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Meanwhile, many other funds seemed destined for greatness, only to fall by the wayside. There were 342 funds that beat the S&P 500 in the five years through December 1995. But just 28% of these funds continued to outpace the S&P 500 over the next five years. Morningstar calculates that, after taxes, investors in these funds kept 85.2% of their pretax annual returns, compared with an average 82.9% for all U.S. stock funds. These figures assume you paid taxes on each year's fund distributions, but didn't sell at the end of the 10 years. But were the managers really so tax conscious? If a fund posts good results, it typically attracts a flood of money from investors. By year end, when it's time to distribute capital gains realized throughout the year, the fund has far more shares outstanding, thus diluting the capital-gains distribution when it is figured on a per-share basis. In effect, shareholders who invested late in the year have to pay taxes on gains realized earlier in the year, before they purchased their shares. This doesn't make any difference to the fund's total return. But it does make the fund seem more tax efficient. But will this tax efficiency continue? That hinges on the fund continuing to deliver good results, so that it continues to attract fresh cash from investors.
Inventories have been drawn down considerably. Many economists now expect that when Commerce Department officials revise their figures on Wednesday for the nation's economic output in the second quarter, they will decide that inventories dropped even faster than the previous estimate of $26.9 billion. That downward revision could even lead to a revised calculation for Q2 economic growth to zero - or even to a slight contraction. The unrevised figures already show that manufacturers' inventories dropped by 4$ from February to June, a precipitous fall that brought them back to late 1999 levels. By the end of June, manufacturers had stocks equal to just 1.29 months of sales, the seventh-lowest monthly ratio in the last decade. But inventories are sustainable at 1999 levels only if sales do not fall below the strong levels of that year. The sector to watch is autos, whose troubles could ripple across the economy.
Funds can't distribute the losses, but managers can use them to offset gains for tax purposes for as long as eight more years, thus cutting the risk of future gains distributions. That makes it worthwhile for taxable investors to keep an eye on a fund's ability to carry losses forward on its tax returns. For those investing in a taxable account, this would be one of the top five considerations in terms of selecting a fund. You've given yourself this embedded cushion, if you will, against distributions for some block of time. Morningstar's Web site offers an estimate of net realized and unrealized capital gains - negative figures are net-loss estimates - and many fund companies provide callers with realized gain and loss figures. Of course, for investors to benefit at tax time, the losses must be realized, which occurs when the fund manager sells portfolio losers. Even funds with plenty of potential losses can end up making big gains distributions if managers sell winners only, notes Vanguard's Mr. Dickson.
As its indexes gained more of a following over the years, S&P began demanding a modest fee for creating funds around them. Mr. Bogle reluctantly agreed to a $5,000 annual fee. Then in 1988 he went along with a higher one, capped at $50,000, so that his main mutual fund could add "500" to its name. (Note: Unlike the many for-profit fund companies, Vanguard is mutually owned by fund investors and operates its funds at cost.) After long pleading futilely with Vanguard for a higher fee, S&P sued the fund firm last year and recently won a round. Vanguard is at least temporarily blocked from building on that huge success by offering certain new products pegged to S&P indexes. Neither firm will discuss terms, but Barclays is believed to be paying S&P at least $600,000 in 2001 - about as much in one year as Vanguard has paid since 1988 - for exchange-traded funds based on S&P indexes. Vanguard now risks losing a chunk of the growing market to Barclays. Related: Barrons 8-13 Vanguard has been reminding all those who will listen that the end of this month will mark 25 years since it launched the first retail stock index fund, Vanguard 500 Index. Currently, around a quarter of a trillion dollars resides in S&P 500 Index funds alone, and their popularity attests to the way investors have been drawn to examine how best to capture stock-market returns. Numbers recently supplied by Vanguard showed the flagship S&P 500 fund having outpaced the average general equity fund since its August 31, 1976, inception by a margin of 14.05% a year to 13.84%.
As an investor you are interested in the cash a company generates, and goodwill doesn't affect that one way or the other. Savvy investors will see through the change in rules. But not-so-savvy investors might be fooled. Even if investors aren't confused by the accounting charge, it matters. If earnings rise as a result of the rule change but share prices don't, the result will be lower price-to-earnings ratios. Low P/E ratios could make stocks look cheaper, even if there hasn't been any change in the company's profit potential.
Only seven of the Fed's 12 regional banks had requested Tuesday's cut, the same as in June. That suggests "some possible dissension," said Peter Hooper, chief U.S. economist at Deutsche Bank, surmising that most if not all of the other five would have preferred no cut. However, the Richmond and KC Feds, two hawkish banks, did request Tuesday's, suggesting some hawks have become either more worried about the economy or less worried about inflation during the past two months. With some signs of stability emerging and the full impact of interest-rate cuts and tax rebates yet to be felt, some economists saw hints that the Fed would pause now in its rate-cutting campaign. In its statement, the Fed alluded to monetary stimulus already in the pipeline. They have acknowledged that there are some elements of firmness in the economy but that they may not be sufficient to restore the kind of growth that they feel is appropriate," said Michael Prell, a former senior Fed staffer. Merrill Lynch chief economist Bruce Steinberg said, "The Fed's view of the economy was not as dire as in July but still gave no sense that the Fed saw an imminent turnaround," suggesting that a cut is likely in October. Bill Dudley, head of U.S. economic research at Goldman Sachs, thinks the Fed will cut rates again this fall but not necessarily at its October meeting. He expects tax rebates to sharply boost August retail sales, but that will make it hard for the Fed to know what the underlying trend is. "I can imagine a scenario where the Fed saw the recovery in retail spending and decided in October to wait for more evidence" before cutting rates again, he says. Mickey Levy, chief economist at Bank of America, said that unlike in previous economic cycles when the Fed cut rates until economic conditions improved, it may stop sooner this time. "One reason they may want to be a little more cautious this time is that over the last year, as the economy has slumped, core inflation has drifted up a bit," he said. Related: Cox News via AJC 8-19 'The full brunt of the Fed's policy will come in the first quarter'' of 2002, predicted Richard Yamarone, chief economist of Argus Research, an equities research firm in NY. At that point, many factors could come together - the tax cuts, interest rate cuts, energy cost reductions, increased federal spending and depleted inventories to ignite an economic bonfire, he said. Rather than root for more interest rate cuts, Americans should take a chill pill and wait for the economic ''medicine'' already dispensed to take effect, Yamarone said. ''We're an impatient society,'' he noted. Related: Jim McTague, Barrons 8-20 The money supply, as measured by the FR Bank of St. Louis' MZM measure (consisting of currency and all check-type deposits, including money-market funds) has been growing at a torrid 20% annual pace. Long-bond yields were climbing until recently, reflecting, in part, investors' fears that the sudden easy-money policy might engender an inflationary spiral in six months to a year. There's strong evidence that the policymakers are employing a game plan called the Opportunistic Disinflation Strategy, which was promoted by Alan Blinder, Janet Yellen, Laurence Meyer and William McDonough in the early 1990s. The strategy holds that you tighten aggressively when rates seem headed higher, to deliberately bring down inflation. But you don't have to hold tight long enough to reach the FOMC's long-run inflation target, despite the perceived benefits. Why? The tradeoff in unemployment, lost productivity and political heat doesn't always justify the tougher stance. The opportunist waits for the next positive or negative economic surprise to do the dirty work for him. You hit the brakes when inflation is rising; you keep the economy purring when inflation is moderate but still above the long-run objective. Related: Gregory Zuckerman, WSJ 8-20 The Fed's rate cuts may yet succeed in sparking the slumbering U.S. economy. But stocks are proving the most resistant to the Fed's actions, and some say lower interest rates can only prevent stocks from plunging, rather than give the market much of a push higher. "Lower rates put a floor under stocks, but I still feel pretty cautious about the overall market," says Barton Biggs, chief global strategist at Morgan Stanley. Since stocks still trade at high prices relative to their earnings, with the S&P 500 trading at about 23 times last year's earnings - above its average of 18 during the 1990s - there is little room for error. Until companies begin signaling their fortunes are improving, investors will dump stocks on any bad profit news. Says Doug Cliggott, an equity strategist at J.P. Morgan Chase: "The place to be right now, unfortunately, is short-term, high-quality securities" such as Treasurys, he says. "But my view would change if bonds kept rallying." Related: Greg Ip, WSJ 8-20 The Fed's interest-rate cuts haven't done much to lift stocks. But in the corporate-bond market, borrowing costs have tumbled, unleashing a record number of issues. So far this year, nonfinancial companies have issued a staggering $195 billion in bonds, blowing past the 1998 full-year record of $153 billion, according to Thomson Financial Securities Data. By helping companies shape up their balance sheets, the Fed has put conditions in place for more business investment. The problem is, companies for the most part aren't spending the money. Capital spending has fallen at an annualized rate of 8%. The bond proceeds are not put to work to add new facilities and equipment, or buy other companies and repurchase their own stock. Companies have suddenly made cash conservation a priority, using cash to do things like pay down a credit lines. Getting companies to actually spend requires a belief that their markets and cash flow will improve. Until then, cash preservation comes first. Capital investment fueled the late-1990s boom, and a lot of it was financed with debt. The financing gap - the shortfall between corporate investment needs and internally generated cash - soared to $265 billion last year from $65 billion a decade earlier, and as a share of nonfinancial corporate output, it hit 4.9%, its highest since 1974. That gap had to be financed by borrowing or issuing stock, leaving investment plans vulnerable to the mood of the markets. Related: Jennifer Ablan, Barrons 8-20 "The financial markets, more than anything, have got to be concerning the Fed," says James Paulsen, chief investment officer of Wells Capital Management. "If the economy was about to recover in a big way, you'd see a big upward move in stock prices, a backup in bond yields, and a rally in commodities. We are seeing exactly the opposite." Using the core personal consumption expenditures deflator - Greenspan's preferred inflation measure - the "real" fed funds rate is 2.60% (the 3.75% nominal fed funds rate minus 1.15% core PCE). During the recession of early 1990s, the real fed funds rate reached a low of negative 0.55% and was positive 1% or lower for roughly two years, he notes. Thus, in comparison to the real fed funds rate in the early 1990s, today's 2.60% level looks high, says Steve East, managing director of economic and policy research at Friedman Billings Ramsey. Related: Gretchen Morgenson, NY Times 8-26 In 2000, according to the Fed, corporations borrowed $437 billion, almost double the amount raised in 1995. Corporate debt recently stood at 85 percent of gross domestic product, a record high. Ravi Suria, the convertible-bond analyst at Lehman Brothers before moving to a hedge fund this year, saw early that the Fed's rate cuts would not propel lenders and investors back into an easy-money mode. Suria compared Fed easing in the current environment to cutting the interest rate for a consumer whose credit card is already at the limit. "It is unlikely that lenders will be willing to give a highly leveraged, noninvestment-grade company additional debt solely because the cost of primary funding for lenders has been reduced," he wrote. Economic Scorecard Greg Ip, WSJ 8-20-2001
**Inventories can be negative or positive depending on the trend The national office vacancy rate, which Grubb & Ellis thought would stabilize at 8% this year, has shot up to 11.5% and is expected to hit 14%. The industrial vacancy rate is also rising. Office space under construction has dropped to 108 million square feet from 125 million last summer and will probably fall for the next four, probably six quarters. Although the latest data show that home sales are strong nationally, sales data often lag behind market conditions, and sales are starting to weaken in many of the biggest markets. Collapsing business investment continues to be the biggest depressant on the economy and Fed officials' biggest worry. That investment amounts to 12% of GDP. In the second quarter, its slide accelerated, plunging at a 13.6% annual rate -- its steepest in 19 years. Weak demand in the U.S. has been compounded by falling orders from foreign customers as growth overseas slackens. Most economists still expect that the stimulus to consumer spending from lower interest rates, tax rebates and falling energy costs will offset the weakness spilling over from manufacturing to produce a recovery. But they disagree considerably on strength and timing; forecasts for growth next year range from less than 1% to a booming 4%.
According to The Hulbert Financial Digest, since 1991 when the digest began tracking Morningstar ratings, the firm's five-star funds have underperformed the market. However, financial pros say ratings are a good starting point for investors researching funds they might want to buy or sell. 'You don't want to have a fund that is two stars year after year.' That signals that something is wrong,'' said Peter H. Calfee, a certified financial planner in Cleveland.
'The more the system takes, the less investors get. There is no getting around that. A 1% or 2% difference in return per year over a lifetime - where you earn 8 percent instead of 10 or 6% instead of 8 - and you are talking about giving up 30% of the market's cumulative, compounded return over time. That's an enormous sacrifice, though it seems small when you make it.' 'The mutual fund industry must take a hell of a lot of responsibility for what happened in the bubble, for bringing out 100 new technology-oriented growth funds and 31 Internet funds right at the top of the market. These people knew what was going on and could see what would happen, but this is a money- gathering business and so that's what they did.' 'We did a study last March on the performance of the funds advertising in Money magazine, and the average return was 85%. The people running those ads know that will never happen again, but they're running those ads anyway. Their hot funds are accidents waiting to happen. They'll keep running those kinds of ads until investors are enlightened enough to ignore them ... and shame on the industry and the SEC for allowing that.' 'Don't expect so much and you won't be disappointed. Be reasonable about things. And think about bonds.' Asset-allocation plans ''are not guaranteed to make you rich. What they are guaranteed to do is make you avoid terrible accidents. If you can go through an investment lifetime without terrible accidents, you're going to do pretty well.'
In Bloomberg News's quarterly survey of forecasts by more than 50 banks taken in March, the average estimate for the euro's value at year-end was 96 cents. That forecast fell to 87 cents in the last survey, compiled in June. Six of the top 10 banks now see the euro above 90 cents by Jan. 1. A survey of 268 fund managers this month by Merrill Lynch showed about 57% said they were more likely to buy euros than dollars. That's up from 40% in July. Earlier this month Citigroup revised its forecast for the euro against the dollar next August to 95 cents, from 85 cents. Deutsche Bank sees the single currency rising to 95 cents by year-end. Goldman Sachs predicts the single currency will gain to more than $1 in six months. J.P. Morgan and Morgan Stanley forecast it will be at 91 cents at year-end. Bank of America yesterday raised its end-of-year euro-dollar forecast to 95 cents from 88 cents. Still, Credit Suisse First Boston and Barclays Capital say it will drop back towards its record low of 82.31 in coming months. The dollar sank earlier this week after the International Monetary Fund said that the U.S. economy may have a protracted slowdown, and that a U.S. current account deficit sets the dollar up for a `sharp depreciation.' Related: Jonathan Fuerbringer, NY Times 8-19 "There is a change in the mood," said Larry Kantor, the head of foreign exchange strategy for J. P. Morgan. "We are in mid-August now, we are in the second half of the year and people are nervous that it is not here," he said of the economic rebound. Mr. Kantor added that the pace of the flow of capital into American markets from abroad might also be slowing a little, which would put downward pressure on the dollar. For the yen, he said the rally seemed to reflect a decision by many investors to pull out of trades in which they had borrowed in yen at nearly zero interest rates and then invested that in securities in other currencies that paid much higher interest rates. He said this shift in strategy was a reflection of a move by investors to be more cautious and was overwhelming the economic fundamentals in Japan, which he said favored a stronger dollar. The flow of foreign investment into the United States, which is now going into bonds instead of stocks and mergers and acquisitions, is still positive. But Mr. Kantor said it could slow suddenly. He noted that foreigners did not have to begin selling American assets to put downward pressure on the dollar. All they have to do, he said, is buy at a slower pace than in the past. Related: M Sesit, WSJ 8-17 The U.S. dollar is falling, and much of Asia is breathing a sigh of relief. The weaker dollar takes pressure off the remaining fixed currencies in the region. Elsewhere, it will reduce interest payments on U.S. dollar-denominated debt. And in some cases it will allow nations to spend more on stimulus packages and lower already-low interest rates, or at least ward off potential interest-rate increases. Hong Kong, with its currency pegged to the U.S. dollar, has found its currency among the least competitive in the region. At the same time, because of its relatively strong currency, import prices have consistently dropped, fueling persistent deflation in Hong Kong. Malaysia saw its foreign-exchange reserves fall precipitously in the first half of the year as the central bank was forced to step into the market repeatedly to protect its pegged currency. A weaker dollar would reduce that pressure, possibly opening the door for lower interest rates. Even in nations with a floating exchange rate, a weaker dollar also would bring relief, because governments and companies hold large quantities of U.S. dollar-denominated debt. More than 60% of the Philippines' external debt is in dollars. Related: M Sesit & S Calian, WSJ 8-17 Some fund managers have made a bundle on the dollar's recent fall against the euro and now they're debating whether the U.S. currency will fall more or whether they should cash in. The decisions money managers make to back - or back away from - particular investments will significantly influence foreign-exchange rates. Some managers expect a brief pullback in the euro and then another rise, while others say the dollar isn't going to fall apart. Analysts credit short-term speculators with triggering the dollar's fall against the euro and other major currencies. But they say it will take "real" money - trader jargon for pension, investment and mutual funds - to extend the euro's gains. In early July, the euro trading at 84.80 U.S. cents. In afternoon trading Thursday, the euro was at 91.48 cents. Aberdeen Asset Management investment manager Rupert Della-Porta says "The whole world will benefit from a weaker dollar." Meanwhile, global stock markets are stalled, waiting to see if the big U.S. economy pulls out of its funk. "To the degree a weaker dollar helps the U.S. economy, it helps the world economy," says Mr. Della-Porta, adding, "It allows the European Central Bank to cut interest rates." Related: Caroline Baum, Bloomberg 8-1 Princeton economics professor Paul Krugman argues that `right now a weaker dollar is in America's interests.' While not advocating intervention to weaken the dollar, Krugman says `the great dollar decline is coming, and we should welcome it' (to aid American manufacturing exporters). If the professor/polemicist would share a few basic facts with his readers, they would see the actual benefits are slim, not to mention the risks involved (a controlled burn often leads to an out-of-control forest fire). Econometric models show that for every 10 percent decline in the dollar, GDP gets a boost of 0.5 percentage point over the next year, Glassman says of JP Morgan Chase. `That assumes no offset from the dollar's decline,' he says. `But everything else isn't the same. Inflation would be higher, bond yields would be higher.' And don't forget the effect that stronger domestic currencies would have on our trading partners, who are arguably hurting worse than the U.S. `The economies of our trading partners overshadows any currency effect,'' Glassman says. Related: M Sesit, WSJ 8-13 Although it has soared from its spring 1995 lows, the dollar still stands 59% below its highs of early 1985 against the Deutsche mark (a proxy for the euro, which didn't exist then) and would have to rise 129% to match its 1982 highs against the yen. Thus, "talk of a [dollar] bubble is absurd," says David Fuller, global strategist at Stockcube Research. Related: John Lonski, Moody's 8-2 US manufacturers have suffered not only from a slowing of US consumer spending, but also from an increase in the share of domestic expenditures accruing to imports. July's 5.9% yearly drop in the number of light motor vehicles sold in the US consisted of a +2.4% yearly increase for imports and a 7.7% yearly decline for US-built models. Moreover, January-July 2001's 4.8% year-over-year decline by unit sales of light motor vehicles in the US masked a strikingly different 7.4% decline for US-built autos and a 4.1% advance for imports. Related: Caroline Baum, Bloomberg 8-10 Cynthia Latta, an economist at Standard & Poor's DRI, which maintains another one of the big U.S. macroeconomic models, says much of the impact of a weaker dollar depends on the relative elasticities; that is, the response of demand to changes in price. `You get a pretty quick and good export response, but it generates more inflationary pressure,' she says. `Foreign demand increases, but there's no drop in domestic demand. The Fed ends up raising rates sooner than it would otherwise to clamp off domestic demand.' The result is more production for the rest of the world and less production for the U.S., which raises the question of why the trade deficit is such a bad thing to begin with. Unless you think that the role of the U.S. is to provide cheap goods and services to the rest of the world, you've gotta wonder why so much attention is devoted to the exchange rate.
In an era of declining rates, however, people are also wary of bank certificates of deposit. The average rate on a five-year CD is 4.69%, the lowest in two years, according to Bankrate.com. While that is far higher than the average bank money-market savings account, which carries a paltry 1.7% yield now, people are fearful of locking in a five-year or 10-year CD at a low rate and seeing rates climb. Instead, they are opting for the liquidity of savings accounts. As a result, about $31 billion has flowed out of CDs so far this year, according to TrimTabs.com.
Alan Greenspan is well aware of this and, in fact, seems to be depending on housing as his buffer against recession. "Greenspan is bound and determined that he is going to nurse this thing along by creating a positive wealth effect for housing," said Paul A. McCulley, a portfolio manager at the Pacific Investment Management Company. And this means, Mr. McCulley said, that interest rates should move lower and, more importantly, stay lower longer than many analysts now expect. "I think one of the things that's occurring in the country," Mr. Greenspan said, "is the evolution of housing into a very sophisticated, complex industry, in the sense that we not only have got standard home-building aspects of homeownership-related activities, but we're also beginning to find that as homeownership rises and as the market value of homes continues to rise, even in a period when stock prices are falling, we're observing a rather remarkable employment of that so-called home equity wealth in all sorts of household decisions." He also said the borrowing against rising home prices was not a worrisome long-term trend. Related: Jane Bryant Quinn, Wash Post 8-26 It's starting to look like a bubble to me. Not only did median home prices soar this spring, they rose at a faster rate than they had before. Signs abound that investors -- nervous about stocks -- are socking their money into real estate instead. In this year's first quarter, the median price of existing homes rose by 4.6% compared with the same period last year, according to the National Association of Realtors. In the second quarter, buyers got even more excited, pushing price gains to 6.4%. In June they spurted by 8.8%. Demand is strong, and there isn't a huge inventory of homes for sale, says NAR chief economist David Lereah. Related: Jonathan Clements, WSJ 8-13 Think of your mortgage as a bond, suggests William Reichenstein, an investments professor at Baylor. But in this case, instead of buying bonds and receiving interest, you are effectively selling a bond and paying interest. What are the implications? Suppose you are retired with, say, $300,000 in bonds and $200,000 in stocks. You might think your portfolio is conservatively positioned. But if you still have $125,000 outstanding on your mortgage, you would need interest from roughly $125,000 of your bonds to pay your mortgage interest. The bottom line: Your net bond position is really just $175,000, and thus your portfolio has more in stocks than bonds.
The rising income of American workers, rapid population growth, and relatively low mortgage rates, which makes home-buying more affordable for more families, have combined to boost demand. Meanwhile, constraints on builders have kept a lid on supply. But some industry observers believe another factor is inflating home values: overly generous appraisals. In theory, appraisals reduce fraud, foreclosure risk and the possibility that buyers - and lenders - will get stuck with homes worth less than the mortgage amount. Appraisers, however, say their mission is in jeopardy and the risk to the market is great, because they're under pressure to raise prices as high as possible so brokers and lenders can make more and bigger loans and thus collect more fees. Why, you might ask, would lenders and brokers engage in practices that could undermine the health of their industry? The short answer is this: Times have changed. In the past, most mortgages were made by banks and savings and loans, which held most of the loans themselves. Now, however, more people are getting loans through mortgage brokerage firms, relatively unregulated operations that take applications from consumers before shopping them to lenders to get the lowest interest rates. Since brokers at times collect fees based on loan size and have little or no stake in whether the mortgage defaults, they could be tempted to pressure appraisers to come up with bigger values. Similarly, traditional banks are increasingly selling loans they make to the secondary market. This theoretically would give traditional banks and lenders less reason to worry about whether an appraisal is correct, although lenders counter that they still retain liability for the loans in some cases. The upward spiral of prices becomes self-reinforcing. Some believe home prices are beginning to act like technology stocks before the bubble burst last year. So far, no one is predicting a major meltdown akin to what happened in the late 1980s and early 1990s, when inflated appraisals contributed to the pain of a real-estate slump that pushed thousands of homeowners into foreclosure. But if the economic slowdown turns into a protracted recession, lofty appraisals could exacerbate any economic problems. Related: Gene Epstein, Barrons 8-20 Housing is a case of a higher price seeking more supply. Low interest rates and rising incomes have naturally fueled increased demand for that commodity that used to be regarded as synonymous with the American dream. But on the supply side, housing starts have been running way below trend; even with the pickup in starts in July reported last week, the shortfall has been averaging about a quarter of a million units . The main reason for the tight supply seems to be that land is at a premium where people want to live, at least according to anecdotal reports. So with demand running ahead of supply, higher prices have resulted. Public Corporate Bond Defaults Moody's 8-15-2001
"When fund companies are launching a lot of new funds in a particular sector, you should approach the funds with trepidation," warns Dan Culloton, an analyst with Morningstar. "History shows that fund companies often introduce new funds at the worst possible time. It's hard to say whether the fund companies are caught up in the excitement or whether they're cynically saying that this will bring in the fees." According to Morningstar, during the three years ended Dec. 31, the number of sector funds doubled, to 373, and the percent of U.S. stock-fund assets invested in these funds climbed to 7.4% from 5%. For fund companies, this is clearly a lucrative business. Sector funds charge average annual expenses of 1.7%, equal to $1.70 for every $100 under management, higher than the 1.4% levied by diversified U.S. stock funds.
But what if you look at the entire 30 years through year-end 2000? It's pretty much a wash. Morgan Stanley's Europe, Australasia and Far East index climbed 13.1% a year. The S&P 500 gained 13.2% annually. Meanwhile, the Wilshire 5000 index, which includes large and small U.S. stocks, returned 13.1% a year. Since 1960, Australian stocks have gained 5.6 percentage points a year above inflation, Belgium 5.7%, Canada 5.7%, Denmark 6.3%, France 6.6%, Germany 5.6%, Ireland 9.4%, Italy 1.9%, Japan 5%, the Netherlands 8.1%, Spain 5.2%, Sweden 9.1%, Switzerland 6.5%, the United Kingdom 7.3% and the U.S. 6.8%. Note that, despite the mighty reputation the U.S. market enjoys today, it ranks only fifth among the 15 national markets tracked. But more surprising is the tightness of the results. Out of the 15 markets, 11 had annual post-inflation results that fell between 5% and 7.3% a year. (The un-stated reason for diversification - you are going to liquidate those holdings one day [for your retirement, for your children's education] and you will want to sell those at the top of their crest and heading down - and hold on to those on the bottom and heading up.)
In May, the latest month for which data are available, the percentage of subprime mortgages nationwide that were seriously delinquent rose to 6.37% from 5.55% at the end of last year, according to Mortgage Information Corp. That compares with a 4.64% delinquency rate at the end of 1999. A mortgage is defined as seriously delinquent when the borrower is three or more payments late. The rising delinquency rate could be an early sign that broader consumer-credit problems are just around the corner, much as rising junk-bond defaults two years ago proved a harbinger of deep problems in corporate lending. Some analysts and regulators already see signs of wider trouble as layoffs mount up and the nation's consumers, already dripping in debt, start to feel the pinch of a slowing economy. The serious delinquency rate for last year's prime mortgages -- the ones for customers with good credit histories -- stood at 0.16% at the end of last year, up from 0.07% for loans made in 1999. Mark Schmidt at the FDIC says the 150 banks with the highest concentration of subprime loans have invested more than 25% of their own capital in the sector. In all, those banks carry a total of $60 billion to $80 billion in subprime loans on their books, he says. This year, regulators asked lenders with high subprime exposure to increase loan reserves and capital requirements. These banks account for only 1.5% of the total number of banks and thrifts but one-fifth of all problem institutions. Related: Jennifer Ablan, Barrons 8-20 According to statistics compiled by Inside Mortgage Finance, subprime originations totaled $160 billion in 1999, the most recent year for which data are available, or 12.5% of the $1.275 trillion total. That compares with $35 billion in 1994, equal to 4.5% of total originations. Tabulations made under the Home Mortgage Disclosure Act show subprime loans for home purchases and refinancing totaled 1,054,400 in 1998, up sharply from 69,700 in 1993. Nearly four-fifths of these loans went for refinancing.
To qualify for the top 1%, your income needs to be $340,306 or higher. Admission into the top 5% club starts at income of $145,199, while the top 10% begins at $107,455. The report defines income as adjusted gross income plus other items including tax-exempt interest income, nontaxable Social Security benefits and employer contributions for health plans and life insurance.
The problem with the PCE price index, or deflator, is that it doesn't measure inflation. The PCE price index measures the change in the prices of the goods and services consumers buy, not a fixed-basket of goods. Inflation is defined as a general increase in the economy's price level, in all goods and services. Let's say folks like to eat sliced fruit on their cereal every morning but are indifferent as to what kind. So if the price of blueberries goes up, they switch to bananas. The consumer price index, which measures the price change in a fixed basket of goods each month, would reflect a rise in the price of berries even if no one buys them. The failure of statisticians to adjust for shifting consumer preferences results in what economists call ``substitution bias.'' Greenspan's pet PCE (ex food and energy) price index shows no sign of inflation anywhere. The core PCE deflator rose 1.1% in Q2, the smallest increase in four years, and less than half the Q1 rise of 2.6%. The overall PCE price index rose 1.7%, well below Q1's 3.2% increase. By comparison, the CPI for Q2 rose at an annualized 3.7% while the core CPI rose 2.6%. The Cleveland Fed's alternate measure, the median CPI, has shown a parabolic rise in the last 18 months: from an annual rate of 2.2% in December 1999 to 3.6% in June 2001. Okay. If one opts for a chain- weighted price index in order to obtain a truer reading of the changes in prices of the things we buy - then what's the justification for excluding food and energy on a regular basis? Changes in food and energy reflect `more than usual a supply adjustment,' says Neal Soss, chief economist at Credit Suisse First Boston. `You don't blame demand for what is really lousy weather causing food prices to spike up.' I'm not convinced. Either you measure inflation via a fixed basket of goods and services, or else you measure cost of living, in which case there's no justification for excluding the volatile food and energy. Just when you thought the statistical agencies had wrung all the excesses out of the inflation measures, along comes another CPI Index, based on the concept of chain-weighting. Starting sometime in the middle of 2002, the BLS will begin releasing a chain-weighted CPI in addition to its current index. The new measure will capture substitution in response to changes in relative prices. Yes, the new CPI will indeed make inflation look lower. Enter the Boskin Commission, which found that the CPI overstated inflation by 1.1 percentage point. A lower CPI translates into reduced cost-of-living adjustments for government transfer payments (like Social Security) and a smaller deficit. While the government's budget has swung from deficit to surplus in the last few years, it doesn't obviate the desire to portray inflation in the best possible light. Just think of the flexibility it gives policy makers!
Equally unsurprising was the rise in wage rates reported last week. This is the essential fuel that drives consumer buying. Average hourly earnings for production and nonsupervisory workers in the private sector rose 4 cents in July, to $14.35 per hour. Given the upward revision to June's figures, hourly earnings over the past six months jumped at an annual rate of 4.6% and ran 4.4% higher than the same month a year ago. Employment fell by 42,000 in July, but the estimates for May and June got upwardly revised by a combined 54,000. Over the three months the job loss has averaged 31,000, virtually all of it concentrated in manufacturing. In that sector, three-month losses averaged 97,000 compared to an average gain of 66,000 in nonmanufacturing. Even that way of splitting things makes nonmanufacturing look a bit weaker than it probably is. That's because this catch-all category also includes an average 28,000 loss in temporary help supply, and research has shown about half of temporary help works in manufacturing. So if you reallocate that half, the score changes to manufacturing, down 111,000, and everything else, up 80,000. An average of 33,000 of that 80,000 rise was accounted for by government, nearly all of it to education on the state and local level. In response to the rambunctious consumer, retail trade added an average of 15,000, while the catchall "services" industries - from health to motion pictures - gained an average of 27,000. Epstein preceived four fallacies in most peoples/economists perceptions of what is going on in the jub market. Fallacy One : What with all those layoffs, the estimated jobless rate of 4.5% is either too low now or will soon vault higher. We all respond viscerally when we read about a serial killer, but the news doesn't make us feel the population must be shrinking. So why should hearing about a spate of layoffs convince us the jobless rate is up? Even in the middle of an economic boom, people lose their jobs; and even in the midst of recession, they often find work. en now, the numbers indicate that more than 75% of the jobless find work within three months of being unemployed. Fallacy Two: The recent runup in the "insured" unemployment rate means the headline rate is due for a rise - or worse, that the headline rate understates the actual rate. (Since last fall, the insured rate rose from 1.7% to 2.3%, while the headline increased from 4.0% to 4.5%.) The BLS counts you as unemployed whether you're receiving benefits or not; all you have to be is without work and actively looking.) Right now, the numbers indicate that a higher percentage than usual probably qualify for benefits, mainly because they got laid off, while a lower percentage than usual don't qualify. Fallacy Three: Payroll employment is overstated because the "bias adjustment" is currently too large. The bias adjustment is the number by which the BLS upwardly adjusts the payroll estimates in order to take into account the effect of business births that escapes their radar. Fallacy Four: White-collar unemployment has been soaring. Well, no, that's not actually the case. Blue-collar has been feeling the bulk of the pain, as always. A Jobs Friendly Stat - John Lonski, Moody's 8-2 Initial state jobless claims serve as a leading indicator, while nonfarm payrolls are a coincident indicator. Since declining by 7% monthly in January 2001, initial state unemployment claims soared higher by 4.8% per month, on average, during the five months ended June. But July's prospective number of initial claims for state unemployment benefits droped 3.7%. Another indication of a possibly steadier labor market was supplied by a second consecutive upturn by ABC/Money MagazineÌs weekly index of consumer confidence. Unlike the two established measures of US consumer confidence, this version rose from June to July, which also was a second straight month-to-month increase.
The basics of investing: The Plain Talk Library from Vanguard (800-662-7447) is the most comprehensive and detailed package of material offered by any fund company. What's particularly good about it, however, is the breadth of material; think of a subject, and there is a good chance Vanguard has a brochure on it. If you are looking for something that helps with more of a ''how to manage money'' bent, consider the ''Financial Library'' that's part of the AARP Investment Program run by Zurich Scudder (800-253-2277). If you really want to walk yourself through a rigorous financial planning exercise, check out the ''Getting Ready for Retirement'' workbook from Fidelity (800-544-6666). On the more rudimentary side is the ''Investment Basics Series'' from the Franklin/Templeton funds (800-342-5236). The ''What You Need to Know'' series from Oppenheimer (800-525-7048) comes close to failing the promotional test - but , its material goes into some areas the other firms miss. The ''Retirement Readiness Guide'' from T. Rowe Price (800-638-2587) offers several good kits filled with work sheets and educational material, but the one I liked best of all was an unimpressive looking but highly unusual offering called the ''Asset Mix Worksheet.'' Related: Best of the rest - Charles Jaffe 8-12 The ''ProcrastiMeter'' from American Express Financial Advisors (800-437-4332) shows how much money you will lose if you delay saving a chunk of your salary by another year. The flip side is a ''GrowthMeter,'' which shows how a little savings add up. American Century (800-345-2021) offers two worthwhile calculators - one on college savings, the other on how long your retirement nest egg will last - as part of its fine ''Investor Education & Guidance'' series. Rydex funds (800-258-4332) offer supercharged sector and hedge-like funds for sophisticated investors, so it's not surprising that they offer a thorough and technical analysis of sector investing as part of their educational series. This is a good but high-level primer; if you can't understand this, you probably shouldn't buy sector funds. Strong Funds (800-368-1030) offers a brochure with 10 questions newlyweds should ask as they start life together. USAA (800-358-0429) has a brochure on ''the basics of buying on margin,'' remarkable for a fund company because brokerage houses, not funds, are in the margin business. Finally, a psychology of investing pamphlet from Dreyfus Founders (800-525-2440) discusses some of the problems that invade the typical investor's thought process.
Professor Pastor and Professor Stambaugh were able to demonstrate that certain stocks were much more sensitive than others to changes in the market's overall liquidity. Liquidity is usually defined at the level of individual stocks, generally referring to the ability to trade large quantities of that stock quickly, at low cost, without moving its price. The phenomenon is well illustrated by what happens during so-called liquidity shocks - events like the 1987 market crash or the 1998 tumble of LTCM. Liquidity shrinks sharply during these events, and not just for individual companies but for the market as a whole. In the wake of liquidity shocks, some stocks plummet while others barely budge. It turns out that, over the long term, the stocks that are most vulnerable to liquidity shocks outperform those that are least vulnerable to them. From the beginning of 1966 to the end of 1999, the professors found, the most vulnerable stocks outperformed the most immune ones by an annual average of 7.5%. Moreover, this performance difference could not be shown in Morningstar's existing style box; it held up regardless of whether a stock was small or large cap, growth or value. Economics 101 helps us to understand this liquidity-related style: To induce investors to own stocks that plummet during liquidity shocks, they must be rewarded with higher long-term returns. Otherwise, they would prefer stocks that are less vulnerable. Though the two professors found that no single historical characteristic was a perfect predictor of how a stock would react to liquidity shocks, one of the useful indicators was how it reacts to large "buy" or "sell" orders. They found that if a stock tended to reverse direction the day after such orders, then more often than not it was sensitive to liquidity shocks. In contrast, a stock was relatively immune to liquidity shocks if it was less subject to such daily reversals. But be careful not to confuse a stock's vulnerability to liquidity shocks with its volatility Ù a measure of the fluctuation in its price. Such vulnerability is but one of many causes of volatility. In fact, many stocks are relatively immune to liquidity shocks but nonetheless quite volatile.
Another sign that mutual-fund companies are making things tougher for the little guy: Minimum investments to open accounts have been rising. Vanguard Group, for example, has raised the investment minimum on four funds to $25,000 from $10,000 or less since 1999. During the past four years, firms including Federated Investors, Franklin Templeton, IDEX Mutual Funds, Strong Funds, Van Kampen Funds and Westcore Funds have increased investment minimums on at least some of their funds, according to Morningstar. Charles Schwab Corp., which sells funds through its large brokerage operation, plans in September to levy fees of as much as $180 a year on most customers with balances of less than $50,000. Before, only clients with less than $20,000 were affected by such fees. Related: Karen Richardson, WSJ 8-16 Mutual-fund fees are rising in fund markets around the world, according to fund-research company Fitzrovia International Plc (London). In 2000, when the world's financial markets suffered a downturn, annual fund-management fees increased on average by 10% compared with a rise of only 1% in 1999. The firm said of the more than 25,000 funds it monitors world-wide, 530 increased their management fees last year compared with 450 in 1999. Related: Albert Crenshaw, Washington Post 8-19 Peter Di Teresa, senior analyst at Morningstar, says mutual funds are setting fees at levels that will attract shareholders who cost less to serve and thus are more profitable. The ideal investor, in the eyes of the mutual fund industry, has long been someone who puts in a lot of money, leaves it there a long time and, when it is necessary to do business with the fund, does it online. Vanguard spokesman Brian Mattes noted that a $3,000 account generates "a total revenue stream of $8.10," based on a typical expense ratio and other charges, "so that account is subsidized by larger accounts. That offends our sense of what's fair." Fidelity's $12 small-balance fee on mutual funds is meant to "discourage people from holding a lot of small accounts," said Tracey Esherick, executive vice president of Fidelity's brokerage. Funds also do not like market timers and other short-term investors. A study by ICI found that "even a few timers can be very disruptive to the fund, and the long-term shareholders end up bearing the cost of those timers," said Brian Reid, ICI senior economist and the study's author. Reid found that in a fund in which 98% of shareholders have a seven-year holding period and 2% have a one-month holding period, the fund had a redemption rate nearly three times as high as it would if all shareholders had a seven-year holding period. Redemptions force fund managers to maintain certain levels of cash or liquid securities, which generally depresses fund performance and forces the fund to incur higher trading costs. One way of doing that is to impose redemption fees on shareholders who buy in and then sell out in less than a specified time. Many fund operators, including Vanguard and T. Rowe Price, have done that. Related: Tom Lauricella , WSJ 8-27 A new fee study, Mutual-Fund Advisory Fees: The Cost of Conflicts of Interest and published in the University of Iowa's Journal of Corporation Law by John Freeman, a professor of legal and business ethics at the University of South Carolina and Stewart Brown, a finance professor at Florida State University, shows that fees borne by mutual-fund investors are substantially higher than those paid by public-employee pension funds for the same services - as much as double on average and three or four times higher in some cases. Using data on 1,343 domestic-stock funds from Morningstar Inc., the study found that mutual funds charged an average annual advisory fee equal to 0.56% of investor assets in 1999. By contrast, 1999 survey data from a third of the nation's 100 largest public-employee pension funds showed they paid an average of exactly half as much in advisory fees on 220 portfolios. Translation: Mutual-fund investors are paying an average of $28 more for every $10,000 invested for advisory services than pension funds. Examining the impact of size on fees, the new study ranks pension funds and mutual funds according to their assets and compares the advisory fees paid by the funds. Among the smallest 10% of both types of funds, the difference wasn't that great; pension funds paid fees averaging 0.6% of assets a year and mutual funds, 0.77%. But advisory fees for pension funds fall off rapidly as their portfolios grow in size. For the largest 10% of pension funds surveyed, with portfolios averaging $1.55 billion in assets, advisory fees were 0.2% of assets. In contrast, the largest 10% of mutual funds studied, with an average of $9.67 billion in assets, were charging investors 0.5% of assets in advisory fees. The mutual-fund industry dismisses the study. "The findings are not convincing," says John Rea, chief economist at the ICI. "There are flaws in the data, and as a general matter, it is an apples-to-oranges comparison -- there's no reason to think fees [for pension and mutual funds] ought to be the same." But Don Phillips, managing director of Morningstar, says the study is dead-on in its methodology and findings. He says the main difference between pension funds and mutual funds is that mutual-fund assets come and go more frequently, which has nothing to do with setting the level of advisory fees.
The truly regrettable paradox is that the strategies advocated by the economic and financial mainstream - reduced government spending, privatization, unrestricted capital flows and completely free trade - are not the policies that gave rise to the rapid growth of developing nations in the recent past. Had South Korea, Taiwan, Thailand or Brazil been restricted to the policies considered acceptable today, they would not have been such success stories. Taiwan and South Korea adopted aggressive industrial policies to subsidize crucial industries. Many of the fastest-growing nations owned and ran major industries and protected infant industries with high tariffs. Government investment in education was often strong in these nations. Most slowly depreciated their currencies, rather than adopt the floating currencies advocated today. At times it may require an import- substitution policy of high tariffs to protect developing domestic industries. But such policies were widely criticized as the main source of failure in Latin America in the 1980's. Others would counter that it was the indebtedness of many Latin American nations that created crises and poor growth in the 1980's, not import substitution, and that the establishment has essentially twisted the argument in its favor. Just the Facts Suicide strategies that will sink a portfolio (1) Buy from the top of the short-term performance chart (2) Aggressively practice market timing (3) Lose faith in what you are doing - One common mistakes is picking a fund to meet long-term goals, then bailing out if short-term results disappoint. Studies show that investors who bounce from fund to fund tend to have miserable long-term results to show for it. (4) Overemphasize sector funds and concentrated specialized portfolios (5) Diversify with funds that buy similar assets - If you only buy funds with great track records over a set period of time, you are likely to buy funds with overlap. (6) Buy and forget about it - The difference between this and a successful buy-and-hold strategy is that forgotten funds get away with poor performance. (Charles Jaffe, Boston Globe 8-26) Bad Credit & Auto Insurance As many as 92% of the 100 largest personal-auto insurers now use credit information when they write new policies, according to a study by Conning & Co., an insurance-research and asset-management firm. More than half of this group started using the data within the past three years. And 52% of companies responding to the survey use credit history not just to decide whether to insure you, but also to help determine your premiums. At Farmers Insurance, for example, a poor credit history could cost you 35% to 40% more in premiums, depending on the state in which you live. according to Gerri Detweiler, author of "The Ultimate Credit Handbook," a 1999 study of insurance companies in Virginia revealing that 16% of new applicants were denied coverage because of poor credit, while 19% of policies were not renewed. (Stephanie AuWerter, WSJ 8-26) MIT predicts productivity boom Researchers at MIT's Artificial Intelligence and Computer Science Laboratories have joined together to develop new hardware and software that they say could increase productivity by up to 300%. Two products currently in development - the Handy 21 and the Enviro 21- feature hardware that is easily reprogrammed to switch functions so that the devices can serve as TVs, cell phones, radios, or network computers. Advances such as limited natural speech recognition and response are the beginnings of a revolution in how computers and humans work together. (Chronicle of Higher Education,8-22) Slow growth in restaurant sales Growth in sales at restaurants and bars has declined steadily. For the 12 months ending this past Jan. 31, sales were 4.4% higher than the comparable year-earlier figure, according to figures from Technomic and the U.S. Census Bureau. But for the 12 months ending July 31, sales were only 2.4% above the prior 12-month period. Though sales are still above last year's, 2001 is shaping up to have the slowest growth since the 1991 recession, when sales dropped 1.2%. (WSJ 8-22) LEI up for 4th month For the fourth straight month in July, index of leading economic indicators rose - this month up 0.3% to 109.9, the same amount it rose in June. The Conference Board the said five of the 10 components that make up the leading indicators index increased last month: money supply, average weekly initial claims for unemployment insurance, interest-rate spread, average weekly manufacturing hours and consumer expectations. The negative contributors to the index were stock prices, building permits, and vendor performance. (WSJ 8-20) Got a will? Overall, 59% of US adults have failed to draft a will, leaving them little control over what happens to their assets or minor children in case they die, according to a survey commissioned by FindLaw, released last week. The percentages are even worse for younger adults and parents: 89% of those between the ages of 18 and 34 have no will, and 66% of those with children have no will. Of those who are age 54 and older, 71% said they have a will. (Dolores Kong, Boston Globe 8-19) Celebrating 'passive' American investors A recent study reported by the Federal Reserve Bank of New York concludes that the popular conception that Americans had become aggressive stock investors in the 1990's as they chased Wall Street returns is off the mark. The study shows that the increase in the stock portion of American portfolios was more modest than thought. The main reason for this more modest increase in stock holdings was the rise in the value of the stocks themselves, not the wild pursuit of more stocks. Since American investors were more passive investors than many thought, as stocks fall, investors may also remain passive. (J Fuerbringer, NY Times 8-15) WEB BUGS A new Cyveillance report finds that "Web bugs"--invisible technology that gathers information on Web site visitors--are embedded in 18% of personal Web pages, compared to less than 0.5% in 1998. Companies such as America Online and Yahoo!'s Geocities include Web bugs in the Web page-building technology they offer free to users. Yahoo! does not mention the fact that Web bugs are placed on personal pages, and AOL fails to describe their use. (NY Times, 8-14) Women & Social Security Social Security represents the only source of income for one of every four unmarried women retirees. In the U.S. population as a whole, only 10% of retirees rely on Social Security as their sole source of support. Social Security makes up just 37% of the average single man's support, he says, but it makes up 55% of the average single woman's support. The current maximum Social Security benefit for someone who retires at age 65 is $1,536 per month, or $18,432 per year. The average benefit is considerably lower, roughly $845 per month, or $10,140 per year. (Chic Trib 8-14) The stealth bull market Michael Weiner, portfolio manager at Banc One Investment Advisors, notes that smaller, less-prominent stocks have been putting in a stealth performance. "Although the averages are down, the median stock is up 2.5%" this year, according to a recent calculation by his colleagues. How is that possible? The larger stocks, which drive the indexes, have been soft, but smaller stocks have held up. "The stealth bull market continues," Mr. Weiner says. The calculation is based on 1,500 stocks: the 500 large stocks in the S&P 500, the 600 stocks in the S&P small-stock index and the 400 stocks in the S&P index of midsize stocks. (WSJ 8-13) The Bubble in hindsight We should have known that an investment bubble was brewing in the second half of 1999. Not only did technology prices lose all relationship to previous valuation models, but only a third of all stocks were rising in value. Those not in the bubble are starved for resources. A healthy sign is that almost two-thirds of all stocks have increased in value during the past 12 months although the indexes have not. Unfortunately, technology stocks still are not down to acceptable values. Some of this is the result of companies that were formed when capital was pouring into the sector. The ratio of prices to earnings for all technology stocks is a stunning 75, but it falls to 32 when companies with negative profits are excluded. (Donald Ratajczak, Atlanta Journal-Constitution 8-12) Consumers becoming more frugal Where consumers have been spending or not spending of late speaks in a loud, clear voice. They have been spending more time in discount stores. They are buying less-expensive, fuel-efficient cars. In the stock market, they are talking about buying value stocks or not buying at all. Earlier this year, an AP poll showed a third of Americans cutting vacation plans. The poll also found the number of people expecting to take no vacation - 15% - had tripled in two years. (AJC 8-12) Fun with numbers Two weeks ago when, in the course of announcing Nokia's first profit drop in five years, CEO Jorma Ollila predicted that sales of its mobile handsets would return to a 25% to 35% growth rate next year. Encouraged investors bid up Nokia shares 15% on the news. Those same numbers inspired analysts at Horizon Research Group, a New York-based hedge fund, to do some calculations and reach a very different conclusion. They quickly established that, if the market grew 35% a year for the next 10 years, 8.1 billion handsets would have to be sold in 2011 - when the world's population is estimated at roughly seven billion. (WSJ 8-8) Selling call options Got a stock that you don't think is going anywhere? The temptation is to sell a call option against your position. The call option commits you to selling the stock at a designated "strike price" any time between now and when the option expires in, say, 10 weeks. Thus, if the stock climbs above the strike price, you will lose out on this additional appreciation. In return, you might collect a premium that is worth a few dollars a share and possibly more. "It's like an extra dividend," suggested one of my recent e-mail correspondents. But that extra dividend could come at a huge cost. If stocks rally, folks who have sold covered calls may find that they suffered through the bear market, only to miss the market rebound. (Jonathan Clements, WSJ 8-7) Run rates Imagine that Company X is growing very rapidly from quarter to quarter. Let's say you need to estimate its current annual rate of sales. You could add up the last four quarters' worth, but that would clearly understate sales, as each quarter's numbers have been rising. Enter the run rate. Take the most recent quarter's sales of $40 million (up from $34 million the quarter before and $29 million before that). Multiply that by four (for four quarters), and you'll have the current run rate for sales: $160 million. This is not a forecast of future sales or a measure of past sales. It just measures the current level of annual sales. (Tom Gardner and David Gardner, Atlanta Journal-Constitution 8-5) Why unemployment is rising slowly Amid the biggest decline in quarterly profits in 10 years, CEO's continued to be optimistic about the economic outlook. The Conference Board's index of business confidence rose to 52 in Q2, up from 45 in Q1 and 31 in Q4. A reading above 50 reflects more positive than negative responses. If these CEOs are as optimistic as they say - in Q2 45% said they expected conditions to improve in the next six months, up from 35% in Q1 - no wonder they aren't willing to sack qualified workers. Substituting cheap capital for labor is the ongoing story in the U.S. At the moment, the substitution effect appears to be on hold. (Caroline Baum, Bloomberg 8-2) Inventories Last month, 19% of those surveyed (by NAPM) said customer inventories were too low. Only 9% said they were too high. In June, 14% said they had too much stuff. `Inventories are the swing factor at turning points,' says Jim Glassman, senior economist at J.P. Morgan Chase. `When the cloud lifts, they're what triggers the bounce-back.' Businesses reduced inventories by $26.9 billion in Q2 after paring them $27.1 billion in Q1. That was the largest two-quarter decline since 1982- 1983. (Caroline Baum, Bloomberg 8-1) And the bad news is ... In the history of US stock markets, the average bear market has lasted 18 months. Welcome to August, the 18th month of the current bear market. The July earnings period has failed to stimulate the market, nor has it set a bottom so low that September earnings are likely to raise the bar. In my book, that means we're looking at February 2002 - the period when year-end earnings are released - before we can expect sustained, broad-based recovery. And that's the good news. The bad news - it could be longer. (Charles Jaffe, Boston Globe 8-1) Dividend stats Once a dividend is dropped, chances are it will stay dropped. "It's very rare," says Joseph Tigue, managing editor of S&P's investment newsletter The Outlook. The reason is simple: Companies that scrap their dividends aren't just struggling with a sour economy - they're usually trying to stay afloat. Naturally, every penny helps. S&P's estimates that about half of the stocks listed on the NYSE pay dividends, but only a quarter on the tech-heavy Nasdaq do so. The average dividend yield for companies in the S&P 500 in 1980 was 5.88%. But by last year, that number had shrunk to just 1.1%. (Smart Money, 7-25) Search engine spam The Ralph Nader-backed consumer group, Commercial Alert, has asked the FTC to investigate the advertising practices of more than half a dozen Internet search engines - claiming that the search engines are guilty of surreptitiously placing paid advertising, instead of objective information, in their search engine results. The complaint fingers AOL Time Warner, Microsoft, AltaVista, Terra Lycos, Direct Hit Technologies, iWon, and LookSmart as culprits. Commercial Alert is accusing the companies of "commercial deception." (Reuters, 7-16 via EduPage) Quick Stats HR departments, especially their training and development wings, draw quick scrutiny during slowdowns because they don't directly produce revenue. One rule of thumb says a company should have an HR employee for every 100 regular employees. (WSJ 8-28) So far this year, PC sales in the U.S. are off nearly 21%, compared with 2000, and trail 1999, as well - according to says NPD Intelect, a research firm that surveys retailers. (WSJ 8-24) Workers nationwide have received an average 4.4% pay raise so far this year, up from 4.2% during the past four years, according to a survey of 1,500 companies by William R. Mercer. Raises usually go out in the earlier part of the year. But raises next year are expected to average 4.3% and could be even lower if the economy continues to weaken. (WSJ 8-19) About 67% of major U.S. companies use some form of drug testing for new hires, current employees or both, according to a recent survey by the American Management Association. That's down from 74% in 1998. (WSJ 8-19) The National Association of Securities Dealers, which runs the nation's largest arbitration system handling investor grievances, reports that through July, 3,950 cases had been filed, 25% more than at the same point in 2000. (Gretchen Morgenson, NY Times 8-19) The typical bear market lasts one-quarter to half as long as the preceding bull market. That could mean that this bear market will last at least until 2003. (Mark Hulbert, NY Times 8-19) Measuring the economy today is like trying to fit a suit of clothes to a customer who won't stand still. (former Undersecretary of Commerce Everett Ehrlich - quoted by Gene Epstein, Barrons 8-13) The July-through-October period historically has been the weakest of the year for share prices, according to data compiled by Hirsch Organization. Plenty of investors have cash they'd like to put to work in stocks, eventually. But a weak market heading into a traditionally weak season would give those with cash one more reason to keep it sidelined. (Tom Petruno, LA Times 8-12) Index funds account for close to 10 cents of every dollar invested in stock funds. (Chet Currier, Bloomberg 8-10) Marked-down goods, which accounted for just 8% of department-store sales three decades ago, have climbed to around 20%, according to the National Retail Federation. Retailer ShopKo has calculated that it costs 18 cents to change the price on a single garment tag, and 24 cents to revise a shelf label. (WSJ 8-7) Big firms plan base pay raises of more than 4% this year and next, according to a survey of 1,500 companies by William Mercer. But companies may reconsider if the economic slowdown continues, Mercer says. (WSJ 8-7) Notwithstanding an increase in quarterly productivity growth, corporate profits plummeted, credit rating downgrades held a wide lead on upgrades and job losses mounted. Some productivity miracle! Almost entirely because of a 2.4% annualized decline in hours worked, productivity growth increased to 2.5% in Q2 from 0.1% in Q1. Continued declines in hours worked are not a desirable or sustainable source of productivity growth. (John Puchalla, Moodys 8-7 ) The same report (mentioned above) showed that second-quarter unit labor costs grew 2.1%, down from a 5% rate in the first quarter. Over the 12 months through June, unit labor costs grew 4.8%. Average hourly compensation for employees of nonfarm businesses grew 4.7%, down from 5.1% in Q1. (WSJ 8-7) A headline from humor newspaper the Onion: "Out-Of-Work P.R. Exec Has Great Things to Say About Unemployment." (WSJ 8-7) Twenty-eight of the 38 funds Morningstar classifies as micro-cap have posted double-digit gains so far in 2001, while large-stock growth funds, the mainstay of many a portfolio, are down 19% as a group year-to-date. After virtually ignoring smaller stocks through the bull market of the late 1990s, investors have been flocking to them and dumping large stocks. (LA Times 8-5) A survey by Myvesta.org, a group that helps consumers deal with debt issues, shows that the average holiday shopper spent $1,220 on gifts in 2000. The group notes that someone making the minimum payments on that average shopping spree would need 23 years (and $2,600 in interest charges) to pay it off. That assumes an 18 percent interest rate and a monthly minimum payment of 2%. (Charles Jaffe, Boston Glove 8-1) The IRS says 981,233 individual income-tax returns for 1999 claimed moving expenses, up 21% from 1998. (WSJ 8-1) Only 48% of 10,000 workers in 18 companies surveyed by Watson Wyatt Worldwide, Washington, trust employers to design a health plan that will provide needed coverage. Also, 69% of workers overestimate the share of coverage for which they pay. (WSJ 7-31) Out of 6.3 million workplace drug tests it conducted last year, 4.7% were positive, says Quest Diagnostics Inc., a Teterboro, N.J., test concern. The rise from 1999's 4.6% is the first since it began tracking rates 13 years ago, though last year's level still trails 1998's 4.8%. (WSJ 7-31) Investors put $10.6 billion into stock funds in June, according to ICI. That is down from $18.1 billion in May. Assets in stock funds dropped in June by 1.8%, to $3.677 trillion from $3.745 trillion in May. Taxable bond funds received $1.76 billion in net new money, while municipal bond funds saw a jump of $1.15 billion. World stock funds saw $1.08 billion in new cash, while in May there were withdrawals of $2.46 billion. (WSJ 7-31) Quick Tips You can type just the domain name of a dot-com address into the Address Bar, for example "emazing," and then press Ctrl + Enter and Microsoft Internet Explorer 5.5 will fill in all the blanks to produce www.emazing.com. (Emazing Tips 8-9) For those of you who have a mouse with a scroll wheel, you can easily change the font size in Microsoft Internet Explorer 5.x without taking your hand off of the mouse. All you have to do is hold down the Ctrl key and scroll the wheel to increase or decrease the font size. (Emazing Tips 8-7) As you know, you can move to the previous page in Netscape by simply clicking the Back button. Once you've moved back in Netscape, you can click the Forward button to move forward to the next page. If you would like to move back more than one page, click the Back button and then hold down the mouse button. After a second or so, a list of the pages you've visited will appear. Now you can select one of those previous sites to move there. The Forward button works the same way. (Emazing Tips 8-6) Many people know that to minimize a window, you simply click on the horizontal line ( -) in the right hand corner of the window. However, there is a simple way to minimize ALL your open windows at once and get back to the desktop. Simply hit the windows key on your keyboard (located between the Ctrl and Alt keys) while pressing "D" simultaneously. (Prodigy Tips 7-23) If you ever run across a Web page you would like to e-mail to a friend, just click the Mail button in the menu bar at the top of your Internet Explorer browser, then choose Send a Link. (Prodigy Tips 7-16) If you want to find sites similar to the one you're currently viewing, you don't have to go back and do a new search. Just go to the Internet Explorer Tools menu and choose Show Related Links. The browser will display links to similar sites in the search window to the left of your screen. (Prodigy Tips 7-16) Home Page Previous Factoid Top Sites |