Word: stocking
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Dates: during 2000-2000
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While Texas Gov. George W. Bush has not completely outlined his Social Security plan, he has indicated that he would support taking a portion of money out of the current system and placing it in private accounts. This money could then be invested in stocks and bonds, as has been advocated by Bush advisor and Baker Professor of Economics Martin S. Feldstein '61. Feldstein has argued that private investments will create a "All-Gain, No-Pain" fix for Social Security, as the swirling stock markets buoy the program to higher and higher returns. Yet pleasant fantasies may not serve...
First, investment in private securities will not bring the benefits that its supporters have claimed. Both stocks and bonds are evaluated on the same scale of risks and return; to argue that stocks will continue to provide higher risk-adjusted returns than bonds in the future is to say that the market is frightened and overestimates the dangers of holding stock. The stock market's high returns over the last 50 years may have been unprecedented, but so was the recent rise in stock prices, which seems to indicate that investors have arbitraged away any misperceptions. Economists widely dispersed across...
Second, simple-minded comparisons of a two percent Social Security return with seven percent returns from stock investments ignore the cost of pre-funding the system. As Barro has written, Social Security's return is so low--lower, in fact, than the Treasury bonds in which it invests-- because today's workers must pay for today's retirees. No program that takes money out of the system and puts it into private accounts can avoid the obligation to pay for current retirees, which would lower the returns. Bush's repeated comparison of the returns on Social Security and safe government...
What does this mean to you? Not all buybacks are bullish. Look for one that takes place when the stock is depressed and the buyback is funded out of operations, asset sales or reserves. Ongoing buybacks can be good, providing a constant source of demand. But any buyback that merely offsets dilution from options should be dismissed as meaningless, possibly even harmful--unless you're the one with the stock options...
KILLING RISK Bucking an 18-year ban on trading stock futures, the SEC and the Commodity Futures Trading Commission have agreed to allow such trading--pending congressional approval. Futures allow stock traders to purchase the option of buying or selling a stock at a specific price on a future date, regardless of market price. The allure of these options is that they help neutralize the risk of trading. Given the markets' gyrations lately, any hedge against the unexpected is probably worth looking into...