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The Wall Street Journal tried to resolve the apparent paradox between a plunging stock market and the frenetic buying of homes. After all, according to the standard theory of the wealth effect, when your portfolio shrivels, so should your spending on this pricy consumer durable. But no, said the Journal, what's really been occurring is a portfolio shift: After having been burned in the market for so long, investors were channeling their funds into real estate. I for one have been intrigued by the theory of the "perverse wealth effect," which says that the bull market actually put a brake on consumer spending by soaking up excess funds. So instead of acquiring that Lexus, you bought Yahoo, for the greatest trip of all. And now that those joy rides are over, funds are freed up for the purchase of homes. Trouble is, the evidence we have belies the Journal's thesis. It appears that the real volume in home-buying has been coming not from the high end, where the disgruntled investor presumably resides, but from the middle levels, where the working stiffs can be found. The principal reason for the strength in home sales stems not from Wall Street but from Main Street: The combination of lower mortgage interest rates and rising incomes pushed the standard "housing affordability ratio" back toward record levels. The National Association of Realtors calculates housing affordability as the ratio of median household income - income in the middle - to what it calls "qualifying income." To calculate qualifying income, you start with the monthly principal and interest payment on a 30-year mortgage that would be required to purchase a median priced home, assuming you financed 80% of the purchase price. You then multiply that monthly sum by 12 in order to get the yearly payment required and, finally, quadruple it to get qualifying income. As of February (the most recent data), qualifying income ran $36,096, while actual median income stood at $52,055, for a housing affordability ratio of 144.2. That 144.2 was about in line with the 25-year highs of late '98 and early '99. Ergo, home sales have been hitting record levels, not as the perverse result of the bear market in equities, but mainly because of the bull market in median income and a mortgage interest rate of 7.2%, down from 8.1% in the first quarter of last year. Over the past several weeks, mortgage interest rates have risen a bit, while house prices are up by even more. So expect both the housing affordability ratio and home sales to run at lower-than- record levels as of April and May, but to still look respectably strong.
The credit markets, having been burned, now shun many borrowers that need money the most. Young telecommunications companies could easily borrow a year ago, but now the banks and bond buyers are not interested. So the companies do not have money to stay in business. That means the lower rates won't help that part of the economy. Another part that still can borrow money doesn't want to. The boom that has ended produced huge overinvestment in some industries, as companies like Cisco learned too late. No interest rate is low enough to persuade a company to build a plant to produce products it cannot sell.
Consumer-products makers churned out more than 31,000 new products in the U.S. last year, including multiple varieties of everything from tomato sauce to garbage bags. The typical grocer now stocks 40,000 items, double the number of a few years ago. The result: Kellogg Eggo waffles in 16 flavors, nine varieties of Kleenex tissue, and Glad garbage bags that offer twist, draw-string or handle ties. That more-is-better approach can backfire, warns Mark Lepper, the chairman of Stanford University's psychology department, who studies how variety affects the odds that people actually buy. Mr. Lepper set up a table with 30 jars of jam and gave shoppers who stopped for a sample a discount coupon for their next jam purchase. He also had a table with six jams. He counted the coupons to see which group was more likely to buy. Of the shoppers who faced 30 choices, only 3% actually bought jam; of the shoppers who had six choices, 30% purchased jam.
It's a basic rule of money management that such disappointments are never the market's fault. In practice as well as theory, stocks have long since established that they can drop sharply whenever the mood strikes them. Money you need for some obligation such as a tuition payment in the next six months or a year doesn't belong there. Longer-term investments, with objectives of three to five years or more, are a different proposition. Even in long-term investing, there's always the chance the stock market will languish for an extended period. A program for retirement 30 years from now promises to be a grueling exercise if you plan to key it off every shift that comes along in market expectations about corporate earnings, Fed policy and world politics. Those imponderables make great excuses to postpone putting money into stocks or stock funds. Then, when it comes time to retire, you find yourself having missed the return that stocks would have paid you, taking both dividends and price appreciation into account. To stay out of trouble, better to invest on the basis of your own aims instead of the market's whims.
CPI rose 0.1% in March, held back by a 2.1% decline in energy prices. Given the surge in gasoline prices this month, energy prices aren't likely to be kept in the tank in the April CPI report. Excluding food and energy, the CPI rose 0.2% last month, holding the year-over-year increase steady at a four-year high of 2.7%. The price of labor-intensive services excluding energy rose an annualized 4.2% in Q1, the biggest three-month increase in six years. The notable villains were shelter (up 4.7%) and medical care (up 6.2%). Why are prices still rising if demand is weak and the labor market sputtering? Inflation is a lagging indicator. In many cases, the core CPI doesn't peak until six months into the recession, Willmore says. It peaks after the business cycle turns down and troughs after the economy has already started to turn up. And it doesn't look as if this period of slow or no growth will produce much `opportunistic disinflation,' which, as outlined in a 1997 paper by Federal Reserve economists Antulio Bomfim and Glenn Rudebusch, is a strategy of `waiting for unforeseen shocks to reduce inflation' rather than taking deliberate actions to bring it down. But what if the Fed is unwittingly doing something to prop it up? Specifically, what if the Fed is monetizing higher energy prices - printing enough money to allow energy prices to remain high, and to prevent other prices from falling? M2 rose at an annualized 13.25% pace in the three months ended March. (From Baum of 4-18)`If the economy goes into recession, politically Greenspan can't walk around and say, `The good news is, there's no inflation,'' says Jim Bianco, president of Bianco Research. `He's determined to get things moving even if it risks inflation because that's not as bad personally or politically.'
While it isn't news that companies can't keep growing rapidly forever, the research gives investors an idea of when and why the stalls happen. The study found that once a company hits about $20 billion in revenue, the slowdown occurs. The stall level varies a bit, and recently more companies have pushed the $30 billion revenue level before hitting the wall. But when growth resumes, the study says, more than 80% of these companies grow in the low single digits or less for the next decade - certainly not growth rates that would get investors excited. "There seems to be this upper boundary of how big a company can get before growth stalls out," says Derek van Bever, chief research officer at the Corporate Executive Board. The researchers focused on revenue growth, which for these companies averaged better than 20% a year during the good times, because they consider it the most important driver of long-term performance. Without growing revenue, the researchers argue, earnings will eventually stall and a company's stock market value will inevitably suffer. The study also found that companies hit their plateau after their period of fastest growth, the time when investors had the greatest expectations for them. But those investors fled when the companies shifted to neutral. According to the study, 69% of the stalled companies ultimately lost more than half their market values. "What's interesting is how permanent the effects of the stall are," says Mr. van Bever. "We never found an instance where a high-growth company stalled to low or no growth then got back up again to that high-growth trajectory." What companies are at that $20 billion to $30 billion threshold? Many are the very names that investors still can't get off their wish lists. Among them, according to Merrill: Intel, which earned $33.7 billion in its most recent fiscal year; Dell, $30 billion; Ericsson, $29.7 billion; Nortel Networks, $28.5 billion; Microsoft, $23.8 billion; Cisco, $21.5 billion and Sun Microsystems, $19.2 billion. In fact, the slowdown is already evident among some of these big companies. Revenue at Intel grew by just 15% in 2000, and 16% at Ericsson, while it soared 55% for Cisco and 44% for Sun Microsystems. The last time investors were so absorbed by a narrow slice of big companies was the Nifty 50 era of the late 1960s and early 1970s, when big, fast-growing companies such as Gillette, Minnesota Mining & Manufacturing and McDonald's soared. The brutal 1973-74 bear market put an end to those gains, and the stock market didn't permanently regain its peak until 1982. Many investors stubbornly stood vigil over the Nifty 50 stocks as they lay comatose for the decade, holding back the major market indexes. But folks who looked elsewhere made a killing on cheap, out-of-favor "value" stocks and smaller companies. Related: Another Study - G Morgenson, NY Times 4-24 Steven Milunovich, technology strategist at Merrill Lynch, says he believes that it is especially important for investors to remember that yesterday's growth stocks more often than not will falter tomorrow. For instance, analysts expect 85% of (tech) companies to increase their sales by a compounded rate of 20% or more during the next three years. But since 1981, only 36% of technology companies have achieved such growth rates for any consecutive three-year period. Milunovich's skepticism is based at least in part on a study of revenue growth at technology companies going back 20 years. The results show how hard it is to maintain high growth rates for extended periods and indicate that it is difficult for tech companies to produce outsized growth even in nonconsecutive years. Here are the numbers: Of the 1,800 technology companies in the study, only half were able to generate 30% compound revenue growth for any three of the years in the study. Only 28% could manage such growth for any five years, and just 7% for 10 years. As a result, Mr. Milunovich said investors should not rush to buy technology stocks based largely on analysts' rosy growth projections.
More broadly, Yamada sees several foreboding macroeconomic trends. Among them are: the continuing high trading range of the dollar; the continuing "flight" of investors to cash or bonds; the continuing high cost of oil; and a "breakdown" in the Morgan Stanley World Index after an eight-year uptrend. As a result, a market top once predicted for the baby-boomer retirement period of 2004 to 2010 may now be upon us. "The bear does not wait to be invited to tea," she said.
The only plausible explanation still standing: With so much economic anxiety, the U.S. remains the safest, most promising place to put money. A strong dollar has advantages, especially for a country that relies as heavily on foreign money as the U.S. does. But right now, it poses two risks. One, it crimps exports. The dollar's rise may be blunting the impact of Fed interest-rate cuts; lower rates usually work by making loans cheaper, by boosting stock prices and by weakening the dollar. Two, the dollar is looking suspiciously like the Nasdaq Composite Index did a year ago -- something that rises so far so fast that the only issue is when it will come down and how fast. The higher it goes, the scarier. Related: More Explanations - Hilsenrath & Sesit WSJ 4-9 Lower rates could be bad for the dollar, since they mean lower fixed-income returns for global investors. But the flip side of the Fed's aggressiveness is that rate cutting may allow the U.S. to emerge from its economic slump more quickly and in better shape than other countries, thus making dollar-denominated assets more attractive. The last time that lots of foreign currencies were weakening against the dollar at the same time was 1997, during the Asian financial crisis. By late 1998, in the face of a global meltdown, the Fed began cutting interest rates to avert a world-wide recession. By 1999, the strong buck - and a raging U.S. stock market - led to an import boom as U.S. consumers soaked up foreign-made products, helping to steer emerging-market economies out of financial crisis and recession. This time around, however, economists say the world shouldn't expect the U.S. to play that role. "America's role as a global savior is finished," says Stephen Roach, director of global economic analysis for Morgan Stanley. Mr. Roach, an outspoken bear, notes that household debt - in the form of mortgages, credit cards and home-equity loans - now sits at about 117% of disposable incomes, a record level. Subtract about $5 trillion in lost stock-market wealth and the payroll jobs eliminated in March, and he says this is not an environment in which U.S. consumers could play the economic engine that they did after the Asian crisis. In the end, all these trends mean "the world is likely to go through a prolonged period - perhaps as much as two years - in which growth is significantly weaker than it was in the second half of the 1990s, when it averaged close to 3.5%," says John Butler, chief market strategist at Dresdner Bank in Frankfurt. How Fund Categories Fared WSJ 4-9-2001
To gauge whether you suffer from myopic risk aversion, consider whether you would be willing to play a game in which you win $200 if a coin flip comes up heads and lose $100 if it comes up tails. If you are like most everyone else, you would decline because you would feel the $100 loss more than the $200 gain. The key to being willing to play is focusing on all the flips as one game rather than as 100 individual games. The coin-flip game is not unlike investing in stocks. The key to stock investing is to focus on your entire portfolio over the long term. If you focus on your individual holdings too often, you will not want to play the game. To test whether it is an accurate description of investor behavior, they constructed an elaborate simulation of the decisions that one must make over a lifetime about one's relative allocation to stocks and cash. One set of subjects in their simulation could check how they were doing every month. Another group did so every year, and a third group only once every five years. Just as the theory predicted, investors who looked at their performance most often had the lowest average equity exposure. Particularly noteworthy was the fact that these frequent checkers not only reduced their stock exposure immediately after a loss, but also had lower average equity exposures during all subsequent months. Unfortunately, because of the Internet, myopic risk aversion is likely to become even more common. A survey conducted in January by Intuit/Quicken.com found that 91% of online investors checked their portfolios' worth more than once a month. In fact, 13% checked it more than once a day.
"If the duration is 5," said Stephen Kane (portfolio manager at Metropolitan West, a Los Angeles-based fund specializing in fixed-income funds), "the price of the fund goes down 5 percent for every 1 percentage-point increase in interest rates." If it's 10, it will go down 10 percent for every 1 percentage-point increase in interest rates. If interest rates go down, the price of the fund goes up in roughly similar - though not exact - proportions. Consider some real examples to see the range between short term and long term. According to figures from Morningstar, the average duration of the Fidelity Short-Term bond fund is 1.7. The American Century Intermediate bond fund's average duration is 5. The Pimco Long-Term U.S. government bond fund's duration is 10.9. How might that translate in terms of changes in net asset values? Since 1993, the short-term fund's net asset value has ranged from about $8.43 to $9.50 - a difference of roughly 13% between high and low. During the same period, the range of the intermediate-term fund was $9.76 to about $11.10 -- a difference of about 14%. The long-term fund, by contrast, had a low of $9.19 and a high of $12.42 - a difference of about 35%. As with different types of equities, an investor needs to gauge his or her tolerance for swings in value. You may get better returns from a long-term fund overall. But you have to be prepared for more volatility, for the possibility that when you need your money, there may be less than you put in. When you buy an investment-grade bond and hold to maturity, you're buying into stability. When you purchase a bond mutual fund, you're buying into the bond market. That's anything but stable.
Of the 63 tech stocks that fell below $10 in 1987, only three rose above $15 in the following year, the study said. Of the 371 single-digit tech shares of 1998, 20 were above $15 in the following year. Conservative investors tend to shun low-priced stocks as too speculative, and that Wall Street analysts often stop following them, further reducing their visibility to mainstream investors. Some tech powerhouses, such as Cisco Systems, Oracle and Sun Microsystems, now are approaching the $10 level. But those that do rebound to $15 or higher tend to produce spectacular results. On average, the winners produced total returns from their lows of 189%. Of the 84 rebounders Merrill identified in its study, 23 were acquired, providing total returns of 626%. Related: More Explanations - Gretchen Morgenson, NY Times 4-8 As Mr. Watts pointed out, there are several reasons for the '$10 Hurdle'. First, many professional money managers, like those in charge of mutual fund portfolios, are barred by their firms' bylaws from buying stocks under $10. That keeps a powerful group of buyers out of these shares. And for many companies with low-priced stocks, the mere fact that their market value is low makes it difficult to tap the stock market for money. That is because investment bankers find it much easier to raise money for a company whose stock has rocketed in the recent past. But the sad fact is that many of these companies have so little cash on hand to run their businesses that if the markets are closed to them, they can very easily fail. So far this year, the recovery rate is grim indeed. Of the 437 companies that became one-digit wonders in 2000, only five have come back in 2001. That is 1.1%. Mr. Watts said this may be a result of too many untested companies being brought to market during the mania. "By electing to invest in companies at much earlier venture stages, public investors have started to experience failure rates closer to those of the venture capital community," he said. Companies face the best odds of rebounding during periods just after major downturns in the overall market, Mr. Watts said, and there is no question that the market has fallen sharply in recent months. After the 1990 recession, for example, 9% of low-priced stocks recovered substantially; following the Russian debt crisis in the autumn of 1998, 5.4% of such shares rebounded. But Mr. Watts added that the 1999 surge in the Nasdaq, when 11.3% of low- priced stocks recovered, has distorted the historical data. Excluding that explosion, which carried many weak companies along with the strong, the average recovery rate for the entire 15-year period would have been 2.9%, not 3.4%.
A recent European Union directive on e-commerce says that rules of the country in which the vendor is based apply, not rules of the customer's country. That will free British, French and U.S. online retailers to offer discounts to consumers that German retailers can't match, so defenders of the old laws are surrendering. The two old laws are vestiges of a not-yet-bygone era in which Germany subordinated interests of consumers to interests of workers and producers, a contrast with the U.S. where shopping is seen as a basic human right. Existing laws still limit clearance sales to twice a year plus anniversaries of a business's birth that are evenly divisible by 25.
The Dow dropped 8.4%, and wasn't in the top 50 quarterly declines overall for the blue-chip index, but it was the worst January-March quarter since 1978. The S&P 500 fell 12% in the quarter, more than it fell in all of last year. Overall, 328 S&P stocks fell in the first quarter, while only 171 rose. [From John Dorfman, Bloomberg 4-3: 326 up, 1 unchanged and 173 down] Just the Facts GDP update Fear mongers got pummeled a bit by Friday's advance report from the Bureau of Economic Analysis, saying GDP grew at an annual rate of 2.0% in Q1. The numbers confirmed that business investment is out of step with consumer spending and will soon need to play catch-up, assuming it hasn't begun to do so already. Consumption increased 3.1%, while capital investment on plant and equipment rose by only 1.1%. Business inventories were actually reduced by $7.1 billion, a cut that subtracted 2.5 percentage points from Q1 GDP growth. So, with the consumer doing all the heavy lifting, business can't be far behind. It's a pretty safe bet that, as a direct result of the step-up in business spending, growth in GDP will accelerate over the quarters to come. (Gene Epstein, Barrons 4-30) Bear facts During two of the stock market's longest nightmares, 1929-54 and 1966-82, the Dow went nowhere. It wasn't until late 1954 that the industrial average finally got back to 1929's peak. Meanwhile, in mid-1982, the industrial average was still 22% below its early 1966 high. These were rough spells. But they weren't nearly as rough as the industrial average's stagnant performance suggests. For starters, when the bears dwell on the industrials, they neglect to account for dividends. According to Chicago's Ibbotson Associates, over the 1929-54 stretch, the S&P 500 gained an average of 6.2% a year, once you include dividends. Meanwhile, adding dividends boosts the S&P 500's return to 5.1% a year for the 1966-82 period. Moreover, those who diversified beyond blue-chip stocks may have fared even better. Smaller U.S. stocks outpaced larger companies during both stretches. (Jonathan Clements, WSJ 4-24) Cyberchondria Overwhelming amounts of online medical information are leading researchers to coin a new psychological classification called "cyberchondria" that describes people who obsessively misdiagnose themselves using the Web. Like hypochondriacs constantly imagining they have various fatal illnesses, cyberchondriacs declare themselves outrageously sick after reading medical material on the Web. (New Zealand Herald, 4-28 via EduPage) Radio silence Commercial radio stations are now virtually silent on the Web because of a dispute over extra fees due the actors in advertisements. The American Federation of Television and Radio Artists, an actors union, appealed to advertising firms to pay special fees for ads broadcast over different media, as stipulated in workers' contracts. Advertising agencies, in turn, advised Webcasting stations to cease broadcasting, as Clear Channel Communications, the nation's leading radio network, did on Apr. 10. Mathis Dunn of the AFTRA claims that his association has no responsibility for what amounts to a business decision on the part of the radio stations and their advertisers. In the meantime, radio stations are looking for technology to replace localized ads with ads targeted at the Web audience. (PC World.com, 4-19) Costly errors The GAO estimates that on about 510,000 returns for 1998, taxpayers didn't itemize, even though mortgage interest payments alone exceeded their standard deductions. The resulting overpayments may have totaled $311 million, or $610 per return. Another common error: overpaying Social Security taxes. This occurs for some workers with two or more jobs, since each employer typically must withhold Social Security taxes from an employee's wages up to a certain amount. Taxpayers who moonlight often have too much withheld and must remember to take a credit for the excess amount on their return. (WSJ 4-18) No deduction Section 212(3) of the Internal Revenue Code provides that in the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in connection with the determination, collection, or refund of any tax. So can an individual deduct a fee charged by a credit card company for using a credit card to pay the individual's personal income taxes due? The IRS has concluded that no deduction is allowed under section 212(3); rather, the fee should be considered as a nondeductible personal expense under section 262. (WSJ 4-18) Counting the losses According to Morningstar, U.S. stock funds lost an average 16.9% over the 12 months through March 31, compared with a 24.7% drubbing for the Wilshire 5000 index of most regularly traded U.S. stocks. But if you are interested in how badly investors have been hurt, that average decline is misleading, because it gives equal weight to all funds, no matter what their size. What really counts is how the largest stock funds performed. With that in mind, I asked Morningstar to calculate the return for the 50 largest U.S. stock funds, based on fund assets as of the March 2000 market top. During the past year, these 50 giant funds, which account for 45.3% of U.S. stock-fund assets, lost an average 27.4%, compared with the Wilshire 5000's 24.7% decline. In other words, fund investors pretty much matched the market before costs, and lost somewhat more once investment costs are figured in. (Jonathan Clements, WSJ 4-17) Bear facts At other major bear-market bottoms, the Dow Industrials have tended to sell at 10 times earnings and yield 6%. We saw a 10% yield in 1932, but that was a historic extreme. In 1949, in 1974 and again in 1982, the yield at the bottom was about 6%. Assuming current dividends on the DJIA components hold up, which they probably won't, the index could fall to between 3000 and 4000. Bear markets usually last about 25%-33% as long as the preceding bull market. Assuming the recent bull market ran from 1982 to 1999; we're talking 17-18 years. By this measure, I expect the decline to last at least four or five years, until 2003 or 2005. One possible difference this time is the speed at which Nasdaq has plunged. If the Dow picks up momentum on the downside, its bottom could arrive sooner than 2003. At its recent 1166, the S&P yielded about 1.2%. Were its yield to quadruple to 4.8% - and it's been higher than that in the past - the S&P would drop to about 300. (From Richard Russell of Dow Theory Letters, Barrons 4-16) A simple idea In my experience, the single hardest concept to get across to investors is the fact that there are tidal movements in the market. The bull tide takes stocks from being undervalued to being overvalued. Then the bear tide comes in, corrects the bull movement, and takes stocks back to undervalued again. Why can't people accept this? Probably because the idea is too simple, too basic, too theoretical. Oldtimers have seen extreme undervaluations before, and can envision them returning. However, the vast majority of investors and analysts don't relate to extreme undervaluations. This phenomenon isn't new. Way back at the turn of the 20th century, Charles Dow wrote that the most difficult concept to teach people is the inevitability of change. Sometimes the simplest ideas are the hardest to get across. (From Richard Russell of Dow Theory Letters, Barrons 4-16) Tea leaf reading One way to read the rally's future is to look at what has been fueling it. The current rally seems to have two main drivers. A large number of market analysts have been telling clients that stocks have fallen so far that they are looking cheap in the short term, and are due to bounce. As the rally progresses, and as stocks get less cheap, investors will be tempted to take profits, which would likely bring stocks' climb to an end. Keeping the rally going will require more long-lasting fuel. So hopes have spread that the market may get some juice from its second basic driver: a growing belief that corporate performance is reaching a nadir, and that the economy and corporate results could begin to improve some time in the second half of the year. If that is true, investors want to get out in front of the trend and buy stocks now. (E.S. Browning, WSJ 4-16) Good valuations James Paulsen, chief investment officer at Wells Capital Management, finds an encouraging aspect to the stock market. With the S&P down 22.5% from its March 2000 peak and long- term bond yields down two percentage points, this makes stocks about 40 percent cheaper relative to interest rates than at the beginning of 2000. He called this a "record-setting postwar revaluation" that could imply higher prices. (Robert Hershey, NYT 4-15) The big tease Jay Weinstein, president of Oak Forest Investment Management, noted that nine of the 10 top daily Nasdaq percentage-point gains have come in the past 12 months, which happen to be the worst 12 months in the Nasdaq's history. This inspired me to check the record books for the Dow Jones industrial average. Sure enough, eight of the Dow's "days with largest percentage gain" have also come during bear markets. The big bear, it turns out, is a big tease. So we shouldn't let these one- or two-day rallies get our hopes up. (Fred Barbash, Wash Post 4-15) Mutual fund stats Of 219 fund funds registered in the first three months of the year, 20% focus on a single sector of the market, 15% on international stocks and 11% on fixed-income securities, said T. Neil Bathon, president of the Financial Research Corporation. For managers, names have become a source of agony since the SEC decreed that by the end of July next year, 80% of a fund's holdings must fit its name. In January and February, 153 funds changed names, according to Lipper. While many of the name changes reflected mergers, others indicated shifts in strategy or marketing. Last year, even as $400 billion of net new money flowed into mutual funds, 225 funds liquidated, the most ever, according to Thomson Financial. (Michael Brick, NYT 4-15) A downside to 'indexing' "Index funds have to buy more of a stock the more expensive it gets," says Managers like Duncan Richardson of the Eaton Vance Tax-Managed Growth. "It's a subtle form of momentum investing." Price risk, he said, "is indexing's fatal flaw." Richardson says that indexing has another weakness: lack of diversification. At one point, the top 10 stocks accounted for 28% of the S&P index's value, he said. While some actively managed funds are equally concentrated, such weighting in index funds is at odds with the perception that they have a broad range of holdings that reduce risk. (Joanne Legomsky, NYT 4-15) Bad omen in the stats Richard Bernstein, chief quantitative strategist for Merrill Lynch, writes "Our indicators still suggest a profits recession is imminent, but the S&P 500's earnings growth rate still remains positive. . . . Just as a reminder, since 1970, the shortest period of decelerating profits in the U.S. was six quarters. The longest was 14 quarters. The average length is eight-and-a-half quarters. We have had three quarters so far in this cycle." (Fred Barbash, WashPost 4-15)Bond holders losing safety In deciding your next move, be aware that the Treasury and investment-grade bond markets have lately been led by the stock market, not by the economy. Usually, good economic news undermines bond prices. Now, rising stock prices do that. And when stocks have plunged, bonds have rallied. The stock market's effect on Treasuries and investment-grade corporate bonds puts more pressure on bond investors to get back into equities, so they won't miss the rally while their "safer" investment is losing value. (Jonathan Fuerbringer, NY Times 4-15) Bond holders, beware While the average stock mutual fund has lost 15.5% so far this year, the average bond fund has gained 1.9%. But if the Fed keeps lowering short-term rates and Congress chimes in with a tax cut, bond traders could turn surly too, fearing that all that stimulus might lead to a flare-up of inflation. Then everybody, in stocks or bonds, would be unhappy. Such a turn of events isn't so hard to imagine. Never underestimate people's capacity to find new causes for gloom when the markets aren't doing well. (Chet Currier, Bloomberg 4-15) Pennies from a bottom From David Sowerby, chief market analyst and portfolio manager at Loomis Sayles: Pound for pound, this bear market is literally identical to nearly every bear market of the last 50 years. The average bear market has lasted about 380 days and seen the Standard & Poor's 500 average decline 27% from its peak to its trough. As of last Wednesday, it has been 380 days since the S&P peaked, and the index is 28% down from its top. Given the low inflation and lower interest rate environment, that tells me we have to be pennies away from the bottom in the market. Three things need to happen for the stock market to recover. The Fed needs to cut interest rates further. So do central banks around the world. And we need tax cuts. If two out of those three items get delayed or diluted, the rebound in the market will be delayed by not just a quarter, but perhaps longer. (Kenneth Gilpin, NYT 4-8) GMO The non-GMO ("genetically modified organisms") label is one of the hottest trends in food marketing. Virtually unknown in the U.S. as recently as three years ago, the label now pops up in nearly every aisle of the supermarket, on hundreds of products - a $7.8 billion market that is increasing at eight times the rate of the packaged food business as a whole. In late January, a national telephone poll funded by the Pew Charitable Trusts found that 75% of respondents wanted to know about the presence of genetically modified ingredients in food, and 58% opposed such ingredients. No government agency or trade group verifies the accuracy of non-GMO labels. The U.S. FDA has approved the use of most genetically modified crops in human food, and these approved ingredients have not been shown to cause health problems. (WSJ 4-5) Why we 'modify' Monsanto five years ago introduced a soybean implanted with a gene from a soil microorganism to make the plant invulnerable to the company's Roundup weedkiller. The altered soybeans save farmers a lot of time by making it possible for them to weed fields chemically without harming their crop. As a result, half of the soybeans grown in the U.S. last year contained the Monsanto gene. (WSJ 4-5) S&P 500 stats GE has the largest weighting and accounts for 4.0% of the S&P 500. Second is Microsoft at 2.8%. Third Exxon Mobil 2.7%. Fourth Pfizer at 2.5%. Fifth Wal-Mart 2.1%. Technology stocks were the worst performers in the S&P in Q1, down an average of 25%. Health-care stocks were down 15% and capital-goods stocks were down 14%. Of the 11 sectors in the S&P, the only one that was up was consumer cyclicals, which gained 0.6%. (John Dorfman, Bloomberg 4-3) Prolonged downtourn? Karina Mayer, a managing director of ISI, theorizes that the current stock-market downturn may prove to be more prolonged and intractable than most other post-World War II bear markets. For this downcycle is being driven by a glut of productive capacity and resulting steep decline in capital spending rather than the typical inventory excesses of past contractions. It's far quicker and easier to work off inventory gluts than excess capacity. Falling interest rates don't always revivify stock prices or even economies. (Barrons 4-2) Best books What are the best books on investing? Accroding to Dave Gardner and Tom Gardner of Motley Fool: "One Up on Wall Street" by Peter Lynch; "The Intelligent Investor" by Benjamin Graham; "Beating the Street" by Peter Lynch; "Common Stocks and Uncommon Profits" by Philip Fisher; "The Gorilla Game" by Geoffrey Moore; and "Stocks for the Long Run" by Jeremy Siegel (AJC 4-1) Best barometer When looking at specific companies to figure out whether the nation's economy is growing or shrinking, Detroit still offers the best approach. And the auto industry is showing surprising signs of short-term health. GM and Ford each still account for more than a full percentage point of the GDP, while Microsoft is about one-sixth of 1 percent. (NYT 4-1) [WSJ 4-16: Since 1990, information-technology-producing industries' share of GDP has risen to 8.3% from 5.8%, the Commerce Department estimates. Autos, by contrast, contribute a little more than 3%.] Markets and post-election years From the Stock Trader's Almanac, the years immediately after presidential elections have been by far the worst for the stock market, with a cumulative gain of just 75% going back to 1832. During those post-election years, the market has finished down 22 times and up only 19 times. Pre-election years were the best, soaring 407% over all and up on 30 occasions, down on 11. Election years were up 296%, with gaining years outnumbering losers 29 to 13. Midterm election years were up 177% over all, with positive years ahead of negative, 25 to 17. (Robert Hershey, NYT 4-1)Quick Stats Computer prices fell by about 40% on an annualized basis in the first quarter of this year, the steepest slide since the BLS began tracking them in 1991. (WSJ 4-30) Ken Matheny, senior economist at Macroeconomic Advisers, estimates that corporate customers had between $60 billion and $90 billion of excess computer hardware, software and communications equipment as of December. Richard Berner, chief U.S. economist at MSDW, believes the excess high-tech capital stock could be $100 billion. Private firms invested about $677 billion last year on computer hardware, software and other information-processing equipment, according to the Bureau of Economic Analysis. (WSJ 4-30) The Investor Responsibility Research Center in Washington reported that the number of shareholder proposals related to executive pay is up 24% this year. The proposals include capping executive pay, limiting golden parachutes and barring the repricing of options. Shareholder opposition to companies' stock option plans that dilute existing owners' stakes is also rising. Back in 1988, only 8.5% of the votes opposed stock option plans. Last year, opposition had risen to 21.8%. (Gretchen Morgenson, NY Times 4-29) While 52% of middle managers say poor performers aren't tolerated [why is that figure so low?], only 40% to 45% of other workers agree, says Hay Group Inc., a Philadelphia consulting firm that asked workers in 189 companies over four years. (WSJ 4-24) The mutual fund industry spent 22% more on advertising last year than in 1999, plunking down a record $515 million, according to the Financial Research Corporation. And it likely worked. "The increase in advertising may have assisted the industry in experiencing a record year for net sales of equity funds in 2000, during a less-than-hospitable market environment that saw equity indexes with negative returns for the first time in 10 years," Financial Research said. Nearly two-thirds of the ad spending was on TV. (NYT 4-22) If history is any guide, battered mutual funds will be coping with 'outflows' quite a while beyond the bear market's official end. After the worst period for the stock market in the last 50 years ended in late 1974, according to ICI data, the number of shareholder accounts in funds kept declining each year until 1982. (Chet Currier, Bloomberg 4-17) About 78% of 1,627 organizations surveyed by the American Management Association monitor worker communications and performance. About 63% monitor Internet access, and 47% store and review e-mail. (WSJ 4-17) From Jonathan Joseph, an analyst at Salomon Smith Barney: The value of semiconductor electronics in an auto today is higher than the steel. (Kenneth Gilpin, NYT 4-15) Index funds have grown to almost 6% of the money invested in equity mutual funds, or $246.2 billion, according to Morningstar. (Joanne Legomsky, NYT 4-15) [From Karen Damato, WSJ 4-9: About 12% of the money invested in diversified U.S. stock funds sits in index portfolios, according to Lipper, and among pension funds, indexing accounts for perhaps 25% or 30% of assets, according to estimates. In all, more than $1.5 trillion was invested in stock-index mutual funds and other indexed portfolios in the U.S. at year end, according to Pensions & Investments newspaper.] The IRS acknowledges continued problems with its phone service. Through March 9, only about 65% of the taxpayers who wanted to talk to an IRS customer service representative got through, up only slightly from 62% a year earlier. WSJ 4-11) Home Page Previous Factoid Top Sites |
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