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As a result, e-tailers earn only a normal return on their capital. Because investors mistakenly assumed that e-tailing would sharply increase returns to capital, they overvalued those companies. Not surprisingly, the companies used the cheap sources of capital to build their significance in the electronic retailing space. When stock values fell, they could not continue to exploit cheap sources of capital through excessive equity prices. Some of the companies have disappeared. Information overload provides some benefits for producers who dominate an electronic space. And a small amount of branding can allow a little bit of pricing power, such as exists with Amazon and eBay. However, any serious attempt to raise prices to those offered by brick-and-mortar competitors will seriously stall growth on even these popular sites. As a result, the ability to exploit monopoly power in e-tailing is relatively small. [While e-tailers lack monopoly power, newer (B2B) e-commerce efforts to 'aggregate activities' of existing companies may result in substantial monopoly power.] An example: A single company dealing with a hundred employees may discover that the cost of maintaining benefit and pension compliance is relatively high. Many already have outsourced these functions because of the costs involved. With the aid of the Internet, applications from small companies can be easily combined. As the Internet service provider adds participants through additional company programs, services can be purchased as if the service provider were a large corporation. In many cases, the additional cost of adding a new participant is extremely low relative to the additional revenue that can be earned from that new member. However, substantial initial costs are needed to provide the electronic structure to exploit these natural economies of scale. High initial costs and low additional costs for each new participant lead to a natural monopoly. Furthermore, those high costs provide a threshold that restricts entry of additional providers. [New competitors] would need substantial initial capital to capture enough participants to drive their costs down to the level enjoyed by the initial provider. If the above reasoning is correct, then Internet technology will lead to the creation of natural monopolies. Is this an argument for restricting the growth of this technology? The answer is a resounding no. We do not avoid the distribution of electricity merely because it is too expensive for a competitor to create parallel power lines. Indeed, natural monopolies provide substantial social benefits because they provide additional services at very low additional resource costs. Related: Alan Murray, WSJ 6-9 In today's world, many New Economy enthusiasts argue, the quest for monopoly can actually prompt competition. At the Fed meeting in April, business theorist Hal Varian referred to it as "hypercompetition." Like purchasers of lottery tickets, companies seem even more eager to compete when they know the winner will take all. Instead of competing on price, they compete by innovating, and trying to leapfrog old echnologies. The relentless push toward monopoly in today's economy is increased by something economists call 'network effects.' In information businesses, the desire for everyone to be part of the same network is intense. Children like AOL's instant-messaging service because their friends use it. Computer users like Microsoft's Word software because it makes it easier to trade files with their colleagues. A piece of software or a Web site or an Internet exchange becomes more valuable with each new user. The diamond monopoly of DeBeers works to keep its product scarce, so prices stay high and consumers suffer. But for software makers, the scarcity principle is turned upside down. In such a situation, consumers may reap the benefits. In a way, many New Economy industries are like the pharmaceutical business, which spends huge amounts of money on research and development, but relatively little on the actual manufacture of drugs. Drug makers are able to recoup their R&D costs with the help of government patents, which grant them a temporary monopoly and shield them from competition. Getting patent policy right in the software business may be even trickier. Should Priceline.com have been allowed to patent reverse auctions, and shield itself from competition? Should Amazon.com have been allowed to patent its "one-click" purchasing method?
Exactly how much more positive? According to five years of research by Siva Nathan, associate professor of accounting at GSU in Atlanta, analysts whose firms have banking relationships with companies they follow issue earnings forecasts that, on average, are 6% higher than forecasts issued by other analysts. Professor Nathan's research also shows that analysts writing about companies whose securities have been underwritten by their firms put out 25% more "buy" recommendations, 46% fewer "sell" recommendations and 23% fewer "hold" recommendations than other analysts. In another study, three professors examined analysts' forecasts from 1982 to 1997 to see what incremental value they provided to investors over and above the data publicly available in companies' financial statements. Eli Amir at Tel Aviv University, Baruch Lev at NYU's Stern School of Business and Theodore Sougiannis at the UI Urbana-Champaign concluded that analysts, over all, made only a modest contribution to investors' results beyond what could be divined from the financials. The study found that analysts provided the most added value in forecasts on technology companies, whose financial statements were the least informative about new product developments, for example. Analysts also contribute more to investors' returns in stocks of companies that report losses than in those with profits. And analysts provide more value to investors during economic boom times than during recessions. But over all, the professors said, the results suggest that analysts generally react to changes in stock prices rather than cause them. Which makes it seem that investors would be well advised to shut out all the yammering about earnings expectations, consensus forecasts and whisper numbers and focus instead on the financial information reported by companies themselves.
Two Facts: (1)A startling 11% of junk bonds, which are issued by speculative-grade companies, are trading at 50% of face value or lower, compared with 2.2% in December 1997 and 7.7% in December 1999, according to Chase Securities Inc; (2) Junk bonds are yielding 5.83 percentage points more than comparable Treasurys, up from 4.44 points at the end of last year, according to Banc of America Securities LLC. If Moody's is wrong and its critics are right, junk-bond prices may be too low. Moody's says that in November, a painful 6.1% of speculative-grade issuers were in default, up from 1.5% in May 1997 and the highest level since November 1992. The default rate has since leveled out at more than 5% despite widespread predictions earlier this year that it would fall. Moody's model predicts the default rate will begin soaring in the fourth quarter of this year, reaching 7.8% by May 2001, up from 5.4% now. Moody's says credit downgrades are outweighing credit upgrades, but DLJ says Moody's doesn't include credit upgrades that occur when junk-bond issuers are acquired by stronger companies, which DLJ says far outweighs the downgrades. By contrast, DLJ says the default rate today is lower than Moody's says, that it is falling, not rising, and that it will decline rather than rise. According to DLJ, high-yield corporate defaults peaked at an annualized 5.3% in the second quarter of 1999, and have since fallen by half, to 2.65% in the three months ended April 28. Moody's default rate - which is measured as the percentage of issuers defaulting, while DLJ measures the percentage of dollar volume defaulting - also includes issuers of convertible bonds, bonds denominated in currencies other than U.S. dollars, and some types of bonds issued by non-US government agencies. The Moody's 1999 numbers include Ecuador's default on its Brady bonds. Each of these other bond types are followed by often-separate groups of investors. For investors following US corporate junk bonds, using the Moody's default rate just isn't accurate. It refers to the global default rate, which is a separate conversation. DLJ says the plunge in commodity prices in 1998 after the Asian financial crisis was the chief driver of last year's default surge. As commodity prices have rebounded, 'the biggest problem is no longer with us,' says Sam DeRosa-Farag, DLJ's director of global high yield portfolio strategy, so default rates are headed 'obviously much lower than we are now.' Of course, DLJ's big bond business stands to benefit from proving Moody's wrong. Merrill Lynch's Martin Fridson, chief high-yield strategist, states 'it doesn't seem credible to me for brokerage houses to be putting out default rate series.' Merrill is another big junk-bond underwriter. Related: WSJ 6-12 Junk-bond issuance peaked at a record $140 billion in 1998, according to Thomson Financial Securities Data. It was $113.1 billion in 1997. Last year, high-yield, issuance fell to $95.1 billion amid a string of investor withdrawals from high-yield mutual funds, an increase in bankruptcies and rising interest rates. The issuance of junk bonds from U.S. companies has dropped to $20.9 billion so far this year from $53.6 billion in the year-earlier period. Related: Bloomberg 6-19 Junk bonds are poised to post their biggest returns in 14 months in June, sales are picking up and money is flowing back into junk-bond mutual funds. Helping the market were recent economic reports suggesting the economy can slow without grinding into recession and Treasury yields near eight-week lows, which gave a lift to high-yield debt and lowered borrowing costs. Investors have been paid 1.5% so far for holding junk bonds in the month, including price gains and interest, following a 1.3% loss in May. Pumping up junk-bond investors was the more than $1 billion that flowed into high-yield mutual funds the past two weeks, according to AMG Data Services. It's only the third time this year money has come in, following more than $5 billion of withdrawals.
The past two economic quarters showed some of the strongest back to back quarters in decades. The reason isn't just because the economy is strong - it's because we also changed how we measure GDP starting in the fourth quarter of 1999. Starting this past October, economists agreed to change how we measure inflation which lowered the rate. And if you revise inflation down, it will produce an upward revision to GDP. Also, for the first time ever, computer software was counted in 'capital expenditures'. It's amazing to think that this booming segment of our economy was never counted before. It makes sense the economy has been growing faster than originally believed, since only now has added the fastest-growing component of our economy into the GDP series. In my opinion, the single greatest reason why we have such a low savings rate is the way in which economists calculate the number. While the capital gains taxes are subtracted from current income, the actual capital gains as a result of rising stock values are not counted as income. And to make matters worse, if people spend some of these capital gains, it makes the consumption figure go up, which in turn lowers our savings rate. In 1990, the census tracked 6.8 million Americans as unemployed, while 133.1 million were employed. However, another 50 million were omitted from the employment category and the unemployment category becausethey were not seeking a job. Thus, maybe our labor markets arenĚt so tight after all. And maybe our record-low unemployment rate wonĚt cause inflation. As investors, it's important to remember that sometimes how we measure a number is more important than the number that we are trying to measure. After all, if you look closely, you too will realize that these economic releases that we are so afraid of as investors just donĚt measure up!
Consider how options help eliminate a company's income tax bill. Under IRS rules, employees pay ordinary income taxes on the gain they receive when they exercise their options, even if the gain is only on paper. When they exercise their options, their company receives a tax deduction equal to the gain. With the stock markets soaring and many employees cashing in, the taxes the employees pay on their gains have meant deductions that greatly reduce and in some cases even wipe out some companies' current tax bills. This does not mean the federal government is reaping less in taxes. It simply means that the tax burden has shifted from corporations to individuals, most of whom willingly pay because the taxes are so much less than the gains. Microsoft's options-related tax deduction of roughly $11.4 billion in the first nine months of this fiscal year exceeds the $10.6 billion in pretax income that the company reported to shareholders. When stocks stop soaring - and many have done so this year - the equation upon which option mania is based changes. Employees exercise fewer options and companies' tax bills will rise. And as worried employees begin to demand more of their compensation in cash, companies' labor costs rise. After Microsoft's stock tumbled on the prospect of a breakup by the government, the company issued $1.9 billion in new options in April to supplement those issued last year that are worthless. This comes on top of the $69 billion in outstanding Microsoft stock options as of last June. Trouble is, the more options there are, the less valuable the stock becomes. Options carry significant costs. One is that companies must buy back millions of their own shares to offset the stock they have dispensed to employees at much lower prices in option programs. If they do not repurchase stock, there will be so many shares on the market that the company's earnings, on a per-share basis, will plunge. A 1999 study by Nellie Liang and Steven Sharpe, researchers at the Federal Reserve Board, found that in 1998 the 140 largest nonfinancial companies in the United States expended 40% of their earnings to buy back shares, up from 17% of earnings used to do so in 1994. In the last three years, Dell Computer has bought back $3.6 billion worth of stock to reduce share dilution. In the period, Dell's net income totaled a little over $4 billion.
The big fear: weaker Southeast Asian exports. The region's recovery has been powered largely by American consumers, who are buying up everything from Indonesian-made sneakers and Thai silk to Philippine-assembled Intel chips. The US is the largest buyer of Southeast Asian goods, accounting for over 20% of exports for Thailand and Malaysia, and nearly 30% for the Philippines. The ripple effects are even greater. Much of the trade within Southeast Asia is in components and materials used to make goods that are later sold on to the US. Adding in these so-called goods-in-process, along with the consumer spending that flows from US trade, analysts estimate the impact on regional economies could be 'multiplied by several times.'
Prior to late last year, the bulk of the surge in debt growth came from the mortgage side. Households were buying more homes, and taking advantage of generationally low mortgage rates to refinance their existing homes and take additional cash out. The Dismal Scientist estimates that households have taken over $100 billion in cash from cash-outs over the past three years. Many households used the extra cash to consolidate higher-rate nondeductible debt as well as to ramp up spending. As higher rates have killed off mortgage refinancing, households are increasingly turning back to their credit cards. And consumers, with the waning of capital gains from equity markets, will need to borrow more in order to maintain the same level of consumption. The current situation sets up clear risks going forward. As consumers rack up more expensive credit card debt, rising interest rates and a concurrent slowdown in the economy pose the risk that increasing numbers of precariously balanced households will tip into insolvency. Importantly, survey evidence (ex: Fed's Survey of Consumer Finances) indicates that the households that have racked up the most debt relative to their income over the past decade have been lower- and lower-middle class. These households are the least likely to have benefited from the boom in housing and equity prices, and so have less to fall back on in more adverse economic times. There are indications that lenders sense these risks. According to the Fed Senior Loan Officer Survey, more consumer lenders tightened than loosened loan standards in the second quarter, a circumstance not seen since 1996. If borrowing continues to outpace income growth by such a large margin for an extended period, this most well balanced of economies may be dealing with a consequential imbalance down the road.
First, it remains the world's reserve currency, a position that enables the US to live with current account deficits. Second, the US is no longer reliant on hot money to finance itself. The longer the economic expansion, the more attractive America has seemed as a place to make long-term investments. Third, the global economy's other major currencies - the euro and yen - both have fundamental problems that make them unattractive. Finally, and most important, Shepherdson thinks the US current account deficit is nearing a peak. Even if US growth remains healthy, the rest of the world is doing better. If Asia, Europe and Latin America buy more US goods, and American consumers scale back their own purchases, thanks to slowing growth and less robust gains in the stock market, a narrower trade gap will follow. Notes Bank One economist Craig Larimer, the dollar's strength rests where it counts: credibility and capital flows. Interest-rate differentials continue to favor the dollar over the euro [and yen]. Also, the [lack of US] growth argument is weak. The US economy probably will grow in the neighborhood of 5% in 2000. The eurozone is expected to turn in a sub-3% growth rate this year. The ECB has been forced to tighten into a recovery - and a fragile one at that. This may limit Europe's gains over the US where economic performance is concerned. [There is no contest between US growth vs Japan's].
Other Fed officials said as much last week, stressing that they're unconvinced the economy is in the midst of a sustainable slowdown. As such, the Fed's tightening campaign may continue in the months ahead. Generally, Greenspan & Co. are seen as a group of nail-biting central bankers at a loss to steer an economy barreling out of control. Poole thinks today's policymakers have it easy. 'The credibility that the Fed has won not only makes the whole economy more stable, but it also makes the policy environment and decision-making easier.' Twenty-five years ago, when double-digit inflation was taking hold in the American economy, households and companies made decisions in an environment where prices would be higher in the days ahead. Today inflation expectations in Corporate America and on Main Street are 'very stable.' It's for this reason he's not frustrated by the bond market's recent move to drive yields lower. Rather than fearing that lower long-term rates will stimulate the economy and offset the Fed's efforts, Poole takes solace in what he views as a clear sign of confidence in the Fed's stewardship. Poole thinks the Fed's efforts to slow the growth of money in the system are working. Wall Street only recently realized that the Fed's six rate hikes are biting. The analogy he offers is one of a car barreling down a steep mountain road. Your car may accelerating, but that doesn't mean your foot on the brake isn't making a difference. 'Clearly, the increase in interest rates we've seen starting a year ago has kept the economy slower than it otherwise would have been,' Poole notes. From Poole, an inflation hawk, it's one of the best signals yet that the Fed may be less aggressive in hiking rates than initially thought.
Banks care about reserve requirements because the rules say they have to maintain a certain amount of money, either in cash or in an account at the Federal Reserve itself, against the demand deposits they offer customers. Total reserves held by all banks have recently been running a mere $7-$8 billion, and there would truly be cause for alarm if that were the only liquidity banks could lay their hands on in order to meet commitments. But not to worry: Reserve management and liquidity management are overlapping activities for banks, but for the most part they are very different animals. Banks don't like to hold reserves at the Fed because these sums earn no interest. And Greenspan has been highly sympathetic. By the early 'Nineties, reserve requirements on savings accounts were cut to zero, requirements on demand deposits were reduced, and rule enforcement was relaxed in order to better permit' sweep accounts'. The name of the game in sweeping is to reduce the declared total of demand deposits a bank has on its books, so it can get away with having to hold fewer reserves. We may think we have a checking account with our bank, but most of the time what we're really holding is a zero-interest CD. But the bank's software keeps book on us, standing ready to sweep the money back into our account just before we're ready to pay the rent. As the practice of sweeping swept the banking industry, the narrowest definition of money (M1) began to decline, and it is now barely higher than it was in 1993, a trend that wreaked havoc on the statistical models of die-hard monetarists who still believe M1 is a meaningful number. As a result of Greenspan's policies, required reserves also plummeted, from $35-$40 billion in the late 1980s to the tiny $7-$8 billion of today. But in targeting the fed-funds rate, the central bank knows that these immediately available funds may be wanted not only to meet reserve requirements, but for other liquidity needs as well. To the extent that banks need to borrow federal funds from each other to satisfy reserve requirements, it wants them to buy at the current targeted rate of 6.5%. It achieves this through its open market operations, by turns pumping liquidity into the system by buying Treasury securities and draining liquidity through selling. The process is highly imperfect, since there can be fairly wide day-to-day fluctuations around this target. For example, on June 2, some fed funds were bought for as high as 8%, and on May 31, some funds went for as low as 6%, despite the 6.5% target. Just as meeting its reserve requirements is not the only reason a bank may buy fed funds, fed funds are not the only means of meeting its reserve requirements. Each bank's objective is to meet its requirements without meeting them too well. It will quickly sell any windfall reserves in the funds market that it deems to be excessive. Ironically, the key to why the funds rate will tend to trade around the 6.5% target lies in the fact that market participants know the target exists. So, let's say a bank puts out an offer to sell funds at 6.5% and gets no takers, then lowers its asking price and still gets no takers. It will have a tendency to withdraw its offer, since it will know that the market is awash in too much supply, that the Fed knows this also, and that the excess will quickly be siphoned out in order to firm up the price. Similarly, if a bank wishing to buy has to pay much more than 6.5%, it will also withdraw, confident the Fed will soon weaken the price by pumping supply back in.
And the list of available bonds changes from day to day. Brokers keep some of these bonds in their inventory, and sell from their stock on hand to their clients, or they allow their customers with large portfolios to shop for the best bid for bonds they want to sell. If you're used to the instant executions typical with stock transactions, you'll have to slow the pace for bond orders; though some markets move quickly, it could be the next day before you find out whether your order was executed. Some of the best fixed-income deals are available with no more hassle than buying a listed stock in the form of closed-end bond funds. Unlike their mutual-fund cousins, closed-end funds issue a set number of shares, which then are bought and sold, usually on the Big Board, making them a snap to buy online. Many closed-ends also trade at double-digit discounts from their underlying assets, which can boost their returns.
Included in the report was a review by the SEC of 29 online brokerage firms. Last year, more than half were not meeting their obligation to provide the best execution for their customers' trades. A major reason is that most online firms have other firms complete their customers' trades in exchange for payments of as much as 1 or 2 cents a share. These payments determine where a customer's order is sent, even if another market or trader is offering a better price. On a 1,000-share sale, a customer would receive $62.50 more if he got a price one-sixteenth above the prevailing market. Of the 29 firms the SEC investigated, 17 'improperly emphasized payment for order flow in deciding where to send orders.' The regulators said the firms did not even try to assess the prices available from trading firms other than those that were paying them. Indeed, most routed orders to traders whose execution quality was well below industry averages. It is high time investors understand that payment for order flow is corrupting trade executions at many online firms - and costing investors a bundle.
1. Where did the term 401(k) come from?(45%) a) The total amount you can contribute to the plan ($401,000) b) The amount you can contribute to the plan annually ($401) c) The section of the tax code that outlines this type of plan d) The income cap for eligibility ($401,000) 2. Can you contribute to a 401(k) and IRA in the same year? (65%) a) Yes; (b) No 3. What is the total maximum annual contribution to a 401(k) plan this year? (17%) a) $2,000 b) $10,500 c) $4,000 d) No maximum 4. Which is not a benefit of a 401(k) plan? (39%) a) Contributions lower taxable income. b) Tax-deferred savings c) Many companies offer an employer match. d) Penalty-free withdrawals for education expenses 5. How many selections (stocks, mutual funds, etc) can a 401(k) have? (55%) a) Five b) Seven c) Nine d) Flexible, no set limit 6. Who is ultimately responsible for making 401(k) investment decisions? (50%) a) The plan participant b) Employer c) Plan administrator d) Employee's immediate supervisor 7. If a company goes bankrupt, can it legally tap into the employees' 401(k) plan assets? (72%) a) Yes; (b) No 8. Can your supervisor legally access your 401(k) info? (67%) a) Yes; (b) No 9. Investment experts generally cite which as one of the biggest mistakes of 401(k) participants? (35%) a) Building a diversified portfolio. b) Investing too conservatively c) Investing too aggressively d) All of these are big mistakes 10. Which is not a consequence of taking a cash distribution from a 401(k) plan prior to retirement age? (26%) a) 16% service charge paid to your employer b) Money is subject to 20% withholding c) Distribution is subject to federal taxes d) 10% early withdrawal penalty if under age 59 and a half ANSWERS: 1-c; 2-a; 3-b; 4-d; 5-d; 6-a; 7-b; 8-b; 9-b; 10-a.
Just the Facts The "Fed effect" - the tendency of stocks to rally in the days up to and the day of the meetings, only to level off or even fall afterward. For each of the past 11 Fed meetings, starting with that of February 1999, the S&P 500 has done better in the five days through the meeting than it has on the following five days. It has surged an average 2.7% before and fallen an average 0.9% after. After five of the 11 meetings, the S&P 500 actually fell. At its outset, the Fed effect may have reflected market psychology. Optimism tended to spring up right before Fed meetings, only to be replaced with more worry afterward, as economic data indicated that the economy still was hot and the Fed might have to raise rates more. (WSJ 6-19) According to a survey last week, there was not a single economist at any major bond firm that expected the Federal Reserve to raise interest rates this month. Last month, 21 of the 29 primary dealers - firms that trade directly with the Fed - expected that it would raise its lending target by a quarter-point. Seventeen of the firms still expect the central bank to raise the federal funds rate, now at 6.5 percent, by a quarter-point in August, the survey showed. Eight firms predict an increase of half a point. (NYT 6-18) Fear that the apparent US economic slowdown might cut deeply into companies' sales and earnings has slammed some stock sectors particularly hard in the last month. The worst-performing stock groups in the S&P 500 index in the 30 days ended Thursday: Automobiles: -21.9%; Electronic instruments: -20.5%; Restaurants: -18.1%; Office equip: -18.0%; Paper/lumber: -16.4%; Shoes: -15.7%; Misc. metal mining: -15.0; Steel: -14.6%; Conglomerates: -13.4%; Textiles: -13.1%; S&P 500: -1.8%. (Bloomberg iva LA Times 6-18) Challenger, Gray & Christmas in the 1990's began tracking layoff announcements and issuing grim monthly tallies. In the current robust economy, mass layoffs are way down and out of fashion. Shedding the chief executive is increasingly popular, and Challenger began last August to keep this new score. The total through last Thursday was 706 chiefs of publicly owned companies, an average of 15 a week. More formal studies confirm the trend. One found that 40% of new chief executives lose their jobs within 18 months. Another, by Rakesh Khurana at MIT, found that for the same poor performance, a chief executive was three times as likely to be fired in 1996 than in 1985. (Louis Uchitelle, NYT 6-18) Is a high level of trading actually a bad thing in a fund? Except for the most extreme cases, the answer is probably no. We looked at the 100 diversified US stock funds with the highest turnover, and compared them with the 100 funds with the lowest turnover. These 100 hyperactive funds had a median turnover of 331%. They produced an average 52.3% gain the past 12 months vs. 24% for the average stock fund. The past five years, they averaged a 175% gain vs. 157% for the average stock fund. The 100 funds with the lowest turnover had a median turnover of just 3%. They averaged a 12.9% gain the past 12 months and 150% the past five years. What gives? In large part, it reflects the recent drubbing that growth funds have given value funds. The past five years, large-company growth funds, which tend to be active traders, have soared 224%. Large-company value funds, which are more patient investors, are up 141%. (John Waggoner, USA Today 6-16) The "No Survivor" show? Cybersatirist Bob Hirschfeld says, "When a focus group was surveyed about the prospect of being on a deserted island with Al Gore, the majority asked to be voted off." (WSJ 6-16) Fund managers are more optimistic about a global economic soft landing and have become strong buyers of stocks and bonds, while sector preferences have undergone a seismic shift, according to Merrill Lynch 's monthly survey of fund managers around the world. Fund managers' preferences have shifted to financial-services and growth stocks (those of fast-growing companies), while cyclicals (stocks of companies whose fortunes wax and wane with the economy) are out of favor. Compared with March, fewer think technology, media and telecom stocks are overvalued. In the US, buyers of U.S. Treasurys outnumber sellers by the greatest margin since the global financial crisis of September 1998. Some 249 fund managers with $8.9 trillion in funds under management were surveyed June 2 through June 8. (WSJ 6-14) The BLS reported that energy prices fell 1.9% in May, matching the April decline. Gasoline prices fell 3.5% last month after a 4.1% drop in April. Traders think the numbers are, quite frankly, cooked. `Energy prices down? This is so absurd the BLS should be ashamed of publishing such numbers,' writes Yvon Gaudreau, Director, Fixed Income and Currencies, at Caisse de Depot et Placement in Montreal. (Caroline Baum, Bloomberg 6-14) Members of Congress are pressing for a rule requiring that mutaul funds publish after-tax return figures, even though individual investors' tax situations vary all over the place. But a fund's past tax `efficiency' isn't always a reliable guide to how well it may succeed in minimizing future taxable distributions. (Chet Currier, Bloomberg 6-13) Brian Jones, an economist at Salomon Smith Barney, thinks the payback for the weak May report could come in July, not June. `The seasonal factors are harsher in June than they were last year,' Jones says. `They anticipate hiring of 578,000, which is well above trend.' In July, meanwhile, the seasonal adjustment factors are supportive, anticipating a decline of 1.33 million jobs, Jones says. Anything less than that gets translated into a seasonally adjusted increase. (Carlone Baum, Bloomberg 6-12) The numbers may say one thing, and the press is going out of its way to round up any and every slowdown anecdote to support it. What folks perceive in the world around them, however, are crowded airplanes, tight supplies and long waits for popular auto models, soaring gas prices, and cerebrally challenged `sales' associates' in stores nationwide. `I can't wait until the next recession,' says a fund manager in Chicago. (Carlone Baum, Bloomberg 6-12) What makes me think the inflation numbers will get worse? When one fifth of the entire index, a component called owners' equivalent rent, is rising at a slower pace than in the last recession - in fact slower than at any time in its 17 year history - you have to think something's amiss. Following a change in the sampling method, the year-over-year change in OER slowed from 3.4% in October 1998 to a cycle and all-time low of 2.3% in October 1999. As of April, OER was rising at a 2.6% rate. An index of repeat home sales compiled by the Organization of Federal Housing Enterprise Oversight, a regulator of Fannie Mae and Freddie Mac, shows home prices up 6.5% in Q1 compared with a year earlier. (Carlone Baum, Bloomberg 6-12) As of Friday, 46% of the 377 Internet companies in Morgan Stanley's list were below their offering price, even though all but five are less than five years old. The group started life with a valuation of $200 billion. On May 2, according to Morgan Stanley, they were valued at $856 billion. So even though half of the companies are below their IPO price, "the wealth destruction by the losers is dwarfed by the wealth creation by the winners," a Morgan Stanley report says. But just 19 companies created two-thirds of the new wealth. (Greb Ip, WSJ 6-12) Looking for some investment ideas? Cornell University posts detailed research reports on companies and industry groups, written by up-and-coming analysts, on the Web for free. The catch: The "analysts" are students. The research reports are their class projects in the graduate-level advanced stock analysis class. Virtually every student in the class had multiple job offers long before graduation with top investment banking houses such as Salomon Smith Barney and Goldman Sachs. Brokerage firms and research companies provide Cornell with millions of dollars worth of data and software. That provides Cornell with a research "platform" that rivals the best brokerage house. And it enables the students to sort through thousands of stocks, looking for a handful that meet set criteria. If you want to see the students' research, which includes sector reports such as revenue forecasts for Internet firms as well as individual stock selections, point your browser to http://parkercenter.johnson.cornell.edu and click on "Investment Fund." (Kath Kristoff, LA Times 6-11)
The SEC is exploring ways to get brokerage firm strategists and analysts to disclose possible conflicts of interest when they recommend stocks during television appearances on networks like CNBC and CNNfn. The possible conflicts that concern the commission involve analysts' personal investments in stocks they recommend, as well as their employers' investment-banking relationships with companies reviewed by the analysts. 'To the extent that investors understand the potential conflicts that analysts may have, it will improve their ability to make sound investment decisions,' said Chris Ullman, an SEC spokesman. (NYT 6-11) 'Whenever an index such as the Nasdaq doubles in price in six months with people caught up in a feeding frenzy, it's healthy to see it pull back,' declared Robert Walberg, chief equity strategist with Briefing.com. 'Active day traders, institutions buying into technology and a robust ipo market all encouraged a lot of people to start playing the market.' Hopefully, everyone learned a valuable lesson from the volatility that followed, namely, that fundamentals such as earnings and sales still make sense. Expect a more rational market the next few months, Walberg predicts, with Federal Reserve rate increases making valuations even more important. 'The Nasdaq has been overreacting on the upside and downside, but, despite choppiness over the next couple of months, we may have seen the market lows for the year,' said Jim Collins, money manager and editor of the OTC Insight newsletter (www.otcinsight.com). 'I think we have a chance at a nice market run, probably starting in late summer or early fall.' (Chicago Tribune 6-10) The Democratic National Committee is offering free Internet service to people who are willing to answer a score of personal questions, including queries about their political views and the type of health insurance they have. The DNC will not sell the info. Meanwhile, the Republican National Committee is offering its own service, www.GOPnet.com, which features e-mail and Web access for $19.95 per month. (Washington Times, 6-9) Randy Bateman of Orlando, Fla., is buying more bonds as he gets older. At age 50, bonds comprise about 38% of his investment portfolio, while 10 years ago all he owned was stocks. "We've had a bull market in stocks, and part of it is because of the baby boom generation building up that nest egg," said Bateman, who pays attention to such trends as a portfolio manager for SunTrust Private Capital Group. "The exact same thing is going to happen in bonds in the next few years as baby boomers start to retire," he predicted. In the 10 years ended Dec. 31, 1990, a steep decline in market rates helped produce a 213% "total" return (interest plus or minus appreciation or depreciation of the underlying principal) on the average general bond mutual fund tracked by Lipper. In that same 10-year period, the average US stock mutual fund had a total return of 203%. So bonds actually beat stocks in that period. (LA Times 6-4) Home Page Previous Factoid Top Sites |