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There is absolutely no way that the Fed is trying to engineer a stock
market crash, or even a very sharp decline and then blame it on Y2K.
While it is questionable that the Fed can engineer what I think they
would like to do, they will try. I do not think that he is trying to
engineer a market decline. The S&P 500 is for all intents and purposes
unchanged this year. Going sideways to slightly lower will be just fine
for another year. What he is worried about is that the patterns evident
in the market are those of a blow off top. If anything, he is trying to
prevent a blow-off, not the opposite.
As for the chart patterns themselves, we should see a s-t bottom within
5-8% of Friday's close, a strong year-end rally that falls short of the
highs and a retest of the October 1998 lows next year (because the Fed
will not be able to engineer what they'd like to do). By the way, I fear
we might also have STAGLATION (not serious, but 3.5-4.5% inflation will
seem like a lot compared to the last few years and it could be coupled
with very slow growth).
>From another credible Fed Watcher who called for the inter-meeting rate
cut last October and the Discount Rate Hike over the summer (that would
be me by the way), here is an article I sent to my clients (and some of
you on the list have seen) last August after the Jackson Hole speech.
Absolutely nothing has changed in my perception following the speech on
Thursday night (outside of the fact that the odds of a rate hike in
November are much greater than I thought at the time):
27-August-1999
Greenspan Attempts to Slowly Deflate the Equity Market Bubble
Alan Greenspan has been concerned about US stock market valuations for
years. Ever since his speech to the American Enterprise Institute in
December 1996, global bourses have awaited with trepidation for the next
bomb from the Fed chairman detailing the overvaluation of the US equity
market. Recently, the "b" word (bubble) has even found its way into Mr.
Greenspan's lexicon. In his 22-July-1999 Humphrey Hawkins Testimony, the
Fed chief intimated that a search for monetary policy initiatives that
could deflate a bubble without bursting it was a high priority of the
Federal Reserve Board.
This search is a work in progress. There is no question that Mr.
Greenspan may very well be the most adept central banker in history at
understanding how and why markets move, both from a fundamental
perspective, as well as from a behavioral or technical frame of
reference. His ability to mold an underlying latticework to the
international asset markets has permitted the US Fed to stave off a
possible financial market seize-up last year. Now, he must figure out
how to deflate what he believes to be a dangerously over valued stock
market without damaging the US and global economies.
While some commentators like to offer as a consolation the fact that
after 1987, the US economy barely even blinked, the simple fact is that
stocks are far more widely owned now than they were in 1987. While there
are no exact statistics, anecdotal evidence indicates that more and more
Americans are taking out home equity loans and borrowing against their
401K retirement plans to purchase stocks on margin. If there is a sudden
loss of confidence in the economy, a occurrence that Greenspan stated
has happened time and again in his speech this past Friday, a sudden and
sharp move to lower risk assets could have a disproportionately negative
affect on the US economy. This must be avoided at all costs.
It is clear that the Fed is spending a great deal of time attempting to
evolve a strategy to slow up the market without crushing it. The first
prong of attack was to suggest that if there is a bubble, that the Fed
could possibly mitigate the blows by applying proper monetary policy, as
stated in July's Humphrey Hawkins testimony. The second prong was to
raise the discount rate, while at the same time mollifying the markets
with a dovish statement regarding expected future inflation.
Unfortunately, the markets misinterpreted this move initially by
assuming that the Fed was finished raising rates. While a further rate
hike is unlikely this year, the discount rate move is a clarion call for
further increases in the Federal funds rate during the year ahead. The
discount rate would not have been nudged higher had the Fed thought
there was any chance that the next move would be to ease rates.
The Fed is apparently hoping to manage the bond and stock markets by
slowly moving rates higher, while at the same time indicating that the
economy remains in balance. Increased borrowing costs will ultimately
force market participants to lay off undue leverage as too costly,
ultimately leading to a more demographically reasonable growth path. The
hope is that this will lead the market to cool off via a trading range,
or modest, drawn out decline.
---
Steven W. Poser, President
Poser Global Market Strategies Inc.
url: http://www.poserglobal.com
email: swp@xxxxxxxxxxxxxxx
Tel: 201-995-0845
Fax: 201-995-0846
----- Original Message -----
From: <SLAWEKP@xxxxxxx>
To: <realtraders@xxxxxxxxxxxx>
Sent: Saturday, October 16, 1999 11:12 AM
Subject: re: credible Fed watcher
> Decision Point (tm) Top Advisor's Corner: Bert Dohmen's Weekly Hotline
>
>
> BBert Dohmen's Weekly Hotline
>
> October 15, 1999
>
> "ABBREVIATED VERSION"
> Substantial portions deleted in fairness to paying customers.
>
> I hope that you were able to access the special HOTLINE issued on
Wednesday.
> The market had made the abrupt turn to the downside on Tuesday, which
fit
> perfectly into my long-term scenario. However, my mild and brief
optimism
> last Friday was cut short quickly.
>
> Now you can see that everything I've been writing for the past two
months in
> Bert Dohmen's WELLINGTON LETTER is coming true. At this point, almost
all of
> the major indices, except the NASDAQ 100 and NASDAQ Composite, have
had
> serious breakdowns. We see large distribution tops on the Dow Jones
> Industrials and other indices. These tops have been in the making for
the
> last four months. It's serious.
>
> For the week, the Dow Industrials lost 630 points, or 6.0%. That's
the worst
> weekly point decline since 1987.
>
> Two months ago I wrote about Fed Chairman Greenspan's opinion on the
stock
> market "bubble" and his belief that it could be broken without causing
a
> depression. Is this what he's trying to do now? In his speech
Thursday
> night
> to the bankers he talked about the risk of loan collateral, if based
on
> stocks, deteriorating significantly. Over the years, Mr. Greenspan
has often
> given veiled advance warning for something that he intends to do.
>
> Is he really trying to engineer a market decline, which in case it
becomes
> more serious than he had intended, could always be blamed on Y2K?
>
> Whatever the reason, the Federal Reserve has made it clear that they
are on
> the warpath against a strong economy and against a strong stock
market.
> There's an old saying, which is probably the best advice you can ever
get:
> "never fight the Fed."
>
> If you have followed my advice over the past several months, you would
now be
> either totally in cash, or only lightly exposed to the stock market.
We
> can't
> always catch the little wiggles, and at times one gets whipsawed. But
the
> major trend is going according to our script.
>
> On the economic front today, the Producer Price Index rose a sharp
1.1% for
> the month, which is higher than a 12% annual rate. Many of the
factors
> driving it up were one-time aberrations. Once you factor them out,
the
> number
> was not much away from normal. However, the inflation scenario I
outlined in
> this month's Bert Dohmen's WELLINGTON LETTER is on track, and will
preoccupy
> the Federal Reserve. They will act on the prices of raw materials
rising,
> assuming that these will filter down to the retail level. The
assumption
> will
> be wrong, but we cannot change their minds.
>
> I wish you a happy bear market.
>
> Bert Dohmen
>
> *************************
> ABOUT BERT DOHMEN: Bert Dohmen is president and founder of Dohmen
Capital
> Research Institute, Inc.(DCRI) He has achieved an international
reputation
> for his expertise in forecasting the major investment markets,
interest
> rates,
> and economic trends.
>
> Bert Dohmen is known as a Fed watcher and a contrarian. You may have
seen
> him
> on Louis Rukeyser's "Wall Street Week," CNN's "Moneyline," or CNBC
Financial
> News Network. He is frequently quoted in The Wall Street Journal,
BARRON'S,
> Business Week, and other leading publications. He was ranked one of
the
> "Top
> Ten Stock Market Timers" (including a number one ranking.) Bert
Dohmen's
> WELLINGTON LETTER was rated #1 in the United States in a national
survey by
> Futures magazine.
>
> Bert Dohmen's WELLINGTON LETTER is an award-winning monthly investment
> newsletter with an impressive 22 year track record. His readers have
> prospered in bull and bear markets alike. Not only can he show you
where and
> when to invest during fantastic bull markets like today, but he can
get you
> out of dangerous situations, as in 1994 when his readers were able to
> sidestep
> major disasters such as the US Treasury Bonds, the Dow Jones
Utilities, the
> US
> Stock Market and the emerging markets.
>
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> refundable) Call (808) 545-2243 to sign up today.
>
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>
> For more information about these services call (800) 992-9989 or Fax
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> subscription to (808) 545-1994 or send via e-mail: dohmcap@xxxxxxx
>
> 1998 copyright DOHMEN CAPITAL RESEARCH INSTITUTE, INC.
> 1132 Bishop Street, Suite 1500, Honolulu, HI 96813
>
> VISIT OUR WEBSITE AT http://www.dohmencapital.com FOR YOUR FREE MARKET
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