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[RT] respected fed watcher

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Title: Welcome to MarketMavens.com // MarketMavens.com (Bert Dohmen)

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MarketMavens.comTM
Market Observations : Bert Dohmen
Updated Monthly

Biography

Subscribe to Bert's Dohmen's Wellington Letter

Oops, The FED Did It Again!

By Bert Dohmen, Editor
Dohmen's Wellington Letter

Posted Tuesday, March 27, 2001 at 03:50 PM EST

The long-awaited Fed meeting occurred yesterday(03/20). My suspicions were correct, in that the Fed

decided to lower interest rates only 0.5%. My belief, as expressed in our services for traders,

was that the markets would react very negatively. They did!

By the close yesterday, the Dow Industrials had plunged 238 points closing at 9,720. Today(03/21) the

plunge continued, with the DJI closing another 233 points. The NASDAQ Composite plunged to

a new bear market low of 1,830 today(03/21). We're getting closer to my long-term target of 1,400.

The Dow stocks, which everyone thought were relatively safe compared to the NASDAQ, will

now accelerate to the downside. These big, slow-moving companies cannot maneuver well in a

rapidly decelerating economic environment. I have compared this bear market to 1973-74. At

that time the DJI, S&P, and NYSE lost 46% to 49% of their value. On the DJI, first chart

support is in the 7,500 area. If it gets as bad as 1974, then you could see 6,100.

Yesterday only 12% of the total volume was on the upside on the NASDAQ, with 83% on the

downside. We should be in the middle of a selling panic very soon.

Yes, finally other commentators are waking up to the fact that the Fed is the problem, and not the

savior. I heard several people say that the Fed is "asleep at the wheel." For appearance sake,

they did not want to cut interest rates more. They also issued the statement as I had predicted,

that they would be ready to cut rates again in the near future if it becomes necessary. But that

doesn't help the markets at all. The statement from the Fed gave all the reasons for lowering

rates by a huge amount. All the observation of conditions was very negative.

Let me say that I'm not advocating a big interest rate cut by the Fed in order to save the stock

market. The stock market is not the problem. The economy is. The stock market is merely

forecasting what it expects to see in the economy, namely an environment where profits will

disappear and turn into losses. The Fed has done great damage to the economy by hiking interest

rates excessively high.

They must undo that and quickly. What does it mean when you're behind the curve? You've

probably seen it in previous recessions, when the home sellers ask for what they thought was

market price six months ago. They get no bids. Six months later they finally decide to lower the

price by $50,000, but by that time the market price has slipped another $50,000 and once again

they're "behind the curve." And so it goes throughout the recession, where the market price

drops lower just before the seller lowers his price. In effect, the seller never accomplishes his

final goal, namely selling his house. The Fed is acting very similar to the novice home seller.

But so far, they're staying behind the power curve and as every pilot knows, that means sooner or

later you crash land. We are now going into crash mode in my opinion.

Japan is not being helped by this financial turmoil and neither is Europe. In fact, the

international markets should now catch up very fast with the U.S. on the downside, if they

haven't done so already.

I'm currently attending the Milken Institute Conference in Los Angeles, and have listened to four

Nobel Prize winning economists. Here were the world's best, and they had no idea where the

economy was going short-term. But they agreed, the long-term is positive. On the panels are

some very intelligent business CEOs, such as Barry Sternlicht of Starwood, Tim Koogle of

Yahoo, etc. A few were quite candid about their outlook for the economy. It isn't good.

In fact, at such special conferences you will find that people speak quite a bit more frankly than

on national television.

I find it amazing, however, that so many people point at current economic statistics, and say that

they really aren't so bad. I don't know what they're looking at, but when I see the charts of the

most important indicators, I shudder.

Consider that the U.S. is probably experiencing zero economic growth right now. Japan has

entered a recession. The two countries together are 44% of the world GNP. The world is

entering a recession, and everyone looks at economic statistics and saying, "things aren't so bad."

They don't realize that statistics show you history, not the future. Once unemployment starts

shooting up, it does so very rapidly. Remember, corporations usually hold onto employees, until

they are sure that the economy is not turning around. Then they pull the plug. We're starting to

see a little of that, but the big layoffs are still ahead. That's when you see the big recession

hitting.

One chief strategist for a major Wall Street firm let something slip in a discussion, which was

probably unintentional. He said: "...in the current crisis." Wall Street people are never supposed

to say that. And they won't tell you that on national TV.

Unless a miracle occurs, the short sellers have everything in their favor for the next several

weeks, as there is no Fed action likely for at least that amount of time. I can't see what else could

turn this market around and rally.

Just about every investor I meet and speak with during my travels is holding onto all of his

stocks. I haven't met anyone who has significantly lowered his exposure to the stock market.

That means that the big selling is still ahead. This bear market is not over by a long shot. And

the effect on the economy hasn't appeared yet. But it will. That's the part that most observers

don't believe.

Bert Dohmen is a weekly contributor to MarketMavens.com. He is president and founder of Dohmen Capital Research Institute, Inc. He has achieved an international reputation for his expertise in forecasting the major investment markets, interest rates, and economic trends. He is known as a Fed watcher and a contrarian. bert has appeared on Louis Rukeyser’s Wall Street Week, CNN’s Moneyline, and CNBC Financial News Network. He has been ranked one of the Top Ten Stock Market Timers in the United States. In a survey by Futures Magazine, he was rated one of the Top Advisors in the United States.