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Nearly all investors are too bullish. We love being right, we love making money, and we get to do more of both when stocks are going up. The financial media, too, is predisposed to being wildly bullish - TV ratings and magazine subscriptions are far higher during a bull market than a bear market. Optimism sells; pessimism doesn't. - Mark Sellers, Morningstar 5-14-03
The number of negative to positive pre-announcements is running at a rate of about two to one. Typically, we have three earnings warnings for every company that raises its estimates. A year ago, second-half estimates were getting slashed. So far, second-half estimates have not been lowered. A year ago, expectations were for profit growth of between 25% and 50% for both the third and fourth quarters. This year, the expectation is for 12% profit growth in Q3 and 21% in Q4. Pre-Annoucements & Earnings Expectations Josh Friedman, LA Times 6-19 Thomson First Call had a warning of its own Wednesday: Don't put too much emphasis (yet) on the bad news. 'Negative pre-announcements' by U.S. companies have been modest in number so far this quarter, according to Thomson First Call, which compiles earnings data and analysts' estimates. What's more, analysts still are raising growth estimates overall for the second half, Thomson First Call said. That shows optimism remains high about a stronger economy. The ratio of downbeat pre-announcements to positive pre-announcements so far this quarter is about 2 to 1, versus the usual 2.5 to 1. Among companies in the Standard & Poor's 500 index, there were 101 warnings through Tuesday, First Call said, compared with 107 at the same point in the first quarter. For the S&P 500 overall, second-quarter operating profit is expected to be up 6.2% from a year earlier. For the second half, forecasts are even rosier: S&P 500 earnings are expected to rise 12.8% in the third quarter and 21.2% in the fourth - estimates that have crept higher in the last week. In the sizzling technology sector, hopes are especially high: Analysts forecast year-over-year profit growth of 21%, 56% and 27% for the second, third and fourth quarters for tech firms in the S&P 500. Earnings Outlook Amy Baldwin, AP via Philadelphia Inquirer 6-29 The market's recent spectacular ride could be over if corporate outlooks are bleak. "I'm cautious about the earnings warnings period. Stocks have had a rather brisk lift," said Alan Ackerman, executive vice president of Fahnestock Inc. "Disappointments might be somewhat devastating and may, more importantly, move money back to the sidelines." Analysts say companies that warn of weaker-than-expected profits for the second quarter could prompt investors to cash in some profits. But companies that cut their estimates for the last six months of the year could cause a more furious retreat by investors, who have been holding out hope for a recovery in earnings, the economy and stocks in the second half of 2003.
At Sharebuilder.com, an online brokerage based in Bellevue, Wash., that has 750,000 accounts, Chief Executive Officer Jeff Seely said in a telephone interview that the signs of the individual investor's return to the market have been very clear. Customers have tripled the volume of trading between February and June, and the average dollar amounts flowing into the market in June are 25 percent higher than in May, Seely said. Growth of the gross domestic product in the second half of the year will be twice as strong as in the last six months, according to Blue Chip Economic Indicators, a monthly survey that polls top analysts for their forecasts. One in five chief financial officers of major companies, surveyed recently by Duke University's Fuqua School of Business and Financial Executives International, say their sales will be higher in the second half because of the dollar's decline. Sticking to his forecast issued in December, Thomas McManus, chief equity strategist for Banc of America Securities in New York, told investors in a report last week that he still expects the S&P 500 index to reach 1,100 by year's end. That would be a 13% rise from Friday's close of 976.22. 'We've had five quarters of consecutive earnings growth,' Stuart Freeman, chief equity strategist at A.G. Edwards. 'The cyclical upturn in earnings that drives the market higher is now in place.'
At least four indicators seem particularly worrisome. Corporate profits aren't expected to grow rapidly until at least early next year. In May, the amount of debt taken on to buy stocks increased nearly 8%, the biggest such jump since the market's peak three years ago - a sign that investors may be getting irrationally exuberant again. Huge sums of money are flowing back into stock mutual funds for the first time in 18 months. [This seems an overstatement. See 'Fund Flows' in the 'Just the Facts' section. Flows into stock funds have just recently turned positive.] And bearish sentiment is at its lowest level since early 1987, just months before a major market crash, according to Investor's Intelligence, which polls market-newsletter writers. Such signals "are signs of a classic market top," says Charles Biderman, president of market-research firm TrimTabs.com. McDonald Financial Group, a Cleveland brokerage firm, earlier this month told clients to take some money off the table because "all the positive catalysts for higher prices are already behind us." J.P. Morgan's private bank group also has begun "emphasizing nagging concerns about the market moving up so fast," says Chris Wolfe, head of equities for the group. Mr. Wolfe says it isn't uncommon for the market to give back one-third to one-half of the points gained in the wake of such a strong rally. If that were to happen, that would put the S&P 500, now at 975, between 880 and 915.
Blacks have been more affected by the prolonged bear market than whites for several reasons, including the fact that many are new to stock investing. Then there's the unemployment rate, which for blacks is 10.8%, or twice as high as the rate for whites. Indeed, 52% of blacks said they would start investing or put more money into stocks if there were a drop in the unemployment rate, compared with 43% of whites, the survey found. According to the study, the percentage of blacks who agree that the stock market remains the best place for long-term investing dropped to 46% from 67% in 2001, while the percentage of whites holding this opinion fell to 62% from 82% over the same period. Meanwhile, blacks who don't trust the stock market with their money rose to 49% this year, compared with 38% in 2002. By contrast, 33% of whites don't trust the stock market, compared with 25% last year. In addition, 48% of blacks and 27% of whites plan to shift more of their money into cash in the coming year, while 38% of blacks and 20% of whites said they plan to move money from stocks to mutual funds during the next 12 months. GenX Increase Holdings in Property, Insurance Sheila Muto, WSJ 6-25 In the past year, Gen X-ers have decreased their investment in mutual funds and securities and are putting that money into insurance and real estate, according to the survey of 515 consumers, ages 22 to 36, conducted from late February through early March by New York Life Investment Management. Of the 170 respondents who have a financial plan, 55% say real estate is included in their holdings, up from 43% last year. Meanwhile, 71% of respondents say they invest in mutual funds, down from 85% in 2002; and 47% invest in securities, a drop from 69% in 2002. (The survey didn't separate out investments in REITs.) Life insurance tops the list of financial-plan allocations, with 75% saying they purchased life insurance, compared with 62% last year.
To those who know Mr. Grantham, this is not news. He has been bearish on the U.S. stock market for so long, some observers say it reduces his credibility. But there is a reason he has been bearish - it's called history. Bubbles disappear completely: Showing graphs of different bubbles versus their trend lines, Mr. Grantham points out that every bubble is symmetrical. If prices rise 100, 200 or 300% over their trend, bursting the bubble ends with a retreat that goes back to the trend line. Then it continues and goes below the trend line. Although stocks rose well above their trend line in the 1920s, the crash that followed gave up all the gains and then went below the trend line. Ditto the 1946-84 bull market, in the '73-74 crash. There have been similar retrenchments in the Japanese stock market, in currencies and in commodities. Stocks are still overvalued: By his measures, large-cap U.S. stocks are still priced in the top 20% of their historic range - "the most expensive 20 percent of history." Although real returns for common stocks have averaged 11% when stocks were relatively cheap, they have averaged 0 percent when they were this expensive. Long-term returns will be weak: Making what he calls "kind" assumptions about the future, Mr. Grantham expects declining price-to-earnings ratios to offset all future gains from sales growth. This would result in an annual total return of only 1.4% for seven years. We could, of course, get to normal valuations faster by having another bear market leg-down. So where should we put our money? International stocks (large and small cap), inflation-protected securities, international debt, REITs and long-term investments such as timber. (Timber, he points out, has provided a higher return than the S&P 500 index, including dividends, for nearly a century.)
Ameritrade's daily trading volume climbed 27% in May, and TD Waterhouse's rose 23%. Both reported a further 25% rise in trading for early June.
With many observers believing the bond market is weakening, there's a good chance that fund managers will attempt to lock in gains they might see with what most believe is the last rate cut the Fed will make. By selling bonds, rather than holding them to maturity, those trades would realize capital gains. Once a fund turns a paper profit into a real one, it must distribute the proceeds of the trade to shareholders. With rates so low, many municipal bond issues will be 'pre-refunded.' This means the issuing municipality issues a new bond to replace the old one. That stops the older bonds from appreciating in value, and typically prompts managers to sell them and lock in [taxable] gains. Experts suggest that muni-bond funds and longer-term government bond funds appear to be the areas most likely to see big gains payouts. The higher a bond fund's turnover - and Morningstar currently pegs average turnover among taxable bond funds at 161% - the more potential for a large distribution this year. Experts can only guess at how big the distributions will be, but most figure that a bond fund with a large exposure will still issue a distribution of less than 10%, and less than 5% in most cases. [But won't that noticably increase the taxes normally paid on fund returns? Your cap gain could equal your dividends. In such a case, the only thing that keeps your taxes from doubling is the smaller tax rate on cap gains.]
According to John Allen Paulos, author of a wonderful new book, "A Mathematician Plays the Stock Market", that's all to the good. The paradox is that, if all investors were convinced that markets were efficient, they would simply sit on their holdings, never buying or selling. In such a world, new information about stocks would never enter the market, moving the prices of stocks in an efficient way. 'The EMH is true,' he said, 'to the extent that people believe it to be false and so, by their exertions, bring about efficiency.' Cool. Paulos cites the insight of economist John Maynard Keynes that stock picking is akin to a beauty contest, where the object is not to choose the prettiest woman but to choose the woman who others think is the prettiest. Investors must anticipate, Keynes wrote, 'what average opinion expects the average opinion to be.' Consider a contemporary example: mortgage maker Freddie Mac (FRE), whose stock dropped 15% in a single day last week on news that top executives were booted out in an accounting investigation. If you believe that investing is a beauty contest, what's your move? Will investors now start bidding up the price of FRE, sensing that others will see that its decline has made it cheap? Or do they predict that the decline in the stock price will scare other investors off, driving the price ever lower? There is really no answer - either at the level of individual stocks or the market as a whole. And trying to divine the psychological reactions of other investors is excruciatingly difficult. In an efficient market, we can't tell the future simply by looking at the past. Such an admission of ignorance is the beginning of wisdom. If we can't know the future, we can stop spending time on trying to pick the precisely correct stocks at the precisely correct times. We can forget about market timing and simply take advantage of the market's broad tendency to rise. 'People need a conceptual map of the market,' Paulos told me last week. The EMH provides it. But, he adds, it is important not to become dogmatic. As super-investor Warren Buffett once told his shareholders, 'observing that the market was frequently efficient, [the EMH enthusiasts] went on to conclude incorrectly that the market was always efficient. The difference between the propositions is night and day.' Paulos agrees with Buffett's demurral, and so do I. The EMH can get carried to extremes. Paulos cites the old joke about the two efficient-market theorists walking down the street: 'They spot a hundred-dollar bill on the sidewalk and pass it by, reasoning that if it were real, it would have been picked up already.' So let's be clear: There are inefficiencies in the market. Investors do get carried away. Mister Market is truly a manic-depressive, who swings from extreme pessimism to extreme optimism. Buying shares of a company because you think they are cheap is not an irrational act. Investing in mutual funds run by managers who aspire to beat the market is not insane. The quest to beat the market is gloriously human. Don't deny it. Just put it in the proper perspective.
Buy More than One Index You need to buy more than just an S&P 500 fund. I would aim to build a portfolio of index funds that gives you exposure to large stocks, smaller companies, real-estate investment trusts, developed foreign stock markets, emerging stock markets and high-quality U.S. bonds. Stick with Your Allocation Plan How much should you invest in each of these sectors? Within reason, it doesn't much matter. But whatever percentages you adopt, it's critical you stick with them. Over 30 years, all sectors should generate fairly decent returns. But you won't collect those returns if you commit a big chunk to one sector and then panic and sell at the worst possible time. What to do? Own a little bit of everything, to get the reduced portfolio volatility that comes with broad diversification. Do not to allocate more to a [volatile] sector than you can stomach. Avoid High Costs Funds Buying these high-cost index funds (Morgan Stanley S&P 500 Index Fund B Shares levies 1.5% charge per year) makes no sense. Index funds win by incurring lower costs than their actively managed competitors. If you give up that cost advantage, you are giving up one of the major reasons to index. While Vanguard's S&P 500 fund has extremely low annual expenses (0.18% per year), you might fare even better with iShares S&P 500 Index Fund, which charges just 0.09% a year. But you will incur brokerage commissions and other trading costs with an ETF. If you plan to invest $20,000 or more and let it ride for 10 years, iShares S&P 500 will probably leave you with more money. Buy the Vanguard fund if you are investing a smaller sum, your time horizon is shorter or you foresee adding regularly to your account. Remember Asset Location It is a mistake to assume you won't get large taxable distributions from an index fund. Unfortunately, some investment styles almost inevitably lead to big taxable distributions, so you'll want to keep these funds in your retirement account. The first things you want to put in your retirement account are (1) bonds, then (2) REITs, then (3) small-company stocks and then (4) value stocks.
Now federal regulators are suggesting that tighter rules may be required on how companies value distressed securities. A tightening could push life insurers, in particular, into a financial squeeze, requiring them to borrow billions of dollars or issue shares [or raise premiums] to maintain capital requirements. Any company with sustained losses on its securities holdings must eventually take an earnings charge. But life insurers currently face the most acute risk because they pour more than 70% of their investment dollars into bonds. Even as the general bond market has been surging, credit-related declines in airline, telecommunications, utility and energy bonds have whacked insurers' investment portfolios. Investment problems may have already led some insurers to raise premiums. Several studies by Americans for Insurance Reform have concluded that poor investment performance - not greater claims and settlements - are the major reason for skyrocketing malpractice premiums. In Colorado, a study by the group found that payouts on medical malpractice claims actually declined even as malpractice premiums rose roughly 30% from 1998 to 2001. Martin Weiss, chairman of Weiss Ratings, which rates the financial strength of insurers, also sees rising premiums as an effect of poor investments. 'In the property and casualty business, premiums have been rising sharply,' he said. 'One of the big factors has been the decline in investment income, which includes portfolio losses.' Already, concern that many insurers are sitting on piles of distressed securities has prompted the SEC to ask some about how they determine if a depressed security is likely to recover. The SEC has acknowledged issuing 'a significant number of comments' to Fortune 500 companies on the issue. When UnumProvident, the nation's largest disability insurer, announced in February that the SEC had asked for information on its accounting for impaired investments, its stock dropped nearly 15% the next day, to $14.50 a share. It soon tumbled to less than $6, as shareholders' lawyers scrambled to file class-action suits, and Moody's warned of a potential credit downgrade. Unum decided to sell off many of its low-quality bonds and raise $1 billion to bolster its own capital base. The stock has since recovered to trade around $14 at the end of last week. In taking a first-quarter charge from investment losses, John Hancock Financial Services nearly doubled its estimate of charges for the year, to $750 million from less than $400 million. Despite taking more than $2.5 billion in investment charges last year, MetLife continues to hold many troubled airline securities and has more than $1.2 billion in potential further losses. Aflac, which has avoided major charges so far, has $286 million in unrealized losses from the below-investment-grade bonds.
For John in New York, the stock market has soared, gold prices are up and oil prices are a bit off for the year. Year-to-date, the Dow is up 6.7%; oil is down 6.8% and gold has risen 2.1%. John, in typical American optimistic fashion, thinks the Dow is forecasting better times ahead. Jean in Paris sees a very different world. For him, the U.S. stock market is down for the year, gold is down and oil has fallen off sharply. For Jean, Dow is down 6.7%, gold has plunged 8.7% and oil is off 18%. "Silly Yankees," Jean would say. "Nothing has changed." [Except now, from Jean's perspective, we are percieved to be 'buying on the dips'.] Einstein would say neither view is more or less real. It exists as it does for the person experiencing it. Mehra and Sharma wouldn't disagree. The reason the world looks so different is the change in currency values. The euro has appreciated 13.5% so far this year. And what's interesting is that John and Jean come to different conclusions about the signals markets are sending about the economy. What's more interesting - and controversial - is that Mehra and Sharma believe a tangible part of the movements in these markets over the past several months has been a reaction to the U.S. dollar's depreciation. If they're right, this market rally isn't signaling economic recovery. Economists are trying to solve a puzzle: how is that every asset class - stocks, bonds, commodities and gold - have been rising at the same time? "The answer is that the apparent bull run was only an adjustment for the massive depreciation in the currency in which prices of all these assets are quoted," they write. Ms. Sharma points out that the reason for this adjustment is strictly because of the dollar's precipitous fall. Had it happened gradually, there would have been no such adjustment. It's a rare phenomenon in developed countries, but stock markets in Argentina and other developed nations have reacted similarly to sharp currency drops. They soared. Ms. Sharma explained it this way: Say a European investor used to spend 30 Euros for one share of Microsoft. If the Euro strengthens 20%, that same investment buys 1.2 shares, assuming the shares are still trading at the same price. The difference between how many Microsoft shares 30 Euros buys now compared with what it used to buy "becomes an arbitrage opportunity," she explained. "Local players say, 'Why give a free ride to the Europeans.' Local players would do away with the arbitrage and bid up the market." The U.S. real-estate market in the 1980s provides something of a different analogy. The dollar depreciated against the yen, giving Japanese greater buying power. They poured their money into real estate. While the total amount purchased by Japanese was only a small percentage of the entire value of U.S. real estate, nearly all properties appreciated in value.
Even if the SEC does not ban the use of shareholder dollars, but requires greater disclosure around them, firms may look to other ways of generating this revenue, the report states. "The way you get a better handle on what soft dollars are used for is through better disclosure," said Daniel Goldberg, co-author of the report. "People are less likely to go to a strip club if they have to disclose it." Revenue sharing agreements contribute an estimated $1 billion annually to brokerage firms' bottom lines, Bear Stearns' report notes, and distribution costs for fund companies could rise if this funding source is undermined by new regulations. S.E.C. Takes On Commissions Floyd Norris, NY Times 6-11 A law passed in 1975 created a "safe harbor" for money managers who did not seek the lowest commission costs but instead used the commissions to pay for certain services. Before the end of fixed commissions, research had commonly been provided as part of the package of services paid for with commissions. In a typical soft-dollar trade, a fund might pay a commission of 5 cents a share on a 10,000-share order, when it could have paid 2 cents a share. The extra 3 cents, or $300, would go to the research provider. Some critics say it is difficult to know the extent to which a given soft-dollar payment benefits the fund that paid the commission, as opposed to other accounts run by the same manager. Bond funds, for example, generally do not pay commissions on trades and so might not pay their share of the costs for some equipment that benefits both stock funds and bond funds.
Companies in the service sector like supplemental-health insurer Aflac or Citigroup, by contrast, are rarely thought of as dollar plays. Yet throughout the 1990s, the advertising, insurance, retail, telecom and courier industries expanded overseas even faster than did manufacturers. Now, many of these service-oriented companies also are poised to benefit from the falling dollar. Two examples: a spokesman for Wal-Mart says, the impact of a weak dollar contributed to a 14% jump in foreign sales from the year earlier. UPS reported $6 billion in domestic sales for the first quarter, a rise of 2% over the year-earlier period. But the company's $1.3 billion in overseas revenue was up nearly 24%, helping the courier exceed profit expectations. While most big manufacturers insulate themselves from currency fluctuations, far fewer service companies use financial hedging, says Rebecca McCaughrin, a Morgan Stanley economist.
Two factors are most troubling. First, employment should not turn down sharply after only a year of economic expansion, although employment may be slow to rebound, as employers use their existing work forces more extensively until they are convinced that the expansion is for real. Second, measures of economic friction should begin to turn positive early in an expansion. These include rising sensitive prices, higher short-term interest rates and rebounding hourly wage increases. This time, those measures, which are contained in lagging indicators, continue to fall. On the other hand, recessions do not persist when economic activity expands for six consecutive quarters. Furthermore, profits are growing faster than economic activity. The leading indicators are positive and growing faster than prevailing conditions. To some extent, all recessions are different. But, typically, profits fall sharply during contractions and rebound strongly early in expansions. Stock prices tend to lead economic activity. Interest rates fall about a year into an expansion and then start to rebound. Inflation remains tame early in an expansion and then begins to rebound after a year of above normal growth. This time, those patterns have not persisted. Some bad patterns also are absent now. Bank lending capacity has not been eroded by the recession. Federal budgetary policy is much more expansive than in many previous anemic recoveries. It does not look like a recovery, but neither is it consistent with a recession. Perhaps we need to restore Jimmy Carter's description of economic malaise. Or maybe, the concept of business cycles no longer means what it did when Mitchell and Burns were going about their work.
2. You shall not worship false management idols. Managers who top the charts for a quarter or a year are lucky. They're not investment deities. Few managers remain popular for a decade or more. Avoiding the "guru du jour" is one way of making sure you end up with funds that can stand the test of time. 3. You shalt not think short-term. [Wish he had also said 'Do not invest short-term money in long term vehicles like the stock market'.] 4. Remember your asset allocation. [Wish he had said allocation AND 'location'. See The Asset 'Location' Decision - Hal Varian, NY Times] 5. Honor your investment objectives. Keep your goals in sight, rather than getting greedy and focusing solely on how to maximize returns. 6. You shall not commit non-diversification. 7. You shall not fall in love with your funds. A fund that no longer fits your current asset allocation and investment objectives, or that has stopped hitting your return targets, doesn't belong in your portfolio, even if it achieved great things for you in the past. 8. You shall not lie about your own risk tolerance. Just as you wouldn't watch a horror movie if you thought it would give you nightmares, so should you avoid funds where downside risk gives you nausea. 9. You shall not be gluttonous and own too many funds. Five to 10 funds should be sufficient for most investors. 10. You shall not covet your neighbor's winner. Just because a fund works for friends and relatives doesn't make it right for you. If your investments have you headed toward your goals, envying the returns of others will simply lead you to muck up a successful portfolio.
Wall Street is still trying to cash in on the lingering appetite for junk by churning out new bonds faster than ever, and creating junk-bond mutual funds. The $18 billion raised from the sale of junk bonds in May was a record for any month, according to Thomson Financial. But investors have started turning away, withdrawing some of the money they poured into junk-bond funds and moving it back into stocks. Junk-bond funds, which had been the most popular category this year, had more cash flow out than in during the last two weeks of May, according to AMG Data Services. The gap between the yields on junk bonds and Treasury notes, a difference known as the spread, is still above its historical mean of 5 to 5.5 percentage points. It has plunged from 10.6 percentage points last fall and is now around 6. Margaret Patel, who manages the $6.6 billion Pioneer High-Yield bond fund, argues that the spread could drop below its historical average, which could translate into an additional gain of about 15% for junk-bond holders. Ms. Patel said she could make a case for buying the junk bonds of companies that should benefit from an economic rebound. After all, she said, growth in the overall economy is the single best tonic for junk bonds. The default rate has been high but falling: about 1 of every 15 issuers of junk bonds defaulted in the last 12 months, she said. The historic average, she said, is about 1 of every 21 issuers. Danger in Junk Bonds Ian McDonald, WSJ 6-3 The recent junk-bond rally has drawn record billions to high-yield bond funds. What junk's new-found fans might not realize is that their own frenzy has fueled much of these recent gains. When interest cools - and fund-flow data suggest that's starting to happen - the junk market may live up to its name. High-yield funds, on average, boast an 11.3% total return this year, according to Morningstar. [And up 23% since early October according to a Merrill Lynch junk-bond index] The yield from the average junk fund is 8.2%. High-yield funds netted $14.4 billion through April 30. Since the high-yield market is fairly illiquid, similar to that for small-cap stocks, steep inflows to junk funds can boost prices as managers buy up shares with the new cash. [Gregory Zuckerman WSJ 6-1: In 2000, the average high-yield fund lost almost 8%. Last year, the funds lost 2% on average.] Default Rates for Junk Bonds Fall Reuters via LA Times 6-13 The global junk bond default rate fell to 6.4% in May from a revised 6.7% in April but will linger around unchanged levels over the next year, Moody's Investors Service said Thursday. The default rate on junk bonds, based on the number of issuers defaulting over the last 12 months, has declined from a peak of 10.8% in January 2002. It stood at 8.3% at the beginning of the year. The U.S. junk bond default rate edged up in May to 6.05% from 5.86% in April, according to Moody's. Default rates often track rating downgrade trends, which still are signaling credit stress. Moody's downgraded 3.8 ratings for every one it upgraded in the first quarter and put 4.5 companies on review for downgrade for every one it put on review for upgrade. One silver lining is that the size of defaults is dropping significantly, from an average of about $1.2 billion last year to about $500 million in 2003. Vanguard High-Yield Corporate Fund Closes Reuters via LA Times 6-12 Mutual fund giant Vanguard Group took the rare step Thursday of turning away new investors from its junk bond fund, reflecting the big influx of cash being pumped into these hot-performing portfolios. The "cooling off" period for the $9.2-billion Vanguard High-Yield Corporate Fund is expected to last at least three months, Vanguard said. "Their decision is more than likely a symptom of this gold rush" into junk bonds, said Eric Jacobson, an analyst at Morningstar. "People are chasing returns, chasing high yields, barreling into this area of the market." Just last week, investors deposited a net $1.45 billion into U.S. junk bond mutual funds, the biggest inflow since February and the third-largest weekly inflow on record, according to data tracker AMG Data Services. Vanguard High-Yield Corporate Fund is up about 10% this year and has pulled in net new cash of $1.4 billion during the first five months of the year. The average high-yield fund has risen 12.8% year to date through June 5, according to Lipper. More High-Yield Stats Chet Currier, Bloomberg 6-6 In the first four months of 2003, Financial Research Corp. said, high-yield funds pulled in $14.4 billion, $6 billion more than their nearest rivals, intermediate- and short-term bond funds. Over the past five years, junk-bond funds now show an average annual gain of 2.3%. Last year at this time, when rally hopes faded in both junk bonds and stocks, a broad Merrill Lynch high-yield index showed losses of 7.7% in June and 3.9% in July. Rapid mood swings can be down as well as up.
Foreigners bought a net $541 billion of fixed-income securities (Treasuries, agencies and corporates) in the year ended March 31. While foreigners always buy more bonds than stocks, the latest ratio of bond-to-stock purchases of 18 to 1 compares with 1.7 to 1 at the Nasdaq peak in March 2000. The percentage of bond bulls tracked by Market Vane has been over 70% for almost a year, Bianco said. Extremes in sentiment tend to be contrarian indicators. Borrowing by primary dealers using securities as collateral is at an all-time high of $638 billion (four-week moving average), more than double the amount of three years ago. Even if the Fed doesn't raise interest rates anytime soon, the bond arket still represents a bubble to Bill Fleckenstein, president of Fleckenstein Capital in Seattle. `A bubble implies the tail is wagging the dog,' Fleckenstein said. `It's the way stocks warped the economy (in the late 1990s), helped create companies that had no business existing, and misallocated capital.' Based on his definition of a bubble as a market changing behavior outside the market, `the bond market is an absolute bubble, leading to a misallocation of capital into housing,' he said. `It's helped people to leverage up and live beyond their means.' During the stock market bubble, traders believed that the Fed would respond to every crisis by cutting rates, thereby putting a floor under stock prices. Now the Fed is offering similar protection against a decline in long-term bonds by implicitly guaranteeing to anchor short-term rates at abnormally low levels. According to Fleckenstein, sooner or later, the inducement will backfire. More on the Bond Bubble Dave Kansas, WSJ 6-18 Last week, the yield on the 10-year Treasury moved so low - the lowest in 45 years - that one of two scenarios seemed plausible: Either a nasty deflationary cycle was looming (good for Treasurys) or the bond market had turned Bubblicious (not). Given how richly priced bonds have become, it doesn't take much to rattle the market. Tuesday, the CPI core measure, excluding volatile food and energy components, rose 0.3%. That's the biggest rise in nine months. Tack on wage growth (about 3% from a year earlier), the slackening dollar, fiscal largess and higher energy prices, and pretty soon the cards in the deflationary hand start to look no better than a couple of threes. "The bond market is pricing in a scenario that is extremely unlikely," says Ian Shepherdson, chief U.S. economist at High-Frequency Economics. "I can't see anything to justify bond yields at their current levels. There isn't any deflation threat - and there never was one." What Bubble? David Nicklaus, St Louis Post-Dispatch 6-20 Scott Colbert, director of fixed income at Commerce Trust Co., says most of the bond market's big players, like pension funds and insurance companies, are betting [that bond rates have reached] a bottom. They're concentrating on short-term bonds, which yield less than longer-term bonds but won't lose as much value if rates shoot up sharply. The average money manager's portfolio duration is shorter than it's ever been, he says. But Colbert's not so sure. In his portfolios, he's keeping duration neutral, holding short- and long-term bonds in the same proportions they represent in bond-market indexes. "Eventually, you will get the reversal of rates, but it might come from a painfully low level," he said. "I'm not discouraging people from buying bonds." Colbert says talk of a bond-market bubble overstates the danger. He says the market is more like a rubber band that has been stretched too tight and will snap back eventually, leaving investors with modest but manageable losses. Related articles: Reduce Your Bond Portfolio's Risk - Jonathan Clements, WSJ, More Bond Tips - Gregory Zuckerman, WSJ, Snag Looms in Bond Funds - Charles Jaffe, Boston Globe, Treasurys are a Bad Bet Now - Clements, WSJ / Baum, Bloomberg
Throw in all sorts of other types of risk - currency risk, socio-economic risk, management risk and many more - and you have most of the reasons why traditional investment advice suggests a diversified, eggs-in-many-baskets approach. 'Real people making real decisions experience risk as a personal and subjective assessment of their capacity to deal with the probability or consequences of loss,' says Richard Geist, who publishes the Strategic Investing newsletter and heads the Congress on the Psychology of Investing. 'What worries you determines what your portfolio should be ... which is why you want to assess risk in a personal manner.' A list of Main Street Risks (1) The risk of outliving your money. (2) The risk of losing it all. (3) The risk of not doing as well as you think you should with your money: Keeping up with the Joneses. (4) The risk of not reaching your financial goals and having to dramatically adjust your standard of living. Says Geist: 'Risk measures tend to be objective, but the way someone feels risk is totally subjective. They may have no realistic worry about running out of money, but if it's keeping them awake at night, they need to treat it like it is a very real worry. ... These subjective factors determine your risk profile and what investment strategies you can live with. By addressing the worries you have, you can develop a strategy that addresses those concerns directly, rather than dealing with risk from a more academic perspective that sounds good but that may not let you sleep at night.'
The money is spilling everywhere else, too, into houses, into bonds - and into companies whose existence the nation might be better off without. The economy's No. 1 problem is an oversupply of capital assets, thanks to exuberance from the 1990s and earlier. Too many airplanes for consumer demand. Too many microchip factories. Too many car plants and fiber-optic phone lines. Greenspan's greenback inundation aims to boost demand and put more idled assets to work. But while low rates have goosed consumer spending, they have also propped up troubled companies that are contributing to the supply problem. 'What Japan has shown us is that the way to fight deflation is to get rid of overcapacity as fast as you can,' Richard Bernstein, Merrill Lynch's chief U.S. market strategist, said last week. 'And the Fed is doing the exact opposite now. What the Fed is doing is keeping the oversupply situation intact by lowering the cost of capital.' Bernstein is suggesting that the Fed's liquidity binge could cause Japan-like symptoms here. His exhibit No. 1: the semiconductor industry, which operates at only two-thirds of its potential but shows no signs of purging its weaker members. 'We're not seeing any consolidation in an industry that's operating at 65% capacity utilization and where that utilization is falling and product prices are falling,' he said. Cheap, plentiful money has allowed struggling companies to refinance at lower rates, stay in business and continue pumping excess product into the economy. Cheap money sped U.S. Airways' exit from bankruptcy court two months ago, and what was the first thing U.S. Airways decided to do in an industry that has perhaps 20% too many airplanes? Buy more airplanes. Cheap money has driven up the Nasdaq index in a "misallocation of capital" reminiscent of the 1990s, Bernstein says, and he wouldn't be surprised if initial stock offerings revive. He does not think the United States will imitate Japan, and neither he nor other analysts believe the Fed should raise rates and tighten the money supply. A move by Greenspan to raise rates would push the economy into a recession, possibly a bad one. On the other hand, "it might be better if the Fed were to maintain a stable monetary policy rather than to be so aggressive," Bernstein wrote in a May 23 report.
Louis Navellier, the editor of the MPT Review and Blue Chip Growth Letter advisory services, says that this development means that stocks are undervalued. Mr. Navellier, whose company also manages some no-load mutual funds, said recently that he had "no doubt" that we're "at the beginning of a great bull market." As Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, argues, the stock market is an instrument for long-term investment. As a result, it should not be viewed as a substitute for short-term bonds. A more appropriate comparison would be to the rates paid by the 10-year Treasury note or 30-year bond; the yield of the S.& P. 500 is still lower than both. Professor Siegel allowed that his theoretical argument should be tested. Following his suggestion, I analyzed the stock market from 1871 to the end of 2002, seeking correlations between the market's relative yield and its subsequent performance. None of my tests found any meaningful support for the notion that the stock market offers above-average gains when its yield is above short-term rates. But the tests did find that smaller dividend yields are generally followed by lower long-term returns in the stock market, confirming what many researchers have found. The dividend-yield model has been only moderately successful in predicting the stock market's short-term direction. But even considering its failure for several years in the 1990's, its record at predicting five-year market moves has generally been impressive. Before the 1990's, for example, the market's record low yield was reached just before the 1987 crash. Its previous low was at the start of the 1973-74 bear market. Because dividend yields are so low, the model is bearish for now. My tests of that model predict that over the next five years, the stock market is unlikely to produce annualized returns as high as the market's long-term average of about 10%. After-tax Return Stats Floyd Norris, NY Times 5-30 The five-year Treasury note now yields 2.26% before taxes. Adjust that for the maximum 35% tax rate in the new tax law, and the yield is 1.47%. The S&P 500 collectively has a yield of 1.77% now, giving an after-tax return of 1.50% because the new tax law cuts the dividend tax rate to 15%.
What's the biggest misperception people have about retirement investing? I'd point out three. First, people think they're going to get a 7% real stock return over time. That was a one-time gift [during a bull market], and not many people got it. Second, the overwhelming majority of investors still believe in the Returns Fairy - that their money managers can beat the market for them. Third, they also believe in the Market Timing Fairy - that newsletter writers and investment strategists know where the markets are headed. In planning for our retirement, what's a sensible return to expect from equities? People tend to confuse economic growth with [stock] price growth. True, the nation's GDP [gross domestic product] grows at an average rate of just over 3.5% a year. But thanks to the investment bankers, we lose about 2% of that to net new-share issuance, so the real per-share increase in dividends and earnings is in the vicinity of just 1.5% a year. Three years ago, no one believed that, but recently it's gotten easier to understand. Add to that a 1.5% dividend, and hey presto, you can expect about a 3% real return from stocks. Just the Facts Fund Flows I Investors poured a net $12.1 billion into stock funds in May, the second straight month of inflows after outflows in nine of the previous 10 months, according to data reported by the ICI. With May's inflow, stock funds have taken in a net $17.1 billion year-to-date. Bond funds took in a net $9 billion in May, the institute said, bringing their year-to-date inflow to $62.5 billion. Money market funds were hit by $17.8 billion in net redemptions last month, bringing their year-to-date outflow to $144.5 billion. [Where did the other $65 billion from money market's go?] (Josh Friedman, LA Times 6-27) Fund Flows II Investors poured a net $16.1 billion into equity funds in April, the biggest monthly inflow in more than a year. From June through March, stock funds suffered net withdrawals in all but one month. Bond funds took in $10.6 billion in April - the first month in a year that they were less popular than stock funds. As of April 30, investors had $2.77 trillion in stock funds, $2.16 trillion in money funds and $1.56 trillion in bond funds. (Josh Friedman, LA Times 5-30) [Jonathan Fuerbringer, NY Times 5-25: AMG Data Services estimates there is $2.15 trillion invested in money market mutual funds, only slightly below the $2.27 trillion a year ago.] Pre-Election Year Gains Stock indexes are on course to post their 16th consecutive pre-election year gain. Since 1914, the Hirsch Organization's Stock Trader's Almanac says, the market has averaged a 50% gain from its low in the second year of the presidential cycle to its high in the third, or pre-election, year. In 1998-99, it gained 52%; in 1994-95, 45%. A 50% rise from the S&P 500's 2002 low of 776.76 would take it to 1,165, or about 16% higher than its recent readings around 1,000. Of course market history seldom repeats exactly, and the present rally could bring more or less than that. Over the last 10 presidential cycles, the rally's gain has ranged from as much as 81% to as little as 21%. (Chet Currier, Bloomberg 6-20) Housing Update In 2001, the most recent year for which data were available, 7.3 million homeowners spent more than half of their income on housing, compared with 5.8 million in 1997. Nearly 7 million renters were in the same predicament, according to a study by the Joint Center for Housing Studies of Harvard. Mortgage delinquency rates are on the rise nationwide, with an estimated 400,000 to 450,000 homeowners in the process of foreclosure at the end of 2002. That's almost double the rate in 2000, but well below the peak years in the mid-1980s. A delinquency is when a conventional loan is 90 days past due. (Chris Reidy, Boston Globe 6-17) Positive Sentiment Not Kiss of Death Last week, Investors Intelligence reported that only 20.9% of newsletter writers were bearish. The last time the percentage of bears was lower was on Jan. 31, 1992. At that time, bulls numbered 50.9% vs. 19.3% [for the] bears. Over the next 12 months, the Nasdaq gained 12.3% and Russell 2000 gained 11.8%, while the S&P 500 tacked on 7.4%. The point we want to make here is that an extremely low bearish contingent is not always the 'kiss of death.' (Dan Sullivan, The Chartist via Washington Post 6-15) Outside Directors Almost all of the several dozen academic studies on board independence have found that it has no correlation with company performance or that companies generally perform worse when they have more outsiders on their boards. A widely cited academic study was begun in the mid-1990's by Sanjai Bhagat, a finance professor at the University of Colorado at Boulder, and Bernard Black, now a law professor at Stanford. Examining nearly 1,000 publicly traded American companies, the professors found that from the end of 1990 through 1993, the companies that performed the worst were those whose boards had the greatest proportion of outside directors when the period began. (Mark Hulbert, NY Times 6-15) See Independent Directors Are Not a Cure - Ian McDonald, WSJ Finance Magazines The bear that has wandered through the stock market tipped over a rack of magazines focusing on personal finance. There were at least 10 personal finance magazines during the boom years; now there are three: Money, Kiplinger's Personal Finance and Smart Money. Many others - like Worth, Mutual Funds and Bloomberg Personal Finance - are now closed, victims of a three-year bear market. Advertising pages at Smart Money have dropped sharply: From a high of 1,289 in 2000, Smart Money finished 2002 with 748 pages, according to the Publishers Information Bureau. Newsstand sales, a significant indicator of current consumer interest, dropped 16.6% in the second half of 2002, to 55,507, according to the Audit Bureau of Circulations. Two years earlier, newsstand sales were 96,269. Money magazine seems to benefiting from a creeping, halting recovery, with ad pages up 12.46% in the first half of the year. But Kiplinger's continues to struggle, with a decrease of 11.51% in the same period. (David Carr, NY Times 6-2) Quick Facts, Stats & Opinions The rally has also been deep. For example, in May, advancing stocks outnumbered losers every week, reaching a peak at the end of the month when nearly nine out of 10 stocks on the NYSE gained in value. (Jim Fuquay, Ft Worth Star-Telegram 6-29) The bear camp is a scary and lonely place, just as it should be when a downturn of great importance is at hand - and one is at hand. The next decline should be a historic thrust that sweeps through all corners of the equity markets. (Steve Hochberg and Peter Kendall, Elliott Wave Financial Forecast via The Washington Post 6-29) Most of us by nature are results-oriented; without performance we lose interest. Lack of patience is probably the biggest single impediment to success in the market. An awareness of the 'big picture,' the knowledge that the long-term historical bias in the market is upward, will help instill the confidence necessary to exercise patience during times when that uptrending bias is interrupted. . . . Most of investing involves waiting for the good things to happen. (Dick Davis, Dick Davis Digest via The Washington Post 6-29) Over the last nine years through May 31, a prominent U.S. index fund, the Vanguard 500 Index Fund, has climbed 10.5% a year while an overseas-stock rival, the Schwab International Index Fund, has had to settle for a 2% annual gain. (Chet Currier, Bloomberg 6-27) Nationwide, state-tax revenue in Q1-03r rose only 1.4% from the same period in 2002, according to a report from the Nelson Rockefeller Institute of Government. That's down from growth rates of 1.9% in last year's fourth quarter and 2.5% in the July-September quarter of 2002. Personal income tax revenue fell 3.1% in the latest quarter. Sales-tax revenue rose only 1.9%. Corporate income tax revenue surged 10.3%, reflecting legislated tax increases. States enacted net tax increases for the fifth quarter in a row. (Tom Herman, WSJ 6-26) In 1995 Japan's 10-year government bonds were yielding 3.5%, and were considered, says Morgan Stanley's chief economist Stephen Roach, "the bubble to end all bubbles." But as deflation took root there, a long rally pulled yields to 0.4%. (Michael Freedman, Forbes 7-7-03) The Nasdaq market said Tuesday that short interest rose 5% between mid-May and mid-June to a record high. The total number of shorted Nasdaq shares was 4.604 billion as of June 13, compared with 4.386 billion on May 15. The previous record was 4.456 billion as of mid-April. The NYSE said last week that the number of shorted NYSE shares rose 2.3% between mid-May and mid-June. (Tom Petruno, LA Times 6-25) Salaries of U.S. workers will probably rise this year at the slowest pace in at least 10 years according to a survey by the Conference Board, a New York-based research group. Look for salary gains of 3.5% this year, down from a previously projected 4%. That would be first time in a decade for median increases to move "significantly" below 4%, the group said. Companies also projected a 3.5% increase for 2004. The research group projected a 2.6% increase in CPI for this year and 2.7% for 2004. (Bloomberg via Houston Chronicle 6-24) Despite the upward movement this spring, the S&P 500 is just barely in the black for the last year, closing Friday about 0.8% above its level 12 months earlier. But if you'd put $100 into an S&P 500 index fund on the 20th of every month, starting June 20, 2002, you'd have had $1,353.50 by Friday morning, on the one-year anniversary - a 12.8% gain on the $1,200 invested. (Jeff Brown, Philadelphia Inquirer 6-22) There are about 120 companies in the S&P 500 paying dividend yields that top the 10-year Treasury bond yield. (Janet Brown, No-Load Fund-X via Washington Post 6-22) The stock market was extremely oversold in mid-March and much of the initial turnaround can be attributed to short sellers covering their positions. But 1) the rally has generated a much healthier buying interest than even short-covering alone can provide, and 2) all rallies, whether short-term in nature or the start of something bigger and more sustainable, all begin with short-covering. And it looks and feels like this one has more staying power than the bear market rallies of the recent past. (The Primary Trend via Washington Post 6-22) Honda averages $1,581 in profit per vehicle sold in North America and Toyota $1,214. G.M. made $701 per vehicle last year, and the Chrysler Group made only $226 per vehicle. The Ford Motor Company actually lost an average of $114 on every vehicle it sold in 2002, according to this measure. Nissan had a North American profit of $2,069 per vehicle. In 1999, Nissan lost $2,162 per vehicle. (Danny Hakim, NY Times 6-19) An encouraging sign can be found in the 41 categories of equity funds that Lipper tracks. Of those categories, all but two have positive returns so far this year. And the two that don't are the type that fare best in bear markets - gold funds and specialty equity diversified funds. Each of the 25 largest stock funds have positive returns so far this year, 20 of them in the double digits, according to Lipper. (Amy Baldwin, AP via Yahoo 6-18) William Bernstein, author of the book Intelligent Asset Allocator, and otherwise a neurologist in Oregon, says 'More money has been lost reaching for yield in the bond market than has ever been lost on stocks.' (Todd Mason, Philadelphis Inquirer 6-17) The fact that stocks are looking up should not come as a shock when the government passes a big tax cut to goose the economy and short-term interest rates are driven to near-zero levels, sending money on a frantic search for something other than safe havens. It's like hitting a juiced baseball with a corked bat. (Steven Syre, Boston Globe 6-17) When deflation hovers around the zero point, it means some prices are going down, and some are going up. Average people probably wouldn't even notice that sort of deflation. But if they did, it would likely have only a modest impact on their spending. Prolonged deflation can make people hold their money and not spend. (Jesse Eisinger, WSJ 6-16) Through the late 1970s and early 'Eighties, the personal savings rate hovered around 10%. The savings rate went into a long-term swoon in the 90s, reaching the 2% level - and since recovered to 3.7%. But after years of single-digit savings rates, not to mention the plunge in equity prices, net worth ran 4.9 times greater than after-tax income for all households at the end of the first quarter; while after years of 10% rates of saving, net worth was only 4.6 times greater than income by 1985. (Gene Epstein, Barrons 6-16) A report, by Cap Gemini Ernst & Young and Merrill Lynch, concluded that there were two million wealthy [having financial assets of at least $1 million] people in the country at the end of 2002, down from 2.1 million the previous year. Worldwide, the number of wealthy people grew to 7.3 million from 7.1 million, and their financial assets increased by 3.6 percent, to $27.2 trillion. The ranks of the wealthy increased by 100,000 in Europe, to 2.6 million. (Jeff Sommer, NY Times 6-15) Last week, Investors Intelligence reported that only 20.9% of newsletter writers were bearish. The last time the percentage of bears was lower than last week's reading was on Jan. 31, 1992. At that time, bulls numbered 50.9% vs. 19.3% [for the] bears. Over the next 12 months, the Nasdaq and Russell 2000 gained 12.3% and 11.8%, respectively, while the S&P 500 tacked on 7.4%. The point we want to make here is that an extremely low bearish contingent is not always the 'kiss of death.' (Dan Sullivan, The Chartist via Washington Post 6-15) All in all, the stock market has come a long way very quickly. This strong showing, in the absence of an equally solid performance from the economy, suggests that the market has gotten a little ahead of itself for the time being, although we remain positive for the year as a whole. (Selection & Opinion, Value Line Investment Survey via Washington Post 6-15) According to the most recent study by the Employee Benefit Research Institute and Investment Company Institute, the average account balance of 401(k) participants who held accounts since 1999 fell just 4% in 2001, even though stock market averages declined 12% that year. According to another study by Vanguard, the average 401(k) plan participant who invests in Vanguard mutual funds saw his account balance decline by just 1% a year during the three years ended 12-31-02, while stock prices fell an average of 15% a year. (Humberto Cruz, Chicago Tribune via the Kansas City Star 6-15) Through yesterday's close, the S&P 500 has gained 29.9% gain over the 245 days since Oct. 10's lows. Even from the somewhat higher lows of March 12, the S&P has rallied 26.6% over 92 days. (Donald Luskin, SmartMoney 6-13) Individual investors have scaled back their expectations as a result of the bear market, according to a survey by Harrisdirect. Before the slide three years ago, the median expected return of investors surveyed was 13% per year vs. a return of 7% expected now. (Steve Gelsi, CBS.MarketWatch 6-14) There are fewer and fewer doubters out there. The most recent Investor Intelligence poll found 58.7% of financial advisors were bullish, while 16.3% were bearish. That's the lowest bearish number since April 1987 and the widest difference between the optimists and the pessimists since August of that year. (Jesse Eisinger, WSJ 6-12) In the past few weeks, fund investors have written to suggest that investors can get around the high tax rate on bond interest by investing in [bond] mutual funds and receiving fund ''dividends.'' It would be a great strategy, if there were a shred of truth to it. (Chuck Jaffe, Boston Globe 6-12) China, an export powerhouse, essentially fixes the yuan at 8.28 to the dollar. While the dollar has fallen by more than 30% against the euro over the past 16 months, it hasn't budged against the yuan. Despite disruptions from the SARS epidemic, China said this week its exports for the first five months of the year were 34% above a year earlier. (David Wessel, WSJ 6-12) The top-performing fund over the past ten years is the $15.8 billion Vanguard Health Care Fund, which boasts a nearly 20% annualized gain in the decade ending May 31. (Ian McDonald, WSJ 6-10) Small businesses represent 98% of all firms and employing 50% of the work force. They pay 44% of the nation's payroll and generate 41% of all the nation's business receipts. (Clare Ansberry, WSJ 6-9) Some 70% of the retailers surveyed by Shop.org said that their Internet divisions generated operating profits last year. The results, based on data from 130 merchants, compare with a 56% profitability rate in 2001 and a 43% rate in 2000. U.S. online sales will reach $96 billion this year, with at least seven merchandise categories showing at least 40% growth, according to a Forrester Research and Shop.org study. (Heather Landy, Ft Worth Star-Telegram 6-8) In 2002, $43.5 billion in retail sales occurred over the Internet, up about 26% from 2001, according to CB Richard Ellis Investors, the Los Angeles-based real-estate investment-management unit of CB Richard Ellis Inc. Internet sales accounted for 1.3% of total retail sales (excluding food service) in 2002, up from 1.1% in 2001. (Sheila Muto, WSJ 6-12 ) The 10 largest capitalization companies make up about 23.4% of the S&P 500 index. When you invest $1,000 in the 500 index fund, $234 of the $1,000 investment goes into [only] GE, Microsoft, Exxon-Mobil, Pfizer, Citicorp, AIG, Johnson & Johnson, Coke, and Intel. (Alan Lavine, Boston Herald 6-8) On Wednesday, 915 companies on the New York and American exchanges and the Nasdaq hit 52-week highs; just nine hit lows. (James Glassman, Washington Post 6-08) According to Wall Street's statisticians, the volatility of the average stock in the Standard & Poor's 500-stock index has been declining for six months, and recently approached a five-year low. (Michael Santoli, WSJ 6-8) According to Morgan Stanley Market Strategist Steve Galbraith, since 1980, the monthly return of the top 100 performers in the S&P 500 has exceeded that of the bottom 100 by about 25 percentage points, with only occasional and relatively brief periods of wider divergences. In the past couple of years, that spread sometimes ballooned to more than 50%. Now, the gap is back to the long-term average. A major reason is that stocks' valuation discrepancies are much smaller than before, when bubble distortions were rife. (Michael Santoli, WSJ 6-8) About 6.1% of all Americans were out of work in May - the highest percentage since July 1994, the Bureau of Labor Statistics reported Friday. That translates to about 9 million jobless Americans. It's become even more difficult for the unemployed to find jobs - it takes an average of 20 weeks. Two years ago, the average unemployed person found work in 12 weeks. (Michael Kanell, AJC 6-8) The speculative fervor of the technology bubble has never been removed from the stock market. In most market cycles, people become incredibly risk-averse. That never really happened this time around. Institutional investors were consistently more concerned with missing the turn in the market than in preserving capital. Look at the relative valuation of risky stocks: their valuations never contracted. The whole technology sector is that way. (Richard Bernstein, chief market strategist at Merrill Lynch via NY Times 6-8) Investors may be losing some of their risk aversion with the largest redemptions from money-market funds since the bear market started. Some of this money is likely leaking into the stock market. The cash mountain is still close to a record high relative to market capitalization and is earning virtually nothing at current interest rates. This implies considerable potential for funds to flow into stocks as confidence builds. (Martin Barnes, Bank Credit Analyst via Washington Post 6-8) The majority of first-quarter earnings have been positive. The weak dollar has also helped multinational firms. Valuations remain at reasonable levels relative to interest rates and should lead to additional monies being allocated to equities by both institutional and individual investors. (Jim Collins, OTC Insight via Washington Post 6-8) If you have core holdings in Treasuries and GNMAs [that] you want to protect without selling, there is another move to consider. Your bond portfolio can be hedged against rising rates using mutual funds. Rydex Juno and ProFunds Rising Rate Opportunity funds sell short the 30-year Treasury bond, gaining value when interest rates rise. . . . You don't want to hold these funds permanently. They are only for when you expect interest rates to rise and do not want to incur the capital gains taxes and fees of selling the bond portfolio. (Bob Carlson's Retirement Watch via Washington Post 6-8) At a 3.4% yield, Treasurys are trading at 29 times their interest payments for the next 12 months. This suggests that stocks, which are at 19 times forecasted earnings, could climb over 50% and still be fairly valued relative to bonds. I wouldn't bank on that sort of gain anytime soon. (Jonathan Clements, WSJ 6-7) Overall, U.S. home prices have climbed a cumulative 39% over the past five years, according to home-finance corporation Freddie Mac. (Jonathan Clements, WSJ 6-7) When stocks recover, history shows they do so with a bang. Rebounding from the 1973-74 bear market, the Dow soared 38 percent in 1975. It was up 67 percent in 1934 after finally bottoming in 1932 following the Crash of 1929. . . . It is also generally true that large-cap stocks enjoy the biggest bounce off a market bottom, but small-caps typically lead once an up-trend is established. Current leadership is still unclear. The certainty of Value leadership evaporated, but don't be too quick to assume Growth style investing is back. (Janet Brown, No-Load Fund-X via Washington Post 6-1) Probably the biggest intellectual problem an investor has to wrestle with is the barrage of noise and babble. Noise is extraneous, short-term information that is random and basically irrelevant to investment decision-making. Babble is the chatter and opinions of the well-meaning, attractive fools who abound. The serious investor's monumental task is to distill this overwhelming mass of information and opinion into knowledge and then to extract investment meaning from it. Meaning presumably leads to wisdom, which should translate into performance - the only thing that matters. (Barton Biggs, Global Strategy Morgan Stanley via Washington Post 6-1) Exports are likely to account for 18.8% of the world's economic activity this year, down from 20% in 2000, according to Global Insight. (David Leonhardt, NY Times 6-01) It's just as likely that if you're buying, the person selling knows more than you. Most of the risks that people take are because they're deluded. We expect of life (and our investments) more than life is going to deliver. (Daniel Kahneman, the Psychology 101 professor at Princeton University who won last year's Nobel Prize for Economics via Michael Collins, CBS.MarketWatch 5-31) Home Page Previous Factoid Top Sites
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