By Rick Glaze

Rick Glaze

Q:At a party recently, people were talking about spiders as some sort of stock. Is a spider a stock or possibly a mutual fund?

A: A spider is part of a group of investment vehicles called exchange traded funds (ETF). Each ETF is a fixed basket of stocks. A group of stocks is selected and the list changes only when corporate events, like a merger or acquisition, make it necessary. So effectively, they are not managed. The securities trade just like stocks in the market but represent sectors in the economy like health care, energy or retail.

If retail stocks look attractive; you no longer have to choose one or two individual stocks in that sector. With a retail ETF you can buy the whole group. ETFs are quite a bit different from mutual funds. One difference is that the funds in the basket you own are always changing and many funds may start to look alike, even though they began differently. That is what happened at the end of the last bull market.

As fewer and fewer stocks were going up, many large funds concentrated in only a few areas. ETFs make it possible to have both wide diversification and a distinct portfolio.

Q: Are dot-com stocks going to recover?

A: Many like Webvan have had the cover pulled over them as the casket was nailed shut. Some of those expanded too fast, borrowed too much and spent too much. Survivors must deal with the business reality of building a brand, meeting customer needs and competition from rivals. Some will succeed but it will be a risky place to invest for both normal investors and professionals.

Q: What can the president or Congress do to make the economy better?

A: The government has a few tools in its toolbox to help the economy. Lowering short-term interest rates has proved to be effective in the past. It is generally believed that lowering tax rates can pump more money into the economy when companies use the money to invest in equipment and new plants or hire more people. There is an unfortunate misconception in Washington that the government can cure all ills; but the economy is like waves in a large swimming pool.

The government can make sure the filters work and the lawn chairs are straight but when they start trying to direct the waves they are out of step with the true nature of the economic flow.

Q: I have read that we are in a recession. However, it doesn’t seem that bad. Why is that?

A: Low interest rates and falling energy prices have really helped soften the blow of this recession by providing more spendable income in the hands of consumers. This in turn has led to strong spending on things like appliances, electronics and automobiles.

Zero percent financing doesn’t hurt either. Consumer spending makes up almost two-thirds of the country’s economic output. In the early 1990s, California was so dependent on aerospace and defense that the severe reduction in defense spending led to the deep recession during that period. This time around, we expect to recover faster. However, California has been more severely impacted by the economic slowdown than most other parts of the country. Multiple effects of the dot-com bust, the energy crisis and out-of-control spending in Sacramento have put the state in a much weaker place going into the recession. State spending is up 35 percent in three years but inflation is up less than 6 percent for the same period.

Send your investment related questions to the Town Crier for inclusion in this column. Rick Glaze is president of Glaze Capital Management Inc. in Los Altos, an investment advisor to individuals. For information, logon to www.glazecapital.com.