Inflation Expectations for Beginners

Inflation Expectations for Beginners

James Kwak Apr 9, 2009
For a complete list of Beginners articles, see Financial Crisis for Beginners.

Only a few years ago, the accepted remedy for a recession was for the Federal Reserve to lower interest rates - namely, the Federal funds rate. Now, however, the economy has been stuck in recession for over fifteen months and the Federal funds rate has spent the last several months at zero. (The Fed funds rate cannot ordinarily be negative, because one bank won’t lend $100 to another bank and accept less than $100 in return; it always has the option of just holding onto its $100.) As a result, the Fed has resorted to other policy tools, most notably large-scale purchases of agency and Treasury securities, funded by creating money. (Here’s James Hamilton’s analysis.)

As the Fed’s monetary policy plays a more prominent role in the response to the economic crisis, there will be more talk of inflation or, more accurately, inflation expectations. While inflation is what affects the purchasing power of the money in your wallet, inflation expectations are what affect people’s behavior in ways that have a long-term economic impact. Take the case of wage negotiations, for example: a union that believes inflation will average 5% over the life of a contract will demand higher wage increases than a union that believes inflation will average only 1%. Once those higher wages are built into the contract, the employer is forced to raise prices in order to cover those wage increases, and inflation begins to ripple through the economy.

One of the major objectives of modern monetary policy is to control inflation expectations, because controlling inflation expectations is the first step to controlling inflation. If there is a short-term burst of inflation - as we had a year ago, if you look at headline inflation numbers that include the prices of food and energy - the macroeconomic consequences can be limited if people believe that the Fed can and will bring inflation under control.

Unfortunately, it is impossible to know exactly what people’s inflation expectations are; in fact, it may not even be a sensible question, since different people have different understandings of what inflation is. However, there are three main approaches to estimating inflation expectations.

1. Inflation-indexed government bonds. (If you need a refresher on how a bond works, read the first part of this article.)

A traditional bond is a stream of payments that is fixed in nominal terms: for example, $100 in 10 years, and 6% interest, paid semi-annually ($3 every 6 months). Such a bond is not inflation-indexed; if inflation goes up, the purchasing power of that $100 goes down, and it’s too bad for the bondholder.

An inflation-indexed bond, by contrast, pays an amount that is indexed to some measure of inflation. In the U.S., where these bonds are called Treasury Inflation Protected Securities (TIPS), we use the Consumer Price Index. A TIPS bond may have a $100 face value and pay a 2% interest rate. However, every 6 months, that $100 face value is adjusted to reflect the change in the CPI, and the interest payment is calculated as a percentage of the adjusted value of the bond. Then, after 10 years, the bondholder gets back not $100, but $100 times the ratio between the CPI at the end of the period and the CPI at the beginning of the period. This way the bondholder is guaranteed a 2% real return (assuming he paid $100 for the bond), no matter what the rate of inflation is in the interim.

The implied inflation expectation, then, is the difference between the yield on an ordinary bond and the yield on an inflation-indexed bond with the same maturity. If the 5-year Treasury has a yield of 4% and the 5-year TIPS has a yield of 2%, then inflation expectations for the next five years are (about) 2% per year. The reasoning is that in order to buy the regular bond as opposed to the inflation-indexed bond, an investor has to be paid a higher yield to compensate him for the level of inflation that he expects.

Actually, in addition to expected inflation, the Treasury investor also has to be paid an inflation risk premium because, all things being equal, it is better not to have inflation risk than to have it. So the implied inflation expectation is actually slightly less than the spread between the regular and the inflation-indexed bonds. If you didn’t follow that, don’t worry, just remember that, roughly speaking, Treasury yield = TIPS yield + expected inflation.

2. Inflation swaps.

These are a type of derivative contract, where the payments under the contract depend on the value of an inflation index, such as the CPI. The swap has a nominal value of, say, $100, but $100 never changes hands. Instead, at the end of some period of time, party A pays party B a fixed rate of interest on $100 - say 2.5% per year. At the end of the period, B pays A the cumulative percentage change in the inflation index over the period. Assuming A has $100 in his pocket, he has now hedged the inflation risk on that $100, because no matter what happens, at the end of the period he will get an amount that compensates him for the impact of inflation on his $100. The price of this hedge is $2.50 per year. (Because these are over-the-counter contracts, there many variations on this, including swaps with periodic coupon payments.)

For the same reasons described above, the implied inflation expectation is roughly 2.5% per year: party B thinks inflation will be less than 2.5% per year, and therefore is willing to take 2.5% and pay the amount of inflation; party A thinks inflation will be more than 2.5% per year, and therefore is willing to pay 2.5% per year to get the amount of inflation back. So the market clears at 2.5%. (Actually, for the exact same reasons as with bonds - party B has to be paid an inflation risk premium for absorbing the risk in this trade - the inflation expectation is slightly less than 2.5% per year. There are also some complications having to do with the lag in the publication of inflation indices, but let’s ignore that for now.)

One curiosity is that the inflation-indexed bond method and the inflation swap method can produce different estimates. Theoretically this should not happen, because if two products that will have the same price in the long term (since they are based on the same index) have different prices today, there should be an arbitrage opportunity. Why this happens in practice is discussed on pp. 5-6 of this Bank of England paper. (Thanks to Bond Girl for pointing out the paper.)

3. Surveys.

You can also just ask people what they think inflation will be. Economists ordinarily prefer markets, under the principle that when people are paying money they are signaling what they really believe. But if you think there are sufficient problems with the markets you may want to go with surveys. Tim Duy has a post with a number of charts, including one of an inflation expectations survey.

So what do things look like today?

For more on measuring inflation expectations, there is a short primer from the San Francisco Fed, as well as the Bank of England paper mentioned above.

http://www.rgemonitor.com/us-monitor/256336/inflation_expectations_for_beginners

Pensions crisis means we will all be retiring later

Pensions crisis means we will all be retiring later
The economic crisis will force people to work longer.

By Hugo Dixon, breakingviews.comLast Updated: 12:29PM BST 08 Apr 2009

Higher fiscal deficits will make generous state pensions even more unaffordable, while the fall in asset prices is hammering private pension plans. There are three ways to cope: higher taxes, poorer old people and delayed retirement. All of these will be tried. But the last is by far the best.

Even before the crisis hit, the so-called demographic time-bomb was a worry for most rich countries and some poor ones. Thanks to better health care and a sharp drop in the average number of children per family, more old people will need to be supported by fewer workers.

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In many countries, the crunch point is coming in the next few years, as the last big bulge of babies, born after the Second World War, reaches retirement age. Statisticians measure the "dependency ratio" - the number of people over 65 as a percentage of those aged 15-64. By 2030, this ratio will have increased to 33 in the US, 40 in the UK and 65 in Japan - from 19, 25 and 35 respectively in 2010, according to the United Nations.

Traditionally, families took care of their own. But in rich countries, the government is now the main pension provider. The greying of the population was always going to squeeze government budgets. But the crisis has made a tough situation even worse, as Barack Obama, Gordon Brown and their peers have engaged in fiscal stimulation in an attempt to prevent the recession turning into a slump. The International Monetary Fund expects government debt in advanced G20 countries to jump from 79pc of GDP in 2007 to 104pc in 2014. That doesn't leave much room for pension-related borrowing.

In the UK and a few other countries, private pension plans are an important source of retirement income. Pension experts have long hoped they could step in when governments ran out of funds. But the crisis has also damaged them.

Private pensions come in two types. First, there are those provided by some companies which guarantee retired people a fixed percentage of their final salaries. The companies set up pension funds, portfolios which are supposed to make sure the retirees get what they deserve. The employers are on the hook to pay the pensioners, whatever happens to the funds' value.

The market tumble means that more companies are going to be called on to top up their pension funds. These "defined benefit" schemes have been on the retreat over the past 20 years, as companies have viewed them increasingly as toxic liabilities. The crisis could prove their final death-knell.

Second, there are pensions which depend entirely on a pot of funds accumulated and invested over the years - either by the individual or with some help from the employer. Thanks to the crisis, those pots have shrunk, bringing down the size of people's future pensions.

Pension funding is a problem. But it is important not to forget the good news: people are living longer and more healthily. What's more, if they are going to live to the age of 85, do they really want to retire at the age of 65 and slump down in front of the television getting depressed and lonely for 20 years?

Far better - for them and for their children - to work a few more years, keep their minds engaged and retire with a bigger pension.

For more agenda-setting financial insight, visit www.breakingviews.com

http://www.telegraph.co.uk/finance/breakingviewscom/5124777/Pensions-crisis-means-we-will-all-be-retiring-later.html

Business failures could be avoided

Business failures could be avoided

Hundreds of small businesses failures in the first quarter could have been avoided if owners had not ignored early warning signs and used a '33 week window' to save their venture according to research.

By Roland Gribben Last Updated: 9:37PM BST 06 Apr 2009


An estimated 880 small companies, accounting for one in six of insolvencies in the period, closed their doors because they had not taken remedial action early enough or failed to carry out any forecasting, the report adds.

Business adviser Tenon Recovery, which used its own client base for the research, estimates that a company has 33 weeks to discover whether turnaround initiatives could work after determining that future prospects are bleak. (i.e. half a year)

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The remedies include

1. establishing key business indicators,
2. forecasting cash needs on a weekly basis,
3. outsourcing specialist jobs like bookkeeping,
4. reviewing and swapping suppliers, and
5. continuous spending reviews.

Carl Jackson, head of Tenon Recovery, said many enrepreneurs "have little or no experience of operating in a recession and... are not used to having to keep such a close eye on their business".


http://www.telegraph.co.uk/finance/yourbusiness/5116161/Business-failures-could-be-avoided.html

Fund management: A game of luck?

Fund management: A game of luck?

A large part of the active versus passive debate has always revolved around whether an active manager's returns are through luck or judgement.

Last Updated: 8:14AM BST 08 Apr 2009

The debate was reignited at the end of last year when Inalytics, a specialist firm that helps pension funds to select and monitor equity managers, published research which showed managers typically get only half of their decisions correct.

The research, based on an examination of 215 long-only funds worth a combined £99 billion, found that the average manager's ability to identify winners and losers was no better than 50-50. Put simply, they would do no worse tossing a coin.

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The research looked at two measurements of fund manager skill: what it termed the hit rate and the win/loss ratio. The hit rate shows the number of correct decisions as a percentage of the total number of decisions. The win/loss ratio is a comparison of the alpha generated from good decisions with the alpha lost from the poor decisions. To judge these, Inalytics daily analysed every purchase/sale, underweight and overweight made by the fund managers.

Rick di Mascio, the chief executive and founder of Inalytics, says: "The industry maxim suggests that six correct decisions out of 10 would constitute good performance. However, we did not find one manager who got six out of 10. The average was five out of 10 (49.6pc) and the really good managers only managed to get a 53pc hit rate, which was a surprise as we expected the best manager to be a lot higher."

To compensate for this, di Mascio says the average manager is able to generate good gains from "winners" to offset the losses from "losers". According to the research, the average win/loss ratio was 102pc, which means the alpha gained from good decisions was 2pc higher than that lost from the poor decisions.

"The good managers had a win/loss ratio of 120pc, with the best getting up to 130-140pc," says di Mascio. "This is where the skill comes in, running your winners and cutting out the losers. It's what differentiates the also-rans from the best. There is nowhere to hide with these numbers."

http://www.telegraph.co.uk/finance/personalfinance/investing/5093111/Fund-management-A-game-of-luck.html

Shock warning on US municipal bonds

Shock warning on US municipal bonds

The creditworthiness of the entire US local government system is at risk, credit ratings agency Moody's has warned, as the global recession continues to pinpoint its latest victims.

By James QuinnLast Updated: 7:30PM BST 08 Apr 2009

The unprecedented warning – the first time Moody's has made such a warning about the US local government system as a whole – was made in the light of the continued recession and the problems that it is causing for city and state governments.

Moody's said that it was assigning a negative outlook to the entire $2.6 trillion (£1.8 trillion) US municipal bond sector – operated by local town, city and state governments – because of the combined collapse in the financial and housing markets.

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Analyst Eric Hoffman said what could prove to be the worst recession since the Great Depression of the 1930s will pressure "many if not most local governments" over the next 12 to 18 months.

The warning is important because municipal bonds are one of the key ways local authorities raise medium and long-term finance in the US, and if investors sense that they might not be paid, bond issues are likely to go unsold.

Local governments have been hit by reduced tax intakes as more residents lose their jobs, and as more companies in their areas either close or have produced losses.

The state of California has so far been the poster boy for the problems in local government funding, with Governor Arnold Schwarzenegger faced with reducing a deficit expected to reach $42bn by 2010.

But smaller entities are also hurting, such as Jefferson County, Alabama, which has been threatening to default of some of its bond payments for a number of months.

Mr Hoffman said that those localities most at risk of a downgrade will be those heavily reliant on car manufacturing, property and financial services, as well as those who have been heavily reliant on property taxes or those have a high proportion of fixed costs.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5127023/Shock-warning-on-US-municipal-bonds.html

S&P: Record number of firms cut dividend in Q1

S&P: Record number of firms cut dividend in Q1

By Stephen Bernard, AP Business Writer

NEW YORK — Standard & Poor's said Tuesday that a record number of companies cut their dividend during the first quarter, while a record low announced plans to increase dividend payments.

It was the first time since S&P started tracking dividends in 1955 that dividend decreases outpaced dividend increases. The total dividend payments during the quarter declined by $77 billion, S&P said.

"Many companies were paying dividends on unrealistic earnings expectations," said Don Wordell, portfolio manager of the RidgeWorth Mid-Cap Value Equity fund. To be included in the fund Wordell manages, a company must pay a dividend.

"It's not surprising at all," that some companies would be cutting dividends, Wordell added. "The economic environment is very, very bad."

The ongoing credit crisis and recession have been the primary reasons given by many companies for cutting dividends in recent quarters. The financial services sector has been among the most active in cutting dividends, as it faces the worst credit crisis since the Great Depression.

Many banks slashed their dividends during the first quarter to preserve capital as loan losses continue to mount and profits decline. Capital One Financial, JPMorgan Chase, Wells Fargo, PNC Financial Services Group and U.S. Bancorp were among the financial firms that cut their dividends during the first quarter.

Wordell said many companies were too aggressive setting dividend policies in recent years and started out paying dividends that were not sustainable during down economic cycles. Investors looking for dividend stocks need to focus on companies that have been paying dividends for 25, 40 or even 50 years because that demonstrates a company can manage its cash flow and handle paying its dividend regardless of the economic situation, he said.

The bulk of dividend cuts might now be completed, Howard Silverblatt, S&P's senior index analyst, said in a statement. But, he noted that a second round of cuts could come again as companies review their 2010 budgets and expenses beginning in August and September.

Among 7,000 publicly owned companies that report dividend information to S&P, 367 slashed their payments during the first quarter, more than quadruple the amount that cut their dividend during the first quarter of 2008. A total of 83 firms cut their dividend payments during the first quarter last year.

Of the companies tracked by S&P, only 283 announced plans to increase dividends during the first quarter, a 53% drop from the 598 companies that announced dividend increases during the first quarter last year.

Since 1955, the average had been 15 increases for every one decrease. During the first quarter, there were about three dividend increases for every four decreases.

Copyright 2009 The Associated Press.

Investment primer charts path for beginners

Investment primer charts path for beginners

Get a Financial Life: Personal Finance in Your Twenties and Thirties, By Beth Kobliner, Fireside, $16.00, 336 pages

By Kerry Hannon, Special for USA TODAY

Sometimes the very best books are the simplest. And that's the beauty of Get a Financial Life: Personal Finance in your Twenties and Thirties. It offers the fundamental ABCs of how to manage your money.

Originally penned more than a decade ago by Beth Kobliner, a former staff writer for Money magazine and financial columnist for Glamour, the revised and updated new edition, is a model personal finance primer. Its return to the bookshelves couldn't come at a better time for a new crop of young people beset by today's financial meltdown.

The latest version delivers a dose of present day reality. For example: "It's easy these days to write off the idea of contributing to retirement savings accounts like 401 (k)s," Kobliner writes. "You've heard scary stories of people losing half their life savings in the chaos of the market. …You don't feel like you have any money to squirrel away. … You're off the hook, right? Wrong.

"401(k)s are the best savings opportunity you can possibly have — in this or any economy. And not taking advantage of them while you're young is a huge (and costly) mistake," she writes.

She goes on to discuss how 401(k)s are "supersmart savings accounts" that "offer terrific tax advantages that allow your money to grow exponentially fast."

Aside from the occasional au courant nod to collapsing investment portfolios, in general, Kobliner sticks pretty close to her original recipe of straightforwardly defining basic financial terms, such as mortgage, mutual fund and money market accounts.

After all, she's addressing an audience she presumes is clueless, or at the very least, one that has given little thought to these matters. That is until now, when they're holding a diploma and $25,000 in student loans and credit card debt, looking for a job in this tight economy, living on an entry-level salary or hoping to buy a first home.

Kobliner's a gentle guide, carefully walking her money neophytes through the nuts and bolts of personal finance — from health insurance, paying off debt, contributing to retirement plans to building an emergency cushion, investing in stock and bond funds, finding your credit score and improving it, buying a house or car. She even dabbles in income tax strategies.

There's no magic formula for taking control of your financial life here, but rather frank meat and potatoes money management moves that have proven the test of time.

To help readers evaluate whether their current saving and spending habits are "right on track, wildly off base, or somewhere in between," she lists a few tried and true financial rules:

•Your debt payments (not including your mortgage) should be less than 20% of your monthly take home pay.

•Spend no more than 30% of your monthly take-home pay on rent or mortgage payments. This might not be reasonable, if you live in a major city like New York or Miami, but in a small town or city, it works. No matter where you live, it's something to shoot for.

•Save at least 10% of your take-home pay each month. It's critical to think of your savings as a fixed monthly expense that's part of your budget, just like your car payments or rent.

One good way to start saving is with $50 a month in an automatic investment plan, she advises. Some no-load mutual funds will waive or lower their minimum initial investment requirement if you sign up for their plan. With these plans, you can have a fixed amount "siphoned off once or twice a month from your checking account and funneled into your mutual fund." You can set this up online with your initial investment.

"After that, you won't have to do much except sit back and watch the money accumulate," Kobliner writes. Fingers crossed.

If you serve or have served in the military or have a parent who did, she suggests USAA (www.usaa.com) as a good savings option. "It offers some low-cost actively managed bond and stock index funds, charging just 0.19%. It will also waive its usual $3,000 minimum if you sign up for its $20 per month automatic investment plan."

While Kobliner presents a sweeping course on personal finance, she's not fooled into thinking she has given her readers all there is to know. Tucked into the back of the book is a handy section, called Further Reading. It lists books she tells her friends to read which range in topic from investing to insurance to taxes and debt. She includes interesting blogs and message boards such as Get Rich Slowly (www.getrichslowly.org) and free online pamphlets and publications on subjects including choosing a credit card, how to build a better credit report and dispute errors — all available from the Bureau of Consumer Protection (www.ftc.org).

There are just a few key steps you need to dig out of debt, jumpstart saving, and plan for the future, Kobliner writes with assurance. "Once you nail these easy concepts, you'll be on your way — in good times or bad."

Kerry Hannon is a freelance writer based in Washington, D.C.

http://www.usatoday.com/money/books/reviews/2009-04-07-financiallife_N.htm

Leadership needed over continental toxins

April 7, 2009

Leadership needed over continental toxins

David Wighton: Business Editor's commentary

Everyone at last week's G20 meeting was pretty much agreed — detoxing the banks of their poisonous assets was a necessary condition for global economic recovery. Curious then that so little was said about the issue in the official communiqué.

The world leaders pointed to what had already been done in terms of recapitalising banks and dealing with their impaired assets. And they underlined their commitment to do whatever was required in the future to restore the normal flow of credit. But that was it.

Experience of previous banking crises suggests that what is required is a comprehensive and systematic approach to bank balance sheets. Yet the approach we have at the moment remains ad hoc and piecemeal.

In Britain great strides have been made both in recapitalising the banks and ring-fencing their toxic assets. The taxpayer has put £37 billion directly into RBS and Lloyds; Barclays has raised £7.3 billion from investors and is expected to bring in another £3 billion from the sale of iShares; and HSBC has just wrapped up a very successful £12.5 billion rights issue. In terms of toxic debt, RBS and Lloyds have taken out insurance with the Government covering potential losses on almost £600 billion of assets.

Even so, some analysts believe more will be needed. Yet Britain is much further down the road than many other countries. And meanwhile, the scale of the problem just keeps mounting.

Only in January the International Monetary Fund doubled its forecast of total losses on US credit assets to $2,200 billion (£1,490 billion). As a result, it estimated that US and European banks would need to raise $500 billion to prevent their balance sheets from deteriorating further.

Now I hear that the IMF's economists are preparing to increase that figure to $3,100 billion, with a further $900 billion for assets originated in Europe and Asia.

This escalation reflects the spreading of the downturn from US property-related securities to the real economy around the world. Banks exposed to the crisis in central and eastern Europe look particularly vulnerable.

In a joint report by Morgan Stanley and the consultants Oliver Wyman, the authors argue that continental European governments need to come up with a more comprehensive approach to bolstering their banks, many of which have perilously thin capital cushions.

Meanwhile in the US, Mike Mayo, a veteran banking analyst now at Calyon Securities, warns that the worst is yet to come. He says that government action on impaired assets could trigger the need for further large capital increases for US banks.

The problem is that ploughing more taxpayers' money into their undeserving banks is politically toxic. What politicians need is the cover provided by concerted global action. And they need it before the next G20 summit. Now that Mr Sarkozy and Ms Merkel have their crackdown on tax havens, perhaps they can show some leadership on more urgent problems.

http://business.timesonline.co.uk/tol/business/columnists/article6047880.ece

Recession: the penny finally drops...

April 7, 2009

Recession: the penny finally drops...

David Wighton: Business Editor's commentary

One of the great mysteries of the recession has been why consumer confidence has held up so well. To judge from the Asda survey we report today, the grim reality finally appears to have dawned. Half of those polled fear losing their jobs in the next six months while two thirds would take a pay cut or a reduction in the working week to protect theirs.

That represents a big shift from December, when only one third of those questioned said they expected their job security to get worse in the next three months.

One surprising result of the survey is that 21 per cent of those questioned said that they expected to receive a pay rise at least as good as last year's. Then again, maybe not so odd. This happens to be almost precisely the proportion of the workforce employed in the public sector.

http://business.timesonline.co.uk/tol/business/columnists/article6047897.ece

Toxic debts could reach $4 trillion, IMF to warn

April 7, 2009

Toxic debts could reach $4 trillion, IMF to warn

Gráinne Gilmore, Economics Correspondent

Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.

The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF's new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

Paul Ashworth, senior US economist at Capital Economics, said: “The first losses were asset writedowns based on sub-prime mortgages and associated instruments. But now, banks are selling ‘plain vanilla' losses from mortgages, commercial loans and credit cards. For this reason, the housing market will play a crucial part in how big the bad debt toll is over the next year or two.”

In its January report, the IMF said: “Degradation is also occurring in the loan books of banks, reflecting the weakening outlook for the economy. Going forward, banks will need even more capital as expected losses continue to mount.” At the same time, there is a clear shift in congressional attitudes in the United States about simply pumping money into the system, Mr Ashworth said. The British Government is also under pressure to repair its tattered finances. Injecting more money into the banks could further undermine its fiscal position.

The IMF's jump will come as little surprise to economists who have suggested that the bad debts will be much higher than anticipated. Nouriel Roubini, chairman of RGE Monitor, expects bad debts from US-originated assets to reach $3.6 billion by the middle of next year. This figure is expected to rise when bad debts from assets elsewhere are calculated, he said.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6047929.ece

Has the economy turned?

Has the economy turned?
One swallow does not make a summer. But we have now had a veritable flight of the passerine birds, writes Harry Wallop.

By Harry Wallop, Consumer Affairs Editor
Last Updated: 3:11PM BST 02 Apr 2009

After 18 months of relentlessly falling house prices, the most severe financial crisis since the 1930s and the start of what is shaping up to be a brutal recession, a few green shoots have poked their heads out of the ground.

A blip? Probably, but the figures come just a few days after the Bank of England said mortgage approvals had jumped during February.

Estate Agents have been saying for months that buyers have started to come back through their doors. It's just that they don't have any funding to buy a property.

Well, maybe it's the spring weather – or maybe it's the billions of pounds of taxpayer money pumped into the system finally filtering through to consumers – but mortgage companies have started to trim their rates.

There are now a number of deals for under 3 per cent. Okay, this is six times the Bank Rate, and you will still need a big deposit to get the loan, but money is available for many people who need it, and at far cheaper rates than six months ago.

To cap it all, the FTSE 100 has climbed back above 4,000 for the first time since February.

The problem is it is sometimes difficult to tell, at this time of year, whether the shoots are your first spring peas, or a new, virulent weed.

Decisions made by consumers last year are only now hitting businesses. Job losses will continue to mount, which in turn will lead to repossessions and lower house prices.

And the tens of thousands of jobs that have been announced every week this year – even if they stopped today – will continue to cause repercussions for a good 12 months to come.

Yes, the bad news has become less relentless, but the best that can really be hoped for is that we have hit the bottom. Not that things are improving.

http://www.telegraph.co.uk/comment/5094693/Has-the-economy-turned.html

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Earnings Concerns Push Shares Lower

Earnings Concerns Push Shares Lower

By JACK HEALY
Published: April 6, 2009

Wall Street took losses on Monday after four consecutive weeks of wins as traders hunkered down for a rough corporate earnings season.

Technology shares fell on reports that the computer giant I.B.M. had withdrawn its $7 billion offer to buy Sun Microsystems, which makes computer software and servers. Shares of I.B.M. fell 0.7 percent to $101.56, while Sun fell 22.5 percent to $6.58 a share as investors raised questions about the next step for the company.

The Dow Jones industrial average finished down 41.74 points, or 0.5 percent, at 7,975.85. The wider Standard & Poor’s 500-stock index fell 0.8 percent, or 7.02 points, to 835.48. The Nasdaq declined 15.16 points, or 0.9 percent, to 1,606.71.

The losses ate into last week’s 3 percent gains in the Dow and the S.& P. 500.

Financial companies fell about 3 percent, according to Standard & Poor’s financials index after a report from the banking analyst Mike Mayo, who recently joined Calyon Securities after leaving Deutsche Bank. Mr. Mayo, who is known for his bearish but independent analysis, predicted that banking loan losses this year compared with their total loans would “increase to levels that exceed the Great Depression.”

He rated 11 major and regional banks as sell or underperform. Shares of Bank of America, JPMorgan Chase and Citigroup fell slightly.

Defense companies including Lockheed Martin, Northrop Grumman and Raytheon rose as investors speculated that they would fare well under an overhauled Pentagon budget. On Monday, the Defense secretary, Robert M. Gates, outlined broad proposed changes in how the military spends.

With the major indexes up more than 20 percent since their March lows, analysts say earnings season could pose an important test of investor confidence in the stock market.

On Tuesday, the aluminum maker Alcoa will report its quarterly earnings after the market closes, reprising its role as the first major company to do so.

“What investors want to hear from executives — and what they may not get — is that things improved through the quarter,” said Jeffrey N. Kleintop, chief market strategist at LPL Financial. “The worry is we may not get that tone, that they might continue to take down guidance in the coming quarters.”

The price-to-earnings ratio on the S.& P. 500 is about 12 to 13, making stocks look cheap compared with the days when stocks sold for 20 times earnings, or more. But some analysts argue that while stock prices may look cheap, expectations of profits and revenues do not reflect the true scope of the global economic downturn.

Stock markets were lower in Europe. The FTSE 100 in London, the DAX in Frankfurt and the CAC 40 in France were all down just less than 1 percent.

The Treasury’s 10-year note fell 10/32, to 98 17/32. The yield, which moves in the opposite direction from the price, rose to 2.92 percent, from 2.89 percent late Friday.

Following are the results of Monday’s Treasury auction of three- and six-month bills:

http://www.nytimes.com/2009/04/07/business/07markets.html?_r=1&ref=business

Buffett's Biggest Mistake (Swing the Bat)

Buffett's Biggest Mistake
By Rich Greifner April 6, 2009 Comments (5)


It doesn't happen often, but it does happen. Once in a blue moon, even the great Warren Buffett makes a mistake.

In his latest annual letter to his Berkshire Hathaway (NYSE: BRK-A) shareholders, Buffett lamented "some dumb things" he did in 2008. He apologized for his ill-timed investment in ConocoPhillips (NYSE: COP), as well as a smaller stake in two Irish banks, which he dubbed "unforced errors."

And those were far from the first flubs Buffett has made during his illustrious investing career. His purchases of shares in Pier One and US Airways were poor investments, and he compounded his ill-fated acquisition of Dexter Shoes by using Berkshire shares instead of cash as currency. In fact, Berkshire itself was a poor investment -- Buffett greatly underestimated the capital requirements and competitive pressures endemic to the textile industry.

The greatest mistake of all

But when prompted for his greatest investing miss in an interview last year, Buffett didn't mention any of those gaffes. In fact, Buffett's biggest mistake wasn't a bad investment at all -- it was a good investment that could have been great.

"There have been a few things where I've started to buy them and then they've moved up," Buffett said. But instead of adding to his position in these great businesses, Buffett "stopped at a tiny fraction of where we should have gone."

Buffett specifically cited his failure to purchase additional shares of Fannie Mae in the early '80s and Wal-Mart (NYSE: WMT) in the mid '90s. "Both of those deals would have made us as much as $10 billion, and I managed to absolutely minimize the profits," he said.

The Oracle was similarly wistful about Costco (Nasdaq: COST): "We own a little at Berkshire, but we should have owned a lot," Buffett lamented. He blamed his failure to buy more shares on "temporary insanity."

Don't be insane -- swing the bat!

Buffett often likens investing to a game of baseball, where every potential investment is a new pitch, and there are no called strikes. Patient investors can sit back and wait for the perfect pitch, ready to deposit that 2-0 fastball into the centerfield bleachers. But before you step in the batter's box, you must first identify what your perfect pitch looks like.

Buffett likes to swing at easily understandable businesses "whose earnings are virtually certain to be materially higher five, ten, and twenty years from now." After taking too shallow a cut on companies like Costco, he learned that "over time, you will find only a few companies that meet these standards -- so when you see one that qualifies, you should buy a meaningful amount of stock."

Finding your perfect pitch With the stocks of many great companies trading at significant discounts to intrinsic value, experienced gurus like Buffett are swinging for the fences right now. But many individual investors are standing with their bat on their shoulder, letting these perfect pitches float on by. Look at these three great opportunities available today:

Company
(Average P/E Ratio, Last 5 Years )
(Current P/E Ratio )

PepsiCo (NYSE: PEP)
24.2
16.3
Target (NYSE: TGT)
17.7
12.3
Yum! Brands (NYSE: YUM)
23.1
15.2
Data from Capital IQ, a division of Standard & Poor's.

Each of these companies is an easily understandable business whose strong brands mean their earnings are very likely to be materially higher five, 10, and 20 years from now. But while their future growth prospects remain strong, their share prices are the cheapest they've been in years. In such a volatile market, there's a chance these companies could fall farther, but I believe they're much closer to the bottom than the top.

Ready to swing?

Rich Greifner is convinced that this is the year for his beloved Chicago Cubs. Rich owns a Mark Grace rookie card, but none of the stocks mentioned in this article. The Motley Fool owns shares of Berkshire Hathaway. Berkshire, Costco are selections of both Motley Fool Stock Advisor and Inside Value. Wal-Mart is an Inside Value recommendation. PepsiCo is an Income Investor pick.
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http://www.fool.com/investing/general/2009/04/06/buffetts-biggest-mistake.aspx

Did You Miss the Best Week to Buy Stocks?

Did You Miss the Best Week to Buy Stocks?
By Todd Wenning March 30, 2009 Comments (20)

Ten years from now, we very well may look back and say that the first week of March 2009 was the best week to buy stocks in more than a generation.

That Monday, the U.S. government announced another bailout of AIG, and the Dow Jones Industrial Average fell 4% to 6,736 -- below 7,000 for the first time since 1997 and marking a full 50% drop from the October 2007 highs.

Breaking that psychological barrier of Dow 7,000 was apparently too much for many investors to bear.

Over $22 billion was pulled out of equity-based mutual funds over the following week, and if you flipped through some of the news stories, they were rife with capitulation from analysts. My favorite lines included:

"It's like an unending nightmare."
"Why should I step out in front of a train?"
"This is the time for hysteria."

Even the slightest contrarian investor had to perk up at such blatant bottom talk. If there was ever a time to buy when there was blood in the streets, that was the week to do it.

Pigs get slaughtered
Fast forward just three weeks and the Dow is up 17% off its March 6 lows of 6,443, and over 80% of S&P 500 members are up more than 10% over the same period. Among the biggest winners are:

Company
Price % Change (3/6/2009 to Present)

NYSE Euronext (NYSE: NYX)
26%
Corning (NYSE: GLW)
34%
Schwab (Nasdaq: SCHW)
33%
Caterpillar (NYSE: CAT)
31%
Adobe Systems (Nasdaq: ADBE)
27%
CME Group (NYSE: CME)
34%
Source: Capital IQ, a division of Standard and Poor's.

Since that first week in March, we've seen a number of positive signs from the market, including tech bellwether Oracle (Nasdaq: ORCL) beating analyst estimates and announcing its first dividend. There have also been numerous economic reports that seem to indicate an end to the free fall of prior months.

But let's not get too excited
Yes, this is only a four week period, and yes, we could certainly see more dips in the market in coming months. But this simple example is a stark reminder to remain rational and patient while those around us lose their heads.

With a little fortitude and a little cash, you can take advantage of tremendous long-term buying opportunities like we saw the first week in March. If you missed the chance to buy during the first week of March, don't panic. If this market's taught us anything, it's that we'll have another shot if we just remain calm.

To get started, begin compiling a list of stocks you'd be happy to own for the next five years and beyond. Ideally, these will be companies …

Built to last 100 years or more.
Dominating growing industries.
Helmed by committed and proven management teams.
Governed by the highest corporate values.
Consistently increasing shareholder value.


Todd Wenning shorts herd behavior, but has no position in any stock mentioned. NYSE Euronext is a Motley Fool Rule Breakers recommendation. Charles Schwab and Costco are Stock Advisor recommendations. Costco is also an Inside Value pick. The Fool's disclosure policy can get you where you need to go.

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http://www.fool.com/investing/general/2009/03/30/did-you-miss-the-best-week-to-buy-stocks.aspx

Skills to Learn, to Restart Earnings

Skills to Learn, to Restart Earnings
Tyrone Turner for The New York Times
ANOTHER DAY Faye Milbourne, a former Verizon worker who went back to school to become a teacher, waits for students to arrive at an elementary school in Virginia Beach. More Photos >

By JOHN LELAND
Published: April 1, 2009

JUSTIN WILLIAMS worked as an engineer at Honeywell International for 31 years, and when he retired last April, he knew he could not afford to stop working. His home in suburban Maryland, on which he had spent his 401(k) savings, was losing value, and his pension did not replace enough of his former income.

Back in School Again Mr. Williams, 65, took stock. He did not want another job in engineering. In past years he had volunteered in public schools, helping young children learn reading and math.

Then he did what increasing numbers of older Americans are doing, especially as the economy sours — he enrolled in community college.

“I realized there was a need for educators,” in large part because so many teachers are retiring, he said of his choice, an accelerated program in early education at Prince George’s Community College in Largo, Md. “I saw things I could do as well or better.”

The impact of the economic and stock market declines on retirees and workers about to retire has been especially pronounced. While younger workers have time to recover some of their losses, many older workers and retirees have to follow Mr. Williams’s example and remake themselves for the job market.

In many cases, they find that their skills, experience and contacts are not enough. So they send themselves off to community colleges or training programs, where they are often surrounded by people far younger, and they have no realistic expectation that whatever new job they might find will produce income comparable to their previous one. In all, it’s daunting.

“Major professionals we’re seeing are going back to work for lower salaries” and often downplaying their accomplishments on their résumés, said Margo Brewer, senior educational director at National Able Network, a nonprofit counseling, placement and training service based in Chicago that receives public and private financing. “The upper-income jobs just are not as available as they once were. And a lot of companies are hesitant to hire full-time staff,” so they are instead creating temporary jobs.

Many community colleges have started to cater to older people, offering incentives that include free tax preparation and valet parking, said Susan Porter Robinson, vice president of lifelong learning at the American Council on Education. Often employers in an area work with community colleges to develop curriculums geared toward actual job needs, sometimes providing scholarships or promises of jobs after graduation.

Coursework tends to be focused and practical, and tuition well below that of universities, Ms. Robinson said.

“Older adults tell us they’re interested in certificate training that will be quick,” she said. “They don’t have two years. What they may be missing are what I call skill-ettes. Right now there’s pressing needs for people in fields like teaching and the health sciences, so that’s where a lot of the classes are.”

The hot fields for older workers are the same as those for younger ones: health care, alternative energy and education, and the economic stimulus program is expected to create jobs with the federal government, said Charlene M. Dukes, president of Prince George’s Community College.

Both employers and schools are recognizing older workers as an untapped resource, said Laura A. Robbins, director of the program on aging in the United States for the Atlantic Philanthropies, which provides grant money to community colleges and other programs for retraining workers over age 50. “You can get community colleges, universities, volunteer networks and employment agencies all in a unified network like a wheel with spokes. But I can’t tell you that there’s a silver bullet right now.”

Like others interviewed for this article, Dr. Dukes said available job opportunities were clustered around the national median household income of $51,000. The school discourages six-figure expectations, she said.

“There’s not currently a lot of pathways to help older adults go to the next thing,” Ms. Robbins said. “It’s not just a short-term emergency problem.”

For Mr. Williams, the path began at a friend’s birthday party, where he learned that the community college provided nearly free tuition to students over age 60 and that it had a one-year program leading to an associate’s degree in early education.

Now back in school, Mr. Williams and his wife, Cookie, are providing day care in their home, which they hope to expand to a day care center and eventually a private school.

“I enjoy going back to school more than I did in the early days,” he said. “It’s a pleasure, though I’m usually the oldest person in the class.”

He said he was happy to be active and building a business — one not at all related to his previous professional experience. “I never saw retirement as laying back on a beach,” he said. “It can’t replace the money I made at Honeywell, but my lifestyle is such that I don’t need to replace it all.”

For job-seekers of any age, the market is tight but not impossible, said Ms. Brewer of National Able Network. “It appears there are jobs everywhere but in limited numbers,” she said. “It’s a matter of matching skills.”

One retiree who came through Ms. Brewer’s program is Rae Lynn Schneider, 61, of Chicago.

Ms. Schneider taught in Chicago’s public schools for 34 years and retired in 2003 with full benefits. She thought her pension and savings would provide enough for her to live comfortably, including travel overseas. But now her annuity no longer looks certain because it’s invested in the stock market.

She did not want another teaching job, in part because she wanted to work close to her home, so she took an eight-week class in basic computer skills and earned a certificate in customer service.

With that in hand, Ms. Schneider found a seasonal job at an American Girl store near her home, and she discovered that her skills as a teacher transferred well to retail: she was used to being on her feet, she was a good communicator and comfortable speaking in public, and she was punctual and orderly.

“In this job market, I said, ‘How am I going to get in?’ ” she said. On the advice of friends and job counselors, she dyed her gray hair blond.

She said the training she got at National Able Network gave her self-confidence, as well as contacts.

“The group I was in really bonded, just in studying the material, which was not easy,” she said. “It was mostly women in their late 50s and early 60s. We have similar problems.”

Ms. Schneider’s job ended in January, but she is hoping to be rehired this summer. Though the income is below what she earned as a teacher, it is a welcome supplement to her pension, she said. And when the economy recovers, she may be in a good position to earn more, she said.

Peter Cappelli, director of the Center for Human Resources at the Wharton School of the University of Pennsylvania, said he did not recommend retraining for workers who had successful careers. Instead, he suggested that they consider part-time or contract work in their fields, where they can use their experience and skills to their advantage.

“If someone has I.T. experience but they haven’t programmed in a while, it might make sense to take a couple classes,” he said. “Or if a C.P.A. has mainly been in management, he could go back and get his accounting skills up to date. But if you’re an accounting guy and you want to go to school to learn marketing, then you’re not making use of the skills you acquired over the years. You’re going to be competing in the job market without a competitive advantage.”

The good news for older workers, he said, is that they may be more flexible about taking part-time or seasonal work, unless they have to replace a large income. In surveys, older workers and retirees say they want jobs without the time demands or pressures of their old career tracks.

“Until the economy is strong, companies are not going to be looking for full-time workers,” Professor Cappelli said. “Project work or contingent work often suits older workers. If you want benefits, I’m not sure how great that is. But temp work generally pays 30 to 40 percent more per hour than full-time work.”

For Sally Stevens and Mark Noonan, who both live in Portland, Ore., pursuing their old career fields was not an attractive option. Ms. Stevens, 58, was a social worker specializing in outpatient alcohol and drug treatment when methamphetamine hit.

“I didn’t think that worked as outpatient treatment, so I felt totally unsuccessful,” she said.

Mr. Noonan, 56, worked as a technology manager, a job that consumed 60 hours a week and demanded he be available by BlackBerry at all hours. Through Life by Design, an Oregon program that offers training workshops sponsored by a consortium of institutions — a community college, a university, nonprofit groups, an employment agency, AARP and several public agencies — Mr. Noonan and Ms. Stevens decided to train for new careers: in gerontology.

“I decided gerontology was a real growth career,” Mr. Noonan said. “It reminded me of when I first got into high tech.”

Both he and Ms. Stevens enrolled in Life by Design through Portland Community College, which, like many community colleges, offered an online degree program, relieving Mr. Noonan’s fear of being stuck in a roomful of 20-year-olds. Ms. Stevens chose more traditional classroom courses, but with supplementary peer mentoring and online study groups.

“I had a snobbish attitude about community colleges,” she said. “I thought that’s where people go who don’t have much intellectual ability. It’s not that way anymore.”

Now Ms. Stevens works as a case manager for older adults. Mr. Noonan designs programs for Elders in Action, a nonprofit advocacy group in Portland. Both took significant hits in their earnings but said they expected greater opportunities in a few years. “The hardest part was that I was used to knowing my job,” Ms. Stevens said. “I had to go back as a newbie, having to ask questions of someone who’s 24. It’s good for me, though. It humbles you.”

Even when older workers need the money, many say they are more concerned about the value of their work, said Pamela Tate, president of the Council for Adults and Experiential Learning, a nonprofit group in Chicago.

“What they need to do is pay more attention to what would make them feel interested and like they were making a contribution, rather than old-fashioned career advancement,” she said. “That’s a young person’s approach. Now you need to think, ‘what are you giving back to society or your company?’ It’s a shift from personal ambition to social ambition.”

For Faye Milbourne, training for a second career meant realizing, “I don’t need the attaboys and the kudos I needed when I was a career person,” she said.

Mrs. Milbourne, 57, previously worked for the company that became Verizon — “31 years, 2 months and 24 days,” she said — before taking an early retirement package in 2006. While at the company, she earned a bachelor’s degree in psychology and a master’s in urban education. She had no plans to kick back in retirement.

“A friend said, ‘You need to learn to do something you would do for free,’ ” Mrs. Milbourne said. So she enrolled in Career Switcher Programs at Old Dominion University in Norfolk, Va., and Regent University in Virginia Beach designed to bring people from various fields into the teaching profession. Now she is a permanent substitute teacher in Virginia Beach, working for a fraction of her old salary.

Though her retirement funds have taken “a half-million downslide” in the last year, she said she was still secure financially and found the work more rewarding than her past career. “For the first time in my life I feel I’m doing something I love to be doing,” she said.

Yet even this career is threatened by the economy, she said. She hopes to find placement as a student teacher in the fall, then advance to a full-time teaching job. But many school districts, including hers, have been forced to cut back.

“If that doesn’t happen, I’ll continue to substitute,” she said. “And if nothing else, I can always be a mentor.”



http://www.nytimes.com/2009/04/02/business/retirementspecial/02reskill.html?ref=business