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One can also point to the impact of the rise in interest rates that has already occurred. Case in point: housing. New-home construction peaked a year ago, while sales of both new and existing homes have been falling as well. But housing could also be the poster child for the argument that it is shortages -- not weak demand -- that are chiefly responsible for the slowdown. Builders have long been complaining that they can't find enough construction workers to put up new houses. For their part, real estate agents in most sections of the country will tell you that their biggest problem is lack of inventory -- there simply aren't enough homes on the market. The National Association of Realtors says that in January there was only a three-month supply of homes available for sale -- the lowest since records were first kept back in 1981. From here, it looks more like shortages that are constraining growth, rather than lack of demand. If the Fed thinks this way, too, look for more than just one hike in interest rates in the months ahead.
Well, here are some reasons why not. First, the impact of taxes isn't the same from one investor to the next, or even sometimes from one account to the next owned by the same investor. So any single method of calculating wouldn't apply to everybody. Second, when you're dealing with capital-gain investments that can be held for varying periods of time, actions taken to manage taxes this year have complicated and unpredictable effects on taxes in future years. One year's after-tax return is only part of the story, and an investor needs the whole story if the information is going to be of use. Third, a good record managing taxes last year and this year doesn't always tell you whether a fund can do the same thing next year as well. `After-tax return numbers are not predictive,' Matthew Fink, president of the ICI trade association, has said. `Investors could misunderstand them.' If you're a tax-conscious investor shopping for a fund today, you might even prefer a fund that paid a big capital gains distribution last year (capital gains distributions have been running at a $150 billion-a-year clip of late) over one that has large unrealized gains built up among its investment holdings. The first may be in a better position to minimize future taxes than the second. Insisting that funds publish some arbitrary after-tax number won't solve this problem. It's more likely to make it worse.
There are about a dozen of them, including five giants, variously referred to as "contract electronics manufacturers" (CEMs) in an industry variously referred to as "electronic manufacturing services" (EMS). They are popular on Wall Street and among fund managers because of their billion-dollar contracts with the OEMs--the "original equipment manufacturers," such as Lucent, International Business Machines, Nokia and Ericsson. The big five are Solectron Corp. (SLR), Flextronics International Ltd. (FLEX), Celestica Inc. (CLS), Jabil Circuit Inc. (JBL) and SCI Systems Inc. (SCI). The combined sales of the CEMs are projected to climb to about $150 billion by 2003--up from about $60 billion just two years ago. According to figures published in Electronic Buyers News recently, the CEMs now make about 25 percent of all the electronics industry's goods, measured by sales. According to a recent study by Merrill Lynch's technology group, the earnings-per-share growth of the five companies has been about 50 percent annually since 1996. Solectron is up 50% for the past year; Flextronics has trebled in price; Jabil Circuit is up 87%; Celestica 164% and SCI 115%. CEM stocks as a whole have appreciated 170 percent for the year, Bank of America analyst Paul Fox said. The industry is getting so large that some of the less-giant manufacturers also are worth investigating. They include Sanmina Corp. (SANM), Plexus Corp. (PLXS), Nam Tai Electronics Inc. (NTAI), EFTC Corp. (EFTC) and Benchmark Electronics Inc (BHE). Apologies--as always--to worthy companies I've neglected. (For further reading, see the Web sites of the companies mentioned above. Also read a detailed article by Robert McGarvey published in the Jan. 11 Upside magazine and the continuing coverage in Electronic Buyers News Online and Electronic Business.)
In part, money flows are being choked off by the Federal Reserve, with its campaign to raise interest rates and tighten credit. But cash inflows to stock mutual funds, one very important source of demand for equities, peaked long before the Fed started raising rates. In 1997, investors poured a record net $227 billion into stock funds. Last year the total was $188 billion. At the same time, many investors are shoveling as much or more cash into money-market funds as they are to stock funds--a sign, perhaps, that some people feel they already own more than enough stocks, thank you very much. The money that is entering the market, meanwhile, is largely momentum-oriented. It wants the new hot thing, which this year is mostly smaller tech stocks, including (of course) initial public offerings. The harsh reality, says Galvin, is that amid competition from IPOs, other momentum stocks and money-market funds, "there is little capital left to energize most stocks" today. Think of Wall Street as the Dodge City of the old Western movies. Said the "new economy" stocks to the "old economy" stocks: "This town ain't big enough for the both of us." Before the Dow makes it official, maybe it's time to say: Welcome to the first bear market of the new millennium. Though the Nasdaq appears to be strong, there is less to its move than meets the eye. Put simply, fewer and fewer technology stocks have star power today. Now, even this crucial sector, which drives the composite, is becoming badly bifurcated. Shares in biotechnology, semiconductor companies and telecommunications equipment makers remain hot, but other groups are losing steam. For example, only 34% of e-commerce stocks are up this year, according to Credit Suisse First Boston. And computer retailers are down 9%. A result: technology as a whole is up just 2% this year, lagging well behind the 9% gain in utilities stocks -- one of the unsexiest sectors of all. 'First Call's earnings estimates for big-capitalization technology companies have been going from the 35-40% growth rates to 20-25%,' said David Sowerby, market strategist at Loomis, Sayles. 'As the possibility of an earnings disappointment in these tech stocks grows, it spreads across the entire industry.' Christine A. Callies, chief United States market strategist at Credit Suisse First Boston, agreed. Tech stocks also are benefiting from a bit of the herd mentality. Because they keep rising even as most other stocks are slumping, everybody wants to own them. That pushes their prices up even more. 'Somebody explained it to me like this,' says Jon Hickman, a senior portfolio manager at Jurika & Voyles. 'It's like the whole world's flooding except one island, so everybody wants real estate there. And as the water rises, that real estate gets more expensive.'
Last month, customers of the no-transaction-fee mutual-fund supermarket of Charles Schwab put a paltry $1.1 million into index funds, down from a record $510.9 million a year ago. Most hurt by the slackening flows: portfolios that track the S&P 500. In December, just $627.6 million went into these funds. That is down 89% from $5.67 billion in January 1999, calculates Financial Research. While such funds nabbed more than 20% of the dollars that went into stock mutual funds in early 1999, their share was just 10% in December. The S&P 500 average one was up 20.2% for 1999, far short of the average 27.7% of so-called actively managed mutual funds, many of them stuffed with soaring technology shares, according to tracker Lipper Inc. And in the current rocky stock market, the average S&P 500 index fund was off about 8% year-to-date through Wednesday, while the typical mutual fund headed by a stock picker was essentially flat. Flows aren't ebbing at all index mutual funds. Mutual funds tracking Nasdaq and Internet indexes continue to balloon. Such funds took in $30 million a month at the end of 1999, up from about $5 million a month a year ago, according to Financial Research. Atlanta Journal-Constitution 2-25-00
Why? Asia's main indexes, and their constituent companies, tend to be slower to respond to shareholder pressure, so the dogs of Asia's smaller indexes can flounder for years. For the strategy to work, companies also have to pay consistent dividends; Asia's companies tend not to. The stocks of the Dow are the bluest of U.S. blue chips, representing multinational giants that are unlikely to go out of business or lower dividends when business slows. Executives often have stock options and work hard to keep share prices buoyant. They also know that if their company struggles for too long, it can become a takeover target. In Asia, the cheapest stocks in many indexes stay cheap because there are fewer incentives for companies to get their acts together, analysts say. Fewer managers hold shares; takeovers are less of a threat. And significantly, some of Asia's biggest companies are owned by the government, families and industrial groups like the keiretsu in Japan, all of whom are less likely to put pressure on companies to reform. All in all, it means that if a company is a dog this year, it may be a dog for years to come. Finally, there are stocks in Asia's indexes that are true dogs, not just lagging blue chips. Contrarian strategies are dangerous when you have companies kept alive by government support or charity from companies in the same industrial group.
In 1973, the cream of the market, the most expensive 20% of the S&P 500-index commanded a median P/E that was 3.0 times the median P/E multiple for the remaining 80%. Today, the top 20% of the S&P 500 commands a P/E multiple of a stunning 4.8 times the P/E ratio of the rest of the market. Gus Sauter (head of stock-index investing at Vanguard Group) calculates -- using the Wilshire 5000 Index, the most expensive 10% of that index sold for an average P/E of 41.2 near the end of January, and the remaining 90% carried a P/E of 22.6. But today's low interest rates argue for higher P/E's ratios, no? Well, the yield on the 10-year bond at the end of 1972 was 6.41%, the same as the yield on 10-year Treasurys today.
The problem is that the additional oomph that market-generated wealth gives to demand is not replicated on the other side of the economy's balance sheet -- supply, or the economy's ability to meet that demand. "It is firmly documented that when people have significant capital gains, a small part of them do induce an increase in consumption," Mr. Greenspan said. "It is the nature of a capital gain not to increase supply accordingly." Greenspan tracks the scale of the wealth effect by watching a ratio of household net worth to income. Since income growth is a rough proxy for growth in the nation's productive capacity, a rise in wealth relative to income implies an expansion of the gap between demand and supply, the very imbalance of most concern to Mr. Greenspan. Greenspan said that the Fed has tracked the ratio back to 1922, and that it did not change in a way that had a big effect on the economy until the mid-1990's. According to the Fed's statistics, household wealth remained between 4.8 and 5.1 times income from 1988 until 1996, when it began surging. By 1997, wealth was 5.7 times income; last year it was nearly 6.3. Greenspan said that squeezing inflationary pressures out of the economy would have to involve bringing the growth in asset values into line with the growth in income. "What I've tried to argue today is not that we are on the edge of instability, but that we have an extraordinary economy which is growing at a pace which is somewhat above the level which is sustainable over a longer term," Mr. Greenspan said. At first blush, the Chairman's claim appears inconsistent with history. Since World War II, personal incomes have risen by less than 8% per annum while stock returns as measured by the sum of the growth in the S&P 500 and the average dividend yield have been closer to 13%. Remember, however, Greenspan is talking about all household assets, including housing, consumer durables, various fixed income assets, as well as stocks. Indeed, the value of all household assets has risen by some 8% per annum since World War II. There is also a simple theoretical justification to believe that the long-run growth in asset values will mirror the growth in household incomes. Household incomes will ultimately grow at a pace equal to GDP growth. If incomes rise more slowly than GDP, then businesses will take a bigger piece of the economic pie through increased corporate profits. Vice-versa, if incomes rise more quickly than GDP, then business profitability will suffer. The long-run outlook for stock price returns is not as dour as implied by the expectation of only 5%-plus per annum household income growth. Stock returns should be greater than returns for the average asset since stocks are riskier than the average asset. Over time the movement of the S&P 500 stock price index has tended to conform to the path of productivity growth. In the context of five-year spans, as the average annual growth rate of labor productivity climbed up from the 1.7% of year-end 1994 to the 2.5% of the year-end 1999, the average annual increase of the S&P 500 stock price index soared up from 5.4% to 26.2%. Not too long ago, the average annual rate of productivity growth sagged from the 2.3% of the five years ended June 1987 to the 1% of the five years ended December 1991. According to the same serial comparison, the average annualized rate of growth for the S&P 500 stock price index slid from 22.6% to 8.2%. Nevertheless, recent stock price appreciation may have exceeded what could be quickly inferred from productivity. When productivity grew at a very rapid 4.4% average annual rate during the 5-years ended 1965, the S&P 500's 9.7% average yearly increase fell considerably short of the 26.2% of the span-ended 1999. Greenspan is saying this: The pickup in productivity has raised expectations that productivity will continue to rise, or at least level off at a higher rate than in the recent past. The prospect of better productivity ahead has raised expectations of higher corporate profits, and share prices have risen in anticipation, increasing the wealth effect and the spending. Bear Stearns economist John Ryding has found that during inflationary times income rises faster than wealth, but during disinflationary periods, wealth rises faster than income. This directly contradicts Greenspan's dubious assertion that today's wealth trend generates excess income and consumption. If it were so excessive, then why is inflation so low? Griffin, Kubik, Stephens & Thomson economist Brian Wesbury found that over the past five years consumer spending growth (33%) is actually less than wage and salary income growth (38.1%). Greenspan has asserted that the so-called stock market wealth effect boosted spending above income. But these data suggest he is wrong. Also, the Fed's own study that suggests most investors in the bull market are actually saving more and spending less in order to reap retirement wealth benefits. By declaring war on rising productivity, Greenspan may have solved his own problem with the irrational bull market. Up to now, economy-wide estimates on rising productivity have been interpreted by market participants as a sure sign that Mr. Greenspan is smiling. But next time, the bears will know he's frowning, and they might oblige him with a selloff. The Fed isn't on autopilot, programmed to jack up interest rates each time the Dow jumps more than wages. Mr. Greenspan made sure to say that his equation applies only if "other things [remain] equal." He would be less inclined to curb the stock market if exports fell, as happened during the Asia crisis, or if the red-hot housing sector cools, as many experts now expect. The unprecedented surge in stocks is making Americans feel a lot richer than they would based solely on take-home pay, fueling consumption beyond the economy's apparent capacity to meet such demand. In asserting a link between the stock market and income, Mr. Greenspan appears to be plowing new theoretical ground. The formula isn't commonly found in economic textbooks and draws skepticism from some prominent experts. "I can't think of anyone who says the stock market does or should track household income," says Yale University's Robert Shiller, an economist who studies stock-market trends. History offers no clear guidance on whether such an assertion makes sense, since the two indicators have never before diverged so sharply for so long. For nearly half a century after World War II, household wealth-stock values, as well as housing values, bank accounts and other assets-rose roughly in line with after-tax incomes, defined as wages, salaries, dividends and interest. From 1946 through 1995, the ratio of household wealth to income mainly fluctuated between a narrow band, with wealth ranging from 4.5 to 5.1 times greater than income. In only three years during that period did wealth rise above that level, and never for two years in a row. Then in 1996, the wealth of American households reached a postwar high of 5.31 times income earned that year. The figure rose sharply again in each of the next three years, soaring to 6.27 in 1999. There is little question that is fueling demand. The Fed estimates consumers spend three or four cents out of every new dollar of wealth. Macroeconomic Advisers estimates that every percentage point of new stock-market wealth now generates twice as much consumer spending as an equivalent increase would have five years ago. [From William Pesek, Barrons 2-21: According to Joe Liro of Stone & McCarthy Research Associates, soaring equity values have generated an overpowering wealth effect that's spurring domestic demand to grow a full 1% faster than productivity-enhanced supply. ] If Greenspan's non-theory theory linking productivity to wealth to inflation seems half-baked, then why is he plying it? `I think he's worried about an asset bubble and can't say it, so he's created this thin veneer to tie the stock market to an imminent wage and price problem,' says Bob Barbera, chief economist at Hoenig & Company. `Like pornography, speculative excess in asset prices is harder to define than it is to recognize.'
As a rule, most of us are squeamish about taking risk. But we are much less sensitive to losses if we have previously earned gains. Academics refer to this as the house-money effect. The casino gambler who gets lucky early in the evening will often start taking riskier bets because he feels like he is playing with the house's money. After all, even if our gambler suffers a few losses, he knows he will still be ahead for the evening. The same phenomenon has probably occurred in the stock market over the past five years. As investors have enjoyed big gains, they have become less risk-averse, prompting them to pour yet more money into stocks. The booming market has boosted investors' self-confidence. "They think that it is their skill that made the market go up and made their portfolios bloom," says Meir Statman, a finance professor at California's Santa Clara University. "People become overconfident. They trade more. They become exuberant. They are likely to increase their allocation to stocks." But these psychological factors, which may have propelled stock prices ahead of fundamentals, also could cause stocks to overshoot on the way down. That could lead to four key changes in investor psychology. First, rather than extrapolating endless market gains, investors may start to assume that prices can only fall. Second, as share prices fall and investors see their portfolio profits shrink, they no longer will feel like they are playing with the house's money and thus they will become increasingly risk-averse. Third, investors' self-confidence will be shaken. But will investors start dumping their stocks? Undoubtedly, some will. But a fourth factor also will come into play. Investors hate to sell at a loss, which may prompt many to hang on to their shares.
Two weeks ago, the NYSE announced plans to launch its first such fund. And other exchanges and trading desks together have grabbed nearly a fourth of the volume in Amex SPDRs. The Amex has one more trick up its sleeve. It is working on a stealth project to list a tradable version of a regular, actively managed mutual fund. State Street Global Advisors, which oversees the Spiders, hopes by this fall to file an application for a managed stock fund that could trade throughout the day. The Amex says it hopes to be trading a traditional managed mutual fund by the end of 2001. Fund firms are concerned that it would be even harder to hold onto customers if managed funds could be traded on exchanges. But perhaps the biggest hurdle is figuring out how to continuously price a managed mutual fund throughout the day, with the value of every security the fund holds constantly in flux. For that to happen, the fund's managers would have to reveal to someone -- exactly who is unclear -- what the fund was buying and selling during the day. "That's like giving away the formula to Coke," says an executive at one large fund firm. This hasn't been a problem with index funds, since anyone who cares can find out what is in an index.
A Treasury Department analysis of tax returns filed by large companies found that each year from 1991 to 1996 a shrinking portion of profits reported to shareholders was reported to the IRS as taxable income. This year less than 70 cents of each dollar of profit reported by companies to shareholders will be reported to the IRS as taxable, down from 91 cents in 1990, Internal Revenue Service officials say. Because of these trends, in 1997 alone, companies paid $60 billion less in income taxes than they would have if they had paid taxes at the same rate as in 1990. But individuals paid $80 billion more. Some of the reduction can be attributed to a growth in tax credits taken for investing in new buildings and equipment, among other things. Also, as stock options proliferate and are exercised, companies can subtract the cost from their profits reported to the I.R.S., even though they can ignore that cost and report higher profits to shareholders. But it is widely agreed that such factors explain only part of the drop in the corporate tax burden. Abusive corporate tax shelters, Treasury Secretary Lawrence Summers estimated, cost the government more than $10 billion a year, a figure Treasury officials call conservative. They suspect the number is much larger. Some of these tax shelters have been found to be illegal tax dodges. The tactics have become widespread enough that even corporate tax lawyers are quietly alerting the IRS about tax shelters they think cross the line from legitimate tax planning into illegal schemes. Such tax shelters differ from legitimate ones because they use accounting gimmicks intended solely to lower tax liabilities and have no legitimate business purpose.
Shulman found good (or 'premium') conglomerates share four key characteristics. They shrink or abandon their low-return businesses and invest in their high-return ones. They emphasize performance and accountability in management. Their portfolios of businesses have what he described as a "distinctive" logic to them. And their earnings are consistent and predictable. Shulman found that for the 10 years through 1997, his 50 'premium' conglomerates returned 27% annually, on average, versus 18% for the S&P 500 and a negative 1% for the 50 underperformers he identified.
The concept has withstood a considerable amount of statistical scrutiny. Consider, first, the historical record back to 1925 through 1998, as compiled by Ibbotson Associates. Over those 73 years, large-capitalization stocks returned 4.9 percentage points more, annualized, between Nov. 1 and April 30 than they did between May 1 and Oct. 31. The difference is even more impressive for small-cap stocks, for which the difference has been 18.2 percentage points. A new study conducted by Sven Bouman, a portfolio manager at Aegon, an insurer based in the Netherlands, and Ben Jacobsen, an assistant professor in the department of economics and econometrics at the University of Amsterdam, confirms and expans IbbotsonÌs findings. Of the 36 stock markets they studied outside the US, they found the seasonal pattern in 35 of them. It was especially pronounced in Europe, where the contrast between stocks' summer and winter returns was even greater than in the United States. The Halloween Indicator is not a modern phenomenon: It has been present in Britain, for example, since 1694. Bouman and Jacobsen have an explanation for why this happens. They have found that the magnitude of the Halloween Indicator in a given country is highly correlated to the length and timing of that country's average summer vacation. How would that help explain the Halloween Indicator? Through extensive surveys, they found that many investors reduced their equity exposure before taking their summer holidays. Such selling puts a damper on the stock market's return during the summer months and the reinvestment provides an extra push in the fall. If you are ready to invest in the stock market and are looking for the right time to do so, the Halloween Indicator suggests that autumn offers a better climate than the spring. Conversely, if you're going to be selling some stock, springtime is the most favorable season.
If you look back at the historical declines and recoveries in the tech sector going all the way back to September 1983--and we're using the Pacific Stock Exchange [technology index], the PSE, as the proxy because that's the oldest one--there have been 13 declines of 15% or more from the then-peak to the ensuing trough. The most significant recovery, during the Gulf War, lasted about 16 months, and we were up 107%. To give you an idea [of where we are now], the PSE, if we go back to the bottom in October 1998, was up 267% as of the end of December 1999. That's more than double the most significant recovery we've had going back over the last 17 years. Obviously, that's one yellow flag--that we've had an off-the-chart move, just a stunning move off the bottom. (Paul Lim, LA Times quoting Chip Morris, manager of T. Rowe Price Science & Technology fund 2-29) Four out of 10 top executives are obese, finds Tufts University medical-school professor James Rippe. The study of 200 high-level, middle-age execs found them to be no more overweight or inactive than most people in their age group. (WSJ 2-29) Assuming they had no significant other, only 37% of working women would date a co-worker, staffing firm AOC found in a survey; 47% of men said they would. (WSJ 2-29) Shares of Wal-Mart have suffered recently with other stocks that make up the Dow. But a Worth (March) profile of the company finds "a ruthlessly efficient retail machine" beneath the company's 'corny yellow smiley-face mascot.' Wal-Mart has dealt heavy blows to competitors such as Kmart and Sears, and all by itself accounts for 1.5% of US GDP, the magazine says. For investors, the downside is the company's lofty market valuation. But on balance, Worth says Wal-Mart 'should be a core, long-term holding in every growth-oriented portfolio.' (Tom Walker AJ-C 2-29) With its 1,860-point, or 15.9%, drop since its January high, the Dow is well into "correction" territory, and nearing bear-market status. But when Ned Davis Research tracked the performance of almost 7,000 common stocks since the industrial average's Jan. 14 peak, they found the median performance was a mere loss of 0.8% -- that is, half the stocks did better, half did worse. Fully 47% of stocks are actually up since then. But the median performance of the big-cap S&P 500 components was much worse, a loss of 15%. A poll by PaineWebber and Gallup Organization to be released Monday found that, as of mid-February, 78% of respondents thought now is a good time to invest, compared with 64% in October amid an earlier correction. The same survey showed an increased comfort with risk: Twenty-four percent of investors now own or have owned shares of Internet companies, compared with 15% last March. (WSJ 2-28) It's too bad Fox Television is canceling development of more reality-based TV shows in the wake of the "Who Wants to Marry a Multimillionaire?" debacle, because the stock market would be fertile ground for ideas. How about: "Who Wants to Admit They Know Nothing About the Tech Stock They Just Bought on Margin?" Or maybe, "When Investors Attack: Angry Shareholders Roast, Then Eat Their Value-Stock Fund Managers." (Tom Petruno, LA Times 2-27) The pile of companies in the value bin is big and getting bigger. At the beginning of this month, more than 250 small-capitalization stocks were selling at prices below 10 times their 12-month earnings through the third quarter of 1999, according to a Merrill Lynch report. The last time a cohort that big was trading at that sort of a multiple was in 1991. (Kenneth Gilpin, NYT 2-27) Investors own more of the United States stock market on credit than at any point in 25 years, indicating that the surge in computer-related and telecommunications stocks is being fueled partly by borrowed money. Margin debt jumped to $243.5 billion in January, the Big Board said. That debt equals 1.41% of the market value of American public companies, the highest ever under the current rules, which date to 1974. (NYT 2-27) In 'The Economic Report of the President', the stock market's current speculative surge ranks only sixth among all stock market surges in the past two centuries. Using several long periods since 1800, stock investments have returned about 7% after inflation at annual rates. So far in this bull market, from 1982, real returns have averaged nearly 9%. This is above average but might reflect a change in the realization of stock market risk by investors. (Donald Ratajczak, Atlanta Journal-Constitution, 2-27) Ominous signs stem from trading volatility. A 1% daily move in a stock index is relatively rare, perhaps once a week. But since Jan. 1, the Dow has moved 1% or more 18 of 38 sessions. The Nasdaq composite has moved 1% in 28 of 38 sessions. And that's on a closing basis, not intraday, which would be higher. That portends more sharp moves. You decide which way. (Greg Heberlein, Seattle Times 2-27) Federal tax laws and regulations filled 40,500 pages when the Republicans took charge of Capitol Hill in 1995, according to CCH Inc., a publisher of tax information. In the last five years, 6,400 pages have been added, CCH said, making the tax laws 16% longer. That pace of growth, almost 10% faster than in the previous five years, required major revisions of tax forms for individuals. And the time it takes to fill out a tax return is growing, too. The IRS estimates that it will take a taxpayer 35.8 hours to fill out a Form 1040 and Schedules A through D, up from 30.6 hours five years ago and 28.6 hours in 1989. (NYT 2-27) The blue chips have nowhere to go but up, according to Standard & Poor's industry analyst Sam Stovall. He measured the performance of 11 basic industry groups starting last June, when the Fed made the first of four interest rate increases. The technology sector was the lone gainer among the industry groups, rising 39.6%. Every other industry group suffered a loss. The losses ranged from 5.3% for utilities to 22.7% for financials and 30.7% for transportation. The S&P 500 index itself, which rose 19.5% in 1999, has fallen 1.4% since last June 30. (Tom Walker, AJC 2-25) After a Bradley TV interview by satellite loses its connection, an aide tells the former Knicks star that the satellite is carrying a basketball game; the aide says he didn't really know why the link was lost, but "it always seems to make him feel better if I say it's basketball." (WSJ 2-25) Leap day, Tuesday, Feb. 29, is expected to add about $25.26 billion to the gross domestic product this year, according to LeapSource, a Phoenix outfit that provides Web-based finance and accounting backoffice services to companies. (WSJ 2-24) The Nasdaq has surged 69% since October, while the Dow has risen only 0.7% and the broader S&P 500 8.5%. (Tom Walker, AJC 2-25) The Nasdaq is up 97 % the past 12 months vs. just 7 % for the Dow. Is the damage to the stock market as bad as the Dow would indicate? No. It's worse. The average NYSE stock has fallen 33% from its 52-week high, says Salomon Smith Barney. More than 89% are down 10% or more. And Nasdaq stocks are hurting, too. The average Nasdaq stock has fallen 31% from its 52-week high, and 83% are down 10% or more. (John Waggoner, USA Today 2-24) IRS officials estimate that 1,556,000 people who paid taxes but didn't file a return for 1996 could lose more than $2 billion in refunds if they don't get those late returns to the IRS by April 15 this year. The law generally provides for refunds "only if taxpayers file returns within three years of the filing deadline," says IRS Commissioner Charles Rossotti. (WSJ 1-23) An IRS official says the average refund as of Feb. 11 was $1,963, up about 8% from a year earlier. One reason for the higher refunds: The child tax credit for 1999 is now $500 for each child under age 17, up from $400 in 1998. (WSJ 2-23) Individual income taxes represented 48.1% of the $1.8 trillion collected by the U.S. government in the year ended Sept. 30, 1999. "Social insurance/retirement" taxes, including Social Security and Medicare, represented 33.5%, corporate income taxes 10.1% and excise taxes 3.9%, the president's budget says. The rest came from estate and gift taxes, customs duties and fees, and "miscellaneous." (WSJ 2-23) Reports by the Federal Reserve Bank of Philadelphia and the National Association for Business Economics call for GDP growth of 3.8% this year before slowing to 2.9% and 3%, respectively, in 2001 as the impact of Fed interest-rate increases cascades through the economy. GDP grew by 4% last year. The CPI is projected at 2.5% in 2000 and 2.6% in 2001, both surveys found. Unemployment should fall to 4.1% for the year 2000, according to NABE, or 4% by the Philadelphia Fed's measurement. Both surveys expect a jobless rate of 4.3% in 2001. The NABE survey of economists found 62% believe that current monetary policy is "just right," the lowest percentage since May 1996. The figure stood at 74% last August. About 32% say the Fed is stimulating the economy to levels of growth that cannot be sustained without triggering inflation, the highest percentage since 1995. (WSJ 2-23) US government bond yields have tended to be steeper relative to the average government bond yields of other G6 countries the wider is the US' current account deficit. When the US current account deficit averaged 2.9% of GDP during 1984-1988, the US' 10-year Treasury yield averaged 151 basis points more than the average 10-year government bond yield of the other G6 countries -- Japan, Germany, France, the UK, and Italy. In response to the US' current account deficit dropping to 1% of GDP during 1989-1993, the 10-year Treasury yield would instead trail the average government bond yield of the other G6 countries by 33 basis points, on average. As the US' current account deficit climbed up from 1995's 1.5% to 1999's prospective record 3.6% of GDP, the gap between the US' 10-year Treasury yield and the "other G6" yield widened from 1995's three basis points to 1999's 215 points, which was the broadest since 1984's 263 points. As of February 17th, the 6.57% 10-year US Treasury yield was 235 basis points above the average government bond yield of the other G6 countries. (John Lonski, Moody's 2-23) Didn't anybody hear the Fed chairman warn that interest rates may have to increase `substantially' in order to bring aggregate demand in line with aggregate supply? Them's fighting words coming from General Greenspan. The market, in all its collective wisdom, has started to entertain that reality. How else can you justify falling short-term rates when the Fed is stepping on the brakes? (Caroline Baum, Bloomberg 2-22) Updating its 2000 outlook, consultant William M. Mercer Co. says that among the more than 1,900 employers it surveyed, average pay increases in December ranged from 4.2% for hourly workers to 4.4% for managers. That's up from a range of 3.9% to 4.2% this past July. To attract and keep workers while holding down costs, 30% to 35% of companies will boost performance incentives. (WSJ 2-22) In 1975, the year after passage of the Employee Retirement Income Security Act, 27.2 million workers, or a little less than a third of the 85.9 million Americans in the civilian work force, were covered by defined-benefit plans. Twenty years later, although the work force had grown by 45%, to 124.9 million workers, the number covered by defined-benefit plans was down by 14%, to 23.5 million. (Albert Crenshaw, Wash Post 2-20) While the general price level for all goods and services has been rising for the last few years at what is still a very modest 2% or so, prices in many of the most competitive arenas [where bricks-and-mortar stores compete with e-business] are actually down. The price index for toys, as calculated by the Bureau of Labor Statistics, has been falling since 1995. Books, on average, cost less today than in 1997. Prices for audio and video equipment, which just joined the e-commerce rush, dipped last year by 0.38%. (NYT 2-20) Researchers Deon Strickland of Ohio State University and Patrick Dennis of the University of Virginia have found that stocks owned predominantly by institutional investors, mainly mutual funds, surged much more than other stocks when the market rose sharply, and dropped more when the overall market declined. To Strickland, "this suggests that institutional money managers may be panicking and trading a lot more on days when the market is particularly volatile." He describes it as "herding behavior," and suggests that fund managers conclude that if their performance is not too different from other money managers, they are unlikely to be replaced." And so, when you see and hear references to investors and what they did in the marketplace, think not of some prototypical individual, but visualize the herd instead. (John Cunniff, AP 2-20) MAXfunds.com, a mutual fund Web site devoted to covering new and small funds with assets under $25 million, began operations last Tuesday. The site is free to use. It includes daily prices, as well as analysis and tools for researching funds. (Richard Teitelbaum, NYT 2-20) Says Harry Milling, market commentator for Morningstar, a Chicago market-research firm: "It's not like investors are doing their due diligence and finding diamonds in the rough." The small-cap swell isn't a value play (buying undervalued, well-run companies). "It's still momentum players" chasing a smaller class of hot stocks "in the same narrow industries." (WSJ 2-20) Today, the going-private idea (where companies whose shares weren't fairly valued in the public market were taken back into the private market by means of a "management buyout") is blossoming again. Last year, the total value of such private buyouts--as distinct from takeovers of one public company by another--surged to $20.6 billion from just $8.3 billion in 1998. Just 165 buyouts were announced last year in all. By contrast, the number of companies converting from private to public ownership via the red-hot initial public offering market was about 550. (Tom Petruno, LA Times 2-20)
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