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Fewer than one in 10 stocks are "long-term buys" at any given time. Thus, the ability to say "no" is much more important than the ability to say "yes." - Mark Sellers, Morningstar
"We're not going to see 7% growth again, but we could well see over 4% over the course of the next year," said Richard Berner, an economist with Morgan Stanley. Profits grew by 14% in Q2, compared with a year earlier, and Mr. Berner estimates Q3 jumped by more than 30% from a year earlier. That is based on the Commerce Department's broadest based measure of corporate profitability. The Labor Department's Employment Cost Index report for Q3, also released Thursday, showed that wages and salaries were up just 2.9% over the previous year, well below the 4% pace during the late 1990s boom. The Labor Department compensation report also showed that benefit costs to companies, largely health insurance, soared by 6.5%, the fastest rate in more than a decade. [From Jesse Eisinger WSJ 10-31: Private-sector wages and salaries, the report showed, rose a healthy 0.9% while benefits rose 1.4%.] More on GDP MMS International, BusinessWeek 10-30 The chain price index, which is used to adjust the GDP number for inflation, posted a 1.7% gain in the quarter, which was also stronger than expected. Inventories were reported to have contracted at "only" a $35.8 billion rate in the third quarter, vs. the hefty $59 billion rate we had assumed from the inventory data for the first two months of the quarter. Within the report's sales components, the real grabbers were a 15.4% surge in equipment and software investment and a 20.4% growth rate for residential construction. Amid all the upbeat data were some downside surprises: "Only" a 6.6% growth rate for personal consumption, due to a weak 2.2% pickup in services and a sharp slowing in government spending growth to just 1.3%. We at MMS expect another big number in the fourth quarter, despite the upside third-quarter surprise in inventories that some analysts might "take out of" their fourth-quarter estimates. We have marginally lowered our fourth-quarter GDP estimate, but we still project 5% GDP growth in both the fourth quarter and first quarter of 2004 - with notable upside possibilities to those forecasts. And our estimates still sharply exceed recent consensus forecasts of roughly 4% growth. [From Jesse Eisinger WSJ 10-31: The economy "is on track to see the best holiday sales in a long time," says Lynn Reaser, chief economist for Bank of America Capital Management. She sees GDP growth in the fourth quarter of a solid 4%.] It's worth noting that gains in line with our estimates will leave fourth-quarter real GDP growth, on a year-over-year basis, of 4.2% in both 2003 and 2004, which should translate to at least a modest downtrend in the unemployment rate and to net job creation. Indeed, payroll acceleration is likely imminent.
So here's the upbeat scenario: First, the great tanker that is the U.S. economy won't turn on a dime. Fourth-quarter growth may not hit 7.2% but it isn't going immediately back down to 2% either. Trend growth of 3.5% seems a good bet. Second, companies have to replenish what the data tell us are severely depleted inventories. Third, to replenish those inventories, businesses have to ramp up production and hire workers. That means that at least for the next several quarters, the economy could be propelled by this inventory turnaround. How strong could it be? Coming out of recessions in 1975, 1980 and 1982, we had inventory spikes that added between 1.2% and 1.9% to overall growth. That, in turn, represented anywhere from a quarter to half of all the economy's growth in those post-recession years. Past inventory swings have been very powerful engines. The lone standout is the 1990-91 recession. There was only a modest inventory spike as we emerged from the jobless recovery in 1994. But inventories didn't decline drastically in the quarters before, so there was no need to build them back up. What's interesting, for all the talk about a new economy - which I believe is warranted when it comes to productivity and low inflation - is that the 2001 recession was pretty conventional as far as the inventory decline. The 1.24% that inventory changes subtracted from growth in 2001 was actually above the average for 1975, 1980 and 1982. That's to say we actually had a worse inventory swing this last time around despite all that inventory-management technolog. But we've already paid the price for that. Now we should reap the benefits of an inventory turnaround. And that's a reason - finally - for a bit of confidence in this recovery.
Part of the sadness lies in the obstacles to re-employment. The corporate sector remains plagued with overcapacity and may require many months of 4% growth just to make full use of those currently working. Job creation has to move above 200,000 a month, most economists say, before we can begin to shrink the pool of nearly nine million unemployed. We haven't gotten to six-digit job creation yet, much less sustained it. No wonder the unemployed spend 19.7 months, on average, seeking work, the longest stretch in nearly 20 years. Of the nine million unemployed, five million were laid off or fired, according to the BLS. (The remainder are new entrants or people returning to the labor force after a voluntary absence.) Most of those five million will work again, but for less pay. The bureau's wage data, from its "job displacement'' surveys done every two years, are clear on this point. Three people are laid off, and three years later only one has regained the lost wage or risen above it. Among the currently unemployed, most are expected to face lower pay in their next jobs. But how many Americans now working lost one or more jobs in the last 20 years as layoffs spread? The BLS suggests the number is high. It has been tracking 10,000 people, a cross section of the population, since 1979, when most were teenagers and the permanent layoff was just becoming a national phenomenon. They are in their 30's and 40's now, and over the years each has held, on average, 9.6 jobs. The survey does not include reasons for so much job-changing, but the average is high enough to suggest that at least one or two of the jobs followed layoffs. Ann Huff Stevens, a labor economist at the University of California at Davis, working with data from a 1992 health and retirement study, found that among men and women 51 to 62 years old who had been laid off, 47% had been laid off more than once. Job Churning Stats Jon Hilsenrath, WSJ 10-12 A recent study by economists at the Federal Reserve Bank of New York recently found that 75% of all jobs are now in industries that have undergone some kind of structural change in recent years, compared with 50% undergoing structural change in the 1980s. Recent employment statistics spell out this shift. Many industries have seen employment decline sharply in recent years. For example, while the manufacturing sector has cut 645,000 jobs in the past year alone, health-care employment has risen by 248,000 jobs. Retailers have eliminated nearly 49,000 jobs, while residential construction companies have added close to 42,000. Related articles: The No-Frills Middle Class - Jeff Madrick, NY Times, Downwardly Mobility - Linda Stern, Reuters
The ECB is growing more optimistic about the recovery in the 12 nations that use the European common currency. But insiders aren't ready to rule out a future rate cut, especially as the euro rises against the dollar. Central banks in Japan and Switzerland, meanwhile, show no intention of deviating from their ultraeasy stance. But outside these major blocs, there will likely be movement upward. The average global central bank interest rate is currently 2.37%, and J.P. Morgan reckons it will creep up to 2.41% by the end of the third quarter next year. In the U.K., the Bank of England revealed last week that it came close to raising rates for the first time in three years. Minutes of its meeting Oct. 8 and 9 showed a policy committee voted five to four to hold its key rate at 3.5%. The narrow margin convinced many that the bank will move soon, perhaps at its next meeting Nov. 6. Whether central banks can navigate the shoals of a weak global economic recovery with their interest-rate decisions will depend on both skill and luck. And there is evidence that even some of the world's biggest central banks sometimes lack both. Could other central banks inadvertently quash an economic recovery? "There is a risk," says Maxine Koster, an economist at Credit Suisse First Boston in London. But on the whole, it appears that central banks will move slowly but surely.
The four-week average is below what economists and forecasters commonly regard as the magic number: 400,000. Jennifer Kelleher, who is an economist at Economy.com, said that at least since 1990, "when the first-time claims fall below 400,000, the overall trend in employment will be flat or up." In fact, over the last 13 years, a sub-400,000 figure has been a pretty good coincident indicator for job growth. From October 1990 to October 1992, a period of job loss, the first-time claims figure remained stubbornly above 400,000. From mid-October 1992 through May 2001, a period in which the economy added a stunning 23 million jobs, the four-week average never topped 400,000. There are other reasons to pay heed. The figure is a rare weekly gauge of the economy's health. And the claims data is hard and comprehensive: state labor offices tally the claims filed and forward them to Washington. By contrast, the Bureau of Labor Statistics arrives at the monthly figures on household employment and business payrolls by sampling a small slice of the economic pie. More recently, the 400,000 figure has a fuzzy guidepost. In June 2000, when first-time claims were only about 280,000, the economy lost jobs. From March 2001 through July 2002, when the number of payroll jobs declined each month, the four-week average ranged from 365,000 to 496,000. It did not top 400,000 until June 2001 - three months into the job-letting. In the fall of 2002, the number of payroll jobs grew while the claims figures were above 400,000. What has been maddening about this recovery is that claims have not fallen much below 400,000. After all, the difference between 390,000 new claims and 401,000 new claims - on a job base of 129 million-is not significant. Ultimately, the claims tell only half the story. A rapidly changing economy with flexible labor markets is constantly putting people out of work. An increase in claims is not a symptom that companies are suddenly shedding jobs. It is a sign that displaced workers are not finding new positions quickly. Based on the recent trends in first-time claims - they have been below 400,000 for three consecutive weeks - the Labor Department anticipates an increase in payroll jobs for October. But here, too, there is another nice, round figure to watch. If payrolls add 150,000 jobs in a month - a figure not recorded since May 2000 - economists say that will be a sign that the economy is in serious job-creation mode. More Job Stats Caroline Baum, Bloomberg 10-24 Yesterday the Labor Department reported that continuing claims for unemployment insurance fell 84,000 to 3.542 million in the Oct. 10 week, a six-month low. The drop represented a marked break below the range that's persisted since July and may be a sign that those who've been fired are getting rehired. I say ``may'' because the decline could reflect people whose unemployment benefits have expired. Monster.com, which bills itself as the leading global online career site, saw a 19% increase in job postings in the past six months. September postings were up 7% from August, led by a respective 33% and 28% jump in job openings in computer hardware and computer software companies. The National Federation of Independent Business's Index of Small Business Optimism vaulted to an all-time high of 104.7 in August before pulling back to a still-strong 101.9 in September. Only 10% of small businesses plan to increase total employment, according to the September NFIB survey. While that doesn't sound like much, the average reading for the index over more than 20 years is 10.3%, according to Bob DiClemente, an economist at Citigroup. So far this year, companies have announced the elimination of 16% fewer jobs than they did in the first nine months of 2002, according to Chicago-based outplacement firm Challenger, Gray & Christmas. And More on Job Growth Bloomberg 10-09 A survey of the 190-member Business Council found about 55% of the chief executives surveyed said they expect the economy to grow by more than 3% next year, beating the 2.8% economists project for this year and last year's 2.4%. Half predicted the jobless rate would decline next year. Only 14% said they would pick up their pace of hiring, and 63% planned to add about the same number of workers as this year.
The answer begins with a personal question: How much faith do you have in your ability to invest without funds? Mutual funds are designed to provide skilled management and diversification at a reasonable cost. Features such as automatic investment programs allow funds to provide convenience and discipline. For most people, the salient features of mutual funds are hard to replicate on their own. Specialists who study investor psychology say individual investors tend to speculate more in their stock purchases than fund managers, taking on more risk of blowing up their portfolios. If avoiding funds means forgoing the opportunity to save in a retirement plan, the savings opportunity being sacrificed would be too great for the average investor. Investors who are upset should ask a slightly different question: "Which fund companies can I trust?" The things an investor should be looking for are not dramatically different from what savvy investors have always sought in funds. (1) A surprising lack of greed. Fund companies with low fees still earn high profits, but they aren't being greedy about it. Keep annual expenses at or below these levels: 1% on large- and mid-cap stocks; 1.25% on small caps; 1.5% on foreign stocks; and 0.75% on investment-grade bonds. (2) An alliance with shareholders. Just 2.5% of all mutual funds have performance fees, which slide up or down based on performance. While that kind of fee system is ideal, in its absence an investor might look for funds where managers are part of the clientele. (3) A history of putting investors first. In general, investors benefit when fund companies shutter funds that are growing too quickly, when they are willing to turn away money when growth might compromise the manager's ability to keep performance rolling. When a fund firm has a history of letting its winners roll until they become losers, that's a problem. (4) Barriers to bad guys. The scandals generally revolve around rapid-fire trades. Fund firms that impose short-term redemption fees or that limit the number of round-trip trades an investor can make hold down costs and align the interests of all shareholders. (5) They speak your language. There's something to be said for companies that take the time and effort to have management tell you what's going on - in reasonable tones, rather than bragging blather.
Over the last 60 years, parents with an only child that was a girl were 6% more likely to split up than parents of a single boy. The gap rose to 8% for parents of two girls versus those of two boys, 10% for families with three children of the same sex and 13% for four. Every year, more than 10,000 American divorces appear to stem partly from the number of girls in the family - says a study by economists, Gordon B. Dahl and Enrico Moretti at the University of California at Berkeley. There are two possible reasons for this. Mothers might tolerate a difficult marriage if they have sons, thinking that the presence of a father is crucial to the boys. Fathers, knowing they are likely to lose a custody battle, might avoid a divorce when it would cost them time with their sons. Among unmarried women who had ultrasound scans, those carrying boys were slightly more likely to marry the father than those with girls, a study of California records from the early 90's by Mr. Dahl and Mr. Moretti showed. The effects of this preference are as obvious as they are pernicious. Children from divorced families are twice as likely as other children to drop out of high school, become parents while teenagers or be jobless as young adults, earlier studies show. The new research makes clear that girls are bearing more than their share of these costs. Parents, and especially fathers, appear to invest more in their families when they include a boy. They put more money into their homes, spending an additional $600 a year on housing, according to a study of families with an only child by Shelly Lundberg, a professor of economics at the University of Washington at Seattle and her colleague Elaina Rose, an associate professor of economics. A second stat: Over the last six decades, 33.7% of families whose first four children were girls had a fifth child, while only 31.5% of those who start with four boys kept going.
Probably the most intriguing - and productive - of the Kahneman-Tversky quirks is called "anchoring." People tend to anchor their predictions in the present; that is, they use prevailing conditions as their base and are reluctant to believe that the future will be much different. For example, what would you say to an economist who predicted that inflation would average 5% over the next 10 years? You would probably have serious doubts because inflation has been just 2% lately. But over the past 40 years, inflation has indeed averaged 5%, and there's no reason it couldn't return to that level. Stock analysts are especially prone to the effects of anchoring. "Research," says the article, "has proved that, when faced with a major change ahead for a company, analysts will generally make a series of small earnings-estimate revisions, each of them inadequate to reflect what's really going on." Sanford Bernstein's own money managers exploit this tendency by delaying the purchase of an attractive stock whose earnings have been downgraded - "because subsequent downward revisions are likely and will probably further depress the price." Two other Kahneman anomalies with real-life lessons: Regret: Imagine you find a lottery ticket on the street. A colleague notices her birth date on it and offers to trade your ticket for hers. Do you do it? Mathematics says, Why not? But psychology says something else. The majority of people prefer holding on to the original ticket for fear that, if it proves to be the winner, they will have lost out. Regret almost certainly played a role in the tech-stock boom when investors held inflated stocks that were plummeting, "paralyzed by fear of selling just before the boom rekindled." Failure of initiative: This is the idea that problems can't or won't be fixed. To the contrary, with established business, the likelihood is that someone will eventually find a cure - there's too much at stake not to. How do you fight emotional, irrational responses to financial stimuli? One way is to remember two words: "mean reversion." Abnormal moves in stock prices tend to correct themselves over time, in both directions. The Bernstein Journal looked at S&P stocks between 1974 and 2003 and found the companies that performed the best over three-year periods fell off sharply over the next three years. Companies that performed the worst over three years did far better over the next three. In the end, the best way to exploit the emotions of other investors is to keep your own wits about you. Remember that nothing goes up - or down - forever, that a little bit of risk is usually worth taking, that turnarounds can be for real, and that the best deals today are often the ones that other people are shunning.
The authors of this research are Xavier Gabaix, an MIT economics professor; H. Eugene Stanley, a Boston University physics professor; Parameswaran Gopikrishnan, an associate at Goldman Sachs; and Vasiliki Plerou, a post-doctoral fellow in the physics department at Boston University. [This paper can be found at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=442940] The frequency of huge daily gains and losses in the stock market has presented a perennial challenge to historians because these big moves are more frequent than would be expected if the market adhered to what is known as a normal, or Gaussian, distribution [sometimes also referred to as a bell curve]. For several years some researchers have suspected that the markets follow another pattern - a power law distribution, which predicts more outliers than a normal distribution. Power law distributions are widely recognized outside the investment arena. Earthquakes follow them, for example. In their study, the researchers not only confirm that the stock market adheres to a power law distribution but also derive a formula that predicts how often a particular percentage change is likely to occur. While the researchers' formula predicts how often a price move of a given magnitude will occur, it does not forecast when. According to the formula, on average a one-day gain or loss of 22.6% occurs once every 75 years.
Over the 50 years through 2003, dividends have provided income-hungry investors with a wonderful stream of cash that has grown at 5% a year, comfortably ahead of the 3.9% inflation rate. Moreover, those dividend increases have been delivered with remarkable regularity, rising in 45 of the past 50 years. By contrast, clocking capital gains has been an iffy proposition. Assuming 2003 finishes as an up year, share prices will have posted gains in just 36 of the past 50 years. Div Tax Treatment: Short Sales & Foreign Source Shirley Lazo, Barrons 10-13 New guidelines from the IRS (Notice 2003-67) deals with dividends from short sales. An individual whose stock is loaned to a short seller receives payments in lieu of dividends from the borrower. These payments aren't eligible for the reduced tax rate says Robert Willens, Lehman Brothers' managing director and tax-accounting specialist. (As defined in Sec. 316 of the tax law, dividends are a distribution of property by a corporation to its shareholders with respect to its stock. In a short sale, the lender no longer owns the stock.) Be that as it may, Willens says that because the new law was enacted in the middle of a year, "Congress recognized that it would take a while for brokers and others to conform their information-reporting systems to insure that amounts were properly reported" to customers as payments in lieu of dividends. Thus, Congress will temporarily "waive any penalties in cases where the brokerage firm shows that it made a good-faith attempt to comply." (Willens said this forbearance apparently runs out at the end of 2003.) Taking Congress's desires into account, the IRS says that "a taxpayer who receives payments in lieu of dividends may nonetheless treat those payments as dividends to the extent that" - and here's the tricky part - "the payments are reported as dividend income (on Form 1099-DIV) to the customer . . . unless the customer knows or has reason to know the payments are, in fact, payments in lieu of dividends." Of course, the IRS didn't offer any guidance on how one would know this or have "reason to know." The IRS had something new to say, too, on the subject of when and under what circumstances a company based outside the U.S. attains "qualified foreign-corporation status," which makes Americans receiving its dividends eligible for the tax break. In Notice 2003-69, Willens says, the IRS lists the countries whose treaties with the U.S. satisfy the conditions. Four exceptions: Bermuda, Barbados, Russia and the Netherlands Antilles. After a year of some success investing in REITs, I have been looking for another sector to make direct [non-mutual fund] investment, and two of the sectors on that prospect list are telecoms [after averaging over 30% losses the last three years, this is a classic chance to buy low] and pharmaceuticals [growth companies that demographics would tell you should stay hot - and they are presently at good valuations]. The two articles below were enough to discourage the telcom investment. Further down there are two articles on pharmaceuticals that had the same effect. The sector that is winning out by process of elimination is the financial sector. [The fed is likely to keep short term rates low while long term rates should rise - thus aiding banks that borrow short and lend long. Brokerages should benifit with rising volumns as people return to the stock market. Insurers should also benifit from rising market returns.] You can see my preliminary research at a new page/section added to this site called "Financial Services Update".
Since then, more than a trillion dollars in telecom equity and debt has been vaporized. As a result of massive overbuilding and rampant price cutting, many companies were forced to close, while even the survivors had their stock prices fall by as much as 90%. Recently, however, there have been tantilizing hints that the sector might be bottoming out. Vulture investors like Carl Icahn swept in to pick up companies like XO Communications out of bankruptcy. Prices, while still falling, were falling less. And after several years of painful write-offs and layoffs and spinoffs, surviving companies have cut their costs to the point that some now boast positive cash flow and rising share prices. So I decided to check in again with Cleland and Kalla, hoping to find out if the sector had really bottomed out and it was safe again for investors. Yes, declared Kalla, who has since moved to Friedman, Billings, Ramsey. As she sees it, the rate of decline in telecom prices has pretty much leveled off. And with the explosion in Internet and cell phone use, broadband and Wi-Fi, the sector is growing again. Most important, Kalla said, the surviving companies - from long-distance giants like AT&T to Baby Bells like Verizon to wireless providers such as Nextel - are valuable franchises that are likely to throw off tons of cash for years to come, even if their market shares erodes. And they are using that cash, she said, to begin expanding their businesses, investing in new technologies and services that allow them to earn higher margins with old customers while selectively picking up new ones as well. In short, Kalla sees this as a good time for getting back into telecom. A call to Cleland elicited a different view. While the companies may be putting up improved financials, he said, their underlying fundamentals continue to deteriorate. Cleland sees the beginning of a second phase of the war for market share, with regional Bells, wireless providers, cable companies and long-distance services scrambling to offer consumers and businesses a bundled package of telecom services at discounted prices. That free-for-all, along with the arrival of voice service over the Internet, will cause prices to collapse, he predicted, taking industry profits with them. "This is the business equivalent of gladiator combat in which the only winner will be the American consumer," said Cleland. He advises all but the heartiest of investors to stay away for at least the next five years. Hoping to somehow reconcile these views, I consulted a half-dozen telecom execs in the Washington area. Like the analysts, they were badly split. Some predicted several more years of hyper-competition, destabilizing technological change and corporate carnage. And the other half figure the surviving players have enough marketing and financial strength, along with technological flexibility, to manage the industry's restructuring rather than becoming its victim. Signs of Telecom Recovery Vikas Bajaj, Dallas Morning News 11-1 Signs that the telecom industry's three-year bust may be nearing an end are slowly floating to the surface. Millions of Americans are using broadband, snapping up smart cellphones and simply spending more on all things connected. About 20% of American homes are logging on to the Internet with high-speed broadband links now, up from 10% two years ago. New Internet services such as Apple's iTunes music store will drive that number ever higher, said Larry Irving, a Washington-based consultant and a former assistant Commerce secretary. "If you have a kid and you don't have broadband, you will have it soon," he predicted. The more time and money consumers spend on broadband and wireless, the faster the telecommunications industry will burn through its excess capacity.
Wireless phone companies - finally back on their feet after a bear-market pummeling - face a newly bleak outlook as customers go deal-hopping in search of the best prices. That will drive up costs, lower prices and likely hurt earnings and stock prices. In a survey by research firm Gartner of corporate executives who buy or manage cell service for their companies, 81% said they would be likely to change their carriers within the next 12 months if they could keep their phone numbers. Right now, churn rates at cellphone companies run at about 26% annually, meaning more than one-quarter of their subscribers leave every year. To keep growing, companies must not only add new subscribers, but also replace the lost ones. The problem: Adding a new subscriber costs about $320, according to Yankee Group, a technology-consulting firm, meaning it takes about six months to turn a profit on a new customer. Several wireless carriers acknowledge that they expect churn to rise after the new rules go into effect. Higher churn can devastate profits. CreditSights, an independent credit-analysis firm, estimates that churn will increase 15%, on average, and that will cut operating income by as much as 17% for some of the weaker carriers. For those picking winners and losers, the scenarios play out this way: Businesses and consumers who want the most extensive coverage will likely flock to Verizon Wireless. That could be significant. In a survey of business users by Gartner, 70% list coverage as the factor that would most likely cause them to switch, while 27% point to price. Consumers, the bulk of wireless customers, are driven by price. The winner here could be T-Mobile, which has traditionally had the lowest prices. The other deciding factor could be companies' ability to avoid the commodity trap. Here, Nextel, with its walkie-talkie "direct connect" feature, sits apart from the crowd, which could help it attract new business.
(1) They have a collection, not a portfolio. If you don't know what to buy, you may just get one of everything. That's not the best approach because 'collections' hurt performance: If you've got four funds in the same asset class, you've got a "closet index fund," meaning the managers trade with each other, while you pay the freight and get performance that's not better than an index fund for the trouble. Unless a fund replaces a current holding or puts you into a new asset class or investment style, adding it to your portfolio may be a mistake, no matter how good that fund looks on paper. (2) Their portfolio is littered with investments representing yesterday's strategy. I'm a big believer that there is no one right way to invest. So long as you are reaching your goals, it doesn't matter if you are a buy-and-hold investor, a market-timer, an asset allocator, a momentum player or anything else. But if you don't have faith in your investment strategy and you keep switching from one strategy to the next, you almost certainly have come up with the wrong way to invest. (3) They worry about daily performance. If you can't count the days until you expect to need the money, worrying about daily or weekly price fluctuations will lead you astray. A few days of bad results may persuade you to make a change, at which point short- term thinking overruns the long-term pursuit of investment goals. (4) They invest by inertia. Successful investors have a plan. Investors who get paralyzed by fear or who can't find the emotional discipline to stick with their plan wind up riding with what they've got. They allocate their investments by chance and accident and find the portfolio's momentum working against them when they decide to act. (5) They can't explain why they bought a fund or what a fund does. You can't make good choices without basic research and understanding. Good investors know what a fund does and have concrete reasons for buying it. When the fund changes, those investors know that it no longer serves the purpose it was purchased for, a sure-fire sell signal. Related article: Bear Market Lessons - Jonathan Clements, WSJ
The study found that only about half of middle-class families own stock at all, and the median value of those holdings was just $17,500 in 2001. This means, as the CFA pointed out, that three-quarters of middle-class households held less than $18,000 combined in individual stocks, stock mutual funds, and stock retirement funds. More than 41% of U.S. households owned IRAs as of June, according to the ICI. At the end of last year, assets in IRAs totaled $2.3 trillion. That was down 8% from a year earlier, but it still represented 23% of the $10.2 trillion U.S. retirement market. Related article: Stats from Survey of Consumer Finances
That's the upshot from a study Morningstar will publish in its bimonthly "Mutual Funds" publication next week. The study has the pragmatic goal of trying to figure out whether past returns are any use as a divining rod for finding funds and managers that will prove their mettle in coming years. Morningstar's study looked at rolling one-, three-, and five-year returns for each fund in Morningstar's nine diversified stock-fund categories and its "foreign stock" category from 1992 through 2001. Each fund was ranked against its category peers over each period. Funds ranking in the top quarter of their peer group over the past 12 months managed to keep their ranking over the following 12 months only one-third of the time. Those that ranked among the top quartile over the past three and five years fared even worse, managing to repeat the feat less than 20% of the time, according to Morningstar's tally. [See table below.] These findings are particularly alarming since they looked at fund returns stacked against their peers. After all, that's how most fund screens are designed: to sift funds according to their relative returns against their category peers. Investors are routinely told to focus on funds' longer-term track records, but in this study the longer a fund had topped its peers, the less likely it was to keep doing so. Even if you broadened your focus from top-quartile funds to those that ranked in their category's top-half, past returns don't get any more predictive than a coin flip. The study found that stock funds ranking in the top half of their category over the past five years, for example, only repeated the feat 49% of the time. So, if past returns don't tell you much about what's to come, what does? There were some common traits among funds that tended to stay above their peers. Among them were below-average expenses and moderate turnover. A screen of the funds that managed to rank in the top half of their category over the past one, three, five, 10, and 15 years shows sharp divergence on these fronts. Funds that consistently topped their peers averaged about a 1% expense ratio, compared with 2% for those that trailed. Consistent outperformers also averaged a 70% portfolio turnover rate, meaning 70% of their holdings changed in a given year, compared with 121% for the laggards. Fund returns are reported after fees and trading costs. So, funds with higher expenses and more rapid trading styles start each year behind less expensive peers. Leading funds also tended to have more holdings and slightly longer portfolio-manager tenure than funds that consistently trailed.
Fortunately, my research reaches a different conclusion. At least in the case of investment newsletters, I have found that focusing on past performance can significantly increase the odds of future success. But this result emerged only when performance was measured over very short periods of up to one year, or over very long periods of 10 or more years. In contrast, correlations between past and future were very low when performance was measured over three- and five-year periods. This helps to explain Morningstar's findings, since their study into the predictive power of the past focused on performance measured over no longer a period than five years. Why would very short and very long-term track records have more predictive power than the intermediate term? I believe this result represents the interaction of two separate phenomena in the investment arena. The first is what academic researchers refer to as the "momentum effect." Stocks that have outperformed the market by the most over the past six to 12 months tend to continue outperforming for another six to 12 months. And the biggest laggards tend to continue lagging. But this effect doesn't last for long. The advisers that were enjoying the most momentum typically lose it after a few short months. In fact, there is some evidence that the best previous performers will then reverse course and be among the worst performers, and vice versa [the "anti-momentum effect"?]. To capture ability, we need to focus on performance over many years. The past three or five years are not enough. But when performance is measured over 10 years and longer, it provides a creditable guide to performance over the next 10 years.
With investors convinced that a broad economic rebound is at hand, they are dumping drug stocks, which generally don't benefit much from an economic rebound, and shifting to tech and industrial stocks. The result: Stocks in the pharmaceuticals index trade at a price-to-earnings ratio of 9.3, about half the value of the overall market. But even as gloom descends, there is reason for optimism for a few of the most appealing drug companies. The few pharmaceutical companies with genuinely promising pipelines of new drugs have been unfairly punished by investors, and will pay off when the drugs become blockbusters. "From a value perspective, the drugs are attractive," says David Sowerby, a portfolio manager at Loomis Sayles in Detroit, which has been adding pharmaceutical shares in recent months. "There are low expectations for the group and attractive valuations, and long-term we're all popping more pills and looking to stay healthier" as baby boomers age. Mr. Sowerby is a big fan of Pfizer [PFE], largely because it is less pricey than its competitors, trading at just 15 times next year's expected earnings, making it "as inexpensive as it has been since the mid-1990s." Kris Jenner, manager of the T. Rowe Price Health Sciences Fund, points to Wyeth [WYE] as an example of a stock where the fundamentals are solid but side issues have turned investors against it. Investors were rattled by the $2 billion charge the company took to boost its reserves for lawsuits stemming from its fen-phen diet drugs. Eli Lilly [LLY], which reported earnings after the close of trading Wednesday that met analyst expectations, trades at a higher multiple than its drug competitors. But analysts say the company has among the best pipelines of new drugs in the business, and if the sector comes back into favor, Lilly shares could do the best. Forest [FRX], meantime, soon will begin selling an Alzheimer's disease drug called Namenda that some industry specialists predict will have annual sales that could reach $1 billion, as earnings jump by a third by 2005 for the company. But Forest's shares have barely moved in the past year, caught in the drug stock malaise. Mr. Jenner and other health-care analysts say some of the industry's better companies, including Pfizer and Wyeth, paid the price for bad news from some of its weaker members, including Merck [MRK] and Bristol-Myers Squibb [BMY]. "These stocks still have a tendency to trade in a group fashion," Mr. Jenner says. "Though, in my opinion, there should be an increasing separation in value between a company like Pfizer that reports a good quarter and Merck that doesn't." Not surprisingly, Henry McKinnell, Pfizer's chairman and chief executive, agrees. "All pharmaceutical companies aren't the same, Every company is its own story," he says. "We had a terrific quarter, and we're down -- but down on a really good story."
The investing public got hints of the hepatitis C trouble in July, but it wasn't until Aug. 22 that it was brought fully into the loop. On that day, Schering-Plough confirmed in a regulatory filing that the market share of Peg-Intron, a form of interferon used to kill the hepatitis C virus, dropped to 63% in July 2003 from 89% a year earlier. While nobody did anything wrong in this case - the investors weren't acting on inside information and the company violated no disclosure rules - it highlights an information chasm in the drug business that essentially punishes smaller investors. Under drug-industry convention, the public gets official drug-sales data only once a quarter, and that data generally reflects sales to wholesalers, not to the final consumer. But for investors willing to pay tens of thousands of dollars a year, it is relatively easy to get a jump on the public data. IMS Health Inc. and NDCHealth Corp., the two biggest players in the drug-information business, use data culled from thousands of pharmacies nationwide to give subscribers day-by-day tallies of the number and sales value of prescriptions filled. The two databases, which generally cost between $25,000 to $50,000 a year for subscribers, give an accurate picture of short-term sales movements. Professional investors and analysts say the numbers are critical to getting an early read of how products are doing. Of course, every industry has its tricks and secret data troves, mined by smart analysts and investors looking for an edge. But, given the critical importance of drug-sales data to the industry's stocks, the gap between public and private data in this case is unusually large. Ordinary individual investors do have ways of finding out the gist of what is in the databases. Brokerage reports -- some available free or at modest cost - and articles in the business media often summarize sales trends using IMS Health or NDCHealth numbers. If unequal access to market-moving drug data is a problem, the solution isn't clear. Database companies spend millions collecting their numbers and can't give them all away free. And don't look for stepped-up drug-industry disclosure.
To survive the long drought at the lab, many executives have concluded that one company is better than two. The $400 billion worldwide pharmaceutical industry has rapidly consolidated; 38 major drug companies have merged since 1994. And at nearly every major merger announcement, executives said that lab synergies were a driving force behind the deals. But many scientists say that if mergers are executives' cure for poor pipelines, the medicine is making the patient sicker. And they point to Glaxo, the world's second-largest pharmaceutical company, after Pfizer, as proof. The science of drug development has become tougher. New technologies like robotic screening machines that rapidly test millions of chemical compounds against biological targets have not worked as well as industry executives hoped. And the avalanche of genetic information created over the last several years has led to more confusion than clarity. Mergers may be harming the industry's long-term ability to innovate. At GlaxoSmithKline, months were spent remaking procedures. The bureaucratic task of combining the two companies became the sole chore for many top scientists, some of whom had to shuttle between continents. Former company researchers say these are some of the results: Development of a cardiac arrhythmia drug was delayed for nine months, two gastrointestinal drug projects were sidetracked for 18 months, and work on a cancer drug was shelved for nearly two years, former company researchers say. In another case, they say, an allergy medicine project was stopped, started and stopped again while newly formed committees examined the science behind each project.
A new study offers an explanation - and shows why value funds are unlikely to be any more successful in the future. Ludovic Phalippou, in work on his Ph.D. dissertation at Insead, the business school near Paris, has found out why the average value stock fund has not outperformed the average growth stock fund. His study documents several barriers that have prevented mutual funds from profiting from the value effect. The first barrier arises because the value effect is only partly a result of the long-run tendency of value stocks to outperform the market. It is also caused by the tendency of the average growth stock to lag behind; to profit from this tendency, and fully capture the value effect, a mutual fund would have to short growth stocks. That would create a problem for mutual funds, even if there were no legal restrictions on their short-selling, according to Mr. Phalippou. They would find it nearly impossible, he said, to sell short the most overvalued growth companies. There is little institutional ownership of those shares, and because institutional investors, like pension funds and universities, tend to supply the securities lending market, mutual funds would find it tough to borrow the shares that they intend to sell short. According to his calculations, the long-run tendency for growth stocks to underperform the market largely disappears after eliminating the stocks that mutual funds could not have sold short. That means that nearly half of the theoretical potential of the value effect has been beyond the reach of mutual funds. That still leaves the other half: the portion that derives from value stocks' tendency to beat the market. But Mr. Phalippou found barriers that would have prevented mutual funds from exploiting that portion, as well. The tendency of value stocks to outperform was caused by rapid price growth in a small number of stocks for which the market was very illiquid. Any attempt by a mutual fund to buy one of these issues would have caused the stock's price to rise markedly. Even if a fund could have made such a purchase, the small number of outstanding shares in that stock would have meant that any profit would have contributed a negligible amount to the fund's bottom line. The extent of a company's institutional ownership was a good proxy for whether mutual funds would have been able to invest meaningful amounts in its stock. Eliminating from his database those companies with little or no institutional ownership, Phalippou found that the long-run tendency of value stocks to outperform the market declined significantly. Conclusion From these findings, investors can conclude that value-oriented funds make sense only for relatively short-term bets that value stocks will outperform growth stocks. And that, in turn, implies that the buy-and-hold investor should avoid both value and growth funds. Professors Houge and Loughran found that both kinds of funds had much higher expense ratios than more diversified funds. Of course, individual investors who want to pick stocks actively have a real advantage over mutual funds in trading value stocks - and nothing about the new study changes that. How Fund Categories Fared Barrons 10-06-2003
Rule 1. Trust the miracle of compounding. Start saving early and the "miracle of compounding" will help you retire as a millionaire. Rule 2. Regular savings is the only sure road to wealth. Malkiel cites "The Millionaire Next Door" where we're told that millionaires "live well below their means ... being frugal is the cornerstone of wealth-building." Rule 3. Prepare for Murphy's Law. Malkiel emphasizes the need for cash reserves and insurances. Rule 4. Stiff the tax collector. "Take advantage of every opportunity to make your savings tax-deductible and to let your savings and investments grow tax-free." Rule 5. Match your asset mix to your personality. Take into account all the variables - age, your personality and tolerance for risk over the long-term. Rule 6. Never forget, diversity reduces adversity. Rule 7. Cut costs and do it yourself. Financial firms take half of your retirement nest egg in fees. They "won't tell you that, but that's what many do" warns Malkiel. Do-it-yourself investing invariably beats hiring an adviser. Rule 8. Bow to the wisdom of the market. The "cold, unflattering - and, yes, unexciting - truth is that the financial market, that sprawling clumsy behemoth, is smarter than any individual. Smarter, that is, in that no one can consistently outfox it by predicting its movements." Rule 9. Buy proven winners, buy index funds. The only investment strategy that makes any sense is to "throw a towel over the financial pages and buy a low-cost mutual fund that includes all stocks and does no trading." Rule 10. Don't be your own worst enemy. Malkiel lists the many ways investors sabotage their financial success; over-confidence, loss aversion, following the herd, chasing hot tips, ignoring costs.
So what's an investor to do? First, examine a company's cash flows - essentially the amount of money that actually comes in and out the door. Cash flow, according to the academic literature, is a better predictor of a firm's future health and true value than accrual earnings. "Earnings are an opinion," goes the saying. "Cash is a fact." Cash flows are reported to the SEC just like earnings, but most investors ignore them. One problem is that cash-flow statements are not easy to understand, and they can be distorted by, say, a huge one-year investment. Still, they are a better yardstick than earnings. Kenneth L. Fisher brought the indicator to the public's attention about 20 years ago, and James P. O'Shaughnessy resurrected it in his important 1996 book, "What Works on Wall Street" (McGraw-Hill). O'Shaughnessy used a massive database to test how dozens of stock-picking strategies worked over a period of more than 40 years (1952 to 1994). One of the best: Find stocks with low price-to-sales ratios. Here's what O'Shaughnessy found: Over the period he studied, the 50 stocks with the lowest P/S ratio produced average annual returns of 18.9%, compared with 14.6% for all stocks. That's a huge difference over time. During the 42 years he studied, an investment of $10,000 became $5.9 million using the low-P/S strategy but just $1.8 million for an investment in the market as a whole. By contrast, low-P/E stocks beat the market as a whole by only six one-hundredths of a percentage point. The American Association of Individual Investors has worked out a more complicated - and more logical - way to search for good low-P/S companies. John M. Bajkowski, the group's vice president for financial analysis, uses a computerized "screen" that seeks companies whose P/S ratios are not merely low in an absolute sense but also low compared with their own P/S history and with the P/S levels in their industry. The results of the AAII technique have been dazzling. Back-tested to 1998, the strategy produced positive returns every year and beat the benchmark Standard & Poor's 500-stock index each year since 1999. So far in 2003, the strategy has returned 32 percent (about twice the S&P), and its cumulative return for the past 53/4 years is 225%, compared with 10% for the S&P. The average P/S ratio for the stocks that qualified was 0.5, compared with 1.4 for all listed stocks -- and at relatively low volatility (price swings). And here's a surprise: The average P/E ratio of these low P/S stocks was actually higher than for all listed stocks. Just the Facts Earnings Update With reports in from nearly two-thirds of the S&P's 500 companies, 87% either met or surpassed Wall Street's forecasts, according to Thomson First Call. Overall, the companies reporting so far have beaten the consensus estimates of Wall Street analysts by 6.4%. During the average quarter, companies outperform analyst estimates by about 3% overall. "You wonder, 'Gee, if these good earnings can't make the market go up, what do we do for an encore?'" said Richard A. Dickson, senior market strategist at Lowry's Research Reports. "We probably won't duplicate this in the fourth quarter, and next year is a wild card." "It's going to be harder to get enough good news to get more gains now that we're already up quite a bit," said Sam Burns, an analyst with Ned Davis Research. "Back when the S&P was at 800, it didn't take so much." (Meg Richards, Associated Press 10-26) Signs of Increased Speculation The positive market factors right now can be parsed in ways that make one wonder about the outlook. For example, 222 stocks in the S&P 1,500 index had prices of $10 or less at the end of 2002. On average, they are up 64.4% this year, the best average performance of any group of stocks in the index. But 103 of them, almost half, have no earnings, according to Birinyi Associates. There are 368 stocks in the S&P 500 that pay dividends. The average total return for them this year through Thursday is 21.9%, according to Howard Silverblatt, equity analyst at S&P. The average return for those not paying dividends is almost twice that, at 41.7%. (Jonathan Fuerbringer, NY Times 10-26) More Signs of Increased Speculation Brokerage firms are seeing a surge in "day trading" by small investors once again trying their luck at rapid-fire stock trading. And more individuals have been buying stocks on margin, with borrowed money, in recent months. There's been a record surge in trading of so-called penny stocks on the OTC Bulletin Board. Trading also is climbing in stocks quoted on the Pink Sheets electronic system. (Gregory Zuckerman, WSJ 10-26) Debt Burden Looms Larger for Renters Americans currently pay 13.3% of after-tax income to service their debts, but adding other recurring liabilities such as rent and auto leases pushes the figure up to 18.1%, according to a report published in this month's Federal Reserve Bulletin. Both figures are slightly below the record levels reached at the end of 2001, but up more than two percentage points since 1993. Homeowners' financial-obligations ratio has risen from 12.2% in 1992 to 14.1% now, but excluding renters-turned-homeowners, the ratio would have risen only to 13.2%. The report also shows that renters' financial obligations have soared to 29% of after-tax income from 22.5% in 1993. The reason isn't so much because of increasing rents, but because renters tend to be poorer than homeowners, and the gap between rich and poor households' incomes grew sharply in the last decade. From 1992 and 2001, renters' incomes rose 22% while homeowners' incomes rose 60%, the Fed said. (Greg Ip, WSJ 10-23) Poll on the Economy In a telephone survey conducted Monday and Tuesday from a sample of 751 adults, 62% of respondents said the stock market is in "good" shape and 47% believed it would rise in the next quarter. Twenty-six percent believe the stock market is in "bad" shape and 10% believe it will decline over the next three months. Thirty-two percent predict no change. Fifty-four percent of Americans characterized the state of the economy as "bad," while 45% called it "good." Twenty-eight percent of respondents see the economy getting better, while 27% see it getting worse. Forty-three percent expect it to remain about the same. (Corbett Daly, CBS MarketWatch 10-22) The Real Drug Problem: Forgetting to Take Them Earlier this year, the World Health Organization reported that only around 50% of people typically follow their doctors' orders when it comes to taking prescription drugs - and the rates are lower for certain medical conditions. Only 43% of patients take their medicine as prescribed to treat acute asthma, between 40% and 70% for depression, and only 51% take the prescribed doses of high blood pressure. This is a major reason that the promising results of drugs in clinical trials often aren't matched when the drugs are in the hands of other patients. Trials of antiretroviral therapies have proved effective in suppressing the AIDS virus in as many as 95% of participating patients. But in the routine of daily life, the reported rates of suppression drop to the 40%-50% range. Rich, highly educated people are just as likely not to take their medicine as poor or less-educated people. (Amy Dockser Marcus, WSJ 10-21) Mutual Fund Tax Questions Who should decide if my mutual-fund distributions are "dividends" qualifying for the 15% treatment? Me or the fund company? The IRS says that for the 2003 tax year, taxpayers can rely on the paperwork sent to them from their funds or brokers when determining whether their dividends qualify for the tax break. For details, see the IRS announcement found at www.irs.gov/pub/irs-drop/n-03-67.pdf. Can't I just trust my regular account statement on what's a dividend and what isn't? No. Some payments may pose as dividends by being described that way on your mutual-fund account statement but fail to qualify for the tax break, such as payments from bond funds or money-market mutual funds. (Rob Wells, WSJ 10-05) Quick Facts, Stats & Opinions Reuters Research looked at all U.S. corporations with market caps above $1 billion that more than doubled during the past year. They found that analysts are more bullish on these stocks now than they were a year ago. A year ago, 35% of analysts' recommendations on these stocks were "buys" or "strong buys." Meanwhile, 45.5% were "holds" and 16% were "underperforms" or "sells." Now, after the stocks have more than doubled, 43.4% are buys or strong buys, 45.5% are holds and 11.1% are underperforms or sells. (Ken Brown, WSJ 10-27) There are now 117 ETFs, according to the ICI, compared with just 30 as recently as 1999. The funds have total assets of $117 billion, compared with less than $5 billion just five years ago. (James Glassman, Washington Post 10-26) When financial journalists interview me, they almost invariably ask the same question: 'Is the bear market over?' The question is silly. The reality is that as far as individual stocks are concerned, bull markets and bear markets often coexist. Or, rather, there are bearish cross-currents in bull markets and bullish cross-currents in bear markets. . . . Consider [that] in 2001, the Nasdaq Composite Index, though down 21.05%, saw 240 more advancing than declining issues. In 1999, the NYSE was up 9.14%, yet an incredible 1,295 more issues fell than rose. The same thing occurred in 1998, when the Nasdaq's 39.63% jump came with 1,187 more decliners. (John Buckingham, The Prudent Speculator via Washington Post 10-26) In a typical fund, you're losing 1.6% to the expense ratio, another 0.8% to the cost of portfolio turnover and another 0.5% to opportunity costs and commissions. That 3% [total] is roughly equal to the equity premium. [That's the amount stocks are likely to yield over risk-free bonds.] (John Bogle, the founder of Vanguard, quoted by Scott Burns, Dallas Morning News 10-26) Most decisions to buy and sell fund shares nowadays are made in institutional, not individual, settings. ICI data show that direct sales to individual investors, which accounted for 23% of all fund sales in 1990, declined to 13% in preliminary figures for 2002. (Chet Currier, Bloomberg 10-23) The really good news is that the economy has consistently been stronger than most economists had forecast. The first two quarters of 2003 came in at least a percentage point ahead of expectations, and the third quarter may deliver a similar surprise. There is concern that we will see some deceleration in Q4, but I lean to the positive view, and I don't expect the economy to roll over in 2004. If I'm right, our earnings estimates of $53.50 for the S&P 500 for 2003 and $58.50 for 2004 should come through. This would support a higher level for the market. (Byron R. Wien, U.S. Strategy, Morgan Stanley via Washington Post 10-19) The strengthening economy, growing corporate earnings, and increasing capital spending support our positive, ever-cautious view. We are in a bull market. Trends last longer than anyone ever expects. The bear market lasted longer than expected. While we have no idea the heights to which this bull may climb, we believe that the greatest risk to investors is not being invested. (Michael K. Farr, The Farr View via Washington Post 10-19) If a stock drops 78% from the price you paid (that was the decline in the Nasdaq index from peak to trough), it must rise 353% just to get you back to even. The Nasdaq index, up nearly 72% from its low of last year, would have to rise 164% from Friday's close to regain all of the ground lost in the bear market. (Tom Petruno, LA Times 10-12) The S&P's 500 index is up 33.6% from its low on Oct. 9, 2002. The first-year rebound from the bear market that ended in 1970 was 43.7%. The comparable numbers were 38% for 1974-75, 58.3% for 1982-83 and 29.1% for 1990-91. (Tom Petruno, LA Times 10-12) Remember that if you try to wait until you feel absolutely comfortable with the stock market, "I can guarantee that that will be when the market is at a top," says James Stack, editor of the InvestTech Market Analyst newsletter. (Tom Petruno, LA Times 10-12) While commodities can be extremely volatile in price, investing in them can help smooth out the performance of an investment portfolio, some financial advisers say, because commodities tend to do well when stocks and bonds decline. In the last 30 years, for example, there were only two years in which the S&P's 500 index and the Goldman Sachs Commodity Index both had net annual losses. (J. Ales Tarquino, NY Times 10-12) According to Janet Bodnar, executive editor of Kiplinger's Personal Finance magazine, the average age at which a married woman will be widowed is 58 for a first marriage and 59 for a second. Because women live longer, they need more money for their senior years. For the typical woman of retirement age, Social Security accounts for 53% of income, compared with 38% of income for a man. (Michelle Singletary, Washington Post 10-12) We urged clients last week to 'get in the game,' as we believed the sell-off the week before provided opportunity to get in [on] the early stages of a new bull market. We will have ups and downs, but we are convinced the current environment is very bullish for growth investors. Interest rates are low, valuations remain attractive, there is a demand imbalance for equities, and there are things to worry about. In short, the perfect environment for us. (Michael T. Moe, ThinkThoughts by ThinkEquity Partners via Washington Post 10-12) It took less than two months for the bond market to go from a 45-year high to a one-year low; the rapid reversal is pretty convincing evidence that we have, indeed, seen a secular top in the bond market. Markets rarely go straight from red-hot to ice-cold, however, and we therefore suspect that the selling has been overdone in similar fashion to the overdone buying of late spring. Some sort of reflex rally is thus likely to take place at some point; such a rally . . . [will] probably be a better opportunity to bail out of bonds than right now. (Walter Deemer, Market Strategies and Insights via Washington Post 10-12) Before third-quarter earnings reports is a good time to invest or add monies to your portfolio. If your allocation is proper, do not be tempted to take money out of your account to take profits. The investment background is very positive and the market trend is up over the next year and possibly longer. The upside/downside risk ratio is attractive, particularly if you can stay invested over the next year. Most other investments, such as fixed income, have very little, if any, upside potential. (Jim Collins, OTC Insight via Washington Post 10-12) In our Aug. 29, 2002, issue we noted that, based on the Presidential Cycle, the Dow could be at 11,233 by the end of 2003. . . . The reason we made the comment was the [historical] performance of the market from its mid-term election-year low to its pre-election year high. The average gain since 1914 for the previous periods . . . was an impressive 50.2%. Whether or not we get above 11,000 remains to be seen, but there's no question that the Presidential Cycle has held true to its historical pattern. Dan Sullivan, The Chartist via Washington Post 10-12) Earnings for companies in the S&P 500 are expected to jump nearly 16% from a year earlier in the third quarter, and analysts have grown more bullish about results as the year has worn on. Back in July, analysts were expecting only 13%, according to Thomson First Call. (Erin Schulte, WSJ 10-05) You owe it to yourself to buy good funds from houses with good reputations. Three large houses that meet this test and are untainted by scandal are American Funds, Fidelity and Vanguard. (James Glassman, Washington Post 10-5) As we approach our target of DJIA 10,000 and Nasdaq near 2,000, we are assessing the next market move. At this point, we see a trading range near 10,000 as the most likely outcome. In regard to the Nasdaq, we expect the rally to fail slightly below the 2,000 level and also form a trading range. The Nasdaq has become increasingly speculative and now appears to be overpriced, creating some short opportunities. (Sean Christian, The Personal Capitalist via Washington Post 10-5) In the standard setup, a mutual fund manager collects an annual management fee of something like 1% to 1.5% of assets under management. The bigger the assets, the bigger the fee. At a typical hedge fund, the manager gets 1% of assets plus 20% of investment profits earned. (Chet Currier, Bloomberg 10-03) In 15 out of the past 25 years (1978 through '85; 1995 through '01), the trade deficit soared - and so did the dollar. Why the perverse result? Because of foreign demand for stocks, bonds and real estate - and for the dollar itself. (Gene Epstein, Barrons 9-29) Only 29% of all [credit card] balances pay at rates over 16.5%. An amazing 46% pay at rates under 10.99%. Those figures are for the accounts that continue to carry a balance and pay interest on it. According to CardWeb.com, nearly 40% of credit card users pay their balances in full each month, incurring no interest charges. (Scott Burns, DMN 9-28) Tactical asset allocation is an investment strategy that is gaining greater attention by major brokerage houses and is seeing increased use by investors. It occurs when investment decisions are based on predictions for changes in the macroeconomy, or in the markets, rather than on the client's individual risk tolerance or future goals. Some brokerage firms believe stocks and bonds will trade in a narrow range for some time. That means that unless investors take active measures to capture shorter-term jumps during volatile times, performance will be disappointing. (Kaja Whitehouse, WSJ 9-25) Early forecasts for the holiday season estimate sales growth of 5.7%, well above the 2% that stifled job growth a year ago. Is this the beginning of sustainable recovery from the recent recession? In 1958-60 and again in 1980-82, similar initial spurts in consumer spending vanished into renewed recession. In most other recoveries, however, once consumers began loosening their purses, economic growth continued until the economy reached high levels of sustainable noninflationary growth. (Donald Ratajczak, AJC 9-21) Home Page Previous Factoid Top Sites
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