Market Mover: FIVE DOWN, ONE TO GO FOR FED?
by Mark Scheinbaum
American Reporter Correspondent
Boca Raton, Fla.
BOCA RATON, Fla., May 15, 2001 -- Fed Chairman Alan Greenspan's latest r= ate cut means it's five down with one to go until economic crunch time. T= o no one's surprise, Greenspan cut rates 50 basis points, a number that had=
already been discounted by both the stock and bond markets.
From credit card rates to mortgage loans, the half percent ease had bee= n the consensus for several weeks. The bias was tilted also, towards furthe= r cuts.
We've said for many months it's not so much about the size of the rate c= uts but the number of rate cuts themselves.
The Fed raised rates six times at the end of the Clinton administration.= The last two increases were at best unneeded and at worst, ill-advised.
Handcuffed by a long-standing refusal to change rates during the period = between Presidential nominating conventions and Inauguration Day, Greenspan= needed to start lowering rates before Thanksgiving.
With ego and history in tact, Greenspan realizes that no matter what per= centage totals take place, history will probably hold him harmless for six = increases, a brief hiatus and then six cuts in rates.
This means that we = have one rate cut to go, probably around Labor Day.
If the sixth cut is only 25 basis points (a quarter of a point), it mean= s the economy is rebounding, layoffs have eased, and employment is fairly s= trong. If cut number six is more than this, well, trouble might be ahead.=
Also, if we see cuts number 7, 8, or more, it means that money policy al= one cannot control a recession. The Japanese, for example, learned that you= can cut interest rates to literally 1 percent, but if people don't have th= e cash or inclination to buy new homes and cars or start new ventures, the = rate cuts were useless.
Commentators are touting "historic" increases in the S&P 500 Index one y= ear after a fourth Fed rate cut. In reality there is no such easy formula o= r hocus-pocus to determine the future.
If pushed to make a prediction, I stick with the results of the "January= Effect" where we tracked big money, investment grade money, and smart mone= y at the end of January, 2001. The trend and allocations were only encourag= ing in the slightest of margins. But at least there was some positive senti= ment.
We stick by our call that the NASDAQ is a languishing secondary con= cern for the Fed and the nation. The S&P 100 and 500 Indices could squeak a= t a very, very small gain at the end of December. For year 2001these gains = could be as low as a fraction of one percent.
Allowing for a virtually "flat" year 2001, and a "down" year 2000, the p= rognosis for a mildly positive 2002 and a hugely positive 2003 are very muc= h in the statistical cards. Again, we're talking blue chip stocks.
So, keep an eye on the next rate cut, and hope it's the last for quite a= while!
AR Correspondent Mark Scheinbaum is chief investment strategist forKapla= n & Co. Securities (Members, Boston Stock Exchange, NASD,SIPC).