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To: Arv who wrote (4449)	8/3/1999 8:28:00 PM
From: Jeff Dryer	Read Replies (1) \| Respond to of 7772

Tuesday August 3, 4:11 pm Eastern Time INTERVIEW-Morgan Stanley strategist cuts US stocks NEW YORK, Aug 3 (Reuters) - Morgan Stanley U.S. investment equity strategist Peter Canelo, worried by a cyclical uptick in inflation and weakness in Internet stocks, recommended clients pull some money out of U.S. stocks and raise their cash positions. Canelo said that while he is bullish on the U.S. economy and corporate profits, he has near-term worries about stock prices. He remains a long-term bull on stocks, but said U.S. stocks could trade sideways until the Oct. 4 meeting of the Federal Reserve's monetary policy committee. ''I expect at least one more interest rate hike (between now and then), and there may be two or three more to take rates back to where they were a year ago,'' Canelo said in a telephone interview. His comments came a day after he advised clients to reduce U.S. stock holdings to 55 from 60 percent. He raised cash to 20 from 15 percent, and advised clients to keep 10 percent in international stocks and 15 percent in bonds. Canelo expects the Dow Jones industrial average to stay between 10,400 and 11,200, and the Standard & Poor's 500 index to trade at 1,280-1,420. Canelo said the market was disturbed by rising bond yields and inflation worries, exacerbated by a rise in Monday's National Association of Purchasing Management index, plus an indicator in its report, vendor performance. Vendor performance measures how many purchasing managers see bottlenecks or delays in getting goods delivered. If they worry about shipments, the argument goes, they may pay more to ensure timely delivery. Canelo said every rise in inflation since 1946 has been preceded by a rise in this indicator. ''It moved up to 53.1 a month ago, and the Fed tightened. Now it's moved up to 54.2, and with (higher) oil prices,'' the Fed can't feel comfortable, Canelo said. ''This is (Fed Chairman) Alan Greenspan's favorite indicator.'' Canelo said is concerned about poor technical performance in Internet stocks, noting the ''head and shoulders'' pattern in TheStreet.com's index of cyber-stocks (^DOT - news). The ''Dot'' hit a lifetime high of 824.20 on April 13, slid to 543 a week later, and rallied back to nearly 700 points in June. It has declined sharply since then, and was down more than 2.5 percent to 524 on Tuesday, about 36 percent below its April highs. ''This is one of the most negative patterns, and I think there's more than a 50-50 chance we will break the neckline at 500,'' he said. ''That would be very unpleasant for investors who have borrowed money to buy these crazy stocks.'' Canelo compared the possible fallout to 1992, when the biotechnology sector fizzled after a long rally. ''It didn't cause a bear market, but the Standard & Poor's 500 Index fell seven percent, while those stocks got clocked,'' he said. ''Just in the last 48 hours, the index is down roughly nine percent. There are a lot of hurting people being forced to put up money to make margin calls, or sell other stocks to make good on their borrowing,'' he said. ''It's not a fundamental problem, but it is important enough to make me a little nervous.'' Canelo said he puts a strong support level for the Dow at 10,400 and an even stronger support at 10,000.