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Jim Bianco, president of Bianco Research, in a report written for the Leuthold Group, argues that investors are not likely to abandon the stock market en masse until most of their unrealized profits disappear. To try to measure where individual investors stand with their portfolios, Mr. Bianco has compiled an index of the stocks in the Dow and Russell 2000, all weighted equally. This combination, which he has tracked since 1990, best reflects the holdings in equity mutual funds. Then he estimates the average cost of investors' domestic mutual fund purchases by analyzing equity fund inflows. 'Since 1990, the public has put about $1.4 trillion into the stock market, and they have about $1.88 trillion of market value,' Bianco said. The difference between those numbers (approx $470 billion as of 12-1-2000) is their unrealized gain. Investors view their unrealized profits as gamblers do their casino winnings: it is the house's money at stake. 'You don't treat it with the care and love that you do with your hard-earned paycheck,' Bianco said. But the minute that those winnings disappear, all bets are off. Bianco saw such a shift in investor psychology some years ago, in bond funds. Investors in those funds reached the break-even point in April 1994 and they promptly began exiting the arena. For the next year, bond funds saw nothing but outflows, on a monthly basis. Although investors' unrealized profits have fallen by $285 billion (or 38%) since they peaked in December 1999, because investors still had $470 billion in house money to play with, they will remain bullish on stocks.
The jobs report is in fact two reports. One comes from a survey of 350,000 businesses that provides data on hours worked and employment by sector. The other comes from a survey of 50,000 households that produces the unemployment rate. Each survey gives the government an estimate of the total number of jobs in the American economy. The business survey suggests that the private work force has grown by an impressive 22.8%. The household survey says 18.5% - the worst such gain since the 1950's. The business survey says contingent work, like temporary staffing, has taken off in recent years. The household survey says it has barely budged. The current difference between the studies is unprecedented. Chinhui Juhn and Simon Potter wrote in a report published in late 1999 by the FRB NY that this difference has puzzled many analysts. The most popular theory, offered in the paper written by Ms. Juhn and Mr. Potter, is that the Census Bureau's estimate of the nation's population is too low. That would mean that even if the household survey accurately estimated the portion of Americans who were working, the Labor Department was not multiplying that percentage by a large-enough number. When the government finishes work on the 2000 Census, the answer should be clearer. Because the business poll covers so many more jobs, most analysts consider it more reliable, even if they cannot explain the gap. But the matter should not be dismissed simply by throwing out the household survey. (And if it could be, people should reject the unemployment rate as inaccurate, too.) The business survey has its weaknesses. To account for start-ups, the Labor Department now adds 165,000 jobs each month that do not actually turn up in its survey. Based on historical data, researchers figure that this is the number of jobs they are missing. But the economy has been slowing sharply, and the number (twice what it was in 1993) could now be exaggerated. Executives are also more likely than household heads to err by counting some workers twice (like those who have two jobs). That happened once in the early 1990's, forcing the government to make an embarrassing revision.
The researchers (Margaret McConnell, Patricia Mosser, and Gabriel Perez Quiros) decline to speculate on the implications of their work for public policy. But one possible conclusion is that a less volatile economy may require quicker, finer adjustments from the Fed. `What may have been considered a moderate fluctuation in activity prior to the break may now be viewed as severe,'' the researchers wrote. Instead of waiting for a major downturn in output, then, the Fed might want to cut interest rates when growth starts to slow just a little bit, lest that slowdown mark the beginning of a steady progression downward. Related: From the FRB Study The growth rates of all the major components of GDP have followed a steadier course, with the most marked reductions in volatility occurring in residential investment and trade (see table below). When we weigh each component by its share in overall economic growth, inventory investment and consumer spending emerge as the chief contributors to the increased stability since 1984. Residential investment, exports, and imports experienced the largest absolute declines in growth volatility, while federal government purchases and consumer spending experienced the smallest reductions in volatility. Growth patterns in each of the major components reflected the decline in aggregate volatility - which is not surprising. Income and spending patterns in a particular sector often depend to some extent on developments in other sectors. Thus, greater stability in one component of GDP likely reflects more stable growth in other areas. The size of quarterly fluctuations in the growth of residential investment has shrunk significantly - from an average of 23.9% in 1959-83 to 11.6% in 1984-98. Regulatory and structural changes in the 1980s very likely contributed to the sectorĖs stability, largely by enabling banks and other financial institutions to stabi-lize the supply of funds for housing investment. For example, the elimination of the interest rate ceilings imposed on bank deposits by Regulation Q curbed the outflow of funds from banks during periods of high or rising rates so banks would funds to continue their mortgage lending. The development of mortgage-backed securities and the increased use of interest rate swaps permitted mortgage lenders to better hedge their exposure to changes in interest rates. In turn, the lowering of interest rate risk may have allowed these institutions to offer a more stable supply of funds. Growth in both imports and exports also exhibited a striking decline in volatility. The gradual breakdown of trading barriers around the world over the past twenty years is one possible explanation for the decrease in trade volatility. With more markets open to US goods, firms here can minimize risk and achieve steadier growth by exporting their products to a broad range of countries. US import growth may be smoother because import shares of relatively volatile commodities such as food, petroleum, and industrial materials have fallen significantly in the last fifteen years. At the same time, services (which tend to grow at a less variable rate) have accounted for an increasingly large share of exports since the early 1980s. Our calculations reveal that the most important contributor to the overall reduction in the variability of aggregate GDP growth is inventory investment The volatility of inventory investmentĖs growth contribution fell from an average of 2.9% in the 1959-83 period to 1.7% in the 1984-98 period. Despite inventory investmentĖs small role in overall economic activity, the component has historically contributed the greatest degree of volatility to growth in GDP. One reason for its small volatility is the adoption of just-in-time ordering methods. A monthly survey conducted by the NAPM shows that firms have reduced the number of days in advance of production that they order their materials and supplies from an average lead time from January 1961 to December 1983 that was seventy-two days; to forty-nine days for the 1984-97 period. By purchasing closer to time of production, firms can react more quickly to unexpected shifts in demand and thus avoid extreme fluctuations in inventories. The mean of inventory investment as a share of final sales was lower in 1984-98 than in 1959-83. The variability of the inventory-to-sales ratio also declined. Consumer spending is the next largest contributor to the increase in stability. Its volatility fell from an average of 2.5% to 1.4%. Because consumption accounts for almost two-thirds of aggregate GDP, even relatively modest declines in volatility can significantly quell overall volatility. The residential investment sector accounts for only about 5% of economic output. Thus, the decline in the volatility of its growth contribution was relatively small even though the variability of its growth rate fell sharply. The same is true for exports, which account for just 10% of real aggregate GDP, and imports, which account for 11% of GDP. Is the less volatile growth in GDP and its components likely to continue? If a stabilizing monetary policy and smaller economic shocks largely explain the steadier growth in GDP, then the recent period of stability may continue only as long as 'good policy and good luck' last. By contrast, if structural changes have muted the transmission of policy shifts and economic shocks through the economy, then the increased stability we have experienced since 1984 may become a permanent feature of US economic growth.
Volatility of Growth in Real GDP and Its Components
Bureau of Economic Analysis, National Income and Product Accounts. RE: Consumer Resiliency - Amey Stone, Business Week 1-24 Lynn Franco, director of consumer research at The Conference Board, notes that consumers are much less troubled now by news of job layoffs (other than their own), which they've gotten used to even in a strong economy, than they were in the early 1990s. Likewise, she thinks they're less bothered by stock market declines than they were in the late 1980s. Most Americans now recognize that markets go up, and markets go down. "Consumers tend to adapt rather quickly nowadays," she says.
The economy is slowing, but that alone is not responsible for the double-digit declines in net income that so many companies are reporting. Also at work is the declining stock market. That the fortunes of the stock market can have an impact on corporate earnings is a relatively new phenomenon. With managers less able to pad results with stock-market related gains, earnings will suffer. Corporate investment was just one of the earnings-enhancement strategies which included (1) Using stock options as a substitute for paying higher wages; (2) Selling put options in their own stock to generate income; (3) Using extensive vendor financing; (4) Using your own high-priced stock to make acquisitions; and (5) Recording gains that resulted from the rising value of assets held in the pension plans of their employees. Corporate investment Intel was perhaps the biggest and most aggressive corporate investor. In Q3, Intel's portfolio was valued at $5.86 billion and produced investment and other income of $966 million. When Intel announced Q4 earnings on Tuesday, it said that the value of its portfolio had fallen to $3.7 billion and that it had produced $800 million in gains and interest income. More ominous, Intel said it expected gains and interest income to fall to $180 million in Q1-2001, adding that it forecast "no net gains from the sale of equity investments" in the coming quarter.
[WSJ 1-24: Compaq reported a fourth-quarter net loss of $672 million after a huge charge. Compaq took a $1.8 billion charge for a write-down of investments in CMGI. It holds about a 13% stake in CMGI. Excluding the charge, Compaq earned $515 million, or 30 cents a diluted share, compared with $332 million, or 19 cents a share, a year ago.]
Vendor Financing
Homeowners, after building up equity through much of the 1960's and 1970's, have let their ownership shares deteriorate over the last two decades to the lowest level on record, the Federal Reserve reports. The average homeowning household owed lenders 46% of the market value of its residence during last year's third quarter, up sharply from about 30% in 1982 and 40% in 1991, at the start of the current economic expansion, the Fed reports show. For a typical family with a home worth the median market value of $144,000 late last year, that meant their equity was $77,760 while their debt was $66,240. The Champagne toasts and mortgage burnings that celebrated the final payment are gone today. Instead, a growing number of Americans are approaching or entering retirement still making hefty home payments. Now a slowing economy catches the average household owning less of a stake in its home than in any economic slowdown since the advent of the modern mortgage in the 1930's. For people convinced that their home can only rise in value as their neighborhood improves, there is still room to borrow more and spend it avidly. "In a brief recession, the extra borrowing and spending would soften the downturn," said Mark Zandi, chief economist at Economy.com. Indeed, a new surge in mortgage refinancing as interest rates fall - the fourth surge since 1993 - is likely to give a lift to spending as some people go further into debt, pocketing the extra mortgage money without increasing their monthly payments. "But in a longer recession," Zandi said, "housing prices would weaken and many homeowners could easily find themselves owing more on their homes than the homes were worth." If that happened, the abrupt pullback in spending as these families tried to work down their debts and preserve their homes would exacerbate a recession. Many Japanese behaved in just this way after the collapse in real estate prices in that country a decade ago. With monthly mortgage and home equity payments in the US at a record level as a percentage of disposable income, trouble on the job (layoffs or cutbacks in overtime pay) could quickly restrict spending, also deepening a recession. Related: Do Refi's Move the Economy? - Caroline Baum, Bloomberg 1-22 I've never been persuaded that refinancings are what moves the economy. For every homeowner who refinances his mortgage and reduces his monthly mortgage payment, there's an investor who gets a high-coupon mortgage-backed security called away from him. Granted, the MBS holder is by nature a saver, so he has a lower marginal propensity to consume than the homeowner. Still, refinancings aren't a one-way street. Related: Household Debt Protection - John Lonski, Moody's 1-15 Most aggregate measures of household debt protection are stronger today compared to what held in the months leading up the start of the 1990-1991 recession. The household-sector's liquid financial assets may have entered into their deepest year-to-year setback since 1ate 1973 and early 1974, where the latter coincided with a severe recession. Nevertheless, the latest slide by liquid financial assets occurred following a spectacular surge. In turn, household wealthĖs coverage of both household debt and consumer expenditures still remains ample compared to what held during the last 25 years. Liquid financial assets may have declined from Q1-2000's 278% to Q4-2000's prospective 235% of outstanding household debt, but the latter compares favorably with the 200% of Q2-1990. Moreover, notwithstanding the latest stock price slump and related slide by liquid financial assets from Q1-2000's 264% of household expenditures to the Q4's anticipated 234%, the latter is still healthier than Q2-1990's 173% ratio of liquid assets to expenditures.
According to Roach, the US economy is witnessing a "broad-based contraction in domestic final demand," as well. But you wouldn't know it from the recent rebound in retail sales, as reported by those two respected sources, Bank of Tokyo/Mitsubishi and Redbook Research. For the week ended Saturday, January 6, the former's index for same-store sales was up 5.7% compared with a year ago, while Redbook Research's was up 6.7%. Bank of Tokyo/Mitsubishi senior economist Michael Niemira believes the strength in sales conveys a "message for the big picture" - that the poor performance of November and December was weather-related, and "should not be extrapolated" into January. The National Weather Service reported that November and December witnessed the coldest temperatures since it began keeping records in the late 1800s. Friday, the Census Bureau reported that December retail sales rose a mere 0.1% on a seasonally-adjusted basis, but this estimate is based on figures for the early part of December -- and that's when the worst of the winter storms kept shoppers away from the stores. Since the final two weeks of the month showed a rebound in sales, the Census estimate should be upwardly revised in next month's report. Roach thinks the economy has skidded into recession because of an unwinding in the information technology cycle. But contrary to what he suggests, there's no indication at all that "US IT demand [is] heading to zero." In the first two months of the fourth quarter, new orders for computers, communications equipment and electronic components were up 12.4% from a year ago. Steven Roach remains one of the bright lights of Wall Street, but I can't resist twitting him with the late John Liscio's classic put-down (a quip that Roach himself is personally fond of): Facts check into the Roach motel, but don't check out. Here's the final bit of news that nearly clinches the change that '01 will be another very good year: The Mortgage Bankers Association index of mortgage applications jumped 33.9% in the week ended January 4, indicating that the strong trend in home-buying will persist. And the MBA Refinance Index more than doubled. And with mortgage interest rates falling below 7% for the first time since April '99, another wave of mortgage refinancing is surely under way, putting fresh cash in the hands of consumers that will help fuel this consumer-led boom. Related: WSJ 1-16 From Barton Biggs, MSDW global strategist: "I think that the Nasdaq is signaling that we are in a recession that is going to last a couple of quarters. That adjustment is going to fall on the Old Economy as well as the New." [Biggs in Barrons 1-15: 'It still boggles my imagination that everybody thinks we can come through the biggest bubble in the history of the world and certainly the longest boom that the US economy has ever had, and get out of it with a very, very mild recession. ....The US is in a recession and the world is following. I'm afraid the decline in the US is going to tip Japan back into recession. It's just a question of time before the European economies do the same.'] From Laszlo Birinyi: Since 1945, we have had nine recessions, but only five came at the same time as bear markets. Related: Three ways this downturn could be different - WSJ 1-5 The stock-market tail wags the economy dog. Between 1989 and 1998, the number of Americans owning stocks, directly or through funds, rose to 84 million from 52.3 million, according to the NYSE. The surge in stock wealth was a huge boon to the economy. The corollary, however: A fall in the market has a much bigger economic effect. Stock prices, which have traditionally responded to expected economic activity, now are just as likely to be the cause of that activity. But just as financial markets can exacerbate downturns, they can also mitigate them. One reason is that investors may respond quickly to a cut in Fed interest rates -- as they did with Wednesday's huge rally in response to the surprise reduction of half a percentage point in short-term rates. That instantly eased some of the pain that had spread through the economy. The double-edged sword of technology. A pillar of the New Economy has been corporate America's heavy investment in computers, software, communications networks and Internet infrastructure, all aimed at enabling them to produce more, better products for the same or lower costs. Spending on information technology has accounted for a big part of economic growth. But the enthusiasm with which corporate America splurged on technology in recent years was driven by cheap capital and expectations of ever-rising returns on technology investments. The sharp economic slowdown now raises the risk that corporate America overinvested in technology, creating troublesome excess capacity. But the after-effects of overinvestment in technology are likely to be much less pronounced than those of previous investment busts. In the 1980s, a frenzy of real-estate investment saddled the US with commercial office space that took years to fill. During that time, new investment in such properties almost ground to a halt. By contrast, business equipment and software depreciate in just a few years, if not months. Rapid depreciation means that any excess capacity should be eliminated relatively quickly. Job loss: The dark side of productivity? A central element of the New Economy is that annual productivity growth has soared. That means GDP can grow faster without triggering inflation, and keep unemployment low. But if growth slows below 4%, then companies may shed workers in large numbers and send unemployment soaring, even if the economy stays out of recession and grows at, say, 2%, a level once considered healthy. Yet the legacy of high growth (and the resulting tight labor markets) may be that unemployment continues to stay low during a slowdown. The reason: The No. 1 problem for businesses over the last several years has just been finding people. Related: Donald Ratajczak, AJC 1-21 The economy is declining. Furthermore, the weakness emerged so rapidly that corporations have not been able to adjust their work forces to the lower rates of production. As a result, productivity gains will be sharply lower during the fall and winter. The best signs of this decline are in industrial production. During the fall, industrial production showed the first quarterly decline since the struggle to get out of recession in 1991. Furthermore, cold weather led to sharply higher production from utilities. Excluding those needed but undesired production jumps for utilities, industrial production would have declined at recessionary rates during the fall. During the fall, business sales fell while business inventories jumped. Most of the problem is in autos, but inventories also grew more rapidly than sales during the past year in hardware, furniture, general merchandise and apparel. What this means is that production will need to be cut further before inventories will begin to come under control. At least another quarter of declining industrial production is virtually certain. Thus, recessionary levels of industrial activity almost certainly will persist into the spring. Because of the purchases of utilities, consumer spending has not declined. Their debt is becoming unmanageable as paychecks shrink or disappear. Economists are worried about the magnitude of the consumer cutbacks. If they intensify, a full-blown recession will be hard to avoid. Related: John Dorfman, Bloomberg 1-23 Typically, stocks start to decline three to eight months before a recession's onset, and start to rise three to eight months before it ends. For folks who like averages, on average the stock market switches direction 4 1/4 months before the economy does. The average length of the 21 recessions since 1900 was about 15 months. Despite the famous crack that the stock market has `predicted nine of the past five recessions,' about 80% of significant stock-market declines are associated with recessions.
Under the old regulations, IRA owners locked in their annual minimum distributions by picking one of eight methods of calculation and a beneficiary just after turning 70 1/2. [LA Times 1-17: If an account holder died without making proper beneficiary elections, heirs could be forced to deplete the account almost immediately, often paying income tax at the highest marginal rates.] But with the new rules, there will instead be a uniform table to determine the minimum distributions they will be required to take each year. [Todd Mason, Ft Worth Star-Telegram 1-17: Where taxpayers don't benefit - as in the case of an IRA saver whose spouse is more than 10 years younger - the proposed rule allows the saver to use the old calculation.] And that table is generous, giving everyone the smallest minimum distribution provided under the old system. Under the new regulations, minimum distributions of inherited IRAs are based on the life expectancy of the beneficiary. And the beneficiary now isn't finalized until Dec. 31 of the year following death instead of being locked in soon after the IRA owner turns 70 1/2. That means that people can change their beneficiary whenever they wish up until their death with no repercussions. In many cases, there is even the opportunity for posthumous planning. A beneficiary, for example, could disclaim the IRA, allowing it to pass to a contingent and perhaps younger beneficiary. Or the IRA could be divided into separate accounts for multiple beneficiaries with different life expectancies. [Todd Mason, Ft Worth Star-Telegram 1-17: The present rules penalize IRAs with multiple beneficiaries, all of whom must use the age of the oldest to calculate distributions. ] Related: NY Times 1-21 Most 401(k) plans will not honor long-term payout plans, nor are they required to do so, because the law allows corporate plans to limit payouts to beneficiaries to five years. As a result, account holders who are doing such long-term estate planning should consider rolling over the balance of a 401(k) into an IRA when they retire. Martin Nissenbaum, national director of retirement planning for Ernst & Young, said that under the new regulations, another possibility would be to use an IRA to fund what is known as a QTIP trust, for qualified terminable interest property, which would give a spouse a life interest in an asset that would ultimately go to another beneficiary. According to the Investment Company Institute, a mutual fund trade group, Americans had $12.7 trillion in retirement plans at the end of 1999. Related: LA Times 1-17 To determine the required minimum yearly distribution from a retirement account under the new rules, divide the balance of the account at the end of the previous year by the figure next to the account holder's age. Example: A 75-year-old with $100,000 in an IRA at the end of 2000 would divide $100,000 by 21.8. The minimum required withdrawal in 2001 is $4,587.16.
Mezrich found that upside and downside surprises had almost equally inverse impact across the overall market. But technology stocks had a cumulative return of about 2% on positive news, they had a loss of around 3% on negative shocks. Other groups that fell further on unpleasant surprises than they rose on positive ones included telecommunications concerns, software makers and food and drug retailers. When times are tough, it is better to be in health care (biotech, pharmaceutical, equipment makers and service providers) stocks. There, positive surprises produced relative returns of 1.83% during the period, while bad news hardly made the stocks budge. Other sectors whose gains on good news outweighed the declines on bad news include energy producers, insurers and basic-materials makers like chemical companies. Why do some sectors behave differently from others? Mezrich said: 'I would argue that there is a behavioral difference in the sectors. On balance in health care, maybe investors are more forgiving.' Another explanation may be that analysts who follow technology companies tend to be more aggressive in their estimates, creating a greater rush to the exits among investors when expectations are not met. Mezrich is convinced his findings can help investors limit their downside risk now, because he suspects that the stock market is not fully prepared for the extent of the economic slowdown that may lie ahead.
For example, after the market crash of October 1987 (which followed five stellar years) many analysts predicted subpar stock returns for years to follow because they figured investors would be too shellshocked to jump back in. Wrong. The S&P 500 rose 12.4% in 1988 and surged 27.3% in 1989. In 1994 (after modest gains in in 1992 and 1993), the market ended slightly lower as the Fed drove interest rates up. As 1995 began, many Wall Street pros were telling clients to expect average returns, at best, from stocks in the latter part of the '90s. Wrong again. Still, the warnings over the years were rooted in sound investing logic - mainly, in the idea that market returns ought to "regress" to the historical average. The bullish case was for a major upward adjustment in the market's long-term average return, befitting a "new era." And that is just what we've had: From 1982 through 1999, the S&P 500 returned more than 19% a year. The long-term annual average return on the S&P, dating back to 1926, is 11.3%, pulled up by the results of the last two decades. Robert Farrell, Merrill Lynch's market analyst and senior investment advisor, says 2000 was a taste of what's to come. Farrell insists that, after two decades of extraordinary returns in the market, investors must be prepared to earn much less. Investor surveys suggest that most people don't buy that scenario. A monthly survey of 1,000 investors by PaineWebber and Gallup shows that the average expected portfolio return over the next 12 months stood at 11.8% as of the December survey. (It was 18.4% in the December 1999 survey) If you believe that regression is underway, even the long-term average return of 11.3% is probably too optimistic a figure for an annualized average return in this decade, according to Farrell. How low could returns get? Some Vanguard Group data at least offer sobering food for thought: The US market generated an average annual return of 27.1% from June 1949 to April 1956, a seven-year bull market. But from April 1956 to June 1962, the return averaged just 5.6% a year - regression at work. From June 1962 to November 1968, the average annual return was 14.8%. But from November 1968 to April 1980, the annualized return fell to a mere 4%. Fat years can give way to some very lean years. At the beginning of 2000, bulls had the fundamentals on their side: Corporate profit growth was surging, energy prices still seemed under control, and the economy was roaring. With the reversal of those fundamental supports, a long, lean period may not seem quite so outlandish to more investors. Let's assume Farrell is right. An expectation of lower stock returns could prompt you to rethink your portfolio mix. Holding a larger portion of your portfolio in bonds and "cash" accounts might seem more attractive. Investors might also begin to look more to other types of assets - foreign stocks or real estate, to name two. For the last 18 years, the smart strategy has simply been to stay in US blue-chip stocks and ignore virtually every other asset class. No one can tell you for certain that, 10 years from now, we won't be marveling once again at how spectacular the returns have been in the US market. But to make that bet now - without any meaningful kind of hedge in the form of portfolio diversification - is to crawl further out on what is arguably an increasingly thin branch. Related: Don't Bet on SnapBack - J Clements, WSJ 1-16 If you are looking for a quick snapback (in the stock market), history isn't very reassuring. How bad could it get? Consider some probabilities calculated by North Carolina State University finance professors Charles Jones and Jack Wilson. Their results, which are based on returns since year-end 1919, were published in the Spring 2000 Journal of Private Portfolio Management. Let's say you're a stock-market investor who's willing to ignore the worst 10% of possible outcomes. Assuming stock returns are random, Profs. Jones and Wilson figure your minimum return would be no gain over five years, 3% a year over 10 years, 5% over 20 years and 6% over 30 years. If your stocks earned those sorts of annual returns, you would clearly want to compensate by saving more money. Willing to ignore the worst 20% of possible outcomes? That boosts your minimum expected return to 3% a year over five years, 6% over 10 years, 7% over 20 years and 8% over 30 years. Earning 8% a year, rather than 11%, might not seem too grim. But the impact on your final wealth is enormous. If you invest $1,000 a year for 30 years and earn 11% each year, you will amass $199,000. But if you garner just 8%, you will finish with a tad over $113,000, or 43% less. Related: WSJ 1-8
Related: Barrons 1-1 'The market was up more than 20% in each of the past five years,' says Byron Wien, MSDW's US strategist. 'Most investors would like that to go on forever, and that was the principal affliction of 2000.' In short, misbegotten expectations of endless growth clashed with the reality of excessive equity valuations, producing one of the market's worst years on record.
Ohio Nation, Wells Fargo, Morgan Stanley Dean Witter and others offer S&P 500 funds that are far more expensive than Vanguard's. Part of the reason is that they charge loads, which they justify as the price of a broker's advice. Ohio National's index shares have an expense ratio of 1.05% and a sales load of 5.5%. Wells Fargo S&P fund has a 0.71% expense ratio and a 5.75% load. Say an investor put $10,000 in the Vanguard fund and $10,000 in the Wells Fargo fund in January 1984. By mid-December of 2000, the Vanguard investor would have had $128,582 and the Wells Fargo investor $102,409, or 20% less, according to data compiled by Vanguard that a Wells Fargo spokesperson did not dispute. Related: Why S&P did not beat mutuals' - NY Times 1-7 The eight-member index committee at Standard & Poor's has been picking plenty of high-technology, large-capitalization stocks with high p/e ratios. Some of last year's picks? Altera, which joined the index in April, would then fall 37.7% by year-end. Broadcom, which joined in June, would fall 61.6%, and JDS Uniphase, which came on board in July, would tumble 69.3%. Yahoo, which joined the index in late 1999, fell 86.1% last year. Related: Could Have Been Worse - Floyd Norris, NY Times 1-2 The S&P 500 also was hurt by its additions of "new economy" companies, although it could have been worse. "In 1998, we got a lot of flak about" not putting Internet companies into the index, recalled David Blitzer, the chief investment strategist at S&P. "We concluded we were not being old-fashioned. We don't object to the Internet; we just object to companies that have never made profits."
Richard Bernstein, chief quantitative strategist at Merrill Lynch, said he wouldn't expect a broad market advance until the corporate profit warnings stop. Somewhere in between was Richard E. Cripps, chief market strategist at Legg Mason: "We believe optimism for economic recovery is well founded, though an upward move for stocks is likely to be jagged until earnings uncertainty abates." They had to say something, I know, just as I have to write something. You don't get to be a strategist, let alone a chief strategist, by saying nothing at times like this. Nor will it do to say, "Sorry, we're not sure." Related: Stephen Dunphy, Seattle Times 1-8 Excess bank reserves, known as fed funds, are traded daily between those banks that have more than enough and banks that have too little. The rate a bank with excess reserves charges a bank with deficiency reserves is the fed-funds rate. An inverted yield curve suggests the Fed is keeping interest rates too high. The fact that the yield curve is still inverted after last week's action is a strong indication that another cut in rates will be coming. Related: WSJ 1-7 Stocks historically have done well following a Fed rate cut. Since 1914, the Dow has gained 20%, on average, in the 12 months following an interest-rate reduction, according to statistics compiled by Ned Davis Research. And the Fed's half-point cut in the key federal funds rate may only be the beginning. Most market veterans say more cuts are likely. When the Fed cuts more than once, "it's one of the strongest buy signals we have," says Tim Hayes, global stock strategist at Ned Davis Research. Still, the Fed's action could be viewed as a bearish sign that "the economy is slowing faster" than many expected, says John Bogle, founder of Vanguard Group. Stocks also remain overpriced by many measures, even after last year's slump. On average, the S&P 500 stocks trade at 25 times reported earnings for those companies - no bargain compared with the norm of only 15.1 times earnings since 1926. Amid all that conflicting information, what's an investor to do? Pros say it's largely a waiting game. Bailing out now wouldn't be smart, but things could get worse before they get better. Related: NY Times 1-7 Byron Wien, chief US investment strategist at MSDW says "It isn't a sure thing that just because the Fed eases, the stock market goes up. The key differentiating factor is whether we are in a recession." In June 1989, after a period of rising interest rates, the Fed began to ease, initially cutting the Fed funds target rate from 9.81% to 9.56%. The day of the first cut, the S&P 500 stood at 326.69. Roughly 18 months later, when Fed funds were at 7% and the nation was in recession, the S&P had risen a mere 2 points, to 328.72. Only in early 1991, when investors sensed that the recession was ending, did stocks start to stir. Related: NY Times 1-5 Louis Crandall, chief economist at R. H. Wrightson, said there were two ways to look at the Fed move: "Does the Fed see something we don't or is the Fed applying new rules?" He predicts an additional quarter- point cut at the January meeting, to 5.75% for the federal funds rate, and then "a wait and see" approach. By the next scheduled meeting in March, some of the dislocations that have contributed to the slowdown, including harsh weather, high energy prices and power shortages, "may fade as the heating season comes to an end." Bruce Steinberg, the chief economist at Merrill Lynch, said the Fed would be more aggressive. He expects a quarter-point cut at the end of the month and another cut of a quarter-point or half a point at the meeting in March. He expects the rate to be down to 5.25% or 5% by June. "The Fed has to accelerate the rate reductions to keep the economy on an even keel," he said. James Glassman, senior US economist at JP Morgan Securities, said the Fed would cut even further, with a half percentage point reduction at the end of the month and further cuts that bring the fed funds rate target down to 4.75% by June. "In our mind the Fed is still stepping on the brake," he said. "So it has to get the foot off the brake quickly." Related: WSJ 1-9 Richard Berner, chief US economist at Morgan Stanley Dean Witter, rattled markets Monday with the release of a report entitled "Recession Arrives." The report argues that the Fed's most recent rate cut was too late to prevent a contraction. "The key questions now are how deep and how long will the recession be, who it will claim as its major victims, what it will take to promote the eventual recovery and what will be the shape of the other side of the valley." Ed Hyman, the chairman of International Strategy & Investments Group Inc., foresees zero growth in Q1 and Q2-2001 - a recession under his definition. Brian Wesbury, chief economist at Griffin Kubik Stephens & Thompson Inc., an investment-banking firm in Chicago, says a recession actually began in October and will continue through the first two quarters of this year. Related: Thomas Mulligan, LA Times 1-7 Since 1980, never has a new round of interest rate cuts by the Fed failed to result in a higher stock market within a year, as measured by the S&P 500 index. Yet some analysts worry that this time is different. "You don't make money betting against the Fed very often, but this could be one of those times," said Maureen Allyn, chief economist at Zurich Kemper Investments in New York. First Call/Thomson Financial, the research firm that tracks Wall Street analyst reports, thinks the S&P 500 firms will post year-over-year profit declines in the first and second quarters of this year. Such a back-to-back drop, or "earnings recession," as it's called, has not occurred since 1991. Another source of concern is stock valuations. Although valuations have fallen, many of the biggest Nasdaq and S&P stocks still trade at historically stratospheric price-to-earnings multiples. Can the market launch a sustainable rally with so many of its leadership stocks already so pricey? "This has been the mother of all credit binges," Allyn said. "The proportion of American housing stock that is mortgaged has never been this high. There are massive amounts of corporate and financial-sector leverage." When most credit was supplied by banks, the Fed, as the top banking regulator, had far greater power to ease a credit crisis by promising to bolster weak institutions or to relax enforcement of lending standards for stronger ones. But today, most of the credit that fuels consumer and corporate borrowing comes from the capital markets, both in Wall Street and abroad. "The Fed can't make an insurance company go out and buy mortgages, or make Europeans buy our corporate bonds," she said. Seattle fund manager William Fleckenstein, a perennial "bear" who makes his money betting against stocks, thinks Greenspan's Fed will be shown to have been one of the most reckless in history, bailing out the markets time and again with rate cuts rather than letting investors learn that mistakes have consequences. "When you try to subvert the business cycle you wind up with an epic collapse," he said, raising the specter of a years-long decline like Japan's. More sanguine is Robert D. Hormats, vice chairman of Goldman Sachs International. He believes the Fed itself was a bit slow on the trigger. "If they'd acted earlier, we wouldn't have so much trouble re-instilling confidence," he said. Related: Donald Ratajczak, AJC 1-7 Whew! We are beginning to steer away from what was brewing as "The Perfect Recession." As the confluence of two minor relatively weather disturbances can combine into an extraordinary storm, two minor economic disturbances were about to collide. The two economic problems are as follows: First, exuberance early last year led to excessive ordering for the Christmas season. As a result, the economy is plagued with too much stuff - except natural gas. Because we could not sell our way out of this stack of goods, we must now shut down production lines to drop activity below quantities demanded. Second, the consumer sector has spent more than it earned because asset appreciation made households feel wealthy. With the stock market slumping 10%, wealth no longer is sufficient to sustain current expenditures. Now combine the needed shutdowns and temporary layoffs with a consumer struggling to rebuild assets and you have the makings of a major recessionary condition. If anyone thinks the stock market rally following the Federal Reserve action ends the risk, he or she mistaken. Some economic rain will fall. Employment will actually decline in the next few months. Moreover, the latest analysts' estimates of earnings for the S&P's companies is a Q1 gain of 5%. If my outlook is correct, Q1earnings will be down by 3-5%. Wall Street may not have discounted all these earnings difficulties. Now, having outlined the seriousness of the developing economic conditions and extolling the timeliness of the Fed action (and I assume more will follow), here are the major projections for 2001 that I wish to make: GDP will grow only slightly more than 2% (1% in first half, 3% in 2nd) as consumer spending slows to 2.5% gains and inventory investment drops dramatically. Construction will be stable. Non-construction fixed investment should grow about 7%. Trade will continue to deteriorate, although the rate of decay will stall toward the end of the year. Employment growth will average less than 50,000 workers per month for the year, and unemployment will rise to more than 4.5% by year-end. Inflation as measured by the CPI will grow about 2.7% in 2001 as energy prices drop, food inflation surfaces, and core inflation rebounds to nearly 3%. The US dollar will continue to slide against the euro and, after March, will begin to weaken against the yen. On average, the dollar probably will drop about 5% against major currencies this year. Long-term interest rates may actually rise slightly for high-quality government bonds, to about 5.5%. Lower-quality bonds will sustain a major rally during the year. Anticipated heavy gains in bank stocks and multinational firms, which are heavily weighted in the Dow, assures record highs of more than 12,500 for that index. The Nasdaq will have trouble going much above 3,300 by year-end. Related: Christopher Farrell, Businessweek.com 1-12 US economic expansions are getting longer on average. Two factors seem especially critical to the trend toward longer upturns. First, with containing inflation its No. 1 goal, the Fed no longer alternates between hitting the accelerator and slamming on the brakes. The other reason is that over a long period of time, inventory control has become less volatile -- thanks to the rise of the information economy and technological advances. Taken together, it means that any downturn should be relatively brief in length and shallow in depth, with the subsequent expansion lasting for a long time. How Fund Categories Fared WSJ 1-8-2001
Like many strategists, Stefan Abrams, chief investment officer for asset allocation at the Company of the West, thinks that even though the economy is going to start the year quite weak, the financial markets will perform reasonably well as investors anticipate help from Mr. Greenspan on interest rates. "But somewhere in the middle of the first quarter," he said, "we're going to say, `Is the economy still deteriorating? Is the consumer still sated? And has business, through its high-tech spending, overbuilt the capital stock?' If so, then there could be cause for considerable concern because, if we need to jump-start aggregate demand, lowering interest rates may not do enough." Most individual investors seem certain Mr. Greenspan will deliver them from the stock market troubles seen in 2000. In a survey of 1,000 investors conducted late last month by Strong Funds, 42.6% said they believed that the stock market would rise at least 10% this year, while 34.8% said they expected it to be mostly flat. Only 20.3% think the market will decline by 10% or more. The main reason for this optimism is investors' faith in Mr. Greenspan. Of those surveyed, 43.3% said that the Fed chairman would have the greatest impact on the market in 2001, well above the 35.6% of investors who said that corporate profits would be the driving force in the market. And if the president- elect has any delusions about who is in charge, only 6.8% of those interviewed said George W. Bush would be the prime mover of stocks in 2001, below even the 7.4% who thought world events would have the biggest impact. Related: WSJ 1-5 Chuck Hill, director of research at First Call/Thomson Financial, cautions that the market may not yet have hit bottom and that "this may be a bigger bubble than normal that takes longer to get the excesses out." Related: The Optimists - Barrons, 1-1 "The median p/e multiple on the S&P 500 is 16, the cheapest in four years," says Thomas Galvin, U.S. strategist at Credit Suisse First Boston (Donaldson Lufkin & Jenrette). [WSJ 1-5: Even with last year's 10.1% decline in the S&P 500, stocks continue to trade at around 23 times this year's projected earnings. That's down from a high of 26.5 in the first quarter of 2000, but still far above the average of 18.1 for the past decade.] [WSJ 1-16: Overall, the S&P 500 is trading at around 24 times its companies' per-share earnings for the past 12 months. That still seems high, compared with an average of 16 since 1970, as measured by Ned Davis Research. The bulls say that level isn't high at all, since inflation probably is 1% or less right now, compared with 10% inflation or more during parts of the 1970s. Taking inflation into account, the p/e ratio of the S&P could easily reach 30 without any problem. But what if we go into recession? Skeptics worry that P/Es could tumble. The median p/e during recessions since World War II has been 10, Ned Davis Research says.] ["People forget that 40% of the S&P 500 in March 2000 was trading at 12 times earnings and less, and that is hardly a sign of notable overvaluation," says Abby Joseph Cohen.] "Expectations have been wound down, and people are bracing for a hard landing. But it would appear that the engines of liquidity are about to restart, which makes this a time to be aggressive, not to head for the hills." Galvin expects the Dow to end the year around 12,650, some 17% above current levels. Valuations also tempt Edward Kerschner, who became chief global strategist at UBS Warburg (PaineWebber). "I'm as bullish as I've ever been," Kerschner exulted recently. "The market by every gauge I use is ridiculously cheap. This is one of the five best buying opportunities I have seen in the past 20 years." Kerschner thinks the S&P 500 will end the year at 1715 (and Dow 13,900), reflecting a gain of roughly 29%. Lehman Brothers strategist Jeffrey Applegate thinks the S&P 500 is priced 19%-20% below fair value and project a year ending Dow of 13,000. "We're looking at 7% earnings growth for the year, but the market's major propellant will be price/earnings multiple expansion." Related: NY Times, 1-14 Just three weeks ago, Merrill Lynch predicted 5% growth this year in the operating earnings for the companies in the S&P 500. That projection is now down to zero growth, with actual profit declines of 3.4% in Q1 and 5.2% in Q2, compared with a year earlier. Robert Barbera, chief economist at Hoenig & Company, says he believes that a recession began in Q4-2000. Richard Berner, chief US economist at MSDW, thinks that the recession will show up in the first two quarters of this year. Both think that earnings will be hammered. While Barbera, Berner, and the few others in the recession camp, are still in the minority, the majority is moving in their direction. With a recession, popularly defined as two consecutive quarters of economic decline, Mr. Berner forecasts that total growth will be 1.1%, year over year, in 2001. Among economists, the January consensus forecast compiled by Blue Chip Economic Indicators is now down to 2.6% growth for 2001, from 3.4% in November. Randell Moore, the newsletter's editor, said contributors were already cutting their forecasts further, so the consensus number will fall again in the February survey. As the Merrill Lynch forecast shows, it won't take an actual recession to produce several quarters of earnings declines that could rattle investors anew. Just the Facts James Paulsen, chief investment officer at Wells Capital Management, remains worried that a recovery could take longer than most people believe. He says the fact that commodity prices didn't rebound after the Fed cut rates by half a percentage point on Jan. 3, is worrying. Normally gold, copper and lumber surge during an economic rebound because people believe demand will rise for these products. But that hasn't happened. A rise in commodity prices would give him more confidence that a recovery is at hand. (WSJ 1-31) Stocks should be your preference in an investment portfolio for the same reason that Willie Sutton robbed banks: That's where the money is. (Douglas Sease, WSJ 1-30) In the 10 years from 1988 to 1998, of the 4,900 companies that became publicly traded (or IPO-ed), nearly 30%, as of 1998, were no longer listed on any market. And of the 70% or so still trading, a study done by US Bancorp Piper Jaffray showed that the median annual return was a paltry 2.4%, less than what an investor could have earned in a simple and relatively safe money-market account. (Douglas Sease, WSJ 1-30) Alan Greenspan hasn't cut interest rates by a full percentage point in a single month since he became chairman of the Federal Reserve in 1987. The shortest time frame for a rate cut of a full percentage point under Greenspan's Fed was 44 days between Nov. 6 and Dec. 20, 1991, according to Jonathan Bailly, an economist at Wrightson Associates, a research firm. (Bloomberg 1-29) The savings rate of those income earners who range in age from 25 to 65 probably remains pretty positive. At least, the consumer expenditure survey showed it was positive for those age groups in 1999, when the officially measured personal savings rate was not far above where it is now, at only 2.2 cents on the dollar. The savings rate is running negative only for the age groups at both ends - the young and the old. But the young get supported with cash from their parents, while the old are able to sell off their assets. (Gene Epstein, Barrons 1-29) When Abby Joseph Cohen declared in this year's Barron's Roundtable that "consumers are now feeling largely satisfied" ever since their three-year binge of buying "housing and autos" came to an end in "early 2000," she put herself in aristocratic company. Greenspan made a very similar point in his July testimony before congress last year. People are all consumered-out with "cars and light trucks," "new homes," and other "durable goods," said the Maestro. Message to Greenspan and Cohen: Median household income, pre-tax, is still about $43,000 a year. The bottom four-fifths of households receive a pre-tax income of about $88,000 or less. The vast majority of households in the bottom four-fifths can't afford to own a new car, but buy used instead; and about 40% don't own a home to begin with. But as long as the real income of this bottom four-fifths keeps rising, we can be fairly certain that their appetite for consumer durables will continue apace. In Q4, average hourly earnings advanced at a record rate. (Gene Epstein, Barrons 1-29) "After the market has gone down, there's a feeling that it will continue to go down," says Meir Statman, a finance professor at Santa Clara University. "But at the same time, there's a feeling that the market might go back up. It's like we have two minds fighting within us. This is captured in those two Wall Street sayings: 'Buy when there is blood in the Street,' and 'Don't fight the tape.'" (Jonathan Clements, WSJ 1-28) The average first-day gain for new offerings, which peaked at 122.4% in December 1999, was only 15.4% in November and 26% in December, according to Thomson Financial/Securities Data, which tracks offerings. From September 1999 to March 2000, 100 offerings more than doubled on their first day. In October and November of this year, only one doubled. (NY Times 1-28) When Fed meet next week, they will confront a world that looks a lot less scary than when they first cut rates. Weekly retail sales have recovered from their dismal December showing, and weekly claims for unemployment insurance have dropped. The Wilshire 5000 is up 7%, more than it rose in the three weeks after the Fed first cut rates in 1990, 1995 and 1998, according to MarketHistory.com. And that is in the face of disappointing profit news. Corporate-bond yields have also dropped more than they typically have after the Fed starts reducing rates, fueling a huge surge in new borrowing. But Jerry Jasinowski, president of the National Association of Manufacturers, maintains "Manufacturing is in a recession and the rest of the economy is on the verge of recession." Since Jan. 3, surveys show manufacturing activity in the Northeast and consumer confidence have slid further, and the unfolding energy crisis in California poses a threat. In the futures market, investors are pricing in 100% certainty of at least one quarter-point cut and 80% probability of an additional quarter point. (WSJ 1-25) Goodwill is the difference between the purchase price paid for an acquisition and the fair value of the acquired company's net assets. And for companies with a lot of goodwill on their balance sheets, it has been a drag on earnings. Current accounting rules require companies to steadily write down their goodwill assets over periods as long as 40 years, expensing the charges against earnings along the way. But that likely will change later this year. Under a proposal that was affirmed Wednesday by the Financial Accounting Standards Board, companies no longer would gradually write down their goodwill. Instead, they would let goodwill sit untouched on their balance sheets until the value becomes impaired, at which point they would be required to write some or even all of it off. Goodwill bulls believe that most companies' stocks will continue to trade at their current price-to-earnings ratios even after the FASB proposal takes effect, though in a rational world, critics respond, these ratios should fall. UBS Warburg, chief strategist Edward Kerschner projects earnings for companies in the S&P 500 should get an aggregate boost of 5% to 6%. (WSJ 1-15) Is the US turning out enough scientists and engineers to make discoveries that will pay off in 50 years? While US colleges awarded 18% more bachelor's degrees in 1997 than in 1987, they awarded 37% fewer degrees in computer science, 24% fewer in math, 16% fewer in engineering and 2% fewer in physical sciences, the National Science Foundation says. (WSJ 1-25) Only 15% of 645 employers surveyed plan job cuts this year, compared with 14% in a similar survey last year, says consulting firm William M. Mercer Inc., New York. Plans for pay increases also are similar to last year's, the survey says. (WSJ 1-23) If history is any guide, now might be a good time to load up on financial-services and consumer goods stocks. Those sectors tend to perform best when the Fed is cutting interest rates, according to a study by Instinet. At the bottom of Instinet's list of performers are many commodity-based businesses such as oil, chemicals and makers of steel and machinery. (Barrons 1-22) Here's why market averages can be misleading. Consider the S&P 500. The final leg of the 1990s rally that took all the major averages to all-time highs last year dates from 10-18-99, the bottom of that year's last dip. From that point, the S&P 500 rose 21.8% to peak at 1,527.46 on 3-24-00. From that same peak, the index dropped 13.6% by the end of last year. On its way to an all-time high, almost two of every three S&P 500 stocks (62%) declined in price or were unchanged. On its way back down, just over 60% of index stocks declined in price. (Tom Walker, AJC 1-21) My favorite measure of consumer confidence consists of the monthly total of new and existing home sales. The Mortgage Bankers Association's index of mortgage applications is now signaling that home sales will remain near record levels. If the consumer is willing to make that kind of commitment to his future, how unconfident can he be? (Gene Epstein, Barrons 1-21) Is the consumer is tapped out? Wage rates earned by the working stiffs have been growing at least 2% faster than the rate of inflation. By way of comparison, through most of the 1980s, and through the first half of the '90s, average hourly earnings lagged the rate of inflation. Jason Benderly has shown that except during recessions, spending always grows a lot faster than earnings, a pattern that we're already beginning to see in the recent rebound of retail sales. This leap in real wages and salaries has been a much more important factor in boosting real spending than the bull market. (Gene Epstein, Barrons 1-21) NBC draws more advertising money on Thursday night than on the other six nights combined, according to several current and former network sales executives. This is due to 'the weekend factor' - the need for sellers to reach consumers before the weekend. Automobile makers expect their biggest traffic on weekends. Retailers, like big department stores, have their biggest sales events on the weekends. The biggest weekend sellers of all are movie companies, which increasingly live and die on how their films score in their first weekend at the box office. As Leslie Moonves, the president of CBS Television, put it: "The economic value of a hit on Thursday is three times as much as a hit on Wednesday and maybe five times as much as a hit on Friday. I'm only exaggerating a little." (NY Times 1-18) Panama adopted the dollar as its official currency nearly a century ago. On New Year's Day, El Salvador became the third country south of the Rio Grande. Its move came less than a year after Ecuador. Guatemala recently passed a law allowing dollar bank accounts and enabling companies to pay salaries in dollars. Most Guatemalans think adopting the dollar is inevitable. Nicaragua, Honduras and Costa Rica are studying the idea. Common currencies can boost trade and investment, as well as insulate smaller countries from external financial shocks. A recent study by economist Andrew Rose at the UC Berkeley, found that trade between two countries sharing a common currency is triple that of comparable countries that maintain their own currencies. Polls indicate that average citizens are open to the idea. If dollarization works in El Salvador and Ecuador, "others will follow," says Mexico's new finance minister, Francisco Diaz. Were Mexico to eventually dollarize, "then all of Central America will surely follow," says Guillermo Calvo, director of the Center for International Economics at the University of Maryland. (WSJ 1-15) Dollar sales of personal computers in US retail stores slipped 0.2% in the holiday shopping season, running from Thanksgiving to Christmas, according to the market research firm NPD Intelect. In the same period, sales of DVD players boomed 102%, and mobile phones were up 44% from 1999. (Seattle Times 1-14) In 1997, the last year for which figures are available, Americans wrote 66 billion checks - roughly 250 checks per year per person, or one check per business day per US resident, according to a recent study published by the FRB of Atlanta. The total value of those checks was $77.8 trillion, or $1,177 per check on average, the study said. So if it costs the system $1.60 more to process a check than to process an electronic payment, and those costs get passed back through to all of us, why do checks remain so popular? Checks are familiar and people cling to the familiar; they provide reliable evidence of payment; it's easy to control the timing of a payment and for many check writers, especially big players, the float retains an important appeal. One study put the value of the float on the average check in 1993 at 9 cents, and it has probably declined since then. (Fred Barbash, Wash Post 1-14) Fees charged investors by mutual funds have declined in recent years but are significantly higher than in the 1970s, according to a new SEC report. Average expense ratios were 0.94% of fund assets in 1999 (down from 0.99% in 1995, but up from 0.91% in 1998) the SEC study found. But in 1979 they were only 0.73%. Year-to-year comparisons on fee levels are difficult to make because of investor shifts in the 1990s toward stock funds - which are more costly to operate than bond funds - and changes in the way the industry structures its fees, the study said. Jeff Keil, who follows fund fees for Lipper, said the trend toward lower costs in recent years probably stemmed from a combination of factors, including the success of the largest fund families (like Fidelity andVanguard) which have below-average fee levels, in attracting new assets to their funds. (WSJ 1-11) Managers oversee an average of 10.75 employees, according to 1999 data from about 970 companies compiled by Saratoga Institute Inc., a research and consulting firm. (WSJ 1-9) Morgan Stanley Dean Witter warns that California's energy crisis threatens to push up production costs and make US exports from the state, which totaled $102.9 billion in 1999, less competitive on world markets. "Negatives tend to snowball, so what is happening in California has the potential to exacerbate the weakness we already are seeing in the US economy," says Joseph Quinlan, a Morgan Stanley economist. The state produced more than $1.2 trillion in output in 1999, making it the sixth-largest economy in the world, slightly smaller than the economy of the United Kingdom and a little bigger than that of Italy. The state's economic output contributed about 12% of total US GDP. New York, in second place, had an 8.1% share of GDP. (WSJ 1-8) More than 4,700 stock funds, or 60% of the 7,830 followed by Lipper, lost money in 2000. The data-tracking firm estimated that 1,238 funds fell by 20% or more, 129 fell 40% or more and 45 lost at least half their value during 2000. Among U.S.-diversified funds, a higher percentage fell more than 10% than any year in the 1990s. 66.6% of US diversified stock funds beat the S&P last year, up from 48.5% in 1999 and 19.8% in 1998. (WSJ 1-3) The Department of Transportation estimates that 25% of long-haul drivers' time consists of nondriving work, such as loading, unloading and waiting to load and unload. Drivers are paid for the miles they drive, so waiting time is uncompensated. The Truckload Carriers Association says excessive waiting time is the No. 1 reason, ahead of time away from home and wages, for the industry's high driver turnover rate, exceeding 100% a year. (WSJ 1-2) Your employer's stock is the riskiest stock you can own. After all, you already rely on your employer for a paycheck, and possibly your health and life insurance as well. Why crank up the risk level even more, by betting your portfolio's future on the same company? (Jonathan Clements, WSJ 12-31 Home Page Previous Factoid Top Sites |
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