Stars aligned for 'serious' US correction, analyst says

   

 

Published: Tuesday, 13 Aug 2013 | 1:43 AM ET

 

By: Katie Holliday | Writer for CNBC.com

 

Monday, 12 Aug 2013 | 6:15 PM ET 

 

Jack Bouroudjian, Bull and Bear Partners CEO, says there is no reason for the U.S. Fed to begin tapering now, and explains why he is concerned about the market for the next couple of month.

As U.S. stocks ease back from record highs this week, more and more traders see the S&P 500 as overvalued and are pricing in a "serious correction."

Jack Bouroudjian, CEO of financial services holding company Bull and Bear Partners, told CNBC's Asia Squawk Box on Tuesday he was the most bearish he has ever been on the U.S. stock market.
"The market is overvalued and we've hit an inflection point. Unless we see some real strong growth numbers coming out of the economy, I'm looking at a 10 percent correction between now and October. It's time to be very defensive," he said.
Bouroudjian said the market's notional value has become vastly inflated versus the country's total gross domestic product on a historical basis, which is a red flag and could herald an imminent correction.


"Equities have historically traded at a discount to GDP except for two times in the last 50 years," he said. "In the late 1990's we traded at 148 percent over GDP, and in 2007 we traded at 118 percent over. Unfortunately, both times were followed by a serious correction. We are now at 110 percent."
"The time has come to say that the 'easy' money in equities might be behind us unless we see real growth in the GDP numbers and forecasts increase for top line revenue from corporate America over the next couple years," he added.

Top 4 stocks to weather a pullback

 

Four energy companies are the best way to get through a short-term stock market dip, Don Hodges of Hodges Capital Management says.

Bouroudjian's comments underscore the cautious tone surrounding the U.S. stock market that has emerged recently, as industry watchers start to doubt just how long the good times can last. Wall Street traders have also flagged several occurrences of the 'Hindenburg Omen' in the past few weeks, a technical indicator which predicts the potential of a financial market crash.


The S&P 500 index is up over 18 percent since the start of the year, boosted by more signs of an economic recovery, particularly in the housing market and employment, although it has in the past week eased from record highs seen earlier in the month, due to thin summer trading volumes and continued worries over Fed tapering.

According to Bouroudjian, another trigger point for a market correction could be the appointment of a new Federal Reserve chairman after Ben Bernanke's term expires in January.
"Twice in my investment lifetime, we have changed the Fed chairman. We changed it when (Paul) Volcker changed to (Alan) Greenspan (in 1987) and when Greenspan changed to Bernanke (in 2006). Both times were followed by a serious correction in the market," he said.


"I'm not saying it will happen again for a third time but I am very defensive because of that too," he added.
—By CNBC's Katie Holliday: Follow her on Twitter

@hollidaykatie

Rethinking the 4-percent retirement rule in uncertain market

 

 Published: Tuesday, 6 Aug 2013 | 11:56 AM ET

By: Sharon Epperson | CNBC Senior Commodities Correspondent and Personal Finance Correspondent

Rene Mansi | E+ | Getty Images

 

It may seem like a fairly safe bet. Withdraw no more than 4 percent from your retirement savings each year, and you'll have enough to last the rest of your life.
After all, many people's biggest fear in facing retirement is the possibility of outliving their money. To make sure retirees have enough money, many financial advisors have relied on a rule that a nest egg should hold out as long as they withdraw a maximum of 4 percent annually.
But some certified financial planners now say the so-called 4 percent rule could put your retirement savings at risk.


"I don't think the 4 percent rule is as feasible today as it was in the past, and the reason for that is because the market returns haven't been as consistent as we've seen in the past," said Richard Coppa, managing director of Wealth Health.

The rule, calculated in the 1990s, was based on a model portfolio that contained a certain mix of stocks and bonds: 60 percent large-cap stocks and 40 percent intermediate-term government bonds.
Times have changed, though. And with historically low bond yields and a volatile stock market, the rule may no longer apply.

"In the last decade, we've seen a dot-com bubble, we've seen a real estate bubble, we've seen a financial crisis—and all of that impacts the types of returns we're getting on both stocks and bonds," Coppa said.

To make sure clients don't outlive their savings, Coppa advises them to get a handle on their cash flow. Managing income and expenses in retirement is more important than relying on any rule, he said. Bottom line, knowing what you'll spend is the best way to determine what you'll be able to withdraw.

But Doug Lockwood, a certified financial planner with Harbor Lights Financial, said it is possible for retirees to withdraw 4 percent a year from savings and have the money last—as long as the mix of assets is well-diversified. A model portfolio of 60 percent stocks and 40 percent bonds could work, depending on the type of equities.

"You have to look at not only interest rates and bond rates that you can draw upon, but where am I getting my income from my equities," Lockwood said. "At that point, you have to look at dividend-paying stocks to grab that equity yield, which is quite frankly a better bet these days ([han bond yields]."

Depending on age and risk tolerance, Lockwood said, a 4 percent withdrawal rate is a good guideline for gauging whether you'll have enough money in retirement. But also consider what effect taxes and inflation have on your investments.

"With inflation and taxes, that investor ... has to be able to make at least a 7 percent return on average to be able to get that 4 percent in their pocket. That can be challenging at times," Lockwood said. "A lot of folks are just not invested appropriately to be able to address that type of need."
But Lockwood and Coppa agree that the most important factor in not outliving your nest egg is to save more. Even increasing your retirement contributions to reach the maximum annual limit for 401(k)s and IRAs may not be enough, so consider adding more money to taxable accounts earmarked for retirement.
In the end, how much money you put in will ultimately determine how much you'll have to take out.
—By CNBC's Sharon Epperson. Follow her on Twitter

@sharon_epperson

Who pays for college education? Not Mom and Dad

 Published: Tuesday, 23 Jul 2013 | 2:38 PM ET

 

By: Sharon Epperson | CNBC Senior Commodities Correspondent and Personal Finance Correspondent

 

 

Mark Gall | Washington Post | Getty Images

A new study finds parents are footing a smaller portion of the college tuition bill as families become more cost-conscious. The burden is shifting to the student, who now has to depend on money from other sources to pay for rising college costs—and many are also finding "free money" to pay for a large chunk of the tab.

According to a report released Tuesday by Sallie Mae, scholarships and grants have trumped parental contributions as the No. 1 source of paying for college for the first time in four years.
Scholarships and grants paid for about 30 percent of college costs in the 2012-2013 academic year, up from 25 percent in 2008-2009, the Sallie Mae study found. Meanwhile, contributions from parental income and savings dropped from 36 percent four years ago to 27 percent today. Student borrowing has risen 4 percent in that time and now covers 18 percent of college costs.

"Student borrowing has leveled off in the past few years, but parent income and savings has come down considerably," said Sarah Ducich, senior vice president for public policy at Sallie Mae. Parents are "just as willing to stretch to pay for college," she says, "but they don't have the money they had prerecession."

Meanwhile, as parental contributions have declined, "college and universities are stepping up," Ducich said. That may also be another factor that has changed who pays for education costs. "The majority of students getting scholarships are getting them from universities and colleges," she says.
Eric Charity got a free ride from Penn State University and he didn't hesitate to take it—even though the school was not his first choice. Charity had dreamed of following in the footsteps of his older brother and cousins, who graduated from Princeton University. But he changed his mind after being offered a full academic scholarship to Penn State.
"When it was my time, my parents really needed some help financially for me to attend school," he says. If he had gone to Princeton or the University of Virginia, his other top choice, Charity says he "would have been in severe debt."
With the university scholarship as well as private scholarship from a local nonprofit, Charity paid for tuition, room and board, fees and other expenses (including a new computer and school supplies) for four years with scholarships. He graduated from Penn State in 2010 and earlier this year got his law degree from William & Mary, which he chose in large part because of cost.

Students and their families are increasingly following Charity's path. "We've seen parents bring their spending down. They're eliminating schools more frequently as they go through the [college selection] process, so that by the end about two-thirds of families have eliminated a school due to cost," Ducich said, referring to Sallie Mae's new report on "How America Pays for College."
As incoming students and their families see recent graduates facing a tough job market, they are also more reticent to spend or borrow great sums of money for college, financial advisors say.
"If your college-educated kids make less money, then you spend less money on their degree," said Ivory Johnson, founder of Delancey Wealth Management. "If you hear stories about degreed friends who are burdened by student loans, then you borrow less money."
Using that lens, more families are choosing colleges and universities based on cost. It's an encouraging trend, Ducich says. "Making the choice that's affordable not just for the first year but the fourth year as well is so important."

Parents pay less of college costs

 

A new study by Sallie Mae digs into just where the funding for college is coming from. CNBC's Hampton Pearson offers insight. 

 

Tips for finding free money for college

• Sallie Mae, the nation's largest private student loan provider, offers these tips to help students find more scholarships:
• Start searching for scholarships as early as possible. You can begin as early as ninth or 10th grade, as scholarships for younger students sometimes have less competition. The key is to start early and renew efforts year after year to take advantage of additional opportunities.
• Sign up for a free online scholarship search service. Sallie Mae's free database lists more than 3 million scholarships worth over $16 billion.
• Expand your search. Not all scholarships will be found online: check with local clubs, religious organizations, employers and your guidance counselor. Local scholarships tend to be less competitive. Also, corporations often award scholarships to their customers or children of employees.
• Don't be intimidated by the competition. Scholarship judges look for other qualities such as leadership and volunteerism, and many don't ask for GPA or standardized test scores. Make sure to showcase commitment and depth with involvement in campus clubs or organizations.
• Don't overlook unusual opportunities. Some organizations offer scholarships to highlight interesting career opportunities, hobbies or products. In fact, there are scholarships such as the Scholar Athlete Milk Mustache of the Year Award and the Stuck at Prom Duck Brand Duck Tape Scholarship Contest.
• Search year-round. There are many scholarships available all year long, and scholarships due in the winter can have less competition. Treat scholarship searching and applying like a part-time job, as many opportunities come up throughout the year.
• Watch out for scholarship scams. Scholarship searches should be simple and free to use.

Why Underemployment May Be Worse Than It Looks

 Published: Monday, 8 Jul 2013 | 12:21 PM ET

 

By: Jeff Cox | CNBC.com Senior Writer

Getty Images

 

Job seekers wait in line to meet with employers at the 25th Annual CUNY big Apple Job and Internship Fair at the Jacob Javits Convention Center

The level of underemployed workers looks bad on its face but even worse when it's not the government doing the counting.
When the Labor Department released its monthly nonfarm jobs report Friday, it was all sunshine and roses except for one glaring weakness: A big jump in the underemployment rate that includes those who have quit working as well as those who have had to take part-time jobs even though they'd rather work full-time.

That rate, which economists call the U-6, jumped from 13.8 percent in May to 14.3 percent in June—a 3.6 percent increase and indicative that the 195,000 new jobs created in the month weren't exactly of the highest caliber.

But what often doesn't get as much attention is the monthly labor count that the experts at Gallup conduct.

'Wake Up and Smell the Taper': Economist

 

Michael Feroli, JPMorgan Bank, explains why he believes June's employment report will likely lead to the Fed slowing its asset-buying program in September.

According to the pollster's results, the underemployment situation is even worse.
Gallup reports that 17.2 percent of the workforce is underemployed, a startling number compounded by its divergence from the government's count. While the rate is down from the 20.3 percent peak in March 2010, it has remained maddeningly high over the past three years even as economists tout the strength of the U.S. economic recovery.

From a broader perspective, the Gallup measure actually has increased from its 15.9 percent multi-year low in October 2012.


The potential significance of the recent trough is that it came a month before the Federal Reserve launched the third round of quantitative easing, the $85 billion a month bond-buying program that is supposed to help the central bank achieve its dual objectives of price stability—and full employment.
Amid questions of whether QE3 is about to come to end, and if it has been as effective as its predecessors, the underemployment rate will be one important metric to watch.
Aside from the Gallup numbers, the government's report was discouraging in its own right: A jump from 28.5 percent to 29.3 percent for the percentage of those working part-time for economic reasons in the labor force, and a year-over-year surge of 25.1 percent—1.027 million total—for those "discouraged workers" who have quit searching for jobs.

"It's a big deal. The labor market is far from healthy, so I don't want to minimize the fact" that underemployment is on the rise, said Joe LaVorgna, chief U.S. economist at Deutsche Bank.

"To me, it's something that bears watching," he added. "Given the month it occurred, we have tremendous exit and entry into the workforce—teachers and students. You really need to reserve judgment. You need another month or two to see if it's a new trend."
Indeed, some of the other Gallup metrics point to a bit brighter labor picture.
The firm's adjusted unemployment rate, which in the past has diverged substantially from the BLS count, stood at 7.6 percent in June, directly in line with the government's numbers and down substantially from May's 8.2 percent reading.
Also, its payroll-to-population gage was at 44.8 percent, a 2013 high though below the 45.7 percent in late 2012.
But the labor market faces clear pressure ahead, particularly from government sequestration spending cuts and uncertainty over the looming Obamacare implementation.

"We expect labor market pressure from the spending sequester in Washington to spread from reduced hours to job cuts," Ethan Harris, global economist at Bank of America Merrill Lynch, said in a report for clients.

For now, though, LaVorgna said he is attributing the data point discrepancies to an unusual jobs climate that will out the kinks in the months ahead.

"The labor market is so far from normal that it wouldn't surprise me that all these metrics are not necessarily moving in the same direction," he said. "There's going to be some incongruity between these two series. When things normalize, you would expect these things to rectify themselves."
—By CNBC's Jeff Cox. Follow him

@JeffCoxCNBCcom

on Twitter.

Gold Bugged: Contrarians Not Ready to Give Up Yet

 

 Published: Saturday, 29 Jun 2013 | 7:00 AM ET

 

By: Jeff Cox | CNBC.com Senior Writer

AP

 

Gold bugs, meet your falling knife.

With the metal hitting a succession of three-year lows recently, its proponents find themselves trying to catch the proverbial plunging dagger that comes with a collapse in prices.
Yet some traders have yet to give up, believing that gold's demise is nearing its end.


It's part of a broader contrarian view that figures investors are overestimating the factors colluding against precious metals. The bear market in gold has seen a 2013 price drop that approached 30 percent this week, falling below $1,200 for the first time since August 2010.

But gold bugs are a resilient species, and they aren't about to go down easy.

Gartman: Gold Probably 'Seen Its Worse'

 

Dennis Gartman, The Gartman Letter, explains why he is now sitting "on the sidelines" on the gold play, and why he thinks stocks are likely on an upward trend.

"Short gold futures positioning on COMEX is at an all-time high and nearly every broker is now negative gold," analysts at ETF Securities said in a report. "Therefore, while further downside in the short-term is possible, investors with longer-term time-horizons may start to look at the recent sell-off as a longer-term accumulation opportunity."
For most of 2013, though, investors have been running for the exits as fast as their trading platforms can carry them.

The SPDR Gold exchange-traded fund—a highly popular way for investors to get in on the trade without holding physical gold—has seen more than $18 billion in outflows this year, losing nearly 30 percent of its assets under management, according to IndexUniverse.

Some of the recent selling likely was related to fears that the Federal Reserve would begin decelerating the amount of money it was creating to buy bonds. The Fed currently spends $85 billion a month on the quantitative easing program, which has been accompanied by fears of inflation that have yet to materialize. Gold has long been thought of as an effective inflation hedge.
But even when Fed officials on Thursday said QE would not end as long as the economic data remained soft, gold continued to sell off despite a Treasury yield drop.

The gold proponents at ETF Securities say the softening economy will actually help gold prices because it will keep the Fed in the money-printing game.
"If this occurs, the Fed will likely step back from QE reductions. With gold positioning so negative, this has the potential to stimulate a strong short-covering gold price move," the report said.
The team at ETF Securities is not alone in sounding the gold resurgence theme.

Capital Economics predicted that gold will suffer more near-term troubles but "there are also still some plausible scenarios that could lead to explosive gains in the next few years."
MacNeil Curry, technical strategist at Bank of America Merrill Lynch, issued a plaintive "GOLD BEARS BEWARE" warning in a research note, saying proprietary models at his firm suggest a bottom is near.

BofA holds a strongly positive stance on gold, beginning 2013 with a $2,000 price target for year's end and $2,400 for 2014.

Curry said the price is likely to linger around $1,200 an ounce for a while, "but this decline is in its final stages."

A bullish case for gold would be made once the metal cracks $1,270.
However, Curry said in in email that the $2,000 target is no longer valid, though he didn't indicate where the new expectation lies.

"There is almost no way that will happen now," Curry said.

—By CNBC's Jeff Cox. Follow him

Market Moves the Needle on 401(k)s, Not Workers

 

Americans with savings in retirement plans have something to celebrate: Average 401(k) account balances rose 10 percent in 2012, to $86,212, according to mutual fund company Vanguard Group.

But only 11 percent of retirement plan participants saved the maximum of $17,000 ($22,500 for those over 50), and they tended to be older, male, high-income workers with already high account balances, said Vanguard, one of the largest retirement plan providers, with $2 trillion in mutual fund assets.
The average contribution rate in 401(k) plans, which grow tax-free until withdrawal, remained steady during the period, at 10.5 percent, according to Vanguard's 2013 How America Saves report.
Positive market returns in 2012 helped boost balances in the accounts, with the S&P 500 up 13 percent last year. However, account contributions have also grown since 2006, up to $4,845 per employee in 2012 from $4,402 in 2006, according to Vanguard's annual study of more than 3 million participants.

PICK A DATE
 
More retirement plan participants than ever are leaning on professionally managed investment options, Vanguard's data show. Thirty-six percent are invested in either a target-date fund, a balanced fund or a managed account advisory program, in which investments are selected and rebalanced without the participant having to take any action. Vanguard expects this number will rise to 55 percent by 2017.

Seventeen percent of assets were in target-date funds, which have investment plans geared toward a specific retirement date. That was up from 14 percent in 2011 and 3 percent in 2006, the first year these funds gained traction.

As target-date funds gain favor, investors are moving away from holding their own employer's stock. Those holdings were only 9 percent of invested assets at the end of last year, Vanguard said, down from 10 percent in 2006.

Diversified equity funds made up the bulk of accounts at 40 percent, for an overall equity allocation of 66 percent. Cash accounted for 15 percent of investors' portfolios. In 2006, by contrast, participants had 23 percent in cash.

Bonds accounted for 10 percent and other balanced funds for 9 percent.
There was a 3 percent decline in new loans against 401(k)s in 2012. Overall, 18 percent of investors had loans outstanding, with the average balance at $9,000, Vanguard said.

Surprised! Insider Trading in DC Just Got Easier

Insider Trading in DC Just Got Easier

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 Published: Tuesday, 16 Apr 2013 | 10:55 PM ET

By: John Carney Senior Editor, CNBC.com

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The Capitol Building in Washington D.C.

 

While almost no one was looking, a law making it easier for congressional and top executive branch staffers to engage in corrupt trading was signed into law Monday.

The law is a modification of the Stop Trading on Congressional Knowledge (STOCK) Act. The modification was passed by unanimous consent by the House and the Senate last week with no debate or even discussion.

The STOCK Act, which became law just a year ago, was designed to discourage insider trading by members of Congress and top government officials. In addition to outlawing trading based on non-public information gleaned by government officials during the course of their public duties, the law required extensive disclosure of financial holdings by Congressional staffers and 28,000 senior executive branch employees.

The financial disclosures of these officials were to be posted in an online database open to the public.
The disclosure requirements were an important part of the law. They would have allowed researchers to detect abnormally successful trading activity by unelected senior government staffers—just as similar disclosure requirements for Congressmen and Senators had allowed scholars to produce evidence that suggested members of Congress were benefiting from non-public information.

Currently, although the reports of staff financial positions are officially part of the public record, they aren't readily available. Often they have to be requested from individual agencies using the names of the individuals about whom information is sought. The result is that the public is effectively blocked from learning the information disclosed in the reports.

The public disclosure requirement was arguably too lax to begin with. There's good reason to prohibit trading by senior government officials altogether. Many lawyers, journalists and Wall Streeters who come into possession of sensitive, confidential information as part of their professional lives are barred from any short term trading. Some are barred from owning individual securities at all, allowed to own nothing but index and mutual funds.


The provision of the Stock Act was a compromise in which government officials were required to disclose trades to the public in exchange for being able to trade in the first place. If disclosure proved too burdensome, government officials could simply adopt personal no-trading policies and avoid the cost of disclosing trades altogether.


The new law scraps the disclosure requirements for the staffers, leaving them in place only for members of Congress, Congressional candidates, and the President and Vice President.

People who lament our bitterly divided political situation might want to reflect what bipartisanship and inter-branch government agreement has been able to so quickly accomplish here.

Original CBC Article

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