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And so it was that the US economy remade itself in the 1990s, in the process replacing a mood of widespread gloom at the start of the decade (remember the 'jobless recovery'?) with a sense of triumph by the late 1990s, as growth soared, unemployment plunged and inflation remained the dog that didn't bark. The nation has recently savored the creation of exciting technologies, thousands of new companies, millions of jobs. All but forgotten is how much destruction occurred, particularly at the start of the decade, as many US companies launched brutal restructurings that pared costs and jettisoned workers. The economy was well out of recession by mid-1991, but the unemployment rate continued to surge, peaking at 7.8% in mid-1992. Corporate write-offs for division closings, layoffs and the revaluation of assets reached nearly 28% of the total operating earnings reported by the blue-chip S&P 500 companies in 1991. In other words, those companies earned the equivalent of $22.20 per S&P share in 1991 from their operations--but had to reduce that by $6.29 a share to account for write-offs. Huge write-offs continued in 1992 and 1993, even as companies' operating results began to reap the benefits of the restructuring wave. The technology sector has been a principal agent behind much of the creative destruction in the economy as a whole. Tech entrepreneurs know that the speed of change in their business means that predators quickly become prey. But that fact of life seemed to have been forgotten by too many investors, as they paid astounding prices to own a share of the technology revolution. For all the talk of the sudden turnabout in the business outlook, the most serious destruction in the US economy so far hasn't been in jobs, but a major destruction in the stock market values of technology leaders. The issue now is what the destruction in those areas will beget in terms of tangible damage to the economy. It comes down to this: What will companies decide they must do to make Wall Street love them, and their stocks, again? (And Wall Street, don't forget, means us.) How much restructuring and work-force paring will US companies decide they must do to either keep earnings on track or restore growth that has flagged? In the name of future profitability, companies inflicted significant pain on themselves and the American worker's psyche in the early 1990s. Are we, as a nation, ready to deal with another wave of change on that scale? A truly capitalist society has no choice. And America, of all places capitalist, has accepted creative destruction, even embraced it, for most of its history. Albert Einstein, speaking about technological change, said it was like "an ax in the hands of a pathological criminal." Are we ready? Related: Robert Brusca, CNBC 12-31 In 1990, some thought the Fed had avoided a recession by starting to cut rates well ahead of the emergence of severe weakness. But the Fed wound up just having cut rates some months before the actual recession started, rather than successfully averting the recession itself. And then the downturn was exacerbated by the Gulf War. The Fed learned at that time that starting to cut rates early isn't enough. It must cut them sufficiently to inspire boldness in the markets. Recession was baked in the 1990 cake by the time the Fed began to move. The Fed's slow and tortured rate cuts of that cycle's downturn phase led the economy to a slow start and to a steady rise in unemployment and a very slow economic recovery.
Other factors being equal, the unfortunate 9% of working men whom interviewers classified as "below average" or downright "homely" made 9% less in hourly earnings than did more attractive men. By contrast, the 32% of men classified as "above average" or "handsome" got a wage premium of 5%. Women took a 5% hit for bad looks and earned a 4% premium for beauty. The difference between the bottom and top categories, Professor Hamermesh said, "is equivalent to about a year and a half of extra schooling." To tease out more specifics about how beauty works in the labor market, Professors Hamermesh and Biddle looked at a more homogeneous group of workers: lawyers who graduated from the same law school. The school provided photos of the students, their class rank and law- review status, data on their earnings a year, 5 years and 15 years after graduating, and information about the nature of their practices. The economists then had each photo rated by a panel of two men and two women. Professors Hamermesh and Biddle found that better-looking lawyers made more money, especially as their careers progressed. Fifteen years after graduating, they noted, "better-looking midcareer attorneys were billing at higher rates, not just billing more hours." Within this general pattern, Professors Hamermesh and Biddle looked for differences between subgroups that might indicate why better-looking lawyers earned more. If, for instance, law firm partners simply discriminated to suit their own tastes, then self-employed lawyers should be immune from the economic effects of their looks. But, the economists found, "if anything, beauty pays off more for self-employed junior attorneys than for employees." That suggests that clients, not hiring firms, make the difference. To test that idea, the economists looked at the difference between private-sector lawyers, who have to woo clients, and public- sector lawyers, who do not. The results were striking. The private sector not only drew more attractive lawyers to start, but the looks gap grew over time.
Instead of lumping together all those stock funds and comparing them with the S&P 500, George Sauter, a managing director of the Vanguard Group, divvied up the fund universe by investing style (value, growth and blend) and then by average small, medium and large market capitalization. He then compared those nine categories with relevant benchmarks, not just the S&P 500. His research was through Oct. 31, but a look at Morningstar figures through Nov. 30 backs up the gist of what he found: Only four of the nine fund categories beat their benchmarks for the first 11 months of 2000. In the five other instances, the index beat the average fund in its category, even if only by a fraction of a percentage point. Scott Cooley, a Morningstar analyst, said, "I think the story is that active managers were not as dumb as everyone thought they were in 1997 and 1998 - and they are not as smart as people seem to be saying they are now." Related: WSJ 12-22 The average diversified domestic stock mutual fund is down 7.18% for the year through Thursday, according to Morningstar, far less of a loss than every major stock index. Calculated for all stock funds, including sector and international funds, the investment return fell to 9.40%. Add in bond funds - the real performance winners of 2000 - and the overall return by mutual funds this year improves to negative 2.88%. That performance isn't too shabby, considering the losses posted by the big stock indexes. The Nasdaq is down 42.49% and the S&P 500 down 13.23%. To get a better sense of how the average investor in a diversified domestic stock fund did this year, Morningstar Inc., the fund-data firm, calculated fund returns on an asset-weighted basis, meaning the performance of bigger funds counted more than that of smaller ones. Using that calculation, the average investor in these funds lost 10.06%, about 2.5 percentage points worse than the average fund regardless of size. In other words, because investors have more money in the weaker-performing growth funds, the investment performance for the average investor was worse this year than that of the average fund. Even so, the average fund investor lost less than the major stock indexes.
Related: Donald Ratajczak, AJC 12-17 If the Fed does not shift policy toward lower interest-rate targets soon, consumer confidence could deteriorate further. While I still do not believe a recession will start next year, I can see how one might start. Consumers could be so concerned about job security they build their purchasing power. This would leave even more goods on the shelf. Production cutbacks would then intensify, leading to even more consumer concerns. When a recession no longer is unthinkable, it is time for the Federal Reserve to begin to think about stimulating this economy. Related: Edward Yardini (chief investment strategist at Deutsche Bank Securities), NY Times 12-10 I buy the soft-landing scenario. The Fed is still very powerful. In 1998, it only took three cuts of 25 basis points each to turn a climate of fear into the biggest spike ever in the Nasdaq composite index. I think we will get at least a 25-basis- point cut in the first quarter. And it usually takes about two rate cuts to turn market sentiment around. Three rate cuts does it for sure. So, if you are betting that Mr. Greenspan will engineer a soft landing, I would not be worried about being in the stock market. I think the economy will be pretty soft in the first half of the year, and the market will be pretty volatile. But bond yields will continue to decline. The first beneficiary should be the financial sector. Retailers should do better. Health care also deserves to be overweighted. Technology will make a comeback. There are lots of good opportunities, but we will be lucky to get 8% to 10% returns from the stock market over the next five years. Related: Floyd Norris, NY Times 12-22 "Big cycles are self-reinforcing on both the upside and the downside," said Ray Dalio of Bridgewater Associates, a money management firm. "We expect falling stock prices to cause weaker economic and profit growth, which will weaken stock prices as earnings chronically disappoint, causing credit spreads to widen, which will constrict lending activity, which will hurt spending and lower investment rates." Related: Louis Uchitelle, NY Times 12-18 The new economy is entering its first slowdown. This is the third or fourth new economy since the 19th century - each one offering a similar promise - and yet none could stop a persistent downturn. Ever faster computers connected through high-speed networks or embedded in almost everything people use are putting their imprint on the nation, just as railroads once did, or the electric motor and the gasoline engine, or Eisenhower's interstate highways. Each enriched America, but could not arrest the endless cycles of a market system. And now the latest new economy is caught in a slowdown. 'When innovation lowers costs by enough so that the return exceeds the cost of the investment, then you undertake the investment regardless of the business cycle,' said John Lipsky, chief economist at the Chase Manhattan Bank. But there is a caveat. 'You don't know ahead of time whether the return will be sufficient. Everyone is flying by the seats of their pants.' Related: David Bradley, analyst at JP Morgan, NY Times 12-17 Right now Morgan's economists are putting a 40% probability on a hard landing. Last week, it was a 35% probability.
McKelvey sees problems on three fronts. First, he says, labor productivity is likely to decelerate with a weakening economy - which is what has happened historically. Second, he sees workers pressuring companies for higher wage increases, in part because of the large jump in energy costs that people are being forced to bear (think gasoline and home-heating costs). Third, the corporate borrowing binge of recent years, and the probability that many companies will have to fund their capital-spending budgets for 2001 with more borrowed funds, will mean that burdensome interest bills will continue for many firms, unless the Fed slashes rates. Related: Smart Money 12-18 Thomas Galvin, the chief equity strategist at Credit Suisse First Boston, calls for the Dow and S&P 500 to rise 20% and the Nasdaq to soar an astonishing 50% next year. He says the inflation rate will plummet below 2% while "economy and technology fundamentals will resuscitate sooner than expected." For that to happen, the Fed needs to lower interest rates. Once the Fed eases, companies most hurt by the credit crunch (technology, telecom and financials) will rebound and their p/e multiples will rise. His four top stock picks for 2001: Nokia, Applied Micro Circuits, AMCC, Celestica and Morgan Stanley Dean Witter. Jeffrey Applegate, the chief investment strategist at Lehman Brothers, says equities will see annual returns next year of 21%, while bonds will rise 8%. By the end of next year, Applegate says the Dow will rise to 13000 and the S&P 500 will surge to 1675, gains of approximately 18% and 21% over today's levels. Operating earnings per share for S&P 500 companies will be up 7%, to $61.25. He foresees a sharp cooling in cpi, from 3.4% this year to 2.6% in 2001. S&P 500 companies capital spending will rise 11%. Profit margins of S&P companies will rise by 7.3% while revenues will increase 5%. Joseph Battipaglia, the chairman of investment policy at Gruntal, pegs the Dow at 12700, the S&P 500 at 1650 and the Nasdaq at 4300, corresponding to gains of 16%, 20% and 39%, respectively. The Fed will have to lower interest rates, preferably with two cuts in the first half of next year. Fuel prices will begin to decline and the yield curve on government bonds will begin to flatten. "2001 should be yet another year of record earnings for most companies." Related: Smart Money 12-14 Goldman Sachs's Abby Joseph Cohen says that ever since last March, three imbalances impeded stock-price performance, and now that the situation is largely corrected, next year should prove a more favorable market environment. Here's what changed. First, economic growth has slowed to a more sustainable rate. Equity valuations are now much more sane. According to Cohen's models, stocks are now roughly 15% undervalued. The third imbalance was the wide disparity in valuations of different groups of stocks. "Quantitative work shows that share price momentum was the single most important factor driving future price action during much of 1999 and early 2000," she says. Since April, it's been all about earnings. Two preconditions for a rally are now in place: attractive valuations and ample liquidity. Over the next 12 months she pegs fair value for the S&P 500 at 1650. And she believes there is plenty of cash on the sidelines ready to be reinvested into the market. Related: NY Times 12-24 Byron Wien, the chief US investment strategist at Morgan Stanley Dean Witter, believes that the overall market, which was 40% overvalued at the beginning of 2000, is now 10% undervalued. "The market has gone through a process of rationalization," he added. "Buy old economy. The only technology you buy is truly distressed. You don't buy any stocks that don't have positive cash flow. Buy value versus growth. Buy small and medium versus large. And I think you'll do well." Both monetary policy and fiscal policy have been very tight this year. Those policies have worked all too well in recent months to slow the economy. Early in 2001, they will be loosened, giving the economy a crucial lift, predicted Mary Farrell, senior investment strategist at PaineWebber. That move is even more likely because inflation remains low, productivity growth is still strong, and oil prices, an important contributor to inflation, are dropping. She predicted growth in the GDP of 2.6% next year and global economic growth of 3.3%. Those gains should translate into an earnings increase of 7 to 8% for the S&P 500 during 2001. At the beginning of this year, the 10-year Treasury bond yielded around 6.5%. The average S&P 500 stock, meanwhile, had a price-to-earnings ratio, based on projected 2000 earnings, of almost 30, or an "earnings yield" of about 3.5%. Usually, the 10-year bond yield and the S&P 500 earnings yield are about the same, and many analysts viewed that gap as a signal that stock prices were dangerously overvalued. Now, earnings have risen and stock prices have fallen, so the average big stock has a P/E ratio, based on projected 2001 earnings, of 21, or an earnings yield of about 4.8%. And the yield on the 10-year Treasury bond has dropped to 5%. With the gap between stocks and bonds virtually gone, stocks are no longer expensive, said Ms. Cohen at Goldman, Sachs. "New bull markets always establish new leadership," said Fred Kobrick, one of the few money managers around who can draw on firsthand experience of the 1973-74 bear market. "The theme players are going to be very disappointed." Kobrick, who manages the Nvest Kobrick Investment Trust Emerging Growth Fund, said investors had panicked and sold good and bad technology companies alike this year, just as they had bought them en masse in 1999. Next year, investors will resume distinguishing winners from losers. Related: WSJ 12-19 Value-fund manager Richard Rosen, who manages the $109 million MainStay Value Fund (part of a New York Life fund family), believes that the value style of investing will be in favor for a while. "After the 'Nifty 50' in the early '70s, we had seven years of value, and after the energy crisis of the early '80s, we also had seven years," he said. "I expect the same here, now that the tech bubble has burst." In Q2, Mr. Rosen purchased P&G, Kimberly-Clark and McDonald's . Looking ahead, Mr. Rosen likes paper stocks, particularly International Paper, and is hoping to buy more McDonald's. Although Mr. Rosen believes that the tech market as a whole is still overvalued, he likes certain tech stocks. At the top of his list are Motorola, Electronic Data Systems, IBM and Apple. Related: LA Times 12-23 Douglas Cliggott, J.P. Morgan Securities analyst, believes the U.S. economy won't pick up again until late next year, even if the Federal Reserve cuts interest rates early in 2001. That's why he's recommending investors stick with companies whose earnings hold up well even in a slowing economy, such as health insurer Cigna, drug maker Schering-Plough, and household products company Procter & Gamble. A year ago, Cliggott predicted that the Standard & Poor's 500 Index would finish this year at 1,300 when most of his peers where forecasting an average of 1,525. With a week left in 2000, the S&P 500 stands at 1,305.97, down 11% for the year. "There's been an increasing mood of pessimism, about the economic outlook, the earnings outlook and hence, the market outlook," Cliggott said. "The market rarely goes down in a straight line, but we see a bottom in the summer and the S&P 500 finishing 2001 at 1,400." That would be a 7.2% increase from Friday's close. Related: Alan Gayle - Managing Director Trusco Capital Management, CNBC 12-28 Three factors point to improved conditions for stocks in 2001. The first is a friendlier Fed. The second is a peak and possible decline in oil prices. Falling energy costs would tend to pull inflation lower as the year progresses, exerting less of a drag on income and profits. Finally, and perhaps most importantly, the markets have already adjusted expectations and prices downward to reflect the prospect of slower growth in the economy and in corporate profits. Share prices have fallen dramatically, and valuations are more attractive. In this light, an increased allocation to stocks makes sense for the coming year.
Over the past 55 years, only once have stocks fallen in two consecutive years. On average, the S&P 500 rose 16.7% following a down year. A bad year in the stock market doesn't guarantee a subsequent good year. But the markets very effectively assess which way the wind is blowing. They adjust, and then they move forward again. In the equity markets, sectors that generally benefit from falling interest rates, such as financials and consumer cyclicals, deserve particular attention in portfolios. Related: WSJ 1-2 'There are only two sources of stock-market return,' says John Bogle, founder of Vanguard Group. 'One is investment return, which is relatively predictable. The other is speculative return, which is highly unpredictable.' Mr. Bogle calculates the likely investment return by adding together the starting dividend yield, currently just over 1%, and annual earnings growth, which Mr. Bogle pegs at 8%. Combine those two numbers and you get just over 9%. But for investors to earn that return, stock valuations would have to remain unchanged. Mr. Bogle thinks that is unlikely. He looks for the market's price-earnings multiple to fall below 20 over the next five years, which would knock six percentage points a year off the market's return. Result? Investors will collect just 3% a year.
What makes junk bonds attractive right now is their yield. Junk bonds, on average, are paying more than 14% - nearly three times current Treasury yields - while investment grade bonds of big companies are yielding 7.5%, according to Merrill Lynch bond indexes. On top of that is the prospect that the prices of high-yield bonds will eventually rally if current concerns about the economy prove unwarranted. Mr. Greenspan has said he will do his best to prove that those concerns are overblown. Martin Fridson, Merrill Lynch's chief high-yield strategist, warned that the high-yield recoveries of 1991 and of 1998 did not happen until short-term interest rates had fallen well below long-term rates, a sign that the economy was poised to grow nicely. Right now the 5.35% yield on the Treasury's 10-year note well below the 6.04% on the Treasury's three-month bill. Still, high yield is very attractive, even if things do get worse before they get better. Look at it this way: Even if it takes a year for high-yield bond prices to move up, with 14% interest rates, you are being paid nicely to wait. Related: Kathleen Hays, CNBC TV Anchor 12-14 The red-hot bond-rally beat keeps pounding in Bondland, fuelled by a very tame inflation report, a weak stock market and gnawing worries over the US economy. As for inflation, the PPI rose a slim 0.1% in November. The core PPI was unchanged. On top of that, oil prices continue to crumble. The weekly Consumer Comfort Index from ABC/Money Magazine showed a marked deterioration in confidence in the overall index and its components: the economic outlook, personal finances and in the buying climate. And a Wall Street Journal/NBC poll shows that almost half of those surveyed see recession next year - two months ago, by a two-to-one margin, they saw no recession at all. And now 43% say the country is on the wrong track - only 39% say it's moving in the right direction. Who's afraid of the Big Bad Fed? No one. Who's afraid of a Horrible Hard Landing? More than one. Related: Floyd Norris, NY Times 12-15 Moody's estimates that the default rate for this year will be 6 percent and that it will rise to 9.1% next year, nearing the record of 10.3% in 1991. [But] in junk circles, 1991 is remembered as more than the year with record defaults. It is also recalled as the year the average junk bond fund returned 41%. Related: Michael Santoli, Barrons 12-18 Bill Miller of Legg Mason Funds thinks that junk funds have been marked down excessively, and represent a potential source of that rare currency, "easy money." In particular, closed-end high-yield funds, a passel of which are trading at huge discounts to their net asset values, stretching their cash yields toward 20%. Though he didn't cite funds by name, some of those that fit this description include Dreyfus High Yield Strategies, DLJ High Yield Bond and CIGNA High Income. Related: Tom Petruno, LA Times 12-10 Through October, a net $32.6 billion has poured out of taxable bond funds, and $15.7 billion out of muni funds according to ICI. For both taxable and tax-free bond funds, the outflows so far represent about 6% of each category's assets at the start of the year. From 1984 through 1990, bond fund assets ballooned from $46 billion to $291 billion. In that same period stock fund assets rose from $83 billion to $240 billion. In the 10 years ending Dec. 31, 1990, the average bond mutual fund that owned high-quality corporate bonds produced a total return of 210%, according to Lipper. That topped the 202% return on the average stock mutual fund in that period. No wonder investors [back then] loved bond funds. Related: Barrons 12-11 Bonds sold off somewhat on Friday morning in reaction to new economic data, which showed average hourly earnings rose by 0.4% in November, stronger than an expected 0.3% rise. This was the fourth increase in this reading in the past five months and a solid indicator that 'the economy is still decent, and that purchasing power is still being generated,' observed Maury Harris, US chief economist at UBS Warburg. Just the Facts Today, there is virtually no such thing as a sell recommendation from Wall Street analysts. Of the 8,000 recommendations made by analysts covering the companies in the S&P 500, only 29 now are sells, according to Zacks Investment Research. That's less than .5%. On the other hand, "strong buy" recommendations number 214. (Gretchen Morgenson, NY Times 12-31) 2000 was rather like enduring a months-long detention at the school of hard knocks. At various times, investors found themselves standing at the blackboard writing over and again: I will not buy stocks with no earnings. I will not buy stocks with no business plan. I will not buy stocks with borrowed money. I will not read Wall Street research. (Gretchen Morgenson, NY Times 12-31) If you carry a balance of $1,220, which is the average amount consumers surveyed by Myvesta.org (a nonprofit financial services organization) said they would spend on gifts, and make only minimum payments at 18% interest, it will take 22 years to pay off. And interest payments will top $2,500. (NY Times 12-31) In 1999, only 241 of the 500 companies in the S&P index gained, while 256 fell. But this year, 276 stocks in the index are up, while only 218 are down. So why do the percentage gains and losses tell such a different story? The S&P is capitalization weighted, so the movement of the companies that investors value the highest (technology companies) has the largest impact on the index. If you instead calculated the index with every stock given the same weight, the S&P rose just 11.9% in 1999 and was up 10.1% through Wednesday. Howard Silverblatt of S&P's Quantitative Services reports that within four sectors of the S&P 500 (health care, financial, energy and utilities) 86% of the stocks are up this year, while only 39% rose in 1999. Just 31% of tech/telcom's are up this year while 86% gained in 1999. The Dow Jones utility average is up 46% in 2000, its best showing since 1943. If a real bear market means investors have lost all faith in stocks, then this market does not qualify. (Floyd Norris, NY Times 12-31) Only 2.1% of all analyst recommendations tracked by Thomson Financial/IBES in mid-December were classified "sell" or "underperform," a small share that is pretty typical in recent years. In contrast, 31.2% of all analyst recommendations were "strong buys," and 39.9% others were "buys." (WSJ 1-2) A London chess shop offers a Shot Glass Chess Set that invites players to drink the contents of captured pieces. The set "can stimulate and eliminate brain cells simultaneously." (WSJ 12-28) When critics of value investing complain about the "value trap" - that is, cheap stocks that stay cheap - Martin Whitman (manager of Third Avenue Value Fund) replies that patient value investors are rewarded when the value of their stock is recognized in a takeover, or through "general market recognition." Meanwhile, the value investor avoids what Mr. Whitman calls "the growth trap," or massive losses when expectations for expensive stocks don't pan out. (WSJ 12-28) 'In the next couple of weeks, people are going to get their year-end statements, and they're going to see how much they've lost, and they're going to start to buy value funds,' said Sheldon Jacobs, publisher of the No-Load Fund Investor. 'We've only seen a trickle, but I think it's going to become a torrent.' (AJC 12-27) The Fed numbers for the third quarter show the ratio of nonperforming assets to total assets increased from 0.67% to 0.7%. Over the course of my career, the average for that ratio has been 1.5%. This number is still very good, even though it will probably go up in the fourth quarter. The ratio in the 1990 was 2.94%. It rose to 3.02% in 1991 - and for savings and loans: 3.96%. Some people are estimating that bank profit growth for '01 will be up 10-12%. That will be hard for most banks to do. Credit problems will be worse than this year. So profit growth of 6-8% is probably a better range. That range might go up to 9-12% in 2002. (James K. Schmidt, lead portfolio manager of the John Hancock Financial Industries fund and the John Hancock Regional Bank fund, NY Times 12-24) Historically, there're plenty of reasons to bet on international stocks. In the 10 years ending in December 1984, for example, foreign stocks (EAFE) outperformed the US S&P 500 index, 298% versus 291%, according to a study by mutual fund firm T. Rowe Price. In the 10 years ending in 1989, foreign stocks beat US stocks 678% to 399%. Even in 1994, foreign stocks were still ahead over 10 years, 419% to 282%. In the 10 years ending in December 1999, however, US stocks handily outperformed foreign stocks, 433% to 103%. Over all the 10-year periods ending each year since 1984, foreign stocks outperformed US stocks in 11 of 16 periods. (CBS MarketWatch 12-24) When investors are feeling good, as they did in 1998 and 1999, they tend to dismiss negative signals as aberrant. When they're feeling bad, the opposite occurs. They tend to discount the positive, which makes recovery harder. That's why they're discounting the economists who keep reminding us that this is not a hard landing. (Fred Barbash, Washington Post 12-24) Although it is popularly believed that a recession is two consecutive quarters of negative economic growth, that is not correct. The recession of 1970 had two quarters of decline, but they were separated by two quarters of growth. In 1980, the recession had only one negative quarter, but it was a major plunge. Indeed, business cycle economists continue to debate whether either of those two events should have qualified as a recession. According to the National Bureau of Economic Research, those recessions stand. The bureau has a dating committee that examines whether economic weakness is sufficient to qualify as a recession. In other words, a vote by a committee of economists determines whether a recession has occurred. Furthermore, this vote usually is taken well after the decline has commenced. (Donald Ratajczak, AJC 12-24) The statistics illustrate how quickly the minimum wage is drifting toward oblivion. Adjusted for inflation, it has declined steadily in value from a high of $7.66 an hour in 1968 to today's $5.15. Measured another way, when the Democrats proposed the $1 increase in 1998, the benefit would have gone to 10.1% of the work force. That was the percentage earning between $5.15 and $6.15 that year. This year, only 6.8% (nearly nine million workers) would have benefited directly from the same increase. (NY Times 12-24) "You must keep buying when the market is down. That's how you accumulate enough shares to win big when the market's uptrend returns." (Charles Carlson, chartered financial analyst, co-manager of the Strong Dow 30 Value mutual fund and author of three books on investing - including "Eight Steps to Seven Figures" - Hank Ezell, Seattle Times 12-24) Back in the middle of 1998, when the 'value' exodus began, value funds had $681 billion in assets and growth funds had $586 billion, according to Financial Research Corp. At the end of this year's third quarter, value funds had $50 billion less than they had in 1998, while growth-fund assets had doubled to $1.2 trillion. (WSJ 12-22) For years, investors have been trained to believe that whenever the financial markets turn particularly stormy, Alan Greenspan can be counted on to calm the seas. But in their stampede out of stocks yesterday, investors seemed to be awakening to the idea that the chairman of the Federal Reserve may not be quite the guardian angel they thought he was. So it seems utterly perplexing to many of them that when the FRB met on Tuesday, it didn't cut interest rates. (Gretchen Morgenson, NY Times 12-21) For many US and foreign companies, the pressing problem may not be the depth of the global downturn but its width: a reflection of the increasing ties across global markets and the greater likelihood that what affects one will affect all. As in the 1998 crisis, the causes of this slowdown - rising interest rates, higher oil prices and slumping financial markets - have all been global rather than local phenomena. The US GDP accounts for almost 30% of world output, up from 26% in 1992. US companies now make up almost half of all world corporate profits, which is a 33% increase from a decade ago, according to Jeff Applegate, chief investment strategist at Lehman Bros. At the same time, the 1990s' mantra of globalization has made US corporations more dependent than ever on overseas revenue. The average company in the Dow now derives about 40% of its revenue from outside the US, up from 35% in 1988, according to Ed Keon, director of quantitative research at Prudential. (WSJ 12-21) A $1 minimum wage hike passed when business is booming and labor is short throws few people out of work. But when the time comes for belt-tightening, the extra $40 a week, plus related payroll taxes, will lead to layoffs and aggravate the slowdown. Similarly, the OSHA's new ergonomics regulations will divert billions of dollars into redesigning work spaces and buying new equipment. The $20 billion that UPS estimates it will have to spend upfront to comply will not be available for new trucks, planes or tracking systems or for employee raises. If the law requires people to worry about ergonomics instead of sales or service, they will do so, but productivity will inevitably be hurt. Whether setting limits on growing new businesses or restricting struggling old ones, regulatory expansion poses the greatest long-term threat to economic prosperity. (Virginia Postrel, NY Times 12-18) Making the latest slowing of business sales even more disruptive has been the concurrent acceleration of inventories. Back during the quarter-ended October 1999, the 8.4% yearly increase of business sales led the 3.4% yearly rise of inventories by a wide and, thus, stimulatory 5 percentage points. By the quarter-ended October 2000, the yearly increase of business sales had descended to 6.4%, which lagged the corresponding 7.0% advance of inventories. Not since early 1998 has the yearly increase of sales lagged that of inventories. Six months prior to the start of the last recession, Q4-89's 3.2% annual increase by business sales trailed inventoriesĖ accompanying 7.2% yearly jump by an economically debilitating 4.0 percentage points. For 2000's final quarter, an expected 4.9% annual increase for business sales may lag concomitant inventory accumulation by nearly three percentage. November's 0.4% monthly decline lowered retail salesĖ year-to-year increase from October's 7% to 5.2%. In view of how the annual increase of retail sales has plummeted from the 10.5% of Q1-2000, excessive inventories and downwardly revised earnings estimates were inevitable. (John Lonski, Moody's 12-18) The conventional wisdom a few weeks ago was that further signs of economic weakness would be good for stocks, because the evidence would compel the Federal Reserve to act faster to loosen credit and keep a slowdown from spiraling into a recession. So far, that bad-news-is-good-news concept isn't holding much water. If the Fed does go the extra yard in trying to calm investors, but the market refuses to climb out of its funk even then, hope for the long-awaited year-end rally may all but evaporate. (Tom Petruno, LA Times 12-17) A decade ago, auto and auto parts companies made up about 4% of the S&P's 500-stock index. Today, 1%. GM is down more than 20% this year; DaimlerChrysler more than 40%. Declines among the auto parts companies are comparable. Earnings per share were growing 10 to 15% in Q1 and Q2. In Q3, it looks like they contracted 20% and that they will fall another 35% in Q4. High fixed costs is the major reason that explains the difference. A 1% decline in sales gives you a 5 to 6% decline in earnings. This is a time to stay on the sidelines. (David Bradley, an auto and auto parts analyst at J. P. Morgan Securities, NY Times 12-17) Home Page Previous Factoid Top Sites |