401(k) on the Rise

According to Fidelity Investments, 401(k) saving is at an all-time high right now, with the average account balance reaching $74,900 at the end of the first quarter of this year. That's up 12 percent from the same quarter a year ago, and up a whopping 58 percent from the first quarter of 2009. Of course, early 2009 was also when everyone's 401(k) had gotten beaten up by the bear market.

Still, $74,900 is not a lot of money if you're looking for it to carry you through your entire retirement, but remember, that includes people who are just starting out in their careers. For those who have been putting money into a 401(k) for at least a decade, the average size of their account is $191,000. For those over 55 who have been putting money away for 10 years or more, the average balance is $233,800.

More good news: People are saving more and more money into their 401(k)s, showing an optimism about the stock market and their various investment vehicles. In the first quarter of 2011, 10 percent of 401(k) investors increased the amount they're putting away, the highest figure since Fidelity began tracking that back in 2006.

Thoughts for Memorial Day

"Courage is rightly esteemed the first of human qualities because, as has been said, it is the quality which guarantees all others." - Winston Churchill

"It doesn't take a hero to order men into battle. It takes a hero to be one of those men who goes into battle." - Norman Schwarzkopf

"Human service is the highest form of self-interest." - Elbert Hubbard

GDP: Not Going Anywhere

Yesterday was the day that the Commerce Department was scheduled to release its revision of the first-quarter GDP numbers, which had originally come in at a disappointing 1.8 percent. There was a consensus among economists that the numbers would get revised upwards to 2.2 percent. But that wasn't the only view out there: Zacks Investment Research published an article early in the week warning about a downward revision in the number.

But the new figure from Commerce was... 1.8 percent. It didn't change at all. It's not that there were no changes to the initial report; it's just that they canceled each other out. To be specific, exports and private inventory investment were revised upward, while personal consumption expenditures were revised downward.

There's a third estimate due out on June 24. The smart money that time around will probably be on the GDP number not changing any.

The Shrinking American House

We've all watched housing prices shrink over the past five years or so, which means it probably comes as no surprise to learn that houses themselves have shrunk as well. In 2007, the average size of completed homes in America was 2,521 square feet. By 2010, that size had slipped by about 5 percent, to 2,382 square feet.

It so happens that 2007 was the high-water mark for the size of the American home. In addition to the raw number of square feet, the percent of homes built that had more than 4,000 square feet peaked as well, at 8 percent. The number of homes that large is now estimated at 3.6 percent.

Home sizes have come a long way in recent decades. The average single-family home built in 1990 was just over 2000 square feet; in 1973, it was 1660 square feet, with one story and two or three bedrooms. We may be heading back in that direction, but it's going to take an awful long time to get there.

A Tax Firm's Woes

The tax-preparation firm Jackson-Hewitt, based right up the road here in Parsippany, filed for bankruptcy on Tuesday. The firm's business had catered to lower-income Americans; they were a staple at Wal-Marts around the country. One of Jackson-Hewitt's selling points was that if offered instant loans against taxpayer refunds, so that someone could walk into a J-H office, fill out their tax return, and walk out with a check.

Many of its clients weren't savvy enough to realize that those loans came with hugely inflated interest rates, in some cases as much as 100 percent. The profits from those loans had come to represent a significant portion of Jackson-Hewitt's income, but the landscape around these loans changed in the past few years. The FDIC officially announced last year that banks who made tax-return loans were acting in an unsound manner. And it didn't take long for customers to realize that the interest rates they were forced to pay made the loans a bad deal.

Whatever its other faults, the IRS is generally good about paying you your tax refund promptly. Eventually, people realized - as prudent investors know- that it makes more sense to be patient rather than act rashly and forfeit your hard-earned dollars. That growing realization ended up costing Jackson-Hewitt dearly.

Fear Strikes Back

Another bad sign for the near future of investing: The so-called fear gauge took a step up on Monday, rising to its highest level in two months. More formally known as the Chicago Board Options Exchange Volatility Index, it's a measure of how prices that investors pay for options on the S&P 500, which basically function as insurance against their stock positions.

The volatility index rises when investors are expecting the market to fall, and they want to hedge their bets. As recently as April 28, it was at its lowest point since 2007, indicating that investors expected very little market volatility on the horizon. But the measure jumped 12 percent last Friday, then another 15 percent on Monday.

One thing that's important to remember, though, is that this is much more an indicator of investor concern than it is an indicator of a market drop. If people were sure the market was going to decline over the next several weeks, we'd be seeing a massive sell-off.

Investor Sentiment Turns Shaky

Are investors losing confidence in this stock market? According to the latest survey from the American Association of Individual Investors, only 27 percent of investors currently describe themselves as bullish, meaning they expect stocks to rise over the next six months. That's the lowest that figure has been since August of 2010.

Meanwhile, 41 percent of investors describe themselves as bearish. That figure is the highest it's been since September 2010. The remaining 32 percent of investors are neutral.

What's even more striking than the changes that have taken place over the past year are the comparisons to the historical norm. Over the course of the history of this survey, 39 percent of the investors have called themselves bullish, or 12 percentage points above where we are now. Similarly, only 30 percent of investors have historically considered themselves bearish, or 11 percentage points below the current figure.

Jobs in New Jersey

While the unemployment rate in the country as a whole was inching upward in April, it turns out the news was a little better here in New Jersey. The state added 14,000 jobs in the month, which breaks down as roughly 18,500 New Jerseyans finding work while another 4,500 lost their jobs. It wasn't enough to budge the state's unemployment rate, which remains at 9.3 percent.

One of the best signs for the overall state of the economy was that the private sector was responsible for 13,400 of those jobs. And the jobs added were in many different areas of the economy: 4,200 in retail, 3,200 in manufacturing, 2,700 in leisure and hospitality, another 2,700 in education and health services.

You may have noticed that the private-sector number leaves 600 government jobs that were added. How does the state of New Jersey, in our current political landscape, add 600 government jobs? The answer is that local governments and schools hired 700 people, while the federal government hired another 100 in New Jersey. By contrast, the state government shed 200 jobs.

The Fed Sits Still

The minutes of the latest Federal Reserve Open Market Committee meeting, dating back to the end of April, were released yesterday. The meeting focused on the strategy surrounding the Fed's portfolio of $1.5 trillion in Treasury bills, which are in addition to its $900 billion worth of mortgage-backed securities. The Fed's plan of buying up Treasurys, also known as quantitative easing or QE2, is scheduled to end in June, and the minutes of the meeting show that the Fed thinks it would take some extraordinary scenarios in order for there to be a third round of purchases.

But what about selling the portfolio the Fed has already accumulated? The consensus seems to be that they won't start disposing of their holdings until after they've begun raising interest rates. And that doesn't seem likely to happen any time soon: According to the minutes, "a few" of the members thought that raising the Fed funds rate "might" be warranted "later this year."

In other words, it's unlikely to happen until 2012. So after it concludes QE2 next month, the Fed is likely to spend the rest of the year sitting on its hands. Is that good news or bad news? That depends on whether you think this economy is still in need of outside intervention.

The Long-Term Housing Slump

The news from the housing sector continues to disappoint. The latest report, on new residential construction for April, showed that single family housing permits - generally considered the primary leading indicator for housing - dropped 1.8 percent from the previous month.

But the bigger picture looked even worse: Single-family housing permits have fallen 18.6 percent over the past year. And as you'll recall, the housing market wasn't exactly healthy a year ago. Since these permits reached their peak in September 2005, they have fallen off by a whopping 78.6 percent.

Single-family housing starts are, if anything, in an even worse position. They've dropped 30.4 percent from where they were in April 2010, and are off 78.4 percent from their peak in early 2006.

Hitting the Ceiling

Yesterday was the day that the U.S Treasury reached its debt ceiling, the much-debated limit for how much the nation can borrow. It's important to understand what the debt ceiling is not: It's not the point at which the government shuts down, or even runs out of money. What it means is that the Treasury Department is not legally allowed to borrow any more cash.

So what will Treasury do if it can't legally borrow money? The first step is this: There are many small, largely unnoticed things the Treasury invests in, such as issuing debt for state and local governments, that will help stave off its reaching the ceiling. Starting this week, they'll stop doing some of those things. Treasury officials estimate that such emergency measures will keep the department from exceeding its limits until early August.

One thing the Treasury department will be able to keep doing until then, oddly enough, is issuing its own debt in the form of T-bills. Why doesn't that add to our nation's debt? Because many of the Treasury auctions are simply rolling over debt that has expired, and doesn't add to the aggregate total of debt. So at least through August, you can expect to be able to invest in Treasury bills just as you always have.

Rumblings in the IPO Market

LinkedIn, the business-oriented social-networking platform, is expected to go public this week with the 22nd high-tech IPO of the year. In all of 2010, there were 42 tech IPOs, so we're ahead of that pace. Still, we're a long way from the highflying Internet IPO landscape of the late 1990s.

All told, 2011's tech IPOs have returned 11.4 percent so far. That's a decent number, but a far cry from the stocks that turned four or five somersaults their first day out in the high-tech boom. One of the most visible, Demand Media, has seen its stock drop by 28 percent since it held its IPO in January. Another, NeoPhotonics of San Jose, California, announced its IPO at $11 per share, and promptly dropped to the $9 range, where it's traded ever since.

Overall,though, we may be seeing a new upsurge of the IPO market. Through the end of April, the number of new offerings had just kept pace with 2010, but the number of companies filing to have their IPO reached 31 in April - the highest that figure has been in any month since before the recession, in August 2007.

More Mixed Signals for Inflation

The latest inflation figures, covering the month of April, bear out what we were saying earlier this week about these numbers: Even as the some of the most visible items we purchase are rising in cost, others are declining, which is tamping down the overall inflation rate. Energy costs were up 2.2 percent in April, and gasoline up 3.3 percent, and if you multiply those numbers by 12, you see a horrific annual inflation rate.

 

But overall, April’s official increase in the consumer price index was just 0.4 percent, which is down slightly from March’s 0.5 percent.  The bad news is that one of the balancing factors is a product that doesn’t even affect most of us: tobacco. The price of tobacco products fell by 0.4 percent for the month. 

 

The silver lining is that commodities prices have begun to slip. On the New York Mercantile Exchange, the price of crude oil has dropped by 13 percent already in the month of May. Let’s hope we see the effects of that at the pump before too long.

Retiring Later

Do you have a number in mind for the age at which you'd like to retire? Most of us do, but - as a recent study from Prudential shows - real life has a habit of getting in the way of those plans. Among the people surveyed who had planned to retire this year, 38 percent have changed their minds and decided to work longer. That breaks down as 16 percent who decided they wanted to keep working, and 22 percent who couldn't afford to stop working.

Among those people who had to keep working, the average age at which they'd hoped to retire was 62. Now, they expect to be on the job till an average age of 68. Forty percent of them now think they'll work to at least 70.

It's a bit disquieting that these numbers have gotten worse in the past few years. In 2010, it was just 15 percent of those planning to retire who had to stay on the job due to financial concerns.

Long-Term Housing Effects

For decades, people considered their homes as not only a place to live but as a key investment that was likely to return a great deal of value. But the crash of the real estate market was so thorough that it has more or less put an end to that thinking. 

Two economists writing for the Federal Reserve Bank of Philadelphia have recently worked to quantify this. Between 1975 and 2009, they found that the real rate of return for a home - according to the national average - has been a mere 1.3 percent a year. 

But, the economists point out, the numbers in real life aren't even that good. Calculating in the effects of depreciation, mortgage interest, income taxes and property taxes (which they figured at just 1.5 percent - clearly they don't live here in New Jersey), they found that the real rate of return on a typical house was actually below zero. They figure that a homeowner could have expected, over those 35 years, to lose 0.575 percent per year. 

What's the Real Inflation Rate?

There has been some debate lately over what the nation's true inflation rate ought to be. People have noticed some dissonance between rising prices for things they purchase every day and an official inflation rate that's still historically somewhat low at around 2.5 percent. Gasoline is the main culprit here, although staples like meat and milk have also been increasing in price. It's hard to believe inflation isn't a problem when you're shelling out extra a couple times a week, every time you fill up the gas tank or stop into the grocery.

In the latest issue of Newsweek, Niall Ferguson argued that the only reason the "official" inflation rate is so low is that the Bureau of Labor Statistics keeps revising the way it figures that rate. Ferguson claims that if inflation were still being calculated as it was in 1978, with the same proportion of consumer items, the true inflation rate would be around 10 percent.

But there's a good reason that the BLS has revised its formula: American spending habits have changed. Back in 1978, we spent 13.4 percent of our personal income on food; now, that number is down below 10 percent. It makes sense that the BLS would reduce the impact of food prices on the inflation number, and increase the impact of things like electronics - which we spend a lot more on today than we did in 1978. Of course, that doesn't make it any easier to take when you're paying $25 for a couple of steaks at the A&P.

Mixed Signals on Jobs

Friday brought one of the oddest jobs reports we've seen in a long time. The headline news was disappointing: The official unemployment rate rose from 8.8 percent to 9.0 percent. But the sub-headline news was very positive, with 254,000 jobs being added in April, including 268,000 new private-sector jobs. And even beneath that, there was further good news, as the number of jobs added in March was revised upward from 216,000 to 221,000.

So why did the unemployment rate go up? The Bureau of Labor Statistics actually derives its data from two different sources: They conduct a household survey to determine the unemployment rate, and a survey of employers to find out how many jobs have been added. The two numbers tend to track each other pretty closely, although throughout the recovery, the household survey has been showing a slightly rosier picture than the employer survey.

What happened in the last report is that the two numbers have merged. The employer report was strong, but the household report was static, and with the natural growth of the employment force, the unemployment rate rose. David Leonhardt of the New York Times has a nice graph and explanation here.

Return of an Internet High-Flyer

What's been the hottest stock in the S&P 500 over the past two years? It's one more often thought of as a high-flying relic of the late-90s Internet boom: Priceline.com. Priceline was at 105 on May 5, 2009, and it closed yesterday at 533. That's what Peter Lynch would call a five-bagger.

The most surprising thing about this is that a few years back, Priceline looked dead in the water, not much different from Internet casualties like Pets.com or EToys. Priceline's stock previously peaked in April 1999 at 990 a share. Then came the high-tech crash, and Priceline crashed about as hard as any of them, bottoming out at 6.36 a share in December 2000. That's a loss of 99 percent of its market cap within the space of 20 months.

Since then, Priceline has made a painstaking return to profitability, with canny acquisitions and a return to its core business of travel. And unlike in those wacky Internet-era days, the company is actually turning a profit now. If you had been smart enough to buy a hundred shares when the stock was at its bottom, your $636 investment would now be worth $53,397.

Relief at the Pump?

Maybe the one financial number people are watching most closely these days isn't the Dow Jones average or the return on Treasury bills or the unemployment rate: It's the cost of a gallon of gasoline. Here in New Jersey, the average price of a gallon of gas sits at $3.82, up 8 cents in the past week. It's up over a dollar from a year ago, when it was $2.75. Still, we're below the national average of $3.91 a gallon.

But we may be headed for some relief. On the New York Mercantile Exchange, futures contracts for gasoline delivery scheduled in November have come in more than 4 percent lower than those for June contracts. So some smart investors think gas will cost less at the wholesale level come this fall.

In addition, the Department of Energy's Energy Information Administration has forecast that the price of a gallon of gas will drop to an average of $3.85 nationally in the third quarter, and $3.73 in the fourth quarter. That's not a big drop from the current national average, but if it's true, it's certainly better than continuing increases.

Generation Gaps

The economic recovery is helping people replenish their retirement funds - but very, very slowly, according to a new study from Towers Watson. They surveyed 9,000 American workers and found that 55 percent of them strongly or somewhat agreed that the recent economic downturn has caused a significant decline in their pension or retirement savings. That may sound like a lot, butit's down from March 2009, when it was 60 percent.

It's younger people who have rebounded most quickly from the downturn. Some 32 percent of those aged 50 and over declared themselves as satisfied with their financial situation, up from 24 percent in 2009. By contrast, 42 percent of those 40 and under are satisfied with their lot.

That number was at 28 percent the last time the survey had been taken, in February 2009. So the gap between the number of satisfied younger people and the number of satisfied older folks, which was already tilted in favor of the younger generation, continues to grow wider.

End of an Era

We join everyone in taking a moment to reflect and even celebrate upon the news of the killing of Osama bin Laden over the weekend. In a sense this brings to an end a very difficult era for our nation, one that began on September 11, 2011, and has led us to suffer through two economic downturns, two or three wars, and a whole lot of human loss.

It's been nearly ten years since that sunny Tuesday morning. Here's what the financial world was like back then:

* The S&P 500 was sitting at 1092, but it promptly plunged down to 965. It's now up to 1363 - for an average gain of about 2.5 percent a year.

* Unemployment was at 5.0 percent, which is more or less the range it would stay in until the recession took hold at the end of 2008.

* Inflation was at 2.65 percent, and after some ups and downs, it's right back in that range today.

* In 2001, the federal government ran a surplus. These days, the federal deficit is running at around $1.6 trillion.

Anticipating the Unexpected

Common sense will tell you that if you plan ahead before making big decisions in your life, you're more likely to make the right decision. A new paper from two behavioral economists, working with Allianz Global Investors, tries to apply that thinking to investing decisions, pointing out how committing to a plan before you engage in it can help you make sure it's fulfilled.

For instance, the authors recommend that both individual investors and their financial advisors sign on to an agreement as to how they'll react when the market moves in different directions. They say that both parties should commit to buying more stocks if the market loses 25 percent of its value, and selling off overvalued stocks if the market rises by 25 percent. It's a little counterintuitive, but it's basically just a codification of the classic "buy low, sell high" strategy that too many investors lose sight of during market swings.

Would it work to actually commit to such a strategy? It's hard to say, but there's certainly a lot of value to talking with your advisor about what you would do if the market takes a sudden lurch in one direction or another, long before it actually happens. If you'd like to talk about what your strategy would be in such a situation, feel free to drop me a line or give me a call.