Finance and Economic

A great earthquake has rumbled through the financial markets, and no one knows for certain when the aftershocks will subside. But it’s not too early to check your foundation.

This advice holds especially true for retired investors who have been depending on their portfolios to supplement outside income sources, such as Social Security and/or pensions. If you have been drawing only interest and dividends from your investments, you might be in reasonably good shape, especially if you’ve escaped bond defaults and dividend cuts. But for a much larger, less fortunate group of retirees — those who need to draw from both income and principal to pay the bills — the foundation almost certainly is weaker now, and possibly even crumbling.

Assume, for example, that you retired last year with a nest egg of a million dollars, and that you have been drawing down $50,000 a year to live on. That’s a 5 percent withdrawal rate, slightly higher than what many financial planners consider sustainable, but still reasonable for a balanced, diversified portfolio.

With a new year under way, you still need $50,000 from your investments (perhaps more to keep up with rising costs), but in recalculating your withdrawal rate you make an alarming discovery: The bear market has reduced the value of your balanced, diversified portfolio to $700,000. Now, instead of the original 5 percent, you are consuming more than 7 percent of your life’s savings each year.

The decision you now face is what to do about it. I see at least four options:

Sell out your portfolio: Find a 7 percent investment and lock it in. There are fixed-income investments that pay 7 percent today, but they don’t come with government guarantees. And while (barring default) the income shouldn’t go down, it won’t go up, either. Fixing your retirement income in a world of rising costs can be very problematic depending on your age.

Invest more aggressively: Taking more risk might lead to higher returns over time, allowing you to sustain a higher withdrawal rate, at least in theory no fax cash advance. But the more risk you take on, the more susceptible you are to the next market downturn. Another year like 2008 could push your withdrawal rate into double digits, turning a difficult situation into one that’s practically impossible.

Annuitize: You can exchange your nest egg with an insurance company for a promise of annual payments for life or a specified time period. This could lessen the risk of running out of income, but it also limits investment and income flexibility.

Stay the course, with adjustments: Depending on how much the current market environment has damaged your financial foundation, you might be able to recover with some less drastic moves. Instead of abandoning a well-constructed investment program, consider rebalancing your portfolio, which at this point probably involves moving assets from the fixed-income side over to the equity side. You also can reduce your withdrawal rate simply by drawing less money from your portfolio, if only temporarily. We all have discretionary expenses that can be reduced, postponed or eliminated. Spending less means preserving capital and purchasing power, the name of the game in retirement.

Desperate times don’t always call for desperate measures, especially when it comes to investing in retirement. But times like these do demand increased vigilance and some creativity. Start with what you know. Do the math. Adapt to new circumstances, and gain wisdom from this experience.

< Mike Brown is a licensed investment broker and a certified financial planner. He is the First Vice President, Investments for UBS Financial Services Inc. He also is the host of "KMOX Money Show" (1120 AM).

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Fannie Mae, the largest provider of money for U.S. residential mortgages, on Wednesday said its regulator named nine board members, including a former Morgan Stanley executive.

The appointment of David Sidwell, who was Morgan Stanley’s (MS, Fortune 500) chief financial officer from March 2004 to October 2007, and eight others comes after the government in September forced the company and rival Freddie Mac into conservatorships under their regulator, the Federal Housing Finance Agency.

Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have lost billions of dollars as the housing slump boosted delinquencies, raising alarm among regulators and lawmakers who are counting on the companies to help stabilize the market for U.S. home mortgages.

The other directors are Fannie Mae Chief Executive Officer Herb Allison; Dennis Beresford, former chairman of the Financial Accounting Standards Board; William Thomas Forrester, former CFO of the Progressive Corp (PGR, Fortune 500) cash advance.; Brenda J. Gaines, former CEO of Diners Club North America, a subsidiary of Citigroup Inc (C, Fortune 500).; Charlynn Goins, former chairman of New York City Health and Hospitals Corp.; Frederick "Bart" Harvey III, former chairman of the board of trustees of Enterprise Community Partners; Egbert Perry, chairman and CEO of the Integral Group LLC; and Diana Taylor, a former managing director for Wolfensohn & Company.

Beresford and Gaines have served as Fannie Mae directors since 2006. Harvey has been a director since August 2008. 

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If Japan’s experience is any guide, the historic plunge in U.S. Treasury yields may deepen as the Federal Reserve’s moves toward unconventional policy tools — such as outright purchases of government bonds — to revive the economy.

As part of the Bank of Japan’s quantitative easing policy launched in March 2001 to fight against deflation, the central bank began buying government outright to drag down long-term rates after having already driven short-term rates to zero.

Benchmark 10-year Treasury yields may test all-time lows struck in the 1940s near 1.60 percent if the Fed decides to start scooping up government bonds as part of any new policy, a prospect Fed Chairman Ben Bernanke has raised.

The Fed is widely expected to cut rates to 0.5 percent or lower this week and possibly lay out new initiatives on top of its array of interventions to prop up frozen markets for commercial paper, mortgage and asset-backed securities.

U.S. banks and Wall Street financial firms are already following a similar pattern seen in Japan that is reinforcing the drop in Treasury yields.

Japanese commercial banks, which were badly hurt by the bursting bubble in stock and real estate prices, turned into hefty buyers of government bonds while repairing their balance sheets and cutting back on traditional lending.

“After the injection of public funds into Japanese major banks in 1999, domestic bank holdings of JGBs kept rising until 2004 or 2005,” said Kazuhiko Sano, chief fixed-income strategist at Nikko Citigroup direct payday loan lenders. “Their behavior may give hints on the future actions of U.S. banks.”

Data from the Fed shows that commercial bank holdings of Treasuries and agencies have surged and reached a record $1.284 trillion in October.

But those holdings of Treasuries and agencies make up just 10 percent of their $12 trillion in total assets, near the lowest proportion in the past 30 years.

In Japan, bank holdings of government bonds are still 36 percent of total assets, up from 9 percent in 2000.

BACK TO THE FUTURE

The 10-year Treasury yield fell as low as 2.48 percent last week, the lowest since 1954, and remain at just 2.58 percent.

Despite concerns about heavy Treasury debt issuance to pay for more fiscal stimulus and the next tranche of the Treasury’s $700 billion TARP program, yields will likely tumble if the Fed chooses to buy big amounts of long-term bonds, analysts said.

The BOJ’s purchases, starting at 400 billion yen ($4.3 billion) a month, drove 10-year yields down to a low of 1.02 percent at the time they were announced.

When the BOJ boosted monthly JGB purchases to 1.2 trillion yen in October 2002, within the next year the 10-year yield slid to just 0.430 percent in 2003 — the lowest benchmark government bond yield in history. 

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JPMorgan Chase & Co., the largest U.S. bank by assets, will cut 9,200 Washington Mutual Inc. jobs nationwide as it acquires the Seattle-based lender, a spokesman said.

The bank will eliminate 4,000 jobs and put 5,200 employees on a transition team. Those employees will help integrate the banks, and some will remain in the positions until the end of next year, JPMorgan spokesman Thomas Kelly said in an e-mail.

JPMorgan paid $1.9 billion in September for most of Washington Mutual, including the branches and deposits, after the thrift was taken over by the Federal Deposit Insurance Corp.

New York-based JPMorgan expects to keep most of the WaMu branch employees and will shutter less than 10 percent of the combined company’s retail outlets free credit reports.

WaMu’s former Seattle headquarters will account for 3,400 of the job cuts, the Seattle Times reported. The bank is also cutting 1,600 jobs in California, mostly in back-office operations.

Washington Mutual had more than 43,000 employees at the end of June.

JPMorgan dropped $5.54, or 18 percent, to $26.12 in New York trading. The shares have fallen 40 percent this year.

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European and Chinese industry activity slumped in November, Japanese officials said their economy was slowing rapidly and euro zone finance ministers gathered on Monday to discuss plans to curb recession.

The Bank of Japan called an emergency meeting for Tuesday to find ways to help corporate finance. BOJ Governor Masaaki Shirakawa warned access to funding was becoming increasingly tough for Japanese firms, to an extent comparable with a debilitating credit crunch a decade ago.

“Sluggishness in economic activity has increased rapidly. Overseas economies are experiencing the same kind of rapid change,” Shirakawa said of the broader Japanese economy.

Euro zone manufacturing activity sank to a record low in November and the outlook was equally grim.

The Markit Eurozone Purchasing Managers Index (PMI) for the manufacturing sector slumped to 35.6 in November, a low not seen in the survey’s 11-year history and way below the 50 mark that separates expansions from contraction.

“The extremely weak … survey intensifies fears that the euro zone’s recession will be deep and prolonged,” said Howard Archer, economist at IHS Global Insight.

The euro zone was officially declared in recession this month following a second quarterly contraction in economic output. Analysts do not see the economy growing again until the third quarter next year — and then only marginally.

The financial crisis that began with a U.S. housing market collapse last year has already knocked several big economies into recession, including the euro zone same day payday loans. Most economists believe the United States and Britain will soon follow.

Similar surveys from China showed its manufacturing industry slumped in November as new orders tumbled, showing the world’s fourth-largest economy being sucked deeper into the global maelstrom.

Japan’s economy minister was gloomier even than Shirakawa.

“We are moving to the next phase of shrinking consumption — some call it deflation — production going down and prices going down,” Economy Minister Kaoru Yosano told the Financial Times in an interview published on Monday.

RATE CUTS COMING

Central banks in Britain, the euro zone, Australia and New Zealand are expected to cut borrowing costs sharply this week in response to the crisis. Politicians are also poised to weigh in.

Euro zone finance ministers meet later on Monday to pick over a menu of economic measures drawn up by the European Commission, which could inject up to 200 billion euros ($258.8 billion) of government spending, although that figure includes national schemes already announced.

Agreement may prove elusive. German Chancellor Angela Merkel told her party on Monday the government, which has unveiled a 32 billion euro plan, would not take part in a “senseless” competition to spend billions more. 

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A global credit crisis that has felled large investment banks and prompted multi-billion dollar bailout packages is also hurting unlikely victims half a world away: small south Asian businesses dependent on microfinance.

Microfinance has helped poor women and farmers in Bangladesh and India set up businesses and grow crops since the 1970s.

But as credit tightens and largesse from corporations and socially-minded investors dries up, microfinance will be hit, impacting poor people who have no other access to finance.

“A liquidity crisis is the very worst-case scenario for microfinance institutions,” said Roy Jacobowitz, managing director of development and communications at ACCION International in Boston, which backs microfinance institutions.

“The demise of microfinance will be devastating. It will leave people that depend on it in a very, very bad situation: they could go from a level of success back to poverty.”

South Asia accounts for the most microfinance borrowers, making up more than half of global demand, according to Sa-Dhan, an association of community development finance institutions.

While ACCION hasn’t seen a “catastrophic impact” on MFIs there yet, Kashf Foundation, an MFI in Pakistan, whose economy is tanking, is now seeking international lines of credit, he said credit score.

In India and Bangladesh, microfinance has given hope to hundreds of thousands, especially women, who have built successful businesses that have changed their lives.

But these may now be under threat because of tighter credit.

“There’s less money out there, so there’s less money for MFIs,” said Siddhartha Chowdri, a manager for ACCION in India.

“For MFIs, the cost of their funds has gone up, and at the same time, they’re under pressure not to raise lending rates to their borrowers. At some point that becomes unsustainable.”

REGULAR INCOME

Microfinance shot into the spotlight in 2006 when the Nobel Peace Prize went to Bangladesh’s Muhammad Yunus and his Grameen Bank that pioneered giving small loans without collateral.

But today in Bangladesh, one of the poorest nations in the world, microfinance borrowers and workers are a worried lot.

Kulsum Bibi, a 45-year-old mother of three, set up a nursery with a loan of 3,000 taka ($44) from Bangladesh Rural Advancement Committee (BRAC), after her husband left her and their children. 

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Have money, will buy Mercedes and mobile phone.

That seems to be the mantra in India, where sales of luxury cars and mobile subscriptions are bucking the overall trend of lower consumer demand and slowing economic growth.

India’s benchmark stock market is down more than half in 2008, industrial production has fallen and analysts expect economic growth could slow to below 7 percent in the year to March 2009 from 9 percent or higher in the past three years.

But that has not stopped mobile phone operators in the fastest growing market for mobile phone services from adding a record 7.7 million mobile users in October to their GSM networks.

Leader Bharti Airtel alone added 2.7 million new subscribers, while No. 3 Vodafone Essar rang in its highest numbers ever, a whopping 2.1 million.

Subscriber additions can continue at the same fast clip if operators stick to their expansion plans, said Usha Rajeev, head of the telecom practice at PricewaterhouseCoopers.

“Generally, in times of trouble, people feel a heightened need to stay connected and keep up with the news,” she said.

“Also, the mobile phone is not considered a luxury product anymore; it’s almost an essential commodity,” she said.

Young consumers see the mobile phone “as an extension of themselves,” Rajeev said, and would not cut spending on it, while for new users from small towns and villages, staying connected may be critical to earning a livelihood short term cash loans.

With just over a quarter of its billion-plus population owning a mobile, consultancy Gartner forecasts India’s mobile user base will increase to 737 million by 2012, helped by call rates as low as 1 U.S. cent a minute and handsets at $15.

MORE CONVICTION

At the other end of the spectrum is demand for luxury cars with a sticker price of more than 2 million rupees ($41,000), which has stayed strong despite a slump in car sales overall.

Car sales in India fell for the third time in four months in October as high borrowing costs and tighter credit depressed demand, with some firms including top vehicle maker Tata Motors Ltd shutting plants to avoid a build-up in inventory.

Car sales fell nearly 7 percent from a year earlier to 98,900 units in October, but Mercedes-Benz has already met its full-year target with sales of 3,141 units so far this year, a 47 percent increase from the same period a year earlier.

BMW’s sales have more than doubled this year. 

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Has your latest brokerage statement got you down? Maybe it’s time to try something completely different: a $96 billion market built entirely on the certifiable absence of a colorless, odorless gas.

That would be the curious and high-growth business of carbon finance. Its primary purpose is to curb global warming by stimulating the trade of a new commodity known as a carbon-emissions reduction credit. Scoff if you like, but know this: During 2008 (through Oct. 15), the value of an index of carbon credits - which you can now purchase on the New York Stock Exchange - grew 5.4%. Can you say that about anything in your portfolio?

What’s more, almost everyone expects carbon trading to really take off once the U.S. government regulates greenhouse gases, as both presidential candidates promise to do. Of course, if Washington doesn’t act, the market could vaporize. "These are political markets, and you can’t take the politics out," says V

A majority of Americans aren’t happy with the way Treasury Secretary Henry Paulson is handling his job or with the financial rescue package he and Congress created, according to a poll released Wednesday.

Of 1,058 people surveyed in a CNN/Opinion Research Corp. poll, 64% said they disapproved of Paulson’s performance and 28% said they approved. The poll was conducted on Oct. 17-19 and the margin of error was plus or minus 3 percentage points.

The Treasury secretary, however, fared better than the president has recently. In an earlier poll, 72% of Americans said they disapproved of the way President Bush is handling his job.

A majority in the latest poll - 56% - said they also oppose the financial rescue package passed by Congress earlier this month. That package allows Treasury to buy troubled assets to stabilize the financial system.

In particular, 53% of Americans polled said they thought a major action taken as a result of that package - Uncle Sam providing capital to banks and other financial institutions in exchange for an equity stake in those companies - is a bad idea.

Fifty-eight percent also think the idea of the government providing financial assistance to keep a big company in business in exchange for a stake in that company is also a bad idea.

The Treasury has stepped in to help giant insurer American International Group (AIG, Fortune 500), which has received more than $100 billion in government loans check cash advance. It has also taken over and agreed to provide funding for mortgage finance companies Fannie Mae and Freddie Mac.

There is one financial rescue strategy that won support in the poll: 58% of those polled said they favored government assistance to homeowners who can’t pay their mortgages.

The financial rescue package requires the government to encourage lenders to modify mortgages in cases where the government holds at least a partial stake in a mortgage-backed security. And in cases where the government buys loans directly, it may modify the loans on its own.

On Oct. 1, the Federal Housing Administration launched a program to encourage lenders to write down loans to below a home’s appraised value in exchange for refinancing a troubled borrower into an FHA-backed loan.

Early reports on that program, however, suggest that any positive effect on foreclosures may take time.

Meanwhile, FDIC Chairwoman Sheila Bair, who was instrumental in working on the financial rescue package provisions, has said publicly she thinks the government now needs to do more to help struggling homeowners. 

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The Dow ended its worst week ever Friday and capped a staggering eight-session selloff that has seen the blue-chip index fall 2,400 points.

Investors could be in for another rough ride as Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500) are on tap to report results this week, giving another glimpse into just how deep their losses continue to be. And a slew of economic reports are also due out, including readings on consumer spending and housing.

Much of the Dow’s loss occurred over the most recent sessions as the global credit market crisis intensfied. In fact, last week the Dow fell just over 1,874 points, or 18%. The index has lost nearly 22% over the last eight sessions, as panicked investors ditched stocks across the board.

That panic also gripped the global markets, which have seen some brutal selloffs of their own.

"The magnitude of what’s going on is unprecedented and people are frightened," said Robert Philips, senior portfolio strategist at BLB&B Advisors.

Finance ministers from the Group of Seven nations said Friday that exceptional steps were needed to ease the global financial crisis and get money flowing again.

And early Saturday, the G-7 vowed to work together to stem the criris. Later in the day, the International Monetary Fund soundly endorsed the G-7 commiment, with IMF managing director Dominique Strauss-Kahn saying the crisis "had pushed the global financial system to the brink of systemic meltdown."

Wall Street lost roughly $2.4 trillion in market value during the week, according to losses in the Dow Jones Wilshire 5000, the broadest measure of the market.

And investor fear surged to record levels, with the CBOE Volatility (VIX) index, or the VIX, hitting a record just shy of 77 Friday, before closing a bit off those levels.

The Dow Jones industrial average (INDU) ended Friday’s session down just 128 points, after falling as much as 697 points in the morning. The Standard & Poor’s 500 (SPX) index also declined Friday and for eight sessions in a row. The Nasdaq composite (COMP) ended barely higher, following seven down sessions.

Paralyzing fear. Banks have clamped down on capital, with credit markets remaining frozen and several measures of bank nervousness hitting all-time highs. Treasury prices slumped, boosting the corresponding yields as investors no longer bet that government debt was necessarily so much safer than stocks. The dollar recovered versus other major currencies. And oil, gold and other commodities plunged on bets that slowing global demand will hurt oil usage.

"Investors are the most fearful they’ve ever been," said Phil Orlando, chief equity market strategist at Federated Investors.

The heightened volatility that has left investors seasick was evident in Friday’s market. In the first five minutes of trade Friday the Dow plunged 697 points, falling below 7,900 to the lowest point since March 17, 2003. The Nasdaq and S&P also hit more than five-year lows. But stocks recovered abruptly, with the Dow erasing losses. The afternoon saw the Dow make violent swings back and forth, toppling as much as 600 points and rising as much as 322 points.

Stocks have plunged despite a series of efforts on the part of the government to unfreeze the credit markets and get money flowing through the system again.

"Fear is feeding upon itself and nothing the officials have done to this point seems to stem the tide," said Ryan Atkinson, market analyst at Balestra Capital.

Last week, the Fed announced an emergency rate cut, coordinated with banks around the world. The central bank has also pumped billions into the system. But the moves have hardly made a dent in investor sentiment.

"Central banks of the world have been flooding the markets with liquidity, but banks are hoarding cash," Atkinson said. "This is the lynchpin of the entire financial system and as long as this is still going on, the markets will be driven by fear."

On Friday, President Bush said that the government will continue to work to resolve the economic crisis to return stability to the markets. Meanwhile, House Democrats are meeting Monday to discuss a potential second economic stimulus package, although House Republicans are reportedly skeptical of a second package, CNN reports.

Looking for a bottom: Stocks have been in a bear market for most of the year, but the selling began accelerating in September following a series of bank failures and mergers.

Since hitting all-time highs a year ago, the Dow has lost just over 40% and the S&P 500 has lost 43% bad credit payday advance. The Nasdaq has not come close to reclaiming its tech-bubble record, but it did hit multi-year highs last October. Since then, the Nasdaq has fallen just over 42%.

And investors across the board are pulling money out of equities, with $43.3 billion pulled out of stock mutual funds during the week ended Oct. 8, according to TrimTabs Research.

"To some extent, we are seeing a retail investor capitulation," said Kelli Hill, portfolio manager at Ashfield Capital Partners. "And when everyone is getting out, that suggests we’re getting closer to finding a bottom," she said.

Wall Street was last in a bear market between 2000 and 2002 amid the end of the tech bubble, a recession and the terrorist attacks on 9/11. But stocks bottomed in October 2002 and then again in March 2003, leading to a more than four-year bull market.

On Friday, the three major stock gauges fell to within shouting distance of that March 2003 bottom. Some market pros are wondering if that 2003 level could turn out to be the bottom for the 2008 bear market also. (Full story)

However, bottoms are often "retested," meaning stocks fall to a low, bounce for a few days or even months, then fall back to right around that low, before making a bigger, more sustained advance off the low.

That’s what happened in the last bear market. Stocks bottomed in early October 2002, bounced a little bit in the lead up to the start of the Iraq war and then retested those lows in March of 2003 before moving higher.

Either way, the analysts spoken with agree that when the market does finally put a bottom in place, it will lead to an extensive rally.

One comfort for investors is the knowledge that there are limits to how low the Dow can go, thanks to rules put in place in the aftermath of the crash of Oct. 19, 1987, when the Dow plunged 22.6%. The NYSE has rules to halt trading if the Dow loses 10%, 20% or 30% in a single day. Trading is halted for 30 minutes, an hour or two hours, depending on the time of day. Trading is over for the day if the Dow loses 30%.

The Dow’s 22% decline roughly compares with the two-day slide in the crash of 1929. On Oct. 28, 1929, the Dow fell 12.8% and it It fell an additional 11.7% the next day, according to Stock Trader’s Almanac.

Bear vs. Bull: Looking for a bottom

Credit markets frozen: Amid the ongoing crisis, lending has dried up, making it difficult for businesses to function on a daily basis and for consumers to get loans.

The TED spread, the difference between what banks pay to borrow from each other for three months and what the Treasury pays, spiked to an all-time high of 4.65% Friday before pulling back slightly.

The wider the spread, the more reluctant banks are to lend to each other, rather than from the federal government. When markets are fairly calm, banks charge each other premiums that are not much higher than the U.S. government.

Three-month Libor, or what banks charge each other to borrow for three months, rose to a 2008 high of 4.82% Friday.

The yield on the 3-month Treasury bill, seen by many as the safest place to put money in the short term, fell to 0.24% from 0.5% Thursday, with panicked investors willing to take a piddling return on their money rather than risk stocks. Last month, the yield on the 3-month bill skidded to a 68-year low around 0%.

But in a sign that banks were willing to take a chance on near-term lending, Libor, the overnight bank lending rate, eased to 2.47% Friday from 5.09% Thursday, according to Bloomberg.com. Libor was at 2.15% a month ago.

Treasury prices slipped at the end of the week, raising the yields. The benchmark 10-year note ended Friday’s shortened session at 3.88%. Treasury bond markets closed early Friday and are closed Monday for Columbus Day.

Other markets: Oil prices plunged $8.89 a barrel Friday, the second biggest decline ever, to settle at $77.70 a barrel on the New York Mercantile Exchange, a 13-month low.

Oil prices have tumbled on bets of slowing demand since the price of crude hit an all-time high of $147.27 a barrel on July 11.

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