| Factoids from Business & Investment News
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Five online job-search companies are together priced at $1.2 billion, yet online-job advertising this year is projected at only $525 million, and already there is fierce competition for that money -- from traditional companies that own the two largest job sites and from some hundreds of other sites. Wal-Mart has grown rapidly this decade to become the world's largest retailer. But with a price/earnings ratio 2.5 times as large as that of other retailers, profit would have to match analysts' bullish estimates of 14% annual growth for seven more years to "grow into" its valuation (with no change in its stock price). To achieve the nearly $400 billion in sales such growth implies, Wal-Mart practically would have to put every other general merchandiser out of business. The S&P 500's 31 price/earnings ratio is misleading. The 10 largest technology stocks plus Yahoo!, together making up a fifth of the index, had a combined P/E of 74. Without them, the market's P/E drops to 26, according to Salomon Smith Barney. Half the companies in the index trade at 20 times earnings or less.
The signal certainly isn't getting through to the stock market. Stocks have historically moved up and down in rough correlation with bond prices, which move inversely to interest rates. But a Lehman Brothers index of stock and bond prices shows the link was severed last year -- shortly before the Fed start raising rates -- and the gap has continued to widen through early this year. Investors appear to have adopted a new paradigm: They are gambling on gorilla-size gains in technology companies, and are less interested in aiming for single-digit returns. The surge in stocks has the perverse effect of undoing what the Fed is trying to do. For many companies, what matters most is the cost of capital, not necessarily the source. While borrowing money is getting costlier, raising money in the stock market isn't. Goldman Sachs attempts to measure these trends with its "financial conditions index," which blends interest rates, stock prices and exchange rates to measure the ease of access to capital. The index suggests the Fed moves have, in the broader scheme of things, been a wash. Nine years of unbroken prosperity have cushioned the impact of higher rates. While corporate borrowing has soared in recent years, companies with ever-rising profits can more easily afford higher borrowing costs. Many businesses can now easily finance expansion from huge cash reserves built up from years of fat profits. No one thinks the Fed has become impotent. Yet it also seems that the knobs Mr. Greenspan turns to tweak the economy aren't as tightly wired as before. The banking sector, which is the most directly affected by the Fed's actions, isn't as important in supplying credit to the economy as it used to be: Bank lending covered just 27% of all private-sector borrowing last year, down from 38% a quarter-century ago. Meanwhile, with the U.S. leading the world into a new economic era, the credit flowing from investors overseas appears almost unbounded. Many consumers feel cushioned as well. They see that jobs are plentiful and inflation is barely perceptible. And they have hefty stock-market gains that they can use to help finance big purchases. Intense competition and new financial instruments have also helped shield consumers from higher rates. Consumers wary of taking on a 30-year fixed-rate mortgage of more than 8% can choose between an array of competitive adjustable-rate mortgages that charge a half-point less, at least for the first few years of the loan. ARM's do become pricier in the later years of the contract, 'but a lot of our buyers only own a home for seven years anyway,' says Ted Mahoney, a Boston-area homebuilder. With 'different mortgage options appearing, demand hasn't really abated, to be honest.' Auto buyers are also finding competitive credit easy to come by. Mr. Greenspan is, in some ways, a victim of his own success. In the '60s and '70s, when the Fed raised rates, people thought times would get worse and unemployment would be an issue. Now, most people don't expect it to threaten their jobs or income security. Lehman Brothers economists Ethan Harris and John Llewellyn wrote in a recent commentary: 'This has created an awkward situation for the Fed. Because only one brake is working, it must push even harder on the brake pedal. That raises the risk of a monetary 'accident' should the stock market suddenly reacquire fear of the Fed.' It happens late in every business cycle. The particular circumstances vary, as do the excuses. Experts start saying that 'Interest rates don't work the way they used to, if they work at all.' Example: Higher short-term rates are good for bonds because they reduce inflationary expectations. Example: Higher interest rates won't slow the economy because interest income is a greater share of personal income. In other words, higher interest rates put more money in savers' pockets, so they must be stimulative. Come again? In order for individuals to forgo current consumption in favor of future consumption they have to be given an incentive. The Fed provides the incentive by raising interest rates, which increases the opportunity cost -- the value of the next best alternative -- of spending. Interest rates have always worked in the past. The interest rate that works in one business cycle doesn't work in another. `If capital is more productive, real interest rates should be higher,' says Neal Soss, chief economist at Credit Suisse First Boston. `But trust me: there is a level of interest rates that will make a difference.' There is some rate, which has yet to be determined, where investments are no longer viable at the margin, which is where economics operates. There is some rate at which investors will pay less for future earnings -- at the margin. And there is some rate at which consumers won't be willing to finance their seemingly insatiable appetites with more debt -- at the margin. Another problem with the WSJ article is the presumption that raising banks' overnight cost of funds (the federal funds rate) matters less than it used to because bank lending comprises a smaller portion of total credit. `That confuses banks' role as a financial intermediary between lenders and borrowers and their role in the money creation process,' a Fed economist explains. Capital markets are entirely capable of allocating credit. What they can't do is create it. Remember how lousy the US economy, with the most highly developed capital markets in the world, performed in the early 1990s when banks were buckling under the weight of bad loans? Contrast that with how splendidly the US economy performed in Q4-98, following the `seizing up' of capital markets. Old shibboleths (customs?) die hard, and banks' relevance to the New Economy is one of them. Banks are still the conduits for expanding the money supply from the raw material -- bank reserves -- created by the Fed. If you like low interest rates, you'll miss Dallas Federal Reserve Bank President Robert McTeer. McTeer and three other regional Fed bank presidents lost their rate-setting votes Jan. 1 in the Fed's rotation, which every year cycles four votes among 11 regional Fed bank presidents. The 12th bank president -- New York -- always gets a vote, as do the seven members of the Fed's Board of Governors. While outsiders generally regard the Fed's rate moves as the product of one man -- Fed Chairman Alan Greenspan -- insiders say the reality is more complicated. Among the four new voters are two Fed bank presidents regarded as among the system's hardest-line inflation hawks: Richmond's Alfred Broaddus and Cleveland's Jerry Jordan. The new group is viewed as decidedly more hawkish than the old one. That could tip a divided and uncertain FOMC toward higher rates in a situation where the case for a rate hike is ambiguous, which is just the sort of situation the Fed is likely to encounter this year.
By agreeing to acquire Time Warner and its cable television systems, AOL has made a major concession: that the future of cyberspace for consumers is not in the phone-line modems on which it has built its base of 20 million subscribers. The Numbers: Advantage Cable The Yankee Group, a technology consulting firm in Boston, estimates that by the end of 1999, 1.1 million US households received broadband data connections through cable lines while only about 300,000 had broadband service through phone wires. In the battle between the cable television industry and the local telephone business, cable is wining. Planning: Advantage Cable Many of even the biggest cable companies have been run by the entrepreneurs who founded them, or by their families, while the biggest local phone companies have had board-room bureaucracies making decisions with more deliberation. Technology: Advantage Cable And there is a technically reason for cable's advantage. Think of the copper telephone wire as a very thin but very intelligent pipe, and the cable wire as very fat but very dumb. Cable television systems were designed to carry television signals, which require far more digital bits than even the quickest data connections generally available to consumers. Moreover, cable systems have been designed to convey those signals over many miles. Local phone wires were originally meant to carry only voice conversations -- a digital trickle. And as more digital bits are pumped through a telephone wire, the sustainable distance for the flow rate is reduced. For consumers, that means homes more than roughly three miles from a telephone switching station have little hope of getting a high-speed connection through phone wires. In a traditional phone network each home essentially has its own wire running to a switching station. Cable networks are designed around a "tree and branch" architecture in which traffic is combined from individual homes and routed into neighborhood-sized communications pipes. This cable design means that, strictly from the perspective of raw communications capacity, even a high-speed data connection hardly taxes a cable system. And just as important is that, from a network standpoint, one home looks the same as the next. In a telephone network, by contrast, the link to each home has its own individual characteristics, starting with the length of the required copper wire. The catch is that traditional cable systems are meant to carry signals in only one direction -- toward the home -- which is one reason why they are sometimes called "dumb." In the last few years the cable industry has spent billions of dollars to make its networks communicate in both directions. Once those two-way upgrades have been made, it can be much easier for a cable operator to introduce a high-speed Internet system. A cable operator can offer service ubiquitously throughout a given neighborhood while telephone technicians must generally make certain, often by hand, that the wire going to each house is capable of supporting broadband service. Phone Line Advantages Technically, phone networks have some important advantages over cable systems. Once a user is connected to a phone-line broadband network, the data connection's speed is essentially guaranteed. Cable's tree-and-branch network layout can reduce the speed of a user's connection as more people in the same neighborhood sign on. That difference in basic network architecture, some engineers say, also makes cable networks more vulnerable to malicious hackers than phone networks are. So despite cable's lead, the local phone giants insist that they will ultimately be able to offer a more attractive high-speed Internet service. To understand why many individual investors were dumping AOL stock last week, you have to understand why they once bought it: It was the stock for all reasons. It was a growth stock. It was a speculative stock, but a safe one. It was a toe in the water for the timid. I could imagine all the gurus on Lou Rukeyser's show sitting around condemning me. Look at those price-to-earnings ratios. Look at those multiples. What sort of idiot would buy that stuff? What the befuddled experts don't understand about small investors and the Internet is that rebellion craves condemnation. Thus, the more the experts warned of the dangers, the more fun the danger became. The higher the multiple, the more daring it all seemed. Middle-aged guys want to be bad, but at heart, most of us are too good to be bad. Here was a stock that was good and bad simultaneously. AOL had revenue. It had earnings. It had a board of directors that includes Colin Powell. AOL offered deniability. "Dot-com stock? This is no dot-com. It's the S&P 500." The stock market made this takeover possible by valuing AOL at twice the value it accorded Time Warner. This despite the fact that Time Warner's businesses produce from four to six times (depending on who's counting) the operating profits of AOL's businesses. Thus, Wall Street says a dollar of AOL operating profits is worth eight to 12 times a dollar of Time Warner profit. New math? AOL is swapping 1.5 of its shares for each Time Warner share. The day before the deal was announced--the way you value such a deal-- AOL stock was $75, Time Warner was $64. Do the math and AOL is paying a bit above $110 a share, a fat $45 premium over the pre-deal price of Time Warner. You can see why (Warner CEO) Levin is hot for the deal on his shareholders' behalf. And his own. By my count, applying the $110 price increases the value of Levin's unvested options by $125 million and the value of his vested options by $240 million. It sure looks to me like this deal isn't about "content". Rather, it's largely about AOL getting to use Time Warner's cable-TV wires to carry high-speed "broadband" services to millions of potential users.
Anyone who thought the revolution would leave the bond market unscathed has had a rude awakening in recent days as borrowers lined up to sell debt electronically. Companies and agencies will learn to live without the expensive handholding provided by their bankers as the Internet learns to match borrowers with lenders efficiently and cheaply. Freddie Mac kicked off last week with the first international bond sale marketed and subscribed through the Internet, a $6 billion 5-year issue. Thursday, the World Bank announced plans to borrow a minimum of $3 billion via the first global bond to be `offered, distributed and traded on-line.' And Ford Motor Co.'s finance unit yesterday announced the Internet's first corporate bond sale, planning to sell $1 billion of three-year notes.
Worried about rising interest rates? Take a look at the yield curve and relax. It points the way to a safe harbor for investors -short-term bonds. The three fed rate moves last year and the threat of more have pushed short-term interest rates up sharply. Since last May, the yield on the Treasury's one-year bill has jumped 1.25 percentage points, to 6.10%. But the yield on the 30-year bond is up far less, just 0.77 percentage point, to 6.69%. The difference between the two yields is now 0.59 percentage points. In bond market parlance, the yield curve in now nearly flat -- and there are some analysts who think that it will actually invert. Bonds don't have much further to fall before their 15-month bear market ends, based on what some analysts and money managers see in the charts. For the past two decades, bond yields have consistently peaked at lower levels. Yields won't break that pattern this time around because inflation is at bay, they say. `Yields are up only on the expectations of rising inflation, but inflation died in the 1980s and never really came back,' said James Paulsen, chief investment officer at Wells Capital Management in Minneapolis. `Inflation has dropped to 2% from 4% since then and the market can't get used to it.' Paulsen expects yields to peak below the April 1997 high, and drop as much as 100 basis points this year once interest-rate increases by the Federal Reserve take hold and slow growth. Joe Keating, chief investment officer for Kent Funds says `There is global competition, higher productivity rates and Internet-related comparison shopping to keep inflation low. `The low inflation rate will keep yields from rising much further, and we'll get a decline in yields once we see definite signs the pace of economic activity is slowing.'
US colleges have led a major push to wire dorms with Ethernet connections in recent years, creating a generation of students accustomed to high-speed Internet access. In addition to academic uses, students use the high-speed connections for music files, instant messaging, toll-free phone calls, e-commerce, games, and digital movies. The connections in most dorms offer 10 Mbps connections, which are 200 times faster than today's fastest dial-up modems, and students find it difficult to revert back to using slower connections. Although about 2 million households now have high-speed Internet connections, about 7 million college students now have high-speed access through their schools, according to Jupiter Communications.
Almost as remarkable as what pleconaril does, is how it came to be. This drug was not so much discovered as designed. It is an exquisitely precise sort of monkey wrench. The drug fits neatly into a groove on the surface of the virus, gumming up the machinery it needs to infect the body's cells. Experts believe the same research techniques will lead to treatments for many other kinds of viruses, predators that are still mostly beyond the powers of modern medicine. The medicine can shorten a bad cold by three or four days and help people feel considerably less miserable along the way. Pleconaril does this by disabling the rhinovirus. And it also neutralizes the second most common human virus, the enterovirus. Various versions of enteroviruses cause an amazingly broad range of illnesses: lingering summer colds, head-splitting meningitis, childhood fevers, inflammation of the heart, polio, plus overwhelming infections that sometimes kill newborns. One drug can stop both rhinoviruses and enteroviruses because they are close cousins, members of a large family called the picornaviruses. Pleconaril is made by ViroPharma Inc., a 5-year-old, 102-employee pharmaceutical firm in the Philadelphia suburbs. The publicly traded company is sponsoring two large studies, due out in the spring, that will determine whether the drug works well enough to win Food and Drug Administration approval. Over the past two years, the FDA has allowed the company to dispense pleconaril outside of organized experiments for infections that are life-threatening or especially gruesome. So far, nearly 100 people have been treated this way, often with seemingly spectacular results. Doctors have also successfully treated people with myocarditis, an inflammation that can destroy the heart, and with polio, which is also caused by an enterovirus. Overall, doctors estimate that about three-quarters of these emergency cases appear to have benefited from pleconaril. ViroPharma estimates that every year, Americans get between 400 million and 500 million picornavirus infections that are serious enough to make them feel bad. It plans to charge between $50 and $100 for enough medicine to cure one infection. NOTE: ViroPharma closed at $38.25 on Friday. It has a 52-week hign on $47 (and since posting this on the 14th, the stock has had a high of $81) and a low of $5. It has no p/e ratio. Additional info available at both the NASDAQ (search 'ViroPharma') and Dr's Guide (search 'Pleconaril' ) sites.
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1) The so-called "broadening out" is a sign of rotation away from the soaring high price-to-earnings multiple and Internet names. When the former leadership begins to lag, watch out for a correction. 2) The new high in the DJIA is not accompanied by other indices. A technical divergence that suggests people are moving to cyclical stocks, typically the most inflationary and the last group to move in a rally. 3) Breadth was better last week, but it is always strong in a new year as new money piles into the coffers of mutual funds. The fact is that long-term breadth sucks! The advance/decline line topped in April 1998. This is the worst divergence since just before the nasty 1973-74 bear market. 4) A lot of technical damage was done to Nasdaq stocks last week when they dropped on extremely heavy volume. This average was the most extended in its history (as a percentage above its 200-day average) going into last week. The euphoric snapback Monday did not help the Nasdaq hit a new high. 5) We are sure to see a flood of new Internet IPO's and a plethora of secondary offerings from last year's Internet winners. This constitutes greater supply. 6) Interest rates continue to rise. Historically, bear markets can start after three rate increases by the Fed. We have already seen three in the last six months and it is almost a certainty that we will see another at the beginning of February. 7) The Fed is surely going to drain liquidity out of the financial system now that the Y2K Apocalypse has failed to apocalize. 8) Not since the Sixties have we seen tremendous speculation accompany such spectacular gains. Usually the most spectacular gains are made when investors are most cautious. This has resulted in margin debt increasing to ridiculously unprecedented levels. Any correction in the market will lead to a tidal wave of margin calls and liquidation. The market trend is still up, but this market is dangerous. I've got my helmet on, the hatches battened, my chinstrap taut, and my mouthpiece installed, ready for the g-forces and the e-farces in store for us.
Some technicians view volatility as a warning sign. `Extreme volatility can take place at turning points,' says Gail Dudack, chief investment strategist at Warburg Dillon Read. `Volatility also increases in down markets. With volatility so high in an up market, it's hard to fit it into the historical pattern, unless it becomes a turning point.' An indicator tracked by Ned Davis Research confirms that volatility in the Nasdaq has increased to the highest level since late 1998. According to Tim Hayes, global equity strategist at Ned Davis Research, `Volatility is more of a measure of a risky environment, one in which small-cap stocks do worse than large-cap ones.' `High volatility occurs in a down market,'' Hayes says, agreeing with Dudack. Just to confuse the matter, extremely high volatility can be bullish, indicating `a selling climax at the end of a decline. `When volatility starts spiking higher in a down market, it can be positive.' Low volatility, on the other hand, is a characteristic of market peaks. `In advance of a top, the market loses momentum and volatility,' Hayes says. `You get low volatility at peaks.' So, just to recap: volatility is low at top, high on the way down, very high at the bottom. Oh, and it's high coming off the bottom, Hayes adds. Some strategists think stock market volatility is just returning to normal after the low volatility 1992-1996 period; that's the view of Goldman, Sachs chief investment strategist Abby Joseph Cohen. Better yet, stock market volatility is low relative to bond market volatility, according to Arun Kumar, senior equity strategist at Lehman Brothers. While Kumar's long-term measures of volatility focus on the S&P's 500 Index, not the newer Nasdaq Composite, he found that `the muted cyclicality of the U.S. economy, with only one mild recession since 1982, has decreased volatility in stocks relative to bonds. You need a lower equity risk premium than in the past because of the elongated business cycle and the reduced need for the Fed to cause a recession to quell inflation.' So, stock market volatility has either increased or decreased, is not relevant in the first week of the year and is giving out confusing signs based on historical patterns. Whew! I'll just wait for someone to ring the bell at the top, which is a helluva lot easier than trying to figure this out. In the first three weeks of trading in 2000, the average differential between the intraday highs and lows on the Nasdaq has been roughly 3.4%. By comparison, the average swing between the daily high and low on the Dow Jones Industrial Average is running a shade under 2%. Last year, the intraday price volatility on the Nasdaq averaged around 2.5%. 'Volatility per se is not a problem, but excessive volatility is a problem,' says Andrew Karolyi a business professor at Ohio State. Excessive volatility could cause some risk-averse investors to shy away from certain high-growth Internet and technology stocks. And if enough people start moving away from those more volatile stocks, then the prices will start dropping. But most experts say there's little sign of that yet. G. William Schwert, a professor at the University of Rochester's Simon School of Business, says that as long as the Nasdaq keeps rising, investors won't get too concerned about volatility and big intraday swings in a stock's prices. 'It is really just the large drops in prices that people care about,' he says.
Investors are taking action. The top five retail brokerage firms (which started 1999 with a combined $240 billion in long-term assets in their funds) had combined estimated outflows of more than $13 billion through November, according to the Financial Research Corp. Brokerage firms now have 10% of all mutual fund assets, down from 19% a decade ago, according to Sanford Bernstein & Co. Cerulli Associates, a research group in Boston, estimates that 80% of the money invested in funds by Morgan Stanley Dean Witter's customers goes into the firm's own funds. That compares with 45% at Merrill; 35% at Salomon Smith Barney; 25% at Prudential; and 10% at PaineWebber. Selling such funds raises the potential for a conflict between a broker's desire to make money for the firm and his duty to steer clients into the most suitable investments. So what accounts for big firms' overall lackluster returns? Many of the larger funds managed by the big brokerage firms have annual operating expenses that are higher than the industry average. And a good deal of it stems from the brokerage funds' conservative bent and their emphasis on the value style of investing during a period in which large-cap growth stocks and highflying technology shares have dominated the market. But the particular -- some would say peculiar -- nature of the brokerage firm fund business has clearly added to the problems, analysts say. Every brokerage firm's fund family is just a part of a larger financial-services company, where most of the attention traditionally has been on retail brokerage, investment banking or trading. Those activities are the usual routes to the top positions at such firms; asset management is not.
Investors are buying more stock with borrowed money. The latest sign: Charles Schwab, the biggest online broker, reported Tuesday that its margin loans to customers rose to $16.9 billion in the fourth quarter, up 25% from the previous quarter. But brokerage industry officials aren't worried, because investors' assets also are rising fast. That makes it easier for borrowers to support new debt. At Schwab, margin loans were just 2.3% of customer assets, only slightly ahead of the previous quarter. (USA Today 1-19) If you're in the dark about how fund taxes work, chances are you're not going to make the best possible decisions about where and when to invest. Ditch your hired tax preparer and do your own income tax return this year. Vanguard Group investors registered at the big fund firm's Internet site (www.vanguard.com) can download Intuit Inc.'s program called TurboTax for free. American Century Investments has a' 13-page 1999 Mutual Fund Tax Guide, from the Web site www.americancentury.com. Invesco Funds Group has a 17page guide at www.invesco.com. Capital Research & Management says it will have an `interactive tax guide' at www.americanfunds.com in late January. Have a professional preparer check your work if you're not sure of yourself. We don't want anybody getting hurt out there. The idea is simply to learn first-hand what you're up against. (Chet Currier, Bloomberg 1-18) The median tenure of 3,000 managers and executives surveyed by Challenger, Gray & Christmas Inc., last year was 9.8 years, up from 6.5 years in 1991. The increase reflects "a more sophisticated approach" to weeding out employees, says vice president Rick Cobb. Just over 18% of respondents worked for just one employer in their career, compared to 5% in 1991. (WSJ 1-18) European investors have more money in stock mutual funds than bond funds for the first time, according to J.P. Morgan Securities. About $1.25 trillion is invested in stock funds, exceeding the $1.15 trillion that's in bond funds, the bank said. Bond fund assets totaled about 40% more than stock fund assets as recently as 1995. In the US, stock-fund assets have topped bond-fund assets since 1989, according to the ICI. At the end of November, $3.68 trillion was in U.S. stock funds, more than quadruple the $822.8 billion in bond funds. (Bloomberg 1-18) The top anxieties of executives differ from those of 1995 in all but one respect. Finding and keeping qualified employees is still tops, a comparison of surveys by Management Recruiters International Inc., based in Cleveland, shows. In 2000, the list is followed by "keeping up with technology," "the economy," and "global competition." In 1995, the respective runners-up were "increasing sales," "improving customer service," and "cutting operations costs." (WSJ 1-18) Nearly 19% of employees were eligible for grants last year, up from 12% in 1998, says a survey of 1,352 employers to be released Tuesday by Watson Wyatt Worldwide. About three-fourths of eligible workers, making as little as an average of $58,100, actually got them. However, the percentage of a company's total shares that options, if exercised, would make up was basically flat, averaging 11%. (WSJ 1-18) Another year of strong growth and declining unemployment is what my favorite forecaster, economist Jason Benderly, currently expects. He foresees a continuation of the consumer-led expansion, with GDP rising by a robust 4 1/4 %, and with the consumption component of GDP advancing by more than 5%. This year, the combination of a weaker dollar and stronger economies abroad should boost exports. By yearend, says Benderly, the jobless rate should fall to 3.8%. (Gene Epstein, Barrons 1-17) According to a survey by Anderson Consulting (of 541 Internet users between Dec 27 and Jan 2), 47% of Internet users bought books on-line while 37% made purchases through traditional stores and the remainder through catalogs. Similarly, video customers made 35% of their purchases through Web sites and 30% through physical stores. (NYT 1-17) The 'content' and software side of e-business turns traditional economic thinking on its head. Instead of "decreasing returns to scale," which the textbooks argue keep companies from getting too big, the new economy is characterized by increasing returns to scale. The result: Microsoft, AOL, Yahoo! and more. (Alan Murray, WSJ 1-17) Supply-siders take note: the economy does not have an infinitely elastic supply curve. Supply-side growth, driven by technological innovation and productivity advancements, is terrific. But there are demand-side effects as well. Generally the latter precede the former. If the government cuts marginal tax rates, for example, it increases the incentive to work, invest and save. But it's a lot easier and quicker to buy a Lexus than start a Lexus dealership. Greenspan lobbed a not-to-subtle warning to his friends in Congress to keep their hands out of the till. To date, budget surpluses have absorbed a good part of the excess demand relative to supply. `I trust that the recent flurry of increased government outlays... is an aberration,' he said, implying that the less they spend the less he will have to raise rates. (Caroline Baum, Bloomberg 1-14) Tech stocks now make up a record 30% of the S&P 500, up from about 13% just three years ago, while the trailing price-to-earnings ratio of the index has risen to 33.4 -- tying a record set at the end of 1998 -- according to Standard & Poor's. Added to the hgih valuation risk is heavy concentration. Right now, the S&P 500's biggest members make up a larger portion of the index than at any time since the early 1970s. Today's top-10 stocks account for nearly a quarter of the index's value, and its performance. Last year, the 10 biggest companies in the index returned 38.8% on average, compared with just 4.4% for the bottom 200 companies, according to the Leuthold Group. And if you removed all the tech stocks from the S&P 500, its return would have fallen to 3.1% last year from 21%. (WSJ 1-14) Don't tell Al: Former Clinton spokesman Mike McCurry at an education conference introduces a speaker as having been in "the Bush administration -- the first Bush administration." (Ronald Shafer, WSJ 1-14) Was anything enlightening in the speech that Greenspan delivered on the 13th? `For the equity wealth effect to be contained, either expected future earnings must decline, or the discount factor applied to those earnings must rise.' From this Greenspan `told us four things in that sentence,' says Bob Barbera, chief economist at Hoenig & Co, which he outlines as follows: 1. There is an excess of demand over and above productivity-expanded supply. That's unequivocal. 2. That it is wealth-induced. 3. There are two ways to stop the stock-price-driven wealth effect: knock earnings expectations down or raise rates enough to cap stock market wealth. 4. Stocks cannot advance at a faster pace than personal income, which has been growing at an average 4.5% rate for the past three years. (Caroline Baum, Bloomberg 1-14) Last year tech-sector funds received more new money--$38 billion--than they did in the past 50 years combined. (Paul Lim, LA Times 1-15) The bond market has a tendency to perform well on the day the PPI is released. The same holds true for the employment report. If you owned bonds on only those two trading days each month in 1999 -- bought them at the previous day's close and sold at the end of the following day -- you would have made 4 3/4 points, according to Jim Bianco, president of Bianco Research. 'That's not bad considering how poorly the bond market performed last year,' Bianco says. `A buy and hold investor would have lost 16 13/32 points.' Of the 4 3/4-point advance on PPI and employment days, the PPI accounted for 2 18/32, Bianco says. (Caroline Baum, Bloomberg 1-13) The number of Internet IPOs surged to 288 last year from 44 in 1998. Internet IPOs gained an average of 274% through year's end, compared with 146% the year before, according to investment research firm CommScan LLC. Thirteen members of the IPO Class of '99 meet the definition of large stock provided by Frank Russell Co., which maintains the Russell stock indices. These companies are now among the 200 biggest U.S. stocks, whose current cutoff is a market value of $11.4 billion. They include, in addition to UPS, Goldman Sachs, Internet Capital Group, Akamai, Sycamore, Foundry, Juniper, Agilent Technologies, Genentech, Red Hat, Williams Communications Group, Infonet Services Corp., and FreeMarkets. (Bloomberg 1-13) Entry-level prices for home PCs are now increasing for the first time in several years, due to diminished competition in the market, the strong economy, and the rise of home entertainment on the PC. Average PC selling prices rose in November and December, hitting $844 in December, which was the highest average price in six months, according to PC Data. Between August and October, average prices had dropped under $800, PC Data says. (WSJ 1-13) The Alternative Minimum Tax hits more people. The IRS says it received about 618,000 individual income-tax returns with AMT for 1997, up 29% from 1996. Total AMT paid soared 42% to more than $4 billion. Mr. Oveson of the IRS calls for elimination of AMT for individuals, saying repeal 'would do a great deal for simplification and burden reduction of the tax system.' (WSJ 1-12) 'A fine is a tax for doing something wrong. A tax is a fine for doing something right.' This quip, attributed to "anonymous," is one of 731 quotations in the latest edition of Tax Notes (www.tax.org), a weekly publication from Tax Analysts, in Arlington, Va. Treasury official J. Mark Iwry quips: 'No one who has witnessed tax lobbyists' perennial infestation of Capitol Hill can ever again confuse the making of tax laws with the making of sausages. At least when you make sausages, you know the pigs won't be coming back.' (WSJ 1-12) Most people claim the standard deduction, rather than itemizing their deductions. An IRS report shows 69% of all individual income-tax returns filed for 1997 took the standard deduction, about the same as the prior year. (WSJ 1-12) Fully 48 of 102 Chicago firefighters tested by the Smell and Taste Treatment and Research Foundation, Chicago, for ability to identify smells showed "impaired olfaction," compared with just 2% of the general population. Researchers blame exposure to toxins, soot, heat and inhaling during heavy exertion. (WSJ 1-11) About 55% of more than 7,500 workers surveyed by benefits consultant Watson Wyatt Worldwide say they're committed to their employer; 16% say they aren't, 29% are neutral. Companies with highly committed employees enjoy a much higher return to shareholders than others, the poll showed. (WSJ 1-11) In the week ended Jan. 5, equity funds saw a total inflow of $2 billion, $1.7 billion of which went into technology funds, according to AMG Data Services. (Caroline Baum, Bloomberg 1-10) Memo to investors: Avoid buying shares of hot mutual funds on the last day of a quarter. Mutual funds tend to beat the market on the last trading day of each quarter and trail it on the first trading day of the succeeding quarter, according to a new study by the University of Pennsylvania's Wharton School of Business. The trend is especially noticeable among top-performing funds. According to the study, which measured funds over the 11 years through 1995, the average fund beat the Standard & Poor's 500 stock index by 0.53 percentage point on the last trading day of the year, then underperformed the index by 0.37 percentage point on the first trading day of the next year. The study found that over the nine-year period ended in 1996, 80% of funds beat the S&P 500 on the last day of the year, while only 30% beat them on the following trading day. The pattern applied to quarter ends on a reduced scale, the study found. (WSJ 1-10) TheStreet.com, a partner of The New York Times, said Monday that it will drop subscription fees for its main site and reinvent itself as a network of free and paid sites. (NYT 1-10) Waging war in one of the scrappiest battles under way on the Web, the biggest drugstore chains -- CVS, Walgreen, Rite Aid and the Eckerd -- have begun offering medicines online at prices 10% to 30% cheaper than those in their own stores. Other drugstore items, from shaving cream to diapers, are also sold at bargain prices online. The price differentials apply only to the 70 million Americans who don't have prescription-drug insurance benefits. They account for 10% to 20% of retail medicine sales, but cash customers' prescriptions are high-profit-margin purchases that help offset the discounts given to managed-care and government buyers. Internet prescription sales in 1999 represented a small slice -- about $160 million -- of the $101 billion U.S. market, according to Forrester Research. (WSJ 1-10) Last week Nielsen/NetRatings reported that in the month of November, various versions of RealPlayer were used by 8.9 million people on the Internet, representing 12.1% of active Internet users. Microsoft's Windows Media Player was used by 2.4 million users and a market share of 3.2%. Industry analysts say the contest is not only about which software will be used to listen to music, or view video snippets. The outcome could determine which company's technology may be the basis for how television, film, music and other media are distributed and digested in the coming digital environment 'convergence'. By most accounts, convergence is still many years away, but it could mean huge business for the companies that sell software to media distributors. (NYT 1-10) In 1999, noted Doug Cliggott, strategist at J.P. Morgan Securities in New York, many institutional and individual investors dumped stocks in many other sectors to raise cash to shovel into technology and telecom stocks. 'The other stocks were food to feed the extraordinary growth in tech issues,' Cliggott said. But given their tech purchases and the ballooning of the tech sector's valuation overall, 'I think more than a few money managers now are uncomfortable with the technology weightings' in their portfolios, he said. The answer for some last week was to reduce those weightings by selling some tech issues and using the proceeds to buy other stocks. Cliggott sees more of the same through the first quarter, resulting in a continuing broadening of the U.S. market's advance. If he's correct, it will mean that many investors with diversified portfolios will see more pluses on their portfolio statements in coming months than simply in the case of their tech stocks. (Tom Petruno, LA Times 1-9) As French industry restructures to improve its global competitiveness, it has attracted billions of dollars in investment capital, much of it from American and British pension funds. Now, the funds' role in the French economy is spawning the latest in a series of fierce conflicts that pit French cultural values against the demands of international finance. Even the president of France, Jacques Chirac, complained publicly that French workers were being asked to sacrifice simply to 'safeguard the investment benefits of Scottish widows and California pensioners.' In the first eight months of 1999, foreign investment in French stocks and bonds totaled 457 billion francs, or $70.3 billion, more than in all of 1998, when the inflow of 400 billion francs was 50% higher than the year before. Among the top 40 companies on the Paris stock exchange, an average stake of 35% is now held by American and British institutional investors and pension funds. Over all, 15% of the French population owns stock, far below the 50% level for the US, but up from only 1% a decade ago. (John Tagliabue, NYT 1-9) Petroleum economist Amy Myers Jaffe, of Rice University's James Baker Institute for Public Policy, notes that U.S. oil imports now come predominantly from "the Atlantic basin"--Latin America, Canada, West Africa. Indeed, Venezuela and Canada are the No. 1 and 2 suppliers of U.S. imported oil. Two other notes: (1)Fields in Angola and other African countries--or in deep waters of the Gulf of Mexico--can be brought to production in 18 months, a process that used to take five years. (2)Technology also lowers costs. The average cost for finding and bringing a deposit of oil to production is now $3 to $4 a barrel, compared with $7 to $10 a barrel in the 1980s. And that holds for remote seas off Africa as well as the Gulf of Mexico. The payoff is that affordable costs make many more places in the world candidates for oil development. (James Flanigan, LA Times 1-9) Inflation-indexed bonds in other countries -- Canada, Britain, France and Australia offer them -- used to offer higher yields than the American bonds. Now the situation is reversed. Perhaps it indicates a strong demand for capital in this country, which pushes real rates higher. (Floyd Norris, NYT 1-7) The consensus forecast for the 53 economists in The Wall Street Journal's semiannual economic-forecasting survey calls for annualized growth in inflation-adjusted gross domestic product of 2.6% in the first quarter and 3.1% in the second, third and fourth quarters. The consensus forecast is for the CPI to advance at an annual rate of 2.5% during the first half of 2000 and 2.3% during the second half. The consensus forecast is for yields on 30-year Treasury bonds to ease from current levels to about 6.39% by midyear and 6.27% by year end. After being wrong so many times, economists have thrown in the towel, rejected their "dismal" teachings and have turned overtly bullish. To some contrarians, that isn't a good sign. Thirty-nine of the 56 economists expect Asia, not including Japan, to have the strongest economic growth of any region in the world. Forty-three economists said Japan will have the slowest growth. Twenty-four respondents placed the odds of a recession this year at less than 10%; 26 placed the odds at less than 30%. When asked what would cause the next recession, nearly half cited tight monetary policy. (WSJ 1-3)
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