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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (23563)	8/21/1999 9:18:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

How the FOMC will move markets I.D.E.A. Global US financial markets should rally in relief if interest rates rise exactly as expected next Tuesday. A surprise decision would trigger turmoil. Like almost everyone else, IDEAglobal.com thinks the Fed will raise the key interest rate to 5.25% from 5.0%. We also expect the rate-setting committee to announce a neutral bias towards further policy moves. Investors, who have grown nervous in the run-up to the decision, will probably be relieved. The Fed will have taken out more insurance against inflation without stamping too hard on the economy's brakes. That does not mean markets will jump as high as they did after the June rate rise. One reason is that rates will be that little bit higher, and their drag on the economy that little bit greater. Another, perhaps more important reason is that we expect the discount rate to rise. The discount rate is an interest rate at which banks can borrow in an emergency. It's rarely used and rarely changes. Because the Fed moves the discount rate very infrequently, markets use it as an indication of the direction of future changes in the key Fed funds rate. We expect the Fed to raise the discount rate to 4.75% from 4.5%. IDEAglobal.com equity analyst Terence Gabriel thinks the discount-rate hike will temper the relief in the markets. They'll interpret the move as a warning that the Fed is still serious about squeezing the supply of money. That will fuel speculation of yet another hike in the key rate in October, restraining the rally in the markets. Higher borrowing costs eat into corporate profits. We see the stock market bouncing from Tuesday, but not convincingly. The Dow Jones industrial average will probably revisit its old high of 11,252 and may make a marginal new record around 11,350. The Nasdaq-100 and S&P-500 are further from their all-time highs than the Dow, and are unlikely to get back up to them. A higher discount rate would have mixed implications for the bond market. Investors would welcome the Fed's determination to combat inflation, which eats into the fixed returns on bonds. But they would probably worry why the Fed was so worried about inflation in the first place. Many would gradually shift money into cash, in the belief the returns on bank deposits would soon go up. While the reaction will not be sudden, bond yields are likely to creep up and prices down. Within a month or two, the yield on the benchmark 30-year Treasury bond should reach 6.25%. The above scenario is by far the most likely, but no-one can be sure what Fed chief Greenspan and his colleagues on the rate-setting committee will do on Tuesday. Were the Fed to hike the key rate by half a percentage point instead of the quarter investors are expecting, stocks and bonds would lose altitude fast. The movements would soon diverge, though, with owners of long-dated bonds cheered by the short, sharp stab at inflation. There would be talk of the end of the tightening cycle. The Dow would still head down to 10,400 or 10,500 within a few days. The Nasdaq 100 could fall to 2,120, and the Amex internet index would target 255. If the Fed keeps rates on hold -- probably the least likely outcome of Tuesday's meeting -- markets could go haywire. Stocks would spike higher initially, but the euphoria would die within a few hours. The rate hike is widely expected, and if the Fed doesn't deliver the Street will lose faith in its determination to stave off inflation. There are clear signs inflation is brewing, and it could hurt the economy, and eventually the stock market, if it's allowed to accelerate. If the Fed makes no move to cool the economy on Tuesday, the Dow will probably jump to 11,200 and then fail. The Nasdaq 100 might falter at 2,356 and the Amex internet index would stall around 300. While bonds in shorter maturities would rally, long-dated issues would sink. I.D.E.A. : Fri Aug 20 20:59:38 1999

To: Les H who wrote (23563)	8/21/1999 10:34:00 PM
From: Fun-da-Mental#1	Read Replies (1) \| Respond to of 99985

Les, I love that chart of the Guess The Dow contest. It confirms my idea that investor sentiment correlates positively with the market, but with a time lag. Week after week the contest participants guessed that the DOW would stay at the same level next week as it was then. What a joke! But wait a minute, the pattern was broken this week! The Dow has gone up around 11000 and they're guessing it'll be down to 10500 next week. This kind of divergence hasn't happened before in the 2-year history shown on the chart. For once investors have stood up on their hind legs and made an independent decision about the direction of the market, instead of just assuming things will stay the same. Are they right? I think so, But What Do I Know? Fun-da-Mental