Mel's Blog

September 21, 2010 Market News

September 21st, 2010 9:40 AM by Mel Samick

Do you know what's not amusing? A new study, conducted by Boston College's "Center for Retirement Research", says Americans are $6.6 trillion short of what they need to retire. The study says savings have been squeezed by declines in stock and housing values. This announcement comes on the heels of other sobering news; Milliman Inc., an actuarial and consulting firm, reported this week that the funded status of the 100 largest corporate defined benefit pension plans dropped by $108 billion during August 2010. This comes amid recent reports indicating that a White House created panel is considering proposals to cut Social Security benefits and raise the retirement age. Oh good, we can work longer! In addition, Americans' wealth shrank in the spring for the first time since early 2009 as financial turmoil eroded stock portfolios. The Federal Reserve says household net worth fell $1.5 trillion in the April-to-June quarter. The decline left Americans' net worth at $53.5 trillion. Shrunken stock portfolios were the biggest force dragging down wealth. Net worth is the value of assets such as homes, checking accounts and investments, minus debts like mortgages and credit cards. Before last quarter's decline, net worth had been growing slowly for four straight quarters. Americans' net worth would have to rise an additional 23 percent to revisit its pre-recession peak of $65.8 trillion.

Consumer sentiment unexpectedly worsened in early September to its weakest level in more than a year, as distress over jobs and finances intensified among upper-income families. The Thomson Reuters/University of Michigan's preliminary September reading on the overall index of consumer sentiment came in at 66.6, down from 68.9 in August. Concern that U.S. personal income taxes will increase next year caused the decline in consumer confidence, indicating the biggest part of the economy will struggle to gain momentum. Waning optimism with unemployment close to a 26-year high at 9.6 percent may increase the risk that consumers will cut back on their purchases, which accounts for 70 percent of the economy. Staff reductions at companies such as Fed Ex indicate it will take years to recover the 8.4 million jobs lost in the recession.

Stocks ended higher last Friday, continuing a September rally despite trading with uncertainty most of the week. The Dow Jones Industrial Average rose 0.1 percent, to 10,607.85, a one-month high. The Dow has gained a total of 4.5 percent over the past three weeks. The S&P 500 rose 0.1 percent, to 1,125.59, also a one-month high. The tech-heavy Nasdaq rose 0.5 percent, to 2,315.61, a four-month high. The index is up 7.52 percent over the past three weeks. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose above 22. Volatility has been at its lowest level in four months but the increase shows that fear still exists for investors. Volume remained relatively light all week, despite the first full week of trading for September. While stocks have continued to move higher this month, investors are still pouring money into safe-haven assets like gold.

Gold hit a record high last Friday, moving to $1,275 an ounce. Poor U.S. consumer confidence helped the alternative asset score its biggest weekly gain since May. September and October are typically strong periods for jewelry demand, with a number of major gold-buying festivals in top consumer India, while Western manufacturers stock up ahead of Christmas. Eclipsing gold's rally, silver has gained 5 percent this week, double the yellow metal's 2.5 percent increase. Silver was up 0.1 percent at $20.74 an ounce, approaching levels not seen since 1980. Foreign-exchange volatility also boosted gold's appeal as an alternative currency. Japan intervened last week to weaken the yen for the first time in six years. The euro fell as European debt worries and the weak U.S. consumer data enhanced the dollar's safe-haven appeal, while fear of more Japanese intervention kept the yen near a one-month low against the U.S. currency. Dollar sentiment overall has been damaged by speculation that the Fed could announce more quantitative easing when it meets on Tuesday. Quantitative easing is a process by which the Fed increases the supply of money in order to buy mortgage backed securities, government bonds, and corporate bonds from banks. The purchases in turn help banks create excess reserves (cash) which then they can use to lend money.

The average mortgage rate for 30-year fixed loans last week was 4.37 percent, according to mortgage buyer Freddie Mac. Rates climbed for the second straight week, but remain near the lowest level in decades, but it hasn't helped the housing market much. However, the average rate on 15-year fixed loans dropped to 3.82 percent. Home sales plummeted this summer and economists don't expect that to change until the unemployment rate falls significantly and credit becomes more accessible to potential buyers. Applications for new home loans fell by nearly 9 percent last week from a week earlier, the Mortgage Bankers Association said last Wednesday. Meanwhile, lenders took back more homes in August than in any month since the start of the U.S. mortgage crisis. The increase in home repossessions came even as the number of properties entering the foreclosure process slowed for the seventh month in a row. In all, banks repossessed 95,364 properties last month, up 3 percent from July and an increase of 25 percent from August 2009.

Mel

Information Provided by Amtrust Bank Capital Markets

Posted in:General
Posted by Mel Samick on September 21st, 2010 9:40 AM

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