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If you're seeking yield, you're going to find it at the short end of the curve. But while it may seem a slam-dunk to shift a good percentage of your bond holdings to cash [or shorter termed bonds], don't overlook the risks. For starters, history shows that inversions don't necessarily last that long. Anthony Chan, chief economist at J. P. Morgan Private Client Services, recently studied periods when two-year Treasuries have paid out more than 10-year ones. Since 1978, this has happened eight times, with an average duration of 7.5 months. To be sure, the last inversion, which began in early 2000, continued for nearly a year. But the three previous ones, between 1989 and 1998, lasted no more than two months each. If this inversion is similarly short, bolting to cash may not be a great idea. A few months from now, those cash instruments could be paying considerably less than short- or intermediate-term bond investments. And what if the yield curve is indeed foreshadowing an economic slowdown? If it is, there is a distinct possibility that interest rates will start to fall. Recent history shows that yield curves don't typically stop inverting because long-term bonds begin to pay out more. Inverted curves come to an end because short-term rates fall much faster than long-term ones, often as the economy teeters on recession. Mr. Chan's research shows that the yield on 10-year Treasuries falls 0.66 percentage points, on average, in the six months after an inversion cycle, while the yield on two-year Treasuries declines almost twice as much: 1.21 percentage points. But in the current world, where rates on the Euro and yen are just starting to rise, is the historical patern just as likely to repeat? This means that there are two risks in converting much of your bond portfolio to cash [or short term bonds]. First is "reinvestment risk." This is the risk that when your short-term securities, like bank C.D.'s, come due, you will have to reinvest the money at even lower rates. And if long-term bond yields start to fall, the value of older securities held in fixed-income portfolios is likely to rise. So there is also the risk that you will miss opportunities in longer-term bond funds. Because of that risk, Stephen B. Ward, chief investment officer for the Schwab Funds, says that while cash yields "can be a little seductive, if you have an asset allocation plan that calls for a certain amount in bonds, you should probably still stick to it." This doesn't mean that you shouldn't park some new money in cash. But make sure you don't stray too far from your overall asset allocation. Bond investors need to understand all types of risks associated with an inverted curve. In the early 1980's, a time of high inflation, cash accounts were paying around 18% while long-term Treasury bonds yielded around 15%. At the time, conventional wisdom said the choice was easy: go with the risk-free cash. The greedy wanted the 18%. But some investors who bought 30-year bonds back then are still earning 15% a year today because they were able to lock in those rates. So who made the wiser choice? Today, of course, with long-term bonds yielding less than 5%, the picture isn't as clear. But it is a reminder that in the bond market, the simple answer today isn't always the best one for the long term.
Delta (Probability of an option finishing in the money) An option’s delta is its most frequently observed characteristic. Delta is, strictly speaking, a hedge ratio, measuring the sensitivity of the option's price to very small changes in the price of the underlying instrument. But for most shorter-dated options it also approximates the likelihood that an option will finish its life "in the money" (e.g., that a call option will expire with the underlying asset at a higher price than the call’s strike). A nearly exact analogy in a basketball game is the probability that one of the teams will win. Suppose Teams A and B are about to play and the game is considered a toss up. Before the game starts, each team has an equal chance of winning. With options, 50% is a typical delta for an at-the-money option with a relatively short term to expiration, say one month. The fact that the option is at the money (i.e., the underlying asset’s price is equal to the option’s strike price) is important for preserving the basketball analogy because each team is neither ahead nor behind, just as the option is neither in nor out of the money. Suppose now that in a game, Team A is a heavy favorite. It has a delta of, say, 80%. Since the game has not yet begun, we must still say that the option is at the money. How can an at-the-money option have such a high delta? It can if there is strong reason to believe the underlying asset will exceed the strike price at expiration (we will continue to use calls in our example, although the logic can also be used for puts). What might be the rationale for such a belief? Consider a ten-year at-the-money call option on an index of non-dividend-paying stocks. The opportunity cost of keeping money in stocks for this long a period is quite high: funds invested in low-risk securities could easily double because of compounding interest. Thus it doesn’t seem reasonable to expect the stock index to have a lower nominal value at the end of the period than at the beginning. Just as Team A is heavily favored to beat Team B, a ten-year at-the-money call option is heavily favored to finish in-the-money. Consequently, the delta, or the approximate probability of the option being in the money, will be much greater than neutral (50%). Note that this logic clearly does not apply to short-term options, since their value is dictated by price moves over a handful of days, and the randomness of these moves will dominate the relatively minor amount of forgone interest income over such a short period of time. Gamma (Rate of change of the probability of an option expiring in the money) Suppose now that the basketball game between two equally matched teams is under way and one of the teams has taken a lead. It makes sense that the team in front now has a higher probability of winning than it did at the beginning of the game, and that the greater the team’s lead, the more the odds have swung in its favor. Moving back to options, this is equivalent to a stock going up and raising the delta of what was originally an at-the-money call. But how much should the delta go up? In option language, this is measured by gamma, which is much higher as the option nears expiration than at the beginning of its life. But if this is Greek to you, go back to basketball! Let’s look again at a basketball game where the teams are considered to have even odds. The game starts and Team A wins the jump ball and scores on a quick layup. It leads 2-0. Realistically, Team A has only a marginally higher chance of winning than it did before the game started. Perhaps now its delta is 51% instead of 50%. In other words, its gamma is 1%. Nothing significant has happened. But skip ahead to the last minute of the game. The score is tied 76-76 with just seconds to play. Each team’s delta should be around 50%. When Team A scores right before the end of the game, its delta goes up from 50% to 98%, a much higher rate of increase, or gamma, than when it scored the first basket of the game. Of course, if the game had been one-sided throughout, with Team A dominating, the last basket before the buzzer would not affect the delta at all. This example shows how gamma is at its highest for near-the-money options approaching expiration. A single, favorable move in the underlying stock makes it almost certain to finish in-the-money, while an unfavorable move virtually guarantees it will expire worthless. On the other hand, using the basketball analogy, buying a long-dated option gives you the luxury of scoring your way out of a bad start. You still have plenty of time to catch up, just like holders of near-the-money Google put options do, even after last Friday's huge move!
The DBC looks and acts like an ETF, but its structure more closely resembles that of a commodity pool. This is the first ETF-like product offered on a U.S. stock exchange providing direct exposure to a diverse basket of commodities. Like an ETF, the DBC's share price is updated intraday and the shares can be traded throughout the day. The fund and the underlying index it closely tracks (the Deutsche Bank Liquid Commodity Index) focuses on six key global commodities with liquid derivatives and futures contracts with the following weightings: Light sweet crude 35%, heating oil 20%, gold 10%, aluminum 12.5%, corn 11.25% and wheat 11.25%. It will be rebalanced back to these levels each November. The DBC is a new way to play oil and energy, with its 55% concentration in crude and heating oil, but I believe this fund, with its exposure to a basket of global commodities, is even more valuable as a diversifying component of an investment portfolio. The real value of this fund is how it can diversify the typical investment portfolio, which is concentrated in U.S. equities and bonds. Global commodities have one of the lowest correlations to U.S. equities or bonds - and including commodities in a typical portfolio is a smart way to reduce the portfolio's volatility and increase its risk-adjusted returns. Plus, the six commodities within the fund are lowly-correlated with each other, which should serve to reduce the volatility of the DBC itself. The energy futures are rolled monthly, the others annually. Deutsche has structured it this way to potentially capture additional gains from the predictable way the different futures contracts often behave near their expirations. It's not a sure thing, but over time this is a clever way to potentially add to the fund's returns. The DBC is also structured to earn interest income on cash invested in the fund through investment in a portfolio of high-quality bonds and other interest-bearing investments (which should more than offset the fund's modest management fee). In short, this fund offers a smart and easy way to invest in global commodities and diversify your portfolio. Related Articles: Study of Commodities Trading Debunks Stereotypes - Mark Hulbert, MarketWatch The Case for Commodities - Marshall Loeb, MarketWatch Facts and Fantasies about Commodity Futures - Gary Gorton & K. Geert Rouwenhorst
To see why that is, let's examine the new TFS Small Cap fund (TFSSX), the second offering run by TFS Capital Management. TFS is best known for hedge funds. In hedge funds, managers are used to making money only if shareholders profit, so it wasn't a big stretch for Larry Eiben and his co-managers to bring that mentality to open-ended mutual funds. With the new small-cap fund, management's goal is not just to beat the Russell 2000 index, but to top it by 2.5 percentage points. "Anyone can get an index fund for pennies, so we don't feel we deserve much compensation for just doing as well as the index," Eiben says. "If we don't add value, we shouldn't get paid." In plain English, if the fund beats the Russell by more than 2.5 percentage points, management will be entitled to a bonus that, at its maximum, would double expenses to 2.5 percent (a level achieved by topping the benchmark by 5 percentage points). If management lags the index, however, it must rebate fees to the fund. While management can get paid if the fund loses money but beats the index, it gets nothing if performance matches or is below the Russell. "From an investor's standpoint, this is the most attractively structured performance fee out there," says Sam Campbell, an analyst with Financial Research in Boston. In fact, the TFS fee structure effectively would turn mutual funds into a meritocracy, where funds survive entirely based upon their ability to deliver. Investment companies keep thousands of mediocre funds alive because, quite frankly, shareholders keep paying.
More mutual-fund investors are facing these complex questions. Stiff competition from other investment products and mounting pressures to cut costs are driving many mutual-fund companies to merge funds. Last year, 222 mutual funds were absorbed into other funds, a 66% jump from a year earlier, according to Morningstar. The trend is expected to continue as major Wall Street firms back away from the mutual-fund business. Last month, Merrill Lynch agreed to sell its investment-management business to money manager BlackRock, and analysts expect that deal to produce some fund mergers. A fund merger could be good news for you if the deal will bring lower fund fees or a more talented management team. But there can also be disadvantages. Shareholders asked to vote on a fund merger need to consider the combination's effects on their fund's fees, strategies, holdings, risks, management and tax consequences. When funds merge, "some red flags should go up immediately," says Phil Edwards, managing director of investment services at Standard & Poor's. If a merger you oppose wins shareholder approval, remember you have the option to vote with your feet. Investors should ask themselves if they would voluntarily purchase shares of the new fund, says Don Cassidy, an analyst at investment research firm Lipper. If the answer is no, Mr. Cassidy says, "move on to something you want." While mergers must be approved by the funds' boards, shareholders don't always have the opportunity to vote. Fund companies often can combine funds that are quite similar without seeking shareholder approval. And when shareholder approval is required, only investors in the fund being acquired get to vote. Investors who do have an opportunity to vote should take a close look at the combined fund's fees. At a minimum, they should be in line with the cheaper of the two merging funds, says Russ Kinnel, director of fund research at Morningstar. If the merger increases the larger fund's assets significantly - 20% or more - the resulting fees should be cheaper than at either fund, he says. But investors don't always see lower fees. In a move that will bring higher expenses, TIAA-CREF plans to merge five stock funds for individual investors into several other funds, which recently won shareholder approval for fee increases. A TIAA-CREF spokeswoman says the funds "had been priced too low," making them money losers for the firm. Investors should also examine the new fund's strategy. Fund combinations may throw off shareholders' asset allocation - because companies can merge funds that have different objectives and strategies. Columbia Management last fall merged its Newport Tiger fund, an Asian-stock fund, into its Columbia International Stock fund, a general foreign-stock fund. "We felt that the shareholders in Newport Tiger would continue to have exposure to international investing and at the same time would benefit from investing in a fund with dramatically lower expenses," a Columbia spokesman says. Mergers can also bring increased risks. John Hancock Funds is seeking shareholder approval to merge its Small Cap Growth fund into its Small Cap Equity fund, which can buy below-investment-grade "junk" bonds and do short selling. Such strategies are off limits to the Small Cap Growth fund. In a letter to shareholders, the company said investors would benefit from "a larger combined fund that may be better positioned in the market to increase asset size and achieve economies of scale." A Hancock spokeswoman says Small Cap Equity isn't currently buying junk bonds or shorting. Taxes are another key consideration. Under tax law, a merged fund may be limited in its ability to use "capital-loss carry-forwards," or accumulated investment losses, to minimize future taxable distributions to investors. The Allianz RCM Global Technology fund lost a large part of its substantial carry-forwards after it merged with the Allianz RCM Innovation fund last year. Phil Neugebauer, an Allianz Global Investors spokesman, says that many of the carry-forwards were about to expire and that the merger cut the Global Technology fund's expense ratio by 0.15 percentage point, to 1.61%, "which is clearly a benefit to shareholders."
Like plenty of other closed-end funds, Tri-Continental's market price trades well below the per-share value of its underlying assets or NAV. Tri-Continental's share price is currently around 13% below its NAV. And Western Investment, which holds almost 7% of Tri-Continental, claims that the fund's total return has vastly trailed the S&P500 index over the past decade. The success of two hedge funds last year in forcing the closed-end Salomon Brothers Fund to consider converting to an open-ended one emboldened other large, frustrated fund investors to try to force changes at closed-end funds. But the dollars involved here are larger: Even with its performance problems, Tri-Continental is a large fund by closed-end standards, with about $2.5 billion in assets. In the past, dissident shareholders have typically tried to effect change at smaller closed-end funds - those with assets of around $400 million or so, because it's too costly to go after bigger funds based on outlays such as mailing materials to other shareholders. ce to force the fund to restructure or let investors cash out. His firm also is pushing for Tri-Continental to repurchase some of its shares, a move that would narrow the NAV discount. Other Tri-Continental investors are backing Western Investment's push. "I think the board's lack of regard to the discount in conjunction with poor NAV performance . . . could warrant an open-ending," said Cody Bartlett, an investment strategist at Karpus Investment Management, a large shareholder supporting Western's slate of directors. Tri-Continental countered that the plan proposed by Western Investment wouldn't benefit shareholders. "Any short-term gain that could be realized through open-ending or similar proposals would be offset by the significant expenses that implementing such proposals could entail," spokesman Hank Green said in a statement. Tri-Continental also said that its NAV recently reached its highest level in more than four years and that the fund has more closely hewed to the performance of the S&P 500 since manager Jack Cunningham took over the portfolio almost 18 months ago. "We have a great deal of confidence in [Mr. Cunningham's] ability to manage the assets of the corporation over the long-term period," Tri-Continental's spokesman Mr. Green said. Thomas Herzfeld, who runs a Miami investment-advisory firm specializing in closed-end funds, said individual investors in Tri-Continental should look out for their own interests. "There is nothing to prevent the dissidents from making a settlement with management for only their own shares," he said.
"Someone had to be the first to offer dollar-cost averaging for free," says John Jacobs, chief executive of Nasdaq Global Funds. "Since no one else wanted to be first, it was us. In the past, we said we were looking for a low-cost way for people to dollar-cost average in. But this is not low cost, it's no cost." QQQDirect offers retail investors the chance to buy fractional shares of the popular Nasdaq 100 Index Tracking Stock with a minimum purchase of $10 a month. This tracking stock follows the Nasdaq 100 Index, which comprises the 100 largest nonfinancial stocks on the Nasdaq Stock Market. Basically, QQQDirect is like a direct-stock-purchase plan. Only there's no account setup fee, no monthly fee, no commission fee, no inactivity fee and no charge to the Qubes' existing investors. Also, there's no minimum balance. However, investors are allowed only one free trade a month and there is a charge to sell, $12.99 per trade. Another downside is MyStockFund invests the money only once a week, each Thursday. Additional purchases cost either $3.99 per trade, or less if an investor purchases an investing plan. Other firms offer inexpensive ways to buy fractional share in ETFs, but they aren't free. For $20 a month, Sharebuilder lets you make up to 20 trades a month, potentially bringing the fee down to $1 per transaction. And if you make the 100 trades that FolioFn allows for $19.95 a month, that commission would be just 20 cents. Like QQQDirect, both of these plans have limits on when the shares are purchased, but they offer access to every ETF on the market. For market or limit orders, they each charge about $4 a trade.
At least one big ETF seller, Barclays Global Investors' iShares, calculates the P/E on its funds in a way that makes some of the biggest, most established companies look as risky as small, upstart firms: S&P 500 Index Fund and iShares Russell 2000 Index Fund sport P/E ratios of 16.4 and 19.1, respectively, according to the iShares Web site. That indicates roughly comparable levels of risk. Yet the companies in those two ETFs are different beasts: The Standard & Poor's 500-stock index represents a majority of the largest companies by stock-market value, whereas the Russell 2000 index includes many much-smaller companies, several hundred of which had no profits last year. While there are several ways to calculate a P/E ratio, a common technique would take a weighted sum of the market value of all the stocks in the index and divide that figure by the companies' total earnings. Using that method, the Russell 2000 Index has a P/E ratio of 41, almost twice that of the iShares ETF, which tracks this index. The Russell 2000 fund has garnered nearly $7.5 billion from investors, making it one of the industry's fast-growing products. Why the big difference between those calculations and the iShares-assigned P/E? Because the iShares ETF excludes all loss-making companies when calculating the measure. A number of other data providers also exclude unprofitable companies when figuring P/E ratios. And like most big ETF providers, the P/E ratios of iShares' ETFs are calculated by an outside provider. Karl Cheng, an iShares portfolio manager, says investors don't normally look at negative P/E ratios for companies, so they don't include it in their calculations. He says the P/E ratio is just one data point in the "overall picture that the investor needs to look at" when deciding which ETF best fits a portfolio. Investors should consider other measures, he says, such as the price-to-book-value ratio. These other measures also are available on the iShares Web site. But the different methods that different ETF sellers use to calculate P/E ratios make it hard for investors to comparison shop. Kelly Haughton, strategic director of Russell Indexes, a unit of the Russell Investment Group, adds that "reasonable people can disagree," but he thinks investors should at least have access to a P/E measure that includes all companies' earnings, not just those that had profits. Yet even the inclusion of unprofitable companies doesn't guarantee that ETF providers will come up with the same P/E for their funds as might be calculated on the underlying index. For instance, Vanguard Group includes money-losing companies in its calculations. The fund firm says its Small-Cap Growth Vipers ETF has a P/E ratio of nearly 30. But the index that the ETF tracks - the Morgan Stanley Capital International Inc.'s US Small Cap Growth Index - has a P/E of nearly 47, as calculated by the index-provider MSCI Barra. Vanguard uses what mathematicians call the "harmonic mean" in calculating an average earnings figure for its funds' P/E ratios. He adds that there are various ways to calculate a P/E, and investors shouldn't be using one number to compare funds. "Buyers need to understand the statistics they are looking at," he says. State Street Global Advisors, a unit of Boston's State Street, also uses a weighted harmonic-mean method to calculate its ETFs' P/E ratios. But State Street excludes unprofitable companies.
The recent weakness of small stocks has whittled -- but not eliminated -- their performance advantage over large stocks so far in 2006. The Russell 2000, which at its March 1 peak was up 10.3% from year end, is now up 7.9% so far in 2006. The Dow Jones industrials are up 3.3%. But since the Russell 2000 small-stock index hit a new high on March 1, that benchmark has slid 2.2% while the large-stock Dow has risen a slight 0.2%. Last year was the third in a row, and the fifth time in the past six years, that the Russell 2000 outperformed the Dow Jones industrials. With every year that passes, the debate gets hotter between those who expect the trend to continue and those who think this is finally the year it will end. Bond yields have risen over the past 10 days amid worries that the Fed has a way to go in its campaign to boost short-term interest rates. Small companies are widely viewed as being more vulnerable than large firms to rising rates. As costs for loans go up, small companies often have fewer resources to carry the higher debt burden. That can hamper growth and earnings because there is less money to put into expansion. Higher rates also can slow the overall economy, and many smaller companies have less of a financial cushion to weather a downturn. James Furey, head of small-stock strategy at Lehman Brothers, is among those voicing caution on small stocks. He currently has a "neutral" stance on the group. His year-end price target for the Russell 2000 is 750; the small-stock benchmark closed Friday at about 726. "We don't think we'll be down, but we don't feel we'll make much money" in small stocks, he says. His biggest concern for small stocks is the risk that "energy and commodity inflation permeate the economy." Furey also feels the Fed's new chairman, Ben Bernanke, could single-handedly bring an end to the stellar run of small stocks by raising interest rates too far. Investors will be less willing to pay up for small companies if their earnings decline. Michael Cuggino, manager at Permanent Portfolio Funds, concurs that small stocks could suffer if "there is risk of the economy slowing down or there is a sharp upward move in interest rates." Investors tend to favor large stocks in times of economic uncertainty, he notes. But Cuggino is mostly bullish on the economy - and therefore on small stocks. "I'm one of those who believe that the economy has got some sustaining underpinnings," he says. He thinks a strong economy will translate into increased spending by big companies that are flush with cash. That could lead to stronger sales at small companies that sell their wares to larger ones or mean that small stocks will become takeover targets for big companies looking to juice up their own earnings. Either would be good news for small companies. Satya Pradhuman, chief small-stock strategist at Merrill Lynch, is predicting "further outperformance" by small stocks. One reason is easy access to funds that will allow small companies to expand and grow profits. Sources of cash include bank loans, follow-up stock offerings and venture-capital funding. Eric Barden, co-portfolio manager of Texas Capital Value and Growth Fund, concurs: "The key for small caps is how aggressive commercial and industrial lenders are in making funds available to these companies." He believes an appetite for risk among banks that lend to small businesses will ensure that these companies have the money to keep growing. Just as banks have been seeking out small companies to lend to, investors have been continuing to pump money into small-stock portfolios. Last year, investors pulled $79 billion out of U.S. large-stock mutual funds, while putting $26.1 billion into small-stock funds, according to Merrill Lynch. In fact, many small-stock funds have closed to new investors, because they can't find enough places to put all that money. Just last week, Masters' Select Smaller Companies Fund closed to new investors. William Blair Small Cap Growth Fund will close May 1.
Even if investors were correct in blaming the Reagan administration's monetary policies for the crash — it is dangerous to draw any generalizations from a sample size of just one. And from a purely statistical point of view, there has been a very weak historical correlation between fluctuations in the dollar and the stock market's ups and downs. Recent research explains, at least in part, why this correlation is so weak. It was conducted by Mahesh Pritamani, a senior research analyst at the Frank Russell Company, and two finance professors at the Pamplin College of Business at Virginia Tech: Dilip K. Shome and Vijay Singal. They presented their findings in an article in the summer 2005 issue of the Journal of Applied Corporate Finance. According to the researchers, the domestic stock market has become increasingly dominated over the years by multinational companies whose costs of operations, as well as sales, are denominated in many currencies in addition to the dollar. That means these multinational companies are largely immune to the effects of currency fluctuations, the researchers say. When one part of such a company's operations is hurt by a change in the value of the dollar, other parts benefit, leaving relatively little net effect on the bottom line. If the dollar fell in value against other major currencies, the domestic sales of multinational companies based in the United States would probably suffer. That is because a declining currency is often associated with a weakening domestic economy. But these companies would make up for at least part of that domestic weakness by reaping higher sales overseas, because their goods and services would now be cheaper when priced in foreign currencies. The greater immunity of multinationals to currency fluctuations helps to explain several curious features of the historical record. It turns out that the correlation between the dollar and the stock market has been declining over the years. Professor Singal says he believes that a big reason for this trend is the increase in international diversification among the largest companies. In the 1970's, he said, fewer American companies enjoyed the immunity that international diversification confers. As a result, they were more vulnerable to dollar declines like the one that occurred in that decade. He suspects that the largest multinationals would be much less affected if a similar decline occurred today. The increasing diversification of big companies also explains why small-capitalization stock indexes are more correlated with fluctuations in the dollar's value than are large-cap indexes. A greater proportion of smaller companies' operations and sales are conducted within the United States, according to the researchers. And because a falling dollar is associated with a weakening domestic economy, it makes sense that those small caps are more vulnerable to a decline in the dollar. Nevertheless, the researchers emphasize that the major stock market benchmarks will be relatively unaffected by what happens to these smaller companies. That is because those benchmarks give the greatest weight to the largest companies — the ones that tend to be most diversified internationally and therefore most immune to currency fluctuations. The 50 largest publicly traded companies in the United States, all with significant international diversification, account for 41% of the combined market value of the entire domestic stock market, according to the Frank Russell Company. Professor Singal acknowledges that the largest multinationals may not be completely immune to a dollar decline. If a sharp slowdown in economic growth in the United States sets off a global recession, for example, those multinationals may not be able to make up in foreign sales what they lose domestically. But even then, it would not be clear to what extent the declining dollar caused the slowdown in the United States or instead was a result of it. What, then, is the bottom line for investors? Those who try to anticipate the stock market's gyrations won't gain much insight by analyzing the dollar. And even if they know when and by how much the dollar will fall, it is unlikely that they will be significantly better at timing the stock market.
Many of the biggest companies bulked up during a wave of mergers at the end of the last decade. Mr. McVey said they had disappointed investors since then because their real returns on equity weren't as high as chief executives predicted when they announced those mergers. Although Mr. McVey agrees with many other market strategists that megacaps are relatively cheap compared with the broader stock market, he said he didn't think that lower price-to-earnings ratios alone would spark their revival. "The catalysts will be simpler business models and better use of capital," he said. Stuart Schweitzer, global markets strategist at JPMorgan Asset and Wealth Management, said there were many explanations for megacaps having underperformed the market for six years. Initially, he said, megacaps were simply too expensive. By the end of 1999, the 50 largest stocks in the S&P500 had outperformed the index by 4.6% a year, on average, during the prior six years. But in the six years since the turn of this decade, the 50 largest stocks have underperformed the index by exactly the same amount, 4.6% a year on average. "In 2000, megacaps were overvalued because expectations were too high," Mr. Schweitzer said. But when stocks started rebounding in 2003, he said investors began pouring money into small caps, which usually do better coming out of a recession. Now, he said, smaller stocks are overpriced. "It's the mirror image of 1999," when megacaps were too expensive and small caps were cheap, he said. Mr. Schweitzer said he thought that megacaps would shine again "when it's cloudy out." If the market hits a rough patch, megacaps would probably fare better than small caps. Megacaps might also benefit if the dollar declined, he said, because they earn much more of their profits overseas than most other United States companies. For instance, the 50 largest companies in the S&P500 earn about 40% of their revenue outside the United States. The rest of the companies in that index earn on average less than a quarter of their profit abroad. Michael Metz, chief investment strategist for Oppenheimer, said this was the cheapest he has seen megacap stocks relative to small and midcap stocks. "That's because the market's been dominated by entrepreneurial investors, rather than typical mutual fund investors," he said. But, he added, it takes a lot of money to lift megacap stocks. He believes they will begin to turn the corner this year, but it may take a few years for them to catch up to smaller stocks in terms of price-to-earnings valuations.
It may seem elementary to say, "Look for good long-term investments," but the elementary often is what investors forget at times when markets are caught up with very short-term concerns — such as, will the Federal Reserve stop raising its benchmark interest rate at 5% or at 5.25%? Where would you bet today if you were looking for substantial returns not in a week or a month, but by, say, 2010? What follows are three investment themes that may have places in a diversified portfolio. They aren't right for everyone, obviously, but the ideas may at least help focus you on industry and economic trends that have the potential to generate hefty gains in the long run: Robert Hagstrom, manager of the Legg Mason Growth Trust stock mutual fund, believes that the greatest growth story of this decade is so obvious, many investors may be looking past it. He's talking about the Internet sector. Google had its own mania last year, but the stock has fallen 22% from its record high in January, to $365.80 on Friday. Year to date, Amazon is down 25% and EBay is down 14%. And this, in an otherwise rising stock market. Hagstrom owns all three of those Net giants in his fund, as well as Yahoo, Expedia and IAC/InterActive Corp. He is amazed that other investors don't see what he sees, looking out the next few years. "I can't think of anything that adds more upside than the Internet," Hagstrom says. "To me, that's the slam-dunk growth idea." His optimism is rooted in the assumption that the use of the Internet for entertainment, information and commerce still is in a relatively early phase. The difference between now and the peak of the Net stock craze in 2000, Hagstrom reminds, is that the field of major players has narrowed significantly. And those remaining players, he says, are profitable, dominant franchises. What's more, he believes that the potential for smaller rivals to displace the Net giants in their niches is limited, because of the brand recognition the leaders enjoy and the resources they can bring to bear in innovation. "In this business, the barriers to entry are very low, but the barriers to success are very high," Hagstrom asserts. As for the prices of Net stocks relative to current earnings, Hagstrom says long-term investors shouldn't be afraid to pay up for true growth stocks. EBay is priced at 36 times 2006 estimated earnings per share; Google is priced at 41 times. All great growth stocks, Hagstrom says, "are disparaged as being overpriced," except in retrospect. Investors who can't stand paying high price-to-earnings multiples might appreciate Doug Sandler's idea of a compelling growth stock sector: investment banking and brokerage. Like the Internet giants, the top investment banking firms essentially are middlemen. They make money by finding something their clients want — investments, merger partners, more capital, etc. Sandler, chief equity strategist at Wachovia Securities, sees bankers such as Goldman Sachs Group as being in a great position to capitalize on the ongoing business globalization wave. Corporate mergers often don't work out as either the acquirer or the target hoped, Sandler notes. But the one constant, he says, is that the investment bankers always get paid. And unlike industries that face high costs to develop new products to boost sales, "bankers don't have to spend $4 billion a year on R&D," Sandler says. That may be true, but firms like Goldman, Bear Stearns Cos. and Lehman Bros. also are at the mercy of financial markets' swings. If stock trading dives, for example, so will their revenue, and probably their share prices. That volatility risk is why investors typically pay so little for the stocks, relatively speaking, compared with earnings per share. The bankers' price-to-earnings ratios generally are between 10 and 12 based on estimated 2006 earnings. If you believe that the globalization of markets and investing is permanent, there's another interesting way to play it: the bonds of emerging-market countries such as Brazil, Mexico and Russia. As the fortunes of many emerging-market nations have improved in this decade, their stocks have been hot investments, and so too their bonds. The result is that these countries, which a few years ago paid double-digit annualized yields to borrow, now pay far less, although still more than what's available on U.S. bonds. Brazil this month sold 31-year dollar-denominated bonds at an annualized yield of 6.8%, or about 2.1 percentage points more than what the U.S. Treasury pays to borrow via 30-year bonds. One camp on Wall Street sees emerging-market bonds as too risky now — not enough yield to compensate for what might go wrong politically or economically in those countries. Art Steinmetz, manager of the Oppenheimer Strategic Income bond fund, takes a different view. He says emerging-market bond yields may still be in a long-term decline as those economies expand and as their finances strengthen. "It strikes me as similar to the U.S. situation in the early 1980s," Steinmetz says of many emerging markets. U.S. inflation was tumbling in the early '80s and the economy was improving, but investors still demanded double-digit yields on long-term Treasury bonds for most of the first half of that decade. They didn't believe things had taken a sustainable turn for the better. It was, in hindsight, a great time to be buying bonds. As yields on new bonds fall, older fixed-rate securities appreciate in value. In the late 1990s, there was a reasonable argument that emerging-market bonds, and foreign bonds in general, were too exotic for small investors. But if you believe that the global economy is in the midst of a long-term wealth shift to the benefit of emerging-market countries, their bonds make as much sense as their stocks as elements in a diversified portfolio.
"The last three years has been a bull market that stands up against any one in history," says Craig Callahan, president of Icon Advisors in Denver. "Unlike the last bull market, where you had high growth and low earnings, you have real earnings and profits for companies," Callahan continues. "Even in sectors that have soared -- like energy stocks -- earnings have grown so much that prices are still below their real value." Bull markets typically don't end until things are extremely overvalued, so, while it is easy to find experts to counter Callahan and urge caution, no one is suggesting that the burgeoning enthusiasm that typically grips the market as it nears new highs is completely misplaced. The problem for investors, however, is less what is happening in the market than what is going through their own minds. That three-year recovery hasn't felt too great precisely because it is a rebound. While the fast-growth '90s were euphoric, the current bounce-back is sedate. Investors have experienced it more as clawing back, or a recapturing of lost ground, especially for the many who were invested heavily in the tech-laden Nasdaq. "The danger lies in people not realizing that the stock market has come back because they don't feel like their own portfolio has come back," says Dr. Richard Geist, president of the Institute of Psychology and Investing in Newton, Mass. "Unlike the late 1990s, this doesn't feel like progress, so they're waiting and waiting and waiting to put money back to work, and the real danger is that they wait for some sign -- like the talking heads on "Good Morning America" on Monday discussing how the stock market was nearing its high and whether it was time to invest -- and they wind up getting in late." Geist believes the market is due for a pullback, he says, and expects to see investors warming up to the idea of plowing money in just before that break in the action.
Hewitt forecasts that the average Gen Y worker at a large corporation who doesn't contribute can expect to replace just 43% of preretirement income upon retirement, based on current Social Security assumptions. Young workers who do take advantage of 401(k)'s stand a good chance of replacing all of their preretirement income, thanks in large part to the power of compound returns over several decades. Most young workers investing in 401(k)'s haven't a clue how to allocate their funds. The average Gen Y worker puts about 35% of his dollars into fixed-income options like bonds and stable-value funds. This means the youngest workers are investing even more conservatively than their parents, who on average keep only 31.4% of their 401(k) money in bonds, according to Hewitt. Why are young workers so conservative? Part of it may have to do with timing. When the markets went down in 2000 and 2001, that's when these kids were in college. So their first impression of the stock market was that it could lose lots of money. Lori Lucas, Hewitt's director of retirement research, said other factors were also at work. Some young workers who sign up for 401(k)'s but fail to select investment options may be placed by their plans into the safest choices, like a money market fund. Many of these workers simply haven't gotten around to shifting money out of the default options.
1. When a 6.73% yield isn't a steal. If you buy Series I savings bonds in the current offering period, which runs through the end of April, you will initially get interest at an annualized rate of 6.73%. Are these bonds really such a good deal? Over the first six months, you will indeed get a return equal to roughly half that 6.73%. But thereafter, your bonds will grow at just one percentage point a year faster than the inflation rate. That's hardly a great rate of return. You could collect six months of interest and then head for the exit. Unfortunately, you have to wait a year before selling your savings bonds -- and, if you sell in the first five years, you lose your last three months of interest. My advice: If you want an inflation-protected investment, consider purchasing inflation-indexed Treasury bonds inside an IRA. That way, you will get tax deferral, just like you would with savings bonds, but you should earn a higher return. Today, inflation-indexed Treasurys yield some two percentage points above inflation. 2. Why ETFs aren't always cheaper. Many index-fund aficionados tout the virtues of ETFs, which often have lower annual expenses than comparable index mutual funds. But when you buy and sell ETFs, you have to pay brokerage commissions and other trading costs. That isn't the case with index mutual funds, which you can purchase directly from the fund company involved. My rule of thumb: If you plan to stash $10,000 or more in a fund and let the money ride for at least five years, consider an ETF. But if you will regularly add to the account, ETF trading costs will wreak havoc on your returns, so you're much better off with index mutual funds. 3. Don't make Uncle Sam your retirement guru. If you have retirement accounts, you typically have to start taking required minimum distributions by April 1 of the year after you turn age 70.5. For instance, at age 79, Uncle Sam requires you to withdraw 5.1% of your retirement-account balance. Many retirees are under the impression that the government is ordering them to spend precisely this sum. But Uncle Sam is saying no such thing. You are free to withdraw more, or you can make the minimum withdrawal and then reinvest the money in a regular taxable account. 4. Not all annuities are evil. Annuities have a terrible reputation due to most them having exorbitant costs. But not all annuities are a terrible deal. In fact, as cash-strapped baby boomers quit the work force, they may find that immediate-fixed annuities that pay lifetime income could salvage their retirement dreams. With these annuities, you hand over a wad of money to an insurance company in return for a check every month for life. If you need more retirement income, sticking 25% or 50% of your nest egg in a lifetime-income annuity could be a smart move. 5. Your mortgage company isn't ripping you off. Many readers insist these extra principal payments on a mortgage are a rotten deal, because they don't reduce their monthly payments. True, if you have a fixed-rate mortgage, paying extra principal may not trim the size of your required monthly payment. But it's still a winning strategy. Suppose you took out a 30-year $200,000 loan at 6%, giving you a $1,200 monthly payment. A year later, you make a one-time $2,600 extra principal payment. Thanks to that single payment, you would pay off your 30-year loan in 29 years and avoid $11,750 in interest. 6. Why one brokerage firm may be enough. Many investors think they should also diversify across brokerage firms, investment advisers and mutual-fund families. Yet, oftentimes, all this achieves is greater financial chaos, without doing anything to improve their portfolios' risk-adjusted return.
Keeping your cool. If you think stock jockeys are obsessed with finding the next hot thing, just listen to the basketball commentators. You will probably hear the television announcers declare that one or two of the players have the "hot hand" because they have scored on, say, their last three shots. The implication: Their teammates should feed them the ball, because there's a good chance they will keep knocking down the jump shots. Academics, however, would beg to disagree. A study that appeared in Cognitive Psychology in 1985 looked at the shooting record of the Philadelphia 76ers during the 1980-81 season, a squad that included the great Julius Erving. The study found that, contrary to popular belief, the probability that the players would score on their next shot was, on average, slightly lower following a successful shot. But what about those unusual hot streaks? Statistically, hitting three or four shots in a row -- or beating the market in consecutive years -- just isn't that unusual. Indeed, if you and a bunch of friends each flipped a coin 20 times, half of you would likely get four heads in a row. "Fund managers can look like they're hot or like they're a market beater," says Thomas Gilovich, co-author of the "hot hand" study and a psychology professor at Cornell University. "But you swap out of your underperforming fund and into the hot fund at your peril. Given that the market is pretty efficient, past performance just isn't a good guide." Why do people reach grand conclusions based on skimpy data? Part of the blame lies with so-called confirmation bias. If you are convinced you're a great stock picker or that basketball players can "get hot," you will likely find the necessary proof. "The brain looks for patterns," says Meir Statman, a finance professor at Santa Clara University in California. "And once you decide there is a pattern, you will look for confirming evidence and you will dismiss contradictory evidence as a fluke." Expecting less. While it's hard to say definitively that some fund managers are superior to others, some basketball teams clearly are more skillful. Yet fans of weaker teams are forever hopeful. How often does a college basketball team that's trailing at halftime come back to win? Allan Roth, a financial planner with Wealth Logic often puts this question to audiences. He says people typically guess that between 30% and 60% of teams make a comeback. In fact, Mr. Roth looked at over 3,300 college games played in November, December and January and found that, among teams trailing at the half, less than 20% came back to win. Why do folks think the number is so much higher? Mr. Roth figures there are two reasons. First, we tend to be overly optimistic. "It's America," Mr. Roth says. "We believe in the underdog - and we believe in the small investor." Even though studies suggest that most investors lag far behind the market, we like to think we can beat the odds and come out on top - which helps explain why market-tracking index funds still aren't that popular. Second, comeback victories tend to get the most media attention, so they stick in our minds. "It's the same thing with hot mutual funds and hot money managers," Mr. Roth says. "Because investors only hear about the winners, they think it's easy to beat the market." A Different View of Playing the Odds. Investors hate the idea of losing. So, too, do basketball coaches - and it can lead both groups to be a little irrational. Suppose a team is down by two points and it has time for one last shot. Let's say there's a 50% chance of scoring on a two-point shot and pushing the game into overtime, but only a 33% chance of making a three-point shot and getting the immediate win. What play should the coach call? Nonetheless, the three-point shot is the rational choice. The reason: If the team makes the two-point shot, it still has to play overtime, where its chances of winning are 50%. In other words, by opting for the two-point shot, the team is looking at having to win on two 50% gambles, which means its overall odds of winning are just 25%. Yet coaches usually go for the two, notes Richard Thaler, an economics professor at the University of Chicago. Chalk it up to our aversion to regret. If the coach goes for the three and misses, not only will the team suffer an immediate stinging loss, but also critics will vilify the coach as "greedy" and "reckless." Similarly, investors are often too worried about looking foolish in the short term. Stocks, like the three-point shot at the buzzer, may be the best bet. But many investors shy away from stocks, because they worry about stinging short-term losses and the pangs of regret that accompany them. "If you believe there's a premium to owning stocks, you're crazy not to own them if you're a long-term investor," Prof. Thaler argues. "You shouldn't be so bothered by day-to-day or month-to-month volatility."
That's exactly what was not supposed to happen. In 2003, all the big Wall Street firms agreed to reform a conflict-ridden system in which their analysts pumped the stocks of investment-banking clients. The changes separated the banking business from research and earmarked funds for independent-research firms that cater to retail clients. Not unexpectedly, individual investors aren't snapping up the free stuff -- who has time for that? More surprisingly, major institutions have proven unwilling to pony up the big bucks necessary for the really good reports from researchers who aim at a more sophisticated audience. These research outfits also find themselves vulnerable to harassment and intimidation for publishing negative reports, with companies attacking them and their hedge-fund clients. The serially litigious drug maker Biovail and the money-losing Internet retailer Overstock.com have both sued independent firm Gradient Analytics and a collection of hedge funds, claiming they coordinated unfair assaults, charges that the defendants deny. Faced with all of this, some independents are getting out, and others are seeing their business decline. Mr. Roberts says business is down about a quarter since an initial burst of interest from established institutional investors after the series of scandals that rocked corporations several years ago. Off Wall Street, the granddaddy of the indies, has been left with more or less its prescandal number of clients. The vast majority are hedge funds that pay tens of thousands of dollars each for an annual subscription. The big institutional investors "were very, very interested in a contrary view, and that appears to have disappeared," Mr. Roberts says. "My bet is, the next market collapse, probably they are coming back."
I was a hit and miss investor before, with some successes and some huge flops. But I was almost always in a state of frenzy. Fear and self-loathing about the stock market and my investments took all of the pleasure and much of the profit out of my investing. Many a night and day, I sat looking at my statements and beating myself to a pulp over my mistakes. Since I joined the program, this has slowly changed. Now, investing still involves many mistakes and some considerable fear and uncertainty. But it's trivial compared with what I used to suffer. Mostly, I quietly, methodically, and slowly make money. I respectfully believe that many of the principles I learned in my program are of value to investors generally, and so, I hereby offer some tidbits from my own personal outfit, Investors Anonymous. I Am Powerless Over the Stock Market, and If I Believe I Do Have Power, My Life Is Unmanageable. The stock market is an immense entity made up of trillions of dollars and billions of people. I float on the market like a cork on the ocean. I don't control it, I merely navigate it as best I can to get to my port without drowning. Nothing That Happens in the Stock Market Is Personal. How a stock performs after I buy it has little to do with me. Immense forces work constantly on its price. I can, at best occasionally, get on the right side of those moves and then, over long periods, make some money. If the market is crashing or rising, no one on Wall Street is doing it to me. Feelings Come and Go - They Are Not Facts. From time to time, I can feel as if I am about to become fabulously rich - or that I am about to go broke - but these emotions will go away. This is just how life is in the market. You Win Just by Staying in the Game. We have a saying in the program: Time takes time. That is, to go a certain while sober or abstinent about food takes as long as it takes. It cannot be done overnight. Just so, unless you are trading on inside information or having a lucky streak, you will need a long time to get rich in the market. But if you stay in the market, getting average or slightly-better-than-average returns year after year and avoiding horrendous losses, you will eventually make some major bucks. You can't hurry the stock market. The market just flows, like the mighty Mississippi. Flow with it, and you will reach the ocean of comfort sooner or later. Stay Away from "Slippery" Places. When alcoholics have a "slip" by taking a drink, that's probably because they went to a bar. It's best for addicts to stay away from places where slips can occur -- that is, "slippery" places. And when investors lose big, it's usually because they are in markets subject to extreme volatility: Commodities, short sales, penny stocks, or high-tech stocks no one has ever heard of. If the investor stays in safe places like big broad index funds and large managed funds invested across a broad spectrum of the market, there can and will be occasional losses. But the catastrophic losses that change a life come from investing in slippery places. Life Lived by Fear Goes Nowhere. We have another saying in the program: The spelling of fear is "False Events Appearing Real". Similarly, in the investing world, there are always reasons to be afraid: Oil shocks, inflation, China, corporate fraud. But these should not keep the people from investing at all. The long-term picture for stocks has always been good. If you let fear keep you out of the market, you are hurting mostly yourself. Do Not Compare Your Insides With Other People's Outsides. Do not be driven insane by people telling you how much money they've made and how their picks always work out. It is never true. Just invest methodically in broad indexes, variable annuities, and sensible ETFs, and don't be driven to rash actions by the siren song of other people's gains. Stick to your prudent, day-by-day investing, and you'll stay safe. The main point is that a serene heart makes for a successful investor, and that taking it easy means raking it in.
In a typical March, first days have been weaker for big cap stocks, up about half the time. Nasdaq stocks and small cap Russell 2000 stocks are much stronger in the beginning of March. By the sixth or seventh trading day things cool off until mid-month as the first Triple Witching of the year and 401k cash inflows tend to push stocks higher. March Triple-Witching weeks have been quite bullish in recent years. But the week after is the exact opposite. The S&P 500 has been down sixteen of the last nineteen years -- and frequently down sharply for an average drop of 1%. Of the three years, this week after Triple Witching was up, 1995 and 1996 were situated smack in the middle of the 1990s super bull and 2000 was the top. After the Ides has past, market gains become scarce until the third to last day of the month. Like the beginning of the month, small stocks and techs perform best the last day with the Russell 2000 up 82% of the time while the Dow Jones Industrials are down much of the time. This is reminiscent of the end of the second quarter when big caps lose ground and small stocks shine.
The public disclosures have sometimes come after prompting. Hospitals voluntarily turn over data to Medicare's Hospital Compare Web site, but the federal agency rewards them with a four-tenths of 1% increase in their Medicare revenue. That may not seem like much, but it can add up to hundreds of thousands of dollars a year for some hospital systems. Insurance companies and employers are also demanding performance data. As costs climb, businesses want to know what they're getting for their money, Fazen said Marianne Fazen, director of the Dallas-Fort Worth Business Group on Health. The trend toward health savings accounts and consumer-driven health care will only increase the pressure on hospitals to report, said Adonica Benesh, director of hospital quality improvement at the TMF Health Quality Institute in Austin. "Individual consumers will be deciding where to go for surgery, and they'll be looking at hospital infection rates," she said. Experts say the new openness springs from the hospital industry's broader effort to reassure the public after the Institute of Medicine reported that medical errors may cause up to 98,000 deaths a year. The 1999 study landed like a bombshell in the laps of health care authorities. "When the institute made that estimate, many hospital officials didn't believe things could be so bad," said Dr. Michael Deegan, executive vice president and chief clinical and quality officer for Texas Health Resources. "Then they got past their denial and started dealing with the problem." Hospital quality executives say it's too soon to see many results from measuring and publicizing the quality of their care, but they're optimistic the effort will pay off. Dr. Deegan cites a 25% reduction in deaths from heart failure throughout his hospital system over three years. "I'm confident we'll see other significant progress in the next few years," he said. The most avid readers of the new hospital report cards may be the hospitals themselves, since they're now able to compare themselves with their peers and discover where to improve. Hospital officials say that making simple changes in key hospital practices and procedures can sometimes produce significant improvements in patients' health and safety. More than 3,000 hospitals – including 144 in Texas – have joined the Institute for Healthcare Improvement's campaign to prevent 100,000 deaths by adopting six changes in patient care. One is to deploy a "rapid response team" consisting of a critical care nurse and a respiratory therapist at the first sign of a hospital patient's decline, such as a drop in blood pressure. As soon as the duty nurse notices a patient slipping, the team steps in, assesses the problem and stabilizes the patient before things get too far out of hand. "We've told nurses to call us even on a gut instinct that something's wrong," said Amanda Wyatt, a rapid response team member at Methodist Dallas Medical Center. Since the hospital created the teams last summer, it's had 44% fewer "code blues," where patients have to be revived because of cardiac or respiratory arrest, said Virginia Davis, Methodist Health System's vice president of quality services. Texas Health Resources launched a Web-based tool last year that allows employees to report anything they see that may compromise a patient's care, such as giving the wrong medication. "Our managers look at the data, determine the severity of the problem and decide what our response should be," said Dr. Jennifer Daley, senior vice president of clinical quality and chief medical officer at Tenet. The national organization that accredits hospitals has also redesigned itself to encourage hospital employees to think about quality care every day. Before January, the Joint Commission on Accreditation of Healthcare Organizations evaluated hospitals on prearranged visits. Hospital executives had weeks to make their buildings and staffs look spick-and-span. The group's inspectors now appear on hospital doorsteps unannounced. "We're forcing hospital staffs to be ready 24/7/365," said commission president Dr. Dennis O'Leary. Quality improvement is still in its infancy. Hospital executives say the current performance measures provide only a snapshot of inpatient care and should include other illnesses. Medicare officials say the medical conditions they track on their Web site represent fewer than 20% of hospital admissions and will be expanded soon. The Dallas-Fort Worth Hospital Council also plans to start collecting data on hospitals' outpatient services this year. Physician ratings will also become more common. "As valuable as hospital ratings are, doctors often are the ones who determine where someone receives care," said Dr. Paul Solomon, market medical director for United Healthcare in North Texas and Oklahoma. United Healthcare reviews claims data and provides its customers with information on its Web site about the quality and efficiency of 3,500 area physicians. "The last frontier for reformers will be to open the black box of price and compare hospitals' rates," said Ms. Fazen of the Dallas-Fort Worth Business Group on Health. "That's when people will have all the information they need to shop for health care." Experts expect hospital quality measures to lead to many pay-for-performance systems where insurers use financial incentives to reward institutions that improve patient care. Medicare is already in a three-year demonstration project with 260 hospitals that rewards high performers with bonuses totaling $21 million. Poor performers may face financial penalties. "We're trying to determine whether offering economic incentives improves hospitals' care, and so far the answer has been yes," said Dr. Sheila Roman, a senior medical officer for Medicare. The Sites: www.dshs.state.tx.us/thcic The Texas Health Care Information Council: a state agency. No charge. www.healthgrades.com HealthGrades: a health care quality ratings company. Hospital ratings are free, but comprehensive hospital reports cost $9.95. www.hospitalcompare.hhs.gov By Medicare and the Hospital Quality Alliance: a coalition of health care organizations. No charge. www.jcaho.org The Joint Commission on Accreditation of Healthcare Organizations: a not-for-profit organization that accredits health care enterprises. Click on "Quality Check." No charge. www.leapfroggroup.org By the Leapfrog Group: a coalition of companies and organizations that buy health care. Ratings cover 31 metropolitan areas, including Dallas-Fort Worth. No charge. Health Search Engines Jessica E. Vascellaro, WSJ 3-21 Kosmix.com, launched last month, offers a tailored health-search engine that trolls more than three billion general Web pages and divides its results into some 20 relevant categories like diet and nutrition, symptoms and message boards. Healthline Networks Inc.'s Healthline.com, launched last October, searches its own doctor-written articles, online medical reference books, and more than 170,000 sites chosen for their health relevance. This month WebMD.com added a feature that allows its more than 13 million monthly users to search across the entire Web. The site late last year added the ability to search within particular categories, like news and experts. Mamma.com Inc., which began as a destination for searching across several different search sites, now offers Mamma Health, a site that scans 12 health-related resources, including the federal government's MedlinePlus site, the British NHSDirect site, and WebMD. Monthly Employment Stats
Hiring last month in goods-producing industries rose by 45,000. The manufacturing sector decreased payrolls by 1,000 after adding 7,000 the month before. The construction sector added 41,000 jobs last month and 346,000 over the past 12 months. Service-sector employment went up by 198,000. Retail payrolls rose by 6,700. Business and professional services companies added 39,000 jobs to payrolls, while education and health services added 47,000.
Just the Facts FDA Also Vets New Drug's Name Anna Wilde Mathews, WSJ 3-17 Allowing medications with similar names could lead to mix-ups - and serious consequences. The FDA's scrutiny is a growing problem for drug companies. They spend as much as $1 million per product making up, checking and registering words like Lipitor, Prozac and Zyprexa. In the 2004 fiscal year, the agency's name-safety reviewers turned down 123, or 36%, of the proposed names they received. That was up from 90, or 29%, the year before, and 86, or 31%, in 2002. Sepracor's sleep drug Lunesta had rejected several other possible monikers, including Astorra, Esonna and Estorra. Eli Lilly has an experimental sepsis drug, dubbed Zovant. But the FDA rejected the name, saying that it was too close to Zofran and Zosyn. Roche Holding proposed the name Bonviva for an osteoporosis drug that appeared to be derived from Latinate words for "good" and "life," but the FDA rejected it as being promotional. It now sells it as Boniva. Schwab Reports Stock-Rating Error Jane Kim, WSJ 3-16 Charles Schwab customers who recently made stock trades based on the company's stock ratings may want to reconsider their moves. A systems glitch Sunday evening resulted in incorrect ratings being assigned to some 300 of the roughly 3,000 stocks in Schwab's proprietary equity-ratings system, which grades stocks based on a variety of criteria such as fundamentals, risk, momentum and valuation measures. The errors occurred Sunday around 6 p.m. Pacific time and were corrected by around 11 p.m. Monday. Schwab, which became aware of the error Monday afternoon, posted an urgent notice on the company's Web site on Monday. On Tuesday Schwab began calling clients who traded the affected stocks during the affected period. Since then, the company has made close to 800 calls and has been asked to reverse about 40 trades. Good-by Spares, Hello Run-Flats Jennifer Saranow, WSJ 3-16 Instead of spares, some vehicles are coming outfitted with "run-flat" tires that are designed to run anywhere from 50 miles to 125 miles after a puncture. Toyota, Nissan and Honda minivans now offers run-flats. Run-flats can cost more than twice as much to replace than conventional tires, and some consumers are finding the run-flats don't last as long as regular tires. Suits seeking class-action status have been filed in six states claiming run-flat tires offered standard on Toyota Sienna wear out prematurely and have to be replaced after about 20,000 miles. Generally, conventional tires have to be replaced every 40,000 miles or so when you buy a typical vehicle. The spread of tire pressure monitoring systems among vehicles is also helping to spur the adoption of run-flat tires. Run-flat tires require these systems because drivers might not otherwise be aware that tires have been punctured. Most run-flats on the market are self-supporting tires, meaning they have a stiffer sidewall than conventional tires that supports the vehicle when the tire loses air. Run-flats are still a tiny portion of total tires sold. According to Modern Tire Dealer magazine, there were about 400,000 factory-installed run-flat tires and about 350,000 replacement run-flat tires shipped last year in the U.S., a fraction of the 53 million original equipment and 205.8 million replacement tires shipped in total. Car Theft Declines as Car-part Theft Increases Jennifer Saranow, WSJ 3-09 The number of gadgets for cars is growing. As thieves are tempted by higher-end accessories [GPS devices, in-vehicle DVD players and headsets with TV screens, even xenon headlights are stolen], stealing a car has become increasingly difficult in the past decade thanks to the spread of car-tracking systems, and as more vehicles come with electronic keys, which send a signal to a car's computer in order for the ignition to start. Such antitheft technologies have made it harder for the casual thief to hot-wire a car, instead forcing many amateur crooks to grab what parts they can on the spot. According to the Federal Bureau of Investigation, thefts of motor-vehicle parts and accessories were up 30% in 2004 from 2000 and thefts from motor vehicles were valued at $697 on average. In contrast, about 1.24 million motor-vehicle theft offenses were reported in 2004, down from 1.54 million a decade earlier. Many crooks have also moved on from many of the parts that were often stolen before, like car radios and hubcaps, because they aren't as valuable on the black market, and car makers have made them harder to steal. Most radios from car factories, for example, today come with detachable faces or are programmed to only work in a certain vehicle. Debt Check Jonathan Clements, WSJ 3-08 Federal Reserve data show that the value of household real estate climbed 71% over the past five years. But mortgage debt grew even faster, up 75%, as folks cashed out part of their home's value when they refinanced or took out second mortgages. At the same time, car loans and credit-card balances are also rising. Outstanding consumer debt is up 27% over the past five years, well ahead of the 13% cumulative inflation rate. Over the 10 years through the 2004-2005 academic year, annual borrowing through student and parent loans jumped 194%. That's far ahead of the 66% increase in the total cost of four-year private colleges or the 72% rise at public colleges, according to the College Board. Among households headed by someone age 75 or older, 40% had some sort of debt in 2004, up from 29% three years earlier. The sums involved aren't small. The Federal Reserve's 2004 Survey of Consumer Finances found that 19% of these older Americans had a mortgage on their primary residence, with $31,000 typically owed. Quick Facts, Stats & Opinions The number of American households with a net worth of $1 million or more, excluding their principal residence, grew to a record 8.9 million last year, the market research firm TNS Financial Services. In most large counties, about one household in 12, or about 8.5%, was worth $1 million or more. (David Johnston, NY Times 3-28) The S&P 500 index is up 4.38% YTD. History suggests when the market’s gain of 4%+ in Q1, it often presages double-digit moves – up or down – in the S&P 500 for the entire year. Since 1956, the market has gained 4% in 27 out of 49 Q1s, or 55% of the time. When that has occurred, the full-year sees a greater-than-10% rise or fall on 20 of 27 occasions (74.07%). Median double-digit gains over 12 months were +25.77%. Median losses were 13.09%. (TheBigPicture 3-28) Investment advisers have been rolling out strategies to exploit the advantages of ETFs. Yet more often than not for advisers who publish investment newsletters, portfolios composed entirely of ETF's have turned in disappointing returns. Over the last several years, the nearly 200 investment newsletters monitored by The Hulbert Financial Digest have created no fewer than 25 model portfolios that invest exclusively in ETFs. On average, they have significantly lagged the non-ETF portfolios that the newsletter industry recommends. Consider the performance of those ETF portfolios recommended by newsletters that also have a non-ETF model portfolio that invests in the same asset classes and pursues the same investment objectives. Sixteen pairs of portfolios meet these criteria. In 13 of the 16 cases, the ETF portfolio had lower returns than its cousin. (Mark Hulbert, NY Times 3-26) Since 1913, the Dow industrials have seen an average decline of 22.2 between the high it hit in the first year of the four-year cycle -- in this case 2005 -- and the low hit in the second year, namely 2006, according to the Stock Trader's Almanac. Right now the Dow is hovering about 3% above last year's high, hit in March of 2005, suggesting a big drop may be coming. But after it bottoms out, the Dow tends to rally substantially through the third year of the presidency -- in this case 2007. On average, since 1914, the Dow has jumped a whopping 50% from the bottom it hits in the second year to the top in the third year. (Alexandra Twin, CNNMoney 3-28) [The start of the terms of more recent presidents witnessed different tendencies: in George Bush Sr.'s first year, the market was up 25.2%, and for Bill Clinton it was up 19.9% and 35.9%. ] Just three short years ago — an eternity when you consider the explosive growth of the online juggernaut — regular Internet users already spent 25.5 hours a month sitting at the computer, the Nielsen/NetRatings study says. By now that has shot up to 30˝ hours — fully an hour a day. Why so much time at the PC? Surely because, as Nielsen/NetRatings' figures also show, broadband use has exploded, to 68% of Web users today from 33% three years ago. The computer's always on, making it easy to, say, look up an air fare or check whether your daughter at college has finally answered your e-mail message. (Hubert Herring, NY Times 3-26) Late last week Richard Moroney, editor of Dow Theory Forecasts, reported that, so far in 2006, the ten percent of stocks scoring the worst according to measures of "debt levels, interest coverage, and profit margins" have gained nearly 13%, versus a less than 5% gain for the ten percent of stocks at the opposite end of the spectrum. Moroney reported a similar pattern when stocks are ranked according to "three- and five-year growth rates, along with return on equity, assets and investment." The 10% of stocks scoring the worst on these dimensions have gained nearly 11% so far this year, in contrast to 1.4% for the 10% with the best scores on these dimensions. In a similar vein, Standard and Poor's reported Monday that "stocks with average to low S&P Quality Rankings (B+, B, B-, and C) have continued to outperform those with high Quality Rankings in recent months." S&P's Quality Rankings are based on dividends and the quality of earnings. What does this mean? As best as I can determine, the historical pattern is for low-quality issues to outperform the high-quality issues both at the beginning of a bull market and at its end. Take your pick. At the beginnings of bull markets, new economic growth will have the most dramatic impact on companies living at or close to the financial margin, since they are the ones whose very survival was most in question during the recession. At the other end of the spectrum, bull markets often come to an end in a speculative blow-off. The companies that typically are the beneficiary, temporarily, of such speculative excesses are the lowest-quality companies. (Mark Hulbert, MarketWatch 3-21) At the start of January, analysts, on average, predicted first-quarter profits would grow 12.6% at companies in the Standard & Poor's 500-stock index. By Friday, that forecast had been cut to 11%. Thomson Financial has found analysts tend to cut forecasts by about three percentage points as a quarter wears on. Then companies have a way of beating the reduced expectations -- by about three percentage points. Lately, the estimate cuts have been less than that. (E.S. Browning, WSJ 3-20) A troubling body of research is beginning to suggest that vitamin supplements may be doing more harm than good. Over the past several years, studies that were expected to prove dramatic benefits from vitamin use have instead shown the opposite. Beta carotene was seen as a cancer fighter, but it appeared to promote lung cancer in a study of former smokers. Too much vitamin A, sometimes taken to boost the immune system, can increase a woman's risk for hip fracture. A study of whether vitamin E improved heart health showed higher rates of congestive heart failure among vitamin users. And there are growing concerns that antioxidants, long viewed as cancer fighters, may actually promote some cancer and interfere with treatments. The Food and Nutrition Board of the National Academy of Sciences -- the top U.S. authority for nutritional recommendations -- has concluded that taking antioxidant supplements serves no purpose. (Tara Parker-Pope, WSJ 3-20) As of the end of last week, a Bloomberg screen of the 15 top mutual fund performers over the past three years among more than 8,000 U.S.-based mutual funds found all of the top 15 to be stock funds invested in single countries and regions of the developing world -- Turkey, Brazil, India, Russia, Indonesia, plus a smattering of Eastern Europe and Latin American funds. Since mid-March 2003 these 15 funds have posted annualized gains ranging from 62% to 82%. Over the same period more than 80 broadly diversified emerging-markets stock funds have averaged a 44%/year gain. Almost 300 stock funds classified as "international," which is presumed to mean they concentrate on stocks in developed markets such as Europe and Japan, have averaged a 31% annual gain. (Chet Currier, Bloomberg News 3-19) The latest survey by Bankrate.com finds that ATM charges have hit records. The Web site estimates that Americans paid $4.3 billion in such fees in 2005, up from $3.8 billion in 2004. The average ATM fee is now $1.54, and banks are charging their own customers who use a "foreign" ATM an average of $1.37, for a total of $2.91 for each withdrawal. A handful of large banks tout their fee-free ATMs, but 96% of banks charge noncustomers for using their machines, and 87% charge their own customers for going to another bank's ATM. (Dallas Morning News 3-16) A bear market in stocks is like being stepped on by an elephant. A bear market in bonds, though, is like being bitten by a poodle - for a decade. The worst 12-month period for the Lehman Aggregate bond index the past 30 years has been a 9.2% loss, recorded in March 1980. Worst 12 months for the S&P? A 26.6% loss in September 2001. Nevertheless, bond bear markets make up in length what they lack in depth. (John Waggoner, USA TODAY 3-10) The National Association for Variable Annuities said net inflows into the products fell to $20.48 billion in 2005, down more than 49% from $40.23 billion in 2004. (Jeff D. Opdyke, WSJ 3-09) Ambien, the nation's best-selling prescription sleeping pill, is showing up with regularity as a factor in traffic arrests, sometimes involving drivers who later say they were sleep-driving and have no memory of taking the wheel after taking the drug. In some state toxicology laboratories Ambien makes the top 10 list of drugs found in impaired drivers. Wisconsin officials identified Ambien in the bloodstreams of 187 arrested drivers from 1999 to 2004. And as a more people are taking the drug — 26.5 million prescriptions in this country last year — there are signs that Ambien-related driving arrests are on the rise. In Washington State, for example, officials counted 78 impaired-driving arrests in which Ambien was a factor last year, up from 56 in 2004. (Stephanie Saul, NY Times 3-08) According to Edmunds.com, an automobile-research Web site, over 18% of the new cars acquired in February were leased. (Jonathan Clements, WSJ 3-08) Suppose last year you saved $2,500, or 5% of your $50,000 income, with the rest going to spending and taxes. The bad news: You probably need to double your annual retirement savings. The good news: It isn't that difficult. After all, to double your savings rate, you need to cut your spending and taxes from $47,500 to $45,000 -- a drop of just 5.3%. (Jonathan Clements, WSJ 3-05) Home Page Previous Factoid Top Sites
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