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To: Patrick Slevin who wrote (42610)	5/7/1998 8:13:00 PM
From: Robert Graham	Read Replies (2) \| Respond to of 58727

You made a good point about how bonds are not necessarily a safe haven for money, particularly considering that there has been evidence that this same market is concerned about increasing interest rates with even some concerns for inflation evident by plays on oil and gold in the recent past. As far as economic growth is concerned, I think the market is real confused in this area. There has been evidence over the last several quarters of an earnings growth decline that culminated in an across the board downward revision of earnings estimates on the S&P 500. No big surprise why most companies have beat their earnings this time around. But beating the substantially downward adjusted earnings was no difficult feat. Yet I hear of news coming out about a very strong and possibly overheating economy which the market apparently is taking to heart. That is why the market took a more interest rate sensative, inflation driven stance in the recent past, and this is also why the market rallies when economic growth related figures come in below expectations. Sure when key companies report decreasing earnings growth there are still major parts of the corporate world doing well. Everyone "feels" this as they look around them at the obvious signs of economic affluence. But the black-and-white signs have been there for some time now of slowing economic growth. Their minds cannot comprehend this apparent paradox. So the market went through stages of denial. Their first stage of denial IMO was when they blew off the market overvaluations and earnings disappointments and played the market with the apparent thought in mind that if the economy is still doing good, there is still money to be made. So the focus has shifted from pricing in next quarters earnings to pricing in the rest of the year in earnings to pricing in next years earnings to "Hey, the economy is still good so everthing is OK" as they sit in their driveway polishing their new car. The market continued up at a good pace helped along by fund money which validated the public's perspective. This stage of denial having run its course IMO has lead to what I term as the market's second stage of denial which came out as fears of higher interest rates and inflationary pressures due to an overheating economy. The difference here is that liquidity appears to have dried up for the time being as far as the massive inflow of money from the funds. In other words, I think the funds are not as aggressive in stepping up to the plate to purchase stock on a very large scale as they were before this market adjustment started. Much of this current runup apparently has been due to hedge fund activity and the public buying into what they saw. Now I suspect the hedge funds have been taking their profits since they are not long term players but tend to profit from events. The focus now is back on economic reports that the market uses to divine the future, looking for signs of an overheating economy. Also, as you have mentioned, rallies are being sold which is a pattern that precedes market adjustments, and the flight of money to bonds is definitely not a good sign. I think the Fed currently may be responding to a different set of measures than the market is thinking they are. First, as explained in a previous Barron's article, the growth in the money supply has posted impressive results which is the natural outcome of a healthy, growing economy. Money supply can fuel through spending additional economic growth. This is one thing they are concerned about. The other is how the market has continued to move in in the face of declining earnings projections. I think that is why the Fed "leaked" their concern to the press as a type of preemptive action on their part. Currently I actually do not believe there is anything for the Fed to raise interest rates over right now. But the fear in the market is there. I agree with what you have to say about the public and their general perception of the market. This indeed has been a slow rollover of the market, hasn't it? Must be due to public buying. They are usually the last to figure out the music has changed. But I do believe there is for now market sentiment that is cautionary and even leaning toward pessamism which may keep the market from a large spill on this leg. The markets response to tomarrows report will reveal more. Bob Graham PS: I definitely have allot to learn about the economy and economic reports. I only know some of the very basics. So if anyone knows more about what has been reported in terms of money supply and its significance, please feel free to speak up. I use economic reports more to gauge market sentiment than to determine the health of the economy.