May 10 - Don't Fear The Fed, Fear Logic

Unless Greenspan puts on an overcoat and starts running around the NYSE trading floor yelling "SELL!", equity prices are sure to  rally with anything but a ½ point hike next week.  Expect the ½ point move, but don't expect investors to continue to fear the fed because it is much easier for them to fear logic.

Greenspan should of  figured out on July 16, 1999, when the markets finished rallying to records after the June 30 ¼ rate hike, that equity investors don't care about higher interest rate as long as the greater fool phenomenon is alive and  well.  But Greenspan didn't.  He continued his gradual approach, didn't flinch at margin rates - which nearly doubled from January 1998 - March 2000, and he juiced the economic engine so tightly that consumer  confidence rose from a calm 130.5 reading in October of 1999 to a record high of 144.7 in January. 

Give the Gradualist Greenspan some credit.  The Dow was topping 11,000 in May of 1999 and is trading  lower today.  It took a plethora of rhetoric and fist waving to accomplish this feat.  Perhaps the Nasdaq is to blame for the Feds nightmares, and the fact that Greenspans containment methods are not effective  in the "new paradigm".   So what can be done?

Essentially nothing can be done by the Fed to control Nasdaq euphoria. Mr.G has cornered himself into an economic waiting game, were he intends to slow the  economy, choke inflation, and keep the equity bubble in check without causing a massive pop.  But when and if the trends of 1999 take flight and stocks continue to boil hotter, Greenspan will rely on the greater transparency of logic to do his dirty work for him.

Logic Kills The Bull

With each new merger, Financial Accounting Standards Board Chairmen Edmund L. Jenkins words are being fretted over:
"There are few areas of accounting that need  improvement more than the accounting for business combinations…using different accounting methods that produce dramatically different financial results, which is confusing to investors."   Chairman Jenkins Testifies at House Hearing

With each ECI report we come closer to unavailing more corporate costs:
"In June 2000 the ECI will include hiring and referral bonuses…beginning in early 2000,  the BLS will conduct a test survey of the incidence of stock option plans across all industries and occupations."  ECI

 With each cheerleading session over endless productivity gains, doubts are being cast:
"There has been no productivity growth in 99% of the economy". The Productivity Illusion, Grants


Many investors are figuring out that the term 'IPO lock-up' in plain English means "holding onto losses".  Others are beginning to understand that if luncheon words from economyst Abby Cohen have more of a market impact than those from Buffett, something must be seriously wrong. 

Inside an economy which epitomizes the word "change", reality is finally catching up to years of Clintonomics, well sculpted economic statistics, and broker infested media dictatorships.  As investors become more aware that stocks are nothing but flutes playing the chimes of happy fools of feather, the bull market will not remain together.

The real fear is not the Fed, but logic.