No Student Left Behind? The Daily Reckoning - Weekend Edition
September 2-3, 2006
Baltimore, Maryland
By Kate "Short Fuse" Incontrera VIEWS FROM THE FUSE: NO STUDENT LEFT BEHIND? Debt. It's been a major them in not just these pages, but all over the
more "mainstream" press lately. And with good reason. But there is one
aspect of the debt monster that is often overlooked: student debt. If you have put your child (or children) through college, you can attest
to the fact that a college education is expensive - to say the least.
Adjusted for inflation, tuition and fees at public universities have risen
by 40 percent in the past five years. Even worse, if you look at college
tuition over the past 30 years, you'll see that it costs around triple of
what it did in the 1970's. That said, it is nearly impossible for the average American to attend a
four-year university without some sort of financial aid. AlterNet's
article, "Student Debt Crisis: Are There Any Solutions?" shows that
"between 1993 and 2004, the percentage of students needing to borrow money
jumped from 46 to 66 percent. Debt for graduates averages around $19,000
across public and private schools. Ten years ago, public school borrowers
needed about $8,000. Now they borrow about $17,250 - a 65 percent
increase, adjusted for inflation." Student loans are a double-edged sword. While you are getting the money
you need to obtain a degree, you'll be paying for it for years to come -
and for some it will take the rest of their adult life to dig their way
out of student loan debt. "2006 has been the worst in history for government action against student
borrowers," continues the article. "In February, President Bush rolled out
the Deficit Reduction Act, which cut $12 billion in federal student aid
money. Part of the plan includes a hike in interest rates on federal
student loans and loans taken out by parents. The interest rate on
Stafford Loans to students rose from 5.3 percent to 7.14 percent on
existing loans and to 6.8 percent on new loans. Interest rates for Parent
Loans for Undergraduate Students (PLUS) loans increased even more
dramatically, from 6.1 to 7.4 on existing loans and to a whopping 8.5
percent on new loans." Once you add these rising interest rates to the equation, you have a
situation not unlike the one we are seeing in the real estate market right
now. But instead of defaulting on a mortgage payment and losing your home,
students are finding it more and more difficult to complete or even begin
their college education. Like with most things, this has an interesting trickle-down effect. Toby
Chaudhuri with Campaign for America's Future estimates, "In the next
decade, over 4.4 millions low- and moderate-income academically qualified
students will opt not to enroll in four-year university degree programs,
and another two million will opt not to enroll in higher education at
all." To try and dissuade prospective student from writing off a college
education all together, places like the Interboro Institute step in.
Interboro is one of the largest, fastest-growing profit-making colleges in
the state of New York. They see to give low-income students who have not
graduated high school an opportunity to earn a high school equivalency
degree in 16 months. While this sounds like a nice plan, a closer look at this institution
shows something else. In late July of this year, a class-action suit was
brought up against Interboro's parent, EVCI Colleges Holding Corporation.
The New York Times reports: "The complaint, filed in Federal District Court in the Southern District
of New York, alleged that cheating in determining whether students were
eligible for federal and state financial aid was routine, not unusual, and
that the company dismissed employees who failed to meet quotas in
enrolling students. "The complaint also quoted former employees as saying that admissions
workers routinely changed answers and scores on completed exams used to
determine whether students were eligible for federal and state financial
aid, which accounted for more than 90 percent of Interboro's revenue." While EVCI denies these allegations, most people can put two and two
together. Similar to waving an adjustable-rate mortgage under the nose of
a pizza delivery boy, EVCI has been accused of "exploiting economically
disadvantaged students for personal gain." Sound a bit familiar? Think of all the Americans who had no business
getting involved in the real estate market to begin with - the "subprime
borrowers" - but were given the opportunity to buy a home with no money
down. In round numbers, half the people who bought a house last year have
negative equity. As the housing bust deepens, their equity is going to get
more and more negative every month. But it's not just recent buyers who have negative equity. With the
refinancing boom, millions of long-term owners have borrowed all the
equity out of their homes. Americans have treated their homes like piggy
banks, taking the money out and spending on frills. This will not end well
for a large portion of our country.
Short Fuse
The Daily Reckoning P.S. Ever since the Enron debacle, you can't open up a newspaper without
reading about some CEO cooking the books - and now a scandal is permeating
the real estate market as well. Folks who refinanced a year or two ago are
finding out their homes are worth less than the appraised value. All over
the country, appraisals have been inflated by lenders eager to make loans
and real estate agents eager to close the deal whatever it takes. Get all the fact here, and find out how you can protect yourself: The Great Appraisal Scandal
http://www1.youreletters.com/t/405305/11596750/793075/356/ --- Daily Reckoning Book Of The Week --- Going Broke By Degree: Why College Costs Too Much
by Richard Vedder Richard Vedder is distinguished professor of economics at Ohio University
and an adjunct scholar at the American Enterprise Institute. Trained as an
economic historian, much of his work has dealt with the history of
American labor markets and issues such as immigration, internal migration,
slavery, and unemployment. After serving as an economist with the Joint
Economic Committee of Congress, Mr. Vedder focused on public policy issues
dealing with labor markets and governmental budgetary policy. In the past
decade he has worked on issues relating to education at both the
primary/secondary and university levels. In this book, Mr. Vedder examines the causes of the college tuition crisis
and explores ways to reverse this alarming trend. You can purchase your
copy by clicking here: Going Broke By Degree
http://www.amazon.com/exec/obidos/ASIN/0844741973/dailyreckonin-20/ --- Advertisement ----
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richer - Five Times RICHER! 11 Companies That Can Suck Profits From Big OIL and Add Big Bucks To YOUR
Bank Account http://www1.youreletters.com/t/405305/11596750/794353/280/ ------------------------ THIS WEEK in THE DAILY RECKONING: Take a time-out from preparing for your
holiday weekend and catch up with what you may have missed in The Daily
Reckoning this week… Family Business, Part II - 09/01/06
by Bill Bonner Money, sex, and hair loss are taboo subjects in our household. They are
all things about which a middle-aged man thinks often, but rarely
speaks."
http://www.dailyreckoning.com/Issues/2006/DRUS090106.html Illusions of Prosperity - 08/31/06
by James Turk "As the dollar suffers one of the great meltdowns in monetary history,
gold will reclaim its place at the center of the global financial system,
and its value, relative to most of today's national currencies, will
soar."
http://www.dailyreckoning.com/Issues/2006/DRUS083106.html The Four Phases of Transition - 08/30/06
by Byron W. King "'In the face of Peak Oil and its multiple consequences…it seems
imperative to get prepared to face all the inevitable shock waves. Every
preparative step taken today will prove far cheaper than any step taken
tomorrow.'"
http://www.dailyreckoning.com/Issues/2006/DR083006.html Weather Windfall - 08/29/06
by Kevin Kerr "Money may not grow on trees, but oranges do, and this year, being long
orange juice futures, or options on juice futures, could be as good as
money."
http://www.dailyreckoning.com/Issues/2006/DRUS082906.html Financial Mouse Trap - 08/28/06
by The Mogambo Guru "'I equate fiat currency like a mouse trap. The easy credit and instant
gratification it gives you is the bait. The bar that is sprung when the
bait is taken is called inflation.'"
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------------------------ FLOTSAM AND JETSAM: If You Want to Outperform the Market…
by Chris Mayer Super investor Anthony Bolton once said: "If you want to outperform other
people, you have got to hold something different from other people… the
one thing you mustn't hold is the market itself." This is a timeless bit of investment wisdom that the great investors all
embrace. Yet in the mutual fund industry, you find many "closet indexers."
A closet indexer is someone who runs a mutual fund that is not an index
fund - nor does it bill itself as an index fund - yet to a large degree,
its portfolio matches an index (such as, say, the S&P 500). So here you are, as a mutual fund investor, handing over your funds -
presumably so a human being will intelligently and thoughtfully manage
them - yet many mutual funds barely escape being index funds. And you are
paying extra for this, mind you. Actively managed funds charge much more
in fees than index funds. A pair of Yale professors created a statistic, called the "active share"
of a portfolio, which measures how much of a portfolio matches up against
an index. So if you have a portfolio that is essentially a replication,
with minor modifications, of the S&P 500 (let's say), then your "active
share" score will be low. Also, the measure accounts for the weighting of your positions. So even if
you own ExxonMobil, which accounts for 4% of the S&P 500, it could still
raise your active share ratio if it makes up 9% of your fund, for example.
You get a high active share rating by doing two things: owning different
stocks and/or owning different amounts of those stocks. Those who make big
bets - like Bolton - would earn higher active share scores. So-called closet indexers, those with scores between 20-60%, made up about
one-third of all mutual funds in 2003, up from practically zero in the
1980s. In other words, it seems that stock picking is becoming a lost art.
The trend is for more and more funds to largely mimic an index. Which sort
of brings up the question why invest with these people at all? Might as
well shove your money in an index fund. Well, not all fund managers have such low active share measures. In fact,
most of the best investors have very high active share numbers. The Legg
Mason Value Trust, run by Bill Miller, has an active share reading of 85%.
That is a high ratio. Of course, Miller has beaten the S&P 500 for
something like 15 years running - though that streak is in jeopardy this
year. The Fidelity Low-Priced Stock Fund, another top performer, also had
a high reading, 90%. Interesting, too, that great money managers of the past also had high
active share ratios. Peter Lynch, when he was running the legendary
Fidelity Magellan Fund in the 1980s, routinely had active share readings
of between 70-90%. Lynch is particularly interesting, because a common criticism of Lynch -
even among those who are otherwise market savvy - is that he had a big
fund that "owned the market" and was fortunate to exist during a great
bull market. The Yale study, however, indicates otherwise and confirms the
conventional wisdom: Lynch was a great stock picker. (However, it is true
that later in the decade, the fund's active share readings plunged to the
mid-50%s as the fund ballooned and its performance lagged. Lynch left in
1990.) Finally, the active share measure seems to have some predictive power.
That is to say, those who have high active share readings tend to beat
those who don't. Stock picking is a skill, after all. Some other funds with active share readings above 95% include the
Brandywine Fund, Longleaf Partners and CGM Focus - all with long track
records of top performance. All of this affirms the old wisdom - if you want to beat the market, you
are going to have own something other than the market. Editor's Note: Christopher Mayer is the editor of Capital and Crisis and
Mayer's Special Situations. Chris began his career in corporate banking
after earning an MBA with a concentration in finance. He later started
Capital & Crisis, a monthly newsletter that gave Chris' unique brand of
financial commentary a more regular and expanded format. To read his latest report, see here: Mayer's Special Situations
http://www1.youreletters.com/t/405305/11596750/791428/314/ ------------------------------------------------------ | 
