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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: LindyBill who wrote (40352)	3/13/2001 11:57:51 AM
From: stockman_scott	Respond to of 54805

***Top Of The News: Nasdaq And Reality Tuesday March 13, 10:42 am Eastern Time Forbes.com By Dan Ackman <<Even when they were dancing on top of it, many investors would not deny that they were on top of a bubble. What happens now that the party's over? The Nasdaq appears in free fall, down 62% from its high of last March, and the S&P is officially in a bear market. The Dow Jones industrial average and the S&P 500 both fell more than 4% yesterday. The carnage, which started with Internet stocks, is now across the board--and applies even to the most solid, profitable firms: Cisco Systems (Nasdaq: CSCO - news) is down 78%, Intel (Nasdaq: INTC - news) down 64%, Oracle (Nasdaq: ORCL - news) down 67% and Dell Computer (Nasdaq: DELL - news) down 63%--all from their 52-week highs. While having 60% of one's paper wealth wiped out is unpleasant to be sure, the even more important question is how the carnage on Wall Street will affect Main Street. During the wild ride up, there was a lot of talk about the ``wealth effect''--how rising asset values fuel spending and economic growth. The scary part of the Nasdaq's drop is that we now may experience the wealth effect in reverse. When Federal Reserve Chairman Alan Greenspan warned about irrational exuberance in the stock markets and raised interest rates two years ago, he wasn't just being a killjoy, he was trying to ward off a steep decline in those markets of the kind that could bleed over into the real economy of wages and spending. Now, for the first time since World War II, total household wealth actually declined by 2% during the year 2000, according to a Federal Reserve report. This decline could lead to a decline in consumer spending that could in turn lead to an economic downturn beyond the financial markets and beyond what the economy has seen so far. While the wealth effect is well known, its magnitude is notoriously hard to measure, says James Poterba, an economist at MIT, in a recent paper. Poterba notes that, at the beginning of 2000, U.S. households owned just over $42 trillion in assets and about 31% of that was held in the form of corporate stock. ``Even after the rise of share prices in the 1990s, tangible assets account for roughly the same share of household net worth as corporate stock,'' Poterba writes. But, he adds, ``[C]orporate stock represents twice as large a share of wealth today as it did a decade ago, meaning that share price movements can have a larger effect on consumer spending than they did in the past.'' This is where the real danger lies. While stock price fluctuations have always had an effect on spending, the effect will now likely be accentuated as more and more Americans hold stocks either directly, or through mutual funds or retirement accounts. Americans reduced their savings rates dramatically during the long bull market, notes Dean Baker, co-director of the Center for Economic Policy and Policy Research in Washington, D.C. At the end of the last cycle in 1989, the savings rate had climbed to between 7% and 8%. Now it's negative, Baker says. ``People are always slower to quicker to adjust their spending downward than upward,'' Baker says. But they will and we have just seen the start of it. Poterba estimates that a 10% decline in stock prices will cause a net reduction in wealth of about $1.3 trillion. ``This translates into a drop in consumer spending of between $25 billion and $50 billion, or between 0.4% and 0.8% of total outlays. This is a significant drop, but such a wealth effect does not seem large enough by itself to derail the current expansion.'' But Poterba wrote that in November when the Nasdaq was at 3,029. It has dropped 36% since then. We have seen the Nasdaq at this level before--indeed less than two and a half years ago. But a reverse wealth effect like this one? This is terra incognita.>>