross, meaning lots

of forms Investors who want to avoid the

paperwork can invest in a closed-end fund like Energy Income & Growth (FEN)

~Reshma Kapadia PARTNERS FOR YOUR PORTFOLIO

Plains All American Pipelines (PAA, $40, 9.5% yield) owns pipelines, storage facilities and terminals that

receive oil Analysts give it high marks for navigating through past crises and having

a lower debt-to-capital ratio than peers Enterprise Products Partners (EPD,

$23, 9.49) owns the largest natural gas storage, processing and transport network, and one of its partners has been buying more units—always a good sign Spectra Energy Partners (SEP, $21, 6.8%) runs natural gas pipelines and storage facilities Its yield is lower, but

analysts see it as one of the safest bets

There are a slew of new products aimed at queasy

investors The question is: Do they work?

ARKETS ARE MOVED BY FEARAND GREED,as the saying goes And so

are marketing departments Gone are the days when fund companies

could hype their chart-topping returns; for today’s shell-shocked inves-

tors, fund companies have started to promise “risk management” and

“diversification”—in other words, safety This happens after every bear market,

says Lipper analyst Jeff Tjornehoj “It’s as predictable as the sunrise.”

And now, rising in the east: new funds from Putnam and Van Kampen, signaling

that the era of fear-based fund investing is back Putnam’s four Absolute Return

funds target specific three-year returns—one, three, five or seven percentage points

over the Merrill Lynch U.S T-Bill index, a common measure of inflation It’s a

strategy that’s been used by pension funds and endowments for years It’s also fairly

of the stock market over time “They’re an

anchor against the wind, diversification from the volatility of a typical fund,” says Purnam

CEO Bob Reynolds

Van Kampen’s new Global Tactical As- set Allocation fund also sounds the lullaby

of diversification By investing in U.S and foreign stocks, bonds, currencies and com-

modities, the fund promises to react nimbly

to volatile markets That allows it to “operate within a risk-controlled framework,” says

fund manager Francine Bovich

Both companies say they didn’t launch

their funds in response to the market crash— that would be nearly impossible, since it takes several months for a fund company to create

and test a new fund and get Securities and Ex-

change Commission approval But Putnam’s Reynolds acknowledges their timing couldn’t

be better: “They’re perfect for people who can’t stand the volatility.”

Though the new offerings might appeal

to the skittish, they have risks, too They can,

of course, lose money, points out Tjornehoj And they aren’t cheap, with expense ratios of

more than 1.65 percent More important, he

says, it’s too late to protect against the crash that happened last October—and the instinct

to do so can actually encourage investors to

be too conservative, precisely when stocks

are poised to rally ~lanet Paskin

THE LAST “SAFE” INVESTMENT

Remember “principal protection” funds? The fund industry hyped these ultrasafe funds after the technology bubble burst

By 2002 investors had bought the pitch, putting $5.75 billion into the funds But the worst was over, and the funds

were too conservative to participate in

the ensuing rally—lagging the market badly Investors bailed out as fast as

they piled in Even those who stayed

weren't home free: The average principal protection fund lost 9 percent in 2008; some more than 30 percent -LP

SMARTMONEY 23

streetsmart

Flying High?

Airline stocks have confounded

investors for decades, but the drop in

oil prices and recent restructurings

has created a new landscape

Southwest Airlines

(LUV, $7)

BUY

HIGHOIL PRICES devastated air-

line profits for yearsand forced the

industry to slash costs—even pil-

lows weren't safe But Southwest

Airlines didn’t have to cut costs as

dramatically, since the discount

airline already had much lower

labor and operational costs than

rivals As competitors cut routes,

Southwest stayed put, picking up

market share and setting it up for

a stronger recovery Plus, it still

has room to cut costs further and

sits on one of the industry’s stron-

gest balance sheets, allowing it to

pay an (albeit tiny) dividend that

adds up to two cents a year “The

fact they pay one at all is a huge

signal they feel good about their

business,” says Don Wordell,

manager of the Ridgewood Mid-

Cap Value Equity fund

THOUGH AMR, parent of Ameri-

can Airlines, has feverishly cut

costs and reduced flights, the firm has a distinct disadvantage:

It has never filed for bankruptcy

protection That may seem like a positive, but it means American

couldn’t reduce labor, supplier and plane costs as much as firms

that went through the process,

says Bill Hochmuth, senior fixed-

income analyst at Thrivent Finan- cial And with flights to more than

250 cities, American has a costly system to maintain, says Daniello Natoli, senior analyst at Matrix

While its labor costs are among the highest, AMR controller Brian

MeMenamy says expenses for

things like landing fees and main-

tenance are among the lowest per

unit of the traditional carriers

Continental Airlines

(CAL, $13)

HOLD

CONTINENTAL AIRLINES’ efforts “to get its act together”

are paying off in its ability to keep fares steady, says Craig

Hodges, comanager of the Hodges fund And so far, he adds, Continental has been reducing flights faster than it is

losing sales But because it went through its last bankruptcy restructuring more than a decade ago, Continental is bur-

dened with higher costs than its rivals Plus, other carriers

like Delta have been more aggressive in cutting capacity

to maintain pricing power and cope with falling demand, which could put it at a disadvantage, says Shaya Berzon, an

analyst at Legg Mason Investment Counsel Continental has said it will continue reducing capacity through the year

-Reshma Kapadia

>» UNDER THE RADAR SKYWEST

SKYWEST (SKYW, $13) operates 70-seat regional jets for larger airlines like Delta and United, which pay ita fixed rate SkyWest Treasurer Michael Kraupp points out that the company's contracts with larger airlines are typically for 10 to 15 years and are “not going away” That creates a much steadier stream of profits than that of more traditional airlines, says T Rowe Price small-firm transportation analyst Kwame Webb As a result, SkyWest's balance sheet is extremely healthy, which should allow it to maintain its small quarterly dividend of four cents

a share and continue to buy back stock Trading at seven times this year's expected earnings, it's a good opportunity with “an attractive margin of safety” Webb adds -RK

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Ask SmartMoney Stephanie AuWerter

Risk of Deflation, Giving Mom’s

Money Away, Credit Card Rates

26 SMARTMONEY

Some experts worry that the U.S may get

« stuck in a Japan-type deflationary trap

What would this mean:

—SIMON GLYNN, Ann Arbor, Mich

It would mean very bad times Deflation, defined

as the chronic price decline of goods and services

(often caused by a reduction in available credit, such as we’re seeing now), is the stuff of night- mares for the Federal Reserve and central banks around the world “Once you get into a deflation-

ary spiral, the chances of depression are pretty

high,” says Diane Swonk, chief economist with

Mesirow Financial Falling prices may seem like a good thing, but if shoppers start holding back on purchases because they anticipate lower prices in the future, the economy grinds to a halt

The Great Depression and Japan’s struggles throughout the 1990s delivered hard lessons on combating deflation, which explains the barrage

of interest-rate cuts and economic stimulus plans

to date While prices may be falling on houses

and commodities, the core Consumer Price Index

(which excludes food and energy prices) was flat

in December 2008 and rose a modest 1.8 percent

in 2008 overall “I don’t think deflation is likely,”

says Gus Faucher, director of macroeconomics at

Moody’s Economy.com “But the economic im- plications of deflation can be very serious, so it’s

important to make sure it doesn’t happen.”

My mother-in-law is in a nursing home,

+ diagnosed with dementia She has

approximately $100,000 left My wife has

power of attorney for both the medical and financial arenas Can she gift money to the

grandkids? —Douce SMITH, Eden, Utah

Probably not Legally speaking, your wife’s pri-

mary responsibility is to act in the best interest of her mother, says attorney Kent Alderman of Salt

Lake City-based Parsons Behle & Latimer Laws

vary by state, but in Utah gifting is permitted only

if it’s stated explicitly in the power of attorney

document, and even then, if there’s a clear conflict

of interest, the gift could be voided by the cour

Asa more practical matter, that money will likely

be needed to pay for nursing-home costs Medicare

usually doesn’t cover long-term care at a nursing home, and Medicaid eligibility has a look-back provision that takes into account any gifting over the past five years Bottom line? It’s Grandma’s money and should be treated as such

J received notification that my credit card’s interest rate will jump from 12 percent to 16 percent Can card companies still

do this? Do I close the account and risk my credit score? —YAsMa THOMAS, Columbus, Ga

Under new rules approved by the Federal Reserve

as of July 1, 2010, rates can’t be hiked on existing

balances unless they’re tied to an adjusting index

or your payment is more than 30 days late (In-

creases on future purchases will be allowed with

45 days notice.) Welcome news—for next year:

In the meantime, call the lender and ask that the old rate be reinstated No luck? Use Web sites

like Bankrate.com to find a better card—you can roll over the balance to a new card, and leave the

old account open for occasional use, says Gerri

Detweiler of Credit.com Closing the old account could hurt your score if it increases your so-called

credit-utilization rate, which is the ratio of your

debt to your total available credit Also, after sev- eral years, a closed account will be dropped from

your credit report, and a small part of your score

is based on the length of your credit history

That doesn’t mean you need to hang on to a lame card forever If your score is well into the good range (760 or higher), it will likely recover quickly from the hit

STEPHANIE AUWERTER is a contributing editor

Questions for this column should be ask@smartmoney.com To be answered, your e-mail

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Seeermimen eres cea

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Common Sense James B Stewart

Tax Tips From

The Very Rich

The 400 top-earning Americans often pay

lower tax rates than the average Joe We scour

their returns to find out how they do it

looking forward to Apr 15 leven met with my accountant months ahead of time instead of waiting, as usual, until the last minute

That’s because I’m expecting a re-

fund—a bit of a consolation prize after

a rough year Because I have self-employed income

as an author, I pay estimated taxes based on the

prior year’s income And in 2007, my income was

buoyed by astill-surging stock market and capital gains Given the subsequent market crash and all

those realized losses I harvested at the end of last

year, [assume I’ve overpaid

around to amending those returns and claiming a

refund The deductibility of things like real estate

taxes is just one of the wrinkles in tax law that

makes it all so maddeningly complex and eats up

countless hours of tedious paperwork

Of course, I’m a journalist, not a corporate

executive or high public official; nor am I in the

ranks of the superrich who have their own jets and chauffeured cars and related tax issues Thanks to the IRS’s Statistics of Income Division, however,

we can get a fascinating look at those highfliers’

income and taxes, specifically the top 400 indi-

vidual tax returns (The names of those individuals aren’t disclosed.) According to the most recently reported data, this group of superelite reported

adjusted gross income, on average, of $263.3 mil-

lion, and paid an effective tax rate of 17 percent—

by some accounts, the lowest they’ve ever paid

This excludes tax-free income, such as interest on

municipal bonds, so the actual percentage paid on

total income is almost certainly far lower These tax numbers are for 2006, which was still

a boom time for stocks, other assets and the global

economy To give them their due, these people

paid, on average, $45.2 million each in taxes The

Big 400 accounted for 1.77 percent of all income

The superrich paid, on average, 17 percent

of their income in federal taxes If |

of President Obama’scabinet_ Can’t beat these people, can | join them?

nominees, who ran afoul of

the tax code for failure to pay withholding tax

(Treasury Secretary Timothy Geithner), for failing

to declare income (Health and Human Services

nominee Tom Daschle) and for failing to make

payments for household employees (White House performance czar Nancy Killefer)

I, for one, would find these oversights more forgivable if they were ever accompanied by mis- takes that accrued to the government's benefit

Irecently discovered that P've been making just such an error As an owner of a New York City

co-op apartment, I could have deducted my share

of the real estate taxes the building pays, thanks to

a change in the law several years ago It’s a pretty

substantial amount, but so far I haven’t gotten

Editor at large JAMES B STEWART’s latest book is Disney War (Simon & Schuster)

taxes paid, the highest level since the IRS started

keeping track in 1992, Even though they're paying

a lower rate, the superrich are paying more than

ever in dollar terms That gives support to those

who advocate lower marginal rates and argue it’s

counterproductive to soak the rich

Still, the size of their incomes and the low tax

rates are pretty dizzying Aren’t these the very

people for whom the alternative minimum tax was designed? I pay a far higher rate—in part because

I’m one of the millions hit by the AMT—and even

a couple that earns just $70,000 a year is in the

25 percent tax bracket So I was eager to examine

the IRS figures for clues as to just how the top 400

manage to keep their taxes so low In other words,

if 1can’t beat these people, can I join them, at least

by paying a lower percentage in tax?

SMARTMONEY 31

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Common Sens¢

Their biggest break is the lower tax rate—15 percent—on capital gains and dividend income Considering that the

165.2 million

wealthiest had, on average

in realized capital gains and $19.7 million

in dividends, with those together account- ing for the largest share of their outsize

incomes, the favorable tax treatment

amounts to a huge savings So one way

to lower your tax rate is to save as much

and as early as possible, plow it into the

stock market or other assets likely to ap- preciate, and hope to eventually live on the

proceeds This, of course, assumes that the

Bush tax cuts survive And reports like this one won't help when there’s a Democratic Congress As long as the rate on capital gains and dividends remains lower than

on earned income, the very wealthy will pay lower rates than everyone else

Still, the top 400 are working people

There seem to be few, if any, retirees in this

bracket rates of 35 percent

The other big advantage of the super- tich is their large amount of itemized de- ductions, an average of $41 million each

How do you spend a deductible $41 mil- lion? Almostall of it consists of taxes paid, charitable contributions and interest paid

The more you earn, the more you pay in state and local taxes, all deductible on fed- eral returns Youcan also deduct property taxes on any number of homes, so if you have, say, seven of them, the savings add

up These people gave, on average, $24.7 million to charity Hard to fault them for that, especially since their contributions

Despite their vast wealth, these people

appear to be pretty aggressive about bor-

rowing money They paid, on average, $

million each in deductible interest You can

only deduct mortgage-interest payments

on two homes, and of course, the bigger the mortgage, the bigger the deduction The rest is presumably from margin loans and other borrowing for investments In other words, this crowd was pretty lever- aged I’m not saying that’s prudent (espe-

cially in the wake of the market and real

estate crashes), and it will be interesting

to see how this group fared in 2008 But

borrowing aggressively and paying lots of interest is a way to lower your tax rate

If anyone would have been caught up

in the dreaded alternative minimum tax,

I thought it would be these people How

naive of me This group paid a paltry $2.2

million each, on average, in AMT, just 1.43

percent of total AMT revenue Perversel

the more you make, the less likely

pu are

to be snared That’s because the added tax

is triggered by a high ratio of deductions

to income—and the higher your income, the lower your deductions are likely to be

as a percentage of the total In my case, the fact that I give a higher percentage of

my income to charity and pay deductible

commissions on much of my

income as

a writer makes me a far more vulnerable AMT target than these multimillionaires, Memo to Congress: Will someone please

do something about this?

All this number-crunching brings me

to an obvious conclusion: The most ef- fective way to lower your overall tax rate

is to make a lot of money For better or

worse, our ostensibly graduated tax sys-

tem provides strong incentives to earn vast

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The New Retirement Peter Keating

New Math for

IRA Savings

The (surprisingly) little-used Roth IRA

could be the best option for many people

approaching retirement

34 SMARTMONEY

SUALLY, THE LAST THING anyone giving financial advice

needs to do is to tell Americans

to dodge taxes Tax our tea

unfairly and we'll start a revo-

lution Give us a holiday from

sales tax and we'll buy all kinds

of clothes and appliances we don’t need Launch single-state muni-bond funds whose yields are ex-

empt from income taxes in jurisdictions that don’t

even have income taxes and we'll plow our money

into them (Seriously, why does the Nuveen Texas

Quality Income Municipal fund even exist?)

Yet there’s a way to com-

pletely avoid paying taxes on

retirement savings, and it’s perplexingly unpopular With

a Roth IRA, your retirement investments grow tax free If

you geta statement showing you have $200,000 in aRoth IRA, that amount—and not some lesser fig-

ure you have to guesstimate after trying to adjust for taxes—is what you’ve got, and you can spend it

whenever and however you please But just 19 per-

cent of working Americans have Roth IRAs, even

though 90 percent are eligible for them, according

to Fidelity And Roth IRAs hold only 4 percent of

all IRA assets, according to the most recent Federal

Reserve Survey of Consumer Finances

This tax season happens to be a particularly good time to get your household’s savings into a

Roth IRA But before looking at why, let’s review

how this type of account works and the possible stumbling blocks to using it effectively

With traditional IRAs, you get a quick tax ben- efit: You can deduct the contributions you make in

any year from your taxable income Your invest- ments are then sheltered from taxes as long as they

remain in your IRA, But when you take a distribu-

tion from an IRA, it is subject to regular income

xes Roth IRAs flip the timing of the tax break

Contributions are not deductible—but then they

grow tax free and will never be taxed again

[fall the other rules governing traditional IRAs

and Roth IRAs were identical, there would be no

reason to favor a Roth Algebra says it shouldn’t

matter whether taxes are applied to contributions

or a compounded total But there are three big reasons why a Roth can be better

First, since creating Roth IRAs in 1997, Con- gress has never distinguished between the limits

on making contributions to them and on making

deductible contributions to traditional IRAs In

2009, for instance, you can puta total of $5,000

into IRAs of both kinds ($6,000 if you’re 50 or older) And that equivalence means Roth IRAs

give you more bang for your buck To take a simple

example, let’s say you put $5,000 intoa Roth IRA

this year and leave it untouched for 30 years If

it grows at 6 percent a year, you would end up with $28,717, tax free To get that much from

a traditional IRA in 30 years at 6 percent, you

There’s a way to completely avoid paying taxes on retirement savings, though it’s perplexingly unpopular—the Roth IRA

would have to invest $6,944 initially, let it grow and then pay income tax on the total (assuming

you're in the 28 percent federal bracket) But you

can’t—you can invest only up to $5,000

Now, with a traditional IRA, you do get an up-

front deduction In this case, that would be worth

$1,400 But even if you invest your deduction ina

taxable account for 30 years, the total will still fall short of the Roth IRA's It may seem paradoxical that after-tax dollars make for a better tax shield,

but the combination of equal contribution limits

and tax-free withdrawals gives the Roth an edge

The second advantage to a Roth is easier to un- derstand: no mandatory distributions In contrast,

you face stiff penalties if you don’t start drawing

down a traditional IRA by age 70%

Third, since you can accumulate large sums in

Roth IRAs without having to worry about

taking distributions, they make excellent

vehicles for estate planning You can pas

a Roth IRA to your heirs and they will

never have to pay taxes on the amounts

they withdraw They will have to make

mandatory distributions according to IRS

timetables but can stretch out drawdowns

over their lifetimes, which makes Roth

IRAs a particularly good asset to leave to

grandchildren,

If this all sounds too good to be true,

well, I actually don’t have a nasty sur-

prise up my sleeve Roth IRAs are terrific

And so are their workplace cousins, Roth

401(k)s Roth vehicles should be signifi-

cant components of retirement planning

for anyone who's eligible (Individuals

earning more than $120,000 and couples

earning more than $176,000 can’t con-

tribute to a Roth.)

So why aren’t they? The vei

Roth tax breaks is one important reason

For decades planners (and financial maga-

zines) preaching the importance of mak-

ing regular retirement investments have

stressed the benefits of deductible contri-

y nature of

butions to IRAs and pretax contributions

to 401(k)s Then Roth IRAs came along,

and suddenly, investors were supposed to

ignore those up-front gains to get extra

gratification later That’s a serious adjust-

ment to make—and it’s complicated by

the often complex rules for investing in

various types of accounts

There’s also a legitimate tax-bracket

concern about Roth IRAs With tradition-

al IRAs, you defer taxes until you cash out

your savings, which is particularly damag-

ing if you move into higher tax brackets

over the course of your lifetime But the

opposite holds for a Roth, where you pay

your taxes early: If you move into a lower

tax bracket after retiring, the benefits of

free growth won’t be worth as much

So if you think there’s a chance you'll

tax

have significantly lower annual income

in retirement, it makes sense to diversify

among traditional and Roth IRAs, to gain

some tax advantage either way

Finally, there had been serious legal

limits on converting traditional invest-

ments to Roth IRAs, but these have been

falling away—and here’s where we get back to why Roth IRAs are an especially good idea right now There have alway

been income limits on who can contribute

or convert to a Roth IRA Currently, for

example, if you make more than $100,000

a year (single or married), you cannot con- vert a traditional IRA intoa Roth IRA But

next year that conversion cap will come

off: In 2010 anyone can convert a tradi-

tional account into a Roth IRA

This is a fantastic opportunity What-

ever your income, if you have made de-

ductible contributions to an IRA,

pay taxes on them now, then never again

And if you have made nondeductible con-

tributions, you will owe taxes only on the

growth in your investments—and, after conversion, never again You will need

enough cash on hand to pay those taxes

(it’s better not take a distribution from

oucan

your IRA to do so) But if you convert in

2010, youcan take two years to pay Uncle

Sam (If you convert in 2011 or later, you'll

have to pay the same year.)

This break came from bad lawmaking, and it may well be bad policy In 200:

Congress was looking for quick revenue and figured that allowing account holders

to switch to Roth IRAs would generate

$6.4 billion in conversion taxes over the next decade Unfortunately, the long-term costs of permanently sheltering so many dollars from taxes will be huge—perhaps

as much as $100 billion through 2049, according to the Tax Policy Center

But as long as you can get your sav-

ings into a Roth IRA, you'd be crazy not

to Whether you watch your investments

grow, spend your money or pass your

assets to your heirs, a Roth IRA is the

ORGANIZE YOUR FINANCES

Smart Ideas Dyan Machan

Franchise

Players

National chains say their franchise owners

do better ina bad economy This recession

could put that safety net to the test

36 SMARTMONEY

NTHESE DAYS OF “GREEN” EVERYTHING, human recycling is hot too Thanks to layoffs, there’s no shortage of slightly used, perfectly

good people hunting for work Take Jon McIn- tosh In 2007 the 51-year-old mortgage banker

found himself downsized for the fifth time in his career and decided it would be his last

Looking to “do something worthwhile and last-

ing,” he tapped his 401(k) account for $110,000

and opened up a business providing home health

care to aging boomers—thus becoming one of

America’s nearly 1 million franchise owners

With unemploymentnum- bers spiking, there has been a

surge of interest in franchises

as the next bright and shiny career option—never mind the name-tag-and-funny-hat connotations Franchised businesses make up 11 percent of the U.S private-sector economy and

take in 41 percent of every retail dollar spent, This

January the International Franchise Expo in Mi-

ami, where franchisors go to show a little leg and

lure some new operators, remained a hot ticket

The temptation to the entrepreneurially inclined is

understandable: be your own boss with a proven brand, all the training you need, financing help and a big hand with marketing

In past recessions, the number of franchises has actually grown faster than it has in good times, says Steve Olson, publisher of Franchise Update Media Group Indeed, the number of franchised

establishments grew at a faster pace than many other sectors of the economy from 2001 to 2005,

expanding by more than 18 percent to 900,000

And the perception of franchising as a safer choice

has been a big factor driving that kind of growth

Companies that lease out franchises like to tell entrepreneurs that they’re three times more likely

to make it by being a franchisee than by going solo But even some franchise owners suspect that sta- tistic may be more legend than fact One study, by Wayne State University professor Timothy Bates, indicated that there is absolutely no difference in the success rate or longevity of independent entre-

preneurs versus franchises Franchise obsessives

can argue about this stuff for hours

Bulls and bears agree that it costs money to make money Franchise fees—the onetime charge

you pay up front for the privilege of tapping the brand—range fromas little as $5,000 to $50,000

After that, the franchisee typically pays a royalty

of 3 to 8 percent of annual gross sales But the bigger hit comes in start-up working capital: The

buyer may need as much as $350,000 for the first

three months to cover equipment, leases and other

starting costs, according to Mark Kiekenapp, who

owns LA Sunset Tans and has been active in fran-

chising for 20 years If that sounds daunting, there

are cheaper options: Some home-based businesses

in party planning, business coaching and trophy

Pizza franchises and furniture chains are

waiving fees and offering financing for new partners—with strings attached, of course

making, for example, require a total investment

of less than $100,000

Olson, a trade journalist who covers the fran-

chise world, predicts that the numbers of new fran- chisees will explode in this recession—provided that would-be Subway shop and U-Haul lot own-

ers can get financing That remains a big if With

homeowner equity down and bank-loan criteria stiffened, the number of Small Business Adminis-

tration-backed loans has fallen by 56 percent since Oct 1, compared with the year-earlier period In

a tight lending climate, notes Olson, “without a

proven concept, you are dead in the water.”

If you've got the nerve, you can leave the banks

out of the financing picture Although the maneu-

ver has ruffled some feathers at the IRS, it’s legal

to roll your retirement assets over into a franchise

To do so, you basically start the You Corpora-

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start up your business Unlike people

who tap their IRAs early to, say, buy a

new sailboat, folks who make this move

don’t have to pay taxes on the rollover

McIntosh liquidated his stock and bond

portfolio to start his BrightStar Health-

care franchise (One nice side effect: He got out of the market before last year’s big

downturn, “It was dumb luck,” he says.)

Ideally—okay, very ideally—he’ll build a

business profitable enough to shore up his

retirement savings later

With today’s depressed account levels,

raiding a 401(k) plan likely means selling

low But for some, the loss is worth it for a

new start Deborah Jack, 49, a former Wall

Streeter, recently found herself reorganized

out of a high-paying job after 20 years in

the industry Jack had a sizable holding

of AT&T stock that she saw shrink by

more than half But she sold anyway, and

the $10,000 in proceeds helped her open

a Fetch! Pet Care franchise in Fort Lee, N.J She works out of her home, man- ages 25 pet-sitters, walk-

ers and groomers, and says she turned a profit her first

year “I figure people will cut

back on other things before they cut back on pet care,”

says Jack

Some franchise ideas, of course, are more recession-resistant than others Cell-phone stores, anything to do with senior care, and specialty cleaning ser-

vices like the ones insurers hire for mold re- mediation are reasonably resilient, accord-

ing to Olson Other possibilities include

greenish enterprises, like Cleveland-based

USA Insulation, which retrofits homes to

be energy-efficient Less promising: video

gaming, food and anything fad-driven

With over 3,000 companies licensing

franchises across 75 industries, someone

who’s franchise-curious may need help nar-

rowing choices Franchisesolutions.com is

an advertising-supported site that’s a good

SmartMoney.com For a slide show of big and not-so-big players

in the franchise world,

visit www.smartmoney

com/mag,

place to start You could also turn to Fran-

chiseMart, a chain of brick-and-mortar

stores that offers “pressure-free guidance”

on 100 possible franchise opportunities

If you enjoy those Russian dolls-within-

dolls, there’s also this option: You can buy

a franchise to open a FranchiseMart and

help other people open franchises

With the economy in so much trouble,

even some franchise chains are having their

own blue-light specials Emerald City

Smoothies will now givea free kiosk (nor-

mally a $20,000 charge) to anyone who

plunks down their $30,000 fee to open up

a store Pizza Inn recently announced it

would waive its royalty payments during

a franchisee’s first full year of operation

Budget Blinds will refund its $15,000 fee

if a new partner can produce $750,000 in

gross sales over three years—not an outra-

geous goal Some franchises are even of- fering 12-month, zero percent financing

to open a store

Scratch the surface of this coziness,

however, and it becomes clear that many

franchisees have as many conflicts with

their parent companies as plain old wage-slave employ- ees have with their bosses

Just as with the local stereo

dealer, for example, a fran- chise borrower who misses a

payment for any reason can get socked with 28 percent interest and penalties Rub franchisors the

wrong way, warns Susan Kezios, president

of the American Franchisee Association, and they can tie you to contract provisions that restrict your ability to purchase sup-

plies In some cases, they even have access

to assets in your bank account

Kezios’s best advice for newbies: Find

a lawyer who specializes in franchisee con- tracts “Ifa franchisor is giving you a free

ride,” she says, “be certain they'll get it out

of you some way down the road.” @

For more coverage of small businesses, start- ups and entrepreneurs, visit SMARTMONEY’s www.smSmallBiz.com,

uhctoday.com/smmag Healing health care Together”

Or contact your broker

Stock Screen Jack Hough

A Return to

Normalcy

The most extraordinary aspect of today’s

stock and housing markets is exactly how

“normal” things really are

HESE AREEXTRAORDINARY TIMES,”

the president told a news anchor recent-

ly He was explaining why the nation

needs the economic defibrillation of a

$789 billion stimulus plan I’m not quite

convinced, and I don’t just mean about

whether a government can safely pull

a big economy out of a downturn with extreme

spending (That’s widely accepted among smart

theorists, but history offers too little clear proof

to say for sure.) | mean I’m not convinced these are extraordinary times

By several measures, the seismic financial events of the past year have

left things more normal than

they’ve been for decades

That’s good news for stock buyers, since a return to nor-

malcy also likely sets up the market for handsome returns Some names to consider in a moment

You'd think houses were extraordinarily cheap

right now Prices are down 25 percent from their

2006 peak, and lawmakers seem to believe the market needs support—beyond that already pro-

vided by, say, tax breaks on mortgage interest

President Obama’s stimulus plan, for instance, included $2 billion to $3 billion toward support-

ing home sales But if falling house prices war-

f”),

have prices fallen far enough? A recent survey by

rant government intervention (a colossal “

Moody’s Economy.com found that houses cost

an average of about 20 years’ worth of what they might fetch in rent, down from close to 25 years”

JACK HOUGH is the author of Your Next Great Stock

and can be reached at jhough@smartmoney.com

worth in 2006, From 1983 through 1999, before

the latest house-buying spree began in earnest, most houses cost 13 to 15 years’ worth of rent

Consumer spending has hit unhealthy lows, right? In December, Americans saved 3.6 percent

of after-tax income, up from an average of 1.7

percent over the past decade Consumer spend- ing, we're often reminded, accounts for more than

70 percent of economic activity That mind-set

prompted an alarmed Congress to pack its stimu- Jus plan with incentives aimed at getting people to

spend more But are Americans really in danger

of spending too little? Since 1929 we've saved

an average of more than double the portion of

after-tax income we're setting aside today, and our spending has contributed five percentage points less to the economy than it does today And while it’s true that car sales have recently sunk to a 26- year low, it’s also true that America has more cars

than drivers

Unemployment recently hit 7.6 percent Now, that’s not normal The average since 1948 is 5.6 percent But the current rate isn’t without prec- edent, and it doesn’t necessarily foretell financial ruin In 1992 the rate fluctuated between 7.3 per- cent and 7.8 percent In 1982 and 1983, it aver-

The common theme here—in home

prices, stocks and spending—is reversion

to the mean, and it’s a powerful force

aged 9.7 percent The stock market in both cases

went on to produce at least six straight years of positive returns

Stocks look especially normal at the moment

That’s surely disappointing for retirees or anyone

hoping for a quick bounce back to Dow 14000,

but it’s good news for savers with plenty of time

The S&P 500 recently traded at 15 times earnings,

its average for more than a century, Earnings on which that calculation is based have plunged 30

percentina year That, too, is more normal than it

seems In 2006, corporate profits were 26 percent

above their long-term average as a percent of gross

domestic income Companies earned more than

usual because we spent more than usual, which was made possible because stock and house prices

were higher than usual