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In an interview with Business Week Smithers said the following: We are arguing that the stock market is normally the right place for long-term investors. But it couldn't be the right place normally and give good returns if it wasn't risky. From time to time, the risks become inordinate. And so it becomes a bad place to be invested. [You can tell the bad times because] we can measure it, because the value of the stock market in aggregate is reflected by the underlying cost of making companies. The price of anything in a competitive society rotates around the cost of making it. In normal circumstances, the manufactured cost is the same thing as the price. And this has been long known by economists. James Tobin produced this famously in a paper back in 1969 about "q," which is the ratio of the underlying value of assets owned by companies in aggregate and their stock-market value. Whereas Tobin had produced it as a theoretical paper in 1969, when there simply was not enough data to test its validity, we proceeded to test it with Federal Reserve data from 1945 to 1999, and from other sources going back to 1900. The first thing we tested was whether the ratio is mean-reverting. And we have established it through a wonderful thing called the Augmented Dickie-Fuller Test.... I think economists refer to it as the ADF. And it indeed shows that "q" does mean-revert, and does it in a way that is extremely unlikely to be accidental. Second, we tested to see which way did the relationship work. When you've got two different values -- the value that the stock market places on companies and the value of their underlying assets -- if they mean-revert, they could come together two different ways. Either when stock-market prices are above average, asset values rise to meet it, or share prices fall. Tobin, in his original paper, implied that it would be the asset values that adjusted. And this is natural for economists who assume that markets are efficient. We showed that it was share prices which did most of the adjustment, not asset values. The "q ratio" tell us today's stock prices are approximately 2 1/2 times higher than they should be. This suggests that over time, the market is likely to at least halve from its current level. We say that the evidence we have is that the chances of the market going down over the next year are roughly two-thirds, one-third of it going up, and nil staying where it is. Over five years, the chances of it falling are about 90%. Our analogy is that "q" is like a piece of elastic. When values are more or less around the middle price, it doesn't make much difference. The elastic will pull you slightly back to the mean but it's a weak pull. It's only really important when you get to extremes, when the market is extremely underpriced or extremely overpriced, then you get the elastic snapping quite hard. [The article failed to mention anything about profit growth. Times of high profit growth - like now - should cause higher valuations. Since 'q' is elastic, such a factor should effect it too. Business Week did ask: 'Did you challenge your thinking on this by assessing values of intangible assets such as trademarks and intellectual property?' I did not buy their answer.] We dismiss claims that these have any effect on the validity of fundamental data. The idea that intellectual property has any aggregate value was dismissed years ago, provided you are talking about a competitive economy. An example would be pharmaceuticals, where there is a lot of intellectual property, but which is also a competitive industry. Pharmaceutical A may get value from their research, and that company will be worth more than its asset value because you will be getting an above-average return. [There is likely to be one or more] Pharmaceutical B's which will not be paying off its reasearch, and will be worth less than its net asset value. In a competitive society, money will be flowing into the pharmaceutical industry until its return is the same as the average on everybody else. [ And how do you know when that flow is over? How do you know, if a company, industry or country is getting above average returns, when those returns stop?] The average return of an industry, after research, and the benefits of it will be the same as everywhere else. [This is the argument I did not buy.] People talk about goodwill and intellectual property, but what they forget is that since the average return on capital must be the average -- there must be as much ill will out there in a competitive society as goodwill. People tend to go around with the theory that ill will doesn't exist and goodwill does. [I had not thought of this. An interesting accounting concept.] Robert Shiller, a Yale economics professor, in his recently released book, 'Irrational Exuberance', claims that investors are driven by impulse, herd behavior, dinner party chatter, intuition, media hype, fear of being left out -- everything, in short, but informed, reasoned analysis. 'People are smart, but they tend to make big errors, and they do it in groups,' says Shiller. He argues that stock market indexes are almost always too high or too low. An individual stock price is often an accurate barometer of a company's earnings prospects. But only occasionally, on their way up or on their way down, have the indexes in this country accurately reflected true corporate value. They have more closely resembled a stopped clock that cannot help but be accurate twice a day.
Inventories and trade subtracted a combined 2.7 percentage points from real GDP growth in the first quarter. Without them, what's known as final sales to domestic purchasers (final domestic demand) soared 8%, the biggest increase since the second quarter of 1984. Real final sales, which is GDP less the change in inventories, rose 6.9%, a pace last seen in the second quarter of 1984. Construction of houses, schools, office buildings and highways rose by 12.1%. Spending for machinery and equipment, mainly computers and software, was up 23.7%. Even politicians added to the bounty. The outlays by all the presidential contenders added more than $235 million to the gross domestic product from January through March. Consumer spending rose 8.3% -- the largest gain since a 8.6% rate in Q2-83. The gain was led by a sharp increase in spending on durable goods, big-ticket items meant to last three or more years. Spending on those shot up at a 26.6% annual rate, the fastest pace since Q3-86. Business investment also ramped up, rising at a 21.2% rate. After hovering in a 3.8-4.7% range for the past four years, year-over-year real GDP growth accelerated to 5%, the fastest since the fourth quarter of 1984. Nominal year-over-year GDP growth rose 6.9% in Q1, the fastest pace since 1989. Employment Cost Index The Employment Cost Index rose 1.4% in Q1, the Labor Department said Thursday, the largest increase since a like-size jump was recorded for the third quarter of 1989. Benefits alone rose 2% during January to March, a growth rate not seen in 10 years. Benefits costs (which represent nearly a third of ECI) climbed 0.8% and 1.2%, respectively, in Q3 and Q4. In the private sector, benefit costs rose 2.3%, accelerating from a 1.1% gain in Q4. Company outlays for health insurance rose 7.6% in the year that ended last month, or three times the 2.5% increase in all of 1998. 'Insurance premiums have risen in the high single digits for a second year,' said Tony Crescenzi, a bond market analyst with Miller, Tabak & Co, also pointing out that the March consumer price index showed medical costs up 3.9% year over year, as prescriptions and hospital stays were both more expensive. Wages and salaries (the largest component of ECI) rose 1.1%, the largest gain since last year's second quarter. That gain follows repeat increases of 0.9% in Q3 and Q4. Economists had expected the ECI to increase just 0.9%. Year-over-year, the index grew at a 4.3% rate, the quickest pace since the fourth quarter of 1991. Other Inflation Numbers The GDP domestic purchases deflator (also called the index for gross domestic purchases), and considered by economists the best measure of inflation, rose 3.2% (compared with a 2.3% pace in Q4)-- the most in nine years. However, excluding food and energy prices, the purchases deflator rose only 2.1% versus 1.9% in Q4. And excluding a big federal pay hike, which is treated as a cost to the government, the deflator rose just 1.7%. The Fed-favored price index for personal-consumption expenditures (the PCE index) rose at a 3.2% annual rate in the first quarter and a 2.4% rate when compared with a year earlier. That's up from a 2.5% pace and 2% year-over-year rate seen in Q4. The quarterly gain was the largest jump since the Q3-94, when it surged 3.5%. Excluding food and energy, the index rose at only a 1.8% pace. On the surface, inflation took a nasty move upward. Below the surface, however, the core consumer spending deflator rose only 1.9% at an annual rate, about the same as in Q4. Meanwhile, the four-quarter change of the core PCE price index stands at a historically low 1.6%, only teensy weensy slightly barely above its low point of 1.2% in early 1998. So, really, there's not much happening on the basic inflation front. The core GDP deflator registered a measly 1.7% four- quarter rise, while the GDP chain-price index came in at 1.8%. Now the big concern is that the Fed is behind the curve in regard to accelerating inflation. In this regard, a continuation of gradual rate hikes is no way to change this growing perception. Indeed, if the Fed would not raise rates 50 bp after GDP rose at a 7.3% pace in one quarter and at a 5.4% pace in the next, inflation showed clear signs of accelerating, and joblessness is at a 30 year low, when would it make such a move?
But the same complaint could be leveled at actively managed funds. According to Morningstar, diversified U.S. stock funds have an average 36.2% invested in their 10-largest stocks, with 29.1% in technology. Moreover, today's S&P 500 is about as diversified as it was two decades ago. At year-end 1980, the 10-largest holdings accounted for 25.6% of the S&P 500, with energy stocks taking up 29.7% of the index, according to Vanguard Group. Critics also charge that S&P 500 funds represent a big bet on big-company stocks. True enough. But the S&P 500 represents 77.2% of US stock-market value. If you think index funds are undiversified and top-heavy, there can only be one reason: The market is undiversified and top-heavy. In recent years, the stock market's return has been driven by a relatively small number of sizzling performers. As these hot stocks climbed in value, index funds became more heavily invested in these companies, while lightening up on lackluster performers. That, complain critics, is the equivalent of buying high and selling low. It's also called letting the flowers grow, and letting the weeds wither. The last criticism: 'You can do better'. Sure, there is always a chance you will get lucky. But as a group, investors in US stocks can't outperform the market because, collectively, they are the market. In fact, once you figure in investment costs, active investors are destined to lag behind Wilshire 5000-index funds, because these active investors incur far higher investment costs. The proof is also in the numbers. Over the past decade, only 28% of U.S. stock funds managed to beat the Wilshire 5000, according to Vanguard.
It may surprise Wall Street folks to learn that some high-ranking Fed officials are far less concerned about inflation than they are about the nation's external imbalance. 'The current-account problem is a bigger one than inflation,' one top Fed official told Barron's. 'If prices heat up, we can work with that. But if tons of capital are pulled out of the US, capital we need to finance the deficit, then that's a systemic risk.' The traditional methods of reversing a current-account problem -- higher interest rates and a weaker currency -- are unappealing because they could slam the stock market, a major force supporting the economy. (That dynamic was evident in 1987, when the current-account last loomed this large. As the world lost faith in the dollar, interest rates soared and stocks crashed in October.) Salomon Smith Barney economist Robert DiClemente thinks the pickup in global growth and moderation in oil prices, which have boosted the deficit of late, will trigger an orderly reversal. By early 2001, DiClemente thinks the current account will shrink to 3.7% of GDP. But many observers fear the worst: Rising inflation from a weak dollar and a weaker economy from higher interest rates. Why is the dollar so strong and the euro so weak? The key, in my judgement, is the relative degree of confidence in the future path of economic growth, inflation, budgetary deficits/surpluses and asset prices in the United States vs. Europe. America continues to look good, very good, on all four counts, including the last one. The washout in the Nasdaq has proceeded in a very orderly manner. The much-feared bursting of the Nasdaq bubble that would send foreigners fleeing for the exits never happened. Instead, the major readjustment in prices has proceeded in a very orderly manner (??). If recent relative performance is a predictor of things to come, Europe's rate of economic growth will continue to be well below that of the US. Its rate of inflation is low, but there are increasingly doubts as to the future, since, with the euro where it is today, the cost of importing dollar-denominated raw materials, especially oil, is bound to push up domestic prices. Add to this the fact that the key euro nations -- Germany, France and Italy -- all continue to run large budgetary deficits, and one can see why the scales continue to be tipped so heavily in favor of the dollar. Europeans hope that if the European Central Bank raises short-term euro rates sufficiently, that might begin to do the trick. It won't. Because, for domestic reasons only, our Fed will more than match European rate increases in coming months, which means that the current short-term interest rate spread in favor of the dollar will remain, or even increase. So the dollar will remain king. US stocks aren't the only world equities buffeted by volatility recently, so there's no reason the dollar would necessarily be weakened more than other currencies. But 'It wouldn't be surprising if additional weakness in US equity markets were associated with dollar weakness as well,' said John Lipsky, chief economist at Chase Securities. 'But so far neither has been apparent in the wake of last week's more dramatic moves.' In the 1980s, large trade deficits severely reduced the dollar's value; now they don't. In fact, when it was announced last week that the US imported $29.2 billion more in goods and services than it exported in February, the dollar rose against the euro and the Japanese yen. What's going on? In simplest terms, the rest of the world is making a living by selling goods to the US, which is paying them in dollars. Then the nations receiving those dollars are investing them back in US bonds and stocks. As of January this year, for example, Japan held $323 billion worth of US Treasury securities; China and Hong Kong combined held $103 billion; the OPEC nations, which ship oil to the U.S. and other countries, held $44 billion worth of Treasury bonds and bills. [So indirectly, it has been the strenght of US companies (and thus our stock market) that has supported the dollar.] And US companies succeed not by putting computers on ships for export but by selling knowledge--of technological systems or products and services aided by technology. Such sales, between or within global companies, form a new pattern of world trade that is not captured by traditional statistics. That's why trade "deficits" no longer upset currency markets. The euro sank to a fresh low Tuesday against the dollar, touching 91.62 U.S. cents intraday in New York, or 22% below where it stood at its creation on Jan. 1, 1999, and 9% below where it traded at the end of last year (and down 5.6% against the pound). 'The euro is weakening because institutional investors [and hedge funds] are finally starting to reduce their long [euro] positions,' said Karen Parker, director of currency research at Chase Securities. Many investors and traders had long believed that a steep decline in US stock prices would be the spark that finally led to a weaker dollar, and stronger euro. 'And now that that didn't happen, many of them have given up hope of the euro's ever recovering,' Parker said. A reversal of the euro's fate requires 'clear evidence that the US economy is moderating,' said Parker. 'The European economy is recovering; but against the blistering pace of growth in the US, the recovery in Europe hasn't been impressive.' To Anne Mills, a currency economist at Brown Brothers Harriman, the euro's weakness 'is a psychological problem, not a fundamental problem. The European economy is strengthening. European interest rates are rising. And Europe is at an earlier stage of the business and restructuring cycles than the US, which suggests greater potential for price gains in the intermediate term,' said Mills. 'But until people cease to believe that the highest potential returns are to be had in dollar assets, the euro is going to remain under pressure.' The euro's losses can threaten to drive up inflation rates by raising the costs producers incur in importing raw materials from outside the region. Just today, Germany's central bank said import prices rose 0.8% in March, up 10.9% from a year earlier. The Bundesbank attributed the increase to the weakening euro and rising oil prices. The inflation rate in the euro zone accelerated to 2.1% in March, surpassing the central bank's 2% ceiling for the first time since the euro began.
Suppose a salaried investor earns $100,000, out of which he pays a $30,000 tax, which leaves him with an after-tax income of $70,000. But now suppose, as has been common these days, he realizes a $50,000 capital gain on stock he owns. So he pays the $10,000 tax out of that cash and reinvests the remaining $40,000. Now, what happens in the national income accounts, and hence in the data used by the Fed, is that this person's after-tax income gets reduced by that extra $10,000 tax on the capital gain. So he is credited with only $60,000 in income, instead of the original $70,000. That's because the accounting perversely factors in the tax, but completely forgets that he had plenty of extra cash with which to pay it! And with capital-gains taxes recently bulging, this distortion makes it look as though after-tax incomes aren't rising nearly as fast as they really are. The savings rate has [also] been understated because of the same capital-gains distortion that befuddles the Fed. To go back to the same math, if a taxpayer has an after-tax income of $70,000 and spends $60,000, he has a relatively high savings rate. But if his after-tax income is put at $60,000 because he paid a capital-gains tax of $10,000, his savings rate is misleadingly pegged at zero.
Source: Ibbotson Associates
WSJ 4-24-00 Thanks to an e-mail that spread throughout Wall Street during the end of last week, all traders wanted to talk about was "Humble Pie" -- a set of lyrics that rewrites folkie Don McLean's "American Pie". The lyrics were passed from Wall Street firm to Wall Street firm. The real mystery is who wrote it: A check of global-news databases shows no record of its original author, and its publication couldn't be found on the Internet.
I can still remember how the market used to make me smile What I'd do when I had the chance Is get myself a cash advance And add another tech stock to the pile But Alan Greenspan made me shiver I can't remember if I cried
Statisticians at Ned Davis Research have gone back to 1927, studying how stock prices react to earnings increases and declines. Their findings: When earnings growth in the S&P 500 stocks exceeded 20% (as is expected this year) the index has historically gained an average of 1.2%. When earnings are rising 10- 20%, the S&P typically rises 6.2%. The real gains for stocks come when corporate earnings growth is slow or nonexistent. For example, the S&P 500 gained on average 9.7% during times when earnings growth was rising less than 10% or when overall profits actually registered as much as a 10% decline. And when S&P earnings fell steeply -- 10 to 25% -- the index gained an astonishing 28.7%. 'This generally just shows that from a long-term perspective strong earnings growth in and of itself is not that bullish,' said Tim Hayes, global equity strategist at Ned Davis Research. But that finding is less counterintuitive than it might seem. 'The market tends to anticipate, to discount earnings growth well in advance of it happening,' Hayes said. 'So by the time you get the peak earnings growth, the market tends to have discounted it.' 'What really drives stocks is what people are expecting,' Hayes said. 'If expectations are really high, you're setting yourself up for disappointment.' And what does that mean for stocks? In the current market, where many of the biggest and most popular stocks are still priced for perfection, it just may be that perfection is not enough. Data from Bogle Investment Management, using analysts' projections from First Call/Thomson Financial, show that for the quarter ended in June 1992, less than 20% of all companies either met analysts' earnings projections or exceeded those projections by a penny or two. By the end of last year, that proportion had steadily grown to about 30% of all reporting companies. In those eight years, the number of companies that missed their estimates steadily declined, while the number of companies with positive surprises grew. In fact, reporting for the fourth quarter last year, more companies beat earnings estimates by a penny than simply met the estimates. The reverse was true in the quarter ended in June 1992. Why is this going on? Quite simply, for a long time, companies that beat analysts' expectations see their stocks rise. Companies that miss expectations can see the knees cut off their shares, regardless of what the results actually are. So to the extent they know what they're going to earn, they signal a lower number than they think they will have. Have companies simply become ever more skilled at the game of managing analysts' expectations? Or are they beating estimates because their business is going great guns? Normally, over the course of a quarter, analysts reduce their estimates by two or three percentage points. In the latest period, they were actually raising estimates of first-quarter earnings growth. Midway through January, analysts expected about 17.5% growth in the first quarter over the year-earlier period. By the middle of this month, analysts were projecting 18.8% earnings growth. Moreover, says Chuck Hill, director of research at First Call, fewer companies 'pre-announced' disappointing earnings for the first quarter, a sign that things really were going well. Also, the aggregate amount by which actual earnings has beaten expectations is extremely high, about 6.7% vs 4.8% in Q4 and a normal/average 2.8%. Many companies are able to adjust their profit. Microsoft's back is bent by the weight of roughly $20 billion in cash and investments. When it sees quarterly operating profit underperforming, it sells off part of this or that investment and voila, for the umpteenth consecutive quarter it tops analysts' forecasts. Legal, but contrived. With all its billions, Microsoft may never miss.
What created the chasm? A mindless stampede into technology stocks? Perhaps. But Edward Yardeni, chief economist of Deutsche Bank Securities, who has developed a rigorous analysis of the technology-stock run-up, concluded at the end of his trail of equations: The price-earnings ratios of technology stocks are optimistic, but they may be realistic as well.' Yardeni and a research associate, Joseph Abbott, started with two sets of numbers for the 72 technology companies in the S&P. The first was corporate earnings estimates for the next 12 months by securities analysts, as compiled by IBES International, going back to the 1980s. The second was the five-year earnings estimates made by analysts over the same span. They found that from 1985 through the early 1990s, the long-term (five-year) growth estimates tended to range from 10 to 15% a year, but as the 1990s wore on the projections started rising, and are now at about 25% annually. Around 1998, Yardeni, believes, investors apparently started taking those long-term growth estimates more seriously as a basis for valuing technology stocks. In Yardeni's thinking, the higher growth estimates, plus a slight increase in the multiplier attached to the long-term growth, and assuming low inflation, translate to justifiable P/E ratios of 33 to 50. (The precise methodology is discussed in two papers, "How to Value Earnings Growth" and "Reversal of Fortune," posted on the Web at www.yardeni.com WSJ 4-20-00
In a recent Investors Business Daily interview, Former Federal Reserve senior economist Kevin Hassett, now a resident scholar at the American Enterprise Institute, argued that when the stock market goes up there are two effects on the economy. "One is that people who own stocks feel wealthier, and they consume more. And the other is that firms have a cheaper source of equity finance, and they buy more machines." So the net effect is a small shift in the demand curve, but a larger shift in the supply curve. And it is this outward supply-curve shift that reduces prices. Therefore, in total, the so-called wealth effect is actually deflationary. (Lawrence Kudlow, CNBC 4-28) Last month, net new money into stock mutual funds fell 33.7% to $35.6 billion from February's revised record of $53.68 billion, according to ICI. Despite the drop, March's intake still qualified as the third-best month ever for stock mutual funds, according to the ICI. Investors pulled net $8.13 billion from bond fund portfolios. According to Financial Research Corp, tech funds had their best month ever in March, raising $11.5 billion in new money. International and global funds were also a hot category, taking in a combined $26.6 billion in new money. (WSJ 4-28) As of March 31, the average stock mutual fund held about 4% of its assets in cash, down from 4.4% the month before, 8% in 1994 and 12% in 1990, according to ICI. Buried in the latest statistic is this significant trend: A growing number of funds hold virtually no cash. According to Morningstar, more than 430 funds -- out of about 2,500 domestic stock funds -- held 0.5% or less of their assets in cash at the end of last year, up from about 300 the previous year. These cash-light funds are down year-to-date through Wednesday, according to Lipper, an indication of how the cash-is-trash attitude isn't helping as it did last year. With broad market indexes down as much as 7% so far this year, stock mutual funds with more than 5% of their assets in cash are essentially flat year to date, compared with a 1% decline for funds with a smaller cash pile. (WSJ 4-28) A Bloomberg News survey today of economists at the 29 banks and securities firms that trade directly with the Fed showed 15 expect policy-makers to raise their target for overnight bank lending, now 6 percent, by a half-point at the next meeting on May 16. The remaining 11 respondents expect a quarter-point increase. Three firms weren't available to comment. In the previous survey, on March 17, only PaineWebber said the Fed might raise rates 50 basis points next month. (Bloomberg 4-28) The most interesting question for investors is how they will be able to tell if the next plunge, whenever it comes, is the real thing or just another buying opportunity. The answer is: Check the dollar and the economy. One or both of them are likely to get into trouble before the stock market suffers a prolonged downturn. (Floyd Norris, NYT 4-28) While the major American equity indexes are down or flat for the year, some prominent European stock indexes have posted gains. Germany's benchmark DAX index has climbed 4.63% in local-currency terms, France's CAC has risen 6.08%, and a key Italian gauge is up 6.42%. But the sinking euro is souring those stock returns for Americans. When the European gains are translated into dollars, the DAX is down 4.24%, the CAC is off 2.92% and the Italian index is 2.61% lower. European investors who own American stocks have profited. When translated into euros, the Nasdaq index is flat for the year while the S&P 500 is up 9.9% and the Dow up 5.7%. (NYT 4-26) In the month through yesterday, the Dow, which represents `the market' to the average investor, has declined only 1.8% (including reinvested dividends). So, many people may be under the impression that it's only investors in Internet or computer-related stocks who have seen their wealth shrivel this spring. The S&P 500 declined 6.3% from March 24 through April 24. The Russell 2000 has tumbled 18%. The Nasdaq (4,713 stocks) has fallen 30%. Among the 3,937 stocks with a market value of $100 million or more, of the stocks that are up, only 15% art up 20% or more. Of the stocks that are down, 52% have dropped by 20% or more. Or to put it another way, 1,388 stocks have suffered 20% declines or worse, while only 182 stocks are up 20% or more. That is a 7.6-to-1 ratio. (John Dorfman, Bloomberg 4-25) Wall Street forecasts of accelerating profit growth at a time when the Fed is committed to taking the economy down a few notches `can be looked upon as a wager that Fed tightening will fail to slow the economy,' says Bob Barbera, chief economist at Hoenig & Co. `I believe the Fed will succeed.' (Caroline Baum, Bloomberg 4-25) IPO-lockup expirations may not always be as harmful to a stock price as generally believed. In a study of the 132 initial public-stock offerings in the first half of 1999 by Thomson Financial Investor Relations in New York, researchers found that the expiration of a lockup period -- generally the 180-day span following an IPO in which insiders are prohibited from selling their shares -- had little effect, on average, on a stock's price. In the IPOs that were studied, the average stock price didn't fall at all leading up to the lockup expiration. Rather, share prices for these IPOs rose an average of 2% in the 10 days leading up to the expiration date and five days following. At year-end 1999, when all the lockups had expired, the average stock was up 108% from its offering price. (WSJ 4-24) The average IPO since the beginning of 1999 has fallen 4.3% based on the performance of offerings from their first-day closing price. The average IPO is still doing well, with a return of 72.3% over the offering price. (WSJ 4-26) Consider the hapless soul who started investing in 1965. His average annual return amounted to 1.2% for the decade ending in December 1974 (based on the S&P 500). Someone who invested in 1931 wouldn't have fared much better (1.8%).(Kathy Kristoff, LA TImes 4-24) From July 1 of last year through the end of March, technology stocks in the Standard & Poor's 500 index, which represent about one-third of the index, were up 60%. The other two-thirds of the S&P was down 3.7%. (Charles Freeman, portfolio manager of Charles T. Freeman is portfolio manager of the $15.6 billion Vanguard Windsor fund Vanguard Windsor fund NYT 4-23) Taxes now claim a greater share of the median two-income family's budget than the combined total of money spent on food, clothing, housing and transportation. And the tax portion is rising. Nobody yet is making the claim that it is in direct proportion to the slowdown in savings, but it is hard to deny taxes have something to do with the lack of savings. And why, according to Merrill Lynch, half of American families have less than $1,000 in net savings and investments. The answer to that perplexing question of why Americans do not save might be an inability to save, odd as that might seem in an age of incredible wealth and prosperity. (AP 4-23) In the 20 days through last Tuesday, the average intraday swing of the Nasdaq composite index was 5.8%, according to researchers Greg Jensen and Vivin Oberol at investment firm Bridgewater Associates. Nothing on that scale has occurred before. Most of Nasdaq's wild periods, back to the October 1987 market crash, have resulted in peak 20-day-average intraday swings in the 3% range. All the better if volatility has reached new highs, Wall Street bulls say: That must mean the market is bottoming. Using the rolling 20-day measure of average intraday volatility, Nasdaq's craziest periods of the last 13 years ended in November 1987, August 1990, April 1994, August 1996, November 1997 and October 1998. In all of those cases, the Nasdaq composite index was either at or close to its bottom for each cycle by the time the volatility peak was reached. Even if volatility has peaked, Nasdaq's near-term performance after most such peaks since 1987 suggests that the potential reward for jumping in right away 'is small relative to the risk that the market continues its sharp tumble,' Jensen and Oberol argue. In other words: It's better for buyers to be patient. (Tom Petruno, LA Times 4-23) Only about half the $2 trillion in wealth that was lost in the previous week has been restored. Because some of those gains were on borrowed money that has since been returned, a full recovery of that wealth must await better economic conditions or a return of courage to the aggressive borrowers. In either case, I see this as a slow process that will not put new highs in our reach until the fall at the earliest. Also, after spending about 2 percentage points more than incomes in the past three quarters, spending in line with incomes is likely during the spring. This alone should slow the economy's growth to well under 4%. IPOs and venture capital development also have slowed. A possible paradox of the latest Federal Reserve policy is that it may slow down the exploitation of technology faster than it slows consumer spending [which is the opposite of what I have been reading recently]. If that occurs, then slower growth and higher inflation may occur simultaneously. (Donald Ratajczak. ACJ 4-23) Despite the stock market's recent trashing of Internet retail stocks, a new study by BCG shows 38% of Web retailers are actually making money. Among Web retailers that have been around for at least a year, 79% of catalog companies, 50% of traditional bricks-and-mortar stores, and 36% of Internet pure plays now have profitable Web operations. The BCG/shop.org study is based on information from 412 of the leading online retailers, 221 of which agreed to answer a detailed questionnaire. While upstart Internet-only retailers spent $82 last year to acquire a new customer, traditional retailers spent just $12 for every customer that shopped at its Web site. (WSJ 4-18) From the 'Top 5' lists of 'Titles for a Movie About Elian Gonzalez' Bill and Fidel's Excellent Adventure, From Here to Paternity, 'E.G.', Three Thousand Relatives and a Baby, Blame It On Reno, and Havana Can Wait (Top 5, 4-18)
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