The global financial crisis took a heavy toll on the world's wealthiest individuals last year, with the number of millionaires falling by a record amount, according to a report released Thursday.
The number of high net worth individuals, those with assets of $1 million or more, plummeted by a record 19.5% in 2008 to 8.6 million worldwide, a survey by Merrill Lynch and Capgemini showed. In 2007, the millionaire ranks totaled 10.1 million worldwide.
Millionaires saw the value of their collective assets cut to $32.8 trillion, down 19.5% from $40.7 trillion in 2007, as world stock markets and property values plunged. According to the survey, last year's losses wiped out all of the gains from the previous two years.
"2008 ushered in an unprecedented global downturn," the report said. "What started as a financial crisis soon expanded into the larger economy, affecting mature and emerging markets alike."
The number of millionaires in the United States fell 18.5% last year to 2.5 million. But the U.S. remains the single largest home to millionaires, accounting for 28.7% of the global millionaire population, the report said.
Ileana van der Linde, principle of Capgemini's wealth management practice, said millionaires with exposure to the financial services industry and commodities, particularly crude oil, were among the biggest losers last year.
However, "there was no asset class that really was safe in 2008," she added.
While the world's population of millionaires is still concentrated in the United States, Japan and Germany, the survey showed that the ranks are beginning to shift to other regions.
For example, China now has more millionaires than United Kingdom, the report said. The firms now expect millionaires in the Asia-Pacific region to outnumber those in North America by 2013, in part because of strong economic growth in China.
Millionaires in Brazil, another developing economy, also moved up on the list despite last year's turmoil. Brazil surpassed Australia and Spain to reach 10th place among millionaire populations globally.
Looking ahead, millionaire's financial wealth is forecast to grow to $48.5 trillion by 2013, advancing at an annualized rate of 8.1%. This compares with annualized growth of 10.4% from 2005 to 2007.
"We're going to have slower growth over the next two years but it will ramp up again," van der Linde said. "China and the U.S. are going to be the engines of growth going forward."
Still, the world's millionaires remain defensive when it comes to their investments. The report showed that millionaires have half of their investment portfolios in cash and fixed-income instruments.
"Investors were looking for safety in a multitude of ways last year," van der Linde said. "A lot of trust and confidence was shaken."
The global financial crisis took a heavy toll on the world's wealthiest individuals last year, with the number of millionaires falling by a record amount, according to a report released Thursday.
A key measure of manufacturing activity rose for the fourth straight month in April, suggesting the sector may be stabilizing even though the indicator has been at the contraction level for 15 months in a row, a purchasing management group said Friday.
The Tempe, Ariz.-based Institute for Supply Management said its manufacturing index rose to a reading of 40.1 in April from 36.3 in March. A reading below 50 indicates manufacturing activity is shrinking.
Economists had forecast a reading of 38.4, according to consensus estimates gathered by Briefing.com.
"The decline in the manufacturing sector continues to moderate," said Norbert Ore, chair of the ISM's survey committee, in a statement. "This is definitely a good start for the second quarter."
The index, which fell to an all-time low in December, has risen every month in 2009 and is gradually approaching 41, which is the level typically associated with a recession. The index has been below 41 since October.
John Silvia, chief economist at Wachovia Economics Group said the index "suggests we have come off the bottom but are still in recession."
The employment index, which rose 6.3 points to 34.4, remained below breakeven 50, which signals further job losses in manufacturing, according to Silvia.
"Manufacturers will continue to cut jobs as a reflection of the current recession and lower growth expectations for future consumer demand," Silvia wrote in a research report.
While most of the components that make up the index remained in recession territory in April, the report contained signs that manufacturing activity is stabilizing.
The index also showed that new orders and production increased in April compared with March.
Manufacturers reported that customer inventories are "too low" for the first time since July 2008, according to the ISM.
A key index of consumer confidence rose in April to its highest this year with some expectations the economic downturn may be reaching a bottom.
The Conference Board's sentiment index climbed to 39.2 this month from an upwardly revised 26.9 in March. The April reading, which was above economists' median expectation for a reading of 29.8, was the highest since November 2008.
The increase in the index was the highest seen since November 2005, in the aftermath of Hurricane Katrina.
The original March reading was 26, which was near an all-time low for the index, which dates back to 1967.
The survey's expectations index jumped to 49.5 this month from 30.2 in March.
"The sharp increase in the expectations index suggests that consumers believe the economy is nearing a bottom, however this index remains well below levels associated with strong economic growth," said Lynn Franco, director of the industry group's Consumer Research Center.
Consumers assessment of present-day conditions improved moderately, with those claiming business conditions are "bad" easing to 45.7% from 51%, while those claiming business conditions are "good" rose to 7.6% from 6.9%.
Consumers expecting business conditions to worsen over the next six months declined to 25.3% from 37.8%, while those expecting conditions to improve rose to 15.6% from 9.6% in March.
General Motors is preparing to announce that the Pontiac car brand, once marketed as GM's "Excitement division," will be killed off, according to a source familiar with the decision.
An official announcement is expected Monday. GM spokesman Jim Hopson declined to comment on Pontiac's fate, saying the automaker has no announcements to make at this time.
In its most recent "viability plan" - which will be updated to reflect this new brand cut - Pontiac was not named as one of GM's four "core brands." Those are Chevrolet, Buick, GMC and Cadillac. But Pontiac was also not to be killed or sold off, as were Saturn, Saab and Hummer.
Instead Pontiac was to continue on as a "niche brand" focusing on just a few models.
That was already a step down for Pontiac which in 2008 was the third-best selling brand behind Chevrolet and GMC. That year the brand sold more than Cadillac and twice as many vehicles as Buick. Cadillac is a high-profile - and high profit - luxury brand while Buick is a hugely popular brand in China and is seen as resurgent in the United States.
In 2005, GM (GM, Fortune 500) vice-chairman Bob Lutz referred to Buick and Pontiac as "damaged brands" during a conference at the New York Auto Show. That set off speculation that one or both of these brands was doomed.
With a focus on affordable luxury, Buick's hopes have been revived by models like the popular Enclave crossover SUV. Improvements in Buick Quality, which earned a top ranking in a recent J.D. Power dependability survey and a public acknowledgement by President Obama, have also helped Buick keep its place in the shrinking pantheon of GM names.
"There was a time, a long way back now, when you knew exactly what Pontiac stood for," said Kevin Smith, editorial director for the automotive Web site Edmunds.com.
The GM unit's identity as a performance brand dates back to the late 1950s and early 1960s. Pontiac cars were designed with wider bodies for cosmetic reasons and the wheels were pushed out to match. This "wide-track" design became a selling point and was advertised as giving Pontiac cars a distinct cornering advantage over other cars.
But the idea of Pontiac as a performance brand was solidified in 1964 with the creation of the Pontiac Tempest LeMans GTO. That car quickly evolved into, simply, the GTO and is often credited with creating a new class of American car, the muscle car.
Under Lutz, plans were formed to bring back some actual excitement to the Pontiac brand, which hadn't seen much since the Firebird - a flashier Pontiac version of the Chevrolet Camaro - ended production in 2002.
One strategy floated for Pontiac was to sell only, or mostly, rear-wheel-drive cars. That would set it apart from other GM divisions, and most cars sold in America. Rear-wheel-drive is associated with performance brands like BMW.
Unfortunately, the re-introduction of the Pontiac GTO name on a performance coupe imported from Australia didn't result in big sales. So far, the Pontiac G8, a rear-wheel-drive four-door sedan also imported from GM's Australian Holden division, hasn't been a sales success either, despite good reviews.
Pontiac's most popular products remain the G6, a decent but unexciting midsize car available as a sedan, coupe or convertible, and the Vibe, a small wagon shared with Toyota, which sells it as the Matrix.
Any plans to return Pontiac to the heavy-horsepower days of the '70s ended as gas prices rose and Congress prepared stricter fuel economy rules for the industry.
Those pressures resulted in GM quietly introducing the Pontiac G3, which had been sold in Canada only. Once again, Pontiac was selling a rebadged Chevrolet product, this time the Korean-built Aveo subcompact car.
Pontiac's lack of focus as a brand may finally have brought its demise, said Smith. "That's just death in a marketplace where there's so much competition and so much quality," he said.
Pontiac's current role in GM seems mostly to be to support GMC and Buick by providing a brand under which Pontiac-Buick-GMC dealers could sell non-luxury cars, filling out what then becomes a full-line showroom.
The brand-channel strategy now makes it easier for GM to phase out the brand because it would cause less harm to dealers, independent business protected by strong state franchise laws. When GM phased out Oldsmobile in the early 2000's, it cost GM more than $1 billion to buy out the contracts of Oldsmobile dealers who were left with nothing to sell.
This time, most Pontiac dealers will have other products to sell.
U.S. securities regulators will consider about four proposals to restrict short selling, a type of investing blamed for accelerating the severe downturn in financial services stocks.
Proposals the SEC will consider at its Wednesday meeting include the restoration of the "uptick rule," which allowed short sales -- a bet that a stock's price will fall -- only when the last sale price was higher than the previous price, the chief of the Securities and Exchange Commission said Monday.
"We are going to put forward about four different proposals, and one of them does include the original (uptick rule)," SEC Chairwoman Mary Schapiro told reporters on the sidelines of the Council of Institutional Investors conference.
0:00 /4:49Do-it-yourself investing
"There are different modified versions because the markets have changed a lot, even since 2007." Schapiro said other proposals on the table include a so-called "bid test" and a "circuit breaker."
Schapiro did not provide details on how the bid test or circuit breaker could work and did not elaborate on the fourth proposal. One source familiar with the matter said the SEC bid test proposal would only allow shorting at a price above the highest available bid.
The source wished to remain anonymous because the proposals are still being drafted. The proposal for the updated version of the uptick rule would apply to all stocks, said the source who wished to remain anonymous because the proposals are still being drafted.
The SEC also is crafting two circuit breaker proposals: One would temporarily halt short sales of a stock if the stock has already fallen by a certain percentage, the source said.
The other would trigger the application of an uptick rule or bid test after the price of a stock experienced a decline by a certain percentage, such as 10%, the source said.
This version of the circuit breaker is similar to a suggestion put forth by the operators of the top U.S. exchanges, the New York Stock Exchange, the Nasdaq Stock Market and BATS exchange. SEC staff are still drafting proposals, the source and a second source familiar with the proposal said.
The second source cautioned that the current draft could go through several more adjustments before Wednesday's meeting. In a short sale, an investor borrows stock and sells it in the hope that its price will fall.
If the price does drop, the seller profits by buying the stock back at the lower price and returning the borrowed shares. In 2007 the SEC abolished the uptick rule after studies concluded that advances in trading strategies had rendered it ineffective.
At the time, the SEC's action did not trigger cries from investors and lawmakers. However, as stocks of big investment and commercial banks sank over the past year, some members of Congress started pressuring the SEC to restore the rule.
Some short sellers have questioned the need for the reinstatement of the rule, saying they are being unfairly targeted. Two bills to reinstate the uptick rule have been introduced in the U.S. House of Representatives and a similar bill has been introduced in the U.S. Senate.
"Abusive short selling has gone unaddressed for too long and simply must end if the SEC is to restore investor confidence in the markets," six Senators including Democrats Carl Levin and Edward Kaufman and Republican Arlen Specter, said in a recent letter to Schapiro.
"In the absence of a strong message from the SEC, we believe Congress will need to consider legislation that directs the SEC to do so," the Senators said in a letter dated April 1.
Billionaire investor George Soros said Monday that he favored a reintroduction of some kind of rule to restrict short selling. "You do need to provide some protection against effectively the bear raids," Soros told Reuters Financial Television in an interview.
A final rule will not be adopted at this week's SEC meeting. The agency will still need to solicit public comment on its proposals and hold another meeting to decide on final short sale restrictions as part of its normal rulemaking process.
When asked if she favored restoring the uptick rule, Schapiro said she was anxious to read the comments.
Earlier in a speech to institutional investors, Schapiro said the SEC would convene a roundtable later to discuss the proposals and potentially some broader issues on short selling.
U.S. auto sales tumbled sharply in March, although officials with some of the companies said they hope the worst of the downturn is behind them.
Overall industry sales tumbled 37% in March, according to sales tracker Autodata. The decline was broadbased, as sales at U.S. automakers General Motors, Ford Motor (F, Fortune 500) and Chrysler LLC and Japanese rivals Toyota Motor (TM), Honda Motor (HMC) and Nissan (NSANY) all fell at least 36% from year ago levels.
All the major automakers posted gains from January and February, and all but Toyota topped Edmunds.com's sales forecasts. March is typically a month that sees a strong pick-up in sales.
The seasonally-adjusted annual sales rate, or SAAR, came in at 9.86 million vehicles, well ahead of the just over 9 million January and February rate in each month, and much better than forecasts of below 9 million vehicles.
But even with the better than expected sales, it was still the worst March for the industry in the 34 years that the sales have been tracked on that basis.
Still the fact that sales turned out better than expected was encouraging for industry executives who have been battered by one piece of bad news after another. While they weren't ready to declare a definite bottom for auto sales, they said an increase in sales in late March is giving them some hope for the coming months, even as two of the major automakers, GM (GM, Fortune 500) and Chrysler LLC, battle to avoid being forced into bankruptcy.
Mark LaNeve, vice president for GM North America vehicle sales, said sales wound up being better for every major manufacturer than what had been widely expected even two weeks ago. Chrysler Vice Chairman Jim Press also said he saw early signs of a recovery in the battered market.
"The market is starting to show small signs of life," Press said in Chrysler's statement. "It's too early to see a trend, but spring shows signs of hope."
Emily Kolinski Morris, Ford's senior U.S. economist, said that some recent readings that show a slowing of the nation's economic decline have the company hopeful that industrywide sales might reach bottom in the next three or four months.
"We think we're getting close to turning the corner," she told analysts and journalists on the company's sales call.
Industry analysts agreed that March numbers were a bit better than expected but they were more reluctant to predict any quick turnaround.
"It's too soon to call this the bottom," said Jesse Toprak, industry analyst with Edmunds.com.
Efraim Levy, the auto equity analyst for Standard & Poor's, wrote in a report Wednesday afternoon that the year-over-year declines may start to show signs of improvement in the coming months, but that he does not expect "an uptick in industry demand before fourth-quarter 2009 at the earliest."
Ford officials even conceded they aren't banking on any immediate sales rebound, and that they are keeping production of new vehicles in check.
0:00 /0:55Honda offers employee buyouts
"There's no point in trying to get ahead of ourselves," said George Pipas, Ford's director of sales analysis. He said Ford's efforts to keep inventories in line with lower demand are "literally almost a day-by-day process."
There are huge challenges for the industry, first and foremost the bankruptcy clock ticking at GM and Chrysler.
President Obama announced Monday that a government task force overseeing $16.4 billion in loans already given to the two companies had found their turnaround plans not viable.
GM has 60 days to try to reach agreements on deeper cost cuts with its creditors and unions, while Chrysler has only 30 days to work out a deal with Italian automaker Fiat or it could be forced out of business.
Obama vowed to provide government help for GM even if it is forced into bankruptcy, and he announced the government would stand behind warranties at the two companies.
GM officials think that, despite the bankruptcy threat, car buyers were more assured than scared by President Obama's remarks on Monday. The company said it had a sales bump in the last two days of the month.
The president also endorsed a proposal now in Congress, a so-called "cash for clunkers" program, to provide incentives to people who trade in older gas guzzlers for more fuel efficient cars. Officials with Ford and GM said that could spark sales of 1 million to 1.5 million vehicles later this year, depending on the details.
Still, the sales numbers from each company were a sign of how far demand for vehicles has fallen from year-ago levels, and how far the industry needs to rebound to get back to what are considered normal sales.
Sharp drops from March '08
GM reported that sales fell 45% from year-ago levels. Its three brands which may be dropped in a restructuring of the company - Saturn, Saab and Hummer - each reported much bigger sales declines than GM's overall drop, the worst being a 76% plunge in Hummer sales.
Ford reported a 41% drop in sales from a year ago and its declines were broad based. Sales fell more than 30% across all the company's brands and vehicle types. The biggest drop was a 73% plunge in sales of SUVs.
Chrysler's sales were down 39% from a year ago, but the company wound up selling more than 100,000 vehicles in a month for the first time since September.
Toyota Motor reported a 39% drop in sales, while U.S. sales at Honda Motor fell 36%. Nissan's sales fell 38%.
Ford also disclosed that first quarter production ended 26,000 vehicles short of its most recent forecast. And production cutbacks are not over at Ford, as it halted production at assembly plants in Kansas City and Chicago for the next three weeks.
The Kansas City plant is one of two that make its F-150 pickup, Ford's best-selling vehicle. The Chicago plant makes the Ford Taurus as well as Mercury and Lincoln vehicles. Ford spokeswoman Angie Kozleski said the shutdowns do not reflect a change in second quarter production targets, however.
Like most investments with higher credit risk, the high-yield bond market took a huge hit in 2008 as investors fled to quality. But with the sector recently seeing its deepest discount ever - and even rallying a bit - some say it's time to test the waters again.
"The values are just extraordinary," says Martin Fridson, CEO of Fridson Investment Advisors and a high-yield bond specialist. "I think it's an opportunity you're not going to see very often in your lifetime."
Fridson says the spread between high-yield bonds and treasuries over the last few months has been far beyond anything seen before. The option adjusted spread, which measures the difference, is about 17.6 points, according to Merrill Lynch data. A year ago, the spread was 8.2 points.
Lower valuations mean more upside, Fridson says, but they're also the reason for investors' hesitations. Default rates will likely run higher than during past recessions, he notes, partly because the quality of the sector has deteriorated since the last low cycle.
Lawrence Jones, associate director of fund analysis at Morningstar, said some experts he's spoken with expect default rates, which have run between 2% and 3% the last few years, to reach between 10% and 15%.
"I see the opportunity," Jones says, "but almost everyone who's being straight with you will say there's a lot of risk."
You may know them as "junk"
High-yield bonds, or "junk" bonds, are defined by the industry as a bond with below a Standard and Poor's BBB- rating. They have a higher risk of default (failure to make a scheduled interest or principal payment), and are subject to greater price swings than more highly rated bonds. But on the upside they also have a higher rate of interest.
Jones suggests making high-yield bonds a small part of your portfolio through bond funds run by experienced managers and research teams investing in better-quality high-yield securities. A fund provides the advantage of a manager's expertise and also the diversification that's needed to limit the risk of default in any single investment. And high-yield bonds can be highly illiquid, i.e., hard to unload if they're thinly traded, but a fund gives you the security of getting in and out when you want.
A small and relatively new entry, which has benefited through conservative investing, is the Intrepid Income Fund. It isn't limited to high-yield - it also holds investment grade and convertible bonds. Morningstar doesn't rate the fund, but it calculates its year-to-date returns at 5.65%, beating out the high-yield sector average of 3.38%. One-year returns fell 7.05% but were well above the category's drop of 21.14%.
Intrepid Income has a greater percentage of its assets in higher-quality debt than is typical for the high-yield bond category, says Jones. About 20% of its assets are in cash, according to Morningstar, which he believes tempered the fund's 2008 loss because the cash held up as the high-yield bond market collapsed. But the fund is not quite two years old, Jones notes. "It's not clear to me whether they're good fund managers or lucky managers," he says.
0:00 /1:19'Should I buy muni bonds?'
Of course fund managers Jason Lazarus and Ben Franklin think there's more than luck involved. They say they can spend more than 60 hours researching one name for their fund, which has $37.5 million in assets under management.
"We like to pride ourselves on not being economists," says Franklin. "We're bottom-up fundamental research analysts."
The fund has only about 30 names in its portfolio and holds concentrated positions in each one. The concentrated positions do, however, reduce diversification. "The reason that we do that is because we can be very confident in the few names that we do own," Lazarus says.
In selecting investments, they consider credit metrics, such as leverage ratio. They look for companies that can cover their interest expenses by a healthy margin to make sure they're going to get repaid in any climate. And while some funds anticipate defaults in their portfolios this year, Lazarus and Franklin expect to avoid these landmines.
The bulk of their work is qualitative, as they try to determine the quality of management, direction of the company, and how cash flows are going to trend over the course of a business cycle. They look for businesses they think will do well in any environment, and they like bonds with short durations (less than five years). Longer-duration bond prices generally fluctuate more with interest rate changes, they say. It also allows them to be more certain in their short-term outlook.
Because Intrepid Income is a small fund, Lazarus and Franklin can invest in issues with about only $150 million in bonds outstanding, while a larger fund wouldn't be able to establish a meaningful position in an issue that small. Fridson says it's hard for large funds to avoid looking like an index. Smaller funds may be able to underweight the less attractive industries, which is harder to do as a fund gets larger.
What catches Intrepid's eye
Here's how their thinking plays out in some of Intrepid Income's representative holdings: (Note that individual investors shouldn't invest in any single junk bond because the risk is too great.)
Silgan Holdings: manufactures metal and plastic containers for companies like Campbell's.
"We like seeing a company that has recurring revenues that we can trust even in a down market," says Franklin. "Many of these companies like Silgan, their operating margins aren't huge, but they're sufficient and we think they'll be able to survive in any situation."
Phillips Van Heusen: one of the world's largest apparel companies.
"We like them because they actually can almost cover their entire amount of debt with cash alone," Lazarus says. "And while we believe they probably won't do that, they may do a strategic acquisition."
Prestige Brand Holdings: makes and sells household names like Comet, Clear Eyes, and Chloraseptic.
"They don't manufacture anything themselves," says Franklin. "They outsource everything. They have almost zero capital requirements to put back into the business. That allows them to use all their free cash flow for acquisitions or paying down debt."
Rent-A-Center: runs a rent-to-own business.
"That bond actually has a one-year to maturity, which is definitely a feature we like," says Lazarus. "It's capitalizing on that sort of customer that wants to go out and buy a TV or needs to buy say a new washing machine or refrigerator but can't get financing from say, Home Depot."