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Bear Stearns looked at the earnings of every company in the S&P 500 to see how dependent they have become on gains from pension income. For 49 companies, lower returns for their pension funds could cut their earnings by 5% or more in 2002. Examples: DuPont booked $469 million in pension income in 2000, accounting for 10% of its operating income. IBM got $1.24 billion, or 11%, of operating income from its pension plan last year.In 2000, GM had pension costs of $346 million, but those could balloon to $2 billion in 2003, according to the Bear Stearns report. Honeywell had pension income of $330 million in 2000 but by 2003 could see pension expense of $18 million. SBC posted a gain of $1.15 billion from its pension plan in 2000, but pension income could fall to $442 million in 2003.
Matt Harris, the chief executive of Village Ventures, observes that ''in the late 1990s, `filing' meant an IPO and `doing another round' meant another financing, probably an uptick. `Filing' now means Chapter 11 or 7, and `doing another round' inevitably means layoffs.' B2B used to mean 'business-to-business.' Now, it stands for 'back to basics' or, in some contexts, 'back to business school' for jobless twenty-something entrepreneurs. P2P once meant 'peer-to-peer,' a promising new architecture for software. Now, it almost always represents 'path to profitability.' Two other acronyms whose usage has unfortunately been increasing of late: (1) RIF = 'reduction in force' and (2)/ MTBU = 'maximum time to belly-up' - or the 'fume date'.
True, the Fed has cut the target of its federal funds rate 4.5 percentage points to 2% this year, leaving it at its lowest nominal level since 1961. But that overstates how much the Fed has really acted. Because of the simultaneous drop in expected inflation, real interest rates have arguably fallen only half as much, argues Goldman Sachs economist Bill Dudley. The most powerful thing the Fed can do to jump-start growth is move real rates to zero or below. But "with lower inflation, especially deflation, you may have significant, positive real rates of interest" even if the Fed's official rate is low, says Mr. Akerlof. The 'Real' Rate Caroline Baum, Bloomberg 11-9 `Even after a 50 basis point reduction (on Oct. 21), the federal funds rate would not reflect an unusually accommodative policy stance in that, in real terms, it would still be positive by many measures and above its typical level in most earlier periods of economic weakness,' the Fed said. To translate, the inflation-adjusted funds rate, using inflation measures other than the widely accepted consumer price index, is still positive. It's an article of faith that the real funds rates has to go to zero, or even negative, to stimulate a moribund economy. With the core PCE price index up 0.5% for the 12 months ended September, the real funds rate is 1.5%, giving the Fed latitude for further rate cuts. `Theoretically a zero real funds rate makes a lot of sense,' says Paul Kasriel, director of economic research at Northern Trust. `You're inducing people to spend because their future income is being eaten up by inflation.' A 'Real' Test Caroline Baum, Bloomberg 11-9 Real M2 is a leading economic indicator. Kasriel thought he'd test the PCE-adjusted funds rate against PCE-adjusted M2 and see which one did the best job predicting real economic growth. He looked for the highest correlation between year-over-year real GDP growth and lagged readings of the two variables. The correlation between the real funds rate and real GDP growth occurred with the funds rate lagged (or advanced) four quarters. The correlation was -0.33 -- negative because the funds rate and growth move in opposite directions (a perfect correlation is 1). The highest correlation between real M2 and GDP growth occurred with real M2 lagged two quarters. At 0.64, it is `almost double the correlation coefficient with the real fund rate,' Kasriel says. `Historically, real M2 has proven to be a better gauge of the thrust of monetary policy than the real fed funds rate'. And `real M2 growth, using the core PCE price index, is growing at a 10.3% rate, the fastest pace in 40 years,'' Kasriel says.
Many economists believe the bottom of the corporate-earnings cycle has yet to be reached. Analysts at J.P. Morgan Chase forecast that profit growth won't return until Q3 of next year and then only a muted rebound is expected. The only piece of positive news that the Q3 decline was a little lower than the 76% earnings drop registered in Q2. For Q3, the employment-cost index rose 1%, including a 1.6% increase in the cost of benefits, compared with Q2. Meanwhile, the producer price index, excluding food and energy costs, declined 0.5% in October compared with September. So company bottom lines are getting hit from three sides: once from a decline in volume, a second time from falling prices for the goods and a third time from rising costs.
Credible as those reasons may be, there are two proven reasons that index funds still beat most actively managed funds over the long run. First, with investment performance being equal, they start with about a 2 percent return advantage - the difference in expenses between running a computer and maintaining an office full of people. Second, active funds are based on the premise that certain managers have the skill, talent or perseverance to beat the market. Most do not. Active managers may be able to shift their money around, but there is no proof they will be able to predict which stocks will be safer. More important, managers as a group have not proved their ability to gauge when a market recovery is starting. Mutual fund managers tend to have the most cash at the bottom of the market and the least at the top, said Gus Sauter, managing director at Vanguard. So when the market begins to recover, index funds, which are always fully invested, will have an advantage. (For the decade that ended Oct. 31, actively managed funds averaged a 10.9% annualized return, Morningstar said, but the S&P 500 returned 12.8%.)
Spending Forecast LA Times 11-8 A survey released late in October by the National Retail Federation suggests that the average household will spend $940 on gifts, decorations, greeting cards and related holiday items. The federation could not provide a comparison for the 2000 holiday season. Myvesta.org on Wednesday released a national survey that suggests average household spending during the holiday season will tumble to $773, down from $1,220 in 2000. Another Spending Forecast Albert Crenshaw, Washington Post 11-11 A recent poll sponsored by the Consumer Federation of America and the Credit Union National Association suggests that the holidays won't be that bad. Nearly three-quarters of the 1,019 people questioned nationwide in late October plan to spend the same or more this holiday season than they did last year, the survey found. Most, 57%, expect to spend the same; 13% expect to spend more than last year. The "about the same" figure is, appropriately, about the same as in last year's survey. The share expecting to spend more, though, is down a bit from the 18% recorded in the 2000 poll. About 28% said they will spend less this year, and that figure was somewhat higher than the 24% who last year expected to cut spending. But the number expecting to spend "much less" than last year grew only to 11%, from 10% last year. The poll also found that consumers are less worried about managing debts this year than they were last year. Only 27% said they are "concerned" about holiday credit card payments, down from 35% a year ago. And the number "concerned" about all non-mortgage debt declined to 39% from 48%.
The bulk of the group's gains can be attributed to home-financing REITs such as Annaly Mortgage Management; Impac Mortgage Holdings; Redwood Trust; and Thornburg Mortgage. Home-financing REITs have an average year-to-date total return of 81%, while commercial-financing REITs have returned 17%, according to the REIT association. Earnings Estimates Fall Ray Smith WSJ 11-7 Earnings estimates for REITs dropped 3% on average and as much as 5% on average for apartment REITs since the end of September. "That has a huge impact on stock prices," Lee Schalop, analyst at Banc of America Securities, says. "That is much more important to investors than inclusion in the S&P." What's Hot Sheila Muto, WSJ 11-14 Amid a slumping economy, apartment properties - particularly units that offer lower rents and could use a bit of sprucing up - are shaping up to be the most active real-estate investment sector this year. Driving the move in large part is the view that these properties are less risky compared with other real-estate investments, as well as low interest rates and efforts by pension funds and other institutional investors to bulk up on their apartment property holdings to better balance their portfolios. Real-estate sales are down across the board, even among apartment properties. Yet the volume and value of transactions within the apartment sector remain strong compared with office, retail and other property types, according to a preliminary survey of 33 markets by Marcus & Millichap Real Estate Investment Brokerage Co. "Performance distinction will be those companies that are in high-barrier-to-entry markets, [meaning they have limited space to build], such as Boston, Chicago, Los Angeles, San Francisco and Washington, D.C., rather than the quality of the asset" says Todd Canter, an analyst at LaSalle Investment Management Securities. California REIT Profits Slow LA Times 11-6 The slowing economy has not yet had a major effect on the earnings of Southern California-based real estate investment trusts, but REIT executives and industry analysts sounded some cautionary notes as they examined third-quarter results. One reason that rents here haven't fallen sharply, as they have in other markets, is that Southern California rental rates "never achieved the unrealistic, unsustainable levels as they did in some other parts of the country," Arden Realty President Victor Coleman said. "We do not expect market rental rates to deteriorate," Coleman said, "but we do expect them to remain flat." REIT Funds Update Tom Lauricella, WSJ 11-2 Real-estate funds are up an average 8.8% over the past 12 months and they are one of just two types of U.S. stock funds to have earned money for investors during that time frame, according to Morningstar. Only funds specializing in small, undervalued companies have done better. Over the past three years, the average real-estate fund is up 7.6% a year, compared with a 3.1% average annual gain in technology funds and a 2.2% return on funds favoring large, seemingly cheap "value" stocks, a group that is now in vogue. Looking back five years, real-estate funds are up an average 7.1% a year. In 1998, the average REIT fund fell more than 15%, in a year when the S&P 500 rose more than 28%. In 1999, during the height of the bull market, the average real-estate fund shed 1.9%. Real-estate investment trusts have an extremely low correlation to broad stock-market gauges and to bonds, meaning that REITs may zig when others zag, or vice versa. Researchers at Ibbotson Associates recently published a study showing that the correlation between REITs and other stocks is roughly half the correlation between stocks and bonds. Office Occupancy Survey Dean Starkman, WSJ 11-1 U.S. office vacancies jumped to about 12% for Q3 from less than 10% a year earlier, as white-collar layoffs took a toll on the demand for space, according to three new surveys.The three reports of national and local vacancy rates - by Property & Portfolio Research, Torto Wheaton Research, and Reis - use different methods and cover slightly different markets. But all recorded a jump in the national vacancy rate of at least two percentage points from last year. Torto Wheaton recorded the largest increase for the quarter, to 12.3% from 8.1% a year earlier. The national average rent, compiled by Reis, fell 3.3% for Q3 to $24.68 per square foot, from $25.53 for this year's Q2. After years of increases, the rent average had peaked during Q1-2001 at $26.01 a square foot and began dropping in Q2. Office users have demanded less space in each of the first three quarters of this year, according to Property & Portfolio Research. The firm forecasts that the so-called negative absorption will continue through the first half of 2002. The Manhattan vacancy rate fell to 4.3% in the quarter, according to Property & Portfolio Research, from 7.4% a year ago, a consequence of the destruction of about 13 million square feet of office space in the Sept. 11 WTC attack. Office Occupancy Rates Fall Ray Smith, WSJ 10-31 Equity Office Properties Trust, the largest publicly traded owner of office properties in the U.S., said that its occupancy levels had declined and that the overall amount of available space in most of its top markets has increased.Much of the third-quarter occupancy decline reflects conditions before the Sept. 11 terrorist attacks on the U.S. As a result, Equity Office used its third-quarter earnings conference call Tuesday to warn that conditions could weaken further, at least until the second half of 2002 or the beginning of 2003. Earlier this month, the company revised downward its earnings guidance for 2002. Though office rents are expected to decline about 15% nationwide going forward, Equity Office and other office owners "are still by and large re-leasing the space that comes through at higher rents than expiring rents," said John Lutzius, analyst at Green Street Advisors Inc., Newport Beach, Calif. "So Equity Office can still grow its cash flow modestly as leases roll over." Hard Times for Hotel REITs Ray Smith, WSJ 10-31 Host Marriott Corp. became the first hotel real-estate investment trust to publicly state that it may suspend its fourth-quarter dividend payment. Others are expected to follow suit. As the Sept. 11 terrorist attacks on the U.S. continue to take their toll on the travel and tourism industry, hotels are struggling with lower revenue-per-available-room as occupancy rates have dropped precipitously. As a result, owners of those hotels, a number of them REITs, are making less money -- and desperately trying to conserve what they do make. And the cuts could extend beyond the fourth quarter. "We expect either significant dividend cuts or outright suspension of most quarterly dividend payments in 2002," says Mike Rietbrock, an analyst at Salomon Smith Barney. As of last Friday, the average dividend yield for REITs was 7.63%, according to Morgan Stanley. The average dividend yield for companies in the Standard & Poor's 500-stock Index was 1.41%. Office Survey Motoko Rich WSJ, 10-24 A survey by the International Development Research Council, an association of executives who manage real estate for large companies, found that prior to the terrorist attacks, only 38% of the 34 respondents maintained space "as insurance against the potential destruction of key properties." Of those who didn't, only 4% said they planned to lease backup space now. When asked if companies planned to "increase the decentralization of mission-critical facilities," two-thirds said "No." Dennis Donovan, principal at Wadley-Donovan Group, a corporate-location consultant in Morristown, N.J., says the survey results partly reflect the poll's timing. Most companies "are going through a waiting period to see how everything shakes out," says Mr. Donovan. "They don't want to make decisions on future deployment strategies until the emotional content can be removed from the decision making." He suggests that companies will eventually rethink these decisions and consider leasing some backup space and moving key employees into different areas. Earnings Warnings Ray Smith, WSJ 10-24 Earnings warnings have been issued from several REITs, including bellwether Equity Office, the nation's largest publicly traded office landlord. "If it weren't for the particularly attractive dividend yield [of REITs], we would probably have seen a more dramatic reaction to the lower earnings guidance," says Gregory J. Whyte, analyst at Morgan Stanley in New York. The average yield for REITs was 7.4% as of last week, compared with an average yield of 1.5% for companies in the S&P 500. REIT executives and analysts have tried to assure investors by saying that while REIT earnings growth will be slower than in the past, at least REITs won't be reporting losses, like other sectors of the economy. Survey Predicts Slump Motoko Rich, WSJ 10-17 In a survey of 60 real-estate industry executives, investors and analysts, the report by PricewaterhouseCoopers LLP concluded that the terrorist attacks, which have sent the economy spiraling, could push some real-estate markets into a slump. A separate report, prepared by PricewaterhouseCoopers with Lend Lease Real Estate Investments LLP, surveyed more than 150 real-estate professionals and showed that respondents now expect far lower returns for 2002 on both private real-estate investments and real-estate investment trusts than they had projected for this year. The joint report showed that respondents expect returns next year of 6.2% on private investments and 6.1% for real-estate investment trusts. Last year, respondents projected returns of 11% for private investments and 12% for REITs for 2001. A few categories of assets might make good investment opportunities in the wake of the attacks, according to the report. These include office buildings in the tri-state area around New York and Washington, D.C. In the retail market, while regional malls and downtown properties are likely to come under pressure, grocery-anchored strip centers are "a highly sought-after investment," said the report. Even in an economic downturn, consumers buy basics. One respondent suggested that grocery-anchored strip malls were the "only safe investment around right now." The report also suggested that the apartment industry would be relatively buffered from the effects of a recession because tenants who might be considering buying a home would postpone such decisions in times of economic uncertainty. Undiscovered Managers REIT Fund David Franecki, Barrons 10-15 William Schaff's and Gary Pollock's (of Undiscovered Managers REIT Fund) favorite picks are health-care REITs, self-storage and manufactured-home communities (a/k/a trailer parks). They like them because they are less sensitive to economic growth than other sectors. There is limited threat to future development in most of Manufactured Home's communities, thanks to zoning laws. Its units have 10%-15% annual turnover, compared with 50%-65% in many conventional apartment communities. Schaff and Pollack believe that hotel stocks are extremely vulnerable now because they have high fixed costs and debt. The fund employs a valuation model, designed by Schaff, which looks at three elements when pricing real-estate stocks: First is a discounted cash-flow model, similar to what many fund managers use to determine the true value of a stock. Next is a real-estate valuation model, which looks at the value of the real-estate property itself, compared with the value of the actual REIT security. Third is a measure of a stock's price compared with adjusted funds from operations (AFFO) -- a measure of cash flow commonly used to measure a REIT's growth instead of earnings. Boston Vacancies Climb Michael Rosenwald, Boston Globe 9-27 Office vacancies in Cambridge and Boston continued to climb in the third quarter - in Cambridge's case nearly doubling - creating the worst office market in the area since 1991, according to figures released yesterday by Cushman & Wakefield. The rise in office vacancies - Boston went from 7.4% vacancy in Q2 to 11%, Cambridge from 9.4% vacancy in Q2 to 17.1 - is in many ways driven by sublease space being put back on the market by firms that went out of business or that took more space than they needed. Outlook Good Bob Howard, LA Times 9-25 The outlook for most types of REITs is relatively good, said analyst Jay Leupp of brokerage Robertson Stephens. He noted that vacancy rates in office buildings, malls and industrial buildings owned by REITs are about half of what they were when the nation lapsed into recession 10 years ago, while relatively little new space is being built. This means that the real estate industry will suffer far less than it did in the early 1990s, even if demand for space stays flat or declines slightly, Leupp said. "REITs will be a very predictable and therefore attractive investment in this environment," Leupp said. REITs Will Suffer Less than other Sectors Ray Smith, WSJ 9-25 Sam Zell, chairman of Equity Office Properties Trust and Equity Residential Properties Trust, based in Chicago, said the terrorist attacks combined with the slowing economy will definitely have an impact on new projects. He predicted "limited activity" in the development arena for the time being, "a significant gap in which nothing [will be] developed," which would be a good thing in terms of maintaining equilibrium of supply and demand and creating pent-up demand that could justify new construction. "It is the first time in 40 years that I have been in business, where there is no excess supply, at least in the markets we are in, going into an economic decline," said Mortimer Zuckerman, chairman of Boston Properties. "Rents will not continue to go up, but by and large they will stabilize in most markets," Mr. Zuckerman said. "And there won't be any great economic downturn in the commercial real-estate market, at least in the markets we are in, simply because there is no excess supply." Buffett Sells Jonathan Weil, WSJ 8-29 Warren Buffett, the billionaire investor who says the best time to sell a stock is never, has sold his stake in First Industrial Realty Trust. So should investors follow him? The disclosure of Buffett's sale comes just as First Industrial is receiving scrutiny over the way it calculates the profit measure most widely followed by Wall Street analysts. REIT industry's widely cited earnings benchmark - "funds from operations," or FFO - is just as fuzzy as the dot-coms' pro forma metrics. "For investors that have moved into real-estate stocks for safety, it may not be as safe as it seems," says Lee Schalop, a REIT analyst at Banc of America Securities.
The spread between BBB+ securities and comparable Treasurys is extremely large by historical standards. In the last 20 years, the spread between BBB corporate bonds and treasurys has exceeded 2.5 percentage points only three times: in 1980-82, in 1987 and now. I think that spread almost fully discounts investors' worries about the economy and it will start to narrow as an economic recovery starts to seem likely. Investment grade corporate bonds have returned 11% - including interest payments - over the last year, under-performing Treasurys as investors paid up for safety. I think that's likely to reverse, with corporates out performing Treasurys as the economy recovers.
When interest rates fall, say, from 4 to 3 percent, it lowers the cost of money, encouraging people to use more of it. That stimulates spending and investment and should make the economy grow faster. But when interest rates are already close to zero, a further cut can have the opposite effect, slowing rather than speeding up the economy. For proof, some observers point to Japan, where bank savings accounts and government bonds currently yield fractions of 1% per year. According to one anecdote I heard, a typical Japanese bank saver can spend more than an entire year's interest just by taking a taxi to the bank to make one deposit. When that happens, it becomes just as attractive to keep cash in a sock or under the mattress as in a bank or government bond. And money in a mattress doesn't encourage much economic activity, which is part of the reason Japan's economy has been stagnating for more than a decade.
A study done for Barron's by Birinyi Associates shows it's true that performance minus the five best days is dramatically lower than it would be if an investor stayed in the market for the entire year. The S&P 500's 19.53% gain in 1999 shrinks to only 3.98% without the five best trading days. And 1998's return of 26.67% slips to a mere 4.54% without the best days of the year included. In addition, the 29.72% loss the market suffered in 1974 balloons to 42.38% without the five best days. And investors who would have ended the year almost flat in 1970 would have found themselves stung with a 13.65% loss without the year's strongest days. Worth noting, however, is that if you're dexterous or lucky enough to jump out of the market for the year's five worst days and be in for the rest, you will do far better. This year, through October 29, if the worst five days for the market (measured by the S&P) are subtracted, the return is a 0.92% loss. While that's not much to boast about, it certainly is a lot better than the actual deficit of 18.03%. (Those out on only this year's five best days would have seen a 32.63% loss.) Overall, the Birinyi study showed, anyone who put one buck into the S&P in 1966 and held it through October 29, would have $11.71 (a 1,071% gain), while those who were in the market for all but the five best days would have had just 15 cents (an 85% loss). But those who were in for all but the five worst days would have $987.12 (an amazing 98,612% rise, aided by the power of compounding). Market timing part 2 James Glassman, Washington Post 11-11 Market timing doesn't work. John Bogle, founder of the Vanguard, once wrote: "After nearly fifty years in the business, I do not know of anybody who has done it successfully and consistently. I do not even know anybody who knows anybody who has done it successfully and consistently." Example: Many investors, believing the economy would collapse after the Sept. 11 terror attacks, sold their shares at the first opportunity. The Investment Company Institute reported that investors pulled $29.5 billion out of stock mutual funds in September. Those who sold their stocks in late September in anticipation of hard times ahead got a rude surprise. The reason for the failure of market timing can be summed up in two words: "random walk." The phrase, made popular 30 years ago by Burton Malkiel, a Princeton economist, describes the pattern that stock prices take in the short term. It's random. Malkiel's notion was that today's stock price is determined by everything that millions of buyers and sellers of stocks know about those stocks today. Tomorrow's price is unknowable today since it is determined by tomorrow's events. So, from today's perspective, tomorrow's price looks random. The Barron's article headline [quoted above] was "knowing when to stay out." But this conclusion raises an important question: How can you know when to stay out? You can't. Barron's does its readers a disservice by implying that you can. Say you are betting your brother on coin flips. You take tails, he takes heads. A total of 100% of your winnings will occur on roughly 50% of the flips. But does that knowledge help you make a good guess before you toss the coin? Of course not. The Hulbert newsletter recently looked at the 10 best-performing newsletters (nearly all of which employ timing of one sort or another) during October 1987, a month in which the market lost 2.5 times as much as it did in September 2001. Mark Hulbert then asked: How have these market timers done since? The answer: Rotten.
Those unlucky enough to be jobless can expect to stay that way a lot longer. Since June, the typical spell of unemployment already has lengthened to 7.4 weeks from 6.2 weeks. In July 2000, 56% of consumers considered jobs plentiful and fewer than 10% of them thought jobs were hard to get, according to surveys by the Conference Board, a New York research organization. However, in its latest survey, as many people consider jobs scarce - 21% - as think jobs are plentiful. In October, average weekly earnings declined 77 cents to $491.98, both because of skimpier raises and reduced hours. Total hours worked in the U.S. fell so sharply in October that even if they stabilize in November and December, they will still decline at a 4% annual rate in the current quarter. That suggests that, absent a jump in productivity, or output per hour worked, the economy could shrink at a 3% to 4% annual rate in Q4, says Peter Hooper, chief U.S. economist at Deutsche Bank. Shrinking paychecks Bernard Wysocki, WSJ 11-5 In a recent survey by Arthur Andersen, some 22% of companies said they won't pay a bonus, another 22% will pay less than a quarter of the target bonus, and only 8% said they would pay the full amount of the target to executives and staffers in the bonus pool. Andersen estimates that overall, U.S. corporations will slash bonuses by one-third to one-half of last year's level. Overtime, too, could take a hit in the months ahead. Overtime hours have held up well throughout the slowdown of 2001. But in Friday's report, total hours worked sank by 1.6%, the biggest monthly drop since 1982. )
You can open an account using stock, mutual fund shares, or other appreciated securities, or simply by writing a check. You get the tax benefits from giving now, and then take your time deciding where to distribute the money. While you are determining where to give the money, the fund company invests it in an investment pool of your choice. The pools generally are made up of a few funds run by the family, and are managed for growth or income. [WSJ 11-6: Compared with direct-marketing mutual-fund companies that typically charge overall fees of between 1.1% and 1.8% of the clients' assets, depending on how the money is invested, fees on adviser-driven funds typically are around 2.5% and sometimes as high as 3%.] Because you can give securities directly to these funds, donors avoid cashing out their securities and paying capital gains taxes. Most of these funds require a minimum investment of $10,000 to $25,000 and have a minimum gift size of $250 to $500. The investment is irrevocable, and the funds generally do not allow you (or someone you designate) to receive any income from the money that has been donated. The programs also have rules about securities transfers that are critical at this time of year. Depending on the securities involved, it can take a day to a month to process your donation. Getting in too late means you can't claim the tax deduction until the next year. When it comes to donations, virtually any charity approved by the Internal Revenue Service is eligible.
Falling mortgage rates may have kept housing robust through many months of sluggish economic growth, but other factors are now weighing in. The surge in layoffs and the terrorist attacks appear to be making people cautious, particularly about buying a home. Then, too, falling stock prices may finally be taking their toll on housing; while stocks were rising, wealthier households used the gains to remodel or to buy new homes. The housing market, in effect, may be following the stock market down. Refinancing has indeed surged, and half the households that refinanced in the last year increased their mortgages. They cashed out the extra equity from rising home prices. That extra cash, available for consumption, helped to prevent a sluggishly growing economy from tipping into contraction, until last July. The wealth effect from rising home values turned out to be enough to offset the damage from the plunge in stock prices. Now that housing is shifting toward reverse, mortgage refinancing is likely to become more of a means of lowering installment payments than sustaining consumer spending. The damage to the economy could be considerable. Georgia Stats Donald Ratajczak, Atlanta Journal-Constitution 11-4 Georgia's housing, which showed less than a 10% decline in new units this year, might drop twice that rapidly next year because of the job losses currently suffered. Thus, the 5,400 lost jobs in construction during the past year could be slightly more than twice that level at the peak of summer construction next year. California Stats Daryl Srickland, Times 11-7 New-home sales in California plunged 30% in Q3 from a year ago, providing the strongest sign yet that the once-resilient housing market is unraveling fast and could add to the current economic turmoil. New homes represent about 15% of the housing market. Existing-home sales in California have been weakening as well; September sales dropped 17% statewide from a year ago. The Sept. 11 attacks accounted for only about 10% of the overall sales decline; sales statewide were eroding early in the June-through-September period, especially for luxury homes, said John Burns, an analyst at the Meyers Group. Despite the sales drop-off, economists do not foresee significant declines in home prices in Southern California. Stephen Levy, an economist at the Continuing Study of the California Economy, said that low inventory and lingering demand for homes, plus falling mortgage rates, helped prop up prices. More Stats Rebecca Thomas, Smart Money 10-17 Wednesday morning, the Commerce Department reported that September building-permit issuance, a good indicator of future construction plans, dropped to the lowest level since December 1997 - falling by 3% to 1.524 million units. On the other hand, the government also announced that actual housing starts rose by 1.7% in September to 1.574 million units, seemingly indicating that the events of Sept. 11 didn't stop builders from proceeding with existing ground-breaking plans. But there's a catch - in fact, there's a number of them. This small increase in starts reversed only about one-quarter of the near 7% decline in August. And the move was so small as to be statistically insignificant. The Mortgage Bankers Association reported Wednesday that its index of applications for home purchases in the week ended Oct. 12 rose by 5.8% from the previous week, the trend for new purchase applications is clearly down; the latest reading is about 8% below its level of four weeks ago. The NAHB's index of housing-market activity fell to 48 from 55 in September Ů the largest single-month point drop since the organization started compiling the index in 1985. "Like the rest of the economy, the housing market is clearly showing the effects of the Sept. 11 attack on America," NAHB President Bruce Smith said in a statement Tuesday. Home builders, he explained, attributed the slowdown in sales to falling consumer confidence, a weakening economy and job market, and a declining stock market. 'The housing sector is joining other sectors of demand in becoming a drag on the overall economy," says John Youngdahl, an economist at Goldman Sachs. "Nothing that I've seen recently has in any way disabused me of this negative interpretation." Echoes Celia Chen, an economist Economy.com: "Housing is turning to a minus for the economy from a plus." But if the housing market is no longer the pillar of economic strength, neither is it poised for a Nasdaq-like crash, economists say. "Ultimately, [housing activity] will settle down at levels that have historically been associated with robust growth," says Lehman Brothers's Joe Abate. "Over the long term, lower mortgage rates will attract lots of buyers." The real question seems to be whether the likely decline in home sales will pull the economy into an even deeper and more prolonged recession. That, explains Youngdahl, would be "very disturbing" to the Federal Reserve, since housing is one of the primary channels through which monetary policy operates (by reducing the cost of mortgages, which encourages spending on other goods). And More Stats WSJ 11-5 According to a survey of 500 households released by the National Association of Realtors at its annual conference, strong home-price appreciation continues to generate wealth for homeowners. The NAR said the typical American homeowner has about $50,000 in "unrealized gains" in the value of a home, which some are tapping through a home-equity loan or other similar financial instrument. Meanwhile, Americans who sell their houses are collecting on average $20,000 in capital gains, which they can put into savings or use to buy another home.
The restrictions take many forms. Particularly well known is the poison-pill defense, which aims to immunize management from hostile takeovers. Others include the staggered election of company directors - which keeps shareholders from throwing out an entire board in any given year - and requirements for supermajorities in voting. These changes make it difficult for shareholders to exercise real influence or control. Paul Gompers, a professor of business administration at Harvard; Joy Ishii, a graduate student in economics at Harvard; and Andrew Metrick, a finance professor at Wharton studied 24 ways in which a company may restrict shareholder rights and combined them into an overall index. A low reading meant that a company imposed few restrictions. Working with a database of companies representing 90% of the market, the team constructed 10 portfolios, according to those companies' index values. The portfolios were reconstructed periodically. From Sept. 1, 1990, to Dec. 31, 1999, the researchers found, the portfolio with the lowest index values gained 9.3 percentage points a year more, on average, than the one with the highest values. While the other eight did not always adhere to the pattern, the performance difference between the extremes has withstood attempts to explain it away. To put the researchers' findings in perspective, consider that the performance difference is almost double the five-point margin of victory that growth stocks had over value stocks during the same period - a heyday for growth investing - according to the S&P's 500/Barra indexes.
Why is there so much pain? For much of the year there was one sure bet in the bond market: that the Federal Reserve would keep cutting interest rates, to spur the slumbering economy. So traders bought short-term Treasurys, which do best when the Fed cuts rates; that is, their prices usually rise as investors rush to grab yields that look generous in contrast to what is coming down the pike. They often used leverage, or borrowed money, to amplify their returns. And, in the wake of the Sept. 11 terrorist attacks, a consensus arose among bond aficionados that the government would have to sell more long-term bonds, such as the 30-year bond, to raise money for new spending programs. So many big investors and trading desks began taking bearish positions in 30-year Treasurys, even as they bought up short-term Treasurys, on the assumption that the additional supply would drive down the price of those long-term bonds. The effect of these moves was to "steepen" the yield curve, the imaginary slope between short-term and long-term bond yields. Since Sept. 11 the "steepening" trade became the hot move on Wall Street, as latecomers jumped on board. In the past two days, however, the worst of all events took place for all these investors and traders. The Treasury's decision to stop selling 30-year bonds sent prices soaring -- the bonds posted their best two-day gains in 14 years -- hurting the investors betting against these securities. But short-term Treasurys barely moved. The big bond bet had turned bad. "Everyone was bragging they were doing the steepening trade. Now they're not talking," says James Bianco, president of Bianco Research. "Now it's caused a tremendous amount of pain. The steepening trade was the most popular trade ... because no one thought the 30-year would disappear, and everyone figured the Fed would cut rates next week." The Treasury Department's decision also has hurt some holders of riskier bonds, including corporate securities, traders say. To protect against interest-rate moves that can hurt the price of these holdings, they usually hedge themselves by selling short, that is they sell borrowed Treasurys, interest-rate swaps and other instruments. But the huge jump in 30-year Treasurys wasn't accompanied by a similar climb in the prices of long-term corporate bonds. So traders and investors who were shorting long-term Treasurys as a hedge on other positions have experienced painful losses in the past two days. "A lot of people in the market were caught shorting Treasurys, and they got creamed," says the head of corporate-bond trading at a major Wall Street firm. While nursing losses, many traders say the Treasury Department's handling of its historic decision to end sales of 30-year bonds has added risk to the Treasury market, perhaps forcing yields higher on some securities. And there have been scattered indications of difficulties trading Treasurys in the past two days. All that could hurt the Treasury Department's continuing efforts to sell debt at the lowest rates. "If you don't know when issuance will be, or how much, you have to assess a risk premium to Treasurys," says one senior trader on Wall Street. Truncation could hurt dollar Jennifer Ablan, Barrons 11-5 "Truncation of the Treasury yield curve offers no longer-term advantages for the economy and is likely to harm the value of the dollar in the longer run," says Michael Cosgrove of Econoclast advisory service. "Treasury securities across an entire maturity range provide both foreign and domestic investors safety. Chopping off the 30-year closes one door and is one more reason to invest elsewhere in the globe." The Euro response Thomas Sims, WSJ 11-5 The 30-year bond may be dying out in the U.S., but it is alive and kicking in Europe. Overall issuance of bonds with a maturity of 30 years sold by euro-zone governments will probably shrink somewhat over the next year or two because finance ministries are showing a preference for bonds with shorter life spans. Two reasons not to expect aboltion of Euro 30's: (1) European governments are regularly operating at a deficit; and (2) European governments are trying to foster a private pension-fund industry that is heavily reliant upon the safe investment of a long-term security with a fixed income. Dresdner Kleinwort Wasserstein Research predicts euro-zone countries that sell 30 yr bonds - Austria, Belgium, France, Germany, Italy and Spain - will market only 25.5 billion euros ($23 billion) next year, down from an estimated 33.4 billion euros this year and 46 billion euros in 2000. The steady demand and limited supply is sure to keep yields low and prices high, investors say. Some think European bond markets may benefit from the increased demand by U.S. investors filling their new investment needs. "If you need duration, you are willing to go anywhere in the world to find it," Antonio Villarroya, fixed-income strategist at Merrill Lynch in London, says in reference to the desire for investments with long maturities. But U.S. investors now turning to Europe will have to deal with both real and perceived impediments: exchange-rate risk, investment rules that could require keeping investments limited to dollar products, and the feeling that euro-zone bonds are less liquid. FYI: (1) The yield of the 30-year German government bond quickly sank in the wake of the news to a low of 4.81% from 5.10% before the announcement. (2) The U.S. is the source of half of all government bonds with a maturity greater than 10 years. The subliminal message Tom Petruno, LA Times 11-4 Of the $2.26 trillion in Treasury debt held by private investors, nearly two-thirds matures in five years or less. If short-term interest rates whiplash in 2002, Uncle Sam may regret having opted to borrow more via short-term securities rather than locking in a cost of around 5% on 30-year bonds. But short-term rates are controlled by the Federal Reserve. If the Fed chooses to keep those rates low for an extended period - as it did in 1992 and 1993 as the economy struggled to rebound from the 1990-'91 recession - the Treasury's decision to shift its borrowing to shorter maturities could work out fine. That was a key message many Wall Street pros took away last week from the Treasury's decision on the 30-year bond. "I don't think the Fed is going to quickly take away the punchbowl [of cheaper credit] this time around," said David Schroeder, a senior bond portfolio manager at American Century Funds. Jackpots could shrink WSJ 11-2 The Treasury's decision Wednesday to suspend issuing its 30-year bond is likely to gradually lower the size of jackpots for winners of state lotteries. Since lotteries typically use long-maturity risk-free Treasurys to fund their eventual payouts, analysts say that over time, as the number of outstanding long-dated Treasury issues shrinks, with their yields heading ever-lower, so will the jackpots. In response to the announcement Wednesday, the yield on the active 30-year bond fell to 4.81% at the close of trading Thursday, compared with 5.22% Tuesday. Truncation could help Fed Charles Jaffe, Boston Globe 11-7 'The move gives the Fed a bigger effect on the entire spectrum of rates,' says Peter Crane, managing editor at iMoneynet.com. 'The Fed's short-term moves will have more impact on the 10-year Treasury note, now that the 30-year bond is out of the picture, making it easier for a Fed rate cut to spur the economy.' Truncation could help stocks Jeff Opdyke, WSJ 11-5 Some analysts predict that the stock market ultimately could be the winner from last week's ene of the sale of the 30-year bond. The logic: The elimination of the high-interest-rate long bond, combined with already anemic short-term rates, will force investors to search out higher returns elsewhere - most likely stocks. Meantime, as rates go down, both consumers and companies are more likely to refinance debts, ultimately boosting earnings and consumer spending. Kevin Grant, a senior portfolio manager for Fidelity Investment's fixed-income division says "Mortgage savings and corporate refinancings help drive the economy and earnings." Historical trends prove stocks benefit when bond yields shrivel. During the past four decades, in periods when 10-year Treasury note yields have dropped year over year, the S&P's 500 index is up an annualized 15% a year, according to statistics from Ned Davis Research. Move will not hurt bond funds Bridget O'Brian, WSJ 11-13 The disappearance of the 30-year Treasury bond isn't likely to affect most bond-fund investors. The 30-year bond isn't widely used by fund investors. Of the 1,034 taxable bond funds in the database of Morningstar, there are fewer than 50 bond funds that focus solely on Treasury bonds. As of Oct. 31, investors had $16 billion invested in Treasury funds, compared with a total of $874 billion in bond funds. There won't be a big impact for most bond-fund investors. There is still a fair bit of skepticism as to whether the 30-year Treasury bond is really, truly going to disappear. Many in the bond world have fixated on the Treasury Department's use of the world "suspend" in its announcement earlier this month. "If the value of the 30-year becomes so rich, or the yields become so low, the connection with the Treasury has allowed itself the flexibility to reissue the 30-year if they can argue that it saves the taxpayer some money," said Dan Shackelford, senior portfolio manager and vice president of the fixed-income group at T.Rowe Price. "If the 30-year becomes so dear that the interest rate is at or below the 10-year bond, I think they'll do the rational thing and reissue them." A conductor without mojo Rebecca Thomas, Smart Money 11-6 Given the worsening economic circumstances, one could easily argue that the Fed has lost its mojo. "The effects [of lower interest rates] have been blunted by the lack of cooperation from the financial markets," says Goldman economist William Dudley. In fact, some economists say the Treasury Department's decision last week to stop issuing the 30-year bond reflected concerns that monetary policy hadn't done enough to bring down long-term interest rates. "It was a signal of desperation coming from the Treasury but orchestrated by Mr. Greenspan," says Chris Bianchet, VP and U.S. economist at Credit Suisse Asset Management.
This produces one of those paradox situations, where what's good for individual families or firms is harmful to the economy as a whole. Erring on the side of caution makes sense for you and me, but if prudence breaks out all over, we're in trouble. Left to its own devices, however, the economy will almost certainly recover momentum in time. Consumers still have needs and desires, and businesses will find ways to sell them what they want as well as what they need. The real question is what noneconomic events may do to prevent or delay recovery. If the war in Afghanistan drags on inconclusively, or if terrorist attacks further disrupt life at home, prospects for a rebound will certainly be hurt. But don't ask economists how much. Theirs is a rational science, and it's hard to factor insanity into a forecast.
Osama bin Laden is captured 'You would get a heck of a rally,' says Charles Gabriel, a political analyst with Prudential Securities. But it might be a good rally to sell into or short, say several market analysts, including Gabriel. The reason: Terrorist networks run deep throughout the Middle East and elsewhere. So capturing one leader won't finish the job. 'The initial reaction would be a belief that we have solved the terrorism issue, even though we haven't,' says Hugh Johnson, a market strategist with First Albany. Finding bin Laden will be a difficult task. Human intelligence sources are scarce in the region. And the CIA has a history of bungling such operations. Example: the unsuccessful plot to assassinate Fidel Castro in the early 1960s. The war escalates Short of a domestic nuclear strike, the worst-case scenario is a full-scale jihad that draws in Muslim countries throughout the Middle East and Asia. Disruptions to oil supplies and the economy would hit the markets hard. But Johnson and others see this as an unlikely outcome. The reasoning goes like this. Many governments throughout the world know they would risk getting thrown out of power if their economies turned down - or if they lost access to capital - because of a U.S. depression sparked by global conflict. "An extended American recession, leading to a global recession, will spawn widespread unrest and, perhaps, several regime changes," says Mark Melcher, a political analyst at Lehman Brothers. "Don't think for a second that the leaders of developing nations, who often hold a rather tenuous grip on power, aren't well aware of this relationship." [The U.S. and Europe are counting on international trade as their longest-range weapon in the war against terrorism. The theory behind this strategy goes like this: Expanded trade wraps the world more tightly in a web of commerce, lifting living standards in impoverished regions and eliminating an important cause of war and terror. In Southeast Asia and South Korea, trade played an important role in lifting living standards. But equally strong commitments to universal education and well-run governments were also in place. Elsewhere, trade has been a destabilizer, opening traditional societies to modern influences that have produced significant backlashes. That is especially true in the Muslim world. (Bob Davis, WSJ 10-28)] Afghanistan turns into a quagmire You can expect things to take a long time. For investors, this is not necessarily a bad thing. 'Quagmire would be good for the market, as long as it is recognized as not being a defeat,' says Melcher, the Lehman Brothers analyst. 'The upside from quagmire will come if it ends up looking like a containable, festering boil,' agrees Gabriel. 'Even with the quagmire scenario, we will get something of a rally just because of all the stimulus, all this lighter fluid - the fiscal stimulus and interest rate cuts, plus declining energy prices. At some point this is going to light on fire.' But will it be sustainable? Yes, barring other events that may play out during a quagmire in Afghanistan. There are more terrorist strikes Most terrorism experts agree that more attacks are coming. The way the market initially sold off with each fresh report of anthrax shows how it would react to another major terrorist attack. 'If there is another major strike, we may have to retest the lows,' says Gabriel. But the market is also in the process of learning how to adjust to more strikes and the new threat of terrorism. 'We will absorb it,' says Gabriel. 'We will have to.' Likewise, most market analysts aren't concerned about the potential economic cost of a new 'terrorism tax' -- the higher cost of insurance and security, for example. 'Crisis leads to stronger economic activity and a stronger market because the way you deal with it is to spend money,' says Johnson. Health-care stock analysts such as John Hancock's Linda Miller says the new focus on bioterrorism will speed up vaccine research, though itĚs not quite clear how to invest in it at the moment. Dissent arises in the United States 'We have an election next year and the gloves could come off,' says Melcher. 'By next March, Bush better have the public on his side and believing that he has done a good job. Because if he doesn't, it will become all right for the Democrats to complain.' Deep, internal political divisions over these issues would bring uncertainty - which investors hate - leading to market weakness, says Melcher. The war on terrorism destabilizes the Middle East A lot of attention has focused on Pakistan. But a more likely candidate for unrest is Saudi Arabia because of internal pressure against the current rulers and their ties with the U.S., says Angelo Codevilla, professor of international relations at Boston University. He thinks there is a good chance Saudi Arabia could fall into the hands of anti-U.S. factions inside the country, who would turn oil into a political weapon. Embargoes could drive up the price of crude dramatically. What will that do to the markets? 'In this kind of scenario, it does not matter what energy stocks you own because they will all do well,' says Jason Selch, an oil analyst with Liberty Wanger Asset Management. Cyclical stocks, meanwhile, would fare poorly as the higher oil prices cast doubts about an economic recovery. 'I wouldn't put a high probability on it,' says Selch. 'But there is probably a greater than 10% chance that there is a major destabilization in the Middle East as a result of all this.' U.S. attacks spread to Iraq or elsewhere Like other terrorism experts, Codevilla thinks terrorist networks run through many other countries, including Iraq, Syria, Sudan and Somalia. But the U.S. is putting off anti-terrorism efforts in places like these, in the hopes of not stirring up a bigger hornet's nest, he says. Could that change? Perhaps, if there are further serious terrorist strikes in the U.S., analysts say. Factions inside the administration already want to move things in that direction, once clear links between terrorists and countries beyond Afghanistan can be clearly demonstrated. Broadening out the war effort would bring a whole new set of uncertainties that would weigh on the market. Given all the unknowns in this new kind of war on terrorism it will be hard to know when it's really over. The definition of victory is when you can go on to other things," says Codevilla, adding: "You and I are no longer worried about Hirohito attacking Pearl Harbor." Fortunately, for investors, markets may learn how to live with these kinds of unknowns and move on, even before that. a French investment proverb Chet Currier, Bloomberg 10-16 The market rally suggests a growing confidence that the U.S. and its allies will prevail. Exactly how remains to be seen. Quite often, though, the market paints its outlook in broad strokes and fills in the details later. Thus hopes of a positive outcome can gain a foothold even while grave dangers persist. Recall the old French investment proverb, `Buy on the cannons, sell on the trumpets.'
The consensus still is betting that the fourth quarter will be bad. After that, the consensus view goes, things will get better because the worst will be behind us. Businesses already have pared their inventories, so they'll be ordering. Housing, which usually crumbles early in a recession, remains hearteningly healthy. Prices of oil and natural gas are behaving. Americans, lured by 0% financing, are buying lots of cars. The Fed is still cutting interest rates, even though earlier rate cuts haven't yet been fully felt. Congress is preparing another dose of fiscal stimulus. And, at least until this week's reversals, the buoyancy of stock prices and consumer-confidence polls offered supporting evidence. The mild-recession scenario starts by assuming that nothing bad will happen. The U.S. will avoid another jarring act of terrorism, another big plunge in the stock market, fallout from Argentina's possible default on its foreign debt, a lengthy disruption of the U.S. mail and anything that lifts oil prices. Yet each of these unhappy events would whack the economy, and no one sensible can rule them all out. 'Two Handed'* Stats Ip and Opdyje, WSJ 11-1 The government announced Wednesday that the U.S. economy shrank at a 0.4% annual pace in Q3, probably heralding a recession. Yet stocks remained stable, maintaining for now their remarkable rebound since the terrorist attacks. Which of the two signals predicts where the economy is heading? Wall Street has an excellent track record of forecasting economic recovery. But the market sometimes sends false signals. The market's rally over the past month is important. By digesting and pricing the collective expectations of millions of individuals acting on all available information, the market is probably the most efficient leading indicator available. In previous recessions, stocks bottomed three to nine months in advance of the economy's upturn, with an average lead time of five to six months, according to Ned Davis Research. If this rally holds and the pattern is repeated, the economy should be growing again by early 2002. That is what most economists expect. "It's going to get worse in the foreseeable future," says Lakshman Achuthan, managing director at the Economic Cycle Research Institute in New York. He notes that the stock market and the recent expansion of the money supply - thanks to aggressive Fed rate cuts - are the only significant early indicators of a turnaround. Other data - from the number of workers making initial claims for unemployment insurance to the yields on risky bonds relative to those of safe Treasurys - suggest a much deeper decline, he says. Wednesday's GDP numbers gave few clues that a recovery is in store. Business spending on equipment, software and buildings fell at a 12% annual rate. High-tech investment dropped 14%. Foreigners cut their purchases of U.S. exports, but imports fell even more. Businesses filled even more of their sales out of existing inventories than they did in Q2 - a potentially promising sign. Personal consumption grew just 1.2%, less than half its Q2 rate and its slowest rate since 1993. Housing also slowed sharply. Consumption will probably determine whether in fact a recession occurs and how severe it will be. Ominous as the news sounds, it may portend the start of a sustained Wall Street rally. Bull markets almost always begin amid bad economic and profit news. Since 1932, years in which earnings have declined 10% or more saw an average gain of 16% by stocks, according to Ned Davis Research. Companies in the S&P 500 this year will take a record $125 billion in restructuring charges - more than four-fifths of that by technology companies, according to Steve Galbraith, a strategist at Morgan Stanley. Recognizing the excess now could clear the way for higher profits next year. He notes that 1993 was one of the best years for profit growth on record - and it came the year after huge restructuring charges were recorded. But for all the value that stocks have lost, there is a persuasive argument that they have more room to fall. Consider price-earnings ratios: The S&P 500 is trading at 31 times trailing earnings. It is trading at between 20 and 24 times expected earnings, depending on how they are measured. Since 1929, bull markets have peaked at a P/E ratio of 17.4, on average, while bear-market troughs hit 12.5. * 'Two Handed' being a reference to a Harry Truman quote, where he wished for a one handed economist. The ones he talked with always made projections with the caveat - 'one the other hand . . . '
The trio's work suggests the directions the stock market could take after the shock of Sept. 11 wears off. In late 1970s and early 1980s (an era when all stocks were suspect), the sure way for companies to move stock prices was to disappear from the stock listings in a merger or a leveraged buyout. Call me an optimist, but I don't see us heading for a similar fate. Investors and regulators are smarter. Public companies might peruse Spence's work on imperfect information for clues on how to win over buyers. Spence shows how signals could overcome imperfect information. In the used-car world, for example, a warranty signals to the buyer that the seller can be trusted. Dividends are the closest parallel in the stock market. I predict a renaissance in corporate payouts if stock prices and interest rates stay low. Stiglitz tackled the information problem from the opposite direction, studying how insurance companies and banks could wring information from reticent consumers that might provide some comfort in extending policies and loans. With a slight twist, his work might be useful in a study of how the financial industry can keep investors in the fold. As I remember the late 1970s, stockbrokers were calling us rather than the other way around. Just the Facts What comes naturaly? Greg Smith of Prudential Equities sees the S&P 500 winding up the year at 1050, a cut below its current level. And he thinks the market is in for a relatively narrow trading range that could prevail for, say, four years. The principal reason he thinks so is that he envisions the ebbing of the vast flood of money that poured into mutual funds and that was a prime force in lifting the market to such giddy heights in the 'Nineties. In 2000, investors put a net $305 billion into equity mutual funds. So far this year, the total is $12 billion. And he's not sanguine that we'll see those massive flows return any time soon. "Individuals still have close to 50% of their assets in the stock market," he points out, compared with only 22% in 1990. "Americans are not natural risk takers," he reflects. But they've now had enough of a taste of risk to keep them wary of stocks for quite a spell. (Alan Abelson, Barrons 11-12) Going long Since in both Europe and the U.S., "there's no inflation, people will continue to have an appetite for more duration in order to get more yield," says Andrea Burke, portfolio manager for global fixed-income at Putnam. (Sensitivity of bond prices to interest-rate movements is greater for longer-dated securities.) As longer maturities attract more buyers, "we could see some flattening" of the U.S. and European government bond yield curves. But that's not the only reason why long-dated sovereigns' yields may drop more than short-term rates. "There is huge global imbalance between requirements for liabilities of a certain duration and the availability of bonds to meet that," driven by the needs of pension funds and insurers for longer-dated paper, says David Goldman, global head of credit strategy at Credit Suisse First Boston. (John Parry, Barrons 11-12) Caution - False Rallies Ahead Since March 2000, every broad market rally preceding the current one proved to be a false alarm - and a better time to sell most stocks than to buy. Consider: The Nasdaq composite index surged 41% between April 4 and May 22 after plummeting in the first quarter. That beats the current rally, which has seen the index rise 28.5% from its Sept. 21 closing low. After May 22, the Nasdaq swooned again for most of the summer. The bottom line: A buyer at the tail end of the spring rally, when the index reached 2,313.85, would still be down 21% today with the index at 1,828.48 as of Friday. (Tom Petruno, LA Times 11-11) [Jacqueline Doherty, Barrons 11-5: Consider that in the last long-term bear market, the Dow closed at 995 in February 1966 and 16 years later, in August 1982, stood at 777. But even during that dour span, there were four periods in which stocks had strong rallies, which respectively boosted the Dow by 32%, 66%, 76% and 38%.] Seven Reasons to Sell a Fund (1) Your fund trails competitors (2) Your fund changes (3) You have a tax loss (4) You need to rebalance (5) You want to consolidate your accounts (6) You need the money (7) You're taking too much risk. (Jonathan Clements, WSJ 11-11) Bond timing Investors pumped $68.9 billion into bond funds in the first nine months of this year. That is five times the cash that went into stock funds, and it is a big change from 1999 and 2000, when stock-infatuated investors withdrew a total $54.1 billion from bond portfolios. The fact that investors are snapping up bond funds only now, after sharp drops in interest rates, is evidence that "people don't have a very good understanding of bonds and bond funds," says Ian MacKinnon, a managing director in the bond-fund area at Vanguard Group. (Karen Damato, WSJ 11-9) The didn't know jack Findings from a new survey by American Century Investments of 750 investors who said they handled finances for their families: Only 31% knew that when interest rates rise, bond prices generally fall; Only 13% answered correctly that generally speaking, the longer a bond's maturity, the more sensitive its price is to changing interest rates; and fully 41% of the survey participants mistakenly thought interest-rate sensitivity declines with the length of time until bonds mature. (Karen Damato, WSJ 11-9) Dividend stability There are now 100 dividend-paying companies in the S&P 500 that offer better returns than many money-market funds or bank CDs. But not every dividend-paying stock is a sure bet, as Ford Motor shareholders learned recently, even big-name companies can be forced to cut their dividend. The most likely candidates for reduced dividends tend to be Old Economy companies such as chemical producers, forest-product companies and heavy-equipment makers, according to analysts at Moody's. Companies with more stable dividends usually are less susceptible to economic downturns because their products or services are almost always in demand. These include drug makers, consumer-products companies, utilities and energy concerns. (Henry Sender, WSJ 11-4) Penalizing the panicky Every once in a while patience is rewarded without the customary long, tedious wait. Look how fast a payoff came for investors in stock mutual funds who resisted the impulse to panic and sell when the terrorists struck on Sept. 11. Through the end of October on Wednesday, the S&P 500 showed a 2.2% total return since the close Sept. 17; the Nasdaq 7%, and the Dow 1.9%. (Chet Currier, Bloomberg 11-2) Flu vs Anthax Amid uncertainty about the reach of the anthrax threat, many people have grown increasingly fearful about run-of-the-mill flu symptoms. Some clues about what is and is not anthrax can be gleaned from the people who have already contracted the disease. None of the patients complained about runny or stuffy noses, upper respiratory problems or wet, hacking coughs. The distinguishing trait has been that the symptoms were systemic - meaning that victims felt sick all over their body, and all felt profoundly tired. Robert Stevens, 63, the first anthrax victim, complained of feeling tired and weak, nausea and fever. Thomas Morris, 55, had progressive fatigue, fever and body ache. Joseph Curseen, 47, thought he had a cold or food poisoning. He had progressive fatigue, nausea, vomiting, diarrhea and fainting spells. Kathy Nguyen, 61, had chills and muscle aches. (WSJ 11-1) Fluke in PCE decline Is the 0.4% decline in the personal consumption expenditures price index in Q3 a sign that deflation is spreading from the industrial world to consumers? The BEA waved a red flag at the quirky drop: `The Q3 downturn in the price index also reflected a deceleration in PCE services prices associated with the treatment of insurance payments resulting from the Sept. 11 attacks. The increase in benefit payments is treated as a reduction in the average net premiums paid for insurance services.' The BEA directed curious readers to a separate technical note, where it expanded on and quantified the adjustment by which the increase in benefit payments resulted in a reduction in the average net premium paid for insurance services. `Excluding the insurance-related price effects, the PCE price index increased 0.8 percent,' the BEA said. (Caroline Baum, Bloomberg 11-2) Wages update Last month, when labor market conditions were about as abysmal as they get - the U.S. economy shed 415,000 jobs while the unemployment rate vaulted 0.5 percentage point to 5.4% - average hourly earnings rose 0.1%, the smallest increase since January, when wages were unchanged. Wages never fell on a monthly basis in the 1990-1991 recession. And there are only spotty examples in the 35-year history of the series where wages actually declined. (Caroline Baum, Bloomberg 11-2) Plan now You want to start planning for emergencies now, while you are relatively calm and not pressured for time, rather than later under possible crisis conditions. If you had to relocate for a time on short notice, where would you go? What necessities would you bring with you, and are they readily at hand? Are you and your family adequately covered by health and life insurance? By wills and estate planning? Will your market holdings survive a scare, or will you get shaken out by a margin call? Are you sufficiently diversified, should economic weakness extend longer than expected? While you may not be able to cover all your bases, the mere act of planning helps to ward off paralysis and allow for constructive responding should additional crises erupt. (Brett Steenbarger, MSN 11-2) More Planets Discovered An international team of astronomers has discovered eight new extrasolar planets, bringing to nearly 80 the number of planets found orbiting nearby stars. The latest discoveries, supported by the NSF and NASA, uncovered more evidence of what the astronomers are calling a new class of planets. These planets have circular orbits similar to the orbits of planets in our solar system. At least two of the recently detected planets have approximately circular orbits. The majority of the extrasolar planets found to date are in an elongated, or "eccentric," orbit. "As our search continues, we're finding planets in larger and larger orbits," said Steve Vogt of the Lick Observatory, University of California at Santa Cruz. "Most of the planetary systems we've found have looked like very distant relatives of the solar system - no family likeness at all. Now we're starting to see something like second cousins. "In a few years' time we could be finding brothers and sisters." (NewsWise 10-17) Quick Facts, Stats & Opinions As OSU Prof. Stephen Cecchetti points out, the strong faith in the link between slack economic times and a slowed rate of inflation hasn't always been justified by history. After all, inflation is essentially a monetary phenomenon, and if an easy-money policy does anything, it tends to create more money. (Gene Epstein, Barrons 11-12) What if the notion that large stocks always win has been so avidly embraced by the public that these stock prices remain stubbornly high - which, perversely but inevitably, will reduce the returns of stock funds in years to come? In that case, the fund industry and the average fund investor - both of whose asset-mix tilts steeply toward large-cap stocks - are set up for profound disappointment. (Michael Santoli, Barrons 11-12) There are VCR's in about 90 million homes in the United States, compared with only about 20 million DVD players so far, But after the holiday shopping season, the number of DVD players in American homes is expected to approach 25 million, according to industry analysts. "Shrek" sold 2.5 million copies on disc in its first three days in stores, making it the fastest-selling DVD ever. DreamWorks said about 4.5 million "Shrek" copies had been sold in the VHS format in the same period. (NY Times 11-12) Year-to-date, diversified U.S. stock funds are down almost 16% on average, while diversified international-equity portfolios have lost more than 22%. Russel Kinnel, of Morningstar, advises that in order to see the benefits of diversification, you'll need to look out further than a few years. When you examine the past few decades, you'll notice that U.S. markets did not always reign. In the 1970s, European stocks ruled. In the 1980s, Japan was the kingpin. "In two out of three decades, the U.S. was not the place to be," says Kinnel. "I'm not sure you'd want to give that up. (Dawn Smith, Smart Money 11-7) According to a survey by the Nelson A. Rockefeller Institute of Government, state-tax revenue slumped about 3.4% in the July-September quarter - the biggest quarterly year-over-year drop in total state revenue since the institute began tracking state revenues more than a decade ago. Personal income-tax revenue dropped 4.2% in the quarter. Sales-tax revenue declined 0.1%, but corporate income-tax revenue plunged 25%. (WSJ 11-7) Though too much tax maneuvering can mess up any long-term investment plan, the urge to ``harvest'' a tax loss can serve useful purposes too. If it forces me to overcome inertia and give my holdings a close appraisal, it might yield benefits beyond tax savings. (Chet Currier, Bloomberg 11-6) Local government jobs rose 2.2% to 13.5 million in October from September, says the BLS. (WSJ 11-6) The arguments for a mild recession (agressive Fed, prompt tax cuts, strong banks, low energy prices, controlled inventories) outweigh those in favor of something worse (high debt, an uncetain war). But such a scenario would not be all peaches and cream. History shows that mild recessions tend to be followed by mild recoveries, since pent-up demands are less likely to build when a downturn is brief. Call it the rubber band effect, but it seems to work out this way all the time. (Irwin Kellner, Economy.com 11-5) Managers of mutual funds are scored on extremely short time periods. It's as if baseball teams were judged not on how many games they win, but during how many individual innings they were in the lead. (Michael Santoli, Barrons 11-5) Bianco Research examined how investors would have fared had they put all the money they've stashed in equity funds since October 1990 - $1.4 trillion - into Treasury bills instead. Stock funds delivered an overall paper profit of $303 billion, while T-bills would've produced $381 billion. (Michael Santoli, Barrons 11-5) Including September's job loss of 213,000, the total decline from August to October came to 628,000. Of that, 188,000 jobs were lost by airlines, restaurants and hotels. And another 367,000 could be attributed to manufacturing if you include all positions shed by help-supply services, many of which contract with manufacturing. Finance, insurance and real estate posted modest gains, as did health and hospital employment, while department- store employment remained about flat. (Gene Epstien, Barrons 11-5) Roughly 4 million Americans have retired in the last two years. They are facing a worst-case scenario: Tapping their savings when stocks are suffering a bear market. (Kathy Kristoff, LA Times 11-4) Stanley Greenberg, a Democratic pollster, surveyed voters recently about the economic stimulus plans put forth by the two parties. Nearly every major idea from both sides of the aisle got strong support. Cutting the capital gains tax was favored by 70% of those surveyed. Providing more federal money for building projects was backed by 85%. A plan to subsidize at least half of health insurance premiums for the unemployed won 68% support. A plan to repeal the corporate alternative minimum tax and allow corporations to claim immediate refunds got just 28% support. (Richard Stevenson, NY Times 11-4) The Labor Department's index of total hours worked - which together with productivity growth helps determine economic activity - tumbled by a far larger-than-expected 0.7% last month. Even if hours worked are unchanged in November and December, they will be down at a 3.8% annual rate in Q4. And that would be consistent with at least a 2% decline in Q4 GDP, according to David Orr, chief economist at Wachovia Securities. (Rebecca Thomas, Smart Money 11-2 ) In October, average hourly earnings rose by just 0.1%, or 2 cents, after a 0.3% increase in September. At an annual rate of 3%, wage growth has significantly slowed from the 4% annual rate recorded in Q2. On a positive note, the resulting cost savings will help buoy corporate profits. Unfortunately, the effect of slower wage growth on consumer spending - which grew by an extremely sluggish 1.2% in the Q3 - is cause for concern. [WSJ 11-2: The average work week fell to 34 hours, down six minutes from September.] (Rebecca Thomas, Smart Money 11-2 ) "My concern," writes Morgan Stanley's Byron Wien, "is that investors are overly complacent about the geopolitical environment." Though the market is 12% undervalued according to Wien's model, it still isn't discounting ground troops in Afghanistan, a potential disruption of oil supplies and the continued threat of bioterrorism. (Rebecca Thomas, Smart Money 11-1) Quick Tips If you're building a Web page, you can add your own icon to the page so that people who save your page to their Favorites folder (using IE5 or greater) will automatically use the icon. To do this, you need to create an icon of 16 X 16 pixels and 16 colors. Name the icon "favicon.ico" and upload it to the root folder of your Web site. (EMAZING 11-10) To listen to the [net] radio using Media Player, run the program and then click the Radio Tuner tab. Now you can select the station you want to hear. If you don't see anything you'd like to hear, select from one of the listed topics (Country, Top 40, etc.). Click the station you want to hear and select Play. [NOTE: I had not tried this before. I had smoother downloads on my 56K connection with Media Player than with the other software I have previously used.] (Emazing 11-8) 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) Google.com has some neat tricks. Need somebody's phone number? Type in a search on the order of John Doe, Chicago, Illinois, and the first hit will be phone numbers for all who fit the search term. Need an address? Same drill, and you will get the street number, and a map showing how to get to that address. Need a stock quote? Type a ticker symbol and you'll get the latest trade data and a list of recent headlines about the company. (James Coates, Chicago Tribune 10-21) Home Page Previous Factoid Top Sites |