Archive for October, 2010

Greek minister: No bailout repayment extension now

Wednesday, October 27th, 2010 | Finance News

LIMASSOL, Cyprus – Greece isn't looking to extend the repayment period of an emergency bailout loan, but that hasn't been ruled out, the nation's finance minister said Wednesday.

George Papaconstantinou said the Greek government is "simply concentrating" on fulfilling the conditions of the euro110 billion ($153 billion) loan package provided by the European Union and the IMF, and that it is not "at the moment thinking or proposing something else" on the repayment period.

Papaconstantinou told the AP on the sidelines of an economic forum on the east Mediterranean island that a repayment extension "is not up to us."

He said, "What is up to us is to do the best that we can to reduce the deficit and do the structural reforms."

Papaconstaninou said Greece's 2009 budget deficit "will be above 15 percent" after final revisions by the EU's statistics agency Eurostat, "which will validate Greek numbers for 2009 once and for all."

The figure confirms how poorly the 2009 budget has been managed and calculated, particularly by the previous conservative government. That administration had estimated the deficit at only 3.6 percent of GDP.

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Gross, Grantham blast Fed’s asset buying

Wednesday, October 27th, 2010 | Finance News

NEW YORK (Reuters) – Two top asset managers, Bill Gross, co-founder of Pacific Investment Management Co., and Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., lambasted the Federal Reserve's loose monetary policy and said renewed asset purchases are in danger of becoming ineffective.

The U.S. central bank's bond asset purchasing program "is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme," Gross wrote in his monthly investment outlook posted on Pimco's website on Wednesday.

"It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up," said Gross, who manages the world's largest bond fund.

The Fed is expected to announce another round of large-scale asset purchases when it holds its next policy meeting on November 2-3, after already deploying $1.7 trillion to pull the economy out of the financial crisis.

Gross said the United States is in "'a liquidity trap,' where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there."

Gross's views came a day after Grantham, who helps oversee over $100 billion at Grantham Mayo Van Otterloo & Co., said Fed policy has resulted in "extraordinary destructiveness" and "ruinous cost."

"I would force (the Fed) to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times -- the Greenspan/Bernanke put," Grantham wrote to clients on Tuesday. He referred to Fed Chairman Ben Bernanke and his predecessor, Alan Greenspan.

"It would be a better, simpler and less dangerous world, although one much less exciting for us students of bubbles," Grantham wrote in a report titled "Night of the Living Fed," in a play on the traditional scary Halloween season.

Gross, who helps oversee more than $1.1 trillion in assets at Pimco and runs the $252 billion Total Return Fund (PTTRX.O), said the resumption of asset purchases by the Federal Reserve would squelch the bond market.

"The Fed's announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment," he said.

Gross said Treasury rates may be "rock bottom," but there are "safe spread" securities that are attractive.

He and Grantham both see value in emerging markets, with Gross exposed to emerging market debt and Grantham moderately overweight in emerging market equities.

Grantham said he still sees compelling value in U.S. quality companies. "For good short-term momentum players, it may be heaven once again" as they are "so cheap," he said.

Gross said he also is exposed to high-quality global corporate bonds and U.S. agency mortgages, which are yielding 200 basis points "more than those 1 percent Treasuries."

Gross did include a caveat: "While our 'safe spread' terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility."

(Reporting by Jennifer Ablan, Editing by Leslie Adler)

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6 Investing Mistakes Young People Make

Wednesday, October 27th, 2010 | Finance News

Do you feel like you need to have "extra" money before saving for retirement? Or that you'd rather invest in specific companies instead of broad index funds? Those are just two common mistakes that young people make when they start thinking about putting money into the stock market. Here are six common errors, and how to avoid them:

[In Pictures: 12 Money Mistakes Almost Everyone Makes.]

Getting excited about single stocks. When J.D. Roth, the Portland-based blogger behind popular personal finance site getrichslowly.org, started investing, he put a year's worth of Roth IRA contributions--about $3,500--in Sharper Image stock. A friend who worked at electronics and gadgets store The Sharper Image had recently mentioned that he invested in the company himself, which made Roth think the shares were undervalued. Unfortunately, that was in 2007, shortly before The Sharper Image filed for bankruptcy.

Investing in your favorite company may seem more glamorous than putting money into an index fund that reflects a broad segment of the market, but it's a far riskier choice, since single companies can suddenly go under or plunge in value. Aside from being diversified, index funds carry the added benefit of having low fees since they're passively managed, which means they don't rely on a person to research and select stocks. Today, Roth puts his money in index funds, including bond, stock, and real estate funds.

Thinking investing is for rich people. Waiting until you have "extra" money to invest probably means you'll be waiting forever. Instead, consider starting by contributing small amounts to your retirement account and slowly raising the percentage over time. The benefit of starting early is big: If you put $1,000 into an account that earns a 5 percent annual return when you're 20, you'll have about $26,500 by your 40th birthday. If you wait until age 30 to begin contributing, you'll have just $16,289.

Forgetting to check up on expenses. Expenses can take a big chunk out of your investment return. But fees vary widely, typically from 0.1 to 2 percent of your total investment on an annual basis. Think tank RAND calculates that even just 1 percentage point difference in annual fees adds up to $3,380 after 10 years on a $20,000 account balance. But most of us pay up without even realizing it, perhaps because the fee details are often hard to find. (They should be in each fund's prospectus; ask the fund company directly if it's not clear.) RAND found that when people were presented with various fund options, including one that clearly came with the lowest fees, only half selected that lowest-fee fund. One in 3 people inexplicably selected the fund with the highest fees. (All of the funds exhibited equivalent returns.)

[For more money-saving tips, visit the U.S. News Alpha Consumer blog.]

And that's another reason to invest in index funds instead of more tailored mutual funds: Because fees automatically reduce investor returns, they are a primary reason research suggests that passively managed index funds perform better for investors than do actively managed mutual funds.

Keeping close track of the market's highs and lows. If your investment portfolio is well diversified and you check in on it once every few months to see if it needs to be rebalanced, there's no need to follow daily fluctuations. Instead of keeping an eye on the cable news channels, which can make every dip feel like a crash, focus on your hobbies, relationships, and other sources of stability. If you still feel anxious about the market's movements, maybe your investments are too risky and you'd be better off putting a greater percentage of your portfolio into relatively safe (and lower yielding) money market funds.

Forgetting to diversify. Diversification--in market sectors, industries, and specific companies--reduces your chances of losing everything. One of the easiest ways to do that while investing in the stock market is through index funds, which mirror a specific market index such as the S&P 500. Most of the victims of the Bernie Madoff scam suffered particularly bad fates because they entrusted their entire nest eggs to a man who turned out to be orchestrating a Ponzi scheme (in which old investors are paid from new investors' money, not from any actual earnings).

[Visit the U.S. News Personal Finance site for more insight and money management tips.]

Letting an advisor--or your parents--invest for you. There's only one way to learn, and it's by making mistakes, as Roth did. If you enjoy checking up on your accounts regularly and plugging numbers into spreadsheets, you can probably manage your own money. Some people prefer to rely on professionals, and that's fine too, as long as you still play an active role. Most good advisors recommend understanding exactly where you're putting your money and not just trusting someone to make the right decisions for you.

This article is adapted with permission from Kimberly Palmer's new book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back (Ten Speed Press).

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