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To: James Strauss who wrote (55758)	10/18/1998 7:50:00 PM
From: Sergio H	Read Replies (4) \| Respond to of 58727

FIRE 1 : T'S (NOT) THE ECONOMY, STUPID By JOHN CRUDELE ------------------------------------------------------------------------ WHO'S in trouble? What's wrong? What is the Federal Reserve worried about? Yesterday's stunning move by the Fed to cut interest rates by another quarter point, just weeks after the last reduction, was explained away by Washington as necessary to keep the economy moving. Wall Street doesn't believe it. And neither do I. You have to ask yourself. Why the cut? Why now? There has to be trouble out there, says one trader. So those three questions above quickly made their way around the investment community in the wake of theFed's shocking move. Fingers were pointing up and down Wall Street - with each firm that's been gambling on exotic, risky securities products responding with a shaky not me. We'll undoubtedly find out what this was all about very shortly. The last time the Fed cut rates was back on Sept. 29. Hours later the markets found out that the Central Bank had been working feverishly for days to keep a hedge fund that was little-known at the time from exploding and possibly taking the entire financial system down with it. Alan Greenspan isn't the sort of guy who likes surprises either. He doesn't like to get them and he doesn't like to give them. So the Fed chairman's decision yesterday to feed another interest rate cut into the softening economy - especially with the downside that will result - had to be the result of something he knows (and didn't like). We'll find out later. Maybe there are severe problems at one or more financial institutions. Maybe a big New York City bank or brokerage firm is in trouble. Perhaps there's yet another hedge fund whose portfolio is bleeding because of stab wounds around the globe. Maybe the original problem child, Long-Term Capital Management, has already exhausted the $4 billion bailout from its peers on Wall Street and needs another advance on its allowance. Bankers Trust and Lehman Brothers are the two names being mentioned as the most likely candidates for disaster. But Merrill Lynch's decision to lay off 3,400 workers this week, and the profit catastrophes at other Wall Street firms, makes the list of suspects considerably longer. All financial institutions have been hurt by volatility in the currency markets, as well as in global stock markets. You cannot have the kind of move you had last week in the dollar. It's just too big. You just can't have a big move like that without someone going under, says one trader. Ironically, the Fed's action yesterday will further hurt the dollar, which has fallen about 19 percent in the last two weeks in relation to the Japanese yen. Unless the Fed has finally found a way to control the massive currency markets, its latest rate cut is likely to have terrible repercussions. For instance, the drop in the dollar's value compared to the yen is already causing Japanese investors to pull their money out of U.S. government bonds. Japanese investors have parked their assets in U.S. bonds for years because of the substantially higher yield they get here than they could achieve at home. But the risk of capital depreciation because of the recent plunge in the dollar now makes these bonds a bad investment that needs to be dumped immediately. So, considering all the problems this rate cut is going to cause, why did Greenspan still think the move was a good idea? One thing is certain. The Federal Reserve did not lower interest rates yesterday because it had nothing better to do. The Dow was up over 100 points yesterday when the Fed announced its rate cut. With this cut, Greenspan opens himself up to criticism for being politically partisan by trying to keep the stock market from fading any further before the Congressional elections next month. The best bet is that another financial institution is in trouble. By cutting rates, a bank or brokerage firm can now get money from the Fed at a cheaper rate than it could on Wednesday. But the rates that banks charge their customers for, say, mortgages and consumer loans remain the same - resulting in an instant increase in profits. What else might the Fed know? As I said earlier this week, there has been some very suspicious activity in the stock market. Someone, perhaps the Fed or its agents, has been boosting stock prices through the opportune purchase of highly leveraged stock index future contracts whenever Wall Street gets into trouble. What else could the Fed know? Experts are telling me that the nation's economy is slowing considerably, and the Fed chairman would know the extent of the slowdown. Suckers were lured into the stock market by yesterday's rate cut. Most pros weren't. As one veteran trader put it: I'm selling everything. I expect there's some bad news that's gonna come out.

To: James Strauss who wrote (55758)	10/18/1998 8:36:00 PM
From: Bill Boy	Respond to of 58727

Jim, I don't disagree with anything you said. I just remain concerned because we have no recent experience with the effects of lowering interest rates when P/E's were still so high and deflationary pressures were mounting. My initial impression is that that are more people than you might think that have already concluded the corner has been turned because of the FED's aggresiveness on rates. Bill

To: James Strauss who wrote (55758)	10/18/1998 9:58:00 PM
From: Sergio H	Read Replies (1) \| Respond to of 58727

FIRE 2 : October 18, 1998 PORTFOLIOS, ETC. Rates Down, Stocks Up. Still ... ------------------------------------------------------------------------ Related Articles • The New York Times: Your Money ------------------------------------------------------------------------ By JONATHAN FUERBRINGER <Picture: O>K, the Federal Reserve may have been stingy when it cut its short-term interest rate target by only a quarter of a percentage point at its last policy meeting Sept. 29. But on Thursday, just 16 days later, it more than made up for that, slicing off another quarter point. As if to add emphasis to the central bank's message that it is alert to the world's financial problems -- especially that of its banks -- this cut came in between the regularly scheduled meetings of the policy-setting Federal Open Market Committee. Investors were ecstatic. After the afternoon announcement from the Fed, it took the Dow Jones industrial average less than 45 minutes to surge nearly 300 points. The rally continued Friday. And more upbeat news is on its way. The odds are good for more reductions by the Fed in its short-term interest rate target, the federal funds rate on overnight loans between banks. After the last two moves, the Fed funds rate is now 5 percent. But by March, investors are expecting that rate to drop to an average of 4.23 percent, based on the current price for the March Fed funds futures contract. All this is positive. But the signs of world financial distress still abound. Japan is working on banking reform, but its economy is still a mess. Congress has approved more money for the International Monetary Fund, but the United States and its allies still need to agree on new rescue strategies for the IMF. And there are many Wall Street firms and banks that still have big bets on bonds and other investments that have -- or can -- go sour. These problems are reflected in the spreads -- the difference between the yields on U.S. Treasury securities and other bonds, like corporate, mortgage, junk or emerging market. These spreads have surged since the Russian debt crisis. And although they have come down some, they are still quite high. As of Thursday, the yield on emerging markets bonds was 12.22 percentage points above comparable Treasury maturities, according to a J.P. Morgan index of emerging market bonds. That was down from a high of 17.05 percentage points on Sept. 10 but still twice the 6 percentage point spread in July. The spread for American junk bonds, according to a Merrill Lynch monthly index, was at 5.73 percentage points at the end of last month, more than 2 percentage points higher than in June. The spread for investment grade corporate debt was at 1.70 percentage points, higher than it was during the 1990-91 recession. The danger is clear. At these levels, interest rates are strangling the flow of credit to corporations and countries, which cannot afford to borrow. And if banks reduce their risk-taking and curtail their lending, the economy will slow sharply, and could even fall into a recession. The spreads reflect two different worries, said Michael Rosenberg, head of international fixed-income research at Merrill Lynch. "There is the worry of increased default and a recession coming," he said. "Also, there is the worry that a significant part of the investment community may still be leveraged and has to sell." Maureen Allyn, the chief economist at Scudder Kemper Investments, added: "The new risk is that markets are in control of who gets credit and who doesn't." And that may mean so much control has been turned over to the markets that authorities -- like the Fed -- "do not have the levers to do what they need to do." That is why these spreads are an important monitor for investors. Until they shrink back to more normal levels, the chances of an economic slowdown will be much greater. And until they shrink, there will still be a good chance that hedge funds, like Long-Term Capital Management, and some Wall Street firms, as well, will face the kind of losses that, when reported, could trigger a selloff. "There is no all-clear signal until spreads come in," Ms. Allyn said.