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Until the late 1990's, many people in academia and on Wall Street said international diversification provided a free lunch. In theory, at least, a portfolio holding both domestic and foreign stocks would perform just as well over time as one containing only domestic ones, but with less risk - when risk is defined as volatility of returns. The key to this idea was the historically low correlation between domestic and international stocks - in other words, their tendency not to move in tandem. Thus, a portfolio with both kinds of stocks would be less volatile than one with domestic stocks alone. But in the late 1990's, a number of researchers found that the correlations were not constant through the market cycle. As a result, they said, the risk-reducing potential of such diversification was exaggerated. It turns out, for example, that correlations between domestic and foreign stocks tend to be highest when domestic stocks are declining sharply. Yet those are the very times when correlations need to be low in order to reduce portfolio volatility. And correlations tend to be lowest when domestic stocks are rising, which is when a low correlation is least helpful. Based on these findings, some people - including a few I quoted in previous columns - went so far as to recommend that stock investors cut or even eliminate their international exposure. The new study, however, says international stocks do a poor job of reducing risk only when an investor focuses on short holding periods. Over the long term, they deliver precisely what theory says they should. The authors studied two hypothetical American investors from 1950 through May 2004. The first investor focused only on one-year periods; the second focused on 10-year periods. The first investor would perceive no benefits from international diversification, the authors found, while the second would see many. First, consider the shorter-term investor. If he invested only in domestic stocks, his portfolio's biggest 12-month decline over all that time would have been 47.5%, after inflation. If, instead, he had divided his portfolio equally among stocks of the United States, Japan, Germany, France and Britain, his worst 12-month loss would have been about as big: 45.4%. Now, consider the second investor. His worst loss over a 10-year period for a domestic-only stock portfolio would have been a cumulative 40%. But for a portfolio divided among the five countries' stocks, the worst 10-year decline would have been about one-fourth as big: 11.3%. The study's conclusions do not apply only to American investors. The researchers also studied stock markets in Japan, Germany, France and Britain, again contrasting investors with short- and long-term perspectives. In each case, global diversification provided few short-term benefits for an investor, but big gains over longer periods. The study did not address the argument that international diversification is no longer important because so many companies are multinational. But Mr. Asness says this objection is overblown. "Investing in a U.S. portfolio is still a hell of a lot more a U.S. bet than a global bet," he said, "even if more a global bet than it was decades ago." So even if the free lunch of international diversification may not be as big, he said, "it's still a free lunch, so why not eat it?" The authors don't dispute previous findings that such diversification failed to cut risk over short time horizons. But they say, "So what?" After all, investors should focus on the long term anyway. While short, sharp market plunges are painful, the new study notes that long, drawn-out bear markets are "significantly more damaging" to investor wealth. "Global diversification," they add, "does an exceptionally good job of protecting investors from these kinds of risks."
Using quarterly forecasts compiled by the Philadelphia Fed, Mr. Montier found that, over the past dozen years, whenever economists have predicted that 10-year yields would rise in the following 12 months, they have ended up being right only 45% of the time. Quarter-ahead forecasts for rising bond yields are even less accurate -- they're right only 22% of the time. The economists' big problem is that unlike, say, the job environment, long-term Treasury yields -- while influenced by what's going on in the economy and at the Fed -- are set by the bond market. When all the economists think the same thing about Treasurys, it's a good bet that everybody else does, too. That certainly seems to be the case now, with surveys showing that portfolio managers widely expect a rise in long-term interest rates. As with any other market, with so many people so bearish on Treasurys, it may take a lot of bad news to force a deep-enough drop to raise yields substantially. "Pretty much everybody has this hatred of the bond market," says Merrill Lynch economist David Rosenberg, one of the handful of economists who doesn't think that 10-year yields will close out the year higher. "You start to wonder who's left to sell."
FRC concludes in the study that there will be more pressure to get the attention of advisers at the nation's biggest brokerage houses. "The fund industry will be increasingly dependent on adviser-assisted distribution," said John Benvenuto, director of mutual-fund research at FRC. A key driver of the trend toward advisers is the growing need of retiring baby boomers for advice on portfolio management and income distribution, as well the overall growing complexity of financial services, FRC said. Another force is the proliferation of alternative investment vehicles. Sales of exchange-traded funds, separately managed accounts and hedge funds, for example, will grow at a faster rate than sales of mutual funds from 2005 to 2009, according to the study. Exchange-traded funds, like traditional mutual funds, are baskets of securities, but they trade all day on exchanges like stocks. Separately managed accounts are portfolios of stocks or bonds, chosen by a money manager and held in an investor's own account. Hedge funds are private investment partnerships that sometimes make high-stakes bets on stocks, currencies and other investments, often using borrowed money to boost returns. By 2009, 61% of long-term mutual-fund sales will be assisted by advisers, as compared with 29% of sales through institutional accounts including retirement vehicles, and 10% of sales directly to the investor, FRC predicted in the study. In 2004, 57% of mutual-fund sales were adviser-assisted, 28% were institutional and 15% were direct to investors, FRC estimated. Selling mutual funds has become increasingly difficult, despite their explosive growth, FRC found. Mutual-fund sales have risen from $10 billion in 1980 to over $1 trillion annually since 2000, but fund companies have had to adjust to a growing number of competitors and to changing investor preferences for types of funds and methods of purchasing them. FRC concluded that the same forces that will lead investors to seek advice also will draw them away from mutual funds eventually. Over the next decade, an expanding pool of retirees will require the help of advisers to structure an income-distribution plan, but "while nearly all mutual-fund firms are currently salivating over the transition of a massive amount of wealth from employer-sponsored plans to IRAs, essentially these assets are just changing hands and will begin to decline as retirees draw down their life savings," Mr. Benvenuto said. "The result will be a rising level of redemptions, which, in some cases, will exceed the growth rate of gross sales." The study, the first of its kind by FRC, draws on the firm's own research on fund assets and flows. It also uses data on fund sales and redemptions compiled by the Investment Company Institute, the mutual-fund industry's main trade group. For details on specific advisers, FRC used data provided by Financial Information Group.
Instead, the yield on the Treasury's 10-year note has fallen to 4.26 percent from 4.69 percent at the end of June 2004, despite a climb of 1.5 percentage points in the central bank's short-term rate benchmark, to 2.5 percent. While Mr. Greenspan cited many possible reasons for this unusual happening, he ultimately concluded that "it remains a conundrum." That's enough to make Paul A. McCulley cautious. "When the Fed chairman says he's scratching his dome, you should be scratching yours," said Mr. McCulley, a portfolio manager and economist at Pimco, the asset management and mutual fund company. "You should always be wary when the central bank says an asset price is aberrant." Thomas H. Atteberry, a manager of the New Income fund at First Pacific Advisors in Los Angeles, agrees. "He's the guy who is supposed to have all the information," Mr. Atteberry said of the Fed chairman. "And he is telling me he doesn't know why. Why commit capital to a long-term investment when you don't understand why it's valued that way?" Mr. Greenspan also acknowledged that he was puzzled by other economic behavior. Although investors seem willing to take on more risk, businesspeople appear reluctant to do so. Capital investment has lagged behind the big rise in corporate profits. And worker productivity, a factor in restraining inflation, has proved to be "notoriously difficult to predict," he said. Both Mr. McCulley and Mr. Atteberry still think that longer-term rates will rise. That is why Mr. McCulley said Pimco had reduced its exposure to the Treasury market, and why Mr. Atteberry said he was staying away from it. Mr. McCulley said Pimco had not participated in a popular Treasury trade in which shorter-term securities are sold and longer-term ones are bought. This is called a flattening trade - a bet that the yield on longer-term securities will fall, or at least rise more slowly, than the yield on shorter-term securities. It has proved profitable with the unexpected decline in longer-term yields. Mr. Atteberry has 40 percent of his money as far from Treasuries as possible without stuffing it into a mattress. It is in money market funds. Most of the rest is in mortgage and agency securities, which he said would fare better than Treasury securities in a rising rate environment. Mr. McCulley argues that longer-term rates will rise partly because one factor now holding them down may soon vanish. Unlike other explanations, including the buying of Treasuries by foreign central banks and a general preference among investors worldwide for putting their excess savings into American bonds, this one is obscure. But Wall Street has not overlooked it. It involves plans announced on Jan. 10 by the Labor Department to shore up the Pension Benefit Guaranty Corporation, the federal agency that insures pension funds. On Wall Street, Mr. McCulley said, the announcement was viewed as a step toward advocating that pension funds invest more in long-term notes and bonds. Mr. McCulley says he believes that hedge funds, eager to be ahead of the game, have increased their purchases of longer-term securities since the announcement. One sign of this could be the sharp decline in the spread, or difference in the yields, of the Treasury's so-called 30-year bond, which matures in 2031, and the current 10-year note. That spread was 0.38 percent on Friday, smaller than the 0.57 percent just before the announcement. The change means that 30-year bonds have been in much greater demand than 10-year notes. But Mr. McCulley expects this run to exhaust itself as soon as speculators see that the change for pension funds will come very slowly; as a result, he said, 30-year bond yields should rise. Mr. Greenspan may have been giving a similar warning to investors, saying that the recent performance of longer-term interest rates "may be a short-term aberration." In other words, the normal upward tilt of longer-term rates could return.
In his recent book Cowboy Ethics: What Wall Street Can Learn from the Code of the West, veteran money manager James Owen talks about how investors have confused rules with principles, and how the financial services industry needs less regulation and more inspiration. He dissects the "code," which was a way of living for the working cowboy, rather than a set of rules to live by. And while Owen is trying to teach Wall Street a better way to live, he may have inadvertently struck a chord for fund investors. The Code of the West, as presented by Owen, has lessons in the way an investor should act, as well as what an investor should expect from the fund companies they take on as hired hands. This week and again next, we'll examine Owen's version of the code, and how investors might use it to ride the new frontier of post-scandal mutual fund investing. Live each day with courage This is not so much about physical bravery as it is moral strength of character. For an individual investor, living with courage means facing up to mistakes rather than allowing them to fester, acknowledging areas of weakness -- and finding help to attend to those issues. For an investor looking at a fund company, you want management that isn't afraid to tell you what went wrong, rather than always focusing on what they think will happen next. Too many managers discount the experience you have just had in their fund, hoping you will stay focused on the future; a manager who lives like a cowboy is going to talk straight, provide detailed information and transparency because there is no reason to hide things when you act with honor. Take pride in your work Owen notes that "cowboying doesn't build character, it reveals it." The same can be said for running a mutual fund. A money management company should never take actions it can't be proud of, and an investor who sees a fund firm that has something to be ashamed of may just want to look for firms that have never had such problems. Always finish what you start For individual investors, the real lesson here is about inertia. Many people see a fund get into trouble and basically "give up," not really knowing what to do next. Likewise, many fund managers change tactics when things don't go well, which is a problem if they start drifting and altering the focus of a fund. No investment journey stops in the middle; investors need to find a plan -- and managers -- that they can trust and then stick it out. Do what has to be done For individual investors, living up to this part of the code may be toughest, because everyone wants the easy way out. That's the shoot-first mentality that leads people to buy yesterday's winner and then be perplexed when it starts losing. But it also involves putting your investments in a position to succeed. Those who belong to the huge group labeled "Americans who aren't saving enough" need to recognize that if they don't reach their investment targets, it's not necessarily the fault of the money managers who were given a paltry portion of income to work with. The bull market of the 1990s showed the danger in "letting the market be the savings plan," as the extra returns of the good years evaporated when the bear market arrived. Be tough, but fair Having high expectations is fine, so long as those expectations are based in reality. Too many investors have an attitude that says "I can stomach risk, just so long as I don't lose any money," and they fire managers whose primary fault was simply participating in a down market. Holding a fund manager's feet to the fire makes sense; dropping them when it would be hard to find a replacement that has done better makes no sense.
When you make a promise, keep it. Investing is all about promise. The investor is trying to achieve the full promise of saving, and the fund firm is trying to live up to the promises it makes to attract new shareholders. No firm makes actual promises about specific returns, and the market simply doesn't allow a fund to always achieve the strong positive returns to which investors feel entitled. But a fund company should always be true to its word, whether that involves sticking with a specific strategy instead of drifting toward what's hot, or simply putting shareholders' concerns first. The firms tainted by the rapid-trading scandal clearly forgot that last one. Ride for the brand. Owen notes that when a cowboy tossed his bedroll into an outfit's wagon, he put the group's needs ahead of his own. That did not mean blind obligation, however; allegiance and respect had to be earned. Investors must watch out for firms where "Ride for the brand" is a fancy way of saying "Be a toady." In any fund scandal where problems were widespread and top management knew things might be amiss, some employee needed to step up and fire a warning shot. If a firm doesn't have a brand you can ride with, it's just a matter of time before you pick up the bankroll and start working elsewhere. You'll be better off making that change today. Talk less and say more. Fund companies routinely fail here, and investors let them off the hook. Too many companies bury meaningful disclosures in legalese, failing to make concrete statements unless they are couched in terms that hedge against disappointment. If you can't describe what your fund manager is doing in two sentences, and can't describe the basics of what your fund company stands for, maybe management has said too much and put its integrity behind too few of those words. Remember that some things aren't for sale. One of the most interesting things to come from the scandals is the punishment meted out by investors. Fund firms that had poor performance before making headlines (think Janus and Putnam) were shot full of redemptions; firms with a better recent track record barely saw a decline. If you turn a blind eye to a fund's problems or actions -- not just legal ones, but high fees and expenses too -- an unhappy ending is in your future. When performance turns, you will kick yourself for not sticking to your standards. Know where to draw the line. Fund companies need to pull the plug on funds that have failed to produce the results management originally anticipated. Firms let funds linger, but that is no excuse for shareholders sticking around. For individuals, "investing with integrity" means developing personal standards and expectations, then sticking to them.
There are three reasons: First, it appears analysts are systematically underestimating potential corporate earnings. Second, there is widespread belief in an earnings and economic slowdown. Third, this is very likely the year that the Fed will stop raising rates, creating the possibility that 2005 could look like 1995. All of these create an essential precondition for jumping into the market: every bone in your body tells you not to do it. With most of the reports in, operating earnings of the S&P 500 are estimated to have grown nearly 20% in the fourth quarter. A year ago, the estimate was for 12%. Right up until the companies reported -- that is, with the very latest guidance from companies -- analysts thought earnings would grow only 15%. The five percentage point miss is historically large. On average, analysts tend to miss by three percentage points. A single quarter's results wouldn't be interesting if there wasn't a trend here. In fact, in seven of the past nine quarters, the miss has been above average, according to data compiled for me by Thomson Financial. Thinking this could be the result of analysts underestimating oil prices and therefore missing the mark on oil company profits, I asked Thomson to run the data sans-oil. It doesn't help. Missing on energy-company profits only explains away a bit of the underestimation; the average miss during the past nine quarters drops to an average of 4.7% from 4.9%. Sarbanes, Oxley and Greenspan Something else is going on and Fed Chairman Alan Greenspan in his testimony Wednesday to Congress suggested something I've suspected: caution on the part of the executives as a result of Sarbanes-Oxley legislation. Mr. Greenspan wasn't talking about earnings guidance, but he could just as well have been. He was talking about the relative sheepishness on the part of executives to invest. Capital spending has been growing by double-digits. But relative to the level of corporate profits and the large amounts of cash in corporate treasuries, spending has actually been mediocre. Meanwhile, investors in corporate bonds seem unusually sanguine about company prospects. They have driven down yields on those bonds to historically low levels compared with riskless Treasury yields. Why the difference between cautious corporations and confident corporate-bond investors? Mr. Greenspan offered a reason: "This apparent disparity in sentiment between business people and market participants could reflect the heightened additional concerns of business executives about potential legal liabilities rather than a fundamentally different assessment of macroeconomic risks." We can be pretty certain that Mr. Greenspan is talking about Sarbanes-Oxley when he says "legal liabilities" as in, they are afraid of going to jail. Consensus Opinion It's time to wonder whether that same caution has crept into the guidance companies are giving analysts. In addition, with investment banks having been fingered in many of the corporate scandals of the '90s, it's reasonable to ask whether analysts are also finding a certain percentage coming in too low rather than too high when it comes to earnings estimates. Let's look, now, at the first quarter. The consensus estimate is for 7% growth, dropping all the way down from the 20% expected for the fourth quarter. In order for the consensus to be right, profits in the financial sector of the S&P have to fall off a cliff. Earnings of financial stocks collectively grew 12% in the fourth quarter. They are now expected to show no -- zero, zilch -- growth in the first quarter. This despite the explosion of mergers and acquisitions that flow right to the bottom line of investment banks and the surge of initial public offerings. Profit growth for consumer discretionary stocks -- such as AutoNation or Circuit City or Carnival -- would have to decline by 4% after growing 25% in the fourth quarter. ISI Group, one of Wall Street's most followed research houses, this week increased its estimate for first-quarter growth to 13.4% from 8.7%. Behind the change was a forecast for better overall economic growth this quarter. If the overall pie is bigger, then it is fair to assume that the share of it extracted by companies in the form of profits will also be larger. ISI also thinks that companies simply won't let profits fall off that much. Collectively, the stocks in S&P are pegged to earn $17.90 in the fourth quarter. ISI believes they'll do a dime better in the first quarter, bringing earnings up to $18 a share. So, sequentially, companies don't have to do much better to achieve a 13.4% growth rate compared with a year ago when earnings were $15.87. If ISI is right, there could be some short-term upside as stocks and profits adjust to an upwardly revised consensus. The obvious risk here is that the market figured this out in mid-October and the move in the S&P to 1,200 from 1,100 was triggered by that adjustment. So watch guidance from some major companies that should be coming in several weeks. If their stocks get a pop from upwardly revised guidance, that could be a sign that the market hasn't already discounted better first quarter profits. But hold on. We're only talking about one quarter and the market discounts profits six months to a year in advance. In fact, ISI Chairman Ed Hyman does see a profits slowdown on the way. He thinks the Fed's interest-rate tightening will slow the economy and profits along with it. Now we get to the real decision to be made. The End of Rate Increases is Coming? Just how severely will the Fed slow the economy? ISI sees profits rising only modestly this year, in the low single digits. But Mr. Hyman sees only a mild slowdown, clearing the way for stocks to take off after the Fed hits cruising gear, as in, neutral, with interest rates. He believes it is a 1995 scenario. The S&P 500 stock index was up just 2% in 1994, it grew 28% in 1995. Investors smelled the end of the rate tightening and stocks took off a couple months before the Fed stopped raising rates. Could we be in for a repeat? The risks are manifest. For one, with the Fed tightening a quarter point each meeting toward some unknown endpoint, it is possible that the rate-hike cycle spills over into 2006. Consensus seems to be that the Fed stops at 3.25% or 3.5% from the current rate of 2.5%. But there are some parties, like Bear Stearns, who think Mr. Greenspan is headed for 4-4.5%. Others are worried that the Fed tightening induces a much more severe slowdown, which would mean stocks could go lower before the way is cleared for a rise. With companies now hiring more and unit labor costs rising, it is possible that the best days of growth in corporate profit margins are behind the economy. Finally, Mr. Hyman's own fear is that the Fed doesn't do enough, that the economy runs away from it, inflation heats up and then the Fed is forced to lean heavily against an inflationary wind with much tougher rate increases. But that is his fear, not his forecast. He thinks the economy comes through this tightening in reasonable shape and that long-term interest rates remain low in the 4% to 4.5% range on the 10-year bond with low inflation. If that's where we end up at the end of a Fed tightening cycle, it is hard to not see that as a very positive environment for equities. The requirement for this play is nerves of steel. You've got to see your way through an inevitable fall in stock prices before a turnaround. It's a tough play to make, but perhaps one worth considering. So, consider stocks now.
The economists expect policy makers to raise the federal-funds rate to 3% by June and they predict the rate will be 3.75% by December of this year. Since the last time the economists were surveyed, they have raised their expectations for rates. In a survey conducted about six weeks earlier, their December 2005 forecast put the fed-funds target rates closer to 3.5%, on average. The Fed raised the funds-rate target by a quarter point last week, the sixth such increase in as many meetings. Rates had been held at extraordinarily low levels in order to stimulate the economy following the 2001 recession and terrorist attacks. In June 2004, the rate stood at 1%, a 46-year low. Jack Guynn, president of the Atlanta Fed and currently a voting member of the Fed's policy-setting panel, suggested earlier this week in an interview with The Wall Street Journal4 that the funds rate still needs to rise somewhat to reverse the Fed's accommodative stance. But he cautioned that once the Fed peels back its easy policy stance, divining the next move will be difficult if the economy regains full strength and slower productivity growth leads to higher inflation. Diane Swonk, chief economist at Mesirow Financial in Chicago, thinks that the Fed will interrupt its regular increases once the funds rate hits 3%. She says that given the Fed's dual mandate to foster both growth and price stability, policy makers "don't want to hit on the brake. They want to hedge against tightening too far." Ms. Swonk expects the federal-funds rate to be 3.25% by year end. The Fed has maintained for some time that the upside and downside risks to economic growth are balanced. The economists expect growth in 2005 to be weaker than it was in 2004, but they increased their forecasts a bit in the latest survey. They predicted growth of 3.8% in the first quarter and 3.7% in the second quarter. In the survey conducted in December, they put growth at 3.5% and 3.6% in the first and second quarters, respectively. The economists expect growth at a 3.6% rate in the second half. In 2004, GDP growth was at 4.4%. Targeting Inflation Meanwhile, there has been discussion lately about whether the Fed should set a specific target level for inflation to help guide interest-rate policy in the coming months. The issue was included on the agenda for the Fed's most recent policy meeting; it wasn't mentioned in the statement the Fed released after the meeting. In the survey, economists were asked what target level would be best and which measure of inflation the Fed should use. The most common target cited by the economists was a range of 1% to 2%. Using the midpoint of the ranges they offered – as well as specific levels that some economists gave as a target – the average inflation target of economists in the survey was 1.77%. Most economists suggested that the Fed should use the Commerce Department's personal-consumption expenditures price index or its core index, which excludes food and energy prices. About one-third suggested the Labor Department's consumer-price index or its "core" index. The core personal-consumption expenditures index, also called the core PCE deflator, is believed to be Mr. Greenspan's preferred inflation barometer. That measure rose 1.5% over its year-earlier level in December. Separately, the economists said they expect the consumer-price index, including food and energy prices, to show 2.4% annual growth in May of this year and 2.3% growth in November. Those expectations were marked down slightly from the previous survey, when they expected price growth of 2.5% in May and 2.4% in November. Consumer prices rose 3.3% in 2004, the largest jump in four years. Core CPI rose 2.2%. Among other findings in the survey: • Economists predict employers will add an average of 186,000 nonfarm payroll jobs per month over the next year – their highest forecast since a survey conducted in August. The Labor Department reported that the economy added 146,000 new nonfarm payroll jobs in January. The unemployment rate, which was 5.2% in January, is expected to be 5.2% in May and 5.1% in November. • Most forecasters expect Americans to put more money away in the coming 12 months after the personal savings rate dwindled to 1% last year, its lowest level since 1933. But on average economists expect the savings rate to edge up only slightly, to 1.23% by the end of 2005. Some economists say that the savings rate is a flawed statistic that doesn't include income from investments or real estate and thus understates the amount of money that Americans have in reserve by a vast margin. Robert T. McGee, chief economist at U.S. Trust, argues that the measured savings rate is doubly flawed because it includes capital-gains taxes in personal outlays but doesn't include capital gains in tabulating income. • Expectations for long-term interest rates were slashed. Economists now expect the yield on the 10-year Treasury note to be 4.57% in June 2005 and 4.97% in December 2005. In the last survey, economists expected yields of 4.79% in June and 5.11% in December.
The fourth quarter earnings season is winding down to a close. Through last week, 80% of companies have met or beat earnings estimates, while two-thirds have met or beat on earnings. This is about par for the course. All in, fourth quarter earnings are tracking to 22% above last year, versus the 17% expected prior to earnings season beginning. Some of this upside has been the result of blowout energy sector earnings, though by our estimates, ex-energy sector earnings are still up 18% versus a year ago compared to the 14% expected. What is not par for the course is that despite equity valuation appearing attractive prior to earnings season, all of the major indices are lower following stronger than forecast earnings. Had investors really "priced-in" the reported strength in earnings by this much; or, have investors recently been discounting factors that will ultimately serve to enhance longer-term investor’s performance? One year ago forward 12-month earnings were expected to be 20% above earnings reported during the prior twelve months. It turns out expectations fell short by 1/3rd! This is despite the oil thing, that “soft patch,” decelerating earnings growth and the dollar “collapse.” Nonetheless, stock prices only managed to gain traction on 9%, or less than 1/3rd, of the total growth in earnings. This begs the question, what does it matter what is “priced-in?” In our view a lot, though it’s often more important to recognize the potential inaccuracy of what is “priced in” as investors digest the concerns of the moment. Last year serves as a good example of an over-discounted future based on the news flow of the present. Despite all that did go wrong, it was the resilience of earnings that provided a fulcrum for reduced investor fear and uncertainty to leverage off of heading into the end of the year. Without the surprising strength and resilience of earnings, there would have been little reason for investors to bid up equities at the end of the year. In effect, what was discounted in future earnings would have been correct. More recently we have seen the short-term downside to not discounting the present by enough. From August to December, measures of investor sentiment went from being extremely bearish to reaching the highest level of bullishness since 1987. During this time, just over $50 billion flowed into the market via equity mutual funds. However, individuals did the unthinkable in January; they pulled money out of the market. In what is typically a seasonally strong month of new net inflows into equity funds, investors withdrew $850 million and even more from domestic equity funds. By comparison, last January saw $43 billion in new inflows. This had to be a disappointment to institutional investors anticipating seasonally strong January inflows. Perhaps it's little wonder then that investors pulled $33 billion out of just three companies this earnings season (Qualcomm, eBay and Amazon.com) – essentially getting “rotated” after failing to meet up with investors’ expectations. So in essence, what is "priced-in" matters, though it is also important to recognize whether the risks being discounted are short-term or long-term in nature. In our view, recent economic data and company fundamentals suggest that the longer-term backdrop remains as healthy, if not healthier, than it has been in the past several years: inflation is poised to moderate, business are becoming more offensive - as evidenced by higher levels of investment as well as sustained hiring; even long-term interest rates, much to our surprise, remain very low as confidence grows in the Fed’s aim to reign in inflationary pressures before they get a head start. The short-term market backdrop however, has been less than ideal. Investor optimism has been complacent and equity demand nonexistent. Unfortunately optimism can only underwrite rising stock prices for so long. Recent data points have been encouraging however. Investor sentiment has been on the wane (contrarian indication), while this past week inflows into equity funds rose by the largest amount in six weeks, rising $4.3 billion. These inflows are instructive as despite recent individual investor sentiment falling to the lowest levels since the market bottom of March 2003, they are nonetheless sending money into the market. Also notable last month was the ratio of insider selling to purchases. While total dollar figures were relatively low, the ratio of sales to purchases was $55 to $1. A similar ratio was reported for December. To put this into context, $20 in sales versus every dollar of purchases as historically been seen as a “bearish extreme.” While this doesn’t portray a lot of confidence by insiders, it should be noted that with earnings season winding down, insiders should be less constrained by trading rules; possibly doing as individuals have done and renew equity purchases in February. Our only reservation, though increasingly marginal as new money flows into the market, is that investment advisor sentiment has remained at relatively lofty levels; with the percentage of investors bullish on the market compared to those that are bearish at a ratio of 2.3x. This is well below the 3.2x seen in late December, though above the individual investor ratio of 0.9x last week. It should be noted that we have yet to see a solid market advance with advisor sentiment as high as it remains today. This said, both levels of advisor bullishness and bearishness have returned to levels not seen since early October – just ahead of the bulk of the year-end market rally. Ultimately we give more weight to the former since bullish sentiment remains high and is still trending lower. Given where we are on the scale of “bearishness,” we should increasingly be looking for the “what could go right” scenario. In an environment where economic and earnings fundamentals remain robust and sentiment toward equities is nearing extreme pessimism, this sets up small-cap, and small cap growth stocks in particular, to benefit from their expected relative earnings growth (20% vs. large-cap’s 10% in 2005) as well as the valuation leverage as investors unwind today’s perceived downside risks in favor of “tomorrow’s” opportunities. Against this backdrop, we expect the companies that will benefit most are those expected to deliver the greatest growth in the future as investors time horizons begin shifting outward. In this light, we once again are highlighting our growth themes for 2005.
Within the next two months, the Securities and Exchange Commission will press a new regulatory framework for the industry to ensure that debt ratings published by the big three - Standard & Poor's, Moody's Investors Service and Fitch Ratings - are a result of thorough analysis, not a desire for fatter profits. "I think it's fair to say that the oversight of the industry is insufficient," said Annette L. Nazareth, director of market regulation at the Securities and Exchange Commission. "We want the firms to commit to meet certain standards with respect to policies and procedures on conflicts of interest and solicitation of ratings. Right now we don't have that at all." Now that would be an upgrade, long overdue. Indeed, given how regulators have attacked conflicts of interest among Wall Street firms, insurance companies and other financial services concerns, it's astounding that the ratings agencies have been allowed to go on this way for so long. Rating agencies play an enormous role in a huge market. After all, far more debt is issued than stock; last year, corporations issued $1.2 trillion in straight debt versus $146 billion raised in common stock, according to Thomson First Call. An additional $1.4 trillion was issued last year in mortgage debt and asset-backed securities. All that paper needed a rating before it could be sold to the public. As such, the financial markets rely heavily on the companies that rate them. Since 1931, for example, the Federal Reserve Board, the Comptroller of the Currency and federal and state laws have regulated the debt held by banks and other financial institutions, using credit ratings assigned to the debt. Pension funds, banks and money market funds are barred from buying debt issues that carry ratings below a certain level. But not just any rating agency's rating, mind you. In 1975, the S.E.C. ruled that the laws relating to debt carried by banks and financial institutions refer only to ratings provided by agencies that it recognizes. Right now, these are the big three and a much smaller fourth, Dominion Bond Rating Service of Canada. What you have, in other words, is an oligopoly. Even more troubling, this oligopoly earns its keep from fees charged to the companies whose debt it rates. This conflicted business model means that the paying customers for these agencies are the corporations they analyze, not the investors who look to the ratings for help in assessing a company's creditworthiness. Other industry practices also lend themselves to producing less-than-rigorous analysis. For example, rating agencies typically receive the largest fees when they analyze an initial bond issue. After that a nominal fee is levied, providing something of a disincentive to do in-depth, time-consuming work. And because the nation's courts have ruled that the work of these agencies is opinion and therefore protected by the First Amendment, the big three are protected from lawsuits from investors contending defective analysis. Such lawsuits could act as policing mechanisms. To make matters worse, these companies have recently begun to expand the services they offer to corporations, leading regulators to fear that ratings could be swayed by revenues earned on other products. These problems are on the agenda for Tuesday, when Senator Richard C. Shelby, the Alabama Republican who is chairman of the Banking, Housing and Urban Affairs Committee, will hold hearings on the state of the rating agencies. Executives from the big three are scheduled to testify. This is not the first time that Standard & Poor's, Moody's and Fitch have been in the hot seat. When Enron and WorldCom failed, investors were stunned by how long it had taken the agencies to recognize the companies' declining fortunes. For example, all three agencies had rated Enron an investment-grade company until four days before it filed for bankruptcy. They had rated WorldCom similarly until a few months before it collapsed. The rating agencies stress that they analyze debt issuers' financial positions to try to predict for investors an entity's ability to pay off its debt. They are not in place to audit auditors, they say, and cannot root out fraud. Their mandate is to provide transparency to the financial market. In an interview on Friday, Raymond W. McDaniel, Jr., president of the Moody's Corporation, acknowledged the industry's conflicts but said his company manages them effectively. "We do not link analyst compensation, including bonus compensation, to the ratings they have on the companies they follow or to the amount of fees they receive from those companies," he said. "Beyond that, we have a collection of business conduct policies and codes of practice and behavior which the entire Moody's population is required to adhere to." Top executives at Standard & Poor's, a division of the McGraw-Hill Companies, and Fitch, a unit of Fimalac, were not available for comment, but both companies said they were aware of the potential for conflicts and careful to prevent them. Increased competition would certainly help investors who are troubled by the conflicts. Unfortunately, companies hoping to break into the ratings game must first earn the all-important designation from the S.E.C. Such nods do not come often. One upstart concern that has applied unsuccessfully to the S.E.C. is Egan-Jones Ratings, of Philadelphia. It rates approximately 800 companies and had warned of problems at WorldCom, Enron and Global Crossing well before other agencies. Egan-Jones does not accept payment from companies it rates; investors who use its services pay the freight. A recent academic study compared ratings by Moody's with those of Egan-Jones. William H. Beaver, professor of accounting at Stanford's graduate school of business, Catherine Shakespeare, assistant professor at the University of Michigan Business School and Mark T. Soliman, also at Stanford, analyzed ratings on some 800 companies made by both services from 1997 to 2002. The academics found that Egan-Jones's ratings changes were more timely than those of Moody's, coming up to six months sooner. The study also found much higher stock returns after rating changes by Egan-Jones than by those of Moody's. "Using several tests we find that the noncertified firm, EJR is more responsive and closely associated with investors," the study noted. There is no evidence, of course, that Moody's tardiness is a result of a conflicted business model. And Mr. McDaniel maintains that ratings stability and accuracy are what customers want. "The market has become extremely intolerant of false positives or false negatives, and encouraged the ratings to only be moved when there is not a likelihood that they would be reversed," he said. But Sean J. Egan, managing director of Egan-Jones, said: "Timely, accurate credit ratings are critical for robust capital markets. Investors, issuers, workers and pensioners will continue to be hurt by the flawed credit rating industry until someone addresses the basic industry problems." Maybe, just maybe, that process has begun.
Of course, these findings for the overall market run counter to the experience of specific companies. For many of them, the relationship of earnings growth and stock price is often positive - especially when a company exceeds profit expectations. But according to a recent study, it makes sound economic sense that what sometimes prevails for one company does not apply to the overall market. The study, "Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance," by S. P. Kothari, an accounting professor at the Massachusetts Institute of Technology; Jonathan W. Lewellen, an M.I.T. finance professor; and Jerold B. Warner, a finance professor at the University of Rochester, has been circulating as an academic paper since last year. A copy is at http://papers.ssrn.com/abstract=380127. The reason that the overall market usually fails to react more favorably to rapidly rising earnings is not that earnings growth is bearish itself. The problem, the professors say, is that such growth usually leads to higher interest rates. When rates rise, the net present value of future earnings, cash flow and dividends automatically falls, and this generally causes the market to decline. The professors say the Federal Reserve is unlikely to feel pressure to raise rates when just one company reports better-than-expected earnings. So the company's profit growth can be expected to translate into a higher stock price. But the Fed will certainly feel that pressure when aggregate market earnings rise quickly. To be sure, the professors' findings are based on a long-term average, and exceptions are inevitable. One occurred in the last couple of years, when earnings grew at a double-digit rate and the overall market performed well, too. But Professor Lewellen says that this recent experience is "the exception that proves the rule," because the Fed kept interest rates artificially low over much of this period. That prevented the fast growth of marketwide earnings from having usual negative consequences. The powerful role of interest rates in the stock market's valuation also explains why the market tends to perform best when aggregate corporate earnings are falling. Ned Davis Research says that since 1927, the Standard & Poor's 500-stock index has risen at a 28 percent annualized rate - nearly triple its historical average - during quarters in which earnings were 10 to 25 percent lower than where they were in the periods a year earlier. This bullish effect vanishes, however, when earnings are falling too much. Ned Davis Research found that during those few quarters since 1927 when earnings were more than 25 percent below their year-earlier levels, the S.& P. 500 declined at a rate of 28 percent, annualized. Professor Lewellen says that this is consistent with the results of his research. "The positive effects of lower interest rates, though strong enough to overcome the negative consequences of more modest declines," he said, "are unable to overcome them when earnings are falling by a huge amount." An implication of the professors' study is that the market's performance is likely to be below average this year, because of the consensus expectation for double-digit profit growth accompanied by rising interest rates. S.& P. estimates that per-share operating earnings of the S.& P. 500 companies in the first quarter will be 14 percent higher than in the year-earlier period. Earnings for all of 2005 are projected to grow 12 percent. In quarters since 1927 when profit growth has been in the neighborhood of what S.& P. is projecting this year, according to Ned Davis Research, the S.& P. 500 has appreciated at an annualized pace of 5.8 percent. That is about half the market's long-term average rate. The pattern discerned by the professors could create buying opportunities down the road. That is because investors tend to drive market valuations way down when interest rates rise over a sustained period. A diversified stock portfolio bought at a time of depressed valuations can be expected to appreciate when interest rates fall. But if the pattern holds this time, it's way too early for the market to start going much higher. Monthly Employment Stats
"This is a little bit below where we need to be," said David Greenlaw, chief fixed-income economist for Morgan Stanley. "We need job growth closer to 200,000 to reduce the slack in the labor market and provide income growth to support consumer spending." Most economists were stumped by January's weak job growth, which was compounded by the Labor Department's revising downward its previous estimate of jobs created in Q4-02 by 59,000 jobs. With the economy growing at a relatively robust pace through 2004, and with a decline in labor productivity toward the end of last year, most economists had expected employers to brush off their previous misgivings about adding new workers and to start hiring more aggressively. Most of the job growth came in the service industries. Hotels and restaurants added 20,000 jobs. Temporary-help services employed 17,500 more people. Health care added 19,000 people. Government agencies put 12,000 more on their payrolls. But manufacturing presented a particularly bleak picture, shedding jobs for the fourth month in a row despite a weak dollar providing support for exports, and strong industrial production. Automakers shed 9,500 jobs. The average workweek in the private sector slipped to 33.7 hours, some 6 minutes less than in December, the Labor Department said. So even though hourly earnings of regular workers rose by 3 cents, to $15.88, average weekly earnings declined by 57 cents, to $535.16, just 2.3 percent more than in January of 2004. January job figures were slightly muddied by the annual revision by the Labor Department to bring estimates in line with unemployment records, which lifted the payroll count of March 2004 by 156,000, and new population estimates, which cut the estimated size of the labor force in December by 49,000. Ian Shepherdson, chief economist at High Frequency Economics, blamed last fall's spike in energy prices for January's slow gain in employment, because it prompted many businesses to put off hiring. With oil below its October peak, he said, job growth should pick up soon. "Leading indicators show demand for workers should pick up in March and April," Mr. Shepherdson said. "It's just a matter of time." Yet other economists argued that employment growth is likely to remain low. Charles Dumas, the top international economist at Lombard Street Research in London, said in a note to investors that future job growth could drop to 80,000 a month, as productivity growth remained high relative to the expansion in output. This has pretty much been the trend so far. Compared with other recoveries in employment, this one has been painfully slow. Jared Bernstein of the Economic Policy Institute, a left-leaning research group in Washington, said that it took 21 months, on average, for the labor market to recover the jobs lost during the 10 recessions from World War II to 1991. This time it took more than twice as long. The total payroll count in January - 132.6 million jobs - surpassed for the first time the employment level of March 2001, when the economy slipped into recession. After years of lower-than-expected job growth, some argue that the United States may have entered a new era, with weak employment growth, below previous historical patterns, actually the norm. "This is as good as it gets; this is reality," said John Silvia, chief economist at Wachovia. Manufacturers seem to fit this mold. David Huether, chief economist at the National Association of Manufacturers, observed that industry had seen an unprecedented burst in productivity, which has kept employment growth down despite strong industrial output growth. Mr. Silvia said the nation was emerging from its first recession since the North American Free Trade Agreement came into being and China became a major force in the global economy. Employers that would have hired workers to meet extra demand in previous recoveries, must now face cutthroat international competition and are extra-wary about adding to their labor costs. Instead, they are investing more in labor-saving technologies and hiring less. "We've been waiting for two years now for higher job growth," Mr. Silvia said. "It's like waiting for Godot."
"It's a sign that companies ... are not as worried that their fortunes will disappear at any moment," said John Challenger, an employment expert at the Chicago-based outplacement firm of Challenger, Gray & Christmas. "It means they are confident enough to take on more risks, more hiring of skilled people to grow their business." The trend in hiring white-collar workers was apparent when the Labor Department reported that 157,000 new jobs were created in December, up from 137,000 in November. Almost 40 percent of the growth came in health care and business and professional services. This came at a time when manufacturing employment was flat and retailers actually cut staff. "It was pretty much an average gain, which I think would continue into 2005," said David Wyss, chief economist at Standard & Poor's in New York. The unemployment rate remained steady at 5.4 percent, but Wyss pointed out that the average duration of unemployment dropped sharply from 19.8 weeks to 19.3. "It's the lowest since August," he said. Although the jobs market is improving — in all 2.2 million jobs were created last year, the most since 1999 — employment specialists caution that business is not getting carried away with hiring as it did in the late 1990s. "We're not going to see this insatiable demand for labor," said Jeffrey Joerres, chairman of Manpower in Milwaukee. "But I think there is a good side to this: As companies are acting in a more measured fashion, job growth is more likely to be sustainable as opposed to the traditional ebb and flow." Yet Joerres said many companies have started to realize they can no longer expect productivity gains out of their workforce as a way to keep projects moving. "You would be susceptible to higher turnover," he said. In fact, according to a survey conducted last month by Monster.com, 93 percent of respondents said they would consider looking for a job in 2005. "It does not mean they will," said Jeff Taylor, founder of the online classifieds company. "But the idea is that we have a generally unsatisfied employee base out there. There are a lot of people who have not gotten a raise for three years." At Monster, which says it gets 3 million visitors a day, the top five job postings are: sales, finance and accounting, health care, computer technology, and administrative and support jobs. "It looks like the bigger companies are doing the hiring," Taylor said. Within white-collar professions, Challenger said accounting is the "hottest" profession, especially for CPAs who are willing to travel. The surge in this profession can be seen at Manpower, which owns the accounting firm Jefferson Wells. It added 1,600 CPAs to its workforce of 900 in 2004 and will be hiring more this year. One of the major spurs to hiring more accountants is the Sarbanes-Oxley legislation, which requires CEOs to vouch for their earnings statements. Taylor said it means accountants are double-checking everything, which takes 25 to 30 percent more time. Businesses also have shown interest in hiring more upper-level executives. At Netshare, a Novato, Calif., company that helps executives earning $100,000 a year or more with their careers, job listings are up 25 percent over last December. "Overall, we're seeing more jobs in sales and marketing than anything else, but we're also seeing a big increase in financial services and healthcare," said Kathy Simmons, chief operating officer. "Both search firms and companies are hiring recruiters, which is a leading indicator that executive jobs are up." Just the Facts The Other "E.D.": Earnings Dysfuntion David Kiley, BusinessWeek 2-28 Despite gargantuan ad budgets, sales for Viagra, Cialis, and Levitra are trailing expectations. Pfizer's Viagra worldwide sales fell 11% last year and, at $1.7 billion, were less than half what was projected by Wall Street firms a few years ago. Cialis and Levitra drove the category up 10% in the U.S. But Wall Street analysts -- some of whom had speculated years ago that Viagra alone would be a $4.5 billion brand by 2004 -- aren't impressed. Cialis, marketed by Eli Lilly and Icos, rang up U.S. sales of $203 million in its first full year and spent $165 million on ads. And GlaxoSmithKline Levitra sold just $128 million worth of pills, well below what the companies spent on TV, print, and other media. Combined, the three spent 37% of their sales on ads, according to TNS Media Intelligence. Less than 15% of the estimated 30 million men suffering from erectile dysfunction have tried one of the drugs. But drugmakers can also blame themselves for lagging sales - they flooded doctors with free samples. Last year, up to 40% of the pills taken by men were free, says pharmaceutical research firm ImpactRx. News and The Market Jonathan Clements, WSJ 2-13 Rather than reacting to the news, you could try to make money by anticipating it. But you immediately run into two problems. First, true "news" is, by definition, unpredictable. Second, even if you know what's going to happen, that alone isn't enough to make money. Instead, you also need to forecast the market's reaction -- and that can be surprisingly tricky. For me, this lesson was driven home in early 1991, at the start of the first Gulf War. As traders waited for bombs to drop on Baghdad, the assumption was that share prices would plunge when hostilities began. But when the initial U.S. assault proved more successful than folks imagined, shares skyrocketed and the Standard & Poor's 500-stock index went on to post a whopping 30.5% gain for the year. The market's reaction can be odd, even in the face of totally unexpected news. After the devastating tsunami struck on Dec. 26, 2004, I expected Asian stock markets to be hit with an onslaught of selling. But when those markets opened for trading the following day, most of them posted only modest declines. Wealth Managers and Fees Jonathan Clements, WSJ 2-6 Investment advisers who style themselves as "wealth managers" usually charge clients a percentage of their portfolio's value each year, rather than charging a commission on each trade. To my mind, this is a vast improvement, because these advisers don't have a financial incentive to push particular products or encourage clients to trade. Paying a percentage of assets, however, can create three other problems. First, if an adviser's fee is linked to your account's value, the adviser might discourage you from doing anything that shrinks your portfolio, such as paying down debt, making gifts, increasing spending or delaying Social Security and living off your portfolio instead. Second, advisers who charge a percentage of assets are usually looking for wealthier clients. If you have just $250,000, you could still find a fee-charging adviser. But you probably won't get much handholding and you are likely to pay more than 1% of your portfolio's value each year, making it tough to earn healthy after-cost returns. Third, even at 1%, we are talking serious money. Suppose you are lucky enough to have $1 million. A 1% fee works out to $10,000 a year. If your adviser puts you in mutual funds with average expenses of 1%, that's an additional $10,000 a year, bringing your total annual investment costs to a whopping $20,000. Quick Facts, Stats & Opinions Sales of second homes soared last year and accounted for more than a third of all residential sales transactions, according to a study released yesterday. The study, conducted by the Washington-based National Association of Realtors, showed that nearly one in four U.S. homes bought in 2004 was purchased for investment purposes; 13 percent were bought as vacation homes. (Daniela DeaneWashington Post 3-02) Since 2002, the average commission that institutions, including mutual funds, paid to trade shares listed on the New York Stock Exchange has dropped 20% to 3.8 cents a share from 4.8 cents a share, according to the latest data from Los Angeles trading consultant Plexus Group. Ten years earlier, these investors paid an average of nearly six cents a share. For Nasdaq Stock Market-listed stocks, the average commission also has fallen and now stands at about 3.5 cents a share, Plexus says. Greenwich Associates estimates that institutional managers overall -- a group that includes pension funds and hedge funds as well as mutual funds -- paid more than $2 billion less in brokerage commissions last year than the $13.4 billion they paid in 2002. (Ian McDonald, WSJ 2-25) Owen Lamont, a Yale University finance professor who, with Harvard finance Professor Jeremy Stein, recently wrote a paper titled, "Aggregate Short Interest and Market Valuations." Rather than high (low) levels of short interest are followed by lower (higher) markets, it instead is just the reverse: Declining (rising) markets are followed by higher (lower) levels of short interest. That is, short interest tends to grow during bear markets and decline during bull markets. "At the aggregate level, short interest appears to be returns chasing," Lamont summarized. (Mark Hulbert, MarketWatch 2-25) Government will pay 49% of health costs by 2014, up from 46% currently, according to the agency that runs Medicare, the federal health program for the elderly and disabled. The government's portion has been rising steadily, from 43% in 1980 and 38% in 1970. On the private side, health-care spending is projected to slow to 7.4% between 2003 and 2004 from a peak of 9% between 2001 and 2002. The government analysts attribute the slowdown in part to a "quiet reimposition" of managed-care tools that tamp down use of medical care, such as increased cost-sharing for patients. Private health-insurance premium growth is also expected to slow, to 7.7% in 2004 from 9.9% in 2003. The government projects that premium growth will outpace disposable personal-income growth by 1.4 percentage points from 2004 to 2014. Spending on drugs is expected to represent the largest share of total out-of-pocket spending -- 24% in 2004. (Sarah Lueck, WSJ 2-24) The spread between the funds rate and 10- year note yield is still historically steep at 175 basis points. It's just less steep than it was at its widest point last June at 387 basis points. ``The spread has gone from massively steep to something closer to historical norms,'' says Mike Darda, chief economist at MKM Partners in Greenwich, Connecticut. In the context of ``elevated metals prices and a dollar that has lost a lot of its value,'' the flatter yield curve, which is part of a global phenomenon, isn't worrisome, Darda says. (Caroline Baum, Bloomberg 2-24) The number of secretaries, administrative assistants, receptionists and clerks has fallen by one-third over roughly the past two decades, from 3.9 million in 1983 to 2.6 million in 2000, according to the U.S. Census Bureau. And those who are left are too busy training staff members, researching presentations and serving on committees to spend their days typing and filing. (John Russell, Knight Ridder 2-20) To qualify for the lower tax rate on dividends, you must hold your stock or mutual-fund shares for at least 61 days during the 121-day period that begins 60 days before the ex-dividend date. (Mark Schwanhausser, Knight Ridder 2-20) Historically, nearly a third of all announced megadeals in the United States worth at least $50 billion have fallen apart before consummation, according to FactSet Mergerstat, a global mergers-and-acquisitions tracking company. (Paul Lim, NY Times 2-13) According to a study by Ned Davis Research. From 1972 to 2004, dividend-paying stocks rose 10.2 percent on an annualized basis, while non-dividend stocks rose just 4.4 percent. (Meg Richards, Associated Press 2-6) ETFs are great on paper because annual operating expenses appear lower. But, in practice, brokers commissions to buy and sell funds can kill returns. Remember, Wall Street brokers invented ETFs because Vanguard Group's no-commission index mutual funds were taking away business. (Paul Farrell, MarketWatch 2-6) In the airline industry's latest attempt to control soaring fuel costs, strange-looking fins are appearing on the wingtips of passenger jets around the world. Airlines say the fins will save them millions of dollars in fuel costs each year at a time when every penny counts in the struggling industry. (Susan Warren, WSJ 2-4) Home Page Previous Factoid Top Sites
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