Now that the dot.com stocks have settled down, people are starting to take a harder look at some of the financial fundamentals of dot.com companies, especially "burn rate." Burn rate takes a look at a company’s cash flow, and makes a projection of when they will run out of cash. In late June Lehman analyst Ravi Suria said that Amazon.com had a weak balance sheet, poor working capital management, and huge negative operating cash flow. He predicted that Amazon would run out of money within a year. Amazon’s stock went into the 30’s after being as high as 113 in the last 52 weeks. Now that financing is tougher to get, companies do not have as many options for raising cash, and there will be casualties. Expect to hear more about "burn rates" in the months to come.
Dot.com is obviously here to stay, but according to the July 3rd edition of Business Week many of the "strong buy" and "buy" recommendations put out by analysts on dot.com stocks are still in place despite often dramatic drops in their stock price and concerns about their finances. The analysts say if they believed in a company strongly enough to take it public they should maintain a high recommendation on it. Critics argue that the investment banking side of firms that analysts work for provide much of their firm’s profits, so analysts are not about to alienate companies that their firm has underwritten. Many investors just see the "strong buy" or "buy" rating, and know nothing of the potential conflict of interest. Newsweek also mentions that only a select few ever see the actual research reports behind these recommendations, which may point out that any commitment to a particular company is "speculative," and that there are significant risk factors.
Good News From Congress
Concerned about the low U.S. savings rate, the House has passed a bill raising IRA and 401(k) contribution limits. The bill would raise the limits for both traditional and ROTH IRAs from $2000 to $3000 in 2001, $4000 in 2002, and $5000 in 2003. After that the amount would be indexed for inflation. If you are 50 or older, the limit is raised to $5000 in 2001. This is being done as a "catch-up" benefit for those who are nearing retirement age.401(k) plans are also benefiting. Maximum annual tax-deferred contributions go from $10,500 to $11,000 in 2001, $12,000 in 2002, $13,000 in 2003, $14,000 in 2004, and $15,000 in 2005. After that the amount would be indexed for inflation.
Other provisions include reducing from 5 years to 3 years when employer-matching contributions must be fully vested. It also increases from 15% to 20% the deduction limit for stock bonus and profit sharing plans. The bill now moves on to the Senate, where it will probably be voted on in September. This bill deserves to pass.
Dysfunctional Mutual Fund Families
Smart Money ran an article dated June 15th on mutual funds titled "Dysfunctional Families" (available online at smartmoney.com) where they come up with the 10 poorest-performing mutual fund groups around. Names such as Ivy, Paine Webber, Seligman, and Pioneer made the list, with the largest member being American Express. Quoting the article about American Express, which has over 93 billion in assets, "an astounding 21 out of 26 of the firm’s funds eligible for our survey lagged their average peers during our five-year period." Surprisingly, American Express is now raising its front-end loads from 5% to 5.75% on fund investments below $50,000!
Book Review of the Month - A Random Walk Down Wall Street (1999 edition) by Burton G. Malkiel
This is a classic book on investing, first published in 1973, and updated several times since. It is very detailed (and perhaps too detailed in some sections for more casual readers) covering everything from how Wall Street works and thinks, to offering personal money management advice. The historical examples are very informative, and the author tackles the tough questions concerning technical and fundamental analysis, and whether anyone can outsmart the market. This book provides a lot of good information and sound advice, and there is plenty here for just about everyone. If you had to pick just one book to learn about the market, this would be it.
Website of the month - www.pasztor.com
Our own website is up and running! It covers frequently asked questions about us, and offers details on the planning services we offer for individuals, as well covering our corporate education services. Please refer any colleagues or friends to our site if you think they may be interested in any of the services we have to offer.
After you check out pasztor.com please get back to us with any comments or suggestions you may have.
"Life is like a ten speed bicycle, most of us have gears we never use." Charles M. Schulz