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If the gods meant for us to have elections, they would have given us candidates. - Donald Ratajczak, Atlanta Journal-Constituion, 11-5-2000
Funds' average cash percentage hasn't been above 6% since September 1998, when it hit 6.3%. That was when markets worldwide were hammered by the Russian economic crisis and the collapse of the LTCM. Rising cash levels at equity funds can be rocket fuel if the stock market snaps out of its funk, because managers would then rush to put some of that money to work for fear of being left behind. Indeed, that's what happened in the fourth quarter of 1998. In October 1990, at the bottom of that year's bear market, cash reached 12.9% of fund assets. During the week ended [last] Wednesday, investors yanked $8.5 billion from equity funds, according to estimates by AMG Data Services. Some of that was investors taking yearend gains distributions, but the outflows still rank as the largest of the year. And the amount slightly exceeded the money that investors handed over in the entire month of October, reported last week by Lipper to have been $8.1 billion. Redemptions by fund investors have functional implications beyond their potential [bullish] value as market-timing signals. They force fund managers to sell, further pressuring the hardest-hit market sectors. And while the amount of the recent withdrawal activity isn't itself enough to seriously bite into already-depressed stock prices, if the instinct to cash out proves more than fleeting, the damage could spread. Investors continued to pull money out of bond funds in October - even though many bond funds have generated strong returns this year. Taxable bond funds had a net outflow of $2.9 billion, while municipal bond funds had an outflow of $272 million. When 401(k) investors get their annual statements in January, they will see that many bond funds posted positive returns this year while stocks slumped. That could force many investors to reconsider their asset mix. In October, 71% of 401(k) contributions went into company stock and other pure equity choices, according to consultant Hewitt Associates. That compared with 68% a year earlier and 66% in October 1998. While the Dow, the S&P 500 and the Nasdaq composite indexes are down between 9% and 36% year-to-date, the average US stock fund has lost about 5%, industry data show. Mutual fund investors now have $4.2 trillion in stock funds. Nearly 50 diversified stock funds - most of them following the "value" style of investing - have returned better than 30% since [Nasdaq's record high on] March 10th, according to Lipper. But as these funds posted some of their best numbers ever, investors overall were selling their shares. All told, shareholders sold $64 billion in value funds in the first three quarters of this year, according to Financial Research Corp. Over that same period, investors added $161 billion in growth funds, which have lost more than 12% so far on the year, and $43 billion of tech funds, which have dropped 24% in 2000. As is often the case, investors also have consistently missed numerous sector rallies this year. For example, financial-services funds have had some of their best runs ever in the third quarter, but in the six months before that, investors pulled $1.5 billion out of those funds. Real-estate funds are the third-best performing sector of the year, but have lost nearly $100 million in assets. A wave that investors did catch was health care. The average health-care fund is up 46% this year, and investors have put nearly $12 billion in new money into these funds.
Dennis Hynes, managing director at R.W. Pressprich, says the reasons investors are flooding the US with capital haven't changed. They include the credibility of the Fed, prospects for an economic soft landing, the unfolding high-tech revolution and a budget surplus that continues to grow. Investors looking to Europe are turned off by the wobbly euro, and stagnant growth has made Japan unappealing. And emerging-market economies in East Asia and Latin America are again awash in turmoil. To Brian Wesbury, chief economist at Griffin Kubik Stephens & Thomson, the dollar's strength is a byproduct of tight US monetary policy. Since 1992, a steady rise in both inflation-adjusted growth and real short-term rates has supported the dollar. Yet, the dollar's advance to new highs is occurring in the face of falling real growth and short rates. If the stock and bond markets are right, the downturn in real economic growth and short rates will become even more pronounced. And the reversal of the secular uptrend in real US growth and short rates is coinciding with signs of economic improvement in Japan and the euro zone.
Now, a new light will shine on these costs, thanks to rules just approved by the SEC that will require Wall Street to disclose more information about how trades are handled. If things go the way the commission hopes, brokerage firms will begin to compete over the "quality" of the trades they offer, just as they have long battled over commission costs and other things. The key to a quality execution is getting the best possible price on the shares you buy or sell. If you place a market order (completed at the prevailing price) to buy 1,000 shares, you want to be sure your broker did everything it could to find shares at the lowest price possible. Making the trade at a price that is just 1/8 point, or 12.5 cents, less per share would save you $125 on that trade. A $10 commission doesn't seem so appealing if you pay an extra $125 to buy the stock you want or if you completely miss out on having a limit order executed. Here are common questions about how the rules work and how they may save you money trading: What kind of information is available? There are two main players in every trade you place: your brokerage firm and the "market center" where the trade is executed. (Market centers include the Nasdaq, NYSE specialists and ECNs.) The new SEC rules (beginning April) require both brokerage firms and market centers to release information regularly about how they handle trades. Brokerage firms will be required once every quarter to release statistics about which market centers handled various types of trades. They'll also give details, such as whether the firm received a payment from the market center ("payment for order flow"). Market centers will make their disclosures on a monthly basis. They will describe how quickly they typically complete transactions, how many orders go unfilled and how much their order-execution prices differ from the prices available in the market at the instant they received their orders. All of these details will be available for each stock traded. Can I get personalized data? Brokerage firms will be required to tell where they directed specific trades that were executed for you, if you make a written request within six months of the trade. Why is payment for order flow important? Critics contend that it can slow trade executions, and they say it creates a conflict of interest for brokerage firms - the broker may overlook other market centers that could give investors better prices. Brokerage firms will also be required to disclose another practice that critics believe can create a conflict of interest: "internalization" of orders - which can potentially keep the trade away from better prices elsewhere. How can I use this info and where will I find it? The two sets of data should allow you to evaluate your current broker or to choose a new one. First, use the brokers' quarterly reports to determine where your orders are likely to be directed. Then, use the monthly market-center data to determine how well your order is likely to be handled by the center that receives it. The data will be released on firms' and market centers' Web sites. The SEC also expects analysts and others who rank online brokerage firms to follow the new data closely and their analyses will be important in interpreting the mountain of data that will be available. Alex Stein, executive vice president of Gomez, says the research firm plans to integrate the new data into its brokerage-firm rankings this spring. Will the rules make it easier to make a claim for a botched trade? The new disclosures are close to the level of the data that attorney Robert Uhl says he typically gets with a subpoena in cases he brings against firms. But the SEC says investors shouldn't consider the new numbers complete enough to use as the basis of a claim. Attempts to win compensation for what you feel was a poky trade may still have to be sorted out in arbitration.
Well, here we are, with Nasdaq as of Friday down 42% from its March peak. The loss was 45% going into Thanksgiving Day - making this decline the worst since 1973-74. Does it hurt? Perhaps not to investors who bought in well before that. But ask the person who shifted his retirement savings into a technology-heavy stock fund in February. Those investors now are gripped by fear. Fear infects not only the people who have lost money in tech, but also those who have watched from the sidelines. It's the latter factor that was missing in the argument last winter that a 40% Nasdaq pullback might not mean much. Peel away every other excuse given, and here's why tech stocks have continued to fall in recent months: Many people are simply afraid to buy. That is the reverse of last winter, when many people were afraid not to buy. Sentiment reversals on this scale aren't unusual. The history of markets is filled with examples of panic buying followed by panic selling, of euphoria followed by despondency. The problem today is that investors' fears are increasingly rooted in fundamental market, economic and political concerns that have the potential to be longer lasting, which means the downward pressure on stock prices may continue for some time. The bear market in Nasdaq may be far from over, and the risk is that it spreads to other sectors. Consider what investors faced a year ago. The economy was booming, and so were corporate profits. Oil was around $25 a barrel, and seemed to be stabilizing. And though the Federal Reserve had already raised interest rates three times, many Wall Street pros were convinced the central bank wouldn't tighten credit much more. Today corporate earnings growth is markedly decelerating. Junk bond defaults has caused potential bond buyers to pull back, which has sent the yields soaring to the highest since 1992. The US political stalemate, the Middle East violence, oil prices at $35 a barrel, and natural gas prices are at record highs. The Fed seems in no hurry to begin cutting rates. Many banks, hurt by rising loan losses, continue to tighten credit. Investors' reaction to all of this is to shy away from taking significant risks. Neither do they want their companies taking such risks. Witness the reaction in Coca-Cola stock last week on news that the company was considering a $13-billion-plus purchase of Quaker Oats. Coke stock plunged 10% over two days after the news broke. When Coke pulled out of the bidding, its shares snapped back 8%. Can the market reach a true long-term bottom here and go on to hefty gains in 2001? Buyers today may not care if they're seeing the ultimate lows if they believe they're smart enough to see long-term values but not smart enough to pick the absolute bottom in prices. That's a reasonable approach to investing. Since the mid-1950s, bear markets in the S&P 500 have lasted anywhere from two months (measuring from the index peak to its trough) to as long as 21 months. That gives us at least some benchmark for the current Nasdaq bear market. The accompanying chart shows not only how long it took the S&P to bottom, but the amount of time (in months) it took from that bottom for the index to get back to the old peak. The average recovery time for the S&P has been well over one year. History cannot tell us the future. But it can remind us how much patience the market can demand of us when things go bad.
A mutual-fund share split, however, "doesn't present any new buying opportunities," said Ramy Shaalan, an analyst for Thomson Financial's Wiesenberger fund tracking unit. A new study by Shaalan found that fund splits are relatively rare compared with corporate stock splits, but their number is increasing. He counted 357 fund splits since 1929, half of which have occurred after 1995. In the case of a 2-for-1 split, a fund's net asset value drops in half and the number of its shares doubles. But it doesn't affect the affordability of the fund's share price, because mutual funds allow for fractional ownership of shares. Splits don't enhance the funds' liquidity, because mutual funds create shares when investors buy into them and redeem shares when they are sold. Related:WSJ 10-03 If a company announces a stock split, think twice before cheering. The fact is, the split has probably increased the cost of trading the shares. Every stock has two prices, the asking price (at which you can buy) and a lower bid price (at which you can sell). Suppose the asking price for a stock is 40 and the bid is 39 7/8 giving a spread of an eighth of a dollar. Now, imagine that the stock splits two for one. What happens? If the spread remains at an eighth, the asking price might now be 20 and the bid 19 7/8. Result? On a $20,000 round-trip trade, you would lose $125 to the bid-ask spread, compared with $62.50 before the split. In practice, spreads, measured as a percentage of a stock's price, probably wouldn't double after a split, but they might increase 20% or more, according to a study by Paul Schultz, a finance professor at Notre Dame. His study appeared in the February 2000 Journal of Finance. Schultz looked at 235 stocks that split over the 12 months ended March 1994. "The percentage spread increased considerably," he says. If a stock splits, "you're going to end up paying more to trade."
The inference here is that the Fed is beginning to think the conditions necessary to allow it to let down its guard against inflation might not be too far away. "This is gold-medal-winning Fed-speak," says Ian Shepherdson of High Frequency Economics, "but it's translatable: Growth has not yet slowed enough to allow us to drop our guard, but we think there is an increasing chance it will." Stuart Hoffman, chief economist at PNC Bank, found great significance in a view stated by the FOMC last week that the economy could for a time expand at a pace below its long-term growth potential. To Hoffman, that suggests policy makers are only one or two FOMC meetings away from a neutral stance on rates, followed soon thereafter by an easing bias and, eventually, lower short-term rates. "The Fed's getting closer and closer to achieving a soft landing," he says. The bond market showed it harbors similar hopes last week. The yield on the 10-year note fell to 5.68% versus 5.80% a week earlier. Yet yields among shorter maturities, those most sensitive to the Fed moves, edged higher. But a rate cut is hardly imminent. Consider that the futures markets are pricing in only a 30% chance that the Fed will ease by February. Elsewhere, yields are on the rise. Credit conditions have firmed considerably in recent months as corporate bond yields rose and banks clamped down on lending practices. On top of that, higher investment-grade and junk-bond yields and tighter lending standards are acting as a drag on growth. In a sense, notes Joshua Feinman, chief economist at Deutsche Asset Management, the credit markets have picked up where the Fed left off. The recent tightening in corporate credit conditions is becoming a global event. Spreads in the UK, the eurozone and Australia have widened by 50-100 basis points. That puts global credit spreads back to levels seen during the 1998 emerging-market crisis, says Dan Bernstein of Bridgewater Associates. In some cases, spreads are even wider.
Modigliani said that if the Trust liquidates $500 billion of the Treasury-backed i.o.u.'s that it holds, the Treasury would have to sell that amount of bonds in the open market. Given that the government bond market is currently around $2.5 trillion, $500 billion for sale is a big enough chunk to drive prices down - and yields up - significantly. As yields rise, some investors will sell stocks to buy bonds. So the net amount going into the stock market will be far below the $500 billion allocated to equities. Since higher bond yields will make it more expensive for American companies to borrow, their profits will be hurt too. Ms. Modigliani's conclusion? 'Selling government bonds to buy stocks is not nearly as beneficial to the stock market as it first appears,' she said. 'In fact, on the margin, we think such a transaction could actually be negative for stocks.'
Overconfidence. "People overestimate their own abilities relative to those of others," Odean said. "They believe they know more than they do, and they believe their knowledge is more precise than it really is." The result: They buy and sell too often, meaning that they are traders rather than investors. That hurts for two reasons. First, it runs up expenses. Second, frequent traders are not necessarily good stock pickers. Odean found that when investors sold one stock and bought another, the shunned stock outperformed the new one. The difference was 3.2% in the first year. The most active traders reaped a net return of 11.4% per year, compared with 17.9% for an unmanaged index fund. Regret avoidance. "Investors don't want to admit they made a mistake," Odean said. That means they hang on to losing stocks, which turns out to be a losing strategy. They would usually be better off taking the loss and moving on to more promising investments. Conversely, investors tend to sell their winners. They are nailing down profits, which feels a lot better than accepting losses. Odean's research found that investors sell more losers than winners only one month out of the year. That's December, when the losses have a clear impact in lowering investors' tax bills. The rest of they year, investors hang on, hoping at least to break even. Someday. Chasing the action. "Overwhelmingly, people buy the stocks that moved up (or down) the most on the previous day," Odean discovered. Investors are faced with thousands of stocks and daily tidal waves of information. It's much more than they can hope to comprehend. "Thus, people search only among stocks that catch their attention," Odean said. "That dominates the decision to buy." Odean's study covered investment records of 78,000 households over six years. To read Odean's research, go to: www.gsm.ucdavis.edu/~odean . Related: Jonathan Clements, WSJ 11-05 "When people have an opinion, they are reluctant to change it in the face of new evidence," says University of Chicago finance professor Nicholas Barberis. "And if they don't have an opinion, they jump to conclusions based on too little data." Once we make up our minds, we tend to embrace confirming evidence and ignore disproving information. If we are bullish on stocks, market dips become buying opportunities, not causes of doubt. If we are bearish, rallies become chances to sell, rather than reasons to revise our opinion. Related: Michael Santoli, Barrons 11-06 Last week the ICI reported that the annualized rate of redemptions from stock funds as a proportion of total assets reached 26.1% in September, up from 24.9% the prior month and 23.8% a year earlier. (This is occurring even as stock funds enjoy an unabated net inflow of new money.) Add in "redemption exchanges," or the direct transfer of money between funds, and the annualized rate of fund-jumping in September was 42.6%, versus 40.8% in August and 39.3% a year earlier. By comparison, in 1996 the redemption rate in stock funds was 13.9% and redemptions plus exchanges were 26.4% of assets.
"You'll have recipients of European shares puking them up as soon as they get their hands on them," said Fritz Meyer, portfolio manager of the Invesco Growth and Income Fund, referring to non-US shares. This reluctance by American investors to hold on to shares of non-US companies has made it tougher, though not impossible, for deal makers to do international transactions. "At the end of the day, it is an additional risk that the acquirer has to consider in cross-border transactions," said James Del Favero, a managing director at Goldman Sachs Group. While it is typical when any deal is announced for an acquirer's share price to decline due to investor turnover, potential dilution to the acquiring company's earnings, and takeover-trading activity, shares of some big foreign acquirers have been falling more than those of their peer group. Through Tuesday, DaimlerChrysler was down 39% since it announced the pact to acquire Chrysler in May 1998, while the auto maker's peer group is down 13%. Deutsche Telekom, suffering from a change in sentiment for wireless stocks and fundamental weakness since announcing plans to buy VoiceStream Wireless in July, is down 32.5%. Similar companies are down 24%. Terra Networks is down 61% since announcing its acquisition plans for Lycos in May; that is down quite a bit more than rivals. Ditto for Vivendi, since announcing in June its planned purchase of Seagram, which is based in Montreal but trades in the U.S. as well as Toronto. One of the core reasons US investors sell foreign companies' stock is that the acquiring company no longer fits the model of the mutual fund, whether the charter of the fund is for growth stocks, small-capitalization stocks, or domestic stocks. Also, when a deal results in the deletion of a stock from a widely followed index, such as the S&P 500, there is a rush of selling by index-fund managers and investors who benchmark their portfolios to a specific index. Americans, in general, don't want to own shares in a foreign company because there is less research and information available and because foreign companies that don't trade American depository receipts (ADR's) aren't required to abide by the same accounting rules as their US counterparts. Also, the market for foreign stocks may be less liquid, making it harder to get a transparent price when buying or selling shares on an international exchange. And for individual investors there is a tax complication. When the acquiring company pays a dividend, it is paid in the local currency. That complicates US individual investors' tax returns. Related: Barrons 11-27 One example of how the S&P 500 panel operates [in chossing which stocks it contains] came with the formation of DaimlerChrysler two years ago. People didn't know whether the merged auto manufacturer would be a U.S. or a German operation. "But because we have a committee and researched who the top executives of the merged company were going to be, we were able to declare it to be German, and we took Chrysler off the S&P 500 Index" says David Blitzer, chief investment strategist at S&P and chairman of the committee that selects stocks for the benchmark index. "Meanwhile," he adds pointedly, "the rigid indexes sat in confusion until we declared the merged company German - and then they followed suit." All of which, as any DaimlerChrysler shareholder well knows, hasn't helped the stock.
Diane Swonk, chief economist for Bank One, says she believes small businesses are starting to give up on expansion plans partly because they can't find decent workers to justify the costs. Benefit costs are escalating. Wage increases to keep workers also are becoming more prevalent. William Dunkelberg, the NFIB's chief economist and an economics professor at Temple, says strong capital spending has raised productivity in recent years, enabling prices to stay tame. But if small businesses cut back on capital spending, as they say they plan to do, and consumer demand slackens, such productivity gains are in danger.
For the first quarter of 2001, earnings are also expected to grow 11.2% compared with the full year 2000's results, down from an estimated 14.2% on Oct. 1. For all of 2001, analysts predict earnings will grow 12.6%, down from an expected 19.1% for 2000. "Earnings expectations haven't come down this fast since the end of 1997 and the first half 1998, and they're likely to keep coming down in the weeks ahead" as we get further into the fourth quarter, says Chuck Hill, research director at First Call. "This isn't just fine-tuning. It could pick up speed and snowball." There may be other storms brewing. Although the fourth-quarter pre-announcement period is not yet under way, 194 companies have already issued warnings about earnings for the quarter, up from 138 during the same period last year, according to First Call. And Now the Good News Some 117 companies have advised investors that their earnings will actually be better than expected, up from just 59 in the same period last year. While earnings projections are rapidly becoming less rosy, some argue that it is no reason for panic. For one thing, analysts typically cut earnings just enough for companies to barely beat them. So there still could be some good news during the fourth quarter's earning season. "After stocks drop sharply, unnerved Wall Street analysts downgrade ratings," wrote Edward Kirschner, chief global strategist at UBS Warburg, in a recent report. "It's only after stock prices rebound that analysts apparently feel confident to upgrade recommendations." In the report, Mr. Kirschner said earnings growth of 7% in 2001 will be enough to send the S&P 500 to 1715 by the end of 2001, up from a close of 1351.26 Monday. And even reduced earnings growth next year still would be quite respectable. Earnings have gained just 7.5% on average each year since World War II, and 8.1% in the 1990s, according to Ed Keon, a quantitative analyst at Prudential Securities Inc. Mr. Keon recently cut his prediction for S&P 500 earnings in 2001 to 9.2% from 9.6%. Related: John Lonski, Moodys 11-20 For now, the available results for 2000Ìs third-quarter show a 21% annual advance by recurring profits. The latter, however, has been biased upwards by the strong performance by larger entities. Thus far, the third quarterÌs median year-to-year increase for nonbank recurring profits was a much flatter 6.4%. Related: John Puchalla, Moodys 11-20 The consensus forecast for economic growth in the top 10 US export destinations is brightening. Strong growth abroad should translate into a lively pace of US exports, which could diminish existing worries about the adequacy of corporate earnings. NovemberÌs consensus forecast of 3.5% growth in the US for 2001 is up from the 3% estimated in January. Weighting by the value of US exports, growth in the 10 largest US export markets in 2001 was also upped from JanuaryÌs 3.5% to NovemberÌs 3.8%. The economies of the 10 largest export destinations are projected to grow by a steeper 4.8% in 2000. However, upwardly revised growth estimates for 2001 suggest the contribution of exports to earnings could be more favorable than previously projected. The EuroÌs slide against the dollar has masked the generally positive contribution that stronger growth in Europe has had on US exports. If the Euro firms, growth in the dollar value of US exports to Europe could accelerate. Related: WSJ 11-8 In previous business cycles, corporate profits, which make up about 12% of national income, didn't matter very much to economists, because profits were not considered a major factor in determining economic growth. "There is no scenario in the postwar period where economic recession was caused by a profit recession," said Ed Yardeni, chief investment strategist at Deutsche Banc Alex. Brown. They tend to be "innocent bystanders" in recessions caused by other reasons. But the stock-market boom of the 1990s may have changed that by more closely tying the nation's economic fortunes to stock-market performance. And since the stock market moves in part on expectations of corporate profits, profits now matter more than ever before. "To the extent that the market is more important to the economy, corporate profits are much more significant," said Yardeni.
Galvin predicts a scenario similar to that of the late 1990s. He expects earnings growth for the S&P 500 to slow to 9.4% in 2001 from 14.7% in 2000. And Galvin sees the current consumer-price-index rate of 3.2% duplicating its late-1990's drop in the next 12 to 24 months. That should signal to the Federal Reserve that interest rates are too high.
Can the US avoid being dragged into the mess if things worsen, as it did so successfully in 1997 and 1998? Yes, but not as cleanly. 'Where's the money going to go? Not into Europe, where the euro is plunging, or the weak Japanese economy,' observes Carl Weinberg of High Frequency Economics. 'The US may not get the same boost, but it will still be the safe haven of choice.' During the 1997 Asian meltdown and broader emerging-market crisis a year later, the US actually benefited as capital coursed into dollar-denominated assets. As the Fed pumped liquidity to stave off the crisis, US interest rates plunged and stock prices soared. American businesses and consumers garnered a windfall of cheap imported goods. In hindsight, the 1997-98 global financial crisis was a win-win situation for the US. But this time around, America may not be so lucky. One reason is the nature of the global mess. Asia's and Russia's collapse were largely economic events. Investors who'd rushed in left faster than they'd entered as currencies fell, debt levels rose and recession loomed. And markets and economies rebounded impressively once policy makers implemented reform programs. But today's bout of market turmoil has an additional source: political instability. These concerns are worsening the effect of economic problems - such as fragile banking systems and high foreign debt levels - that already exist. In the Philippines, opponents of President Joseph Estrada are calling for his impeachment. In Taiwan, foes of President Chen Shui-bian are seeking new elections. In the Americas, Argentina is struggling with a weakened government coalition on top of a stubborn recession and speculation that it soon will abandon its currency peg to the US dollar. If Argentina goes, it could take Brazil along for the ride. And in Peru and Mexico, there's considerable uncertainty over transitions from one leader to another. Investors never like political instability, but nowadays it poses risks to badly needed economic reforms. During the 1997 and 1998 crises, leaders rushed to implement confidence-boosting changes like strengthening banks, opening markets and improving transparency. But as soon as money returned to Asia and Latin America, there was less urgency for reforms. Political uncertainty may only exacerbate investor fears about economies moving in the opposite direction. Credit-rating agencies have taken notice. Standard &Poor's recently downgraded Peru's sovereign debt rating. It's also reviewing Argentina's economic prospects, prompting fears that a downgrade may be forthcoming. S&P last month revised its credit outlook from Stable to Negative for the Philippines. What rating agencies are acknowledging, says Chen Zhao of the Bank Credit Analyst, is that 'any number of things could push Asia into another economic contraction.' In such an environment, some investors are avoiding emerging-market debt at all costs. According to Morningstar, emerging-market bond funds have lost 4.43% in the past three months alone, 1.90% in the past week. The J.P. Morgan Emerging Markets Bond Index Plus (EMBI), which compares developing-economy yields over comparable U.S. Treasuries, widened to 7.84 percentage points last Thursday from 6.77 at the end of September. Surging oil prices exacerbate both economic and political risks for emerging-market economies. Consider Brazil: the price of its main export, coffee, has plunged, while the cost of its main import, oil, has soared. A frightening number of currencies are on the defensive nowadays. The South African rand recently fell to a record low against the greenback, as did the Philippine peso. The Thai baht is at a 28-month low versus the dollar. Singapore's dollar has been sliding, as have the Brazilian real, the Korean won and the Chilean peso. Brady bonds also have experienced heavy selling. Ironically, US markets could be a catalyst of a crisis. Investors looking to offset losses in junk bonds trimmed their holdings of emerging-market debt. 'All of this is a reminder that the next financial drama might well have its roots in the United States,' says Rory Robertson, economist at Macquarie Bank. The US isn't the only industrialized economy of which investors are wary. The euro is causing chaos in global currency markets. Japan's economy is barely expanding, and its efforts to add fiscal stimulus have resulted in a crushing debt load. Emerging markets may have their own problems, but they're also vulnerable to shocks from larger economies that historically have featured stable conditions. In the meantime, the US may be a shelter from the storms brewing abroad. But for how long? Related: Gretchen Morgenson, NYT 11-12 The Securities Industry Association estimates that foreign investors' net buys of US stocks could exceed $194 billion this year, up from $107.5 billion last year. That the overall market has fallen in spite of such buying shows how vulnerable stock prices are to falling foreign demand [.. if foreigners start to view the election uncertainty in a negative light]. Related: William Pesek, Barrons 11-6 While credit quality outside the US seems to be improving, Moody's last week warned of "enduring risks to global credit worth." Things in Asia, Europe and Latin America have brightened for the fifth straight quarter. But the domino effect of slowing US growth, industrial overcapacity around the globe and a chronically weak euro may augur poorly for credit trends down the road. Japan is experiencing a "sluggish recovery," while emerging-market banking systems remain fragile and developing-nation government bond yield spreads are historically wide.
What has happened to e-commerce is twofold. First, the use of equity capital to purchase customers has proved too expensive and not sticky enough (in terms of getting repeat business) to justify the costs. Second, competition has increased so fast that company growth has slowed before cost advantages from size and being first have been exploited. The number of months of operating capital needed before cash flow turns positive has been far more than most venture capitalists thought. In the first half of this year, almost 40% of the ad dollars on the Web were generated by Web sites trying to be noticed. So far, there is little evidence that these ad dollars are effective. In effect, the Web was attracting equity capital to finance advertising that was supporting Web sites. Now that some of these sites are failing, that portion of the Web advertisement dollar is vanishing. Early this year I estimated that the Internet economy would become 15% of GDP before its growth slows to that experienced by more traditional economic sectors. That would justify a valuation of almost $5 trillion for this technology. Therefore, the $2.9 trillion valuation that was reached early this year did not appear to be excessive. Except my assumptions are based on the total potential of the Internet economy. There never was any justification for assigning two-thirds of that value to existing enterprises. Have we now overdone the shakeout in new technology values? We are currently valuing the sector at a quarter of its potential. This is not cheap, but neither is it excessive. Furthermore, those companies that soon will be creating positive cash flow probably have been punished more than justified by current conditions. Growth will be slower, but its destination in terms of importance to the economy probably has not been changed. When the price to next year's earnings for a Dell or a Microsoft falls below the ratio paid for all stocks on the S&P's index, as happened recently, I would bet more on the future of these leading technology companies than I would on the economy. Related: Smart Money 11-10 Jeffrey Applegate, the chief investment strategist for Lehman Brothers, expects the S&P 500 to hit 1600, up 17% from here by year's end. The Dow should likewise climb 17% and reach 12400. And the Nasdaq could go as high as 4600, a jump of 52%.
On average, women have saved just 44 cents for every dollar that men have saved in defined contribution pensions or individual retirement accounts. A decade ago they had socked away only 40 cents for every dollar that men had in such plans. Bajtelsmit examined whether women with full-time jobs were making any progress on retirement savings. The findings: * Forty-five percent of employed women participated in a pension or retirement plan at work in 1998, compared with 43% in 1989. Men's pension participation declined modestly to 52% from 53%. * The percentage of women covered by so-called "traditional" (set payment) pensions declined to 16% in 1998 from 28% in 1989. However, the percentage covered by defined contribution plans jumped to 33% from 23%. The trends with men's pensions were similar, but men were more likely to be covered by all types of pensions. Some 19% of men are covered by traditional pensions, while 40% are covered by defined contribution plans. * Women of all ages are investing more aggressively, but they still invest more conservatively than males. In 1998, only 20% of women said their assets were predominately in bonds, which pose less investment risk, but provide lackluster long-term returns, compared to 32% invested mainly in bonds in 1989. Notably, only 14% of men invested primarily in bonds in 1998, but 31% of men said they invested primarily in bonds in 1989. Thus men's accounts were growing much faster than women's.
Just the Facts Investor money flowing into stock mutual funds totaled a net $19.07 billion in October, compared with $17.33 billion in new money put into stock funds in September, the said ICI. Investors also poured $26.1 billion into money-market funds in October (vs withdrawing $8.6 billion on September), indicating that investors were becoming more cautious about the volatile stock market. [Investors are also shying away from stock funds this month because of the taxable capital gains that many portfolios pass along to shareholders in the last months of the year.] (WSJ 11-30) The Fed wants to `devalue the Greenspan put,' says Paul McCulley, a money manager at the Pacific Investment Management Company. The Greenspan put is the protection investors have from a falling stock market in the form of lower interest rates. Based on the experience of 1987 and 1998, investors have been trained to buy any dip in the stock market because the Fed always rides to the rescue. This is not the view that a central bank wishes to convey because it breeds risky behavior. (Caroline Baum, Blooberg 11-29) To provide some perspective on the impact of its best-known index, Standard & Poor's has produced a report in September entitled "Event Study: Quantifying the Effect of Being Added to an S&P Index." The report says the share price of 188 companies listed on the S&P 500 since 1991 rose an average 8.52% during the week between the announcement of their selection and the actual listing. (For the S&P MidCap and Small Cap indexes, the comparable figures were 6.94% and 5.63%, respectively.) In the 10 days after listing, however, newcomers to the S&P 500 lost, on average, 1.9%, for a net gain of 6.42%. In all, they rose a hefty 34.12% in the first year. The reason for the stocks' rise is obvious. Index funds keyed to the S&P 500 must maintain portfolios that mimic it. Thus, when a stock is chosen for inclusion, the rush is on to purchase shares. Indeed, indexers usually absorb 5%-8% of a newly listed company's outstanding stock between the announcement and the event. (Barrons 11-27) According to Jeff Gardner of Bridgewater Associates, the U.S. is now absorbing roughly 70% of the world's available capital. (William Pesek, Barrons 11-27 Ralph Wanger, manager of the Acorn Fund, jokes that, yes, the market has been hurt by the Florida election deadlock - and "has been disturbed" about the mess ever since this past April. Since Nov. 7, the S&P 500 has fallen 5.9%. But since its March 24 peak, the index has fallen nearly 12%. It's notable that the stock market has been far weaker during the Florida election mess than it was during the impeachment - which created its own deep political uncertainty. The big difference: Two years ago, investors were feeling confident and stock fundamentals appeared excellent. Now, the fundamentals appear weaker, and suddenly political worries are one more thing to blame. (WSJ 11-22) The cost of complying with tax laws continues to surge. The Tax Foundation, a Washington nonprofit research group, estimates businesses and individuals will spend more than $125 billion this year on compliance. This includes the value of the time it takes to read and understand the rules, fill out forms, keep records and take other compliance steps. Other analysts using different approaches have come up with similar numbers. Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan Business School, has estimated the total cost of enforcing and complying with federal corporate and personal income taxes at about $115 billion. (WSJ 11-22) Several of the most valuable public companies in the US don't have a chance of joining the S&P 500 Index any time soon. Why? (1) Some are in the process of being merged/taken over (examples: Infinity Broadcasting, Axa Financial, Nabisco). (2) Some have insufficient `float' (examples: Berkshire Hathaway, UPS, Goldman Sachs). (3) Some are technology companies - which already represent about 27% of the total market value of the S&P 500 (examples: Juniper Networks, Ciena, PMC-Sierra, Intuit). Add to that the fact that some of the high market cap tech have yet to make a profit. And (4) some are telephone companies (already 6% of the S&P) or media (3% of S&P) companies (examples: Cox, Echostar, Fox, Level 3). It's always possible that one or more of these companies may find their way into the S&P eventually. But don't expect many to get there right away. (Bloomberg 11-20) By the Federal ReserveÌs estimate, the manufacture of high-tech equipment surged higher by 56.1% annually in October, while the manufacture of other goods dipped lower by 0.1%. The latter reflected year-to-year setbacks of 7.1% for the manufacture of motor vehicles and parts, of 2.0% for the production of primary metals, of 4.3% for the production of lumber and products, and of 8.9% for the manufacture of textile mill products. (John Lonski, Moodys 11-20) The Fed may sense a need to impress on individuals that the 25% average annual advance by the market value of US common equity shares of the five years ended 1999 is not likely to be repeated anytime soon. Despite the 7% setback of 2000-to-date the market value of US common equity has still swelled by an astounding 17% per year over the last five years. The FOMC must be careful not to become so accommodative to each and every softening of share prices that it inadvertently suggests to investors that there is no such thing as speculative excess. Accordingly, Fed policy should not be preoccupied with remedying the huge investment mistakes of the past several years. (John Lonski, Moodys 11-20) The majority of stocks have been falling for nearly three years. Market value weighted averages (Nasdaq, S&P 500) can mask the performance of the average stock. The un-weighted Value Line average is thus a better estimate of the stock price performance of the average company since the beginning of 1998. The Value Line index fell by a cumulative 5.1% in 1998-1999 but concurrent gains of 51.4% in the S&P 500 and an unsustainable 159.1% in Nasdaq stocks reflected the narrowness of stock price gains. Value LineÌs equally weighted stock price index last moved in tandem with other major market indexes in 1997 wherein a 21.1% increase joined advances of 31% by the S&P 500 and 21.6% by Nasdaq. (John Puchalla, Moodys 11-20) While the New Economy stocks got hammered, the Old Economy companies have posted respectable gains, at least by Old Economy standards. To show that the orderly rotation really has happened, one need only parse the 5.9% year-to-date decline of the S&P 500 (as of 11-14 close). The 408 old-guard firms in the index rose 7.3% over this period, while the new-wave 92 plunged 28.2%, according to figures calculated for me by S&P's senior investment strategist, Sam Stovall. The 92 firms are comprised of 80 in the tech sector (down 25.2%) and 12 in the telecom sector (down 31.2%). (Gene Epstein, Barrons 11-20) Technology earnings appear to be a lot more cyclical than people think, and we don't think that is priced into the stocks. Look at the valuation of technology stocks relative to the nontechnology stocks that have similar growth characteristics, which is growth of 20%+. Back in March, you had to pay 4 to 4.5 times the multiple for a technology super- grower versus the nontechnology supergrower. Now the multiple is about 2.2 times. Historically, the multiple is 1. People were paying the multiple for the word technology. (Richard Bernstein, chief quantitative strategist at Merrill Lynch, NYT 11-19) Stock funds held an average 5.3% of their assets in cash at the end of the third quarter, up from 4% six months earlier, according to the latest numbers from ICI. Based on US stock-fund assets of about $4.4 trillion, a move to 5.3% in cash on Sept. 30 from 4% March 31 means about $57 billion more now is sitting on the sidelines in Treasury securities and other liquid investments instead of being invested in stocks. The Sept. 30 cash level is the highest since November 1998, when it stood at 5.5%. (WSJ 11-17) As pets live longer and become more like family members, drug companies devote more resources to them in a global market expected to grow 23% to $3.7 billion over the next five years, says Pfizer. About a third of US cats and dogs are older than 10, and as many as 30% of them take medicine for chronic ailments such as arthritis, says Robert Hamlin, a professor of veterinary biosciences at Ohio State. (WSJ 11-16) With just over a month to go before year's end, the number of announced European M&A transactions stands at 12,958 deals, valued at a total of $888.3 billion through Nov. 10 -- well behind full-year 1999's total of 13,590 deals valued at $1.2 trillion, according to Thomson Financial Securities Data. [WSJ 11-6: The creation of the euro is creating bigger and more-liquid European stock and bond markets, including a junk-bond market that is opening global financial markets to companies that were never before welcomed. The maturing capital market is reducing the cost of capital in Europe, liberating corporate borrowers from dependence on banks, and making acquisitions much easier to finance.] In the US through Nov. 10, there were $1.64 trillion in deals (with US targets), up from $1.4 trillion in the same period last year. (WSJ 11-16) The trailing price-to-earnings ratio of the S&P 500 was 26.5 in October, down only slightly from 28.3 in October 1999 and far above the 20-year average of 17.3. (Scott Gerlach, CNBC 11-15) "Corporations are leveraged to their eyeballs. If earnings are slowing, how are they going to finance this capital spending going forward?" says Paul Kasriel, chief economist at Northern Trust. (Scott Gerlach, CNBC 11-15) The US remains one of the world's largest producers of crude oil, pumping about six million barrels a day - more than almost any country except Saudi Arabia. (WSJ 11-13) At year-end 1999, for instance, stock-mutual-fund investors had just 14% of their money in funds that invest largely or entirely abroad, according to Washington's Investment Company Institute. Foreign stocks account for roughly half of world stock-market value. According to Ibbotson, over the past 30 years the S&P 500 gained 13.7% a year and EAFE climbed 13.2% annually. (Jonathan Clements, WSJ 11-12) As Louise Yamada, head of technical research at Salomon Smith Barney, pointed out, the stock market has rallied in the months after a presidential election only about as often as it has declined. In the 28 election cycles since 1888, the overall market rose 57% of the time and fell 43% of the time from Election Day until the end of the year. (Gretchen Morgenson, NYT 11-12) "We forget, or were never really taught, that Social Security is an insurance policy that redistributes a pool of retirement money from those who die early to those who live long," said Teresa Ghilarducci, an economist and pension expert at the University of Notre Dame. (Louis Uchitellenyt, NYT 11-12) About 10.4 million households had signed up for Roth IRA's as of midyear, up 46% from a year earlier, says the ICI. (WSJ 11-8) Revenue from individual income taxes topped the $1 trillion mark for the first time in the year ended Sept. 30. That was up sharply from about $879.5 billion the prior year. Corporation income taxes were $207.3 billion. (WSJ 11-8) In the age of surpluses, divided government may not be much of a tonic, either. As recent negotiations in Congress have shown, "compromise" between the two parties can sometimes result in double the trouble. 'Divided government often means the cronies on both sides get exactly what they wanted,' says former GOP Rep. Bill Frenzel, 'and the taxpayers get the shaft.' (WSJ 11-6) Throughout the 1990's, when corporate governance reforms and the Internet were said to be endangering executives, annual turnover in the corner offices of America's 200 biggest companies hovered at about 10%. In the first 10 months of this year, it has already reached 19%, according to Pearl Meyer & Partners. In October alone, 129 chief executives at companies of all sizes left their jobs, more than twice as many as in the same month a year ago, according to Challenger Gray & Christmas. The big question now, analysts say, is whether this instability is a harbinger of yet more turmoil. (NYT 11-5) Ken Goldstein, an economist at the Conference Board, suggests a Bob Dylan lyric to describe the current reality: "He not busy being born is busy dying."Ê'Creative destruction' has become the most fashionable phrase for describing the change. Coined by Joseph A. Schumpeter, an early 20th- century economist, it suggests that capitalist economies grow by creating new businesses that then destroy the old ones. Schumpeter asserted that profit comes only from innovation. When all companies are making the same goods the same way, none can make a profit, because they eventually cut prices to the level of their costs. In recent years, a phalanx of political and economic forces have come together to turn creative destruction into a reality for a wider range of industries. "The theoretical competitive model has been around forever," said Edward Yardeni, chief economist at Deutsche Bank Securities. "Only in the past few years has it become relevant to how markets are actually operating." (NYT 11-5) Inventory pileups in the third quarter caused a cash-flow squeeze that prompted companies to increase their bank borrowings, says PricewaterhouseCoopers. Its survey of fast-growing outfits finds that 26% of them completed new bank loans in the quarter, up from 21% a year ago, and at an average interest rate that was more than a percentage point higher. (WSJ 11-2) Public elementary and high schools are expected to spend $795 million on improving security this school year, or about $19 a student, according to a study for American School & University, a publication for school administrators. The bulk of spending this year is expected to be for locks, call boxes, identification-card systems and closed-circuit television systems. (WSJ 11-2) Estate- and gift-tax revenues totaled a record $29 billion in the year ended Sept. 30, the administration says, up more than 4% from the prior year. The September 2000 Monthly Treasury Statement of Receipts and Outlays of the US Government can be found on the Financial Management Service Web site. (WSJ 11-1) To rank in the top 25% of taxpayers based on adjusted gross income for 1998, your income had to be at least $50,607, an IRS report shows. ... The report also shows the top 25% earned about 66% of the nation's adjusted gross income and paid 83% of all personal income taxes. (WSJ 11-1) Friday's report from the Bureau of Economic Analysis that Q3 GDP rose by a much-less-than-expected annual rate of 2.7% was almost purely a public-sector phenomenon. The sole reason for the tame figure was that the government portion shrank by 3.6%. Q3 private-sector GDP jumped by 4.1%, mute testimony to the strength of the real economy, the part that most of us care so much about. (Gene Epstein, Barrons 10-30) On a national level, the Federal Reserve and others have warned that the biggest expansion in consumer debt has taken place among households with income below $50,000. In that bracket, 20% had debt-to-income burdens of 40% or more in 1998, well up from 1995 levels of 15% of such households. Only 5% of higher-income American households carried burdens this high. (WSJ 9-28) Home Page Previous Factoid Top Sites |