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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: Wally Mastroly who wrote (6037)	6/18/1999 11:58:00 AM
From: MrGreenJeans	Read Replies (1) \| Respond to of 15132

Dr. Irwin Kellner, CBS MarketWatch (Thoughts on This?) Last Update: 10:29 AM ET Jun 18, 1999 Kellner's forecast Previous Kellner gems NEW YORK (CBS.MW) -- How do you spell "relief"? For the bond markets, it was Fed Chairman Alan Greenspan's dulcet tones in which he implied that one hike in the Federal funds rate might be all that's needed to stay ahead of the curve, when it comes to keeping a lid on inflation. See full story. This followed the earlier good news on the rate of inflation for the month of May. Producer prices returned to their minuscule monthly increases while at the consumer level, prices were surprisingly flat. See full story. To top it off, the dollar bounced up against the beleaguered euro and several other key currencies. See exchange rates. Bond traders sprang into action. They bought everything in sight, pushing prices up and yields down. See Bond Report. From a high of 6.17 percent touched briefly on June 11, the yield ($TYX: news, msgs) on the government's bellwether long bond fell back below 6 percent, to 5.95 by the close of business on June 17. Stocks were dragged higher by this euphoria, with the Dow ($INDU: news, msgs) rising over 350 points in four trading sessions. See Market Snapshot. In my view, this looks like a classic case of premature excitation. Not that I don't think bond rates are too high: I did, and still do. It's just too much too soon—and it could spell bad news for the equity side of the room. In pushing yields down on the basis of this past week's developments, bond traders are overlooking two things: (1) The Fed is not worried about today's rate of inflation, but, rather, next year's, and (2) this is because the economy continues to grow at a rapid pace, witness retail sales and new-home starts for May. Greenspan acknowledged that, until now, the economy has been able to generate rapid growth without stoking the fires of inflation because of remarkable gains in productivity. However, he also pointed out that these gains can't last forever, thus the need for a "pre-emptive" move against inflation. Read this to mean higher rates. Why, then, could this be bad news for stocks, you might ask? Because it's been the roaring stock market that's enabled and encouraged people to spend with reckless abandon. That's why Greenspan also implied that he wouldn't mind seeing the stock market come off a bit—a remark most players chose to ignore. As I pointed out last week (see my column of June 11), the stock market is the key to Fed policy. And if the bond market's euphoria succeeds in sending stocks back into orbit, don't be surprised if the Fed pushes rates up a half-point, rather than the quarter-point that the markets now expect in order to let more air out of the equity bubble. Remember, Greenspan thought that stocks were "irrationally exuberant" over 4000 Dow points ago. And unlike you or me, Greenspan's opinions are all that matter at the end of the day.