Monday, August 31, 2009

Looking for Balance in 401(k)s

A recent study by Hewitt Associates found that the market downturns have resulted in a reduction in equity exposure in 401(k) plans, from around two-thirds at the end of 2007, to 53 percent just over half, this past June. That's a huge dropoff, driven primarily by investors selling off stocks and heading for safer returns in the fixed-income markets.

There's an undeniable logic to that strategy, but if you take a step back, you see it flies in the face of conventional investment wisdom. For one thing, selling stocks when the market is falling is a form of market timing, which almost everyone thinks is a bad idea. For another, financial advisors spend an awful lot of time studying and creating-asset allocation strategies, designed to help their clients meet their financial goals over the long haul. When people start loading up on bonds because they're afraid stocks will continue declining, they throw all that asset-allocation planning out the window.

Especially in 401(k)s, which are long-term plans, it's vital to stick to your asset allocation. It's not easy to tell someone who's lost 40 percent of his retirement funds that he or she needs to stay in this stock market that has been so brutalizing. But now that the market has begun to rebound, it's starting to make some sense.

Friday, August 28, 2009

Market Fatigue

We've had a lot of good news on the economy in the past week: the consumer confidence numbers were way up, there was some positive data from the housing industry, etc. But the stock markets basically shrugged all that off. Both the Dow Jones average and the S&P 500 inched around a bit the past few days but basically look like they'll end the week close to where they started.

Shouldn't the markets be showing a little more enthusiasm for these numbers? There was an interesting column on the investing Web site Seeking Alpha making the case that the market has become saturated with good news. "The bottom line," writes the author, Mitul Kotecha, "is that so much recovery news is built in the prices that the continuing run of better-than-forecast data is having only a limited impact."

Remember, the stock market is a leading indicator of the recovery. That means that by the time the recession is ending - which may well be right around now - stocks will have already absorbed that good news. Stocks, unlike the job and housing markets, are forward-looking, so it's not surprising that their reaction to the beginning of the recovery might be a little meh.

Thursday, August 27, 2009

Inside the Housing Numbers

On the heels of the rise in consumer confidence comes an uptick in housing prices as well. New-home sales were up 9.6 percent nationally in July. This follows news that sales prices for existing-home sales rose 0.4 percent in the New York area in June, and one economist said that home prices in New Jersey appear to have bottomed out sometime last winter, in December and January.

Like the historically low consumer confidence numbers, though, there are lizards in the basement for these numbers too. Home prices are still down 11.9 percent from a year earlier. Complicating the pictures is the huge number of foreclosures out there. Here in the Northeast region, existing-home sales climbed 13 percent in July, but the median price was down 15 percent from a year ago because so many homes are being sold out of foreclosure. And it still takes an average of more than a year to sell a new house, the highest number on record.

And there's the fact that these numbers aren't really all that reliable. In the name of getting figures before the public while the data is still fresh, the government tends to rush things. It takes a while for the figures to become statistically significant. The standard error in July, for instance, was plus or minus 13.4 percent, so in a sense, we don't know if the housing numbers even went up. It takes as much as five months to recognize a statistically meaningful trend in sales.

So the housing figures for June and July are mostly good news. But let's check back sometime in autumn and see how they look then.

Wednesday, August 26, 2009

Confidence Game

One of the big news items yesterday was the consumer confidence report, which came in strongly higher than analysts had expected. It was expected that consumer confidence would tick up slightly in August, but it surged, following declines in both June and July.

The consumer confidence numbers are put out by a nonprofit business research group based in New York called the Conference Board. They ask consumers about five areas:

1. Current business conditions
2. Business conditions for the next six months
3. Current employment conditions
4. Employment conditions for the next six months
5. Total family income for the next six months

Consumer confidence is actually still historically low. In answering the question about the prospects for their family's income, for example, only 10.6 percent said they were expecting an increase, but that's up from 10.1 percent in July.

But every little bit helps. As we said earlier this week, one thing holding back a full recovery is wariness on the part of business owners. If consumers are confident enough to start spending more of their hard-earned cash - and if business owners see that confidence returning - that's good for all of us.

Tuesday, August 25, 2009

Homeowner Woes

The housing crisis has taken an odd new turn: Now you can lose your home to the bank even if your payments are up to date. The whole thing was a mistake, of course, but what's even more frightening was that the banks knew about the mistake, and the house still got auctioned off. Anna Ramirez, a woman in Homestead, Florida, had gone to Washington Mutual to restructure her loan, and somehow, the bank recorded it as a foreclosure. They auctioned off her house, even as Ramirez was making the new payments.

Fortunately, the bank recognized the error, and went to court to get the auction sale reversed. But then, the comedy of errors continued: the court never filed the judge's orders, so the man who bought her house went ahead and took possession.

Ramirez arrived home last week to find all her possessions out on the front lawn. It took her till the next morning to get a judge to realize that yes, this woman who had been making her mortgage payments didn't deserve to have her house auctioned out from under her.

Washington Mutual, of course, was one of the biggest issuers of subprime mortgages in the nation. Add to that the court system in Florida, and you end up with a lawful homeowner getting her furniture strewn all over her lawn.

Monday, August 24, 2009

Little Loans

We've been discussing for a long time the necessity of getting the credit markets flowing freely again in order to have a fully healthy economy again. As the economy has gotten stronger in recent months, credit has indeed become more available. Mortgage rates, for example, have remained low, helping housing purchases to rise here in the Northeast 3.3 percent in this past July as opposed to July 2008.

But while people are getting loans, the size of those loans tends to be smaller than before the recession. A report by the Treasury Department surveying 22 big banks that received money from the bailout program noted that loan originations had jumped 13 percent in June but that total loan balances declined by 1 percent. So each individual loan must be significantly smaller than before.

The number of businesses seeking loans is also not heartening. More than half of banks said that demand for loans in April from small businesses was weakening, and about 40 percent of banks reported that demand from big corporations was also weakening. These are the types of loans that fuel business growth and that, in the end, will get the economy moving again.

You hear it said sometimes that the biggest obstacle to the recession is the mindset of the American people. Here's a situation where the challenge really is to change people's minds: The money is out there, and the economy is getting back on its feet again, and the sooner business owners recognize that, the better off we'll all be.

Friday, August 21, 2009

Strong Weak Hands

Did the recent market meltdown send you running to sell your stocks at the first sign of panic? While it's not a recommendation I would make, a recent study argues that it's also not the worst thing in the world. A paper called “When Everyone Runs for the Exit,” by a professor of finance at New York University, looked at the way investors react to serious market downturns, and the results are pretty interesting.

Buy-and-hold still works in these situation, but only if you've got the fortitude to wait out the crisis. Even better if you've got the wherewithal to buy cheap assets in the midst of the downturn. If not, the best move appears to be selling at the first sign of crisis. The phrase "cut your losses" would apply here.

The people who really get killed during market downturns are what the paper calls the “strongest weak hands.” They hold on for a while, hoping the markets will recover, then sell off in the midst of the crisis, when prices tend to be low.

These findings are all intuitive when you take a step back and think about them. The problem is, when a financial crisis hits, most people don't take that step back. "If you can keep your head when all about you are losing theirs," Rudyard Kipling wrote, "then you'll be a man." And, he might have added, a wealthier man.

Thursday, August 20, 2009

Buffett on Inflation

We talked earlier this week about Warren Buffett, and also about the possibility of inflation returning. Then lo and behold, what should show up in yesterday's New York Times but an op-ed by Warren Buffett warning about the return of inflation. Like a lot of people, Buffett is worried about the enormous deficits the federal government is running, and lays out the scenario for various ways of financing that debt.

Buffett makes it clear that his concerns are still some years in the future, and that there's time to avert the kind of monetary policy that can bring about crushing inflation. But he's doubtful that Congress will do the right thing: "Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election," Buffett writes. "To avoid this fate, they can opt for high rates of inflation."

"Our immediate problem is to get our country back on its feet and flourishing - 'whatever it takes' still makes sense," he writes. "Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources."

One of Buffett's most famous lines is "Someone's sitting in the shade today because someone planted a tree a long time ago." It's good to have people looking out for our long-term future - someday soon, we will be into a full recovery, and it's important to not forget about other problems that may arise down the road.

Wednesday, August 19, 2009

The Latest on Inflation

We've been keeping an eye on the possibility of inflation returning, and we've had some good news this week. Wholesale inflation, measured by the Producer Price Index as kept by the Bureau of Labor Statistics, dropped 0.9 percent in July. Over the past year, the PPI has now fallen 6.8 percent, the largest drop since the BLS began tracking the index.

Interestingly enough, prices have fallen more the further back you go on the production line. The PPI measures prices for finished goods, and as I said, it's fallen 6.8 percent in the last year. Meanwhile, what's known as intermediate goods have fallen 15.1 percent and the price of crude goods - raw commodities that have yet to be processed - has fallen 44 percent.

The federal government's massive deficit spending has led to increased inflation fears, so these reports are very welcome. Not only can inflation be a nasty shock to the paycheck, but a low inflation rate will allow the Federal Reserve to keep its Fed Funds rate low. That will be critical in funding the recovery.

Tuesday, August 18, 2009

Buffett's Moves

Yesterday, we talked about where venture capitalists have been investing lately. At the end of last week, Warren Buffett's Berkshire Hathaway also announced some stock purchases and sales. Here's what the Oracle of Omaha has been up to:

Bought shares of Becton Dickinson & Co., a syringe and laboratory equipment maker based right here in Franklin Lakes, New Jersey.

Bought shares in Johnson & Johnson, the world’s largest maker of health-care products, also located close by in New Brunswick, New Jersey.

Sold shares in Eaton Corp., a manufacturer of of circuit-breakers and fuel pumps based in Cleveland.

Sold shares in Carmax Inc., the nation's largest used-car dealer, based in Richmond, Virginia.

Sold shares in Home Depot Inc., based in Atlanta.

Sold shares in WellPoint Inc., a health insurance company based in Indianapolis.

Sold shares in UnitedHealth Group Inc., another health insurance company, this one based in Minnetonka, Minnesota.

Sold shares in ConocoPhillips, the oil company based in Houston, although Berkshire Hathaway remains the company's second-largest shareholder.

Monday, August 17, 2009

The Smart Money

One of the best ways to address the status of the economy is to see where the smart people are putting their money. The business school at Pepperdine University in California surveyed 185 VC firms to see where they're been investing lately. The biggest winner in recent months has been, not suprisingly, software, a common favorite for venture capitalists. Software firms have collected 23.7 percent of all VC money lately.

Here's the top five:

Software: 23.7 percent
Medical devices: 13.4 percent
Biotech: 10.3 percent
Clean technology: 9.3 percent
Internet specific: 9.1 percent

It's interesting to see clean technology, which the Obama administration has made such a big show of supporting, garnering so much venture capital. Near the bottom of the list is pharmaceuticals, at 3.5 percent, financial services, at 3.1 percent, and consumer products, at 2.9 percent.

Pepperdine also asked the firms how many investments they were planning to make in upcoming months. More than half, 54 percent, said they planned to make three or more investments over the course of the next year. That's a lot of money that could be coming into the economy.

Friday, August 14, 2009

Pretty Money

There's an email going around suggesting that our paper money has been redesigned, and that the new five will look something like this:

It's not true; the design above is simply something produced by an artist named Michael Tyznik for a contest called the Dollar Rede$ign Project. Notice that in redesigning the dollar, he moved George Washington to the five-dollar bill. Tyznik's plan calls for the dollar to be replaced by a coin.

So Washington moves up to the five, Lincoln goes to the ten, Jefferson to the twenty and Jackson to the fifty. Tyznik also proposes doing away with the penny and including a new $200 bill. You can see more here.

Thursday, August 13, 2009


According to the Federal Reserve, the worst of the recession is over. The Fed emerged from its two-day meeting yesterday optimistic about the economy and the recovery, although it also said "economic activity is likely to be weak for a while."

You probably saw that the Wall Street Journal went even further: It polled a panel of economists and came away declaring that the recession is over - not just the worst of it, but the whole shebang.

So where does this leave us? It's good news; it's always a plus when the most qualified observers think the economy is doing well. But it certainly doesn't change anything fundamentally. The same companies still woke up this morning and tried to find new customers so they could make more money and grow. An assessment of the larger economy means very little for individual stocks. Not to mention for individuals looking for work; indeed, the WSJ panel of economists still expects unemployment to rise near ten percent by year's end.

I don't mean to be too negative; this is very good news. And it may be reaping dividends already - the dollar rose against the yen, apparently because of the Fed's report. But we still have a lot of work to do.

Wednesday, August 12, 2009

The Fear Index

Despite the gains the markets have put up in recent weeks, are investors still nervous? The Chicago Board Options Exchange compiles a Volatility Index - also known as the market's fear index - and it rose 4.1 percent to 26.01, its highest level in a month. Historically, the average is more like 18-20. After peaking at a record 89.5 last October, in the midst of the banking meltdown, it's down 35 percent in 2009 but now it appears to be moving back up.

But volatility doesn't necessarily equate to a bear market; volatility can mean violent upward price movements, too. The Volatility Index looks at options based on the entire S&P 500 to see how much volatility investors are expecting over the next 30 days. Call options, those expecting an increase in stock prices, raise the Volatility Index just as much as put options, which expect downward price movements.

So the fear index isn't always aptly named. Investors suspect there are extreme times to come in the market, but it may well be extremely good.

Tuesday, August 11, 2009

The Tech Stock Rally

One of the biggest reasons for the market's brighter outlook lately has been the performance of the tech sector. The tech-heavy Nasdaq Composite Index closed above 200 last week, for the first time since October, and is up more than 25 percent for the year. The Nasdaq is up nearly 60 percent since bottoming out at 1268 on March 9. (It is still 43 percent off its peak of 2859 on Oct. 31, 2007.)

Technology stocks are also the top-performing industry sector in the Standard & Poor's 500, too. Taking tech stocks out of the mix, the S&P would be up only 7.9 percent this year instead of its actual 12 percent.

There are a couple of reasons for this. After getting destroyed in the tech crash of 2000, technology firms now tend to keep more cash on hand for a rainy day - leaving them well-positioned to survive both a business downturn and the recent credit crunch. Even more than that, tech issues are one of the most cyclical stocks out there, following the business cycle up and down. It makes sense that they would be leading this recovery - and that they'll be the first sector to deflate the next time the economy turns down.

Monday, August 10, 2009

Job Losses, Job Gains

As I suggested on Friday, the jobs report that came out at the end of last week was very good. It was so good, in fact, that the unemployment rate, as measured by the Labor Department, dropped a tick, from 9.5 percent to 9.4 in July. But at the same time, the economy lost another 247,000 jobs in July. So how could the unemployment rate drop?

It's primarily because the ranks of the jobless fell - not because those people found jobs, but because they left the labor force altogether. Most of those people probably got discouraged by their inability to find work and gave up. The labor force, as defined by the Department of Labor, includes only those who are now employed or are actively looking for work.

That's not to say that the July news was bad, or that these figures are cooked in some way. The 247,000 jobs lost in July were down significantly from the 443,000 that were lost in June, and is the lowest monthly figure since last August. So it's a step in the right direction - just not as much of a positive step as that unemployment rate would reflect.

Friday, August 7, 2009

Up and Down With the Jobs Report

There appeared to be some good news in the unemployment front in the latest Labor Department figures: the number of people filing for unemployment benefits last week dropped more than economists had expected. This requires a little bit of unpacking so as to eliminate any confusion; the Washington Post headline reads "New Jobless Claims Drop More Than Expected," which sounds like bad news.

And it is bad news, in a sense. The ranks of the unemployed continue to grow, and are expected to continue growing for some time to come. A total of 550,000 people filed for unemployment last week, which is a lot. But economists had thought that number would be more like 584,000. In other words, the jobless ranks are still growing, but they're not growing quite as fast as some people expected.

There's an unemployment report due out today from the government on the jobless rate in July, and there's speculation that this will show the jobless ranks aren't growing as fast as they had been earlier this year. Even if this provides more "good news," it's important to keep in mind the context: The jobs news isn't really all that good. It's just not quite as bad as it has been.

Thursday, August 6, 2009

Faking Forty-four Cents

Usually when you hear about counterfeiters, it's people making up phony twenties or hundreds - the biggest denominations that merchants would accept without batting an eye. You wouldn't expect anyone to make fake dollar bills, but someone has been busted for doing even less than that. Someone in Williamstown, down in South Jersey, has actually counterfeited postage.

Now, there's a little more to this story: The guy they caught makes his living selling CDs and videos on eBay. So he uses a lot of postage - more than $200,000 worth of the fake stuff, according to the complaint filed by the U.S. attorney. He would print out a postage meter strip from, then photocopy it for multiple packages.

I think many of us take a good look at a hundred-dollar bill when we get one. Now, maybe we should start taking a look at the stamps on our letters - do those look real to you?

Wednesday, August 5, 2009

Downgrading the Garden State

Some tough news for New Jersey today, as Moody's Investors Service announced it was downgrading the state's credit rating. New Jersey, which has $31 billion in outstanding debt, now has an Aa3 rating - the fourth-highest - on its general-obligation bonds, and A1, the fifth-highest rating, on its securities-backed bonds.

What does this mean? Moody's thinks that since New Jersey has seen a drop in its tax revenue and has had to use other revenue sources to meet its obligations, it will have a harder time paying off its debts in the future. if the long-term credit rating gets downgraded as well, the state will have to pay higher interest rates when it raises money by issuing bonds.

Maybe more importantly, it means that financial experts have combed through the fiscal data for our state and come away pessimistic. Moody's thinks there's a good likelihood that New Jersey's economic recovery may lag that of the nation as a whole. While the national economy has begun to look better lately, here at home, we still may have a tough hill to climb.

Tuesday, August 4, 2009

The GDP Figures

Concurrent with the good news from the stock markets in July that we've been talking about lately, there was a report released last Friday by the Bureau of Economic Analysis that provided us with more reason for optimism: GDP, which had been contracting at an annual rate of about 6 percent each of the past few quarters, shrunk by only 1 percent in the second quarter of 2009, from April through June.

At the same time, though, the BEA revised its estimate of GDP from the first quarter of 2009. While it had been previously reported that the economy shrink by 5.5 percent, now the BEA thinks it was more like 6.4 percent. The BEA also thinks that the economy contracted by 1.8 percent rather than the earlier report of 0.9 percent in 2008.

In a sense, this doesn't matter: The economy was what it was, and stock prices have already fallen, businesses have already failed, jobs have already been lost. Changing the big numbers doesn't change any of that. It does mean that the contraction was somewhat more severe than expected, meaning that this quarter's puny 1 percent presents a significant contrast to recent quarters.

But it's also worth remembering that not only are these economic numbers always presented in hindsight, they're also always subject to revision. Three months from now, there's always the possibility that we'll discover this past quarter wasn't as good - or as bad - as we think now.

Monday, August 3, 2009

A Hot Time in July

As we expected, Friday ended with the Dow Jones average posting its highest monthly gain since October 2002, with a sizable 8.6 percent increase. Significantly, the market was doing all this in July, which is historically a pretty blah month for investors. Traders and other Wall Street bigwigs tend to take vacation during July, dampening down the trading volume.

But this July was a firecracker. This was the Dow's best July performance since 1987. It was the best July performance by the Nasdaq since 1997, and the best by the S&P 500 since 1988. The Wilshire 5000, which contains all the equities in the United States with readily available price data (it now actually contains more than 5,000 stocks), posted the best July in the history of the index, which dates back to 1975.

This July, with people desperate for a turnaround in the markets, is probably different in many respects from previous Julys. Traders are working harder these days - those fortunate enough to still have jobs. And it's easy to get too excited about these figures: Both the S&P and the Nasdaq posted higher monthly gains as recently as April. But overall, the news for July was worth getting excited about.