January 1999 Contents
Higher Purchasing Power Boosts U.S. Retail Sales As 1998 dwindles to a close, a final wave of consumer spending usually hits the shore during the holiday season. Before the yearís end, many retailers experience the holiday rush, which is characterized by heavy shopping and in turn, a well-received influx of sales. This yearís holiday madness was led by the exceptional buying power of American consumers. With a strong job market and virtually no inflation, the Christmas season reflected positive sales in a market that fluctuated dangerously throughout 1998. Inflation under 2%, unemployment rates near 30-year lows, cheap oil and interest rate cuts are giving consumers extra income for numerous products ranging from computers to home furnishings. Although economists picture 1999 to be a long road (filled with bumps) given a decrease in domestic demand, the next few months seem optimistic. The 1999 slowdown will develop gradually as a result from strong consumer spending with housing being strong and minimal inflation and steady job growth boosting buying power. On the whole, household income has risen 3% this year (after taxes and including inflation adjustment) and on top of that, ìpaycheckî income has doubled in just three years. However, this in turn affected overall growth of income at 1.9% annually influenced by low interest income, strong job markets limiting unemployment benefits, and stricter welfare laws having reduced growth of transfer payments. Consumer prices for goods and services in November grew by 0.2%. Energy prices also fell 1.6% last month with food prices down as well for the year. In all of 1998, total consumer inflation anticipates an increase of 1.5%, the slowest growth of inflation since the 1986 oil-price collapse. Surprisingly, the sudden spurt in holiday spending has enabled consumer confidence to remain high given 1998ís turbulent economic ride. The New York based Silicon Alley hub has experienced dramatic change and publicity in 1998. With this year being more expansive than any other for Silicon Alley firms, e-commerce and the stock marketís acceptance of these Internet fairy tales (a handful went public in 1998) has pushed the Alley into mainstream society and business. In 1998, several companies in particular made influential movements in the Silicon Alley arena. Agency.com, a now-global company with $80 million in annual business is seen as the fastest on the ground growth this year in Silicon Alley. NBC confirmed its position as a serious player in the Internet market as it acquired stakes in iVillage, which just recently hit the IPO market, or doing equity investments to the Mining Company or Snap. 1998 was the year for moving from community builders to portals, where the e-commerce and advertising are main part of webpages. The Mining Company, iVillage, theglobe.com have been parts of these changes. Online buying has significantly boosted holiday sales. Over $5 billion in sales was seen in holiday shopping alone this year. It has been said that online shoppers will spend an average of $457 on goods this season. From Interworld to Biztravel, e-commerce has come a long way in minimal time. The stock market has welcomed Silicon Alley into the IPO market with open arms. Throughout 1998, Alley companies were setting record-breaking numbers. EarthWeb and theglobe.com for example both saw their public offerings increase hundreds of percent within a dayís span. These IPOs can be credited for the revival of a market once dead in terms of public offerings. Silicon Alley was also marked as usual by huge amount of money invested into companies. For 1998 the winner was Star Media who raised around $80 million for its last round. iVillage is still in a good position after raising $67 million. Particularly this year the influx of cash was coming from Japan, France, United Kingdom, Germany, Israel and Mexico, explaining the interest of Silicon Alley company from overseas. 1998 has proved to be a landmark year for Silicon Alley companies as they have gradually begun their influence in the business world. 1999 started with the IPO of the Mining Company and will be marked by the follow-up of 1998 with more investment, more aggressive and innovative companies and with much more expertise, ready to lead the Internet content market. 1998: Year of the Megamerger When they say itís a small world, the year of 1998 can surely prove the statement true. 1998 will be classified as the ìYear of the Megamerger.î From banking to natural resources, automobiles to telecommunications, mergers became commonplace in the hustle-bustle of daily business. In an effort to consolidate and build strategic relationships with would-be competitors, companies witnessed the most mergers ever in U.S. history. Total value of all these megamergers exceeded the $1 trillion mark with the natural resources and financial sectors leading the top industries in the merging mania. Natural resources saw a 1038% increase in M&A value from 1995 due to (almost) priceless mergers between Exxon and Mobil and British Petroleum and Amoco, which was worth $49 billion. Value of 1998 natural resources mergers was concluded at $194.3 billion. However, the largest deals of 1998 were seen in the services and financial sectors valued at $518 billion and $452 billion respectively. Other industries that experienced substantial merger deals in 1998 were the manufacturing and trading sectors. The largest of the mergers was first seen in the Daimler-Chrysler merge, which in combination now produces 4.4 million automobiles annually and will see $148 billion in its first year of the marriage between the two. However, in early November the largest merger of 1998 and of all time was created when Exxon and Mobil merged, which was valued at $75.3 billion. The banking sector experienced numerous and valuable mergers throughout 1998. These included Wells Fargo and Norwest to form the 7th largest bank and valued at $34 billion and NationsBank and BankAmerica worth $60 billion. Other notable mergers in this industry were First Chicago and Bank One ringing in at $30 billion and the renowned Deutsche Bank AG and Bankerís Trust to now becoming the worldís largest bank by assets. Finally, Citicorp and Travelers Group also followed the trend this year and merged gallantly. Telecommunications also rode the megamerger wave this year as MCI Communications and WorldCom formed one of the largest telecom companies ever. 1999 may look similar to 1998 as mergers between SBC and Ameritech, AT&T and Tele-Communications Inc., and Bell Atlantic and GTE are still pending. Exxon and Mobil Merge to Form a New Energy Giant In this past month, The size of the new company with a combined 1997 profit of $11.8 billion on $203.1 billion in revenues is one of the largest ever. The companies together employ about 12,700 people, brand more than 48,000 service stations and have reserves that are larger than that of Canada. Given its staggering reserves and its tremendous production capabilities, the combined company would tower over competitors such as Royal Dutch/Shell Group and British Petroleum. The Exxon/Mobil merger now dominates the energy industry leaving its next closest competitor, Chevron, in the dust with over double the production capacity. This megamerger arrives at a time when oil prices are extremely low. In fact, oil prices now stand at some 40% below levels of just a year ago. Though the two are not correlated, the merger may indirectly be able to keep prices low for the time being. A major reason for the drop in oil prices is the advances in drilling and other oil technologies, which are turning the global oil industry upside down. As production costs, including excavating and exploring for oil, drop, prices will continue to see lower levels. Furthermore, the reason for the mergers is not the low prices; instead, it is the advances in technology that pushes these energy companies together. When companies merge, they find it easier to achieve economies of scale and thus setting the stage for a more efficiently run and profitable company. In 1998, the energy sector has seen other large mergers such as the joint company formed between British Petroleum and Amoco. With advances in technology continuing, more mergers in 1999 can be expected to strike ground in the natural resources industry. Moderate Growth and Higher Stock Market in 1999 Outlook In a year where Russian and Brazilian markets collapsed, an economic financial crisis plagued Asia creating a domino-effect that rippled throughout the world, and a U.S. stock market that soared and crashed (and soared again), the American economy in 1998 may have shaken our nerves as we now step into the final year of the 20th century. With 1999 knocking at the door, economists believe corporate profits will continue to be pressured and, in turn, incomes and growths will weaken. Though the U.S. economy anticipates growth in 1999, it will be seen as moderate. U.S. strategists observing the overall market determine profit growth of roughly 3.5% in 1999. However, this number may jump substantially higher depending on next yearís performance of the companies involved in the ìmegamergerî deals of 1998. Despite the Asian economic crisis, extremely low interest rates, the recent hedge fund bailout, and even the American political turmoil involving President Bill Clinton, the U.S. stock market looks to swing upward during the first six months of 1999. The turbulent ride of 1998 which has settled on the most part and large sell-offs prior to the new year may boost the Dow Jones to the 10,000 level as eagerly anticipated by many analysts. The doubtful chance for interest rates to fall even lower and inflation being nearly nonexistent are significant factors in a somewhat optimistic 1999 stock market. It may seem that the outlook for 1999 is rather mixed, and, indeed it is. Though the stock market may see upward trends throughout the year, the U.S. economy may not boast identical results. Numerous economists expect the American economy to grow at a mild 1.7% rate in 1999. Although recession is an issue daunting companies and consumers, the odds are we most likely will not see it in the coming year. Overall, the U.S. economy will not experience substantial growth in 1999, but the stock market will surely receive its share of ups (and downs). From mergers to crashes, the landmark events of 1998 have changed the face of business, and 1999 may produce similar results if not greater ones. | |
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