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To: Les H who wrote (166867)	5/20/2002 3:42:48 PM
From: Sonny Blue	Read Replies (1) \| Respond to of 436258

Doubting the stock answers 05/19/2002 By SCOTT BURNS What return should we expect from common stocks? This is not an academic question. The answer has visceral importance to all of us. It will shape our expectations. It will change where we invest. It will influence how much we save. And it will change living standards for those near retirement. So what return should we expect? If we rely on the conventional wisdom, embodied in Stocks, Bonds, Bills, and Inflation, the Ibbotson Associates' annual yearbook recounting of investment returns since 1926, the answer is reassuring. The long-term return on common stocks is 10.7 percent, a healthy premium over the long-term return on government bonds (5.3 percent) and inflation (3.1 percent). Questioning returns We like to hear numbers like this, particularly after two dismal years of losses, because it tells us that our money will double in less than seven years, quadruple in 14 years and continue doubling into the distant future. If we just relax, the long-term trend will resume. Equally important, the conventional wisdom also tells us that equity investors always receive a "risk premium" of about 5 percent a year for choosing stocks over bonds. In fact, the conventional wisdom is under attack. In the March/April issue of the Financial Analysts Journal, Robert D. Arnott and Peter L. Bernstein examine two centuries of stock, bond and economic data. (Yes, you read that right. Two centuries.) They conclude that our expectations have been distorted by the relatively brief 75 years of history in the Ibbotson Associates data. Our expectations have been even more dangerously warped by the experience of the 1975 to 1999 bull market, when stocks returned 17.2 percent, a gigantic 7.8 percent premium over long-term government bonds. Risk less rewarded Taking a longer view, they come to a sharply different view of investment return and risk. First, they conclude that the normal risk premium for stocks – the amount by which stock returns should exceed the return on bonds – is 2.4 percent or less. That's half the risk premium usually accorded common stocks. They also conclude that the risk premium isn't constant. Instead, it varies from different price levels. Based on current price levels, they conclude that the risk premium for common stocks is zero, or less. "The current risk premium is approximately zero, and a sensible expectation for the future real return on both stocks and bonds is 2 to 4 percent, far lower than the actuarial assumptions on which most investors are basing their planning and spending," they conclude. If Mr. Arnott and Mr. Bernstein are right, here are some of the implications: • Withdrawal rates from retirement portfolios will need to be reduced to reflect lower expected returns from common stocks. Failure to reduce withdrawal rates will result in running out of money. Just as many retirees of the 1960s were threatened by the combination of high inflation and relatively low stock returns in the '70s, current retirees may be threatened by a decade of below-average equity returns. • Although the Ibbotson data indicate good portfolio survival at withdrawal rates just over 4 percent, the Arnott/Bernstein data could lower withdrawal rates to the return on long-term Treasury Inflation Protected Securities, or about 3.4 percent. • Younger workers will need to save more to adjust for the lower returns expected from common stocks. There will be some compensation, however, in that they will be able to invest more in bonds and suffer less risk. • Lower spending by the retired and greater saving by those who are working may become part of a self-fulfilling prophecy of slower economic growth. • The investment industry – brokers, advisers, funds, etc. – is heading for a deep shakeout. It has grown fantastically on 25 years of high equity returns. One example: More than 100,000 candidates will take the examinations for certified financial analyst in June. That's five times the number of people who took the exams in 1995, only seven years ago. We can expect incredible pressure on financial service industry revenue as portfolios shift from equities to bonds. Pressure on fees will be intense.

To: Les H who wrote (166867)	5/20/2002 3:59:02 PM
From: Giordano Bruno	Read Replies (2) \| Respond to of 436258

U.S. posts $67.2 billion surplus April's tax receipts down 28% from a year ago cbs.marketwatch.com April's surplus is the largest for a single month in the current fiscal year. It follows a $64.2 billion deficit in March and a $76.1 billion deficit in February. April, of course, is the biggest month for revenues. Analysts are looking for a deficit of at least $100 billion this year.

To: Les H who wrote (166867)	5/20/2002 7:36:54 PM
From: maceng2	Respond to of 436258

Quarter review for semis... [I have emboldened the pertinent text re..assumptions pb] Semiconductors No one's ready to call it a recovery just yet, but encouraging semiconductor results in the first quarter assured many weary executives and analysts that the worst of the cycle has passed. Following nine months of bad news, the semiconductor industry is expected to resume growth in the second quarter, according to Mark Edelstone, an analyst at Morgan Stanley Dean Witter & Co. in San Francisco. “Order momentum improved significantly during the [first] quarter, as virtually every semiconductor company benefited from replenishment demand following last year's severe inventory correction,” Edelstone wrote in a recent report. Across the sector, new orders outpaced sales for the first time in almost a year, restoring hopes for a sustained upturn, although industry executives are keeping their enthusiasm in check. “With the lack of solid data, we're not forecasting, even internally, dramatic growth rates,” said Dave Côté, vice president of marketing and communications ASSPs at Integrated Device Technology Inc., Santa Clara, Calif. “We're watching to see what major customers have to say about growth rates.” Cisco Systems Inc.'s recent forecast of 5% revenue growth in the current quarter was welcome news for its biggest chip suppliers, IDT included, but market watchers remained wary, citing lingering uncertainty in the computer and wireless handset sectors. “The demand environment is still weak,” said Ted Parmigiani, an analyst at SG Cowen Securities Corp. in Boston. “Pricing power has clearly shifted to the component buyer, and will probably be persistent even when we do get signs from end markets that demand has shifted.” Even as ASPs declined across the board, putting pressure on gross margins and revenue, semiconductor companies generally reported an uptick in unit shipments. For instance, flash memory product revenue finally bottomed in the first quarter of 2002, though unit shipments have been rising since the third quarter of 2001, according to Kevin Plouse, vice president of technical marketing in the Memory Group at Advanced Micro Devices Inc., Sunnyvale, Calif. While the higher chip orders in segments like communications infrastructure were attributed to inventory replenishment, semiconductor manufacturers said OEMs were, on the average, coming in for new programs. “The bet that people are making is, 'We can go ahead and build inventory on the balance sheet because even if third-quarter demand is less than expected, we still have the fourth quarter behind that,' ” SG Cowen's Parmigiani said. However, in order for the fledgling recovery to take hold, end-market demand will have to start increasing; otherwise, pressures on gross margins and chip pricing will resume, analysts said. -Crista Souza ebnonline.com