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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: J.T. who wrote (3981)	7/27/2000 1:41:26 AM
From: J.T.	Read Replies (1) \| Respond to of 19219

A controversial viewpoint on easy Al: Economy: Nominate Greenspan for Nobel Economics Prize? Dr. Sung Won Sohn Executive VP & Chief Economist Wells Fargo Economics Financial Market Strategies Tuesday, July 25, 2000 -------------------------------------------------------------------------------- wellsfargo.com Economy: Nominate Greenspan for Nobel Economics Prize? Is the recent economic slowdown a spring flirtation? Higher interest rates are bearing some fruits. Some of the earlier hikes by the central bank are still in the pipeline. The stock market is no longer providing the kind of oomph it used to. The Wilshire 5000, the favorite of Chairman Greenspan, has barely budged; the net worth in equities have dipped by $900 billion during the second quarter. The price of crude oil has tripled from its low, levying a tax burden of $75 billion and shaving economic growth by 1 percentage point. Higher prices have eroded consumers' buying power. The phasing out of census workers will reinforce the slowdown. Chairman Greenspan is on the verge of pulling off another soft landing, qualifying him for Nobel economics prize. If I could ask God an economic question, it would be the sustainability of productivity gains that come from two sources: cyclical and structural. Cyclical gains slacken as economic growth ebbs. In this drum-tight labor market, businesses are reluctant to cut back employment and wages leading to higher labor costs and pinching profit margins. The bulk of productivity gains seem to be coming from long-term structural forces. The Old Economy, over 90 percent of the economy, is a primary beneficiary of the technology revolution. Heavy tractors now use a plug-in computer to diagnose engine problems. It used to take days to determine the cause and repair the problems; now it takes hours. Businesses continue to invest in efficiency-enhancing equipment. However, it is premature to declare victory. Economic growth could rebound later this year. Higher energy costs might thread through the economy. Labor costs, which constitutes about two-thirds of the CPI, will surely rise. If the stock market rallies based on the mistaken belief that no more tightening is on the horizon, the economic temperature will rise leading to higher interest rates. Bonds: Credit Spreads Are Quite Generous Bonds are priced for a recession; stocks for a continuing economic boom. Neither market is completely right. However, the valuation is better in bonds now that a soft landing is likely. Credit spreads over Treasuries are likely to shrink. Tax-exempts, which gave us one of the highest returns over the last six months, low-coupon GNMA Passthroughs, Government Sponsored Enterprises and high-quality Corporates, are attractive. The primary risk is that economic growth could reaccelerate later this year forcing the Federal Reserve to slam on the brakes. Higher interest rates and a recession should not be ruled out. Buy high-quality products. Stocks: From Interest-rate Fears to Earnings Concerns A soft landing, a pause in monetary policy and the possible cresting of bond yields are music to equity investors. No wrenching market correction is on the horizon. Attention will shift to earnings from interest rates. A soft landing does not necessarily mean poor earnings. Economically sensitive sectors of the economy including basic industries, retailers and other consumer cyclicals are only about 8 percent of S&P 500 earnings while economically non-sensitive areas such as technology, healthcare, financial services, consumer staples, etc. account for more than 55 percent. The gains in S&P 500 earnings this year will approach 20 percent. But a rotational correction will continue based on earnings disappointments from excess valuations and the ongoing economic slowdown. Wells Fargo & Company Best Regards, J.T.