Hello all:
Since the Ted-Man is not here to bring in street.com stuff, here's an article of some mild interest:
THESTREET.COM - Apr 27 10:24pm
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Apr 27, 1998
By Dave Kansas
Editor in Chief
Huntington Beach, Calif. -- The Alan Greenspan jawbone is out, and it doesn't feel good.
Rather than use the traditional method of offering arcane hints through various cryptic speeches,
Greenspan & Co. took out the big lumber today and fed The Wall Street Journal a story
indicating that the central bank is concerned about U.S. economic growth. In fact, the Fed now
says it may need to raise rates to curtail growth before it gets rolling too hard.
It is easy to dismiss Fed warnings airily. The strategy has worked in the past. Greenspan's famous
"irrational exuberance" quote led to nothing more than a brief break in the markets in late 1996.
Other Fed hints in the past 18 months similarly have had minimal, short-lived impact. But this time
the market is taking the Fed hint more seriously.
Essentially, the stock market's high prices have hinged on one factor above all: low long-term
interest rates. The benign interest-rate environment led Warren Buffett to declare that he was
comfortable with the stock market. With valuations stretched, Buffett and others argue that interest
rates need to remain low in order to support the stock market.
With today's action, the key measure of long-term rates, the 30-year Treasury bond yield, shot
above 6%. With that measure above 6% it is nigh impossible for stock prices to rattle on, record
after record.
More troubling to the stock market is that the Fed's missive comes at the tail end of the corporate
earnings reporting season. That means the market will receive little respite from the interest-rate
issue for some time going forward.
Could rates come back down? Perhaps. But it would require stark indications that the Fed's grand
Asian gamble is starting to pay off. Last fall, the Asian tumble and the concurrent Asian economic
and currency crises forced the Fed to stay its hand at a time when many economists anticipated an
increase in short-term rates.
But raising rates at that point would've delivered a crushing blow to the already reeling Asian
economies. Since then, the Fed has argued that the overseas trouble would inevitably lead to a U.S.
slowdown.
The trouble is that the scorching U.S. economy has, thus far, paid little heed to the Asian situation.
Corporate profits, while less strong, remain reasonably robust. Real estate prices and housing stats
continue to strengthen, and wage pressures show no sign of abating.
The Fed, however, faces the same problem it has for the past two years. The central bank is clearly
concerned, but what are its real options? The robust U.S. dollar and the still-weak Asian economies
would make an interest-rate hike unpopular overseas. Many of the Asian economies want a very
strong U.S. economy that will gobble up goods from abroad, helping recoveries.
Also, the looming European Monetary Union is expected to contribute to monetary policy
caution as European central banks essentially go on hold ahead of EMU. Lastly, consumer prices
remain meek, meaning that inflation has hardly reared its head.
Still, despite all of these cautionary realities, the Fed may make a modest move in order to bring the
stock market to heel. Even after Monday's drop, the Dow remains up about 10% for the year.
So what should investors do as the Fed rumbles and pundits debate rates? First, focus on the large
amount of downside protection in this market. Corporate share repurchases remain solid, and the
IPO calendar has yet to get egregiously heavy. Investors, small and large, still have cash to throw at
the stock market.
In favor of diminishing supply is the continued flurry of large mergers. Also in the plus column,
corporate profits remain strong and the Asian crisis seems reasonably contained, with many of the
region's economies starting to show signs of recovering.
The wild card, of course, remains Japan. If the huge Japanese economy falls off the cliff, as a small
but vocal group argues is possible, then the U.S. markets will most certainly suffer. But it's much
more likely that Japan will continue to bumble along just shy of disaster.
Certainly sharp declines are distasteful, but as Goldman Sachs strategist Abby J. Cohen has
correctly noted, the stock market has moved in a staircase pattern for the past three years. Stocks
race ahead and then pause as earnings and interest rates bring valuations back to reasonable levels.
It is likely we are once again on a landing, and stocks will bob around these levels heading toward
summer. Such an environment can provide investors with a chance to grab some unexpected
bargains.
If rates stick in this modestly higher area, investors may want to focus on steady earners. Stocks
like the drug and consumer product companies offer the best refuge in such environments. But their
valuations are already stretched. That may lead some investors to hunt for different safety spots.
One area is the major oil companies. The damage of low oil prices is already in these stocks, giving
some downside protection. These stocks tend to pay decent dividends, which gives investors a little
something extra to hold on to if the market enters a consolidation phase. Also, the tenuous Middle
East peace process also offers the possibility that whiffs of crisis could give oil prices, and oil
companies, a boost.
Some argue that the Fed, in raising rates, would merely slow -- not halt -- economic growth. That
might encourage some investors to seek out otherwise unpopular inflation-sensitive stocks such as
gold and copper. Gold prices remain meek, but if inflation hints start to infiltrate the market, this
group could benefit.
The real conundrum for investors is technology, which got slammed hard on Monday. Most
troubling is the sharp retreat by bellwether Microsoft since it reported strong earnings last week.
Microsoft's weakness stems from a panoply of concerns, among them worries that the government
will take tougher action against the software giant, slowing its growth. Without Microsoft, it's
difficult to rally around the battered technology flag.
But some segments remain solid. Demand for computers remains strong, as Dell and Dataquest
surveys show. And networking spending remains robust on a global basis. Capital spending will
hold the key for this group. If companies continue to pour money into technology upgrades, as they
have the past several years, then the tech group will find its feet once again.
Ultimately, the market's fixation will remain interest rates and the Fed, at least for the next few days.
It will be important to see what kind of follow-up commentary the Fed chieftains make in the
coming days. If the Fed continues to beat the drum, then the market will have a tough battle ahead
of it.
* * * * *
Media Notes: I'm in southern California for the Society of American Business Editors and
Writers conference. Mostly a newspaper crowd, many discussions focus on coverage of the
markets and investing.
Coincidentally, the hotel hosting the conference does not have CNBC or CNNfn on its cable
system. Go figure...
Some of you may recall when I complained about that Amigo car ad campaign. Today USA Today
reports that the ads are -- surprise -- annoying viewers...
**********
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