To: Frodo Baxter who wrote (3409 ) 5/7/1998 10:35:00 AM From: Zeev Hed Respond to
Lawrence, welcome to the club, my logic confuses me too (g). slight deflation is good for stock, because it brings long term interest down. If, however, that gets out of hand profitability turns to losses. These balances and the herd psychology, I feel will dictate the market's direction in the near future. Since we are already quite "fairly" valued there will be forces to cause a correction, IMHO. I do not think this is going to be a bear market, because I do not foresee a full fledged deflation (in the US-in SEA we are already in a major bear market for quite some time), nor a recession in the US. Once this correction take place, I believe that liquidity will drive the markets higher. There are a number of sources of liquidity, some of which could be horrendous. In the US we have reduction in borrowing from the government. People rolling over bonds will find that no one wants to sell them these bonds, thus creating downward pressure on bonds' yield. Then we have the "Postal" source of liquidity which could be quite horrendous. So, to try and deconfuse myself, I turn to my turnips, and they see a correction (as we speak) which could at worst go to the high 8200 on the Dow. The trigger is the "fear" of higher interest rate (which I think is groundless) and the SEA situation, which I believe will have a more direct impact (lower profit margins for international companies, high tech (but not domestic type high techs) on future earnings. Once this correction has taken place, the turnips think that the sloshing liquidity will cause resumption of the current trends. If the decline (either here or the post rally decline in Autumn?) brings a breach of 8250 or so, then all bets are off, in my turnips' opinion, and a bad bear might evolve. It will be interesting to see what happens to the sloshing liquidity in such a case and its presence leads my turnips to assign to such an eventuality a very low probability.
