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Your Money: All the Ways That Stocks Churn Your Stomach

August 13, 2011 by Leave a Comment

Sure, a 4 percent swing in the Standard Poor’s 500-stock index reflects some sort of investor conviction. But four days in a row of violent up-and-down movements? The weeklong chart looks like the readout of a lie detector test run amok.

The default advice at times like these is to remain calm. But I’d be lying if I didn’t admit that I was also grappling with every emotion along the fight-flight-freeze continuum. The most harrowing feeling is the sense of déjà vu, given the rumors of trouble in European banks and various efforts to ban short-selling. It all feels too much like the fall of 2008, and nobody wants to go back to the way they felt in the year after the collapse of Lehman Brothers.

So like you, I imagine, I wanted to buy, and I wanted to sell, sometimes on the same day. And I felt rage toward various authority figures. Another recession is a real possibility. And government debt isn’t just having its own impact on stocks worldwide; it’s wreaking havoc on our confidence in our country and our basic sense of security.

These emotions aren’t particularly constructive in the long term, since they can be paralyzing or lead us to make hair-trigger decisions. And if we don’t stop to confront and untangle these feelings, they can easily lead us astray. So this weekend, I’d encourage you to see if any of the visceral reactions I describe below sound anything like your own internal conversations. Then, dig into them — and deploy some countermeasures.

IGNORANCE Given that the stock market seems to be sending a message of utter confusion, there is no shame in admitting that you do not understand what is happening.

The relentless chatter for days on end only compounds the problem. “People do not know what all of these economic terms mean,” said Kenneth Doyle, a psychologist and former financial planner who is now a professor at the University of Minnesota. “But they do know the fear in the voice of commentators, and everything looks dismal.”

When the background noise gets too aggravating, turn it off and remind yourself what you do know. After all, the last dozen years have actually hammered home a number of basic personal finance principles.

In 2000, we learned an important lesson about portfolio diversification when technology stocks collapsed. When Enron declared bankruptcy, it became clear that we should not make long-term investments with our life savings in company stock if we could possibly avoid it. And in the last five years, it’s become painfully clear that housing prices do not go up forever. Small down payments, meanwhile, can leave you stuck with a bad mortgage in a home that is worth less than the balance of your loan.

This time, one lesson is already clear, even if the precise implications are not. Governments at all levels cannot pay for the services we once believed that we would have coming to us forever. In the future, many of us we will get less financial help in old age, spend more of our savings to make up the difference and pay more in taxes for the privilege.

My plan is to put more money away, when I can, in savings accounts that are shielded from taxes or free from them entirely, like 529 college savings plans and Roth individual retirement accounts, and hope that the tax rules don’t somehow change midstream.

FEAR If you’re scared, allow yourself to imagine the worst possible outcome. For most of us, it’s running out of money. So before you make any big changes to your portfolio, follow this fear to its logical conclusion. What would have to happen for you to be truly penniless?

First, your investments would need to go to zero or be utterly ravaged by inflation. Social Security would have to cease to exist. Medicare would no longer pay for much, if anything. Medicaid would no longer pay for nursing home care for people without any other assets. And your family and friends would be unwilling to take you in or pitch in to help.

Once you realize how unlikely this combination is, call a timeout on any big decisions and let your rational mind settle back in. “Put some distance between impulse and action,” said Brad Klontz, a psychologist and consultant specializing in financial matters. He adds that this is particularly important for men, who tend to react more emotionally than women.

Simple things like intense exercise can help. Or, focus on a couple of financial tasks that you can control, like updating a will or crossing something else off that nagging list of financial to-dos.

GUILT Sometimes the most damaging feelings are less about your own financial standing and more about how you’ve failed or disappointed others.

Perhaps you couldn’t persuade your parents to scale back their stock exposure. Or you were too aggressive yourself with investing any college savings money you managed to put aside and are worried about saddling your child with student loan debt.

This is the worst kind of myopia, though. You are more than the sum of your family’s stock returns, and their returns are about much more than stocks.

Elderly relatives, for instance, will probably not see the same cuts to Social Security and Medicare that you will. And hopefully they also have at least some bonds or other holdings they can call on while waiting for stocks to recover. If they have a home that’s at least partly paid off, a reverse mortgage can help as a last resort measure, too. You can explain all of that and help them sort through it.

If you are still employed, your biggest asset is probably your future income stream. If you haven’t lost your job this week, then you still have that going for you and can put it to work helping your children when (and if) they truly need it.

BRAVADO If none of the above helps, it’s easy to fall prey to the damaging tendency to take drastic action.

Carl Richards, whose posts on our Bucks blog sum up complex emotions in deceptively simple sketches, refers to this as the need to do something heroic.

Kathleen Gurney, chief executive of the Financial Psychology Corporation, calls it the “manic response” that therapists look for and try to counteract. It’s the idea that going all in on gold will protect you, or that your Apple stock will, or foreign currencies or something else.

This sort of single-minded response has made some people rich over the years and allowed others to lead a worry-free retirement if they timed the markets right and died within a couple of decades.

But the risk of being wrong and living long is just too high for most people to make big bets like that today.

If you still feel the need to do something, consider this self-assessment test from Ken French, a Tuck School of Business professor and stock market expert, who offers it as a frame of reference and not as a prediction of short-term performance.

“Ask yourself how you are different from the market,” he said. “If you think you are particularly risk-averse relative to everyone else, then it makes perfect sense for you to sell.” Just don’t get in and repeat the cycle when things look as if they are turning up again.

“If you think you are more risk-tolerant, then maybe this is an opportunity for you to buy,” he added, noting that the market may pay a small premium to people willing to endure the gyrations. “If you’re not averse to that volatility, you are getting a higher expected return for a modest psychological burden.”

Article source: http://feeds.nytimes.com/click.phdo?i=36717de898b93aea985ec5131133cf41

Filed Under: Your Money Tagged With: , ,

News Analysis: Central Bank May Be Winner in Europe’s Debt Talks

July 23, 2011 by Leave a Comment

It is true the central bank lost its fight to prevent European leaders from precipitating a partial default of Greek debt. After meeting with Ms. Merkel and other leaders in Brussels on Thursday, though, Mr. Trichet appeared to have prevailed on important points. Governments agreed to reclaim the task of preventing collapse of the Greek economy and to take responsibility for fiscal performance of the euro zone, tasks that the central bank did not want.

“Have they backed down?” asked Peter Westaway, chief European economist at Nomura International, about the central bank’s position on a default. “To an extent they have.”

In turn, the central bank will be able to spend less time saving Greece and concentrate on its day job, overseeing monetary policy.

“The E.C.B. is trying to resist anything that makes it look like monetary authorities are taking on a role that governments should be taking on,” Mr. Westaway said.

Mr. Trichet won commitments from governments on another longstanding issue. Political leaders in Brussels agreed to take more concrete steps to reduce their debt and to ensure that the Greek disaster is not repeated elsewhere. Euro zone countries promised to cut their budget deficits to below 3 percent of each country’s annual output by 2013, in line with limits set by treaty, but widely violated.

The European countries also agreed to support Greek banks, a task that has been handled up to now primarily by the central bank. And the leaders will do more to help Greece fix its dysfunctional economy.

“The decision of member states and of the commission to mobilize all resources necessary in order to provide exceptional assistance to help Greece in implementing its reforms is very, very important,” Mr. Trichet said in Brussels on Thursday, according to Reuters.

A high-ranking monetary policy official, who would not be quoted by name, said, “We got what we wanted.”

Since the debt crisis began last year, there has been a strong temptation by Ms. Merkel, President Nicolas Sarkozy of France and other leaders to leave the heavy lifting to the central bank. Unlike the politicians, Mr. Trichet and his colleagues on the governing council cannot be voted out of office. The central bank also has extensive financial resources and does not need an act of Parliament to deploy them — though it took pains to avoid the appearance that it was printing money.

Even as Mr. Trichet framed his actions in terms of monetary policy, he faced increasing criticism that the central bank had compromised its sacred independence from politics. He was clearly annoyed at political leaders for their lack of decisive action. During a meeting last year, he got into a shouting match with Mr. Sarkozy, according to several people who attended.

The package announced in Brussels late Thursday would shift responsibility for a number of major tasks from the central bank to governments. For example, the European Financial Stability Fund would have the power to buy government bonds on open markets to stabilize prices, allowing the central bank to wind down its own controversial bond-buying program. The decision in May 2010 by the central bank to begin buying Greek, Portuguese and Irish bonds split the bank’s governing council and has left the bank with billions in distressed debt.

“It is no longer necessary for the E.C.B. to do this job, which is a plus for the E.C.B.,” Jörg Krämer, chief economist at Commerzbank, said in Frankfurt.

European leaders will also guarantee the quality of Greek bonds even if some ratings agencies declare the country to be in partial default. Fitch Ratings said Friday that the plan to extract a contribution from bond investors would constitute a restricted default.

The guarantees by the European Union mean that the central bank can continue to accept Greek bonds as collateral for short-term loans, maintaining the flow of the bank’s funds to Greek institutions that are shut out of international money markets.

“In our view this is a very important sign of institutional respect from Europe to the E.C.B.,” analysts at Royal Bank of Scotland wrote in a note Friday.

Analysts cautioned that the rescue plan, outlined in a four-page statement by European leaders Thursday, was short on detail. It is not clear, for example, if the euro zone countries are committing enough money to support the Greek banks, Mr. Krämer of Commerzbank said.

He was also skeptical of promises by leaders to do a better job policing each other’s fiscal discipline. “I have heard this for 15 years,” Mr. Krämer said. “I don’t believe it. The E.U. is a consensus-driven club. You can’t force other countries to do this or that.”

Jens Weidmann, president of the German Bundesbank and a member of the central bank’s governing council, implicitly greeted the greater willingness by leaders to take more responsibility.

“It is decisive for monetary policy during this sovereign debt crisis that no further risk be transferred to the Eurosystem, and that the separation between monetary and financial policy not be further weakened,” Mr. Weidmann said in a statement, referring to the network of European central banks.

But, in a sign that not all members of the governing council are happy with the agreement, Mr. Weidmann criticized what he called a major step toward collective responsibility for the mistakes of individual states.

“This weakens the fundament of a monetary union built on individual fiscal responsibility,” Mr. Weidmann said in a statement. “In the future it will be even more difficult to maintain incentives for solid financial policy.”

Article source: http://feeds.nytimes.com/click.phdo?i=32c09d007d33421c108f4985bcd2eedf

Filed Under: Business News Tagged With: , ,

News Analysis: E.C.B. May Be Winner in Debt Talks

July 22, 2011 by Leave a Comment

The E.C.B. lost the battle to prevent European leaders from precipitating a partial default of Greek debt. But, after meeting with Ms. Merkel and other leaders in Brussels Thursday, Mr. Trichet appeared to have won on a more important issue: getting governments to reclaim the task of preventing collapse of the Greek economy, as well as wider responsibility for fiscal performance of the euro area.

“Have they backed down?” Peter Westaway, chief European economist at Nomura International, said of the E.C.B. “To an extent they have.” But in the process, he and other economists said, the central bank extracted concessions that allow it to spend less time saving Greece and concentrate on its day job, overseeing monetary policy.

“The E.C.B. is trying to resist anything that makes it look like monetary authorities are taking on a role that governments should be taking on,” Mr. Westaway said.

Mr. Trichet won commitments from governments in Brussels on another longstanding demand. Political leaders agreed to take more concrete steps to reduce their debt and ensure that the Greek disaster does not repeat itself in some other corner of the euro area. Euro area countries promised to cut their budget deficits to below 3 percent by 2013, in line with limits set by treaty but widely violated.

The European countries also agreed to support Greek banks, another task that has been handled primarily by the E.C.B. And the leaders will do more to help Greece fix its dysfunctional economy.

“The decision of member states and of the commission to mobilize all resources necessary in order to provide exceptional assistance to help Greece in implementing its reforms is very, very important,” Mr. Trichet said in Brussels on Thursday, according to Reuters.

A high-ranking monetary policy official, who could not be quoted by name because of the sensitivity of the matter, said, “We got what we wanted.“

Since the debt crisis began last year, there has been a strong temptation for Ms. Merkel, President Nicolas Sarkozy of France and other leaders to let the E.C.B. do the heavy lifting. Unlike the politicians, Mr. Trichet and his colleagues on the governing council cannot be voted out of office and were able to act more decisively. The E.C.B. also has extensive financial resources and does not need an act of Parliament to deploy them — though it always took pains to avoid any appearance that it was printing money.

But, though Mr. Trichet always framed the E.C.B.’s actions in terms of monetary policy, he faced increasing criticism that the bank had compromised its sacred independence from politics. He was clearly annoyed at political leaders for their lack of stronger action. During a meeting last year, he even got into a shouting match with Mr. Sarkozy, according to several people present.

The package announced in Brussels late Thursday shifts responsibility for a number of key tasks from the E.C.B. to governments. For example, the European Financial Stability Fund will have the power to buy government bonds on open markets to stabilize prices, allowing the central bank to wind down its own highly controversial bond-buying program. The decision in May 2010 by the E.C.B. to begin buying Greek, Portuguese and Irish bonds split the bank’s governing council and has left the bank with billions in distressed debt.

“It is no longer necessary for the E.C.B. to do this job, which is a plus for the E.C.B.,” Jörg Krämer, chief economist at Commerzbank, said in Frankfurt.

European leaders will also guarantee the quality of Greek bonds even if some ratings agencies declare the country to be in partial default. Fitch Ratings said Friday that the plan to extract a contribution from bond investors would in fact constitute a restricted default.

The European Union guarantees mean that the E.C.B. can continue to accept Greek bonds as collateral for short-term loans, maintaining the flow of E.C.B. funds to Greek banks which are shut out of international money markets.

“In our view this is a very important sign of institutional respect from Europe to the E.C.B.,” analysts at Royal Bank of Scotland said in a note Friday.

Analysts cautioned that the rescue plan, outlined in a four-page statement by European leaders Thursday, was short on detail. It is not clear, for example, if the euro area countries are committing enough money to support the Greek banks, Mr. Krämer of Commerzbank said.

He was also skeptical of promises by leaders to do a better job policing each other’s fiscal discipline. “I have heard this for 15 years,” Mr. Krämer said. “I don’t believe it. The E.U. is a consensus driven club. You can’t force other coutnries to do this or that.”

Jens Weidmann, president of the German Bundesbank and a member of the E.C.B. governing council, implicitly greeted the greater willingness by leaders to take more responsibility.

“It is decisive for monetary policy during this sovereign debt crisis that no further risk be transferred to the Eurosystem, and that the separation between monetary and financial policy not be further weakened,” Mr. Weidmann said in a statement, referring to the network of European central banks.

But, in a sign that not all members of the governing council are happy with the agreement, Mr. Weidmann also criticized what he said was a major step toward collective responsibility for the mistakes of individual states.

“This weakens the fundament of a monetary union built on individual fiscal responsibility,” Mr. Weidmann said in a statement. “In the future it will be even more difficult to maintain incentives for solid financial policy.”

Article source: http://www.nytimes.com/2011/07/23/business/global/ecb-may-be-winner-in-debt-talks.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Banks Amass Glut of Homes, Chilling Sales

May 23, 2011 by Leave a Comment

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.

“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.

Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.

Before the housing implosion, the inflow and outflow figures were typically one-to-one.

The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.

“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”

A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.

But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.

Article source: http://feeds.nytimes.com/click.phdo?i=d21e8376c7103840b950084c0f53ed17

Filed Under: Business News Tagged With: , ,

Books of The Times: Diving in Search of the ‘Great Vampire Squid’

April 12, 2011 by Leave a Comment

Mr. Cohan, whose title signifies nothing more fine-tuned than “The Goldman Sachs Story,” even puts the squid on his opening page. He juxtaposes it with his own calmer version of the same idea: that Goldman Sachs is “a symbol of immutable global power and unparalleled connections, which Goldman is shameless in exploiting for its own benefit, with little concern for how its success affects the rest of us.” But that hint of combativeness is misleading. Most of his long, carelessly shaped, jargon-filled book is far more conciliatory than that.

In the wake of his tightly constructed “House of Cards,” about the collapse of Bear Stearns, Mr. Cohan (who is a regular contributor to the Opinionator blog of The New York Times) has taken on a much broader and more daunting subject. However much enthusiasm he brought to the task, he does not inspire optimism by writing in an author’s note that he and his editor deemed Goldman Sachs “the next mountain we needed to climb.”

What a big mountain it is. The span of “Money and Power” extends from the firm’s founding in 1869 to the April 2010 hearing of the Senate Permanent Subcommittee on Investigations, at which an angry Senator Carl Levin, Democrat of Michigan, presided, and browbeaten Goldman Sachs executives were the main attraction. Most of this terrain has been traveled by others, whose books are abundantly cited in Mr. Cohan’s “ibid.”-filled endnotes.

He draws on sources from Stephen Birmingham’s 1967 “Our Crowd: the Great Jewish Families of New York City,” to John Kenneth Galbraith’s “Great Crash, 1929,” from 1954, to Charles Ellis’s thorough, elegant and much better-explicated 2008 Goldman Sachs history, “The Partnership.” Mr. Cohan’s most important material is that which extends beyond Mr. Ellis’s and documents the firm’s recent history. This is uncharted territory, thanks to the proliferation of opaque mortgage-backed securities, the decline of corporate accountability, the damage inflicted by the Great Recession (though not to Goldman Sachs) and the existence of embarrassingly candid e-mail. There are Goldman Sachs staff members who write “$$$” when they mean money. That’s not even the embarrassing part.

Mr. Cohan, who received the 2007 FT/Goldman Sachs Business Book of the Year Award, was able to interview many of the firm’s recent leaders, most notably Lloyd Blankfein, its current chief executive and chairman. Mr. Blankfein talks about himself humorously and well. But the book digs up minutiae like Mr. Blankfein’s ability to sing sitcom theme songs from the 1970s and a rabbi’s comment that Mr. Blankfein “was brilliant as a 12-year-old boy.”

Despite this level of detail, “Money and Power” remains relatively impersonal about the people it profiles, even when Mr. Cohan has interviewed the participants in bitter he said/he said Goldman Sachs disputes. (Jon Corzine versus Henry Paulson is the book’s most heated bout.) Its many thumbnail biographies tend to concentrate on educational background and favorite sports.

Interviewees range from Mr. Paulson, who is said to have a “heavily book-filled” office, to Robert Freeman, who speaks angrily about the insider trading scandal in which he was embroiled and vehemently accuses the writer James W. Stewart of unfair reporting in The Wall Street Journal. (“I think he’s absolutely dishonest,” Mr. Freeman says.) But this book does its hardest hitting when the interviewees are allowed to remain anonymous. Their candor is conspicuously different from the schmoozy yet careful information provided by those with clear Goldman Sachs connections.

About Goldman Sachs’s present-day business practices, one “private equity investor” says this: “They view information gathered from their client businesses as free for them to trade on … it’s as simple as that. If they are in a client situation, working on a deal, and they’re learning everything there is to know about that business, they take all that information, pass it up through their organization, and use that information to trade against the client, against other clients, et cetera, et cetera.” The speaker stops short of labeling this as insider trading, but only barely, saying, “I don’t understand how that’s legal.”

Mr. Cohan raises the same question as he writes that the firm’s onetime dedication to its clients has evolved into something more ruthlessly self-serving. “Its primary source of profit has shifted from banking to trading,” he writes, “and the firm is intentionally quite vague about how, and precisely where, those trades are made or, equally relevant, from whom the profits are coming.” When “Money and Power” can boil down its arguments that clearly, it has welcome moments of toughness and precision.

But the explication of intricate financial and legal issues is an art form not easily mastered. Mr. Cohan has done a better job of reporting and gathering information than he has of relaying it to the reader. Over the span of 600 pages, “Money and Power” includes an exhausting load of reasonable but clumsy observations like this, about the refinancing of mortgages by homeowners when interest rates fell in 1985 and 1986:

“This caused Goldman’s portfolio of mortgage-backed securities, which contained mortgages with higher interest rates, to be paid off early (through refinancings) and to lose value rather than increase in value as would be expected when interest rates fell, since the value of a bond with a higher interest rate increases when relative interest rates fall.”

There’s a better way to say this. And there is a better raison d’être for a new Goldman Sachs book than this one provides. Here are three central questions: “Why is Goldman Sachs so very powerful on so many dimensions? How did the firm achieve its present leadership and acknowledged excellence? Will Goldman Sachs continue to excel?”

Those were asked in 2008, by Mr. Ellis. Their meaning has changed startlingly over the last three years. Somewhere within “Money and Power” there should be new answers.

Article source: http://feeds.nytimes.com/click.phdo?i=e9a40d2ea12b28df652e934dd1da0c0b

Filed Under: Business News Tagged With: , ,
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