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New orders for capital goods - everything from heavy trucks to PCs - picked up in April. But actual shipments fell, and order backlogs declined, suggesting companies were canceling old orders faster than they were placing new ones. What's more, a weekly survey of old-line capital-equipment producers by consultants International Strategy & Investment found that their business tailed off sharply at the end of May and into June, to their lowest levels since last November. Stock options now account for 80% of executive compensation. By BusinessWeek's calculations, the average CEO lost an astounding $15.4 million in pay-related wealth last year, thanks to the steep drop in the market in 2001. With share prices also eroding this year, the hit to corporate honchos is only getting worse. "That feeds directly into CEO confidence," says Goldman Sachs chief economist William Dudley. Could the downbeat mood sour the economy in the second half? That prospect clearly worries President Bush's chief economic adviser, Lawrence Lindsey. He sees a risk that corporate chieftains and investors will overreact to the excesses of the late '90s and pull back too far. "When the excesses were happening, people might have been more skeptical," Lindsey says. "But now there may be excessive risk aversion." There may be good reason to expect an eventual pickup in capital spending. Profits and cash flow are reviving, and productivity has stayed strong. But as long as gloomy CEOs remain under a cloud, the risk increases that the revival of spending will occur later, and come in weaker than generally hoped. And that could translate into sputtering growth in the second half.
Kasriel isn't alone in suggesting the reduction in equity supply was a force driving the bull market of the 1990s. Paul McCrae Montgomery, a money manager and market analyst at Legg Mason Wood Walker, cites a 17th-century English surveyor and cartographer as his source on the supply-side effect. `Gregory King's Law of Prices holds that dollar for dollar, a change in the supply of equities has exponentially greater effect on market prices than does a change in demand,' Montgomery says. The bull market of the 1990s `was largely driven by an incredible merger and acquisition frenzy, and by an enormous, if artificial, share buyback mania,' he says. When those two activities ceased or reversed, the tailwind that drove the secular bull market was becalmed.
Is this bad news? Well, yes and no. Full-scale market declines rarely end until virtually all groups are drawn into the vortex. This is now happening. Public sentiment, judging from just about everyone and anyone who calls our office, is at the most pessimistic levels we can ever recall. Ditto for the financial press. The fundamentals? We keep reading that productivity is rising, that unemployment is declining, that real estate is real happy, and that an economic recovery has already started or is just a week or so away. At the same time, corporate earnings seem to be disappointing - Intel the latest casualty. In any event, something seems wrong. Maybe it's subliminal concerns regarding terrorism. Maybe, it's the fall-out from Enron that has cast a shadow over corporate trustworthiness in general. Maybe the economy has been worse than everyone connected with Wall Street likes to admit. Maybe it's all a false alarm. Third-quarter earnings will come in just fine, stocks will recover, the world will once again orbit in the proper direction. Maybe. We're still positive for the long term. I think. But we are not betting the farm.
Last year, the average hedge fund rose 4%, compared with a loss of 13% for the S&P 500 index. The performance will likely slip, with more hedge funds entering the market, but returns could continue to top stocks. The fear is that if hedge-fund managers, under pressure to beat the market and to justify the hefty fees they are charging, begin piling on the leverage and making bigger and riskier bets, it could jeopardize the market.
How difficult? Let's do some simple searches of the Morningstar mutual fund database. The idea is to count the funds that provide higher returns with less risk than the index they are measured against. If you search all funds in operation for at least five years that specialize in domestic stocks, you will get 2,844 domestic equity funds. While 1,011 had less risk, only 438 offered less risk and more return. That's only 15.4%. Worse, many of the 438 funds would not have been on the list as recently as two years ago. Some 238 of the funds are large-, mid-, and small-cap value funds. Many were in net redemption as recently as 1999 when investors fled value funds because of poor returns. There are 563 funds that Morningstar categorizes as "large blend" with five-year histories. These funds tend to invest in the same pool of stocks as funds that duplicate the S&P 500 index. Of the 563 funds, 303 had less risk. Only 72 funds had a higher return and less risk. That's less than 13% of the sample. There are 477 funds with five-year histories that Morningstar classifies as "domestic hybrids." This means they invest in a combination of U.S. stocks and bonds, generally in a 60/40 percent mix. Only 50 of these funds provided a higher return with lower risk than the Vanguard Balanced Index fund. This fund mixes 60% Vanguard 500 Index fund with 40% Vanguard Total Bond Market fund. Only 10.5% of all managed funds provided a better risk/return than a simple index fund.
Census data also show that from 1990 to 2000, the U.S. population grew by 33 million, to 281.4 million in all, and that more than one-third of that rise was accounted for by immigration. Most of these new immigrants have come from Latin America, and most of the rest from Asia. It's a pretty safe bet that many of these unskilled newcomers must have joined the ranks of the poor in their adoptive country. The number of folks in poverty rose by less than two million in the 'Nineties, while the influx of Latin and Asian immigrants totaled more than 11 million. A second indication that the 90s did not just lift the yachts: BLS economists found that earnings in the lowest third of paid occupations rose by 11.6% from 1989 to 1999 (in constant dollars), compared to 2.4% in the middle third, and 6.3% in the upper third.
The benefits of this change in the financial underpinning of the economy were evident during the recession. As banks tightened lending standards, alternative lenders and capital markets took up the slack. Auto makers jump-started car sales by extending zero-percent financing. When investors turned cold on airlines after Sept. 11, Boeing Capital lent United Airlines more than $700 million to pay for jets. Before the recession and throughout it, Fannie Mae and Freddie Mac made the housing boom possible. Their mortgage holdings have risen 21% and 35%, respectively, since the end of 2000. Those of banks are up just 8%. But all of this also has a downside. These companies' hunger for growth helped increase borrowing, aggravating excess capacity and fueling bubble-like conditions (ex: Lucent). More worrisome, many of these nontraditional lenders don't get as much regulatory oversight as traditional banks and brokerage houses, even though the failure of a big alternative lender would be no less troublesome than a big bank's collapse. Almost 40% of the earnings of the companies in the S&P 500 in 2000 came from lending, trading, venture investments and other financial activity, estimates Steve Galbraith, a Morgan Stanley investment strategist. Of those earnings, a third were at nonfinancial companies such as Enron and GE. "Corporate America is rapidly becoming Bank America," he says. Some of these companies are drawn to finance because it offers more growth potential than slow-growing, increasingly competitive core businesses. Others want to boost sales by giving customers easier access to credit. But because of limited disclosure and sometimes murky accounting, outsiders often simply don't know how much risk nontraditional lenders are taking on. Regulatory oversight of alternative lenders varies. Most are subject to consumer-protection rules. Some have subsidiaries that are regulated as banks or insurance companies. But in general few are subject to the on-site examinations, constant monitoring and risk of government-ordered closure that are standard for banks. For the most part, the government lets bond markets and credit-rating agencies discipline these competitors to banks. Fannie Mae and Freddie Mac are exempt from SEC disclosure and other requirements that all other public companies face. Their regulator, the Office of Federal Housing Enterprise Oversight, monitors them and makes site visits, but it doesn't have as much power as bank regulators, nor does it require them to hold as much capital as banks and thrifts. Fannie and Freddie had equity of a bit more than 3% of assets at the end of 2000. Thrifts had 8.45%. Some critics worry that so much leverage exposes Fannie and Freddie to adverse moves in interest rates. Spokesmen for the companies argue that they are just as well capitalized as banks, given how much safer residential mortgage loans are than a typical bank's loans. They add that their voluntary disclosure equals or exceeds that of most public companies. Even when loans are sound, financing activity makes a company far more sensitive to a loss of confidence among its investors and lenders. Tyco bought the equipment-finance company CIT Group a year ago, hoping to use it to finance buyers of Tyco's industrial products. But when Tyco's credit rating fell this year amid concerns about its debt and accounting, CIT was downgraded, too. That cost CIT access to the commercial-paper market and forced it to turn to costlier bank borrowing, constraining its ability to make new loans.
The Household Data reported a surge of 441,000 in May. Household Data employment has been rising by an average rise of 237,000 a month since January, versus a small decline over this same period in the Establishment Data. So which of these two very diverse trends do we believe? Normally, the Establishment Data is deemed to be a more reliable source of employment gains. But the annual revision to this series reported Friday was almost enough to shake your faith in this dancing data. For example, January was revised up by 90,000, from minus 109,000 to minus 19,000; February was revised down by 161,000, from minus 4,000 to minus 165,000. Next year at this time, further revisions will be made to these figures. Since the economy is now expanding, and since the weak payroll employment numbers run counter to the strength in every other labor market indicator, the revisions are likely to be up, rather down. So perhaps the 41,000 increase in May will turn into 181,000 by next June.
Purchasers of such "odd lots" often pay too much when they buy and get a rotten price when they sell. Mr. MacKinnon reckons you need to invest $50,000 in any one corporate bond "to get away from the pirates and into more accommodative waters." For those on small budgets, the math isn't encouraging: To invest $50,000 in 100 different bond issues, you need $5 million. [Note: Corporate-bond issuers do sell directly to small investors through Internet services such as Direct Access Notes (www.directnotes.com) and InterNotes (www.internotes.com).] Many bond funds snag close to 1% a year in annual fees. To avoid that hefty hit, stick with low-cost managers like TIAA-CREF, USAA Investment Management and Vanguard, where some bond funds charge less than 0.4% a year. What do you get for that money? In addition to broad diversification, funds offer the chance to reinvest your investment income, something that's far trickier with individual bonds. Bonds ETFs Coming Soon Abby Schultz, NY Times 6-9 Barclays is now preparing to introduce in the United States the first exchange-traded funds that track bond indexes. [Barclays has been offering exchange-traded bond funds in Canada since November 2000] Late last month, the SEC gave Barclays tentative approval to offer seven fixed-income funds in late July. ETF Advisors is also seeking approval to start its own such funds. Because they are in a huge investment pool, the investors receive the same discounted bond prices as big traders, said Steve Rive, general manager for iUnits, the ETF's offered by Barclays in Canada. "That's the real value proposition of these funds," Mr. Rive said. "People are able to get access to wholesale pricing," he said. Costs tend to be lower than those for actively managed mutual funds, because the ETF's track indexes and trade infrequently. In 2001, the average expense ratio for ETF stock funds was 0.48%, according to Morningstar, compared with 0.89% for traditional stock index funds. Bond index mutual funds had an average expense ratio of 0.35%. Barclays has not disclosed the pricing on its new funds. But the firm's exchange-traded stock funds often have the lowest cost among E.T.F.'s, and the firm intends to price the bond funds "aggressively," said Lee Kranefuss, the chief executive of Barclays's individual investor business. Before investing in a bond ETF, you should consider whether the savings are enough to justify the brokerage fees. Financial adviser company Kochis Fitz Tracy Fitzhugh & Gott says investors in taxable accounts can save a tenth of a percentage point through lower expenses and higher tax efficiency in a stock ETF if they have at least $10,000 in the account and plan to hold it at least two years. In this example, the investor would save about $100 a year, enough to justify brokerage fees. You should make similar calculations before buying the bond ETF's instead of index funds like those offered by Vanguard. [Rule of thumb: Use ETFs for lump sum investments, and use mutual funds for monthly investments.] There's not a lot of room for Barclays to price their EFT expense ratios lower than the Vanguard funds.
'The fact is there is just sheer randomness in consumer spending,' said Sydney Ludvigson, a New York University economist and the co-author of one of the critical studies. For those hoping for a quick economic recovery, that is disconcerting. The nation's two main consumer confidence indexes have been rising lately, encouraging many on Wall Street and in Washington to believe that optimistic consumers will revive the economy. What the new research has concluded is that the consumer confidence indexes turn out to be much better at predicting ups and downs in the employment numbers than what they are supposed to predict: swings in spending. American spending patterns are much more varied now than they were in the early years after World War II, when the first consumer confidence index was born at Michigan. That early index assumed the existence of a typical, average consumer, one whose mood and propensity to spend could be fathomed in a survey. That typical consumer was more likely to have existed in the 40's than today, said Richard Curtin, the director of the University of Michigan's Survey of Consumer Sentiment. "People were more focused on their jobs and wages." Today all sorts of other factors figure into spending and interfere with consumer confidence as a national concept. Some people base their spending decisions on their wages, while others are governed by job security or the value of their stock portfolios and homes, or interest rate fluctuations, or their willingness to accumulate debt, particularly through credit cards, which did not exist in the 1940's. And there is income inequality, which has increased since the 1970's and has affected the consumer confidence surveys, says Nicholas Souleles, an economist at Wharton. Analyzing the Michigan survey data over 20 years, he found that low-income households constantly and optimistically overestimated their future incomes, while upper-income people swung from optimism in expansions to pessimism in downturns. Mr. Curtin would prefer more public interest in the individual survey questions, which do help to foreshadow future home buying and auto sales, for example, and do shed light on public expectations about inflation.
A general consensus holds that while earnings are open to manipulation, cash flow, or more specifically, operating cash flow, is not as malleable. In fact, some companies, when questioned about their reported earnings, will tout their cash flow numbers as evidence that their earnings can be trusted. There are, however, many steps a company may use to manage reported cash flow within the boundaries of generally accepted accounting principles. Typically, the objective is to boost operating cash flow because it is the cash-flow measure of business success. Then, as not to misstate the total change in cash for a reporting period, the increase in operating cash flow will be offset with an accompanying increase in investing or financing use of cash. Consider the examples listed below. Cash flows from the purchase and sale of most investments are reported in the investing section of the cash flow statement. However, when an investment is classified as a trading position, which is an investment made for very short-term speculative gain, the cash flow associated with its purchase and sale is classified in the operating section of the cash flow statement. Accordingly, operating cash flow can be boosted by changing an investment's classification to trading. It is understandable that financial institutions will have trading desks and consider the purchase and sale of trading investments as part of operations. It is out of character, however, for non-financial companies to have trading positions and classify them as part of operations. A company can take longer to pay its vendors, thus increasing accounts payable. The operating cash flow provided in this manner is effectively vendor financing. While it is properly reported in the operating section, such cash flow is not inherently sustainable. Collections of accounts receivable, reported as an operating source of cash, can be accelerated through securitization. In effect, accounts receivable are sold and become the collateral supporting a financing transaction. Many companies, but not all, will report cash flow derived in this manner as an operating item. While it is not improper to report such transactions as operating events, such cash flow is effectively borrowed from future periods. However, if the amount of securitized accounts receivable per period remains relatively level over time, the net effect on operating cash flow will be zero. Capitalized expenditures such as software and interest are reported as investing uses of cash. As such, increases in amounts capitalized will boost operating cash flow and be offset with increases in cash used in the investing section. Acquisitions play havoc with the statement of cash flows. Cash paid to acquire net assets -- assets less liabilities -- in an acquisition is reported as an investing activity. Among the assets acquired are working capital items such as accounts receivable and inventory less accounts payable. When acquired as part of operations, the cash employed in building working capital is reported as an operating use of cash. The realization of this working capital is an operating source of cash. When working capital is acquired in an acquisition, however, the cash paid to acquire the related accounts is reported as an investing use of cash, though their realization is still an operating source of cash. Thus companies can effectively "purchase" operating cash flow through acquisitions. Investors may see signs of the effects of acquisitions on operating cash flow by examining the cash flow statement. For example, an increase in accounts receivable from one balance sheet to the next may not equal the amount reported as the increase in accounts receivable on the cash flow statement because accounts receivable acquired in a business acquisition were reclassified to the investing section. The same can be said for other operating accounts such as inventory and accounts payable. I am personally somewhat leery of reported operating cash flow when a company discloses numerous acquisitions during a reporting period. It would be helpful if the FASB would require companies to disclose pro-forma operating cash flow for a combined entity as though the combining companies had been consolidated for all periods presented. Such information would help investors get a clearer reading on sustainable operating cash flow. Regardless of their source, generally accepted accounting principles require that all income taxes be reported in the operating section of the cash flow statement. Accordingly, tax benefits accruing from the exercise of stock options, ostensibly a financing activity, are properly reported in the operating section of the cash flow statement. Such cash flows are inherently very volatile, increasing during periods when high stock prices are accompanied with increased exercises of stock options and decreasing during other periods. Because of this volatility the tax benefits arising from the exercise of stock options should not be considered as part of sustainable operating cash flow. Some companies will reclassify outstanding checks to accounts payable, increasing the cash balance in the process. Such a reclassification boosts operating cash flow. Because cash is defined as amounts available for immediate use, outstanding checks are not cash. Reclassifying them to accounts payable is tantamount to saying that the amount due a vendor has not been paid and the cash is available for any other desired use. This, of course, is not true because the check has already been written. A closely related act is to reclassify cash overdrafts, a negative cash balance, to accounts payable. Overdrafts are checks written for which there is no available cash. It is a liability but is more properly reported as a bank financing obligation than as accounts payable, an operating liability. To my knowledge there are no accounting rules permitting the reclassification of outstanding checks and overdrafts to accounts payable. I suspect that companies take these actions because the amounts involved are considered to be immaterial. Granted this reclassification entails a balance-sheet only adjustment and does not affect net income. It does, however, affect operating cash flow and, in my view, can affect an investor's assessment of a company's financial performance. While the items described here may not be outside the boundaries of generally accepted accounting principles, their use does distort operating cash flow. As such, investors should carefully consider whether operating cash flow should be adjusted, where possible, to remove their effects.
However, do not make the mistake of confusing a tepid economic rebound with a weak earnings recovery. The former doesn't necessary lead to the latter. Even though sales at most companies aren't about to suddenly take off, corporate earnings still can. The financial markets seem loath to recognize this fact, but smart investors who get in early will reap the rewards if they remember the concept of "operating leverage." Operating leverage is the idea that companies can make more money from each additional sale if they don't have to increase fixed costs to produce more. "The benefits of operating leverage are immense," says Jay Mueller, chief economist at Strong Funds. "That's because the minute business picks up, the existing workforce and the existing plant and equipment can do a whole lot more without adding additional costs." Profit margins expand, and profits boom. Right now, the broad economy is rife with operating leverage. Companies have cut costs to the bone. "For two years, all they've been doing is cutting," says Bob Kippes, portfolio manager of AIM Aggressive Growth. "When the top line improves, companies are so lean and mean that it will all go straight to the bottom line," he predicts. As for the impact on earnings, "it should be explosive." The low-but-improving rate of capacity utilization (in 12-01, at 74.4% - was at a 19-year low - much lower than the 1990-91 recession's bottom of 78.1%) is probably the best indication that profits can jump later this year, says John Lonski, chief economist at Moody's Investors Service. The last time rates were this low, profits of nonfinancial companies jumped 34% annually, on average, one year later, he says. The other clear sign of operating leverage at work in the U.S. economy is the jump in productivity, says Mueller. A measure of business efficiency, productivity grew 8.4% in the first quarter (the largest jump since exiting the 1982 recession). That more than offset the 2.8% rise in hourly compensation and resulted in a 5.2% drop in unit labor costs. More reductions like that, and a profit jump can't be far behind. Of course, for productivity increases and low capacity utilization to work their magic on corporate profits, business sales still need to pick up. Spurring greater demand for U.S. goods is the falling dollar. For the economy to really soar, businesses have to start spending again -- on hiring workers, new technology, and capital improvements. And they will, once the evidence clearly shows that profits are perking up. "It's these improvements in profitability that lower the risk aversion of Corporate America," says Lonski. Then, companies will spend more, and investors can feel good about buying stocks again. Productivity & Profitability Hal Varian, NY Times 6-6 Recent productivity growth seems strong, and that is good news for the economy. But is it good news for business? Not necessarily. The relationship between productivity and profitability is looser than one might think. If productivity grows in highly competitive industries, the benefits can quickly be competed away. The telecommunications industry is a good example. After the AT&T breakup in 1984, labor productivity in telecommunications services grew 8% a year. But the competitive environment in this (partly) deregulated industry has meant that most gains have shown up in the form of lower prices. This is great for consumers but does not do much for the bottom line. That the telecommunications industry is in such terrible shape now is in part because productivity growth has been so strong: the increased output of services created a glut of capacity, which in turn led to increased competition and lower prices.
Take the case of Wal-Mart. Just about 10 years ago, on Sept. 16, 1993, this retailing behemoth traded at $12 a share. More than three years later, at the end of December 1996, the shares still traded for $12. Net gain: zero. Yet from 1993 to 1996, sales almost doubled. Net income climbed by 40%. And book value per share soared by more than 60%. Why didnĚt the price of a Wal-Mart share climb to reflect that value? Well, in 1993, investors were focused on fears that Wal-Mart had saturated the U.S. market. That year, Wal-Mart opened stores in four additional states, bringing Wal-Marts to 49 out of the 50 states. But in that same year, Wal-Mart laid the foundations for its future growth outside the United States. The international division got its first president in 1993. By 1995, the company would have 276 stores overseas. In 1997 alone, Wal-Mart added its first stores in Argentina, Brazil and China. The stock price, which had been stagnant for so long, began to climb once more in 1997 as the market realized the value created by the company. The stock split again in March 1999, the first split since February 1993. Wal-MartĚs stock, which hadnĚt appreciated for three-plus years, proceeded to gain 510% from the beginning of 1997 to the end of 1999. Now, the lag for Wal-Mart between value creation and value realization was specific to that company. During the span when Wal-MartĚs stock went nowhere, the S&P 500 gained 60%.
This year, the firms in the S&P 500 will pay dividends equal to just 31% of operating earnings, as estimated by analysts at S&P. What if, instead, companies started paying out 50% of operating earnings, which is the historical average? The resulting yield of 2.5% might make shares more appealing. Higher payouts could also boost confidence in corporate profits. After all, if companies fork over more cash to shareholders, investors might be more inclined to believe earnings were the result of real corporate progress, rather than accounting shenanigans. When money managers Robert Arnott and Clifford Asness analyzed the period since the Second World War, they found that, when management retained the most earnings, profit growth over the next 10 years was flat or negative, once you figure in the impact of inflation. Meanwhile, when management retained the least earnings, real earnings per share over the next 10 years grew at an average 4% a year, faster than the 2% historical average. "Dividends seem to be associated with good corporate behavior," says Mr. Asness, managing principal of New York's AQR Capital Management. "When companies in aggregate pay more dividends, subsequent earnings growth is faster. You'd expect the exact opposite." What explains this bizarre result? Mr. Asness's theory: "Let's say you're paying a dividend and you want to embark on a new project. Then, you have to go to the capital markets and get the money. There's a lot of discipline imposed by that." More on Dividends Shirley Lazo, Barrons 6-10 Donald Straszheim, president of Straszheim Global Advisors, an economic and financial research firm, concludes that the dividend payout ratio for the overall economy (dividends paid out as a percent of after-tax corporate profits) exceeded 100% during Q4-01 and Q1-02. In the January-March quarter of this year, dividends were $436 billion, while after-tax profits totaled $428.9 billion (up 0.9% from the fourth-quarter level). The payout ratio averaged 59% from 1980 to 1999. Then, in the final three months of 1999, it spiked to 63%, reaching over 100% recently. For the economy as a whole the current dividend pace is "unsustainable," says Straszheim, who was chief economist at Merrill Lynch from 1985 to 1997. "Earnings have to improve smartly over the next several quarters, or dividends have to be pared back." He adds, "Investors who are becoming more risk averse, looking for yield instead of growth, may be very frustrated." The Commerce Department takes a point of view on profits that's slightly different than Straszheim's. Because of accounting quirks associated with recent tax-law changes, Commerce says it's more worthwhile to look at profits from current production instead of after-tax profits. The former rose by 0.5% in Q1, which continued the profit recovery as seen through these data, albeit at a slow pace. Dividends as a share of profits from current production actually fell - which is a sign of underlying improvement in the profit cycle that could further propel dividend payments in the future. An alternative reading of the data shared by some other economists is that dividends have grown in importance for the U.S. economy. They point out that the dividend share of national income rose to a record 5.19% in the first quarter of 2002. Between 1959 and this year's first quarter, that share averaged 3.38%. And More on Dividends Floyd Norris, NY Times 6-14 From 1938 on, an investor who bought the stocks in the S&P 500 six months before a recession ended, and then held on until six months after the end, always did well - they averaged a 27% return, and that figure does not include dividends. This recovery will be six months old in two weeks, but you wouldn't know it from the S&P 500, which is off 12.1% this year. Reports Howard Silverblatt of the S&P, the 351 dividend-paying companies in the S&P 500 are, on average, up a little this year. It is the others that have dragged down the average, with an average decline of 17.6% since Dec. 31.
In 1999 US stock funds with the growth style averaged a 55% gain compared to 21% for the S&P 500. The following year they took in more than $92 billion, while more plodding value funds and bond funds slipped into net redemptions according to Financial Research Corp. Since the tech-laden Nasdaq Composite's March 2000 peak, the average multi-cap value fund and the average income fund are up 6.8% and flat, respectively, in the 12 months ending with Friday's trading according to Lipper. The average multi-cap growth fund is down 23% over the same stretch. So it's not surprising that value funds and bond funds took in more than $160 billion combined in 2001 and the first quarter of this year, while growth funds' inflows were about flat. While some of us are dutifully broadening our once growth-heavy portfolios, others are no doubt still chasing the style du jour. Our newfound appetite for bond funds, balanced funds and price-conscious value stock funds is refreshing after the orgiastic bubble period. But a cynic - or realist - might rightly see it as a different symptom of the same disease. Value managers are having a tough time finding cheap stocks. Interest rates are expected to rise, which is a bad development for top-selling intermediate-term bond funds. And bonds themselves are coming off a great run in which they've beat stocks over the past five years. No matter how today's low-key favorites fare in the next few weeks or months, this comforting lineup is far more conservative than the stock-heavy approach prescribed for most of us investing for a goal that's a decade or more away. Consider that a portfolio with 60% of its money in the S&P 500, 30% in intermediate-term government bonds and the rest in cash would've posted a 9.8% annualized gain and lost just 6% in its average down year from 1955 through the start of this year, according to T. Rowe Price. An all-stock portfolio would've averaged an 11.4% annualized gain over the same stretch and lost 12% on average in down years. These return figures don't sound too different, but they add up over time. A $10,000 investment in the former portfolio would've grown to about $114,000 over the past 20 years, compared to more than $170,000 for the latter. So one concern with a more conservative portfolio is that in return for a smoother ride you'll have to invest more to reach your goal. Another factor to consider is that if bond funds are a large percentage of your holdings in a taxable account, their dividends will trigger tax bills.
Portfolios & Capitulation Charles Jaffe, Boston Globe 6-5 'People feel exactly the opposite today of how they felt when the market was in its heyday,' says Richard Geist, who runs the Congress on the Psychology of Investing and publishes the Strategic Investing newsletter. 'Back in 1999, people had a tendency to think things would never go down. 'Today, people are starting to think there may never be a time when things go up again. Typically, when people can't sleep at night is when they decide to capitulate to the market, and that's when the market goes up.' Market watchers have been talking about a capitulation for a long time. The capitulation trend has been slow, rather than a rush for the exits. Every market mini-rally is met by a wave of selling from people who used the run-up to make back some of their losses and decided to sell out. It's a typical individual investor action; studies have shown that people selling stock like to make their moves - even when they are dumping a loser - on an uptick. 'That kind of capitulation - where it happens small wave by small wave - takes a long time to shake out,' says Donald MacGregor, senior researcher at Decision Research. 'People don't want to throw out their whole portfolios, but they want to move more money to where they feel safe, in cash, so they sell off whenever the market lets them feel better about their losses. 'The market would be better off if people would all just capitulate at once,' he says. But that's not going to happen. Says Geist: 'No one likes living through a downturn, but they also don't like missing out on a rebound. For most investors, the idea right now is not to be all in cash or all in stocks, it's to have a mix that they can live with for as long as this market continues down, while still being prepared to take advantage of what happens next. If you make it an all-or-nothing decision and go to cash now, you are being every bit as speculative as if you had been all in the Internet in 1999. And you're just as wrong.' Capitulation Michael Santoli, Barrons 6-3 Plenty of professionals declare that there needs to be some form of capitulation - a panicky selling climax to purge speculative instincts and wash out weak holders of stocks. This kind of talk always raises the question of how mass panic can occur when so many are looking for it, each with the confidence that it will be followed by a rebound. [But not everyone is expecting a rebound.] Kevin McClintock, chief investment officer for stocks at David L. Babson, says, "I think what we're seeing is a slow and steady capitulation" - the figurative whimper rather than a bang.
It is important to remember that a market economy works through price fluctuations that respond to changes in supply and demand. In the absence of inflation, the only way to signal relative differences across the full range of goods and services is for some prices to fall in absolute terms even as others are rising. A modicum of inflation allows this price signaling to occur without squeezing so many producers to cut prices. As long as the central bank does not allow it to get out of control, this kind of modest upward price movement creates an environment more conducive to economic growth than a determination to squelch inflation at all cost. What's good for the economy, though, will probably not help the stock market regain its vitality. Indeed, perhaps the greatest single prop underlying the almost uninterrupted market boom of 1980's and 90's was the secular decline in interest rates that accompanied disinflation. Not only did corporate profits rise sharply, but investors found it easy to value stocks at unprecedented multiples to earnings. That movement has now run its course. "A flattening-out of inflation trends suggests that the up trend in price-to-earnings ratios that began in the early 1980's is over" wrote Myles Zyblock, a Brown Brothers Harriman economist, in a recent investment report.
Why aren't such techniques used now? Mainly because under current accounting rules, performance-based options plans must be counted as expenses, while ordinary, nonperformance-type options are not. Since companies hate this "hit to earnings" caused by performance-based plans, they rarely use such options. Changing the rules to count all options as expenses could put both types on an equal footing, perhaps increasing the use of performance options. Accounting reform would make it easy for shareholders to see the cost of options. And it might help bring executive compensation levels down to Earth.
The poll results also show how much damage the Enron eruption has done to investor confidence. Nearly 71% said they believe questionable accounting practices are widespread in business, up from 62% in February. As a result, 40% say they are less likely to invest in stocks or mutual funds. That figure was 34% in February. Jason Trennert, managing director and investment strategist at the I.S.I. Group, said regulatory investigations into the business practices of brokerage firms were a cloud over the industry that was not going away. "You're going to continue to see things coming out every day that question how Wall Street does business, and that is not helpful for investor confidence," he said. "Longer term, reforms will be positive to the extent that it will make investors more confident, but the investigations will be a heavy headwind for investor confidence." Mitchell Caplan, president of the E*Trade Group, characterized many of his firm's customers - particularly those with more than $100,000 in investable assets - as frozen. "People are trying to figure out what to do and more often than not they are going to cash," he said. In a recent confidence report cited by Moody's, tracking the first five months of 2002, only 21% of respondents expect higher incomes in six months. That is below the 25.7% average from 1996 to 2000 and below the 23.9% of a year ago. The trouble with the current market malaise may come down to this: While nobody wants a frightened investor class, few think that its suspicions or frustrations are irrational. "As the average investor learns more about the shenanigans that went on, he is going to get mad and he has every right to be mad," said James Stack, president of InvesTech Research. "You hate to see it because the small investor is paying the steepest price, not because they lost the most but because they lost the greatest amount of what they could not afford to lose." More on Fear Tom Petruno, LA Times 6-2 The stock market is supposed to be a "discounting mechanism" - that is, it's supposed to be a place where well-informed, rational people weigh future prospects against current events and value stocks accordingly. Theoretically, then, the sum of all fears at any given moment should be reflected in share prices. A core reason for the market's struggle this year is that many investors are trying to weigh, and to appropriately discount, very different fears from what they faced in the 1990s. Even as shares recovered in the fourth quarter, it was generally accepted that terrorists would strike on U.S. soil again. In the absence of new attacks since Sept. 11, many people (including those with money to invest) may feel as much apprehensiveness as relief. Nobody wishes for another strike, but the terrorists' inaction makes for greater uncertainty: We're still guessing what they're capable of doing, and when. In the last two weeks, a new fear element has been introduced into the discounting equation: the threat of nuclear war between India and Pakistan. How is Wall Street supposed to discount that possibility? The nuclear threat during the Cold War was so massive as to be almost surreal. A "limited" nuclear war is a new concept. The world probably would survive such a war. Likewise, a single nuclear bomb attack on the United States. But it could change the way many people live their lives and their assessment of the future. In that context, it could change people's view of money and how they save and invest it, or perhaps whether they should save it at all. For many investors, little or none of this disaster-discounting is methodical. Much of it doesn't even occur on the conscious level. It's too unpleasant. Rather, such discounting occurs in the gut: For many, it's a general feeling that things just aren't quite right, that it's too risky to make significant new commitments to financial assets such as stocks. Better to wait than chance a loss, especially given the red ink most portfolios have suffered over the last two years, investors may figure.
Investors aren't used to being asked where their money is coming from, but they may get that question now. 'Some companies have let people open accounts with just a name and address. Now it's going to be a name, residential address, date of birth, and maybe a Social Security number' says Bob Grohowski, associate counsel for the Investment Company Institute. Potentially, fund customers might also be required to provide driver's license numbers, a signed copy of certain tax documents, an explanation of where the money for a large deposit is coming from, and a statement swearing that all of the other information is true and accurate. The Patriot Act may drive many firms to stop taking 'third-party checks,' international wire transfers, and even cashier's checks. Electronic money transfers from abroad and large third-party transactions - where you get a check made out in your name and sign it over to a fund for deposit into your account - meet the banking standard for suspicious activity, and many fund firms already refuse them. With cashier's checks, the fund has no way of knowing where the money behind the check actually came from, a problem under the ''know your customer'' rules. Rules about fast turnarounds may be tightened, too. Many funds already won't redeem new deposits for seven days. More firms may adopt that time frame, or even lengthen it, which could hinder some market-timers.
Market bulls contend that trends tend to persist when it comes to the relative strength of the large caps. That tendency, they say, indicates an above-average chance that large caps will repeat as outperformers in June - and, if so, a good chance that they will three-peat in July. That argument, however, is quite weak. Consider a database maintained by two finance professors - Eugene Fama of the University of Chicago and Ken French of Dartmouth - that has measured the relative performance. If an investor would have bet on large caps in any month, chosen at random, from the middle of 1927 to the end of this past April, his chances of beating the small caps would have been 48.8%. The chances of success would have grown to just 55.3% if he had bet on large caps only if they had outperformed the small caps during the previous month. In the big-cap bulls abridged version of market history, there were long periods in which large caps outperformed small caps with virtually no interruption, followed by equally long periods in which just the reverse was true But the stock market has never fit so neatly into this alternating pattern. Consider the period dating back to March 2000, when the current bear market began. In retrospect, this may look like a period of nearly continuous small-cap relative strength. The reality has been different. Although small caps have far outperformed the large caps over all, there have been 11 months along the way in which the reverse has been true. Large caps have outperformed small caps in 32 of the 73 years beginning in 1928, or 43.8% of them. In the years immediately following those years of outperformance, the large caps repeated as winners 62.5% of the time. Even taking into account their strong showing in May, large caps have trailed behind the small caps by nearly 13 percentage points over the last 12 months. As a result, the intelligent bet is that the next 12 months will mean more of the same.
The idea, roughly speaking, is for corporate chief executives to sit down once a year and write their investors a clear, concise and frank assessment of the company's recent performance and future prospects. What went wrong and what went right? How does the company rate by the key industry measures? What are the biggest risks ahead? It sounds reasonable. But for corporate America, it would represent nothing less than a cultural revolution. The framework of the reports is generally unchanged, requiring a reader to wade through scores of pages, much of it repetitious boilerplate, to learn what's really going on. Bad news is generally ignored or blamed on uncontrollable factors such as the weather, the economy, the stock market or government regulation. There is precious little data and analysis on the key operating measures that executives themselves look at to assess the company's performance - measures such as inventory turns or the cost for each new subscriber or the average transaction size. The payoff from corporate candor, according to SEC Chairman Harvey Pitt, would be higher stock prices - and thus a lower cost of capital for companies - as investors feel more confident that they're getting the straight scoop and won't be hit with unexpected surprises. But lawyers, executives, accountants and academics say companies hesitate to reveal too much about their operations and strategies for several powerful reasons. Foremost is the fear that discussing what went wrong, or predicting too much of what may be ahead, will invite more shareholder lawsuits. There is also concern that being too candid will simply arm competitors, suppliers, lenders and customers with information that will put the company at a disadvantage in the marketplace. The reluctance to level with shareholders certainly reflects the normal human reluctance to admit problems or mistakes. NO New Ideas Scott Burns, Dallas Morning News 6-4 'They're pulling weeds instead of planting gardens.' That's how management consultant William Dunk characterized this years' crop of annual reports. 'What's most striking is everyone's lack of a good idea.' Dunk was struck by the fact that most annual reports showed no top line or bottom line growth. They did, however, show lots of liquidation and cash generation, all framed by promises of strength and confessions of vulnerability. 'With this risk-paranoid frame of mind,' he wrote in the recently released report, 'you concentrate on not taking risks and fixing mistakes, rather than seizing big opportunities. The risk-averse have a hard time growing, particularly in bad times, preferring instead to shrink behind their barricades.' The entire 2002 report on annual reports is at www.globalprovince.com.
Mr. Ameriks reached that conclusion by running computer simulations, known as "Monte Carlo analysis," to figure out the probability of a 65-year-old's draining his assets prematurely if he were to withdraw 4.5% of his initial assets every year (adjusting for inflation each time) for a set number of years. He used four portfolio types - conservative, balanced, growth and aggressive - and time periods in five-year increments ranging from 20 to 40 years. For example, annual withdrawals over 30 years from a "growth" portfolio made up of 60% stock, 30% bonds and 10% cash would deplete the non-annuity part of the portfolio early 12.6% of the time. But if half those assets were annuitized, that likelihood drops to 3.3%. There's another advantage, too, says Mr. Ameriks: "Once you have that annuity income, something coming in every month that you can count on, you can take a better look at the rest of your assets and how you can make them grow." Although his model didn't take Social Security income into account, he suggests factoring that, along with any private pension payments you receive, into the amount you need to have on hand each month to pay fixed bills. Sample results showing the probabilities that each portfolio would allow the retiree to withdraw 4.5% (inflation-adjusted) annually to meet living expenses over 20, 30, and 40 years TIAA-CREF Winter 2002 To estimate a broad range of possible returns, John Ameriks (research economist at the TIAA-CREF Institute), Robert Veres (editor and publisher of Inside Information), and Mark Warshawsky (former director of research at the TIAA-CREF Institute) ran each portfolio through a Monte Carlo analysis, in which numerous historical investment returns and inflation data were drawn at random. This method reflects future possibilities better than simple historical returns, which are a single sequence of numbers that probably will not repeat themselves. The analysis ran 10,000 trials using data from the period 1946 - 1999. The test used four portfolios: conservative (20% stocks, 50% bonds, 30% cash); balanced (40% stocks, 40% bonds, 20% cash); growth (60% stocks, 30% bonds, 10% cash); and aggressive (85% stocks, 15% bonds). The simulations revealed the probabilities of maintaining 4.5% inflation-adjusted annual withdrawals for 20, 25, 30, 35 and 40 years with each portfolio.
Average success rate in making withdrawals last 30 years with different percentages of the portfolio annuitized TIAA-CREF Winter 2002
More on Withdrawal Rates FPA Journal Dec 2001 In his 1994 article for this publication [FPA], financial advisor Bill Bengen started with a compelling scenario. He noted that Money magazine had recommended that investors spend 5.29% of their portfolios in the first year of retirement, and in subsequent years, they take out the inflation-adjusted equivalent of this figure until death. Given the double-digit yearly returns that stock portfolios have provided since 1926, this 5.29% figure might appear to be reasonable and even conservative. But when Bengen performed a simple spreadsheet analysis using the historical returns on the portfolios with asset mixes that he, himself, was recommending, and assumed that a client had retired in 1972, he found that the client would have completely run out of money after 23 years. A client retiring in 1966, using the same strategy, would have been bankrupted after 18 years. Clearly, if past conditions repeated themselves, people who took Money magazine's advice could have found themselves in financial difficulty. A subsequent analysis by Gordon Pye offered similar but not identical results. Over a relatively short ten-year retirement period, Pye found that a stock portfolio was able to sustain withdrawals of four percent of the initial portfolio, inflation-adjusted, in 92% of the hypothetical future sequences of returns. When the analysis was extended to 20-year and 35-year time horizons, the 4 percent liquidation rate succeeded more than 80% of the time.
Rather than labor mightily to shave a few seconds off the clock, customer service departments should be putting their efforts into structuring experiences to synch up better with the way humans actually process the information. 'What sticks with you is not the event itself, but your perception of the event,' Chase says. Speed is relative according to Chase and Dasu. More important is the pacing, and the structure of the interaction. How it starts and, more important, how it ends. 'Many people believe that first impressions are the most important,' Dasu says. ''That is dead wrong. The end is far more important - that's what remains in people's mind.' Chase offers some examples of companies that 'finish strong': a kitchen cabinet company that ties bright bows on all the installed work, and leaves behind a vase of flowers; and cruise lines that end each day with raffles, contests, and shows. As a corollary to their 'last impressions count' rule, Chase and Dasu advise companies to get the bad news out of the way early, to increase the odds that the customer's experience will end on a good note. Chase mentioned Amazon's policy of notifying customers very early in a transaction when a book is not in stock and will require a longer-than-usual delivery time. Many online retailers, he says, delay that information until deeper into the purchasing process, potentially annoying the customer. 'That's definitely the wrong approach,' Dasu says.
More than thirty years ago, Nobel Laureate Robert Lucas wrote a compelling paper suggesting that all future economic events are unique. His argument is that expectations as well as conditions determine the behavior of people. Even if the same conditions reappear, expectations will be different as the events unfold. This occurs because today, people know what happened last time, while those in the earlier period did not. That knowledge makes at least one important variable - expectations - different between the two periods. However, there is one caveat to the uniqueness claim by Robert Lucas. What if the expectations held in the earlier period proved to be justified? Would not the same expectations be formed today, thus making the analogy valid? The reason this discussion may be important for investors is that there are similarities between some investment performance today and in the aftermath of the last recession in 1991. As the economy fell into recession in 1990, low credit bonds showed substantial price weakness. At their nadir early in 1991, "junk" bonds had established almost a 10 percentage point gap in yield above treasury bonds of the same maturity. This gap was justified because of huge defaults, almost 10% of all "junk" bonds issued. Higher returns were needed to attract investors. Early this year, a 10 percentage point spread had emerged again in the "junk" market. Not surprisingly, defaults once again were above 10% of all issues. When the 1990 recession ended early in 1991, defaults slowly began to decline. By the end of 1992, the default level had declined to less than 5% of all issues. But investors were getting compensated for much higher defaults. In 1992 and 1993, total returns from high-yield bond investing rose toward 25% per year as investors sought the high-yields of low quality bonds. This year, high-yield bond funds once again are outperforming almost all other investments. There are economic reasons suggesting that high-yield bonds may again outperform for a period of time. Those companies offering huge supplies of high-yield bonds, such as energy marketers and communications companies, are trying to upgrade their balance sheets by cutting capital spending and selling assets. The same pattern existed in 1990, when real estate developments and industrial mergers subsided. Also, many junk bonds are created from higher quality bonds that have deteriorated. This supply certainly increases in a recession, but ends by the end of the first year of recovery. Furthermore, the weakest have died, so survival rates begin improving soon after the economy begins to recover. I see more similarities than differences between the two periods. Yet, Lucas never gave us guidance on the degree of uniqueness that each observation may have. Just the Facts Labor Market Update Companies boosted their payrolls by a modest 41,000 in May. The National Federation of Independent Business says its members are putting up 'help wanted' signs. ManPower, the nation's largest temp agency, reports that employers are rapidly ramping up their temp hiring plans. Last month, announced job cuts fell to 84,978, the first time in 12 months that the count came in under 100,000, according to Chicago consultants Challenger, Gray & Christmas. Today, the 5.8% unemployment rate is below the 6.2% average rate for the past 20 years. So it won't take much of an improvement in economic activity for the drum-tight labor market to quickly reassert itself. Odds are the 2002 expansion won't be a jobless recovery. In fact, it could well turn into the labor-shortage rebound. (Christopher Farrell, Business Week 6-14) Waiting for the Turn-Around Among 293 Massachusetts stocks I tracked through a database, 125 traded at a lower price yesterday than they did on Sept. 21, the worst day of all for a market gripped by fear and uncertainty. This means slightly more than 42 percent of those 293 stocks are lower today (companies delisted since last fall for failing to meet minimum requirements were not counted). The gap between encouraging economic data and the more dour performance of corporate America continues to perplex. The prospect of a business rebound is an elusive stock market carrot that constantly appears to be six months into the future, and investors chasing it have become fatigued. The six-month turnaround was consensus opinion well over a year ago. Now that rebound is supposed to take place in the second half of this year. Or will it? (Steven Syre, Boston Globe 6-13) Bulls v. Bears Bears will note that ISIĚs weekly surveys of current sales results at retailers, auto dealers, manufacturers, homebuilders, banks, technology companies and airlines suggest the recovery has softened; that the Economic Cycle Research InstituteĚs weekly leading indicator has hiccupped; and that First CallĚs tally of upward analyst earnings estimates has flattened. Bulls, in contrast, will point out three signs of strength: Commodity prices are still rising, signaling demand; consumer confidence is strengthening; and the nationĚs money supply is beginning to reaccelerate. (Jon Markman, MSN Money 6-12) Mortgage Levels at New Highs Housing payments, as a percentage of disposable personal income, are at their highest level since the Federal Reserve began tracking the statistic - up 45% since 1980. And the trend is likely to continue as low interest rates keep fueling home sales. Lenders now permit some well-to-do borrowers to apply up to 50% of their income to their regular mortgage payment. A decade ago, the norm was 28% to 32% of income. The average down payment from a first-time home buyers dropped to just 3% in 1999 vs. 10% a decade earlier, according to the National Association of Realtors. Nationwide, slightly less than 1% of loans are in foreclosure or at least 90 days past due, according to LoanPerformance, a mortgage-data firm. Still, if interest rates rise and the economy slows, experts worry about a rash of foreclosures. (Simon & Higgins, WSJ 6-12) ProFunds Seeks to Offer Leveraged ETF ProFunds Advisors filed statements with the SEC Wednesday seeking approval for eight "enhanced" ETFs that would attempt to double the return of the indexes that they track. [The SEC is concerned that such ETFs would be able to 'reprice' themself's throughout the day like static indices] ProFunds' open-end mutual fund UltraBull, which attempts to double the performance of the S&P has sunk 38% year-to-date. UltraBear, which seeks to double the inverse of the S&P, has delivered gains by the same amount. The S&P benchmark is off 18% for the one-year period. (Craig Tolliver, CBS.MarketWatch 6-6) Flash Back Fred Bleakley WSJ 9-23-97: Nominal gross domestic product, the government's broadest economic measure, has been rising at an average of about 5.75% a year since 1991. That pales in comparison with the average annual growth rate of 17% for corporate profits. During many previous business cycles, the difference between corporate profits and the economy has been much smaller, often just one or two percentage points. A big chunk of the extra earnings growth, say some economists, is due simply to lower interest costs, fewer write-offs for depreciation expenses, some artful tax dodging and some accounting magic. On-line Parents Offering parents online access to everything from daily quiz grades, to class-project due dates, to whether his kids have turned in homework or skipped class, Forsyth County School District [about 50 miles north of Atlanta] is part of a movement that could change the relationship between families and schools. Demand for the programs took off only in the past couple of years, after Pearson and Apple began marketing their programs. The programs are so new that few districts have been able to measure their effectiveness. Still, anecdotal evidence suggests the tracking programs may help. Example: Instead of playing phone tag with busy parents, teachers can respond to e-mails at their convenience. Parent-teacher meetings are more productive because parents know more about their child's situation. (Robert Tomsho WSJ 6-4) Reform This Thursday the NYSE plan to announces its prescriptions for how the companies whose shares it trades can improve their corporate governance. The biggest change is the proposal to require that independent directors are a majority of a company's board. Present rules require just three independent directors per board, regardless of its size. One-quarter of NYSE's listed companies do not meet the proposed standard. Another proposal would require nonmanagement directors at each company to meet regularly without management present, to promote open discussion among outside directors. The proposals also say that directors' fees must be the sole compensation that an audit committee member receives from the company. (Gretchen Morgenson, NY Times 6-2) Rise of the Creative Class In 'The Rise of the Creative Class', Richard Florida, a professor of regional economic development at Carnegie Mellon, observes that creative jobs in science, art, media, research and technology now dominate our economy. From only 3 million people and 10% of the workforce in 1900, the creative class has ballooned to 38 million workers and 30% of the workforce today. Creative class workers surged from 20% to 30% of the workforce during the last 20 years. During the 1900-2000 period, the proportion of people he defines as working class peaked at 40% of the workforce in 1920, and today account for only 26%. During the same period, agricultural workers fell from 37% and virtually disappeared. Although service workers surged from 20% of employment in 1900 to more than 40% of the workforce by 1980, their proportion peaked in 1980. It has been in decline ever since. (Scott Burns, Dallas Morning News 6-2) Quick Facts, Stats & Opinions Both economists and the market have been scaling back expectations for the first Fed rate increase almost by the day. Less than three months ago, the August fed funds futures contract was trading at an implied yield of 2.52%, traders' best guess at the average rate for that contract. At 1.78% today, the August contract is putting the odds of a move before then at about 20%. After today's report on retail sales for May [sales down .9%], it won't be too long before the Fed will be declared missing in action for the rest of the year. (Caroline Baum, Bloomberg 6-14) In April there were net inflows of 1.4 billion Euros ($1.32 billion), a 63% slide from 3.8 billion Euros in March, according to mutual-fund associations in Italy, France, Spain, Germany, Switzerland and the U.K. In the first four months of this year, investors have put only °8 billion into stock funds, which is less than half the 18.1 billion for the year-earlier period. But the level has dropped even more compared with two years ago, when a record 88.9 billion Euros poured into stock funds in the first four months of 2000. (WSJ 6-14) Housing prices in the United States are nothing compared with the United Kingdom, where the ratio between average income and home prices has soared to 8:1, versus just 3:1 here. Residential investment as a percentage of disposable personal income currently is at 6.1% -- a figure thatĚs up from a low of around 4% in 1990, but well off the 9% level seen in 1955, the 8% level of the 1970s or the 6.8% level of the mid-1980s. (Jon Markman, MSN Money 6-12) The average age of a four-seat, single-engine piston airplane is 32 years, according to the General Aviation Manufacturers Assn. There are 150,000 single-engine aircraft in operation. After peaking at about 14,000 a year in 1977, sales of single-engine aircraft plunged to less than 500 by 1994, and reached 1,810 in 2000 before falling a bit in the aftermath of the terrorist attacks. (LA Times 6-12) According to new U.S. census figures, average travel times to work from 1990 to 2000 increased by only about three minutes. Between 1980 and 1990, it grew by about 40 seconds. (WSJ 6-12) Classical economists look to the theories of the late 17th, early 18th century political economist Jean-Baptiste Say to explain the tendency of an economy to expand. Say's Law, supply creates its own demand, states that an increase in the output of goods and services, through the revenue it generates, leads to an increase in demand. Unemployment is merely a temporary state. So have faith. The economy wants to grow. (Caroline Baum, Bloomberg 6-11) The number of people who said they had read a newspaper the previous day declined to 41%, down from 47% in 2000, according to the poll by the Pew Research Center for the People and the Press. About 32% of the public said they regularly watch the evening news on ABC, CBS or NBC, roughly the same as in 2000 but down from twice that many a decade ago. (AP via LA Times 6-10) We have been losing quite a bit of ground in the supply and demand area. There have been net redemptions from stock mutual funds over the last three weeks. And last week we had about $3 billion to $4 billion in secondary stock offerings, which is a negative when taken against the selling pressure. (Steve Leuthold, president of Leuthold/Weeden Capital Management, NY Times 6-9) Most troubling to some Wall Street analysts is the wavering of what had been bulwarks in an otherwise rickety market - stocks of small and mid-size companies. From their mid-April peaks, the S&P SmallCap 600 index has dropped 9.9% and the S&P MidCap 400 index is off 8.3%. (Josh Freidman, LA Times 6-7) The bull market, which I define as running from August 1982 through March 2000, produced an S&P return of a tad under 20% a year, according to Ibbotson Associates. That's more than double the 8.9% of the previous 56 years. In a 20%-gain-a-year world, dividends don't matter much. In a world of 6% to 10% gains, they matter a lot. Get used to it. Investors survived and prospered, gradually, for 56 years, averaging less than 9% a year. So can you. (Allan Sloan, Newsweek's Wall Street editor, Washington Post 6-4) Foreign investors shied away from the U.S. in 2001, as direct foreign investment fell by 60.4% from 2000, the Commerce Department said. Foreign direct investment to buy or establish U.S. businesses dropped to $132.94 billion from the record $335.63 billion in 2000. (Reuters via LA Times 6-6) In doing a google search I ran into Investment Strategies for the 21st Century by Frank Armstrong. I have scanned a few chapters - and plan on going back when time permits. A second site worth some time: Investing Made Simple. (Factoids 6-4) A new study by J.D. Power found that a number of cars and trucks that were redesigned last year had more problems than the 2001 models they replaced. A new model typically scores about 2% worse. Two Examples: In 2001, buyers of Honda's then-newly redesigned Honda Civic reported an average of 178 problems per 100 vehicles. The Civic's score improved to 118 problems per 100 this year. The redesigned Toyota Camry slipped in 2002 to 117 problems per 100 cars, from 113 a year ago. (WSJ 6-3) The broad S&P 500-stock index is down about 7% so far this year, but it still is up more than 10% since the dark trading days that followed the terrorist attacks last fall. A look inside the index, however, is more disheartening. More than one stock in six, or about 18% of the entire index, is down not just for the year, but actually has fallen below the panic lows hit in late September. Of the 26 telecommunications stocks in the S&P 500, 20 are below their Sept. 21 levels. All the energy pipeline stocks are down. Even 7 of 19 software firms, 6 of 15 computer-related stocks, and 8 of 15 pharmaceutical and drug-related stocks have fallen further since Sept. 21. (ES Browning, WSJ 6-3) Quick Tips You want to know how fast an F-16 flies, but your search engine spits back details on camera shutter speeds. To save yourself these detours, take a page from Sergey Brin, co-founder of Google: Instead of describing the information you want, think about the specific words you want back. When Mr. Brin wants to know how much protein is in a serving of chicken breast, he doesn't just type in "chicken breast" and "protein." He adds the word "grams." Another of his winnowing tricks is to use the minus sign. To ensure that a search for "dolphins" doesn't bring up references to the Miami football team, type dolphin -miami. (Mylene Mangalindan, WSJ 6-5) If you prefer to not use a virus program because you don't download a lot of software and don't feel that you need real-time virus checking. You can simply visit Trend Micro's free online virus scanner. You can either register or just click "Scan without registering". Select the drives and folders you want to check and click Scan. (EMAZING 6-3) When you need to find out who owns a particular domain, you can visit the InterNIC site and use their Whois Search page. There are also some freeware programs around that will provide the information. We sometimes use WhoIs ULTRA from AnalogX. (EMAZING 6-2) Home Page Previous Factoid Top Sites
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