The 401(k) Outlook

After last week's survey showing that baby boomers were confused about how to best save for their retirement, along comes another one, from the investment management firm Black Rock, this time focusing on 401(k)s. It provides a little more detail on the same subject. Clearly, people with a 401(k) recognize its importance; 74 percent named retirement planning as a top savings goal, more than cited health care (61 percent) or getting out of debt (51 percent).

But again, we see that many people are not really strategizing for their retirement. When people were asked what most influenced their 401(K) strategies, the top-ranked answer was the rate at which their employer matched their contributions. Investing the most money that your employer will match is a great idea, but that shouldn't be the end of your dealings with your 401(k).

And they recognize that they need help. Three quarters of the people surveyed said they'd appreciate getting more assistance from their employer in directing their investments, and 82 percent said they had no experience in dealing with sums of money greater than $100,000. While your employer can no doubt be helpful with your 401(k), it's a useful reminder that this needs to be managed to the best of your abilities, just like any other investment.

Incomes on the Rise

There was a report out yesterday from the Commerce Department showing that American household income increased during May. Incomes were up by a wide enough margin that both total spending and total savings were able to increase during the month. Personal consumption had been flat in April, so it's nice to see that it edged upward in May.

This comes on the heels of Friday's report that business investment was picking up, with orders for goods like computers and machinery were up by 0.9 percent in May. The question is, if business is spending all this money, and people are making more money, why isn't it showing up in the unemployment figures?

It may be that, even though the numbers are positive, they're not strongly positive. Personal consumption rose by a minuscule 0.2 percent in May, which looks good in the context of some other recent figures but isn't exactly robust. And, as we noted, the increase in income was split between spending and savings, meaning it wasn't able to make much of an appreciable difference in either area. The numbers are moving in the right direction; the next step is for them to move with enough strength to help the economy get rolling again.

Highlights from Financial Reform

As you probably heard, the financial reform bill emerged from the conference committee on Friday, newly reconciled between the House and Senate versions. The plan now is to have the president sign the bill on the Fourth of July.

We'll have a full report on how this legislation will affect your financial interests, as well as how it will affect the larger economy, on the Echelon Wealth Strategies website in the next few days. In the meantime, here are some highlights:

* The so-called Volcker Rule survived in somewhat weakened form. Banks are prohibited from investing depositors' taxpayer-insured money in proprietary trading schemes. They are still able to invest up to three percent of what's known as tier I capital in private equity and hedge funds.

* Mortgage lenders are required to hold onto 5 percent of all the mortgages they issue, in hopes of preventing them from issuing risky, subprime motrgages we saw during the housing bubble. Loans to high-quality borrowers are exempt from this rule.

* The Consumer Financial Protection Bureau will be put under the control of the Federal Reserve, although the director is technically independent.

* The decision as to whether to force brokers to follow a fiduciary standard - to be required to always put their clients' needs ahead of their own - was put off until there could be further study on the issue from the SEC. This is unfortunate. Wealth managers such as myself are pledged to follow their fiduciary duty, and brokers should too.

Can the Fed See the Future?

We looked at the Fed's regular economic outlook yesterday (which as you recall called for very slow growth moving forward). How accurate are these forecasts? Let's take a look back at the Fed's reports from 2007, prior to the onset of the recession that November. Current Fed chair Ben Bernanke was in charge back then as well. Here are some excerpts:

January 2007: Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

May 2007: Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.

August 2007: Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

October 2007: Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

December 2007: Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time. [NOTE: The economy was already in recession by this time.]

The Fed Speaks

That the Fed is going to keep interest rates low for the foreseeable future is the most immediate news that came out of Ben Bernanke's announcement yesterday, but just as significant was the Fed's outlook for the economy. As we mentioned earlier in the context of the leading economic indicators, the forecast is for the economy to contain expanding, but at an excruciatingly slow pace.

The key is in the details here: Whereas the Fed said "economic activity has continued to strengthen" in April, the last time it concluded one of these two-day meetings, now it says the economic recovery is merely "proceeding." The big issues seem to be the continuing troubles in Europe and a housing market that appears to be slowing again. While the previous Fed report noted that housing had "edged up," that language was absent from the most recent report.

Was there any good news in the Fed report? You have to look carefully, but there are a couple of things moving in the right direction. "Household spending is increasing," for one thing, and "business spending on equipment and software has risen significantly." And inflation remains something the Fed is almost entirely unconcerned about. Aside from that, we may be muddling along in our present economic situation for some time to come.

The Analysts Miss Again

There was a fascinating article on Bloomberg News yesterday pointing out that when it comes to the stock market, no one really knows what exactly the future will hold. Bloomberg went back and looked at stock analysts' recommendations from the beginning of the year and found that the stocks they liked the least have in many cases performed the best.

Wall Street was especially bearish on banks back then. Two banking companies were among the top ten stocks with the highest percentage of sell ratings: Zions Bancorporation, in Salt Lake City, and Huntington Bancshares, in Columbus, Ohio. Zions is up 86 percent on the year, and Huntington is up 66 percent. In that top ten group, seven of the stocks have advanced in 2010, despite the fact that the S&P 500 overall is down slightly on the year.

At the other end of the scale, Bloomberg found that Coca-Cola had 14 buy ratings and only one sell rating at the beginning of the year, but it's lost 8 percent of its value in 2010. Pfizer was recommended by 81 percent of the analysts Bloomberg found, but it's dropped 17 percent this year. Not that it makes sense to consciously go against the recommendation of Wall Street, but this just goes to show once again that when it comes to stocks, you never know.

Fears of a Boomer

Here's another measure of economic confidence, coming from a different direction than yesterday's survey: Allianz Life Insurance found that American baby boomers fear outliving their life savings in retirement more than they fear death itself. According to the survey, 61 percent of boomers are more afraid of living out their days penniless than they are of dying.

A lot of this is clearly the result of simply not knowing what the future holds and how to plan for it. Only about half of the baby boomers surveyed said they felt comfortable assessing how much income they'd need to live comfortably in retirement. And 31 percent say they're not even sure what their expenses would be once they're retired.

Helpfully enough, by dealing with the knowledge and strategies required to put a reasonable retirement plan in place, we can simultaneously deal with the fear of outliving your savings. If you're unsure of how much income you'll need to retire in the lifestyle you've become accustomed to, feel free to give me a call.

What Fund Managers Are Thinking

When you're interested in what people think about the economy, it's generally wise to ask those who are forced to put their money where their mouth is. BofA Merrill Lynch surveys investment fund managers worldwide every month, and the global trends there are not good. A net margin of 24 percent of June's responding fund managers* think the worldwide economy will grow over the next 12 months. That's down from a net margin of 42 percent in May and 61 percent in April.

Remember, this is the worldwide economy we're talking about, and the biggest culprit in the downward trend here is Europe. A margin of 7 percent of all fund managers in Europe expect the European economy to improve over the next year, down from 23 percent in May. The number of fund managers thinking European earnings would improve over the next year was a net of 74 percent in April; that number has fallen all the way to 20 percent.

Is there any good news in the survey? A net margin of 38 percent of all fund managers think stocks are currently undervalued, the biggest margin this survey has found in over a year. That's the kind of confidence survey that might actually have an effect on the economy - if fund managers think stocks are a good value right now, they're the people in the best position to start buying them up.

*This is the odd way BofA Merrill Lynch has chosen to report the survey numbers; it means that, in this case, the difference between the number of fund managers expecting the economy to grow and those expecting it to shrink is 24 percentage points.

The Recovery: Still Sluggish

The index of leading economic indicators for May was rolled out this week, and the numbers are in positive territory, although just barely. After not rising at all in April, the index rose by 0.4 percent in May. Of the ten indicators, five were up in May, and five were down, with the stock market decline being the biggest culprit on the downside.

All told, the Conference Board thinks that adds up to a recovery that will continue but at a very slow pace. One forecast out of UCLA calls for 3.4 percent GDP growth throughout 2010, followed by 2.4 percent in 2011 and 2.8 percent in 2012. That would be OK for ordinary times, but it's not going to be enough to move the unemployment numbers a whole lot. One common estimate is that it takes 5.0 percent GDP growth for any kind of real jobs growth. According to the UCLA figures, their growth forecast leaves unemployment at 8.6 percent by 2012.

So the vicious cycle continues: We won't see a big movement in the unemployment figures until we get robust GDP growth. We won't see robust GDP growth until we get big movement in the unemployment figures. So it looks like the recovery will just keep plodding along.

Jersey Schemer

It appears that we've got our own little version of Bernie Madoff here in New Jersey, not that that's something to be proud of. A woman named Antoinette Hodgson from Montclair was running a real estate investment fund that supposedly was buying up homes and lots around the country. All told, she bought around $16 million worth of residential real estate. The problem: She had actually taken in $45 million from around 20 investors.

Prosecutors have charged that Hodgson was running a classic Ponzi scheme, where the money she took in from new investors went to pay off the old ones. They've also alleged that she spent much of the money at casinos in Atlantic City, gave huge sums to family members, and bought a Dunkin Donuts freanchise in Arizona.

Much as with Madoff, there were pretty clear signs that something might be amiss here. People running aboveboard investment funds keep scrupulous accounts of where the money is going, and should be only too happy to let you see all the records. But more obviously, this scheme was in operation between between 2006 and 2009. Hardly anyone was making money by investing in residential real estate in that era; anyone who claims to be doing so needs to be treated with extreme skepticism.

The Bond Vigilantes

There's been some talk recently of the return of the so-called bond vigilantes, investors who look to punish the federal government for their profligate ways. Who are these bond vigilantes? The term was coined back in 1983 to define investors who sold off massive amounts of government debt when they saw inflation ahead. What makes them vigilantes is that these sales were supposedly protests against inflationary policies, rather than pure investing decisions.

But that may not be the right way to look at what these people are doing. Most investors are far more interested in their monetary returns than they are in protesting anything the government is doing. If large groups of investors are staying away from Treasury bills, it's probably for the simple reason that they fear inflation will drive down their prices. The Treasury then has to offer higher yields to get investors to buy its bonds, driving up the price of borrowing, and starting a vicious cycle.

Fed chair Ben Bernanke has tamped down some of the bond vigilantes' fears by keeping short-term interest rates at near-zero levels, which has helped tamp down inflation to near-zero levels as well. So are these vigilantes concerned about inflation, or simply concerned about the value of Treasury bills? It might well be the latter.

Housing's Grim Outlook

Harvard's Joint Center for Housing Studies released its annual State of the Nation's Housing Report on Monday, and the outlook was pretty grim. The bottom line is that we won't see a full turnaround in housing until we see robust jobs growth.

Home values have declined by an estimated 30 percent since 2006, according to the study, but if anything, that understates the problem. Because most of the houses in the U.S. were bought at what are now inflated prices - and because incomes have stalled out instead of growing - millions of American households are now devoting half their income to their mortgages. More than 11 million homeowners are underwater on those mortgages, so they can't even sell them and move into more affordable housing. Two million mortgages are in foreclosure, quadruple the amount from four years ago.

Is there any good news in all of this? The Harvard researchers do foresee something that could end the housing slump: They think a leap upward in those jobs numbers could have a huge impact on the housing market. With all the pent-up demand from people who basically haven't been able to move over the past five years, a bit of a jump-start from the employment numbers could have a big ripple effect.

Sentimental Journey

Are you optimistic about this stock market's prospects yet? If you're not, you're not alone. A recent survey from the American Association of Individual Investors found that 43 percent of investors are still having bearish sentiments about the future of the market. That's the highest it's been in almost a year, which apparently reflects the cooling-off in May after a generally positive 12 months prior to that.

That's not a terrible figure, of course, although it's above the historical average of 30 percent of investors feeling bearish. By contrast, 35 percent of individual investors are feeling bullish right now, with 22 percent reporting neutral thoughts.

Among investment advisors, the sentiments are a bit more positive. Only 32 percent of investment advisors report their outlook as bearish, while significantly more - 39 percent - consider themselves bullish. It's interesting that the professionals' sentiments are basically flip-flopped from the individual investors'. We'll see who has the better grasp of the situation in the end.

Quarterly Stats

Lots of statistics came out this week, looking back to the first quarter of 2010 for some key macroeconomic figures. Let's just throw some out there:

* Household wealth increased by over a trillion dollars in the first quarter of '10. That's a gain of 2.1 percent. It was the fourth consecutive quarterly gain.

* But the value of the nation's real estate investments dropped by $26.8 billion. American home values fell by an average of 0.4 percent.

* Personal spending grew by 3.5 percent in the first quarter. That's the highest such number in three years.

* Household debt fell by 2.4 percent, the seventh consecutive quarter in which it declined.

* But the federal government's debt grew by a whopping 18.5 percent.

* And the debt of state and local government combined grew by 4.3 percent, the fifth straight quarterly increase.

The Volcker Rule

One of the holdups preventing the financial reform bill from making it through the joint House-Senate committee continues to be the so-called Volcker Rule, which would greatly inhibit the ability of banks to move beyond their traditional lending role. The rule would keep banks from making proprietary trades with their customers’ money, keep them from sponsoring or investing in hedge funds and private equity funds, and cap their market share in order to keep them from becoming “too big to fail.”

People who study the banking industry say that imposition of such a rule could cut banks’ profitability by anywhere from 12 to 35 percent. But Paul Volcker, the former Fed chair under Ronald Reagan who is widely credited with wringing the double-digit inflation of the late 1970s out of the economy, has redoubled his support for the rule. He argued yesterday against providing exemptions for larger banks and allow them to invest in outside funds.

What’s interesting about the Volcker Rule is the momentum it has gained. In the House version of the financial reform bill, passed last December, it wasn’t mentioned at all. (It was formally proposed by Volcker and President Obama in January.) The Senate version included the language, but with a two-year study period for regulators to see if the rule was feasible and sensible. Now, Senate Democrats are reportedly trying to insert an even tougher version of the rule they passed just a few weeks ago.

With the stabilization of the financial sector, we might have expected to see the reverse, with tough new rules for banks being watered down over time as the banking crisis receded in memory. Instead, we have just the opposite.

Splits Are Back

Three stocks have announced that they're splitting their shares: General Mills, Express Scripts, and Danaher Corporations are all splitting 2-for-1 this week. In ordinary times, there would be nothing remarkable about that news, except that these are the first three stock splits of this year among companies in the S&P 500. In fact, they're the first three stock splits in the S&P 500 since AmerisourceBergen did so last June 15, almost a calendar year ago.

Stock splits, of course, are a way for companies to reduce their stock price without reducing value, keeping trading more convenient since it's easier to execute sales in smaller amounts. In normal years, this happens all the time. There were 100 stock splits of S&P 500 companies back in 1997, and the number of splits was in the 30s every year from 2004 to 2006. But when valuations aren't rising, there's very little incentive for companies to split their stock.

So maybe it's a good sign that we're seeing companies split once again. On the other hand, three splits in a year is still a ridiculously low number. We need a lot more of this for it to be a real positive.

Assessing Health Care Costs

There's a statistic going around based on a poll from the well-known consulting firm McKinsey & Company that supposedly shows how willing Americans are to pay for their own health care. As quoted by the Harvard Business Review, McKinsey found that "more than 74 percent of insured patients responding to a survey can and would pay expenses of $1,000 a year."

But there's a major problem here: As we noted a couple of weeks ago, health care insurance for most families costs a lot more than $1,000 a year. The average cost for a family health care plan is $13,4000, not $1,000. Sure, most of us would be willing to pay $1,000 a year to cover our health-care costs, but you can't even get bare-bones health insurance for that amount.

For most people, health-care insurance is literally a hidden cost - we don't see how much it costs our employer to provide that to us. The McKinsey people certainly would know how much health care costs, which makes this survey question all the more frustrating. One more reminder about the dangers of taking fun little news items like this at face value.

Flight From Money-Market Funds

When the stock market has been as shaky as it's been over recent weeks, many investors seek a flight to safety, putting their assets in such things as money-market funds, which are guaranteed to do no worse than return your money to you. But money-market funds have been beaten down as well lately, and they're doing hardly anything more than that - the seven-day and 30-day yields are both at a barely visible 0.03 percent. The annual percentage yield is 0.22 percent.

Not surprisingly, assets in money-market funds have been dwindling alongside those paltry returns. Earlier this year, the amount of money in these funds fell below $3 trillion for the first time since October 2007. They lost nearly $10 billion in the last week alone, dropping the total amount invested in them to $2.84 trillion.

That's an awful lot of money coming to the sidelines. One potential bright side to the weak returns offered by money-market funds is that it might force investors to be a little more risky with their choices. And goodness knows, the stock market could use a little extra money right now.

The Wells Fargo Judgment

In Minnesota yesterday, a jury found that Wells Fargo was guilty of violating its fiduciary duty to several of its institutional clients as a result of selling them several highly risky securities that Wells Fargo had claimed were safe. The court also ruled that Wells Fargo was guilty of consumer fraud. Given the way so many supposedly safe securities lost their value over the past couple of years, we could see a lot more cases like this.

The suit was brought by four nonprofits participating in an investment program whereby Wells Fargo held their assets for them and supposedly loaned them out in secure ways. Wells Fargo then invested these assets in securities known as structured investment vehicles, or SIVs, which are basically short-term debt issued to fund the purchases of even more debt, such as corporate bonds or mortgage-backed securities, as well as some other high-risk vehicles. When the crash started happening in 2007, these proved to be awful investments. The nonprofits said they were expecting these investments to be more akin to money market funds.

The jury gave the plaintiffs a total of $30 million in damages, and there could be more to come in punitive damages. Wells Fargo, though, is claiming a victory of sorts, since the plaintiffs had asked for more than $400 million. It remains to be seen how much of a precedent this sets, but at least institutions are now on notice that if they push an investment as safe, it had better be reasonably safe.

Construction Comes Up Strong

The housing market continues puttering along - in various news reports on Wednesday, we learned that pending home sales were up 6 percent in April, which is good, but mortgage applications have fallen to their lowest level since April 1997. It seems that for every good sign, there's a concurrent bad one.

But there was a very good report from the construction sector: April brought the biggest rise in construction spending in almost ten years. The construction industry was up 2.7 percent in total spending for the month. Nonresidential construction was up 1.7 percent, which doesn't sound like much but was the first monthly gain in that area in over a year.

The biggest reason we look for a rebound in the housing market is to get the construction industry moving again. Selling existing homes is great, but it's the creation of new homes that really fosters economic activity. The fact that construction is moving ahead even in an environment where the overall housing market is still very mixed - that's pretty good news.

The Market in May

So now that we're into the month of June, we can look back at the stock market's performance in May and ask: What happened? The S&P 500 lost more than 9 percent of its value, as did the Dow. Are we heading into another bear market, or was this a simple correction? The real answer is "No one knows," but there is no shortage of opinion on the matter.

One pundit who might be worth paying attention to is Alan Brochstein, a veteran technical stock picker who writes for the Web site Seeking Alpha. The reason Brochstein's opinion might carry more weight is because he expected this to happen: He thought back in February that the S&P would peak between 1200 and 1230 (it actually peaked at 1220) before correcting by at least 10 percent.

So how does Brochstein read the market now?

* It's fundamentally and technically sound.

* None of the market's individual sectors indicate a return to a bear market.

* Earnings are improving.

* The market's long-term moving averages are still going higher.

Add it all up, and despite some frightening signals from Wall Street, Brochstein thinks we're likely to see more upward movement through the year. For more, see his analysis here.

Inside the Mind of the Wealthy

Has the economic crisis of the past few years caused you to take more control of your finances? If so, you're not alone, according to a new survey from Barclays Wealth Americas. A third of all high-net-worth individuals around the globe have reacted to the financial downturn by taking a more active role in their money decisions, and nearly half have begun reviewing their portfolios more often. Sixty percent are now more focused on wealth preservation, and roughly half are avoiding high-risk investments more now.

Half of the American respondents are so pessimistic that they think things might get worse before they get better. Sixty-six percent said the government handled the crisis poorly, and sixty percent have less confidence in government as a consequence.

Interestingly enough, wealthy women may not be part of that group taking more interest in their money. The survey found that wealthy American women consider themselves less knowledgeable about money and investing than men, and not surprisingly, are less interested in it. Of course, if you find yourself in one of these groups, there's any easy way to make yourself better informed on your investment decisions: Give me a call.