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This means your equity grew to $69,820 through price appreciation. (We are ignoring equity growth through amortization of your original debt.) Put that number in a financial calculator, and the 10-year annual compound growth rate is 13.7%. Invest the same sum in the Vanguard 500 Index fund, and it would have grown to $60,593 over the same period, after paying taxes on dividends and capital gains that were distributed over the period. That computes to a compound annual return of 12.1%. You can get some idea of how important by considering the distribution of net worth. As recently as the 1998 Survey of Consumer Finances, the median net worth of all American households was $71,600. That's only a tad over the $69,820 of equity built by the 10-year homeowner. In other words, a single investment decision - to own a home - was enough to take a family into the midrange of American wealth. More Stats David Wessel, WSJ 4-4 Since New Year's Day 2000, Americans' stock portfolios have lost nearly $4 trillion, but their home equity has grown by $1.2 trillion. The government's house price index, the best available measure, surged 9.2% in 2000 and 6.9% in 2001, though it slowed in the closing months of last year. An end to the remarkable real-estate rally of the past decade is inevitable; house prices can't climb faster than incomes forever. A gentle end to the housing boom wouldn't threaten renewed prosperity. A sustained drop in housing prices would.
Over the last five years, these portfolios performed as the theory predicts, according to a working paper by four researchers: Paul Harrison, an economist in the research and statistics division at the Federal Reserve Bank; Jens O. Ludwig, an associate professor of public policy at Georgetown University; Laurie J. Bassi, chairwoman of Knowledge Asset Management; and Daniel P. McMurrer, chief research officer of that money management firm, which aims to use this research in managing clients' investments. Companies that ranked in the top 20% or so in spending on training and development would have earned an average of 16.2%, annualized, in the five years through 2001, or 6.5 percentage points a year more than the Wilshire 5000 index. Better yet, that market-beating performance was produced with about 10% less risk, as measured by the volatility of returns. Currently, that list of companies includes Accenture, Agilent Technologies, Allstate, Capital One, Corning, FedEx, First Consulting Group, IBM, Intel, NCR and Storage Technology Over those same five years, companies at the bottom of the training-expense rankings had significantly lower returns. And the researchers obviously couldn't include companies that did not report training expenses and presumably performed even worse.
The U.S. economy is on the mend. History shows that it isn't uncommon for a weakening dollar to coincide with strong U.S. growth and stock-market rallies, says Michael Metcalfe, a senior strategist at State Street Bank in London. That's partly because stronger growth gives investors the confidence to sell the U.S. bonds they bought as a haven in bad times. "Faster euro-area growth will underpin European financial assets, which are cheap by global standards," says James Lister-Cheese, an economist at investment consultants Independent Strategy in London. "In contrast, U.S. stocks are expensive on virtually all counts." Interest rates may favor the euro. The Federal Reserve this week signaled that it is through cutting U.S. rates. Because bond prices tend to rise as interest rates fall, euro advocates argue that should make European bonds relatively more attractive. The U.S. current-account deficit may drag the dollar down. For years, the deficit has been financed by foreign purchases of U.S. companies, plant and equipment, as well as of U.S. stocks and bonds. When one funding source faded, another filled the gap. Now those flows are ebbing. Not everyone buys this story. Overseas investors are drawn to the higher expected rates of return on U.S. investments. Meanwhile, oil prices have been rising, and that trend usually favors the dollar. The U.S. is less dependent on imported oil than Europe or Japan; and oil-producing countries tend to recycle their petrodollars by purchasing U.S. securities.
But the picture immediately darkens after the Fed does the deed, according to data prepared by Morgan Stanley. The S&P 500 on average has lost 13.8% in the three months and 3.3% in the 12 months following the start of a more restrictive credit cycle. Interest-sensitive financials, stocks that depend on discretionary consumer spending and shares of raw-material companies historically fared even worse. The credit market's track record as a forecaster has been awfully good in recent years. Yields peaked in January 2000, just as the dot-com bubble burst and started dragging down the economy. Rates finally bottomed in November 2001, just before the economy began to mend.
The joke was Buffett's way of making the more serious point that the alleged misdeeds and misjudgments that have come to plague companies such as Enron and Global Crossing and Tyco are really manifestations of a much broader and more pernicious problem: the single-minded focus of corporate executives on boosting their companies' stock price. At worst, recent history shows that share-price obsession has driven some executives to improperly, and perhaps illegally, misrepresent their companies' financial condition to investors, who later lost many millions when the true picture was revealed. But even at companies that have continued to prosper, executives report that the general fixation on daily and weekly stock-price movements drives them to manage for the short term, sacrificing the long-term interest of shareholders and employees. Like it or not, the short-term impact on the stock price has become the metric against which nearly all major corporate decisions are judged. It drives decisions on what to buy and when to sell, whom to hire and how much to invest -- and whether to put any of it on the books or off. Getting the incentives and disincentives right has now become Topic A in Washington and in boardrooms across the country, where directors and top executives are scrambling to fix what ails American capitalism and prevent another round of high-profile corporate collapses. The fear in the business community is that reforms will go beyond what is necessary to discourage unethical behavior and short-termism and wind up discouraging the kind of good risk taking that has been the core of America's economic success. Ten years ago, Harvard University professor Michael Jensen co-authored an influential study that concluded that the pay of top executives was unrelated to the performance of their companies' stock. Jensen studied the period 1974 through 1988, during much of which stock prices, adjusted for inflation, stagnated. He concluded that as long as corporations continued to pay their leaders as if they were bureaucrats, the self-interest of those executives would remain fundamentally different from that of their shareholders. By then, Wall Street had already come to a similar conclusion. In a wave of hostile takeovers, corporate raiders showed that huge fortunes could be made by buying up undervalued and undermanaged corporations and bringing in managers ruthlessly focused on the bottom line. Faced with the threat that they might be the next takeover target, executives quickly realized they had no choice but to do whatever was necessary to quickly generate competitive returns to shareholders. A new era of shareholder-focused capitalism was born, and with it a new favored instrument for getting executives to behave more like owners than bureaucrats - the stock option. With these incentives and the bull market of the 1990s, the use of options soared. By last year, options accounted for 60% of the pay package for the typical corporate CEO, helping to drive the average compensation package above $10 million, according to Pearl Meyer Partners, a compensation consultancy in New York. Options have accomplished one purpose - a recent study by Brian Hall of the Harvard Business School says the sensitivity of CEO pay to shareholder return has increased tenfold since Jensen did his study more than a decade ago. But there is a growing consensus among academics and practitioners that corporate America "overdosed on stock options," as Ed Archer of Pearl Meyer put it last week. Not only have options contributed to a backlash against what many people view as excessive CEO pay, but many experts have concluded that options have the effect of disconnecting the interests of executives and long-term investors. Some argue that stock options are essentially a one-way bet for executives that encourages them to take more risk than would a real owner. If they take a risk and it works out, they gain as much as any stockholder. But if it doesn't work out, the worst that happens is the option becomes worthless. Stockholders, however, suffer a decline in wealth. Related article: Option Share Growth Will Hurt P/Es
Seemingly foolish behavior can help us with this struggle. Consider: Mental Accounting = Discipline To compensate for our lack of self-control, we often fall back on mental games. For instance, we might have a chunk of cash sitting in a money-market fund earning 1.5%, which we have earmarked for our toddler's college education. But right now, we need a new car. Financially, it would make sense to "borrow" from the college fund and then pay the money back. But instead, we take out a car loan. Why? Mentally, we have earmarked the money-market fund for the kid's college education, and we don't trust ourselves to replenish the account if we dip into it. "Lots of us know that we won't make those payments to ourselves," says John Nofsinger, author of "Investment Madness" and a finance professor at Washington State University. "Mental accounting helps us stay disciplined." False Hope of Beating Market = More Investment Savings The evidence is undeniable: Market-tracking index funds outperform actively managed stock funds. Despite this lackluster performance, actively managed funds still account for 91% of all stock-fund assets. Why do we continue to bank so heavily on a losing proposition? It seems we like having the chance, however slim, to beat the market. In fact, it makes us more inclined to invest in stocks. We also find it comforting when professional stock pickers watch over our money. Their oversight gives us added confidence in our strategy and makes us more tenacious during rough markets. To be sure, all this is likely to cost us, with the price paid in market-lagging performance. But when we suffer this performance penalty, maybe we are getting our money's worth. False Confidence from Analysts/Newletters = More Investment Savings Studies suggest you won't beat the market by following the advice of newsletter writers and stock analysts. Yet, as we try to summon the nerve necessary to buy individual stocks, we often latch onto the recommendations of these experts. Are we misguided? Maybe not. "Even if the stocks don't turn out to be better than other stocks, at least it gives us the courage to get started," Prof. Nofsinger notes. Comfort of Familiar Stocks = More Investment Savings Similarly, we often invest in companies we are familiar with, such as our employer, local corporations or companies whose products we use. These stocks may perform no better than others. Nonetheless, "if owning some company you see on the drive to work makes you more comfortable as a shareholder, that's probably a good thing," Prof. Nofsinger says. Self Confidence = More Investment Savings While many investors struggle to find the courage to buy stocks, some folks have too much confidence. These investment junkies buy and sell stocks like crazy, thereby incurring exorbitant trading costs and taking unnecessary risks. Still, such enthusiasm isn't all bad. After all, if we are enthused about investing, we are probably more keenly aware of how much money we need for retirement and thus we are more likely to save enough. Market Timing = Being in the Market Most of the Time We should all decide what portion of our portfolio we want in stocks and then stick with this percentage through thick and thin. But as folks have discovered over the past two years, this advice can be tough to follow. Inevitably, some investors get skittish, and start dancing in and out of the stock market. This isn't a smart strategy. But it will probably lead to better results than simply leaving everything in a money-market fund. "Some people don't seem to be able to buy and hold stocks," Prof. Nofsinger says. "If they market-time, they will at least be in stocks part of the time. They may make less. But they will be making money." Related article: Good Neighbors
That is not to say that earnings will disappoint, but that they are particularly important because the stock market, at its current ratio of price to earnings, is much overvalued. According to J. P. Morgan, the P/E ratio of the Standard & Poor's 500-stock index, using operating earnings, was 44 at the end of last year. That was the highest since the late 1940's and three times the average since then. The only recent brush with such high valuations came in the spring and summer of 1999, not long before the stock market buckled in March 2000. As of now, earnings forecasts for Q1 gathered by First Call may not offer that reassurance. Charles Hill, director of research at First Call, said he expected earnings for the companies in the S&P 500 to decline 12% in Q1, compared with a year earlier. But Mr. Hill does see some encouraging signs. The percentage of positive earnings pre-announcements and the percentage of positive earnings forecast revisions by company analysts have been climbing recently. And while the outlook for Q2 is still fuzzy, he expects earnings to inch up 2% to 3%, which would make it the first quarterly increase after five declines. J. P. Morgan is upbeat about the profits outlook. A slide in unit labor costs is expected to play a larger than usual role in helping companies raise profit margins as sales volume picks up and productivity remains strong. Still, Bruce Kasman and Robert Mellman, the economists who conducted the profits analysis for J.P. Morgan, said the earnings increase over the next four quarters would be less than the average first-year rebound during the last five economic expansions. The biggest were the 64% surge after the 1973-75 recession and the 56% increase that began at the end of 1982. After the 1990-91 recession, profits rose just 6% in the first year. Mr. Wolfe is forecasting a climb of 15% to 18% in profits for the S.& P. 500. "Although the economy will experience a cyclical bounce, it is not positioned for a sustained upturn in profit margins," Mr. Kasman and Mr. Mellman wrote in their report. "Pricing power remains limited in an environment of global excess capacity and a strong dollar. And without the benefits of the labor market slack and falling interest rates present in the early 1990's, it is unlikely that costs can be compressed on an ongoing basis."
Despite the risk, trading has soared on the four E-minis - the S.& P. 500, S.& P. Midcap 400, Nasdaq 100 and Russell 2000. Volume for the E-mini S.& P. 500 contract more than doubled, to 39.4 million contracts, from 2000 to 2001, making it the exchange's second-most-active contract on the Chicago Mercantile Exchange after just five years; the E-mini Nasdaq 100 is third. Leverage can be much greater in the futures market. Stock margin accounts require a deposit of 50 percent of the value of a position. By contrast, a futures buyer needs to deposit only a small fraction of the value of a contract, typically 10 percent or less.
A typical 65-year-old in Miami will cost Medicare $50,000 more in his or her lifetime than a 65-year-old in Minneapolis, enough to pay for a Lexus with all the trimmings. Only 14% of the terminally ill in Sun City, Ariz., enter an intensive care unit in the last six months of life, but 49% do in Sun City, Calif. Elderly men in Binghamton, N.Y., are nine times more likely to have their prostate removed than men of the same age in Baton Rouge, La. Dr. Wennberg's primary point: There is little scientific basis for the differences in the way medicine is practiced across the U.S. and little evidence that giving more care always extends lives. We could save a lot of money if we figured out what care is valuable and what is not - and provided more of the first and less of the second. Dr. Wennberg's work focuses on easy-to-measure outcomes, such as longevity, and can't yet reveal if the quality of patients' lives is better in places where bypass surgery is more frequent. And though Dr. Wennberg identifies communities in which doctors probably do unnecessary procedures - often out of habit, not self-interest - he can't tell which patients should undergo surgery and which should not. But all this highlights two facts about American health care. One is ignorance. For all the obvious benefits of medical technology and all the money we spend, we still know little about, for instance, which treatment for prostate cancer is best. Even among big university medical centers, there's huge variation in success rates for treatments of various ailments. Yet these institutions make "unconscionably little effort" to understand why, he complains. The other is the focus on cost rather than quality. Traditional Medicare pays the bills whether care was appropriate or not, whether the doctor was high or low quality. Maybe, Dr. Wennberg suggests, it's time for government, insurers and employers to move toward paying doctors and hospitals based on the quality of the care they provide, not the quantity.
In its first-quarter figure, Strategic Insight estimated new money going into stock and balanced fund inflows exceeded $11 billion and that bond fund inflows also exceeded $11 billion. Money-market funds experienced modest redemptions in February, reversing persistent recent inflows by institutional investors, Strategic Insight said. New money into bond funds fell modestly to $9 billion from January's $10.6 billion, according to Lipper's figures. Lipper also estimated that investors pulled a net $12.5 billion from money-market funds in February, marking the first time such safe investment vehicles faced net redemptions in February since 1995.
From Jason Benderly, of Benderly Economics: Over the 56 years since 1946, consumer borrowing habits don't appear to have changed at all. His own work showed that the average maturity of consumer debt had been relatively stable at 3.5 years. And this meant that roughly each year, consumers borrowed 10 cents for every dollar of after-tax income. A skeptic might say: Let's grant that consumers aren't borrowing any more than they used to. Even so, the debt-to-income ratio hit a record high of 22.3% in December, which still looks pretty worrisome. The real measure of the debt burden is another ratio: debt payments to disposable personal income. By the third quarter of '01, the last period for which figures are available, households were spending 7.7 cents out of each after-tax dollar to pay off their debts, a full penny lower than the peak of 8.7 cents in first quarter 1980. Since early 1996, when the consumption boom first began, this ratio has grown by 0.1 cents per year. Accordingly, let's impose a 0.1% haircut on the growth rate of consumer spending for the year to come.
It looks like bonds' time in the sun has expired. As economic data in recent weeks have pointed to a surprisingly robust rebound in business activity, many investors have been dumping bonds, betting that interest rates are headed higher. History shows that a strong economy usually isn't a friend to the bond market. Investors who have been parking their dollars in money-market mutual funds, bank CDs and other short-term accounts for the last year have endured the lowest returns in 40 years. Nationwide, the average 1-year CD yields 2.21%. The only good thing one can say for cash accounts is that they continue to offer relative safety compared with bonds and stocks. The equity market seems to be responding positively to the idea that the economy is recovering, which should (eventually) translate into higher corporate earnings. But the almost universal lament of market strategists and money managers is that most stocks aren't cheap relative to the earnings outlook. For investors truly focused on the long-term, none of these near-term concerns may affect their asset-allocation decisions. But if your sense has been that this is a particularly frustrating period to be making money choices, there may be at least some comfort in knowing that that view is widely shared. Just the Facts Earnings Expectations S&P 500 company sales, in total, are expected to be down 0.4% in Q1 from a year earlier, according to Wall Street analysts' estimates as tracked by Thomson Financial/First Call. That compares with a 4% year-over-year slide in sales in the fourth quarter. Analysts' estimates of S&P 500 operating earnings (profit excluding those ubiquitous "one-time" gains and losses) call for an overall decline of about 9% in Q1 compared with a year earlier. If the estimates are on target, the drop in earnings will be half what it was in Q4 - the first sign of a recovery in the corporate bottom line. (Tom Petruno, LA Times 3-31) Mutual Fund Update The average mutual fund may have been up in the first quarter of 2002, but chances are the average fund investor was not. The hottest funds over the last three months came from some of the smallest categories, meaning that the hot money wasn't in most individual investors' portfolios. According to Lipper, the average large-cap growth fund fell by 3.5% during the quarter. Mid-cap growth funds were nearly as bad, losing an average of 2.1%. Tech sector funds lost roughly 7% on average, with communications funds falling by 16.7%. (Charles Jaffe, Boston Globe 3-31) Prescription Drugs Sales Outpatient prescription drug spending totaled $154.5 billion last year, up from $131.9 billion in 2000, according to a study conducted by the National Institute for Health Care Management Research and Educational Foundation. The study found that just 50 drugs out of 9,482 on the retail market were responsible for 62.3% of the $22.5-billion increase in spending last year. Leading the list of drugs contributing to the increase were cholesterol treatments Lipitor and Zocor, arthritis drugs Vioxx and Celebrex, pain reliever OxyContin and antidepressant Celexa. Also contributing to the rise in spending was the increase in cost of a prescription, which jumped 10.1% to $49.84. Antidepressants remained the top-selling drug in 2001, with sales up 20.2% to $12.5 billion. Anti-ulcer drugs were the second-biggest selling category with sales up 14.4% to $10.8 billion. (AP via LA Times 3-29) Investor Optimism Rises The UBS Index of Investor Optimism rose in March to 121 from 92 in February - its highest level since November 2000 - as investors showed renewed confidence in the U.S. economy and the financial markets. The optimism index has been a joint effort of UBS and Gallup since 1996. UBS Warburg said investors are more bullish about the overall financial markets, with 71% of those surveyed saying now is a good time to invest, up from 67% in February. In addition, 65% agree the worst of the nation's recession is behind us compared with 57% last month. (Julie Rannazzisi, CBS.MarketWatch 3-25) Bear Market Here "The prevailing consensus, according to the sentiment polls, is that the bear market is over. We are not so sure. First off, the rally has been confined mainly to the blue chips. Since the September lows, the Dow has made a series of higher highs. Among the major indices, it is the only one to surge past its January recovery highs as well as move significantly above its 200-day moving average. Since the January 2000 peak, the Dow has made no less than three attempts to overcome its previous highs. The top of these three rallies ended within a range of 75 points (April 12, 2000 at 11,425; Sept. 6, 2000, at 11,401; and May 2, 2001, at 11,350). Currently, the Dow is approximately 8% away from these peak readings, which now represent formidable overhead resistance. It is interesting to note that the ensuing pullbacks that have occurred on each rally attempt have been of increased magnitude." (Dan Sullivan, The Chartist via Wash Post 3-24) Bear Market Gone "It is the strength of the U.S. economy that has driven stock prices higher, and this continued strength insures that the experts who were sure that the September lows had to be revisited before stock prices were truly on the road to recovery will be disappointed. Ironically, the turning point occurred when investors shifted their focus from accounting to economic issues right after former Enron CEO Jeffrey Skilling's second appearance on Capitol Hill." (Roger Tweed, Tweed Update via Wash Post 3-24) Manufacturing Jobs While manufacturing jobs did disappear over the past two years, the statistics are misleading. Some 1.7 million manufacturing jobs have been lost since the 1990s boom pushed employment in this area up to 18.7 million in January 1999, according to the Manufacturers Alliance. The high was 21.2 million in 1979. But the drop over the past two decades masks some major shifts, on top of productivity gains. Manufacturers have been farming out tasks such as marketing, trucking and managing the payroll. Nearly 40% of all "temporary" work takes place in warehouses or on assembly lines - essentially manufacturing work - although temp jobs generally are classified as service. (Clare Ansberry, WSJ 3-22) Investors Alter Behavior After Enron Collapse The Enron debacle has persuaded 72% of 401(k) investors to change their behavior in some way, although only 27% said they are diversifying their portfolios more, according to a survey conducted for brokerage Charles Schwab. In the survey, conducted by telephone Feb. 7 to 11, 33% of the 620 investors polled said they now avoid companies they don't understand, and 31% said they do more research before investing. Also, 22% said they pay more attention to financial advisors as a direct result of energy giant Enron's meltdown, and 15% said they worry more about their investments. (Liz Pulliam Weston LA Times 3-18) A Buy-and Hold Reminder A report by fund-consulting firm Dalbar claimed to show that from 1984-2000, while the S&P 500 index was rising nearly 16% annually, stock-fund shareholders' average annual return was less than 6%. The reason for investors' profound failure to get a decent share of the greatest bull market of all time, according to the report, was their debilitating instinct for chasing hot funds as they peaked, to the exclusion of those poised to rebound. (Michael Santoli, Barrons 3-18) Quick Facts, Stats & Opinions The IRS expects to receive more than 8.2 million filing-extension requests this year. That would be a record and up from an estimated 7.9 million last year and 7.3 million in 2000. (WSJ 4-3) The recent action of the stock market has taken on the look of an elevator in a two-story building. There has been a lot of price movement with little or no progress. The environment for stocks remains extremely uncertain with many crosscurrents. This creates a great platform for traders but must be wearing thin on long-term investors. With heavy resistance overhead and good long-term support below, the markets' intermediate-term outlook is likely to be one of directionless trading. (Equity Insights, Standard & Poor's via Washington Post 3-31) We think the recent pessimism is overdone. Talk of an expanding war is now heard less and less frequently; instances of accounting irregularities are not proliferating; and the strength now being exhibited on the economic front should gradually help unleash a nice rebound in corporate earnings and, in turn, rising equity quotations. (Selection & Opinion, Value Line Investment Survey via Washington Post 3-31) Corporations and municipalities took advantage of low interest rates in the first quarter to issue nearly $310 billion in new debt, Thomson Financial Securities Data said Thursday. Long-term municipal bond issuance jumped to $64.7 billion in the first quarter, an 11% increase from the year-earlier period. Companies sold $245 billion in debt - compared to $242.2 billion sold in Q1-01. (Reuters via LA Times 3-29) "Who sells more vehicles for more than $35,000?" asks GM CEO Rick Wagoner. "The answer is Chevrolet," he says - thanks to SUVs such as the Suburban, which can cost well over $40,000. (WSJ 3-29) Strikes and lockouts involving 1,000 or more workers last year fell to 29 from 39 in 2000, says the Bureau of Labor Statistics. The number of workers involved fell to 99,000 from 394,000. (WSJ 3-26) The CPI has risen only 1.1% since February of last year, an increase that still looks benign. Not so benign is the CPI's underlying trend. The median consumer price index as of February was still 3.9% higher than a year earlier, which looks mildly malignant. (Gene Epstein, Barrons 3-25) Three months ago, 11% of small-business executives said they planned imminent price increases, according to a survey of 1,500 companies by the National Federation of Independent Business. Since then, over the past three months, 5% more companies have cut prices than have raised prices. (Bernard Wysocki, WSJ 3-25) America in the 1960s had a far higher ratio of dependents to workers than boomer retirement will produce in the 21st century. Boomers were kids then, and there was also a host of retirees at that time. (Michael Kanell, Atlanta Journal-Constitution 3-24) Because people don't know when they will die, they tend not to use up all of their assets. Many people want to leave something to heirs, too, said Kevin Hassett, economist for the American Enterprise Institute. "In the United States, retired people are actually net savers," he said. "The notion that baby boomers are going to retire and start eating their wealth is not consistent with behavior." (Michael Kanell, Atlanta Journal-Constitution 3-24) According to a recent report by Smithers & Company, an economic consulting firm in London, the value of options granted at the 325 largest companies in the United States equaled almost 20% of their pretax profits in 2000, the latest year for which data is available. (Gretchen Moregenson, NY Times 3-24) Dan Crippen, the director of the Congressional Budget Office, told the Senate Finance Committee this month that the cost of paying Medicare benefits would grow to 5.4% of GDP in 2030 from 2.3% today, reflecting both the demographic shift and the rising cost of health care. Medicare and Social Security together would rise to nearly 12% of GDP in 2030 from just over 6% today. That would be more than half the total federal budget. (Richard Stevenson, NY Times 3-24) Like the Fed, central banks in Europe slashed rates last year to stave off recession. The formal end to that cycle of monetary easing took place Tuesday, when Sweden's central bank became the first major central bank to raise interest rates. The much-larger (12 nation) European Central Bank is signaling that interest rates won't fall further, but that they will not rise anytime soon either. For the most part, though, the euro zone economy does appear well on the way to economic recovery. (Greg Ip, WSJ 3-20) Companies that are the subject of negative analyst reports often lash back at the analysts themselves, denying them access to management, refusing to take their questions on conference calls, and declining to participate in conferences organized by analysts - says Prudential Securities analyst Michael Mayo. "Our livelihood depends on being information merchants and the worst fear you have is getting cut off," says Dan Niles, a semiconductor analyst at Lehman Brothers Holdings. Last year, roughly 85% of Wall Street analysts had no sell recommendations on any of the companies they followed. (Susan Pulliam, WSJ 3-19) From research by International Strategy and Investment: motor vehicle inventories expressed in terms of days supply equalled 55 days at the end of February 2002. At the start of the 1991 recovery, car dealers had about a 72-day supply. (Caroline Baum, Bloomberg 3-19) Fair Isaac won't disclose its exact recipe, but its says a consumer's payment history and debt load account for 35% and 30% of the score, respectively. The other 35% is determined by how long the consumer has had credit, how actively the consumer is looking for new credit and the types of credit the consumer uses. (Ruth Simon, WSJ 3-19) "The [bond] market is discounting a worst-case scenario," says Paul McCulley, managing director at Pacific Investment Management Co. "Every time you get more and more data that strong, the fixed-income markets keep on discounting an even worse scenario. So until we are told otherwise, we will assume that [a tightening cycle] is going to be mean, nasty and nefarious." (Jennifer Ablan, Barrons 3-18) Tom Sowanick, director of global fixed-income research at Merrill Lynch, says the economy is "too strong to keep fed funds at crisis level and the Fed should take back 125-175 basis points of the insurance policy." His three-month view on the Treasury yield curve includes "a near-term bearish outlook across the entire curve followed by a somewhat more constructive view for six to nine months for the back end of the market." (Jennifer Ablan, Barrons 3-18) Since the start of the year and in several appearances, Greenspan has reiterated his concern about corporate profits and capital spending, about the lack of pent-up demand on the part of households, and about the negative effects rising unemployment could have on the recovery. There is nothing in Greenspan's recent offerings to suggest that he views strong growth as even a remote possibility. Greenspan is concerned that the markets will upend the nascent recovery by unnecessarily anticipating a stronger economy and aggressive Fed. (Caroline Baum, Bloomberg 3-18) It's fair to say that investors are still not correcting to reasonable expectations. Never in the history of past recessions have so many people been so bullish and stocks so overvalued while the economy was on shaky ground. Bullish investors may again be proved wrong in a big way, and the nice paper profits they amassed in March could evaporate just as quickly. (Pierre Belec, Reuters via Boston Globe, 3-17) Studies have shown that most reasonable stock-and-bond mixes work over time. What doesn't work is constantly playing with the mix. Sure, performance at any given point in time may not be where you want it, but so long as the trend shows that you are moving toward your goals, be patient. (Charles Jaffe, Boston Globe 3-17) Mutual funds distributed only $72 billion in taxable capital gains to shareholders last year, the lowest level since 1995, according to the ICI. In 2000, funds distributed a record $326 billion in capital gains. The long bull market of the 1990's generated an estimated $1.5 trillion in unrealized capital gains in mutual funds by the end of 1999. By last year, those gains had been wiped out. Losses amounted to $200 billion, or 7% of all equity fund assets. (Jeff Sommer, NY Times 3-17) Hedge funds around the world attracted record-breaking amounts of money last year, according to a new survey. Net inflows amounted to $31 billion for the year, according to TASS Research. The previous high was $22.2 billion in 1997. (Jeff Sommer, NY Times 3-17) 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) Home Page Previous Factoid Top Sites
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