Interesting thoughts from Washington Post on what caused market to drop in first days of January...more tax-related selling. Not a bad strategy.
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Another Cause of Jan. 2 Dip
By Jerry Knight
Washington Post Staff Writer
Thursday, January 4, 2001; Page E04
When the stock market started the year with a nose dive Tuesday, there were plenty of plausible explanations.
The National Association of Purchasing Management reported that manufacturing activity dropped to the lowest level since the 1991 recession.
Goldman Sachs Group Inc. said its highly regarded computer model of the U.S. economy is forecasting a better than 50 percent chance of a recession this year.
Robertson Stephens Inc., California's biggest investment firm, predicted that corporations will cut their information-technology budgets, and Morgan Stanley Dean Witter Inc. issued a similar warning about networking and communications equipment.
And then Morgan Stanley strategist Byron Wein tossed out his annual wild card: a list of potential surprises for the year, starting with simultaneous recessions in the United States and Japan, political unrest in Europe over the falling euro and $40-a-barrel oil.
But looking at Tuesday's list of losers among Washington stocks suggests another likely answer: A chance to cash in handsome profits on some of 2000's hottest stocks and not pay taxes on the capital gains until 15 months from now.
Four of the five best-performing local stocks last year dropped significantly on 2001's first trading day, and all four had significantly heavier-than-usual trading volume.
Isomet Corp., the tiny Springfield company whose stock was up 474 percent last year, escaped Tuesday's avalanche, but the runners-up got run over.
Manugistics Group Inc., the No. 2 stock of 2000, with a 253 percent gain, fell 24 percent on Tuesday, dropping from $57 a share to $43.06. Volume was almost 2.8 million shares, close to a million more than most days.
Shares of the Rockville-based business-to-business Internet services company started down again yesterday but turned around after the Federal Reserve cut interest rates. Manugistics closed at $45.92.
Ciena Corp. shares dropped 19 percent Tuesday, from $81.25 to $65.88, on volume of 1.7 million shares, more than 300,000 more than average. Ciena was last year's third-best-performing stock, ending the year up 183 percent. It also was one of the year's most volatile stocks, often the biggest winner or loser of the day among stocks of companies based in the District, Maryland or Virginia. Ciena shares recovered yesterday, climbing to $84.94.
Ciena and Manugistics are key players in the industries that Robertson Stephens and Morgan Stanley warned were likely to be hurt by the slowdown in corporate spending.
But none of the factors thought to have moved the market Tuesday applied to the two other hot local stocks that were knocked down -- Trigon Healthcare Inc., the Virginia Blue Cross/Blue Shield company, and NVR Inc., the Washington region's biggest home builder.
Trigon stock, up 164 percent last year, fell by a little more than 5 percent Tuesday, from $77.81 to $73.63, and continued to fall yesterday, closing at $70.
NVR's stock also was off more than 5 percent on the first day of the year, falling from $123.60 to $116.60, but gained back some to finish at $119.60 yesterday.
Taking profits is always tempting for investors holding a stock that has had a strong run-up, especially when the big gain comes in a down market. Shareholders of Manugistics and Ciena have even more reason to sell because of the forecasts for a rough year ahead in their business sectors.
If any more incentive to sell is needed, there is the tax timing issue, which often influences the year-end behavior of markets.
It's well understood that investors who have decided to give up on a losing stock and claim a tax deduction on their losses generally want to get out before the end of the year. By selling in December, they can deduct the loses from gains they've made on profitable stocks sold during the year.
That tax incentive is one of the reasons for the "January effect," which often causes the market to go up in the first month of the new year. Investors who sold losers in December use the proceed to invest in new stocks in January; that inflow of cash can drive up the market.
Some investors holding winners also may sell them in December, because they can offset their gains with the losses on losing investment liquidated at the end of the year.
But for investors who don't have a lot of losses to take -- or who do their tax-planning by looking ahead, rather than back -- January can be a better time to sell.
Selling Manugistics, Ciena, Trigon or NVR stock on Tuesday put the profits into the 2001 tax year, which means for most taxpayers that Uncle Sam doesn't have to be paid until April 15, 2002.
That gives investors 15 months of float on the money they'll eventually have to pay to the Internal Revenue Service. Even stashing the cash in a certificate of deposit can earn enough interest to offset part of the taxes that will be due in 2002.
And if they put the cash back into the market, they have the "opportunity" to lose some money on stocks that can be sold for losses before the end of the year. Given the forecasts for the market this year, that may be a strong possibility.
© 2001 The Washington Post Company |
