Headlines (Scroll down for complete stories):
1. 'Prudent' Tice Says Dow 12,000 is Doomed
2. Fed Meets, Investors Bet on No Action
3. Existing Home Sales, Prices Tumble
4. Retirees Face Shrinking Lump-Sum Payouts
1. 'Prudent' Tice Says Dow 12,000 is Doomed
David Tice, manager of the $682 million Prudent Bear Fund, is warning that Dow
12,000 isn't here to stay, reports Forbes.
His outlook isn't surprising. Tice's Prudent Bear Fund is an inverse fund, which
profits when stocks drop. The fund returned 63 percent in 2002 in the midst of
the bear market, and so far this year it's up 6.85 percent as of October 24.
Story Continues Below
Tice tells Forbes that the economy is showing troubling signs even as the Dow
reaches new highs. He cites the U.S. trade deficit as well as the slowing
housing market as the most important concerns for the economy.
Of the nation's gigantic current account deficit, Tice says that the country
won't be able to maintain its standard of living without relying on foreign
borrowing. "I believe that the credit expansion will end in tears," says Tice.
Tice also worries about real estate debt. He sees defaults, foreclosures and a
giant recession in the works because of the bursting real estate bubble.
Tice explains that sagging property values, combined with the inability to flip
homes quickly is squeezing homeowners. In addition, rising interest rates and
adjustable-rate mortgages are a recipe for disaster not just for flippers but
also for all homeowners.
Tice's recommendations: Tice tells Forbes readers that now is a great time to
short technology stocks and the Nasdaq 100 ETF, the QQQQ. With the Nasdaq
rebounding to its highest level since 2001, Tice says the index is overvalued
because growth rates aren't going to be impressive. He points to Advanced Micro
Devices and Novellus Systems as two technology stocks worth shorting, in
particular.
For buying, Tice recommends precious metals and energy plays. These defensive
stocks will guard against a dropping dollar, which he says is inevitable given
the status of the trade deficit.
Editor's Note:
2. Fed Meets, Investors Bet on No Action
U.S. Federal Reserve policy-makers resumed a two-day meeting Wednesday that was
widely expected to conclude with a decision to hold interest rates steady along
with a fresh warning on inflation.
The Federal Open Market Committee began the second day of meetings at about 9
a.m., a Fed official said. The U.S. central bank is expected to announce its
decision around 2:15 p.m.
While the rate decision holds little drama for financial markets, any hints the
Fed might give on its future policy course will be scrutinized closely.
After a more than two-year long campaign of interest rate increases, the Fed
moved to the sidelines in August and again held overnight rates steady at 5.25
percent in September.
However, officials have kept the possibility of more rate hikes on the table as
they continued to warn of the risk inflation could stay unacceptably high.
One FOMC voter, Richmond Federal Reserve Bank President Jeffrey Lacker, has
dissented against the decisions to leave rates unchanged at the past two
meetings, saying more needed to be done to bring inflation down.
A month ago, financial markets had been thinking a housing-led slowdown in U.S.
economic growth could lead to a series of rate reductions beginning early next
year.
Recently, however, markets have begun to price in some chance that the Fed might
raise credit costs again to deal with persistent price pressures.
© 2006 Reuters.
Editor's Note:
3. Existing Home Sales, Prices Tumble
Sales of existing homes fell for a sixth straight month in September and the
median sales price dropped on an annual basis by the largest amount on record,
further documenting a lukewarm housing market.
The National Association of Realtors reported that sales of previously owned
homes fell by 1.9 percent in September to a seasonally adjusted sales pace of
6.18 million units, the slowest sales rate since January 2004.
The median price of a single-family home fell to $219,800 last month, a drop of
2.5 percent from the price in September 2005. That was the biggest
year-over-year price decline in records going back nearly four decades.
Housing, which had set sales records for both new and existing homes for five
consecutive years, has been rapidly loosing altitude this year, as consumers
were battered by rising mortgage rates, soaring energy prices and a slowing
economy.
However, economists with the Realtors said they believed the housing decline
could be hitting bottom.
"The worst is behind us as far as a market correction -- this is likely the
trough for sales," said David Lereah, the Realtors' chief economist. "When
consumers recognize that home sales are stabilizing, we'll see the buyers who've
been on the sidelines get back into the market."
However, analysts said that the weakness in housing could last for several more
months with a real upturn in sales not occurring until next spring.
Sales were down in all sections of the country except the South, which posted a
small 0.4 percent decline. Sales fell the most in the Northeast, a drop of 3.7
percent, followed by the West, where sales were down 3.1 percent, and the
Midwest, where sales fell by 2.8 percent.
The inventory of unsold homes, after climbing to all-time highs, fell for a
second straight month, decreasing 2.4 percent, to 3.75 million unsold homes at
the end of September, which represents a 7.3 months supply at the September
sales pace.
Sales of single-family homes dropped by 1.6 percent to an annual rate of 5.42
million units while sales of condominiums fell by 3.2 percent to an annual rate
of 763,000 units.
The 2.5 percent drop in the price of single-family homes pushed them down to
$219,800 while condominium prices fell by 3.2 percent to a median price which
was also $219,800.
© 2006 Associated Press.
Editor's Note:
4. Retirees Face Shrinking Lump-Sum Payouts
The pension-reform legislation Congress passed in August is resulting in smaller
lump-sum payouts for retirees who choose this option, says The Wall Street
Journal.
The WSJ explains that the change in the law is a double whammy. "The pension law
made two changes that effectively reduce payouts when a retiree takes his
pension as a lump sum. Companies calculate this by taking the monthly payment
the retiree is entitled to and then figuring how much this is worth as a lump
sum in today's dollars, making certain assumptions about life spans and future
investment returns.
"Under the new law, companies starting in 2008 will be able to assume a higher
investment return, using a corporate-bond interest rate instead of the lower
Treasury-bond rate previously used. This change produces a smaller lump sum
payment, because the higher rate represents the return an employee would have to
earn to generate the same retirement income as if he were receiving the pension
as a monthly paycheck."
For Larry Korwatch, who's planning his retirement, the changes mean a $200,000
cut in his lump-sum payment, says the WSJ.
"It's going to mean lump sums are smaller for everybody," says David Certner,
director of legislative policy for AARP, the seniors advocacy group. The Journal
says that about half of those eligible for lump-sum payments take them.
To top it off, because of a delay in passing the pension reform, the effective
date of the changes is January of this year. That means if retirees took a
lump-sum payout in the past 10 months, they may have to fork over some of the
cash.
"You can't slice and dice a man's nest-egg the year he retires without advance
notice," says Joe Clark, an Anderson, Ind., financial adviser with a client
whose lump-sum pension was reduced by the change, tells the WSJ.
The WSJ says that the only way to avoid the reduction in payments is for
retirees to opt for lifetime payments. However, that leaves retirees at risk if
their company goes bankrupt, as we've seen in recent cases such as US Airways
and UAL.
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