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Home Prices See Strong Gains in Q1 2013

Year-over-year change in home price (Click to enlarge)

Very positive news from the S&P/Case-Shiller Home Price Indices based on the latest data (through March 2013):

• All three composites posted double-digit annual increases.
• The 10-City and 20-City Composites increased by 10.3% and 10.9% in the year to March with the national composite rising by 10.2% in the last four quarters.
• All 20 cities posted positive year-over-year growth.
• In the first quarter of 2013, the national composite rose by 1.2%. On a monthly basis, the 10- and 20-City Composites both posted increases of 1.4%.
• Charlotte, Los Angeles, Portland, Seattle and Tampa were the five MSAs to record their largest month-over-month gains in over seven years.

Click to enlarge

How Will Gen X Retire?

The Pew Charitable Trust released a report last week detailing the impact of the financial crisis and specifically the damage to Generation X defined as those born between 1966 and 1975.

The bad news

The typical Gen Xer now in his or her late 30s to late 40s saw their net worth drop by a larger proportion than older Americans during the crisis.
Generation X suffered losses amounting to 45% of median net worth between 2007 and 2010.
Gen Xers are now less prepared for retirement than the post-World War II boomer generation.
Gen Xers are on track to replace only 50% of their pre-retirement income if they stop working at age 65. Boomers (borned 1946-1955) are set to replace 82% of income while Late Boomers (1956-1965) are tracking to replace 59%.

What’s working against Generation X?

Gen X will bear the full brunt of the decision made decades ago to raise the age at which beneficiaries can get full Social Security benefits to 67 up from 65.
Life expectancy is rising meaning retirement assets will have to last longer.
Most Gen Xers will have to rely on defined-contribution plans (e.g., 401(k)s), instead of traditional pension plans.

What do Gen Xers need to do?

Gen Xers are facing a genuine possibility of downward mobility, if they don’t change course.
Generation X needs to take steps such as saving more, investing more wisely, and borrowing less to maintain their living standard in retirement.
There’s additional reason to be optimistic because many Gen Xers may have been fairing better in the last few years following the 2010 cutoff of the Pew study.
Home prices and the stock market have been rebounding in recent years.
As long as Gen Xers didn’t sell stock and they continued to contribute to their retirement accounts through the recession they will be in a reasonably good position.
That’s a prudent lesson to remember when inevitable occurs and we face another recession.

Source: Wall Street Journal

Average Retirement Age Up to 61

The average age at which U.S. retirees say they actually retired is now at 61, up from 57 in the early 1990s.

Currently, 37% of nonretired Americans say they expect to retire after age 65, 26% at age 65, and 26% before age 65.

Some key observations:

• The average retirement age has crept up by four years over the past two decades, from 57 in 1991 to the current 61

• The average nonretired American currently expects to retire at age 66, up from 60 in 1995.

• More than half of nonretirees aged 58 to 64 expect to retire after age 65, compared with 36% of nonretirees aged 50 to 57, 38% of those between 30 and 49, and just 26% of those younger than 30.

• The average age that current U.S. retirees said they retired is now 61, compared with 59 in 2003 and 57 in 1993.

• Gallup has found that Americans aged 60 to 69 who work have slightly better emotional health than those who do not work, and this relationship is stronger for Americans in fair or poor health.

Gallup has additional interesting interpretation and discussion at this link.

Source: Gallup

Self-Destructive Investor Behavior

Over the 20-year period from 1993 to 2012, the S&P 500 returned 8.2% annually, while the average stock investor in the U.S. earned only 4.3%. This great divide between the two results is called the “investor behavior gap” because the majority of it is the result of individual investors making bad decisions.

Fear, greed and other emotions drive negative behaviors such as:

Dumping money into the latest high-flying fund or asset class with the expectation that the outperformance will continue.
Actively avoiding areas of the market that are down and out of favor with the mindset the beleaguered investment will never come back.
Disregarding your investment plan by attempting to time the market.

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” — Benjamin Graham (“Father of Value Investing”)

College Graduates Fare Well in Jobs Market, Even Through Recession

A remarkably stark employment picture in the below New York Times graphic below – the recovery and early stages of the new Knowledge Economy has not been kind to non-college graduates at all.

From the related article:

The number of college-educated workers with jobs has risen by 9.1 percent since the beginning of the recession. Those with a high school diploma and no further education are practically a mirror image, with employment down 9 percent on net. For workers without even a high school diploma, employment levels have fallen 14.1 percent.

What’s Wrong with the Financial Services Industry?

According to Barry Ritholtz, the big problems that plague the financial service industry are the following:

• Simplicity does not pay well: Investing should be relatively simple: Buy broad asset classes, hold them over long periods of time, rebalance periodically, get off the tracks when the locomotive is bearing down on you. The problem is its easier in theory than is reality to execute. And, it is difficult to charge excessive fees for these services.

• Confusion is not a bug, its a feature: Thus, the massive choice, the nonstop noise, confusing claims, contradictory experts all work to make this much a more complex exercise than it need be. This is by design.

• Too much money attracts the wrong kinds of people: Let’s face it, the volume of cash that passes through the Financial Services Industry is enormous. Few who enters finance does so for altruistic reasons. There is a difference between normal greed (human nature) and outright criminality. This is why strong regulators and enforcement cops are required.

• Incentives are misaligned: Too many people lack the patience to get rich slowly. Hence, not only do the wrong people work in finance, and some of the right people exercise bad judgment.

• Too many people have a hand in your pocket: The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and Accountants have doen an awful job, allowing corporations to mislead investors with junk balance statements. The Media’s job is to sell advertising, not provide you with intelligent advice. The Regulators have been captured.

Source: The Big Picture

12 Misguided Commandments of Gold Bugs

Gold prices have fallen approximately 10% over the past week. Prices tumbled 9% on Monday, the biggest one-day loss in 30 years.

Barry Ritholtz of Fusion IQ recently shared his 12 commandments of gold bulls which he says are completely bogus.

Here are his twelve (misguided) gold bug commandments in his own words:

1. Gold is a Currency: This is rule number 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.

2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of Central Bankers and politicians. Its a conspiracy, and we know who the guilty parties are.

3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior Rule of Gold manipulation. Gold runs up despite the overwhelming opposition to it.

4. The world MUST return to the Gold Standard one day: It is inevitable that we will return to a Gold Standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a Gold Standard, we can derive prices of Gold in the $7,000, $10,000 even $15,000. Hence, we know its cheap even at $2,000.

5. Central Bankers are printing money relentlessly, and this can only drive Gold prices higher: NOTE: You must ignore, for the moment, that Gold has not gone higher for the past 2 years as Central Banks around the world have ramped up QE. This only means that ultimately, Gold will go much much higher.

6. Gold works whether the economy is good or bad: When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!

7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles around you. Get yourself some gold coins and a Glock and you will be just fine when the whole world goes to shit. We welcome the era envisioned in the movie Mad Max.

8. Never admit that Gold is essentially a sucker’s bet: Never discuss how in the last century, gold has run up only be to trounced in repeated massive sell offs (always blame rule #2 for this). Do not discuss how this has happened in 1915-20, 1941, 1947, 1951-66, 1974-76 1981, 1983-85, 1987-2000 and 2008.

9. Gold is a rejection of government, and their control of fiat money and finance: There are no printing presses that produce gold, it is finite, natural and God created. How much we scrape out of the ground each year is limited, and the only variable to the old equation. (Just ignore Man’s natural tendency to organize into to City-States over the past 12,000 years).

10. All Gold discussions must contain ominous macro forecasts: Your description of why Gold is going higher must consist of spurious correlations, unprovable predictions, and a guarded expectation of bad things in the future. Avoid empirical data at all costs.

11. Gold is always rallying in one currency or another: Sure, it may be down 30% in Dollars, the reserve currency it is priced in, but you can always find a currency falling faster than it does and claim you own it in that denomination. Last week, it was up in Japanese Yen. This week, it is up in Zimbabwe dollars.

12. China & India know the value of Gold; the Western world does not: The massive buying of gold by consumers in Chindia reflects the culture, intelligence and investing savvy of the people in these countries. The West doesn’t get it, and it is their loss.

Bonus rule: Never admit Gold might be falling because it trades on human emotions and psychology and has no intrinsic value whatsoever.

People trust the big banks least

A New York Times article titled “The Least-Trusted Banks in America” cites a Forrester Research study that found customers of the biggest banks in the US don’t believe their financial institution does what’s best for them, but instead does what’s best for their bottom line.

Source: The Financial Brand

Education Still Matters If You Want a Decent Paying Job

Click for larger view

Data: BLS, FactSet, J.P. Morgan Asset Management. Source: Census Bureau, J.P. Morgan Asset Management; Unemployment rates shown are for civilians aged 25 and older.

Source: JPM Morgan Guide to Markets, Q2 2013

LPL Runs Afoul of Regulators Unusually Often

A New York Times article published last Friday tells the story of the 4th largest brokerage firm in America and its frequent run-ins with regulators.

Here are some key excerpts:

LPL Financial, has 13,300 brokers, 6,500 offices, 4.3 million customers — and a growing list of problems with regulators.

State and federal authorities have censured the company and its brokers with unusual frequency.

LPL brokers have been penalized for selling complex investments to unsophisticated investors, for speculative trading in customer accounts, and, in a few cases, for outright stealing from clients.

“LPL is on our radar screen more than any other firm,” said Lynne Egan, who oversees securities regulation in Montana.

Since the financial crisis hit in 2008, prominent firms like Merrill, which long catered to individual investors, have lost brokers and customers. Many investors have turned instead to independent brokerage firms like LPL. Unlike employees of the industry giants, LPL brokers are essentially contractors. They get LPL e-mail addresses and come under LPL compliance but pay for office space and staff.

LPL’s most serious case in Montana was resolved in 2009, when Donald Chouinard, an LPL broker in Kalispell, was sentenced to 10 years in prison for operating a Ponzi scheme. LPL paid Mr. Chouinard’s clients $1.3 million, and Ms. Egan’s office a $150,000 fine.

William F. Galvin, the Massachusetts secretary of the commonwealth, came to a $2.5 million settlement with LPL in February for selling the same product to investors in his state. Mr. Galvin said LPL had failed to properly examine who the products were being sold to, and had pushed the investments without mentioning that they provided big commissions to LPL and its brokers.

“What we really saw was a complete lack of supervision,” Mr. Galvin said.

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