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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Tom Murphy who wrote (14795)	10/25/1998 5:19:00 PM
From: fred woodall	Respond to of 18691

AMAT/KLAC and the rest of the semis sector for that matter look to be prime short candidates. Interesting article I thought I'd pass along. By Ed Carson Investors Business Daily Take two rate cuts, and call me in November. That's Federal Reserve Chairman Alan Greenspan's prescription for what ails us. The Fed chief's move to cut interest rates Oct. 15 jolted the market, which is exactly what he wanted to do. By taking the unusual step of changing policy between meetings, Greenspan signaled that he will be proactive in combating the effects of a global economic crisis. The Fed said it cut the federal funds and discount rates because of "growing caution by lenders." Investors have been shying away from anything with risk, particularly after Russia defaulted on its ruble-priced debt and hedge fund Long-Term Credit Management nearly collapsed in September. New corporate bond issuance has dried up, particularly for junk grades, and initial public offerings have slowed to a trickle. Brian Bethune, an economist at Caterpillar Inc. in Peoria, Ill., says credit problems don't directly affect his company. But he's still concerned. If developers aren't able to get financing, large projects may never break ground. And that would cut into demand for Caterpillar's earth-moving machines. Bethune says Fed rate cuts "are certainly in the right direction." He thinks the Fed will need to cut the fed funds rate, now at 5%, by another 25 or 50 basis points. Analysts aren't willing to give the markets a clean bill of health just yet. "There has been some improvement in liquidity, but I would not underestimate the risk-averse sentiment of investors," said David Ader, bond analyst at Thomson Data in Boston. A key gauge of investors' willingness to accept even small credit risks is the yield spread between U.S. Treasuries and corporate bonds. When Greenspan cut rates, the spreads had widened to levels usually seen only during recessions. A week after the Oct.15 Fed cut, the yield spread between investment-grade bonds and Treasuries narrowed slightly. But it still maintained a hefty 176-basis-point premium. Junk bond spreads actually widened to a fat 703 basis points. Stocks, though, are doing much better. The tech-laden Nasdaq fell 33% from July 21 to Oct. 8. But the index has recouped half those losses in just the last two weeks. Many analysts wondered why Greenspan; took the unusual step of cutting rates between meetings of the Federal Open Market Committee. Does the world's top economic doc know something we don't? "The good news is the Fed's easing," said Ed Yardeni, chief economist at Deutsche Bank Securities. "The bad news is the Fed's easing." But central bankers are saying that there are no hidden surprises. Bank of England Gov. Eddie George said, "No new problems on the scale of LTCM have, in fact, been uncovered." While Wall Street has suffered some bumps in the road, Main Street has been cruising. Commercial and industrial loans are still rising at a fast clip. And there are few signs that small businesses or consumers are having trouble getting credit. But the economy is slowing. Housing activity, though still very strong, appears to have peaked. Consumer spending certainly isn't suffering, but it's no longer torrid. Job growth is weakening. Industrial production is flat. And exports are falling fast, which is hurting manufacturers and farmers. Lower rates should trickle down to the real economy and spur more investment and spending. "The 30-year bond has a lot of power to affect consumer spending," said Christopher Rupkey, senior financial economist at Bank of _Tokyo-Mitsubishi in New York. As yields on the benchmark 30-year T-bond plunged, mortgage rates also fell to their lowest in 30 years. That sparked a huge round of refinancing. Millions of households each are saving hundreds of dollars a month. That's a lot of new discretionary money in consumers pockets. Other analysts are also optimistic. "Maybe we'll be back to 3% growth by the second half of next year." said Wayne Angell, chief economist at Bear Stearns & Co. and former Fed governor. Most analysts expect third-quarter economic growth to come in at a 2% annual rate. But David Levy, director of forecasting at the Jerome Levy Institute, says small rate adjust-ments don't have a huge influence on invest-ment decisions. "Small monetary changes will not change business behavior that much," Levy said. "There's a limit to what the Fed can do." He says continuing problems of over capacity, both at home and abroad will push the U.S. into recession. Business investment has been a growth engine during the current expansion. But with earnings and sales flat, and prices falling, it doesn't matter how low rates are. Companies just aren't going to invest. Yardeni says rate cuts are coming too little and too late - and deflationary pressures are too strong. He points to continued low commo-dity prices. 1 The Fed is easing rates with an eye to stabilizing the global economy as well as the U.S. As Greenspan has said, the U.S. cannot remain an oasis of prosperity" amidst financial turmoil in the rest of the world. Rate. cuts have helped push the dollar down against most major; currencies. That should help U.S. exports and boost overseas profits. The weaker dollar also takes some of the devaluation pressures off Asian currencies. The result: big rebounds in those stock markets. But the weaker dollar and stronger yen hurt Japan's exports. Japan relies heavily on its exporters for economic growth. Yet investors are heartened because it looks as if Japan's government is finally dealing with the battered banking sector. If the Fed can prevent a full-fledged credit crunch and help stabilize global markets, then consumer confidence and spending should remain strong. In recent days, Fed policy-makers have been out in force, soothing investors' raw nerves. Thomson Data's Ader says that's the best thing they can do. He says the Fed should offer "words of encouragement" and hope the market makes a steady recovery over time.