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In essence, the mutual fund company profits from this deal while the shareholders with ever diminishing returns, pays the brunt of this transaction. Not only does the overall volatility of the fund increase because of the pre-bought nature of these transactions, but the fund company is able to keep their reportable expense ratio down. One economist, Dr. Benn Steil, believes that if these soft money costs were eliminated, the expense of the fund company would soar into the double digits.

It gives those with good names, bad reputations because of the efforts of some to profit on investors backs. I believe that some sort of style purity would help eliminate the need for frequent trading to chase the "next" hot investment, allowing the fund manager a shareholder commitment and confidence to do the right thing over a longer period. That confidence would eliminate the need to carry cash in reserve if there was some sort of opportunity to invest.

Thanks for writing Joy.

Play on WordsYour quarterly update letters from your fund managers that are due soon and there is growing concern over the wording. I have had some real fun in the past poking fun at these letters, especially since this market has been a humbling experience for those with inflated abilities. But because of the same legislation that requires corporations to certify the contents of their shareholders reports, the Sarbannes-Oxley Act can be interpreted to apply to fund managers and their teams as well.

If that is the case, these letters might be less conclusive about a fund managers outlook, mistaking those comments as being the same as certified promises. If that happens, this periodic pouring out of the leaders of these funds would be sorely missed. You and I both know that this forward guess about their fund(s) performance is next to impossible to do. The federal act may require that these outlooks at future market movements or equity purchases might be considered opinions or expectations.

Beyond the fun that I poke at these folks, lies the explanation as to why a fund manager has done what he did. And some believe that these notes can keep investors interested in the fund even if the fund hasn't performed well within it's group, or if the fund's style has fallen out of favor. But the S.E.C. is concerned that many fund letters don't go far enough now as it is. Without the necessary explanation of performance, the fund might find this commissions ire a bit more elevated. Good communication is vital and with any luck, encouraged by powerful partnerships, shareholders will take their fund managers to task on not only open lines of information but also on both expenses and performance.

Something like that is happening at Janus. Many of you have heard that the gal at the helm, Helen Young Hayes has left supposedly taking her 956,707 shares of stock, some of it awarded in plenty of time to report it to shareholders in 2002, was instead reported in 2003. On the surface, it looks like another accounting mishap that is almost incomprehensible to the average investor. But one investor doesn't like the act.

Evidently, Highfields Capital Management has taken the fund on, and in doing so, has made themselves representatives for the rest of us who might hold an interest in how things are done at the parent headquarters of Janus. Admittedly, this one would have slipped past me unnoticed. The same could be said for the remaining 91% of us.

Our hope is that they pursue this line of accusation and eventually find that it is only an isolated incident.

Today's Commentary: 04.21.03
Trading the Macro
Note from the Editor:
My apologies first off for not having this weekly installment up over the weekend. I appreciate all of the letters of concern. Aside from the holiday, I had the opportunity to obtain some additional office furniture. Who could pass up the chance at adding to the clutter that my workspace has become.

The Week Ahead/The Week Behind
Last week, we had more confusing numbers. This week, the trend will continue. Last week, the markets proved Baruch Spinoza (1632-1677) incorrect. Mr. Spinoza suggested in a far off century that the relation between emotion and reason were somehow linked, inseparable cohorts in the decision making process. This son of an Jewish Amsterdam merchant was ahead of his time with his theory on mind-brain-body systems. A recent book supporting those claims has been released by neurologist Dr Antonio Damasio. In "Looking for Spinoza", the good doctor supports the Dutch philosopher's thinking by suggesting that there is a chain of events that takes place that leads to this corroboration. First an emotion, stimulated by some external event, sets in motion our feelings, a brain based reaction, which causes us to act. Dr. Damasio's theory that the mind is there for the body, an information gathering devise that is used primarily for enhancing our lives through this "optimization".

So how do we explain what happened last week? Mutual fund investors flocked to the markets, lead by some unknown force that was counterintuitive to what they should already understand. Three of the biggest players in the tech sector, Microsoft, IBM, and Intel, all suggested that the outlook was not the least bit rosy. These players seemed almost relieved that they were able to survive the first quarter. That news, and those cautious comments fell on deaf ears though, as mutual fund investors found the money to get back into the game. Although the game they chose wasn't an intelligent diversified attempt at rebuilding damaged portfolios. No. It was looking once again to the tech sector, aka aggressive investing.

In a holiday shortened week as well as a memory shortened event, investors found $8.7 billion to move into this arena. If Dr. Damasio believes that feelings are triggered by the body, then what happened last week might be just a little beyond that theory. What if anything, can we draw from traders who seem giddy at the notion that the markets are getting better? So why did investors jump back into these speculative market plays in such a big way?

The belief that this whole Iraq thing is behind us could be one (albeit short lived) reason to suggest such behavior. The appearance of low cost could be another. But to actually purchase many of these companies would lead most of us to believe that we are not, as Spinoza theorized, at one with ourselves as these philosophers would like to believe, ignoring the suggestion that "the knowledge of an effect depends on and involves the knowledge of a cause". In this case, the knowledge that our best export, technology, may become too expensive for the world, as China verges on the edge of creating replacement wares that mimic this industry. As I write this, this country is buying what we produce (semiconductors, in particular) almost as fast as they build factories to produce them (semiconductors, in particular) themselves. That can't be spun optimistically.

Last week, I suggested that our biggest export was jobs. If that continues, I argued, no matter what kind of stimulus package that is introduced, it will not sustain any real growth with the competition working to usurp our technological stronghold on the world.

Two other oddities took place last week. The first deals with volatility. The Chicago Board of Options Exchange reported last week that their index of Nasdaq sentiment hit an four year low. This reliable indicator of what is about to happen points a croaked finger at this latest tech rally as unfounded and likely to be short lived. In otherwords, be prepared for a fall. Also reported last week was the strength of the financial sector, a necessary component to a sustained rally. By their own admission, they told the markets that the reason is in the refinance, a tool by home owners who see their homes as an investment rather than a place to hang their collective hats. By their own admission, they also suggest that this will not last forever. And when that happens, this little bright spot in the overall group, will not lift the rest of the market. Without this group supporting a return to bullishness, there is little likelihood, the tech sector will be capable of doing it on their own.

The second little tidbit comes from an observation of the movements of the stock and bond markets. Traditionally, and of course that word is open to conjecture, these two markets move away from each other. Stocks go up, bonds go down. Stocks react because of positive corporate developments; bonds react to negativity. Once the bond markets begin to see too much good news on the horizon, their retreat is usually as steady as the equities markets rise to embrace the optimism. So why aren't the bond markets retreating? Perhaps it is the fact that there is just not enough good news to cause any retrenchment of serious money. Instead of falling Treasury prices, they seemed to stabilize.

The Week Ahead in Equities
This enthusiasm for technology stocks will probably continue and may even do so in the same record setting numbers. The last five weeks have seen a definite shift from conservative to aggressive and it is institutional investors who are responsible. It is a recipe for further losses that could continue into the summer. This is not an economy whose feet are becoming steady. Instead, the latest reference that this is a "mature" economy with a good deal, and some speculate too much, debt held by foreign investors.

The Week Ahead in Bonds
This week will see a continuation is strength in the bond markets, especially in the intermediate taxable arena. Corporations are saying the right things to investors and bonds are reacting positively to the talk. The more companies suggest that the balance sheet is at the top of their priority list, the better things will get in fixed income. What gets the stock market going seems to be similar to what is piquing further interest in the bond market as well. Look for this rally to continue. In an interest rate favorable market with some investment grade companies trading as if they were high yield junk, the opportunities to improve are abundant.