| Factoids from Business & Investment News
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As measured by the Dow, the median length of bear market declines from 1900 through 1990 was 363 days, according to market data firm Ned Davis Research. By contrast, all of the Nasdaq index's major declines since 1990 have run their course in 68 days or less. There are some good reasons recent market pullbacks have been so short. On a fundamental basis, the US economy has been growing for the entire period. The economy's success, and the market's gains, have in turn created massive wealth. Even when investors lose a chunk of money, for many it may not feel like more than a scratch, given what's happened to their portfolios and their home's value in the last decade. What's more, information obviously moves much faster than ever before. When trouble hits, every investor has an opportunity to panic out at the same moment. And every investor has an opportunity to panic back in. Perhaps most important with regard to technology stocks, the sector is simply so huge, there is always something exciting going on somewhere.
Economists expect a consumer spending pace of about 5% in Q1. Some 3 or 3.5 percentage points of that growth stems from factors unrelated to the wealth effect, at least judging by the thinking of Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University. He predicts that by late summer the economy could be generating a more sustainable 200,000 jobs a month. That isn't so far below the current hiring pace, which happens to be decelerating when calculated as a year-over-year average. 'We will see job creation slow down in the next month are two,' says Chris Low, chief economist at First Tennessee Capital Markets. The slowdown may be difficult to perceive at first, because it is likely to show up erratically. He suspects certain sectors, like construction, will start to smooth payroll addition over more of the calendar - something the seasonal adjustments in the government survey will distort into violent swings. 'What you're going to see is more volatility,' Low says. More volatility. Just what investors need. Morningstar 4-7-00
Unlike the NYSE, where trading in each stock is controlled by a single "specialist" responsible for maintaining an orderly market in its shares, Nasdaq has a "dealer" system. In the electronic Nasdaq market, dozens of big Wall Street firms, known as dealers or market makers, post prices at which they will buy shares of a stock from, or sell them to, investors. Theoretically, market makers compete to offer investors the best price on trades. But when a stock price is falling during a turbulent market, market makers don't want to buy shares because they fear the price could sink lower. To avoid having to buy a falling stock, market makers drop their "bids," the posted price at which they're willing to buy shares. Typically, market makers won't aggressively bid for stocks again until institutional investors such as mutual funds send in buy orders on stocks that have fallen sharply. At that point, market makers seek to scoop up shares being unloaded at rock-bottom prices by panicked investors, then sell them at a quick profit to institutions. The real problem, says Harold Bradley (head of strategic investments at American Century mutual funds), might be that many individuals use "market orders," which instruct brokers to buy or sell at a prevailing market price, rather than "limit orders," which specify a price. By not designating a price in a market order, investors run the risk that their orders will be filled at significantly different prices from what they expect. Individuals might suffer in a turbulent market because market makers have a built-in conflict of interest in how they handle small-investor orders, said David Whitcomb, chief executive of Automated Trading Desk. When market makers receive sell orders from individuals, they have two options: They can either fill the order themselves by using the firm's own money to buy the shares, or they can send the order to other firms where it may be filled. But because market makers always seek to buy shares cheaply in the hope of turning around and selling at a profit, they might be tempted to delay sending out individual investors' orders, Whitcomb said. Instead, they might hold on to the orders. If institutional investors then submit a batch of buy orders, indicating that a stock is likely to head up in the short term, dealers can quickly buy shares on the cheap from small investors and turn around and sell them at a higher price to institutions, he said. 'There's every incentive to execute customer orders very slowly because every second of delay . . . is a second where you may have the option of filling that order at a guaranteed profit,' Whitcomb said. As more and more investors have entered the market, traders whose job it is to help them execute their orders have retreated from the arena. Profits for market makers in Nasdaq stocks have fallen significantly, a result of regulators' scrutiny. And so the ranks of market makers have dwindled, leaving fewer buyers on hand to provide a floor for stock prices when they start to slide. 'There is very little cushion provided by intermediaries today,' said Steven Leuthold of Leuthold Weeden, an investment advisory firm in Minneapolis. 'There is an illusion of liquidity given with the number of shares trading today. But the true liquidity of the market is revealed in a situation like we saw Tuesday.' Henry Kaufman, the Wall Street economist, identified another important force propelling market volatility: Wall Street's obsession with making tradeable securities out of investments that previously would have sat on investors' or bankers' books until they came due. Home mortgages, for example, are now bought and sold furiously. 'With these new obligations, you can leverage them more, because the market price allows you to borrow against them,' Mr. Kaufman said. 'This allows a more intensive management of those assets, which also creates a more near-term orientation by portfolio managers. So stocks are bought more for their next price turn than for the likely value of them 10 to 20 years from now.'
Shop.org, a trade association of e-tailers, estimates the number of Web sites that sell things at 30,000 or more; about 1,000 have sales topping $500,000 a year. Maurizio Zecchione, president of StyleClick.com, a clothing e-tailer, says he has seen figures that suggest the average e-tailer spends $45 'to acquire a customer who generally spends $35 and never comes back.' Zecchione's figures are at the low end of many estimates: Some experts put the cost at as many as $200 a customer. Pets.com Inc. rattled investors when it disclosed that it spent $30.7 million on marketing in the fourth quarter, or nearly six times the company's sales for the period. Internet concerns spent an estimated $200 million to $300 million between Thanksgiving and the Super Bowl on tv ads. That means their cash could be gone soon. And each ad's impact is diluted when multiple competitors are running ads in the same e-tail categories. Jupiter says 93% of e-tailers are currently making special offers (discounts or free shipping). The effect has been to train shoppers to wait for deals. Growing numbers of e-tailers are swallowing the cost of shipping because they find shoppers often go through the ordering process but then cancel on the last screen when they see shipping costs. Some e-tailers are concluding that making customers happier requires making the kinds of capital investment they originally expected to avoid. They have found themselves doing more of what conventional retailers have always done, from building warehouses to adding service staff, eliminating some of their alleged cost advantage. Example: EToys is doubling the size of its California warehouse and building a new warehouse in Virginia to improve delivery speed and hold down shipping costs. Since almost all e-tailers are losing money, funds for operations must come from either cash on hand or new financing. Goldman Sachs estimates that half the 26 e-tailers who went public before Dec. 1 last year will need to go back to the capital markets in 2000. But the stock market's sudden disenchantment with e-tailing may shut off the equity avenue, and lenders aren't apt to look favorably on companies spilling so much red ink. The only good news: Projections of online sales remain bullish. Web watcher Jupiter Communications expects the figure will rise 53% to $23 billion this year, after doubling last year to $15 billion. The rest of dot-com-dom would do well to study e-tailers' pain, say some Silicon Valley observers, because the cloud over e-tailers may also form over the now-hot 'b2b' sector. As the Internet matures and as Old Economy firms storm onto the Web, they say, the model of the young start-up selling something to somebody inevitably dims. Most retailers that operate entirely on the Internet will be out of business by next year, a respected consulting firm predicted in a harsh report that fired another blow to the battered online shopping industry. Intense competition combined with an ongoing sell-off in dot-com stocks will result in a rapid rise in buyouts and bankruptcies in the coming months, according to Forrester Research. Forrester said that most companies won't be able to cope in the coming months as competition intensifies and money evaporates just as merchants need to ramp up marketing for the Christmas season.
Since 1995, Microsoft's Money market share has dropped from 22% to about 6%., while Intuit's Quicken has maintained more than 70% of the market, according to market research PC Data. In PC games, Microsoft ranks only seventh with 5% of the market [a much different estimate than given above], according to PC Data. In educational software, Microsoft is also ranked seventh with a mere 1.2% market share, compared to the 45% share held by Mattel Interactive and the 23% held by Havas Interactive. Even its Windows crown jewel is facing a meaningful threat from Linux, a free operating system that has rapidly claimed a 25% share of the fast-growing market for servers that operate networks of computers--an overnight success that took the industry by surprise. Microsoft generated nearly $20 billion in revenue last year with sales of Windows operating systems accounting for 44% of the take. Desktop applications such as word processor Word and spreadsheet Excel combined for another 44%. [From James Flanigan: Revenues from Windows in 1999: $8.6 billion. Operating Income: 6.0 billion. Revenues from Office Applications: $8.7 billion. Operating Income: 5.6 billion. Revenue from Consumer Products/WebTV: $1.8 billion. Operating Loss: -1.07 billion.] The bear growling at Microsoft's door today is the government's antitrust case. But the bear that may be around longer is in the cages at data centers, or so-called hosting companies, like Exodus Communications. These cages house thousands of linked PC's running on the lean Linux operating system for Internet companies like Yahoo. The bear case is also in the future of cellular phones and personal digital assistants as they more readily gain access to the Internet and as demand increases for the systems to accommodate them. It is on the Internet, where people and companies will be able to do more and more of their computing and have less and less hardware [and software] on their desks, that some analysts think Microsoft is way behind. There are already many ways in which people can use the computing power available on the Internet, for which a Microsoft operating system would be unnecessary. For example, they can go to the Quicken.com site, use TurboTax and do federal and state taxes for 1999. Having enough talented programmers may also become an issue for Microsoft. Its legal troubles (and a floundering stock) could exacerbate its difficulty in attracting them. [From James Flanigan: Microsoft's 31,400 employees are renowned for being paid mostly in stock options--the firm's employees hold vested stock options worth $36 billion at latest count. The total stock market value of all Microsoft shares is more than $460 billion.] PaineWebber Inc.'s Donald Young reiterated his 'buy' rating for Microsoft and predicted the shares will rise to $150 in a year. Credit Suisse First Boston's Michael Kwatinetz repeated his 'strong buy' recommendation. Drew Brosseau, an analyst at SG Cowen Securities rates it a 'strong buy.' Axxel Knutson of First Allied Securities rates the stock 'sell,' and Donald Cunningham of Gilmour & Associates has a near-term 'sell' recommendation. Microsoft will do well in any circumstance, because it is an uncommonly skillful company. It is already a far more varied and complex force in information technology than critics give it credit. Right now, 45% of company sales and just about half its total profit come from systems for offices and industry in which it doesn't enjoy the dominant position of its Windows operating system. Not least among its preparations have been investments in telecommunications, cable and media companies, including $5 billion in AT&T, $1 billion in Comcast and tens of millions in such firms as Akamai Technologies, a hot firm with a way to speed downloads of programming from the Internet. As to civil lawsuits, even Microsoft critics admit there is not much in last week's ruling that opens it to class-action suits. Also, with $17.8 billion in ready cash and short-term investments, Microsoft can afford to fight lawsuits. Linux, the free, open operating system, now holds a leading share of the market for Internet server computers; Microsoft's Windows NT trails. Palm computers hold the clear lead in the market for hand-held devices, ahead of computers with Windows CE systems. So Microsoft doesn't win them all. But it keeps coming back--'like a Japanese company,' say rueful competitors. If the Republicans reclaim the White House, the government might simply drop its effort to rein in Microsoft. And a government withdrawal would devastate the judicial prospects of private litigation against Microsoft by individuals and corporations. WSJ 4-3-00
Morningstar 4-1-00
Stocks and options can trade on more than one exchange, and with that freedom, new markets called ECN's have sprung up. While this seems like a good thing for traders, Levitt also sees problems. There is fragmentation. Brokers need not -- and almost all do not -- search all the available ECNs and stock exchanges to find the best prices for their customers. But a broker who searches diligently and then sends an order to the market with the best price for his customer runs a substantial risk of finding that the price has changed before the order gets there. The broker knows only the position of the price, not its momentum. Now the SEC is considering tighter linkages among competing markets -- a proposal to require all markets to display all bids and offers in a single electronic order book. This would include disclosure of active limit orders so that traders could see the strength and depth of the market. Levitt believes in the power of 'limit orders'. In a recent policy-setting speech, he contrasted market orders and limit orders this way: 'When an investor places a market order, a broker executes the trade at the best current price in the market. In this way, investors can be viewed as price-takers. In contrast, limit orders enable investors to compete for better prices than the market is offering. Limit orders allow investors to be price-setters.' With all due respect to the chairman's long experience as head of the Amex, his description is not in tune with the way the universe works. A limit order is no more powerful than a market order. Werner Heisenberg, the physicist, described what is apparently a fundamental principle of the universe: The uncertainty principle. Heisenberg said it was impossible to know simultaneously both the position of a subatomic particle and its momentum. If one can fix the tiny particle in space, it may be going in any direction at any speed; or if one knows its direction and speed, it is not possible to say with certainty where it happens to be. A limit order says only that if the market's momentum happens to go in the direction of the order, it will be filled. The customer specifies the position of his electron, but its path is a random event. The market order is the opposite, since the customer views the apparent movement of the stock and the price is the random event. [There is also a] cost of transparency. Big traders [mutual funds?] say that quoted bids and offers are thinner than they used to be. A quote that used to be good for almost any quantity now stands for the first 1,000 shares, or even less, and is adjusted quickly. So big traders pay as much or more than they ever did. The order-handling rules work like a progressive tax, which has rates that are reasonable for the vast majority of taxpayers, but higher rates to burden those few who pay the majority of taxes [Donlan thus implies higher cost for mutual fund owners]. As rules requiring transparency and linkages grow stricter, the markets will be shaken as surely as a steeply progressive income tax shakes economies.
The most stunning piece of data last week was the report showing that a record $53.6 billion of net new money poured into stock mutual funds in February. And nearly three-quarters of that sum flowed into aggressive-growth stock funds, including technology-sector funds. This is a very good time for everyone who owns technology stocks or aggressive-growth mutual funds to consider just how firm their commitments are to these investments. Because it appears that Wall Street is about to enter a piling-on phase--a sort of, 'Who can say the most damning thing about tech?' period. Last week, Abbey J. Cohen at Goldman, Sachs advised clients that tech stocks 'are no longer undervalued.' Mark Mobius at Templeton who warned of an impending Internet stock crash worldwide. PaineWebber's Edward Kerschner said that the 'new metrics' by which many investors have been valuing technology stocks are a sham--and the stocks are finally beginning to reflect that. Cohen, Kerschner and others aren't looking to discredit the tech-stock boom entirely, of course. But with many tech bulls now on the run, any doubts cast upon the sector can quickly become 'substantial doubts,' whether warranted or not. In the past four years, investors have noticed that if it is April, there must be a technology sell-off in the U.S. financial markets. Apparently enough investors have learned about this April slump to begin preparing their holdings in March.
As top executives and other employees continue to exercise their rising pile of options over the next decade, other stockholders will see their stakes watered down. Already, companies have spent billions of dollars in recent years -- and taken on rising levels of debt -- buying back shares to minimize the dilution. For the repurchasing to continue at its current pace, a recent Federal Reserve study warned, companies would have to devote virtually all of their future earnings to buybacks. In a speech last summer, Alan Greenspan said stock options helped "impede judgments about prospective earnings" and, over the last five years, had caused companies to overstate profit growth by one to two percentage points each year. The level of exaggeration is on the rise, doubling between 1997 and 1998, according to a study by Bear Stearns. Companies publish their level of "overhang" -- the percentage of the company that options would represent if all were exercised -- allowing investors to factor it into their decisions. And widely published statistics on diluted earnings per share take into account any options that currently have value. At some companies [Cisco is an example] earnings would be more than 20% lower if stock options were accounted for. Last year, the nation's 200 largest public companies handed out options that represented the equivalent of 2.1% of their outstanding shares, up from 1.2% in 1994, according to Pearl Meyer & Partners, a pay consulting firm in New York. As a result, the average overhang reached 13.7% in 1999, well above the old 10% ceiling. From 1994 to 1998, the amount that companies in the S&P 500 spent each year on stock repurchases more than tripled, to almost $150 billion, according to a Fed analysis of Compustat data. Together, buybacks over that period accounted for about 2% of all outstanding shares. The buybacks have generally prevented options granted in the early 1990's and exercised over the last few years from diluting earnings per share -- though, of course, the money used to buy the shares could have been deployed to other ends. But the pace of option grants has accelerated rapidly in the last few years, and the number of exercisable options will be far greater in five years than it is now. As a result, the Fed study found, companies would have no money for investments or dividends if they tried to keep up their pace of buybacks. On the other hand, the study's authors warned, slowing the pace of buybacks 'could have a negative effect on equity valuations.' Of course, companies could borrow to buy back stock -- a strategy for which they have already shown a fondness. Corporate debt has risen by 45% over the last five years, and much of the increase is a result of share repurchases, said John Lonski of Moody's. Numerous studies in recent years have shown that companies with high levels of executive stock ownership have outperformed companies with low levels. But three Columbia Business School professors undertook a study of 600 companies, examining their performance over the last 20 years. Their results, published last year in the Journal of Financial Economics, showed that increasing an executive's stakes in a company did not cause stronger earnings or a higher stock price. A recent Salomon Smith Barney study, meanwhile, found that most of the heaviest users of options in the S&P 500 actually underperformed the index. Such findings can only fuel the skepticism that already has companies working harder to win shareholder approval of proposals for new option plans. Fourteen such proposals failed last year. More significant, one out of every seven proposals received at least 30% negative votes last year, according to Strategic Compensation Research Associates. Three years ago, only one of every 12 plans met that level of opposition. Joe Mattey, a researcher with the Federal Reserve Bank of San Francisco, estimates that 80,000 employees of Bay Area companies that went public between 1997 and 1999 gained an average of $700,000 each on stock options.
'What was readily workable in 1999 and early 2000 is up for review,' said James Moltz, vice chairman of International Strategy and Investment, an investment advisory firm in New York. 'It seems clear the investor perception that nothing can go wrong in the new economy seems to be meeting with greater suspicion. The element of risk has been introduced into the equation.' (Gretchen Morgenson, NYT 4-9) As of Wednesday's close, 67.8% of stocks in the S&P 500 were down 20 percent or more from their 52-week peaks, according to Salomon Smith Barney, and 84.9% of stocks in the Nasdaq. Volatility on the Nasdaq is up. The index has moved 3% or more from the previous close on less than one-half of 1 percent of all the trading days in the Nasdaq's 29-year history. This year, there have been such moves on 27 percent of trading days. The S&P has moved 1% or more from its previous close on 47.6 percent of trading days. To exceed that level of volatility requires a trip back to 1938, a time of global turmoil. Even in the bear market year of 1974, volatility was lower than it is today: 45.1 percent. (Gretchen Morgenson, NYT 4-9) The average equity fund holds 143 stocks, according to Morningstar. However, nearly $4 out of every $10 in a domestic stock fund is riding on the top 10 holdings in that fund. (Paul Lim, [his last column for the] LA Times [he's moving to DC] 4-9) Christine Callies, chief equity strategist at Credit Suisse First Boston, says the love affair of investors with tech stocks is waning. As of Wednesday, she noted, roughly a third of technology shares were down at least 50% from highs hit in the first three months of 2000. (Gretchen Morgenson, NYT 4-9) Look for the market to stay moderately strong until the end of the month before correcting again in the seasonally "unfavorable" period of May to October, said Michael Burke, editor of Investors Intelligence, an investment newsletter. (Deborah Adamson, CBS MarketWatch 4-7) Borrowing by US consumers surged in February for a fourth consecutive month, Federal Reserve statistics showed. Consumer debt rose by $12 billion in February - to $1.42 trillion - after a January increase of $18.2 billion (originally reported as $17 billion) that was the highest on record. Monthly borrowing has risen by $10 billion or more since November. Rising incomes, tame inflation and low unemployment have made Americans optimistic about borrowing and spending, in turn fueling an economic expansion. Analysts had expected consumer credit to rise by $11.5 billion. (USA Today 4-7) Want to check on your portfolio's [sector] weighting? You could make a good guess using the latest annual reports for your mutual funds. But you will get a more accurate figure by firing up your computer, going to www.morningstar.com and plugging your holdings into Portfolio XRay, one of the analytical tools offered at the Web site. If you have more than a 33% technology weighting, seriously consider lightening up. (Jonathan Clements, WSJ 4-4) To simplify your life as a mutual-fund investor, spend less time worrying about the issue of `cap' size. Over the last five years, the three categories of growth funds rank this way: mid-cap, up an average of 30% a year; large-cap, up 28%; and small-cap, up 27%. In the laggard value sector -- funds that look for bargains in out-of-favor stocks -- the five-year variations are similarly skimpy. Large-cap value funds have averaged a 16% gain, small-cap 14% and mid-cap 13%. To believe that one size category holds more long-term attraction than the others presumes that the whole world of modern investors still hasn't grasped its potential, and is `mis-pricing' it. I'm ready to believe there are still many instances of mis- pricing in the markets, most of them little. But the `secret' of small caps, or any other size caps, is no secret any more. (Chet Currier, Bloomberg 4-4) As Internet usage grows, maladies such as eyestrain and related neck and back aches are rising, especially for bifocal and other glasses wearers, says James Sheedy, director of professional development at SOLA Optical USA, a Petaluma, Calif., supplier of ophthalmic lenses. In a SOLA phone survey of 1,011 computer users, 41% reported suffering from symptoms related to computer usage, but only 29% were aware of the problem, known as computer vision syndrome, or CVS. (WSJ 4-4) `Pricing power is strong in many segments.' Thus sayeth the nation's purchasing managers in today's report on manufacturing activity for March. After years of hearing the mantra that corporate America has no pricing power, leaving increased productivity growth as the only outlet for preserving profit margins, the reference in the National Association of Purchasing Management's report was startling. (Caroline Baum, Bloomberg 4-3) Global investors showed an increasing propensity to look at the world through an industry lens. Their gaze fell most frequently on technology, media and telecommunications shares. In Europe, they accounted for the bulk of the continent's gains. The Dow Jones Stoxx Index advanced just 3.9% in Q1, while the media sector surged 30% to lead all others. The technology sector was next with an 18% rise; the utilities sector, which includes telecommunications, was up 12%. No other industry group managed to return even 5%. The best-performing European countries were the technology-heavy Nordic markets. Sweden (dominated by Ericsson) was on top with an 18% gain in local currency, while Finland (dominated by Nokia) jumped 14%. (WSJ 4-3) Recently, congress voted to eliminate the Social Security retirement earnings test for 65-to-69-year-olds who, under current law, lose $1 in Social Security for each $3 they earn over $17,000 annually. For those who choose to delay collecting Social Security after they hit normal retirement age, a long-standing provision in the law provides for a substantial boost in the eventual monthly benefits check. So working seniors have to make a choice: some money now or more money later. For each year that today's 65-year-olds delay receiving Social Security, they'll receive a 6% boost in future benefits. The question is: Will those higher future benefits make up for the amount you lose in payments in the meantime? The answer depends on how long you live. Given the current delayed retirement credit rates and average life spans, today's retirees are probably better off taking benefits now. They'd have to live much longer than the average American to enjoy an economic benefit from the higher future payments. One caveat: If you happen to be in a high tax bracket now while still working, the value of the current Social Security income would be pared by the tax bite. You may get more after-tax if he delays Social Security until he stops working and drops into a lower tax bracket. (Kathy Kristof, LA Times 4-2) In 1988, when the average pay of chief executives at large companies first topped $2 million, the Dow Jones industrial average ended the year at 2,168. By 1995, when average pay hit $5.8 million, the Dow had reached 5,117. On Dec. 31, 1999, the end of a year in which the average pay package reached $11.9 million, the index closed at 11,497. (NYT 4-2) In the wake of the nasty sell-off in technology stocks last week, diversification overseas may be looking smart. But for investors in mutual funds, that may be less an escape than a trap: foreign funds have come to resemble domestic ones in their commitment to technology. As of Tuesday, Morningstar said, funds that invest in Europe had a 10.4% weighting in technology, versus 2.8% as recently as 1997; funds committed to Japan were 22.4% in technology, approaching the 26.2% weighting of US diversified funds. The lowest such exposure was in Latin American funds: less than 1%. The extent to which technology stocks move as a group is "pretty high" (said Bill Rocco, an analyst at Morningstar), a force that may well outweigh geographic diversity. (NYT 4-2) According to David Hirshleifer of Ohio State University, whose specialties include investor psychology, investors suffer human foibles. One is that they tend to be overconfident about their own ability to pick winning stocks. Another is that their confidence increases more sharply when news supports their thinking than it decreases when the news is contradictory. The first human fault helps explain why investors have made the sky the limit for some technology stocks. That tendency to be too confident --- and overvalue stocks --- can build on itself because of the second fault. 'If people get some good news on a stock, they overreact. If they get some more news, they overreact even more.' On the other hand, people tend to downplay news that runs counter to their thinking. Eventually the weight of contradictory news overcomes the hubris and a stock should return to a price level commensurate with available information, or so the theory goes. (AJC 4-2) The Fama-French model/theory says one stock does better or worse than others because of its sensitivity to three factors: the movement of the overall stock market, the performance of value stocks relative to growth issues and the performance of small-capitalization stocks relative to large-cap stocks. (Mark Hulbert, NYT 4-2) You should still keep the bulk of your portfolio in actively managed mutual funds, not indexed ones. That is the conclusion reached by Lubos Pastor, an assistant finance professor at the University of Chicago, and Robert F. Stambaugh, a finance professor of the Wharton School of UP. The research, presented last week at the Federal Reserve Bank of New York, can be found at finance.wharton.upenn.edu/~stambaug/eval1.pdf. (Mark Hulbert, NYT 4-2) Almost 2.4 billion shares, which represent 220% of the existing float, will be freed from IPO lockups in the next couple of months. As of the middle of last month, the aggregate market cap of the fourth-quarter class of IPOs was about 400 percent above the initial offering prices. You will clearly have people who want to monetize their holdings, particularly the venture capital folks. If you go back over the last 50 years, on the first day of trading IPOs moved up between 5 and 10%. Over the last 12 months, they have traded up close to 100% on the first day. As an analyst, that tells me there is a supply-demand imbalance. That supply-demand dynamic is about to change. Our general sense is that demand for last year's hot IPOs is being supplanted by demand for the new, new things. The end of the lockup expirations may exacerbate this situation. (Steve Galbraith, an analyst at Sanford C. Bernstein, NY Times 4-2) Testing conducted by the FDA covering more than 100 drugs, prescription and over-the-counters, showed that about 90% of them were safe and effective far past their original expiration date. A drug maker is required to prove only that a drug is still good on whatever expiration date the company chooses to set. The expiration date doesn't mean that the drug will stop being effective after that, nor that it will become harmful. (WSJ 3-28)
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