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'When you are feeling good about the market, you should be worrying about what could go wrong,'' says Richard Geist, director of the Congress on the Psychology of Investing and publisher of Strategic Insight newsletter. 'People who worry that they will miss out on the next move up tend to have a pattern of mistakes, all of which come back to haunt them later on.' Those mistakes include: Not making asset allocation a factor in the buying process At any given time, certain market sectors can be hot. But when the market is bottoming out, investors who have suffered losses are particularly tempted to chase whatever looks good. The result is a portfolio that chases current performance numbers, but that most likely is out of line with long-term performance objectives. Failure to diversify Many investors were not sufficiently diversified when the market peaked in 2000, with the common tendency being an overweighting toward big domestic stocks and technology issues. Having ridden those issues down, some investors will be reluctant to change strategies. That completely ignores everything this whole downturn taught us about diversification. Insufficient research Any time an investor rushes to get in on a rally, they are focusing more on the immediate future than on the long-term. During the late 1990s, the rising tide of the market did lift virtually all boats, making it possible to invest in almost any respectable stock or fund and come out ahead. The new rising tide - if indeed that's what we're seeing - will be much more selective. Unreasonable expectations Prior to Sept. 11, virtually every study of investor expectations showed that a long-term return of 14 to 16 percent was what most individuals were counting on.In other words, people are thinking they can earn more than they are likely to. This has two impacts. Investors are easily dissatisfied with what they do own, even when it performs reasonably well. And they don't save enough, because they believe the market will provide such big returns that it ''saves'' for them. Overlooking how your time horizon mixes with market volatility If you are a thirty-something investor, the recent market downturn most likely presented the proverbial buying opportunity. If you are a 60-something investor, it may have changed how you live out the rest of your life.
Advertisers often end up paying three times as much to reach younger viewers as older ones, in part because young adults watch less than their elders, making them harder to reach, according to media buyers and advertisers. Many advertisers also regard younger viewers as trendsetters and early adopters. They believe consumers choose their brand allegiances early and stick with them throughout their lives, rarely changing. "There is no evidence I have been able to see that supports the myth that getting people while they're still uncertain about the permanent use of products and trade names is going to last a lifetime," said Lawrence Grossman, who was at the helm of NBC News from 1984 to 1988. ProMatura Group, a research and consulting firm specializing in older consumers, found that 78 percent of Americans between 56 and 90 years old are in fact "likely" or "very likely" to try new products - flying in the face of conventional marketing wisdom. Older buyers also tend to have more money to spend. The nation's peak spenders are those 45 to 54 years old, a group that spent $46,160 per household in 2000, according to U.S. Bureau of Labor Statistics. Coveted youthful consumers - those under 25 - spent $22,543 per household. "There's a lot more spending power among 50-pluses, there's no question about it," said Tim Spengler, vice president for national broadcasting at Initiative Media, a large media-buying firm. "But it doesn't matter how much money you've got; you're not going to drink a lot of beer at 55. The same is true of certain car models and many movies." A recent consumer profile by Miller Brewing showed that 53% of all beer is consumed by 21-to-34-year-olds, while those over 45 accounted for 28% of the beer market. That's significant because the beer industry is a big advertiser on television -- beermakers spend $346 million on network and cable ads in 2001. Movie advertising is a big revenue generator for network and cable broadcasters. Media buyers like to point out that moviegoers are between 12 and 24 years old makes up 42% of the movie audience, according to the Motion Picture Association of America. But the second-largest movie audience - 31% - is made up of those over 40.
In the Treasury market, the yield on the benchmark 10-year note soared to 5.32% Friday from 4.98% one week earlier, while the 30-year-bond yield jumped to 5.71% from 5.50% a week earlier -- levels not seen since the week of July 9. The two-year note, the maturity most sensitive to Fed rate expectations, jumped to 3.55% Friday from 3.17% a week earlier, the highest since the week of September 4. The May fed-funds futures are pricing about a 70% chance of a 25 basis-point (one-quarter percentage point) hike at the May 7 FOMC meeting. And the July fed-funds futures are fully pricing in a 25-basis-point rate hike by the FOMC's June 25-26 meeting, and a 75% chance of another 25-basis-point tightening at that time.
From 1998 to 2001, Mr. Galbraith found that share growth owing to options and acquisitions averaged 16.5% annually at telecommunications concerns, almost 8% at utility companies, and by 5.7% at information technology companies. Although stock issuance has started to slow, many technology companies remain swollen with shares among which company earnings must be divvied. From 1997 to 2001, for example, Cisco's shares more than doubled, to 7.3 billion from 3.1 billion. At Qwest Communications, where shares rose to 1.66 billion last year from 862 million in 1998. Stock splits were a major force behind the big increase in share counts at major companies. According to Mr. Galbraith, there were almost 400 stock splits at S&P 500 companies from 1997 to 1999. For years, splits had been a powerful signal of future gains in a stock. From 1995 to 1999, shares that had split gained more than 40% in the subsequent 12 months. But in 2000, that trend was reversed, and companies averaged a decline of 26% the year after their split. Option grants are another culprit in share inflation. In 2000, according to Pearl Meyer & Partners, a compensation consulting firm, more than half the nation's 200 biggest companies granted their chief executives what can only be called obscene option packages, those worth $10 million or more. Nearly 60% of chief executive pay that year was delivered through option grants, Pearl Meyer said. More Stats Gretchen Morgenson, NY Times 3-31 In the last decade, options have grown from 5% of shares outstanding at major companies to 15%. Martin Sullivan, economic correspondent at Tax Notes, recently found that because of stock options, United States companies cut their tax bills by an estimated $56.4 billion in 2000. Two years earlier, options reduced corporations' taxes by $27.6 billion. Thankfully, officials at TIAA-CREF, the big institutional investor, have taken up the fight. After perusing options programs at large companies, TIAA-CREF identified 13 companies with programs it considered significantly dilutive to shareholders, if all authorized shares are granted. It has asked them to put their options programs to shareholder votes in the future. Peter Clapman, chief counsel at TIAA-CREF, said that four companies had agreed to its request and that five more might do so. But four companies (amoung them Adobe Systems) declined to put their options plans to a vote by shareholders. "The recent movement by some companies to deny shareholders their proper role in approving such plans is a substantial blow to shareholder rights" Chapman has said. A second blow to these rights has come from the SEC, which backed Adobe in its shareholder brush-off. In a Feb. 1 letter, the S.E.C.'s division of corporation finance told the company that it concurred with Adobe's conclusion that option plans were compensation matters requiring no shareholder approval and said it would not recommend enforcement action if Adobe failed to put its option plan to a shareholder vote. TIAA-CREF will appeal the decision.
But beware, that "E" part of the P/E ratio is figured in different ways. Usually (as above) it's the earnings of the past four quarters. Sometimes it's the earnings that are estimated for the current calendar year. The Value Line has its own unique method: adding the actual earnings of the past six months to the estimated earnings for the next six months. This technique last month produced a P/E for the market of 20.1. That compares with just 18.0 at the last market top (May 2001) and 10.6 at the last market bottom (October 1987). My own view is that P/Es have a role in investing, but you shouldn't make a fetish of them. High P/Es and other valuation indicators are, emphatically, not predictors of market declines, as two economists at UCLA, Amit Goyal and Ivo Welch, have shown in an academic paper. In fact, Robert Hall of Stanford found that high P/E ratios tend to precede periods of unusually high earnings growth, and low P/E ratios foreshadow sluggish earnings. In the early 1990s, P/E ratios were double the average of the preceding decade. But reported earnings during the 1990s soared, and so did stock prices. On July 1, 1991, the Dow stood at 2907, which represented a P/E of 22. That certainly would have scared off the fetishists. For the rest of the decade, P/Es averaged 25 and never got below the long-term average of 14. Yet the Dow kept rising. It ended 1999 at 11,497. Investors in the 30 boring Dow stocks (not racy high-techs) more than quadrupled their money, including dividends. P/E ratios have remained high - indeed, they've gone higher. Yes, stock prices have dropped - because "E" has dropped. Earnings in this recession have fallen more sharply than in any economic slowdown in at least 50 years. But "E" will recover. And if P/Es remain in the mid-20 range, then stock prices will recover, too. Need more reassurance? Take the normalized P/E ratio of 25 and invert it; that is, turn it into an E/P ratio. It becomes 1/25, or 4%. That's the "earnings yield," or the percentage of your investment that the company produces in earnings - that is, your share of the annual profits. Now compare the 4% earnings yield with the yield on a 10-year U.S. Treasury bond, which recently was 5%. The Treasury bond wins, right? Not at all. Say you invest $1,000 in both the stock and the bond. The first year, the stock earns $40, but assume that earnings rise at a rate of 10 percent annually. After 10 years, thanks to compounding, the stock will be earning $104. The bond will still be earning $50. (Even at a sluggish growth rate of 6%, the stock's earnings rise to $72.) The stock is probably more risky than the bond, but if you own a diversified portfolio of stocks or a mutual fund, the difference in risk could be tiny. A high P/E ratio for the market as a whole is not a cause for alarm. If you believe that the U.S. economy will continue growing as it has - at about 3% annually - then P/E ratios at current levels, or higher, are justified.
Pharmaceutical companies require enormous capital to finance the research and clinical trials that go into drug development. A relatively low stock price can force even the strongest firms to take short-term actions that lead to long-term regrets. Merck today offers a particularly clear example of the crosscurrents of modern medicine and modern capital markets. Merck Chairman Raymond Gilmartin has told investment analysts that after a decade in which Merck's earnings growth averaged 16% a year, profit in 2002 would be flat with last year. Merck has half a dozen of its most important drugs going off patent, including the high blood pressure medicine Mevacor and the ulcer drug Prilosec. Once patents expire, generic, cheaper versions of the drugs hit the market and Merck makes little profit from them. Merck's problem is that for the next few years, it has no major drugs coming along to replace the others. A drug it counted on, the arthritis remedy Vioxx, is not delivering the sales anticipated and has run into problems involving side effects. Merck this year will spend $2.9 billion on R&D, a 16% increase from 2001, and $2.5 billion more on development of laboratories and other facilities for research. A major part of Merck's research is pursuing brain and nervous-system medicines, including drugs to alleviate the effects of Alzheimer's disease, and new forms of tranquilizing and antidepressant drugs. The company promises to introduce 11 major new drugs by 2006. And Merck may make a move or two to bolster its stock price. The company announced recently that it would sell part of its Medco division, which manages prescription costs for hospitals, in a public offering and spin the rest of the division off to shareholders. The need to balance the demands of science and finance is critical. "This is a high-risk, high-growth industry and so investors demand high returns," says analyst Bob Kirby of Edward Jones. Successful companies such as Merck and Pfizer typically return 30% to 40% a year on capital invested, among the highest rates of profit in U.S. industry. In recent decades, drug firms have earned those high rates of return by developing drugs to alleviate heart disease, multiple sclerosis, Parkinson's disease and other illnesses. But financial markets are impatient taskmasters and react with alarm at any sign of faltering in the rates of financial returns or scientific discovery. That's why Merck is scrambling to quell today's doubts and fulfill tomorrow's promises. Commercial Paper Outstanding (in billions of dollars) Federal Reserve Bank 3-7-02
The chart above shows the dramatic fall of domestic non-financial commercial paper. See related article: The Age of Easy Money Ends, which is a collection of articles discussing 'tight money' conditions despite the low Fed Funds rate. The conditions in the CP market may slow the Fed in making any attempt to raise rates in 2002. CP Spreads Jonathan Fuerbringer, NY Times 3-10 The current spread between rates paid on the highest-rated commercial paper and those for the second tier shows that there is concern about the economic outlook. For 30-day commercial paper, the spread is now 40 basis points, or four-tenths of a percentage point. The five-year average is 30 basis points, according to Standard & Poor's. More on CP Gregory Zuckerman, WSJ 3-28 Increasingly skittish about corporate-accounting practices, the ultra-conservative investors who control the commercial-paper market have cut back on a key source of liquidity. Economists worry that the troubles could help put a lid on capital spending, as companies scramble to save cash - a move that could delay or even reverse the recovery. Last month, amid investor concerns about its accounting, Tyco had to draw on a backup line of credit from its banks to come up with cash it needed. The move to replace cheap commercial paper with bank line will cost Tyco about $400 million in additional after-tax, annual borrowing expenses, slicing about five cents per share from first-quarter earnings, which were expected to come in at 80 cents per share. Sprint had been relying on the commercial-paper market for $3 billion of its day-to-day expenses. Now it can not get commercial-paper investors to buy its debt. The cash crunch sent Sprint shares tumbling, and had credit-rating agencies sending warnings. The result: Sprint was forced to take on more expensive debt, including a $1 billion new loan and $5 billion in long-term bonds, costing the company almost $200 million in additional borrowing costs each year, according to analysts. Sprint is now slashing its capital spending by $400 million. Pacific Investment Management Co., the $250 billion fund company known in the bond market for its aggressive bets, has slashed its holdings of lower-tier commercial paper to just 4% of its portfolio, down from 25% at the end of 1999. Last week PIMCO declared it would not longer by commercial paper from GE. Earlier this month, GE's GE Capital unit sold $11 billion of long-term bonds with higher rates than it was paying on its commercial paper. CreditSights, a bond-analysis firm, estimates that the shift will cost GE over $100 million in additional annual interest payments. Now even first-tier companies are worried that the market just might not be there when they need it, even if they're having no trouble placing the debt right now. Verizon Communications, a top-rated company that's having no problems selling $12.8 billion in commercial paper, nevertheless is preparing for the worst. Verizon has sold $5 billion of longer-term debt in recent months, even though it had to pay higher rates that will cost the company about $100 million in additional annual interest. And the company is cutting capital spending to between $15 billion and $16 billion this year from $17.4 billion last year. Since December 2000, the overall value of commercial paper issued in the U.S. has shrunk 12%, to $1.4 trillion. That's a sharp reversal from previous annual growth rates of around 19%. The cost is going up, too. Second-tier companies, which account for around $159 billion of borrowing, are paying annual rates of 2.24% to sell one-month debt, up from nearly 2% in late January. That's a relatively high spread compared with the 1.79% that top-rated companies are charged to borrow money for one month. Top-tier rates have also gone up some, from 1.6% in January. Debt Outstanding by Sector (in billions of dollars) Federal Reserve Bank 3-7-02
CenterPoint Properties Trust told analysts in a conference call last month that the company had a loss of 76 cents a share for Q4 funds from operations, due to a $41.5 million charge primarily for the write-down of an office building left vacant by a company that filed for bankruptcy-court protection. Yet if you looked at Thomson Financial/First Call's statistics, CenterPoint met analysts' estimates of 98 cents a share. That's because the majority of analysts who reported to the firm chose to exclude the charge, even though they were instructed to include it. The National Association of Real Estate Investment Trusts recommends that REITs include recurring and nonrecurring charges in their main funds-from-operations figure. But some analysts argue that because the charges aren't a continuing part of the business, they shouldn't be included. Equity Office Properties Trust encouraged analysts to focus on the Q-4 number that included a charge, in accordance with Nareit, even though those numbers made their results look worse. Most analysts, however, focused on the number without the charge. EOP and CarrAmerica each reported write-offs for Q4 on their investments in HQ Global Workplaces. Thomson Financial/First Call listed Equity Office's funds from operations as being in line with estimates at 82 cents a share, and CarrAmerica's at 85 cents, a penny above estimates. Including the charges, their results would have been 55 cents and 14 cents, respectively. Related article: January REIT Update Portfolio Study James Glassman, Washington Post 3-31 A study last year by Ibbotson Associates examined two portfolios over the period 1972 to 2000. The first was allocated this way: 50 percent stocks, 40 percent bonds and 10 percent short-term Treasury bills. The second: 40 percent stocks, 30 percent bonds, 20 percent REITs and 10 percent T-bills. Thanks to low correlation, the second portfolio was less risky than the first -- and it returned a little more. It's clear that every portfolio could use REITs; they make a good substitute for both stocks and bonds. Dallas Office Stat Steve Brown, Dallas Morning News 3-29 At the end of the first quarter, only about 1.4 million square feet of office buildings were still under construction in the Dallas area, according to the numbers just released from Cushman & Wakefield Inc. That's down from almost 6.5 million square feet of development under way this time a year ago. The recent peak was 11.2 million square feet under construction in 1998. Industrial Building Sector Steve Brown, Dallas Morning News 3-24 Unlike the Dallas office market, which lost tenants in 2001, the industrial building sector was still gaining ground. But the amount of new construction at the start of the year far outstripped demand, according to a survey by Cushman & Wakefield Inc. More than 3.5 million square feet of new industrial space was in the development pipeline at the end of 2001, according to the brokerage company report. Compared with the new building, the demand for industrial space last year was woefully inadequate. Only about 495,000 square feet of net leasing was recorded in the Dallas area. Industrial Building Sector Part 2 Bob Howard, LA Times 3-26 Small businesses are buying industrial buildings in Los Angeles and Orange counties faster than developers can finish them, creating a hot spot in an otherwise tepid market for industrial space. The buying binge is primarily the result of low interest rates, prompting scores of small businesses that rented their industrial space to buy buildings in the 5,000-to-30,000-square-foot range. There can be tax benefits for owners as well. Developers have built and sold nearly 150 such small industrial buildings in Orange County and 100 in Los Angeles County in the last two years, selling most of them before or soon after construction was completed. FDIC Survey Bloomberg via Boston Globe 3-21 The slowdown in the US commercial real estate market worsened in the second half of 2001, as vacancy rates rose in office buildings, warehouses and other properties, the Federal Deposit Insurance Corp. said. The FDIC has conducted its semiannual real estate survey since 1991, when many economists blamed real estate for the recession. It polls 278 senior examiners and asset managers at federal bank and thrift regulatory agencies on conditions in their real estate markets. In the office sector, 66% of the respondents said the market had worsened, compared with 48% in the previous survey. For retail properties, 55% said conditions worsened, compared with 34%, and 55% said industrial properties were worse off, up from 26%. On the residential side, 41% said apartment conditions were worse off, compared with 21% in the earlier survey, and 41% said single-family housing had weakened, up from 27%. Boston Survey Thomas Palmer, Boston Globe 3-20 Its first-quarter 2002 numbers show 7% of the 55 million sq ft of space in downtown Boston is empty - up from 5.9% at the end of last year, and 2 percent at the end of 2000, according to Cushman & Wakefield, a real estate services firm. Relatively cheap subleases helped to keep the overall vacancy rate about the same as it was last year, said Gilbert Dailey, a director at Cushman & Wakefield. ''There was a significant discount in sublease space over direct space,'' he said, ''anywhere from 20 to 50 percent.'' Apartment REITS Stats Ray Smith, WSJ 3-6 A study expected to be released next Tuesday by the National Multi Housing Council shows that the 50 largest apartment owners increased their apartment holdings by 6% in 2001, from a 3% rise in 2000. For the year, they collectively owned 2.77 million apartment units, about 17% of the total national stock, up from an 11% share 10 years ago for the top 50. Apartment REITs hold two of the top three places in the council's top-50 list. Apartment Investment & Management Co., Denver, topped the list with 251,201 units, while Equity Residential Properties Trust fell to third place from second, with 226,314 units. EQR Ray Smith, WSJ 3-6 Citing uncertainty in the economy, Equity Residential further lowered 2002 earnings expectations recently, and said it would build only half the apartment units it planned for the year. Apartment Oversupply Ray Smith, WSJ 3-1 Sam Zell, chairman of EQR, blasted Fannie Mae and Freddie Mac for "very aggressive overlending" in the multifamily sector. Construction of apartment buildings has remained relatively strong despite weakening demand for apartment housing, and industry analysts and developers believe a glut of apartments is in the offing. Some are blaming expected oversupply on a more aggressive effort by Fannie Mae and Freddie Mac to finance buyers of apartment buildings. Fannie Mae and Freddie Mac are the two biggest providers of financing for acquisitions in the multifamily sector. Last year, Freddie Mac invested $12.3 billion in the multifamily sector. Fannie Mae of Washington nearly doubled its investment in multifamily rental housing in 2001, providing $22.8 billion. By financing loans for buyers, Fannie Mae and Freddie Mac "have made it more advantageous for builders to go out there and develop," said Robert Stevenson, an apartment analyst at Morgan Stanley. In a worst-case scenario, "what you could eventually see if the supply problem got bad enough, is that some of these properties would be given back to lenders in foreclosures, like in the '90s," he said. Reis Inc., a research firm based in New York, expects the number of completed apartment units nationwide to increase to 123,500 this year from 112,000 units in 2001. Office Owners Expect Weak Demand Reuters via LA Times 3-5 Though other sectors of the economy seem to be perking up, office property owners last week gave a downbeat forecast at a real estate conference sponsored by Lehman Bros."Office markets are going back to the 1999 level," said Sam Zell, chairman of EOP. A study by PricewaterhouseCoopers found 200,000 fewer office occupants at the end of 2001 than a year earlier. The study predicted continued weakness through 2003. REITs, Refi's and Recovery Thomas Palmer, Boston Globe 3-3 'The biggest beneficiary of Alan Greenspan's generosity is us,'' said Charles Wu, managing director of Charlesbank Capital Partners . ''You're refinancing at rates that are unheard of.'' That refinancing - and the fact companies were not heavily borrowed in the first place - is saving them. ''Our clients are able to carry 16 to 18 percent vacancies,'' said Kenneth Witkin, managing director of the Fleet Real Estate Finance Group. ''Refinancing provides a solid cash flow.'' They were heavy hitters from the real estate world gathered one morning last week to discuss ''Investment 2000: Where Are the Opportunities?'' And when will things turn around? For that, the panelists turned to the 500 in pinstripes who were just finishing up their croissants. Real estate recovery in three months, anybody? No hands raised. Six months? A few. Nine months? A few more. Twelve months? Most hands went up. The consensus. And, 18 months? Yes, there are some pessimists out there, too. REIT Accounting Ray Smith, WSJ 2-28 CBL & Associates Properties, a real-estate investment trust that owns mall properties, is capitalizing on its capital expenditures. CBL has promised to spend $220 million over four years to renovate a huge mall portfolio it bought last year. You would think that would reduce the company's earnings for the next few years. But as it turns out, it will actually help increase them. Unlike most companies outside of real estate that make capital expenditures, the REIT doesn't book the costs of upgrading its malls as an expense against its funds from operations. But when CBL is reimbursed by tenants for many of the renovation costs it incurs, it includes them as revenue. Essentially, its funds from operations end up getting a boost from its mall-improvement costs. CBL isn't the only REIT that treats capital expenditures in this way. The method of not booking such costs as an expense but including the reimbursements as revenue is actually approved under generally accepted accounting principles. In net income, the cost of expenditures is reflected as depreciation. However, since funds from operations adds back depreciation, no expense shows up. This method has the effect of boosting CBL's funds from operations. Mall REITs have been handling capital expenditures this way for so long that the practice hardly bothers REIT analysts and big REIT investors. "When we analyze CBL," says David Fick, analyst at Legg Mason Wood Walker, "we recognize that there's apples-and-oranges issues in terms of quality of earnings." What's more, CBL has been so widely praised by analysts and investors for creating shareholder value through its strategy of buying and improving "B" malls, that its treatment of capital expenditures is viewed as less important. "We're more concerned with asset valuation and this doesn't affect that at all," Mr. Fick says. Lease-Termination Fees Lift Earnings Ray Smith, WSJ 2-20 Despite the weak economy, most big REITs that own office properties have managed to either meet, beat or come pretty close to earnings expectations in the latest quarter. That isn't necessarily good news. To understand why, you need to look at what helped boost the REITs' bottom lines. When an office tenant breaks a lease, it usually has to pay the landlord what's called a termination fee. These fees have been climbing as contracting or closing companies scale back or unload their office space. Some office REITs have been adding more fees collected in these lease terminations to their earnings as profit. Though not huge, the fees are hardly inconsequential. EOP would have missed analysts' estimates for Q4 results had it not been for the $24.4 million it generated in lease-termination fees. Duke Reality reported funds from operations of 63 cents a share for Q4. If not for the $8.4 million in lease-termination fees it booked for the quarter, funds from operations would have been five cents lower, or 58 cents a share. Duke expects to book nearly $2 million more in lease-termination fees this year than last, mostly in the first and second quarters. REITs & the Business Cycle Elizabeth Stanton, Bloomberg 2-15 Fidelity Real Estate Investment Portfolio, one of the largest and best-performing funds of its kind, has eschewed holding shares of lodging companies even as they rebound. Steven Buller, its manager, says the economy won't grow fast enough to sustain the rally in lodging. He favors industrial and mall properties, which fare better when growth is slow. Real estate, Buller said, is `a contractual lease business' in which the shortest leases - for hotel rooms - are as short as one day, and the longest, for retail space in malls, are for as long as 10 years. Apartment buildings are near the short end, industrial properties near the long end. When the economy is growing quickly, short-lease properties should gain the most because leases will more quickly reflect rising prices, Buller said. Industrial properties fare better when growth is slow because they can be built quickly, which keeps the supply of buildings in line with demand. A distribution facility can be built in three to six months, compared with three to four years for a downtown office building in New York or Boston, Buller said. Malls, which take longer for construction, are being built at the rate of about eight a year. That represents a square-footage rate of increase of less than 1%, which is slower than the population is growing, Buller said. Appartment REITs Update Daniela Deane, Washington Post 2-5 "We're pessimistic about the near-term outlook," said a recent Merrill Lynch report on rental-apartment markets in the United States. "After their unexpectedly sharp turn for the worse last year, market conditions will likely deteriorate further during 2002 - whether or not the U.S. economy stages a recovery." Of the 11 apartment markets nationwide studied by Merrill Lynch for its January report, four - Atlanta and three markets in the San Francisco Bay area - were labeled "distressed." Three markets - Washington, San Diego and Houston - were judged "in good health" and considered among the "first ones to emerge from the cyclical downturn." The other four markets studied fell somewhere between those two extremes, with Los Angeles and Orange County, considered in better shape than Dallas or the Seattle area. But why is the apartment industry hurting while the rest of the housing market is still relatively rosy? "It's a classic supply-and-demand problem," said Steve Sakwa, senior real estate analyst at Merrill Lynch. "Demand evaporated while a lot of brand-new units came onto the market. Not only did job growth not happen, jobs were lost. So there was no new demand." In Atlanta, for example, demand was down. Renters occupied 5,000 fewer apartments at the end of 2001 than at the beginning of the year, the report found. At the same time, though, 10,124 newly built units hit the market. In comparison, some 6,700 new apartments will come onto the market in the Washington area in 2002, the report said. And the demand for apartments here is estimated to be about 3,500 units. That means there will be about 3,000 more empty apartments than there are now - out of about 450,000 rental units in the Washington area. Where have all the renters gone? "What happens in most recessions, when individuals lose their jobs or become worried that they might lose their jobs, is that they tend to double up, take a roommate," said Ron Witten of Witten Advisors, an apartment investment advisory firm. "Or they move back home with their parents. Either of those conditions shrinks the demand for apartments pretty quickly." Many renters have also become homeowners, which is unusual in an economic downturn. "One of the big surprises over the last year is how many renters have gone out and bought homes," said Mark Obrinsky, chief economist at the National Multi Housing Council.
According to current accounting rules, companies that issue millions of shares of options each year don't have to charge a dime in cost against earnings. Instead, they provide a footnote to their financials stating what earnings per share would have been if the cost of options had been deducted from earnings. That fine print hides some big numbers. In 2000 Intel, reported earnings of $1.73 a share. Pro forma earnings after deducting for the cost of options came to $1.40 a share, according to the companyÌs 10K filed with the SEC. At Cisco, another big user of options, charging the cost of options against earnings would have increased the loss per share in the fiscal year that ended in July 2001 to 38 cents from the reported 14 cents. And at Microsoft, accounting for the cost of options would have resulted in earnings of 91 cents a share for the year ended June 2001, instead of the reported $1.32 a share. The reductions in earnings per share at these technology companies are dwarfed by the drop in earnings per share at new technology companies that had to reprice options after their stocks tanked in 2000. But this is all just part of the way that options accounting distorts corporate earnings. The bigger problem takes place when a company that has issued options to its employees goes to pay its tax bill. For example, let's take a company whose employees exercised a million options in 2000 with an initial average strike price when granted of $80 a share and an initial value of those options at $20 a share. During the year the stock moves up in price, causing the options to be more valuable. By 2000, those options become worth $40 each. The company would therefore have been able to take a $40 million tax deduction for the cost of those options - even though the initial 'cost' was just $20 million. The higher the stock had climbs in price, the bigger the tax deduction. In 2000, Intel's total tax break from options came to $887 million. At Cisco the total for fiscal 2001 came to $1.4 billion. And at Microsoft, $2.1 billion in fiscal 2001. Reform lacks a natural and energized constituency. You may be outraged that Intel can claim $1.73 a share in earnings when it really made $1.40 and that the company is getting a $900 million tax break from the U.S. Treasury to boot - but if you're an Intel shareholder directly or through a mutual fund, do you really want to see Intel's shares take another hit in exchange for accounting accuracy?
"You've got a real eye for bargains, Fred": As Fred steers his leased BMW down the driveway of his doubly mortgaged home and heads out for another Saturday afternoon at the local mall, you should offer up a small prayer of gratitude. True, Fred saves so little that he may never retire. But where would the economy be without folks like him? After all, if we all saved diligently and never went into debt, economic growth would stagnate, bond yields would plunge, and the stock market would go into a tailspin. Sort of like Japan. William Reichenstein, an investments professor at Baylor University, notes that 'At any point in time, there are a limited number of good investment opportunities. Naturally, savers seek the best investment opportunities available. The more people save, the more money you have chasing less and less promising investments." "You're right, Bob, the fund is a real dog": Bob jumps on the hottest stock funds, only to bail out in a panic when their performance falters. Undeterred, he plunges into the next hot sector, joining the rest of the sheep in their headlong rush to the shearing shed. And Bob is to be commended. If risky investments didn't seem risky, the rewards would be scant indeed. Long-term investors need shortsighted folks like Bob.
The number of Internet users who made online purchases rose 45% to 58 million people in 2001, as travel-service sales increased 59% and online banking increased 79%. The average online session fell to 83 minutes from 90 minutes in 2000. The study was initially based on a random telephone survey of 3,533 people in March 2000. Researchers attempted to reach everyone a year earlier and succeeded in completing 1,501 follow-up interviews. Comparisons were based on the cases where interviews were conducted both years.
An analysis by Ned Davis Research of the past six decades of trading shows that stocks generally don't fall very far after experiencing this kind of volatility. And while it also doesn't suggest that the market is about to take off like a rocket, it could mean that the major indexes are, however slowly, forming a base from which they can rise. History shows how unusual it is for the blue chips to have the kind of volatility. Several such periods occurred in 1974, soon before the market turned up. It happened again in 1982, after a long slump, in 1987, around the time it hit bottom following the crash, and in 1998, when the market rebounded after the Russian debt default. Finally, it happened again in September of last year, as the market bottomed following the terrorist attacks. But volatility isn't a perfect indicator. The Dow industrials gyrated sharply in 1973, when stocks still had further to fall. Then, after a period of volatility last spring, stocks rebounded, but then ran out of steam. All of that means there is no guarantee the current rebound will last. But over the past few decades, the high volatility generally has signaled the likelihood of a coming rally. One explanation for that, which applies this time, is investor psychology. After a big market drop, shell-shocked investors have a tendency to cash in their positions once they post gains, for fear that stocks will fall again. That helps explain why stocks have had trouble sustaining gains in recent weeks. But lately, more bullish investors have been stepping in to buy beaten-down stocks, preventing declines from accelerating. This, traders say, looks like a classic case of base-building, with indexes showing a lot of choppy ups and downs within a broad range. Another reason for the market's volatility is the growing influence of hedge funds that often trade actively, looking for quick profits. Hedge-fund assets soared 24% to $507 billion last year, partly due to fresh inflows and partly due to successful investing by hedge-fund managers, according to New York's Hennessee Group. Hedge funds also bet on stock declines through short selling. Short selling tends to increase short-term market volatility, because opening a short position requires heavy selling, and closing the position requires sudden buying. Moreover, short sales often come during market declines, reinforcing the decline. And when a short seller closes out his position, it can serve to exaggerate a market rally.
Analysts are quite optimistic that the profit recovery will continue, climbing to earnings of $14.72 a share by the fourth quarter of this year. For all of 2002, Wall Street analysts expect $52.89, a gain of 17.2% from last year's anemic levels. Current earnings comparisons will also be distorted during the transition period to new GAAP goodwill accounting. The new practice, which took effect January 1, ends the mandatory amortization of goodwill (which now has to be written down only when an asset's value is impaired). All 2002 estimates are now on the new basis, but most 2001 earnings have not yet been restated, except for those in the technology sector. Estimates for S&P 500 tech earnings are for a delcine of 23% year-on-year in Q1, a 42% gain in Q2; and to a 140% gain in Q3. Results for some sectors in the first quarter are expected to drop deeply: energy by 60%, basic materials by 21% and utilities down 5%. The earnings recovery may help the market less than it has in the past. Enron's bankruptcy, tougher enforcement by the SEC and crackdowns by accounting firms could depress investor enthusiasm in years to come. But 'Enronitis' has infected portfolios less than investors may think. Less than $10 billion of disputed 2001 operating income among 43 companies in the news was tied to accounting issues, according to a report last week by Tobias Levkovitch of Salomon Smith Barney. Compare that to an $87 billion decline in operating income caused by last year's recession. Clearly, the economy is far more important to earnings than accounting issues. 'There will be a mild recovery, but not the bounce back from a V-shaped recession' where earnings can rebound as much as 20%, says Nick Sargen, global market strategist at J.P. Morgan Private Bank. 'I've heard this one called a 'square root' recovery,' with a quick drop, a quick rebound and then steady but slow growth. What do the soothsayers worry about? 'Many companies competing globally now, and that hurts their pricing power,' says Chris Wolfe, equity strategist at J.P. Morgan Private Bank. Investors spooked by unpleasant surprises in companies' SEC filings 'will want to sell first and ask questions later.' Earnings smoothed by pension income "may also be more of an issue now than in the past," Wolfe adds.
Little wonder banks have become downright defensive. On Friday, they agreed to lend $1 billion to Sprint, which faces liquidity problems and declining sales. But the No. 3 U.S. long-distance telephone company - with its triple-B rating, an investment-grade credit - had to pledge its phone-directory publishing business as collateral. On the whole, 'There is not a credit crunch for asset-rich companies,' says Glenn Reynolds, CEO at CreditSights. 'There is credit, but at a price and a structure. [Sprint] is a large-cap triple-B-tier company forced to pledge assets. That reflects risk aversion, but it demonstrates that these companies do face a liquidity crisis.' Banks are protecting themselves on the downside - if things get worse from here - by turning the unsecured bank lines into senior secured lines of credit. In the event of a liquidation, senior debt has first claim on a corporation's assets, ahead of junior obligations and equity. Thus pledging assets is a negative for bondholders because it subordinates a bondholder to the banks. In the least aggressive tactic, banks are charging higher fees and rates on bank lines, Reynolds relates, adding that banks are tightening financial covenants and adding more onerous provisions, such as coverage tests of debt to EBITDA. In addition, inserting rating triggers can create a "springing lien," which means that if a company is downgraded to a certain credit rating, it is required to pledge assets. An Example Struggling retailer Gap, which fell to junk status recently, announced a new secured $1.3 billion, two-year bank facility to replace an existing $1.3 billion, 364-day facility maturing in June and a $150 million, five-year facility due in June 2005. 'The news was the lesser of two evils,' writes Patricia Lee, senior analyst at CreditSights, 'as nailing down two years of liquidity support was a crucial step in the process of starting its turnaround.' Moody's and S&P last week moved aggressively after the announcement. Moody's confirmed Gap's Ba2 senior implied rating and lowered the ratings on the company's existing senior unsecured long-term debt to Ba3. S&P downgraded Gap's corporate credit and senior unsecured debt rating to double-B-plus from triple-B-plus. Credit Stats Rebecca Thomas, Smart Money 3-1 The Federal Reserve's latest Senior Loan Officers Survey shows that banks tightened their lending standards at a faster rate in the three months ended January than they did in late 1991, though at a slightly more moderate pace than in the previous three months. [LA Times 4-3: In a report last week, the FDIC said banks' commercial and industrial lending fell nearly 10% last year, a decline greater than in the recession of 1990-91.] Moreover, credit spreads have widened for companies with suspect or complicated balance sheets. The good news, Credit Suisse First Boston's chief investment strategist Thomas Galvin points out, is that credit problems are "isolated to specific companies or industries rather than systemic." In fact, credit spreads on just 15 of the 47 sectors and 20 of the 500 companies Galvin monitors have widened this year. More Credit Stats E Scott Reckard, LA Times 3-4 In a report last week for the National Assn. of Manufacturers, there appeared to be a two-tier economic recovery, with giant firms still able to borrow at decent rates via bond offerings, while many smaller companies, dependent on banks for expansion capital, endure higher interest rates, special fees and outright denial of access to credit. In a survey last month, 34% of the manufacturing group's members said credit was tighter than a year ago, and 26% said that was restricting their expansion. Counting three major sources of credit - bank loans, short-term notes known as commercial paper and long-term bonds - U.S. businesses have had substantially more access to credit during this economic downturn than in the last three recessions, the FDIC reported last month. Many smaller businesses, particularly in non-manufacturing sectors, said they have no funding worries. A January survey by the National Federation of Independent Business found plenty of firms talking of expansion, with bank loan rates averaging a low 7.2%. Credit availability was cited as the "most important" issue by 2% of the federation's 600,000 members.
The investors, on average, said they expected stock market returns over the next 12 months to be 9.5%, down from 10.2% in the survey the previous month. Expected returns among investors under the age of 40 rose to 13.2% from 10.3%. Expectations among investors over 40 declined to 8.4% from 10.3%. Related article: Majority Thinks Stocks Will Rise
Mr. Arnott builds his pessimistic case by taking apart long-run stock returns. Since year-end 1925, shares have outpaced inflation by around eight percentage points a year. But of that return, roughly 1.5 percentage points came from the rising value put on dividends and earnings over the past 76 years. With stocks now trading at sky-high share-price-to-earnings multiples and offering skimpy dividend yields, investors are unlikely to benefit from a further rise in valuation. Moreover, today's rich valuation has a sinister side effect. Investors at year-end 1925 were buying stocks that yielded over 5%. Today, yields are four percentage points lower. Result? If you take that eight-percentage-point margin of victory and subtract the gain from rising valuation and knock off four points for today's lower dividend yield, you are left with the prospect of shares beating inflation by a little over two percentage points a year. That is slightly worse than the return on bonds since year-end 1925. What is the alternative? If Mr. Arnott is right and stocks are unlikely to outpace bonds, then it makes sense to favor the lower-risk investment and buy bonds. The problem is, with bond yields so low, you're still looking at modest gains. "If you want to get better returns, you've got to stray out of mainstream assets," Mr. Arnott argues. On that score, he recommends inflation-indexed Treasury bonds, real estate. Investors could buy real-estate investment trusts, emerging markets and high-yield junk bonds. To further bolster returns, Mr. Arnott suggests aiming to hold down taxes. For instance, if you are investing in a taxable account, he advises buying tax-managed stock funds. In a recent study, Mr. Arnott found that, after all taxes, just 16% of stock funds beat Vanguard Group's S&P 500-index fund over the 20 years through Dec. 1998. For these funds, the average margin of outperformance was 1.46 percentage points a year. Meanwhile, the other 84% lagged behind the Vanguard fund by an average 2.67 percentage points a year. How else could you boost performance? Mr. Arnott advocates regularly rebalancing investments held within a retirement account. "Some people think rebalancing is boring," Mr. Arnott says. "But when you're looking at a real return of 3%, an extra half percent a year is useful." Another Bear NY Times 3-3 I think we are in a structural bear market that will last for 5 to 10 years. It will not be over until stocks trade at attractive valuation levels. Don't forget that the norm for the U.S. stock market over the past 80 years is a price-earnings ratio of about 15. (Felix Zulauf, president of Zulauf Asset Management A.G. in Zug, Switzerland - International Herald Tribune via the NY Times) Another Consideration Donald Ratajczak, Atlanta Journal-Constitution 3-3 Should one be surprised to learn that bond analysts are more likely to spot problems at companies than stock analysts? Bond analysts know that if credit risks increase, brokers must recommend selling bonds that no longer comply with the investment criteria of their [mostly institutional] customers. Most stockbrokers are trained in selling securities and gathering assets rather than managing assets. They assume customers manage their own accounts. When was the last time your broker called to suggest a transaction because your portfolio no longer conformed to your stated objectives? Related article: The Case for Lowered Expectations for Stocks
Bogle, in a recent speech, said the 75 largest mutual fund companies control 44% of the voting power at U.S. companies, including pension and institutional accounts. Combined, this "constitutes the 800-pound gorilla who can sit wherever he wants to sit at the board table" to demand corporate accountability or change the way firms conduct themselves, he said. [WSJ 2-14: Mutual funds have approx. $7 trillion invested - (Bloomberg 3-1) but only $2.39 trillion invested in diversified U.S. stock funds.] However, many mutual fund managers say the idea that they should get involved in pressuring companies is unrealistic. There isn't enough time to do that while managing a portfolio, and to take the time to do it risks generating higher costs - and lower returns - for fund investors, some say. Bogle believes there is a link between good corporate governance and higher stock returns, as do many public pension funds and the socially directed investing industry, which screens companies based on issues such as the environment and workplace diversity. TIAA-CREF, which spends slightly more than $1 million a year on corporate governance issues, believes it generates far more than that in added shareholder value. According to New York-based Domini Social Investments, its Domini Social 400 index of large stocks screened for social and environmental criteria has beaten the blue-chip Standard & Poor's 500 index over the last decade. The Domini index returned an annualized 13.8% in the 10 years ended Jan. 31, versus 13% for the unscreened S&P 500. But those long-term numbers have little relevance for many fund managers, especially momentum-oriented managers who routinely turn over their entire portfolios more than once in a calendar year. Bogle suggested that his Federation of Long-Term Investors start with six big index mutual fund managers that control an estimated $1.4 trillion, or 10%, of U.S. stocks: Barclays, State Street, Vanguard, Mellon, Deutsche Asset Management and TIAA-CREF. [A WSJ article of 2-14 put this figure at $300 billion.] As passive investors who simply buy and hold stocks in indexes such as the S&P 500, these investors in theory have a vested stake in promoting forthright corporate management to minimize the risk of more Enrons occurring. "The only way an index fund manager can really influence shareholder value is through governance," said Mercer Bullard, CEO of Fund Democracy, a company that lobbies regulators on behalf of mutual fund shareholders. "These funds can't vote with their feet [by selling their stake in a company], so they should be more involved" in monitoring their companies. Just the Facts IT Spending At least $500 billion of the $2,700 billion spent on information technology by companies last year was wasted on products that failed to meet objectives, resulting in a loss of confidence among managers in their ability to spend wisely on IT, according to Gartner, the research group. Companies typically waste 20% of corporate IT budgets, but that many CIOs and CFOs consider that to be a conservative estimate. Gartner said the waste was typically a result of companies buying more capacity or applications than needed or implementing systems with software licences for many more people than those needed to use them. (London Financial Times 3-14) GDP Stats & Recessions Based on output, last year was great for Dell Computer. It shipped 18% more personal computers than in 2000, and they were faster computers with more memory and bigger hard drives. But because markets were tough and prices were falling, Dell's revenue slipped 2%, and its profit sank 43%. It ended its fiscal year with 5,400 fewer employees thanks to its first-ever layoffs. It share price is mired at half its high of 2000. Judging by things such as jobs and profits that most people care about, including in all likelihood Dell's employees and shareholders, it was a recession. But by the standards of economic output - the volume of goods and services - it is a tougher call. (Greg Ip, WSJ 3-11) Unemployment Stats The BLS reported Friday that the jobless rate held steady in February, ticking down just barely to 5.5% from 5.6% the month before. The news ran counter to the nearly unanimous view that unemployment was headed back toward 6%. In January, the BLS reported a 587,000 decline in the number of folks employed and a 337,000 fall in the number of unemployed. But wait 'til February, analysts said, when those 587,000 people who lost their jobs join the ranks of the unemployed, and when the 337,000 formerly unemployed start looking again. With that big a jump in the number of jobless, the jobless rate would have climbed to 6.2% in February. (Gene Epstein, Barrons 3-11) More Unemployment Stats Friday's positive job numbers didn't seem to help those unemployed the longest. While the number of unemployed for 14 weeks or less fell 4% to 5.3 million, those unemployed 15 or more weeks saw their numbers grow 0.6% to 2.6 million. They now make up about a third of the unemployed, compared with about 25% a year ago. (WSJ 3-12) Buffett's Pessimsim Warren Buffett issued a pessimistic outlook on the world, saying the war on terror could never be won - a potential problem for his insurance interests - and warning that returns from the stock market over the next few years look meager. "Today's equity prices presage only moderate returns for investors," Buffett warned those looking for outsize returns. "The market outperformed business for a very long period, and that phenomenon had to end. A market that no more than parallels business progress, however, is likely to leave many investors disappointed, particularly those relatively new to the game." Buffett also stated that he was 'disgusted by the situation, so common in the last few years, in which shareholders have suffered billions in losses while the CEOs, promoters and other higher-ups who fathered these disasters have walked away with extraordinary wealth.' (LA Times 3-11) Advertising and Mutual Funds There is absolutely nothing a firm can put into its advertising that should make you rush out and buy a fund, compelling performance numbers included. Every fund purchase you make should start with an evaluation of your needs and your current portfolio, two things the fund groups know nothing about when writing clever ads. When it comes to funds, remember that some great firms have never spent a penny on advertising, and some lousy companies have gotten a lot of money largely because they know how to hire a good advertising agency, even if they can't figure out how to hire good fund managers. (Charles Jaffe, Boston Globe 3-10) Employment Report & the Bond Market The biggest surprise in today's employment report was the drop in the unemployment rate to 5.5% in February from 5.6% in January. The January decline from 5.8% in December was considered a fluke. Now we have back-to-back flukes. Wall Street economists' have been assuring us that the Federal Reserve never starts to raise rates until the unemployment rate starts falling. No one expected unemployment to head down until the second half of the year. Now they have to come up with a new story. Today's employment report sent bond prices lower, which is something of a feat given what a lousy month March has been for Treasuries. Since the close of trading on Feb. 28, yields on Treasury securities are up as much as 47 basis points. (Caroline Baum, Bloomberg 3-8) Household Net Worth The Federal Reserve's "flow of funds" report stated that household net worth - a measure of total assets, such as houses and pensions, minus total liabilities, such as credit-card debt - declined 2.4% year over year to $40.3 trillion at the end of 2001. Before this current two-year decline, household net worth had increased every year for more than half a century. The decline last year was driven by an increase in value of $576 billion in liabilities, led by a rise in home mortgages. Assets decreased $414 billion, mostly because of stock-market losses. In another report issued Thursday, the Fed reported that U.S. consumer credit expanded $12.8 billion in January to a seasonally adjusted $1.668 trillion. (WSJ 3-8) Pension Plans Roughly half the workers on private payrolls don't have any employer-sponsored retirement plans at all. About 74% of the best-paid fifth of American workers participate in some form of pension plan on the job, but only 17% of the worst-paid fifth do, according to number-crunching of Labor Department data by the Economic Policy Institute. In 1980, 64% of all retirement-savings money went into old-style (defined benefit) pension plans. In 1999, 85% went into accounts (defined contribution) over which workers had control. (David Wessel, WSJ 3-7) Private Pension Funds (in billions of dollars) (Federal Reserve Bank 3-7-02)
Quick Facts, Stats & Opinions In the roaring bull market of the late 1990s, as many as 80 companies split their shares each month. This month, it's down to 15 companies. (Thom Calandra, CBS MarketWatch 3-14) Bill Gale, senior fellow at the Brookings Institution in Washington, says: "Passing the stimulus bill now that the recession is over is like taking Viagra the morning after." (WSJ 3-13) Today, mortgage payments for the average person are about 17% of his or her monthly income. In 1991, it was 23%. In the 1980's, it was 30%. (Ivy Zelman, building and building products analyst at Credit Suisse First Boston, NY Times 3-10) The Nasdaq, at 1,929.67 on Friday, is still down 62% from its peak. The Nasdaq would have to soar 162% from Friday's close to eclipse the old bull-market peak. If the Dow gains 11% from here, it will surpass its record high of 11,722 set in January 2000. The S&P 500 needs a 31% advance to retake its all-time high. (Tom Petruno, LA Times 3-10) Digital TVs accounted for only about 1.4 million of the 28.3 million televisions sold in the U.S. last year, and only about 100,000 of those digital sets included tuners to receive high-definition programming. Yet their high price meant they brought in a whopping 27.6% of total television revenue. Many are buying digital TVs to watch DVDs. (WSJ 3-7) The nation's manufacturing activity in February expanded for the first time in 18 months. Don't be fooled by the hype, says David Gitlitz, chief economist at Trend Macrolytics, a market research firm. After manufacturers spent months shedding excess inventory, it's hardly surprising that a subdued level of business activity would show up as an expansion, he says in a Mar. 5 note to investors. "Nothing in this data as yet confirms anything more than the potentially ephemeral uptick that would be expected following the unprecedented inventory liquidation of recent quarters," says Gitlitz. (Eric Wahlgren, Business Week 3-7) The ISM's index of service companies, builders and other non-manufacturing companies [which accounts for about four-fifths of the U.S. economy] rose to 58.7 from 49.6 in January. Orders at service companies also were the highest in 15 months, reflecting rising sales at retailers. The new-orders index rose to 57.3 in February, the highest since November 2000, from 49.4 in January. Nonmanufacturing inventories increased for the first time since October 2000. Export orders rose for a third straight month, Tuesday's report showed. (Bloomberg Via LA Times 3-6) High-speed Internet usage accounted for more than half of all time spent online in January, outpacing dial-up Internet access for the first time, Nielsen/NetRatings said in a report. High-speed Web surfers logged 1.9 billion hours - or 51% of the total 2.3 billion hours spent online during the month. Total time spent online by high-speed Web surfers rose 64% from a year-earlier. Time spent online by dial-up users fell 3% from 1.18 billion hours to 1.14 billion. (Reuters via LA Times 3-6) Says Chris Wiles, chief investment officer at fund manager Rockhaven Asset Management, `Our tax system has encouraged corporations to use leverage, manage for short-term gains, and not pay dividends. Enron is not the cause of our current crisis, it is simply a symptom. The congressional inquisition is a farce.' (Chet Currier, Bloomberg 3-5) New Jersey budget watchers say a gasoline tax increase might appeal to lawmakers grappling with a tough fiscal situation. That makes some station operators worry that lawmakers would consider easing up on the state's full-service law to offset a rise in gasoline prices, thereby putting New Jersey among the 48 states that let motorists pump gas themselves. Oregon is the other holdout. (WSJ 3-5) The smallest AFL-CIO union last year was the Horseshoers' union, with 55 members, down from 97 in 1996. (WSJ 3-5) According to a survey by the Mortgage Bankers Assn. of America, the delinquency rate for mortgage loans on 1-4-unit houses was 4.65% in Q4-01, down from Q3's rate of 4.87%. (Bloomberg News via LA Times 3-5) An exhaustive annual survey shows another jump in the spread of computer viruses. A sample of 300 North American companies and other organizations surveyed by ICSA Labs experienced 1.2 million incidents involving malicious computer code on 666,327 computers during the 20-month period that ended Aug. 31. At the end of that period, the respondents had a monthly average of 103 virus infections per 1,000 computers they operate, up 13% from 91 infections a month in a survey conducted in 2000, according to ICSA. (WSJ 3-4) Jim Bianco, of Bianco Research, makes a practice of tracking the "P&L" of the American stock fund investor. By analyzing the flow of money into stock funds and the level of stock prices each month since 1990, Bianco comes up with a hypothetical breakeven point for all stock-fund holders who've invested since then. Bianco notes that, when adjusting for investors' cost basis, the public hasn't made a dime in domestic stock funds since 1997. (Michael Santoli, Barons 3-4) Commerce Department figures also show that less than one-third of children aged 10 to 17 from black and minority homes can access the Internet at home, compared to at least two-thirds of children from white and Asian homes. (AP via EduPage 3-3) Customers must also take some blame for Enron research failures. We get what we pay for. By demanding cost reductions, we may have biased research. Indeed, how many brokerage firms are responding to Enron research problems by beefing up their research? (Donald Ratajczak, Atlanta Journal-Constitution 3-3) Core inflation - prices excluding food and energy - rose only 2.6% last year. Over the past five years, core inflation averaged a few tenths more than 2%. By contrast, between 1940 and 2000, the average inflation rate was twice as high. In the 1970s, inflation averaged over 7%; in the 1980s, over 5%. (James Glassman, Washington Post 3-3) "Wall Street continues to be trapped between powerful crosscurrents. On the one hand, the Federal Reserve has flooded the system with liquidity, pushing the returns from money market funds below zero, after taxes, fees and inflation. These conditions are normally very bullish for stock prices. On the other hand, corporate profits are under severe pressure, and the equity market remains expensive, even after two consecutive years of decline." (Bank Credit Analyst via Wash Post 3-3) "Is the current p/e valuation level in the mid-20s sustainable? Possibly, if the economy revives quickly and earnings get back on a strong growth path; but that would be defying the pattern of history. So in making investment decisions, investors must allow for the potential of some slippage in valuations, at least partway back toward past norms. This would reduce investment returns temporarily." (H. Bradlee Perry, Babson Staff Letter via Wash Post 3-3) "Over time, less economic volatility, or risk, facilitates business growth planning. And it provides justification for higher P/E ratios. In all, improving business fundamentals should gradually lift demand for stocks." (Arnie Kaufman, Standard & Poor's Equity Insights via Wash Post 3-3) Personal incomes rose 0.4% in January, but after-tax or "disposable" personal income rose 1.6%, in part because of the tax-cutting legislation enacted last year. (John Berry, Washington Post 3-2) In an analysis headed, "O Recession, Where Art Thou?", economist Robert V. DiClemente of Salomon Smith Barney Inc. told his clients, "First-quarter growth is beginning to look like it will top 4% [at an annual rate]." (John Berry, Washington Post 3-2) Losses deepened for stock fund investors in February. Equity funds lost an average 2.4% according to preliminary data from Lipper. The average stock fund is down 4.4% this year. (Bloomberg 3-1) A new research center at the University of Calgary harkens back to the "holodeck" from the Star Trek. Java 3D is used to create virtual models of things ranging from a whole landscape to a single cell. Scientists go into the 10 x 10 foot laboratory wearing 3D glasses to view the models that are created. Companies including pharmaceutical firms, oil companies, and meteorologists will be able to use the facility, but the primary goal is to further medical research, particularly for complex genetic diseases such as Alzheimer's and cancer. (Reuters via EduPage 2-28) Quick Tips FindArticles goes where most search engines can't, providing full text access to thousands of articles, many of which aren't freely available elsewhere on the web. FindArticles is a partnership between LookSmart and the Gale Group, which provides the published editorial content. It contains articles dating back to 1998 from more than 300 magazines and journals. The major strength of FindArticles is that it's a self-contained archive. You can often find a particular piece that may not be possible to find either on a publication web site or by using a general purpose search engine. (Search Engine Watch 3-21) Millions of Americans are piping live, local weather reports onto their computer screens using a Web-connected program called WeatherBug ( www.weatherbug.com). If you download this free Windows program and type in your Zip code, WeatherBug will show the current local temperature at the bottom of your screen, beside the time display on most Windows desktops. Clicking on the temperature pops up a window showing a wind gauge, tomorrow's forecast, barometric pressure, rainfall and other conditions in your area. While 12,000 users pay $19.95 a year for an ad-free view, most opt for the free version. (Leslie Walker, Washington Post 3-3) The Alexa toolbar integrates with the Microsoft Internet Explorer toolbar, and it provides you with information about any Web site you visit. You can discover the amount of traffic a site gets and check the ratings and reviews of other Alexa users. Alexa also offers shopping and search information, a desktop reference library, and a thesaurus. Note that Alexa adds what is commonly called Spyware to your computer. This allows Alexa to track your browsing for advertising purposes. Download and install at www.alexa.com (Emazing 2-27) You'll often find that you have numerous Explorer windows open at the same time. Some of these windows are the ones you opened, and others are windows that opened without asking you for permission. In any case, to close all the windows at once, click one of the window tags in the Windows 98 taskbar. Now hold down Ctrl while you click each of the remaining windows. Right-click the collection and choose Close. (Emazing 2-22) Home Page Previous Factoid Top Sites
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