Average 401(k) rebounds to $60,700, Fidelity says

For what it’s worth: Fidelity Investments says the average 401(k) account balance of the 11 million investors for whom it keeps records rose to $60,700 as of Sept. 30, surpassing the $58,400 average of a year earlier -- which was just before the financial-system meltdown accelerated.

Although financial markets have rebounded sharply this year, the Fidelity figure doesn’t mean that the investments in the typical account more than recouped what was lost in the meltdown. The totals include all employee and employer contributions to the accounts, so the money coming in would have offset some of the prior losses.

Still, psychologically it always feels better to look at a higher 401(k) total than a lower one.

Fidelity’s average balance now is well above the recent low of $47,500 reached at the end of the first quarter, but remains 13.3% below the recent peak of $70,000 in the third quarter of 2007.

The average is skewed by the large accounts of people who are nearing retirement. Fidelity’s median 401(k) account balance was $19,500 as of Sept. 30, up from $17,300 a year earlier.

The median is the middle of the pack -- meaning that half the accounts were above that figure and half were below.

-- Tom Petruno

Despite fiscal woes, muni bonds' appeal stays strong

The good news in the sell-off that has clipped California tax-free municipal bond prices over the last six weeks is that the market now should be harder to shock.

So for muni investors, the report Wednesday that Sacramento already may be facing a $21-billion budget gap over the current and next fiscal years was more a firecracker than a bomb.

After rallying sharply in August and September, the California muni market has given back some of those gains since early October. Amid a flood of new bond sales by the state investors have demanded higher yields, which in turn has pushed prices of existing bonds down.

California is back in the market this week with a $1.34-billion revenue bond offering from the Public Works Board to finance infrastructure projects. Yields on those bonds will be set today.

All in all, though, the damage to the market from the supply glut has been relatively modest, at least for muni mutual fund investors who have the benefit of wide diversification. Case in point: The per-share net asset value of the Franklin California Tax-Free Income fund, which holds $14.2 billion of state and local debt, was $6.90 on Wednesday, a drop of 4% from the 52-week high of $7.19 on Oct. 5.

That’s unfortunate for anyone who bought near the high, but year-to-date the fund’s total return (share price gain plus interest earned) still is a hefty 15.6%. And that’s even better than it looks, given that the interest earned is exempt from state and federal income tax.

The muni market nationwide has been suffering a bout of indigestion since September, driving yields higher. But nationally and in California the market has been stabilizing over the last week or so.

Despite the dire fiscal outlooks for many state and local governments, there are three main reasons to believe that the muni market is unlikely to fall off a cliff from here and wipe out all of its recovery from the worst of the credit crunch:

--- Big investors just don’t buy the idea that actual defaults by muni issuers in 2010 will match the doomsday predictions that are out there.

"There is going to be a lot of ‘headline’ risk in the market over the next 12 to 18 months," said Chris Sperry, co-manager of the Franklin California fund. But local governments of any size know, he said, that the decision to default would make it impossible to get the basic credit they need to function. The market clearly believes that the vast majority of politicians will get out the cleaver and hack expenses further, not bond payments.

--- Muni yields still are historically high versus yields on taxable bonds. A 10-year California state general obligation bond now yields about 4.55% tax-free, compared with 3.36% for a 10-year U.S. Treasury note that is federally taxable. Muni bond yields normally are below Treasury yields.

"In order for muni yields to get a whole lot [higher] you’re going to have to see the Treasury market sell off," said John Carbone, manager of the Vanguard California Long-Term Tax-Exempt bond fund. That could happen, of course, but it probably would require the backdrop of a robust economic recovery or an inflation surge -- neither of which seems likely in the near term.

--- Many muni investors figure that tax rates at the federal, state and local levels can only go up as governments struggle to close deficits. That would boost munis’ appeal for yield-hungry investors. "Munis are going to become more attractive from a pure income standpoint," Sperry said.

Yes, he’s talking his book. But raise your hand if you think taxes are more likely to go down than up.

-- Tom Petruno

Mutual fund case hinges on fee comparison

Must mutual fund investors pay significantly higher fees than institutional investors such as pension funds?

That was the issue today at the U.S. Supreme Court as the justices heard oral arguments in a case accusing a mutual fund manager of charging excessive fees.

Several investors have accused Harris Associates, which manages money for the Oakmark mutual fund group, of charging high fees in violation of the federal Investment Company Act.

A ruling for the plaintiffs could force fund companies to lower fees paid by millions of American investors.

Two justices seemed to side with the mutual fund industry, while three others seemed receptive to the plaintiffs.

But even if the justices ultimately were to side with the defendants, their ruling still could result in lower fund fees, said William Birdthistle, an assistant professor at the Chicago-Kent College of Law, who attended the hearing.

That’s because a central issue in the case is whether mutual fund boards should be required to compare the generally lower rates that managers charge pensions, endowments and other institutional investors with the higher rates they charge for mutual funds.

The plaintiffs say the lower fees on institutional accounts prove that mutual fund fees are too high. The industry disputes that logic, saying investors have lots of low-fee options and that, in any case, mutual fund fees have come down steadily over the years.

Three justices -- Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor -- seemed to support the idea that mutual fund boards should use institutional fees as a benchmark when setting mutual fund fees, Birdthistle said.

Existing law, which was set by a 1982 ruling, did not require a comparison with institutional fees.

Such a requirement would boost pressure on managers to justify mutual fund charges and could ultimately push fees down.

"The message would be heard loud and clear by boards and by future trial courts," Birdthistle said.

-- Walter Hamilton

Bad timing for some stock mutual fund buyers

One group of investors must have been particularly relieved to see the stock market’s sharp rebound Thursday: The folks who jumped into mutual funds last week, giving stock funds their first week of net cash inflows since mid-August.

It looks like some of them might have waited, waited, waited -- and then barreled in just before equity markets took their biggest spill since early July.

As I’ve noted on many occasions over the last two months, individual investors have been ravenous for bond mutual funds since spring, while their interest in stock funds has waned as the market has continued to rally. The vote for bonds over stocks has been a strong sign of how risk-averse many people have remained since markets crashed last year.

In September alone, even as the Standard & Poor’s 500 index surged 3.6%, U.S. stock mutual funds had a net cash outflow of $11.2 billion, meaning redemptions exceeded new purchases by that amount.

By contrast, bond mutual funds had a huge net inflow of $47.4 billion in September. The data come from the funds’ trade group, the Investment Company Institute.

But it appears that some investors couldn’t resist the lure of stocks as major market indexes worldwide jumped to new one-year highs in mid-October. After nine straight weeks of net outflows, stock funds overall (domestic and foreign) had a net cash inflow of $1.68 billion in the seven days ended Oct. 21, the latest data available.

Foreign funds took in a net $2.9 billion in the latest period, the most since mid-June. Domestic funds had a net outflow of $1.2 billion, but that was the smallest outflow since mid-August.

Some of the new buyers (and would-be sellers who delayed) quickly were facing remorse: The S&P 500 reached a one-year closing high of 1,097.91 on Sept. 19. It then slid 5% in the seven following sessions through Wednesday.

The Russell 2,000 index of small-company stocks dived 9% in the same period.

The losses also were heavy in some foreign markets. The Brazilian market tumbled 10.5% from Oct. 19 through Wednesday; the German market slid 6.1%.

On Thursday, though, stocks resumed their climb on news that U.S. economic growth in the third quarter was stronger than expected. The S&P 500 rallied 2.2%, the Russell 2,000 jumped 2.4%, Brazil’s main index shot up 5.9% and the German market recouped 1.7%.

-- Tom Petruno

Battered muni bond market stabilizes, but test looms

The municipal bond market has stabilized in recent days after a steep, two-week sell-off. A heavy supply of new bonds for sale nationwide this week will show whether tax-free yields have reached levels high enough to lure investors back.

Cash poured into muni bonds in August and September as many investors rushed to lock in yields, fed up with near-zero returns on money market mutual funds and other short-term accounts.

But the strong demand for bonds pushed down interest rates on the securities (as bond prices rise, their yields fall). The annualized tax-free yield on 10-year California state general obligation bonds plunged from 5.25% in late June to less than 4% by early October.

Then the muni market hit a wall, as buyers essentially went on strike. That wreaked havoc with California’s attempt to sell $4.5 billion of new bonds the week of Oct. 5. The state was forced to boost yields sharply to get the deal done.

The sell-off in munis nationwide continued through late last week, pushing bond prices down and yields up. The share price of the Vanguard California Long-Term Tax-Exempt muni bond mutual fund slumped from a 52-week high of $11.39 on Oct. 5 to $11.12 by last Thursday, a loss of 2.4% -- a rude jolt for investors who had forgotten that it was possible to lose money in bonds.

But the fund’s share price has held at $11.12 the last two days, indicating that the selling wave has abated.

"There’s more investor interest with yields up," said Parker Colvin, a muni bond trader at Stone & Youngberg in San Francisco.

The yield on 10-year California general obligation bonds has rebounded to about 4.45%, he said.

But the muni market nationwide will face a glut of new bonds this week, testing whether yields can hold at current levels or whether issuers will have to pay more to attract buyers.

State and local governments including Minnesota, Maryland and Cook County, Ill., will try to sell about $11.3 billion in muni issues this week, the most for any week since June, according to Bloomberg News data. The California Public Works Board will be in the market with an $800-million offering of lease revenue bonds. That sale starts today.

-- Tom Petruno

American Funds group bleeds cash as investors stay wary of stocks

Small investors' reluctance to pump more cash into U.S. stock mutual funds is taking a heavy toll on the American Funds group, the L.A.-based money management giant.

American, the second-largest fund company by assets after No. 1 Vanguard Group, saw a net $1.8 billion in cash flow out the door in September as investor redemptions exceeded purchases for the sixth month in the last nine, according to data compiled by Morningstar Inc.

Year to date through Sept. 30, American Funds suffered a net cash outflow of $19.3 billion, or about 2.2% of its current asset total of $880 billion.

By contrast, Vanguard, with $1 trillion in total assets, had a net cash inflow of $74.2 billion in the first nine months, according to Morningstar. Fidelity Investments saw a net $17.2 billion come in the door, and Newport Beach-based Pimco funds took in a net $55.6 billion.

Vanguard, Fidelity and particularly Pimco have benefited from record demand for bond funds this year, as many individual investors have opted to play it safer with their money rather than risk another huge loss if the stock market should dive again.

American Funds, controlled by privately held Capital Group Cos., manages bond funds as well as stock funds, but the 80-year-old company's bread and butter has always been equities. Just 11% of the firm's assets are in its bond funds. So when small investors shun stocks, American has a limited menu of other funds to entice them.

American also relies heavily on brokers and other financial advisors to market its funds. It doesn't sell its funds directly to the public except via 401(k) retirement plans. So if nervous financial advisors are tilting clients' portfolios away from stocks after last year's market crash, they may be siphoning cash from American's funds toward other assets.

An American Funds spokesman, Chuck Freadhoff, declined to comment on the company's fund sales.

One other issue may be hurting American this year: its conservative money management style. The firm stresses long-term investing and has always followed a "value"-oriented stock-picking discipline. But that means its equity funds tend to lag the market when share prices are surging.

Of American's 10 largest stock and "balanced" (stock-and-bond mix) funds, six trailed the performance of the average fund in their investment category in the first nine months of this year, according to Morningstar data. American's huge Washington Mutual stock fund, for example, was up 10.7% in the nine months, far behind the 18.6% gain of the average large-stock value fund.

But even beating the market has been no help to some of American's funds this year. Its Growth Fund of America saw a net outflow of $334 million in September even though the fund has kept pace with the market. Growth Fund gained 27.1% in the nine months compared with a 26.4% return for the average large-stock growth fund.

Because fund companies charge management fees as a percentage of assets, investor redemptions cut into fee income. American Funds slashed about 14% of its staff worldwide in two rounds of layoffs in the first half of the year -- the first mass job reductions in the firm's history -- in reaction to a plunge in assets as stock prices dived from September to March and investors yanked cash.

Redemptions also can hurt a fund's performance by putting portfolio managers on the defensive -- for example, by forcing a manager to sell stocks in order to have enough cash on hand to meet investors' requests to exit.

-- Tom Petruno

Stocks on shakier ground as indexes diverge and bond market chokes

A victory celebration isn’t much fun if you’re there all alone.

The Dow Jones industrial average closed at a new 2009 high on Friday, but without the company of any other major U.S. market index.

It'll be a bad sign for the seven-month-old rally if the other indexes can’t make their own new highs next week.

The Dow rose 78.07 points, or 0.8%, to 9,864.94 on Friday, surpassing the previous 2009 closing peak of 9,829.87 reached on Sept. 22. The index now is up 12.4% for the year and 51% from its 12-year low in early March.

Friday, by the way, was the two-year anniversary of the last bull market's peak.

The blue-chip Dow leading the way, without broader indexes staying with it, is akin to the battlefield scene of a general advancing to the top of the hill -- only to find his troops far behind. Good luck keeping that hill, general.

Still, the broader market also climbed Friday, and most other indexes are within easy striking distance of this year’s highs, which most also reached on Sept. 22. The market went into only a modest swoon after that, still defying the bears who say it’s way overdue for a sharp pullback.

The Standard & Poor’s 500 added 6.01 points, or 0.6%, to 1,071.49 on Friday, just below the Sept. 22 close of 1,071.66.

The New York Stock Exchange composite inched up 0.4% to 7,015.54, which left it within 0.5% of its Sept. 22 close.

Among small-stock indexes, the Russell 2,000, which rose 1.2% to 614.92, will need to gain another 1% or so to take out the Sept. 22 high.

In June, divergences among the major indexes signaled the top of the spring rally. The NYSE composite, for example, peaked on June 2. The Russell 2,000 topped out on June 4. The Dow was the last to hit a new rally high, reaching 8,799.26 on June 12. After that the market pulled back through July 10, with the Dow losing 7.4% in all, before buyers rushed back into the market beginning in mid-July.

Second-quarter earnings reports fueled the summer rally, and the bulls are betting that third-quarter reports will power the market in the next few weeks.

Stocks could face one other big hurdle: a back-up in interest rates.

The bond market was hit by a selling wave late this week as the steep drop in yields in recent months finally triggered a buyers' strike. Momentum traders who've been riding the bond rally quickly bolted for the door. They got an extra push courtesy of more warnings by Federal Reserve policymakers that short-term interest rates will, some day, rise from zero.

The 10-year Treasury note yield ended Friday at 3.38%, up from 3.25% on Thursday and 3.18% on Wednesday.

Yields also jumped in the California municipal bond market this week after the state was forced to boost rates on an offering of new tax-free debt to get the deal done.

Rising market yields push down the value of older bonds, which is reflected in falling share prices of bond mutual funds. The share price of the Vanguard California Long-Term Tax Exempt bond fund, which hit a 52-week high of $11.39 on Monday, had fallen 1.1% to $11.26 by Friday.

That's not a big loss compared with what the stock market might suffer in a week. Still, for bond investors who've been watching the value of their holdings rise almost non-stop since July as cash has poured into the market, this week was a rude reminder that it's possible to lose money in bonds, too.

-- Tom Petruno

Photo: On the NYSE floor on Friday. Credit: Mario Tama / Getty Images

Bill Gross kicks the sick dog that is California

Pimco bond guru Bill Gross ought to be feeling charitable: The share price of his $178-billion-asset Pimco Total Return fund hit a record high Thursday, thanks in part to his decision in recent weeks to load up on long-term Treasury bonds -- exactly what the rest of the world was clamoring for in Thursday’s big bond rally.

Instead, Newport Beach-based Gross uses his October commentary on Pimco’s website to lambaste what has become of California.

Some excerpts:

Once "golden" and the land of entrepreneurial opportunity, the state has turned from filet mignon to ground chuck and its residents are now on a short leash as opposed to masters of their own universe. Unemployment at 12.2% is near the nation’s highest and its Baa bond rating is the country’s lowest. Its schools are abysmal, competing with Louisiana and Mississippi for the lowest rating in the federal government’s National Assessment of Educational Progress.

Perhaps more than any other state, California has been affected by its perverted form of government, requiring a two-thirds vote by state legislators to effectively pass a budget. In addition, the state’s laws are almost tragically shaped by a form of direct democracy more resemblant of the Jacksonian era, where the White House furniture was constantly at risk due to unruly citizens high on whisky and low on morals and common sense.

But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26-billion [budget] deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge.

All of that is well-put, but Gross, 65, isn’t telling demoralized Californians anything they don’t already know.

What his fellow Californians really might like to read are Gross’ ideas for beginning to fix what’s wrong with the state. Raise income taxes? Cut them? Junk Proposition 13? Offer new incentives for entrepreneurs? Forcibly annex Arizona?

The uber-rich Gross just paid $23 million for a Harbor Island mansion that he reportedly will tear down in favor of building something better. So he’s apparently planning to stay in California despite his dismal assessment of its economic and social situation.

Yo Bill -- we know we're in a bad way. What should we do?

-- Tom Petruno

Photo: Bill Gross. Credit: Pimco

Deflation warning? Treasury bond yields plunge amid new rush for safety

Money is pouring into Treasury bonds today, driving yields sharply lower as investors start the fourth quarter with another rush into what they perceive to be safe.

The yield on the 10-year T-note plummeted to 3.20% by about 12:20 p.m. PDT, down from 3.30% on Wednesday and the lowest since May.

The 30-year T-bond yield, charted below, has slumped below 4%, to 3.97% from 4.04% on Wednesday.

Falling market yields mean bond prices are rising. That should give a big boost today to the most popular bond mutual fund, Pimco Total Return, which has been loading up on long-term Treasuries in recent weeks, as detailed by portfolio manager Bill Gross.

The latest bond-buying binge is making individual investors look like they were ahead of the curve: The public has been voracious for bond mutual funds for the last few months even as many Wall Street bulls insisted that stocks were the smarter investment in a recovering economy.

Today, stocks are selling off amid fresh concerns about the economy’s ability to sustain a recovery, despite the surprising rise in consumer spending in August. The Dow Jones industrial average was down about 150 points, or 1.5%, to 9,564 at about 12:20 p.m. PDT.

For the bond market -- or at least, high-quality bonds such as Treasuries -- the explosion in demand today suggests an epiphany for many investors who’ve been disbelieving that long-term interest rates could go much lower.

Many bond pros say weakness in key economic data in recent days (including today’s report on U.S. manufacturing activity in September) has raised strong doubts about the recovery.

More investors are sensing that "the feel-good bounce in the economy created by the [government’s] fiscal stimulus is not a permanent factor," said Tom Tucci, head of Treasury trading at RBC Capital Markets in New York.

That boosts the likelihood that the Federal Reserve will have to maintain near-zero short-term interest rates well into 2010, he said. And if short-term rates aren’t heading higher, investors are more comfortable locking in current yields on longer-term bonds.

Rising tensions between Iran and the West also are encouraging investors to find refuge in the traditional haven of Treasuries, said Tom Di Galoma, head of U.S. rates trading at Guggenheim Capital Markets in New York.

But the biggest factor driving cash into longer-term bonds is the feeling that there is no inflation threat to fixed-income securities, Tucci and Di Galoma said.

In fact, sentiment is shifting more toward the idea that the U.S. could face outright deflation, Tucci said.

Figure it this way: If inflation is 2% and a bond pays 3% interest, the "real" or after-inflation yield is just 1%.

But say inflation turns to deflation, and the U.S. sees broad-based declines in prices of goods and services, similar to Japan’s experience.

At a deflation rate of 2%, the real return on a 3% bond would be 5% -- a huge number, by bond standards.

The deflationistas are still a minority camp on Wall Street. But their numbers will grow if the economic data get weaker instead of stronger.

A big test looms for the bond rally on Friday, with the government’s report on September employment. Wall Street expects that the economy lost a net 175,000 jobs last month. If the tally is larger than that it could spark another rush out of stocks and into Treasuries.

-- Tom Petruno

For many, bonds vs. stocks is no contest

The numbers showing inflows and outflows of money in the mutual fund industry over the last few months tell us two things:

First, the typical American investor won’t be at all surprised if the stock market takes a dive.

Second, that same investor could be very surprised if something bad happens to the bond market -- say, if interest rates were to shoot up, devaluing older bonds.

As Wall Street has continued to push higher this month U.S. stock mutual funds have been suffering net cash outflows, according to data from the Investment Company Institute, the funds’ trade group.

Domestic stock funds saw a net $2.04 billion in cash flow out in the seven days through Sept. 16, the latest data available from the ICI. That followed an outflow of $1.75 billion in the week ended Sept. 9 and an outflow of $3.35 billion in the week ended Sept. 2.

All told, that’s the heaviest amount of net selling in domestic equity funds since March -- when the stock market was reaching 12-year lows.

Now, note that we’re talking about small amounts relative to the $3.5 trillion or so in total domestic stock fund assets. But it’s the trend that’s instructive: The public, on balance, has been exiting even as the market has been rallying.

It’s just the opposite with bond mutual funds, which have about $2 trillion in total assets: Money has poured into those funds this month, exceeding what already were heavy inflows in July and August.

Bond funds (government, corporate and municipal) took in a net $12.7 billion in new cash in the week ended Sept. 16, the largest weekly inflow this year, according to ICI data. That followed inflows of $8.2 billion in the previous week and $12.1 billion in the week before that.

After last year’s stock market meltdown many investors began tilting  their portfolios more toward bonds. They know that bonds are, in general, safer than stocks. The income bonds pay provides a cushion even if the value of the securities declines.

And bonds can rise in value -- generating capital gains – if market interest rates fall, because sliding rates boost the appeal of older bonds that pay higher fixed rates.

That’s what has happened in the corporate, mortgage and municipal bond markets, in particular, over the last two months: Market interest rates have continued to drop, pushing up prices of existing bonds.

The share price of the biggest bond fund of all, Pimco Total Return, closed at a record high of $10.91 on Thursday. The fund's year-to-date total return (principal change plus interest income) is 12.2%. That's less than what stocks have done, but it's comfortable enough -- and that's all many bond investors ask.

With so much new money favoring bonds, the temptation is to think that the crowd must be wrong. If market interest rates were to rise abruptly the rally in bonds would reverse, of course.

Yet few signs are pointing to higher rates. Inflation is subdued. The economy is reviving but it surely isn’t busting out. And the Federal Reserve again this week pledged to keep its benchmark short-term rate near zero indefinitely.

Conventional wisdom is that all of the money the Fed and the Treasury have pumped into the financial system will result in an inflation surge. But that's a story for 2010 or 2011, or maybe even later, if it happens at all.

In the near term, the most likely negative surprise for bonds might just be that stocks continue to perform much better while bonds putter along. That's the kind of disappointment most bond investors probably could live with.

-- Tom Petruno

Photo: The other trusted Bond. (Yes, totally gratuitous. I just like the poster.) Credit: Matt Dunham / Associated Press