Good money by throwing darts at NASDAQ tables !

The late 1990s were the time of individual investors and the rush to do-it-themselves online. In truth, during that period most probably could have made good money by throwing darts at NASDAQ tables. Few really needed professional advice.

Then came the “bursting of the Dot-com bubble”. This was followed in late 2000 by the beginning of a prolonged “Bear market”, a period of negative investor sentiment because of several very negative converging factors. Some called this the “Perfect Storm”. Also during this period, corporations in the high growth telecom sectors were finally exposed to have grossly overstated sales and earnings. It then became obvious that significant misinformation had been provided by industry CEOs, such as John Roth of NORTEL, and hyped by supportive analysts and investment managers.

The year 2001 was a very disappointing one for most investors. Then, at the end of last year, just as investors seemed to be coming to “grips” with the traumatic acts of terrorism, a new war, an apparent spreading global recession, and the negative wealth effect on equities, new issues arose to damage investor confidence.

The bankruptcy of ENRON exposed an apparent colossal management manipulation of corporate accounting records and an utter failure by auditors and regulators to inform or protect investors. And just recently, TYCO International revealed a massive restructuring of previously undisclosed debt to “become more transparent”. Other companies are warning of SEC investigations and/or are changing or delaying their earnings reports. These relatively sudden events have again caused a serious loss of investor confidence. Many stocks are now being “punished” by investors if there is any hint of inflated statements.

Who are we to believe if there has been widespread lack of disclosure and creative accounting practices? And, even more disturbing, why have these not been exposed before, by the professional audit firms, federal regulators, Wall Street analysts, or financial journalists?

Fortunately, most corporations, audit firms, credit agencies, and regulators are now “feeling the heat” and are scrambling to get back to sound principles and practices. Better legislation and more regulations are also being postulated to prevent future occurrences.

the remainder of this decade. Some economists and investment managers are projecting years of weak market performance. Others are saying exactly the opposite. They are forecasting an equity market boom for the remainder of this decade.

Obviously, someone has to be very wrong !

Where there is a lot of consensus, is that the US economic recovery this year should be a gradual one, as there is no apparent catalyst now for accelerating growth. As the US economy and the markets do recover, however, a majority also agrees that we can expect another significant period of relatively strong growth.

Before we start celebrating our upcoming good fortune, however, it is prudent to examine the most widespread worry today that could hamper US economic growth for many years. A number of economists and others are very concerned about an apparent deteriorating personal saving rate in the US. They believe that, after having taken on ever-higher levels of credit card and mortgage debt to finance the highest material standard of living the world has ever known, Americans will soon have to cut back dramatically. Thus, the argument goes, the US economy will suffer for years as people have to save more and spend less.

However, many economists are now questioning the validity of the official published American savings rate. The published figures show that savings went from 8% 10 years ago to zero or less today. Those who questioned the makeup of the official rates now have good evidence to demonstrate these are more an accounting fiction than an actual trend. This is because the official rate figures do not take into account gains on assets such as land, homes, stocks, and retirement accounts.

Prodded by Alan Greenspan, the Federal Reserve recently discovered that much of the touted decline in personal savings rate in the 1990s occurred almost exclusively among the richest 20% of Americans, who also registered large gains in stock holdings and home values.

Another economist produced a chart that plots people’s net worth - assets minus debts - relative to their income. This chart showed that no group of Americans is worse off now than they were a decade ago, once their homes, mutual funds, and retirement accounts are taken into consideration.

This is probably why recent events have not “spooked” people about their finances. How else could one explain that despite a recession, recent equity market losses, the worst terrorist attacks in the country’s history, and a war of undetermined length, consumers have continued to increase their spending levels, although modestly.

Thus, rather than listening to those still focussed on the published savings rate to forecast that “the sky is falling” as Americans get “crushed” by debt, we should read the more comprehensive reports of accumulated net worth. One recent report on the latter was called “Are US Households Saving Too Much?”

Of course, there are limits to debt accumulation. But, it now perceived that more “Baby-boomers” and newly retired people are much more attentive today to wealth preservation and prudent investment.

A very significant factor that is missing from these discussions is the dramatic effect of demographics on the US economy and the markets? It is a known fact that the largest segment of the “Baby-boom” population is entering their peak earnings and spending years. This latter fact alone is a market mover. In addition, not enough is being said about the largest transfer of wealth in US history that will be made over the next decade or so to these same aging “Baby-boomers”. They are destined to inherit a good “slice” of their parents’ hard-earned wealth.

To summarize the market situation, there is now a general consensus that this year will again be a difficult one for individual investors. It appears to be a market for careful stock selection. Also, many believe that the major equity indices will not grow appreciably this year. During this period, good mutual fund professionals should be able to offer high quality, well-diversified portfolios to achieve better results.

Finally, we should soon be past the recession and issues of trust in corporate results. In closing, the following quote from an AMEX commercial is one of the best expressions heard recently about the future in the US: “Of all the things that America produces, the most important is opportunities”. We believe there will be many opportunities in the equity markets for years to come. For more detailed information on equity investing, please contact the author at 257-6646

© El Residente ARCR Administración S.A. San José, Costa Rica N.B. Like all information on the internet, this article may currently be incorrect or out of date.