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Stock Market - Cheerful News And Hopes For a Happy New Year

Stock Market News

January 2005

Stock Market - Cheerful News And Hopes For a Happy New Year

A so-called "Santa Claus" rally, boosted by money managers adjusting their portfolios prior to the year-end, sent the Dow Jones Industrials to a 3 ½ year high point, and put a smile on investors' faces in time for Christmas. The market was also buoyed by better-than-anticipated earning reports from Bear Stearns and Morgan Stanley, and by positive forecasts for corporate profits and earnings in 2005.

In a year that had its share of ups and downs, the year-end saw several high notes both in market performance and in the regulatory arena. Prior to the Christmas market rally, investors got an early shot of holiday cheer when the Financial Accounting Standards Board (FASB) announced new rules regarding disclosure of stock options in financial statements. The new FASB decision will require companies to deduct the value of stock options from profits, and its implementation is slated for next year. Under current accounting standards, a company was permitted to record the cost of issuing options in a footnote, and was not required to deduct this cost from its reported income. Stockholder advocates believe that the new rules will provide investors with a more accurate picture of a corporation’s true financial position.

In the past, many companies have used stock options to attract and retain employees, but critics note that abuses allowed some companies to beef up executive compensation and to create a misleading earnings picture. Technology companies were among those who most vocally opposed the expensing of options. Proponents of the move included some highly influential individuals and organizations, including Federal Reserve Chairman Alan Greenspan, Warren Buffett, and the "Big Four" accounting firms. The new rules, which could dramatically reduce profits for some companies, are slated to take effect in the first reporting period after June 15, 2005. Private companies and companies that file as small business issuers have until after December 15, 2005. However Capitol Hill still may have the last say. Early this year, Congress passed a bill calling for the expensing of options to be confined to only those granted to a company’s top five executives. This bill has been stalled in the Senate since last summer.

However, all was not cheery and bright on Wall Street in December. Perhaps the toughest lesson learned during 2004 was that no industry sector is immune to risk. Large pharmaceutical companies - long the darlings of the so-called "blue chip" segment - saw stock values dive in December in the light of troubling product news from Merck and Pfizer. Wall Street gurus point to the bad news from Pfizer - news involving newly discovered cardiovascular risks associated with its painkiller Celebrex - as a clear indicator that even the so-called "safe" stocks - the modern versions of the old "widows and orphans" stocks - are not without risk. Industry analysts note that Pfizer’s troubles (generated by Celebrex) and Merck’s (spawned by Vioxx) may not just be an aberration (albeit an expensive one for their stockholders) within the "big Pharma" segment, and they suggest that the pharmaceutical industry is facing other big challenges including Medicare’s influence on drug prices.

Wall Street experts cite the above as a clear message to investors to diversify their holdings. If investors make just one New Year’s resolution, the experts suggest that they re-examine their portfolios and make diversification a key component in their investment strategy for 2005.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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