News Articles
BusinessWeek.com
March 2, 2006
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Stocks Inch Lower on Retail Sales

Merchants like Gap, Pier One and Abercrombie & Fitch posted disappointing February sales. Crude futures climbed above $63

Stocks finished modestly lower Thursday, well off session woes, amid soft retail sales, weak foreign markets and a rally in crude futures. Energy groups gained, while cyclical, retail and rate-sensitive stocks like financial and utility companies were weak, says Standard & Poor's MarketScope.

The Dow Jones industrial average fell 28.02 points, or 0.25%, to 11,025.51. The broader Standard & Poor's 500 index slipped 2.08 points, or 0.16%, to 1,289.16. The tech-heavy Nasdaq composite index edged lower 3.53 points, or 0.15%, to 2,311.11.

Recent market choppiness may continue, some analysts say. "We do not yet see an end to the pattern of aborted rallies and reactions that have characterized market action over the past couple of months," says Richard Dickson, senior market strategist for Lowry's Reports.

Retail sales figures Thursday brought with them a winter chill. Apparel merchants Gap (GPS ), Chicos FAS (CHS , Abercrombie & Fitch (ANF ) and Aeropostale (ARO ) all posted February same-store sales that were weaker than Street estimates. Home furnisher Pier One (PIR ) fell 2.6% after a 10.8% sales decline.

Retail behemoth Wal-Mart (WMT ) said same-store sales rose 3.2%, as forecast, while a 3.6% gain at rival Target (TGT ) barely beat expectations. Costco (COST) posted flat second-quarter earnings of 62 cents a share, despite a solid 7% same-store sales rise. Costco shares rose 1.2%, while Wal-Mart slipped 0.2% and Target declined nearly 1.5%.

Internet search giant Google (GOOG) was in focus following an early-week plunge. Shares were 3.2% higher as the tech bellwether said its goal is to become a $100 billion company.

Chip stocks drew attention following a rally Wednesday that fizzled midway Thursday. Advanced Micro Devices (AMD ) was 3% higher, while Texas Instruments (TXN ) rose 0.5%. Intel (INTC ) fell 1.5%.

Auto-parts maker Dana (DCN) was down 44.9% as it said it could not make a bond payment of $21 million. Deutsche Bank said the stock might drop to zero due to possible bankruptcy.

On the economic front, investors were eyeing a tame employment report. Initial jobless claims jumped an unexpected 15,000 to 294,000 for the week ended Feb. 25, but remained lean for the month, says Action Economics.

The economic calendar Friday is highlighted by the ISM business activity index. February's reading is expected to bounce to 58.0 from January's 56.8, says Action Economics. Also Friday, the University of Michigan's consumer sentiment guage is seen at 88.0.

In the energy markets Thursday, April West Texas Intermediate crude oil futures settled higher $1.39 at $63.36 amid geopolitical concerns.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index dropped 11.1 points, or 0.19%, to 5,833. Germany's DAX index tumbled 83.12 points, or 1.42%, to 5,783.49. In Paris, the CAC 40 index slid 48.52 points, or 0.96%, to 5,009.09.

Asian markets finished mixed. Japan's Nikkei 225 index fell 54.7 points, or 0.34%, to 15,909.76. In Hong Kong, the Hang Seng index rose 64.36 points, or 0.41%, to 15,882.45. Korea's Kospi index slipped 3.89 points, or 0.28%, to 1,367.7.

Treasury Market

Prices for 10-year Treasury notes were lower in afternoon trading at 98-30/32 with a yield of 4.63%, while 30-year bonds fell to 98-04/32 for a yield of 4.61%. The yield curve was inverted.

News Analysis
BusinessWeek.com
February 24, 2006
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Smart Steps for Young Investors

By Marc Hogan

Jump-Start a Lifetime of Saving

For those just launching their working lives, target-date lifecycle funds are as easy as they sensible

Young people have plenty of excuses for not saving. They face mountains of debt, settle for shabby workplace benefits, and endure a high cost of living (see BW, 02/06/06, "Up Against It at 25").

One way to get started saving is a lifecycle fund, which helps simplify investing for the long term. Rather than fretting over that long list of unfamiliar fund names and indexes, investing newbies can estimate their retirement date and pick a lifecycle fund that matches. "It's one-stop shopping," says Don Cassidy, senior analyst with fund-tracker Lipper.

Over time, target-date lifecycle funds automatically shift their underlying holdings from stocks to bonds, becoming more conservative as investors age. Sure, well-heeled investors can hire financial advisers to do this, but that's probably not an option for someone just starting out. Ideally, lifecycle funds let novice investors maintain a diversified portfolio that's right for their time horizon -- without heavy lifting (see BW, 07/26/04, "Funds That Adjust As The Years Go By").

WASH AND WEAR.   Young people actually tend to be too cautious when it comes to investing. Workers in their 20's allocate less of their 401(k) balances to stocks than thirtysomethings do, according to a Hewitt Associates (HEW ) survey. Target-date funds avoid such misguided prudence, which can result from sticking with an ill-fitting default investment like a stable-value fund.

Lifecycle funds not only let shareholders drive hands-free, they also eliminate the need for regular tune-ups. Investors of all ages usually forget to adjust their portfolios anyway. From 2000 to 2004, only 40% of participants in 401(k) plans made a single change to their accounts, according to Hewitt. Financial advisers recommend rebalancing at least once a year, a task lifecycle funds handle without requiring any effort from investors.

And these autopilot investments are catching on. Assets in lifecycle funds with target dates nearly doubled in 2005, rising to $70.1 billion from $43.8 billion at the end of 2004, according to Financial Research Corp. More than one in five 401(k) participants in their 20's hold some kind of lifecycle fund, according to Hewitt.

IN THE MIX.  Vanguard, Fidelity, and T. Rowe Price top some analysts' lists of the top lifecycle fund providers. However, 401(k) plans usually have limited choices. It's important to have confidence in the fund family because nearly all lifecycle products are "funds of funds" investing in other mutual funds run under the same roof.

Each provider constructs its lifecycle funds differently. The Vanguard Target Retirement 2045 Fund (VTIVX ) holds just four index funds, while the Fidelity Freedom 2040 Fund (FFFFX ) uses 22 actively managed funds. The T. Rowe Price Retirement 2045 Fund (TRRKX ) invests in a mix of one index and nine active funds. "Investors need to be comfortable with the way the funds are assembled and managed," says Philip Edwards, managing director of Standard & Poor's Investor Services.

SOME CHOICE INVOLVED.  Lifecycle funds also differ when it comes to cost. Vanguard's offering has the lowest expenses, but Fidelity and T. Rowe Price (TROW ) are competitive after fee waivers, Edwards says. Some companies layer an additional management fee for lifecycle funds on top of the costs of their underlying holdings, but these three providers do not.

Asset allocations vary, too. Vanguard's 2045 fund kicks off with 90% in stocks, while T. Rowe's version is close behind with 87% in equities. By comparison, the Fidelity Freedom 2040 Fund starts with 70% in equities. Someone with a family history of longevity may prefer a more aggressive fund, but investors should also be sure they're comfortable with the potential risks involved.

Lifecycle funds are most appropriate for people who won't want to sweat those details. The key point to remember is that lifecycle funds are intended as an all-in-one portfolio that can be held until retirement. "You could argue that lifecycle funds are the ideal investment for 401(k) investors throughout your lifecycle, given their broad diversification," says Steve Utkus, a principal with the Vanguard Center for Retirement Research.

BUY 'EM, HOLD 'EM.  For investors just starting out, lifecycle funds should usually be their only investment. Adding other investments makes sense later, as they grow savvy. Some financial advisers suggest rounding out the portfolio with alternative investments, such as real estate, which typically aren't available in lifecycle funds. An exception is Barclays Global Investors, which recently added Real Estate Investment Trusts (REITs) and Treasury Inflation Protection Securities (TIPS) to its LifePath lineup.

A potential pitfall is unloading the fund after a period of low returns. Lifecycle funds are supposed to be a long-term investment, and investors should plan to buy and hold. "The trick is, don't mess with it," says Frank McKinley, a New Jersey-based financial consultant.

Another thing to consider is these one-size-fits-all funds may not coincide with your risk tolerance. What's more, you could also miss the chance for greater returns in other investments, because it's unlikely a single fund company excels in all the asset classes that go into a lifecycle portfolio.

THE TIME IS NOW.  To avoid confusion, investors should be aware that not everything labeled as a lifecycle fund has a target date. Some lifecycle funds are "risk-based" and don't change their asset allocation at all. Instead, they're tailored for an investor's risk tolerance, ranging from conservative to aggressive. Most 401(k) plans provide only one type of lifecycle fund, either target-date or risk-based.

Young investors should look for a target-date lifecycle fund, so that it can grow and adjust as they age. They only have to remember to get started.

Self Portrait

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Pitchfork
February 20, 2006
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News Article
BusinessWeek.com
February 16, 2006
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Stocks Climb on Profits, Housing News

Hewlett-Packard reported 30% higher first-quarter earnings. January housing starts beat expectations by a wide margin

Stocks pushed higher in the final hour Thursday, as investors digested solid high-tech earnings reports and a flurry of economic news. Fed Chairman Ben Bernanke's comments to the Senate, like his testimony before the House Wednesday, yielded no surprises, says Standard & Poor's MarketScope.

The Dow Jones industrial average rose 61.71 points, or less than 0.56%, to 11,120.68. The broader Standard & Poor's 500 index added 9.38 points, or 0.73%, to 1,289.38. The tech-heavy Nasdaq composite index climbed 18.2 points, or 0.8%, to 2,294.63.

The session's strong economic data may be deceptive, some analysts say. "In a very warm January, one cannot read anything into the underlying health of the housing market from the strength of housing starts," says John Ryding, chief U.S. economist for Bear Stearns. January housing starts rebounded 14.5% to a whopping 2.3 million units, handily exceeding expectations.

Upbeat quarterly results appeared to be boosting sentiment Thursday. Hewlett-Packard (HPQ) rose 7% after posting 30% higher first-quarter profits late Wednesday. Credit Suisse upgraded the computer maker from neutral to outperform. After the close, rival Dell (DELL ) posted higher fourth-quarter EPS of 43 cents, up from 26 cents and above targets.

Applied Materials(AMAT ), which makes chip equipment, ended more than 2% lower. The company said orders will rise as much as 20% this quarter from the period ended Jan. 29.

In retail, JC Penney (JCP ) posted 66% higher fourth-quarter earnings. Target (TGT ) said its fourth-quarter earnings rose 14 percent, modestly above expectations.

XM Satellite Radio (XMSR ) fell 5% after fourth-quarter earnings failed to meet Wall Street estimates. Competitor Sirius Satellite Radio (SIRI ), which reports Friday, declined 3%.

Heading into a long President's Day weekend, earnings are also due Friday from Campbell Soup (CPB ), PG&E (PCG ) and RadioShack (RSH ).

On the M&A front, General Motors (GM ) rose 1% after a report that a group led by Cerberus Capital Management is the head bidder for majority stake in the automaker's GMAC finance unit. Another Big Three member, DaimlerChrysler (DCX ), posted an 84% increase in fourth-quarter profit, on a 9.8% revenue rise.

Among other companies in the news, Dow component Honeywell (HON ) got a boost as CIBC World Markets upgraded the company from sector performer to sector outperformer. Cardiac device-maker Medtronic (MDT ) was 1% lower amid a California lawsuit alleging the company sold flawed cardiac defibrillators for two years after learning of a potential defect.

Economic action continued Thursday, a day after Bernanke's well-received initial testimony before Congress. In addition to housing starts, import prices jumped 1.3% in January, as export prices rose 0.7%, providing stronger data than markets had anticipated.

Initial jobless claims rose 19,000 to 297,000 for the week ended Feb. 11, a bigger increase than forecast. The Philadelphia Fed index also surged higher than expected, to 15.4 in February after slowing to 3.3 in January.

Also, the new Fed chief spoke again, this time before the Senate Banking Committee. He refused to limit his options regarding data-dependent rate hikes.

On the economic front Friday, the release of the January overall producer price index is expected to drop 0.1%, while the core index increases 0.3, says Action Economics. The University of Michigan's preliminary February reading for consumer sentiment is seen rising to 93.0 from 91.2 in January.

In the energy markets Thursday, March West Texas Intermediate crude oil futures settled higher $1.05 at $58.70.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 37.4 points, or 0.65%, to 5,803.1. Germany's DAX index gained 24.88 points, or 0.43%, to 5,789.25. In Paris, the CAC 40 index added 39 points, or 0.79%, to 4,973.09.

Asian markets ended higher. Japan's Nikkei 225 index rose 110.84 points, or 0.7%, to 16,043.67. In Hong Kong, the Hang Seng index edged higher 27.62 points, or 0.18%, to 15,450.88. Korea's Kospi index climbed 27.62 points, or 0.8%, to 1,314.32.

Treasury Market

Prices for 10-year Treasury notes edged higher to 99-10/32 with a yield of 4.59%, while 30-year bonds were also barely higher at 98-28/32 for a yield of 4.57%. Bernanke told Congress he was not "overly" worried by the inverted yield curve. Steady bond yields helped stocks avert inflation fears, says S&P MarketScope.

News Analysis
BusinessWeek.com
February 16, 2006
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Life Without a 401(k)

No retirement benefits at work? No problem. Here are some fairly painless ways young workers can build a nest egg

It's hard to turn on the TV these days without seeing a commercial about world-changing baby boomers and their upcoming retirement bliss. But guess who's inheriting a future with diminished job stability, disappearing pensions and increasingly imperiled safety nets? Their children (see BW Online, 1/13/06, "Slow-Mo in D.C. on Retirement Issues"). Today's young professionals should start saving fast, because there's a good chance no one else will be watching over their investments during their golden years.

That's easier said than done. As companies cut costs, many twentysomethings now hold freelance, temporary, or contract positions that don't come with a 401(k) or another retirement plan (see BW Online, 12/23/05, "Temporary Jobs: Bah, Humbug?"). According to the Employee Benefit Research Institute, less than two-thirds of employees between 21 and 30 have access to an employer-sponsored retirement plan in 2003, vs. roughly three-quarters of workers their parents' age.

Most young people also have other financial concerns. The typical college graduate in 2004 had a debt of $15,162, nearly a two-thirds jump from 1993 (see BW, 11/14/05, "Thirsty & Broke"). Throw in housing and health care, and the costs really add up (see BW Online, 2/02/06, "How to Get Your Health-Care Coverage").

But enough with the excuses. Thanks to the power of compounding, a little scrimping now can grow into a hefty sum down the road. So how much should cash-strapped Generation Debt workers save, and where should the savings go? This Five for the Money finds ways that young workers without company retirement plans can squirrel away money for the future.

1. Open an Individual Retirement Account (IRA).
A 401(k) isn't the only way to get tax-preferred savings. IRAs provide tax benefits of their own, and come in two distinct flavors, traditional and Roth. Both are available from most mutual fund companies.

Many financial advisors recommend Roth IRAs, especially for young people. Investors can't put pretax funds into a Roth IRA, but qualified withdrawals are tax-free. The after-tax nature of the accounts makes them ideal for anyone who is presumably in a lower income-tax bracket now than they will be at retirement. However, if you currently earn $110,000 or more per year, you can't use a Roth IRA.

Some young workers may prefer a traditional IRA, which defers taxes until withdrawal. In other words, money goes into these IRAs on a before-tax basis, as with a 401(k). Depending on annual income, assets going into a traditional IRA may be tax-deductible, too. Contribute by Apr. 15 to take deductions for the 2005 tax year.

For savers below age 50, the annual contribution limit for either type of IRA is $4,000, enough for most young professionals. In 2008, the limit rises to $5,000.

Most experts recommend leaving contributions in an IRA until retirement. Early withdrawals typically carry a tax penalty, but there are exceptions for medical expenses, higher education costs, or a down payment on a first home.

2. Explore other savings options.
Plenty of young people worry about locking up their money in the long run. After all, they might need to crack their nest egg for weddings, children, or rainy days. So contributions to an IRA can be supplemented with savings outside a tax-favored retirement plan.

Meanwhile, self-employed individuals have access to a wider array of retirement-plan options (see BW 12/05/05, "A Perfect Match"). A Simple IRA allows contributions of up to $10,000 a year and can be established anytime between Jan. 1 and Oct. 1 by visiting a financial institution. "They're very easy to use, and you can put a ton of money away," says Terry Balding, a certified financial planner at Terry Balding & Associates.

The self-employed have access to the same types of plans used by big corporations. A one-person 401(k) or pension plan could make sense for those with high income. But the cost and hassle of maintaining these complex programs will be too much for most young professionals.

3. Make savings and investments automatic.
Once workers start saving, the best way to keep up the momentum is to ensure that it happens by default. "The biggest piece of advice, beyond 'start now,' is to use a 'set it and forget it' approach," says John Curry, managing director of retirement management with FundQuest.

Most mutual fund companies allow deposits into IRAs or taxable accounts to be made directly from another account via bank draft. Like contributing to a 401(k), setting up a systematic bank draft allows savings to pile up in the background, without requiring any further effort.

These days the details of investing can be automatic, too. Mutual funds called lifecycle funds aim to take out the legwork, and they're growing in popularity (see BW 07/26/04, "Funds That Adjust As The Years Go By"). These funds shift their asset allocation from stocks to bonds as they approach a certain retirement date. Assets in the funds have more than doubled since 2003, according to Financial Research. Products like the T. Rowe Price Retirement 2040 Fund (TRRDX ) and Vanguard Target Retirement 2045 Fund (VTIVX ) have earned praise for low fees and ease of use.

4. Investigate indexes.
Then again, fees are usually even lower for an index fund. Young investors are widely encouraged to invest primarily in equities, because of their longer time horizon. An index fund lets them reduce management costs while they do it.

A fund tracking an index like the big-cap Standard & Poor's 500 gives exposure to a broad array of U.S. companies. Fidelity Spartan 500 Fund (FSMKX ) has a low expense ratio of 0.1%, while the Vanguard 500 Index Fund (VFINX ) costs only 0.18% (see BW Online 2/8/06, "How to Kick a Fund's Tires"). S&P 500 funds are also tax-efficient, so they can be relatively painless even outside a tax-favored account like an IRA.

"The last thing you have to worry about at this point in your life is asset allocation, because you don't have a lot of money," says Patrick Doland, a financial adviser in Northbrook, Ill. "So let's get you in an investment vehicle to start out, and let's not overcomplicate it."

Index funds make sense for young people who are confident they'll remember to give their portfolio a tune-up once it reaches $10,000. Indexes can be volatile, so the risk-averse should either be prepared or consider other options.

5. Follow the 10% rule.
Financial advisers suggest workers save 10% of what they earn. That may sound steep, especially since the national savings rate sank into negative territory last year for the first time since the Great Depression. But it is possible.

On after-tax earnings of $30,000 a year, saving 10% would mean setting aside less than $60 a week. So give up a night on the town, or start packing your lunches and skipping Starbucks in favor of the office coffeepot.

The trick is to get your house in order first. Keep paying off those student loans, but don't necessarily pay them ahead of schedule. In many cases, if a student secures a low, fixed interest rate, it may be better to invest that money.

On the other hand, it's almost always smart to pay off credit card debt first. Only extremely risky investments would have a chance of overcoming the high interest rates credit card companies typically charge. Better yet, avoid racking up debt in the first place.

THE TIME IS NOW. Saving doesn't have to mean all work and no play. Young professionals might also want to set aside an extra 10% for future indulgences, if they can swing it financially. "This is a generation that likes to have toys, too," says Jim Ludwick, founder of MainStreet Financial Planning.

Most importantly, start saving. Not having a 401(k) shouldn't be an obstacle to a young person getting a head start on retirement.

News Article
BusinessWeek.com
February 15, 2006
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Stocks Rise After Positive Bernanke Remarks

The new Fed chairman sounded an upbeat note before Congress amid mixed economic reports. Crude futures fell below $58

Stocks finished higher Wednesday, bolstered by a lack of surprises in Fed Chairman Ben Bernanke's first testimony to Congress. A mixed bag of economic reports was also in the picture, while crude oil futures continued their descent. Select tech, retail and health care stocks led gains, accompanied by slightly lower volume, says Standard & Poor's MarketScope.

The Dow Jones industrial average rose 13.37 points, or 0.12%, to 11,041.76. The broader Standard & Poor's 500 index edged higher 1.8 points, or 0.14%, to 1,277.33. The tech-heavy Nasdaq composite index added 10.2 points, or 0.45%, to 2,272.37.

The new Fed chief told the House Financial Services Committee the economic expansion remains on track but cautioned about the risk of overheating, according to prepared remarks. He reiterated the Jan. 31 FOMC statement leaving the door open to "some" further rate increases. He also said the Fed's decisions will be flexible but "increasingly dependent" on data. These comments were in line with expectations, says Action Economics.

Bernanke's testimony likely sets the stage for additional rate hikes. "Given our economic outlook, we see the funds rate rising to 5% by the May 10 FOMC meeting and we see an increasing risk of a 5.25% fed fund rate by the middle of the year," says John Ryding, chief U.S. economist for Bear Stearns.

The comments were notably even-handed, some analysts say. "We have a hard time trying to put a hawkish or dovish spin on Chairman Bernanke's prepared remarks," says Joseph LaVorgna, chief U.S. fixed income economist at Deutsche Bank.

In economic data Wednesday, industrial production fell 0.2% in January. But December and November data were also revised higher, so the decline doesn't suggest weakness, says Action Economics. Earlier, the U.S. Empire State manufacturing index edged higher to a better-than-expected 20.3 in February. The National Association of Home Builders remained at 57 in February for the third straight month, ahead of Thursday's housing starts report.

Earnings news came after the close. Computer maker Hewlett-Packard (HPQ) reported first-quarter non-GAAP diluted EPS of $0.48, up from $0.37 a year earlier, and raised second-quarter guidance. Chip-equipment manufacturer Applied Materials (AMAT ) posted fist-quarter EPS of 9 cents, down from 17 cents. Companies reporting Thursday include Dell (DELL ), JC Penney (JCP ) and Target (TGT ).

M&A activity continued Wednesday, as brokerage giant Merrill Lynch (MER ) and money manager BlackRock (BLK ) reached a deal to merge Merrill's investment management business and BlackRock. Merrill will have a 49.8% stake and 45% voting interest in the newly created entity. As a result of the merger, PNC Financial (PNC ), which owns 70% of BlackRock, will hold a 34% share in the combined company.

Separately, Merrill boosted Bank of New York (BK ) and Bear Stearns (BSC ) from neutral to buy. Credit Suisse (CSR ) shares fell more than 8% amid worries about rising costs and investment bank revenue.

Among other companies in the news, Johnson & Johnson (JNJ ) was little changed after a report that the company is slashing its sales operations for anemia drug Procrit. DuPont (DD ) was also little changed after the Senate shelved an asbestos relief bill.

Anheuser-Busch (BUD ) and Wells Fargo (WFC ) were both higher after billionaire investor Warren Buffett's company, Berkshire Hathaway (BRK.A ), revealed large stakes in the companies.

In the energy markets Wednesday, March West Texas Intermediate crude oil futures settled down $1.97 at $57.60 per barrel. A weekly inventory report showed crude supplies jumped 4 million barrels, far more than expected.

European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index slipped 0.8 points, or 0.01%, to 5,791.5. Germany's DAX index edged higher 0.97 points, or 0.02%, to 5,764.37. In Paris, the CAC 40 index fell 27.25 points, or 0.55%, to 4,934.09.

Asian markets ended mostly lower. Japan's Nikkei 225 index fell 252.04 points, or 1.56%, to 15,932.83. In Hong Kong, the Hang Seng index edged higher 2.94 points, or 0.02%, to 15,423.26. Korea's Kospi index declined 24.37 points, or 1.83%, to 1,303.84.

Treasury Market

Prices for 10-year Treasury notes were slightly higher at 99-06/32 with a yield of 4.6%, while 30-year bonds climbed to 98-28/32 for a yield of 4.57%. The yield curve was inverted.

News Analysis
BusinessWeek
February 8, 2006
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How to Kick a Fund's Tires

It's a bit late to learn about hidden fees or untried managers after buying in. Here are some tips to avoid those and other unpleasant surprises

Investors know they should examine a mutual fund's fees and performance record before writing that check. Though many people get help from a financial adviser to find the best funds (see BW Online, 4/8/05, "Finding the Right Money Coach"), knowing where to look under the hood can help avoid getting a lemon.

Low fees are a good thing, but there may be a catch. FundAlarm.com publisher Roy Weitz noticed that E*Trade (ET ) recently promoted its E*TRADE S&P 500 Index Fund (ETSPX ) as one of "the industry's lowest-cost stock index funds." The fund has an expense ratio of 0.09%, well below the 0.39% average for its Lipper category.

The fine print reveals that E*Trade will limit its fees only temporarily. "There is no assurance that [E*Trade] will continue these expense limits beyond April 30, 2006," a footnote reads. Without this fee waiver, E*Trade's index fund would carry a 0.78% expense ratio. By comparison, Fidelity's Spartan 500 Index Fund (FSMKX ) charges 0.1% and the Vanguard 500 Index Fund (VFINX ) shares cost 0.18%. Both funds require shareholder approval to raise fees. E*Trade's fund doesn't, but a company spokeswoman says the brokerage plans to keep its fee caps in place for at least another year.

Weitz fears that investors may get confused when companies trumpet those fees to sell index funds, which compete mostly on price. To check if expense ratios are temporary, read all the footnotes in fund advertisements. NASD rules require companies to disclose the non-waived fee, even if they're touting something lower. Failing that, visit the company's Web site and skip to the section of the prospectus devoted to expenses.

Fee waivers aren't the only way funds can be less attractive than they might appear. This week's Five for the Money looks at how investors can make sure they're getting exactly what they bargained for when they stash their hard-earned cash.

Look at costs beyond just the expense ratio.
"Fees are the most important single factor in evaluating a particular fund," says Mercer Bullard, founder of investor advocate Fund Democracy. So investors should know whether their funds carry hidden costs.

Trading costs can slash investors' returns, but they aren't included in expense ratios. To avoid getting burned, investors should be wary of funds with turnover rates higher than 100%, says Christine Benz, director of fund analysis at Morningstar (MORN ).

So-called opportunity costs are another factor. Some funds may be too large to buy some of the small-cap stocks they might have in the past. Watch out especially for funds that combine high turnover rates with a large asset base or a focus on smaller companies.

Taxes can also hit investors' pocketbooks without showing up in a fund's expense ratio. Funds that frequently distribute dividends or have high turnover rates might give investors an unwelcome surprise on April 15. These funds might be more suitable for tax-deferred account such as a 401(k) or IRA.

Scrutinize performance figures.
Just because a fund has had a couple of good years doesn't mean it's right for everyone. Investors planning to hold a fund for only a few years should read up on the fund's performance volatility, not just its overall performance.

On a number of Web sites, investors can look at the bar chart that shows a fund's returns for each year. "If you have bars that fluctuate up and down dramatically, you know that this is not a short-term investment vehicle," says Bullard.

Don't put money in a volatile fund unless you can afford to leave it there for at least five or 10 years. If investors wind up scrapped for cash when the fund is having an off year, they might end up having to eat substantial losses.

Weigh the risks looking forward, not just backward.
Some investors study measures like standard deviation to learn how risky a fund is. But that only gauges a fund's previous risk levels. Investors should check forward-looking risk measures, too.

Investors should analyze a fund's fundamentals, such as sector weightings and the percentage of the fund's money in its top holdings. Risks can crop up if a fund bets heavily on certain industries or companies. For example, a fund that bets heavily on small stocks may be vulnerable if large ones begin to outperform, as many market watchers have been predicting, says Morningstar's Benz.

Do your homework on a fund's portfolio managers.
A fund is only as good as the people who run it. But sometimes portfolio managers jump ship, particularly during the fund industry's recent consolidation. Investors should make sure a fund with a good record still has the same management team.

Portfolio management information is usually available on a fund's Web site. Also check the prospectus. "A fund could have the greatest track record in the world, but if the portfolio management team that posted that track record is no longer running the fund that history is basically irrelevant," says Brian White, vice president and director of mutual fund marketing with Ryan Beck.

The fund's daunting statement of additional information (SAI) tells how much money, in broad terms, a manager has invested in the fund. In theory, a manager with "skin in the game" has more incentive to rake in high returns.

The SAI also indicates how many other accounts a manager handles. This might include separately managed accounts run for institutional investors or wealthy individuals. If the fund skipper manages a big amount using the same strategy, the fund might bump into problems when trying to unload securities. "They're basically fishing in the same water," Weitz warns.

Watch out for incubated funds.
Sometimes fund companies launch new funds to a select group before making them available to the public. Typically, only employees and their families can invest for the first few years. Industry insiders call these funds "incubated" because they build up a track record under artificial conditions.

Delaware Investments introduced Delaware Small Cap Core (DCCAX) last year. But the press release announcing the launch listed the fund's start date as December, 1998. What's more, the fund previously had a different name and investing style, but it still touted the track record it had piled up while closed to normal investors. A Delaware spokeswoman declined to comment.

Incubated funds aren't necessarily bad investments. Still, investors should be leery of them because a manager running an incubated fund doesn't have to deal with inflows and outflows from regular investors. So when the funds open their doors, investors are looking at performance numbers that occurred under vastly different circumstances.

It can be tricky to spot incubated funds. In most cases, though, the phrase "limited distribution" will appear somewhere in performance footnotes or in the history of the fund. "They never use the word incubated," Weitz says.

It's easy for fund investors to suffer from information overload. But ask the right questions, and you can rest assured your nest egg isn't in a Trojan horse.

News Analysis
BusinessWeek.com
February 6, 2006
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Has Janus Turned the Corner?

The asset manager has turned itself around, thanks in part to CEO Gary Black's efforts, but there are still reasons for investors to be cautious

Named for a two-headed Roman god, Janus Capital Group (JNS ) may have done an about-face. Investors poured $2 billion into the Denver-based asset manager's products in 2005, after $20.6 billion in outflows a year earlier. Fourth-quarter profits rose. And analysts are widely touting the return of growth stocks, the company's bread-and-butter investing style (see BW, 12/29/05, "All Aboard the Growth Train"). On a recent conference call, Janus Chief Executive Gary Black declared: "We've got a lot of momentum as we begin 2006."

Investors have noticed the turnaround. Janus shares hit a 52-week high of $22.43 during trading on Jan. 12, partly on news that Bank of America upgraded the stock to buy from sell (see BW Online, 1/6/06, "B of A Ups Janus Capital, Legg Mason Shares to Buy"). Last year the stock was stuck in a $13 to $16 range until November, when takeover speculation surfaced. Granted, the rising stock market is lifting all asset managers' boats.

Janus recently reported 23.1% higher fourth-quarter profits, as expected, on revenues of $225.2 million. Rivals like Franklin Resources (BEN ) and T. Rowe Price (TROW ) posted similar gains, with substantially higher revenues.

HEFTY SETTLEMENT.  While Janus has taken strides in the right direction (see BW, 9/6/04, "Putting a New Face on Janus"), it may be tough for it to return to its former glory. "It's like turning a battleship," says Morningstar equity analyst Rachel Barnard.

The company still doesn't have many fans on Wall Street. All but one of the analysts have hold or sell recommendations on the stock. Currently trading around $21, the shares are priced well above Barnard's $17 estimate of their fair value. On Jan. 31, UBS analyst Michael Carrier downgraded Janus to reduce from neutral, citing valuation in a note titled "Nice turnaround, but too pricey." The stock price is banking on too many uncertainties working in Janus' favor, Carrier said.

Recent years have been tough for Janus, one of the highest-flying mutual-fund companies of the late-1990s bull market (see BW Online, 5/7/04, "Janus Is Hardly in the Clear"). Fund performance took a nosedive after the bubble burst in 2000, and investors shifted money to value stocks. In 2004, Janus struck a $226 million settlement with state and federal regulators as part of New York Attorney General Eliot Spitzer's probe into improper fund trades.

EXECUTIVE OVERHAUL.  Janus' regulatory troubles, at least, seem like a thing of the past. The company has placed new emphasis on compliance, kick-started by Chairman Steven Scheid, who was CEO from 2004 until Black's recent promotion (see BW Online 9/6/04, "Janus' Scheid On 'Our No. 1 Goal'"). "They can't afford to make any more mistakes," says Jeff Keil, principal at industry consultancy Keil Fiduciary Strategies.

Black has overhauled his investment team to boost performance. Most recently, the company tapped David Corkins to run its struggling flagship Janus Fund (JANSX ). Janus also promoted portfolio managers Jonathan Coleman and David Decker to co-chief investment officers of its domestic equity group. "Black has done a terrific job in his short tenure of making the firm more disciplined and laying out a long-term strategy," Barnard says.

Long-term performance numbers are starting to creep back, as the brutal 2000 and 2001 showings recede in the rearview mirror. As of Jan. 26 well over half of Janus' funds were beating their peers on a five-year basis, up from 26% at the beginning of the year. Sixty-four percent of Janus' funds are ranked four or five stars in Morningstar's three-year ratings, compared to an industry average of roughly 33% with those rankings.

Despite the improved performance for Janus mutual funds, investors haven't been putting new money in them. Although Janus reported it had inflows last year, they came mostly from Intech, its lower-margin quantitative business for institutional clients. Excluding Intech and money-markets, investors yanked a net $14.1 billion from Janus products in 2005, after outflows of $29.2 billion the year before. Company spokesman Blair Johnson finds the progress encouraging. "We always thought that flows would follow strong performance, and it's good to see that happening in a number of products," he says.

GETTING EVEN.  Janus' outflow woes won't necessarily screech to a halt. The reason is what fund-industry consultant Geoff Bobroff calls the "get-even syndrome." Shareholders tend to pull their money out when it grows back to the amount they originally invested. "Good performance only gets investors back to even faster," Bobroff says.

Some investors may want to get even in another sense, too. The bull market's collapse cut many shareholders to the quick. "A lot of investors who have been burned by Janus in the late 1990s feel like it should be drawn and quartered," says Morningstar's Barnard.

Ultimately, any big move in Janus shares will be tied to the overall fortunes of growth stocks. And there are less risky ways to bet on growth than buying into a rebuilding asset manager.

News Analysis
January 26, 2006
BusinessWeek.com
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Sluggers Among Large-Cap Growth

Funds focusing on these stocks appear to be primed for a comeback. Here are some that earn high marks from analysts

Large-cap growth funds finally may be due for a comeback. After all, the companies they invest in -- typically ones with market capitalizations of $10 billion or more and strong growth prospects -- were out of favor for almost five years. According to Boston-based Financial Research, investors yanked $10.8 billion out of these funds in the first 11 months of 2005, while pouring $18.7 billion into their large-cap value brethren.

Now, the beleagured funds have improving performance on their side. Growth stocks overtook value stocks in the second half of 2005, according to data from Chicago-based investment researcher Morningstar -- and many Wall Street pros don't expect them to look back (see BW, 12/29/05, All Aboard the Growth Train"). In a recent survey of 112 U.S. money managers, Russell Investment Group found 80% favored large-cap growth stocks above all others.

BARGAINS GALORE.  Larger companies happen to be paying higher dividends than they did in the past, thanks to a 2003 tax law. And historically, large-cap growth tends to do better in the later stages of a market expansion, when investors are willing to shoulder more risk (see BW Online, 12/21/05, "Investing Trends to Watch in 2006").

At the same time, large-cap growth stocks are cheaper in a relative sense than they've been in years, some analysts say (see BW Online, 1/11/06, "Equity Funds Reveal an Evolving Market"). "There are a lot of bargains out there in large-cap growth stocks," says Brian Gendreau, investment strategist for ING Investment Management.

So where should fund investors put their money? There are 1,000 large-cap growth funds, and they come in many shapes and sizes. Some large-cap growth managers are willing to bet on companies perceived as riskier in exchange for higher returns, while others play it cautious. Smaller asset sizes might make some funds more nimble. And of course, expenses vary.

"ALMOST BORINGLY STRONG."  A trio of T. Rowe Price funds earn analysts' stamp of approval. Philip Edwards, managing director of Standard & Poor's Investor Services, likes T. Rowe Price Growth Stock (PRGFX ) for its solid performance and low risk. "It's consistently and almost boringly strong," he says. Manager Bob Smith has beaten his peer average by about 3% since taking the helm in March, 1997. The fund has a modest 0.72% expense ratio.

Morningstar senior fund analyst Paul Herbert points instead to T. Rowe Price New America Growth (PRWAX ). At $873 million in assets, it's considerably slimmer than its $10.7 billion big brother. It has an expense ratio of 0.91%.

The fund also holds a hefty tech stake, with more than 20% of the portfolio in software and hardware stocks. Herbert sees tech stocks leading the way in case of a large-growth rebound.

ENERGY-PRICE IMPACT.  New America Growth manager Joseph Milano agrees the economic underpinnings are right for large-cap growth this year. But he cautions that runaway energy prices may still curtail the stocks' ascendance. "When we're looking back, one way or the other we're going to say the returns have been dictated by what happened in energy," he says.

T. Rowe Price Blue Chip Growth (TRBCX) has also posted consistently solid returns, outpacing a typical peer in four of the last five years. "This fund does a pretty good job of being selective along the way and not just taking the largest companies out there," says Jeff Tjornehoj, a research analyst with fund tracker Lipper. Managed by Larry Puglia, this large-cap growth fund has an expense ratio of 0.85%.

Investors looking for something more cautious may want to consider ABN Amro/Montag & Caldwell Growth (MCGFX). Morningstar's Herbert calls it "an old-school growth fund," because it invests in classic growth stocks such as Procter & Gamble (PG ) and Johnson & Johnson (JNJ ).

AGGRESSIVE PEER.  The fund's skipper, Ronald Canakaris, hunts for bargains like a value manager. "We're not willing to pay any price for growth," he says. So he buys shares of companies with reasonable valuation as well as strong earnings growth. The fund's returns lag some rivals because it takes fewer risks, but its expense ratio is a relatively low 1.02%.

Almost the exact opposite in terms of risk and return is the doughty TCW Galileo Select Equities (TGCNX). "If you're more interested in an aggressive large-cap growth, this is the other side of the universe," says Lipper's Tjornehoj.

The portfolio contains only about 25 stocks, with Progressive Auto Insurance (PGR ), Genentech (DNA ), and Yahoo! (YHOO) among its largest holdings. Its annualized three-year returns top 20%, placing the fund in the highest 6% of funds in its Morningstar category. And it has a below-average 1.2% expense ratio.

GROWTH GIANT.  Another fund for intrepid investors is Harbor Capital Appreciation (HCAIX), subadvised by Jennison Associates. "It's a fund you have to take on a little more risk to enjoy," says S&P's Edwards. But the returns can be worth it, as the fund trounced its category average each of the past three years. Manager Spiros Segalas has steered the portfolio since May, 1990. Its expense ratio is 1.1%.

The elephant in the large-growth room is Growth Fund of America (AGTHX), and for good reason. American Funds' $128.1 billion flagship ranks in the top percentile of its category for 10-year annualized returns. It has a low 0.66% expense ratio and a front-end load of 5.75%.

S&P's Edwards credits the fund's multi-manager approach, which lets nine different portfolio counselors each pick stocks individually. But he suggests caution regarding the fund's ballooning asset size.

TIME TO REBALANCE?  Morningstar's Herbert also recommends two smaller American Funds offerings, New Economy (ANEFX ) and Amcap (AMCPX ). Roughly a quarter of both funds' holdings received four- or five-star ratings from the research outfit's stock analysts.

While the shift to large growth stocks would be welcome news for the group, fund watchers advise against trying to chase the market's twists and turns. "It's good to have some exposure to large growth in your portfolio independent of intraday dramatic moves," Herbert says. Indeed, a rebalancing of your portfolio to take advantage of the comeback of growth stocks, especially if it hasn't been touched in a while, could boost your returns down the road.

News Analysis
BusinessWeek.com
January 12, 2006
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Coping with the Alternative Minimum Tax

With millions getting hit by the AMT, a number of funds are specifically geared to avoid the pain. Here are some to consider

The alternative minimum tax may soon be coming to a Form 6251 near you (see BW Online, 2/16/05, "Meet the Enemy"). Enacted in 1969 to snare wealthy individuals who had managed to deduct their way out of paying any taxes whatsoever, the controversial parallel tax doesn't adjust for inflation. So it's hitting more and more middle-income earners

An estimated 3.8 million taxpayers this year -- and 20.5 million in 2007 -- will be slapped with the AMT, according to the Treasury Dept. They'll face a heftier bill from Uncle Sam, and extra paperwork, too.

Efforts are afoot to repeal the unpopular levy. The House of Representatives and the Senate are hashing out legislation that would spare taxpayers from the AMT. In late 2005, the President's Advisory Panel on Federal Tax Reform recommended changes that would include the AMT's demise. But it's unclear whether lawmakers will find room in the budget to slash another revenue source.

WHO BENEFITS MOST.  So with the AMT still alive and kicking, mutual funds are increasingly targeting investors who dread the tax. Typical tax-free bond funds aren't really tax-free when it comes to the AMT. But funds such as the Fidelity AMT Tax-Free Money Fund (FIMXX ) or the Putnam AMT-Free Insured Municipal Fund (PPNAX ) invest only in securities that aren't subject to the tax.

"This is an area where people can look for current income, especially when they're in the upper tax brackets," says Tom Roseen, a senior analyst with New York-based fund tracker Lipper.

AMT-free funds are ideal for investors who already know they have a need for municipal securities, according to Eric Jacobson, a senior fund analyst with Chicago-based fund tracker Morningstar. Folks typically pour their money into munis because their tax efficiency can mean higher returns, depending on individual circumstances. Investors can use a number of online tools to determine whether municipals are right for them. Then, they should check with tax planners about their AMT risk. "If you think you might be subject to AMT and you want a muni fund, it's fine to err on the side of caution and buy the AMT-free fund," Jacobson says.

NOT EASY TO TRACK.  Not all AMT-free funds are alike. They can come from any category of municipal money-market or bond fund, including short, intermediate, and high-yield. "It's good because it gives investors choice, but it makes it more difficult to track the funds," says Brian Boswell, a research analyst for Financial Research, a Boston-based firm. On the plus side, he says the funds' performance is competitive with their AMT-bearing peers.

Fidelity Investments recently introduced its eighth AMT-free fund, the most of any fund company. In 2004, the Boston-based fund complex changed the goals of its five municipal money-market funds to include avoiding the contentious tax. In 2005, Fidelity updated the funds' names to reflect their new AMT-free strategy and lowered the investment minimums on them from $100,000 to $25,000. Expense ratios range between 0.33% and 0.40%, relatively low for muni funds.

Fidelity also offers an AMT-free bond fund, Fidelity Tax-Free Bond Fund (FTABX). It has posted returns that beat its peer-group average each full year since its inception in 2001 and charges a 0.25% expense ratio that's well below average.

DIGGING DEEP.  At American Funds, the Tax-Exempt Bond Fund of America (AFTEX) has been AMT-free since it was introduced in 1979. The fund charges a 3.75% initial sales load and carries a relatively low 0.57% expense ratio. It has beaten its category average over a three- and five-year period, according to Morningstar.

Dexter Williams, manager of the Los Angeles-based fund company's fixed-income department, attributes the fund's record to superior research capabilities. "Most people don't think of research on the municipal side, but we find it to be very important," he says.

Launched in 1978, Eaton Vance Municipal Bond Fund (ETMBX) is another long-running AMT-free fund. The portfolio has a 4.75% sales load and has a slightly below-average expense ratio of 0.91%. Meanwhile, its performance has handily beaten its benchmark Lehman Brothers municipal bond index every year since 2000.

TAKE THE LONG VIEW.  "For the right individual, a non-AMT fund is an absolutely fabulous idea," says Tom Metzold, portfolio manager for Eaton Vance National Municipals (EANAX ). "But one has to do the calculations to determine whether they would better off with a fund that does have some AMT exposure."

Oppenheimer Funds offers a pair of AMT-free funds that seek higher yield than their competitors, but may entail more risk by investing up to 25% of assets in junk bonds. Oppenheimer AMT-Free Municipals (OPTAX ) has expenses of 0.92% and the Oppenheimer AMT-Free New York Municipal (OPNYX ) expenses of 0.93%, while both charge a 4.75% front-end sales load. Over a five-year period, the national fund ranks in the top 2%, and the New York fund in the top 4% of their respective Lipper peer groups.

"People should consider them as long-term holdings," says the funds' manager, Ron Fielding, a senior vice-president with the New York-based company. "When you get out and look at a bond fund's performance over 10 years, most of its total return will come from its yield."

AMONG THE UNLABELED.  Some funds may try to avoid the pesky tax even if they're not specifically AMT-free. Take the $3.9 million Dreyfus Tax Managed Balanced Fund (DLMBX ), launched last fall. The fund combines Dreyfus' municipal-bond management with stock picks from institutional equity manager Fayez Sarofim & Co. It has expenses of 1.15%.

"While [the fund's] prospectus [says] we can buy bonds subject to the AMT, we endeavor that we will not do that," says Paul Disdier, director of municipal securities with the New York-based group. Dreyfus hasn't put AMT-free language in the fund prospectus, he says, for fear of boxing itself in should the tax be overturned by Congress.

Similarly, Putnam Investments shies away from AMT-laden securities across its entire tax-exempt lineup. The Boston-based fund company also offers Putnam AMT-Free Insured Municipal Fund (PPNAX ), which avoids the tax completely. This fund has a 0.84% expense ratio and a front-end sales load of 3.75%, though its performance has trailed its category average for the past three years, according to Morningstar.

AN AMT-FREE FUTURE?  Even investors who aren't currently hit with the AMT should take a long-term approach to the issue, because next year they might be, according to David Hamlin, team leader of Putnam's tax-exempt fixed-income team. That's particularly true for investors in high-tax states or those who have dual incomes. "If you've chosen a fund purely on yield and not lifted the hood and dug around in the engine, you might be buying yield that's coming a lot from the AMT," Hamlin says.

The AMT-wary can only watch and wait as legislative efforts to kill the tax grind along. But in the meantime, some investors might find these fund alternatives a little less taxing. As Morningstar's Jacobson says, "I don't think anyone is likely to be hurt by buying an AMT-free fund, even if the AMT ceases to become a worry."

The Strokes - First Impressions of Earth

Album Review
Paste
December 2005/January 2006
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Reviews, Issue 19, Published online on 11 Jan 2006

Different Strokes: Gritty New York quintet does its best to branch out on third LP
 
A half decade after luring rock critics back to the garage, The Strokes cast their heavy-lidded eyes on the arena. First Impressions of Earth sees the formerly concise New York quintet stretching out with frilly guitar solos, because-we-can time-signature shifts and a new producer, David Kahne, who has a proven track record getting bands like Sugar Ray and Sublime played on pop radio. (First item on Kahne’s agenda: scrub Julian Casablancas’ vocals of their signature distortion.) Where 2003’s excellent Room on Fire found the band in a holding pattern after stellar debut Is This It, The Strokes’ latest attempts a bold new statement.

To be sure, First Impressions of Earth holds some surprises for listeners expecting yet another set of streamlined downtown rock. First single “Juicebox” is the band’s heaviest yet, setting hoarse screams over an ominous, detective-show guitar riff previously lit in Weezer’s “Hash Pipe.” The rock turns harder and darker on “Heart in a Cage,” on which guitarist Nick Valensi races through scales like a prog-metal hero. “We gotta live, live, live, live, live,” Casablancas sings. Conversely, the loungey “Evening Sun” sounds like The Strokes abandoning their Lower East Side dives for merlot and smoking jackets someplace uptown. “Fifteen Minutes” leans slurringly toward The Pogues’ pub rock, complete with traces of brogue. “Vision of Divison” starts with the bombast of an ’80s monster ballad—“All that I do is wait for you”—before diverting into a Middle Eastern-tinged jam. Clearly, The Strokes aren’t confining themselves to three-minutes-and-out anymore.

Despite these new splashes of color, The Strokes paint from their usual palette, too. It helps that prior producer Gordon Raphael helms three tracks. Uptempo songs like “You Only Live Once” and “Electricityscape” still feature the ringing-guitar style The Strokes share with New York bands like The Walkmen and the French Kicks. “On the Other Side” is anchored by a disco beat straight off a Casio pre-set as Casablancas muses, perhaps half-heartedly, “I’m tired of being so judgmental of everyone.” The album’s best song, “Razor Blade,” uses more shimmering guitar work but builds into a chorus so affecting it’s hard to mind that it’s nicked from Barry Manilow’s “Mandy,” of all things.

Trouble is, by the time they’re through brandishing quotations, The Strokes don’t have much of their own to say here. They even admit it. “I’ve got nothing to say,” Casablancas confides over Mellotron-like accompaniment on the album’s biggest departure, “Ask Me Anything,” which sounds like the pop-in-a-box of early Magnetic Fields, right down to Stephin Merrit’s flat vocals. Awash in once-uncharacteristic reverb, “Fear of Sleep” slowly repeats its title enough times to actually warrant it. Meanwhile, if “Juicebox” is The Strokes’ “Hash Pipe,” “The Ize of the World” is their “Island In The Sun,” but its pacific guitars give way to crescendo-ing choruses that mindlessly rhyme words ending in “-ize” until cutting off mid-word on “vaporize.” On jaunty closer “Red Light,” Casablancas complains about “a generation that has nothing to say.” He can speak for himself, but it seems any bold new statements will have to wait.

News Analysis
BusinessWeek.com
June 1, 2006
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A Miserable May for Markets

Interest-rate uncertainty and a flight from risky assets have investors saying "Mayday." And the roller-coaster ride may not be over

Investors heeding the old dictum "sell in May, then go away" might be wishing they had hightailed it a little earlier this year (see BW Online, 4/26/06, "A Savvy Seasonal Stock Strategy"). For the month, the Dow Jones industrial average fell 1.8%, the broader Standard & Poor's 500-stock index dropped 3.1%, and the tech-heavy Nasdaq composite index slid 6.2%.

What's behind the markets' malaise? Uncertainty about the Federal Reserve's course on interest rates, increased risk aversion, and debates about inflation and slower economic growth contributed to the downturn, market pros say. The bad news is, stocks' recent topsy-turvey ride may not be over yet.

It may seem like ancient history, but the markets actually started the month poised for record gains. On May 10, the Dow hit a six-year closing high of 11,642.65, just 80.33 points from its all-time peak. Companies in the Standard & Poor's index were enjoying their 16th consecutive quarter of double-digit percentage earnings growth, while surging commodities prices drove metal companies such as Alcoa (AA ) and Phelps Dodge (PD ) to 52-week highs. Since then, the Dow has dropped 4.7%, and other indexes have been hit even harder.

RUNNING FROM RISK.  The turning point came with the Fed's last interest-rate hike, analysts say. On May 10, the Fed raised the key federal funds rate to 5%, as expected, but it also left the door open for further tightening (see BW Online, 5/11/06, "Interest Rates: Look, Ma, No Pause!"). "The markets anticipated seeing the red light at 5%," says Art Hogan, chief market analyst at Jefferies & Co. "Everything has been perceived as a negative for the markets after we didn't get that clear message."

At the same time, investors have been fleeing riskier asset classes that had roared ahead, such as emerging markets, commodities, and small-cap stocks. The S&P/IFCI Composite index, which tracks emerging markets, tumbled 9.4% for the month through May 30. The Reuters-Jefferies CRB Futures Price Index fell 2.1% over the same period, despite climbing 2.9% through May 11. The Russell 2000 index, a benchmark for U.S. small companies, was down 7.1%.

In the midst of this shift, the market is left searching for leadership, others say. As energy, metals, and mining names lose luster, large-cap names and companies with strong balance sheets could come out in front, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup. "We think that large-cap and large cash wins," he wrote in a May 30 dispatch, noting that small and mid-cap stocks have led the way for nearly 80 months. Indeed, many market watchers have been predicting that large-caps would stage a comeback this year (See BW, 12/26/05, "The Bulls: Pawing and Snorting").

TOO CLOSE FOR COMFORT?  Since the last Fed meeting, reports showing stronger than expected inflation have spooked investors. On May 17, the Labor Dept. reported that the core consumer price index, which excludes energy and food prices, rose 0.3%, slightly ahead of expectations (see BW Online, 5/17/06, "Stocks Tumble on Inflation Worries").

The report raised the odds the Fed will have to hike rates again in June, Lehman Brothers economist Drew Matus said at the time. On May 26, the Commerce Dept. said the core personal consumption index (PCE) deflator, also excluding energy and food, rose 2.1% in April from a year earlier. It was biggest year-over-year increase in 13 months for the Fed's preferred inflation gauge. Chicago Fed President Michael Moskow said on May 30 that the data indicate an inflation level at the "upper end" of his comfort zone.

A weakening dollar has also loomed. Nevertheless, some analysts say dollar pessimism has been overblown (see BW Online, 6/1/06, "Dodging the Dollar's Decline"). "We think dire warnings of an imminent collapse of the greenback are off base," notes Jay Bryson, global economist at Wachovia. Nor is dollar policy likely to change after the appointment of Goldman Sachs Chairman and CEO Henry Paulson to succeed Treasury Secretary John Snow, according to Bryson (see BW Online, 5/30/06, "Paulson to the Rescue?").

POINT BY POINT.  On the bright side, the housing market hasn't crashed, as some experts feared. Instead, the data have pointed to a gradual slowdown. The National Association of Realtors recently said domestic existing home sales slipped 2%, to a 6.8 million pace in April, from 6.9 million in March. On May 18, former Fed Chief Alan Greenspan said "the boom is over" for housing, in his first public U.S. speech since retiring.

Considering the conflicting signals, the Fed remains uncertain about whether to pursue a 17th consecutive rate increase, judging from the minutes from its May 10 meeting. Options on the table ranged from a 50 basis-point increase to a pause, the minutes show. After the May 31 release of the Fed minutes, futures markets indicated a 74% chance that policymakers will raise rates to 5.25% when the Fed meets June 28-29. That's up from 58% odds a day earlier.

An employment report June 2 could give investors an idea of what to expect. May nonfarm payrolls are projected to rise a modest 163,000, says economic researcher Action Economics. However, nearly a full month of economic data lies ahead for investors before the Fed's meeting. "Every data point has much more meaning again," says Joseph Battipaglia, executive vice-president and chief investment officer for Ryan, Beck & Co.

NEWBIE BLUES.  Some of the stock market's recent downtrend may just be typical for a mid-term election year, says Jeff Kleintop, chief investment strategist for PNC Advisors. "The market usually runs up in the first quarter, peaks in the second quarter, then tends to fall," Kleintop says. "We're following that classic pattern." He adds that government projections of another busy hurricane season could also hang over the market through the summer. Then, he predicts "a classic fourth-quarter rally."

For the time being, investors should keep their seat belts buckled. Stocks historically have higher volatility and lower returns in the first year under a new Fed chairman, according to Mary Ann Bartels, chief U.S. market analyst at Merrill Lynch. Says Bartels in a May 30 report: "Markets are likely to remain volatile until the Fed gives the markets more clarity."

Death Cab for Cutie - Plans

Album Review
Playboy.com
August 25, 2005
(no link)

three bunnyheads out of four

In cooler-than-thou indie-rock circles, Death Cab for Cutie was always sort of, well, square. Singer Ben Gibbard wore his well-crafted pop hooks, like his heart, on his sleeve. So it actually makes sense that these nerdy-looking guys with a goofy name would break out of the rock-snob scene and hit the big time. On major-label debut Plans, the veteran Bellingham, Wash.-based quartet fully unleashes its inner soft-rocker, and neither radio-ready sheen nor too many slow songs can dim Gibbard's sparkling melodies and emotive lyrics. Love is still the 29-year-old songwriter's main subject, but now it's weighed down by mortality. First single "Soul Meets Body" contemplates "the darkness" amid ba-ba choruses and guitarist Chris Walla's ornate production. Sparse acoustic ballad "I Will Follow You Into the Dark" and Walla-penned "Brothers on a Hotel Bed" are equally haunted, the latter relying on the band's new favorite instrument, piano. But Plans sees too much hope in the human condition to get depressing. Expansive opener "Marching Bands of Manhattan" imagines moving an island for love, while "Someday You Will Be Loved" lets a would-be Mrs. Gibbard down surprisingly easy. Even when Gibbard sings that "love is watching someone die," on emergency-room portrait "What Sarah Said", a quiet awe still seeps through. Sneer if you must, but Death Cab's legacy is still being born.

The Arcade Fire's Joyful Funeral

Feature
UR Chicago
November 2004
(no link)

The debut album by Canada's latest indie-rock export makes clamorous noise and mournful lyrics uplifting. Lead singer Win Butler explains how.

A few days after playing sold-out shows at the CMJ Music Festival and earning rapturous praise in the New York Times, Win Butler is talking about dogs.

Butler is the lead singer for a Montreal band called The Arcade Fire, whose debut album, Funeral, is a madcap, orchestral indie-rock epic that fuses Neil Young, Talking Heads and the Pixies. The album's centerpiece is a suite of four songs about a concrete yet universal "neighborhoods," ranging from the fractured escapism of "Neighborhoods #1 (Tunnels)" to "Neighborhoods #4 (7 Kettles)", a blistering emo ballad that would make Bright Eyes weep (maybe more than usual).

It's angular, accordion-accented "Neighborhoods #2 (Laika)" that has the soft-spoken Butler's thoughts turning toward man's best friend.

"Laika's the Russian space dog," he explains, "the first living thing in space. They launched this dog up in space, it had enough food for two days and they knew it was going to die. There's the image of this animal being the first thing to see Earth from space -- to see this amazing, unbelievable thing -- but also knowing that they're going to die, or everyone else knowing it, anyway."

As a child, one of Butler's favorite movies was 1985's My Life as a Dog, directed by Lasse Hallström. This bittersweet film tells the story of a boy whose mother is dying of cancer.

"The character keeps saying that 'whenever stuff gets really bad, I think about Laika,'" Butler recalls. "He's just up there going around the Earth."

The central contradiction of Laika's existence suffuses Funeral. As the album's title suggests, the Arcade Fire's members saw their share of death in the time leading up to Funeral's recording. Multi-instrumentalist Régine Chassagne, the other half of the band's songwriting team, dealt with the death of her grandmother in June 2003. Butler's grandfather died in March 2004. Richard Parry's aunt died a month later.

As a result, conscious or not, the album is dark with the frayed emotions of people who have lost their loved ones. "The streetlights all burnt out," Butler sings, his voice fragile and stark, in "Une Annee Sans Lumiere" ("A Year Without Light").

Yet in the midst of so much sadness, Funeral resonates with the joy of living, with the magic of being the first to experience something amazing, even if life is ultimately temporary. After Butler delivers a lyric about the grim reaper in "Wake Up", his accompaniment takes on a Motown-like bounce. Sounding perversely uplifting, Butler shouts, "Look out below!"

"It wasn't really a record that was explicitly trying to deal with anything," Butler says. "It was just something that leaked through, I guess. I don't know if it's that explicitly uplifting if you look at the lyrics on the page. That's what we feel, so that comes through, even if it's not explicit."

Amid the past year's funerals, the Arcade Fire also saw a wedding. Butler and Chassagne were married in August 2003. They first started playing together after Butler saw Chassagne singing jazz at an art exhibit at Concordia University.

"Everyone was just totally caught up watching her sing," he recalls. "I'm just -- I knew I had to play music with her."

As Butler describes it, their musical relationship was like a compulsion, not something optional.

"It was just kind of a sense that we had to do it," he explains. "There was almost like a real dire kind of feeling to it, 'Yes, we have to play.' It wasn't like, 'I want to play it.' I still feel that way."

The Arcade Fire have played in Chicago once before, for a show with fellow Canadians the Unicorns at Open End Gallery in June.

The band's upcoming shows at Logan Square Auditorium and the Empty Bottle will feature the return of Butler's younger brother, multi-instrumentalist Will. A student at Northwestern University, Will Butler appears on the album and played at CMJ, but his classes prevent him from playing on most of the band's dates.

"We're super-excited," exclaims the elder Butler.

On stage, the band likes to stray a bit from the record, Butler says.

"I don't know that we could ever go into the studio and just capture what we do live," he observes. "It's a lot more draining and a lot more intense physically live, and it could really only exist the way it does in a live setting."

Butler says the band is made up of a bunch of instinctual performers.

"When we feel the instinct to do something, we just kind of follow it to its logical extreme," he explains.

All right, but what's up with the band's name? Butler says urban legend held that there was once a fire at the arcade he played in growing up. Funeral may hold as many layers of meaning as it does orchestration, but some questions have simple answers.

THE ARCADE FIRE PLAYS LOGAN SQUARE AUDITORIUM (2539 NORTH KEDZIE, 773/276-3600)  NOV.  25 AND THE EMPTY BOTTLE (1035 N. WESTERN, 773/276-3600) NOV. 26. FUNERAL IS OUT NOW.