Home Prices in Your City (Bizjournals.com)

Changing home prices in the Top 100 metros

bizjournals - July 16, 2009

Metro Peak year for housing prices (1st Q only)
Change in housing prices since peak
1-year change in housing prices (1st Q, 2008-2009)
5-year change in housing prices (1st Q, 2004-2009)
10-year change in housing prices (1st Q, 1999-2009)
Population (2008)

Akron, Ohio 2006 -3.23% -1.22% 3.12% 22.12% 698,553
Albany, N.Y. 2008 -0.33% -0.33% 42.45% 93.38% 853,919
Albuquerque 2008 -2.94% -2.94% 41.83% 63.37% 845,913
A'town-Bethlehem, Pa. 2008 -4.73% -4.73% 32.93% 78.95% 808,210
Atlanta 2008 -1.65% -1.65% 12.18% 46.95% 5,376,285
Austin 2009 - 1.49% 32.88% 75.34% 1,652,602
Bakersfield, Calif. 2007 -34.89% -22.80% 14.24% 73.01% 800,458
Baltimore 2007 -6.72% -6.44% 41.79% 114.20% 2,667,117
Baton Rouge, La. 2009 - 1.16% 34.39% 61.80% 774,327
Bethesda-Frederick, Md. 2007 -11.71% -7.86% 29.09% 114.96% 1,176,401
Birmingham 2009 - 1.08% 24.40% 52.82% 1,117,608
Boston 2006 -8.36% -3.66% 6.68% 95.29% 1,884,659
Bradenton-Sarasota, Fla. 2006 -31.93% -16.12% 9.01% 74.24% 687,823
B'port-Stamford, Conn. 2007 -6.95% -5.31% 19.61% 89.45% 895,030
Buffalo 2009 - 3.29% 22.19% 43.01% 1,124,309
C'bridge-Newton, Mass. 2006 -5.77% -2.61% 7.27% 81.81% 1,482,478
Camden, N.J. 2007 -5.33% -5.06% 32.44% 96.21% 1,250,569
Charleston, S.C. 2008 -3.19% -3.19% 40.49% 101.98% 644,506
Charlotte 2009 - 0.39% 26.59% 48.09% 1,701,799
Chicago 2007 -5.22% -4.89% 20.13% 69.20% 7,990,248
Cincinnati 2008 -0.77% -0.77% 9.36% 33.54% 2,155,137
Cleveland 2006 -3.78% -1.53% 1.27% 21.13% 2,088,291
Colorado Springs 2007 -1.76% -1.70% 14.99% 49.96% 617,714
Columbia, S.C. 2009 - 1.32% 24.14% 52.34% 728,063
Columbus 2008 -0.42% -0.42% 8.00% 32.05% 1,773,120
Dallas 2009 - 2.21% 16.40% 46.15% 4,226,003
Dayton 2008 -0.51% -0.51% 6.24% 21.63% 836,544
Denver 2009 - 0.80% 7.87% 56.54% 2,506,626
Detroit 2006 -22.15% -11.47% -19.80% 6.13% 1,949,929
Edison-N. B'swick, N.J. 2007 -7.79% -5.30% 24.88% 116.57% 2,325,224
El Paso, Texas 2008 -2.32% -2.32% 42.33% 64.97% 742,062
Fort Lauderdale, Fla. 2007 -32.28% -23.79% 10.78% 93.84% 1,751,234
Fort Worth 2009 - 3.11% 17.22% 44.63% 2,074,003
Fresno, Calif. 2006 -30.78% -20.34% 7.60% 84.12% 909,153
Gary, Ind. 2008 -1.67% -1.67% 17.75% 37.16% 702,458
Grand Rapids 2006 -5.57% -3.96% -0.40% 25.02% 776,833
Greensboro 2009 - 0.27% 13.95% 34.58% 705,684
Greenville, S.C. 2009 - 2.23% 22.66% 44.01% 624,715
Hartford 2007 -3.24% -3.12% 22.28% 76.58% 1,190,512
Honolulu 2008 -4.75% -4.75% 54.45% 115.46% 905,034
Houston 2009 - 3.83% 26.36% 64.86% 5,728,143
Indianapolis 2008 -0.38% -0.38% 8.36% 27.23% 1,715,459
Jacksonville 2007 -12.54% -9.67% 31.84% 96.29% 1,313,228
Kansas City 2008 -1.13% -1.13% 11.03% 46.48% 2,002,047
Knoxville, Tenn. 2008 -0.03% -0.03% 30.38% 58.36% 691,152
Lake County, Ill. 2007 -4.22% -4.11% 14.67% 54.64% 876,918
Las Vegas 2007 -38.25% -29.52% -2.42% 40.51% 1,865,746
Little Rock, Ark. 2009 - 1.91% 22.87% 45.77% 675,069
Long Island, N.Y. 2007 -7.83% -6.10% 22.41% 132.34% 2,863,849
Los Angeles 2007 -24.38% -16.58% 22.86% 116.14% 9,862,049
Louisville 2009 - 0.14% 15.26% 42.69% 1,244,696
McAllen-Edinburg, Texas 2009 - 1.47% 18.64% 42.68% 726,604
Memphis 2008 -0.82% -0.82% 13.90% 30.63% 1,285,732
Miami 2007 -29.81% -25.39% 22.53% 107.79% 2,398,245
Milwaukee 2008 -1.83% -1.83% 20.88% 61.07% 1,549,308
Minneapolis-St. Paul 2007 -7.14% -4.92% 8.50% 74.63% 3,229,878
Nashville 2009 - 0.00% 29.32% 51.93% 1,550,733
New Haven, Conn. 2007 -5.64% -4.36% 22.81% 87.88% 846,101
New Orleans 2007 -1.21% -1.12% 30.54% 67.67% 1,134,029
New York City 2007 -6.34% -5.64% 30.00% 121.58% 11,696,649
Newark 2007 -7.03% -5.74% 25.28% 103.64% 2,121,076
Oakland 2006 -26.17% -14.96% 6.07% 92.54% 2,504,071
Oklahoma City 2009 - 1.88% 23.04% 54.57% 1,206,142
Omaha 2008 -0.50% -0.50% 10.88% 35.11% 837,925
Orlando 2007 -21.63% -14.97% 33.47% 92.12% 2,054,574
Oxnard-T. Oaks, Calif. 2006 -28.80% -16.52% 3.66% 93.57% 797,740
Peabody, Mass. 2006 -8.95% -4.34% 4.07% 81.99% 736,457
Philadelphia 2008 -2.41% -2.41% 34.94% 99.67% 3,892,194
Phoenix 2007 -23.27% -17.34% 32.82% 80.20% 4,281,899
Pittsburgh 2009 - 1.08% 17.59% 46.85% 2,351,192
Portland, Ore. 2008 -5.81% -5.81% 44.93% 78.41% 2,207,462
Poughkeepsie, N.Y. 2007 -8.93% -7.05% 18.78% 104.09% 672,525
Providence 2006 -10.58% -6.78% 11.90% 104.98% 1,596,611
Raleigh 2009 - 1.16% 25.16% 45.29% 1,088,765
Richmond 2008 -3.01% -3.01% 41.19% 88.46% 1,225,626
R'side-S. Bern., Calif. 2007 -38.97% -28.33% -1.17% 77.10% 4,115,871
Rochester, N.Y. 2009 - 1.64% 14.73% 33.60% 1,034,090
Sacramento 2006 -30.97% -15.11% -1.82% 81.54% 2,109,832
Salt Lake City 2008 -4.80% -4.80% 45.88% 61.15% 1,115,692
San Antonio 2009 - 1.68% 33.24% 63.27% 2,031,445
San Diego 2006 -25.67% -13.79% 0.64% 99.96% 3,001,072
San Francisco 2007 -11.73% -8.20% 20.76% 103.76% 1,770,460
San Jose 2007 -15.59% -11.74% 17.48% 86.70% 1,819,198
S. Ana-Anaheim, Calif. 2006 -24.87% -13.93% 12.64% 107.40% 3,010,759
Seattle 2008 -6.66% -6.66% 43.01% 94.59% 2,559,174
Springfield, Mass. 2008 -2.54% -2.54% 24.56% 84.69% 687,558
St. Louis 2008 -1.04% -1.04% 18.97% 60.37% 2,816,710
Stockton, Calif. 2006 -49.66% -31.22% -21.78% 40.34% 672,388
Syracuse, N.Y. 2009 - 1.16% 25.90% 57.37% 643,794
Tacoma, Wash. 2008 -6.87% -6.87% 45.63% 94.41% 785,639
Tampa-St. Petersburg 2007 -21.64% -13.93% 23.48% 92.67% 2,733,761
Toledo, Ohio 2007 -4.95% -3.86% -0.55% 23.44% 649,104
Tucson 2007 -12.63% -9.80% 36.04% 83.10% 1,012,018
Tulsa 2009 - 2.10% 17.61% 44.77% 916,079
Virginia Beach-Norfolk 2008 -4.02% -4.02% 55.23% 119.98% 1,658,292
Warren-Troy, Mich. 2006 -18.27% -9.00% -14.72% 9.72% 2,475,181
Washington 2007 -15.23% -9.98% 29.86% 117.51% 4,181,729
West Palm Beach, Fla. 2006 -31.31% -20.20% 10.31% 89.30% 1,265,293
Wilmington, Del. 2008 -3.59% -3.59% 33.51% 89.58% 695,708
Worcester, Mass. 2006 -10.58% -5.49% 5.28% 83.40% 783,806

SOURCE: bizjournals

Beware Title Insurance Fees ( from WSJ )

JULY 21, 2009 Title-Insurer Fees Draw Scrutiny

By JAMES R. HAGERTY
The U.S. title-insurance industry faces increasing pressure from regulators to justify the fees charged to consumers for ensuring they have clear ownership of their homes.

For most people, title insurance is just another mysterious fee they must pay when they buy a home or refinance a mortgage. Unlike some of those fees, though, title charges aren’t negligible. They range from several hundred to several thousand dollars—and last year totaled more than $10 billion for the title industry. Lenders insist on the insurance to protect them against the possibility that a taxing authority, another creditor or a disgruntled heir may have a claim to the property, among other risks.
As falling home prices tempt more people back into the housing market in some parts of the country, politicians and regulators are raising questions about whether they may be paying too much for this protection. “There’s no transparency,” Delores Kelley , a state senator in Maryland, said in an interview. She introduced legislation that created a commission to study the title-insurance industry in Maryland. That panel is due to make recommendations about possible regulatory changes by December.

In Pennsylvania, Attorney General Tom Corbett earlier this year successfully campaigned against a push by the title industry for increases in regulated rates. New Mexico’s legislature this year enacted a law that will allow price competition among title insurers, previously required to charge standard prices set by the state insurance regulator. That kind of fixed-price regime continues in Texas.

A bigger potential threat to title insurers comes from the Obama administration’s proposed Consumer Financial Protection Agency. The new regulator would oversee a wide variety of financial products, including title insurance, which is now regulated mainly at the state level. That would open the door to more federal oversight.

Rather than shopping around, most people accept title-insurance choices made for them by a real-estate agent, mortgage company or builder. Cathy Pearson, an elementary school teacher who recently bought her first home, in San Clemente, Calif., says she accepted as “a given” the title insurer chosen by real-estate agents involved in the transaction. Like many buyers, Mrs. Pearson didn’t feel she had time to question all the details.

Yet people advising home buyers often have conflicts of interest. Some real-estate brokers, mortgage firms and builders own firms that act as agents for title insurers. Federal and state laws bar title insurers from giving kickbacks to real-estate agents, mortgage firms or others for funneling business toward a particular title company, but enforcement is spotty. In recent years, regulators have fined title companies for various alleged violations of laws against inducements to steer business toward a title agent. The inducements have included entertainment, trips and help with marketing.

Typically, 80% or more of the premium goes to the title-insurance agent, with the rest going to the insurer. Agents often handle the task of searching through and analyzing public documents, sometimes going back many decades. But in many states, consumers pay separate fees to the agents for that research, on top of the premiums.

Charges vary widely around the country. In Texas, for instance, the current cost of basic title coverage for a $250,000 home-purchase loan is $1,644. That is supposed to include the cost of searching for and examining title records and related tasks, Texas insurance regulators say, but they warn that title agents sometimes tack on unjustified fees. In Iowa, the costs of similar coverage—including fees for lawyers and title researchers—range from around $500 to $800. Unlike the rest of the nation, Iowa has a state agency that provides title insurance.

The industry so far has fended off a class-action lawsuit, filed in early 2008, charging title insurers with illegally fixing prices at unreasonably high levels in New York state. A U.S. District Court judge for the eastern district of New York dismissed that suit last month. It has been appealed to the U.S. Court of Appeals for the Second Circuit.

The American Land Title Association, or ALTA, a trade group for insurers and agents, rejects suggestions that title insurance is overpriced. “Nobody’s getting rich” selling title insurance, says Kurt Pfotenhauer, the ALTA’s chief executive officer.

The ALTA opposes the Obama plan to include title insurance as a product to be regulated by the proposed consumer-protection agency. “Regulation of local transactions by Washington bureaucrats is a recipe for frustration and malfunction,” says Mr. Pfotenhauer.

State regulators are striving to show they are on top of the issue. A working group of the National Association of Insurance Commissioners is devising plans under which title insurers and agents would provide financial data to help regulators determine whether premiums are reasonable. The working group is also looking at ways to help consumers shop effectively for title insurance.

Jack Guttentag, a finance professor emeritus at the University of Pennsylvania’s Wharton School who provides mortgage advice on the Web site www.mtgprofessor.com, advises home buyers to shop for title insurance online and to do so early in the home-buying process. When refinancing, borrowers should make sure they are getting the discount for title insurance that often applies on such transactions, says Mr. Guttentag.

The pressure on title insurers comes at a time when they are struggling to adapt to the plunge in transactions that has accompanied the housing bust. The four biggest title insurers—units of Fidelity National Financial Inc., First American Corp., Stewart Information Services Corp. and Old Republic International Corp.—all reported losses for 2008. Together, they account for more than 90% of the market. They distribute their insurance through thousands of title agents nationwide.

The big title insurers may face more price competition. Entitle Direct Group Inc., of Stamford, Conn., last year began selling title policies online. Timothy Dwyer, chief executive officer and founder of the company, says Entitle aims to undercut other insurers by at least 35%.

Printed in The Wall Street Journal, page D1

Municipal Bond Default ( Bloomberg )

Subprime Finds New Victim as Muni Defaults Triple: Joe Mysak


Commentary by Joe Mysak



May 30 (Bloomberg) -- The amount of municipal bonds that have defaulted this year is already more than triple what it was for all of 2007.

And who could doubt there's more bad news on the way?

So far this year, $736 million in municipal bonds have defaulted. That doesn't necessarily mean they didn't pay investors; they may have just drawn down reserves. That's what happens just before they stop making payments to bondholders.

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the ``Distressed Debt Securities'' newsletter, published in Miami Lakes, Florida.

That $736 million is nowhere near the record for municipal bond defaults, to be sure. The record year, if you're counting, was 1991, when almost $5 billion went bust. That's still small potatoes compared with what happens over in the corporate-bond market, where $36.6 billion blew up in 2006, and almost $24 billion in 2007.

But wait a minute: Municipal bonds never default, do they? Or at least this is how they are perceived by individual investors, right?

We're probably going to see a lot more munis default this year and in the years to come, because of the subprime crisis and maybe, just maybe, because of the high price of a barrel of oil.

New Residents

The hangover from the collapse in real-estate prices is going to be a boom in so-called dirt-bond defaults.

These are bonds sold by municipalities to build the infrastructure for housing developments, and are backed by the taxes paid by all the new residents who are going to move in. If no residents move in, or too few do, the bonds aren't repaid.

Of the 30 bond issues that have defaulted so far this year, more than half are from issuers in two of the states that have figured prominently in all tales of the housing bust: 10 in Florida and seven in California.

Consider the $50 million in special assessment bonds sold by the Monterra Community Development District in Broward County, Florida, for example. On May 7, the district disclosed that it had tapped its $1,279,200 reserve fund for $1,211,727.11.

You can just stop right there and know that this story is bound to be a sad one.

These particular bonds were sold by the district in 2006 in a limited offering. The bonds were unrated, and sold in minimum denominations of $100,000. The bonds carried a 5.125 percent coupon due in 2014, and were priced to yield 5.198 percent.

Remember Colorado
The Monterra development is located in Cooper City, which is about 20 miles north of Miami and has a population of almost 30,000. Of the 10 Florida bonds that defaulted this year, all were sold by community development districts, and all within the last four years.

The big jump we are going to see in the number of such municipal bond defaults this year won't be limited to Florida and California, but will include all those places where the high tide of real-estate mania has now receded.

This isn't an uncommon phenomenon after housing busts. In the past, the damage was usually confined to certain states where the boom was craziest, such as Colorado in the 1980s.

More bondholders are going to be affected this time around because the housing collapse is more national rather than regional or isolated, and because of the relatively recent development of so many ``exurbs,'' as chronicled, for example, by New York Times columnist David Brooks in his 2004 book, ``On Paradise Drive.''

Three-Hour Commutes

These are the suburbs beyond the suburbs, where Americans have moved to enjoy the good life, commute (usually) be damned. Not too long ago, the newspapers seemed to be filled with stories about people who gladly commuted two and even three hours each way for affordable real estate. Most people knew actual examples of such hearty souls. I wonder how much gasoline at $4-plus a gallon will dent the growth, and tax base, of such communities.

It's not just the price of gasoline that is going to make the nation's many far-flung communities less attractive. On May 28, Bloomberg carried a story detailing how the increase in the price of jet fuel was causing airlines to curtail service throughout the country.

Maybe we'll have to reconsider this whole flight-from-the- coasts idea that got such attention a few years ago.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

Last Updated: May 30, 2008 00:01 EDT

Investing in Trends - from Smartmoney.com

SmartMoney
Published March 25, 2009
Screens by Jack Hough

7 Stocks for 10-Year Holders

Stock screening software is handy for sorting cheap shares from pricey ones and determining which are recently rising. But it can’t tell which companies are neatly aligned with long-term societal trends. That means a search for stocks to hold for the next 10 years strays necessarily from the comfort of cold calculus to the gray of human judgment.

Still, I hope you’ll find the following points noncontroversial. For each, the computer has helped find some promising stocks—modestly priced ones attached to prosperous companies.

1. We’re getting old.

About 13% of Americans are 65 or older. By 2030, more than 20% will be, reckons the Census Bureau. The old spend less than the middle-aged on lots of things, but healthcare isn’t one of them. Four in five seniors have a chronic health condition like high blood pressure and diabetes, and half have two or more such conditions. Pills and prescription plans seem like good bets, but a greater role for government in coming years might crimp the profitability of either or both.

Companies that put paper medical records on computer networks, thereby saving money and improving results, seem more assured of growth. San Francisco-based McKesson (MCK1) is North America’s largest drug distributor and a leading provider of information technology to hospitals, insurers and government health-care agencies. Its sales are growing nicely through the current recession, and its shares fetch less than nine times forecast earnings for the company’s fiscal year ending March 31.

2. We’re still fat.

Beyond fat, really: The obese, at 34% of the population, now outnumber the merely overweight, at 33%, according to the National Center for Health Statistics. I suppose that favors purchases of plenty of ordinary things in larger sizes, like pants and airplane seats, but the companies mostly likely to gain from these — Wal-Mart (WMT2) and BE Aerospace (BEAV3) — are more affected by other trends. Kinetic Concepts (KCI4), based in San Antonio, makes vacuum-assisted systems for healing difficult wounds, like skin ulcers associated with diabetes, which is itself associated with obesity. It also makes specialty hospital beds, including ones that accommodate oversized patients.

Optimists might prefer to invest in diet plans and exercise. Companies that offer both are cheap right now; shares of gym chain Life Time Fitness (LTM5) and diet programs Weight Watchers (WTW6) and NutriSystem (NTRI7) trade at 8 to 9 times earnings. Weight Watchers is the best diet plan, according to ConsumerSearch.com, which amalgamated opinions from a variety of sources, including Consumer Reports and The Journal of the American Medical Association. With budgets tight, sales for Weight Watchers are seen declining 9% this year, and those for NutriSystem are seen falling 14%. Life Time is growing sales, mostly because it is opening new clubs, not expanding sales at longstanding ones. NutriSystem, unlike the others, is debt-free, and it offers the plumpest dividend yield: 5.3%.

3. A house bubble has popped, but has left plenty of houses.

Prices are down 27% from their mid-2006 peak, according to S&P’s Case/Shiller index, last reported in February for December. But houses built during the frothy years — from 2000 to 2007 the number of housing units swelled 10% while the population increased less than 7% — remain. Not all are cared for; a record one in nine are vacant. Assuming prices will eventually find a level where buyers will move in, our huge housing stock will need plenty of paint and lawn care in years to come. Sherwin-Williams (SHW8) leads the nation in paint sales, makes most of its money from touch-ups on existing houses, and has increased its dividend each year since 1979. Current yield: 3.2%. Shares are 14 times earnings. The Scotts Miracle-Gro Company (SMG9), true to its name, is increasing sales in what seems like an unlikely setting. Shares sell for just under 15 times earnings, but those earnings are expected to grow by double-digit percentages this year and next. The dividend yield seems in need of a spritz or two of growth spray, at just 1.5%.

Screen Survivors Company Ticker Price P/E Yield
McKesson MCK10 36.27 9 1.4
Kinetic Concepts KCI11 19.78 6 n/a
Lifetime Fitness LTM12 11.28 7 n/a
NutriSystem NTRI13 14.14 9 5.3
Weight Watchers WTW14 19.35 8 3.7
Sherwin-Williams SHW15 50.2 14 3.2
The Scotts Miracle-Gro Company SMG16 33.97 15 1.5


1http://www.smartmoney.com/quote/MCK/
2http://www.smartmoney.com/quote/WMT/
3http://www.smartmoney.com/quote/BEAV/
4http://www.smartmoney.com/quote/KCI/
5http://www.smartmoney.com/quote/LTM/
6http://www.smartmoney.com/quote/WTW/
7http://www.smartmoney.com/quote/NTRI/
8http://www.smartmoney.com/quote/SHW/
9http://www.smartmoney.com/quote/SMG/
10http://www.smartmoney.com/cfscripts/director.cfm?searchstring=MCK
11http://www.smartmoney.com/cfscripts/director.cfm?searchstring=KCI
12http://www.smartmoney.com/cfscripts/director.cfm?searchstring=LTM
13http://www.smartmoney.com/cfscripts/director.cfm?searchstring=NTRI
14http://www.smartmoney.com/cfscripts/director.cfm?searchstring=WTW
15http://www.smartmoney.com/cfscripts/director.cfm?searchstring=SHW
16http://www.smartmoney.com/cfscripts/director.cfm?searchstring=SMG

URL for this article:
http://www.smartmoney.com/Investing/Stocks/7-Stocks-for-10-Year-Holders/

Outlook for 2009 from RGE monitor - predicting a LONG Recession

RGE Monitor - 2009 U.S. Economic Outlook

Christian Menegatti, Arpitha Bykere, Elisa Parisi-Capone and Mikka Pineda | Jan 7, 2009

It is clear that 2008 was not a very good year and it is official that the current U.S. recession started already in December 2007. So how far are we into this recession that has already lasted longer than the previous two (1990 and 2001 recessions lasted 8 months each)? We believe the U.S. economy is only half way through a recession that will be the longest and most severe in the post war period. U.S. GDP will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.

One last look at 2008 will reveal a very weak fourth quarter with GDP growth contracting -6%, in the wake of a sharp fall in personal consumption and private domestic investments. We see the real GDP growth contraction playing out through the year as follows: Q1 2009 -5%; Q2 2009 -4%; Q3 2009. -2.5%; Q4 2009 -1%, adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009.

Personal Consumption

The resilient U.S. consumer started to give up in the third quarter of 2008, when for the first time in almost two decades, personal consumption contracted. With personal consumption making up over two-thirds of aggregate demand, the outlook for the U.S. consumer is at the center of the dynamics that will play out in the real economy in 2009.

In our view, personal consumption will continue to contract throughout 2009 quite sharply as a result of negative wealth effects from housing and equity market losses, the disappearance of home equity withdrawal from the second half of 2008, mounting job losses, tighter credit conditions and high debt servicing ratios (the debt to income ratio went from 70% in the 90s, to 100% in 2000 to 140% now). This retrenchment of the U.S. consumer will result in a painful rebalancing in the economy that will eventually restore the saving rate of a decade ago.

The wealth losses for households related to the fall in home prices are roughly $4 trillion so far, and are clearly bound to increase further as home prices continue to fall –eventually reaching the $6-8 trillion range (compatible with a 30-40% fall in home prices peak to trough). With a negative wealth effect of 6 cents on the dollar, the reduction in personal consumption could amount to a whopping $500bn. And negative wealth effect from fall in equity prices – on the wake of a bleak 2009 for corporate profits – will also contribute to the contraction in personal consumption by an estimated $100bn (compatible with a 25% contraction in the stock markets).

This adjustment is consistent with a rebalancing of the economy that will over time bring the saving rate to a positive level of roughly 5-6% where it was a decade ago, for this to happen consumption has to contract by an amount close to $800bn.

Housing Sector


The 4th year of housing recession is well on course.

Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate (SAAR) peak of January 2006 all the way to the 625 thousand SAAR of November 2008 (the last data point available), an all time low for the time series that started in January 1959. Single-family starts built for sale are down 75% from their Q4 2005 peak (seasonally adjusted data are not available, we performed our own seasonal adjustment).

On the demand side, new single-family home sales are down 65% from their July 2005 peak. Both demand and supply of homes are therefore still falling very sharply which does not bode well for inventories. Inventories are the mortal enemy of prices for any goods-producing sector, including housing.

Starts need to fall substantially below sales so that the excess supply in the housing market is reabsorbed. Inventories persist at record highs and the gap between one-family starts (for sale) and one-family sales (-92K annual rate in Q3 2008 according to our estimates) is at levels that cannot promote a fast work–off of inventories. To put these numbers in perspective, compare this with a measure of vacant homes for-sale-only. Vacant homes for-sale-only were at 2.2 million in Q3 2008, an all time high. In the decade between 1985 and 1995 it oscillated around 1 million units on average and 1.3 million units between 2001 and 2005. This implies that we have to deal with an excess supply that ranges between 0.9 and 1.2 million units, of which roughly 85% are single-family structures.

The sharp and unprecedented fall of starts might not have reached a bottom yet. In this economy-wide recession, weakness on the demand side is bound to persist and we believe that supply will have to fall further, given also the great wave of foreclosures that is adding to the excess of supply in the market. We see starts falling another 20% from current levels.

We believe that home prices will not bottom out until the middle of 2010. Our target is a 38% peak to trough (so far prices have fallen 25% from the peak) but given the worsening conditions on the real side of the economy, we see a meaningful chance for over-correction that would bring prices down 44% from the peak reached in the first half of 2006 (Case-Shiller is the reference index for these predictions.)

Labor Markets

With continued credit crunch and significant cut down in consumer and business spending, the monthly job losses will continue in the 400-500k and 300-400k range during the first two quarters of 2009 respectively, bringing the unemployment rate to 8% by mid-2009. The severe contraction in private demand until early 2010 will keep lay-offs high and the unemployment rate elevated over 8%.

Economy wide job cuts are expected, with big corporations and small enterprises, residential and commercial construction, financial services and manufacturing continuing to shed jobs at a strong pace. Moreover with structural shifts in the economy since the last recession, job losses this time will be more severe in the service sector, including retail, business and professional services and leisure and hospitality. Unless the fiscal stimulus addresses the deficit problem for state and local government, job losses at the government level will also gain pace. In turn, income and job losses will further push up default and delinquency rates on mortgages, consumer loans and credit cards. Moreover, the loss of high paying corporate and financial sector jobs will be a big negative for tax revenues over the next two years.

Lay-offs are bound to continue thereafter as cost-cutting gains pace with the beginning of the (sluggish) recovery period in early 2010. Even as consumer demand might show some signs of recovery, firms, like in the past, will begin by hiring only part-time and temporary workers initially. The unemployment rate might peak at close to 9% in Q1 2010, almost two years after the recession began. However, the hiring freeze across industries that began in late 2007 will continue at least until 2010 causing discouraged workers to leave the work force and containing the extent of the spike in the unemployment rate. Further, the decline in labor utilization will add to the deflationary pressure in the economy. An aging labor force, lower capital spending and potential growth over the next few years might also result in lower productivity growth and an increase in the natural rate of unemployment (NAIRU).

Capital Expenditure

Firms have been drawing down inventories beginning in Q4 2008. As the slump in domestic and foreign demand and difficulty in accessing short-term credit persist over the next four quarters, business investment is bound to contract in double-digits throughout 2009. Industrial production, spending on equipment and durable goods will also remain in red through 2009. Moreover with a sluggish recovery in private demand even during 2010, firms will start building inventories and contemplate capex plans only at a slower pace.

Trade

Exports contraction that began in late 2008 will gain pace in 2009 as more and more emerging economies slip into slowdown following the G-7 countries. On the other hand, easing oil prices and secular downward trend in consumer spending and business investment will help imports to shrink. In fact, this might cause the trade deficit to contract in 1H 2009 since the contraction in imports might well exceed the decline in exports, thus containing any negative contribution of trade to GDP growth.

Dollar Outlook

The fate of the U.S. dollar in 2009 rests on the global growth outlook. After profit-taking on long USD positions ends and trading volumes pick up as investors return from their holidays, the dollar may temporarily recover its relative safe haven status in H1 2009. Since markets have yet to fully appreciate the impact of the commodity slump and financial crisis on the rest of the world, risk appetite may collapse again on signs of a deeper- or longer-than-expected recession outside the U.S.. Further de-leveraging of USD-denominated liabilities could provide an additional boost to the dollar as a funding currency. The bond yield outlook could be a further source of strength: while the Fed is already at ZIRP, other central banks will cut rates further to stimulate growth, putting downward pressure on currencies like the Euro. Alternating with these upside risks to the dollar may be downside risks from 1) a supply crunch in commodities that lifts commodity prices and producers' economies, 2) inability of the market to absorb increased Treasury supply at low yields.

Downside risks to the dollar seem more likely to outweigh upside risks in the latter half of 2009 and in 2010. Yet at the same time, similar downside risks exist for other currencies – growing fiscal deficits will weaken a range of currencies. With emerging markets continuing to have trouble attracting capital and Asian economies, hammered by export contractions, will be reluctant to allow their currencies to appreciate against or with the dollar – China allowed some depreciation of the RMB at the recent euro-dollar peak.

Once crucial support from deleveraging wanes, however, the dollar may be left with only foreign central bank reserve accumulation, which has already waned on the reversal of capital flows, to finance the large U.S. current account deficit. Continued repatriation of assets and higher enforced domestic savings rates will at least reduce pressure on the dollar in the short-term.

Inflation/Deflation



Annual U.S. inflation, as measured by official producer and consumer price indices, is likely to slow in 2009 and even fall into technical deflation despite increases in the monetary base and fiscal measures to boost spending power. Slumping commodity prices may drag down the average annual headline CPI inflation rate to around -2% - a technical deflation which may morph into genuine deflation if falling prices generate expectations that they will continue to fall. Meanwhile, the growing slack in product and labor markets will keep core consumer inflation subdued at an average year-over-year rate of 1-2%. Steep discounts to get rid of unsold retail inventory, rising job losses and lower wage growth will reinforce the trend of stagnant or falling prices. Loose labor markets and weak demand for commodities and goods/services will keep producer prices at bay. Risks to the outlook include 1) a commodity supply crunch or geopolitical shock that leads to a sustained rise in commodity prices and 2) an earlier than expected global economic recovery.

Credit Losses Still Ahead



Back in February 2008, Nouriel Roubini warned that that the credit losses of this financial crisis would amount to at least $1 trillion and most likely closer to $2 trillion. As of mid-November 2008, the threshold of $1 trillion in global financial writedowns was finally reached. Given that national house prices expected to drop another 20%, we expect credit losses of $1.6 trillion.

An in-depth analysis of current and expected loan losses per asset class and separately of mark-to-market writedowns per securities class based on current prices indeed confirms RGE’s initial loss range estimates (outstanding loan and securities amounts as in IMF GFSR, Table 1.1) For our calculations we assume a further 20% fall in house prices, and an unemployment rate of 9%. With respect to credit losses on unsecuritized loans, recent research by the Fed Board using comparable assumptions (but assuming high oil prices) concludes that over half of 2006-2007 subprime mortgage originations are going to default (i.e. $150bn out of $300bn). The loss trajectories for Alt-A loans are similar resulting in a 25% default rate ($150bn out of $600bn). Even prime mortgage delinquencies display a very high correlation with subprime loan delinquencies, implying an approximate 7% default rate when the potential for ‘jingle mail’ is taken into account ($266bn out of $3,800bn).

The cycle has also turned in the commercial real estate (CRE) arena with the traditional lag of around 2 years. Current serious delinquency plus default rates of 5.9% of CRE loans (net recovery, via Fed data) are projected to increase to up to 17% by Fitch assuming a 25% fall in prices ($408bn out of $2.4 trillion.) In the consumer loan area, we estimate credit card charge-off rate could increase to 13% in the worst case scenario. Adding a typical 5% delinquency rate during recessions, the total loan losses on unsecuritized consumer loans are projected to increase to $252bn out of $1.4 trillion (see The U.S. Credit Card Industry in 2009, by RGE’s Mathias Kruettli.)

The IMF warned that commercial and industrial loans (C&I) charge-off and delinquency rates are likely to climb to historical peaks and potentially beyond in this cycle. Compared to past C&I loan loss rates, we project charge-off and serious delinquencies to reach 10% or $370bn out of $3.7 trillion of unsecuritized C&I loans. With regard to leveraged loans, the latest research by Boston Consulting/IESE Business School based on the 100 largest PE firms engaged in LBOs calculates an expected book loss from default of about 30%. This translates into $51bn out of $170bn unsecuritized leverage loans.

Based on these calculations, RGE expects total loan losses to reach about $1.6 trillion out of $12.4 trillion of unsecuritized loans alone, implying an aggregate default rate of over 13%. The IMF assumes that the U.S. banking system carries about 60-70% of unsecuritized loan losses (and about 30% of mark-to-market losses on securitizations). Even assuming that future loan losses are fully discounted at current market prices, deploying the remaining TARP funds towards recapitalizing the banking system would still be warranted.

The Disconnect Between Bond and Equity Markets



U.S. government bonds were on a tear in 2008, while equities plummeted in a nasty bear market. Bond yields at the long end hit all-time record lows, while the short end even dipped into negative territory. Only TIPS suffered as deflation risks rose. Stocks, on the other hand, had their worst year since the Great Depressions: DJIA lost 34%, S&P 500 -38.5%. At its 2008 low on November 20, the S&P 500 was down 49% for the year and 52% from its October 2007 peak. Stocks rallied in December though, resulting in an apparent disagreement between the stock and bond markets over the outlook for the U.S. economy. Bond markets seemed to be discounting a recession in 2009 while stock markets have been gaining since late November. This disconnect may vanish in 2009 though if the stock market rally was really just a bear market rally due to portfolio re-balancing and thin year-end trade volumes.

However, there have been intimations that the bond market is in a bubble about to burst in 2009. Indeed, with ultra low bond yields, investors may be tempted to switch into higher-yielding equities - which are now considered by many to be undervalued. Valuation, however, is not the be-all and end-all of asset performance. The credit freeze needs to end before equities can see the end of the bear market. However, considering the likely economic stagnation ahead, bonds should be a better bet than equities for some time. We see meaningful downside risks to stock prices as bad macro news – worse than expected – continues to dominate in 2009. Using the S&P 500 as benchmark, earnings per share will stay in the $50-60 range – and earnings will fall further. If, and it is not unusual during recessions, P/E ratio falls in the 12-14 range, we could see another 25% slide in stock prices.

Fiscal and Monetary Policy

Fiscal Policy

A lot of hope is being placed on the expected fiscal stimulus package of around $750 bn spread over 2009-10 including 40% of the stimulus in tax cuts for households and firms. Around half of the stimulus is expected to kick-in starting Q2 2009 and through 2010. But this will fall short of the pull-back in private demand of close to $1 trillion during this period.

Infrastructure spending, in spite of being highly effective, might not be timely, stimulating the economy only in late-2009 and 2010 when it has well passed the severe recession phase only to exacerbate the ballooning fiscal deficit. Nonetheless, around $100bn of infrastructure investment might be able to kick-in during 2009. Moreover, job creation in infrastructure might be overestimated given limitations in moving laid-off workers from other sectors to the infrastructure projects. As such, any job creation via government spending and tax incentives for firms will significantly fall short of the ongoing lay-offs.

Given the drawback of the ‘spending’ component of the stimulus, the government may be enticed to implement more tax cuts. While tax incentives for households like payroll and child tax credit might be well-targeted at the group with high propensity to spend, tax cuts in general will be less effective in stimulating demand given a secular rise in the saving rate expected over the next few years. Likewise, tax breaks for firms hiring new workers or investing in new equipment will be rather ineffective since businesses see little viability in doing so during a slump in domestic and export demand. At the most, tax stimulus in spite of being timely and well-targeted will cause only a temporary rebound in the economy for a month or a quarter merely shifting the spending decision period just like tax rebates did in 2Q 2008.

Expansion of unemployment benefits, food stamps and other incentives will have a high bang-for-buck effect in 2009 and will only assuage the impact of the recession. The stimulus will also include up to $100 bn for state and local governments to meet their severe budget shortfalls including grants, Medicaid and unemployment insurance funds, preventing cutbacks in public services, investment and jobs in several recession-hit states. But again, fiscal aid for states often suffers from time lags.

Fiscal stimulus, TARP spending, GSEs-related expenditure along with further slowdown in corporate and individual income tax revenues will push the fiscal deficit to around $1.3 trillion in FY2009.

Monetary Policy

The Fed has enacted a wide and unprecedented range of measures to mitigate the credit crisis and stimulate the economy. It has already cut its target range for the Fed funds rate down to 0-0.25% (essentially ZIRP) but, more importantly, it has created currency swap lines and an alphabet soup of programs to provide liquidity to the financial system and clean out toxic financial assets. The Fed experimented with different forms of financing itself in order to enable a sharp expansion of its balance sheet to accommodate these liquidity facilities. In addition to rate cuts and quantitative easing, the Fed has directly aided failing financial institutions. Now, the Fed is considering issuing its own debt and/or purchasing long-dated Treasuries and Agency debt. Will the monetary easing work? So far, the increase in money supply has not been accompanied by an increase in the velocity of money. In other words, credit growth remains stagnant as banks are reluctant to lend back out the money provided by the Fed and, at the same time, borrower demand has fallen.

Safety First (from Barrons)

Monday, September 15, 2008




Retirement: Safety First
By KAREN HUBE

Risk experts explain how to keep your nest egg from cracking in shaky markets. Also, which investments offer the most stable returns during slumps? And, exotic real estate -- with an American twist.

THESE ARE SCARY TIMES FOR INVESTORS TRYING to protect and increase their retirement portfolios. With stock prices gyrating and major financial institutions crumbling, the mattress may look like as good a place as any to stash your holdings.

Not so fast. Take it from five titans of risk management: There are steps you can take to protect your nest egg for as longs the tumult lasts -- steps that will make sharp market dips much easier to endure.

Even better, without sacrificing those safeguards, you can position your retirement funds to participate in the earliest gains as the stock market begins to recover. And yes, these experts say, the market will recover.

So heed the practical advice and recommendations of the intellects whose views you'll read on the following pages -- Barton Briggs, Peter Bernstein, Charles Ellis, David Darst and Jeremy Siegel -- and reserve that mattress for some peaceful sleep.


Brad Trent
Peter Bernstein
Founder, Peter L. Bernstein Inc.

After almost six decades of contemplating market risk, Peter Bernstein knows how to spot investors' worst-case scenarios before they do. These days, what he sees concerns him deeply.





As the current economic crisis unfolds in ways that even the most bearish Wall Street strategists never predicted, Bernstein says any number of disasters could still be in store for investors. For those saving for retirement, in particular, taking protective measures is critical.

"The goal for investors right now should be survival, not making a killing," says Bernstein, who has been an economics professor and money manager, and is the author of several books, including Against the Gods, a classic on risk. "You should be thinking about how to hedge against extreme outcomes."

With markets down and unemployment and home foreclosures rising, what more could happen?

"A major bank failure, causing a run on banks in general," Bernstein speculates. Or "a run on the dollar, perhaps provoked by what foreigners view as too big a fiscal deficit."

Or runaway inflation or deflation, either of which could be disastrous for long-term retirement investors.

The next step of this crisis is hard to predict, Bernstein says, because the crisis is so unusual. "Nothing like this has ever happened before," he continues. "There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary."

He suggests diversifying a portfolio so that it is not only exposed to many different markets, but also to ensure it can weather all kinds of scenarios.

For example, to guard against rampant inflation, every portfolio should contain at least a sprinkling of Treasury inflation-protected securities and short-term Treasuries, Bernstein suggests.

The TIPS come with a guaranteed return above inflation, and short-term Treasuries enable you to roll your money into higher-yielding issues every 90 days if inflation rises and interest rates follow.

"Short-term Treasuries aren't a very good holding under normal conditions, but they are a hedge against extreme conditions," Bernstein says. Long-term Treasuries are a good hedge against deflation, he adds.

Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide they no longer want to invest as much in U.S. Treasuries. "In a total disaster, where there is a run from paper currency, you'll get your biggest bang for your buck in gold," he says.

You don't have to buy much gold to have an effective hedge, he adds, noting that "if everything hits the fan, gold could be worth several thousand dollars an ounce." It is now valued at about $750 an ounce.

Above all, don't let your defensive attitude waver, Bernstein counsels.

"Every day, we are faced by the possibility that something we never dreamed of will happen," he cautions.

"In 1958, I'd been in the business for seven years when, for the first time in history, bonds yielded more than stocks. My associates said, 'It's an anomaly, don't worry, it will be reversed.' It's 50 years later, and I'm still waiting."


Gary Spector
Charles Ellis
Founder, Greenwich Associates

In Japan, investors fill their stock portfolios primarily with Japanese companies. The French place their biggest bets on French companies. The story is the same in New Zealand, India, Russia, and around the globe: Investors favor their own countries' stocks.

For U.S. investors it's easy to criticize foreign investors for being provincial. But Charles Ellis, a former chair of Yale's Investment Committee and a consultant for institutional investors, has a suggestion for them: Look in the mirror.

The typical U.S. investor holds at least 85% of his stock portfolio in domestic stocks, even though the U.S. stock market accounts for only 40% to 45% of the world's total stock-market value.

"People feel more comfortable emphasizing their own country, because they recognize the company names," says Ellis, whose internationally renowned book is Winning the Loser's Game. "But from a pure investment point of view, it doesn't do any good" -- particularly for folks investing for retirement and other long-term goals, he says.

A U.S.-centric stock portfolio creates high levels of volatility, and denies investors the benefit of surging markets around the world, Ellis notes.

The best risk-adjusted returns over the long term can be scored by matching the market capitalization weightings of the world's markets, Ellis says. That would mean putting 45% in domestic stocks, 47% in developed foreign markets and 8% in developing foreign markets.

The idea is to have no bets on whether one market or another will be stronger in coming months.

"If you said, 'I don't really have a smart idea about the direction of the markets, I'm just a sensible person, what should I do?,' the answer is to go to a global index and start there," Ellis says. "If you have reason to make any changes from there...then you can adjust it from a neutral to an opinionated portfolio."

Traditionally, investors have been hesitant to plunge more deeply into foreign markets -- because of perceptions that foreign-currency exposure presents too much risk, foreign companies don't get enough oversight from their governments, and foreign markets are simply too volatile.

To Ellis, however, the truly global allocation of assets trumps all those concerns.

"There really is a free lunch, and it's called diversification," he says. "By diversifying, you reduce your risk substantially. It doesn't cost anything, and you get something for it."


Evan Kafka
Barton Biggs
Managing Partner, Traxis Partners

When the herd zigs, Barton Biggs zags. So it shouldn't be a surprise that while U.S. investors can't dump their technology stocks fast enough these days, Biggs has been declaring that now is the time to get into the trampled tech sector.

The best values right now, he says, are in large-cap, high-quality stocks around the world, "but particularly in the U.S., and within that category, technology appeals to me the most."

Biggs, co-founder and managing partner of the $1.3 billion hedge fund Traxis Partners in New York, is the former global investment strategist at Morgan Stanley.

"We've been in a period of stagnation in terms of tech spending since the bubble burst in 2000. The next recovery is going to be marked by unusual spending in all types of technology...and the sector will be one of the first areas to pick up as the U.S. and the world begin to recover," Biggs says.

A market recovery, he believes, will begin in the first half of 2009. By then, oil prices should be consistently below $120 a barrel, and the housing market should have started stabilizing.

Due to the government's takeover of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) -- which he characterizes as "one of the most important events of the last 20 years" -- further declines in home prices are likely to be more moderate than expected earlier.

But don't wait for an economic recovery in order to step into large domestic stocks and global tech stocks, or "the markets will already be up," Biggs says. "I wouldn't be surprised if later, in retrospect, we will find that the stock market is at its bottom about now."

Biggs is a notoriously trend-bucking strategist, which has sometimes paid off massively for those who follow him. In the late 1990s, he spared his clients huge losses by predicting the technology-driven bull market was going to plummet. And in 2003, when investors were steering clear of Japan, he moved into the Japanese stock market, adding untold wealth to clients' portfolios in the following three years as Japan soared.

Today, while many Wall Street strategists are recommending an underweighted position in stocks, Biggs is defiantly upbeat." The public has been selling stocks and has an incredible amount of liquidity, and so have institutions and hedge funds," he says.

"The fact that everyone is cautious has raised a lot of investable funds, and that's bullish," he adds. "We're in a stage where ordinary investors ought to be buying on weakness," says Biggs.

Some of his top picks: Cisco (CSCO), IBM (IBM) and Google (GOOG).

Biggs is steering clear, for now, of stocks in the materials, energy, agricultural and industrial- and oil-commodity sectors, but notes that "those will come on strong again -- but not until further into the recovery."


Dave Moser
Jeremy Siegel,
Professor, Wharton School

To most investors, dividend-paying stocks seem about as cutting edge as a corded telephone. Yet Jeremy Siegel talks about stock dividends with the enthusiasm and sense of discovery of a first-time iPhone user.

Through his recent research, Siegel, a finance professor at the University of Pennsylvania's Wharton School of Business, has become enamored of the dividend, and hopes to elevate its status from a humdrum staple for retirement-income seekers to a punch-packing contributor to younger investors' retirement portfolios.

He argues that the tendency of investors to look solely at the growth rates of earnings, sales and cash flow hurts them in the long run. The bias toward high-growth companies causes them to miss out on the high dividend-paying companies whose total returns, contrary to popular perception, have historically outshined the performance of growth stocks over time, he says.

"Everyone thinks it's old-fashioned to think about dividends, but investors have historically gotten about an extra two or three percentage points a year of higher returns by investing in the highest dividend-yielding stocks and reinvesting the dividends," says Siegel, author of The Future for Investors, Stocks for The Long Run, and other books.

One of his most striking examples is the difference in fortunes between people who invested in IBM rather than Standard Oil, now ExxonMobil (XOM), in 1950. Over the next five decades, through 2003, IBM trounced Standard Oil in per-share growth of revenue, dividends and earnings. But Standard Oil had a higher total return: A $1,000 investment in Standard Oil would have grown to $1.26 million with dividends reinvested, compared to $961,000 -- 24% less -- for IBM investors. "And that was before the recent energy price increases," Siegel says.

While financial companies historically have been reliable dividend payers, the dividends on Fannie Mae and Freddie Mac have been halted, and 21 financial-services firms have cut their payouts since the beginning of this year, according to Standard & Poor's. In a typical year, two or three financial firms cut their dividends, but the majority of them increase their payouts.

Long a supporter of index investing, Siegel now favors index funds that rebalance on a dividend-weighted basis. Siegel is a senior investment strategy adviser at WisdomTree, which has developed a series of funds that operate this way.

A dividend-weighted index rebalances regularly to favor stocks that pay the highest dividend. Most indexed portfolios, in contrast, rebalance based on the market capitalization of the stocks. With a dividend-weighted index, investors end up buying stocks when their prices are low relative to their fundamentals. A high dividend yield is a strong indication that a stock is undervalued, Siegel says.

Throughout history, dividend-paying stocks have gotten the spotlight. When the tech bubble burst in 2000, many investors sought out dividend-paying stocks to try to steady their portfolios. In 2003, payouts got a boost when the tax rate on dividends was changed to the 15% capital-gains rate, versus the higher income-tax rates.

Some of this tax benefit may get rolled back if Sen. Barack Obama (D.-Ill.) is elected president; he has said he would raise the dividend tax rate to 20% -- "but that's still a preferred rate," Siegel points out. He adds that investors who keep a steady spotlight on the high dividend-paying stocks in their portfolios are likely to have a brighter retirement.


Gary Spector
David Darst
Global Wealth Management Group,
Morgan Stanley

David Darst is the Iron Chef of the investment world. As chief investment strategist at Morgan Stanley's Global Wealth Management Group for the past 11 years and one of Wall Street's foremost experts on asset allocation, Darst spends much of his time considering the perfect ingredients -- of a portfolio, that is. He takes a little of this, blends it with a little of that, and -- voilà! -- produces nourishing retirement portfolios.

Investors who have seen the air sucked out of their retirement portfolios lately might need convincing. The problem in the typical portfolio, Darst suspects, is that most people skimp on alternative investments like commodities, real estate and hedge funds.

"The perception is that they're too risky, but we view the benefits of alternatives more by the reduced volatility they bring to a portfolio than by an increased return," says Darst, who recommends that folks with $1 million to $20 million to allocate 20% to alternative investments, and those with less, 8%.

While any particular alternative investment may, indeed, be more volatile than the broad stock or bond markets, a portfolio diversified across stocks, fixed income, and a number of different alternatives will likely be less risky than one with fewer asset classes -- and it may even score higher returns, Darst says.

Consider a portfolio with 40% invested in stocks and the rest split between commodities and real estate. That may sound risky, but according to Ned Davis Research, in the 35 years through 2007, such a portfolio had the same risk as a portfolio with 40% invested in stocks and 60% in bonds. Yet it gained almost two percentage points more per year -- 12.47% versus 10.5%.

Within an alternative-investment portfolio, Darst recommends a 50% weighting in hedge funds, which gives investors the potential to benefit from talented money managers who have the freedom to invest where and how they see fit, without constraint.

Some 20% should be in real assets, such as commodities and gold. Both provide a hedge against inflation, and gold in particular has been a historic refuge in times of turmoil in the financial markets, political instability, or other crises.

Another 20% should be directed to managed-futures funds, Darst says. These invest by going long or short futures contracts in a broad basket of commodities and other investments, including metals, grains, sugar, foreign currencies, stocks and bonds.

Managed-futures funds provide a cushion to portfolios in down markets, because they typically are inversely related to the stock market, Darst says.

During the period 2000 to 2002, when the tech bubble burst and the Standard & Poor's 500 cratered 31%, the Barclay CTA Index of Managed Futures Funds was up 20%. In the fourth quarter of 1987, when the U.S. stock market crashed and the S&P 500 lost 22.5%, the Barclay index was up 13.8%. This year through August, the S&P 500 was down 14%, while the Barclay index was up 6.95%.

Lastly, Darst recommends placing 10% of a portfolio in Treasury inflation-protected securities to get their risk-dampening benefits, Darst says.

While he has usually included real estate in the alternative-investments portfolio through direct investments or REITs (real-estate investment trusts), he predicted enormous volatility in the sector last December and made a tactical move to eliminate real estate from his models.

For the average investor, however, it would take a rare event to prompt the removal of an asset class from the alternative-investments portfolio, because that could mean missing its next surge.

Says Darst: "You want to have all of your relatives at the table. Not just the 17-year-old singer in the family that everyone has always listened to, but the quiet nephew who turns out to win the Pulitzer Prize."

Follow advice like that, and investors themselves just might take home a prize.


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