Has the January Effect Become the October Effect?

Rally Rationale

The Dow and S&P dawdled today, but the Nasdaq Composite Index rumbled to a new record. It's silly to read too much into today's action, however, given the bond market was shuttered in observance of Columbus Day. (This after bonds closed early Friday in anticipation of the holiday, to which I can only say: only the bond market, only in America.)

Despite a lack of oomph in blue-chips today, many market players are forecasting a continuation of last week's rally. In large part, the expectation for strong third-quarter earnings is the linchpin on which bulls hang those short-term expectations.

But don't forget about tax-loss selling. The practice of large institutions and individuals selling stocks that have been losers for tax purposes late in the year has spawned a cottage industry of market players searching for candidates likely to get a boost when the new year begins. Anticipation of this so-called January effect is so prevalent it's accelerated the process by several months (and, for example, is perhaps one factor in the recent resurgence of drug stocks, which have struggled for much of 1999).

"In general, we've gotten a sense -- anecdotally -- that [tax-loss] selling is happening earlier and earlier," said Jeffery Warantz, equity strategist at Salomon Smith Barney. "You do have a lot of mutual funds where the fiscal year is closing at the end of September. As that component has grown, the fiscal year-end has become almost as big as calendar year-end."

Given that, Warantz (with an assist from fellow equity strategist John Manley) recently unveiled a list of stocks for which tax-loss selling may create attractive buying opportunities.

In addition to having buy ratings from Salomon's research team, their criteria includes:

• Market capitalization of at least $3 billion;

• Stock down at least 30% from two-year high;

• Consensus earnings-per-share estimate for 2000 up since June, plus five-year EPS consensus growth estimate of at least 12%;

• At least 18 months as a publicly traded entity, and;

• Positive return on equity for the past four quarters.

And the winners (err ... losers that Salomon Smith Barney thinks will be winners) are: America Online (AOL), AXA Financial (AXA), Capital One Financial (COF), Fluor (FLR), Galileo International (GLC), H&R Block (HRB), Lincoln National (LNC), Merrill Lynch (MER), Providian Financial (PVN) and Schering-Plough (SGP).

Hasbro (HAS) initially made the list but has since been downgraded to outperform; thus, it's no longer eligible for inclusion on Salomon's list, Warantz noted. However, you don't have to be as beholden to the same kind of nepotism. (Speaking of which, the firm has done underwriting for AXA, Capital One, Fluor, Galileo, H&R Block and Merrill.)

The list was done "mechanically," thus the prevalence of financial names is coincidental, the strategist said. However, it does fit with Salomon's general bullishness on the group, as Manley described in this column on Sept. 9 and which Warantz reiterated today.

"We didn't steer the screen toward financials," he said. "It's more a question of given the type of screen we defined, the conditions we look for, which stocks have the potential for a nice pop. Some of that applies dramatically to the financial sector."

Today, however, was another tough day for the group; the Philadelphia Stock Exchange/KBW Bank Index slid 1.6%.

All's Not Quiet

Jim Bianco, president of Bianco Research of Barrington, Ill., has just returned from the Western Front (well, Switzerland, anyway -- and, yes, I know that's not where Remarque meant) with some startling news: John Meriwether, founder of Long Term Capital Management, has raised almost $1 billion for a proposed new hedge fund.

Bianco's information comes via several private-banking sources in Switzerland, with whom the bond researcher met last week (regarding other matters).

Noting Swiss bankers are "notoriously tight-lipped," Bianco said it wasn't easy getting information but "three of them told me that Meriwether either was through their offices -- as in, an hour before we arrived -- or coming into their offices right after us. Apparently, I had a schedule similar to the former master of the universe."

Because of the Swiss bankers' proclivity for privacy, Bianco declined to name his sources. But because of their noted conservatism, he surmised Meriwether "must be close to being done with his marketing calls," forecasting the fund will be up and running by early next year.

A spokesman for Long Term Capital declined to comment and said Meriwether was unavailable.

Recently, The Street.com's Suzanne Kapner reported on the obstacles and opportunities facing Meriwether in his quest to raise money in the aftermath of Long Term Capital's near meltdown last year. Bianco's sense is that the investment community (at least in Europe) is convinced the only difference between the hedge fund founder today and a year ago is that "the 1999 version will use less leverage" and provide more transparency.

Apparently, the Swiss think that's good enough, even though scandal has followed success at Meriwether's two most famous stops: Salomon Brothers' government bond trading desk and Long Term Capital.

"Celebrity matters more than performance," Bianco said, noting America's current fascination with the political aspirations of Warren Beatty and Donald Trump (not to mention Cybill Shepherd). "Here's the lesson for raising hedge fund money: Better to be famous with a lousy track record than to be unknown with a great track record."

Furthermore, the one-year anniversary of Long Term's debacle has just passed. I doubt the TaskMistress knows (or cares), but my married sources tell me one year is the paper anniversary. So perhaps Meriwether's friends and associates are just sticking with tradition by giving him some more to play with.

Accountability Before Dishonor

Since the kids have been back to school for a few weeks, I figured it was high time for our own report card. Time, once more, to take a look back at how market prognosticators featured in this column have fared. As always, we'll try to follow up with the sources as warranted and where possible.

Report Card
Date	Source	Recommendation/ forecast	% up or down*
Aug. 30	Barry Hyman, senior market analyst, Ehrenkrantz King Nussbaum	Buy: Azurix (AZX); US West (USW); Qwest Communications (QWST)	AZX: (23.7) USW: 10.5 QWST: 33.3
Aug. 31	Sam Ginzburg, managing director of equity trading at Gruntal	Buy: Nuveen Muni Value Fund (NUV); Muniyield Insured Fund (MYI); RCM Strategic Global Government Fund (RCS)	NUV: (3.6) MYI: (2.8) RCS: (1.4)
Aug. 31	Mariana Bush, closed-end funds analyst at Everen Securities	Buy: Municipal Advantage Fund (MAF); Van Kampen American Advantage Muni Trust II (VKI)	MAF: (4.5) VKI: (5.2)
Sept. 8	Ronny Kraft and Allen Gillespie, CEO and director of research, respectively, at Gotham Capital Management	The Dow Jones Industrial Average and S&P 500 will fall 25% in the next four to eight weeks. The Nasdaq 100 will decline 40%.	DJIA: (3.5) SPX: 0.1 NDX: 5.1
Sept. 9	John Manley, Salomon Smith Barneymarket strategist	Buy: Chase (CMB); Wells Fargo (WFC); Lincoln National (LNC); Allstate (ALL)	CMB: (4.8) WFC: 8.1 LNC: (15.8) ALL: (27.1)
Sept. 14	Mark Davis, vice president of research at Banc Stock Group	Buy: First Republic Bank (FRC); North Fork Bancorp (NFB)	FRC: (2.7) NFB: 4.1
Sept. 14	Brian Gilmartin, portfolio manager at Trinity Asset Management	Buy: Bank of America (BAC); Chase Manhattan ; Firstar (FSR); Fifth Third Bancorp (FITB); Zions Bancorp (ZION)	BAC: (4.2) CMB: (4.6) FSR: 11.7 FITB: 6.8 ZION: 14.4
Sept. 16	Scott Bleier, chief investment strategist at Prime Charter	Sell: Harmonic (HLIT); Red Hat (RHAT); Redback Networks (RBAK)	HLIT: 13.7 RHAT: (16) RBAK: 38.9
Sept. 16	Richard Moroney, editor of Dow Theory Forecasts	Buy: Sprint (FON); AT&T (T); BellSouth (BLS); Lucent (LU); ECI Telecom (ECIL); Vari-L (VARL); Southwest Airlines (LUV)	FON: 35.3 T: 7.1 BLS: (4.8) LU: (5.1) ECII: (14.2) VARL: 10.6 LUV: 11.9
*Through today's close. Source: ILX.

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