The Float

Making Sense of DB and DC Retirement Plans

We'll have much more on this in the opening days of 2009, but for now we'd like to draw your attention to an interesting (and relatively new) voice in the world of retirement plan research, the National Institute on Retirement Security. Check 'em out; they've posted some excellent research that's very useful for plan sponsors and service providers. Again, we'll offer a much more extensive take on their work next week.

Behavioral Finance At The Movies

We interrupt this holiday blogging break to post a great New Yorker cartoon, and a link to the column in which it appears: Adam Gopnik's clever mash-up of behavioral finance and It's a Wonderful Life.

Household Cash Flow

A quick note on the Mortgage Bankers Association's release this morning on weekly mortgage applications. Here's the opening of Bloomberg's account:

Mortgage applications in the U.S. increased 2.9 percent last week as more homeowners refinanced to take advantage of lower interest rates.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan rose to 841.4 from a revised 817.7 a week earlier. The group's refinancing index increased 6.5 percent, while the purchase gauge dropped 4.5 percent.

This is great news for a lot of household balance sheets. The big picture problem over the last two years has been falling real estate values, which have unleashed all sorts of ugly second- and third-order effects in the financial markets. The small picture problem is household cash flow, people simply being able to afford their monthly payments.

Our view is that residential and commercial values must fall further, much further in some places, in order to reach any sort of sustainable equilibrium (i.e., a base for reasonable rates of future price appreciation). But where foreclosure can be avoided by squaring households' monthly cash flow with their debt service, we'll all be better off. If lower mortgage rates and the attendant refinancings help push the system in that direction, we'll have a better chance to muddle through all this with a little less damage.

Source

Courtney Schlisserman, "U.S. MBA’s Mortgage Applications Index Rose 2.9% Last Week," Bloomberg, December 17, 2008

Dueling Headlines

Bloomberg, December 16th, 2008:

U.S. Stocks Rally, Led by Banks, as Fed Cuts Rate to Record Low

Bloomberg, December 17th, 2008:

U.S. Stocks Fall on Concern Fed Is Running Out of Ammunition

Recession Thought of the Day

Flipping through the December issue of GQ last night, a simple intuition crystallized:

The ostentatiousness and superfluousness of things advertised in a glossy magazine is directly proportional to the number of pages preceding that magazine's table of contents.

That number for the December GQ? 49(!). In this economic climate, there's something about that that seems a little...off.

Economic Anecdotes

On this cold, snowy day, lunch didn't do much to warm things up. The company was good, but the overall impression of economic activity left by the group--a banker, an insurance broker, and a recruiter, all very successful at what they do--was more chilling than encouraging.

From the banker: We're privately held and we have money to lend and we want to see deals. We've made it through in much better shape than most, and we're doing some business. But other lenders aren't. And can't.

From the insurance broker: The industry is in bad shape. Our firm has held up, but it's tough out there. Mass layoffs by most of the publicly traded insurers. And you try telling your client his premiums are going up 15% next year!

From the recruiter: The first three quarters of 2008 were great. Then things basically fell off a cliff in October. Information technology in particular looks grim. Health care might be a little better, but that too is weakening. And we're getting so many résumés that we're in danger of turning into a résumé-processing business.

An afternoon of borderline euphoria over monetary policy (and not just rates per se) can't obscure what's happening out there. Namely: A lot less economic activity. Monetary policy can and will help on the margins, but next year fiscal policy will take center stage.

While households continue to repair their balance sheets after years of neglect, and while corporate balance sheets (many of which have been relatively strong to this point) deteriorate because of household deleveraging, it's the taxpayers' balance sheet that'll take the next big hit. It won't be pretty. It certainly won't be perfect. But it's pretty much all we have left. Uncle Sam, after all, is truly the big spender of last resort.

Second Opinions

Toles...

What's Happening Inside Those Retirement Plans?

We just ran across a vaguely interesting--and somewhat frustrating--item on the behavior of retirement plan participants from Vanguard's Center for Retirement Research (CRR).

The report, which uses year-to-date data through October 31, 2008, collected from plans for which Vanguard serves as recordkeeper, focuses on three primary topics: Trading, account balances, and, loans and hardship withdrawals.

On trading, CRR finds that 85% of participants hadn't made a trade (i.e., an exchange) in their accounts in 2008. That surprised us. But this didn't (emphasis added in bold):

"Our prior research has shown that traders tend to be disproportionately older, richer men who are Web-registered and who often invest in active equity funds and company stock," said Steve Utkus, a Vanguard principal and head of CRR. "This is the psychological profile of the overconfident investor. That said, there are always other participants with different demographic and risk-aversion characteristics who are trading in a given period."

Then the report adds this caveat:

Mr. Utkus also noted that during the recent market volatility, it's possible that a broader range of participants may have decided to make an investment change--that is, a greater number of less-experienced, less-wealthy investors may be included in the group who traded.

The report goes on to note that 34% of participants saw their account balances rise through the end of October, with another 10% experiencing year-to-date losses of less than 10%. Sensibly enough, the report notes that participants' ongoing contributions account for a chunk of these rising account balances, and of course this would be most true for those with modest account balances at the start of the year, for whom salary deferrals represent a relatively larger share of total account values.

Here's one source of our frustration: It would be helpful to see trends in account balances stratified by account balance. Our sense of the situation is that older participants with bigger balances have suffered disproportionately, in part because their ongoing deferrals are such a small part of their overall account values. We'd like to see balance trends presented by quintiles, or by ranges, with the percentage of all accounts in each range indicated on the chart. Or both! We'd like to see these results stratified by age as well.

The last category of interest here is loans and hardship withdrawals. As the chart below indicates, year-over-year change in hardship withdrawals spiked in 2006, remained high in 2007, and has continued to climb, though as a slightly slower pace, thus far in 2008.

We aren't wild about this presentation, either. Visually, it gives the first-glance impression that hardship withdrawals are declining when they're continuing to increase. And by presenting only five years of data (and no narrative explanation on this point), the reader has no information about how these rates of change--let alone the absolute levels!--compare to previous periods.

Bottom line: This report might present some reassuring evidence on participant behavior (and thus outcomes), but we just can't be sure. Edward Tufte would not approve!

Source

"Participants calmer than you'd think amid market turmoil," Vanguard Center for Retirement Research, December 2, 2008

SOAFOUG

Today's posts are like golf's silly season: At this late date, at the end of such a long year, we can only process trivia.

In our daily update from Investment News, we saw this headline:

Ex-Fidelity traders fined $1M for taking swag

That's a pretty hefty fine for accepting "stuff we all get." Wouldn't a better headline be "Ex-Fidelity traders fined $1M for taking soafoug"? Doesn't roll off the tongue quite the same, but that would be "stuff only a few of us get." Those few had it pretty darn good for a while. And now...the reckoning.

Update: Things We Don't Like About CNBC

With an assist from Float reader TC, two additions to our running (and woefully incomplete!) list of Things We Don't Like About CNBC...

New Items

• The midday interlude featuring the heavy voiceover: "It's halftime of the trading day. Do you know the score of your portfolio?" (Or something like that.) Please. This is nothing more than an expression of contempt for investors, one that reinforces their very worst instincts. There oughta be a law.
• And this recent addition, one that belongs in the Top Five for sure: Those cloying, ridiculously self-absorbed ads that culminate in some version of: "I'm Charlie Gasparino, and I am CNBC." For better or worse, that's true enough. But someone needs to make these spots stop.

Old Items

• Bob Pisani's crutch-like reliance on the word "here." If you haven't noticed this before, and get annoyed by verbal tics like this, we apologize for bringing it to your attention. If you have noticed it, we feel your pain.
• The little clock in the upper-right corner of the network's charts rushing past in hundredths of seconds. As if the general tone of the whole production weren't short-term jumpy enough.
• Those Pat Boone gold ads. The leathery face is bad enough, but the overweening hucksterism has earned these spots a place in this particular hall of shame.
• Cramer's Fed-Begging. Part schtick, part sincere, entirely over the top.
• Rick Santelli not getting enough love. Chicago's own is a rare (if not "lone") voice of reason in the wilderness.
• Erin Burnett insisting that her guests say something positive. We like positive stuff ourselves--where it's justified. But scraping around for a "silver lining" for its own sake strikes us as something other than disinterested.
• 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 on February 27th, when the S&P 500 was 0.73 points above the previous day's close: "Why are we higher today?" Good grief.