Day: May 29, 2019

Deep Dive: Investors’ patience with oil-services stocks could be richly rewarded

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Oil-stock investors sure are jittery these days, and they have been particularly brutal to oil-services companies over the past year.

That group of stocks has fallen far more than the price of oil has, setting up what appears to be an opportunity for investors who can look beyond the next few months and stay committed for several years.

Charles Lemonides, chief investment officer of ValueWorks, which manages about $220 million for private and institutional clients in New York, named two oil-services companies he has invested in for the long term. Those and related exchange traded funds are listed below.

Long-term potential

A list of S&P 500 companies that had fallen at least 50% from 52-week highs included two oil-field-services companies: Halliburton HAL, -0.94%  and National Oilwell Varco NOV, -1.94%

Here are total returns (and the price change for crude oil) for five oil-related energy subsectors for one year through May 28:

S&P 500 energy subsector Total return – 12 months
Integrated Oil -5.1%
Oil and Gas Exploration and Production -18.1%
Oil and Gas Drilling -22.4%
Oil and Gas Refining and Marketing -32.2%
Oil and Gas Equipment and Services -44.7%
West Texas Crude – continuous quote -12.9%
Source: FactSet

Phil Flynn, a senior market analyst at Price Futures Group who writes a daily energy report, said in an interview May 28 that oil-services companies have suffered “partly because their customers cannot afford to pay them.” Cuts in capital spending by oil-exploration-and-production companies have hurt services companies’ profitability.

Flynn said that when the price of oil was rising in late 2017 and early 2018, oil-services companies were “ramping up,” but then “got caught leaning the wrong way” as a reversal in price action led to a significant decline in the U.S. shale rig count.

Meanwhile, services companies that need to expand their labor forces face a seller’s market, which means more pressure on profits.

With a lot of oil producers “in debt up to their eyeballs,” Flynn doesn’t expect a quick turnaround for the services companies. Yes, the U.S. oil industry is expected to set a production record this year, but spending on exploration and production is set to decline significantly.

So the short-term problem for oil-services companies is clear. But “you will not continue to see increases in production without drilling,” Flynn said.

“We know the cycle will change, especially with growth of demand, which people are underestimating. A couple of years from now, producers may have difficulty meeting demand, and then the services companies will be in the drivers seat,” he added.

So there’s the long-term case for beaten-down oil-services stocks, with an emphasis on “long term.” It’s easy to say that you shouldn’t be buying stocks unless you can commit for three to five years. That flies in the face of sell-side analysts’ one-year price targets. But for oil-services companies, it might be more reasonable to make a firm five-year commitment before jumping in. Otherwise you could easily get burned. Badly.

Two favorite stocks and four ETFs

Lemonides of ValueWorks said a slowdown in drilling activity would likely be “a pretty quick self-correcting phenomenon.”

“If activity slows, production slows, and then prices head higher, and we start the whole thing again,” he said in an interview May 28.

“Up to now we have been mostly keeping our powder dry” in the energy space, he said, but ValueWorks has positions in two oil-services companies:


Lemonides called Transocean RIG, -2.02%  “very compelling” because the shares are “trading arguably” at a quarter or a third of the replacement cost of the company’s vessels, in his estimation. “At some point it will come back to replacement value. So the upside on the shares is three to eight times your money,” he said.

That is a big potential, which is why it isn’t surprising that Lemonides said: “We don’t get too sensitive on time periods.” He expects the shares eventually to rise to $30 to $40 from the current levels of below $7, “two to five years down the road.” Maybe you should focus on the second of those year-range numbers.


Tidewater TDW, -2.05%  is “even more of a niche play,” Lemonides said, as it runs a fleet of offshore supply vessels. “Its share price has held up much better than the rest, probably because it was just too cheap, and secondarily you are seeing signs of an inflection in their business,” he added.

That inflection point represents the endpoint of Tidewater’s efforts to absorb its excess inventory of unused vessels, brought about by the collapse of oil prices in 2014 and 2015 and the consequent reduction in demand for ocean drilling. Once the inventory problem is solved, “profitability can explode to the upside,” Lemonides said.

“And you are starting to have credible arguments made that the supply/demand imbalance is starting to close. It is still early, but the share price is compelling,” he said, while calling Tidewater “the premier company in that space.”

Lemonides emphasized the importance of long-term discipline for this type of investment. “The willingness to be invested even though there is near-term volatility and compression is a huge advantage. If you are willing to look past the storms and are willing to be invested for the next two to five years, you can position yourself for two- to five-fold increases,” he said.

A broad investment in the oil-services space might be appropriate if you are confident that the industry cycle will eventually favor the subsector and if you don’t want to select individual stocks. Here are four ETFs that track the oil and gas services subsector in various ways:

ETF Ticker Annual expense ratio Assets under management ($ million)
VanEck Sectors Oil Services ETF OIH 0.35% $645
SPDR S&P Oil & Gas Equipment & Services ETF XES 0.35% $165
iShares U.S. Oil Equipment & Services ETF IEZ 0.43% $119
Invesco Dynamic Oil & Gas Services ETF PXJ 0.63% $16

The ETFs follow various methodologies. Before considering any of them, you need to do your own research and assess an ETF’s strategy for yourself.

Don’t miss: These 6 stocks in the S&P 500 are down at least 50% — and analysts say buy

Create an email alert for Philip van Doorn’s Deep Dive columns here.

Pokémon Go wants to watch you sleep

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Could Pokémon Go players become as obsessed with catching Zs as they are with catching Pikachu?

The game makers at Niantic and The Pokémon Company (a Japanese consortium between Nintendo NTDOY, -0.36% Game Freak and Creatures) have already gamified walking around by letting players (aka trainers) catch and collect the cute, imaginary pocket monsters that “appear” in the real world thanks to augmented reality technology and geolocation tracking. Traveling two, five or 10 kilometers on foot or by bike also lets players hatch eggs and level up their favorite Pokémon characters, for example. So now the next stage in the franchise’s evolution will be rewarding players for getting a good night’s sleep — by monitoring them with a sleep tracker placed next to their pillow.

Related: This is why parents are playing Pokémon Go with their kids

“In 2016, Pokémon Go turned the simple act of walking into entertainment, making the entire world into a game. We’re about to do it again, Trainers — this time, for sleeping,” the Pokémon Company announced on Twitter Tuesday night, following a press conference in Tokyo to show off a number of new games, services and hardware.

The official announcement shared with MarketWatch continues, “Soon, Trainers will be able to wake up with Pokémon every morning with Pokémon Sleep, a mobile app from The Pokémon Company. Pokémon Sleep aims to turn sleeping into entertainment by having a player’s time spent sleeping, and the time they wake up, effect the gameplay.”

While the company hasn’t shared details about the way the app functions, or exactly what kind of rewards players will get for catching 40 winks, it did announce that a new Nintendo device, the Pokémon Go Plus Plus (yes, that is the real name, as it’s an upgrade to the Pokémon Go Plus, which runs around $24), will connect to Pokémon Sleep and launch with the app next year. The device — resembling a flattened, disk-shaped red and white Pokéball — will function like the original Plus to complement the Pokémon Go app during the day by tracking the distance a player has traveled, and alerting them to Pokémon and other in-game markers nearby. But it will also include an accelerometer to track a user’s time sleeping, which it will send to their smartphone via Bluetooth. By night, trainers put the device next to their pillows to monitor their snooze and get them to Pokémon go-to-sleep.

Related: Why even Prince Harry is wearing a sleep tracker

We could all certainly use more sleep. One third of American adults aren’t getting enough sleep, according to the CDC, and a troubling new survey from Common Sense Media finds that 70% of teens said they use their mobile device within 30 minutes of going to sleep, and more than a third of them wake up in the middle of the night and check their phones. (Most Pokémon Go players are under 30, but more adults getting into the game still represents around 30% of all players.) So encouraging players to put their phones down could help them get more shut-eye — and get Niantic and The Pokémon company a slice of the global sleep aids market, which is expected to hit $76.7 billion in 2019.

Getty Images
Pokémon Go will add sleep tracking.

The Pokémon Company also announced a cloud-based Pokémon Home service that will let players store and share their Pokémon across all platforms — from Pokémon Go on their phones, to Pokémon Let’s Go on the Nintendo Switch, and more. And it revealed another mobile game, Pokémon Masters, which appears to focus on teams of players siccing their Pokémon against other people’s in three-on-three battles.

Related: Yes, I’m one of the 5 million people still playing Pokémon Go every day

Pokémon Go raked in a record $207 million during its July 2016 release, setting the Guinness World Record for most revenue grossed by a mobile game in its first month, with daily user numbers having around 28.5 million people. While those early audience numbers plummeted to around 5 million by December 2016, the game has held on to a dedicated player base, and drawn in new users, by rolling out features such as Pokémon trading, one-on-one battles and monthly community day events.

Indeed, players spent more than $65 million world-wide the game in April, according to analytics firm Sensor Tower, and the game has grossed $270 million through April in 2019, which is up 33% over the same period last year. It’s earned more than $2.45 billion overall since that initial release.

And Niantic has more on deck, as its new game “Harry Potter: Wizards Unite” co-developed by Warner Bros. WB Games division is also due later this year.

As the Midwest is hit by tornadoes, what you need to know about disaster insurance

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Tornadoes have torn a path of destruction across the country.

On Tuesday night, a large tornado pummeled Linwood, Kansas, a small city located near Kansas City, injuring 12 people and destroying homes and businesses. Debris from the storm was carried over 47 miles, causing damage to the nearby Kansas City International Airport.

And that was just one of the multiple tornadoes that wreaked havoc Tuesday. Another twister touched down in Berks County, Pennsylvania, destroying multiple homes, CNN reported. On Monday night, an 81-year-old man died in Celina, a small city north of Dayton, Ohio, when a tornado tossed a car into his house.

Over the last 30 days, more than 500 tornadoes have touched down across the U.S., according to federal weather forecasters. The storms have killed seven people and injured many more. And the end is not in sight: The National Oceanic and Atmospheric Administration’s Storm Prediction Center has warned of severe storms across the country Wednesday.

Home insurance typically covers damage caused by tornadoes. But deductibles still apply, and residents of coastal states may need to buy windstorm insurance.

“Scattered severe storms are likely from portions of the southern Plains through the Ozarks, and across the Ohio Valley to the north-central Appalachians and Mid-Atlantic States,” the NOAA said.

See more: Footage from Florida Panhandle shows the incredible force of Hurricane Michael

For homeowners, what precisely caused the damage to their home will prove important for insurance purposes, because coverage will depend on how the damage was caused. The same severe weather that has produced windstorms across the country has also contributed to massive flooding, especially along the Mississippi River.

During a tornado, if high winds cause roof damage that leads to significant water accumulation within the house, most insurance policies will cover it. But if a nearby river crests because of the storm’s heavy rainfall and then causes flooding, the damage to homes will only be covered if the owners have flood insurance.

That’s why most homeowners in the path of last year’s Hurricane Florence’s torrential rains would have been better off if their home had been hit by a wildfire or volcanic eruption — at least from an insurance perspective.

Damage caused by flooding isn’t covered by standard home insurance policies. Only homeowners who bought separate flood insurance for their homes were covered if water from Florence damaged their house. And there weren’t many people in that boat.

Florence caused between $20 billion and $30 billion in losses to both commercial and residential properties across the Southeast due to flood and wind damages, according to estimates from property data firm CoreLogic CLGX, -0.56%

Most homeowners affected by Florence will be stuck footing the bill: CoreLogic also estimated that 85% of the losses to residential properties were uninsured. Before the storm hit, actuarial firm Milliman estimated that fewer than 10% of households in North Carolina had flood insurance.

Don’t miss: How to find a contractor after a hurricane

In volcanic eruptions, damage caused by lava flows or resulting fires is covered by a standard homeowner’s policy.

Even when insurance does cover the damage from a certain catastrophe, deductibles are still at play. Windstorm and hurricane deductibles vary from policy to policy, but are often assessed as a percentage of the home’s overall value.

In some coastal states and counties, including in Florida and Texas, homeowners may need to purchase separate windstorm coverage.

Coverage for other disasters operates similarly. In volcanic eruptions, damage caused by lava flows or resulting fires is covered by a standard homeowner’s policy, but if the eruption causes seismic activity, homeowners will not be reimbursed unless they have purchased a separate earthquake policy.

Buying additional insurance policies for disasters like floods and earthquakes might seem like a no-brainer, but it’s an expensive proposition. “They have to do a cost benefit analysis,” said Michael Crowe, co-founder and CEO of Clearsurance, a site where consumers can review and compare insurance companies.

The average annual premium for a policy through the National Flood Insurance Program was $878 as of April 2017. But flood insurance premiums can easily cost thousands of dollars in regions that are determined to be at the highest risk of flooding.

But flooding is just one type of natural disaster that isn’t covered by standard home insurance policies. And in the case of disasters like hurricanes, where damage can be caused by a variety of factors including wind, rain and storm surge, it can quickly get confusing—and frustrating— for homeowners who are trying to figure out whether their insurance policy covers certain damage.

Buying additional insurance policies for disasters like floods and earthquakes might seem like a no-brainer, but it’s an expensive proposition.

Here is what homeowners need to know about insurance and natural disasters:

What is covered under a standard homeowner’s insurance policy

Some natural disasters are almost always covered by homeowner’s insurance, including wildfires and hail storms. But other natural disasters are never or rarely covered under a standard homeowner’s insurance policy. They generally fall into two categories: floods and “earth movements.”

The first category comprises disasters caused by rising water, which includes everything from floods caused by extensive rainfall and hurricane-induced storm surges to dam failures and tsunamis. “Earth movements” include disasters such as earthquakes, landslides and sinkholes.

Unfortunately, many Americans are unaware that these disasters are not covered by a standard homeowner’s policy, according to the Insurance Information Institute.

Certain natural disaster typically aren’t covered because of the level of the destruction they create, said Lynne McChristian, a spokeswoman for the Insurance Information Institute and executive director of the Center for Risk Management Education and Research at Florida State University.

With these disasters, “the damage is usually so widespread, and it’s typically a total loss,” McChristian said. “Insurance companies can’t price it appropriately to make it a viable line of business for them.”

Are you covered with a standard homeowner’s insurance policy?
Typically covered Sometimes or partially covered Rarely covered
Tornado Hurricane Flooding (including storm surge and tsunamis)
Wildfire Volcano Earthquakes
Hail storm Sinkhole Mud- and landslides
Blizzard or ice storm Sewer backup
The government provides flood insurance

In the case of insurance for flooding, the federal government has stepped in. The National Flood Insurance Program was created in 1968 after insurance companies struggled to pay off claims following a slew of floods in the 1950s. Homeowners have the option to buy flood insurance through this program or to get a private insurance policy. In certain cases, homeowners may be required to purchase flood insurance by their mortgage lender if their home is located within a flood zone.

Private flood insurance now accounts for roughly 15% of all flood premiums nationwide, according to a March report from Insurance Journal. And for many homeowners, a policy from a private insurer rather than through the federal insurance program could be cheaper. A July 2017 briefing from Milliman found that private flood policies would have lower premiums for 77% of all single-family homes in Florida, 69% in Louisiana and 92% in Texas.

Read more: Congress just dodged hard decisions about flood insurance again


Similarly, homeowners will need to purchase a separate policy or a rider to their standard home insurance policy from a private insurer to be covered for an earthquake. California residents also have the option to purchase coverage through the California Earthquake Authority. That said, if an earthquake causes a house fire, some damage might be covered by the standard policy alone.


As for sinkholes, coverage options vary from state to state. A standard home insurance policy may cover minor damage caused by a sinkhole — but catastrophic damage (generally defined as damage to more than half of the structure) is excluded. People can either get sinkhole insurance in the form of a standalone policy or an endorsement to the standard insurance policy, depending on where they live.

Tennessee and Florida require insurers to offer optional sinkhole coverage. Insurers in Florida are also required to provide insurance for “catastrophic ground cover collapse” through their standard policies.

Read more: Your easy step-by-step guide to paying off all kinds of debt

Did the homeowner take care of the property?

The property’s upkeep can also play a role in whether or not damage caused by a storm or other natural disaster is covered. For instance, if winter storms cause an ice dam to form on the roof of the home and the owner is not proactive about removing it, the insurer may choose to deny coverage for water damage.

You have some options if you skip insurance

If homeowners don’t buy specialized insurance coverage and then get hit by some sort of disaster, they do have some options to offset their losses. They can get a grant from the Federal Emergency Management Agency or a loan from the Small Business Administration.

“Those are not designed to bring you back to a pre-disaster condition — they’re designed just to get you back on your feet,” McChristian said. “Insurance is designed to get you back to where you were before the disaster occurred.”

How to decide whether you need coverage

Earthquakes have caused damaged in all 50 states at some point since 1900, according to the Insurance Information Institute.

For starters, homeowners need to consider whether or not they are at risk. They should check government flood zone maps. They are generally available from county governments, or you can search by address on the FEMA website. But they aren’t foolproof because they are only periodically updated.

Other factors to consider include the property’s elevation (if it’s at or just a few feet above sea level it’s more prone to flooding) and whether there has been a lot of construction in the area. This could displace vegetation that would soak up rainfall and prevent flooding.

As for earthquakes, homeowners shouldn’t assume they’re not at risk just because they don’t live on the West Coast. Earthquakes have caused damaged in all 50 states at some point since 1900, according to the Insurance Information Institute (a trade group that of course has a vested interest in people getting insurance). And fracking for oil and natural gas has led to seismic activity in parts of the country that had never before experienced it.

How to get to the front of the line when you need help

Regardless of whether or not a homeowner has insurance coverage for a specific natural disaster, getting their property assessed is critical in beginning the rebuilding process.

Following a natural disaster, a consumer’s first step should be to contact their insurance agent or company immediately. That is critical because insurance claims are handled on a triage basis, McChristian said.

“Those with the most damage get to the front of the line because those people have the most need for recovery assistance,” McChristian said.

By clarifying how to file a claim and conveying the state of their property, homeowners can improve the chances of having their case handled more quickly by their insurer. Homeowners should also learn the ins and outs of how to file their claim, including what information is needed and how long they have to file. Now is also the time to determine what their policy’s deductible is.

Also see: What to do about your home and mortgage if you’re hit by a disaster

Make a head-start on assessing damage

The insurance company will send its own adjuster free of charge to inspect the property and assess the total cost of the damage. Homeowners can take steps to prepare for this by documenting what was damaged or destroyed by the natural disaster, getting bids from contractors and keeping track of receipts for any expenses they incur following the storm. Homeowners shouldn’t hesitate to make temporary repairs to protect their property from further damage.

Homeowners shouldn’t hesitate to make temporary repairs to protect their property from further damage.

A pricier option: Hire a third-party insurance adjuster to assess their property. Given the backlog insurers will experience following widespread disasters, it can take a while to receive a payout. To expedite this process, a homeowner can choose to hire an independent or public adjuster to assess their property.

Studies have shown that hiring public adjusters leads to higher insurance settlements. But these professionals don’t come cheap — they generally charge a fee that’s anywhere from 10% to 20% of the insurance settlement. And it’s critical to hire a reputable professional. (Check the websites of the National Association of Independent Insurance Adjusters and the National Association of Public Insurance Adjusters.)

Always have someone look at damaged property

And even if homeowners aren’t covered for flood insurance, they should still have their insurance company assess their property and whatever damage occurred.

Crowe has experienced this firsthand. In 2006, an extended period of rainfall in Newburyport, Mass., where Crowe and his family lived, caused their newly remodeled basement to flood. However, their insurance policy did not include flood coverage. He thought he would have to pay for all the damage.

But when insurance adjusters inspected the property, they noted that the basement’s sump pump — designed to prevent water accumulation — had failed.

In other words, he got lucky. The insurance company categorized the damage as the result of a mechanical failure rather than a flood, so the company covered the damage.

“I thought to myself, ‘I’m really fortunate to have insider knowledge,’” Crowe said.

This story was updated on May 29, 2019.

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CFPB tweet offers ‘negligent or worse’ student-loan advice, advocates say

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The government’s consumer watchdog circulated student loan advice that advocates say is bad for consumers.

The Consumer Financial Protection Bureau posted a tweet Tuesday highlighting forbearance, an option borrowers struggling to repay their student loans can use to pause their payments. “If you’re having a hard time paying your student loans, you may qualify for loan forbearance,” the tweet read.

Experts generally advise borrowers consider forbearance only as a short-term last resort. When borrowers use forbearance, their payments pause, but interest continues to accrue on their debt and capitalizes — the unpaid interest on a debt is added to its principal — once the borrower exits forbearance.

As a result, borrowers often see their debts balloon. What’s more, borrowers in forbearance are not earning credit towards having their debt discharged under Public Service Loan Forgiveness or other programs.

The CFPB’s tweet comes as consumer advocates and state watchdogs remain concerned that student-loan companies are pushing struggling borrowers towards forbearance instead of other options that could better suit their needs, like income-driven repayment.

It also comes amid worry that the CFPB under the Trump administration is pulling back from its oversight of the student-loan industry; historically, the CFPB has been one of the most aggressive monitors of the sector.

The CFPB didn’t immediately respond to a request for comment.

While forbearance is an important option for borrowers in distress, student-loan experts generally agree that it’s best used only temporarily and not as a long term solution for student-loan repayment challenges.

“Promoting forbearance as the starting point for borrowers who are struggling is problematic,” said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center.

With an income-driven repayment plan — a suite of programs that allow borrowers to repay their debt as a percentage of their income — qualifying borrowers can pay as little as zero dollars a month, stay current on their loans and build credit towards having their debt discharged in a maximum of 25 years.

“It’s negligent or worse for the bureau to be tweeting that,” said Dalié Jiménez, a professor at the University of California-Irvine’s law school and a founding staff member at the CFPB.

Jiménez said the emphasis on forbearance is particularly strange because the CFPB’s tweet links to a post describing options for borrowers struggling with their debt and lists other repayment choices ahead of forbearance. “They’re steering people in the wrong direction and they should know that,” Jiménez said.

Forbearance is cheaper and faster for student-loan companies

Over the past few years, borrowers, states attorneys general and even the CFPB itself have alleged in lawsuits and elsewhere that student-loan companies steer borrowers towards forbearance because it’s a faster and easier way for them to deal with borrowers’ distress, saving the companies time and money.

The CFPB’s suit alleges that Navient unnecessarily cost borrowers nearly $4 billion in interest by steering them towards forbearance instead of income-driven repayment plans. (Navient denies the allegations).

Borrower advocates have also worried that the contract between the federal government and the student-loan companies it hires to work with borrowers and collect their payments incentivizes the firms to solve borrowers’ problems as quickly as possible — which is often through forbearance — instead of helping them understand their options.

Despite this evidence, that the agency is promoting forbearance and, Jiménez said, raises questions and suspicions about how effectively the CFPB is overseeing the student-loan industry. The CFPB’s student-loan ombudsman resigned last year in protest and the agency’s leadership has yet to appoint someone to take over the role.

For borrowers struggling with their student debt, there are some steps experts say they can take to make sure they end up in the repayment plan that’s best for them — and not just the quickest fix.

Assess the nature of your problem. For borrowers whose struggles are truly temporary — for example, they have a month between jobs — forbearance may be a decent option, Jiménez said. “Forbearance really only makes sense very temporarily,” she said; otherwise, the best option is typically an income-driven repayment plan.

If you know what you want, tell your servicer. Often, borrowers wind up in forbearance because they call up their servicer and simply tell them they’re struggling. But if borrowers know about income-driven payment plans, then they should ask about them specifically, Yu said.

If you don’t know what you want and are exploring your options, say that explicitly too . Yu suggests that when borrowers call up their servicers they ask something along the lines of “I’m having trouble making my payments, what are my options?” instead of simply stating that they’re struggling.

Ask about the long-term consequences of any option you’re presented. Borrowers should ask how any option offered by their servicer would affect their monthly payments and the lifetime cost of their loan, Yu said. That way, they may be able to better understand the pitfalls of relying on forbearance for a long period.

“It’s not just a harmless break that one takes from their loans,” Yu said. “The long-term consequence is that their loan balance will actually grow.”

Encore: Do pension benefit cuts encourage public employees to leave?

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The Center for Retirement Research just published a brief on how state public sector workers respond to a cut in their future pension benefits, using wonderful data obtained from the state of Rhode Island.

The results show that benefit cuts encourage government workers to leave their jobs, but that the size of the response is small relative to the budgetary savings.

The 2005 reform of the Employees’ Retirement System of Rhode Island (ERSRI) raised the normal retirement age, reduced the multiplier that determines benefit levels, and capped future cost-of-living adjustments. Importantly, the reform did not affect vested members, but it also ignored local government employees who participate in a separate pension system, the Municipal Employees Retirement System (MERS).

To assess whether these cuts encouraged workers to leave for the private sector, the analysis proceeds in three steps. It’s a little complicated but really clever.

First, the researchers follow individual ERSRI members who were employed at the beginning of 2003, and calculate how many nonvested (who were affected by the cuts) and vested (who were not affected by the cuts) employees had left state government by the end of each year between 2003 and 2008. The figure below displays the difference in their cumulative separation rates. After the reform, the gap between nonvested and vested workers rose by 2 percentage points — from about 4 percentage points to about 6 percentage points — and remained at this higher level for a few years.

This finding suggests that the benefit cut spurred separations. However, the difference in the cumulative separation rates was already trending upward in 2004, the year before the benefit cut. This trend could have been due to many factors, including a strong economy that may have disproportionately lured short-tenure workers to the private sector.

The second step is to control for these other factors by looking at the separation patterns of municipal employees in MERS, who were not affected by the cuts. Reassuringly, MERS displayed the same upward trend in 2004 as ERSRI, but stabilized in 2005 and subsequently declined (see the figure below). The fact that ERSRI and MERS diverged in the year of the pension reform indicates that the benefit cut encouraged some state employees and teachers to leave their jobs.

The last step is to simply subtract the red bars in the second figure from the gray bars to provide an ERSRI-MERS comparison.

The final result shows that in 2004 the difference in separation between nonvested and vested members of ERSRI was 1 percentage point higher than the difference in separation between nonvested and vested members of MERS (see below). Then it suddenly jumped up by 2.4 percentage points (the average in the post-reform period minus the average in the pre-reform period). In other words, the benefit cut in ERSRI caused an approximately 2.4 percentage point increase in the rate at which current employees left for the private sector. The full paper underlying this research confirms that the estimated effect is statistically significant.

The impact of benefit cuts on employment — although small relative to the pension savings — is an important finding, because a number of state and local pension systems have persistently low levels of funding and may eventually be forced to cut benefits for current employees.

Tax Guy: Are you in the path of tornadoes? Trump’s tax reform changes your deduction options

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Tornadoes have been leaving a path of destruction throughout the Midwest.

Ohio was hit on Monday evening by a tornado and the National Oceanic and Atmospheric Administration’s Storm Prediction Center has warned of severe storms across the country. “Scattered severe storms are likely from portions of the southern Plains through the Ozarks, and across the Ohio Valley to the north-central Appalachians and Mid-Atlantic States,” the NOAA said.

In 2017, the U.S. experienced Hurricanes Harvey, Irma, and Maria and destructive wildfires in California. Last year, we had Hurricanes Florence and Michael and more California wildfires. These events resulted in deaths and billions in property damage. The nation will undoubtedly be hit by other natural and man-made disasters in the not-too-distant future, because this is a big country and stuff happens.

Unfortunately, the Tax Cuts and Jobs Act (TCJA) places a new restriction on personal casualty loss deductions for 2018-2025.

Here’s what you need to know, starting with the necessary background information.

The contractor safe-harbor method and the disaster loan appraisal safe-harbor method are only available for personal residence losses due to federally-declared disasters.

Personal casualty loss basics

The Internal Revenue Code potentially allows individuals to claim federal income tax deductions for casualty losses to personal-use property. The word “casualty” means damage or destruction of property resulting from an identifiable event that is sudden and unexpected. So we are talking about casualties caused by hurricanes, tornadoes, storms, floods, fires, earthquakes, and the like.

Calculating a personal casualty loss

For income tax purposes, a casualty loss generally equals the lesser of: (1) the tax basis of the property immediately before the casualty event or (2) the decrease in the property’s fair market value (FMV) due to the casualty event.

The decrease in FMV (if any) is a frequent point of contention between taxpayers and the IRS.

Recommendation: If you have a significant casualty loss, consider hiring a competent independent appraiser to establish the amount of the loss. In addition to backing up your tax-saving loss deduction, an independent appraisal may help you negotiate a better insurance settlement.

Safe-harbor casualty loss calculation methods

The IRS provides five safe-harbor methods for measuring casualty losses for personal residences. The first three methods are: (1) the estimated repair cost method for losses of $20,000 or less, (2) the de minimis method for losses of $5,000 or less, and (3) the insurance method. The contractor safe-harbor method and the disaster loan appraisal safe-harbor method are only available for personal residence losses due to federally-declared disasters.

For personal belongings, there’s a safe-harbor method for measuring casualty losses under $5,000. The replacement cost safe-harbor method is available for personal belonging losses due to federally-declared disasters. (Source: IRS Revenue Procedure 2018-8.) When you use one of these safe-harbor methods to measure a personal casualty loss, the IRS cannot question your calculation. Your tax adviser can give you full details on how to use the safe-harbor methods.

Warning: For purposes of eligibility for these safe-harbor casualty loss calculation methods, the term “personal residence” does not include any property that you’ve used as rental property or any property containing a home office used in a business.

Condos and coops do not count as personal residences if you do not own the structural components (e.g. foundation, walls, and roof) or if you only own a fractional interest in the structural components. Trailers and mobile homes also do not count. The term “personal belongings” does not include cars, SUVs, trucks, vans, motorcycles, boats, aircraft, mobile homes, trailers, RVs, or off-road vehicles. Antiques and other assets that maintain or increase their value also do not count as personal belongings.

Longstanding limitations on personal casualty loss deductions

To calculate the casualty loss deduction for personal-use property, you must take three steps. First subtract any insurance proceeds. Next, subtract $100 per casualty event. Finally, combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction. AGI includes all taxable income items and is reduced by certain deductions, such as the ones for student loan interest, HSA contributions, and alimony paid. You can potentially deduct the loss that remains after all these subtractions as an itemized deduction on Schedule A of Form 1040.

Remember: For 2018-2025, it’s harder to itemize because the TCJA basically doubled the standard deduction amounts. For 2018, the standard deductions are $12,000 for single filers, $18,000 for heads of households, and $24,000 for married joint-filing couples. For 2019, the standard deductions are $12,200, $18,350, and $24,400 respectively.

Example 1: Calculating a personal casualty loss deduction

In 2018, you sustained a $40,000 loss to your home (after considering insurance reimbursements) due to a federally-declared disaster. Your AGI for last year was $100,000. Calculate your deductible loss of $29,900 ($40,000 – $100 – $10,000) on Form 4684 (Casualties and Thefts) and then deduct the loss on Schedule A of Form 1040.

See also: After Hurricane Michael, what homeowners need to know about disaster insurance

Unfavorable TCJA change

For losses incurred in 2018–2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally-declared disasters.

Exception: If you have personal casualty gains because your insurance proceeds exceeded the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that are not due to a federally-declared disaster up to the amount of your personal casualty gains.

Example 2: Calculating a personal casualty loss deduction under the new law.

Same as Example 1, except this time your $40,000 loss in 2018 was not due to a federally-declared disaster. The loss is non-deductible. Sorry about that.

Special deduction timing election

When your casualty loss is due to a federally-declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year.

Deadline: The election must be made by no later than six months after the due date (without considering extensions) for filing your Form 1040 for the year in which the disaster actually occurs. However, the election itself must be made on an original or amended return for the preceding year. Confusing? You bet.

Recommendation: The decision on whether or not to make the special deduction timing election should be based on an evaluation of: (1) whether you need cash quickly and (2) your overall tax situation in the casualty event year and the preceding year. Tax-wise, the most important factor is usually your AGI in those two years.

The bottom line

There you have it: most of what you need to know about disaster-related losses to personal-use property. For full details, see IRS Publication 547 (Casualties, Disasters, and Thefts). If you have a big loss, consider hiring a tax pro to deal with the complicated rules and prepare your return for the year you claim the loss deduction.

More Tax Guy tips

Buying a house? Here’s how to ensure your confidential financial details remain secure

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Buying a home is a complicated process that involves sharing sensitive information with multiple people. And the latest major data leak highlights the risk consumers take on when they share that information.

Roughly 885 million mortgage-related files stretching back over a decade were exposed by First American Financial Corp., one of the country’s largest title insurance companies, thanks to a flaw in the design of a website that stored the files.

Roughly 885 million mortgage-related files stretching back over a decade were exposed by First American Financial Corp., one of the country’s largest title insurance companies, thanks to a flaw in the design of a website.

The files, which could accessed if someone had the proper URL, contained a wide array of personal information for parties to thousands of real-estate transactions, including bank-account numbers and statements, mortgage and tax records, Social Security Numbers, wire-transaction receipts, and driver’s license images.

The data leak was first reported by the watchdog website

First American FAF, -6.26%  confirmed that the information was leaked and said it rectified the situation once it was notified of it. The company also said it has hired an outside forensic firm to investigate whether any customer information was compromised due to the security flaw.

So far it does not appear that there was any large-scale access to the information, according to the company, but if that changes First American said it will notify consumers and provide credit-monitoring services.

“We deeply regret the concern this defect has caused,” said Dennis J. Gilmore, chief executive officer at First American Financial Corporation. “We are thoroughly investigating this matter and are fully committed to protecting the security, privacy and confidentiality of the information entrusted to us by our customers.”

Also see: The $100,000 question to ask your real-estate agent to avoid being scammed

This is not the first time this year that a data breach involved mortgage documents. In January, news site TechCrunch revealed that some 54,000 mortgage borrowers had their financial data exposed by Ascension, a financial data firm that converts paper documents into computer-readable files. Among those affected included past customers of Wells Fargo WFC, -1.26% Citigroup C, -0.93%  and Capital One COF, -2.24%

Scammers will pose as real-estate agents requesting money for a down payment, or pretend to be a title-insurance firm and ask consumers to hand over the money for closing.

While major data breaches like these attract headlines, many consumers nationwide have fallen victim to much simpler, email-based scams, which involved hacked or spoofed email accounts, losing thousands of dollars in the process.

In some cases, scammers will pose as real-estate agents requesting money for a down payment. In other instances, they will dupe unsuspecting consumers into handing over the money for closing from their escrow account by pretending to be a title insurance firm or hacking into their systems.

“Business email compromise can happen to anyone involved in the transaction,” said Katie Johnson, general counsel and chief member experience officer at the National Association of Realtors.

Here are steps that consumers can — and should — take when buying a home to ensure their personal information and money are protected.

Make sure your cyber house is in order. A lot of sensitive information will be shared throughout the process of buying a home and getting a mortgage. Now is a good time to ensure that all of that information is well-protected, Johnson said. This includes changing passwords to make them more secure and enabling two-factor authentication whenever possible. And since you can’t freeze your credit during the mortgage process, it’s not a bad idea to sign up for credit-monitoring or identity-theft protection services.

Ask every company how they will protect your data. Not all companies have the same policies when it comes to cybersecurity — while banks may be subject to stringent federal oversight, the same is not true of smaller mom-and-pop real-estate agencies or title insurers. Before going with a certain company, consumers should find out how they protect information — for instance, do they store documents in encrypted databases?

Avoid sending documents or other sensitive information over email. Many wire-fraud schemes involve hacked or spoofed email addresses. If a real-estate agent, lender or insurer asks for sensitive information over email, consumers should call them to double-check the email is really from them, Johnson said. If possible, consumers should opt to deliver information in person, verbally over the phone or through a secure online portal rather than over email.

More from MarketWatch

Buy This, Not That: Dreaming of early retirement? The No. 1 book you need to read to make it happen

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MarketWatch has highlighted these products and services because we think readers will find them useful. We may earn a commission if you buy products through our links, but our recommendations are independent of any compensation that we may receive.

Read your way to early retirement.

Americans of all ages are dreaming of retiring early. In the past year, “how to retire early” was the second most-asked retirement question on Google, and a 2018 MassMutual survey found that four in 10 Americans say they want to retire before 60. Of course, most people will need a lot more money than they’ve got now to do it — one in three Americans has less than $5,000 in retirement savings, according to Northwestern Mutual — as well as a lot of help in the planning department. So MarketWatch asked about a dozen financial experts to give us the scoop on the one book you must read if you want to retire early. (Most are now available for free on Amazon with a free Audible trial.)

“The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life” by JL Collins — about $15 on Amazon. This was the No. 1 most recommended book by our panel of financial experts. “This is a book that can change how you think about early retirement, investing, and help you course correct to make it an actual possibility,” says Michael Kern, a CPA and founder of Talent Financial. Financial coach Michael Quan calls it “powerful,” noting that the author “breaks down the most efficient way to build wealth.” And Bob Haegele of The Frugal Fellow raves about the author’s “simple investment strategy” that gives an investor “the best chance of setting him- or herself up for success.”

“Work Optional: Retire Early the Non-Penny Pinching Way” by Tanja Hester, about $12.
Financial coach Steven Donovan calls this “well-thought out” book “the best step by step guide to retire early.” (Hester is a MarketWatch contributor.)

“The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime” by MJ DeMarco, about $15.
Financial author Rachel Hope Richards says this is her “absolute favorite book for early retirement.” She adds: “He talks about the slow lane to retirement, and how working in a cubicle for 40 years and investing in mutual funds won’t get you there. And then he talks about the fast lane; becoming a producer instead of a consumer, building up a lucrative business quickly, and retiring early.”

“Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence” by Jacob Lund Fisker.
Moana Whipple, a financial Associate at Natural Bridges Financial Advisors, raves about this book: “For a world plagued by overconsumption, materialism, and greed, Fisker’s no-nonsense blueprint for getting out of the rat race is the perfect antidote,” she says.

“The Wealthy Barber” by David Chilton, about $10.
Leif Kristjansen, who retired in his 30s and blogs about it at the Five Year FIRE Escape, picks this book noting that it was “the very very beginning of my good relationship with money.” And while it isn’t an early retirement book per se, “really all that needs to be added to change this into an early retirement book is to be more aggressive. The author, Dave Chilton, recommends saving at least 10% of your income whereas most very early retirees save around 50% of their income.”

“The New Rules of Retirement” by Robert Carlson, about $10.
Certified Financial Planner Patricia Russell of Finance Marvel loves this book in part because the author thoroughly addresses how to handle some of the bigger risks to your retirement like health care.

“The 4 Hour Workweek” by Tim Ferris, about $14
Two experts put this as their one must-read book, with Stacy Caprio of Fiscal Nerd calling it “an incredible book for those looking to retire early to read. It walks you through the process of how you can set up your own business and then take yourself completely out of the process of running it while still having profit coming in.”

“The Millionaire Next Door: The Surprising Secrets of America’s Rich” by Thomas Stanley and William Danko, about $11
Two experts gave their votes to this book. Michael Outar of notes that “while this book is not directly about early retirement it lays the foundation of what financial independence means and how you can achieve it so you can retire early.” And certified financial planner Betty Wang says you “can’t beat” this book, adding that “it’s crucial, especially for those seeking to retire early, to understand how your spending habits have a direct result on your wealth.”

How the cell phone helped reduce drug-related gang deaths

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The increased use of cell phones reduced U.S. homicide rates in the 1990s, according to new research distributed by the National Bureau of Economic Research.

The popularity of cell phones undermined the turf-based business model for illegal drug dealing, a co-author of the study suggests. That, in turn, may have undercut street gangs’ drug profits.

The researchers found the link between mainstreamed cell-phone service and the reduction in 1990s homicide rates after analyzing data from 1970 to 2009. Homicides declined by about 10,000 between 1990 and 2000, they found.

The study, entitled “It’s the Phone, Stupid: Mobiles and Murder,” estimated that roughly 1,900 to 2,900 of that decrease could be explained by the mainstreaming of cell phones.

‘When users had cell phones, they didn’t have to buy on the corner. The street market for drugs became less important.’

—Lena Edlund, an associate professor of economics at Columbia University.

Cell phones may have been behind the decline in violent crime in the 1990s by reducing drug-related deaths, said co-author Lena Edlund, an associate professor of economics at Columbia University. “When users had cell phones, they didn’t have to buy on the corner,” Edlund told MarketWatch. “The street market for drugs became less important.”

Edlund and co-author Cecilia Machado, an assistant professor at the Getulio Vargas Foundation in Rio de Janeiro, propose that the cell phone effectively cut out the middleman. Phones also allowed parties to handle payment and delivery separately, they said, potentially reducing the likelihood of an altercation.

“A move away from turf-based dealing may have reduced the ability to cartelize drug sales, dented profits, and dulled the allure of gang life,” the authors added.

‘A move away from turf-based dealing may have reduced the ability to cartelize drug sales, dented profits, and dulled the allure of gang life.’

—’It’s the Phone, Stupid: Mobiles and Murder.’

Edlund and Machado examined county-level mortality data from the vital statistics system and mortality data from the Federal Bureau of Investigation’s supplementary homicide reports (SHR), using the density of antenna structures (like towers) as a proxy for cell-phone service expansion.

The researchers found stronger effects among male black or Hispanic victims. They also saw stronger effects for homicide categories more closely linked with drugs and gangs (“Narcotics-gang,” “Argument” and “Theft”) and observed concentrated effects in urban counties, where turf wars tend to play out. And there was no effect on “wife killings,” they wrote, “consistent with gang members or drug dealers not being the marrying kind.”

As for more recent year-over-year increases in violent crime — the U.S. murder rate increased in 2015 and 2016, for example — Edlund and Machado pointed out that homicide rates had remained relatively low, suggesting a “fundamental regime shift” overall.

“This research suggests that no, they’re not going back up again,” Edlund said. “The market for drugs has changed, and we’re not going back to the street business model.”

Associated Press: Tornado activity has risen sharply in 2019

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INDIANAPOLIS (AP) — After several quiet years, tornadoes have erupted in the United States over the last two weeks as a volatile mix of warm, moist air from the Southeast and persistent cold from the Rockies clashed and stalled over the Midwest.

On Monday, the U.S. tied its current record of 11 consecutive days with at least eight tornadoes confirmed on each of those days, said Patrick Marsh, warning coordination meteorologist for the federal Storm Prediction Center. The previous 11-day stretch of at least eight tornadoes per day ended on June 7, 1980.

“We’re getting big counts on a lot of these days and that is certainly unusual,” Marsh said.

The National Weather Service had already received at least 27 more reports of tornadoes Tuesday, suggesting that the record for consecutive days would be broken once the official totals are in.

The weather service has received 934 tornado reports so far this year, up from the yearly average of 743 observed tornadoes. More than 500 of those reports came in the last 30 days. The actual number is likely lower, however, because some of the reports probably come from different witnesses who spot the same twister.

The U.S. has experienced a lull in the number of tornadoes since 2012, with tornado counts tracking at or below average each year and meteorologists still working to figure out why.

“A lot of people are trying to answer that, but there’s no definitive answer,” Marsh said.

The recent surge in tornado activity over the past two weeks was driven by high pressure over the Southeast and an unusually cold trough over the Rockies that forced warm, moist air into the central U.S., sparking repeated severe thunderstorms and periodic tornadoes.

“Neither one of these large systems — the high over the Southeast or the trough over the Rockies — are showing signs of moving,” Marsh said. “It’s a little unusual for them to be so entrenched this late in the season.”

Those conditions are ripe for the kind of tornadoes that have swept across the Midwest in the last two weeks, said Cathy Zapotocny, a meteorologist for the weather service in Valley, Nebraska. Zapotocny said the unstable atmosphere helped fuel many of the severe winter storms and subsequent flooding that ravaged Nebraska, Iowa and Missouri earlier this year.

“We’ve been stuck in this pattern since February,” she said.

Zapotocny said the number of tornadoes this year was “basically normal” until the surge this week. May is typically the month with the highest incidence of tornadoes, usually in the Plains and Midwestern states collectively known as Tornado Alley, where most of this year’s twisters have hit.

Most of the confirmed tornadoes were rated as less-intense EF0, EF1 and EF2s on the Enhanced Fujita Scale. But 23 were classified as EF3 tornadoes, with wind speeds of 136-165 mph. The strongest confirmed tornado this year was the EF4 tornado that killed 23 people in Alabama in March.

So far this year, 38 people have died in 10 tornadoes in the United States, including a combined seven within the last week in Iowa, Missouri, Oklahoma and Ohio.

The relative quiet in recent years followed the massive tornado that killed 161 people and injured more than 1,100 in Joplin, Missouri, in 2011. The EF5 storm packed winds in excess of 200 mph and was on the ground for more than 22 miles.

Scientists also say climate change is responsible for more intense and more frequent extreme weather such as storms, droughts, floods and fires, but without extensive study they cannot directly link a single weather event to the changing climate.

Monday’s outbreak was unusual because it occurred over a particularly wide geographic area. Eight states were affected by two regional outbreaks, in the high Plains and the Ohio River Valley.

Tornadoes strafed the Kansas City metropolitan area straddling Kansas and Missouri Tuesday night, barely a week after a massive tornado ripped through the Missouri state capital of Jefferson City.