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MORNING COMMENTS WEEK OF 12/20/99-12/24/99

 

12/31/99

NO COMMENTARY PUBLISHED

12/30/99

NO COMMENTARY PUBLISHED

12/29/99

Yes Virginia, there is a wealth effect, and no Virginia, neither Y2K nor the Fed Menace can stop a ball in motion...only gravity can.

We knew consumers were happy campers, in fact, we even thought the smiles were a bit wider this month than last, but we underestimated by a mile just how ecstatic they were during this holiday season. As it turns out, those grinning faces in the jam packed shopping mall parking lots of the land were, overall, the happiest group of consumers we've seen since before the days of the original Woodstock.

Yes, as you might have guessed, the latest read of the Conference Board's Consumer Confidence Index came in far above expectations at 141.4-- its highest level in 31 years. Underneath the headline figure, it was more of the same: the Present Situation index hit a record 181.5 in December as surging stock prices and the best employment situation since the days when Richard Nixon ruled the land  made one and all believe that there's no better time than the present...

...unless of course it's the future.  The Future Expectations component of the survey rose to 114.7, its highest level since June, indicating that the future continues to look brighter than even the present day to many consumers.  The jump in the future expectations component indicates that the driver of nearly 64% of all economic growth, the consumer, isn't about to curb his or hers spending habits anytime soon--good news for retailers and producers of consumer goods, bad news for anyone who thought "no change in bias" meant "no more rate hikes".

The Employment component of the survey also hit a record high.  For the first time ever, over half of all those surveyed believed that jobs are readily available.  The high percentage of respondents who believe jobs grow on trees in the present economy is important because it makes the job seeker less likely to jump on the first job that is offered, instead the job seeker will hold out for the job that best suits his terms: the highest paying job with the best benefits--a method of attaining employment that could put upward pressure on wages in coming months if the unemployment rate drops from its already decades low rate of 4.1%.  Needless to say, anything that could push up wages is unlikely to have our friends at the Fed ringing in the New Year in a celebratory demeanor.

A stronger than expected 6% rise in Existing Home Sales in November, reversing a 4 month slide, will also cause more than one Fed member to lose a few winks of sleep. Now as some of you may remember, in a November 2nd speech Fed Chairman Alan Greenspan hinted that there is a wealth effect and capital gains from existing home sales, like stock market gains, play a significant part in feeding it, "...the sale of a newly constructed home does not generate capital gains financed through the mortgage market. Sales of existing homes almost always do, and the purchasing power released through converting home equity to unencumbered cash can affect overall consumer demand and the economy, just as the stock market gains of recent years have boosted consumption."  In short, that 6% jump in existing home sales could bolster consumer spending in coming months.

Beyond the headline 6% jump in existing home sales, a drop in the supply of available home to its lowest level in 5 years: 4.3 months, could put additional upward pressure on home prices, giving home owners an incentive to cash in their gains on their homes--a scenario which would feed more money into an economy that shows no signs of slowing.

The continued indications that 3 rate hikes were not enough means that, as we have said more times than many of you care to hear, the Fed will be forced to raise rates far higher than expected in order to counteract the wealth effect.

The final resting place of the Fed Funds rate does not depend on a lessening of domestic consumer demand alone, however.  The Fed must also take into account a rebounding global economy which is bolstering the demand for U.S. Exports.  The economy-slowing effects of any decline in domestic demand that the Fed achieves must exceed the economy-boosting effects of rising global demand for U.S. goods.

Despite the stock market's complacency on interest rates, the lion's share of the current rate hike cycle lies waiting just over the horizon.  The inability of the Fed action

...which is not out of the question as the stock market surges higher complacent in the belief that low current inflation obviates the need for prolonged Fed action. The focus on current inflation continues to blind the stock market to the Fed's focus on the demand side of the equation...

...a fact which makes us say, " No Virginia, there is no Sanity Clause when overconfidence blinds the eye."

12/28/99

NO COMMENTARY PUBLISHED

12/27/99

There are times when the mass of onlookers regard the glass as being half full.....there are times when the crowd peers at the glass and believes it is half empty....and then there are those times like the present when the giddy masses look at the glass and are convinced that it is full but has a spill proof lid--and it is during these times that, in retrospect, the safest course of action has always been to run for the hills.

As Y2K week dawns, the worries are few and far in between, and with little on this week's economic calendar that the stock market will pay heed to, the short term direction is likely to be up, up, and away.

Although the short term is more likely than not to be more of the same and the crowd's perception of the future is bright indeed, cynics that we are, we're not quite convinced that the lid on that glass is really spill proof.

The mass acceptance of the perceived wisdom that today's market buoyancy is possessed of immortality (a condition some may call witless euphoric complacency) heads up our list of post holiday trepidations.  Troubling not only because it makes the unsuspecting open targets for the unexpected, but troubling also because those unflappable believers are sitting on a record mound of margin debt.

Now, there are other things besides euphoria which also bothered us as last week drew to a close, and which even after a hearty holiday dinner of curmudgeon stew, still trouble us as this week begins.

Friday's record close by the Dow Industrials caused us to lose a few winks of sleep over the weekend.  We lost sleep over the new record not because we were too overcome with euphoria to sleep, not because we were worried that the record close occurred with 13 of the 30 Dow stocks in long term downtrends and 55% of all stocks in long term slides, but rather we lost sleep because it was the psychologically important Dow that made a new high--an event that we have previously said could give consumer confidence the extra nudge it needs to rise to new record highs...

...and with a resumption of soaring consumer confidence in the future, our old friend the wealth effect will be right back in the thick of things, driving the consumer's urge to splurge to a new level, which in turn will move the final needed resting place of interest rates in this rate hike cycle that much higher.

While the Dow Confidence Effect will not show up in tomorrow's consumer confidence numbers (although the lesser S&P500/NASDAQ Comp effect will give the numbers an upward shove), it could make itself felt in next month's numbers--just in time for the digestion of a Fed that has made an acceleration in demand Public Enemy #1.

As the century dwindles to its final days, our worries are unchanged from the summer: euphoric market speculation amidst an unfavorable interest rate environment which is unlikely to become more hospitable until consumer demand eases and labor market conditions slacken.

Although blowoff tops and bouts of speculative mania can carry valuation levels far higher than expected, and last far longer than expected, as this epoch of mania has, eventually their end is triggered....

....with that in mind and annual prediction time at hand, and believing as we do that this bout of irrational complacency is drawing to a close, we'll leave you today with three stocks we feel could depreciate 50% by the time 2001 rolls around: American Express, Goldman Sachs, and Yahoo.

In the case of Yahoo, the stock's chart defines the word parabolic, and with the 200-day moving average sitting a few hundred points below at 180, we feel that Yahoo's shares could come under a little pressure if investors infatuation with the word growth eases, and investors instead attempt to quantify that growth.  The stock's market cap briefly surpassed the combined market cap of General Motors and Ford on Thursday--two companies that had a combined $332 billion in revenues and $12.6 billion in profits over the past month, compared to Yahoo's $465 million in revenues and $58 million in profits.  Now maybe we're missing something, but even with the current rosy growth projections for Yahoo, the company's business (as opposed to its market cap) is unlikely to reach the size of either GM's or Ford's any time soon.

In the case of Goldman Sachs, business is great and the times are rosy now, but with the company trading at a premium to its peers in an environment of rising interest rates, what happens if the current IPO market euphoria dies down and merger mania is dealt a blow by a severe market correction? Historically, the time to buy the brokerage stocks has been when all appears lost and industry profits are slipping, not when the stock market is setting daily records and industry profits are at a peak.

In the case of Amex, it's that inhospitable interest rate environment once again (not to mention the stock's premium P/E ratio) that makes us leery.  Call us old fashioned in our thinking, but it seems to us that eventually rising interest rates will take their toll on anyone who issues credit cards and doesn't have the luxury of passing these increases along to their customers.  Bank One's First USA unit and other credit card issuers can raise the rates charged to customers, but there is no annual APR on an Amex Gold or Platinum card.  American Express shares are standing in the line of fire of a Fed intent on slowing the consumer.  

 

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Last modified: April 02, 2001

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