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» Rande - wcw,
wcw,Actually, I believe all the Russell indexes are cap-weighted. Only braod-based ones I’m familiar with that are price-weighted are put out by Value line. There are some smaller price-weighted indexes that track certain sectors (there’s also the Dow, of course, and some foreign indexes such as the Nikkei, etc.) Let’s face it, none of the indexes are perfect. I do tend to agree with Bogle and others who lean toward the W5000 as the best representation of the U.S. stock market and prefer the Vanguard version personally.
BTW – Following is a fascinating piece from the April 23, 2000 NY Times (by Mark Hulbert) that is on-point to your question. I recommend this one for everyone as a must-read. KEY PASSAGE – “Using skewed benchmarks has serious consequences beyond leading investors to mistake a simple market ‘breather’ for a bear market. “ Thanks for the question:
Stock Indexes Paint An Imperfect Market Picture
By Mark Hulbert
WHAT'S all the fuss?
From the day the Nasdaq composite hit a record high on March 10, through its trough on April 14, the index lost 34 percent of its value. Yet over that same period, the average United States stock actually fell by less than 1 percent.
That's right. By simply using a somewhat different methodology, it is perfectly reasonable to argue that not only are stocks avoiding the clutches of a bear market -- traditionally viewed as a decline of 20 percent or more from a high -- but that they also have a long way to go before even entering a correction -- usually defined as a sell-off of 10 percent or more.
The discrepancy arises, in part, because the Nasdaq composite does not represent the entire market. But more important is the fact that none of the major stock market indexes reflect the performance of the average stock. Instead, they are built to give far greater weight to certain stocks – those with the biggest market capitalizations.
As a capitalization-weighted index, the Nasdaq composite is one of the worst offenders in this regard. The index weighting of Cisco Systems, the largest Nasdaq stock with a market cap of $452 billion, is more than a thousand times that of, say, Offshore Logistics, with a market cap of just $256 million.
As a result of its capitalization -based weightings, the Nasdaq composite paints a far too rosy picture when the largest-cap Nasdaq stocks are leading the market, as they have in recent years. In 1999, for example, when Cisco rose about 131 percent, it led the Nasdaq composite to an 86 percent gain. The average Nasdaq stock, however, gained less than 10 percent that year.
Conversely, the Nasdaq composite often paints a far too pessimistic picture when the dominant stocks perform poorly, as was seen over the past month. Although the index shed a third of its value, the average Nasdaq stock on April 14 traded at more or less the same level as it did in early March.
Most of the other major stock indexes, like the Standard & Poor's 500, the Russell 2000 and the Wilshire 5000 Total Market, are also skewed by capitalization weighting. Sure, the Wilshire 5000 is more comprehensive than the Nasdaq composite, in that it encompasses virtually all publicly traded United States stocks. But it still gives heavy weighting to large-cap stocks. From March 10 through April, for example, the Wilshire 5000 declined 11 percent. Though that's not as large as the loss of the Nasdaq composite, it is still very different from how the average stock has performed.
A number of indexes seek to give equal weight to each of their component stocks. But these benchmarks pose problems, too, because no one has figured out how to calculate them without imputing a bias to the results.
For example, in part because of the way price changes are translated into percentage changes, the Value Line Arithmetic Index of some 1,700 widely traded stocks has an upward bias -- it rose 0.4 percent at the same time the Nasdaq was plunging 34 percent. Its sister benchmark, the Value Line Geometric Index, makes use of logarithms in its calculations, which gives the index a downward bias. It fell 1.6 percent over the same period. I simply split the difference to arrive at my estimate of a loss of just 0.6 percent for the average stock.
Using skewed benchmarks has serious consequences beyond leading investors to mistake a simple market "breather" for a bear market.
The practice also leads investors to draw spurious conclusions about their fund managers' performance. In recent weeks, after noting that more fund managers were beating the S. &P. 500, some commentators concluded that those managers were to be applauded for doing a better job. But all that happened, of course, was that those managers were jumping over a ridiculously low hurdle instead of a sky-high one.
The lesson is simple: If you are gauging the market, or your fund manager, by using an index that is prejudiced toward a few large-cap technology stocks, chances are that you're reaching the wrong conclusion.
<img src=http://www.internetcount.com/1867857677.cgif width=5 height=5>
-- posted by Rande
» Rande - Kirk,
Kirk,Haven't checked the latest weightings, but I think it's safe to say that even Cisco or Microsoft or GE would fall under the old "4% rule" as a percentage of the W5000 total market. The top ten holdings in the Vanguard fund represent 20% of the portfolio, however, so even at an average of 2% each they have a disproportionate impact on the rest. Fine with me -- the leaders are big for a reason and if Cisco, Microsoft, HWP, Intel, Dell, GE, etc. drive the returns, so be it. Twenty years ago it was a different set of leaders and twenty years from now it may yet be another set. I think it's smart to let the market decide these things.
<img src=http://www.internetcount.com/1867857677.cgif width=5 height=5>
-- posted by Rande
» Kirk - ok...
Agree on the Wilshire5000 but am not convinced I would want to own QQQ... at least at its peak where it was heavy into high PEG stocks.For dip buying... QQQ is hard to beat unless you subscribe to my newsletter.
[Chest thumping mode on]
I just sent out an email to subscribers on today's buys... AMAZING how well we have done with a simple strategy of taking profits and buying back at appropriate levels in corrections. AS IT TYPE, my stock portfolio in the newsletter is up 13.9% YTD!! (surprised even me!)
All I am doing is taking profits when the stocks go up so I stay near 80:20 and then I buy the best of the best when we get dips (plus some BOWG trading). Since it is usually small 1 to 2% moves, they are easy to do in IRA's! Good stock picking and paying attention to value and I get nearly 14% when even the number one rated marketimer at 40:60 is probably down for the year! 8)
[Chest thumping mode off]
-- posted by Kirk
» Rande - Understanding the Producer Price Index (PPI):
Understanding the Producer Price Index (PPI):
<img src=http://www.internetcount.com/1867857677.cgif width=5 height
-- posted by Rande
» JenL_2 - Another Rande Citing in TSC
Rande is quoted in the 5/11 TSC Tax Forum @ TheStreet.comLittle-Known Provision May Be a Life Preserver
By Tracy Byrnes
Odds are, the difference between your stock options' exercise price and the stock's current trading price is negligible these days. If so, check your options grant to see if you have an early exercise-option provision. If you do, you may be able to take advantage of a little unpublicized tax perk that lets you lock in future appreciation at long-term capital gains rate of 20%.
This tax election needs to be made within 30 calendar days of your early exercise and the shares become subject to forfeiture: That means if you leave the company or it goes under, you lose the shares. But if you believe your stock is going to Johnny-rocket, you could save yourself some serious tax bucks.
An early exercise doesn't allow you access to the shares any earlier than your vesting or lockup period allows. It just gives you the opportunity to take advantage of a market slump. "Any plan that does not have one is less than state of the art these days," says Rande Spiegelman, a senior manager in KPMG's investment advisory-services group in San Francisco.
The bulk of the companies offering this early exercise option are dot-coms, says Martin Nissenbaum, national director of personal-income tax planning at Ernst & Young. So it's been dubbed a "West Coast thing." But this planning technique does not have geographical restrictions.
When you exercise your vested nonqualified stock options, or "nonquals," you'll owe ordinary income tax up to 40% on the difference between your exercise price and the current fair market value, a.k.a. the spread. When you exercise vested incentive stock options, although you won't owe ordinary income tax on the spread, you may get hit by the dreaded alternative minimum tax.
Generally, you want to exercise when the spread is small. With this precarious market, odds are high that your spread has shrunk. But if your shares are not vested, what can you do?
Meet the 83(b) election.
Named after its section in the tax code, the 83(b) election allows you to convert more of the appreciation on your exercised stock into capital gains (Read: lower taxes). The stock is subject to "forfeiture" for a year, so if you leave the company before 12 months or it goes belly up, you'll lose the shares. But if you stay, all appreciation will be taxed as capital gains, at the preferential 20% rate.
Say the exercise price on your nonquals is a nickel, the stock has plummeted to $5 a share, but your gut tells you it's coming back.
Do an early exercise. You'll owe ordinary income tax on the spread of $4.95, which includes Social Security and Medicare. Your new basis in the stock is $5, says Nissenbaum.
To lock in your upside at the long-term capital gains rate, you make the 83(b) election on the stock and notify the Internal Revenue Service that you're doing so within 30 days of your exercise.
Let's say the stock goes to $10 when your vesting period ends a year later and you decide to sell. Without the 83(b) election, you'd owe ordinary income tax on $9.95, at possibly 40%. With the election, you'll already have paid ordinary income tax on $4.95 and now you'll only owe $5 at the 20%. "So it's a rate play," says Spiegelman.
Of course there's a downside: Aside from having to cough up the cash to pay tax on that spread, you have to stick around for a year. And here's a not-so-unrealistic question: What if the stock never gets above $5?
You lose. You've paid tax for no reason.
You can make this 83(b) election with your incentive stock options (ISOs) and restricted stock as well. With ISOs, when you early exercise, the spread will be an alternative minimum tax adjustment. Hopefully, the spread is small enough to keep you out of AMT altogether.
If you make the election within 30 days of your exercise, you no longer have to follow the ISO rule that says you must hold the stock two years from grant date and one year from the exercise date to get long-term capital gain treatment. As long as you (and the company) stick around for one year, all appreciation is capital gains.
Same goes for restricted stocks. Generally given to high-level execs and board members, employees get the shares outright but have to wait a requisite amount of time before they can sell them. But the 83(b) election must be made within 30 days of the restricted stock grant.
Some Admin
It's imperative that you let the IRS know that you're making this election within 30 calendar days -- not business days -- after an option exercise, or 30 days after the grant of restricted stock. Your employer should supply the appropriate form.
Like any document you mail to the IRS, send it "certified mail, return requested." In addition, you must provide a copy of this form to you employer and attach it to that year's tax return.
As with all tax planning, this needs to make economic sense and you've got to believe the stock is going up. "You've got to have patience and guts," says Spiegelman.
Seems to be the new mantra for this market.
TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.
......Jen
-- posted by JenL_2
» Rande - Thanks for the post Jen.
Thanks for the post Jen. Speaking of articles...Excerpts from Laszlo Birinyi Jr. (5/15 Forbes):
Another encouraging sign is how stale the bears' arguments are. Since the bull market began in 1991, we've been hearing that it's overvalued. In fact, one columnist wrote an article that year titled: "Remember When the Market Made Sense?" The recent orgy of I-told-you-so's was, as before, wrong. When the market bounced back, the splutterings we heard were comical.
Is the market risky? Of course. But even riskier is staying out of it. If you heeded the pessimists in 1995, say, and put your money into cash or Treasurys, you wouldn't have made much progress toward your retirement goals.
And if you tried to really capitalize on the coming 1996 downturn by selling short, buying market puts or selling calls, you'd be in very bad shape--sitting on a park bench, reading a borrowed copy of FORBES and drinking out of a brown paper bag.
To truly understand the market, realize that corrections and consolidations occur from time to time. I first highlighted Texas Instruments in my Jan. 6, 1992 column. Since then the stock is up over 4,000%, but it has had ten corrections of 20% or more. It's having another now. Since every other one has been a buying opportunity, this is one as well.
History is on the side of the bulls. A year ago we had a similar correction. Beginning Apr. 26, 1999 the Nasdaq declined 6.8%, reflecting Y2K concerns. (You remember Y2K.) A major publication had this dead-on headline: "Bon Voyage, Internet Stocks."
There will be other corrections and some day a bear market. But watch what investors actually do.
-- posted by Rande
» Rande - April PPI:
April PPI:Overall -.3%% (-.2% expected)
Core +.1%% (.1% expected)
Excellent.
<img src=http://www.internetcount.com/1867857677.cgif width=5 height=5>
-- posted by Rande
» KLR - In with biotech, out with utilities
NEW YORK -(Dow Jones)- MedImmune Inc. will replace Central & South West Corp. in the S&P 500 Index, Standard & Poor's said Thursday.Standard & Poor's, a unit of McGraw-Hill Cos. (MHP), said American Electric Power Co. (AEP) is buying Central & South West.
MedImmune (MEDI) is a biotechnology company. Central & South West (CSR) is a public utility holding company.
-- posted by KLR
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