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Technology Stocks : Semi Equipment Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Return to Sender who wrote (28743)	2/21/2006 11:34:44 AM
From: sixty2nds	Respond to of 95730

I'll check out the FD thread. No promises. ASYT was nice...I'm feeling like a starfish. I've now regenerated a current 61% of "my body" since mid 02. Later, S

To: Return to Sender who wrote (28743)	2/21/2006 11:37:20 AM
From: sixty2nds	Read Replies (1) \| Respond to of 95730

The Big Picture Print version Updated: 21-Feb-06 08:27 ET Beyond Neutral - The Next Two Rate Hikes Will be Different The stock market showed last week that it is comfortable with new Fed Chairman Bernanke. He impressed the markets with his strong anti-inflation talk. That is fine for the long term. The stock market also appears comfortable with the likelihood that he will raise the fed funds rate target at the next two FOMC meetings. The market should not be comfortable with that. Two more rate increases could prove very problematic over the near-term. Rate Hike Indifference The Fed has raised the fed funds rate target at 14 straight FOMC meetings. The first rate hike occurred on June 30, 2004. Through the next nineteen months the Fed raised rates steadily. The S&P 500 has risen 13.3% over that period. This is about an 8% annual rate of increase. So, what difference does it make if the Fed raises rates two more times, particularly if the new Fed Chairman seems reasonably similar to the previous one? A lot. These next two rates hikes will be entirely different. They will start to restrain economic growth, and that means lower earnings growth in the second half of the year. The stock market has not adjusted for that reality. Prior Rate Hikes The previous fourteen rate hikes did not put interest rates at a level that restrained economic growth. Rather, they simply raised rates to a level that was less stimulative than before. When the fed funds rate went from 2% to 2 1/4%, for example, monetary policy was still stimulative. Interest rates had not reached "neutral" - a level at which monetary policy neither stimulative nor restrictive. Interest rates throughout 2004 and 2005 were still low enough that they actually boosted economic growth. The most recent fed funds rate hike to 4 1/2% arguably still leaves monetary policy at a level that is mildly stimulative. The rate may or may not yet be at that long-sought neutral level. But if the fed funds rate does go to 5%, as is now commonly expected, rates will finally reach a level that restricts economic activity. And that appears to be exactly what the Fed wants. Bernanke's Comments In last week's testimony before Congress, Bernanke said, "the risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately -- in the absence of countervailing monetary policy action -- to further upward pressure on inflation." That means that he feels continued economic growth above the long-term trend of about 3% requires restrictive monetary policy action in response. Otherwise, inflation might pick up to an unacceptable level. He intends to not only get rates to neutral, he intends to push them to a slightly restrictive position so as to bring economic growth down. At 5% short-term rates, that is exactly what he will get. Market Has Yet to Get the Message The stock market has shown an amazing indifference to the likelihood that Bernanke wants interest rates to go from stimulative through neutral all the way to a slightly restrictive stance. Commentators are already suggesting the market is comfortable with the idea of two more rates hikes. That circular thinking results from the fact that the market was up last week, and the fed funds rate futures and just about everyone in the market expects two more rate hikes. The problems with this will eventually become evident. First of all, economic growth has to slow. A restrictive Fed policy will produce exactly that. That in turn means slower earnings growth. Forecasts at this time are for earnings to grow 11% in the first quarter and 7.5% in the second quarter. These numbers have been lowered recently because guidance with recent fourth quarter earnings reports required it. Forecasts for the second half of the year, however, remain too optimistic. Third quarter estimates are at 14% and fourth quarter estimates are at 12%. Product releases from Intel and Microsoft won't be near enough to make that happen. As it becomes apparent that 5% interest rates will indeed slow economic growth down to 3%, these earnings numbers will come down. A restrictive monetary policy means earnings growth will slow in the second half of this year, not accelerate. What it All Means The market is far too comfortable with the likelihood that the Fed will raise rates two more times. The previous rate hikes simply reduced the amount of monetary policy stimulation. Rates are now at or near neutral, and will soon be restrictive. The prior rate hikes slowed real GDP growth from 6% in the second half of 2003, to 4.4% in 2004, to 3.5% in 2005. Operating earnings growth slowed from 24% in 2004 to 13% in 2005. Further rate hikes will take real GDP growth to 3%, and earnings growth down into single-digit levels. To expect anything better than that is too optimistic. There is no reason to overreact to this, however. The prospect of two more Fed rate hikes doesn't lead us to a bearish stance. We remain Neutral on our Market View page. But make no mistake - these coming rate hikes are not like the past fourteen. They will bite, and perhaps bite hard. Investors should be cautious over the next few months about assuming that two more rate hikes are simply another brick to climb in the wall of worry. As we said back in our November 21 Big Picture column, the Fed risks going too far. They are no longer seeking that elusive "neutral" level, they are now seeking a slightly restrictive policy stance. The market is overly sanguine about the implications of further Fed tightening. Dick Green, Briefing.com