A ''W-Shaped'' Recession
8/9/2009 11:45:00 PM
Last Friday, at the Financial Advisor Webinar Series, economist-turned-money-manager Rob Stein, predicted a "W-shaped" recession.
Forecasts of a W-shaped recession are drawing attention. See the Carlos Lozada commentary in The Washington Poston April 19, FT Columnist John Authers’on May 17, or economist Nouriel Roubini on July 16.
Stein, who heads Astor Financial LLC, predicted that technology will be among the sectors that gain disproportionately from the coming economic rebound. Stein’s also bullish on China.
Stein, who began his career at the Federal Reserve in 1983, believes The Great Recession of 2008-2009 has combined two recessions in one: a traditional V-shaped recession and a credit-bubble recession. While the US economy is now slowly coming out of the traditional recession and economic growth starting up, a second downturn is likely to follow in the next couple of years because of continuing losses from the credit crisis.
Using a macroeconomic approach, Stein actively manages three stylesof broadly diversified ETF portfolios: a long/short balanced fund, growth fund, and low-volatility program.
You can view a reply of Stein's presentation, "Actively Managing An ETF Portfolio." It's free, but you need to register. You can also download his slides.
Next week, CFPs will be able to get continuing education credit on replays of the Financial Advisor Webinar Series at advisorsforadvisors.com.
Is It Time To Buy Municipal Bonds?
For most of this year, thousands of people have been unable to access large sums of their own money they had placed in investments that Wall Street brokers assured them were “just like money-market funds."
But auction-rate securities are not just like money-market funds, which became clear to most investors only after the market for these securities crashed in February as a result of the nation’s credit crisis.
In August, the Wall Street giants who sold these securities – sold them even after it became clear to them the market was collapsing – agreed to buy them back at par value. However, these companies – starting with Citigroup, UBS and Merrill Lynch – only agreed to make their customers whole after state and federal authorities took action against them and Congress scheduled hearings. They are paying stiff fines as well.
Now that the wreckage is starting to be cleared away, investors should step back and think about the lessons to be learned from this latest example of Wall Street greed.
First, some history: Over the past few decades the market for Auction-Rate Preferred Shares has grown into a $330 billion behemoth. As with money-market funds, investors can put their money into these securities and earn healthy interest rates while retaining quick access to the funds. And auction-rate securities offer protection from interest rate risk, since the interest rates were reset at weekly or monthly auctions.
The shares in these securities are issued by mutual-fund companies, student-loan companies, nonprofit entities, schools, museums and municipalities that need to raise cash. So Wall Street brokers have long touted auction-rate securities as super-solid, safe investments.
Auction-rate securities are suitable for someone who has a large amount of money they will need soon but not right away. For instance, someone who is planning to buy a house or incur a large hospital bill in a few months’ time, or someone who plans to invest the money but is waiting for the economy to change. Auction-rate securities typically offer a higher return than do regular money-market funds or certificates of deposit.
The auctions began failing in February after buyers fled from complex investment instruments in the face of the credit crunch. But the big Wall Street firms not only kept selling auction-rate securities, they failed to warn their clients about the danger, according to a slew of lawsuits.
That left anyone owning auction-rate securities shares holding the bag – they were still earning interest, but could not withdraw the cash because there were no buyers left.
These investors began complaining and filing lawsuits, and within weeks the attorneys general of Massachusetts and New York had begun investigating major players such as Citigroup, UBS and Merrill. Under separate settlements, these firms have agreed to buy clients out of their auction-rate securities investments.
That may sound like a happy ending, but many investors have been unable to access huge sums of money since February, and they will not be compensated for that.
Furthermore, the state actions allege a disturbing pattern of behavior on the part of large Wall Street firms, one that has been noted during other financial crises: They encourage their brokers and analysts to gloss over potential dangers and push investments that are profitable for the firm, even at the expense of their own clients. They then deny wrongdoing and resist making their clients whole until the authorities step in.
New York Attorney General Andrew Cuomo alleged that Citigroup repeatedly committed securities fraud by misrepresenting or omitting facts about auction-rate securities. While agreeing to pay fines and buy back the securities, Citigroup and other Wall Street firms continue to deny any wrongdoing.