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

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Today's Commentary: 04.23.04
How Mutual Fund Investors Lose

Using mutual funds for your retirement plan have become de rigueur for investors. They not only allow broad participation in the markets but they allow the investor some peace-of-mind that their money is safe in the hands of money managers who have their best interest at heart. Or perhaps not.

It is unfortunate that regulation of this industry, which has over $7 trillion under management would not be more open to self regulation. It doesn't take a business degree to understand that straightforward honesty and transparency would be the one thing that investors could wrap themselves around. If only it were that simple.

Mutual funds, as many of you already know, pool investor capital and use the money to invest in broad based indexes, growth and value, or more specifically in sectors. This has allowed investors to reap the benefits of compounding, dollar cost averaging, and until now, the knowledge that their investment advocate was hard at work making sure that their money was safe and fully invested.

If it were that simple, there would be no need for the Securities and Exchange Commission to step in and propose that trading stop immediately at 4pm. To those who may have been suffering from that previously aforementioned and naive understanding of the industry, the suggestion that funds close at 4pm sharp may come as a surprise. Many folks believe that this close, the time when all of the assets of the fund are tallied to reach a Net Asset Value for the fund, is already a hard fact. But it is not.

Traders who understand the volatility of the markets may be able to get a better price exactly at the 4pm close. This is costing long term investors an estimated 1% of current equity assets under management. How will a hard close help? Let's first take a look at how it hurts.

An investor who purchases shares in a mutual fund at the close of trading creates a problem not only for the manager but for the long term investor as well. The money the fund received at 4pm will not be used to purchase stocks until the following day and usually at the higher price of the markets next day open. Falling markets might find redemptions to be the problem as shares are sold at a higher price than the next days open.

Some companies have voluntarily closed their funds at 2:30pm allowing their managers to invest the cash on hand in the markets without these anomalies coming into play. But don't expect the industry to adopt these rules without regulation. And that is a shame.

Contemporary pricing benefits more shareholders in the long run. SEC chairman William Donaldson testified before the Senate Banking Committee recently that the agency is looking at the effects of a hard cut off in trading. With many competing interest at play here, the proposal, he said, "wouldn't disadvantage certain investors and wouldn't disadvantage competition in the marketplace".

That doesn't sound like the chief regulator wants to step in and tell the industry to stop. He may believe that this kind of regulation would impact liquidity and the ease of investment. Any sluggishness by the agency in moving toward a hard trading close for the industry would definitely not be seen as an effort to protect long term investors. Perhaps they are hoping that long term investors just won't notice.

Today's Commentary: 04.19.04
The New Vicious Cycle

Short term traders who are willing to take a volatile position are actually making some serious money of late, causing many people to sit up and take notice. And this is mucking up the chances that the market will provide the proper confidence for the economy to improve as well.

When the market has everyone convinced that things are 'without a doubt' improving, the market is likely to be fully invested. This stagnation will provide some rude awakenings for the staid investor the one who got burned once, reinvested tentatively over the last couple of years, and then saw some recovery made on nest eggs lost and dreams dashed. Now this investors is faced with a lot of pundits who believe this market is capable on only one possible direction: up. It is not.

Three things will keep this market shuffling about listlessly and they will be as follows - the estimated impact of inflation, the realities of a WalMart economy, and the enormous amount of available money.

The markets took a step back on their heels this past week as the CPI rose 0.5%. Inflation is here even with the crippling effects of rising food and fuel prices excluded from the calculation. One analyst for the travel industry even went as far as to suggest that the cost of fuel at two bucks a gallon will impact the average family vacation (around 500 miles) by only $7.50. But the real cost of fuel for these unsuspecting travelers will be passed on in the rising costs of menu items and hotel rates. Those industries are going to be further impacted by their reluctance to hire workers that are outside their tradition sources.

That's right, when the Oswald's get up and head out this summer for destinations such as WallyWorld, the hotel and restaurant along the way will be short of seasonal workers. The quota for imported farm help and service industry workers cross the boarder to fill jobs that tend to swell in the summer high months, have all be hired. To the less astute, that might mean a boon for American workers anxious to do just about anything to stay afloat in a job market that seems intent on stubbornness. Instead, the effect is quite the opposite. When the Oswald's hit the road, the cost of their trip will not only be higher, some of their options may be limited as well. The price of fuel at the pumps will take a big bite out of their budgets but the real costs will be incurred once they are wherever they are going. Those who are fortunate enough to calculate these costs in advance will probably rethink the vacation altogether. If they decide to stay home, that money will probably be spent as opposed to the other "s" word, saved.

Which will have another positive impact China's eight largest trade partner, Wal-Mart. In their efforts to bring back feudal style management methods, the company has created legends of fans on Wall Street who thank their lucky stars every day that they do not have to work there.

Wal-Mart has done more than create consumers from customers, they have produced a 'carrot on a stick' ideal. Many folks who shop these stores are the same people who work there. Earning less than a living wage does not allow the average Wal-Mart worker many other options to be the kind of consumer many of the capitalist idealist envision when they speak so highly of the company. Without a living wage, Wal-Mart becomes the company store in a company town.

Gathering today at the University of California Santa Barbara are 250 scholarly types that include sociologist and anthropologists to discuss the impact of this business nodel that the organizers of the conference feel is the perfect alignment of "efficient and profitable relationships between the technology of production, the organization of work and the new shape of the market". Wal-Mart has declined to participate.

Any of the aforementioned inflation that might find its way to the Wal-Mart shopper will have the beginnings of an economic logjam. This will impact the economy in a bigger way than we may have thought.

The squeeze that Wal-Mart will put on its suppliers once it begins to feel any economic pressure to increase prices will be passed up to their suppliers not down to the customer. This renewed pressure on wholesale pricing will not cause companies to begin to hire but instead cause them to look for additional cuts that could be made to keep prices competitive. The economy will hiccup as a result and in doing so will allow these industries to make these cuts just as demand slows. Ironic, isn't it?

The irony of what this recovery will wield in the coming months will not be easy to avoid. The result of the most recent surge in the economy did not come - brace yourself - because of tax cuts or rebates. Surprisingly, they didn't even come because of low interest rates. They came because of money supply.

The Federal Reserve will need to begin to pull some of that ample supply off the table before too long, perhaps as early as June. You can pretty much rule out an after the election move and the reason will be pesky impact of both fuel driving the cost of things higher and Wal-Mart forcing them down. Take some money off the table and these two costs will be allowed to rise only as much as demand will allow.

So what do we have? A fully invested market, a rising inflation index, a good chance that jobs will not improve as higher prices slow consumption, may all point to a 'run for the hills'; scenario for the investor. That isn't necessarily the case, though. Even a fully invested portfolio in equities will do better without any change in strategy for the rest of the year.

With one caveat. If consumers refuse to accept their role as the goat in the economic recovery, then all wagers are off. And if all things become equal, the alignment will be a dangerous one for investors. Just ask the bond traders.

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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