Since the end of 2007, Family Dollar shares are up 67%. Today, Family Dollar proved again why the downscale retailer is so attractive to investors.

In quarterly results released July 8, earnings per share of 62 cents were 35% higher than last year and 3 cents above Wall Street expectations. Family Dollar eased a few investor worries with this report.

Analysts had warned that profits might falter as "consumables" -- which have lower profit margins -- take up a bigger portion of the chain's sales. Consumables sales were up 12.6%, but profit margins widened. "The company continues to demonstrate that it can increase gross margin despite the growing sales contribution from consumables," wrote Raymond James (RJF) analyst Dan Wewer.

Also, many worry about retail results as the unemployment rate rises. But economic pain might actually be helping Family Dollar, as consumers look for bargains. Same-store sales rose 6.2%, while revenues rose 8.3%.

Mark Miller, an analyst at William Blair, reiterated his "outperform" rating on the stock. "Consumers [remain] focused on value," he wrote, noting the U.S. savings rate could almost double in the future. Another positive factor:

Major legislative initiatives that should bolster income and spending for the lower-income consumer, including the third minimum wage increase this month and added funding for the food stamp program.

But how long can Family Dollar continue benefiting from economic trends that are clobbering other retailers? Wall Street seems to think the answer is "quite a while." Family Dollar shares ended the day up 12.4% to 31.18.

New research out from the Ariel Education Initiative, Hewitt Associates and several other partners shows that African-American employees who earn $120,000 or more have saved $154,902 in their 401(k)s on average, versus $223,408 for their white counterparts—a $68,000 deficit that worries retirement experts, notes my colleague Nanette Byrnes in BusinessWeek’s Management IQ blog. Overall, lower-income blacks and Hispanics also lag their when it comes to saving for retirement. Moreover, nearly two of every five African-American workers and almost a third of Hispanic workers borrowed from their retirement accounts compared to just one in five white workers.

The data comes from an extensive analysis of nearly 3 million employees who participate in a 401(k) across 57 large companies in the U.S. Hewitt has been aggregating this data for many months, so it doesn’t even include the impact on retirement savings after the recession hit America the hardest in the past year.

Back in January, I profiled McDonald’s (MCD) where nearly 20% of the 6,700 store managers are black. Thanks to the work of John Rogers, founder of Ariel and a McDonald’s board member, McDonald’s is one of the few companies trying to close the savings gap between its African-American and Latino workers in comparison to their white and Asian counterparts.

What fascinates me the most are the cultural reasons why minorities don’t save more. African Americans, for example, do not trust the financial system because it has excluded them for generations. They consistently put home ownership and college ahead of retirement goals. In the black professional community, owning a home and educating children are top priorities, particularly if you are the first person in your family to do it.

Saving for the future is controversial. "If your Mama lives with you—and others in your extended community are struggling to get by—putting aside money that you can't touch for the next 15 to 20 years feels selfish and inappropriate," according to a quote I have in my article from Andreas Tapia, chief diversity officer at Hewitt Associates, who led the data-mining project. (Hewitt also helped McDonald’s redesign its 401(k) plan.)

The story is similar in the Latino community, although the familial bonds tend to be even more intense.

To close the retirement savings gap, McDonald’s is attacking on many fronts. It is pushing financial literacy on employees, and it is using grassroots employee networking to spread the retirement savings gospel.

But McDonald’s is just one company, and my sources say it is light years ahead of its competitors as well as the rest of Corporate America on investing education. Let's hope this will be a wake up call to other companies to get workers to save more for the future. (For more information on saving for retirement, check out BusinessWeek's special issue on Rethinking Retirement.)

What makes this confusing is that reform could significantly help or hurt particular industries within health care -- depending on how the law is written.

BusinessWeek's Aaron Pressman discussed the debate over hospital stocks in this video.

Stifel Nicolaus (SF) recently issued a 63-page report analyzing the possible effect of health care reform on various health care stocks. A few of the key conclusions:

First, the bullish case for health care stocks is easy to understand: Health care reform could boost overall health care spending by bringing 48-million uninsured people onto insurance rolls. Stifel cites the Commonwealth Fund, which estimates a 16% increase in the insured could result in an extra $122 billion in spending each year.

But, second, Stifel analysts question this thesis, seeing an increased risk to firms' profits from health care reform. The political tone has changed because of worries about mounting deficits, "suggest[ing] that more aggressive cost cutting and increased regulation may result." That's a change from May, when health care stocks actually outperformed the market on better-than-expected earnings and hopes of positive effects from reform.

Finally, Stifel's experts warn this debate could take a long time:

Health reform legislation is likely to take most of 2009 to finalize and will continue to be a headline risk for most healthcare sectors throughout the process.

Some health care industries are less exposed to the debate -- "medical and drug distributors, generic pharmaceuticals and possibly large-cap pharmaceutical and biotechnology companies." But for most of the health care sector -- and for its investors -- this could be a long, volatile year.

Is the long-term expected real (after-inflation) return on stocks no longer positive? In other words, if the expected return is no longer positive, then an investor would need to trade in and out of stocks in order to earn a positive return.

Stone then reviews the evidence and concludes what most (though not all) financial advisors have been saying for decades. Stocks do tend to outperform other investments and also inflation over long time periods. Plus, jumping in and out of the market is difficult, because it's very hard to do so at the right time.

Whether you agree or not, some pieces of evidence from PNC are worth considering:

PNC looked at 881 rolling ten-year time periods for the S&P 500 since 1926. Adjusted for inflation, 119 of those time periods (13.5%) showed a negative return. That's a surprisingly high figure, which underscores the significant risk that investors do take when they put their money in stocks.

Second, Stone's team reviews studies, looking at dozens of countries, showing "essentially no correlation between the rate of GDP growth and real returns on stocks -- in fact the correlation is slightly negative."

That's an important point because many bearish investors expect slow economic growth for many years to come. And they cite these economic doldrums as a reason not to own stocks for now. Stone, citing this research, argues this is a poor rationale.

But how could it be that the economy could grow and equity investors earn nothing? Or that an economy is stagnant but stock investors benefit? I'm intrigued by one possible reason:

GDP can grow without gains accruing to equity shareholders. In some countries the GDP gains might accrue primarily to the government or workers.

Whether or not economic growth is slower in the next decade than in the last decade (and I think that's highly debatable), this passage raises a troubling question for investors. Might we also be facing a situation where political developments in Washington -- more generous health benefits, tighter financial regulation, pro-union labor laws and regulators, environmental rules -- limit investor gains even if the economy does grow?

We don't know the answer to this question, or to many others. And that uncertainty about the future is one reason why I remain, cautiously, a buy-and-hold investor. (The other reason is that I see few proven, viable alternatives to buy-and-hold.)

But what do you think? Is buy-and-hold still a useful investing philosophy?

But a consensus appears to have emerged that oil is overpriced and ready for a fall. The International Energy Agency released a report on June 29 showing weak demand. Furthermore, while fundamentals may be determining the direction of the price, speculation is responsible for oil's enormous price swings. In its Perspectives Quarterly, Credit Agricole says that $70 is unsustainable. "Looking at fundamentals, however, the recent rebound in prices appears overdone," the French bank says. It expects prices to return to $60 per barrel in the third quarter before increasing to $68 per barrel in the fourth quarter.

And the Wall Street Journal attacked the notion of $70 oil in two separate blogs, "$70 Oil, but Where's the Demand?" and "Is the Oil Bubble Back?"

British bank Barclays has a different take. In a new report, Commodity Refiner: Children of the Revolution, Barclays claims the fall in oil to below $40 a barrel was the aberration, and the recent rise in oil prices is a "return to normalcy." Look no further than the price of December 2015 futures contracts, which have traded above $66.77 since September 2008, despite market turmoil and the complete collapse of spot oil to under $40 a barrel.

"Even at the lowest point for macroeconomic expectations, and for oil demand forecasts and sentiment, the idea that a sub-$70 per barrel price could be sustainable did not seemingly gain any significant traction," the report says.

Barclays attributes oil's renewed vigor to the fact that the world economy didn't implode, an event that may have been priced into the market. (Sorry, no link.) It also says that the declines in oil production caused by the collapse in oil prices has yet to hit the economy. When it does, it will make up for the lack of demand cited by the IEA.

If Barclays is right, it's time to stop assigning blame for $70 oil and learn to live with it.

From the BIS report:

At this writing, the ability of those plans to generate a sustained recovery is an open question. The major reasons for doubt, discussed in the final section, are limited progress in addressing the underlying problems of the financial sector and the risks associated with the expansionary fiscal and monetary policies put into place during the period under review.

This probably shouldn't come as a surprise. As astute investors have noticed, the government's plans to get toxic assets off the bank's books have been undermined by the banks themselves, who refuse to sell the securities at distressed prices, and by changes in mark-to-market accounting rules, which have given them the ability to ignore the problem.

And more bank assets may be on the verge of going toxic. Everyone knows that commercial real estate is the next domino to fall, but the worst may not have been reflected in bank earnings, says Douglas Burtnick, investment manager on the Aberdeen Global Financial Services Fund. "We're still early in the game in knowing how that's going to play out," he says.

Not necessarily, according to a new study Growing Old in America: Expectations vs. Reality by the Pew Research Center.

Of the 2,969 adults surveyed, 83% of adults ages 65 and older describe themselves as retired, “but the word means different things to different people,” the data show. Just three-quarters of adults (76%) 65 and older fit "the classic stereotype of the retiree who has completely left the working world behind," the survey says. Which begs the question: What kind of jobs do the other 24% have? Is it volunteer work or are they employed as a greeter at Wal-Mart (WMT)?

The answer seems to be a mix of different jobs. For example, 8% of the “still-working” respondents say they are retired but working part time. Another 11% of the 65-and-older population describe themselves as still in the labor force, though not all of them have jobs.

We’ve been thinking the impact of the recession on retirement a lot lately. We are putting the finishing touches on our summer retirement issue, which will be out in early July. What’s encouraging for people who dream of spending their golden years at the golf course or on a porch sipping lemonade is that only 2% of the “still-working group” in the "Growing Old in America" survey they are retired but working full time while just 3% say they are retired but looking for work. Considering the economic downturn, those numbers seem surprisingly low. (Interviews were conducted from Feb. 23 to March 23, 2009.)

Whatever the fuzziness around these definitions, one trend is crystal clear from government data: After falling steadily for decades, the labor force participation rate of older adults began to trend back upward about 10 years ago. In the Pew Research survey, the average retiree is 75 years old and retired at age 62. (In 2002, it was 92.)

The Growing Old in America report is chock-full of data on other topics impacting the elderly, such as living arrangements, family relationships, and end-of-life wishes. Two data points that caught my eye: Respondents think old age begins at 68 while the ideal age to die is 89.

What do you think? Do you think you will be retired by age 62? If not, at what age do you plan to retire?

The background is that Q2,’09 is expected to come in 17% lower than Q2,’08, but off 17% is better than the Q1 which was off 39% and much better than the negative earnings posted in Q4,’08, which of course was the first quarter in history where the index lost money. So, if less bad is good, Q2 will be a winner. And with Q3 estimated to be down only 6% from its prior year’s comparison, everything is going by plan – at least up to then.

Q4 is where ‘getting less bad’ needs to change to ‘getting better’. Earnings recoveries are not a U turn or V curve, they decline, flatten out and then start to improve. This recovery is being fueled by a few trillion dollars extra from the stimulus programs, reduced tax withholding schedules and lower Fed rates. We are seeing positive signs of the impact, but signs will need to change to actual sales by year end.

So where does that leave Q2. Reporting a penny more or less may not be as important this quarter as it has been historically. Instead the attention will be on how you earned your money. Year over year quarterly sales have declined at a double digit pace, and this quarter is expected to be slightly down but not double digit – again ‘less bad’. The programs in place were expected to kick in near the end of the second quarter, and have a greater impact on Q3, so there should be some signs in the reporting to support that hope. If not, the market will be quick to revaluate the situation, Washington test balloons for a second stimulus package may be floated, and companies, already nervous about commitment will take another look at spending, all of which can not bode well for consumer confidence or the market.
For my full FILE please click here

http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS

The Securities and Exchange Commission unveiled its money market fund recommendations yesterday. If there is any controversy to be found, it is the whether the net asset value of a money market fund, currently pegged to $1, would be allowed to float. The reason why this is an issue is that money market funds came under intense scrutiny when the Reserve Fund "broke the buck" last fall-the value of a share fell below $1. Breaking the buck is the financial equivalent of wearing white before Memorial Day. You just don't do it.

Overall, however, the fund industry was relieved. “The big news is that there are no earth-shattering new recommendations here,” says Peter Crane, president of Crane Data and publisher of the Money Fund Intelligence newsletter.

As expected, the SEC's proposals include:

* A requirement that money market funds have certain minimum percentages of their assets in cash or securities that can be converted to cash for redememptions.

* Shortening the weighted average maturity limits for money market fund portfolios from 90 days to 60 days.

* Limiting money market funds to invest in the highest quality securities.

* Banning illiquid securities in money market fund portfolios, which can currently make up 10% of a fund.

(The SEC is accepting comment on these recommendations for the next 60 days.)

Back to the floating NAV: For the record, I haven't spoken to anyone who thinks a floating NAV is a good idea. Charley Ellis, who is a consultant to large institutional investors, is in favor of keeping a stable NAV. “Most of the money invested in market funds are at outfits like Vanguard, T. Rowe Price, and Fidelity,” he says. “They are doing a really good job.” Ellis is a director at Vanguard.

Vanguard also says the $1 stable net asset value is an integral feature of the money market fund product. "A floating net asset value would not be well-received by investors accustomed to the safety and stability of money market funds," says Vanguard spokesman John Woerth.

The proposals, if adapted, could ultimately lead to slightly lower yields for money market funds, but, overall, Crane is pleased with the SEC’s recommendations. “I’m definitely happy,” Crane said. (Then again, he was talking to BusinessWeek from a cruise ship in the Caribbean.)

Reuters writer Agnes Crane says the proposed reforms don't "go far enough considering that most people park their money (in money market funds) so they can get it out quickly if needed."

What do you think of the proposals? Should money market funds be allowed to break the buck?

This year’s race was between buybacks and dividends; for a few days it looked like executive pay might join the race, but it didn’t. Dividends payments were down 18% in the first quarter and I expect the second quarter to be down 20%, with no improvement until ‘sometime’ in 2010. Buybacks, which had easily outspent dividends for the past four and half years, and peaked in Q3 2007 at almost three times more than dividends, have fallen off 82% from that mark, with the Q1 2009 expenditure of $31 billion down 72% from the Q1 2008 expenditure of $114 billion. And the numbers are actually worse than they first appear. First, Exxon Mobil, the poster child for buybacks with 35 consecutive quarters of share count reduction, accounted for over 25% of the total Q1 buybacks – it’s always good to have money. Second, many companies only made token purchases, which were most likely used to cover options or prior agreements. And third, 83 of the issues that repurchased shares during the fourth quarter of 2008 didn’t buy any shares in the first quarter of 2009.

What’s happening here is that the need to conserve capital in the current recession, combined with the uncertainty of future cash flow, has made buybacks too high risk for most corporations. While companies may want to buy back shares to support their stock and increase EPS, their priority is insure that they have enough resources to run the business, just in case the recovery is delayed a bit.

I expect buybacks to remain weak for the foreseeable future, even as earnings improve. Buybacks are now well behind dividends in corporate priorities, and dividends are declining. The reality of buybacks is that are gone as we knew them, at least until the bad memories fade from our minds and portfolios.

For more details see my buyback release chick here

P.S. - Without buybacks supporting stocks it’s going to be hard to gain that 60.2% advance needed to break even for the decade

Washington will be looking at target-date funds tomorrow in a hearing sponsored by the Department of Labor and Securities and Exchange Commission.

These funds, which were supposed to be one-stop shopping for 401(k) investors, performed abysmally last year, raising questions about just how good target-date funds are. The hardest-hit 2010 funds lost as much as 41%, according to fund-tracker Morningstar, slightly worse than the S&P 500 index’s 37% loss. That’s a rotten result for anyone so close to retirement.

At tomorrow’s hearings, dozens of retirement experts, consultants and target-date-fund providers are slated to testify on issues that include these funds’ investments, glidepaths (that is, how they reallocate over time) and disclosures to investors.

One big issue: People think target-date funds are interchangeable based on their dates, but they’re often nothing alike under the hood. They may have widely variable equity allocations, and shift their investments based on very different models as they approach retirement. Those issues are especially important because target-date funds are considered qualified default investments, which means 401(k) participants who don't choose investments get them automatically. That means that these funds are often held by the least financially-savvy investors—and that they’re gaining assets rapidly.

Will regulatory change follow? Or will the changes come from the industry itself, which is already redesigning these funds in new ways? What would you like to see happen?

But his book offers a very different approach for individuals, who don’t have access to most of the investment managers used by Yale. Instead, Swensen recommended that individuals allocate their assets across a simple and fixed mix of six index funds (30% in U.S. stocks, 20% in real estate, 15% in U.S. Treasury bonds, 15% in U.S. Treasury Inflation Protected Securities, 15% in foreign, developed stocks and 5% emerging market stocks). Beyond occasional rebalancing, Swensen’s formula was fixed, unchanging and perfect for all. It seemed like the magic formula for investing success, according to Swensen.

One particular out-to-lunch passage struck me from the March interview, when Swensen asserted that someone following his magic formula “probably did reasonably well” through the recent credit crunch and market turmoil. That wasn’t true. The magic formula lost fully one-third of its value over the prior year, nearly as bad as the loss of the S&P 500 by itself and certainly not what people following Swensen’s advice (or reading his quote in the interview) would have expected. And so I posted my critique here.

The post has received a number of comments, most quite critical of my analysis. I posted a reply in the comments field today but I thought it was worth expanding my reply into a full-blown blog post to further the discussion.

[UPDATE: I asked Swensen if he would comment. He sent a reply that he did not want published. Needless to say, he doesn't agree with me.]

Until he wrote a book for individual investors, Swensen regularly admitted that individual investors could not follow Yale's investing program. I suspect he got tired of giving that non-answer and, to paraphrase Woody Allen in the great flick "Manhattan," let's face it, he wanted to sell some books here. And there’s really not much offered to support the magic formula’s particular allocations beyond considerations of how those kinds of assets have performed in the past.

Second, commenters like “MSS,” “Stu” and “Finn” say one year is too short a time frame to evaluate how the magic formula has done. “Ignorance Arbitrage” says it’s singularly idiotic. But the point isn’t to assess Swensen’s formula over one-year periods. Swensen himself had misstated the performance of the recent formula (without even getting into how long it would take to earn back a 32% loss). It’s critical to assess how an investment strategy performs in all kinds of markets. Swensen’s seemingly conservative strategy worked fine under “normal” market conditions but failed miserably in the bear market. We’ve also just experienced a 30-year or so trend of declining long-term interest rates and inflation in the U.S. that gave a nice tailwind to certain assets. An asset mix constructed based on returns and volatility during that period might not work so well if the next 30 years see a very different interest rate backdrop.

[UPDATE 6/18/09: Running the results of the six-fund magic formula over longer periods doesn't help Swensen's case much. If you invested $10,000 in the magic formula at the beginning of 2005, when the book came out, how much would you have 4-1/2 years later on May 31, 2009 with annual rebalancing? $10,275. That's worse than if you'd kept the whole sum in T-bills or a money market fund and virtually identical to the $10,268 you'd have investing a BENCHMARK EXAMPLE of 70% U.S. Stocks and 30% U.S. Treasuries.]

Third, commenters Lawrence Weinman and “Finn” criticize asset allocations I supposedly recommended in the post. I didn’t actually recommend any strategy, offering the performance of a simpler mix for context. We do write about that topic frequently in Businessweek and on the blog, though. Check out this post about Mebane Faber or this one looking at age-appropriate portfolio designs, for a few examples. And I recently wrote a magazine article looking at the pro’s and con’s of asset allocation funds. There are also many great blogs that cover the subject like CXO Advisory, Bespoke Investment Group and Interlake Capital.

Finally, commenter "Finn" make reference to modern portfolio theory, the efficient frontier and the benefits of diversification. These are excellent theories but they're constructed on top of numerous simplifying assumptions about how the world works. I'd suggest taking a look at some of the more recent research about how MPT has failed of late. Particularly, see what Nassim Nicholas Taleb has said. Here's a quote from a recent interview with Taleb (free registration required):

The field of statistics is based on something called the law of large numbers: as you increase your sample size, no single observation is going to hurt you. Sometimes that works. But the rules are based on classes of distribution that don’t always hold in our world.

All statistics come from games. But our world doesn’t resemble games. We don’t have dice that can deliver. Instead of dice with one through six, the real world can have one through five—and then a trillion. The real world can do that. In the 1920s, the German mark went from three marks to a dollar to three trillion to a dollar in no time.

That’s why portfolio theory simply doesn’t work. It uses metrics like variance to describe risk, while most real risk comes from a single observation, so variance is a volatility that doesn’t really describe the risk. It’s very foolish to use variance.

The comments are open for further debate!

Convertible arbitrageurs try to profit from inefficiencies in the convertible bond market. As their name implies, convertible bonds are securities that can be converted from an interest paying debt instrument into common stock. The arbitrageurs try to find convertibles that are trading for less than the implied value of the current equity. They then buy the convertible, short the common and wait for prices to normalize. The bonds got wrecked in 2008 and the historical relationship between the stocks and the bonds broke down. As a result, the average convertible arbitrage hedge fund lost 24.4% in 2008. But the convertibles market has recovered this year and the bonds are up 19.3% year-to-date (though still down 22.4% for the past 12 months).

Retail investors don't have to be shut out of the convertible game. Morningstar lists 18 convertible mutual funds and they're up an average of 16% this year. Tops is Legg Mason Partners Convertible (SCVSX), which is up 32.7% this year. In 2008, however, it plummeted 42% and is still off 23.12% for the past 12 months. Although the Miller Convertible Fund (MCFAX) is up only 14% in 2009, it lost just 19% in 2008, making it a less volatile play.

Scary, right? And while holders of the state’s GO municipal bonds will receive timely payments on the money they're owed, others may not be so lucky. From the Standard & Poor's press release:

We believe that without budget revisions, the state may need to defer (or issue registered warrants in lieu of making) cash payments for certain lower-priority obligations (such as vendors, student aid, and tax refunds) in order to preserve cash for required payments for education and debt service.

California's municipal bond investors must be feeling pretty peachy right about now. Remember, these are the same folks who gobbled up over $13 billion in tax-free, taxable, and Build America bonds issued by the state in 2009 alone. California's budget shortfall was obvious even then--so obvious, in fact, that BusinessWeek warned of a possible downgrade in our April 13 issue.

I asked Warren Pierson, portfolio manager of the Baird Intermediate Municipal Bond Fund (BMBIX), a source for that story, how he feels about those bonds now and his opinion hasn't changed. He doesn't think California will default (though the cost of insuring California's debt is rising rapidly). But the bonds are still too pricey for his liking. Even after falling 7% in the last month, the bonds are trading near face value and have room to fall further.

States are not permitted to declare bankruptcy, so investors who plan to hold until maturity will likely be fine. And the debate has already begun about how much help California should get. Is it too big to fail? Does helping California mean helping other states as well?

These aren’t academic questions. Says Pierson: "California isn’t the only state with budget problems."

(One of my colleagues was rooting for Bank of New York because "they needed it more.")

The fact that so many top-tier firms were vying for a piece of the ETF business bodes well for the industry. As BusinessWeek previously noted, it tells the world that BlackRock (and other would-be buyers) see exchange-traded funds as having a very hopeful future. Indeed, ETF guru Jim Wiandt of IndexUniverse says: "This BlackRock deal is big not just for the index/ETF industry, but the financial sector in general. It underscores just how big basis-point-linked passive assets have gotten."

As a firm, BlackRock has already done a respectable job absorbing Merrill Lynch's mutual funds. Morningstar gives it above-average scores for its domestic stock, international stock, and municipal bond funds. Wiandt says that, on paper at least, "it’s a marriage made in heaven, with BGI in a dominant position where BlackRock is mostly absent: ETFs and institutional indexed asset management."

Will BlackRock be a good steward of the ETF business? What do you think?