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The Wall Street Journal Education Program Weekly Review & QuizCovering front-page articles from Feb 24 – March 2, 2007Professor Guide with Summaries Spring 2007Developed by: Scott R. Homan Ph.D., Purdue University

Questions 1 – 12 from The First Section, Section A

States Set Big Spending Plans As Washington Preaches AusterityBy CHRISTOPHER COOPERFebruary 24, 2007; Page A1http://online.wsj.com/article/SB117226890441117724.html

Washington may currently be focused on fiscal austerity. But a major spending spree is shaping up in the states, as local legislators abandon a half-decade of fiscal conservatism to pursue bigger budgets.From New York to Montana to California, states are proposing budget increases that outpace inflation and far exceed the 1% rise in domestic outlays -- outside of defense and homeland security -- that President Bush recently proposed in his fiscal 2008 federal budget. In Montana, Gov. Brian Schweitzer is cutting taxes and boosting spending by 26% over two years, including $100 million for new "meth prisons" that blend incarceration with intensive drug rehab for those convicted of methamphetamine crimes. In Vermont, Gov. Jim Douglas wants to borrow $40 million to create "the nation's first e-state," where free wireless broadband is available to all. And in Arizona, the only dispute between a Democratic governor and a Republican legislature over a half-billion-dollar road-repair program is whether to borrow the money or pay cash.The binge is bipartisan. Last year, the Massachusetts legislature approved a $1.56 billion universal health-care plan under Republican Gov. Mitt Romney, who is now running for president. This year, at least ten states -- most notably Republican Arnold Schwarzenegger's California -- are weighing similar programs.But that's just one of many areas where state governments are seeking to expand services that were long considered distant dreams by advocates. Universal prekindergarten is being championed by several incoming Democratic governors, such as New York's Eliot Spitzer, Deval Patrick of Massachusetts and Mike Beebe of Arkansas. Democratic leaders in Colorado and Pennsylvania and several other states want to create funds for state "energy independence." Many of these proposals will be topics of conversation at the National Governors Association's annual meeting, which begins in Washington today.The new state activism is driven in part by the Bush administration's budgetary focus on Iraq, defense and homeland security, which leaves states to grapple with domestic concerns on their own. Higher tax receipts and growth in energy royalties, from higher oil and natural-gas prices, have also left many states flush.But even states faced with declining revenue are mulling ways to ramp up spending -- not with unpopular tax increases, but by privatizing valuable public assets in return for big slugs of cash. Michigan and Illinois, among others, are looking at selling off their lotteries, while Missouri is considering doing the same with its student-loan portfolio.

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The growing popularity of health-care programs and higher teacher salaries raises the risk that states, giddy from surging revenue, may be in danger of expanding beyond their means, using short-term windfalls to create new long-term obligations at a time when tax increases remain unpopular with voters.It was just a few years ago that states last found themselves in financial dire straits. In the early 2000s, many state governments were hit hard by recession and constitutional requirements to balance budgets. Reluctant to unwind fresh tax rollbacks, states were forced not only to cease creating new services but also to cut back on many basics, such as road repairs and prisons. In 2003, the National Governors Association reported that states collectively were undergoing the worst budget crisis since World War II.Even after their economies and revenue streams recovered in the middle part of the decade, state governments concentrated on building surpluses and kept spending relatively in check. But now, many states are returning to their old ways: along with spending more, several governors are proposing hefty tax cuts as well.Like many governors, Arizona Democratic Gov. Janet Napolitano faced a looming budget shortfall -- $1 billion in her case -- when she took office in 2003. Now, thanks to strong economic growth, surging sales-tax revenue and low unemployment, the state has $650 million in reserves. For fiscal year 2008, Ms. Napolitano has proposed a $10.4 billion budget that calls for a 6.9% increase in spending on top of the 18% increase last year.The extra money allows Ms. Napolitano to put tens of millions of dollars toward her priorities: pay raises for teachers, 12% more for state universities, and $60 million for projects to train and attract high-tech workers and businesses. "Somewhere out there is the next Microsoft," Ms. Napolitano said. "I'd just as soon that it be in Phoenix or Tucson."Montana's Mr. Schweitzer, who also faced an austere outlook when he first took office, is now enjoying a $1 billion surplus, largely due to higher tax revenues on capital gains and energy production. As he sees it, states spend nearly all of their money to "educate, medicate and incarcerate." His two-year, $7.7 billion budget boosts spending on all three. Legislative analysts peg the budget increase at 26%; Mr. Schweitzer excludes the rainy-day fund and payments towards pension obligations and says the jump is closer to 13%.The state's prison system will see one of the largest increases. Mr. Schweitzer says Montana leads the nation in the per-capita number of citizens incarcerated. Because the vast majority of those are for drug-related crimes, he's proposing a program that would marry the state's prison system with its Department of Health.

1. The new state spending is driven bya. privatizing valuable public assets for small amounts of cash b. Bush’s policies that leave states to grapple with domestic concerns on their own Correctc. declines in energy royalties have left states flush with fundsd. All of the above


2. Some states are considering spending on a. "meth prisons" that blend incarceration with intensive drug rehab for those convicted of methamphetamine crimes b. universal prekindergartenc. universal health-care plansd. all of the above Correct

Policy Makers At Fed Rethink Inflation's RootsBy GREG IPFebruary 26, 2007; Page A1http://online.wsj.com/article/SB117245624842818971.html

For decades, a simple rule has governed how the Federal Reserve views the nation's economy: When unemployment falls too low, inflation goes up, and vice versa.But Fed officials have rethought that notion. They believe it takes a far bigger change in unemployment to affect inflation today than it did 25 years ago. Now, when inflation fluctuates, they are far more likely to blame temporary factors, such as changes in oil prices or rents, than a change in the jobless rate.One explanation for why inflation is influenced less by changes in unemployment is that the American public has come to expect inflation to remain stable. When inflation moves up or down, it is less likely to get stuck at the new level because companies and workers don't factor the change into their expectations -- or their behavior. Another explanation is that the Fed is better at adjusting interest rates in anticipation of swings in unemployment before those swings can affect inflation.This new view of the economy, formed in recent years, helps explain why the Fed stopped raising interest rates last summer while core inflation, which excludes food and energy prices, was rising. And it helps explain why the Fed is reluctant to cut rates now even though it sees inflation edging lower over the next two years.The new view "has profound implications," says former Fed economist Brian Sack, now at Macroeconomic Advisers, a St. Louis-based forecasting firm. That doesn't mean unemployment can be ignored. But it does mean that in the short run, a period of high or low joblessness would be less likely to alter the Fed's view of inflation and trigger an immediate change in interest rates. A shift in public expectations of inflation, however, would carry more weight in the Fed's calculations.In the late 1950s, economists discovered a tendency for inflation to rise when unemployment was low and to fall when unemployment was high. At lower unemployment rates, they concluded, companies paid more to attract scarce workers and recouped the higher wage costs by raising prices. This relationship was shown on a chart called the Phillips Curve, after Alban William Phillips, one of the first economists to identify it.In the 1960s, American presidents and Fed officials sought to exploit the Phillips Curve by letting inflation edge higher in exchange for lower unemployment. But in the late 1960s economists Milton Friedman, who died last year, and Edmund Phelps, both of whom would later become Nobel laureates, independently deduced that the reduction in unemployment would be temporary.



Once workers began to expect higher inflation, they would want higher wages. In the long run, the economists argued, unemployment would gravitate to some "natural" level no matter what inflation did.Although economists concluded there wasn't a long-run tradeoff between inflation and unemployment, they still believed there could be a short-run tradeoff. From 1979 to 2003, Fed Chairman Paul Volcker and his successor, Alan Greenspan, exploited this idea, periodically using interest rates to push unemployment higher to achieve lasting reductions in inflation.But even as they were doing so, the short-run impact of unemployment on inflation began to diminish. Though the trend has been under way for 25 years, only recently has intensive research by Fed economists and others incorporated it into mainstream thinking. The new thinking on inflation will be the subject of a March 9 conference in Washington that brings together Wall Street Fed watchers, academics and Fed officials."Among the feet-on-the-ground Fed inflation forecasters, who do this for a living, there's been a lot of concern for the last 10 years about whether there's...less of a relationship between output and future inflation," says Harvard University economist James Stock. "The accumulation of evidence occurs at a snail's pace. The evidence now is a lot stronger."Mr. Stock and fellow economist Mark Watson at Princeton University presented evidence to a Fed conference in late 2005 that inflation's long-term trend has varied little since 1984, and that most fluctuations were the result of temporary disturbances, such as a change in energy prices.Indeed, when core inflation rose last year, the Fed blamed higher rents and oil prices, rather than an overheating economy. It appears to have been right: As energy prices have come down and rent increases moderated, so has core inflation.Core inflation, now running at a 2.2% rate by the Fed's preferred measure, remains higher than the 2% ceiling most Fed officials are comfortable with. But Janet Yellen, president of the Federal Reserve Bank of San Francisco, noted earlier this year that over the past decade, when inflation has drifted away from the 1.75% to 2% range, it has later reverted to it. For this reason, it "may move down from its elevated level faster than many forecasters expect."Fed Chairman Ben Bernanke echoed that sentiment earlier this month, saying the public's expectations will determine whether temporary factors like changes in rents and oil prices "leave a lasting imprint" on inflation: "It is encouraging that inflation expectations appear to have remained contained," he said.Mr. Phelps says the new thinking on the Phillips Curve doesn't change the implications of his Nobel-winning work. If the Fed never responded to higher inflation, consumers and businesses eventually would begin to expect higher inflation, and "then the game is up."Fed officials agree. While a given drop in unemployment is less likely to spark inflation, the potential is still there. The Fed's staff estimates it takes up to twice as much additional unemployment to achieve a percentage drop in inflation as it did before 1984. "Imbalances between demand and potential supply [may] be slow to show through convincingly to inflation, but when they do, they may be costly to correct," Fed Vice Chairman Donald Kohn said in late 2005.That's one reason the Fed, though it expects core inflation to ease this year, isn't relaxing. With unemployment currently 4.6%, at or below the Fed's view of its natural rate,


inflation may edge up after the temporary impacts of energy and rent subside. That could require the Fed to raise interest rates enough to push unemployment up sharply and bring inflation down.

3. For decades, a simple rule has governed how the Federal Reserve views the nation's economy: When ________, and vice versa.a. unemployment goes up, inflation goes up b. unemployment goes up, inflation goes down c. unemployment falls too low, inflation goes up Correctd. unemployment falls too low, inflation goes down

4. Mr. Stock and fellow economist Mark Watson at Princeton University presented evidence to a Fed conference in late 2005 that inflation's long-term trend has varied little since 1984, and that most fluctuations were the result of ______.a. the economy of Europe b. the economy of China c. long term changesd. temporary disturbances Correct

Immigration Crackdown Targets Bosses This TimeBy BARRY NEWMAN February 27, 2007; Page A1http://online.wsj.com/article/SB117226355698617645.html

GUILDERLAND, N.Y. -- Early in April of 2005, a man whose friends knew him as César went looking for a job at a wholesale distribution hub near this upstate village. At a workshop run by IFCO Systems North America Inc., the nation's biggest recycler of wooden pallets, César let the boss know that he was in the country illegally, but would be trying to buy some fake "papers.""That will work," said Robert Belvin, the 42-year old IFCO site manager.What Mr. Belvin didn't know was that César was an undercover informant working for federal immigration enforcers. Or that he was wearing a wire.The conversation -- and many others César recorded -- helped build a case that is the biggest test so far of a heavily touted government campaign to control illegal immigration.A year after César went to work, agents from the Immigration and Customs Enforcement bureau pounced on 52 IFCO workshops in 26 states, arresting 1,187 foreigners. Unlike raids on many other companies -- including December's arrests of 1,282 workers at Swift & Co. -- the motivation for the raid on IFCO wasn't to catch foreigners. It was to catch the Americans who hired them. Seven IFCO middle managers were also arrested that day and charged, in identically worded complaints, under the same felony statute that punishes human smuggling. Five of them, people familiar with the case say, are expected to plead guilty today in the U.S. District Court for the Northern District of New York.Neither the company nor its top executives were named in the complaints, which allege that the managers "knowingly conspired with others" to transport, harbor and support undocumented workers for "commercial advantage or private financial gain." But the



investigation isn't closed. Like any ICE operation today, one immigration official says, the objective is "to move up in the organization."In 2005, the Department of Homeland Security announced that instead of imposing small fines for sloppy paperwork, its immigration-enforcement branch would flush out "egregious" employers and put them in jail. That demands proof and police work -- including undercover informants and secret recordings -- more common to drug busts than immigration audits.Since ICE's creation in 2003, employer arrests have leapt from 25 in 2002 to 718 in 2006. Only last week, ICE arrested three executives of a Nevada-based janitorial service with national reach. But successful prosecutions have so far largely been limited to smaller labor contractors, restaurant owners, and a company putting up a fence on the Mexican border.IFCO's parent, IFCO Systems NV, by contrast, has world-wide sales of nearly $650 million. Registered in Holland and managed out of Houston and Munich, it promotes itself as a smoothly run system, listing Target Corp., Cargill Inc. and Dell Inc. among many corporate customers. Repairing pallets -- the rough frames that carry goods from factory to warehouse -- is tough work. Up until last April, most IFCO pallet workers were Hispanic.It was easy for ICE to swoop down on those working illegally. To accuse their bosses of a conspiracy, punishable by prison terms of up to 20 years, was a far greater task. The clues ICE collected, as disclosed in the complaints filed in federal court in Albany, resulted from a combination of lucky tips and accidents. The evidence was backed up by local police work, aggressive surveillance, and the unusual involvement of the Social Security Administration.IFCO maintains that nothing points to illegal immigration as part of its formal business model. "We deeply regret that we had even a single ineligible worker on our payroll," the company said in a written statement. The company declined to comment further on the case.The government claims that the immigration status of more than half of IFCO's 5,800 workers in the U.S. was suspect. It is unclear whether the U.S. Attorney in Albany, who is supervising the case, will bring charges against higher-level IFCO executives.Still, the government's intrusive new style has petrified other companies that rely on foreign labor. "Everybody thinks these are show trials," says Amy Peck, an immigration lawyer in Colorado who represents corporate clients. "And at the same time, we're scared to death about what's going on."

5. Since ICE's creation in 2003, employer arrests have leapt from 25 in 2002 to ____ in 2006.a. 118 b. 418c. 518d. 718 Correct

6. The Immigration and Customs Enforcement bureau has increased arrests of _____.a. employers who hire illegal workers Correctb. persons who transport illegal workers


c. family members of illegal workersd. children of illegal workers

After a Rough Morning, A Data Backup Jolts The Blue-Chip AverageBy SCOTT PATTERSON, AARON LUCCHETTI and RANDALL SMITHFebruary 28, 2007; Page A1http://online.wsj.com/article/SB117262349120221401.html

The stock market was having a bad day and, briefly, it looked even worse.Spooked by a selloff of Chinese shares, the Dow Jones Industrial Average started the day under pressure. By midday, the average of 30 blue-chip stocks was already down around 200 points, and it continued to slide through early afternoon.Suddenly, at about 3 p.m. Eastern time, the Dow industrials fell out of bed, logging one of their fastest declines in history. Behind the abrupt 200-point plunge: a glitch in the mechanism that calculates the average."The system fell behind," said Mike Petronella, president of Dow Jones Indexes, which is owned by Dow Jones & Co., the publisher of The Wall Street Journal.The result briefly made a tough day look like an investor's bad dream.Until around 2 p.m., the three leading barometers of the nation's stock market -- the DJIA, the Nasdaq Composite Index and the Standard & Poor's 500-stock index -- tracked each other downward, with the Nasdaq performing a tad worse than the other two.Then, they parted company.Over the next hour, the Nasdaq and S&P started declining more sharply than the Dow. At 2:59 p.m., the Dow suddenly caught up. Within minutes it was down 4% on the day, roughly matching the performance of its two major counterparts.Behind the scenes, the team that compiles the DJIA had noticed at about 2 p.m. that heavy trading volume was overwhelming the system, creating a data backlog that was affecting all of the Dow Jones indexes.The Dow's component stocks were falling, but -- improbably -- the Dow average wasn't falling as much. Just before 3 p.m., the team switched over to a backup computer system. Almost immediately, the Dow caught up, tumbling 200 points, for an eye-popping plunge on the day of more than 500 points.On Wall Street, the benchmark's dizzying descent set off a frantic guessing game, with traders speculating about whether it was caused by a trading glitch, a single giant computerized trade or a torrent of forced selling into a market that lacked buyers.Mike Driscoll, a senior stock trader at Bear Stearns Cos., said he was on the phone around 3 p.m. when the market tanked. "As I'm looking, the market goes down from 250, 260 to down 550 in a heartbeat," Mr. Driscoll said. He quickly theorized -- more or less correctly -- that the sudden downdraft was caused by a backup in reported trading prices on a day of exceptionally heavy trading. When the backup cleared, Mr. Driscoll said, "the dam broke."Mr. Driscoll said that traders who had been bidding for stock at prices $1 below the last sale suddenly had their bids hit, and quickly absorbed losses as prices continued downward. "People were bidding for stocks and all of a sudden they got plugged," he said.



Adding to the confusion, the New York Stock Exchange's new hybrid electronic trading system was overloaded as investors frantically tried to buy and sell shares. The NYSE is now investigating what happened, including whether the Dow Jones problem played a role in the exchange's woes, and what might be done to prevent another trading traffic jam.Mr. Petronella blamed the problem with the DJIA on a Dow Jones computer system that feeds data to another system that calculates the Dow average and indexes every few seconds and distributes them to the public.The glitch affected all of Dow Jones's roughly 400 real-time indexes. Futures contracts tied to the Dow Jones indexes weren't affected, Mr. Petronella said, because those contracts are usually calculated by exchanges, such as the American Stock Exchange and the Chicago Board of Trade.Investors who bought or sold shares of the main exchange-traded mutual fund that tracks the Dow -- the Dow Diamond -- probably didn't get erroneous prices because its share price is based on the actual prices of the Dow's 30 stocks, not on the average itself.In fact, the price of the Dow ETF fell faster than the average for nearly an hour before the fix was made to the Dow industrials data.After the Dow problem was resolved, other woes bedeviled traders. About a half hour before the closing bell rang at 4 p.m. Eastern time, traders reported having problems sending electronic buy and sell orders to the NYSE, which recently began converting to a largely electronic system.At one post on the floor, traders resorted to writing buy and sell orders on a dry-erase board. Most of the letters next to the stock symbols said "S," for "sell.""Go manual if you can," said Art Cashin, a longtime floor broker for UBS, to traders at about 4 p.m. "Take paper if you have to."Traders were still negotiating stock closing prices 10 minutes after the 4 p.m. close. "You're done, 50 grand at 74.20," Michael Rutigliano, a floor broker at the NYSE, yelled into his headset shortly after the markets were supposed to have been closed.Mr. Rutigliano reflected the frustration floor traders are feeling these days, as their role becomes diminished by the electronic age. "We were able to revert to a manual process that never breaks down," he said.Louis Pastina, an executive overseeing trading systems at the Big Board, said "a rush of orders" in the last hour of trading overwhelmed the exchange's computers, leading to delays and an unknown number of orders that were never completed. Some trades may have been done on alternative markets or in an after-hours crossing session the NYSE extended by a half hour to 5:30 p.m., he said. He added that floor traders were finishing trades manually until around 4:25 p.m., about 20 minutes later than usual.

7. On February 27, 2007 the team that compiles the DJIA noticed at about 2 p.m. that _________, creating a data backlog that was affecting all of the Dow Jones indexes.a. heavy trading volume was forcing investors to buy more shares b. heavy trading volume was causing record gains in the DJIAc. heavy trading volume was causing traders to go home earlyd. heavy trading volume was overwhelming the system Correct


8. On February 27, 2007 about a half hour before the closing bell rang at 4 pm, traders reported ________, which recently began converting to a largely electronic system.a. having problems sending electronic buy and sell orders to the NYSE Correctb. having problems sending electronic buy orders to the NYSEc. having problems sending electronic sell orders to the NYSEd. having problems sending emails to the NYSE

As Market Fell, Some Big Names Won Their BetsBy SUSAN PULLIAM, RANDALL SMITH and HENNY SENDERMarch 1, 2007; Page A1http://online.wsj.com/article/SB117271874969422974.html

Market routs always leave plenty of victims behind. A savvy -- or lucky -- few can come out ahead amid the chaos, though.Winners from Tuesday's market plunge included one of the more renowned traders in recent Wall Street history: John Meriwether. Mr. Meriwether formerly ran Long Term Capital Management, the hedge fund whose collapse in 1998 nearly triggered a global financial crisis. He now runs a $2.6 billion fund, JWM Partners, which was up after markets closed Tuesday and has generated positive returns for February, according to investors.The 59-year-old Mr. Meriwether, who was traveling and unavailable for comment, benefited from bullish bets on the yen and Japanese equities and U.S. Treasury bonds, according to people familiar with his results.Another winner was Deutsche Bank's Greg Lippmann, who in recent months has made paper profits for the bank of roughly $250 million betting against an index of subprime-mortgage loans, which plunged more than 7% Tuesday before rebounding a bit yesterday. Mr. Lippmann, Deutsche's asset-backed securities trading chief, has urged his firm's clients to bet against the value of mortgage bonds underpinned by subprime loans, as those made to borrowers with weak credit are known. According to attendees at a September dinner, he boasted, "This trade will work."Mr. Lippmann declined to comment yesterday.The ability of Messrs. Meriwether and Lippmann to stay afloat while the market was sinking illustrates how some of the most sophisticated players have learned to take advantage of heightened risk levels in the financial system these days. To be sure, some of the gains and losses so far exist only on paper, and whether they will actually materialize in the real world -- especially for trades that aren't easy to unwind -- is an open question.Meanwhile, a number of small investors making more-mundane stock-market bets were left holding the bag. Hit especially hard were individuals stampeding into mutual funds in January, especially stock funds that invest overseas. (See related article1.)Joseph Clark, a 42-year-old day trader in Buffalo, N.Y., initially steered clear of stocks most of Tuesday because he didn't see any good opportunities for a quick profit. After spending most of the day painting his son's room, he checked his eight Dell Computer monitors and decided to buy. At 2:58 p.m., he bought 1,000 shares of Allegheny Technologies for about $98 a share. With some other trades, he plunked down about $150,000 of his $700,000 portfolio.


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He lost $1,200 within a few seconds, as the Dow industrials suddenly plunged about 300 points due to a glitch in computing the index. "Before I could blink, the stock had sunk to $96, so I started selling at a loss," he says. "It went to hell in a handbasket. It was disgusting."And some hedge funds -- private partnerships that cater to wealthy investors and large institutions -- that focused largely on stocks were pinched as well. Many individuals and hedge funds have been using heightened levels of borrowed money to amplify returns, and that left them exposed on bad bets when stocks dived."In U.S. equities and volatility the damage was much sharper and faster, with the bulk of the move we saw in May last year delivered in a single day," noted Goldman Sachs Group economists Dominic Wilson and David Heacock.Yesterday, stock prices rebounded a bit from Tuesday's 416-point decline, with the Dow Jones Industrial Average rising 52.39 points to 12268.63. But the recent action highlights how some of the market's heavyweights have profited from the sudden pullback in various markets world-wide that have been marked by excesses. Financial markets for some time have been awash in cash, leading to huge amounts of cheap financing. And market players have benefited from buying riskier securities around the world and letting them ride. The question is whether Tuesday's plunge could begin to change that scenario.Mr. Meriwether's macro fund -- which like other macro funds has a no-limits investment strategy that can make for volatile performance -- profited from having bought Japanese yen, which rose Tuesday as investors sought the currency to unwind so-called carry trades. In these transactions, investors buy a currency whose central bank pays low interest -- in this case, Japan's yen -- to invest the money in places with higher yields.In addition, JWM held lots of U.S. Treasury bonds, whose reputation as one of the safest places to park money drew buyers fleeing riskier assets Tuesday. The firm had also bet against riskier issues of corporate bonds.Compared with other hedge funds pursuing the same strategies, Mr. Meriwether has done well. Last year, his macro fund generated returns of 7.5%, down from 25% in 2005. The Macro Index compiled by Hedge Fund Research Inc. of Chicago was up 5.61% in 2006 and 6.67% in 2005.Meanwhile, Deutsche Bank's Mr. Lippmann, 38, promoted his winning bet at a September dinner with several dozen top hedge-fund clients in a private dining room at the Palm restaurant in New York. At the gathering, Mr. Lippmann strongly argued that the value of mortgage bonds underpinned by loans to borrowers with weak credit would begin to fall. Some in the room had already lost money trying to predict a softening in the housing market, and they were skeptical that Mr. Lippmann's timing was right, attendees say.On Tuesday, Mr. Lippmann's bet became even more profitable when the ABX index, which reflects the value of such risky mortgages, fell 7.4% on top of a 30% decline since the beginning of the year. Yesterday, the ABX index rebounded, rising roughly 3%.The ABX index tracks how much it costs to insure a group of BBB-minus-rated bonds based on subprime mortgages. The index is a derivative that falls in value when the cost of insurance rises, so it is seen as a proxy for the value of the underlying bonds. The position Mr. Lippmann was promoting involved betting that the cost of insuring such bonds would rise, causing the index to fall in value.


The same bearish bet championed by Mr. Lippmann at Deutsche was widely popular among hedge funds, analysts say. "The [ABX] market appears to have been in control of [bearish investors] for some time now," says Peter DiMartino, an asset-backed securities strategist at RBS Greenwich Capital in Connecticut. "Folks who historically would have [made bullish bets on the index] have been hesitant to step in, which has made it an even more illiquid market."Of course, Mr. Lippmann and hedge funds could lose big if the index rebounds strongly, given how the illiquidity makes it difficult to buy and sell in this burgeoning market. Says Loren Katzovitz of fund firm Guggenheim Advisors: "I've spoken to over 40 hedge-fund managers in my world, and the trade is in the billions."

9. The ability of Messrs. Meriwether and Lippmann to stay afloat while the market was sinking this week illustrates how some of the most sophisticated players have learned to take advantage of _______ the financial system these days.a. computer trading in b. traders blogging aboutc. the use of Blackberry devices ind. heightened risk levels in Correct

10. Mr. Meriwether's macro fund, which like other macro funds has a no limits investment strategy that can make for volatile performance, profited from having bought ____.a. Local bonds b. Japanese yen Correctc. American Dollarsd. Junk bonds

Desperate to Cut Costs, Ford Gets Union's HelpBy JEFFREY MCCRACKENMarch 2, 2007; Page A1http://online.wsj.com/article/SB117280286900424363.html

DETROIT -- For years, Jerry Sullivan, the head of the largest United Auto Workers local at Ford Motor Co., fought for higher pay, job protections and limits on the work his members had to do.But in the past year, as Ford teetered financially, the 59-year-old Vietnam veteran has changed course. These days he has urged his members to accept the outsourcing of company factory jobs to lower-paid workers, and to work new shifts without the tens of thousands of dollars in overtime they formerly would have earned."Ford is in a desperate situation," sighs the burly, bearded Mr. Sullivan, who has spent 36 years at Ford, the last 10 as president of UAW Local 600 in suburban Dearborn. "If this company goes down, I want to be able to look in the mirror and say I did everything I could."Mr. Sullivan's turnabout reflects the stark reality facing the UAW and the big U.S. car companies, which still employ roughly a third of the union's workers after years of job cuts. The Big Three auto makers acknowledge Japanese and Korean companies are out-



earning them on each car by delivering more features for less cost. Now Detroit -- with some help from the union -- is trying to dismantle old business methods factory by factory in an effort to cut costs.Ford, which lost $12.7 billion last year, so far has persuaded UAW locals at 33 of its 41 plants to accept new agreements aimed at transforming the way work is done on the factory floor. The "competitive operating agreements," all reached in the past 10 months, loosen some complex and often costly work rules.In past local negotiations, union leaders rarely gave any ground, and talks often stalled over such matters as getting microwaves installed for employees' use. But this time, recognizing their precarious position, Dearborn members agreed that non-Ford workers earning half their pay could take jobs in the plant such as shuttling car components across the factory floor. Thousands of UAW members accepted changing to four-day, 10-hour shifts that can include weekend days, without collecting overtime. At an engine plant in Lima, Ohio, some union workers have volunteered to manage their brethren, for a 50-cent-an-hour bump in pay. Elsewhere, long-honored seniority rules have been waived and job definitions have been broadened.The new pacts don't deal with UAW members' pay packages, which due to health care and other benefits are about 50% higher than for workers at Asian auto makers' U.S. plants. Those issues are to be handled in national talks between the UAW leadership and the car companies this summer. But company officials and labor experts say Ford's local negotiations -- in which Ford asked for the union's help -- may help set a precedent for the national talks.An industry consultant's chart used by Ford during some negotiations with locals estimated Detroit's auto makers have an average "profit gap" of $2,400 per vehicle compared with the U.S. units of Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. That gap is so wide that Detroit is losing money on each car. Labor costs represent $1,080 to $1,335 of the gap, according to the consultant's figures. The biggest share of that, $490 to $705, is attributable to retirees' health-care costs. Next is $250 for work rules, edging out $220 for active workers' health care. Ford estimates it will save $1 billion a year if all plants adopt the various work-rule changes being asked of them.

11. Ford, which lost $12.7 billion last year, so far has persuaded UAW locals at 33 of its 41 plants to accept ________.a. illegal workers into the Union in order to temporarily reduce labor cost b. new and less expensive health plansc. lower wagesd. new agreements aimed at transforming the way work is done on the factory floor Correct

12. Thousands of UAW members accepted changing to _______ that can include weekend days, without collecting overtime.a. three-day, 15-hour shifts b. four-day, 10-hour shifts Correctc. six-day, 8-hour shiftsd. seven-day, 7-hour shifts


Questions 13 – 17 from Marketplace

All Companies Need Innovation; Hasbro Finds a New MagicBy CAROL HYMOWITZFebruary 26, 2007; Page B1http://online.wsj.com/article/SB117244992317418824.html

EAST LONGMEADOW, Mass. -- Every Friday at lunch, game designers, marketing managers and other employees at Hasbro's games division gather in the cafeteria to play board games. Some compete over Scrabble, Sorry, Clue or more than a dozen other famous games invented decades ago and still manufactured at a factory here. Others play games sold by competitors, or they enjoy their own childhood favorites no longer on store shelves.One current obsession: a dice game called Can't Stop, manufactured in the 1980s by Parker Bros., now a unit of Hasbro. "We dug it out of our archives, and it's so much fun, we can't stop playing it," says senior game designer Rob Daviau.These lunchtime games have a business purpose. They are part of Hasbro's efforts to find ways to update classics and create new games. Mr. Daviau is musing about reissuing Can't Stop or designing a similar game. "We have an unbelievable heritage with our brands, but we have to keep them relevant to customers" to compete against videogames and other pop culture, says Philip Jackson, who took charge of the games division as group executive last February and has been rolling out new products. Sales in Hasbro's games unit rose 11% last year.In any business, innovation is at least as critical for old companies as for start-ups, and more complex. It requires two steps: "upgrading, leveraging and extending old and still-popular brands while also looking for new ideas," says Tom Kuczmarski, president of Kuczmarski Associates in Chicago, a product-development consultant. "The biggest roadblock is risk-aversion."At Chicago-based USG, a 106-year-old maker of building materials, profit has increased in recent years under Chief Executive William Foote with new products such as dust-control Sheetrock and Durock Tile Membrane for flooring material, which keeps out water and prevents warping.At Procter & Gamble, under Chief Executive A.G. Lafley, a cabinet of beauty and health-care products has been launched, including Crest teeth-whitening strips. "Instead of battling to sell $3 tubes of toothpaste, they're selling something that costs 10 times as much, and which customers want," Mr. Kuczmarski says.To spur innovation, Hasbro managers keep in touch with a global network of game inventors, do online surveys of customers and observe thousands of children and adults playing games developed in a new lab called GameWorks at the division's headquarters. They also talk with prospective customers about their lives and how they want to spend leisure time. Hectic schedules and time pressures are prompting Hasbro to launch "express" versions of Monopoly, Sorry and Scrabble. Unlike the standard versions, which can take hours to play, the express games have their own rules and can be wrapped up in 20 minutes or less.



"People don't have time to play a game for three hours, so we're asking ourselves how we can leverage brands so they can be played in smaller time frames," says Jill Hambley, a vice president of marketing.Another classic, The Game of Life, was revised to reflect consumers' wishes for more balanced lives. In the original game, success equaled money and the winner was the player who earned the most. In the new game, players move among four quadrants: to "live it" and have adventures, to "love it" and have family lives, to "learn it" and become educated, and also to "earn it."New tastes also dictated the look for a new version of Monopoly. The original board, which is still available, features streets in Atlantic City, which was a glamorous tourist destination at the time the game was released, in 1935, amid the Great Depression. Last year, designers and marketers selected destinations in 22 U.S. cities and asked customers to cast online votes on which they preferred. In three weeks, Hasbro received three million votes, which were used to design a Monopoly Here and Now board. Times Square in New York received the largest number of votes, and so it replaced Boardwalk. Las Vegas Boulevard replaced Pacific Avenue.Hasbro is also gunning for technology-savvy customers. Sales of videogames outpace board games by more than six to one, so Hasbro makes versions of its board games that can be played on laptops, cellphones or in video format. In the Game of Life, players use a debit card that holds information about them and points scored. Clue comes with a DVD with 10 murder plots to be solved, in addition to the original board-game mystery.Mr. Daviau spent nine months developing the Clue DVD, working with a writer, production company, market researchers and others. In the latest version of the game, actors playing the butler and the inspector offer the clues, and there is background music and sound effects, such as buzzing insects for one crime that occurs in the summer."Games are math puzzles with a thousand details, but what you want customers to feel is that they're getting magic in a box," he says.

13. Innovations at Hasbroa. include possible “express” versions of Monopoly and Scrabble b. are encouraged by having lunchtime games Friday c. include versions of its board games that can be played on laptops, cellphones or in video format d. All of the above Correct

How Long Can India Keep Office Politics Out of Outsourcing?By JARED SANDBERGFebruary 27, 2007; Page B1http://online.wsj.com/article/SB117251592499619641.html

When underwriter Ram Negi considers whether to approve a loan from San Jacinto, Calif., he crawls through about 80 pages of documents, which any applicant dreads compiling. And he reads them very, very carefully.Mr. Negi is trying to sniff out fraud in the applications. "About 45% of people are hiding something," he says. So, if someone doesn't come clean about his assets -- like the guy who claimed he had three other properties when he really had 15 -- Mr. Negi denies him



a loan. He also uses third-party Web databases to verify answers, so when another applicant lies about his income, Mr. Negi can hold out for the truth before making his irreversible decision. "If I deny the loan, then it's denied," he says. "There is no chance."Far from a power-wielding crank, Mr. Negi, who works for the outsourcing firm Equinox in Gurgaon, India, is a soft-spoken and unassuming 26-year-old who, like many of his young colleagues, still lives with his parents in New Delhi. In a large room of blue cubicles, under some crooked ceiling tiles and fluorescent lights, he sits shoulder to shoulder with his managers as well as with his junior colleagues.The scene points to one of the little surprises of India's outsourcing boom: Knowledge outsourcing, the offshoring of skilled work, is outpacing the simpler call-center work, rising 42% last year compared with 34%, respectively. Tasks one wouldn't expect to see leave the four walls of American companies are handled overseas by the world's second-largest reserve of Ph.D.'s, M.B.A.'s, engineers, doctors and lawyers.It's a professional cubicle class working on heady stuff such as equity research, biotech R&D and legal services. And even though some of these are professions known for their outsized egos, office politics haven't been a big problem -- so far.The knowledge-outsourcing industry is growing so fast that it hasn't yet fostered the level of back stabbing, turf wars and stealing credit you see in any mature business. In fact, in India's older industries, such as manufacturing, there's plenty of political maneuvering -- like, say, publicly agreeing with the boss when you privately don't -- and plenty of private grumbling, executives point out. But in the hot knowledge-outsourcing industry, which is desperate to hold on to its talented people, hierarchies aren't built into the floor plan, executives entertain suggestions from the lowliest of employees, and if a boss is playing favorites, he will get an earful from a powerful HR department.The setup helps to diffuse the poison of office politics. Deepa Trivedi, a senior process executive at Tata Consultancy Services, when asked for an example of back stabbing, can't seem to think of one. Ms. Trivedi, a Ph.D. in life sciences, has bigger things on her mind -- specifically, the documents she drafts for a U.S. drug company to get FDA drug approval. "I have the therapeutic knowledge and understanding of the drug," she says."Nobody expects more than that," she adds, speaking about her colleagues who, like her, appreciate the work and the benefits, and don't mind sitting in a blue-and-gray cubicle instead of a corner office.Such job satisfaction is a preoccupation for people like the head of her company, Sanjay Gupta. He is quick to reveal his flaws: Some thought he wasn't spending enough time with junior employees. "I went through some introspection," he says, seeming troubled. He now meets with employees once every two weeks, and he has helped arrange for perks -- from guitar lessons and salsa dance classes to big health-care benefits.Employees are often shown the same kind of deference shown to overseas clients. As Alok Aggarwal, chairman of outsourcing firm Evalueserve, likes to say to his customers: "We row. You steer."But Mr. Aggarwal sees a time when these highly skilled workers start vying for higher posts, and succumb to office politics. As a young industry, the knowledge-outsourcing business may have the egalitarianism of the dot-com era. But it will eventually become more political."People build their own empires and those empires become silos," says Mr. Aggarwal. "I don't see how to stop it from happening."


It's also hard to keep everyone happy. Says Nitin Aggarwal, director of Pipal Research, which conducts financial and strategy research: "We're almost 100% M.B.A.'s. That has its own challenges. They're more ambitious."Still, "there is a quite a marked difference" between these young workers and their U.K. and U.S. counterparts, says Matthew Banks, senior vice president of Integreon Managed Solution's legal-process division, which does work such as drafting acquisition documents. The outsourcing workers don't expect the trappings of status and trinkets that their overseas counterparts do -- things like company-logo beach blankets and mouse pads. He says a young lawyer in the industry, for example, would never say, "Can you believe they only have three cross-training machines in the office gym?"

14.___________, the offshoring of skilled work, is outpacing the simpler call-center work, rising 42% last year compared with 34%, respectively.a. Knowledge outsourcing Correctb. Expert outsourcingc. Intelligent outsourcingd. Educated outsourcing

Manufacturers Face Consumer Confusion Over TV TechnologyBy PETER GRANTFebruary 28, 2007; Page B1http://online.wsj.com/article/SB117261044032221088.html

Anyone who thinks consumers understand high-definition television should consider a recent survey by Leichtman Research Group. It concluded that close to one-half of the 24 million households with HDTVs don't actually watch high-definition programs because they haven't obtained the necessary hardware from their cable, phone or satellite operators.And about one half of those viewers -- about six million -- don't even realize they're not watching HDTV. Bruce Leichtman, the market research firm's president, figures the confusion is partly because the consumers spend so much money on the set they can't believe they're not getting what they paid for. "This is cognitive dissonance," he says.The forward march of consumer electronics, of course, is replete with examples of technology outpacing the ability of average users to understand it. Look no further than the success of the "For Dummies" series of how-to technology books. Most consumers, surveys show, use only a small fraction of the features on their various devices.But the history of digital TV has been particularly tortured. In addition to the usual false starts and over-promising, the technology has been hampered by political quagmires, battles at all levels of the TV industry, misleading ads and far too little consumer education.The problem is bound to get worse as we near the February 2009 digital-transition deadline, when all broadcasters must transmit entirely in digital, rather than analog, signals. In the meantime, sales are rising as the price of flat-panel HDTV sets fall below $1,000. There were 13.6 million HDTVs sold last year, according to the Consumer Electronics Association.



The failure of so many HDTV owners to figure out what they've actually bought is bad for everyone. After years of dragging their feet, TV networks finally are investing heavily to produce shows in high definition. But these investments aren't going to pay off anytime soon if 50% of the HDTV owners aren't set up for HD viewing. Retailers and manufacturers complain of unacceptably high rate of returns, though they won't disclose specific figures.Consumers get discouraged when the picture that transfixed them at the store isn't the same at home. "It's getting a Porsche and driving it at 40 down a straight highway," says Blaine Altaffer, a senior buyer for Circuit City. "You want speed and a crooked highway."Consumer ignorance is understandable. It used to be buyers needed only to bring a new set home, plug it into a cable or satellite hookup and flop back on the couch. Now they first must choose either an HDTV set or a standard-definition digital set that has a lower price tag and inferior picture quality. (All HDTV sets are digital, but not vice versa.) Then, they must make sure they're getting high-definition service from their cable or satellite operator, which typically costs more. After that, they have to lease a high-definition set-top box and make sure it's set up right.After all that preparation, viewers still can make the mistake of watching the wrong channel. Cable and satellite systems now carry both HDTV channels and regular channels for the same networks, such as ESPN and CBS. Some consumers get confused when they see the "broadcast in high definition" bug written across the regular channel. They think they're watching HDTV.Adding to the complexity, device makers have been fighting over what's better, plasma or liquid crystal display screens. Even worse, if consumers want a high definition DVD player, they must choose between Blu-ray and HD-DVD formats. Naturally, discs for one don't play on the other.In the heat of battle, information is often the first casualty. Take the current TV commercials with the "Back to the Future" theme being broadcast by DirecTV. It boasts that the satellite operator has a "future" of 150 channels and soon will have three times more high-definition capacity than cable. It neglects to say that in many smaller markets, DirecTV subscribers still won't be able to get HD signals from local ABC, CBS, NBC and Fox affiliates unless they set up an over-the-air antenna.But there are signs of hope. A major consumer-education effort on the digital transition is set to be announced today by the largest industry trade groups representing broadcasters, cable operators, device manufacturers, networks and retailers. There will be the obligatory new Web site, and then extensive research and focus groups organized to figure out consumers' needs.Some manufacturers are ahead of the game. Panasonic last year launched a customer-service line, dubbed the "Plasma Concierge program" for flat-screen buyers. At the same time, Best Buy began giving customers discounts of up to $300 to get the right hardware and setup to watch HDTV. That reduced returns by several percentage points, says Michael Vitelli, a Best Buy senior vice president. "Employees have been telling us that customers come in and do not understand this technology," he says. "We're trying to make sure that the customer does the right thing."


15. A recent survey by Leichtman Research Group concluded that close to one-half of the 24 million households with HDTVs don't actually watch high-definition programs because ____.a. they prefer to watch DVDsb. they haven't obtained the necessary hardware from their cable, phone or satellite operators c. viewers make the mistake of watching the wrong channeld. Both b and c Correct

Mac and PC's Overseas AdventuresBy GEOFFREY A. FOWLER in Hong Kong, BRIAN STEINBERG in New York and AARON O. PATRICK in LondonMarch 1, 2007; Page B1http://online.wsj.com/article/SB117271641509622894.html

When Apple Inc. wanted to bring its series of "Mac vs. PC" ads to international markets, it faced a difficult issue: What's funny in one culture can seem ill-mannered in another.In the American ads, made by Omnicom Group Inc.'s TBWA\Chiat\Day, a nerdy PC guy keeps getting trumped by his hip Mac counterpart, who uses pointed banter that demonstrates how Macs are better. In one recent spot, PC is proudly having a camera taped to his head so he can do video chatting -- only to discover that Mac already has a built-in camera. In another, PC is flanked by a gruff security guard who insists on getting his permission each time Mac tries to say something to him, meant to represent security in Microsoft's new Vista operating system for PCs.But in Japanese culture, where direct-comparison ads have long been frowned upon, it's rude to brag about one's strengths. So for Japanese versions of the ads that rolled out last fall, two local comedians from a troupe called the Rahmens made subtle changes to emphasize that Macs and PCs are not that different. Instead of clothes that cast PC clearly as a nerd and Mac as a hipster, PC wears plain office attire and Mac weekend fashion, highlighting the work/home divide between the devices more than personality differences. In the first ad of the series, Mac even gives PC a nickname: waaku -- a playful Japanese version of the word "work."PC's body language is a big source of the humor in Japan: Mac looks embarrassed when the PC touches his shoulder, or hides behind Mac's legs to avoid viruses. "PC constantly makes friendship-level approaches that Mac rejects in a friendly-irritated way," says Oliver Reichenstein, the founder of Tokyo-based interactive brand consultancy Information Architects Ltd. "The western Mac ads would backfire in Japan, because the Mac would appear to lack class."

16. When Apple wanted to bring its series of Mac vs. PC ads to international markets, it faced a difficult issue. The western Mac ads would backfire in Japan, because the Mac would appear to ___.a. make fun of the governmentb. insult young people c. insult the elderlyd. lack class Correct



Start-Ups Seek to Cash In on Web-Video AdsBy KEVIN J. DELANEYMarch 2, 2007; Page B1http://online.wsj.com/article/SB117280318693924372.html

Several start-up companies are hoping to cash in on the exploding viewership for online video with systems that can match advertising to video content.Google Inc.'s enormously successfully online-ad system works by identifying key words users are searching for or seeing on Web pages and placing ads alongside them that are targeted to the same words. So a consumer who reads a Web site that includes the words "Canon" and "digital camera" might see ads from Google for retailers carrying Canon cameras.Now a handful of start-ups is deploying advanced technology to take a similar approach to advertising that appears with online video clips.Most agree the market for such ads has enormous potential as blue-chip advertisers look for some of the same branding boost they get from TV. Web publishers also say they quickly sell out ads linked to professional and semiprofessional videos. But advertisers are just beginning to tap the marketing potential alongside the sea of amateur clips that consumers put on Web sites such as Google's YouTube.There is little consensus, however, on the best means to scan videos for content, how to display the ads or how to target them to consumers who will be most receptive to them.The start-ups, with such names as ScanScout Inc. and YuMe Networks Inc., are trying out various high- and low-tech tools to scrutinize the content of online videos, ranging from software that generates transcripts of audio tracks to human editors in India who try to verify that videos' creators have accurately characterized their contents.Closely held ScanScout has some of the most ambitious plans. The Cambridge, Mass., start-up uses technology to recognize words spoken in the audio tracks of clips. It then lets advertisers choose to have their ads appear at the moment in the videos when specific words are spoken. The company tested the program with video sites late last year and plans to make it widely available next month.In a demonstration, ScanScout's system displayed an ad for a sports-car brand at the bottom of a video clip as the people on screen were discussing that type of car. Consumers can click on the ad to pause the playback and see a video commercial, or be taken to the advertiser's Web site. By analyzing a video's content, ScanScout can help companies steer clear of subject matter and language that make them uncomfortable, potentially increasing the confidence of traditional advertisers in buying ads on amateur videos. It can also place multiple ads on a given video clip as what is being discussed changes, something that could let Internet companies tap additional ad dollars."This becomes a new revenue stream on top of what [online video sites are] already doing," says Sarah Fay, president of the Aegis PLC digital marketing subsidiary Isobar U.S., which has advertiser clients that plan to try ScanScout. Some experts also predict that similar ad-targeting systems will eventually be used in television set-top boxes to match commercials with TV shows.ScanScout takes a commission on ads it sells that are carried on other companies' sites. Borrowing from the search-ad model, it charges advertisers only when a user clicks on an ad, with the flat fee set at roughly 50 cents or less a click to start. Its investors include



Georges Harik, a former Google executive who helped build the technology behind some of the search company's ad systems.ScanScout is already gaining some traction with customers. Online video site PureVideo Networks Inc. of El Segundo, Calif., says it plans to begin testing ScanScout, probably with standup comedy videos on its StupidVideos.com site. Blip Networks Inc. of New York has tested ScanScout on its blip.tv video site since the fall, and Chief Executive Mike Hudack says he believes it is more effective than just matching ads with the descriptive information the videos' creators supply.Brian Buchwald, general manager of an NBC Universal digital venture who has been briefed on the system, says he is impressed with ScanScout's approach. "If the technology does what they say it can do and it improves over time, it becomes a business execution question for them," he says.Closely held YuMe Networks, meanwhile, relies on information supplied by video creators and other data sources to group video clips into categories, such as "automotive." Advertisers can then select the category alongside which their ads will appear. YuMe, Redwood City, Calif., says it verifies the information using speech-recognition technology that picks out words in the audio track. It also employs people in India to make sure that videos purporting to be about sport-utility vehicles, for example, are what they say they are. Internet executives say amateur video creators often lie about the contents of clips or are sloppy when they supply information.PodZinger Corp., a Cambridge, Mass., subsidiary of BBN Technologies Corp., uses technology to generate word-for-word transcripts of the audio tracks of clips that appear on its partner sites. It then classifies videos based at least partly on the transcripts, such as by grouping together clips related to professional basketball. Advertisers select categories of videos they would like to advertise in, and in some cases they can identify specific spoken key words they would like to target.

17. Several start-up companies are hoping to cash in on the exploding viewership for online video with systems that can match advertising to ______.a. television content b. video content Correctc. MP3 contentd. iPod content

Questions 18 – 23 from Money & Investing

A New Trick For Avoiding Estate TaxesBy RON LIEBERFebruary 24, 2007; Page B1http://online.wsj.com/article/SB117227690809217934.html

Last summer, President Bush signed a bill that made earnings in certain college-savings accounts permanently free of federal taxes, as long as the money is used for tuition, room, board or other allowed expenses. This was great news for parents, since the tax break was scheduled to go away at the end of 2010.



Now, these "529" accounts look like an even better deal for grandparents and others looking to minimize inheritance taxes."A lot of what goes on in estate planning is trying to give clients as much control as possible without keeping something included in their estate," where it could be subject to taxes, says Stephen C. Hartnett of the American Academy of Estate Planning Attorneys.The lure with so-called 529 accounts is that they accomplish this goal simply and cheaply: Account owners can move huge piles of money out of their estates without paying taxes, while still controlling the money.How is this possible? Start with the 529 plans themselves. Those in play among estate planners are the state-run ones that allow you to invest money in an account where you choose among a handful of mutual funds.Then, consider the rules on gifts. Normally, you can't give away more than $12,000 each year to any individual without creating a potential tax hit for yourself farther out. With 529s, however, you can give multiple individuals $60,000 each in a single year.By doing that, however, you use up five years of $12,000 exemptions at once. That does leave you more vulnerable to taxes if you give another gift to that same person during that time period.Now, take a grandma and grandpa with, say, four grandchildren and lots of money. They could each give $60,000 to every grandchild.Once they do, that $480,000 is out of their estates and not subject to estate taxes. (Deathbed contributions may cause problems; if they die within five years of the big 529 dump, some money could get counted toward taxes).Worried about wayward grandchildren? Disowning them turns out to be relatively easy. Account owners are free to change a 529 account's beneficiary, bequeathing the funds to a more favored relative (say one with designs on medical school).You can also change the beneficiary's name to your own and use the money for classes at the local university. Or take it out to just pay for a nursing home or a boat, though you'll have to pay taxes on the gains plus a 10% penalty.There's additional fancy footwork that one could also try here, in theory. For instance, you could change the beneficiary a few times, on purpose, to push money down through the generations in a way that avoids certain gift, estate or additional generation-skipping taxes. Don't try this at home without an experienced professional standing by.The loophole-seeking that 529s have inspired in the estate-planning community has likely drawn the attention of Treasury Department officials seeking to close them, according to savingforcollege.com proprietor Joseph Hurley. If enough people pile money in, some of the rules could change.Meantime, don't let fear of future changes keep you from taking basic steps to avoid the tax man -- and retain the ability to take your money back from misbehaving heirs.

18. With 529 accounts you can give multiple individuals ______ each in a single year.a. $12,000b. $20,000c. $40,000d. $60,000 Correct


Home Lenders Cut the Flow Of Risky LoansBy RUTH SIMON, JAMES R. HAGERTY and MICHAEL CORKERYFebruary 26, 2007; Page C1http://online.wsj.com/article/SB117245665740318975.html

David Radley, a sound engineer, wants to borrow $180,000 to buy a house he rents in Appleton, Wis., but he can't afford a down payment and has a low credit score.Finding such a loan was a snap until recently. Now mortgage broker John Waite of Full Resource Lending says Mr. Radley needs to pay off old bills and put down at least 5% to qualify. Though Mr. Waite's motto is, "We say 'yes' when the banks say 'no,' " he is saying "later" more frequently these days.Mr. Radley's plight reflects the turmoil in the business of packaging mortgages into securities that are sold to U.S. and overseas investors.Fears about defaults are slowing the gusher of investor funds going to riskier segments of the mortgage market. That means less money available for "subprime" loans to riskier borrowers, forcing lenders to focus more on borrowers who can afford down payments and have well documented finances. With fewer lower-income Americans able to buy homes, downward pressure on prices will probably increase.These pressures have intensified in recent days. The cost of insuring mortgage-bond holders against default risk, as measured by the so-called ABX index, has soared, deepening the concerns of investors in collateralized debt obligations, among the biggest holders of riskier mortgage bonds. Managers of some CDOs are delaying new offerings to "wait for the dust to settle," a process that could take weeks or months, says Chris Flanagan, head of CDO research at J.P. Morgan Chase & Co."CDO managers and hedge funds still want to do CDOs, but the conditions are much, much tougher," David Liu, a mortgage analyst with UBS AG, adds.Investors' loss of confidence is reordering the mortgage business. "A lot of loan programs that have been available for the past several years...are going away," says Jack Pevey, president of Integrated Mortgage Services Inc. in Denver. "It's going to keep a lot of people out" of the market.No-money-down loans to borrowers with low credit scores "are going to be a thing of the past real soon," says Bob Moulton, president of Americana Mortgage Group, a Manhasset, N.Y., broker.Economists don't expect the tightening of standards to tank the economy because loans remain plentiful for borrowers with good credit.But "at the low end, it ought to whack 5% out of effective home demand right now," says Thomas Lawler, a housing economist in Vienna, Va. In a recent report, Keefe, Bruyette & Woods analyst Frederick Cannon said "constraints on lending to first-time home buyers are likely to prolong the housing downturn" by limiting sales of entry-level homes, making it tougher for the owners of those homes to trade up.Nationwide, 16% of the home-purchase loans issued in the first half of 2006 were subprime, the Mortgage Bankers Association says. The impact of the tightening likely will be bigger in markets that were more dependent on subprime loans.Such mortgages accounted for more than one-third of such loans in some California markets, including Stockton-Lodi, Modesto and Merced; in Richmond-Petersburg, Va.; and in Miami, according to First American LoanPerformance.



Nearly two dozen subprime lenders have been acquired or shut down in the past year, "with another dozen on the 'ailing' list," a recent Credit Suisse Group report says. Cumulative losses on subprime loans could exceed $10 billion over the next two years, the report says.

19. Fears about defaults are slowing the gusher of investor funds going to riskier segments of the mortgage market. That means less money available for ______ loans to riskier borrowers, forcing lenders to focus more on borrowers who can afford down payments and have well documented finances.a. subprime Correctb. topprimec. lessprimed. Grade C prime

Housing Sector May Be Knocked By MortgagesBy JUSTIN LAHARTFebruary 27, 2007; Page C1http://online.wsj.com/article/SB117253927019020091.html

Investors looking to see whether trouble in risky mortgages will spill over into the broader housing market could find solace in today's home-sales report.But such complacency would come at a heavy price. Economists polled by Dow Jones Newswires estimate that today's report will show that an annualized 6.24 million existing (that is, previously owned) homes were sold in January, up from December's 6.22 million pace. Taken on its own, that would suggest that the housing market is holding its ground, allowing the glut of unsold homes on the market to get worked off in an orderly way.Let's put that number in some perspective. With lenders tightening standards on the subprime mortgages they offer to high-risk borrowers, home sales will have to take a hit, says Goldman Sachs economist Andrew Tilton. He estimates that loose lending standards boosted home sales for the past three years by about 200,000 homes a year. If lenders ratchet their standards up to normal levels, those sales will go away, he says. That represents 3.1% of last year's existing-home sales.The total fallout could be even broader. When banks trip up by lending too freely, their usual reaction has been to overcompensate and put standards in place that are far more stringent than the banks otherwise would deem necessary. Having discovered that they took on far more risk than they thought they were, lenders need to go through a period of taking on less risk. Those subprime-mortgage lenders that have ceased operations won't be taking on any more risk.The good news is that despite the subprime shakeout, default and delinquency rates for prime mortgages remain low. The worry is that fresh declines in the housing market could spur lenders to be more cautious even with low-risk borrowers.Firms' Forecasts Augur Some Bumps for InvestorsWith fourth-quarter earnings season gliding into the rearview mirror, investors are turning their eyes to the road ahead. A warning sign: Watch for falling stocks.



Through Friday, 74 companies in the Standard & Poor's 500-stock index have said they expect earnings that will be below analysts' consensus expectations, while 21 have issued forecasts that top analysts' targets, according to Thomson Financial.The ratio of companies with lower-than-expected forecasts versus those expecting to best the Street's targets -- 3.5 to 1 -- is the highest since the third quarter of 2001. Over time, the ratio is 2 to 1, on average. The increase isn't because more companies are missingforecasts. Rather, 36% fewer companies have forecast better-than-expected earnings than the average of the previous eight quarters.The slump in optimism doesn't necessarily mean more companies expect economic growth to slow markedly -- that probably would have caused more to issue disappointing expectations. More likely: It reflects rising uncertainty about the economy and twitchy chief financial officers less willing to commit to a robust outlook.In other words, investors should fasten their seatbelts and prepare for more twists and turns in the coming months -- and perhaps some unpleasant surprises.

20. Goldman Sachs economist Andrew Tilton estimates that loose lending standards boosted home sales for the past three years by about ______ homes a year.a. 20,000 b. 200,000 Correctc. 500,000d. 2,000,000

Markets Find It Hard To Break the Greenspan HabitBy GREG IPFebruary 28, 2007; Page C1http://online.wsj.com/article/SB117262845397021498.html

WASHINGTON -- As chairman of the Federal Reserve, Alan Greenspan had 200 Ph.D. economists at his disposal to help decipher economic and market trends. Now, in the year since retiring from the job he held for 18 years, he relies on less than a half-dozen staffers to analyze the same economic trends.The last 48 hours have made clear, though, that investors can be just as devoted to what he has to say about those trends -- a devotion some say makes it harder to concentrate on what his successor, Ben Bernanke, has to say.Mr. Greenspan told an audience via satellite early Monday, Hong Kong time, that a U.S. recession was possible. "When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign," he said, according to Dow Jones Newswires. "For example, in the U.S., profit margins ... have begun to stabilize, which is an early sign we are in the later stages of a cycle."Mr. Greenspan didn't say a recession was likely. Indeed, he said most forecasters don't see one, the global environment is "benign" and there has been no "significant spillover" from the contraction in housing activity. His comments appeared more aimed at questioning the conviction of many investors that because each of the last two expansions lasted a decade, this one, now five years old, will, too.But the perceived pessimism of the remarks grew as headlines made their way around trading rooms and were blamed for helping contribute to a two-day, world-wide selloff in



stocks, a plunge in bond yields as bond prices rallied, and increased market expectations of a cut in interest rates by the Fed.In a widely distributed email yesterday, Stan Jonas of hedge fund Dutch Book Partners LLC wrote, "MR. GSPAN SAYS A RECESSION IS LIKELY."The power of Mr. Greenspan's remarks both awed and frustrated some in the markets. "Somehow, he's still the maestro," said Thomas Joseph Marta, a fixed-income strategist at RBC Capital Markets. "Even though Bernanke is the one calling the shots, Greenspan's crystal ball is somehow given more weight."He compared it with a retired general commenting on military matters on cable television. "They're loose cannons and can do a lot more damage than good, and I see Greenspan the same way."Alan Blinder, who served as vice chairman of the Fed under Mr. Greenspan in the mid-1990s, said, "From the Fed's point of view, it's a little off message. What Greenspan said was noticeably more pessimistic than the Fed's outlook."Keeping QuietThere are no formal prohibitions on what a Fed official talks about after he leaves the Fed, other than confidential Fed deliberations. Upon retiring, though, Mr. Greenspan went further and said he would follow the example of his predecessor, Paul Volcker, and not comment on his successor's monetary policy. By most accounts, he has stuck to that commitment.In an interview yesterday, Mr. Greenspan said, "I have been scrupulous not to respond to any questions which refer directly to monetary policy, what the Fed is doing, or what it should do."He added: "What I do talk about are the global forces that are functioning, how the world is running and how the economy is developing in a manner that I used to do when I was an economic consultant. The only difference is back then I'd discuss what the Fed was going to do as a consequence of all this. Now, I just don't do that."But Mr. Greenspan's observations on economic and market developments have been inevitably interpreted for their significance toward interest rates.Barely a week after he left office a year ago, he appeared at a private event for fewer than a dozen clients of Lehman Brothers, mostly prominent hedge-fund managers. Reports of his remarks filtered out the next day, roiling markets.At the time, some in the market and some of his former colleagues questioned his judgment for hitting the speech circuit so soon after leaving office.Yesterday, that criticism was largely absent, in part because Mr. Bernanke is widely considered to have established himself as a credible Fed chairman in his own right. "You can't expect him to be quiet forever," said Mr. Blinder, who now teaches at Princeton University but also analyzes Fed policy for fee-paying clients.

21. Former chairman of the Federal Reserve, Alan Greenspana. is prohibited from formally making any statements regarding the US economyb. has stated that a U.S. recession was impossible c. said, "I have been scrupulous not to respond to any questions which refer directly to monetary policy, what the Fed is doing, or what it should do." Correctd. All of the above


NYSE's Trading Overload Draws Attention of the SECBy AARON LUCCHETTI and KARA SCANNELLMarch 1, 2007; Page C1http://online.wsj.com/article/SB117270535271922623.html

The New York Stock Exchange's move into the electronic age happened almost overnight. Now the Securities and Exchange Commission is looking into whether it happened too fast and contributed to this week's trading troubles.Over the past year or so, the Big Board has shifted much of its trading away from its floor and onto an electronic platform, a move that many investors have embraced because it promises faster execution times in a business where time is money. In November, the NYSE announced it would close one of its five trading rooms, citing the potential to cut costs and because electronic trading requires fewer floor traders.The SEC is examining whether the NYSE's shrinking of the floor affected the NYSE's ability to handle a surge in trading volume such as occurred during Tuesday's market slide, according to a person familiar with the matter. The regulators are concerned that capacity issues may have exacerbated the Big Board's woes this week.The NYSE doesn't believe floor consolidation played any role in the trading problems this week, and a spokesman said they have not received an inquiry from the SEC related to floor consolidation and this week's trading woes.The NYSE's system for delivering trades to its so-called hybrid platform -- a combination of electronic and human-based trading -- overloaded and frantic traders couldn't process thousands of orders.On Tuesday, the market experienced one of the biggest point drops in five years and record volume, with 4.07 billion shares trading in Big Board-listed stocks. Trading problems grew more serious after an error in the calculation in the Dow Jones Industrial Average caused a sudden point drop, which the NYSE says led to a 50% spike in orders."It was a mess," says Steve Swanson, head of Automated Trading Desk LLC, a large brokerage firm based in Mount Pleasant, S.C. "There was a lack of information. No one was telling us what was going on. The hybrid is new, and we're seeing record volumes, and it's not holding up well."The stakes are high for the Big Board's parent, NYSE Group, which became a publicly traded for-profit company last year. The exchange, formerly a not-for-profit membership club, is counting on its new electronic system to boost trading revenue and profit, all while making trading easier for investors. The SEC is talking to a number of firms and exchanges to determine whether other structural problems contributed to the trading issues.Tuesday's trading problems attracted attention on Capitol Hill yesterday, where two Republicans on the House Financial Services Committee, Rep. Spencer Bachus of Alabama and Rep. Deborah Pryce of Ohio, asked the chief executives of NYSE Group and Dow Jones & Co. -- publisher of The Wall Street Journal and of Dow Jones Industrial Average and other market indexes -- for a "full explanation of what caused the systems failure." (Read the Bachus-Pryce letter1.)"We are conducting a detailed review of yesterday's events and do not believe the calculation delay nor the subsequent catch up in the calculation in the Dow Jones Industrial Average exacerbated the market decline, as the market was down sharply


http://online.wsj.com/public/resources/documents/letter20070228.pdf


during the 70-minute period and rebounded strongly soon after the DJIA was brought current," Dow Jones said in a statement. An NYSE spokesman said it was also reviewing the situation. NYSE officials met with Rep. Bachus's staff yesterday and plan to respond to the letter, he added.So far, investors are cutting the NYSE some slack. NYSE Group fell 6.2%, or $5.56, Tuesday to close at $84.45 in Big Board trading, but rallied yesterday with the broader market to close at $84.90 a share, up 0.5%, or 45 cents.The NYSE blames the problem on its Designated Order Turnaround, or DOT, system. DOT is an electronic pipeline that routes certain orders to the exchange. NYSE said the system was working better yesterday, with the company's daily market share in NYSE listed trading rising to about 70%, behind increased usage of floor brokers and NYSE's Arca electronic platform. The exchange adjusted the capacity of its pipeline and is working on further improvements.The NYSE wasn't the only exchange that experienced problems this week. Nasdaq Stock Market and others had problems keeping up with the flood of orders. Problems elsewhere weren't as severe as those at the Big Board.Sam Lek, chief executive of Lek Securities, spent much of yesterday fielding calls from frustrated investors trying to sort garbled trades that got caught in Tuesday's market crunch. One investor sold 10,000 shares of a stock at a price that was 90 cents below the best bid available when he placed the order Tuesday, effectively shortchanging the investor $9,000.On Tuesday, things got worse after the Dow suddenly dropped at about 3 p.m., when the delay in calculating the average was fixed -- and the index reflected the big drop that occurred during the previous hour or so.

22. The NYSE's system for delivering trades to its so-called _____ a combination of electronic and human based trading, overloaded and frantic traders couldn't process thousands of orders.a. hybrid platform Correctb. hyperactive platformc. combination platformd. integrated platform

China's Reckoning Day On Stock Sales Appears NearBy JAMES T. AREDDYMarch 2, 2007; Page C1http://online.wsj.com/article/SB117280192739124343.html

SHANGHAI -- More sellers than buyers in the stock market here earlier this week ignited a fire sale that caused shares to fall world-wide, a sign that China has joined the global market economy. Yet China's transition from communism to capitalism remains a work in progress, which could mean even more sellers in the months to come.When China first permitted stock trading in 1990, it did so cautiously. It divided ownership of listed companies into tradable and nontradable shares, in part to keep the government in control of the companies going public. On average, just a third of each listed company's shares could be traded publicly.



The nontradable shares remained in the hands of a variety of big investors that often represented the state but which held back development of a Western-style stock market. Nearly two years ago, Beijing began overhauling the market to make all shares tradable. The key aspect of the highly complex process was that each company would permit the sale of previously nontradable shares according to its own timetable.The plan looked smart at the time, pushing big risks into the future. The reforms were a key reason for last year's 130% rise in the benchmark Shanghai Composite index.Now the day of reckoning appears imminent. The lockup periods for selling the nontradable shares are starting to expire. Investors in about 1,000 companies, holding shares valued at around 540 billion yuan, or $70 billion, will be eligible to sell by year end, estimates Zhang Gang, a Beijing-based analyst at Southwest Securities Co.The huge gains in Chinese share prices over the past 20 months that pushed the stock market's overall value to more than $1.5 trillion appear to have encouraged parent corporations, state investors and other powerful institutions to begin taking advantage of their ability to trade and take profits on their investments.Regulatory filings show more than a dozen big investors have sold shares in companies listed on the Shanghai and Shenzhen stock exchanges in recent weeks. The companies affected are those that had initially spearheaded the overhaul in 2005, a process that ultimately affected nearly all of the market's 1,400 listed companies. Because these institutions are the controlling shareholders in many Chinese companies, even small sales from insiders can rattle prices.Indeed, some analysts say some such sales were a significant factor in Tuesday's sudden 8.8% plunge in the Shanghai Composite Index.The plunge seemed to come unexpectedly. The week began with a surge of individual investor enthusiasm, in the first session after a weeklong break for the annual Lunar New Year. Monday, the Shanghai Composite Index was pushed to a record close, above 3000 for the first time.Little noticed that day were terse announcements from institutional investors that they had sold shares in Citic Securities, Sany Heavy Industry Co. and other companies.In one announcement that appeared deep inside Monday's Shanghai Securities News, Youngor Group Co., a big well-known garment maker, said it had pared an investment in Citic Securities, a Beijing-based brokerage. Despite the publication date, Youngor had actually dumped the shares before the holidays, the notice said."The market has been good recently, and the stock price [of Citic Securities] also rose, so gaining profits is one of the reasons," said Liu Xinyu, board secretary at Youngor. She pointed out the shirt maker sold only 30 million, or 1%, of Citic Securities and retains its place as the third-biggest shareholder with 154 million shares, or about 5%, of the brokerage. Youngor has no further plans to sell shares, she added.As news of sales of shares in Citic and Sany filtered into the market, those shares faced significant selling pressure, albeit from high levels. Citic Securities, for instance, has fallen more than 10% this week although it is still up 28% for the year. The Shanghai Composite Index is now up 4.5% for 2007, after losing 2.9% yesterday to end at 2797.19.Other off-loaded holdings in recent weeks include chunks of one of the country's main telecommunications equipment makers, ZTE Corp., plus investments in famous makers of wine and construction machinery.


These insider sales could mark the beginning of a profit-taking trend, so "this is a valid concern which could result in 'too much' supply," CLSA Ltd.'s China research chief Li Hui told her clients in a report.The old share structure has been a nettlesome problem for China's market for years. The different classes of shares contributed to a mismatch of interests between small investors and the big -- often government -- shareholders who controlled listed companies. Holders of nontradable shares, for instance, had little incentive to take steps that might push the share price higher in the open market, since they couldn't themselves trade in the market.There were always worries that big investors, especially the state, would ultimately try to sell. The kickoff to nearly five straight years of selling in China beginning in 2001 was concern that Beijing would permit sale of the nontradable stock.The restructuring launched in 2005 was arguably the most ambitious single undertaking Chinese securities regulators ever introduced. But it also invited the risk that for the first time, big shareholders would have an opportunity to cash out of their investments, just like individuals.To make the reform palatable to the public -- and avoid gutting a market that at the time was already in the doldrums -- the government built in delays in the complex process, preventing big shareholders from selling their newly tradable stakes for one to three years. The reforms have been well-received, and millions of new investors have been drawn to the market.

23. This week more sellers than buyers in the ____ ignited a fire sale that caused shares to fall world-wide. a. China stock market Correctb. Korean stock marketc. Japanese stock marketd. New York stock market

Questions 24 – 26 from Personal Journal

Soda Makers to Disclose Caffeine Content on LabelsBy TARA PARKER-POPEFebruary 27, 2007; Page D1http://online.wsj.com/article/SB117253501182519963.html

Soda drinkers are about to get an added jolt from their sodas: The big drinks makers now plan to disclose the caffeine content on the product label.The new information will allow consumers to compare the caffeine content of various soft drinks and comes as beverage companies are introducing new supercharged drinks. PepsiCo, for instance, in June plans to offer Diet Pepsi Max, touted as an "invigorating cola" with nearly twice the caffeine of regular Diet Pepsi. Coca-Cola, meanwhile, is offering Full Throttle, a citrus drink, and Tab Energy -- both of which contain more than three times the caffeine content of Coke Classic.But the move to add a caffeine disclosure to soda labels raises more questions than answers about the health effects of caffeine. How much is too much? And does caffeine consumption really boost our brain power or make a meaningful difference to our health?



While health groups laud the move toward more labeling, some worry the caffeine disclosure might be used to encourage more caffeine consumption. "It's conceivable that some people will choose higher caffeine soft drinks," says Michael F. Jacobson, executive director of the Center for Science in the Public Interest, who has lobbied for caffeine labeling by soda companies.Over the years, there has been a lot of confusion about caffeine because of studies linking coffee consumption with heart disease and high blood pressure, among other health worries. Most of the health risk shown in earlier studies probably was due to the fact that heavy coffee drinkers were often smokers. Later research has shown coffee is safe and may even have health benefits, possibly due to antioxidants and other compounds. Studies show coffee drinkers are less likely to develop diabetes, gallstones, Parkinson's disease and colon cancer.But the health effects of caffeine from sodas are less clear. Caffeine makes us feel alert by binding to brain receptors that make us sleepy and giving us a boost of adrenaline. The impact depends on the individual and how often he or she ingests caffeine. Too much can make you jittery or cause an upset stomach. Regular drinkers who miss a dose can experience withdrawal symptoms including headache, irritability and fatigue.While most caffeine drinkers feel they are getting a mental boost, it isn't clear if caffeine really improves alertness, according to the Harvard Mental Health Letter. People who aren't regular caffeine consumers say they feel more alert, but tests show caffeine doesn't boost performance. And studies suggest regular caffeine users develop a tolerance to caffeine's stimulating effects. So while regular drinkers may feel lifted by a midday caffeine dose, it's more likely they are avoiding the crash of caffeine withdrawal.Sodas typically have far less caffeine than coffee. Eight ounces of Pepsi, for instance, has about 25 milligrams of caffeine. Caffeine content of coffee varies by variety and brewing technique, but an eight-ounce cup may have from 100 to 200 milligrams of caffeine. The new Tab Energy drink from Coke has 72 milligrams per eight ounces.Most studies show people can drink about 300 milligrams of caffeine a day without any negative effects. However, studies at Johns Hopkins University show that as little as 100 milligrams of daily caffeine (about a cup of coffee or three cans of soda) over three days could trigger withdrawal symptoms when you stop the caffeine. The withdrawal symptoms become more severe after seven to 14 days of regular caffeine exposure.While the caffeine content of soft drinks isn't a huge issue for most adults, it can have a big impact on kids because of the differences in body weight. A child consuming a can of regular caffeinated soda receives a caffeine equivalent of about four cups of coffee.A big question about caffeine is its impact on blood pressure. A single cup of coffee can lead to a temporary jump in blood pressure. But a 2005 study in the Journal of the American Medical Association concluded that there's no link between coffee and chronic high blood pressure or hypertension.However, data from Harvard's Nurses Health Study show that while coffee-drinking nurses weren't at higher risk for hypertension, the women who drank four cans or more of regular or diet cola per day were at increased risk for high blood pressure. The culprit might be the caramel coloring used in colas, which contain unstable compounds called advanced glycation end products or AGEs, according to the study. The study authors noted far more data are needed. "I think the balance of health effects is much more


positive for coffee than cola beverages,'' says Rob M. van Dam, assistant professor at the Harvard School of Public Health.The bottom line with caffeine is that moderation is the key. If you're jittery, suffering sleep problems and going to the bathroom more often than usual, chances are you're taking in too much caffeine.

24. Major soft drink makers are a. not planning to disclose the caffeine content on the product label b. raising the caffeine content of some of their drinks Correctc. considering lowering the caffeine content of their drinks d. Both b and c

Yesterday's Market Lesson: Maybe You're OverstockedBy JONATHAN CLEMENTSFebruary 28, 2007; Page D1http://online.wsj.com/article/SB117261999668621305.html

Why risk it?Investors piled into stocks in late 2006 and early 2007, only to see the market weaken over the past week, including yesterday's 416-point dive by the Dow Jones Industrial Average. Bad timing? Nobody knows how the market will fare in the year ahead, and some sort of bounce back today wouldn't be a big surprise.But this much is clear: Many investors have more in stocks than they really need -- and that extra risk could come back to haunt them.• Getting ahead. To understand what's at issue, imagine it is the beginning of 2006 and you have $300,000 in retirement savings. That money is split between 70% stocks and 30% bonds. You figure your stocks will return 8% a year over the long haul and your bonds might clock 5%. Meanwhile, over the next 12 months, you're aiming to sock away 12% of your $80,000 salary, or $9,600.If you got what you expected, you would have had some $331,000 at year-end 2006. But as it turns out, while your bonds eked out 4% last year, your stocks leapt 16%, so you finished the year with more than $347,000. Result: You're over $16,000 ahead of where you expected to be.The standard advice is that you should rebalance back to your 70% stock-30% bond mix, and I think that's a fine strategy. What if you're tempted to leave your stocks to run?My contention: If you're going to start fooling around with your asset allocation, you should reduce your stocks below 70%, not overweight them. After all, you are now closer to your retirement goal than you expected -- which suggests you don't need to take so much risk to accumulate your desired nest egg."Investing is never just about return," says William Bernstein, an investment adviser in North Bend, Ore. "It's also about controlling risk. If you've already won the game, what sense does it make to go on playing?"• Growing cautious. I can already hear the objections. If stocks usually beat bonds, why not own more? If you're ahead of schedule with your retirement savings, why not save



less or retire earlier? It could be that you'll do just fine with such strategies. But a little caution is probably in order. The fact is, the stock market doesn't generate returns in a vacuum. Instead, share-price appreciation is driven by economic growth and the resulting rise in corporate earnings.True, over the short term, stock prices can race ahead of the economy. Maybe exuberant investors will bid up the stock market's price/earnings multiple. Maybe corporate profits will, for a year or two, grow faster than the economy.But over the long haul, share-price gains will mirror economic growth. During the past 50 years, for instance, the Standard & Poor's 500-index has notched an average annual share-price gain of 7.1%, right in line with the 7.1% annual increase in gross domestic product. Tack on dividends, and you get a total return of 10.6%. The bottom line: We can't get outsized stock returns every year -- and periods of heady gains will inevitably be followed by stretches of modest performance.• Crying uncle. If you are more than 10 or 15 years from retirement, I wouldn't fret too much over the market's recent performance, including yesterday's big decline. Instead, stick with your stock allocation and continue socking away money like crazy. But those already retired or close to quitting the work force should think carefully about how much money they need for retirement -- and whether they need to take so much risk, especially after the stellar gains of recent years. To see if you have enough money to carry you through a long retirement, try the two online calculators listed in the accompanying chart.Even if you have plenty of money for retirement, you should probably continue holding at least 30% or 35% in stocks as part of a diversified portfolio. And arguably, you might go somewhat higher -- for the sake of your heirs. "There comes a point when you have more than enough money and you take risk not for yourself, but for your beneficiaries," Mr. Bernstein says.

25. Even if you have plenty of money for retirement, you should probably continue holding at least _____ as part of a diversified portfolio.a. 10% or 15% in stocks b. 20% or 25% in stocksc. 30% or 35% in stocks Correctd. 40% or 45% in stocks

Just Say Yes, or Just Say No: Whatever Happened to Maybe?By JEFF ZASLOWMarch 1, 2007; Page D1http://online.wsj.com/article/SB117270859073222702.html

Yes! Or, on second thought: No!Lately, the dynamics contained in those two words -- "yes" and "no" -- are fueling more motivational tomes and seminars than ever. Just look at today's self-help bookshelves:



"Why Great Leaders Don't Take Yes for an Answer." "How to Say No Without Feeling Guilty." "The Answer to How Is Yes.""The two most fundamental words in the English language are yes and no," says William Ury, co-author of the best-seller "Getting to Yes" and director of Harvard University's Global Negotiation Project. "Life is the dance of yes and no. Every second, we're saying, 'Yes, I'll do this,' or 'No, I won't.' "But why does our culture make us want to boil everything down to yes or no? Can focusing on those two words really change our lives? And whatever happened to maybe?On the yes front, motivators embrace America's optimistic spirit, delivering the message "You are what you think," says Jonathan Black, who investigated the motivational industry for his 2006 book "Yes You Can!" He found that seminar attendees are encouraged to be "totally yes/positive." The message: "If you say yes to the universe, the universe will say yes back to you."One danger is that yes disciples can end up sounding like Meg Ryan in the restaurant scene from "When Harry Met Sally." "Yes! Yes!" she said, acting out how women fake lovemaking. "Yes! Yes! Oh, yes! Yes! Yes!"Many inspirational workshops and books are built on "literally half a thought," says Mr. Black, but even if a spiel is simplistic, people can find value in it because it helps them picture achieving their goals. The runaway self-help hit "The Secret" -- available in DVD and book form -- lands firmly in the yes camp by preaching that if you envision what you want, it will be yours.Workplace consultant BJ Gallagher uses her book "Yes Lives in the Land of No" to help companies. She predicts that the 2008 presidential candidate with the most idealistic "yes" persona will prevail. "Yes always wins," she says. "People want the optimist who says America is great and getting greater."Jeffrey Gitomer may be America's top yes man. Author of the "Little Gold Book of Yes! Attitude," he has trademarked the term "Yes! Attitude." In his book, he explains that he is using the phrase to create "online courses and helpful products ad infinitum," and he reminds readers that they need his permission to use "Yes! Attitude" in their writings or training programs. His book encourages the memorizing of mantras such as: "The main reason people rain on my parade is because they have no parade of their own."Those in the "no" camp, of course, don't want to align themselves with rained-on parades. Instead, they sell the concept of using no to put on the brakes. In Jim Camp's upcoming book "No: The Only Negotiating Strategy You Need for Work and Home," he advises us to start every negotiation with the word no, whether it involves our teenagers' curfews or clients seeking a price break. "No" allows for a closer look at the real issues, says Mr. Camp, a negotiating coach.Mr. Ury agrees. "Right now, the world is hurtling so fast -- whether it's expanding email or eroding ethics -- and we need to be able to use the stop button, to say 'no' as a complement to 'yes,' " he says. His latest book, out next week, is "The Power of a Positive No."Eight of the Ten Commandments are framed as no's, Mr. Ury says, but our culture stigmatizes the word. He points out that when toddlers assert themselves by saying no, we attribute it to "the terrible twos." As he sees it, Rosa Parks was a heroine of the positive no, because she said no to surrendering her bus seat, which was a way of saying yes to dignity and equality for all.


Meanwhile, the one word motivators speak of most dismissively is "maybe." They call it wishy-washy and counterproductive. "'Maybe' is absolute death to effectiveness," says Mr. Camp.It's a fair point. After speaking to these yes and no enthusiasts, I've come to a conclusion: Maybe they're on to something.

26. Recent motivational books and seminars are focusing ona. the concept that if you envision what you want, it will be yours.b. the concept of using no to put on the brakesc. “maybe” as being the most effective to productivityd. Both a and b Correct


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