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Getting allocated shares of an ipo is a source of pride. Buying a socially responsible mutual fund is a political statement. Investing in a hedge fund means we have joined the club. "Some rich people still shop for bargains, because it is part of their personality. For the same reason, they feel an affinity for value stocks. Meanwhile, buying growth stocks is the equivalent of going to the hottest new restaurant. These are people who happily pay full price to be part of the latest trend." Many investors aren't content simply to make money. We also want to boast about our victories. That helps explain the popularity of high-octane technology stocks.
Here is a sampling from the quiz.
1. A mutual fund's performance is best measured by:
2. Which type of investment has offered the best protection against inflation over long periods?
3. If a fund charges an expense ratio of 1% it means:
4. Common stocks always provide higher returns than bonds.
5. As an individual, the most you can contribute to an IRA each year is:
6. Dividends earned on municipal bonds are exempt from federal
income tax.
7. All else being equal, the lower a bond fund's average credit quality, the higher its yield.
8. The investment objective of an index mutual fund is to:
9. If interest rates declined, the price of a bond or bond fund generally would:
10. Dollar-cost averaging is: ANSWERS: 1. c; 2. c; 3. b; 4. b; 5. b; 6. a; 7. a; 8. a; 9. a; 10. c.
The number and size of initial public offerings waiting in the wings has ballooned since the spring, as the market has proved unwilling to absorb the supply. According to Thomson Financial Securities Data, some 280 companies are awaiting their debuts. These companies, mostly technology concerns, hope to raise around $36 billion from investors by the end of the year. That is about the same amount raised in initial public offerings in all of 1998. Another considerable source of supply is IPO lockup restriction epirations. Insiders cannot sell their shares until about six months after a public offering. Fred Hickey, editor of The High-Tech Strategist, believes that when huge numbers of lockups expire, Nasdaq struggles. In May, according to IPOlockup.com., insiders at 63 companies were free to sell 2.7 billion shares. Nasdaq fell 12% that month. In June, the shares available for sale dwindled to 1.3 billion shares, and the Nasdaq rose 17%. Now the lull is over. By the end of the month, some 1.7 billion shares issued by 53 companies will have been unlocked. And in September, 1.8 billion shares in 45 companies will be free to trade for the first time. October will have only about half that level. Hickey also points out that there would be enormous stock and bond offerings by European telecommunications companies looking for funds to pay for spectrum technology licenses they are buying in government auctions.
The most popular way to run a market neutral fund is to try to make money wagering on shares the managers expect to rise and stocks they bet will tumble. The value of the stocks they are long is equal to the value of those they are short. The biggest problem is that managers have twice the opportunity to mess up, and few managers are trained in intentionally picking losers. `Shorting is an art form that not many people have mastered,'' said Kinnel. The funds also tend to have high fees because of trading costs associated with keeping the value of the longs and shorts equal in the portfolio.
In a new paper, economists Maurice Obstfeld of UC-Berkeley and Kenneth Rogoff of Harvard warn that America's current-account bubble will inevitably deflate, causing the dollar to lose between 12% and 45% of its value. The larger figure is possible if a curtailment of capital inflows forces the current account rapidly into balance in an Asian-style crisis. A 12% drop may occur even if there's a gradual, orderly contraction in the current-account gap. Here's where the 2000 elections come in. If investors in Tokyo, Frankfurt and Sao Paulo think Gore or Bush will make major changes in US economic policy, they have piles of dollar-denominated assets to sell, which would be felt first in the bond markets. Notes Jensen of Bridgewater Associates: 'These holdings are so big and so much larger than US assets abroad that they are a long-term risk to US financial markets.' Related: Janet Stewart, Chic. Trib 8-20 The trade deficit widened to a record $30.62 billion in June. The current account deficit; a broad measure that includes foreign investors' stock purchases; is expected to account for more than 4.3% of GDP this year. That's a record, and well above the levels of the '80s and early '90s. Eighty percent of the global surplus savings today is going into the United States, says Patrick Jilek (economist with Credit Suisse First Boston), up from roughly 50% in the mid-1990s. Put another way, the nation that contributes 30% of global GDP is using 80% of the world's savings.
Why? The actively managed advantage seems to boil down to the quality of information available on listed companies, and how intelligently that information is evaluated. Says Robert Conlon, (chief investment officer at Investec Asset Management Ltd. in Hong Kong) 'In the US, when you think company A is better than company B, when you look at the share prices, company A is always more expensive than company B.' That doesn't hold true as often in Asia.
Those are among the conclusions of a new stock volatility study by Prof. John Campbell of MIT; Martin Lettau, economist at the NY FRB; Prof. Burton Malkiel of Princeton; and Prof. Yexiao Xu of UT-Dallas. Why, then, do the recent gyrations seem so severe? One possible explanation is in another of the researchers' findings: that even though the overall market may be no more volatile than in the past, the average stock is much more so. In fact, the volatility of the typical stock in the 1990's was about twice as high as in the early 1960's. That is because the correlation between individual stocks' gyrations has fallen - in other words, more stocks are rising sharply at the same time that other stocks plunge. This combination of higher volatility and reduced correlation has profound implications for how many stocks an investor needs in a portfolio in order to achieve adequate diversification. For years, statisticians have argued that a portfolio of about 20 stocks, in a variety of industries, is large enough to diversify away 90% of the volatility associated with owning a single stock. According to the new study, given that the average stock's volatility is twice as high as it was during the 60's and 70's, the number of stocks needed to achieve such diversification is now closer to 50. What accounts for the average stock's much-increased volatility? The authors point to two factors. The first is the trend over the last decade away from conglomerates and toward companies whose businesses are more focused. A related factor is that a greater number of younger and smaller companies are publicly traded today. Because investors feel far less certain about the long-term prospects of these companies, their stock prices are much more sensitive to good or bad news than are those of larger, more established concerns.
In this kind of scenario, when prices fluctuate from economic report to report, `the path of least resistance for Treasury yields is higher, because investors have already factored in the good news,' said Kevin Flanagan, an economist at Morgan Stanley Dean Witter. Treasuries have rallied furiously in the past three months, with the the 10-year yield dropping almost 80 basis points and the two-year yield falling 64 basis points. Many economists say that's a precarious position with the economy showing signs of continued strength. Treasuries are priced for the Fed to leave rates unchanged, which `means we are likely to see them back up if growth stays strong,'' said James 0'Sullivan, US economist at JP Morgan. Related: Lawrence Kudlow, CNBC 8-22 An interesting article by Boston economist Richard Salsman assesses the outlook for future rate hikes and concludes that rising rates are possible but not probable. 'Financial markets themselves provide far better objective forecasts of what the Fed will do -- not just next week, but in the next half year and in the coming year.' Salsman looks at the fed funds futures market as a forecaster of future fed policy, and he finds only a 28-percent chance of a rate hike of 25 basis points at the Fed's November 15 meeting, down from a 68-percent rate-hiking chance back in mid-July. For the December 19 meeting, the futures market is currently saying there's only a 36-percent chance of a rate hike of 25 basis points, down from an 84-percent probability last July. In other words, the odds of future Fed tightening have diminished from about four chances in five to only one chance in three. Salsman also points to the spread between 3-month Treasury bills and the fed funds rate as an indicator of future Fed policy. He finds that over the past 45 years that spread has averaged 38 basis points. When the spread widens significantly, it implies a future easing in Fed policy. However, a narrowing of the spread (especially if the T-bill rate is rising) implies policy tightening. Assessing today's picture, where the spread is a relatively narrow 24 basis points and the T-bill rate has been rising of late, Fed tightening is still possible. But since the spread has not turned negative (T-bill rates above fed funds), 'the chances of further, severe rate hikes over the coming year are quite slim.' Related: Jonh Lonski, Moodys 8-21 Price inflation appears to be holding steady, which weighs against a further decline by Treasury yields. July's 0.2% monthly increase was the sixth such gain by the core CPI through the first seven months of 2000. July's annual rate of core CPI inflation was 2.4%, matching its average of the last five years. Barring either slower core CPI inflation or a worsening of economic prospects, Treasury yields may have largely exhausted their downside potential. About 3.4 percentage points now separate the recent 5.76% 10-year Treasury yield from July's 2.4% annual rate of core CPI inflation. This version of the real 10-year Treasury yield lags all of its previous quarterly averages going back to the 2.8% of 1999's first quarter. Resistance to lower Treasury yields could mount given how the latest real 10-year Treasury yield falls beneath its 15-year average of 3.7%. However, the long-term average of real Treasury yields is drawn from a history that does not resemble current market conditions. The now stepped-up retirement of US government debt has lowered Treasury yields relative to inflation expectations, as well as relative to all other bond yields. All else the same, Treasuries have generally been a buy at real yields above 4% and a sell at real yields below 3%. Since late 1985, the real 10-year Treasury yield averaged at least 4.2% in 46 months. The 10-year Treasury yield would be lower six months hence for 70% of those 46 instances and fall (on average for all 46 months) by 55 basis points. Regarding a sample that starts in late 1985, for 49% of the 77 months showing a real 10-year Treasury yield no greater than 3.5%, the 10-year Treasury yield would be higher six-months hence and rise (on average for all 77 months) by 16 basis points. In 22 of the 33 months since late 1985 for which the real 10-year Treasury yield was no greater than 3%, the 10-year Treasury yield would be higher six-months hence and climb (on average for all 33 months) by 43 basis points.
The signs that growth is again on the rise are still limited, but it increasingly appears that the Fed's efforts to apply the brakes gently have only slowed the economic engine a bit, and that the engine's built-in momentum is again accelerating. Mr. Prince thinks the economy is now growing at an annual rate of about 4%, down from last winter but still above the gains in productivity. Mr. Prince says there have been three big sources of economic stimulus from 1996 to 1999. The Fed was one, but it was the least important. The others were the big increase in capital gains in stocks and the similar increase in such gains from rising house prices. Some of those capital gains are spent, expanding the economy for everyone. Eventually, he thinks, if the Fed wants to slow the economy, it will have to 'take away some of those capital gains in housing and stocks.' To fight inflation, the Fed will have to slow the economy. And the lesson of 2000 may be that to do that it will have to apply far more pain than it already has. Next winter may not be as happy as this summer has been. Related: Jonh Lonski, Moodys 8-21 Household credit worth remains adequate for the purpose of assuring that the latest slide by fixed rate mortgage yields will spur domestic expenditures. Moody's just announced that the second-quarter's delinquency and loss rates on consumer cards were the lowest in nearly four years. June was the 31st consecutive month for which the consumer credit card delinquency rate fell year-to-year.
'There is not enough difference to raise concern, but there is enough to raise an eyebrow,' says Chuck Hill, research director. Typically, about 370 firms each quarter indicate that the estimates have been too high, says First Call. But in the first quarter of this year, only 225 companies indicated a cooler outlook. The total in the second quarter grew a bit, to 314 companies. Still, First Call notes analysts haven't trimmed estimates beyond normal. Analysts will keep a close eye on consumer cyclical stocks this quarter and next as a market bellwether.
The decline in buyback announcements has surprised market watchers. 'The one working hypothesis we're going with is that companies think their future free cash flow is going to slump,' says Charles Biderman, chief executive officer at TrimTabs.com. He suspects buybacks are slowing because corporate treasurers are girding for leaner times. In addition, higher corporate borrowing rates and a sketchy market for new equity offerings may be encouraging companies to conserve cash. There are more benign explanations for why buyback activity might be ebbing. Buyback announcements and actual repurchase totals don't always match up. Typically, companies announce programs that unfold over several months or years. So the slowdown over the past few months may simply reflect where companies are in their repurchase plans. Another possibility involves compensation trends. More employees are now requesting cash compensation, as opposed to stock options. No matter its cause, a decline in buybacks could hurt the stock market if it proves to be long-running. Data show a very strong correlation between repurchase activity and share prices. 'There appears to be a correlation between buybacks and the showing by the S&P. As companies cut back on equity buyback activity, stock price performance tends to sag,' says John Lonski, chief economist at Moody's. A temporary buyback slump, however, actually might prove positive over the long run, Lonski says. Forestalling repurchases improves corporate creditworthiness and builds a fiscal cushion to protect against a future downturn. So if that downturn is coming soon, companies that plan for it should whether the storm better and see less effect on their shares. 'When you think about it, maybe investors might take some comfort in the fact that the equity market has held up fairly well despite a reduction in buyback activity,' Lonski says.
What might be called the "Harry Potter divide" - the depressed level of academic engagement in poor households when school is out - is responsible for a major portion of the gap in achievement between low- and high-income students. Three sociologists (Doris Entwisle, Karl Alexander and Linda Olson), of Johns Hopkins University, have been studying a random sample of 800 Baltimore public school students since they entered first grade in 1982. At the beginning and end of each school year, students took the California Achievement Test. The researchers examined gains and losses in test scores over the school year and summer break. Students were classified into groups based on their parents' socioeconomic status, which depended on education, occupation and income. Children from families of high and low socioeconomic status made equivalent gains on math and reading exams during the school year. But the achievement level of children from low-income families either fell or stagnated during the summer, while children from higher income families continued to make progress. The entire achievement gap between children from low- and high-income families arises from periods when school is out and the period before children enroll in school. This pattern, which also holds in other studies, suggests public schools are doing more to help poor children overcome the obstacles they face in their homes and neighborhoods than is commonly appreciated.
Just the Facts A survey shows revenues jumped 11.4% in Q2 from last year's Q2. That was by far the fastest growth for any quarter in the past 10 years, says the report by the fiscal-studies program of the Nelson A. Rockefeller Institute of Government. Nationally, personal-income-tax revenues leaped 18.8% in the quarter. Sales-tax revenues rose 7.3%, and corporate-income-tax revenues grew 4.2%. States have had the seventh straight year of cutting taxes, with cuts totaling $5.6 billion. (WSJ 8-30) About 53% of the employed labor force lacked a pension plan in 1998, down from 58% 10 years ago, says the GAO. Most of those without pensions are young, work part time, are low income or work for small firms. (WSJ 8-29) About 56% of workers don't have Internet access at work, according to a survey of 1,000 people conducted for online-benefits provider Employeesavings.com. Also, 13% have access at work but never use it. (WSJ 8-29) The worst of the euro's declines may be yet to come. That's the finding of a global investor survey conducted by Merrill Lynch. The poll, which tracks currency and bond holdings in the current quarter, indicates that overweight positions in the euro rose to their highest level since Q4-99. Problem is, the euro has moved against investors for seven straight quarters now, and they're getting antsy. And the fact that many global investors are carrying too many euros -- and may have to unload them -- means the currency is on shaky footing. (William Pesek, Barrons 8-28) Most investors prefer to sell their positions in dribs and drabs with the thouth that selling slowly reduces risk. But it just isn't so. You continue to have stock exposure and could get caught in a stock-market downdraft. So why sell slowly? Instead of reducing risk, what they are really doing is minimizing regret. Investors sell their holdings piecemeal because they hate the idea of unloading an entire position, only to see the shares take off. (William Clements, WSJ 8-27) It is popular to sing the praises of independent boards these days, but when it comes to the bottom line, bigger is better, says research by Dan Dalton, dean of Indiana University's Kelley School of Business, and Catherine Daily, a professor there. They reviewed 27 studies on board size done over 40 years, covering 20,620 firms. Boards ranged from about six to 22 directors, and the team concluded there is a positive link between large boards and performance. The benefit of a big board may be a greater ability to obtain critical resources ranging from raw materials to refined information. Still, the academics don't recommend building a 30-member board, but they say there are good reasons to opt for nine members instead of six, or for 12 rather than nine. (WSJ 8-24) Countless studies show that owning four or more funds in the same asset class creates a "closet index fund," whereby the aggregate performance of those funds is the return of the benchmark, but at a higher-than-index-fund cost. (Charles Jaffe, Boston globe 8-23) About 35% of the nation's prisoners are in some kind of work program. (WSJ 8-22) Although less than 3% of the economy, almost 28% of the new jobs were created by "new economy" companies in 1999, according to estimates developed by UT Austin. (Donald Ratajczak, AJC 8-20) Investments in Q2 by venture capitalists, according to the Money Tree survey conducted by PricewaterhouseCoopers, were at a record $19.6 billion on a record 1,432 deals during the spring. (Donald Ratajczak, AJC 8-20) Your stock fund may be having a miserable year, but here's some comfort: Your mutual fund company is really raking in the cash. There. Feel better now? The Lipper Management Company Index, which measures 12 of the largest fund-company stocks, has soared 50.5% this year. In contrast, the average stock mutual fund is up just 4%. (John Waggoner, USA Today 8-18) The Justice Department and eBay move to halt apparently tongue-in-cheek offers by citizens to auction their votes to the highest bidder, just as they claim politicians are doing. (WSJ 8-18) Most states fail to provide regular individual retirement accounts and Roth IRAs with the kind of ironclad protection from creditors that is afforded pension benefits and 401(k) plans. A state-by-state listing of IRA protections in bankruptcy can be found at the Investment Company Institute Web site at http://www.ici.org/retirement/99_state_ira_bnkrptcy.html. [Note: Texas does protect Roth and regular IRA's, but not educational IRA's.] (LA Times 8-18) In just the 12 months ended March 31, foreigners bought $2.8 trillion worth of US shares, up 65% from the previous 12 months, the U.S. Treasury says. After accounting for stock sales, net foreign purchases totaled $159.6 billion during the period. About 85% of that was from Europe. (WSJ 8-16) In the US today there are 3.05 people working for every retiree. But in the year 2010, it's projected there will be only 2.05 workers for every retiree. We're actually better off than many countries. In Europe, there are only 1.75 workers per retiree. In Japan, only 1.4. (Jim Barlow, Hou. Chronicle 8-14) Home Page Previous Factoid Top Sites |