|
Fund Scandal March Update Feb Update Jan Update Dec Update Nov Update Oct Update Sept Update More Factoids February 04 February Too January 04 January 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 March 04 March Stats March Stats Feb 04 Feb Stats Feb Stats Jan 04 Jan Stats Jan Stats Dec 03 Dec Stats Dec Stats Nov 03 Nov Stats Nov Stats Oct 03 Oct Stats Oct Stats Sept 03 August 03 July 03 Financial Services Updates Feb 04 Jan 04 Dec 03 Nov 03 Oct 03 Biz Links Business News Economic Reports Stock Exchanges Searches |
The average money market fund is yielding just 0.5%, CD rates are 2.5%, and long-term U.S. government bonds are yielding less than 5% [or 3.83% on 3-29]. There is an old saying, 'Money goes where it's treated best,' and there is no denying that the stock market has been the place to be for the last several months. Dan Sullivan, The Chartist Mutual Fund Letter
Closed-end funds can provide investors with attractive income relative to other investment products, analysts said. Given current low interest rates, many see closed-end funds as a way to generate substantial returns. However, closed-end funds do bear risks. One is that share prices can trade at a discount to the value of a fund's underlying portfolio for long periods if demand weakens. Closed-end funds are also vulnerable to takeovers. Still, funds selling at a discount to their net asset value also provide investors with a unique buying opportunity. Closed-end funds that invest in real-estate investment trusts and in stocks of high-yielding utilities and financial companies are among the most recent trends, analysts said. A number of last week's new issues followed those trends.
Consumer prices rose just 0.2% in February, or more slowly than the 0.3% increase the month before, according to the personal consumption expenditure index. That means that after adjusting for inflation, consumer spending was unchanged last month. And after-tax personal income, after adjusting for inflation, rose just 0.2%. The saving rate [personal saving compared with after-tax income] was 1.9% in February, up from 1.8% in January. Excluding the volatile energy and food categories, consumer prices rose a scant 0.1% last month, the same as in the previous month, and they increased just 1.1% in the 12 months that ended in February.
As a result, the auditors performed far fewer tests of the numbers on the company's books than they would have at an audit client where they perceived the risk of accounting fraud to be higher. That's standard practice under the "risk-based audit" approach now used widely throughout the accounting profession. Among the items the Ernst & Young auditors didn't examine at all: additions of less than $5,000 to individual assets on the company's ledger. Those numbers are where HealthSouth executives hid a big part of a giant fraud. This blind spot in the firm's auditing procedures is a key reason why former HealthSouth executives were able to overstate profits by $3 billion without anyone from Ernst & Young noticing until March 2003, when federal agents began making arrests. A look at the risk-based approach also helps explain why investors continue to be socked by accounting scandals, from WorldCom and Tyco to Parmalat that admitted faking $4.8 billion in cash. Just because an accounting firm says it has audited a company's numbers doesn't mean it actually has checked them. In a September 2003 speech, Daniel Goelzer, a member of the auditing profession's new regulator, the Public Company Accounting Oversight Board, called the risk-based approach one of the key factors "that seem to have contributed to the erosion of trust in auditing." Faced with difficulty in raising audit fees, Mr. Goelzer said, the major accounting firms during the 1990s began to stress cost controls. And they began to place greater emphasis on planning the scope of their work based on auditors' judgments about which clients are risky and which areas of a company's financial reports are most prone to error or fraud. Auditors still plow through "high risk" items, such as derivative financial instruments or "related party" business dealings between a company and its executives. But ostensibly "low risk" items - such as cash on the balance sheet or accounts that fluctuate little from year to year - often get no more than a cursory review, for years at a stretch. Instead, auditors rely more heavily on what management tells them and the auditors' assessments of a company's "internal controls." Under a traditional "bottom up" audit [description by KPMG], the auditor gains assurance by examining all of the component parts of the financial statements, ensuring that the transactions recorded are complete and accurate. By comparison, under the "top down" risk-based audit methodology, auditors focus less on the details of individual transactions and use their knowledge of a company's business and organization to identify risks that could affect the financial statements and to target audit effort in those areas. So, for instance, if controls over a company's sales and customer IOUs are perceived to be strong, the auditor might mail out only a limited number of confirmation requests to companies that do business with the audit client at the end of the year. Instead, the auditor would rely more on the numbers spit out by the company's computers. "The problem is that there's not a lot of evidence that auditors are very good at assessing risk," says Charles Cullinan, an accounting professor at Bryant College, and co-author of a 2002 study that criticized the re-engineered audit process as ineffective at detecting fraud. "If you assess risk as low, and it really isn't low, you really could be missing the critical issues in the audit." Facing a crush of shareholder lawsuits over the accounting scandals of the past four years, the Big Four accounting firms say they are pouring tens of millions of dollars into improving their auditing techniques. But the firms aren't backing away from the concept of the risk-based audit itself.
The municipal-bond market's recent rally has exacerbated the situation. Prices of many muni bonds have appreciated so much that selling would create large capital gains, wiping out the advantage of tax-exempt coupon payments. "A lot of funds managers, particularly those who have a fairly conservative mandate, feel their clients will tolerate underperformance in a rally a lot better than they would tolerate getting hurt if the market sells off," said Eric Jacobson, senior fund analyst at Morningstar. Investors cite the bond-market's performance last year as a harbinger of difficulties ahead. Bonds rallied strongly in the spring after Fed officials voiced worries about deflation. Then market sentiment abruptly shifted, and investors rushed to sell Treasurys. Within weeks, the 10-year yield had soared more than one percentage point. Bruce Whiteford, who manages some $6 billion in tax-exempt bonds at Bessemer Trust in New York, has positioned his portfolios for the possibility of a similar market reversal later this year or in early 2005. "It may take a while, but the next significant move in rates is going to be up, not down," he said. "And when people finally decide that things are effectively changing, everyone is going to head for the door at once." Like others, Mr. Whiteford has responded by trimming duration. But shorter term also means lower yield - especially now, when short-term munis are yielding much less than longer-term issues. Mr. Whiteford, like others, employs a "barbell" strategy, with most of his investment picks weighted at each end of the maturity spectrum and little or nothing in the middle maturities. At USAA Investment Management Co. in San Antonio, fund manager and senior vice president Clifford Gladson switched to a defensive stance about two years ago. He stocked up on variable-rate demand notes -- tax-exempt instruments that, like money-market securities, are highly liquid and maintain their par value. But the notes yield only about 1%, and when the bond market rallied in 2002, the USAA Tax-Exempt Intermediate-Term Fund Mr. Gladson manages lagged its category in total returns by nearly a third of a percentage point, according to Morningstar. Last year, though, the cautious strategy finally paid off, as yields rose around midyear. The fund's return topped the overall 4% gain in its category by more than a full percentage point, according to researcher Morningstar. Mr. Gladson continues to maintain shorter durations.
The market's near-term performance may depend on the strength of first-quarter earnings reports, which will begin rolling out in significant numbers in mid-April. Thomson First Call is forecasting operating earnings growth of 15.9% for the S&P 500, compared with Q1-03. That estimate is up from 13.4% in January. Several barometers of market performance, including the price-to-earnings ratio, new highs for individual stocks, the pattern of advancing and declining stocks, and levels of interest rates and inflation indicate that the market is not in a precarious position. These indicators suggest that a steep decline is not in the offing, and that an eventual rebound is. Based on current earnings, the price-to-earnings ratio for the S.& P. 500 was 23.3 at the end of February, according to Ned Davis Research. That is above the average of 16.1 since 1946, but considerably below the 32.4 average of 1999, the year before the stock bubble burst. And it is well below the high of 46.5 in January and March of 2002, when P/E's zoomed after earnings fell for five consecutive quarters. Many analysts, like Abby Joseph Cohen at Goldman Sachs, still say that the market is undervalued, based on models that include estimates of economic growth, inflation, earnings and interest rates. When the S.& P. 500 was near 1,100 on Monday, Ms. Cohen estimated that the market was undervalued by about 18%. Another measure, the so-called Fed model, which weighs the relative value of stocks to bonds, shows the stock market further underpriced, currently by 33.3%. Indicators of investor sentiment show that the bullishness of early this year has receded. That is a positive development, because many analysts see extreme bullishness as a signal to sell stocks. The two-week average of the bullish sentiment index of the American Association of Individual Investors was at 84.8% on Jan. 23, the highest reading since the survey began in July 1987. By last week, that reading had fallen to 58%. In addition, measures of trading volume and the ratios of advancing and declining stocks indicate that the market is oversold because most of the trading volume is concentrated in declining stocks, according to Ned Davis Research. For those who follow these gauges, the data do not yet send a buy signal, but they do show an improving market environment. Since 1962, the S&P 500 has had 10 rallies, including the current one, that have lasted at least 343 calendar days without a 5% fall from the most recent high. Once the other nine rallies fizzled, the S&P 500 fell by an average of 10%. Market Update II Erin Schulte WSJ 3-22 The recent market weakness has resulted partly from heightened terrorism fears and uncertainty about the outcome of the November presidential election. Some people say it also reflects jitters about first-quarter earnings and the economy in general, based on slower-than-expected job growth. "One reason the market started to correct was that economic data we've been seeing has been slightly weaker than projected," says Marc Pado, U.S. market strategist with Cantor Fitzgerald in New York. "That had a lot of people thinking we're going to see earnings that aren't going to meet expectations." However, he says companies have been fairly cautious about forecasts, and midquarter updates indicate profits will be "OK, but not great." According to First Call, in the week of Feb. 11, when the market hit its 2004 peak, stocks in the S&P 500 sold for an average of 18.3 times earnings forecasts for the coming year. As of Friday, these stocks were selling for an average of 17.8 times expected earnings. Stocks historically have sold for 15 or 16 times earnings. So far, for every company that is telling investors that earnings will be better than expected, about 1.7 have warned that a disappointment is coming, according to First Call. That is better than the long-term average of 2.3. Even if companies continue to surprise on the upside throughout earnings season, the ranks could be thinner than usual. Steve Young, chief investment strategist at Banc of America Capital Management, notes that in 2003, actual earnings outpaced estimates about 5.5%, compared with about 3% historically. He sees a return to a more normal performance this year. "I'd characterize what's going on with earnings as very much following the pattern of the economy: a deceleration in the rate of growth. That includes not only the rate of growth for earnings, but perhaps even the number of upside surprises," he says. "The magnitude of those may decelerate as well." One factor that could muck up analysts' estimates - and result in some unexpected first-quarter results - are oil prices, which reached a 13-year high of $38.15 a barrel at one point last week. Joe Cooper, senior research analyst at First Call, says analysts have based their first-quarter earnings forecasts on oil prices of $31.40 a barrel. "Analysts tend to chronically underestimate the price of oil embedded in their forecasts," Mr. Cooper says. That could mean "major pain" for a number of sectors, including chemicals companies and airlines. Oil prices could continue to be a wild card in quarters to come. Mr. Young says. "The reason the market and economy has been able to handle [higher oil prices] is because tax cuts and lower interest rates have offset higher oil prices. If oil stays up here in the mid- to upper-30s and some of the stimulus goes away, it will begin to affect the economy more significantly."
Last week I received a brochure from Morgan Stanley that showed how six asset classes had performed in the 23 calendar years from 1980 to 2002. None of the six classes [Nasdaq stocks, European stocks, large-cap U.S. stocks, corporate bonds, Treasury bills and managed futures] "has consistently outperformed all other types of investments," wrote Morgan Stanley. "By prudently distributing funds among several asset classes, an investor can potentially reduce overall portfolio risk and increase the chances of achieving greater returns." I am not sure about the "greater returns" part, but I am convinced that, by spreading your assets across several categories that don't move up and down together, you'll modulate the severity of the ups and downs of your portfolio's value. Things, or commodities, are represented on the Morgan Stanley chart as the Barclay's CTA Index, the benchmark that tracks the performance of more than 300 "commodities trading advisors" - that is, specialists who run programs that invest in contracts to buy food, metals and other things. Over the 23-year period, managed futures finished in first or second place eight times - exactly as many times as the Standard & Poor's 500, the index for large-caps. But, typically, when the S&P did poorly, futures did well -- and vice versa. For example, in 2002, futures rose 12% while the S&P dropped 22%; in 1998, the S&P rose 29% while futures rose only 7%. According to my calculations, the annual average increase for managed futures between 1980 and 2002 was 15.5%, for the S&P 14.5%. Very close, but very uncorrelated. Morgan Stanley points out that during each of the eight quarters over this period when the Citigroup Bond Index experienced negative returns, the Barclay's CTA Index averaged a gain of 6% while the S&P fell an average of 4% and corporate bonds fell an average of 3%. In other words, futures were a great hedge against declines in both bonds and stocks. Managers of futures programs play both sides, sometimes shorting commodities because they expect prices to fall, sometimes going long (or buying) because they expect prices to rise. And, of course, managers don't buy all commodities; they pick and choose among vast choices, including gold, natural gas, soybeans, coffee, pork bellies, corn oil, cotton, cattle and dozens more. Taken as a whole, commodities had a rough time in the 1990s. Between 1991 and 1998, for example, the Goldman Sachs Commodity Index (GSCI) -- which reflects the prices of energy, metals and agricultural futures - was flat. During this same period, however, managed futures programs rose an average of 7% annually, after accounting for commissions. While managed futures look like mutual funds, they are typically limited partnerships with restrictions on who can invest and when you can take your money out. Managed futures are sold through brokerage firms, and the commissions are high - 4% a year is not unusual. Initial investments can be lofty and, since trading is often frenetic, you can run up big tax liabilities in a good year. Be sure you understand what you are getting into. Right now there's a separate case for investing in things: They're going up in price. The GSCI has doubled since the end of 1999, and the Dow Jones-AIG Commodity Index has risen by about three-quarters since mid-2001. There are three reasons for these increases: First, the dollar has fallen lately, which means that it requires more dollars to buy a commodity with constant value. Second, supplies have been tight because businesses cut back on expansion during a worldwide recession and are still reluctant to invest heavily in getting things out of the ground or turning them into products. And, finally, demand is rising as China, especially, booms and gathers raw materials from around the globe to feed its people and its industries. Buying commodities futures contracts is an extremely risky business. Investors typically use tremendous leverage, putting up small amounts of cash to "control" large positions. Your liability is unlimited, and nine out of 10 commodity speculators (let's not call them investors) lose money. So stay away from futures contracts. There are alternatives. You can buy mutual funds that specialize, not in things themselves, but in companies that profit from the extraction and production of things. Three of the best known are T. Rowe Price New Era (PRNEX), First Eagle Gold (SGGDX) and Vanguard Precious Metals (VGPMX). These own share in companies like Devon Energy (DVN), an Oklahoma-based exploration and production company, Total S.A. (TOT) - the integrated French giant, Newmont Mining (NEM), Compania de Minas Buenaventura SA (BVN) and Placer Dome (PDG).
Most hedge funds pursue so-called market-neutral or absolute-return strategies intended to make money whether the stock market goes up, down or sideways. In theory, their performance should not be closely linked to that of the overall stock market. The researchers found that if hedge funds' returns were calculated with accurate prices, the average fund's correlation to the stock market would nearly double. This means that the average hedge fund is significantly more sensitive to stock-market movements - climbing when the market gains and declining when it falls - than it seems when returns reflect stale prices. In other words, the average hedge fund is much less hedged against stock-market volatility than many investors think. The increased correlations make returns of many hedge funds much less attractive, according to the researchers. Theoretically, a hedge fund, adds value only if it can outperform an unmanaged portfolio invested in the same asset classes and with the same allocations. The researchers interpret the higher correlation with the stock market as evidence that the average hedge fund is more exposed to equities than was previously thought. That, in turn, means that if the hedge fund is to add value, the unmanaged portfolio it must beat needs to have a higher allocation to the stock market. And because the stock market performs better over the long term than most other asset classes, this higher allocation raises the bar for hedge funds. The researchers found that the average hedge fund did not outperform a corresponding unmanaged portfolio from January 1994 through February 2004.
The ICI has argued that rumors of "window dressing" are greatly exaggerated, and the SEC has never found enough evidence to bring a case asserting that kind of deception. But a new study suggests that the practice may be quite common in bond funds, which account for $1.6 trillion of the industry's holdings. Academics at Pace University and Wake Forest University found that bond funds load up on government holdings during disclosure periods but put more of their money into riskier, higher-yield corporate bonds in periods when they don't have to tell the public what is in their portfolios. The study, which used data from a quarterly survey of funds conducted by the research firm Morningstar, found the effect was particularly pronounced in corporate high-quality bond funds, which put 40.6% of their holdings into government bonds during disclosure periods, on average -- but only 35.6% during non-disclosure periods, said co-author Matthew R. Morey, a finance professor at Pace. "They're buying government bonds right before disclosure periods," he said. "It makes them look safer than they are." The portfolio manager benefits in two ways - the fund gets a lower risk rating by holding government bonds during disclosure periods, yet it gets higher-than-expected returns because of its investments in riskier corporate bonds. Investors are misled and may also receive lower returns than they would have without the last-minute churn because the fund has to spend extra money buying and selling its holdings, according to some academics. Sean Collins, an economist for ICI, said there are legitimate reasons for bond funds to load up on government bonds at particular times of the year. Interest rates, which affect bond values, tend to fluctuate sharply both in late December, when the U.S. calendar year ends, and in late March, when the Japanese year ends, two times when many funds disclose their holdings. As a result, fund managers may increase government holdings to reduce their exposure to uncertainty, he said. SEC officials say revamping a portfolio just for public disclosure would constitute fraud, but they add that it is hard to prove that a fund manager was selling bad stocks or bonds or buying good stocks or bonds for improper reasons. There haven't been any good studies recently on the subject of window dressing in stock funds, academics said, but a four-year-old study found evidence that stock fund managers used another technique to dress up their holdings at key times. This end-of-quarter activity, generally called "portfolio pumping," involved managers who went into the market in the last minutes of a quarter or a year - say five minutes before the markets close on Dec. 31 - and bought shares in stocks they already owned to push up the closing prices of those shares. The study, which looked at hot stock funds over a five-year period, found that they generally had their best days on the last day of a reporting period, such as a quarter, and their worst days on the first day of the following period. As a result, investors suffered because their funds were buying stocks at artificially high prices and potential investors were misled by slightly inflated reported prices, one of the authors, University of Pennsylvania finance professor David K. Musto, said in an interview. The effect is stronger in the funds that are fighting for a top ranking, and less pronounced in underperforming funds for which a short-term bump would have little impact on customer opinion, the study said. It's virtually impossible for most investors to detect window dressing, but industry experts said high turnover in a fund's holdings - more than 100% in a year -- is one clue that the fund might be making unnecessary purchases and sales. SEC officials hope a rule adopted in February will cut down the incentive for window dressing and make it harder to do. Mutual funds will be required to disclose holdings quarterly rather than just twice a year, making it harder for managers to dress up portfolios for public consumption.
To see how two negative emotions, disgust and sadness, affect economic decision making, Prof. Jennifer Lerner of Carnegie Mellon University and her colleagues recruited 199 volunteers, age 16 to 49. Some watched a scene from the 1979 tearjerker "The Champ," in which a boy's father dies. Others watched the infamous filthy-toilet clip from the 1996 Gen-X hit "Trainspotting." A third group watched an emotionally neutral clip of coral reef fish. All wrote down how they felt afterward. Half the volunteers, drawn equally from the three film audiences, then got a set of highlighter pens (a hot commodity at CMU) and the chance to sell it back at any price from 50 cents to $14. The other half were just shown the set and asked if they would rather receive it or get cash. This was akin to a purchase, because volunteers who opted for the pens had to forgo money for them. Disgust, the researchers suspect, makes people want to get rid of things; they seem to feel everything is tainted. Sadness, in contrast, often reflects loss and helplessness, and so makes people want to change their circumstances. These effects carried over into the experimental marketplace. Disgust cut people's selling prices, as the "yuck" factor made them eager to get rid of the pens. Volunteers who felt disgust were willing to unload the pens for only $2.74, on average, compared with the $4.58 demanded by the emotionally neutral fish-watchers. Disgust also reduced buying prices. Reluctant to take on anything new, the volunteers would do so only at a rock-bottom price. Yet they had no idea their feelings were affecting their economic decisions. Sadness, too, cut people's selling price, to $3.06, compared with what emotionally neutral volunteers demanded for their pens. Feeling blue made people so desperate for change, even one as inconsequential as getting rid of a few pens, that they held a fire sale. Sadness also raised, to $4.57, the price people would pay for the very pens they were willing to sell for just $3.06. Overpaying seemed a small price for change. This was a 180-degree reversal of one of the core tenets of behavioral economics. Called the endowment effect, it is the tendency for people to demand a higher price for something they own than they are willing to pay to buy the same item. Psychologically, we place greater value on what we already have. Yet if you've ever overpaid for something, you know there are exceptions. The CMU results may explain why. "Sadness reverses the endowment effect, making people willing to pay a higher price for something than they were willing to sell it for," says Prof. Lerner. That fits with the common observation that compulsive shoppers tend toward depression and that having a really bad day can trigger a shopping spree.
Consider Van Eck International Investors Gold Fund, class A shares. It discloses to investors that 1.97% of its assets are used each year to cover the fund's expenses. But that doesn't count some $7 million in annual payments to brokers. Suddenly, the cost of owning the fund rises to 5.8% a year, the highest of the funds studied by Lipper for the Journal. RS MidCap Opportunities Fund and RS Diversified Growth Fund had total annual costs of about 4%, including brokerage expenses, Lipper says. Expense ratios average 1.68% for all stock mutual funds, according to Lipper. That data doesn't include the cost of brokerage commissions, or what funds pay to middlemen for buying and selling stocks and other securities -- a figure now buried deep in regulatory filings. Lipper says stock funds, on average, pay 0.41% annually in brokerage commissions. The SEC is now considering whether to require the disclosure of that figure in fund reports.
The catch has always been that you can't change the amount of your distributions once you start them until the agreed-upon waiting period is up. The rigidity of the rule caused problems when the stock market dropped in 2000. Investors who failed to account for a decline in the value of their annuity assets when they established a withdrawal rate suddenly faced the risk of depleting their accounts. To help investors, the IRS added a little loophole to rule 72(q) on March 1. The loophole says that people who take early distributions from an annuity can opt to change, one time, the calculation that determines how much is withdrawn.
The Wrong Withdrawal Rate Starting at age 70.5, you have to make minimum withdrawals from certain tax-sheltered retirement accounts. According to the rules, you have to pull out at least 3.8% of your accounts' value at age 71, 3.9% at 72, 4% at 73 and so on. But just because the government says you must withdraw a certain sum each year doesn't mean you should spend precisely this amount. If your health is poor, maybe you should deplete your accounts even more quickly. If your health is good or you have plenty of other income, maybe you should withdraw only the minimum and then reinvest this money. The Wrong Quitting Time People pay way too much heed to the qualifying ages for Social Security for setting their retirement date. If your finances allow it, you should treat the decision to retire and the decision to claim Social Security as two separate choices. The Wrong Savings Amount Investing in the IRA and 401(k) maximums is often seen as a sign of financial rectitude. But it doesn't mean you are saving the right amount for retirement. If you will receive a traditional company pension, where you get a check every month for the rest of your life, you may not need to fully fund your 401(k) and IRA. On the other hand, if you're earning $200,000 and you're putting $13,000 in a 401(k), that's probably not enough. The Wrong Investment Mix Many financial experts advise holding bonds in a retirement account, while keeping stocks in a taxable account, because this is often the most tax-efficient strategy. The reason: Bonds typically generate a lot of immediately taxable interest. But if you stick them in an IRA or 401(k), you defer this tax bill until retirement. Meanwhile, by holding stocks in your taxable account, you can take advantage of the low tax rate on qualifying dividends and long-term capital gains. Seem reasonable? Problem is, a lot of folks, hearing they should keep stocks in their taxable account and bonds in their retirement account, mistakenly allow their mix of taxable and retirement-account money to determine their stock-bond mix. But this is foolish. If all your savings are in retirement accounts, that doesn't mean you should be 100% in bonds.
And they are getting plenty of it. In 2004, reports John Lonski, the chief economist of Moody's, companies rated Caa - the nether region of junk - have raised $6.8 billion. That is triple what they raised in 2002. It reminds him of the complacent days of early 1998, before crises in Russia and then Asia petrified bond investors.
Many say that the bull market has at least a few more months to run; some say a year or more. The economy keeps getting stronger. Corporate earnings are improving faster than most people expected. Interest rates are at or near 45-year lows, and inflation isn't an issue. Investors are recovering their confidence: They plowed more money into stock mutual funds in January than they had in four years, and preliminary estimates show that the inflows continue. The world seems less frightening than it did a year ago, when the Iraq war loomed. The problem is that "nothing good lasts forever." As investors take increasing risks in a belief that nothing will go wrong, they become more demanding. And as their expectations rise, the list of things that could go wrong gets longer. The higher stocks go, the bigger the danger of a decline, and the more time the analysts spend combing data for any sign of trouble. Here are some of the indicators investing pros are watching to get a better handle on the future direction of stocks: Investor Psychology How to tell whether the market is properly exuberant -- but not, as Greenspan famously put it, irrationally so? Check the local garages and coffee shops. If auto mechanics cast an occasional eye toward the financial news, that is good for the market; it suggests an interest in stocks. But if they become so fixated that they put off repairs to watch CNBC, that would be excessive. Right now, says Brian Pears, a stock trader in Cleveland, interest in stocks "is awakening again, even here in the sleepy Midwest," but it isn't excessive. "When the Starbucks in our building starts putting in a TV so people can watch CNBC, I will get worried." Brian Belski, a market analyst at brokerage firm Piper Jaffray in Minneapolis, tracks the amount of speculative froth he senses when other hockey dads sidle over to ask stock questions during his son's games. Right now it is "kind of bridled optimism". Others say they are starting to see signs of excess. Some clients now want to make riskier investments than are appropriate for them, says Peter Wall, chief investment officer at Chase Personal Financial Services in New York. "We have those conversations quite a bit. It is a challenge to try to manage those expectations," he says. Francois Trahan, chief investment strategist at New York brokerage firm Bear Stearns, follows five indicators of investor psychology. Those range from demand for put options -- which can protect nervous investors by giving them the right to sell stocks at a prearranged price -- to the number of stocks hitting new lows and highs. He thinks the indicators signal that investor optimism is getting stretched and a pullback is ahead. Paul Desmond, president of research firm Lowry's Reports, tracks similar barometers, and he has concluded that serious problems still are months away. He expects stocks to turn down about nine to 12 months after a peak in the number of stocks hitting new 52-week highs. The number of new highs peaked in December, suggesting that the rally has some months to run. Other gauges, such as the number of stocks rising compared with the number falling, suggest that the rally still is fairly broad and resilient, he says. But Mr. Desmond, too, is seeing signs of excess. People with little investing background are asking to subscribe to his research service; he generally sends them elsewhere. Interest Rates "The biggest concern we have right now is the risk of a resurgence in inflation," producing higher interest rates and choking off market gains, says Mr. Wall at Chase. This certainly isn't a problem today. The most closely watched market interest rate, the yield of the 10-year Treasury note, has fallen since early September, to 3.8% from 4.6%. Consumer-price inflation has been running at about 1.9%. But some professional investors worry because they believe that low interest rates have been the single biggest factor underpinning the stock market by reducing borrowing costs that helps corporate earnings and make bonds, CD's and money-market accounts much less attractive than stocks. Sooner or later, rates will have to rise again to prevent inflation. In the past, such as in 2000, rising rates have been a chief catalyst for market declines. Earnings Mr. Wall is also watching for what the pros call "earnings disappointments," or quarterly corporate earnings reports that fall short of expectations. "Our feeling is that some of the first signals of trouble for stocks will be some earnings disappointments," which could come as soon as July, when second-quarter earnings news begins to be announced. Many companies already reported strong earnings gains last year, which will make it harder to show big percentage gains this year. And as the year goes on, companies will be hiring more workers, making it harder to keep showing strong productivity gains. The problem, adds U.S. investment strategist Richard Bernstein at Merrill Lynch, is that analyst expectations for corporate performance are rising. Earnings disappointments at the end of 1999 and the start of 2000 helped end that bull market. The market will get an initial indication of earnings performance this month, when companies expecting disappointments begin to warn of problems to come in first-quarter earnings. Money Flows Some analysts believe that stock movements, like those of any economic system, are simply a matter of supply and demand. One cloud on the horizon is that more companies have begun issuing new shares, or making IPOs, to take advantage of the rising demand. And more corporate insiders have begun to sell their stock, to realize gains. All of that pushes supply higher. Researcher and money-manager Laszlo Birinyi of Birinyi Associates, analyzes supply and demand for individual stocks, checking to see whether investors are buying or selling at certain key points. "If stocks start hitting new highs and people are selling into those highs, that to me is the best signal of all" of trouble to come, Mr. Birinyi says. It means that money is beginning to move away from those high-priced stocks, not toward them. "Right now, people are reacting pretty strongly to good news and reasonably well to mediocre news," meaning that demand is keeping pace with supply, Mr. Birinyi says. And investors generally have been buying stocks when they rise, not selling, indicating continuing support for the market. Some analysts track a different kind of money flow: the amount of cash going into mutual funds. In January, investors channeled almost $44 billion in net new money into stock mutual funds, the highest monthly figure since the bubble burst in 2000. Most analysts view this as a sign of confidence rather than excess. Economic Trends Many investors currently are focused on employment, believing that when new job creation strengthens, consumers will spend more, sustaining corporate earnings and stock values. Other investors worry that when employment improves, the Fed will raise interest rates. Hiring will push up corporate costs and make productivity gains harder, which in turn hurts profitability. Prosperity for ordinary people, in other words, could be bad for stocks, because it will raise fears of inflation, higher rates and slower profit growth.
Trouble seemingly develops for stocks only if the first rate hike doesn't brake the economy and quell inflation sufficiently, which then prompts further increases. For example, in the 16 instances in which the Fed resorted to a second interest-rate increase, the Dow dipped an average of 2.73% over the succeeding three months, and rose an anemic 3.04% over the next 12 months. In the 12 months after four rate hikes, the Dow averaged a decline of 3%. Multiple rate hikes, of course, imply an economy at or near full boil. But cooling such a beast via monetary policy frequently results in recession.
His conclusion: Investors should "underweight immediately" classic cyclicals such as auto makers, homebuilders, household-appliance firms, and makers of construction and farm equipment whenever the Fed starts tightening. Likewise, railroads and electric utilities exhibited poor performance after initial rate hikes, and joined the same list. The correlation between poor relative performance and rate troughs is particularly robust for the home-building industry, which underperformed the S&P in six of the past nine credit cycles and could be particularly vulnerable to another big slide. Construction and farm-machinery makers scored poorly in relative performance during eight of the past nine troughs. U.S. auto makers peaked in relative performance in five of the past nine troughs, though fierce global competition has driven their performance peaks ever lower since 1960. Brewers and soft-drink companies have held up well in the face of rising interest rates, and Yardeni advises overweighting both sectors as soon as rates start rising. Brewing stocks outperformed the S&P following five previous rate troughs, while soft-drink concerns outpaced the index after each of the past nine troughs. Integrated oil and gas shares were superior performers in six instances after interest rates started rising, a fact that frankly puzzles Yardeni. The sector's rich dividends might have insulated the stocks, he suggests, enhancing their competitive allure relative to high-yield bonds. Similarly, Yardeni found little correlation between the household and personal products sectors and the S&P. Tobacco, food retail, packaged foods and meats, paper and forest products, chemicals, pharmaceuticals and health-care equipment historically have done well versus the S&P several months after the Fed tightens credit. Yardeni recommends investors overweight them "later." As Yardeni and others are quick to concede, stock prices are influenced by a host of factors, not just monetary policy.
The trend can be seen in the contrasting performances this year of the broad S&P 500 index and the tech-heavy Nasdaq. As of Jan. 26, the Nasdaq was up 7.5% and the S&P 500 had risen only 3.9%. Since then, the trend has reversed. The S&P 500 finished last week up more than 4% on the year. The Nasdaq now is up only 2.2% on the year. The Dow is up only 1.4% this year. "As the new year turned, some people decided they should shift toward more quality and stability," says Keith Karlawish, president of BB&T Asset Management. "We are seeing the pendulum swing back. I think it does have staying power," says Jeffrey Kleintop, chief investment strategist at PNC Advisors. Dividend-paying stocks are doing better. Some investors still are betting on a tech revival. But investors have been struck by comments from big technology companies such as Intel, which on Thursday trimmed its projection for Q1 sales, just as some technology bulls were hoping it would be boosted. "Earnings expectations are just too high" for these stocks, and investors may be disappointed at the results, says Kleintop. He points out that analysts expect the pace of earnings gains to slow as the year goes on. The quarterly percentage gain in the earnings of companies in the S&P 500 is expected to fall to single digits by the second half of this year, from about 25% in Q4-03. That means that profitability already may have peaked, which in turn means some of the fastest-growing stocks may look less dazzling in the months to come.
Fund closings are rare -- the biggest year ever was 2002, according to Lipper, when 77 mutual funds stopped taking new cash -- because financial services firms are not in business to turn money away. But in each of these recent closings, management's spoken motivation was to stop asset bloat, where a fund draws in so much money that it can't stay true to its investment objective. The best closings occur when the fund plans to shut its doors once assets reach a certain level, or when new sales are cut off without warning. The dangerous closings occur when a hot fund makes a "last call," allowing investors weeks to rush in, all the while panicking that they might miss out. Two out of every three funds closed recently have been small-cap funds, with small stocks one of the hottest asset classes in the last year. That performance point brings us to the downside of fund closings, namely that funds that close to new investors tend to see a drop-off in performance, according to a 1999 study by Morningstar Inc., the most recent report on the subject. Morningstar showed that for every fund where the relative performance improved in the three years after closing, three other funds saw performance deteriorate. Some industry watchers believe that a rash of closings, like the one currently seen in small-cap funds, is a sign of a market top, an indicator that small stocks might be running out of steam. That theory is behind the drop-off in performance. The asset category heats up, driving performance numbers, the returns get investors excited, and the individuals throw money at the fund. By the time assets are so big that the fund is closing, the economic cycle that lit a fire under the fund is turning. "Closing a fund is in an investor's best interest, particularly if it stops asset bloat, which really changes a fund's ability to do what it is intended for," says Stephen Savage, editor of the No-Load Fund Analyst newsletter. "If you conclude that closing a fund leads to poor performance -- especially if the closing was done quickly and in a way that prevented a huge rush of assets at the end -- (it) is completely erroneous. The conclusion you can draw when you see a lot of funds closing is the same that you might make when you see a lot of firms creating some new type of fund, which is that when something becomes popular in the fund business, it may be time for the economic cycle to change and you may want to put your money elsewhere." That does not mean bailing out of closed funds. Instead, it means it might be time to change the way you are allocating your new investments. You might close off the flow of assets to the type of fund that has closed. Says Savage: "The funds you worry about are the ones that stayed open too long, where they stop performing the way you expect a fund in their asset class to perform."
When Congress cut the tax rate on dividends to 15% last year, it helped change corporate behavior. Businesses that once hoarded cash are now distributing it to their shareholders. Most investors haven't noticed, but there has lately been an orgy of dividend increases, unprecedented in recent history. Last year, 19 of the companies that constitute the benchmark Standard & Poor's 500-stock index started paying dividends for the first time. Total dividends paid by the S&P companies have risen an average of 15% over the past 12 months, according to statistics in Barron's; for the 30 companies of the Dow Jones industrial average, the increase has been 10%. Taxes are not the only reason dividends are growing. The corporate scandals that began breaking in late 2001 have encouraged companies to make their earnings more visible -- to prove to investors that they are really making money, not merely moving numbers around on the books. Dividends are the best evidence of a healthy business. You can't fake a dividend; it's hard cash. There's a final reason that companies are increasing their dividends lately: They're making higher profits. In Q4-03, Business Week points out, "earnings from continuing operations at S&P 500 companies . . . leaped 28%, compared with the year-earlier period." And companies seem confident that the strong profits will continue -- otherwise, firms would be reluctant to raise dividends at double-digit rates. While investors can tolerate a decline in earnings (businesses are always ready with an excuse), they exact a severe penalty on practically any company that cuts its dividend. The yield on the S&P, at 1.6%, and the yield on the Dow, at 2%, aren't really paltry compared with the alternatives. [At the end of February, eight of the Dow 30 were yielding at least 3% and 13 were yielding at least 2%.] On Thursday, money-market funds were yielding 0.5% on average ; two-year Treasury notes, 1.7%; five-year T-notes, 3%. Or look at municipal bonds. The yield on a typical five-year AAA-rate muni on Thursday was only 1.9%. For an investor in a 25% bracket, the after-tax yield on General Electric dividends is 1.8%. Let's say that you invest $10,000 in a five-year muni and $10,000 in GE stock. This year, after federal taxes, you'll put about $190 in your pocket from the muni interest and $180 from the GE dividends. But five years from now, the muni will still be paying you $190 while the GE stock - assuming the dividend rises at 8 percent annually (a modest rate for the company) - will pay you $264. And that doesn't even include the likely rise in GE's stock price. It's my strong suspicion that investors don't yet realize the delicious tax benefits of owning stocks that pay good dividends. As they wake up, they will get hungrier and hungrier for such companies, whose shares may then rise at a higher rate than the market as a whole. That's just a hunch, but, with the new tax treatment, it's hard to see how you can lose even if I'm wrong.
The research firm sent out a flash alert. Some big investment funds quickly sold or changed their bets on the shares. Several weeks later, CarMax lowered its earnings "guidance" for the next quarter, although it plays down the significance of the data Majestic used. "Clients pay us a premium to do something just for them," says the research firm's chief executive, Seth Goldstein. Unlike Wall Street analysts who publish widely, he explains, "we don't market what we do and we don't advertise." This is the changing face of stock research. When New York Attorney General Eliot Spitzer succeeded last year in separating investment-banking divisions from stock analysts to eliminate conflicts of interest, the historic settlement was supposed to herald a new era of securities analysis - one benefiting little-guy stock pickers. But now more than ever, the most pioneering, market-moving research is going exclusively to big mutual funds and the private investment pools known as hedge funds, not to the small investor for whom regulators waged their campaign. At the same time, Wall Street research available to individual investors is being produced under sharply curtailed budgets. The regulatory accord, in the interest of ending conflicts of interest, stopped firms from tying research budgets to investment-banking revenue. That left much more of the budgets to be funded by trading commissions, which are under heavy pressure. The 10 largest research departments on Wall Street are following nearly 20% fewer stocks than at the height of the boom in 2000, according to Reuters Research. Research budgets are so spare the brokers have even dabbled in outsourcing. J.P. Morgan Chase. has hired 50 junior analysts in Bombay, India. The move has helped cut the yearly cost of covering a stock to $117,000 from $185,000 in 2001, a spokesman says. Trading commissions earned by the securities firms historically funded their stock analysis. But commissions have been shrinking for years, thanks to low-cost electronic alternatives and trading in pennies instead of fractions of a dollar. Commissions ran as much as 15 cents a share on institutional trading desks in the early 1990s, leaving plenty of cash to pay analysts. Today they average a nickel a share, and money managers have ways of pushing them far lower. This trend mattered less to analysts during the late-1990s underwriting boom, because investment-banking divisions were happily subsidizing analysts' pay. Now analyst pay must again be funded largely out of commission income. The eight biggest securities firms have sharply cut their U.S. stock-research budgets. Their combined spending peaked at $2.7 billion in 2000 but is just $1.7 billion today, estimates Brad Hintz of the Sanford C. Bernstein unit of Alliance Capital. This puts the pros with big trading dollars to spend in the catbird seat. Brokerage firms especially seek the trading business of today's proliferating hedge funds, because they tend to trade frequently and also to multiply their buy and sell orders with leverage. These big traders, in an age when earnings-report analysis hits the Web in minutes, want insights the whole world isn't getting. In this environment, luxe-research boutiques are prospering. A growing number tout "bespoke research," or custom projects for a single client, named after the British term for made-to-measure gentlemen's suits. For Nick Zaharias, managing director of Field Check Group, a typical project would be a request to check whether a software firm was losing salespeople to its competitors. Retail analyst Jennifer Black, formerly at the broker-dealer arm of Wells Fargo, struck out on her own six months ago. "I decided I would be expensive and have limited distribution," she says. She has seven clients and intends to stop at 15. Customers of Assay Research LLC, a forensic-accounting shop that dissects financial statements for clues to a deteriorating business, offered to pay premium fees if the stock analysis was sharply limited. "Clients really want to feel that they're getting something that nobody else is," says Brad Rexroad, an Assay principal. Mutual-fund companies also have access to this exclusive research. In late December, Victory Capital Management was trying to decide whether to invest in memory-chip maker Micron Technology Inc. Vista set up a call with an executive who buys and sells dynamic random access memory chips, or DRAMs, in Asia. For an hour and a half, Victory portfolio managers crouched around a speakerphone and grilled the executive, trying to determine whether sliding chip prices had finally bottomed out. Two days later, with much of Wall Street still bearish on Micron, Victory invested in the stock. It is up about 18%, amid talk that DRAM prices have started to stabilize. Victory wants insights that aren't widely broadcast, says Richard Turgeon, an executive of the fund family, a unit of KeyCorp. He says Victory is "using Wall Street less and less."
But every rules change brings unintended consequences, and mandatory redemption fees are no exception. In this case, the problems could snare a lot of ordinary investors. The problem occurs because people who invest through large firms get folded into an "omnibus account." In this fashion, all customers of, say, Charles Schwab, get lumped into one account. In an overly simple example, a fund is not told that "Schwab customer Joe Smith bought 100 shares and John Doe sold 50." It is only told that Schwab's customers combined to buy 50 shares. If both individuals reverse those trades two days later, the fund only knows that a total of 50 shares was sold by Schwab investors, and it does not know that the two individuals have been in and out quick. You can hide a lot of trading activity that way, which is why redemption fees to date have only slightly reduced the problems associated with rapid-fire trading. By making the redemption fee mandatory, you force those intermediaries to identify each individual account. That stops investors from gaming the system by market timing in 401(k) accounts, brokerage accounts or other places where this kind of activity has not been ferreted out. Getting that kind of information on all accounts won't be cheap, and you can bet that fund companies will pass the cost along in the form of higher expense ratios. What's more, if you rebalance your 401(k) account every six months and just happen to be in a fund that has a six-month redemption fee, the fund will now be identifying your trading activity and dinging your account. Smooth your portfolio too often, and your fund might kick you out altogether because you make too many trades. Rebalancing and tactical asset allocation moves are not problems the SEC wants to stamp out. When all is said and done, the redemption fee may not be enough to stamp out abusive trading, but the SEC won't make the fee more punishing. Expect traders to price the fee into their models and keep going.
Monthly Job Stats The Jobs Mystery A decade ago in the last recession which ended in March 1991, it took about a year until the GDP growth shot up to about 4%. Then, the rapid growth was accompanied by accelerating payroll increases. By 1993 [or 20 months into the recovery], the U.S. economy was on its way to creating about 230,000 jobs every month. History shows that strong economic growth is quickly followed by robust job creation. With this recovery, that still hasn't happened. The official "recovery" from the 2001 recession is more than 2 years old, but the United States has 718,000 fewer jobs than when the recession ended. Not since the government started counting jobs in 1939 has the nation increased its GDP by this amount and for this long with so little to show in putting people to work. The jobless recovery of the early 1990s lasted only about 18 months. This jobless recovery is 27 months old with no end in sight. Another sign of sluggish job growth: The average duration of unemployment in February was more than five months -- the longest since 1984. With advances in technology, rising productivity rates and the outsourcing of work to foreign countries, more economic activity won't translate into more jobs. Employers are still feeling a bit unsure about this recovery. And they have tax incentives to invest more in equipment and capital rather than labor. "I'm growing increasingly suspicious that something more fundamental may be happening to the job market and the economy," said Mark Zandi, chief economist at Economy.com. If hiring remains sluggish for several more months, it could dampen consumer spending, which has been a major stimulant for the economy. The recovery, then, could be derailed. At this point, most analysts don't see that happening. "Our view is still that it's not a question of whether but when the job recovery will take place," said Lynn Reaser, chief economist at Banc of America Capital Management. (Jay Hancock, Baltimore Sun 3-07 & Don Lee, LA Times 3-10) Jobs Stats II The reported employment stats continue to disappoint. Payrolls in January and February increased by a monthly average of only 46,000 per month since their low in August-September. But don't believe it. Employment gains must have averaged 100,000 over this period, and probably more. Blame the BLS for not gathering data on the new jobs being created by small firms and start-ups. The underestimate could easily be running 50,000 per month; add that to the 46,000 already being recorded and you get nearly 100,000 per month. According to the household survey, employment did rise by a monthly average of 108,000 from August-September to January-February. The unemployment rate ran 5.6% in both January and February, down from its August/September high of 6.2%. Naysayers argue that the recent decline in the unemployment is bogus because it was accompanied by a decline in employment. And naysayers would afgue that the unemployment rate fell because many discouraged workers stopped looking for work. They cite that the overall rate of labor force participation (LFPR) is low. But the problem is all concentrated in the 16-to-24 age group -- school-age folks who are least committed to the labor force. The LFPR for those 25-and-up is doing quite nicely. (Gene Epstein, Barrons 3-08) Jobs Stats III The two employment surveys diverged in the opposite direction in the 1990s. The discrepancy built up until July 2000, when payroll was 22.3 million and household 17.1 million above their respective levels in January 1993. Thus, payroll did better by 5 million jobs. If we gauge the labor market by household numbers, rather than payroll ones, the expansion of employment in the 1990s is much weaker. The BLS has tried to explain the three million job divergence between the two employment series. The obvious place to look is conceptual differences -- errors in self-employment tracking, under surveyed new employers, agricultural employment, and the effect of multiple job holders. The self-employment numbers in the household survey have not risen that much and the number of self-employed was smaller as a ratio to household employment at the start of 2004 than it was in the mid-1990s. In any event, when the BLS considers self-employment and other measurable differences between the two surveys, they explain only 200,000 to 400,000 of the extra three million jobs in the household survey. When the BLS used unemployment-insurance records through March 2003 to update the payroll survey for new-firm growth, this adjustment did not help to explain the mysterious gap between the household and payroll numbers. (Robert Barro, professor of economics at Harvard and a fellow of the Hoover Institution, WSJ 3-09) Education & Employment More than 27% of the U.S. population has a bachelor's degree. That is up from 21.3% in 1990 and 17% in 1980, according to the Census Bureau, and the proportion is rising by a percentage point or so every couple years. The percentage of all college graduates 25 and older who hold jobs fell from just over 78% in 2000 to just under 76% in 2003. That was the lowest level in more than 25 years, according to an analysis of Labor Department data by the Economic Policy Institute. The 25- to-35-year-olds have been hit the hardest. The portion employed in this group of college graduates dropped from more than 87% in 2000 to 84.1% late last year. That was also the lowest since the late 1970's, and their average wage has fallen since 2001. (Louis Uchitelle, NY Times 3-14) Just the Facts Managed Funds vs Index Funds Only 22% of the managed funds [in a study compiled by Morningstar] beat the comparable index funds in the 10 years ended Dec. 31. [From Meg Richards, AP 2-22: Only 17% of actively managed large-cap funds have out-performed the S&P 500 over the past 10 years.] With taxes taken into account, only 13% of the managed funds beat the indexers. On a pre-tax basis, the average annual return over 10 years was 10.63% for the indexers, 8.99% for the managed funds. That's a sizable margin. And it gets even bigger on an after-tax basis - 9.42% a year for indexers vs. 6.99% for managed funds. The five-year figures show 62% of managed funds winning on a pre-tax basis, and 55% winning with taxes counted. (Jeff Brown, Philadelphia Inquirer 3-30) Earnings Expectations We are seeing 1.7 negative preannouncements for every positive announcement. A year ago, in the run-up to the war, the ratio was 2.8 to 1. And the long-term average ratio is 2.3 to 1. That positive news cycle is forcing analysts to raise earnings expectations. At the start of Q1, analysts had been forecasting earnings growth of 13.4% for the first quarter. Right now that number is up to 16.7%. We think the numbers will be better than that, and are forecasting earnings growth of 20%. (Joseph Cooper, a research analyst at Thomson First Call, NY Times 3-29) Finding a Financial Planner Looking for a financial planner and do not know what questions you need to ask? The National Association of Personal Financial Planners has a terrific questionnaire to get investors started. Its website: www.napfa.org/index2.htm. Also check an adviser's or company's background, ask for information about advisers' education, experience in the business, and description of clientele, to determine whether other clients have financial circumstances similar to yours. Watch out for these telltale signs: (1) If the adviser practically guarantees an investment he's promoting will deliver a certain return, you should turn and run away. (2) If the adviser recommends investments you don't understand -- complex derivatives, or pushes once in a lifetime opportunities that you have to act on now - that's a big red flag. (3) If the adviser hems and haws about whether he receives higher commissions for selling one company's investments over another, run. (Andrew Caffrey, Boston Globe 3-21) Debt & Seniors "Retiring in the Red," available on the Demos Web site, found that self-reported credit card debt among seniors had nearly doubled from 1992 to 2001, reaching an average of $4,041. "Borrowing to Make Ends Meet" notes that self-reported credit card debt may understate actual debt because it is only one-third of the level reported by the Federal Reserve. "Retiring in the Red" also found: (1) That credit card debt for those 65 to 69 had risen a stunning 217 percent over the same period, to $5,844. (2) That about 20 percent of households over 65 are in "debt hardship," with at least 40 percent of their income committed to debt payments. (3) That having medical insurance Ä or not having it Ä made a major difference in credit card debt. Families in the 55-to-64 age range, for instance, had seen a credit card debt increase of 169% if they had no health insurance but only 37% if they had health insurance. (Scott Burns, Dallas Morning News 3-07) The Value of Money is Falling "Can anyone name anything that is not rising in value? There has probably never been an easier time to be an investor. Everything has gone up, and continues to go up. Bonds, stocks, commodities, real estate, all types of emerging-markets instruments, corporate bonds, mortgages and anything else we can think of is rising in value. What does that tell you? It tells you that the value of money is falling. And it is falling on purpose because the people who control its value are devaluing it in order to fight off deflation. This much stimulation comes around about once a generation. And when it does, everything rises in value in money terms. It was the production of liquidity in 1933 that ended the Great Depression and sent stocks, bonds and commodities immediately and simultaneously higher. We're getting a similar treatment today." (Bob Prince & Jason Rotenberg, Bridgewater Daily Observations via Washington Post 3-07) Net Worth of U.S. Households Rises Rising house and stock prices pushed the total net worth of U.S. households to a record $44.41 trillion at the end of 2003, the Federal Reserve reported, surpassing the peak of $43.58 trillion reached in Q1-00, just before the bursting of the stock-market bubble began. The recovery in wealth reflects a rebound in the stock market as well as the rapid appreciation in home values in the past few years. The figures aren't adjusted for inflation. Rising house prices have allowed Americans to use their homes as piggy banks. Economists at Bear Stearns estimate that Americans extracted $491 billion of equity from their homes last year through such means as refinancing them with bigger loans or keeping some of the cash when they sell one house and buy another. Even so, because housing prices jumped, the total amount of equity Americans have in their homes rose $656 billion to $8.4 trillion last year. (Hagerty & Lagomarsino, WSJ 3-05) Fewer Funds in the Future Fund industry experts predict the consolidation of mutual fund offerings will pick up pace in coming years, regardless of market conditions. The costs of running mutual funds are likely to increase as the current fund scandals bring more regulatory scrutiny and new rules to the industry. To stay competitive, many fund companies will be forced to scale down their product arrays. According to data from Lipper, 870 U.S. mutual funds were merged into other funds last year, while 464 were liquidated. The pace is similar to 839 mergers and 555 liquidations in 2002, and 956 mergers and 433 liquidations in 2001. Meanwhile, new fund launches are on the decline. Just 1,460 new funds were rolled out last year, based on Lipper's preliminary data, compared with 2,309 funds in 2002 and 2,392 in 2001. The planned merger between J.P. Morgan and Bank One and the acquisition of FleetBoston by Bank of America should add momentum to the merger or deletion of funds. (Yuka Hayashi, Dow Jones Newswires 2-26) Quick Facts, Stats & Opinions Standard & Poor's is launching an index made up of the 74 Nasdaq-listed stocks in the S&P 500. The new index, called the S&P 500 O-Strip, will consist mostly of technology stocks traded on the Nasdaq, but also will include biotechnology issues and some financial stocks. (Karen Talley, WSJ 3-30) In a two-year study of Chicago area shoppers completed in 2003, Stephen J. Hoch, a professor of marketing at the University of Pennsylvania, found that 75% of consumers regularly shop at three or four stores carrying grocery items. (Michael Barbaro, Washington Post 3-22) It has been four years since the market peaked in March 2000 and the broad market S&P 500 still has a negative five-year return. The S&P reached a multi-year low in October 2002, and the Center for Research of Securities Prices at the University of Chicago reports that each time in the past the market hit a multi-year low, the subsequent gains averaged over 20 percent per year for five years running. (Janet Brown, No-Load Fund-X via Washington Post 3-21) U.S. Treasury funds have already have gained 4.5% this year, according to Lipper. Since mid-August, investors in the 10-year Treasury note have enjoyed a total return of 10.1%, including interest and price appreciation, says bond-research firm Ryan Labs. The Dow has gained 11.8% in the period. (Lucchetti & Lauricella, WSJ 3-12) Through 3-18, Treasury funds returned 3.89%, Lipper reported, while junk returned only 1.54% and the diversified stock funds 1.73%. For all of 2003, Treasury funds returned only 1.80%, and returns contracted 0.84% in Q4-03. The 10-year Treasury note yielded 3.78% Friday [3-19], and bond analysts expect it to stay below 3.90% until the labor situation improves and/or inflation begins to show signs of heating up. (Agnes Crane, WSJ 3-22) Stronger Bush leanings could help drive the market higher, and stocks could falter (at least initially) if it looks like Sen. Kerry will be taking the helm. "Investors broadly prefer the known to the unknown, whether it's for comfort or whether they have greater conviction for how policy will evolve," says Jack Caffrey, equity strategist with the J.P. Morgan. "Investors like the predictability of an incumbent -- or, they like gridlock." (Erin Schulte WSJ 3-14) Under rules proposed by the SEC to give investors a greater voice on corporate boards, shareholder groups would be eligible to nominate board candidates if at least 35% of the votes for a company's slate of directors are withheld. Automatic Data Processing, which processes proxy votes for companies, says shareholders withheld 35% of their votes from directors at 115 companies in serves. (Bloomberg News 3-09) For cars less than a year old, the average problem rate for European cars was 20 per 100 vehicles, compared with 18 problems per 100 for traditional U.S. brands. Prestigious European brands Mercedes-Benz, BMW, Volkswagen, Audi, Volvo, Mini and Jaguar all ranked below average for reliability in 2003, based on results from Consumer Reports's annual subscriber survey, which this year got 675,000 responses. (Karen Lundegaard 3-09) "We are not really bearish, but rather we believe the near-term risk/reward ratio of being aggressively long right now does not justify the risk. . . . The only problem in calling for a correction is that this notion has become increasingly popular, and rarely do we get a meaningful decline when everyone is looking for it. . . . We still think the market is in a dangerous spot, but the very positive macro environment, combined with declining investment sentiment, makes this a tough call. . . . An exhaustive sell-off would be a huge positive, but it doesn't feel like the environment is set up for this event without an outside catalyst which no one can predict." (Michael T. Moe, ThinkThoughts, ThinkEquity Partners via Washington Post 3-07) According to a 2002 survey by ICI and the Securities Industry Association, 86% of individual investors say they practice buy and hold. Yet consulting firm Dalbar found that between 1984 and 2002, equity mutual-fund investors held their funds for an average of 2.5 years and got an annual return of 2.6%, well below the 12.2% return for the S&P 500 in the same period. This is not buy-and-hold investing. Instead, it is "buy high, sell low" investing. (Andrew Blackman WSJ 3-07) More than 20% of all U.S. households provide care to someone who is 50 or older, and the estimated annual cost of care provided by families has reached $196 billion a year, according to the National Quality Caregiving Coalition and the Rosalynn Carter Institute. Some 63% of family caregivers suffer from depression -- but that the number drops dramatically for people who attend support groups. A directory of local groups is available at Caregiver.com. The national Eldercare Locator service at 800-677-1116 or www.eldercare.gov is a source for information. Also check Center for Family Caregivers for events and information. (Kelly Greene, WSJ 3-07) In 2002 17% of companies receiving shareholder proposals on corporate governance issues responded by agreeing to change their practices, according to the Investor Responsibility Research Center. Last year, 28% of companies did so. (Gretchen Morgenson, NY Times 3-03) A restructuring at market-information provider Thomson Financial First Call that has struggled with declining revenue in recent years, forced out respected stock-research head Chuck Hill. Hill was often quoted here. (WSJ 3-03) Standard & Poor's said yesterday that it would change the way it assigns weightings to stocks in indexes of United States equities, including the benchmark S&P 500, by accounting only for shares available for trading. This process will be done over the next 18 months. (Bloomberg News 3-02) Investors poured $43.76 billion into stock mutual funds in January, more than triple the $14.18 billion inflow in December and the largest amount for any month since the bursting of the stock-market bubble in the spring of 2000. The ICI said the January addition to stock funds was the third-largest monthly inflow on record. The booming sales of stock funds increased the total assets invested in the nation's mutual funds to a record $7.54 trillion at the end of January, exceeding the previous high of $7.47 trillion in August 2000. (Yuka Hayashi, Dow Jones Newswires 3-01) The Nasdaq rose or fell more than 2% on just 39 days in 2003. So far this year that size move has occurred in three trading sessions. By contrast, Nasdaq had 134 of those 2%-plus days in 2000 and 101 in 2002, according to James Stack, a veteran market analyst and editor of the InvesTech Research investment newsletter. (Tom Petruno, LA Times 2-29) In December, investors poured $12.6 billion of new money into ETFs, according to the ICI, pushing the funds' total assets to more than $150 billion for the first time. The December ETF inflows were nearly on par with investments in traditional stock funds. (Paul Lim, NY Times 2-29) A bet on technology and cyclical stocks is a bet that these sectors will deliver superior earnings growth beyond 2004. Considering the overall profit-growth records of these sectors, we view such a bet as a long shot. While it makes sense to have some cyclical exposure in a portfolio, subscribers should not be too eager to take advantage of the minor pullbacks seen in many richly valued cyclicals. Instead, look for reliable profit growers positioned to benefit from continued growth in the economy. (Dow Theory Forecasts via Washington Post 2-29) The British bank HSBC has decided to scrap its analysts' buy and sell stock recommendations, acknowledging what many professional investors have been telling the brokerage industry for years - that they prefer to use their own judgment to pick stocks, and to turn to outside research only as a supplemental tool. The customers of HSBC research were almost all institutional investors. Firms that cater to smaller investors are unlikely to eliminate buy and sell calls. (Conrad De Aenlle, NY Times 2-29) Tech Tips Goggle Goes Local Google is introducing a new site designed to make it easier for people to find things closer to their homes. The new gateway, local.google.com, will allow Google to display more local information in response to search requests that include a ZIP code or a city's name. Last week, Yahoo introduced a similar provincial tool, called SmartView, and Verizon Communications recently overhauled its SuperPages.com site to deliver more useful local results. (AP 3-17) InterActiveCorp's Citysearch has been beefing up its local listings. Yahoo's SmartView is the only site that lets users easily find nearby money machines or hiking trails, but unlike Verizon's SuperPages, it isn't geared to more practical listings such as plumbers. Google works well if you are just looking for a phone number, while Citysearch tends to be good for reviews. In a three pronged test for (1) a plumber in Chicago suburb; (2) pizza in NYC and (3) a florist in a rural Indiana town, Verizon's SuperPages won with the best search results, with honnorable mentions for Citysearch and Yahoo. (Jennifer Saranow, WSJ 3-17) Yahoo Revenue As recently as 2000, Yahoo's search revenue amounted to just $400 million, according to an estimate by analysts at Smith Barney. This year, it is likely to exceed $3 billion. Even from 2004 levels, you are looking at 25 percent to 27 percent growth over the next four years says Lanny Baker, an Internet analyst at Smith Barney. (Kenneth Gilpin, NY Times 7-21) Online Bill Payment Stats One-third of the nation's largest banks and brokerage firms offer free Internet bill payments, according to financial research firm TowerGroup. One in four American households pays bills online each month. Adoption of Internet bill payments rose 26 percent last year and 19 percent the year before. (Leslie Walker, Washington Post 3-18) Home Page Previous Factoid Top Sites
|