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It's easy to overlook the fact that there really is a slowdown under way, at least in some key sectors. Thanks to six Federal Reserve interest-rate increases over the past year, new-home sales have slipped. Industrial production - excluding computers, telecommunications equipment and semiconductors - was flat through the first half of the year. The wealth gusher behind the great 1990s household spending spree has dried up, with the broad-based Wilshire 5000 stock index down 10% since the year began. In other words, monetary policy is working precisely as it should: raising the cost of capital to the point where many consumers and investors are turning more frugal.
In reality, the auctions could lead to wider spreads between Treasuries and corporate securities. The reason is that telecom companies that win the licenses will have to borrow billions to pay for them. On top of that, they may need to borrow more to finance equipment. As a result, private-sector rates probably will rise. As colleague Vito Racanelli pointed out recently, a similar dynamic is unfolding in Europe (see his May 15 article). Initial optimism that auctions of Universal Mobile Telecommunications Service licenses would enable governments to trim debt was replaced by the sobering realization that private debt issuance would rise, obviating the benefits.
Chuck Hill, director of research at First Call, noted that earnings forecasts are holding up even for some economically sensitive sectors despite higher interest rates. Companies in home construction are expected to show a 13% decline in earnings in Q2, decline 3% in Q3 and post 6% growth in Q4. Auto companies are expected to show 14% growth in Q3 and 15% in Q4. These are not the numbers one would expect, Mr. Hill said, if the economy were slowing down the way Fed policy makers would like. That optimism indicates that Wall Street analysts do not expect a significant slowdown in growth in the second half -- not unreasonable, given that the economy has stuttered in Q2 in past years only to reaccelerate in the fall. But Alan Greenspan reminded investors that the Aug. 22nd decision on another interest rate hike will depend on new economic data for July showing that the slowing trend he has identified is continuing. That means one of two things: Wall Street analysts are wrong - the economy really will slow significantly, and so will corporate earnings, to investors' intense disappointment. Or, the analysts are right - the Fed's rate increases haven't worked yet and the economy is perking up again. Right now the data favors the analysts, including the totally unexpected 5.2% jump in Q2 GDP, the increases in durable-goods orders and existing home sales in June and the rising consumer confidence this month. If the trend holds, the Fed is likely to push rates higher still. And that won't be good for stocks. So beware. Earnings may be bad for the stock market's health.
In recent quarters, the tight labor market appears to have pushed up compensation. However, stronger productivity gains continued to blunt inflationary pressures. As a result, unit labor costs have increased less than 1% in the past four quarters. On closer examination, however, the relationship between costs of production and prices in the business sector are not so clear. Between 1992 and 1997, prices rose 50% faster than unit labor costs. In the past two years, however, labor costs per unit of output have been rising twice as fast as prices. In other words, the capacity to pass along cost pressures was relatively easy early in this cycle. Then the ability to pass along cost pressures became exceedingly difficult. Something other than productivity is responsible for this outcome. The conventional argument is that outside shocks, such as declining oil prices and the plunge in the costs of capital, are responsible for the low inflation relative to labor costs in recent years. However, another explanation comes to mind. During 1997, the Asian crisis surfaced. As a result, the world economy slowed from more than 4% growth to less than 2% gains within a few quarters. So much new equipment was being ordered that the world's ability to produce continued to grow at more than 4% growth rates. Only in the past few quarters has world growth returned to the growth of world capacity. Fortunately, falling prices for capital goods have encouraged modernization and expansion. For example, new equipment can drive down the costs of lumber production by about 20%. However, that equipment is most effectively used when production on the new machines is more than 20% greater than on the older equipment. Therefore, many industries are discovering that in order to efficiently lower their production costs, they must increase their capacity to produce. That additional capacity continues to put downward pressures upon prices. Lower prices for their products encourage even more rapid conversion of old equipment into the more efficient new generation of capital goods. There is a side effect of this process. Companies try to regain price control by merging with their competitors. Thus, only a few of the plants are converted into technologically efficient production. The remaining plants are shut down. When enough companies have merged with their competitors in an industry, productivity can surge even as shuttered factories allow price increases. The recent slowing of pricing relative to labor costs indicates that such mergers have not yet achieved their ability to control prices in many industries. However, as the world economy continues to grow at more than 4%, they will.
Historically, the market clearly favors stocks. Over 65 10-year periods since 1926, S&P's 500-stock average lost money only twice, and those were in decades around the crash of 1929. Over 60 15-year periods, stocks made money every time, according to Ibbotson Associates. But you have to weigh these facts against a couple of caveats. First, they assume that you reinvest all dividends. Also, the performance data aren't adjusted for inflation. So they overstate the purchasing power your investments' yield. After inflation, stock investors lost money in seven of the 65 10-year periods studied. That's 11% of the time. There were even two 15-year periods that fell behind. There's also a higher chance of mediocre returns. In 20 of those 15-year periods, stocks returned 5% or less, after adjusting for inflation. So long-term investors had poor returns 33% of the time. So here's another little fact to tuck away. Historically, super years for stocks have followed years when the market was excessively undervalued. Conversely (and this is the bad news), punk years for stocks follow years when prices have been extremely high. They appear high now. That suggests lower average returns in the years immediately ahead - although one never knows.
Two researchers at Columbia University's Graduate School of Business, Donald Hambrick and Eric Jackson, studied 40 pairs of companies and their performance from 1987 to 1996. For each pair, companies were selected that were in the same industry and began the period at about the same size and performance, but deviated thereafter, with one turning in sterling total returns - at least 10% better than the median for their industry - while the other fell far behind - at least 10% worse than the median. On average, the researchers found, each outside director at the companies that turned out to be stars began the study period owning an average of almost six times as much company stock as did those at laggard companies - $470,000 versus $80,000. The difference in the fraction of total company equity held was even more striking - 1.3% at the stars, 0.1% at the laggards. Star company boards were one and a half times as likely as laggard boards to have a director holding $500,000 in stock or more, and almost three times as likely to have two such directors, according to the study. The researchers found no similar pattern for inside directors and their holdings. Neither did they find any relationship between company performance and other board characteristics, like the number of seats, the proportion of outside directors, directors' average ages or average length of tenure. Clouding the usefulness of the results for current investors is the practice, common today but rare in 1987, of compensating directors with significant stock grants.
"The costs of acquiring and establishing a new account are significant and rising, and in the mutual fund industry those costs are disproportionately borne by long-term shareholders," said John Brennan, chairman of Vanguard. "In addition, retail shareholders who have maintained sizable accounts for a long period of time and have not caused a fund to incur transaction costs are very desirable." Such accounts help hold costs down for all investors.
Goods piling up unsold in warehouses and stores accounted for nearly a percentage point of the growth. A surge in federal government spending, mainly for the military and the 2000 Census added nearly another percentage point. The federal government raised its spending by nearly 18% in Q2, after a fall of 14% in Q1. The GDP report's price measure showed inflation rising at a 2.5% annual rate in the second quarter. This is higher than last year's levels, partly because of gasoline prices, but declining from a rate of 3.3% during Q1.
The capital-gains distributions are driven in part by increasingly quick index changes. Furthermore, the proliferation of index funds based on narrower sectors of the market increases the turnover of stocks going in and out of various index funds. Of course, index funds are still pretty tax efficient compared to actively managed mutual funds. The average stock index fund distributed 2.63% of its assets last year, substantially lower than the 6.16% distributed by U.S. stock funds, 5.26% by large blend funds, 6.14% by large-cap funds, 7.63% by mid-cap funds and 6.56% by small-cap funds, according to Morningstar data.
[WSJ 7-5: Junk bonds outstanding have soared to $529 billion from $173 billion a decade ago. Plus $320 billion of syndicated loans were made last year to companies with low-grade credit ratings, up from $58 billion in 1990. Corporate debt represents 46% of the nation's GDP, the highest level ever.] If the trend continues through year-end, the annual default rate would hit 2.4%, a rate exceeded only by those recessionary years 1990 and 1991. If default rates are rising in an environment of 5%-plus growth, tame inflation and healthy corporate profits, what happens if the economy experiences a hard landing in the months ahead? All it would take for defaults to surge is a sustained slowdown in growth. Many analysts think a growth downshift to the 1.5%-2% range would be enough of a shock to slam credit quality throughout Corporate America.
In the Spring 1993 Journal of Portfolio Management, Robert Jeffrey and Robert Arnott noted that efforts to outpace the market tend to generate hefty capital-gains tax bills, as managers sell their winning stock positions. If a manager typically holds his stocks for one year, he would have to beat the stock market by over two percentage points a year to match the post-tax return of a market-tracking index fund. In a March 1997 Journal of Finance article, Mark Carhart looked at 32 years of stock-fund data, trying to figure out whether it was possible to identify superior managers. He found evidence that the top managers from one year tended to perform well in the year that followed. But this outperformance was due to market trends, not stock-picking skill. If a manager specialized in, say, large-company growth stocks and those stocks were in favor, the manager might post strong gains for a couple of years. But this superior performance would then peter out. A study, for the April 2000 Journal of Finance that Terrance Odean wrote with Brad Barber, found that the worst returns were earned by the 20% of investors who traded the most. After investment costs, these active traders earned just 11% a year over a six-year stretch, compared with 18% for the stock-market average.
Two of the four strong growth factors that have propelled this economy in recent years remain in place. Capital equipment remains very productive, and its price continues to fall. In the past four quarters, operating profits grew 14.5% according to my estimates, well above normal profit growth. An aging economic expansion almost always shows reduced profitability before the economy sours. Also, American exports are expanding despite the strong dollar. Our equipment is more productive than that produced in some other countries, and our prices have remained competitive. Furthermore, the strong dollar has stalled, which encourages further export activity in an expanding world economy. But higher interest rates are beginning to bite into housing activity. Whether it's the stock market slump, higher debt [WSJ 7-5: Household borrowing has risen almost 60% to $6.5 trillion in the past 5 years. The average US household now sports 13 credit or charge cards, and carries $7,500 in credit-card balances, up from $3,000 in 1990. Household debt is a record 101% of income, up from 84% in 1990.] or merely satiation, something has stalled consumer spending. (The wealth effect may be reversing. This would account for some of the slowing in consumer spending.) And a buildup of business inventories will mean slower manufacturing activity in the next few months. The ultimate source of this slowing is monetary restraint. In the past three months, M2, a measure of money that includes the money market holdings of households, has increased at an annual rate of only 2.2%. My studies suggest that M2 is closely related to spending over time. With inflation as measured by the GDP deflator approaching 3%, this money growth leaves little room for real spending. Initially such monetary restraint reduces the growth of real spending. However, the ultimate impact of a continuation of such slow money growth will be a reduction of inflation. The only question is how much real spending will slow first. High oil prices have made inflation difficult to cool in recent months. Therefore, the monetary restraint has been pushing down the real spending capacity of the economy. If oil prices remain high, a continuation of this monetary growth could lead to more economic slowing than would be desirable. The Fed might be waiting for the textbook response of higher interest rates leading to lower interest-sensitive activity, such as investment, construction and consumer durable purchases. Instead, the monetary restraint appears to have pricked the speculative Internet bubble, causing a reduction in the growth of enterprises. Monetary restraint has kept the dollar very strong. This has not destroyed export activity, but it has encouraged import penetration. Thus, our trade balances continue to deteriorate. As for inflation, there is very little once energy prices are pushed aside. I still believe this economy has a great deal of momentum and is not about to slump into a downturn. However, a continuation of this relatively low monetary growth for several more months could mean the Fed is engineering too much slowing. That has not happened yet, but those monetary figures should not be completely ignored. Growth of 2.2% in an important monetary measure is not sufficient to preserve desirable economic growth in this economy.
Greenspan mentioned all the usual suspects -- the rise in interest rates, the flattening of equity prices, the rising debt burden of households and the rise in the oil price, which acts as a tax -- before offering a new, albeit old, approach. Even without the rise in interest rates, a tapering off of purchases of things like cars and houses would be expected, Greenspan said. Such rapid accumulation historically has been `followed by a pause,' he said. `It sounds lame, but it's not a saturation argument,' says Jim Glassman, senior economist at Chase Securities. `It's really a textbook explanation, something out of Econ 101, that goes to the heart of the investment side of consumer spending.' Durables spending is different than other consumption, Glassman explains, because it produces a service. Consumers buy durable goods specifically for the flow of services they deliver. What's more, `durables spending behaves like investment in that it moves in long waves,' Glassman says. `The weight that Greenspan put on the slowdown in consumer durables purchases compared with the list of reasons to be cautious (about its permanence) was so out of proportion as to suggest he believes it's sustainable.' If that's the case and Greenspan has come up with a working hypothesis to support his view, it will take more than a few economic numbers to dissuade him, Glassman believes. `He's telling you that the slowdown is entrenched.' Related: Gene Epstein, Barrons 7-24 Greenspan cites 'the rising debt burden of households,' commenting, somewhat incredibly, that 'interest and amortization as a percent of disposable income have risen materially during the past six years, as consumer and especially mortgage debt has climbed.' Most of that rise took place in the first three years of that six-year period. In the first quarter of 1994, the service burden ratio stood at 11.8%, then jumped to 13.1% by first-quarter 1997, then inched up to 13.6% as of the first quarter, the most recent period for which figures are available. So it was back in 1997 that the chairman might have sounded the alarm about this rising burden placing a brake on consumer spending, but by then the consumer was just hitting his stride. Related: William Pesek, Barrons 7-24 'Reading between the lines, Greenspan's tone was surprisingly positive on the economic risks,' notes Scott Brown, chief economist at Raymond James. 'At this point, it seems, it will take strong data to force the Fed's hand.' Some observers weren't so sure the central bank meant to give Wall Street the all-clear. 'The door is open and a tightening is still on the table for August,' says Donald Fine, chief market analyst at Chase Asset Management. 'What you can say is that whatever probability you assigned to a tightening next month, there's probably less now.' Gail Fosler, chief economist of the Conference Board, doubts the recent slowdown will stop rates from rising. The economy, she argues, is carrying 'tremendous forward momentum' that will re-exert itself by the end of the year, prompting policy makers to resume their rate hikes. And while higher rates have forced down many stock valuations, Fosler doubts they've had much impact on the total liquidity available in the marketplace or the economy. Related: NY Times 7-23 'What has captured the markets' attention here is that Greenspan has raised the possibility that the Fed is done,' said Louis Crandall, chief economist at R. H. Wrightson & Associates. Richard Berner, chief United States economist at Morgan Stanley Dean Witter, said the Fed's aggressive stance of last spring had mellowed. 'The tone is one of a Fed that is going to be in a watchful, waiting mode, but doesn't see any catalyst for acting,' he said. While the chances of a rate increase in late August, when Fed policy makers next meet, are diminishing, Richard Berner, chief United States economist at Morgan Stanley Dean Witter, expects at least one more rate rise before the central bank is finished. 'If we were to rally 15% or 20% from here, that would negate some of the Fed's tightening pressure,' Mr. Berner said. Related: Lawrence Kudlow, CNBC 7-19 Biting through all the dog-chasing-tail, GDP-number-crunching Fedspeak central planning presented Thursday by Sir Greenspan, there's one truly tasty morsel that can be easily digested. Namely, it is possible that the Fed is now using long-term interest rates as their new policy guide. And bond rates over the past six or seven weeks have been coming down. Thereby signaling lower future inflation and a less sizzling economic growth rate. Greenspan said: 'As the financing requirements for our ever-rising capital investment needs mounted in recent years -- beyond forthcoming domestic saving -- real long-term interest rates rose to address this gap. We at the Federal Reserve, responding to the same economic forces, have moved the overnight federal funds rate up 1-3/4 percentage points over the past year. To have held to the federal funds rate of June 1999 would have required a massive increase in liquidity that would presumably have underwritten an acceleration of prices and, hence, an eventual curbing of economic growth. So the Fed's tightening looks to be over. The futures market in fed funds is forecasting only a 10-percent probability of a one-quarter of a percentage point rate hike in August, and a 42-percent chance of a move in October. By then, I'll bet, long-term rates will be even lower.
Charles Schwab updated its Web site to include an educational area in early July that is free for anyone who visits the site. The area, dubbed "Smart Investor," is designed for investors of all knowledge levels, and covers subjects such as investing strategies, saving for retirement and tax issues. These topics are covered in several different formats, including message boards, interactive classes and online forums. Online broker Suretrade enhanced its online educational tools through a partnership with SmartMoney earlier this month to include content on investing basics, strategic investing, worksheets and calculators. Morningstar introduced a free "Interactive Classroom" this month that gives users access to a broad range of educational material, including classes and quizzes about stock and fund investing. Users progress at their own pace through five course levels, starting with things like how to buy a mutual fund and advancing to topics such as how to ensure a solid financial future. Fidelity Investments will launch a "retirement center" on its Web site later this month, pooling all of its retirement planning resources for Fidelity customers in one online location. And earlier this month, personal-finance site Investorama joined with Web portal Yahoo! and women-based site Oxygen Media to offer financial education content to their audiences.
Here's what I mean. You've heard me talk about picking cotton when I was a little boy. My goal was to pick 100 lbs., and I could hardly get that in a day. I was 10 years old. The adults around me were easily getting 300 lbs. Now the difference in their productivity and my productivity was attributable to better labor. But when that old cotton picker [the machine] came along and put us all out of the fields, one guy could do 100 acres or something a day.... Think of the increase in productivity. You have that one guy's hours counted and all those acres of cotton picked. That had nothing to do with the quality of labor. It had everything to do with quality of the capital.
The chances are slight that we will return to a market that is fairly valued by historical standards, which might put the Dow at 4000 or 5000. 'My feeling is that 20 to 25 is a reasonable range for the price/earnings ratio,' Mr. Siegel says. 'We're on the high side of that. But a lot of good things are happening.' Mr. Siegel says higher valuations are justified by today's technology-driven economy, with its rapid productivity improvements and faster economic growth. Stock valuations have also benefited from low interest rates, a reflection of moderate inflation and government budget surpluses.
But today, you can buy inflation-indexed Treasury bonds and lock in a 4% return above inflation. That's good news for balanced investors, who want to own a mix of stocks and bonds. Even as they make less on their stocks, they will earn more on their bonds. That means these folks should be able to reach their target return with less stock exposure. Since 1925, you would have needed a mix of 50% stocks and 50% bonds to earn five percentage points a year more than inflation. Today, 'to capture a 5% real return, you only need a third of your portfolio in stocks,' says William Reichenstein, an investments professor at Baylor University. 'We can say with confidence that the real return on bonds is higher today.'
To spot the trends, the firm compares the dollar amount such large block sales, net of block purchases, with the total value of the stock market. It defines a big block as a transaction of at least 100,000 shares or $1 million in value. Going back to 1983, researchers at Leuthold found that the percentage of market value made up of insider sales moves in a fairly tight range. When the amount of big block sales represents the smallest percentage of overall market value - one-tenth of 1% - it has often been a good buy signal for the overall market. Conversely, when block sales hit the top end of the range, seven-tenths of 1% of the market's total value, it has typically marked a good time to sell. In late 1993, for instance, block sales approached eight-tenths of 1% of market capitalization, a sell signal to the statisticians at Leuthold. The next year, the S&P's 500-stock index fell 1.54%. But a buy sign flashed in early 1995, when big block sales fell to one-tenth of 1% of market value. Later that year, the market began its historic four-year advance. So far this year, insider block sales, net of buys, have totaled $36 billion, double what they were in the corresponding periods of 1998 and 1999. When weighed against total market value, insider block sales now account for a full 1%. That is unprecedented. One reason that these figures are high recently - more insiders typically own greater numbers of shares today than they did in the past. With more stock being dispensed to insiders, it is not surprising that more shares come up for sale. Still, the hefty sales help explain why, even as money has been flooding into equity mutual funds, the overall market has stalled this year. According to AMG Data Services, buyers have put $169 billion to work in equity funds. But as Bjorgen pointed out, 21% of that buying has been neutralized by insider selling. Today's selling levels can hardly be construed as bullish. After all, it is indisputable that these blocks represent insiders making a big bet that their company's stock is not going higher in the coming months. "When you aggregate all the activity together over the last year, insiders have become increasingly concerned about their exposure to their companies," Bjorgen said. "Insiders have sometimes been early, but they've usually been right."
Just the Facts Fewer than half (45%) of the 5.6 million people currently counted as jobless actually lost a job, and most of them are receiving unemployment benefits. The rest either quit their jobs voluntarily, or are just beginning their search, having re-entered or newly entered the labor force. The large majority (78%) remain unemployed for less than 15 weeks, and relatively few (11.6%) for more than 26 weeks. (Gene Epstein, Barrons 7-31) I say "buyer beware" whenever you confront those supposedly scary ratios purveyed by bubble theorists. Every one I've seen is grossly exaggerated, and some are simply wrong. For example, they like to calculate the upward trend in corporate debt as a percentage of GDP. But to begin with, that trend would look noticeably less steep if they used not GDP, but more appropriately, the gross domestic product of nonfinancial business. And the trendline would flatten out completely if they used not corporate debt, but the cost of servicing that debt, which makes much more sense. (Gene Epstein, Barrons 7-31) After the close of trading on Wednesday (its revenues came in at $578 million rather than a projected $585 million - a difference of 1%), Amazon reported its second-quarter results. With remarkable synchronicity, 6 of the 35 analysts who follow Amazon cut their ratings on the stock the next morning. What scared the analysts - just a guess - was Amazon's falling stock. That is not surprising. Academic research shows that equity analysts generally react to changes in stock prices rather than cause them. (Gretchen Morgenson, NYT 7-30) While the stock market treaded water in the first six months, the assets of exchange-traded funds nearly doubled, to $52.6 billion from $35.8 billion, according to Strategic Insight, a New York fund consulting firm. This year the number of ETF's have swelled to 59 offerings from 30. By way of comparison, mutual fund industry has $7 trillion in assets. A survey of industry experts by Financial Research forecasts that ETF assets will hit $500 billion to $1 trillion by 2007. (NYT 7-27) Take one of the new $20 bills, hold it face-side up and tilt it toward the light. See how the numeral "20" in the lower right-hand corner flips from green to black? That's the result of using an optical variable ink, says the Graphic Arts Technical Foundation, Pittsburgh, which suggests its members consider using such devices to meet a growing demand for secure documents. (WSJ 7-27) Of an estimated 6 million food and beverage vending machines that accept $5 bills and $10 bills in the United States, only 1 million of them thus far have been modified to recognize the redesigned bills. (AJC, 7-23) Health-care vouchers that let employees shop for benefit plans may become more common as employers seek ways to curb rising health-care costs, says Deloitte & Touche. (WSJ 7-27) A fresh solution for safeguarding US nuclear security comes from humor columnist Dave Barry. He suggests that the IRS "rewrite our nuclear secrets in the style of the federal tax code, so that any enemy who tried to read them would be driven insane." (WSJ 7-26) When asked, 57% of 1,040 Americans surveyed on behalf of American Express Incentive Services LLC say they'd rather be rewarded with $100 than a day off. (WSJ 7-25) Greenspan has never publicly 'fessed up to targeting the market with monetary policy. In private, his remarks have been as pointed as the needle he used to prick the market balloon. Indeed, recently released transcripts of Federal Open Market Committee meetings show that the Fed has been targeting equity prices since early 1994, when the Dow Jones Industrial Average stood around 3900. After the first increase in February 1994, Greenspan evidently was pleased. "I think we partially broke the back of an emerging speculation in equities," reads the transcript of the February 28, 1994, FOMC conference call. "We pricked that bubble [in the bond markets] as well. ... We also have created a degree of uncertainty; if we were looking at the emergence of speculative forces, which clearly were evident in very early stages, then I think we had a desirable effect." [The article by Robert Auerbach goes states several other examples.] (Barrons 7-24)The Value Line Arithmetic Index, a broad collection of 1,650 large, medium and small stocks, each of which counts equally in the gauge, has 9% rise so far this year, outpacing the technology-laced NASDAQ, which is just above break-even. Taken together with a new high also set last week by the NYSE Composite -- which includes all 3,000 or so Big Board names -- this underscores the more democratic tone the market has taken on this election year. The fortitude displayed by these plodding, wide-ranging measures is a sign of underlying health in a market whose front-and-center stars have been prone to take ill without notice. (Barrons 7-24) Companies have been migrating for decades, moving operations both within the United States and overseas for many reasons, including the search for cheaper labor, cheaper office space, lower employee turnover and lower housing costs. But since 1996, corporate migration within the country has soared, roughly doubling to more than 11,000 moves a year (from fewer than 5,200 occurrences annually from 1980 through 1994), according to Site Selection Magazine of Atlanta, the only organization to track the phenomenon. At the same time, the emphasis has shifted from factories to every type of service operation. As labor shortages and competition for workers drives up wages in one city, companies have shifted work or have expanded in another location. This movement helps to answer one of the big questions about the recent economy: How has the US managed to achieve its lowest unemployment rate since the 1960's and yet not experience as much upward pressure on wages as it has during past booms. (NYT 7-24) Just who held those 100 AT&T shares before you did? Investors may soon be able to find out. The SEC said it may propose a rule this week that would require brokers to disclose when they use shares from their own inventory to fill customer orders and when they route orders to other brokers for execution. Levitt has spoken out in favor of greater disclosure of order-routing and execution practices, which can put the interests of brokers and their customers in conflict. Orders matched internally by firms are not exposed to the full market, where they may attract better prices, and the same can be true when brokers sell orders to other firms for execution. (Bloomberg via NYT 7-23) Women represent 19% of all golfers but account for 36% of new duffers, says the National Golf Foundation. (WSJ 7-20) Peaches at a Westchester County, N.Y., Food Emporium bear little stickers with a Web site for instructions on ripening the fruit, prompting one shopper to complain: "You can't even buy a peach without the Internet." (WSJ 7-20) Tax-cut fever has broken out in Washington, and it's a key driver behind the 10% stock market rebound since late May. It's the new, new thing in economic policy. A pro-growth, pro-investor, pro-profits and pro-wealth creation tonic for the stock market. (Lawrence Kudlow, CNBC 7-18) Companies are expected to boost budgets for salary increases by about 4.5% next year, or at about the same level as this year, says a survey of 2,900 companies by WorldatWork, formerly the American Compensation Association. (WSJ 7-18) Drug-benefits costs for large employers are expected to jump 22.5% for employees and 23.4% for retirees over the next year, says a survey of 61 companies by Watson Wyatt Worldwide and the Washington Business Group on Health. Watson Wyatt says new drugs, price increases and a rise in use will fuel the increase. (WSJ 7-18) The National Federation of Independent Business index of small businesses for last month showed its weakest performance since October 1993, dropping to 97.9 from 100.5 (with 100 the baseline set in 1986). The NFIB, with 500,000 members, bases its index on 10 factors, seven of which fell in June, including earnings, hiring plans and capital-spending plans. Small businesses are considered a leading economic indicator. When a downturn first hits, they tend to have a tougher time than larger companies in raising capital, maintaining cashflow and increasing prices to combat slower demand. Wages, which are a bigger portion of small business costs, are up, too, inducing some firms to raise prices. A quarter of the businesses upped prices the past three months. On a seasonally adjusted basis, a net 19% increased prices, taking into account those that dropped their prices. That 19% is the highest in a decade. (WSJ 7-17) Internet's wizards are hard at work trying to computerize trust and turn it into a science. Using equations and databases, they're creating systems known as "reputation managers." Two examples: (1) Epinions.com is a site where people can read and write reviews. As you read the writeups, you tell the site which ones are helpful and which fellow members you trust. When you come back for more reviews, Epinions prioritizes them based on who has earned a good reputation with you. (2) The Google search engine ranks a Web page is based on how many other sites link to it. A vote from a site with a great reputation counts for more than a vote from a low-profile site. (WSJ 7-17) Looking out to mid-2001, we would say that growth outside the US is going to be stronger than inside. We've had the strong currency and we've been the engine of growth and have kept the rest of the world afloat. A huge group of the S&P has done really poorly as a result. American-based multinationals, food companies, cosmetic companies, huge segments of consumer staples have done awful because they derive much of their earnings overseas. The strong dollar has not been helpful to them. At the same time, the sales they did have were in slowing economies. I don't see a dollar crisis. But we could see an environment created whereby the positive earnings surprises come from the consumer cyclicals and staples that have downsized and restructured. You can wait a long time for huge companies to turn around. But what has been a negative could become a positive. (Susan Byrne, president and chief investment officer of Dallas-based Westwood Management; Barrons 7-17) In the 1970s, the number of people working as secretaries and clerks grew at a rate of nearly 3% a year. By the 1980s, as labor-saving devices in the form of faxes, voice mail, photocopiers and word processers were introduced, growth of this category of worker slowed to 2% a year and by 1999, there were about as many people employed as secretaries and clerks as there was in 1989, even though the economy was much bigger. But if the growth of employment had continued at the same rate as in the 1970s, as would have happened in the absence of the new information technology, then an additional eight million people would be working in these jobs who are now free to do other things. Now, that's productivity. (Gene Epstein, Barrons 7-17) A technical rally is usually caused by one of a handful of buying patterns used by professional traders to reconcile stock portfolios to some earlier short-term market movement. When the market drops quickly, as it did last spring, it creates a condition known as an oversold market. That environment sets the stage for a subsequent technical rally brought on by short-term forces of supply and demand. A fundamental rally results from a long-term trend, as in the belief that improvements in technology will increase worker productivity and keep companies profitable for the foreseeable future. (AJC 7-17) In 1999, half of the top 10 diversified domestic equity mutual funds were less than two years old, according to Morningstar. And in 1998, eight out of the top 10 funds weren't far beyond their first birthday. What makes new funds so special? First, young portfolios are blessed with a small asset base, which makes it easier to buy and sell stocks at a moment's notice. In addition, fund companies do everything they can, including giving funds a crack at hot initial public offerings, to make sure that fledgling funds succeed and attract plenty of money. (WSJ 7-16) The Williams Companies, founded in 1908 as an oil pipeline businessm has since the early 1990s used the rights of way from its extensive gas pipelines to create one of the nation's primary fiber optic networks and become a leading provider of broadband services for telecommunications companies like SBC Communications. Two of SBC's rivals, Sprint and Qwest Communications, were spawned by the Southern Pacific Railroad, which used its right of way to find a place in the new economy. (NYT 7-16) Social Security is not in some form of terminal crisis. It's a serious challenge but not a sinking ship. The problems are fixable with incremental changes in benefits, taxes and, eventually, borrowing. Social Security isn't going bankrupt. In 2037, Social Security's surplus (or "trust fund") will run dry, under current projections. But payroll taxes will still finance 72% of current Social Security benefits. Withdrawals from the trust fund are expected to start in 2015. We don't know for sure that the Social Security trust fund will be exhausted in 2037. That's a projection which assumes slower economic growth than we've averaged over the past 75 years. That's based on a projection of slower population growth. (Jane Bryant Quinn, Washington Post 7-16) The last recession was a decade ago. The next one is probably a lot closer. That means some folks will lose their jobs. What would you do if you were laid off? Maybe it's time to take a few precautions. Even if you are not yet 59, you can pull out your Roth contributions tax- and penalty-free at any time, which could come in handy if you lose your job. As balances have ballooned in 401(k) and other employer-sponsored retirement plans, many have borrowed from their accounts. But if you get laid off, those loans usually have to be repaid immediately. If you don't pony up the money, you will be hit with the double whammy of income taxes and the 10% tax penalty. Sound painful? Similarly, getting rid of credit-card debt should be a top financial priority. You might also want to set up a margin account at your brokerage firm, so you can borrow against the value of your investments. (Jonathan Clements, WSJ 7-16) Home Page Previous Factoid Top Sites |