Fundmastery Blog

Kurt Brouwer May 29th, 2008

Via: Carpe Diem

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Kurt Brouwer May 29th, 2008

Retirement assets owned by Americans had a very healthy gain of over $1 trillion in 2007. This report from the Investment Company Institute spells out the news [emphasis added]:

Americans’ Retirement Assets Grew 7% In 2007 (Investment Company Institute, May 8, 2008)

U.S. retirement assets topped $17.6 trillion in 2007, up 7 percent from 2006 (Figure 7.1). Retirement market assets are held in a variety of tax-advantaged plan types. The largest components are Individual Retirement Accounts (IRAs) and employer-sponsored defined contribution plans, holding $4.7 trillion and $4.5 trillion, respectively, at year-end 2007.

Figure 7.1 Source: Investment Company Institute

Other employer-sponsored pensions include private defined benefit pension funds (with $2.4 trillion in assets), state and local government employee retirement plans (with $3.2 trillion in assets), and federal government defined benefit plans and the federal employees’ Thrift Savings Plan (with $1.2 trillion in assets). In addition, there were $1.7 trillion in annuity reserves outside of retirement plans at year-end 2007.

Eighty-two million, or 71 percent of, U.S. households report they had employer-sponsored retirement plans, IRAs, or both in May 2007 (Figure 7.2). Sixty-one percent of U.S. households report that they had assets in defined contribution plan accounts, were receiving or expecting to receive benefits from defined benefit plans, or both. Forty percent of households report having assets in IRAs. Thirty percent of households had both IRAs and employer-sponsored retirement plans.

Figure 7.2 Source: Investment Company Institute

We hear a lot about the problems with funding Social Security and that is a legitimate issue. On the other hand, retirement plans outside of Social Security are doing very well indeed as we can see from these numbers.

See also last year’s report, $16.4 Trillion in Retirement Accounts.

And, assets in 401(k) plans should grow nicely in the future as well due to more favorable regulations (New 401(k) Plan Regulations Should Increase Retirement Assets).

• Geopolitics , Mutual Funds , Personal Finance , Retirement
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Kurt Brouwer May 29th, 2008

U.S. Economy: First Quarter Growth Estimate Raised (Bloomberg, Shobhana Chandra, May 29, 2008)

The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record.

The 0.9 percent gain at an annual pace in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent. Separate figures today showed the number of Americans continuing to receive jobless benefits rose to a four-year high this month.

“It’s basically like an airplane at stall speed, just skimming above the water,” Jeffrey Frankel, an economist at Harvard University who is a member of the panel that dates U.S. economic cycles, said in a Bloomberg Radio interview. “I wouldn’t rule out going into a recession” later in the year.

Trade remains the bright spot for an economy that is likely to slow this quarter as surging fuel and food bills and falling home values force consumers to cut back. The economy will expand just 0.1 percent this quarter as spending slows further, according to economists surveyed by Bloomberg this month.

“We are somewhere in the twilight zone between an expansion and a recession,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “We will have a poor pace of growth through the year.”…

I had to laugh as I read the tortured analogy from Harvard economist Jeffrey Frankel. The ‘twilight zone’ remark from Mr. Feroli was pretty funny too.

We all try to say and write pithy comments. Sometimes we succeed and sometimes we fail. But, the lively metaphor should never distort the truth. Unfortunately, Professor Frankel’s remark does just that. The U.S. economy is not like a plane over water about to crash. If we do enter a recession, it is part of the normal economic cycle of ups and downs. We have recessions periodically and the economy recovers and moves on. A plane running into some air turbulence is a normal part of air travel. Or, a plane having a bumpy landing is normal. But, a plane crashing into water is not normal, nor does it recover and move on — it’s gone.

Now, I could write that remark off to a bad ‘hair’ day or whatever. I read Jeff Frankel’s blog periodically and he is a competent economist and, no doubt, a good guy. But, for some reason he is committed to a very negative view of the economy and this seems to be a problem for him because events are not working out as he thought they would.

Now, he claims he wouldn’t rule out a recession, but as recently as a couple of weeks ago he harshly criticized Ed Lazear, Chairman of the Council of Economic Advisers, for being in denial that we are in a recession [emphasis added]:

White House Confidence that US is Not in Recession is Misplaced (Jeff Frankel’s Weblog, May 12, 2008, Jeff Frankel)

White House CEA Chairman Ed Lazear expressed confidence to the Wall Street Journal today that the country is not in recession. I, like Menzie Chinn, am surprised that Lazear is willing to put his reputation on the line in this way.

It is true that the Commerce Department BEA’s advanced estimate of first-quarter GDP growth was still above zero (+0.6%). But there are three reasons not to take this number too seriously…

As recently as May 12th, the good professor thought that anyone who did not see the recession was in denial. Now, we find out that he thinks we may not be in a recession. Does that mean he is now in denial? Or, is he just confused about this economy (see The Peekaboo Recession — Is It or Isn’t It?) like the rest of us.

Bashing anyone associated with the White House is a popular pastime these days. However, today’s report that GDP growth has been revised upward suggests that CEA Chairman Ed Lazear was correct. If so, that’s good news for all of us.

Update: From the Bureau of Economic Analysis:

Via: Carpe Diem

Pictures often tell the story when words don’t. The gray section at the left side of the bar shows a mild recession. So far, 2008 shows positive — albeit modest — growth. A recession may yet happen, but it is not here yet.

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Kurt Brouwer May 28th, 2008

As a reprieve from the rather gloomy economic news, herewith we present a bevy of technological advances that the Massachusets Institute of Technology believes are on the horizon. These are advances that will not only be cool, but they will enliven and empower economic advances too:

Hope On The Horizon (MIT News, May 21, 2008)

History is filled with examples of how technology helped usher in new eras of prosperity. To help build the case for optimism, the MIT News Office asked a collection of MIT faculty and researchers for their thoughts on the potentially life-altering technologies that lie just around the corner. Here’s a sample of what they said:

Bioengineering – Phillip Sharp
Biosolar Cells – Shuguang Zhang
Digital Fabrication – Neil Gershenfeld
Education – Eric Klopfer
Electrochemical Energy – Paula Hammond
Embedded Electronics – Michael S. Strano
Fusion – Leslie Bromberg
Life Extension – Mehmet Fatih Yanik
Mitigating Autism – Rosalind W. Picard
Problem Solving – Ed Boyden
Robots – Rodney Brooks
Sustainable Cities – William J. Mitchell

Here’s one sample on what is known as life extension. In general, life extension could be described as a body of research and knowledge on how we can prolong human life and enhance it as well [emphasis added]:

Life Extension

Mehmet Fatih Yanik

Asst. Professor of Electrical Engineering

Significant extension of the human lifespan by disease-preventive and tissue-regenerative technologies within the next one to two decades will dramatically impact the world economy. These technologies will probably span everything from small molecule therapies and nano- and microscale devices to whole organ replacement technologies using stem cells. Beyond the scientific and technological hurdles, temporary challenges will include the cost versus benefit of these technologies, legal and ethical concerns, and regulations and strategic investment choices among various options. The current economic slowdown may delay this revolution, but I strongly believe it is unstoppable, and hopefully it will take place within most of our lifetimes.

Assuming the good professor is correct in this statement, the economic implications alone are staggering. Here’s one more example:

Neil Gershenfeld

Director, Center for Bits and Atoms

The most significant coming technology is the digitization of fabrication, the impact of which will be analogous to the digitization of communication and computation. Like those earlier revolutions, the consequence will be personalization, in this case, allowing anyone to make almost anything, anywhere. Coupled with digital video and digital libraries, this means that the formerly scarce resources (facilities, books, people) of advanced technical institutions (such as MIT) can become much more widely accessible.

In this paragraph, I honestly think Gershenfeld is understating the potential of this technology. What little I know about digital fabrication is wild. Perhaps he’s worried it will sound far-fetched to lay readers.

These are very short, pithy takes on amazing new stuff that is coming our way. Read the whole thing.

Via: Carpe Diem

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Kurt Brouwer May 28th, 2008

Chris Davis and Ken Feinberg, are the co-managers of Selected American Shares (SLASX), which is a mutual fund with a history that dates back to 1933. Davis and his father, Shelby Davis, became co-managers of the fund in 1994. Now, Shelby is semi-retired and Chris Davis and Ken Feinberg are in charge. This piece was written by Russ Kinnel, the Director of Mutual Fund Research, at Morningstar [emphasis in the original]:

Success Under Stress (Kiplinger’s Personal Finance, June 2008, Russel Kinnel)

When the markets get tough, the tough go shopping. That’s what Selected American Shares co-managers Chris Davis and Ken Feinberg are doing.

At Morningstar, we’ve long been fans of Selected American. Davis and Feinberg are in their forties, so they’ve seen a couple of brutal markets. But they have wisdom beyond those years.

Chris is the third generation of the Davis family to manage money, and he learned quite a few lessons from his father and grandfather. Davis and Feinberg are also big fans of Warren Buffett and Charlie Munger of Berkshire Hathaway. They try to put their lessons to use in times like these.

Quality counts. I talked with Davis soon after the books were closed on a dismal first quarter, in which the swoon by Bear Stearns highlighted another awful stretch for financial stocks. Yet despite Selected’s hefty financials stake (nearly a third of assets), the fund is currently ahead of Standard & Poor’s 500-stock index for 2008 because Davis and Feinberg are in some of the healthiest financials. What’s more, they own a pretty diverse group, from Progressive to Wells Fargo to Berkshire Hathaway.

In a downturn such as this one, the two fund managers like to double-check that their investments are on track and tap the knowledge of those who have seen more bear markets. They visited important companies that were already big holdings in the fund, such as Wells Fargo, Hewlett-Packard, Cisco Systems, JPMorgan and Merrill Lynch. They also visited some of the best investors around, beginning with Chris’s dad, Shelby Davis, a legendary Wall Street figure who preceded Chris at Selected American.

They then turned their attention to upgrading the quality of Selected American’s portfolio by putting more money behind its strongest holdings and trimming holdings they have less confidence in. This is something they have done in past selloffs, notably in 2002. That year, Davis snapped up some blue chips he hadn’t been able to buy cheaply enough for years — stocks such as AIG, Microsoft and Berkshire Hathaway.

This time out, Davis and Feinberg are adding to positions in steady growers with heavy overseas revenues — for instance, Johnson & Johnson. Among financials, they are adding more of AIG (symbol AIG) and Bank of New York Mellon (BK).

Holding shares of Progressive (PGR) even as the stock declined illustrates Davis and Feinberg’s approach with disappointing stocks. Rather than run for the hills, they take the time to do a thorough review. If the stock is still trading for much less than their estimate of its worth, they’ll stick around or even buy more. In mid April they gave GE a closer look after it reported weak earnings…

…Think twice. I suggest that you adopt a similar mind-set. Treat downturns as buying opportunities and take the time to evaluate your holdings thoroughly so that you aren’t acting out of fear.

For more on Selected American Shares and its willingness to step in when name brand companies fall on hard times see Davis Selected Advisors Buys Merrill Lynch Stake.

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