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MORNING COMMENTS WEEK OF 12/20/99-12/24/99

 

12/24/99

THE TULIPS A.M. EDITOR IS ON HOLIDAY AND WILL RETURN ON MONDAY.

12/23/99

THE TULIPS A.M. EDITOR IS ON HOLIDAY AND WILL RETURN ON MONDAY.

12/22/99

The holiday season: a time for rejoicing and merriment, a time for giving, a time when millions momentarily forget the grind of the workweek and spend carefree days with friends and family, a time when young and old gather, a time when all feel an enhanced need to belong...

...and perhaps it is only this need to belong, to feel part of the festivities,  to share in the holiday spirit, to give something back, that can account for Tuesday's less than sagacious Fed peace offering of a symmetric directive to the assembled euphoric tribes of the speculative bubble.

Granted the wording of the Fed's statement hinted of rate hikes yet to come, but to a stock market which has grown myopic and has developed a tendency to focus on one word, idea, or bit of data, at the expense of the larger picture, the words "no change in bias" are a license to soar skyward unfettered from the chains of the wall of worry.

While the boost of confidence provided by the Fed's officially neutral  stance will help avert short term market turbulence in the runup to Y2K, we have to question the wisdom of a short sighted policy that in its desire to avoid short term pain is helping to set the stage for the financial markets to suffer through a far greater degree of pain down the road.

By not seeking to halt the further development of the market's current state of frenzied euphoria,  Greenspan & Co have fallen far behind the curve--not the inflation curve, but the curve of avoiding the unstoppable market meltdown that inevitably is bred when euphoria is allowed to run unchecked.

The Fed's booster shot to complacency will make their job that much harder in the new year.  The Fed's careful handholding of the markets has made its three rate hikes this year for naught.  With 30-year yields approaching 6.5% and no sign of an ebbing of demand in sight, the Fed will be forced to abandon the days of quarter point hikes and deliver harsher medicine--and there is no guarantee that one dose of 50 basis points will do the trick.

The Fed's unwillingness to act to prevent the further growth of a dangerously speculative environment has set the stage for the pendulum to ultimately swing much further to the downside than it otherwise would have needed to, and in the process, the Fed has lost the window of opportunity that it had to bring the economy in for a soft landing.

By allowing euphoria to grow to levels not seen since the last time that the mass public's imagination was captured by a technology-spawned New Era, a time when radio rather than Internet was the buzzword, the Fed has set in motion the necessary ingredients for a hard landing--a hard landing that could have global repercussions.        

12/21/99

NO COMMENTARY PUBLISHED

12/20/99

On the eve of the last FOMC meeting of the decade, a little profit taking and a minor case of the rate jitters were to be expected.  In the midst of a euphoric momentum driven surge, another new record high was in order....and the market delivered on both counts on Monday, with the Dow Industrials squandering an early lead to end the day down 113.16 at 1144.27, yields on the long bond shooting up to 6.44%, and the NASDAQ adding another 30.83 to close at yet another record high.

Although the NASDAQ Composite scaled to new heights of excess today, the index's ability to maintain its lofty levels is in doubt. The sprightly duo of euphoria and momentum are showing no signs of tiring from their quest, but they will soon have to toil without the aid of one of their prime ally's: the window dressing portfolio manager.

End of year/quarter portfolio moves, or window dressing, by fund managers have contributed significantly to the NASDAQ's narrow surge. Now, while we have always regarded end of quarter window dressing as a quaint exercise in futility (The customer's first concern is the value of his fund holdings, and if those holdings drop 5% in a quarter, it is unlikely that the customer will be appeased after looking at the "hot performers" the fund manager has added days before the quarter's close), it does serve its purpose during periods of unbridled enthusiasm by giving an added boost to the crowd's favorite basket of stocks.

Subtract the year-end boost provided by fund managers, and replace it with a bout of first-of-year selling by investors who have been waiting until after January 1st to take their profits, and the NASDAQ Composite could be in for rough sledding in the first half of January.

Of course, even without the withdrawal of window dressing fund managers and the addition of capital gains tax delaying tech stock investors, the odds are mounting against the narrow band of tech stocks that have accounted for the lion's share of the NASDAQ's recent gains remaining at their current lofty levels.

The silent army, the legion of the bubble popper, is waiting in the wings, looking for the first opening to make an unexpected attack.  The leaders of this army are none other than its current heroes euphoria and momentum, along with their pals bad breadth and equity inflows.

The increasingly narrow breadth of the NASDAQ's advance, with decliners leading advancers by a margin of 27-20 on the NASDAQ last week, increases the burden that the market's current leaders must bear.  The widening gap between the haves and have nots, and the increasingly narrow flow of money into the market, has exponentially increased the vulnerability of the current crowd pleasers to the unexpected.

In the event of the unexpected, there is no where to go but straight down, NASDAQ's parabolic rise has left it riding on a cloud far above the nearest support levels.  While technology shares continue to benefit from money flowing into them, with the most recent data from AMG Data showing  investors pumping another $811 million into tech funds last week despite a $9.1 billion net outflow from equity funds, this money will turn on a dime and run in the event of a crack appearing in the euphoric technology juggernaut.

We continue to believe that we are witnessing an end of trend blow off top.  If the history of excess holds true to form, the current euphoria and upward momentum which have lifted the NASDAQ parabolically will become its worst enemies on the way down as the pendulum of market sentiment follows its historical course of overswinging to the opposite extreme.

In the event of a breakdown of the current market leadership, there is no clear contender to step into the leadership role and cushion the blow of a decline.  Small cap stocks are heralded by many as a contender but their recent performance, when combined with their lack of crowd appeal and the recent large-scale outflows from small cap funds, make them little more than a pretender.

No, rather in the event of a serious stock market break, it will likely be this week's arch villain, the Federal Reserve, who is forced to once again step in to soften the blow.

While we expect the FOMC to bow to pressure and unwisely leave rates unchanged at tomorrow's meeting, thus giving euphoria one more month in the sun, we do expect them to attempt to put a damper on unbridled enthusiasm and complacency by shifting towards a tightening bias.

Any negative side effects of a move to a tighter bias are likely to be limited.  The stock market will repeat the pattern of the Summer and Fall: a momentary lapse into sorrow, an acceptance of the inevitability of a quarter-point rate hike bump, and then an ensuing period of upward bound complacency-- a pattern that has allowed demand to remain on an upward slope despite the Fed's efforts to rein it in.

At some point next year, the Fed will have to take decisive steps to break the continued overheating of the economy.  We continue to believe it will take several more interest rate moves by the Fed before the effects of interest rate hikes counteract the positive push given to demand by the wealth effect.

Now, of course we could be wrong about there being several more rate hikes waiting in the wings next year--wrong not because this truly is a "New Era" and the rules of the game have changed thus negating the need for higher rates, but rather wrong because history repeats itself and there's a whole legion of people who haven't learned from their past mistakes...as a headline on the front page of Monday's Financial Times illustrates: "Standard & Poor's puts US on 'credit bust' alert".         

 

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Last modified: April 02, 2001

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