MARKET UPDATE: WILL HE OR WON'T HE?
By Peter D. Henig
Red Herring Online
September 23, 1998
Alan Greenspan, chairman of the Federal Reserve Board,
would be a tough guy to live with.
We're not saying he's commitment-phobic -- in fact, he's
happily married to TV journalist Andrea Mitchell -- but Mr.
Greepnspan seems a wee bit on the fickle side when it
comes to deciding interest rate cuts.
The Fed Chairman has played both sides of this market
with incredible aplomb. First, Mr. Greenspan lured investors
into bed with him as he hinted strongly at cutting interest
rates two weeks ago, only to spurn those market lovers five
days later as he refused to commit to curing the world's
economic ills with the single stroke of a pen.
Now, Mr. Greenspan is up to his old tricks again, having
told the Senate Budget Committee today that the central
bank must act soon to stem world economic turmoil,
signaling an imminent push for an interest rate cut.
In his Congressional testimony, Greenspan noted the crisis
in foreign economies had deteriorated considerably over the
last month. "I do think that we have to bring the existing
instability to a level of stability reasonably shortly to prevent
the contagion from really spilling over and creating some
very significant kinds of problems for all of us," he testified.
Taking a hint
Like any spouse who's heard the same story one too many
times, you'd think investors would take the Fed chief's
statements with a grain of salt.
But not this market. The full faith and credit of the
American public jumped right back into equities in a rally
that was both broad and deep. The Dow rose 257 points, or
3.3 percent, to 8,154, while the technology-weighted
Nasdaq Composite Index jumped 62 points, or 3.7 percent,
to 1,760.
"I don't think it's smart to be trading this way, but people
have been responding to Greenspan's remarks like this for
years," said Anthony O'Bryan, market analyst with A.G.
Edwards.
What impressed market analysts most, however, was not
investors' willingness to place Mr. Greenspan on his
pedestal once again, but that the breadth of the rally finally
saw buying on all sides of the market, including large-,
small-, and mid-cap stocks.
"One thing that's positive that I do see today is a
broadening out into small-cap and mid-cap issues," said
Ron Rosato, director of research for Tasin & Co. "It wasn't
just confined to the large-caps."
Mr. O'Bryan agrees: "We've been focusing on the
large-caps for years, but we are seeing some evidence that
the small-caps are getting stronger relative to the
large-caps, and that's a good sign."
Indeed, in terms of technology, Wednesday's rally was
enjoyed by all sectors. In the Internet space, America
Online (AOL), Yahoo (YHOO), Lycos (LCOS), and Excite
(XCIT) all shot up nicely. In the hardware and software
sectors, the gains were tremendous, with Sun (SUNW),
Broadcom (BRCM), Dell (DELL), Cisco (CSCO), Microsoft
(MSFT), IBM (IBM), and PeopleSoft (PSFT) all posting
major gains. Even recently trashed sectors like the satellite
industry lifted off its lows, with companies like Orbital
Sciences (ORB) and Globalstar (GSTRF) finding some
buying power.
Down on the range
"The general feeling is not if the Fed will cut rates, but
when," said Mr. O'Bryan. "If it's not at this meeting, then it
will be before the next one on November 17."
This level of confidence that Mr. Greenspan will eventually
make his move, is a double-edged sword for investors. The
failure of the Fed to cut rates after building up such strong
hopes in the market could lead to a major haircut for
stocks. But if Mr. Greenspan does follow through, the
markets now face the danger of having already been
discounted into equities and treasuries.
"If nothing happens, the market will run out of steam and
we'll see a pullback," says Mr. O'Bryan "If [Greenspan]
doesn't cut it, you can still fantasize about what [the
market] could do."
Mr. Rosato thinks the market's already a step ahead of the
Fed: "I think this is typical Greenspan kneejerking. On a
technical basis, I think a half-point rate cut is already in
this [market] if you look at the long bond."
So where does all of this flirting between rate cuts and
austerity packages leave the market and the investors who
dance around it? In a trading range, of course.
"I see a trading range between 7,400 and 8,200," predicts
Mr. Rosato. "I would not want to see the Dow print 7,300,
and as the Dow continues an upside bias that range could
broaden."
Mr. O'Bryan agrees. "We think that we've already put in the
bottom for this correction, and we're putting in some basing
work which has to happen when you have a decline this
sharp."
In fact, Mr. O'Bryan's firm, A.G. Edwards, still maintains a
year-end price target on the Dow of 9,300, and is
recommending positions in technology firms such as EMC
(EMC), Compaq (CPQ), and Cisco.
As good as it gets?
As good as the market got today, it wasn't good enough for
everyone.
"I love for the market to play its tune, and then I like to
dance," says Mr. Rosato, hedging his strategy until he can
see real commitment by the market, one way or the other.
And what does Mr. Greenspan have to say with regards to
that commitment? "I think we know where we have to go,"
said the Fed head.
Unfortunately, he may be the only one who knows. |
