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The report was based on an examination of the supply of new office, retail, industrial, hotel and apartment space coming onto the market across the country. Cities that ranked in the top 10 of any two of the categories made the list, though some cities were more at risk than others. FDIC officials said Las Vegas, Orlando and Phoenix, for example, placed in the top 10 in four of the five categories. The other cities on the list were Atlanta, Charlotte, Dallas, Portland, Ore., and Salt Lake City.
Consumer spending is the locomotive of economic growth and a key variable in forecasting interest rates. Right now, itĖs pointing to slower growth and lower rates. 'There has been a rather substantial slowdown in the economy from earlier in the year,' says William Griggs, of economic consultants Griggs & Santow. ThatĖs the old news. The new news is that many economists, including former Treasury undersecretary Griggs, believe the slowdown is here to stay. Until recently, forecasters cautioned that the apparent spending deceleration was a head fake that might wrong-foot investors betting on the decline of retailers, consumer products makers and interest rates. They worried the stock market might surge at summerĖs end, renewing the urge to spend and eventually forcing the Federal Reserve to tighten the interest rate screws still further. 'There was a lot of worry about a second-half bounce in the stock market. Now that it didnĖt happen over the summerš People donĖt expect itĖs going to happen in the fall, which tends to be a tougher period for the market,' says Chris Low, chief economist at First Tennessee Capital Markets. As evidence of slower growth mounted in recent weeks, economists more confidently predicted steady Fed policy for the foreseeable future. Employment data, manufacturing statistics and certain home sales measures have started sending a unified message. But itĖs the retail data that have economistsĖ full attention. If sales of non-durable consumer goods such as clothing, restaurant fare and gasoline follow the deceleration in durable goods, economists say, then the prospects for an old-fashioned recession will grow and consumer confidence finally will falter. But for now, few experts are uttering the R word. Most see energy prices as the biggest wildcard, since the peak winter fuel season looms ominously close and petroleum prices havenĖt slipped far from 10-year highs. While most economists and, if you believe polls like the confidence survey, consumers themselves claim high oil hasnĖt altered spending patterns much, a few forecasters beg to differ. For instance, Gary Thayer, chief economist at A.G. Edwards & Sons, finds that gasoline station sales, when adjusted for the energy spike, are lower than they were a year ago. That 4-percent decline, he says, suggests people driving less as gas costs remain high. 'The last time we had a slowing in gasoline station sales was in the early Ë90s, when the economy was a lot cooler,' Thayer says. For now, the consensus forecast through the first half of next year puts the U.S. economy on a 3- to 4-percent growth pace Ä solid, but slower than the 4-percent-plus rate of the past several years. Those predictions may be revised lower, however, if the complexion of consumer spending continues to change.
In Europe, 11 nations have adopted a single currency and effectively forfeited economic sovereignty to the European Central Bank. These fiercely independent, unelected officials are steering economic activity in an area roughly the size of America's without a government looking over their shoulders. In this way the ECB holds the fortunes of most Europeans - not to mention the politicians who entrusted them with this power - in the palm of its hand. In Japan, it's the central bank that economists around the world are watching, not elected officials. By any objective measure, the Fed, ECB and Bank of Japan dominate the global financial system, controlling upwards of 80% of growth in the developed world. "Governments have largely ceded to these three institutions the responsibility of controlling world inflation, and to do this they must necessarily influence the near-term path for GDP and unemployment," notes Goldman Sachs economist Gavyn Davies. "Rarely, if ever, can so much power have been wielded by such a small number of institutions sitting outside the direct democratic process."
First, gains on the sales of stocks, bonds and certain other assets are now taxed at two rates: 10% for gains that would be taxed in the 15% bracket if they were ordinary income, and 20% for income that would be taxed at 28% or higher were it not capital gain. Second, to qualify for these preferential capital gains rates, assets must be held a year; gains on assets held less than a year are taxed at ordinary income rates. The law adds another holding period of five years, and it is to assets held five years or more that the new rates apply. Beginning Jan. 1, 2001, the 10% rate falls to 8% for assets held five years or more. The rate takes effect immediately, so investors who have assets they have owned for five or more years can save 2 percentage points on their tax rate by selling next year, rather than in 2000. Under the law, the 20% rate falls to 18% on assets held more than five years, but in this case the holding period must begin in 2001 or later. In other words, assets acquired next year would get the lower rate if sold in 2006 or later. Assets owned now don't qualify. To prevent investors from having to sell their assets and buy them back, thus incurring transaction costs as well as taxes on current gains, the thoughtful lawmakers put in an option known as a "deemed sale and repurchase election." Under it, a taxpayer after Jan. 1 can pretend to have sold an asset and bought it back. The taxpayer will have to pay taxes on whatever gain he or she has accumulated since the asset was originally acquired, but any future appreciation will be taxed at 18% instead of 20% when the asset is finally sold. Moderate-income taxpayers with large gains could see the 8% rate apply to only a portion of the gain. The rest will be taxed at 20%. Higher-income taxpayers who expect to hold a stock for many years should consider waiting until after Jan. 1 to buy it, assuming there is no pressing market reason to buy it now. The really tricky part of the new rates is the "deemed sale" provision. Exercising this option could result in savings, but it could also be a booby trap. This election is irrevocable and you have to guess not only about the asset's future performance but also about what tax bracket you will be in. Prepaying tax on assets held less than a year will result in ordinary income. If you have a stock that's been flat or slightly higher but you expect it to turn up later on, you could use the deemed-sale option and pay little or no tax and lock in the lower rate for years in the future (2006 and beyond). If you have a loss at this point, it would probably be better to sell the stock and recognize the loss.
Whether you are talking about strong dollars or weak euros, there is a difference between a transactional gain or loss and a translational gain or loss. In other words, there is a difference between something that really hurts you and an accounting translation. Coca-Cola, for example, is not selling less or more soda based on what the value of the euro is. That should have a minimal impact on sales. And the cash those sales generate is probably not repatriated. But for accounting purposes it has to come back. So that is a purely translational loss. On the other hand, Corrus, the old British Steel, probably has 80% of its business on the Continent. Now, the British pound is very weak against the dollar, but it is strong against the euro. That will really hurt them. So companies that export are going to be truly impacted by the weakness of other currencies against the dollar. On the other hand, if you are a multinational and manufacture in local markets, in my view the weakness of the currency is an excuse to cover up some fundamental problems.
Terrance Odean and Brad Barber of UC-Davis found that investors who traded most frequently had the worst returns for a five-and-a-half-year period ended in December 1996. During that period, the average household earned an annualized return of 15.3%, frequent traders earned an average annualized 10.0% and a value-weighted market index earned 17.1%. Despite steps to discourage the trading, the activity persists. One catalyst was a study by the Yale School of Management's International Center for Finance in March that noted that buying and selling international funds based on moves in the S&P 500 could beat a buy-and-hold investment strategy in the same funds by about 20% annually, before transaction costs, which, of course, are zero for no-load mutual funds. The reason: Many international funds traditionally have used the closing prices in local stock markets to arrive at a net-asset value, making the price somewhat stale by the daily 4 p.m. deadline for purchasing the fund. Partially because of this pricing phenomenon, the S&P 500 in the US sometimes can be a good indicator of how international funds will perform the next day. Here's how it works. Since the Japanese market closes hours before the markets in the US open, funds that invest in Japan, for example, have established their closing prices hours before the deadline for buying the funds. If the US market has a good day, the assumption is the overseas funds will get a bounce, so people buy them with the intention of selling the next day. Do it enough times with enough cash and you can make a lot of money.
Europeans made about two-thirds of net purchases of all private and government debt and equity securities in the first half [amoung foreign purchasers], and an even higher proportion of the net purchases of corporate equities. European buying is roughly split evenly between the UK and the rest of the continent. Net foreign purchases of all government and private US debt and equity securities surpassed $100 billion for the first time in 1993, reached a record of $388 billion in 1997 and have averaged about $315 billion a year since then.
But let's examine that increase. Real retail sales, adjusted for inflation, rose about 0.5%, given the decline in goods prices in August. And the real number is the one that truly matters. Combining that figure with June and July growth, moreover, yields an annualized three-month growth rate of 5.5%. Now assume a modest increase in real sales for the month of September. Then growth in real consumer spending for Q3 will come in at a 5%-5.5% yearly pace, up from 2.9% in Q2. And if that increase transpires, the Q3 rise in GDP easily could be 4%-5%. The other main components of GDP - government, investment and exports - are almost sure to do their part in bulking up the number. The only reason growth probably will not top 5% is because of an anticipated pause in inventory-building. But what if the growth of final sales GDP exclusive of inventories - in the current quarter happens to exceed 5%? Will the Street's cockeyed seers finally admit that for the fifth consecutive year the slowdown they'd been expecting simply didn't materialize? Don't bet on it. When winter comes, bringing an expected rise in consumer heating bills, they'll probably rest, chilly but secure, in the belief that the longed-for soft landing once again is just around the corner. But even if winter's impact is concentrated in Q1-2001, the extra outlays required for gas and heating oil will account for 0.4% of total consumer spending, at most. After all, combined spending on these commodities normally comes to about 0.8% of total consumer spending in a typical year, or about $50 billion out of $6.6 trillion in consumer layouts. The extra cost of electric heating could boost the total bill for unanticipated spending on energy to 0.5%. But consumers have been in the habit of paying for extra energy costs by dipping into savings rather than reducing their spending on other items. So let's cut that 0.5% in half and assume a 0.25% cut in spending generally. Against a projected increase in consumption of at least 5%, that 0.25% comes to a mere handful of BTUs. The boom is likely to survive even a bitter-cold winter, which means that better-than-4.0% growth is likely to persist through 2001.
The bills primarily help the people who can afford to put more than the current maximum into their plans. In 1997, there were IRA deductions on about 4% of individual tax returns. Half showed the maximum investment, according to a Treasury estimate. Of the workers with 401(k) plans, no more than 6% are contributing the maximum. The issue of savings incentives for people of modest means needs to be addressed. Only 17% of workers in smaller businesses (under 25 employees) are covered by a retirement plan. In many of those plans, employers don't make contributions to their workers' accounts. There should be a companion tax incentive bill that helps the workers, too. [But that is easier siad than done]. Let me take you back to the early 1980s. High-earning professionals and small-business owners were setting up pension plans that paid them a lot, while providing little or nothing for their employees. Congress rightly toughened the rules so that the bosses couldn't get tax breaks without including their workers in the plans. But instead of creating fairer pensions, thousands of business owners simply dropped the plans and made other arrangements for themselves. Related: WSJ 9-12 With consumer credit reaching $1.47 trillion in July, experts worry that debt keeps employees from contributing to their 401(k) plans. In a Strong Investments Inc. survey last year of 1,000 plan participants, 11% said they weren't saving because of debt, while 35% said they saved less than they liked. Related: NYT 9-6 The number of US households owning mutual funds climbed 4.5%, to a record 50.6 million this year ICI said today. With the increase, about 49% of households in the nation own mutual funds. A year ago, the figure was 47.4%, or 48.4 million households. Of families earning less than $25,000, 17% owned mutual funds. That percentage rises steadily with income to peak at 79% of families earning $100,000 or more.
That skepticism is understandable, but it also may help the case of those who believe the energy rally has staying power: Every investor who still doesn't believe - and there are plenty of them - is another investor who may yet be convinced. The cold reality for stocks of most commodity-based companies: The market doesn't pay up for these stocks, relative to earnings, because there is usually little faith that strong earnings growth can be sustained. That is largely why, even though the fundamentals pushing this energy price surge have frightening overtones of the prolonged 1970s energy crisis, many investors view energy stocks with a jaundiced eye. Consider: Many of the stocks, while up in price this year, remain below their peaks reached in the 1990s. That means many investors who have been in the stocks for years still have made no significant capital gain, if any--even with the rally this year. Even if OPEC does get supply right, energy investing has more than market-price worries working against it. Let's face it: Rooting for higher oil company profits is un-American in most parts of this nation, and the world as well. People hate paying more for gasoline. And that creates another risk for energy companies and their stocks: If their profits stay healthy, the government may demand a bigger share, as penalty. When a tech company doubles its profit (Microsoft excluded, perhaps), the government cheers the "new economy." But when an energy company doubles its profit, politicians believe a felony has been committed. But amid all of these doubts about the wisdom of owning energy in this new decade, it's worth asking whether a contrarian view might be worth the risk: If the skeptics are wrong, and the oil and gas industries are at the start of a multiyear profit expansion, a lot of investors who don't own this sector will have to get aboard sooner or later. Related: James Stewart, Smart Money 9-12 Oil prices are like interest rates. They move in long-term cycles. It's foolhardy to try to predict when they will peak or bottom out, or how long pricing and production trends will last. But they're unlike interest rates in that they are heavily influenced by a cartel. Unlike Alan Greenspan and the Fed, there's no energy czar attempting to act in the best interests of the US economy. On the contrary, what's good for OPEC tends to be bad for America and the rest of the industrialized world, though since the painful experience of the Arab oil embargo, there seems to be a recognition that our fates are more interdependent than OPEC once assumed. I have no idea how long the current high prices will persist, but I do know that we are deep into the cycle. The likelihood of falling prices is thus greater than the risk that prices will go even higher. So what strategy should investors pursue? I believe there's a place for oil stocks in every portfolio. That's because they're not only cyclical; they're countercyclical, which means they tend to do well when all the other cyclicals are in trouble. They also serve as a hedge against inflation. While they don't have the glamour of growth stocks, they have huge cash flows, reliable earnings and the chance of striking a gusher. They trade at low price/earnings multiples. As such, they provide nice ballast for a riskier portfolio. That said, now isn't the time to go on a shopping spree in the oil patch. On the contrary, it's time to begin reducing positions slightly in anticipation of an inevitable decline in prices. Most of the major oil producers are near 52-week highs. Three years ago was the time to buy (when you couldn't give them away). It's certainly OK to buy oil stocks low and hold them forever, but a better strategy is to buy gradually in declining markets and sell in rising ones. We remain in a rising market. For investors who own no energy stocks and want to build a position, I counsel patience. The patience to wait is one of the most important virtues in long-term investing. Opportunity in the oil sector will come again. Related: Bloomberg 9-14 Asian governments will pay $27 billion this year to avoid the protests and civil strife gripping Europe as oil prices surge. It's a price they're willing to pay to keep their economies ticking and voters happy. From Malaysia and Indonesia to Thailand and India, governments are digging deeper to shelter farmers, taxi drivers and motorists from costlier oil by subsidizing gasoline prices. In those countries, especially where government finances are tight, subsidies may only delay a rise in fuel prices. Morgan Stanley Dean Witter estimates those higher costs for consumers and companies will trim 1.2 percentage points from Asian economic growth this year. And rising diesel fuel, kerosene and gasoline prices may stoke inflation. Related:Donald Ratajczak, AJC 9-17 OPEC has raised its production quotas to ensure adequate oil for the winter heating season in the Northern Hemisphere. Eventually these higher production levels will meet the oil needs of the world. However, there are serious questions about whether there will be enough oil and natural gas this winter. In four of the past five weeks, oil and natural gas inventories have declined. Low development when prices were at rock bottom about 18 months ago accounts for some of this failure to build inventory. Also, mild winters in the past two years have discouraged energy producers from holding inventories for a heating season that never arrived. Most producers lost substantial sums on their winter inventories last year. They do not wish to do so again. Until those producers feel there is a good chance they will gain profits from their inventories, they are reluctant to hold more. In other words, until the winter creates a price spike because of inadequate heating fuel, producers are unwilling to store adequate fuel for a normal to cold winter. If you think that this will release enough oil to meet US needs without any reduction in growth here, think again. I estimate that the combined impact of reduced domestic purchasing power from higher oil prices and slower export growth as oil slows growth in much of the remainder of the world, will take $100 billion at annual rates from the U.S. economy in the fall and winter. This probably will slow economic growth from 5% in the first half of this year to only 3.5% in the second half.
Normally a soft landing is achieved when GDP slows and relieves pressure on prices. The current soft landing, however, is occurring because inflation has not taken off, not because GDP has fallen sharply. After all, the US is growing rapidly and unemployment is at 4.1%, yet the vast majority of Wall Street analysts speak of an orderly downshift in growth without inflation. Behind this change is the fiscal environment. Investors have come to realize that strong growth has increased tax revenues, a dynamic that is helping cut federal debt levels and leaving the federal budget in surplus. If the economy remains strong, the surplus could grow and the Treasury Department could step up its buyback program. But if the expansion ends and tax receipts drop, the deficit could return. Hence the idea that there is a new bond market paradigm. Because the fiscal outlook has become so important, continued solid GDP growth seems to have become as important to many bond investors as stockholders. All bets are off, of course, if price pressures become problematic. Right now, the consensus view is that they will not.
The guru's bottom line: Investors should invest only where the cash register is ringing louder all the time. If you choose to stray from this advice, Kerschner recommends that you make sure the stock trades at a low multiple relative to its peers and its revenue growth is about to pick up again. Otherwise, you might just pick a dud.
One sign that the indexing proposition is losing support comes in the form of rare outflows from a couple of big index funds run by Vanguard. Dan Weiner, who runs the Independent Adviser for Vanguard Investors, estimates that in August, Vanguard 500 Index had an outflow of approximately $100 million. That's an almost-negligible sum for a fund with $104 billion in assets. But Weiner says it's only the second month - after March of this year, when $700 million was withdrawn - that the fund has registered any net outflows at all in almost seven years. In the first eight months of this year, the fund pulled in $1.4 billion, down steeply from $10.5 billion it attracted in the same period of 1999, he says. Vanguard Total Market Index, a broader passively managed portfolio, seems to have suffered its first notable outflows in its history in August, an amount on the order of $90 million, Weiner figures.
Fair Isaac already is shedding light on its credit-scoring procedures. Earlier this summer, the company posted on its Web site (http://www.fairisaac.com) the relative weights a variety of factors have on your credit rating. These include timeliness of loan payments, amount you owe, length of loan history, breadth of loan history and whether you're opening new accounts at a rapid clip. Here are some of the myths and realities of credit scoring: Myth: Canceling unused credit cards, thus reducing the amount of available credit, will boost your score. Reality: Canceling cards could hurt your score for two significant reasons. One component of your score calculates a ratio based on how much you've borrowed versus how much credit you have available. The lower this ratio, the higher the score. Translation: If you have 10 credit cards with an aggregate credit limit of $10,000, but have an outstanding balance of just $1,000, your ratio is just 0.10, which gives you a relatively high score in this area. On the other hand, if you have borrowed $1,000 on one card with a total credit limit of $1,000, your ratio is 1. That gives you a miserable score, Watts says. Roughly 30% of your credit score is based on this ratio and five other factors related to the amount you owe today versus the amount you initially borrowed. Having several loans that are paid down well below their initial balances boosts your score. An additional 15% of your score is based on your "length of experience" with credit. However, that experience is measured only by what remains on your credit file. If you cancel your oldest credit cards--perhaps those high-rate cards you've had since 1975--and keep only the newer, low-rate cards, your long history with credit evaporates. Canceling old cards will make you look like a relative credit newbie and lower your score. It's better to keep old cards and simply not use them. Myth: Your score declines if your borrowing exceeds a particular percentage of your income. Reality: The FICO program doesn't consider your income--at all. This data is not collected by the program. (It also doesn't collect data on your age, assets, marital status, gender, ethnicity or address.) However, when a lender considers giving you a loan, it will check your income to determine a debt-to-income ratio. Generally speaking, lenders frown on people who have unsecured debt payments exceeding 20% of take-home pay and mortgage loan payments exceeding 30% of net income. Moreover, if you have substantial "available" but unused credit, such as high credit limits on numerous credit cards, they're less likely to extend another loan, fearing that you could become overextended even if you're not now. Also, a version of your FICO score is used in calculating auto insurance rates. That score can have a bigger impact on the premium you pay for auto insurance than your driving record, Watts contends. "We have found from our research that a person's credit history is more indicative of their propensity to file an insurance claim than their driving record," Watts says. "It has to do with human psychology. If you are a conservative person who pays bills on time, you are more likely to maintain your house and keep your roof intact; you are more likely to maintain your health; and you are more likely to maintain your car and be a cautious driver."
US Treasury securities historically have provided the best baseline curve because they have no credit risk. Moreover, there was a steady stream of new issues from the bond market's biggest borrower. And Treasuries comprised the world's biggest, most actively traded and most liquid securities market, which provides an accurate read on rates. Federal surpluses have played hob with Treasuries as an indicator. As a result, a new international debt standard is emerging: interest-rate swaps. Swaps are agreements between two parties to exchange interest payments, typically short-term floating rates (such as LIBOR, the London interbank offered rate on dollar deposits) and longer-term fixed rates. An estimated notional amount of $52 trillion of interest-rate swaps were outstanding at the end of 1999, a sharp increase from $30.2 trillion in 1997, according to Swaps Monitor. (The notional amount represents the principal size of the theoretical loan on which the counterparties exchange interest payments. Unlike bonds, only interest flows are exchanged in swaps, not actual principal amounts.) According to Goldman Sachs economist John Youndahl, swaps are the only other dollar-based fixed-income market with identical credit across the yield curve that comes close to Treasuries in both size and liquidity. Switching to the swaps curve may help investors make sense of the current economic outlook. Right now, the Treasury yield curve is inverted. The Treasury 30-year bond at 5.68% and the two-year T-note at 6.16% points to a coming recession and easing moves by the Federal Reserve. But the 30-year swap yield currently is 0.1 percentage point above the two-year swaps rate, which is far more consistent with the economy's 5%-plus growth trend and 4% unemployment rate. "The swaps curve just fits so much better with what we're seeing in the U.S. right now," notes First Union analyst Mark Vitner. In late May, a poll conducted at the Euromoney Global Investors & Borrowers forum in London found that 55% of respondents saw swaps as the pricing tool best suited to replacing US Treasuries. Roughly 29% favored agency debt, while 8% gravitated toward high-quality corporate debt. Ten percent hadn't yet decided.
But the average fund delivered annual returns that were eight-tenths of a percentage point below the market's over that period. Taken together, the two facts mean that the average mutual fund frittered away 2.3 percentage points of return annually. Today, that would mean $92 billion a year, considering that the industry now manages about $4 trillion in assets. Until now, most researchers believed that the average fund produced mediocre performance because managers had subpar ability to pick stocks. But to me, the professor's study shows that the real culprit has been the fund industry's inability to translate good stock-picking to the bottom line. The professor constructed a database that contained not only the performance of virtually every fund from 1975 through 1994, but also the stocks that each owned. According to Professor Wermers, the largest single source of fund inefficiency was expenses -- investment managers' salaries and administrative and marketing costs. Roughly 1.1 of the difference of 2.3 percentage points was spent on such costs. Today, that is about $44 billion a year. The second-largest source is the lower returns of funds' nonstock holdings. Wermers estimated that these cash and other nonstock holdings cut the average annual return by 0.7 percentage points -- about $28 billion or so in today's terms. The third reason for the gap is transaction costs. Wermers estimated that transaction costs of all kinds reduced performance by 0.5 percentage points or so a year - or $20 billion today. Note that the study did not even consider front- or back-end loads, or sales charges. The $92 billion price of the industry's inefficiency is above and beyond the load factor. Devastating as the conclusions may be for the fund industry, they contain a silver lining for the rest of us. In contrast to previous studies that found that it was impossible to consistently pick stocks that outperform the market, Professor Wermers shows that not only is it possible, but also that it is not particularly unusual. By creating our own portfolios - and assuming that we can pick stocks as well as the average fund manager - we stand a good chance of saving the bulk of the 2.3 annual percentage points spent on fund inefficiencies -- and a betting chance of actually outperforming the market.
He predicts that the 10-year government bond yield might fall to 5% by the end of next year, from its current 5.68%, and to 4.5% by the middle of the decade. In making a case for bonds amid strong economic growth, Dr. Yardeni points to a statistical measure, called the "age wave," that he developed many years ago. The age wave tracks the percentage of the labor force that is 16 to 34 years old; as baby boomers have aged, the age wave has fallen. The path of that wave has been roughly parallel to that of inflation and the 10-year government bond yield. All three hit a trough in the early 1960's, crested during the first half of the 1980's and have generally been falling since. Dr. Yardeni, contends that there are sound reasons for the correlation. As the baby boomers have aged, he argues, productivity has improved, because older workers have more experience than younger ones and are more committed to their jobs. "Faster productivity growth," he said, "would be an important source of disinflationary pressure, pushing bond yields lower." He also said that older baby boomers tended to favor tax cuts and less government spending. As the government buys back debt securities and issues fewer Treasuries, there has been increased investor demand for those securities. The age wave, meanwhile, has continued to fall. Having peaked at 51% during January 1981, the percentage of the work force that is 16 to 34 is now down to 38%. When it comes to using the age wave to predict bond yields, Brian L. Beaulieu, director of the Institute for Trend Research says: "I think his assumptions do not bear up under close scrutiny. The past is not necessarily prologue -- other factors will affect the market. For instance, almost no one is looking at Japan, a huge wild card. Its economy could slip back into a severe recession."
Job creation has been slowing since 1997, when annual payroll growth peaked at 2.5%. Payrolls are now rising by 1.8%, yet GDP growth is red hot. "If it only takes 1.8% job growth to produce 6% real GDP growth," Mr. Paulsen asked, "could we end up in a situation where a soft landing of 2 - 2.5% growth means jobs falling by one-half or 1% a year?" Mr. Paulsen studied the relationship of job creation and growth since 1950 and found that even in tough economic times, job growth was much higher than it is today. From 1980 through 1984, a period that included two recessions, each percentage-point increase in GDP growth translated into a 0.61% gain in jobs. But since 1995, every percentage-point increase in economic growth has resulted in just 0.10% more jobs. If consumers were in sounder financial shape, the job losses that a slowdown might bring would not be so worrisome. But installment debt and stock market margin debt carried by consumers are now an astounding 24.5% of disposable personal income. From 1965 to 1995, this figure averaged 18.4%. This debt load also means that consumer spending could contract significantly, exacerbating the downturn.
Just the Facts Drilling for votes? Humorist Bob Orben says that, after the release of government oil supplies, "Republicans claim Al Gore is tapping the Strategic Pandering Reserve." (WSJ 9-29) Prudential Securities technical-markets analyst Ralph Acampora predicted that the Nasdaq composite index will shake off its September blues and rally more than 20% in coming months. He has a near-term target for the Nasdaq index of 4,563. That would be a 24% gain from Tuesday's close of 3,689.10. 'My conclusion is that we've made a low with the latest sell-off. I think we are starting a pre-election rally right here, which should be followed by a honeymoon rally. So I think we've seen the worst of it for a while,' he said. (LA Times 9-27) After a vaunted turnaround in the late 1990s, Fidelity's stock picking has slipped in the new millennium -- and so have sales to investors. Through Monday, 51% of Fidelity's stock and bond funds were beating their peers -- that is, funds that invest in the same sectors and with similar styles says Morningstar. That's down from 60% in 1999 and 67% in 1998. Fidelity currently ranks No. 10 in net sales this year, according to Financial Research Corp. Through July 31, Fidelity pulled in $4 billion in net sales -- down from $17.7 billion in the same period the year before. Fidelity's share of the entire industry's flows slipped to 3%, down from 14% last year. As recently as 1995, Fidelity garnered almost a quarter of the industry's net sales. (WSJ 9-27) The top-selling mutual-fund companies, 2000 net sales, in billions: (1)Janus - 36.5 (2)Putnam - 13.3 (3)AIM - 8.8 (4)Vanguard - 8.0 (5)Invesco - 7.3 (6)MFS - 7.1 (7)Alliance - 6.1 (8)Pimco - 5.0 (9)SEI - 4.9 (10)Fidelity - 4.0 (WSJ 9-27) When stock-market investors take a hit, they rail at their stupidity and question their investment strategy. But when lottery-ticket buyers lose, they shrug off their bad luck and pony up for another ticket. Maybe those lottery players have the right idea. Sure, if you lose a bundle in the stock market, it could be your fault. But there is a fair chance that the real culprits are bad luck and skewed expectations. (Jonathan Clements, WSJ 9-26) Economists estimate that a sustained price of about $35 a barrel could take a substantial slice out of global economic growth next year, perhaps as much as one percentage point, according to some analysts. George Perry, an economist at the Brookings Institution, a Washington think tank, points out, "Three of the past three recessions were sharply related to higher oil prices." (WSJ 9-25) It can be reasonably argued that up to this point, the higher energy prices have done more economic good than bad, as they have facilitated the Fed's efforts to slow runaway demand growth and thus circumvent an overheating economy. Also mitigating the economic importance of today's higher oil prices is that there is little chance they have or will significantly affect inflation expectations. Nary a person or business today believes that today's higher energy prices will be sustained for very long, as global demand growth slows and new energy supplies come online. (Mark Zandi, Dismal.com 9-25) Despite the latest week's decline in crude inventories, an absence of crude no longer is the problem in the oil markets. Indeed, refineries are operating at 98% of capacity. The strategic reserve should only be tapped when there is not enough crude to keep our refineries operating. However, there are more compelling reasons not to touch the reserve. If we demonstrate that this reserve will be used to manipulate price, how can we hold the high ground in arguing against price manipulation by the OPEC nations? (Donald Ratajczak, AJC 9-24) Treasury secretary Summers had a rocky week last week. He had strongly advised Clinton against tapping the oil reserve. His advice was rejected, and he was forced to issue a crow-eating statement on Thursday suggesting that in such "a rapidly evolving situation" some use of the reserve "could be appropriate." Witnessing the Treasury secretary's change of tune, Rudiger Dornbusch, a MIT economist, observed: "Rapidly evolving circumstances ... are [the] famous last words of someone who has lost his virginity." (WSJ 9-24) The consensus of forecasters surveyed by the Blue Chip Economic Indicators newsletter is that inflation-adjusted GDPdomestic product growth will slip from Q2's 5.3% annual pace to a 2.9% rate in Q3, then rebound to 3.6% in Q4. (WSJ 9-24) Almost out of nowhere, the market has been hit with a one-two punch. First, there's been the sharp rise in oil prices, which pushes up costs for a wide range of businesses and dampens consumer's buying power. Then there's the plunge in the euro, Europe's common currency, which hurts U.S. companies that depend on sales there. On top of that, there are clear signs that the U.S. economy is slowing. All these developments have one common result: lower corporate earnings. And if there's one thing that spooks the stock market these days, it's profit warnings. (Gregory Zuckerman, WSJ 9-24) Many economists are concerned about the dollar's value. Given the huge US current-account deficit - experts have argued for years that the dollar could dive if foreign investors began to view the US economy less favorably. But American investors can be forgiven if they fail to see a genuine crisis, whichever way the dollar goes from here. The US stock market, after all, rose with a weakening dollar in the mid-1980s, and rose with a strengthening dollar in the late 1990s. At least so far, the market - in the long run - hasn't found a dollar "crisis" it couldn't learn to like. (Tom Petruno, LA Times 9-24) In Asia, population charts signal this century's growth market. By the end of this decade, two-thirds of all the world's people between the ages of 15 and 40 will live in Asia. (James Flanigan, LA Times 9-24) Stock-market gains can seem so dazzling that we forget about brokerage commissions, annual fund expenses and other investment costs. But the reality is, investing is a game of nickels and dimes and even seemingly small expenses can severely hurt our long-run results. Imagine two funds that, before costs, earn that 11%. One fund charges 1% in annual expenses, while the other levies 1.5%, so that the funds earn 10% and 9.5% a year after costs. Over 30 years, $10,000 invested in the cheaper fund would grow to almost $174,500, compared with $152,200 for the costlier fund. (Jonathan Clements, WSJ 9-24) The number of patents granted by the patent and trademark office totaled just over 600 per million Americans in 1999, up from an average of 400 to 450 patents per million for most of the 1990's. That was the highest since 1916, when the rate was 500 per million. Almost half the patents granted nowadays go to foreign companies, particularly from Japan. Since 1977, the percentage of US patents granted to Japanese companies more than doubled, to 19% of the total, while the percentage going to Americans fell, to 56% from 66%. (NYT 9-24) Assets in money market funds have climbed to $1.75 trillion, according to ICI. That is more than twice the $800 billion that investors now have in bond funds. Just seven years ago, bond funds were bigger than money funds, which specialize in securities with lives of less than a year, like commercial paper. (NYT 9-24)The 'Dow indicator' says that if the Dow rises from the end of July through the end of October - the three months when investors are most attuned to the political season - the incumbent party will win the election. If the Dow falls, however, the incumbents will be thrown out. Perhaps a rising stock market reflects contented voters. This will be the 26th presidential election since the Dow' birth in 1897. So far, its record as an election prognosticator is 22-3. Not perfect, but at least as good as the average pollster. It has been 32 years (1968) since the Dow last blew an election call. (Floyd Norris, NYT 9-22) Inflation drives up income thresholds for taxes next year. Examples: the top 39.6% federal income-tax bracket for 2001 is generally expected to start on taxable income of more than $297,150. That will be up from $288,350 for this year. The new limit will apply to married couples filing jointly, single taxpayers and heads of households. This and other tax changes have been calculated by James Young of Northern Illinois University and two tax-information publishers, CCH and RIA, based on new inflation data. The 36% bracket for married couples filing jointly will start on incomes above $166,400. The 31% bracket will start at more than $109,200, and the 28% bracket at more than $45,200. For most singles, the 36% bracket will start at incomes over $136,700, and the 31% bracket will start at $65,500. (WSJ 9-20) Since 1995, the number of workers holding second jobs has dropped to 5.7% of the work force from 6.4%. Fewer than half do so to make ends meet or pay off debts, the BLS says. Many hold second jobs because they enjoy the work, want the experience or hope to save for the future. (WSJ 9-19) At the end of 1999, the dollar represented 66.2% of world foreign-exchange reserves, up from 65.7% the year before. The dollar's market share has steadily risen each year since 1990, when it was 50.6%. Euros, by contrast, made up only 12.5% of global holdings, roughly the same amount as the combined share of the 11 former currencies held outside the euro zone in 1998. Foreign holdings of yen fell to 5.1% from 5.3%, a continuation of a trend that began in 1992. Some analysts had predicted central banks would stock up on euros, causing the currency to appreciate. (WSJ 9-18) Professional investors say a critical review of stock index composition is long overdue. In particular, investors are wondering whether indexes should reflect investment ideas (cap weighted) or investment opportunities (free-float). According to analysis by Salomon Smith Barney, several leading components of the S&P 500, which is weighted by the full equity value of shares, have less than 80% of their shares actually trading in the market (the rest being held by founders/insiders). Among them are Wal-Mart Stores, Coca-Cola, Microsoft, Oracle and Dell Computer. Frank Russell Co., which compiles the widely followed Russell 2000 index of small-company stocks, attempts to reflect free-float in its indexes. But most of the other prominent stock indexes weight their components according to the value of all shares outstanding, not just tradeable shares. (Bill Barnhart, Chic Trib 9-17) From 1986 through 1997, the average income of the richest 1% of Americans soared 89%, to $517,713 from $273,562. Those figures are after federal income taxes have been paid, and are expressed in constant 1997 dollars. To be counted among the top 1% in 1997 required an after-tax income of at least $268,889, suggesting a pretax income of at least $440,000. During those same 12 years, the bottom 90% of Americans, meaning everyone who took home less than $80,000 after paying federal income taxes, was up a scant $364, or 1.6%, from 1986. In 1997, the average income for the bottom 90 percent was $23,815. Adjusted for inflation, the median income rose just 1.5% during those years, to $37,005 in 1997 dollars. (NYT 9-17) Consultant company Runzheimer International says gas will account for 19% of the cost of owning and operating a midsize car this year. It's the highest amount since 1988, when fuel was 18.1% of costs, but well below the 34.7% in 1976. (WSJ 9-14) A bill approved by the Senate Finance Committee last week would allow savers to contribute more to individual retirement accounts and other retirement plans. For example, millions of savers would be allowed to contribute as much as $3,000 to an IRA next year, $4,000 in 2002 and $5,000 in 2003. That would be up from the current $2,000 limit, which hasn't budged since the early 1980s. For people age 50 and over, the contribution limit would rise to as much as $7,500 in 2003. Look here for details of new retirement-savings incentives.(WSJ 9-13) Global demand for U.S. stocks is at its highest level since 1997, a Merrill Lynch survey found, as fund managers around the world remain satisfied that the Federal Reserve has engineered a "soft landing" for the economy. Merrill said fund managers based in the US, in particular, have moved to an overweight position in U.S. stocks in their global portfolios for the first time in 16 months. Further, a record number of them plan to invest their cash and most are sellers of bonds, the firm's latest monthly survey of global managers found. (WSJ 9-13) Only 34% of employees at companies involved with United Way programs contributed last year, compared with 47% 10 years ago, according to United Way of America surveys of about 400 (out of 1,400) local chapters. (WSJ 9-12) Net inflows into stock funds in Germany, France, Italy and the UK, Spain and Switzerland dropped 18.4% to $13.3 billion (14.05 billion euros) in May from $16.3 billion in April, according to monthly data released by Europe's mutual-fund associations. Industry executives say the outflow from bond funds continues at a steady pace. France, Germany, Switzerland, Italy and Spain all had net outflows from bond funds in May, according to their countries' mutual fund associations. (WSJ 9-11) As of Sept. 1, a total of 121 funds had made distributions exceeding 10% of the fund share price, compared with 33 at that point a year ago, says to fund tracker Morningstar. (WSJ 9-10) Exchange-traded funds assets have nearly doubled this year, to $52.6 billion; and so has the number of the offerings, which now exceeds 60, according to Strategic Insight. (NY Times 9-10) According to First Call/Thomson Financial, the consensus among Wall Street analysts is that third-quarter operating earnings, which exclude one-time charges and other nonrecurring items, will be 17.3% higher than a year earlier for the companies in the S&P 500-stock index. (Excluding the energy sector, the earnings growth forecast for the S.& P. 500 would be 14.7%) For Q4, the growth forecast is 15.8%. [WSJ 9-11: This is well above the average of about 10% quarterly growth for the past five years.] (NYT 9-6) Wellcoaches.com offers an online fitness program for deskbound sloths. (WSJ 9-5) The Modern Humorist, a satirical Web site, says it planned to attend sensitivity training over Labor Day and will return Tuesday "or when our bigotry is cured, whichever comes first." (WSJ 9-5) The CBS.MarketWatch.com consensus thinks that economic growth in the current quarter is running less than 4%. Translated into earnings, it suggests that their growth rate simmered down over the summer to a rate not strong enough to justify the high multiples many stocks now carry. (Irwin Kellner, 9-5) Why doesn't the Fed tighten money late in the year/it only loosens it? Wrightson Associates Chief Economist Louis Crandall explains that the bond market is too thinly traded that late in the year to absorb the potential shock that a tightening might cause. (Gene Epstein, Barrons 9-4) The Nasdaq, S&P and Dow industrial indexes all have risen for five consecutive weeks--a hat trick that last occurred in early 1998, according to Bloomberg News statisticians. "I think the markets are seeing [the economic data] as having 'soft landing' written all over it," said James Glassman, economist at Chase Securities. (Tom Petruno, LA Times 9-3) Home Page Previous Factoid Top Sites |