| Factoids from Business & Investment News
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Greenspan would almost certainly love to see the stock market finally pay attention to him--and shudder. A meaningful drop in share prices could give many consumer-investors the reason they haven't had for the last year or more to stop filling their shopping carts to overflow. If an economic slowdown finally ensues, and the Fed signals that interest rates have gone up enough, history suggests investors are likely to warm to stocks again--and quickly. The only question is the distance between here and there.
Sharpe Ratio In layman's terms, the Sharpe ratio measures how much reward an asset delivers per unit of risk. The higher the ratio, the better the investment. The typical stock fund sports a Sharpe ratio of 0.63, according to Morningstar. The predictive powers of the Sharpe ratio are debatable, because it is based on historical risk and return data. But at the very least, it should keep you away from the dogs. To find a fund's Sharpe ratio for free, go to Morningstar's site, http://www.morningstar.com. Type in the name of the fund in the box on the upper left corner of the page. Once the fund's page comes up, click on the tab labeled "Ratings and Risk." The Sharpe ratio will be shown on that screen. R-Squared R-squared tells you how much the fund's performance correlates with the movements a given index, usually the S&P 500. Say you already own an S&P 500 index fund and you're looking to invest in a second domestic stock fund (Funds X and Y). Which do you choose? Check out the funds' R-squared, a figure many funds list in their shareholder reports, or that you can find on Morningstar's Web site. The fund with the smallest correlation to the S&P index will give you the most diversification. Price-to-Earnings Ratio P/E, a valuation measure, is a stock's market price divided by the underlying company's per-share earnings over a 12-month period. The higher the ratio, the more an investor is paying for that company's earnings. Russel Kinnel, equity editor for Morningstar, recommends that investors consider the average P/E of a fund's holdings before jumping in. "A lot of the best-performing funds have average P/Es in the 50s," he says, well above the average P/E of 28.7 for the S&P 500, based on the last 12 months' earnings. "Obviously, there's a lot of price risk in those situations." You can look up the average P/E of a fund's portfolio for free on Morningstar's Web site. Click on the tab labeled "Portfolio." Be aware, though, that these figures may not reflect recent changes to the fund's holdings. Portfolio Concentration How many stocks does a fund own? If it owns few stocks, it will give you a much more turbulent ride. If you're after safety, then you'd want a fund with a broader portfolio. But if you've got money to gamble, volatility be damned, then you might look for high returns with a concentrated fund. This information also can be found on Morningstar's site. But, again, the data can lag by weeks or months. Expenses "So much of what you're evaluating in a fund carries a high degree of uncertainty," notes Steve Savage, editor of the No-Load Fund Analyst newsletter. Not so expenses. There is absolute certainty that a fund with an expense ratio of 0.19% will take a modest 0.19% of your assets (including gains) every year, and that one with a ratio of 2.19% will take a lot more. A fund's expense ratio can be found by calling the fund company, in fund literature, or at the fund company's Web site. Intangibles When the No-Load Fund Analyst searches for good funds, "we look for good performance records that are likely to be sustainable," Savage says. The newsletter staff does this by talking with fund managers to learn whether their investing strategies are disciplined and well-thought-out. Until recently, most fund investors haven't had access to such analysis--at least, not for free. But today there are a few places to look. One is at http://www.standardandpoors.com/onfunds. There you can check to see if your fund made S&P's Select List of recommended funds. If it's on this list, you can get a free report written by S&P analysts. Morningstar's site offers a brief analysis of a fund for free, and more lengthy write-ups are available for a fee.
I urge you to get into something, develop a specialty, wade into the literature as if you were part of the business. Get into something and shake that post-run-up why-didn't-I-know-about-that self-flagellation mode I know so well. Unlike big-time fund managers, you may not be able to hobnob with CEOs, but you can certainly do better than watching the ticker on CNBC. Where do you look for trade publications and Web sites? Start with a good list of lists, such as Selected Business Periodicals by Industry, put out by the Michigan Electronic Library, a project of the University of Michigan at www.mel.lib.mi.us/business/BU-IPmenu.html. It connects you with publications in 27 industries, from airlines to waste management, most of which are free.
The Fed wields a blunt instrument, the federal funds rate, to affect aggregate demand. But demand for some things -- food, oil and health care, for example -- is insensitive to prices. So does the Fed raise rates to restrain prices in areas that are price-insensitive? `If they tighten, it will affect the price of other things, which will offset rising health care costs,' says Ray Stone, an economist and managing director at Stone & McCarthy Research Associates. The good news in yesterday's GDP report was another strong implied increase in productivity growth. Since total hours worked rose 2.2% in Q4 and GDP rose 5.8%, the 3.6% difference reflects productivity gains. A rise in the wage rate is just like a rise in the price of any commodity or any service that is in high demand. This in itself is not a bad thing and moreover it can be self-correcting. If the U.S. needs workers so badly, it should import them, legally. Turn this over to the Immigration and Naturalization Service, not to the Fed. Isn't that a better idea than putting a bullet in the Dow Jones Industrial Average? The last time we went through [an inflation scare] was 1994-1995. Greenspan raised the federal funds target seven times for a total of 300 basis points. The markets roiled, traders coughed up blood, and in the end, no inflation showed up. The science of economics rarely allows for controlled experimentation. Can you say the medicine is working just because the disease doesn't appear? Forth quarter government spending was up 8.4%. It was the largest increase in government spending since 1986, according to Christopher Low, chief economist at First Tennessee Capital Markets. More striking was the 16% increase in federal spending, the fastest pace in 15 years. Is the era of big government really over? `This is the single best argument for a tax cut,' Low says. `Surpluses are just too tempting.' From Lawrence Kudlow's column, CNBC 1-27 'Is it possible to sustain productivity growth above 2 1/2%, and output growth at 4%, without driving inflation above its present rate? Let me answer you this way: We've been doing it for four years now. As Yogi Berra is alleged to have said: You can observe a lot just by watching.' 'Add to technology and globalization, deregulation in most of the world, and privatization, and the replacement of the heavy hand of government with Adam Smith's invisible hand of the marketplace, and you've got what I would call a new paradigm.' 'I'm not saying that inflation will remain low despite strong real growth; I'm saying it will remain low in part because of strong real growth. If inflation results from too much money chasing too few goods, more goods will help as much as slower money growth.' U.S. Department of Commerce, Bureau of Economic Analysis, Gross Domestic Product, Fourth Quarter 1999, Jan. 28, 1999. U.S. Department of Labor, Bureau of Labor Statistics, Employment Cost Index, Jan. 28, 1999.
Since late 1998, the average price for a barrel of crude oil has jumped to more than $27 from nearly $13, an increase of 112%. There is an 81% correlation between Treasury rates and oil prices. Perhaps it's a hangover from the 1970s, or even the 1990 Persian Gulf War. Folks know the oil shock can't last, but bond traders still live in fear when it happens. My hunch is that market forces will pull oil down toward $18 to $20 a barrel. This could take about 50 basis points off the Treasury bond rate, bringing it back toward 6%. As for real interest rates, I think the combination of Fed restraint (total bank credit growth has already slowed to 5% from 11%, according to Victor Canto) and slower post-Y2K technology investment and production will take some of the sizzle off the economic grill. Consequently, look for a more normal real interest rate of around 3.5% to 3.75%, representing a gradual descent of perhaps 70 basis points. This could move 10-year Treasuries down to 5.5%. Another way to see this: 3.5% real rate plus no more than 2% expected inflation equals a 5.5% bond yield.
Smart way. Find a card with a low "fixed" rate (one that isn't scheduled to expire in three months) and transfer your other card balances to that card. Stupid way. Transfer your balance to a credit card with a 3.9% teaser rate, and then keep charging to take advantage of that great low rate. Stupid way. Move your balance from card to card every few months, chasing low teaser rates. Smart way. Pay off your highest-rate, nondeductible debt first. Stupid way. Make extra payments on your tax-deductible mortgage or home equity loan while carrying high-rate credit card debt. Smart way. If you are deep in credit card debt consider a home equity loan to consolidate your card debt and (usually) make the interest tax-deductible. Stupid way. Tap your retirement funds to pay off credit card debt. Borrowing from your 401(k) means that money is no longer earning tax-deferred returns for you. And you wind up paying taxes twice on the money you use to repay the 401(k) loan--once when you earn it, and again when you take it out in retirement. Smart way. If you're really in over your head you can turn to a nonprofit credit counseling firm. Stupid way. Turn to a high-interest debt consolidation loan or a for-profit, fly-by-night company that calls itself a credit counseling firm.
Investors have long turned to Treasurys to hedge their bond bets. Investors buying corporate bonds often sell Treasurys short to hedge themselves in case interest rates suddenly rise. With fewer Treasurys around, investors are struggling to find new means of hedging themselves. The shrinking supply of Treasurys may even hurt the Fed's attempts to aid investors in times of distress. Currently, the Fed can easily inject liquidity into the financial markets by buying Treasurys. As Treasurys become scarcer this will likely become more difficult, though the Fed could turn to other securities, like agency bonds. David Hale, chief economist at Zurich Kemper Investments, points out that when the United Kingdom began buying back government bonds in the late 1980s, it hurt the Bank of England's ability to slow the British economy. The bank was sending checks to investors even as it was trying to slow growth. Similarly, the Fed's current efforts to slow the U.S. economy 'could also be impaired,' he says. The dollar's status as the world's reserve currency could be hurt, perhaps raising the risk of inflation. Foreign central banks, who normally invest their foreign currency reserves in bonds issued by the foreign country's central government, could be deterred from holding dollars because it's harder to find Treasurys in which to invest.
Concern about inflation and the Fed raising interest rates has hurt bond prices, sending yields to their highest level in two years. That has hurt blue-chip stocks, which compete with bonds for investors' dollars. All very predictable. The question is why the technology stocks continue to defy the gravitational pull of higher interest rates. Fans say tech stocks have defied the pull of higher rates because they have superior profit growth; but that doesn't quite ring true. Technology stocks traditionally have fallen harder than the broad market when interest rates rose, precisely due to their high profit expectations. When the Fed raised rates several times in 1994 and once in 1997, the Dow fell just under 10% on both occasions, but the Nasdaq Composite fell 14% and 13%, respectively. Ed Keon, director of quantitative research at Prudential Securities, says he thinks the trend (or divergence) makes eminent sense. He suggests some technology stocks are in a growth class of their own. 'If you looked at the macro-level projections for things like wireless communications, broadband and business-to-business e-commerce, you're talking about markets that reasonable people think will grow by factors of 10 or 20 over a very short period of time. Twenty-fold growth in a short period of time is nearly impossible to value based on the techniques we all grew up with.' Even more-traditionally minded analysts are reluctant to challenge such thinking given the current euphoria. 'The fact is that every wildly optimistic concept that you can conjure up has been rewarded,' says Byron Wien, US investment strategist at Morgan Stanley Dean Witter. 'So prudence has been punished and I'm not willing to say prudence is obsolete but it's certainly in remission.'
The report found that while almost half of participants have accounts with their current employers of less than $10,000, 13% have balances in excess of $100,000. Workers in their 50s with 20 to 30 years of tenure with their current employer had an average balance of $135,000, while those in their 60s with at least 30 years of job tenure had balances of $185,000. Half of total plan balances were invested in equity funds, 17.7% in company stock, 11.4% in guaranteed investment contracts, 8.4% in balanced funds, 6.1% in bond funds and 4.7% in money funds. About 42% of 401(k) assets was in mutual funds, up from 9% in 1990. Younger workers tend to favor equity funds while older participants are more likely to invest in guaranteed investment contracts and bond funds. On average, 78% of eligible employees participate in their employer-sponsored 401(k) plans, with the number of participants growing from 19.5 million in 1990 to 36.7 million in 1998. The $1.41 trillion was about 13% of the $10.9 trillion American retirement market. Assets in 401(k) plans accounted for $593 billion, or 11%, of all mutual-fund assets. In a 1999 survey of 491 employers with a total of 3.3 million participants and $295 billion in assets, Hewitt Associates found 19% of employers providing dollar-for-dollar matches in their 401(k) plans. The most common match is 50 cents per dollar, at 32%. Eighty-six percent of the employers said they provided investment education, up from 59% in 1997. And 62% use the Internet for such purposes, up from 20% in 1997.
According to Standard & Poor's, the S&P 500 has risen in 37 Januarys since 1945, and completed the year higher than it started in 33 of those years. The gains averaged 20%. Following the 17 January declines, the index finished the year down 11 times, with losses averaging about 10%. The handful of years that gained after a down January saw only modest increases, averaging about 4%.
Morningstar examined the percentage change in cash flows--the money going in or out--of funds since 1987. It found that unpopular categories have beaten the average equity fund over the next three years nearly 80% of the time. And attention, tech-fund shoppers: When compared with popular fund categories, the unpopular categories have won out over the next three years 90% of the time. The company suggests buying one fund from each unpopular category (for 2000 they are Latin America, precious metals and convertibles) to limit risk; holding the funds for at least three years; and limiting your bets to 5% or 10% of your portfolio.
If Mr. Greenspan and his colleagues really want to slow the economy, they can. And it appears that Mr. Greenspan wants to do just that; he just doesn't want to take the blame for it. In his speech a week ago, pointed out that consumption is rising much faster than incomes or productivity, and attributed a large part of that to the booming stock market and the feeling of wealth that it has produced. That cannot last, he said: 'What will stop the wealth-induced excess of demand over productivity-expanded supply is largely developments in financial markets.' It is the markets that will slow the economy, not vice versa. 'He sees rising interest rates as the force that will ultimately cap the equity market's advance, contain equity wealth effects, and thereby rein in excess demand,' said Robert Barbera, the chief economist of Hoenig & Company. There are signs that the Fed's medicine (or is it the bond market's?) is starting to work. Much of the stock market is stuttering, as the Dow plunges while the Nasdaq composite zooms, or vice versa. There have been just 6 days in the last decade when one of those indexes rose at least 1% while the other fell by that amount. Four of them were in the last two months. The yield on 10-year Treasuries has climbed from 5.9% to 6.8% since mid-November, while the Nasdaq composite is up 30%. You can take that as evidence that the Fed cannot stop this runaway economy, or the technology bull market. Or you can agree with the wisdom of the late economist Herbert Stein, as quoted by Mr. Greenspan: 'If a trend cannot continue, it will stop.' Mr. Greenspan thinks interest rates will rise enough to offset, if not end, the wealth effect. Do you want to bet he is wrong? Robert Barker, Business Week 1-21-00
An "inverted" curve, in which shorter-term yields are actually higher than the longest-term ones, historically has been a signal of a weakening economy: It suggests some investors believe that short rates have gotten high enough to slow the economy sooner rather than later--at which point investors often rush to lock in yields. Tony Crescenzi, bond strategist for Miller Tabak Hirsch, said the current inversion between 10-year and 30-year securities in part reflects supply issues. (Bloomberg 1-21: The Treasury changed its rule book last year to allow it to reopen benchmark issues more frequently to keep them large and liquid, which resulted in a bigger pool of the most current 10- year notes after the November auction. The Treasury auctioned $44 billion face amount of 10-year Treasuries in four sales last year, more than double the $20 billion of 30-year debt sold.) When there is a relative oversupply, yields must rise to attract more investor demand. Crescenzi said he won't be sure that an economic slowdown is in process until yields on 2-year T-notes and even shorter instruments match the level of the 30-year bond. Still, "The fact that we're nearing parity or inversion means we're getting close [to a slowdown signal]," he said. In any case, the overall trend in bond yields indicates that investors are nearly certain that the Fed will continue pushing short-term rates higher. The only question is how many rate hikes are foreseen. Scott Grannis, economist at Western Asset Management in Pasadena, thinks the market has "priced in" a full percentage point of Fed tightening between now and Labor Day, which would push the federal funds rate--the overnight bank loan rate that the Fed essentially controls--from the current 5.5% to 6.5%. He may not be able to cool down the sizzling economy, nor slow the stock market juggernaut, but Greenspan has convinced the bond markets that he can keep inflation under control. This is the main conclusion that can be drawn from the recent inversion of a key part of the yield curve. Many investors who had purchased short-term securities before year end, in a flight to safety ahead of potential year-2000 related computer glitches, are now selling those securities. At the same time, a growing number of companies and government agencies have been selling bonds in recent days. To prepare for these deals, investors have been selling 10-year Treasurys. Also, declines in European bond markets have weighed on the 10-year note. Most European benchmark securities are 10-year notes, and the weakness overseas has pressured medium-term US issues. A better barometer [than the inverted yield between the 30-year and 10-year bonds] is the yield gap between the two- and 10-year Treasury, which Susan Nason (who oversees government bonds at Federated Investors) uses as a gauge of economic growth and inflation. That spread, which almost doubled in the past month to 31 basis points, suggests the curve isn't about to invert fully and the economy is nowhere near recession, Nason said. The real driver of the economy is not the bond market but stocks, said Ned Riley, chief investment strategist at State Street Global Advisors. The stock market eclipsed the bond market in size for the first time in at least 13 years in 1998, and last year was worth $17.62 trillion compared with $14.22 trillion for bonds, according to data from the Securities Industry Association and the Bond Market Association. Not until stocks drop, he said, will enough investors return to fixed-income investments to ignite a rally.
During the latest period, from 1995 to 1998, the S&P 500 surged 76% while another major asset for most families, the value of the family home, went up 15% to $129,500. The 17.6% increase from 1995 to 1998 in median net wealth compared with a much smaller 7.8% rise for the three years ending in 1995 and an actual drop of 5.3% in family wealth for the three years ending in 1992. The mean--net worth of American households rose 25.7% over the period, from $224,800 in 1995 to $282,500 in 1998. Much of the gain recorded since 1995 stems from Americans' stock portfolios, the median value of which rose from $15,400 in 1995 to $25,000 in 1998. Americans making less than $25,000 a year saw their median income and net worth fall between 1995 and 1998. Poorer Americans also are devoting an extremely high percentage of their income to repaying past debts. Nearly a third of all families earning less than $10,000 a year allocate more than 40% of that money toward paying debts. The median American family, by contrast, devoted 17.6% of its yearly income to repaying old debts, up slightly from the 16.1% recorded in 1995. Among families with debt, the median amount owed rose 42.3% above its 1995 level, to $33,300 from $23,400, and was up 73.3% from its level in 1989. The survey, published in the Federal Reserve's monthly bulletin for January, was based on interviews with 4,309 families. During a period when stock markets were returning double-digit gains, the net worth of those without high school diplomas shrank by about one-sixth. The net worth of Americans who had completed high school but not college also contracted, though to a lesser degree. Young people also saw their net worth diminish: The median family in which the main breadwinner was younger than 35 saw its net worth shrink by nearly 30% from 1995 to 1998. Growing debt contributed to the plight of the bottom-of-the-ladder groups. The Fed researchers found that about 1 family in 8 spent more than 40% of its income toward meeting debt payments in 1998. Families with incomes below $50,000 and the elderly showed the greatest strains. The percentage of families who own stocks, either directly or through mutual funds or retirement accounts, has grown substantially in the last 10 years, from 31.6% in 1989 to 48.8% in 1998. The median family stock holdings of nonwhites and Latinos more than tripled from 1995 to 1998, from $2,500 to $9,000. This was at a time when the median stock holdings by whites approximately doubled, from $9,800 to $20,000. "The most amazing figure to me is that the median value of total family indebtedness rose from $23,400 in 1995 to $33,300 in 1998," said Edward Wolff, a NYU economist. "That's a huge increase." In 1998, the Fed found, the median American family spent 14.5% of its income staying ahead of its debts. Though the Fed did not cite this as dangerously high, it noted that this debt burden was greater than at any time since it began issuing such reports in 1989. (From the FRB Report: The fraction of families having direct ownership of publicly traded stocks-that is, stocks other than those held through mutual funds, retirement accounts, or other managed assets-rebounded to 19.2% in 1998; the proportion had fallen to 15.2% in 1995 from about 17% in both 1989 and 1992. Fueled by a rising stock market, the median amount of stock held by those having direct holdings rose 82.3%, from $9,600 in 1995 to $17,500 in 1998. Continuing earlier trends, the ownership of tax-deferred retirement accounts rose broadly, from 45.2% of families in 1995 to 48.8% in 1998.) The Survey found that median household income, adjusted for inflation, rose a mere 2.1% over the three years from 1995 to 1998. But as I pointed out to one of the analysts who helped prepare this report, that figure is nonsense. All the numbers we have on soaring wage-rates and surging employment say otherwise -- and that must be why the Census Bureau finds that real median household income actually jumped by 6.7% over this period, or more than three times as fast as the Survey fallaciously claims. (The report is available at www.federalreserve.gov/pubs/bulletin/default.htm.) How incredible it is to consider that during the five years ended 1999, the price appreciation or capital gains of stocks and mutual funds owned by US households approximated 36% of wage and salary income. Prior to the current great equity market rally, stock and mutual fund price appreciation would rise no higher than the 19% of wage and salary income of the five years ended 1968. The earnings for the poorest fifth of American families rose less than 1% between 1988 and 1998 but jumped 15% for the richest fifth, the Center on Budget and Policy Priorities and the Economic Policy Institute said. Income for the poorest families - defined as two or more relatives living together - rose $110 to $12,990 during the 10-year period. For the richest families it increased by $17,870, to $137,480, more than 10 times that of the poorest sector, the report found. The study used before-tax data from the U.S. Census Bureau. The figures were adjusted for inflation. From the Survey of Consumer Finances - FRB
From the Survey of Consumer Finances - FRB
At 4 cents apiece, the Sacagawea costs one-third more to make than a paper dollar but will save the government a fortune if it catches on: coins last more than 30 years in regular use, while paper dollars wear out in 9 to 14 months. With vending machines selling higher-value items, demand should be strong for the new dollar coin. Most machines do not have to be retrofitted to accept this dollar. Vending machines accept coins by reading their electromagnetic fields. The metal alloy used in the new coin causes the vending machine to 'read' it like it's a Susan B. Anthony. The Sacagawea dollar distinctive has three crucial differences from a quarter. First, it's gold in color. Second, it has a smooth edge, like a nickel. Third, it has a wide border, which you can feel with your thumb when you reach in your pocket. (NYT 1-30) The stock market's continuing gains in '99 more than offset the impact of higher rates. Think of it this way: The increase in the prime lending rate last year raised the annual simple interest cost on a $100,000 loan at prime from $7,750 to $8,500. But $100,000 invested in the average U.S. stock mutual fund produced a return of $27,500 last year. With numbers like those, who's afraid of the big, bad Fed? (Tom Petruno, LA Times 1-30) Yields are now 8% to 10% on preferred stocks. According to a Merrill Lynch study, they average about nine-tenths of a percentage point higher than bonds of similar credit quality, a difference that is about three times as much as usual. And the yield to maturity on the Merrill Lynch fixed-rate preferred stock index, at 9.03%, is nearly a full percentage point higher than it was a year ago. The dividends are usually specified when issued -- but sometimes float -- and are usually paid quarterly. Preferred issues trade like bonds, meaning that their prices move more in response to fluctuations in interest rates than in response to what happens to the companies that issue them. Convertible bonds, on the other hand, trade more like stocks. Investing in preferred shares is generally safe and easy, with 468 of them listed on the New York Stock Exchange. But they are not for everyone because, except for those convertible into common stock, they are almost guaranteed not to rise much in value. (NYT 1-30) The European invasion began with "Who Wants to Be a Millionaire," which transformed the competitive landscape of network television. Next comes a 13-episode summer series called "Survivor" -- a giant hit in Sweden -- in which 16 people will be stranded on an island off Borneo in the Pacific Ocean, charged with finding ways to survive. Cast members will be eliminated each week by vote of the other contestants until one is the final survivor, winning $1 million. Also this summer (from the Dutch), 100 consecutive nights of "Big Brother," which throws a group of 10 people, mostly in their 20's, into a new house constructed with cameras and recording equipment everywhere to document their every move. Each week one cast member is voted out, with viewers participating by phone and Internet. (NYT 1-30) When a Wall Street stock analyst issues a rare sell, or a rarer strong sell, recommendation on a company, the shares often won't budge. The reason? The smart money probably bailed out when the a "hold" (a code word for "sell" with most analysts) recommendation was issued months before. This phenomenon is rarely observed, however, because most analysts stop covering companies rather than issue a sell or strong sell recommendation, another trick of the trade. (James Kelleher, Knight-Ridder/Chicago Tribune 1-28) Americans had borrowed $228.5 billion to buy stock as of Dec. 31, 1999, up from $141 billion a year earlier -- a 62% jump, according to Ned Davis Research, a Venice, Fla., market data firm. In 1990, the figure stood at around $35 billion. (USA Today 1-28) For summaries and analysis of what presidential candidates are saying about taxes, click on www.otpr.org. That's a Web site set up by the University of Michigan Business School's office of tax policy research. (WSJ 1-26) Charitable gifts by individuals surged 15% to $99.2 billion for 1997, according to new IRS estimates. The agency's latest Statistics of Income Bulletin says 32.6 million returns reported charitable donations. (WSJ 1-26) The Nasdaq at 5,000. The Dow above 13,000. Sound farfetched? Apparently not to stock traders. The Security Traders Assn. said Monday that 70% of the 427 traders it surveyed expect stocks to reach or pass those milestones by year-end. That would amount to an 18% gain in the Dow from Monday's close, and a 22% gain in the Nasdaq. (LA Times 1-25) Private investors are expected to boost capital flows to emerging markets by about 30% this year as confidence in Asia and Latin America strengthens, the Institute of International Finance said. The IIF predicted that net private capital flows to emerging markets would rise to about $190 billion, higher thatn the $150 billion a year in 1999 and 1998, but substantially lower than the $327.9 billion reached in 1996. Private capital flows to Latin America is forecasted to increase to $89.6 billion in 2000, from $68.8 billion in 1999. Flows to emerging markets in Asia are forecast to rise to $59.4 billion from $39.3 billion. Emerging markets in Europe should expect flows to increase to $32.5 billion from $31.9 billion. Flows to Africa and the Middle East will rise to $11.6 billion from $8.7 billion, the IIF predicted. (WSJ 1-25) Jim Fish, director of the Baltimore County Public Library, said his staff has been peppered with complaints from library customers who could not open any Super Bowl Internet sites the past few years. The problem: anti-smut software on the library's computers kept mistaking "Super Bowl XXX" for something naughty. "We finally turned the filtering system off. People were getting aggravated." (WSJ 1-25) If you are going to gamble in the market, the trick is to make sure you don't do too much damage. Resolve to trade with only 3%, or at most 5%, of your total portfolio, and then stick to this limit. When you set up your speculative account, you should assume that this is lost money. If you have great hopes for your speculative account and you lose, you'll dip into the money you set aside for other goals. Life will be a lot simpler if you trade in your retirement account, because you won't have to list all your gains and losses on each year's tax return. Avoid investments where you are likely to lose everything - options, futures, selling short, buying on margin. So what should you do? Stick with no-load stock funds and well-capitalized individual stocks, and pay close attention to investment costs. Hang onto winning investments, while dumping your losers quickly. To keep yourself honest, track your performance. (Jonathan Clements, WSJ 1-25) While we wouldn't be surprised to see some continued choppiness in the market in the near term, we don't expect [it will lead] to a major sell-off. Two important factors that would help prevent that are earnings and investor sentiment. We expect that earnings growth will remain strong, and...we've already seen some good numbers on the earnings front. In terms of investor sentiment, the "buy on the dips" mentality has been so deeply ingrained in the investing public that they tend to view any weakness in the market as a buying opportunity. This tends to put a floor underneath the market. That's not to say that higher interest rates won't pressure stocks...[but] we still have a favorable long-term view of the market. (Kevin Gooley, equity analyst for S&P Personal Wealth, BW Online 1-25) If your home-business requires you to be online much of the day or if you need an open line for frequent faxes, splurge for the extra line for $25 per month. But if you really want or need to do this on the cheap with one phone line, devote $10 each month to Call Answering. That way, if your line is busy, callers get routed to a message; they never get a busy signal. And don't get Call Waiting which could break the connection during an incoming fax. And instead of purchasing a fax machine, you can send faxes from your PC using a free program like Microsoft Fax. To receiving faxes without a fax machine, one option for those with one phone line and no fax machine is to sign up for a virtual-fax service like Jfax. (Jimmy Guterman, Chicago Tribune 1-24) Investors in this country allocate more than 90% of their equity investments to the stocks of American companies. (According to Morgan Stanley, the combined market capitalization of all United States stocks amounts to less than one-half of the world's total market value.) Investors in Britain invest nearly 80% of their equity portfolios in British companies. This tendency of investors to favor their own country's securities is so universal that researchers have given a name to it: 'home bias'. All other things being equal, an investor's stock portfolio should be divided among the world's markets based upon each country's share of global stock market capitalization. An investor should be able to justify the geographical diversification of their stock portfolio. (Mark Hulbert, NY Times 1-23) In 1989, defense dollars accounted for 26.4% of the federal budget. In 1998, that figure had declined to 17.6%. In 1989, defense dollars equaled 5.5% of GDP; in 1998, only 3.4%. (Baltimore Sun 1-23) HOLDRs, or holding company depositary receipts, are a new quasi-form of mutual fund. They are an unmanaged portfolio of stocks that trade like a single stock. You get a fundlike diversification of multiple stocks, plus low costs because no manager is picking those stocks, coupled with some tax benefits and the ability to place buy or sell orders at specific prices. Created by Merrill Lynch but traded by all brokerage firms, HOLDRs debuted in the fall. HOLDRs are a cousin to 'exchange-traded funds' such as SPDRs, but with their own rules. For instance, trades must be made in round lots of 100 shares. And the portfolio you buy is precisely what you get; it never changes, unless a company gets taken out by a merger. (Charles Jaffe, Boston Globe 1-23) Muni's current yield is 94% of treasuires, less than the 100% ratio that munis hit briefly last fall, it is still far above the 85% that they have averaged since the Tax Reform Act of 1986. And because muni bonds are not subject to the ebb and flow of foreign demand, they have been far more stable investments than Treasuries. David Kotok, president of Cumberland Advisors, a muni bond manager, calculated that over the last 115 weeks, 10-year Treasuries were three times as volatile as munis, as measured by their standard deviation. Kotok said current prices offered the chance for capital gains of 15% or more if, as he expects, muni prices rise enough to push their yields down to 85% of that of Treasuries. (NYT 1-23) US stocks are now worth 185% of GDP, the highest ever. Before the 1929 stock market crash, stocks were valued at a relatively paltry 82% of GDP. (But what percent of GDP came from companies that had 'equity' in relativley agrarian '29 compared with today?) The current bull market started with stocks at about 33% of GDP in the summer of 1982. (Stephen Dunphy, Seattle Times 1-23) Overall earnings growth for the S&P 500 is on track to exceed 17% in 1999. The trend accelerated in the second half of the year. Earnings rose more than 22% in Q3 and are estimated to be up about 21% for Q4. That growth rate is three times the long-term average of 7%. Industry analysts are projecting 17% growth in earnings in 2000, said Charles Hill, director of research for First Call/Thomson Financial. (NY Times 1-22) After gaining 86% last year, the Nasdaq stock basket trades at 125 times its companies' earnings of the last 12 months, according to Joseph Abbott, senior equity strategist at I.B.E.S. International. Though the Nasdaq composite is extremely expensive, its companies are expected to grow 63% (a figure I find hard to believe and wish I had a 2nd source) in 2000, about nine times the average growth in corporate earnings for the last 50 years recorded by First Call. (NY Times 1-22) The personal consumption expenditures deflator (according to Bear Stearns economist Melanie Hardy) is a broader in scope than the CPI. The consumer deflator is a chain-weighted index that is updated each quarter, based on actual consumer spending patterns. It is weighted by the composition of consumer purchases of the current year and the prior year. The CPI component weightings, however, are based on spending patterns recorded during the 1993-95 period. So it's a lot of past history. Only urban areas are surveyed in the CPI, whereas the PCE deflator includes rural households as well. The PCE price index also picks up government health care and financial services better than the CPI. Also, the PCE deflator has a more accurate housing reading -- owners' equivalent rent is only 11% of the total index, compared to 21% for the CPI. (Lawrence Kudlow, CNBC 1-21) Some credit card companies and other lenders deliberately withhold data from credit bureaus to prevent competitors from stealing their customers. The practice is especially devastating to those trying to improve poor or nonexistent credit histories, because no one else besides the company will know about their on-time payments and new credit lines. (Liz Weston, LA Times 1-21) The practice of selective non-reporting could have fair-lending implications as well: If statistical studies that minority groups are more likely to carry subpar credit scores than other groups are correct, he says, then minorities -- especially African-Americans and Hispanics -- could be hurt by non-reporting more than other consumers. (Kenneth Harney, Washington Post 1-30) The International Energy Agency warned that crude-oil supply cuts by OPEC have severely diminished world oil inventories. 'According to the numbers, the market needs more oil now,' said the IEA. Several oil analysts said there was little doubt that market fundamentals make a price of $30 a barrel almost a certainty and $40 a barrel a possibility. 'It's a prescription for disaster for the world's consuming economies,' said oil economist Phil Verleger with the Brattle Group, an energy-consulting firm. He said world oil inventories, adjusted for consumption and economic growth, are the lowest in 20 years. Verleger adds that OPEC is giving Iraq a powerful economic weapon. Iraq is an OPEC member but isn't subject to quotas because of UN sanctions, and Saddam Hussein has turned the Iraqi oil spigot off in the past to protest UN actions. Without an OPEC production increase, the cartel 'is effectively handing Saddam Hussein veto power over world economic growth in 2001,' Mr. Verleger said. (WSJ 1-21) Forbes jokes that in backing school prayer, "I always hesitate to use the example of Congress because some would say, 'You see, it doesn't do any good.' " (WSJ 1-21) The Fed will no longer adopt a "bias" toward higher or lower rates. Instead, officials will disclose after each rate-setting session a more general description of how the Fed's open-market committee views "risks" to the economy. The committee will have three options: that inflation is a greater risk to the economy than a slowdown, that a slowdown is the greater risk, or that the risks are balanced between the two. When the Fed started revealing its "bias" statements in May, financial markets tended to treat the directives as a virtual guarantee of the outcome for subsequent meetings. That wasn't what the Fed intended. With markets ascribing greater clarity to Fed statements than the Fed did, officials at times felt boxed in by extreme market reactions. But it is far from certain that the change is really going to alter Wall Street's reaction. "We don't care what they call it. We care about the likelihood they'll keep moving in a certain direction, and this won't change that," said James Glassman, an economist at Chase Securities. (WSJ 1-20) About 20% of companies with multiple locations are currently testing IP (Internet Protocol) telephone services as a potential replacement for traditional phone service. An additional 25% will initiate trials later this year. So says a new study by the Phillips Group, a consulting firm based in Parsippany, N.J. (WSJ 1-20) Until now, investors could only obtain the high, low and average price. Now, every trade will be available, including the size of the trade and whether it was a customer buying from a brokerage firm or a dealer trading with a dealer. The information will be available at investinginbonds.com, the Web site of the Bond Market Association trade group.(WSJ 1-19) Siemens Chief Executive Heinrich von Pierer predicts that Germany will be short 300,000 high-tech specialists by 2005. The shortfall already stands at about 75,000, according to the German Electrical and Electronic Manufacturers Association.(WSJ 1-17) If you are looking at the year-end performance charts (of mutual funds) and searching for something on which to roll the dice, add three questions to your normal selection process: (1) How much of my money would I have put into this fund a year ago? The vast majority of investors might have gravitated toward technology, but they were hardly dumping big chunks of cash into Japan. (2) What did the manager do to make this happen? If you believe the fund got hot mostly because it was the right time for the assets it buys, then consider the fact that every 24 hours the world turns over on someone who is sitting atop it. (3) How are you going to feel if the joyride ends suddenly? A fund that can produce a 200% return when the Nasdaq composite is up 80-plus percent is likely to be pretty badly hurt when the Nasdaq gets crunched. (Charles Jaffe, Boston Globe 1-17) Last year, investors held stocks for just over eight months on average, well short of the two years that was typical a decade ago, according to Sanford C. Bernstein, an investment research firm. Among Nasdaq stocks, the hottest shares last year, the average holding period was five months, down from roughly two years. The trading frenzy has even infected the staid mutual fund world: investors are holding funds for less than four years on average. A decade ago, it was 11 years. On the New York Stock Exchange, the equivalent of 79% of all the shares listed there traded hands last year, up from 46% in 1990. The supercharged Nasdaq is turning over its shares at more than three times the pace of any major industrialized market in the world. The trading in its shares amounted to more than twice its entire share base; the turnover was 88% in 1990. In the 50 Nasdaq stocks with the heaviest trading, investors hold their shares for just three weeks, on average. (Gretchen Moregenson, NY Times 1-15) A fast-growing economy encourages the entrepreneurial risk-taking and creative destruction that increases productivity and raises economic efficiency. For instance, from 1870 to 1913, when the US emerged as the world's leading industrial nation, net national product rose fivefold, and real per capita income nearly tripled. Yet inflation averaged a mere 0.7% annually. A recent study into the business cycle by economists Ricardo Caballero and Mohammad Hammour found that the amount of restructuring in an economy increases during expansions and slows during recessions. Jerry Jordan, head of the FRB of Cleveland, once observed that if you go back in our history, 'the periods with the highest growth in output and employment, with the most rapid rises in the standard of living, are those periods where you have proximate price stability.' 'The NAIRU argument is getting tired,' says Jim Paulson, chief investment strategist at Wells Capital Management. The idea that more people working and producing more goods and services debauches the currency and reduces the purchasing power of money is highly suspect. (Christopher Farrell, Business Week 1-7)
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