Gold glitters again - sets new record

Investors flock to the commodity amid sinking dollar and worries about rising inflation.

NEW YORK (CNNMoney.com) -- Gold futures soared to a fresh all-time trading high above $1,000 an ounce Friday as the dollar sunk to new lows.

COMEX gold for April delivery touched $1,007.30 an ounce in morning trading before slipping back a bit.

After weeks spent hovering below the key psychological mark, gold finally hit $1,000 an ounce for the first time Thursday.

Behind gold's surge has been a drop in the dollar, which dropped below 100 yen for the first time since 1995 Thursday. It also has hit a string of record lows against the euro.

The greenback has fallen to record lows amid fears of a protracted slowdown in the U.S. and concerns about rising inflation.

A key inflation reading released by the Labor Department Friday showed consumer prices were flat last month, but there are signs that price pressures are building.

Commodity prices have soared recently. Oil prices have set 12 record highs in the past 13 trading sessions. The front-month crude contract is now trading just below $111 a barrel. Gasoline has set record highs for four straight days, as U.S. drivers now need to shell out an average of $3.28 a gallon.

Targeting the right fund mix

It’s easy to select a good asset allocation for your nest egg on your own, but if you don’t have the discipline to stay balanced, a target-date retirement fund could be your best option, says Money Magazine’s Walter Updegrave.

Question: I’ve got my 401(k) invested in a target-date retirement fund. I’m wondering, though, whether I would be better off investing it in large-cap, mid-cap, small-cap and blended funds, putting 25% into each option. What do you think? –J. Duffaut

Answer: You’ve no doubt heard the expression, “First, do no harm.” (You scholarly types may be more familiar with the Latin version, “Primum non nocere.”)

It’s a bedrock principle that all good physicians adhere to. The idea is that a doctor shouldn’t dole out medicine or prescribe a treatment that has an uncertain benefit for the patient but may have a good chance of causing harm.

In other words, a doctor must consider the downside before intervening.

Well, I think that individual investors - and particularly people who are building a nest egg for retirement in a 401(k) or similar account - ought to take this principle to heart as well.

Take the case of 401(k)s and target-date retirement funds. The number of 401(k) plans offering target funds has mushroomed over the past few years and more and more participants are plowing their contributions into this option. I think the growing popularity of target funds is good for two reasons:

1. They make retirement investing easy. Just choose a target fund with a date that roughly matches the year you plan to retire, and you get a ready-made diversified portfolio of stocks and bonds that’s appropriate for someone your age. What’s more, the fund automatically shifts its mix more toward bonds as you age, so that you take less investing risk as you grow older.

2. They can save us from our own worst impulses. Here I’m talking about our tendency to chase hot funds and sectors, buy into inflated asset classes and pour too much money into company stock and other investments that may be risky but we don’t necessarily see as risky. In short, target funds make it harder for us to sabotage our own retirement planning efforts.

Are target funds perfect? Of course not. But if your 401(k) offers this option, then it seems to me that before you reject it in favor of other funds, you ought to ask yourself: Can I do better on my own?

The answer may very well be yes. You don’t have to be an investing savant to put together a decent portfolio of stock and bond funds. But you do have to take responsibility for creating and maintaining a workable investment strategy - that is, deciding on a reasonable mix of stocks and bonds, choosing appropriate funds, monitoring their performance and then rebalancing your portfolio once a year.

If you don’t know enough about investing to do this or you’re not willing to put in the fairly minimal time and effort needed to do it (or you know deep inside that you’ll probably give in to the urge to tinker often enough that you may undermine your efforts), then it seems to me that taking an active approach has the potential to do more harm than good. In which case, I’d say you’re better off with a target fund.

Now, I don’t know you well enough to judge how capable or responsible an investor you are. But based on your question, my guess is that you’re probably a good candidate for a target fund.

Why? Well, you talk about putting equal amounts of money in large-, mid- and small-cap funds. That means you’ve got twice as much money in mid-size and small stocks combined as you do in the big boys. (Let’s leave the “blended” funds aside since I’m not sure what kind of funds you mean.)

But if you take a look at the percentage of total market value that large-, mid- and small-cap stocks actually account for in the stock market, you find that large stocks represent almost 75% of market value and mid- and small-caps combine for the other 25%. (You can see this for yourself by plugging the stock market ticker for Vanguard’s Total Stock Market Index fund—VTSMX—into the Instant X-Ray tool.)

This means that investors as a whole have allocated about three times as much of their capital to large stocks than medium and small ones. You, on the other hand, are proposing to do pretty much the opposite by putting twice as much in the mid-size and small stocks.

If you’re doing this because you believe you have insights that investors overall lack - in effect, you think they’ve made the wrong decision - then fine, maybe it makes sense to go so far against the grain. But if you don’t have insights or information the rest of the investing world doesn’t have, then I don’t see how you can justify divvying up your money as you’ve suggested.

Either way, I can tell you that by piling so much into mid- and small-size stocks (and putting nothing in bonds, unless they’re in your “blended” category), you are creating a very volatile portfolio that, if nothing else, is virtually guaranteed to give you a white-knuckle ride.

So I guess I would answer your question with one of my own - namely, how did you come up with that 25%-in-each-group strategy? And unless you have a very cogent reason for it, I’d say you’re better off sticking with your target-date fund.

That’s not to say, however, that at some point in the future you can’t switch out of your target-date fund and into a portfolio of individual funds you’ve created. But for that to make sense, I think at the very least you would want to have read a few of our Money 101 lessons, starting with the basics of investing, then moving on to stocks, bonds, mutual funds, asset allocation and, of course, retirement planning.

Until you do that, however, I say your first obligation is to do no harm, which means staying put in that target-date fund.

Lawmakers take aim at CEO compensation

High-profile former Wall Street CEOs and the head of the nation's largest home lender will testify before a Congressional committee examining the link between executive pay and the mortgage crisis.

Rep. Henry Waxman, D-Calif.
Why were executives at the helm of some of the world's largest banks compensated so richly even as their industry was being pummeled by the mortgage meltdown?
Lawmakers will pursue this question Friday when the House Committee on Oversight and Government Reform hears testimony from two former Wall Street CEOs, Charles Prince and Stanley O'Neal, and the chief of the nation's largest mortgage lender, Angelo Mozilo.

At issue are the salaries, bonuses, perks and stock awards that the executives received as the companies under their leadership took enormous losses on bad bets related to mortgage backed securities. Calls for accountability have become increasingly louder as the housing market continues to deteriorate and homeowners across the country face foreclosure.

Henry Waxman, the Democratic congressman who chairs the Committee, has developed a reputation as an aggressive reformer during his thirty years representing the Los Angeles area on Capitol Hill.

As a ranking member on the Committee, Waxman has tackled issues ranging from the high cost of prescription drugs to waste, fraud, and abuse in government contracting. Most recently, Waxman's committee made headlines when it held a series of high-profile hearings on the illegal use of steroids in major league baseball.


Stanley O'Neal, Merrill Lynch & Co.
2006: $46 million.
Stanley O'Neal relinquished his title as chairman and CEO of Merrill Lynch & Co. in October, after a 21-year career there, and less than a week after the company reported an $8 billion loss on subprime related investments.

According to a profile from Harvard Business School, where he earned his MBA in 1978, O'Neal was born into poverty in Alabama. As a young boy, he labored on his family's cotton farm while his mother worked as a cleaning lady.

He rose through the ranks at Merrill, becoming president and chief operating officer in July 2001. He was tapped as CEO in December 2002 and added the title of chairman in April 2003. The posts made him one of the most powerful African-American executives on Wall Street.

O'Neal was eventually replaced by John Thain, the former chief of NYSE Euronext. In 2006, O'Neal received $46 million in total compensation, including an $18.5 million bonus and $26.8 million in stock awards, according to SEC filings.


Charles O. Prince, Citigroup Inc.
2006: $24.8 million.
Charles Prince stepped down as CEO of Citigroup Inc. in November, not long after world's largest bank reported a 57% drop in quarterly earnings and lost nearly a quarter of its market value.

"It is my judgment that given the size of the recent losses in our mortgage- backed securities business, the only honorable course for me to take as chief executive officer is to step down," Prince said in a statement at the time.

Two months after Prince walked away, Citigroup suffered a $10 billion quarterly loss -- the largest ever in the company's history -- and announced an $18.1 billion writedown due to mortgage-backed investments.

In 2006, Prince's total compensation was $24.8 million, including a $13.2 million bonus and $10.4 million in stock awards. As part of his separation agreement with Citigroup, Prince is entitled to an office, executive assistant, and a car and driver for up to five years, according to a SEC filing.


Angelo Mozilo, Countrywide Financial
2006: $42.9 million.
Angelo Mozilo has already heard from lawmakers about the level of his compensation as the CEO of Countrywide Financial Corp.

Mozilo reportedly stood to collect a windfall of $115 million dollars after his firm agreed in January to a yet-to-be completed $4 billion sale to Bank of America. But after facing heavy criticism from lawmakers, including Sen. Hillary Clinton, Mozilo said he would forfeit $37.5 million in payments tied to the deal.

In January, Sen. Charles Schumer and Rep. Barney Frank, both openly criticized Mozilo's compensation as Countrywide became a symbol of the subprime mortgage crisis.

"Mr. Mozilo could display some goodwill by donating any severance pay he stands to receive to the nonprofit housing counselors trying to prevent foreclosures," Schumer said in a statement.

In 2006, Mozilo took home $42.9 million in compensation.

NEW YORK (CNNMoney.com) -- Despite all the pain the U.S. dollar has endured in recent days, the greenback may still have further to fall before seeing

Adviser-recommended annuities aren't always a red flag, but proceed with caution. Make sure you know what you're getting into before you buy in says Money Magazine's Walter Updegrave.

NEW YORK ( Money) -- Question: My 63-year-old mother earns about $1,200 a month, has $90,000 in savings and, as a result of a recent refinancing, has a $90,000 30-year mortgage. In three years she will begin collecting an estimated $1,300 a month from Social Security. A financial adviser suggests she put $60,000 into a variable annuity that is guaranteed to double in value in 10 years. Is this a good idea? --David, Denver, Colorado

Answer: Whenever someone tells me they're considering an investment that purports to deliver lofty guaranteed returns, my antennae automatically go up. Doubling your money in 10 years amounts to an annualized 7.2% gain, a guarantee that borders on too-good-to-be-true in almost any market, especially today's.

When this investment involves an annuity, I become even more suspicious because annuities are notorious for hitches and complications that can make them far less appealing than they seem.

And when I see that this annuity is being pitched to an older person, alarm bells really begin to go off for me because regulators have long warned about sales people earning big commissions by convincing seniors, often at "free lunch" seminars, to put their money into annuities and other investments that are often inappropriate.

I don't say all this because I am "anti-annuity." On the contrary, I think in many cases it can make sense for retirees to devote a portion of their savings to a certain type of annuity - an immediate annuity, a.k.a an income or payout annuity - while leaving the rest in conventional investments like stock and bond mutual funds. The idea is that the annuity can offer a guaranteed lifetime income, while the funds can provide liquidity as well as long-term growth.
Beware of hidden fees
But variable annuities are a different breed. They're often sold more as tax-advantaged investments than income vehicles. With a variable annuity you get to invest in "subaccounts," essentially mutual fund portfolios, whose gains are sheltered from taxes as long as your money remains in the annuity.

That sounds just peachy, but there are downsides too. When you pull those gains out of an annuity, they're taxed at ordinary income rates, even if they're long-term capital gains that are normally taxed at more attractive long-term capital gains rates. And most annuities also carry high fees that can dramatically reduce their returns and, in my opinion, undercut their effectiveness.

Over the past few years, many advisers have begun selling a type of variable annuity that's designed to provide retirement income. It's called a variable annuity with a guaranteed minimum withdrawal benefit. But as I've noted before, I believe the combination of this annuity's mind-boggling complexity and generally blimpish fees make it an inferior choice to a combination of a plain-old immediate annuity and mutual funds.

Get it straight
I don't know which type of variable annuity your mom is being pitched. But I do know that she needs to understand what it costs and how it actually works.

Just getting a handle on costs can be daunting because the disclosure of fees is, how should I put it, so non-consumer friendly that you can't help but wonder if annuity sellers are purposely making it difficult for people to understand what they're paying. I've proposed an E-Z Annuity Fee Disclosure form and, who knows, maybe one day annuity companies and regulators will come up with something similar (or better) on their own to help people like your mom.

As for understanding how the annuity works, that's an even bigger challenge. Let's start with that guarantee you mentioned. What exactly is guaranteed to double in 10 years? You might assume that it's the value of your account - that your mom invests $60,000 and in 10 years is guaranteed to have $120,000 no matter what happens in the financial markets.

But there may be any number of strings attached to that sum. For example, your mom might not actually be able to withdraw $120,000. To collect on the guarantee, she might have to take that amount in payments over the rest of her life. And the annuity company could pay a subpar return during that time, in effect taking away at the back end the alluring gain the annuity appeared to deliver the first 10 years.

Your mom also needs to know what happens if she has to get to her money for unexpected expenses or an emergency. Most variable annuities come with surrender charges that can start at 10% or more and take years to disappear. Many annuities allow you to withdraw up to 10% of your account value with no withdrawal charge, but withdrawals can also affect the guarantee. (Withdrawals from an annuity before age 59 1/2 can also trigger a separate 10% IRS penalty tax. That's not a concern for your 63-yer-old mom, but other readers should keep this tax in mind.)

Question an adviser's motives
My advice is that you and your mom sit down with an adviser and figure out how much income she'll need in retirement and how she should get it given her resources. She may not need an annuity. After all, Social Security provides lifetime income that's adjusted for inflation. If an annuity does make sense, the adviser can help her decide which type is right for her.

A fee-only planner willing to work on an hourly or flat-fee basis would be most likely to provide the most independent advice. You can find such planners in your area by clicking here.

One final note: I couldn't help but wonder whether your mom's $90,000 in savings came from the proceeds of her $90,000 refinancing. That led me to wonder whether the adviser recommending the annuity also recommended the refi.

If so, I'm not saying there's anything necessarily sinister going on. But it would raise additional suspicions in my mind about the adviser's motives, especially given all I hear about seniors being steered into reverse mortgages by people looking to sell them annuities or other products. If you come to the conclusion that the annuity salesman was behind the refi and that the goal was to sell your mom an annuity she didn't really need, I'd recommend reporting the incident to the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), your state securities regulator and your state insurance department.

I think it's worthwhile keeping regulators informed about what's going on given all the inappropriate investments, scams and other ploys being directed at seniors these days. Who knows? The information might prove helpful later on for someone else's mom.

Dollar: It will only get worse

Greenback likely to stay under pressure in near term but find relied by mid-year, currency experts argue.

NEW YORK (CNNMoney.com) -- Despite all the pain the U.S. dollar has endured in recent days, the greenback may still have further to fall before seeing any sort of relief, according to currency experts.

Driving much of the dollar's decline this week were tepid remarks about the U.S. economy by Federal Reserve Chairman Ben Bernanke, who hinted that the central bank would cut interest rates once again at the Fed's March meeting.

Those comments, combined with a number of troubling signs about the strength of the U.S. economy, helped send the dollar tumbling to multi-year lows against a host of currencies including the Swiss franc, the Malaysian ringgit and Japanese yen.

"It all points towards a weaker U.S. economy and currency traders don't want to be exposed to that kind of risk," said Gareth Sylvester, senior currency strategist and self-described "dollar bear" at HFIX Plc in San Francisco.

But perhaps the most notable move of the week was the dollar hitting successive all-time lows against the euro, breaking the key psychological barrier of $1.50 for the first time since the 15-nation currency was launched in 1999.

Currency experts, however, argue that the dollar will remain under pressure at least through the next month or longer.

If next Friday's February employment report is as bad as economists are anticipating, argues Joe Francomano, manager of foreign exchange with Erste Bank in New York, the greenback could possibly hit rock bottom at that point.

"You are going to see the momentum of this week carry over as far as dollar weakness goes and culminate next Friday," said Francomano.

How far could it fall?

The prevailing forecast lately is that the dollar will hit a ceiling of $1.55 against the euro in the near term and fall further against the yen, sinking as low as ¥101 or ¥102.

Even the most bearish currency experts agree that the pressure on the dollar should abate some time around the middle of 2008, after the Fed winds down its rate-cutting campaign and as the sluggish U.S. economy starts to perk up.

But where the dollar heads after that is anyone's guess.

Greg Anderson, executive director of forex strategy at ABN AMRO, expects the greenback to move towards $1.56 against the euro as 2008 comes to a close.

Ertse Bank's Francomano, however, argues that the dollar should wind up around $1.46 against the euro by year end as investors are lured back in by a discounted greenback.

"When the bad data has been processed and the Fed has cut rates to 2 percent or so, then expect the dollar to look cheap," said Francomano.

Saving the bond insurers: 5 fixes for the crisis

Just about everyone seems to have an idea on how to fix the troubled bond insurers and stave off a crisis that threatens to send the financial services sector into disarray.

Divide and survive
The plan: When testifying before Congress last week, New York Gov. Eliot Sptizer and State Insurance Superintendent Eric Dinallo told lawmakers that the best solution would be to recapitalize the bond insurers. If that failed, they would break up these firms into a "good bank" that would manage their healthy municipal bond insurance business, and a "bad bank" to oversee the smaller structured finance arm. Each division would remain part of a holding company.

The prospects: Likely. Of all the different solutions being floated, this proposal has garnered the most interest. After the bond insurer FGIC was downgraded last week by Moody's, the company asked Dinallo's office for permission to break itself up. Its larger rivals Ambac and MBIA are also reportedly considering similar moves.

A break-up would prevent cities and towns - which buy insurance on bonds they sell to raise money for projects like roads, schools and bridges - from getting saddled with higher borrowing costs. But it is widely believed that, after a split, the structured finance arm would wither and die, meaning downgrades on the asset-backed securities issued by Wall Street and more writedowns.

Uncle Warren to the rescue
The plan: A little over a week ago, Warren Buffett proposed a bold solution for the bond insurance crisis by offering to take over $800 billion of the industry's municipal bond obligations.

Under his plan, companies like Ambac and MBIA would focus on their troubled structured finance arm, which are the source of the industry's woes.

The prospects: Slim to none. Even though the announcement of the plan garnered significant attention, it appears unlikely that any of the companies approached will accept the deal; one firm has already rejected the offer, according to Buffett. More importantly, the plan would impose a pretty stiff premium on the bond insurers, while they would lose control of their low-risk and profitable municipal bond business.

Can you spare $15 billion?
The plan: When New York Insurance Superintendent Eric Dinallo implored some of Wall Street's top firms to kick in about $15 billion to help bail out the capital-squeezed bond insurers late last month, their responses were only moderately better than a cold-shoulder.

While major financial firms have a vested interest in keeping the insurers afloat, they have their own capital problems after losing billions as a result of the credit crisis.

The prospects: Possible. While a bank bailout plan seems unlikely, it is not off the table. A coalition of banks including Citigroup, BNP Paribas, Wachovia and UBS are reportedly working on a bailout plan of Ambac, the nation's second-largest bond insurer. One considerable risk, however, is that there is no indication that a one-time capital infusion would save these troubled firms' credit ratings. Sean Egan of independent ratings shop Egan-Jones has publicly stated that the bond insurers require somewhere closer to $200 billion in capital.

Short-seller solution
The plan: Pershing Capital Management's Bill Ackman has been one of the leading critics of the bond insurance industry, but offered up his own remedy for the crisis Wednesday. Under his proposal, the company's structured finance division would take control of its municipal business, with the two remaining under the umbrella of the holding company.

The prospects: Very doubtful. While the plan would insulate the municipal business and provide support to the structured finance division, it is unlikely that the industry would want Ackman to decide its fate, given his long-standing role as critic and industry short-seller. He stands to benefit if companies like MBIA continue to see their stock tumble even further. Just hours after Ackman pitched his idea, MBIA publicly rejected his proposal.

Buyer beware
The plan: Like the bank bailout program, the notion of a private equity, or distressed investor rescue doesn't remain out of the realm of possibilities. MBIA, for example, has raised about $2.6 billion in capital this year, part of which came from private equity firm Warburg Pincus. And famed distressed investor and billionaire Wilbur Ross has repeatedly said he is looking to invest in one of the bond insurers.

The prospects: Possible. While selling a stake to an outside investor would be a quick fix for the bond insurers, it remains to be seen if they could raise enough capital to satisfy Moody's and Standard & Poor's requirements to sustain their `AAA' rating. What's more, it would not necessarily cure the systemic problems that plague the industry, an area that some, including MBIA's newly appointed CEO Joseph "Jay" Brown, are hoping to fix.

Oil prices start to cool

Crude futures head downwards after heating up on weak heating oil inventory report.


NEW YORK (CNNMoney.com) -- Oil prices fell Thursday, despite a government report showing supplies of fuel used to make heating oil declined much more than expected.

Early Thursday afternoon, U.S. light crude for April delivery fell $2.39 cents to $97.31 a barrel. Oil traded up as much as 10 cents to $99.80 a barrel after the report's release at 10:30 a.m. ET, but have since retreated.

Traders initially thought the decline in distillates was demand-related, as colder temperatures in the Northeast have increased demand for heating oil, according to Phil Flynn, senior market analyst at Alaron Trading in Chicago.

But now Flynn believes that traders realize the weak supply is refinery-related, suggesting an overall decline in demand.

"The market's coming back down to earth," said Flynn. "$100 a barrel isn't a price anymore, it's a destination. It gets to the level, then it backs off."

In its weekly inventory report, the Energy Information Administration said crude stocks rose by 4.2 million barrels last week. Analysts were looking for a rise of 2.9 million barrels, according to a Dow Jones poll.

But distillates, used to make heating oil and diesel fuel, fell by 4.5 million barrels while analysts were looking for a 1.5 million barrel decline.

Refinery usage was lower than the previous week, operating at 83.5% capacity last week. And gasoline demand continued to fall, averaging just 9 million barrels per day over the past month.

These numbers are only a little higher than the same period last year.

Gasoline supplies rose by 1.1 million barrels, just above forecasts for a 1 million barrel rise.

Panning for black gold, a global challenge
Oil prices have soared recently as whispers of supply cuts and lower interest rates sent oil above $100 Tuesday and Wednesday.

Demand for gasoline has continued to weaken, leading some traders to believe that the Organization of Petroleum Exporting Countries will decide to cut its output at a March 5 meeting.

Also, in Federal Reserve meeting minutes released Wednesday, the U.S. central bank issued a weaker economic forecast for 2008, predicting slower growth, higher unemployment and higher inflation for the rest of the year. Some economists believe that the report indicated another interest rate cut is on its way.

An interest rate cut usually sends the dollar lower - and oil prices higher - as investors sell dollar-denominated securities and buy commodities as a hedge.

Also, oil is priced in dollars worldwide, so a falling dollar provides less incentive for oil-exporting counties to increase output, or for foreign consumers to cut back on oil use.

"It's a double-edged sword," said Flynn, who noted that when the Fed says the economy is bad, oil prices should go lower. But the Fed's solution to the weak economy - interest rate cuts - sends oil higher.

"So bad news is bullish news for oil," added Flynn.

After oil prices topped $100 a barrel for the first time on January 3, they pulled back to the mid-$80 range amid fears of a recession in the United States, the world's largest economy; however, oil prices have risen again by nearly $14 a barrel in the past few weeks.

Oil prices have risen nearly five-fold since 2002. Most analysts blame rising demand and tight supply. That has also attracted floods of investment money, and exaggerated the effects of supply disruptions.