Tags: Americans | Severe | Savings | Deficit

Americans In Severe Savings Deficit

Monday, 04 April 2005 12:00 AM

1. Report: Americans In Savings Deficit
2. Analysis: Investment Banks Can Beat Higher Rates

1. Report: Americans In Savings Deficit
2. Analysis: Investment Banks Can Beat Higher Rates

1. Report: Americans In Savings Deficit

Most Americans might be shocked to see the savings and debt guidelines issued by financial consultant Charles Farrell.
He says Americans are incurring too much debt (including mortgage debt) and not saving enough for retirement, the Wall Street Journal reports.

Farrell notes:
-- At age 30, total debt should not exceed 1.7 times income.

-- At age 45, if you make $70,000 annually, you should have $210,000 in retirement savings and just $70,000 of debt.
-- If you are 65 and about to retire, your nest egg should be 12 times your annual income.
Many will see this as an impossibly large sum, but according to the Journal, the table's targets are not stringent enough.  

The ratios are based on three key assumptions, all of which could be a bit too optimistic to make retirement plans:
-- First, Farrell assumes your retirement savings will earn about 5 percentage points a year more than inflation.

-- Second, he figures you will save 12% of your pretax income for retirement every year between age 30 and 65.
-- Third, he is too liberal with retirement withdrawals, assuming a 5% withdrawal rate while most experts advise only 4 or 4.5%.

Farrell blames today's soaring real estate market for the savings deficiency. He says people are investing too deeply in real estate, thinking they can cash out some of their home equity and retire in style.

But even if the real estate market continues to grow and home prices hold, people have made it difficult to save.

Owning a home means high mortgage payments, maintenance expenses, property taxes, utility bills and homeowner's insurance.

2. Analysis: Investment Banks Can Beat Higher Rates

by Andrew Wilkinson

The American equity markets' recent response to continued interest rate hikes was due more to concerns about the prospect of inflation rearing its ugly head than to the rise in rates itself.
Wall Street can't stop fretting over a weaker dollar, rising bond prices and steadily increasing oil costs.

And only time will tell whether Fed rhetoric will drive up the dollar's value, as investors expect higher yields from dollar-denominated assets.
Market losses last week stemmed from fears about inflation and rising energy prices – not weakness in earnings.
A look at the surprisingly strong numbers out of the investment banks last week will illustrate that. Shares in Morgan Stanley and Bear Stearns both fell over the past few weeks, while Goldman Sachs and Lehman Brothers managed to swim against the tide.
Financially-related stocks tend to do well in times of falling interest rates, and theory has it that a rate rise has the effect of narrowing margins and raising banks' cost of capital.
While the S&P 500 index is down 2.5% for the year, shares in Merrill Lynch are now down 5.4%, while Morgan Stanley and Goldman Sachs have risen by 2.5% and 5.5% respectively. Shares in Lehman Brothers have risen 7.8% so far in 2005.
All of these companies form part of the S&P 500 Capital Market index. In fact, between them, these four investment banks account for some 61.6% of the index. And that index is down just a little less than 3% for the year.
Between these four banks, revenues for 2004 totaled a massive $123.1 billion, which is an increase of 19% on 2003. And profits are up by 28.5% to stand at $15.8 billion.

But as the chart shows, prices of both common banking shares and those in the Capital Market index are feeling the weight of the recent market decline. Investors persist in ignoring climbing rates, taking the Federal Reserve at its word that rates will continue to rise at a measured pace.
When financial prices last put in a top, it was capital market candidates whose price suffered the most. The chart below clearly shows the peak of the first quarter of 2004 to be a top. And you will notice how the investment banks took it on the chin, relatively speaking. Despite some early summer respite, it was not until August that prices finally turned around.
Have we set off on a similar pattern as we reach the end of the first quarter of 2005?
It's beginning to feel a lot like it. We still can't argue that earnings growth will be faster than in 2004, at least not until the earnings dash begins in earnest. And we can't refute that the Fed is more likely to maintain its tightening stance.
But there is some good news, which should keep financial bulls chomping away. For the last two years, the Capital Market index has traded at an average price-to-earnings ratio of 15.24. In fact between June 2003 and August 2004, the PE ratio for the industry fell from 21 times earnings to 11 times earnings, before buyers stomped in, lifting the index by 27% through to March 8 of this year.

The S&P index itself is not expensive at 19.7 times last year's earnings, and the Capital Market index currently sits at 13.2 times last year's earnings.
The boom in investment banking has boosted income – as evidenced by a 15.8% surge in revenues at Goldman Sachs. Morgan Stanley reported a 14% increase in investment banking, sales and trading revenue to $4 billion, which accounts for 56% of all revenues. Buoyant commodity trading revenues will remain completely shielded from fears of rising interest rates.
While equities may have looked sick last week, investment banks continue to look attractive. Out of all of them, Lehman continues to look most attractive, sitting on a prospective PE of just 10.2 times 2005 earnings.
Full-year earnings are set to rise from $7.94 to $9.08 per share for the year to December.


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1. Report: Americans In Savings Deficit2. Analysis: Investment Banks Can Beat Higher Rates1. Report: Americans In Savings Deficit2. Analysis: Investment Banks Can Beat Higher Rates1. Report: Americans In Savings Deficit Most Americans might be shocked to see the savings...
Monday, 04 April 2005 12:00 AM
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