Up-to-the-Minute Financial Commentary about Money, Investing, and How It Affects the Average Investor

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At Arm's Length: 03.26.04 (8:450 am EST)

You can look at the slight decline in oil prices, but you would have to base your numbers on "facts" released by the administration. Before you get too carried away, gasoline prices on average across the country have reached four year highs with less refineries on line keeping supplies at the pump far beneath demand.

You can credit short term traders who believe that the market drop made equities better priced.

Or you can take a look at the programs.

The full article.

Today's Commentary: 03.22.04
Soft Money: Worth the Cost...?
Soft dollars are basically the cost of the trade above the actual transaction cost. Brokerages who trade for fund managers bundle their services when they contract with a money manager. Currently you are paying for this service.

Soft money is not easily understood. So be patient as we take a look at something might be both as necessary to a successful return on your investment and at the same time, something you might find loathsome as well.

A good deal of time is spent these days looking at the topic of fees. Who pays for what and why has been at the heart of many of the scandals that have racked the mutual fund industry. And as unpleasant as they may seem, they are, in their most simplified form, the cost of doing business.

Once an investor determines what type of risk tolerance they can stomach, the search for funds that match that criteria begins. The most conservative among us will choose an index fund, a passively managed mutual fund whose holdings usually mimic some index. The manager of this fund has little in the way of trading to do apart from rebalancing or following changes in the index they are following.

Investors who can tolerate greater risk will need to have an actively managed fund. This type of fund requires the manager to make investment decisions in order to keep fully invested and increase the returns of their portfolios. Portfolios with higher returns are often compared to indexes so performance better than your peers is important.

That performance costs money not only in timely trades but for the research that accompanies that trades. Now the questions begs to be asked: should you pay or should the fund company?

Whether this research is good is another matter that we will get to in a minute. Shareholders generally have no problem with the cost of an executed trade. We understand that stocks need to be bought and sold and that comes with a certain handling fee. But the core of the soft money problem has fallen under "safe harbor" rules. Safe harbor rules were first brought into focus with the amendment of the Security and Exchange Act of 1934. These so-called bundled services have become safe harbors for such costs passed on to shareholders, making us pay for not only research but computers and software. Bloomberg terminals do not come cheap by the way.

But problems and more questions start rising when these safe harbors are abused. Should shareholders pay to send their managers back to school for such things as professional development? Or pay for the phones? No we shouldn't.

More problems are found with the bundled services themselves. Often these services use other small indenpendent firms to execute trades with the brokerage acting as a middle man or reseller. This means, that had the mutual fund manager done a little shopping, they could have saved a little money with the less expensive service.

This of course points to a need for more transparency not only for us but for the manager of our money. And this of course is a cry for regulation that isn't really needed.

If soft money were going for research then everyone should know how much. Outlawing the use of third party research is not a good step either. Much of the good quality research comes from these small independent firms and the cost of that research might well translate into excellent returns.

Is it worth the costs? The biggest fear that the industry has would be from drive for the fund company to make a profit for their shareholders. Many fund companies are publicly held and owners of stocks in fund companies have been awash in profits. Estimates of the loss of profits if soft money were halted are somewhere in the 6-8% range. Faced with having to suddenly pay for these costs with cash, many managers might find the service not worth the cost. That might turn a good deal of active managers into passive "closet" indexers.

For now, a little self tightening and a little more transparency would be good for all parties concerned. The belief that you have to spend money to make money may be worth holding onto when it comes to active management.

Today's Commentary: 03.22.04
Looking Back: The Week Ahead

Friday was a fitting close to a dismal week. It was a week that traders tried to digest news from halfway around the globe, which may or may not be true, the price of oil, which may not have reached it's highest point, and the possibility that corporate profits in the future may not be buoyed by the same reasons.

Looking at the numbers, the Dow Jones Industrial Average ended the session closing down at 10186.60. This triple digit loss (109.18 points or 1.1%) was the second consecutive losing week for the blue-chip index. The tech heavy Nasdaq Composite Index moved farther away from the psychological high of 2000 by shedding another 22 points to close the week at 1940.47. Year-to-date, the index is down 4.72% as some of it's biggest members faced pressure from Europe, revenues, and/or profits. The Standard & Poor's 500-stock index fell an additional 12.54 to end the week at 1109.78. The Russell 2000, which remains in positive territory for the year (2.48%) took it on the chin as well with a weak showing on Friday.

Looking at the reasons for the drop is not always as easy. News from a remote corner of Pakistan left traders jittery at best. The possibility that Osama's number two guy might be captured or killed unsettled traders somewhat as they harbored visions of new retaliatory strikes from terror cells hidden around the world. Instability is never a good way to do business. This is one reason that what was once seen as a normal correction is now being viewed as a possible slump.

Friday was also the quarterly expiration of futures and options, this time multiplied by four. Normally a volatile time, it was made worse by quadruple witching. Using this as the primary reason to rethink their portfolios, this once a quarter phenomenon allowed investors to gravitate towards more defensive positions.

Oil is now a real problem that may take the often giddy investment types down the notch or two they need to fall. Many talking heads have mouthed their positive spin but they are looking dated - and I'm talking only several years ago when everyone was foolishly giddy. There is a high degree of enthusiasm in the air these days and over the past year as well which suggests that there is something amiss with the atmosphere on Wall Street. Too many of us outside of those institutions of higher wealth understand more about the numbers than they do - even those without any numbers savvy.

For instance, as oil approaches $40 a barrel, no matter what the Consumer Price Index reports, or for that matter, Producer's Price Index, we have inflation. The two aforementioned indexes tend to exclude the increasing costs of fuel and food by pointing towards the core of those reports. There are a number of reasons why, many of them actuarial that will save the government from making higher payments to individuals whose incomes are tied to the calculation. Even Greenspan spoke of using the core index to save money on Social Security payments. Turning your back on rising prices does not make the disappear.

The average consumer who is pulling up to the pumps is experiencing sticker shock and if it hasn't trickled to the prices on the grocery shelf, give it a minute to catch up. The higher cost of transportation has begun to show up in the markets with the losing streak the Dow Transportation Index has been experiencing. This overlooked index reflects the increased cost of getting those manufactured goods to market. The DTI is down 7.32% for the year and that gap is expected to widen giving the bears more ammunition in their argument that this has been nothing but a bear market rally.

For those more knowledgeable about the nuances of the market will recognize this correlation between the the Dow Industrials and the Transportation index as the ground work for the Dow theory. The Dow theory, invented by Charles Dow, ties the Transports with the Industrials as a means of validation. If the Transportation index is up in tandem with the Industrials, the trend can be called bullish. If the Transports do not follow, then the market should be called bearish. And they haven't followed since late last year. moving steadily away from each other.

For those of you who are more knowledgeable your income, the debt you carry, and the savings that may not exist, you will recognize gasoline and food prices for what it really is.

There is a good deal more wrong with the CPI accounting than the idiotic removal of the two most volatile members of the index. Start with how the price of housing effects the number. Mortgage refinancings coupled with the increased in overall debt by these homeowners should signify an increase in the price of housing. Not so. If you were to consult the CPI numbers, the cost of a house has only risen about 2%. Evidently, the air in Washington might also be suspect.

And lastly, as the week opens with these worries undercutting any optimism, the pressure of oil prices will put pressure on interest rates. Interest rates will put pressure on inflation. And to keep this prediction in simple terms, these factors will start showing up in corporate profits by year end - if not sooner. It is probably safe to conclude that buying now is not the same as buying the bottom - and this morning's futures will support that claim.

The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.

It is the World of Money and Investing Explained.

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