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Francois+Goelo

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Francois+Goelo

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Saturday, 12/23/2000 1:14:49 PM

Saturday, December 23, 2000 1:14:49 PM

Post# of 1520
***¶***Weekly Economic Indicators & Second Guessing Grenspan....

WEEKLY UPDATE FOR: December 23, 2000 by Bob Bose

Prior Week in Review:

Financial Market Highlights:
============================ 

                        12/22/00     12/15/00     %Change

S&P 500 1,305.90 1,312.16 -.48%
Dow Jones 10,635.50 10,434.96 +1.92%
NASD Comp 2,517.05 2,653.34 -5.14%
Russell 2000 462.99 458.04 +1.08%
SOX Index 587.14 578.78 +1.44%
Value Line 380.42 380.71 -.08%
MS Growth 582.63 564.03 +3.30%
MS Cyclical 497.64 462.57 +7.58%
T - Bill 5.11% 5.84% -73 BP
Long Bond 5.39% 5.42% -3 BP
Gold - Oz-Near Month $275.50 $272.90 +$2.60
Silver - Oz-Near Month $4.68 $4.64 +$.04


Economic News:
==============

FOMC Leaves Rates Unchanged, But Biased To Ease
Economic Reports More Mixed - Retail Sales Could Bounce
Next Move Down, But Timing And Magnitude Important


*October International Trade Deficit narrowed to $33.2 bil

*FOMC Leaves Rates Unchanged, But Biased Toward Rate Cut

*November Housing Starts rose +2.2% - Surprisingly Strong

*3rd Qtr GDP revised downward to +2.2% from +2.4% - Slowest
Growth Rate in Four Years - Price Indexes also lowered

*Jobless Claims rose +34,000 to 354,000 - Four Week
Moving Average rose +4,000 to 347,250

*December Philadelphia FRB Index -6.1 vs November +5.2

*November Personal Income rose +.4% - Personal Spending
Rose +.3% - October revisions were upward for both

*Durable Goods Orders for November rose +2.3% - Without
Volatile Transportation sector orders rose +.4%

*Univ. of Michigan December Consumer Sentiment 98.4 -
Improvement from midmonth but down from November


The real news last week, at least in my opinion, was on
Monday, and it was not an official report. It was what I
thought was a planted story in the Wall Street Journal
that the FOMC (Federal Open Market Committee) might
adopt a bias toward lowering rates, rather than just the
neutral policy we had been expecting. Given the number
of FOMC members that still believe in the Phillips Curve
(that there is a close linkage between unemployment and
inflation), the actual adoption of a bias toward ease
is surprising, and the targeting of stock prices, even
though the FOMC disavows doing so, has investment implications.

My view is that the FOMC was seriously concerned that the
"tech wreck" and a sell-off in the broader market could
accelerate to the downside. Given the sloppy, at best,
corporate fourth quarter earnings pre-announcements, they
wanted to provide some sign that they would act to try to
avert an actual recession. So, they plant the story in the
Wall Street Journal, stock prices go up, but do not even
fully reverse the prior Friday's sell off. Message from
the markets, "It's ok to adopt a bias toward ease."

Had the markets really soared on Monday, then the FOMC
could have gone just neutral, stocks would have sold off,
and the FOMC would have obtained the same level of stock
prices, and by implication, impact from the "wealth
effect" (the assumption that there is a significant
linkage between changes in net worth and spending).
Perhaps I am being a little too cynical, but I truly
believe in the "Greenspan Put" - where the FOMC, at
some level, will move to halt a decline in stock prices.
In my view, last week demonstrated that prices much
below the current level would seriously worry the FOMC,
even given low levels of unemployment.

Also, while we had expected only a neutral policy, once
the outsized impact on stock prices from potentially
adopting a bias toward ease had been removed from the
equation, then there was little risk in doing so. Overall,
sound monetary policy, in my opinion, just don't believe
that the FOMC doesn't target stock prices.

While the real economic reports were therefore somewhat
anticlimactic, they nonetheless did present more of a
mixed outlook than the uniformly soft reports of prior
weeks. And, perhaps most importantly, consumer spending
was better than expected, and October's spending increase
was revised upward from the originally reported +.2% to
+.4% - in this case a significant revision.

And, as longer term subscribers know, we have alerted
everyone to the fact that this year's selling season has
an extra weekend, and United States consumers are
notorious for last minute shopping. Just how notorious?
Well last year, according to Investor's Business Daily,
32% of the selling season's mall traffic was in the last
seven days before Christmas. Holiday sales may yet be
quite soft, but in our view it is still too early to
predict. In short, it ain't over yet, the consumer can
still come through.

Nonetheless, the best bet at this point still seems like
a rate cut at the end of the January, 2001 meeting. The
magnitude of the cut, though, probably depends upon the
upcoming data. Does the FOMC get somewhat worried by
a rebound in consumer spending, should it occur, or by
further wage gains, and only lower rates by 25 basis
points (one basis point equals one one hundredth of a
percent), to be followed by a further cut in March.
Or is the risk of recession increasing, and they want to
make a more dramatic statement by lowering rates 50
basis points?

In our view, it remains too early to make that call, and
given our above comments about the FOMC targeting stock
prices, the direction of the market between now and then
is likely to influence their decision. So, stay tuned !
Formulating a strategy for 2001 will require flexibility,
and we plan to offer new tools to help.

HAPPY HOLIDAYS TO ALL !




Current Weekly Calendar of Economic Data:
=========================================

Monday: MERRY CHRISTMAS - Financial Markets Closed

Wednesday: Leading Indicators

Thursday: Jobless Claims, Consumer Confidence, Existing Home Sales

Friday: Chicago Purchasing Managers' Index

Full reports, and updates, are available on our Website at:

http://www.stockresearch.com/archive.html







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