Making Unique Observations in a Very Cluttered World

Sunday, 22 August 2010

Borrowing Trillions has consequences - Maneuvers in Yellow Sea closer to China will not involve a U.S. aircraft carrier -

Borrowing Trillions has consequences - Maneuvers in Yellow Sea closer to China will not involve a U.S. aircraft carrier -

The U.S.S. George Washington, a nuclear-powered aircraft carrier, will not take part in the second of a series of the combined military drills between South Korea and the United States following the Cheonan sinking, the UN Command said yesterday.
An initial plan to mobilize the 97,000-ton aircraft career in the drill, scheduled to be held in the Yellow Sea early next month, drew strong protest from China, leading some to worry about a physical confrontation between the world’s superpowers.
“The George Washington is not scheduled to participate in this ASW [anti-submarine warfare] exercise,” the UN Command said in a statement.
The UN Command added that the George Washington will be mobilized for future exercises and operate in the waters off the Korean Peninsula, but did not specify the Yellow Sea, suggesting it will be kept out of the waters near China.
The first combined drill following the Cheonan sinking, dubbed “Invincible Spirit,” and held between July 25-28, involved the George Washington, but only in the East Sea after a hostile Chinese response to a ASW drill in the Yellow Sea.
Asked why the plan to dispatch the George Washington to the Yellow Sea was changed, an official from the UN Command said, “Nothing had been decided about it, so it is not a change.”
The official stressed that the drill is defensive by nature and is designed to send a message of deterrence to North Korea.
Local analysts such as Lee Nae-young, an international relations professor at Korea University, said China's response obviously affected the decision.
Beijing reacted angrily to the planned Yellow Sea drill by Seoul and Washington, with the People's Liberation Army Daily warning of a physical response in an editorial last week.
“If someone harms me, I must harm them,” the editorial warned.
Many observers, however, said the U.S. decision not to send the George Washington was not a fear of China but a strategic choice.
“The U.S. has several issues in which it needs cooperation from China such as sanctioning Iran and pushing North Korea toward denuclearization,” said Jun Byoung-kon, a China expert at the Korea Institute for National Unification.
Said Lee Tai-hwan, a researcher at the Sejong Institute: “The U.S. appears to have judged that it is better to avoid unnecessary misunderstanding.”

Read more - http://www1.voanews.com/english/news/US-South-Korea-to-Stage-War-Games-in-September-101146714.html

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first 7 months of this year -

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first 7 months of this year -

Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to theInvestment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.
Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.
So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.
“At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.”
The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.
It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.
For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession.
“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”
One investor who has restructured his portfolio is Gary Olsen, 51, from Dallas. Over the past four years, he has adjusted the proportion of his investments from 65 percent equities and 35 percent bonds so that the $1.1 million he has invested is now evenly balanced.
He had worked as a portfolio liquidity manager for the local Federal Home Loan Bank and retired four years ago.
“Like everyone, I lost” during the recent market declines, he said. “I needed to have a more conservative allocation.”
To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.
Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.
Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working.
And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.
On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.
According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.

Disturbing Trend - and Worse to Come - record number of workers made hardship withdrawals from 401(k) retirement plans -

Disturbing Trend - and Worse to Come - record number of workers made hardship withdrawals from 401(k) retirement plans - 

As the economy continues to worsen under Obama's "recovery" plan, more disturbing news emerges.  A record number of workers made hardship withdrawals from their 401(k) retirement plans.  In fact, "the number of workers borrowing from their accounts reached a 10-year high" and reflects "the financial stress many workers" are experiencing according to Beth McHugh, Fidelity's vice president of marketing insight.

The report was made by Fidelity Investments which administers 17,000 plans and represents 11 million participants.  The number of people initiating the hardship distributions has risen from 45,000 in 2009 to 62,000 in 2010.  Equally alarming is that "45 percent of participants who took a hardship withdrawal a year ago, took another one this year."

These 401(k) withdrawals are a result of the increasing unemployment in the country as well as companies cutting back on "overtime or overall hours" of their workers.

401(k) plans have "a provision that allows withdrawal of money from the plan" if an individual "can demonstrate ‘heavy and immediate financial need' and there is no other resource that an individual can use to meet the need."  Many employers allow hardship withdrawals only for the following reasons:

  • To pay the medical expenses of the worker, his/her spouse, or dependents
  • To pay costs related to the purchase of a principal residence
  • To pay a maximum of 12 months worth of tuition and related educational expenses for post-secondary education for an individual, his/her spouse, or dependents
  • To make payments to prevent eviction from or foreclosure on the principal residence

An employer will generally require that the employee submit a written request for a hardship withdrawal.

The disadvantages of withdrawing money from the 401(k) before it was intended include an overall reduction in the size of a person's retirement nest egg.  Moreover, the funds that were withdrawn will no longer grow tax deferred. Additionally, hardship withdrawals are generally subject to federal (and possibly state) income tax in the year the money is withdrawn.  A ten percent federal penalty tax may also apply if an individual is under 59 ½ years old. In addition, an individual may not be able to contribute to the 401(k) plan for six months following a hardship distribution.

The economic downturn has rippling effects in other ways as well. A survey conducted by the International Foundation of Employee Benefit Plans in May 2009 found that "the [economic] crisishas forced both defined benefit (DB) plan sponsors and defined contribution (DC) plan sponsors to make changes to their retirement coverage and plan design."  The reexamination of offering pension benefits has resulted in "27 percent of DB plan sponsors [discontinuing] offering pension benefits for all or some employees and 21 percent have closed their plan to new participants." 

Furthermore, there is also an impact on the employer match as DC plan sponsors "reduced or eliminated employer matches as a result of the economic situation." Sally Natchek, Senior Director of Research at the International Foundation of Employee Benefit Plans has said that "although the number of plan sponsors who have reduced or eliminated their employer match is relatively small, the number is still significant since any change tends to result in the employee lowering his or her contribution." 

Thus, as companies make less profit, they decrease their overall retirement plan contributions; this, in turn, makes it less advantageous for employees to contribute to their own retirement plans. In some cases, the number of participants completely stopping plan contributions altogether has increased.