DEC 27, 1999

Early To Rise

There may be a chance that the Federal Reserve could act by raising interest rates another 1/4 point in the first couple weeks of January if the economic statistics support such a move. You can see the T-bond already factor in that kind of move and normally it would be the free market T-bond trading that moves first.

Nov 3, 1999

Multiple Moves

The rate increase in Australia, then higher rates in Europe could force our Central Bank to do the same. You could see the US dollar fall if our Federal Reserve leaves rates unchanged. I have been writing all year that our Federal Reserve probably will raise rates many times until the interest rates in a money market account compete with all other forms of investment in respect to risk and reward. Over the last week, Mr. Greenspan has addressed their focus on the wealth transference into the real estate market and the serious implications of that as the most damaging form of inflation to any society. Hence, I feel interest rates can go as high as 8% over the next year. In the late 70's, real estate was my ticket to financial independence and mock-retirement at the age of 28. I learned during the early 80's how important understanding the impact of interest rate adjustments are on the real estate market and how non-liquid such an asset can be with rates around 12%.

Sep 26, 1999

Pressure Release

The chance of the Federal Reserve tightening again October 5th has lessened to perhaps a 50/50 chance due to our equity market reaction to the risk reward factors in relation to yield on investment. Additionally, the technology industry may slow more than expected and this sector has been the main catalyst for any stock market rally for quite some time and the reason for the favorable increases of productivity efficiencies. One of the few sectors that seems ready for a very short term bounce is the financial sector along with the bond market although many of the stocks such as AXP, GE and JPM are at critical levels that if breached, they could at least go to the low end of their trading range since January. Earnings may be lower due to the possible slowdown and this should cause the respective stock prices to reflect the realities such as Dow 9800 or lower.

Inflationary pressures may increase as a result of higher interest rates, at least until interest rates get to a level that competes directly with any other investment return. It could take interest rates going much higher to distract from the return on equity ratio that so many of us have become accustomed to at this point in time. This real asset inflation phenomena could occur if fewer dollars no longer find paper assets as a viable means to get a good return on investment and investors start to buy real assets as a substitution. Simple supply and demand factors would force prices higher because of the possible interest of too many dollars chasing a limited quantity such as Carmel California real estate. As the return on such investments become more popular and more investors with more dollars come into the market, you could see prices climb the same way we have seen multiples climb in the equity market. More and more investors chasing, wait.... too few shares? Well, short term we may see interest rates fall into the mid-5% zone again, but the next leg of higher interest rates may have to go to a level that stops investment in all assets including just plain spending on things like cars, furniture, home theaters and more stuff. Someday savings accounts or money markets will be of interest.

Sep 22, 1999

Utilized

As a frumpy old classic technician, I still pay attention to the Dow Jones Utility average which fell below the 40 week moving average yesterday and is resting on the 80 week MA. The next support may be 270 if 300 is violated and that would be a very bad situation for the rest of the stock and bond market. Also examine financial stocks like AXP, JPM, BAC and even GE to find signs of further deterioration of valuation because we could be going back to 1997 prices for many more stocks.

June 18, 1999

Long Term Considerations

Momentum is an influence from the past causing a form of investment inertia to keep prices trending higher or sideways. This directional force diminishes if the price of the stock trades sideways for an extended period of time. A stock price decline has the same characteristics only reversed such as Compaq at the current time. As information regarding the fundamental aspects of a company are released, it is important to analyze the reaction by the investment community reflected in the price action of the stock. Looking, feeling and being ahead of the financial markets interpretation of current news is the skill we all want to achieve.

Such is the skill which Federal Reserve Chairman Greenspan incorporates with every decision he makes. The complexity of influences is immense and it takes the experience and talents of the best economic minds to project correctly. Still, it is pure conjecture mixed with a lot of luck. This may be one reason why Chairman Greenspan has chosen to make such gradual moves when needed in order to analyze as fully as possible the economic statistics that are release following his action. Hence, one or several months may go by before any conclusion can be made regarding the ramifications of the previous policy stance.

Please remember his situation in the early 1990's when he was trying to get the banking system to start lending again after the S & L crisis. Very conservative practices were instituted that made it very hard to stimulate the economy with monetary policy cause the phrase "pushing on a string" to be used to describe it. Well, finally things started to kick in when banks started to lend and this was when a banks stock was selling at a price to earnings ratio of 3 which is unlike the current situation where the ratio is many times higher. My conclusion after considering the degree of monetary stimulus applied last year to support our economy along with the world's economic health, is that we are in a situation that may be similar to 1994 when many tightening moves by the Fed occurred until the desired effect was accomplished. A continued high degree of caution needs to be applied to your investment strategy perhaps well into the year 2000.

February 10, 1999

Wealth Transference

The pursuit of a return on equity causes capital to shift from one investment to another depending on the economic trends established in the particular market. It is the intention of the investor to anticipate opportunities, before or as these macro and micro trends change, in order to maximize potential profit and stay ahead of the competition. Microsoft has done this extremely well by understanding the potential and threat of the internet, the new functionality of the media business and the roll of cable and wireless communications to provide access for business and the consumer. Microsoft has maintained their leadership by rapidly changing their business plan after realizing that their operating system was becoming less critical for personal computers to function.

Preservation of capital could be causing the stock markets around the world to fall from such lofty levels. Valuation is a matter of perspective and you have to understand the where and why things are as they are in order to prognosticate potential profits and dangers. Everyone is an expert in the stock market these days after having it appreciate for the last four years fueling the attitude that all you have to do is buy, buy and buy some more. So few investors cared about the dangers last July, until they felt the pain in September and October. Again in early January the same attitude prevailed and now there is a little pain starting that probably won’t get investor’s screaming until 8,800 is reached on the Dow Jones Industrials. There is a macro trend that should hold for at least a bounce if the average goes to that level and I am ready for it with yield shields wrapped around my positions to protect profits as I did in the sell off last year.

New appreciation potential may be forming as stock market wealth moves to real asset accumulation as an alternative investment. Selling stock and paying cash for a new home, car or keeping profits as a cash stash until after 1/1/2000 could be the new trend for 1999. Foreign investment has diminished as capital is repatriated causing fewer buyers to appear in our stock and bond markets as I prognosticated last June. This may be a macro shift of economic reality that takes a long time to start, but can inflict damage quite quickly unless you transferred your wealth to the right asset class early enough.

February 1, 1999

Brazen Nonchalant Naiveté

The riverboat casino mentality of investing may soon part just as that sector did after having a period of extreme valuation. There seems to be many changing tides continuing to happen that suggest higher interest rates short term, which could cause the equity spectrum to suffer. Even the dead precious metals mining sector seems to be flinching.

Shields Up In The Fullness Of Time 1999