Two weeks of declines had traders thinking the holidays would be blue (or red, as in the color of declining shares on computer terminals) this year. So in keeping with its historic trait of doing the opposite of what's expected by the majority of participants, the stock market began this week with some healthy gains. Rather than continuing recent declines, major stock proxies opened higher and were able to build on those gains as the afternoon arrived. As of 2:27 p.m. EST, the Dow Jones Industrial Average was up 1.8% to 8582.76, the S&P 500 was higher by 1.8% to 905.48 and the Nasdaq Composite was up 2.1% to 1390.59. Factors aiding the midday advance included strong gains by European bourses. Ian Scott, head of European equity strategy at Lehman Brothers, upped his recommended weighting in U.S. equities to 50% from 39%, and Merrill Lynch added Hewlett-Packard ( HPQ) to its Focus One list. Peter Oppenheimer, European equity strategist at Goldman Sachs, also made some bullish comments about U.S. equities. Crude prices continue to surge, which ultimately will hamper the global economy. But for now, crude's rise was giving a boost to market-cap giants such as ExxonMobil ( XOM), which was further supporting major stock proxies. Other factors helping shares were more technical in nature, including that recent weakness in the dollar and stocks that had become overextended, both of which were due for a rebound. After trading above 104.20 earlier, the U.S. Dollar Index was lately unchanged at 103.98. On a more emotional basis, the New York transit workers calling off (or at least postponing) the strike originally planned for midnight Monday may also be helping buoy spirits on Wall Street. New York is not the be-all, end-all of the financial markets, of course. But major equity exchanges are based in Manhattan, and concerns about a potential strike may have weighed more heavily on sentiment late last week than was generally acknowledged -- here included.
We'll have more on the broader market action after the close, but for now, a follow-up on a piece here last week about
prospects for dividend tax reform.
Furthermore, because their compensation is linked to options, senior management has little personal incentive to support dividend payments, Garnick observed, "because the options holder does not receive the dividend." In a nutshell, current tax laws discourage companies from paying dividends, while current accounting rules don't require companies to record stock options as a quarterly expense. Furthermore, the prime beneficiaries from those options are the same folks making decisions about whether their firms should pay dividends, and they have little to gain personally from increasing dividends. Little wonder, then, that the dividend yield of the S&P 500 is at such a historically low level. "There are two structural flaws why dividends don't get paid," Garnick said. "One, there's a disincentive on the part of executives who get paid in stock options; and two, investors prefer not to have to pay ordinary income tax." If the $1 million cap on corporate deductions is eliminated and "single taxation" of dividends also occurs, "what's likely to happen is companies will come under pressure to pay higher dividends, or start to pay them," she predicted. "What we think is going to happen is employees will start to get paid in stock vs. options." (Executive compensation truly linked with the performance of shares -- what a novel concept.) Forcing companies to treat options as an expense against earnings is a key element to all this, Garnick acknowledged, and there is momentum behind that concept. A spokeswoman for the Financial Accounting Standards Board confirmed Monday that before the end of the year there will be a final ruling on
FASB 123, which addresses changes in accounting for options. Finally, Garnick noted that Wharton professor Jeremy Siegel has advised the White House on issues related to dividend tax reform, and has frequently opined on the same in the pages of The Wall Street Journal. He, too, was unavailable for comment Monday. But if the professor and author of Stocks for the Long Run does return my call, I'll duly report any relevant comments.