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Biz Links REIT Update April-May More Factoids April Part 2 April Part 1 March Part 2 March Part 1 Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index Q4-00 Index Q3-00 Index |
Shares of Schering-Plough on Wednesday plummeted to their lowest level since 1997 after the drug giant disclosed that the federal government had launched a criminal investigation of the company's operations. On Friday, Schering said it agreed to pay $500 million in fines related to quality-control issues at four plants--while the criminal probe still looms. Another drug firm, Abbott Labs, saw its shares fall 7.1% for the week after it also disclosed that the government has quality-control issues with one of its key plants. States Take Pharmaceuticals to Court Caffrey, Hensley & Gold WSJ 5-21 The beleaguered pharmaceutical industry is already wrestling with a wide range of lawsuits and investigations by states reeling from the cost of Medicaid, the joint state-federal health-insurance program for the poor and disabled. Now more than 35 states are working together in hopes of repeating the success of the nationwide campaigns that led to the $208 billion tobacco-industry settlement and the pursuit of antitrust sanctions against Microsoft. In Washington, a group of big companies and governors are lobbying Congress to help generic drug makers compete against brand-name rivals. In Boston and Philadelphia, federal prosecutors appear to be broadening investigations of pharmaceutical makers' pricing practices. The drug companies also face class-action suits from a coalition of consumer groups alleging that the companies engaged in deceptive and illegal acts to drive up medicine prices. Medicaid costs to states have shot up more than 25% over the last two years, partly because of drug-price increases. But the drug industry has mounted stiff resistance to any legislative effort to impose tighter cost controls. In a case scheduled for trial next year, Texas has charged three drug makers with falsely reporting wholesale prices to the state, leading to overcharges to Medicaid. California is contemplating similar legal action. On another front, states are targeting efforts by brand-name makers to extend patents on their blockbuster drugs and keep generic versions off the market. In December, 29 states sued Bristol-Myers Squibb, alleging the company made false statements to federal regulators to extend its patent on the antianxiety drug Buspar. Earlier this year, Nevada and Montana alleged that at least 17 drug makers and their affiliates defrauded consumers by abusing a system designed to guarantee Medicaid the lowest drug prices available. Pfizer last week disclosed that several state attorneys general are studying its marketing of a epilepsy drug. Eli Lilly recently reported that Massachusetts had subpoenaed it in an investigation of alleged overcharging of the state's Medicaid program. Early last year, Bayer settled federal charges that the company falsely inflated the average wholesale prices, or so-called AWP, it reported to the government of drugs for hemophilia and immune disorders. By inflating average wholesale prices and then selling drugs to doctors at a deep discount, prosecutors said, Bayer boosted the reimbursement doctors got from Medicaid and thereby encouraged them to use the company's medicines. Bayer agreed to pay a $14 million fine. Another milestone came in October, when TAP Pharmaceuticals Products Inc. paid $875 million in federal fines for fraud and overcharges, mostly to Medicare. [Boston Globe 5-22: TAP paid $875 million to settle claims that the company defrauded the government by helping doctors bill Medicare and Medicaid for free drug samples. A whistle-blower lawsuit against TAP accused the company of offering bribes to Tufts Associated Health Maintenance Organization after the Boston health plan decided to cover only AstraZeneca PLC's Zoladex prostate drug because it was cheaper than TAP's Lupron.] Pharmaceuticals Need Focus Ashish Singh & James Gilbert, Bain & Co (health care consultants) Boston Globe 5-12 Two years ago, the industry's leaders swore that bigger must be better. But if recent merger mania proved anything, it's that joining two businesses with little in the labs is nothing but a pick-me-up. Sure, Glaxo Wellcome squeezed out millions in costs when it merged with SmithKline Beecham in December 2000, but it has been able to do little to deflect the pending loss next year of patent coverage on four drugs, including popular antidepressant Paxil, that bring nearly $4 billion in US sales alone. The problem is that the big players are hitting the limits of scale. Their strictly functional organization models - centered on research labs that seed molecules across a wide swath of therapeutic categories to see which ones become blockbuster drugs - worked well once, but no longer. In fact, focus, not serendipity, led to earlier breakthroughs. Studies by strategy consultancy Bain & Co. show a big performance lead for drug firms that reorganize internal research efforts, license more compounds more often, and focus on research and development, sales, and marketing around a few therapeutic franchises. These companies increased revenues 1.5 times faster and drove market capitalization almost twice as fast as those with a broader presence across therapeutic franchises. Some industry executives argue that such tight focus puts all the eggs in one basket. We argue it's far riskier in the long term not to concentrate - and riskier still to buy into the bad math behind renewed merger mania. Japanese Pharmaceuticals Peter Landers WSJ 5-21 Americans who have stomach ulcers may get a prescription for a drug called Aciphex (made by Eisai) to reduce the amount of stomach acid. Adults with diabetes may be put on Aptos (made by Takeda Chemical Industries), which helps control blood-sugar levels. The two hit drugs have something in common: They are helping produce record profits for their Japanese developers at a time when the economy in Japan is a mess. Many of Japan's top drug makers reported strong results last week thanks to the U.S. market, and they are increasingly looking to Americans to fuel growth in the future. The company showing the biggest success in the U.S. is the Toyota of Japanese drug makers, Takeda Chemical Industries Ltd., based in Osaka. For the year ended March 31, Takeda reported a net profit of 236 billion yen ($1.87 billion), up 60% from a year earlier. Takeda's sales rose 4.3% to 1.01 trillion yen. Japanese pharmaceutical makers have been late in targeting the U.S. market compared with other foreigners because until recently their home market in Japan seemed more than adequate. The Japanese pharmaceuticals market, the world's second largest, is valued at about $50 billion a year, but growth has been practically flat in recent years. Pharmaceuticals sales in North America, meanwhile, totaled $182 billion in 2001, according to IMS Health, a health-care information company. Japanese Pharmaceuticals 2 Peter Landers & Jason Singer, WSJ 4-28 The decision last week by Abbott Laboratories Inc. to pay 38 billion yen ($297 million) for the 33% it doesn't own of drug maker Hokuriku Seiyaku Co. shows how Japan, the world's second-largest pharmaceuticals market, is turning into a hot area for mergers-and-acquisitions activity. The need to fill up the pipeline of new drugs also lies behind a deal last December to give Roche Holding AG of Switzerland a 50.1% stake in Chugai Pharmaceutical, a midsize Japanese company strong in biotechnology research. Foreign investors collectively already own about 45% of Yamanouchi Pharmaceutical's shares.Foreign investors also held 39.5% of Shionogi & Co. and 30.5% of Daiichi Pharmaceutical Co. as of Sept. 30, 2001. Both companies have promising pipelines and could be attractive targets for cross-border deals. Pharmaceutical Investments Ian McDonald, WSJ 5-3 Jordan Schreiber has run the $855 million Merrill Lynch Healthcare fund for 19 years, making him the health care fund category's most tenured manager. He's also topped his average peer and the S&P 500 over the past one, five and ten years, according to Morningstar. Schreiber admits he'd probably underweight health care stocks over the next three years because big drugmakers are in big trouble. The problem is their dearth of new products. Pfizer has the best [drug] pipeline but they have an enormous marketing force to pay too. Eli Lilly has a reasonable pipeline. Schreiber has been buying shares of hospital and health-maintenance firms, where price increases and cost cuts have led to good results. Quick Stats Of the 18 major drugs that Pfizer markets for annual sales of $26 billion, eight bring in more than $1 billion each in sales annually and together account for 76% of total drug sales. During the next five years, four of the eight will lose patent protection. (Scott Hensley, WSJ 5-2) More channel-stuffing? Pfizer disclosure this week that its receivables, or money owed by customers, rose in the first quarter from the fourth despite a decline in sales. An analyst at brokerage firm Raymond James, Mike Krensavage, pointed out in a note to clients Thursday that in addition to Pfizer, Schering-Plough and Eli Lilly also saw big receivables jumps in the first quarter. (Jesse Eisinger, WSJ 5-16) Spending on drugs bought at pharmacies alone rose $21 billion to $132 billion in the United States in 2000, according to the National Institute for Health Care Management Research and Educational Foundation. (Bloomberg News via Boston Globe 5-22) Rising drug costs in Medicaid have forced about 40 states to make emergency budget cuts of $27 billion this year, according to the National Association of State Legislatures.(Bloomberg News via Boston Globe 5-22) Related articles: May Update, March Update, Pharmaceutical Sales
The role of a fund has evolved from being your investment portfolio - pretty much all you would own was one or two funds for all of your needs - to fitting one little slot in an overall investment portfolio. As a result, the asset allocation decision has been transferred from the fund manager - who used to decide where best to invest rather than sticking with one narrow category - to the individual or their adviser. I'm afraid a lot of people still don't get that. I talked to a lot of investors who during the bull market said, `If we get a bear market, I certainly hope my manager is smart enough to go to cash.' Yet I had talked to their manager the week before and he was saying, `My job is to stay fully invested in stocks at all time.' Managers were assuming that the buyer had made the decision to buy the fund because they wanted stock exposure.
No more. Funds can be whirlwind traders. For example, fund analysts look at a figure called turnover rate, which measures trading velocity: The higher the turnover rate, the more trading the fund does. The average U.S. stock fund has a 107% turnover rate, the rough equivalent of selling your entire portfolio in a year. "Institutions trade more often than individuals, so a large institutional interest in your stock could mean a more volatile stock," Kaufman says. A big institutional interest in your stock could have other bad consequences: Morningstar says 938 large-company funds own $46.5 billion of Microsoft stock, or about 16% of the company's $282 billion market capitalization at the end of April. All institutional players combined own 49% of the stock. What's so bad about that? It stinks if you're expecting others to bid up the stock's price. "If everyone already owns the stock, where is the future buying power going to come from?" says Chuck Carlson, author of The Smart Investor's Survival Guide. The most widely held stocks are also the most closely scrutinized. You may be able to find one thing about Pfizer that the world hasn't, but the odds are long. So you won't get as many pleasant earnings surprises as you would from less well-known stocks. Just because a fund bought a stock doesn't mean it was a smart purchase. Alliance Capital, for example, bought 102 million shares of WorldCom stock in the first three months of the year, doubling its stake in the troubled telecom company. The stock has fallen 79% since March 31. Another example: The fund with the largest percent of its portfolio in Microsoft Ų 20.2% Ų is Ameritor Security Trust, formerly Steadman Associated Trust, arguably the worst mutual fund in history. The fund has lost an average 1.6% a year the past 15 years.
The basis for the declaration is their contention that we are heading for a long period of dismal investment returns, that history shows we have had such periods before, and that our Wall Street-created expectations are far higher than anything reality will deliver. The result will be a lot of angry people who will live out their retirement years in desolation and poverty. Specifically, they point out that stocks rose to unsustainably high levels three times during the last century: 1901, 1929 and 1966. After each of these highs, stocks fell into a long funk. In the 20 years following 1901, for instance, the inflation-adjusted annual return on common stocks wasn't the familiar 7 percent made famous by Ibbotson Associates in Chicago. It was minus 0.2%. It was only 0.4% for the 20 years following 1929, and it was only 1.9% for the 20 years after 1966.
In years past, insurers were willing to stomach losses on their homeowners policies in order to find customers for their larger and more profitable automobile and life-insurance lines. Besides, even if they lost money through careless underwriting - taking in less cash in premiums than they paid out in claims and expenses - they could usually make it up through their investments in the stock and bond markets. But the waning bull market put an end to easy investment gains. And a slew of disasters last year - ranging from massive storms in the Midwest and a costly outbreak of mold in Texas to the Sept. 11 terrorist attacks - has suddenly rocked insurers with big underwriting losses. Now the companies are trying to wring profits from homeowners policies, and growing numbers of the nation's 58.6 million homeowners are paying the price. Insurers are also much quicker to ditch unwanted clients. State Farm Mutual Automobile Insurance Co., the nation's largest home insurer, last month instituted a practice under which customers in its middle-Atlantic region could lose the ability to renew expiring coverage if they have two claims in three years, according to an internal memo from its agents' association. State Farm suffered a $3.7 billion underwriting loss on its homeowners line last year, atop a $5.6 billion underwriting loss in its auto-insurance business. Solid estimates of the number of customers who have been dropped in recent months are hard to obtain. John L. Ward, chief executive of Ward Financial Group, a Cincinnati consulting firm that counts more than 300 insurers as clients, says those insurers are declining to renew 6% of their policyholders, about double recent historical rates. "Consumers don't believe how close the homeowners line is to complete chaos," says Jerry Carnahan, president of personal-insurance lines for Los Angeles-based Farmers. The industry points to figures compiled by ratings agency A.M. Best Co. showing that the industry has turned a profit on underwriting homes just once in the past two decades. That was in 1987, when claims and related expenses cost insurers 97 cents of every dollar collected in premiums. To rebuild their capital, many insurers decided that homeowners insurance, which for years had been a good deal for consumers, should become less generous. By the late 1990s, insurers were shifting more of the risk and cost of insurance onto their customers. In addition, in the mid-1990s the industry began using credit histories as a way to predict a customer's future claims behavior. Also in the late 1990s, a new homeowners-insurance menace sprouted: mold. Last year, Farmers registered more than 12,000 mold claims, up from 12 in 1999. Allstate says its monthly tally of such claims in Texas climbed to 1,000 in the first three months of this year, up from 40 a year ago. Most insurance experts believe the nonrenewal crisis won't be a long one, provided insurers receive approval from states for more rate increases that will make writing homeowners insurance worth their while. That, of course, means that homeowners likely will be paying still higher rates over the next few years. Home Insurance Tips Michelle Singletary, Washington Post 5-19 You don't buy insurance, especially homeowners, to protect you from any loss. Insurance has evolved into protection from a major loss. Otherwise, if you file repeated claims, even for legitimate but relatively minor repairs, you could find yourself either paying a higher premium or without insurance at all. Some insurance companies will cancel a policy if you file more than three claims in three years. Experts suggest you consider raising your deductible, which is the amount of money you agree to pay out of your pocket before tapping into your coverage. Raising your deductible probably means you won't be filing claims for something minor - such as a broken window caused by hail - or any other repair that costs less than or slightly more than your deductible. Still, the savings from the lower premiums can be significant. Raising a deductible from $250 to $500 can lower a customer's premium 12 to 13 percent, according to a spokesman from Allstate. Going from $250 to $1,000, will typically result savings of up to 24%. Going from $250 to $2,500, will typically result savings of up to 30%. Going from $250 to $5,000, will typically result savings of up to 37%. Other Tips: Buy your home and auto policies from the same company. Many companies will give you a discount for doing so. Don't include the value of the land when calculating how much homeowners insurance you need to buy. Look for group coverage. Alumni and business associations often work out deals with an insurance companies. It's Not You, It's Your House Opdyke & Oster WSJ 5-23 The insurance industry has been cracking down on individuals who file too many claims. Now companies from State Farm to Nationwide are focusing on the houses themselves. Even if you have a squeaky-clean insurance record, the home you own - or the home you want to buy - may be tough to insure because it has had too many claims in the past. Getting insurance is almost always a prerequisite to buying a home and securing a mortgage, but some buyers are now having trouble doing so for homes with repeated claims. Homes that have been hit by water damage, storm damage and burglaries are particularly vulnerable to rejection. The Comprehensive Loss Underwriting Exchange database is a shared industry repository containing 90% of the insurance claims made in the U.S. While insurers have used CLUE for years to assess the risk of individuals, the big change is that they are now subjecting homes to extensive background checks. Buyers don't have the legal right to view the CLUE report until they close the purchase. But they can request that the owner provide them with the CLUE report before they agree to buy the house. Owners have the right to request the CLUE report on their property, but it can take weeks to get them. Starting this fall, however, they will be able to access the CLUE reports instantly over the Internet for between $10 and $15.
Expense ratios, which average about 1.5% for domestic equity funds, are calculated as a percentage of total assets. But Kanon Bloch decided to look at costs differently. It set out to determine the percentage of investment returns that are retained by the fund company -- that is, the portion of the money you have earned that you donĖt get. In the worst case, fund giant Alliance Capital is ripping off 16 cents of every dollar its investors earn, according to Kanon Bloch research. But even thrifty Vanguard Group nibbles away 4 cents on the dollar - more than three times the level of SEC-approved expense ratios. Percentage of Returns Kept by Fund Companies
The accounting rules let companies book as income not the actual dollars earned by their pension investments in any year; rather, the companies get to book the returns that those assets would have earned if they had performed as the company expected. So for example, in 2001, IBM recorded $1.45 billion in net pension income (thatĖs after pension payouts and service costs), up from the $1.27 recorded in 2000, simply because it had assumed that the $61 billion in its pension funds would earn 10%. (According to Goldman Sachs, 35 companies in the S&P 500 got more than 10% of their earnings from their pension funds in 2001.) At GE, which just lowered its expected rate of return to 8.5% from 9.5%, the change will slice $800 million to $1.2 billion - or between 5 cents and 7 cents a share - out of earnings. IBM, which cut its own estimated rate of return to 9.5% from 10%, will take a hit of about 10 cents a share as a result. And GM will show a drop of $1 billion or more in its earnings because of its pension plans. According to Milliman USA, an actuarial and consulting firm, the 50 largest U.S. corporate pension funds lost $36 billion in value last year thanks to a dismal stock market. The companies had projected gains of $55 billion. And because projected gains are what count, the companies were able put $9 billion in net pension income on their books after deducting the costs of their pension plans. The real numbers do count eventually, however. The IRS reviews corporate pension funds annually to see if they might be underfunded. If they are underfunded, a company has to pony up the cash to bring the planĖs assets back into line with future liabilities. And any company with a pension fund that fails the test faces higher insurance premiums from the federal program that backs corporate pension liabilities. So investors have two jobs ahead of them - estimating the potential pension-related hit to earnings a company might face, and figuring out the potential timing of that hit.
Measuring the actual returns, the S&P 500 index returned 11.05 percent, compounded, over the 42-year period while the 50/50, 60/40 and 70/30 portfolios returned 9.34%, 9.72% and 10.09%, respectively. How did managed-equity funds do during the same period? I found the answers by using Morningstar Principia Pro, the Chicago investment research firm's database and software product for financial planners. First I searched for mutual funds in operation before 1960. Then I created a portfolio with equal investments in 10 of the largest and best-known fund names at the time Ä American Funds Investment Company of America, American Funds Washington Mutual, American Funds Growth Fund, American Funds Fundamental Investors, Fidelity Fund, MFS Massachusetts Investors, Pioneer Fund, Putnam Fund for Growth and Income, Vanguard Wellington and Vanguard Windsor. All 10 have been in the top 50% of their peer groups over the last 15 years. Many, particularly the American funds, have been well into the top 25% of their peers over the last 15 years. Without considering taxes, a portfolio with equal investments in all 10 managed funds produced a 42-year return of 9.1%. In other words, a 100% commitment to managed-equity funds provided a lower return than the least risky passive portfolio Ä a 50/50 combination of S&P 500 index and five-year Treasury notes. Index Funds Aaron Lucchetti, WSJ 5-6 From Robert Pozen, a visiting graduate-school professor at Harvard, ran Fidelity Investments' giant mutual-fund management business for four years and spent a total of 15 years at the nation's largest fund firm before retiring last year: Index fund investing is very cyclical. First of all, you have to talk about market segments. Active managers beat the relevant indexes on a regular basis for things like international funds, small-cap funds, etc. The only question is with the S&P 500. When the market is dominated by the 25 to 50 largest stocks in the S&P 500, money will flow to index funds. That's because the top 50 stocks [in the S&P 500] usually account for 65% to 70% of the performance of the index. If those stocks do well, index funds do well. On the other hand, in markets that have a more broadly based rally, where medium-sized companies do well, then indexes lose to active managers and people go away from index funds. Average Tax Deductions Tom Herman, WSJ 5-9 Average deductions for three income categories, based on adjusted gross income for the 2000 tax year. The new statistics on deductions were prepared by Jim Seidel of RIA, a New York-based publisher of tax and other business information.
Source: RIA, based on IRS preliminary statistics
What that means, basically, is that it's hard to speak and think at the same time. Shneiderman says researchers in his computer science lab discovered through controlled experiments that when you tell your computer to "page down" or "italicize that word" by speaking aloud, you're gobbling up precious chunks of memory -- leaving you with little brainpower to focus on the task at hand. It's easier to type or click a mouse while thinking about something else because hand-eye coordination uses a different part of the brain, the researchers concluded.
Take the case of the first quarter of 2002. The Commerce Department reported two weeks ago that real GDP soared an annualized 5.8% from the fourth quarter. On a year-over-year basis, however, real GDP rose 1.6%. Industrial production rose an annualized 2.5% in Q1-02, the first quarterly increase in almost two years. Yet production was still 3.8% below Q1-01, according to Steve Wieting, an economist at Salomon Smith Barney. `Operating earnings for (S&P) 500 companies tracked production gains nearly perfectly in Q1, with earnings up 14% from Q4 2001 but roughly 12 % below Q1 2001, excluding accounting-related changes,' he says. There was a 17.8% decline in non-defense capital goods orders in Q1-02 from the year-earlier quarter. Any CEO looking at those results would have little reason to think a turning point in capital spending was at hand. `But the same data show a sequential annualized gain of 3% in the first quarter - the first sign of the turnaround in 18 months,'' Berner says. The bottom line is `comparing quarter-over-quarter gains in GDP with year-over-year declines in earnings is inaccurate and misleading,'' Wieting says.
According to ICI data, cash in stock funds fell to 5% from 5.3% of total assets. While total stock-fund assets in March were up by about $90 billion, or 2.7%, from the same time last year, cash in stock funds has fallen 11.5% - to $174.9 billion from $197.7 billion over the period. From a historical perspective based on data going back to 1970, liquid assets in stock funds hit a high of 12.9% in October 1990, and the lowest cash level carried by stock funds was 3.9% in May 1972. A shift in the profile of money funds during the past decade may mean less of that money is marked for stock investing, according to Peter Crane, managing editor of the Money Fund Report newsletter. "Today, the bulk of money-market funds have a checking-account profile rather than a savings account," he said, so they act as a permanent cash cushion for transactional purposes. The rise in money-fund assets, which have more than doubled since January 1998, has been hastened by institutional money flowing in, Mr. Crane said, as corporate treasurers, for example, use them to hold cash needed for operating purposes as opposed to investments. During the past five years, institutional assets in money funds have grown 20% to represent about 53% of total money-fund assets, Mr. Crane said. Brokers Find Investors Reluctant E.S. Browning, WSJ 5-8 Instead of putting money into stocks, investors are holding back, which means it could take longer than people thought - perhaps much longer - for the stock market to come back. "We've seen a change in psyche, a change in mentality," laments Marvin Manes, broker for McDonald Investments in Youngstown, Ohio. "Where before the client had a thirst, a hunger, that no longer exists. His thirst and his hunger are elsewhere now, whether it be purchasing a second home or something else." What Mr. Manes and his colleagues are finding is a crucial fact that doesn't show up in the market numbers: It isn't just the prices of stocks that are down, but the moods of many investors, who fear a further decline. "Phone calls are probably 10% of what they were," Manes says. "There are a lot of client concerns about, 'Should I be in the market?' " Today, some of the brokers confide, they hardly bother to send stock suggestions to clients anymore. Says one broker, "There aren't a lot of proposals going out, because not a lot of people want to hear your proposals." Investor Sentiment Gerard Baker, Financial Times 5-2 In the glorious, sun-filled days of the late 1990s, good news on growth, output, employment was an occasion to buy equities, as it vindicated investors' unshakeable faith in the object of their affections. Bad news on growth, output or employment provided another reason to buy equities, as it meant the Fed and the bond markets would be keeping interest rates low. Now good news is an excuse to sell equities since it means interest rates will surely be going up, strangling the recovery before it has had time to generate real growth and profits. And bad news is simply confirmation of a painfully sluggish recovery or even a double-dip. Just as the conviction that the US had achieved a kind of perfection a few years ago was flawed, so the current belief that it can now do no right is also overdone.
In other words, this jump in the rate of joblessness to 6.0% is bogus. It doesn't reflect what's really happening in the labor market. It's a temporary bulge brought about by the extension of jobless benefits, just as in December '91. Some folks just can't say no to another three months on the dole. So they decide to wait a bit longer before actively seeking work. And if they happen to be asked in the household survey if they're out of a job and have looked for work in the past four weeks - the two main criteria for being counted as unemployed - of course they'll say yes. In April, the labor force jumped by a suspiciously high 565,000, out of which the count of unemployed rose by 483,000. The Labor Department announced last week that based on reports from 45 states, the number of folks receiving extended jobless benefits came to 1.03 million, more than enough to account for most of that 483,000 increase. This isn't all. Our culture is such that women tend to exit and reenter the labor force more than men. Of that 483,000 rise, fewer than one-third, or roughly 154,000, were men. And since there are fewer unemployed women to begin with, in percentage terms, unemployment among men rose by 3.5%; among women, by 9%. Finally, the apparent jump in the jobless rate doesn't square with any other labor market indicator: the Help Wanted Index; the percentage of people saying jobs are hard to get or easy to get; the estimate of planned layoffs from Challenger, Gray, or the figures on hiring plans from the National Federation of Independent Business. If I'm right, then April's 6% jobless rate should start falling back to 5.6% to 5.8%, probably not by May, but certainly by June.
Uncertain Duration Through out the extremes (the 10% of 65 year olds who will die the most quickly and the 10% who will live the longest, leaving only the middle 80%) even then, the range is huge. Men in this middle 80% might live as little as seven years or as long as 32 years. For women, the range was 10 to 33 years. Uncertain Inflation The dollar's spending power was slashed by 51% in the 1970s, 39% in the 1980s and 25% in the 1990s, according to Chicago's Ibbotson Associates. In other words, even in the low inflation 1990s, folks living off a fixed income would have seen their standard of living cut by a quarter. The implication: As you confront the prospect of spending 20 years or more in retirement, you can't simply plunk your savings in bonds or certificates of deposit and then spend all the interest. Uncertain Markets Fending off inflation is a lot easier if the markets are kind. On that score, the 18 years through year end 1999 were a bonanza for retirees. The Standard & Poor's 500 stock index clocked 18.5% a year and long term government bonds garnered 12.1%, while inflation shuffled along at 3.3% annually. But the prior 16 years, through year end 1981, weren't nearly so generous. According to Ibbotson, the S&P 500 gained just 5.9% a year and long term government bonds returned 2.5%, less than the 7% inflation rate. Will today's retirees get lucky or unlucky? With long term government bonds yielding less than 6% and stocks still at nosebleed valuations, my hunch is that the decade ahead will deliver lackluster returns. Uncertain Market timing But even if the next 10 years eventually offer up healthy gains, you need to pay attention to the "sequence of returns." This is especially critical in the first few years after you quit the work force. Suppose you retire and immediately get hit with a vicious bear market. If you are not careful, the combination of market losses and your own withdrawals could devastate your portfolio. Indeed, even if the market later rebounds strongly and fares well through the rest of your retirement, you may still find yourself pinching pennies. The reason: Your portfolio was so depleted in those initial years that you don't benefit much from the subsequent strong returns. Retirement Study Albert Crenshaw, Washington Post 5-5 A study by New York University economics professor Edward N. Wolff, released last week by the liberal Economic Policy Institute, found that the "retirement wealth" of all but the wealthiest workers nearing retirement (households headed by someone between 47 and 64 years old) actually declined between 1983 and 1998. [From ABC News 5-2: Between 1983 and 1998, when the Dow Jones industrials rose 777%, the median retirement wealth of Americans fell 11%, from $197,000 to $175,000.] Wolff said last week that he had expected that the shift to 401(k) and related retirement plans from traditional defined-benefit pensions, combined with the stock market boom, would have left today's pre-retirement workers "far ahead of those of 15 or 20 years ago." Instead, he found, most such workers lost ground in the 1990s. The one group that gained was workers with a net worth of $1 million or more. Even those worth between $500,000 and $1 million fell back, he said. "The people who benefited most from the switchover from defined-benefit plans were those who were already wealthy," Wolff said. David Wray, president of the Profit Sharing/401(k) Council of America, said Federal Reserve figures show that total retirement savings climbed almost 60% between 1995 and the end of last year -- most of that in 401(k) and similar plans and IRAs. He also said that Wolff's methods tended to overvalue traditional pensions and undervalue 401(k)s. More on Wolff's Study Peter Gosselin, LA Times 5-3 The study by Wolff concludes that more than 40% of households headed by workers nearing retirement - those 47 to 64 years old - don't have enough to replace even half their pre-retirement income, up from less than 30% in the 1980s. Nearly 20% don't have enough to keep themselves above the poverty line. Wolff based his study on the Federal Reserve's every-three-years Survey of Consumer Finances, which provides the most comprehensive look available at the wealth - including retirement wealth - of American households. Among his findings: From 1989 to 1998, the last year he examined, the share of households whose projected retirement income is less than half their pre-retirement income rose from 29.9% to 42.5%. The news is even worse for African American and Latino households, which saw an increase to 52.7%. For households at the median or the middle of the nation's economic pile, overall retirement wealth declined by 11% from 1983 to 1998. The share of near-retirement households with non-Social Security retirement coverage climbed only 3.5 percentage points to 73.7% despite the proliferation of 401(k) plans. At least in part, that was because many people covered by traditional pensions at the start of the period traded their coverage for individual accounts. In the one bright spot in the retirement landscape, Social Security coverage became virtually universal, rising from 82.4% in 1983 to 98.4%.
Unless you have strong opinions to the contrary, your equity portfolio should be divided among the world's stock markets based upon each country's share of total global stock market capitalization. The reason: Even though the stock market is not totally efficient, it is largely so.
The Economist said a Big Mac goes for about $2.49, using an average in four big U.S. cities. In Japan it goes for 262 yen, or about $2.01. Dividing the Japanese price by the U.S. price puts the implied exchange rate at 105 yen per dollar. At about 130 yen to the dollar these days, the yen is 19 percent undervalued. The dollar-per-euro rate in Europe now is 0.89 dollars per euro. However, the Big Mac index puts the implied rate at 0.93 euro to the dollar, meaning it is slightly undervalued. In general, the U.S. dollar is more overvalued against the average of other big country currencies than at any time in the life of the index, the magazine said. Australia has the most undervalued currency at 35 percent below "McParity," while the pound sterling in Great Britain is overvalued by 16 percent.
How improbable is it that bonds are even with stocks over the past five years? A look at rolling five-year returns for the Lehman Aggregate and S&P 500 each month over the past 20 years shows stocks beating bonds a whopping 94% of the time. The last time Lehman's Aggregate bond index topped the S&P 500 over a half-decade was the five years ending September 1992, according to Schwab's data. Stocks averaged a 21% annualized gain over the following five years, topping bonds by more than 13 percentage points. Mean Regression Chet Currier, Bloomberg 4-30 Since the stock market has just suffered two consecutive losing years, many people figure it is due to rise in 2002. Contrariwise, since the stock market enjoyed two consecutive decades of outsized gains in the 1980s and `90s, many people figure it is due for a subpar overall showing in the `00s. Confused? So it goes when you try to plot an investment course by what is known commonly as `the law of averages,' or in more sophisticated circles as reversion to the mean. In the 1990s, law-of-averagers drove themselves batty trying to figure out when an obviously overvalued market would stop going up. Suppose you followed a policy of exiting stocks whenever the price-earnings ratio of the S&P's 500 Index rose above a `normal' 15 to 1. According to my Bloomberg, that got you out of the market in 1991, and you're still not back in. Mean regression, in short, is a troublesome basis for investment decisions. Just the Facts Luck or Skill? Legg Mason Value Trust's William Miller has beaten the market for 11 consecutive years, making him the mutual-fund industry's most-celebrated stock picker. But to statisticians, he's just a coin flipper on a winning streak. But what are the chances of flipping heads 11 consecutive times? That would be one in 2,048. To be fair, the odds are somewhat steeper than that, because half of all money managers don't beat the market in any given year. Let's say the chances of beating the S&P 500 in a single year are 45%. In that case, the odds of outperforming for 11 consecutive years would be one in 6,526. If those sound like long odds, consider this: SEI Investments tracks 7,000 mutual funds, separate accounts and other investment products that focus on U.S. stocks. "Somebody has to come in No. 1. It just happened to be Mr. Miller" argue the statisticians. (Jonathan Clements, WSJ 5-15) Graphics Developed to Add to Real Life Researchers at Columbia University are developing graphics technology applications that work in conjunction with the real world rather than replacing it. The technology involves a display worn on the head and a computer in a backpack. Users can see through the head piece, while the computer adds information that can augment the user's perception and understanding of his surroundings. For example, a construction worker might wear the device working at a construction site to "see" locations of pipes and wiring that are behind walls or underground. (NewsFactor Network via eduPage, 5-14) Graphics Pt 2 MicroOptical produces computer displays that can be integrated into - or clipped onto - eyeglasses. The displays can be connected to a wide range of devices, like a cellphone, PDA, laptop, Blackberry, or a specially designed wearable computer. The company's low-end displays cost $995. USES: (1) If you're a doctor performing a procedure, you don't have to turn your head in order to see what your arthroscopic camera is seeing. (2) A system tested at Fort Polk combined a camera, biometric face recognition. It allowed military police to ID someone (requesting entry to a secured area) to see if that person had the appropriate clearances. (3) One of MicroOptical's employees takes a display, rigged to a small TV, to Patriots' games so he can watch the field and the television broadcast at the same time. (4) You might use the glasses to remind you of your points when you're delivering a presentation - like a personal teleprompter. (5) You might use them for caller ID, to see who's calling on a cellphone before fishing it out of your purse. (6) You might use them to call up information about a person you run into at a conference, reminding you of the last time you saw him, your last e-mail exchange, or his kids' names. (7) You might want them when you're driving or walking in an unfamiliar city, to give you step-by-step directions. (Scott Kirsner, contributing editor at Wired and Fast Company, Boston Globe 5-20) Know When to Toss'em The happy side of April 15 - that's when the statute of limitations generally kicks in to bar the IRS from challenging items on income tax returns that fell due three years ago - your tax return for 1998. One breach in the three-year wall gives the IRS an additional three years (six years from the due date of the return, or the date it was filed, if later) to make an assessment: If you report less than 80% of your gross income. Documents and records that establish your bases for your securities, real estate, cars and jewelry, and other items, should be stored for at least three years after you dispose of the asset; expense and income data, such as bank statements, account books, and bills, should not be trashed for at least six years. (Joseph Gelband, tax lawyer, Barrons 5-13) Moody's & Downgrades Is Moody's, criticized for responding too slowly to Enron's financial troubles, now downgrading companies too aggressively? The market in the first quarter saw 18 fallen angels, totaling $15 billion, Moody's reports. The fourth quarter of 2001 saw 16 fallen angels, however, totaling $47.83 billion. But that's not all. In the first quarter, U.S. issuers, both investment-grade and high-yield, saw only one ratings upgrade for 4.7 downgrades, Moody's reports. (Jennifer Ablan, Barrons 5-13) Fiber-Optic Waste Boston consulting firm Adventis Corp. estimates that despite $139 billion that was "wisely" spent on fiber-optic infrastructure, another $70 billion was wasted. Another consultant, TeleChoice, said the mistake was having so many different companies building separate national fiber networks. Officials at Adventis said an inversion occurred when more money was spent on long-distance backbones than on local access, which typically requires more investment for the overall system to work efficiently. As a result of this inversion, less than 10% of the fiber backbone is active, and the broadband share of the market still lags far behind where some predicted it would be. Some observers defended the investments, saying telecommunications companies must plan 20 years in advance and predicting an end soon to the glut of bandwidth. (Rocky Mountain News via EduPage 5-6) Know When to Fold'em Knowing when and why to sell a fund is a decision at least as important as knowing what to look for when buying. In general, a sell decision should be triggered by a few conditions. If you see two or more of the following conditions in a fund you own, it may be time for a change: (1) The fund has changed strategies, missions, and/or managers. (2) Poor performance relative to similar funds. (3) You've reached your goals (ex: funds for college, house, etc) - or will soon. (4) You need to change your asset allocation. (5) You've got a loss, but want a tax refund. (6) You wouldn't buy the fund again today. (Charles Jaffe, Boston Globe 5-5) Earnings Update More than 235 companies within the S&P 500 have exceeded analysts' Q1 earnings expectations, while only 55 constituents have missed their numbers - a sharp improvement over the last several quarters. According to UBS Warburg's Ed Kerschner, this is the first quarter in the last eight with more positive than negative surprises, and the ratio of positive to negative surprises is the highest it's been since he began tracking such data 12 years ago. A "normal cyclical earnings recovery" - with solid double-digit year-over-year earnings gains in the second half of this year and midteens profit growth in 2003 - should push stocks up 15% to 20% within a year, Kerschner says. (Rebecca Thomas, Smart Money 5-1) Deep Links Two years ago U.S. District Judge Harry Hupp declared that deep linking, the practice of hyperlinking to a specific page within a Web site rather than the site's home page, was not a violation of copyright law. The dispute has come up again, however, in several recent complaints by site operators. The Danish Newspaper Publishers' Association has asked that the practice be disallowed, and Belo, the owner of "The Dallas Morning News," this week sent a stern letter to BarkingDogs.org demanding the end of deep links to the newspaper's Web site. If deep links were ultimately declared illegal, this would have significant implications for many sites, including search engines, which consistently bypass home pages. A spokesman for Belo said they feel they should have some control over the use of their content and that deep links undermine the advertising model for Web sites. (Wired News via EduPage 5-1) Quick Facts, Stats & Opinions State tax revenues fell about 8% in the first three months of this year compared with a year ago, according to a survey to be released soon by Nicholas W. Jenny of the Nelson A. Rockefeller Institute of Government. It's the third quarterly decline in a row - and the largest since the institute began keeping score in 1991. "All major tax sources were weak," Mr. Jenny says. "Particularly startling was the 14.4% decline in personal income-tax revenues." Sales-tax revenue fell 1% for the quarter, and corporate-tax revenues were down more than 18%. (WSJ 5-16) Even in this miserable environment, some stocks are rising, and some investors are profiting. For example, on Friday, May 3, the Dow Jones industrial average tumbled 85 points, losing about 1% of its value. But that same day, 251 New York Stock Exchange stocks hit new highs while only 42 hit new lows. (James Glassman, Washington Post 5-12) Many analysts say one-day surges for stocks are usually a troubling, not a hopeful, sign. Big jumps usually happen in difficult markets, following weeks of down days, rather than in bull markets. To wit, 14 of the Nasdaq's 15 best days have come since the market peaked in March 2000. (Zuckerman & Karmin, WSJ 5-12) Consumers continue to buy 25 million to 35 million analog television sets every year, apparently unaware that the sets are slated to stop working in 2006. On that date, when the nation supposedly transitions to digital television service, consumers will be forced to spend several hundred dollars to keep these analog sets working [but analog sets should work with cable - given their slow transformation to digital]. (Jim McTague, Barrons 5-6) Equity markets have maintained remarkable composure in the face of escalating violence in the Middle East, revelations of misleading accounting by a number of iconic firms, and continuing worries about terrorist acts . . [but] investors have not yet mentally adjusted to the possibility of lower multiyear projected equity returns, caused by: below-trend earnings growth, declining P/E ratios, and a continuing low contribution from dividends. (Market View Bulletin, Morgan Stanley via Washington Post 5-5) The five best- selling categories of long-term funds during the first quarter were all conservative (that is, NOT growth or aggressive growth) species - large value, small value, large blend, mid-cap value and domestic `hybrid,' or stock-bond mixture. (Chet Currier, Bloomberg 5-3) Congressmen Jim Moran (D-Va.) and Tom Davis (R-Va.) have proposed a $315 million program mandating biometric markers on all driver's licenses within five years. The representatives want licenses to carry the driver's retinal scan, fingerprint, or some other kind of biometric marker in an encrypted chip. The legislation would also require states to use tougher criteria in verifying identity when people apply for a driver's license, as well as strengthen federal identity theft laws by making it a federal crime to alter a license. (ComputerWorld via EduPage 5-2) Richard Bernstein's Corporate Misery Index, which measures the number of units sold and the margin per unit, is just one of several indicators suggesting that the profits recovery will be "anemic" relative to expectations. At its current valuation, the overall equity market reflects "tremendous optimism" about the timing and magnitude of a rebound in corporate profitability, says the Merrill Lynch strategist. (Smart Money 5-1) Ask a doctor for a prescription drug you saw advertised, and 69% of the time you'll go home with it, according to a FDA survey. Critics bemoan the findings, while proponents say ads help sick people find treatment. The FDA surveyed 943 people who saw a doctor in the previous three months. Five percent said a drug ad spurred them to go to the doctor. Once there, 69% who asked for a particular drug got it. (Naomi Aoki, Boston Globe 5-1) Some institutional investors face guidelines restricting them from buying stocks under $5. Some brokerages don't let investors buy stocks under $5 on margin. At brokerage Edward Jones, brokers get no commission when a customer buys a stock below $4 a share, and clients are prohibited from purchasing shares under $1. At rival A.G. Edwards & Sons Inc., customers are warned of the "potential risks" associated with stocks trading below designated levels. (LA Times 4-29) Quick Tips When you forward e-mail, you may not want the recipient to get all those < marks that are used to indent an original message. You don't have to use these marks in Outlook Express 6. Just choose Tools|Options. When the Options dialog opens, click the Send tab. Now, under "Mail Sending Format" click Plain Text Settings. Deselect the check box labeled "Indent the original text with < when replying or forwarding" and then click OK. Back in Options, click OK to close the dialog box and save your new selection. (EMAZING 5-1) Home Page Previous Factoid Top Sites
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