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Preferred shares often trade so infrequently that some issues go for days without seeing any action. That means they aren't appropriate investments for people who may need to quickly liquidate their holdings. What's more, if you're going to invest in preferred issues, you need to understand credit risk - the chief consideration on which issues to avoid. Dividends on stocks can be cut. The dividend on preferred stock is much more secure from earnings malaise. For one, the payout is fixed, and the dividend has to be paid before those on the common shares. Moreover, most preferred dividends are cumulative, meaning that if they are cut or suspended they must be repaid in full before common shareholders see another cent. Dividend suspensions, though they have happened, are nonetheless a rare event, according to credit-ratings concerns. Like bonds, the big concern with preferred stock is credit quality. Thus, like bonds, preferred stock receives credit ratings from ratings concerns such as Moody's Investors Service Inc., Fitch and Standard & Poor's Ratings Group. Investors seeking safety should concentrate on higher ratings: triple-BBB and above is considered investment-grade. QuantumOnline.com, a financial-services site, provides one of the most comprehensive lists of available preferred shares. Yahoo Inc.'s financial Web site, meanwhile, offers up the dividend, current yield and payment date. The SEC's Edgar site offers access to a company's financial filings, where you can read up on the preferred shares they have issued, as well as find the numbers needed to track coverage ratios, along with a company's general financial health. To ferret out credit ratings, head to Moodys.com, the Web site of Moody's, or Fitch.com. Both provide free of charge their ratings on each security of the companies they track.
Although stock trading has been heavy in recent weeks, one hedge fund manager explained that much of the action appeared to be reaction. "There has been a fair amount of program trading related to asset allocations," the manager said. "It's been a long time since we've had a one-hundred-basis-point cut in the Fed funds rate in a month and, at the same time, the stock market dropped 10%. So everybody's asset allocation got really messed up." "I think this is a rally to watch, but I don't think it's a rally to be bought," said Liz Miller, portfolio manager at Trevor Stewart Burton & Jacobsen. "Even though the market tends to rally ahead of the end of a recession, what sparks that rally is corporations giving some view that they can foresee what their business trends look like. I have yet to hear the bellwether company saying there is a visible trend." And with consumers cutting back on spending, an economic recovery will have to include renewed corporate spending. Yet economists at Goldman, Sachs estimate that if a credit cutback forces companies to finance their investment with internally generated funds - as has happened in virtually every recession since 1950 - capital spending could fall another 30%.
Are markets done with the `recession' and on to the recovery? Paul McCrae Montgomery, a money manager and market analyst at Legg Mason Wood Walker, thinks they just may be. Using a `headline indicator,' which is similar to the magazine cover indicator in its contrarian nature (by the time a trend is sufficiently entrenched to grace the covers of the nation's weeklies, it's pretty much over), Montgomery cited a Richmond Post Dispatch headline from Sept. 22: `Market is in a Free-Fall.' This indicator `tends to act immediately,' unlike the magazine cover indicator, which usually sees the market go in the direction of the cover for a few weeks before reversing, Montgomery says. The coincidence of abject pessimism, reflected in news headlines, and the autumnal equinox, a phenomenon he believes coincides with volatility or directional changes in markets (exactly which markets is up for grabs) leads Montgomery to believe that the low is in for stocks. `The pessimism reached an extreme last month,' says Tim Hayes, global equity strategist at Ned Davis Research. Hayes uses a composite indicator of sentiment, which includes things like the put/call ratio and adviser sentiment surveys, to measure extremes in the market. It's when everyone is leaning in one direction - either very long or very short - that markets tend to turn, even when it seems counterintuitive to the news. It's no surprise, then, that financial variables are included in the index of leading economic indicators. Specifically the S&P 500 Index and an interest-rate spread (the difference between the 10-year Treasury rate and federal funds rate) are two of the 10 components in the LEI. It's too soon to say the rally off the Sept. 21 low - 14.3% for the Dow, 13.6% for the S&P 500 and 19.6% for the Nasdaq - represents the end of the decline and the start of a sustained uptrend. However, the market's ability to buck the trend of dire forecasts, especially the determination that a recession was upon us following the Sept. 11 attack, is a sign the market expects a brighter future.
And a good part of whatever increase we have seen may be attributable to declining stock prices. If a fund has $48 in stocks for every $2 in the money markets and the stocks' value falls to $31, in a static portfolio the `cash' position rises from 4% to 6%. To judge from the ICI data, the typical manager industrywide hasn't made any big move to cash. Whether this counts as positive or negative news depends on your point of view. On the plus side, it suggests managers learned well the pitfalls of trying to time the markets, and have resisted any pressure to recant. On the negative side, it provides no evidence of the `capitulation' that analysts who follow investor sentiment look for as a sign of a market bottom. In 20 market declines from 1987 through early this year, Schwab found that the actively managed funds performed no better than the index funds, which are always fully invested by definition. `Flexibility helps only if you can exploit it,' concluded Mark Riepe, who heads Schwab's investment research. The study results shouldn't surprise anybody who had previously accepted the rationale for `fully invested' stock funds - that market timing is an impossible mission.
The intuitive appeal of the linkage is obvious: an increase in the price of an input material will raise the cost of production, causing the producer to raise the price at which he sells his goods to the consumer. `Simple economic theory suggests the chain of production should link movements in the PPI to subsequent movements in the CPI,' wrote Todd Clark, an economist at the Federal Reserve Bank of Kansas City, in ``Do Producer Prices Lead Consumer Prices?'' (Kansas City Fed Economic Review, third quarter 1995). Simple economic theory, in this case, would be wrong. `Producer prices aren't useful in predicting consumer prices,' Clark said. Subsequent research has validated his conclusions. `The relationship is tenuous because of structural changes in the economy.' For starters, input materials prices aren't the primary determinant of the cost of a finished product. `Production cost depends on labor, physical capital and productivity,' Clark said. During the economic boom of the late 1990s, businesses were able to offset rising labor costs with increased productivity growth. Measured inflation stayed low. If they were able to absorb the added expense of labor, about two-thirds of the cost of production, without raising prices, higher materials costs are a piece of cake. Then there's the question of mark-ups. How much a firm marks up its price over its cost varies. `Firms have strategic reasons for absorbing higher costs,' such as increasing their market share, Clark said. Some of the disconnect between the PPI and CPI can be traced to the compositional differences. The PPI tracks the average change in price that domestic producers receive for the products they sell, according to the BLSt. Imports are excluded. So are sales and excise taxes, which show up in consumer prices. What's more, the PPI for finished goods and the CPI do not measure the price change for a comparable set of items. Consumers don't buy capital equipment, for example, which accounts for 24% of the finished goods PPI. Unlike the PPI, which measures just goods prices, the CPI includes labor-intensive services. In fact, services account for 58% of the index. `Such differences weaken the production chain linkage from the PPI to the CPI,' Clark said. Consumer Comfort Index ABC News 10-7-2001
Related: Greg Ip, WSJ 10-15 In the wake of the Sept. 11 terrorist attacks, predictions quickly followed that consumer confidence would collapse, dragging an already fragile economy into recession. A month has passed, and consumers still refuse to cooperate with those predictions. Leisure hotel bookings, Broadway show attendance and auto sales are all back to, indeed in some cases above, preattack levels. It also is possible the positive consumer sentiment seen since the attacks reflects a burst of patriotism that won't translate into behavior. Hotels' occupancy rates, which were 57% the week before the attack, were 60% in the first week of October, according to Smith Travel Research. Both figures are sharply below year-earlier levels. North American rail-car loadings, an old-economy indicator, were down 0.1% in the first week of October from a year earlier, a bit better than the year-to-date 1.6% decline, according to transportation consultants ASI-Transmatch Inc. The industrial economy that railroads serve is mired in recession, says Drew Robertson, the firm's president, but that recession "is not any worse, yet." The University of Michigan, in a sentiment survey released Friday, found the portion of consumers saying the government was doing a good job on economic policy shot up to 48% in early October from 33% in September. More respondents now plan to spend their tax rebates, and more rate the climate for buying a car or house more positively. ( WSJ 10-15: The University of Michigan's consumer-sentiment index rose to 83.4 in mid-October from 81.8 at the end of September. The latest number was close to the 83.6 reading in mid-September.) To be sure, consumer confidence and spending remain at risk from mounting layoffs and further terrorist attacks. But the massive policy response set in motion a month ago appears to have laid the foundation for a stronger economic outcome than many could have expected in the first traumatic days after the attack.
The S&P 500 produced a positive return in all five cases, on average nearly doubling with a five-year return of 94.8%, or 14.3% per year. That handily surpasses the typical annual return of 9% to 11% that shows up in long-term studies of the U.S. stock market through all years good and bad. Note, though, that the gains ranged from a potent 224% from March 1982 through March 1987, to a puny 11 percent from March 1970 through March 1975 (a 2.1% annual rate, much less than you could have earned in money-market securities over the same span). How Fund Categories Fared WSJ 10-8-2001
But is it realistic for investors to try and make investment decisions on imponderables, such as how the U.S. military may act? Deutsche Banc's Mr. Yardeni says mutual funds and big institutional investors, which are paid to be fully invested, are being forced to put such considerations on the back burner. "How do you manage your portfolio around the idea that there may be a germ attack?" he asks. "There is no way to predict what happens on the geopolitical side," he says. Already, the interest in military data has become amazingly detailed: Some hedge funds, for instance, are placing bets on what the target of possible future terrorist attacks could be. As a result, some are short-selling crude-oil futures and buying heating oil or unleaded gas, on the assumption that terrorists could target U.S. oil refineries in a future attack. While betting on possible attacks may seem to be a morose investment strategy, it is one that history favors. Stocks have had a consistent reaction to past military shocks, sinking on the news. They dropped following the Iraqi invasion of Kuwait in 1990 and rose once the U.S. military intervention convinced people that victory was in sight. This time, clear signs of military success could be harder to come by. Few if any of the confrontations are expected to involve pitched battles or decisive outcomes. "If we were able to accomplish something against bin Laden, people might be a little fearful that there would be retaliation," says Robert Harrington, head of listed trading at brokerage firm UBS Warburg. "The reality," he says, "is that it is going to take a little bit of time. People will be watching political events in Afghanistan and against the terrorists."
The pre-Gulf War period also had a stunning financial meltdown that rivals the one that has recently taken place in technology stocks. The blowup then was in the junk-bond market and bank stocks. Ed Jamieson, chief investment officer of domestic equities at Franklin Templeton, says the damage in bank stocks was even more severe than that in today's technology stocks. "I don't think anyone is convinced that anything is as down as banks were [then]," he says. Leading up to the Gulf War, "there were times when we couldn't see the light at the end of the tunnel," Jamieson says. "It feels kind of similar now." Perhaps the biggest difference between the Gulf War period and today is that, during the Gulf War, the world was not caught in the midst of a global recession, says Andrew Clark, a research analyst at Lipper. During the Gulf War period, international investments, especially those in the Pacific Rim, were a safe haven. The same won't be true this time around, he says. International funds have been doing as badly or worse than domestic funds leading up to the terrorist strikes, and there's no reason to think that will change, he says. Clark He also thinks equity income funds will do well, as they did in 1991, due to their high yields and defensive nature. Balanced funds, those that invest in both stocks and bonds, should hold up well in the next few months, says Clark. Clark studies flows into mutual funds and is finding that investors are getting defensive with their money by pulling out of pure stock funds and putting money into conservative money-market funds, bond funds and balanced funds. Above all, investors should remain mindful of the old saying that, while history may not repeat itself, it often rhymes.
Nine of the 10 funds have lost at least two-thirds of their value since 1999, and the 10th is down almost 50%. Over the same period, the S&P 500 index fell 29%, while the Nasdaq lost 63% of its value. Of the 10 best funds of 1999, five appear on the lists of worst-performing diversified or specialized funds for the third quarter this year, and six are on the laggard lists for the last 12 months. Measured in the conventional way, four funds are still higher than when they were started, meaning that an investor who got in at the very beginning and hung on still has profits (Even arriving early at this party was not a good idea - unless you left early too.). But measured in the more meaningful way of dollars actually earned or lost for investors, all of the funds have been net losers. Because most investors got in late, they have substantial losses. Example: Nicholas-Applegate Global Technology began a little over three years ago. Reports from the fund to shareholders show that in its first 20 months of existence, through March 2000, it rose 1,185% and earned $156.2 million for its investors. In the next year, as a much larger fund, its 70% decline produced losses of $234.6 million. The fund has not yet reported on actual losses for the last six months, but monthly calculations based on reported asset levels and its 38% decline indicate a loss of $26 million. Over all, that would bring the lifetime loss of the fund to $104.6 million.
The problem is, Treasury yields are relatively low, so the insurer wouldn't be able to offer generous payouts to annuity buyers. By contrast, an insurer can be more generous with an immediate-fixed annuity, because it can fund its obligation by investing in higher-yielding corporate bonds.
Want to reduce that risk? Mark Warshawsky calculates that, if you put half your portfolio in an annuity and then kept the rest in the 40-40-20 mix, the failure rate would drop to 5.5%. But there is a cost to this strategy. While buying the annuity may lower risk, it also reduces the chance of leaving behind a substantial estate.
Consider the performance of funds buying large-cap growth stocks compared with a large index fund with a similar mandate. Vanguard Growth Index Fund, which tracks the Standard & Poor's 500/Barra Growth Index, fell 33% for the 12 months ended Wednesday, according to Morningstar. While giving up a third of their assets is a sharp loss, 79% of large-cap growth funds - the largest category of stock funds, with more than $400 billion in assets - fell even more. Vanguard Value Index Fund, based on the S&P 500/Barra Value Index, fell 15% during the past 12 months, and more than three-quarters of actively managed large-cap value funds fared better than the index, according to Morningstar. The results are similar since the Sept. 11 terrorist attacks. The average large value fund has shed 2.5%, with 54% beating the value index fund, according to Morningstar, while large growth funds have fallen 2.7%, with only 26% beating their index. Not surprisingly, investors have rushed to value funds. In August, a net $7 billion flowed into value-oriented funds, while a net $7.3 billion was yanked out of growth, according to Lipper. During some long-term periods, growth and value have performed similarly. Large value funds have returned an annualized 11.4% during the past 15 years, barely higher than the 11% gain for the average large growth fund, Lipper says. Value funds beat growth funds by 4.6 percentage points a year during the past three years, and by 30.7 percentage points during the past year. Related: Scott Burns, Dallas Morning News 10-14 Over the last five-year time period, growth funds were far riskier than value funds. One measuring tool is standard deviation, a statistical measure of variability. If we check the amount of price fluctuation, the average growth fund had a standard deviation of 27.01%, and the average value fund had a standard deviation of 17.63%. This means that the price of growth funds was half again as volatile as value funds. While both are high, a growth fund investment would need to be diluted with 35% money market funds to have the same price risk as the average value fund. Is this just a freak event, another weirdness from the techno-hysterical 1990's? I don't think so. In addition to beating growth over the last five years, value has beaten growth over the last 10- and 15-year investing periods. While the advantage becomes slender over the 15-year period, value funds have been about two-thirds as risky over longer periods as growth funds.
By one measure, most investor profits in the past decade have been wiped out. That is because so much of investors' money actually was invested in the market shortly before its peak last year. And the disappearance of those profits now raises disturbing questions about how investors will react when they realize how little they are now ahead. "If you're playing with the house's money, you tend to be a little more reckless with the money, but when you cross that line to zero and you're playing with your own cash, everything changes," says James Bianco, president of Bianco Research LLC, an investment-research firm. "That's why the public has been so calm and so cool, because all they've been losing is unrealized profit. Now we're getting dangerously close to the zero number." But "if the market stays down here, then I think you're going to start to see attitudes change, and you might see more consistent outflows from mutual funds," he says. In December 1999, investors had $753 billion in unrealized profits in their stock funds, according to Mr. Bianco. This past July, the profit figure had fallen to $542 billion. At the end of August, it was $452 billion, and today it stands at approximately $199 billion. For the first time in a decade, investors would have been better off in bonds, with a profit of $202 billion, Mr. Bianco says.
Only 37% of actively managed diversified stock funds managed to beat the S&P in the quarter, according to Morningstar. So far this year, 45% of diversified stock fund managers have beat the benchmark index. The average domestic taxable bond fund gained 1.9%, with the best performance coming from low-risk U.S. Treasury bond funds, which gained 5 percent, and the worst from high-risk junk bond funds, which lost 4.9%. Related: Dolores Kong, Boston Globe 9-30 some taxable bond funds averaged a 3% return, and gold-oriented funds just over 1%, while bearish funds averaged 45%, according to the Lipper. (AP 9-30: Science/technology funds had their worst-ever quarter, with a negative return of 40.3%.) 'Value funds, down in August, actually attracted about $7 billion in new money,' said Avi Nachmany, director of research for Strategic Insight. Value funds invest in stocks that are relatively low-priced, based on such factors as earnings. 'Bond funds continue to sell,' with cash inflows in August totaling $14 billion in both taxable and tax-free funds, Nachmany said. 'That's the highest number in many years.' The previous high monthly net redemption for this year, in March, was about 0.5%. In October 1987, when the stock market crashed, the net redemption for the month was about 4.5%, according to Nachmany. Related: Aaron Lucchetti, WSJ 10-1 Investors pulled out about $20 billion from stock funds IN Q3, more than any other quarter on record, according to preliminary estimates reported by Banc of America Securities. (WSJ 10-8: During Q3, investors poured a net $33.3 billion into bond funds, according to AMG Data Services, while simultaneously removing a net $20.59 billion from stock funds. In the first nine months, the net amount of cash flowing into bond funds has totaled $78.2 billion.) Measured on the basis of a percentage of assets, however, the estimated withdrawals from stock funds were lower than in previous periods of market strain. While that single-month figure would fall well short of even March's withdrawal of a net $20.6 billion from stock funds, it would follow additional redemptions from stock portfolios in August and July to produce the worst quarter on record for stock-fund sales. With $3.4 trillion invested in mutual funds, the estimated investor defections in Q3 represented only about 6/10ths of 1% of the industry's assets. By comparison, investors took about 3.1% of their assets out of stock funds in October 1987 (Strategic Insight's figure was 'net redemptions' - which MAY account for the difference.), when the Dow posted its worst one-day drop on record. Carl Wittnebert, director of research for fund-tracker Trim Tabs, says the investor defections often signal that the market is getting toward the end of its descent. "People sell after declines and buy after rallies." Because figures available now are based on surveys of only a portion of the fund industry, estimates for the September fund-flow number vary widely. Other fund trackers like Financial Research, Strategic Insight and Lipper will release their September estimates in about three weeks, while the fund industry's trade group, the ICI, will release its final tally based on reports from most of the fund industry in late October. Related: Josh Friedman, LA Times 10-3 So far in this year's market plunge, one out of four stock funds has lost at least 30% of its value, according to Morningstar. If your tech fund is down 30% in 2001, you might want to send the manager a thank-you note, because the average tech fund has fallen nearly 55%. Related: LA Times 10-4 The estimated number of U.S. households owning stock, bond or money market funds grew to 54.8 million, or 52% of total households, this year. That's up from 51.7 million households, or 49%, last year, said ICI. The number of individuals owning funds rose to 93.3 million from 89.7 million in 2000. As a result, one out of three people in the U.S. now owns mutual funds. One-third of U.S. households held mutual funds in employer-sponsored retirement plans as of May. A larger share of households, 38%, owned funds outside employer retirement plans. As of May, 35% of households with incomes of less than $50,000 owned mutual funds, while 74% of those with incomes of more than $50,000 owned funds. The report is based on a survey of 3,019 randomly selected households. Related: Bond Funds - Chet Currier, Bloomberg 9-28 In the first eight months of this year, says Lipper, U.S. bond funds attracted a net $53.7 billion from investors -- compared with a $51.8 billion flow into stock funds. If this keeps up, 2001 could see the strongest bond fund flows in 15 years. What's more, a check of Investment Company Institute data shows, it would be the first year since 1991 that people put more money into bond funds than stock funds. If I were a bull on bonds these numbers would give me pause. Fund investors, while demonstrably adept at many aspects of financial decision-making, are complete clods when it comes to timing the bond market. Consider two recent years of more than lukewarm interest in bond funds -- 1993, when the ICI reported net inflows of $70.6 billion, and 1998, when the figure was $74.6 billion. Each time, Morningstar's index of general bond-fund performance dropped the following year: down 2.8% in 1994, down 0.30% in 1999. Related: Tyler Lifton, WSJ 10-8 Municipal bonds have reaped solid gains in recent years because "there's been a huge demand for them and not a whole lot of supply," said Andrew Clark, a fixed-income research analyst at Lipper. With the economy struggling, however, state and city tax receipts are likely to fall, prompting a need for municipal issuers, whose debt tends to carry high credit ratings, to borrow more. That could alter the supply-and-demand equation, potentially hurting returns among muni-bond funds. For the quarter, high-yield bond funds lost 4.97%, dropping their return for the first nine months to negative 3.43%. But those price reductions may create profit opportunities in the near future, many believe. "There will probably be an opportunity in Q4, or Q1-02, to pick up some good value in high-yield funds," said Marie Chandoha, co-head of fixed income for Montgomery Asset Management. But look for signs that the economy has turned the corner and that stocks have stabilized before moving into the high-yield sector, she and others advised.
Tax cuts won't get airlines to order more planes or hotels to rehire workers; a resumption of travel would. In other words, stimulating spending and making Americans feel secure would be more effective than reducing corporate-tax rates as a way to boost economic growth. But how? One option is another tax rebate. While the $40 billion of rebate checks sent out since July haven't turned around the economy, they appear to have kept retail sales from shrinking. And the rebate's effectiveness may have been damped by the exclusion of millions of lower-income households that pay little or no income tax. The risk with both permanent new spending and permanent new tax cuts is that not just this year's budget surplus but those of future years start to melt away. That prospect is one reason long-term interest rates on bonds have remained stubbornly high since the attack, even though the Fed has slashed short-term interest rates a half-percentage point and is expected to do so again Tuesday. Eight years ago, President Clinton tried, and failed, to get a fiscal-stimulus package through Congress. He then raised taxes and curbed spending, which helped push down market interest rates. The Fed helped by keeping its key rate targets low. And the economy boomed. It's worth remembering that sometimes the most effective fiscal stimulus is none at all. Related: Donald Ratajczak, Atlanta Journal-Constitution 9-30 Some have proposed a temporary reduction in the capital gains tax "to encourage investors to buy stocks." In fact, the proposal does just the opposite. By lowering the cost of cashing in on accumulated capital gains, the tax cut encourages selling. This would be accentuated if investors believed the opportunities for lower taxes were only temporary. Congress also is considering a tax cut for businesses. Perhaps those burdens are too high, causing American goods to be less competitive than goods produced abroad because of the tax costs. That is an issue for another time. However, businesses that do not have taxable income, and many now are in that camp, will probably be harmed by the higher interest rates required as government replaces that lost tax revenue with government bonds. Just the Facts Cash is cushion Microsoft has $46 billion in cash and investments worth over $8 a share, and a stock price of around $55. Apple, whose shares recently traded at $16, has about $11 a share in cash. Yahoo shares have found support around its current price of $11, in part because it has $3 a share in cash and another $1 a share from a stake in Yahoo Japan. (Andrew Bary, Barron's 10-14) Long rates - part two "I think some people are overestimating how much interest rates are going to rise on the long end," said Mario DeRose, a bond strategist at Edward Jones. "Longer-term rates have not fallen like short-term rates, so they are not going to rise as much. I think when the economy starts to turn around, short-term rates will rise the most, and you won't see much activity on the longer-term rates." The 30-year U.S. Treasury bond was yielding 5.5% at the beginning of this year and currently yields 5.4% - not much of a change. (Bill Deener, DMN 10-14) Short stats Recent data show that short interest hit record-breaking levels last month on the NYSE and the Nasdaq. On the Big Board, the number of short positions not covered as of Sept. 10 rose 1.3% from the previous month to a record 5.98 billion shares. It was the 7th consecutive monthly high for NYSE short interest and amounted to 1.8% of all shares listed on the exchange, compared with 1.4% a year ago. Among Nasdaq stocks, short interest as of Sept. 10 reached 4.17 billion shares --up 2.6% from a month earlier to a fourth-straight record high. Some analysts note that short interest is actually below historical averages (and at their lowest point in decades) when measured against trading volume. Many financial Web sites provide short-interest statistics, including Yahoo Finance (www.finance.yahoo.com) and WSJ, and MSN/CNBC (www.moneycentral.msn.com). Historical data about short interest is also posted at Nasdaq at (www.marketdata.nasdaq.com.) (Peter Edmonston, WSJ 10-11) Government as Risk Manager Insurance covers quantifiable risk, economist Frank Knight taught 80 years ago, not uncertainty, which cannot be measured. The greater the risk, the higher the premium. Unable to measure the risk of terrorism, the insurance industry argues, it cannot insure it. Today - by practice if not by explicit policy - the federal government assumes the risk of major natural disasters. It wasn't always so. When the Mississippi River flooded in 1927, the American Red Cross spent more than twice as much as the federal government - and between them they covered less than $1 of every $10 of damage. In 1955, the government covered just 6% of the damage from a big hurricane and flood. In 1993, the government covered more than 50% of the damage done by the flooding Mississippi, a hundred times more than the Red Cross. (David Wessel, WSJ 10-11) Fuel economy data show what zero effort will accomplish Fewer than 6% of the 2002-model cars and trucks arriving in U.S. showrooms get more than 30 miles per gallon, according to the EPA. Just 48 of the 865 models get 30 mpg or better in combined city and highway driving. More than a third (330 models) get less than 20 mpg. The majority (487 models) get between 20 and 30 mpg. Overall, new passenger vehicles average about 21 mpg. For the 491 passenger cars, average fuel economy is 23.9 mpg, a slight decrease from 24.2 mpg in 2001 models. That compares with 17.9 mpg for 374 models or variations of sport-utility vehicles, vans and pickup trucks, a modest increase from 17.3 in 2001. (Fuel Economy Guide) (Wash Post 10-10) Demand exists for efficient SUV's Ford is scrambling to keep up with demand for its compact Ford Escape SUV, even as it cuts production of its SUV behemoths. The Escape is one of a new breed of SUVs designed using lighter-weight passenger-car components and architecture. The Escape averages 22 mpg in the city and 25 mpg on the open road. The ['behemoth'] Ford Explorer gets a city/highway mileage score of 15 and 20 mpg. The conventional wisdom been that with gas cheaper than bottled water, fuel economy doesn't sell. But smart car companies are starting to realize that "If we build it, will they come". (Joseph White, WSJ 10-15) REITs REITs account for barely 1% of the U.S. stock market. But because these high-yielding stocks often hold up well when other shares are suffering, many advisers recommend plunking 3% to 5% of a globally diversified stock portfolio into REITs. "REITs are still quite cheap compared to the rest of the market," says Ken Gregory, founder of the No-Load Fund Analyst, a newsletter in Orinda, Calif. "We think double-digit returns are a reasonable possibility. You have yields of 7.5%. REITs are probably at a 10% discount to their estimated net asset value. And real-estate fundamentals are good. Supply and demand are in pretty good balance." (Jonathan Clements, WSJ 10-9) When wages were flexible During the severe recession of 1920-21, something happened that could not occur today: Wage rates fell. And no, I don't mean real, inflation-adjusted wages, but the actual rate in nominal dollars. In fact, by today's lights the plunge was so steep as to almost defy belief. By Q4-21, the average money wage was more than 19% lower than in Q3-20. That kind of labor market flexibility played a key role in pushing the jobless rate down from 11.7% in 1921 to 6.7% in '22 to an incredibly low 2.4% by '23. Chalk it up to the simple interaction of supply and demand. When labor supply is in surplus - when unemployment is high - labor's price falls, which helps the market clear. (Gene Epstein, Barrons 10-8) Earnings forecasts under review If people say this stock market is cheap relative to earnings, don't believe them. First Call can't say with any certainty what the consensus of stock analysts is for operating earnings of companies in the S&P 500 in Q3 or in the coming quarters. S&P has been running a disclaimer recently on its earnings-outlook Web page, warning that many company earnings forecasts "are still under review." Without corporate guidance and reliable analyst estimates for individual companies, First Call's much-followed aggregate earnings figure for the S&P 500 lacks any particular meaning. Some warnings so far have been unusually vague, such as Ford's announcement that it wouldn't make its previous earnings target, but its failure to provide new forecasts. And there's concern that a variety of companies will attribute unrelated costs and expenses to the disaster. (Steve Liesman, WSJ 10-3) Cheap Tech stocks may not bounce back As Frederick Lewis Allen said in his book ``Only Yesterday'' discussing the aftermath of the Great Crash of 1929: `Doubtless prosperity was due ultimately to return. But it could not be the same sort of prosperity as in the 1920s; inevitably it would rest on different bases, favor different industries, and arouse different forms of enthusiasm and hysteria.' Same goes for now. (Chet Currier, Bloomberg 10-2) Counter-cyclical hiring Companies that hired during downturns in their industries saw better stock-market performance two years after recovery, according to a recent study. Many such companies hire for hard-to-find skills while laying off in other areas, says Charles Greer, associate dean for graduate programs at TCU and a study co-author. The study suggests down times also help companies hire for affirmative-action purposes, injecting new perspectives while limiting future discrimination litigation. The study can't prove a direct causal relationship. (WSJ 10-2) Long Rates Have you ever stopped to think why every central bank in the world targets short rates if it's long rates that move the economy? `If the long rate is the rate that matters, why not go into the market and set that rate directly?' asks Bob Laurent, professor of economics and finance at the Illinois Institute of Technology's Stuart School of Business. `The Fed can easily buy 30-year bonds.' What's more, there are ample instances to upend the theory that long rates move the economy, a view shared by 99.9% of the economics community. According to that logic, `the fall in 10- and 30-year rates last year should have been stimulative to the economy,' says Paul Kasriel, director of economic research at the Northern Trust. Instead, the economy went straight down the tubes with long yields. Long-term rates are the most misunderstood phenomenon in finance. If it's long-term rates that move the economy, Japan should have been booming this past decade instead of being mired in a slump. (Caroline Baum, Bloomberg 10-1) Profit estimates shrinking According to First Call's Mr. Hill, on July 1, the S&P 500 earnings were expected to show a 6.2% decline from a year earlier for Q3-01, roughly paralleling the drop for Q2. Even before the attacks, the outlook had worsened to a projected profit declines of 14.7% from a year earlier. Since then, the projections have lurched down to a 19% drop. By the time the actual results are in, earnings declines should reach 22% for the quarter, Mr. Hill says. Even though prices have skidded, earnings multiples haven't. The price-to-earnings multiple of the Standard & Poor's 500-stock index fell to just over 26 during the week ended Sept. 21, down only marginally from where it stood last year at this time. (WSJ 10-1) Bullish news Some solid evidence has emerged that the stock market plunge may have gone too far. The data supporting that optimistic assessment is from the Value Line Investment Survey. Known by its devotees as the VLMAP, for Value Line's median appreciation potential, it is the median percentage by which Value Line's analysts project that the 1,700 stocks they follow will grow over the next 3-5 years. Historically low levels indicate that the market has gotten ahead of itself. VLMAP flashes an all-clear signal when it rises to historically high levels. That is exactly what it has done since the Sept. 11th. The last time the Value Line measure was as high as it is now was in late January 1991. True to form, the stock market rose smartly over the subsequent four years. (Mark Hulbert, NY Times 9-30) Quick Stats Number of times Lee Greenwood's song "God Bless the USA" was played nationwide on Sept 10th: 6. Number of times played on Sept 11th: 2,100. (Wacky Facts! 10-15) The Recording Industry Association of America (RIAA) tried to attach amendments to the antiterrorism act that would allow it to hack people's computers with impunity in order to delete illegally copied files. Privacy and consumer advocates were alarmed over the original language of the amendment, language which the RIAA has now backed away from. (Wired News, 9-15) The federal government over the years has shifted to state and local governments the responsibility for maintaining roads, bridges, sewers, airports and the like. By 1999, spending by state and local governments had reached an amount equal to 62% of all federal outlays, up from 54% in 1990 and 42% in 1960, according to James Hines, a University of Michigan economist. Now, with tax revenue falling in a weak economy, states and cities are cutting back. Mr. Hines and others would have Washington step in with federal subsidies to sustain the projects. (Louis Uchitelle, NY Times 10-14) Britain's mandate to govern Palestine, granted by the League of Nations, took force officially in 1922 - on Sept. 11, according to Jim Phillips, a Mideast analyst for the Heritage Foundation. Osama bin Laden's grievance [with the West] in no way justifies the bombing. But we ought not close our ears to its essence, which is that the West has placed its business interests over popular sovereignty in the Middle East for 80 years. (David Warsh, Boston Globe 10-14) According to Standard & Poor's, the companies in the S&P 500 last year paid out just 33% of reported earnings as dividends, compared with an average 57% for the past 75 years. Currently, the stocks in the S&P 500 are yielding around 1.5%. Historically, stock dividend yields have averaged over 4%. (Jonathan Clements, WSJ 10-14) There are many things that can make your portfolio go up or down, but how often you look at your investments is not one of them. (Charles Jaffe, Boston Globe 10-10) State sales-tax revenue growth continued to slow in this year's second quarter from a year earlier. Over the past several quarters, growth has slowed in 39 of 45 states with a general sales tax, according to Nicholas Jenny and Don Boyd of the fiscal studies program of the Nelson Rockefeller Institute of Government. (WSJ 10-10) The public can find out whether a particular organization is qualified to receive tax-deductible contributions by calling the IRS Exempt Organizations' toll-free phone number for customer assistance, 1-877-829-5500, or by checking www.irs.gov. (WSJ 10-10) As recently as 1997, 82 public companies with total assets of $17.2 billion filed for Chapter 11 protection. Last year, 176 companies filed for bankruptcy, with pre-petition assets hitting a record $94 billion, surpassing the previous record posted in the 1990-1991 economic recession. It is about to get worse. According to New Generation Research, companies with assets of $163 billion filed for bankruptcy-court protection through September. The figure may exceed $200 billion by year end. (Bernard Wysocki, WSJ 10-8) Margin debt (borrowed against U.S. stockholdings) is down 42% since the stock-market highs early last year. (Chet Currier, Bloomberg 10-5) In riskier debt investments, the maxim `no guts, no glory' always applies. How can you flee a fund such as the Morgan Stanley High Yield Securities Fund in a bad year for junk bonds like 1990, when it fell 36%, if you expect to be around for a good year like 1991, when it gained 67%? (Chet Currier, Bloomberg 10-5) Since the horrific events of Sept. 11, a lot of Americans are reassessing their priorities. Some are huddling close with family and friends. Others are seeking solace at church. But with the country on the verge of war and fear, many are wondering what's the point of being good anymore. The abstemious are drinking. Homebodies are dancing all night. Calorie counters are hitting the Doritos. Across the country, grocery-store managers report that diet foods aren't selling well. Bookstore chains are seeing slower sales of diet manuals. (B Barnes and A Petersen, WSJ 10-5) The lasting impact of Sept. 11 is likely to be greatest on Americans in their late teens and early 20s, the people who are still young enough to have their values being formed. For them, Sept. 11 will likely prove as important in shaping attitudes and behavior as the traumatic Kennedy assassination and the divisive Vietnam War were for an earlier generation. And it is truly impossible to predict just how that will show itself in the decades ahead. (David Wessel, WSJ 10-4) The IRS says it cost 39 cents to collect each $100 of tax revenue in the year ended Sept. 30, 2000. That's the lowest level since 1954, a spokesman says. (WSJ 10-3) The U.S. Supreme Court will soon decide if the FCC has the right to regulate the fees utility companies charge cellular carriers and ISPs to hang their network wires on utility poles. The case is set to interpret provisions of the 1996 Telecommunications Act. The act failed to clarify the phone companies' position on the Internet, however. Last year, a federal appeals court ruled that the FCC does not have the right to regulate rates. Before that decision, the cable sector paid $5 dollars per pole, but since then they have been charged as much as $38 per pole, which is passed on to consumers in higher rates. (AP via Edupage 10-3) One difficultiy in forecasting recessions is that they happen so infrequently. There have been nine since World War II and only two over the past 20 years. Taking it in months, and now confining our look back to the past six recessions since 1960, the economy was contracting for a total of 67 months, or a little more than 5.5 years, over this 41-year period. (Gene Epstein, Barrons 10-1) Russia's oil output has surged this year by about 500,000 barrels a day, while OPEC has slashed its production by about 3.5 million barrels a day. Next year, output from Russia, the world's second-biggest petroleum producer, is expected to rise an additional 350,000 barrels to more than seven million barrels a day, bringing its output near that of world leader Saudi Arabia. (WSJ 10-1) In search of better yields on their savings, some investors may wind up in an unlikely place: the stock market. The dividend on shares of banking giant J.P. Morgan Chase now provides an annualized yield of 4%; energy firm Chevron's dividend yield is 3.1%; Philip Morris yield is 4.8%; PPG yield is 3.7%; Ford Motor's yield is a whopping 6.9%, far above what most bank CDs pay. (Tom Petruno, LA Times 9-30) Industries directly linked to airline travel - hotels, rental cars, aircraft manufacturing, theme parks, airport restaurants - have also suffered. Still, the airlines and their satellites represent less than 4 percent of the nation's $10 trillion economy, according to the Commerce Department's Bureau of Economic Analysis - hardly enough to sink the economy alone. (Louis Uchitelle, NY Times 9-30) The question is how long the fearfulness and shock will last. Andrew Kohut, director of the Pew Research Center, found in a poll of 1,000 people that 70% said they were depressed, 50% said they could not focus on their jobs and 33% said they were having trouble sleeping. "We have to recognize that this is a mood in America unlike any we have ever seen before," he said. "It could last, or people could snap out of it." (Louis Uchitelle, NY Times 9-30) As in many other industries, the savings from strategies that are meant to minimize the expense of keeping inventories have been diluted. Toyota (news/quote), for example, had maintained enough Canadian parts for only one day's production at its three United States assembly plants. Because of unpredictable border delays, that has been doubled to two days' inventory. (Louis Uchitelle, NY Times 9-30) The balance sheet of U.S. corporations overall is pretty stretched. Corporate debt rose 61.3% over the past five years, according to the Federal Reserve. Relative to the market value of stocks, net debt stood at 42.5%, a level not seen since the 1960s, according to Goldman Sachs. (Brown and Zuckerman, WSJ 9-27) Quick Tips To know when a specific Web page was last updated (with IE), navigate to the page and type into the Address Bar javascript:alert(document.lastModified) and press Enter. A dialog box will open display the date and time of the last update. (EMAZING 10-12) Although you can download anti-spam software to help you fight off junk email, you can eliminate quite a bit of it just by using Outlook Express. To see how this works, run Outlook Express and click File|Folder|New. In the Create Folder dialog box, click Local Folders, name your new folder "Spam," and click OK. Next, choose Tools|Message Rules|Mail. Click New and then select the check box labeled "Where the To line contains people." Now, for the sake of simplicity, let's assume that you have only one email address. Click "contains people" under "Rule Description." Enter your email address and click Add, and then click OK. Select the check box labeled "Move it to the specified folder," click "Specified," and select the new folder named Spam. Then click OK. Back in Message Rules, click OK. This works because most spam is not sent to an email address. So, any email that isn't sent to your address will get moved to the Spam folder. Don't delete the spam without looking since some commercial transactions also result in email that doesn't contain the recipient's address. (EMAZING 10-1) Some Web sites are notorious for pop-ups ads. We know of two freeware pop-up killers that do an excellent job. One is POW! from AnalogX www.analogx.com, and the other is PopUp Killer from xFX JumpStart software.xfx.net. Both these apps sit in the system tray, monitoring your browsing and closing pop-ups as soon as they open. (EMAZING 10-7) Home Page Previous Factoid Top Sites |
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