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Last year, the companies in the S&P 500 paid out just 33% of reported earnings as dividends, compared with an average 57% for the past 75 years, according to Standard & Poor's. If management paid out earnings at more-typical levels, stocks today would yield around 2.5%, rather than the current 1.5%. Investors are trusting management to turn retained earnings into faster earnings-per-share growth. To deliver that growth, management can plow back profits into the company, make acquisitions or buy back shares. But none of these strategies is a slam-dunk. Historically, companies have been net issuers of shares, so that total earnings have grown faster than earnings per share. But thanks to share buybacks, that trend was reversed in the 1990s, with earnings per share growing about one percentage point a year faster than overall earnings, calculates William Bernstein, author of "The Intelligent Asset Allocator." But he argues that such buybacks didn't make sense in the 1990s and they don't make sense now. "When P/Es are so high, the most rational thing for a corporate treasurer to do is to issue shares, not repurchase them," Mr. Bernstein says. "Corporate treasurers, in the aggregate, are not stupid. I think we'll revert back to net share issuance." Still, without the buybacks of the 1990s, current shareholders would have seen their ownership stake diluted, so that each share had a shrinking claim on the company's assets and earnings. How come? Blame it on employee stock options. If management hadn't bought back stock, the number of shares outstanding would have ballooned, as those options were exercised. For instance, over the five years through 1998, major companies bought back 2% of their stock each year, according to a paper by J. Nellie Liang and Steven Sharpe, researchers at the Federal Reserve Board. But half the buyback was offset by exercised options, so the net share reduction was only 1% annually. According to Chicago's Ibbotson Associates, the S&P 500's earnings growth since 1950 has puttered along at just 2% a year, after inflation, less than the 3.5% growth in GDP. Why haven't profits grown faster? A large part of GDP growth comes from the creation of new businesses and new industries. These companies only later issue shares to the public. Robert Arnott, managing partner of First Quadrant and Clifford Asness, managing principal of New York's AQR Capital Management looked at dividend payouts for the period 1950-91 and then analyzed subsequent 10-year earnings growth. Their findings seem counterintuitive. When dividend payouts were highest, earnings growth over the next 10 years was strongest. But when payouts were modest, as they are now, subsequent 10-year earnings growth was weakest. In fact, if you look at the 25% of periods when dividend payouts were lowest, you find that earnings, on average, fell 0.7% a year over the next 10 years, after making allowances for inflation. "My favorite theory is that the cash burns a hole in management's pocket and they over-invest in a series of less-attractive projects," Mr. Asness says. "The poster child for this is the massive investment in telecommunications equipment in the late 1990s. Meanwhile, when they are paying out a lot as dividends, companies are forced to run lean and think very hard about every project." Earnings Update WSJ 10-29 Among the S&P500 companies, 383, or 76%, have reported earnings for the latest quarter. Results are running 1% higher than analysts' expectations.
Jeff Knight, senior asset allocation strategist at Putnam Investments, who identified stocks as compellingly underpriced in mid-September, believes the days of value managers throwing a shutout against growth types are likely passed. In his investigations of prior periods that approximate the current economic and financial setup, he's found that in times when corporate earnings are scarce, investors pay up for that minority of companies that are achieving some growth. Further, Knight notes that, historically, in the six months surrounding a bear market bottom, large growth stocks far outperform all other market sectors. This suggests that the skills of growth investors will again become valuable, and that simply combing for cheap stocks won't be the only game in town anymore. Knight avers that growth managers might soon begin beating their benchmarks again soon, and he's recommending that Putnam's value managers become more mindful of growth dynamics. Hugh Whelan of Aeltus Investment Management went back to examine the patterns of earnings-estimate revisions by analysts going back to 1977. The current slashing of profit expectations has been far more dramatic than any prior recessionary period (the data for the 1973-74 bear market weren't available). Looking at how the market stood six months after analysts sharply lowered their sights, Whelan finds stocks were substantially higher - sometimes 30% higher - a half year hence. Value-Line's Bullish News Ingrid Eisenstadter, Barrons 10-28 Value Line's buy signals are the highest they have been in more than three decades. But that piece of tantalizing news from the New York-based stock picker's asset-allocation monitor comes with a caveat: "Our Asset-Allocation Model is very bullish," wrote Value Line in a notice to subscribers on October 5. "However, there are offsetting factors, including weak economies in much of the world, a decline in the high-tech sector both here and abroad, and a drop in consumer confidence ¹ It is difficult to say when confidence will be restored." Still, the company's buy signals for stocks are now higher than at any time since 1989, when it started publishing asset-allocation recommendations. Indeed, Value Line's reconstruction of the model going back to 1968 confirms that buy indications have never been higher. Value Line's allocation calculations are based on 10 factors - among them, interest rates, dividend yields, market highs and lows relative to current prices - that when taken together aim to predict where the market will be in six months. The asset-allocation formula historically has accounted for 52% of market fluctuation six months ahead, says Samuel Eisenstadt, Value Line's chairman of research. The other 48% can be accounted for by calling a top or bottom prematurely, or by anticipating a greater market increase or decline than what actually occurred. At present, the company is actually recommending up to 90% investment in stocks, compared with a historical average of 68%. This week, Value Line is projecting a 36% increase in the S&P 500 over the next six months. Thus, by Value Line's lights, here is a theoretical buying opportunity that is rare.
The slowdown may not produce the significant numbers of 1997-98, but the recession could prove more sustained and harder to resolve. Today's problems are different. Back then, Asia experienced a crisis of confidence sparked by investor worries about trade deficits and high debt. Policy makers had the tools to rebuild sentiment and climb out of the crisis - actions such as restructuring foreign debt, financially supporting banking systems and adhering to IMF scripture. Backing up this action was the continued boom of the U.S. economy that sucked up Asian exports. The result was a "V"-shaped recovery. This time around, economists and businessmen in Asia are expecting a slower recovery. Fan Jiang, an executive director at Goldman, Sachs in Hong Kong, says this downturn "won't be as sharp but [will be] certainly longer" than in 1997-98. Today, a slumping U.S. economy is Asia's main problem. Countries with a high dependence on electronics exports, such as Singapore and Taiwan, are the worst off. Compounding the situation for parts of Asia, especially Southeast Asia, is the increasing competitiveness of China, which is the country many economists believe will be the least affected by the U.S. slowdown. Foreign investment that once went to countries like Indonesia is moving more and more to China. The causes of the downturn leave policy makers with far fewer options to engineer a rebound. "Whatever we do, we cannot make up for the loss of export demand," said Lee Kuan Yew, Singapore's senior minister. Singapore reported preliminary data suggesting a 5.6% contraction in Q3 - the worst quarterly performance since 1965. The Sept. 11 terrorist attacks have made the storm more severe, and not only because they will likely delay that much-needed U.S. recovery. An expected drop-off in foreign investment will also strain Asian economies. Indonesia, for example, was counting on distressed-asset sales and privatization efforts to bring in foreign currency, plug holes in a shaky state budget and rebuild confidence among foreign investors. Now those plans are at serious risk. Bankers and economists fret that Asia, blaming the U.S. for its woes, will stall on reform. Asia's problems, they contend, lie still deeper, and a recovery in the U.S. won't automatically solve them. Japan and Korea are being punished for lax reform efforts, Taiwan and Thailand need to fix their banks, and Indonesia must shore up its legal system. As in 1997, the downturn may force a rethinking of the support for some of Asia's biggest companies. Example: South Korea's Hynix Semiconductor. The memory-chip maker, one of the world's largest, has posted net losses totaling $5.3 billion during the past seven quarters. Its creditors, wedded to Korea's ideal of becoming a technology powerhouse, nonetheless have maintained support by rolling over debt and freezing interest payments. Now Hynix says it needs another one trillion won (a little less than $1 billion) in new loans. But the creditors' past aid was based on the belief that a recovery of the world chip market was imminent. After the Sept. 11 attacks, that is looking less likely, and the Korean banking system is facing greater risk by continuing to pump money into Hynix.
Fund companies still are attracting new money from investors, enabling them to hold up remarkably. In fact, after adding a net $310 billion to their stock-fund holdings last year even as the major stock indexes got hammered, investors have put a net $43 billion into stock funds this year through August. One indicator of how comparatively well the mutual-fund industry has fared is that only three major U.S. fund companies have so far announced layoffs of more than 100 people in the current slowdown, while brokerage firms have slashed many thousands of jobs. T. Rowe Price has been one of the worst-hit of the big mutual-fund companies, with overall assets under management falling 16% because of market declines to about $140 billion, despite a net inflow of $1.5 billion. Even so, the company so far has fired only 55 of its 3,828 employees. Bolstered by continuing automatic deposits going into tax-favored accounts, money is still flowing into most fund-company coffers. Largely because of a net $28 billion in new money from investors this year, overall assets of Fidelity Investments, the largest fund company, have declined only about 6% since the beginning of the year, significantly less than the 19% decline in the S&P 500. Assets at No. 2 Vanguard have dropped about 2% in the period (AJC 10-21: At the beginning of September, Vanguard had $338 billion in all its stock funds. So far, less than half of 1%, about $1.7 billion, has moved out.), while American Funds, the third-largest fund group, has managed to avoid losing assets at all, thanks to conservative stock funds and large bond portfolios. The loyalty of investors gives fund-management companies a buffer not available in the brokerage and investment-banking worlds, where economic and market downturns quickly translate into business droughts. Earnings of large publicly traded fund companies have dropped about 20% from their peak, while large brokerage firms' earnings are down about 57%, according to data provided by Baseline. In addition, many of the largest fund companies are closely held, giving them flexibility to keep staffs large even if short-term earnings are sacrificed.
Market risk: This is the big one, also known as principal risk, and it's the chance that a downturn chews up your money. Purchasing power risk: Sometimes called ''inflation risk,'' this is the ''risk of avoiding risk,'' and it's at the opposite end of the spectrum from market risk. This is the possibility that you are too conservative and your money can't grow fast enough to keep pace with inflation. Interest-rate risk: This is a key factor in the current environment of declining rates, where you face potential income declines when a bond or CD matures and you need to reinvest the money. Goosing returns using higher-yielding, longer-term securities risks losing ground to inflation if the rate trend changes again. Shortfall risk: This is the possibility that you won't have enough money to make your goals. Get too aggressive and losses could decimate your savings. Get too conservative and your assets may not grow sufficiently to support you. Timing risk: The chance of stock mutual funds making money over the next 20 years is high; the prospects for the next 18 months are murky. If you need money at a certain time, this risk must be factored into your asset allocation. Liquidity risk: Another risk heightened by current tensions, it affects everything from junk bonds to foreign stocks. If world events were to alter the flow of money in credit markets or to close some foreign stock exchanges for an extended period, your holdings in those areas could be severely hurt. Opportunity risk: This is the greed factor. Unfortunately, opportunity risk works completely to the reverse of innate human psychology, as people see opportunity at the worst times (such as market peaks) and get stressed over buying in at good times (such as the market low on Sept. 21). Political risk: This is the prospect that government decisions will affect the value of your investments. Given the current environment, it is probably a factor in all forms of investing, whether you are looking at stocks or bonds. Societal risk: Call this ''world-event risk.'' It was evident when the first anthrax scares sent markets reeling briefly. Some businesses are more susceptible (airlines, for example), though virtually all types of investing have some concerns here. Even after all of those risks, some investments face currency risk, credit risk, and more. Every type of risk deserves some consideration as you build your holdings. Ultimately, by making sure that your portfolio addresses all types of risk - heavier on the ones you prefer and lighter on those that make you queasy - you ensure that no one type of risk can wipe you out. That's something that a ''less risky'' portfolio may not be able to achieve.
Take a look at one of the key categories: services excluding energy services. While core commodity prices have been dead-on- arrival for a while, rising less than 1% annually for five years, labor-intensive services have accelerated, reflecting tightness in the domestic labor market. The annual increase in core services accelerated from a low of 2.5% in September 1999 to 3.8% in August and September, the highest in six years. The near-term trend is showing some improvement, however. Core services rose an annualized 3.1% in the three months ended September compared with a 4.5% increase in Q2. Housing, which makes up 40% of the CPI, showed a rare decline last month. The 0.2% drop was the first fall since 1986 and the biggest since 1982. The largest component of the housing index, shelter, was unchanged last month, the first month without an increase in almost 19 years. Both rental components of shelter continued to accelerate, with owners' equivalent rent up 4.3% annualized in the third quarter and rent of primary residence up 4.5%. Instead, the index was held down by a drop in lodging away from home (a direct result of the Sept. 11 attack) and fuels and utilities. Don't be fooled by the near-term improvement in inflation, warned the Shadow Open Market Committee earlier this week. So what's in the shadows to make the Shadow Committee nervous? A no-nonsense surge in the monetary aggregates, that's what. The broad aggregate M2 has grown 10.4% in the 12 months ended September, the fastest pace since 1983, when both money growth and inflation were making a slow, arduous descent. In other words, inflation may be contained at the moment, but soaring money growth makes it unlikely to be contained in the future. Stephen Cecchetti, professor of economics at Ohio State University and former director of research at the New York Fed, said in his monthly inflation update that there was no sign that slow or probably negative growth had tempered inflation. `There continues to be a strong belief in a link between general economic slack and movements in overall inflation' despite the fact that the U.S. has experienced strong growth with low inflation and slow growth with high inflation, Cecchetti wrote. Inflation, Fed officials would have said, lags the business cycle. Monetary policy has to be forward-looking and, with the economy growing well below trend for more than a year, the Fed doesn't have to worry about the ghosts of inflation past. Who would disagree with that view of how policy should be conducted? That's exactly what concerns the Shadow.
Examples: (1) The Fed saved the government-bond market from seizing up by pumping more than $45 billion into the banking system; (2) Some securities firms strongly discouraged their analysts from making negative stock calls; and (3) Stock buy-backs. Some of the most important steps addressed mundane areas such as trade processing, sometimes thought of as the financial plumbing of Wall Street. The biggest test came right after the attacks. The markets were shut because of massive damage to communications systems. "The concern and worry ... was overwhelming," says Merrill Lynch Chairman David Komansky. Within hours, a flood of calls to the New York Fed and the SEC offered a chilling field report. Citigroup and J.P. Morgan Chase executives witnessed something they had never seen before: cash hoarding. A number of corporations were trying to draw down their credit lines at banks, while individuals were lining up at ATMs for cash. By 11:30 a.m., Citigroup and J.P. Morgan Chase knew they had a problem. The attacks had cut electronic ties between some banks that act as middlemen in the market for commercial paper - short-term loans used by corporations to meet funding needs. Now a number of companies, facing potential defaults on their commercial paper because they couldn't "roll it over," or reissue it, were anxiously ringing their bankers to draw down loans. Initially, J.P. Morgan Chase, the lead bank on a number of syndicated corporate loans, and other banks were having trouble providing their portion of these loans. Chase, for instance, didn't immediately fund its $100 million portion of an $860 million revolving credit facility that American Airlines drew down on the morning of Sept. 12. Some say J.P. Morgan Chase was unwilling to advance cash immediately to clients such as AMR, or to put up money for other banks on loans where it served as the lead agent. A J.P. Morgan Chase spokeswoman says the bank was willing but unable to do so because of disruptions to its lower Manhattan operations, which weren't damaged but had to be evacuated. She says the evacuation kept the bank from allowing corporate clients to draw funds from existing credit lines until the day after the terror attack. If Citigroup and Chase hadn't been willing to advance the money to their corporate clients, this could have triggered commercial-paper defaults. These, in turn, could have have sent markets into a tailspin and caused a crisis of confidence. A top concern was Bank of New York, a middleman that handles about 12% of funds transfers in the U.S. - $900 billion on a typical day - and processes up to $1 trillion a day in government-securities trades. With its offices damaged and those of the leading bond broker Cantor Fitzgerald destroyed, executives were nervous that a mundane back-office logjam could spiral out of control. Government officials and regulators quieted the executives' concerns. Treasury Undersecretary Peter Fisher told them the Fed "will be providing the banks with all the funding they need and the brokerage firms will have access to that." One banker broached a sensitive issue. Could the banks have some leeway regarding Rule 23-A, a Depression-era law that prevents banks from using customer deposits to fund their risky broker-dealer business? His concerns were assuaged. To the bankers, the message was resoundingly clear. The Fed was willing to suspend certain time-honored regulations to make sure financial institutions felt sufficiently protected. This was critically important: Big banks and securities firms borrow heavily to fund day-to-day activities, so a funding crisis could have been devastating. As Wall Street chiefs were sorting out these issues, Mr. Malis, the Legg Mason research chief, was phoning the firm's 33 analysts and laying out a new, though informal, policy. With so much uncertainty, the firm didn't want negative changes to stock recommendations until after the market reopened. Meanwhile, Salomon Smith Barney bond chiefs, operating out of makeshift offices in East Rutherford, N.J., were pondering a key decision: Should they close on a $1.25 billion underwriting for Delta Airlines. But Salomon bond chiefs felt that would be seen by investors as a big no-confidence vote and could send the corporate-bond market into a tailspin. On Thursday, Sept. 13, the bond markets reopened. To ease cash concerns among primary dealers in bonds - which include investment banks that aren't able to borrow directly from the Fed - the Fed on Thursday snapped up all the government securities offered by dealers, $70.2 billion worth. The next day it poured even more into the system, buying a record $81.25 billion of government securities. On Monday, Sept. 17, stocks were poised to resume trading after the longest halt since a "bank holiday" declared during the Depression. Legg Mason, knowing some analysts would want to downgrade certain stocks, offered a middle course: It said they could suspend their ratings on stocks. Several Wall Street firms, including UBS Warburg and Bear Stearns, tried to keep a lid on short sales, or bearish market bets. And some influential investors, including Art Samberg, co-manager of Pequot Capital Management, the nation's largest hedge fund, told troops not to make bearish bets on the market's opening. Before the market opened, Jay Goodgold, a Chicago sales manager for Goldman, phoned Henry Herrmann, chief investment officer at mutual-fund group Waddell & Reed. His message: Goldman was willing to take the other side of trades that the mutual-fund company wanted to make - that is, buy any stock the fund firm wanted to sell. Mr. Herrmann didn't do much trading that week. But some corporations did jump in - as buyers. In some cases they were taking advantage of regulators' newly relaxed stock-buyback rules. At the close on the first day of resumed trading, the busiest day in Big Board history, the Dow was off 684.81 points, or 7.13%. Some market pros were relieved. Still, the worst wasn't over. Two days later the market stumbled again, the Dow tumbling 400 points by early afternoon. At 1:39 p.m., John E. Roberts, a Merrill chemicals analyst, sent an e-mail to clients. He offered his views on three stocks he considered good "defensive" plays. As stocks hit their lows that day, Wednesday, Sept. 19, traders noticed a hopeful sign. Goldman, Merrill and Lehman were large buyers for their clients of S&P-500 and NDX (QQQ or Nasdaq 100) futures. That suggested some big investors believed that the market was due for an upturn. A bout of buying lifted the Dow Jones Industrials by more than 250 points in the last hour of trading that Wednesday, trimming the loss for the day to about 144 points. So the system had steadied, with a little help from its friends. Says Laszlo Birinyi, global trading strategist for Deutsche Bank: "The financial markets were held together perhaps more than anyone expected."
Population size is highly correlated with the level of industrial diversity that an MSA is able to foster. Economy.com measures industrial diversity in terms of how similar a regional economy's structure is to the nation as a whole, which is assumed to exhibit the most optimally diversified industrial mix. The index is measured using detailed employment data and is banded between 0 and 1, where a value of 1 means that a region's economy is structured exactly like the nation's, and 0 means that a region's economy is structured nothing like that of the U.S. Overall, MSAs with populations greater than 1 million exhibit an average industrial diversity of nearly 0.6. Medium-sized MSAs (between 500,000 and 1 million residents) average 0.41. Small MSAs (less than 500,000) weigh in with an average industrial diversity of 0.29. A key component in many small MSA economies is manufacturing employment. Of the nation's top 50 metro areas, ranked by manufacturing employment as a share of total employment, only 4 show populations greater than 1 million. Only 4 others have populations slightly greater than 500,000. It was manufacturing industries that led the nation's downturn beginning in August of 2000. As layoffs piled up, workers in those industries found little opportunity to switch jobs in the smaller metro areas due to a lack of industrial diversity. Greater industrial diversity in larger MSAs allowed the opportunity for laid-off manufacturing workers to shift their skills to industries that were faring better, mostly services.
Prices of corporate bonds, including junk bonds, still are down sharply from their preattack levels, amid concern that a long-term economic downturn is under way. Meanwhile, credit-rating agencies continue to lower ratings on an assortment of companies, even as investors shy away from bond issues that aren't in safe industries or from companies with stellar ratings. The result: A money crunch for many companies, as bond investors make it tough for companies to raise money with bond issues. "There's been a flight from risk in the bond market, and that's certainly not what's happening in the stock market," says William Gross, chief investment officer at Pacific Investment Management Co., the biggest bond-investment firm. During the past several years, the bond market anticipated trouble in several industries before the stock market caught on. Right now, the spread between junk bonds and Treasurys is nine percentage points, its widest level since 1990, according to Merrill Lynch. Junk bond prices are down about 6% since the attacks, with the average junk bond trading at 76 cents on the dollar, down from 81 cents before Sept. 11. Ford, for example, has seen its stock jump to $17.73 from $15.34 since Sept. 21, after closing at $19.40 on Sept. 10. But its bonds trade at a yield spread vs. comparable Treasurys of 2.50 percentage points, significantly wider than the 1.95-point difference on Sept. 10, according to CreditSights Inc. Credit ratings often are a lagging indicator of the outlook for corporate health, so the fact that there were many more credit-rating downgrades than upgrades during the third quarter isn't especially worrisome. More troubling: 82 U.S. companies saw their debt ratings put on review for a downgrade by Moody's during the past quarter, compared with just 19 that may have their ratings upgraded. The debt of the companies being put on review for a downgrade adds up to a staggering $337 billion, compared with $50 billion of debt that may be upgraded. Interest rates may still fall J Fuerbringer, NY Times 10-14 Interest rates crept higher last week. But that does not mean that the Treasury rally, which drove longer-term yields down a percentage point in four months, is over. One reasonably trusty barometer of these rates is pointing down. This tool is the historical relationship between the manufacturing index of the NAPM and the Treasury's 10-year note, adjusted for inflation. The manufacturing index, which has begun to decline again, is a good proxy for global economic performance (NAPM's monthly index dipped only slightly in September to 47. August's jump to a nine-month peak of 47.9 had raised hopes that the sector), and Robert J. Barbera, chief economist at Hoenig & Company, contends that an economic slowdown worldwide will pull down interest rates into early next year. He is not worried about the effect on the Treasury market of government budget deficits. "Large increases in government spending are the rule in recessions," he said, "and declines in interest rates are the rule in recessions." More on interest rates Scott Burns, DMN 10-14 The one-year Treasury Constant Maturity Index, a good proxy for short-term yields, closed September at 2.82%, the lowest it has been at any time since 1970 when the index was originated. The previous low was 3.24% in April 1994. The five-year Treasury Constant Maturity Index, often used as a benchmark for intermediate term yields, is also pushing new lows. It averaged 4.13% for September, far lower than the 4.73% that occurred in September 1993. It was lower than the most recent low of 4.18% in October 1998. The 30-year Treasury CMI is near its lowest level in decades. It averaged 5.48% in September, not much higher than its 5.06% low in December 1998. Data from the Dallas Federal Reserve Bank
Let's say that on March 24, 2000, our investor's first $100 installment purchased 2.82 shares of Vanguard Total Stock fund, which then had a net asset value of $35.45 a share. Last Friday - the most recent and also the lowest-cost purchase during this period - that same $100 bought 4.67 fund shares at $21.40 each. The stress of continuing with systematic investing during a market slide is also illustrated by the hypothetical example, prepared for WSJ by Vanguard. On several contribution dates, even with the latest $100 added in, our investor's account balance was lower than it was two weeks earlier. And the total $4,000 invested over time (with distributions reinvested) has purchased 137.55 fund shares valued at only $3,059 as of Wednesday - a 24% decline. The reward for buying throughout this bear market will come whenever the market rebounds, as history suggests it will surely do. Investors who continue investing as stock prices tumble and then rebound can lower the average cost of their holdings and thus return to a net profit on their investments sooner than those who don't buy during the ugly times. To understand the benefit, consider that it would take a 31% jump in the fund share price to immediately boost the value of our investor's Vanguard Total Stock Market stake to the $4,000 invested over time. Now consider the required rebound for another hypothetical investor - one who held a $4,000 stake in the same fund on March 24, 2000, and didn't add a penny since: That account has dropped to $2,560 in value as of Wednesday, requiring a 56% rise to get back to $4,000. Just the Facts Consumer confidence `Take your pick: you have three different consumer confidence measures telling different stories,'' said Henry Willmore, senior U.S. economist at Barclays Capital Group. `The Conference Board was down a lot, Michigan was up slightly and ABC News Money Magazine was unchanged. Confidence is a reflection of what's going on in the job market and stock market. Once you account for those two factors, consumer confidence has little independent causality on spending.' Whether confidence rose, fell or stayed the same in October, the level is low. How then to explain the ebullience of investors? A Gallup poll last week found that investor optimism soared in October, more than making up for the September decline. (NOTE: 'Our economic models have never been particularly successful in capturing a process driven in large part by nonrational behavior.' Alan Greenspan, 2-13-01) (Caroline Baum, Bloomberg 10-30) Cash exits stock funds Investors withdrew $29.51 billion from stock mutual funds in September in the largest one-month exodus of cash on record, said the ICI. The ICI was quick to point out that, large as September's withdrawals from stock funds were, they represented only 0.87% of the fund industry's $3.02 trillion in stock-fund assets under management. By contrast, investors withdrew 3.1% of total stock-fund assets after the October 1987 stock-market crash. Taxable bond funds saw net deposits of $7.96 billion in September, while municipal bond funds saw a slight cash drain of $335 million last month. (WSJ 10-30) Alternatives to Cubes As a proxy for tech, the Nasdaq 100 unit trust, or QQQ, became one of the most successful exchange-traded funds, and currently trades an average of about $2.5 billion a day. But after this year's changes to the Nasdaq 100, the index will likely diversify away from technology and be less volatile. And that has implications for option investors. [NYTimes 10-21: The tech component of the index would fall to 66%, according to Lehman Brothers figures, down from 73% now and 86% in 1998.] New technology benchmarks could eventually rival the QQQs dominance as the leading technology ETF, such as the Technology SPDR (XLK), Technology iShares (IYW) or the Semiconductor HOLDRs (SMH). (Erin Arvedlund, Barrons 10-29) Aerial images online Florida International University researchers have introduced TerraFly, new software that supplies users with topographical maps via satellite images of the United States. ( Article did not give URL ) FIU will use the new technology for commercial as well as educational uses such as real estate, tourism, and urban development. (Miami Herald, 10-27) Security costs The owner of a one-million sq. ft. building in midtown Manhattan recently has closed some entrances and restricted deliveries to tenant offices. The owner also added a security desk with guards who check visitors' bags in what was once an open lobby. The price tag: $200,000 a year. The same property owner plans to install a computerized access-control system, which matches employees' identities to digitally stored photos; intrusion alarms at strategic places in the building; a cutting-edge video-surveillance system and bomb-detection and X-ray equipment for its messenger center. The cost of the additional upgrades, including consulting fees, is expected to run as high as $370,000, with another $50,000 a year in maintenance. Figures compiled by David Anderson, an economist at Centre College in Danville, Ky., put the pre-Sept. 11 nationwide amount at about $54 billion a year or 0.5% of the gross domestic product. That includes $20 billion for security guards, $5 billion for access-pass systems and $500 million for airport security. (Greg Ip, WSJ 10-24) New legal questions Employers worried about anthrax and other issues in the news today are giving employer attorneys new questions to think about. Questions include whether mailroom safety policies are adequate, whether reluctant employees can be made to board airplanes, and whether employees fearful of working in tall buildings are protected under discrimination laws. The Occupational Safety and Health Administration says it received one informal complaint so far. But OSHA notes terror attacks come from outside and aren't the result of employer negligence. (WSJ 10-23) Small investors are cool On the first day that the stock market reopened after last month's terrorist attacks, trading was dominated by huge blocks changing hands between professionals. As the volume of large trades was more than doubling on Sept. 17, the volume of small trades, of 100 shares or less, actually declined by one-third on that day, falling to 11 million shares from 15.7 million, as small investors moved to the sidelines. That day's activity wasn't a fluke - the disparity between volume of large and small trades continued for most of the month. The volume of larger trades didn't fall back to preattack levels until Oct. 1, while the volume of small trades didn't climb up to preattack levels until the last trading day of September. Analysis of the trades suggests, in fact, smaller investors turned bullish a lot sooner than the pros. On Wednesday, Sept. 19, the third day of resumed trading, big investors were continuing to put stock up for sale, according to data compiled by WSJ's Market Data Group. But that day, smaller investors appeared to begin showing net buying demand. Block trades of 10,000 shares or more didn't start to be dominated by upticks until Sept. 24, the start of the second week of trading. (E.S. Browning, WSJ 10-22) Is Cipro the only treatment for anthrax? Most broad-spectrum antibiotics, including penicillin and doxycyclene, are equally effective against anthrax. But those drugs aren't under patent, and their makers have no financial incentive to do the additional tests required by the FDA to be able to market their brands as anthrax fighters. Bayer has simply conducted the studies and undertaken the bureaucratic process that allow it to make anthrax claims about Cipro. (WSJ 10-19) Fear and awareness Tonight I opened a Miller Highlife and found a red residue around the top of the bottle. It was probably rust. But I had never seen that before - or maybe I had never noticed. But after 9-11, after the antrax scares, nothing goes without notice. It is a different world. Some days the world changes so little that it goes without notice. Now we are a more observant nation. We may see a lot that we have been missing. But there is a difference between awareness and fear. I tested to see if the residue was inside or outside the bottle - it was outside. I poored it in a glass. I still drank the beer. (Bob Martin, Factoids 10-18) Alternatives to Diamonds The TD Waterhouse Dow 30 fund (WDOWX) is a traditional index fund that tracks the 30 companies that constitute the Dow. The Strong Dow 30 Value fund (SDOWX) and the Burnham Dow Focused 30 fund (BUROX) index 50% of their portfolios to the Dow, but actively manage the other half, overweighting and underweighting certain stocks in an attempt to beat the Dow's returns. The Orbitex Focus 30 fund (OFTAX) also overweights the names that the fund manager believes are positioned to do well. The Potomac Dow 30 Plus fund (PDOWX) aims to return 125% of the performance of the DJIA by investing a portion of the portfolio in futures and options. (June Kim, SmartMoney 10-18) Alternatives to Cubes The Summit Apex Nasdaq 100 Index fund (SANIX), Victory Nasdaq 100 Index fund (VNIAX) and Rydex OTC fund (RYOCX) are all Nasdaq 100 index funds. The Brinson Enhanced Nasdaq 100 fund (PWNAX) and the Potomac OTC Plus fund (POTCX) both seek higher returns over the long-term than the Nasdaq 100 by using futures and options. (June Kim, SmartMoney 10-18) Big government How did the lesson of Sept. 11 become that we need bigger government, when it represented the government's biggest failure to discharge its duties in 60 years? According to Steve Moore, president of the Club for Growth in Washington, D.C., `We spend $2 trillion a year on the most expensive government in the history of the world, and the one thing it's supposed to do is protect us from foreign enemies. We need smarter government, not bigger government. If the federal government can't protect our national security, it is the height of folly to empower it to do much of anything else.'' (Caroline Baum, Bloomberg 10-17) Strange URL's In June VeriSign and RealNames unveiled a program to enable the registration of multi-language domain names and characters in the .com space. The program also allows the registration of symbols as domain names, a fact not widely publicized. New Zealand registrar Pdom.com predicts that symbol-based domain names will eventually take off and said many symbols are currently listed on Pdom.com's secondary "Buy & Sell" Web site. Symbols for sale include the international symbols for male and female, symbols for a telephone, a Valentine heart, the four symbols on packs of cards, the Christian cross, and other symbols, all of which can stand alone or be combined with words, to form a domain name. (SiliconValley.com, 10-18) Quick Stats George Kinder's Seven Stages of Money Maturity: Innocence, Pain, Knowledge, Understanding, Vigor, Vision, and Aloha. (Mary Rowland, MSN 10-31) Only 29% of 1,015 employers surveyed by WorldatWork, an association of compensation managers, have adjusted planned raises since earlier this year. But of those who did, the overwhelming majority cut the size of the increase. (WSJ 10-30) With more than 75% of the S&P 500 companies reporting so far, third-quarter profits were down 19.3%, according to Thomson Financial/First Call. (Caroline Baum, Bloomberg 10-30) According to estimates by Sheldon Jacobs, publisher of the No-Load Fund Investor newsletter, last year equity funds distributed, on average, gains equal to 9.6% of their net asset value. That significantly exceeded the average from 1996-99 of 5.9%. Jacobs is now forecasting that, among funds that will make distributions this year, the size of the disbursements will return to that typical 5-6% range. (Michael Santoli, Barrons 10-29) Alice Cornish, an analyst at Prudential Securities, expects pretax profits for the companies in the S&P's 500-stock index will drop by an average 2.5 percent in 2002 because of higher insurance prices. At communications services concerns, pretax earnings should decline, at most, by only 2.3%. But at health care companies, costs may jump 35.5%, causing an 11.5% hit to pretax earnings. For cyclical consumer companies earnings could decline as much as 8.2%, and makers of consumer staples could see their pretax profits fall 5.4%. (Gretchen Moregenson, NY Times 10-28) Clifford Asness, managing principal of AQR Capital Management, points out that stocks are still at exorbitant P/Es, based on trailing 12-month earnings. Indeed, over the past 50 years, the market has been more expensive only 5% of the time. Even if you look at average trailing 10-year earnings, which smooths out earnings and thus compensates for the past year's profit slowdown, you find that the market's P/E has been higher only 9% of the time. (Jonathan Clements, WSJ 10-28) "As long-term investors, there is more risk in being out of the market than in the market," says Thomas Rath, a portfolio manager with Safeco mutual funds in Seattle. "I am not saying it is a great time to jump in and that the market is going to go straight up," he cautions. "I think we are going to have fits and starts." (WSJ 10-28) Delays at the border with Canada - the nation's largest trade partner - have slowed many industries' supply chains. In the days immediately following Sept. 11, those delays extended to 18 hours, compared with an average wait of only 15 minutes before the attacks. The border slowdown now has subsided to only a few hours. (WSJ 10-24) Personal illness counted for about a third of unscheduled absences at companies over a period of 12 months ended in June, according to a survey of 234 human-resource professionals by CCH Inc., Riverwoods, Ill. Family issues and stress made up 21% and 19%, respectively. (WSJ 10-23) New York and California are the biggest issuers of tax-exempt securities. They represent about 25% of total tax-exempt debt outstanding. (Jerome Jacobs, chief investment officer for tax-exempt fixed-income securities at Putnam Investments, NY Times 10-21) Thirty-year insured municipal bond yields are yielding 4% less (NOT 4 percentage points less) than U.S. Treasuries. Essentially, you are getting the tax exemption for free. (Jerome Jacobs, Putnam Investments, NY Times 10-21) Retirement accounts made up 36% of [stock] fund assets in 1999, the latest year for which data are available, up from 25% in 1991, according to ICI. (Carol Vinzant, Wash Post 10-21) Since 1802, there have been 186 different, though overlapping, 14-year periods, and in fewer than 4 percent of them have stocks failed to produce a positive real return, according to data provided by Jeremy Siegel, a professor at the Wharton. (Mark Hulbert, NY Times 10-21) Morgan Stanley investment strategist Steven Galbraith advises that "investors should be extremely leery of companies that have made the term 'nonrecurring charge' an oxymoron." (Tom Petruno, LA Times 10-21) The broad aggregate M2 has grown 10.4% in the 12 months ended September, the fastest pace since 1983. Inflation may be contained at the moment, but soaring money growth makes it unlikely to be contained in the future. (Caroline Baum, Bloomberg 10-19) HDTV sets once cost several thousand dollars, but a few 32- and 36-inch models have ducked under the $2,000 mark. Market researcher NPD Intelect projects that 1.2 million digital TVs will be sold this year, bringing total sales to 2 million. NPD Intelect reports that HDTV prices have dropped by 22% through August of this year. (Wash Post 10-18) Sales of DVD players continue to grow sharply, up 48.6% from last year, the Consumer Electronics Association says. The flip side is that sales of VCR machines plunged 41.2% as DVD player sales surpassed VCRs for the first time in September. (WSJ 10-18) A survey of 1,000 people by the University of Michigan Survey Research Center (www.otpr.org/) asked: "Thinking about your family's financial situation this year, will the tax rebate lead you mostly to increase spending, mostly to increase saving, or mostly to pay off debt?" Results through September: Only 18.8% said "spend," 33.6% said "save," and 47.6% said "pay off debt." (WSJ 10-17) Quick Tips If you hold down the Shift key while you move the wheel on your 'wheel mouse', IE will navigate backward and forward through visited pages. Just like clicking the Back and Forward buttons, or holding down the Alt key while you click the left or right keypad arrows. (Emazing 10-28) Home Page Previous Factoid Top Sites |