The Float

Chart of the Day

Lots of talk today about the major averages closing lower for the fourth month in a row, the first four-month losing streak since 2002. Here's what that looks like on a 10-year monthly chart of the S&P 500...

Note that the index is now (un)comfortably below its 10-month moving average--and that the 10-month has rolled over. Late 2000 was the last time the index closed below the moving average without moving back toward (or, more commonly, above) it.

We hope we don't have to add (but we'll add anyway) that this does not mean we're headed back to 850. What it means is that the burden of proof is firmly on the near-term bulls.

Thomas Palley Gets It

We've argued repeatedly that the U.S. economy has become fully dependent on credit expansion...which makes a period of deleveraging and credit contraction an especially stubborn foe for policymakers.

For more on the debt-driven business cycle, we urge you to read Thomas Palley's Tuesday post. Here are two key excerpts:

[T]here is a deeper problem that has been overlooked: the US economy relies upon asset price inflation and rising indebtedness to fuel growth.

Therein lies a profound contradiction. On one hand, policy must fuel asset bubbles to keep the economy growing. On the other hand, such bubbles inevitably create financial crises when they eventually implode.

This is a contradiction with global implications. Many countries have relied for growth on US consumer spending and investments in outsourcing to supply those consumers. If America's bubble economy is now tapped out, global growth will slow sharply. It is not clear that other countries have the will or capacity to develop alternative engines of growth.

...

[T]he Fed contributed to creating the sub-prime crisis. However, in the Fed's defense, low interest rates were needed to maintain the expansion. In effect, the new cycle locks the Fed into an unstable stance whereby it must prevent asset price declines to avert recession, yet must also promote asset bubbles to sustain expansions.

So, even if the Fed and US Treasury now manage to stave off recession, what will fuel future growth? With debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted.

It is not enough to deal only with the crisis of the day. Policy must also chart a stable long-term course, which implies the need to reconsider the paradigm of the past 25 years. That means ending trade deficits that drain spending and jobs, and restoring the link between wages and productivity. That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth.

Now go read the whole thing.

Friday Reading

Looks like a rough open for equities, but given the intraday volatility of late, does anyone have even the foggiest clue where we'll finish this afternoon?

• As we noted a couple days ago, certain market rates aren't responding too well to the Fed's rate-slashing campaign.
• All about inventories: 200,000 new homes sitting empty.
• The credit crisis as Vietnam-style catastrophe: Yves Smith and James Hamilton on the Fed and the problem of "credibility."
• We've made the (obvious but underappreciated) point that the "E" in PE is as much a variable as the "P." In fact, in some sense, it's more variable. Here's Barry Ritholtz with a look back at expectations and reality for S&P 500 earnings in 2007.
• Here's a tidy summary of Bernanke's two days of testimony formerly known as Humphrey-Hawkins, from the WSJ's Real Time Economics.

Toles on Debt and Leverage

Yet another insightful effort from Tom Toles...

A New List: Things We Don't Like About CNBC

This is the first installment of a gratuitous, self-indulgent list: Things we don't like about CNBC, with emphasis on personality conflicts, verbal tics, lame sound effects, and other such trivia. Demonstrable ignorance is also eligible for inclusion.

We welcome nominations for additions to this living document. To send your additions for our consideration, just click here. We'll re-post the whole list as it grows, which it surely will.

• Dennis Kneale. We don't understand Kneale's relentless, damn-the-evidence optimism on the economy and the markets. But the real problem with Kneale is that no one on CNBC's air gets more immediate corrections, curious looks, and dismissive headshakes. It's the willful cluelessness, not the opinions themselves, that make Kneale CNBC's most mutable voice. We simply do not understand why the network has made him such a fixture. Perhaps it's because no one with a fuller sense of reality could muster Kneale's spin--a kind of spin CNBC's decision-makers think they need to sustain their audience.
• "It's four o'clock on Wall Street. Do you know where your money is?" What in the world is that supposed to mean? Why do Maria Bartiromo and her understudies insist on saying it every day? This is a daily must-mute moment.
• The sound effects used to transition between images during Bartiromo's 4:00 summary schtick. Too loud. Too grating. Utterly unnecessary. Sort of like most of the fake noise made in NBA arenas these days: sound and fury signifying nothing.
• Inane questions about why the market is doing what it's doing at a given moment. Bill Griffeth yesterday, when the S&P 500 was 0.73 points above Tuesday's close: "Why are we higher today?" Good grief. 

In fairness, there's also a list of things we do like about CNBC. We'll post that when we're feeling a little more generous.

WSJ: Target-Date Funds "Holding Up"

Over the last few months, we've posted a number of items on target-date and other fund-of-fund vehicles. (Click here and here for two recent examples.) In Tuesday's Wall Street Journal, Jilian Mincer made this rather bland observation:

While the gyrating stock market may have scrambled some retirement nest eggs, holdings in near-term target-date funds have emerged relatively uncracked.

Target-date funds for those in or near retirement -- those structured for people retiring between 2005 and 2010 -- have lost less than the Standard & Poor's 500-stock index, according to Morningstar Inc. The average total return among these funds was a decline of 4.8% from Oct. 1 through Feb. 20, compared with a decline of 10.2% for the S&P 500, including dividends.

Is that even remotely surprising? In a period when cash-equivalents and most fixed-income securities compare very favorably with equities, it figures that funds with heavier exposure to cash and bonds will "hold up."*

Then there's this revealing passage, one that reinforces our belief that investors should be presented with target-risk rather than target-date portfolios:

Investment in the market always entails volatility. But target-date funds vary significantly in how much they move in reaction to the market's swings, according to Tom Idzorek, director of research and product development at Ibbotson Associates.

For example, some funds for retirees have as much as 70% in stocks while others have less than 40%. "Different people have different tolerance to risk," he says. "Some of us are comfortable with volatility and some are not."

That's a pretty significant range, 40% to 70%. But can rank-and-file investors, many of them 401(k) participants, be expected to know that, let alone understand its implications?

As always, the answer has to be a combination of better investment vehicles, fiduciary advice, and maximum possible transparency of asset allocation, expenses, and other material facts.

~~~~~~~~~~~~~~~~

* It isn't just cash and bonds that help a truly diversified portfolio "hold up" when the S&P 500 is under pressure. If you'll forgive the self-referential example: Our most aggressive target-risk portfolio, which includes no fixed-income positions and just 3% cash, has comfortably outpaced the S&P 500 this year (and since inception, for that matter). How has it done that? Thus far in 2008, it's a function of exposure to commodities, international equities (in particular Canadian stocks), and U.S. REITs. And that gets us back to another problem with many target-date funds: inadequate coverage of global asset classes.

Source

Jilian Mincer, "Target-Date Funds Are Holding Up So Far," Wall Street Journal, February 26, 2008

Market Rates Matter

Ben Bernanke has heard some version of the following question from multiple members of the House Financial Services Committee: "If the Fed's cutting rates so aggressively, why are mortgage rates not falling or, worse, actually rising?" (See the adjacent chart from this morning's Wall Street Journal.)

This gets at something that's been a recurring theme over the last several months: Market participants skewing certain actual interest rates away from official targets. Think of the persistence of elevated LIBOR rates through most of the last third of 2007, credit card issuers raising rates as we type, auto loan rates remaining elevated, and, of course, the stubborn mortgage rates members of Congress have noted this morning. (It's important to note that variable rate HELOCs and other instruments pegged to banks' prime rates have gotten cheaper since the Fed started clashing rates in September).

Bloomberg's Shannon D. Harrington and Christine Richard add another brick to this particular wall this morning by noting that even as the rating agencies sustain the fantasy that MBIA deserves the AAA stamp of approval, real-world investors aren't buying it. Literally.

Moody's Investors Service and Standard & Poor's say MBIA Inc. has enough capital to withstand losses and justify its AAA rating. MBIA's debt investors aren't so convinced.

Credit-default swaps indicating the risk that Armonk, New York-based MBIA's bond insurance unit won't be able to meet its obligations are trading at similar levels to companies such as homebuilder Pulte Homes Inc., which is rated 10 steps lower.

The discrepancy illustrates the skepticism debt investors have about the safety of MBIA's rating after the company posted $3.4 billion of losses on subprime mortgages last quarter. Moody's and S&P both said that while at least $4 billion of writedowns lie ahead, MBIA's management has made enough changes to warrant the top rating.

"Pardon me if I find this a little hard to believe,'' said Richard Larkin, director of research at municipal-bond brokerage Herbert J. Sims & Co. in Iselin, New Jersey. "This is basically the same management that put MBIA into this hole in the first place.''

This is a big part of the dilemma facing legislators, regulators, and central bankers. Try as they might, all the king's horses and all the king's men can't summarily put broken markets and shattered assets back together again. Price and time? They'll do the trick, but not without some further patience--and almost certainly some further pain.

Sources

Kelly Evans, Serena Ng, and Ruth Simon, "Decline in Home Prices Accelerates," Wall Street Journal, February 27, 2008

Shannon D. Harrington and Christine Richard, "Moody's, S&P Say MBIA Is AAA; Debt Market Not So Sure," Bloomberg, February 27, 2008

Wednesday Reading

Bernanke speaks...

• One way of putting it: Bernanke tells the House Financial Services Committee that tightrope-walking investors do indeed have a net between themselves and the abyss.
• Barry Ritholtz provides a little context--and some attitude--for this morning's Journal piece on the continuing/deepening struggles of residential real estate.
• Fannie stinks...but OFHEO busts the caps.
• Yves Smith engages Martin Wolf's FT column on the role of government in the current crisis...and the future/appropriate/necessary role of financial market regulation.
• As Bernanke speaks, the WSJ's Real Time Economics has a tidy roundup of perspectives on Fed policymaking.
• Then there's this: Bloomberg's Craig Torres on the divergent views of Bernanke & Co. held by traders and economists.

The Day (So Far) in Headlines

A parade of horribles (with an assist from Calculated Risk)...

• U.S. Economy: Confidence Declines, Producer Prices Increase
• OFHEO: Widepread House Price Declines in Q4
• S&P Case-Shiller: Prices Fall Sharply in Q4 2007
• Home Depot Has First Annual Sales Decline
• FDIC Readies for a Rise in Bank Failures

...is apaprently no match for an upbeat forcast from IBM...

• IBM Plans $15 Billion Stock Buyback, Boosts Forecasts

...which has 'em buying everything in sight...

Note: We reserve the right to revise this post at the end of the day!

Egregious Fees

Back in September, we posted an item called "Advisory Fees: Beware the Layers," in which we noted that an advisory relationship with several layers of fees--which, each in isolation from the others, may not seem especially high--can turn out to be a very expensive cake indeed.

Last week, we received a note from someone in the business. "Check out our fees," he wrote, having attached his company's ADV II. So we did. And we could hardly believe our eyes. Behold...

After seeing these astonishing numbers, we had to ask our source: What's up with the "annual fee" and "manager fees"? What's the difference? Do we combine the two to get the real number?

The predictable answer came back: You combine the two to get the real number. So a client with a modest account invested in fixed income positions will pay between 2.40 and 2.65% per year. And that's just the explicit expenses! With 10-year yields perched below 4%, that doesn't leave a whole lot for the client, does it?

And what's up with the notion of "Equity & Balanced"? Does that mean if a portfolio has even a single stock position, it gets the full equity fee treatment, even it has a non-trivial allocation to bonds? We're not sure we want to know.

We have no idea why investors would ever pay these sorts of fees for long-only management. They needn't. And therefore they shouldn't.

Then there was this coda from our source: "And just think if we do this in an annuity account, with an additional wrap fee and the M&E charge!" Yes. Just think...