An IBD news letter ............
This Tuesday, just one week before the October FOMC meeting, the DJIA flirted with 4-digits. Not "1999", "9999." That "bottom" created about a 12% correction from the index's August highs. Since Tuesday afternoon, the DJIA has recovered to as high as 10,400 or so.
In the next few days, followers of the market are likely to hear the word "discounted" used more than once. Is a tightening already "discounted?" Is no tightening being "discounted?" We've all heard it before and we'll hear it ad nauseum as "Game the Fed" really heats up.
I don't plan to game the Fed. It's pointless. There is nothing to be gained from it. What I will do is offer some likely scenarios that may pan out next week depending on what the FOMC does decide to do, and how I intend to react to them:
Fed Tightens
If the FOMC tightens, whatever policy bias it adopts will be rather
meaningless. Tightening is not bullish for stocks. The idea that "now they are done for the year" makes no sense and reflects a desperately asinine interpretation of such an event.
Tightenings are bad for stocks, for good reason. They raise the cost of capital for corporations. They put pressure on financial institutions which is bad for everybody involved in the markets. They put a damper on demand in the real economy (generally the point of a tightening). They increase the value of short-term cash flows (usually obtained from bonds) by dramatically
reducing the value of long-dated ones (i. e. future corporate earnings).
With the exception of the inflation-damping benefits that tightenings offer, there is absolutely nothing that is good about them for stockholders.
What to do if...
...stocks rally - Sell into it, it won't last.
...stocks fall hard - Sell into the bounce-back rally
...stocks do nothing - Sell
I hope I was clear. A tightening brings support near DJIA 8000 into play. Maybe that happens as a result of a sickening one or two day massacre, or maybe it is a drawn out decline that does it, but it happens. Maybe it will be temporary, but there is no reason to ride into that deep a trough. In fact, I'd probably sell into any pre-meeting rally and look to buy back rather than betting "red 23" on the outcome.
Fed does nothing, adopts a tightening bias
Good times. Best-case for bulls. The fact of no tightening is significant, and the bias part will put enough of a scare into traders to create a buying opportunity (however brief).
The FOMC is unlikely to tighten again in 1999 after next Tuesday. The "this is the last tightening crowd" has that much right. With Y2K liquidity issues subject to much uncertainty, the Fed is unlikely to be hiking after Tuesday.
The potential for bullish ecstasy under any no-tightening scenario is rather large. We would at least test August's highs, and probably go higher.
What to do if...
...stocks fall - Buy them
...stocks go up - Buy them even faster
...stocks do nothing - Buy
Fed tightens, adopts favorable (none or loosening) bias
Same as above, but even more bullish. Rather unlikely, however, and likely to confuse the bond guys. Could maybe be interpreted as a huge, trust-busting blunder, but bullish at the end of the day nonetheless.
Fed loosens (keep dreaming)
Talk about euphoria. If this happened, you'd have mass confusion. Traders would have a tough time registering this outcome. It would be so unbelievable that the result would be tough to game. Fundamentally, it would be considered very bullish, except to the extent it drove the bond market batty and sent 30-year yields to 6.5%. This scenario isn't even worth considering, but just in case...
What to do if...
...stocks fall - Buy
...stocks go up - Sell
...stocks do nothing - Do nothing
If Hobbs homers while bleeding to win in the 9th
So here is the "Hollywood Ending" for the bulls: the FOMC loosens, adopts a loosening bias, and issues the following announcement...
Attention bond traders: inflation is dead. Trend rate of inflation has settled well below 3%. If meaningful inflation rears its ugly head again, we'll crush it like a mosquito. We have proven that we can. Don't doubt us. And cut it out with the too-high real yields. Rally, already, and let the stock market go back to doing what it does best - CREATING FORTUNES FOR THE INDIVIDUAL INVESTOR!
__________________________________________________________________
Special: Techs come in many flavors
By Mark Johnson <markuss@triton.net>
Mark Johnson, Editor of the Internet Financial
Connection, provides the following interview
with David Takata of Gruntal & Co.
David Takata covers the hardware, software and
services areas for Gruntal & Co. Like most pundits,
he is bullish on the long-term outlook for the
technology area. In brief, his view is that
technology will create new products and is changing
the way consumers live, work and play.
One of his favorite areas in technology is the
Internet services area. Web hosting is becoming
increasingly popular as companies build their Web
sites. A related area that he likes and sees growth
in is photonics, which is the fiber optic segment of
hardware. JDS Uniphase (JDSU 113 7/8) is a company
that he sees as particularly positive in the
photonics realm. "They are doing very well and
winning all kinds of contracts for their optical
components." David believes that the wireless area
will post significant growth in 2000 and in 2001.
Companies he likes in that area include Ericsson
(ERICY 31 1/4) and WinStar (WCII 39).
As for the Y2K problem, David explains that the
problem started when computer programmers believed
the computer software being written would be
obsolete within five to ten years. The programmers
limited the use of space in computer programs as
much as they could. This included dates, where 1975
would read "75" in computer language. "When 2000
rolls around the computers do not know if it is
1900 or 2000, he said. "It is believed by many that
weird things might happen." As an example, he adds
that Social Security payments were made from very
old computer systems. Some computers could have
trouble figuring out check payments if the computer
has trouble determining if a person has been born.
His biggest fear is the psychological impact the Y2K
problem may have on people. People may act
irrationally and hoard cash and goods, which can
disrupt the economic cycle. "As people buy goods and
store them, they do not become buyers of these goods
later on," says Takata. "There could be a false sense
of strength in the economy by the stockpiling or
hoarding of goods." As for Y2K concerns affecting
the stock market, he thinks it could happen. He
compares the Y2K problem to other phenomena such as
riots. "When it becomes a group mentality, it can
feed on itself. People could liquidate stocks or
bonds in order to raise cash."
As for the Internet, David is a BIG believer in it.
Wall Street is increasingly focusing its attention
on the Internet and no longer views it as "just a
fad," like CB radios. David mentions that one benefit
of the Internet is that it lowers the cost of doing
business, ecommerce and communications. "That is why
you are seeing high multiples on Internet type of
stocks." His top play in the Internet space is a
company he has been following for some time, which
is PSINet (PSIX 36). It is a domestic and
international ISP (Internet Service Provider).
"Domestic consumer ISPs are eating into each others'
installed base of customers. I do not see that happening
internationally. PSINet operates in several different
international markets. It is my top pick." Another
favorite of Takata's in the Internet space is eBay
(EBAY 141). He likes the company because it is
creating a new economy on its Web site and acts as
an intermediary. "I like that business model."
In the hardware sector, Takata notes that there are
a couple of big trends. In the PC area, one trend
is the sub-$1,000 PC. "This is being driven by the
Internet. It is my belief that we are moving towards
a server-centric computing model. It is like going
back to the days when computers were hooked up to
a single mainframe computer. The exception is that
now we are connected to the world of information
out there." As the move toward server-centric
computing continues, he believes in owning the
hardware companies that will benefit from that
trend. EMC (EMC 71 3/8) is his favorite company in
the hardware area. It is the leading storage-systems
vendor in the world and has a 35 percent market share.
EMC also has a booming software business that is
driving growth. In the networking area, Cisco
(CSCO 68 1/2) is the 800-pound gorilla and Takata
is high on the company. "I think over the long run,
Cisco will continue to accelerate their growth.
International growth has yet to come. It is one
of my top picks."
As computers move closer to a server-centric model,
one name he favors as an application service provider
is USinternetworking (USIX 31 1/4). In the online
publishing area, he likes Vignette (VIGN 90 1/2).
Microsoft (MSFT 90 1/2) is another company he thinks
will definitely benefit from the growth of the
Internet.
When I asked David if there were certain areas he
would avoid, he recommended staying away from the
consumer ISP arena. He cautions that consumer
Internet connectivity prices continue to drop and
there are relatively high costs related to deploying
these services. Companies he would avoid are
MindSpring (MSPG 27 3/4) and EarthLink (ELNK 43).
Those two companies recently announced they would
merge. "As we move towards cable and DSL services,
these companies will need to replace their
infrastructure needed to accommodate this. They
have not generated substantial profits to date.
Now, they have to deploy infrastructure for cable,
DSL and they are competing against a whole different
league of players. So, I am avoiding that area."
He is also cautious in the software industry over
the near term pending the Y2K issue. "There will
be continued disruptions through the end of the
year in that sector." He would not be a buyer in
that area unless he was taking a long-term
investment approach. He thinks that sector will
pick up in early 2000.
One company Takata likes is Seagate (SEG 30 5/8).
"They are a well-run company that is trading close
to its liquid assets." Seagate owns a large portion
of Veritas and Gadzoox. "I think there is a good
core technology group within Seagate that will pull
them through the disk-drive industry, which has been
relatively weak within the last 18 months." |
