Lipper Research Analyst Don Cassidy on "Business for Breakfast" 1060 KRCN

Tuesday, June 28, 2005

A. You're right. And because of how people's emotions work, that may havesome influence on how the market acts in the period ahead.

Q. Can you expand on that just a little?

A. Sure. First, people tend to steer their investment vehicles by lookingin the 'near' part of the rear-view mirror. In other words they projectcontinuation of the recent past. And many casual investors look only ormainly at their quarter-end statements, so the results over the next coupleof days may have outsized influence on moods in July and August.

Q. Can you give us some quick stats on where we stand right now in terms ofQ2 and YTD returns in equity funds?

A. Of course:

Quarter to date, the S&P 500 index with dividends is up a little under 1%.We were about 3% better a week ago!

About 45% of equity funds are up for the year to date.

The first quarter was down and the second was much better until the fadelast week. Over 90% of equity funds had losses last week.

The winners in Q2:

• Real Estate Funds +12%
• Latin America +6.5%
• Health/Biotech +6%
• Utility fds +5.5%
• Telecomm Fds +4.5%
• Sci & Technol +4%
• Pacific ex Japan +4%
• Nat Resources +3.5%
• Emerging Mkt +3.5
• China +3
• Large-Cap, MultiCap Gr +2.5%

The trailers in Q2:

• Financial Svcs +2%
• LgCap Core, Value +1%
• European Region -1.5%
• Japan -2%
• Gold fds -2%

Q. How much of a dent in emotions/psychology do you think last week hascaused?

A. Well, it has not helped. But I think the fact that stocks were prettysteady all day Monday was a nice positive surprise and may have taken thepotential fright away. A down-3% week would do much more damage if it hadcome after a string of prior losing weeks, but it came after a rally. Themarket had been a little overbought 10 days ago, so you might see those twobad days as just a normal adjustment.

Q. You mentioned earlier that many investors look at their portfolios onlyquarterly?

A. You and I and our B4B listeners, and members of AAII or NAIC are verytuned in to the markets. The average person has a job outside the financialindustry and is not as intensely interested as we are. Millions of fundsinvestors hold funds in their IRAs because of the tax savings, or are401(k) investors at work because of the match or because they know theyneed to invest. Yes, a lot of such people look only at quarter end or maybeat month end.

Q. So that would probably make end of the quarter numbers very important,then?

A. Yes, in people's heads more than in economic reality. But the sign theysee, plus or minus, after June 30 creates the final net verdict, and willbe the impression these millions of casual investors have for the nextcouple of months. I remember the end of 1987, after the October crash. Itturned out that people who were passive made or lost just one or 2% for theyear, and everyone breathed a sigh of relief when their year-end statementsarrived and told them that. It took the sting out of memories of October.So those QE numbers do have some extra power in people's minds.

Q. OK, looking forward for the second half?

A. We at Lipper have been of the opinion right along that 2005 would be aslightly up year, probably in the +2% to +6%, range for equity investors.Getting there from here probably means we will see more choppy marketswithout major trends up or down, net. So investors need to focus on the bigpictures: proper asset allocations, being in line with macro economictrends, and so on.

Q. What will be the big drivers for the market, do you think?

A. Putting aside any possible wild cards like terrorism or a happy/fastunexpected wind-up in Iraq, or serious trouble in Korea or Iran...

Energy: how much beyond $60 does oil go, and how much might that hurt? --or the opposite of the price falls!

Interest Rates: will the Fed stop, continue, or accelerate? Implicationsfor the economy, especially housing and autos.

Taxes: Might Congress actually repeal the estate tax below a very highthreshold? Good for stocks except probably life insurance.Dollar: will it weaken again after having a plus first half? Good forinternational funds if it does.

Inflation: if it should kick up, that would worry the market again aboutFed responses and maybe an economic deceleration.

Q. Bottom line?

A. Not new: for the average investor, staying fairly well diversified makessense so individual positions do not excite or upset you too much to takewrong actions.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).