Earthside Comments: The most alarming, but under-reported news item from last week, is at the top of this post.
American 'consumers' are so tapped-out that they are raiding their own paltry retirement funds to pay current expenses.
Put that information together with the size of this problem, as Bill Gross of Pimco, points out ... and you begin to understand just why an economic nightmare is upon us.
Link: Stocks Face Longer Bear Market as More Tap Nest Eggs | Reuters
Major U.S. stock indexes, already trapped in bear territory, face a tougher road to recovery, as more Americans crack into their nest eggs to withdraw cash to cope with rising economic pressures. ...
... Baby boomers are adding another layer of anxiety for money managers looking for a sustainable stock market recovery during the year's second half. That's because boomers, born after World War II in the economic expansion between 1946 and 1964, are increasingly withdrawing funds from their defined contribution plans as the housing debacle gets worse.
In a recent survey conducted by the AARP of more than 1,000 respondents aged 45 and older, almost 25 percent of individuals between the ages of 45 and 64 are prematurely withdrawing from their 401(k) retirement plans and other investments.
And the Vanguard Group, the fund company that's popular among retail investors because of its low fees, points to another worrisome sign: Last December, so-called "hardship withdrawals" shot up 22 percent from a year earlier.
The increase in hardship withdrawals at Vanguard suggests "rising economic pressures on financially vulnerable households, possibly related to the national crisis in subprime and adjustable rate mortgages," said William Nessmith and Stephen Utkus, authors of a Vanguard report on this alarming trend.
For years, as home values skyrocketed, people used their houses as glorified ATMs, pulling out money for all sorts of reasons. The trend helped support continued economic growth and recovery from the tech-telecom recession of 2001. ...
... Charles Schwab & Co., the largest U.S. discount broker, also has seen a similar trend. The percentage of Americans lowering the amount they are saving with regular contributions to their 401(k) plans is climbing. In the first quarter of 2008, 7.1 percent lowered their contribution rate -- up from 5.8 percent in the year-ago period, according to Charles Schwab data.
"It certainly doesn't help matters that people are freaking out and taking their money," said Brian Gendreau, an investment strategist in New York for ING Investment Management Americas.
"This will help to contribute to a longer drawn-out down market," Gendreau said.
During volatile periods, investors are told not to make panicky decisions and to stay well diversified. But the bursting of the credit and housing bubble has hit Americans to such an extent that they may have no choice but to dip into their savings.
So far this year, U.S. equity funds have suffered withdrawals of roughly $52.7 billion, by far the worst first half for the group since EmergingPortfolio.com Fund Research in Cambridge, Massachusetts, began tracking them in 2000.
Link: US Home Foreclosures Jump 14% in 2nd Quarter: Survey - AFP/Yahoo! News
US home foreclosures leapt nearly 14 percent in the second quarter from the previous quarter, research group RealtyTrac said Friday in a sign of deepening housing woes.
On an annual basis, home foreclosure filings soared 121 percent from the same period in 2007, RealtyTrac said in releasing a survey of the country's 100 largest metropolitan areas.
Foreclosures have spiked in the worst housing slump in decades and a related credit crisis that have brought the economy to a crawl.
With home prices falling and unemployment and inflation rising, homeowners are increasingly hard-pressed to make their home loan payments. ...
... The California-based company said that one in every 171 US households had received a foreclosure filing and the distress was nationwide.
According to the survey, 48 of the 50 states and 95 of the 100 major city regions had experienced year-over-year increases in foreclosure activity.
Link: Mortgage Writedowns to Total $1 Trillion, Gross Says | Bloomberg.com
Falling U.S. home prices will force financial firms to write down $1 trillion from their balance sheets, crimping bank lending and sparking sales of assets, said Bill Gross, who manages the world's biggest bond fund.
A total of $5 trillion of mortgage loans, or almost half of the nation's home loans, belong to ``risky asset categories'' such as subprime and Alt-A, Gross of Pacific Investment Management Co. said in commentary posted on the firm's Web site today. About 25 million U.S. homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices, he said. A home has negative equity when it's worth less than the mortgage with which it was bought.
``The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth,'' Gross wrote.
The U.S. House of Representatives approved yesterday a bill designed to shore up confidence in mortgage-finance companies Fannie Mae and Freddie Mac and stem mortgage foreclosures. Treasury Secretary Henry Paulson earlier this month proposed allowing the government to purchase equity stakes in the companies and expanding their credit lines. The proposals followed speculation that the companies, which own or guarantee almost half of the $12 trillion of outstanding home loans, didn't have enough capital.
`Blow Them Up'
While Congress will enact the bill into law, lawmakers won't give the Treasury Department unlimited authority to buy Fannie Mae and Freddie Mac's debt or equity, Paul McCulley, a fund manager at Pimco, said in a separate commentary. Instead, lawmakers will probably count any government funds that go toward the companies against the Treasury's legal borrowing limit, which is controlled by Congress, he said.
The government could boost housing prices by buying one million new or unoccupied homes, ``blow them up, and then start all over again,'' Gross wrote, adding that the suggestion comes from ``one of the wisest men I know.'' Aside from that solution, the housing legislation ``is the best way to begin the long journey back to normalcy,'' he said.
Gross's forecast implies that credit-market losses are less than halfway over. Since the start of 2007, firms including Citigroup Inc., Merrill Lynch & Co., and UBS AG have reported $467.9 billion in losses and writedowns after the collapse of the U.S. submprime mortgage market roiled credit markets, according to data compiled by Bloomberg News. Firms worldwide have raised $344.2 billion of capital since the third quarter of 2007.
Record Drop
Former World Bank President James Wolfensohn and Charles R. Morris, the author of ``The Trillion Dollar Meltdown,'' are among those who share Gross's estimate. Wolfensohn said April 28 that losses from the global credit turmoil may climb to $1 trillion. The International Monetary Fund predicted $945 billion of losses on April 8.
Home prices in 20 cities dropped 15.3 percent in April from a year earlier, according to S&P/Case-Shiller, the most since the group began collecting data.
The U.S. central bank's seven cuts in the benchmark lending rate since September haven't led mortgage rates to fall or slowed the decline in home prices, Gross said. Rather, yields on 30-year mortgages have risen in that period.
Policy makers have reduced the target rate for overnight lending to 2 percent from 5.25 percent in that period, pursuing the most aggressive series of cuts since the 1980s.
Fed Cuts
The average rate on a typical 30-year fixed-rate mortgage has risen to 6.51 percent, from 6.10 percent at the start of last September, according to data from Bankrate.com.
Falling bank stocks may make it difficult for firms to raise more capital, Gross said in a Bloomberg Radio interview. The Standard & Poor's 500 Financials Index has declined 28 percent this year. Banks may take up to two more years to report a total of $1 trillion in writedowns, he estimated.
The government's rescue package probably won't be enough to revive the housing market because Fannie Mae and Freddie Mac have ``signified they're in a balance sheet reduction mode,'' Gross said in the interview. The companies ``have to be willing to take some chances of their own to buy mortgages.''
The cost of the government rescue package to taxpayers ``will run into the trillions,'' Gross added. ``I'm forecasting three years from now we'll see our first trillion-dollar budget.''
Eight of the top 10 holdings in Gross's $128.8 billion Total Return Fund were mortgage-backed securities guaranteed by Fannie Mae, according to data compiled by Bloomberg News as of March 31, the latest date for which figures are available. Mortgage securities made up 61 percent of the fund as of June 30, up from 53 percent a year earlier, according to Pimco's Web site.
Pimco, a unit of Munich-based Allianz SE, has $830 billion of assets under management.
Place this speaker wherever it best coordinates with the acoustics of the surrounding space. http://futures.morewrite.com/2008/06/26/make-options-easy-on-equity-indices/
Posted by: Equity Index | Sunday, July 27, 2008 at 01:36 PM