| Factoids from Business & Investment News
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According to Steven Galbraith, research analyst at Sanford Bernstein, the increased supply in new-company shares will come from the inside. Top executives at companies going public usually agree to abstain from selling their shares into the open market for a period of time after the offering date. These agreements are known as lock-up periods. Many lock-up periods are about to expire, unleashing what could be a flood of shares onto the market. By Galbraith's reckoning, over the next three months some 2.4 billion shares of stock in last year's new issues -- more than twice the current number of shares trading in these companies -- will be free to enter the market. While the initial value of these offerings was $52 billion, their worth, as of last week, had rocketed to $256 billion. Only one in four of these companies makes money, Galbraith noted. "It truly is the physical supply-demand dynamic of the piece of paper that is determining the near-term valuation of these securities, not the intrinsic value," he said. Given that about three-quarters of early venture investments typically fail, Galbraith suspects that within a year or so, many of these stocks will have hit the skids. Many of the companies that came public last year are already trading well below their offering prices, a situation that will only be exacerbated by a fresh supply of shares. That unwinding will hurt individual investors much more than institutions. While institutions are the initial owners of these shares -- 90% of IPOs are allocated to favored mutual funds and other large investors -- individuals typically own them in the months after their debuts. Galbraith found that nine months after an offering, institutional ownership amounted to around 10%. The amount of restricted stock registered for sale by corporate insiders and other in-the-know investors jumped last month to $22 billion, according to First Call/Thomson Financial, which tracks insider transactions. For the past couple of years, planned sales of unregistered shares had run in the range of $1.2 billion to $2.9 billion a month. It has been running at $12.3 billion a month since November 1999. These planned sales "in effect drain liquidity from the equity system," meaning that the cash insiders receive for their shares usually goes elsewhere and isn't reinvested in the market, said Bob Gabele, director of research at First Call. "Money is leaking out of the equity markets at a faster pace than I have ever seen." The stepped-up pace shows no signs of slowing this month. Restricted-stock filings are expected to top $15 billion in March.
During the 1990s, by contrast, this strategy's performance was, well, awful. For the 11 years from January 1988 through February 1999, according to recent follow-up research conducted by LeBaron, the system lagged behind the Dow by an average of 2.3 percentage points a year. A large part of the failure of such approaches likely has to do with increasing market efficiency. Investors in the 1990s witnessed the growth of two important forces: personal computers and discount brokerage commissions. The PC lets individual investors learn about and act quickly upon statistical patterns in price and volume data -- information that previously could have been known only by large firms with supercomputers. Cheap trading, particularly online, has let investors exploit technical strategies far more easily. Of course, as more and more investors try their hands at technical analysis, trying to take advantage of pricing anomalies, the anomalies evaporate and the strategy loses its advantage. Paul Lim, LA Times 3-19-00 MoneyCentral -- May be the best site for free. Click on the "investor" section of MoneyCentral. Then, click on the tab marked "finder." To screen for funds, you'll have to download software from the site, but that takes a few minutes. And once you do that, you can screen for funds based on hundreds of different criteria. Among them: investment category, performance, 12-month yield, brokerage availability, Morningstar rating and risk, portfolio turnover, portfolio holdings, the number of stocks or bonds in the fund, sector weightings, and statistical measures such as alpha, beta, R-squared and even Sharpe ratios. Offers a plethora of "pre-defined" screens to help you identify the best "safe and steady" funds, the best tech funds, the best no-load funds with momentum, and funds that recently received additional stars under Morningstar. Morningstar-- You can screen for most of the basics through the "Fund Selector" section of Morningstar.com for free. And no site has a richer database of funds to mine from--and richer information about funds in general. The only downside is, to access Morningstar's "Advanced Selector" screening tool, which has all the bells and whistles, you have to become a premium member. Price: $9.95 a month or $99 a year. E-Trade -- Mot nearly as powerful as MoneyCentral's, but it gets you started. Easy to use and navigate. Select "Power Search." You can search funds based on fund families, investment objectives, historic performance, assets, minimum initial investments, expenses, turnover and manager turnover. Plus, you can search based on sophisticated statistical measures such as a fund's alpha, beta, Sharpe ratio and R-squared. All of this is free. However, to access this data, you must register on the site by submitting your name, phone number and e-mail address. Quicken -- Click on the "investing" tab and you can access "popular searches." There, you can look up the best no-load, low-expense funds; the best funds with total assets of less than $100 million; the best large-, mid-, and small-cap funds; and the best funds with low minimum initial investment requirements. MaxFunds -- 'Fund-o-matic' lets you search for "undiscovered" funds--those that are too new or small to have a ticker symbol, and thus don't get listed in most newspaper mutual fund listings.
If you're going to need to take money out of the market in 20 years, Shiller would have you try out zero and 1% as assumptions for annual stock returns in your financial planning. Shiller compares the 1990s bull market to those that peaked in 1901, 1929 and 1966. Those years registered the highest spikes in valuations in his records going back to 1881. By his calculations, early this year valuations were one-third again higher than the 1929 record. (You can get his data at www.econ.yale.edu/~shiller/.) Don't fear a crash as much as endless torture. The 1901 peak was followed by a gradual decline in which dividends were basically the only source of return. After 20 years, investors had an average annual real return of negative 0.2%. Twenty years after the October 1929 crash, the average annual real return was 0.4%. From the market's 1966 peak, the average annual real return 20 years later was 1.9%. The prospects could be even worse this time around. Dividends that helped offset price declines were much higher at earlier peaks than today's 1.2%.
You can't value stocks in isolation. Instead, you have to compare them with the two main alternatives, bonds and cash. Last year, stocks seemed impervious to rising short-term interest rates, which made money-market funds and short-term bonds more appealing. But this year, the rise in rates finally took its toll on many stocks. According to conventional wisdom, when large-company stocks tumble, small-company shares get crushed. So much for conventional wisdom. Even as the Dow has tumbled this year, small stocks have posted impressive gains. This underscores the reason for broad stock-market diversification: You never know what will do well. The case for diversification got a boost from another quarter. P&G, one of the bluest of blue chips, announced March 7 that operating earnings would fall far short of expectations. That day, its stock plunged 31%. Clearly, it is dangerous to bet heavily on one stock, even a dominant, well-established company. If all you own is an index fund that tracks S&P, you aren't indexing. You are making a big bet on large-company stocks. Investors should spread their bets across large, small and foreign shares. This year has been heralded as the revenge of active fund managers. Baloney. What we are seeing is the fallout from the performance gap between large and small stocks. That doesn't mean you should abandon indexing and buy active managers instead. What it means is that you should index the much-broader Wilshire 5000. Stocks are no place for short-term savings. An investment needs a minimum five-year time horizon. If you have less time, it's not investment money, it's savings and cd's. Even if you have a long time horizon, betting heavily on stocks may not be for you. If you can't tolerate these sorts of short-term losses, you should moderate the level of risk in your portfolio, by adding bonds.
Flash to the beginning of 1998 as the full impact of the Asian financial crisis begins to take shape. Year-to-year growth in the S&P 500 peaked at near 50% during this period, as both foreign and domestic investors fled to the U.S. seeking safety during a period of uncertainty. The flight to quality that occurred during this period is now being unwound. The average P/E ratio on the S&P500, 30+, is nearly one and one-half times what it was at the beginning of 1997; this cannot be supported by corporate profit growth. Other stocks around the world that offer similar growth and risk potentials to those in the U.S. but with lower P/E ratios are now being snapped up. This is driving the world market back to equilibrium by lowering the price of overvalued U.S. stocks and raising the price of undervalued foreign stocks. Another important factor that is contributing to the run on foreign stocks is the search for undiscovered technology stocks. The continued expansion of the use of American Depository Receipts, and the cross listing of foreign companies on U.S. exchanges is contributing to the trend of domestic investors seeking foreign technology companies. Lower interest rates in some foreign countries, such as Canada and the Eurozone, and the strength of the U.S. dollar vis-…-vis most currencies, are other factors that are contributing to this phenomenon. Foreign markets will continue to outperform their U.S. counterparts as the Fed institutes more rate hikes, international growth continues to accelerate, and the domestic expansion decelerates. John Dorfman, Bloomberg 3-14-00
So far, Beijing's response has been to spend money. It has pumped more than $30 billion into the economy for each of the past three years, accounting for about half of economic growth in 1998 and 1999. But a recent survey by the central bank showed that for every $3 lent by banks -- overwhelmingly to state enterprises -- output increased by only $2. In other words, state enterprises have destroyed a third of the capital they've received. To ensure US backing for admission, China agreed to open a variety of business sectors to foreign companies. Now, "it's dawning on China's senior leaders that five years from now, the economy could be largely foreign-owned," says Andy Xie, an economist with Morgan Stanley Dean Witter. But, "after 20 years of reform, China still doesn't have a real private sector" that could compete with foreign companies. For years, China's leaders have looked suspiciously on private enterprise, allotting it a secondary role in the "socialist market economy." But the country's pending entry into the World Trade Organization has forced a rethink. Consider the case of Weng Lianhui, owner of the Auspicious Dumpling Shop in Shanghai. Last year, when Mr. Weng wanted to open more stores, he was told by Chinese bureaucrats that he must hand over a $12,000 deposit for each new shop -- far too much for a small entrepreneur. That capital requirement is part of a long line of regulations that have throttled China's private sector since reforms started 20 years ago. Earlier this year, these restrictions on private enterprise came tumbling down, the latest in a series of small but important victories for structural reform in China. For the equivalent of just 60 cents, Mr. Weng registered a private holding company, and with the money he saved, he plans to launch a chain-store operation. Taken alone, Auspicious Dumpling's contribution to China's economy is small. Yet multiply it by the hundreds of thousands of small-business operators throughout China and the impact is profound. Private enterprises are soon to be given the right to list on the country's stock markets, including a new high-tech board modeled on Nasdaq. Until now, the stock markets had been almost exclusively the domain of state companies. Alone, these reforms don't guarantee China's economic health, or its full integration into the global economy. That probably requires privatization of the state sector, which accounts for about half of economic output and is still guarded jealously by Beijing's economic mandarins. But as the year wears on, the success of the increasingly liberated private sector will help determine if China can break out of its economic slump and peel away another layer of its command economy.
The most significant evidence comes in a soon to be published research paper by Stephen D. Oliner and Daniel E. Sichel, two Federal Reserve economists. In a landmark study five years ago, they had looked into how computers contributed to labor efficiency and found little impact. Since then, the statistics have recorded a surge in the productivity growth rate. Oliner and Sichel now find that computers -- both the manufacture of them and their use, particularly the large-scale networking of computers since 1995 -- are making a measurable contribution. But they decline to estimate how much of the improvement is temporary -- a result of companies straining to produce more while the boom lasts -- and how much will persist through the next recession. Still, they are optimistic. There have been surges in productivity growth before, but none in which information technology played so big a role. The added wages and profits that flow from all this will last if the productivity improvement is permanent -- a result of more efficient equipment, for instance, rather than an operator straining to keep up with a rising workload in a booming economy. Efficiency, however, is not enough to sustain productivity. There is a demand side to the equation. The productivity growth rate gets whittled away if customers fail to purchase all the additional goods and services generated with every hour of work. And then there is the capital spending aspect. Responding to the tremendous demand of the last four years, companies have raised capital spending to record levels. This spending, in turn, is a major contributor to the surge in productivity. Or as Solow put it, "I will feel better about the endurance of the productivity improvement after it survives its first recession."
Individual investors have already begun to take notice. For the last three months, some have been pulling money from core growth-and-income funds, in some cases shifting that money into "momentum" plays such as technology-sector funds and aggressive growth funds, which invest in the technology and emerging-growth stocks that dominate Nasdaq. This dynamic is sure to pick up steam, analysts say, once first-quarter statements are mailed out and investors realize that their old standbys such as Babson Value, Fidelity Equity-Income, T. Rowe Price Equity-Income and Vanguard Windsor are down anywhere from 11% to 17% since Jan. 1. And if that happens, it could spell even more trouble for investors in these money-losing "value" plays. In part, that explains why Laura Tarbox, head of Tarbox Equity, an asset management firm, has reduced her recommended allocation toward value stocks and value-oriented funds. At the start of the year, Tarbox was recommending investors hold 30% to 35% of their portfolios in value-oriented stocks and funds. Today, that recommendation is down to 20%. When funds are bleeding assets, it means fund managers can't play offense because they have no new stream of money to do that with. And they can't effectively play defense because cash--the great cushion in a down market--is flying out the door. 'People are fed up' with core value funds, Tarbox says. 'It doesn't seem to me that it's going to turn around real soon.' So where does that leave investors in these funds? You shouldn't automatically sell. One option is to simply direct more 'new money' into growth funds, cash, bonds or other alternatives to depressed value funds. If the gains in growth stocks continue, at least you'll know you're riding along. Or you can do the reverse: Move some percentage of your accumulated [IRA] assets from value funds to other alternatives, but increase the amount of new money you're contributing to beaten-down funds. After all, the concept of "dollar cost averaging" works best when the markets are falling. Sounds familiar, doesn't it? Buy low, sell high. When the stock market throws some ice cold water in your face, as it has recently, you start to notice a few things. Such as how much you're paying in expenses on your mutual funds. Annual expense ratios below 0.5% are generally considered low, while those above 1.5% are deemed high. The average annual expense ratio of U.S. diversified stock funds is 1.43%; small-cap funds 1.59; international funds 1.71; government bond funds 1.09; and bond funds 0.94%.
Last week, Merrill announced three new versions of these Holding Co. Depositary Receipts -- whose acronym is pronounced "holders." And the firm says that more, a lot more, are on the way. As of Friday, the seven existing sector Holdrs had garnered assets of over $6 billion. Each Holdr invests in a fixed portfolio of 20 or so companies chosen from a specific sector. The Holdrs are traded on the American Stock Exchange in round lots of 100 shares, each lot representing a set amount of stock in the component companies. The Telecom Holdr, for example, has 27 shares of SBC Communications, 25 of AT&T, 8 of GTE, 6 of Sprint and so on. There are also Holdrs for the drug, biotechnology and Internet sectors. The three newest Holdrs focus on subsectors of the Internet: business-to-business e-commerce; infrastructure, which includes software and services companies, and architecture, which includes hardware companies. Part of the attraction of Holdrs is that they can be bought and sold throughout the day, like stocks or ETFs. The biggest lure of Holdrs, however, may be tax efficiency. Holdrs do not track an index -- the stocks they hold are picked by Customized Investments to represent a sector. The portfolio is fixed, so Holdrs have no turnover except, sometimes, in the case of mergers involving companies in the portfolios. Moreover, the unique structure of Holdrs allows investors to manage their tax situations deftly -- something that is impossible with traditional funds. Each Holdr can be exchanged for its component stocks for a fee of 10 cents a share. That makes it possible to groom the portfolio over time -- focusing on the winners, taking profits, locking in losses that can be offset at tax time, and controlling the timing of capital gains. Holdrs are cheap to own: Merrill charges an annual fee of just 8 cents a share, taken out of dividends. Even that is waived if dividends are not enough to cover it. And an investor need pay only one commission to get industrywide exposure. Merrill makes its money, in part, on the 2% underwriting fee it charges investors at the offering; the fee can be avoided by buying Holdrs after the offering. Despite these features, the long-term success of Holdrs rests on their attractiveness to buy-and-hold investors. But critics say the drawbacks of Holdr's may hit such investors hardest. The flip side of the Holdrs' unmanaged structure is that for volatile sectors like the Internet, the fixed portfolio may lose its sizzle as years pass. "If you have a fixed portfolio there are some real disadvantages when the industry is so dynamic," said Henry T.C. Hu, a finance professor at the University of Texas at Austin. But active managers are wont to cut their stake in top performers. Holdrs 'let winners run.' And nothing prevents Merrill from introducing a new, improved Holdr that investors can switch into. Another negative: When Merrill starts buying a particular stock for a Holdr ahead of its offering, the share price often rises on the additional volume, which means investors can pay inflated prices for the bunch. Still, Ed McRedmond, senior analyst at A.G. Edwards, the brokerage firm, is unconvinced, in part because Merrill's stock-picking has no long-term record with Holdrs. "The ETF products to me make a lot more sense," he said. Jim Novakoff a partner at Levitt, Novakoff & Co., an investment firm in Boca Raton, Fla., acknowledges that Holdrs are convenient, but suggests that individual stock-picking may be worth the extra effort. "There's no reason why investors can't just buy the stocks," he said.
Because so many Nasdaq issues still are very small, it would be difficult for an index fund to buy all those stocks and hold them in proper proportions. Even index funds track the Wilshire 5,000 total stock market index (ex. Vanguard Total Stock Market Index fund holds about 1,900 of the largest stocks in the index) only buy a representative sample. But there is one way to capture the general trend of Nasdaq in a single investment: The Nasdaq 100, a subset of Nasdaq that reflects the largest 100 nonfinancial stocks in the composite. Those stocks represent roughly 68% of Nasdaq's total market capitalization. Since 1990, the Nasdaq 100 has outperformed the Nasdaq composite in seven of 10 years. And you can but this index via (1) QQQ, an index tracking stock for the Nasdaq 100 that trades on the American Stock; (2) Ranson Nasdaq-100 Index Fund; (3) Rydex OTC; (4) AXP Nasdaq 100 Index Fund; (5) Potomac OTC Plus; (6) ProFunds UltraOTC and (7) Rydex Velocity 100.
Many major investors such as pension funds only invest in countries with an investment-grade rating, which meant Mexican bonds and stocks were excluded from their portfolios until now. The Mexican stock market and peso both strengthened, and interest rates fell sharply on the expectation of significant inflows of new investment in Mexican government and corporate bonds and equities. Mexico's benchmark 28-day government bond fell at the weekly auction Tuesday by more than a percentage point to 13.95%, the lowest level since late 1994. Moody's said its action "reflects a lower relative foreign currency debt burden underpinned by a dynamic export sector well-integrated into the North American economy and increasingly integrated with other regions in the world." Economist Rogelio Ramirez de la O, who runs the Mexico City consulting firm Ecanal, wondered whether Moody's moved prematurely. He noted that electoral uncertainties, the weak banking system, a possible drop in oil prices and a potential U.S. slowdown still could affect the Mexican economy in the next year. Paulo Vieira da Cunha, chief Latin American economist for Lehman Bros. in New York, said the Moody's upgrade would make it easier for mid-size Mexican companies to get access to affordable financing--one of the most serious obstacles to growth in the 1990s. The declining interest rates have tracked a fall in inflation from 52% in 1995 to 18.2% in 1998 and 12.3% in 1999. The government is aiming this year for single-digit inflation a shade under 10%--and for inflation to be similar to that of its major trading partners by 2003. While Mexican markets rallied on the news, the nation's sovereign debt may have further upside potential. Recall what happened in early 1999 when Korea regained investment-grade status: In the six months following the announcement, Korean bonds plunged 130 basis points through July 1999.
If you are a [very] small investor looking to dabble in individual stocks, there is a growing array of Web-based services, including BuyandHold.com (www.buyandhold.com) and ShareBuilder (www.sharebuilder.com). These services gather orders from a slew of small investors and then use that money to purchase shares. Investors pay as little as $2 in commissions. Why bother with these services, when you can go to Internet broker Ameritrade and pay just $8 a trade or Suretrade, which charges $7.95?" Because it does not make sense when you want to steadily invest $50 a month. (Jonathan Clements, WSJ 3-19) Who suddenly changed the rules and decided stocks with sales and profits were more attractive than fiber-optic shells with neither? Just when we had converted all our rust-belt shares to the stock of itgoesstraightup.com. (Greg Heberlein, Seattle Times 3-19) One study found that a typical Fortune 500 company grants options equal to 1.25% of its outstanding shares each year, whereas software and Internet firms grant between 5% and 8% annually. (Albert Crenshaw, Wash Post 3-19) A friend of mine says if you want to know where the next crisis is coming from, just follow the money: look where banks are lending. The latest target of their affections is venture capital, or equity investments in start-up companies. Concerned about the risky nature of this lending, the Fed and Treasury jointly proposed a new rule that would require banks to set aside 50% of the value of an equity investment in a firm as capital reserves. Such a rule would create something of a disincentive by `raising the cost of capital,' says Bill Dudley, chief economist at Goldman, Sachs & Co. `But basically it protects the Federal government, which underwrites deposit insurance. The regulators want to avoid another case of `too big to fail' [like LTCM]' (Caroline Baum, Bloomberg 3-17) "What is worrisome now is not the fact the market has a divergence but the size of it," said Legacy South strategist Phillip Larkins. "The S&P 500 is trading at 24 times earnings, but the Nasdaq is at 300 times earnings. It's not that the Nasdaq has taken center stage but that so many stocks are trading on the long-term hope that technology leads to earnings. And the odds are that most Internet companies won't be profitable even in the long term." (Tom Walker, AJC 3-17) The median stock has about half of its shares outstanding trade during the course of a year, up from 12% in the early 1980s. (Robert McGough, WSJ 3-16) The government reported that its Producer Price Index rose 1.0% percent overall last month, well above the 0.6% forecast. Most of the increase stems from a 5.2% monthly rise in energy prices and a [surprising] 5.6% jump in tobacco costs. Few economists believe these reports [PPI and CPI] will push the Fed to lift short-term rates more than a quarter percentage point at next Tuesday's monetary policy meeting. Why not? Because energy isn't a price the Fed can influence through interest rates, and there still isn't any clear sign of a broader inflation pickup. (Scott Gerlach, CNBC 3-16) Amid the Nasdaq composite index's fast 9.2% decline this week, investors should instead be asking where all the buyers went. Indeed, traders say this week's sell-off is due not so much to a herd of investors panicking out of stocks as to a sudden lack of buyers. That has forced sellers to mark down prices drastically to lure buyers, and it could portend serious "liquidity" problems in a more pronounced downturn. Call it the flip side of "momentum" investing. As technology and biotech stocks soared in recent weeks, investors were reluctant to sell, a dynamic that contributed to their huge gains. But now that momentum has swung the other way, buyers are hard to find. Some experts say this week's sudden dearth of buyers in Nasdaq tech shares could foreshadow an even deeper problem for investors in a prolonged downturn. Liquidity--Wall Street parlance for the ease with which investors can buy and sell stock at reasonable prices--could be increasingly problematic. "That's one thing the public has to be aware of," said E.E. "Buzzy" Geduld, president and chief executive of Herzog Heine Geduld. "If there's a very real sell-off, liquidity just won't be there." (Walter Hamilton, LA Times 3-16) Falling interest rates in Latin America are helping drive many Latin stock markets higher. The Mexican market, for example, has gained 12% this year, while U.S. blue-chip indexes have tumbled. The Argentine market is up 10.1% this year, and Brazil's main index has inched up 1.7%. US mutual fund investment in the region's stock markets is up 7% this year and at the highest level in two years, according to Merrill Lynch. (LA Times 3-16) The Electric Power Research Institute, a nonprofit group, says local power outages doubled in the U.S. between 1996 and 1998 because of strong demand and deregulation. (WSJ 3-16) Economists say higher refunds should give a mild boost to first-quarter retail sales. As of March 3, the IRS had approved about $62 billion of personal income-tax refunds, up 18% from a year earlier. Average refund: $1,774, up 5.8%. Many more people are filing electronically this year, resulting in faster refunds and fewer errors. The IRS says the number of electronically filed returns has surged 16% to 23.4 million. (WSJ 3-15) More people use plastic to pay their taxes. More than 6,400 card payments had poured in as of March 4, more than four times as many as a year earlier. Average payment: $761. Many people like the program because it's convenient and enables them to amass large amounts of frequent-flier miles. For all of last year, the IRS received more than 53,000 card payments. The Treasury doesn't charge any fees, but cardholders do have to pay "convenience fees," which average about 2.5% of the tax payment last year. (WSJ 3-15) The Fed's quarterly "flow of funds" report found that Americans held $13.33 trillion in stock -- including individual investment accounts, mutual funds and shares in employee-controlled retirement accounts -- at the end of 1999, up from $10.57 trillion in 1998. Stockholdings, meanwhile, made up an ever-larger share of overall household wealth, accounting for 31.7% of net worth in 1999, up from 28.34% in 1998. Household and business debt rose 9.4% and 10.6%, respectively, up a bit from the 1998 increases. Debt as a percentage of net worth actually fell to 41.3% in 1999 from 43.54% in 1998 and 48% as recently as 1996. Americans owed $222.4 billion in outstanding margin debt at the end of last year, up sharply from the $152.76 billion in debt at the end of 1998 and almost triple the $78.59 billion in debt at the end of 1995. (WSJ 3-14) It may happen that the shooting of P&G in the courtyard will provide the final scare that undoes "closet indexing" as it's been practiced in recent years, when the Standard & Poor's 500 came to be seen as bulletproof. This tack of buying the foremost names in the S&P 500 to mimic its once-humbling performance had already been on the wane. An index of all stocks not in the S&P, weighted by market value, was up 63% in the 12 months through February, according to Vestek Systems. The closet of choice to hide in could become the Nasdaq. A final lesson to be drawn from the P&G drubbing is that, contrary to earlier belief by many fund managers, the liquidity offered by huge stocks doesn't in itself imply safety. (Michael Santoli, Barrons 3-13) You might expect that the soaring price at the pump (averaging nearly $1.40 a gallon, versus $1 a year ago) might start to take the edge off the sales of gas-guzzling SUVs. But GM announced last week that sales in the light truck category rose by 20% in February over January's figure. (Gene Epstein, Barrons 3-13) The Morningstar universe of convertible-bond funds (which numbers only a few dozen) had risen 13.5% this year through Thursday, after turning in a 29.6% gain last year, which is a pretty big number for an asset class bred to offer some measure of downside protection. But belying the tortoise-like image of these funds, the big story in convertibles over the past couple of years has been the fixation on Internet, biotech and telecommunications issues. Companies with skyscraping stock prices, yet too unproven for bank or straight bond financing, have flooded the market with low-yielding debt that offers upside through conversion into common shares. Through Wednesday, just about $20 billion worth of convertibles had been brought to market this year, according to Convertbond.com. That amounts to half of last year's $40 billion total. Of the 55 deals in 2000, exactly eight were for anything besides a biotech, Internet-linked or communications company. (Michael Santoli, Barrons 3-13) Americans who worry about paying $1.80 per gallon for gasoline are lucky they don't fill up in Hong Kong. Or Japan or Britain or France - or just about any of the world's wealthy economies - where such prices would seem like an unbelievable bargain. As the price of crude oil virtually tripled to about $34 a barrel, French retail gasoline prices rose by about 30% to the equivalent of $4.50 per gallon. Ask the Japanese, who pay about $3.46 per gallon, about the problem of high gasoline prices in America and you'll likely get some incredulous stares. The English pay about $5 per gallon. Unleaded fuel costs around $5.40 per gallon in Hong Kong. In Mexico, the state oil monopoly has a lock on all gas stations, which all charge about $2.04 a gallon for regular. n Italy, where gas now goes for a record $4.28 a gallon, officials are afraid that a new bout of inflation will crimp recent economic gains. (Atlanta JC 3-12) Major share indexes from Mexico to Germany to Japan are rocketing. Just as in the US, foreign investors are rabid for technology and telecom names this year, and their tremendous gains are masking weakness in many other shares. In the German DAX stock index, Deutsche Telekom alone accounts for about 23% of the index. That stock has soared 34% this year. In Mexico, the IPC share index is dominated by TelMex, which accounts for 28% of the index and is up about 31% this year. By contrast, in the U.S. Standard & Poor's 500 index, Microsoft is the biggest stock, but it accounts for just 4.4% of the index. (Tom Petruno, LA Times 3-12) Scott Grannis, chief economist at Western Asset Management, likes to refer to Greenspan today as a "buffalo hunter." Like the Great Plains buffalo hunters of old, Grannis says, Greenspan and the Fed would dearly like to corral the entire economy and bring it to heel. Instead, Grannis argues, the Fed's efforts to raise rates are bringing down only the oldest and/or sickest buffalo (i.e., the old-economy companies and debt-burdened businesses). The young and healthy buffalo--the new-economy companies--are easily outrunning the Fed, Grannis argues. Funny, but that is exactly how investors are viewing things today--and why the Fed's New Commandments are falling on so many deaf ears. (Tom Petruno, LA Times 3-12) In 1999, 34% of all trading days showed one-day moves by the Dow of 1 percent or more. So far in 2000, that percentage has ballooned to 48%. Meanwhile, the wilder, technology-heavy Nasdaq composite index swung that widely on 59% of the sessions in 1999. This year, that has risen to 73%. (Greg Heberlein, Seattle Times 3-12) Many independently owned restaurants, from the fanciest boite in Boston to a barbecue joint in Dallas, aim for an overall food markup of 300% -- or four times -- the cost of the raw ingredients. (Any less, and the restaurant might not turn a profit, food consultants say.) But some ingredients -- especially prime cuts of beef and gourmet seafood such as day-boat scallops -- cost the restaurant so much that diners wouldn't tolerate such a high markup on them. So, since restaurants can't ratchet up the rates enough on those items, they have to make it up on the cheap stuff, such as salmon, lettuce and pasta. Vegetarians tend to subsidize meat-eaters. (WSJ 3-10) The success of Amazon.com is itself evidence against its core beliefs about the way its business will one day work [selling items now at a loss to build brand loyalty]. After all, customers previously believed loyal to independent bookstores were happy to drop their old fashioned merchants once Amazon.com offered them an easier, cheaper way to buy books. And you'd expect an e-customer to be even less loyal than a bricks and mortar customer, as it is so easy for the Internet buyer to shop around. Amazon.com has taught them to be disloyal shoppers. There is a paradox at the heart of the Internet: It builds better mousetraps that don't pay very well. It increases efficiency at the same time it eliminates the possibility of profit. It has created a social and economic revolution on the scale of the Industrial Revolution, with no real economic justification. Then again, perhaps investors don't believe anything at all about the New Economy. They just think other people do. ( Michael Lewis, Bloomberg 3-10) Most managers have given up on market-timing and have instead kept their portfolios fully invested. Between 1990 and early 2000, the percentage of cash and bonds in the average domestic-stock fund fell by more than half, to 6% from nearly 15%. This shift makes sense. Presumably, investors buy stock funds because they want stocks, not because they demand an uncertain, ever-changing amount of exposure to equities. Moreover, even if investors knew where the market was headed, it would make little sense to pay a stock-fund manager an expense ratio of 1% or more to buy short-term debt. (Scott Cooley, Morningstar 3-9) Skyrocketing prices for shares in high-tech companies led Wednesday to a dramatic reshuffle in the bellwether stock index for Britain's 100 most valuable businesses. The FTSE 100 added an unprecedented nine companies to its ranks, including high-flying telecommunications firms and the country's most popular Internet-service provider. To make room for them, it demoted nine other companies operating in more traditional industries such as brewing, utilities and cigarette production, to its second tier of the top 250 British firms. (WSJ 3-8)
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