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why don't we ever hear about the buyers? Jonathan Clements, WSJ 2-15-04
Rates are likely to remain low, compared with almost any period except the last few years. But the simple fact that they will be increasing, perhaps for years, creates a new economic dynamic. What may be most worrisome, economists say, is that rising rates often expose problems that were papered over by the benefits of ever-cheaper credit. "It's a challenging period to make the transition to withholding the economic stimulus at just the right time," Lawrence H. Meyer, a former Fed governor, said. "But it's a challenge of success," he said, alluding to the Fed's battle to bring the economy out of the recent downturn, "and it's better to manage success than to manage failure." With higher rates giving investors a newfound ability to make a decent return on safe investments, many might suddenly flee riskier ones. That happened during the modest rate increases of the mid-1990's, helping to cause the Mexican peso crisis and the bankruptcy of Orange County, Calif. This time, hedge funds - larger than they were a decade ago, and with a tendency not to make their investments public - offer a particular source of uncertainty. Rising rates will also reduce the additional cash many households have been able to get by refinancing their mortgages. The biggest question, though, may be whether the millions of families with adjustable rate mortgages will still be able to meet their monthly payments without making big cuts in the rest of the budget. Fed officials' recent efforts to communicate their policies publicly - in this case, their plan to raise rates slowly and steadily - could minimize turmoil, by giving businesses, consumers and investors time to react that they did not have a decade ago. Still, said Ethan Harris, chief United States economist at Lehman Brothers, "I think we're going to have some accidents along the way. It's inevitable." These new concerns reflect the reversing fortunes of many of the economy's biggest pieces. What was up is now headed down, in large part, and what was down is moving up. The worst hiring slump in two decades has given way to help-wanted signs and healthy job gains this year. The decline in the dollar against many other currencies has helped exports jump in the last year. Business executives finally have the confidence to buy new machines and software again. Many retirees who rely on investments for their income are getting a welcome, if modest, raise. But federal, state and local government spending on everything other than the military, an important crutch during a downturn, is falling. Rising interest rates will probably cause home sales, long soaring, to decline eventually and house prices to stop increasing rapidly. Prices might fall in some large metropolitan areas on the East and West Coasts, economists say. "It used to be that everyone complained about employment and thought low prices and interest rates were the bright spots in the economy," said Richard T. Curtin, director of consumer surveys at Michigan. "Now they've switched." Investors expect the Fed's benchmark rate to rise to 2.25% by December, based on the price of a futures contract linked to monetary policy. Fed officials have said that they plan to increase rates gradually, and most analysts assume that means a quarter-point at a time. "Unlike 1994, there has been an appreciable increase of market rates in anticipation of policy tightening," Mr. Greenspan said recently, "though history cautions that investors' anticipations of the cumulative magnitude of policy actions and their timing under such circumstances are far from perfect." History also cautions that the Fed is rarely able to restrict itself to only quarter-point rate changes. The economy has usually moved more quickly, up or down, than policy makers initially expect. "Prudence gives way to impassioned action," said Robert J. Barbera, chief economist of ITG/Hoenig, an investment firm. "I'd be very surprised if we get to a 4% fund rate with a series of step-wise 25 basis points." Early in 1994, as the economy gained strength, the Fed raised rates by a quarter-point three times. But the next four increases were all at least a half-point, bringing the benchmark short-term rate to 6% by early 1995. That was one of the few periods of rising rates since 1980, and none lasted long enough to undo the overall decline during that period. The mid-90's increases caught many investors by surprise, leading to a drop in stock prices and the stampede out of some risky investments. Almost no one will be taken by surprise this time by a long campaign of rate increases - another reason to be optimistic about the economy. But expecting a major economic change is not enough to allow people to know what it will bring. The new era of rising rates, with its uncertain implications, begins in two days.
Variable rates, like those on credit cards, often track what the Fed does, which means they are likely to rise one-quarter of a percentage point over the next few weeks. The immediate cost for the nation's households as a result of this process could be as much as $4.5 billion. The $4.5 billion is roughly 10% of the cost of the rise in oil prices so far this year. That is not a big number yet, but each quarter-point increase would be another step closer to matching the oil shock While the oil shock quickly raised the gasoline and heating oil bills of nearly every household, the burden of higher interest payments falls most heavily in the early stages on lower- and middle-income families. They are the biggest users of variable rate debt, particularly on credit cards, various studies show. Upper income families, on the other hand - that is, families with more than $80,000 in annual income - are more likely to have fixed rate debt, particularly mortgages, and to owe relatively little on their credit cards. What variable rate debt they do have is usually at lower interest rates than lower income people. Lower income people, as a result, are 10 times more likely than upper income people to be devoting 40% or more of their income to debt repayment, the Economic Policy Institute reports. In addition, upper income people are the nation's biggest savers, and a rate increase raises the return on their interest-bearing securities. One antidote to rising interest rates could be the recent surge in employment, and all the new income that will accompany the one million jobs created since February - but that remains to be seen. "The question really is, are the people who are leveraged with debt, are they the ones getting the jobs and income?" said Richard Berner, chief domestic economist at Morgan Stanley. The fragile low income Americans do not tend to own homes, but those who do buy them through subprime mortgage loans, in many cases with adjustable rates. Apart from housing, nearly every transaction for these consumers involves interest payments in one form or another. Lacking enough income, they rent television sets, furniture and appliances, signing agreements that can adjust upward as interest rates rise. Like their higher income peers, they often take loans to buy car, in their case, used cars. But they are loans of shorter duration and higher interest rates than the standard four- or five-year new car loan, now averaging 7.4%. They have credit cards, but at rates above 15%, which convert into much higher penalties when monthly payments are late. More Rate Stats Aaron Lucchetti, WSJ 6-29 Money-market funds, savings accounts and certificates of deposit are where many of the nation's roughly 35 million people age 65 and older, as well as investment scaredy-cats of all ages, have a combined $5.5 trillion tucked away, much of it producing razor-thin returns near or below 1% a year. The Fed's expected increase of one-quarter percentage point would mean an additional $14 billion a year in income for these investors. The totals in money-market funds, savings accounts and CDs are up 5.6% from the prior year and 26% since 2000 according to Federal Reserve data. By contrast, stock-market holdings by U.S. households and nonprofits have declined nearly 24% to $5.83 trillion since the end of 2000, despite last year's stock-market rally. The figures don't include stock owned through mutual funds. About 30% of U.S. money managers surveyed by Merrill Lynch also are holding more conservative interest-based investments now than usual, up from 17% in January. Rising rates also could help some businesses, including purveyors of money-market funds, many of whom have been absorbing expenses that they normally charge investors to keep returns in positive territory. Rates already have started inching up. The average yield on a one-year CD for example has risen to 1.48% from 1.11% in April, according to Bankrate.com. Since April, the average money-market fund yield has edged up to 0.56% from 0.51%, reaching the highest level since June 2003, according to Peter Crane, vice president and managing editor of iMoneyNet.
Because consumer spending is the primary driving force of the economy, a crucial question has been whether higher borrowing costs could suddenly sap Americans' desire or ability to spend. One concern has been that spending was underpinned in recent years by the mortgage refinancing wave. Americans took advantage of lower interest rates not only to cut their monthly payments but also to pull equity out of their homes to pay for big-ticket expenses like cars. Yet consumer spending has held up even as refinancing activity has dived since mid-2003 amid rising mortgage rates. "The time to worry about debt isn't when employment and incomes are accelerating," said Susan Sterne, president of Economic Analysis Associates. "I think they could go to 3% without a major negative impact on the economy," said Brian Wesbury, an economist at investment firm Griffin Kubik Stephens & Thompson. Credit cards often charge interest that is tied to banks' prime rate. The prime, now at 4%, usually moves with the Fed's key rate. However, rate floors imposed by many credit card firms in recent years kept card interest from sliding too far — and now will delay increases as the prime rises. Some analysts say the consumer loan that has the greatest potential to cause problems as rates move up is the home equity credit line. The interest rate on the loans typically is the prime rate, or is linked to it. So the cost will rise as the Fed begins to tighten. Consumers have about $326 billion in home equity line debt outstanding, up from $100 billion four years ago, Fed data show.
Quarterly earnings no longer are rising as fast as at the end of last year, when they peaked at a 28% year-over-year rate, according to Thomson First Call. That was the sharpest pace of gains since 1993. To Mr. Bernstein, that means investors now should be avoiding the kinds of stocks that usually do best when the Fed is starting to raise rates, in a booming economy. Instead, he says, they should look for those that do well as the economy begins to cool. "What doesn't work well in such circumstances is technology, followed by materials," Mr. Bernstein says. Indeed, he says, those two sectors have been the weakest so far this year. He says he prefers makers of basic consumer products such as food and drink, health-care stocks and utilities, all of which typically do well in a slowing economy. Sure, say other investors, earnings gains seem to have peaked, but they still are three times the historical average rate of 7%. Analysts widely expect earnings for companies in the Standard & Poor's 500-stock index to rise more than 20% in the second quarter, marking the fourth consecutive quarter of 20%-plus gains, a rarity. "If interest rates are rising, the presumption is that inflation is rising," says Henry Herrmann, chief investment officer at mutual-fund group Waddell & Reed. That means that, in a sharp break from the recent past, some companies are able to raise prices. "And those that can pass along their costs get their earnings going faster than the average stock," Mr. Herrmann says. Mr. Herrmann favors some of the stocks that Mr. Bernstein rejects, notably makers of materials and other products that benefit from an economic boom, as well as some retailers that would benefit from greater consumer demand. Both men, interestingly, favor some energy-related stocks, which haven't yet risen as sharply as some analysts expected and which could benefit if oil prices stay high. Another approach is to look for the unusual companies whose business actually will improve because of the rate increase. There are a few, some in the financial field. Banks normally suffer when rates rise because their cost of funds goes up, but consumer-oriented banks, in particular, might actually welcome higher rates, says Bruce Harting, mortgage and specialty-finance analyst at Lehman Brothers. Those banks get money from customer deposits, and then lend it to consumers and businesses. They have been hurt by falling rates because there is a limit to how low they can push their deposit rates without losing deposits. When they hit that limit and stop lowering their rates, they get squeezed as their income from loans continues to fall. For such banks, an increase in lending rates would actually improve margins, Mr. Harting says. He mentions Sovereign Bancorp, a community-bank holding company that he follows. Banks that specialize in floating-rate mortgages might also benefit. A leading adjustable-rate lender that is popular with analysts is Golden West Financial. A group that is less well-known is the companies that write mortgage insurance -- policies that guarantee that a mortgage will be repaid even if the homeowner runs into trouble. Their business suffers when rates are falling, because home prices tend to rise and owners' equity in homes rises. More homeowners are able to avoid being required to obtain mortgage insurance. But when rates are rising, business picks up. In 2000, the last time rates were rising, about 14% of existing mortgages included mortgage insurance -- compared with only about 9.5% now, says Jonathan Gray, mortgage-finance analyst at brokerage firm Sanford C. Bernstein. That gives them lots of room for growth. He follows three major mortgage-insurance stocks, PMI Group and MGIC Investment, of which he is recommending the first two. "If their volume goes back to 14% of mortgages, they will have faster volume growth than the market at large," he notes. And the stocks still trade at prices below the market average, giving them room to rise, he says.
But that study, ended in the mid-1990s. Immediately afterward, something seemed to change. Markets, especially in the developed world (North America, Europe and Japan), became more and more correlated. In 2000, for example, the average U.S. large-cap growth fund fell 16.3% while the average international fund fell 15.6%. A study by Robin Brooks and Luis Catao for the International Monetary Fund looked at the performance of 5,500 stocks in 40 markets over the period 1986-2000. The researchers found that the correlation between returns in American and European stock prices rose from 0.4 in the mid-1990s to 0.8 in 2000. In other words, the movements of U.S. stocks could explain 80% of the movement of European stocks, compared with just 40% a few years earlier. It's unclear, however, whether the late 1990s were an aberration or the vanguard of a brave new correlated world. Over the past 12 months (ended Wednesday), for instance, the Dow Jones World Index (which does not include U.S. stocks) returned 28% while the Standard & Poor's 500-stock index, the U.S. benchmark, returned only 16%. In 2002 and 2003, foreign stocks rose a total of 17% while U.S. stocks were practically flat (up 0.2%). On the other hand, so far in 2004 (again through Wednesday), the MSCI World Index has risen 1.7% while the S&P has risen 2.9% -- awfully close. Bernard R. Horn, a talented money manager who has concentrated on foreign markets for about a quarter-century, believes that the post-1995 period was a fluke. Horn is president and portfolio manager of Polaris Capital Management. Horn said that the apparent correlation between foreign and U.S. stocks in the late 1990s and early 2000s was the result of the run-up in a single sector: telecommunications, media and technology. High-tech stocks all over the world rose so much that they distorted the broader country indexes, which are weighted by the market caps of the companies they comprise. "Nortel became one-third of the Canadian market," said Horn. "Nokia became one-half of the Finnish market. So, the rise in the sector made the indexes look more correlated. Is that a reason to throw international investing out the door? No." While I am persuaded by Horn's argument that correlation is a passing fad, I still worry about the future of European and Japanese companies, especially. Although many of them do business globally, they are still burdened with their governments' economic policies, which have not proven very successful in recent years. Between 1992 and 2003, for example, the gross domestic product of the United States grew by an average of 3.2 percent annually after inflation; Europe grew just 1.7 percent; Japan, 0.9 percent. The United States grew less than 2 percent in only a single year (2001, when we were attacked by terrorists) while Europe grew less than 2 percent in six of the 12 years and Japan in nine of the 12. Recognize that a bet on Europe and Japan is a bet on substantial change -- both in government policies and in corporate management. Will it happen? I think so, but the revolution isn't tomorrow. What proportion of your portfolio should be foreign? Somewhere between 10 and 20 percent sounds about right.
The longest market pause since 1983, according to Birinyi Associates, was in a period that in some ways was a mirror image of the current one. That trading range, during which the Dow rose 5% in the 310 days from Feb. 19 to Dec. 26, 1991, came after the Persian Gulf war and during a jobless economic recovery. At the moment, the United States is bogged down in Iraq, but the number of jobs is growing. The shortest of the 11 pauses was 87 days, from March 23 to June 18, 1987. The average length of the 11 episodes - before the current one - was 181 days. When the market broke out of these trading ranges, in 8 out of the 11 cases it rose over the next three months. After the 1991 pause, for example, the Dow climbed 6 percent; after some other pauses, however, the gains were tiny. The sharpest decline came after a 232-day market pause that ended on Dec. 31, 1999. That turned out to be just days before the Dow touched its all-time closing high and then began a three-year plunge. In the next three months, the Dow fell 5 percent.
Jim Paulsen, chief investment officer of Wells Capital Management, also sees major indexes hitting their stride after the summer slump. He thinks indexes will end 2004 up about where he initially predicted this year: the Dow topping 11000 and the S&P 500 breezing past 1200. Both will need to gain about 6% to hit those marks. Stuart Freeman, chief equity strategist at A.G. Edwards, is upbeat about consumer staples and health-care. Values in both of those sectors "are near the bottom of a 10-year range," Mr. Freeman says. Jeff Kleintop, chief investment strategist for PNC Financial Services Group, says he's moving away from some cyclicals like technology stocks, but that others still have potential. He says he likes industrial and financial stocks; while cyclical, they have better dividend yields than tech, and financials aren't as susceptible to rising rates as many people still think. Broadly, he sees the market still going up this year, with the S&P 500 in the 1175 to 1200 range -- about where he predicted heading into 2004. More Second Half Predictions "Given how good the profits and jobs numbers have been, one might have expected the market to have moved higher by now,'' said Abby Joseph Cohen, the chairwoman of the investment policy committee at Goldman Sachs. "The waiting game," she added, "may continue until there is clarification on Iraq, energy prices and the election." (Jonathan Fuerbringer, NY Times 6-27) This summer may bring us a short rally, but there should not be any real breakout to the upside until the September-October time frame. No matter the resolution of these unknowns, stock prices will be higher at the end of the year than they are now, barring a major terror attack within the United States. (Roger M. Tweed, The Tweed Update via The Washington Post 6-27) "As you get later in the cycle, people begin to rotate and look for stocks that are likely to sustain an above-average growth rate going forward," said Greg Forsythe, a senior vice president of equity research at Charles Schwab Corp. "We think we're at that transition point." So far this quarter, the Russell 1000 Value index is up only 0.94 percent, compared to a rise of 2.28 percent for Russell 1000 Growth. (MEG RICHARDS, Associated Press 6-27) Speaking at the annual Morningstar conference last Thursday, Bob Rodriguez, the veteran manager of the FPA Capital fund, painted a bearish picture for stocks and bonds over the next five years, an environment where annualized returns from U.S. stocks average about 5 percent. The cautious sentiment was echoed by fellow panelists Joe Deane, manager of the Smith Barney Managed Municipals fund, and Jeremy Grantham of privately held investment firm GMO, which handles a portion of the Vanguard Explorer fund. Grantham was concerned about the "unprecedented debt" that the U.S. is carrying. Deane expressed skepticism about bonds over the long term. "The secular drop in interest rates that began in 1981 was completed last June," he said. For the next several years, he added, "The wind that has been at your back for a generation will be at your face." (Jonathan Burton, CBS.MarketWatch 6-24)
For the first five months of this year, the HFD has data for 199 stock market timing strategies. Just nine of them have made more money than they could have by simply buying and holding the market - paltry as the market's return has been so far this year. That's barely more than a 4% success rate - hardly enough to get you even moderately excited.
On average, according to a study by Ned Davis, bull markets since 1900 have lasted about 718 days -- just shy of two years. The shortest was two months, in 1932. The two-year anniversary of this bull market will be Oct. 9. It is even possible, says research analyst Sam Burns at Ned Davis Research, that stock indexes already saw their highs in February, levels to which perhaps they won't return before we endure a new bear market. Since 1929, bull markets have tended to have their strongest gains early and then slow down. The Dow industrials have tended to rise 43% in the first half of a bull market and only 16% in the second half. "We could go up another 5% or 10%. We are likely to see more-modest gains now" says Burns. "I would say that if we were up 10% for this calendar year, that would be a nice continuation of the bull market," says Richard Sichel, chief investment officer at Philadelphia Trust.
In the past, whenever one industry dominated the index, that sector was at or near its peak value and soon began a steep decline. For example, in 1980, at the height of the energy crisis, stocks in that industry made up 27.1% of the index. Five years later, energy stocks had fallen to 12.8%. And in 1999, during the Internet and telecommunications stock nuttiness, technology shares made up 28.2% of the index. Now they represent just 16.9%. It is also worth noting that the current weight of financial services companies in the S&P is significantly understated because the 82 financial stocks in the index do not include GE, GM or Ford. All of these companies have big financial operations that have contributed significantly to their earnings in recent years. The index considers GE an industrial stock, but GE Capital's contributions to profits makes GE at least one-third a financial services company, maybe more. The retrenchment in financial shares has already begun. Since rates hit a low in March and began climbing, the American Stock Exchange Financial Select Sector index of 82 banks, brokerage firms and insurance companies has lost 2.5% of its value. But Andrew Smithers, the founder of Smithers & Company, an economic consulting firm in London, says he thinks these shares have a lot further to fall. "It seems to me a high degree of probability that financial profits are the source of profits that are most vulnerable looking ahead, and secondly that the market does not yet allow for that in valuations," he said. "Therefore not only are financial shares overpriced, they are probably more overpriced than most." Financial companies now generate about 30% of the profits, after taxes, of United States companies, Mr. Smithers said. That is up from 7% in 1982. In addition, profit margins at financial companies in the first quarter of 2004 stood at 32.6% of all corporate output, around 11% higher than their average since 1929, he said. If these profits revert to normal proportions, profits will fall 20%, Mr. Smithers noted. The biggest force behind these profits was the Federal Reserve Board's aggressive interest rate cuts. Now, however, interest rates are rising. And profits can be expected to reverse direction, too. "Profit margins of financial companies are exceptionally high and vulnerable," Mr. Smithers said. "Common sense tells you that they are going to come down."
Taleb is a fellow at the Courant Institute of Mathematical Sciences at New York University, where he teaches a course on the failure of models. And he has an MBA from Wharton and a PhD from the University of Paris. His field is "skeptical empiricism." He casts doubt on the things most people think they know for certain. Investors and analysts are obsessed with reading tea leaves; that is, they perceive patterns that appear compelling but are actually meaningless. Burton Malkiel, the Princeton economist, disputed the value of "technical analysis" -- trying to determine where the price of a stock will go in the future based on a graph of where it's been in the past -- in his classic book "A Random Walk Down Wall Street." He generated graphs based on the results of coin flips and showed how they looked like the "head and shoulders" patterns and other fetishes of chartists, as such analysts are called. Academic research has judged technical analysis useless. But "the academic community has rendered its judgment. Fundamental analysis is no better than technical analysis in enabling investors to capture above-average returns" writes Malkiel. To dispute fundamental analysis - the examination of financial records, sales reports, macroeconomic forecasts and the like - is more disturbing. It's what conscientious investors do. Malkiel, however, shows clearly that the value of stocks in the future often depends on unknowable events. Consider the relatively stable utilities industry. In the 1970s, utilities were deeply affected by suddenly higher oil prices; in the 1980s, by the Three Mile Island nuclear incident; in the 1990s, by deregulation; in the 2000s, by the Enron scandal. "Analysts failed to predict these random events (that's why they're random), and earnings for the companies suffered," wrote Richard McCaffery of Motley Fool . "Random events are an intricate part of life in the business world, and these events make it very difficult for investors, whether professionals or not, to predict earnings and find winning investments." Here's an example of flawed reasoning of the sort that many investors practice -- reduced by Taleb to absurdity: "I have just completed a thorough statistical examination of the life of President Bush. For 58 years, close to 21,000 observations, he did not die once. I can hence pronounce him as immortal, with a high degree of statistical significance." You may believe that just because a company has increased its profits for 10 straight years, it will keep doing so. Don't believe it. So what does all this mean in practical terms? Can the average investor distinguish between luck and skill? Probably not. The lessons I draw from Taleb are: 1) If you're doing well in the market, don't get carried away by hubris. 2) Don't be reluctant to invest purely by instinct since fundamental analysis is not all it's cracked up to be. 3) Pay little attention to the day-to-day movements of stocks and news about companies. 4) Don't expect mutual funds to outperform their peers simply because they have done well in the recent past. 5) Put money in low-cost index funds or broadly diversified portfolios. 6) Beware of black swans. Black swans? Taleb paraphrases the Scottish philosopher David Hume: "No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion." In other words, surprises happen. The fact that something hasn't occurred in the past -- such as a single-day decline of 23 percent in the Dow Jones industrial average (unknown prior to Oct. 19, 1987) or the destruction of the two tallest buildings in Manhattan (unknown prior to Sept. 11, 2001) -- doesn't mean it can't occur. The Victorian writer and novelist G.K. Chesterton wrote: "The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait." Exactly. Investing, like life, is both random and logical, and it is excruciatingly difficult to separate the two.
With this in mind, let's examine an experiment done with pigeons that I think provides insight into some bizarre investment behavior. It's mind boggling that so many investors are piling back into the same sectors that crushed them only a short time ago, like moths drawn to a flame. A recnet article I wrote prompted my friend Peter Kaufman, a board member of Wesco Financial, to email me the following: Your observation made me think of classic behavioral research of the 1950s, which employed rats or pigeons to determine how thinking creatures react to certain situations. One such research project, "Pigeons at a Feeding Bar," may offer some insight into this tendency of investors to return again and again to the same bad situation. In one stage of the research project, pigeons are first acclimated to a set pattern of food rewards, in which the pigeon "earns" his kernels by pecking a feeding bar until a unit of food is delivered (for example, the pattern might be for one kernel after every 10 strikes of the bar). Subsequent to this particular pattern being established, food delivery is terminated altogether, allowing researchers to tabulate how long a pigeon will continue to hit the feeding bar before it realizes it has become fruitless. The research revealed that pigeons are, as a group, remarkably consistent in the time that elapses until they realize that a formerly productive pattern has been replaced by a new, fruitless one. Once pigeons rationally discern the true pattern, they uniformly abandon the process in a predictable and timely manner. But what happens if no true pattern of reward ever exists in the first place? What happens if instead of an established pattern of rewards, the feeding bar reward sequence is purely arbitrary? Under this scenario, the poor pigeons see there are alluring rewards to be had, they are unable to grasp how those rewards can be consistently earned. The amazing result: Even after the food delivery has been terminated altogether, pigeons return again and again, relentlessly hitting the bar until finally they drop from physical exhaustion. What relevance do pigeon studies of the 1950s have to Wall Street behavior in 2004? Well, investors repeatedly returning "to the flame" [or the feeding bar]. And the reason appears to be the same: Both the investors and the pigeons are mesmerized by the tasty rewards they believe lie within the system, and both are similarly unable to divine a recognizable pattern as to how such rewards are earned. Should investors' inability to grasp a recognizable pattern really surprise us? Investors have watched in bewilderment as an entire investment hierarchy has thrown out basic accounting conventions and valuation metrics that have been in effect for nearly a century; and they have seen IPOs soar to the stratosphere for companies with no comprehensible business model, no cash flow, and sometimes, even no revenue. Is it any wonder why investors are unable to identify a recognizable, dependable pattern as to how rewards are to be earned in this system? In environments such as market bubbles, it seems this same stimulus-response mechanism that draws birds to the random feed bar can apply to human beings. Just as is the case with slot machines, lotteries and other forms of unskilled gambling, when investment returns take on the character of being arbitrary, unearned, or random, human hope springs eternal -- rendering many investors unable to resist the feeding bar. Can anything be done to stop this recurring insanity? The antidote for market bubbles is rational pattern recognition, recognizing that the valuations of the securities they are snapping up have no basis in future earning power or any other objective economic measure, but instead have a basis in grossly unrealistic claims, promotions, hopes, and dreams. Is there any hope that the irrational exuberance will evolve into a saner set of investor behaviors? Human greed and wishful thinking, time tested as they are, suggest that most human investors will never be anything but pigeons. I think Peter Kaufman is exactly right, and his conclusions are supported by other studies conducted by Vernon Smith, a professor at George Mason University who shared in the 2002 Nobel Prize for economics. In numerous experiments he conducted, "participants would trade a dividend-paying stock whose value was clearly laid out for them. Invariably, a bubble would form, with the stock later crashing down to its fundamental value." One would think that the participants, having suffered horrible losses, would have learned not to speculate. Yet when they gathered for a second session, "still, the stock would exceed its assigned fundamental value, though the bubble would form faster and burst sooner." How could another bubble form so quickly? Simple: The take-away lesson investors learned the first time was not "don't speculate," but rather, "it's OK to speculate, but one must sell more quickly once the bubble starts to burst." Sound familiar? Of course this game doesn't work either, since few people can accurately time the top and everyone tends to head for the exit at the same time. Professor Smith notes that "The subjects are very optimistic that they'll be able to smell the turning point" and "They always report that they're surprised by how quickly it turns and how hard it is to get out at anything like a favorable price." Thus, it is only when Professor Smith runs the session a third time that "the stock trades near its fundamental value, if it trades at all." I would argue that in many sectors, we are in the midst of the second mini-bubble and that speculators will be crushed again. Investors -- and pigeons -- beware! From "The Law and Economics of Irrational Behavior: An Introduction" Francesco Parisi & Vernon Smith No longer can the value of assets be determined simply by the financial equations of the market. Rather, a combination of emotions and heightened attention to the market, fed by the optimistic cheerleading of pundits, led to an excessive desire to 'get into the game' (R. Shiller, 'Irrational Exuberance' 2000). But behavioral and experimental economics’ unique blend of psychology, economics and neuroscience can explain more than the overvaluing of stocks. In many ways it offers an analytical opening where mainstream economic models have failed. The former theory may help explain questions such as why Americans save too little, acquire too much debt and manage their investment portfolios in a self-destructive fashion (Dubner - 'Calculating the irrational in economics' NY Times, 6-28-03). Gerd Gigerenzer, focusing on the existence of cognitive and memory failures, argues that the methodology of human choice must be understood within the constraints on reason that our own minds impose on us. In order to truly understand the decision-making processes utilized by individuals, one must consider not only the cognitive process of people, but the environmental constraints and limitations in which the decision-making process occurs. Gigerenzer examines several different heuristic devices that individuals use to limit the cognitive information that go into reaching decisions, including one-reason based decisions, a preference for recognizable outcomes, etc. Gigerenzer concludes that these devices, which take into account humanity’s cognitive limits, have strong predictive ability in regards to human choice. Peter Huang maintains that emotions play a strong role in investing decisions. Frequently, emotions diverge from cognition, and it is emotion that often drives behavior. Emotional responses by investors have particular salience because of a line of securities regulations that mandate a broad swath of public disclosure by companies. Emotional reactions to these disclosures can lead investors to make unsound decisions. Understanding the role of emotions in investing and in particular the emotional reaction to mandated disclosure is vital in creating appropriate securities regulation. Note: I am posting this for MY benefit, so that I will remember to investigate the writings of the above listed authors - and not for the edification that the immediately above listed information contains - which I admit, is limited.
When markets are flying high, folks attribute their portfolio's gains to their own brilliance. That gives them the confidence [or optimism] to trade more and to take greater risks. But 2003's growing confidence has been damped by this year's weak results. You can see this trepidation in the pattern of buying and selling at online brokerage Ameritrade. In February 2003, there were 100,000 trades per day through Ameritrade. Eleven months later, after 2003's stock-market rally, that number had spiked to 254,000. But as stocks have struggled this year, Ameritrade's activity has subsided, slipping in May to 144,000 trades per day. Similarly, this rising and falling confidence is reflected in mutual-fund sales. Brian Reid, an economist at ICI, says withdrawals from U.S. stock funds don't change much from one month to the next. To gauge investor sentiment, you need to look at new stock-fund sales. "In 2002, sales continually weakened, and they bottomed in February 2003," Mr. Reid says. "They picked up after that, as the market picked up. But recently, they've backed off a bit, because the market has softened." As is the case with investor confidence, investor optimism effects sales activity. "People are influenced by what has happened most recently, and then they extrapolate from that," says Meir Statman, a finance professor at Santa Clara University in California. "But often, they end up being optimistic and pessimistic at just the wrong time." Once again, it's driven by recent market action. While this syndrone primarily causes investors to 'chase' returns, it also effects the timing of new investments, causing them to buy high and sell low. Consider some results from the monthly UBS Index of Investor Optimism. Each month, the poll asks investors what gain they expect from their portfolio during the next 12 months. Result: The answers rise and fall with the stock market. During the bruising bear market, investors grew increasingly pessimistic, and at the market bottom they were looking for median portfolio gains of just 5%. But last year's rally brightened investors' spirits and by January 2004 they were expecting 10% returns. That enthusiasm has been nixed by this year's wobbly market. May's poll found that investors were expecting median 12-month portfolio gains of just 7%. My hunch: Many investors, who were tempted to buy stocks after last year's rally, have since backed off, deterred by 2004's lackluster results. Overreacting to short-term market results is a great way to lose a truckload of money. But if you are aware of these timing pitfalls, maybe you will avoid them. Or maybe I'm being too optimistic. "You can tell somebody that investors have all these behavioral biases," says Terrance Odean, a finance professor at the University of California at Berkeley. "So what happens? The investor thinks, 'Oh, that sounds like my husband.' I don't think many investors say, 'Oh, that sounds like me.' "
Consumers value variety for its own sake, not just because of lower prices or higher quality. Being able to get exactly the widget you're in the mood for makes you, in a sense, better off. But this improvement in consumer welfare has tended to go unmeasured. In most economic statistics, coffee is coffee, beer is beer and shoes are shoes. In a recent working paper (available at www.ny.frb.org/research/staff_reports/sr180.html.), David Weinstein, an economist at Columbia University, and Christian Broda, an economist with the Federal Reserve Bank of New York, estimate how much international trade has benefited consumers simply by increasing variety. The results are striking. Consumers, they estimate, would be willing to pay $280 billion a year, or about 3% of GDP, to have access to the variety of goods that were available in 2001, rather than what they could have bought in 1972. That represents a huge, previously uncounted rise in the standard of living. It also suggests that measurements of real price increases, like the Consumer Price Index, are overstated. The conventional import price index, they estimate, overstates the price of imports by about 1.2% a year, because it does not take the higher value of variety into account. Americans are not the only consumers who are better off. "Countries like China, Mexico, the former U.S.S.R., and Singapore have welfare gains that are double digits - three to five times larger than those for the U.S.," Dr. Broda says. "This is really a world phenomenon, beyond the U.S." The benefits of variety also help explain why many people are willing to pay more to live in big cities. Thanks to greater variety, urban dwellers get more for their money. Professor Weinstein, who used to teach at the University of Michigan, explains it this way: "In Ann Arbor, you have maybe a dozen good restaurants to choose from, and in New York you probably have several thousand good restaurants to choose from. Yet when you compute the price of a meal, you don't take that at all into account."
Alan Greenspan's latest rationale as to why inflation isn't in danger of accelerating has to with wide profit margins. `Fears of losing market share should dissuade businesses from passing these high costs fully through to prices,' Greenspan said in a speech to the International Monetary Conference in London last week. `Accordingly, the forces of competition should cap the rise in profit margins and ultimately return them to more normal levels.' It doesn't make sense to say inflation won't rise because businesses have big enough margins to absorb higher costs. Businesses want to maximize profits -- at all times. History suggests that profit margins aren't even a good indicator of inflation. `Prior to 1990, we had higher profit margins and higher or rising inflation,' said Joe Carson, director of global economic research at Alliance Capital Management. `Profit margins aren't a good predictor of where inflation is going.' Inflation is a process that takes root when too much money is chasing too few goods and services. The Fed relies on backward-looking CPI data to get an idea about where inflation is going. Steve Cecchetti, professor of international economics and finance at Brandeis University and a former research director at the New York Fed, thinks the Fed is already `in dangerous territory' if its objective is 2.5% inflation. `Interest-rate changes take 18 to 24 months to have an impact on inflation,' Cecchetti said in his monthly inflation update. `The implication is that inflation will continue to rise for two years after the target federal funds rate returns to its long-run equilibrium level of 4 to 5%.' Since it will take at least until late 2005 to normalize the funds rate from its current 1%, `inflation will continue to rise for the next three years,' Cecchetti said. Inflation Rate is Slow Paced in Fast Food Reuters 6-12 The average amount one person spent on dinner at a fast-food restaurant during the three months that ended in April rose a penny from the same period last year to $5.52, according to market research firm NPD Group. Meanwhile, the average full-service restaurant check increased a modest 2% to $12.82. "Americans are going to hold the line," NPD Group Vice President Harry Balzer said. "Americans will never let food costs rise more than their incomes, no matter what inflation is doing." Higher costs for milk, beef, cheese and pork have led many restaurant operators to raise prices on popular menu items. But Balzer said consumers have responded by choosing cheaper restaurants or entrees, or by eliminating something, such as dessert. Energy Inflation Robert Dodge, The Dallas Morning News 5-30 Energy prices have surged at an annual rate of 25% during the first four months of this year, according to the CPI. Lyle Gramley, an economic consultant and former Federal Reserve board member, estimates that higher energy prices have sucked $93 billion out of consumer pocketbooks in the last two years. His analysis illustrates why the Fed might see higher energy prices as a precursor of inflation. But Mr. Gramley's figures also support a somewhat contrary view held by many analysts: Higher fuel costs will act like a burdensome tax and slow economic growth, thus relieving inflationary pressures.
Annual annuity fees currently an average 2.22% a year compared with 1.45% for ordinary mutual funds, according to Morningstar. The policies also generate commissions of 5% or more for the brokers who sell them, raising a red flag for regulators concerned about improper sales. Assets in annuities shot up 20% last year to $985 billion and have now hit $1.026 trillion.
"It's logical that the sectors and companies that are heavily indebted would be hurt by rising rates, because the cost of their capital will go up," said Sandy Lincoln, chief executive of Wayne Hummer Asset Management. Utilities, telecommunication business, and some large-cap value stocks, such as automotive companies, tend to make heavy use of the debt markets, Lincoln said. Rising borrowing costs combined with the slower growth associated with value stocks can seriously dent earnings. Smaller companies are also vulnerable, as they often rely on debt to push their businesses forward. There have been six periods since 1970 when the central bank tightened rates multiple times over a period of many months. On average, in the six months following the first rate hike, the Standard & Poor's 500 fell 5%, nine of the 10 sectors in the index posted declines and all but one of the 56 industries in existence for all six periods fell. From a style standpoint, the growth group fell an average of 3% during the first six months of rate tightening, while value dropped 5%. The hardest-hit sectors were interest rate sensitive financials, which tumbled an average 13%; industrials sank 12%; consumer discretionary stocks fell 11%; and utilities lost 10%. Not surprisingly, health care, energy, consumer staples and materials - things that people use regardless of the economic climate - endured less daunting losses. But the only sector that saw an average gain was tech, thanks to a 6% overall advance in electronic instruments. From Byron Wien of Morgan Stanley James Glassman, The Washington Post 6-13 "It is unlikely that inflation will exceed 2.5%, in my opinion," wrote Byron Wien of Morgan Stanley in a letter to clients on June 1, "and a 10-year U.S. Treasury yield in the area of 5.5%, accommodating a 3% real rate, should not impede further stock market progress." The best-performing sectors 12 months after the five Fed rate increases since 1983 studied by Wien and his colleague Michelle Weinstein were: technology hardware, up 25%; pharmaceuticals and biotechnology, up 22%; health care equipment and services, up 20%; food and drug retailing, up 17%; media, up 17%; and software and services, up 14%. Note: These are returns are for the 12 month period after the first rate hike. And remember the rule is "three steps and then a stumble." One Year Anniversary Allan Sloan, The Washington Post 6-15 Interest rates on Treasury bonds have been rising since June 13 of last year, when rates bottomed out at 3.11% for the 10-year Treasury bond. Last week's closing rate: 4.80%. Yields on five-year and two-year Treasury securities have more than doubled, to 4.06% and 2.81%, respectively, from 2.03% and 1.08%. Those are pretty hefty increases.
If we are now in the second year of a bull market, there may be another problem for small stocks. Since World War II, small stocks have returned 5.5%, on average, in the second years of equity rallies, according to Prudential. By comparison, midcap stocks have returned 6.5% and large caps 8.1%. And small stocks, because of their recent run-up, are now more expensive than blue-chip shares. Based on operating earnings in 2003, the S.& P. 600 index of small stocks is trading at a price-to-earnings ratio of 24.6, versus 20.8 for the S.& P. 500. Based on estimated operating earnings for 2004, small stocks still have higher P/E multiples: 18.4, on average, versus 17.4. And when interest rates rise, investors typically aren't willing to pay steep prices for stocks. This means that higher-multiple stocks are likely to fare worse than lower-multiple ones.
NFJ's Mr. Fischer says his firm's exposure to energy -- about 12% -- is roughly double that of the S&P 500 stock index. Mr. Fischer has been buying coal stocks, "since the U.S. is the Saudi Arabia of coal," he says. "As our economy grows, so will the demand for electricity." That should propel profits for companies such as Arch Coal and Massey Energy. "With rising prices," Mr. Fischer says, "you need to be thinking more in terms of protecting your portfolio with commodity-driven securities." James Stratton, who runs the Stratton Growth fund and has been managing money since 1960, says that his fund has been moving into raw-materials, chemicals and capital-goods companies -- sectors that will benefit from inflation and an improving economy because they will gain pricing power. Stocks that fit the bill: International Paper, Black & Decker and Deere, among others. Mr. Stratton has overweighted the energy sector, too, concentrating on natural-gas producers because gas supplies are tight and gas is harder to import than crude oil. He favors Anadarko Petroleum, Penn Virginia and Occidental Petroleum. He's also been buying refining stocks Valero Energy and Marathon Oil. The U.S., he says, "hasn't built a new refinery in 20 years, and capacity is tapped out." That's behind some of the pricing problems with gasoline. Mr. Stratton has halved his exposure to health care and reduced his interests in financial stocks. John Rogers, chief investment officer of the Ariel Fund, says he "wouldn't be surprised" if inflation gets up to 4% or 5%. "I remember vividly the inflation of the early '80s," he says, "and once it gets going it goes higher than people anticipate." Because inflation fears often drive down stock prices even as earnings are improving, Mr. Rogers says he can see price/earnings ratios -- now at roughly 22 for the Standard & Poor's 500-stock index -- "fall back to single digits in the next 18 to 24 months." He has tweaked Ariel's portfolio by owning companies that profit from a rise in the price for hard assets -- everything from real estate to art. The fund has recently bought real-estate stocks such as Rouse and Jones Lang LaSalle.
It isn't just stocks. There is no asset class that looks attractive now: Mainstream stocks, small-cap stocks, Treasurys, corporate bonds, junk bonds, real estate, cash, emerging-market assets, commodities . . . all are either expensive or yield little. "Everything has a low -- but not absurdly low -- expected return," says William Bernstein, co-principal of Efficient Frontier Advisors. "Four years ago [the investment landscape] was fairly mountainous, with peaks and valleys," Mr. Bernstein says. Now it is flat as far as the eye can see." "It's an all-asset mild bubble, instead of one super-bubble," says Cliff Asness, managing principal at AQR Capital Management, a money-management firm. Take stocks. Yale economist Robert Shiller, famous for a book written during the latest bubble called "Irrational Exuberance," has pioneered a valuation method that measures stock prices against an average of net income over the trailing decade. When stocks have the price-to-earnings ratio they currently sport according to his method, which is around 27.5 times, compared with a median of about 17 times, stocks have, historically, logged essentially flat returns during the following decade, according to Mr. Asness. For the stock market to average double-digit returns in the next decade, justifying their lofty valuations, earnings and dividends will have to rise much more quickly than they have during the past several decades. Alternatively, investors could rationally be prepared for much lower returns. But if those things aren't true, stocks will fall or stagnate. Meantime, an uncertain geopolitical world means investors should require more compensation for riskier assets. As would be expected when borrowing costs fall, corporations and consumers have piled up debt. Wall Street firms had higher leverage ratios in Q4-03 than in late 1998. Consumers have pushed up their exposure to mortgage debt to the highest levels ever. Banks responded by overconcentrating, putting a record percentage of their earning assets into mortgage-related obligations. If the world truly becomes a less-volatile place, then leveraging up to turn a small, safe return into a larger one is rational. But such an assumption is, well, risky.
After hitting a high of 10737.70 on Feb. 11, the Dow industrials have been in the doldrums. At its worst in the middle of last month, the average was down almost 8% from that high. It has been edging back up since then. The Dow, at Friday's 10242.82, now is down only 4.6% from the February high, helped by a mild report on May job creation that helped cool inflation fears, and by falling [sub $40] crude-oil prices. "The crucial question on inflation is, 'How much does the Fed hate it?' " says Richard Hoey, chief economist at Dreyfus. While the Fed wants to keep it under control, it doesn't yet feel the need for hate or fear, he says. He and other optimists say the recent stock downturn permitted investors to adjust to the idea that last year's boom is over. Now, they say, stocks can enjoy a period of continuing gains, but at a more moderate pace. The most important thing for investors to do is to take a realistic view of the kinds of stocks that can prosper in such a world of moderate inflation and moderate growth. "What's logical isn't to avoid stocks but to get out of the speculative stocks and upgrade to the quality stocks," Mr. Hoey says. By quality stocks, he means larger blue-chip names with strong competitive positions, proven track records and steady progress in profits and earnings. As long as inflation becomes tame again and interest-rate increases are mild, these experts say, the bull market can continue. If inflation doesn't show signs of quieting down, the issue no longer will be which stocks are going to rise. It will be how to limit your losses.
Of course, if other things were equal, a climb in interest rates would be cause for concern, because the higher rates add to businesses' borrowing costs and can slow the pace of economic growth. But the Fed raise interest rates only when they believe that inflation is rising; and in these circumstances, higher interest rates have only a small net effect on the average company. People who believe that stocks are invariably worth less when interest rates are higher presumably also believe that companies cannot earn more when inflation is higher. Historically, though, the average company's earnings have grown faster when inflation is relatively high. In other words, the stock market is a good long-term hedge against inflation. In a 1979 article by two finance professors, Franco Modigliani and Richard A. Cohn argued that investors in the late 1970's, a time of double-digit inflation, were placing unreasonably low valuations on stocks by mistakenly assuming that a company's nominal earnings were the same as its real ones and thus would not grow faster with higher inflation. In effect, the professors forecast the great bull market of the 1980's and 90's. Another good illustration of money illusion came in the late 1990's. Then, because inflation and interest rates had been low for several years, investors priced stocks too dearly. By early 2000, the average P/E multiple of the S&P 500 was above 20; in the late 1970's, it was below 8. The bear market of 2000 to 2002 can be viewed in part as the market's attempt to correct years of gross overvaluation. To be sure, some advisers, including Mr. Asness, say that the bear market accomplished only part of the job, and that stocks are still overvalued. So they don't plan to jump wholeheartedly into stocks anytime soon. Nevertheless, Mr. Asness says, worries about interest rates should not make you any less bullish today than you were six months ago.
These short maturities -- recently averaging 51 days -- explain the funds' current average yield of only 0.53%, but also explain why yields would respond quickly to a Fed rate boost. Within two months of a Fed move, the average money fund will have fully turned over its portfolio and its yield will reflect new higher rates. And much of that adjustment will typically take place within one month, says Peter Crane, managing editor at iMoneyNet, a firm that tracks money-fund rates. In 1994, when interest rates rose rapidly, long-term bond funds fell 6.4% and even the average short-term bond fund lost ground, according to Morningstar. By contrast, the average money fund earned 3.7%. Bank-loan funds [aka "floating-rate" or "loan-participation" funds] invest in short-term loans made by banks to companies that typically either aren't rated by credit-rating companies or have credit ratings below investment grade. In 1994's rough market, the average bank-loan fund posted a 6.6% gain, according to Morningstar. Over the past 12 months these funds averaged close to a 5% total return. But bank-loan funds carry much more credit risk. As credit problems hit the funds in 2001 and 2002, some posted negative annual returns exceeding 3%, according to Morningstar. Adjustable-rate mortgage funds held their own in 1994, rising 1%, according to Lipper. But they weren't a perfect hiding place from rising rates, as some funds suffered down quarters that year. Related: Profiting When Rates Go Up (May Factoids)
The value of TIPS will likely fall along with other bonds when interest rates rise. While TIPS provide insurance against rising inflation -- because their principal is adjusted for changes in the CPI -- they don't provide insurance against rising rates. TIPS are likely "to perform poorly on an absolute basis" over the next few months as interest rates move higher, says Joseph Shatz, senior government bond strategist at Merrill Lynch. Last month, Merrill wrote in a report that 10-year TIPS would lose between 1.6% and 4.4% over the next 12 months if the Federal Reserve raised its target short-term rate by one percentage point. The smallest loss assumed 4% inflation while the largest assumed tame inflation of 1%. Bill Tedford, director of fixed-income strategy at Stephens Capital Management, says that "even though inflationary expectations have risen, the real yield isn't high enough yet" on TIPS to start buying. Mr. Tedford won't be interested again until the 10-year TIPS yield rises to 3% from its current level of about 2%. If the Fed moves quickly to raise rates in an effort to stave off inflation, TIPS will suffer a double whammy because rate rises hurt fixed-income investments generally and because the inflation premium may whittle away if it looks like a vigilant Fed will stamp out inflation. The concerns about TIPS come as the Treasury plans to vastly expand its TIPS selling program -- adding five-year and 20-year securities to the current 10-year notes later this year -- and as investors big and small are racing to buy TIPS, often through mutual funds and retirement accounts. TIPS mutual funds can be more volatile than that of standard Treasurys that don't offer inflation protection. The average TIPS fund tumbled more than 4.6% on average in April, compared with a 3.9% fall for general Treasury funds, for example. Despite their low-risk billing, TIPS have suffered other monthly losses of that magnitude, notes Eric Jacobson, a senior fund analyst at Morningstar.
In fact, the economy has been in a state of rip-roaring "expansion" -- the strongest in 20 years -- yet the media persists in painting a dreary picture. "I don't know how much is agenda and how much is ignorance or just lemming-type journalism," said Comerica Bank Chief Economist David Littmann, who's tracked the economy for 40 years. "We're in a mini-boom, and to characterize it as a recovery is to diminish it." This isn't nitpicking, mind you. The media is a powerful influence on how we view ourselves, and refusing to come around to substituting one word for another is depressing the national mood. Think about it: An expansion implies strength and virility, while recovery suggests lingering weakness -- the stroke victim in therapy for paralysis, or the reformed alcoholic still at risk of falling off the wagon. Contrary to what conservatives might suspect, the media's dim view isn't due to a liberal conspiracy to derail President Bush's reelection. No, the driving force here is altogether different. Namely, as a sage editor of mine used to say, "Don't blame on malice what can best be attributed to incompetence." The business media has always been a lagging economic indicator. We're the watchdogs who failed to bark menacingly at sky-high stock prices, who let the bear maul small investors for a year before finally barking long and loud, and who were chloroformed when it came to sniffing out massive corporate corruption. We're now loath to change our characterization of the economy, for fear we'll be ridiculed for cheerleading again. Three reasons to call the economy 'booming': (1) The nation's GDP grew 4.4% in Q1-04, capping its biggest 12-month gain since 1984. By most forecasts, GDP this year is expected to grow 4.7% -- the best calendar-year performance in two decades, surpassing even our longed-for 1999. (2) The economy has created more than 1.1 million jobs since last August, with unemployment falling to 5.6% in April. That rate was lower, by a hair, in only two of 22 years from 1974-to-1995 -- 5.5% in 1988 and 5.3% in 1989. (3) Home ownership reached a record-high 68.6% in Q1-04 -- up nearly 5 percentage points in the last decade. Americans still bear some responsibility for not seeing past the media's mischaracterization, though the reasons are understandable, said Richard Geist, president of the Institute of Psychology and Investing. "People got so fed up with bad economic news, they stopped paying attention" he said. The Gallup Poll last week found we're growing dispirited again despite a host of encouraging economic news. "Even as the U.S. economic expansion begins to provide real job growth, Gallup Poll economic data for early May show more consumers rating the economy as 'poor' than at any time this year. Half the public also says the economy is getting worse, not better. Economy Becomes More Vibrant by the Day Englund & MacDonald, Action Economics via BusinessWeek 6-04 Growth in total hours worked looks to accelerate to roughly 3.7% for Q2, from a 2.3% pace in Q1, which provides solid support for our estimate of 6.3% GDP growth for Q2. Overall, strong domestic demand, depleted inventories, and solid export growth (helped by the relatively cheap dollar) appear to be contributing to the best environment for manufacturers in several years. The robust May numbers suggest ongoing strength in other factory reports that will be released later in the month -- especially industrial production. Industrial production is steadily accelerating from its cyclical low in Q2-03. Since then, it grew 3.8% in Q3-03, 5.6% in Q4-03, 6.3% in Q1-04, and now is projected to rise 8% in the current period. And nothing appears to be on the horizon to restrain the sector's growth any time soon, given the broad strength in the factory employment and workweek data, alongside other supportive indicators. Meanwhile, U.S. personal income is now poised for a solid 0.6% increase in May, given the month's healthy payrolls and workweek data, alongside the big 0.3% wage gain in May. In total, the May jobs data indicate that the month's remaining reports are all likely to reveal extraordinary strength in factory activity, widespread growth in income and spending, and continued gains for the high-profile construction sector.
From the beaches of Pearl Harbor to the shores of Normandy, there were abundant examples of almost criminal neglect or serious miscalculation that costs thousands of American lives. But the history that I read in school, saw on the movie screen or saluted on the city streets never spoke of any mistakes. And maybe this is the root of an amnesia that haunts us today. The Viet Nam war was so totally different. On TV, it seemed nothing but a mistake. And in Viet Nam, stories leaked. The horror of war was more real, even when the national commitment to war so much less so. Did the U.S. do anything right in Viet Nam? The popular perception is probably like mine, and I can not think of anything that went right. As we enter another Memorial day, I have the impression that my fellow Americans are more full of amnesia than memories. Things have always gone wrong in war. Assumptions have proven wrong. Preparation has been inadequate. Horrors happen. The popular perception is that things have gone worse than normal in Iraq. And that could be. But did we ever have a proper perception of what is 'normal'? Probably some of those who watch the History Channel do. But I fear that Joe Public is more like a "Jay Walking" contestant than a History Channel watcher. If only our fathers had told us more about war, maybe we could have had more of a consensus about the execution of this one. If only the textbooks had told us about past mistakes, maybe we could have had more realistic expectations about this one. There is an American amnesia about war that haunts us.
`Whether they recognize it or not, many people are concerned that their investments will give them a similar lifestyle and retirement as their friends or some other reference group,' says Au. `Thus, if a person's family and friends are all buying technology or Internet stocks, it is a rare individual who will not be similarly invested, because he or she otherwise may end up with a new group of friends. A similar rule applies to a group of people who all have most of their assets invested in their company's stock,' Au writes. `If such investments prosper, terrific! If not, `misery loves company.' For professional investors, `there is a tendency to invest along with the pack because it is safer,' wrote Bob Litterman, director of quantitative resources at Goldman, Sachs, in a recent commentary aimed at investing institutions. Understandable as this urge may be, it glorifies mediocrity. And when individuals, wishing to learn from the pros, get entangled in relative-performance thinking, the results can be downright ridiculous. `What are your objectives?' I once inquired of an investor who had asked me to recommend a few good mutual funds. `I don't know,' came the reply. `To beat the S&P 500, I guess.' But for individuals who need only answer to themselves, that makes no sense. As long as you aren't getting paid on the basis of relative performance, index beating is of very little benefit. The main motives for such thinking are emotional, not financial -- to appear smart or to avoid looking foolish. For the lemming that doesn't go along with the crowd, it makes a choice that isn't so easy -- staying around to face the cold tundra alone. Likewise in the market, where avoiding the madness of the masses may take more courage than is generally acknowledged. So how does one apply all this to fund investing? Instead of buying what others are buying, Au suggests, `Choose a style that is compatible with your temperament as well as your investment objectives.' That takes some knowledge and skill, whether supplied by investors themselves or intermediaries such as brokers hired for the purpose. To help acquire that skill for oneself, Au offers a worthy suggestion: `All but the busiest investors should manage at least a portion of their own portfolio, in order to get a taste of the business of investment, thereby learning what a mutual fund manager or an adviser can or cannot do.'
The professors determined that during the bear market months from April 2000 to December 2002, investors who fared the best - relative to their market benchmarks, at least - were those with restrictive rules that did not allow much leeway for hanging onto stocks for emotional reasons. For instance, more than a third of the 4,332 institutional money managers in the study relied primarily on a strategy called "valuation level" selling. That is a fancy way of saying that they sold stocks because they became too pricey, based on measures like earnings or book value. The study's authors regard such a strategy as highly disciplined and objective. Managers who relied on this method outperformed their chosen benchmarks by 0.46 percentage points a month or 5.5 points a year, on average, during this period. By comparison, institutional managers who relied on more flexible sell strategies - requiring judgment calls on the health of a business - fared worse. They beat their benchmarks by just 0.08 percentage points a month or just less than 1 point a year, on average, during the downturn, despite outperforming the more disciplined sellers during the roaring bull market of the late 1990's. What does this mean for investors who may not have the skills or the resources of professional money managers? For starters, it is a reminder that some kind of selling discipline is better than none. "Without any kind of strategy, emotions will come into play and emotions are almost always wrong," said Greg Forsythe, director of the equity model development team at Charles Schwab. Beyond that, said Mr. Shawky, director of SUNY's Center for Institutional Investment Management, "discipline matters in down markets." The notion of cutting losses may seem anathema in the world of long-term, buy-and-hold investing. But it makes sense to hold all your stocks forever only if every one of your "buy" decisions is perfect. And who can claim that? That is why it is important for investors to introduce discipline and structure to their investment plans. Here, we can take cues from some mutual fund managers: Set Up-Side Sell Targets Like many managers, Lanny Thorndike, lead manager of the Century Small Cap Select fund, judges how high each of his holdings may trade over the coming 12 months. This target is based in part on his judgment of how much others are willing to pay. Whenever a stock comes within 5% of his target price, Mr. Thorndike trims his position. In Q1-04, he sold shares of Sunrise Senior Living, the assisted-care company, as its price approached his target of $42. The stock fell to $30 a share in early May. He bought its stock again at $33; It now trades at $36.04. "The sell discipline deserves more credit than the analysts or myself when it comes to keeping us out of trouble," he said. Set a Price Floor "The key to good investment results is to avoid the big loss," says Arieh Coll, manager of the Eaton Vance Growth fund. Academic research tells us that individual investors have a knack for hanging onto money-losing stocks. But one way that Mr. Coll makes sure that he does not ride his losers all the way down is by re-examining any holding that falls 15% below its recent peak. Although some managers sell at this point, Mr. Coll reassesses his entire investment: he decides whether to dump the holding and take advantage of the tax loss, which he can use to offset other gains; to stand pat; or to buy more shares. This forces him to deal with his laggards head-on, instead of avoiding the topic, as many investors do. Maintain Diversification Caps Investors often benefit from cutting their losses and keeping their winners, but there are limits to the strategy. For example, if you let your winners grow too big, a diversified portfolio can quickly become too concentrated in a handful of stocks, raising the risk level. The managers of the Jensen Fund have a simple way of dealing with this. Whenever a stock in the fund becomes more than 7.5% of the overall portfolio, the holding is trimmed. This approach keeps any single stock from having undue influence over the entire portfolio, and ensures that you take some profits along the way. Make Your Sell Strategy Work with Your Buy Discipline Whatever your approach, your sell discipline should reflect your buy strategy. Consider the Jensen Fund again. The only stocks that qualify for this large-cap growth portfolio are of companies that have produced returns on equity of 15% or more for 10 years in a row. Only about 120 companies in a universe of 10,000 meet that standard. If a holding stumbles and breaks its string, it is kicked to the curb. "Our preferred holding period for all our stocks is forever," said Robert G. Millen, the fund's co-manager. "But in the real world, we know that doesn't happen." Related: Eleven Reason to Sell a Mutual Fund - Paul Merriman, CBS.MarketWatch, Just Say Sell - Charles Jaffe, Boston Globe, Another "Sell" Criteria - Charles Jaffe, Boston Globe, Six Sell Signals - Glenn Curtis, Washington Post, Know When to Fold'em - Charles Jaffe, Boston Globe The Warren Buffett Philosophy Warren Buffett sums up his sell philosophy in his 1987 letter to Berkshire Hathaway shareholders this way: 'We are quite content to hold any security indefinitely, so long as the potential return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market doesn’t overvalue the business.'
In 1970, oil was $3.18 a barrel. Think of it as the good old days. It was three years before the OPEC embargo reminded us that we need oil from the Middle East to run our economy. The Standard & Poor's 500 index was at 92.15. That means it would have taken 34.5 units of S&P 500 to buy 1,000 barrels of oil. By 1975, oil prices had more than doubled and stock prices had fallen. So it took 85 units of S&P 500 to buy 1,000 barrels of oil. By 1980, when investors were about to give up on stocks, oil was $21 a barrel while the S&P was 135.76. So it took 159 units of S&P 500 to buy 1,000 barrels of oil. That, it turns out, was near the peak for oil and the bottom for stocks. By 1985, oil was $24.09 a barrel while the S&P was 211.28. It took 114.0 units of S&P 500 to buy 1,000 barrels of oil. By 1990, oil was $20.03 a barrel while the S&P was 330.22. It took 60.7 units of S&P 500 to buy 1,000 barrels of oil. By 1995, oil was $14.62 a barrel while the S&P was 615.93. It took 23.7 units of S&P 500 to buy 1,000 barrels of oil. By December 1998 - the last time I wrote about the Barrel Standard - oil was down to $11.18 a barrel and the S&P 500 was up to 1,149. As a consequence, you needed only 9.7 units of S&P 500 to buy 1,000 barrels of oil. Oil was dirt-cheap. We had enjoyed nearly two decades in which you needed less and less stock to buy a barrel of oil. Viewed as an exchange rate, oil had fallen 94%. Today, with oil testing $42 a barrel and the S&P 500 index down from 1998, the trend has clearly reversed. In May, it took 38.7 units of S&P 500 to buy 1,000 barrels of oil. One message here is clear: When oil prices rise, stock prices tend to fall. When oil prices sink, stock prices tend to rise. The question at hand is whether $40-a-barrel oil is a transitory peak or a new reality. My personal view is that $40 oil is the new reality. The era of cheap oil is over. My money is where my mouth is - I've invested in energy stocks as a substitute for dollar-based investments. Here's why: 1: We love unlimited energy, but we don't want to do anything to get it. Our capacity to deliver and refine oil is inadequate. We either haven't invested or been allowed to invest enough. 2: The Middle East remains the largest pool of oil reserves in the world. That's bad news for Western civilization. Meanwhile, global demand continues to increase. The supply/demand balance is likely to be a source of instability for the foreseeable future. 3: Some are predicting that global production would peak in this decade. Today, with production declines in some important oil fields, the idea is attracting more attention. Monthly Employment Stats
Payroll-growth figures for March and April, which were already considered strong by many economists, were revised even higher. Employers added 74,000 more jobs than previously thought during those two months. The surge in job creation drew some previously discouraged workers back into the civilian labor force, expanding it by 233,000 to 146.9 million. The unemployment rate, as a result, held steady at 5.6%. Many economists now expect the economy to generate about 200,000 jobs a month for the remainder of 2004. Over the last nine months, employers have replaced 1.4 million of the 2.7 million jobs lost in the previous two-and-a-half years. Steven Wood, chief economist at Insight Economics, explains that the low unemployment rate is due in part to the large number of people that have dropped out of the labor force. In May, the number of people working part-time for economic reasons jumped to 4.605 million, the twelfth time in the last 13 months that it has exceeded 4.5 million. "There is still substantial slack in the labor markets despite the relatively low unemployment rate," says Mr. Wood. "As the expansion continues, many of those who dropped out of the labor force are likely to return while some others will switch to full time work. This will prevent any substantial improvement in joblessness although the degree of stress in the labor market will diminish." Job creation was "widespread" for a third consecutive month, the Labor Department said. Employers expanded jobs in most major sectors of the labor market except government, which cut 27,000 jobs, and the telecommunications sector, which shed 5,000 jobs. The service-producing industry added 176,000 jobs. That included a 64,000 increase in professional and business-services jobs, which include temporary-help jobs. The manufacturing industry added 32,000 jobs, marking the largest increase in nearly six years. Average hourly earnings rose five cents to $15.64 in May. Over the last year, average hourly earnings have risen 2.2%. The average work week held steady at 33 hours and 48 minutes. From NY Times 6-05: Total hours worked are now rising at an annual rate of nearly 4%, roughly double the rate reported in April. "That makes May the strongest jobs report of the last three months, even though it had the lowest number of jobs created," said William Dudley, director of domestic economic research for Goldman Sachs. Prior Employment Updates: April 2004, March 2004 More Stats Gene Epstein, Barrons 6-07 With average hourly earnings up by a brisk 0.3% in May, wages are probably rising at an annualized rate of at least 3%, consistent with a 5.6% unemployment rate. As the unemployment rate declines further, however, wage growth should accelerate. The number of folks the Bureau Labor Statistics classifies as managers and professionals has been rising year after year. In April-May, they were 48.6 million strong, or about 33 percent of the labor force, both records for this time of year. These figures continue to give the lie to the idea that white-collar jobs are shrinking because of "outsourcing." Raw Stats Danielle DiMartino, The Dallas Morning News 6-09 The 248,000 jobs created that was reported Friday is "seasonally adjusted". So what exactly was the nonseasonally adjusted payroll gain in May? A cool gain of 939,000. Wages vs. Profits Zuckerman & Zimmerman, WSJ 6-22 There are signs the labor market is finally showing strength. In April and May, personal income was up about 6% from the same months a year ago. But most analysts doubt a wage surge is around the bend. They predict that unless unemployment drops from its current level of 5.6% to below 5%, profits can keep growing without companies feeling pressure to raise prices to make up for rising wages. James Glassman, senior U.S. economist at Chase Securities, predicts the rise in wages will be subdued, as will the drop in profit margins -- keeping a lid on wage gains, but buoying investors. "People are too pessimistic," he says. "Companies are very focused on keeping profitability and productivity high, and they're not about to give back gains achieved in recent years. And labor isn't exactly in the driver's seat." Glassman argues that the coming wage gains will be positive for the economy by encouraging personal spending, among other positives. Others say wage gains are crucial to enabling the U.S. consumer, weighed down with debt, to deal with the anticipated rise in interest rates.
Only three industries paid a lower average hourly wage: other services, retail trade, and leisure and hospitality. Take out earnings for retail trade and leisure and hospitality, the two lowest-paying categories, and service jobs paid $17.34 an hour on average, according to calculations by economists at Bear, Stearns. Twenty years ago, manufacturing ranked seventh in wages. Ten years ago, it ranked eighth. If the high-paying manufacturing job was a myth 20 years ago, it has slipped further into fairy-dust territory today. So if high-paying manufacturing jobs are a myth, it makes you wonder about the claims that all the new jobs being created in the U.S. are low-paying ones. Of the total 275,000 private non-farm jobs created in May, 59,000 of them were in the low-paying retail and hospitality categories, according to John Silvia, chief economist at Wachovia. `Most of the jobs were not created in the low-paying area, contrary to what you hear on TV,' Silvia said. Over the last six months, service jobs excluding retail and leisure have risen by 665,000 while lower-paying retail and leisure jobs rose 313,000, according to Bear Stearns economists.
U.S. factory orders dropped 1.7% in April, the largest in a year, the Commerce Department reported. But the decline followed a robust 5% increase in orders in March. Orders for big-ticket goods, such as cars and appliances, dropped in April, while demand for nondurable items, such as food and clothes, was flat. "The labor markets still contain a high degree of slack and we believe that we are still far from the point where wage gains become a problem for the economy and inflation," said David Rosenberg, an economist at Merrill Lynch. Just the Facts Huge Price Increases for Homes in S. California Vrana & Haddad, LA Times 6-17 The median price of a Southern California home rose to $396,000 in the region's six major counties in May, a 27% increase from a year ago and the largest percentage increase on record, DataQuick Information Systems reported Wednesday. In Orange County's median price rocketed 36% from a year earlier, to $543,000. Riverside County saw the next-largest leap, with the median price rising 32% to $317,000. The median price In Ventura County surged 27%, to $492,000; 26.9% in San Bernardino County, to $236,000; and 21% in San Diego County, to $454,000. Los Angeles County prices, reported last week, gained 26% to a record median of $394,000. Index's are a Tough Competitor Mark Hulbert, CBS.MarketWatch 6-04 The Hulbert Financial Digest is fast approaching its 24th anniversary of tracking investment newsletter performance. More than half the 30 or so newsletters that the HFD was tracking then no longer are published; just 14 have survived. And the model portfolios of just three of these 14 have made more money since mid-1980 than the Wilshire 5000 index. That means that only 10% of the newsletters that were on the HFD's original list have made more money for their subscribers than they could have by simply investing in an index fund. MarketWatch reader David Herskowitz reports that just 12% of the equity funds in existence in 1970 are both still around today and have made more money over the past 34 years than would have an index fund. I do not take these data to mean that the markets can't be beaten. Nonetheless, one should never lose sight of how stiff a competitor the markets really are. Quick Facts, Stats & Opinions Lipper data released this week show uninspiring performance this quarter across much of the fund universe. Large-cap growth funds gained 0.65%, while small-cap value funds gained 0.23%, Lipper reported. Multi-cap growth funds were down 0.15%, and small-cap core funds lost 0.57%. Target maturity bond funds were down 5.6%. TIPS funds lost 3.5%. (Arden Dale, WSJ 6-29) "Zombies," personal computers that have been unwittingly commandeered by spammers and used to send out unwanted e-mail and malicious programs, now account for as much as 40% of all spam. (Jonathan Krim, Washington Post 6-23) From the ICI 2004 Mutual Fund Fact Book: Last year, withdrawals exceeded new purchases by $43 billion. The figure was due to investors' big withdrawals - $258 billion - from money-market funds. In fact, investors poured $216 billion more into long-term funds than they took out. These are all types of funds other than money-market funds. (Jeff Brown, Philadelphia Inquirer 6-22) From the ICI 2004 Mutual Fund Fact Book: The median fund investor is 48 years old and has a household income of $68,700. The household has $125,000 in financial assets, not including the home, and has $48,000 invested in four funds. (Jeff Brown, Philadelphia Inquirer 6-22) Thanks to the recovering economy and significant productivity gains, . . . companies are piling up the cash. Balance sheets have been repaired, and only so much money can go into new capital investment. . . . As earnings continue to mount, managers will have to decide what to do with the surplus funds. Currently, the S&P 500 companies hold $2 trillion in cash on their books. This equals slightly more than 20% of their collective market capitalization and compares to the longer-term cash-to-market-cap average of 16% or so. The earnings payout [dividends divided by earnings] ratio, meanwhile, stands well below the post-World War II average of 51% and even the more recent 20-year average of 40%. Curiously, [however], after a flurry of interest in the immediate aftermath of the bubble bursting, dividend-paying stocks have taken a back seat to the higher-octane, cyclical stocks. (Edwin D. Everett, The Babson Staff Letter via The Washington Post 6-20) Markets are poised for huge gains if second-quarter earnings projections are any indication says stock researcher Thomson First Call. First Call says the ratio of negative-to-positive earnings outlooks is greater than last quarter and the year-ago quarter. As a result, earnings should be up an average of 26%, up from previous estimates of 20.3%. (Russ Britt, CBS.MarketWatch 6-19) Wal-Mart accounts for 9% of all non-auto-related consumer sales in the U.S. (WSJ 6-17) The 2004 World Wealth Report, compiled by Merrill Lynch and consultancy Capgemini Group finds that one of every 125 Americans is a millionaire. There were 2.27 million millionaires last year, up from two million in 2002. (Robert Frank, WSJ 6-15) About 30% of U.S. employers expect to add workers to their payrolls in the third quarter, according to the latest Manpower Employment Outlook Survey. Of the nearly 16,000 U.S. employers polled, 6% expected to decrease their payrolls; 59% expected no change and 5% didn't know. (Lauren Etter, WSJ 6-15) A new study of investor behavior by Hewitt Associates found that only 17 percent of retirement investors made any type of changes to their 401(k)'s in 2003, the same as in 2002. "That's pretty consistent with what we found over the last few years," said Lori Lucas, Hewitt's director of 401(k) participant research. In other words, in each of the past two years, five out of six retirement investors failed to rebalance their portfolios even once. (Paul Lim, NY Times 6-13) The chances are that the cost of money will rise for a long, long time, says James Grant, publisher of Grant's Interest Rate Observer. Mr. Grant is not about to predict how high rates will go in this cycle, or how long it will take for them to peak, but the last secular bear market in bonds lasted from 1946 to 1981. (Kenneth Gilpin, NY Times 6-13) Among bad investment strategies, few have cost investors more than averaging down. Buying more of a stock simply to lower your average price is stupid. On average since 1990, investors would have done well buying 12-month leaders after one- or two-month declines. But buying 12-month losers was a poor strategy. (Richard Moroney, Upside via The Washington Post 6-13) A survey to be released next week will show state tax collections rose 8.1% in Q1-04 from a year earlier. That follows a 7.2% gain during Q4-03 and represents the largest quarterly gain in nearly four years, says Nicholas Jenny, the survey's author and a senior policy analyst at the Nelson A. Rockefeller Institute of Government. (Tom Herman, WSJ 6-10) "Over time, companies that shrink their share counts should provide good returns to shareholders," says Tobias Levkovich, U.S. equity strategist at Smith Barney. In sorting the Standard & Poor's 1500 Composite index, Levkovich found only 95 companies that lowered their total share count from 1999 through 2003. Of the 20 most aggressive "stock choppers," whose share reductions range from 19.7% to 38.5%, all but two have outperformed the S&P 500 in the past five years. (Jacqeline Doherty, Barrons 6-07) Net foreign purchases of American stocks totaled about $37 billion last year, the lowest since 1996, according to TrimTabs Investment Research. (Conrad De Aenlle, NY Times 6-06) The U.S. financial markets are still fragile and remain susceptible to disruptions caused by geopolitical events. As long as inflation remains low, which it is, the Fed is likely to show restraint when raising rates. This will allow the economy to continue to grow at a rapid pace and for corporate earnings to advance at a strong year-over-year rate. . . . Until earnings begin to falter, short-term market declines should be viewed as buying opportunities. (Jim Collins, OTC Insight via The Washington Post 6-06) Bonds are beaten and bedraggled, with almost no one believing bond prices can go up. That means they ought to do just that in order to surprise the majority. The smart money is already long bonds. (Tom McClellan, The McClellan Market Report via The Washington Post 5-30) So far this year, 119 companies have reported they are raising their payouts, compared with 92 at this time in 2003. And, through mid-May, dividend-paying stocks among the S&P 500 had lost an average of just 0.6% while non-dividend payers had lost 4.9%. (James Glassman, The Washington Post 5-30) - Within the Standard & Poor's 500 index, the 375 stocks that pay dividends are up 3.5% this year on average, said Howard Silverblatt, a researcher at S&P. The S&P 500 stocks that don't pay dividends, by contrast, are up 0.5% on average. (Tom Petruno, LA Times 6-01) James W. Paulsen, chief investment strategist at Wells Capital Management, reckons that the 10-year Treasury could rise to 6% this year and maybe hit 7% later on a wild spike. (Gretchen Moregenson, NY Times 5-30) Dr Alexander Bentley, of University College, London, looked at the frequencies of different first names in American babies. One of his findings was that the “mutation rate” in names is higher for girls than for boys. Parents, in other words, are more liable to be inventive when choosing a name for a baby girl. The researchers have found that for every 10,000 daughters born in America there is an average of 2.3 new names. For sons, the figure is 1.6. Novelty in names was high for both sexes in the 1970s, went down in the 1980s, and then increased in the 1990s. (The Economist 5-20) Home Page Previous Factoid Top Sites
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