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Those ideas were tested recently by three finance professors -- Louis Chan and Josef Lakonishok of the Univ. of Illinois at Urbana-Champaign, and Jason Karceski of the Univ. of Florida. They focused particularly on the period since the end of 1995, when stocks became grossly overvalued by almost all historical valuation measures. They found that the new paradigm was an almost complete failure in describing the recent operating performances of public American companies. For sales growth: From the end of 1995 through 1998, sales of large-cap growth companies grew just 6% a year, on average. That is not only lower than their historical rate of 10.3% a year (from 1970 through 1998) but also lower than the 12.7% rate for small-cap value companies over the same three years. For operating income before depreciation: For large-cap growth companies, this line item grew 9.6%, annualized, over that period, lower than their historical rate of 10.6% and far below the 16.6% annual rate for small-cap value companies over the same three years. Before extraordinary items, profits at large growth companies grew 11%, annualized, over the test period -- higher than the historical growth rate of 9.6%. Yet the growth was much slower than the 22% annual rate for small-cap value companies. The professors' study furnishes no evidence of a new paradigm at work. The conclusion is inescapable: This time is not different. Rather than representing a brand-new world, the recent outsized gains of large-cap growth stocks simply reflect overvaluation -- which the market will correct in due course. Related: Paul Erdman, CBS MarketWatch, 12-14 I have come to the conclusion that beyond any reasonable doubt the dreaded bubble that everyone has been worrying about is here and represents a clear and present danger to a lot of investors. I'm talking about the Nasdaq bubble, and its counterparts abroad. The price-to-earnings ratio of the 100 largest firms quoted on the Nasdaq now equals 100 to 1. The Internet sector, which a year ago had a market capitalization of $130 billion, is approaching $1 trillion. Need I say more? Related: USA Today 12-13 Laszlo Birinyi, president of Birinyi Associates, the top-rated stock-picker on Wall Street Week, has recommended selling technology shares. Birinyi said investors who are expecting a January bounce may be disappointed. Technology shares already have rallied amid optimism that computer companies will weather problems related to the Year 2000 date change. 'You're seeing the Y2K rally now, not then,' said Birinyi. 'I'd quite frankly be a little bit of a seller of technology' going into the new year.
`Our biggest concern going is, once you cross Y2K, what's to hold the Fed back?' said David Brownlee, head of fixed-income at Sentinel Advisors. By a majority of 23 to seven, economists at the primary dealers predicted the Fed will raise rates on Feb. 2 to slow economic growth before it leads to faster inflation. A handful of them see a March move, too. Some analysts even say a 50 basis-point rise at that time is possible, followed by more rate increases as the year goes on. The Fed last increased rates by a half-point in February 1995. `What we'll see in the market is a lot of anxiety about the sheer strength of the U.S. economy,' said Brad Tank, who invests in fixed-income at Strong Capital Management. Following are the firms and their forecasts for whether the Fed will boost rates at its Dec. 21 and Feb. 1-2 meetings:
Result: Small-company growth funds beat small-company value funds in 66 of the 80 periods. What's more, the worst 10-year period for small-company growth funds was a 97% gain, the period ended March 31, 1980. The worst 10-year period for small-company value funds was a 4.7% loss. Most academic studies show small-company value stocks beating small-company growth stocks. Why doesn't that theory work in practice? John Rekenthaler, research director for fund tracker Morningstar, notes that value stocks sometimes fare better in down markets. 'But they don't make the money that growth funds do in the hot periods.'
Other assignments aren't usually disclosed in fund prospectuses. Yet, separate accounts can be even more of a burden than the manager's main mutual fund because institutional clients often demand extra attention. A money manager, for instance, might be expected to meet with an institutional customer several times a year and take his phone calls. Another concern is whether being a master of multiple funds creates conflicts of interest in regard to where the best ideas go. If a manager discovers a great small stock, what fund gets the shares if there aren't enough for all of the funds? Morningstar says the number of managers juggling multiple portfolios is growing. Currently, 1,729 stock pickers manage between two and five funds, up 11% from 1,558 in 1997. More than 180 managers oversee as many as 10 funds now, up 13% from two years ago. The trend has popped up in a feast-or-famine environment for mutual funds, in which investors place money with the rare stock pickers with stellar records while ignoring virtually everyone else.
At SBC Corp.'s Southern New England Telephone unit, 54% of unionized employees who were in cash-balance plans -- but hadn't yet vested -- left the company in 1997. At MCI Communications, 57% of those who were in the plan but hadn't vested left in 1997. All of these mobile, mostly youthful employees forfeited whatever benefits they had accumulated. Then again, what they forfeit may not be much. Calculations by WSJ based on the cash-balance formula at NationsBank suggest that a 22-year-old who starts at the bank's typical salary for that age, $15,682, accumulates only $157 in two years. After five years, when the employee has vested and can take along the balance upon leaving, it still will amount to less than $700. Why are these totals so small? It is commonly supposed that employers contribute about the same percentage of all workers' pay to their accounts each year, maybe 4%. But many companies take age or years of service into account and start the contribution level much lower. The starting level for young, newly hired employees is just 1% of salary at NationsBank, increasing over time. At Aetna, a 21-year-old starts at a 1.3% annual company contribution. Like traditional pensions, cash-balance plans require workers to be on the job a year before they can participate. So even if they stick around for five years and become vested, they receive just four years of company contributions for that period.
Related: WashPost 12-11 In 1997 and 1998, the nation's economy grew by about 4% a year while the nation's energy consumption grew barely at all, according to a report issued yesterday by the nonprofit Center for Energy and Climate Solutions. The amount of energy required to produce a dollar of GDP fell by more than 3% in 1997 and 1998, after declining by less than 1% a year in the previous 10 years. At the same time that many businesses are making traditional improvements in energy efficiency, the Internet is also producing structural changes in the economy that may result in lower energy use, according to the report. Those changes include reducing the amount of floor space needed for retailing, replacing it with warehouses, which 'typically use far less energy per square foot than a retail store.' The Internet might also reduce energy use in transportation as consumers substitute online shopping for trips to the mall.
Fund managers in the U.S. and Europe have been particularly aggressive about using cash to buy stocks, helping explain recent market rallies in those regions. Over the last two months, the S&P 500 has climbed 14%, while France's CAC-40 index has risen 23%. Almost simultaneously, money managers in Europe cut their cash holdings to 3% from 6%, and U.S. managers of international funds reduced their cash allocation to 1% of their portfolios, according to Merrill's survey.
Economists are well versed in the seasonal adjustment problem that consistently inflates exports in the fourth quarter. The Commerce Dept adjusts the individual trade components if there is a discernible statistical pattern, according to Salomon Smith Barney economist Brian Jones. Often there isn't. Put all the individual items together, however, and a definite seasonality emerges. Based on the past pattern, the improvement in the NAPM export orders index and stronger overseas demand, Jones expects the October trade deficit, reported on Thursday, to contract by $2.4 billion to $22 billion. After adjusting for increases in export and import prices, Jones calculates that the real merchandise (goods) trade gap contracted by almost $3 billion to a 9-month low of $28.8 billion. (From Sherry Cooper, Chief Economist, Nesbitt Burns: The October trade deficit could widen to $25 billion from $24.4 billion due to a higher oil import bill, but the underlying picture may show export-led improvement as demand in the rest of the world is clearly swinging higher.) `If sustained over the final two months of 1999 - an admittedly heroic assumption -- the expected October improvement would add a hefty 3.25 percentage points to Q4 GDP growth,' Jones says. We're talking 7 to 8% GDP here! That wouldn't go down well with the Fed. The growth pessimists are already arguing that the Q4 strength is Y2K-related. But Q4 growth is more than just canned creamed spinach and bottled water. `We have seen nothing in the economic data to suggest that anticipation of Y2K is goosing Q4 economic growth. Therefore, there is no reason to believe that the unwinding of any Y2K spending will have anything other than a temporary impact on the fourth quarter,'' write Bear Stearns economists in their weekly economic note. The challenge of tight labor markets is being met by strong capital spending, they point out. With the Nasdaq acting like a true lottery and labor markets stretched tight as a drum, the Fed is not going to demand incontrovertible proof before stepping on the brakes early next year. Related: Caroline Baum, Bloomberg 12-15 For the year through Dec. 14, the 30-year bond produced a total loss of 13.03%, according to Ryan Labs Inc. That includes the change in price as well as interest payments. Where does 1999 rank in the annals of bond history? Right up there with the worst, according to Jim Bianco, president of Bianco Research. In fact, the latest swoon catapulted 1999 into first place, ahead of that truly horrendous year 1994, when the 30-year bond delivered a total loss of 11.97%. Using 20-year Treasury bond data from Ibbotson's dating back to 1927, Bianco found that the worst year for bonds between 1927 and 1974 was 1969, which produced a total loss of 9.19%. So the bond is having its worst year in memory, yet inflation is a no-show and the federal budget is in surplus by $124 billion? Fancy that! So is there no relationship between the federal budget and interest rates? If the deficit is rising because the economy is in the dumpster, you can be pretty sure that interest rates will be falling. As Bianco points out, the positive supply, inflation and productivity dynamics have delivered a knock-out punch to bond investors. How is this possible? Simple. Inflation and inflation expectations aren't the only things driving interest rates. Real rates, or the nominal rate minus inflation expectations, aren't fixed in stone at 3%, which seems to be the perception. They fluctuate with economic activity, and with inflation expectations. `Since 1981, real rates have averaged 4.93%,' Bianco says. (Bianco calculates the real rate by subtracting the annual change in the CPI from the Treasury constant maturity series' 30-year yield.) `The current real rate of 3.87% is actually below the average of the last 18 years. If one accepts that the rules have changed in other areas, one should be open to the notion that the rules have changed in respect to the appropriate level of real interest rates,' Bianco claims. Related: Caroline Baum, Bloomberg 12-16 The good news is the trade deficit was bad, imposing a brake on Q4 growth. Trade has made a positive contribution in the fourth quarter of every year this entire decade with the exception of 1997 (Asian crisis) and 1992. The trade deficit widened to another new record of $25.9 billion in October as exports surprisingly fell for the second straight month. The 0.1% drop taken in conjunction with a 1.6% increase in imports and adjusted for changes in prices suggests the real trade gap will subtract from GDP growth again in Q4 as it has in the last three. The trade figures should have been good news for the bond market, given that any positive trade contribution was going to push already high GDP forecasts of 5-5.5% even higher. Trade is always a tough number for the market to interpret. A wider trade gap will hold down Q4 GDP growth (good). But an ever-widening trade and current account deficit could be a problem for the dollar at some point (bad). At 94.265, or 5.735%, the February federal funds futures contract is placing the odds of a 25 basis-point rate hike at 100 percent. Of course, there is already speculation from traders that the Fed may take two baby steps at once and hoist the funds rate by 50 basis points.
Instead of straight wages, workers are agreeing to be paid in ways that vary with their performance or their company's. Almost two-thirds of 2,800 companies surveyed annually by the American Compensation Assn.--a veritable Who's Who of corporate America--use bonuses, incentives and goal-sharing arrangements to adjust what some or all of their workers make depending on performance. That's up dramatically from the start of the decade, when less than 15% relied on such schemes. Almost 40% of large American companies issue stock options to half or more of their employees, according to a study by the consulting firm of William M. Mercer Inc. For the 500 companies in the S&P index, a Deutsche Bank study found, the market value of vested, unexercised options totaled more than half a trillion dollars at mid-year, or the equivalent of $17,000 a worker. California state finance officials estimate that stock option cash-ins alone accounted for almost 3% of the state's personal income in 1998 or about $25 billion.
'We're seeing tremendous growth in variable pay in the form of bonuses and incentives, a large increase in the use of across-the-board options and a very dramatic broadening in employer-sponsored stock purchase plans,' said Dallas Salisbury, executive director of the Washington-based Employee Benefit Research Institute. 'People are so confident the ball is going to keep rolling, they're treating these payments as if they are as certain as fixed wages.' Said Salisbury. The rise of self-directed retirement plans such as 401(k)s at the expense of more traditional company-controlled pensions has come in an era of sustained growth. It has been accompanied by a significant decline in employer contributions to all types of plans (down 15% after inflation since the mid-1980s) and a big jump in stock investment of retirement money (up from less than one-third in the mid-1980s to well over half last year.) As a result, a major market tumble could substantially shrink what millions of Americans have set aside for retirement. 'This is not your parents' retirement system,' said Steven Sass, an economist with the Federal Reserve Bank of Boston. 'The risks are very different and much more beyond your control.' How far beyond awaits the next recession. Only then will it become clear whether the go-for-it pay plans and make-your-own-way pensions represent passing fads or fundamental changes in the way the nation works.
The tech-fund sector holds less than 2% of total stock fund assets. But investors have become so enamored of the funds that, in one November week, the tech sector attracted $2 out of every $3 that went into equity mutual funds. Performance, obviously, is what's driving this: The average tech-sector fund has gained 112% thus far this year, compared with 19% for the average diversified stock fund. In 1998 the average fund in the sector rose 51% -- yet the sector's inflows were nothing compared with this year's. 'There's a tendency among mutual fund investors to jump in when something's got a great three-year or five-year track record,' says Sheldon Jacobs, editor of the No-Load Fund Investor. 'Which may be fine when it comes to a diversified fund. But it's especially risky in a sector fund.' Alan Skrainka, chief market strategist for St. Louis-based brokerage Edward Jones, notes that cash flows into sector funds 'can be an incredibly reliable indicator of market and sector peaks. History has a weird way of repeating itself,' Schultz says. 'They just change the names.' Three Case's in Point (1) A decade ago, investors thought Japan stock funds were a "sure thing," notes Greg Schultz, principal with Asset Allocation Advisors. In the 10-year period ended December 1989, the average Japan fund delivered average gains of 22.6% a year, according to fund tracker Lipper. Between the end of 1987 and the end of 1989, assets in Japan funds available to U.S. investors nearly doubled, as cash poured in. That was just in time for the Japanese market's peak, reached Dec. 29, 1989. In the decade that followed, the average Japan fund lost approximately 5% a year. (2) In the early '90s, it was biotechnology's turn. From 1989 through 1991, the Fidelity Select Biotechnology fund posted annual total returns of 44%, 44% and 99%, respectively. Yet it took most investors until the third year of that three-year rally to muster the courage to invest in the biotech fund sector. At the start of 1991, Fidelity Select Biotechnology's assets stood at $224 million. By the end of that year the fund had ballooned to $1.1 billion. Shortly thereafter the biotech boom went bust. The following year, the fund lost nearly 11%. (3) More recently, at the end of 1998, investors who finally piled into hot Europe stock funds got whipsawed as much of the region slid into recession. More Reasons for Caution Mutual fund analysts say individual investors ought to take a cautious approach. For one thing, as the Japan and biotech sector experiences show, 'Investor timing has been really abysmal,' notes Christine Benz, a tech fund analyst with fund tracker Morningstar. For another, even if tech continues to shine, which is certainly a possibility, some tech funds may not. History has shown that hot funds often cool down when they receive so much money so quickly that they have difficulty putting it all to work in the market. Before you seek this exposure through a sector fund, check to see how much technology you already own through your diversified stock funds. If all you own is an S&P 500 index fund, $1 out of every $4 you have in the market is already invested in tech companies. More than 30% of all large-cap growth fund assets are currently in tech. And nearly 40% of the assets invested in all growth-oriented funds are tied up in tech.
Yet even as unknowing investors pour into the stocks and drive them higher, the pretenders have already withdrawn their bids and are selling. The shares soon fall. Traders in New York call these phantom bids. In London, the practice is called "spoofing" the market. Spoofing the market is easier these days for three reasons. (1) The rise of electronic communication networks, which allow traders to place orders anonymously and to cancel them immediately with no consequence. The NASD system requires traders to keep their bids and offers available to other investors for 10 seconds. (2) Firms that make markets in NASDAQ stocks are unwilling to commit big capital to many stocks, instead limiting their exposure to 100-share blocks at a time. Even a 1,000-share buy order can move the market. (3) The growing use of computers to trade stocks allows investors to watch second-by-second changes in NASDAQ stock prices on their screens. Throngs of traders are looking for a rocketing stock jump on board.
In several countries, new laws are part of the trend. In 1998, Italy made takeovers easier and use of defenses more difficult, and encouraged companies to include an independent member elected by minority shareholders on their audit boards. In Germany, new legislation has loosened restrictions on voting rights, strengthened auditors' independence and required companies to disclose the existence of any board committees. The French government is considering compelling the release of more details on executive pay and requiring shareholder approval each time the roles of chairman and chief executive are combined. Shareholder rights groups have sprung up, meanwhile, as have proxy research services. And European mutual funds and individual investors, like non-European pension funds, are increasingly speaking their minds at annual meetings. In many ways, however, European activism is just beginning. Most European shareholders still habitually trust the management of domestic companies and are reluctant to vote against them or their proposals. They are even more passive with their foreign holdings, because they find cross-border voting to be costly and time-consuming, although many large American investors have found ways to do it efficiently. Initiatives by shareholders are rare in France and Germany, because only those with large stakes can propose them. Most observers expect European corporate governance to retain significant differences from the American-British model. It may be impossible for management to focus entirely on shareholder value in countries like Germany and France, where other "stakeholders" like labor unions and local governments have entrenched influence on boards.
Combine these positive trends with sliding share prices and you end up with cheap stocks, say analysts. Mall REITs are now trading about 25% below the private market value of the underlying real estate they own. Plus, the yields of many REIT stocks are around 9%, when traditionally they have yielded about 6% (REITs are required by law to pay out 70% to 80% of their free cash flow as dividends). The group is trading at a multiple of about seven times their projected 2000 FFO. Typically, they trade at 10 times forward FFO per share, says Paul Morgan, an analyst with PaineWebber. REITs have going for them. They should have steady cash flow into the future, since most of their leases with retailers are long-term (about seven years on average). Due to consolidation in the industry, many REITs operate as "quasi-monopolies" and enjoy high barriers to entry, says Samuel Lieber, who buys bargain real estate stocks for the Alpine Funds. Many industry observers believe the Net may change the mix of stores at malls but won't kill them. There may be fewer music stores and electronics stores, since CDs and consumer electronics are easily bought over the Web. But many malls emphasize apparel, which isn't Internet-friendly, and malls may rent more space to e-tailers who want real-world outposts, says Schmidt. Related: WSJ 12-17 The REIT industry has been battered in the stock market for the past two years. REIT share prices are down about 19% so far this year amid tepid demand. Including hefty average dividend yields of 8.5%, the REITs' total returns are down 11.9% for the year. What's so enticing about real-estate stocks? The real-estate market appears to be riding the top of a cycle -- prices of properties are high, rents are up and vacancies are down. Earnings of REITs are climbing and dividends are high. Interest rates, though rising, are still relatively low. The passing of the REIT Modernization Act this year eased some of the restrictive rules on the industry and allowed the companies to provide more services. REITs also recently have embarked on a massive stock-buyback effort. Related: San Francisco Examiner 12-5 Real estate investment trusts (REITS) that own big-box merchandisers (retailers who do most of their selling from giant, stand-alone buildings that often share a large parking lot with other big-box operators) could take a bath once the analysts have figured out which have tenants that are most vulnerable to online competition, says Mark Borsuk, a San Francisco-based consultant and leasing broker.
According to International Strategy and Investment, an investment advisory group, retail sales closely parallel the stock market's gains, especially around Christmas. In the fourth quarter of 1997, for example, retail sales inched up 1%; the S&P 500 index rose 3%. In the fourth quarter last year, retail sales climbed 11% and the S&P jumped 17%. (Gretchen Morgenson, NYT 12-19) Buyandhold.com of NYC, drastically lowers the barriers to entry for small-fry investors, allowing individuals to open accounts for as little as $20 and to buy fractional shares of stock. The fee to buy or sell shares is $2.99 a transaction, regardless of the dollar amount. A possible downside: The low transaction cost stems from the fact that buy-and-sell orders are executed just twice a day, once in the morning and once in the afternoon. As of last week, Buyandhold.com had attracted 3,000 accounts. (NYT 12-19) According to Lipper, the average US diversified equity fund, a proxy for actively managed stock funds, returned 12.7% from Sept. 30 through Thursday, versus 10.8% for the average S&P 500 index fund. Unless something upsets the markets in the next two weeks, this will be the third quarter in a row in which active stock fund managers beat the index. (NYT 12-19) 'The average holding period for all the publicly held shares of Amazon.com and Yahoo, as well as most other Internet stocks, is just eight days. For Dell Computer, it's four months; Microsoft, six months; Cisco Systems, nine months; and Wal-Mart, 18 months. And even for blue chips that epitomize long-term investing --- like Exxon, GE and Johnson & Johnson --- their entire huge stock capitalizations are turning over in a mere 30 to 33 months' says H. Bradlee Perry, an investor for nearly 50 years and the retired chairman of the David L. Babson money management firm. (Atlanta JC 12-19) It seems counterintuitive. The less diversified your portfolio, the more vulnerable it should be. Instead, the opposite is true, contends Scott Schoelzel, fund manager for the Janus Twenty Fund. The average U.S. diversified mutual fund holds 132 stocks, according to Morningstar, and scores no better on standard risk measurements than funds holding 35 stocks or fewer. (Atlanta JC 12-18) From 1994 to 1999, total equity holdings of U.S. households more than doubled, to $10 trillion (or about $76,000 per household), according to a recent New York Federal Reserve Bank report. The median household income of individual investors is $60,000, their median age is 47, and their median household financial assets, excluding the value of their homes, total about $85,000. Some 58% of those non-home assets are in stocks -- a percentage that has quadrupled since 1989. (Margaret Popper, Business Week 12-17) `Investors appear bullish on fund investments for the coming year,' reports Charles Schwab. In its most recent poll of more than 500 fund customers, Schwab says, 40% said they planned to increase the amount they invest in funds during the next six months. That's double the number who said they planned that in September 1998. (Chet Currier, Bloombeerg 12-17) Despite the recent battle in Seattle, Americans by 50% to 38% think Congress should approve the U.S.-China trade deal. In the poll, which has a margin of error of 2.2 percentage points, the public by 39% to 30% believes free-trade agreements have helped the U.S. Gore voters tend to favor free trade, while Bush voters are divided and swing voters believe it hurts the U.S. (WSJ 12-17) Americans by 49% to 41% disagree with Judge Jackson's finding that Microsoft is a monopoly. And by 52% to 29% they don't think Microsoft should be broken up. (WSJ 12-17) The trade gap hit $25.94 billion in the month, a 7.4% increase from the revised $24.15 billion September figure. September had originally been reported as a $24.41 billion deficit. Commerce said imports in the month grew by 1.6% to a record $107.86 billion, while exports fell by 0.1% to $81.92 billion. Seasonally unadjusted crude petroleum imports rose to $5.48 billion, up from $5.35 billion in September. (WSJ 12-16) Goldman, Sachs' Abby Joseph Cohen said she expects the S&P's 500 Index to reach 1525 by the end of 2000. Cohen said in a report to clients that gains in the US stock market next year will be more in line with historical trends, rather than the 20-30% gains of recent years. Cohen reiterated an earlier prediction that profit from operations for companies in the S&P 500 will rise about 8% next year. The Dow should reach 12,300 by the end of next year. (USA Today 12-16) According to a survey released Monday by benefits firm William Mercer, insurance premiums rose an average 7.3% in 1999, nearly three times the rate of inflation, to $4,097 per employee. The survey of 3,166 companies also found that workers' contributions to their insurance coverage actually dropped, from 24% of the total premium for an HMO plan in 1998 to 20% in 1999. The average worker paid $37 a month toward HMO coverage in 1998 and $32 this year. Family coverage fell from $138 a month for an HMO in 1998 to $124 in 1999. (USA Today 12-15) Sales and use taxes generate about 25% of all state and local tax revenues, says Harley Duncan, executive director of the Federation of Tax Administrators in Washington. That is up from about 20% two decades earlier. (WSJ 12-15) State tax revenues grew 5.7% in fiscal 1999 over 1998, says the Center for the Study of the States. That was slightly slower than in the two prior years. But it was still quite strong, especially since many states cut taxes. (WSJ 12-15) The number of millionaire households has more than doubled since 1990 to about eight million, according to Spectrem Group, a market-research company based in San Francisco. (WSJ 12-15) A recent study for the Dept of Labor shows that states with low unemployment have been experiencing no more wage-inflation pressure than those with high unemployment. A possible implication: The national unemployment rate -- already at 4.1%, a 29-year low -- might safely sink even further without causing an inflationary spiral. The study compared state unemployment rates and wage gains over the period 1995-1998. As of October, 32 states had unemployment levels below 4%. The lowest, in Iowa, stood at 1.8%. (WSJ 12-14) Experts seem to agree that stock purchases by a company's directors, managers and principal owners (known in the trade as "insider buying") are usually bullish portents. Observes Craig Columbus, who runs Primark's InsiderSCORES.com research service, only slightly more than 10% of purchases by insiders since 1987 have prefigured positive stock returns over three-month and six-month periods. (SmartMoney 12-14) The cadre of stock-market bargain hunters called value investors have a chronic problem. You could call it `freeze-out.' The problem is that we cheap-stock devotees rarely get to buy stocks in popular industries. Right now, for example, there are no cheap Internet shares, and hardly any cheap stocks in computer-related businesses, telecommunications, drugs or even foods. (John Dorfman, Bloomberg 12-14) If the Fed's rate hike campaign is over, bond yields may have peaked, according to Robert DiClemente of Salomon Smith Barney. His research on the history of preemptive monetary policy steps suggests hikes in short-term rates don't necessarily translate into proportional increases in long-term rates, especially when the tightening cycle is well under way. Bond yields traditionally have peaked before the federal-funds rate in all of the major tightening episodes since inflation was curbed in the early 1980s. Moreover, DiClemente says, a look back at these periods shows that bond yields changed very little or even declined, even with tightening still ahead of as much as 100 basis points, or a full percentage point. So barring evidence that underlying inflation is moving above levels that prevailed before the global financial crises of recent years, the 30-year bond yield shouldn't rise much above 6.50%. That is, if it even approaches 6.50%. (William Pesek, Barrons 12-13) At some point, cyclical stocks may well come back into vogue given that we are starting to see the most synchronized global growth environment in a decade. (Sherry Cooper, Chief Economist, Nesbitt Burns 12-13) Four signs of customer economic health: In the three-month period ended Sept. 30, personal bankruptcies fell 10% from the same period in 1998. Mortgage delinquencies fell to 4.1% in the third quarter, the lowest level since first-quarter 1995, according to the Mortgage Bankers Association. Growth in credit card debt has slowed. And in the second quarter, credit card delinquencies reached a four-year low, the most recent data available, according to the American Bankers Association. The proportion of credit card accounts that are paid in full each month has grown from 29% in 1991 to 43% today, according to CardWeb.com, a credit card tracking firm. (NYT 12-13) We can do miracles in a tissue culture dish. You can cure cancer in mice with gene therapy. But then you go to the human body, and we face three major problems. The first is, how do you get a gene into enough cells to make a difference? The second is the body's defense mechanisms, which basically shut down the genes once they get there. And then the third is figuring out how to get genes into cells at the right place, at the right time, making the right amount of product to treat a given disease. (Dr. W. French Anderson, director of the gene therapy program at the University of Southern California NYT 12-12) Unfunded state pension systems account for 88% of European pension entitlements. EU figures show that at present, contributions from four working people support one pensioner in the European Union. This is projected by the EU - and the OECD and the IMF - to fall to just two working people per pensioner within 40 years, that is by the year 2040 - causing a huge strain on public finances. (BBC 12-12) As of midweek, stocks in the tech sector on average were trading at nearly 40 times projected earnings for next year, way ahead of the price-to-earnings ratio of 23 for the broader market as measured by the S&P 500, noted Christopher Wolfe, market strategist for J.P. Morgan. So far this year, the tech-heavy Nasdaq composite index is up about 65%, the largest capitalization tech's (the Nasdaq 100) is up about 74%, while the S&P 500 index is up only about 15%. (Kathy Bergen, Chicago Tribune 12-12) Japan's economic numbers were badly reported in the U.S. The headline number was worse than expected, although that was largely due to the fact that prices as measured by the gross domestic product deflator fell more than they had in the second quarter. In real terms, the economy grew at just under a 1% annual rate, up from 0.6% in the previous quarter. (Nicholas Edwards, a managing director, Warburg Pincus Japan Growth NYT 12-12) Japan's Topix stock index is up nearly 50% this year. Telecommunications, electronics, specialty retailers and securities brokers, have done well. The rest have under-performed. Fifteen of the 33 groups of stocks in Japan are down for the year. Steel, mining, foods, warehousing are all the boring old sectors. (Nicholas Edwards, a managing director, Warburg Pincus Japan Growth NYT 12-12) 'This is one of the rare opportunities to buy closed-end muni bond funds at extremely undervalued levels,' said Thomas Herzfeld, an investment adviser specializing in closed-end funds. 'This is shaping up to be the second-worst year in the bond market, after 1994, since we started keeping statistics in 1926,' said investment adviser George Karpus. The recent price decline has meant rising yields. Closed-end muni bond funds recently yielded an average of 6.5% versus about 6.2% for long-term taxable Treasuries. Herzfeld likes Van Kampen Strategic Sector Municipal Trust and Van Kampen Municipal Opportunity Trust II, both yielded 7.0% as of Dec. 8 and traded at discounts of 15 and 17%. He also likes Morgan Stanley Dean Witter Municipal Premium Income Trust, yielding 7.1% on Dec. 8 and trading at a 18% discount. Karpus likes Colonial High Income Municipal Trust, with a yield of 7.7% and a discount of 18% as of Dec. 8. (NYT 12-12) The US administration has decided to turn a blind eye towards the inherently export-oriented exchange-rate policies that some Asian countries are following. The most glaring example is Japan -- isn't that the basic idea when Japanese authorities talk of wanting to prevent a `premature strengthening of the yen?' They mean they don't want to their currency to get stronger because they are afraid that will hurt their exporters. Even more blatant is South Korea. The magic number for Seoul appears to be 1200 won to the dollar. Today we read that the Koreans are planning to borrow 1.3 trillion won ($1.15 billion) next week to buy dollars on the local currency market. You can find plenty of people in Washington who talk tough on trade. Still I have never heard anyone get outraged about countries that intentionally try to weaken their currencies to promote and protect their export industries. (David DeRosa, Bloomberg 12-10)
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