Week In Review
June 1, 2009
Dow Jones Launches Economic Stimulus Index
Dow Jones Indexes has launched the Dow Jones U.S. Economic Stimulus Index, which will list 50 companies that are expected to receive stimulus money from the American Recovery and Reinvestment Act of 2009. The six key areas the index will focus on are: alternative energy, construction and materials, the energy grid, the environment, technology and telecommunications, and the Internet.
The index will select companies that have already been screened for inclusion in the Dow Jones U.S. Total Stock Market Index and that have an average daily trading volume of at least $5 million. The biggest sector that the index will include is construction and materials (20 companies), followed by alternative energy (10 companies) and the energy grid, the environment, technology and telecom/Internet (five companies each).
"The American Recovery and Reinvestment Act represents a significant strategic investment in the U.S. economy, and as such, is anticipated to have a positive impact on the stock market," said Michael A. Petronella, president of Dow Jones Indexes.
Ahead of the index's announced launch last week, Dow Jones actually created it on Dec. 31, 2008. Between that date and May 26, it rose 1.62%.
IRS Proposes Safe Harbor For Employers That Suspend 401(k) Match
The Internal Revenue Service has proposed new rules that would grant safe harbor for employers experiencing substantial business hardship that want to suspend or reduce their 401(k) matches.
The rules would relieve employers from having to run an IRS nondiscrimination test to assure that higher paid employees are not contributing more to their 401(k) plan than the rank and file, by a legally set amount. That would permit higher-paid employees age 49 or younger to continue to contribute up to $16,500 a year and those 50 or older $22,000.
Consultants say having to change the rules for higher-paid employees would cause sponsors to return money, is administratively difficult and, basically, is bad employee communications.
The IRS said the goal is to discourage employers from eliminating their 401(k) plan altogether.
Lower Earnings Could Be Future of S&P 500
In November, analyst consensus was that the S&P 500 would decline 17% for 2008 but rebound by 30% this year. But the fact of the matter is that 2008 profits fell 40%. Analysts then tamped down their expectations for the S&P 500 for 2009 to 24%, then 20%. Now the projections are for 9%.
"Recency bias" and "anchoring bias" based on tried-and-true benchmarks that have traditionally shaped the views of Wall Street may be a thing of the past, experts now say. In fact, the "golden age of profitability" may be permanently replaced by lower profits.
In 2006, profits reached historical highs, driven by consumer credit and home equity loans. With profits as a percentage of gross domestic product now at long-term averages, some people on Wall Street believe they must reset their models to account for permanently lower profits.
EU Moves to Tighten UCIT Depository Rules
European Union Internal Market Commissioner Charlie McCreevy is expected to propose uniform new rules regarding depositories for undertakings in collective investments in transferable securities (UCITs), the European Commission's version of mutual funds.
Besides leveling the playing field for requirements among all European nations, the new rules would disallow investment firms from permitting a sub-custodian bank to hold assets, rather than a depository, since sub-custodians' obligation to return assets is not as stringent.
McCreevy's action is in line with previous calls to action by French Economy Minister Christine Lagarde, to avoid another Madoff scandal.
SEC Suffers From 'Deregulatory Capture'
In its zeal to apply a free market philosophy to the Securities and Exchange Commission, the Bush administration created an environment where the agency's enforcement staff was unable to take definitive policy positions or bring enforcement actions, according to Mercer Bullard, associate professor of law at the University of Mississippi School of Law and founder of Fund Democracy.
Testifying on May 7 at a Senate Banking subcommittee hearing, Mercer said that the problems at the SEC reflect a state of "deregulatory capture," where the Commission was unaware of and unable to respond to many enforcement matters before they surfaced.
The enforcement division's effectiveness has been compromised by "a lack of resources and poor leadership by the Commission itself," said Bullard, adding that the SEC has abdicated its policymaking responsibilities to state regulators and private litigants in a number of areas.
"The result has been a decline in public confidence in the markets, a reduction in investor protection, and an increase in uncertainty regarding applicable legal standards," Bullard said.
Examples where the SEC failed to act include excessive mutual fund fees, the failure of the auction rate securities market and the options backdating scandal, he said. "Indeed, the current liquidity crisis in fixed-income instruments is partly the result of the SEC's failure to push more aggressively for the development of liquid debt markets," Bullard told the subcommittee.