September 2010

September 24, 2010 02:15 p.m.
Approaching the Precipice Again

The housing data over the last week was very bad. Here’s one of many examples. There is no demand for homes. The government support for the market is withdrawn, and it did not put a floor under prices and lead to the higher demand for homes. Instead, sales and demand are declining now that the support is gone. That means prices will decline. In addition, the number of homes in the default pipeline is rising and constitutes a substantial shadow inventory. There are far more houses on the market and about to come on the market than there are buyers. These forces will push down home prices. The result is household wealth is falling, more people are underwater in their mortgages, and we’re getting close to where we were in 2008.

There’s been good news in the stock market. Stocks are likely to close today with the best September in 70 years. But I don’t see that as the beginning of a new rally or the end of the trading range we’ve been in for a while. The September rally appears to be primarily a momentum-based rally. Stocks were short-term oversold after the very weak August, so short-term investors bought. Looking at the broader picture, I see low trading volume, weak breadth, and lagging financial stocks. Unemployment isn’t budging, and companies still are hoarding cash. I’m still recommending our cautious posture on the investment markets.

Why do people retire? More importantly, why don’t the wealthy retire? A new survey reveals most of the wealthy don’t plan to ever retire. One reason is the wealthy tend to be entrepreneurs. They may sell or retire from a particular company or job, but they move on to something else. They may work less, but they don’t stop. Working and creating define them, and keep them healthy and active. For them, at least, it’s not natural to stop being active.

September 24, 2010 02:15 p.m.
Topping the Trading Range

The next week could be an important one for stock investors. The stock indexes have been stuck in trading ranges for about a year, and a long-term trading range going back to the late 1990s highs. Now the S&P 500 is near the top of the trading range established in late spring. Here’s a snapshot of the trading range for the Dow. If stocks push through this level, they likely will rise further before hitting the next key trading point.

Stock investors are excited because the Fed is indicating it is likely to begin a new round of quantitative easing, the action that ignited the stock market boom of March 2009. What they may not be factoring in is that it will take a lot more QE this time to get an effect anywhere close to that of the first QE.

China’s currency policies don’t receive all the attention they should, and the attention it does receive often is misguided. Here’s a good review of how China controls its currency and how that affects other countries. China’s actions were behind the “conundrum” Alan Greenspan identified in the first decade of the 2000s, when the Fed raised short-term interest rates but long-term rates stayed stable. Take a look at this quick review to have a good handle on the subject. China’s problem is that it is trying to make its products cheap to the U.S. and Europe without importing inflation from the U.S.

Government officials frequently learn the wrong lessons from events, especially economic and financial events. The bankruptcy of Lehman Brothers is no different. The financial reform law and other actions were justified by a need to prevent future crises, but they don’t address the fundamental problems. This article by an economist who studied a lot of financial crises. He believes the Fed misinterpreted a solvency crisis as a liquidity crisis and made other mistakes we’ve discussed in the past.

Michael Lewis is an amusing and insightful financial writer. In this article he takes a personal look at the Greece debt crisis by traveling to Greece. It’s a good look at the crisis and, unlike many discussions of it, doesn’t overlook the effect joining the EU and benefiting from Germany’s fiscal discipline led to Greece’s overborrowing. It doesn’t mention that one reason interest rates were so low is Germany was scared about a liquidity crisis after the tech stock meltdown and had the central bank increase the money supply.

September 15, 2010 11:45 a.m.
Two Years After Lehman Brothers’ Demise

The headline is a little inaccurate, because Lehman Brothers filed for bankruptcy, and what is left of the company still is being wound down. One of this week’s report is the accountants and others who are liquidating the company have earned about $1 billion in fees so far.

Longtime readers know I believe the bankruptcy of Lehman Brothers was a major turning point in the markets. It disrupted all asset markets to an extent few believed possible. Investors, company executives, and consumers still bear the scars from that event, and it affects the economy and markets. The biggest scar, I think, is the knowledge of how little government policies know about the economy and markets. That makes future policy mistakes very likely.

The real mistake was not failing to bail out Lehman. The first mistake was helping with Bear Stearns. This misled investors and business managers. Then, allowing Lehman to fail in such a disorganized manner was the second mistake. The third and continuing mistake is to protect creditors of Bear Stearns, AIG, Fannie Mae, Freddie Mac, and others. There was a lot of media attention on the second anniversary of the Lehman Brothers bankruptcy. The best I looked at was by the Financial Times.

You might be aware there’s a new chief at Medicare and Medicaid, and he was snuck in with a presidential recess appointment instead of being approved by the Senate. He’s made his first major address, promising to cut costs in Medicare. He’s trying to calm critics by stating cost cuts will focus on reducing medical errors and creating efficiencies. Yet, health care reform includes cuts in Medicare Advantage and reimbursements to hospitals.

Byron Wein is a Wall Street celebrity, because he is a respected analyst. Each summer he holds private lunches and dinners with wealthy individuals to learn their views of the economy and markets and their intentions regarding their portfolios. This year he apparently found them to be particularly pessimistic. They agreed with us that the country probably is in a long-term period of slow growth.

Should you use a web site or software to write a will, avoiding an attorney’s fees. I’ve always been skeptical that the average person could do this without creating a problem. I’ve recommended using the resources to write an estate plan, but have an experienced attorney review it. A New York Times reporter did just that. Take a look at the results.

Senior IRA owners need to pay more attention to their required minimum distribution obligations for IRAs and other qualified retirement plans. An IRS study found a high rate of noncompliance with the obligations. So the agency is planning a crackdown. (A membership might be required to view the article.)

September 10, 2010 03:00 p.m.
Roundup on the Economy; How to compare annuities

The economy is taking center stage these days. There were some interesting, thoughtful pieces published about the economy and economic policy recently. David Rosenberg of Gluskin Sheff (formerly of Merrill Lynch) believes we entered a depression in 2008 and still are in it. In this piece he explains why he believes that and insists too many analysts are in denial.

Kenneth Rogoff co-authored a book I recommended in the past about the history of financial crises and their effects. His research indicates it takes at least 10 years to recover from a severe financial crisis. In this article he criticizes some of the suggestions being offered to turn around the economy and concludes “Americans will have to be patient for many years.”

A little bit more positive piece from John Makin of the American Enterprise Institute lists the policy moves we need to keep the economy from getting worse. Most of you probably haven’t heard of Makin, but he’s been very much on top and ahead of the turns in the economy the last few years. He believes the Fed needs to avoid deflation, and Congress needs to reform the tax code.

For many years I told readers to compare immediate annuities before purchasing one. Even the insurers with top ratings for safety have differences in payouts by as much as 20%. I recommended visiting sites such as www.immediateannuities.com. This week Vanguard offered its own annuity comparison service. Its intent is Vanguard IRA owners who want steady income will compare payouts using the web site and purchase one of the annuities through their Vanguard annuities. I’d still check with immediate annuities as well, because there likely are insurers that aren’t covered by both services.

Let’s look at a couple of ways to save money. Auto insurance premiums vary not only by your driving record but also by the type of car insured. This article reviews how some vehicle choices affect insurance premiums.

Your credit score affects the interest rates you pay on all your debts. Yet, there’s a lot of misinformation about the actions that affect your score. You could be taking  steps that hurt your score or avoiding simple actions that could improve your score. Read the details about credit scores here.

September 2, 2010 03:45 p.m.
Reports from the Fed Conference

August was a dismal month for stocks, the worst August in some time. Despite the steep losses in stock indexes, all of our model portfolios recorded solid gains for the month. We’ll have the details in the October issue of Retirement Watch. We’ve shown for some time that investors can earn steady, solid returns without owning traditional stock-based portfolios. The key, as we’ve stated for some time, is to have true diversification and not the nominal diversification of the standard portfolios of today. You can earn positive returns and avoid the volatility of the stock indexes without hunkering down in low-paying money market funds and other safe investments.

The biggest news of the last week came from the Kansas City Federal Reserve’s annual congregation in Jackson Hole, Wyoming. Here are some of the presentations that struck me as worth your time:

Central banks should pay attention to rising asset prices, such as those of stocks. Excess monetary creation can boost asset prices without triggering higher consumer price inflation. Central bankers need to be sure they are not distorting asset prices as well as keeping an eye on consumer price inflation.

Slow economic growth and high unemployment usually follow a financial crisis. It takes some years for the economy to work through the effects of a financial crisis, such as the one the U.S. experienced in 2007 and 2008. GDP growth and housing prices are significantly lower for the 10 years following most crises.

You can read details at the Wall Street Journal‘s Real Time Economic blog’s entries for August 27. They were here when I posted this, but the address is likely to change over time.

Before the conference the big news was a paper by James Bullard, head of the Federal Reserve Bank of St. Louis, arguing the U.S. could be on the verge of a Japanese-style long-term deflation. He argues that ultra-low interest rates make a long-term deflation more likely and that a quantitative easing program such as the one the Fed recently ended is the best way to avoid that outcome.