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The experts misled me. They forgot to mention that, in certain markets, aggressively investing for a rainy day can actually bring about a rainy day.
What am I doing, you may ask, comparing a bond fund with a stock index? Well, junk-bond funds are often described as `equity- like,' given that both lower-rated bonds and stocks are sensitive to anticipated ups and downs in business conditions. So junk-bond investors are encouraged by the progress of economic recovery, while stock traders are not. One way to interpret this is that stock investors have been slower than junk- bond investors to see their way out of the bear-market miasma. When they eventually come around, by this line of thinking, stocks have some catching up to do. `For those who argue that the stock market has not declined enough to offset the excesses of the 1980s-90s bull market,' argues Ken Gregory's No-Load Fund Analyst newsletter, `it is worth noting that the 10-year annualized return on the S&P 500 is now less than 9%. This simple fact seems to support our valuation analysis that concludes the excesses have been purged from stock prices.' Sure enough, for the 10 years through Jan. 31 Bloomberg data show the S&P 500 with an 8.9% annualized return, a bit below its historical average in the 9% to 10% range.
* Thirty-five percent of respondents said they are optimistic about the prospects for economic growth over the next 12 months, the lowest percentage of optimists since the survey was launched and down from 42% in January. * A majority, 51%, are pessimistic about the performance of financial markets in the short term. A record low 42% believe that now is a good time to invest. * The potential for a U.S.-Iraq war was cited by 37% of respondents as a "major threat" to the investing climate. Other key risks, in order: a prolonged economic downturn, cited by 22%; terrorist attacks, 22%; and a significant depreciation of the dollar, 9%.
Since the Fed's cuts began in January 2001, the federal funds rate has taken a slightly bigger plunge, about 4.8 points. Yet the average 30-year mortgage rate and the 10-year Treasury yields have declined only 1.2 points. These may not seem like big differences, but consider the proportions: this time, the Fed's cuts are having only two-thirds of the effect on long-term rates - the rates that often determine the willingness of businesses to invest and the appetite of consumers to spend. [Altman is making that point that the long rate's failure to fall is a bad thing. Below, Baum makes a more persuasive counter-argument.] So what, exactly, is keeping the rates from falling further? A year ago, analysts were asking the same question. The answers fell into two camps. One side said investors were looking forward to a quick recovery, which would raise the return on capital and the demand for credit. The other side blamed the vanishing federal budget surplus, saying demand for credit would rise as the government made plans to borrow more. These days, with the prospects of more tax cuts and a potential costly war in Iraq, that second explanation is gaining relevance. The deficit, however, is not the only story. Thomas G. Maheras, vice chairman in charge of global fixed income at Salomon Smith Barney, contended that jitters about a possible war in Iraq were more to blame. In the early 1990's, most of the Fed's cuts came after the resolution of the Persian Gulf war. This time, most of the cuts came before war plans took shape. "Until this uncertainty is resolved, corporate America is not going to feel comfortable investing," Mr. Maheras said. Why Long Rates Have Not Fallen Caroline Baum, Bloomberg 2-24 Because the Fed targets an overnight rate, providing whatever reserves the banking system demands to keep it steady at the target level, the relationship between the central-bank-controlled short rate and a market-driven long rate is a simple and useful guide to policy. If the short rate is steady and rates across the rest of the curve start to rise, it's a pretty good sign the demand for credit is picking up. If the short-rate weren't being held down artificially by the Fed, it would be rising, too. The implication is that the demand for credit (evidenced by the long-rate response) is rising faster than the central bank can supply it (indicated by a steady short rate). Increased demand pushes the price (interest rate) up. While conventional wisdom holds that falling long rates are what stimulate the economy, you don't have to look farther than Japan to upend that idea. Spontaneously falling long rates more often than not are a symptom of a sick economy. `I like to look at interest rates as a kind of blood pressure kit,' says Jim Glassman, senior U.S. economist at J.P. Morgan Chase. `Low rates are a sign of a weak economy.' The fact that long rates haven't fallen more implies that something else [like credit demand from the housing market] is holding them up, that the economy isn't as weak as is widely perceived.
Enron paid $523 million in dividends in 2000, compared with the $979 million of net income it initially reported for that year before later conceding that the earnings were overstated. Dynegy Inc. paid $102 million in annual dividends in 2001, compared with reported net income of $648 million. Those earnings - as well as Dynegy's operating cash flow, from which the dividends ostensibly were being paid - also proved to be exaggerated. Other dividend payers that eventually admitted their earnings were inflated include Xerox, Waste Management and WorldCom. As financial scandals have shown, corporate executives intent on cooking the books often are willing to have their companies incur large cash expenses - including dividends and even extra income taxes - precisely so their earnings will look real to the outside world. Indeed, one of the oldest financial scams in the book, the Ponzi scheme, is predicated upon paying large dividends to early investors with new investors' money, in order to create a perception of outsize returns that sucks in even more investors before the scheme inevitably collapses. At the University of Chicago, accounting professor Merle Erickson notes parallels between the signaling effects of dividend payments and federal income-tax payments. For instance, if a company is reporting stellar earnings to investors but paying no income taxes to the government, that can be a sign the earnings are illusory. One way to counter that perception gap, of course, is to also report inflated income to the IRS and incur higher taxes. A recent study co-authored by Mr. Erickson examined a sample of 27 companies since 1996 that both had restated their earnings and been accused by the SEC of accounting fraud. The companies in the sample paid $320 million in taxes on overstated earnings of about $3.36 billion, Mr. Erickson and his colleagues found. Adds Morgan Stanley market strategist Steve Galbraith: "It's not that if they pay a dividend, you won't have fraud. What it's all about is, you're not going to be increasing [dividends] and paying dividends if you don't have the cash to do so. If they're paying it out of free cash flow, then there's no problem. If the debt's going up a lot to pay it, that's cancerous."
The 1981 report told us we had $690.3 billion in assets and total obligations of nearly $3.5 trillion. The liability figure included $784.4 billion in "borrowing from the public" but excluded $209.9 billion in "intra-governmental" holdings. A footnote explains that the $1.4 trillion liability for Social Security represents the entire 75-year period figured by the Social Security trustees. If we want an apples-to-apples comparison, the 1975 figure adjusted for the full liabilities of Social Security would have been $3.2 trillion. So things were getting better. The 1991 report tells us that government assets are now $1.4 trillion but obligations have risen to $4.5 trillion. This leaves a negative net worth of $3.1 trillion - a nominal change over 10 years. Unfunded liabilities of Social Security were $6.6 trillion. Adjusting for an apples-to-apples figure that includes Social Security, government negative worth has more than tripled to $9.7 trillion. The 2001 report tells us that government assets are only $926.1 billion, while government liabilities are $7.4 trillion. That means we have a negative net worth of $6.5 trillion. Government obligations held by the public now total $3.3 trillion. There is $2.5 trillion of that weird "intra-governmental debt" hoarded in government trust funds. It isn't counted. Social Security has unfunded liabilities of $4.2 trillion, and Medicare Parts A and B unfunded liabilities of $12.8 trillion. That brings the total negative net worth to $23.5 trillion.
'Until now, this has never really been an issue because it hasn't come into play,' says David Mangefrida, national director of asset management tax services for Ernst & Young. 'But I believe everyone can agree that an individual investor does not deserve a worse result when they invest in a mutual fund than if they owned the individual stocks that make up that fund. Under the current rules, the fund investor suffers.' The issue is coming to the surface because so many funds have enormous losses, the kind that the manager has no realistic hope of offsetting with gains in the next few years. Red Oak Technology Select, for example, has realized losses - on stocks it has already sold - of $668 million, according to Morningstar. It has unrealized losses - on stocks it still holds - worth another $1.1 billion. Combined, that's a potential capital loss exposure of more than 1,000 percent of the fund's current price. To use that loss fully, the fund needs a tenfold increase, and most of it would have to be within the next eight years. That would require an average annual gain of roughly 33.3% until about 2011. No stinking way. While that's an extreme case, huge losses hardly are rare. Among funds where the loss exposure is more than three times the current price, according to Morningstar, are Fidelity Aggressive Growth, Janus Enterprise, and Putnam OTC Emerging Growth. Funds have these inflated losses in part because investors gave up on ever seeing a turnaround. Because tax-loss carry-forwards stay with the fund - instead of exiting with the shareholder - the potential benefits get spread among the smaller pool of remaining investors. The more people who bail out, the bigger the potential tax benefit to the hangers-on. It would be an incentive to stick around, if only the loss carry-forwards didn't expire and investors could expect a tax-efficient rebound for years to come. Furthermore, under current rules, big losing funds can't even use all of their losses if they go through a merger with a fund that has gains. Only a portion of the losses - as determined by a formula so complex it makes accountants queasy - can move along when a losing fund goes through a merger. More on Losses Ian McDonald, WSJ 2-24 If liquidated today, the average U.S. stock fund would have net capital losses that total more than half its assets, according to funds' most recent reports to Morningstar. The $4 billion Fidelity Aggressive Growth Fund had an $11.5 billion in capital losses on Nov. 30, according to its most recent annual report. The $2.8 billion T. Rowe Price Science & Technology Fund had a little over $6 billion in capital loss carry-forwards on the books at the end of last year. The last time the folks in D.C. touched this rule was the dreary 1970s. After stocks fell hard in both 1973 and 1974, the shelf life for fund losses was upped from five to eight years in 1976. Back then, few thought a broad swath of the nation's stock funds would need longer to sop up their losses.
Maury Harris, chief economist at UBS Warburg, noted that the factory sector is looking considerably better this year than it did in late 2002. "Industrial production finally turned decisively higher and is already on course to grow" at a 2.3% annual rate in Q1, compared with a 2.9% rate of decline in Q4, he said. Data this week again outpaced consensus estimates, particularly on the consumer," said economist Robert DiClemente at Salomon Smith Barney. "The roller coaster of spending on motor vehicles masked a continued revival in non-auto sales in January," and the industrial production figures "reinforced signs that factory activity is stabilizing."
'The appropriate question is, `Will I be able to reach my goals?'' says Roy Diliberto, of RTD Financial Advisors. 'It's not, `When is the market going to turn?' ''If someone is affected today to the point where their losses or lack of earning power or loss of income is going to affect their future, yet they have not changed their lifestyle to reflect the reality of their future, they're just sticking their head in the sand.' A quick 'TO DO' list: (1) Do some simple math - or use a retirement calculator on the Web - to see just how far off track you've gone. (2)Assuming you can't earn more, look at how you can change spending habits.
Look back 10 years to a time when, as today, the U.S. economy was working its way out of a recession. According to my Bloomberg, real (inflation-adjusted) GDP grew 3% in 1992 and 2.7% in 1993. The unemployment rate at the end of 1992 was 7.4%, 30 percent higher than today's. Many people also mention high stock valuations. Lately the price-earnings ratio of the S&P 500 has hovered around 29 times the latest 12-month earnings of its component companies, which is pretty high by most usual definitions. Bloomberg data, however, show 1992 P-E multiples in the 22 to 26 range, not so far from current levels. Today's P-E shrinks to 16.5 when we figure it on estimated earnings for the next 12 months.
Light-emitting diodes, or L.E.D.'s, have huge performance advantages in many mundane tasks. In devices like traffic lights, for example, they consume 80% less electricity than do the bulbs they replace and last up to 10 times as long. A study for the Energy Department concluded that the widespread use of solid-state lighting by 2025 could cut electricity demand 10% and save consumers $100 billion. Moreover, they have the safety advantage of gradually fading instead of unpredictably burning out. Beyond such obvious benefits, though, it is the ease of mating the chips to computers that is driving interest. Programs simple enough to run on a hand-held personal digital assistant can alter the intensity, pattern and colors produced by solid-state lights. That flexibility is already used in advertising and entertainment. Solid-state lights are featured in numerous Times Square signs and Broadway shows. Architects and building designers have far more ambitious possibilities in mind, including mimicking indoors the variability of natural lighting as the day progresses. "L.E.D.'s are only limited by what we put in the computer," said Fred Oberkircher, director of the Center for Lighting Education at TCU. "I'm waiting for the day when clouds of light float across my ceiling." Currently, the cost of white-light diodes for standard electrical sockets is anywhere from 40 to 100 times that of comparably bright incandescent bulbs, according to various industry estimates. But like their cousins the microprocessors, the diode chips are continually improving in performance and plunging in price. The biggest market at the moment is in outdoor signs and in lighting the contours of buildings like fast food restaurants, where the diodes are displacing neon. The nation's four million or so traffic signals represent a smaller market, but diodes have taken over a third of it and continue to spread rapidly. In the future, L.E.D. chips are likely to be facing competition in many specialty applications from a newer form of solid-state lighting known as organic light-emitting diodes, or O.L.E.D's. These light-emitting plastics are not nearly as bright or durable as the chips but may prove to be more economic.
The dismal story of the capital sector splits into several stories. To begin with, while spending on structures like stores, factories, and office buildings often declines after a recession, this time the plunge was more severe than usual. Spending on plant fell at an annual rate of 9.4% in the fourth quarter, after double-digit drops in previous quarters. By contrast, the more than four-fifths of capital investment that consists of spending on equipment and software has been rising since the second quarter of last year. In the fourth quarter, equipment spending increased at an annual rate of 5.0%. In most recoveries, spending on equipment normally grows fast enough to offset the drag from spending on plant. But this time, as noted, we had to wait until the fourth quarter for that to occur. While the wait was worth it, it would have been a lot shorter but for the plunge in two key components of equipment spending: telecommunications and commercial aircraft. Spending on telecommunications equipment peaked in Q4-00, falling 31.4% to its low in Q4-01, just when the recovery was starting. What really hurt was the 68.3% plunge in commercial aircraft spending, from its ironic peak in Q4-01, just after 9/11, to its low in the third quarter of '02. But the worst seems to be over for equipment spending in both these industries. In every quarter of last year, investment in telecommunications was off its low. And the dramatic Q4 rebound in commercial aircraft, while still far below the peak, was a key reason for the rise in equipment spending as a whole in that quarter. Also, those who think investment in IT is dead and buried should think again. In the fourth quarter, spending on software was up 6.3% over the year before, while computers and peripheral equipment leaped 25.3%. Another cause for optimism about the prospects for investment is the above-mentioned smaller decline in spending on structures. And then there's the sustained rise in the ISM index of manufacturing. The ISM Composite is based on a monthly questionnaire the ISM distributes to its members. While it's widely reported that anything above 50 on the ISM Composite signals a rise in manufacturing production, economists who have looked at the data know the neutral level is lower. Neutral is about 47. Despite an extremely cold January, the reading for that month was 53.9, following an upwardly revised 55.2 in December. These figures are signaling a rise in manufacturing to about 5%, which will in turn require a jump in capital investment. But a proportionate increase in manufacturing employment will not occur. Output per worker-hour in manufacturing rose by 4.6% last year; a similar rise in productivity this year will mean a 5% increase in output can easily be achieved with the same number of workers putting in a few more hours.
Can I deduct as an investment expense the fee paid to a trustee when I rolled over my 401(k) into an IRA? Yes, you both can, as long as you didn't pay the annual management fee or the rollover fee out of the IRA itself - you need to pay these fees separately in order to deduct them as an investment expense. To qualify, you have to itemize your deductions, and your total miscellaneous deductions must exceed 2% of adjusted gross income. My brokerage firm offers a "wrap account" with a 1% fee on assets. Is this considered a deductible (investment advisor) fee or a non-deductible commission? The wrap fee is deductible to the extent it relates to taxable income. Remember, many wrap accounts have at least some tax-exempt investments, so it's an important distinction. If I lost money in 2002 on my investments, does that mean I cannot claim any of my related investment expenses? With the exception of margin interest, any investment expense that is related to a taxable investment is deductible, regardless of your investment income or loss. Most people do not qualify for the stringent 2% requirements of miscellaneous deductions. Do you know what the requirements are for making investment income part of business income, and taking the deductions on Schedule C? To deduct investment-related costs on Schedule C (Profit or Loss From a Business) you must be classified by the IRS as a "trader," rather than as an investor. To pass the IRS sniff test, you need to be able to document these four points to show that your main occupation is investing for your account: * You're engaged in trading activity throughout the year; * trading activity is continuous and doesn't vary significantly from month to month; * you trade extensively -- there are no benchmarks, but the number of trades and the dollar amounts involved are generally used to make this determination; and * trades are intended for short-term gain. Investment Write-Offs Terri Cullen, WSJ 1-16 Things you can write-off: If you subscribe to investment-related magazines, newspapers and newsletters - online or off - you can deduct the cost of the annual subscription. Investors are allowed to deduct the cost of personal-finance software (such as Microsoft Money and Quicken) that can be used to track their investments. While not impossible, it's harder to make the same case when it comes to a home computer - the IRS may look askance at a claim that 100% of the time a household spends on a home computer is engaged in tracking investments. If you currently hire a financial expert to give you targeted investment advice, you generally can write off the cost. But note that I said "investment adviser" and not "financial planner." If your financial planner spends most of the time dealing with estate-planning issues, then it probably wouldn't be deductible. You can deduct the cost of borrowing money to buy investment securities or property that is expected to generate a capital gain or taxable income. Two things to remember: In order to take these investment-expense write-offs, you have to itemize your deductions on IRS Schedule A. And you can only claim the amount of the deductions that exceed 2% of your adjusted gross income. Three things you can NOT write-off: (1) Broker commissions and mutual-fund fees. Broker commissions are added to the cost of the property. (2) Investment conferences and seminars and (3) Trips to shareholders meetings.
When researchers analyzed the top 20 shows watched by teenagers, 45% of the episodes with sexual content also included safe-sex references. On the other hand, the researchers determined that 83% of the shows most watched by teenagers had sexual material; one in five included intercourse.
LSAs With the Lifetime Savings Account, any individual could stash away as much as $7,500 a year. That limit would rise with inflation in future years. It wouldn't matter how old you are or what your income is. You could also make penalty-free withdrawals at any time for any purpose. There would be no required holding period to qualify. You couldn't deduct your contributions, as many savers now can with traditional IRA. But earnings would build up tax-free, and distributions would be tax-free. During 2003 only, you could convert balances in an Archer Medical Savings Account, a Coverdell Education Savings Account and qualified state tuition plans into a Lifetime Savings Account. Balances in these accounts couldn't be converted after 2003, the Treasury says. RSAs The proposed Retirement Savings Accounts share some but not all of the features of Lifetime Savings Accounts. For example, the contribution limit would be the same and not tax-deductible. But the $7,500 has to be "compensation," such as wages. These accounts are designed to encourage retirement savings. Earnings would accumulate tax-free, and distributions after age 58, or after death or disability, would be tax-exempt. If you're eligible, you could set aside a total of as much as $15,000 for yourself in the two accounts this year. You could also make LSA or RSA contributions on behalf of others, including your spouse and kids. But total contributions made on behalf of any one person can't exceed $7,500 for LSAs and $7,500 (or compensation income, if less) for RSAs. Under current law, the most you can contribute for this year to a traditional individual retirement account - or to a "Roth" IRA - is $3,000, plus an additional $500 (for a total of $3,500) if you'll be age 50 or older this year. With a traditional IRA, contributions typically are tax-deductible for those whose incomes fall below a certain level. With a Roth IRA, contributions aren't tax-deductible, but qualified distributions are tax-free as long as you meet certain requirements. ERSAs The Treasury says the ERSA would replace all types of funded plans with employee contributions. "Thus, ERSAs would replace 401(k) plans, SIMPLE 401(k) plans, 403(b) plans, governmental 457 plans, salary reductions simplified employee pensions (Sarseps) and SIMPLE IRAs," the Treasury says. But the new plan wouldn't replace nongovernmental 457 plans. It also wouldn't affect rules for defined benefit plans. Existing regular (deductible) and nondeductible IRAs could be converted into these new accounts. Those not converted couldn't accept any new contributions, other than rollover contributions. The Treasury says nobody would be required to convert. Existing "Roth" IRAs wouldn't be affected, although they would no longer be called Roth. [I wonder how long it will take before we start calling these plans 'LiSAs, RoSAs and ERiSA's?] Plan Has No Chance Jim Vandehei, Washington Post, 2-7 A key element of President Bush's ambitious tax-cutting agenda - his proposal to create new tax-free savings accounts - has virtually no chance of passing and should be replaced with a bipartisan proposal to expand existing retirement programs, House Republican leaders have told the White House. 'I just don't think we can realistically go as far as the president proposes,' Ohio Representative Rob Portman, chairman of the GOP leadership team and a close Bush ally, said yesterday. House Speaker Dennis Hastert agrees, said a source close to the Illinois Republican. 'It hasn't gained any currency at all,' the source said of the president's savings account plan. Portman has informed Joshua Bolten, the president's top domestic policy adviser, of growing opposition to Bush's proposal. In response, Bolten and other administration officials have indicated to House members that they will not wage an all-out fight for the plans, at least over the next two years.
The professors subscribe to a theory that says financial markets over the long run are rational and efficient. They have argued that value stocks must be riskier than growth stocks because there would otherwise be no reason for markets to reward investors for buying them. Disputing that theory has not been easy because it does not rely on independent evidence. Three researchers nevertheless think that they have found a novel way of refuting it. Finance professors, Alon Brav of Duke and Roni Michaely at Cornell, and accounting professor, Reuven Lehavy from the University of Michigan studied a Thomson First Call database that contained more than 7,000 yearly price forecasts made by analysts at brokerage firms from 1997 through 2001. The brokerage analysts predicted that the average growth stock would rise more than 20 percentage points a year faster than would the average value stock. To those who believe that the markets are rational and efficient, this is evidence that growth stocks are riskier than value stocks. [I suppose they are defining risk as 'volatility'. The man on the street would say the data above is reason to believe that value stocks are more risky, because you will risk failing to reach your retirement goals with a 20 percentage point smaller return on your investment. ] The professors say the prospect of investment banking business may have led the brokerage analysts to overestimate growth stocks' returns consistently. So they turned to Value Line, which does not engage in investment banking, for an unbiased sampling. They used a database containing Value Line analysts' price projections for some 2,900 stocks over the 15 years from 1987 through 2001. Among this group of analysts, there was no difference in the average expected returns of growth and value stocks. The above research, "Expected Return and Asset Pricing", is available at papers.ssrn.com/sol3/papers.cfm ?abstract-id=360680. Tortoise vs Hare Donald Ratajczak AJC 2-16 The study concluded that, because value stocks as a group are no riskier than growth stocks but outperform growth stocks over long periods, value stocks may be bargains. Frankly, I believe the study shows that we normally choose the hare and are shocked when the slow and steady tortoise wins. Instead of reflecting only all known information, the stock market reflects human emotions in the short run. Where Have All the Growth Stocks Gone? Tom Petruno, LA Times 2-2 In relative terms, there is a growth-stock drought today, contends Kevin Marder, chief market strategist at money management firm Ladenburg Thalmann Asset Management in Los Angeles. That is so, he said, in part because the market for initial public offerings has been nearly shut down for two years. Meanwhile, the most dependable growth names for much of the 1990s - consumer-oriented giants such as Coke and McDonald's - continue to battle the perception they no longer deserve the label of "growth stock." The problems facing these companies, and the poor performance of their shares, aren't new. Indeed, Eastman Kodak's stock peaked in 1997, Coke's in 1998 and McDonald's in 1999, all well before the plunge began for the broad market in 2000.
The average monthly cost of cable-modem access crept up from $33.22 in the second quarter of 2000 to $45.31 two years later. DSL prices have been a little more stable, rising from $50.90 to $51.36 over the same period, according to ARS. But just about every broadband provider (85%, according to ARS) has ongoing promotions to make the first three, six or 12 months cheaper for new customers. So in some ways, prices are going both up and down at the same time. "The effective annualized monthly prices for broadband actually declined when you work in all the promotions, though the absolute prices are going up," said Mark Kersey, an analyst at the firm. Covad Communications is one of the first companies to offer "tiered" service. That is, customers can choose to pay more for faster access or less for slower access. Covad figured that it could advertise a cheaper plan as costing the same as a dial-up Internet subscription plus an extra phone line. That plan, at $39.95 per month, still offers download speeds about seven times as fast as you could get with a dial-up subscription, but half those of other forms of broadband. The company now offers a $49.95 plan and, for high-end users, a $69.95 option; EarthLink plans to roll out a similar sort of price structure this year. If broadband providers can't close the deal with consumers on the strength of an attractive price alone, an increasingly popular strategy is to fold Internet access into a package with other communications services. Verizon now offers a package it calls Verizon Veriations, in which customers sign up for local, long-distance and wireless phone service as well as DSL Internet. Verizon DSL will run you $49.95 per month by itself, but get the service as part of Verizon's bundle and it's $34.95. Broadband Hurts Big Three Saul Hansell, NY Times 2-3 America Online, EarthLink and Microsoft's MSN all have shrinking numbers of dial-up subscribers. The problem is speed. Consumers have been dropping their slow dial-up services and switching to broadband. AOL and the others offer broadband, but the latest quarterly results show that consumers are shunning these offers, despite increased promotion. Rather, they are buying broadband services offered by cable and telephone companies. Final results are not in from every company, but it appears that broadband subscriptions in the United States increased to about 16 million at year's end from 10 million a year earlier, out of about 60 million total households online. The broadband offering by the three big dial-up players totals no more than 2 million subscribers. A recent study by Nielsen/NetRating found that the number of people who connect to the Internet at home over dial-up connections had actually started to decline as broadband users increased by 59% over the last year. At year's end, America Online, had 26.5 million subscribers, a loss of 176,000 from the previous quarter. For last year, it added only 1.2 million subscribers, far less than the 3.7 million it added in 2001. At year's end, AOL had about 650,000 broadband subscribers, up only a handful in the fourth quarter. Microsoft, which thought it would capitalize on AOL's problems, saw no growth in the quarter; it has nine million subscribers for its various MSN Internet services. Microsoft said it was hobbled by a large number of defections among customers who had signed long-term contracts a few years ago in return for rebates of as much as $400. EarthLink, the third-biggest Internet service provider, kept its subscriber count flat in the final quarter of last year, at 4.8 million. But that masked a reduction of 70,000 dial-up subscribers, offset by acquisitions that added 130,000 subscribers and the addition of 98,000 broadband subscribers. If it were not for acquisitions, EarthLink's dial-up subscriber count would have declined by 8 percent last year, Goldman, Sachs estimates. EarthLink is betting the market would split and that many customers would move to broadband service and many more would gravitate to lower-cost dial-up services. EarthLink has bought PeoplePC to compete with United Online's growing $9.95-a-month dial-up services. The other full-price dial-up services are also losing ground. SBC's dial-up service, mainly the venerable Prodigy service it had acquired, has fewer than half of the customers it did a year ago. And even a venture with Yahoo to add features to SBC's dial-up offering could not prevent the service from losing 150,000 subscribers in the fourth quarter alone. AT&T will no longer discuss how many subscribers it has for Worldnet, its dial-up Internet service provider, which had 1.4 million subscribers a year ago, according to ISP-Planet, a Web site. The major telephone companies are all expanding their broadband subscriptions for what is called D.S.L. or digital subscriber line, service at an annual pace of more than a 50 percent. In the last quarter of 2002, SBC Communications added 245,000 subscribers, Verizon Communications added 148,000, and BellSouth added 97,000. Broadband Lite Dexter Webb, WSJ 2-2 Broadband cost around $42 a month on average, according to December prices compiled by Jupiter Research. Some service providers are now offering broadband "lite," a cheaper ($30 - $35/month) alternative that is geared to casual users. Broadband lite typically downloads Web pages two to four times as fast as a dial-up connection. WideOpenWest of Castle Rock, Colo., for instance, offers three levels of service in several states, with a roughly $10 difference between its "value" (lite) and "advanced" broadband package (similar to standard broadband service). The lite package is $29.99, but it's roughly $15 if bundled with a cable-TV subscription. One reason providers may be rethinking their pricing strategy: Research indicates that roughly 50% of consumers who might be impressed by broadband's speed are in no hurry to pay for it. Just the Facts Fund Flow Update Data reported Thursday show that redemptions outpaced cash inflows to stock mutual funds by nearly $500 million in January. Of course, many investors continue to buy stock funds. Gross purchases in January totaled $72 billion, according to ICI. Americans are buying bonds and other fixed-income securities. Bond mutual funds had a net cash inflow of $12.7 billion in January. At the same time, an index that tracks how 1.5 million workers divide their contributions to employer-sponsored 401(k) retirement plans found that 61.3% of the money went into stocks in January, down from 68.4% for all of 2002. The latest figure was the lowest since Hewitt Associates launched the index in 1997. (Josh Friedman, LA Times 2-28) One Thing at a Time Managing two mental tasks at once reduces the brainpower available for either task, according to a study published in the journal NeuroImage. Marcel Just of Carnegie Mellon University asked subjects to listen to sentences while comparing two rotating objects. Even though these activities engage two different parts of the brain, the resources available for processing visual input dropped 29% if the subject was trying to listen at the same time. The brain activation for listening dropped 53% if the person was trying to process visual input at the same time. (Sue Shellenbarger, WSJ 2-27) Burkenroad Reports Each year since 1993, about 200 first-year MBA candidates at Tulane University divide into groups of three or four and study nearby companies whose shares are listed on the major exchanges. Many of the stocks have turned out to be "tremendous opportunities," says Peter F. Ricchiuti, the professor who runs the program, which is called Burkenroad Reports (www.burkenroad.org), after an alumnus and benefactor. The stocks have to pass two initial screens besides proximity: first, market caps have to be under $500 million and cash flow and earnings have to be positive for the preceding 12 months. Four years ago, the students began putting together a portfolio of the stocks they liked most. Total gain since then: 43.6 percent, compared with a loss of 5.5 percent for the Russell 2000 index, the best benchmark, since the stocks are all small-caps. (James Glassman, Washington Post 2-23) Claims Against Brokers In the last several years, thousands of investors have won claims against brokers to arbitration via the dispute-resolution services of the major exchanges. But there's a big catch for smaller investors: Lawyers who take these cases typically work on a contingency basis, collecting a third of the award if they win. With the rise in cases, it's increasingly hard to find a lawyer willing to pursue anything less than a six-figure claim. Though you'll pay a fee, your odds are always better if you have help in a dispute when the other side has legal representation. To find a specialist, contact the Public Investors Arbitration Bar Association (1-888-621-7484; www.piaba.org). You can ask for a list of members who handle smaller claims. (Jeff Gelles, Philadelphia Inquirer 2-16) No Inclination To Disclose A study, by consultant Shelley Taylor & Associates in London, of global companies paints a bleak picture of their willingness to disclose extra information at a time when firms are under financial pressure from a slowing global economy and are being pushed to improve their corporate-governance practices. Although Web sites are increasingly used to communicate with investors, six of the 50 companies surveyed don't include a link to their investor-relations department on their home page. Only 18% of firms included forward-looking statements in their annual reports, down from 79% two years ago. That is despite a change in U.S. rules that makes it easier for companies to make such statements. Despite a souring economy, only 30% included a discussion of "bad news," down from 50% two years earlier. (Silvia Ascarelli, WSJ 2-5) U.S. Retirement Assets As of the end of 2001, the ICI says in its annual fact book, U.S. retirement assets came to $10.9 trillion, counting both `defined contribution' plans such as 401ks, and `defined benefit' pension plans. The just-aborning market for dedicated educational savings had passed $10 billion and was climbing fast. For purposes of comparison, last time I looked the total market value of actively traded stocks in U.S. markets, as measured by the Wilshire 5000 Total Market Index, was $8.1 trillion. (Chet Currier, Bloomberg 2-4) Full-Service Accounts in 401(k) Grows Growing numbers of employers are offering full-service brokerage accounts in their 401(k) plans. By last year, 11% of large companies (those with 5,000 or more employees) included brokerage accounts in their 401(k)'s, according to a survey by the Profit Sharing/401(k) Council of America. That compares with 5% in 1997. Self-directed accounts are expected to be offered in nearly one-third of all retirement plans by 2006, according to Cerulli Associates. Even though the number of choices has grown in the last decade, the average person invests in just three options, according to a 2001 study of 401(k) plan participation by the Vanguard Group. Just 2% of the 100,000 people in Vanguard 401(k) plans who are offered the option of a brokerage account actually use one. But Schwab says half of the 401(k) plans it administers include individual brokerage accounts, and 65% of new clients ask for them. Nationwide, just 6% of eligible 401(k) participants have actually opened individual accounts at companies that offer them, according to a 2001 survey by Hewitt. (Donna Rosato, NY Times 2-2) Tax-Managed Funds In 1996, according to ICI, mutual funds paid $101 billion in gains distributions. Roughly $30 billion found its way into individual investors' taxable accounts. Four years later, the total soared to $326 billion, of which $97 billion fell into the `taxable household' category. Fund managers found a marketing opportunity. They scrambled to organize tax-managed funds, which sought to minimize the current tax burden via tactics such as matching realized losses against gains. Now there are 115 funds with `tax-managed,' `tax-efficient,' or `tax-aware' in their names. In 2001, the ICI says, total gains distributions dropped 79% to $69 billion, of which a mere $14 billion went to taxable accounts. `Looking ahead,' says Avi Nachmany, director of research at Strategic Insight, a build-up of paper losses in fund portfolios `ensures that the industry's capital gain distributions will remain small for years to come.' Legions of funds that made little or no effort to be tax-efficient now can claim that status as a kind of bear-market booby prize. (Chet Currier, Bloomberg 1-31) Hi-Tech Cheating Officials from the University of Maryland confirmed that six students have admitted to using cell phones to cheat on an accounting exam, and another six students have been implicated. The university had set up a sting in which answers to test questions were posted on the Internet as soon as the test began. Mixed in with correct answers, however, were several bogus answers. The students involved in the cheating had friends look up the answers online after the test began and then send those answers by cell-phone text messages to students taking the test. Officials then looked to see who had included the bogus answers on their exams. A similar scandal at Hitotsubashi University in Japan saw 26 students flunked for using their cell phones to cheat. (Wired News 1-30) Quick Facts, Stats & Opinions People in 16 states will file their returns to a different IRS center than last year. The states are Arizona, Idaho, Indiana, Kentucky, Louisiana, Maine, Mississippi, Nebraska, New Hampshire, New Jersey, North Dakota, Ohio, Oklahoma, South Dakota, Vermont and Washington. See the IRS Web site (www.irs.gov) under "The Newsroom" for details. (Tom Herman, WSJ 2-27) The conventional wisdom is that the market will rally when the war begins. Of course, if investors really thought that, traders might buy right now, anyway, which they're not. That leads one to wonder if, in fact, consensus is only being mouthed and nobody truly believes the rally scenario. (Jesse Eisinger, WSJ 2-26) Three-quarters of all online searches use Google or sites that use Google's search results, according to WebSideStory, a San Diego-based Web analytics company. (Totty and Mangalindan, WSJ 2-26) The SEC recognized a fourth credit-ratings company, just one month after the commission agreed to look into anticompetitive practices related to these influential evaluators (Moody's, S&P and Fitch) of bonds. Dominion Bond Rating Service Ltd., a privately owned Toronto rating agency, will be the first new ratings company to compete with the three existing agencies since 1997. (WSJ 2-25) A new study by Thomson Financial found that insiders at Standard & Poor's 500 firms with 4 percent or more in annual dividends sold an average of only $763,041 worth of stock each quarter in the past five years. That contrasts with average quarterly sales of $8.4 million by insiders at firms that pay no dividends. (Rachel Beck, AP via Seattle Times 2-23) Thomson First Call says its tally of 24,000 recommendations shows that 45.5% now are 'buy' ratings, 43.9% are 'hold' ratings, and 10.6% are 'sells.' The percentage of buy recommendations was 62.5% on April 1, when just 2.6% of recommendations were sells and 34.9% were holds. (Tom Petruno, LA Times 2-23) Investors should realize that a 7% to 8% return on stocks is a good return, especially in a modest-inflation, low-interest-rate environment. They should also take a less active approach to managing their portfolios. . . . People should be owners of stocks, not renters. (Bob Smith, T. Rowe Price Report via Wash Post 2-23) Q4-02 earnings, now more than 80% complete for the S&P 500, have shown a 14.7% year-over-year gain in as-reported results and a 19% gain in operating earnings. However, because actual results have generally been worse than earlier estimates, investors are beginning to mutter 'not again,' fearing that the optimists' phrase 'wait until the second half' will turn into 'wait until next year' for 2003, as it did in 2001 and 2002. (Investment Policy Committee Notes, Standard & Poor's via Wash Post 2-23) According to the U.S. Department of Labor's 2001 Consumer Expenditure Survey, the average household consists of 2.5 people and owns 1.9 vehicles. In 2001, households lavished an average 15% of their pretax income on their cars. This figure includes insurance, maintenance expenses, gas and the cost of buying and leasing vehicles. (Jonathan Clements, WSJ 2-22) Recently, high-quality long-term munis were yielding 4.81% while a 30-year Treasury bond yielded 4.80%. Why are muni bonds so cheap right now? (1) Tax receipts are way down, but from 1970 through 2000, only 18 municipal bond issuers out of more than 28,000 rated by Moody's defaulted. (2) Many strategists say interest rates are more likely to rise than fall this year, which could make any bond, but especially long-term bonds, less attractive. (Russell Pearlman, SmartMoney 2-22) According to H & R Block, an average return takes one to three hours to prepare on a computer, versus 10 to 12 hours by hand. (Jan Rosen, NY Times 2-16) The IRS estimates taxpayers who file electronically and are due refunds should receive checks within 21 days. Those who ask that their refunds be deposited directly in their bank accounts will get refunds within 10 days. Filing a paper return means it could take up to six weeks to receive a refund check, according to the IRS. (David McNaughton, AJC 2-16) In January 1991, mutual fund cash levels were close to 13% - among the highest in history. The hoard of cash was fuel that propelled prices higher. In comparison, mutual fund cash levels are now at a historically low level of 4.6%. Rather than building cash reserves during this time of uncertainty, fund managers have dipped into already low reserves to buy more stock. This is a sign of complacency. If investors panic and begin pulling money out of mutual funds, managers will be forced to sell stocks in order to raise cash to meet redemptions." (Dan Sullivan, The Chartist via Washington Post 2-16) In the past decade, the percentage of CDs bought by people 45 and older has doubled, to 24%, according to the Recording Industry Association of America, making it the fastest-growing segment of the album-buying public. The 15-to-24 category now accounts for 25% of all sales, down from 34% in 1992. (David Segal, Washington Post 2-16) The Iowa Electronic Market, a real-money futures exchange administered by the University of Iowa, allows speculating on the American presidential election. Despite trading volume that has averaged just $108,000 an election, these Iowa contracts have had an excellent track record. Their average forecast error for the popular vote in the last four presidential contests has been 1.37 percentage points, about half the average error of nine major polling organizations. (Mark Hulbert, NY Times 2-16) Using the Dow as the benchmark, the bear market has been in effect for 999 [as of Feb. 9, 2003, it's 1,016] calendar days. That's the longest decline in the market's history and is more than twice the average length of all the bear markets since 1900. (Dan Sullivan, The Chartist via Washington Post 2-8) Our peace dividend - not only in terms of lower defense expenditures, but U.S. domination of (and benefits from) free capital markets and free trade - is nearing an end. We will experience a somewhat vicious cycle of policy reversals instead of the virtuous circle of recent decades, which led to higher profits and lower inflation. In the reversal's wake will come subdued profits, higher inflation, a lower dollar and anemic financial returns. (William Gross Investment Outlook, Pimco Funds via Washington Post 2-8) According to a survey by the Center for e-Service at the University of Maryland, employees spent 3.7 hours a week taking care of personal online needs on the job. At home, they spent 5.9 hours a week on work-related surfing. (AP via AJC 2-9) The Bush administration has reversed course and decided not to penalize individual investors who borrow money to buy dividend-paying stock. The reversal came Monday in the administration's latest description of its plan to end the double taxation of corporate dividends. Under the original plan, an investor who bought stock on 50% margin would have ended up paying taxes on half the tax-exempt dividends received. As under current law, the interest charges paid to finance investments are deductible from income only to the extent of taxable investment income. So an investor might find some interest was not deductible if total taxable investment income was not high enough. (Floyd Norris, NY Times 2-5) [In a seperate NY Times article, House Republicans were expressing some doubts about passage of the dividend reform package.] Not so long ago, Washington managed to hack through much of the underbrush of the tax code in an overhaul that President Ronald Reagan signed into law in 1986. But in the years after, lawmakers started adding dozens of provisions to the individual and corporate income tax systems, contributing to their complexity and helping the tax preparation industry grow into an even larger business. This year's instruction manual for the federal government's individual income tax adds up to 126 pages, a far cry from the 56 pages needed in 1987, after the revision took effect. (Daniel Altman, NY Times 2-4) The alternative minimum tax is a form of double taxation - because people required to compute their taxes that way cannot deduct state and local income taxes from their federal obligation. (Daniel Altman, NY Times 2-4) Utilities in recent years have stepped up efforts to fight squirrels - buying everything from predator urine to baffles to fend them off. It's a war and the squirrels are winning as the electrical grid spreads and more wires are closer to more animals whose natural habitat has been destroyed. At Pepco Holdings, a 1.8-million-customer utility in Washington, D.C., squirrel-related outages rose to 999 last year from 702 in 2001. Longmont Power & Communications, which serves 35,000 customers north of Denver, says that more than 90% of its significant outages are caused by squirrels, which cut the power 393 times in 2002, up from 349 two years earlier. (Barbara Carton WSJ 2-4) We are in a period much like 1966-1982. That was a long secular bear market during which the Dow was flat and stock investors' returns largely came from dividends. Within the long-term trend, stock investors who purchased small- and mid-size company stocks performed much better than the indexes dominated by stocks of the largest companies. (Bob Carlson's Retirement Watch via Washington Post 2-2) U.S. stocks are about 10% undervalued in our refined valuation model. [The] equity risk premium is now 4.2%, suggesting 8% long-term expected returns for stocks (vs. about 4% for gov't bonds). (Steve Galbraith, QuantWorks - Morgan Stanley via Washington Post 2-2) S&P has reduced its 2003 targets for the S&P 500 and Nasdaq. The S&P 500 is now projected to reach 930 by mid-year and 1005 by year-end, while the Nasdaq is expected to close at 1420 on June 30 and 1535 on Dec. 31. . . . The total market value for the companies in the S&P 500 was 76% of total projected U.S. GDP as of year-end 2002. The average market-value-to-GDP ratio since 1964 is 50%, with a high of 131% in Q1-00 and a low of 23% in Q3-74. (Investment Policy Committee Notes, Standard & Poor's via Washington Post 2-2) This growing optimism still needs to stand the test of short-term reality. Yet this apparent growing resiliency to negative news may support a 'buying on the dips' investment policy for more investors in the months ahead." (David Henwood, Focus List and Market Commentary - Raymond James & Associates via Washington Post 2-2) 'Reality helps shape the [market] participants' thinking and the participants' thinking helps shape reality in an unending process,' George Soros said, explaining his theory in a speech at the World Economy Laboratory Conference on 4-26-94. `The situation participants have to deal with does not consist of facts independently given but facts which will be shaped by the decision of the participants.' (Caroline Baum, Bloomberg 1-31) Tech Tips & News The 'Age' of Information When you visit a web page, you may not have any way of knowing how old the information really is. If this is important to the information's validity, you can at least find out when the page was last updated. Just click in the Address Bar and type javascript:alert(document.lastModified) and press Enter. A dialog box displays the last date and time that the page was modified. (Emazing 2-22) Other javascript 'alerts': What colour is the background of this page? javascript:alert(document.bgColor) For a quick calculator: javascript:alert(2+2) To see the cookies which have been set from that domain: javascript:alert(document.cookie) Too see version of IE or Netscape being used on your computer: javascript:alert(navigator.appVersion) On-line Sale Taxes Begin Some of the nation's largest retailers started voluntarily collecting taxes this week on all their online sales, a switch that could have broad implications for how commerce is conducted on the Internet. Under a deal with 38 states and the District, several big retailers that also have major stores around the country - including Wal-Mart, Target and Toys R Us - will have their online divisions collect sales tax. Shoppers will pay based on the tax rates in effect where they live. Although the change will often mean higher total prices compared with those charged by online-only retailers that do not collect sales tax, Wal-Mart and the others are betting that their decision will help an effort to allow states to compel sales tax collections. [Online sales account for only about 2% of total retail sales. ] (Brian Krebs and Jonathan Krim, Washington Post 2-7) Advance in Data Storage Researchers at the State University of New York in Buffalo have created magnetic sensors that may solve the problem of increasing storage capacity of hard drives. Writing vast amounts of data to a hard drive was not the problem, said Harsh Chopra of the university. The problem was reading that data, the magnetic signals of which would be extremely small. The new sensors created by Chopra and Susan Hua are extremely small "whiskers" of nickel, said to be just a few atoms wide. The whiskers are extremely sensitive, much more so that current magnetic sensors, and could allow terabits of data to be stored on each square inch of disk space. Chopra said, however, that much of the science involved, including how the signal is enhanced to such a degree, is not adequately explained by existing theories and that "there's a lot of science to be discovered yet." (NewsFactor Network 2-3) Better Checklists Lots of people use to-do lists. But for many, the hard part isn't getting the stuff done - it's penning the list in the first place. Enter the Internet. A slew of Web sites now are dedicated to the art of personal organization. List Organizer offers preformatted checklists free of charge. At Printable Checklists there are 224 checklists in categories from housecleaning to party planning. At Checklists, topics range from dealing with an adoption to preparing for houseguests. (Alex Frangos WSJ 2-2) Home Page Previous Factoid Top Sites
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