The new face of private philanthropy
September 29, 2008 on 8:58 am | In Money | No Comments
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Ken Weeman can remember a time when he and his wife, Kathryn, wrote dozens of personal checks every year to charitable organizations they knew relatively little about. Overwhelmed by the ritual, Weeman, a former Dresdner RCM Capital partner who lives in California, stood back one day and realized that he was “clueless” about the impact of his family's giving.
Changing tack, Weeman reduced his family's portfolio of charities down to 10 carefully selected entities, 4 of which he is directly involved with today. Among them is Clínica Verde, a U.S.-based nonprofit group created in late 2007. Its mission is to build clinics aimed at improving maternal and infant health care, beginning in Nicaragua, which has one of the Hemisphere's highest rates of adolescent fertility and maternal mortality.
Weeman, who is semi-retired, is a founding board member for Clínica Verde. In this capacity, he plays an active role directing the organization's financing, which includes some $275,000 in private donations. By crunching numbers and asking questions - including “impertinent” ones about goals and budgets - Weeman came to the conclusion that “for a relatively little amount of money, we could save a lot of lives.” The charity will break ground on its first clinic in 2009, which will one day provide a medical home for about 4,000 children and prenatal care for 1,500 high-risk pregnancies per year.
Experts in charitable giving say Weeman's experience is typical and points the way to the future of individual philanthropy.
“People want to give responsibly,” said Caroline Garnham, a senior partner in the London law firm Lawrence Graham and founder and director of Family Bhive, a philanthropy Web site for ultra-high-net-worth individuals and their advisers. “What they don't want is to give money and feel they have lost all control over its outcome.”
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While Garnham expects the current U.S. financial market crisis to further solidify this attitude, she does not think it will stem the tide of giving. If anything, it could help it along. According to Garnham, her clients know they have surplus wealth that could be put to good use during tough economic times. The big question is how?
Charitable giving has been a challenging proposition at least since the days of Andrew Carnegie, who was once quoted as saying, “It is more difficult to give money away intelligently than it is to earn it in the first place.”
Given the unprecedented number of charitable organizations in the world today, the learning curve associated with philanthropic giving has never been steeper. In the United States alone, there were about 904,000 public charities registered with the Internal Revenue Service as of 2006. In Britain, as of this year, there were an estimated 180,000.
Small wonder, then, that potential donors may feel ill-equipped to navigate this new landscape - especially when they are approached in a high-pressure manner, like at a fund-raising auction. Garnham said her clients tell her they are tired of being “shamed” and “bullied” into parting with their money in haphazard fashion. “There is a lot more suspicion about money finding its way into the hands” of the persons on whose behalf it is being solicited, she said.
Donor anxiety is a very real issue, said Katherina Rosqueta, executive director of the Center for High Impact Philanthropy, at the University of Pennsylvania. Her organization recently conducted a survey of 33 ultra-high-net-worth Americans - all of whom had the capacity to give a minimum of $1 million per year in charitable donations. While Rosqueta said the majority of the respondents expressed “a desire to use more of their wealth for philanthropy, many seemed unable to do that confidently.”
Surprisingly, perhaps, this response is coming from a group of people whose wealth in many instances was earned as opposed to inherited. “You are talking about some very successful people who had real achievements in their professional life, but none of them have been well educated or well trained in philanthropy,” Rosqueta said.
Until recently, opportunities for individual philanthropists to research the efficacy of their charitable donations were scarce. Even when they did exist, donors often avoided them, fearing that direct inquiries would result in unwanted solicitation.
Online information services like GuideStar and Charity Navigator are helping improve the transparency and accountability of charities. The two collect financial data from hundreds of thousands of charitable organizations, repackaging the data for philanthropists and their wealth advisers. They are picky about those they list. Charity Navigator evaluates only public charities - organizations given tax-exempt status under Section 501(c) (3) of the Internal Revenue Code and have filed a Form 990 with the IRS. Likewise, entities must show high-level public donor support of at least $500,000 and have at least four years of filed tax forms.
Should you buy or sell into the bailout?
September 29, 2008 on 8:58 am | In Money | No Comments
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The striking ups and downs in the stock market offer something for everyone.
The blastoff in the stock market just over a week ago that carried the Dow Jones industrial average nearly 1,000 points higher over four trading hours furnished some bulls with the sign they had awaited that the trend had changed. For investors who think the glass is half empty and may contain something toxic, the cascade that followed confirmed that the rally was just another chance to dump stock.
So what do investment advisers think is the right thing to do now, buy or sell? The consensus is: neither.
Whether they are hopeful or fearful, analysts and fund managers contend that the best course of action is to hold back and wait to see what develops next. During this period of extreme volatility, that is an option that few investors seem interested in taking, but there are good reasons for bulls and bears to give it a try.
Among many unknowns, the biggest one concerns the government agency being created to take bad debt off the hands of financial-service companies. Congressional leaders announced Thursday that the broad outline of a deal had been worked out, but just a few hours later, it became clear that no agreement was at hand. And even if a bailout bill is passed, it is likely to remain unclear for months what the cost and the impact on the economy and financial system will be.
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“Transferring assets that are so difficult to price into this vehicle is not going to be easy,” Mark Schmeer, chief investment officer for global equities at MFC Global Investment Management, cautioned. “That's one of the details that might create speed bumps for the market.”
The closest thing to a precedent may be the Resolution Trust Corp., set up in 1989 to engineer an orderly disposal of real estate and paper assets from failed savings and loans. If the economy and stock market follow paths similar to what they did after the RTC was formed, buyers have good reason to hold their fire.
David Rosenberg, chief North American economist at Merrill Lynch, recalled in a note to investors that the Resolution Trust liquidations were deflationary enough to delay a trough in economic growth for two years and in the housing market for three years.
Sam Stovall, chief investment strategist at Standard & Poor's, pointed out that the agency did no favors for stocks either. Financial stocks rallied slightly in the weeks after the agency was set up, then lost nearly half their value over the next year. The broad market did better, but not well, trading sideways for 15 months.
One difference between conditions now and then is that stocks and the economic cycle were rising in 1989, not mired in long slumps, so the Resolution Trust Corp.'s value as a road map might be limited.
Even if there is more room for improvement today, it may not happen immediately. Stovall noted that bear markets often ended for good only after a low was made and then approached again and sometimes exceeded slightly.
A successful retest of a low tends to occur on lighter volume and is “less emotionally gut-wrenching,” he said. The mood at that point is closer to resignation than panic.
Stovall is reserving judgment on whether the retest will confirm a lasting low. Schmeer is more confident, in part because so few of his peers seem to be.
“There is a lot of bearish sentiment,” he said, noting that recent surveys of investment newsletter writers showed twice as many bears as bulls, an extremely rare event. Another sign of nervousness was very high readings over the summer on measures of market volatility.
Nearly universal anxiety is almost a prerequisite for a bear market bottom. It is what prompts the last sellers to bail out, clearing the way for the next rally.
Schmeer expects the low set last week to hold. Even if it doesn't, he says he is confident that the next significant move is up, although he is not sure it will be easy to get there.
“I think stocks will be materially higher a year from now,” he predicted, “but we still have tough sledding to get through.”
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Maybe short-selling isn't so bad, after all
September 29, 2008 on 8:58 am | In Money | No Comments
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U.S. regulators have banned short sales of more than 800 stocks, mostly of financial companies, in an effort to stabilize prices in a shaky market. But the move may have an unintended consequence: reducing the stock market's efficiency and prolonging the current crisis.
That's the consensus of several finance professors who have devoted considerable energy to the study of short-selling — a mode of trading in which a profit is made from a price decline. Short-sellers, like investors who go “long” on a stock, make money by buying low and selling high. The difference is that short-sellers reverse the usual chronological order, selling first and buying back later, at what they hope will be a lower price. They accomplish this time switch by selling borrowed shares and agreeing to return them later.
Were short-sellers ganging up on various stocks in the recent tumult, causing prices to plummet? Adam Reed, a finance professor at the University of North Carolina at Chapel Hill who has extensively studied short-sellers' behavior and its effects on the markets, said it was “hypothetically possible” that they were. He added, though, that the question still needs study because real-time information about these possible “bear raids” isn't available. But he would be surprised if short-sellers were a major cause of the market's turmoil over the last year.
“In recent years,” he said, “when academic researchers have looked for bear raids — even in those areas in which investors suspected that they existed — they haven't found them.”
Consider a group of 19 beleaguered financial stocks for which the SEC restricted short sales between July 21 and Aug. 15. Arturo Bris, a finance professor at IMD, the Swiss business school, who also is a research fellow at the Yale International Center for Finance, analyzed short-sellers' behavior in the months before this SEC action. He concluded that the poor performance of those 19 stocks in the year leading to that action “cannot be attributed to short-selling activities.” One of the statistics on which Professor Bris focused was the so-called short-interest ratio, which is calculated by dividing the number of shares held short by the average daily trading volume. On average, those 19 stocks had short-interest ratios that were no higher than those of other financial stocks in the year leading up to the SEC policy change. And here is another telling statistic: While the SEC restrictions were in place, these stocks, on average, actually performed worse than the rest of the market.
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What about the dismal performance of many financial stocks earlier this month? It's too early to know, Professor Reed said, because the data are not all in. But here, too, he said he doubts that short-sellers played any significant role.
Consider, for example, what short-sellers did on Sept. 9, a day that rumors circulated widely about a possible bankruptcy at Lehman Brothers and Lehman's stock fell 45 percent, to $7.79 from $14.15. According to Professor Bris, the average price at which short-sellers sold Lehman stock that day was $9.29, significantly closer to the day's low than to the high. That implies that they were reacting to the downward momentum, not causing it.
Typically, Professor Bris said, “short-sellers trade in response to past negative news, rather than inducing current stock price drops.”
What about “naked shorting” or “failure to deliver” borrowed shares, a practice that was the focus of the SEC restrictions in July? These terms are used to describe a breach of the standard practice in which a short-seller has three trading days to actually borrow the shares he is selling short. Naked shorting has been blamed for some of financial stocks' recent woes, but Professor Reed says this claim isn't supported by the evidence.
Each day, the exchanges publish a list of stocks for which there has been even a very small number of failures to deliver. In recent months, according to Professor Reed, the large financial stocks have hardly ever appeared on those lists.
Then there is the abolition of the so-called uptick rule on short sales in July 2007. When the rule was in place, a stock could not be sold short unless its last trade was higher than its previous traded price. The rule, put into effect in the 1930s, was intended to prevent short-sellers from accelerating the downward momentum of an already-declining stock.
Has the rule's removal been an important contributor to the bear market of the last year? Professor Reed doubts it. Before scrapping the uptick rule, the SEC ran a pilot program to test the possible consequences. In the test, the rule was lifted from hundreds of stocks that were part of the Russell 3000 index. The trading patterns of these stocks were exhaustively analyzed in a number of academic studies, all of which concluded that the rule had no significant impact on those stocks' price movements, Professor Reed said.
The rate cuts that passed Wall Street by
September 22, 2008 on 8:13 pm | In Money | No Comments
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So whatever became of the much-ballyhooed Fed rally? In September, investors clamored for the Federal Reserve Board to start cutting interest rates aggressively - not only to stave off a possible recession, but to give the then-faltering stock market an added lift.
Historically, rate cuts have done just that. Since 1954, the Standard & Poor's 500 index has surged 13 percent on average in the first six months after the first in a series of Fed rate cuts.
Well, nearly half a year has passed since the Fed began to lower short-term rates last year, on Sept. 18. But this time around, the Standard & Poor's 500 has lost more than 8 percent of its value.
What's more, virtually every sector of the market has fallen since mid-September, in many cases significantly so. Financial stocks, for instance, have plummeted 24 percent, telecommunications are down 20 percent, and shares of technology companies have lost 13 percent of their value. If this market lived up to historic patterns, all major market sectors should have rallied dramatically.
Duncan Richardson, chief equity investment officer at Eaton Vance, an asset management firm in Boston, said it was too soon to deem the Fed cuts a failure, at least when it comes to propelling the stock market.
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“I refuse to despair until all the ammunition is used,” Richardson said, noting that the Fed was likely to continue lowering rates this year.
Ben Bernanke, chairman of the Fed, hinted as much in testimony he gave before Congress.
Richardson noted that Fed rate cuts often have a delayed effect: “We're only now getting in the range where the stimulus is supposed to take effect.” In other words, investors need to give the stock market time to reflect the Fed's actions.
On one level, he is right. On the few occasions in recent history when rate cuts failed to propel stock prices higher within six months, Fed easing eventually moved the market higher. In fact, during the past half century, the S&P has shot up 19 percent in the 12 months after the first in a series of rate cuts.
But while history says that stocks are likely to be higher this Sept. 18, 2008 than they were last Sept. 18, don't count on a dramatic rally just yet.
Since 1954, there have been four instances when Fed cuts have failed to lift stocks in the first six months. Those took place in 2001, 1990, 1981, and 1960. In those periods, stocks eventually climbed higher, but the average gain 12 months out was quite modest: just 5 percent, according to figures compiled by S&P's Equity Research Services.
This may have to do with what those four years have in common. In each case, the Fed simply acted too late in lowering rates to stave off recession.
In 2001, for example, the Fed began trimming rates in January, just two months before the start of the official recession in March. And before that, in 1990, the Fed started easing in July - the month in which the economy began to contract.
Does this mean the market is saying that the Fed was too late this time around? Not necessarily. But some market strategists say one reason that stocks have disappointed so far is that Wall Street has not always been confident of the Fed's commitment to lowering rates aggressively. (This uncertainty may have something to do with the fact that Bernanke has not battled a potential recession before. As a result, the market has not known how to assess him.)
Nick Raich, director of equity research at the National City Private Client Group in Cleveland, pointed out that immediately following the first cut in September, the market got off to a hopeful start. From Sept. 18 to Oct. 9, the S&P 500 jumped 3 percent.
But then, Raich said, there was a distinct change in mood. At its Oct. 31 meeting, the Fed cut rates, but only by a quarter of a percentage point (this, after the central bank lowered rates by half a point in September). And instead of saying that its prime concern was tackling the slowing economy, the Fed “talked about the balanced risks of inflation and growth,” Raich said.
Wall Street interpreted that as a sign that the Fed might not lower rates much further, Raich said. And investors acted accordingly, sending stock prices lower by 15 percent by Jan. 22.
But after the Fed announced an emergency three-quarter point cut in January, investors became more convinced tthat it was serious about stimulating the economy. Since then, the S&P 500 has surged nearly 6 percent.
Despite interest rate reductions, inflation is still an economic threat
September 22, 2008 on 8:13 pm | In Money | No Comments
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The public grew frustrated late last year when central bankers kept banging on about the threat of inflation, even as economic conditions became noticeably weaker. Sure, oil and some other commodities were expensive, and the cost of goods from China was rising, but wages and consumer prices were still well behaved, central banks said. Home prices, moreover, were either increasing at slower rates or falling, heralding a slowdown.
Yet while the rest of us detected little evidence of inflation, Ben Bernanke, chairman of the U.S. Federal Reserve, Jean-Claude Trichet, president of the European Central Bank, and their peers could see it as plain as day. The picture suddenly became fuzzier last month to Bernanke when global stock markets plummeted, along with interest rates on ultra-safe government bonds. With so many investors apparently banking on a recession, raising the risk of its occurrence, the Fed reduced its discount rate twice within about a week, the only time that has happened since 1914.
The moves were understandable. When economic growth begins to peter out, central bankers are often forced into a Faustian bargain - making credit easier to stave off a more significant downturn but in the process raising the risk of inflation down the road.
Critics contend that some authorities, especially in the United States, are prone to give the Devil more than his due. Bernanke and Alan Greenspan, his predecessor, have been widely blamed for reducing interest rates more than was necessary to stabilize the economy, helping to create bubbles in Internet stocks and home prices.
One sign that inflation may not be as quiescent as many think arrived earlier this week when U.S. consumer prices came in stronger than forecast in January, sending the 12-month increase above 4 percent.
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“We are concerned that the Federal Reserve is much better at cutting rates than raising them and is too anxious to preempt a slowdown which would hit inflation expectations on the head,” said Max King, a strategist at Investec Asset Management.
Declaring that “inflation is the No. 1 long-term risk for financial markets,” King went easier on the Fed's counterparts. “The U.K. and Europe have less trigger-happy central banks,” he said. But their fingers are getting itchy, too. The Bank of England cut its benchmark rate at its meeting earlier this month, and Trichet has signaled that the European Central Bank will be easing soon. Some economists foresee a relaxation of credit in Japan later this year, too, despite decent economic growth - by Japanese standards - and interest rates already at 0.5 percent.
Even if European and Japanese central bankers are more rigorous in fighting inflation, other authorities there are not, King said. “Globalization is a significantly disinflationary process, but governments are squandering much of the benefit on a bloated state sector, regulation and barriers to competition,” he said. “Eventually, the globalization process will run out of steam, but the momentum of government policy will continue. Inflation will then be back as a serious problem.”
But not just yet. “Inflation will diminish this year, perhaps by more than is forecast,” King said. He added ominously: “Bond yields show that investors have no long-term concerns. I am not so sure.”
King is not alone in fearing a false dawn. “We would be extraordinarily lucky to find that we had got everything spot on and that the world sailed on with stable growth and low inflation,” said Alan Brown of Schroder Investment Management.
For him, the two most likely outcomes are “a long, Japanese-style economic winter” or a V-shaped snapback. The second would be more desirable - and is more likely, in Brown's view - but the benefits might be fleeting if inflation sparked by a swift rebound resulted in a fresh round of rate increases, leading to a protracted recession.
If King and Brown are right, what should investors do? Stocks are fairly inexpensive and stand to get a lift in coming months from easier credit policies. High-yield debt may gain, too, as risk appetite returns and odds of default diminish.
Assets that almost certainly would lose value are long-term government bonds. With yields ranging between 1.5 percent or so in Japan and 4.6 percent in Britain, 10-year bonds promise almost no return above recent levels of inflation.
“They are telling us that inflation is not a problem,” King said. His advice: “Sell.”
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