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Key signs do point to just such a recovery. Growth in Q2 consumer spending moderated to 2.1% from Q1's 3.0%. But, the consumer still has plenty of financial firepower left, with incentive to use it. The key to consumer spending is wage and salary income. Q2 wage and salary income ran 6.3% above a year ago, or 4.1% in inflation-adjusted terms. With a jobless rate around 4.5%, the labor market is still one of the tightest in years. And as for inventories, shipments of goods have lagged far behind the level of sales on the retail and wholesale level. When that gap widens, inventory-building can't be far behind. Also, capital investment should stop hemorrhaging and begin to contribute a bit to GDP, given that the NAPM index's moving back to neutral, the relative cost of labor still running high, and capacity utilization in the service sector still looking tight. Reasons for Optimism - Gene Epstein 7-23 The economy appears to have survived this mini-cycle in relatively good shape and appears ready to lurch forward. The inventory contraction appears to be ending, and while capital investment will show a decline for the second quarter, all key signs (e.g., an upturn in orders of nondefense capital goods) show that it, too, is in the process of recovering. The poor earnings outlook will have close to a negligible effect on business investment. In a competitive marketplace, business must invest in response to an increase in the demand for its product. Alan Greenspan will help see to that. Index vs Active Managed Funds Jonathan Clements, WSJ 7-29 At year-end 2000, less than 10% of stock mutual-fund assets were in index funds. True, that is up from 2% a decade earlier. Still, given indexing's success, it is amazing the number isn't higher.
Over the same stretch, junk bonds had an even rougher time, suffering three calendar-year losses, while foreign bonds got slapped with four losing years. Still, if you had combined an 80% stake in intermediate governments with 10% positions in junk and foreign bonds, you would have been pleasantly surprised. That three-sector portfolio, like intermediate-term government bonds, lost money in 1994 and 1999, but its losses were smaller. The reason: While the three sectors each had their rough moments, those moments didn't always coincide, and thus the diversification tended to smooth out performance. Moreover, despite the reduced volatility, the portfolio had a slightly higher return, gaining 8.4% a year. Investors don't perceive the need to diversify with bonds," says T. Rowe Price Vice President Steven Norwitz. "But, in fact, diversification may be more worthwhile in the bond area. The correlation between high-quality bonds and junk bonds tends to be lower than the correlation between different sectors of the U.S. stock market." The correlation between U.S. and foreign bonds is also low. Much of this comes from currency swings, and thus you will likely get more diversification benefit. As you build your diversified bond portfolio, also consider adding some inflation-indexed Treasury bonds (TIPSs). Series I bonds could be a great addition to your portfolio. Like inflation-indexed Treasurys, these bonds provide a guaranteed return above inflation. Currently, Series I bonds pay three percentage points a year more than inflation. That is slightly less than TIPS. Moreover, if you hold I bonds for less than five years, you have to pay a penalty equal to three months' earnings. But, I bonds have a few key advantages. The interest grows tax-deferred until the bonds are sold. By contrast, with inflation-indexed Treasury bonds, you have to pay taxes each year on both the interest you receive and the step-up in value as a result of inflation.
While this spreading of risk clearly has been good for banks, it is potentially controversial because some of the lending downside has been pushed onto individual investors. Many of these people, who have made what they believe to be safe investments, don't realize they could lose money if the economy falls into a deep recession, causing widespread loan defaults. So far, they've lost little. And in any case, many economists say investor losses would tend to be widely spread and shallow, rather than concentrated and deep. Amid a burgeoning credit crisis in the telecom industry and a general downturn for many other corporate borrowers, banks are starting to acknowledge growing problems. But there's no sign that any big institutions are close to failing. That's a sharp contrast to the last downturn, when falling property values ravaged a banking system that had binged on real-estate loans. Bad loans are now hovering around 2.37% of total assets, less than half the 6.15% peak of the recession 10 years ago. Even if problem loans continue to mount, as many expect, "the financial system is structurally much more sound now than it was a decade ago," says John Lonski, economist at Moody's. For that, the nation can thank diversification. A decade ago, it was not uncommon to see a bank have 30% or 40% of its loan portfolio linked to real estate. Today, most money-center banks concentrate no more than 7% of their loans in any single sector. Syndications have been a big factor in allowing banks to stay diversified. Banks syndicated $1.2 trillion in loans last year, up from $234 billion a decade earlier, leaving total syndicated loans at nearly half of the $3.9 trillion of all outstanding loans. Of new syndications last year, roughly a fourth, or $320 billion, involved loans to non-investment-grade companies. Nearly 50% of those riskier loans were snapped up by institutional investors, mostly mutual funds, according to S&P. U.S. banks retained just 23.2% of such loans, with the rest spread out among foreign banks, specialty finance firms and brokerage companies. As banks shed loans, though, mutual funds picked them up - and thus are now facing some turbulence. There are currently 67 so-called "prime rate funds" that specialize in bank loans, holding some $160 billion in assets. The largest funds have seen returns fall to 2.67% over the 12 months ended June 30, on average, down from a five-year average of 5.45%, according to Morningstar.
If you've been wronged by your broker, you can take legal action. But don't expect to have your day in court. When you open a brokerage account, you generally agree to take any disputes to arbitration, where your case will be heard by a panel of arbitrators instead of a jury. Arbitration can be time-consuming, with a typical case dragging on for a year. Except in rare instances, the arbitrators' decision can't be appealed. Just 55% of cases heard by arbitrators are decided in favor of investors, according to NASD Dispute Resolution Inc., an arbitration forum operated by the National Association of Securities Dealers. Just because an investor has lost money doesn't mean the broker has done something wrong. Some 70% of arbitration claims are settled before a decision is reached. If you do receive an award, don't expect to hit the jackpot. When a case isn't clear-cut, arbitrators often "split the baby," giving the broker, say, 60% of the responsibility for any losses and the investor the other 40%. Punitive damages are handed out infrequently. Unless the panel awards attorneys' fees, your lawyer will typically collect about one-third to 40% of any award or settlement. Smaller, less-reputable firms often simply disappear or file for bankruptcy protection instead of paying up. A GAO study of arbitration awards handed out in 1998 found that 52% of arbitration awards weren't paid, and 12% weren't fully paid. A smaller, more recent GAO study, released this spring, showed that the number of unpaid awards had dropped to 13%. Securities lawyers say unpaid claims are falling because they've stopped taking cases where the chances of payment are slim.
The impact abroad of the U.S. slowdown has been magnified by its concentration in investment spending, in particular on technology because of its globally integrated nature. A component may cross a foreign border several times as it moves up the assembly chain into a finished computer, network router or cellphone. More than 60% of the value of new computer purchases in the U.S. is imported, almost double the level in 1987, according to the Council of Economic Advisers. Thus, the boom in tech spending that accounted for almost a third of real U.S. growth in recent years helped pull in massive amounts of imports. Last year, the U.S. spent more on semiconductors and computer accessories from abroad than it did on crude oil. In most countries the domestic market is considerably more important than exports, and there are pockets of strength in Europe and Asia to counter U.S. weakness. But George Magnus, chief economist at UBS Warburg, says the weakest countries now - Japan, South Korea, Taiwan and Germany - are those most dependent on capital-goods exports and thus most affected by the U.S. investment bust. Their weakness could radiate through their regions. So far, the global pain has arguably been America's gain. J.P. Morgan economists note that "the U.S. demand slowdown has fallen disproportionately on the shoulders of foreign producers."
Given that three-quarters of all such traded funds invest in bonds or other income-generating vehicles, the firmer pricing can be attributed partly to the renewed appeal of fixed-income markets amid a weakening economy and falling interest rates. Bond funds as a class stood at a 3.8% discount, with taxable-bond entries priced just about at NAV. Meanwhile, domestic stock funds were at a 6.9% discount and world equity shares at a gaping 16.1% shortfall (though the latter had narrowed from 25.9% a year earlier). Another reason for the better performance is a lack of new supply. The upshot is that this often-maligned class of investments is simply no longer a great bargain for the small investor, given that discounts will tend to widen out over time.
If the raw results for index funds look good, their post-tax performance can be almost unbeatable. The $94 billion Vanguard 500 Index Fund, which tracks the S&P 500, has outpaced 65% of diversified U.S. stock funds over the past 10 calendar years. But Morningstar calculates that, once you figure in taxes, the Vanguard fund beat 82% of active funds. (This figure assumes you paid taxes on each year's income and capital-gains distributions, but didn't sell the fund at the end of the period.) Indexing also has been a winning strategy in the bond market. Consider the record of Vanguard Total Bond Market Index Fund, which tracks the Lehman Brothers Aggregate Bond Index. Over the past five calendar years, it has outpaced 95% of all high-quality taxable U.S. bond funds, according to Morningstar.
Traditional Treasury issues are not guaranteed to keep up with inflation. A traditional 10-year Treasury bought for $10,000 is cashed in at maturity for $10,000; it pays interest twice a year. A 10-year note maturing in February 2011 yielded 5.28% on Wednesday. An important question for investors is whether inflation will rise enough to make up for the difference between the base return of TIPS and the yield on traditional Treasuries. This difference, or implied inflation rate, was 1.78% as of Wednesday. If inflation over the life of the bond is less than 1.78%, on average, then the regular Treasury bond will turn out to be a better deal. If inflation is higher than 1.78%, TIPS will be the better option. TIPS have sometimes underperformed traditional Treasuries. Since early 1997, when first issued, 10-year TIPS had a cumulative return of 29.5% through June 2001. That compares with 36.2% for traditional 10-year Treasuries over that period, according to calculations by Vanguard. But most of the gain for traditional Treasuries, occurred from February 1997 through September 1998, when inflation was falling faster than expected. Traditional Treasuries outperformed TIPS by 19.5 percentage points over that period. But from October 1998 through June 2001, TIPS had a total return of 21.3%, versus 7.9% for traditional Treasuries.
Related: Volatility = Opportunity, Smart Money 7-12 Where will corporate earnings go next? Down? Up? Sideways? Well, Wall Street's current forecasts are really all over the map - especially in the energy and technology sectors. In other words, the supposed experts collectively have no clue. And we think this earnings uncertainty spells opportunity. You see, companies with a wide range of earnings estimates tend to trade at lower valuations than comparable companies about which the future is more certain. So if you spot a good company stuck in a period of uncertainty, you might be able to pick up a bargain. And oddly enough, companies that confuse the experts may even make for slightly less risky bets than those about which the opinions are unanimous. How's that? There's a better chance a company will report earnings somewhere within a wide range of estimates. On the flip side, if all estimates are the same or close to the same, a complete miss (and massive stock sell-off) becomes more likely. As Morgan Stanley U.S. Equity Strategist Steve Galbraith put it in his April research note (titled "Agreeing to Disagree"): "High dispersion of expectations signals opportunity while uniformity may signal risk."
Fed Option 1 Consider a scenario in which the central bank places a greater emphasis on price stability than employment and output stability. According to this scenario, those industries that promulgated the worst excesses during the late 1990s must now suffer the largest contraction, with little in the way of support from expansionary policy. The firms that negotiated the largest pay raises will suffer the largest cyclical rise in unit labor costs and contraction in profits. These firms will have the most layoffs. The profits recession, then, will progress in a firm-to-firm, idiosyncratic manner, as corporate losses mount and staff is cut. The ultimate resolution involves wages falling to a level that is consistent with lower productivity, which would allow unit labor costs, profits and employment to stabilize. Unfortunately, the mechanism by which wages fall involves the creation of a pool of unemployed labor who are then willing to be rehired, most likely at another firm, or even in another industry, at a lower wage rate. Fed Option 2 A central bank can facilitate this adjustment with the use of expansionary monetary policy. By expanding liquidity, the Fed supports demand, which allows firms to pass higher unit labor costs on to consumers. A rise in the general price level reduces real wages across the economy, even as nominal wages remain fixed by contract. As a result, real wages are reconciled to productivity, which obviates the need for layoffs. Since the central bank is willing to accommodate higher inflation, comparatively smoother employment and output, and more volatile prices characterize the course of the economic adjustment under this scenario. Both arguments possess merit, and the Fed will likely walk a middle ground between two poles. Indeed, the central bank has already accommodated an increase in the core rate of inflation. Divining further action is complicated by the institution's twin mandates of promoting full employment and price stability. Still, in practical matters, the emphasis is generally placed on the latter. How Fund Categories Fared WSJ 7-9-2001
Markets Boxscores WSJ 7-2-2001
Related: Karen Damato, WSJ 7-9 After the first quarter, in which fewer than 8% of stock funds avoided a loss, stock portfolios in Q2 turned in their best showing since late 1999, with almost 90% in positive territory. Diversified U.S.-stock funds rose an average 8.51% in the latest quarter, according to Lipper. Related: Tom Petruno, LA Times 7-8 In the first half of this year, about 59% of U.S. stock mutual funds beat the blue-chip Standard & Poor's 500 index, which sank 6.7% (including dividends), according to fund tracker Morningstar. 75% of New York Stock Exchange issues performed better than the S&P 500 index in the first half, according to strategist Tobias Levkovich at brokerage Salomon Smith Barney. Some of the stocks in that universe merely fell less than the S&P, but many more posted gains while the index fell. So there was no shortage of ideas that worked in the first half, regardless of a manager's style of investing. If a fund lost money in this environment, shareholders deserve a detailed explanation of what went wrong and why they should keep faith.
Morningstar style box is the most familiar to many investors. It carves the world up into nine squares based on the market size of the companies the fund invests in and whether those stocks fall into the value or growth camps or somewhere in between. The nine-category formulation caught on rapidly with financial advisers who found the style box a big help in piecing together diversified portfolios for clients. For many mutual-fund companies, the style box has become a driver of expansion strategies. Even Morningstar analysts concede the style box isn't perfect and shouldn't be the sole determinate for diversifying a portfolio. Instead, Morningstar says the style-box categories should be used in conjunction with other tools such as sector weightings and analysts' written evaluations of funds. So Morningstar is about to make more changes. This summer, the company will add two new factors to its methodology for determining a fund's style. Currently, Morningstar bases a portfolio's style-box placement on the trailing price-to-earnings and price-to-book ratios. The higher ratios tilts a fund toward growth; lower ratios towards value. The new variables will add two more ratios: price-to-cash flow and price-to-forward earnings. These alterations won't change the number of boxes, but they should provide a more-accurate reading of portfolios because some stocks - such as cable-TV stocks or cyclicals - can often swing between the value and growth categories using Morningstar's existing ratio tests. Morningstar plans to go another step in defining investing style within categories. Later this year, it will introduce a new set of tools for looking at sector weightings that will break stocks down into three categories: "smokestack," "service" and "information technology." That way an investor could quickly see the difference between a value portfolio willing to load up on tech stocks, and the Old Economy approach. Barra's new report highlights the continuing large divergence in performance within single categories. Among the funds falling into Morningstar's large-value category, for instance, returns for the 12 months ended in late June range from a gain of 49.4% to a loss of 38.2%. Small-cap growth ranged from a 38.5% gain to a 66.5% loss. "This is too big a range to be explained by just manager ability," Mr. Acito says. What is needed, Acito contends, is a finer slicing of the value and growth categories. For example, value could be better broken into "deep value" or "contrarian," to designate funds that look at the cheapest of the cheap stocks, and "value and growth," for funds that dabble in both broad types of stocks. The growth category could be better sliced into "growth at a reasonable price" and "momentum" players, funds that will buy only those stocks with rocketing earnings. [example from Charles Jaffe, Boston Globe 7-15: Barron's rated Janus the top fund company in 1999, but ranked it dead last in 2000. The firm may be back at the bottom for 2001. The problem has a lot to do with Janus's growth style, which borders on momentum.] By measuring fund managers in a more-appropriate apples-to-apples comparison "you really begin to differentiate between skill and a manager that has the wind at his back," Mr. Acito says. Related: Low Diversification - Ken Brown, WSJ 7-13 More than two dozen U.S.-stock funds that don't specialize in energy boast energy weightings at least three times the sector's recent 7.5% weighting in the S&P 500 index, according to Morningstar. If the notoriously cyclical energy sector doesn't behave as fund managers hope, investors could get burned. Most of the current crop of energy-heavy funds are technically "nondiversified," which means they have wide latitude to place big sector bets. Yet they also aren't dedicated energy funds, meaning investors might not realize what they're buying. Plenty of fund shareholders were stunned last year when they discovered too late that their funds had racked up big gains by investing in tech, only to plummet when the tech bubble burst. Energy isn't the only target in the weighting game, of course. More than three dozen funds carried more than double the S&P 500's weighting in financial stocks as of June 30, according to Morningstar estimates.
According Ron Nicol, a partner at Boston Consulting Group, corporations overextended their overhead - ad budgets, travel,administrative and sales employees - by about $150 billion between 1997 and 2000. That means they need to shed at least 7% to 9% of their costs to restore healthy profit margins. While companies have made plenty of cost-cutting announcements in recent months, he estimates they are less than halfway done. Mr. Nicol tracked overhead costs - also known as sales and administrative expenses - at America's 1,000 largest companies. He found that these expenses, after rising at a 1.7% rate between 1985 and 1996, began exploding at a 10% annual growth rate, adjusted for inflation, in 1997. By the end of 2000, the cost boom added nearly $500 million in extra annual costs to the average company on his list. In building up these costs, many companies abandoned an old rule of thumb about the relationship between costs and sales. He says history shows that for every dollar of sales growth, companies typically add just 80 cents of overhead. But in the late 1990s, overhead costs rose nearly a dollar for every dollar of sales growth, as corporate executives projected ever rising sales growth into the future. If companies had applied the business rule of thumb during the boom, Nicol estimates, overhead costs would be $150 billion lower today. Related: Donald Ratajczak, Atlanta Journal-Constitution 7-8 While the inventory correction is nearing an end, the capital spending plunge could be six to 12 months away from bottoming. Because of previous capital spending, capacity still is growing more than 3 percent while the economy is growing less than 1 percent.
Fund industry officials acknowledge that expense ratios are rising, but they contend that the numbers are skewed. Many new funds, as well as small fund companies, have relatively high costs, but a rising share of all assets is invested in lower-cost funds, either index funds or actively managed funds whose expense rates have fallen as assets have grown. Adjusted for where the assets are concentrated, the industrywide expense ratio is not much higher than 1% accoridng to those officials. Mr. Bogle puts it at about 1.25%. Fee differences even amoung managed funds can be major. Consider Alliance Premier Growth, run by Alliance Capital Management Holdings. That one fund charged shareholders $375 million in expenses last year. Almost half of that amount, $178 million, went directly to Alliance Capital as an advisory fee. That was $42 million more than Capital Research & Management received for managing the American Funds Investment Company of America stock fund, which is three times as large as Premier Growth.
A just-completed study of the five years ended in December 1997 reached a broadly similar conclusion. This study, by Matthew Morey, a Pace University finance professor, focused on all domestic diversified equity funds existing at the end of 1992. (His working paper, "Should You Carry the Load?" is at papers.ssrn.com/sol3/papers.cfm?abstract_id=265133.) According to Dalbar, a financial research firm, the average load fund investor in 1996 held on to his equity fund for 3.2 years, in contrast to 2.9 years for the typical no-load fund investor. But load-fund investors' reluctance to switch has helped them at the same time that it has hurt them: They tend to have a higher average exposure to equities than do no-load investors, whose frequent switching leads to a higher exposure to cash. The resulting benefit to load-fund investors is significant. According to Dalbar, the average equity investor in load funds from 1984 to 1996 made 118.8%, in contrast to 113.9% for the average no-load fund investor. In other words, despite the lesser performance of the average load fund, average load fund investors are making more money. As a result, they are probably not aware that they could have made even more by investing in no-loads - if, of course, the absence of loads didn't tempt them into moving their money around. Now that we know, and given the magnitude of some funds' loads, investors have a powerful incentive to find a way to behave more like a load-fund investor while investing in a no- load fund.
The cockroach-fearing category has no tolerance for companies who stray from an upward-sloping path of earnings advancement. For the value managers -- to hear some of them tell it -- there's nothing better than the sound of corporate executives unburdening themselves of their tales of unmet profit goals. That's when their investigations begin to see whether time and care can transmogrify these hairy beasts into something more pleasing. "Value results from a problem," says Stephen DuFour of Fidelity Equity Income II Fund. "We look for where there's negative news. We have to be buying bad news in order for us to own a big enough slug" to profit when a company's fortunes turn for the better. Related: Scott Burns, Dallas Morning News, 7-10 Among the large-cap stock funds, value has trumped growth year-to-date, in the last 12 months and in the last three years. It still trails over the last five years (data from Morningstar). This leaves us with an embarrassing question: Have value funds had their 15 minutes of fame? Is New Economy Growth coming back? The answer, I think, is a simple "No." You can understand by taking a close look at where most of the money is - large-cap stock funds. Growth stock performance is bubble-based. If you compare the average large-cap growth fund performance in each year since 1991, you find that growth beat value only in 1991, 1998 and 1999. It trailed in seven of the 10 complete years and is trailing so far this year. The only thing that put growth on the winners' list is the two "bubble years" - 1998 and 1999 - where growth funds beat value funds by more than 54%. Just as value-oriented funds did best for years after the '73-74 crash, we can expect that newly cautious investors will avoid their last source of pain well into the next recovery. Skeptics should consider that equity funds were in net redemption after the '73-74 crash. Bottom line: Value funds may continue to trump growth in the near future (but by smaller margins) and they will always top the sleep-better list. Related: Mark Hulbert, NY Times, 7-22 It is difficult to generalize about value investing, because the term has many definitions. But it is safe to say that value investors share a contrarian bent: they buy out-of-favor stocks and sell them when they become popular. They have the courage to buy what most other investors are shunning and to sell what most of them are buying. Researchers in behavioral finance have found that relatively few people have the courage to depart consistently from the prevailing view. What courage does exist is too often fleeting. That is why, over time, even genuine value managers often become indistinguishable from growth managers Ù a phenomenon known as style drift.
One explanation for the less aggressive action holds that Greenspan & Co. hoped to buoy everyone else's confidence by signaling its own confidence in what had been done already. Perhaps the are implying that the easy-money cake had pretty much been baked, while the last quarter-point was merely the cherry on top. But since the FOMC statement also expressed the usual concern about "declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad," another view seems the most plausible: (shifting metaphors again), the Fed chairman wants to keep a few extra bullets in his gun. The reasoning? A funds rate of 3% appears to be a psychologically important barrier that Greenspan would breach with great reluctance. The only time fed funds even touched 3% on his watch was from September 1992 to February 1994, when he was hoping to lift us out of the sluggish recovery. To push that rate even lower, you might have to abandon the claim, which the FOMC statements have repeatedly made, that inflation has been "contained." For with the consumer price index already rising at a rate of more than 3% (really 4%), a short-term interest rate of less than 3% would begin to look inflationary indeed. Ergo, simple arithmetic would tell you that at 4% on fed funds, you have only two chances left to shoot with half-point bullets before you get to 3%. But quarter-point ammo allows you four such opportunities.
They talk about the importance of long-term investing but acknowledge they would dump a stock that misses its next earnings estimate. They talk about the importance of shareholders staying in the market and participating in equities, but acknowledge making decisions based on market timing. Most managers - with the notable exception of those running ''tax-efficient'' funds - get paid based on pretax returns. Unless you hold the fund in a tax-deferred account, you are paid with the fund's after-tax returns. When a fund charges high fees (or raises the ones it has), the manager doesn't object on your behalf. Managers often try to maximize current performance to look good right now. You want them to look good over time. Finally, the manager makes money even when the fund is down.
In fact, according to the most comprehensive study ever of analysts' ratings, their highest-rated stocks have outperformed the market in most years and their lowest-rated stocks have lagged behind. The study, published in the April issue of The Journal of Finance, was written by Professor Brad Barber of UC-Davis and three co-authors from Stanford and UC-Berkeley. Using data from First Call and Zacks, the professors studied more than a half-million recommendations from 1986 to 2000 by more than 4,000 brokerage-firm analysts. They constructed a consensus recommendation for each stock, then used the consensus recommendations to create five portfolios. Portfolio 1 contained the approximately 20 percent of stocks whose consensus recommendations were the most favorable, while Portfolio 5 contained those that were least favorable. The results were impressive for the 14 years through 1999. Portfolio 1 outperformed Portfolio 5 in each of those 14 years, and by an average of more than 16 percentage points a year, before transaction costs. Last year was another story. After earning an A for 14 years in a row, the analysts flunked miserably during 2000, with Portfolio 5 making 37.6% and Portfolio 1 losing 42.3%. Still, 14 A's and one F isn't a bad report card. Related: Jeff Opdyke, WSJ 7-10 For the record, only about 1% of all research recommendations are sells. Currently, 66% of all stock recommendations are buy or strong buy, according to First Call; 32% are neutral. But, here is the real rub: Academic evidence suggests that buy recommendations aren't an overly valuable indictor. Kent Womack, a finance professor at Dartmouth College, found in a study published in 1996 that "new buy recommendations are only marginally valuable." The ensuing price rise of about 3% in the six months after the call, he says, "would probably cover your commission cost." What Mr. Womack did find is that analysts are at their best when they are critical. His research showed that "investors should really listen when an analyst turns negative on a stock." Following a downgrade, shares often slip about 7% over the next several months. With outright sell recommendations, he found, shares typically fall about 10%. Bearish signals, he says, "are incredibly valuable." Analysts as a group provide a valuable service: They compile the intelligence that investors, don't have the time, inclination or ability to chase down. That research, far more than the recommendation, is where investors should look for the most important insights into a company. By reading the report, says Chuck Hill, research director at Thomson Financial/First Call, you can tell if an analyst has put independent research into the recommendation and isn't merely spouting the company line. Moreover, because stocks are as much about risk as reward, reading the report provides a sense of the perils the company, and thus your investment, might face. If you want to build the best perspective, pay attention to the analysts with the highest and lowest earnings estimates. Mr. Hill contends that the analysts with the highest and lowest estimates, "are the ones who are probably seeing what the others aren't, and you want to know what they're thinking." Just the Facts Mutual Funds update According to estimates from Lipper, investors put $18.4 billion in new money into stock funds in June. Lipper estimates that value funds drew more money than growth funds by nearly five-to-one in the month of June; in May, it was a 4-to-1 advantage. Only about 20% of stock-fund investors have earned a positive return in the past year ended June, said Strategic Insight. Even so, they have added to their equity position with about $70 billion in the first half, and continue to add not an insignificant amount of money in June. A good portion of that new money - about $8 billion to $10 billion a month - is a steady flow of retirement money, from 401(k) plans and IRA. (WSJ 7-25) Medical deductions A new IRS publication shows more than 5.8 million individual income-tax returns reported medical and dental expense deductions for 1999. Those 5.8 million returns with medical-expense deductions represented less than 5% of all individual returns filed for 1999, the IRS says. Under current law, taxpayers may deduct only the amount of unreimbursed medical and dental expenses that exceed 7.5% of adjusted gross income. (WSJ 7-25) IRS Data Book The IRS releases its latest annual "Data Book" with statistics ranging from audit rates to criminal-investigation program results. The new 68-page publication is for the year ended Sept. 30, 1999. For more IRS statistics, visit www.irs.gov. At the bottom of the page, click on "Tax Stats". On the right-hand side of the page, look under "Statistical Publications" for "SOI Bulletins." For a copy of the IRS's "Data Book" for 1999, visit the IRS Web site. At the bottom of the page, click on "Tax Stats". On the right-hand side of the page, look under "Statistical Publications" and look for "IRS Data Book." Or try going directly to: www.irs.gov/tax_stats/soi/other_ia.html (WSJ 7-25) Where the money went Look at where money has been going. At the end of May, according to the Investment Company Institute, assets of money market mutual funds, at $2.07 trillion, represented 55% of the assets in stock funds ($3.74 trillion). That was up from 40% at the end of 1999. While the gauge has swung in a direction that indicates more fuel in the tank for the next stock rally, it could rise a lot more. As recently as 1992, assets in money funds exceeded the total in stock funds. (Chet Currier, Bloomberg 7-24) The Kitchin cycle The Kitchin cycle is named after Joseph Kitchin, who in 1923 wrote an article outlining his discovery of a 40-month cycle resulting from a study of U.S. and U.K. statistics from 1890 to 1922. While Kitchin was carrying out his investigation, a fellow Harvard professor, W.L. Crum, found a cycle of 39-41 months in commercial paper rates in New York. Subsequent studies show that both men's findings were valid. In fact, the Kitchin cycle has been traced back 200 years -- as far back as we have reliable records. (P.Q. Wall, Barrons 7-23) The key and the hope "The key to a revival of the economy is capital spending," said Robert Hall, a Stanford economist. "Generally speaking, you are more likely to see an upward movement in something that is below normal, like investment, than in something that is normal, like consumption." But public policy aims mainly at persuading the consumer to spend more, in the absence of a better alternative. Exports are constrained by the strong dollar. Government spending on education, infrastructure or the military, is constrained by the emphasis on preserving the budget surplus. Consumers, by default, are the great hope. (Louis Uchitelle, NY Times 7-22) [Consumers account for two-thirds of the U.S. economy, and business investment just 15%] Mutual Fund ABC's Fund shares that charge upfront sales commissions - typically A shares - are often the best choice for very large investments. B shares have a combination of higher annual expenses as well as back-end charges (which decrease over time - evenualy converting to A shares) that hit people who sell their shares within a few years. Investors who want the most flexibility to move their money among different funds may want to pick those C shares, that pay sellers through permanently higher annual expenses (and are not convertable). Annual fees on A shares average 1.24%, according to Morningstar. The B and C industry average is 1.94%. (WSJ 7-19) Currency Update Remember that when Thailand devalued the baht four years ago, hardly anyone knew the event would stir up the worst global financial crisis in a half a century. That's just what happened, however, which explains why recent hiccups in Argentina and Turkey have investors losing sleep. If Argentina defaults on debt or devalues the peso, investors figure, emerging markets near and far would get slammed as well. The worry is that once the turmoil hits bigger economies, it could be 1997 all over again. Warnings signs are flashing. The Brazilian real hit an all-time low versus the U.S. dollar last week as concern grew about an Argentine default. Mexico - an emerging-market success story - also has seen its currency lose ground along with those of Chile and Peru. Emerging market bond yields, meanwhile, are on the rise. (William Pesek, Bloomberg 7-16) Hiring by AI Beyond a self-reported job history, references and interviews, employers have little ability to determine how long an employee will stay and what would allow them to thrive. Unicru Inc., an electronic recruiting company, would like to change that by harnessing the power of artificial intelligence. "Because of the assessment technology we've put in, we've dramatically lowered turnover" says Bob Gregg, Unicru's chief executive. Unicru assembles a database with thousands of employment case histories, and neural networks are able to spot the statistically similar characteristics of employees who stay longer. One example, if an applicant remembers their boss' name from two jobs ago, they will typically stay on longer as an hourly employee. (Jeff Meredith, Chicago Tribune 7-16) Equity income universe shrinks According to S&P, as of last week only 364 of the 500 components of the benchmark S&P 500 Index paid a current dividend. That's down from 372 at the start of the year and is 15% fewer than the 428 that had a positive yield at the end of 1996. This development underscore the hardships a manager of a large-stock equity income fund must endure in these times of disappearing dividends. This could mean that these managers of conservative funds will take deeper forays into convertible bonds to search for equity-like securities that offer some yield. (Michael Santoli, Barrons 7-16) QQQ facts The NYSE will begin trading in the QQQ later this month. Within the Amex's ETF family, the QQQ is king, accounting for about 48% of daily trading volume on the exchange. A hefty chunk of QQQ trading already has been diverted from the Amex floor to other trading centers, such as electronic communications networks, regional stock exchanges and Nasdaq traders who move stock through a forum known as the Nasdaq InterMarket. Amex still maintains the single-largest chunk of QQQ trade executions at 55%. Today, the QQQ is one of the most "liquid," or easily traded, securities on any exchange, moving an average of 67 million shares a day. The QQQ has also grown to about $23 billion in assets, one of the most dramatic growth spurts of any fund product in history; at the end of May, the Nasdaq 100 trust had grown to the 20th-largest mutual fund in the country, according to Lipper. Note: The Nasdaq may take the QQQ listing back from the Amex's when its five-year contract runs out. (WSJ 7-12) [From WSJ also 7-12: Some of their biggest users of ETF's are hedge funds because, unlike individual stocks, ETFs can be shorted on a down tick.] Lower your expectations Scoring 8% a year with stocks may not seem too rough, until you throw in the added hit from inflation, taxes and investment costs. If you are losing three percentage points a year to inflation and two percentage points a year to costs, your net return may be just 3% a year. Subtract taxes, and your annual return will likely fall below 2%. (Jonathan Clements, WSJ 7-8) Worth the money? A recent survey by Russell Reynolds Associates, the executive search firm, said the average domestic stock fund manager at a bank made $140,000 last year, compared with $175,000 for mutual fund managers at insurance companies, $222,000 for those at brokerage firms and $436,500 for those at companies whose main business is managing mutual funds. But the top 10 percent tend to take much of the overall pay in the industry. At stand-alone mutual fund companies, managers in the 10th percentile Ù the low end of the top performers Ù made an average of $1.7 million each last year, almost four times as much as the median for the group, according to the Reynolds study. (NY Times 7-8) Worth the money? (part 2) Here's a candidate for money-management quotation of the year, from Charles Schwab : `We're not magicians.' If nobody can divine the future, what makes competent, diligent advisers and money managers worth the price they charge? That question has been debated since the first coin was struck, and it isn't going to be resolved soon enough to do you or me much good. (Chet Currier, Bloomberg 7-13) When news = fear Reporters covering markets, I included, deem it our civic duty to sound the alarm about every hazard imaginable. The trouble with this simple-minded approach is that if I scare people out of taking some perfectly reasonable risk, I may not serve their interests at all. Readers won't think they've been helped if they find themselves living off the proceeds of a passbook savings account in their golden years. (Chet Currier, Bloomberg 7-6) Gravity While one might think investors would gravitate toward funds that maintain a steadily positive course, investors tend to be attracted to more volatile funds, lured by the potential of larger payoffs. "People who are moving their money tend to move to funds that have done very well," says Terence Odean, an assistant professor of behavioral finance and economics at UC-Davis. Of the less flashy, steadier performance that characterizes many of these funds, "you're not driving your existing customers away, but not bringing in lots of new ones," he adds. (WSJ 7-6) Fluoronet? Steven Leeb, an associate professor at MIT, has developed a way to transmit analog and digital data through fluorescent lights. Each fluorescent light fixture has magnetic ballasts to create the electrical pulses that trigger the lights. In a normal fluorescent light, the pulses occur at regular intervals; in lights that use Leeb's technology, the pulses occur in intervals that transmit such data as text, graphics, or audio. PCs or handheld devices equipped with special optical transceivers receive and then display this data. Leeb envisions the technology initially being used to send data such as simple directions to users, especially those with disabilities, in public places. (InformationWeek 7-2) Quick Stats During the past 25 years, home prices have increased on average about 5.8% a year, according to consulting firm Economy.com, using data from Fannie Mae and Freddie Mac. The stock market - as measured by the S&P 500- index, swelled by 10.6% annually before dividends -which averaged of about 3.4% a year. (WSJ 7-25) About 90% of beginning primary-care physicians expect to earn between $101,000 and $150,000 in their first year, while 82% of beginning specialists expect $151,000 or more, says a survey of 300 medical residents by staffing firm Merritt Hawkins & Associates, of Dallas. (WSJ 7-24) The world of no-load funds is getting smaller. Direct sales of mutual funds are 20% of all fund sales, down from 31% in 1990, according to Financial Research Corp. FRC expects such direct sales to drop to 18% by 2005. (WSJ 7-20) American households spend 14% of each paycheck on debt and interest today, more than at any time in the past 20 years. (WSJ 7-19) About 89% of 1,000 workers surveyed by Right Management Consultants, a Philadelphia consulting firm, say they expect to get a similar job with similar salary and benefits if laid off. (WSJ 7-19) A record 9.6 million individual income-tax returns for 1999 reported taxable Social Security benefits. That was up about 6% from the prior year, the IRS says. The total amount of taxable Social Security benefits rose 9.5% to $76.5 billion, according to the IRS's latest Statistics of Income Bulletin. About 45.7 million people now receive Social Security benefits. (WSJ 7-18) Renewed interest in reducing gasoline use is driven as much by worries about global warming (cars produce 20% of U.S. emissions of carbon dioxide) as it is by fears about imported oil (cars account for 40% of U.S. oil consumption). A WSJ/NBC poll last month found that 87% of those polled favor requiring auto makers to produce more-efficient cars. There already is a gas-guzzler tax, and consumers paid $65.6 million last year. But it doesn't cover sport-utility vehicles. New cars - before counting SUVs - got an average of 28.1 mpg last year, below the 28.7 in 1988. (WSJ 7-12) The alternative minimum tax affected a record 999,790 individual returns for 1999, up 21% from the prior year, the IRS says. The dollar amount of tax paid surged 34% to $5.9 billion. (WSJ 7-11) Tax-exempt interest income totaling $52.4 billion was reported on about 4.8 million individual income-tax returns for 1999. That was 3.8% of the total returns filed. (WSJ 7-11) State sales-tax revenue rose 3.3% during this year's first three months from a year earlier, the slowest growth rate in about nine years. That was down sharply from 8.2% growth for the year-earlier period. Sales-tax revenue during the recession in the early 1990s declined as much as 6% to 8%. (WSJ 7-11) The percentage of women holding executive-management posts in the 500 top U.S. companies rose to 5.1% in 1999 from 2.4% in 1996, says an International Labor Organization survey. Other Western nations generally have registered even lower rates, such as Australia, with 1.3%. (WSJ 7-10) The average 401(k) shrank to $41,919 in 2000 from $46,740 in 1999, according to Cerulli Associates. Although comprehensive data will not be available for some time, the average account has since shrunk about $600 more, to about $41,300, projects one Cerulli analyst. Recent info from Fidelity, the nation's largest 401(k) administrator, shows the average Fidelity account had 19% in company stock on top of almost 62% in stock funds at the end of last year. Hewitt Associates, the nation's second-largest provider, has almost 30% in company stock. (NY Times 7-9) The labor force by 2008 will have a median age of 40.7 years, a high level by historical standards, says the Bureau of Labor Statistics. In 1998, the median age was 38.7 years. (WSJ 7-3) Vanguard is planning a second exchange-traded share class for one of its big index funds - the Wilshire 4500, a collection of mid-cap and small-cap stocks that rank just below the largest 500 U.S. equities in size. A so-called Vipers version of its Total Market Index is already trading. (Barrons 7-2) The tax system heavily favors saving. A dollar of income that is earmarked for the mall will get nicked by federal, state and sales taxes, so that it might ultimately turn into, say, 64 cents of goods purchased. The cost of spending gets even greater, if you stick the purchase on your credit card and don't pay off your card balance in full. By contrast, stash that $1 in a 401(k) plan and you might end up with $1.50 or $2, thanks to your employer's matching contribution. (Jonathan Clements, WSJ 6-30) Home Page Previous Factoid Top Sites |
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