Bull!
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CHAPTER 18
1. Gail Dudack, interview with the author. (All quotations and descriptions of Dudack’s thoughts and feelings that follow are drawn from interviews with the author beginning in the fall of 2001.)
2. Jonathan Fuerbringer, “Still Bullish, but Pulling in the Horns,” The New York Times, 26 December 1999.
3. Suzanne Woolley, “Wall Street’s Take on 2000; Six Pros Make Their Predictions for the Year Ahead,” Money, February 2000.
4. Jersey Gilbert and Tiernan Ray, “The Next Big Thing,” Smart Money, August 1999; Jersey Gilbert, “Retire Ten Years Early—You Can Get There from Here: Surely You’re Tempted by the Idea of an Early Retirement (Who Isn’t?) But Can You Really Afford It? Here’s How to Find Out; See Table, ‘The Right Mix,’” Smart Money, 1 August 1999, 96.
5. Richard Siklos and Catherine Yang, “Welcome to the 21st Century: With One Stunning Stroke, AOL and Time Warner Create a Colossus and Redefine the Future,” Business Week, 24 January 2000.
6. Allan Sloan, “Cable Carried Incentive for AOL Merger,” The Washington Post, 18 January 2000, E01.
7. See Chapter 11 (“AOL: A Case Study”) on AOL’s accounting, and Sloan’s efforts to warn his readers. In 1998, the SEC again disputed AOL’s earnings, and in 2001, investors continued to question the company’s bookkeeping. In the first quarter, AOL cited free cash flow of $651 million, but fund managers such as David Tice, editor of Behind the Numbers, argued that cash flow was only $70 million after AOL paid to settle a lawsuit related to Time Warner’s sale of Six Flag entertainment parks.
8. Suzanne Woolley, “Wall Street Sizes Up 1999,” Money, December 1998, 58.
9. “Investor’s Chronicle,” The Financial Times, 23 April 1999, 29.
10. Hank Herrmann, interview with the author.
11. All of Rukeyser’s on-air comments come from a transcript of Wall $treet Week, 5 November 1999. Technically, Dudack was not banished from the show; she was fired from her position on the elves’ panel. But the way in which it was done virtually ensured that she would never again appear on Wall $treet Week.
12. Susan Douglas, a professor of cultural studies and communications at the University of Michigan, made this observation in “Wall Street Week,” The Progressive, January 1997.
13. Gary Strauss, “TV’s Financial Dean Celebrates 30 Years,” USA Today, 3 November 2000.
14. John Brooks, “Onward and Upward with Wall Street,” The New Yorker, 14 November 1983; Warren Kalbacker, “20 Questions,” Playboy, 3 January 1982.
15. James Conaway, “Wall St. Wiz; How Louis Rukeyser gets 10 million viewers inside his tent each week,” The Washington Post Magazine, 6 November 1983, 24.
16. At the end of 2000, Rukeyser himself acknowledged that “neutral” had been the correct forecast for most of the year. On September 7, 2001, Rukeyser called the elves “comatose,” and on September 21, he announced that following the tragic events of September 11, he had decided to give the elves a rest.
17. The first set of allegations were reported in The Wall Street Journal (Michael Schroeder, “A Popular Fund Manager Allegedly Took Kickbacks,” 17 December 1999, C1). The Journal reported the second set of charges in August of 2001 (Jerry Markon and Michael Schroeder, “U.S. Charges Bond Bilked His Clients…Fund Manager Faces ’99 Kickback Case, Too,” 10 August 2001, C1). For the end of Bond’s story, see Chapter 20 (“Winners, Losers, and Scapegoats”).
18. Michael Lewis, “Why James Grant Will Never Be Louis Rukeyser,” Bloomberg News, 29 October 2002.
19. Patrick McGeehan, “Expert’s Top Choices, Gone Awry,” The New York Times, 7 October 2001.
20. For more on how mutual fund companies discreetly bury failing funds, see Chapter 13 (“The Mutual Fund Manager: Career Risk versus Investment Risk”). Christopher Davis reported on PWKAX’s 2000 performance in “Morningstar’s Take,” 9 February 2001. In October of 2002, Morningstar’s Christopher Traulsen reported on the second name change (to UBS Strategy), with Kerschner still at the helm (“Morningstar’s Take,” 25 October 2002). Finally, in December, Morningstar reported the merger (Karen Wallace and Dan Culloton, “Fund Times: Janus Reshuffles Its Deck, and More,” “Morningstar’s Take,” 13 December 2002).
21. Richard Russell’s Dow Theory Letter, November 2000.
22. Marc Faber, The Gloom, Boom & Doom Report, November 1999, 2.
23. Richard Russell’s Dow Theory Letter, 21 October 1998.
CHAPTER 19
1. Comments made at a congressional committee hearing and reported by Jackie Calmes, “Washington Wire: A Special Weekly Report from The Wall Street Journal’s Capital Bureau,” The Wall Street Journal, 27 July 2001.
2. Alan Abelson reported on insider sales, citing Steve Leuthold’s research, in “Up & Down Wall Street,” Barron’s, 14 August 2000.
3. Mark Maremont and John Hechinger, “Fifty Corporate Insiders Bailed Out Before the Slump and Made a Mint,” The Wall Street Journal, 22 March 2001.
4. David Henry, “More Insiders Sell Big Blocks of Stock: Surge May Foretell Market Weakness in 3 to 12 Months,” USA Today, 18 September 2000, 01B.
5. Andrew Countryman, “Window of Opportunity: Talk About Good Timing: Execs Sell Before the Fall,” The Chicago Tribune, 2 March 2003, 1. The Tribune ’s analysis was based on information regarding insider transactions provided by Thompson Financial, a research firm. More than half of all sales were followed by a drop of least 10 percent. Even in the period from 1995 to 1999, when the Dow posted consecutive double-digit gains, two-fifths of the insider sales were followed by a drop of at least 10 percent over the next six months.
6. Mark Maremont and John Hechinger, “Fifty Corporate Insiders Bailed Out Before the Slump and Made a Mint,” The Wall Street Journal, 22 March 2001.
7. Even after Milken was tried, convicted, and jailed, Lay tipped his hat to Milken, calling him a “visionary.” When the king of junk was released from prison, Lay invited him to speak at an Enron conference. “Drexel may have been accused of arrogance,” Ken Lay told The Economist, “but they were just being very innovative and very aggressive.” The remark underlined how the sleight-of-hand accounting of the nineties was, in many ways, simply an extension of the financial engineering of the eighties. See Marie Brenner, “The Enron Wars,” Vanity Fair, April 2002, 195; and “Face Value: Enron’s Energetic Inspiration: By Bending All the Rules of the Energy Business, Kenneth Lay Has Turned Enron from a Stodgy Gas Concern into a Soaring New-Economy Company,” The Economist, 3 June 2000.
8. Mark Bimein, “What Did Joe Know? Joe Nacchio’s Qwest Booked Hundreds of Millions in Bogus Deals,” Fortune, 12 May 2003.
9. Laurie P. Cohen and Dennis K. Berman, “How Analyst Grubman Helped Call Shots at Global Crossing,” The Wall Street Journal, 1 June 2002.
10. Rebecca Blumenstein, Deborah Solomon, and Kathy Chen, “Global Crossing Cosseted Executives,” The Wall Street Journal, 21 February 2002.
11. Allan Sloan, “Pride After the Fall: An Investing Parable,” The Washington Post, 5 February 2002.
12. Dennis K. Berman, “Dialing for Dollars: Some Insiders Sold Out Stakes,” The Wall Street Journal, 12 August 2002.
13. At a Fed policy meeting in 1996, Greenspan said, “I recognize there is a stock-market bubble problem,” and added, “We do have the possibility of…increasing margin requirements…I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” See Chapter 14 (“Abby Cohen Goes to Washington; Alan Greenspan Gives a Speech”).
In 2000, when Sloan raised the question, margin requirements allowed an investor to borrow $500 for each $1,000 of stock, although some brokerage houses had more stringent rules. “Increasing the margin rate to 100 percent, which would eliminate borrowing to finance new purchase [of stock] would send a powerful message. Not to mention trashing some ultra-speculative stocks whose price moves are influenced by day traders, who typically borrow heavily,” Sloan observed (Allan Sloan, “Greenspan Misses the Mark in the War on Stock Pric
es,” The Washington Post, 14 March 2000).
14. Allan Sloan, “Greenspan Misses the Mark in War on Stock Prices,” The Washington Post, 14 March 2000.
15. Jim Grant, “Irrational Exuberance Toward Mr. Greenspan,” The Financial Times, 10 February 2000.
16. Justin Martin, Greenspan: The Man Behind the Money (Cambridge, Mass.: Perseus Publishing, 2001), 226.
17. Ralph Wanger, interview with the author.
18. Gretchen Morgenson, “If You Think Last Week Was Wild,” The New York Times, 19 March 2000.
19. Robert McGough, “Bull’s Retreat Doesn’t Cause a Stampede—Some Once Feared a Market Tailspin,” The Wall Street Journal, 29 March 2000.
20. Greg Ip, “A Year of Living Dangerously,” The Wall Street Journal, 2 January 2001, R1.
21. Bianco Research, L.L.C. (www.arborresearch.com/biancoresearch), 7 March 2000.
22. Peter Bernstein, interview with the author.
23. Gail Dudack, interview with the author.
24. “2001 Mutual Fund Factbook,” Investment Company Institute.
25. Terence O’Hara, “2000; It Was the Best of Times and the Worst of Times, and the Difference Was All in the Numbers,” The Washington Post, 31 December 2000, H1.
26. Tom Cahill, “CSFB Suspends Banker Quattrone Pending Investigation,” Bloomberg News, 3 February 2003.
27. Greg Ip, “A Year of Living Dangerously.” Quotations that follow from Bernstein, Farrell, and Kerschner are drawn from the same article.
28. Justin Martin, Greenspan: The Man Behind the Money, 243–45.
29. Martin Mayer, “Averting a Meltdown,” Worth, July/August 2001.
30. Justin Martin, Greenspan, 244–45.
31. In the first half of 2003, it seemed, to many, that the Fed’s cuts were finally having a salutary effect—but capital spending was not rising. For a discussion of the difference between fueling consumption and boosting capital investment, see Chapter 21 (“Looking Ahead: What Financial Cycles Mean for the 21st-Century Investor”).
32. Jim Grant, “Blame Greenspan,” Forbes, 3 September 2001.
33. Martin Mayer, “Averting a Meltdown.”
34. In a speech that he gave at the University of California, San Diego, on July 23, 2003, Bernanke reiterated an earlier suggestion that the Fed would be willing to cut the Fed funds rate to zero—even though such “an action imposes costs on savers and some financial institutions.” In the July speech, he also talked about the Fed going a step further, to try to lower long-term rates by using “non-traditional measures.”
“Such measures might include, among others, increased purchases of longer-term government bonds by the Fed, an announced program of over-supplying bank reserves, term lending through the discount window at very low rates, and the issuance of options to borrow from the Fed at low rates.” “Text of Bernanke’s Comments at the University of California,” The Wall Street Journal, 23 July 2003.
35. Bill Gross, “Investment Outlook—Is That All There Is—To a Fire?,” www.pimco.com, May/June 2003.
36. Jonathan R. Laing, “The Debt Bomb: Only Housing Is Keeping the Fuse on America’s Borrowing Habit from Burning Down,” Barron’s, 20 January 2003. When Barron’s reported on debt, it cited Federal Reserve figures as of the third quarter of 2002, showing a total of 31 trillion. By 2003, the number had risen to 32 trillion. Barron’s acknowledged that some questioned the $31 trillion number: “Some contend that today’s debt level of $31 trillion, or 295% of current GDP of $10.5 trillion, is somewhat artificial. About $10 trillion of the debt consists of the borrowings of financial players—banks, savings institutions, finance companies, issuers of asset-backed securities and government-sponsored enterprises such as Fannie Mae and Freddie Mac. These entities mostly use their borrowings to fund corporate loans, mortgages, auto loans and credit-card balances. So, in a sense, about a third of today’s aggregate debt total is being double-counted. That wasn’t true in the early thirties, when the ratio of U.S. debt to GDP hit its previous high of 264%, because the financial sector was far less developed at the time.”
But Barron’s also noted that defaults on corporate debt had climbed while revenues slowed, “particularly in the wholesale electric-power, telecom and high-tech sectors. According to Moody’s [the credit-rating agency], a staggering 18.4% of all speculative-grade debt, on a dollar-weighted basis, went into default in the 12 months ending Aug. 31 2002.” Default rates were shrinking, but Moody’s noted that corporate revenues—which provide the cash needed to pay off debts—had fallen to just 113 percent of corporate debt levels. This was the second-worst ratio of debt to revenue since the Great Depression. “That revenue-to-debt ratio should be a lot higher—it ran 130% to 145% in the mid-nineties…,” warned John Lonski, Moody’s chief economist.
CHAPTER 20
1. “The Betrayed Investor,” Business Week, 25 February 2002; Ian McDonald, “Mutual Fund Investors 2002: A Dreary Fund Odyssey; There May Be Hope Ahead,” The Wall Street Journal, 31 December 2002 (updated).
2. “The Betrayed Investor.” Business Week cited the Pew Research Center for People and the Press as its source.
3. Jim Tucci, interview with the author. Tucci originally told his story to Business Week (see “The Betrayed Investor”). In 2003, he updated the story, expanding on and correcting some details.
4. “Participants Report Card for 2002: The Impact of the Bear Market on Retirement Savings Plans,” The Vanguard Group Retirement Research, February 2003. Over five years the Vanguard survey showed an even more striking difference between more affluent and less affluent 401(k) investors: From January 1998 through December 2002, the average investor with less than $250,000 earned less than 1 percent a year, while those with larger accounts gained an average of 4.9 percent annually.
5. See Chapter 9 (“The Media: CNBC Lays Down the Rhythm”). Also see table “Who Owns Stocks?” Appendix, pages 463–64.
6. Rebecca Blumenstein and Susan Pullam, “WorldCom Report Finds Ebbers Played Role in Inflating Revenue,” The Wall Street Journal, 6 June 2003, A1.
7. Shirley Sauerwein, interview with the author. For a reference to the original 1999 Wall Street Journal story, see Chapter 7 (“The Individual Investor”).
8. These losses do not include new money that came into the account during the three years surveyed. In the financial press, Vanguard’s sample was widely accepted as a fair proxy for small investors’ losses nationwide. (It would be some time before multiple surveys could give a composite picture of just how much individual investors of all stripes lost, not just in 401(k)s but in taxable accounts.)
9. Ray Martin (the Saturday Early Morning Show ’s financial advisor), “Tweaking Your 401(k),” 19 October 2002; Toddi Gutner, “How Hard a Hit?” Business Week, 17 March 2003.
10. Gail Marks Jarvis, “Despite Declines, Investors Hang Tough,” Pioneer Press, 3 March 2003.
11. Jennifer Postlewaithe, interview with the author.
12. “The Betrayed Investor.”
13. Chet Currier, “The Bear Market Is Dead—Long Live the New Bull,” Bloomberg News, 13 June 2003.
14. Neither example includes the profits either might have made on new contributions to the fund during those three years. But that calculation would only widen the gap between the passive buy-and-hold investor and the investor who sold his losers and spread his risk.
15. Louis Uchitelle, “Do 401(k)’s Give Workers an Illusion of Wealth?” The New York Times, 26 May 2002.
16. Ruth Simon, “Why Even a Rally Won’t Save You—Host of Deep Problems Raises Doubts About Role of 401(k)s; Time to Turn Over the Reins?” The Wall Street Journal, 1 May 2003.
17. See Chapter 2 (“The People’s Market”).
18. Ralph Wanger, interview with the author.
19. Brian Steinberg, “Louis Rukeyser’s Last ‘Wall Street Week’ Will Be June 28,” Dow Jones News Service, 21 March 2002; Jay Hancock, “Minus Rukeyser, It’ll be ‘Wall Street Weak,’” The Baltimore Sun, 27 March 2002.
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