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To: Softechie who wrote (1989)	3/5/2002 11:00:06 AM
From: Softechie	Read Replies (1) \| Respond to of 2155

MONUMENT DERIVATIVES: Euphoria Or Relief? 05 Mar 06:53 By Stephen Lewis Of Monument Derivatives LONDON (Dow Jones)--It is a long time since the words 'euphoria' and 'equities' have figured in the same sentence. But there are plenty of reports today claiming that euphoria has overtaken the US equity market. Relief may be a more accurate characterisation of US investors' current mood. They no longer judge a Japan-style economic meltdown to be on the cards in the USA. Such a depression may always have seemed improbable to some of us but it was a scenario that gained many adherents on Wall Street last autumn. The latest US data show that the impetus to growth persists, though they are far from giving a convincing answer to the question how strong that growth will be. We are inclined to side with Mr Greenspan, for once, in looking for patchy and fitful economic progress, perhaps not fully matching the connotations of recovery. However that may be, the point is that a significant body of market opinion has had reason to change for the better its view on the prospects for the economy and for corporate earnings. The consequent reweighting of portfolios by such investors has generated upward momentum in stock prices. No major move in the capital markets may be properly judged without reference to the monetary background. It has not been widely appreciated that, in recent weeks, the Federal Reserve has adopted a credit stance more accommodative even than in the run-up to Y2K. This is evident from the free reserves data. In November-December 1999, the average two-weekly level of free reserves did not exceed $1.23bn but latest figures, for the two weeks to 20 February, show free reserves at $1.408bn. They have consistently averaged above $1bn so far this year. Another measure, total bank reserves, rose at an annualised rate of only 5.8% between October and December 1999. Most of the growth in monetary base that occurredover that period came in the currency component; it was a response to a rise in precautionary demand for banknotes reflecting fear of computer glitches. Between December 2001 and February this year, by contrast, total bank reserves rose at the much faster annualised rate of 21.4%. Fed policy with regard to the provision of reserves to the banks has been similar to that seen in the past at times of financial crisis. Indeed, with Argentina and then the Enron debacle, Fed officials might well argue that the system has been facing a crisis situation. However, when a central bank pumps so much assistance into the banking system to ward off crisis-induced illiquidity, the risk is that the degree of accommodation will prove excessive as soon as the immediate threat passes. Unless the central bank is quick to drain funds, the surplus will tend to find its way through channels into the capital markets. This may be an important element in what has happened in the US equity market, now that accountancy concerns have waned. The challenge for the Fed is to work out how best to proceed from here. There may well be members of the FOMC who are worried that the issues raised in the Enron case could flare up again at any time, though Mr Ferguson sought to downplay these risks in his speech a few days ago. From a broader macro-economic viewpoint, Mr Greenspan seems anxious that the equity market should not run too far ahead. That, at least, appeared to be his motivation in the early days of this year when he sought to pour cold water on the Wall Street rally then under way. His concern, presumably, is that a surge in the equity market would take it to an unsustainable level from which a destabilising break downwards might subsequently occur. Such gyrations could greatly complicate the Fed's task of managing an economic recovery that must rely on a steady improvement in business and consumer confidence. In early January, the Fed Chairman was a little heavy-handed. Instead of moderating investors' ardour, his words sent equities into a reverse so steep that, within days, he felt obliged to admit that he had used inappropriate language. He will have learnt from that experience. There is no reason to think that he has set aside his concerns over a runaway rise in the equity market, when the economic foundations are unsure, but he may adopt a more subtle approach to market management this time. He has an opportunity when he appears before the Senate Banking Committee in two days' time. As ever, the written testimony will be unchanged from last week but the Q&A session could well be illuminating. In particular, Mr Greenspan's response to the question asked by the chairman of the committee should, as always, give a pointer to the direction in which his thoughts are moving. -By Stephen Lewis: 44 20 7338 0179: analysismonumentderivatives.com (Stephen Lewis is chief economist at Monument Derivatives, London, independent brokers specializing in institutional business.) Opinions expressed are those of the author, and not of Dow Jones Newswires. This column is published for information only, and it neither constitutes, nor is to be construed as, an offer to buy or sell investments. The information and opinions expressed herein are based on sources the author believes to be reliable, but he cannot represent that they are accurate or complete. Any information herein is given in good faith, but is subject to change without notice. No liability is accepted whatsoever by Monument Derivatives Ltd, employees and associated companies for any direct or consequential loss arising from this article. Monument Derivatives Ltd is regulated by the SFA and is a member of the London Stock Exchange, LIFFE and ISMA. (END) DOW JONES NEWS 03-05-02 06:53 AM