|
Fund Scandal Sept Update Oct Update Nov Update More Factoids Nov Too Oct Sept Sept Too August August Too Q3-03 Index Q2-03 Index Q1-03 Index Q4-02 Index Q3-02 Index Q2-02 Index Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index Q4-00 Index Q3-00 Index Q1-00 Index REIT Updates Nov 03 Nov Stats Nov Stats Oct 03 Oct Stats Oct Stats Sept 03 August 03 July 03 Financial Services Updates Nov 03 Oct 03 Biz Links Business News Economic Reports Stock Exchanges Searches |
Note: The November Fund Scandal Update is on a separate page.
Pieter Jelle van der Sluis, an assistant professor of finance at the Free University of Amsterdam, and Nolke Posthuma, vice president for research at ABP Investments, recently found the necessary data. They reported their findings in "A Reality Check on Hedge Fund Returns," a working paper available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=438840. According to the authors, databases for hedge fund performance are misleading because participation in them is voluntary. Because young hedge funds have too little data to interest those databases' customers, the managers of these new funds often wait several years before starting to report their track records. If their records over those initial years turn out to be poor, they may choose not to report at all. That wouldn't necessarily create a bias, however, if the databases recorded a hedge fund's returns only after it began reporting performance. But at major databases, that has not been the case. When adding a hedge fund, they also include its historical returns. Because that process, known as backfilling, excludes the poor returns of funds that choose not to report, it paints an overly optimistic portrait of the average hedge fund's performance. The researchers measured the magnitude of this so-called backfill bias by using the TASS database of Tremont Capital Management; the researchers say that this database includes the greatest number of hedge funds from around the world. Once backfilled returns were eliminated, they found, the average annual return of hedge funds from 1996 through 2002 dropped to 6.4% from 10.7%. But even the 6.4% figure is upwardly biased, the researchers said, because hedge funds typically do not report their returns over the last few months before they go out of business, during which their returns may be dismal. By assuming that the net asset value of a fund that is closing shop declines 50% in the month it stops reporting to the databases, average hedge fund returns from 1996 through 2002 dropped to almost nothing - just 0.1% a year, annualized. That is far worse than the performance of the average mutual fund. According to Lipper, the average annual return of a domestic equity fund over that period was 4.9%; for domestic bond funds, it was 6.1%.
Today GM makes roughly the same number of cars and trucks, but employs just 118,000 people as a result of a drive to become more efficient and cut costs to survive against ferocious global competition. In the past five years alone, GM has cut the amount of labor required to assemble a vehicle by 30%, to just 24.44 hours, according to the Harbour Report, which tracks such data for the industry. GM's experience illustrates what has happened throughout U.S. manufacturing over the past two decades. From 1979 to 2000, U.S. factory output nearly doubled while the number of manufacturing jobs fell by 2.3 million. Since early 2001, through the recession and slow recovery, 2.8 million more factory jobs were cut. Some of those jobs disappeared because of rising imports, the movement of jobs overseas and other factors. But most by far were eliminated because companies used new technologies, management techniques and other methods to achieve huge gains in productivity. And the jobs lost to productivity gains will not come back, regardless of what policymakers do in Washington. Even during the slump and the hesitant recovery that followed, manufacturing productivity continued to climb. In October, factory production was 5% below its pre-recession peak. But the number of manufacturing jobs had plunged over the past three years by almost 2.8 million, a decline of more than 17%. Economists note that manufacturing's share of U.S. employment has been declining for 40 years. And that is true in other nations. Since 1979 both Britain and Sweden shed a larger share of their factory jobs than the one-quarter lost in this country. Germany lost a fourth of its manufacturing jobs just since 1991, and Japan lost 16 percent of its factory jobs since 1995, according the U.S. Labor Department. Brazil's manufacturing employment fell 20 percent in the past seven years. In most cases, rapid growth of productivity has been the primary reason for the losses. From 1995 to last year, factory efficiency rose 134% in China, which allowed China virtually to double its manufacturing output while shedding more than 15% of its factory jobs. Employment last month outside of manufacturing was virtually the same as before the recession. In other words, while many non-manufacturing jobs were eliminated since early 2001, about as many others were created. Recently, job growth outside of manufacturing has been strong enough to more than offset the continuing loss in factory jobs.
The Bureau of Labor Statistics calculates the unemployed not from the insurance rolls, but from a monthly survey of about 50,000 households nationwide, selected to reflect the entire "non-institutional" population. The skeptics are quite right about the relative size of the figures. Compared to 3.5 million people currently receiving unemployment insurance, the BLS estimates that there are 8.8 million unemployed. How is it possible that fewer than half the unemployed are receiving unemployment insurance? But it isn't hard to reconcile the two figures. To begin with, of the 8.8 million jobless, 800,000 quit their jobs voluntarily. And another 3.2 million are either "new entrants" or "re-entrants" into the labor force - workers who wouldn't qualify for benefits because they have no recent job history. That leaves 4.9 million, compared to 3.5 million receiving benefits. Various factors account for that difference of 1.4 million. First, Labor Department figures show that nearly 12% of initial claims, or about 200,000 per month, are rejected. (Reasons include being fired for cause and not enough work history.) Many don't bother to apply for benefits because they expect to land another job very soon, according to one Labor Department study. And some have already exhausted their benefits. The skeptics raise a final question. At the rate of 367,000 initial unemployment insurance claims per week, that comes to a staggering 19.1 million a year. Could there be that many unemployed? Well, no, although the figure does reveal how frequently people have "spells" of unemployment. Apart from the 12% of claims that are rejected to begin with, there is rapid turnover: More than 30% of the jobless are unemployed less than 5 weeks and 60% less than 15 weeks. There is also "double-counting": Labor Department figures show that last year 3.1 million people accounted for 6.2 million claims -- first going on the rolls, then getting a job, then rejoining the rolls. Related articles: The Pool of Unemployed Is Not Stagnant - John Berry, Washington Post / Sam Zuckerman, San Francisco Chronicle
Both funds aim to replicate the performance of the S&P 500 index. But iShares 500, an ETF sponsored by Barclays Global Investors, charges just 0.09% of assets a year. Meanwhile, Vanguard 500, a regular index mutual fund levies a higher 0.18%. Of course, you shouldn't own just the S&P 500. Let's say your goal is to build a globally diversified portfolio that includes 40% U.S. stocks, 5% real-estate investment trusts, 15% developed foreign-stock markets, 5% emerging-market stocks and 35% bonds. To build that portfolio using ETFs, you could combine 30% iShares 500, 5% iShares S&P MidCap 400 Index Fund (IJH) and 5% iShares Russell 2000 Index Fund (IWM) to get your core 40% U.S. stock exposure. What about the portfolio's other sectors? You might add 5% StreetTracks Wilshire REIT Index Fund (RWR), 15% iShares MSCI EAFE Index Fund (EFA), 5% iShares MSCI Emerging Markets Index Fund (EEM) and 35% iShares Lehman 7-10 Year Treasury Bond Fund (IEF). This mix was suggested by David Jackson, a technology research analyst who operates a Web site that's devoted to ETFs. www.etfresources.com calculates that this portfolio has weighted average annual expenses of 0.2%, equal to $2 a year for every $1,000 invested. That 0.2% is far less than the 1.2% or 1.3% you might pay for a balanced portfolio of average-cost mutual funds. But what if you compare the ETF portfolio to an array of low-cost Vanguard index funds? Suppose the alternative consists of 40% Vanguard Total Stock Market Index Fund (VTSMX), 5% Vanguard REIT Index Fund (VGSIX), 15% Vanguard Developed Markets Index Fund (VDMIX), 5% Vanguard Emerging Markets Stock Index Fund (VEIEX) and 35% Vanguard Total Bond Market Index Fund (VBMFX). The overall expenses on these Vanguard funds amount to 0.25% a year. This means that for every $1,000 invested, the Vanguard portfolio would cost 50 cents more per year than the ETF portfolio. The ETF portfolio may have lower annual expenses. But that doesn't mean ETFs are necessarily cheaper. The reason: You need to figure in the cost of buying and selling ETF shares. Imagine you bought the seven ETFs in Mr. Jackson's portfolio and unloaded them 10 years later. Let's assume each of these 14 trades cost $20 in brokerage commissions, for a total cost of $280. The bottom line: If you have a large portfolio and thus trading costs don't loom large, ETFs look like a decent investment. That's especially true once you factor in taxes. Thanks to a quirk in the way they operate, ETFs should make smaller taxable distributions each year than comparable index mutual funds. But if you aren't a big-ticket investor, the economics of ETF investing don't seem nearly so appealing.
Less than 12% of consumers expect investment conditions will worsen in the short term. But only 25% say they'll invest in stocks over the next six months, the survey found, and about 74% said they would not. A year ago, slightly more than 22% said they're willing to go into the market. Consumer outrage over the corporate scandals such as Enron Corp. appears to be subsiding, the business research group found. Trust in corporate managers, boards of directors and accounting firms made good gains over last year's survey results.
An absence of transparency on fees has helped disguise the extent of the wrongdoing, Spitzer said. Mutual funds "charge whatever they can get away, with and nobody has been stopping them," Freeman said. Putnam has charged individual owners of its International Capital Opportunities mutual fund $91 per $10,000 invested. Putnam charged the state of Massachusetts $27 per $10,000 invested in international stocks for a $1.1 billion account. Management fees charged by the 25 biggest fund managers show Pittsburgh-based Federated Investors has among the highest fees, collecting an average $83 for every $10,000 in its equity mutual funds. Dreyfus Funds demands $80. Vanguard charges the lowest stock-fund fees among the 25 biggest companies - $27 per $10,000 invested. The management company is owned by shareholders, unlike most of its competitors, allowing for lower expenses. Related articles: Scandle in the Fund Industry
Stock prices reflect investors' view of the future, not the past or present. This year's big gains came as investors began to anticipate an economic recovery; now that recovery seems well on the way, investors are thinking about what will happen six or 12 months from now. In their contrary way, they often think today's good news is bad for tomorrow. For example: The hiring by businesses in September and October obviously reflects a greater demand for workers, who may be able to parlay that demand into wage increases. That could cause companies to raise their prices. Inflation is a bigger threat than it was early this year. When inflation looms, the Federal Reserve tends to raise short-term interest rates, and that generally causes long-term rates to rise, too. Although the Fed has said it will keep short-term rates low for some time, bond investors have begun to anticipate an eventual rate increase by bidding up rates on long-term bonds. The yield on the key 10-year U.S. Treasury bonds has gone from 3.2% in June to about 4.2%. Higher rates, or yields, help make bonds a more formidable rival for investors' dollars, sometimes undermining stock prices. Also, mortgage rates have been rising. The rate on the standard 30-year, fixed-rate loan has gone from about 5.4% in June to slightly more than 6%. That has caused a decline in the number of mortgage refinancings, according to the Mortgage Bankers Association. For the last couple of years, consumers have been propping up the economy by spending the additional money they get through refinancings. If this source of funds dries up, the economy could suffer. Consumer spending also has been helped by the tax-cut checks sent this summer to people with children. That source of spending money is now gone, too. Yet another factor: Although corporate earnings jumped in the third quarter, experts see some cause for concern. Reported earnings for S&P 500 companies were 38% higher than in the same quarter last year, but sales rose only 5.1%. That means business cost-cutting was key to raising profits, and cost-cutting cannot continue forever. To continue boosting profits, businesses eventually must sell more products and services, or raise prices. Sophisticated investors evaluate the level of risks in the stock market by watching the price-to-earnings ratio, which is figured by dividing a stock's price by the company's earnings for the last 12 months. The higher the P/E, the riskier the stock. Many experts believe that the "normal" P/E level today - the level we would have if investors were neither too optimistic nor too pessimistic - is in the low 20s. But the P/E for the S&P 500 has been hovering in the mid- to high-20s. To get back to normal, corporate earnings have to rise or stock prices fall. That doesn't mean stocks will tumble. Indeed, Standard & Poor's and other analysts think earnings will rise next year. Using those estimated earnings instead of previously reported ones, the projected P/E for next year is in the high teens. That makes it likely that stocks will go up. S&P predicts that the S&P 500 will gain another 4.4% this year, and rise nearly 10% next year, which would be consistent with long-term averages. But some other uncertainties are dampening investors' enthusiasm, such as the war in Iraq, the latest Wall Street scandals affecting the mutual-fund industry, and the buildup to the 2004 presidential election.
The global manufacturing PMI [Purchasing Managers Index] - tallied from those national PMIs by J.P. Morgan and NTC Research, with the help of purchasing associations around the world - jumped last month to its highest level in more than three years, rising 2.2 points to 54.5, the fourth consecutive month in which the index pointed to expansion. But the weakest aspect of the manufacturing upturn remains jobs. The global manufacturing PMI, which has a number of subindexes including one on employment, indicates companies around the world continued to shed workers in October, but at a less rapid pace. Mr. Hensley, the J.P. Morgan economist, says global factory employment could stabilize early next year. The survey also found input prices continued rising around the world, adding to cost pressures on manufacturers. However, global manufacturing output surged and orders books are growing fatter, pointing to strong output growth in coming months. The subindex of the global PMI for new orders jumped to 59.2 in October, the highest level since January 2000. Similarly, export orders are rising.
The study was conducted by two finance professors at French business schools, Jose-Miguel Gaspar of Essec and Massimo Massa of Insead, with grad student Pedro Matos. The research used a database of all actively managed domestic equity funds in the United States from January 1991 through June 2001 and focused on the 50 largest fund families, whose combined assets amount to more than 80% of assets in such funds. The researchers found that, because of favoritism, some funds do better than they would otherwise, while others perform worse. The resulting performance gap averages 1.6% to 3.3% a year. These conclusions are based on a statistical study of fund families as a group. Professor Massa says that the researchers have not tried to pinpoint favoritism at any fund family in particular, and that they do not know what might have motivated executives of fund families to engage in favoritism. But they have suspicions. They say that because executives want to maximize total earnings, they favor funds that charge higher fees or funds that are within shouting distance of finishing at the top of year-to-date performance rankings. Many studies have shown that investors pour a disproportionate amount of money into funds that lead the rankings. The researchers found that executives of fund families used several approaches to favor certain funds. In one strategy, the highest-fee funds in a fund family, on average, received far more shares of initial public offerings than those with the lowest fees. And funds with the best year-to-date performances also received a disproportionately large share. This pattern was even more pronounced for IPO's whose prices jumped the most on their first day of trading. These were presumably the IPO's for which market demand was greatest, and therefore could be most expected to increase the favored funds' returns. The researchers attributed an even bigger impact to a practice known as opposite trading, which occurs when funds within a family take the opposite sides of trades. That can happen when the manager of a favored fund wishes to buy or sell an illiquid stock, Professor Massa said. The manager might otherwise think twice before making these trades, because the fund's own buying or selling could hurt prices. But by having other funds in the family buy when favored funds are selling or sell when the favorites are buying, the manager of a favored fund can trade with minimal impact on prices. Over the period studied, the stocks sold by favored funds generally lagged behind the market after they were sold, and the stocks they bought generally outperformed. As a result, opposite trading had the effect of transferring some of the returns of out-of-favor funds to their favored brethren. The researchers did find that, on average, favoritism is most prevalent at the 25 largest fund families. Shareholders need to decide whether the benefits of membership in a large fund family are worth the risk of holding funds that may fall from favor.
Closed-ends have another advantage over mutual funds: A closed-end manager has a fixed amount of cash to invest, which is raised when the fund launches its initial public offering. Investors in a closed-end who want to sell shares offer them on the New York or American stock exchange or the Nasdaq Stock Market. The sale has no effect on the fund's portfolio of stocks or bonds. In contrast, when investors want to sell shares in a mutual fund, the shares are "redeemed" - or turned into cash - by the fund itself. What's the difference between an ETF and a closed-end? An ETF is an investment company that has a portfolio that tries to mimic a specific index. A closed-end fund is also a portfolio that trades on a stock exchange, but it's not based on an index. It's run by a real person. There's another, technical, difference that has significant consequences. Because of some clever financial engineering, shares of an ETF decrease and increase in a way that keeps the price of those shares linked closely with the underlying index. In other words, the price is rarely at a significant premium or discount to the index's net asset value (NAV). When you buy an ETF, you get the index, plain and simple. Shares of closed-ends often trade at prices that are different from the NAV of the stocks they own. Discounts and Premiums Since World War II, closed-ends have generally sold for less than the market value of their holdings; that is, at a discount. The median has fluctuated between a premium of 5% of NAV and a discount of 25%. Why? Economists haven't found a definitive answer. They call the anomaly the "closed-end puzzle." But the result is clear: Closed-ends carry an element of risk that's absent from mutual funds and ETFs. For example, in July, ACM Income (ACG), a closed-end fund that owns a portfolio of government bonds, carried a 10 percent premium. Investors then began to grow less enthusiastic, and the premium turned into a 2% discount. So, even though the value of the assets within the fund (the NAV) rose, the price of the fund dropped from $8.73 to $8.17 - a loss of 6%. Probably the best answer to the closed-end puzzle was offered in 1989 in a paper authored by a distinguished cast of economists that included J. Bradford DeLong, Andrei Shleifer and Lawrence H. Summers, the former Treasury secretary who is now president of Harvard University. They argued that closed-ends vary from their NAVs because of an "irrational investor sentiment factor." For example, in the third quarter of 1929, the fervor for stocks drove the premiums for closed-ends up to an average of 50%. Concerns about investor sentiment impose "an additional source of risk on holdings of closed-end funds that investors must be compensated for bearing," DeLong and Shleifer wrote in a later paper. "In other words, closed-ends must on average sell at a discount to their net asset values, which is indeed the case." In order to pay you to take the extra risk, closed-ends are cheaper than the stocks they own. Weird, but logical. A Few Recommendations Tri-Continental is the largest closed-end fund, with total assets of $2.1 billion. It carries an expense ratio of 0.68%. That compares with expenses of about 1.5% for the average stock mutual fund and about 0.25% for the average ETF. But don't forget that with both closed-ends and ETFs, you have to pay brokerage fees to buy and sell. I try to find closed-ends that have a history of fairly stable discounts. A good example is Adams Express (ADX), which, like Tri-Continental, is an old-timer that concentrates on blue chips. Launched in 1929, Adams last week declared its 67th straight annual dividend. Adams currently trades at a discount to NAV of 11 percent. Since 1995, its average annual discount has fluctuated only between 10% and 17%. The fund carries a tiny expense ratio of 0.19%. Its returns have run close to those of the S&P for the past 10 years, and it's up 22% so far in 2003. If you decide to buy just one closed-end as a core holding, this could be the best bet. One of the best closed-ends is First Financial Fund (FF), which owns a portfolio of financial stocks. The fund has produced annual returns averaging more than 17% over the past 10 years. So far this year, it's up 39%, and it trades at a small discount. Muni and Country Funds The single largest category of closed-ends is tax-exempt municipal bonds, available by state or a national mix. A report last month by UBS Investment Research found that there are 286 muni funds, with $57 billion in assets, out of a universe of 571 closed-end funds, with $135 billion in assets. The reason is simple: Since closed-ends can't be redeemed, managers can keep a stable portfolio of muni bonds, which typically are thinly traded. Forced to come up with cash to meet redemptions, the manager of a muni mutual fund, by contrast, might have to take a knock-down price on an illiquid bond. Similarly, closed-ends are excellent vehicles for single-country portfolios of stocks in emerging markets. There are currently 47 such funds, with total assets of $6.4 billion. They include some of the biggest winners of 2003: the Thai Fund (TTF), up 15%; China Fund (CHN), up 158%; Indonesia Fund (IF), up 120%; Chile Fund (CH), up 74%; and Turkish Investment Fund (TKF), up 83%. A Quick Summation There's no such thing as a perfect investment. Closed-ends are cleaner than mutual funds, but they also present special risks to investors through their discounts. But, in many cases, the benefits of closed-ends outweigh the drawbacks, and, in the end, investors should seriously consider adding these investments to their portfolios.
That hasn't been the case this year. Standard & Poor's reports that stock prices in its benchmark 500 index are up 55.1% for companies that don't pay dividends, compared with a 25.1% increase for those that do. But from 1980 through 2002, companies in the S&P that paid a dividend returned 13.5% a year, compared with a 10.8% return for those that didn't. Hersh Cohen, portfolio manager of the Smith Barney Appreciation fund, said some investors mistakenly take only the short-term view of dividends. They look at the current 2.6% dividend yield of General Electric and dismiss it as immaterial. But if an investor had bought GE shares in January 1993 at the price then of $7.13, the current dividend payout of 76 cents would be yielding a hefty 10.3% on the original investment. Similarly, Pfizer's current annual dividend payout of 60 cents a share for a yield of 1.9% on the current stock price would also be a 10% yield for those who bought shares in 1993. Related article: Investors, Returns & Dividends - Peter McKay & Bob Davis, WSJ
If you move your money elsewhere, you could find yourself paying another "load," or commission. If your financial adviser suggests buying new funds, you might mention this little-known fact: It's sometimes possible to shift money from one broker-sold fund company to another without paying a commission. Some front-load funds allow "NAV transfers," so called because you avoid the commission and instead buy into the new fund at the current net asset value. A fistful of broker-sold fund companies accept these NAV transfers, including Columbia Funds, First Eagle Funds, Hartford Mutual Funds, OppenheimerFunds, Phoenix Funds and Thornburg Investment Management. Each firm has a slightly different policy. But typically, to avoid the commission, you need to have sold another load fund within the prior 30 to 90 days. Dumping no-load funds can also be costly. If you hold these funds in a taxable account and you are sitting on profits, any sale will trigger capital-gains taxes. To reduce the hit from Uncle Sam, consider selling losing investments to offset these winners. Thanks to the recent bear market, most folks likely have at least some losers they can unload. Also, you could find yourself out of the market at the wrong time. Suppose you cash in your shares at a scandal-tainted fund company, wait for your check to arrive and then reinvest the money in new funds. This whole process might take two weeks. For instance, if you are moving $25,000 and stocks climb 4% during the intervening two weeks, you will lose out on $1,000 of potential profits. Fortunately, there are ways around this dilemma. Imagine your $25,000 is in a stock fund managed by Strong Funds. But you also have another $25,000 sitting in a savings account. Arrange to have your Strong fund holdings transferred into a brokerage account at your new fund company. Once the shares are there, you can then sell them. I am told you can usually reinvest the proceeds in other funds that same day or the following day. Major fund managers like Fidelity Investments, T. Rowe Price Associates and Vanguard Group have discount-brokerage arms that include mutual-fund supermarkets. These supermarkets allow you to buy funds from a host of fund companies.
It is that selling, particularly if the pace increases, that could affect the prices of stocks in Putnam's portfolio -- and even hurt the market in general. "It could be a big problem for the market because there's not a lot of buying going on otherwise," says Phil Roth, chief technical market analyst at Miller Tabak + Co., a brokerage firm. Other firms that are the focus of the investigation, including Janus Capital Group Inc., Strong Capital Management and AXA SA's Alliance Capital, have released numbers only for October. (Late Tuesday, Janus said its assets under management barely changed in October, at about $150 billion, in a month when the Dow Jones Industrial Average rose 5.7%.) Some stocks are particularly vulnerable. According to FactSet Research Systems, which tracks institutional stock holdings, the four firms collectively own a hefty 24.6% of the shares outstanding of auto parts maker Lear.; almost 21% of Action Performance, which sells motor-sports merchandise; 20.8% of cable operator Comcast ; and 19.7% of Juniper Networks, a computer-networking company. Some of these stocks already have been hit, though it's impossible to pin the blame on the fund companies. Lear is down nearly 10% from its high last month, shares of Action Performance, a relatively illiquid small-cap stock, are down by a third after the company reported weaker-than-expected earnings and Comcast shares are down 6% this month. Shares of Whirlpool, a big holding of Putnam and Alliance, are down 4% in the same period.
If the effect of the unfolding scandal is to make it more difficult for all investors to make changes in their portfolios, or to justify changes, it isn't at all clear that the average fund owner's interests would be helped. It might be just the opposite. On the other hand, the mutual fund industry's interests certainly would be served if people just bought fund shares and never sold, regardless of individual portfolio performance or broad market trends. "I think we're going to have some tremendous rallies in the next five years - but also some tremendous declines," said Bo Bills, a Franklin, Tenn.-based member of the Society of Asset Allocators and Fund Timers - who uses timing strategies to manage about $60 million for clients. Miller says all that her members want is to be able to use mutual funds to make or terminate market bets within the law. What she fears is overreaction by Congress, regulators, fund companies and other investors. "Why restrict the individual investor's right to trade?" she said.
But with 10-year Treasurys bobbing around 4%, interest rates don't have much more room to drop. That doesn't mean stocks and real estate are destined to collapse. But it does suggest the easy money has been made and that returns in the decade ahead are likely to be modest. Corporate-earnings growth has been surprisingly modest. Consider the 50 years through 2003. Assuming this year's corporate profits come through as predicted, earnings per share for the past half century would have grown at just 5.9% a year, according to Standard & Poor's. That's less than the 7% growth in GDP and just two percentage points a year ahead of the 3.9% inflation rate. Add in the current average dividend yield of 1.6%, and we have stocks outpacing inflation by just 3.6 percentage points a year. Related article: Stocks to be Safer with Lower Returns - Jonathan Clements, WSJ
Of course, productivity almost always grows fastest in the early stages of a recovery -- while companies catch up to a rise in demand - and then typically slows. As a result, few economists believe productivity growth can stay anywhere near the lofty levels reached in recent months. Yet even longtime skeptics expect some elements of the most-recent gains to endure and have an important impact on the economic outlook. One is Robert Gordon of Northwestern University, who recently concluded that productivity has momentum to grow at a 3% rate in the near term and could grow at a 2.5% rate during the next 20 years. That's an upward revision from his estimate of 2% three years ago and far stronger than the 1.4% productivity growth rate that prevailed between 1972 and 1995. Some Pleasant Consequences If the long-run trend of productivity growth is even just a half percentage point faster than the 2% many thought possible after the 1990s revival, the impact on the economy would be enormous. Robert Solow, a Nobel Prize-winning economist at the MIT, figures that living standards would double in 28 years with productivity growth at 2.5%. At 2%, it would take seven additional years to double living standards. Economists at the Congressional Budget Office estimate that an extra half percentage point of productivity growth would boost total federal tax revenue -- because incomes would be rising more swiftly -- by nearly $780 billion between 2004 and 2013. It would also allow Fed policy makers to keep interest rates lower for longer because productivity growth holds down inflation. Baumol's Disease Much of the service sector was thought to be ailing from a condition called "Baumol's Disease," named after economist William Baumol. When he first wrote about the subject in the late 1960s, Mr. Baumol argued that productivity in large chunks of the service sector tended to rise more slowly than in manufacturing because services required more hands-on activity that machines couldn't replace. Mr. Baumol noted that a Mozart quartet would always require four musicians to perform and it would always last about as long as the composer originally intended. Lagging productivity, in turn, tended to push costs in services up faster than overall inflation. While that was certainly true in the late 1960s, it's starting to change now as technological advances allow service companies to do what electricity allowed manufacturers to do nearly a century ago - wring costs out of their operations by automating processes that used to require time and people. Several recent studies suggest that the sector's productivity is indeed improving. In one completed in September, Brookings Institution economists Jack Triplett and Barry Bosworth found that service industries ranging from security brokerages to transportation services to law firms experienced sharply improved productivity-growth rates during the late 1990s. Even the health-care sector - a long and notable laggard - went from declining productivity between 1987 and 1995 to slight improvement between 1995 and 2001. Some economists doubt the data. Morgan Stanley's Stephen Roach argues that workers in the service sector aren't more productive, they are simply working longer hours that don't get counted in official statistics. Productivity vs Job Growth Alan Krueger, professor of economics ay Princeton, NY Times 11-13-03 On examination, rapid productivity growth is unlikely to account for the dismal job picture in the United States over the last two and a half years. First, there is no reason the gross domestic product could not have grown faster once productivity accelerated. Monetary and fiscal policy have not restrained growth. Second, in the United States greater job growth tends to accompany faster productivity growth, over either a quarter or a year, as well as over longer periods. Productivity growth usually surges at the beginning of a recovery, but the job losses are unusual this time. Furthermore, during the second-longest jobless recovery on record, which occurred during the previous Bush administration, productivity growth was lower than it is now, so accelerating productivity is not the only potential cause of a jobless recovery. Lawrence Katz, an economist at Harvard and the National Bureau of Economic Research, raises another possibility: maybe recoveries that follow longer booms have weaker job growth initially because companies postponed restructuring during the boom. Therefore, more time is needed for companies to reorganize work, which spills over into the recovery phase. Indeed, the recessions in 1991 and 2001, notable for extended jobless recoveries afterward, both followed long booms. But in the eight earlier postwar recessions, longer booms were typically followed by shorter jobless recoveries, not longer ones. For example, after the recession following the 1960's boom - the second longest, after the 1990s boom - job growth resumed immediately. William Lewis, former director of the McKinsey Global Institute, noted that fiscal, monetary and geopolitical environments are much more uncertain now than they were in the 1990's. "That makes business people run lean and be cautious about investing in new capacity," he said. Another factor is that the Bush tax cuts were aimed not specifically at job creation but at consumption and savings. In previous recessions, countercyclical policy was more focused on job creation. For example, President Jimmy Carter introduced the New Jobs Tax Credit, which gave employers a tax rebate if they expanded employment. Studies by the economists Jeffrey M. Perloff, Michael L. Wachter and John Bishop suggested that the tax credit spurred job growth. Where will the new jobs come from? Prediction is difficult because the labor market is continually changing. A quarter of all workers are now in occupations that were not listed in the Census Bureau's occupation codes in 1967. Slow Job Revocery, OR Hidden Job Growth? Victor Godinez, Dallas Morning News 10-19 Recruitment executive Jon Davis is seeing the first signs of a recovery in the job market, but most of the employers he talks with aren't looking for full-time workers. They want contractors - independent workers who are paid by the assignment. "I would say there are more employers today than there were in the past that like the flexibility of a contingent workforce," said Mr. Davis, branch manager in Dallas for Matrix Resources, an Atlanta-based technology placement firm. The rising cost of supporting a full-time workforce, diminishing worker-employer loyalty and the proliferation of technology are contributing to what may be a permanent shift away from the traditional employment model. Workers are discovering that the perceived primary benefit of a permanent job stability doesn't exist anymore, says author Dan Pink, who published Free Agent Nation in 2001. "There's a base amount of insecurity in the workforce, period," he said in an interview. "I can either manage that insecurity on my own or let someone else manage it for me and lay me off whenever they want." At the same time, employers are reeling from the escalating cost of hiring and maintaining full-time employees, according to Dr. Mike Davis, a professor of economics at SMU. He pointed to exploding health care costs as one of the biggest burdens on employers. When the Bureau of Labor Statistics prepares its monthly unemployment reports, it uses two surveys to gauge the performance of the job market. The first is the establishment - or payroll - survey of 400,000 business establishments with paid employees. It's used to calculate the official number of jobs lost or gained. The second is the household survey, which polls 60,000 households nationwide about occupants' employment status. It's used to calculate the official unemployment rate. Over the last two years, the surveys have diverged. The household survey shows that 780,000 jobs have been created since November 2001, the official end of the recession. The payroll survey shows that a little over 1 million jobs have been lost. Though economists point out that the numbers aren't exact, Dr. Davis of SMU said the discrepancy is so large that it likely points to job creation outside the traditional space. Job stability could soon be less attainable, said Robert Morgan, president of the employment solutions group for Florida-based staffing firm Spherion Corp. "We've told people as employers that we're not going to be as paternalistic," Mr. Morgan said. "We're going to put benefits management in your own hands. We're going to break the traditional contract of work for life. And guess what? Workers adapted, and they liked it." Mr. Morgan said that researchers in Spherion's latest study on the emerging workforce, completed in July, found that 54% of workers are confident in their ability to leave their current jobs, set up shop on their own and earn a living. "We're seeing an overwhelming increase in people's confidence in being able to do that," he said. Spherion explored a trend it noticed in its first survey in 1997: the appearance of emergent and traditional workers. "Emergent workers are looking at how they take charge of their careers," he said. "They want a good work-life balance." In 1997, Spherion found that only 20% of workers were emergent. That number is up to 31% this year and is predicted to rise to 52% by 2007. Technology is also driving the opportunities for people to work from home as their own bosses, said Mr. Potter of the Employment Policy Foundation.
Restaurants, real-estate companies, doctor's offices and most of the rest of the giant service sector added to their payrolls, apparently in response to the recent jump in household spending. Manufacturers, still struggling against foreign competition, cut jobs for the 39th consecutive month, but the loss was the smallest since the early months of the streak. The number of people working part-time because they could not find full-time work fell 139,000, to 4.8 million. Average hourly wages rose by just a single cent, but an increase in hours, as businesses worked harder to keep up with rising demand, fattened weekly paychecks. [WSJ: The average work week grew six minutes to 33.8 hours. Average hourly earnings edged up one cent to $15.46.] Still, the recent job gains remain modest by many measures. They are not large enough to keep up with the growth of the labor force over the long term and far smaller than the average gain over the last 50 years when the economy is growing as rapidly as it has been recently. More Stats WSJ 11-07 The Labor Department said that employers since July have replaced more than half of the 510,000 jobs they cut in the previous six months. Factory jobs declined by 24,000 after a 28,000-job drop in September. Goods-producing industries shed 17,000 jobs. The airline industry also saw a drop in payrolls last month. Since reaching an employment peak in March 2001, the industry has lost more than 20% of its jobs. A seperate report showed that consumers added to debt loads in September at the fastest pace since January. Consumer credit outstanding rose $15.1 billion to $1.972 trillion, after an upwardly revised $8.8 billion rise in August, the Federal Reserve said. Retailers are Increasing Their Hiring Hilsenrath, Zimmerman, & Merrick, WSJ 11-10 Retailers say they're expecting an improving year for the sector, not just in sales but also in how many people are manning their cash registers. In an early sign of that, retail employment rose 30,000 on a seasonally adjusted basis in October from the month before, the largest monthly increase for the industry since February 2001. Retail sales already have been heading higher, and a hiring spurt in the retail and services sector could foster a favorable cycle of rising incomes, more spending and then more hiring. Costco Wholesale is increasing its holiday sales force by 10% over last year, hiring 6,500 to 7,000 seasonal workers. Gap expects to hire more than 20,000 holiday workers for its Gap division this year. Wal-Mart says it will increase store staffing by 32% on average for the shopping season, up from a seasonal increase of 30% last year. Sears, Roebuck & Co. says it plans to hire 30,000 to 35,000 holiday workers, down slightly from previous years, despite recently improved sales. California Retailers Slow to Hire Help Goldman & Earnest, LA Times 11-26 The holidays may not bring much cheer to Southern Californians looking for work. When the big shopping season kicks off Friday, many employers will have only modestly beefed up their ranks. Although stores operating in Southern California and across the country say they are taking on seasonal help, the number of applicants is outpacing the number of jobs. Those who do get hired for the short term, economists and others say, may find it tougher than ever to stay on after the holidays. The National Retail Federation, which represents 100 retail associations, is expecting a 5.7% boost in holiday sales this year, yet many merchants aren't hiring any more help than usual. Rather, they probably will have employees work longer shifts, said spokeswoman Ellen Tolley. Nationwide last year, retailers added about 750,000 workers to their payrolls in November and December, a 3.2% increase over 2001, she said. This year, she expects an increase of 3.5% to 4%. In California, retailers added about 100,000 jobs in November and December of 2000 and 2001. But last year, the total holiday hiring slipped to about 65,000, according to the state's Employment Development Department. And this year, retail hiring around the state has been flat, the state department said.
M1 and Nasdaq probably have become linked, he suspects, because the increased volatility of Nasdaq issues has made them more sensitive to moves by the Federal Reserve Board to juice the money supply in the hope of revving up the economy. Burns notes that overall liquidity remains favorable, even though the short-term road appears a little bumpy. It's the most illiquid stocks that will have the roughest ride. Says Charles Blood, a managing director of Brown Brothers Harriman, In our view, a six-week slowdown in money-supply growth is much too short to draw any firm conclusion about lasting changes in financial conditions." In two other instances money supply contracted, only to be followed by sharp revivals, he notes. Nevertheless, Blood says, he's watching the money figures closely and would be less willing to try to ride through any downturn in the stock market than he would be if liquidity were on the upswing.
Jacobsen and his colleagues studied the relationship between oil prices and the American stock market from October 1973 to April 2003. (They chose their starting date because the price of oil generally changed infrequently before 1973, and by small amounts.) The researchers found that "changes in oil prices strongly predict future stock market returns." The is available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=460500. To illustrate the implications for investors, the researchers constructed a hypothetical portfolio invested entirely in the domestic stock market, as measured by the U.S.A. Total Return index from Morgan Stanley Capital International, whenever the price of oil declined during the previous month. The portfolio shifted entirely into short-term Treasury bills whenever oil prices rose during the previous month by more than 5 percent. When the oil-price increase was less than 5 percent, the researchers kept the portfolio in stocks, theorizing that the negative impact of more expensive oil was probably not enough to counteract the long-term historical tendency of the stock market to rise. During the period studied, this market-timing portfolio, after transaction costs, gained 11.5%, annualized. By contrast, a buy-and-hold strategy in the stock market throughout that period gained 10.4% a year, on average. Better yet, the market-timing portfolio was 30 percent less risky than buying and holding, as measured by the volatility of its returns. Although he said the results were statistically significant, Professor Jacobsen acknowledged that he would be more confident if he could replicate them over other periods. That is not possible now, because oil did not trade freely before 1973. They examined the impact of oil prices on the stock markets of 17 other industrialized countries over the same period and found that changes in oil prices had considerable predictive power in those markets, too. In a number of countries, in fact, the researchers' oil-based market-timing model was even more profitable than it was in the United States. The researchers divided the 30-year period into two parts - 1973-1988 and 1988-2003 - and analyzed them separately. Their market-timing model was profitable in both periods. Although the researchers' results were statistically significant, they found that the stock market moved in the direction suggested by the model only 52% of the time. The strategy was so profitable, however, because the portfolio generally lost only small amounts when the model's predictions were wrong; the portfolio tended to perform very well indeed when the predictions were correct. In October, the stock market behaved as the researchers' model predicted. The price of crude oil fell 6.2% in September, suggesting that October would be a strong month for the market. The U.S.A. Total Return index rose more than 5% for the month. Just the Facts A Discounting Apparatus? What an exquisite discounting apparatus this stock market is, distilling precision from the noisy chaos. That's the tempting conclusion to be drawn from the fact that the addition of 126,000 jobs in October - twice the published forecasts - ushered in a Friday trading session of unusual stasis. This is a market, after all, that has propelled shares of the online job-search firm Monster Worldwide to a 130% gain year to date and furnished the stock with a multiple of 46-times projected 2004 earnings. Does anyone else think that a labor recovery was already anticipated by investors? Yet the inability of stocks to rally on the good tidings suggests a fresh push higher may not be immediately likely. (Michael Santoli, Barrons 11-10) The Cost of Cashing Out Your 401 (k) Half of all workers who change jobs cash out their 401(k) plan savings instead of leaving them to grow, either there or in some other form of tax-deferred account, according to a new study by Hewitt Associates. Some 87% of workers with accounts of less than $5,000 opted to take cash, as did nearly three-quarters of those with balances between $5,000 and $10,000. But even as balances approached $50,000 the survey found one in five workers taking the cash, and even among accounts of $80,000 to $89,000 some 10% of job changers cashed out. Hewitt calculated that a 25-year-old who cashes out a $5,000 balance potentially gives up about $75,000 - which is what the $5,000 would grow into by age 65, assuming a 7% annual return. If that same worker then changes jobs at 30 and 35, and again cashes out his balance, the potential loss at retirement balloons to $165,000 at a 7% return. Cash withdrawn from a 401(k) is subject to ordinary income taxes, and for workers under age 591/2, there is a 10 percent tax penalty as well. (Albert Crenshaw, Washington Post 11-09) Surge in Ocean-Shipping Rates With the demand for seafaring vessels far outstripping supply, the cost of shipping iron ore, soybeans, coal and other commodities used in the manufacture of a wide range of goods has nearly tripled this year. China's surging economy is creating a huge demand for ships to import the basic raw materials the country needs to build infrastructure, supply its massive manufacturing sector and satisfy a growing consumer market. As more ships go to China, fewer are available to ferry goods between other countries, causing a supply shortage that helps to boost prices. Compounding the squeeze, shrinking mining industries in the Americas and Europe have increased those regions' imports of coal, while the summer drought in Europe is boosting grain shipments from the U.S. This year, China has increased its imports of iron ore, a basic material to make steel, by nearly 40 million tons, or 33%. Meanwhile, coal exported from China, Indonesia and Australia is making its way to Europe in strong numbers, up about 35%, according to industry statistics. (Robert Matthews, WSJ 11-04) Quick Facts, Stats & Opinions Of the 10 fund companies that have taken in the most new money this year, just one - the One Group funds in Chicago, operated by Bank One - officially has been implicated in the fund scandal. Meanwhile, well before fund companies including Putnam and Janus had been implicated, they had been suffering net outflows of cash this year primarily because of poor portfolio performance. (Tom Petruno, LA Times 11-30) So how much did investors pay to stock and bond fund managers in the most recent 12 months? More than $35.2 billion [or 0.86% of assets], according to Max Rottersman, president of FundExpenses.com. And the total does not include sales charges on broker-sold funds. The largest is adviser fees, which totaled $21 billion or 0.52% of assets. The self-serving 12b-1 charges fund companies use to attract new money, totaled $9.2 billion, or 0.23% of assets. Shareholder servicing fees added $5.6 billion, or 0.14%, and custodian fees brought in $537 million, or 0.01%. (Gretchen Morgenson, NY Times 11-30) The stock market's price-to-earnings ratio has climbed in recent months, increasing the level of risk. Still, the investment climate remains attractive, given the rising earnings, low interest rates, and subdued price inflation now in place. On balance, we think further selective stock market gains lie ahead. (Selection & Opinion, Value Line Investment Survey via Washington Post 11-30) The outlook for stocks remains very positive despite some minor negatives and concerns. The balance of risk strongly favors equities, particularly in the smaller capitalization ranges. The economic recovery is locked in. . . . While stock prices have risen, earnings have been revised upward to keep pace. Growth stocks continue to outperform their value counterparts. [We have] been advocating smaller growth stocks for outperformance and remain bullish. (Jim Collins, OTC Insight via Washington Post 11-30) I'm sure that by now you've heard that rising mortgage rates are going to kill the home market. But do not fear. For every 1 percentage point increase in mortgage rates, researchers estimate that about 200,000 people are priced out of the housing market. If that's true next year, total U.S. home sales will still be higher than they were in 2002. And home prices rose by about 7% that year. (Steve Brown, Dallas Morning News 11-27) The Commerce Department reported that profits at American companies rose 30% in the third quarter, compared with a year earlier. That was the largest year-over-year growth in profits in 19 years and was enough to lift the annual pace of profits above $1 trillion for the first time in history. (Jon E. Hilsenrath, WSJ 11-26) Kodak is an interesting example of a 'high-quality' company that fell on hard times for no other reason than 'creative destruction' as a result of a new technology, and one has to wonder how many of today's favorite momentum stocks, such as Cisco, Intel, Microsoft, Oracle, Sun, etc., will eventually encounter a similar fate. . . . Stocks do not always go up in the long run. The reality is that most companies go out of business in the long term, and investors must continuously look for new companies, regions, sectors and asset classes within the investment universe. (Marc Faber, Strategic Investment via Washington Post 11-23) There are several catalysts in place supporting the prospects for international equities. These include corporate restructuring plans, deregulation of industries and markets, and a greater emphasis on shareholder value. In addition, interest rates are near historic lows, investment options are increasing, and many foreign pension funds are seriously underfunded, creating incentives for greater equity ownership. So, over time, we are confident international investing will provide improved returns for U.S. investors. David J.L. Warren, T. Rowe Price Report via Washington Post 11-23) As predicted by some private tax specialists, the basic standard deduction for a married couple filing a joint return for 2004 will rise to $9,700 from $9,500 for 2003. The basic standard deduction for most singles will rise to $4,850 from $4,750. These and other changes are in IRS Revenue Procedure 2003-85. (Tom Herman, WSJ 11-20) The basic estate-tax exclusion will jump 50% to $1.5 million on Jan. 1 from $1 million today. The exclusion is scheduled to remain $1.5 million in 2004 and 2005. Then, it's set to rise to $2 million in 2006, 2007 and 2008 and $3.5 million in 2009. The tax is scheduled to disappear entirely in 2010, but only for that one year. (Tom Herman, WSJ 11-20) An old financial bogeyman is on the prowl again. It's the specter of forced selling of stocks as unhappy investors pull their money out of funds, and fund managers in turn dump stocks to get the cash they need to meet those redemptions. It is certainly possible that the fund scandals could touch off a general decline in stock prices. If such a thing should happen, look for the smart money to be buying, not fleeing along with the madding crowd. (Chet Currier, Bloomberg 11-18) The key question [for bonds] is whether job growth can occur soon enough to sustain consumer confidence and spending, even as the benefits of tax cuts and mortgage refinancings wane. The futures market is now pricing in rate hikes of 120 basis points over the next 12 months; we think the Fed may be pressured to act sooner, but with a much smaller increase. Inflation should continue to moderate, but long-term yields remain vulnerable to dollar depreciation, higher wage costs and rising commodity prices. We are bearish on government bonds long term due to deteriorating government finances and a large current account deficit that may ultimately lead to a weaker dollar, and we are now neutral on high-grade bonds. (The View, Citigroup Private Bank Research via Washington Post 11-16) The economic cycle is back, the monetary policy cycle is back, the productivity cycle is back, the profit cycle is back, the interest rate cycle is back, the Presidential cycle in the stock market is back and the inflation cycle will eventually return. (Dick Hoey, chief economist for Dreyfus via Michael Santoli, Barrons 11-10) According to Standard & Poor's, the average dividend increase this year for the 193 stocks in the S&P that have raised their dividends was more than 19%, with the median increase 10%. The catalysts for this increased corporate largesse are twofold. First, an improved economy is buoying bottom lines. . . . Second, the new tax law, which reduces the maximum tax on dividends to 15% this year, is spurring corporate America to share the wealth. (Dow Theory Forecasts via Washington Post 11-9) This is a momentum market if I ever saw one. Top-performing stocks, particularly on Nasdaq, often have no earnings and a questionable future. On the NYSE, I'm astonished by the number of stocks under $7 which pop up on the most-active list, or the biggest gainers. Curious, I looked at balance sheet data, profits, etc., of about 30 of those current zingers. The data would singe the hair off a dog. (Charles Allmon, Growth Stock Outlook via Washington Post 11-9) In its annual poll of investor attitudes toward the securities industry, the Securities Industry Association said 46% of investors believe the coming year will be "good" or "very good" for investing - up from 29% a year ago. The survey of around 1,500 investors was conducted by Harris Interactive between Aug. 22 and Sept. 16.The survey also found that, while perhaps still high, investors' expectations for the performance of their investments has become more realistic, with the average rate of return pegged at 10%, down from a buoyant high of 33% in 2000. (John Shipman, WSJ 11-05) Byron Wien of Morgan Stanley notes that tech stocks currently have a price to sales (P/S) ratio of 2.9 compared with a historical average of 2.0 and a price to earnings (P/E) ratio, based on expected profits for the year ahead, of 29 compared with a historical average of 20. Both P/S and P/E, then, exceed their own norms by nearly 50%. (James Glassman, Washington Post 11-02) Our experience has taught us stock prices will get ahead of fundamentals coming out of a correction. When they fall back or [move sideways] for short periods, that is expected. It is also an opportunity to add to your portfolio. (Jim Collins, OTC Insight via Washington Post 11-2) Home Page Previous Factoid Top Sites
|