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1. Because there are so many savvy players in the stock market, who together ensure that shares tend to be fairly priced, smart investors find it hard to do really well and ignorant investors find it tough to do really badly. 2. Investors who are most confident of their skill, and thus tend to trade the most, often get the worst investment results, because of the trading costs they incur. 3. You are more likely to outperform other stock investors if you give up trying and instead buy market-matching index funds. 4. "The best way to get rich is to buy one stock and hope it's a 20-bagger," says William Bernstein, an investment adviser in North Bend, Ore. "But it's also the most likely way to end up poor." 5. In inefficient markets, stocks will be mispriced. But if you try to take advantage of these opportunities, you may trail the market, because trading costs in inefficient markets are often exorbitantly high. 6. Adding a risky investment like international stocks to a U.S. stock portfolio can reduce the overall portfolio's risk. The reason? Foreign stocks may tread water or climb when your US stocks are tumbling, thus damping your portfolio's volatility. 7. The more successful an actively managed stock fund is, the more difficult it is for that performance advantage to persist, because of the influx of new cash from investors. 8. By the time you are confident that a money manager is truly skillful, his career may be almost over. 9. "The most discussed investments tend to have the lowest returns," Mr. Bernstein says. "Popular assets get their prices bid up, lowering subsequent returns." 10. A stock-market tumble might be unpleasant. But for many folks, it is better than the alternative. After all, if you are still adding fresh savings, wouldn't you rather buy at cheaper prices? 11. When stocks plunge, all the talk is of panicky investors dumping millions of shares. But every one of those shares is bought by somebody. 12. The market's performance each year is driven by a handful of highflying stocks. But instead of trying to pick those stocks, you should diversify. How come? If you try to select the few big winners, the odds suggest you will end up owning the clunkers and thus lagging far behind the market average. 13. Investors with long time horizons fret endlessly about daily performance. 14. If you buy a stock gradually, rather than all at once, you reduce risk. But if you sell a stock gradually, you take more risk than somebody who dumps his shares in one fell swoop and thereby eliminates exposure to the stock. 15. The rich are most able to bear stock-market risk, but have the least need to do so. 16. As investors grow older and gain experience, they usually become more comfortable with stock investing. But by then, they have less time to reap the benefits of their wisdom. 17. Younger investors can profit most from long-run returns, but often are least able to save. 18. "In the US, we have the most heavily regulated markets in the world, and yet they're the most liquid and the most open," Mr. Bernstein says. "This is one case where government regulation stimulates market development." 19. The 15% income-tax bracket may be a nice place to visit, but you wouldn't necessarily want to live there. 20. If a bond defaults on its interest payments or a stock cuts its dividend, that is almost always bad news. But if the annual distributions from a stock or bond fund shrink, often that is a sign of prudent money management. 21. Zero-coupon bonds, which are the most volatile of bonds, offer great long-run certainty, because you know exactly what return you will get if you hold to maturity. 22. The longer you hold an individual bond, the less erratically it performs, as the bond gradually approaches maturity. But a bond fund's volatility typically stays the same, no matter how long you hold it. 23. "The most profitable companies tend to have the lowest returns going forward," Mr. Bernstein says. "Highly profitable firms attract competition, amass cash that's used for unwise acquisitions and, in general, become fat, dumb and happy." 24. By refusing to pay dividends, companies encourage shareholders to be disloyal, because the only way investors can get back cash is to sell shares. 25. The best time to buy cyclical stocks, like autos, paper, steel and heavy-equipment manufacturers, is when they have no earnings. The best time to sell them is when they are making plenty of money.
'The markets haven't priced in as severe a slowdown as might be coming,' said Jim Coons, chief economist for Huntington Bancshares. He expects corporate profits will grow by 6.4% from this quarter to next year's fourth quarter, down from expected 12% growth from last year's Q4 to this year's. Q4's productivity growth rate will be 2.8% or lower, he predicts. In this climate, the overall market is shrinking. Corporate debt offerings fell about 6% in the first six months of this year from year-earlier levels. The high-yield corporate bond sector fell 55%, to $28.2 billion in issuances, in the first half of this year, while investment-grade bonds gained nearly 7%, according to the Bond Market Association. In response, businesses are cutting back on capital spending forecasts, according to a survey released Friday of 105 members of the National Association of Business Economists. The percentage of firms reporting falling capital spending in Q3 was the highest since 1992, at 21%, up from 7% in Q2, the survey found. Forecasting the next six months, about a quarter expect to cut spending. Although most observers have been predicting an economic slowdown, this could be the beginning of a vicious cycle that leads to a much more dramatic downturn.
Once in possession of it, crooks can obtain credit, make purchases, even steal the person's entire identity. Names, addresses, dates of birth and other personal data--even that old-fashioned identifier, your mother's maiden name - are readily obtainable, much of it from public records. What does seem clear is that it is time to recognize officially that Social Security numbers are our national identification numbers and treat them as such. This means setting up a complete set of rules governing when they can and can't be used. The FTC operates an identity-theft hot line. The number is 877-IDTHEFT (877-438-4338).
Consider the shock that hit investors in two Heartland municipal-bond funds earlier this month: Their stakes in Heartland High-Yield Municipal Bond Fund and Heartland Short Duration High-Yield Municipal Fund tumbled 70% and 44%, respectively, in a single day when the funds slashed the values at which they were carrying certain bonds in the portfolios. Officials at other fund companies say the steep repricings by Heartland are an isolated event and aren't indicative of huge problems facing other municipal-bond funds. Even so, the still-unfolding Heartland saga highlights a little-recognized risk of mutual-fund investing: Occasionally, NAVs may not be an accurate reflection of the value of the underlying portfolio of securities. There can be far more estimation and fuzziness in setting fund NAVs than many investors realize. Investors whose funds hold thinly traded or even untraded securities, such as private-company stock, syndicated bank loans and the types of high-yield unrated municipal bonds favored by the two Heartland funds, should be particularly aware that pricing portfolios can be less of an exact science than it appears. Investors can suffer if they buy fund shares at inflated NAVs or sell at prices that understate the value of the portfolio securities. Sudden events can present short-term pricing quandaries for funds. When problems with "derivative" securities exploded in 1994, for instance, fund companies scrambled to determine values for arcane securities for which buyers had disappeared. Funds holding Taiwanese securities had pricing problems last year when the Taiwan Stock Exchange closed for days following a local earthquake. Fund companies that invest in thinly traded securities typically use independent pricing services to help fix the value of their holdings each day. For instance, Heartland uses Interactive Data, a unit of Britain's Pearson PLC, to help price its high-yield muni bonds. Some other fund companies use Standard & Poor's J.J. Kenny, a unit of McGraw-Hill. But there can still be sharp disagreements about what infrequently traded securities are really worth. For example, Heartland High-Yield Municipal Bond Fund valued seven bonds at midyear at prices 60% to more than 100% higher than the prices Kenny said it suggested to its clients. The seven bonds were all defaulted issues that Kenny said it had marked down to 40 cents or 50 cents for each dollar of par value. Discussing the process of pricing high-yield munis in general, Art Brasch, director of municipal services at Interactive Data, said some small issuers of municipal bonds aren't forthcoming with financial disclosures needed to fully evaluate the ongoing credit-worthiness of those bonds. He also said his pricing firm counts on its mutual-fund customers to pass along any material information they glean about the financial condition of projects financed by the bonds. "The overwhelming majority of clients are very diligent about that," he says. But that reliance on fund managers has its drawbacks, notes Mr. Rekenthaler of Morningstar. The fund managers who may be in the best position to learn negative news about a particular bond "have incentives not to voice that news" because it will reduce the fund's NAV and eat into fund performance. "It's a fox guarding the henhouse situation," he says.
Now, something known on Wall Street as Reg FD has entered the picture, and it means Mr. Berler no longer will have access to all the information he uses in his spreadsheets. The result: He is less certain his earnings estimates. Reg FD (for Fair Disclosure) 'is already having a chilling effect' on analysts and their contacts with corporate managers, says Stuart Kaswell, general counsel for the Securities Industry Association, an industry trade group that has begun to hear accounts of companies canceling one-on-one meetings with analysts, a staple of the business. The main thrust of the SEC's mandate: Companies must publicize all potentially market-moving data simultaneously, and they cannot selectively disclose data to certain analysts or big investors before releasing it to the public. In practice, that means the job of Wall Street analysts - to cobble together a mosaic of data bits mined from companies, competitors, suppliers, customers and internal employees - 'has gotten more difficult,' says Richard Schneider, a PaineWebber analyst and 13-year veteran of research on forest-product companies. Analysts traditionally have served as an important link between the flood of financial data from public companies and investors. Delivering accurate earnings forecasts typically required an often-cozy, often-symbiotic relationship with corporate management. Companies played along because it helped them manage investor expectations and keep their stock prices from swinging violently. Related: Williams & McGough, WSJ 9-25 "You can't give guidance to individual analysts any more," said Chuck Hill, director of research at First Call/Thomson Financial, which tracks analysts' estimates. "That will inevitably lead to wider ranges in estimates, and more surprises." And with more surprises, there is likely to be more volatility in individual stocks - and even in the entire market. Some observers think Reg FD already is having an effect, forcing more companies to announce news of disappointments. So far this quarter, there have been 206 negative preannouncements, up from 165 at the same point last year, according to First Call.
I must also point out that tax fraud increases sharply when tax credits are refundable. This will clearly tax IRS in its enforcement. More money may be raised by auditing the rich, but more fraud will be uncovered, if past refundable programs are any guides, by auditing the poor. IRS resources simply are not available to do both. Bush tax cuts are in the rates. No additional forms need to be generated to calculate lower tax rates on prevailing incomes. Unfortunately, we have two tax codes, and the Bush tax cut only alters one. For most people with limited deductions, their rates will go down and nothing else will be changed. However, for those with significant deductions, including capital gains and state taxes, they may be subject to the alternative minimum tax. Already, more than a million households must pay a minimum tax rate based upon this alternative system, which denies many deductions but taxes at a fixed lower rate. This system was designed to assure that even the wealthy will pay some taxes regardless of the deductions they can garner. As the normal rate falls, the gap between the tax rates for the two tax systems will narrow. This increases the likelihood that even relatively moderate deductions will push taxpayers into this alternative system. Indeed, one study shows that about 7.5 million households will be paying on the basis of the alternative system by 2010 if nothing is done to the standard tax rates. By narrowing the tax rate gap, about 15 million households may be paying the alternative minimum tax by 2010. Anyone who has been pushed into that second tax system knows that tax filing becomes much less simple. Of course, Bush could solve this problem by changing the alternative minimum tax rate by the same percentage as the other tax rate. Why not do so? Apparently the answer is that too much revenue already is lost in the initial tax cut to allow commensurate cuts in the alternative minimum rate. What that says about the viability of the Bush tax cuts if a recession looms is frightening. Oh well, we probably must await another election to see if anyone really is serious about simplifying the process of raising revenue for the government.
But even as the company prepares its first five Viper issues for release - pending their approval by the SEC - it has provided a five-page fact sheet that aims to dispel the "alarming number of myths" that it says are being perpetuated about ETF's. Some of those myths, Vanguard says, are that exchange funds have lower expense ratios than index funds, that they are extremely tax efficient and that they will replace traditional index funds. Assets in ETF's stood at $52.6 billion at the end of June, according to Strategic Insight, a consulting firm in New York. While that was only a sliver of the $7 trillion invested in mutual funds, E.T.F. assets had grown nearly 50 percent in six months, in part because Barclays started an extensive advertising campaign, renamed its exchange-traded funds "iShares" and created dozens of new ETF categories. What Vanguard says are myths about exchange funds are, in Barclays' view, often valid positions. Vanguard's fact sheet compares fees in 13 of the group's mutual funds with those of 13 similar iShares. Seven Vanguard funds have lower expense ratios than their iShare rivals. Two have the same fee and four iShares are less expensive. When told of the comparisons, Lee T. Kranefuss, who runs the Barclays retail investing business, said, "They're comparing apples and oranges." He noted that Vanguard was comparing products that, while similar in focus, did not follow the same indexes. Vanguard, for example, compares the 0.84 percent expense ratio of iShares that separately track indexes for Australia, Hong Kong and Japan to the 0.37 percent expense ratio for the Vanguard Pacific Stock Index fund, which invests in several countries. A more convincing argument made by Vanguard presented a comparison of a hypothetical $10,000 investment in the Vanguard 500 Index fund with a $10,000 investment in the iShare 500, both of which are intended to approximate the performance of the S.& P. 500. A direct purchase through Vanguard would cost $18, according to the document. By Vanguard's reckoning, the iShare purchase, made in a new Fidelity brokerage account, would cost $102.97. Vanguard's calculation includes many exchange-fund costs that it thinks are overlooked, including brokerage commissions, bid-ask spreads and minimum charges for brokerage accounts with assets below a threshold of $20,000 or $30,000. Vanguard also questions the tax efficiency of exchange-traded funds, citing several that have had sizable capital gains distributions, which are taxable. Three of Vanguard's tax-managed funds have not made distributions since they were created in 1994. In response, Mr. Kranefuss of Barclays cited a recent study that compared the taxable capital gains distributions of Vanguard 500 Index with the comparable Spider. The Spider's taxable gains were significantly lower, according to the Financial Research Corporation. From 1993 to 1999, the Vanguard fund had an average annual capital gains distribution of 0.41% of its net asset value. By comparison, the Spider had no distributions except in 1996, when its distribution was 0.16% of its assets, according to the study. The crux of Vanguard's position is that exchange-traded funds are more expensive products that might be worth the money for short-term traders. Mr. Kranefuss bristled at such a notion. "The benefits of ETF's - lower costs and tax efficiency - are benefits for long-term investors," he said. "Our customers are long-term investors." Related: Kenneth Klee, Smart Money 10-23 Net inflows into America's numerous S&P 500 index funds slowed to a relative trickle in the first eight months of this year - a total of $5.8 billion, down from $25.6 billion for the same period in 1999, according to the Financial Research Corp. For that same first eight months of 2000, Lipper Analytical reports that 72% of actively managed US funds outperformed the S&P 500. Now, actively managed equity funds are supposed to do better in tough markets; for one thing, they can take partial refuge in cash - something index funds can't. But we haven't seen this many managers beat the S&P since 1990 when 72% beat the index, and before that 1980, when 76% did. And in a world where ailing companies get ruthlessly restructured, where traders hammer stocks for earnings disappointments, there's a strong bias toward action: You got a performance problem, you do something about it. It's part of the culture.
The contents of these low-interest accounts top $1 trillion, the CFA found after analyzing data from the Federal Reserve, and this money earns an average of 2.1% a year. At 2.1% interest, the $1 trillion in these accounts would increase to $2.3 trillion in 40 years, but at 7.1% interest, it would climb to $15.5 trillion in that time. So, what's going on here? First, moderate-income Americans are obsessed with safety and thus keep their savings in a government-insured account. Second, many savers don't realize that they can get higher rates and government backing by shifting institutions, or even changing account types within the same institution. [And third] most planners recommend that people keep amounts equal to three to six months of living expenses in relatively liquid form, and that may account for some of the balances. How can savers do better? First, there are various government securities like US Savings Bonds. The Series I inflation-protected bonds are currently paying 7.49%, are safe and can be cashed in easily. After six months, you can get your investment plus some interest. These bonds are meant as long-term investments, so if you cash in within five years of purchase you lose three months' worth of interest. Staying with your bank and getting a CD is another option. Another alternative to preserving access is to buy a series of CDs with "laddered" maturities. This way, you'll have some of your CDs maturing at different times, giving you a series of points at which you can take the money if you need it. There are also deals in which banks "sweep" excess amounts from your checking account into savings so little of your money sits idle. And you can do some of this yourself, either on the Internet or via telephone transfers, which many banks offer. Also, credit unions often offer higher rates and lower fees.
Oil and natural gas supplies will increase in the next two years thanks to large investments made in recent years in exploration and development. But major companies are not rushing to boost investments today, when oil is more than $30 a barrel, because they don't believe prices will stay that high. But gasoline prices will stay relatively high because refining capacity is in tighter supply than it used to be. That also means that refining is a good business for investors to watch in the next two years. Because of development projects underway for years in deep waters of the Gulf of Mexico, offshore West Africa and in the former Soviet Union, world oil supplies will increase by roughly 4 million barrels a day, or 5% in the next two years, says Daniel Yergin, chairman of Cambridge Energy Research Associates. As that 5% growth in supply is slightly higher than projected increases in world demand, experts see crude oil prices declining to about $20 a barrel from the current $34. But prices of gasoline may not fall by a comparable percentage, because refinery capacity hasn't been expanding as fast as demand for oil products. As OPEC released more oil and Clinton opened the Strategic Petroleum Reserve, prices of gasoline and other fuels didn't fall as much as the price of crude did. Refineries in the US couldn't easily handle the increased flow. 'It was like pushing a golf ball through a soda straw,' says analyst Douglas Terreson of Morgan Stanley Dean Witter in Houston. That tight refining situation will persist through next year, Terreson predicts, giving major oil companies and independent refining companies higher profit margins on their refinery operations. How did such a bottleneck come about? Because refining has been a lousy business for years. Tosco Corp., Valero Energy, Ultramar Diamond Shamrock, and Sunoco (oil refineries) earned combined average returns on investment of 6.9% from 1996 through 1999. They could have earned more with less risk from a government bond or a bank CD. Facing such poor returns, refiners invested as little as possible to expand capacity. And as demand for gasoline and other products grew, a refining pinch resulted. Now analysts project returns on refining at 14% a year. And new investments will be made to add refinery capacity. But California faces special problems because the next phase of refining investment in the state is to remove MTBE, a substance added to gasoline to reduce air pollution but being phased out because it contaminates ground water. Simply put, taking out the MTBE will reduce refinery output by 10% to 11%, says Leslie Watson of Purvin & Gertz's Long Beach office. 'Supplies will diminish somewhat,' Watson says, although refinery expansions are being planned. The upshot: Californians will continue to pay more for environmentally cleaner gasoline and other refined products. But there will be no severe long-term shortage of products, and refiners will invest in expanding output in the state because, as one refining executive declares 'it's the greatest refining market in the world.'
But a savvy reader can peek at much of this behind-the-scenes fiddling by using widely available text-reader programs, such as Notepad, or by simply selecting the right word-processing options. Sometimes, depending on a computer's settings, Word revisions that weren't at all visible to the writer are obvious to the recipient. And when those documents get zapped through cyberspace as e-mail attachments, the inside information they contain can set the sender up for embarrassment or worse. Microsoft has "gotten few customer complaints" about the problem, says Lisa Gurry, a product manager for Microsoft Office. But she adds that those will be addressed in late spring in the next version of Microsoft Office, which will include a "privacy option" to allow a Word document's author to "remove all personal information with the click of one button and be warned if you're saving tracked changes and comments." For now, Microsoft offers a nine-page article through its Web site on "How to Minimize Metadata in Microsoft Word Documents."
Myth No. 1: Tech companies can generate breathtaking gains in earnings, sales and productivity for years to come. This was probably the most pervasive and influential of all tech-stock myths, partly because it seemed so hard to challenge. Growth in tech-company sales and earnings was undeniably outpacing growth elsewhere. Technology's contribution to economic growth underpinned the analysis by Merrill's Bruce Steinberg. In the late 1980s, he noted, earnings at big tech companies grew more slowly than at most other companies. By the late 1990s, tech earnings were growing twice as fast as those of other companies, which was a good reason to value tech stocks more highly. The stocks had become "priced for perfection." Nor did this perspective on the market take into account a historic reality: No matter how good a company is, it can't maintain as a large organization the same growth rate it had when it was much smaller. Dell boosted revenue by about 50% a year from 1996 through 1998. Then, in 1999, sales growth slowed to 38% - still enormous, but earnings growth also slowed, and in the fall of 1999, Dell warned investors that its earnings would fall short of estimates. Dell's stock multiplied 93-fold between the same starting point and its peak this March, and is down 54% from its peak this year. Myth No. 2: Tech companies aren't subject to ordinary economic forces, such as a slower economy or rising interest rates. Until the late-1990s, technology was considered a cyclical business. But as the tech craze shifted into high gear, one of the most popular arguments in favor of technology companies was that demand for their products was so enormous that it would keep growing through the peaks and troughs of the Old Economy. PC sales, for example, were thought to be able to grow regardless of general economic conditions, as they had through most of the 1990s, says Andrew Neff, an analyst at Bear Stearns. But then one PC-related company after another shocked investors with warnings of softening business, from Intel to Dell to Apple. Mr. Neff, who used to dismiss such warnings as "company specific," now says he has changed his thinking. The PC business is now cyclical, he adds, and investors should sell PC stocks when the fundamentals begin to deteriorate. In the same vein, many analysts argued tech companies were immune to interest rates because demand for their products was so strong and their borrowing needs so slight. As it turns out, even though tech companies don't borrow much themselves, their customers do. And as buyers have curtailed spending, tech suppliers have suffered. Myth No. 3: Monopolies create unbeatable advantages. Some tech companies were thought to deserve extraordinary valuations because the nature of their products created near monopolies. The huge number of people using Microsoft's operating-system software or America Online's instant-messaging service gave those companies a critical mass of customers (a network) that made it hard for others to break in and compete. One problem with this argument is that government may become suspicious of monopoly power. Moreover, monopolies may erode as the marketplace evolves. Beyond the government antitrust suit, Microsoft faces the far more daunting danger that its customers will reject the desktop computer as online and wireless technologies open the way for new handheld devices and inexpensive "dumb" terminals that can connect to the Internet. Myth No. 4: Exponential Internet growth has just begun and, if anything, will accelerate. But demand for Internet products and services, though strong, hasn't proven infinite. Once most companies set up a Web strategy and a home page, growth in their Internet spending tends to slow. As the overall economy has downshifted a bit, Internet-advertising dollars have flowed less readily. Last week, the stocks of Yahoo! and DoubleClick were clobbered on signs of flagging growth in Web advertising, finishing the week down 76% and 91% from their highs, respectively. What's more, Internet companies had assumed shareholders would wait patiently for years before demanding that they show significant profits. Instead, investors are bailing out of companies that spent aggressively on attracting customers. Amazon is down 75% from its all-time high, E*Trade 81%, and iVillage 98%. Myth No. 5: Prospects are more important than immediate earnings. Henry Blodget of Merrill Lynch expressed the core of this myth in December, when he wrote of Internet leaders like Yahoo, "It is a mistake to be too conservative in projecting future performance." Yahoo at that time was trading at 500 times projected profits for 2000. "The real 'risk,' " Mr. Blodget asserted, "is not losing money - it is missing major upside." In retrospect, Mr. Blodget concedes that while advising investors not to be too conservative "was the right prescription for 1995 to 1998, as soon as we got into 1999, it was a mistake. Expectations got ahead of reality." Myth No. 6: This time, things are different. More than any other misconception, this was the most fundamental of the myths to which people succumbed. What made it so seductive was that it had so many elements of truth to it. Rarely had a series of phenomena (the Internet, wireless communications and computer networking) so quickly become such a big part of so many people's lives. But tech fans ignored the fact that even companies involved in a revolution eventually face market forces. Most early auto makers failed to survive. RCA and General Motors were two of the hottest stocks of the 1920s, but that didn't prevent both from crashing along with the rest of the market in 1929. RCA eventually lost 98% of its value. Some analysts remain unrepentant defenders of their views on tech stocks. Mr. Steinberg of Merrill Lynch says "I think the new economy is alive and well," he says, "and I don't think this is the end of the story right now." But some money managers warn that certain tech stocks, notably in the networking and optical-fiber area, still haven't fallen enough to reflect the real world. Says Michael Weiner of Banc One Corp.'s money-management unit in Columbus, Ohio: "It doesn't look to me like we have entirely learned our lesson." Related: Fred Barbash, Wash Post 10-29 Jeff Bezos (Amazon founder) points to improved inventory efficiency, better sales per customer, better revenue than analysts had predicted (79% greater than the same quarter last year) and numbers that he believes prove that Amazon has plenty of cash, contrary to claims by Lehman Brothers analyst Ravi Suria that the company is running out. Bezos could now boast of 25 million "active" customers and projected revenue for 2001 of $4 billion. Some dot-coms, Bezos said without naming names, were fake businesses. "Some of them were trying to build stocks rather than trying to build companies." When "their ability to raise capital came into question," Bezos said, they had nothing to keep their businesses growing. So when's the profit coming, I asked? Bezos won't project publicly. How about the valuation? "I never comment on that."
Where does this leave the central bank? A precipitous plunge in stocks could prompt it to ease and the probability of a rate cut is now the highest it's been since late 1998. The March federal-funds futures contract indicates a 70% chance of a quarter-point cut in the Fed's target, which currently stands at 6.5%. Salomon Smith Barney economist Robert DiClemente now thinks downside risks for the economy "have begun to overtake the chances of a sustained upturn in inflation." But PaineWebber chief economist Maury Harris says there are no signs of a generalized credit crunch with a wide-spread lessening of availability to capital. Corporate-bond issuance is off from last year's pace, but overall, short-term business borrowing at banks, finance companies and in the commercial-paper markets continues. And money supply is expanding. M2, for instance, is growing more than 6% on a year-over-year basis. And MZM (money of zero maturity) has been growing at better than an 11% annual rate in the latest three months. This belies any notion that the economy is starved for liquidity. It's still the case, however, that spreads of loan rates versus funding costs in August rose to levels last seen during the international credit crunch of fall 1998. This development is playing a not-inconsequential role in the growth slowdown this year. Ironically, a sharp slowdown may not send bond yields much lower, notes William Gross of Pacific Investment Management Co. For one thing, Treasury yields already have moved quite a bit lower - the 10-year note yield ended the week at 5.72%, down from 6.42% at the start of the year. Also, inflation would have to stop rising and edge lower to pave the way for lower yields. Related: W Pesek, Barrons 10-23 William Gross, the world's most influential bond buyer and chief investment officer at Pacific Investment Management believes that the New Economy isn't necessarily good for bonds. In Gross' view, the risk comes from the mountains of private-sector debt being issued to fund technology investments, a trend that raises the stakes for the market if many of today's business expenditures don't pan out. The survivors in this new corporate world order will pay bondholders 100 cents on the dollar at maturity while the losers (and there may be many) go bankrupt. And Gross thinks the economy is more likely to experience a hard landing than a soft one. News last week that consumer prices rose a greater-than- expected 0.5% in September -- 0.3% excluding energy and food -- fit with his view that inflation trends could worsen. Today's bond market can be a confounding one. Consider the divergence between equity and debt performance. As Alan Abelson (of Barrons) also notes, the corporate bond market is pricing in a significantly high probability that companies will default, while equities, even with the recent tumble, still have historically high valuations. "This pricing is logically inconsistent," notes Greg Jensen of Bridgewater Associates, "because the same earnings that go to equity investors are available for the debt service payments that go to bond investors."
So far the shopping public doesn't appear to be nearly as concerned about the shrinking equity market as the commentators on CNN, whose personal portfolios are undoubtedly much larger. September's retail sales figure probably means that real consumption growth over the first nine months of this year will uncannily match that in the corresponding '99 stretch, even though last year's shoppers enjoyed a soaring bull market, while this year's haven't been nearly as lucky. Mortgage applications continued to run near its record high through the first week in October. The year is finally putting Wall Street's theory of the one-legged boom to a severe test. That theory held that the boom that began in 1996 was due solely to the greatest bull market in history. It's time for them to master the theory of the three-legged boom, the other two legs being the lowest unemployment rate in 30 years and the highest housing affordability ratio in more than two decades. Related: Alan Murray, WSJ 10-16 For many people, last week's horrific cascade of events in the Middle East felt like a flashback to the 1970s. And it raised the inevitable question: Could this desiccated corner of the world once again be the undoing of the American economy? The triple threat of a religious war, rising anti-U.S. terrorism, and surging oil prices creates a frightening and unpredictable mix. But as events unfold, it's worth keeping the following in mind. On Feb. 26, 1993, a bomb ripped through the hotel parking garage beneath the World Trade Center, literally shaking Wall Street. Investors shook that off, and the Dow Jones Industrial Average ended the day up five points. The Dow industrials also rose the day in 1998 when bombs exploded outside the U.S. embassies in Kenya and Tanzania, and in April of 1995 after the Oklahoma City bombing. When does terrorism upset investor confidence? When it involves oil, as it did in 1987 when an Iraqi missile attack hit the USS Stark, and fears of inflation were already roiling the market. As for consumer confidence, Lynn Franco, director of the Consumer Research Center at the Conference Board, says that absent an effect on oil prices, terror in the Middle East is a nonevent. Consumer confidence remains near record highs, and this won't change that significantly. 'When the economy is strong, the impacts are minimal,' she says. Events in the Middle East could help ease some of the concerns of policymakers. At the Federal Reserve, some officials worried that the economy wasn't slowing quite enough; recent events will help soothe that fear. And at the Treasury, some worry that the nation's expanding trade deficit could cause the US dollar to have a 1980s-style collapse. But turmoil abroad will help support the dollar, since investors see the US as the safest investment harbor in a storm.
The professors studied trading in 1,948 stocks for 50 days before and after lockups ended for the 10 years ended 1997. They split the sample into companies with major venture-capital funders and those without. When "unlocked," the average stock volume increased 40% and the average price declined about 2%. But the price drop was deeper and the volume was roughly double for companies with venture funders. The fact that venture capitalists cash out isn't surprising, but the magnitude of their selling is, says Prof. Hanka. In a 1999 follow-up, the team plotted 200 IPOs and found venture-funded firms lost about 6% of their value at the "unlocking."
Abundant historical evidence supports the view that a strong currency is bullish for local profits. Consider first the dollar's exchange rate against Europe's. The precursor to the euro, the European Currency Unit, or ecu, has a history going back to 1978. We splice this into the briefer history of the euro (launched January 1, 1999) and observe how the fluctuations in Europe's currency over the past 21 years have influenced the profits of S&P 500 companies. In the 10 years that the dollar appreciated most against the ecu/euro (on average, by 12.3%), S&P profits in the same period rose on average by a healthy 9.5%. In the 10 years the dollar appreciated least and depreciated most (by an average of 6.3%), S&P profits climbed by less than half that rate, or an average of 4.1%. The far greater depressant on US profits in coming quarters will come from the Fed's prior rate hikes of 1.75 percentage points from June 1999 to May of this year. We've studied all the episodes since 1955 that the Fed has raised rates by at least 1.5 percentage points over an 18-month period. There are 13 such episodes and the average increase in the fed-funds rates was 3.5 percentage points. S&P profits had been growing by an average of 19.4% annually in those periods; but in the year following, average growth decelerated sharply, to 3%. The European Central Bank, by raising interest rates by 2.25 percentage points since last November, is inflicting the same harm on its local markets. Notice that the ECB's rate hikes in the past year (which have exceeded the Fed's by a half a percentage point) have begun to harm growth in Europebut have done nothing to bolster the euro. Contrary to popular opinion, which falsely attributes dollar strength to Fed rate hikes, that result should be expected. Interest-rate fluctuations are the effect, not the cause, of currency swings. Higher interest rates don't make a currency stronger; they reflect the rising inflation expectations that result when it turns weaker.
Dividend generosity has been on the wane for several years, even in times of strong earnings growth. Institutional investors often have encouraged companies to use their cash flow to buy back shares in the open market rather than increase dividends. But the decline in the number of dividend increases announced in September, compared with a year earlier, was particularly steep. It coincided with a larger-than-usual number of companies warning that their third-quarter earnings wouldn't meet expectations. Arnold Kaufman, editor of Standard & Poor's Outlook investment newsletter in New York, said that the number of dividend cuts is running below the level of 1999. The number of companies cutting their dividends or omitting dividends entirely totals 93 so far this year, down from 116 in the same period of 1999. How Fund Categories Fared USA Today 10-3-00
Just the Facts Stock options are a small part of compensation. A Bureau of Labor Statistics study found only 2.4% of all US private employers offered their workers stock options last year. BLS said 5.3% of employees in publicly held companies and 19.6% of executives in such firms received stock options in 1999. (WSJ 10-31) Lawmakers approved a bill last week requiring health-care facilities to use retractable-needle syringes or other safety devices to help prevent needle-related injuries. There are 500,000-plus incidents a year in which someone is accidentally pricked with a needle on the job; more than 1,000 of those injuries result in HIV or hepatitis C. (WSJ 10-31)An analysis of payroll statistics by the Employment Policy Foundation found that only about 20% of all full-time hourly workers put in any overtime, and they tend to be concentrated in certain industries, such as mining, construction, and transportation and communication services. (WSJ 10-31) In 26 of the 63 years of Social Security's existence, payroll taxes haven't covered its costs and the shortfall was made up from other revenue sources. That happened as recently as 1995. (John Berry, Wash Post 10-29) Misconceptions about women's ability and willingness to handle international assignments are preventing them from advancing in global business, according to a study of people working abroad by Catalyst women.org, a New York nonprofit research and advisory group. It says that only 13% of managers sent abroad are women, though women represent 49% of all middle management. (WSJ 10-26) Many workers will get hit with higher payroll taxes next year. They will have to pay Social Security taxes in 2001 on earnings of as much as $80,400. That's up from $76,200 this year and only $51,300 as recently as 1990. Next year's increase will affect about 10.9 million workers. Here's how it works: Suppose you earn $81,000 this year and again next year. Based on the 6.2% Social Security tax rate, your tax will rise by $260.40 next year to $4,984.80. That's a 5.5% increase from this year and a 57% increase from 1990. Employers also have to pay their share. Self-employed workers have to pay both portions, which means they may owe as much as $520.80 more next year, but they get to deduct part of the total on their federal income-tax returns, thus softening the blow. A separate 1.45% Medicare tax has to be paid on all your earnings. (WSJ 10-25) The consumer price index was created more than 80 years ago to help the nation wage World War I. The cost of living was rising rapidly, which happens during every major war, and President Wilson's Administration got concerned about threatened strikes in the nation's shipyards that might hamper the war effort. So it asked the Dept of Labor to devise a price index that would provide shipyard workers with a cost-of living escalator in their paychecks. The CPI was born as a result, which also explains the anomalous fact that its keeper happens to be the Bureau of Labor Statistics (instead of an agency of the Commerce Department, which would make more sense). (Gene Epstein, Barrons 10-23) This probably is a time to be looking for bargains [in the stock market]. But I'm not confident there are very many there. (Fred Barbash, Wash Post 10-22) According to Morningstar, foreign mutual funds that invest in big companies have a 68% correlation with funds that invest in American stocks. That means more than two-thirds of the foreign funds' performance can be explained by movements in the American market. But buy a fund that owns small and midcap names and the correlation falls to about 50%, reducing the odds that the foreign and US stocks will move in lockstep. Small and midsize stocks tend to bounce around a bit more than large-cap funds. But investors have been rewarded for taking that risk, at least recently. Over the past three years, international small-cap funds have returned an annualized 14.77% according to Lipper, beating the 5.92% return for large-cap foreign funds, and even beating US diversified stock funds, which returned 11.73%. (WSJ 10-22) Remember 1998? As Asian currencies crumbled and stock markets crashed, panic spread around the world. Amid fears of global recession, the Fed aggressively eased credit. Markets recovered. Now those gains have been wiped out. Measured in dollars, half the value of stock markets in such countries as Indonesia, the Philippines, South Korea and Thailand has melted away this year, leaving them close to their 1998 lows. Japan has lost a quarter of its value. The markets of Argentina, Brazil, Chile, Mexico and Peru are all down by 15% or more. And you were upset that the S&P is down 5%. Junk bonds are trading as if recession and huge defaults are just around the corner, at premiums to Treasury bond yields that exceed those of the 1998 panic. David Bowers, the chief global investment strategist at Merrill Lynch, says investors face a major decision on asset allocation. "Have we overestimated the slowdown?" he asked. If so, this would be a good time to look for investments in depressed markets. (Floyd Norris, NYT 10-22) Only 42% of African-American and 51% of Latino households hold credit cards, compared with 67% of whites, according to Claritas, a marketing research firm in San Diego. (Greg Winter, NYT 10-22) The top 1% paid about 35% of all federal personal-income taxes for 1998, up from 33% the previous year and 29% for 1993, according to new IRS statistics posted on the Web site of Congress's Joint Economic Committee (www.house.gov/jec/). To rank in the top 1%, you had to report adjusted gross income of $269,496 or more for 1998. To rank in the top 5%, your income had to be at least $114,729. For the top 50%, your income had to be at least $25,491. (WSJ 10-18) US-based stock funds suffered a net cash outflow estimated at $12.15 billion in the week ended Thursday, according to Trimtabs.com. That was the biggest one-week net outflow since the firm began keeping track in late 1996. (LA Times 10-17) Stock-market investors may have lost money in recent weeks. But what they have really lost is time. That, at least, is how I like to think about it. If you own the stocks that comprise the Dow, you are back to where you were in April 1999. If your portfolio looks more like the Nasdaq, you might be back to November 1999. (Willaim Clements, WSJ 10-17) 'There's a real mismatch between the length of our investment horizon and how often we get feedback on our strategies,' says Nicholas Barberis, a finance professor at the University of Chicago. 'A lot of us are long-term investors and yet we get all this short-term information. If you get out at the first sign of trouble, you're not going to get those long-run returns. Part of the problem is that many people focus on gains and losses in individual investments. That only makes things worse, because you're bound to have a loss somewhere.' Stocks will do what they want. The question is, how will we react? (William Clements, WSJ 10-15) The average American household gets 28 credit card offers in the mail each year. The number is much higher, of course, for middle- and upper-income families. Only one of every 20 pieces of household mail is personal. The rest is mostly advertising, financial statements and bills. Only one in eight householders usually reads in-the-mail advertising. (AJC 10-12) NPD Group, a market research firm, expects 10.4% of evening meals to include frozen entrees this year, up from 8.8% in 1995. Food brought home from restaurants is expected to grow only to 6.8% of meals from 6.2% in 1995. (WSJ 10-12) For most of 1998 and 1999, many stocks lagged behind as technology stocks soared and bolstered the major market indexes. This year, many of the technology stocks have come back down, but a lot of other stocks have held their own. Indeed, while the Value Line index - which gives equal weight to every stock - has fallen 5.7% over the last 15 days, it is still up 4.2% since the end of last year, indicating that the average stock has risen this year despite the big falls of some stocks. The Nasdaq is down 22% since the end of last year. (Floyd Norris, NYT 10-12) Bush has a $1.3 trillion tax-cut package. His mantra that the "surplus belongs to the people" is true enough. But as a would-be leader of the people, he ought to try informing his flock that the government's $3.4 trillion of outstanding debt unfortunately belongs to them as well, not to mention the obligations it's incurred to support them in their old age. And Gore's program of Prosperity for America's Families outlines $1.26 trillion in spending increases could more than wipe out the on-budget surplus. (Gene Epstein, Barrons 10-9) Nigel Nicholson, professor of organizational behavior at the London Business School, attributes gossiping to animal behavior. Our workplace confidences have a primitive social agenda and are a survival skill that may be attributed to evolution. "In human societies, we share information as chimps share food," said Nicholson. "A person standing in the middle of a room regaling colleagues with a juicy story is sharing a vital human resource: gossip. A person huddled in a corner with a colleague, telling him some piece of minor sensation about a common acquaintance is grooming - letting him know he is important and liked enough to be trusted with a confidence." (Chic Trib 10-8) Don't confuse the performance of high-valuation stocks with what the economy is really doing. A well functioning growing economy in which the Fed doesn't cut rates sounds like a good thing for corporate earnings, not a bad thing. (Robert Brusca, CNBC 10-8) At a staff briefing Greenspan urges a briefer to continue even as the Fed chief talks to an aide, saying of himself: "If an economist can speak out of both sides of his mouth, he can certainly hear out of both ears." (WSJ 10-6) Prudential Securities, which each quarter surveys its analysts on the state of the industries they cover, says that in Q3, the analysts felt that only 42% of the industries had stockpiles that were appropriate for current business conditions. That is a marked difference from the five previous quarters, when they said 70% or more of their industries had stocks that were just about right. Inventories that are too high or too low can set off actions that raise or lower economic growth in the short run, says Richard Rippe, Prudential's chief economist. Industries where analysts judged inventory as too high were generally associated with consumers, such as food and retailing. Sectors thought to have low inventories were often energy-related, but also included semiconductors and telecommunications. (WSJ 10-5) Govt errors on inflation data will change tax thresholds for 2001. Among the changes: The 39.6% federal income-tax bracket for 2001 will start for most people on taxable income of more than $297,300. The 36% bracket for married couples filing jointly will start on income above $166,450, the 31% bracket at more than $109,250 and the 28% bracket at more than $45,200. For most singles, the 36% bracket will start at incomes above $136,750, and the 31% bracket at more than $65,550. The regular standard deduction for married couples filing jointly will be $7,600, and $4,550 for most singles. The 2001 income threshold above which an itemized-deduction limit will begin to hit will be $132,950 for most people. The threshold for the personal-exemption phaseout for married couples filing jointly will rise to $199,450. These numbers come from CCH, RIA and James Young of Northern Illinois University. Official IRS numbers won't be released until later this year. (WSJ 10-4) A new survey by Discovery Health Channel on Americans' fears finds "57% of the Americans polled feared the IRS more than God." (WSJ 10-4) The warning that a fund's history won't necessarily be repeated is clearly posted in mutual-fund advertisements and prospectuses. Now, Joanna Shuang Wu, an assistant professor at the William E. Simon Graduate School of Business, Rochester, N.Y., and Prem C. Jain, a professor at Tulane University, New Orleans, offer evidence that past performance really didn't signal future performance. The professors analyzed performance for one year of 294 equity mutual funds that had been advertised in the press from 1994 to 1996. They found that post-ad performance, on average, was inferior to benchmarks such as the Standard & Poor's 500-Stock Index. The funds also typically fell short of performance lauded in the ads. More info here. (WSJ 9-29) The S&P 500 index, which is now down 2.2% since the end of last year, is on course to show its first election-year loss since 1960. (That was also a year when an incumbent vice president, Richard M. Nixon, sought the presidency, and he lost despite his efforts to portray John F. Kennedy as inexperienced.) (Floyd Norris, NYT 10-4) During the third quarter, in 27% of market sessions, the S&P registered high volatility (defined as days when an index ends trading up or down by at least 1 percent from the previous day), down from a record 48% in Q1. It was the lowest figure since 24 percent in the second quarter of 1998. And just 3% of the sessions had moves of 2% or more, way down from 21% in Q1. It is unusual to see a day when the Nasdaq does not move at least 1%Ù More than two-thirds of the days in the last quarter showed moves that sharp. But that compares with an astonishing 86% of the sessions in Q2. (Floyd Norris, NYT 10-4) The "Opt-Out Request Line" (888-567-8688), is a service provided by three large credit-reporting agencies that lets you remove your name from consumer-marketing lists. (Guy Halverson, Christian Science Monitor 10-2) ... But the exclusion will last for only two years. If you want to make it permanent, the law requires that you write a letter to each of the credit bureaus. For their addresses and a sample opt-out letter, go to www.ftc.gov/privacy/protect.htm#Credit. Or you can call the FTC at 1-877-382-4357, press 1 and ask a representative to read you the information on that Web page. (AJC 10-12) Fed insiders tell Barron's that Greenspan and many of his colleagues think the US economy's best days may be yet to come. When he pores over data and anecdotal reports, Greenspan detects little to suggest that the glow of the New Economy is dimming. In fact, it may get brighter still. Greenspan thinks we've yet to feel the full benefits of the telecommunications and computer revolution that's swept the economy. And what the Fed is hearing these days - particularly from district Fed banks scattered around the nation - is that the downshift in growth may actually spur a new wave of productivity-enhancing, high-tech spending. That runs counter to the conventional wisdom that a slowdown would end the productivity revolution. But faced with intense global competition, which limits pricing power, and the constraint of a dwindling pool of labor, Corporate America has to boost productivity or see profits suffer. While this keeps the pressure on managements - and their companies' stock prices - it gives comfort to Fed officials these days. (William Pesek, Barrons 10-2) Over the past week, we saw some rebound in the private-sector purchasing manager barometers. We saw a drop in weekly jobless claims to below the key 300,000 level. We saw an upward revision to second-quarter GDP, implying even stronger US productivity growth. We also saw that consumer confidence remains very strong and consumer spending up-trends are taking hold again. So why do commentators continue to talk about the Fed cutting rates or even of the Fed dropping its tightening bias at the upcoming meeting? (Robert Brusca, CNBC 10-1) Running the dishwasher every day costs you about $11 a month. Doing 20 loads of laundry each month costs between $5 and $16, depending on whether you've got electric or gas appliances and whether you're doing more cold- or hot-water washes. Using your gas oven an hour a day, 30 days a month, costs less than $3; so does the range. You can leave the computer and color monitor on 10 hours a day every day and it'll cost you about $5 a month. Running your 27-inch TV four hours a day costs less than $2 a month. The monthly cost to operate an old 15-cubic-foot refrigerator amounts to roughly $20 each month, compared with about $10 for a newer (post 1992) fridge. For more info - PG&E has an energy cost calculator on its Web site at www.pge.com. The rates are based on an average of 11 cents per kilowatt hour. (Kathy Kristoff, LA Times 10-1) Preliminary estimates show that the US government had about a $235 billion surplus for the just-ended fiscal year. About $165 billion is being used to build reserves in government trust funds for Social Security, Medicare, highways, airports, future unemployment, etc. These are needed reserves to meet future obligations. Nevertheless, they are counted in the surplus. Excluding these reserve additions, the surplus is only about $60 billion. Those smaller surpluses in previous years were less than what was put into the reserves. (Donald Ratajczak, AJC 10-1) Home Page Previous Factoid Top Sites |
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