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Bernard Madoff victims get first compensation cheques October 5, 2011

Victims of Bernard Madoff‘s fraud scheme are set to receive $312m (£202) this week as the trustee charged with recovering their cash sends out their first set of compensation cheques.

The money will be split between the holders of 1,230 Madoff accounts and represents a recovery of roughly 4.6 cents for every dollar they invested.

Irving Picard, court-appointed trustee for the Madoff victims, said he had recovered, or entered into agreements to recover, approximately $8.7bn, about half the $17.3bn he estimates was lost in Madoff’s Ponzi scheme.

“This initial distribution is the first return of stolen funds to Madoff’s defrauded customers,” said Picard. “Significant, additional funds – currently unavailable for distribution due primarily to appeals – will ultimately be returned to their rightful owners, as well as future monies yet to be recovered. The need among many Madoff customers is urgent, and we are working to expedite these distributions.”

Picard said distribution of the rest of the money he has recovered was being held up by appeals or the timing of payments. Picard’s $5bn settlement with the estate of late investor Jeffry Picower – his largest settlement to date – is currently being appealed.

The payments were to go out last week but were delayed as Picard considered the effects of a court ruling over Madoff profits given to the owners of the New York Mets baseball team.

On 27 September Judge Jed Rakoff of the US district court in Manhattan ruled that the trustee was allowed to seek only the return of fictional profits the Mets owners withdrew in the last two years of the fraud, which lasted more than a decade. The judge also rejected Picard’s bid to recover preference claims, the cash paid to team owners in the last 90 days of the fraud.

Picard calculated that if the ruling applied to the hundreds of other claims he is pursuing, it would reduce potential recoveries by $6.2bn. “The order had raised potential issues regarding the distribution, which have since been resolved, allowing the distribution to commence,” said Picard.

The trustee has sued for nearly $100bn in damages and fictional profits that he claims banks, including HSBC and JP Morgan, hedge funds and investment managers made dealing with Madoff during his decades-long scheme.

Madoff is serving a 150-year jail sentence after being found guilty of running one of the largest fraud schemes of all time.

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It’s Déjà Vu All Over Again September 30, 2011

Tim MicKey

About three months ago, I wrote a piece called “How to Value the Stock Market.” The article addressed the relevance of price-to-earnings ratios (P/E) and earnings yields (E/P). On July 1, 2011, the SP 500 Index stood at 1335, and estimated earnings were at 97.81. That left us with a P/E ratio of 11.95 and an earnings yield of 7.3 percent—both at levels that indicated the market was undervalued.

[See How to Avoid Making Costly Investing Mistakes.]

Here we are three months later, and the SP 500 stands at 1140 with estimated earnings at 98.16. This gives us a P/E ratio of 11.61 and an earnings yield of 8.6 percent. At first glance, it looks as if not much has happened in the last three months, but it has. The recent figures reflect a 14.6 percent decline in the value of the SP 500, a 35-cent increase in the total earnings of the SP 500, and a 1.6 percent increase in the earnings yield.

To understand what these numbers tell us, let’s take a look at the historical averages. The P/E ratios of the SP 500 from 1988 to today range from a high of 29.44 in the fourth quarter of 2001 to a low of 11.51 in the fourth quarter of 1988. Eliminate the extremes and you come away with averages that fall between 13x and 16x earnings. As of September 26, 2011, the SP 500’s  P/E ratio was 11.61, which puts us very close to the 1988 lows.

A 17-year look back at the earnings yield of the SP 500 shows a range from our recent high of 8.6 percent on September 26, 2011, to a low of 3.4 percent in December of 2002. Simply put, this means that the expected earnings of the SP 500 are 8.6 percent of the price of the index.  This 8.6 percent is over four times the expected return of the ten-year Treasury. Why is this relevant? Because we are comparing the additional rate of return we expect to receive by investing in equities with the risk-free rate of return one can expect from investing in Treasuries. The last time the SP 500 earnings yield approached 7 percent was at the end of 1994. The market responded with a five-year bull run from there.

In looking at these two indicators, one might think it’s time to back up the truck and load it with equities. Ahhh, if only it were that easy. There’s another side to this story, and it has everything to do with earnings. What I haven’t mentioned is that the level of downward earnings revisions in the past few weeks is near historic levels. Yes, the full year estimates for the SP 500 are 35 cents higher (as of September 26) than they were on July 1, but they trail their highs of just over 100 on August 4. In fact, according to Bespoke Investment Group, over the past four weeks analysts have raised forecasts for 287 companies in the SP 1500 and lowered forecasts for 717 others. That turns out to be nearly a 2.5-to-1 ratio. Add in the fact that so far during the earnings off-season (August 16 through October 10), 13 percent of the companies have lowered their earnings forecasts, while only 7.5 percent have raised guidance. That’s enough to keep a lot of investors on the sidelines.

[See Be Cautious When Investing in Gold.]

This past earnings season turned out to be a very volatile time for the markets even though approximately 70 percent of the companies in the SP 500 beat their earnings estimates. (Roughly 20 percent missed their number, and around 10 percent came in as expected.) What troubled the markets was everyone’s reluctance to project with any confidence what the next quarter or two might bring in the way of revenues and/or earnings.

As the third-quarter earnings season approaches, I expect markets to behave much as they did during the second quarter—which means lots of volatility. For those companies that beat their earnings estimates, there’s room for appreciation, and for those that don’t, there’s still room to decline further. What we all look for is the triple play: companies that outpace earnings estimates, beat revenues, and raise guidance. 

If the estimates come in better than expected and the analysts have been too negative, there’s plenty of room on the upside. It may turn out that the P/E ratio as well as the earnings yield indicators have gotten it right. If not, maybe they’re just early.

I don’t think it’s time to turn a blind eye to the rest of our economic concerns, such as the ongoing problems in Europe, our own U.S. debt obligations, and the multitude of other issues we face. I wouldn’t exactly go on a buying spree, but I’d keep the truck in the garage and make sure it’s in running condition. I sure wouldn’t want to be left behind if my indicators turned out to be correct.

Timothy S. MicKey, CFP®, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Tim and Monument Wealth Management on their blog Off The Wall, on Twitter at @MonumentWealth and @TimothySMickey, and on their Facebook page. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for individuals. To determine which investment is appropriate, please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results.

Stock investing involves risk, including loss of principal. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  Stocks are not guaranteed and have been more volatile than bonds.

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United States in last-ditch effort to set up Israeli-Palestinian peace talks September 15, 2011

The United States, Europe and the Middle East quartet are engaged in a last-ditch effort to set up a fresh round of Israeli-Palestinian peace talks in an attempt to head off a major diplomatic embarrassment over the looming Palestinian request for recognition of statehood at the UN.

The US is leading diplomatic pressure on Israeli and Palestinian leaders in a bid to persuade the parties back to negotiations rather than risk a damaging collision in New York next week. Secretary of state Hillary Clinton is in telephone contact with the three delegations in the region, who are co-ordinating their efforts.

Washington is keen to avoid carrying out a threat to veto a Palestinian request for full membership of the UN, a move likely to further damage America’s already battered reputation in the Middle East, particularly following its strong backing for moves towards self-determination in the region this year.

But some at the heart of the diplomatic manoeuvres believe that it is now too late to stop the Palestinians taking their case to the UN and are concentrating on damage limitation by seeking a clear position for a return to the negotiation table after the world body meets.

The Palestinians insist that they will not be diverted from making a formal request at the security council for full member status, and that diplomatic interventions have come too late. They claim to be resisting pressure, which included President Obama this week describing their move as “counterproductive”.

Washington, fearing isolation in wielding its veto, is seeking support from Britain in particular in its stand against the Palestinian resolution if it comes to a vote. Two other security council members, Russia and China, have openly backed the Palestinian move. France is sympathetic to the Palestinian demand but is seeking a compromise resolution that could be supported by Germany, which is opposed to UN recognition of a Palestinian state, in the hope of forging a common EU position.

Britain has so far not declared how it would vote but diplomatic sources say that it is torn between American pressure to support the US position in the security council and concerns about what such a move would do to the UK’s standing in a changing Middle East, particularly while it is still heavily involved in Libya.

The former British prime minister, Tony Blair, now special envoy of the Middle East quartet, was Wednesday working on a text to put to Israeli and Palestinian leaders outlining a basis on which talks might resume.

He was liaising with EU foreign affairs chief Catherine Ashton and US special envoys David Hale and Dennis Ross in the region, and by telephone with Clinton. The former British prime minister expects to remain in the Middle East until flying to New York at the weekend.

The Palestinian president, Mahmoud Abbas, has said he will take the request for full recognition as a state to the UN security council next week. But some Arab and European nations are pressuring him to downgrade the request to the general assembly, which can only offer observer status to the Palestinians, to save Washington the embarrassment of having to wield its veto.

The Palestinians insist their approach to the UN does not preclude a return to negotiations later. “We see no contradictions between doing both,” said Dr Mohammad Shtayyeh, a senior member of the team heading to New York. The UN bid was “the beginning of the game, not the end. It is a process”.

But diplomatic efforts to secure a breakthrough on a return to talks are constrained by Palestinian demands of guarantees that any future negotiations would be based on the pre-1967 borders plus a total settlement freeze. Israel is unlikely to sign up to that.

The International Crisis Group warned this week that any climbdown by the Palestinians now “could decisively discredit [Mahmoud Abbas's] leadership, embolden his foes and trigger unrest among his people”. It went on: “Most Palestinians do not strongly support the UN bid; but they would strongly oppose a decision to retract it without suitable compensation.”

Israel was also making last-minute efforts to persuade undeclared countries not to vote for a Palestinian resolution, although it has acknowledged it will lose a vote at the general assembly. The Palestinians claim to have the support of around 130 countries so far, just beyond the two-thirds majority needed for a resolution to succeed.

Israeli ministers have threatened retaliatory measures should the Palestinian bid succeed. They include tearing up the Oslo accords, under which the Palestinian Authority was given control of parts of the West Bank and Gaza, annexing the West Bank settlements and withholding tax revenues that Israel collects on behalf of the PA. The US Congress is also threatening to cut off financial aid to the Palestinians.

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