December - International Society of Certified Electronics Technicians

Post 2004-Election Market Outlook (Continued)
Also, many items are at technical
extremes – meaning overbought and subject
to correction. The secular bear is very much
alive and could strike at any time – just
when investors least expect it. The downside
potential of this bear is MUCH greater
than the upside.
Meanwhile, in the back-to-reality
world, The New York Times reported last
week that after 2 years in bankruptcy,
"United Airlines told its unions that it wants
to terminate its four employee pension plans
and seek additional wage and benefit cuts,
as part of a plan to cut another $2 billion a
year in costs." Other airlines and a number
of other big businesses are reported to be
closely monitoring developments.
FIXED INCOME. We have taken a small
short position against US bonds and are
invested in foreign currencies, to benefit
from the expected continuing decline in
value of the US dollar vs. other major world
currencies.
The dollar fell for the sixth straight
week, to a nine year low. Continuing budget
and trade deficits expected in Bush years
5 through 8 will exert continuing downward
pressure on the dollar. India announced that
they will be pulling $200 billion of their
trade surplus from the US market and using
it for domestic infrastructure projects.
Russia, China and Middle Eastern countries
also appear to be backing away from the
dollar.
However, Commercials – who take the
opposite side of nearly every strong financial
trend – have taken a record LONG position
on the dollar, so don't be surprised if the
dollar shows some "surprising" strength.
There are simply too many traders now
lined up on the short side of the dollar, and
a few of them need to be "washed out."
But longer range – and technically – we
can now expect to see the dollar fall even
further, down to the 80 area. And long-range
charts show the potential for going much
lower than that.
Bond yields appear to be bottoming
and it looks like yields will be rising in the
Extended Warranty Contracts – Where Does the Money Go?
Did you ever wonder about the profitability
of extended warranty contracts and
how the money is distributed? The following
information was provided by an article
in a national warranty publication.
How much each party gets is always
open to negotiation. The underwriter needs
to be compensated for the risk, plus it needs
to make a profit after claims are paid. The
administrator also needs to make a profit
after accounting for the overhead involved
in claims processing. But in general, the
three entities involved in the sale and
administration of an extended warranty split
the premiums in the following way: the
sales agent gets 50%, the administrator gets
20%, and the underwriter gets 30%. That
30% is split further into an amount set aside
to pay claims (which is typically 19.8%), an
amount to cover "fees" (just over 5%), and
the remainder as a buffer in case claims
exceed expectations.
The ratios vary tremendously given the
type of product involved. With a product
line known to have a low loss ratio, there is
less need for reserves, and of course an
expectation of fewer claims. With a new
type of product such as plasma screen televisions,
the loss ratio will at least initially be
unknown. Factors that need to be considered
include the typical lifespan of the product,
the length of the contract, and the projected
cost of repairs/replacements. Another factor
is the "clout" of the participants, and their
ability to take their business elsewhere in
pursuit of a bigger slice of the pie. For
instance, a very large electronics retailer
may be in a position to demand a higher percentage
of the premiums as a sales commission.
Industry Participation
It's astonishing to report that nobody
seems to have ever published a comprehensive
market research report that sizes the
extended warranty industry in all its sectors:
homes, PCs, consumer electronics, major
appliances, HVAC, office equipment, and
weeks ahead. But the major intermediate
trend for bond prices will remain up unless
yields rise and stay above 4.27% on the 10
year and 5.08% on 30 year yields. Popular
opinion anticipates a further Fed rate
increase next week, following Friday's
strong jobs report, but that assumption may
be false. [Editor's Note: The Fed did raise
rates on 11/10/04 for the fourth time in 5
months.] Richard Russell agrees with Bill
Gross that US short rates MUST be kept
low, to avoid jarring our over-indebted
economy into a recession or something
much worse.
"Market Outlook" published with permission
by Wayne Peterson and Family
Business Office, Inc. Family Business Office
is a comprehensive financial planning firm
founded in 1992 and located in Colleyville,
Texas, five miles from DFW Airport. They
specialize in dealing with the challenges
and opportunities faced by family-owned
businesses. For more information, visit
www.familybusinessoffice.net.
automotive. Last year, a British research
firm called PA Consulting undertook an
international market study on behalf of the
UK's Competition Commission, to which it
reported that the U.S. extended warranty
market was between $4 and $7 billion in
size. But that estimate included just what
industry insiders call brown goods and
white goods — home audio, television,
DVD, VCR, washer, dryer, refrigerator, etc.
The estimated guess at the revenue generated
by extended warranty companies is
$15 billion. That is a low-end estimate, and
it doesn't include automotive. "It's a nebulous
number," but it is thought that $15 [billion]
is probably a pretty good estimate." It
was also noted that this estimate does not
include a lot of the programs that bundle
both preventative maintenance and corrective
maintenance into a single offering.
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December 2004