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Our Outlook for Health-Care Stocks

While the last hurdle to PPACA implementation was removed in

early summer with the U.S. Supreme Court's ruling on the

ndividual mandate, a Republican sweep could jeopardize the

reform's rollout, although full repeal is unlikely.

Sequestration is a real threat to numerous health-care

ndustries, with Medicare cuts hitting providers particularly hard.

While the number of uninsured patients is finally declining, the

acceleration in commercial enrollment is still needed to

stimulate health-care demand.

Elections to Determine Fate of PPACA

The U.S. Supreme Court upheld the individual mandate in a

narrow ruling on June 28, clearing the main hurdle for health-

care reform via the Patient Protection and Affordable Care Act.

The reform's fate now depends on the upcoming election

season, as the Republicans are still determined to unwind majorif not all) provisions of the reform. While we are not in the

business of making electoral predictions, our sector analysis

would be incomplete without some discussion of plausible

scenarios. It is clear that any talk of a repeal is useless without

either a Republican in the White House or a supermajority (two


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hirds) in both chambers of Congress to override a certain

President Obama veto. The latter outcome is virtually

mpossible, as it would require a monumental sweep--13 out of

23 Democrat-controlled Senate seats must change hands.

Democrats may be in danger of losing their majority status in the

Senate, but they will be able to thwart any efforts to override a

presidential veto.

f Mitt Romney takes the White House in the fall, the fate of the

PPACA becomes a bit murkier. Romney has already suggested

hat he would be in favor of maintaining certain provisions of

he law, while removing some less popular ones, but will he

have mechanisms in place to accomplish this? A full-blown

repeal is unlikely, given the low probability of Republicansobtaining a filibuster-proof majority in the Senate. However, the

Republicans might have another tool in their arsenal to

effectively suffocate PPACA: reconciliation. Under this process, a

debate on a particular bill would be limited to 20 hours with

imited amendments, as long as it pertains to a budget.

Considering that most provisions of the PPACA carry budget

mplications, the bill in theory could be stripped of most of its

power, rendering it meaningless. In this scenario, we might see

he future of the health-care system become much more cloudy,as some of the provisions of reform have already been


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mplemented and many companies in health care have put plans

n motion to incorporate changes from the PPACA. Unwinding

hese provisions and reversing preparations will once again wrap

health care in a shroud of uncertainty, exacerbated by the lack

of visibility surrounding GOP plans to reform health care. While

here are some PPACA provisions that are clearly punitive to

certain sectors (a device excise tax, pharmaceutical industry

ees), they are accompanied by provisions that at least mitigate

he negative consequences of the reform (coverage expansion).f the entire system is back to square one, investor sentiment is

ikely to turn negative (investors hate uncertainty), suppressing

earnings multiples across the sector.

A more likely outcome at this juncture is that despite Republicanefforts, the PPACA is here to stay. Some of the reform's

provisions could be tampered with (a Medicaid expansion for

example), but at this point, we have incorporated the

anticipated effects of the PPACA into all of our projections.

Sequestration Cuts Will Be Felt Throughout Health-Care Sector

A more imminent threat to the health-care sector is

sequestration. It is becoming more and more likely that there

will be no deficit reduction compromise attained before the

deadline, and automatic budget cuts will take effect in January


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2013. The magnitude of these cuts varies from 2% to Medicare

o as much as 8.2% to nondefense nondiscretionary spending

such as National Institutes of Health funding. We've been

operating under the assumption that these cuts have a

reasonable chance of happening, and as result, most of our

valuations for health-care providers and to a lesser degree

device suppliers have incorporated reimbursement reductions.

Ultimately, this is not a devastating outcome for many health-

care industries, but some--mainly providers--will be reeling

more, especially considering an already rather challenging

reimbursement environment. If the sequester occurs, we

estimate reimbursement growth will be essentially flat for most

service providers in 2013 based on the current reimbursementevels set by the Centers for Medicare and Medicaid Services.

Our investment thesis on the provider industry contends that

slowing Medicare reimbursement growth is likely to erode most

benefits obtained by the health-care providers from the decline

n uncompensated care under the PPACA. This industry remains

argely at a mercy of the government, and no current provider

carries an economic moat as a result of the few levers available

o combat any reimbursement headwinds.


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The life science sector is the other area directly affected by

sequestration. If the NIH does in fact lose 8.2% of its funding, it

s very likely that new grant awards will come to a screeching

halt, suppressing the demand for life science research

nstrumentation and consumables. Academic and government

customers account for a meaningful chunk of most life science

irms' revenue streams, but the extent of sequestration damage

s probably overblown. First, most firms in the sector have been

operating in a spending-constrained environment for the past 12months, as research labs pre-emptively tightened their spending

n anticipation of future cuts. Second, with the exception of a

ew firms (Illumina(ILMN), for example), no life science company

s at the complete mercy of the NIH budget; academia and

government typically don't represent the majority of total

revenue, mitigating a potential high-single-digit decline in orders

rom that end market. Our expectations for 2013 are muted for

he sector, but there are a few interesting investment

opportunities likely to stem from this uncertainty. Our top pick

here is Thermo Fisher Scientific(TMO).

Patient Volume Trends Have Improved Since Mid-2011, but We

Have Modest Expectations

Patients are slowly returning to hospitals, as adjusted admissionand surgery procedure growth at hospitals we track has


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mproved slightly from late 2011. However, this growth slowed

considerably during the last quarter and will probably remain

ackluster over the near term as unemployment,

underemployment, negative home equity, and higher cost-

sharing provisions with insurance companies continue to

pressure patient health-care utilization decisions. The continual

decline in inpatient admissions stems from hospital efforts near

he beginning of the recession to place more visit and procedure

volume in lower-cost outpatient clinics.

Most patient volume growth remains from less favorable patient

categories, namely Medicare, Medicaid, and the uninsured.

Although Medicare patient volume has been relatively stable,

commercial volume (the most preferred reimbursement) is stillweak and is tied directly to surprisingly stubborn

unemployment. Although growth in uninsured patients has

slowed (and based on recent Kaiser research has turned

negative), the rate remains high--more than 17% of the

population, according to estimates by Gallup survey data.

n Absence of Domestic Growth, Health-Care Firms, Particularly

Big Pharma, Turn to Emerging Markets

Emerging markets carry significant barriers to entry for Big

Pharma firms, and their importance to valuations and moats has


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been emphasized over the past several years. However, we still

believe the investment community is discounting the strategic

upside from these markets because of recent economic

slowdowns that have increased volatility in emerging markets, a

historical focus on the dominant U.S. market, and the mistaken

nvestor perception that emerging markets' margins are too low

o matter. We expect this discount will dissipate as economies in

emerging markets stabilize and the sales contribution from

emerging markets increases.

Growth in GDP is directly correlated with drug spending. Based

on a sample of 63 emerging and developed countries, World

Market Monitor calculated an 80% correlation between GDP per

capita and pharmaceutical spending. With the rapid growth inemerging market incomes over the past five years, drug

purchases have accelerated. This massive expansion in wealth

should directly increase the market opportunity for drug

companies.

A brand is very important in emerging markets; it tends to

reduce generic and counterfeit threats and gives Big Pharma an

upper hand in these geographies. Given the perception of a high

degree of variation in quality of generics, these drugs are seen as

generally inferior to branded drugs. Counterfeit drugs have also


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plagued emerging markets for decades, and we believe this has

nstilled a sense of distrust toward nonbranded drugs. The

strong reputations of large multinational drug companies for

manufacturing and safety have supported branded drug sales,

and such firms are able to provide a much higher degree of

service to physicians and patients in the form of educational

marketing relative to generics. Lastly, out-of-pocket pay

constitutes the majority of revenue in emerging markets, but

patients are willing to pay more for a trusted manufacturer. Themportance of the branded drugs not only allows companies to

aunch into emerging markets with less fear of counterfeits, but

also gives the branded drug a much longer life cycle in emerging

markets relative to developed markets.

While pricing power is not as strong relative to developed

countries, emerging-market drug prices remain high enough to

confer 20%-plus operating margins (excluding research and

development and central administrative costs, as these require

minimal incremental investment beyond base levels). Over the

past few years, Sanofi(SNY), GlaxoSmithKline(GSK), and

AstraZeneca(AZN) have all presented operating margin data on

emerging markets. These companies reported operating margins

n emerging markets (after incorporating any drug discounts) of23%, 28%, and 41%, respectively, relative to developed markets


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and excluding R&D and central administrative costs. While

pricing power varies depending on the therapeutic class and

specific market, branded drugs in emerging markets are typically

priced at a 50% discount relative to developed markets.

However, operating costs are much lower in emerging markets.

According to AstraZeneca, a sales representative is more than

50% cheaper in emerging markets; Brazil is 50% cheaper, Turkey

and Russia are 60% cheaper, and Mexico and China are 80%

cheaper. Therefore, lower marketing costs help offset lowerpricing power in emerging markets.

Top Health-Care Sector Picks

Data as of 09-18-12.

Covidien(COV)

Star Rating: 4 Stars

Fair Value Estimate: $76.00Economic Moat: Narrow

Fair Value Uncertainty: Medium

Consider Buying: $53.20

As we've been advocating for several years, Covidien is spinning

off its underperforming pharmaceutical business. We believe


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his transaction will allow investors to appropriately judge the

company and its core device business; we consider the shares

undervalued. The company's moat trend is now positive.

Covidien's device growth prospects are compelling, as the latest

product launches have been well received by the marketplace

and the company successfully integrated a number of sizable

acquisitions. While a weak macro environment continues to

hamper the elective procedure volume, the company's revenue

growth in the device segment remains strong, particularly inenergy and vascular, where Covidien continues to gain market

share. With emerging markets also fueling growth, we expect

strong revenue and earnings momentum despite ongoing

nvestments in R&D and sales.

Express Scripts(ESRX)


Fair Value Estimate: $73.00

Economic Moat: Wide



We're big fans of Express Scripts' high-return-on-capital business

model as well as its exemplary management. The company has

established a wide economic moat through a series ofacquisitions, which have granted Express Scripts unmatched


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bargaining power over suppliers, the ability to leverage fixed

costs, and differentiated pharmacy benefit management

capabilities. With the Medco integration barely under way,

Express Scripts has already stared down major suppliers like

Walgreen(WAG) and the pharmaceutical distributors and made

progress toward realizing at least $1 billion in synergies. We see

he company continuing to create shareholder value for the

oreseeable future.

con(ICLR)



Economic Moat: Narrow

Fair Value Uncertainty: HighConsider Buying: $19.20

con's growing scale has helped it gain entrance into the upper

echelon of the contract research industry, and we think the firm

will continue to benefit from industry tailwinds provided by drug

companies' increasing tendency to outsource R&D work.

However, a slowdown in drug-development spending has led to

capacity underutilization and losses in the firm's central lab

division, and hiring in anticipation of an uptick in demand has

weighed on earnings. We think the firm's results hit a low pointn the third quarter of 2011 and earnings will regain traction


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hroughout 2012 as central labs pass break-even and new

partnership deals begin to meaningfully contribute to revenue.

As demand returns, Icon should see high-single-digit top-line

expansion and operating margins return to the double digits by

he second half of this year as it leverages new staff and

nfrastructure across an expanded revenue base.

WellPoint(WLP)



Economic Moat: Narrow



WellPoint's 14 Blue Cross and Blue Shield plans provide thecompany with a unique combination of regional and national

scale. The former is the key to negotiating favorable provider

rates, while the latter is essential for leveraging administrative

costs. Investors remain fearful about the regulatory and

economic headwinds facing WellPoint, causing the stock to

rade at barely 8 times earnings and a greater than 35% discount

o our fair value estimate. However, we think these concerns are

overblown, as the recent health reform law should have only a

modest impact on WellPoint's future profits. While we expectongoing medical cost pressure, this should be partly offset by


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revenue growth opportunities and potential selling, general, and

administrative expense leverage. In the meantime, WellPoint

generates copious free cash flow, which it is using to repurchase

shares at a breakneck pace.

Alex Morozov, CFA, has a position in the following securities

mentioned above: ESRX ICLR WLP

Symbol Price Change

TMO 59.04 -0.40

WAG 36.42 -0.18

COV 59.35 -0.41


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Symbol Price Change

ESRX 63.15 -1.10

WLP 58.00 -0.07


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The Great Disconnect: Awful Earnings vs. a Hot Stock Market

ByMatt Nesto

A week from today, when Alcoa (AA) officially kicks off third-quarter earnings season, analysts who know the company best

are expecting the aluminum producer to report a penny per

share in earnings on $5.6 billion in sales. That's down sharply

rom $0.15 per share and over $6.4 billion in revenues that it

delivered in the Q3 last year.

Given that Alcoa the smallest and second worst performing

stock in the Dow Industrials over the past year has already

been punished for its lackluster results, some might argue that it

s poised for a pop. The bad news, so to speak, is already in.

But there's only one problem: Alcoa's projected plunge is not an

sland of strife, it's part of a bigger crisis. All totaled, more than

80% of Q3 earnings pre-announcements have been negative, a

rate that Jeff Kleintop, chief market strategist at LPL Financial,

says is not only running at more than double the historic norm,

but is a key factor in why he thinks we're looking at the start of a

"global profit recession" that is going to see estimates come

down.


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As we discuss in the attached video, Kleintop cites three reasons

why he thinks we're about to see the worst quarter for earnings

n three years. Chief among them is his call that manufacturing is

stalling, despite Monday's better-than-expected ISM

Manufacturing report.

"Everywhere you look we're seeing declines now for the first

ime in three or four years, back to a recession in profits,"

Kleintop says, pointing out the negative profit outlooks that exist

or markets in Europe, Asia, and the U.S. While we have gone

nto earnings seasons with negative expectations more recently,

he tendency for companies to post better-than-expected

results (a.k.a. to beat the street) helped avert that situation in

recent quarters.

Kleintop is also on watch for any erosion in profit margins,

pointing out that "companies have already cut costs to the

bone." As he sees it, there is a limit to the amount of time that

corporate America can deliver double-digit profit growth at a

ime when revenues are barely moving.

Finally, Kleintop says he's looking out for the unspoken side of

share buybacks or repurchase programs. Of particular interest to

him are companies and industries that are able to come through


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with positive earnings growth, via a few pennies of better-than-

expected EPS, at a time when their net income is shrinking.

As he sees it, traders may be focused on policy events like the

easing authorized by the fed and ECB, but "what matters most

o investors" is long-term earnings growth.

PMorgan Suit a Model For Future Cases?

A multi-billion dollar civil suit filed by the New York State

Attorney General's office against JPMorgan Chase over

mortgage-backed securities could become a template for state

and federal officials seeking accountability for the 2008 financial

crisis, according to sources close to the case.

The lawsuit, filed in New York State Supreme Court in

Manhattan on Monday, securities working group first

announced by President Obama in his state of the union address

n January. The group includes officials from multiple federal

agencies, as well as ten state attorneys general, including New

York's Eric Schneiderman, who has broad powers to prosecute

inancial fraud under a state law known as the Martin Act.

While it was Schneiderman's office that ultimately brought thesuit, a federal official familiar with the investigation told CNBC


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eleven U.S. prosecutors as well as three attorneys from the

ustice Department's Civil Division helped develop the case. The

official says the inter-agency cooperation is a model for future

cases, but would not say whether similar suits are imminent

against other Wall Street firms.

A spokeswoman for Schneiderman also declined to comment

about ongoing investigations.

The lawsuit filed Monday alleged that "a systemic fraud on

housands of investors" in mortgage-backed securities sold by

Bear Stearns, which was taken over by JPMorgan Chase (JPM) as

part of a government rescue package during the financial crisis

n 2008.

"Defendants committed multiple fraudulent and deceptive acts"

n promoting and selling the securities, the lawsuit said. The

securities, made up of pools of residential mortgages, were at

he heart of a global financial meltdown after the housingbubble burst in 2008.

The suit alleged that Bear Stearns had told investors it did

extensive due diligence on the mortgages when in fact the bank

was focused on originating and securitizing mortgages inmassive numbers.


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PMorgan plans to fight the lawsuit, which it said involved

conduct at Bear Stearns well before the takeover.

"The New York Attorney General civil action relates to Bear

Stearns, which we acquired over the course of a weekend at the

behest of the U.S. government," spokesman Joe Evangelisti

wrote in an e-mail to CNBC. "We are disappointed that the NYAG

decided to pursue its civil action without ever offering us an

opportunity to rebut the claims and without developing a full

record."

The lawsuit alleged that as early as 2006, Bear Stearns knew the

oans it was originating and packaging as securities were risky,

but it continued to aggressively market the securities with claims

of "prudent" and "extensive" due diligence. But in fact, the suit

claims, Bear Stearns became a "securitization machine."

"To accommodate this massive volume of loans, Defendants'

due diligence process abandoned certain basic inquiries," thesuit said. It quoted an e-mail from a team leader at a firm hired

by Bear Stearns to evaluate mortgages.

"Have 1,594 loans to do in 5 days. Sound like fun? NOT!"


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Organic Foods One More Time Jon Barron

Earlier this month, the Annals of Internal Medicine published a

Stanford study that found that organic foods were neither

substantially more nutritious nor substantially "cleaner" than

non-organic products and are probably not worth the added

cost.1 As might be expected, these conclusions brought the

pundits on both sides of the argument wriggling out of the

woodwork. The agricultural industry trumpeted, "See, that's

what we've been telling you all along." The organic industry

cried, "Foul! The "small" differences that the study cited are

actually important, and besides, even if they aren't, there is bias

here." While the direct funding for the study may not have been

ainted (it was funded by an undergraduate research grant),some of the researchers involved in the study are affiliates and

ellows of Stanford's Freeman Spogli Institute, which has been

unded to the tune of millions of dollars by companies such as

Cargill, the world's largest agricultural business conglomerate

and several agricultural chemical and biotechnology

corporations such as Monsanto. "Obviously," the pundits

argued, "The researchers are merely doing the bidding of their

corporate puppet masters." Also, if that weren't reason enough

o leave the issue to others, I've already countered severalsimilar anti-organic studies in previous newsletters--in fact, I've


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borrowed extensively from those previous newsletters for this

report. And besides, Hiyaguha Cohen, one of our foundation

staff writers, wrote a blog about this exact study several weeks

ago. What more is there to say on the question: is organic food

better for you?

Quite simply, the reason I'm dealing with it now is that I believe

he true meaning of this study and its results have been left

unexplored. Key concepts worth examining have been left on

he table. Before we look into those, however, let's take stock of

where we are at this point in time. First of all, I believe that the

alternative health community missed the moment and ended up

arguing over table scraps as it were. As I've already mentioned,

heir argument was that the small differences cited in the studywere actually important differences and that perhaps the results

weren't real anyway because of bias. But in fact, the community

at large never considered the possibility that the results might

ndeed be real, and that the minimal differences between

organic and conventional produce were not only accurate as

measured, but probably to be expected. Given that, we're left

with two questions:

Starting with the assumption that it has nothing to do

with bias or inaccuracy, why are the differences in


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nutritional values so much lower than most people

expected?

Why were the differences in pesticide contamination

also less than expected?

But before we answer these questions, let's quickly review the

specific results of the study.

s Organic Food Better for You -- the Study?

Among other things, the study concluded that:

Fruits and vegetables labeled organic were, on

average, no more nutritious than their conventional

counterparts, which tend to be far less expensive.

Specifically, the researchers stated that organic

produce did indeed contain a "statistically" significant

greater number of phenols, which are believed to help

prevent cancer, than conventional produce. But then

the researchers pointed out that the size of the

difference varied widely from study to study, and the

data was based on the testing of small numbers ofsamples. More importantly, they also pointed out


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that ripeness has a greater influence on nutrient

content than how the fruit is grown. A lush ripe

peach, for example, grown with the use of pesticides,

can easily contain more vitamins than an unripe

organic one.

Organic milk contains more omega-3 fatty acids, but

milk is not a primary source of omega-3 fatty acids in

any case.

Organic foods are no less likely to be contaminated by

dangerous bacteria such as E. coli.

And yes, conventional foods, including fruits andvegetables, are more likely to be contaminated with

pesticide residues than organic produce--38 percent

VS 7 percent--but the levels are almost always under

the allowed safety limits, so the significance is

minimal.

And organic chicken and pork are less likely to be

contaminated by antibiotic-resistant bacteria. But the

researchers argued that any such bacteria were likely


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to be killed in cooking, so again no advantage to

organic meats.

To fully understand what these conclusions mean, we have to

back up a bit and get some context for the word "organic."

History of Organic Farming

The idea of "organic food" has its roots in the first dawning of

civilization. When you think about it, in the beginning, allarming had to be organic since there were no synthetic

ertilizers or pesticides until the last century. It might not have

been sustainable in some cases, as some ancient societies

definitely over farmed the land and made themselves extinct,

but it involved only natural components. The use of the word

organic as being something more than just "natural"--as being a

orm of agriculture that was in harmony with nature and

sustainable in addition to being natural, can probably claim its

roots some 60 years ago when Oxford University agriculturalist,Lord Northbourne, in his book, Look to the Land, designated the

natural alternative to chemical farming as organic farming. The

erm stuck and over time became the defining term for "natural"

agriculture. Until the early 90's, the use of the term was a bit

oosey-goosey, but since organic farming was only practiced by


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hose really into it, anything labeled organic tended to be truly

organic. However, in the early 90's, under the auspices of the

Organic Foods Production Act of 1990,2 the USDA took control

of all organic farming in the United States--and more

mportantly, control over the definition of the word organic.

Currently, the production of organic food is governed by a raft of

regulations that generally prohibit the use of synthetic

pesticides, hormones, GMOs, sewage, irradiation, and

additives.3

And if you thought the use of the word "organic" was loosey-

goosey before the government took over, the definition of

"organic" according to the government now opens the door to

all kinds of interpretation and abuse that would have beenconsidered "grave-turning" to its original practitioners.

Specifically, to be sold or labeled as an organically produced

agricultural product under law, the products need to match the

ollowing requirements:

1. They have been produced and handled without the

use of synthetic chemicals, except as otherwise

provided in this chapter. [Yes, there are exceptions].


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2. Except as otherwise provided in the law and excluding

livestock, not be produced on land to which any

prohibited substances, including synthetic chemicals,

have been applied during the 3 years immediately

preceding the harvest of the agricultural products.

[And yes, there are once again exceptions. But more

importantly, regulation does not cover practices on

"organic adjacent" land, and with many large

agricultural corporations setting up organic plots nextto their conventional acreage, which means organic

produce can be contaminated by pesticide runoff from

the conventional farms, we see a possible explanation

for much of the organic contamination seen in the

Stanford study.]

3. And the organic foods must be produced and handled

in compliance with an organic plan agreed to by the

producer and handler of such product and the

certifying agent. [And as we shall see, sometimes

those agents are nowhere to be found.]

Unfortunately, this definition allows for many exceptions. Some

of those exceptions come from the blatant ignoring of the law by

hose authorized to enforce it, and some exceptions are gently


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nudged in later to accommodate pressure groups and vested

nterests. We'll explore this in more detail a bit later.

Organic Foods -- Pros Cons

Now, this will come as a surprise to many people, but in most

cases, there is likely to be little if any difference between

conventionally grown and organic produce when testing for

many antioxidants and even many vitamins. Since phenols and

vitamin C--the focus of the Stanford study--are all comprised

entirely of oxygen, hydrogen, and carbon, they can grab all of

hese elements from the air and water. The type of fertilizer

used is irrelevant. You don't need a degree in chemistry to

understand the meaning of the following molecular formulas.

They all contain nothing but carbon, hydrogen, and oxygen. For

raw ingredients, we're talking carbon dioxide and water.

Quercetin -- C15H10O7

Beta carotene -- C40H56

Lutein -- C40H56O2

Resveratrol -- C14H12O3

Vitamin C -- C6H8O6


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could go on and on, but the point is obvious: many key

nutrients are assembled from nothing but carbon, hydrogen,

and oxygen. For those nutrients, whether pesticides are used, or

even if organic fertilizer is used, is irrelevant. The plants pull

what they need to make these nutrients out of the air and water

- which is equally available to both organic and conventional

produce. However, the situation is different when we talk

about other nutrients that contain elements not found in air

and water and that are also important markers of food value.For example:

Vitamin B1 requires sulfur -- C12H17ClN4OS

Methylcobalamin (the most active form of B12)requires nitrogen and phosphorus -- C63H91CoN13O14P

But there's more. One of the problems with commercial

ertilizers is that in order to be cost effective, they provide plants

with the minimal ingredients needed to make the plant grow.When it comes to conventional fertilizers, you're pretty much

alking about NPK--nitrogen, phosphorus, and potassium plus, of

course, the hydrogen, oxygen, and carbon found in the air and

water. Organic fertilizers, on the other hand, tend to supply


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nutrients across the entire spectrum (with a huge qualifier that

we'll discuss in a moment). Why does this matter?

Consider selenium, one of the most powerful antioxidants

known and a component of several powerful antioxidant

enzymes. If selenium is in the soil, plants pick it up. If it's not in

he soil, they can't pick it up. They don't actually need it to grow.

t helps with their defense against pests, but for the most part,

plants will "look" just fine if grown in selenium deficient soil--

especially if doused with pesticides to control for pests. Plants

require only 16 nutrients to grow;4 selenium isn't one of them.

n other words, if selenium isn't in the soil, the final crop will be

selenium deficient. It will not be found in the plant, either alone

or as part of any other molecules. When farms rely exclusivelyon NPK conventional fertilizers for raising their crops, all of the

race minerals such as selenium are soon depleted from the soil

and drop out of the equation, as do any antioxidants that

require their presence. Overall, the plant's phenol level will be

minimally changed (since selenium is not needed for production

of phenols), but its total antioxidant value will be profoundly

essened because the powerful antioxidant, selenium, will be

missing. (As we'll discuss in a bit, the use of pesticides may

produce a very different result in regard to polyphenols.) Tosummarize: conventional and organic fertilizers will produce


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similar levels of polyphenol antioxidants, but not selenium based

antioxidants. Likewise, sulfur based antioxidants will be

substantially higher in organic crops, as will levels of antioxidants

hat require metals such as copper, zinc, iron, magnesium,

germanium, or nickel--for all the same reasons. (Note: NPK

ertilizers usually contain minimal amounts of additives such as

dolomite clay that contain extremely small amounts of trace

minerals to cover the basic needs for plants--but not enough to

cover the nutritional needs of those of us who eat them.)

Now, I did mention a couple of paragraphs ago that there are a

couple of huge qualifiers to this analysis. First, not all organic

ertilizer is equal. A key question is, "Where did the manure

come from?" Did it come from organically raised animals orconventionally raised animals? This is important for two reasons.

Manure from conventionally raised animals will often

contain the residue of pesticides, herbicides, and

veterinary pharmaceuticals the animals have ingested-

-some of which can make its way into the plant, thus

raising the pesticide count of the "organic" produce.

This will also be true of fertilizer made from processed

municipal sludge. While these fertilizers are now heavy


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metal free (they weren't originally), non-metallic

toxins are not removed.

Just as plants can only contain the elements they are

raised on, manure can only contain the elements that

were in the feed given to the animals that produced

the manure. If it's absent from the conventionally

raised cattle that were fattened in stockyards with

selenium deficient conventionally grown corn, then it

will be missing from the manure that comes out the

back end of the cow. Once again, selenium (and any

other mineral for that matter) can't be generated out

of thin air. On the other hand, if selenium is present in

the grass that range fed animals eat, then it will be inthe manure.

What this means is that some so-called "organic" manure

ertilizers might provide no material benefit over conventional

synthetic fertilizers when it comes to the final nutrient level of

he plant. The bottom line is that unless you deliberately re-

mineralize the soil, minerals will not magically appear in the

plants.


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By the way, even better than manure is organic matter compost.

But that requires a great deal of work and is not the dominant

source of fertilizer on large farms. Small organic gardens yes.

Large farms, not so much.

So what minerals and antioxidants are we talking about that

might be missing?

We've already mentioned selenium. Selenium is a

component of the glutathione peroxidase enzymes

(there are eight of them), which are primarily

responsible for reducing peroxide free radicals that

include lipid peroxide formation in cell membranes.5

Reduction of peroxides breaks the auto-oxidative

chain reaction that damages cell membranes.Selenium is not only a component of glutathione

peroxidase, as an element, it is also synergistic with

glutathione and catalase in helping to protect the

integrity of cell membranes. It stops the growth of

tumors, and it protects the liver. Specifically, low levels

of selenium have been connected to death from heart

disease, breast cancer, prostate cancer, colon cancer,

and in fact cancer of all kinds. Some studies have

shown that selenium may be 50-100 times morepowerful than any other anti-carcinogen known.


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Sulfur is a key component in several amino acids that

have strong antioxidant activity.6 For example:

- L- methionine is an essential sulfur amino acid that

works as a powerful antioxidant and liver detoxifier--

where it assists in the normal detoxification processes.

As an antioxidant, it provides powerful protection in

the colon.

- Supplementation with N-Acetyl Cysteine (NAC),

another sulfur-bearing amino acid, has been proven to

substantially raise the body's glutathione levels. One

of the keys to a healthy immune system is maintaining

high levels of glutathione in the body. Unfortunately,supplementing with glutathione doesn't really help.

The molecule is too big to pass through the intestinal

wall. Fortunately, supplementing with NAC does help

as it facilitates the body's generation of glutathione

peroxidase. In addition, NAC supplementation is

mandatory for all smokers and big-city dwellers as it

protects against toxic aldehydes that enter the body

through cigarette smoke and pollution.


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On a different note, glutathione peroxidase, superoxide

dismutase (SOD), and catalase are the three primary enzymes

produced in the body as an antioxidant defense. As we've

already discussed, selenium is a key component of glutathione

peroxidase. Iron, on the other hand, is required for catalase,

which is a specific for protection against tumors. A little catalase

can go a long way: one catalase enzyme molecule can catalyze

he breakdown of five million molecules of peroxide radicals into

water and oxygen in just one minute. As for SOD, copper, zinc,ron, magnesium, and nickel are all required for the construction

of the various SOD molecules.

You get the idea. There are a number of essential antioxidants

hat require more than carbon, oxygen, and hydrogen for theirconstruction. Basing a study on the antioxidant value of foods

measured only by the amount of phenols and vitamin C present

provides an extremely misleading picture. This means that just

because there is little measurable difference in phenol levels

between organic and conventional produce doesn't mean they

have even close to the same antioxidant values, let alone

nutrient values. It's all a question of what you choose to

measure.


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As a side note, I find it very interesting that virtually all of the

mainstream studies, including the Stanford study, that compare

he nutritional value of organic food to conventional food focus

on those nutrients that can be assembled from water and air

and ignore those nutrients where organic farming has an

nherent advantage. I'm not saying it's deliberate -- but it is

nteresting.

Note: even given the identical molecular requirements and

equal availability of required molecules, organic produce can still

post higher numbers for phenols, carotenoids, and vitamin C

han conventional produce. How is this possible? The answer is

marvelous, and it brings us to our second huge qualifier. Plants

produce antioxidants to protect themselves from stress factorssuch as insect pests and plant diseases. If you use pesticides to

prevent exposure to these stress factors, the plants have no

need to build up their defenses, so they will produce fewer

antioxidants. On the other hand, organic plants that have to

end for themselves in the field start packing in the antioxidants

o protect themselves. To use a metaphor, antioxidants are to

plants as muscles are to us. The more you use them, the

stronger they get. On the other hand, if someone wheels you

around everywhere you want to go, your muscles will atrophy --or as in the case of plants, their antioxidant levels will drop.


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Organic Isn't What You Think it Is

Most people believe that organic products come from small

arms using sustainable agriculture methods. This turns out to

be as mythical as the life depicted in Mayberry, RFD.7 Organic

oods have become very big business. From 1997 to 2007,

consumer spending on organic foods grew by more than 20

percent.8 The portion of spending on organic products that

went for non-produce items (dairy foods, beverages, grains,

prepared foods, snacks, and breads) increased by 54 percent

rom 1997 to 2008. Almost simultaneously, the supply of organic

products moved from small local stores, co-ops, and a few large

natural food purveyors to "conventional channels" including

Costco, Wal-Mart, and large supermarket chains. In fact, by2006, nearly half of organic food was sold via these large venues.

Meanwhile, mega-food-conglomerates like Heinz, PepsiCo, Kraft,

and others made busy gobbling up small, dedicated, organic

ood producing companies.9

For example, Horizon, an organic milk producer, is owned by

Dean, a huge company that has already absorbed brands such as

Silk, Land-O-Lakes, Pet Evaporated Milk, Meadow Gold, and Alta

Dena, among others.10 Read the story on a carton of Horizon

milk and you find yourself in the land of small farmers whose


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cows graze on open pasture lands maintained with sustainable

practices. However, an expos by the Cornucopia Institute

revealed just the opposite. Horizon uses farm-factory techniques

penning up as many as 4000 cows in tight rows for milking

assembly-line style.11 The food they're fed may be organic, but

he techniques employed are pure factory farming. This is just

one example. You can be sure that at least some, if not most, of

your favorite healthy "organic" products actually originate from

sources like Heinz (Breadshop, Health Valley); Pepsi (Nakeduice), Coca Cola (Odwalla), and General Mills (Cascadian Farm).

You don't have to stretch your imagination too much to envisage

how the profit motives of conglomerates can and do run

roughshod over the ideals and sustainable practices of the

organizations they devour.

Then there is the definition of the term "organic" itself. In 1990,

Congress passed a law that created a basis for organic food

standards in the U.S.12 The law required spot testing of organic

oods for traces of pesticides, but that testing simply hasn't

happened, at least up through 2010, according to a report

released by the Office of the Inspector General of Agriculture

Phyllis K. Fong). In fact, Fong's report showed lots of flaws in the

USDA's National Organic Program, including failing to inspectoreign producers and failing to crack down on companies


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marketing non-organic products as organic.13 The report

ocused on the years 2006-2008 during the Bush administration,

during which a lack of funding and staffing resulted in

cumulative failures that prevented the USDA organic seal from

representing adherence to a uniform standard for organic

products--a problem that the USDA stated that they intended to

correct. Unfortunately, further budget cutbacks as a result of

he recession and hostility to government regulation in general

make that largely a pipe dream.

To make the term "organic" even more confusing, Congress has

been meddling with what ingredients can be included in the

abel "organic." In October, 2005, Congress passed an

amendment to the organic program law that weakened organicabeling.14 A previous ruling would have required companies

using the term organic in their labels to eliminate synthetic

ngredients within 12 months. The October amendment allowed

producers to use the organic label, even if their products

contained synthetic ingredients and processing aids, and even if

heir young cows (who would later be converted to organic

methods) were given hormone treatments and genetically

modified feed. Why would Congress do such things? Because

Congressmen (and women) need donations from manufacturers


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n their home states and gifts from Washington-based lobbyists

f they want to get re-elected.

n 1997, the USDA quietly proposed allowing certain irradiated

oods to be labeled as "organic." After all, there's nothing

"synthetic" or "chemical" in irradiation--so allowing irradiation

of organic foods was within the letter of the law, if not the spirit.

Unfortunately, the USDA wasn't quiet enough. In short order

hey received over 275,000 public comments from people

outraged and opposed to the idea. In fact, the response was so

strong that the law was revised to reflect new standards that

organic foods be excluded from irradiation. See! Occasionally,

we do win one.

But it gets worse.

n 2007, the USDA proposed that certain non-organic products

be allowed in foods using the organic label.15 Among the items

hey included were "natural sausage casings (processedntestines)," "colors from 19 extracts," and "orange shellac." The

ist also included non-organic celery powder (used in the curing

of meat), and non-organic chia (which adds fiber and omega-3 to

baked goods and beverages). If an organic product contains non-


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organic ingredients, is it still organic? Apparently, both the U.S.

Congress and the USDA think the answer is yes.

Which Brings up another Flaw in the Stanford Organic Study

The Stanford study compiled no new data. It was what is

referred to as a meta-analysis -- the use of statistical methods to

combine the results of a number of smaller individual studies. In

act, it assembled its data from 17 human studies and 223

studies of nutrient and contaminant levels in foods grown

conventionally and organically. However, when the label organic

was applied to any food in these studies, no distinction was

made as to which end of the organic spectrum it was grown

under -- the conscientious organic farmer using 100 tons of

organic matter compost per acre per year and who methodically

rebuilds trace mineral levels, or the mega conglomerate running

a USDA qualified organic operation that uses 3-5 tons of

processed, feedlot cow manure per acre per year -- not to

mention planting their crop right next to millions of acres of

conventional fields owned by the same conglomerate and

ended to by below minimum wage laborers who have no

understanding of what the word organic means. The risk, of

course, is that these organic crops can be exposed to pesticide

run off from the conventional fields -- not to mention E. coli


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contamination. What this means is that in a meta-analysis, your

inal organic nutrient numbers are going to be "averaged" down

by the lowest common denominator organic crops.

t's worth mentioning that if you're buying this low level organic

produce in your local supermarket, then these are the nutrient

numbers you're looking at in your own food. On the other hand,

f you're buying your organic produce from a local, dedicated

organic farmer who truly works the soil trying to produce "super

organic" foods, then you're likely looking at a much bigger

difference in the nutritional value of the food you're getting VS

conventional -- not to mention much lower pesticide values.

Conclusion - Is Organic Food Better for You?

So where does that leave us?

Although the results of the Stanford study were

predictable, and probably accurate within the scope of

what they analyzed for, its fundamental conclusion

that buying organic isn't worth the price you pay

doesn't hold up. In the end, organic will give you

anywhere from decidedly more nutrients to

profoundly more nutrients, depending on:


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o Which nutrients you look at

o And how into the organic process the grower

is

It's also worth remembering that (excluding the

exceptions noted above) buying organic will mean that

your food is free of synthetic pesticides (more or less),

hormones, GMOs, sewage, irradiation, and additives.

And despite what the Stanford researchers say, isn't

that alone worth the price of admission?

Although any organic food is likely to get you a better

product, why settle for low end organic if you don't

have to? See if you can find a local organic grower at a

farmer's market and talk with them about how they

grow their produce. What do they use to fertilize their

fields and how many tons of it do they use per acre per

year? And do they actively re-mineralize their soil?What you're really looking for is a "super organic"

farmer who uses as close to 100 tons of organic

matter/compost per acre per year in growing their

crops as you can get. Not only will the food be more

nutritious. It will taste a whole lot better too.


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And finally, it's time to admit that the word "organic" has lost its

original meaning. The USDA has dumbed it down to

accommodate the interests of the largest mega farms.

Unfortunately, they now "own" the word, so there's no

reclaiming it. As a community, we need to leave "organic" to the

USDA and come up with our own term to describe the real food

we're trying to eat. For example, we could call it "Integral

Farming"--for farming that produces crops that are grown in an

ntegral manner and that "contain everything essential for lifeand required for their own completeness." We could define it

he way we once defined organic farming and organic foods,

before the words were co-opted. Products could be labeled

"organic" to satisfy the government and "Certified Integral" to

satisfy ourselves. The question is: who will define the term, and

who will certify "integral" farms and products -- until such time

as the USDA decides to steal that term too?

Working Past 65? Don't Overlook the Financial Side Effects

Working past the traditional retirement age of 65 is the fallback

strategy for many people hurtling toward retirement but

concerned they haven't saved enough. And indeed, the financial

benefits of deferring retirement can be potent. Continuing to

work means continuing to save, for one thing, and even more


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mportant, deferring withdrawals from your investment kitty

also reduces the number of years you'll need your investments

o last. Working longer also often means deferring Social

Security, which itself delivers a sizable inflation-adjusted

compounding benefit.

But continuing to work past the traditional retirement age--or

even part time during retirement--can bring unintended

inancial side effects, some good, some bad. These issues

should, of course, play second fiddle to the key factors

surrounding whether to continue to work: whether you want to,

whether you're able to, and whether continuing to earn a

paycheck will have a meaningful effect on your bottom line. That

said, here are some of the secondary financial issues to bear inmind as you assess the merits of working past 65.

Social Security Benefits

First, the good news. If you've waited until your full retirement

age or later to file for Social Security benefits, you can earn as

much income as you like and not see your Social Security benefit

reduced by a dime. However, if you've claimed benefits prior to

your full retirement age (currently 66, rising to 67 for younger

baby boomers), you'll be hit with a penalty on earnings that

exceed $14,640 (in 2012) until you hit your full retirement age.


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For every $2 that your wages are over that limit, your Social

Security benefit will be reduced by $1. In the year you reach

your full retirement age, you can earn up to $38,880 without a

benefit reduction; once your earnings exceed that threshold,

your benefits will be reduced by $1 for every $3 over that

amount until the month you hit your full retirement age. This

calculator (http://www.ssa.gov/OACT/COLA/RTeffect.html)

helps estimate the extent to which working will reduce your

Social Security income if you claim benefits before your fullretirement age.

On the plus side, those withheld benefits aren't lost forever:

When workers hit full retirement age, their benefits are

recalculated and the withheld benefits are essentially addedback into their Social Security benefits. But as Morningstar

columnist Mark Miller notes in this article, those reductions--and

he fact that they kick in at fairly modest income levels--are a

key reason why those who are still working should defer Social

Security until their full retirement age if they can swing it.

Social Security Taxation

Even if you're past full retirement age, it's worth noting that

Social Security benefits become taxable once your income

exceeds a certain threshold. That means that continuing to work


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s apt to increase the taxes you'll owe on your benefits. In fact,

or the highest-income people, Social Security benefits can be up

o 85% taxable.

For the purpose of what's taxable under the Social Security

calculation, income includes all of the usual items that compose

adjusted gross income on your tax return, including wages and

nvestment income; income taxable under Social Security also

ncludes nontaxable investment income (yep, municipal-bond

ncome) and one half of your Social Security benefits. That total

s called your provisional income. If provisional income is lower

han $25,000 for singles and $32,000 for married couples, the

Social Security benefits are tax-free. If provisional income is

between $25,000 and $34,000 for singles and between $32,000and $44,000 for married couples, the Social Security benefit is

up to 50% taxable. If provisional income is above the highest

hresholds--$34,000 for singles and $44,000 for married couples-

up to 85% of your Social Security benefits become taxable.

Given those fairly low dollar amounts, it's easy to see how even

a modest sum of wage income could bump your provisional

ncome into one of the higher thresholds. And once the effects

of those higher tax costs on your Social Security benefits are

actored in, continuing to work might not be as beneficial as it


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seemed at first blush. At the same time, someone who wanted

o continue working longer could simply delay receipt of Social

Security, thereby avoiding the aforementioned benefit

reductions and tax implications. Alternatively, the variety of

ncome sources that factor into provisional income means that

even people who continue to earn a salary while also receiving

Social Security benefits have some latitude to reduce the tax hit.

For example, someone who wanted to continue working while

imiting taxation of their Social Security income might benefitrom converting traditional IRA and 401(k) assets to Roth in the

years prior to receiving Social Security (thereby enabling tax-free

withdrawals from their IRAs) and focusing on growth (that is,

non-income-producing) investments for taxable accounts.

RA/401(k) Contributions

One of the chief benefits of continuing to earn a salary past the

raditional retirement age is that you can continue to make

retirement-plan contributions, at least to some account types. If

you're employed and your company offers a 401(k) plan, for

example, you'll be able to make contributions to it regardless of

your age. And while traditional IRA contributions are off-limits

once you've reached age 70 1/2, you can make Roth IRA

contributions regardless of your age, provided you have enoughearned income to cover the contribution and your modified


48/81

adjusted gross income doesn't exceed $125,000 in 2012 (single

ilers) or $183,000 for married couples filing jointly. Even if just

one spouse is working, he or she can make Roth IRA

contributions for both spouses, provided the working spouse's

ncome is equal to or higher than the total amount contributed.

Roths--whether Roth IRAs or Roth 401(k)s--will be more

attractive for pre-retirees who expect to be in a higher tax

bracket when they eventually retire than they were when they

made the contribution and/or for those who would like to avoid

having to take required minimum distributions once they turn

age 70 1/2. (People with Roth 401(k)s are required to take RMDs

rom them, but such individuals can readily roll their money into

a Roth IRA, thereby circumventing RMDs.)

401(k) RMDs

n a related vein, being an active worker can also help you delay

RMDs from a 401(k) plan, even if you've passed age 70 1/2.

Assuming your 401(k) plan rules allow it, you can defer

withdrawals from the plan until you actually retire. A key

exception is if you own more than 5% of the company; in that

nstance, RMD rules still apply, even if you're still working. Note

hat this exception to RMDs only applies to 401(k)s; RMDs from

raditional IRAs are mandatory whether you're working or not.


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Health-Care Coverage

People who continue working past age 65 will also have some

decisions to make on the health-care front because they might

be covered by a health-care plan at work while also eligible for

Medicare coverage.

n most cases, the best option will be to sign up for Medicare

Part A even if you're staying on your company's health-care plan.

If you're receiving Social Security, you'll automatically be signed

up for Medicare Part A and B coverage just before you turn 65.)

As Mark Miller outlined in this article, you won't pay any

premium for the Medicare Part A coverage, and you'll avoid

having to jump through hoops to enroll when you actually do

retire. Your employer's health-care plan will continue to be yourprimary insurer if you work for a company with more than 20

employees; if there are fewer than 20, Medicare will be your

primary insurer.

This strategy might not be for everyone, however, especially if

you're actively funding a health savings account. In that case

you'll no longer be able to contribute to the HSA once you've

signed up for Medicare benefits or you've been automatically

opted in. If contributing to the HSA is a valuable component of


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being employed, it might be worth it to hold off on Medicare

Part A.

You can also probably delay enrolling in Medicare Part B if

you're covered by a company health-care plan, relying on your

company's insurance instead. Larger companies are required by

aw to provide older workers with the same health-insurance

benefits as younger ones, but if you work for a small company

fewer than 20 employees), your employer may require you to

sign up for Medicare Part B at age 65. When you do sign up for

Medicare Part B, be sure to follow the rules to ensure that

here's no break in coverage and that you won't pay extra

premiums that other people who delay Part B coverage will pay.

This Q&A provides the details.

You should also consider signing up for Medicare Part D as soon

as you become eligible if your company's plan doesn't include

coverage for prescription drugs. In this case, you'll pay a

premium for the coverage, but it could be well worth it if you

have substantial pharmacy costs. However, be sure to enroll

within three months after your 65th birthday; if you sign up

after this window, you will incur a penalty.


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f your company does offer drug coverage and it's creditable

that is, it's at least as good as what's available under Medicare

Part D), you'll be able to avoid the penalty if you sign up for Part

D at a later date. Page 46 of this document

http://www.medicare.gov/publications/pubs/pdf/11109.pdf)

provides more detail on creditable prescription drug coverage;

check with your plan administrator to find out whether your

current plan is creditable. If your employer's drug coverage is

not creditable, you must enroll in Medicare Part D no later thanhree months after you turn 65 to avoid the penalty.

Last but not least, people who are still working should pay

attention to the high-income premium surcharges for Medicare

Parts B and D, which affect individuals with $85,000 or more inaxable income and married couples filing jointly with taxable

ncomes of more than $170,000. Those thresholds are high

enough that tax-management techniques such as converting

raditional IRA assets to Roth prior to retirement might help

circumvent the surcharge.


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Can I delay Medicare Part B enrollment without paying higher

premiums?

Yes. In certain cases, you can delay your Medicare Part B

enrollment without having to pay higher premiums. If you didnt

ake Medicare Part B when you were first eligible because you or

your spouse were working and had group health plan coverage

hrough your or your spouses employer or union, you can sign

up for Medicare Part B during a Special Enrollment Period. You

can sign up:

Anytime you are still covered by the employer or union group

health plan through your or your spouses current or active

employment, orDuring the 8 months following the month the

employer or union group health plan coverage ends, or whenhe employment ends (whichever is first).

f you are disabled and working (or you have coverage from a

working family member), the Special Enrollment Period rules

also apply.

Effective date if you sign up during a Special Enrollment Period

f you enroll in Medicare Part B while covered by the group

health plan or during the first full month after coverage ends,your Medicare Part B coverage starts on the first day of the


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month you enroll. You also can delay the start date for Medicare

Part B coverage until the first day of any of the following 3

months.

f you enroll during any of the 7 remaining months of the Special

Enrollment Period, your Medicare Part B coverage begins the

month after you enroll.

Remember: If you do not enroll in Medicare Part B during yourSpecial Enrollment Period, you'll have to wait until the next

General Enrollment Period, which is January 1 through March 31

of each year. You may then have to pay a higher Medicare Part B

premium because you could have had Medicare Part B and did

not take it. Call the Social Security Administration for more info

or to enroll in Medicare. You can visit the Social Security web

site .

Unemployment Dips, Stocks Rip on Hiring Blip 05-Oct-2012

f you're like me, when you come across a delicious new food

you probably want to know what's in it and where you can get

he recipe.


54/81

That's exactly how I felt when the succulent 7.8%

unemployment rate news fell on my plate this morning,

alongside another garnish-like month of hiring that came in

below expectations at just 114,000.

As it turns out, the secret ingredient was not some great

government conspiracy, but rather an eye-catching gain of

873,000 people who said they either rejoined, or sought to

rejoin, the labor force last month a 40-fold increase from

August's gain and the biggest single-month increase in 29 years.

Economist Jerry Webman from OppenheimerFunds says the so-

called household survey and other data are trying to tell us

something.

"This could be suggesting that we're seeing a little bit of a pick-

up in new businesses and small businesses," he says in the

attached video, just like what we saw in the ADP report

Wednesday, which showed that 162,000 private jobs wereadded last month.

Also worth noting this month was a solid gain in wages, which

saw hourly earnings increase 0.3%, as well as an uptick in the

participation rate (or the percentage of able-bodied Americanswho are involved in the nation's 155 million-person labor force).


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"It's not great and there are a lot of discouraged workers, but at

east when you ask people on the telephone, there are more

people working or looking for work than a month ago. It could

be good news," Webman says.

One thing missing from the month's report is the whole "game

he Fed" concept that either good or bad data would impact

he likelihood of more easing. But as Webman says, that's a

good thing, since trading these reports is risky business.

"The truth is, you're not supposed to invest on what one number

o the next really says. What you're supposed to be doing is

rying to pick up some of the longer trends," says Webman. "In

act, I think having the Fed out of the picture really means we

can focus on what we need to focus on, which is who's getting

employed, who's making stuff, who's earning a living, and who's

making a profit."

Despite Gains, Many Flee Stock Market 05Oct2012

The stock market is reaching toward new highs on the fourth

anniversary of the financial crisis, but many people refuse to be

ured back.


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Even as stock indexes have doubled in value since the market

ow in March 2009, investors have yanked a net $138 billion

rom mutual funds and exchange-traded funds that invest in U.S.

stocks, according to the Investment Company Institute, a

mutual-fund trade group. Investors over the same period put $1

rillion into bond funds, a traditionally lower yielding but safer

nvestment.

t marks the first time since 1981 that investors have pulled

money from U.S.-stock funds for more than a year at a time.

Crumbling confidence in stocks reflects a broader loss of trust in

he stock market and in the idea that the prudent investor could

expect a comfortable retirement and even a measure of wealth.

The stock market has become the foundation of U.S. retirement

savings, with nearly half of American families owning stocks. But

wounded investors, worried about another big loss, are

riggering a decline in stock ownership.

Market busts in the 1930s and 1970s soured previous

generations of investors. Now, said money manager Steven

Leuthold, of the Leuthold Group in Minneapolis, "I think we've

ost another generation."


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The signs of disaffection are widespread. The percentage of

American families who say they own stocks or stock funds

slumped to 46% in 2011 from 53% in 2001, according to the

nvestment Company Institute. Only a quarter of households

with retirement plans were willing to take above-average

nvestment risk in 2011, down from 33% in 1998, an ICI survey

ound.

Mutual funds, predominantly owned by individuals, widely

reflect the investment patterns of ordinary people. Whether

hey made profits or losses after exiting the funds depends on

when they bought. Regardless, it is now a clich that small

nvestors are less interested in the return on their money than in

he return of their money.

Rosa White, a 27-year-old TV-commercial producer in Brooklyn,

sold about half of her stock portfolio this spring and moved the

cash to a money-market account. She is still buying stock funds

hrough her 401(k) retirement account, she said, but plans to

reduce those contributions. She would like to invest more

aggressively but said she was afraid.


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"Every other day on the news there's some crisis," she said. "The

whole euro-zone collapse talk keeps going and going. If it's not

Greece, it's Spain. Then there's the whole Facebook blowup."

Although most people don't like to tinker with their retirement

accounts, the portion allocated to stocks in 401(k)-type accounts

overall fell to 61% in July from 70% in early 2007, based on data

rom Aon Hewitt, a firm that manages corporate benefit plans.

The stock allocation would be even lower except that many

companies are automatically putting new employees in so-called

arget date plans, which direct most of their contributions to

stock funds, said Patti Bjork, Hewitt's retirement research

director.

"The fear in the mind and heart of the investor is more acute

now than it was in the '70s, because the investor class today

doesn't know what to do, doesn't see an option," said David

Kotok, president of Cumberland Advisors, which manages about$2 billion in Sarasota, Fla.

Many investors are afraid of the real-estate market and are

unhappy with bonds. "People don't want to be in cash at a zero

nterest rate and have a growing fear of longer-term bonds


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because the yield is so low and the price risk is now high," Mr.

Kotok said.

Demand for bonds, together with central bank policies aimed at

stimulating the economy, has pushed interest rates and bond

prices to extremes. Prices and yields will eventually return to

more normal territory, and people invested in bond funds could

see future declines.

Still, Mr. Kotok said, clients call him asking to get out of stocks.

"The conversation will go something like this: 'The market is up

enough, I don't like the way things are, take me out and put me

n bonds.' I get that every few months. I rarely get a call telling

me to go the other way," Mr. Kotok said.

Some clients say they no longer trust Wall Street. "I get the

reaction, they are a pack of thieves and liars and you can't trust

hem," he said. "The news flow continues to reinforce it."

A parade of Wall Street scandals has given small investors the

mpression they are at a disadvantage, beginning a decade ago

with criminal behavior at Enron and WorldCom. More recently,

bankers at Barclays PLC admitted to trying to manipulate for

years an interest rate widely used as the basis for U.S. mortgagerates; J.P. Morgan Chase & Co. disclosed a trading goof that has


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cost the bank at least $5.8 billion; and Morgan Stanley and the

Nasdaq Stock Market have been criticized for their handling of

Facebook's stock offering, which cost investors billions.

"I've changed my views remarkably on how to invest in the

market," said Franklin Riesenburger, 66-year-old lawyer in

Cherry Hill, N.J.

Through the 1990s, Mr. Riesenburger was a dedicated buy-and-

hold stock investor, owning no bonds and delighting at the risks

of the stock market. He made good profits in small technology

and biotech stocks. But after technology stocks collapsed in

2000, he decided the world had changed.

"On July 18 of that year I started my new wave of investing," he

said. "I sold everything."

Today, Mr. Riesenburger considers the stock market a scary

place. Over the past year, he gingerly put money back into such

blue-chip stocks as AT&T, Coca-Cola and Exxon Mobil. He sold

hose stocks as global economic growth slowed this summer.

n late September, he returned about a third of the money to

blue-chip stocks and a gold fund, betting that Federal Reserve

stimulus would push those investments higher. Depending on


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events, he said, he will either increase that bet or pull out his

money.

Most of his savings remains in bonds, real estate and money-

market funds. "I do not trust the stock market to put in lasting

gains," said Mr. Riesenburger. His main concern now, he said, is

avoiding a loss.

As in the 1930s and 1970s, when stock price collapses and

inancial scandal mangled savings, it could take years to rebuild

confidence, Mr. Leuthold and other money managers said.

After the 1929 crash, the Dow Jones Industrial Average didn't

return to its previous high until the 1950s. After the stock

market turmoil that began in 1966, the Dow didn't start

recording sustained gains until the 1980s.

Beginning in 1971, investors withdrew money from stock funds

or 11 consecutive years as the U.S. struggled with oil crises and

stagflation, the pernicious combination of inflation, high

unemployment and little growth.

Mutual-fund firms are seeing another exit today. Demand for

U.S.-stock funds peaked in 2000, after technology stocks

collapsed and the market began a 2 year decline.


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Some optimism returned in 2003, but flows into U.S. stock funds

never reached 2000 levels.

People began taking substantial money out of U.S.-stock funds in

2008, the year Lehman Brothers Holdings declared bankruptcy,

big banks sought a government rescue and the global economy

eetered on a precipice.

The decade's two financial calamities cost the stock market

many long-term, stable investors who helped support the

double-digit annual stock gains that created vast wealth in the

1990s.

ay Greenblatt, a 75-year-old lawyer, said for years he had no

stocks and held most of his money in tax-free municipal bonds.

About 20 years ago, he said, he hired an investment adviser,

who persuaded him to diversify into stocks.

Mr. Greenblatt did well, and he kept as much as a quarter of his

money there until 2007, when he decided to exit. His investment

adviser persuaded him to keep about 10% in stocks.

"I ski the biggest mountains all over the world. I have ridden my

motorcycle all over the country. I love risk, but I still fear the

market," Mr. Greenblatt said.


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"There is just no stability in the world on anything," he said. "It is

he fact that the entire nation, if not the world, is living on

credit. It is the fact that the values of stocks have no real relation

n my book to the earnings of corporations but rather in a

popular sense are speculative and based upon puffing, PR, a

presumed future growth."

Two weeks ago, worried about the U.S. election's impact on the

stock market, Mr. Greenblatt sold his remaining stocks and put

he money in bonds.

The flight from stocks could be worse. Retirement accounts still

unnel billions of dollars into U.S.-stock mutual funds each year.

n the 1970s and 1930s, 401(k) plans didn't exist, so the stock

exit was more stark.

n addition, figures on exchange-traded funds probably

overstate demand for stock funds among rank-and-file investors

because they also are used by professional traders for hedging.

A pullback from stocks leaves trading increasingly in the hands of

professionalshedge funds and high-frequency traders that use

hard-to-regulate computerized methods. That makes the market

more volatile, helping fuel such events as the "flash crash" on


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May 6, 2010, when the Dow Jones Industrial Average fell 700

points in eight minutes.

A decade ago, high-speed trading made up a small share of stock

rading. Today, many large companies do little else, holding

shares for as little as a second. They now represent more than

half of all stock trades, according to Tabb Group, which tracks

such transactions.

The trend away from the stock market has been reinforced by

aging baby boomers, the oldest now well into their 60s. People

nearing retirement often pull back from stocks to preserve their

gains. Others who lost jobs in the downturn sold stocks to pay

bills.

Some people shifted money into international-stock funds,

banking on China and other fast-growing economies. But many

have sold those mutual funds in recent weeks.

Mr. Leuthold said he saw the Great Depression's stock market

hangover extend into the 1960s. "When I started as a broker in

61, we had a couple old guys in the office who had suffered

hrough the Depression, and two of them, personally, would not

own a share of stock," he recalled. "One said, 'I would onlynvest in real estate.' "


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William Hackney, a partner at Atlanta Capital Management in

Atlanta, Ga., recalled when investors abandoned stocks in the

1970s. Eventually, the U.S. economy and the stock market

recovered, he said: "My point is, this, too, will pass."

But first, painful memories will have to fade.

"People are scared stiff to go through an '08 again," said Mark

Pollard, a financial adviser in Princeton, N.J., with Merrill Lynch

Wealth Management. "People do talk about that: 'Whatever you

do, I don't want to go through an '08 again.' "

Planning for Retirement? Dont Forget Health Care Costs, Oct 5,

2012

TS not news that health care costs are increasing. Yet several

recent studies show that few people factor those rising costs

nto their retirement plans.

Consider this example from an annual report from Fidelity

nvestments: For a 65-year-old couple retiring this year, the cost

of health care in retirement will be $240,000, 6 percent more

han that same couple retiring in 2011 would pay. The report

assumes that the man will live 17 years and the woman20.Most people dont realize Medicare covers much less than


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raditional employer plans, Sunit Patel, senior vice president in

Fidelitys benefits consulting group. The $240,000 number

captures the Part B premium for physician services, Part D for

prescription drugs. Then there are deductibles and coinsurance,

and benefits that are not covered like vision exams, hearing

aids.

Another study, this one from Nationwide Financial, found that

people who were near retirement routinely and wildly

overestimated the percentage of health care costs covered by

Medicare. It covers only 51 percent of health care services,

according to the Employee Benefit Research Institute.

Robert L. Reynolds, president and chief executive of Putnam

nvestments, which has its own study, bluntly summed up the

situation at a recent news briefing. It makes no sense at all to

alk about retirement savings or lifetime replacement income

without talking about health care expenses, he said.

A calculator developed by Putnam, called the Lifetime Income

Replacement Tool, shows people not only how much they have

saved but also how much they need to save depending on their

health (cigarette smokers with diabetes need to save the least

because their life expectancy is the shortest) and where they


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plan to retire (Louisiana is the cheapest, Alaska the most

expensive) so they can live at their same income in retirement.

Moving to cheaper and possibly warmer climates is something

many retirees naturally do. But while someone may be willing to

move to Florida to reduce state taxes and avoid the ice and

snow of the north, most people have so little awareness about

he costs of health care in retirement that those costs are

probably not a driving factor.

Carol and Richard Bechtel had worked in the San Jose, Calif.,

area, she for Stanford University and he at various technology

companies. When it came time to retire in 2006, they put a lot

of thought into where they wanted to live. They picked a

community in Fairfield Glade, Tenn.

Cost of living was a factor. They were able to sell their home of

37 years in San Jose, pay cash for a house on a golf course, and

still have money left over to put in their retirement account.Quality of life also mattered. By their account, the Bechtels are

horoughly enjoying their new community and friends. Mr.

Bechtel found a hangar close to their home for his airplane, and

hey are closer to their son and three granddaughters in

Wisconsin.


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But when it came to knowing their health care expenses in

retirement, they were pretty typical: they had to check on what

he exact costs were. Their premiums, between Medicare, a

supplementary policy through Stanford and a dental plan, will

cost them $9,058.80 this year. That is a whopping 14 percent

ncrease from the same policies in 2011. And that number does

not include any out-of-pocket medical expenses, like co-

payments or the costs of over-the-counter medications.

Health premiums are probably one of our biggest expenses,

Mrs. Bechtel said.

Yet Mrs. Bechtel was not complaining. She said her Stanford-

sponsored plan was excellent and it had given them freedom to

choose the doctors they wanted, particularly for her husband,

who had some health problems recently.

Our premiums are small compared to what our bills would be,

she said. It really makes us realize how great my Stanfordbenefit is. It covers everything. I worry a little bit how Medicare

may change.

While most retirees pay for insurance that supplements what

Medicare pays, how comprehensive and open each plan isvaries. But the fear that they will not be able to choose the


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doctors or care they want drives some wealthier people to set

up separate accounts for health costs.

Faith Xenos, chief investment officer for Singer Xenos Wealth

Management near Miami, said she counseled clients to set aside

5 percent of their annual budget for health-r

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