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Such bonds are designed to be even safer than the widely owned, high-profile bonds sold by government-sponsored Fannie Mae and Freddie Mac. The most well-known full-faith-and-credit bonds are those sold by Ginnie Mae, or the Government National Mortgage Association, a wholly owned government corporation. And Ginnie Mae mortgage-backed securities currently yield about 8.1%, or about 1.7 percentage points above the yield on the current 10-year Treasury note. Yields on bonds fully guaranteed by the government under Title XI of the Merchant Marine Act of 1936 are hovering anywhere between 1 to 1.25 percentage points above Treasurys of similar maturities. Examples: Ship-financing bonds issued by Vessel Management Services, maturing in 2024 with a coupon of 6.08%, and ship-financing bonds with a 7.3% coupon sold by St. Philip Towing. Securities stripped from bonds issued by Resolution Funding Corp. yield usually 0.35 percentage point to 0.45 percentage point higher than the comparable Treasury. Another outfit that provides full-faith-and-credit securities is Private Export Funding Corp., a New York quasi-agency that assists in making loans to foreign importers to promote US exports. Pefco has sold some $800 million of triple-A-rated notes this year alone. Then there are securities of Overseas Private Investment Corp., known as OPIC. The federal agency sells political risk insurance and project financing to encourage private investment by US companies in emerging economies. Finally, there's the Agency for International Development, which promotes US economic and political interests overseas.
At the top of each cycle, managers recognize these facts. They stop hiring, which abruptly halts growth in jobs. At the same time, they cut capital spending. Together, these actions push the economy into a self-reinforcing contraction -- in a word, recession. Based on 40 years of observation as journalist and economist, I think the U.S. is close to just such a critical turning point. Mistakes by government policy makers are also part of the witches' brew. Fiscal and monetary policy is at the top of the current list of potential trouble spots. The operating surplus in the federal budget (revenues minus expense, other than net interest) was $450 billion in the first quarter, not only a huge amount in dollars but also 4.6% of the economy, the highest figure since 1951. A spike in the federal operating surplus has preceded every US recession since World War II. Meanwhile, Alan Greenspan and the Fed are playing their typical role in setting the stage for the next downturn. Transaction money - narrowly defined to include domestic currency and plain-vanilla checking accounts that don't pay interest -- has hardly changed since 1997. Such a sustained slowdown in the growth of spending money qualifies at minimum as monetary restraint, if not actual tight money. Four main factors support this view:
In general, nominal short-term rates are a weak indicator of the Fed's monetary policy stance. Nominal rates minus current inflation ('real rates') are more useful. Fed officials have raised their funds rate target five times during their current cycle of rate increases. The first four moves appear to have had little or no impact on real rates. However, the fifth increase could tell a different story. Nominal rates are up, while transitory pressures in wholesale and consumer prices have started to ease. (The CPI was unchanged in April following substantial increases during the winter; producer prices were down.) In this setting, the Fed may have to pull reserves out of the banking system to prevent rates from dropping below its 6.5% target. In turn, that could lead to an outright decline in the supply of domestic spending money, and thus turn monetary restraint into tight money. Related: NY Times 5-28 What is the risk of a hard landing? 'There is a growing minority that believes the Fed could prove to be too heavy-handed, too aggressive,' said Thomas Galvin, chief investment officer at Donald Lufkin & Jenrette. 'It's a question that is being asked a lot more and it makes sense,' Douglas Cliggott, US equity strategist at JP Morgan Securities, added. 'It's going to be tough to land this thing gently,' he said, referring to attempts to slow America's rapid economic growth without triggering a recession. Related: Caroline Baum, Bloomberg 5-30 Stock jockeys decided long ago that the Fed has overshot already, sowing the seeds of the next recession. They latched onto that notion as soon as they were forced to give up the nonsense about technology stocks being immune to higher interest rates. Related: William Pesek, Barrons 5-29 Following the Fed's recent half-percentage-point move, (UBS Warburg's chief economist) Joseph Carson thinks it'll take another 100 basis points -- a full percentage point -- to keep inflation from accelerating and soothe bond investors. That would put the federal-funds rate at 7.50%. Carson's rationale is that demand and supply are getting too far out of whack, GDP is too strong and a cyclical peak in market liquidity hasn't yet been reached. Most analysts think the Fed will go another 50-75 basis points. The FOMC is still expected to tighten at its June 27-28 meeting, but a growing number of observers fear the central bank may go too far. Anthony Crescenzi, head of BondTalk.com, thinks those conditions may be tight enough to precipitate an economic slowdown. He points to a plunge in IPO's (see Gretchen Morgenson article below) and April's anemic level of corporate bond issuance -- the lowest since September 1998. Meanwhile, spreads have widened considerably for corporate, agency and mortgage-backed debt, making the capital markets a less hospitable place for borrowers. And the Fed's quarterly survey of loan officers showed that banks have become 'significantly more cautious.' Corporate issuance has dried up recently as triple-A corporate financing rates rose above 8% - the highest in five years - notes Briefing.com strategist Tim Rogers. At the same time, the near-disappearance of new Treasury-bond issuance leaves the market pricing government bonds close to a 6% yield. The spread between high-quality corporate debt and Treasury bonds last week was a whopping 190 basis points -- the biggest gap since the Treasury began selling 30-year debt in 1977. The divergence between Treasury and corporate debt may convince Fed officials that their tightenings are getting some traction. Something else that may give the Fed pause is increasing volatility in emerging markets. In Asia last week, the Philippine peso hit a 19-month low despite the central bank's decision to tighten credit along with the Fed. The Indonesian rupiah and Korean won also have taken a hit since the Fed's rate hike. Latin American currencies, too, have suffered. The Fed is faced with a delicate balancing act. Policy makers don't want to send shock waves through the global economy. And at home, the central bank wants to dampen growth without choking off investments that encourage both innovation and productivity. If the Fed continues to tighten the monetary noose, productivity could slip. That could mean higher inflation. (Conversely - From Baum of 5-30: The more productive the economy, the higher the real rate of return on investment, the higher the real interest rate required to slow things down.)
In early 1998, when many of the nation's leading computer, software and local communications companies formed an alliance to support DSL, they thought it would generally deliver 1.5 million digital bits per second to consumers' homes. Today, it is unlikely that more than a quarter of the few hundred thousand residences with working DSL are consistently receiving more than a million bits, or a megabit, per second. Industry experts say that most DSL users probably receive only about 500,000 bits per second, at best. Cable modems, the main alternative to DSL, more frequently deliver megabit-plus speeds, but in some ways those communications pathways are less reliable than DSL. Even 500,000 bits per second is still an order of magnitude faster than the 53,000 or so bits per second that can be delivered by today's fastest analog modems. But consider that a single channel of TV-quality video, using compression technology, requires at least 2 million bits per second and often requires more than 5 million bits per second; it becomes quite clear that for the majority of consumers, television as they know it is not going to be converging with the Internet soon. But then, merging TV with the Internet is probably the wrong goal, anyway. Pushpendra Mohta, until recently one of AT&T's top Internet engineers and now entrepreneur-in-residence at the venture capital firm Benchmark Capital, shared an analogy: 'If you are used to shipping stuff by boat and all of a sudden you get access to an airplane,' he said, 'you don't put the boat on the airplane and fly the boat to your destination.' Rather than take the form of merely repackaged traditional media, the most successful converged services will probably be cut wholly from new cloth to take advantage of the specific characteristics of cyberspace. Napster, the service that allows users to swap digital music files, is a perfect example. 'When you're trying to migrate old services to a new medium, the barriers are high and the payoffs aren't that great,' says Vinod Khosla, the venture capitalist from Kleiner Perkins Caufield & Byers. 'But when you have a new service, maybe the barrier is high but I'll climb over it because the payoff is higher.'
When it thought its winners would score 20 times revenue, the venture capital community was more willing to finance a host of companies to see which would emerge. However, at six times revenue, the winner can finance less than a third of the errors that were possible when the higher valuations ruled. Therefore, fewer ventures are getting money. Another factor slowing net development: the sale of PCs. Growth rates have slowed to 50% and are assumed to slow further to less than 30% in two years. Slower PC growth means smaller growth in Internet traffic. Furthermore, recent studies show that Internet usage is declining from active users, at least at their most popular sites. They may be wandering to the ever-increasing variety offered by the Net, but they are online only half as long as in the past.
Mullins believes the bloodletting in stocks will not be stanched until investor fervor for initial public offerings goes completely cold. The number of new stock offerings has dropped considerably in recent weeks -- only 23 companies have offered shares to the public in May, down from 65 in March, according to Richard Peterson, chief market strategist at Thomson Financial Securities Data. (Some 61% of this year's new issues are trading below their offering prices.) Around the 1987 crash, the average number of deals each month fell from 63 to 9. And during the Long Term Capital Management crisis in the fall of 1998, the number of deals fell from 53 monthly to 15. So the 23 stocks issued so far in May looks a bit high. During April and most of May, first-day gains in IPO's averaged 13%. While that is well below the 109% average pop seen last December, it is still above the average for 1994 through 1998, when the figure was 12.7%. 'An enormous amount of damage has been done to investor psyches,' Mullins said. 'But the new-issue market continues to be fairly resilient. My expectation is we will see the market continue to be much more selective about what issues will be brought out. The window will shut completely before the correction is done.' Mullins bases this view on 20 years of initial public offering data. New stock issues, he has found, are a perfect measurement of investor sentiment. 'It's when investors know the least about the companies and the information has been structured to have maximum appeal,' he explained. 'When investors are wildly bullish, you can put anything through the channel. When they are bearish, if you had a company turning dirt to gold, people would say gold is going down.' Still, one piece of Mullins' data may indicate we are close to the correction's end. That is the difference between a new stock's offering price and the middle of the price range company management expected when they presented their deal to investors. When investors are euphoric for new issues, the stocks typically fetch prices well above the expected range. Last January, the average IPO's price was an astonishing 45% above the middle of the expected range. By comparison, between 1994 and 1998, the average IPO came out at a price 0.1% below the middle of the expected range. This month, IPO's have been pricing at 30% below the midpoint. Mullins said this was the lowest monthly average he has seen in six years.
For several weeks, fund managers have been sitting on growing pools of cash or, if they were buying stocks, opting for only the most conservative stock investments. Some were waiting for tumbling technology stocks to reach a bottom; others merely stayed on the sidelines of a market that lacked any clear sense of direction. 'A lot of the money you read about is being used to build up cash positions,'' said Hugh Johnson, chief investment strategist at First Albany. 'At this stage, portfolio managers are becoming more defensive.' This past week brought the first hint that ordinary investors are catching up to the professionals, deciding to stay out of the market rather than jump in at a time of high volatility and shaky performance. Net outflows from stock mutual funds totaled $609 million last week, according to Trimtabs, a research company that tracks fund flows. But this past week's report was one of the few blemishes on a year that has seen individual investors pouring money into mutual funds at a much faster pace than in 1999. Investors may not realize, however, that in the past few weeks, more of that money has been held as cash. Cash investments include money market accounts and mutual funds, and this past week, the ICI reported individual investors are putting increasing amounts of money into these relatively conservative vehicles. In a separate report, Trimtabs reported the decline in money coming into stock mutual funds. The heaviest losers were technology-related funds, paralleling the poor performance of the technology-dominated Nasdaq composite index. Edward Rosenbaum, director of research at mutual fund tracking company Lipper, has one harrowing idea where some of that money is now. 'It's just gone,' he said. 'There's a hole in the market. Money coming in can look like cash flow, but it's not benefiting investors because the market is falling even faster.' The Dow has fallen 12% since its peak on 1-14. The Nasdaq is now 37% off its peak. But there are some stocks and some sectors that are holding up pretty well, including drug, beverage and utility stocks (up about 15% ytd). But that in itself indicates extreme caution on the part of investors, Johnson said. 'Utility stocks are always the worst performers in a bull market and the best performers in a bear market,' Johnson said. 'That alone has got to make you raise questions.'
David Herro, co-manager of Oakmark International Fund, says he has 'never seen such a buying opportunity' in Europe in his 14 years in the business. 'Really good businesses' in diverse industries including pharmaceuticals, financial services and food are downright cheap. Further, broad economic trends bode well for non-U.S. stocks. While the Federal Reserve's interest-rate boosts are expected to produce an economic slowdown here, economies in Europe and Asia are in the early stages of expansion. 'Growth in Europe is not as strong as in the US, but it is also not going to slow down as the U.S. growth is likely to do,' says Debby Kuenstner, chief investment officer of large-cap value stocks for Putnam Investments.
*Lipper categories include funds that invest primarily in particular
regions or types of stocks.
But the truth about US debt: It isn't going down; it's going up. If the statisticians are correct - and that's a big if - the federal debt will soar some 21% between now and 2013, the date targeted by the Clinton administration for the country to be debt-free at last. How can that be? The Clinton administration is committed to paying down the $3.5 trillion of marketable debt held by the public. Meanwhile, the debt held in the trust funds, including Social Security's, is galloping ahead. Currently Social Security taxes exceed benefit payments and get credited to the trust fund in the form of non-marketable Treasuries that earn interest. In a presentation at an American Enterprise Institute conference Tuesday, Francis Cavanaugh, an economist and 32-year veteran of the Treasury Department, presented some telling statistics from Clinton's 2001 budget and the quarterly Treasury Bulletin. Numbers for 2000 and 2013 are estimates.
So why shut down the government bond market infrastructure if it's going to have to be resurrected almost immediately? While some of the issues involved in functioning without a liquid, risk-free benchmark, including a potential deterrent for foreign central banks to hold dollar reserves, have been documented, Cavanaugh brought up others. For example, the law establishing the Social Security Administration requires that the interest rate earned by the trust funds be calculated on the basis of current market yields on intermediate- and long-term Treasuries. But there will be no marketable Treasuries. And, to the extent that the winnowing of the Treasury market reduces Treasury yields across the board, the reduction in investment income increases the future strain on the Social Security system, which will be exhausted by 2037 without some kind of fix. Cavanaugh sees a way out for the government to reduce its future financing burden, improve the trust funds' return and in the process throw a bone to Government Sponsored Enterprises, including Fannie Mae and Freddie Mac. `Congress ... should make the (government) guarantee explicit, reducing the cost to the GSEs, housing and the Treasury,'' he said. Then let the trust funds buy GSE debt, which they are currently authorized to do but which they don't do in practice. The effect would be less non-marketable debt and more marketable debt, as the Treasury is forced to borrow to make up for the lost revenue when the trust funds purchase GSE debt instead of Treasuries.
With most of the companies in the S&P 500 now reporting, it looks as though first-quarter corporate profits jumped by a hefty 24%, compared with the same period last year. Costs of raw materials have begun to rise. The Commodity Research Bureau's spot price index for industrial raw materials has jumped 3% in the past month alone. The same goes for foodstuffs. Meanwhile labor costs are also on the move. Total employee compensation jumped 4.6% in the first quarter from the same period the year before. That was one of the biggest increases in the past ten years. And while worker productivity was up a respectable 3.4% over the same period, it didn't rise enough to offset the jump in compensation, so unit labor costs rose as well. On the sales side, revenues rose by 17% over the same period of 1999, far less than the jump in profits. With costs rising, this increase in profit margins clearly indicates that companies were able to raise selling prices -- and make them stick. The National Federation of Independent Businesses says that the number of firms reporting higher average selling prices doubled in both March and April. That spells inflation, no matter how you look at it.
Economist Robert Gordon of Northwestern University believes that the way things are headed, core inflation will have risen to an annual rate of 4.0% by 2002. Jason Benderly of Benderly Economics projects a similar estimate. The reason the current means at Greenspan's disposal probably won't tame inflation arises from the very strength of the boom he helped unleash and the low level of joblessness he helped create. To begin with, at the current rate of unemployment, 3.9%, the NAIRU (nonaccelerating inflation rate of unemployment) does appear to be rearing its ugly head. According to NAIRU, even if joblessness remains stable at this level, wage inflation will continue to accelerate, bringing pressure on prices. And even assuming unemployment doesn't fall, if the Fed is now unlikely to be able to boost it, then those pressures will continue to build. Think about it this way: Suppose the Fed is able to reduce growth in GDP to what many economists believe is now its "trend" rate of 3.5%, about a point and half down from the 5.0% that prevails today. At the trend rate, the number of jobs the economy adds about equals the growth of the labor force. Result: the NAIRU continues to bite. This means that the central bank must knock growth down to an even lower level to raise unemployment back to 4.0% or greater. But that will take time, and meanwhile, rapid growth is already causing price pressures of its own by boosting rates of capacity utilization. What are the chances of a hard landing that will push the economy into recession? RFA chief economist Mark Zandi rightly points out that the economy still appears to be resilient enough to absorb the shocks that a tightening may bring. The usual "imbalances" - excessive inventories, poorly capitalized financial intermediaries, over leveraged businesses, over built real-estate markets - are nowhere to be found. That leaves the overvalued stock market, whose power to lay the economy low has been greatly exaggerated. But one never says never to the prospect of external shocks. Wrightson Associates chief economist Louis Crandall points out that the economy is always more vulnerable to these shocks during periods of Fed tightening. Sometimes, the shock occurs before the tightening process is complete, and does part of the Fed's work. That's the role the Mexican crisis played in 1994, during the last period of tightening. But in 1990, Greenspan wasn't so lucky. The Gulf War broke out after the tightening was over, and the economy slipped into recession.
While the recent increase in Fed aggressiveness has pushed the S&P 500 roughly 6% off its highs, many emerging-market indexes are more than 15% off their highs. A rapid increase in credit spreads across the emerging-market world also illustrates the dramatic deterioration in investors' view of the outlook for economies like Brazil, Korea, Mexico, Poland, Thailand and Venezuela. To Jensen, these trends suggest that emerging-market economies may well be in for rocky seas before the Fed is able to slow the U.S. economy enough for comfort. (William Pesek, Barrons 5-22) First-Quarter Net Income By Industry WSJ 5-22-00
Volatility may be rising simply because investors must digest more information every day. With product cycles shortening, with breakthroughs every week in technology and biotechnology, no one should be surprised that share prices are bouncing all over, Mr. Duffee said. If the day-trader theory were right, there would be telltale statistical evidence. 'Imagine it's just more trading that's causing more price changes, and not more information,' he said. 'Then people are just pushing prices, and you're going to see a lot of negative serial correlation' - what went up on Monday comes down on Tuesday. For the clincher, Mr. Duffee said, look back at past occasions when trading volume rose sharply. The best example came in 1975, when brokers were forced to compete on commissions for the first time. Trading just exploded. Volatility didn't.
First, Terra offered stock, not cash. Had it been an all-cash offer, Lycos more likely would have been in the $90 range. The huge discount reflects uncertainty about where Terra stock will be when the deal closes six to nine months down the road. If Terra is down a lot, so will be Lycos stock. To protect the participants, collars are included. Terra stock can move as much as 20% in either direction, and the deal remains as is. But if it drops below the collar, new terms or a busted deal might be in the offing. If it goes above the collar, better terms for Lycos shareholders may be exacted. On top of the stock/cash and pricing issues comes the factor of a foreign company buying a US entity. Regulators get involved and could make fresh demands or ding the deal entirely. Meanwhile, some Lycos investors may have no interest in holding Terra stock, and may sell their shares, putting more pressure on price. And then there's a natural discount because investors must wait so long to be sure the deal gets done. The uncertainty over many months, especially in a stock deal, requires mitigation. Of course, if all goes well, approvals occur, and the stock market remains healthy, the shareholder will be trucking in a Lycos share worth about $60 for a Terra share worth nearly $100. That would exceed the average annual returns over the past five years of either the Dow or the Nasdaq. Related: WSJ 5-23 The roughly $12 billion Terra-Lycos deal is the latest in a series of Internet combinations that have received a thumbs down by the stock market, despite generally favorable reviews by Wall Street analysts. Monday, the rout continued in the shares of Lycos, as they tumbled another 7.5%, or $4.375, to $53.75. Frederick Moran, head of Internet research at securities firm Jefferies &Co., said Terra now trades at roughly 80 times its expected 2000 revenue, a premium even to industry gold standard Yahoo. Combined with Lycos, the company looks more reasonable -- at 60 times 2000 revenue. But, even then, it is rich compared with, say, a combined America Online and Time Warner, at 16 times 2000 revenue. Henry Blodget, the well-known Internet analyst with Merrill Lynch, says Lycos may also be weak because many of the mutual-fund managers who bought shares have charters that keep them from owning foreign stocks. Mr. Blodget, whose company has suspended its rating on Lycos because of the deal, says he can't make recommendations to investors. But he calls the spreads between Lycos and the Terra deal's potential value 'eye-openingly wide.' Related: Barrons 5-29 Why trade options in a bear market? Many puts and calls remain staggeringly expensive. In part, blame the so-called "liquidity myth." That is, the illusion that the market remains liquid enough for investors to make a bid or offer without substantially moving the price. Take Terra Networks. The stock is hard to borrow and illiquid. So we consulted Larry McMillan of McMillan Analysis to deconstruct the Lycos-Terra Networks takeover deal -- and along the way found out that Terra and Lycos options hint the deal will go through. Briefly, Terra bid $97.55 a share for Lycos, to be paid in Terra stock. As long as Terra trades between 45 and 68 the deal is firm. If it trades below 45, Terra issues 2.15 shares for each Lycos share; if above 68, Terra issues 1.43 shares. With Lycos trading in the 50s, McMillan says, 'this looks like a great time to buy Lycos.' Why? Scare stories that Lycos' shareholder CMGI will put the kibosh on the deal are just that. Moreover, Terra put options are expensive, as good a clue as any that arbitrageurs are betting on the deal's eventual success. (For disclosure, McMillan is long Lycos stock.) 'As long as Terra puts stay expensive, and Lycos call options do the same, then the arbs are 'saying' this deal will go through,' McMillan points out. Finding the right strategy is tough, although the one he likes best is to buy Lycos stock and protect it with Terra puts, such as the September 30 strike. Here's McMillan's caveat emptor: If the deal goes through, you make money as long as Terra is above 33. If the deal blows apart, you could lose more than half your money. 'If you're uncomfortable with the risk, then don't take this trade.'
The Supreme Court, in two important cases - Helvering v. Davis (1937) and Flemming v. Nestor (1960) - said that there is no legal right to Social Security. Instead, a worker's retirement security is `entirely dependent on the political decisions of the president and Congress,' writes Charles E. Rounds Jr., professor of law at Suffolk University in Boston, in `Property Rights: The Hidden Issue of Social Security Reform,' published by the Cato Project on Social Security Privatization. `Paying Social Security taxes does not give rise to any contractual right to Social Security benefits.' Benefits are not a worker's property. They do not devolve to his heirs. When one considers that there is nothing in the Social Security trust fund except a bunch of IOUs, and what they owe you is $21 trillion and what they pay you is an average 2% return, it's a wonder that the public isn't jumping at the opportunity to opt out of the system, even in a small way. Al Gore will have none of it. This week, he told a gathering at AARP that Bush's plan `would take the security out of Social Security. We could see the end of Social Security as we know it.' What we know, and what he ain't saying, is that the only way the government will be able to meet its future obligations is to increase the payroll tax to at least 50% of total income or cut benefits by one-third. Rather than scaring seniors, ending Social Security as we know it should be the rallying cry for workers of the world to unite.
Well, there has been a shift over the past two years in how investors pay their taxes. They still figure them out in January and early February, and instead of writing a check and letting it sit in a checking account or money market account, investors plowed the money into the stock market. You see, they found out that this so-called January effect in which the market goes up every January is now a January, February, March effect. Over the past few years if you werenĖt in the market in those three months, you missed the bulk of the markets move. Thus investors (a.k.a. taxpayers) decided that instead of letting their tax payments sit idol in their checking accounts, they would put them in the stock market and let Wall Street pay part of their tax bills to Uncle Sam. This is a great strategy so long as the market goes up. This year, it went down. Thus investors not only had to liquidate their investments to pay taxes, they had to liquidate even more because their initial investment could no longer cover their tax bill. Thus it was the combination of three unrelated events (margin calls, capital gains tax lock and tax day) that fueled our major market sell-off.
In an economically driven correction it takes about a year for the market to rebound. After all, if economic growth is flat, inflation high, unemployment high with no consumer confidence, it will take almost a year for the economic numbers to convince investors itĖs time to get back in the market. The second type of correction is an earnings-driven correction - where you find numerous earnings surprises that are negative across all industries. We are currently having earnings surprises, but the surprises are positive. Earnings are up a whopping 25% on a year-over-year basis. In an earnings-driven correction, it only takes about six months to rebound. Earnings are issued quarterly, so even if you can turn earnings around in one quarter, investors will not be back in the market. They are skeptical that the accountants cooked the books to make earnings happen this quarter. Thus investors want proof. Give them back-to-back quarters of positive earnings (six months) and they will be back in the market in a big way. The third and final category is a market-driven correction (which is what we are having now). We should be getting good at this, because we seem to have these market-driven corrections almost annually. First it was the Asia-led currency crisis, then the Long-Term Capital Management bailout, followed by the Russian bond default. It takes about six minutes to recover from a market-driven correction! There is no timeline for a market-driven correction. Because no economic or earnings fundamental brought the market down, it doesnĖt need any economic or earnings fundamentals to bring it back up. Remember, the market rebounded every bit as fast as it fell after the past few market-driven corrections. This will be no exception. If you blink, you just might miss the market rebound.
`In the past, any variance between the NAPM and government data -- when they do revisions -- has been resolved in favor of our data' says Norbert Ore, chairman of the NAPM Business Survey Committee. Government stats on new home sales started to reaccelerate in September. The 966,000 annual selling rate in March represents the second best month for new home sales of the current expansion. Mortgage applications for home purchases have picked up as well. The National Association of Homebuilders' housing market index took an 8-point dive in March to a two-year low of 61. Government statistics are quantitative: they attempt to detail how many widgets were produced. On the downside, the numbers can be derived from a small initial survey sample, and they are highly revised. But industry data tends to come out slightly ahead beacause: their track records are good; the private sector has its own motive for accuracy: profit (survey respondents typically get results before the public -- thus make better informed decisions due to better data); and third, if industry data aren't sending the correct message now, they will be pretty soon with a little help from Alan Greenspan & Co.
Just the Facts If you are a long-term investor, are these exchange-traded funds a better alternative to regular index mutual funds? You would pay annual expenses of just 0.0945% for Barclays' new iShares S&P 500 Index Fund, compared with 0.18% for Vanguard 500 Index Fund, the giant mutual fund. But ETF's aren't always cheaper and annual expenses aren't the only cost. When you purchase an ETF, you also get nicked for a brokerage commission and other trading costs. If you plan to add, say, $200 a month to your holdings, trading costs would put a big dent in your returns and you would be better off with an index mutual fund. ETF's seem like a reasonable alternative for US stock exposure, but mutual funds remain your best bet in the international arena. You could build a global portfolio using the 18 exchange-traded country index funds that Barclays currently offers. But these funds typically levy 0.84% in annual expenses, far more than the Vanguard Total International Stock Index Fund. (Jonathan Clements, WSJ 5-30) Training programs were outsourced last year 58% of 225 employers in a survey by Buck Consultants, a human-resources consulting concern, compared with 22% in 1996. Buck attributes the move to cost-cutting and an openness to ideas from outside the companies. (WSJ 5-30) More than 40% of high-school students were in the labor force last year, says the Bureau of Labor Statistics. (WSJ 5-30) Every place I have gone in recent months I am offered a "payday advance". Payday advances are sometimes known by the more demure name "deferred deposits," and the practice is popular with cash-strapped consumers. Payday advances are ultra-small loans. A payday-advance lender will give the borrower the money for a very short time, against the earnings of the next paycheck. The borrower writes a personal check for the amount of the advance, plus a fee that is almost always at least 10 to 20% of the amount he wants to get. It sounds simple enough, until you consider the numbers involved. Let's say you borrow $500, paying a 20 percent fee of $100, and that you repay the whole thing in 10 days; the annual percentage rate on that loan is more than 700%. (Charles Jaffe, Boston Globe 5-29) For many companies, pension plans are bolstering profits. Dick Joss of Watson Wyatt Worldwide Consulting points out that roughly 24% of 500 large companies he tracks showed pension income in 1992. By 1998, this had jumped to 32%, and even at companies that showed pension expenses, the costs were declining. Adam Reese, a consulting actuary at Towers Perrin, analyzed the 30 companies in the Dow, 24 of which offered defined-benefit plans (which pay employees a fixed amount upon retirement) last year, with combined assets totaling $457 billion. The bottom line was boosted for 11. In aggregate, the 24 companies had surplus pension assets -- the excess of assets over liabilities -- of over $101 billion, a 35%-plus increase over 1998's level. For the Dow as a whole, pension plans boosted income by more than $1 billion, compared with pension expense of the same amount in 1998. Should the surpluses grow, or even hold steady, companies would have an enviable tool to smooth out earnings over time. When a pension's return on assets beats the company's estimates, the difference is considered a deferred gain and spread out over a number of years. This has left some companies with a rainy-day fund to be tapped down the road. (William Pesek, Barrons 5-28) In its first look at first-quarter corporate results, the Commerce Department said that profits, adjusted for the impact of inflation on inventories and depreciation, rose 3.8%, slightly slower than the 4% gain recorded in the last months of 1999. Profits were 7.6% higher than they were a year earlier, down from a 9.6% year-over-year change in the fourth quarter of last year. Profit margins, meanwhile, inched up 0.1% to 9.8% for the quarter, but have been relatively flat for the past two years. 'The peak rate of profit growth is behind us,' said David Orr, chief economist with First Union Bank. ' There will still be growth, but at a decelerating rate.' Consumer demand increased at an annual rate of 7.5% in the quarter. Business investment is now said to have increased at a 25.3% annual rate. (WSJ 5-26) Here's my advice: Don't listen to all the doomsday rhetoric rippling through the financial press and media today. For a couple months the national press has been on a steady diet of bear market scenarios covered with doom'n'gloom. Irrational fear hangs over the markets. Listen to these bears at your peril, you'll miss the upturn. Most so-called "breaking news" today is really old news. It will mislead you. Remember Jack Schwager's warning in the New Market Wizards, "Don’t get caught up in mass hysteria. By the time a story is making the cover of the national periodicals, the trend is probably near the end." Well, we're way past the end. On to the next cycle. And recovery. (Paul Farrell, CBS MarketWatch 5-26) As the percentage of women using the Internet has increased from 15 to 50 over the last five years, women have become the dominate purchasing force in e-commerce. Women shoppers make up 63% of all online shoppers, according to a survey of more than 2,000 Internet users by online study group PeopleSupport. Most women who shop on the Internet more than once a week are between 45 and 54, white, have children, and make at least $75,000 a year, according to the study. (Cnet, 5-26)What, me worry? MAD magazine notes that an anagram for "George Bush" is "He bugs Gore." (WSJ 5-26) The yen's 35% rally over the past 21 months, its longest winning streak in five years, may founder because of a few ill-timed words. Prime Minister Yoshiro Mori's approval rating plunged (his disapproval rating is at 55%) this week after he said Japan is a `divine nation with the emperor at its center,' evoking memories of the country's military past. Waning confidence suggests Japanese voters may punish Mori in elections he is expected to call for June 25. A Mori failure would hurt the yen because his successor may reduce spending on infrastructure projects and economic-stimulus plans before a recovery is in place. Global investors may sell Japanese stocks and the yen if Mori suffers a humiliating defeat. (Bloomberg 5-26) The once-cherished link between Japan's banks and their corporate customers will unravel further in the coming year as lenders announce plans to sell off huge blocks of their holdings of those companies' stock in an effort to protect themselves from problems that Japan's gyrating stock market has caused them in the past decade. But their selling has also exacerbated the stock market's persistent weakness, especially since the borrowers also tend to respond by selling off shares they own in the banks. Overall, Japan's major banks are almost certain this year to exceed the roughly 2.3 trillion yen in shares they are estimated to have sold in the year ended March 31. (WSJ 5-25) Corporations gave $11.02 billion to charity last year, up 14% from 1998, says a report from the American Association of Fund-Raising Counsel's AAFRC Trust for Philanthropy. Personal donations rose 7% to $143.71 billion. Gifts by foundations rose about 17% to $19.81 billion. Overall giving in 1999 rose 9% to $190.16 billion, buoyed by a strong economy and stock market. (WSJ 5-25) In a surprising study released Thursday, researchers found that more victims of cardiac arrest may be saved when bystanders skip mouth-to-mouth resuscitation and perform only chest compressions until help arrives. University of Washington researchers found that 40% of cardiac arrest patients who were given only chest compressions by bystanders survived to reach a hospital, compared with 34% of those who also received mouth-to-mouth resuscitation. Nearly 15% of the 241 patients receiving chest compressions alone eventually made it home from the hospital, compared with only about 10% of the 279 who received both components of CPR, or cardiopulmonary resuscitation. One explanation is that it takes longer for a dispatcher to explain to someone with no medical training how to perform both components of CPR - 2.4 minutes vs. 1 minute. (Nando 5-25) Everything is off the record,' a government official said at a recent conference on estate and gift taxes. 'So if I said anything quotable, it was a mistake or you heard it wrong.' (WSJ 5-24) Analysts surveyed by the Federal Reserve Bank of Philadelphia now expect inflation of 3.1% this year and 2.7% in 2001, as measured by the consumer price index. In February, analysts expected inflation of just 2.5% for the remainder of this year and 2.6% in 2001. The Philly Fed survey also found that many analysts boosted estimates of inflation-adjusted growth in GDP for the year to 4.9% this month from 3.8% in February. (WSJ 5-23) A congressional subcommittee is expected Tuesday to consider legislation creating a new form of stock option. When the typical nonqualified stock option is exercised, the employee pays tax, as income, on any gain. With the new options, employees who exercise and then hold long-term only pay the usual capital-gains tax when the shares are sold. Lawmakers hope the new treatment will encourage employees to hold onto stock. (WSJ 5-23) A survey by Dallas staffing firm Merritt, Hawkins & Associates of 300 physicians at least 50 years old shows 38% plan to retire within three years, while an additional 10% will look for another line of work. Of those making changes, 17% blame managed care, while 31% list it as a significant factor. Meanwhile, the American College of Radiology says retirements doubled to about 800 between 1995 and 1998 as job satisfaction fell due to managed care, though it hasn't yet established a direct link. (WSJ 5-23) Last week I saw Merrill Lynch's monthly survey of mutual fund managers. For the first time since the survey began in 1996, the May poll showed that the people who buy and sell the most equities are bearish on technology stocks. They prefer "defensive" stocks, such as health care, consumer staples and energy. Increasingly, they like cash. Fund managers planning to raise cash outnumber those planning to invest by the highest margin since the survey's inception. (Fred Barbash, Wash Post 5-21) In the most recent PricewaterhouseCoopers survey of CEOs of the fastest-growing companies, when they were asked to name "potential barriers" to growth over the next 12 months, "lack of skilled, trained workers" took first place, with 67% identifying it as a problem. Second place went to the first cousin of labor shortage, "pressure for increased wages." That's deadly. That is the essence of the inflationary scenario. (Fred Barbash, Wash Post 5-21) Average time, in seconds, that a car spends in a fast-food drive-through lane, from arrival at the menu board to departure from the pickup window: 203.6 (Chicago Trib 5-19) Investors who jumped into the market on the days the Fed raised rates and then jumped out have done very well for themselves. On the six days the Fed raised rates, the Nasdaq rose a combined 383.90 points while gaining just 691.56 on the other 218 trading days since the first such hike took effect last June 30. Overall, the Nasdaq is up 40% since the first hike, with fully one-third of those gains coming on Fed days. Blue-chip Fed timers have done even better. The Dow closed Tuesday at 10,934.57, up just 1.1% since the day before the first hike. On the six days of Fed hikes, however, the Dow rose 626.91 points, compared with an aggregate drop of 507.68 points on the other 218 days. Why would stocks rally when the Fed raises rates? It's probably just unbridled optimism. Each time the rates go up, the market naturally assumes it will be the last move. Eventually, of course, it will be the last hike. (Rex Nutting, CBS MarketWatch 5-17) The ICI estimates that Americans have more than $4.4 trillion invested in 4,432 all-stock funds, a tenfold increase since 1990. (NYT 5-18) Less than 1% of towns with fewer than 10,000 people have DSL access, and roughly 1% have cable modem service. By contrast, 86% of cities with over 100,000 residents have DSL service, and 72% of cities with more than 250,000 people have cable modem service. (NYT 5-18) For a fee of $295 a year, Folio[fn] (www.foliofn.com) will let investors create three do-it-yourself stock funds containing as many as 50 stocks each and as much money as they choose. For no additional charge, they can make changes in their holdings as often as twice a day through what they hope will become an efficient internal trading system. The various fees that funds charge add up to, on average, 1.35% of assets. On the median mutual fund investment, about $38,000, that translates to annual fees of $513. (NYT 5-18) The importance of technology exports to a country plus the country's ability to use technology to improve its productivity are increasingly affecting the value of its currency, say economists at Morgan Stanley Dean Witter. Using those benchmarks, the U.S. is the global leader. But the much-beleaguered euro stands to benefit down the road if Europe makes strides toward becoming a "newer economy." Ironically, Morgan Stanley's bullish outlook for the euro depends partly on a predicted retrenchment in the dollar. The dollar may weaken as the Federal Reserve allows interest rates to rise further in a bid to stem inflation, economists say. The economists add that any correction in the U.S. stock market could also help the euro. (WSJ 5-18) For background on estate taxes, click on the Web site of Congress's Joint Committee on Taxation: (www.house.gov/jct/) and go to www.house.gov/jct/x-29-99.htm for a 1999 summary of present law and background on federal tax provisions relating to retirement savings incentives, health and long-term care and estate and gift taxes. For background on the House Ways and Means Committee, go to: www.house.gov/ways_means/ (WSJ 5-17) One quarter of small businesses surveyed reported raising prices in April, as opposed to the 7% who said they cut prices, according to a monthly survey of small businesses by the National Federation of Independent Business. That marks the second month in a row that price increases among small businesses were more than triple the number of price reductions. Small businesses, which represent about half the nation's GDP, are considered a leading indicator when it comes to inflation. Bigger businesses, which face more international competition, have a harder time raising prices in reaction to early signs of inflation. What is more, the services sector, for which wages constitute a high percentage of costs, is heavily populated by small businesses. (WSJ 5-15) The recent Love Bug computer worm had one oddly disturbing behavior: In a few scattered cases the program faxed itself to its victims. Because the rogue program was designed to send itself to every address in a Microsoft Outlook e-mail address book, when it came across a fax number in the list it simply transmitted itself via fax. (NYT 5-15) Four years ago, according to figures from the Security Industry Association, the average holding period for a stock was a little less than a year. Now it is about 90 days. (Wash Post 5-14) PaineWebber and Gallup were scheduled to complete their monthly survey of investor optimism on April 16, the Sunday after the Nasdaq slid over 9%. When they extended their poll for an extra day to see how investors reacted to the plunge, they found that the respondents' attitudes were even more positive. When asked if they thought it was a good time to invest in the financial markets, 74% answered "yes," compared with 73% before the April 14 plunge. (Wash Post 5-14) From Wharton economist Jeremy Siegel: 'We know how to avoid a depression like the 'Thirties, we know how to avoid an inflation like the 'Seventies, and except for the mild recession of 1990-91, we've been living through a peacetime expansion that's now in its 18th year, and is still going strong. So I think we could make the case that our macrostability has markedly improved, and that for this reason, equities aren't as risky as they used to be. We're in a productivity spurt that may be like the 'Sixties, which is friendly to earnings growth, and we're living through a period of globalization in which U.S. firms are leading the way and scooping up profits around the world. Even at current prices, the market might be bought for the long term. If S&P earnings keep growing at the rate of 10% a year, then prices can rise at 8%-9% annually, and the market's P/E can eventually revert to a fair level.' (Gene Epstein, Barrons 5-12) Total US gov't revenue for the 2000 fiscal year, which ends Sept. 30, are expected to be $1.95 trillion, according to CBO figures. Individual income taxes will account for 49%; Social insurance taxes, 34%; and Corporate income taxes, 9.7%. The rest are miscellaneous revenue such as excise and estate taxes or customs duties. From 1994 to 1998, overall revenue rose at an average annual rate of 8.3%, faster than the 3.8% annual growth of the economy during that period, according to the CBO. How did this happen? CBO officials say the creation of a new top tax bracket of 39.6 percent in 1993 tax bill, which Clinton championed, `largely explains' why individual tax receipts surged. And CBO said the share of adjusted gross income going to taxpayers making more than $200,000 a year rose from 14.5% in the 1993 tax year to 21.6% in the 1998 tax year. Another force behind the tax surge are capital gains taxes, which rose 72% to an estimated $99.7 billion in 1999 from 1990. (Bloomberg 5-12) Home Page Previous Factoid Top Sites |
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