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[1] In recent years, equity-indexed annuities have exploded in popularity. These annuities allow you to capture part of the stock market's gain, while guaranteeing you will at least break even or earn a modest rate of interest. There's nothing special about this. In fact, you could get similar results by owning a mix of stock and bond funds. But what mix? That's part of the problem. While the equity-indexed annuity will limit your downside, it's often tough to figure out how much of the stock market's upside you will capture. This much, however, is clear: These things aren't cheap. Indeed, on an equity-indexed annuity, the sales commission alone can run around 7% and it occasionally tops 10%. [2] I frequently suggest that retirees buy "immediate fixed" annuities that pay lifetime income, thus locking up a healthy stream of income that they can't outlive. But seniors resist the idea, fearing they will buy the annuity and die soon after. As a result, most immediate-annuity buyers opt for downside protection, in the form of a guarantee that the payments will last for, say, 20 years. That way, should they die before the 20 years are up, their heirs will continue to get the monthly checks. Purchasers usually have to pay for this guarantee by taking a cut in the annuity's income. But that defeats the point of the exercise, which is to get yourself a fat check every month. My advice: Unless the cut in income is modest, forget the guarantee. Instead, buy the annuity purely for income and then earmark other assets for your heirs. [3] Investors are often advised to diversify their U.S.-stock holdings by moving 20% or 25% into a foreign-stock fund. Yet many people can't quite bring themselves to follow this advice. Some eschew pure foreign-stock funds and instead buy global funds, which include a mix of U.S. and foreign stocks. Others limit volatility by purchasing international funds that hedge their currency exposure. But with either strategy, you dilute the benefits of investing abroad. When you purchase a foreign-stock fund, the hope is that your foreign fund will post gains when your U.S. stocks are suffering, thus providing downside protection. What if your fund hedges its currency exposure or includes U.S. stocks in its portfolio? The fund itself may perform less erratically -- but it probably won't be nearly as effective in reducing your portfolio's overall volatility. [4] We buy insurance to protect against financial disasters. What if disaster doesn't strike? True, buying the insurance proved unnecessary. But rather than regretting that small financial loss, we should consider ourselves lucky. Yet life-insurance agents argue that policyholders are "wasting money" when they buy term-life insurance, which only provides a death benefit, and that they should instead purchase cash-value life insurance. Cash-value policies involve far heftier premiums, because they combine the downside protection of the death benefit with the upside potential of an investment account. Sound enticing? Unfortunately, these policies often turn out to be a costly way to buy insurance and a rotten way to make your money grow. Combining performance and safety in a single product isn't always a bad idea. For instance, balanced funds and lifecycle funds include a mix of stocks and bonds, and these funds can be a fine investment. Still, as I see it, a great portfolio consists of a series of distinct bets, each of which is designed to play a particular role. You buy insurance in case disaster strikes. You purchase an immediate annuity to generate retirement income. You buy U.S. stocks to earn long-run inflation-beating gains. You add foreign stocks to diversify your U.S. holdings. This is another reason to purchase index funds. If you purchase an index fund that tracks real-estate investment trusts, or emerging markets, or the U.S. bond market, you know precisely what you are getting and there's no risk your results will get messed up by the manager's incompetence. If you favor index funds and other relatively "pure" investments, you should enjoy three key advantages. First, your investment costs will tend to be lower, and that should translate into higher long-run returns. Second, it's a lot easier to control your portfolio's risk level. Third, if you avoid combination investments, you have greater control over what to sell. Suppose U.S. stocks are in a slump but foreign stocks are riding high, and you want to trim your foreign holdings while leaving your U.S. shares to recover. That's simple enough if you own a pure foreign-stock fund. If you own a global fund, however, and you go to sell, you will be bailing out of both highflying foreign stocks and beaten-down U.S. shares. To maintain your U.S. stock exposure, you could always sink more money into a U.S.-stock fund. But isn't this getting sort of messy?
In a recent study, Massimo Massa, a finance professor at Insead, the French business school, and two Ph.D. students there, Nishant Dass and Rajdeep Patgiri, found that performance incentives have had a significant and salutary influence on the buying and selling decisions of fund managers. Their study is titled, "Mutual Funds and Bubbles: The Surprising Role of Contractual Incentives" is at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=759365. Funds compensate their managers in a variety of ways. The managers who have the least incentive for good performance, according to the researchers, are those who are paid a declining percentage of assets under management as those assets grow. At the other end of the spectrum are managers, whose compensation is significantly greater if certain performance hurdles are met. In the middle are those whose compensation is a flat percentage of assets under management. The researchers measured how various incentives affected a fund manager's predisposition to buy Internet stocks during the late 1990's. They found that managers with the strongest pay-for-performance incentives tended to have the smallest investments in such companies. That, in turn, tended to make their funds lag behind the average fund over the three years before the Internet bubble burst, and to outperform over the three years thereafter. The researchers say they believe that compensation incentives affect a manager's willingness to buy and sell the same stocks that others are trading. They theorize that managers who are the least rewarded for good performance tend to be most worried about ending up at the bottom of the rankings - and are not very motivated to take a risk and try to finish at the top. This means that they will be more likely to mimic other funds' portfolios, something that the researchers call herding behavior. During a bubble, these managers tend to invest in the frothiest stocks. While doing so looks risky from the investors' point of view, it is a safe strategy for managers who at all costs want to avoid falling to the bottom of the rankings. That is because they know that by jumping on the bubble's bandwagon, they will participate in the spectacular performance while the bubble is expanding, but still land in the middle of the pack when the bubble bursts. In contrast, managers who are best rewarded for good performance are less likely to run with the herd. "With high-enough contractual incentives," the researchers write, "the prospect of ranking at the top by diverging from the bubble would more than offset the incentives to have a high, but not the best, performance by riding the bubble." Such managers will tend to invest in stocks that are out of favor. The study also helps to explain the conflicting conclusions of previous research into the effect of performance-based fees on fund returns. During a bubble like that of the late 1990's, the funds with the greatest performance-based incentives for their managers are likely to lag behind those with the least such incentives. But the opposite conclusion emerges after a bubble bursts. Securities regulators typically have taken a jaundiced view of pay-for-performance among mutual funds, based on the idea that such compensation may encourage fund managers to incur too much risk. But the researchers believe that mutual funds whose managers are poorly compensated for performance may unwittingly be contributing to the market's boom-and-bust cycle. Funds with stronger performance incentives "may provide a useful counterweight" to offset future bubbles, they said. In light of these findings, should you be leaning toward a mutual fund that gives its managers more performance-based incentives? The answer depends on your willingness to have your fund's performance deviate significantly from that of the average fund. In the late 1990's, many investors were impatient with funds that did not load up on Internet stocks, so they dumped those funds before the bubble burst. Others were willing to tolerate their funds' low rankings in the hope of outperforming over the longer term - and, for the most part, they have had the last laugh.
Most concentrated funds have more than 40% of their money devoted to their top 10 holdings, or have 30 or fewer total holdings. Cconcentrion can amplify gains AND losses. According to Morningstar, diversified stock funds rose 16.9%, on average, over the 12 months through September, surpassing the 16.1% gain by concentrated funds. The diversified funds were ahead over the longer terms, too: they were up 19.1% a year, on average, over the last three years, versus 18% for the concentrated funds, and were up 2.1% a year over the five years, compared with the concentrated funds' loss of 0.1%. Over a much longer period, the concentrated funds come out slightly ahead. They returned 8.9% a year, on average, over the last 10 years, versus 8.7% for the diversified funds. William F. Sharpe, a Nobel winner in economics and the founder of Financial Engines, an investment research and advisory firm, questions whether investors should concentrate their investments. Sometimes Dr. Sharpe's own work is cited in support of investing in a small number of securities, but he said that it had been misinterpreted. Many years ago, he demonstrated that investment risk decreased as you raised the number of securities you held, but that once you reached 20 or 30 holdings, each additional selection would not lower risk substantially. That conclusion may have encouraged some to favor concentrated portfolios, he said. "I always feel badly when that crops up," Dr. Sharpe said. "The mathematics of my example were impeccable, I think, but people have run with that who wanted to use it to justify concentration." In theory, he said, concentrated portfolios may work, but they generally require an unusual quality in a manager: the ability to pick underpriced stocks regularly and consistently. And his original example assessed the statistical risk of a portfolio of securities picked at random and held in equal dollar amounts - not the way most people invest, he said. Looking at a portfolio's statistical risk, or standard deviation, is a good tool, but is not enough to account for everything that might happen in the markets. "What you're particularly worried about is what happens when everything falls apart," Dr. Sharpe said. Cynthia Conger, a certified financial planner, cautions investors against putting their faith in a small number of stocks. "Diversification, whether in a portfolio or in a mutual fund, is what saves you from having to time the market," Ms. Conger said. "When you have a limited number of companies in a portfolio, you're banking that you picked the right company."
"There are times when active funds can do better, such as when the market is declining. If active managers are in cash, they're obviously going to minimize their losses," Pane said. "Secondly, if a certain sector starts to lead the market, and managers are already in that sector and they're overweighted, they're going to do better." Despite the success of large-cap managers through the first three quarters of this year, however, longer-term results show indexes consistently outperforming active funds. The S&P 500 index has beaten 69.4% of actively managed large-cap funds over the past three years and 63.6% over the last five years. At the end of September, the S&P MidCap 400 outperformed 72.1% of mid-cap funds, while the S&P SmallCap 600 beat 72.3% of small-cap funds, in keeping with three- and five-year trends.
But there's no guarantee the next big rally will coincide with the death of "measured" in the Fed's statement. "It is important to understand what fuels equities during that first critical year following the last rate hike," Francois Trahan, Bear Stearns' chief investment strategist, wrote. "Undeniably, one variable that plays a significant role in equity performance is the behavior of long-term interest rates." Past rallies in the 1980s and 1990s went hand in hand with falling rates. But rates had farther to fall then. How do stocks behave when the Fed's campaign ends with long-term bond yields still hovering near 40-year lows? "A better example of the current environment would be in the 1960s, when long-term interest rates were low and relatively stable. At that time, it was more the trend in leading economic indicators that drove the behavior of stocks. As such, it could remain frustrating until the economic cycle finds a footing." The LEI declined by 0.7% in September and was down for a third consecutive month, bringing the annualized growth over the last six months to 0.9%, down from 10.2% a year and a half ago. "While it is normal for higher-income consumers to enjoy a more positive outlook, we have recently seen a deterioration of confidence among all income levels," he said. He traced these new doldrums to the roofs over consumers' heads: "House-price weakness will likely impact higher-income consumers to a greater extent." And Fed officials, not that they would admit it, have every intention of raising rates more than they otherwise would to get a handle on the runaway housing market.
For example, overall capital gains distributions among American Century stock funds are likely to be 50% to 60% larger this year than last, said Brian Janssen, senior tax manager for American Century Investments. At T. Rowe Price, distributions among their retail stock funds could be 35% to 40% higher this year. "I think that seems to be indicative of the entire industry," a T. Rowe Price spokesman, Steven Norwitz, said. Large year-end distributions are a problem unique to mutual funds. Each year, funds are required to pass along to shareholders the capital gains they realize as their fund managers sell stocks at a profit (the distributions, in turn, reduce the NAV of the fund). Investors in taxable accounts have to pay taxes on the payout immediately (about two-thirds of fund assets are held in tax-deferred accounts). In recent years, fund managers were able to use their capital losses in the bear market to offset their gains, thereby reducing - or in some cases completely eliminating - the distributions. This explains why capital gains payouts to fund shareholders in taxable accounts fell from $114 billion in 2000 to as low as $5 billion in 2002 and $6 billion in 2003, according to the ICI. But the pool of tax losses remaining from the bear market is drying up. "The tax loss carry-over from the 2000 to 2002 bursting of the bubble has diminished considerably," said James Peterson, vice president of the Schwab Center for Investment Research. Meanwhile, even though the stock market may seem to be in a rut, equity prices have actually been soaring since the market bottomed in October 2002. The Russell 2000 index of small stocks has returned more than 24% annually over the last three years. During the same stretch, the mid-cap S&P's 400 index has shot up more than 20% a year and the S&P 500 index has gained 14% annually. As fund managers have been selling some of the winning stocks in their hands, they've been booking gains that now must be passed along to shareholders. All of this means that investors who are thinking of putting new money to work in this quarter need to be careful. For instance, unless you like paying taxes sooner rather than later, it's probably wise to wait in investing new money until a fund makes its distribution at the end of this year. That way, you won't be stuck footing an immediate tax bill for a fund you just stepped into. In the coming days, many fund companies will advise shareholders of distributions they can expect in their funds. But even before those notices go out, some companies they will provide guidance to shareholders seeking that information. Whatever fund you choose, do a little homework. Tom Roseen, senior research analyst with the fund tracker Lipper, says investors who are thinking of putting new money into a fund should read its annual report carefully. These reports will detail whether a fund is sitting on harvested tax-losses or whether it has embedded gains. "If you're comparing similar funds - and one has a great deal of tax losses to carry forward - then that may help you make your decision," Mr. Roseen said. Another place to look is Morningstar's Web site. Click on the "tax analysis" tab. Then look up the fund's "capital gains/loss exposure." Morningstar recently crunched the numbers and found that funds in categories that have lagged the broad market recently still had significant net losses to carry forward from the bear market. These included growth-oriented funds, large-cap funds and tech and telecom sector funds. The average technology sector fund is still sitting on net losses amounting to more than 200% of its current assets, which means it may be years before these funds have to make a capital gains distribution. Funds with the highest potential capital gains exposure are those in high-flying sectors, which value-minded investors would probably want to avoid anyway. Among real estate funds, for example, capital gains account for more than 27% of assets, on average. Gains represent nearly 26% of the assets of the average natural resources funds, according to Morningstar. Latin American stock funds have risen 51% annually over the last three years; diversified emerging markets funds are up 36% a year during that same stretch; and small-cap value funds are up 24% a year over the last three years.
For tax-qualified dividend income, ETFs and index funds may be a better way to go. Currently, all ETF's are index funds, and as such, they generally have expenses that are a third to a half that of actively managed funds. All mutual funds and ETF's are required to pay expenses out of dividend and interest income before using fund assets to cover costs. The lower a fund's expenses, the higher its income stream and the higher its yield. It is low expenses plus that fund accounting rule that make ETF's and index funds superior vehicles for generating dividend income. Conventional mutual funds, which tend to have higher expenses as it is, have further reduced yields by folding marketing fees and commissions into their annual expense ratios. That gives ETF's and index funds an even bigger advantage. The there is a big advantage to ETF's and index funds - they don't have distribution costs embedded in their expenses and they have lower management fees because they are passively managed. Thus much less of the tax advantaged income is eaten by expenses. The typical domestic stock mutual fund yields a paltry 0.71% on a trailing 12-month basis, according to Morningstar, much less than the 1.84% yield on the S&P 500 index. Mutual funds that bill themselves as high-dividend payers, by putting the word "dividend" into their names, fared better, with an average yield of 2.2%. In terms of dividends, some ETF's have done better. The iShares Dow Jones Select Dividend Index fund yields 3%. It tracks the 100 highest-yielding stocks that have maintained or increased their dividends over the last five years. The PowerShares High Yield Equity Dividend Achievers fund yields 3.3%. It invests in the 50 highest-yielding stocks with 10 consecutive years of annualized dividend increases. In the last two months, fund sponsors have introduced or filed with the SEC to introduce five ETF's or index funds focused on dividends. The latest to do so is Vanguard, the Vanguard Dividend Achievers Index fund. It will be offered in both conventional index fund shares and ETF shares, which Vanguard calls Vipers. "In either case, you're talking about a very low-cost investment, which should be very attractive," Mr. Phillips said. The fund is expected to become available to investors sometime in December. PowerShares Capital Management recently issued three new dividend-focused ETF's, including one that invests in 325 stocks of companies whose dividends have grown consistently in the last 10 years. "We've had tremendous interest by investors in reliable dividend growth," said Bruce Bond, president of PowerShares. "Some investors want broad exposure to the group as a whole." Of course, dividend-focused ETF's have their flaws. When investors received their statements last year, they found that not all dividend income generated by the iShares Dow Jones Select Dividend E.T.F. qualified for the preferred dividend rate under IRS guidelines. To qualify for the 15% tax rate, a stock must be held by an investor for 60 days before and after the dividend declaration date. Because assets in that fund grew rapidly last year, it bought many shares of stock that did not qualify for the 60-day holding period. As a result, of the dividend of $1.91 a share paid by the ETF last year, only $1.63 qualified for the 15% rate. The other 28 cents counted as ordinary income. James Parsons, managing director for iShares at Barclays Global Investors, said that the fund should be more tax efficient this year as money coming into and out of the fund would be more balanced. A second problem with ETF's in general is that they usually are not attractive for investors who put money into their funds on a regular basis. Commissions on those periodic purchases can offset whatever expense or yield advantage the ETF's may have.
1. Undefined Objectives and Priorities If you have owned funds, individual stocks or bonds in your portfolio for a long time, it can be easy to forget that those investments are there to do a job. Investors frequently own stocks to create capital appreciation over time and own bonds to generate income. You may not need to seek red-hot growth with the portion of your portfolio devoted to stocks, but make sure you clearly define your expectations. Take the time to think whether your needs or expectations for your portfolio have changed. If an investment hasn't delivered on your objectives for it, it may be time to evaluate potential replacements. 2. Lack of Focus If you find yourself staring at a long list of funds and aren't really sure why you own them, your portfolio probably lacks focus. You should have a core group of three or four funds that are proven performers. A core holding must be reliable year in and year out, providing a solid foundation for the rest of your portfolio. Large-cap blend funds, which own big companies, are core stalwarts. Core holdings can be index, ETFs or actively managed funds. They can be stock or bond funds, or balanced funds (part bond and part stock). 3. Too Many Extras Use additional funds for diversification and growth potential. For instance, if your core is made up of large-cap funds, you might want to add mid-cap, small-cap, and international funds for diversification. On the bond side, you may want an international fixed-income fund. While you probably wouldn't want to put a significant portion of your portfolio in any one of these types of funds, they do allow for the possibility of extraordinary returns. They also generally carry a higher level of risk. But as long as you limit the riskier portion of your portfolio, you aren't likely to threaten the bulk of your nest egg. 4. Loss of Balance If you want to protect your portfolio by being defensive, you should think about balance. If you see something that "sticks out," you need to determine whether it still fits your risk profile. Imbalance can happen when some categories do very well or very poorly or when you have an overconcentrated position in any one stock (especially company stock). If you hold more than 10% in any one stock, you may want to think about reducing that weighting. 5. Too Many Funds Many investors know they have this problem -- they just don't know what to do about it. Start by evaluating where the fund fits into your portfolio. Is it a core fund or not? Do you have more assets invested in core funds than other non-core funds? Reallocate your assets so that you own fewer funds but larger positions in the ones you keep. 6. Poor Choices within Categories What style are your funds? Do you see a pattern of owning too many funds in a particular category? Group your funds by style and make sure you have a good reason for holding so many in one category. If too of many of your holdings use a similar approach and invest in the same kinds of stocks, keep the strongest and sell the weakest. 7. Inefficient Tax Strategies Long-term capital gains tax rates as well as tax on most dividends are relatively low right now. That means you should reassess where in your portfolio you're holding bonds and stocks. Bond interest will be taxed at ordinary income tax rates, but most stock dividends will be taxed at the 15% rate. If you hold your stocks in a tax-deferred account, you don't have to recognize any income currently. But when you take money out of the account, you pay ordinary income tax at current rates up to 35%. So you might benefit from holding stocks in your taxable accounts and bonds in your tax-deferred accounts. But consider this: If you're young and have a long time horizon, stocks may provide greater growth over that time period. That means you could be better off investing in stocks in a tax-deferred account even if they are taxed at a higher rate in the future. Second, factor the new tax rates into your decision to hold taxable versus tax-exempt bonds. To find the tax-equivalent yield of a muni bond or fund, divide the tax-exempt yield by (1 minus your tax rate). Once you've evaluated the tax equivalency, you can choose the bond or bond fund that delivers the highest tax-equivalent yield. 8. Paying too Much in Fees If you have a choice between two similar funds, take the one with lower costs. Over time, the difference in performance. Say you invested $10,000 in a fund that gained 12% per year before expenses and carried a 0.5% expense ratio. Your friend invested $10,000 in a fund that also gained 12%, but his fund carried a 2.0% expense ratio. Twenty-five years later, you'd have nearly $45,000 more than your friend. 9. Poorly Defined Sell Criteria Most of us learn best by making mistakes -- or losing money. You can put that information to good use by setting up your sell criteria. Try to quantify how much you can lose before you panic. Perhaps you can live with a 15% loss, but 20% is too much. Think about other criteria, too. What happens if a manager leaves a fund you own? Do you automatically sell, or does the fund go on a "watch" list? What benchmarks do you intend to measure your funds with? How long will you accept performance below a benchmark before you sell? Thinking through the answers to these types of questions up front can make the difference between successful investing and just drifting. 10. Reluctance to Seek Professional Help There are times when it pays to get professional guidance that focuses on your individual situation. Complex tax issues, retirement, or estate planning can necessitate a trip to a financial specialist.
The biggest stock-price gains go to the companies whose numbers blow away estimates. That's to be expected. But perhaps more eye-opening is that many of the biggest surprises came from little-known companies. Amerco, FreightCar America, and King Pharmaceuticals are hardly household names, but they could be among the superachievers in this reporting season. Finding these companies ahead of their good news is easier than you may think. "The best predictor of companies that will surprise again are those that surprised in the past," says Russell Lundholm, chairman of the accounting department at the University of Michigan's Ross School of Business. And those that surprise investors in a big way often do so because they are low-profile companies with fewer analysts watching them and making earnings forecasts. Investing in the big surprisers can be a smart strategy. Lundholm, along with Jeffrey Doyle at the University of Utah and Mark Soliman at Stanford University, studied 160,000 earnings announcements from 1988 to 2000 to measure the stock returns of companies that had large quarterly-earnings surprises and then constructed a portfolio made up of the top 10% of those with earning surprises. When they bought the companies two days after the earnings announcement and held the stocks for one year, their portfolio beat the market by 9%. When held for two years, the portfolio beat the market by a cumulative 15%. Beyond two years, the size of the earnings surprises decrease because more analysts start covering the companies, and the estimates are less wide-ranging.
Louis Navellier, the fund manager and newsletter publisher, is typical of the mega-bulls, advising private clients over the past weekend that their “best buying opportunity in six months” was last Friday. “If you have any cash, invest it right now,” he wrote. "The next few weeks will be phenomenal.” More objectively, the quantitative team at Thomson Financial put out a note on Monday stating that their Market Model Risk Premium -- which gauges the extent to which investors are overpaying for the safety of government bonds -- has risen to a record level that tied a mark set in September 2002. That was, as the Thomson research team pointed out, an “excellent buying opportunity.” The Dow at 40,000? A cadre of analysts arguing that stocks are actually on the verge of a historic breakout. They say their calculations suggest the Dow Jones Industrial Average, now at 10,200, will rocket to 20,000 to 40,000 over the next three to five years, driven by improving global income levels, a boost in the money supply and the deployment of vast quantities of hoarded cash by companies and individuals. It’s hard in the current climate to imagine the super-bulls could be right. But maybe we should be open-minded, and note that one expert’s guess may be as good as another. While it’s always tempting to side with the downers who moan about the negative effects of higher interest rates, energy prices and inflation, we might just as well consider what might happen if the rebuilding of New Orleans, Biloxi and Islamabad let the good times roll again. The two leading trumpet-blowers in the optimist brigade are Don Hays, a veteran Wall Street strategist who runs Hays Advisory, and Harry Dent, an economist-author who runs the HS Dent Forecast. Both believe the past 20 months of flat returns in the broad market indexes have just about done their job of lulling investors to sleep in advance of a gigantic rush to much, much higher ground. In September, Hays told clients to expect gains of 100%-plus in the next couple of years, in part due to vast piles of individual and corporate cash being put to work amid “the reinvigoration” of the U.S. dollar and productivity. “The monetary liquidity floating around the world is so humongous it is impossible to describe all the pockets overflowing and looking for a home,” he said, adding that the believes U.S. GDP is on track to double to a 7% annualized rate, while inflation will remain in a 1%-to-2% range over the next decade. Not to be outdone, Dent told clients on Oct. 1 that he “couldn’t be more bullish for the next year, and the next five years.” He added: “Ignore the news and be investing as fully as your risk tolerance warrants. … We are very close to the last great buy opportunity ahead of the greatest five-year stock bubble in history. And still, no one suspects such a bullish scenario while our long-term indicators say it is almost inevitable.” A Pattern Emerges of Bull Markets A key element of both the Dent and Hays outlook is the observation that most extreme bull phases of the last century – 1915 to 1919, 1925 to 1929, 1935 to 1937, 1985 to 1987 and 1995 to 1999 -- were preceded by major corrections (or crashes), followed by a strong initial recovery and then a one-to-two-year trading range. Of course, the implication is that the crash in this case was the 2000-2002 bear market, the recovery rally happened in 2003 and the trading range was seen from 2004 to 2005. Dent suggests that the markets “are simply waiting for signs that the Fed can’t tighten much further” and for oil to correct below $58-to-$62 support levels “to suggest a top in that bubble.” One prominent analyst who is looking for quite the opposite of a bull move is veteran technician John Murphy. In a note to clients, he said a combination of Elliott Wave analysis, the four-year presidential cycle, seasonal trends, weekly and monthly index charts, sector rotations, rising inflation and higher interest rates have persuaded him that the cyclical bull market that started in the spring of 2003 “is just about over.” The forecast gets a little more interesting when you begin to apply it to individual stocks. For in order for the Dow industrials to double, either virtually all of those 30 stocks would have to double their earnings or investors would need to decide that their price-earnings multiples should be twice as high as they are now. Strangely enough, several of the Dow stocks won’t get to their all-time highs even if they double. Pharmaceutical giant Merck could shoot 100% higher and only get halfway back to its glory days. Chip goliath Intel could triple and still not get back to its 2000 high. And you can go down the line with the list to find similar examples, including Verizon, SBC Communications and Walt Disney. Riding the next bull Indeed, considering the walking wounded in the Dow, it’s impressive that the index is only trading about 12% down from its all-time peak of 11,698, set in late 1999. You can certainly see that if oil prices moderated and investors’ mood began to lift, the venerable measure of the market could certainly approach and exceed its old highs while its sleepier components were just barely getting off the floor. After that, it wouldn’t exactly take much imagination to see a 50% move up to 15,000, as it would only require an advance in a stock like Intel, for instance, to $34.50 from its current perch around $23. It was there as recently as November, 2003. Merck would only have to get to $38.77, where it traded only a year ago. If the optimists’ vision were to come into play, it would take a lot of investors off guard. Possibly the best way to guard against the chance that the Dow might take off without you would be to devote 5% to 10% of your funds, let’s say, to a portfolio containing Dow industrials, transports and utilities that are considered the most favorable today under our StockScouter system. That way, you’re probably going to be great shape for a bull run, and you're unlikely to get badly hurt -- at least on a relative basis -- if bears gain firm control instead.
These and related thoughts went through my mind when I read the recent issue of Fosback's Fund Forecaster, edited by Norman Fosback. In it, Fosback explored developments that may not have any noticeable impact on the markets over the next year - but which could very well have a huge impact over the next several decades. Fosback focused on the opinion that people outside the U.S. have of the U.S. and its financial markets. In particular, he discussed how that opinion has changed, and will likely to continue changing, in light of the struggles the U.S. is facing in Iraq and of U.S. failures in responding to Hurricane Katrina. The picture that emerges is, in Fosback's words, "not pretty": Foreign opinion of the U.S. has already begun to fall markedly, and will likely continue falling. Though the downward pressure of this on U.S. investment markets will not be felt overnight, over the next several decades its impact will be profound. In a nutshell, Fosback argues that the U.S. experience in Iraq and Katrina has eroded the world's belief in U.S. invincibility and competence. What's happening in Iraq is revealing to the world "our inadequacy of imposing a political vision on those to whom that vision is alien. Now, in the New Orleans aftermath, the world has witnessed firsthand America's extraordinary ineptitude in dealing with an internal and preventable crisis." As a result, the "American leadership mystique has been shattered." Fosback is not commenting on whether he thinks foreigners are right or wrong to be developing this more jaundiced view of the U.S. Instead, he is focusing on the investment implications of this jaundiced view that, rightly or wrongly, more and more foreigners are adopting. Fosback argues that those implications will be huge. The consequences of this will be a gradual process of foreign disinvestment in the U.S. equity and bond markets." That in turn will lead to "higher interest rates in this country and in a convergence of price/earnings multiples between the U.S. and foreign stock markets." What should you as an investor do in light of this dismal picture? Fosback's answer: Diversify globally. What does global diversification look like? U.S. stocks currently constitute about half of the combined market cap of all publicly-traded stocks worldwide. An equity portfolio that was fully diversified globally therefore would have around half allocated to non-U.S. stocks. How does your portfolio compare to that standard?
Of course, individual investors remain major participants in the stock market, but now do so largely through mutual funds and public and private pension plans. But such participation lacks the traditional attributes of ownership such as selection of individual stocks and engagement in the process of corporate governance. But aren't our financial institutions owners of stocks? Not really. They are owners in name -- agents with a duty to act on behalf of their principals, including our mutual fund owners and beneficiaries of our retirement plans. Today's agency-dominated investment society is overwhelmingly composed of those two groups of underlying owners. At first, the march toward institutionalization was led by pension plans. Holding less than 1% of all stocks in 1950, they shot up to 19% in 1980 and 27% in 1989-95, only to ebb to today's level of 21%. Growth in mutual-fund ownership, on the other hand, was stagnant in the early years, holding at 3% in 1950 and 1980 alike, rising to just 8% by 1990. Since then, fund ownership of stocks has risen relentlessly to a record high of 28% currently. Within the pension segment, public plans are holding steady while private pension plans are gradually receding. But the secular decline in defined-benefit pension plans has been matched by an offsetting rise in defined-contribution thrift and savings plans in which mutual funds are the major component. So today's dominant stock ownership by mutual funds seems destined for continued growth. Institutional investing is now largely the business of giants. America's 100 largest money managers alone now hold 58% of all stocks. When such a relative handful of professional managers substantially displaces a diffuse group of millions of inchoate individual investors, one might have expected the managers to more aggressively assert their rights of stock ownership and demand more enlightened corporate governance focused on shareholder interests. With few notable exceptions (some state and local pension plans, unions, and TIAA-CREF), our institutional investors have refrained from active participation in corporate affairs. What explains the passivity of these institutions that in fact hold effective control over corporate America? First, too many of our financial agents have their own interests to serve, often conflicting with the interests of their investor-principals. It is a truism that principals are likely to watch over their own money with far more care than they take in watching over assets of others. When there are many masters to serve, it is the master who pays the servant whose interests are most likely placed front and center. Corporate pension plans, for example, are controlled by the same executives whose compensation is based on the earnings they report to shareholders. During the 1990s, they arbitrarily raised their projections of future pension plan returns, enhancing operating earnings to meet "guidance" targets, even as interest rates tumbled and prospective returns eroded. Similarly, mutual fund managers are compensated by separate corporations seeking to maximize the return on their own capital (to enhance their own wealth), in direct conflict with their duty to maximize the returns to the shareholders. The excessive advisory fees, expenses, hefty sales loads, and huge commissions on portfolio transactions paid to brokers in return for their sales support consumed something like 45% of the real returns earned on fund portfolios during the past two decades. Second, unlike their predecessors in the '50s and '60s, financial institutions focus on investment strategies that emphasize short-term speculation in evanescent stock prices, rather than traditional long-term investing based on durable intrinsic corporate values. From 1950 to 1965, equity mutual funds turned over their portfolios at an average rate of 17% per year; in 1990-2005, the turnover rate averaged 91% per year. The old own-a-stock industry could hardly afford to take for granted effective corporate governance in the interest of shareholders; the new rent-a-stock industry has little reason to care. To further complicate matters, today's typical giant private financial institution -- managing both pension plans and mutual funds -- faces serious conflicts in its exercise of the rights and responsibilities of ownership. When a proxy proposal is opposed by the management of a corporate client, the money manager is unlikely to vote in its favor. It is not surprising, then, that governance activists among large private money managers are conspicuous not merely by their scarcity but by their absence. And it gets worse. Today, it is difficult to separate the owners from the owned. Through its defined-benefit pension plans, corporations own 12% of all stocks, and dominate another 11% through defined-contribution savings plans. What is more, most of our largest money managers are themselves now owned by giant financial conglomerates. Arguably, this circularity of ownership allows corporate America to control itself. The problems created by this new and conflicted world of financial intermediation are hardly trivial. Excessive return projections for pension plans have played a major role in creating the current shortfall of $600 billion in private pension plan liabilities relative to plan assets. The shortfall in public plans has been estimated at $1.2 trillion, bringing the total deficit to $1.8 trillion, and rising. Individual retirement savings are also at dangerously low levels. Only 22% of workers participate in 401(k) savings plans and only 10% in IRAs (9% have both). Despite having had a quarter-century-plus to build these assets, investors have accumulated balances of but $33,600 and $26,900 per participant respectively, a trivial fraction of what would be required for a decent retirement. With today's agency society arrogating to itself far too large a share of market returns, the outlook for future individual retirement savings is dire. A citizen entering the work force today has an investment horizon of at least 60 years. If the stock market were to earn an average nominal return of 8% per year, $1,000 invested today would then be worth $101,000 -- the magic of compounding returns. But if our financial system consumes 2.5 percentage points annually of that total return -- a conservative estimate of today's reality -- that $1,000, growing now at 5.5% net, would be worth just $25,000, a minuscule 25% of the accumulation that could have been obtained simply by owning the stock market itself. The magic of compounding returns, it turns out, is simply overwhelmed by the tyranny of compounding costs at today's exorbitant levels. The serious shortfalls in retirement reserves that represent the backbone of the nation's savings have arisen importantly because our manager-agents have placed their own interests ahead of the interests of the investor-principals they are duty-bound to serve. Our financial institutions have failed to exercise the rights and responsibilities of corporate citizenship; to adequately fund pension reserves; and to deliver to fund shareholders their fair share of the returns generated by the financial markets themselves. Why? Largely because the radical change from an ownership society dominated by individual investors to an intermediation society dominated by professional money managers and corporations has not been accompanied by the development of an ethical, regulatory and legal environment that requires trustees and fiduciaries, as agents, to act solely and exclusively in the interests of their principals. In addition, we have developed a patchwork of tax-deferred retirement programs -- Social Security, corporate and public pensions, deferred compensation plans, 401(k)s, 403(b)s, individual IRAs, and Roth IRAs -- and are now considering the addition of Personal Savings Accounts to the list. We need to undertake a careful appraisal of this often costly mix, and develop an integrated retirement system that will enhance savings. The overarching need is for a clearly enforced public policy that honors the interests of our citizen-investors and puts these beneficiaries in the driver's seat where they belong. The ownership society is over. The agency (or intermediation) society is not working as it should.
At the start of the year, analysts were predicting a conservative gain of 7.6% in Q1 earnings for the S&P500 index, versus the same period a year earlier. As it turned out, S&P profits jumped nearly 14% in the first three months of the year. In April, Wall Street analysts were expecting Q2 earnings to grow 8.8%. Profits grew around 12% during the period. Yet the luxury of low earnings expectations appears to be a thing of the past - and that puts equity prices at risk. In recent weeks analysts have been lifting their forecasts for third- and fourth-quarter profits. The consensus forecast for Q3 profit growth now stands at 17.8%, up from 15.1% at the start of the quarter, according to Thomson Financial. Fourth-quarter estimates have also shot higher - to 16.5% from 12.2% in July. The upward revisions in S&P earnings forecasts come as economists have been reducing their forecasts for economic growth for the second half of this year. The rosy earnings outlook worries some people on Wall Street. "I'm concerned that the numbers may be a bit too optimistic now," said Mary Ann Bartels, an equity trading strategist at Merrill Lynch. "We now appear to be in a complete opposite situation from the first and second quarters" when expectations were low and the ability to exceed them was good. David Dreman, chairman of Dreman Value Management, said: "Honestly, I just don't see earnings rising that fast, partly because of the cost squeeze companies are in due to high energy prices. I don't see where it's coming from." Well, a couple of answers come to mind. For one, analysts may simply be reacting to their misjudgments in previous quarters. "Analysts have a tendency to miss profit trajectories on both sides, and I will tell you that going into the second quarter, analysts had lowered their forecasts only to be completely amazed by the level of actual profit growth," said Jack Ablin, chief investment officer at Harris Private Bank. "So given the fact that there were so many positive surprises last quarter, analysts may be trying to adjust their numbers higher." Of course, a simpler explanation is that S&P earnings forecasts are rising because energy sector profits are expected to shoot through the roof. While higher oil and gasoline prices hurt consumers, as well as companies in a variety of industries, especially transportation, they are clearly a boon to energy-related businesses. Indeed, at the start of the year, when a barrel of crude oil was trading in the low $40's, analysts were predicting that earnings among energy companies in the S&P would fall 7% in Q3, versus the period a year earlier. By early July, when oil prices were hovering near $60 a barrel, Q3 earnings in the energy sector were expected to jump 21%. Energy prices spiked in the aftermath of Katrina and as of Friday the consensus estimate had surged to 73%, according to Thomson Financial. To be fair, it's not just energy that's growing, said Mike Thompson, director of research at Thomson Financial. "The reality is, earnings remain strong and the impact of Katrina on S&P500 profits doesn't look, at least initially, to be tremendous," he said. Mr. Thompson noted, for example, that if you stripped away the energy sector, earnings for the rest of the S&P500 would still be expected to grow 11% in Q3 - higher than the historical growth rate. Still, when the energy sector is subtracted, estimated earnings growth for the S&P500 has been falling in recent weeks and months. At the start of January, analysts were predicting that S&P500 earnings, aside from those of the energy sector, would grow 15.3% for Q3. That forecast fell to 14.3% at the start of April, and now stands at 11%. By that measure, the profit outlook may not be so rosy after all. On top of all that, there are a couple of wild cards for investors to consider. For starters, how many companies will report negative earnings surprises in Q3, perhaps because of the devastation and disruptions caused by Hurricanes Katrina and Rita? Even a marginal increase in negative surprises could disappoint the Street and hurt equity prices, money managers and investment strategists say. Ms. Bartels of Merrill Lynch noted that in Q2, nearly 70% of companies beat consensus estimates for earnings growth. If positive earnings surprises fell back to the historical average of 59%, that alone would disappoint the markets, she said. The other unknown is how energy costs are affecting consumers. At the end of the day, consumers are responsible for roughly 60% of corporate profits. And while consumer confidence took a big hit after Katrina, it remains to be seen how consumers will change their spending - if at all - in response to the surge in gasoline prices. The big test may come later in the year, as winter approaches and households may also have to contend with high heating bills. Corporate profits, like consumers, have been surprisingly resilient. But the problem is that when expectations are this high, the margin for disappointment can be quite small. Yet the fallout of lower-than-expected profit growth can be big.
To overcome the threat from inflation, you could buy inflation-indexed Treasury bonds instead and then live off the rising income generated by these bonds. But 10-year inflation bonds currently yield around 1.8%, so you would garner initial annual income of some $1,800 for every $100,000 saved. (The bonds' principal value also gets stepped up with inflation.) Historically, stocks have also been a good source of rising income, with the dividends paid by the S&P's 500-stock index rising 5.2% a year over the past 50 years, modestly ahead of the 4% inflation rate. But in terms of initial income, you wouldn't be much better off with stocks than with inflation bonds. After all, the stocks in the S&P 500 now yield just 2%. You could get more income by opting for an immediate fixed annuity. Today, a 65-year-old couple who invests $100,000 could get annual income of $6,492, according to www.immediateannuities.com. To fend off inflation, you could buy the new inflation-indexed annuity offered by Vanguard. A $100,000 investment in a joint-and-survivor annuity for a couple, both age 65, would yield initial annual income of $4,362. But once again, your $100,000 would be gone. To be sure, there are other alternatives, including REITs, preferred stock and limited partnerships, all of which can offer healthy yields. But keep in mind that there is no free lunch. The higher the prospective return, the greater the risk. What can retirees learn from all this? Clearly, current investment pickings are pretty slim. But there are also five other lessons. 1 You can't ignore inflation. Even at a modest 2.5% inflation rate, the spending power of a dollar would be cut in half in 28 years. Whatever strategy you adopt, it has to generate a rising stream of income. 2 Bonds aren't enough. Because of the threat from inflation, only the wealthiest retirees will be able to invest solely in bonds and then live off the interest. To understand why, suppose you bought a collection of bonds that yielded 5%. To ensure your income grows over time and thereby thwart the threat from inflation, you might need to take two percentage points of that 5% yield and reinvest it back into your portfolio. That would leave you with just 3% to cover groceries, travel, utilities and other living expenses. In other words, if want your portfolio to provide $30,000 of spending money in the first year of retirement and you are determined to invest only in bonds, you would need to quit the work force with $1 million. The numbers for an all-bond strategy would be even more daunting if you were incurring, say, 1% of assets in annual investment costs and 15% in taxes. After those two costs and after reinvesting two percentage points of your annual yield as a hedge against inflation, you would be left to live off a yield of just 1.4%. Suddenly, to score $30,000 of spending money, you would need more than $2.1 million. 3 Hold down investment costs. This is especially important in today's low-yield market. To that end, I would consider low-cost strategies like buying Treasurys directly from the U.S. government. You can find out more at www.treasurydirect.gov. Also, favor low-cost bond funds, such as those offered by Payden & Rygel, TIAA-CREF, USAA Investment Management and Vanguard. 4 Buy stock funds for growth. You should seriously think about stashing between 40% and 60% of your portfolio in low-cost stock funds. But once again, you would have to be wealthy to live just off the dividends. Instead, your goal would be to clock capital gains and then occasionally cash in some of your profits. 5 Prepare to part with some of your principal. To generate enough retirement income, there's a good chance you will have to kiss part of your portfolio's principal good-bye, either by buying an immediate annuity or by deliberately eating into principal later in retirement. None of us like to do this, partly because we want to leave the money to our kids and partly because of the old prohibition that we should "never dip into principal." If you buy a lifetime-income annuity, you will get a check every month for the rest of your life. But there's also a chance you will buy the annuity and die soon after, leaving your heirs with little or nothing. Despite that risk, plunking maybe a quarter of your nest egg in an income annuity strikes me as a smart strategy -- assuming you are in reasonably good health. What's the alternative? Starting in your late 70s, you might begin slowly spending down your principal, by occasionally selling some of your stocks, bonds and mutual-fund shares. True, once you start eating into principal, you're on a slippery slope and you may outlive your savings. But many folks, unfortunately, won't have any other choice.
Companies are splurging on their own shares for a simple reason: they have a lot of cash and need to do something with it. Companies in the S&P index have cash equal to 7.3% of their market value - slightly off the 7.7% peak reached earlier this year, which was the highest level since 1988. That pile of cash accounts for not only the increase in stock buybacks, but also for rising dividend payouts and a higher level of activity in mergers and acquisitions. "Companies have more cash than they know what to do with," Mr. Silverblatt said. "The number is just huge, especially in an environment where it is cheap to get money. So companies have plenty of money to do buybacks." In general, buybacks are good for investors. David Ikenberry, a finance professor at the University of Illinois at Urbana-Champaign who studies corporate buybacks, found that the stock price of companies that announced buybacks tended to outperform those that did not. In an unpublished study of 7,725 announced corporate buybacks from 1980 to 2000, Mr. Ikenberry and three other researchers found that investors who held those stocks for four years earned a return that was 15.6 percentage points higher than that of a similar basket of stocks from companies that might or might not have announced repurchases. The results were consistent with a similar study published in the Journal of Financial Economics in October 1995 by Mr. Ikenberry and two other academics that focused on stock buybacks from 1980 to 1990. The study is at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=686567. "It is a phenomenon that is fairly robust," Mr. Ikenberry said. "Companies buy back stock for all kinds of reasons. The biggest one is a perception of mispricing. So these stock buybacks are considered signals that management is confident of where the stock prices should be headed." Until legislation in 2003 cut the tax rate on qualified dividends to a maximum of 15%, there were tax advantages to share buybacks over dividend payouts. With the tax changes, dividend payouts and share buybacks have become more equal. "A few years ago, we preferred stock buybacks over dividends because there used to be a tax rate difference," said Ronald Muhlenkamp, manager of the Muhlenkamp Fund, which was up 28% a year, on average, in the three years through Thursday. "Today our preference is simply a matter of how high the stock is priced. If the stock is cheaply priced, we would prefer a buyback." Mr. Muhlenkamp said the question to ask when looking at buybacks was whether the company could get a better return by buying back shares, paying a dividend or expanding its business. "If they don't have projects that can maintain their return on equity," Mr. Muhlenkamp said, then the money should be paid to shareholders in a dividend or by repurchasing shares. But not every buyback announcement is significant. Not all companies that say they will buy back shares actually do. And many buybacks - particularly among technology companies - are simply a way of offsetting the dilution that would otherwise accompany the exercise of stock options. "So many companies are doing buybacks, but they may not all be doing meaningful buybacks in the sense that they are big enough to give the company a reduced share count," said David R. Fried, president of Fried Asset Management and editor of the online newsletter buybackletter.com. That said, more companies are doing meaningful buybacks these days and some in huge quantity. Consider Exxon Mobil, the world's largest energy company. As oil prices have soared, it has accumulated cash, and it has been sharply increasing its share repurchases, up to $5 billion in the third quarter from $3.7 billion in the second quarter. S&P data shows that the number of companies that have reduced their outstanding shares by at least 0.5 percent has risen - to 81 companies in the second quarter from 62 in the first quarter, and the moves have started to affect corporate earnings. And the buyback announcements keep coming, sometimes from companies that have gone through tough times - like Time Warner and Motorola. "They've had some problems recently, and they're trying to do some signaling to the market," says Timothy Loughran, a finance professor at the University of Notre Dame. He compared current buybacks to the stock repurchases made after the stock market plunge in October 1987. "It's been a pretty good signal," he said. "And I think it is generally a positive signal for the market as a whole." If you're interested in investing in companies that have had buybacks, Mr. Fried recommends looking at valuations as well as the size of the buyback programs.
Three Reasons/Causes for Concern Soaring energy prices have sent consumer prices 3.6% higher during the 12 months through August, the largest such increase in four years. Some economists expect to find that inflation topped 4% in September. Another concern: The anticipated rebuilding effort that will center on New Orleans. All the spending is liable to be another factor pushing inflation higher in the months ahead, some argue. At the same time, the federal government shows no signs of slowing its spending on other projects. And workers could finally begin seeing more reward in the form of higher wages, some analysts predict. A bit of inflation may not be so bad for stocks. If companies can raise the prices of goods and services they sell, profits are liable to rise. But periods of high inflation often bring problems for stocks, as well as for bonds. That's because stock prices trade on the value of future earnings. And if inflation is high, the value of future earnings is reduced. As a result, investors are generally less willing to pay a high price/earnings multiple when inflation is riding high. They also tend to dump bonds, because the fixed yields are worth a lot less as inflation rises. How to Adjust Your Investments The best move for investors is to add some investments that would do well if inflation moves higher, but not to radically adjust investment portfolios, analysts say. For example, a handful of mutual funds invest in gold, energy and other commodities, all of which usually do well in periods of higher inflation, as investors shift to raw goods and away from financial assets. By buying shares of a mutual fund, rather than putting money directly in these investments, an investor can gain a broader exposure to all these investment classes. Investors also should focus on companies that could benefit from rising commodity prices, such as reasonably priced energy companies with upbeat profit outlooks. Sunoco is expected to grow profits by more than 40% in the next year. Analysts expect Marathon Oil's profits to jump 80% in the next year. Pogo Producing profit is expected to jump 45%. James Paulsen, chief investment officer at Wells Capital Management, also likes tech stocks. These companies have had to keep a lid on prices in recent years. But in a higher inflationary environment they may be able to boost prices to keep earnings rolling. Mr. McManus recommends TIPS, or Treasury Inflation Protected Securities, which are bonds that rise in value if inflation grows. Investors can buy TIPS directly from the Treasury or through bond mutual funds specializing in these bonds. How Fund Categories Fared Barrons 10-08-2005
Monthly Employment Stats
Employer payrolls outside farms fell by 35,000 workers in September from August, the Bureau of Labor Statistics said Friday. That was the first decline since May 2003 -- but far less than the 175,000 drop expected by economists. The bureau estimated that total employment would have followed its recent upward trend if employment growth in the Katrina-affected areas had matched that in the rest of the country. Monthly payroll growth averaged 194,000 in the 12 months through August. The bureau also revised sharply upward its estimate for job growth in prior months to a gain of 277,000 in July and 211,000 in August. Reflecting the impact of Katrina, the number of newly unemployed workers jumped by 193,000, the biggest such increase since December. The employment data reinforced the message from several Fed officials that the central bank is likely to raise rates at its next few meetings, with no pause imminent. That prospect has sent Treasury bond yields up and stocks down in recent weeks, though both were little changed Friday. Carl Tannenbaum, chief economist at LaSalle Bank in Chicago, noted that surveys show manufacturing orders remained brisk in September across the country. He said, "I have yet to encounter a customer whose business has been seriously disrupted, and that includes nationwide companies like trucking, manufacturers reliant on parts, some agricultural companies. Producers of things like building materials are . . . gearing up for the reconstruction effort." Companies that have received large federal relief contracts, such as Fluor and Shaw Group, already have begun filling job openings in the afflicted area. Since Katrina hit, economists have steadily revised their estimates of the national economic impact -- for the better. The Congressional Budget Office initially predicted the storm would cost 400,000 jobs by year's end. But last week it cut that estimate to about 200,000. Unemployment insurance claims data, meanwhile, show little impact outside the Gulf. In Louisiana, the jobless rate among those workers eligible for unemployment insurance jumped to 10% in mid-September from 1.3% in late August, while in Mississippi, it rose to 5.1% from 1.4%. But for the U.S. as a whole, it was unchanged, at 1.8%. The reliability of the September employment data may be affected by the difficulty of gathering information in the storm-damaged areas. Of the 160,000 establishments usually surveyed for the payroll report, the BLS said, 82 could not be reached, and it assumed their paid employment was zero. That assumption would overstate job losses if some of those firms in fact had paid employees. Of the 55,000 households sampled for the household survey, 464 could not be reached. The BLS assumed the unemployment rate of the missing households was the same as other households in those states. That would tend to understate unemployment if a disproportionate number of the unsurveyed people were unemployed. Leisure and hospitality employment fell 80,000 in September, reflecting the loss of tourism and casino jobs in the Gulf Coast region. Retail employment fell 88,000, reflecting both the hurricane and closures by supermarket chain Winn-Dixie, which is in Chapter 11 bankruptcy protection. Average hourly wages rose 3 cents to $16.18, and were up 2.6% from a year earlier, in line with the trend all year and well behind the rate of inflation. Inflation was 3.6% in the 12 months though August, but data is expected to show it topped 4% in September. Manufacturing employment, which has been weak all year, fell 27,000, in part because of a strike at Boeing Co., which has since ended. Temporary staffing added 31,700 employees, much of that related to hurricane recovery. The BLS also said its earlier estimates of payroll employment for the 12 months through March would be revised downward by a cumulative 191,000, an annual revision based on improved data. The revision, still preliminary, represents a minor setback for the Bush administration, by eliminating the 119,000-job gain currently reported for its first term, which ended in January, said Dean Baker, an economist at the liberal think-tank Center for Economic and Policy Research.
Just the Facts The ABC's of Fund Investing Charles Jaffe, Marketwatch 10-09 Mutual Fund shares come in three classes: A, B and C. A is for "all at once." With Class A shares, the investor pays a traditional front-end sales load, usually lopping between 3% - 6% off the top to pay for the services of the adviser. Of broker-sold share classes, however, A shares carry the lowest continuing costs, which tends to make them the best option for long-term investors. B stands for "back end." Class B issues carry a back-end load, payable if you exit within a set period, usually the first four to six years. C stands for "Costs" because this class is the most expensive for a buy-and-hold investor. Class C shares have no upfront sales charge and may have a small deferred load if you sell the fund in the first year or two. In exchange for the reduced sales fees, the fund carries higher costs for life. As a general rule, C shares tend to be the best choice for an investor who doesn't expect to stick around too long. Quick Facts, Stats & Opinions The Direct Marketing Association provides instructions on how to remove your name from mailing, telemarketing and spam lists at its consumer-services Web site: http://www.dmaconsumers.org/consumerassistance.html . (Washington Post 10-23) The continuing struggle of the 1990s growth stocks is a reminder of another era on Wall Street. From 1966 through 1978, a time of rising inflation and rising interest rates, the S&P 500 index's entire net price gain was 4% -- not 4% a year, but 4% over 13 years. There were many rallies and declines within that period, but for a buy-and-hold investor, the net advance was abysmal. No investor really wants to contemplate that the market could do so poorly for such a long stretch in this era. But then, it was probably inconceivable to most Microsoft investors seven years ago that the stock would make no net progress by 2005. (Tom Petruno, LA Times 10-23) On Friday, the U.S. Department of Labor reported that the consumer price index jumped 1.2 percent in September from the previous month. Not since 1980 has inflation risen so quickly from one month to the next. Nearly all the increase came from a 12 percent surge in energy prices. In September, the consumer price index increased 4.7 percent over the preceding year, its fastest pace for a 12-month period since 1991. At the same time, however, core inflation was just 2 percent higher than a year ago. (Brendan Case and Angela Shah, Dallas Morning News 10-15) Most of the airframes - big aluminum fuselages - of retired jets are reincarnated as beer cans. (Eric Torbenson, Dallas Morning News 10-16) What traders and investors need at the outset is discipline, because most mistakes come about either from being too hopeful or from plain arrogance. Learn to limit your mistakes, he advised. Do the homework, and not just a little. Listen to conference calls, watch presentations on a company's Web site, read the financial statements. (Jim Cramer recap of Thursday 10-12's "Mad Money") High energy prices, a potential shift in public psychology toward accepting higher prices, signs that businesses are using up spare capacity and a steep federal budget deficit combine to make Federal Reserve policy makers more nervous about the inflation outlook. Futures markets have responded by signaling they expect the federal-funds rate, the amount financial institutions pay on overnight loans, to reach 4.5% in mid-2006. A month ago, the futures markets were predicting the federal-funds rate then would be below 4.25%. The current rate is 3.75%. (Jon Hilsenrath, WSJ 10-10) Americans' love affair with credit cards has continued unabated recently, with the average credit card debt per household reaching a record $9312 in 2004. That's up a whopping 116% over the past 10 years. And it's expensive debt too: average annual percentage rates for September rose to 11.84%, compared to 11.56% a month earlier. Americans paid over $127 billion in household bills on credit and debit cards last year, and that number is predicted to top $161 billion in 2005, according to CardWeb.com. Many households have far more plastic than you could fit in a wallet. The average number of bank cards per cardholding household is 19.3 -- typically eight bank cards, eight retail cards and three debit cards. Bank card delinquencies reached an all-time high in the past quarter, according to ConsumerFlow.com, with 4.81% of accounts missing minimum payments. (Rob Kelley, CNN/Money 10-10) The Dow Jones industrial average ended the week down 276 points, closing just below the 10,300 mark. That's about where it was in December 2003. And in March, May, June, July, September and November of 2004. And again in April and June of 2005. Do you think, perhaps, we're in something of a rut? (Washington Post 10-09) In its annual "retirement confidence" survey for 2005, TIAA-CREF, the largest U.S. retirement fund, says, "More than half of all workers report less than $50,000 in total savings and investments (excluding their home)." (Chet Currier, Bloomberg 10-09) Home Page Previous Factoid Top Sites
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