MoneyNews
Tuesday, Feb. 14, 2006

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(Headlines - scroll down for full stories)
1. Mandatory 401(k) Enrollment on the Way?
2. Oil Prices Distort Huge Corporate Earnings
3. Retail Sales Gains Biggest Since 2004

1. Mandatory 401(k) Enrollment on the Way?

A number of giant Wall Street investment firms are aggressively lobbying Congress to allow them to provide investment advice to corporate owners of 401(k) plans.

But they're running into a brick wall - in the form of Senator Charles
Grassley (R-Iowa), the chairman of the Senate Finance Committee.

Grassley says the motives of investment houses like Fidelity and Goldman Sachs are suspect and that they are only angling to make themselves richer, under the guise of proffering investment advice.

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"They want to be able to recommend their own investment funds or other
funds from which they receive compensation," Grassley told Bloomberg News on Monday.

"That is often little more than a legal kickback."

The good news for investment firms is that newly installed U.S. House Majority Leader John Boehner believes that legislation allowing investment companies to give 401(k) advice would be a boon to investors.

"The Ohio Republican says allowing fund managers to offer advice would
provide employees ' with access to a qualified investment adviser who can inform them of the need to diversify and help them choose appropriate investments,' " says Bloomberg.

The news service also reports that the proposed legislation could be tied in to a larger measure that would make it easier for companies to automatically enroll employees in 401(k) programs.

Bloomberg estimates that such a law, if passed, would be worth $1.8 trillion to financial-services companies. The House is scheduled to meet later this month to debate the two proposals.

While 401(k) plans are growing in volume and stature in U.S. corporations, not everybody enrolls in them. According to the newsletter Fidelity Investor, 401(k) plans are offered to 52% of the U.S. workforce, or 105 million workers. But the newsletter says that only 74% of those eligible actually enroll.

The Bloomberg story also reports that a June 2005 study by Hewitt Associates states that currently only 19% of U.S. businesses automatically enroll employees in a 401(k). More employers would like to do it, but many states prohibit such practices without employees' consent, because of state laws banning paycheck deductions without the worker's approval.

In 2005, both houses of Congress passed legislation that would eliminate such restrictions in 31 states.

According to Bloomberg: "Both House and Senate measures would require companies that choose auto-enrollment to put 3% of their employees' salaries into 401(k)s and increase the contributions by 1% a year to a ceiling of 10%."

"They also would require employers to match 50 cents for each dollar invested, up to a maximum of 6% in the House version and 7% in the Senate measure. Employees could opt out of the plans."

But the advice component seems to be a hang-up for lawmakers.

The proposal before the House would jettison a 2001 Labor Department ruling allowing fund managers to provide advice only if they use independent contractors to do so.

The 401(k) advice market is a lucrative one. Fidelity Investor estimates that should the government pass legislation allowing investment companies to give 401(k) advice, the market would be bumped up from $200 million today to $1 billion by 2009.

2. Oil Prices Distort Huge Corporate Earnings

Standard & Poor's reports that in 2005, American corporations averaged 13.2% in earnings.

At first glance, news that U.S. corporate earnings are soaring seems positive for both the economy and the chances that Republicans will maintain Congressional power in November's elections.

But a closer look reveals that the enormous profits generated by the U.S. oil industry over the last few months may be skewing that picture.

ExxonMobil alone earned $36 billion in profits last year - a record amount for American companies.

Matt Krantz, writing in Monday's USA Today, says that when oil revenues are taken into account, the U.S. corporate earnings environment isn't as amazing as it seems.

"While corporate earnings are in the midst of a record-breaking streak of double-digit growth, the historic profits reported by the energy industry thanks to the soaring price of oil are a big reason why," writes Krantz.

Next, Krantz does the math - and has conclusion is revealing.

"Take out the contribution from energy companies, and that (13.2%) growth shrivels by a third to a less impressive single-digit number of 8.9%," he writes.

USA Today says that "the energy sector's earnings are expected to grow by 57% in the fourth quarter and 45% in the current quarter, dwarfing the 14.1% and 11.1% comparable growth for the S&P 500."

The next-highest-ranked growth sector is the health care industry, which is expected to blossom by 21% this quarter, according to Standard & Poor's.

Overall, the energy sector should account for 14% of the S&P 500's earnings in 2006, although it accounts for just 9.7% of market value.

The disturbing news for U.S. companies and the White House is that energy profits could begin to slide later in 2006.

" 'Analysts currently expect energy's contribution on earnings to fade in 2006,' says Dirk Van Dijk, research chief at Zacks Investment Research," writes Krantz.

"But that's changing as some have upped estimates for energy earnings this year," he says.

But this would not be good news for the American economy, say others.

"Every time energy prices triple, we have a major recession in 1½ to 2 years," says Peter Beutel, president of energy research firm Cameron Hanover.

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3. Retail Sales Gains Biggest Since 2004

Among other factors, a spike in car purchases and the use of holiday gift cards brought retailers their biggest sales gains in almost two years.

Bloomberg reports a 2.3% rise in retail sales, which "was more than double economists' forecast and followed a 0.4% increase in December," according to a Wednesday report from the U.S. Commerce Department.

This fifth straight gain is attributed to robust job growth and a drop in unemployment, the news service says, as "earnings rose last month from a year ago by the most since February 2003, and the stronger consumer spending will help the economy snap back from its worst quarterly performance in three years, economists said."

"The consumer is in pretty good shape," said David Abella, portfolio manager at Rochdale Investment Management, as the warmest January in over a hundred years generated sales of building materials, furniture and clothing.

According to the article: "Economists expected sales to rise 0.9%, after an originally reported 0.7% gain in December, according to the median of 71 forecasts in a Bloomberg News survey. Estimates ranged from 0.3% to 1.5%. Excluding autos, sales were expected to rise 0.8%, according to the Bloomberg survey."

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