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Strategies & Market Trends : MDA - Market Direction Analysis

SPY 672.07

-1.7%

Nov 13 4:00 PM EST

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To: donald sew who wrote (30084)	10/16/1999 1:30:00 AM
From: Jack T. Pearson	Read Replies (4) of 99985

I am beginning to suspect that this sell-off has gone about as far as is warranted by the possibility of another rate hike. Re-reading Greenspan's remarks: He appeared to be challenging the thesis that equities warrant high prices because in the long run they have higher returns than bonds. He didn't name "DOW 36,000" but that appears to be what he was challenging. He doesn't want the bankers to discount risk in stocks. I hope Greenspan cautions some group every couple of months. I'd rather have multiple small sell-offs than one really big one. My other observation is that the September core rate of inflation (0.8%) is somewhat distorted by early auto model changes (driven by the need to circumvent the CAFE fuel efficiency goals for 1999) and an 8.4% increase in tobacco prices in September--not likely to be repeated anytime soon. If you discount tobacco, the core PPI rate drops to 0.3%; if you also discount new model year auto prices, you end up with a core PPI rate of 0.1%. That sounds like good news, not bad news. It takes time for Fed rate increases to impact the economy (not the market)--about 5-6 months. The April increase is just being felt. The impact of the August will be felt in the first quarter of next year. It would be dangerous for the Fed to increase rates rapidly if the economy responds slowly. So far they have been raising rates because of an increased potential for inflation--not because of evidence of inflation. In a very strong economy, a few small rate hikes to head off potential inflation may be prudent, but it wouldn't be prudent to have too many such hikes without clear evidence of inflation and before the economy can respond.

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