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To: accountclosed who wrote (42231)	5/23/1999 5:53:00 PM
From: Lymond	Read Replies (1) \| Respond to of 86076

I was pretty sure this wouldn't escape his attention. <g> Hell, even Barron's and the NY Times saw fit to spare a few lines to the subject this weekend, though you had to squint to find em. In all seriousness, I commend BF for bringing it to his readers' attention. I'm a big fan of his column. However, I think his source may be overstating things a bit in saying "....demand for liquidity is at the LTCM October extremes...Fed bias has large accounts liquidating corporate paper." What we've seen has been tame compared to last October, when, for a brief period, capital markets for all intents and purposes ceased to function. And this recent sell-off was not driven by investors; it was caused by the street stepping back and not providing liquidity. Above all, this episode illustrates the still fragile state of fixed income markets. The street was horribly burned last fall, with every major house taking a major bath in their fixed income departments. As a result, the street has significantly pared back its capital commitment to spread product (i.e., mortgages, agencies, corporates, ABS, etc..); inventories are by some estimates running 50-75% below year-ago levels. As a result, spread markets are now much more vulnerable to even small changes in sentiment. Keep in mind that high-grade corporate investors are largely dedicated accounts (unlike in emerging markets, which is dominated by hot money). These guys have huge sums invested in this market, and it is not at all easy for them to effect big portfolio shifts. Furthermore, spreads remain wide versus recent (pre-August) history, so one can make a reasonable case that spread product offers decent value -- which is obviously not the case in equities. Things will likely remain choppy in the next week or so, and then IMO settle down, barring some exogenous shock. The problem I see is that liquidity will almost certainly get worse in the second half of the year, as institutions find it increasingly desireable to build cash reserves ahead of Y2K. While everyone has their own views on how serious the whole issue is, you can count on one thing: Cash will be king come December. And if stocks finally crack? It is absolutely scary to think of the ramifications. Never have credit markets, and the economy for that matter, been so exposed. Fortuna has oft proven herself to be a capricious goddess. (Sorry for the long-winded response.)