Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Les H who wrote (41459)	2/26/2000 10:44:00 AM
From: Les H	Read Replies (1) \| Respond to of 99985

BEING STREET SMART by Sy Harding syharding.com IT?S ALL ABOUT INFLATION. Fed Chairman Alan Greenspan?s fear of inflation resembles my grandson?s approach to goblins and ghosts. He hasn?t seen any yet, and doesn?t know if he will, but he?d just as soon have a light on when he goes to bed. Greenspan says there?s no inflation showing up anywhere in the economic numbers yet, except ?perhaps? in oil prices. But the Fed started to raise interest rates last year anyway, and he says they will continue hiking rates this year until the economy slows down. Otherwise the Fed fears the inflation goblin will pounce on us. Critics of the Fed say they?ve got it all wrong this time. This super hot economy will not result in inflation. Computers and automation have raised worker productivity so much that companies can absorb higher costs of materials and wages and still maintain high profit levels, without passing the higher costs along to consumers. The Fed?s critics fear that rising interest rates will needlessly risk slowing the economy too much, sending it into recession. The debate is important not only to mortgage bankers, builders and the auto industry, where sales depend so much on the level of interest rates. It?s vital to everyone, that a balance be found between an economy that might be so over-heated it brings on inflation, and the possibility that higher interest rates could slow the economy too much and we wind up in another recession. The need to find the right balance is of particular importance to investors. Periods of low inflation have been very kind to investors, while periods of rising inflation have been downright cruel. For instance, in the decade of the 1950s, inflation rose just 25% over the 10-year period. The stock market gained 481%. In the 1970s however, inflation rose 103% in eight years. The stock market gains amounted to only 77% during that period, and even those gains were almost entirely due to dividends. In fact, on a market basis, the Dow had no gain at all from 1965 to 1982. It was at 1000 in 1965, and didn?t break above 1000 until 1982. Even worse, during that 17 year period it suffered five bear markets in which the declines were as much as 42%. But then in the 1980s, under Fed Chairman Paul Volcker, inflation was brought under control again, rising just 64% in his 9 year tenure. And the stock market rose 405%. In the 1990s, under Fed Chairman Greenspan, inflation declined even further, rising just 33% from 1987 through 1999. And the stock market rose another 433%. So controlling inflation is not just important to the economy and workers? paychecks, but also to investors and the stock market At the same time, raising interest rates to control inflation is risky business, as the stock market detests rising interest rates almost as much as it fears inflation. No one knows that better than Alan Greenspan. One of his first acts when he took over the Fed in 1987 was to hike interest rates to slow that overheated economy. Soon after, the stock market topped out into the bear market that culminated in the 1987 crash. The Fed has an unenviable job in trying to pull off this balancing act. The very high valuation levels in the stock market this time make the job much more dicey. While Greenspan has long warned that some of the air needs to be let out of the stock market bubble, that must also be controlled, as a severe bear market alone would likely plunge the economy into recession. And the stock market has already begun responding negatively to the rising interest rates. Greenspan?s balancing act strategy for the stock market could be seen in his recent testimony before Congress. Before the House Banking Committee, he included a comment indicating the Fed?s interest rate hikes were also aimed at the too high stock market. The already weak market plunged sharply for several days. Then he appeared before the Senate Banking Committee, and softened his comments, saying the Fed would continue to raise interest rates but was not specifically targeting the stock market. That brought some calm to the market, and the Dow rose 300 points over the next two days, before resuming its slide. If he can continue such skillful manipulation of investor sentiment to slowly let the air out of the economy and market expectations, rather than have the bubble burst in panic, a soft landing for the economy will be possible. However, until a successful resolution becomes evident, maintaining a skeptical and cautious approach to the market, maintaining high cash levels, even hedging risk with initial positions in bear type mutual funds, makes sense. Buy and hold investors remaining 100% invested and taking no steps toward risk management could face substantial losses.

To: Les H who wrote (41459)	2/26/2000 11:16:00 AM
From: studdog	Read Replies (3) \| Respond to of 99985

Here's what I think: Small caps/aggressive growth will explode. Why? The Dow and the S&P 500 stocks which have been shellacked the small cap for years, have had their day in the sun. These stocks are overvalued and have been for some time. They will revert to somewhere near the mean. However, there is still a lot of dough out there and the public has gotten a taste of what the stock market can do. It actually took huge sums of money to cause such a rise in the megacaps over the last few years. Just think what kind of rise you will see when that money is redeployed into the small capitalization stocks. The rise will probably be as narrow as the rise has been in the megacaps but it could be astounding. Look at the 2.3% fall in the Dow on Friday. Market meltdown? Well, the RUT was up half a percent. Is this the shape of things to come? If it is, then the small investor can potentially reap huge rewards because of access to information like that found on SI. Anyone agree or disagree?