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One reason for the investor confusion over the risk levels is that there are actually many types of munis. The kind of muni most investors are familiar with are the traditional "general obligation" bonds that are backed by the full faith and taxing ability of the issuer. The default rate on those GO bonds and other bedrock investment-grade munis average about one third of 1% of bonds issued, according to bond-rating firm Fitch. The higher-risk munis, by contrast, "are essentially tax-exempt corporate borrowings," says Martha Haines, chief of the SEC's Office of Municipal Securities. For repayment, investors in this type of munis are often relying on a single and closely held venture such as a nursing home, housing complex or even an amusement park or microbrewery - sometimes set up by an inexperienced entrepreneur. If the project doesn't produce the expected revenue, the bondholders are the losers. Municipal governments allow their names to be attached to these issues because they see the projects generating a public benefit, such as additional housing or jobs for residents. And the municipality can get that public benefit without cost to the taxpayers, because the government body isn't on the hook to repay the bonds. Higher-risk munis, which typically come to market without a rating from a credit agency, are about 10 times as likely as high-grade muni bonds to default, according to a 1999 study by Fitch. The default rate is 3% to 4% for non-rated and below-investment grade muni bonds - including a nearly 15% default rate on industrial-development bonds, historically the riskiest muni sector, Fitch found. Given the stock-like risk of many nonrated munis, investors might expect the type of disclosure they can obtain on public companies. Not so. The SEC and other federal regulators are legally barred from requiring municipal issuers to provide particular disclosures or to register their securities in advance. Instead, the SEC regulates muni disclosure only indirectly, by barring securities firms from recommending muni bonds that don't provide certain disclosures. Muni issuers aren't usually required to disclose financial information more than once a year - often with as much as a six-month lag - and that information can be difficult for individual investors to obtain because it isn't filed with the SEC. Some issuers fail to release any financial reports at all, market participants say.
1. Non-Farm Payrolls are up just 1.3%, year-over-year. The past five times growth was this weak, we had recessions. This indicator, like all but one of the others I cite, didn't miss calling any recession over the past five, dating to 1970. 2. The most recent household employment number was down more than 180,000. Its year-to-year change is just 0.5%. Five of the prior six times it produced such a reading, a recession struck. The exception was in late 1995. 3. Hours worked are just 0.3% above their corresponding 2000 level. Five of the past six times the increase was so wan, the U.S. had a recession. 4. Growth in temporary employment is down to minus 2.1%, year-over-year. We've had a recession on each of the previous four occasions that it dropped into negative territory. 5. The help-wanted index is at minus 15.6%, year-over-year. All five times since 1973 when it has skidded below minus 15%, recessions occurred. 6. The Purchasing Managers Index is at 41.9. The past five times it fell to 44, we had recessions. 7. The Philadelphia Fed Index recently slumped to about minus 36 and is still a poor minus 23.5. On the past five occasions that it dropped below minus 30, recessions occurred. 8. Capacity Utilization is down to 79.4%. In four of the past five stretches when this measure of factory usage dropped to 80 or below, an economic slump developed. 9. Industrial Production has fallen for five consecutive months. On each of the five prior occasions when this happened, there was a recession. 10. The OECD index of leading indicators is 2% below its year-earlier reading. In five of the past six cases when such numbers were reported, we had recessions. 11. Consumer Confidence has fallen by close to 40 points. On the five previous occasions when it dropped at least 30 points, we had recessions. 12. Consumer-confidence expectations have slid by more than 50 points. The past three times they have dropped by at least 40, this heralded a recession. 13. The yield curve shows Treasury-bill yields divided by 10-year T-bond yields. When the figure hits 0.99 or higher (signaling a "flat" or an "inverted" curve), it sends a danger signal - one that correctly called the past five recessions. This ratio hit a recent high around 1.12. It's now in the mid-0.90s. However, it has always fallen to the current level or lower in the ensuing recessions. Related: A Possitive Indicator- John Puchalla, Moodys 3-19 Favoring an acceleration of household spending, retail sales growth is now at its widest deficit relative to wage and salary income and M2 growth since late 1998. Previous instances in which retail sales lagged significantly behind wages and salaries and M2 growth were followed by a pick up in consumer spending. Average annual growth rates of 6.3% for retail sales, 6.4% for wages and salaries and 5.9% for M2 growth over the last 20 years are remarkably similar. In part because of rapid stock price swings, retail sales growth became more volatile than either M2 or earned income growth in the 1990s. Nevertheless, the latter two measures continue to serve as a strong anchor to consumer spending. Retail sales grew by 3.5% yearly in the quarter ended February, which trailed concurrent gains of 7% for M2 and 6% for wages and salaries. M2 and wages and salaries last grew as steeply relative to retail sales in Q3-98. A then 4.2% yearly expansion in retail sales jumped to 8.1% in Q1-99. But falling stock prices could wipe out the gains wage and salary income. For the six months ended March 2001, the market value of household equity and mutual fund shares could drop by something approaching $2.3 trillion, which would fall just shy of the approximate $2.45 trillion of wages and salaries over that span. Related: Another Possitive Indicator- Kamalesh Rao, Moodys 3-19 The current pace of bank lending seems at odds with more pessimistic appraisals of the economyÌs near future. Overall bank loans are currently growing at about 10.3% year-to-year, a significant decline from their most recent peak growth of 13.8% during September of last year. But this slowing still leaves bank loan growth above the 8.6% annualized growth rate of the past five years. Real estate loans, which comprise around 40% of commercial banksÌ loans and leases, have also slowed in the past year to 10.4% year-to-year from July of 2000 17.3% year-to-year, but is still well above the 8.6% annualized growth rate of the past five years. Bank commercial and industrial loans has fallen to an 8.7% growth rate, which is only slightly below its average growth rate of the past three months. And despite fears about corporate profits and debt burdens, C&I loan growth has not slipped below its annualized growth rate of the past five years.
But there's just one problem with this exciting scenario: It doesn't make any sense. The fact is, we all can't panic and sell. We also need somebody to buy. There has to be both a seller and a buyer for every share traded. If you had more sellers than buyers, they would close the stock market and everything would go to zero. So maybe the end of the bear market doesn't come when investors capitulate and sell. Maybe it happens when investors get greedy and buy. Or maybe it just happens and later we look back and realize that the bear market has passed. But that, of course, wouldn't be nearly so exciting.
Exactly why there has been an enormous difference between returns from equities and fixed-income securities is one of the great puzzles in finance. In a classic paper, "The Equity Premium: A Puzzle", economists Edward C. Prescott and Rajnish Mehra argued that equities, after taking into account investor attitudes toward financial risk, should have commanded a risk premium of around 1% rather than the actual 6% for the period they studied, 1889 to 1978. In two more recent papers, Prescott, along with economist Ellen R. McGrattan, revisits the equity-premium question. The two economists argue that their theoretical model suggests the real return on stocks and bonds should hover around 4% in the future, a prediction consistent with the current real rate on U.S. Treasury inflation-protected bonds. Prescott and McGrattan say risk has nothing to do with the gap in stock and bond returns over the past half-century. Theirs is a story of tax, regulatory, and institutional change, not volatility, standard deviations, and risk aversion. In the 1950s and 1960s, legal and regulatory barriers prevented many pension plans from investing in stocks. Even more important, equity investors shouldered a huge tax burden, with a top marginal rate of 91% from 1947 to 1962. So it took high pretax returns to lure investors into the stock market, they argue. Contrast this scenario with today's investing environment: Equities are now the foundation of institutional and individual pension plans. Tax burdens have been greatly reduced, thanks largely to lower income-tax rates and tax-deferred retirement-savings plans. For instance, the effective marginal tax rate on dividends fell from 53% in 1950 to a little over 15% in 1996, calculate the scholars. Other factors also suggest a narrowing equity premium. Corporate earnings are less volatile than before as swings in the business cycle have moderated over time. Market history shows that stock and bond returns run close together when inflation is stable. So, next time you're plugging some return numbers into a retirement-planning calculator, it's a good idea to use far more conservative numbers than the postwar period would suggest. Odds are stocks will still outperform bonds, but by a much smaller margin.
At a meeting with about 10 chief information officers a few weeks ago, Merrill Lynch technology strategist Steve Milunovich says he heard tales of spending cutbacks ordered by chief financial officers and chief executives. At the start of the year, Mr. Milunovich projected that corporate technology spending would rise 9% this year. He now thinks the increase will be 5% to 6%, and could slip lower. And next year could be even worse, even if the economy recovers, says Naomi Seligman, a senior partner at Cassius Advisors, a New York consulting firm with close ties to big-company chief information officers. Ms. Seligman says corporate tech budgets tend to be based on the prior year's results. Budgets for this year are relatively strong because most companies had a pretty good year in 2000. But poor results this year will show up in tech budgets for 2002. 'Information technology budgets in major corporations are a lagging indicator of general economic conditions,' Ms. Seligman says. 'Eighteen months from now, it's going to look a lot worse.' Related: Andrew Bary, Barrons 3-19 The Philadelphia Semiconductor index was up on the year until a selloff Thursday despite terrible industry conditions. Why? Investors, perhaps perversely, are betting that the worse things are now, the quicker they will get better. It's worth noting that once industry groups lose their leadership position, they usually don't quickly regain it. After energy stocks, which dominated in the 1970s, peaked in 1980, they never were pace setters again. Consumer stocks surged in the late 1980s, but have since faded. Financial stocks vaulted higher from 1995 through early 1998, and then lost their primacy to tech stocks, which took the baton from late 1998 through early 2000. Which group will lead the next upturn in the stock market? Perhaps it will be tech, but history suggests otherwise.
Yet the bubble also may have done society a huge favor. The techno-boom fertilized new technologies and business innovations, and it galvanized old-economy companies into accelerating their own adoption of these innovations. Technological advance almost seems to require periodic investment manias. The bull market of the 1920s enabled many companies to exploit the emerging technologies of electricity and the internal-combustion engine, whose benefits survived the 1929 crash and Great Depression, says Boyan Jovanovic, a co-author of a study on the subject and professor of economics at the University of Chicago. Historically, says Mr. Jovanovic, the problem with markets isn't too much risk-taking, but too little. That's because all of society reaps the benefits of an invention, while the innovator bears the costs. Stock-market bubbles help overcome that market failure by tempting innovators with enormous wealth. 'We're never worse off for having generated more ideas,' he says. One measure of innovation, the number of patent applications by U.S. inventors, soared along with the Nasdaq, from an annual average of 70,000 between 1978 and 1992 to 135,000 in 1998. A study of manufacturing innovation by Samuel Kortum of BU and Josh Lerner of Harvard Business School attributes a chunk of that increase to rising venture-capital investing, which they conclude generates more innovation per dollar than corporate research-and-development departments. Between 1978 and 1992, they found, firms backed by venture capital conducted 3% of R&D but accounted for 8% of patent applications. By 1998, they accounted for 5% of R&D and 14% of patent applications. Apart from the lost wealth, Prof. Lerner warns of a potentially much longer-lasting negative consequence: that investors stop financing even good ideas for some years to come. He believes the information-technology revolution of the 1980s and '90s might have arrived sooner if not for the bust that followed the 1968-72 boom in computer-stock issues. In 1968 and 1969, young computer firms raised $1.5 billion in current dollars, puny by today's standards but a dizzying sum at the time. Between early 1973 and mid-1978, just $200 million was raised.
California is hardly an emerging market. But the confluence of plunging Nasdaq stocks (49 of the stocks in the Nasdaq 100 index are Californian), soaring electricity prices, money-making energy traders and feckless political leaders resembles nothing so much as an emerging-market crisis. For obvious reasons, California isn't headed for Asian-style devastation. But Barry Eichengreen, an international economist at the University of California at Berkeley, says two factors are particularly instructive. First, California's banks are diversified; South Korea's weren't. BankAmerica, swallowed by North Carolina's NationsBank, now has more than four times as many real-estate loans outside California as in it. Message to emerging markets: If foreign banks buy into your banking system, your banks will be less exposed to local catastrophes. Second, California doesn't have its own currency. So Gov. Gray Davis isn't worrying about the collapse of the California Avocado (or whatever the state might call its currency), which surely would have followed the blackouts and bickering of the past few months. Message to emerging markets: Abandoning your currency for the dollar can make sense.
For starters, real consumer spending is on course for a 3.75% increase in Q1, according to Salomon Smith Barney economist Brian Jones. Consumer confidence should still remain positive, according to Henry Willmore, senior U.S. economist at Barclays Capital Group. And the economy will get some help from the other components of GDP, which are likely to improve from the very poor performance seen in the second half of last year, Willmore says. `It's a remarkable but little noted fact that the non-consumption components of GDP contracted an annualized rate of 2.5% during the second half of last year,'' Willmore says. Net exports (exports minus imports) and residential investment posted significant declines, inventory accumulation slowed, subtracting from GDP, and government spending grew at an anemic rate. Housing activity remains strong, which is reflected in the biggest jump in home prices - an 8.1% year-over-year increase in Q4 - in 13 years. Auto inventories have come down sharply while sales have remained strong. Inventories of cars and light trucks fell to a 66-day supply at the end of February from 85 days at the end ofJanuary, according to Dave Zoia, editorial director at Ward's Automotive Reports. Based on announced production schedules, motor vehicle production should add 1.5 percentage points to real GDP growth in Q2 following six consecutive quarterly declines. `It's going to take a year to work out the imbalances in capital goods,' Willmore says. `We don't understand the dynamics of the shakeout in the information technology sector. So rather than rely on a forecast, we have to give weight to the data as they come in.' On that score, the 12.2% jump in non-defense orders for communication equipment in January following after a poor second half was encouraging. Ditto the 5.2% increase in computer orders. Whether this is all peripheral noise, a sign that the decline in manufacturing activity is stabilizing or a whiff of outright improvement remains to be seen. At minimum, pronouncements that the U.S. is now in recession seem to be greatly exaggerated.
Such cost-cutting has happened before, but with nothing like the speed and ferocity of this downturn. Even Federal Reserve Board Chairman Alan Greenspan said he feared negative psychology created by rapid layoffs could distort the economy's underlying strength and lead to a breach of consumer confidence. 'The quickness of their reaction may ironically make the business cycle more extreme in the short term,' said former Labor Secretary Robert Reich. Related: Slow Cuts - WSJ 3-19 When markets swoon, securities firms typically take out a big ax and start chopping. That is what Goldman Sachs did; it cut 1,000 jobs after stinging bond-market losses in 1994. Ditto at Merrill Lynch, which axed 3,400 traders, investment bankers and others in the fall of 1998. In the current market slump, which is far steeper than those in the 1990s, Goldman, Merrill and Morgan Stanley Dean Witter are trying to get by with mild measures such as freezing hiring and cutting staff in noncore operations. This go-slow approach comes even as Street staffing has bloated to record levels. Since September, an estimated 12,000 jobs on the Street have been cut. That number, though, represents a fraction of overall securities-industry employment, which had surged 36% to a record 359,327 nationwide between 1996 and the third quarter of 2000, according to the latest data available. Head count is at a record 62,000 at Morgan Stanley and 22,600 at Goldman; at Merrill, total staff has fallen by 700 from the record 72,700 last September. Most financial firms are resisting pressure to take more-drastic measures for fear of losing ground to rivals when - and if - markets rebound. It is industry executives' consensus that Goldman and Merrill botched it when they cut too deeply in 1994-95 and 1998 and markets quickly bounced back. In 1994, many executives recall, Morgan Stanley made a point of not cutting, and thus gained ground on rivals. One positive for Wall Street firms: They haven't yet suffered big trading losses in the current slump. Brokerage-firm earnings estimates have been reduced. But the firms still are showing profits. Related: Slow Cuts - NY Times 3-25 As the economy slowed at the end of last year, many employers were reluctant to discharge workers who had been so difficult to find and keep in the first place. This is one reason that the unemployment rate, at 4.2% in February, is still so low. Avoiding layoffs as production slowed cut into productivity, which grew at a 2.2% annual rate in Q4, down from 8% a year earlier. So the price of the downturn was reduced productivity growth, which raised costs and sent earnings into their own recession.
The greatest source of anxiety for most tech stock owners is, of course, the money they've lost on paper or for real. But what's also deeply troubling for many investors is the jarring realization that they can't intelligently evaluate the companies they own. A first step in evaluating any company is to ask two basic questions: (1) Where does the money come from to make the business grow? (2) How does the company use the money it takes in? The first question also forces you to consider the company's debt situation and other capital-raising issues: Has it borrowed, and does it continue to borrow, as part of its growth program? Is the debt manageable--or is the interest-expense item on the company's income statement rising far faster than sales or earnings? If investors in many now-failed dot-com companies had merely focused more closely a year ago on the question of where the money came from, they might have understood that much of what the companies promised was totally dependent on their access to capital markets. In other words, with relatively little in the way of sales, the only way these businesses could sustain themselves was to devour capital from investors. The second question - how a company uses the money it takes in - gets to the heart of what most investors ultimately find interesting about fundamental analysis. People get excited about a business because of the products or services it offers and the potential for those products or services to find a wide audience. If that happens, shareholders figure, they will reap the winnings. But managing growth is a major challenge for any company. The right decisions have to be made about how to invest in the business - that is, which product lines to pursue, how to price those products, where to sell them, how much to pay employees so the firm retains the best work force it can, how much capital to retain as a hedge for bad times, etc. What you're betting on, as a shareholder, is that the company is going to manage itself well enough to produce strong and consistent earnings growth for years to come. But that is no easy feat. Related: Reading Financial Statements - Motley Fool - AJC 3-25 When you're learning how to read and understand financial statements, a major annoyance will be the fact many items go by different names. Fret not, though. The handy reference list below can make your life easier. Accounts payable = payables Accounts receivable = trade receivables = receivables Additional paid-in capital = capital in excess of stated value = capital surplus = paid-in capital Balance sheet = statement of financial condition = consolidated balance sheets Cost of goods sold = costs of sales = cost of revenue = cost of products sold = costs, materials and production Earnings = net income = net profit Income statement = earnings statement = statement of operations = profit-and-loss statement = consolidated statement of income Inventories = merchandise inventories Earnings per share = net income per share Net income = net profit = net earnings Revenues = sales = net sales Shareholder equity = shareholders' investment Short-term debt = debt payable within one year = current portion of long-term debt = notes payable
Investors Intelligence conducts a weekly poll of about 130 market newsletter writers, and calculates the percentage who are bullish, bearish or expecting a short-term correction. During most bull markets the survey averages 45% bulls and 35% bears. Earlier this year, II, as it's called, hit its most bullish reading since 1987: 61.8%. Last week bulls numbered 57%, while bears totaled 11.7%. II's persistently bullish readings confound some observers. The American Association of Individual Investors now polls its 170,000 members daily. Respondents indicate how they feel about the market's performance in the next six months. A 65% bullish reading suggests a coming correction; a 25% bullish reading signals a rally ahead. Bullish sentiment shot up to 46% last week from 26%. Bears remained relatively unchanged at about 34%, but the neutral camp was nearly halved. Consensus Inc.'s index of bullish Market Opinion tracks sentiment among more than 100 newsletter writers and brokerages weekly. The firm deems a bullish reading of 75% "overbought", and a 25% bullish reading "oversold". Only 22% of respondents were bullish last week. It posted a bullish high of 62% in January 2000 and again in August 2000, just prior to big downturns. Market Vane's queries commodities traders and investors in S&P 500 futures contracts. Just 25% of all respondents were bullish last week, right around the low of 23% seen in May 2000. Generally readings below 25% are bullish; those above 65% are bearish. The CBOE compiles an equity put-call ratio - the total volume of equity put options divided by call options. Readings of 0.60 are considered bullish and of 0.30 bearish, because nervous investors rush to buy protection in the form of puts. The ratio generally indicates the market's direction in the next two weeks. Last week, the put/call rocketed to 0.81 -- in other words, a hopeful sign. In January of this year, U.S. brokerage strategists were more bullish than at any time in the past 16 years. Their average asset allocations form the basis of a survey compiled by Richard Bernstein, chief quantitative strategist at Merrill Lynch, who correctly viewed the current reading as worrisome for the market. Strategists at the top Wall Street firms advised investors to keep 66.4% of their assets in stocks. Bernstein terms any reading below 50.5% a buy signal, and any above 58.3% a sell. Related: More Indicators - Ken Brown, WSJ 3-15 The declining-vs.-advancing volume ratio The ratio on Oct. 19, 1987, the day the Dow fell 22.6%, was 533.4-to-1, and on Oct. 27, 1997, during the big sell-off at the start of the Asian financial crisis, it was 168.1-to-1, according to Ned Davis Research. The Chicago Board Options Exchange's market volatility index (VIX) The VIX measures the price investors are willing to pay for put options, which protect you in a market downfall, vs. call options, which let you benefit from a market rally. When the market drops, the VIX rises as nervous investors pay up for protection. The VIX topped 55 both in the summer of 1998, during the Russian debt default and the meltdown at hedge-fund LTCM.
Investors fretting about the past 12 months have this to ponder: Nasdaq could (gulp) go still lower. While the p-e multiple of the Nasdaq has fallen to 121 from 400 a year ago, according to Birinyi Associates, that is still well above the average of 52 since 1985. Nasdaq stocks would have to drop by more than half just to get back to their average. Joseph Battipaglia, head of investment policy at Gruntal & Co., said "the latest correction in equity values, while certainly unpleasant, has not been unusual." He protests that the still-bloated P/E on the Nasdaq composite is misleading because the median multiple among the 10 most valuable technology companies has "fallen by roughly half to just over 30 times reduced earnings estimates. ... Since the 10 largest companies represent 40% of the Nasdaq composite's market capitalization" it is "fairly clear that there is no meaningful valuation issue among the Nasdaq's leadership." Related: Tom Petruno, LA Times 3-4 Richard Bernstein, an analyst at Merrill Lynch, calculates that 90.3% of the non-tech and non-telecom shares in the S&P 500 held up better than the index's 9.1% drop in February. In other words, even if the stocks fell, they fell less than the index itself. What's more, 43% of all stocks in the S&P rose in February - another sign that, as money continues to exit technology, much of it is looking for a home in non-tech stocks rather than fleeing to the sidelines. "The bear market for tech, but nothing else, continues," Bernstein said. Many investors would argue that he's being far too glib. The average U.S. stock mutual fund has lost 6.8% so far this year, after a mere 2% loss last year, according to Morningstar. Much of this year's slide may be tied to the ongoing tech plunge, but the market pullback has been broader than that. The average health-care stock fund is down 11.1% this year, and the average utility stock fund is down 4.2%. Bulls say people will stay in the market, or come back to it quickly, because returns on bonds, money market funds, gold and other options aren't attractive enough to justify staying away from stocks, despite their risk. It's a decent argument. But as Japan's experience has shown, if the stock market becomes too scary a place, investors will leave it, and they won't come back. U.S. stocks, as measured by the S&P 500, have produced an average annualized return of 13.5% over the last four years. But with their dive of the last year, the two-year annualized return is just 1.3%. [S&P 500 annualized returns through Feb. 28: Last four years: +13.5%; Last three years: +7.1; Last two years: +1.3: Last year: --8.2%] If Nasdaq's plunge is signaling a long trying period for stocks in general, investors' staying power is about to be put to its greatest test. Related: WSJ 3-14 Just how bad could it get? Try the Dow Jones Industrial Average at 5000, and the Nasdaq Composite Index below 1000. 'We are seeing the unwinding of a bubble, and that will take us not only back to levels of normalcy but below that,' says Fred Hickey, who publishes a widely followed, and very bearish, technology-stock newsletter. A Nasdaq 1000 would bring the index down to a price-earnings multiple of about 40 times trailing 12-month earnings; that wouldn't be too far removed from the average level of 52 that Birinyi Associates cites since 1985. That multiple currently is approximately 150 times trailing 12-month earnings, according to Birinyi. [Smart Money 3-21: One week ago, the Nasdaq was still trading for 154 times trailing earnings. (And from WSJ 3-13): But earnings are falling at an even a faster clip than prices lately, so p-e's have actually been going up. A week ago, the pe multiple of the Nasdaq was 121. ] The Dow at 5000, by comparison, would trade at a multiple of about 10.5 times trailing 12-month earnings, roughly in line with historical levels; the Dow now stands at about 21 times its trailing 12-month earnings. In neither example, Mr. Hickey says, would the indexes fall to price-to-earnings levels seen in past bear markets. [WSJ 3-13: The p-e ratio of the S&P 500 is now 24. By comparison, at the end of the S&P's last bear market, in 1987, the price-earnings ratio was 12. Another measure of how expensive stocks remain: The median dividend yield - dividend payout divided by the share price - of the S&P 500 since 1957 is 3.4%, according to the Leuthold Group. On Friday the yield was 1.1%.] Related: Sam Jaffe, Business Week 3-23 PNC Advisors Chief Investment Officer Donald Berdine thinks the general market is close to hitting bottom as well. He points to a simple ratio known to be a favorite of Alan Greenspan: You take the yield on the 10-year U.S. Treasury note and divide it by the S&P 500 earnings yield. Under most conditions, the ratio will range between 1.2 and 1.5. The lower it goes, the cheaper stocks are relative to bonds. So let's do the math. The current 10-year Treasury-bond yield is 4.71%. Using his relatively conservative earnings projection for the S&P 500 for 2001, Berdine estimates the index' earnings yield to be 5.06%. That means the stock-to-bond-yield ratio is currently at 0.93, which is strikingly low. Compare that to where it stood during the bottoms of the last few nasty downturns, and you'll start feeling better about the markets' direction. In the fall of 1998, the ratio dipped to a low point of 1.0. At the nadir of the 1990 market drop, it got down to 1.1. During the recession of 1981, it reached 1.0 just as the market bottomed. In short, stocks are already historically cheap. Very cheap. "We don't have to base our progress on the 'Greater Fool' theory anymore" says Berdine
Since April of 2000, the factors that have determined share price are earnings, return on equity and relative valuation. And I think that is terrific. The return to fundamental analysis is highly appropriate. I do not think that the market is at equilibrium today. It is undervalued. We aren't projecting a return to very large, double-digit profit increases or the rapid GDP growth of 1999. Our forecasts are based on a long-term trend in profit growth of 7% or 8% a year. Based on that model, we think the S&P 500 is undervalued. Sectors whose valuations were of concern to us a year ago no longer are, and here I mean technology and telecom. It is important to add that our projections are aimed at a six-month to 12-month horizon. In late 1999 and early 2000, we were a few months early in moving to an underweight recommendation in technology. Today, we may be too early in moving to an overweight stance. But this gives investors an opportunity to build their positions. A market that is undervalued can still get cheaper, but it creates that much more of an opportunity. It is important to remember that a year ago, when almost everyone was optimistic and anticipating the most rosy scenarios, the risk to the market was greatest. Today, when many investors are pricing in the bleakest scenarios, the risk is the lowest and the opportunity is the greatest. Related: Recent History - USA Today 3-7 Cohen is the third strategist this week to paint a rosier picture of Wall Street. Monday, Merrill Lynch's David Bowers and Morgan Stanley Dean Witter's Jay Pelosky advised buying more U.S. stocks. In early October, Cohen turned bullish on techs for the first time in a year. Since then, the Nasdaq is down 35%. In mid-November, she said stock prices, especially techs, were "the most attractive they have been all year." That may have been true, but the Nasdaq continued to slide and is down more than 25% since. And last week, Goldman Sachs' team of tech analysts cut profit predictions for software companies and said tech stocks could continue to suffer in the second half of the year. Some of Cohen's rivals are still preaching caution. "Investors should still be thinking defense," says Douglas Cliggott, strategist at J.P. Morgan. "There are still very significant risks to earnings for at least the next two quarters. The major trend in the Nasdaq is still down."
Fine. But who, pray tell, makes the market efficient in the first place? Nobody but those active managers, beating their brains out trying to outdo the competition. The harder they work, the more efficient the market gets, and the more difficult it becomes for anyone to win the game. When you look at it this way, index investors come to resemble pilot fish, swimming alongside sharks and freeloading on the big dudes' leftovers. Whatever analogy you choose, eliminate the active managers and the indexers lose their meal ticket.
In a fax to clients entitled `We Are in a Recession. Deal With It,' Bridgewater Associates, a money management firm, wrote the following: `The markets are pricing in a V-shaped recovery in the U.S., with the Fed only needing to ease a few more times. Short-term interest rates are priced to bottom at 4.5%. Since World War II, no recession on record has subsided with so little easing. We doubt this one will. In fact, the risk in our mind is that the Fed may not have enough ammunition to get the economy turned around.' Haven't we been down this road before? At least the presumed impotence of interest rates cuts both ways. One year ago, analysts were claiming that higher interest rates wouldn't work to slow economic growth. Bridgewater analyst Greg Jensen says the risk interest rates won't do the trick has to do with the `over-investment cycle and the problem with telecoms and debt.' `We've knocked out the engine of the bubble, which was also the source of the productivity miracle,' Jensen says. `The problems are so fundamental, so deep, the debt so large that there won't be any new investment for a long time.' The Fed can't do anything about over-investment; the economy has to grow into the excess capacity and absorb the superfluous capital stock. John Ryding, senior economist at Bear, Stearns, has more faith that a market economy can work through the excesses, especially if the Fed stops holding short-term rates above the unobservable `natural' rate. Unlike Asia, whose problem was too many office buildings and no one to fill them, the U.S. has over-invested in computers and information technology. A computer may be a capital good, but a consumer's decision to purchase one is influenced by interest rates and prices, over which the Fed has control. `If we invested in too much telecom equipment, and traffic on the Internet is doubling every 100 days or so, that will absorb it.' Related: Greenspan's Words - WSJ 2-28 Federal Reserve Chairman Alan Greenspan, delivering a sober assessment of the U.S. economy, told Congress Wednesday that the sharp slowdown that began in the second half of last year "has yet to run its full course." He blamed much of the economy's weakness on an effort to cut back quickly on production in the face of falling sales. Greenspan also suggested he was no longer sure that consumer confidence is strong enough to keep the country out of a recession. "Even after the policy actions we took in January, the risks continue skewed toward the economy's remaining on a path inconsistent with satisfactory economic performance." Greenspan gave no indication that Fed is inclined to cut interest rates before its next meeting of policy makers on March 20. Wall Street widely expects the Fed to cut its key federal-funds rate by half a percentage point, to 5%. Related: WSJ 3-21 With his third big interest-rate cut in three months Tuesday, Alan Greenspan is acting more aggressively than ever before to prevent economic weakness from turning into recession. Yet reducing borrowing costs may have a muted impact, with consumers and businesses already heavily in debt and feeling less inclined to take on more loans because of plunging asset values. Faced with excess capacity and bulging inventories, companies seem hesitant to invest, even if financing costs fall. Nor can Mr. Greenspan, the Fed chairman, do much for America's trading partners - from Japan to Europe to Latin America - who also seem to be weakening. The Fed has certain conditions working in its favor. In contrast with the U.S. in the early 1990s - and with Japan today - the American banking system remains healthy, indicating that credit should remain available for those who want it. Continued low inflation, meanwhile, gives Mr. Greenspan far more leeway to cut rates more quickly than he had during the last downturn. What makes this slowdown so hard to read is that it is unlike any the U.S. has experienced in recent memory. Nearly every recession since World War II has followed rising inflation which forced the Fed to raise interest rates sharply. This time, consumer prices outside of energy have remained remarkably stable despite rapid growth. From June 1999 through the following May, the Fed raised its benchmark target just 1.75 percentage points, to 6.50% from 4.75%. That compares with median increases of about three percentage points during most tightening episodes of the past three decades. Related: Richard Stevenson, NYT 3-18 The problem may not be too much money chasing too few goods, as in the past. Rather, it may be too much investment chasing too little return. Recent corporate announcements of steep reductions in capital spending, plus faltering sales and profits among technology companies, suggest there is something to the notion. Related: G Morgenson, NY Times 3-25 James Paulsen, chief investment officer at Wells Capital Management, studied the impact that the Fed's two major policy tools - changing the Federal funds rate and managing the growth in the money supply - have had on economic growth over the last 40 years. For decades, both had demonstrable economic impacts. Growth in the money supply translated to growth in the economy. And changes in the Fed funds rate had an inverse effect on the economy, with a lag, of course. All of that changed in 1990. Since then, the relationship between real economic growth and changes in the money supply and Fed funds rate has virtually disappeared. Paulsen thinks that the shift has much to do with the dominant role that technology plays in the economy today. While interest rates have huge impact on the fortunes of manufacturing companies, and on sales of cars and housing, the success of technology companies has everything to do with new product introductions. Interest rates have less of an effect. "Although the Fed traditionally has had strong influence on the economic cycle, this suggests that coincident with the substantial growth in the technology sector, the Fed's ability to manage the economy has been greatly reduced." Paulsen points to another reason why more aggressive easing may be required. Banks' willingness to lend has plummeted, according to the most recent figures from the Fed. The percentage of large and medium-sized banks that are willing to make business loans has fallen below the level seen during the recession of 1990. This unwillingness has to do with the fact that long-term bond yields are not sufficiently higher than short-term yields. Banks, which charge rates based on long- term yields and borrow based on short-term yields, have lower profits than they would have if long-term yields were higher. "It used to be, when the Fed would ease, long yields would come down less," Mr. Paulsen said. "Now, long yields fall first." A result? "They've lost a big piece of the ammunition that makes Fed policy work," he said. "They might have to be more aggressive than they're used to."Ê Just the Facts Spreads are shrinking According to the statistics complied by the National Association of Securities Dealers, spreads on Nasdaq stocks have fallen by over 75% in the past nine years. In 1992, the average relative spread was slightly above 1.70%. By September 2000, it had fallen to only 0.22%. Today, most Nasdaq stocks trade in 1/16th increments, with the typical spread being about 14 cents. Large-cap names routinely trade in increments of 1/256th, on average OTC volume of well over 1.5 billion shares. Decimalization will bring down spreads even further. (Jonathan Hoenig, SmartMoney 3-29) The buyback slump Share-buyback announcements are currently at a seven-year low, albeit still way up from a decade ago, according to financial-data provider Thomson Financial. The buyback slump is in part due to companies looking to preserve precious cash or pay down debt. In addition to using up cash, there are other costs a company must consider. Share repurchases typically increase leverage, which raises a company's risk and therefore credit premiums. Companies in the 90's repurchased shares in order to offset the dilutive effect of stock-compensation programs. But, with employees less tempted to exercise options at these current low prices, there is less need for companies to buy shares back. (WSJ 3-28) No Return to Average Valuations Could the market, which still trades at more than 20 times earnings, bs headed back to its historical average P/E of 14 or 15? Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School, says no. He thinks the market can sustain today's higher valuations, thanks to a host of favorable factors, including the low capital-gains tax rate, modest inflation, a more stable economy and reduced trading and investment costs. (Jonathan Clements, WSJ 3-27) 'Restricted stock' definition Restricted stock differs from options in that it represents actual ownership in a company. Executives may contribute to the purchase of the shares or the company may reduce their cash compensation by the amount of the stock. The executive cannot sell the shares for several years, and the company must book the cost of the shares, unlike options, as an expense. Companies find that executives expect fewer shares than they would stock options, so investors worry less about their stake being diluted. (Reed Abelson, NY Times 3-27) The sky is falling People talk about the Mir coming down like it's the only satellite to fall. But some 8,300 satellites, rocket pieces and other fragments, currently orbit the Earth and are tracked by the U.S. Space Command said. That number is only one-third of the 26,000 items the center has tracked since 1957. The rest have 're-entered'. On average, one satellite a day has fallen to Earth in the last 40 years, said Nicholas Johnson, chief scientist and program manager for orbital debris at NASA's Johnson Space Center. (Nando 3-25) A bright side to bad news If there is a bright side to the recent wave of earnings warnings, it might be that revised expectations are easier to meet, analysts say. So far this quarter, 889 companies have commented on their earnings, and 70% of those comments were negative, says Joe Kalinowski, equities strategist for I/B/E/S International. Compared that with the year-ago quarter, when 234 companies commented ahead of their reports, nearly half of which were offering positive guidance. (Stephanie Mercurio, CNBC 3-24) An excessive worry Could worries over the wealth effect be excessive? Surveys of consumers show that remarkably few think the market's fall will affect them personally. And it is possible that since much of the wealth lost since the market's peak a year ago was created only in the 16 months prior to that peak, it was too short-lived to affect the behavior of more than a relatively small group of tech entrepreneurs and stock speculators. At the end of last March, household holdings of stocks and mutual funds equaled $12.2 trillion, or 178% of annual disposable personal income, up from $2.3 trillion, or 52% of such income, in 1990, according to the Fed. The value of those holdings plunged 21% to $9.6 trillion at the end of December, and has probably dropped another 16% this year. In a poll for ABC News and Money Magazine, 12% of respondents in January said they were affected a great deal by movements in stock prices. That was up from 9% in 1997, but down from 13% in October 1987. (WSJ 3-23) An Independent Fed The only sound reason for a democracy to make its central bank "independent" from political pressure is that politicians are so shortsighted they'll accept inflation now at the cost of future prosperity. So does it really make sense for the Fed to take cues from the one place (Wall St) that is even more shortsighted than politicians? "If the central bank strives too hard to please the markets, it is likely to adopt the markets' extremely short time horizons as its own," former Fed governors Alan Blinder cautioned. "This can create a dangerous 'dog chasing its tail' phenomenon. The market ... overreacts to perceptions about what the central bank might do and the central bank looks to the markets for guidance about what it should do." (David Wessel, WSJ 3-22) Insiders bearish In-the-know corporate insiders have been remarkably bearish. Insider sentiment is "at its most bearish levels in over two years," which could signal more pain to come, says Jonathan Moreland, research director of InsiderTrader.com. According to Lancer Analytics, the sell-to-buy ratio in February was 29:1, the highest, or most bearish since the firm began tracking the data in 1996. The sell-to-buy ratio among technology insiders was 55:1 in February. Such sustained selling has a twofold effect on the stock market. It increases the float of shares on the overall market, which creates downward pressure on stocks. Also, it signals to investors a lack of confidence by management in the health of the market. (WSJ 3-21) Mutual Fund stats New estimates from Lipper show that investors withdrew a net $2.4 billion from stock funds in February. It was the first month that more money left stock funds than went in since August 1998. (WSJ 3-23) Investors withdrew a net $800 million from funds tracking the S&P 500 in January and February this year. That marks the first time that S&P funds have had net withdrawals in seven years. Actively managed U.S. diversified stock funds returned an average 29.2% in 1999, compared with the S&P 500's 21% gain, including dividends. Last year those stock funds lost 1.3% compared with a 9.1% S&P decline. Thursday, ICI reported that investors pulled out a net $3.07 billion from stock funds last month, the first month that investors took more out of stock funds than they put in since August 1998. (WSJ 3-30) Cost of mortgage app's ABN Amro Mortgage Group's executive vice president, William Newman, says it costs $2,000 to $3,000 to process a typical home mortgage application. (WSJ 3-21) New Mutual Fund rule A new SEC dictum (Rule 35d-1) tightens standards for mutual fund names. In simplest terms, the rule says that if a fund calls itself, say, a `tax-exempt income fund', it must put at least 80% of its assets where its name implies. Previously, the minimum was 65%. ``The new rule does not apply to common designations such as `mid-cap,' `balanced,' `indexed' and `international,' primarily because of the lack of a standard definition for these categories,'' says the accounting firm of Deloitte & Touche in an analysis. Common sense dictates that you and I also keep looking at funds' names with the same skeptical eye. (Chet Currier, Bloomberg 3-20) Higher labor wages A survey by an employment-reporting service, the Bureau of National Affairs, found that the average pay increase in labor contracts signed this year was 4.7% (factoring in lump-sum payments), compared with 3.7% for the same period in 2000. (WSJ 3-20) Fewer sabbaticals The Society of Human Resource Management, in its annual corporate-benefits survey, finds that fewer companies are offering worker sabbaticals. Last year 17% of respondents offered extended unpaid time off for research, vacation or travel, and 4% offered paid leaves. In 1996, 27% of companies polled offered unpaid sabbaticals and 6% paid ones. (WSJ 3-20) Tempted by Apple Susan Byrne, a veteran money manager who runs the Gabelli Westwood Equity Fund, is excited about her recent acquisition of Apple Computer Inc. shares. With Apple's cash on hand alone being worth $15 of the $18 to $19 a share that she paid for the stock, the computer maker is now a "real value name," she said. [From article of 1-28 in WSJ: Apple has more than $4 billion in the bank. Total number of shares = 346 million. Cash per share would be greater than 4000 divided by 346 or $11.56 per share.] (WSJ 3-20) Extended Patent Protection A pioneering paper by the National Institute of Health Care Management last year documented a series of legal changes over the past two decades that had the effect of nearly doubling the length of the effective patent protection for new drugs. (Alan Murray, WSJ 3-19) Tech share of S&P falls The great bull market of 1995-2000 left a lot of portfolios happily out of whack, as stocks and index funds rose sharply. Then, last March, the stock market abruptly rebalanced their portfolios for them. For example, if you owned a S&P's 500-stock index fund, you saw the percentage invested in tech drop from 33.7% last year to 19.2% now. (Jerry Morgan, Wash Post 3-18) Self-Directed 401(k)'s increase In a survey conducted by Hewitt Associates (an employee-benefits consulting firm), 55% of employers say they either offer self-directed brokerage accounts in their 401(k)s or are considering doing so. For most of the roughly 20-year history of 401(k) plans [also called 201k's if they have lost half their value in the last 12 months], employers have tended toward caution, even what might be called paternalism, in the investment options they offered workers. Self-directed accounts offer workers great investment flexibility. Employers expect only about 5% or 6% of workers to use the self-direction option, and so far that has proved to be the case. (Albert Crenshaw, Wash Post 3-18) The Great Humbler The market, at its worst (or, some would say, at its best), is the Great Humbler. As the Great Humbler, the market has no respect for your station in life or for how smart an investor you may have been until now. In fact, the market in this incarnation most prefers to humiliate those who remain smug or who appear to be telling it what to do and when to do it (example: Abby Joseph Cohen). The question of "how low can it go" has been asked of the Nasdaq market with every new sell-off over the last 12 months. The answer from the Great Humbler has consistently come back: lower than you thought. ....Year to date, 70% of the 87 stock industry groups within the S&P's 500 index have declined. ... Assuming you've followed basic rules of diversification, a decline in your portfolio doesn't reflect on your intelligence. Don't take it personally. (Tom Petruno, LA Times 3-18) Volatility study The market's overall gyrations didn't increase between 1962 and 1997, according to a study in the February 2001 Journal of Finance by John Campbell, Martin Lettau, Burton Malkiel and Yexiao Xu. But over the same stretch, the volatility of individual stocks more than doubled. 'Investors that have a portfolio that is highly concentrated in just a few securities are taking on a lot more risk than they were 20 or 30 years ago,' says Mr. Malkiel, an economics professor at Princeton. While individual-stock volatility has been rising, Mr. Malkiel and his co-authors also found that stocks were less likely to move in lockstep with one another. (Jonathan Clements, WSJ 3-18) Volatility implications In a Winter 2000 Journal of Investing article, Ronald Surz and Mitchell Price calculated returns for portfolios of 15 randomly selected stocks over the 13½ years through June 1999. The authors found that among such randomly selected 15-stock baskets, the typical portfolio strayed as much as 8.1 percentage points a year from the market's return. Thus, if the market was up 11% in a given year, the typical portfolio might gain as much as 19.1% - or as little as 2.9%. What if you are careful to pick a group of 15 well-diversified stocks? The typical tracking error was 5.4 percentage points. Some 15-stock portfolios strayed far more than this amount, while others would track the market more closely. Even if you held 60 stocks and even if you were careful to diversify, the typical tracking error was still 3.5 percentage points a year. (Jonathan Clements, WSJ 3-18) A Comforting stat Over the past 75 years, the worst 30-year stretch for stocks was the three decades through August 1959. How bad was it? According to Chicago's Ibbotson Associates, stocks climbed 7.8% a year, enough to turn $10,000 into $95,000. (Jonathan Clements, WSJ 3-18) Who are the idiots? Commentators talk about the massive selling that's going on. But every share sold is bought by somebody. So ponder this question: Who are the idiots, the buyers - or the sellers? (Jonathan Clements, WSJ 3-18) Earnings forecast Analysts polled by Thomson Financial expect earnings for S&P 500 companies to be down 6% for Q1 from the year-ago period, mostly because of the technology sector. At the beginning of the year, analysts predicted 14.2% growth for the quarter. Looking ahead, they are predicting a 3.8% earnings decline for Q2 and a possible recovery in Q3, with earnings growth of 4%. At the beginning of the year, analysts were expecting 1.8% earnings growth for the technology sector for the quarter. Now they expect earnings for the tech sector to be off 29.8%, according to Thomson Financial. Of the 86 technology companies in the S&P 500, 68 have had downward earnings revisions within the past 30 days, according to Zacks. Some sectors have it even worse. Analysts polled by Thomson Financial expect earnings for basic materials companies such as chemicals, metals, paper to drop 43.8% from the year-ago period. Communications services companies earnings for are expected to be off 32% this quarter. Earnings bright spots: Energy companies are expected to be up 47.4%; Health care is expected to be up 12.3%; and Utilities up 9.9%. (WSJ 3-15) Consumer Reports says ... Japanese automobiles dominated the influential Consumer Reports survey of performance and reliability ratings for 2001 models. On average, new cars from the Big Three developed 23 problems per 100 vehicles in 2000 (there were 105 problems per 100 vehicles in 1980), compared with 11 for Japanese cars (34 in 1980) and 20 for European nameplates (50 in 1980). (WSJ 3-14) Buffett says ... Any true value-conscious purist who insisted on selling stocks whenever the S&P's 500 Index surpassed a `normal' price-earnings multiple of, say, 15 would have cashed out in late 1990 and never gotten back in. Think that through before you vow to avoid stocks from now on except when it appears safe and sensible to be in the market. Warren Buffett offers the sobering thought that bargains are still scarce in the stock market. `The long-term prospect for equities in general is far from exciting,' he says. Notice, though, that Buffett and Berkshire aren't abandoning their investments,' even if most of their stocks are `fully priced.' (Chet Currier, Bloomberg 3-14) Economists vs Strategists Market economists generally are more pessimistic than strategists. Nowhere is the split more dramatic than at Goldman Sachs, where investment strategist Abby Joseph Cohen forecasts of positive 7% earnings growth for the S&P 500. Goldman's U.S. economic group, led by Bill Dudley and including Ed McKelvey and John Youngdahl, sees slightly negative earnings growth for the year for the overall stock market. Christine Callies, chief U.S. investment strategist at Merrill Lynch, sees the S&P earnings rising 3.7% (and the index rising 38%) by year end. Merrill's chief economist, Bruce Steinberg, sees 2001 as a bleak year with earnings declining 2%. One reason economists and strategists disagree is because their audiences tend to be different. Strategists talk to stock-market investors, who want to hear that economy and market are in fine shape. Economists, whose interest-rate outlooks are widely followed, tend to focus on bond investors, who want to know which way interest rates are moving, and can be quite happy in a slowing economy, particularly when inflation isn't a threat. (WSJ 3-13) Household net worth falls Household net worth - total assets such as houses and stocks, minus total liabilities such as mortgages and credit-card debts - declined 2% to $41.4 trillion at the end of 2000 from $42.3 trillion at the end of 1999, according to the Federal Reserve Board's "flow of funds" report released Friday. While not big in percentage terms, the decline stands out as the first since available data begin in 1945. The value of direct household stock holdings sank to $6.6 trillion from $8.75 trillion, and the value of household mutual-fund holdings declined to $3 trillion from $3.1 trillion. Total liabilities rose to $7.6 trillion from $7 trillion, with most of the rise coming in mortgages. (WSJ 3-13) First Fired Black female workers saw their unemployment rate fall to 5.8% in February from January's 7.3%. Some economists had been closely watching that group's typically volatile rate, which tends to rise early in a recession. (WSJ 3-13) A convenient number About 20% of 64 companies that disclosed layoffs between November and February planned to cut exactly 10% of their workers, says Bain & Co., a Boston consulting firm. Such companies simply may pick a convenient number for job cuts instead of scrutinizing their work forces. (WSJ 3-13) Unemployment insurance stats Against last year's average of 5.655 million unemployed, only 2.141 million (38%) were receiving unemployment insurance benefits. Through the 1950s, the fraction of the unemployed receiving benefits averaged about 50%, from 1960-80, about 40%, and since 1980, about 35%. Why? Back in the 50s, unions accounted for about a third of the labor force and kept laid-off workers informed of their eligibility. In the 50s, you could actually qualify if you quit your job. In the 80s, tighten requirements included: (1) If you were already receiving pension and Social Security benefits, you were no longer deemed in need of getting insurance money; (2) You were disqualified if you hadn't earned enough, which meant that many people receiving the minimum wage were shut out. Since the 80s, rising wages have, to a great extent, offset the earnings requirement. (Gene Epstein, Barrons 3-12) The magic box For corporate leaders and government policymakers alike, the stock market over the past 20 years has been a magic box. Pensions too expensive? Set up a 401(k) plan and the market will solve the problem. Middle class can't afford college? Enact Section 529 savings plans and the market will solve the problem. Social Security going broke? Allow private investment accounts and the market will solve the problem. But as the market sputters and struggles to maintain altitude, now is a good time for both investors and policymakers to consider how many of our eggs we want to put in this basket. (Albert Crenshaw, Wash Post 3-11) An indecent proposal? In "Maestro," Bob Woodward tells the story of Greenspan's proposing marriage to news correspondent Andrea Mitchell: He 'actually proposed to Mitchell twice before she accepted, but either she had not understood what he was saying or it had failed to register. His verbal obscurity and caution were so ingrained that Mitchell didn't even know that he had asked her to marry him.' (Dale Dauten, Chic Trib 3-11) Patent losses for pharmaceutcals' From Larry Feinberg, managing partner of Oracle Investment Management, a hedge fund that specializes in health care: Between now and the end of 2004, about 25% of prescription drugs, which represent about $25 billion in revenues, will go off patent in this country. (Generic drug companies like Ivax Pharmaceutical and the Andrex Corporation have the biggest potential drug pipeline.) Counterbalancing that is the fact that we are entering perhaps the most prolific period in history in drug discovery because of biotechnology and the human genome. There are about 450 targetable proteins that can become drugs. The genomics companies are where the greatest potential return is. Companies like Curagen, Myriad Genetics, Incyte and Millennium Pharmaceuticals have lots of intellectual property and are discovering what the proteins do. (Kenneth Gilpin, NY Times 3-11) Fund Update While the S&P index is down 8.5%, including dividends, for the last 12 months (and off 16.5% since its peak on March 24, 2000), the average fund investing in large, fast-growing companies is down 31%, according to Lipper. Mid-cap growth funds are down 40% and small-cap growth funds are down 35% since March 10, 2000. Diversified stock funds are down an average of 9% for the year. Early in 2000, at a time when tech stocks accounted for 30% of the S&P 500 (up from just 13% three years before), funds falling into Morningstar's growth category held more than 40% of their assets in technology on average. The average growth fund still has about 36% of its portfolio in technology. (WSJ 3-9) Market stats Yes, we are in a bear market. No, there's no way of telling how quickly stocks will snap back. But if you're regularly adding to your stock portfolio, you'll pray for a slow recovery. How quickly will stocks bounce back? From the bottom of the last 10 bear markets, it took 19 months, on average, for the S&P 500 to recoup its bear-market losses. That average, however, disguises a huge spread. Following the 1980-82 bear market, investors had to wait just five months to recover their losses, according to the Leuthold Group. But after the 1973-74 bear market hit bottom, it was almost six years before investors got back to even. If you are among those who bet heavily on technology stocks, it could be a long wait. Consider the record of Fidelity Select Technology Portfolio. During the technology boom of the early 1980s, it was possibly the country's hottest fund, skyrocketing 162.1% over the 12 months ended June 1983. But in mid-1983, technology stocks went into rapid reverse, driving the fund down 24.7% over the next 12 months. And the pain didn't stop there. Through the rest of the 1980s, it gained just 0.6% a year, while the S&P 500 climbed at a 20.8% annual clip. (Jonathan Clements, WSJ 3-6) Comparing downturns Investors in the Nasdaq have lost more than $3.6 trillion since the March high of last year, more than the entire stock market was worth at the beginning of 1981. How does this downturn compare with past market tumbles? Consider that just $500 billion was lost during the 1973-1974 bear market period, according to Ned Davis Research, until recently the worst period for stocks in the postwar era. (WSJ 3-5) The $8 Myth The 'It Costs Only $8 to Trade' Myth Exposed: If you buy 100 shares of a $50 stock and later sell it, you might pay just $8 for each trade if you use an Internet brokerage firm. But your round-trip trading cost is far more than $16. How come? Every stock has a buying price and a slightly lower selling price. For our $50 stock, suppose the spread between the two prices is 25 cents. That means that, on a 100-share round-trip trade, you will lose $25 to the trading spread, bringing your total trading cost to $41. (Jonathan Clements, WSJ 3-5) Fund stats Stock mutual funds took in $24.5 billion in net new cash in January, according to ICI. That's a good distance short of the $44 billion hauled in a year earlier. In January 2000, nearly 84% of all the net cash flow into equity funds was placed in growth, aggressive growth and sector funds, the latter almost entirely representing a zeal for technology-only funds. This past January, those three categories represented 68% of new investments. In a dramatic swing in investor preferences, generally conservative growth-and-income funds reeled in more than $4 billion in the latest tally, compared to outflows of $1.2 billion a year earlier. (Michael Santoli, Barrons 3-5) Location-based services Location-based services could be the next big thing in the wireless communications industry. International Data values the segment at nearly $600 million today and projects that it will soar to $5 billion over the course of the next three years. Companies see enormous commercial potential in installing wireless location systems in vehicles, handheld computers, cell phones, and even watchbands. Restaurants hope to use the technology to alert cell phone users when they approach that there are available tables; stores plan to alert cell phone users of sales; and hotels want to inform people that they have vacancies. A company in Florida wants to use the technology to help parents keep track of their children. Some researchers are ready to imbed the technology, in the form of a chip, beneath the skin. (NY Times 3-4) Boomers could reallocate Baby boomers - the 77 million Americans born from 1946 to 1964 - represent about $3 trillion in invested assets, enough to make or break the U.S. stock market in the years ahead. 'Very small percentage changes in the asset allocation of individual investor portfolios have a very large impact on the market,' said Mark Harbour, area director of personal financial counseling at Ernst & Young. If the baby boomers say, 'Now that I'm within striking distance of retirement, I want to squeeze back my allocation to stocks,' that is going to result in a fairly substantial reduction of cash into the equity markets. That has enormous implications. (Kathy Kristof, LA Times 3-4) When Fed cuts, what rises? Between 1980 to 1998, retail and technology stocks rose an average of 26% in the year after an initial (Fed) rate cut; financial stocks gained only 15%, according to a study by Ned Davis Research. Surprising? It shouldn't be. Rate cuts make it easier for companies to pay for expansion, which in turn boosts the economy and the outlook for growth stocks. (Gerri Willis, NYT 2-25) Home Page Previous Factoid Top Sites |