Tuesday, March 12, 2013

Investors Flee Stock Funds

The bubble pops. Stock markets tumble. Investors flee.

It is the narrative of nearly every economic boom and bust, as investors scramble to find other places -- besides underneath mattresses -- to park their money.

Investors pulled $10.5 billion out of stock funds in the week ended Dec. 10, up from $3.3 billion the previous week, according to the Investment Company Institute, a trade group for mutual fund managers. A record $72 billion flowed out of stock funds in October, according to the ICI's most recent monthly data.

"We've seen major redemptions out of equity mutual funds," said Alec Young, an equity strategist with Standard & Poor's.

The hits are largely across the board, according to a report from Morningstar: "The heavy redemptions are likely due to the widespread losses that haven't been isolated to a few asset classes but have spread to more conservative asset classes and funds."

Investors also took money out of bond funds, to the tune of $4.2 billion in the week ended Dec. 10 and $2.8 billion in the week ended Dec. 3.

From the start of September through the middle of this month, about 3 percent of the assets in stock and bond funds had been yanked by mutual fund investors, according to the ICI. That's roughly comparable to investor behavior in other bear markets, according to Brian Reid, the chief economist for the group.

Who is moving all this money out of stocks and stock funds? The everyday investor, according to analysts and financial advisers. "The money moving in and out is the general public," Young said. "It's the regular investors or an adviser selling funds. But the general public is making the direction to move money out."

Bernie McGinn of McGinn Investment Management in Alexandria said investor angst really picked up in late November, particularly the week of Nov. 20, when U.S. stock markets suffered heavy losses. "People who I hadn't heard from that much called me to say: 'I can't take it anymore. I want out. I don't care where it goes, but get it out.' "

Where all the money went -- what was left of it, at least -- is hard to say, but assets of retail money-market mutual funds have risen in four of the past five weeks, according to the ICI. The biggest spike came in mid-November, when $8.4 billion flowed into money-market funds in a single week, bringing total retail money-market mutual fund assets to $1.27 trillion. As of Dec. 17, the total had climbed above $1.28 trillion.

U.S. Treasurys have also been a popular parking place.

But that doesn't account for all the money coming out of funds. Analysts at TrimTabs Investment Research estimate that retail investors pulled $86 billion out of long-term mutual funds in November. But the increase in the amount of money that went into savings, certificates of deposit and money markets from October to November was only $5.7 billion, according to Federal Reserve statistics.

Conrad Gann, the president of TrimTabs, thinks a lot of the money actually went to pay down bills, mostly mortgages. "Sadly, we are in code red on the economy right now," Gann said.

So much money is coming out that stock funds long closed to the public are reopening. Morningstar says dozens of funds have reopened this year.

But some mutual fund industry officials and financial advisers say they had expected to see more people flee the markets. Reid notes that in October 1987, investors pulled back 3.14 percent of their stock fund assets when the market collapsed. He said that in 1987 many stockholders were relative newcomers who got into the market during a good run in the mid-1980s -- and were the first out the door when stocks crashed.

Now more people have 401(k) plans through their employers. Currently about 54.5 million, or 47 percent of U.S. households, participate in the market through stock or bond ownership, according to a poll conducted earlier this year by ICI and the Securities Industry and Financial Markets Association. That's up from 39 percent in 1989, the first year for which comparable data are available.

These investors seem reluctant to move the goal posts when it comes to their long-term investment strategy, said Stuart Ritter, a financial planner with T. Rowe Price in Baltimore.

"There certainly are individuals who have done it, and I'm sure lots of people may have considered it, but when it comes to the actions people are talking, it's safe to say you're not seeing people take out everything they have in the stock market," he said. "While what we're going through is uncomfortable and frustrating, it doesn't mean it's time for a wholesale change in approach."



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Mortgage scandal boosts investors' campaign to get banks to buy back securities

Since the financial crisis broke out two years ago, unhappy investors in mortgage securities have struggled to organize themselves and achieve a common goal - force big banks to buy back loans that went bad because of shoddy lending practices.

This StoryFull coverage: Foreclosure system in chaosTimeline: Foreclosure debacle

Now, widespread reports of the banks botching their loan paperwork have breathed new life into the efforts by investors, and they say they are organizing their most aggressive legal offensive yet against the biggest bank in the country, Bank of America.

Once run by a loose group of hedge funds, the investors' campaigns have bulged in size in recent weeks, turning them into a force that could recoup tens of billions of dollars from Bank of America and other large lenders and act as a major drain on their earnings.

Previously, this group struggled to force the banking industry to hand over data critical to their lawsuits. Now with the Federal Reserve Bank of New York, the regulator of mortgage giants Fannie Mae and Freddie Mac, and some of the world's largest funds on board, the investors may be able to compel banks to reveal more about their lending practices.

The newly energized investors present a troubling scenario for the big banks that packaged loans and sold them as securities. On top of fighting off lawsuits from homeowners seeking to challenge foreclosure proceedings, these companies could face months of bitter and costly litigation as angry investors finally unite.

On Wednesday, a team of attorneys leading the charge is holding a conference in New York about failures by banks to properly service loans and their practice of hiring "robo-signers" who signed off on thousands of foreclosure files each month without verifying their accuracy.

The prospect of more lawsuits has already spooked Wall Street. On Monday, Bank of America's stock hit a 52-week low.

"If you think about people who come back and say, I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cyclinder, we're not putting up with that," said chief executive Brian T. Moynihan in an earnings call last week. "We will diligently fight this."

Still, the foreclosure debacle represents a turning point for mortgage investors who have long accused banks of misrepresenting the mortgages they issued. For instance, some investors have accused banks of overstating how many loans were taken out by borrowers using their properties as primary residences, which made the mortgages seem less risky than they actually were.

The robo-signer issue is one more piece of evidence, say investors, that the banks have failed to keep their end of the bargain.

"I think the robo-signers are a battle in a long war," said Bill Frey, chief executive of Greenwich Financial, which filed a suit in 2008 against Countrywide, now owned by Bank of America.

So far, investors have faced two major hurdles in their battle against the banks.



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Monday, March 11, 2013

Citing pension costs, Costa Mesa, Calif., plans to lay off nearly half its employees

IN COSTA MESA, CALIF. Nearly half the city workers in Costa Mesa received layoff notices last week. Street sweepers. Firefighters. Mechanics. Payroll clerks. Animal control workers. In all, about 210 of the city's 472 employees, many of whom have worked there for decades. On Thursday, as the notices were being handed out, one maintenance worker committed suicide by jumping from the city hall roof.

"It's like they decided to blow up the city," said Billy Folsom, 58, a mechanic who got a pink slip. "It's devastating."

The cutbacks are necessary because the escalating costs of providing pensions for police, firefighters and other unionized employees are draining the city's revenue, city leaders say.

Within three years, city projections show, more than one of every five tax dollars will be spent on employees' retirement benefits, which were made far more generous in the years before the stock market crashed in 2008.

"Just do the math - this is unsustainable," said Jim Righeimer, the city's recently elected mayor pro tem. He campaigned on the pension issue, eliciting anger and a counter-campaign from the city's police and firefighters. "Under these kinds of burdens, we can't do everything the city needs to do."

The public pension fight

The financial follies of the boom years - by banks that lent too easily, by home buyers who bought places they couldn't afford, by consumers who didn't save - became obvious shortly after the recession.

But many states and cities may have overextended themselves as well, and the risks they undertook are now playing out in the public pension shortfalls provoking political battles across the nation.

Republican efforts to roll back public employee benefits and bargaining rights has triggered mass protests in places such as Wisconsin, Indiana and Ohio. But in Costa Mesa, where conservatives dominate city politics, the offensive against public worker compensation has gone further.

During the boom, many state and local governments promised their employees better pensions. Some employees were allowed to retire earlier. Others received a larger portion of their final pay. Financially, it was easy to do; the stock market was soaring, lifting pension fund balances.

Between 1998 and 2008, the last year for which figures are available, total pension payments by state and local governments rose twice as fast as their payrolls, according to census figures.

But now that the recession has led to steep drops in pension funds, those promises to past and present employees may be much harder to keep. Dozens of state and local pension funds around the country are now considered seriously underfunded. By 2009, about 58 percent of state and local pension funds were less than 80 percent funded, a standard benchmark of pension soundness, according to the Center for Retirement Research at Boston College.

The shortfalls have had far-reaching political ramifications. Already, some politicians ideologically opposed to public employee unions have attributed the problems to their greed and political influence. Now members of those unions are on the defensive.



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Treasury: Will begin selling mortgage securities

WASHINGTON -- The Treasury Department announced Monday that it will begin selling its remaining $142 billion in holdings of mortgage-backed securities purchased during the financial crisis.

Treasury officials said the first sales of up to $10 billion in the securities, primarily issued by troubled mortgage companies Fannie Mae and Freddie Mac, would start this month.

Assistant Treasury Secretary Mary Miller said the sales represented a continuation of efforts by the government to wind down the emergency programs put in place in 2008 and 2009 to help restore market stability.

Treasury estimated it could bring in an additional $15 billion to $20 billion over what it paid for the $142 billion in mortgage-backed securities it currently holds. However, that amount would still leave the government with heavy losses from the rescue of Fannie and Freddie in September 2008.

The final cost of the bailout of the two companies has been estimated to be as high as $259 billion, making it by far the government's costliest rescue operation during the financial crisis.

Treasury has retained State Street Global Advisors to manage the sales of its mortgage-backed securities. Officials said they would post an accounting of the sales at the end of each month on Treasury's web site.

The program was designed to stabilize the market for mortgage-backed securities, which investors had started to flee as defaults in the mortgage market began to escalate. Treasury announced in December 2009 that it was halting the purchase of new securities under the program. At the time it had purchased a total of $220 billion worth of mortgage-backed securities.

Treasury said in its announcement Monday that the market for mortgage-backed securities had "notably improved" since 2008 and 2009.

In a fact sheet, Treasury said it planned to sell up to $10 billion of its $142 billion in mortgage-backed securities per month. At this pace, Treasury said the whole portfolio would be disposed of in about one year. But Treasury said if market conditions change, it is possible it will take longer to fully exit from the program.

Treasury said it believed the sales could take place with a "minimal impact" on home mortgage rates.

Treasury said that the announcement to sell the remaining holdings of mortgage-backed securities was not related to the impending battle over the debt limit. Treasury's latest estimate is that the government will reach the current $14.3 trillion borrowing limit between April 15 and May 31.

Republicans are demanding steeper cuts in government spending before they will agree to raise the debt limit. Treasury Secretary Timothy Geithner has warned that failure to raise the borrowing limit would trigger an unprecedented default by the government on the national debt which would drive up the government's borrowing costs.



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Half of firms have yet to restore 401(k) match, poll finds

NEW YORK -- Almost half of U.S. companies that reduced or suspended their contributions to employee retirement plans during the recession haven't restored them, according to Towers Watson.

A survey of 334 firms with more than 1,000 employees in April and May found that 18 percent reduced or suspended their contributions to 401(k) plans since September 2008 to save money. About 49 percent of them haven't resumed their matches, the New York-based benefits consultant said this week.

"Some of the companies who have reinstated or who are thinking about reinstating are making the contributions contingent on profits of the company," said Robyn Credico, defined-contribution practice leader in North America for Towers Watson. "If there is ever another downturn they don't have to go through the painful experience of communicating to employees that they're suspending the match."

Companies including General Motors, Ford, Eastman Kodak and FedEx have restored contributions to 401(k) plans, according to the Pension Rights Center, a consumer group based in Washington.

Motorola, with 53,000 employees globally, will reinstate its contributions to employee plans starting July 1, said Tama McWhinney, a spokeswoman for the cellphone maker. Sears, with 290,000 U.S. workers, hasn't reinstated its match, according to spokeswoman Kimberly Freely.

The most common contribution by larger employers is 3 percent if workers save 6 percent of their salaries, Credico said. The average account balance of workers was $71,044, according to the survey, which represents more than 5.3 million plan participants.

Employer matches to workers' contributions help employees increase savings and provide an incentive for them to contribute, said Nancy Hwa, a spokeswoman for the Pension Rights Center.

About 57 percent of firms automatically enroll employees into their 401(k)s, and 72 percent use target-date funds as the default choice for those who don't select their own investments, according to Towers Watson.

Target-date funds gradually move money from riskier investments such as stocks to more conservative investments such as bonds as a worker reaches retirement. They attracted $45 billion last year, according to Morningstar, the Chicago-based fund researcher.

Lawmakers are seeking ways to prevent Americans from outliving their savings as more workers who relied on traditional pension plans are trying to pay for retirement with their 401(k) savings.



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Tuesday, March 5, 2013

Business Highlights

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Wholesale inventories and sales rise in January

Businesses at the wholesale level added to their stockpiles in January and their sales jumped by the largest amount in 14 months. But the spike in sales was partially influenced by rising oil prices.

Wholesale inventories rose 1.1 percent in January, the Commerce Department said Wednesday. It was the 12th gain in 13 months.

Sales at the wholesale level rose for the seventh straight month. The 3.4 percent increase was the largest gain since November 2009.

Still, a 10.6 percent rise in demand for petroleum helped drive the jump in sales, reflecting higher oil and gas prices.

The rise in inventories left stockpiles at $436.9 billion. That's 13.1 percent higher than the low reached in September 2009, when companies were slashing their stockpiles to keep costs under control during the recession.

Greater sales should encourage businesses to keep restocking their shelves and drive factory production in the months ahead.

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Mortgage applications spike; home sales still weak

The number of people applying for a mortgage jumped last week. But analysts cautioned that the increase was likely driven by investors, not first-time homebuyers who are needed to help housing markets recover.

The Mortgage Bankers Association says its overall mortgage application index rose 16.1 percent from the previous week, the biggest jump since June. But the index is still far off where it was last spring and summer following four straight months of declines.



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Tips for couples to help solve money problems

In my online discussions I frequently get questions from couples facing financial issues.

Q I'm getting married next summer and my fiance and I are in a lot of debt. We live together and have two kids. There is a breakdown in communication when it comes to our finances. I've recommended we talk to a credit counselor, but he shuts down and doesn't want to talk about it. He did agree to go to premarital counseling. I don't know where to begin to get out of debt. I've tried to budget. I feel overwhelmed.

A You are right to be concerned. When a partner refuses to talk when you're trying to work out the financial stuff, that's a huge red flag. Communication is key when it comes to money, and if that's a problem now, it won't get better with a ring. The way to find out if you should get married is to take him up on his interest in going to premarital counseling. Go soon, before you put a penny down on any wedding arrangements. For now, don't stress about what he won't do. Let it all come out in counseling with a neutral party. Find a really good premarital counseling course or instructor. During your search, make sure the person or program incorporates techniques to help budget and tackle the debt in addition to dealing with the emotional issues.

My husband and I are renting a condo but want to buy a house soon. We have about $11,000 in a bill consolidation loan. We have $12,000 in savings. The emergency fund is what's in our savings, but I'm able to put at least $500 a month in there, so it's building. Would it make more sense to keep paying the loan (the minimum is $350 a month, but I usually pay $700 to $1,000) and save what we can, or take the money from savings and pay off the loan and then build the emergency fund back up?

This is what I would do:

-- Calculate how much you need for an emergency fund of at least three months of living expenses (rent or mortgage, food, utilities, cable, cellphone service, etc.). This will give you a benchmark of what you should have on hand before you even think of buying a house.

-- Designate about $2,000 for a "Life Happens Fund" for expenses that come up, such as car repairs. Take this money out of the $12,000 and put it into an account separate from your emergency money. This leaves you with $10,000.

-- Put $5,000 as the beginning for your emergency fund. When you reach the three-month goal, then start saving for the housing fund.

-- Take the rest of your savings -- $5,000 -- and pay down the $11,000 loan. If you are paying upward of $1,000 a month on that loan, you will be done with it in six months.

My partner continues to run up credit cards, and I keep helping him pay them off. He promises me every month that he's not going to do it again. But sure enough, like clockwork, he runs them up again within a few weeks, mainly through online shopping when he's bored. Any tips on how to help him to stop?

Stop yourself. You are part of the problem. He knows you will be there with the money for a bailout. Quit helping him, and he'll have to face up to his problem.

My girlfriend of two years has about $50,000 in debt and donates $3,000 to $5,000 a year to various charitable events. I have no problem giving to charity, but am I a bad person for thinking that paying off debt should come before giving away about 20 percent of her take-home salary? Right now it is her money and she can do what she wants, but I'm thinking of the future when we get married.

I think it's great she wants to give, but you are right to be concerned that she may not be aggressively attacking the debt. But the answer isn't in encouraging her to stop giving. Instead, say: "Honey, I'm worried about how much you have in debt. Do you mind if I help you budget or recommend a source that could help you get rid of your debt?" If she doesn't want the help, just sit back and watch. If getting rid of the debt isn't a priority, you are facing the future with conflicting values.



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