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Greenspan's Overseas Allies

Economic Trends


Europe's ills help ease U.S. prices

In June, the U.S. consumer price index was up just 2.3% on a year-over-year basis, while core consumer inflation (excluding food and energy prices) averaged just 2.7% last year, its lowest reading in 30 years. When you consider that many economists think current consumer inflation is overstated by a percentage point or more, that's an extraordinary achievement for Federal Reserve Chairman Alan Greenspan.

But if Greenspan is regarded as a policy genius, says economist Paul L. Kasriel of Northern Trust Co. in Chicago, "then Antonio Fazio, the head of the Bank of Italy, should be considered some kind of central-banking Einstein." Italy's CPI, which was running about 6% over its year-earlier level as recently as early 1996, was up just 1.4% in June. Indeed, all of the other major industrial nations (G-6) except Britain have inflation rates below that of the U.S., and most have cut inflation far more dramatically than the U.S. in recent years (chart).

To be sure, America's inflation-quelling act is the only one accompanied by low unemployment. But that's precisely why Kasriel thinks it's less "miraculous" than it seems. While conceding the importance of Greenspan's leadership, he points out that a relatively ignored factor has been "the unusual weakness of other industrialized economies at this stage of the U.S. business cycle."

As the jobless rate has dropped in the U.S. during this expansion, notes Kasriel, it has risen sharply in most other industrial countries. He calculates that in the G-6 nations, it climbed by 1.3 percentage points, or 22% on a weighted-average basis (weights based on economic size) from 1992 to 1996. (It has declined in Britain and Canada but is still in double digits in Germany, France, and Italy.) Since the G-6 account for 44% of world output, compared with America's 27%, their continuing anemic growth and high unemployment have tended to hold down global inflation.

For Kasriel, the lesson is clear: The real test of Greenspan's genius--and of the popular thesis that the U.S. economy may have entered a brave new world of inflation-free growth--will come when Europe and Japan adopt policies aimed at achieving robust growth.BY GENE KORETZReturn to top

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Yes, if the number of shares declines

Investors tend to salivate when a company unveils a buyback plan. After all, the stated intention of most managements is to raise their stock prices by reducing shares outstanding, thus boosting per-share earnings. Indeed, some market observers think the rising tide of buybacks explains the market's greatly reduced dividend yield, as companies opt to use their cash to provide investors with capital gains rather than more highly taxed dividends.

Lately, though, many investors have grown skeptical of such announcements. For one thing, many companies don't complete their repurchase plans. More important, many buy stocks with one hand and then issue low-price options covering a similar amount of stock to employees--resulting in little change in the amount of shares outstanding.

Market analyst Melissa R. Brown of Prudential Securities doesn't dispute these observations, but she believes that there's still money to be made from buybacks--if you keep track of whether companies are actually shedding shares.

Brown recently analyzed how several thousand large-capitalization, mid-cap, and small-cap stocks performed on a quarterly basis from 1978 through 1996. Each quarter, she compared the average returns of stocks of companies that had reduced their shares by 5% or more over the prior year with the average return for their capitalization group.

The results were revealing. In the large-cap group, companies that had cut their shares by at least 5% saw their stocks appreciate by an average 21% a year over the 1978-96 period, compared with an average annual gain of 15.5% for the group as a whole. Among the mid-cap stocks, the average annual return was 26% for the share repurchasers, compared with 16.1% for the entire group. And among small-cap stocks, the difference was 22.6% vs. 15.8%.

Of course, such a strategy doesn't work for every stock. In an average quarter, reports Brown, only a little over 50% of the large-cap and mid-cap stocks with 5% share reductions beat the Standard & Poor's 500-stock index. But over time, she notes, "in both down and up markets, stocks with appreciably fewer shares than a year earlier tended to produce clearly superior returns."BY GENE KORETZReturn to top

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