JUNE 21, 2010, 1:03 PM
One Big Thing We Don’t Know About Stocks By CARL RICHARDS
Carl Richards
Carl Richards is a certified financial planner and the founder of Prasada Capital.
The only reason we invest in stocks is to earn more than we would get from cash or bonds. The amount you are supposed to earn by taking the additional risk of owning stocks is called the risk premium. If you don’t get paid more for taking the risk, you should put your money in bonds.
Over the last 207 years you got paid 2.5 percentage points more each year (on average) to invest in stocks than you did in bonds.
But you know what they say about statistics, right? In the real world, we have to deal with the fact that, like all averages, this one has some serious problems. Sometimes the risk premium is higher than 2.5 percent, and sometimes it goes away or is hugely negative (say, in a bear market).
Until recently, most of us thought of bear markets as those three- to five-year periods where you grit you teeth and hang on. But recent experience is more painful than that.
In an article by Robert Arnott in The Journal of Indexes, he highlights multiple 20-, 30- and even 40-year periods where we would have been better off in bonds. In other words, the risk premium did not exist.
This starts to get ugly when we admit that we have no idea when these types of prolonged bear (or sideways) markets are coming. Where are we right now in the cycle? I have no idea, and I wouldn’t bet my life savings on anyone who claims to.
So earning this mythical risk premium of 2.5 percent is largely a function of timing, and it’s not the kind of timing we can control. This is the purely random luck kind of timing: when you were born, when you sell your business, when you retire or receive a large lump sum to invest. And if the risk premium is a function of timing, and timing is a function of luck, it doesn’t take much to realize that earning the mythical risk premium is a function of pure luck, too.
This is why so many of us who have been investing for 15 years feel as if we are about back where we started, even if we did everything right (assets allocated, properly diversified, didn’t bail out at the bottom and so on).
Let me be clear, I am not saying that the risk premium is dead, or that we should run out and sell everything. But I am suggesting that with the Dow bouncing around 10,000, it might be time to consider what you define as long term. Ask yourself if you can you live through a prolonged period where you earn no risk premium at all, and make adjustments accordingly.
Showing posts with label Investments. Show all posts
Showing posts with label Investments. Show all posts
Monday, June 21, 2010
Sunday, February 08, 2009
A 10-Year Stretch That's Worse Than It Looks By FLOYD NORRIS
February 7, 2009
Off the Charts
A 10-Year Stretch That's Worse Than It Looks By FLOYD NORRIS
IN the last 82 years — the history of the Standard & Poor's 500 — the stock market has been through one Great Depression and numerous recessions. It has experienced bubbles and busts, bull markets and bear markets.
But it has never seen a 10-year stretch as bad as the one that ended last month.
Over the 10 years through January, an investor holding the stocks in the S.& P.'s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation, as is shown in the accompanying chart.
Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent.
That decline was strongly influenced by inflation. Ignoring inflation, stocks over that decade returned half a percent a year, not a very good showing but not a loss. But with inflation taking off, the real, inflation-adjusted return was negative.
For the current period, the total return was negative, at minus 2.6 percent a year, even before factoring in inflation.
Perhaps surprisingly, the 10 years after the 1929 crash were not that bad by this measure — which may say as much about the measure as it does about the performance of the stock market. The deflation of the 1930s helped the after-inflation of the stock market to look better.
For the 10 years after the crash, through Sept. 30, 1939, the compound annual decline of the stock market, with dividends reinvested, was 5 percent a year before considering inflation. That remains the worst 10-year period. But after factoring in deflation, the loss was 2.8 percent a year, which is still bad but not horrid.
Compounding interest rates over a 10-year period can magnify differences that look small. For example, over the 10 years through January, the total losses in nominal dollars from the S.& P. 500, with dividends reinvested, was 23.5 percent. But with inflation added in, the decline was 40.4 percent.
The numbers in the chart assume that the Consumer Price Index was unchanged in January from December. But the accuracy of that assumption does not matter. Even if consumer prices rose or fell sharply during the month, the decade would still have been the worst one.
The decade was not a smooth one. It started with the market nearing the peak it would reach in early 2000, as the technology stock bubble expanded. Prices tumbled through late 2002, then doubled from those depressed levels by late 2007. Since then, a rapid decline has brought them back close to the lows of 2002 before considering dividends and inflation.
Taking inflation and dividends into account, an investor who put money into the market any time after the end of 1996, and held on, now has less value than when he or she started.
Many things influence stock prices, of course, and there is no guarantee that continued economic and financial woes will not drive the market down from here. But long-term investors may be able to take comfort from the fact that bad decades are often followed by 10-year periods that are better than the long-term average, which shows a gain of 6.2 percent a year.
Off the Charts
A 10-Year Stretch That's Worse Than It Looks By FLOYD NORRIS
IN the last 82 years — the history of the Standard & Poor's 500 — the stock market has been through one Great Depression and numerous recessions. It has experienced bubbles and busts, bull markets and bear markets.
But it has never seen a 10-year stretch as bad as the one that ended last month.
Over the 10 years through January, an investor holding the stocks in the S.& P.'s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation, as is shown in the accompanying chart.
Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent.
That decline was strongly influenced by inflation. Ignoring inflation, stocks over that decade returned half a percent a year, not a very good showing but not a loss. But with inflation taking off, the real, inflation-adjusted return was negative.
For the current period, the total return was negative, at minus 2.6 percent a year, even before factoring in inflation.
Perhaps surprisingly, the 10 years after the 1929 crash were not that bad by this measure — which may say as much about the measure as it does about the performance of the stock market. The deflation of the 1930s helped the after-inflation of the stock market to look better.
For the 10 years after the crash, through Sept. 30, 1939, the compound annual decline of the stock market, with dividends reinvested, was 5 percent a year before considering inflation. That remains the worst 10-year period. But after factoring in deflation, the loss was 2.8 percent a year, which is still bad but not horrid.
Compounding interest rates over a 10-year period can magnify differences that look small. For example, over the 10 years through January, the total losses in nominal dollars from the S.& P. 500, with dividends reinvested, was 23.5 percent. But with inflation added in, the decline was 40.4 percent.
The numbers in the chart assume that the Consumer Price Index was unchanged in January from December. But the accuracy of that assumption does not matter. Even if consumer prices rose or fell sharply during the month, the decade would still have been the worst one.
The decade was not a smooth one. It started with the market nearing the peak it would reach in early 2000, as the technology stock bubble expanded. Prices tumbled through late 2002, then doubled from those depressed levels by late 2007. Since then, a rapid decline has brought them back close to the lows of 2002 before considering dividends and inflation.
Taking inflation and dividends into account, an investor who put money into the market any time after the end of 1996, and held on, now has less value than when he or she started.
Many things influence stock prices, of course, and there is no guarantee that continued economic and financial woes will not drive the market down from here. But long-term investors may be able to take comfort from the fact that bad decades are often followed by 10-year periods that are better than the long-term average, which shows a gain of 6.2 percent a year.
Wednesday, December 10, 2008
Investors Buy U.S. Debt at Zero Yield By VIKAS BAJAJ and MICHAEL M. GRYNBAUM
December 10, 2008
Investors Buy U.S. Debt at Zero Yield By VIKAS BAJAJ and MICHAEL M. GRYNBAUM
When was the last time you invested in something that you knew wouldn't make money?
In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world's safest investment, United States government debt, that they agreed to accept a zero percent rate of return.
The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.
While this will lower the cost of borrowing for the United States government, economists worry that a widespread hunkering-down could have broader implications that could slow an economic recovery. If investors remain reluctant to put money into stocks and corporate bonds, that could choke off funds that businesses need to keep financing their day-to-day operations.
Investors accepted the zero percent rate in the government's auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.
In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill.
In these times, it seems, the abnormal has now become acceptable. As America's debt and deficit spiral from a parade of billion dollar bailouts and stimulus packages, fund managers, foreign governments and big retail investors reckon they will get more peace of mind by stashing their cash, rather than putting it toward any of the higher-yielding risk that is entailed in stocks, corporate bonds and consumer debt.
The rapid decline in Treasury yields — which since summer have headed toward lows not seen since the end of the World War II — also renders the Federal Reserve less effective, as investors and banks stuff the money that the central bank is pumping into the financial system into Treasuries, rather than fanning it out across the broader economy.
"The last time this happened was the Great Depression, when people are willing to accept no return on their money, or possibly even a negative return," said Edward Yardeni, an independent analyst. "If people are so busy during the day just protecting the cash they have, it's not a good sign."
Stocks fell sharply as investors digested the implications. The Dow Jones industrial average dropped 242.85 points, or 2.72 percent, to 8,691.33, and the Standard & Poor's 500-stock index declined 2.31 percent, to 888.67. The Nasdaq composite index lost 1.55 percent, to 1,547.34.
If there is a silver lining to the Treasury market's gyrations, it is that the United States can borrow money more cheaply from investors, whether they be the governments of China or Japan, or big fund managers. That could help Washington finance various programs intended to revive the ailing economy.
Borrowing by the Treasury has already ballooned since Congress approved the $700 billion financial rescue plan, and policy makers expect the federal budget deficit to swell further next year as the Big Three automakers and other industries look for support.
"That sucking sound is all the world's capital going into the U.S. Treasury market," Mr. Yardeni said, "which means the Treasury and the Fed can tap into that liquidity pool to finance TARP and offer mortgages at 4.5 percent."
While that may offset some of the expense of the bailouts, economists say the fact that the United States must borrow so much to prop up large parts of the economy is a big cause for concern.
There are several explanations for the flight to safety in the bond market. The world of short-term money market funds, for instance, is still reeling from troubles at the Reserve Primary Fund, a money market fund frozen in September after it lost money on investments in Lehman Brothers. Since then, individual and large investors have put more than $200 billion into money funds that only invest in safe Treasury bills, according to iMoneyNet, a financial data publisher. At the same time, investors have withdrawn nearly $400 billion from prime funds.
That has forced portfolio managers to buy Treasury bills, driving down yields. "That group of investors has to invest in something," said Max Bublitz, chief strategist at SCM Advisors. "They don't have the luxury of saying, 'I will stick it in the mattress.' "
Yields for longer term Treasury securities have also slumped, with the 10-year now yielding 2.64 percent, down from 2.7 percent Monday and 3.75 percent a month earlier. That decline appears to reflect several other forces. Many investors are seeking safety because they believe that the economy is in its worst recession since the Depression. Rather than inflation, which was a worry for some a few months ago, many are now worried about deflation, or falling prices.
Thomas H. Atteberry, a bond fund manager, said at current prices the market is predicting that the United States will suffer the kind of "lost decade" that Japan suffered in the 1990s.
"I have a hard time justifying that," said Mr. Atteberry, a partner at First Pacific Advisors. "The Fed seems much more upfront about boosting its balance sheet by creating money."
Another reason, analysts say, that Treasury yields may be falling is that foreign investors are using American government securities to protect themselves against the falling value of their own currencies. Many investors are also pulling money out of mutual funds and hedge funds, forcing portfolio managers to sell more risky assets and hold Treasuries, which are easier to sell.
And some fund managers are simply looking to dress up their portfolios before the year ends.
"There is no doubt that there is potentially some hoarding of cash in anticipation of potential redemptions," said David Kovacs, a strategist at Turner Investment Partners. "People want to own it to show that they played it safe by year-end."
http://www.nytimes.com/2008/12/10/business/10markets.html?_r=1&sq=Bajaj&st=cse&adxnnl=1&scp=4&pagewanted=print&adxnnlx=1229260118-NzuUleVbEVTdjSVxRQvaUg
http://snipurl.com/83iu0
Saturday, November 01, 2008
A Monthlong Walk on the Wildest Side of the Stock Market By FLOYD NORRIS
Off the Charts
A Monthlong Walk on the Wildest Side of the Stock Market By FLOYD NORRIS
The wildest month in the history of Wall Street ended on Halloween with both scary and thrilling price movements.
October was the worst month for the Standard & Poor's index of 500 stocks in 21 years — since the 1987 stock market crash.
But the final week was the best week for the market in 34 years.
As befits such a wild month, it was the most volatile in the 80-year history of the S.& P. 500.
The huge gains of the final week were reminiscent of the sharp recoveries from bear market lows in 1974 and 1982. Both of those moves came while the economy was mired in recession, as it almost certainly is now.
If Monday's stock market lows prove to be the low prices for this cycle, the bear market will have ended with the S.& P. 500 down 46 percent from the peak it reached in October 2007.
That would make the bear market almost, but not quite, as bad as the 1973-74 bear market, which ended with the index down 48 percent.
In the 2000-2 bear market, the fall was 49 percent.
The hectic market action in October spread across most of the globe. Remarkably, the American market was one of the calmer markets during the month. Several had more volatility and larger swings in prices.
Nor was the volatility limited to stock prices. Oil prices fell 33 percent during October, making this the worst month for that market since oil futures began trading in 1983. Oil is down to just under $68 a barrel, from a peak over $145 in July.
One volatility measure, shown in the accompanying charts, is the number of days in which an index closes up or down at least 4 percent.
In normal times, the market goes years without having even one such day. There were none, for instance, from 2003 through 2007. There were three such days throughout the 1950s and two in the 1960s.
In October, there were nine such days.
The accompanying chart shows the months, from 1928 through the present, when the S.& P. 500 had at least five days with 4 percent moves. Most of them were during the 1929 crash and the Great Depression.
Until now, September 1932 held the record for the most days with big moves, at eight.
Two days during October ended with the index leaping more than 9 percent, something that had happened only nine times in the previous 80 years.
For the week, the S.& P. 500 was up 10.5 percent, the best weekly gain since a 14.1 percent rise in the week that ended Oct. 11, 1974.
If the rebound this week indicated that the bear market of 2007-8 had ended, it lasted just over a year and hit bottom on Monday, at 848.92. It recovered to 968.75 by week's end.
There were similar moves in most major indexes. The Dow Jones industrial average ended the week up 11.3 percent, at 9,325.01, and the Nasdaq composite climbed 10.9 percent, to 1,720.95.
For the month, the S.& P. 500 was still down 16.9 percent, the worst showing for the index since it fell 21.8 percent in October 1987. The Dow fell 14.1 percent, and the Nasdaq index lost 17.7 percent.
Both moves — weekly and monthly — affected every sector and nearly every stock. Only seven of the stocks in the S.& P. 100 fell this week, while just nine were up for the month.
Of the 30 stocks in the Dow industrials, only one fell this week. General Motors dropped 16 cents to $5.79 amid talks on a possible merger with Chrysler and additional government aid.
For the month, all 30 were down, with Alcoa turning in the worst performance with a decline of 49 percent. But in the final week, it rose 22 percent, ending at $11.50 after trading as low as $9 and as high as $22.35 during the month. It traded at more than $47 last year.
During the bear market, financial stocks led the way down. The S.& P. financial index fell 65 percent from the high it reached in early 2007 to the low close on Monday. By Friday, the index had recovered 17 percent.
Internationally, Russia led the volatility parade, with an astonishing 17 days with 4 percent moves in the Micex index. It might have had more if Russia had not closed the market on Oct. 10, fearful of the selling panic that was sweeping the world.
That index ended the week up 42.5 percent. For the month, it was still down 28.8 percent,
Many countries, among them Britain, Japan, India and Brazil, also showed more volatility than the United States.
That volatility was so high everywhere was an indication of how linked markets have become in the age of globalization. It is not just that most industrial countries appear to be in recession, or close to it. Another factor is that investors now own portfolios of shares from around the globe, and in times of stress may sell what they can, instead of just what they want to unload.
The period from 2003 through 2007 — when there were no daily moves of at least 4 percent in the United States — became known as the "Great Moderation" to some economists. That very lack of volatility encouraged investors to take more risks by borrowing money, and encouraged others to lend it.
All of the big days in September and October came after Lehman Brothers was allowed to fail. That Lehman was not deemed important enough to save signaled to investors that there was risk where they thought there was none and caused a sharp tightening of credit for many borrowers, despite efforts by central banks to push interest rates down.
The big advances, on Oct. 13 and again on Tuesday, came as hope grew that the financial system would be protected. The first came on the Monday after the Group of 7 finance ministers promised to take steps to protect banks. This week's big move came amid indications that central banks would aggressively cut interest rates.
Such wild volatility may be an indication that a bottom was reached. The biggest week since World War II did come at the end of the 1973-74 bear market, and the biggest week in the 1980s, a gain of 8.8 percent, came just after prices hit bottom on Aug. 12, 1982.
Or the wild moves could just show how baffled investors are by a series of events unlike any they can remember.
Floyd Norris comments on finance and economics in his blog at nytimes.com/norris.
http://www.nytimes.com/2008/11/01/business/01chart.html?sq=Monthlong%20Walk%20Wildest%20Side&st=cse&scp=1&pagewanted=print
http://snipurl.com/7shyp
Wednesday, October 29, 2008
Are Stocks the Bargain You Think? By DAVID LEONHARDT
October 29, 2008
Economic Scene
Are Stocks the Bargain You Think? By DAVID LEONHARDT
Some of the country's most famous investors, including Warren Buffett and John Bogle, have started to make the case that it's time to dive back into the stock market.
They are usually careful to add that they don't know what stocks will do in the short term. Yet their basic message is clear enough: stocks are now cheap, irrational fears have been driving the market down lately, and people who buy today will be glad that they did.
After a day like Tuesday, when the market rose 11 percent, it's easy to see the merits of the argument.
But there is another argument that deserves more attention than it has gotten so far. It's the bearish argument that is based neither on fears that the country may be sliding into another depression nor on gut-level worries about the unknown. It is based on numbers and history, and it has at least as much claim on reason as the bullish argument does.
It goes something like this: Stocks are truly cheap only relative to their values over the last 20 years, a period that will go down as one of the great bubbles in history. If you take a longer view, you see that the ratio of stock prices to corporate earnings is only slightly below its long-term average. And in past economic crises — during the 1930s and 1970s — stocks fell well below their long-run average before they turned around.
To make matters worse, corporate earnings have now started to plunge, too. Assuming that they keep dropping, stocks would also need to fall to keep the price-earnings ratio at its current level.
As stocks were soaring on Tuesday afternoon, I called James Melcher to hear a dose of fact-based bearishness. Mr. Melcher is president of Balestra Capital, a hedge fund in New York, who wrote an essay for his clients two years ago that predicted the broad outlines of the financial crisis (and then arranged Balestra's portfolio accordingly). Like the bulls, he said that no one could know what the market would do in the short term. "But to think stocks are cheap now," he added, "is not rational."
He went on: "In the last 20 years — and particularly in the last six or seven — you had the most massive creation of liquidity the world has ever known." Consumers went ever deeper into debt, thanks to loose lending standards, and a shadow banking system, made up of hedge funds and investment banks, allowed Wall Street to do the same. All that debt lifted economic growth and stock returns.
"It was a nice party," Mr. Melcher said. "The problem is that all the bills are coming due at the same time." He thinks stocks could easily fall an additional 20 percent and maybe 35 percent before hitting bottom.
So who's right — the bears or the bulls? The smartest people in both camps, like Mr. Melcher, Mr. Buffett and Mr. Bogle, have a healthy dose of humility about their own conclusions. And when you dig into their arguments, you find that they're not quite as different as they first sound. But they are different, and it's worth taking a minute to consider the numbers.
There are any number of ways to measure the valuation of the stock market. Some examine prices relative to earnings, others are based on cash flow, a company's underlying assets or the total value of the market. But they tell a pretty consistent story right now. Stocks, which were fabulously expensive for much of the 1990s and this decade, no longer are.
My favorite measure is the one recommended by Benjamin Graham and David L. Dodd, in their classic 1934 textbook, "Security Analysis." They urged investors to use a price-to-earnings ratio — stock prices divided by average annual corporate earnings — based on at least five years of earnings and, ideally, closer to 10. Corporate profits may rise or fall in any given year, but a share of stock is a claim on a company's long-term earnings and should be evaluated as such.
(Why not use a forecast of future earnings? Because they tend toward the fictional, as we're now seeing once again.)
The 10-year price-to-earnings ratio tells an incredibly consistent story over the last century. It has averaged about 16 over that time. There have been long periods when it stayed above 16 and even shot above 20, like the 1920s, 1960s and recent years. As recently as last October, when other measures suggested the market was reasonably valued, the Graham-Dodd version of the ratio was a disturbing 27. But periods in which the ratio has jumped above 20 have always been followed by steep declines and at least a decade of poor returns.
By 1932, the ratio had fallen to 6. In 1982, it was only 7. Then, of course, the market began to self-correct in the other direction, and stocks took off.
After Tuesday's big rally, the ratio was just a shade below 16, or almost equal to its long-run average. This is a little difficult to swallow, I realize. Stocks are down 40 percent since last October, and every experience from the last 25 years suggests they now have to bounce back.
But that's precisely the problem. Since the 1980s, stocks have always bounced back from a loss, usually reaching a high in relatively short order. As a result, the market became enormously overvalued.
As Robert Shiller, the economist who specializes in bubbles, points out, human beings tend to put too much weight on recent experiences. We think the market snapbacks of 1987 and the current decade are more meaningful and more predictive than the long slumps of the 1930s, 1940s and 1970s. Of course, anyone who made the same assumption in 1930 or 1975 — this just has to turn around soon — would have had to wait years and years until the investment paid off.
Now, Mr. Buffett, Mr. Bogle and their fellow bulls know all this history, and they're still bullish. (Though I'd be more bullish, too, if I could get the favorable terms that Mr. Buffett did. In exchange for his money and his good name, Goldman Sachs and General Electric each guaranteed him an annual return of at least 10 percent.)
So on Tuesday afternoon, I also called Mr. Bogle, the legendary founder of the Vanguard Group, the investment firm whose low-cost index funds have made a lot for a lot of people.
He, too, prefers the 10-year price-to-earnings ratio, he said, but he didn't think that it necessarily had to fall to the same bargain-basement levels it reached in the 1930s and 1970s.
You can certainly see why that would be the case. Investors are well aware that the market fell to irrationally low levels during past crises, and they may not allow it to become so cheap this time around.
Mr. Bogle also thinks that corporate profits will rebound nicely within a couple of years and likes the fact that interest rates are low. Low rates have often — though not always — accompanied bull markets.
But it was his last argument that I think is the main one for most investors to focus on. "I'm not looking for a great bull market," he said. There are some reasons to be optimistic about stocks, he said, "and I also look at the alternative."
And, really, how attractive are the alternatives? Savings accounts and money market funds will struggle to keep pace with inflation. Bonds may, as well.
Stocks, on the other hand, are paying an average dividend of about 3 percent, which is better than the interest on many savings accounts, and stocks are also almost certain to rise over the next couple of decades.
If that is your time frame — decades, rather than months or years — this will probably turn out to be a perfectly good buying opportunity. In the shorter term, though, it's a much tougher call, and it involves a lot more risk.
E-mail: Leonhardt@nytimes.com
http://www.nytimes.com/2008/10/29/business/economy/29leonhardt.html?sq=are%20stocks%20the%20bargain%20you%20think&st=cse&scp=1&pagewanted=print
http://snipurl.com/7sjbd
Economic Scene
Are Stocks the Bargain You Think? By DAVID LEONHARDT
Some of the country's most famous investors, including Warren Buffett and John Bogle, have started to make the case that it's time to dive back into the stock market.
They are usually careful to add that they don't know what stocks will do in the short term. Yet their basic message is clear enough: stocks are now cheap, irrational fears have been driving the market down lately, and people who buy today will be glad that they did.
After a day like Tuesday, when the market rose 11 percent, it's easy to see the merits of the argument.
But there is another argument that deserves more attention than it has gotten so far. It's the bearish argument that is based neither on fears that the country may be sliding into another depression nor on gut-level worries about the unknown. It is based on numbers and history, and it has at least as much claim on reason as the bullish argument does.
It goes something like this: Stocks are truly cheap only relative to their values over the last 20 years, a period that will go down as one of the great bubbles in history. If you take a longer view, you see that the ratio of stock prices to corporate earnings is only slightly below its long-term average. And in past economic crises — during the 1930s and 1970s — stocks fell well below their long-run average before they turned around.
To make matters worse, corporate earnings have now started to plunge, too. Assuming that they keep dropping, stocks would also need to fall to keep the price-earnings ratio at its current level.
As stocks were soaring on Tuesday afternoon, I called James Melcher to hear a dose of fact-based bearishness. Mr. Melcher is president of Balestra Capital, a hedge fund in New York, who wrote an essay for his clients two years ago that predicted the broad outlines of the financial crisis (and then arranged Balestra's portfolio accordingly). Like the bulls, he said that no one could know what the market would do in the short term. "But to think stocks are cheap now," he added, "is not rational."
He went on: "In the last 20 years — and particularly in the last six or seven — you had the most massive creation of liquidity the world has ever known." Consumers went ever deeper into debt, thanks to loose lending standards, and a shadow banking system, made up of hedge funds and investment banks, allowed Wall Street to do the same. All that debt lifted economic growth and stock returns.
"It was a nice party," Mr. Melcher said. "The problem is that all the bills are coming due at the same time." He thinks stocks could easily fall an additional 20 percent and maybe 35 percent before hitting bottom.
So who's right — the bears or the bulls? The smartest people in both camps, like Mr. Melcher, Mr. Buffett and Mr. Bogle, have a healthy dose of humility about their own conclusions. And when you dig into their arguments, you find that they're not quite as different as they first sound. But they are different, and it's worth taking a minute to consider the numbers.
There are any number of ways to measure the valuation of the stock market. Some examine prices relative to earnings, others are based on cash flow, a company's underlying assets or the total value of the market. But they tell a pretty consistent story right now. Stocks, which were fabulously expensive for much of the 1990s and this decade, no longer are.
My favorite measure is the one recommended by Benjamin Graham and David L. Dodd, in their classic 1934 textbook, "Security Analysis." They urged investors to use a price-to-earnings ratio — stock prices divided by average annual corporate earnings — based on at least five years of earnings and, ideally, closer to 10. Corporate profits may rise or fall in any given year, but a share of stock is a claim on a company's long-term earnings and should be evaluated as such.
(Why not use a forecast of future earnings? Because they tend toward the fictional, as we're now seeing once again.)
The 10-year price-to-earnings ratio tells an incredibly consistent story over the last century. It has averaged about 16 over that time. There have been long periods when it stayed above 16 and even shot above 20, like the 1920s, 1960s and recent years. As recently as last October, when other measures suggested the market was reasonably valued, the Graham-Dodd version of the ratio was a disturbing 27. But periods in which the ratio has jumped above 20 have always been followed by steep declines and at least a decade of poor returns.
By 1932, the ratio had fallen to 6. In 1982, it was only 7. Then, of course, the market began to self-correct in the other direction, and stocks took off.
After Tuesday's big rally, the ratio was just a shade below 16, or almost equal to its long-run average. This is a little difficult to swallow, I realize. Stocks are down 40 percent since last October, and every experience from the last 25 years suggests they now have to bounce back.
But that's precisely the problem. Since the 1980s, stocks have always bounced back from a loss, usually reaching a high in relatively short order. As a result, the market became enormously overvalued.
As Robert Shiller, the economist who specializes in bubbles, points out, human beings tend to put too much weight on recent experiences. We think the market snapbacks of 1987 and the current decade are more meaningful and more predictive than the long slumps of the 1930s, 1940s and 1970s. Of course, anyone who made the same assumption in 1930 or 1975 — this just has to turn around soon — would have had to wait years and years until the investment paid off.
Now, Mr. Buffett, Mr. Bogle and their fellow bulls know all this history, and they're still bullish. (Though I'd be more bullish, too, if I could get the favorable terms that Mr. Buffett did. In exchange for his money and his good name, Goldman Sachs and General Electric each guaranteed him an annual return of at least 10 percent.)
So on Tuesday afternoon, I also called Mr. Bogle, the legendary founder of the Vanguard Group, the investment firm whose low-cost index funds have made a lot for a lot of people.
He, too, prefers the 10-year price-to-earnings ratio, he said, but he didn't think that it necessarily had to fall to the same bargain-basement levels it reached in the 1930s and 1970s.
You can certainly see why that would be the case. Investors are well aware that the market fell to irrationally low levels during past crises, and they may not allow it to become so cheap this time around.
Mr. Bogle also thinks that corporate profits will rebound nicely within a couple of years and likes the fact that interest rates are low. Low rates have often — though not always — accompanied bull markets.
But it was his last argument that I think is the main one for most investors to focus on. "I'm not looking for a great bull market," he said. There are some reasons to be optimistic about stocks, he said, "and I also look at the alternative."
And, really, how attractive are the alternatives? Savings accounts and money market funds will struggle to keep pace with inflation. Bonds may, as well.
Stocks, on the other hand, are paying an average dividend of about 3 percent, which is better than the interest on many savings accounts, and stocks are also almost certain to rise over the next couple of decades.
If that is your time frame — decades, rather than months or years — this will probably turn out to be a perfectly good buying opportunity. In the shorter term, though, it's a much tougher call, and it involves a lot more risk.
E-mail: Leonhardt@nytimes.com
http://www.nytimes.com/2008/10/29/business/economy/29leonhardt.html?sq=are%20stocks%20the%20bargain%20you%20think&st=cse&scp=1&pagewanted=print
http://snipurl.com/7sjbd
Tuesday, October 28, 2008
Reserve Fund's Investors Still Await Their Cash By DIANA B. HENRIQUES
October 29, 2008
Reserve Fund's Investors Still Await Their Cash By DIANA B. HENRIQUES
The national "bank holiday" that ushered in the New Deal in 1933 locked up the public's cash for four days. The crisis that hit last month at the Reserve Fund, the nation's oldest money market fund, has frozen hundreds of thousands of customer accounts for more than six weeks — with no sure end in sight.
At least 400,000 people, and perhaps as many as a million, can't get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments.
Some of these customers — who, like most Americans, assumed their money funds were as safe and accessible as bank accounts — are getting desperate.
"Longer term, I just don't know how we'll deal with it," said John Oakes, a retired engineer in Austin, Tex., who can't tap $20,000 in a Reserve account to pay his mother's nursing home bill. "They say we may get some money this week, but we don't know if we'll get 100 percent, 90 percent or 30 percent."
Sandra and Lawton Dews, a retired couple in North Myrtle Beach, S.C., had more than $250,000 — 35 percent of their retirement assets —invested in the Reserve US Government Fund.
"They even bragged that you could sleep at night if you invested in their funds," Mrs. Dews said. "In the past month and a half, we don't sleep at all."
Her insomnia began soon after Sept. 15, when the Reserve Fund was hit by a wave of redemptions, apparently because its largest fund had a stake in notes backed by the newly bankrupt Lehman Brothers.
The next day, its $62 billion Primary Fund and two small offshore funds "broke the buck," incurring losses that pushed their per-share price below a dollar.
Only one other money fund, a small bank fund, had ever broken the buck, and the announcement on Sept. 16 sent tremors from Wall Street to Washington. It ultimately played a role in persuading the Treasury to set up a temporary insurance program for money market funds.
And the Reserve Fund had seemed the least likely candidate for trouble, given its long and stable history — its founder, the legendary Henry B. R. Brown, had invented money market funds.
Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.
The news occasionally posted on the fund's Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.
Since then, investors have been on a roller coaster of broken promises, with the company repeatedly blaming its record-keeping systems for delays.
Several requests for comment from management of the Reserve Fund have been declined. "I have no confidence at all in what it says," said Mrs. Dews.
Mrs. Dews and Mr. Oakes are among the plaintiffs in a lawsuit filed against the Primary Fund and the Reserve Fund management by Girard Gibbs, a law firm in San Francisco.
It is one of eight cases pending against the fund company, including one that accuses the fund management of tipping off big investors before the Primary Fund broke the buck so they could get out in time — an allegation the fund has denied.
Many Reserve investors say their issue has become the forgotten crisis. "The government is focused on the banks and the big problems," said Sherry Bryan, a retired industrial photographer in Atlanta. "But this is happening right now to real people."
Ms. Bryan, 58, said she thought of her Reserve Fund investment as "very safe — an 'old-granny' investment." She added, "We really never expected to lose money on this."
Ms. Bryan has tried to keep a sense of humor about having to "tighten my belt and tighten it again." Selling other nest-egg securities in a bad market to pay her bills was "like I'd gone out and bought a speedboat and a Mercedes and traveled all around Europe," she added. "It's cost me the same amount of money, but I didn't have any of the fun."
The Reserve has posted updates on its Web site, www.ther.com. In those reports, it has asked customers to be patient as it tries to cope with "these unprecedented events."
Regulators have had to be patient, too. Despite all their efforts to restore liquidity and confidence in all money funds, they don't have any good options in this case other than to monitor the liquidations carefully.
"The staff has been actively involved in the entire process, intervening to protect all shareholders," said John Heine, a spokesman for the Securities and Exchange Commission.
But it can intervene only so much. The Reserve has proprietary computer systems, so taking over the process at this point could delay the redemptions even further, current and former regulators said.
The largest fund, the Primary Fund, is not eligible for the ad hoc insurance program the Treasury set up for money funds last month. The big US Government Fund seems to meet the criteria and has applied for coverage, but no announcement of its acceptance has been made.
The biggest mystery is why redemptions from that government fund have not been handled more promptly, said James Cracchiolo, chief executive of Ameriprise Financial Services in Minneapolis.
Ameriprise is among those suing the Reserve Fund over the Primary Fund's losses — it is the company that contends management tipped off big investors . But that lawsuit does not name the US Government Fund, Mr. Cracchiolo said.
"This is good government paper — even the government itself could take it from this fund and not lose a penny," he said. "We are all very frustrated at the lack of responsiveness from that fund's trustees. For heaven's sake, if they can't find a white knight to take the paper, we'll take some of it."
Ameriprise alone has about 400,000 clients caught in the freeze, he said, and his rough calculations indicate that "as many as a million, a million-plus people" could be affected. Records from last year showed the Reserve had about 170,000 separate accounts, but many of those were large omnibus accounts that could serve tens of thousands of individuals, businesses and local governments.
Mr. Cracchiolo's firm, like some others, is temporarily offering customers very low-interest loans to help them cope while they wait for a resolution.
The mutual fund industry is equally frustrated, said Paul Schott Stevens, chief executive of the Investment Company Institute, a trade association. "I can't emphasize too strongly that this absolutely is not typical of money funds," he added.
He cited a large money fund at Putnam Investments, which was also hit with heavy redemption demands the week of Sept. 15. But it promptly froze the fund and sold it to Federated Investors with scarcely a glitch in customer's access to their money.
The Reserve Fund's prolonged crisis is particularly baffling to Michael Brunner, a research scientist in Columbus, N.J., who has been a customer since the fund first opened its doors in 1970. He knew the money fund was not insured, as bank deposits are. "But after 30 years, one doesn't think it will go bad," he said.
He can manage without his frozen assets, he added — but he is furious that he still has to, after so much time.
"People talk about this like it's something that happened," he said. "But this isn't something that 'happened.' This is still happening. I still don't have my money and I still don't know what's going to happen to it."
http://www.nytimes.com/2008/10/29/business/29fund.html?pagewanted=print
http://snipurl.com/7sjmh
Reserve Fund's Investors Still Await Their Cash By DIANA B. HENRIQUES
The national "bank holiday" that ushered in the New Deal in 1933 locked up the public's cash for four days. The crisis that hit last month at the Reserve Fund, the nation's oldest money market fund, has frozen hundreds of thousands of customer accounts for more than six weeks — with no sure end in sight.
At least 400,000 people, and perhaps as many as a million, can't get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments.
Some of these customers — who, like most Americans, assumed their money funds were as safe and accessible as bank accounts — are getting desperate.
"Longer term, I just don't know how we'll deal with it," said John Oakes, a retired engineer in Austin, Tex., who can't tap $20,000 in a Reserve account to pay his mother's nursing home bill. "They say we may get some money this week, but we don't know if we'll get 100 percent, 90 percent or 30 percent."
Sandra and Lawton Dews, a retired couple in North Myrtle Beach, S.C., had more than $250,000 — 35 percent of their retirement assets —invested in the Reserve US Government Fund.
"They even bragged that you could sleep at night if you invested in their funds," Mrs. Dews said. "In the past month and a half, we don't sleep at all."
Her insomnia began soon after Sept. 15, when the Reserve Fund was hit by a wave of redemptions, apparently because its largest fund had a stake in notes backed by the newly bankrupt Lehman Brothers.
The next day, its $62 billion Primary Fund and two small offshore funds "broke the buck," incurring losses that pushed their per-share price below a dollar.
Only one other money fund, a small bank fund, had ever broken the buck, and the announcement on Sept. 16 sent tremors from Wall Street to Washington. It ultimately played a role in persuading the Treasury to set up a temporary insurance program for money market funds.
And the Reserve Fund had seemed the least likely candidate for trouble, given its long and stable history — its founder, the legendary Henry B. R. Brown, had invented money market funds.
Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.
The news occasionally posted on the fund's Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.
Since then, investors have been on a roller coaster of broken promises, with the company repeatedly blaming its record-keeping systems for delays.
Several requests for comment from management of the Reserve Fund have been declined. "I have no confidence at all in what it says," said Mrs. Dews.
Mrs. Dews and Mr. Oakes are among the plaintiffs in a lawsuit filed against the Primary Fund and the Reserve Fund management by Girard Gibbs, a law firm in San Francisco.
It is one of eight cases pending against the fund company, including one that accuses the fund management of tipping off big investors before the Primary Fund broke the buck so they could get out in time — an allegation the fund has denied.
Many Reserve investors say their issue has become the forgotten crisis. "The government is focused on the banks and the big problems," said Sherry Bryan, a retired industrial photographer in Atlanta. "But this is happening right now to real people."
Ms. Bryan, 58, said she thought of her Reserve Fund investment as "very safe — an 'old-granny' investment." She added, "We really never expected to lose money on this."
Ms. Bryan has tried to keep a sense of humor about having to "tighten my belt and tighten it again." Selling other nest-egg securities in a bad market to pay her bills was "like I'd gone out and bought a speedboat and a Mercedes and traveled all around Europe," she added. "It's cost me the same amount of money, but I didn't have any of the fun."
The Reserve has posted updates on its Web site, www.ther.com. In those reports, it has asked customers to be patient as it tries to cope with "these unprecedented events."
Regulators have had to be patient, too. Despite all their efforts to restore liquidity and confidence in all money funds, they don't have any good options in this case other than to monitor the liquidations carefully.
"The staff has been actively involved in the entire process, intervening to protect all shareholders," said John Heine, a spokesman for the Securities and Exchange Commission.
But it can intervene only so much. The Reserve has proprietary computer systems, so taking over the process at this point could delay the redemptions even further, current and former regulators said.
The largest fund, the Primary Fund, is not eligible for the ad hoc insurance program the Treasury set up for money funds last month. The big US Government Fund seems to meet the criteria and has applied for coverage, but no announcement of its acceptance has been made.
The biggest mystery is why redemptions from that government fund have not been handled more promptly, said James Cracchiolo, chief executive of Ameriprise Financial Services in Minneapolis.
Ameriprise is among those suing the Reserve Fund over the Primary Fund's losses — it is the company that contends management tipped off big investors . But that lawsuit does not name the US Government Fund, Mr. Cracchiolo said.
"This is good government paper — even the government itself could take it from this fund and not lose a penny," he said. "We are all very frustrated at the lack of responsiveness from that fund's trustees. For heaven's sake, if they can't find a white knight to take the paper, we'll take some of it."
Ameriprise alone has about 400,000 clients caught in the freeze, he said, and his rough calculations indicate that "as many as a million, a million-plus people" could be affected. Records from last year showed the Reserve had about 170,000 separate accounts, but many of those were large omnibus accounts that could serve tens of thousands of individuals, businesses and local governments.
Mr. Cracchiolo's firm, like some others, is temporarily offering customers very low-interest loans to help them cope while they wait for a resolution.
The mutual fund industry is equally frustrated, said Paul Schott Stevens, chief executive of the Investment Company Institute, a trade association. "I can't emphasize too strongly that this absolutely is not typical of money funds," he added.
He cited a large money fund at Putnam Investments, which was also hit with heavy redemption demands the week of Sept. 15. But it promptly froze the fund and sold it to Federated Investors with scarcely a glitch in customer's access to their money.
The Reserve Fund's prolonged crisis is particularly baffling to Michael Brunner, a research scientist in Columbus, N.J., who has been a customer since the fund first opened its doors in 1970. He knew the money fund was not insured, as bank deposits are. "But after 30 years, one doesn't think it will go bad," he said.
He can manage without his frozen assets, he added — but he is furious that he still has to, after so much time.
"People talk about this like it's something that happened," he said. "But this isn't something that 'happened.' This is still happening. I still don't have my money and I still don't know what's going to happen to it."
http://www.nytimes.com/2008/10/29/business/29fund.html?pagewanted=print
http://snipurl.com/7sjmh
Reserve Fund's Investors Still Await Their Cash By DIANA B. HENRIQUES
October 29, 2008
Reserve Fund's Investors Still Await Their Cash By DIANA B. HENRIQUES
The national "bank holiday" that ushered in the New Deal in 1933 locked up the public's cash for four days. The crisis that hit last month at the Reserve Fund, the nation's oldest money market fund, has frozen hundreds of thousands of customer accounts for more than six weeks — with no sure end in sight.
At least 400,000 people, and perhaps as many as a million, can't get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments.
Some of these customers — who, like most Americans, assumed their money funds were as safe and accessible as bank accounts — are getting desperate.
"Longer term, I just don't know how we'll deal with it," said John Oakes, a retired engineer in Austin, Tex., who can't tap $20,000 in a Reserve account to pay his mother's nursing home bill. "They say we may get some money this week, but we don't know if we'll get 100 percent, 90 percent or 30 percent."
Sandra and Lawton Dews, a retired couple in North Myrtle Beach, S.C., had more than $250,000 — 35 percent of their retirement assets —invested in the Reserve US Government Fund.
"They even bragged that you could sleep at night if you invested in their funds," Mrs. Dews said. "In the past month and a half, we don't sleep at all."
Her insomnia began soon after Sept. 15, when the Reserve Fund was hit by a wave of redemptions, apparently because its largest fund had a stake in notes backed by the newly bankrupt Lehman Brothers.
The next day, its $62 billion Primary Fund and two small offshore funds "broke the buck," incurring losses that pushed their per-share price below a dollar.
Only one other money fund, a small bank fund, had ever broken the buck, and the announcement on Sept. 16 sent tremors from Wall Street to Washington. It ultimately played a role in persuading the Treasury to set up a temporary insurance program for money market funds.
And the Reserve Fund had seemed the least likely candidate for trouble, given its long and stable history — its founder, the legendary Henry B. R. Brown, had invented money market funds.
Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.
The news occasionally posted on the fund's Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.
Since then, investors have been on a roller coaster of broken promises, with the company repeatedly blaming its record-keeping systems for delays.
Several requests for comment from management of the Reserve Fund have been declined. "I have no confidence at all in what it says," said Mrs. Dews.
Mrs. Dews and Mr. Oakes are among the plaintiffs in a lawsuit filed against the Primary Fund and the Reserve Fund management by Girard Gibbs, a law firm in San Francisco.
It is one of eight cases pending against the fund company, including one that accuses the fund management of tipping off big investors before the Primary Fund broke the buck so they could get out in time — an allegation the fund has denied.
Many Reserve investors say their issue has become the forgotten crisis. "The government is focused on the banks and the big problems," said Sherry Bryan, a retired industrial photographer in Atlanta. "But this is happening right now to real people."
Ms. Bryan, 58, said she thought of her Reserve Fund investment as "very safe — an 'old-granny' investment." She added, "We really never expected to lose money on this."
Ms. Bryan has tried to keep a sense of humor about having to "tighten my belt and tighten it again." Selling other nest-egg securities in a bad market to pay her bills was "like I'd gone out and bought a speedboat and a Mercedes and traveled all around Europe," she added. "It's cost me the same amount of money, but I didn't have any of the fun."
The Reserve has posted updates on its Web site, www.ther.com. In those reports, it has asked customers to be patient as it tries to cope with "these unprecedented events."
Regulators have had to be patient, too. Despite all their efforts to restore liquidity and confidence in all money funds, they don't have any good options in this case other than to monitor the liquidations carefully.
"The staff has been actively involved in the entire process, intervening to protect all shareholders," said John Heine, a spokesman for the Securities and Exchange Commission.
But it can intervene only so much. The Reserve has proprietary computer systems, so taking over the process at this point could delay the redemptions even further, current and former regulators said.
The largest fund, the Primary Fund, is not eligible for the ad hoc insurance program the Treasury set up for money funds last month. The big US Government Fund seems to meet the criteria and has applied for coverage, but no announcement of its acceptance has been made.
The biggest mystery is why redemptions from that government fund have not been handled more promptly, said James Cracchiolo, chief executive of Ameriprise Financial Services in Minneapolis.
Ameriprise is among those suing the Reserve Fund over the Primary Fund's losses — it is the company that contends management tipped off big investors . But that lawsuit does not name the US Government Fund, Mr. Cracchiolo said.
"This is good government paper — even the government itself could take it from this fund and not lose a penny," he said. "We are all very frustrated at the lack of responsiveness from that fund's trustees. For heaven's sake, if they can't find a white knight to take the paper, we'll take some of it."
Ameriprise alone has about 400,000 clients caught in the freeze, he said, and his rough calculations indicate that "as many as a million, a million-plus people" could be affected. Records from last year showed the Reserve had about 170,000 separate accounts, but many of those were large omnibus accounts that could serve tens of thousands of individuals, businesses and local governments.
Mr. Cracchiolo's firm, like some others, is temporarily offering customers very low-interest loans to help them cope while they wait for a resolution.
The mutual fund industry is equally frustrated, said Paul Schott Stevens, chief executive of the Investment Company Institute, a trade association. "I can't emphasize too strongly that this absolutely is not typical of money funds," he added.
He cited a large money fund at Putnam Investments, which was also hit with heavy redemption demands the week of Sept. 15. But it promptly froze the fund and sold it to Federated Investors with scarcely a glitch in customer's access to their money.
The Reserve Fund's prolonged crisis is particularly baffling to Michael Brunner, a research scientist in Columbus, N.J., who has been a customer since the fund first opened its doors in 1970. He knew the money fund was not insured, as bank deposits are. "But after 30 years, one doesn't think it will go bad," he said.
He can manage without his frozen assets, he added — but he is furious that he still has to, after so much time.
"People talk about this like it's something that happened," he said. "But this isn't something that 'happened.' This is still happening. I still don't have my money and I still don't know what's going to happen to it."
http://www.nytimes.com/2008/10/29/business/29fund.html?pagewanted=print
http://snipurl.com/7sjmh
Reserve Fund's Investors Still Await Their Cash By DIANA B. HENRIQUES
The national "bank holiday" that ushered in the New Deal in 1933 locked up the public's cash for four days. The crisis that hit last month at the Reserve Fund, the nation's oldest money market fund, has frozen hundreds of thousands of customer accounts for more than six weeks — with no sure end in sight.
At least 400,000 people, and perhaps as many as a million, can't get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments.
Some of these customers — who, like most Americans, assumed their money funds were as safe and accessible as bank accounts — are getting desperate.
"Longer term, I just don't know how we'll deal with it," said John Oakes, a retired engineer in Austin, Tex., who can't tap $20,000 in a Reserve account to pay his mother's nursing home bill. "They say we may get some money this week, but we don't know if we'll get 100 percent, 90 percent or 30 percent."
Sandra and Lawton Dews, a retired couple in North Myrtle Beach, S.C., had more than $250,000 — 35 percent of their retirement assets —invested in the Reserve US Government Fund.
"They even bragged that you could sleep at night if you invested in their funds," Mrs. Dews said. "In the past month and a half, we don't sleep at all."
Her insomnia began soon after Sept. 15, when the Reserve Fund was hit by a wave of redemptions, apparently because its largest fund had a stake in notes backed by the newly bankrupt Lehman Brothers.
The next day, its $62 billion Primary Fund and two small offshore funds "broke the buck," incurring losses that pushed their per-share price below a dollar.
Only one other money fund, a small bank fund, had ever broken the buck, and the announcement on Sept. 16 sent tremors from Wall Street to Washington. It ultimately played a role in persuading the Treasury to set up a temporary insurance program for money market funds.
And the Reserve Fund had seemed the least likely candidate for trouble, given its long and stable history — its founder, the legendary Henry B. R. Brown, had invented money market funds.
Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.
The news occasionally posted on the fund's Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.
Since then, investors have been on a roller coaster of broken promises, with the company repeatedly blaming its record-keeping systems for delays.
Several requests for comment from management of the Reserve Fund have been declined. "I have no confidence at all in what it says," said Mrs. Dews.
Mrs. Dews and Mr. Oakes are among the plaintiffs in a lawsuit filed against the Primary Fund and the Reserve Fund management by Girard Gibbs, a law firm in San Francisco.
It is one of eight cases pending against the fund company, including one that accuses the fund management of tipping off big investors before the Primary Fund broke the buck so they could get out in time — an allegation the fund has denied.
Many Reserve investors say their issue has become the forgotten crisis. "The government is focused on the banks and the big problems," said Sherry Bryan, a retired industrial photographer in Atlanta. "But this is happening right now to real people."
Ms. Bryan, 58, said she thought of her Reserve Fund investment as "very safe — an 'old-granny' investment." She added, "We really never expected to lose money on this."
Ms. Bryan has tried to keep a sense of humor about having to "tighten my belt and tighten it again." Selling other nest-egg securities in a bad market to pay her bills was "like I'd gone out and bought a speedboat and a Mercedes and traveled all around Europe," she added. "It's cost me the same amount of money, but I didn't have any of the fun."
The Reserve has posted updates on its Web site, www.ther.com. In those reports, it has asked customers to be patient as it tries to cope with "these unprecedented events."
Regulators have had to be patient, too. Despite all their efforts to restore liquidity and confidence in all money funds, they don't have any good options in this case other than to monitor the liquidations carefully.
"The staff has been actively involved in the entire process, intervening to protect all shareholders," said John Heine, a spokesman for the Securities and Exchange Commission.
But it can intervene only so much. The Reserve has proprietary computer systems, so taking over the process at this point could delay the redemptions even further, current and former regulators said.
The largest fund, the Primary Fund, is not eligible for the ad hoc insurance program the Treasury set up for money funds last month. The big US Government Fund seems to meet the criteria and has applied for coverage, but no announcement of its acceptance has been made.
The biggest mystery is why redemptions from that government fund have not been handled more promptly, said James Cracchiolo, chief executive of Ameriprise Financial Services in Minneapolis.
Ameriprise is among those suing the Reserve Fund over the Primary Fund's losses — it is the company that contends management tipped off big investors . But that lawsuit does not name the US Government Fund, Mr. Cracchiolo said.
"This is good government paper — even the government itself could take it from this fund and not lose a penny," he said. "We are all very frustrated at the lack of responsiveness from that fund's trustees. For heaven's sake, if they can't find a white knight to take the paper, we'll take some of it."
Ameriprise alone has about 400,000 clients caught in the freeze, he said, and his rough calculations indicate that "as many as a million, a million-plus people" could be affected. Records from last year showed the Reserve had about 170,000 separate accounts, but many of those were large omnibus accounts that could serve tens of thousands of individuals, businesses and local governments.
Mr. Cracchiolo's firm, like some others, is temporarily offering customers very low-interest loans to help them cope while they wait for a resolution.
The mutual fund industry is equally frustrated, said Paul Schott Stevens, chief executive of the Investment Company Institute, a trade association. "I can't emphasize too strongly that this absolutely is not typical of money funds," he added.
He cited a large money fund at Putnam Investments, which was also hit with heavy redemption demands the week of Sept. 15. But it promptly froze the fund and sold it to Federated Investors with scarcely a glitch in customer's access to their money.
The Reserve Fund's prolonged crisis is particularly baffling to Michael Brunner, a research scientist in Columbus, N.J., who has been a customer since the fund first opened its doors in 1970. He knew the money fund was not insured, as bank deposits are. "But after 30 years, one doesn't think it will go bad," he said.
He can manage without his frozen assets, he added — but he is furious that he still has to, after so much time.
"People talk about this like it's something that happened," he said. "But this isn't something that 'happened.' This is still happening. I still don't have my money and I still don't know what's going to happen to it."
http://www.nytimes.com/2008/10/29/business/29fund.html?pagewanted=print
http://snipurl.com/7sjmh
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