|
|
More Factoids Oct Sept Aug July Jun May Apr Mar Feb Jan 2005 Updates Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan Bank Updates Oct Sept Aug Jul Jun May Aprl Mar Feb Jan Banks 2005 Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan MLP Updates Nov Oct Sept Aug Jul Jun May Aprl Mar Feb Jan MLPs 2005 Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan REIT Updates Oct Updates Off/Ind Retail Triple Apt/Hsp Sept Updates Off/Ind Retail Triple Apt/Hsp August Updates Off/Ind Retail Triple Apt/Hsp July Updates Off/Ind Retail Triple Apt/Hsp June Updates Off/Ind Retail Triple Apt/Hsp May Updates Off/Ind Retail Triple Apt/Hsp |
The gyrations have been large. The June Eurodollar futures contract rallied 43 basis points from 94.72 on Sept. 18 to 95.15 on Oct. 4. The gains were completely reversed over the next three weeks as various Fed officials -- Fed Governor Don Kohn and District Bank Presidents Michael Moskow (Chicago), Charles Plosser (Philadelphia), Richard Fisher (Dallas) and Jeffrey Lacker (Richmond) -- reiterated their concerns about inflation accelerating or failing to retreat from its current unacceptably high levels. Then something strange happened. The market stopped listening. While June Eurodollars have yet to scale their former heights, they haven't revisited their September/October lows in the face of repeated reminders of the risks of inflation from the Fed. The June contract is priced for a full 25-basis-point rate cut and part of a second by mid-year -- even after Fed Chairman Ben Bernanke's comments yesterday that inflation risks are ``primarily to the upside.'' In a world where the next Fed move will be based on the cumulative weight of the evidence (data), Mr. Market is saying he knows best. Inflation Reality To be fair, a dose of inflation reality intervened to challenge the Fed's fears about higher inflation. The core consumer price index, which excludes food and energy, rose 0.1 percent in October, the smallest increase in eight months. The year-over-year increase fell 0.2 percentage points to 2.7 percent, also the first drop in eight months. The energy-driven CPI rose 1.3 percent in October from a year earlier, down from more than 4 percent as recently as July. One month does not confirm a trend, but the improvement was enough to reassure the market and give weaker economic data the upper hand. Yesterday's report of a 5.1 percent drop in orders for non- defense capital goods excluding aircraft, the biggest decline since January 2004 for this indicator of future capital spending, was another coffin nail in the optimistic investment outlook. Investment Outlook Dimming ``We have always been skeptical of the idea that capital spending would charge on regardless of the rest of the economy,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, in a note to clients. ``These data support our view.'' While durable goods orders are volatile on a month-to-month basis -- non-defense capital goods orders excluding aircraft rose 3.2 percent in September -- the year-over-year increase has fallen to 7.2 percent from a peak of almost 20 percent in January 2005. This wouldn't be the first time that traders and investors have chosen to challenge the Fed's forecast, if you can call its risk assessment that. (No doubt the hawkish rhetoric was geared in part toward containing inflation expectations, which seem to garner as much weight as actual inflation.) And on some level, Fed Chairman Ben Bernanke must be smiling. One of the reasons he's such a strong advocate for adopting an explicit inflation target is to make the central bank more transparent. In a perfect world of central bank transparency, investors respond to news, not to what policy makers say. A defiant bond market, whose risk assessment is for a weaker economy and a reduction in the overnight rate, is both a sign of success -- the price action has detached from Fedspeak -- and a source of information. If the bond market merely reflected what Fed officials said, then they have achieved a perfect feedback loop, with zero informational content. As it is, the yield on long-term Treasury notes and bonds reflects the price at which borrowers (the U.S. government) and lenders agree to transact business. The invisible hand sets the equilibrium price. The Fed, on the other hand, arbitrarily picks and maintains an interest rate at which banks can make uncollateralized overnight loans to one another. Its ``guesstimate'' of the appropriate federal funds rate is submitted, each and every day, to the market for its approval. Is the funds rate too high, too low or just right? The current inverted shape of the yield curve, with long rates lower than the funds rate, reflects the bond market's view that short rates are unsustainable at this level. November will be the fifth consecutive month the spread is negative. Yesterday the yield on the 10-year Treasury note slipped below 4.5 percent for the first time since January. Does the market know something the Fed doesn't know? It usually does. Bernanke may be smiling, but on some level, he has to be concerned about the message he's receiving loud and clear. Market to Fed: I hear you. I respectfully disagree.
One reason for the November effect is that many mutual funds close their fiscal years on Oct. 31. Because they're required to distribute most of their realized capital gains and dividend income, many funds sell their worst-performing shares in October to offset those gains, lowering the tax burden of investors in the funds. They may also sell losers to make their holdings look more impressive to investors -- something known as window-dressing. In November, the downward pressure eases and those stocks pop. It's similar to the January effect, during which year-end tax-loss candidates bounce in the beginning of the new year. The November effect has been more powerful than the January effect lately, says Mr. Bukowski, probably because the January effect is more widely known and traders front-run it more actively. In December, meanwhile, the trend reverses again, with winners tending to outperform the losers by better than three percentage points. In other words, prepare for a break in underdog season. Timing is everything.
The aging bull market has thrived recently as investors have set the bar low and watched as corporate profits have consistently exceeded expectations. In Q3, investors had been bracing for 14% earnings growth, compared with the year-earlier period. But they were pleasantly surprised when profits for the S&P500 companies grew by 19%. Now the situation is likely to reverse. It appears that investor expectations are rising just as corporate earnings are on the verge of disappointing. According to the most recent Thomson survey of Wall Street analysts, S&P500 earnings are expected to expand 9.6% in Q4. That would be a major slowdown from Q3, and even Q2, when profits rose 16.3%. It would also be the slowest rate of earnings growth since Q2-03. In reality, profits for most S&P500 companies are growing much slower than 9.6% this quarter. If you stripped out the financial sector, where a profit surge of 32% is expected, corporate earnings would be likely to grow by only 3.1%, said John Butters, senior research analyst for Thomson Financial. And this slowdown is likely to continue through 2007. Many economists and market strategists are forecasting only modest single-digit earnings growth next year.
The differences are quite large — as much as 10 percent a year, on average, depending on the stock index and the number of decades studied — and they are pervasive. The researchers found a lunar effect in all major United States stock indexes over their history, including the Dow Jones industrial average back to its start in 1896. Furthermore, after examining several dozen foreign markets, the study by Professors Dichev and Janes concluded that “if anything, the results are more pronounced for foreign countries.” One complete lunar cycle — from new moon to full moon and back again — lasts slightly less than 30 days. New moons and full moons do not occur on the same days of each month in the modern Western calendar. That is important, because it means that the stock market’s lunar cycle is not a disguised version of any other seasonal pattern based on that calendar. Other research has found, for example, that the market performs particularly well at the beginning of each calendar month, especially at the start of each year. What would cause the lunar cycle to affect the market? Neither group of researchers studied this question directly. But both cited extensive psychological and biological literature that has found that the lunar cycle can heavily influence our moods. A full moon, for example, increases our tendency to feel depressed and pessimistic, so investors may be more inclined to stay out of the stock market at or near that time. The lunar effect appears strongest for the smallest-cap stocks — a finding that raises the researchers’ confidence in their psychological explanation. After all, according to Professor Zheng and her colleagues, relatively few institutional investors hold such stocks, and individuals are more likely to be affected by the lunar cycle — in part because institutions typically have cumbersome decision-making processes, often involving committees, that immunize them from employees’ moods. What should investors make of this research? Perhaps the most important lesson is that our emotions too easily trump our objectivity. According to Professor Dichev, the lunar cycle in stocks “serves to remind us how much changes in our moods can affect our behavior in potentially irrational ways.” To prevent that effect, we may want to pursue largely mechanical strategies — like buying and holding an index fund — that specify in advance what actions to take in our portfolios and when. Could a trading strategy be devised to exploit the lunar-cycle trend? Possibly, but you need to minimize transaction costs, and there is no guarantee of success in every cycle. Based on historical data, the strategy would succeed only about 60% of the time. The strategy worked in the most recent cycle: the S&P500 returned just 0.3% in the 15 days surrounding the full moon on Nov. 5, versus 0.9 percent in the days surrounding the preceding new moon. But the strategy failed in the previous cycle: the index was up 2.2% in the full-moon period and 1.5% in the new-moon period.
1 Just Say No to Spending Like the Jones To save and invest successfully, nothing is more critical than self-discipline. That means settling on a mix of stock, bond and money-market funds and then sticking with that mix, no matter how unnerving you find the market's daily turmoil and no matter how tempted you are to buy the latest hot stock. More important, you also need the ability to delay gratification, so you save a healthy sum on a regular basis. 2 Index Despite all the talk of beating the market, there's a devastating piece of logic that stands stubbornly in our path. We can't all beat the market, because collectively we are the market. If somebody beats the market, somebody else must lag behind. In fact, once investment costs are figured in, there are very few winners and most of us trail the market averages. 3 Cut Taxes & Investment Costs All this should be a reminder that, like it or not, you have two investment partners: Wall Street and the taxman. The three of you divvy up your investment spoils. Want to keep more for yourself and pay less to the Street and to the taxman? Your best bet is to clamp down on investment costs and make the most of tax-sheltered retirement accounts. 4 Choose Help Wisely Most investors are not capable of investing on their own. Most folks don't have the time, interest and emotional fortitude to invest successfully. But unfortunately, you may not fare much better if you hire a broker or financial planner. Many advisers charge too much and have had scant formal financial education, so you really need to pick your adviser with extraordinary care. 5 Diversify When experts argue the case for diversification, they will point out that buying a wide variety of investments can lower risk, because some of these investments will post gains when others are suffering. The problem: Whenever we get a major financial crisis, diversification -- especially global stock-market diversification -- often proves pretty much useless, because everything plummets at the same time. Yet I think this misses a key point. Even if, say, U.S. and foreign stocks tend to rise and fall in tandem, there are often startling differences in their annual return. Those who own just one market can end up suffering long periods of lackluster performance. Moreover, diversification isn't just about tempering short-term swings in your portfolio's value. You also want to limit the damage done by financial calamities, whether it's political upheaval that shutters a country's financial markets or the sort of devastating market collapse we saw in Japan in the 1990s.
The metaphors some of these advisers use - an analogy to an airplane that tries to rise too quickly. An airplane in such a situation will eventually stall out and then plunge. Technicians often refer to the ever-steepening slope of such an ascent as a parabolic rise. And in recent days, a growing number of investment advisers have begun to describe the stock market's advance in these terms. Richard Russell, editor of Dow Theory Letters, had this to say earlier this week: "Let's check out the weekly Dow chart going back three years. Note the three angles of ascent the third is almost parabolic." Adding to the sense of danger are parallels between the market's recent advance and the strength it exhibited in the months prior to the bursting of the Internet bubble in early 2000. As one alert reader recently pointed out in an e-mail, the Standard & Poor's 500 index gained more than 2% in each of the last three months, and before this past July, the last time this happened was in 1999. To find out whether this parallel with the pre-burst Internet bubble is helpful, or merely a fluke, I looked back through U.S. history to find all situations in which the stock market gained more than 2% in three successive months. In order to have the maximum amount of data, I focused on the Dow Jones Industrial Average, since data for it extend back to the mid-1890s. It turns out that it is not as rare a phenomenon as you might think to have three months in a row of gains greater than 2%. Cuch strength has been exhibited more than 5% of the time over the last century - about once every 20 months, on average. On the basis of the econometric tests I ran, one cannot conclude at the 95% confidence level that the market behaves any differently following three successive months of gains in excess of 2%. However, insofar as one can draw any inference from the data, even if at less than the 95% confidence level, one would have to conclude that the stock market is more likely to perform better than average, not worse, following periods of such strength. The bottom line? When it comes to reasons why the stock market might soon decline, there no doubt are many other things one can worry about these days. But the pace of the market's recent advance is not one of them. Fear that Markets are Rising Too Quickly is Founded Conrad De Aenlle, NY Times 11-19 As the holiday season begins, some analysts are worrying that the traditional year-end rally on Wall Street may have already come and nearly gone. Mary Ann Bartels, technical research analyst at Merrill Lynch, wondered in a note to investors whether the tendency for stocks to climb in the last couple of months of the year had been rescheduled this year for September and October. She then acknowleged feeling torn between what her charts have told her and what the calendar and history have led her to expect. “It is not our favored stance to be more toward the bear camp looking for a cyclical correction of 8% to 10%, but all of the market indicators suggest this is the more likely scenario over the coming weeks,” Ms. Bartels said. “What is surprising is that these readings are occurring at this time of year. Most years see a bullish year-end rally.” She highlighted several exceptions that prove the rule, including three years in the 1990s when the S&P500 lost at least 6% at some point during the last two months of the year. What signs suggest that 2006 will play out as those three years — 1991, 1994 and 1996 — did? Trading volume has shrunk, something that often precedes a price decline, she noted, and several sentiment indicators, including opinion surveys of investment advisers and measures of market volatility, show the sort of complacency that typically occurs near market tops. She also detected a “barbell strategy” among investors, favoring emerging markets on one end and defensive, high-quality American blue chips on the other while ignoring the moderately risky stuff in between. That is similar to the pattern last spring, just before the market took a tumble. These warning flags lead Ms. Bartels to forecast a decline in the S&P500 to as low as 1,260 from its close on Friday of 1,401.20 “All technical signs are pointing to the markets nearing a consolidation period and not a blowoff to the upside,” she said. “We cannot rule out further upside, but the risk/reward warrants a more defensive stance.” Does Strong Fall = Weak Santa Rally? Sam Stovall, Standard & Poor's Equity Research 11-10 In all years since 1945, the S&P 500 typically posted a flat return in August, declined in September, and recovered in October after bottoming out. But this year, the S&P 500 gained 2.1% in August, picked up a little speed in September to clock a 2.5% advance, and then stepped on the gas for an increase of 3.2% in October. But will returns in November and December be subdued as a result? Have we been stealing returns from the traditional Santa Claus rally? Not according to history. Momentum appears to be the key. Investors have witnessed a "string of strength"—positive performances in August, September, and October, which are usually periods of market weakness or heightened volatility—10 times since World War II. In eight of these 10 times, the S&P 500 went on to post an above-average return in the final two months of the year. The average two-month return for all 10 cases exceeded the average performance for all years by 1.3 percentage points.
Value investing may mean something quite different nowadays. Today's value manager is just as likely to be buying a computer or a health-care stock as a metals or paper manufacturer. See Warren Buffett at Berkshire Hathaway snapping up shares of drugmaker Johnson & Johnson. See value managers like Southeastern Asset Management and Harris Associates LP in Chicago loading up on the stock of computer-maker Dell. It appears that yesterday's growth stocks may be today's value stocks, and vice versa. But no matter which category you aim to invest in, you're dealing with a moving target. Value managers face an increasing challenge in the coming years: As more people glorify the idea of value investing and try to practice its principles, the harder it may become to find value opportunities. The hard facts are these: From the end of the 1990s through the first 10 months of 2006, the Vanguard Value Index Fund, a standard-bearer of value investing, gained 5.2% a year. Over the same stretch, its opposite number, the Vanguard Growth Index Fund, lost 3.6% a year. In 2006 through the end of October, Value Index has climbed 15%, Growth Index a measly 4.6%. Regression to the mean is a favorite subject of many value managers. In financial markets, nothing stays hot forever. And after seven strong years in a row, value investing would seem to be a prime candidate to feel some regressionary pressures.
Neglecting foreign bond funds may be shortsighted. Many bond experts say that a little foreign diversification can be good for the fixed-income side of a portfolio — and can help smooth out returns if there’s a decline in the dollar. That said, some experts caution that investors shouldn’t expect foreign bond funds to keep outpacing domestic bond funds as much as they have so far this year. Funds that invest in emerging-markets debt have returned more than 8% this year, while a broader foreign bond fund category has returned more than 4%. Funds that buy long-term United States Treasury issues, meanwhile, have struggled to eke out 1%, according to Morningstar. “One reason that foreign bonds have outperformed over the last year is because the Fed was raising rates while other countries were not,” said John Donohue, the chief investment officer in the fixed-income group of J. P. Morgan Asset Management. Bond prices fall when interest rates rise. Mr. Donohue predicts that Treasuries will fare better than foreign bonds next year, on an absolute basis, because the Fed will start cutting rates. But he says he thinks that the dollar will fall against other currencies, which would benefit Americans who hold some foreign bonds denominated in those currencies — for example, in an unhedged foreign bond fund. That view of interest rates and the dollar is becoming fairly common among bond experts. “We think the U.S. economy is going to slow, and inflation pressure is going to subside,” said Martin Mauro, the fixed-income strategist at Merrill Lynch. Mr. Mauro said he thought that the Fed would cut its benchmark short-term interest rate to around 4% by the end of 2007, from its current 5.25%. On the other hand, Mr. Mauro said he expected British and European central bankers to raise rates next year. While he is cautious about bonds from other developed countries, he said the risks were far greater for emerging-markets bonds, which have soared in recent years. He said investors were now being paid very little extra interest for owning emerging-markets bonds, compared with United States Treasuries. On average, he said that the difference was only 1.85 percentage points; four years ago, the emerging-markets bonds were paying 8 points more than Treasuries. “If there should be any slowdown in global economies,” Mr. Mauro said, “emerging markets would suffer the most.” The outlook for foreign interest rates is only one part of the picture. Foreign currency markets can have a much stronger impact on foreign bond funds, which generally come in two varieties with respect to currencies. They are either hedged — eliminating the risk of foreign currency markets — or not hedged. If you invest in a hedged fund, you have to worry only about the relative interest rates in the countries where it invests. But keep in mind that the dollar’s slide this year was responsible for a large part of the gains in unhedged foreign bond funds. Consider Pimco, which specializes in fixed-income portfolios and has both hedged and unhedged foreign bond funds. Sudi Mariappa, who manages both the Pimco Foreign Bond (U.S. Dollar Hedged) fund and the Pimco Foreign Bond (U.S. Dollar Unhedged) fund, says that the two portfolios aren’t clones, but that they have very similar holdings. This year through Thursday, the unhedged foreign bond fund returned 5.3% while the hedged foreign bond fund returned 2.6%. The unhedged fund started trading in 2005. But Mr. Mariappa has managed its hedged cousin since 2000, with average annual returns of 4.5% over the last five years. Both funds yield more than 2.5% and have expense ratios of 0.95%. Mr. Mariappa said that there was now a stronger case for unhedged foreign bond funds, because of a weak outlook for the dollar, but he thought that Treasuries might outperform foreign bonds on an absolute basis next year. “We expect U.S. rates to fall more than foreign rates,” he said, “so you’ll get a bigger capital gain by holding U.S. bonds.” If you are interested only in shielding your portfolio from a decline in the dollar, you can opt for one of the relatively new foreign currency ETF’s. These provide direct exposure to foreign currencies. They are basically money market accounts that are held in each currency, so they do not have the interest-rate risk of longer-duration bonds in those currencies. But Mr. Donohue of J. P. Morgan warns that investing in a specific foreign currency is not for the faint of heart. He said that investors who didn’t own any foreign bonds or foreign currencies might want to put 5% to 10% of their fixed-income portfolio into an unhedged foreign bond fund that invests in developed markets, and that this would probably be a lot less jarring than owning a single-currency ETF. “Currency is a very volatile asset class,” he said. “If you’re wrong you can get really smoked.”
Some investors say price-earnings multiples only appear low because the U.S. economy is at risk of a recession. If earnings drop, history suggests that valuations will contract further. The price-earnings ratio on the S&P 500 fell to a low of 6.5 in April 1980, and the average from 1960 to 1998 was 15.4, according to Birinyi. This year's profits at S&P 500 companies, bolstered by the Fed's decision to stop raising interest rates, may quadruple from their 2002 level, according to data compiled by Bloomberg. The index has climbed 76% during the period. Earnings for the S&P 500 probably grew more than 10% for the 13th straight quarter, matching the longest streak since at least 1950, according to Thomson. Profit climbed by an estimated 17.4% in the period, Thomson said Oct. 27. Analysts don't see the pace lasting much longer. In the first quarter of next year, earnings may increase 8.4%, Thomson's data shows. Third-quarter profits exceeded forecasts at 74% of the S&P 500 companies that reported through last week, above the average of 57% since 1992, according to data compiled by Thomson Financial. But that levelof performance could fade if the economic expansion weakens, as is projected. Growth in GDP may slow to 2.6% in 2007 from 3.3% this year, a Bloomberg survey of economists showed. `Valuation is the best indicator of sentiment,' said Jason Trennert, chief investment strategist at Strategas Research Partners LLC. `People have gotten burned so badly in the late '90s, they've been slow to recognize value in large-cap stocks.' S&P 500 companies will earn $87.06 a share next year as a group, according to Thomson. That translates into 9.4% growth, exceeding the average of 7.6% since 1947. What the markets indicate is that there's still undervaluation in the S&P 500.
The trend isn't universal. In hurricane-prone areas, homeowners still face higher insurance rates. And health-insurance costs continue to soar because of spiraling health-care costs. But the widespread declines in insurance rates indicate that many risks that directly touch Americans' lives are on the decline. Car-collision claims have decreased in frequency, thanks in part to safer cars and safer driving. Workplace-injury claims are down, in part because of improved technology. Americans are living longer, meaning life insurers often face lower odds of making big payments on the term policies they write. Workers' compensation insurance costs are down 3.5% from last year. The percentage of employees with workers' compensation insurance who have reported work-related injuries fell by more than 45% between 1991 and 2005, according to the National Council on Compensation Insuranc, based on 38 states for which it collects data. In the auto market, insurance-price increases have slowed drastically. Between 1993 and 2002, firms that insure personal cars paid out more in claims and expenses than they took in from premiums every year but one. In 2002 and 2003, prices rose 8.8% and 7.8%, respectively. However, collision claims have since fallen, in part because of technological improvements and stricter teen license requirements. Claims are down by between 1.7% and 5.1% in each of the past four years, according to data compiled by industry organizations. Car insurers, in turn, have recorded underwriting profits three years running, according to both the institute and A.M. Best. With the business becoming less risky, car insurance prices rose just 1.1% in September from a year ago, less than the 2.1% inflation rate.
Roseen cited the case of closed-end funds that focus on real estate. In Q2, their net asset value fell 1.38% over all, while their share price fell 1.4%. But in Q3 as the commercial real estate market remained robust and the Fed interrupted a string of interest rate hikes, net asset value of real estate funds rose 9.69%. At the same time, their share prices jumped 14.14%. John Miller, manager of funds management at Nuveen Investments, the largest player in the closed-end fund world, said all 21 categories of closed-end funds Nuveen monitors showed improved share prices and net asset value returns in Q3. And all but one category showed the share price outperform the increase in net asset value. Nuveen's preferred and convertible income fund saw its share price increase 14.81% while its net asset value rose only 6.24%.
When Large-caps Win . . . Ian McDonald, WSJ 11-06 In 13 of the past 20 years, the majority of actively managed funds trailed behind the S&P 500, according to Morningstar. (If returns of merged or closed funds are included, the figures are even more humbling.) Three of the winning years for stock pickers were 2003, 2004 and 2005. Results were lifted partly because management fees and average trading costs dropped. At the same time, shares of small companies - missing from large-cap indexes but well represented in managers' portfolios - were riding high. But the good times might be winding down, at least for a while. The long-awaited rally by large-cap stocks seems to have arrived. Because indexes like the S&P 500 are weighted by companies' market value, a rally for big stocks pushes the indexes up in a hurry. There are reasons to believe the recent rise of big-cap stocks isn't just a blip. Overall, shares of small companies look a little rich compared with those of big-company stocks that, broadly, are trading at lower price-to-earnings ratios than historically. And some of the biggest companies are paying dividends rivaling the income an investor might pocket from a Treasury bond after taxes. Fans of big-company stocks argue that the excesses of the late 1990s have finally been wiped out of these once-lofty shares. "If the largest companies do the best, it will be exceedingly difficult for the vast majority of active managers to beat the large-cap, market-cap-weighted index," says Michael Mauboussin, chief investment strategist with Legg Mason Capital Management. To be sure, all big companies won't perform well, and there will be stock pickers who beat the index in any given year. But money managers who routinely crack that theirs is a humbling line of work soon might be musing that a bit more often.
An ordinary consumer might jump to the conclusion that investing is complex. But the right message to take away is that there is no one right way to invest in funds. In fact, many advisers made compelling cases for keeping things simple and straightforward, even while acknowledging that some clients feel they're not getting their money's worth if there is nothing complex in the mix. The key for consumers is to understand that reaching financial goals is more about finding a strategy that you can live with, than it is finding the best available fund. It's about sleeping well at night, believing your money is properly taken care of. Strategies should reflect investors' personal preferences, risk tolerances, desire for simplicity or complexity and more. For example, many advisers suggest rebalancing a portfolio every quarter or year. If you cull your winners and pour money into laggards, your allocations stay true to your plan. But William Bengen, author of "Conserving Client Portfolios During Retirement," noted that letting your winners run and rebalancing less often has, historically, goosed returns by a few percentage points over time. But less-frequent portfolio tweaks, he said, can increase volatility, which some investors will find scary. The idea is to focus on whatever rebalancing plan is right for you. That philosophy applies to most investment ideas. Diversification is a necessity, but advisers disagree on just what makes a "diversified portfolio." I asked planners how many funds they thought the typical investor "needed." Most said between six and 15. But many said their average client owns a lot more, sometimes having participated in various retirement plans or invested in sectors or niche markets to spice things up. Problem portfolios, most felt, are those with too few issues to truly be diversified or too many funds to manage with ease. Anything in the middle, however, seems OK if it meets the investor's expectations. While asset allocation often sounds like an advanced science, advisers recognized that placing money into certain asset classes is more a matter of taste than necessity. None of this makes so-called "investment rules" invalid. Instead, it means the investing roadmap to financial goals can be a personal one.
Recent data from Lipper also suggest S&P 500 index funds could continue beating actively run large-cap stock funds in the next few months. Last quarter, S&P 500 index funds outperformed all other Lipper U.S. diversified stock classifications, with 5.51% in returns. It was the first time the category topped the Lipper categories since the end of 2002. Research indicates "it may be time to move out of the active-manager realm and into the passive manager," said Bill Sickles, a former Lipper senior research analyst who examined the issue in a report. Large-cap index funds have pulled in $3.8 billion in net cash this year through September, but actively managed peers have lost $8.8 billion. Index ETFs have also increased in recent years as alternatives to active large-cap mutual funds. More than two-thirds of U.S. broad-market ETF assets were recently tied up in large-cap products.
Idea No. 1: Buy large-cap stocks in developed markets - A broad case for large-caps has been made for some time by some Wall Street analysts who observe that small-cap and midcap stock performance has trumped larger rivals for several years running -- an unusually long stretch. Large-cap shares have made a comeback this year, in fact, reflecting the Merrill strategists' belief that in a weaker economy, bigger is better. Highly rated companies on Merrill's U.S. stock "buy" list now include Coca-Cola [KO], PepsiCo [PEP], McDonald's [MCD], 3M [MMM], DuPont [DD], General Mills [GIS], Kellogg [K[, Procter & Gamble [PG] and Walgreen [WAG]. "Larger companies are better able to keep their earnings growing," noted Duncan Richardson, chief equity investment officer at mutual-fund company Eaton Vance Corp. "We've been encouraging folks to consider asset allocation shifts from other assets to U.S. equities," Richardson said. "The U.S. market is very reasonably valued. We may look back in three- to five years and say the most conservative, blue-chip area was the cheapest, and maybe the best performing." Seeking shelter in developed markets follows similar logic. Emerging markets tend to be export-driven and lack a vibrant consumer class to provide diversification and protection from external shocks, such as slack demand from major customers. [CNBC reported that 84% of the world's population lives in 'emerging' market nations.] Idea No. 6: Non-U.S. dividend-paying stocks - Strong companies that pay bondholders regardless of economic conditions are also likely to pay regular stockholder dividends. The Merrill strategists suggest broadening horizons to include dividend income from non-U.S. companies. When the U.S. dollar is weak, payments made in non-dollar currencies are worth more to U.S. investors. Examples: Netherlands-based ABN Amro Holding [ABN], Sweden's Electrolux [ELUXY.PK], "Within the U.S. this is a relatively undiscovered investment theme," the Merrill report says. One exchange-traded fund that tracks an index of non-U.S. dividend payers is PowerShares International Dividend Achievers [PID]. Monthly Employment Stats
Professional and business services employment grew by 43,000 in October, with gains in management and technical consulting services (+12,000) and in business support services (+6,000). Employment in temporary help services was little changed over the month and has been relatively flat since January. Health care employment continued to grow with a gain of 23,000 in October. Job growth occurred in nursing and residential care facilities and in hospitals. Over the year, health care employment has increased by 302,000. In leisure and hospitality, food services and drinking places continued to add jobs in October (+27,000). Both wholesale and retail trade employment were little changed in October. Since January, wholesale trade has added 61,000 jobs; in contrast, retail trade employment is down by 104,000. Within retail trade, general merchandise stores lost 11,000 jobs in October. Since its most recent peak in August 2005, employment in general merchandise stores has fallen by 100,000. Within financial activities, commercial banks added 5,000 jobs in October. In the goods-producing sector, mining employment grew by 5,000 in October. Over the last 12 months, mining has added 54,000 jobs. Construction lost 26,000 jobs in October as employment declines in residential specialty trade contractors (-31,000) more than offset gains in nonresidential specialty trades. Since its most recent peak in February, employment in residential specialty trades has declined by 99,000. Manufacturing lost 39,000 jobs in October. Plastics and rubber products lost 14,000 jobs, largely reflecting strike activity in rubber products manufacturing. Employment also declined in motor vehicles and parts (-15,000) and in wood products (-5,000). The average workweek for production or nonsupervisory workers on private nonfarm payrolls increased by 0.1 hour to 33.9 hours in October, seasonally adjusted. The manufacturing workweek also rose by 0.1 hour to 41.2 hours, and factory overtime was unchanged at 4.3 hours. Average hourly earnings of production or nonsupervisory workers on private nonfarm payrolls rose by 6 cents, or 0.4%, in October to $16.91, seasonally adjusted. Average weekly earnings rose by 0.7% in October to $573.25. Over the year, average hourly earnings increased by 3.9% and average weekly earnings increased by 4.2%.
Quick Facts, Stats & Opinions Everyone Has a Plan Until . . . ToddBrown, mrswing.com 11-02 Everyone has a plan, until they get punched in the mouth. heard Mike Tyson say this years ago, and it immediately stuck with me because of so many ties it has to trading your trading plan with focus, discipline, and repetition. We have seen the trades. We know the system is profitable. We have simulated the system and are showing a profit. We are ready to trade live hard earned cash that we have an emotional attachment to. Every dollar we are trading equals a loaf of bread, so to speak. Our hard earned trading capital is now taking the INEVITABLE equity draw-down, as dictated by the system. We WILL lose trades, traders, this is a fact that we must embrace on all levels. But remember, contraction leads to expansion. Your draw-down will inevitably lead to a run-up. The KEY is NOT TO MISS IT! Now, we've had the draw-down, and to put it bluntly we've "Been punched in the mouth". THIS is where the magic happens. At this very moment what will you do? Will you let the fear and painful associations of the market dictate your trading executions? Or will you draw upon your training, having fully accepted that this equity swing is nothing more than another step to consistent profitability? Will you continue to place those next trades with consistency? Will you remove all impulsive trades from your trading style? Will you follow the trading plan that you've put so much thought and process into developing for yourself? Fund Family More Important than Manager Mark Hulbert, MarketWatch Emory University Assistant Finance Professor Klaas Baks found that only a small portion of the differences in performances among funds could be attributed to the one managing those funds. Prof. Baks reached this conclusion by constructing a database of fund managers who, at some point in their careers, switched the funds they were managing. He found that, in most cases, a manager would perform much better at the helm of one fund than another. Furthermore, he found that funds of certain fund families tend to perform better or worse than others, regardless of who their managers were. These results altogether suggested to Prof. Baks that the fund organization -- its research department, its trading desk, and so forth -- is more important than the manager. Testing this hunch with a complex statistical model, he found that, sure enough, about 70 percent of the differences in the performances of various funds can be attributed to the fund companies, with just 30 percent accounted for by the managers themselves. When choosing among various mutual funds, therefore, you should place more importance on various qualities of the fund organizations themselves than on the identities of the funds’ managers. Consumer-electronics makers once seemed light years ahead of the computer industry in creating products that were easy to use. Today the tables have been turned. Home-entertainment systems come with controls that resemble airplane instrument panels, while the computer industry has gotten better at making products that are both more functional and friendlier to use. Much of the remote's usefulness has been lost, experts say, with the continuous addition of more buttons. Jakob Nielsen, a user-interface expert with the Silicon Valley consulting firm Nielsen Norman Group, once totaled up the buttons on the six remotes in his living room -- for a cable set-top box, digital video recorder, DVD player, TV, stereo receiver and VCR -- and came up with 239. He uses perhaps a third of them. (Nick Wingfield, WSJ 11-27) Jason Trennert at Strategas Research Partners points out that a falling dollar could help the stock market, particularly sectors such as energy and technology, both of which derive more than 50% of their revenue from foreign sources. The S&P 500’s revenue is 35% derived from foreign sources. (David Gaffen, WSJ 11-27) So far this year, private equity firms have announced deals for 939 U.S. companies valued at $357.88 billion as calculated by market researcher Dealogic. That's more than the going-private deals announced in all of 2003, 2004 and 2005 combined. This year, the average premium on a buyout target has been 29%, according to Thomson Financial, compared to 44% in 2000. While private-equity firms are taking some companies out of public hands, they are responsible for some new public offerings of stock. For instance, car-rental company Hertz Global Holdings recently sold a 28% stake in a $1.32 billion public offering, just 11 months after three private-equity firms bought Hertz from Ford Motor. On average, stock offerings of former buyout targets outperform other initial public offerings and the stock market as a whole, according to a recent study by Harvard professor Josh Lerner and Boston College's Jerry Cao. (Jaclyne Badal, WSJ 11-26) While the percentage change in average real household income between 1990 and 2004 was an increase of 2 percent for the bottom 90 percent of American households, it was 57 percent for the top 1 percent; and shot up to 85 percent for the top 0.1 percent; and up to 112 percent for the top .01 percent. That is, the richest are getting richer almost twice as fast as the rich. (Eric Konigsberg, NY Times 11-19) Unlike the second quarter, when much of the strength in earnings reports was concentrated in the energy, utilities and financial sectors, this time growth is broader-based. With 1,520 companies reporting earnings in the third quarter, year-over-year net income growth is 22%, with all major S&P groups reporting positive growth. (David Gaffen WSJ 11-02) Hedge Fund / Private Equity News Briefs Is there a conflict-of-interest for mutual fund managers who also serve as hedge fund managers? The numbers of them are growing: from under 60 in 2002 to 112 in 2005 and 124 this year, according to Morningstar. Some big firms such as American Century Investments ban them altogether (though it offers hedge-like funds as a consolation), but a number of high-profile companies such as The Vanguard Group, Pioneer Investment Management, Ameriprise Financial and Gartmore Global Investments have these “side-by-side” management arrangements. On the one hand, reports The Wall Street Journal, allowing MF managers to sell hedge funds assures that mutual fund firms will hold on to their top talent. On the other hand, however, there’s the fear that managers will favor the high-fee-paying hedge fund clients. (DailyII 11-03) Though not likely yet a threat to the hedge fund industry, long/short equity mutual funds are growing like weeds. Citing figures from Financial Research Corp., Barron’s reports there are now 32 of these long/short mutuals, and already this year they’ve attracted $2.9 billion, more than the $1.9 billion in last year and $1.6 billion in 2004. “The group is big enough now, and there’s enough interest in them to justify grouping the funds together to help investors understand and compare them,” Morningstar analyst Todd Trubey told Barron’s. While the cost of investing in these mutual funds are higher than their more traditional counterparts, says Barron’s, the fees are still much lower than what hedge funds charge – a potential selling point for investors who find high HF fees distasteful. In addition, the long/short mutual funds have no lock-up periods and offer greater transparency, since mutual funds are regulated and are required to disclose more information that the unregulated hedge funds do. Barron’s says the trick for the long/short mutuals – the biggest ones in the field being the Gateway Fund, Hussman Strategic Growth and JP Morgan Multi-Cap Market Neutral Fund – is that the additional cost for a mutual fund is worth it. According to Trubey, “I suppose there’s a cachet for paying up, but unlike a yacht, paying more doesn’t necessarily get you something better. In Investing, it’s all about returns, and expenses come directly out of returns.” (DailyII 11-09) Single-manager hedge funds assets under administration have zoomed to $2.1 trillion, according to the latest semiannual survey by HFMWeek. The report found that this group of hedge funds has soared 53% in the past year, compared with 37% a year earlier, even as the actual number of single HF under administration has increased by only 1% since April. (DailyII 11-29) All hedge fund indices are not created equal. John Prestbo of MarketWatch reports that loads of money have flowed into hedge funds on the strength of the performance by hedge funds in various strategies, but often the funds that produced the best results are already closed to investors, so the investable index includes those still open, and whose results may be less than stellar. In addition, the number of components of the different indices vary wildly, and that could distort the true picture of the industry. For example, the Dow Jones Hedge Fund Strategy Benchmarks has just 45 component funds while the MSCI Hedge Invest Indices have more than four times that number. (DailyII 11-30) Home Page Previous Factoid Top Sites
|