| Factoids from Business & Investment News
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In addition, Paulsen removed technology stocks from the S&P index and found that the price-to-earnings ratio on the median stock in the index currently stands at around 12. That is the same depressed level reached on the entire index during the recession of 1990. With technology stocks included, the index's price-earnings ratio is 43. Stocks in many sectors -- banks, consumer durables and basic materials -- are trading at depressed levels that historically have foretold a recession. But the economy is so hot that Alan Greenspan is threatening to raise interest rates again later this month. 'Greenspan is mistaken about the wealth effect,' said Stefan D. Abrams, chief investment officer for asset allocation at Trust Co. of the West. 'He's missing the bifurcation. While 50 stocks are racing, the other 450 S&P stocks are losers. Every time he plays the Cassandra, he has the effect of accelerating the boom in the hot stocks.' Grenspan's attempt to stopping tech shares from rising will be hard and painful: (1) Innocent companies that have not been toys for speculation are in the line of fire. Automakers, homebuilders and retailers depend on interest-rate sensitive consumer spending. (2) Tech stocks are going up because they've been going up. The recent surge has built the Nasdaq's gain since the beginning of 1995 to 551% vs. 157% for the Dow. Nothing attracts new money like stellar past performance. (3) High interest rates make tech stocks less attractive in a discounted future cash flow analysis, but that doesn't matter now when the trend-setting investors don't use the analysis. (4) Rising rates have less effect on demand for tech companies' products. Why? Customers must use the Internet as effectively as their competitors. Computers also can hold down labor costs and make up for rising expenses elsewhere. (5) Asian nations are coming back and buying more tech products. After Procter & Gamble said its fiscal Q3 growth rate would fall well below expectations, investors marked down its shares by 31%. And other consumer plays fell hard, too: Colgate-Palmolive was down 11%; Clorox down 10%; Gillette down 6.9%; and Kimberly-Clark down 11%. All now labor at or near 52-week lows. 'These companies used to be the sacred cows, and people gave them the benefit of the doubt,' says Scott Black, manager of Delphi Investments. 'But paying 30 times earnings for a company that is growing at 10% to 12% is lunacy. And I don't see a lot of great value yet.' The growth rates for consumer nondurable companies have been sinking while their stock multiples have stayed relatively high, even considering the steady sell-off in their shares this year. The upshot: These stocks, beaten down though they are, may have a long way to go before they bottom. And Wall Street isn't in a particularly forgiving mood. Says Laszlo Birinyi, of Birinyi Associates: 'There is an old theory on Wall Street that says there is never one cockroach.' Technology has been swallowing every dollar in sight. According to the ICI, net inflows in domestic equity funds totaled $28 billion, an all-time one-month record. $28.1 billion, however, flowed into aggressive growth and tech sector funds, meaning that those funds, concentrated in tech stocks, have accounted for all the inflows, while the total of all other funds showed slight redemptions. No wonder the Nasdaq has been screaming -- everyone and their brother's broker has thrown money at it. The speculation in this group in fact guarantees that the next bust cycle will be a lulu. For 2000, the Nasdaq and Russell 2000 readings are up, Dow and S&P 500 are down. A similar pattern can be found in the market in 1977, when Nasdaq rose 7%, while Dow fell 17% and S&P dropped 11%. Over the ensuing 5 1/2 years, the market developed a persistent predilection for small stocks. Nasdaq rose 200% from the end of 1977 to mid-1983, compared with a 120% Dow increase and a 136% S&P gain. An Old-Economy Update: Money manager Robert Stovall of Prudential used to joke that he liked beaten-down stocks because they at least wouldn't fall much more, saying: 'You can't commit suicide by jumping out of a basement window.' He has stopped using that joke. As long as there is worry about an overheating economy, weak stocks tend to get weaker, while hot stocks continue to skyrocket. It wasn't supposed to work like this. Many experts thought that as solid blue-chip stocks became cheap, investors would swoop in and buy them up. By and large, that hasn't happened.
Guess who will pay? The study says 70% of employers plan to pass some of the costs on to employees. Companies also plan to negotiate more with insurers and to help workers better match plans with needs. The study, done with the Washington Business Group on Health and the Healthcare Financial Management Association, covered 503 employers, 953 providers and 69 big health plans.
Historically, when these markets suddenly spring to life and wild bidding overtakes the shares, it has been "an infallible indicator" of a market top for Nasdaq overall, said Clark Yingst, market analyst at Prudential Securities. The last time a Nasdaq plunge was foreshadowed by furious activity in these "microcap" markets was in spring 1996, when the Nasdaq was being led by such highfliers as Iomega and Presstek. After a dramatic rally to a then-record 1,249.14 on June 5, the Nasdaq composite index slumped 17% in six weeks. The index regained the lost ground by the end of the year, but many issues--Iomega and Presstek, for two--never recaptured the heights they reached that spring.
Today, the Phillips curve is missing. All of a sudden, economists are a lot less useful as forecasters. For as it stands now, economists' forecasts of economic growth, unemployment and inflation are no longer projections based on historical patterns but, instead, pure guesses based on gut feelings about when, how and if the Phillips curve will return. When last seen during the 1990-92 recession, the Phillips curve looked very healthy. In the second half of the 1980's the unemployment rate fell to a low of 5.3% in 1989 and inflation, which had averaged 2.4% a year in 1984-87, picked up to 4.1% a year and rising by early 1990. Greenspan reacted sharply by pushing up interest rates. Tighter monetary policy caused total spending to fall. Unemployment rose above its natural rate to a peak of 7.6% in June 1992. And inflation fell. Due to low unemployment, there was confidence until the end of 1997 that the Phillips curve would soon return. Temporary special factors (a slowing growth in health care costs, rapid falls in computer prices) were momentarily retarding the tendency of inflation to rise when unemployment was lower than its natural rate. But years passed, and inflation did not rise. So mainstream economists' opinion shifted to the belief that the natural rate of unemployment had fallen, though how far no one really knew. Economists began spinning theories of what had caused the natural rate to fall. James Medoff of Harvard began arguing in the early 1990's that technological and organizational changes had led the labor market to do a better job of matching workers needing jobs to vacancies, thus substantially lowering the natural rate. Others pointed to faster productivity growth that allowed higher wage increases to be consistent with relative price stability. Still others pointed to workers' fears for their jobs generated by the memory of the recession and widespread layoffs of the early 1990's. Still, at some primal level, economists continue to believe in something like a Phillips curve. The Phillips curve has not worked well outside America. Only in the US has there been a relatively stable natural rate of unemployment to serve as a reliable indicator of when demand pressure is about to raise inflation. Elsewhere, the causes of rising inflation have always been too complex to be summarized by simply comparing unemployment to even a semistable natural rate. And even in the US, as Douglas Staiger, Mark Watson and James Stock pointed out in the Journal of Economic Perspectives, the Phillips curve relationship was never as strong or as good at forecasting inflation as was taught in intermediate macroeconomics. Thus perhaps the surprising thing is not that forecasts of inflation based on the Phillips curve have gone awry the last half decade. Perhaps the surprising thing is that the complicated economic processes determining changes in inflation could be summarized for so long by such a simple relationship as the standard Phillips curve.
'Special subscription periods clearly benefit the management, and shareholders don't get so much out of it,' says Jerry Tweddell, publisher of Tweddell's New Fund Focus newsletter. Why subscription offerings may not be such a good deal is that the first investors pick up all initial trading costs. Brokerage commissions--what funds pay to buy and sell stocks--are not part of a fund's expense ratio but are taken off the top. The pot of money raised during the subscription period cuts these costs, but they are borne entirely by the first investors. In addition, subscription deposits sit idle or earn a money market return while waiting for the fund to open. If you want a fund because it invests in a hot market sector, letting that cash sit for a few weeks may defeat your purpose. If a fund subscription interests you, avoid the down time by waiting to invest until a few days before the fund goes live. Remember, too, that a new fund could lose one of its big advantages if the subscription is popular. Virtually every study examining new fund performance indicates that small asset size could be the driving factor behind initial success; that edge could be negated if subscription is a big hit. Ultimately, the pros and cons of a new fund tend to level out, so the best advice is to buy funds for which you believe the manager or the firm's research point toward success.
While the past 12 months were extremely kind to high-priced growth stocks, I don't think the next 12 months will be as hospitable. So I see the list mostly as a guide to great companies, not necessarily great stocks. However, eight members of this year's club carry a P-E of 20 or less. They are Navistar International (with a P-E ratio of 6 on Feb. 29), Maytag (P-E of 8), Jones Apparel (P-E of 12), Sara Lee (P-E of 11), C.R. Bard (P-E of 16), Limited (P-E of 17), Compuware (P-E of 18) and Safeway (P-E of 18). Among these, I recommend Maytag as a long-term holding, Sara Lee for the coming year, and C.R. Bard for an indeterminate period.
GDP growth, on a quarterly annualized basis, has averaged 4.5% for the last 15 quarters. The table below displays the forecast quarter in question (column 1); the average forecast of about 30 economists surveyed by Bloomberg News, compiled in the final week of the preceding quarter (column 2); the actual annualized quarterly real GDP as reported by the Commerce Department (column 3); and the average forecast error in percentage points, with a ``+'' indicating an overestimate of the forecast relative to actual growth and a ``-'' indicating an underestimate (column 4).
The rising number of uninsured Americans threatens to add to the price of health insurance for all businesses as hospitals try to pass on some of the $18 billion -- about 6% of their revenue -- in free care that they provide annually. Jobs created by companies with fewer than 500 employees accounted for 73% of the 3.59 million increase in jobs in 1994 and 1995, according to the SBA. Those jobs helped cause the number of non-elderly people covered by Medicaid to drop to 24.9 million in 1998 from a high of 29 million in 1995, according to the Employee Benefit Research Institute. Consider that 34% of employees in firms with fewer than 10 workers are uninsured, compared with 13% in companies with 1,000 or more workers, according to the Employee Benefit Research Institute. A study by Peter Cunningham, senior researcher at the Center for Studying Health System Change, a Washington-based research group, found that workers in low-wage jobs are often asked to pay a higher share of an employer insurance premium than middle- and upper-income workers. The study found that about 20% of the uninsured decline employer coverage, with the overwhelming majority citing costs as the reason. According to a recent study by the Urban Institute, only one third of women who got jobs after leaving welfare had employer health coverage. Using the study's estimates, that suggests that people leaving Medicaid may have caused 30% of the increase in the uninsured between 1995 and 1998.
New numbers provided last week by Morningstar show the extent to which large-cap fund portfolios are becoming less correlated to big S&P 500 stocks such as Microsoft, GE and Intel. Using a measurement called R-squared to measure the correlation, Morningstar found that the average large-cap fund's correlation to the S&P dropped to an R-squared of 84.6 at the end of last year from 89 in late 1998. Translation: Less than 85% of large-cap fund performance is driven these days by moves of the S&P, down from 1998, when the S&P explained 89% of large-cap fund movements. A four-percentage-point move may not sound like much, but consider this: In the spring of 1999, $1.105 trillion in large-stock mutual-fund assets were highly correlated to the S&P 500. (Any fund with an R-squared of more than 90 was judged highly correlated.) At that time, many analysts and pundits were criticizing fund managers for running "closet-index" funds -- in other words, charging investors more to run funds that look and act like lower-priced S&P 500 funds. By year end, the amount of money in large-cap funds highly correlated to the S&P had dropped to $986 billion, a decline of $119 billion, representing more assets than the nation's largest mutual fund, Fidelity Magellan. Some of the highfliers [in technology] have done so well that they have become bigger than companies in the S&P Index. Partly because of such rapid market-cap increases, 256 of the 500 largest stocks traded in the US, including ADR's, aren't in the S&P 500, up from 214 at the end of 1998, according to data provided by Birinyi Associates. Until recently, a lot of investors felt pretty darn smug. They bucked the conventional wisdom about diversification, banked heavily on the large-company stocks in the Standard & Poor's 500-stock index and made out like bandits for five consecutive years. But these folks weren't smart. They were lucky. And their luck just ran out. Muscular America was reasserting its global economic dominance and the assault was being led by large U.S. companies, with their management depth, financial strength, brand names and technological savvy. 'In grade school, it was always maddening to see the bad kids break the rules and get away with it,' says Jerry Tweddell, an investment adviser in Sonora, Calif. 'For the past few years, bad investors ignored diversification and concentrated on the S&P 500 stocks. The Goody Two-shoes who diversified looked like dummies by comparison.' If current trends persist and small stocks finish the year with gains while the S&P 500 loses money, it will be only the third time that has happened since World War II, according to Ibbotson Associates. The last occurrence was 1981, when small stocks climbed 13.9%, while the S&P 500 shed 4.9%. It isn't just small companies that are on a tear. After trouncing the S&P 500 in 1999, emerging markets and developed foreign markets have continued to outpace U.S. blue-chip stocks so far this year. At the end of February, more than 75% of active managers were beating the S&P 500. Not since 1977, when 88% of actively managed portfolios bested the benchmark, have so many pulled off the feat. Indexing appears to have peaked in the first quarter of 1999, when the best-selling fund of the year, the Vanguard 500 Index, took in $4.5 billion for the quarter. Sales have been sliding ever since, however, and sharply dropped off in the second half of last year; last month the fund collected $125 million in new money, less than one-tenth what it attracted in the year-earlier period. Money started cascading into growth funds early last year, while the torrent into technology funds began in the fourth quarter. Now there's insatiable demand for small-cap and micro-cap growth funds.
In the 12 months ended last Thursday, 63% of the S&P's 500 stocks were down, 42% of them by 20 percent or more. For the Dow, the figures, respectively, were 46.7% and 13%. Even for the technology-loaded Nasdaq 100, the figures were 20% and 10%.
The important "what if" question is: What would have happened if the Federal Reserve had acted directly upon stock market speculation by raising margin requirements rather than indirectly through higher interest rates? Would the economy have suffered so grievously, and would the subsequent stock market crash and bank liquidity crises have ever materialized? Of course, no one can alter history and observe how the outcome would be different if the policy had been different. Nevertheless, we can speculate about how the impact of credit restraints upon stock purchases would have altered events then, to determine if such a policy makes more sense than raising interest rates in our time. We know that higher interest rates, beginning in February 1929, did not stall the economy until that August. Also, the stock market did not stall until after the economy did. Furthermore, as the economy slowed, stock speculation intensified. The economy got more out of balance because of the Federal Reserve action at that time. On March 21, the Federal Reserve will meet again to determine whether the economy is so out of balance that further interest rate increases will be needed to slow things down. Most economists believe that consumers are spending more than is justified by their income gains. Rising stock market values clearly are contributing to this "unsustainable" consumer activity. A policy that slows stock market gains might lead to more balanced spending and a more extended economic expansion. Unfortunately, there is little evidence that higher interest rates will slow stock market gains before they stall the economy. Why not use credit controls to determine that no stock with a market valuation in excess of 10 times book value can be used as collateral for borrowing? That would slow the speculative technology bubble (if one exists) without harming the economy. I would not want future historians to ask "what if" about the Fed's decisions on March 21.
Manufacturing jobs (which lost 248,000 last year and 527,000 over the previous 18 months) are beginning to revive, rising by 5,000 last month and 31,000 since October. (From Baum: The manufacturing workweek and overtime both lengthened by 0.2 hours to 41.9 hours and 4.8 hours, respectively. The increase in both bodies and hours lifted the aggregate manufacturing hours, a proxy for output, by 0.4%.) And with energy prices rising, a more profitable oil and gas industry added 9,000 jobs last month. Average hourly earnings for production workers went up only 6 cents (to $13.53), or 0.3%, leaving this measure of wage growth hovering, as it has for months, at a mild annual rate of 3.6%. (That 12-month change was well below those in 1998 when unemployment rates were noticeably higher than they are now.) But even with last month's unusually low number, the average increase in payrolls over the past three months has been about 245,000, well above the roughly 175,000 figure most analysts say is needed to absorb the steady increase in the labor force as the population expands. Bruce Steinberg, chief economist at Merrill Lynch, said a dip in the unemployment rate back below 4% in the next few months 'is probably inevitable, because job growth still exceeds labor force growth.' The number of officially unemployed workers, which includes only those who actively sought a job, rose 115,000, to 5.8 million. Last month there were an additional 4.43 million people who said they want a job but were not looking for one reason or another, an increase of about 80,000 over the month before. Ray Stone of Stone & McCarthy Research Associates, a financial markets research firm, said he expects a reversal in the loss of business service jobs, a resumption of growth in construction jobs and the looming huge hiring spree by the Census to result in extremely large increases in payroll jobs in coming months. 'We now look for the March and April payroll numbers [increase] to be solidly in the 500,000 to 600,000 range,' Stone said. Is there anything else in either the government's statistical reports, industry surveys or anecdotal evidence to suggest that the demand for labor fell off a cliff last month? No. If anything the demand for labor is getting more intense. Take Manpower Inc.'s quarterly survey, released last week. Manpower's employment outlook survey showed second-quarter hiring demand is the strongest in two decades. The construction industry won hands down, but Manpower CEO Jeffrey Joerres described it as `principally seasonal,' citing durable goods manufacturing as the industry `most significantly beyond seasonal expectations. Never in the survey's history has the outlook been brighter,' with 38% of durable goods manufacturers continuing to recruit and 6% anticipating reductions, Manpower said in its Feb. 28 news release. Manpower's hiring plans for the upcoming quarter generally reflect actual hiring in the current quarter, Salomon Smith Barney economist Brian Jones finds. Manufacturing, like housing, is considered to be a cyclical industry; that is, it is interest-rate sensitive. If manufacturing is accelerating and housing is slowing only gradually, as starts play catch-up with sales, the Fed is apt to conclude that interest rates are nowhere near a level at which they are starting to bite. These numbers `are consistent with 5% real GDP growth'' [in Q1-2000] says Melanie Hardy, an economist at Bear Stearns. With the economy roaring ahead thanks to a buoyant stock market and spend-happy consumers, one month of friendly jobs data won't soothe many nerves at the central bank. Indeed, bonds didn't rally the way one might expect. Hopes that Friday's figures were a harbinger of slowing growth -- and less aggressive Fed tightening -- sent stocks higher, reminding investors that the forces boosting the economy haven't gone away. In particular, some Fed staffers were spooked by recent auto sales figures. Automakers had their second-best month ever in February, with total industry sales surging 11.8% to a 19 million-unit rate. The dynamic-consumers getting big [income tax rebate] checks from the IRS on top of their stock -- created wealth -- is likely to delay any slowdown in the economy in the months ahead. The upshot could be more aggressive Fed tightening. Payroll gains have averaged 245,000 over the past three months. If this pace were to continue, notes Ray Stone of Stone & McCarthy, the unemployment rate will finish 2000 at 3 3/4 %, well below the 4.1% seen in February. And if Stone's analysis is correct, payrolls could rise as much as 600,000 in March. But now that the two-to-10-year curve is inverted, analysts are more inclined to think the curve may actually be signaling a slowdown in U.S. growth this year. February's 0.4% monthly drop for the number of hours worked in the US' private sector was at stark odds with the many other indications of a brisk economy. Consider the February manufacturing activity index of the National Association of Purchasing Management (NAPM). Contained within the NAPM index's rise from January's 56.3 to February's 56.9 were advances of 55.9 to 61.3 for the production indicator and of 52.7 to 53.2 for the employment component. As derived from a sample that begins with January 1985 and ends with February 2000, a monthly NAPM index of 56.9 has been accompanied by the creation of 254,000 new jobs per month, on average. With a startling similarity, the NAPM's employment component of 53.2 has been historically associated with an average monthly addition of 255,000 new jobs. Arguably, the Labor Department's count for February shortchanged the underlying pace of jobs growth by more than 200,000 jobs. For the three previous incidents where nonfarm payrolls grew by less than 100,000 jobs for the month -- May 1999, March 1999, and August 1997 -- employment would grow by 337,000 new jobs, on average, during the subsequent month. The magnitude of the average rebound from extremely low employment gains reinforces the early anticipation of a 323,000-worker addition to March's nonfarm payrolls.
Most observers believe that higher interest rates signify tight money. This is a Keynesian view, based on the notion that less money causes higher interest rates. In this view, the Fed withdraws liquidity from the financial system, then interest rates go up and economic activity goes down. However, monetarists and price-rule supply-siders believe that less liquidity is usually a good thing. That is, less money means lower inflation, and lower inflation reduces interest rates -- a good thing for the economy. Also the reverse. The classical view argues that more liquidity breeds higher inflation and rising interest rates, a bad thing for the economy. During the inflationary 1970s, for example, steadily rising interest rates actually signaled loose money. Both economic growth and stock market performance deteriorated. Are we all sufficiently confused now? Over the past two months the adjusted monetary base published by the St. Louis Fed has declined at a 20.4-percent annual rate, following its prior 36-percent rate of rise. The rapid rate of liquidity withdrawal during January and February fostered a decline in long-term Treasury rates. Thirty-year bonds have dropped about 60 basis points in recent weeks, while 10-year paper has fallen roughly 40 basis points. Using the supply-side and monetarist viewpoint, the contraction of high-powered money has engendered lower inflation expectations which, in turn, have contributed to an easing of long-term rates. Liquidity was being withdrawn, gold prices have retreated and the dollar index has appreciated, along with falling long-term rates. These price signals imply that the Fed has removed excess money from the banking system. So less money is good. Since Mr. Greenspan seems bound and determined to raise the fed funds rate some more, let us hope that monetary base growth is extinguished in the event. If so, then excess money will evaporate further. And the bond rally will continue, bringing ten-year Treasuries back under 6%. When the dust clears, this would be very bullish for stocks. Final thought. Back in the early 1980s, the policy mix employed by President Reagan was "tight money" to reduce inflation and lower marginal tax rates to restore economic growth incentives. This combination reduced money supply and increased money demand. Inflation and interest rates fell, while economic growth revived. The rising stock market measured this progress. Right now, Congress is moving in the direction of tax cuts. Eliminating the Social Security retirement earnings test and the marriage penalty is progress, though not perfection. On the campaign trail, George Bush's supply-side tax-cut message is resonating. Back in Washington, Greenspan & Co. appear to be removing excess money. I'm watching what they do, not listening to what they say. So it may be a reach, but current policies may actually be nourishing the Internet economy. A wee dose of tight money and tax cuts. A good deal of good may come out of all this. So, keep the faith.
In 80 of the past 100 weeks, investors pulled money out of equity-income funds, usually to chase the jaw-dropping returns of tech and small-cap growth funds. Such unpopularity produces a vicious spiral, as redemptions force managers to sell the very stocks that the managers see as great bargains. Across the mutual-fund industry, about $107 billion sat in equity-income funds as of last month, according to AMG Data Services. In 1998 and 1999, the mutual-fund industry introduced just four new equity-income funds, while it gave birth to 198 growth funds, 37 small-company funds and 21 technology funds, according to fund-tracker Morningstar. Despite the recent troubles, equity-income funds could well live up to their reputation. In seven bear markets since 1960, equity-income funds have lost 18.2% on average, compared with losses of 27% for funds focused on fast-growing companies, 30% for small-company funds and 25% for the S&P 500 index, according to numbers compiled by T. Rowe Price using data from Lipper.
Now here's the catch. Let's say Dealer B has a customer, Jane, willing to sell at the highest bid possible. Dealer B doesn't have to direct Jane's order to Jim's bid, because Jim isn't his customer. Dealer B doesn't even have to expose Jane's order publicly to see if someone else will pay more than $20. Rather, he buys it himself at $20. Then, hopefully, a buyer will come along to whom Dealer B can sell the stock at $20.25, for a 25-cent-a-share profit. This practice of executing orders internally using the public best bid or offer as the benchmark is called "internalization" and is how all Nasdaq dealers have traditionally treated their own customers' orders. This is less of a problem on the NYSE because more than 80% of NYSE-listed stocks are executed by the NYSE specialist. But NYSE members are gaining new freedoms to internalize.
Gas and cigarettes account for more than 60% of a typical convenience store's sales and are expected to continue as leaders, says a study from the National Association of Convenience Stores. But margins are shrinking and competition is growing.Technology is key-both in trimming overhead and in offering new services, such as Internet access at gas pumps so consumers can check their stocks and such while filling up. There is also talk of using the stores as drop-off depots for goods ordered on the Internet.(WSJ 3-9) Bank One has launched a new Internet service that lets anyone in the country who has a Visa card or a checking account e-mail money to anyone else. Called eMoneyMail, the program allows users to send up to $500 at a time, for $1 per transaction. The senders can access eMoneyMail.com and deduct money from a Visa credit/debit card or checking account and send the funds to an e-mail address. The recipient receives an e-mail saying how much money has been sent and from whom, and is asked where it should be depositedŮonto a Visa card or a checking account. Recipients requesting paper checks will have to pay [an extra] $1. The cost for a $300 transfer at Western Union is $29. Western Union will launch a venture this year that will allow people to use some ATMs to transfer money to another ATM or a Western Union location. (Chic Trib 3-8) Total state-tax revenues climbed 7.4% in last year's final quarter from the same period in 1998, says a report to be issued soon by the Center for the Study of the States. Personal income-tax revenues rose 9.1% in the latest quarter, while sales-tax revenues gained 7.3%. Corporate-tax revenues increased only 3.8%, extending several years of 'poor performance,' the report says. (WSJ 3-8) If you looked at just the 374-point decline [of hte Dow yesterday], it seemed like a market catastrophe. But once you saw that just one company, Procter & Gamble, accounted for nearly a third of the dive, you saw something else. The P&G sell-down provided the best evidence yet that the Dow is too idiosyncratic and too unreliable to be considered as a measure of the overall market. (D Greising, Chic Trib 3-8) Catastrophes cost the world $100 billion in 1999 and the global insurance industry had to cover $28.6 billion of the losses, making last year the second most expensive year in insurance history, according to a report released Tuesday. Natural and manmade disasters took the lives of 105,000 people - almost half of those in December's flooding and mudslides in Venezuela. (USA Today 3-7) About 9 million U.S. households have assets of $1 million or more. (AJC 3-7) Last week the House voted unanimously to repeal the earnings limit on many Social Security recipients. Under current law, people 65-69 lose one dollar of their Social Security benefits for every three dollars they earn above $17,000 per year. This earnings limit does not apply to folks 70 and older. The Social Security Administration estimates that as many as 800,000 seniors will wind up with more money in their pockets, once the law is changed. Personal incomes of these seniors are expected to grow by an annual rate of $8 billion, or about 10,000 per person. If all of these extra funds are spent, they could grow to as much as $40 billion through the multiplier effect. That could eventually boost the level of retail sales by as much as 1.5%. So even if the Fed is able to reduce some of the wealth that the stock market has created, it still won't find much of a slowdown in consumer spending, once this bill is signed into law. (Irwin Kellner, CBS Market Watch 3-7) By a recent federal count, at least 157 on-line brokers are vying for more than $415 billion in on-line accounts. Plenty of rankings are freely available on the Internet to help people shop. But anyone looking for an answer will be disappointed: The rankings disagree. Shopping begins with a thorough self-examination. 'Whenever somebody is trying to pick a broker, that's the most important part. They have to honestly assess what kind of investor they are,' said Dan Burke, senior analyst at Gomez Advisors Inc., a leading evaluator of on-line sites. Gomez issues an overall ranking of on-line services, and four other rankings designed to appeal to different types of investors. Its rankings for the "hyper-active trader," who wants a simple interface with the broker, vary noticeably from those for the "life-goal planner" who wants tools for financial planning. Two other rankings are intended for the "serious investor" and the "one-stop shopper." (Mark Davis, Knight-Ridder/Chic Tribune 3-7) Wal-Mart, at $49.625, is down almost 30% from its recent peak. Home Depot, at $53.50, is down more than 23% from its peak. There is nothing wrong with their fundamentals. Their earnings continue to grow steadily at double-digit rates. David Alger, president of Fred Alger Management, still believes 'they're great companies, we want to continue to own them as long as the fundamentals are intact.' But rising interest rates hurt even fast-growing retailers, which is part of the problem afflicting growth stocks such as Wal-Mart and Home Depot. Investors are "very spoiled" by the growth rates in technology stocks, Mr. Alger says. Growth of 25% or so at Home Depot just doesn't look like much in comparison. Buying good stocks when they are cheap "works in theory," Federated analyst Angela Auchey says, but warns: "It's never good to be 'right' when the market's 'wrong.' " (WSJ 3-7) Roger Ferguson (the No. 2 guy at the Fed and a Harvard-trained Ph.D. economist) dismissed speculation that policy-makers are trying to precipitate a correction in the stock market, an inference that many investors made from the central bank's recent interest-rate hikes. On the contrary, a sustained swoon in stocks could pull the rug out from under an economy that's already carrying its share of risk, not least of which is a gaping current-account deficit that necessitates massive capital flows into assets denominated in U.S. dollars. But the role of the stock market in creating wealth and driving consumer spending is something the Fed can't ignore. Also, growing demand for U.S. exports may hamper the Fed's efforts to slow the economy. (William Pesek, Barrons 3-6) Good thing it's different this time! Because that means we can regard the data without concern. For instance, corporate paper topped out six months before the crash of 1987, 11 months before the start of the bear market of 1990 and nine months before the market top in 1994 -- the last year in which the S&P 500 was down. Since it's different this time, we needn't give a thought to the fact that corporate bonds topped out in December 1998 and that the Dow hit its most recent high 13 months later, on January 14 of this year. It's a particular comfort considering that, if a 36% decline like the one that smashed the Dow in October '87 occurred now, the average would shed 4,200 points, which surely would get the attention of even the most ardent believer in the New Economy. (Sy Harding, Barrons 3-6) To look around here (Iran), you wouldn't know that the Persian Gulf is enjoying an oil windfall. The region's stock exchanges are showing only mild signs of life. Iran is suffering the usual 20% unemployment and 30% inflation. Its currency, the rial, is only slightly stronger than last year. An estimated 65% of spending goes to operate state-owned companies. Spending more money on them would make it more difficult for Iran's private sector, which already is having a tough time competing against the state-run companies. Iran has much more work to do to build a free-market economy. Iran has price controls, multiple exchange rates and almost no private banks. Changing the structure in Iran would cause real pain to the large working class. Saudi Arabia is trying to get control of its domestic debt, which actually rose last year and is believed by economists to be higher than its gross domestic product. Saudi officials don't disclose the figures. (Daniel Pearl, WSJ 3-6) Is there any practical difference between raising rates to curb the wealth effect and raising them to push up the unemployment rate and subdue wage increases? Jim Bunning, R-Ky. told Greenspan "Don't become so frightened by success that you throw wet blankets on a fire that isn't burning." Charles Schumer D-NY, suggested that Greenspan consider raising margin requirements. "Isn't raising interest rates too blunt an instrument, a meat cleaver rather than a scalpel?" (Richard Stevenson, NYT 3-5) With the economy so strong it is hard to argue that the Fed is doing any damage. Indeed, we must wonder how strong the economy would be today had the Fed not hiked rates four times already. Look for the rate hikes to continue. The Fed is still on a mission. But itĚs on a mission with moderation. (Robert Brusca, CNBC & Ecobest Consulting 3-5) B2B Update: i2 Technologies' market capitalization of around $26 billion is about 1,000 times last year's earnings; Ariba and Commerce One have also seen their stocks shoot up 20- and 30-fold from their offering prices. Consider a few hypotheticals. Total B2B transactions are expected to rise from $145 billion last year to $7.3 trillion in 2004, according to the Gartner Group, a consulting firm. A cut of, say, 0.25 percent of that in transaction fees would yield nearly $20 billion in annual revenue, with much more growth to come. 'There is probably at least a trillion dollars in market cap up for grabs in the B2B industry,' said Andrew Roskill, an analyst at Warburg Dillon Read. 'At the end of the day, there are probably only going to be a very few winners in each vertical industry sector, but those guys are going to command a very high premium.' (Richard Oppel, NYT 3-5) From Leah Modigliani, a US equity strategist at MSDW: Earnings were very strong in the fourth quarter and we think that trend is continuing. For the S&P 500 companies, we think earnings will rise about 15.7% on a year-over-year basis in Q1, and 12% for the year. According to our calculations, the consensus projected earnings growth rates for energy companies will go from negative in 1999 to 45% this year. The projected growth rate for basic materials is 36%, which is a little higher than the 33% earnings growth projected for technology companies. (Kenneth Gilpin, NY Times 3-5) Henry Blodget, Merrill Lynch's multi-million-dollar Internet analyst, said three-quarters of all dot-coms will fail. (Greg Heberlein, Seattle Times 3-5) The average small-company growth fund is up 106% the past 12 months vs. 33% for the average diversified stock fund. (From Todd Mason, Ft-Worth Star-Telegram 3-4: The Russell 2000 is up 16.84% in January and February vs. a loss of 6.8% for S&P 500 index. The average small-cap growth fund in Morningstar's database is up 30% in the first two months.) That's a stunning reversal: Large-company stocks steamrolled small-company stocks from 1995 through 1998. The Russell 2000 index, which measures small-company stock performance, has only beaten the S&P 500 in one 10-year period since 1978. Small-company growth funds have only beaten large-company growth funds in two 10-year periods since 1978. (John Waggoner, USA Today 3-3) Bradlee Perry (who formerly chaired Boston investment firm David L. Babson) has noted, in 1999 stocks of all profitable public companies declined an average of 2%. Stocks of all money-losing companies rose an average of 50%. This is unstable behavior and cannot continue indefinitely. A steady diet of nothing but unprofitable companies leaves the patient without basic nutrients needed for long-term viability. (Chet Currier, Bloomberg 3-3) An escalation in short-term trading has some mutual funds seeking to boost redemption fees -- a move the SECommission has so far resisted. The SEC limits redemptions fees to a maximum of 2%. The fee money goes back into the funds, and benefits long-term shareholders. Funds argue that costs involved in letting short timers out are borne by those who stay in. And none of the relief requests the SEC has received so far have been enough to change its stance, rooted in the Investment Company Act of 1940. Financial Research Corp. said 309 funds out of about 5,900 long-term mutual fund portfolios had redemption fees as of April 1999. That compares to 209 funds out of about 5,600 funds as of December 1997. (Bloomberg 3-3) The dollar value of trading in ADRs on the New York Stock Exchange surged 63% to $243.4 billion from November through January compared with the same period a year ago. The monthly value is rising steadily, hitting $95.2 billion in January from $66.3 billion in November. Web sites run by J.P. Morgan (adr.com), Bank of New York (www.adrbny.com) and Citibank (www.citibank.com/corpbank/adr/index.htm) are useful places for researching the nearly 2,300 foreign companies that offer ADRs. All three give investors an option to invest through direct-purchase programs for less than it costs to buy shares through a traditional broker. Investors can start direct-purchase account for $10 at Bank of New York, $15 at J.P. Morgan. Citibank charges no fee, and investors can purchase ADRs with initial investments as low as $200. When shopping for ADRs, it's important to determine if they are listed on a U.S. exchange, because the fees can really add up if they're not. While some 2,300 ADRs are available to U.S. investors, only 400 are listed on a U.S. exchange. (WSJ 3-3) "If I seem unduly clear to you, you must have misunderstood what I said." So Federal Reserve chairman Alan Greenspan once remarked, in response to someone who thought he understood what the Fed chief was talking about. (Dr. Irwin Kellner, CBS MarketWatch 3-3) According to Lipper, value-oriented funds suffered net outflows of about $12 billion in January. At the same time, growth funds, which have whipped value in recent years based on average performance, enjoyed net inflows of about $27 billion. (LA Times 3-2) The consumer price index overstates U.S. inflation by about 0.8 percentage point per year, even after changes in the way it's calculated, according to former members of a congressionally appointed panel who studied the price indicator four years ago. As a gauge of inflation, the CPI is used in many labor contracts to adjust wage levels, and it is used to calculate annual cost-of-living adjustments for Social Security and other government benefit programs. If those adjustments were reduced by the amount of the remaining bias, it could significantly reduce the danger that the nation's retirement program will run out of money sometime in the next couple of decades. A correction of 0.8 percentage point would eliminate more than half of the long-run Social Security deficit, said Sen. Daniel Patrick Moynihan (D-NY). (LA Times 3-2) Salsa overload is just one example of too many brands chasing too few consumers, says a report from Mercer Management Consulting, New York. It says there are now more than 200 brands of salsa, which in 1980 was a niche product with fewer than 25 brands. (WSJ 3-2) A study by public-relations firm Burson-Marsteller, New York, a part of Young & Rubicam Inc., finds that a CEO's reputation accounted for 45% of a company's reputation in 1999, up from 40% in 1997. (WSJ 3-2) While European central bankers and fiscal policy makers fret about the unified currency's descent, corporate Euroland is rejoicing. In sectors ranging from telecommunications to textiles, and chemicals to eyeglasses, companies that rely on foreign markets either as buyers or as a base of operations are enjoying higher profits due to the currency's problems. The increased demand from abroad is prompting some companies to expand production, offering new product lines and hiring more workers. The weaker euro exerts a substantial impact on gdp growth in Euroland. Exports of goods and services from the region contribute 17.1% to its gross domestic product, according to the European Central Bank. The equivalent figure in the U.S. is 11%, and in Japan 11.5%, according to the central bank.(WSJ 3-1) Federal Reserve Flow of Funds data reveal that the net equity buybacks of US companies approximated 3.2% of GDP during the year ended September 1999. By contrast, over the last 15 years, net stock buybacks averaged 1.1% of GDP. The big gains by the major stock price indices of the last five years owe something to a stepped-up pace for equity buybacks. As long as corporations have the capacity to fund sufficiently large equity buybacks, an extended slide by the share prices of financially fit companies may be avoided. (John Lonski, Moody's 3-1) Even if oil stays at $30 a barrel, inflation won't follow, added Ed Yardeni, chief economist with Deutsche Bank Alex. Brown in New York, reasoning that consumers spending more on gasoline would have less in hand to bid up the price of other goods and services. "If oil stayed at $30 from here to eternity," he said, "that might be more deflationary." (Chic Trib 3-1) Thanks to a dizzying array of fiscal spending plans over the last couple of years, Japan's budget deficit is over 8% of GDP and heading toward 10% this year. Moreover, its gross public debt weighed in at just under 130% of GDP in 1999, and many analysts think that figure will hit 150% later in the year. It's been 40 years since a developed nation -- never mind a G7 member --carried a debt-to-GDP ratio higher than Japan's today. And when countries have come close -- like Italy, Ireland and Belgium -- market forces prompted fiscal improvements. In 1999, Japan had $2.9 trillion of debt outstanding, compared with the U.S.' $2.5 trillion and the $3 trillion of the 11 euroland countries. J.P. Morgan estimates that Japan alone will sell a net new $318 billion of debt this year, while governments of other industrialized nations are seen issuing a net new $246 billion. That the increased supply is scaring off international investors at a time when Japan is becoming the biggest source of public debt. (William Pesek, Barrons 2-28)
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