I really believe that my levels on the NASD of 2139-2199
(maybe a quick dip to 2060 )will mark the bottom of at
least a meaningful trading rally for the NASD.
We could easily see the time and price meet by Friday, of
this week.
The economic numbers are collapsing into a black hole,
the bond market is starting to consider a 50 basis point
Fed Funds rate cut this month, possibly inter meeting, no
less.
The Economy : The December NAPM index released this morning revealed a much sharper than expected decline to 43.7% from 47.7% in November. The December reading was well below the 50% breakeven level, indicating that the manufacturing sector is contracting, and it was the lowest since April 1991 -- the month after the trough of the last recession. All of the key indicators fell off a cliff in December -- orders, production, and employment all posted steep declines versus November. These declines are all the more worrisome given a few recent corporate earnings warnings that cited a sudden drop-off in demand in December. The NAPM notes further that the export order index remained below the breakeven 50% mark for the third straight month. This index has only been below 50% in 17 months since its inception in 1988; 13 of those months followed the 1998 Asian crisis and 3 of the remaining 4 were the past 3 months. The message is that there is not only a decline in domestic demand -- foreign demand also appears to be flagging. The global economy has been fortunate in recent years that demand weakness has tended to be isolated in specific regions, with the US always carrying the growth banner. But as 2001 begins, weakness appears to be global in nature. That the NAPM index has fallen to recessionary levels does not confirm that we are in a recession or that we will be in a recession soon. The NAPM index only covers the manufacturing sector, and there are times when the manufacturing sector gets hit much harder than the overall economy. But it would be foolish to ignore the risk of recession that this report clearly illustrates. With the wealth effect shifting from positive to negative, real interest rates at high levels, and credit standards being tightened significantly, many factors are hitting the economy simultaneously. The fact that the prices paid index rose unexpectedly in December is not important -- as the economy slides closer to recession, it is a question of when and not if price pressures will moderate; inflation always lags the business cycle. It is now a near certainty that the Fed will ease before month's end. The only question is whether they will move before the January 30/31 meeting or at that meeting. But we would submit that the more important question is how much the Fed will ultimately ease in this cycle. Recent economic figures and reduced credit availability suggest that the magnitude of easing could be considerably greater than the 75 bp the market seems to expect.
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As the surging fixed income market calms after tacking on more than a point and a half to the Treasury bond, the short end carries a good story as well. The short end of the curve is surging with more aggressive Fed policy expectations. The crumbling of the manufacturing sector and weakness throughout the economy leave increased worry of recession and have increased the odds of a near-term ease. The funds futures market now puts 50% odds on an intermeeting ease in the coming week, just two weeks after the Fed policy makers swung the directive from a tightening bias to an ease bias. The February funds futures contract now puts 90% odds on a 50 bp ease as the May contract prices federal funds 98 bp lower than they are now.
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A new group of Fed presidents took over the role of policy voting at the turn of the year. Out are year 2000 voters Jordan, Broaddus, Parry and Guynn. In are a slightly more dovish crew. As FOMC vice-chairman NY Fed president McDonough always holds a seat on the voting committee. Chicago's Moskow alternates with Cleveland's Jordan. The remaining 3 regional Fed presidents are Boston's Minehan, Kansas City's Hoenig and St. Louis' Poole.
The growth risk assessment issued after the last meeting leaves Greenspan in charge of an intermeeting move if he deems it necessary. The 10 policy voters -- the 5 regional presidents and the short-staffed group of 5 Fed governors guide the policy directive on January 31. Both Fed Gov Meyer and KC president Hoenig step up to the soapbox on Saturday to groups of economists and financiers. |
