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I won't be wronged, I won't be insulted, and I won't be laid a hand on. I don't do these things to other people, and I require the same from them. - John Bernard Books - played by John Wayne, 'The Shootist' (EMAZING Quote of the Day 9-25)
Spending on hospital care accounted for 47% of the increase in health-care costs last year. Last year's increase was driven by an 11.2% growth in spending on outpatient care at hospitals, following an 8.9% increase in 1999. Spending on overnight hospital stays rose 2.8%, compared with a 1.6% increase the year before. Prescription drug costs continued to rise, though they made up just 27% of the overall spending increase. Costs have risen because aging Americans need more medical care and insurers have responded to pressure from patients by relaxing limits on care. Hospitals may be charging more to cover their higher labor costs, the study said. Labor accounts for almost half of hospital costs, according to the Federation of American Hospitals. Costs are increasing as hospitals pay more to hire nurses and medical technicians. Employers had absorbed most of the increase because the labor market was tight. Now, companies are making workers pay more for drugs and doctor visits, a trend that may increase as the economy slows, the study showed. Related: AJC 9-25 Hospitals were able to raise their prices as employers have gravitated toward looser forms of managed care. In such systems, which give patients more choice of hospitals and doctors, a health insurance plan is likely to lose business if its network does not include the most popular hospitals. There has been a change in the balance of power between hospitals and health plans. A spate of hospital mergers has lessened competition, giving the companies that remain more leverage in negotiations with the plans. And with fewer open beds, each hospital is less dependent on any one plan's patients. Hospitals, squeezed by low Medicare payments, also are increasingly aggressive about making money through their private contracts. Spending for drugs also rose - by 14.5% in 2000 - after jumping 18.4% in 1999. Drug costs accounted for about a quarter of the overall cost increase, down from 41% in 1999. The center pointed to two factors for the smaller increase: no new ''blockbuster'' drugs that drive up demand, and an increased use of tiered pharmacy plans, where patients pay extra to get name-brand drugs and even more if the ones they choose are not on a discounted list. Related: LA Times 9-25 Premiums for auto and homeowners policies, which were already on the rise before terrorists flew hijacked airliners into the WTC, may continue to inch upward as insurers struggle with lower profits and higher costs, analysts said. Related: Paul Duggan and Susan Levine Washington Post 9-26 Many workers and retirees who depend on employer-sponsored health insurance are likely to face significant premium increases in the near future, and some small employers may stop offering coverage, according to a Kaiser Family Foundation report. The report is based on a survey of 3,402 employers nationwide. The anticipated premium hikes come in addition to an average increase of 8.3% this year. With the 8.3% hike in premiums, the average cost of covering a single employee rose to $2,426 a year, and to $6,351 for an average family, the report said. (Center for Studying Health System Change Data Bulletin 21 - 9-26: In 2001, the employee share of premiums remained stable at 15% for single coverage and 27% for family coverage.) The Kaiser report found that premium increases were especially severe in the Northeast, a conclusion supported by a recent survey of employers by the Boston Globe. Several employers said they had been informed by insurance providers that premiums would increase 20 - 30% in the next year. The federal government has announced that workers' insurance contributions will rise by an average of 10.5% next year. Annual Spending and Premium Trends, 1991-2001 Source: Milliman USA Health Cost Index ($0 deductible), Kaiser/HRET survey of employer-based health plans for 1999-2001 and KPMG survey for 1991-98
SOURCE: www.hschange.org Center for Studying Health System Change Issue Brief No. 43 'The backdrop right now is not toward cutting costs; it's toward providing more care,' said Norman M. Fidel, a senior vice president at Alliance Capital Management. In fact, the big surprise so far in 2001 is that employers have done so little to shift costs to employees, he said. But consumers shouldn't get too comfortable with the status quo, because declining corporate profits and increasing medical costs and insurance premiums will eventually force employers to shift more costs to workers. Robert Reischauer, Ph.D., president of The Urban Institute, believes three main factors will determine how quickly employers begin major cost shifts to employees. First, if the tight labor market significantly loosens, employers will no longer have to compete as aggressively to attract and retain workers. Second, if corporate profits continue to shrink, firms will have less leeway to absorb higher premiums. And finally, the magnitude and duration of underlying medical cost increases may push employers to increase cost sharing. Currently, consumers' health care expectations are almost limitless, said Roberta Goodman, a Merrill Lynch managing director. 'We think our health care system should cover anything we need, anytime we want it, from whomever we want it with no delays. And that somebody else ought to be paying for it. That's our basic problem,' she said. Goodman predicted more health plans will abandon restrictive care-management practices such as preauthorization for care and instead invest in information technology to analyze physician and hospital practice patterns to determine whether patients are receiving the best care based on current scientific evidence. According to Goodman's research, managed care companies should give more focus on 'best practices'. They could weed out the 30% of care that's inappropriate, ineffective or outright harmful. Research shows that there are substantial gaps between what is done in the marketplace by practicing physicians and what we know from evidence-based medicine to be more appropriate. Managed care companies can identify and help close those gaps through quality incentives. That can have a very positive impact on costs over an extended period of time. Related: Washington Post 9-11 The cost of employer-sponsored health insurance rose 11% this year, according to a new report by the Kaiser Family Foundation. (WSJ 9-26: That's because insurance companies expect continued cost increases and are trying to make up for profits lost in the late 1990s when they cut expenses to gain market share, the report said.) What are national policymakers doing about the problem? Not much. The major health care fight in Congress involves the regulation of managed care. The leading versions would strengthen the hand of patients and providers vs. cost-containers. If anything, such measures would add to costs. The Kaiser report notes that there already has been a retreat from the strictest form of managed care. Five years ago, 31% of workers with employer-paid insurance were enrolled in health maintenance organizations; today the figure is 23%. National Health Expenditures Aggregate Amounts, by Type of Expenditure (in billions) Health Care Financing Administration, National Health Statistics Group.
Losing Value: Andrew Engel, a senior research analyst at Leuthold Group in Minneapolis, reckons "the downside from here is maybe another 5%" for the S&P 500 and the Dow Jones Industrial Average. But what if things got really rough? To get a handle on a reasonable worst-case scenario for the next 12 months, Mr. Engel examined historical valuations for the S&P 500 and the Dow industrials, including key market measures such as price-to-earnings multiples, price-to-book value, price-to-cash flow and dividend yield. "If stocks go back to the lowest 25% of historical valuations, we see downside of 37% to 44% for the S&P 500 and the Dow industrials," he says. "You might see that if there was another terrorist attack on the U.S., or if there were absolutely no signs of economic recovery." The numbers are much less alarming for smaller companies. "If you look at small and midcap stocks, we're already in the bottom 25% of valuations," Mr. Engel says. "The focus of investors should really be on the small and midcap stocks. There's less risk there." Clifford Asness, managing principal of New York's AQR Capital Management, also focuses on valuations. He notes that, based on history, there is a 5% chance that earnings could tumble 20% or more in the next 12 months. Meanwhile, he notes the S&P 500 is still at a lofty 24 times trailing earnings. But even in a realistic worst-case scenario, Mr. Asness doesn't think the market's earnings multiple will fall back to the historical average of 15. "We've done extensive modeling that shows that p/e multiples do tend to be higher when inflation and interest rates are low. Also, if earnings really do plunge, you could see a slightly higher earnings multiple as people correctly see earnings as being abnormally low. Finally, I do give some credence to the idea that investors have learned that equities have historically traded too cheaply." Mr. Asness figures p/es might drop to 18 from their current 24. Combine that with a 20% decline in earnings and you could see the S&P 500 drop 40%. "Throw in an exciting 2% for dividends, and I'd call a 38% decline in the S&P 500 a realistic worst case," he says. Asness hastily adds that this is not his forecast. "This is what might happen if everything that realistically can go wrong does go wrong." Jay Mueller, an economist and portfolio manager at Strong Capital Management, notes that economic slowdowns propelled the S&P 500 down 36% in 1968-70, 27% in 1980-82, and 20% in 1990. "Typically, when you get a recession, you get a sell-off in the range of 25% to 35%. "We're at those levels already." The risk is that this isn't an ordinary recession, but something more like 1973-74, when stocks plunged 48% as the market reacted to a host of economic and political problems. If today's market dropped that much, share prices would lose another 21% from current levels. "I don't think this is like 1973-74 yet," Mr. Mueller says. "I still think this is more like 1990-91, in terms of what the economic damage is going to be like. But other bad things could happen."
Home builders energetic activities have been a mainstay of the economy. New construction starts on single- family homes fell in August, but they are still above the levels a year ago. That is mainly because builders, until Sept. 11, had been willing to build houses they have not sold in advance. These spec homes represent more than 30% of new single-family construction, according to the NAHB. "Now some builders are telling us they will discontinue spec starts," said Michael Carliner, the association's vice president. Airlines, forced to cut back flights, have announced that they will eliminate 79,000 jobs, almost 12% of total employment. The ripple effect is much worse, said David Swierenga, chief economist of the Air Transport Association. For every airline job that is lost, six or seven jobs disappear in related industries. These include "people who work in airports, at travel agencies, for aircraft manufacturers, hotels, resorts, Disneyland-like amusement centers."
And the Fed's series of rate cuts earlier this year has sharply reduced mortgage rates and kept the housing market from collapsing. That's a big contrast with the situation a decade ago. When the last recession started in July 1990, Greenspan's key interest rate was at 8%. By the time it hit 3% in September 1992, the country had been out of recession for a year and a half. That's one reason economists are cautiously optimistic this time around. Since interest-rate cuts usually take 12 to 18 months to fully affect the economy, the cuts begun this year are better-timed and are setting the stage for a rebound, they say. "Lower mortgage rates and lower lending rates are an advantage now compared to the last recession," says Doug Pedersen, of Conway Pedersen Economics. "That's certainly been stimulating consumer spending up till now."
"The most significant thing about the numbers this week is the flow numbers for money-market funds," said Bob Adler of AMG Data Services, a fund research firm. About $66 billion went into those funds, by far the most on record, he said. "This may be coming in from sale of [directly owned] stock, but it did not come from net cash redemptions from equity mutual funds," Adler said. Money-market funds may be benefiting from new money that in the past might have gone into equity funds, he said. TrimTabs.com, a firm that tracks fund flows, estimated that $9.4 billion left equity mutual funds in the first three days of this week - $1.6 billion on Monday, $6.2 billion on Tuesday, and $1.6 billion on Wednesday. But "the interesting thing about that $9.4 billion" is that when the firm looked at the five trading days ending Sept. 5, "the outflow in that [period] was $10.7 billion," said Carl Wittnebert, TrimTabs' director of research. Related: Mutual Fund Stats - LA Times 9-22 Stock mutual funds could be on track for their worst year in at least 40 years. The average diversified U.S. stock fund is down 25.7% year to date through Thursday, according to Lipper. If funds close the year at that level, the losses would exceed the 24.9% decline of 1974 and the 22.1% decline of 1973. Quarter to date, the average diversified stock fund is down 21.6% through Thursday. If that figure holds through the end of the quarter it would be the worst quarterly performance since the second quarter of 1970, when the average fund fell 22%. Related: Mutual Fund Stats - Christine Van Dusen, Atlanta JC 9-22 The average stock fund fell 10.26% through Thursday, according to Lipper. That's a greater drop than the 9.89% decline in the S&P's 500 Index over the same period. Investors with retirement plans reacted by moving their assets from large-cap stocks to more conservative investments, such as bonds. According to the Hewitt 401(k) Index, which tracks transfers, Monday's activity was nine times heavier than a normal day and more than twice as heavy as on other high activity days. (NY Times 9-25: Transfers to stable value funds and bonds, along with the stock market's decline, lowered the percentage of stock in the average Hewitt 401(k) participant's account from 68.5% at the end of August to 61.5% after last Monday.) Related: Danny Hakim, NY Times 9-23 Much of the selling came, some investment advisers said, from companies and financial institutions that bailed out of large blocks of stock. Others said it was foreign investors, retreating nervously from a long love affair with the United States market. There were reports of wealthy financiers, like the Bass family of Texas, selling huge chunks of stock in a scramble to raise cash to pay off margin loans or other obligations. Others said the sellers were insurance companies preparing to pay the $30 billion to $40 billion of claims related to the collapse of the WTC towers. Related: Michael Santoli, Barrons 9-24 The analysts at industry research consultant Strategic Insight are always quick to broadcast the idea that fund shareholders tend to be steady-handed in the treatment of their portfolios, rarely fleeing in stampedes. Marshaling the evidence of history in bear markets past, the firm has concluded that "During times of financial uncertainty, investors reduce the turnover of their financial assets; thus redemption activity tends to decline during a bear market, with the exception of brief and modest spikes during sharp down-market weeks. Investors' psychological aversion to realizing losses explains part of such bear-market behaviors." Strategic Insight looks back to the bear market of 1973-74 to press its case that redemptions, as a percentage of fund assets, tend to decline as weak markets persist. Sales dropped precipitously from $4.1 billion in 1972 to $2.4 billion in 1974, but redemptions slowed by even more. These observers make the point that Joe Q. Fundholder tends not to monkey with his fund portfolio much unless there are other, more compelling, hot-performing funds stirring his envy. There aren't many of those around at the moment. Related: Reuters 9-25 Investors drained a net total of about $8 billion from stock funds last month amid broad declines in major U.S. market gauges, Lipper estimated. The August outflows from stock funds still represent only about 0.25% of total equity fund assets. The August outflow was the biggest since March, when redemptions exceeded new purchases by about $20.6 billion. Before Monday's market rebound, stock funds were on track to post what could be a record net outflow, in dollar terms, of about $40 billion in September, according to estimates by TrimTabs.com.
At a minimum, the U.S. will likely give up some long-term growth in exchange for more security, both military and economic. Increased spending by the government will mean smaller surpluses, higher long-term interest rates, and less private investment. Already, the prospect of diminished surpluses has sent rates on 10-year government bonds heading up. And with more research and development funds going to projects that enhance security, less will go to those that enhance profits. "The immediate implication of a shift to public spending is a significant reduction in productivity growth," says Marvin H. Kosters, the American Enterprise Institute director of economic policy studies. During the '90s, free trade and open immigration were two New Economy mantras. The growth of trade during the decade helped stall inflation and boost profits, with about one-quarter of corporate profits coming from outside the U.S. Meanwhile, the flow of people into the country accounted for one-fourth of population growth in the 1990s, helping ease strains in the labor market. The terrorist attack hit directly at both aspects of openness. With the terrorists moving freely in the U.S, and even getting pilot training here, there will inevitably be new restrictions on immigration and tighter border controls. Security considerations, such as restrictions on air cargo and more intensive custom inspections, will likely make the cost of shipping goods overseas rise. Another big worry is that more government activism will reduce innovation. Over the last 30 years, the U.S. developed an unequaled system for funding creative young companies through private financial markets such as venture capital and IPOs. During the '90s, this funding for startups soared, providing fuel for growth. This expansion of privately financed innovation was aided and abetted by a sharp reduction in the resources going to R&D for defense. Since 1988, real spending on that has fallen by roughly 28%, freeing up scarce skilled engineers and scientists for commercial rather than defense jobs. Now spending for those needs is likely to rise. That's appropriate, but it could dampen the entrepreneurial process that helped create the New Economy. A recent study by two Organization for Economic Cooperation & Development economists suggests that increases in spending on defense research displaces private R&D. Moreover, increased use of security classifications makes the free flow of information more difficult. And small innovative companies thrive on speed, but the complicated and slow process of defense procurement tends to favor large established companies. The goal of commercial R&D is to find the projects that have the highest rate of economic return, while military spending is devoted to projects with the highest rate of security return. Occasionally these overlap, but that's the exception more than the rule. The result: On average, a dollar of defense-related R&D is likely to contribute less to productivity growth than civilian R&D. Related: Bernard Wysocki, WSJ 9-24 First-round venture funding already had fallen to just $1.04 billion during the 2001 second quarter, down 87% from the year-earlier period, according to a survey by PriceWaterhouseCoopers. In September, just as some were detecting the faint signs of a rebound in confidence, this confidence disappeared on the terrible morning 13 days ago. Funded or not, most start-ups are keeping expenses to an absolute minimum. Some call it "hibernating" and just trying to hang on until a warmer climate loosens up funding and purchasing by potential customers. Will would-be entrepreneurs pause from starting companies in a world economy that has gone from fragile to something worse. That would crimp innovation in America, surely. Paradoxically, though, the payroll slashing could bring new entrepreneurs to the scene? Related: James Flanigan, LA Times 9-23 Industry will see changes in the new war economy. Industrial deregulation, a trend since the 1970s, when banks and airlines were deregulated, will be modified. The trend was already on the wane after California's troubles with electricity deregulation. Other industries will come to the fore in the new war economy. Communications is getting renewed attention. Investors noted how essential telephone communications were in the week of the terrorist attacks. That's why stocks of BellSouth, SBC Communications and Verizon rose last week even as most stocks fell. Experts predict that companies will rely even more than they now do on computer systems to run their affairs. Stocks of computer services companies, such as EDS and Computer Associates, fared better than most stocks in last week's markets. "Authentication will be a major new field," says telecommunications expert Peter Bernstein of Infonautics Consulting, a Ramsey, N.J., firm. "Security of data will be paramount; companies will want to be sure who they're dealing with and whom they're employing." Some on Wall Street see a poorer economy ahead. William Seidman, former head of the Federal Deposit Insurance Corp., said on the CNBC cable channel last week that the economy would see "government intrusion increase and productivity decrease" in the next five years. But Wall Street thinking as usual is like the proverbial "reed shaken by the wind" - much anxiety, little reflection. One of the greatest periods of growth in economic productivity occurred in the 1950s, when government guidance led the economy. The point, of course, is that other factors influenced the economy in the Cold War, as they will in this "long campaign" period. The only certainty is that the war economy has begun. Related: Greg Ip and John McKinnon, WSJ 9-25 President Bush has warned of a prolonged fight, raising the risk of more attacks. If that is the case, the experience of other countries suggests business investment and economic growth could be hurt for some time to come, though how much is hard to measure. The money expected to be spent as a result of the attacks overstates the stimulative impact of fresh government spending, since much of it will simply go to replace lost incomes, notes UBS Warburg economist Maury Harris. Overall, the economic spinoffs from direct spending related to the conflict are likely to be quite small. Some security activities might even drain economic energy by slowing commerce and discouraging travel. U.S. government spending as a percentage of GDP peaked at 43.7% in 1944 during World War II and was only 20.5% at the height of the Vietnam War in 1968. It is currently about 18%. Related: Louis Uchitelle, NY Times 9-23 "For the longer term," Alan Greenspan told the Senate Banking Committee on Thursday, "prospects for continued rapid technological advance and associated faster productivity growth are scarcely diminished." Related: Caroline Baum, Bloomberg 9-26 Frederic Bastiat, the early 19th century French political economist's famous essay, `What is Seen, and What is Not Seen,' tells a simple story of a hoodlum who heaves a brick through a shopkeeper's window, thereby providing income for the glazier who repairs the window. That's what's seen. What's unseen is what the shopkeeper might have done with the money if he didn't have to repair the window - buy a new piece of equipment, or a new suit of clothes. It's not hard to figure out where Bastiat is with all of this. It was fashionable following the Great Depression and the publication of John Maynard Keynes `General Theory of Employment, Interest, and Money' to think that the government could provide employment and income when the private sector was in a slump. `Keynes `General Theory' was a general theory for a specific time,'' says Paul Kasriel, director of economic research at the Northern Trust. The Great Depression `was a time when the private sector didn't want to spend at all. We're not there now.'
The mid-1970's were also the last time that the future of the United States seemed bleak to many people. That was also the last time that all the major economies of the world - the United States, Europe and Japan - were in recession at the same time. Japan is in recession now, the United States probably is, and European economies have been slowing and could enter a recession soon. (Baum, Bloomberg 9-13: Four of the 12 euro-zone countries have already reported a contraction in real GDP. One, Germany, showed no growth in Q2.) In recent years, investors around the world have come to believe that the American economy is the most dynamic in the world and therefore a place they have to invest. Stocks are virtually sure to go up, at least in the long run. The really important issue is whether people think that America is losing its preeminence and is becoming a relatively risky place to invest. A prolonged, bloody and inconclusive war against terrorism probably would bring lower stock market values even if the economy is growing again. Investors could come to have less confidence in the future of the American economy, and that confidence plays an important role in determining how much money is invested in stocks. This is just the third fall of more than 14% since the Dow took its present form during World War I. The worst, a decline of 15.5%, came in the week ended July 21, 1933. Then the economy was mired in the Great Depression, and a speculative recovery in the market was collapsing. The week ended May 17, 1940, when the index dropped 14.2%. The news then was that the French army was collapsing. One thing common to both times was a sense that the future of America and the world seemed dim. World economies had collapsed by 1933, and attempts at recovery had failed. In 1940 Adolf Hitler's Germany was triumphant, and it was far from clear that he would ever be stopped. Those worries proved to be wrong, although in each case it took years to become clear. If the American stock market is to return to the optimism it was demonstrating less than two years ago, it will be necessary for investors to conclude that fears about the long-term success of America are as unfounded now as they were in 1933 and 1940. Related: Rhoads & Sims, WSJ 9-17 The euro-zone grew by just 0.1% in Q2. The U.S. buys 22% of Europe's exports. Economists estimate a percentage-point drop in U.S. economic growth translates into a half-percentage point decline in European growth. Most troubling for Germany is that about two-thirds of its exports are consumer-oriented goods that are susceptible to swings in the economic climate, such as cars and electronics.
"Airlines benefited from the telegraph, from the telephone, from the fax and from the Internet," says Thomas Petzinger, a former reporter for this newspaper who published a history of the airline industry in 1995. "Those methods of communication increased the desire of people to meet one another and be with one another in business situations. The more artificial bandwidth that exists, the more they want the real bandwidth experience." Mr. Petzinger is proof: He drove nine hours Wednesday from Pittsburgh to Westport, Conn., for a meeting with a venture capitalist. American businesspeople will be spending less time on airplanes for a while -- and more on trains and cars. Yet last week also demonstrates how much technology, from global computer networks to mobile telephony, is fundamentally changing the way we live and work. Much of what happened last Tuesday could not have happened on Sept. 11, 1991. The terrorists allegedly communicated with each other with free e-mail services that they accessed at public libraries. The victims said goodbye on mobile phones from airplanes that were doomed. The survivors sent reassurances on pocket-size, wireless e-mail devices. And companies recovered rapidly because their New York City computers weren't centralized brains, but a node on a network spread throughout the country and world.
The SEC Friday relaxed rules to allow companies to buyback shares during the first transaction of the day and the last half hour of trading, which normally is prohibited. In addition, companies are allowed to buy as much as 100% of average daily trading volume, extended from the regular 25%. Companies are under no obligation to follow through on their announced buybacks. Historically, only about a third of buyback programs announced actually are completed, according to Thomson, which excludes those programs that are only partially completed. Other experts estimate roughly three-quarters of all dollars announced are actually spent. The follow-through rate tends to be higher the larger the company is and the more regularly it repurchases. Related: Cintra Scott, SmartMoney 9-21 In the wake of last week's terrorist attacks, more than 100 companies across a broad array of sectors have announced new or expanded stock-repurchase plans. The total value of buyback programs announced within the past week is fast approaching the roughly $110 billion announced between Jan. 1 and Sept. 10. Ed Keon of Prudential Securities recently looked at large-cap stock returns though the second quarter of this year, and found that reduced share counts (resulting from buybacks) yielded bigger price gains (see table). Going back 15 years, the study found that when companies reduced their share count by at least 1%, their stocks saw higher annualized returns than the S&P 500. And after companies reduced their share count by more than 5%, they saw even greater returns. In a nutshell, bigger is better with buybacks. When buybacks aren't executed after being announced, it's usually because the stock has ceased to be undervalued. This time, because of the slumping economy, some are openly wondering if companies will have enough cash to pull the trigger, regardless of share price.
If nothing has changed in your life, your asset allocation plan is still relevant. If you don't think you can do better by making a change, then you don't have much reason to make that change. Says MacGregor of Decision Research: 'In the grand scheme of your life, so long as you reach your financial goals, how your investments performed during this period is not what you are going to remember about the events of the day.'
What choice does Greenspan have? On the one hand, he can hardly fail to meet the liquidity demands of the global marketplace at a time like this. After all, even before the terrorist attacks, for four years now, the market has been clamoring for more liquidity than he's been willing to give. But if he were to post a fed-funds target that reflected the reality of today's liquidity demands, it would be about 2.25% - that's the rate implied in the fed-funds-futures contracts on the Chicago Board of Trade. Can you see conservative old Alan Greenspan lowering rates by 125 basis points last Monday instead of 50? Related: WSJ 9-25 The average junk bond traded Friday, the last day for which precise numbers are available, at 9.78 percentage points above 10-year Treasurys. That is up from a spread of 8.38 percentage points right before the Sept. 11th. The outlook for investment-grade bonds is far from rosy. John Lonsky, chief economist for Moody's Investors Service, anticipates that there will be more than four downgrades for every one upgrade for the third quarter, a sharp jump from the 2.8 ratio earlier this year.
"When the market goes up, people get optimistic," says University of Chicago finance professor Nicholas Barberis. "When the market's gone down for a while, they get pessimistic. In principle, the smart investor could come in and take advantage of that pessimism by buying at a bargain price. The problem is, it's never clear when the price is a bargain." Since the Second World War, the S&P 500 has declined 20% or more on 10 occasions, according to Leuthold Group. On average, during those declines, share prices shed 29% over 15 months. The current bear market has already dragged on for 18 months and the S&P 500 is currently 32% below its March 2000 high. Based on history, we should be due for a rebound. But how relevant is this history, especially when valuations are still so lofty? It is a great conundrum. On the one hand, what happens with investors' risk tolerance is the key to the stock market's short-term performance. On the other hand, you can't base your investment strategy on this, because it is impossible to gauge investors' fear and greed. Instead, you have to go back to first principles. If you have money you will need in the next five years, it shouldn't be in stocks. And if you own stocks, you should be prepared to sit tight through a possible further contraction in price-earnings multiples. You may have bought shares when skies were blue. Don't compound your error by fleeing stocks when the outlook seems bleakest. * FUD = fear + uncertainty + doubt
In an average week, Wal-Mart attracts 100 million customers to its U.S. stores. But last week was hardly average. Wal-Mart says sales nationwide on Tuesday were 10% below the same day a year earlier. At stores around New York and northern Virginia, where the terrorists struck, sales plummeted as much as 30% to 40% for the day. The next day, as shock and fear gave way to a flood of patriotism, consumers snapped up flags and anything else that was red, white and blue. The chain sold 200,500 flags on Wednesday, compared with 10,000 a year earlier. People were calmer on Thursday, but they then started realizing that nothing was resolved. They were waiting anxiously for consequences and justice. And they still wanted more flags. Wal-Mart says by Friday its overall customer count had returned to within normal ranges, and comparable-store sales gains returned to around 5%. Still, the size of the average purchase lagged, the company said. Over the weekend, weary from the news and with no professional baseball or football to watch, they got back to their regular shopping patterns. Related: NY Times 9-19 The nation's largest chains, including Wal-Mart Stores, Kmart and Sears reported that spending patterns returned to near normal levels over the weekend. Over all, most merchants experienced somewhat weaker sales than during the previous weekend, but not as bad as feared. Related: USA Today 9-25 In another sign of caution among consumers, retail sales at discount, chain and department stores fell last week, according to a report by UBS Warburg and the Bank of Tokyo-Mitsubishi. The chain store sales index fell 0.8% in the week ended Sept. 22. It was the fourth consecutive weekly decline in the weekly snapshot, which tracks activity at seven giant discount store and department store chains. Related: Leslie Earnest, LA Times 9-19 Sales at Sears, Barnes & Noble and some other major retail chains fell 50% or more on the day of the terrorist strikes, leading to the second-biggest weekly drop-off for retailers this year, according to a report released Tuesday. In one of the first quantitative overviews of the loss to retailers from the Sept. 11 attacks, Bank of Tokyo-Mitsubishi Ltd. said sales at retail stores open at least a year dropped 1.4% from the previous week. Although that number appears small, Bank of Tokyo analyst Michael P. Niemira called it a "huge decline by historical parallels." It was the weakest performance this year since a sales drop-off in late March that was attributed to poor weather. "The only thing that prevented it from being more negative is consumers buying basically on fear, buying food, buying candles, buying propane tanks," Niemira said. A separate report showed that mall traffic around the country plunged by more than 65% on Sept. 11, when many malls and stores did not open or were closed early. Shoppers reappeared the next day, some seeking relief from the tragedy. But traffic overall, which had been waning in recent months, slid 14% for the week compared with a year earlier, according to RCT, a Chicago-based industry consultant. Frank Bedillo, senior retail economist at PricewaterhouseCoopers, said he now expects a mere 1.5% increase in retail sales for the fourth quarter, a full percentage point below his estimate before the attacks.Over the last three months, TeleCheck Services Inc. has been reporting a comparable-store sales increase of 2% to 3%, barely enough to cover inflation. And September figures to be worse. But one poll released Tuesday, by ABC/Money Magazine, showed consumer confidence rose slightly in the latest week, despite the terrorist attack. Related: Car Sales LA Times 9-19 Researchers at J.D. Power & Associates tallied daily sales data from more than 5,000 new-car dealerships nationwide, finding an average drop of 32% for the first six days of the crisis, compared with same-day sales the previous month. Power also found Friday to be the worst day, with sales down 42%. Related: Retail Sales WSJ 9-21 The National Retail Federation said Thursday that it cut its outlook for sales growth to 2.2% for the fourth quarter, compared with its earlier forecast for 4% growth. It expects holiday retail sales to rise 2.5% to 3% from a year earlier. Related: Retail Sales USA Today 9-24 Federated Department Stores, parent of Macy's and Bloomingdale's, on Monday said sales are running 20% below forecasts since the Sept. 11 attacks on the World Trade Center and Pentagon, and said sales at stores open at least a year will be down 15% to 20% for the month. Revised Third-Quarter Growth Forecasts WSJ 9-17-01
Prior to last week's events, Richard Rippe, chief economist at Prudential Securities, expected real GDP, the inflation-adjusted value of the nation's output, to rise at an annual rate of 0.5% in Q3 and 3% in Q4. Now, he says, GDP will contract in Q3 and might well contract again in Q4, although he won't have exact estimates for a few more days. J.P. Morgan economists believe GDP will advance at an annual rate of 3% during Q2 of next year and by 4% after June of next year. "By next spring, policy stimulus along with lower long-term borrowing rates should allow for a fairly rigorous recovery to take hold," they said in a release Friday. Related: Donald Ratajczak, Atlanta Journal-Constitution 9-16 My forecasts of inflation-adjusted GDP have changed from a gain of 0.7% in this quarter to a decline of 0.5%. My fourth-quarter forecast is less than 2% growth, down from about 2.5%. However, growth in excess of 3% could develop as early as the spring of 2002, earlier than originally expected. Consumer prices might grow almost 3% next year instead of the 2.5% I originally thought. Related: Martin Cej, CBS.MarketWatch.com 9-22 Jeff Rubin, chief economist at CIBC World Markets, forecasts that the U.S. economy will shrink 1.1% in the third quarter and contract 0.2% in the fourth quarter. Related: Rachel Koning, CBS.MarketWatch.com 9-21 Eighteen out of the 21 National Association for Business Economics panelists forecast that the United States is in a recession. Thirteen of those feel the terrorist attacks on New York and Washington last week triggered the recession while four believe that the country was in a recession already and one had no opinion. Three said the United States is not in recession. The group largely represents economists at the nation's corporations, banks, brokerages and other entities. The members expect domestic growth at 0.2% in the third quarter and dipping to negative 0.5% in the fourth before recovering to a modest 1% rate of growth in the first three months of 2002. "The panel is looking for growth to improve to an annualized rate above 3% in the last nine months of 2002," said Harvey Rosenblum, the group's president and senior vice president and director of research at the Federal Reserve Bank of Dallas. Related: Christina Binkley and Kathy Chen - WSJ 9-21 The consensus of forecasters surveyed Wednesday by Blue Chip Economic Indicators is that the recession will last through the end of this year. What happens then is in dispute. Three-quarters of the forecasters think the recession will be no worse than the mild 1990-91 downturn; a quarter think it will be worse.The Blue Chip forecast paints a painful scenario, with unemployment heading toward 7%.
The 10-year Treasury note is trading at roughly 22 times its annual interest payments. Meanwhile, the S&P 500-based on closing prices for Monday, before the terrorist attack-is at 21 times estimated operating earnings for the next 12 months, according to Thomson Financial/ First Call. (Bloomberg 9-26: It hasn't been cheaper since mid-1997, according to First Call, when Asian financial markets plunged, raising concern U.S. profit growth would slow. The S&P 500 sells for less than 18 times expected 2002 earnings.) Historically, the stock market's earnings multiple and the bond market's interest multiple have tracked each other fairly closely, which makes sense. The implications of this: You probably shouldn't back up the truck and buy stocks like crazy. But this also isn't the time to abandon the market. Related: Scott Burns, Dallas Morning News 9-23 Are stocks overvalued or undervalued? One measure is the Fair Market Value model developed by the Federal Reserve. Based on an estimate of next year's corporate earnings and the current yield on a 10-year Treasury note, this model has slipped into undervalued territory. You can check the current over/under valuation of the model by using the calculator on economist Dr. Ed Yardeni's Web site, www.yardeni.com/stocklab.asp#smcalc. On Friday, based on a 4.74% 10-year Treasury yield and a projected 2.5% decline for S&P 500 earnings, the model indicated that stocks are now 16.1% undervalued. The Web page also allows you to make your own estimates of interest rates and earnings change so I plugged in larger estimates of earnings declines. Related: Earnings - Bloomberg 9-20 Analysts had forecast a 14.8% decline in Q3 earnings for S&P 500 index companies before the Sept. 11 attacks, according to Chuck Hill, research director at Thomson Financial/First Call. He now expects analysts to revise their collective forecasts to show a 21% decline in S&P 500 earnings, compared with a year ago. Almost 47 of the members of the S&P 500 index are forecast to report losses for the third-quarter, First Call said, up from 20 companies in the year-earlier period. Fourth-quarter results also will be far worse than expected. Before the attacks, analysts had forecast an earnings decline of 2.7% from a year earlier, Hill said. The forecasted decline now could reach 15%, he said. Related: Earnings - J Fuerbringer, NY Times 9-24 Wall Street analysts had already projected earnings declines, compared with the quarter a year earlier, of 14.6% for Q3 and 4.3% for Q4 because the economy has slowed more than many economists had expected six months ago. That would mean four consecutive quarters of corporate earnings declines, the first time that has occurred since the recession of 1990- 1991. But back then, the overall earnings decline lasted two years. Chuck Hill, director of research at First Call, estimates that the Q3 decline will wind up at 22% while Q4 will show a 15% to 20% decline, after more data is in. "I am afraid we are in for a lot of bad news in the next month or so," he said.
The immense loss of output - from airline travel, Wall Street brokerage fees and retail sales - will reduce corporate profits that were shrinking rapidly. That, in turn, could lead to a fresh surge in layoffs, and aggravate the unwinding of consumer confidence that was already under way. "As long as there is shock and grief, your mind is somewhere else, and not on buying a new car, or on fixing the bedroom and kitchen, or on anything that requires an effort out of the routine," said Daniel Yankelovich, chairman of DYG, a public opinion polling company. "The question is how long does it take to get over the shock and grief, and if you are not personally touched by this tragedy, that is probably two or three weeks." Two or three weeks can produce enough damage, economists say, to postpone the rebound that many forecasters had expected by Christmas and to tip an already weak economy into recession. Virtually no executives mentioned layoffs last week. On the contrary, companies embraced and comforted their workers, and the downsizing announcements that had proliferated through Monday - there were a dozen on that day alone - shrank to only two for the rest of the week, a survey by Challenger, Gray & Christmas, the outplacement firm, showed. But many managers face an even greater profit crunch now than they did a week ago, forcing thoughts of job losses eventually. "Cutting staff has to be an issue in everyone's head," said Earnest Deavenport, chairman of the Eastman Chemical, "but it is much too early to speculate on that." As a result of the terrorist attacks, security is proliferating, and that is becoming a drag on efficiency, further slowing the economy. The Toyota assembly plant in Georgetown, Ky., halted production Friday night, idling 8,000 workers, because three tractor-trailers loaded with parts made in Canada were delayed in getting across the border. "We understand the extra time needed for security checks, but this is starting to have a significant economic impact," said Dennis Cuneo, a senior vp. The border delays reduced production at the Georgetown plant and one in Indiana by 3,500 vehicles last week, or 15% of the usual run at Toyota's three American assembly plants.
If you put $1 into the Standard & Poor's 500-stock index in 1980 and left it there until the end of 2000, you'd have $18.41, according to Ibbotson Associates. But what if you sat out the best 15 months of that 240-month time period? You'd be stuck with chump change: a mere $4.73. In troubling times, many investors fall prey to two common mistakes. They chase what few positive returns the market has been offering - which usually just ensures that they buy in at high prices. Or they hide in overly conservative investments. Remember the dollar that turned into $18.41 in stocks? If you'd invested it in Treasury bills instead of stocks from 1980 until 2000, you'd have ended up with just $3.61. A study by the Employee Benefit Research Institute showed that most 401(k) participants accumulated money last year, even though the S&P 500 fell 9.1%. Folks in their 20s gained nearly 27% while those in their 30s added 5.1%. Even people in their 50s -- whose balances were too big to be affected much by their employers' latest contributions -- saw losses of just 2.3%. So, keep on making regular 401(k) contributions.
The Arab-Israeli conflict, in this sense, is a surrogate in many places for the discontent that people feel with their own governments. Because it is dangerous in most Muslim countries to express or act upon such political frustrations, people lash out at the U.S. and Israel instead. The main political grievance is well-known: America's alleged double standard in defending Israel's occupation of Arab lands while continuing to hit Iraq with economic sanctions and military attacks for what some Muslims consider essentially the same behavior. For many, this humiliating disparity is compounded by the fact that so many of their own authoritarian rulers have not only acquiesced in this state of affairs but also actively helped maintain it by cooperating with the U.S. military. When Muslim countries such as Algeria, Jordan and Egypt attempt to elect parliamentary representatives - often Islamic fundamentalists - who challenge the regimes' pro-U.S. stance, their rulers thwart democracy with hardly a protest by a U.S. government fearful of change. In Algeria, Egypt and Turkey, secular American-backed regimes dominated by the military thwart Islamic activists from winning seats in parliament. In Morocco, Syria and Jordan, where long-ruling strongmen have died in recent years, their sons were elevated to power in sumptuous coronations with full American support. An oft-heard lament from Arabs and Muslims is: Why, if equality and freedom are so important in the West, doesn't the U.S. stand up for them in the Muslim world? "We are sorry about the civilian victims, and cannot but condemn this terrorist act," wrote the London-based Arabic newspaper al-Quds al-Arabi in an editorial this week. "But we call upon American citizens to ask, why among all the embassies, buildings and defense establishments of all the Western powers, it is theirs that are targeted by terrorist actions?" The heart of the matter is pride, say Mideast scholars, the pride of Muslim peoples who know from their religion, history and traditions they were once a dominant civilization but who now feel subjugated by an American superpower they regard as culturally shallow and by what they see as its warship, Israel. Many Arabs and Muslims feel the normal ways societies pick themselves up - developing their economies, renewing their governments - aren't available to them, again because the U.S. has propped up oppressive regimes. Related: Michael Slackman, LA Times 9-15 From the moment the devastation of Tuesday's acts of terror became clear, words of condolence have poured in to the United States from some of the most unlikely places, including Iran, Syria and Sudan. But there has been a recurring subtext: that the United States brought this tragedy on itself and that a premature retaliatory strike would only serve as further provocation. At Friday prayers in Tehran, the Iranian capital, for example, sermon leader Imam Kahani said: "With so many defenseless and innocent men, women and children engulfed in flames, who can witness such an event and remain unaffected? We are all sorry." But he said that it must also be remembered that the "real terrorists are the Zionists," and he added: "Arrogant actions need to be stood in front of. Arrogant behavior provokes the oppressed." In a front-page editorial in the pan-Arab newspaper Al Hayat, Editor in Chief George Semaan wrote that the U.S. will not be able to uproot terrorism "unless it changes its perspective on how it builds its interests and how it defends them, by building a network of relationships that takes into consideration the interest of others, who are weak and who have rights but are incapable of imposing these interests or these rights." Related: James Flanigan, LA Times 9-16 European investors, while pledging support for the US, stressed the need to address the Middle East's economic ills, which they saw as "root causes" of political unrest and terrorism. This region, containing some 250 million people, despite its energy resources, is not a participant in the development of the global economy. The difficulty is made acute by surging population, where more than half the people are younger than 20. Over recent decades, countries such as South Korea have developed industrial economies with rising living standards for their people. But the Middle East has stagnated. Iran, for example, with 62 million people, has annual economic output only one-fourth that of South Korea, which has 47 million people. The story is similar for Egypt, Syria, Jordan, Algeria and others - some with natural resources, some without, but all with low living standards and a lack of investment and development. In the Middle East, autocratic government is the rule, not the exception. And experts point to it as the leading cause of economic backwardness. "Lack of democracy is the most important reason for lack of economic progress," says Muhammad Sahimi, an Iranian-born economist and professor at USC. "Under the Shah and later under the mullahs, the rule by a small group led to corruption in Iran," Sahimi says. Also, governments maintain monopoly control over industries in most Middle Eastern countries, and that has held back development. Other experts on the region agree that governments of one political party or one tribal group inevitably distribute favors to an inner circle, fomenting resentment and opposition among the groups left out. Yet as long as the world is consuming oil, many Middle Eastern countries have capital to spare. But oil riches are used not to put young people to work - but to distract the unemployed with hatred for the United States and for Israel. Wealthy Arab states have supported the Palestinians - but at a distance. A skilled people, Palestinians supplied an educated work force for oil-rich Kuwait until 1991, when Kuwait expelled all Palestinians after they cheered Saddam Hussein's invasion. Other oil-rich states, such as Saudi Arabia, do not allow Palestinians even to enter their territory. Can economic progress ever occur in such a conflicted area? Yes. Lebanon, almost destroyed by conflict, still produces greater economic output per person than most of its neighbors. Israel, with an educated population and a modern economy, generates output 10 to 15 times that of many of its neighbors. Related: Business Week 9-20 The failure of key Muslim nations to benefit from globalization has created a more fertile ground in which extreme ideas can grow. While the U.S. boomed in the 1990s, Arab economies grew by a mere 0.7% annually. Unchecked population growth has resulted in massive youth unemployment. This has been coupled with a breakdown in social services. Indeed, across huge swaths of Western and Northern Africa all the way to Pakistan, Islamic institutions - schools, welfare groups, even hospitals - have been stepping in to fill the gaps. "You can see people switching loyalties to an Islamic belief system as secular, liberal models fail for them," says Mark Malloch Brown, head of the United Nations Development Program. The same trends are at work in the old Soviet republics of Central Asia. Since 1990, the economies of Kyrgyzstan, Turkmenistan, Uzbekistan, and Tajikistan have shrunk dramatically. But a gush of U.S. aid in the early 1990s has slowed because of frustration over the slow pace of economic reform. "The social consequence is that you see an unhappy population that is moving toward Islamic fundamentalism," says Kathleen Collins, a University of Notre Dame researcher who has spent three years in Central Asia. Related: Waldman and Pope WSJ 9-21 The way the U.S. responds to the attack is certain to affect the fundamental struggle within Muslim societies between zealotry and moderation. The struggle has simmered off and on since the early Middle Ages. It reached a new intensity as Christian countries began to conquer large swaths of Islamic territory 200 years ago. Some Muslims became modernists who urged an embrace of Western technology in order to catch up with their Christian rivals. But they always faced a strong Islamist countercurrent. Reactionary clerics delayed the introduction of the printing press to core areas of the Muslim world for nearly three centuries. Ever since colonial powers weakened the great Islamic empires of Turkey's Ottomans, Iran's Qajars and India's Moguls over the past two centuries, Muslims have seen themselves as tossed around by outsiders, culminating in the creation of whole new territories and dynasties in the 20th century at the stroke of European pens. Univ of Michigan Consumer Sentiment Survey Dismal.com 9-13-01
Related: D Leonhardt and L Uchitelle, NY Times 9-16 The University of Michigan calculates the index from responses to a telephone survey of Americans in which it asks them their current feelings about the economy and their feelings about the next six months. Many analysts consider the survey a reliable predictor of consumer spending, which accounts for roughly two-thirds of the gross domestic product. In the spring of 1995, after domestic terrorists bombed the federal building in Oklahoma City, a widely followed index of consumer confidence fell 3 percentage points in a month, to 89.8, although it rebounded the next month. After Iraq invaded Kuwait in the summer of 1990, the fall in the index was more pronounced. It dropped 13 percentage points, to 76.4, and continued to fall into the mid-60's as the United States prepared for war. The resulting uncertainty helped to send the economy into its most recent recession. Given all the new uncertainty, and the billions of dollars of profits and wages lost after the attacks, consumers are almost certain to pull back even further, at least in the near term, economists said. "Following the terrorist attack, we should expect an even weaker outlook," said Richard T. Curtin, the director of Michigan's consumer survey. "The possibility the economy will fall into an outright recession has grown substantially." Still, economists cautioned, the long-term economic effects of a disaster can often appear to be much greater in its immediate aftermath than they actually become. Over the last 25 years, Britain has been the site of many bombings, mostly carried out by the Irish Republican Army. But even the largest - in train stations or crowded neighborhoods - had only the smallest effects on the nation's overall economy. Related: James Schembari, NY Times 9-23 A closer look at the Conference Board's consumer confidence index for August shows that while the index fell to 114.3, from 116.3 in July, the index for people under 35 and those 55 and over actually rose. It's the boomers who became more depressed. Households headed by 35- to 54-year-olds, a category that comprises mostly boomers, fell to 112.3 from 117.8 in July. Related: Carlone Baum, Bloomberg 9-25 The Conference Board reported today that consumer confidence plummeted 16.4 points in September to a 5 1/2-year low of 97.6. That matches the magnitude of the decline in August 1990, following Iraq's invasion of Kuwait, and in November 1987, following the Oct. 19, 1987, stock market crash. In other words, as bad as things get, it's only worth about 15-20 confidence points to the consumer. History suggests that how consumers feel about the president and how they feel about the economic outlook are closely allied, according to a study by Jim Bianco, president of Bianco Research. `The relationship between the president's approval rating and consumer confidence not only holds during these crises, but in most cases actually strengthens,' Bianco says. `Often a crisis that gives the president's approval rating a jump - rally 'round the flag -- does the same for consumer confidence.' The state of the economy isn't so good, yet the president's approval rating is on the moon. If historical precedent holds, ``the massive jump in Bush's approval rating bodes well for consumer confidence next month,'' Bianco says, countering the Conference Board's assessment that confidence is going the way of the employment situation. Related: Gene Epstein, Barrons 9-17 Up to now, the decline in conventional measures of consumer confidence has seemed bogus, more a case of survey respondents saying one thing and doing quite the opposite. How better to gauge confidence than through the willingness to buy a house and car? Purchases of new and existing homes have been running at near-record levels. Sales of cars and light trucks have been sustaining one of the best years ever, despite the softness in the August numbers. Moreover, real consumer spending has been rising broadly, fueled by the steady rise in wages and salaries.
Related: Allan Sloan, Wash. Post 9-23 Remember that investing is about economics, not patriotism. If you sold stock this week, it doesn't make you a bad American. If you bought - which I did on Friday, heavily - it doesn't make you a good American. Stock markets are about sending economic signals, not patriotic signals. Related: Euro Markets Reaction - NY Times 9-15 Germany's benchmark DAX slumped 6.3%, compounding losses since Monday, bringing the weekly loss to nearly 12%. The CAC 40 in France dropped 5%, for a decline of 11% since Monday. In London, the Financial Times Stock Exchange index of 100 leading shares, which had rallied earlier, closed down 3.8%, for a loss of 5.5% since Monday. Related: David Wessel, It's Up to Us - WSJ 9-13 If the economic outlook was too uncertain Monday, it's more uncertain today. Consumers have more reason to postpone vacations and buying new cars. Foreign investors, who sent the U.S. more than $100 billion last quarter, have more cause to wonder if America is so much safer - both physically and economically - than the rest of the world. We often talk of the economy as if it is a machine: The Fed pumps in credit and the economy accelerates. But an economy more closely resembles a human organism; it is driven by mood as well as muscle. Will America hunker down, cower in its living rooms, mesmerized by all-news television? Or will tragedy and threat give the country a new sense of national shared purpose? Answering those questions is the best way to forecast the economy today. The 1990-91 Gulf War offers a lesson. When Iraq invaded Kuwait in August 1990, the U.S. economy came to a near standstill. Americans stopped shopping and watched TV news instead. The Conference Board's measure of consumer confidence fell nearly 18%, an even steeper decline than the one that followed the 1987 stock-market crash. The economy slipped into a recession that proved stubbornly resistant to conventional economic remedies. The risk today is similar. Back then, consumer confidence and spending sagged for about five months and began to turn around in January when U.S. aircraft attacked Iraq. When U.S. ground forces routed the Iraqis at the end of February, confidence rebounded smartly and the stock market soared. A resolute U.S. president - and decisive military success - dispelled uncertainty and fear. The attacks could create a sense of national, even international, purpose that has been palpably lacking lately. With the luxury of peace, antiglobalization demonstrators were able to seize the public stage and members of Congress got television time to argue fine points of federal budget accounting. No more. America was never more united than the day after Pearl Harbor or the day after JFK's assassination. A lot rides on the words and actions of the U.S. government - but a lot depends on the rest of us. "I believe that the sooner all of us return to doing what we do, the less likely Tuesday's events will go down in history as the shock that induced the 2001 recession," economist Mark Zandi wrote on his Economy.com site. "This would be at least a partial victory against the perpetrators." Related: Caroline Baum, Bloomberg 9-12 To change our way of life, to cower in response to terrorism, would give undeserved power to those who inflicted the damage. Life will go on, even as the sense of loss lingers. While there will no doubt be a monetary policy response to the ailing economy, if not to this week's events, the fiscal policy response is apt to be greater. `You remember that locked box?' asks Paul Kasriel, director of economic research at Northern Trust. `It's unlocked. Defense spending? No problem. Is the government going to cut back on other spending? No way.' In the spirit of bipartisanship in the wake of Tuesday's tragedy, `we'll have more government spending than we would have otherwise,' Kasriel says. `And we may even get a capital gains tax cut.' The effect on consumer confidence may be transient. Any change in fiscal policy will be with us for a while. `The recovery may be delayed, but when it comes it will be stronger than it would have been,' Kasriel says. Related: E.S. Browning, Lessons of History - WSJ 9-13 Past experience with sudden exterior shocks since the fall of France in 1940 has been fairly consistent, market historians say. Ned Davis Research studied the market's reaction to 14 such events, including the Cuban Missile Crisis, the Gulf War, the Pearl Harbor attack and the 1993 bombing of the World Trade Center. It found that, in general, markets tended to fall right after they reopened. But then they recovered, meaning that those who bought stocks on any sudden drop tended to profit. The median first-day decline in the Dow was 1.4%, and after about a month, the industrials were down a median of 3.7%. But after three months, the industrials had recovered all their losses to show a gain of 2.1%. That widened to a gain of 6.6% after six months. "What history teaches," says J. Thomas Madden, chief investment officer at Federated Investors, "is that if markets dip at the open, what generally happens is that markets rally and they continue to rally. In my view that is because central banks provide additional liquidity - as they are likely to do now." Even without the terrorist attack, many economists note, economies around the world were performing more poorly than expected over the summer; others think the attack could push the world economy clearly into recession now. Market historians also point out that the stock market hasn't recovered promptly after every external shock, just after most of them. Jon Brorson, director of stocks at Northern Funds, points out that the great bull market of the 1990s was based partly on a view that the world's major problems had gone away. Financial markets were becoming free and open, and stocks soared partly "on the idea that we were experiencing a remarkable era of economic and social stability, and no wars. Now I think we are seeing the other side of the mountain on this." He worries that the experience of the past 18 months could have lasting effects on the current generation of investors. If you look at what investors have lived through in 12 months - the bursting of a tech-stock bubble, one of the most highly contested elections in our history, a possible recession and now, through a military attack. None of these are supportive of the level of p/e ratios that stocks have been enjoying. And the current environment makes it even harder for companies to announce any time soon that they see signs that their business is turning around. According to a poll by Harris Interactive, taken the night after the terrorist attack, only 1% of people surveyed said they intended to sell their stock as a result of the attack. But half of those surveyed said they think the attacks make stocks now a worse investment over the coming months, suggesting that people will have to get over their current skepticism before they plunge back into the market. Related: The Fear and The Stimulus - NY Times 9-14 Though many Americans were slowly returning to work and to normal shopping patterns, car dealers reported that their lots were empty, real estate agents said buying had slowed, and deal makers said corporations had put off just about every major decision. The Fed continued to pump money into the financial system, hoping to reassure investment firms and banks that plenty of money was available to help them through any problems that might crop up as the markets begin operating again. The FRB of New York injected $70.2 billion into the system by buying government securities from bond dealers, one of the biggest such operations in memory. On a normal day, the Fed buys or sells a few billion dollars of securities; on Wednesday, in the immediate aftermath of the attacks, it bought $38.25 billion of securities from dealers. Related: Karen Damato, Mutual Discomfort - WSJ 9-13 This week's tragedy-driven suspension of stock trading has a particular impact on investors in mutual funds, because funds typically execute purchases and sales only once a day. Whenever stock trading is resumed, most fund investors won't be able to get into or out of funds immediately. Instead, investors' buy and sell orders - including orders placed as long ago as late Monday afternoon - will be executed hours after trading resumes, based on that day's closing prices for stocks and other securities. Given the uncertainty about when trading will resume, Strong Capital Management in Milwaukee has temporarily shut down its Internet and touchtone-telephone ordering systems. The firm is taking orders only through telephone representatives because "we want to make absolutely certain people understand we do not know when those trades will be executed." Charles Schwab has also shut down its online fund trading system temporarily, requiring fund traders to place orders through phone representatives. Related: Dawn Smith, Mutual Calm - Smart Money 9-14 The mutual fund firms we reached were reporting substantially lower call volume than usual. At Vanguard, volume is 25% lower than normal for this time of year. And at T. Rowe Price Funds, calls are down about 40%. But both firms observed that investors are remaining relatively calm. "A lot of people are concerned and worried, but not panicked. But by and large they are taking a wait-and-see approach" Steve Norwitz, of T Rowe Price, says. Why the lack of obvious anxiety on the part of investors? First, many are still focused on the human tragedy and its political and military implications. Second, many investors know that long-term goals, such as a child's college education, are best served if they hang tight, no matter how difficult that may be. And third, the market's recent decline has prepared them somewhat for any financial pain to come. Related: David Henry, BusinessWeek 10-1 Individual investors did not rush to redeem mutual fund shares after the attack. History suggests they'll remain passive and not buy or sell, according to Avi Nachmany at consulting firm Strategic Insight Mutual Fund Research. European investors, significant players in the market, are not rushing to sell U.S. shares, either, says Byron Wien, a Morgan Stanley Dean Witter & Co. strategist. He was meeting with clients in Europe at the time of the attack. "They think things will go back to normal relatively quickly," says Wien.
The World Trade Center tragedy canceled all forecasts about the American economy. And whatever happens next in the United States will affect the global economic outlook. Until yesterday, the economy's future rested on whether layoffs would inhibit consumer spending, whether business investment would revive, whether home construction and home prices would stay up. Now, what happens next to the American economy depends on how the public reacts to yesterday's terrorism, economists said. "Uncertainty causes people to seek information and suspend their judgment, and I think that will affect buying behavior initially," said Richard T. Curtin, director of consumer surveys at the University of Michigan. "People are going to be fearful of public places for a while, and they are going to stop going to car dealerships and malls. And that is likely to cause a decline in consumer spending." James Glassman, chief domestic economist for J. P. Morgan Chase, and a few other economists were optimistic. "This is going to make America, and the civilized world, be defiant," Mr. Glassman said. "People are going to see this as a threat to the civilized world, and good things are going to come out of it." That was certainly the reaction to Pearl Harbor. Stock prices fell steeply at first but recovered as the nation mobilized. The recovery, however, is not likely to come as easily this time, Mr. Glassman said. "We are likely to be in shock and mourning for several weeks, and that means volatile markets and less consumption," he said. Related: Greg Ip and John McKinnon, WSJ 9-12 "A full-blown global recession is highly likely," Sung Won Sohn, chief economist at Wells Fargo & Co., predicted in a report Tuesday afternoon. "Confidence-shaking events usually have transitory negative effects on consumer spending. But we've never seen anything like this that I can think of" said Alan Blinder, economics professor at Princeton University. Many economists said this event is likely to be more severe than in the 1990 Gulf War because of the much greater loss of life on U.S. soil. In 1990 travel was depressed by fears of a terrorist attack. This time, the entire air-travel system has been shut down by actual attacks. "One might expect [confidence] ... will plunge much like they did when the Gulf crisis began in August of 1990. The weakness might be more severe because this impacts Americans more directly, it's on our soil," said Ray Stone, economist at Stone & McCarthy Research Associates. In addition, Stone said, "the economy looks more fragile going into this episode than it did back in 1990." Business investment and exports are falling, unemployment has risen sharply and stock prices are sinking. The impact of the tragedy on confidence could severely undermine consumer spending, which had been the economy's remaining bulwark. Disasters such as the Northridge, Calif., earthquake in 1994 "hardly show up in the economic data. I would expect this to be one of those events" said Edward Leamer, a professor of economics and statistics at UCLA and director of UCLA Anderson Business Forecast. Another negative could be a rebound in oil prices as political tensions rise again in the Mideast. Brent crude-oil futures surged $3.60 to $31.05 a barrel after the attacks, before closing at $29 a barrel in Europe. But the secretary-general of the OPEC said the group is prepared to take necessary measures to stop world oil prices from spiking. Related: Alexei Barrionuevo, WSJ 9-12 Across the country, people lined up at gasoline stations to top off their tanks, apparently concerned about gasoline supplies. Exxon Mobil Corp., one of the country's largest gasoline retailers, advised against it. The company said it had "ample supplies" of gasoline and urged consumers to "maintain normal buying habits to avoid artificial run-outs." In a statement, BP PLC said "for today, we are holding the line on prices." A greater concern is a repeat of the panic buying that followed the 1979 Iranian revolution. Fears the revolution would spread to other Middle East nations led the oil industry to stockpile greater-than-normal inventories for nearly a year and a half. Prices didn't drop until industry storage tanks were full. Just the Facts Equity-phobia During the Great Depression, when stock prices fell 86% over three years, investors were so scarred by the experience that they avoided the stock market for a generation. During the bear market of 1973-74, when the S&Pr's 500 index dropped 48% over two years, investors lost their appetite for stocks for a decade. So how about now? Anyone who put money into a typical mutual fund a year ago would have lost 30% of his or her investment, according to Lipper. Over three years the average annual mutual fund return is just over 3%; for five years just over 6%. It strains the imagination to think that this much bad news has not started to change people's attitudes about a lot of things. For younger investors the bear market is more likely to change expectations and the appetite for risk taking. For baby boomers, the next quarterly statement is going to be a sobering reminder of how high a hill they have to climb. (Steven Syre and Charles Stein, Boston Globe 9-27) Treasury update The Treasury Dept. sold $14 billion in 3-month bills at a discount rate of 2.38% (a 2.43% return), down from 2.56% last week. Also $12 billion was sold in 6-month bills at a rate of 2.36% (a 2.42% return), down from 2.57%. The 3-month rate was the lowest since 11-6-61, when the bills sold for 2.35%. The 6-month rate was the lowest since 4-24-61, when the rate was 2.3%. In a separate report, the Fed said that the average yield for one-year constant maturity T-bills fell to 2.60% last week from 3.02% the previous week. (Barrons 9-24: Last week the 30-year T-bond's yield soared to 5.59% from 5.37% one week earlier. The yield on the 10-year T-note surged to 4.68% from 4.57%. Spreads on high-quality bank and financial issues relative to benchmark Treasuries increased by 20-70 basis points on the week, while auto issues widened another 50-60 basis points.) (LA Times 9-25) Bonds beat Stock Funds? Long-term returns on bond mutual funds are beating those on stock funds for the first time in nine years as eighteen months of eroding share prices have cut gains made during the 1990s rally. For the five years ended yesterday, the average bond fund gained 5.7% a year, according to Lipper. Over the same period, the average stock fund has returned just 4.6% a year. The last time long-term returns for bond funds beat stocks was for the five years ended September 1992, when the average stock fund purchased just before the October 1987 market crash gained an average 7.1% a year and the average bond fund returned 11% a year. For funds that don't invest in foreign securities, five-year returns for stocks, at 6.6%, are still slightly ahead of bonds. (Bloomberg 9-25) Fire safety Depending on the building's size or other circumstances, fire and building officials use phased or zoned evacuation in cases of fire. It calls for removing people from the two or three floors above a fire and from the floor below, while telling the rest to wait. The approach reduces injuries that result from a mad rush to escape and allows firefighters the room to climb stairs. But after reports that some World Trade Center workers were told to stay in the buildings, will workers listen? (WSJ 9-25) Oil price drops Oil futures tumbled 15% Monday - the biggest one-day decline since the Persian Gulf War - to trade under $22 a barrel for the first time in 16 months, on growing market concerns that an economic recession will decrease worldwide demand for oil. Crude for October delivery had risen to a high above $29 a barrel a week ago, as traders feared that a possible U.S. retaliation would hamper exports out of the Middle East Region. But now, there's panic about a possible recession and concern about consumer confidence falling and people not flying or driving - but going into a hide-mode. "OPEC has cut production three times this year to maintain prices. However, it's not possible for the cartel this time, because of the recent terrorist events and because if they did, they would "cede market share to non-OPEC producers and risk weakening demand even further," said John Kilduff, an energy analyst at Fimat USA. (CBS.MktWatch 9-24) Uncertainty I've been reading a lot of comments this past week by pundits claiming that uncertainty was responsible for the trashing in the stock market. When is the future ever certain? Eighteen months ago, with the Nasdaq Composite Index trading in the rarefied atmosphere above 5,000, was the future certain? Or, more likely, are investors less optimistic about an always-uncertain future? Some analysts think it's a matter of degree. I cannot remember a time in my 15 years of writing a daily column that the Federal Reserve didn't voice some uncertainty about the economic outlook and awaited more data to clarify things. (Caroline Baum, Bloomberg 9-24) One Certainty Don't underestimate the people: the strength, the resiliency, the flexibility and the potential to shrug off adversity and respond. (Stephen Dunphy, Seattle Times 9-23) Cold Cash Part 1 The Fed has slashed short-term interest rates this year, that's driven down yields on money-market funds, T-bills, CDs and other cash investments. The slump in yields got an extra shove this past Monday, when the Fed trimmed short-term rates by another half a point. Result? At the beginning of the year, many money-market funds yielded more than 6%. Today, some are paying less than 3%. With yields so low, money-market funds are effectively a money loser for some folks. If you're in a high-tax bracket, your after-tax return is going to be less than inflation. There's no incentive to leave money in cash investments. (Jonathan Clements 9-23) Cold Cash Part 2 The average seven-day simple yield on taxable money funds tumbled to 2.55%, down from 2.98% a week ago and the lowest level since the funds were invented 30 years ago, according to IMoneyNet.com, which tracks money fund returns.The previous low was 2.59% in May 1993. Yields on tax-free money funds fell to 1.74% this week from 1.80% a week ago and now are just above the low of 1.72% in January 1994. A year ago, investors enjoyed tax-free yields averaging 3.53%. Bankrate.com, which tracks rates on certificates of deposit, said CD yields also have tumbled to the lowest levels since the company began monitoring the rates in 1984. One-year CDs now average 2.94%. A year ago the average was 5.65%. Greater economic uncertainty means banks are making fewer loans and thus not competing as aggressively for CD deposits. (LA Times 9-27) Volatility So far, Wall Street firms have said they will put extra capital on the line to halt any lurch into panic. But, to protect themselves against sudden drops in prices, they'll be less ready to carry as much inventory as they have in the past, removing a buffer against instability. "Over the next several months you are going to see a very volatile market" says John Manley, strategist at Salomon Smith Barney. (David Henry, BusinessWeek 10-1) Capitulation If you bought $1000 worth of Nortel stock one year ago, it would now be worth $49. If you bought $1000 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, and traded in the cans for the nickel deposit, you would have $79. My advice: Start drinking heavily and recycle. (DW Read, Abuzz 9-21) Economic impact Economic ripples from last week's terrorist attacks are being felt in all regions of the U.S. But the force of the impact will depend very much on where you live. Among the hardest hit will be states and cities built on tourism, including Florida and Las Vegas. A few regions may weather the storm better: oil-producing economies such as Houston and Louisiana; defense-contracting strongholds such as Southern California and northern Virginia; and areas where displaced Manhattan firms are setting up temporary or permanent offices, most notably New Jersey, which could gain as many as 100,000 jobs. (NY Times 9-19) Air-travel security "Every day some 3,500 or more commercial airline flights crisscross the U.S., many coming in from overseas," says a U.S. intelligence official, speaking anonymously. "In some cases the pilots don't speak English very well and in others the planes suffer radio or transponder failure. We can't as a nation halt illegal international drug flights, so it's unrealistic to assume we can inspect all these planes. Even if we could, we can't fly fighter cover over major cities and shoot down suspicious passenger-carrying planes." (Jay Palmer, Barrons 9-17) A previous NYSE closing Charles Geisst, a professor of finance at Manhattan College, called last week's assault on the financial pillars of capitalism probably "an act of war" that reminded him of the outbreak of World War I, when the New York Stock Exchange shuttered itself for almost four months. (NY Times 9-16) Counter-intuitive reaction There was one very good sign out of Europe yesterday. Stocks of reinsurance companies, which had plunged on the news of the attack, actually rallied. Insurers, goes the latest thesis, will take a big hit from claims now, but in the future they will get rich from higher premiums and increased demand for their product. (Floyd Norris, NY Times 9-14) Quick Stats According to First Call, profits from operations for the companies in the S&P 500 should fall 17.5% this quarter and 5.7% in the final three months of the year, the firm's survey shows. The first two quarters of next year are expected to show growth of 5.7% and 18.7%, respectively. The expected drop of 11.6% in profits this year would be the first annual decline since 1991. Goldman, Sachs' Abby Joseph Cohen this week told investors to buy more stocks. She predicts the S&P 500 will rise as much as 38% in the next year. (Bloomberg 9-26) Corporate-income-tax revenues continue to fall sharply. During the 11 months through August, revenues totaled about $144 billion, down from $163.85 billion a year earlier, the Treasury says. (WSJ 9-26) The IRS issues a "data book," packed with tax statistics for the year ended Sept. 30, 2000. Tables from the book are available on the IRS Web site (www.irs.gov) under "Tax Stats." (WSJ 9-26) The market value of all NYSE, Nasdaq and Amex issues was $8.9 trillion, according to the Wilshire Associates Equity Index. That's a drop of $1.2 trillion, or 13.4%, from the previous week. A year ago, the market value was $13.7 trillion. Three stocks fell for every one that rose on the NYSE, while one of out of four stocks posted a new 52-week low. (Lisa Singhania, AP 9-22) This bear market certainly has taught us about the wisdom of staying diversified. The average of all stock funds tracked by Bloomberg lost 28.9% in the past year. The average bond fund, by contrast, posted a positive return of 7.9%. If your money was invested 60% in that average stock fund and 40% in that average bond fund, you experienced an overall loss of 14.2%, or less than half what an all-stock investor endured. (Chet Currier, Bloomberg 9-21) In Q2, credit card payments past due 30 or more days jumped by almost a full percentage point to a seasonally adjusted 3.93% from 2.99% in Q1, according to the ABA. In Q2-00, the rate also was 2.99%. The latest credit card delinquency rate is the highest since 1972. The report also shows that the delinquency rate on a composite of other kinds of loans - including auto, personal and fixed-term home equity loans - rose to 2.51%, the highest rate since 1997. It was 2.4% in Q1. (LA Times 9-22) For the first time in many years, networks will televise the national anthem at NFL games this weekend. Usually they forgo the anthem to show advertisements. (NY Times 9-20) Non-farm business productivity rose 1.5% in the four quarters ended with the second quarter of 2001 compared with a 4% increase in the preceding 12-month period. (Carlone Baum, Bloomberg 9-21) State-tax revenues grew only 2.6% in the April-June quarter compared with the year-earlier period. That was the smallest gain in 10 years. (WSJ 9-19) According to the Pew Internet & American Life Project, more than four-fifths of Americans turned to television for news, while 11% turned to radio; only 3% used the Internet as their primary news source. On Tuesday and Wednesday, about 51% of people with Internet access logged on, less than the average 55-58%. (AP 9-15) Quick Tips One of the new IE 6 features that we like is the ability to lock down the toolbars. It seems our toolbars were always changing - or someone was changing them for us. But, in IE6, you can right-click a toolbar and choose Lock the Toolbars. (EMAZING 9-26) Two sites giving current virus information: Symantec (Norton) and McAfee. (EMAZING 9-25) Microsoft Internet Explorer has a built-in Search Assistant, but sometimes you don't need all that power. Suppose all you want to do is get some info about dogs. Just click in the IE Address Bar and type "? dogs." This will open MSN Search and provide you with a list of dog sites. (EMAZING 9-25) Some people don't write viruses - they just start rumors about viruses. To find out what's what, take a trip to F-Secure Corporation's site and read the latest list of hoaxes. www.datafellows.com/virus-info/ (EMAZING 9-14) The size of the Microsoft IE cache can determine how fast you can surf the Web. However, since the cache resides on your hard disk, its size depends on how much disk space you can afford to use. To increase your IE cache size, run IE and choose Tools|Internet Options. When the dialog box opens, click the General tab (if necessary) and then click Settings. When the Setting dialog opens, adjust the "Amount of disk space to use" slider to increase or decrease your IE cache size. After you make your changes, click OK. Back in Internet Options, click OK again to close the dialog box. (EMAZING 9-17) Home Page Previous Factoid Top Sites |
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