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Now consider that some part of that $6 rise simply reflected the economic expansion, both in the U.S. and in Europe. When an economy expands, most other things rise along with it, including purchasing power. So a good $1 to $2 of that $6 increase was probably business as usual. But let's be generous and assume that $5 of it can be blamed on Middle East-related jitters. Now, to estimate the impact on the economy, let's do the math. Since there are 42 gallons in a barrel of oil, a $5 increase reduces to an 11.9 cent hike for each gallon of crude. Assume every extra cent for crude translates into a 1.5 cent increase at the pump, which is about what's been happening. So at 1.5 for 1, each gallon of gasoline costs 17.85 cents more. [1.5 times 11.9 = 17.85] Last year, the average amount of gasoline used by consumers, government and business each day was 361.2 million gallons. Therefore, a 17.85-cent rise means an added expense of $64.5 million a day, or $23.5 billion in a year. We're almost done. Probably 80% of all gasoline sold goes to the consumer, but let's assume all of it does, since we haven't factored in the increased cost of heating oil, diesel, and jet fuel. Disposable personal income runs $7.5 trillion a year; against that outsized figure, $23.5 billion punches a 0.31% hole.
Turnover is generally considered a negative by fund analysts and most investors, though it's not clear that it should be. Rich McFarland, who researches and manages accounts of no-load funds at Widmann Siff, has shown that higher turnover is positively linked to better performance over time. The reasons behind this are unclear, though it might have something to do with the fact that trading more often implies the manager is on top of his or her stocks and is frequently incorporating new information into the decision-making process. This is not to suggest that investors ought to seek out high-turnover fund managers, many of whom are indeed simple momentum-chasers, and tax headaches waiting to happen. But this bustling trading activity just might indicate that managers are working a bit harder for their money, in a difficult market that is bereft of broadly profitable moves - but one that just might give opportunities to active stockpickers and traders.
"We've had our bout with terrorism, we've had our bout with the recession, and everything is on the mend," said Bernie Schaeffer, chairman of Schaeffer's Investment Research. "The feeling is that the worst is over." But to a contrarian like Schaeffer, low volatility means stocks are likely to fall in the near term. Richard Medley, president of Medley Global Advisors, a consultant to hedge funds and investment houses, says there has been more volatility in markets directly affected by the Middle East crisis, especially oil. In other financial markets, the lack of volatility does not mean complacency but "deep, deep uncertainty." The lack of volatility in stocks and currencies is complacency is like saying "a deer frozen in the headlights is complacent because it is not running." Medley said that if the geopolitical uncertainty led to a freezing of corporate investment, "you don't get the second leg of the recovery that Fed is hoping for."
Watching the whole spectacle are open-mouthed individual investors, clutching their wallets, with one question in common: Now where do we turn for research? A once-obscure source is becoming more accessible. Computrade Systems and Alpha Equity Research urged investors to sell Enron around this time last year, when its shares still hovered in the $50-to-$60 range. Callard Asset Management told investors to sell on Aug. 14, the day the stock closed at $42.11 and one day before Goldman Sachs said buy. Alpha, Callard and Computrade are only three of about 120 small independentsthat follow public companies, crunching the numbers, each following its own complex proprietary computer model. The independent research firms aren't new. What's new is that they're starting to be more available to the individual investor. Instead of signing up pension funds and institutional money managers at $20,000 or even $60,000 a year, they're offering reports on individual companies for anywhere from $10 to $300 each. The Bank of New York, one of the nation's largest financial services firms, last month inked a deal to buy Jaywalkinc.com, a site that aggregates and ranks reports from independent research firms. A handful of independents, as well as some majors, also make their reports available on Yahoo Finance (finance.yahoo.com). Reports by independent research providers (as well as brokerage houses and investment bankers) are also featured on the MultexInvestor.com site. First Call/Thomson Financial (www.thomsonfn.com) and (www.firstcallanalyst.com) abstracts research, as does Starmine (www.starmine.com). Research into corporations follows most of the same broad lines no matter who is doing it. Analysts look at the climate of the market, of the sector, then the company. They look at the company's price and earnings targets; they judge its ability to generate those earnings. In their reports they explain the company's structure and whether it's appropriate to the kind of business the company is trying to do. They construct complex mathematical models using company-provided numbers and try to project where the firm is going. Where they may diverge is in the modeling, in which numbers they emphasize - and what they believe about what they're told. There may be another difference, though. Officials at the independent research providers say they sometimes succeed where Wall Street fails because they rely exclusively on publicly available documents and their own computer models to predict performance. Of course, just because this research is "independent" does not guarantee it is more accurate or better informed than the research flowing out of Wall Street. Jaywalk/Bank of New York recently ranked analysts on how closely they predicted the performance of the stocks making up the Dow Jones industrials for the year ended Friday, collecting data on 116 Wall Street firms and 15 independent analysts. The independents don't always come out on top; indeed, there are some stocks that none of them track. But John Eagleton, president of Investars, points out that 24 of the top 90 spots - Nos. 1, 2 and 3 in calling a stock's performance - were taken by independent firms when average return is calculated. Looking at cumulative return, the independents fill 49 of the 90 spots.
Dropping names from required documents means Putnam can ax managers at will without ever telling the public. Funds can be overhauled with minimal noise and public scrutiny. Putnam ranked 79th out of 85 firms for overall performance in 2001 by Barron's magazine. Putnam ranked 61st out of 69 fund groups over the last five years. The firm's 10 largest funds - on average among the top third of their peers for the three years ended in 1999 - are now all in the bottom 40 percent based on the most recent three-year period. Only two of Putnam's 66 funds earn the top rating for performance within their asset category, according to data from Morningstar Notes Stephen M. Savage, editor of the No-Load Fund Analyst newsletter: ''A poor performing fund group that will no longer disclose who is responsible for running the money sure seems to be making a bad public relations move. It's probably reflective of much deeper-seated problems within the management group. And it wouldn't make me comfortable as a shareholder.'' The firm has left the names of its managers on its Web site. Unfortunately, investors who don't track management teams on the firm's Web site - and figure out in the future whose names are missing - will never know precisely how fund management is changing. That's legal, but it's wrong. And investors should demand better.
So, is it too late to buy Korea? The average Korean stock carries a price-to-earnings ratio of a mere 12, or less than half the P/E of the S&P index, and profits this year are forecast to rise 57%. The change in Korea since its severe financial crisis, just five years ago, is astounding. The Koreans cut their short-term external debt nearly in half, paid off a $20 billion loan from the IMF early, boosted foreign reserves from $9 billion to $105 billion, closed nearly half the country's commercial banks and opened the remainder to foreign management and ownership, booted "zombie companies" off the stock exchanges, privatized many state-owned enterprises, cut the number of government regulations from 14,000 in 1997 to 7,000 in 2001 and improved corporate governance, forcing companies to adopt better auditing standards and more transparency. As a result, investors rediscovered Korea. Daily average trading volume on the stock exchange went from 27 million shares in 1996 to 473 million in 2001 even though the number of listed companies dropped by 259. In late March Moody's Investors Service raised Korea's credit rating by two notches - a big vote of confidence. Korean management in the 90s wanted to increase their market share. They didn't worry about returns for their investors. That attitude has changed abruptly. Managers now focus on the most efficient uses of the assets that their shareholders provide them. The job isn't finished. Labor flexibility remains a big problem. When we were in Seoul, thousands of workers were on strike protesting a plan to privatize electric utilities. The chaebols - Korea's version of Japan's notorious keiretsu, those interlocked conglomerates - remain powerful, impenetrable and often wasteful. But consumer prices have leveled off, unemployment is below 4%, and prospects for political stability seem good. The Korea Fund (KF) trades on the NYSE. It's a substantial ($900 million) closed-end fund dominated by the large companies. Since 1999, the fund has returned an annual average of 29%. It still appears attractive, trading at a significant discount to the actual market value of stocks it owns. The Korea Equity Fund (KEF) is a smaller closed-end. Pohang Iron & Steel (PKX), which Forbes last week termed "the world's best steel company" and SK Telecom (SKM) are two of the few Korean companies offering ADRs. Related article: Stats and a Study on Emerging Markets
And then, nearly all of those companies bounced back. The rebounds, in fact, have been so strong that, even including that huge initial drop, almost all of the industries have surpassed the gains of the overall market. Casinos now are up nearly 26% since Sept. 10, the day before the attacks, according to a study by Dow Jones Indexes. Hotel companies show an overall gain of 22%, chip makers are up nearly 11% and brokerage firms are up more than 10%. The one exception has been the airlines, which, although they have recovered most of their initial loss, still as a group are down more than 9% since Sept. 10. The overall stock market, by comparison, fell less in that first week, but also has rebounded less. The Dow Jones Industrial Average is up only 8.1% since Sept. 10, while the volatile Nasdaq Composite Index is up 4.2% and the broad Standard & Poor's 500-stock index is up only 3.5%. The lesson for stockholders is simple: Investor attitudes, and financial markets, are far more flexible than experts realize when crises happen. Catastrophic events often mark points from which stocks turn up, not down. Stocks that investors fear will suffer most wind up falling to levels where they look very cheap, and some, which aren't as beleaguered as initially feared, manage strong gains. "Crisis events like Sept. 11 or 'Enronitis' actually turn out to be bullish," notes Ned Davis of market research firm Ned Davis Research in a report to clients. Although investors repeatedly are surprised to see it, Mr. Davis notes that such recoveries aren't all that unusual. Why? Partly because the government usually tries to calm markets by flooding the financial system with cheap money, which finds its way into stocks. And partly because the crisis itself often makes nervous investors dump stocks at fire-sale prices, which pulls more-confident investors into the market and creates a surge of bullishness. Ned Davis Research has studied market reactions to crisis events going back to the closing of the New York Stock Exchange at the outbreak of World War I. In general, stocks fall during a short period after the first shock, but rebound to more than recover as soon as two to four months later. This time, at least so far, "history repeats," Mr. Davis concludes.
The boost comes when homeowners refinance and take out a bigger mortgage, known as a `cash-out' mortgage, because the value of their underlying collateral - their home - has appreciated. Increased demand for credit lifts money supply growth, which boosts economic activity. In Q4-01, 47% of Freddie Mac- owned loans that were refinanced were at least five percent higher in amount than the original mortgages. That pales in comparison to Q3-00, when 82% of refinanced Freddie Mac-owned loans were at least five percent higher than the original loan. In dollar terms, some $80 billion was taken out of home equity last year in the course of the record $1.14 trillion in refinancings for single-family homes, according to the Mortgage Bankers Association of America. It's no surprise that refinancings have slumped as 30-year mortgage rates shot up from 6.45% in November to 7.2% last week. The MBA's mortgage refinance index fell from a record high of 5535 in early November to 1272 in late March. A slowdown in mortgage refinancings won't slow economic activity; a slowdown in home purchases and, more importantly, housing starts, will. On that score, the news is still upbeat. The MBA purchase index increased 5.9% last week to a 2two and a half month high of 350. The purchase index hit a record high of 376 in January. Continued strength in new home sales inspired builders to break ground on new single-family homes at the fastest pace in almost a quarter century in February. This is what counts for economic growth, not the offsetting reduction in interest payments and interest income for borrower and lender. Consumer Confidence and Consumer Spending Steve Liesman WSJ 4-8 Retail spending, after falling in September, has been higher in every succeeding month than it was in August. Indeed, even excluding autos, retail sales grew in every month during the past half-year compared with a year ago. All this while the most closely watched of the two main confidence gauges still hasn't topped pre-Sept. 11 heights. Could it be that consumer sentiment isn't so closely tied to spending behavior after all? And if so, what does that mean for the U.S. economy now? Carl Steidtmann, chief economist of Deloitte Research, jointly owned by the accounting firm Deloitte & Touche and Deloitte Consulting, believes he has an answer. Mr. Steidtmann compared changes in consumer confidence and consumer spending over the past 20 years. His finding: There is very little, if any, relationship between confidence and spending. Politics, disasters and war drive confidence, Mr. Steidtmann concludes, while cash flow drives spending. The twain may or may not meet. How Fund Categories Fared WSJ 4-8-2002
Related article: Q4-01 Results
The belief stems in part from the relative nimbleness of smaller funds. It is difficult, for example, for a large fund to buy or sell a sizable position in some stocks without moving their prices up or down significantly. In some cases, it would be downright impossible for a big fund to establish a position that it would consider worthwhile. The ability to trade in small-cap stocks lets the smallest funds exploit the so-called small-cap effect - the historical tendency of small-cap stocks to outperform large ones. Since 1926, on average, that performance difference has been about 1.2 percentage points a year, according to Ibbotson Associates. To qualify as a small-cap stock, under the definition of Ibbotson and others, a company must have a market capitalization of less than $200 million. For years, the data confirmed the theory that small funds perform better than large ones. One study, for example, found that for every doubling in a fund's size, investors could expect a decrease of 21 basis points, or hundredths of a percentage point, in annualized performance. That adds up to a big difference, especially when considering that the largest funds are many times bigger than the smallest. This is where the conventional wisdom stood until the late 1990's, when a fatal flaw was found in the historical comparisons of large and small funds. The discovery was made by Mark M. Carhart, then an assistant professor of finance and business economics at the University of Southern California and now co-head of quantitative research at Goldman Sachs. Mr. Carhart found that the previous studies had used historical databases that ignored funds that had gone out of business. That omission was significant, and for two reasons: Smaller funds go out of business much more often than larger ones, and funds that fold tend to be poorer performers than those that survive. Upon correcting this so-called survivorship bias, Mr. Carhart could detect no systematic difference in the performances of large and small funds. (His research has circulated for several years as a working paper). Why can't the average small fund capitalize on its abilities to trade with lower transaction costs and to invest in smaller-cap stocks? One major reason is now known: The average smaller fund spends a greater percentage of assets on administrative costs, advisers and managers, and on marketing costs like 12b-1 fees. In fact, according to research conducted several years after Mr. Carhart's paper, the smallest 25 percent of funds have average expense ratios that are 94 basis points higher than those of the largest 25 percent of funds. (This research was conducted by John M. R. Chalmers of the University of Oregon, Roger M. Edelen of the Wharton School of the University of Pennsylvania and Gregory B. Kadlec of Virginia Tech.) Yet another factor diminishes the theoretical advantage of the smallest funds. The small-cap effect, it seems, is not as exploitable in practice as theory suggests, even by the smallest funds. Recent research by three finance professors - Joel L. Horowitz of Northwestern, Tim Loughran of Notre Dame and N. E. Savin of the University of Iowa - has found that the small-cap effect is being driven almost completely by the tiniest companies. How tiny? The three professors found that if companies with market capitalizations of $5 million or less are eliminated from the record, the small-cap effect disappears. That is devastating to the small-cap effect because it is virtually impossible to make money by investing in such companies Ù they hardly ever trade, and their bid-ask spreads are prohibitive. The bottom line is this: In choosing a mutual fund, you should not take its own size into account. Instead, search for a fund that has beaten the market over many years. If it happens to be a small fund, so be it.
There are several reasons. First, studies of long-run returns often suffer from "easy-data bias," which results from using starting dates when the market was at very low points, thus overstating performance for the average investor. Then there is "survivor bias." Very long-term performance, going back to the years before major indexes were created, tends to be calculated for companies that are still in business. And then there are trading costs and taxation - hurting returns. Elroy Dimson, Paul Marsh and Mike Staunton in their book, "Triumph of the Optimists: 101 Years of Global Investment Returns", studied returns for the 101 years from 1900 through 2000, removing these biases as best they could. For some markets, returns fell by more than half, compared with studies of shorter periods. Over the 101 years, the United States market, the world's biggest in 1900, as it is now, returned 10.1% annually, enough to turn each dollar invested into $16,797. The return for Britain, the other major market a century ago, would have been healthy as well, with œ1 growing to œ16,160. But a dollar was worth a lot more in 1900, about 24 times as much, and a pound bought 55 times as much in inflation-prone Britain. The real return for each dollar over the century was $711, or 6.7% annually; each pound invested in British stocks grew to œ292, or 5.8% a year, adjusted for inflation.
When Miskit started preparing his 2001 tax return, he got socked with more bad news: The preferred stock dividends that Edison didn't pay continued to accrue. His broker issued a Form 1099 that included this unpaid income and explained why it may be taxable even though it wasn't received. Cash-basis taxpayers--that's virtually all individuals--don't have to pay income taxes on interest they haven't received. However, there's an exception for certain types of bonds and preferred stocks. The most common exception is interest accrued on zero-coupon bonds. Technically, it works this way: If a company gets in a bind and is unable to pay dividends to its preferred shareholders, it is allowed to suspend those dividends for as long as five years. During that period, the company - on paper - continues to record "dividend payments." But those "payments" go into a captive trust that accepts corporate IOUs instead of cash. The company ends up with a tax deduction without the corresponding cash expense - a particularly large benefit to a company in financial trouble. But this method of accounting also means shareholders must pay tax on that phantom income. If the company later resumes paying preferred shareholders, the tax issue eventually evens out. The investor has simply prepaid the tax on dividends. But if the dividends are never paid, investors lose out. Although they can claim a capital loss (usually at the 20% rate) for paying tax on the dividend payments they never received, that write-off usually is worth less than what the shareholders already paid in taxes on the dividend income at their ordinary income tax rates (usually 27.5% to 38.5%). Sometimes investors get phantom income even when it's likely that the interest or dividends will never be paid. In those cases, although you may need to report the phantom income, you should write it off as a loss on the same year's return, said Richard Lehmann, publisher of the Forbes/Lehmann Income Securities Investor in Miami. Lehmann said he had to do this when the issuer of a zero-coupon bond he owned went into bankruptcy protection but continued to accrue interest owed to bondholders.
Cash flow from operations tells you about the cash flow surrounding the sale of the company's a product or service. If the company doesn't have enough cash to run its day-to-day business, that's not a good sign. A great quick check is to compare net income, off the income statement, to cash flow from operations. The numbers should be in sync. If not, that's a big red flag. If there is a big disparity between net income and cash flow, then delve deeper to analyze the company's "working capital." Technically, it means current assets minus current liabilities. But it's just the money that's come in (or still is owed to the company) less the money the company has paid out (or still has to pay out). So working capital helps you figure out how the company is managing its cash. Cash comes from paid sales or money that's owed to the company from customers, a.k.a. accounts receivable. Money is paid out when the company pays for the things it needs to run its business, like inventories or the heating bill. It also includes money it owes out, or its accounts payable. You'd like to see the accounts receivable portion of this equation decreasing over the years. That would mean customers are paying their bills and the company has the actual cash, not an IOU. If receivables are increasing it could mean the company's having a hard time collecting. Or maybe it's pushing its product out the door too fast and letting too many customers finance their purchases. Either way, that doesn't bode well for the future. You're looking for a slight increase in accounts payable. Of course big increases may mean the company is having a tough time paying its bills. Or maybe it's buying too much inventory. That's not good because it's not used, it will have to take a hit for obsolete inventory. Cash Flow from Investing Activities This is where you find out how the company is investing its excess cash and how it's expanding its business. Basically this is where the money goes out the door. That includes things like buying property, plants, or equipment - a company's capital expenditures. But be skeptical. The more money management dumps back into the company the less money left for the shareholders. So while opening new stores and buying new equipment sounds good, if the demand is not there, that's a big waste of money. Many companies will invest their excess cash in other companies. You'd find the details of those outside investments in this section and in the corresponding footnotes. Finally, information on loans made or collected from related parties will also appear here. Sometimes companies have policies that allow them to offer loans to executives and shareholders, mainly in correlation with stock purchases or buybacks. That's reported here. Cash from Financing If you want to know how your company comes up with its extra money to grow the business, this is the section for you. You'll see how the money comes in the door. So big numbers from financing are a good thing - especially if you're investigating a start-up. If the has company no sales and overall losses, but the cash flow from financing is high, that could make you feel better. It means someone out there - delusional though they may be - thinks the company has got what it takes to make it. And while you never want to see negative cash flow from operations, if you do and the cash from financing is meaty, at least you know the company has some money to get by until it figures out how to profit from its product. The company also may get more money by taking on more debt or buying back stock [I thought companies could get more money only by SELLING stock]. You'll find that info here too. Just take notice of whether it's attempting to pay down it current debt. You know what can happen when you keep taking out loans. A Word of Caution While you can't necessarily change the cash flow numbers, the way the cash-flow statement is formatted can be manipulated, says Professor Norman Bartczak, an accounting professor at Columbia University. So a company might list an item in its investing section that ought to be in operating activities, thereby sacrificing its investing cash flow to make its operating cash flow look prettier. Enron and Global Crossing were both guilty of this. Also, be careful of one-time charges that make the numbers look prettier, especially in the operating section. So while it's not the perfect statement, it comes pretty close. At a minimum, you have a feel for whether the company has enough money to run its day-to-day business. You have some idea of what it's investing in and what it does to raise money. More Financial Analysis Pointers Jacqueline Doherty, Barrons 4-1 Morgan Stanley's Trevor Harris, head of Morgan Stanley's global valuation, accounting and tax policy team and a former professor of accounting at Columbia University recommends checking these items before investing. Harris advises tracking a company's inventory levels, too. That's done by dividing inventory by the cost of goods sold, and then multiplying by the number of days in the quarter. If the result falls below that of previous quarters, or below competitors', the company might be manufacturing products more efficiently, which would lessen the need to keep excess inventory on hand. Conversely, when inventory levels rise without a commensurate increase in sales, a company might be tying up cash that could be used more productively elsewhere. Too, rising inventories can mean a product isn't selling well, or that a new product is being stockpiled prior to a launch. Nonetheless, question. Depreciation is a non-cash item that's often ignored. Dividing capital expenditures by depreciation, says Harris, may offer clues as to whether a company is investing sufficiently in its business. Typically the ratio of capital spending to depreciation is 1-to-1.2. A lower number implies the company is cutting back on expenditures, perhaps to cut costs - a development that may spell future trouble. Other items to check: Statement of Cash Flows: Compare cash flows to earnings to see whether profits are being translated into cash. If not, question earnings. Management Discussion and Analysis: Gives management's insight about past and future opportunities and potential pressure points. Statement of Accounting Policies: Discloses what accounting methods were used for items such as revenue recognition and inventory valuations. By changing accounting methods, companies can artificially increase or decrease earnings. Deferred Tax Note: Describes the difference between the value of assets and liabilities used when reporting taxes and the value used in preparing earnings. Shows how quickly companies are drawing down reserves. "Other": When a company classifies something as "other," this usually refers to an item or adjustment on which management doesn't want investors to focus. Related articles: Special-Purpose Entities, Off-Balance Sheet Items
That combination - a small decline in payrolls and longer hours - lifted aggregate hours worked in manufacturing, a proxy for output (minus productivity), 0.8% last month, the first increase since January 2001. The unemployment rate rose 0.2 percentage points to 5.7%, which is only disturbing if one was looking for unemployment to suddenly become a coincident indicator instead of the lagging indicator that it is. For the second month in a row, employment in help supply services (a.k.a. temps) showed an increase. The gains -- 10,000 in February and 69,000 in March -- were the first since September 2000 (first in, first out). The intervening months saw the army of temporary workers shrink by almost one-fifth, according to the Labor Department. In the services sector, payrolls rose 118,000, the largest monthly increase since September 2000 - and has nearly recovered from 245,000 job losses late last year. Average hourly earnings rose four cents, or 0.3%, to $14.67 in March.
Winstar's descent from multi-billion-dollar telecom star to near worthlessness in less than two years illustrates a fundamental change in the longevity of companies. Value today is increasingly derived from intangible assets -- intellectual property, innovative technology, financial services or reputation. As Winstar's investors and lenders found, the value of such assets can erode with shocking speed if customers find something better. Winstar is among the most spectacular in a wave of corporate meltdowns that has claimed energy trader Enron, broadband pioneer Global Crossing Ltd. and storied photographic innovator Polaroid. Consider what investors are paying for the debt of companies in bankruptcy protection, ownership of which often brings control of a company. Enron's bonds now trade for 13 cents on the dollar, Polaroid's for five cents, and Global Crossing's for two cents, proof of how little investors think they can recover. The recession, accounting gimmickry and bursting of the technology bubble have been factors in these collapses. But rapid technological change and the increasing importance of intellectual, as opposed to physical, property suggest that once these recent factors have faded, corporations will still be more vulnerable to swift extinction than they once were. Fifty years ago, tangible assets such as real estate, equipment and inventories represented 78% of the assets of U.S. non-financial corporations. Today, the proportion is 53%, according to Federal Reserve data. Much of the shift is due to growth in intangible assets such as patents, copyrights and goodwill - the difference between what a company pays to acquire another and the net worth of the acquisition as reported on its balance sheet. Leonard Nakamura, a researcher at the Federal Reserve Bank of Philadelphia, estimates that annual investment in intangible assets, which he classifies as research and development, software purchases and advertising, rose from 4% of gross domestic product in 1978 to almost 10% in 2000. What's becoming clear is that there's nothing magic about hard assets. They don't generate cash. What does is a better solution for your customer. And increasingly that's intellectual, not physical assets, driven. The most valuable companies today, with a few exceptions, make most of their money from intangible assets: Microsoft Corp.'s software, Pfizer Inc.'s drug patents, and Walt Disney Co.'s film and television productions. These formidable franchises are unlikely to erode soon. But rapid shifts in corporate standings show nothing can be taken for granted. Total collapses remain rare, but major reversals of fortune are not. In the 1981-82 bear market, three of the 100 largest companies in Standard & Poor's 500-stock index lost at least two-thirds of their market value, according to Aronson & Partners, a money-management firm. In the 1990 bear market, none did. In the latest bear market, 26 companies at some point sustained losses of that magnitude. Most are technology and telecommunications companies, including Hewlett-Packard and AT&T. But the losers also include broker Charles Schwab and retailer Gap. The combination of heavy debts, falling revenue, and skittish investors as well as the rapid obsolescence of yesterday's technology are producing a tide of bankruptcy filings. Forty percent of the largest filings since 1980 have occurred since the beginning of 2001, according to Edward Altman, a New York University finance professor. And recovery rates - what lenders can expect to get back after companies are restructured or their assets sold - were an estimated 21 cents on the dollar last year, excluding financial-services company Finova Group, whose assets were subject to an unusual bidding war. That's the lowest since Prof. Altman began gathering data in 1978.
The difference between the two average-cost methods is fairly simple. With the single-category method, you use the average basis of all shares owned at the time of each sale, regardless of how long you owned them. With the double-category method, you go one step further: "All shares in an account at the time of each disposition are divided into two categories: short-term and long-term," the IRS says. By "short term," the IRS means shares held one year or less. Shares held longer than one year are long-term. See IRS Publication 564 for more details. Last Minute Help Stacy Forster WSJ 4-13 Note to procrastinators: If you have last-minute tax questions for your mutual-fund company or broker, you better start dialing now. Despite the rapidly approaching April 15 filing deadline, a few of the largest financial-services companies have limited phone-in customer-service during non-business hours (ex: Vanguard) - and some not at all (ex: Janus). Instead, many will be directing customers with last-minute questions to their companies' Web sites. Just the Facts Hedge Funds 101 There are nearly 6,000 hedge funds worldwide, up from 880 a decade ago. Investors poured $144 billion into the funds last year, pushing up assets to $563 billion, 38% above the total of the previous year, according to a Hennessee Group survey. American hedge funds delivered an average gain of 5.6% in 2001, versus declines of 11.9% for the S&P 500 and 5.6% for the average equity mutual fund, according to Van Hedge Fund Advisors International. Hedge funds can register under the Investment Company Act of 1940. This allows them to offer investments to an unlimited number of people. This requires more disclosure than traditional private partnership hedge funds, which are typically limited to 100 investors and have no reporting requirements. (Donna Rosato, NY Times 4-14) Help for the 'Tax Poor' What if you get to the bottom line of you 1040 and it's larger than the bottom line in your checkbook? IRS does allow strapped taxpayers to enter into agreements under which you can pay off your debt in monthly installments. They are no fun, though. The IRS charges a one-time "user fee" of $43 to set up an agreement, and charges penalties and interest on the unpaid balance as you go along. Get Form 9465 and read the instructions.(Albert Crenshaw, Washington Post 4-14) Help for the 'Tax Broke' If there is no hope of paying in full, you can apply for what is called an "offer in compromise." Under these deals, the IRS agrees to settle for less than 100 cents on the dollar, on the theory that getting something is better than nothing, and that resolving the issue is better for both you and the agency. You'll need to fill out Form 656, which is almost as complicated as a tax return, and the IRS has to agree to the deal. For more information look at IRS Publication 594, "The IRS Collection Process." (Albert Crenshaw, Washington Post 4-14) Making Amends With the Tax Man If you just remembered an important deduction you forgot to include on your return, or some income you omitted, relax. That's what Form 1040X (Amended U.S. Individual Income Tax Return) is for, and record numbers of people have been reaching for it as our tax laws have grown more and more complex each year. (Tom Herman, WSJ 4-16) Don't Get Comfortable It's good for investors to see and hear from a lot of voices, not the same few over and over again. The very comfort that comes from familiarity often builds a false sense of security, where people drop their guard and stop questioning things simply because someone who comes into their house on-air each week 'must be smart.' If you look at a list of Louis Rukeyser's most regular guests, you won't find shelves filled with Morningstar fund manager of the year awards. Frank Cappiello and Ralph Acampora had average picks that lost 5.1% and 4.2% respectively in the last year, compared to a 3.66% gain for the average picker tracked by Validea.com. But even if someone makes great stock picks to any number of media outlets, that doesn't guarantee great returns for the investor. Paul Cook, manager of the Munder NetNet fund, has the third-best prognosticating record over the past 12 months, with his stock picks generating a return of more than 110% - while his fund lost 22% in the last year. (Charles Jaffe, Boston Globe 4-10) Three Facts on Diverisfication [1] Funds that would seem to have little to do with one another could in fact be highly correlated. Take natural resource funds (up 11.27% in Q1) and emerging-markets funds (up 12.24%). Many emerging markets are highly correlated to natural resource prices because these products represent the main exports of those markets. If you own both, you aren't diversified. [2] Equity-income funds (up 2.74%) invest in mature companies that typically aren't involved in technology or other fast-paced areas, thus they are slightly out of step with S&P 500 index funds and growth-stock funds. [3] The best way to diversify away from a stock index fund is to own another kind of instrument, such as bonds or cash or real estate. (Craig Torres, Washington Post 4-7) Roth Flexibility "Roths are a low-commitment investment," says Nicholas Kaster, a tax attorney with publisher CCH in Riverwoods, Ill. "If you make a $3,000 contribution and the account is now worth $3,200, you can pull out $3,000 and it's not a taxable event. It only becomes a taxable event once you start digging into earnings." Suppose you just got out of college, and you want to save for both retirement and a house down payment. With those goals, you might make the maximum possible Roth contribution for the next six years. Because the allowable contribution is going up, you could sock away $3,000 in 2002, 2003 and 2004 and $4,000 in 2005, 2006 and 2007 - a total of $21,000. If you then needed some or all of that $21,000 for a down payment, you could pull the money out of your Roth and owe nothing in taxes and penalties. (Jonathan Clements, WSJ 4-3) Quick Facts, Stats & Opinions It wasn't all that long ago when market pundits were telling investors just to stick their retirement in an index fund, mostly commonly the large-cap-heavy Vanguard 500 Index. That's it. Leave it there and never worry about your money again. Unfortunately, these so-called experts forgot one important factor: just as sectors come into and fall out of favor, so can styles. In March, the Russell 2000 [small-cap index] gained 7.9% and the S&P 400 Mid-Cap Index grew by 7.1%, far outpacing the 3.7% gain of the large-cap S&P 500. This phenomenon is not rare, either, as both small-caps and mid-caps have outperformed large-caps over the past one-, two- and five-year periods. (Ron Rowland, All Star Fund Trader via Wash Post 4-14) It may not seem like it right now, but stocks are performing better. It is not clear that we are in a sustainable uptrend; however, the outlook for the economy and corporate profits is improving and setting the stage for a market recovery. It is unlikely that interest rates will move up over the next year to a point where they prevent the upward movement of stock prices. This is one of the best times to invest in growth stocks that we will see for the next several years. (Jim Collins, OTC Insight via Wash Post 4-14) Even before figuring in taxes, funds in the tax-managed category outperformed their peers last year, according to Standard & Poor's. In the large-cap growth fund category, tax-managed portfolios beat the industry average by 6.4 percentage points. Among large-cap blend funds, the tax-efficient group led by 1.1 percent, and among large-cap value funds, they led by one-tenth of 1 percent. (Justin Wiser, CBS.MarketWatch 4-10) Almost two-thirds of the 2,600 new mutual funds created in the past two years charge a load. Last year, some three-quarters of new dollars flowing into mutual funds went to load funds, compared with 62% in 1999. And not only are there more funds with loads, but the loads themselves are getting heavier. The average load today is 5.2%, according to Financial Research Corp., up from 4.86% five years ago. (Jeff Opdyke, WSJ 4-10) The number of "platinum" cards has exploded, doubling to at least 100 million in just the past two years, according to the Nilson Report, a credit-card newsletter. As a result, the term has ceased to have much meaning. Then the industry rolled out "titanium" cards, but even that is now offered in a student version by First USA. The same thing could happen with the Centurions and Quantums. (Ron Lieber, WSJ 4-9) Not too long ago, fund investors lusted for sector funds. Now they can't run from them fast enough. A record-setting 25 cents of every dollar sunk into U.S. stock funds in 1999 and 2000 went into a technology or telecommunications fund, according to data from Financial Research Corp. Last year redemptions from sector funds outpaced investments by more than $11 billion. (Ian McDonald, WSJ 4-8) Examining the returns of stocks and bonds since 1925, James Paulsen, chief investment officer at Wells Capital Management, found that when the market multiple has fallen below 18, annualized returns have averaged 17 percent. When the market traded above 18 times earnings, returns have averaged 2.5 percent annually. "Where we're operating right now suggests very low returns in the stock market, mid-single digits," he said. The S.& P. 500 is trading at 20 times next year's projected earnings. (Gretchen Morgenson, NY Times 4-7) The Federal Reserve on Friday said consumer credit rose $7.1 billion to $1.669 trillion, representing a 5.1% annual growth rate. The increase stemmed from a $6.3 billion jump in nonrevolving credit. Revolving credit, such as credit cards, rose $600 million in February after rising a revised $1.4 billion in January. (WSJ 4-5) In Q1, 431 companies raised dividend payments, down 3.8% from the number in the first quarter of 2001 and down 25% from the pace in the same period of 1999, S&P said. The number of companies cutting or omitting dividends totaled 45 in the first quarter, up slightly from 44 a year earlier. (LA Times 4-3) Since the mid-1990s, the luxury segment of the European and U.S. market has vastly outperformed the mainstream market. In the U.S., unit sales of luxury vehicles rose 80% between 1996 and 2000 compared with a 5% rise for ordinary vehicles and light trucks. Why? According to the U.S. Census Bureau, the number of families with annual incomes over $100,000 more than tripled, to 14.2 million, or 13% of U.S. households, between 1990 and 2000. (Jay Palmer, Barrons 4-1) Some say the market isn't as overpriced as it looks at first blush, at least if you remove some of the most highly priced stocks. According to Wilmington Trust Co., 250 of the stocks in the S&P 500 have price-earnings ratios below 17, just a tad above the market's long-term average. (Gregory Zuckerman, WSJ 4-1) Quick Tips Web surfers are encountering a new type of advertisement, one that downloads software to their computers. So-called pop-up downloads take advantage of the fact that many Web users are not savvy enough to understand what they're agreeing to and that most people are inclined to say "Yes" when presented with a pop-up box asking whether they will accept the download. Most of the applications downloaded through such ads are legitimate products, though some are programs that can redirect users to adult Web sites, create new dial-up accounts, or otherwise interfere with a user's computer. (CNET via EduPage 4-8) Did you know that you can save a Web page without navigating to that page? If you use Microsoft Internet Explorer 5.x/6, all you have to do is right-click the link to the page and choose Save Target As. In Netscape 6x, you right-click the link and choose Save As. (Emazing 4-9) After spending the last six months refining the technology, Teoma will roll out a search engine this evening that will take dead aim at Google. Both sites depend on complicated algorithms to analyze search requests, but Teoma says its formula is more effective because it breaks the Web into clusters of online communities. This enables Teoma to categorize its results better than Google and offer more helpful choices to refine a request. Besides providing a basic list of primary results, Teoma presents links to sub-categories that may be related to a topic, as well as a section devoted to "expert" sources. Teoma still must prove it's the best among other lesser-known but technologically promising search engines, which include Alltheweb.com and Wisenut.com. (LA Times 4-1) Home Page Previous Factoid Top Sites
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