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Strategies & Market Trends : The Thread -- Ignore unavailable to you. Want to Upgrade?

To: DebtBomb who wrote (24331)	12/9/2000 9:32:39 AM
From: DebtBomb	Respond to of 49816

Saturday December 9, 8:28 am Eastern Time Column: Wall Street Begs for Rate Cuts By Pierre Belec NEW YORK (Reuters) - Hey buddy, can you spare an interest-rate cut or two? Such is the mood on Wall Street, where $3 trillion in stock market wealth has gone up in flames since March. Federal Reserve Chairman Alan Greenspan tried this week to cheer investors. Four years to the day after rattling the market with the use of the term ``irrational exuberance'' to describe the behavior of stocks on Dec. 5, 1996, the Fed chief again jolted stocks. This time, he lit a firecracker under the market. Hinting that the central bank might consider lowering interest rates, Greenspan sparked a big one-day market rally on Tuesday. In the speech, he signaled the central bank sees a need to shift money policy to avoid trouble down the road. The money-tightening campaign from June 1999 to May this year, which produced six rate increases totaling 175 basis points, had laid the groundwork for the carnage in stocks. But Greenspan apparently sees something dangerous on his radar screen, suggesting that the credit squeeze may have been overdone. ``The Fed will play a more critical role, now that the stock market has clearly contributed to negative economics,'' says Ned Riley, chief investment strategist for State Street Global Advisors in Boston. And the pressure on the central bank to act will mount as corporate earnings warnings continue to flood the market, he said. The market's tremendous gains between 1995 and 1999 built the huge wealth effect, and the undoing of the bull market is having an unexpected impact on the economy, he said. The U.S. economy grew at its slowest pace in four years during the third quarter, but the confirmation that the good times are over may come with Christmas retail sales. The fear is that a weak Christmas could determine the direction of the market early in the New Year, Riley said. The holiday season is the most important of the year because it generates up to 60 percent of some retailers' total revenues. The central bank will take another look at the economy at its next policy-setting meeting on Dec. 19. The betting is that the Fed may shift to a neutral stance from the current tightening mode and that by early next year, it will do the right thing -- lower interest rates to restore confidence in the economy and stock market. Still, there are big questions out there. Can Greenspan really turn things around at this stage of the money-tightening campaign? How far can he cut rates without reigniting the speculative market bubble that Greenspan helped burst? Experts say there isn't much he can do to keep the economy from a hard landing or perhaps, a nasty recession. Since it takes up to nine months for the full impact of each rate increase to be felt, then investors should brace for more pain. By some estimates, only three of the six rate increases have so far filtered through the economy. CHANGING INTEREST-RATE EXPECTATIONS WON'T HELP The market is in bad shape after a nose-bleed fall wiped out nearly 50 percent from the Nasdaq Composite Index from its March record and put the Dow Jones industrial average on track for its first down year since 1990. More bad signs. Banks are toughening their lending standards, with the cost of borrowing at the highest level in nine years. According to the latest Fed survey, the percentage of banks that raised their lending standards is the highest in 10 years. Also, corporate bond defaults are soaring with 25 percent of junk bonds at distressed levels, something that has not been seen since the early 1990s recession. History shows that recessions are often preceded by a widening of the junk-bond spreads. Lately, technology companies have warned of weaker growth and analysts have scaled back their earnings estimates for the sector by almost half. This week, Apple Computer Inc. (NasdaqNM:AAPL - news) stunned investors, warning that its revenues in the current quarter would plunge to $1 billion from the previously projected $1.6 billion and it would post a loss of up to $250 million. Apple blamed economic factors and its own miscalculations for the poor results. Mobile phone giant Motorola Inc. (NYSE:MOT - news) was another high-profile company that warned about quarterly profits and went a step further by saying results will also fall short of expectations next year. And, computer chip giant Intel Corp. (NasdaqNM:INTC - news) also warned of slowing sales. Greenspan has raised the cost of borrowing money because he thinks that the wealth created by five years of exploding stock gains may cause the cost of buying stuff to rise as demand exceeds supplies. In this week's speech, Greenspan was more worried about economic growth than inflation. A slew of big-name companies have warned of disappointing results, which proves that investors are not just dealing with isolated instances of chief executives who have used lousy business models to predict sales and earnings. A lot of companies have gotten it wrong and the list will probably get longer before the fourth-quarter earnings posting season kicks off in January. Riley believes that the warnings in November were just the tip of the iceberg. ``The most verbal damage will be done within the next four to six weeks as companies set the record straight about their earnings going forward,'' he said. ``The warnings for the fourth quarter will justify the fundamentals that have been supporting the bear market for the last six months.'' The U.S. Securities and Exchange Commission's fair disclosure rules, which went into effect this fall, may have contributed to earnings pronouncements. The explanation: The disclosure rule that prevents companies from giving major news to Wall Street analysts or institutional investors ahead of ordinary investors may have the unintended consequence of giving the companies a sense of duty to their shareholders. TIME TO RAISE HANDS AND SURRENDER ``With the stock market in such a negative mode, the companies will see an opportunity in using fair disclosure rules to truly clean up the unresolved issues about accounting practices, such as nonoperating earnings that a lot of them have been recording and the diluted effects that stock options once had on their operations,'' Riley said. Wall Streeters are wisely pricing in less exuberance, which is chopping away at investors' wealth. And Greenspan figures that he's got a chance to stop the reversed wealth effect. Better to have tried and failed than to have never tried at all. For the week, the Dow Jones industrial average was up 339.37 points at 10,712.91. The Nasdaq composite index climbed 271.78 to 2,917.07 and the Standard & Poor's 500 index was up 54.63 at 1,369.86.