HomeMy WebLinkAbout1997-01-17 - Agendas - Final . AGENDA
POLICEMEN ' S PENSION AND RELIEF BOARD
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f January 17 ; 1997
1 : 00 p . m .
City Hall Room 326
f 1 . Approval of the minutes of the October 24 , 1996 , regular
meeting .
2 . Old Business
3 . New Business
A . Review written reports from Dean Witter and Morgan
Keegan
B . Investment report from Longer Investments
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C . Investment Policy review - Elaine Longer
D . Other
r4 . Adjournment
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FAYETTEVI LLE
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THE CITY OF FAYETTEVILLE, ARKANSAS TRACI PAUL, CITY CLERK
TO : Policemen ' s Pension Board Members
FROM : Traci Paul , City Clerk/ Treasurer TP
DATE : January 8 , 1997
SUBJECT : POLICE PENSION BOARD MEETING
The next Police Pension Board meeting is Thursday , January 17 ,
1997 , at 1 : 00 p . m . , in room 326 of City Hall . Attached , please
find a copy of the agenda for the upcoming meeting , the minutes
from the October 24 , 1996 regular meeting , and the pension lists
for December , 1996 and January , 1997 .
., Attachment
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113 WEST MOUNTAIN 72701 501 575-8323
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MINUTES OF P; POLICE PENSION BOARD MEETING
Alspecial meeting of the Police Pension Board was held on October
24 , 1996 at 10 : 00 a . m . in room 326 of the City Administration
Building , 113 West Mountain , Fayetteville , Arkansas .
PRESENT : Mayor Fred Hanna , Eldon Roberts , Jerry Friend , Hollis
Spencer , Dr . James Mashburn , Randy Bradley , and City
Clerk/Treasurer Traci Paul
CALL TO ORDER
Mayor Hanna called the meeting to order and explained that the
meeting was a continuation of the October 17 meeting .
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CHANGES IN ALLOCATION OF FUNDS
Mashburn made a motion to leave the Madison Account with Dean
Witter , move . the TCW Account to Morgan Keegan for Mike Kirkland ' s
proposal to have two managers as presented at the October 17
meeting , invest the available turnback funds of $ 155 , 000 and the
$ 279 , 814 that is in the Dean Witter Cash Account with Elaine
Longer .
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In answer to a question from Friend regarding the need for a cash
account , Administrative Services Director Ben Mayes stated we do
not need that much in the cash account . Over time it has built up
to $ 27.9 , 814 . We try to maintain a minimum of three months of
pension payments which would be approximately $ 100 , 000 .
Mashburn stated he would change his motion . He proposed to move
$ 150 , 000 of the cash account plus the turnback funds of $ 155 , 000 to
Elaine Longer .
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Roberts asked who oversees the fact that we keep a little cash on
hand .
Mayes explained that the Accounting Department monitors that .
Mayes stated we keep the money at Dean Witter because they can earn
a better interest rate on their cash account than we can . We just
draw money as we need it .
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Roberts asked how Dean Witter comes up with cash if they start
running short .
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Mayes stated their are several things that bring money into the
Fund throughout the year .
Mashburn asked if the Board wanted to leave $ 100 , 000 with Dean
Witter in a cash account or transfer the cash account over to
• Longer Investments .
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October 24 , 1996
Mayor Hanna asked if the funds for pension payments comes from Dean
Witter or from City held investments .
Mayes stated both . The City held investments is usually only
around $ 2 , 000 .
Bradley suggested the Board should extend its risk in equities by
changing the equity percentage from 201 - 406 to 25 % - 45 % .
Roberts suggested inviting Elaine Longer to the next meeting to
work with the Board on what we can do to increase our exposure to
the equity market .
Paul asked if Elaine Longer would be reviewing the investment
policy . The Board said yes .
Friend stated we should send Elaine Longer an invitation to attend
the meeting to review the policy and copy of the investment policy .
Roberts suggested sending a copy of the actuary and a list of total
investments might be helpful .
Mashburn suggested sending a letter soon asking Elaine Longer to
make a presentation at the January meeting and asking her to
request any documents that she may need to help make a
presentation .
Mayor Hanna asked how changing the investment policy would reflect
how the other managers operate .
Mayes stated when all of the managers were hired they were given a
copy of the policy . You hired Madison to be nothing but a fixed
account . You hired TCW to be a balanced account . Mike was the
Board hired counselor to keep. TCW within parameters that balanced
between stock and balanced between equity . Elaine Longer was hired
as a balanced manager . The Board did everything the way it should
have been done with one exception . The policy states that the
Board should review its investment methodology , including its
investment policy , semi - annually . Mayes suggested leaving the
basic guidelines the same with the exception of increasing the
equity . Mayes stated the Board could set separate policies for
each individual manager on the maximum equity percentage . The
Board can discuss the structuring with Elaine Longer at the January
meeting .
Roberts commented that the Board has preached conservatism but now
we have enough safe investments that we can afford to take a little
risk .
• 2
October 24 , 1996
Mayes stated the Board asked him to research about the South
African . It is no longer a State Statute . It was repealed so it
can be deleted from the policy in January .
Mayes stated it was estimated that $ 155 , 000 was available for
investment from the turnback funds but we are down to $ 152 , 000 so
the motion needs to be changed to $ 150 , 000 on the turnback .
Mashburn agreed to change the amount of turnback funds invested to
$ 150 , 000 .
Roberts stated $ 150 , 000 from the Dean Witter cash account plus the
$ 150 , 000 in turnback funds will be transferred to Elaine Longer .
Mayor Hanna stated Dr . Mashburn' s motion is to leave the Madison
Account with Dean Witter , transfer the TCW account to Mike Kirkland
at Morgan Keegan , take $ 150 , 000 out of the Dean Witter cash account
plus $ 150 , 000 in turnback funds and give to Elaine Longer . Roberts
seconded the motion . The motion passed unanimously .
Roberts stated we need to send a letter to Mike Kirkland and ask to
manage the account like he mentioned at the October 17 meeting .
Mayor Hanna asked if the Board wanted Mike Kirkland and Jim Wood to
• attend the meeting in January or just send a written report .
Roberts stated lets just let them send a written report because
that meeting will be time consuming .
Mayes reported that the City has the turnback money invested until
next Thursday . Mayes stated it will be wired on Thursday or Friday
of next week . We will get with Dean Witter next week also .
Roberts commented that historically , for the long term , the stock
market is where the money is .
Mayor Hanna stated the Board ' s main charge is to preserve the money
while making as good a return as possible . There is a risk to
everything .
Mashburn stated prior to the July thing , Elaine anticipated what
was going to happen and was prepared . She is a very sharp money
manager .
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Mayes stated for your information on a cost basis you have $ 7 . 6
million . On a market basis you have $ 8 , 136 , 000 . On a cost basis
your equity percentage is 30 and on a market basis it is 35 . 1 .
There is a big difference in cost and market calculations .
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October 24 , 1996
Mayes stated we will pull the Actuary Study and see where they
projected you to be by the end on 1996 .
In answer to a question from Bradley , Mayes stated he would write
ailetter to TCW notifying them to halt trading .
The meeting adjourned at 10 : 28 a . m .
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•' 4
POLICE PENSION FUND
DECEMBER 1996
• EMP# NAME GROSS FED. TAX ST. TAX NET
131 ARNOLD, R D 838.00 838.00
130 BAYLES. DON 760.73 760.73
107 BLACK, JOE P 539.44 539.44
120 BOWEN, J R 350.00 10.00 340.00
147 BRADLEY, GERALD 2,345.47 300.00 45.47 2,000.00
139 BRADLEY, RANDALL 1 ,388.45 11388.45
101 BROOKS, BILL 728.22 728.22
109 COOPER, ADRIAN_ 350.00 350.00
111 DAY, LUCILLE 350.00 350.00
108 DENNIS , WARREN 666.51 666.51
125 FLOWERS , HAROLD 413.39 413.39
140 FOSTER, BILLIE D . 1 ,563.71 150.00 50.00 11363.71
148 FRIEND , JERRY 1 ,510.85 11510.85
145 HANNA, MARK 1 ,311 .73 120.00 35.00 11156.73
124 HASKINS , RONALD 374.85 374.85
146 HUTCHENS, BERNICE 874.85 130.00 744.85
143 JOHNSON , CHARLES 1 , 176.74 36.70 1 , 140.04
103 JOHNSON , WENDELL 375.30 375.30
118 JONES , BOB 11581 .67 1 ,581 .67
144 KILGORE, DONALD 980.73 19.72 961 .01
129 LAWSON , FORREST 751 .38 50.00 701 .38
114 LITTLE, LOYD F 350.00 350.00
119 LORCH , EARL 350.00 350.00
128 MCCAWLEY, LARRY 812. 19 70.00 742. 19
116 MCCHRISTIAN, MARIE 350.00 350.00
126 MCWHORTER, KAREN 485.02 485.02
136 MITCHELL, MICHAEL 1 , 104.75 150.00 954.75
141 MUELLER, ROSEMARY 989. 10 989. 10
j 112 MURPHY, JAKE 350.00 350.00
137 PERDUE, LARRY 1 , 113.09 100.00 11013.09
132 PHILLIPS , HOMER GENE 843.00 300,00 543.00
105 PRESTON , GEORGE DAVID 767.43 67.43 700.00
135 RICKMAN , LOREN 1 ,069. 19 169.00 20.00 880. 19
104 RIGGINS, RAYMOND C 806.67 100.00 706.67
[ 115 RITCHIE, LIZZIE 350.00 350.00
122 SKELTON , FRANK 398.70 398.70
123 SPENCER, HOLLIS 659.25 50.00 609.25
1 121 STOUT, WAYNE 415. 25 415.25
133 SURLES , JERRY 1 ,304. 17 138.00 1 , 166. 17
142 TAYLOR, DENNIS 989. 10 60.00 15.00 914. 10
106 UPTON , FRANKLIN 506.58 10.00 496.58
110 WATTS , BEULAH 350.00 350.00
138 WILLIAMS , BOBBY 1 ,217.07 217.07 11000.00 -
134 WITT, DON 846.72 64.00 782.72
127 WOOD , PAUL J 757.62 757.62
--$36_ --
416.92 -- $2,255.50 . --$221 .89 ---$33_939.53 -
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POLICE PENSION FUND
JANUARY1997
EMP# NAME GROSS FED. TAX ST. TAX NET '
131 ARNOLD, R D 836.00 838.00
130 BAYLES, DON 760.73 760.73
107 BLACK, JOE P 539.44 539.44
120 BOWEN , J R 350.00 10.00 340.00
147 BRADLEY, GERALD 2,345.47 300.00 45.47 21000.00
139 BRADLEY, RANDALL 11388.45 11388.45
101 BROOKS, BILL 728.22 728.22
109 COOPER, ADRIAN 350.00 350.00
111 DAY, LUCILLE 350.00 350.00
108 DENNIS, WARREN 666.51 666.51
125 FLOWERS, HAROLD 413.39 413.39
140 FOSTER, BILLIE D. 1 ,563.71 150.00 50.00 11363.71
148 FRIEND, JERRY 1 ,510.85 11510.85
145 HANNA, MARK 1 ,311 .73 120.00 35.00 11156.73
124 HASKINS, RONALD 374.85 374.85
146 HUTCHENS, BERNICE 874.85 130.00 744.85
143 JOHNSON , CHARLES 1 , 176.74 36.70 1 , 140.04
103 JOHNSON , WENDELL 375.30 375.30
116 JONES, BOB 1 ,581 .67 1 ,581 .67
144 KILGORE, DONALD 980.73 19.72 961 .01
129 LAWSON , FORREST 751 .38 50.00 701 .38
114 LITTLE, LOYD F 350.00 350.00
119 LORCH , EARL 350.00 350.00
128 MCCAWLEY, LARRY - 812. 19 .70.00 742. 1.9
• 116 MCCHRISTIAN, MARIE 350.00 350.00
126 MCWHORTER, KAREN 485.02 485.02
136 MITCHELL, MICHAEL 1 , 104.75 150.00 954.75
141 MUELLER, ROSEMARY 989. 10 989. 10
112 MURPHY, JAKE 350.00 350.00
137 PERDUE, LARRY 1 , 113.09 100.00 1 ,013.09
132 PHILLIPS, HOMER GENE 843.00 300.00 543.00
105 PRESTON, GEORGE DAVID 767.43 67.43 700.00
135 RICKMAN , LOREN 1 ,069. 19 169.00 20.00 880. 19
I 104 RIGGINS, RAYMOND C 806.67 100.00 706.67
115 RITCHIE, LIZZIE - 350.00 350.00
i 122 SKELTON , FRANK 398.70 398.70 -
123 SPENCER, HOLLIS 659.25 50.00 609.25
121 STOUT, WAYNE 415.25 415.25
133 SURLES, JERRY 1 ,304. 17 138.00 1 , 166. 17
142 TAYLOR, DENNIS 989. 10 60.00 15.00 914. 10
106 UPTON, FRANKLIN 506.58 10.00 496.58
110 WATTS, BEULAH 350.00 350.00
138 WILLIAMS, BOBBY 1 ,217.07 217.07 1 ,000.00
134 WITT, DON 846.72 64.00 782.72
j 127 WOOD, PAUL J 757.62 757.62
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$36,416.92 $2,255.50 $221 .89 $33,939.53
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Morgan Keegan
Morgan Keegan & Company, Inc.
lW1 Halsted Circle, Suite 5
ogers, Arkansas 72756
501/936-77741
WATS 800(758-4008
Members News York Stock Exchange, Inc. -
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1City of Fayetteville
Police Pension & Relief Fund
Morgan Keegan Accounts Summary
1 (as of 12-31 -96)
Bond Account # 47001946 $492,375
Stock Account # 47002001 $7453495
(Flippin, Bruce & Porter)
Stock Account # 47002019 $746.605
• (NIWQ)
Total $ 15984475
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Aiitivi in each equity account bean in late November and the statements I have enclosed do
tY q tY g
not show cost basis. You will receive year end custom statements before month end showing
that information. We are still gathering data to be able to deliver to you the performance of all
accounts and will present that in April. Please call me to discuss any questions you may have.
Thank you, /
Mike Kirkland
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Morgan Keegan & Co., Inc.
Ratajczak 's Economic Comments
• From: MIKE KII2KLAND Phone: 1-800-758-4008 Date: January
14, 1997 i
9ervice-Exports
Aupusiness-Inventories +0.4% $1,015.40 Nov +0.5% $1,011.35 Oct
usiness-Sales +0.0% $724.24 Nov +0.2% $724.24 Oct
oney Supply -Ml -0.2% $1,073.6 Dec +0.0% $1,075.7 Nov
-M2 +0.6% $3,821.5 Dec +0.6% $3,797.6 Nov
-M3 +0.9% $4,887.0 Dec +0.6% $4,842.4 Nov
ternational Trade-Deficit ($8.41) Nov ($7.99) Oct
nods-Exports +0.5% $53.16 Nov +5.2% $52.89 Oct
oods-Imports +1.1 % $67.72 Nov -1.2% $66.98 Oct
+0.6% $18.96 Nov +1.6% $18.94 Oct
ervice-Imports +0.5% $12.80 Nov +2.3% $12.74 Oct
01/17 Industrial Production +0.7% 128.9 Dec +0.9% 128.0 Nov
apacity Utilization +0.3% 83.5 Dec +0.5% 83.3 Nov
ECONOMIC INDICATORS FOR THE WEEK ENDING JANUARY 10, 1997
EMPLOYMENT-Another strong report virtually assures that fourth quarter GDP will be in excess of 3%. Construction was
strong because of favorable weather during the survey week. This is not the case in January, which should show a large drop
in construction. However, the weakness in employment agencies was reversed, but retail activity was seasonally weak. A sur-
prising rebound in durable manufacturing in the non-production area must be a sampling problem that also should be re-
versed. Thus, employment should grow below trend in January while the unemployment rate should remain unchanged.
Hourly earnings showed a 0.5% gain on top of a 0.8% increase and is now at a cyclically high 3.8% from the previous year.
Hours worked surged by 0.7% with the manufacturing workweek showing a 0.3% increase. The diffusion index was above
60%, suggesting that gains were widespread. In other words, employment showed substantial strength.
Because of the employment report, real earnings should rise more than 0.5%, leading to almost a 2% in real earnings for the
year. The consumer certainly has spending power. Also, the surge in the manufacturing workweek suggests that industrial
production, especially in materials and consumer goods, will be stronger than expected. As a result, capacity utilization will be
in the inflation range and rising in that range. The leading indicators will be stronger than expected because of gains in the
workweek, and may be revised upward further after consumer confidence is released.
BUSINESS IACTIYITY-The manufacturer's report generally confirmed the weakness in durable goods orders. However, the
large drop in electronics orders was not reflected in electronics shipments and may reflect delivery delays that are stalling or-
ders rather than any general weakness in the economy. Furthermore, some aircraft orders should surface next month. Rising
petroleum prices should create stronger orders and shipments in nondurables, although most of the change is in prices. This
also explains the stronger than anticipated increase in inventories for nondurable goods. Finished durable goods actually
showed a decline in orders, which suggests that some strength may soon surface. Inventories are assumed to grow more slowly
next month; but further gains in energy prices may require an upward revision in that estimate.
The stronger manufacturing inventories should lead to stronger gains in business inventories.
CONSTRUCTION ACTIVITY-The strong gains in construction employment suggest that construction expenditures also will
•remain strong in December. However, this strength probably is not in housing starts.
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i. CONSUMER ACTIVITY-Strong gains in hours worked and in the hourly earnings suggest that wage income will be in excess
of a percent gain in December. As a result, personal income should be stronger than originally expected, allowing strong con-
sumer spending with no change in savings.
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Preliminary estimates of vehicle sales for December show modest gains. Little change is expected in January. This is consis-
tent with our estimates of retail sales.
• Consumer debt in November was stronger than expected, with the largest percentage gains occurring in miscellaneous debt.
Credit card debt also jumped at double digit rates but auto debt; reflecting weak sales that month, showed little change in No-
vember. Auto debt should climb in December while other debt probably should slow while revolving debt should remain near
the 12% annual gains that occurred in November.
ERLCE,S-Energy price gains were stronger than expected in November while computer and auto prices declined before sea-
sonal adjustment. The large drop in computer prices is not expected to persist (the declines were at a 30% annual rate in the
past three months. Thus, core inflation should rise more than the 0.1 % gain of December, but energy prices should show only
little further moderate advance following strong gains in the past month. These PPI changes show little reason to alter our
CPI estimates for this month.
MONETARY ACTIVITY-Following strong gains in Ml last week, some moderation should be expected in all the aggregates
this week. Some slowing should be expected, as money growth has been in inflationary territory in the past two months. How-
ever, the Federal Reserve is not expected to react at this time. The demand for money should slow in the next few weeks and
that should lead to stronger growth in the monetary aggregates. -
INTEREST RATES-Despite the strong employment report and the rise in wage rates, the Federal Reserve is not expected to
act at its February 4 meeting. No change in targeted rates is expected this year, as slowing in economic growth should be ap-
parent before the early spring meeting.
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Long term 'rates reacted to the strong gains in hourly earnings and now appear to be headed toward 7%. Economic conditions
do not justify such a high yield, but little hope of moderation is likely until after the quarterly funding in February. Then
rates should fall, especially when the Fed's intention to do nothing becomes clearer.
FOREIGN EXCHANGE-The dollar remains strong against the yen, which could easily slide to 120 in the next month. The
dollar als0s holding against European currencies now that quarterly reports show weaker gains than previously expected.
No interestlrate changes are expected in Europe, and the dollar should weaken when this is apparent, but some gains in the
•dollar currently seem likely.
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STOCK PRICES-Unless Green Bay loses to New England, an unlikely event, this stock market will march forward to 7000 on
the basis of strong liquidity from 401K investors and foreign capital. However, the opposite performance of stocks and bonds
is worrisome and probably means that some jaws will close later in the winter or spring. Thus, a correction is expected 60
days out, but none appears to be close.
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ECONOMIC FORECAST
• ` 1998 4997 1998 Anttuak:' Annual Annual :"
t 111/ 121 (�[[ G1111 :: G111/ HI 1996 1997 ,.:i 4998
Real GDP 3.2 2.4 2.5 2.2 2.0 1 .5 2.4 2.5 1 .2
GDP Deflator 2.2 2.4 2.5 2.4 2.6 2.6 1 .8 2.3 2.7
Nominal GDP 5.5 5.0 5.1 4.7 4.7 4.2 4.3 4.9 4.0
CPI-UI 3.6 3.5 3.0 3.2 3.3 3.5 2.8 3. 1 3.6
91 -Day Bills 5. 1 5.2 5.2 5.2 5.2 5.3 5.2 5.2 5.5
Prime Rate 8.3 8.3 8.3 8.3 8.3 8.5 8.3 8.3 8.5
Federal Funds 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3 5.3
1 -Yr Note 5.4 5.6 5.6 5.5 5.5 5.7 5.4 5.6 5.8
2-Yr Note 5.6 5.8 5.9 5.8 5.8 6.0 5.7 5.8 6. 1
5-Yr Note 5.9 6.0 6.1 6. 1 6. 1 6.3 6.0 6.1 6.4
10-Yr Note 6. 1 6.5 6.5 6.5 6.4 6.6 6.3 6.5 6.5
30-Yr Bond 6.8 6.8 6.7 6.6 6.5 6.5 6.6 6.7 6.5
Corpo{ate Profit 425 432 439 446 450 453 418 442 457
($MMM)
Operating Profit 424 430 436 442 445 448 417 438 452
Adjusted ($MMM)
• S & P 500 717 766 763 756 762 755 668 762 761
Trade Weighted Dollar 86.8 88.9 89.7 88.4 87.3 86.9 86.9 88.6 86.3
updated 1114197
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Ratajczak's Schedule
01/22/96 Dallas, Tx, Brian Dalton contact
02/13/96 At Ga, John Sillay contact
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Ratajczak's'Economic Comments is prepared by Dr. Donald Ratajczak, PhD., Director of the Economic Forecasting
Center, Geo rgia State University. Additional Information Is Available Upon Request.
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111
1 IQ 'sINcox�oR ►�n Comments end Outlooks from Longa Investm7 lac. S
December 31, 1996
The Year in Review In prior newsletters, we have written about the
primary determinants of stock market perfomlance: liquid-
The year ending December 31 , 1996, was another ity, interest rates, earnings growth, and valuation. We
impressive year in the U. S. equity markets. Largecapitali- have characterized these variables as forming a four-legged
zation stocks (as measured by the Dow .Jones Industrial stool supporting the market. If one of the legs becomes
Average [DJIA] andthe S & P 500) outperformed small- and wobbly, the stock market is likely to encounter turbulence.
mid-capitalization stocks (as measured by the Russell 2000 During the summer months, interest rates rose significantly,
and the S &P Mid-Cap Index) for the third year in a row. (See precipitating a stock market correction from the highs set
chart below.) The U. S. market outperformed foreign markets earlier in the year. As rate pressure subsided in the fourth
and the Dow Jones World Index. quarter, the bond and stock markets recovered. We will look
forward to explore the 1997 outlook for each of these vari-
Retums for 1996 by market indices are listed below: ables; however, first let us take a look backward to see how we
arrived at this point in the stock market.
DJIA (cash basis) 26.0%
DJIA (with reinvested dividends) 29.5%
S & P 500 (cash basis) 20.2% A Look Back..
S & P 500 (with reinvested dividends) 22.9% _
Russell 2000 (small-cap index) 14.7% In the decade of the 1990s several major structural
NASDAQ 22.7% changes occurred in the U. S. economic, political, and demo-
• Lipper Index of Growth Mutual Funds 17.2% graphic arenas that have laid the groundwork for the advance
Lipper Small Company Growth Index 16.0% we have seen in the U. S. equity markets this decade. There
Dow Jones World Stock Index 10.5% is more to this market advance than the "irrational exuber-
Lipper International Index 10.6% ance ''alludedtobyFederalReserveChainnanAlanGre=pan
Salomon Bros. Treasury Bond Index 2.7% in his December dinner party speech heard `round the world.
DJ Utility Index 9.2% Investor behavior represents a very rational response to
several favorable developments this decade:
Bonds,however, delivered returns that were less than
coupon-interestretums(SalomonTreasuryBondlndex+2.70/o) 1.) U. S. Corporate Renaissance
due to the rising interest rate environment duringthe year that 2.) U. S. Fiscal Policy
depressed bond prices. Conversely, in 1995 interest rates 3.) Inflation Expectations
declined and bond prices rose so that total return approxi- 4.) Interest Rates
mated 15%. The two years taken together provided bond 5.) Increased Allocation to Equities
returns closer to the stated interest rate on bonds. Prices on
bonds will fluctuate; however, overthe lifeofabond investors
receive an annualized return equal to the interest rate of the U. S. Corporate Renaissance
bond they hold.
In the 1990s U. S. corporations started paying
U. S. Treasury Yield Curve increasing attention to the bottom line, international competi-
tiveness, capital investment and reduction of debt. Conse-
December September December quently, U. S. corporations arenow the most productive in the
1995 1996 1996 world, positioning the U. S. as the economy with the highest
corporate profit margins and returns on shareholder equity in
Two-Year Notes 5. 15% 6.40% 5.85% comparison with others of the western industrialized nations
Five-Year Notes 5.25% 6.75% 6.22% (see chart on page two). U. S. corporations have invested
Ten-Year Notes 5 .50% 7.00% 6.44% substantially in capital equipmentand technology. As adirect
Thirty Year Bond 5 .95% 7. 15% 6.68%
i
r
Market News Page Two
Veneto Inflation Expectations
Operating Mara1" _ 1991 _ 1992 1993 19G 1996
Germany 4.0 3.0 1.6 2.6 7.4
Fnn 6.2 6.6 4.6 6.4 9.9 Inflation in the 1990s declined significantly and for
swlhedand 7.0 7.6 7.6 6.6 10.1
Netherlands 7.3 7.1 6.7 7.7 9.6 most of this decade averaged 3%. Economists now debate
u. s.,. 9.0 6.4 9.6 11.1 17.6 whether inflation next year will be2.5n/g3 .0%, or3 .5%onthe
Retum on Equity high side. It was not long ago that the debate was over 8%
Germany 9.7 7.6 6.6 7.1 •2.6
France 12.7 11.6 10.1 9.9 .0.1 versus 10%. Inflation has been contained for a prolonged
SvdtzwNdhorl and 14.6 16.3 14.7 14.0 6.7 period and as a result lower inflation tions are
Neu,enenda 1x.6 9.o e.7 1x.7 n.a Pe expects being
[U. a. 12.6 121 13.2 16.3 :1a : institutionalized in the economy via lower wage rate inflation
am.n wr«
and value-pricing ofmostconsumer goods. Inanenvironment
of low inflation, there is less anticipatory production to build
inventory before prices increase and less anticipatory pur-
consequence of that investment, profit margins have ex- chasing by consumers. As a result, the boom/bust cycles of
panded and earnings growth has been dramatic even though the past have given way to a prolonged, moderate growth rate
the domestic economic growth rate has been somewhat in the economy with the Federal Reserve's role being one of
sluggish. watchdog or caretaker to "adjust monetary policy at the
margin" thereby facilitating the extension of the growth cycle
U. S. Fiscal Policy in the economy.
The U. S. budget deficit for the fiscal yew ending Interest Rales
September 30, 1996, was $ 107 billion. This represented the
fourth year-in-a-row decline in thebudget deficit, bringingthe The combination of deficit restraint, which reduces
deficittoonlyl .5%of real gross domestic production (GDP). government demand for capital, and lower inflation expecta-
By comparison, the deficit represented 6% of GDP during tions has produced the lowest interest rates in over thi rty years .
George Bush's last year in office. The sea-change in U. S. Although interest rates have occasionally increased ( 1990,
fiscal policy toward deficit restraint has had positive implica- 1994, and 1996), the overall long-term trend has been toward
tions for interest rates and foreign investors' perceptionsofthe lower interest rates.
U. S. for investment purposes.
Increased Allocation to the Equity Market
Although major unfunded liabilities, such as Social
Security and Medicare, pose the risk of acceleration of The baby-boom generation is moving toward peak
government debt after the year 2005, the progress toward a savings years, having emerged from peak consumption years.
balanced federal budget has been dramatic in the last four This year the oldest baby boomer turns 50 years old. By now
years. Major changes in Social Security and Medicare are he or she has probably had the meeting with the financial
open for discussion once the new Congress is in session. Most planner/investment advisor/401k plan administator where
likely, a bi-partisan commission will be created to offer fixture capital needs to fund retirement and college education
recommendations and to provide political cover for the poli- forchildren werewell detailed. They nowknowthey vvillneed
ticians. Several trial balloons have been floated already that anywhere from $500,000 to $3,000,000 to retire without
include .adjustments in cost of living allowances (COLA), reducing living standards. Keep in mind that most ofthem also
privatization of Social Security, pushing back She age of place little faith in the Social Security system to provide them
retirement, means-testing Medicare benefits, moving Medi- with the retirement they want. By the time reality sets in,
care toward managed-care and away from fee-for-service, consumption begins to take a back seat to saving for retire-
experimenting with medical savings accounts, etc. Although ment.
no actions have been taken as yet, the public, particularly the
baby boomers, is slowly being conditioned to accept the need In disinflationary environments such as we are cur-
for action and is becoming more sensitized to She risks of rently experiencing, real assets and inflation hedges
inaction. All of this paves the way for addressing the serious underperform financial assets and the interest rates available •
problem ofunfindedliabilities which die demographics ofthe on bond investments are at low levels. With a lack of attractive
U. S. population can no longer support. atemativestoprovidethegrowthnecessaryforretirement, the
baby boom generation is increasingly allocating savings to the
Market News Page Three
equity market. (See chart.) Although equities as a percent of of the market.is in line with valuations on the stock market in
household financial assets have increased since 1990, we have prior periodsdisplaying correspondingly low interest rates.
not yet reached the levels attained during the 1960s. 5 & P 500 Price/Earnings Multiple
LIQUIDITY Relative to Interest Rates
Stocks as a Percentage of Financial Assets PIE T-91111 Yield
ae >ax
asx '
a
erne +sx
_ a
aax
vela�e P/o: +n
cox +e
10 [
ss
IM e a
IM IBS] 1MI IM IM +on 6911 +a+ IM IM in] M O " " nn " e+ " Gym a M
IMS 1Ba IM 1M7 1971 1076 19n IBM IM7 INI IM P/E- T-Bills
Year — .. .-
Sour": Nwe Tr tr"us B"nrd • O"Bh" 196 Bwr": Beok C"ds Anlre4 Nm. IM
updmed 1Mough Ietr esen Cay.
We have written about these fundamental forces of
change in prior newsletters to reinforce the relative attractive- Individuals'allocation ofcash toequity mutual funds
ness ofthe U. S. market vis avis foreign markets. "CGWITB" reached historic levels in excess of$200 billion for the year
isanacronymforthemostbasicrule infinance -"capilalgoes ending December 31 , 1996. Liquidity is the lifeblood ofthe
inhere it 's-treated best " The fundamental forces of rising rising stock market and new money purchases are the driving
corporate productivity, low inflation and interest rates, force for higher prices. With an absence ofattractivealterna-
• responsible fiscal policy, and an aging population increas- fives, the increasing savings pool should continue to flow
ingly predisposed toward saving have set the stage for the Predominantlytowardthe equity marketuntilovervaluation is
market advance of the 1990s and provide the foundation for reached and/or interest rates rise as they did in the summer.
the primarydetenuinantsofmarket direction. Thesedetermi- The liquidity flow, and therefore the current level of the stock
nants are characterized below: market, is very sensitive to rising interest rates. In July, as .
interest rates reached 6.25% on the two-year Treasury note
and 7.00%on the ten-yearnote, money flow into equitymutual
Earnings funds came loan abrupt halt. As a result, the stock market
Growth entered a correction that, although not prolonged in time, saw
dramatic declines in the small-capitalization stocks (18%)and
ugnkitty valuation approximately a 10% decline in large-capitalization stocks.
We view rising rates, shouldtheyoccur in 1997, as thegreatest
risk to another good year in the stock market. _
Irrtereat.
Rates
Outlook
Earnings growth on the S & P 500 slowed in 1996 The valuation on themarket is fair relativeto current
to approximately 10% (final numbers will not be in until mid- rates; however, it is unlikely that WE multiples can expand
January). This year's modcrateearnings growth ratefollowed from these levels unless interest rates decline further. Conse-
gains of 18.4%, 23 .9%, and 17.6% in 1993, 1994, and 1995, quently, if interest rates stay at the same levels, returns inthe
respectively. Looking forward to 1997, earnings are expected stock market in 1997 should more closely parallel underlying
to grow 7- 10%. The important point is that earnings contin- earnings growth, expected to be in the range of 7-10%.
ucd to rise as the market price advanced resulting in a
valuation level, as measured by price/eamings (P/E) ratio, It isreasonabletoexpect the large-cap stocks toenter
that is not extended given current interest rates. (See chart.) a consolidation phase after two years of 20'/o+ returns back-
At approximately 17 times estimated 1997 earnings, the P/E to-back. However, the mid-cap and small-cap stocks which
Markd News Page Four
have trailed the performance of the blue-chip stocks in 1994, return is subpar or unacceptable, at which time money will •
1995, and again in 1996, appear to be poised to delivera better migrate toward a higher return. When investors can make
relative performance in 1997. 'There are several reasons for double-digit returns by passively investing in a large-cap
our optimism regarding small- and mid-cap stock perfor- index fund, there is no need to extend risk tolerance by moving
mance in 1997: toward smaller, less liquid stocks in search of higher returns.
If, however, the larger stock indices enter a consolidation
1.) Small- and mid-cap stocks have trailed the phase in 1997ductoalessrobustcamingsoutlook, moneycan
S & P 500 performance since 1993 (see chart). be expected to flow to the higher-growth, reasonably-valued
smaller stocks.
Performance History
S & P 500 and Russell 2000 As a result of the factors detailed above, we arc
Cumulative Performance
concentrating our research efforts on finding companies
capable ofdelivering top-line (sales) growth rates in excess of
101/u, showing improving profit margins and returns on
�^^+ shareholder equity, possessing strong balance sheets and
reasonable valuation relative to growth rates. We are still
finding a lot of value in the market: however, most of the
undervalued stocks we are identiMrtg at these levels in the
° - stock market are among the small- and mid-sized companies.
i
1c +w+ +ate We would like to wish all of you a very• happy.
Year healthy, and prosperous 1997. Please feel free to call us ifyou
Russell 2000 S & P 500 have questions or comments. It is always a pleasure to hear
from you . •
2.) Earnings growth among the small compa-
nies that comprise the Russell 2000 Index is ECOt10Mlf NftvS �I iE7WEEN THE ND HE
projected to be 22% in 1997 versus 7-10% for
�EARS, I'M
the larger companies that make up the S & P u k y fuFFAL401
500.
5IPJ *YSH
3.) Despite the higher growth characteristics of 4 97
.. , , s..e•er
the Russell 2000, the PIE multiple, or valuation,
on the small-cap index is the same as the valua-
tion on the S & P 500, leading to a very large Personal Inves vtenl Planning
discrepancy between valuation/growth rates RiskToferanceAssessment
of 0.77 (Russell 2000) versus 2.3 (S & P 500). In Development of an Gnrstnnent Policy
other words, valuation relative to earnings Reurentenr Planning
growth is much more compelling among small- IRA, Pension, and Nord Sharing Alanagenrern
Survivorship and Estate Transfer Planning
and mid- sized companies. Charitable Trust Alanagement
Non-Profit Foundation and Endon7 nem Alaragernnent
4.) Small stocks tend to performbetterwhenthe FacilimringTavandAcrnuntingPreparation
U. S. dollar is strong and 1997 is expected to be Reputable Fee-Only Asst Afmagemet
a year of continued dollar strength.
The trend toward indexing we have seen in the past �j P. O. Box 1269
few years via purchases of S & P 500 Index mutual funds by Farcncville, AR 72702
LONGER Phone: (501) 443_5851investors has been in large art responsible for the Perfor- INVESTMENTS
T'ax: (501) 443-7129
mance discrepancy between large- and small-sized compa- INCORPORATED
nies. A trend in motion tends to stay in motion until the trend