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To: big guy who wrote (11500)	5/11/1998 7:40:00 AM
From: Alex	Read Replies (2) \| Respond to of 116828

BUYERS BEWARE WHILE GREENSPAN PONDERS HIKE By JOHN CRUDELE ------------------------------------------------------------------------ IT'S cover-your-backside time at the Federal Reserve Board. So this would seem like a good opportunity to discuss in a mature and calm fashion how the stock market bubble came into being, what the Fed will do about it and how small investors should be reacting. In case you haven't been watching the smoke signals coming from Washington and abroad, just about anyone whose reputation will be tarnished by the collapse of the stock market or hurt by the economic fallout has issued belated warnings to investors. Most recently Alice Rivlin, vice chairman of the Fed, said she "sees cause for concern about the value in the stock market." You have to understand that nobody wants to be directly responsible for making the market collapse, so Rivlin added, "That doesn't necessarily mean it's a bubble." Ah, but it also doesn't necessarily mean there isn't a bubble. And since financial luminaries like Treasury Secretary Bob Rubin, IMF head Michel Camdesus and top politicians from both Japan and Germany have recently publicly and privately lamented the exceedingly high value of U.S. stocks and the inherent dangers, you have to assume that this has been a coordinated effort hatched during the G-7 meeting a couple of weeks ago. The first shot across the bow from the Fed came in dual - and dueling - stories in the Wall Street Journal and the Washington Post that said, in this order, that the Fed had adopted a bias toward tightening interest rates but that didn't mean a rate hike was a foregone conclusion. So what's the Fed really thinking? Probably the same thing Alan Greenspan and his accomplices were thinking back in 1994 when the Fed head patted two of its governors on the rump and asked them to go out and talk some sense into investors. That was the first time that a Central Bank official ever discussed out loud that the stock market might be in a dangerous bubble state. Investors ignored those warnings. So Greenspan, at the very first opportunity, raised rates in '94 and temporarily halted the euphoria. Forget that he continued until this week to feed the bubble by allowing a huge rise in the nation's money supply. That all happened thousands of Dow points ago. And once again Greenspan is releasing his minions with a warning. Will Greenspan have the guts to do what he should have done a long time ago? Will the chairman, as they say, take away the punch bowl now that the majority of the population is in a drunken stupor over their stock market profits? Probably. When? It could come as early as the May 19 meeting of the Fed's policy-making Open Market Committee. But there are a lot of economic announcements that will be released between now and then. If these statistics show a slowing economy, Greenspan won't have his excuse. But if one number comes out too strong - like Friday's employment report did - the fate of the rate hike could be sealed. But the action of the stock market could be the most compelling argument for or against a rate hike. If Wall Street pushes its luck by moving stock prices much higher, then Greenspan will very likely act. Can the market survive a hike? One interest-rate hike probably won't collapse the market, especially since its coming has already been widely telegraphed. And Greenspan will probably take contradictory actions in the money markets - like adding monetary reserves - that will blunt the rate hike. Greenspan has been draining reserves these past few days as a warning to those experts who understand such things. If he cuts rates, he might add reserves as a tonic. But the risk that something else will go wrong at precisely the time Greenspan is raising rates is real. Asia's problems have been increasing in recent days, and stock markets over there have been weak. While that might help U.S. markets if Asian investors suddenly look at us as a safe haven, it could just as easily cause foreign countries to encourage their citizens to bring their investments back home. And then there is the political situation in Washington. While it now looks as if Independent Counsel Ken Starr is delaying yet again his report on Bill Clinton, it won't be many more weeks before the document is delivered. When that happens, the stock market will be like a bird tossed into a propeller. It might still be able to fly, but the odds will be long. What should investors do? If your stock market investments are in retirement accounts and can be moved without incurring capital gains taxes then it might be a good time to reduce your exposure until after the Fed's thinking is clearer. But if you will be owing Washington on your gains, the decision is more complex. Do you think the market won't fall more than the tax you'll have to pay? And remember, you'll still owe the capital gains tax sometime in the future.