So Much for an End to Tax-Loss Selling, and Don't Bank on an Early Cut

SAN FRANCISCO -- The new year opened on a decidedly depressing note for those who own equities. By day's end, it had become pretty clear that tax-related selling did not cease just because the calendar changed. That contributed mightily to today's declines of 1.3% for the Dow, 2.8% for the S&P 500 and 7.2% for the Nasdaq Composite, the seventh-largest percentage drop in its history.

But tax issues didn't seem an obvious culprit this morning, as people focused on the starkly weaker-than-expected NAPM report (more on that in a minute). Nor at midday, when I noted in the Columnist Conversation the following observation from Sean Mueller of Mueller Capital Management in Denver:

Losses today are being caused by people selling the highfliers such as Brocade (BRCD), Juniper Networks (JNPR), Check Point Software (CHKP), and Veritas (VRTS). These stocks had to get hit because people still wanted to sell them [prior to Dec. 31], but didn't want to take the tax hit in 2000. Mutual funds not wanting to sell and hurt their own performance were buying and supporting these stocks on Friday trying to protect their quarter. Nobody is buying these stocks today.

Mueller's small hedge fund (he wouldn't disclose its size) has no positions in the aforementioned, which closed off between 17% and 24% each. Meanwhile, the Nasdaq 100 dumped 9.1% as some of the winners of 2000 such as Oracle (ORCL), Siebel Systems (SEBL), Handspring (HAND) and i2 Technologies (ITWO) also suffered big declines.

A belief that tax issues were largely responsible for the rough start to 2001 suggests this, too, shall pass. Yet paradoxically, many of the same pundits pointing to the (maxi) tax factor also joined in the cry of salvation now rising to near full throttle: Save us, Uncle Alan, save us.

Uncle Alan, of course, being Federal Reserve chairman Alan Greenspan, on whom many investors are again calling to lower interest rates prior to the Fed's meeting on Jan. 30-31. In addition to the continued pain in stocks, the Fed-ease-now camp also pointed to today's NAPM data as further proof of the need for "emergency" action.

Indeed, the National Association of Purchasing Management's index of manufacturing activity fell to 43.7 in December, its lowest level since April 1991 (coincidentally (?) during the last Bush administration). NAPM was at 47.7 in November and was expected to fall to only 47.

"I think there's a chance they could act between meetings," said David Jones, chief economist at Aubrey G. Lanston. "Friday would be the time, after they get the payroll numbers" for December.

Specifically, if December nonfarm payrolls grew by 100,000 or less -- the consensus estimate is for 125,000 -- and if there were further declines in average hours worked, that would generate "added justification for a rate cut," Jones said. That, plus "reinforcing declines in the stock market, and you certainly had that today."

But Taskmaster thinks it unlikely that the Fed will cut rates. To see his seven reasons why, click here.

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