NASDAQ Decline Jude Wanniski April 12, 2000

On my brief vacation in Louisiana, I of course noticed the action in the NASDAQ, but there was nothing I could think of on why they have been hit so hard better than the March 30 brief -- which I send here along with a NYPost business story that ran Tuesday, the 11th. There are many risks facing the dot.coms, but none as palpable as the April 15 deadline for paying taxes on 1999 income. The market cannot discount in advance for the myriad decisions individual taxpayers will make in selling shares to meet tax liabilities -- because the market has no way of knowing who cashed in on what shares last fall. In other words, there is no "efficient market" in the short run in determining the behavior of investors -- as opposed to the value of the shares in the broad marketplace. The Post article points out that there were market selloffs last year on the three Mondays PRIOR to April 15 and advances on the three Mondays AFTER the tax date. With Y2K cautionary selling in the last quarter of 1999, the effect would be greater this year, as taxpayers are discovering they have to liquidate now for gains they took then. And the shares being sold tend to be those that had the sharpest increases this year. If there is not some darker problem we don't see, the bounce-back should take place in pieces, beginning later in the month, as tax refunds go into the shares driven down and in a sense undervalued by this tax effect. Of course, some enterprises that have been starved for cash in the runoff may never recover, while others coming onstream will start fresh. Here is the Post piece:

MART TAPPED OUT BY SALES OF SHARES AT TAX TIME
By Beth Piskora
April 11
New York Post

Move over, January effect; the April effect is taking hold. There's a new market theory that suggests the Mondays in the weeks before taxes are due tend to have sell-offs, since Americans spend the weekends filling in their 1040 forms and realizing they owe Uncle Sam a big payment. They then sell shares on Mondays to raise the money to pay the tax bill.

"It's a seasonal thing," said Peter Cohan, head of Cohan Associates, an investment bank. "Americans are using their brokerage accounts as their savings accounts, and many of them don't have the money just lying around to pay the tax bill."

On the Nasdaq, the last seven Mondays have been down days. It started in late February when the early tax-filers were preparing their 1040 forms and continued through yesterday as the last-minute taxpayers rushed to get their taxes done in time.

The theory suggests that next Monday, when taxes are due, will be a down day, and then the markets could turn back up again. That's what happened in 1999. Three of the five Mondays before tax day saw sell-offs in the Nasdaq. But after tax day passed, the following three Mondays were all up days.

Market watchers aren't entirely sure why the April theory affects only the Nasdaq index. It could be that many momentum players -- investors who get in and out of positions relatively quickly, thus incurring bigger capital gains taxes -- invest only in tech stocks and thus only have tech stocks to sell when their tax bill comes due. Some strategists are already suggesting ways to play the April effect to investment success. "I would suggest buying right after the tax season is over," said Cohan.

"It just happened that people sold because they needed the cash to pay their taxes. But the fundamentals are the same. The companies are just as good -- or just as bad -- as they were before people had to pay their taxes and ended up selling out their positions to raise money."