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The stock market has felt like a weapon of mass destruction over the past three years. (Ian McDonald, WSJ 4-22)
Marshall Adkins works for Raymond James & Associates as a managing director. He's an energy analyst. Of course, analysts have gotten a bad rap recently, but I love talking to good ones like Adkins. He doesn't push stocks; in fact, he's reluctant to give me any company names. He just knows his industry inside out - and his passion is infectious. Plus, he has a great story to tell. Natural gas is the second most abundant energy resource in the United States, after coal. It's used to power industrial plants, to generate electricity, and to heat homes and offices. And, just for reference, its average price last year was about $3.30, twice the level of the mid-1980s to mid-1990s. In December, the consensus estimate for 2003 was $3.43 per Mcf, but Adkins was predicting $5. In March, he raised it to $6. On Friday, the spot price for gas was $5.38. What does this mean to investors? Well, if you believe Adkins and other experts who agree with him, the stock prices of companies in the natural gas business are going to go up. Maybe a lot. The story is that "the game's over for U.S. gas supply, same with Canadian." What he means is that demand keeps rising but supply can't keep up. "Supply is rolling over," he says. It has started to decline. That means prices will rise, and the increases, he asserts, aren't merely temporary. But can't we develop more supply at home? Not soon, says Adkins. There are environmental - or political - constraints that are limiting production, especially on the extensive federal lands in the Rockies. There's natural gas in Alaska but no pipeline to get it to the lower 48 states. And then there's the Arctic National Wildlife Refuge, a vast expanse that Congress, it seems, is placing off-limits. What about the rest of the world? Gas is not like oil. You can't ship it cheaply from the Middle East. Colin Ferenbach, an investment manager with an excellent track record and no ax to grind, agrees with Adkins. "I am a big believer in gas," he told me. Demand keeps going up, and the shallow wells being drilled in what are currently the most productive areas of the United States are suffering decline rates of 40 to 50 percent annually, which means that the gas runs out in about three years. Deeper gulf wells may be more productive, but they take time and money to drill. So, the laws of economics being what they are, prices for gas will rise in what Adkins calls a "step change." From 1986 to 1995, the average price was $1.60 per Mcf; from 1996 to 1999, it was $2.35; over the past three years, $3.72. Now, it's going to $5 and beyond. "Five-dollar gas is very, very profitable," says Ferenbach. Ferenbach directs me to a new report from Bear Stearns, titled "The 'Other' Energy Crisis." Gas, of course. "The tide has finally turned," write analysts Ellen Hannan, John Kang and Scott Burk. "The maturing of the gas-producing basins in North America, combined with a market that has grown by more than 25 percent over the past 15 years, finds the industry in a difficult position to continue to provide a source of cheap, abundant energy." They predict gas prices of $4.25 to $5.50 per Mcf for the next two years - not as high as Adkins's predictions but still awfully profitable for gas companies. In late March, one of my favorite strategists, Byron Wien of Morgan Stanley, headlined his weekly commentary "Buy Energy Stocks Now." Yes, he said, the war with Iraq would bring oil prices down from their stratospheric highs, but the decline would not be nearly as much as most people were expecting. Supply remains tight, and demand, depressed by fear of war, would rise. He argued that fundamentals suggest a price of $27 per barrel for oil, which translates into $5 per Mcf for natural gas. While these oil and gas prices are high, they are not high enough, Wien contends, to dampen demand or throw the nation into another recession. Economic growth "edging toward 3 percent is likely, and that should be good for earnings overall," he says. If markets are efficient, then isn't the rising price of natural gas and the increased profits that will flow to gas companies already reflected in the prices of stocks? In a word, no. The Bear Stearns analysts point out that the sector is trading at about 3.7 times cash flows -- "at the low end of historical ranges." Why so cheap? Investors seem to expect "an imminent decline" in gas prices. But the analysts disagree: "The earnings and cash flows of the sector are likely to be higher (and last longer) than the consensus view." Not even the gas companies believe it. Many of them, including Newfield Exploration (NFX), have hedged most of their production; that is, they have locked in prices that are a good deal lower than the gas bulls are predicting (in Newfield's case, $4.32 per Mcf on average). Look first at exploration and production (E&P) companies that haven't done much hedging - that are, in the lingo, the most "leveraged" to price changes. Bear Stearns cites Devon Energy (DVN), which has gas and oil properties in Texas, New Mexico, the Rockies, the Gulf of Mexico and Canada. Bear Stearns estimates Devon will earn $7.09 per share in 2003; Value Line projects $7.50. The stock was trading April 24 at $49.50 a share for a year-ahead price-to-earnings (P/E) ratio of about 7. Devon, by the way, is among the best-managed and least volatile E&P stocks; it actually bounces around less in price than the market as a whole. Also highly leveraged, says Bear Stearns, are Burlington Resources (BR) and two smaller companies, Chesapeake Energy (CHK) and Stone Energy (SGY). While Adkins won't recommend stocks, he points me in the direction of Anadarko Petroleum (APC), whose stock has barely budged over the past three months and trades at a P/E, again based on 2003 projections, of less than 10; Apache (APA), ranked highest, along with Burlington and Pogo Producing (PPP), among the E&P stocks, by Value Line; and XTO Energy (XTO), a smaller company that's also in the transport and marketing business. But the real excitement - the big leverage - is in the gas and oil service sector, the companies in the boom-or-bust business of drilling and supplying. When gas and oil are abundant and cheap, the rig count drops and they have little to do. But the rig count is up 30 percent in a year and, if Adkins is right, it will keep rising. He points to drillers such as Nabors Industries (NBR) and Grey Wolf (GW) and to pipemakers Maverick Tube (MVK) and Lone Star Technologies (LSS). These are highly speculative stocks. For example, because gas prices dropped last year, Grey Wolf's revenue fell 42%. In his concentrated 42-stock portfolio, Ferenbach, who prides himself on risk aversion, owns Ocean Energy (OEI), which is about to merge with Devon, as well as a couple of integrated petroleum companies, which explore, produce and sell at retail: ConocoPhillips (COP) and Royal Dutch Petroleum (RD), which has been part of Tocqueville's portfolio since 1984. Rig Count Jersey Gilbert, May SmartMoney The North American rig count fell by 28% last year, while well depletion rates topped 30%. Without new exploration and production, more cold winters will strain supply. That means gas prices will top the historical average of about $2.60 more frequently. That's good for the earnings of E&P companies with large reserves, such as Devon Energy (DVN), EOG Resources (EOG) and Burlington Resources (BR). It also means drillers and energy-service firms will get more business. That bodes well for the leading land drillers Nabors Industries (NBR) and Patterson- UTI Energy (PTEN) and service firms such as BJ Services (BJS). More on Gas & Oil Vito Racanelli, Barrons 3-24 Natural-gas prices, which tend to fluctuate with crude, also are likely to exceed current market expectations of $3 to $3.50 per million British thermal units. Tom Petrie, chief executive of Petrie Parkman, a Denver-based investment bank specializing in energy, sees gas prices of $3.50 to $4.50 per MMBtu, rising to $4-$7 over the coming decade. Even with relatively high gas prices - currently $5.15 per MMBtu - drilling for new gas hasn't yielded great results. Either exploration and production companies don't believe these prices will hold, or they are running out of good properties to drill, Petrie says. "I think it's the latter," he adds. With winter ending and gas storage low, there is "significant upside" to companies leveraged to natural gas prices, Petrie says. Of the exploration and production outfits that Petrie Parkman rates "Buy," gas accounts for 76% of Cimarex Energy's estimated 2003 hydrocarbon production; 71% of Westport Resources' production; 69% of Devon Energy's output and 58% of output at both Forest Oil and Pioneer Natural Resources. Petrie personally owns Westport shares. Refining stocks, on average, are trading for seven times Petrie Parkman's 2003 estimated earnings -- "too low for the kind of margins our analysts are expecting," Petrie says. The firm has "Buy" ratings on Premcor, Valero Energy and Tesoro Petroleum. Although Premcor has been public only since last April, the company has "high-quality, focused refining assets" exposed to Midwest and Gulf Coast markets, and an experienced management team, Petrie says. The stock is trading for about 25, or just over eight times this year's expected earnings. Valero, with $27 billion in 2002 revenue, is the "gold standard" among refiners, with a greater product-refining capacity and market capitalization - some $4.46 billion - than any other independent refiner. Tesoro, on the other hand, presents perhaps the biggest risk/reward opportunity. The company's debt now equals 69% of total capitalization, one of the highest debt-to-capital ratios in the sector, while its price/earnings multiple is one of the lowest. If Tesoro shores up its finances, as planned, the company's exposure to the big California market could yield handsome returns. And More on Gas & Oil Ken Brown, WSJ 4-30 With gas inventories at their lowest levels in a decade, the effort takes on increased urgency this year. That could lead to a pitched battle between utilities, which have to fill their storage tanks no matter what the cost, and chemical and fertilizer producers, among others, who use gas to make their products. The net result likely will be high gas prices. "Every day we move toward the winter, you lose that day in terms of refilling inventory," says Dan Pickering, director of research at Simmons & Co., a Houston-based investment bank specializing in energy. "It feels like there's a showdown coming sometime over the summer, and the only question is what's the price that's going to be the result of that showdown." Last year, gas production fell 5%, even though demand has stayed strong, driven by cold weather and a growing preference by utilities to use gas to generate electricity, because it burns cleaner than most other fuels. "We continue to be unable to turn production around," says Robert Morris, an analyst at Banc of America Securities, who expects production will drop an additional 2% this year. A big boost in drilling could ease that decline a bit, but new wells take time to start producing and gas is getting harder to get out of the ground in North America. In 2001, when the number of new wells soared, gas production rose only 1%. That's worrisome given that inventories stand at 684 billion cubic feet, down from 1,575 billion cubic feet at this time last year and the five-year average of 1,257 billion cubic feet, according to the federal Energy Information Administration. "It boils down to three simple factors: supply, demand and inventories," Mr. Pickering says, adding that the only way to balance out the market is for prices to rise so demand falls. The question is what that price will be. Many analysts believe natural-gas prices will average between $3.50 and $4 per million cubic feet for the rest of the year. That's higher than the prices of the past few years, when gas averaged about $3 per million cubic feet. But it's below where gas has been trading, meaning the price that analysts expect isn't high enough to cut demand enough to fill the storage tanks. So natural-gas prices are likely to stay high. Natural-gas investors don't have to go that far back for an ugly scenario. In the spring of 2001, inventories also sank to low levels and prices went up. But a confluence of events - warm weather, increased drilling, then declining demand, thanks to a slowing economy - sent prices tumbling. Those aren't likely to happen, or happen all at once, this time around. "It was everything that you could imagine that would be negative," John Segner, who manages Invesco Energy fund, says of spring 2001. In fact, many of the biggest drillers at the time, such as El Paso Corp., now are more focused on repairing their balance sheets than drilling for gas. Also, some big gas consumers such as fertilizer makers, have seen the prices for their products rise 50% this year, meaning they can pay more for gas, keeping demand strong. Given the decline in supply and steady rise in demand, some analysts see gas prices staying high for the next several years, which could convince investors that prices above $4 per million cubic feet are sustainable. "If you have a sustainable $4 to $5 gas price and $23 to $27 [a barrel] oil price, that's when both sectors need to take a quantum step up in valuation," says Kenneth Beer, an energy analyst at Johnson Rice & Co., a New Orleans-based investment bank that specializes in energy. If gas prices do stay high and investors start to believe they are sustainable, a wide swath of energy companies, ranging from behemoths such as BP PLC to the big exploration and production companies such as Apache Corp. and Anadarko Petroleum Corp., would benefit. But the biggest winners would be companies that get the bulk of their earnings from gas rather than oil. EOG Resources Inc., for example, gets more than 70% of its production from North American natural gas, and Banc of America's Mr. Morris expects the company to increase its North American gas production by 3% this year. EOG shares are down slightly for the year. The biggest risk to strong natural-gas prices is the economy. A big slowdown would cut demand, meaning the price needed to fill the tanks for winter would be lower. But since energy stocks already are valued as if natural-gas prices were lower than they are now, at least the downside would be limited.
In the S&P 500, the average decline of a stock for the three years ended March 20, 2003, was 2.3%. (The index itself fell much further because it is weighted by capitalization, and large companies that declined significantly had a bigger impact.) But the five companies earning the firm's highest score rose 23.1% on average. The top 15 companies averaged total returns of 3.4%. Top-ranked companies also outperformed their peers in measures like return on assets, return on investment and return on capital, he said. Stocks of the 50 companies with the lowest scores fell 28.2% in the last year, on average, and 11.1% in the last three years. To identify good governance citizens, Mr. Anderson's firm takes roughly 600 measures. These include a company's labor practices, environmental activities, workplace safety approach and litigation history. The firm also looks for anti-investor practices, like instituting poison pill provisions to prevent takeovers and keep management entrenched. And it checks for independence among a company's board members, watches for clues that a company is trying to manage its earnings too aggressively and assigns demerits for those that have restated past earnings. Extraordinary charges to earnings that represent 5 percent or more of a company's revenue also hurt a score.
Nexium and Prilosec block the stomach's production of acid, but they also decrease the effectiveness of drugs such as Nizoral or Sporanox, which are remedies for fungal infections like blighted toenails. Atenolol, a blood-pressure medicine, and Advair, an inhaled asthma treatment, work well alone. But a combination threatened to neutralize the positive effects. The heart medication quiets the same receptors in the nervous system stimulated by the asthma drug. Some common antacids and calcium supplements can interfere with the absorption of tetracycline antibiotics, and blunt their efficacy. Supplements such as iron can interfere with some antibiotics. St. John's Wort can interact with oral contraceptives and decrease their effectiveness. Penicillin also can block the efficacy of birth-control pills. There is evidence that cholesterol-fighter Lipitor may block the anticlotting action of Plavix, used to reduce the risk of stroke and heart attacks.
In the last three years, the equal-weight index beat the weighted version by an average of 11% a year. And now mutual fund company Rydex is coming out with a new low-cost, exchange-traded fund next week that will track the less-popular one. The cap-weighted S&P 500 tumbled 16.1% on average over three years through March, while the equal-weighted version lost 5%, according to Standard & Poor's. The recent superior performance of the equal-weighted S&P strategy since 2000 was achieved with elevated risk. The equal-weighted S&P index is more volatile on an individual stock basis than is the cap-weighted, due to its relatively greater emphasis on small- and mid-cap stocks. Average portfolio turnover is also higher in the equal-weighted index than with its cap-weighted counterpart, at 30% annually vs. 5%. Cap Weighted S&P 500 Sectors Rick MacDonald, Standard & Poor's 4-17
An initial study of profit gains reported for the first quarter show that the 9 percent increase from the previous-year level would be only 1 percent if the earnings from oil producers are excluded. This is significant, because no sales growth means no need to expand while no profit growth means no funds to modernize. Even oil producers have no incentive to spend. Because most of Iraq's oil infrastructure remains intact, many producers are more afraid of excess world production later this year than they are about the low level of energy material inventories now. Therefore, those profits are not being converted into new pipelines, more refineries and new oil fields, as they would have been in the past. More on Earnings Peter McKay, WSJ 4-20 If current trends hold up, according to financial-data company Thomson First Call, there won't exactly be an army of companies beating expectations this quarter, but rather a happy few that book stellar results. "What we're seeing so far is that there are some giant market-share gains being made, but only by the strongest companies," says strategist Jim Russell of Fifth Third Bank in Cincinnati. Mr. Russell believes that corporate profits and the broader economy are in "the first inning" of a longer recovery but that the steepest gains probably won't materialize until 2004. "The market is able to have a longer time horizon now, in the postwar period," he says, "and will hopefully start looking forward and liking what it sees." Chuck Hill, director of research for Thomson First Call, says about 58% of the companies reporting earnings so far have beaten analysts' expectations, which is close to the nine-year average of 57%. What's unusual so far, Mr. Hill says, is that the companies beating expectations have done so by an aggregate 6.9% - more than double the nine-year average of 2.7%. "The surprises we've seen on the positive side have pretty much been across the board - everything from Ford to Maytag to J.P. Morgan Chase to Intel," he says. The Early Expectations Jesse Eisinger, WSJ 3-31 Through Friday, analysts expected operating earnings for the S&P 500 companies to be up 8.3% compared with a year earlier, according to Thomson First Call data. Expectations have been deteriorating. On Jan. 1, analysts foresaw an 11.7% gain.
Millions of people are so enthusiastic about homeownership that they assume that large benefits last forever. But they are wrong. For the majority of Americans, homeownership tax benefits are small and temporary - or nonexistent. How much you benefit depends on your income, your marital status, the amount you finance and the interest rate you pay. How long you benefit also depends on the price of the house, how it is financed and your marital status. Suppose, for instance, that you are married, in the 15 percent tax bracket and just bought a median-price house - $161,600 with a 3 percent down payment. How much are your tax savings? The answer depends on how much you pay in interest and real estate taxes. With a new 5.5%, 30-year mortgage, your first-year interest payments would total about $8,569. Your real estate taxes might be about $3,555. That's a hefty $12,124. Couples who don't itemize have a standard deduction of $7,950 this year. Homeownership deductions only benefit you when they exceed the standard deduction. Since your itemized deductions exceed the standard deduction by $4,174, your tax savings would be $626 in the first year. The standard deduction, however, is indexed to inflation. As a result, future tax benefits are usually smaller than first-year benefits. How much smaller? Lots. I calculate the second-year tax savings at $588. The third-year savings is $549. By the 14th year, your tax benefit is zero. Your tax benefit for all 13 years is $4,686. That's 2.9 percent of the original purchase price. More Examples: A $30,000-income couple qualifies to buy a $98,700 home but receives no tax benefit. Their deductions are less than the standard deduction. They are in the 15 percent tax bracket. A $50,000 couple qualifies to buy a $154,400 home. Over the next 12 years, their tax benefits will total $3,675, or 2.4% of the home's value. They are in the 15 percent tax bracket. A $70,000 couple qualifies to buy a $205,500 home and is usually in the 27 percent tax bracket. Over the next 19 years, their tax benefits will total $22,814, or 11.1% of the home's value. Homes priced at $105,000 or less have no tax benefits. At a 4.5 percent interest rate - currently available for adjustable-rate mortgages - homes under $125,000 have no tax benefits. Bottom line: For most Americans, homeownership deductions are nice. But that's all. Does this mean we shouldn't want to own a home? No. It just means we ought to be realistic about the tax benefits. Tax Brakes & Extra Principal Payments Jonathan Clements, WSJ 4-27 By adding $100 or $200 to each monthly mortgage check (making extra principal payments), you could save yourself thousands of dollars in interest and pay off your loan years earlier. Sound attractive? To figure out whether this is the right strategy for you, consider not only the interest rate on your mortgage, but also your tax situation and what else you might do with the money. Let's say you have a mortgage with a 6.5% interest rate. That 6.5% is the interest expense you avoid by making extra principal payments and thus that is the effective pretax rate of return you earn. You should be able to do better than that 6.5% by buying stocks or bonds within a retirement account or by purchasing stocks in a taxable account. But what if you have maxed out on your retirement accounts and you already own plenty of stocks? What if the alternative is to buy bonds or certificates of deposit within your taxable account? In that case, making extra principal payments could be a smart strategy. Suppose you are choosing between paying down your 6.5% mortgage and buying a corporate bond for your taxable account that yields 5.5%. If your mortgage interest is tax-deductible and you are in the 27% federal income-tax bracket, the after-tax return from paying down your mortgage is 4.75%. But the after-tax return on the corporate bond would be even lower. After paying federal income taxes on the bond's 5.5% yield, you would be left with just 4.02%. In fact, paying down your mortgage may garner you an even higher return. Imagine you are married and you file a joint tax return. In 2003, you and your spouse are entitled to a standard deduction of $7,950. But let's assume you don't take the standard deduction. Instead, you itemize your deductions by filing Schedule A along with your federal tax return. This year, you expect to have itemized deductions of $10,000, consisting of $5,000 in mortgage interest and another $5,000 in property taxes, charitable gifts and state income taxes. Because your total of $10,000 in itemized deductions is greater than your $7,950 standard deduction, you save taxes by itemizing. Even so, the tax benefit you get from your mortgage interest is still fairly modest. Indeed, I would argue that just $2,050 of your mortgage interest is truly tax-deductible. The reason: If you had $2,050 less in annual mortgage interest, you would take the standard deduction instead and thus you wouldn't get any tax benefit from your mortgage. Nonetheless, the after-tax return from adding an extra $100 to your mortgage check would still be 4.75%. How come? The interest you avoid by making extra principal payments is interest you could have deducted. Eventually, however, as you pay down your mortgage and thereby reduce the amount of interest you incur each year, your itemized deductions will fall below $7,950 and you will take the standard deduction instead. At that point, the after-tax return from making extra principal payments jumps to the full 6.5%. Tax Brakes & Fairness Scott Burns, Dallas Morning News 4-27 Location. Location. Location. That famous phrase describes the value of real estate. It also describes the distribution of the tax benefits for owning it. Buy a home in an expensive East or West Coast city, and you will be showered with decades of tax savings, primarily from the mortgage interest deduction. Buy a home in Peoria or Pittsburgh, and you'll get zilch. The National Association of Realtors web site provides median home sale prices throughout the United States, updated quarterly. Its current list shows year-end prices in 125 urban areas. It also shows a national median home price of $161,600. In the 25 lowest-price areas, anyone buying a median-price home would receive virtually no tax benefit. Median home prices for these areas ranged from $110,600 in Fargo, N.D., and Moorehead, Minn., to $81,500 for Beaumont and Port Arthur, Texas. If you bought a median-price home in Fargo, you would enjoy total tax savings of $67 over two years. Every year thereafter, your tax savings would be zero. Buy a median-price home in places like Daytona Beach, Fla., Topeka, Kan., and El Paso, and there are no tax benefits. Ever. Taking the exercise a step further, home buyers who financed their home purchases with an adjustable-rate mortgage at 4.5% (instead of a 30-year fixed rate at 5.5%) would receive no tax benefits from homeownership in 50 of the 125 areas. Increase the down payment to 20 percent with a 4.5% interest rate, and owners of median-price homes in most of the country receive tax benefits that are minuscule and short-lived Ä if they receive any at all. Now let's look at the other end of the price scale. Homes in the 25 most expensive areas of the country range in median price from a staggering $516,400 in San Francisco to $189,900 in the Minneapolis-St. Paul area. San Diego, the fourth most expensive area (Orange County and Boston rank second and third, respectively) has a median home sale price of $379,300. Assuming a 3% down payment, a 5.5% interest rate, a 1% of market value tax rate and a 30% tax rate, San Diego home buyers can expect tax benefits of $59,161 over a 23-year period. This is 15.6% of the purchase price. Tax deductions intended to encourage homeownership nationwide are now working to subsidize expensive areas. Query: Should the residents of Peoria really send their share of $110 billion to subsidize expensive condos in San Francisco?
"As of year-end," said Bernstein, "nine of the 10 had met or beaten Wall Streets latest earnings estimates and had stable or rising estimates for this year, in both cases bucking the market trend. On average, they were projected to grow earnings at 16% a year over the next three years, versus the S&P's 10%. (The latest: 17% vs. 9%.) However, investors didn't seem to care." And that's the point. The bear market has destroyed the value not only of weak companies that never deserved the support of investors, but also of strong companies that have thrived even as the economy has struggled. Take, for example, Kohl's Corp. (KSS), a highly profitable chain of 457 specialty department stores. Earnings for each share of Kohl's stock have risen in a beautiful line since the company went public in 1990, increasing by at least 20 percent each year and averaging a gain of more than 40% annually. Value Line estimates that growth will continue at 25 percent a year through 2008. Yet, based on 2003 earnings projections, the stock trades at a P/E of 24, the highest among Bernstein's 10 companies but still modest by historic standards. The other nine Bernstein stocks? Freddie Mac (FRE), mortgage financing; UnitedHealth Group (UNH), managed care; Lowe's (LOW), home-improvement retailer; Pfizer (PFE), pharmaceuticals; Citigroup (C), financial giant; Microsoft (MSFT), software; Viacom Class B (VIA.B), entertainment; MBNA (KRB), credit cards; and General Electric (GE). FRE has increased its earnings at a 17% pace for the past decade and is expected to continue at double-digit rates for the next three to five years. UNH's revenue has risen from $1 billion to $33 billion in a decade. Bernstein projects earnings to rise 18% annually for the next three years. United stock has nearly tripled since 1998, but it still trades at a P/E of 19 based on current earnings. That compares with 28 for the Dow Jones industrials and 31 for the S&P. LOW's earnings have risen at a double-digit pace since 1991 - with average growth since 1997 of 24% and projected growth through 2008 of 23%. Annually. This is a dazzling money machine, conservatively managed with a solid balance sheet, a lot of cash and a small but consistently rising dividend. "These are companies," says the article in the Bernstein Journal, "with the wherewithal to weather the current tumult, precisely because they are industry leaders in market share, customer good will, and earnings history and prospects." The strategic-growth portfolio has beaten the S&P in 70% of the 12-month periods and 100% of the 10-year periods since 1980.
In the late 1990s, when the Standard & Poor's 500 Index rolled up one 20% plus annual gain after another, the mean- regression crowd warned us stocks were cruising for a bruising. Now, bulls are noticing that the pendulum has swung the other way. If stock prices can truly be counted on to regress to their mean, they should be due at some point for a rally. That's a big if. Even supposing that mean regression in stocks were universally accepted dogma, which it isn't, the record is of limited use in telling us exactly what mean the market ought to regress toward in the future. Maybe 9%, as seen in the last century, was freakishly high. Or maybe somehow in the new century 9% can be sustained or even bettered. Since one-year results of stock indexes jump all over the lot, let's look at five-year annualized returns. In the five years through 1999, according to my Bloomberg, the S&P 500 returned 28.2% a year. At the end of 2000, the five-year average dropped to 18.1%. By the end of 2001, it was down to 10.6%. After 2002, it swung to a loss, at minus 0.6%. To bring us up to date through the first quarter of 2003, the index has declined 3.7% a year since the end of March 1998. Lo and behold, the 10-year average gain for the S&P 500 stands at 8.5%. For the last 12 years, it's 9.2%. Does that mean the market must now immediately rise? Of course not. Whatever relevance it might have, mean regression has proved conclusively that it is no market-timing tool. Strong arguments have been made that stock returns are likely to be subdued for this whole decade. In the 1970s, the last decade that began with a bull-market collapse, the S&P 500 averaged a measly 5.8 percent gain a year. Still, you know what? If the '97-to-'07 period were going to produce that same 5.8% annualized rise, the index would be due for an 11.9% yearly return over the last five years of that stretch. Not bad. While this mathematical daydream may not prove anything, here's what I take from it. To whatever extent the mean-regression argument scared investors in the '90s, it has a corresponding capacity to cheer us up now.
"When I get even, I'll get out." Experts in investor psychology say that the pain we get from losses is more than twice as great as the pleasure we get from gains. It is not simply that this great bear market has left us poorer. We also feel pretty darn stupid. The resulting sense of regret stops us from selling. This refusal to sell at a loss isn't such a bad instinct. In fact, it could be your financial salvation. If you own a sensible, well-diversified portfolio, your reluctance to sell may keep you invested, so that you benefit from the eventual market rebound. "Stocks always bounce back." Truth be told, if you currently hold a prudent portfolio, I am not too worried. If you had a sensible portfolio to begin with, you will probably continue to behave sensibly. What if you have a lopsided portfolio that is heavily invested in a few stocks or a single sector? Now, I am worried. The problem isn't that you might sell too soon. Rather, the problem is you may never sell.If you hold a well-diversified portfolio, you are sure to benefit from any market rebound. But if you are heavily invested in just a handful of stocks, your portfolio could take years to bounce back. "I don't want to make it any worse." It is not just the "get even, then get out" syndrome that paralyzes investors. Another factor comes into play. What's that? As we lose money, we also lose confidence. It seems our cockiness tracks the market cycle. When stocks rise, we become more self-assured, as we attribute our portfolio's gains to our own investment savvy. But when share prices slump, that confidence slips away. This rising and falling confidence shows up in trading among small investors. When a bear market sets in, trading tends to slow, as investors grow increasingly unsure about what to do next. If you own a sensible portfolio, doing nothing isn't such a bad course of action. But with a little courage, you may be able to do even better. "It's headed for zero." Often, we take market trends and project them into the future. Have stock prices been tumbling for a while? Soon enough, investors believe that further declines are inevitable. By 2002, the "headed for zero" crowd was crowing loudly. As the drumbeat grew louder, many stock-fund holders abandoned hopes of getting back to even and instead hit the panic button. In July alone, a record $52.6 billion was pulled out of stock funds. Many of the investors who abandoned stocks in 2002 didn't have to sell. They had ample time to ride out the decline. But instead, they locked in their losses and gave up all chance of profiting from a market rebound. Related articles: The Truth About Investing - James Glassman, Washington Post Neuroeconomics - Sharon Begley, WSJ, Coping By Not Checking Your Portfolio - Bridget O'Brian, WSJ, It Pays Not to Follow The Crowd - Ian McDonald, WSJ, Ambiguity Aversion - Sara Calian, WSJ, Your Irrationality Is Predictable - Steven Pearlstein, Washington Post
How many times did the audit committee meet during the past year? The numbers ranged from two to twelve in the proxies we looked at. Two is woefully inadequate and twelve may be overkill. The proxy statement should also disclose whether the committee met without members of management present so that frank and open discussion can take place about the integrity of management's financial reporting. How much are outside auditors being paid for nonaudit services? How does it compare to the amount paid for audit services? Enron was faulted for paying Arthur Andersen about as much in (highly profitable) consulting fees as for (low-profit) audit services. Yet such well-known companies as Cooper Tire and Rubber and Wachovia paid their outside auditors nonaudit fees in amounts about equal to the amounts paid for audit services. Most of these fees were for tax services, including "tax planning," a service that the AICPA has vigorously fought to keep. Nevertheless, with the recent revelations of highly questionable tax strategies being peddled by some accounting firms (witness Sprint), it is doubtful that the outside auditors could give an unbiased opinion on the tax provision in a company's income statement when they were the ones who computed it. Did the audit fees increase substantially from one year to the next? While the proxy statements don't reveal the reasons for a big increase, this could be an indication that there were problems encountered which required the auditors to extend the scope of their services. Has the company changed auditors? Companies are required to disclose when they change auditors and the reason for the change if there was a disagreement over accounting principles. In practice, management is usually too smart to do anything that would cause the disclosure of a disagreement over accounting principles. A CFO that is going "principles shopping" will simply let one year's statements be issued and then carefully "interview" a successor who will give the right answer to the question: "What does 2 + 2 equal?" (answer: "What would you like it to equal?"). One proxy statement showed a company changing auditors twice in three years. Even though no reason was given, it still doesn't pass the smell test. Are there any "reportable events?" Did the auditors discover serious weaknesses in internal control (e.g. company policy permitted the capitalization of expenditures that should have been expensed, thus inflating income) or did they discover illegal behavior? Are there related-party transactions? One company rents its corporate headquarters and several of its branch locations from a partnership controlled by the chairman and his family. While these transactions are supposed to be conducted at arm's length, their existence raises eyebrows. What are the components of executive compensation and how much is it? This subject has been nearly beaten to death and the required disclosures aren't close to being adequate. Nevertheless, wages are only one component of executive compensation. Look in particular for severance pay and change in control agreements. Read the Shareholder Proposals. Shareholders who make proposals at annual meetings are often characterized as gadflies, crackpots, or worse. However, institutional investors and others are making more and more proposals with agendas worth serious consideration. Performance-based compensation, concern about a company's environmental or safety record and issues raised by labor organizations may be portents of future problems. Related article: Proxies 101 for Mutual Funds - Charles Jaffe, Boston Globe
In clear-cut cases of fraud, such as a stolen card, customers usually don't have to pay a dime, because zero-liability policies have become a marketing tool for banks. It can be a different story when no obvious theft is involved. Such cases frequently involve family members, romantic partners or friends with access to cardholders' PINs. Bank investigators often are skeptical in cases in which a customer could have been involved in the fraud. And now identity thieves - who use stolen personal and info to drain bank accounts - are so good at their jobs that it can be days or weeks before holders of debit cards realize anything is amiss. Debit cards are popular targets for thieves. And as fraud claims rise, some financial institutions are taking a tougher stance on refunds, especially in cases where there is no hard evidence of theft or fraud. Consumer complaints about banks' handling of unauthorized ATM transactions nearly tripled from 1999 through 2002, according to the Office of the Comptroller of the Currency, which regulates national banks. Thieves no longer need to steal a debit card to gain access to a bank account through an ATM. They simply make the cards themselves. Debit card information is stolen by using data-reading "wedges" like those used in card-swiping machines at retail checkout counters. The wedges, along with blank magnetic-strip cards and the paraphernalia needed to turn them into duplicates of real cards using stolen information, can all be bought on the Internet. Investigators recently have seen increased use of a new high-tech device: a thin overlay slipped unnoticed over the keypad of an ATM. The overlay contains computer chips that record PINs as they are entered by unsuspecting customers. That information then can be matched against customer data provided by an accomplice working inside the bank or gas station. Debit card fraud is more prevalent at gas stations, convenience stores and other such non-bank locations for ATMs. The American Bankers Assn. made its first detailed survey of the problem last year. It reported that frauds involving PIN-based debit cards cost banks nearly $51 million in 2001. Tips for preventing ATM fraud: (1) Change PINs often; (2) Never provide personal or financial card information over the phone, unless you initiate the call; (3) Don't respond to "account verification" requests for financial information sent over the Internet. Related articles: Skimming Data - Roy Furchgott, NY Times, Web-Enabled ATMs - David Margulius, NY Times Reporting ID Theft Kathy Kristof, LA Times 4-27 A group representing the nation's three largest credit reporting firms announced recently that they would make it easier for victims to repair the damage that identity fraud can do to their credit reports. In the past, an identity theft victim had to report the fraud to each of the three credit bureaus and often needed to send separate letters to every department store, bank or other lender where the thief had opened a bogus account in the victim's name. Now, consumers can report the fraud to just one of the credit bureaus, and that bureau will notify the other agencies. Equifax: (888) 766-0008 Experian: (888) 397-3742 TransUnion: (800) 680-7289 Californians have the right to block access to their credit reports, allowing access only by providing a special personal identification number when they apply for a loan. Still, more could be done by retailers and the credit industry to prevent identity fraud in the first place. For instance, identity thieves often misstate their victims' personal information when filling out fraudulent credit applications, giving an incorrect address, for example, or the wrong birth date. If this information were checked more carefully, many bogus applications would be rejected, she said. Additionally, credit bureaus should notify consumers when there is unusual activity in their accounts, such as frequent address changes or applications for credit. The credit bureaus are not at present considering such reforms. Credit Card Fees Rise Jennifer Bayot, NY Times 4-20 Many fees and business practices that were considered unusual only a few years ago are quickly becoming widespread as the card companies seek to build revenue at a time of low interest rates. Because of the competitive climate, "you cannot charge an annual fee and you have to offer a low interest rate," said Robert B. McKinley, chief executive of CardWeb.com, which tracks the credit card industry, "so there's been this fee frenzy." [A second reason for the fee increase:] Last year, banks had to write off an average of 6% per quarter on outstanding credit-card balances. If you carry a Citibank or Chase card, for example, your late fees are now based on your outstanding balance; the greater the debt, the higher the fee. Customers of First USA now pay a 2 percent surcharge on overseas purchases, on top of what the credit card networks charge. MBNA and American Express, among many others, are raising interest rates or reducing credit limits of customers who slip up with any other creditors, even if those customers' record with them is clean. Penalty fees are now the third-largest source of revenue for major card companies, after interest and the surcharge merchants pay to accept the cards, industry experts say. For Visa and MasterCard customers alone, those fees grew 10 percent in 2002, to $8 billion, according to a survey published in the May issue of Credit Card Management, a trade publication. A study last winter of 143 cards by Consumer Action, an education and advocacy group in San Francisco, counted 21 with late fees of more than $30. In 2001, the same survey found only one card issuer, Fleet Bank, a unit of FleetBoston Financial, whose late fee had broken the $30 level. The average fee for late payments is now $30.04, or 6% higher than it was last year and double the average five years ago, according to CardWeb. Many issuers are also now imposing higher interest rates, or penalty rates, on customers whose credit ratings decline for any reason, including late payments to other creditors. Citibank started such pricing in 2000, and the AT&T Universal Card did so shortly after. The first company to institute such pricing was Capital One Financial, in 1996. Related articles: Credit Card Perks - Betty Lin-Fisher, Knight Ridder, Card Issuers Increase Scrutiny - Peralte Paul, AJC
The beauty of this is that this tax advantage does not require that you have been a shareholder of the fund when it actually suffered those losses. On the contrary, you can enter into such a fund today and receive the full tax-sheltering benefit of those previous losses. Picking such a fund is a bit tricky, however. You shouldn't choose solely on the basis of which have the largest unrealized capital losses, for example, because by doing so you could easily end up with a loser fund that has little hope of ever generating capital gains. Instead, you want a fund that has an excellent long-term record but which has suffered greatly in this bear market. The two mutual funds that currently are among the most popular among investment newsletters, and which also have the greatest negative potential capital gains exposure, are the Fidelity Select Technology Fund (FSPTX) and the Fidelity Select Electronics Fund (FSELX). According to Morningstar, these funds have potential capital gains exposures of negative 216% and negative 174%, respectively. This means that each of these two funds has loss carry forwards that are well in excess of its total assets. That in turn means that these funds will be able to shelter from taxes a big chunk of future capital gains. This is a major advantage. Imagine a hypothetical investor that, instead of investing in one of these funds, purchases the stocks that these funds own. On an after-tax basis these funds will most likely come out far ahead over the next 8 years. Related article: Funds are Losing Their Tax Losses - Jaffe, Boston Globe / McDonald, WSJ
A commentary published by Putnam Investments says: `We think the fact that investors are not yet bidding up stocks that pay dividends versus those that don't represents an opportunity. Whatever the outcome of the Bush administration's proposals, dividend yield is just getting started as a major driver of relative stock performance in U.S. markets.' But `so far this year,' Putnam goes on to acknowledge, `the performance of dividend-paying stocks as a group has been undistinguished.' Same goes for stock funds - income and growth- and-income funds - that emphasize dividends. Equity-income funds tracked by Bloomberg averaged a 2.5% decline from the start of 2003 through the end of last week, and growth and income funds lost 1.6%, while plain old growth funds declined 0.9%. Several misgivings linger. What happens to the attractiveness of stock dividends if interest rates continue their recent rise, pushing yields higher on high-quality bonds and money- market securities? Stocks will need dividend increases, or at least the expectation of dividend increases, to keep pace. The chances of that depend to a great extent on an improvement in corporate earnings, which are the wellspring from which dividends flow. Right now that seems a questionable prospect. Should the economy strengthen enough to reinvigorate earnings growth, it will give interest rates a strong push as well. Any way you script it, the dividend revival is subject to the Ringo Starr rule. You know it won't come easy.
While Vanguard's flagship index fund, the Standard & Poor's 500 Index Trust, will remain unchanged, the rest of the funds will morph to their new incarnations as early as April 20 and last through September. But there are some who are concerned about the changes. 'We may find out that there is really no difference, or that the big change is in tax efficiency or that it's exactly as Vanguard says, but the jury is going to be out on these funds until they show that they can do what Vanguard purports they can do,' says Dan Wiener, editor of the Independent Adviser to Vanguard Investors. 'You'd expect the funds to do what Vanguard says they will do, but you have to be just a little bit nervous about it until you see it on paper in your account statement.'
These derivative securities allow investors to bet on where they think the indexes, like the S&P500, are going. RiskMetrics, a financial analytics company in New York, has analyzed S&P futures prices and determined how many investors are moderately positive, wildly optimistic or outright negative about the overall market for the next three months. At the moment, for example, while many strategists are calling for a hefty rally, only 19 percent of futures investors have bet that the S&P will rise more than 10%. Most of these investors - 62% - appear to believe that the index will trade in a range of plus or minus 10%. Some 14% have wagered that it will be 10-25% lower in three months. Professional traders in the government bond market use a similar tool - federal funds rate futures - to assess the thinking among investors about where interest rates might go. Bond traders either bet alongside or against these expectations. Investors in stock-index futures can be wrong, of course. But a look at recent history shows that a majority has often been correct. For instance, in early January 2001, while the pundits were pounding the table for stocks, 54% of stock-index futures players had wagered that the index would remain in a range of plus or minus 10%. And 12% had made bets that the index would fall as much as 25% within three months. By the end of March, the S&P had fallen 9.6%. And at the end of November last year, as investors bid up stocks on the glimmers of an economic rebound, 60% of stock-futures investors had bet that the rally was unsustainable. They were right. 'This is an assessment of what investors in the S&P futures market believe, so it gives you a real feel for the actual money that is being bet on where the market is going,' said Michael Thompson, a risk strategist at RiskMetrics. 'It is the voice of the market rather than the voice of an individual strategist.' And considerably more credible.
Although manufacturers attempt to overwhelm buyers with technical jargon, projectors aren't that hard to understand. In the front, there's a lens that projects the image. Any flat surface will show the image, although a projection screen - available for as little as $200 - produces the best results. In the back, there's an AC power plug and inputs for every type of video source: a VGA port for computers, as well as ports or adapters for the S-Video, composite video and component video connections used by TVs, DVD players, VCRs and video game consoles. Most crossover (intended for both business and entertainment use) projectors cost less than $2,000 and are designed for portability, weighing less than 8 pounds. Among those emphasizing crossover models are Epson, InFocus, Optoma, Philips, Sharp and ViewSonic.
Recently, I was discussing my admiration of the all-or-nothing, my-way-or-no-way zeal of many correspondents with Terry Odean, a professor at the University of California at Berkeley who studies investor behavior. I posited that whether I agreed with the strategy of these investors or not, their steadfast beliefs should serve them well. And then Odean shattered that happy illusion. He noted that there is a difference between someone who has a quiet confidence in his or her beliefs and the person who shouts them from the rooftops. ''The investor who is so certain that what he is doing is right has a real potential to be overconfident,'' Odean explained. ''Investors who think they know more than they do tend to place bigger bets, which leaves them less diversified and, if they are actually wrong, leaves them in the hole. ''There is always someone who can say `I'm doing better than a diversified strategy right now,' but there is always someone who is doing worse and who isn't saying anything at all.'' Odean argues that this makes the case for traditional, buy-and-hold, widely diversified investing. Investing for the long term requires that investors ask themselves one key question: ''What if I'm wrong?'' Odean's answer to this one is simple: His research shows that diversified investors generally don't get the best of all outcomes, but they don't get the worst, either. How Fund Categories Fared Barrons 4-7-2003
This study has been replicated many times on different databases. Researchers have generally agreed with the original study's finding that asset allocation is by far the most important factor in performance. I decided to analyze investment newsletters to find whether asset allocation has become any less important in recent years and whether it has become any easier to add value through market timing and picking actively managed mutual funds. I analyzed every mutual fund newsletter in the Hulbert Financial Digest database that regularly allocates its model portfolios to more than one asset class - a total of 56 portfolios. Consider one example, the Growth Fund Guide. A portfolio that strictly adhered to its investment policy would have produced an annualized return of 5.9% from the beginning of 1988 through February this year. In comparison, the newsletter's growth portfolio actually produced an annualized return of 3.3% over the period. That means that the newsletter's market-timing decisions and recommended mutual funds cost the portfolio an average of 2.6 percentage points a year. To track changes in the relative importance of the asset allocation decision, I calculated each newsletter's trailing 10-year returns for every month beginning December 1997, then averaged them. The average newsletter appeared to be doing a slightly better job now than in 1997 but not good enough to justify a shiftfrom strict adherence to an investment policy. Over the 10 years through December 1997, the combined effect of market timing and choices of actively managed funds reduced the average newsletter's performance 3 percentage points a year. Over the 10 years through February this year, that combined cost was 2.1 points a year. More than half the newsletters would have made more money over the last 10 years by never deviating from their investment policies. The unmistakable conclusion is that even in a bear market, market timing and actively managed mutual funds generally hurt investment performance more than they help it.
She also foresees an uptick in consumer sentiment inspired by "the strength and competence" of the country's armed forces. And consumers will have the money to go with their recovered confidence, since Americans' disposable income has increased 5% a year for the last three years. There's a good case to be made that assuming the war goes quickly, economic recovery is on the horizon.
Since 1997, General Motors Corp.'s Chevrolet Corvettes have come with four runflats and no spares. Runflats are standard equipment as well on DaimlerChrysler's Dodge Vipers, most of the new Q45 sedans from Nissan Motor Co.'s Infiniti luxury brand and a raft of cars from BMW. Runflats are an option on the SC 430 roadster from Toyota's Lexus division, and this spring GM will use them on the new Cadillac XLR roadster. The current all-wheel-drive version of the Toyota Sienna minivan is the first runflat-equipped family passenger vehicles sold in the United States. Most Sienna models still have a spare. Last year about 60,000 new vehicles were sold without spare tires, or less than 0.4% of the 16 million passenger vehicles sold in the U.S. It's part of a quiet move by the auto industry to wean drivers from their century-long dependence on spare tires. In recent years automakers have eliminated the spare in a handful of sports cars and luxury models to get extra storage space or to reduce weight for improved fuel mileage. Because the tires run so smoothly even when deflated, these vehicles have an extra warning gauge on the dash to tell drivers that, say, their right rear tire is technically "flat" and they must get it fixed. Most runflats have a synthetic rubber insert in the tire's sidewall that makes it stiff enough to support the tire temporarily even when it loses all its air. "The spare should go the way of the hand crank on the engine" by the end of the decade, said Edouard Michelin, chief executive of Michelin, which is aggressively pushing automakers to adopt its two runflat models as standard equipment. Automakers also have discovered that big wheels, those with diameters of 16 to 20 inches, increase a vehicle's visual appeal with many motorists. But providing spares with huge wheels also eats up space. Using runflats would solve that problem and allow designers to specify bigger wheels than were practical in the past. One caveat is that runflats don't work if the structural integrity of the tire is destroyed by a complete blowout. Runflats also cost about 20% more and present a stiffer ride, which may be fine for sports cars but is not so great for conventional sedans. Skinny "doughnut" spare tires are in 90% of passenger cars and 70% of minivans sold in the United States - although most pickup trucks and sport utility vehicles don't have them, because they might be unable to support a heavy vehicle. A new runflat tire developed by Michelin could help bring runflats into the truck segment. Michelin say its patented PAX system has a plastic insert that is wrapped around the metal wheel inside the tire to support the tire if it begins to lose air pressure. Michelin says the overall cost to automakers for its new pickup and SUV tire is about the same as for a car equipped with runflats. Goodyear and Bridgestone have licensed Michelin's technology, and some in the industry believe the first pickups with runflats could appear within a few years.
Altria's woes are a problem for municipal-bond funds because many of them invest in state bonds that tie their return to the ability of tobacco companies, including Philip Morris, the industry's largest, to pay their legal obligations under their 1998 settlement with the states. To speed up their access to money expected to be received under the tobacco settlement, many states sold municipal bonds backed with future payments from the tobacco firms. But if the tobacco companies can't make those payments, municipal-bond funds and other buyers of the tobacco-related bonds are in danger of losses. Late Monday, Moody's also downgraded a variety of the tobacco settlement-related bonds, following up on an announcement by S&P Thursday that it was putting the bonds on negative credit watch. Some municipal-bond funds also have been suffering investment losses from the decline in airline-related debt, which has been under pressure as a result of the airline industry's woes. Experts say such problems highlight the risks of investing in municipal-bond funds, whose portfolios include many low-risk bonds but also can take on riskier securities in a bid for higher yields and fatter returns. Just the Facts Average Pay Drops For the first time since the 1980s, the average pay of workers at all income levels is falling. The pay of the nation's top earners has become the most recent to fall behind inflation. The weekly salary of workers at the 90th percentile of earners, those who earn more than nine-tenths of all workers, fell 1.4% over the last year, to $1,439, according to an analysis of government data by the Economic Policy Institute, a research group in Washington. The inflation-adjusted weekly pay of the median worker fell 1.5% between early last year and early this year, according to the Labor Department. It was the biggest drop since the mid-1990s. During Q1-03 consumer spending increased at an annual rate of 1.4%, which matched the slowest pace in 10 years. (NY Times via Houston Chronicle 4-26) Gender Bias in Bond Fund Market Women portfolio managers have a tougher time attracting assets to their funds than their male counterparts, a new study (published in the latest issue of the Journal of Financial Research) of U.S. bond funds shows. The study's authors examined taxable bond funds that were at least five years old as of August 2000, based on data from research firm Morningstar, and found that of 1,294 funds, only 72, or 5.6%, were run by women. Using a mathematical formula showing normalized asset flows, portfolios run by new male managers had an asset flow level of 1.391 in the initial year, more than the 0.187 measure for women, which means the women managers took in less cash. (Reuters via Houston Chronicle 4-21) Pension Update A survey released yesterday, covering 100 of the largest corporate pension plans, by Milliman USA, a benefits consulting firm, found that that collectively these companies' pension plans went from a funding surplus of $183 billion at the end of 2000 to a deficit of $157 billion at the end of 2002. Together their assets dropped from 124.5% of their liabilities to 82.4%. Some of the most underfunded on a percentage basis were Procter & Gamble, where assets equaled 44.8% of liabilities; ConocoPhillips, 49.3%; and Exxon Mobil, 50%. Underfunded pension plans in certain industries, notably steel and airlines, have raised questions about the ability of the government's pension insurance agency, the Pension Benefit Guaranty Corp., to meet its obligations in future years. (Albert Crenshaw, Washington Post 4-17) See: Stocks & Pension Problems - Charles Jaffe, Boston Globe for more info and links on pension problems. Photocopy Your Wallet If you can't name everything in your wallet or purse without looking, you could be in trouble if it is ever lost or stolen. Just as you should always have a list of all of your financial accounts, you should keep a list of the contents of your wallet. The easiest way is to empty your wallet onto a copy machine. The photocopy - include both sides of your cards - becomes a record of what's in there, and you can supplement it by writing the contact numbers for each issuer on the copy, making it easy to report lost or stolen cards. Once you have the copy, store it carefully. A list of account numbers could be as valuable to some criminals as stealing the wallet. (Boston Globe 4-13) Fund Fees Kill Profits Assume a one-time investment of $10,000 and an annual return of 11 percent over 30 years. Assume also an expense ratio of 1.5 percent. Using the "mutual fund cost calculator" on the Web site of the Securities and Exchange Commission (www.sec.gov/investor/tools/mfcc/mfcc-int.htm), I found that the $10,000 grew to $145,000, which sounded spectacular until the calculator told me that expenses and forgone earnings (that is, money I could have made if I had invested what I had paid in expenses) totaled $83,000. Imagine a fund advertising that fact: "Invest with us long-term. We'll take one-third of your account as our fee." By contrast, with a fund charging 0.8 percent (and getting the same returns), $10,000 grew to $179,000. In other words, an expense ratio seven-tenths of a percentage point lower produced returns that were 24 percent greater. (James Glassman, Washington Post 4-6) More on Fund Fees "Today, there is not a single mutual fund firm that uses its investor statement to thoroughly and clearly disclose the fees associated with investors' mutual fund accounts," according to DALBAR Inc. in Boston, a financial services market research firm that just released a report on fee disclosure. "In fact, two-thirds of mutual fund statements do not acknowledge that fees are charged to the account at all." Fund companies have no impetus to be clear about their fees, said Brian Portnoy, senior fund analyst Morningstar. "It's not mandated," he said, "and there's not a strong incentive for mutual fund companies to make it crystal clear what they're charging you because they actually charge much more than you actually think." The more explicit that funds are about fees, the more complaints they're likely to field from fund shareholders and the more attention they will attract from regulators, Mr. Portnoy said. (Pamela Yip, Dallas Morning News 4-7) Homes as Investments People will claim their home is the best investment they ever made. But in reality, long-run gains have been fairly modest, with home prices outpacing inflation by just 1.2 percentage points a year since 1975. Typically, homeowners get back 70 or 80 cents for every $1 they spend on home improvements like to upgrading the kitchen, finishing the basement or remodeling the bathroom. Which brings us to our second lesson: If you are in the market for a house, consider buying a place that has already been fixed up. Another dubious strategy: Dumping stocks and using the proceeds to trade up to a bigger house. At first blush, that might seem like a sensible move. If you double the size of your house, you should double your dollar gain from rising home prices. But unfortunately, you will also likely double your maintenance expenses, monthly mortgage payment, taxes and insurance costs. (Jonathan Clements, WSJ 4-6) Wanger Echoes 'Trading Range' Prediction Ralph Wanger (comanager of the $5.7 billion Liberty Acorn Fund) thinks stocks are going to be sideways drifters for years. I would expect a sideways market for a significant amount of time. We don't know what's going to happen, but that's certainly probable. My basic theory is that we're in the third sideways market in the last century. After a long [bull market] stocks get way overvalued. You need a long period of basically waiting around for the world to catch up with stocks' prices. After 1929 it took 25 years for stocks to make a new high. After 1966 it took almost 25 years for the market to make a new high, if you adjust for inflation. We just started another of these phases a couple of years ago. I'm not saying it will take 25 years this time, but it will take a while. (Ian McDonald, WSJ 4-4) See: 'Trading Range' World - C Currier, Bloomberg / M Kahn, Barrons for more info on the 'Trading Range' Prediction. Quick Facts, Stats & Opinions The 'dead' tech sector is clearly leading the market, with the large-cap-driven NASDAQ 100 up 10% year to date [April 21] and EPS growth expected to be up 21% in Q1 with an expected 52% EPS increase in Q2. . . . While we don't think it's straight to the moon from here, we do believe we are in a constructive environment for stocks. We think the huge move stocks made after the March low was a watershed event shifting the momentum in the market. The risk for three years was buying stocks, because if you did, most of them went down. Now the risk is not participating in rallies. (Michael Moe, ThinkThoughts, ThinkEquity Partners via Washington Post 4-27) The American Funds group's 26 long-term funds attracted a net $38.8 billion from investors last year, reports Financial Research Corp. of Boston. That just edged out the Vanguard Group, with net inflows of $38 billion. Pimco, which boasts the biggest of all bond funds, ranked third with $27.4 billion. In the first two months of this year, American Funds kept the lead with $6.1 billion in inflows, compared with $5.9 billion for Pimco and $4.6 billion for Vanguard. (Chet Currier, Bloomberg 4-22) The Dow finished 1994 at 3834.40. If it had risen 10% each year since then it would've started this year at 8219.3. The Dow, about flat since Jan. 1, started this week about 1.5% up from that level. "If you'd gotten 10% a year instead of all this volatility your account would be in roughly the same place," says Charlie Bevis, research editor at Financial Research Corp. "You'd be thinking of that same account a lot differently than you are now." (Ian McDonald, WSJ 4-22) 92% of Nasdaq companies and 65% of New York Stock Exchange companies have market capitalizations under $1 billion. (James Glassman, Washington Post 4-20) "We found that the cost of capital exceeds the return on capital" in many sectors, David Rosenberg, chief North American economist at Merrill Lynch, said in a recent report. "So where is the incentive to embark on a capital investment spree right now - or in the near future?" (Rachel Beck, AP via Philadelphia Inquirer 4-20) You can estimate your marginal tax rate on Yahoo at taxes.yahoo.com/rates.html. You can calculate how much house you can afford at Homefair.com. (Scott Burns, DMN 4-20) Signs homeowners are overdoing it on home-equity loan. Boston's AEW Capital Management, a real-estate investment adviser, calculates that home buyers in late 2001 were borrowing an average 67.3% of a home's purchase price, compared with 41.3% two decades earlier. According to the Federal Reserve, total mortgage debt stood at 44.4% of home values in late 2002, up from 30.1% in late 1982. (Jonathan Clements, WSJ 4-16) Corporate America has aggressively locked in low long-term interest rates, so interest expense should tumble by 300 bp in relation to cash flow this year. Spreads have narrowed dramatically, easing financial conditions. And the slow recovery so far has reinforced capital discipline. (Richard Berner, Morgan Stanley 4-14) Our quantitative models are sending a number of signals that are quite constructive for the U.S. stock market. The market is currently pricing in a soft GDP recovery and no deflationary pressure. The market is pricing in earnings growth of only 7-8%, quite low compared with what we think is possible this quarter. Our new revenue model (based on GDP) indicates that next-quarter revenue growth should be 4-8%, which should enable earnings growth to significantly exceed what the market expects. Finally, our What's Working analysis shows that over the past three months, growth factors have steadily come back to life in the market, while value factors are no longer working. (Qi Zeng, Morgan Stanley 4-14) This is a worse "jobless recovery" than in the early 1990s, when the phrase was coined, said David Rosenberg, chief North American economist at Merrill Lynch. Since the economy bottomed in September 2001, total U.S. payrolls have dropped by a net 679,000 jobs, he said. By contrast, 20 months from the recession bottom in 1991 the economy had added 165,000 jobs. (Tom Petruno, LA Times 4-13) We see a market that wants to go up, and investors' sentiment creates a perfect 'wall of worry' for stocks to move higher. Currently, the S&P 500 sells at 16 times [this year's] earnings; with a 3.9 percent 10-year T-bill, it implies that stocks are undervalued by as much as 40 percent. (Michael Moe, ThinkThoughts, Think Equity Partners via Washington Post 4-13) We are in a bear market until proven otherwise. All of the previous rallies since March of 2000 have ended in failure and there is no question that an incredible amount of money has been lost by investors chasing these rallies. Our advice for the time being is to remain cautious. If the market has indeed turned the corner, we will have ample time to make commitments. We say this because the average bull market since 1900 has lasted in the neighborhood of two years. (Dan Sullivan, The Chartist via Washington Post 4-13) The Business Roundtable, a group of chief executives of large companies, reports that most of its members say their sales will increase over the next six months. But they are still pessimistic about the economy, and many plan cuts in employment. What was most striking about that report was that nearly 80% of the executives say it is the consumer who scares them. Asked to name the "greatest economic challenge facing corporate America," few chose the strong dollar's damage to exports, or weak foreign demand or rising health insurance costs. But 27% cited "weak consumer demand," and 52% picked "consumer uncertainty" stemming from war and terrorism. (Floyd Norris, NY Times 4-11) Prior to April 19, everything you earned went directly to the government without passing go, without passing through your personal bank account, according to the Tax Foundation. We work longer (109 days) to pay the federal, state and local government than we do to buy basic necessities, such as food, clothing and shelter (105 days). As a nation we will perform forced labor for 74 days for the federal government and 35 days for state and local governments. We will work 30 days to cover our Social Security taxes. (Caroline Baum, Bloomberg 4-9) In his latest published analysis this year Pimco's Bill Gross declares, `the imminent demise of bonds has been exaggerated. I still prefer an overvalued Treasury to an overvalued stock.' (Chet Currier, Bloomberg 4-8) Michael Sheldon, chief market strategist for Spencer Clarke LLC, suggests that, by one measure, investor apathy is at its worst level in five years. He estimates that the ratio of the money supply - meaning money-market accounts, checking and savings accounts, and currency in circulation --to the Wilshire 5000, a stock market index that covers 85 percent of the value of publicly traded stocks, is now at 109%. That means a lot of money that average buy-and-hold investors could be funneling into mutual funds is still locked up in ultrasafe bank accounts. In contrast, that ratio was a mere 45% in April 2000, when the market was just beginning to descend from its peak. (Anitha Reddy, Washington Post 4-06) Chances are you didn't get an 8% pay raise last year, in the middle of the bear market. But the guys who represent you as overseers on your mutual funds did. According to the latest survey from Management Practice, fund directors at the 50 largest fund companies got an 8% pay raise in 2002, with the median compensation rising to $113,000. With performance suggesting that few people in the fund business deserve a raise - it was reasonable to expect that director pay would hold steady or decline. (Charles Jaffe, Boston Globe 4-6) The typical stock fund since the mid-1980s has kept an average of 8% of its assets in cash. That's too much. Holding 4 percent or 5 percent cash is reasonable, in case shareholders bail out and want their money back, but more than that is an indication that the manager is trying to time the market -- a dangerous and foolish practice. (James Glassman, Washington Post 4-6) The average turnover for a large-cap growth fund is about 100 percent. In other words, the typical manager keeps the typical stock for only one year. That's absurd. The only good reason to buy a stock is that you want to be a partner in a great business, and few great businesses become mediocre in a year. A study by Edwin J. Elton and other scholars found that "high turnover was robustly associated with poor performance." (James Glassman, Washington Post 4-6) In the future, the monthly insurance premium for Medicare Part B is expected to rise faster than the monthly retirement [Social Security] benefit. A person who retired at 65 in 2000 paid about 6% of his retirement benefits for the insurance premium. In 2020, when the same person is 85, the insurance premium will take 10.6% of retirement benefits. A person retiring in 2030 can expect Medicare premiums to absorb 9.1% of his benefits at age 65 - but 13.6% 20 years later. (Scott Burns, Dallas Morning News 3-30) Tech Tips & News Vivisimo Next time you are net searching, give Vivisimo a try. In a quick trial of 2 searches comparing Vivismo to Goggle, Alta Vista, Lycos, MSN, Kartoo and Teoma - Vivismo produced more relevant documents than any other search engine. Google was a strong second. Lycos was worth the effort of going there. Kartoo was interesting to visit, but a little hard to use - strange interface. Alta Vista and Teoma were a waste of time. To be fair, I compared Vivismo with two other mega-search engines. SurfWax had fewer hits with more bad links. Ixquick (this being the first time I tried it) had a good amount of links, predominantly relevant. I would say Ixquick finished fourth. No conclusions should be formed with such a small sample size - so I may update if I find this initial reading to be wrong. (Factoids, 4-13) These common-sense steps will keep your machine running (1) Create a filing system for all your program installation CDs. File away the manuals that came with the programs as well as any special code numbers needed during installation. If - make that when - your hard disk crashes, you'll need to reinstall every program, including Windows. (2) If your PC and its components are plugged directly into the AC socket, unplug them right now. Then, at a minimum, get a good surge protector (one with an Underwriters Laboratory rating of UL 1449 or higher). If you can afford the $100 or so, buy an uninterruptible power supply. (3) Twice a month, spend a few moments running the Windows defragmenting program and, with some versions of Windows, ScanDisk. To find out how to do this, read the Windows manual or type the name of each program into the Help section of Windows and you'll get complete instructions. (4) Pay special attention to how your computer behaves after a major change and be prepared to undo it and fix the conflicts. Keep a diary of major changes made. That way it's easier to undo them. (5) Become familiar with what Windows calls Restore Points. These Restore Points can return your computer to the way it was before the kind of major change I just mentioned. Again, use the Windows help section - by typing in "restore point" - to learn more. (6) Learn how to start your computer if it won't boot from the hard disk. With earlier versions of Windows, that requires a start-up or crash recovery disk. You can make those by going to the icon in the Control Panel called Add/Remove Software. With Windows XP and ME, you can use the Windows installation CD to restart the computer. Consult your Windows manual, or check out www.microsoft.com to learn how to start your computer this way. (7) Find a way to back up the important information stored on your computer. If tattoos were available for hard disks, they'd all have one that says "Born to Die." (8) I know it's my constant nag, but get and install anti-virus and firewall software. (Bill Husted, AJC 4-13) Custom CD's Sony Music Entertainment has started a Web site where online shoppers can buy CD's containing songs of their choosing. But rather than appealing to casual consumers with a broad mix of music, the site is designed to promote particular artists. Currently the site offers only songs by Bob Dylan and the alternative-rock quintet Train. For $15, plus shipping, consumers can select up to 12 songs or 78 minutes of music. Josh Bernoff, a music industry analyst at Forrester Research, said "What consumers have demonstrated by their use of file-trading services is that they're very interested in assembling the pieces of music they want from a wide variety of sources for use in whatever format they want." He remained skeptical of the venture's potential. Officials at Universal and RCA Records said they had no plans to offer a custom-CD service. (Matthew Mirapaul, NT Times 4-7) Google Tricks Google lets you quickly get definitions. Simply click on a word in your search string at the top of a results page. The 'advanced search' page lets you narrow a query with a number of variables including language, date range and words to be excluded. At the bottom there's a link for searching U.S. government pages only: www.google.com/unclesam. [Note from 4-16: Even though I knew this tip, I still used standard google to search for tax forms. Big mistake.] Special codes can also hasten the hunt. Let's say all you want is recipes for kumquat dishes where the name of the fruit is in the Web page's title. You'd enter ''intitle:kumquat recipe'' in the search box. If you're only interested in recipes on commercial Web sites in Australia, you would add ''site:com.au'' to the search string. Sometimes you're unable to find a page that was on a particular Web site just a few days ago but has since vanished. For that there's the special prefix ''cache:''. Combine it with ''site:'' and you're apt to score. [Note to self: use 'site:irs.gov' for tax forms.] (Frank Bajak's review of 'Google Hacks', Associated Press 4-4) [Note: "Google" is a play on the word "googol", a number with 100 zeroes. ] E-Mail Security One way to protect yourself from damaging e-mail viruses is to use Outlook Express's Message Rules. To do this, you run Outlook Express and choose Tools|Message Rules|Mail. Now, click New and then, under "Conditions" select "Where the message has an attachment". Under "Actions", select "Delete it". This will delete any e-mail with an attachment. To accept e-mail from friends, create a new rule. This time, select "Where the From line contains people". Enter the acceptable addresses and then select "Stop processing more rules". Click OK to save your mail rules and close the dialog box. (Sue Whitehouse, Emazing 4-04) Going Wireless There are three digital receiver systems that will transfer your computer digital music (MP3's or internet radio) to traditional stereo systems. CD3o's top model costs $250. Turtle Beach's top is $350. HPs spring planned entry will retail at $300. The HP model will also transmit digital pictures from the computer and displays them on a TV screen. The top-of-the-line HP and cd3o models work wirelessly. (Peggy Rogers, Miami Herald 4-8) Going Wireless Part 2 Linksys Group Inc.'s Wireless-B Media Adapter lets you transfer digital photos from your PC onto the TV. It also allows users to scroll the music or photo library on the TV screen. Sony Corp. is pushing its own adapter, which, unlike the others, can also transmit video. But it has a serious shortcoming: The book-size RoomLink works with Sony PCs only. While the coming devices let people wirelessly move around pictures and music, it may be awhile before that becomes feasible with video. Those files tend to be larger than music files, requiring faster network speeds to play smoothly on a TV screen. So any device that moves video wirelessly will hinge on newer technologies that operate at faster speeds than today's most-popular Wi-Fi networks. (Tam & Wingfield, WSJ 4-23) The easy way to stop pop-ups is to disable Java scripting in the Advanced section of Internet Options. That's not a terrific idea, though, because disabling Java scripting will also disable your ability to take advantage of interesting features on many Web sites (including mine). Still, if you want to go this route, look at article 308446 in the Microsoft Knowledge Base. (John J. Fried, Philadelphia Inquirer 4-20) Windows 95/98/ME stores passwords in the password-list file. The file's name is a combination of your name, or a variation, and a .pwl extension. With the help of Microsoft's password editor, you can take a pass at clearing individual passwords from the file. The password editor can be downloaded at http://support.microsoft.com/default.aspx?scid=kb";EN-US;135315. (John Fried, Philadelphia Inquirer 4-13) Some scroll mouse functions that you can use in Microsoft Internet Explorer 6. To Decrease Font Size: Ctrl + Scroll Wheel Up. To Increase Font Size: Ctrl + Scroll Wheel Down. (Sue Whitehouse, Emazing 4-7) You can use MSN StockScouter Rating Summary and MSN Stock Reaseach Wizard to get some good info when researching stocks for purchase - just be sure to verify the info - because some of it is laughably wrong. Example: This is the only site that thinks HIW will more than double before the year is out. And the StockScouter Ratings appear to be based on a computer program using selected valuations and it reaches conclusions that are way out of the main stream. (Factoids 4-17) Three megapixel cameras give enough resolution for terrific 8-by-10-inch prints. Four-megapixel cameras can make prints up to about 13 by 19. Also note that digcams differ in the focusing delay between the shutter-press and the image capture. (David Pogue, NY Times 4-3) Home Page Previous Factoid Top Sites
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