|
|
More Factoids May 06 Apr 06 Mar 06 Feb 06 Jan 06 2005 Updates Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan Bank Updates Jun May Aprl Mar Feb Jan Banks 2005 Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan MLP Updates Jun May Aprl Mar Feb Jan MLPs 2005 Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan REIT Updates Apr Off/Ind/Apt Apr Retail/Hlth Mar 06 Mar Off/Ind/Apt Mar Retail/Hlth Feb 06 Feb Off/Ind/Apt Feb Retail/Hlth Jan 06 Jan Off/Ind/Apt Jan Retail/Hlth Dec 05 Dec Off/Ind/Apt Dec Retail/Hlth Nov 05 Nov Off/Ind/Apt Nov Retail/Hlth Oct 05 Oct Off/Ind/Apt Oct Retail/Hlth Sept 05 Sept Off/Ind/Apt Sept Retail/Hlth Aug 05 Aug Off/Ind/Apt Aug Retail/Hlth July 05 July Off/Ind/Apt July Retail/Hlth June 05 June Off/Ind/Apt June Retail/Hlth May 05 May Off/Ind/Apt May Retail/Hlth April 05 April Off/Ind/Apt April Retail/Hlth |
But for long-term, buy-and-hold investors, the debate is a lot of sound and fury that signifies very little. In fact, there is a strong case that long-term investors should ignore the noise of the current rate debate and begin preparing for the next phase of the economic cycle by diversifying and dialing down the risk in their portfolios. Some investors may be paying close attention to the Fed because they think that once it pauses, the stock market will have an all-clear sign to resume its bull run. That was certainly the case in 1995: the Dow allied more than 40% in the 12 months after the last Fed rate increase that year. But basing your strategy on when the Fed is likely to pause is market-timing, which long-term investors eschew. Moreover, Liz Ann Sonders, chief investment strategist at Charles Schwab, said she doubted that a pause in rate increases would be "an elixir to the markets" this time around. That is because stocks have already risen substantially during the last two years of Fed tightening. Even after accounting for the market sell-off that began in May, the Russell 1000 index has still risen nearly 8%, annualized, since the Fed started lifting rates at the end of June 2004. And the Russell 2000 index of small stocks has gained nearly 10% a year, on average, during that time. While Wall Street economists debate exactly how many more rate increases are in the works, a majority of money managers now believe that the current economic expansion is in its final innings. In fact, many market watchers have already begun discussing when the Fed will have to start trimming rates to jump-start an economy that it is now slowing down. Merrill Lynch economists see at least a 40% chance of recession next year, and they predict that the Fed will have to cut short-term interest rates sometime in the first quarter of 2007. Mark Zandi, chief economist at Moody's Economy.com, says he does not think that a recession is likely. But he also believes that the Fed might have to start trimming rates in early 2007, possibly in the spring, as the economy slowed. A rate cut could come even sooner, he said, if the central bank's aggressiveness in raising rates this year causes major problems for the financial markets. Maury Harris, chief United States economist at UBS Securities, predicts that the Fed will pause after its August meeting, and will begin cutting rates around five or six months later. The transition may be even shorter if there is a significant slowdown in the housing market that further cools the economy. While it's unclear whether we are in store for a hard landing — a recession — or a soft one, many strategists are bracing for some kind of landing in the next several months. And investors should be mindful that transitions from landings to takeoffs often last just a matter of months, not years. Sam Stovall, chief investment strategist at Standard & Poor's, recently studied what he called the "plateau period," or the time between a Fed rate increase and the first in a new series of interest rate cuts. Since 1971, there have been eight such turning points in the economy. On average, the time between the end of a tightening cycle and the start of a new easing cycle has been only 7.3 months. Twice in recent history, the Fed raised rates only once before easing. "If you take out those one-and-out situations, the spread between the last hike and the first decline is only 5.5 months, on average," Mr. Stovall said. The bottom line is this: It's time for investors to pay attention to the plateau period that's coming. So what works and doesn't during these plateaus? If history is a guide, this is not a good time to be betting on growth. In fact, highly cyclical sectors of the market — such as energy, industrials and basic materials stocks — have all lost money during these in-between periods. The basic materials sector, in fact, has been the worst-performing sector of the S&P500 index in plateau periods, losing 7%, on average, during these stretches, according to S&P. The broad S&P500, for instance, has actually risen 3 percent, on average, in these periods. Traditional defensive sectors have performed even better during these transitions. Health care stocks have rallied 10%, on average, in these periods going back to 1971, according to S&P. And the consumer staples stocks have risen 8%. One More Fed & the Market Stat Jeff Brown, Knight Ridder 6-25 Robert Johnson of the CFA Institute, an organization of financial analysts, and University of Illinois finance professors Scott Beyer and Gerald Jensen found that from 1937 through 2000, the Standard & Poor's 500 index produced average annual returns of 18.48% when the Federal Reserve had an "expansive" policy - that is, it was reducing interest rates or keeping them low. When the Fed had a "restrictive" policy - raising rates or keeping them high - returns averaged 8.1%. Recent history was even more dramatic. From 1969 through 2000, annual returns were 22.63% during the low-rate periods compared with 4.08% in the high-rate periods.
The most important reason inflation has risen is that the economy is much stronger. The unemployment rate, at 4.6%, is its lowest in five years, which means employers are having more trouble finding workers, and are having to offer higher wages. U.S. factories are operating at more than 80% of available capacity, the highest in six years, so increased demand is more likely to lead to bottlenecks and higher prices. Another reason is the steady upward march in oil prices. Previous spikes in crude-oil prices were usually reversed after awhile. There is no sign that's about to happen this time, so companies may be trying harder to pass those costs on to their customers. The acceleration of inflation may not prove sustained. The primary driver, other than energy, has been a rise in the cost of shelter, principally tenants' rent and "owners' equivalent rent," which measures the cost of owning a home by comparing it to what that home would rent for. As rising prices and mortgage rates have made homes less affordable, many prospective buyers have chosen to rent, putting upward pressure on rents, and therefore owners' equivalent rent. If home prices cool enough to draw back renters, and if empty houses and condominiums are dumped on the rental market, that could slow the increase in rents and cap that source of inflation. Moreover, although wage gains have recently picked up, they still barely exceed growth in productivity. That means businesses should be feeling little impetus from labor costs to boost prices. Finally, inflation sometimes moves in ways that defy easy explanation for months at a time. Several times in recent years inflation has accelerated, then fallen back. This could be another one of those times.
Lesson 1: Bad markets are good for those with time. To 20- and 30-year-olds, today's market may look like a sorry deal. The decade started with losses — 9% in 2000, 12% in 2001 and 22% in 2002, as measured by Ibbotson Associates' large-company stock index. Then there were two good years before 2005's lackluster 4.9% total return. This year, the market is barely treading water. For people who start investing in a bad market, that can spell opportunity. Consider someone who put $1,000 a month into the stock market starting in January 1970. Over the decade, because of several years of double-digit losses, this investor earned a mere 5.9% compounded return. But if he had the fortitude to stick with what appeared to be a stupid investment, he'd be richly rewarded because stock prices zoomed forward in the next two decades to catch up to their norms. The average return in the 1980s was 17.55%, and it was 18.2% in the 1990s. The investor who stuck through 30 years making consistent investments every month would have ended up with $4.03 million. What would happen if he earned the same returns, but in a different order — the good returns early and the bad later? He'd end up with $3.08 million, or nearly $1 million less. The trick? Investors who start in bad years suffer when they've got the least at stake and reap a windfall after they've been able to build up a nest egg. Lesson 2: Rotten markets can last. The 1970s held a very different lesson for older investors: Markets turn around in their own good time, not yours. If your financial plan requires a set rate of return, leaving the bulk of your assets in stocks is foolish. Money that can't be left alone for long stretches belongs in more stable investments, such as medium-term bonds, certificates of deposit and money market accounts. That doesn't mean that older investors should pull every dollar from stocks. Virtually anyone with a remaining life expectancy of 10 years or more should have some stocks. But the more you rely on income from your portfolio, the smaller that percentage ought to be. Lesson 3: Get in gradually. The last couple of decades have delivered far more stable returns than is historically true, Ibbotson noted. In the '70s, the market was choppy, like it is today. That can be beneficial to those putting money into the stock market on a regular basis. "Choppy markets are the norm," Ibbotson said. "But as long as the market keeps returning to where it was, volatility is good." The reason: One month stocks will be up; the next, down. By pouring the same amount into the market in good times and bad, investors reduce their average cost and eliminate the chance of putting all their money in at the peak. Investing the same amount month after month is called dollar-cost averaging. Consider how it would have worked for an investor who put $1,000 annually in big company stocks at the end of 1970 and continued investing through 1980. Even though total inflation-adjusted returns amounted to a poor 3.7%, this investor would have reaped a 13% gain over the period because, by investing $1,000 each year, he bought more shares on market dips and reduced his average cost. Had the market been stable or steadily rising, he would have fared much worse.
So why do we find it so tough to save? We can't, it seems, blame it all on morning lattes and evenings out. Instead, the big culprits are our two largest expenses: The roof over our head and the cars in our driveway. When I look around, I see plenty of signs of financial distress. A study sponsored by Putnam Investments estimates that seven million retirees have chosen or felt compelled to return to work. A Pew Research Center survey discovered that 20% of baby boomers had provided financial help to a parent within the past year. Families are also finding it tougher to pay for college, with College Board data showing a 194% increase in annual borrowing through college loans over the past decade. All this suggests folks are struggling to make ends meet. But why? Consider a new study from the U.S. Department of Labor titled "100 Years of U.S. Consumer Spending." The study draws on the Bureau of Labor Statistics' consumer expenditure survey. It might seem like Americans spend too much on clothes, eating out and entertainment. In reality, the portion of our spending that's devoted to food and apparel has fallen sharply over the past century. Tobacco and booze also account for a shrinking share of spending. Meanwhile, the slice of our budget that goes to entertainment and health care isn't much changed from 40 or 50 years ago. Indeed, if you look at all these categories, you might imagine families have ample financial room for maneuver. The blame seems to lie with two other expenses, transportation and housing. Our transportation spending jumped sharply in the 1960s and has remained high ever since, accounting for more than 19% of spending in 2002-03. The number of passenger vehicles has leapt 270% since 1960, far ahead of the 86% increase in the adult population. We now have one car, van, pickup truck or sport-utility vehicle for every adult. Meanwhile, housing expenditures have climbed fairly steadily over the past century, and our homes now claim a third of our spending. More families are buying houses, more folks are purchasing second homes, and houses are getting bigger. According to the Census Bureau, over the past 25 years, the number of second homes has jumped 95% and the size of the typical newly constructed single-family home has ballooned 40%. Put it together, and houses and transportation accounted for 52% of all expenditures in 2002-03, up from less than 41% in 1950. It strikes me that housing and transport expenses are ripe for cutting, if only because they are such plump targets. But how are you going to cut back? Consider this: We may be spending more on cars and homes, but we are also purchasing cars and homes that are far more luxurious. "The trend has been to buy the most house you can afford, rather than the amount you need," notes Sophie Beckmann, a financial-planning specialist at A.G. Edwards. "It's the same thing with cars. While you can get by with a $20,000 car, people buy the $40,000 SUV with the leather seats and the TV. There's a lot there that's discretionary." If you're willing to skip the heated car seats and the third bathroom, you would probably still be living better than your parents did - and you will free up money that can be saved. But houses appreciate over time, so shouldn't you buy the largest home possible? That might have been true during the recent housing boom - but it isn't likely to be true over the long run. Since 1975, home-price appreciation has been modest, averaging just two percentage points a year above inflation. The bottom line: Once you deduct mortgage's cost, maintenance, property taxes and insurance, you could probably amass far more wealth by purchasing a smaller home and then sinking the extra money into your 401(k) plan. While this is an 'equity income' site, I stress investing in stocks with GROWING dividends or distributions. That stats from the study below gives the reasons for that emphasis. And the numbers from the 1930s should also be an example of why an age appropriate percentage of your holdings should be in bonds - a lesson I know but have thus far failed to implement in my asset allocation. From the Study: 100 Years of U.S. Consumer Spending In 1901 yearly household income averaged $750. Annual expenditures for the average U.S. family averaged $769. Of this amount, 42.5% ($327) was allocated for food, 14.0% ($108) for clothing, and 23.3% ($179) for housing. The U.S. population was 76 million. There were 7.2 million owner-occupied housing units in the country, but only 19.0% of U.S. families owned a home, while 81.0%were renters. Grocery store prices in 1901 averaged about 14 cents per pound for round steak or pork chops, 27 cents for a pound of butter, and 13 cents for 5 pounds of flour. By 1919, average family income had more than doubled, to $1,518 (a 102% increase), while household expenditures had increased to $1,434 (an 86% gain). The average U.S. household spent 75.4% more for food ($549), but the household’s expenditure share for food had decreased to 38.2%. Spending for clothing had increased 120.4% to $238, but this category represented only 16.6% of total expenditures. Housing was where the significant change took place: spending for housing had increased 86.6%, to $334, although the expenditure share for this category remained 23.3%. The population in the country was 105 million. There were over 10 million owneroccupied housing units in the country. Spending for housing had increased 86.6%, to $334, although the expenditure share for this category remained 23.3%. (The housing expenditure category included costs not only for rent, but also for fuel, light, furniture, and furnishing.) Families who lived in their own homes had a yearly rent (the term used in the Consumer Expenditure Survey) of $176. Families living in apartments or flats paid a yearly rent of $178. Retail prices had almost tripled since 1901. A pound of round steak cost an average of 37 cents, and pork chops, which had cost 13 cents a pound in 1901, averaged 39 cents in 1918. Five pounds of flour cost 34 cents, and consumers paid 58 cents for a pound of butter. By 1936 - in the 15-year period following World War I, average family income had remained flat, rising only $6 to $1,524. Meanwhile, average family expenditures had risen 5.4% to $1,512. These dollars would have purchased $1,387 worth of goods and services in 1918 dollars, compared with the $1,434 that families in 1918 spent, demonstrating the deflationary effect of the Depression on the dollar’s value. Food, clothing, and housing occupied a 76.2% share of household spending, a decrease from 1918–19. The expenditure share for housing was 32.0%, which translated into an average annual expenditure of $485. The number of owner-occupied housing units had increased to 14 million. Forty percent of families owned automobiles, almost all of which were purchased secondhand rather than new. Average household expeditures for food was $508. In 1950, with wages double or triple what they had been in 1935. The average U.S. family’s income of $4,237 had increased by 178.0% since 1934–36. Average family expenditures during the same timeframe had increased 151.9%, to $3,808. This amount would have purchased $2,171 worth of goods and services in 1935 dollars, reflecting inflationary forces. Nationally, home ownership had increased, with 48% of all families owning their own home. Average annual housing costs were $1,035. Retail food prices had risen sharply from 1934–36 levels. The price of a pound of butter had doubled, from 32 cents to 73 cents. Meat prices also had risen sharply, with a pound of round steak increasing from 28 cents to 94 cents and pork chops from 26 cents to 75 cents per pound. Average household expeditures for food was $1,130. By 1960, average family income in the country was $6,691, 57.9% higher than in 1950. Average family expenditures, $5,390, had increased 41.5% from 1950. This amount would have purchased $4,366 worth of goods and services in 1950 dollars. The U.S. population had surpassed 179 million, a gain of 19.0% from 1950. More than half of U.S. families were homeowners, with annual expenditures on housing being $1,588. Families spent proportionately less for food despite rising retail prices. One pound of round steak cost $1.06, up 12 cents from 1950. The price of a pound of pork chops had risen 11 cents to 86 cents per pound. More Americans (73%) owned automobiles, and they paid more for their cars. Average household expeditures for food was $1,311. By 1972 the average family income in the United States was $11,419, an increase of 70.7% from 1960–61. The average U.S. household had an after-tax income of $9,731, having allocated 14.8% of income for taxes: $1,399 in Federal income taxes, $234 in State and local income taxes, and $55 in personal property and other personal taxes. The market value of the average household’s financial assets was $7,094. Average household expenses were $8,348, an increase of 54.9% from 1960–61. This sum would have purchased $5,972 worth of goods and services in 1960–61 dollars. Average annual housing expenses were $2,551. Of total spending on housing, the average U.S. household allotted 51.4% ($1,311) for shelter (54.8% for owned dwellings versus 43.6% for rent), 16.0% ($409) for fuel and utilities, 17.4% ($443) for household operations, and 15.2% ($387) for furnishings and equipment. Most Americans [58.8%] owned their home (33.4% having a mortgage and 25.3% having no mortgage), while 36.8% were renters. The estimated market value of the average family home was $14,283, which translated into an estimated monthly rental value of $100. Some 80.1% of U.S. families owned at least one auto. These households spent $784 (9.5% of their expenditures) to buy and finance their autos. Additionally, they spent $750 (9.1%) on auto operating expenses. Average household expeditures for food was $1,596. By 1984 average family income in the country had risen to $23,464, an increase of 105.5% since 1972–73. The average U.S. family had an after-tax income of $21,237, having allocated 9.5% of income for taxes: $1,733 in Federal income taxes, $431 in State and local income taxes, and $63 for other taxes. Average household expenditures, $21,975, had grown 165.7%. This amount would have purchased $8,790 worth of goods and services in 1972 dollars. Compared with 1972–73, the share for food had decreased to 15.0% ($3,290), while clothing had declined to 6.0% ($1,319), and housing had held steady at 30.4% ($6,674). Of total spending on housing, the average U.S. family allotted 52.3% ($3,489) for shelter; 24.5% ($1,638) for utilities, fuel, and public services; 4.7% ($315) for household operations; and 13.9% ($926) for household furnishings and equipment. Among U.S. families, 63% owned their own home (38% with a mortgage and 25% without a mortgage), while 38% were renters. The estimated market value of the average home was $47,269, and its estimated monthly rental value was $292. In 85% of households, there was at least one automobile, with an average yearly cost for transportation of $4,304. Average household expeditures for food was $3,290. By 1996-1997 the average family income in the country had risen to $38,983, an increase of 66.1% since 1984–85. Average household expenditures, at $34,312, had grown 56.1%, over the same period. This sum would have purchased $22,646 worth of goods and services in 1984 dollars. In terms of home ownership status, 64% of Americans owned their home (38% with a mortgage and 26% without a mortgage), while 36% of households were renters. Of total spending on housing, the average U.S. family allotted 56.4% ($6,205) for shelter, 21.6% ($2,380) for utilities and fuel, 13.0% ($1,432) for furnishings and equipment, and 4.2% ($459) for household supplies. The estimated market value of the average home was $74,835, which translated into an estimated monthly rental value of $521. Some 85% of U.S. families owned at least one vehicle, the average family owning 1.9. These families allotted 18.7% ($6,420) of their total spending for transportation, with 8.1% ($2,775) for the purchase of vehicles; 3.2% ($1,090) for gasoline and motor oil; and an additional 6.3% ($2,145) on other vehicle expenses, including financing and maintenance costs. Average household expeditures for food was $4,750. By 2002-2003, the average family income was $50,302, an increase of 29.0% from the mid-1990s. Average household expenses, $40,748, had grown by 18.8% from the mid-1990s. This amount would have purchased $35,827 worth of goods and services in 1996 dollars. Of total spending on housing, the average U.S. family allotted 58.8% ($7,859) for shelter, 20.6% ($2,749) for fuels and utilities, 9.3% ($1,243) for household operations and supplies, and 11.2% for furnishings and equipment. Two-thirds of U.S. households (67%) owned their home (41% with a mortgage and 26% without a mortgage), while 33% rented. The estimated market value of the average home was $114,522, and its estimated monthly rental value was $735. Some 88% of U.S. families owned at least one motor vehicle, with the average family owning 2.0. These households allotted 19.1% ($7,770) of their total spending for transportation expenses, with 9.1% ($3,699) for the purchase of vehicles; 3.2% ($1,285) for gasoline and motor oil; and 5.9% ($2,400) for other vehicle expenses, including financing and maintenance costs. Average household expeditures for food was $5,357.
For people who don't spend a lot of time gabbing on the phone, the refunds could be minimal - anywhere from $20 to $50 a person. But for those who regularly pay substantial bills for long-distance and cellular service, the amounts may be well worth documenting. "We had a charge of $3.79 last month. You add that up, and it's $147" over a little more than three years, said Bill Hardekopf, chief executive of SaveOnPhone.com, a phone-discount comparison service, referring to his small company's phone bill. "That's worth pulling records." Virtually anyone who has paid for long-distance or cellphone service in the last three years is entitled to a refund. But nothing is automatic. You'll need to file a refund claim when you file your 2006 federal income tax return, Smith said. The federal excise tax was levied on telephone services in 1898 as a temporary measure to help pay for the Spanish-American War. Like many taxes in those days, it was meant to hit only the wealthiest Americans. The telephone was a rarity then, having been invented only 22 years earlier. The war was short, lasting a mere eight months, but the tax was never repealed. Indeed, it became deeply ingrained in the tax law, revised slightly as phone service became more common. In 1965, the tax law was updated, defining three separate types of phone service subject to the tax -- local, toll and "teletypewriter exchange services." But as time went on, the definition of "toll" service became a problem. That's because when the law was updated, toll charges were defined as those based on the amount of time elapsed and the distance of the call. Now most long-distance companies charge a flat per-minute rate, no matter the distance of the call. Some cellular providers make no distinction between local and long-distance calls. As companies realized that the law authorizing the tax had not kept up with changes in phone service, they began to file legal challenges. The IRS defended the tax in court, but courts consistently ruled against the government. Late last month, the government announced that it would no longer fight the legal challenges. It has notified phone companies, which collected the tax through bills, to stop levying the charge. The agency said it would refund excise tax payments made after Feb. 28, 2003, to all taxpayers who file a claim. The IRS said all refund requests should be made on 2006 returns, which can't be filed until January. The agency expects to have two methods for figuring refund amounts. One would be a simplified method that would not require taxpayers to provide any documentation of how much tax they have paid. The other method will require compiling phone records.
Stock prices have slumped almost everywhere on the globe since mid-May. The boilerplate explanation is that investors suddenly became nervous that rising inflation pressures would drive the Fed and other central banks to continue tightening credit, perhaps to the point where they would choke off the strongest global economic expansion since the early 1970s. "When you get inflation accelerating, the Fed always risks overshooting," says Ethan Harris, an economist at brokerage Lehman Bros. "The Fed doesn't like to create recessions, but accidents happen." That may have been the root cause of the markets' slide, but it's a stretch to think that a lot of investors took time to connect the dots. Heavy selling of stocks often is little more than a function of itself: Once it starts in volume, it causes more of the same. Let's assume, though, that the markets were seized by a generalized fear sparked by the Fed's tougher talk on inflation, beginning in early May. In congressional testimony April 27, Fed Chairman Bernanke suggested that the central bank might soon pause in raising short-term rates after nearly two years of consistent increases. Then Bernanke reconsidered. On May 10, when Fed policymakers met, they raised their benchmark rate yet again, and warned that they might keep going. On May 17, when the government reported a surprisingly big jump in April consumer prices, talk of a pause all but died. Since then, central banks in Europe, Turkey, South Korea and India, among others, also have raised interest rates. Higher rates pose two big problems for stocks: They're competition for capital. And they make it tougher for an economy to keep growing. So what some investors chose to do in the last five weeks was to reduce their risk level by selling equities. It was a logical move. And not surprisingly, the stock sectors that went up the most during the last few years — emerging markets, for example, and commodity-related issues — came down the fastest, because those were bets on robust global growth, and because that was where people had the biggest profits to protect. Those sectors also tumbled because some of the players recognized that what they were doing was as much speculation as investing, if not more so. Why did they buy? Because it was going up! Speculative money is by definition hot money, but it often masquerades as responsible capital — until it gets frightened. Hot money is sometimes is borrowed money. Investors can buy stocks on credit through margin accounts. Buying on credit compounds your winnings when stocks are rising. But your losses are also compounded. That can fuel a cascade of selling in falling markets, as some investors who bought on margin are forced to cash out to stem their losses. Investors' margin debt balances at NYSE member brokerages reached $241.5 billion in April, the latest month for which data are available. The total has been climbing with the bull market of the last three years and is nearing the record $278.5 billion of March 2000, at the height of the technology-stock frenzy of that era. That may help explain the ferocity of the slide in some market sectors in the last five weeks, as selling begot more selling. Again, the Fed may only have been an afterthought for many of those investors. A Fed rate hike from 5% to 5.25% now is a virtual certainty at the central bank's June 28-29 meeting, but that might not be the end of the world, or even of the economic expansion. But how much higher will they go? Where will inflation peak? That uncertainty will remain after the next Fed meeting, which at a minimum probably will make for a volatile summer. Odds are that Fed policymakers, and their counterparts overseas, will stay obsessed with inflation risks, for better or worse. And they clearly want their obsession to be our obsession, because they can't stop talking about inflation. Twenty years ago, the Fed was as talkative as the Sphinx. Now, its governors and regional bank presidents can't seem to shut up. "One part of the story is the Fed is talking too much about inflation," says David Kelly, economic advisor at Putnam Investments. "The other part is that people are listening too much to the Fed." If they're trying to scare the markets, it's working. If they're trying to be transparent and helpful, they may need to reconsider. Inflation is bad — we get it, already. Can we talk about something else? Study: Hedge Fund-Heavy Stocks Sink Deeper Stuart Wise, Hedge Fund Daily 6-19 Stocks in which hedge funds hold a large stake tend to perform worse in volatile markets, according to research by Goldman Sachs. The selling “was most concentrated in the names hedge funds had positions in,” David Kostin, the Goldman analyst who conducted the study, said in an interview. Upon studying the stock investments of the 550 largest hedge funds, Kostin found that those hedge-heavy stocks fell between 9.7% and 13% during a particularly volatile period – May 9 to June 13 – while the Dow Jones Industrial Average and the Standard & Poor’s 500 dropped about 7.5%. Among the companies studied were the likes of Boston Scientific, Sprint Nextel, Conoco Phillips and Time Warner, with about 100 HF investors each. According to the study, the poorer performance among HF-laden companies is the result of hedge funds selling in a tough market in order to satisfy investors clamoring top performance.
The cash on the books of S&P 500 companies adds up to 7.4% of their stock-market value, the highest level in almost two decades. Shareholder dividends have risen 14% for S&P 500 companies since the start of 2003, according to S&P. But that trails well behind buyback growth, probably because investors will punish a company and its managers if the size of a dividend check is cut in leaner times. Meanwhile, cash has piled up in the bank. Corporate interest income is expected to rise more than 60% to almost 4% of earnings this year.
For the week, the Dow Jones industrial average fell 355.95 points, or 3.2%. The Standard & Poor's 500-stock index lost 2.8%. The Nasdaq composite index lost 3.8%. [While the Dow is still in the black this year, up 1.6%, last week's 3.8% slump in the Nasdaq pushed it into the red, down 3.2% so far in 2006.] For the week, the Morgan Stanley Capital International Europe, Australasia, Far East index, or EAFE, fell 5.9%, and the M.S.C.I. Emerging Markets index plummeted 8%. Much of the turmoil in global markets stemmed from concern about inflation. Several central banks in Europe and Asia raised short-term interest rates last week, and Wall Street expects Federal Reserve policymakers to do the same later this month. "Greed is finally giving way to fear and safety seeking," said Joseph Quinlan, chief market strategist at Bank of America's investment strategies group. Is this change in attitude a bad thing? Not necessarily. It happens in every bull market run. In fact, so long as safety seekers do not flee stocks altogether, a shift in emphasis away from speculative stocks and into safer, higher-quality names may be a positive sign that the bull market is evolving, not dying. There are plenty of signs that investors are finding stability in high-quality investments. For starters, while large, blue chips in the Dow have declined recently, their losses have been moderate when compared with those of higher-risk investments. Since April 30, the Dow has lost 4.2% while the Standard & Poor's 500 is down 4.4%. Moreover, the highest-quality domestic stocks have fared better than that. S&P assigns letter grades to publicly traded domestic companies based on the quality of their long-term earnings performance. Since April 30, stocks with a grade of "A" have held up quite well. They are down less than 3%, on average. But shares of companies graded "C" have fallen by an average of nearly 9%. "When times are good, when everyone is making money, investors are willing to take big risks because they don't see the pain," said Howard Silverblatt, equity market analyst at S.& P. "But quality regains its appeal when times get tough." A change in market leadership is long overdue. "As you get to the midpoint of an economic expansion, you tend to see a shift away from speculation and toward companies that can sustain earnings growth amid a slowing economy," said Jeffrey Kleintop, chief investment strategist at PNC Wealth Management. By most accounts, this economic expansion is well beyond its midpoint. Most money managers say that we are in the late stages of this economic cycle, according to a recent survey by Merrill Lynch. So what finally scared investors straight? Mr. Quinlan says he believes the change is a natural outgrowth of global monetary policy. At the start of this decade, global central banks were frantically easing monetary policy, driving down the cost of capital to jump-start economies. This cheap money wound up stoking speculation. But now that central banks are raising interest rates to fight inflation, cheap liquidity is drying up. Jack Ablin, chief investment officer at Harris Private Bank, attributes the recent market volatility to one central bank in particular: the Federal Reserve in the United States. Though the new Fed chairman, Ben Bernanke, has pledged to be more open about monetary policy, investors are increasingly confused about the Fed's real feelings about inflation, Mr. Ablin said. "The Fed has moved from an environment of transparency and predictability to one of transparency and uncertainty," he said. If anxiety surrounding the Fed is a driving force behind recent market volatility, investors should probably brace themselves for several more weeks of bumpiness. The next Fed monetary meeting will not be held until the end of June, and even after that session, there are no guarantees that the Fed will clarify its intent. David Dreman, chairman of Dreman Value Management, says he thinks that renewed fears over inflation "could lead to a pretty unstable market for the next six to nine months." Even though this road may be bumpy, the good news is that the signposts are clear. Chris Orndorff, head of equity strategy at Payden & Rygel, says he thinks that growing fears in the equity market mean that investors should focus on high-quality large caps. "Your reward for taking risks in this type of market are becoming smaller and smaller," he said. Mr. Orndorff asserted that earnings growth among large-cap companies was still strong. And, thanks to years of neglect, large-cap stocks are actually quite cheap, relative to small stocks. Indeed, the S&P 500 trades at a price-to-earnings ratio of less than 15, based on estimated 2006 operating earnings. By comparison, the S&P600 index of small stocks trades at a P/E of 17.2. There are plenty of other reasons to shift to large stocks from small ones. For starters, if inflation does become a real problem, large companies that dominate their industries should have more pricing power than smaller ones. Moreover, if the economy is slowing, large-cap companies are likely to continue to generate profit growth based on their industry dominance, Mr. Perkins said. That is especially true in sectors like health care and consumer staples, he said. He said global investors should also consider shifting from risky assets like emerging-market stocks to safer bets like blue-chip companies in Western Europe. "As far as we know, this is just turbulence," he said. "The hope is that the economy will cool down, taking inflation concerns down with it, and investors will focus on steadier but slower growth." If that's the case, it's time to look for a safer ride, not to abandon this trip altogether.
1 Increased volatility -- Markets are emotional. Bull markets are driven by greed. Bear markets are driven by fear. Since fear is a more powerful emotion, it tends to lead to more rash decision-making. The result of this rash decision making is increased volatility. The more panicked and irrational people get the more volatile the whipsaws will be. 2 Market rallies are generally sharp and brief -- Panic selling leads to panic buying. Part of this is due to short covering and part of this is due to investors desire to catch a bottom. 3 Everything goes down eventually -- Ok, not EVERYTHING. There will be some winning stocks. All sectors will eventually feel the pain, though. Groups that typically don’t correlate will begin to correlate as selling takes hold everywhere. Not just among stocks, but across most investment vehicles. Stocks go down, bond prices go down, and commodities go down -- pretty much everything. Part of this is due to the fact that money is not simply taken out of the market during a bear, it is destroyed. This is done in the opposite way that bull markets create money. For example, if a certain market or trading vehicle has a market cap of $1,000,000 and a large investor or group of investors decide they want to cash out for say $50,000, they will not simply sell their shares for $50,000 and have the assets transferred to someone else. Instead, they will begin liquidating. In an era of declining prices, this will force the price of the market down. By the time they are able to liquidate their $50,000 position, they may have pushed the price down to a point where that position is only worth $45,000. This is not a $5,000 effect on the market, though. In pushing the price down, the price of everyone else’s shares has also been affected. Therefore, the $1,000,000 market cap is now $900,000. $100,000 of market cap has been destroyed. If the other market participants now want to cash out and move their money elsewhere, there will be less of it to move. This destruction of money means there is less money to invest anywhere, and therefore all markets are eventually affected.
The researchers argue that most previous studies of hedge fund performance were flawed because they failed to correct fully for statistical problems in databases of hedge fund returns. Perhaps the most significant problem is the one caused by the disappearance of hedge funds from those databases - a problem of "self-selection bias." Funds vanish from the databases for two primary reasons. Some funds that are particularly poor performers close down and liquidate. And others, particularly good performers, close their doors to new investors and stop reporting their performance to the databases. Correcting for this problem is not easy. But by analyzing such funds' performance until they disappeared from the performance databases, the researchers could make educated guesses about what those funds' returns would have been had they not vanished. In general, they found that the funds that closed to new investors because of good performance were more likely to be above-average performers in the period after they closed. This could explain why so many studies have failed to find evidence of performance persistence. By eliminating from consideration those funds that disappear from databases, such studies may have overlooked funds that provided the strongest such evidence. The researchers in the new study, after making educated guesses about the returns of disappearing funds, found that many hedge funds were surprisingly persistent in their performance from one period to the next. For every 100 basis points by which a hedge fund beat its benchmark over a given three-year period, the researchers found, it outperformed that benchmark by 57 basis points, on average, over the next three years. The researchers estimated a similar degree of underperformance for the worst performers. The performance advantage lasts far longer for a hedge fund than it does for a mutual fund, Professor Jagannathan said. On average, a mutual fund tends to stay a top performer for 12 months or less; often, it then becomes a market laggard. In fact, performance persistence among mutual funds is so modest that some researchers say it can be explained by factors having nothing to do with genuine investment ability. Professor Jagannathan says the results of the new study provide compelling evidence, however, that many hedge fund managers have such skill. That stands to reason, he said, because hedge fund managers typically have the freedom to take longer-term risks, while mutual fund managers have incentives to focus primarily on short-term performance. Undoubtedly, the generous management fees paid by hedge funds also lure many highly skilled managers to the hedge fund world.
"It's not that hedge funds are bad," says Jeff Spears, managing director of Presidio Wealth Management in San Francisco. "It's that most don't measure up, and the person getting into hedge funds for the first time isn't going to get into the few funds that really have proven that they can get the job done." Presidio recently completed a research report that compared the performance of a diversified investment portfolio to the Hedge Fund Research Fund of Funds Composite Index, the industry benchmark for hedge fund-of-funds. Typically, individual investors use a fund-of-funds when they first go into hedge funds, because it diversifies the risks. From April 2000 [the height of the bull market] through March 2006, Presidio found that the diversified portfolio (40% taxable bonds, 20% large-cap domestic stocks, 10% high-yield bonds, 15% international equity, 10% domestic small-cap stocks and 5% emerging markets) generated an average annualized return of 6.2%. The hedge fund index gained 5.2%. Since 1990, when the hedge-fund index started, the diversified portfolio delivered 10.6% annually, compared to 10.1% for the hedge funds. "Hedge-fund managers talk about the benefits of lower volatility, better diversification and superior performance a hedge fund gives your overall portfolio, but that's not what most hedge funds are delivering," says Spears. "But you can get all of those things — plus full transparency and everyday liquidity — just by sticking with regular mutual funds."
Some bonds are riskier than others and historically, the markets have priced in risk, so that bonds from the shakiest creditors have offered much higher yields. But that is far from the case now, so the more exotic bonds may be no bargain. And if economic storm clouds loomed, such bonds could really tumble. "The bond markets have suffered from their own irrational exuberance," said Tad Rivelle, the chief investment officer at Metropolitan West Asset Management. Mr. Rivelle said that investors had such a deep hunger for yield a few years ago — when domestic interest rates were low — that they bid up high-yield and emerging-markets debt in particular. "Now we find ourselves in an environment where Russian government bonds are only paying 1% more than U.S. Treasuries," Mr. Rivelle said. "There is a willingness to embrace some of these markets that borders on recklessness." Even high-grade American corporate bonds are not too compelling now, Mr. Rivelle said. They are yielding about one percentage point more than Treasury bonds of similar duration. In fact, he said, the spreads between the yields on Treasuries and all sorts of bonds are historically narrow. By contrast, he said, those Treasury and muni bonds may be the best bargains in the fixed-income universe, even if they are not very sexy. "You don't form a crowd at the cocktail party if you tell people you're buying two-year Treasuries," said Mr. Rivelle, who is also a co-manager of Metropolitan West Total Return, an intermediate-term bond fund. In 2005, the fund's return of 3.11% topped 95% of its peer group, according to Morningstar. The fund has a yield of 5.63% and an expense ratio of 0.65%. Through Thursday, it has returned an average of 5.03 percent a year over the last five years. Bond yields fall when the underlying bond prices rise. The yields on high-yield corporate bonds, known as junk bonds, and emerging-markets debt have fallen to within an inch of Treasuries as investors have moved money into funds that invest in them. Investors poured $21.4 billion into high-yield bond funds and $5.3 billion into emerging-markets bond funds during the five years through May, according to AMG Data Services. Two years of steady rate increases by the Federal Reserve have lifted interest rates on five-year Treasury bonds to more than 5%. Many bond strategists say Treasury bonds with expiration dates in the range of two to five years now offer some of the best values in the bond market. John Donohue, chief investment officer in the fixed-income group of J. P. Morgan Asset Management, suggests holding Treasuries in that short-term range. He says that there is a 60 percent chance that the Fed will raise the federal funds rate this month by an additional quarter-point, to 5.25%, "and we think people should still be running short duration until that's more clear." But he says he doesn't expect the fed funds rate to go above 5.25% this year, as long as the data behaves. "Clearly, if the data surprises on the strong side, particularly the inflation data, then the Fed will raise rates more aggressively in response," he said. In the municipal market, the difference between yields on longer- and shorter-term bonds is greater than for corresponding Treasuries. (In financial jargon, municipal bonds have a steeper yield curve.) So strategists recommend municipal bonds with 5 to 10 years left to maturity. But even in the municipal market, investors should not go longer than 5 to 10 years, said Warren Pierson, a bond fund manager at Robert W. Baird. Investors who reach for a little extra yield in munis, Mr. Pierson said, are not being paid enough for the extra risk. Mr. Pierson is a co-manager of the Baird Aggregate Bond fund, which has a yield of 4.47% and an expense ratio of 0.55%. It has had an average annual return of 5.24% over the last five years. When it comes to tax-deferred account investing, Martin Mauro, a fixed-income strategist at Merrill Lynch, says he prefers a very diversified portfolio of Treasuries, investment-grade corporate bonds, mortgage-backed securities and other types of high-grade bonds. If investors want to dabble in high-yield bonds, he recommends limiting them to 5% of the bond portfolio within a tax-deferred account. Mr. Mauro described high-yield bonds as "vulnerable" because the spread on yields between the entire junk bond market and three-month Treasury bills is 3.6 percentage points. "That's just about the narrowest it's ever been," he said. But he does not recommend owning any foreign bonds now, not even those from large developed countries like Germany, Japan and Canada. Mr. Mauro pointed out that Americans would give up a lot of yield to do so, because most of the government bonds in those countries have lower yields than Treasuries do. For instance, he said, an investor who wanted to hedge against further losses in the dollar could buy a one-year German certificate of deposit or a one-year German government bond. But they are yielding about two percentage points less than a one-year Treasury bond. So the dollar would have to decline more than 2% from its current level for that investment to begin paying off. What's more, many strategists say that while the Federal Reserve is nearly finished raising interest rates, policy makers in Europe and Japan are closer to the beginning of a rate increase cycle. That could benefit those currencies against the dollar but it would also reduce the value of existing European or Japanese bonds.
For a more dramatic example, look no further than the roller coaster in emerging-markets stocks of recent weeks. The MSCI EAFE index, which measures emerging markets, now shows 96% correlation to the S&P, up from just 32% six years ago. Even commodities like oil and precious metals are increasingly moving in tandem with stocks. The Goldman Sachs Commodity Index, which tracks 24 commodities, moved from a correlation of negative 14% in 2000 to a positive correlation of 33% at present, according to the report, released in late March. For investors, that poses a troubling issue: how to maintain a portfolio diversified enough so all the pieces don't tank at once. It turns out that there are a few options. Cash-like investments such as money-market mutual funds, or funds that invest in short-term, 30-day to six-month Treasury bills, have in the recent past moved increasingly independently of the stock markets, making them a diversification play. Treasury bills with three-month durations, for instance, went from a positive correlation of 34% in 2000 to a negative 58% by February this year. "The uncorrelated assets are bonds and cash," says the report's co-author, Richard Bernstein, investment strategist for Merrill Lynch. Another diversification option in the current environment are funds that invest in high-quality bonds -- either long-term government bonds, or corporate bonds with high credit ratings, says Milton Ezrati, chief economist at money-management firm Lord Abbett. The bad news right now is that funds investing in these instruments have had meager returns over the past two years. The current correlation trend doesn't mean investors should go out and ditch their existing investments. It's just that they may not be "getting the same diversification" they thought if the investment decisions were made some time ago, says Mr. Ezrati. He adds that over long periods of time, going back decades, sometimes varied asset classes tend to converge, reiterating the need for investors to reassess their allocation at regular intervals. For instance, commodities - which were moving inversely to stocks until a few years ago - moved in tandem with stocks back in the 1950s and 1960s and also briefly in the 1980s, because of the healthy domestic economy during those times, which lifted demand for natural resources and at the same time lifted stock prices. One explanation for today's higher correlation is increased globalization, which has made the economies of various countries more interdependent. A related factor is low interest rates globally, which has made it easier for people to borrow money inexpensively. That, in turn, has sent them looking for new ways to invest that borrowed money, simultaneously driving up prices for many types of investments. More Correlation Stats David Gaffen, WSJ 6-22 MarketBeat has pointed out in the past that world markets have been like the Rockettes in the last two years - a blur of similar faces, moving in lockstep, with no perceptible difference between them. Looking back over the past 12 years, Jim Bianco of Bianco Research said on a conference call today that of a group of eight different assets, the performance of all of them has a greater than 80% correlation with the S&P 500, which means as it goes, so goes everything else. (A 100% correlation implies an exact match; a -100% correlation means exact opposites.) It's a diverse group, too -- including the federal-funds rate, the performance of investment-grade corporate bonds relative to Treasurys, the CRB Index and the Brazilian stock market. For the past 12 years, Mr. Bianco has calculated which of these assets has been the least correlated; until two years ago, there was always something less than 40% correlated with the S&P 500, but not anymore.
"Liquidity is trumping everything -- it is the dominant fundamental," Mr. Bianco said. "There's no way that we can sit a health-care analyst, commodity analyst and emerging market analyst together and have them tell us, 'Why, yes indeed, health-care stocks, copper and Brazil should all be moving up and down together.' The fundamentals of everything cannot all be in synch at the same time." Here's the rub: This situation isn't going to persist. As central banks have raised rates, even the Bank of Japan, the markets have fallen. Mr. Bianco believes they're set up for more pain in the second half of the year, and only then, when liquidity has dried up, will these assets uncouple from each other. "If the Fed calls off the rate hikes or the BoJ calls off quantitative easing, that could help re-correlate the markets to the upside, but then, we're either going to risk inflation or have to get rid of this liquidity, because this situation cannot last much longer," he said. Related: A World Full of Texas Hedges - Justin Lahart, WSJ
The lower estimates for future large-cap and bond returns were linked to Schwab's expectations that in coming years there will be a decline in long-range inflation. Schwab also expects interest rates that will be low in historical terms. Typically, stocks rally in times of low inflation and low rates. During bull markets, small caps generally outperform large caps, a phenomenon that explains the disparity in Schwab's projected returns for small- and large-cap stocks in coming years. Monthly Employment Stats
"Unemployment fell to 4.6% largely because more adults chose to not participate in the job market," said Peter Morici, professor at the University of Maryland. "It is clearly a 'haves' and 'haves not' labor market, and these conditions go a long way toward explaining why President Bush cannot convince Americans the economy is on solid ground, even as it demonstrates robust GDP and productivity growth." Over the month, job gains continued in education and health services, wholesale trade, professional and business services, and mining. Retail trade employment was down in May. Education and health services continued to add jobs in May, with a gain of 41,000. Over the past 12 months, employment in the industry has increased by 408,000, with health care accounting for about two-thirds of the growth. In May, health care added 19,000 jobs, with about half of the gain in hospitals. Elsewhere in the service-providing sector, wholesale trade added 14,000 jobs over the month; employment in this industry has risen by 108,000 over the past year. Employment in professional and business services continued to trend upward in May (+27,000). Within that industry, computer systems design added 11,000 jobs. Temporary help employment has been flat since January. Retail trade employment fell by 27,000 in May, following a larger decline in April. However, employment in the industry was little changed over the year. Over the month, general merchandise stores and clothing stores each lost 9,000 jobs. Employment in the information industry fell by 13,000, largely due to a decline in motion picture and sound recording employment. In the goods-producing sector, mining employment rose by 4,000 in May. Mining has added 113,000 jobs since its most recent low in April 2003, largely reflecting gains in support activities for oil and gas. In May, construction employment was essentially unchanged in all its component industries. Total construction employment has not increased significantly since February. Manufacturing employment edged down in May (-14,000), following a small gain in April. Over the month, employment declined in motor vehicles and parts and in computer and electronic products; both of these industries had added jobs in April. The average workweek for production or nonsupervisory workers on private nonfarm payrolls decreased by 0.1 hour to 33.8 hours in May, seasonally adjusted. The manufacturing workweek also fell by 0.1 hour to 41.1 hours, while factory overtime was unchanged at 4.6 hours. The index of aggregate weekly hours of production or nonsupervisory workers on private nonfarm payrolls decreased by 0.2 percent in May to 104.6 (2002=100). The manufacturing index fell by 0.3 percent to 96.0. Average hourly earnings of production or nonsupervisory workers on private nonfarm payrolls edged up by 1 cent in May to $16.62, seasonally adjusted. This followed an increase of 10 cents in April. Average weekly earnings decreased by 0.2 percent in May to $561.76. Over the year, average hourly earnings increased by 3.7 percent and average weekly earnings increased by 4.0 percent.
Quick Facts, Stats & Opinions Profit 'Purity' Peter McKay, WSJ 6-26 Michael Thompson, research director at Thomson Financial, says the earnings "purity" of stocks in the Standard & Poor's 500-stock index has risen since 2002. He arrived at that conclusion by taking the earnings figures presented by the companies and backing out certain charges, fees and other figures that say nothing about whether the company is selling more of its products or services. These days, Mr. Thompson is finding fewer items to exclude; thus, he thinks the quality of earnings is higher. How "good" can earnings get? Mr. Thompson and other analysts say the relatively low prices now seen on many stocks leaves room for the shares to keep climbing, which would suggest the quality probably will get a little better. The thinking: When a stock is cheap relative to the company's earnings, it has more room to rise. That means executives have less incentive to fiddle with earnings in order to try to boost the stock. Once a stock gets expensive, it is less likely to keep climbing, and that is historically a point at which companies have tried to eke out more gains on paper, according to Mr. Thompson. The companies in the S&P 500 trade at about 14 times the per-share-earnings estimate for the next 12 months, compared with a historical valuation of about 18 times. "At this point, companies don't need to do a lot of that engineering," Mr. Thompson says. "We're getting to the point where earnings are really, really clean, which is good for the market." Consumers Can Cut Credit Offers Pamela Yip, The Dallas Morning News 6-18 When you get junk mail, do you just throw it away? That could be a problem. Identity thieves have been known to rifle through trash to find credit card applications and apply for credit in someone else's name. Consumers are supposed to use a shredder to destroy credit card applications that come in the mail. But there's another way. You can tell the credit card industry not to send you any more applications. Just go to www.optout prescreen.com, or call toll-free 1-888-567-8688. Federal law requires the credit industry to make the opt-out option available. The Web site and telephone number ask you to provide your Social Security number when opting out. This throws many people for a loop, since we've been taught not to give out our Social Security numbers. Credit bureau officials and officials at the FTC, which enforces the Fair and Accurate Credit Transactions Act, said the Social Security number is necessary to accurately match a consumer with his or her request. When you call in, the opt-out number identifies itself as the "consumer credit reporting industry opt-in and opt-out number." The average consumer doesn't have a clue as to what the "consumer credit reporting industry" is. Once you've made it past those roadblocks, you have the choice to opt out from receiving offers for five years, or you may opt out permanently. But if you choose the permanent option, you have to confirm your request in writing. Federal law requires that. The Dangerous 50's Scott Burns, Dallas Morning News / Liz Pulliam Weston, MSN 6-25 A recent study at the Center for Retirement Research at Boston College found that individuals in their 50s were likely to experience one or more shocks that could dramatically reduce their retirement security. Worse, it was more likely that you would experience one of these shocks than not. The study found there was a 69% chance [73% for blacks and hispanics] that between age 51 and age 61, an individual would experience at least one of these events: A major medical condition (41.3%). A health-related work limitation (33.7%). Severe disability (6.9%). Enter a nursing home (3.4%). Be laid off from job (18.7%). Be divorced (2.3%). Be widowed (7.3%). The percentages for each event, by the way, add to more than 69% because some individuals experienced more than one of the events.[For married couples, the odds are 86.9% that a negative event will happen to one or both of you.] The setbacks the center studied can disrupt retirement savings plans by reducing income, increasing expenses and causing some to raid their nest eggs. The effects on long-term wealth can be profound. The study found that the median wealth for healthy people with no work-related limitations grew 45.7% during the 10-year study. Those who experienced such health restrictions, by contrast, saw their median net worth increase just 17.1%. Simply being diagnosed with a major medical condition, even if no work limitations were involved, had a dampening effect on wealth growth. Those who were diagnosed during the study period saw a 23.5% increase in their net worth, while those who had the condition at the start of the survey had just 16.1% growth. Those who were laid off during the study decade experienced similar stunting of their net worth, which grew by 19.2%. (If they were out of work at the time the study started in 1992, the results were worse: just 14.3% growth.) The picture was even grimmer for the divorced and disabled. Those who split up during the 10-year study saw just 4.3% growth in their median wealth over the 10 years, and those with severe disabilities experienced a 9.8% decline in their median net worth. The study can be found at http://www.bc.edu/centers/crr/issues/ib_45a.pdf. Three Retirement Myths Robert Powell, MarketWatch 6-8 Myth 1: Social Security will still replace 42% of an average worker's earnings. Reality: Net Social Security replacement rates will drop to 30% by 2030, adjusting for the rising normal retirement age, taxation of benefits and higher Medicare premiums. Myth 2: Although 401(k)s are the most common type of employer-sponsored pension, traditional defined-benefit plans still cover a large share of the work force. Reality: In 2003, only 10% of all private-sector workers with pensions were covered solely by a defined-benefit plan. Myth 3: 401(k)s have allowed workers to save significant amounts for retirement. Reality: In 2004, the typical household head approaching retirement had only $60,000 in 401(k) and IRA accounts, which translates into less than $400 per month in retirement. Buy and Hold Chet Currier, Bloomberg 6-02 Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo, figured, `The market is 19 times as volatile as the underlying fundamentals would seem to justify.' Says Grantham in a commentary on the Web site of his company, which manages $122 billion: `Ironically, most of the risk to long-term investors in equities comes from panicking in the short-term and closing out positions' at temporary low points. He adds, `Most investors would be better off if they had a hard rule that everything they bought had to be held for 30 years or longer.' Kill Germs - Store it in Silver Rhonda Rundle, WSJ 6-06 Since ancient times, people have known of the germ-fighting qualities of silver. Dead bodies were wrapped in silver cloth to ward off bad odors. Milk stored in silver vessels didn't spoil as quickly. Now, silver is showing up as a bacteria- and odor-fighting material in a range of contemporary consumer products, from sports socks to washing machines. Sharper Image recently introduced a line of plastic food containers infused with silver nanoparticles that are intended to keep food fresher. The boxes, priced at $69.95 for a set of 12, have drawn positive reviews - including one owner enthusing about strawberries staying fresh for 14 days. In March, South Korea's Samsung Electronics launched a new washer in the U.S. that uses silver ions to sanitize laundry. Antimicrobial silver is also increasingly popular in athletic and outdoor clothing. During May, multi-cap funds pulled in about $8.5 billion for the month, according to data from fund researcher Lipper Inc. Large-cap mutual funds lost about $6.7 billion, and small-cap funds drew about $300 million. According to Lipper, multi-cap funds returned 22% in 2005, better than the 18% returned by small-cap funds and 17% by large-cap funds. (Anjali Cordeiro, WSJ 6-27) More than 230 stocks will get kicked out of the Russell 3000 index on Friday. The Russell swap-out is a bit below average for the last decade, when more than 430 stocks turned over in a typical year. There are 122 IPOs making the list this year. (Chuck Jaffe, MarketWatch 6-25) As Q2 earnings season closes in, investors are likely to get nervous about whether the string of 11 quarters of double-digit earnings growth will continue. Right now, the answer depends on whom you ask. Zacks expects Q2 average earnings growth of S&P500 companies of 8.3%. S&P is forecasting growth of 9%. Thomson Financial is targeting growth of 11.9%. (Scott Patterson, WSJ 6-21) Alec Young, equity market strategist at S&P, says that this quarter investors are likely to put more weight on guidance than they normally do. The reason: The Federal Reserve's campaign to boost interest rates. "The concern is that the Fed is going to overshoot and earnings are going to slow in the second half," he said. If companies are worried about whether the Fed is going to crank up rates too high and choke off growth, they may choose to lowball expectations. Most analysts, including Mr. Young, expect earnings season to revive the sagging stock market as investors focus on the continuing trend of stellar earnings. But with Wall Street keyed up about the impact of rates on earnings, weaker-than-expected forecasts could hit stocks especially hard. (Scott Patterson, WSJ 6-21) The World Wealth Report, an annual report compiled by Merrill Lynch and Capgemini Group, shows that in 2005, the U.S. population of individuals with net financial assets of at least $1 million [or high net worth individuals] grew 6.8% to 2.67 million. In 2004, the same population increased 9.9% to 2.5 million. World-wide, the number of wealthy individuals climbed to 8.7 million, a 6.5% increase from 2004. The wealthy also shifted investment strategies last year, the report says. Anticipating rising interest rates, they shifted their money away from fixed-income investments and opted for equities and alternative investments. The report says 21% of their investments went into fixed income in 2005, down from 24% in 2004. The rich continued to diversify globally their investments in 2005, shifting assets from North America to the Asia Pacific region. In 2005, the rich had 23% of their investments in the Asia Pacific region, up from 21% in 2004. Investments in North America and Europe likely will continue to decline over the next few years. (Anjali Athavaley, WSJ 6-21) Is the Fed less predictable now than in the past? Not necessarily, says David Altig, an economist who works for the Cleveland Fed, pointing out that there were periods during Alan Greenspan's run when the Fed wasn't so easy to anticipate. "The transition periods 1994-95 and 2000-2001 - that is the end of the last two significant northerly runs in the funds rate - just about jump out at you," he writes. "I've said it before: You just can't know more than you can know, and it is at turning points when you know the least. It was true during the reign of Sir Greenspan. It is certainly true today." (David Gaffen, WSJ 6-20) When you sell shares in a typical ETF, your gains are taxed the same way as when you sell shares of stock--and you enjoy the same maximum long-term capital-gains rate of 15%, as long as you hold the shares for more than a year. But ETFs that track the price of gold, such as StreetTracks Gold Trust (GLD) and iShares Comex Gold Trust (IAU), are an exception to the rule. The top long-term gains rate jumps to 28% because the IRS considers investments in gold ETFs equivalent to buying collectibles. If you hold a gold ETF for less than a year, your short-term gain will be taxed as ordinary income. (Sean O'Neill, Kiplinger 6-16) The emerging markets have been getting smacked around in recent weeks, but Craig Karmin writes in this morning's Ahead of the Tape that those markets can handle this volatility better than in the past. "Only 10% of emerging markets were rated investment-grade credits in 1998. Now more than 50% are. Yields on their bonds dropped from around 15 percentage points above U.S. Treasurys to less than two percentage points, lowering borrowing costs. Many allow their currencies to trade more freely, offering their economies greater flexibility," he writes. (David Gaffen, WSJ 6-15) Emerging markets have certainly been roiled in the past month or so, but when measuring the collective decline in the world's stock-market capitalization lately, the usual suspects are to blame: the U.S., Japan, the U.K., and other big European nations. Between May 9 and June 12, the world's stock-market capitalization declined to $41.59 trillion from $46.90 trillion, an 11.3% loss, according to Bianco Research. However, Bianco took a look at the markets that had all lost more than 16% in that time period, such as India, Brazil and Sweden, and found that even with their declines, they only accounted for world market-cap losses of $852 billion, compared with the loss from Japan, which totals about $884 billion. (The U.S., with $1.30 trillion lost, is the most, but the U.S. market cap accounts for 37% of the world, far outpacing second-place Japan at 11%.) "Reading the financial media lately, India's stock market seems to be the center of the universe. However, India's stock market accounts for only $208 billion, or 4%, of the $5 trillion lost world wide," Bianco pointed out, noting that the Bank of Japan's removal of reserves has tightened liquidity in Japan. "We contend it is easier to sell the idea that hot money (read: hedge funds) is bailing out of these markets rather than Japan. While this may be true on a relative scale, the Japanese market remains more significant than India or even the U.S., as its losses tell us a lot about what is driving global markets." (David Gaffen, WSJ 6-15) Volatility may not necessarily a bad thing, if historical patterns hold. In the past 50 trading days, volatility measured by the Chicago Board Option Exchange's Volatility Index (the VIX) is up 105%, as fear has engulfed investors and the market has sold off. But the charting sleuths at Birinyi Associates point out that since 1990, there have been only five other periods where the VIX, commonly known as the "Fear Index," has increased by 100% in a 50-day period. In all of those periods, the market has done well in the next six months, and in all but one, the market was higher three months later. (David Gaffen, WSJ 6-15) The Vanguard-funded Bogle Financial Markets Research Center calculates that stock-fund investors sold almost 24% of their shares in 2005. The Bogle Center calculates that index funds account for less than 16% of the money in stock funds. Among folks who invest in mutual funds outside their employer's retirement plan, a mere 14% do so without any help from a financial adviser, according to the Investment Company Institute. (Jonathan Clements, WSJ 6-11) A new Harvard University study calculates that only about 4% of U.S. homeowners have mortgages that will reset upward in 2006. Here's the math: Only about two-thirds of homeowners carry a mortgage at all. Of those, only about one-quarter have adjustable-rate mortgages. And of those with adjustable-rate mortgages, only about one-quarter are scheduled to reset their rates in 2006. That's one-quarter of one-quarter of two-thirds, which is 4%. What's more, the Harvard study says, the vast majority of people have enough equity in their homes that they won't be underwater on their mortgages even if housing prices do fall somewhat. As of 2004, the most recent year for which numbers are available, only 3% of households have less than 5% equity in their homes, and fully 87% of households have at least 20% equity. (Peter Coy, business Week 6-06) Sales figures reported Thursday showed that Toyota, Honda and other Asian manufacturers claimed a record 40% of the American auto market in May, when sales of fuel-efficient vehicles like the Toyota Corolla, Honda Civic and Hyundai Sonata all rose 20% or more compared with May 2005. For Detroit companies, which have continued to aggressively market their costly new sport utility vehicles and pickup trucks despite the high gas prices, market share last month dropped to 52.9% - their second-lowest in history. In all, industry sales for May dropped 4.6% compared with 2005, according to Ward's InfoBank. Car sales rose nearly 2%, but sales of SUV's, pickups and minivans fell 10.2%. (Maynard & Bunkley, NY Times 6-02) Lou Crandall, at Wrightson ICAP, believes that the long reign of certainty about Fed moves is over. "The surprise is not that we have a lack of certitude but that it took so long in coming," Mr. Crandall said. "We're back to where the Fed wants us to be . . a central bank is never very happy when it can say what it's going to do next - that's a sign that it recognizes it has unfinished business." (Michael Hudson, WSJ 6-02) Goldman Sachs economists recently extrapolated the potential impact of a housing slowdown on the job market. During the last downturn, housing-related employment fell to 8% from 8.7% of total U.S. employment. That implies that between 0.7% and 1% of today's jobs, or up to 1.3 million workers, are at risk today. (Danielle DiMartino, Dallas Morning News 6-01) Since 1950 the S&P500 has, on average, gained 0.8% in June, according to Jeffrey Hirsch, who publishes the Stock Trader's Almanac. However, midterm election year Junes have been terrible since 1950 - the S&P, on average, has fallen 2%. (David Gaffen, WSJ 6-01) Bob Doll, chief investment officer at Merrill Lynch Investment Managers, tackles the theory that inflation jitters have been the catalyst for the market's May stumble. If inflation really were running much higher, "we would have seen the energy, industrials and materials sectors outperform during the correction" because those sectors generally benefit from higher prices, he wrote in a Tuesday note. Instead, they took some of the biggest hits. The real reason for the decline has been "moderating economic growth," the analyst wrote, as record-high energy prices, rising interest rates and a slowing housing market hurt the consumer. (Scott Paterson, WSJ 6-01) Home Page Previous Factoid Top Sites
|