Brigitte
19.12.2000, 12:48
* * * *
12/18/00 Investment House Daily
* * * *
Investment House Daily Subscribers:
TONIGHT:
- Opinions on Fed action run the gamut, but today we heard it all.
- More warnings, layoffs, poor weekend sales and other pessimism.
- CSCO leads the charge down.
- Some bulls out there as Galvin looks for 50% Nasdaq gain in 2001.
- Subscriber Questions
- Team Trades
Swing a cat, hit a Fed soothsayer.
Opinions are cheap with respect to what the Fed will do tomorrow. The
majority plays it safe as always: shift to a neutral bias, not even toward
an easing bias. Cannot blame them. Scorched by a bear market, they are
playing the odds, running with the crowd. But that is what is wrong with
the 'analysis' we get out there; the majority make calls on emotion, not
the numbers. Indeed, some of the 'logic' we heard as to why the Fed won't
cut rates tomorrow is truly amazing. We are not excluded from the long
line of soothsayers; our views are just different. We may be wrong about
a rate cut, but at least our arguments make some sense.
John Manley, a nice guy from Salomon Smith Barney, stated today that
Greenspan "is very adept at this sort of thing" when Mr. Manley was
responding to a question as to whether the U.S. was in or facing a
recession. Very adept at what? At putting the U.S. into recession when
one was not anywhere on the horizon? He did it in 1987 and 1991, skated
by one in 1998, and if he does not act now, will have done so now. If
there is no rate cut tomorrow, the question remaining is whether the
recession has already started this quarter (as some are suggesting given
the abysmal retails sales this holiday season) or will it wait until 2001.
Mr. Manley's statement was strange, but Mr. Stephen Slifer at Lehman
Brothers today stated that if the Fed cut rates tomorrow it would 'scare'
the markets by "sending a message to the markets that they [sic--the Fed]
are really worried." Further, Mr. Slifer stated that it would scare
foreign investment as to how serious the U.S. economic slowdown is.
First, is it better to pretend everything is okay when it is not and let
things worsen for another six weeks until the next meeting to let everyone
know that things are bad? Second, foreign investors will want a rate cut
as Fed rate cuts always lead to a rise in the markets. The fear would be
not being in the market as it started back up. The markets are showing us
that things are bad. The economic numbers out today show us that things
are bad with another round of weak economic news today. The Fed would be
acting responsibly by cutting rates 25 basis points.
That brings us to another incredibly weak argument that is bandied about,
even by some FOMC members. Remember that Greenspan is now concerned that
the tanked stock market will further impact weakening consumer confidence
and send a weakened economy down further. Well, some on the FOMC are
still saying that the market is not down; they point to the Dow and say it
is not in a bear market. Well, that argument simply represents studied
naivety. The bulk of investment money was in technology stocks on the
Nasdaq when the bear market started. Billions and billions (sorry Mr.
Sagan) of dollars of retirement capital was burned as the tech stocks dove
into the longest bear market in recent history. That is where the bulk of
the money related to the 'wealth effect' came from, and that is where the
bulk of the money has been lost, leading to what some are now referring to
sarcastically as the 'poverty effect.' That is what Mr. Greenspan is
worried about despite what the 'yes-men' pundits and FOMC stuffed shirt
hawks simplistically argue.
The Facts.
What did Mr. Greenspan say two weeks ago? He said that he feared an
already weakened economy could further suffer if flagging equity prices
continued to undermine consumer confidence and lead to further slowing in
consumption. He said that the Fed had to be on alert for continued signs
of economic weakening that could signal this was happening.
What have we seen in the intervening two weeks? Pretty much economic
carnage. We have the biggest retail buying season of the year turning
into the worst buying season since the 1991 recession (Merrill Lynch noted
that today) as last weekend was another truly pathetic showing for retail
sales. Indeed, retail sales for last month were down 0.4% versus an
expected 0.2% increase. Consumer confidence was down again in the last
showing. Jobless claims have shot up. Inventories are higher due not to
robust production (remember, the NAPM has showed us four months of
contraction), but due to lack of sales. On top of that we all know that
GDP was 2.4% growth for the third quarter, down 57% from the second
quarter's 5.6% growth rate. Indeed, many are now saying that with the
incredibly weak retail sales this quarter, we could actually have the
first negative GDP quarter in years occurring right now. Lovely thought.
At least inflation remains well in check.
No doubt Greenspan has his hands full. He wants to cut rates; as we said
before, he wanted to take that last rate hike back about two weeks after
the Fed let it fly just as he wanted to take that last rate cut back in
1998. He knows the last 75 basis points is going to slam into the economy
this spring; the economy has already taken on a lot of water, and those
last rate cuts will rip it wide open without some evasive action. His
problem is convincing the most stubborn FOMC hawks that the Fed needs to
act NOW not later. What does he have going for him? Some moderate FOMC
members that want to cut now; they help balance out the hawks, and that
gives Greenspan the opening to go ahead and make the decision to cut. We
think we have read Greenspan right on this. Despite what many are saying,
to us he has not acted any differently than he has in the past in
telegraphing what he thinks needs to happen.
We are looking for that quarter point rate cut to stabilize things. Those
arguing that any cut would send the markets racing back up and re-ignite
inflation fears miss the big picture. Without Fed intervention, interest
rates would be down around 5%. A quarter point cut right now would be a
fraction of those cuts back in 1998, and would hardly counteract the last
75 basis points of hikes that are racing full speed toward a limping
economy. What it would signal is that the Fed recognizes that the economy
is slowing faster than thought even without those last 75 basis points of
rate hikes, and that it was taking this action to keep the economy from
slowing further. The Fed could easily calm any nervous investors (if
there would be any) with such a statement about its analysis. This may be
all for naught if the Fed continues to make like a bump on a log, afraid
to act so close to the end (?) of the political turmoil. That, however,
sure won't be good for the market.
THE ECONOMY
Corporate layoffs are the big story. GM to lay off 5,000. Aetna to lay
off 5,000. Gillette to can 2,700. That is almost 13,000 layoffs
announced in one day. They join International Paper that announced
layoffs in October and Ford and Chrysler who have closed several plants
since Thanksgiving. Those worrying about a too tight labor market should
be looking forward, not at last month's numbers that significantly lag the
economy.
Today also brought other corporate news as Time Warner warned it would not
make its quarter. Terayon, a broadband sector stock, also warned it would
not make its number. After the bell, Mead also lowered expectations for
this quarter. Warnings are significantly higher this quarter, and we are
going to see more coming as a side effect of a slowing economy and the
need to get the information out to the public and start blaming the
slowing economy to ward off those s
12/18/00 Investment House Daily
* * * *
Investment House Daily Subscribers:
TONIGHT:
- Opinions on Fed action run the gamut, but today we heard it all.
- More warnings, layoffs, poor weekend sales and other pessimism.
- CSCO leads the charge down.
- Some bulls out there as Galvin looks for 50% Nasdaq gain in 2001.
- Subscriber Questions
- Team Trades
Swing a cat, hit a Fed soothsayer.
Opinions are cheap with respect to what the Fed will do tomorrow. The
majority plays it safe as always: shift to a neutral bias, not even toward
an easing bias. Cannot blame them. Scorched by a bear market, they are
playing the odds, running with the crowd. But that is what is wrong with
the 'analysis' we get out there; the majority make calls on emotion, not
the numbers. Indeed, some of the 'logic' we heard as to why the Fed won't
cut rates tomorrow is truly amazing. We are not excluded from the long
line of soothsayers; our views are just different. We may be wrong about
a rate cut, but at least our arguments make some sense.
John Manley, a nice guy from Salomon Smith Barney, stated today that
Greenspan "is very adept at this sort of thing" when Mr. Manley was
responding to a question as to whether the U.S. was in or facing a
recession. Very adept at what? At putting the U.S. into recession when
one was not anywhere on the horizon? He did it in 1987 and 1991, skated
by one in 1998, and if he does not act now, will have done so now. If
there is no rate cut tomorrow, the question remaining is whether the
recession has already started this quarter (as some are suggesting given
the abysmal retails sales this holiday season) or will it wait until 2001.
Mr. Manley's statement was strange, but Mr. Stephen Slifer at Lehman
Brothers today stated that if the Fed cut rates tomorrow it would 'scare'
the markets by "sending a message to the markets that they [sic--the Fed]
are really worried." Further, Mr. Slifer stated that it would scare
foreign investment as to how serious the U.S. economic slowdown is.
First, is it better to pretend everything is okay when it is not and let
things worsen for another six weeks until the next meeting to let everyone
know that things are bad? Second, foreign investors will want a rate cut
as Fed rate cuts always lead to a rise in the markets. The fear would be
not being in the market as it started back up. The markets are showing us
that things are bad. The economic numbers out today show us that things
are bad with another round of weak economic news today. The Fed would be
acting responsibly by cutting rates 25 basis points.
That brings us to another incredibly weak argument that is bandied about,
even by some FOMC members. Remember that Greenspan is now concerned that
the tanked stock market will further impact weakening consumer confidence
and send a weakened economy down further. Well, some on the FOMC are
still saying that the market is not down; they point to the Dow and say it
is not in a bear market. Well, that argument simply represents studied
naivety. The bulk of investment money was in technology stocks on the
Nasdaq when the bear market started. Billions and billions (sorry Mr.
Sagan) of dollars of retirement capital was burned as the tech stocks dove
into the longest bear market in recent history. That is where the bulk of
the money related to the 'wealth effect' came from, and that is where the
bulk of the money has been lost, leading to what some are now referring to
sarcastically as the 'poverty effect.' That is what Mr. Greenspan is
worried about despite what the 'yes-men' pundits and FOMC stuffed shirt
hawks simplistically argue.
The Facts.
What did Mr. Greenspan say two weeks ago? He said that he feared an
already weakened economy could further suffer if flagging equity prices
continued to undermine consumer confidence and lead to further slowing in
consumption. He said that the Fed had to be on alert for continued signs
of economic weakening that could signal this was happening.
What have we seen in the intervening two weeks? Pretty much economic
carnage. We have the biggest retail buying season of the year turning
into the worst buying season since the 1991 recession (Merrill Lynch noted
that today) as last weekend was another truly pathetic showing for retail
sales. Indeed, retail sales for last month were down 0.4% versus an
expected 0.2% increase. Consumer confidence was down again in the last
showing. Jobless claims have shot up. Inventories are higher due not to
robust production (remember, the NAPM has showed us four months of
contraction), but due to lack of sales. On top of that we all know that
GDP was 2.4% growth for the third quarter, down 57% from the second
quarter's 5.6% growth rate. Indeed, many are now saying that with the
incredibly weak retail sales this quarter, we could actually have the
first negative GDP quarter in years occurring right now. Lovely thought.
At least inflation remains well in check.
No doubt Greenspan has his hands full. He wants to cut rates; as we said
before, he wanted to take that last rate hike back about two weeks after
the Fed let it fly just as he wanted to take that last rate cut back in
1998. He knows the last 75 basis points is going to slam into the economy
this spring; the economy has already taken on a lot of water, and those
last rate cuts will rip it wide open without some evasive action. His
problem is convincing the most stubborn FOMC hawks that the Fed needs to
act NOW not later. What does he have going for him? Some moderate FOMC
members that want to cut now; they help balance out the hawks, and that
gives Greenspan the opening to go ahead and make the decision to cut. We
think we have read Greenspan right on this. Despite what many are saying,
to us he has not acted any differently than he has in the past in
telegraphing what he thinks needs to happen.
We are looking for that quarter point rate cut to stabilize things. Those
arguing that any cut would send the markets racing back up and re-ignite
inflation fears miss the big picture. Without Fed intervention, interest
rates would be down around 5%. A quarter point cut right now would be a
fraction of those cuts back in 1998, and would hardly counteract the last
75 basis points of hikes that are racing full speed toward a limping
economy. What it would signal is that the Fed recognizes that the economy
is slowing faster than thought even without those last 75 basis points of
rate hikes, and that it was taking this action to keep the economy from
slowing further. The Fed could easily calm any nervous investors (if
there would be any) with such a statement about its analysis. This may be
all for naught if the Fed continues to make like a bump on a log, afraid
to act so close to the end (?) of the political turmoil. That, however,
sure won't be good for the market.
THE ECONOMY
Corporate layoffs are the big story. GM to lay off 5,000. Aetna to lay
off 5,000. Gillette to can 2,700. That is almost 13,000 layoffs
announced in one day. They join International Paper that announced
layoffs in October and Ford and Chrysler who have closed several plants
since Thanksgiving. Those worrying about a too tight labor market should
be looking forward, not at last month's numbers that significantly lag the
economy.
Today also brought other corporate news as Time Warner warned it would not
make its quarter. Terayon, a broadband sector stock, also warned it would
not make its number. After the bell, Mead also lowered expectations for
this quarter. Warnings are significantly higher this quarter, and we are
going to see more coming as a side effect of a slowing economy and the
need to get the information out to the public and start blaming the
slowing economy to ward off those s