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February, 2001

Stephen H. Cypen, Esq., Editor

1. INCLUSION IN S&P INDEXES AFFECTS STOCKS: From an article in Pensions & Investments: the announcement that a company has been included in one of Standard & Poor's three major stock market indexes sends the price of the stock up an average 5.4% to 8.49%. However, inclusion in one of the indexes does not insure a price boost or provide a guarantee against severe price declines. Specifically, for the S&P 500, the stock price shot up an average of 8.49% (adjusted for general market movement) from announcement to effective date of inclusion; for the S&P MidCap 400, 6.31% (adjusted); and for the S&P SmallCap 600, 5.4% (adjusted). The more widely followed the index is, the greater the price impact on the average stock being added.

2. FORTUNE RANKS MOST/LEAST ADMIRED COMPANIES: For the fourth year in a row, General Electric sits atop Fortune's Annual List of America's Most Admired Companies. Following GE are Cisco Systems, Wal-Mart Stores, Southwest Airlines, Microsoft, Home Depot, Berkshire Hathaway, Charles Schwab, Intel and Dell Computer. Except for last year's number ten, Lucent Technologies, nine of the ten companies are repeats. (Charles Schwab is the new member.) Rankings are based on votes a company received from all respondents across all industries in the survey. The bottom ten, based on scores received from respondents in the company's industry only, are Trans World Airlines, Trump Resorts, Kmart, Bridgestone/Firestone, America West Holdings, LTV, US Airways Group, Federal-Mogul, Warnaco Group and CKE Restaurants.

"When the bosses talk about improving productivity, they are never talking about themselves."

3. THE INDEX OF LEADING ECONOMIC INDICATORS -- AN EARLY WARNING SYSTEM: A Salomon Smith Barney pamphlet entitled "A Survival Guide to the Monthly Economic Indicators" teaches about the Index of Leading Economic Indicators, a composite of ten data series, designed to predict turning points in aggregate economic activity. The LEI is compiled by the Conference Board, a private-sector consulting firm. Historically, the LEI reaches peaks and troughs earlier than the underlying turns in the economy and is widely regarded as an important tool for forecasting and planning. The LEI's individual components were chosen because of their economic significance, statistical adequacy, consistency of timing at cycle peaks/troughs and prompt availability. The specific leading indicators -- selected from various economic sectors -- are weighted to provide a net contribution to the composite index. But how do the individual components relate to the overall economy? The average work week and jobless claims provide insight into labor market conditions. Consumer goods orders and consumer expectations provide clues about future consumer spending. Vendor performance reflects the percentage of companies reporting slower deliveries. Contracts for new plant and equipment reflect business investment spending plans. Building permits lead residential construction activity. The interest rate spread does a nice job of predicting lending. Stock prices reflect consensus expectations about future earnings and overall business conditions. And changes in the money supply measure banking system liquidity. We found the weights of the individual components to be particularly interesting:

Component Weight
Interest rate spread (10 year treasury yield less Fed funds) 33.2%
Money supply (M2) 30.1%
Average work week (production workers) 18.4%
Manufacturers' new orders (consumer goods and materials) 5.0%
Vendor performance 2.8%
Average weekly initial unemployment claims 2.5%
Stock prices (500 common stocks) 3.1%
Building permits 1.9%
Consumer expectations 1.8%
Manufacturers' new orders (nondefense capital goods) 1.3%

4. THANK GOODNESS FEBRUARY ONLY HAD 28 DAYS: In the third-worst performing month ever, the Nasdaq lost 22.39% in February. October 1987's 27.2% loss is the worst and November 2000's 22.9% is second. For the month, the S&P 500 fell 6.09%, while the Dow fell 2.7%, the Russell 2000 went down 1.89% and the Wilshire 5000 slid 6.16%. Year-to-date, the Nasdaq is down 12.9%. The S&P 500 is off 9.55%, the Dow lost 3.63%, the Russell 2000 is off 7.03% and the Wilshire 5000 is 9.91% lower.

"They say Patience is a virtue. I can't wait to find out!"

5. CITY COMMISSIONER'S ANONYMOUS NEWSLETTER SEEKING FEEDBACK SUBJECT TO SUNSHINE LAW: Section 286.011(1), Florida Statutes, part of Florida's Government-in-the-Sunshine Law, provides that all meetings of any board or commission of any state agency or authority or of any agency or authority of any county, municipal corporation or political subdivision at which official acts are to be taken are declared to be public meetings open to the public at all times. The basic requirements of the Sunshine Law are that meetings of a board or commission be open to the public, reasonable notice of such meetings be given and minutes of the meeting be taken. According to the Florida Attorney General, a city commissioner who publishes an anonymous newsletter using an e-mail address to receive feedback violates the Sunshine Law when the newsletter is sent to and feedback is received from fellow commissioners. The fact that the newsletter is anonymously written does not matter. Our long-time readers may remember our piece on AGO 96-35 (May 17, 1996), wherein the Attorney General held that a board member can write a memorandum to provide information or to make a recommendation to other members on a particular subject, but use of a memorandum to solicit comment from other members or the circulation of responsive memoranda by other members would violate the Sunshine Law (see C&C Newsletter for July, 1996, Page 5). We would not recommend that trustees use any type of memoranda dealing with their official duties. Florida Attorney General Informal Opinion dated October 31, 2000.

6. S&P UNVEILS STOCK IQ: Plan Sponsor's NewsDash reports that Standard & Poor's has unveiled Investability Quotient, a proprietary stock analysis system that evaluates a stock's investment characteristics, incorporating S&P's STARS (Stock Appreciation Ranking System), as well as the company's quality ranking and issuer credit rating. The IQ calculation also draws from a proprietary multi-factor statistical model that looks at valuation, profitability, risk and momentum factors; a technical element that consists of three-month relative strength; and a liquidity/volatility segment that measures liquidity and downside risk.

"Make it idiot proof and someone will make a better idiot."

7. MORE ZIP CODE MISCELLANY: Following our tradition: (see C&C Newsletter for May, 1998, Page 2 and C&C Newsletter for November, 1999, Item 1), we present the most affluent zip codes ranked by 2000 per capital income. This time the data are presented a little differently -- by County. So here are South Florida's Counties' richest neighborhoods:

33480 (Palm Beach) $ 88,299
33483 (Delray Beach/Gulf Stream) $ 54,008
33487 (Boca Raton/Highland Beach) $ 51,253
33306 (Oakland Park) $ 51,787
33308 (Lauderdale-by-the-Sea/Sea Ranch Lakes) $ 50,887
33316 (Rio Vista/Fort Lauderdale Beach) $ 50,630
33122 (Doral) $104,026
33156 (Kendall/Pinecrest/Coral Gables) $ 54,806
33149 (Key Biscayne) $ 53,743

Readers may want to discount the Doral entry, as zip code 33122 has a total population of eleven! We presume the zip code is new, as it has not appeared in the last two years.

8. DEWEY WOULD BE PROUD: On January 29, 2001, more than two months ahead of the SEC's April 9 deadline, the New York Stock Exchange began trading all 3,500 listed securities in decimals. Our readers have been following the Exchange's progress toward complete decimalization (see C&C Newsletter for August, 2000, Item 6 and C&C Newsletter for October, 2000, Item 1). Incidentally, in searching for a "clever" caption, we were reminded of Melvil Dewey, inventor of the Dewey Decimal Classification system. We are somewhat sure this latter information is a little bit more than our readers need to know.

9. LACERA SUES FORMER ACTUARIAL FIRM: The Los Angeles County Employees Retirement Association has filed suit against its former actuary, seeking to recover more than $2 Billion in losses LACERA claims it incurred as a result of miscalculations that grossly under calculated the amount of contributions that should have been made to the fund -- an error that apparently went undetected for twenty years. Our readers may have followed this saga in prior issues (see C&C Newsletter for March, 1998, Page 6 and C&C Newsletter for March, 1999, Item 8).

"No one is listening until you make a mistake."

10. DB PLANS STILL BEDROCK OF RETIREMENT: The Committee on the Investment of Employee Benefit Assets recently surveyed more than 100 corporate plan sponsor members. All members surveyed sponsor both defined benefit and defined contribution plans, with DB plans representing the primary retirement plan type. Compared with DC programs, respondents' DB plans had 57% more assets, covered 85% more participants and paid out 27% more in benefits. also reports that the survey found at year end the same amount (16%) of DB plan and DC plan assets were managed internally, but 86% of DB plan assets were actively managed compared to 40% of DC plan assets. Plans included in the survey provide benefits to 15.2 million participants and represent more than $1.3 Trillion in assets.

11. WHAT IF YOUR MONEY MANAGER IS SANCTIONED BY THE SEC?: The Benchmark Companies have provided three tips to protect funds whose money managers are "sanctioned" by the Securities and Exchange Commission. The SEC may sanction a manager that has been found to have engaged in a form of wrongdoing serious enough to merit some form of punishment. The SEC inspects larger money managers at least every five years, conducting between 1,200 and 1,400 inspections in a typical year. Virtually all money managers are found to have some compliance problems and are issued a "deficiency letter." The letter summarizes compliance problems found and may contain a resolution as agreed upon by SEC staff and the manager. Although many deficiency letters concern minor compliance oversights, such letters must be carefully scrutinized to assess whether or not there is reason for concern. Unfortunately, deficiency letters are not available to the public and less than 5% are referred to the Enforcement Division for further legal action. (Even after referral, the Enforcement Division may determine not to pursue action.) All too often, the SEC waits to institute a proceeding in court until after it has already reached a settlement with the money manager, announcing imposition of a sanction in connection with the settlement. Here is what Benchmark suggests if you hear one of your managers may be in trouble with the SEC:

  1. Make sure your contract with the manager requires immediate written notice of any adverse regulatory developments. Be sure broadly to define "adverse regulatory developments" to include deficiency letters or the manager may interpret the requirement to apply only to final legal determinations.
  2. Use technology to search for answers. Check the SEC's website ( and have your counsel check other available sites. Demand that the manager provide all correspondence to and from the SEC.
  3. Get your pension consultant involved. While pension consultants are not generally well versed in SEC matters, their relationships with multiple funds and managers may be useful in ferreting out the truth.

"Weakness of attitude becomes weakness of character."


Copyright, 1996-2004, all rights reserved.

Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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