View Full Version : July 15th

04-04-2005, 08:04 AM
I thought this was an interesting tidbit..........


Eyeballing July 15

One reason Wall Street money managers pocket so much money is that they can state the obvious with enormous conviction. After all, if the so-called experts agree with each other, and they all do the same thing, then it becomes a self-fulfilling prophecy. But we think that come this summer, a bunch of money managers will instead be dead wrong -- and we have history on our side to prove it.

The Wall Street pack registered its collective voice in a quarterly survey dated March 2005 conducted by the Russell Investment Group (the folks who brought us the small-cap Russell 2000 Index). Of the nearly 100 buttoned-down prognosticators, 71% were bullish on large-cap growth stocks. Only 32% were bullish on small-cap growth. And small-cap value stocks ranked the least favorite of our consensus-happy experts, garnering a bullish rating of merely 29% (compared to 45% who favored large-cap value).

What's the point of the survey?

On Wall Street, the process of surveying the professionals is called "sentiment," and it's typically used to build forecasting models based on the opinions of people who, as it turns out, generally think alike. After all, with all that responsibility resting on their shoulders, imagine how much easier their jobs are when they can point to a million other money managers who all made the same mistake.

This time, they have turned their sentiment against small caps. Actually, since early last year, Wall Street has been warning us that large caps are about to overtake small caps -- after an incredible small-cap joy ride...

For the past five years, the small-cap Russell 2000 index returned a profit of 4.3%, versus a loss of 2.73% for the large-cap Russell 1000. Over the past three years, the Russell 2000 generated a profit of 8.03%, while the Russell 1000 coughed up a paltry 3.35%. But over the past year, the tables turned hard, with the Russell 1000 returning 7.24%, compared with the Russell 2000's 5.54% -- the contrast becoming notably stark in the year-to-date returns, a 1.90% loss for the Russell 1000 against the Russell 2000's bloodbath of minus 5.37%.

But come July 15, we think that the past and the future will collide to decimate popular sentiment...igniting an afterburner of small-cap enthusiasm. That's because the onerous Sarbanes-Oxley Act will take effect that day for many small-cap companies.

Sarbanes-Oxley was enacted in July 2002 as a post-Enron legislative cure for executive fraud. The new law beefed up requirements for record retention, financial controls and a higher level of accountability for CEOs, CFOs and directors. Sarbanes-Oxley is very expensive to implement, and small-cap companies are eating the expense big time -- resulting in missed earnings, lowered earnings and reduced profits. Relatively speaking, the cost of compliance is much higher for small caps than for large caps, hence the longer grace period.

For example...

The law firm of Foley & Lardner said that under Sarbanes-Oxley, the average cost of being public for a company with annual revenues under $1 billion (think small cap) will surge 130%, or $1.6 million. That covers everything from accounting and audit fees, computer systems, liability insurance and higher director compensation to offset the increased personal financial risk.

The fallout is already impacting small-cap companies and souring investor sentiment. Angela Roberts wrote that Harvard Bioscience turned in depressed results. Even though the company's 2004 revenues were up 6% over 2003, net income was down $2 million due to Sarbanes-Oxley compliance. And when another small-cap company, OCA, Inc., delayed reporting its 2004 results as it struggled to implement Sarbanes-Oxley, the company's stock plunged 10%.

While the Wall Street wingtip crowd gives small-cap CEOs a punishing knee to the groin, we wonder if they see the long-term benefits for small-cap investors that arise from Sarbanes-Oxley...such as unprecedented transparency, stronger corporate governance and stricter reporting by foreign-based small-cap operations. Because while the analysts focus on quarter-to-quarter growth, we're expecting a small-cap renaissance after July 15.

In part, that's because we believe that small-cap investing will never be safer. All you have to do is look back to the Securities Act of 1933, which ensured the reliable disclosure of pertinent information relating to publicly offered securities. The following year, the Securities Exchange Act of 1934 focused on secondary markets, ensuring that the parties that trade securities -- exchanges, brokers and dealers -- act in the best interests of investors. The Securities Exchange Act established the Securities and Exchange Commission as the primary regulator of U.S. securities markets. In this role, the SEC gained regulatory authority over securities firms -- eventually hunting down the likes of Michael Milken, Bernie Ebbers and Kenneth Lay.

And small-cap stocks boomed...

Large caps registered gains of 46.5% in 1933...but small caps more than doubled, rising 104.2%. Small-cap stocks jumped 41.5% in 1935 and then gained another vigorous 36.4% the year after. So can history repeat itself with similar run-ups after the important small-cap compliance deadline of July 15?

As of that date, a portion of the 2,959 small-cap companies with valuations between $75 million and $1 billion must meet the Sarbanes-Oxley compliance deadline. It applies to companies that we categorize as small-caps that have not yet met the initial compliance deadline of Nov.15, 2004, due to the SEC's revised schedule, based on corporate fiscal calendars, annual-report distribution and other criteria. That's why we think July 15 is a significant milestone for investors looking for reliable, small-cap opportunities.

So let Wall Street turn bearish on small caps and leave the winners to us. Our sentiment forecasts a busy (and lucrative) summer.

Happy investing,

Irwin Greenstein

05-09-2005, 06:15 PM
S fund has done better in the last month than the c fund I rely on it but I keep a close eye on it at the same time. I believe it will be a good year for the small caps.


05-09-2005, 08:19 PM
If the market continues to mimic 1994, it may lag behind the C fund. The rallies might be good when they come, but the troughs may be more severe.

Take a look at this page...
http://www.tsptalk.com/returns/returns2.htmland see what happened to small caps from 1994 to 1998 compared to the S&P. Kind of a pay back for the over perfomance of 1991 to 1993.

I think this could happen, particularly if Greenspan doesn't putthe breaks on interest rate hikes.

05-09-2005, 09:00 PM

Glad I can oblige you of an alternate opinion on small caps. I rode the small caps up beginning in 1998 and stayed away from the hype of the tech market. I'm fond of the Russell 2000 but they have our performed every class of investment until tomorrow. They have had a very nice run and are ready to only perform at a slower level. They will hit the proverbial wall sometime this year and begin to under perform. Don't misunderstand-you can still make money there-only not maximize you funds with the I fund. You don't have the option to choose individual stocks. You gotta have great expectations and faith.

The sp500 is an undervalued index and will be heading for at least 1600 on the index. It put in a tripple bottom and in 3/03 ran up nearly or close to 390 points. Add 400 points on to 1180 and you are there. I truly believe this class will go even higher than that. Time will tell, of course.

The I fund has a nice complement of stocks from Japan. The Nikkei 225 also put in a tripple bottom after a 15 year basing pattern. It is now ready to outperform with the C fund. You can hedge you bet and risk by getting some of each. Dennis

05-09-2005, 09:47 PM
I agree as soon as I see it drop back my money will be more diversified like c fund and I I pay close attention

Thanks for doing my picture