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"The market is more a market of emotions than a value machine." - James McGlynn, Summit Everest Fund Anatomy of a Diversified U.S. Stock Portfolio Ian McDonald, WSJ 7-30-02
For years, fund executives have avoided certain disclosures because 'shareholders haven't asked.' Let's ask now, at a time when funds fear losing frustrated investors and when corporate transparency is at the forefront of the investor psyche. Fund companies will give into investors if they hear common concerns over and over again. A few isolated investors - or even newspaper columnists - won't get the job done, but many individuals representing a lot of total money will. Here are a few things to ask for: Manager disclosures. Beyond the basic premise of knowing your manager's name is the bigger issue that shareholders have no clue how their manager is compensated. Are incentives based on asset growth, pre- or after-tax earnings, short- or long-term performance? Is there a bonus for something like a top star rating? Increased portfolio disclosures. Many funds now give regular lists of their top 10 holdings, in addition to their required six-month write-up of the entire portfolio.Investors deserve more. Proxy votes. When funds vote on corporate issues, they represent you. As a result, you should know from their Web site how they voiced your opinion, whether it concerns the appointment of Arthur Andersen as a corporate auditor or a social or environmental issue on which you feel strongly. Personalized performance. Do not just tell us how the fund has done, tell us how OUR investment has done - since timing of deposits can widely vary that amount. Also request the average cost you have paid for your shares, information that is crucial when you sell and must calculate capital gains. Every fund firm should disclose these personal account details by now.
Merck, at $44, has a dividend yield of 3.2%. ExxonMobil, at $34, yields 2.7%. Verizon Communications, at $28, yields 5.6%. Philip Morris, at $45, has a dividend yield of 5.1%. Bank of America, at $60, yields 4%. All these payouts are easily supported by current earnings.
But a risk that the banks cannot expunge is the fear taking hold among investors that the nation's largest financial institutions were central to the financing of the stock market bubble that has burst so spectacularly. That perception is not only punishing bank stocks, which were not long ago seen as a haven for investors, but it is also casting a pall over the entire market, fund managers say. Bank stocks, as measured by the Philadelphia Stock Exchange/KBW Banks index, have lost 10.4% in the last two weeks alone. At the market's peak, technology was the single biggest component of the S&P. As tech plummeted, financial services companies stepped into the top spot. At the end of June, financial companies accounted for 20% of the S&P. The next-largest sector is info-tech at 14%. Moody's said it expects the junk-bond default rate to hit 8.8% by year-end, down from the 10.7% peak reached in January, but still high. If the economy slips back into recession, banks could really be hurt.
Mr. Trennert, whose missives are widely read by money managers, says that six of the eight conditions necessary for a bottom have been met, including big mutual-fund redemptions, rising corporate share buyback announcements and panic in the media. The only ones missing are a huge bond-market rally that would drive interest rates even lower than they are now and an end to lists of bear market bottoms. 'Everyone wants to be a hero picking the bottom,' explains John Kosar, a senior research analyst at Bianco Research. Among the statistics he watches is the open interest on 30-year Treasury bond futures, which indicates how willing investors are to hold bonds overnight. 'It shows, for lack of a better word, trust,' Mr. Kosar notes. Lately that figure is down, meaning investors who have rushed into the bond market during the day as stocks have swooned are afraid to hold bonds overnight for fear that stocks might rally, sending bonds down. That, to Mr. Kosar, is a bullish indicator meaning the bottom is near. Tobias Levkovich, Salomon Smith Barney's U.S. institutional equity strategist, looks at the dividend yield on the S&P 500 and compares it to interest rate on the three-month Treasury bill. In early stages of bear markets, three-month Treasury yields exceed dividend yields, because higher stock prices mean lower yields. But as stock prices fall, the dividend yield increases. When the dividend yield exceeds Treasurys, money often starts flowing back into stocks. 'It suggests you're getting enough income from owning stocks to offset the risk of owning stocks,' he explains. This crossing of the two yields finally occurred as a result of the stock market's recent plunge, which moved the dividend yield on the S&P 500 up to 2%, versus the three-month t-bill yield of 1.665%. Mr. Levkovich says that when the two cross, as they did in 1974 and two other times during the past 32 years before this month, the market has risen an average of 8.9% during the next six months.
[Joseph DiStefano, Philadelphia Inquirer 7-21: Mutual-fund net redemptions approached $20 billion in June, and could top $40 billion for the month of July, eclipsing last September's record $30 billion, according to Mutual Fund Trim Tabs.] A study last week by analyst Steve Kim of brokerage firm Credit Suisse First Boston suggests that investors in as many as 411 of the 500 stocks in the Standard & Poor's 500-stock index are holding losing positions, based on the average price they paid. Friday's volume of 2.63 billion shares was the largest ever on the New York Stock Exchange. In fact, of the Big Board's 20 heaviest trading days ever recorded, 11 have come since June 20, almost all on days when the market was falling.
Fund Flows Ian McDonald, WSJ 7-22 Early estimates of June's record outflows from mutual funds aren't as bad as they first seem, but they're not great either. Thanks to mammoth redemptions from money market and stock funds, net cash outflows from mutual funds were a record $45.8 billion, according to estimates from Lipper. At the same time, a record $18 billion gushed into bond funds by Lipper's count. And the outflow record isn't completely driven by panicking individual investors as many might assume. Estimated outflows from money market funds, totaling $50 billion, are skewed by institutional investors who accounted for more than 90% of money-market funds' outflows. What do these outflows portend for the stock market? Prognosticators can often use fund flows to buttress their argument, with optimists saying steep outflows signal a market bottom and pessimists arguing they augur for darker days ahead as fund managers sell stock to cash out exiting investors. That said, fund flows are usually a better barometer of investor sentiment than the market's next move. "You couldn't find a worse predictor of where the market is going than fund flows," says Russ Kinnel, director of fund research at Morningstar. "If you put that $14 billion outflow across a $1 trillion in trading volume it's a drop in the bucket. Flows really tell you what investors make of what's gone on in the past two years. When you have a really pronounced downtrend like we've had, flows respond and reflect that." The bulk of June's outflows was the $50 million leaving money market funds. Lipper's data indicate that about $42 billion or 92% of that cash left institutional accounts. Many companies have used money market funds rather than accounts with banks or internal money management departments because they offer a higher yield, according to Lipper's June report.
As a result, some stocks now qualifying as "value" would be surprises to Mr. Graham. Consider Veritas Software, which is part of the S&P's 500/Barra Value Index. Despite having a price-to-book ratio of 2.54, a number that would be high by Graham's standards, Veritas nevertheless makes the list because that number still falls in the lower half of the market. But when defined in terms of relative book value, value stocks do not perform significantly differently over the long term than growth stocks do. Research conducted by Eugene Fama of the University of Chicago and Ken French of Dartmouth, shows that, since 1927, stocks with the very lowest price-to-book ratios have done several percentage points a year better than those with the very highest ratios. According to Tim Loughran, a finance professor at the University of Notre Dame, the bulk of this difference can be traced to the value stocks' January performance, which he calls a fluke. [But if the fluke is consistent, can it still be a 'fluke'?] Professor Loughran says that this strong performance is caused by tiny companies, whose stocks typically trade near their bid prices at year-end, because of tax-loss selling, and nearer to their asked prices in January. To get a more accurate picture of value and growth, he suggests eliminating January from the picture. In all other months over the last 75 years, value outperformed growth by an average of just 15 hundredths of a percentage point. [I still do not see the point. You would have to sell your holding Dec 31 and buy Feb 1 to get those results. And who, knowing the January advantage, would want to do that?] Professor Loughran suspects that after taking commissions and bid-asked spreads into account, this advantage is not enough to be meaningful. If value does not really beat growth over the long run, how do researchers account for the huge difference in their performances over the last two and a half years? Andre Shleifer of Harvard and Nick Barberis of the University of Chicago have an answer: All it takes for the growth and value styles to swing in and out of favor is for investors to think that there is a genuine difference between them. An actual, objective difference is not necessary. The new research has this implication: If the gyrations of growth and value are not based in reality, they inevitably will correct themselves. Stocks become good candidates for purchase as investors shun them in favor of whatever is in style. A more basic lesson is this: Don't blindly accept categories created by others. If you can't make sense of them, think twice before basing investment decisions on them.
"The really big risk is that consumers will reawaken to the timeless truth that the best way to save money is to stop spending," said Richard Hastings, chief economist at Cyber Business Credit. "And I think that will impact aggregate demand in a way that has not been seen since the 1930's." Economists at Goldman, Sachs, say that weakness in consumer spending will curb economic growth not only for the remainder of this year, but well into 2003. As a result, the firm recently lowered its estimates for GDP growth to 2.5% this year and 2.8% in the next. With economic weakness still weighing on the market, investors are beginning to doubt Mr. Greenspan and his control over the economy. Indeed, one of the biggest shifts that market strategists sensed last week among investors was a diminished trust in the Fed chairman. Throughout the two years since the stock market peaked, investors have viewed Mr. Greenspan with something approaching awe. Now they are wondering if he can do anything to stop the market's slide. As they begin to wonder about Mr. Greenspan's power, investors' fears can only escalate. "Behind this downward move is a Fed impotency panic," said Mr. Paulsen. "What's the catalyst that can turn the market around? Usually it's the Fed." But he added that investors seem to be so anxious these days that if the Fed moved, it might scare investors even more, if temporarily. Many investment strategists think that investors are spending the weekend sorting through their fears of what the coming weeks might bring. These ruminations may results in further selling on Monday. As Mr. McManus pointed out, markets rarely hit their lows on Fridays.
On today's stock market compared to those of the past: 'There are always differences between current markets and the past. One thing I haven't heard a lot of people talk about is that trading volume is as high as ever, which is very healthy. 'As I remember the markets in times like 1973-74, the volume dried up. People got discouraged and they didn't think there was anything useful to do, so they stopped investing. This time, it doesn't look to me like people have given up on the market ... at least not yet.' On the fund industry's ratings and rankings systems: 'They haven't changed the way I do things, but it has changed the way people think I do things. For example, the Liberty Acorn Fund has been in three different Lipper style boxes in the last 12 months and we have done nothing to make that happen. We've had 20 percent turnover. We changed style boxes because when one stock goes up or down 30 percent and you are near the line, you get whipped from mid-cap to small-cap. That's one stock out of a 300-stock list.
On a world-wide basis, about 74% of the investment professionals said they expect stocks to be higher a year from now, with 37% hopeful for double-digit returns from world markets in a year's time. But in the U.S. market, perceptions about stocks took another turn for the worse, even before the latest stretch of Wall Street declines. A little more than one-third of the managers said they think the U.S. has the worst corporate profits outlook, as well as the worst quality of earnings in terms of volatility, predictability and transparency. And 57% still believe U.S. equities remain relatively the most expensive in the world. The U.S. dollar remained the least favorite major currency among the managers surveyed, but the recent drop in its value has somewhat improved their feeling. Now 54% think the currency is overvalued, down from 65% last month. An overwhelming 68% of managers picked the euro as their most favorite currency, while 13% said they preferred the dollar. The percentage of managers who cited the Japanese yen as their least favorite was up slightly to 29% from 28% in June. The latest Merrill survey was conducted July 4 to July 11 among 279 institutional investors, who together manage $632 billion in assets.
There are a few signs of progress. Morgan Stanley analysts rate as "underperform," the lowest of their three ratings, nearly 21% of the 918 stocks in their universe, according to First Call. In contrast, the next most bearish major brokerage house is Merrill Lynch, with 5.8% of its recommendations listed as "sell." Meanwhile Credit Suisse First Boston, a unit of Credit Suisse Group, has just 0.4% of its stocks rated at the bottom. Still, the antisell bias remains so ingrained on the Street that even independent brokerage firms, which aren't beholden to corporate clients through an investment-banking arm, seldom attach the dreaded S-word to their research reports. Just 3.5% of Prudential's ratings are in the sell category. Sanford Bernstein, a longtime poster child for independent research since it does no stock underwriting, calls 2% of the stocks under its coverage a sell. Gerard Klauer Mattison, another independent research firm, hasn't a single stock on the sell list. Sean McGowan, Gerard Klauer's director of research, says he is pulling his "hair out" over the problem. Mr. McGowan, in fact, runs a contest offering a cash award (he won't say how much) to the analyst whose sell recommendation drops the most in price. No takers to date. There's a reason for the reluctance. The Gerard Klauer analyst who won the contest last year, when the firm had as many as 14 sells, was denied access by the company on which he slapped the sell rating. Overall, the Street's army of analysts is more bearish than in the past, although investors must read between the lines. About 61% of ratings today are some form of "buy," down from 72.6% buy ratings right before the market's peak in March 2000. But "hold" ratings, Wall Street-speak for take the money and run, have ballooned. Of the 27,160 ratings currently in Multex's database, nearly 35% are rated a hold. In September 2000, holds amounted to 26.2% of all ratings.
"This is all right out of the textbook," said Richard Bernstein, chief U.S. strategist for Merrill Lynch, who is among those who think full capitulation - and a subsequent return to a bull market - is still some distance off. "Heroes have become goats. People are demanding legislative change. We are blaming the auditors. It's all par for the course in the classic post-bubble environment." Is this the bottom? Strategists such as Bernstein at Merrill Lynch say the simple fact that people are asking the question means the answer is no. "The bottom comes when no one is talking about it anymore and no one thinks there will ever will be a bottom," Bernstein said. But Peter Cardillo, chief market strategist at Global Partners Securities, suggests that stocks in many sectors, notably health care and technology, are now, or soon will be, what Wall Street calls undervalued. "The market will soon exhaust itself on the downside," he said. "Now, I would not be surprised to see the Dow touch its post-9/11 low [8,235.81]. But we are pretty close to full capitulation." Several money managers also noted that one dynamic seen this week - GM and Ford share prices dropping on concerns about their mammoth unfunded pension liabilities, made worse by declining markets - could spread to other firms as well. "I see that as a potentially big issue for 2003 if we don't get a recovery," says James Paulsen, chief investment officer at Wells Capital. One thing a handful of managers interviewed this week seemed to agree on was one area likely to be strong if stocks do eventually pick up. "When the bear market ends, and the economy shows quicker improvement, you will see a pickup in corporate capital expenditures," Cardillo said. "And, believe it or not, the place to be will be in tech." No Alternatives Gregory Zuckerman, WSJ 7-14 Bond yields have fallen far, with the 10-year Treasury now yielding less than 4.60%. Money-market funds sport puny returns. And many investors aren't comfortable plowing money into real estate, after home prices have already soared in most areas. While corporate bonds offer generous yields, they, too, have been tumbling as investors there digest the same issues that are weighing on stocks. Junk bonds, for example, are down about 7% so far this year. So, the lack of attractive alternatives may mean the worst of the stock slump is past. Buy Bonds, Not Stocks Tom Redburn, NY Times 7-14 'I would be very surprised if bonds don't outperform stocks over the next decade or so. The economy is probably going to be fine; it will just take a decade or two to catch up with what the market had anticipated' says Robert Arnott, managing partner at First Quadrant, a money management firm in Pasadena, Calif. Investors seemingly forgot that stocks are inherently riskier than bonds and began bidding up prices in the market accordingly. That drove down the 'risk premium' for holding stocks until it essentially vanished. Yet at the same time, investors came to believe that stocks would continue to outperform bonds and inflation. You can't have it both ways indefinitely. When stocks were priced at, say, 12 times earnings and offered dividend yields of 4 to 5 percent, it was very easy to beat the return from government bonds and inflation by 5 to 8 percentage points a year. But when the market, at its top in 2000, was selling at about 35 times earnings and dividends were yielding barely more than 1%, investors could no longer expect to maintain such premium returns. For the bull market to return, Mr. Arnott reasons, either the stock market must fall even more or earnings and dividends must soar. But his research found, contrary to the conventional wisdom on Wall Street, that the growth in earnings and dividends over the longer run cannot even keep up with real economic growth per person, largely because new enterprises rather than established companies account for a significant share of the gains.
But acquiring mutual funds often see returns buckle under the weight of the inherited stocks and shareholders, according to a fund-merger study published in the latest issue of the Journal of Finance by three business professors, Drexel University's Edward Nelling and Naraynan Jayaraman and Ajay Khorana of the Georgia Institute of Technology. 'You merge a fund to bury a poor performer,' Mr. Nelling says. 'This can be good for you or I as shareholders of a lousy fund, but how can this help the shareholders of the acquiring fund? It's hard to imagine a way it does.' Mr. Nelling and his co-authors studied 742 fund mergers executed from October 1994 through December 1997, both within fund families and among merging fund groups. On balance, they found that the marriages are positive for shareholders of target funds who usually see their returns rise and their expenses drop. But shareholders of the acquiring fund - often a larger group - don't fare so well. The typical target fund trailed its average peer in each of the two years prior to the merger and then edged its average competitor in the year after the merger. The typical acquiring fund, however, went from topping its category average by more than two percentage points the year before the merger to being just about even with the pack the year after the merger. Thanks to the merger, the average target fund's expense ratio dipped form 1.32% to 1.16%. Mergers can negatively affect us even if our funds aren't involved, since mergers tend to muddle the already difficult job of researching and finding good funds. More 'Merger' Stats Jonathan Clements, WSJ 7-10-02 John Bogle, founder of Vanguard, notes that some 6.5% of stock funds are killed off each year, double the failure rate of just a few years ago. "That means that two-thirds of the funds around today will be gone in 10 years," he says. "That's an astonishing number." According to Morningstar, U.S. stock funds returned an average 13.8% a year over that stretch, just a smidgen behind the 14.3% for the Wilshire 5000-index of almost all U.S. stocks. What if you add back the funds that have since been liquidated or merged out of existence? That knocks more than a percentage point off the 20-year average, dropping it to 12.7% a year. Under SEC guidelines, the surviving fund is allowed to use the record of whichever predecessor fund it most closely resembles. What does "closely resembles" mean? Put it this way. If a fund company wants to bury a large fund's lousy record, it seems there's plenty of room to maneuver. And, frankly, I encourage fund-company executives to mess with performance. The more games they play, the more disgusted stock-fund investors will become - and the more likely they are to make the sensible choice, which is to buy no-frills, market-tracking index funds.
It shows that we were so beaten up by the 1973-1974 market crash that we had more money in bond funds than in equity funds from 1985 through 1991. During that period, large equities returned 18.1% a year. From 1992 through 2000, we poured money into equities. Net new cash to equity funds totaled a stunning $1.3 trillion. That was 10 times the $126 billion that went into bond funds during the same period. Our collective enthusiasm for equities was so strong that in 1999 and 2000, we sold $54 billion in bond funds and $44 billion in hybrid funds to raise cash. What did we do with that $98 billion? We put it all on the fast horses. Mix stocks and bonds, and your risk is reduced. Over the last 15 years, Morningstar figures show that the average equity fund provided a return of 10.38%, annualized. Risk, as measured by volatility, was a standard deviation of 21.61 percent. Invest in the average balanced fund over the same period, and your return was 8.8%. But your risk was half as much, 10.27 percent. You got 85% of the return with less than half of the risk. Equity zealots will argue that the higher long-term return on stocks is worth the additional risk. I disagree. You raise the odds of holding through thick and thin by reducing the volatility of your investments. What Your Portfolio Should Look Like Opdyke & Simon, WSJ 7-9-2002 Asset allocations that T. Rowe Price recommends for people in different age groups.
The cycle likely has further to go argues Steven DeSanctis, chief small-cap strategist at Prudential, who expects earnings of small-cap companies once again to have outpaced those of large-cap companies in the second quarter. If he's right, it would be the ninth quarter out of the past 10 that small firms' earnings have proved sturdier than those of their larger counterparts. In the first quarter, while earnings for Prudential's universe of 875 large-cap firms declined 9.8% year-over-year, profits of the 1,307 companies in the small-cap universe fell less than 1%. Based on First Call estimates, earnings for Prudential's small-cap universe are expected to have climbed 7.5% in the second quarter, compared with a 6.4% rise for large-caps. Satya Pradhuman and his crew of small-cap strategists at Merrill Lynch, like DeSanctis, expect small caps to continue to outperform - perhaps for another two to three years. Compared with similar periods in the past, this small-cap cycle, at just over three years, isn't really all that long in the tooth. Pradhuman & Co. have looked at five small-cap cycles going back to 1926 and found that the average duration is 62 months, or 5.2 years. Sure, the shortest cycle - the stretch of small-cap outperformance from November 1990 through December 1993 - lasted just 37 months. But, in sharp contrast, the one that began in December 1973 went on for almost a decade. And the stock market in general seems to be more analogous to that in the first part of the 'Seventies than to the opening years of the 'Nineties. Over the past 12 months, an average of $3.2 billion a month has flooded into the 880 small-cap funds in Lipper's universe, according to Merrill's Pradhuman, even as the 1,700 or so large-cap funds have suffered outflows averaging $1.8 billion a month. But to lump all small-caps together, as we have done so far, is to tell only half the story. For it is small-cap value stocks that are responsible for most of the good performance. To wit: Since April 1999 (through July 3), the Russell 2000 Value Index is ahead 41%, while the Russell 2000 Growth Index has fallen 25%. [Note that the fund stats in the table below do not show that dramatic of a difference - but it is close.] And so far this year, small value is still trouncing growth. While the S&P 500 is down 14% and S&P Smallcap Growth is off 9%, the S&P Smallcap Value Index is up 1%. The question, of course, is, Will value continue to outpace growth? Our hunch is...no! The gap between small value and growth is so out of whack that some sort of reversion to the mean seems in the cards. Since the market peaked in March 2000 through the end of the first half, the Russell 2000 Value Index was ahead 37%, while the Growth Index was down 56% - an awesome difference of 93%. Prudential's Steven DeSanctis, who has been good timing moves in growth and value, notes that growth still looks expensive based on earnings. Russell 2000 Growth currently trades at 2.86 times the trailing P/E ratio of Value, while the long-term average is 1.86%. That's why he believes small-cap growth won't revive until late in the third quarter, when downward revisions in tech earnings begin to abate and investors see improving prospects in 2003. Then he expects small-cap growth to take the lead, providing fresh fuel to this small-cap cycle. However, by some other measures, growth already looks compellingly cheap. Over the long haul, the Russell 2000 Growth Index, on average, has traded at 2.76 times the price-to-book ratio of Russell 2000 Value. It's now at 1.67 times - a whopping 40% discount. How Fund Categories Fared Barrons 7-8-2002
Related articles: Q4-01 Results, Q1-02 Results
The top ranking of NoLoad Fund X's performance can be traced to what is called the momentum effect. Many investors know about this phenomenon among individual stocks: those that have performed the best over the last 6 to 12 months tend to be above-average performers for up to another year. Momentum affects mutual fund rankings as well. Funds that have owned a given year's top-performing stocks have a good chance of outperforming the next year, too. Momentum, however, is generally short-lived. A fund that has ranked high in one year can be expected to rank above average only in the second year. By the third year, according to Mark Carhart, who helps lead quantitative research at Goldman Sachs, its performance essentially will be no better than the average mutual fund. As a result, three-year track records do not do a good job of capturing momentum. In any given year, you will make more money by investing in the previous year's top-performing funds than you would by investing in the funds that did the best over the previous three years. These considerations help explain why a number of mutual fund ratings services have been so disappointing, despite their use of methods that otherwise seem eminently reasonable. The best known of such services is Morningstar. Although it does not rely exclusively on three-year returns in building its famous star-ranking system, it places more weight on them than for returns over any other period. Given the inadequacy of three-year track records, it should not be surprising that Morningstar's top-rated equity funds have significantly lagged the market. According to The Hulbert Financial Digest, Morningstar's top-ranked equity funds underperformed the Wilshire 5000 by an annualized average of 5.5 percentage points from the beginning of 1991 through May 31, after deducting all fees. Another popular mutual fund newsletter, Louis Rukeyser's Mutual Funds, focuses exclusively on three-year returns and has also underperformed the market by a wide margin. I have found that a portfolio of growth funds on the Louis Rukeyser Honor Roll has lagged the Wilshire since the beginning of 1996 by an average of 10 percentage points a year through May 31. My firm's study of around 160 newsletters found that 15-year rankings were four times better at predicting future rankings than those based on just three years. If you are a short-term trader of mutual funds - a focus on recent performance is justified, although this approach will probably drive up your transaction costs. But if you are a long-term investor in mutual funds, pick them according to their very long-term performance.
The trend makes sense given that retirement accounts don't involve a gut check. They also have key advantages over standard taxable accounts in a dreary market, such as tax-deferral and, in some cases, matching contributions from employers.
It's not yet clear how 529 college-savings plans will be treated for financial-aid purposes. But money in these plans will almost certainly hurt aid eligibility, so you shouldn't fund a 529 if you think you will qualify for aid. The Hope and Lifetime Learning education tax credits are fully available to couples filing jointly with modified adjusted gross income below $82,000. The problem is, if you claim these tax credits, you can't make a tax-free withdrawal from a 529 plan to pay for these same expenses. Result: You could find that part of your 529 withdrawal turns out to be taxable. Don't forget Coverdell education savings accounts. Like 529s, Coverdells can't be used for expenses covered by the education tax credits and these accounts could hurt your aid eligibility even more. With a 529 plan, you don't face the $190,000 income limit and you can invest far more than $2,000. Still, Coverdell accounts have three key advantages. First, you can use your Coverdell to buy any mutual fund, rather than being limited to a 529 plan's investment choices. Second, you should be able to find mutual funds for your Coverdell that are cheaper than even the lowest-cost 529 plan. Finally, there is a danger that Congress won't extend the tax breaks in the 2001 tax act and thus 529 plans' tax-free status could disappear in 2011. Related article: 529s vs UGMA - Terri Cullen, WSJ
These are examples of changes stock markets can make to companies' stock symbols. That these changes can be made is nothing new, but the recent wave of scandals provides a refresher on how they work a timely reminder. In Enron's case, the change in stock symbol was triggered by the NYSE's decision to delist the company's shares. Enron stock now trades on Pink Sheets LLC, a New York company that provides pricing and financial information for over-the-counter securities. NYSE-listed companies use symbols that are three letters or less, while Nasdaq, the Over-the-Counter Bulletin Board and the Pink Sheets all normally use four-letter symbols. But fifth letters can be added to these symbols: Enron, for example, had a "Q" stuck at the end of its new stock symbol. The Q serves as a warning to investors that a company is involved in bankruptcy proceedings. Filing for bankruptcy can cause a company's stock to be delisted from Nasdaq or the NYSE. It's worth noting that an extra letter doesn't always signal that something is amiss. A fifth letter "Y," for example, is added on Nasdaq to the end of foreign stocks that trade in the U.S. as American depositary receipts. A fifth letter also was added to WorldCom's and Peregrine's stock symbols. In these cases it was an "E," which signals that a company is delinquent in its regulatory filings. WorldCom and Peregrine have separately told investors that some of their past financial statements are inaccurate. The companies also have received delisting notices from Nasdaq. After Nasdaq decides that an "E" must be added to a company's stock symbol, the market posts the change on one of its Web sites, www.nasdaqtrader.com, and also alerts market-data vendors, a Nasdaq official said. The NYSE does not use special identifiers on stock symbols to indicate problems with a company, a spokesman said. The Big Board issues news releases to alert investors that a company is under review by the exchange or has been kicked out for falling below the NYSE's listing standards. Also, companies often issue news releases of their own to disclose these events, the spokesman noted. Additionally, the Big Board posts a warning on its Web site, www.nyse.com, that pops up when an investor requests a stock quote for a company that is under review or is about to be delisted.
He starts with an example from Robert C. Merton, a Nobel Prize-winning economist and his co-author for Finance, a college text. "Would you rather have $5 million or $10 million?" he asks. "Ten million sounds good to me," I answer. "That's OK for the information you have," he says. "Now the rest of the story. You've reached retirement and you've got $10 million to invest in an environment of 1% yields. Alternatively, you could have $5 million to invest in an environment of 5% yields. "Your $10 million will earn only $100,000 a year. Your $5 million will earn $250,000 a year. So you'd be two and a half times better off with half the wealth!" Our common measure of personal welfare - wealth - is inadequate. Instead, he suggests we measure personal welfare by our lifetime access to goods, services and leisure. [A real world example of this strange explanation is posted later.] I asked him to explain more. [ . . and at this point, I needed more examples. This is one of the more important articles that Burn's has written, and one of the least well explained.] "The main thrust of modern finance, post-Merton, is that risk management requires looking at the entity as a whole. The key contribution of Merton's models was the life-cycle model," Professor Bodie says. "When you do that, you learn that there is a big difference between wealth and standard of living. In a single period, they are much the same. In a life cycle, they can be quite different." These are not academic matters. How to cope with chance and risk is what all of us are trying to do when we make decisions about investing, home ownership, personal debt, etc. Unmitigated risk - such as owning a portfolio of common stocks - regularly works to reduce current welfare by limiting the amount that is safe to withdraw in any year. We can reduce the risk through diversification. But we can only reduce it. We can eliminate it altogether, Professor Bodie points out, if we go beyond the wealth measure of welfare. We can purchase a conventional life annuity or an inflation indexed life annuity [where you surrender 'wealth' to get a current cash flow]. Similarly, retirees who are holding large investments in reserve to cope with possible long-term care expenses could free wealth for consumption (or inheritance) with the purchase of long-term care insurance [again, surrendering 'wealth' for potential cash flow. Other examples - reverse mortgages, immediate annuities and investment hedges and leveraes - appear in related articles posted below]. What Professor Bodie envisions is a future that contains a new set of financial tools designed explicitly to maximize lifetime consumption. Instead of merely reducing risk through diversification, as mutual funds do, he sees funds being replaced by structured standard of living contracts - such as Treasury Inflation Protected Securities - and targeted accounts, such as tuition-linked certificates of deposit. An obscure trickle today, these new and little-understood tools are just the beginning. [Given the need for more 'explanation' - I went searching the net for more info on Bodie's research and writings - the results are posted below.] A Real World Explanation Factoids 7-7-02 Person A has $500,000 saved for retirement and a home worth $200,000. Person B has zero saved and has sold his home. Who is richer? Person A is conservative and has all his money in CD's earning 1% per year - stocks and bonds are just too ricky for him. He switched jobs often and cashed out his retirement money each job switch. This added to his savings put killed his pension income. He refused to 'reverse mortgage' his home because it too seems risky. His $5,000/year investment income plus Social Security equalls 60% of his pre-retirement income. He has no medicare suppliment insurance or presciption benifits. Person B had $300,000 saved, but purchased an immediate annuity with the money. Now he has zero savings. His pension plus Social Security equalls 70% of his pre-retirement savings. He reverse mortgaged his $150,000 house (thus he does not 'own' his home). The reverse mortage plus the annuity plus pension plus Social Security equalls 110% of his pre-retirement income, and that if AFTER the costs of long-term-disabily insurance he recently purchased. He has medicare suppliment insurance and presciption benifits as part of his retirement benefits. Let's ask the question again. Who is richer? A Framework for Analyzing and Managing Retirement Risks Olivia Mitchell and Zvi Bodie, Pension Research Council WP 2000-4, June 2000 On the Three Risk Management Tools Hedging against risk means eliminating the risk of a loss by sacrificing [some of] the potential for gain. For example, as a worker grows older, it is often argued that he should reduce the fraction of his wealth held in stocks by boosting the fraction in risk-free bonds or annuities. If someone held a portfolio of stocks and sought to hedge it without selling the stocks, he could do so by selling short a futures contract on a stock index. Insuring against risk means paying a known sum of money (the insurance premium) to eliminate the risk of losing a much larger sum. In this case, the insured party protects against loss but retains the potential for gain. To continue our example, if the investor bought put options on stocks instead of selling them, he would be insuring against stock market risk. If stock prices went up by more than enough to offset the cost of the puts, he would come out ahead. Diversification, the third risk management tool, means investing in many different risky assets instead of putting all of one's money in a single asset. Diversification is useful when it reduces one's total exposure to risk without lowering one's expected rate of return. In practice, however, the power of diversification to reduce risk is limited by positive correlations across one's portfolio of risky assets. Many in the investment industry have taken a narrow view of retirement preparedness. Their strategy has been mainly to advocate diversification in one's financial personal portfolio to the virtual exclusion of hedging and insuring. Using housing wealth to finance retirement consumption Housing wealth amounts to about $150,000 for the median household on the verge of retirement, and half the population had little financial assets of any kind. One way that older persons might extract income from their housing wealth would be to "trade down" to less expensive dwellings. But there is little support for the proposition that people who remain homeowners through time draw down their housing wealth smoothly as they age. In view of the difficulty people seem to have converting their housing wealth to income, economists have suggested the need for a product known as a "reverse annuity mortgage" (RAMs). RAMs are currently available in the US market, but only some 50,000 of these products have been sold to date. It appears that the product's theoretical appeal is offset in practice by several problems, including limits on the total amount of homeowner equity that is accessible, upfront costs totaling 14% of capital, the risk of foreclosure, and continuing uncertainty about the tax status of the product. RAMs will have to be reconfigured to be simpler and more transparent, less costly, and better regulated, if it is to meet retirees' needs in the next several decades. More from Bodie Pension Research Council WP 2001-8, Feb 2001 Sponsors of self-directed investment plans can enhance the risk-reward opportunities available to investors by offering option-like securities or contracts as an additional asset class. These assets can provide a means of leveraging participation in stock market gains while protecting onès minimum standard of living. Example: Investing 90% of your money in 1-year risk-free bonds, and the other 10% in a 1-year call option on an index (ex: S&P 500) with an exercise price equal to the current value of the index nets you a return almost equal to investing 100% of your money in that index - with substantially smaller downside risk. [A put option gives the holder the right to sell the undrlying instrument at the strike price. A call option gives the holder the right to buy the underlying instrument at the strike price.] Are stocks as an inflation hedge? Michael Clowes, Investment News 5-4-01 Prof. Bodie points to the performance of stock markets during the only inflationary period in modern U.S. history - the 1970s. For example, a variable annuity tied to a value-weighted portfolio invested in all stocks listed on the NYSE which had a value of 100 in 1968, would have fallen to a real value of only 37 in 1974 and would not have recovered fully until 1991. A person retiring on such an annuity in 1968 would have suffered a crippling cut in living standard in just the first six years. [From A Framework for Analyzing and Managing Retirement Risks: During the 1970s, inflation rates reached double digits and stock prices fell by more than half in just two years (74-75). Stocks are not a good inflation hedge, at least in the short to medium term. Hence people seeking to protect against the corrosive effect of inflation over a 25-year retirement period would likely benefit from investing a portion of their financial assets in inflation-protected bonds.]
Average annual returns slipped to 4.3% from August 1901 to August 1920, 2.27% from September 1929 to September 1949 and 5.09% from January 1966 to August 1982. Real annual returns, removing the effect of inflation during World War I, World War II and the 'Seventies, sank to paltry levels of 0.10%, 0.63% and minus 1.79% during the respective three periods. In other words, investors faced 15 to 20 years of torture after each fall. Nothing in stock-market history can approach the January 2000 P/E peak of 44.3, at the height of the Internet boom. The price/earnings ratio of the S&P 500 slipped back to 26.5 last month. [That's still a high P/E.] Yet many investment strategists and other self-proclaimed gurus assume that today's subdued inflation and low interest rates will continue to bolster P/E ratios at a high level. As the argument goes, the stock market's main competition is the bond market. As long as yields remain low on bonds, stocks can continue to trade at elevated P/E levels. The S&P currently trades at 25 times estimate of 2001 operating earnings. Dividing 25 into 1 you get a 4% market's "earnings yield", which is more than a full percentage point above two-year Treasury notes. But Wharton economist Jeremy Siegel pokes holes in the theory that low inflation and interest rates are sufficient to explain high stock valuations today or during other periods. According to Siegel, even though a drop in inflation and interest rates would appear to reduce the competitive tug of bonds and therefore allow P/Es to bob higher, such an environment would also tend to diminish the growth rate of earnings. "Over long periods of time, changes in inflation rates cause changes in earnings growth of the same magnitude and therefore don't change the valuation of stocks," he explained. Siegel also takes a dim view of yet another bedrock assumption of today's bull crowd, namely that faster economic growth fueled by accelerating productivity gains will inevitably push stock prices higher. Economic growth, he points out, requires companies to boost capital spending to meet increased demand. Capital costs money. So either companies' interest tabs rise if they tap the debt market, or per-share earnings results are diluted from the issuance of additional stock. Thus, added revenues always come at a price. Then, too, analysts erroneously assume that investment in productivity-enhancing technology leads to permanent boosts in corporate profit margins and earnings growth. More often than not, competitors quickly avail themselves of the same new technology and any productivity gains are quickly "competed away" in the form of lower prices. Also, much of the spending on technology is merely defensive, designed to preserve rather than enhance profit margins, says Siegel. In today's Darwinian environment of global price competition, productivity gains have mostly redounded to the benefit of the consumer in the form of cheaper prices and enhanced purchasing power rather than bolstering corporations' share of national income. Stocks in the decade or two ahead may also be flying into the headwind of slowing revenue growth that, in turn, is likely to make bottom-line growth harder to come by. That, at least, is a theme that Wells Capital Management's Jim Paulsen has been harping on for some time. He notes that nominal GDP, his proxy for the U.S. economy's sales growth, has grown at an annualized rate of just 5.23% since 1990, compared with a 7.69% growth rate in the 'Eighties and 10.74% in the 'Seventies. Declining inflation is, of course, part of the explanation for slowing sales growth. Yet the 'Nineties rate is also below that of the low-inflation 'Fifties, which posted annual growth of 6.67% and the 'Sixties, with a 6.93% annual rise. Subtle factors have undermined demand growth, as well. The aging baby boomers are now spending less proportionately than they did in peak consumption years of the 'Seventies and 'Eighties. Debt-engorged household, corporate and government balance sheets have resulted in a dramatic slowing in the growth rate of U.S. nonfinancial debt, from a peak growth rate of around 15% in 1987 to a post-war low of around 4% during the early 'Nineties. Debt growth has remained muted since, attenuating a huge multiplier effect on consumer demand. Similarly, federal spending as a percentage of GDP has dropped steadily from a non-wartime high of 23% in the 'Seventies to below 17% in the past several years. [So what might happen if profits actually do rises substantially?] In the 'Seventies, the stock market was largely a range-bound flatliner despite a tripling in corporate profits because P/E multiples collapsed during the decade. That could easily happen again this decade. The stock market could dip in the years ahead even if profits exhibit sprightly growth - bringing P/Es back to earth. EPS Growth Jonathan Clements, WSJ 6-30 Dividend yields are low and P/Es are unlikely to climb. But there is still one thing that could propel stock prices higher, and that's rapid earnings growth. Is faster profit growth likely? Recent history isn't comforting. Since 1925, earnings per share have grown less than two percentage points a year faster than inflation. Even if we are heroically optimistic and assume management boosts that growth rate to 4%, we are still looking at stock returns of just 8.5%, once you figure in 3% for inflation and one and a half percent for dividends. That's better than investors will collect from high-quality bonds. But it's far below the sort of double-digit returns that many investors expect. Procrastination Chet Currier, Bloomberg 6-25 It's easy to buy the argument, advanced by sophisticated investors everywhere, that stocks at their current levels are no bargain even after their bear-market fall. P/Es, the sages tell us, are still too high. What's not so easy is to decide how to act on that tidbit of information. The innocent-sounding impulse `I'll wait for a better price,' has probably destroyed more wealth than any bear market in history. Thanks to the power of procrastination, it soon is too late to make the investment you were afraid to make too early. Also, `bargain' stock prices typically come packaged with potent reasons to keep sitting on your wallet. If I can't work up the nerve to invest now, chances are I'll have just as many misgivings after the price comes down. Last time I looked, the P/E of the S&P 500, figured on estimated year-ahead earnings, stood at just under 20 to 1, against a traditional norm of 15 or so. In these days of low interest rates the market P/E is probably not going back as low as 15.
Despite the existence of a successful 3-year-old model in Japan, attempts by the giant U.S. wireless companies to launch services beyond voice have not gone very far. In Japan, the video camera in a phone is just the icing on a multilayer cake. At the end of March, 51.9 million people were using their cellphones to send e-mail, play games, take photos, find restaurants, locate businesses, track down friends, schedule meetings and download maps, ring tones, screensavers or karaoke songs. You can even buy soda by pointing a cellphone at a vending machine. In fiscal 2001, Japan's largest wireless carrier, NTT DoCoMo, generated $5.8 billion in revenue from users on its i-mode wireless-data service. In the U.S. the carrier with the most subscribers using data service is Sprint PCS, and it has just 3 million users generating about $15 million a year. The problem is that, until now, no one in the U.S. has had a financial incentive to develop that application. Japan's carriers set up a business model in which content providers - the ones who develop the ring tones and games - could make money. When users choose to play games, a monthly charge of $2.50 or less shows up on their phone bill. The carrier takes a small slice, but about 90 percent goes to the game developer. The result is that 56,000 content sites are available to i-mode subscribers. So far, most of the U.S. carriers have not allowed content providers to assess charges, leaving little incentive to create any compelling content. Paradoxically, the U.S. carriers desperately need revenue from data services to stay competitive. Despite financial turmoil in the telecommunications industry, they're sinking billions of dollars to upgrade their data network; AT&T Wireless alone plans to spend $5 billion this year. At the same time, the whole industry has been reduced to steep price competition for voice minutes because the customers see little difference between choosing one carrier over another. In Japan, the revenue from data services has shored up a dropoff in voice revenue. Furthermore, providing data services costs a fraction of what it costs to provide voice service, so the profit margin for the carrier is much higher. Just the Facts Misery Index "We have added the duration of decline in months to the percentage decline to arrive at what we call a 'Stock Market Misery Index.' The notion is that the longer a bear market lasts, the more miserable people feel. Similarly, the deeper the market plunges, the greater the magnitude of investor frustration. With a reading of 60.1, the Stock Market Misery Index has only been exceeded by its reading at the bottom of the 1973-74 bear market, when it stood at 69.0. If the market gives up a few more percentage points by year-end, this will be the worst bear market in modern memory." (Gerald Perritt's Mutual Fund Letter, via Wash Post 7-21) Patience to be Rewarded "Our crystal ball remains cloudy as to when the major market averages will bottom out, but we believe that long-term oriented investors will be handsomely rewarded over the next three to five years for their continued patience and iron-clad stomachs during the current market downturn." (John Buckingham, The Prudent Speculator, via Wash Post 7-21) 10 Reasons Investors 'Mess Up 1. We lack self-control. 2. We read too much into recent market action. 3. We procrastinate over tough financial decisions. 4. We forget about earlier uncertainty and instead regard bull and bear markets as entirely predictable. 5. We don't focus on our whole portfolio. 6. We shy away from smaller companies, foreign markets and other unfamiliar investments. 7. We believe we can beat the market. 8. We are reluctant to sell losers. 9. We invest for entertainment. 10. Our appetite for risk isn't stable, instead rising and falling with the market. (Jonathan Clements, WSJ 7-14) Fee Comparisons Investors buying funds or annuities should carefully consider the various charges spelled out in the prospectus. Cost calculators on the Web can help in adding up the dollars-and-cents cost of various fees and in comparing funds. Two such tools are offered by the Securities and Exchange Commission (www.sec.gov, click on "interactive tools") and on the www.personalfund.com site. (Karen Damato, WSJ 7-5) Investor Sentiment A market bottom is characterized by 'fear'. And judging by the Hulbert Financial Digest's stock sentiment index, there's still too much preoccupation with 'greed'. The sentiment index that measures the average equity exposure among market timing newsletters that communicate their thoughts daily with their subscribers stood at -8.3% as of Tuesdays close. This modestly negative reading means that the average adviser is slightly more bearish than bullish. The only bright spot in this otherwise gloomy picture: the HFD's Nasdaq sentiment index. This index is similar to the HFD's overall stock sentiment index, except that it focuses just on the Nasdaq signals of the various market timers. As of the end of the day on Tuesday, this index stood at -78.6%, close to the record low for this index of -84.6%. (Mark Hulbert, CBS MarketWatch 7-3) Credit Downgrades Moody's tally of U.S. corporate rating revisions shows that 172 downgrades in the second quarter of 2002 affecting $333 billion of bonds topped 35 upgrades affecting $49.7 billion of bonds. "Falling asset prices, excess capacity, and weak capital spending - particularly in energy, telecom and hi tech - helped credit rating downgrades far outnumber upgrades, said Moody's senior economist, John Puchalla. "While efforts to pare leverage will be helpful, a definitive firming of corporate credit worth will be difficult to realize until revenues improve and corporate profits strengthen." According to Moody's, the utility, energy and telecom industries accounted for the most downgrades. (Moodys 7-2) Q2 & Q3 Expectations Analysts now expect Q2 profits to be down slightly for the S&P 500, while at the beginning of the year they were calling for a 2.5% increase. The trend continues into Q3 with earnings now projected to rise about 18%, compared with 23% at the beginning of the year. The percentage of "sell" and "strong sell" ratings for stocks is increasing, although the figures still pale in comparison to the number of "strong buys," "buys" and "holds." As of June 2, the latest data available, about 62% of stocks were rated buy or strong buy, 35.5% were rated hold and 2.7% were rated sell or strong sell, according to First Call. In January, only 1.8% of stocks had sell ratings. It is easier for analysts to be more bearish these days as the stock market continues to slide. The question is what will happen when the market rebounds and the calendar for investment-banking deals improves, something that is predicted to begin later this year. (Munk & Talley, Dow Jones Newswiee 7-1) Reform Karen Schnatterly, assistant professor in strategic management at the University of Minnesota's Carlson School of Management, recently completed a study on corporate crime indicating that much of the current reform talk - tougher audit rules, alterations in executive compensation, better corporate governance - may be misguided. Using the period of 1986 to 1996, she analyzed 70 companies that had problems with corporate crime and 70 companies that did not. She found that more outside board members and a tougher auditing charter had little impact. "Anyone inside a firm determined to hide a crime, can," she says. "Once information has been processed and aggregated to where the audit committee gets it, they can't pick it up." Ms. Schnatterly says the main missing ingredient in corporate crime cases is "spine." Along with that, her study finds that formal inter-divisional interaction and incentive-based compensation deep into the organization increase the likelihood that corporate malfeasance will surface sooner rather than later. (Dave Kansas, WSJ 7-2) Factory Activity The ISM reported yesterday that its index tracking changes in factory activity rose last month to 56.2, its highest level since February 2000. The monthly reading was the fifth in a row above 50 (or neutral). Even the index for employment, at 49.7 last month, has almost reached the break-even point. "The manufacturing recovery continues to gain momentum," said economist Sung Won Sohn of Wells Fargo in San Francisco. "Strong new orders and production indices are driving the growth. The rebound is broad-based, with 15 of 20 industries reporting expansion of production." A weaker dollar and "stronger economic activity abroad" are also helping export orders, "which rose strongly as well," Sohn added. (John Berry, Washington Post 7-2) Forecasting Economists from the Federal Reserve Bank of Atlanta recently studied the past 16 years of The Wall Street Journal's forecasting surveys and found that economic prognosticators are at their worst when the economy is at a turning point, just when some sound advice on the outlook is most useful. The study looks at economic predictions in the Journal surveys for a range of indicators and compares the predictions with what actually happened in the economy. The accuracy of the forecasts is gauged on a scale of 0 to 100, with 100 showing the highest level of accuracy and 0 showing the lowest level of accuracy. When the economy was purring along in the middle of an expansion, accuracy scores tended to hover between 60 and 80. But at turning points, they collapsed. For example, in July 1990, the start of the '90s recession, the accuracy scores fell to just 15. Last January, they fell to 17. And in July of 1987, right before the late 1980s stock-market crash, the scores fell to 38. (Jon Hilsenrath, WSJ 7-1) Global Markets - Q2 All major European markets slipped in Q2. London's FTSE 100 Index was down 11.7%, while the Paris CAC 40 index declined 17%. Frankfurt's Xetra Dax Index ended 19% lower. The Dow Jones Stoxx Index, which measures the performance of 600 European blue-chip companies, slid 16.2%. The Nikkei fell 3.7% in Q2 and is up a mere 0.75% for the first six months. Asian emerging markets continued to be the star performers of the world. The Dow Jones Indonesian index rose 17.6 %, while Thai stocks advanced 5.4%. South Korea, however, cooled off after a hot start, falling 6.3%. (Craig Karmin, WSJ 7-1) Quick Facts, Stats & Opinions In the second quarter, U.S. companies announced plans to repurchase $24 billion of their own stock, up slightly from the first quarter, which experienced $23 billion in buyback announcements, said Richard Peterson, chief market strategist at Thomson Financial/First Call. While that may not seem like much of a leap, buyback plans were expected to dwindle to about $12 billion to $13 billion in the second quarter, according to Thomson. (Shaheen Pasha, WSJ 7-18) "We're seeing a lot of panic today," said Jack Bogle, founder of the Vanguard Group, in a Monday interview. "The secret of investing is that there is no secret other than to put your money away regularly, intelligently and stay the course." (Jonathan Clements, WSJ 7-17) There will always be cyclical swings in the markets, but, ultimately, the fundamentals count more than terrorist attacks or accounting scandals. As stocks resume their long-term upward climb, this bull market is just getting started. (Joseph McAlinden, Investor's Quarterly, Morgan Stanley Via Wash Post 7-14) Since the market peak in March 2000, roughly $7 trillion in stock wealth has evaporated, leaving about $10.5 trillion. (Kenneth Gilpin, NY Times 7-14) A lot of companies have changed auditors, and friends of mine in the profession tell me it takes at least six months to nine months to get to know how a company operates. So we think accounting issues will be around until at least next year. (Christopher Wolfe, equity strategist at J. P. Morgan Private Bank via Kennth Gilpin, NY Times 7-14) Brokerage firms are setting themselves up as direct competitors to consumer banks. Among the offerings: free checking, higher interest rates and other perks. So far, about 1% of households with incomes of $100,000 or more have their main checking account with a brokerage firm, according to a study by Synergistics Research. The same study found that 36% of this income group would consider opening a checking account with a brokerage firm. (Coleman & Higgins, WSJ 7-10) One year ago, WorldCom bonds were trading around par. The bonds didn't fall below 90 until March of this year. They have been trading around 15 cents on the dollar in recent days. (Gretchen Morgenson, NY Times 7-7) With fear and distrust ruling the stock market, investors who have the courage now to buy out-of-favor growth shares should reap a substantial profit later when reason returns and these stocks inevitably rebound. "The old investment adage says ... 'Buy when there's blood in the streets.' Well, there's blood in the streets right now, and it's a great opportunity" says Morry Zolet, first vice president of investments for Salomon Smith Barney in Lutherville. (William Patalon, Baltimore Sun 7-7) Three years ago, it was quite evident that growth in the music business was plateauing. The top was 1998-1999, when worldwide revenues were around $40 billion. Now we are closer to $34 billion. (Harold Vogel, an independent analyst, Kenneth Gilpin NY Times 7-7) At least 93 Internet companies closed their doors or filed for bankruptcy protection in the first six months of 2002, down from 345 during the same period last year, according to Webmergers.com. (AP via LA Times 7-6) At the top of the boom in 1999 and 2000, a look at the record affirms, mutual fund managers and government regulators kept up a steady barrage of warnings that stocks were on dangerous ground. Financial writers spoke up too. From any angle, the drop of the last two-plus years qualifies as the most widely anticipated bear market in history. The allegation simply won't wash that the financial establishment recklessly foisted off stocks on an unsuspecting public for as long as the bull market lasted. (Chet Currier, Bloomberg 7-5) WorldCom is beset by scandal, but its "fundamental blunder," in the words of Robert Barbera, the chief economist of Hoenig & Company, "was investing like mad in an excess-capacity industry." (Floyd Norris, NY Times 7-5) 401(k) accounts now collect about 75 cents of each new dollar being tucked in some corporate retirement fund. (Steven Syre, Boston Globe 7-4) A salesman who persuades a retiree to move $50,000 from bank certificates of deposit or an individual retirement account into an annuity will generate a commission of $3,000 to $4,000. (Schultz & Opdyke, WSJ 7-2) Quick Tips The Emerson Switchboard Phone Line Sharing System alows users to log on to the Internet and get a fax or talk on the phone line without interrupting the Internet connection. But it will give you about 30 seconds - or less - to answer an incoming call. (John Fried, Philadelphia Inquirer 7-21) If you elect to not keep the Address Bar visible, you don't really lose any function because all you have to do is press Ctrl + O and type in your URL then press Enter. (Emazing 6-29) Home Page Previous Factoid Top Sites
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