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Strong Dollar, Weak Effect


Economic Trends

STRONG DOLLAR, WEAK EFFECT

U.S. foreign earnings still roll in

It wasn't supposed to happen. After soaring nearly 30% last year, U.S. corporate receipts from foreign direct investment were expected to sag this year because of sluggish global growth and a strong greenback's impact on the dollar value of overseas profits. Instead, first-quarter foreign earnings rose 12% over their year-earlier level, and economist Joseph P. Quinlan of Dean Witter Reynolds Inc. expects them to keep that edge through 1996 (chart).

Quinlan thinks many of the policies that have boosted competitiveness of U.S. companies at home are affecting their foreign subsidiaries. Despite Europe's recessionary climate, for instance, receipts from direct investment there (a proxy for foreign profits) hit a record $35 billion last year. And they rose 6.7% in 1996's first three months, suggesting that "U.S. companies have been racking up significant market-share gains."

Mexico's turnaround also aided U.S. foreign direct-investment receipts. After tanking early last year, such earnings rose 256% in this year's first quarter, to $830 million--the strongest level this decade. And the pickup in America's investment in Japanese facilities is also paying off. Despite Japan's economic woes, U.S. earnings there last year more than doubled, to $3.7 billion. And they hit $1.2 billion in the first quarter of 1996 alone--27% over last year's pace.

Looking ahead, Quinlan sees strong evidence of a synchronized global expansion. Japan's economy is already recovering, Germany is turning the corner, and looser monetary conditions in Europe have set the stage for a general upturn. Latin America is mn the mend, and growth in Central Europe and emerging Asia remains solid.

The upshot, says Quinlan, is that America's huge direct investment abroad--which hit $96 billion last year--should continue to bolster corporate earnings despite the strong dollar.BY GENE KORETZReturn to top

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IT PAYS TO JOIN THE S&P 500

New stock additions get a boost

When the Standard & Poor's 500-stock index adds or drops a stock, so-called index funds--which mirror the index's composition--adjust their holdings accordingly. And that process, report economists Anthony W. Lynch of New York University and Richard R. Mendenhall of the University of Notre Dame, can create some nifty profit opportunities for smart investors.

Before 1989, S&P used to announce changes in its index in the evening (after trading ceased) of the day before the changes were to take place. Sure enough, prices of stocks added to the list usually surged about 3% the next day, while deleted stocks fell.

To reduce such price shifts, S&P in late 1989 began giving the market about a week's notice before the index changes went into effect. The idea was to give fund managers ample time to act before the switch and thus smooth out any price fluctuations.

Apparently, however, the plan has backfired. According to a new study by Lynch and Mendenhall analyzing all 71 changes in the S&P 500 from March, 1990, to April, 1995, the resulting price movements have increased significantly.

Looking only at "clean" index changes (not resulting from mergers or break-ups), the researchers found that stock prices of additions rose an average 3.2% on the first day after the announcement and a further 3.8% in the intervening week. Once the stocks were added, however, their prices dropped--about 0.75% the first day and 1.25% more over the next week. So they still wound up a net 5% higher.

What's behind these rises? Pointing to the huge growth of index funds and index-investing vehicles, the economists estimate that some 16% of the shares of companies in the S&P 500 are now tied up in index investments. Thus, being added to the index can cause a big decline in the effective supply of a stock--and a nice jump in its price.BY GENE KORETZReturn to top


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