National Savings Rates

by Bruce Fenton

If you are short of something economic to worry about, try the American savings rate. The people of Europe might tell us that our economy is going down like a lead sled because we Americans are such poor savers. And, more than a few of the financial press seem to share that view.

The world is so concerned that we Americans save too little, borrow too much, and basically consume too much for our own good.

The problem is one of perception and definition. To begin, we need to be clear on the term “national savings rate.” The Bureau of Economic Analysis (BEA) defines the savings rate as the amount the U.S. population saves divided by its disposable income. Personal savings is calculated by taking personal income and subtracting from it personal contributions to social insurance, personal tax, non-tax payments, and personal expenditures.

Their measurements are totally out of touch with contemporary American wealth accumulation practices. Missing from the calculations are increases in wealth from short or long-term capital gains. Nor is wealth created from real estate by refinancing or selling counted. The numbers do not count gains from growth inside pension plans or IRAs. Neither do the numbers include valuations of business interests or growth in equity in investment real estate.

An article in Reuters® pointed out that despite the high savings rates in the growing economies of Asia, Asians need to learn to save “smarter” according to Jonathan Larsen, head of retail banking in Asia for Citibank®. He notes they tend to keep too much in cash. Traditionally this has been due to the relative immaturity of the investment markets.

As the middle classes develop in Asia, and they begin to put more of their savings to work in the markets, we can anticipate their savings rates to come down, their wealth to grow, and their consumer class to spend.

Not a bad equation for a stronger economy!

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

India and the Hunt For Oil

by Bruce Fenton

It’s oil, not gold, that developing nations realize they need to power up their economies and grow with the rest of the 21st century world. India is a prime example. Unlike the days of the British Raj, when Indian princes and their British counterparts found fame and fortune as hunters of exotic game and precious gems, today these princes are hunters of oil.

While India’s economy races ahead at growth rates in excess of 8%, year after year, its ability to keep up that pace is becoming more dependent on oil and energy resources every day. It has struggled with power shortages, blackouts and rolling brownouts which are hurting overall production and growth, according to a report on Economy.com® by Matthew Cairns.

India’s economy is not dissimilar to ours 100 years ago. Our population came out of the fields and joined the middle class as jobs were being created by new manufacturing industries. With this new found middle-class status comes the demands for perks of life … air conditioners, cars, electric appliances … all of which put even more demands on an overtaxed energy system.

According to Department of Energy figures, India’s current domestic crude oil production accounts for only 30% of its total demand. To take up the slack, India is looking to increase its nuclear power output by a factor of 10 in the next 15 years. India is also striving to increase hydroelectricity generation, which currently supplies around 20% of current power needs.

India does not have enough domestic oil resources to meet the demands for energy. As a result they are forced to import about two thirds of their daily need of 2 million barrels a day.

Part of the reason we have seen oil prices skyrocket in the past two years can be attributed not only to India’s thirst, but also to that of neighboring China, its competitor for imported oil. Between the two nations they import about 7% of world demand at 5.46 million barrels a day, according to PetrolWorld statistics.

By 2025, Indian officials project their nation could be consuming 7.4 million barrels a day … over three times what they consume today. This level of consumption bodes ill for the rest of the world competing for scarce oil resources as well as an environment which could pay the price for increased energy related pollution.

India’s success at dealing with its growing needs for energy in large part will come from its diplomatic success in dealing with old adversaries. By not directly bordering oil producing Asian countries, India needs a transit system through bordering Pakistan, or access to Myanmar, a geographically strategic Asian source of oil … both of which historically have not been “best friends” with India.

In the hunt for oil, India’s biggest competitor remains China. India’s Oil and Natural Gas Corp. (ONGC) has invested approximately $3.5 billion in overseas exploration since the beginning of 2000 … but that pales in comparison to China’s largest international oil company investments of around $40 billion.

While the two giants are competing for the same prize, they have begun to cooperate and work together on a number of other energy related projects. Last year, as reported by Glenn Levine writing for Economy.com, the two countries reached an agreement that aims to promote cooperation and collusion between Indian and Chinese companies when competing for energy resources.

Investors should keep an eye on this part of the world and its struggle to deal with energy needs. The outcome will greatly impact our oil prices and the development of these giants as traders for our economy. On the plus side, these nations are learning to compete economically rather than on the battlefields of war.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Using Available Resources

by Bruce Fenton

It’s no secret today’s stock market is propelled “up and to the right” by earnings expectations. These expectations, widely broadcast by the financial press, generally come from two sources—the “official consensus estimate” and so-called “whisper numbers.”

In the case of the former, the terms official and consensus are somewhat mutually exclusive because, in reality, there is no “official” source for estimates.

Thomson ONE is a Thomson Financial (TF) service that operates a global research network that money managers and brokers worldwide rely on for real-time, commingled equity and fixed income research, corporate news, quantitative and shareholdings data, and the internal distribution of research. The company gathers data from its network of analysts and compiles this information into so-called consensus estimates. This information is then provided to service subscribers.

Whisper numbers can play an even more important role than the consensus estimates in moving stock prices during the quarterly earnings season. Whisper numbers do not always originate from securities analysts. In fact, on the Internet there are several websites where individual investors can input their own “whisper numbers.”

It is not uncommon for the financial officers of public corporations to poll a handful of analysts just before the end of a quarter to get their expectation and then suggest to the analyst that they consider some additional information. These key analysts may adjust their estimates so that they are more aligned with the company's own expectations with the hopes that other analysts revise their expectations.

This has the effect of helping to reduce the volatility in the stock price, both up and down, when earnings are announced. For example, a few weeks before the end of the quarter, a computer manufacturer might call a handful of key analysts to get an idea of what their estimates are. If the estimates are off by a significant amount, the company will point out items such as rising or falling chip costs, increasing or decreasing sales costs, large contracts in the pipeline, etc. The resulting “whisper numbers” may be more accurately aligned with the “consensus estimates” coming from sources such as Thomson ONE.

Whisper numbers are playing an increasingly important role in keeping today’s stock market momentum-bound by acting as a measuring point against which actual estimates are measured. Thanks in no small part to the Internet’s whisper websites, information and speculation on a specific company can be instantly shared around the globe.

The Internet offers a plethora of information, some factual and some a bit more gossip-oriented, on individual companies, industries, and the markets. However, I caution you to take most of what you see with a grain of salt.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Dubai: The Biggest Story in the World

Including the biggest mall, biggest airport, tallest building…

See Also: Dubai Radio Interview, Dubai FAQ, and the Middle East 2.0 Video

Download Article PDF

by Bruce Fenton, Editor

Could the world's biggest story slip by the world's most powerful nation? Wake up and smell the (Arabian) coffee America. Our world is changing and the memo didn’t get through Customs.

The story begins in the Middle East we don’t know: Dubai City. While Dubai has meaning to billions of people, aside from a passing mention of the world's finest hotel or Tiger Wood's Golf Tournament, it's practically unheard of here in America.

Day One: "You're going where?"
My journey to this city of contrasts launches from London with the excitement of a Club Med charter. Instead of the aging businessmen I expected, my flight buzzes with energetic young families and Euro hipsters. Brochures depicting smiling Western vacationers prove truth, not marketing fluff: tourism yields over three million visitors a year and growing. Fast. Tourism in the Mid East? An incredible concept to most Americans. Before departure, friends offer protection tidbits like "get a good security firm" and "stay in the safe zones". Ten minutes research shows any American how patently absurd this thinking is. Dubai's safety ranks with Tokyo or London and a good deal safer than Washington D.C. Crime is almost non-existent in this ultra modern city, one of many facts that confound the iceberg of American misconceptions about the region.

Within hours of landing, I know that I have never seen such a thing in my life. Of course I haven't. No one has. The growth and scale of business in this land of unbounded potential is like nothing else in modern history. Dubai represents no less than the creation of a major new world center, the transformation of a region and therefore the entire world. Welcome to Middle East 2.0, the city of the future.

Dubai City is located in the Emirate of Dubai, within The United Arab Emirates (UAE), a wealthy oil producing nation bordering Saudi Arabia and Oman with excellent relations with the west. The mega wired city is the planet's biggest construction site, yielding the world's largest per capita concentration of cranes and Caterpillar's biggest customer. Its landmarks include the Burj Al Arab, the worlds first seven star hotel. Dubai hosts over 50 major projects, all with sub projects that each dwarf almost anything we can conceive: a Manhattan-sized palm tree shaped peninsula visible from space, 300 man made islands in the shape of the Earth, the world's tallest tower, tallest residential tower, largest airport and a dozen cities within a city, each with tax free treatment, infrastructure and special benefits for international corporations. The desert magnet has attracted Microsoft, Cisco, Sun, Reuters, Virgin Airways, Donald Trump and Martha Stewart. Not just business brings people to Dubai; in a word the place is fun. Supreme restaurants, golf courses, hotels, malls and nightclubs pepper the beachfront skyline.

Dubai's diversity rivals the zenith of New York's immigration boom. At my hotel, women in Abayah's, the traditional head to toe black dress, sit poolside next to bikini clad Europeans. At mega malls, men in traditional robes push strollers carrying babies with Superman caps past trendy students, Asian businessmen and stores that sell everything from Mont Blanc pens to Persian rugs to Chinese pottery and the latest Sony laptops. What Dubai has achieved is a peaceful and universal melting pot of the world- a land where hundreds of dialects are unified by the international languages of business, hospitality and entertainment.

The Visionary
If every story needs a hero, this one's is Crown Prince Sheik Mohammed bin Rashid Al Maktoum, known locally as Sheik Mohammed. Ever since 1776 when we fought King George III for independence, Americans have been unenthusiastic for royalty and have judged people based on their accomplishments rather than family connections or title. But by even by the most cynical American standards, Sheik Mohammed has accomplished enough to not only truly deserve our deepest respect but to ensure his place in world history. Perhaps, even with great natural talent and intelligence, only one born with such opportunity would be able to dream so large. One cannot help but admire Sheik Mohammed when asking "What kind of man looks at a small desert town and decides to create the greatest city on earth? What kind of man looks at the ocean and resolves to create miles of islands in the shape of the earth and palm trees?"

Faster than a bird or a plane…
The "Speed of Dubai" is a few clicks past the speed of the tech boom I saw with the founding of my Internet investment company in 1994. Everything here moves faster than a speeding bullet and Superman. My business meetings and taxi rides move quicker than any during my days in New York. Outside my hotel springs a development with 50 skyscrapers: by day three of my stay, five of them have the entire outside walls completed, transforming steel shells to the outline of landmarks they will be. In three weeks the view will be entirely different and in a year, unrecognizable. Like breeding a prize winning stallion, something this crowd knows better than anyone on earth, Dubai uses a "best of breed" approach for the construction of this super-city. The world's best advisors are recruited to design everything from the stock exchange which is modeled after the US and London exchanges to Dubailand, a gargantuan theme park and the Middle East's answer to Disneyland. Other projects are modeled on nothing more than guts and creativity including the worlds largest man made marina and a massive indoor ski resort. At the Mall of the Emirates you can step from 100 degree weather to a 30 degree snow covered domed artificial mountain watching children of all nationalities throwing snowballs and sledding.

We don’t know what we don’t know
Dubai is truly international, representing over 160 nationalities in all income and job categories. Most noticeable to me is the lack of Americans. Others in town simply lump us together with the British, of which there are plenty. Of the few Americans that are here, most are engineers almost none are tourists. To the American mindset, the Middle East just isn’t a place where one considers a vacation with the family. Even American companies here are typically staffed by Londoners or Middle Easterners. Our misconceptions about the region are so great that it is both embarrassing and inconceivable. The locals I speak with are still stunned over Congress's decision to block US port ownership by Dubai Ports. Even long-term American residents I meet have forgotten just how many and how deep our misconceptions about this region run. Indeed it is easy to forget: within days I'm so accustomed to the buzz of this place that I must remind myself how few of us have heard of Dubai let alone can point to the UAE on a map. Many Americans tend to lump the region together like one giant country, thinking that Afghanistan, UAE, Saudi Arabia and Iran and Iraq are all similar economically, educationally and politically. This is like thinking that San Salvador, Guatemala, Haiti, Houston, Atlanta and Boca Raton are similar because of their geographic proximity.

America is a great nation with so many natural resources and attractions that we tend to be isolated in our world view. Our best and brightest tell us of the new 'flat world' and global economy but other than a smattering of India and China investments what are we doing about it? Dubai is not only a center of a new global economy but also center of the region we understand least. Islam being the primary religion of the UAE and the area causes even further misunderstanding or outright false perceptions. For example, many Americans do not realize that Islam condemns terrorism or even that Muslims believe in Jesus. Many Americans do not know that Arab and Muslim are two different terms with two different meanings. A religion larger than Catholicism has been condemned by many Americans based on the actions of two dozen fanatics. Few realize that there are peaceful nations in the region with standards of living and per capita wealth near our own levels. When we hear "Gulf War" many Americans associate the entire Gulf region with war, terrorism, poverty and violence. Most would be so shocked at the contrasts in Dubai that they would regret even making a comparison. Sadly, many American journalists cannot write or speak about the Mid East without speaking of terrorism, even though the nations are as different as Georgia and Cuba. Dubai shines as the antithesis of everything wrong in the region, for this small area is in some ways more in line with our values than our own country. No longer is it possible for a third world resident to jump on a plane to America and become a cab driver who sends his children to medical school. This dream now lives in Dubai where working visas are still obtainable, even encouraged; millions of workers now call Dubai home. The state's expatriate population has grown to 80% of the residents, making its religious and language composition far more diverse than our own. If investment prosperity and world peace require us to understand and embrace the changes in our world, there may be no better place to start than Dubai.

The stars are aligned
One key to the success of Dubai is its strategic location: equidistant between London and Beijing, nearby India and at the center of the Gulf region. Dubai is home to the region's largest port where reselling goods is surpassed only by oil and tourism in revenue. Dubai is blessed with oil wealth but less of it than some of its neighbors, sparking the desire to work hard to diversify revenue. A singularly focused and pro business government with ample funding and offerings of huge infrastructure and tax benefits combines well with the can-do attitude of the area. One of my hosts sums up how obstacles are dispatched, "In Dubai, we make things work." And working it is; the speed of this development has left even some who follow the story in the dust: by the time we speculate if it will work, it already is working. Yesterday's concepts are up and running today. In half the time we have plodded along with Boston's Big Dig or other major American projects, this city has completed two dozen equal or larger scale undertakings. The world's skepticism at this nation's ability to build a world financial and economic center is already obsolete and outpaced by the speed of Dubai.

The stunning growth of the city is transforming the region, and therefore the world. Already the UAE's more conservative neighbor, Saudi Arabia, has asked Dubai construction firms to begin work on King Abdullah Economic City, a super city and economic zone created in a similar model to parts of Dubai. Dubai is now an international hub and free work zone to which millions flock seeking a better life. The energy and focus here is massively positive, an experiment in goodwill that shows how well people get along when focused on building, creating and having fun. American smart money is already here but not in nearly the scale we could be. How can we, the greatest nation on earth be participating so little in this incredible spectacle?

A colossal metamorphosis is indeed occurring in the Middle East and here the change is not from bombs or guns but from handshakes and construction crews. In its quest to become the world's greatest city Dubai doesn’t need to submit a memo to the desks of America: Dubai doesn’t need our permission. This story is occurring with or without our participation. Middle East 2.0 is here to stay.

A new global economic center has been born. The question is, will America remain in quiet isolation and trod to our sunset retirement home or will we come to the nursery and celebrate this birth with words of congratulations? I choose the latter. I hope, for the sake of our nation and our world, that my fellow Americans will join me. Welcome to the world's big leagues Dubai, it’s a pleasure to meet you.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

This article is (cc) Copyright 2006 under the Creative Commons Copyright License, Some Rights reserved. You have permission to reprint and use this article for promotional or non profit purposes provided it remains intact and un-altered in its entirety including links, byline and images. Author retains other copyright ownership.

This Bull Has Legs

by Wendell Cayton

It is a call I will never forget… a stockbroker friend of mine in Denver called me in Oregon where I was fishing to tell me the markets were beginning to move. It was around the middle of August 1982. On August 12, 1982 to be exact, the greatest Bull Market in history began its run.

I was reminded of how far we have come when I visited the office of a patent attorney friend. As we talked, one of his firm’s IT technicians fixed a minor problem on his laptop computer. We laughed about the changes since we have known each other. When I met him in early 1985 in his small office in San Francisco, there were fewer lawyers in the office than he has IT technicians working for him today.

Today, his entire 28,000 sq. ft office is layered with networks of computers. PDAs, scanners, and video conferencing are the rule. Yet only 15 years ago, the IBM Selectric typewriter was the height of productivity. When his office first started with word processing, only a select few were authorized to touch the Wang Word Processor. When the firm finally allowed personal computers, the staff was allowed to use any model they wanted… as long as it was an IBM. Portable cell phones created huge suit case affairs with limited range and usefulness. Only 15 years ago!

I glanced around his office and admired his collection of antique patent artifacts.
A model of the very first Mercedes Benz automobile, manufactured in the 1880’s, caught my eye. Next to it was a small rectangular device of many computer chips and complex circuitry. Extruding from the front of the device was a chip and circuitry protrusion shaped like a small weather vane. He asked me if I had any idea what this was. I correctly guessed that it was the core element of the Mercedes ignition switch and the Mercedes optical key.

This key system works on an optical signal from the key to the circuitry. It not only starts the car but it enables the car to customize itself for its driver and who knows what else.

It is incredible to look at the model and the switch and realize how far we have come. Are we there yet, you might ask? Is this the end of the trip… the end of the Great Bull Market of 1982? I tend to think not.

The catalysts for the start of that market such as falling inflation, falling interest rates, a work force that was just beginning to become productive, a wave of innovation just taking off, all contributed to the growth of the Bull.

According to a report published by CSFB economist Tom Galvin, these elements combined to provide free cash flow and liquidity. Despite today’s anemic market, the mutual fund industry takes in more dollars each month than it did on an annual basis in 1982. The top two stocks in the S&P 500, GE and Microsoft, have a combined market capitalization of nearly $800B that is greater than the aggregate of the 500 companies back in August 1982.

But as any marathon runner can attest, there is a time to pause and rest. The Bull is resting, giving businesses a chance to slim down and become more productive, more competitive, for the next push. Businesses will need the technology that is coming along in order to remain competitive. Our higher workforce productivity resulting from this investment in technology will keep prices and inflation down and keep the fittest of companies growing.

This Bull has plenty of leg left. It’s just catching its breath!

Flat World

by Bruce Fenton

Columbus may have been the world’s greatest entrepreneur: He set out not knowing where he was going, didn’t know where he was when he got there … and did it all on someone else’s dime. He succeeded in proving that the world is round, but six centuries later author Thomas Friedman gives us reason to believe that the world is rapidly being flattened.

In his fascinating book, The World is Flat, Friedman lays out his version of the history of the 21st century. He sees us as being in the middle of a disruptive, dislocating technological revolution that is changing the world in profound ways … at warp speed.

Outsourcing takes on a whole new meaning according to Friedman. It is not about factories turning out products formerly made by American labor. It is about leveling the playing field by connecting together all the knowledge centers of the world in a collaborative process to innovate, build businesses, produce useful products and services, and raise the level of prosperity and innovation on a global scale.

But outsourcing is not simply jobs displaced across national borders. Friedman gives examples of how outsourcing is everywhere … permeating our entire economic and cultural fabric. For example, pull into a McDonald’s® off I-55 in Missouri and the voice speaking to you at the drive-in order window is not in the store … not even in the state … but hundreds of miles away in a call center.

The enterprising owner has figured out that by using one call center for a number of his franchises he can speed up the ordering and delivery process, allowing more cars to be served at a more efficient cost.

Call a JetBlue® reservation number and you are likely to be speaking to a housewife in Salt Lake City, working from her home. JetBlue CEO, David Neeleman, calls it “home-sourcing.” His airline employs over 400 agents, all working at home where they are 30 percent more productive, happier, more loyal, and have a lower attrition rate.

But it is on a global scale that outsourcing is contributing to the flattening of the world as knowledge and resources are being placed in the hands of the many, rather than the few, as was the case 20 years ago. As governments, businesses, and people communicate and interact, we are seeing the emergence of completely new social, political, and business models.

Friedman attributes this flattening process to 10 key events, the first being the tearing down of the Berlin Wall. As he so aptly puts it, “when the walls came down and the windows went up,” the balance of power in the world tipped toward democracy with consensual, free-market-oriented governance, and away from those advocating authoritarian rule with centrally planned economies. He wryly notes that Communism was a great system for making people equally poor while capitalism makes people unequally rich.

What’s important is that this event allowed people with huge potential to climb up the ladder of personal success and “be all that they can be.”

Nowhere is that more in evidence than in India, where the riches Columbus sought are rapidly being generated … albeit in a far different fashion than he envisioned.

When the British turned over their former colony to self-rule, Prime Minister Nehru looked north to Communist Russia for guidance on running his country and economy. For years India struggled with a managed economy. By 1991, running out of hard currency, leaders opened the economy and turned to a more capitalistic model. Three years later their economy was growing at seven percent and an economic tiger was unleashed.

Today, India’s economy is soaring due to technological innovation and services. According to a recent Business Week® article, by year 2050 they will own 17% of the world’s economy … next to a projected 26% for the U.S.

This has largely come about through the tech boom that has made possible sharing knowledge and communication on a worldwide level with people hungry to work hard and succeed.

The World Is Flat is a fascinating book. Friedman has done a wonderful job of looking at the transformational changes affecting us today. It makes for a great Labor Day read.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Investing in Real Estate

by Bruce Fenton

As home prices soar, many are looking at real estate as a bigger part of their retirement income schemes. According to the Office of Federal Housing Enterprise Oversight, home prices increased 11.2% from the 4th quarter of 2003 to the 4th quarter of 2004…the first time we have seen annual double-digit growth in more than 25 years.

More telling on the investment scene is the fact that 23% of all homes purchased last year were investment properties, according to the National Association of Realtors.

Investors find the idea of collecting a rent check from property that is increasing in value a compelling reason to add this asset class to their retirement income plan.

Before answering the “Siren’s Song” for real estate investing, I suggest doing the math and examining all financial aspects of investing in income property.

An excellent place to start is an investment real estate spreadsheet found at
www.mortgage-investments.com [no longer available]. On their site find the “10-year Investment real estate Net Operating Income and Profit on Sale” spreadsheet. Input purchase price, down-payment, mortgage information, rental income and the several other assumptions regarding appreciation, expenses, vacancy rates, etc.

The calculator will give you before and after tax cash flows, returns on equity over ten years, and a wealth of other financial information you will need to evaluate your potential investment. Play “what if” by varying inputs to see what happens if rents go up or down, property values change or tax rates vary.

Of greater importance…this calculator will help the investor understand the concept of “capitalization rate,” known as the return a property would provide a hypothetical all-cash buyer. For example a $400,000 property generating $20,000 in cash flow after operating expenses has a 5% cap rate. This same property, priced at $600,000 would have a 3% cap rate. The higher the cap rate, the better the return potential.

The inflated real estate markets have made it difficult to find properties that provide a positive cash flow and have raised the risk levels involved in investment real estate by lowering the cap rates. Since all-cash purchases are rare, most properties are purchased with mortgages of 50% to 75%, making it likely the investor is looking at a negative cash flow. Further, the tax benefits of owning investment real estate are generally too small to make up the out of pocket negative cash flow.

Therefore, the investor must plan to carry the negative cash flow, have money set aside to cover contingencies such as vacancies and repairs, all in anticipation of rentals increasing to cover the outlays. The real carrot of course, comes with potential property appreciation.

This appreciation means little until the property is sold. Here the calculator does an excellent job of comparing after tax investment returns resulting from a sale. Gains for properties held longer than one year are taxed at advantageous capital gains tax rates.

It also helps to have a working knowledge of how income from real estate is taxed. Rents received are considered taxable income in the year received. Expenses of renting property can be deducted from gross rental income in the year expenses were paid. Expenses or services provided by a tenant are considered rents.

Passive investors who do not actively participate in the management of the property cannot write off rental losses in the year of the loss. Losses can accumulate year to year until there is enough rental income to offset the losses or the property is sold. Unused losses can be added to the cost basis to reduce the gain.

An investor who actively participates in the management of the property and has an adjusted gross income of less than $100,000 can write off up to $25,000 in rental losses. This amount is proportionately phased out between $100,000 and $150,000. Income levels above that are taxed as passive investors.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

GM and Ford Bonds Downgraded

by Bruce Fenton

General Motors® and Ford®, two icons of American industry, got a wake-up call last week when their debt was downgraded to “junk” status by Standard and Poor’s® (S&P). Both companies have seen sales hurt as consumers have shunned their “fuel economy challenged” SUVs in the face of smaller, lighter and more fuel-efficient offerings from competitors.

S&P® found a number of areas of concern that called into question the creditworthiness of GM® and Ford bonds. Besides falling SUV sales, both auto makers have had difficulty cutting costs, and reducing excess manufacturing capacity, and both have failed to boost efficiency necessary to keep up with competitors.

Longer-term problems resulting from under-funded pensions and obligations for retiree medical liabilities continue to raise concerns and could impede future profitability, according to the rating agency.

S&P is one of three rating agencies that evaluate corporate debt and provide ratings on debt for investors. The other two rating agencies, Moody’s® and Fitch®, as of this writing have not yet downgraded the debt to “junk.”

The impact of the downgrades will have a rippling effect through the financial markets. With a drop in the rating to double-B, or two notches below S&P’s lowest investment grade, portfolio managers who may not hold bonds rated less than investment grade will be forced to sell the automaker bonds.

All of the above puts pressure on the price of existing bonds, pushing prices down and raising yields. Immediately after the announcement last Thursday, GM’s 8.375 percent bonds due 2033 fell $5.50 to $73.50 per $100 in face value, yielding 11.573 percent, according to MarketAxess®, an electronic trading system for corporate bonds. A bond trading below $80 per $100 in face value is generally considered to be “distressed.”

More speculative investors may find these yields attractive, but not without risk. A Standard & Poor’s credit rating is a current opinion of the creditworthiness of an obligor with respect to their financial obligations. The Standard & Poor’s credit rating takes into consideration all aspects of the creditworthiness of the issuer. Like FICA scores used by mortgage lenders and banks to determine consumer creditworthiness, these ratings serve as a guide to investors, who in turn set market prices and yields by what they are willing to pay for a particular bond.

The highest rating issued by S&P is an AAA (Moody’s Aaa). S&P considers the obligor’s capacity to meet its financial commitments as extremely strong. One rung below is AA (Moody’s Aa), considered “quite strong.”

Investment grade ratings continue down through A to BBB (Moody’s A to Bbb). A BBB rated bond is considered a medium grade investment bond, with the issuer exhibiting adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

Ford and GM bonds were rated before the S&P changes last week. When they were downgraded to the BB level they became less than investment grade and were considered by S&P as having significant speculative characteristics. These obligations are likely to have some quality and protective characteristics, but face large uncertainties or major exposures to adverse conditions.

Ratings go down to B, CCC, CC and C. B ratings recognize more risks but acknowledge that the obligor currently has the capacity to meet its financial commitment on the obligation.

Ratings of CCC (Moody’s Ccc) or lower indicate the issuer is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Trend is Your Friend

by Bruce Fenton

“…Do not attack an enemy whose ranks are in perfect order and not to advance uphill”…sage advice from Sun Tzu’s The Art of War. Savvy investors might translate this to read, “The trend is your friend.”

Those who study stock markets and what makes a market move, have a variety of theories attempting to explain the volatility that surrounds market movements. Robert Shiller’s book, Market Volatility, advances the popular theory that uses a qualitative explanation of price fluctuations.

Shiller believes that investor reactions, due to psychological or sociological beliefs, exert a greater influence on the market than good economic sense arguments.

The popular model theory proposes that people act inappropriately to information that they receive. Shiller believes that investors factor in the uncertain future when making decisions. Since the future is unknown, it becomes an ex-post value, or dependent upon psychology.

Opposite Shiller are the Efficient Market Hypothesis (EMH) believers. These theorists believe that all investors are equally well informed and that all information, both public and private is known and represented in the stock price. The EMH group acknowledges that investors may react differently to known information, i.e. a risk adverse investor might sell as markets become bearish, more aggressive may sell short or begin buying as prices fall, making it possible for some to profit from these market inefficiencies.

Shiller accepted the fact that some price movements can be attributed to EMH, but that a greater amount of price movement, or excess volatility, can be explained by the psychological behavior of investors. If Shiller were correct, then his assertions would cast doubt on the validity of fundamental and technical analysis. Both forms of analysis could be rendered worthless if all investor behavior was attributable to psychological factors.

Investor fears and overreaction to the disappointing news have added to the excess volatility of the market. But, remember the words of Sun Tzu, and the modern day translation:

“The trend is your friend.”

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

The Internet is Dead . . . I Don’t Think So!

by Wendell Cayton

Mark Twain once said that rumors of his death had been greatly exaggerated. The same could be said of the dot.com world, despite the calamitous collapse of that economy. Last week I heard an “old economy” stock analyst chortle, “give me bricks not clicks.” But I suspect he is over fifty and without a clue as to what is actually happening.

My sense is that deep within the skeletal remains of what was once the dot.com universe, embers glow that will eventually relight fires and send that Internet technology off on a truly mainstream journey.

Recently I talked with a friend, whose son is about the age of mine. Like most fathers, we spent the first half of our conversation talking about the accomplishments of our offspring. He told me his son is making a living in the dot.com world with a tiny company in San Francisco.

Intrigued, I called the budding entrepreneur to find out about his business. He and several friends, after graduating from a local university, went to work in the “old” dot.com world, where they learned basics and what not to do when building a business. When the “old” crashed last year, they picked up a few pieces, and keeping their wits about them, started a business.

Today, their enterprise employs five and provides technical advice and assistance to business clients who want to make the Internet a more productive part of their operations. They see unlimited potential for their business. This was all accomplished without a cent of venture capital funding or a foosball game in the lobby.

What I learned from him falls in place with what author Michael Lewis, in his recently published book NEXT, refers to when he says the Internet is already spurring much bigger changes than anybody realizes. And it is the young generations who have this figured out.

Lewis contends that in this rapidly changing world, the Internet gives the youth of the world a leg up on older generations, who are slower to change, as they challenge conventional ways of business, authority, culture, and society at large. The Internet has made it possible for people to thwart all sorts of rules and conventions, and nobody knows this better than the youth.

The power of the Internet really lies in its ability to increase business productivity. Already, most large firms use Internet-based platforms to effectively control inventories and the movement of goods and services. My firm is increasingly incorporating Internet usage, not just for communications, but also for web-based applications and data storage.

But I believe that the real power of the Internet will be realized when real-time video makes it possible to routinely use the Internet for face-to-face conversations. Instead of having to fly across the country to meet, we will use the video teleconferencing for a fraction of the cost and for a fraction of time spent. And, we can disperse our work force, allowing them to live and work nearer their homes instead of being massed in huge office complexes in large cities, thereby taking loads off over-burdened transportation systems and reducing security concerns. The enhancements to productivity in our economy will be huge!

Imagine for a moment that you needed a second medical opinion. Instead of flying to a noted specialist somewhere in the world, you could simply be interviewed, your records reviewed and given a cyber-examination. Instead of days of expensive travel, and hours spent filling out forms, the information you seek is immediately available.

This will become reality when our communications system brings broader bandwidth into our everyday world. It is not far off . . . the scary thought is that our children will be running the show!

Putting a Fair Value on the Stock Market

by Bruce Fenton

As stocks are bouncing along their bottoms for the year, we are left to conclude that buyers must be on vacation. The lethargic stock market performance certainly cannot be attributed to a problem with economic fundamentals. The economy is showing anything but “dog day” attributes.

Corporate profits have been on a tear as the economy continues to improve. Through the end of the first quarter of 2004, corporate profits were up an impressive 32.3% on aggregate from the same period a year ago. Those numbers represent the strongest growth rate in two decades. With final figures not in yet for the 2nd quarter, impressive earnings reported over the past several weeks suggest that profit growth remains strong. As of the last quarter, Economy.com estimates corporate profits were up 20% every year from the previous year.

Reading between the lines, I am encouraged to conclude that the economy is making a gradual transition from its initial blast-off stage coming out of the 2001–2 recession to a more solid, sustainable rate of economic expansion.

Under “ordinary” circumstances, the lack of enthusiasm for buying stocks might be attributed to the slower underlying earnings growth of stocks. This does not seem to be the case today when looking at the S&P 500. For most of 2004, the P/E of this index of the largest group of publicly traded companies has been below 25, leaving it well below the elevated levels of much of the last decade. Based upon reported earnings growth it appears that the E in P/E is finally catching up with the P.

If the market is the great predictor of the future direction of the economy, we might be looking at a slow-down. But this is an economy that has begun creating jobs, which points to a self-sustaining expansion. Granted that the rate of growth is slowing, but that is to be expected as a growing economy gears for the long run.

Rising interest rates could be putting a damper on enthusiasm for equities. But the Fed expressions of “measured trajectory” for increased rates from a base already low by historical standards should provide a credit environment conducive to continued expansion and growth of corporate profitability.

From this perspective we might conclude that the market is undervalued. We can test this theory using what is known as the Fed Model for the fair value of stocks. While the Fed officially has never acknowledged that it has a fair value model of stocks, the framework for determining the appropriate valuation for stocks was discovered in the Fed’s July 1997 Humphrey-Hawkins report, and the label “Fed Model” has been attached ever since.

This report observed that the ratio of forecasted earnings one year ahead to stock prices is highly correlated with the yield on longer-dated Treasuries. Using the Fed Model, stocks were approximately undervalued during the Long Term Capital Management Crisis of 1998 by 21%, and overvalued just before the bubble of 2000 by 65%.

Using the following assumptions to approximate today’s situation, a 10-Year Treasury at 4.4%, the S&P trading at 1080 and the forecasted forward earnings for the S&P of $65 a share (Thompson Financial estimates through June 2004), the Fed Model says the market is undervalued by 26%.

I don’t mean to imply that the market will quickly jump 26% . . .because this formula has its flaws. For example, the Model does not take into account investor preferences for risk premium. During periods of higher uncertainty, investors demand a greater premium over the return offered by risk-free Treasuries. Today we have uncertain times, and that may explain why this market does not reflect the theoretical fair value.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Forecasting the Stock Market (Part 2)

by Bruce Fenton

Also See: Forecasting the Stock Market (Part 1)

As the good news on the economy continues to roll in, investors are still scratching their heads over stock market performance. The market continues to go sideways despite the positive economic outlook. However, that’s just the short-term picture; in the long term, things may look a bit different.

Last week, we examined the widely varying opinions of others for that longer-term perspective. As I promised, this week, we will explore several ways to perform a do-it-yourself forecast.

The easiest way to develop a forecast is to compare the value of the stock market (using returns on large cap stocks computed by Ibbotson and Associates as representative of the market) measured in ten-year rolling periods from 1926–2003. That average turns out to be 11.1%.

Using that average with the year 2000 as the beginning of this decade, we could project a Dow of approximately 32,000 by the end of the ten-year period. For that to happen, the Dow would have to average 21.1% for the next 5 ½ years.

But there is a problem with this number, as anyone who follows markets knows—markets don’t move in a straight line. Some years are up and other years are down. This variation can be measured with what is known as a standard deviation, and in our example, it computes at 5.73%. In layman’s terms, this means that 68% of the time, the actual return will be within a range of plus or minus 5.73% from our average.

When applied to the decade 2000–2009, we can forecast a range of returns from a low of 19,396 using an average of 5.37% (11.1% – 5.73%) to a high of 54,489 using an average of 16.83% (11.1% + 5.73%). To hit the lower number, the Dow would have to average 10.9% from 2004 to 2009; the higher number requires an average of 31.7% for those years.

A second method of valuation involves comparing the earnings of the stock market to a risk-free rate of return. The risk-free rate commonly used in fundamental analysis is the ten-year Treasury bond, currently yielding 4.76%. An investor buying the ten-year bond is buying a financial instrument with a Price/Earnings ratio of 21. Typically, the market trades at a P/E similar to that of the ten-year note.

If that were the case today, the S&P 500 index would be undervalued by about 20%, trading at 1,110 when by the valuation model it should be 1,365 (based on forward earnings of $65 as reported on the S&P website).

A stock buyer is buying the expectations of future earnings from a stock. He/she might be willing to pay more for the future earnings if interest rates are lower (implying a higher P/E for the ten-year bond, lower inflation and more money supply) than he/she might if the reverse were true.

If you go to the S&P website, www.standardandpoors.com, you’ll find the forecasted earnings projections for the S&P through 2009.

For instance, the forecasted earnings for 2005 = $73, scaling up to a forecast of $92.82 by 2009. Using the model, make a forecast for ten-year bond interest. Divide that number into 100 to determine the P/E on the bond. Multiply the S&P forecasted earnings by that P/E. The resulting figure is your forecast for future value of the S&P. For example, if the ten-year bond is yielding 5%, its P/E is 20, and in 2009, its forecasted earnings = $92.82. The value of the S&P forecast is $92.82 x 20 = 1,856. This implies a 9.98% annual increase in the S&P for the next 5 ½ years.

Try varying this forecast exercise with lower interest rate assumptions and compare the results. Voila—a do-it-yourself market forecast.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Forecasting the Stock Market (Part 1)

by Bruce Fenton

Despite strong earnings reports, an improving economy and low inflation, the lack of resolute buying is indicative of some doubt concerning the market’s direction and future.

Those looking for a helpful forecast from the experts can find plenty of opinions. Since you shouldn’t be without one of your own, especially if your retirement plan is invested in equities, I’ll pass along a few to consider. In a future column, I’ll also give you a couple of ideas for a “do-it-yourself” forecast.

To start, let’s throw out the extremes, like the mutual fund president who wrote a book during the tech boom forecasting the Dow would hit 100,000, or perennial bears such as Robert Prechtor, who has been calling for the death of all bulls since the 1980s. They both may be right—I’m just not sure it will happen in our lifetimes!

Back in the bear’s den, we have Marc Faber, a Hong Kong contrarian who tells us we don’t have a chance against China and a rising Asia. He thinks we are in for a long and dark winter of economic morass. According to a recent Forbes article by Rich Karlguard, Boston investment banker Jeremy Grantham sees our recent upward surge as “the greatest sucker rally in history,” based on his assumptions that the market is overpriced at its current P/E of 24 and will fall to its trend line of 16.

Warren Buffett, recently proclaimed the “Greatest Investor of All Time” on the cover of Fortune magazine, is looking for a do-nothing, sideways market for the next ten years, reminiscent of 1972–82. Buffett is one of the few money managers who lost money in 1999, but he has been right for the past three years.

On the other side of the fence, there are more than a few supply-side bulls, like Art Laffer, economist and inventor of the Laffer Curve. He theorizes that lower taxes increase tax receipts through increased economic activity. To his credit, his 1980 theory has been correct. In January 2004, Laffer noted that American stock markets are more undervalued than they have been in forty years, selling for just 25¢ to the dollar.

Fellow bulls like Ed Yardeni, Chief Investment Strategist of Prudential Equity Group, and Larry Kudlow, co-host of CNBC’s “Kudlow&Cramer,” agree with Laffer. They point to American productivity, low interest rates and the Bush tax cuts as the jump-start of a multiyear stock rally that will lead to new highs.

While I’m not quite ready to hitch a ride on the Dow “40,000 or bust” wagon train, I would like to put some of these bearish sentiments in perspective.

From 1926 through 2003, using ten-year rolling periods, research done by the H.S. Dent Foundation™ shows large cap stocks have averaged annual returns of 11.1% with a standard deviation of +/- 5.73%. If the Dow trades sideways from now through the end of the decade, as Mr. Buffett and friends suggest, this implies an average annual return of -2.17% for the decade.

To put that into perspective, that is a poorer ten-year return than the years from 1929 continuing through the Great Depression. During those ten years, the U.S. economy suffered with violent contractions in the money supply, 25% unemployment, a drop of almost 50% in worker productivity, restrictive trade policies and an increase in income taxes.

Today, we have plenty of liquidity in the money supply, rising worker productivity, unemployment near the norms of 5–6%, lower taxes and relatively free trade.
For the bearish scenario to play out, our economy would have to be seriously disrupted for the next six years! Keep in mind that even after 9/11, consumers continued to spend and our GDP remained positive quarter over quarter.

Read More: Forecasting the Stock Market (Part 2)

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Job Outsourcing

by Bruce Fenton

Job outsourcing is not a new problem for any economy—history is replete with examples. In the 1830s, England became so proficient at milling cloth that India cried “foul” as jobs in the textile mills fled India for England. Lately, we’ve been hearing a lot of anecdotal evidence of the US economy being driven to its knees by job outsourcing, but the facts paint a different picture. Outsourcing is a natural result of technological innovation and growing world economies.

Gregory Mankiw, head of President Bush’s Council of Economic Advisors, recently observed that outsourcing is just “a new way of doing international trade, which makes it a good thing.” This touched off a political firestorm on both sides of the aisle, since jobs are an emotional issue, especially in election years.

What makes this picture different is that for the first time, white collar jobs are at risk. As Nandan Nilekani, CEO of the India-based Infosys Technologies, said at this year’s World Economic Forum, “Everything you can send down a wire is up for grabs.”

During the 1980s and the early 1990s, many corporations began shifting jobs overseas to take advantage of lower cost structures. This shift drew little attention as our economy was creating jobs faster than jobs were leaving. During the recent downturn, however, outsourcing has become the dog to be kicked, even though close to 90% of jobs in the US require geographic proximity. Jobs requiring high skill levels, communication and innovation skills and business expertise are not leaving. Analysis by the International Data Corporation concluded, “The activities that will migrate offshore are those that can be viewed as requiring low skill, since process and repeatability are key underpinnings of the work. Innovation and deep business expertise will continue to be delivered predominantly onshore.”

Research by the Forrester Group predicted that 3.3 million jobs will be lost over the next 15 years to offshore outsourcing. That is a tiny fraction of total US employment—less than .2%. Because outsourcing enables our corporations to produce at lower costs, our economy benefits from lower inflation and better service. As IT costs come down, for instance, industries such as health care can make better use of technology at lower costs while improving the quality of their output. Research by the McKinsey Global Institute has estimated that for every dollar spent on outsourcing to India, the US reaps between $1.12 and $1.14 in benefits.

Yes, manufacturing jobs have suffered . . . but not because of outsourcing. Technology has increased productivity both here and abroad, allowing manufacturers to do more with fewer people. An Alliance Capital Management study of global manufacturing trends from 1995 to 2003 showed that the US lost 11% in manufacturing employment during those seven years. Meanwhile, China showed a 15% decrease and Brazil had a 20% decrease. Our job losses in manufacturing were mirrored worldwide.

Outsourcing has also proven to reallocate skilled workers to more competitive, better-paying jobs. According to McKinsey, from 1999 to 2003, 70,000 computer programmers lost their jobs, but during the same period, 115,000 computer software engineers found higher-paying jobs.

Protectionism is not the answer. A recent tariff on steel imports sought to protect 40,000 steel workers. However, over 40 times as many jobs are related to steel use rather than steel production. According to estimates by the Institute for International Economics, between 45,000 and 75,000 jobs were lost because higher steel prices made US steel-using industries less competitive.

The bottom line is that trade protectionism forces inefficiencies on an economy, subsidizing uncompetitive sectors while preserving jobs that are less competitive or less productive. This leads to higher prices for consumers while destroying current and future jobs in sectors that have comparative advantage. If barriers are erected to prevent offshore outsourcing, the overall effect will not create jobs, but destroy them.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Tired Of Record Low Interest Rates?

by Bruce Fenton

Over the past several months, we have talked to many of our clients about their accounts. There’s one message we continually hear: “I am tired of low interest rates on my money!” As we searched diligently for an investment that would have potential for income and dividend gains with limited market risks, we found such an investment: REITs (pronounced REETS), or Real Estate Investment Trusts.

These investments are governed by a board of directors and may be publicly traded on a major stock exchange in the same way shares of a corporation’s stock are traded. Just like other publicly and privately offered companies, REITs must provide investors with a prospectus, annual reports and other periodic updates. These investments are not for everyone. With privately held REITs, there can be some restrictions such as not being as liquid as publicly traded investments.

That being said, why would you or anyone want to invest in a privately held REIT?

• REITs allow smaller investors to own large income-producing real estate.
• REITs pay non-guaranteed quarterly dividends (currently 7%) which are often used as an additional source of income.
• REITs collect their income from corporations first. Corporations are obligated to pay operating expenses such as rent, salaries, taxes and utilities FIRST before any interest or dividends are paid to bondholders or stockholders.
• REITs can further diversify a portfolio, which can offer the potential for reducing the overall portfolio risk and higher returns.

We think this may be an appropriate investment for some people, but not everyone. This investment requires a time commitment, and there could be a waiting period for withdrawing your money.

We have found what we believe to be one of the most conservative REIT firms on the market today. If you are concerned about today’s low interest rates and want to look at some alternatives, please feel free to call us at 800-559-2900 and ask for the REIT information packet, which will include a current prospectus.

Better yet, make an appointment so we can explain this investment to you in person. It’s very easy to understand if we can sketch it out, but it’s a bit difficult to do over the phone. We look forward to speaking with you soon.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Note: There are special risks associated with real estate investing, and it may not be suitable for all investors. REIT investments should be made as long term investments. Volatility is potentially increased by investing in a portfolio solely of real estate securities. A prospectus detailing all risks, fees, and expenses is available for review from your investment consultant. Past performance is no guarantee of future results. Dividends are not guaranteed and, if paid, will fluctuate in rate.

January Effect

by Bruce Fenton

“October. This is one of the peculiarly dangerous months to speculate in stocks.
The others are July, January, September, April, November, May, March,
June, December, August and February.”
-Mark Twain (1884)

Twain was on the right track. Some market followers believe there is a “January Effect” leading to greater stock price increases in January than in other months. In fact, there are a number of calendar effect theories that are closely followed by some.

As much as economists would have you believe that all economic theories are grounded in empirical evidence, that is not always the case. Too often, with so much data available, theories can be tested and “proven” by compiling, or mining, the right data. Yet there is strong evidence of seasonal regularities in stock returns. Richard Thaler, writing in the inaugural issue of Journal of Economic Perspectives (1987), first identified these anomalies. He also put his work in plain English in his book, The Winner’s Curse.

The efficient market hypothesis states that stock prices should follow a random pattern and not be subject to seasonal influences. However, with data on daily prices going back to the 1920s, researchers have found evidence that supports the theory that the returns in January tend to be higher than in other months. Work by Rozeff and Kinney (1976) showed that the average returns in January exceeded the average returns of all other months by about 3%, with almost one-third of the annual returns occurring in January.

Some who have studied the January Effect have attempted to attribute it to year-end tax-loss selling. By January, the pressure to sell is over and buyers begin accumulating shares, bidding the prices up. To test this, Gultekin and Gultekin (1983) looked at patterns in 16 countries and found that January returns were exceptionally large in 15 of them, suggesting that tax-loss selling is not relevant.

Studies similar to those noted above seem to confirm the existence of other “calendar pricing” anomalies. For instance, stock prices seem to go up on Fridays and down on Mondays, and according to Ariel, the day before a holiday appears to have a greater percentage of advances over declines (1985). Ariel also tested data from 1963–1981 for intramonth trading and found that the first four days of each month plus the last day of the prior month averaged .473%, a number greater than the average total monthly return of .35%! In other words, aside from the four days around the turn of every month, the DJIA falls!

The “why” behind these anomalies remains a puzzle to economists. The fact that they do occur, and continue to occur even after significant documentation, would imply that the pricing differentials are not significant enough for trader speculation.

Thaler offers three possible explanations for these calendar effects:

First, price movements may be influenced by the timing of funds into and out of the market, such as pension deposits that are routinely made at certain times of the month or year.

Second, intuitive managers routinely engage in “window dressing” their portfolios in anticipation of reporting deadlines as they get rid of poorly performing assets. Since reporting deadlines typically occur at month and year-end, this may explain some of the seasonal price movements.

Finally, the systematic timing of good and bad news may have something to do with price movements. If bad news is systematically posted after the close of Friday’s markets, Monday is usually not a good day.

In any case, the fact that these calendar effects seem to exist provides welcome fodder for the financial journalists seeking to explain market movements they might not otherwise understand.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Women’s Investment Clubs

by Bruce Fenton

The Beardstown Ladies made 'investment clubs' a household term a few years ago when they published their first book, “Beardstown Ladies’ Common-Sense Investment Guide”. While their four books probably made them more money than their investments, their real legacy might be the interest they created in women’s investment clubs.

Investment clubs, groups of 12 to 20 people who come together for fun, education and profit, started about 1900. According to the National Association of Investment Clubs (NAIC) some clubs have been in existence more than 30 years and have accumulated assets of $1,000,000 or more.

Women have found these clubs to be a particularly valuable education resource for learning about investments. While women tend to live longer than men and are likely to need more savings in retirement, until the last several decades they have remained on the sidelines when it came to making investments.

That is rapidly changing. Contrasting studies in 1990 by the New York Stock Exchange (NYSE), and in 1998 by the Nasdaq, point out that the number of female investors grew from 37% to 47% in eight years. By 1998, 45% of the female investors surveyed said that they’re the primary investment decision-makers in their households.

NAIC studies show that between 1960 and 1996, the percentage of NAIC member clubs that were all women skyrocketed from 10% to over 50%. They show that three out of four new clubs formed are all women. As more women become active investors they are turning to clubs as a way to learn and invest.

The NAIC reports that the number one goal of all-women clubs, ahead of turning a profit, is to learn about investing. They are motivated by a genuine curiosity and a desire to learn—or because they realize that it’s vitally important for them to be able to tend to their own or their family finances. A haunting statistic provided by a recent Bureau of the Census survey shows that 75% of the elderly poor in America are women.

It takes only a few persons interested in the potentialities of an investment education to start a club. The NAIC, established in 1951 for the purposes of educating individual investors and encouraging investment clubs, publishes a wealth of information on their web site,
www.better-investing.org for those interested in forming a club.

Investment clubs usually do not have to be regulated by SEC rules providing they do not sell interests in the club as a security or investment contract. Further, if all members actively participate in deciding what investments to make, interests in the club would not constitute ownership of a security regulated by the SEC.

Since the club requires a bank account and a brokerage account in which to make deposits, and purchase and sell investments, the club will likely be required to have its own taxpayer identification number which can easily be obtained from a local IRS office.

Members decide on investment choices as well as club administrative matters by vote. Each club should adopt bylaws as well as a partnership agreement that spells out the voting method. The two most common ways to vote are: one member-one vote, or a weighted vote based on ownership percentages.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

We Can Learn A Lot From History

by Bruce Fenton

There was a time when a technology boom swept across the land. Entrepreneurs touted a new, improved life for everyone. The stock market marched up and up, with no limit in sight. Life was good…then came the crash.

The leading technology stock of the day lost 75% of it value. The Dow Jones Industrial Average (DJIA) plunged. Investors panicked, a depression swept across the land. Suddenly, the new technology did not matter.

A few years later, Americans expressed their revulsion against corporations across the land and cried out for an end to corporate greed and corruption. The President and Congress acted, and a host of new regulations sprang forth.

We can learn a lot from the way the crash occurred in 1920-21. The government regulatory efforts happened in 1932 when President Franklin D. Roosevelt and a newly elected Democratic Congress took control of the country.

The fact that much of this mirrors our situation today is important…we’ve “been there, done that.” But what is equally important today is understanding what happened between the crash and the government intervention 10 years later.

The Henry Ford generation was a generation of innovators and entrepreneurs. Born in the latter half of the 1800s, they invented the car, the airplane, the telephone, and harnessed electricity. Their numbers were greatly increased by a huge wave of immigrants who hit our shores in the latter part of the 19th century and the early part of the 20th Century.

They worked hard, bought houses, bought cars, educated their children, and spent money through the first two decades of the 20th century. They also benefited from a booming stock market. This generation was mirrored 80 years later by the ba