Week of August 6, 2007

The Markets
 
As big money players in the stock market gorged on easy credit terms over the past few years, they helped drive up stock prices.  Now that lenders have tightened their standards, it looks like those heavy hitters have been placed on a forced diet…and that may have broad implications for the financial markets.

Making matters worse, last Friday, Bear Stearns chief financial officer, Sam Molinaro, told analysts on a conference call that the current bond market turmoil, “may be a worse predicament than the 1987 stock market crash and the bursting of the Internet bubble in 2000,” according to a Reuters news story.  The government didn’t help the situation either when the Labor Department announced that non-farm payrolls grew by a less than expected 92,000 in July and that the unemployment rate ticked up to 4.6%, according to MarketWatch.  Not surprisingly, the Standard & Poor’s 500 index declined for the week and is now up just 1.0% for the year, excluding reinvested dividends, according to Barrons.

Ironically, corporate earnings in the second quarter are looking good.  According to Zacks Investment Research, “With more than 70% of the earnings reports in, it looks like the second quarter is yet another winner on the earnings front.  The median growth rate is 12.82%, which is well above the 10.0% that the market managed to pull off in the first quarter.”  So yes, earnings look solid right now but investors aren’t paying too much attention to that.  Instead, they’re figuring that the current bond market turmoil might slow the economy and hurt earnings down the road. 

As the human emotions of greed and fear play out, the financial markets inevitably go through bouts of euphoria and despair.  It’s happened many times in the past and will likely happen many times in the future.  Presently, there’s fear in the bond markets, but that may not be such a bad thing. According to The Economist, some tightening of credit standards may be a good thing for the markets as “many of the reckless practices that have become the norm in corporate lending will be abandoned.”  However, let’s just hope the cure doesn’t create worse side effects.  In the mean time, we continue to closely monitor the situation.

Source: Yahoo! Finance, Barrons Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

THE AVERAGE ACCOUNT BALANCE AMONG AMERICAN WORKERS who consistently held 401(k) accounts from 1999 through 2006 increased at an annual rate of 8.7%, according to a study released last week by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).  Among this group, the median, or midpoint, account balance increased at an annual rate of 15.1 percent.
The EBRI/ICI 401(k) database, the largest database of 401(k) plan accounts, showed that average account balances rose to $121,202 at year-end 2006 from $67,760 at year-end 1999 among participants who maintained accounts for the entire period.  Among the same group, the median account balance increased to $66,650 at year-end 2006 from $24,898 at year-end 1999.

The study also found:

• Most 401(k) assets are in stocks.  On average, at year-end 2006, about two-thirds of 401(k) participants’ assets were invested in equity securities including company stock.  About one-third was in bonds, money market funds, and stable value assets.

• The share of 401(k) accounts invested in company stock continues to shrink.  The share of 401(k) participants’ investments held in their employer’s stock dropped 2 percentage points (to 11%) in 2006, continuing a steady decline that began in 1999.

• New employees like lifecycle/lifestyle investment products.  Across all age groups, more new or recent hires are investing their 401(k) assets in balanced investment products, including so-called “lifestyle” or “lifecycle” investments.  At year-end 2006, 24% of the account balances of recently hired participants in their 20s were invested in balanced investment products, compared with 19% in 2005 and about 7% in 1998.

It looks like 401(k) investors are becoming more diversified and less concentrated in their company stock. From a risk standpoint, that’s a good thing. If you have any questions about your 401(k), please let us know.

Weekly Focus - What ever happened to the Berlin Wall?

A recent article in Time Magazine answers the question.  After the German reunification in 1989, politicians wanting to emphasize unity had the concrete knocked down and taken away.  However, with the route still marked by a double trail of cobblestones in the ground, avid cyclist Michael Cramer, a Berlin resident and spokesman for the Green party’s transport committee in the European Parliament, had an idea: create a bike path along the Wall’s former course.

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

Brain Teaser Answer:  It contains the numbers one to nine, in alphabetical order.