ContraryInvestor - Market Observations

Gimme Credit...So far this year, we do have to give the Greenspan team a teenie tiny bit of credit for easing off the credit accelerator. Don't get us wrong here, he's not doing the right thing and sopping up a bit of the massive 4Q 1999 injection he let fly. The Fed balance sheet numbers suggest a steady as she goes attitude in the first seven weeks of the year. There have been more than a few repos (like a pretty significant $5 billion in the last few days), but no big expansion of Fed credit. No massive bond buybacks (from the Fed, anyway). No huge acceleration in money supply. Things have quieted down nicely since 4Q. Behold:

The aggregate monetary base has also sheepishly taken a few steps backward. For a while there it looked as though Larry Summers was about to pick up the monetary spigot banner with the announcement of long bond buybacks. A back handed way of injecting liquidity? A potential contravention of Fed rate increases? You may have noticed that the Treasury recently backed off its buyback projection. What was a plan of buying back $30 billion has been toned down to $10 billion. We do have to give the Fed a bit of credit for knocking off running the hardcore, Fed controlled, credit machine at top speed. Depending on conditions in the financial markets, we'll have to see how long this all lasts.

Isn't it just amazing that almost precisely when the Fed tones down on money/credit creation, that equities start to gasp for breath? To us, it's not amazing at all. It's perfect confirmation that excess money and credit are needed to power the broad stock market higher. It speaks to the fact that institutions and individuals are relatively fully invested. It speaks to the fact that individuals cannot fund stock purchases from private savings. It suggests 401(k) balances are already heavily invested in equities. As you know, the current market machinations are being experienced with the cut back in Fed credit. Can you imagine what would be happening if credit creation outside of the direct control of the Fed system was also stagnating. God forbid. At some point we are going to find out what happens when credit creation beyond current direct Fed control is cut back. At that point, investors may even begin addressing an "Old Economy" concept called risk. Just imagine.

Under Pressure...Preparing for a (soft) landing? Although Greenspan may have taken his foot off the accelerator and is timidly throwing 25 basis point darts at the so far impenetrable balloon, government spending is a counterbalancing weight. It was reported last week that 4Q government spending grew at the fastest rate in 14 years. The fact is that government spending has been growing increasingly faster on a quarterly basis over the last 4 quarters. See for yourself:

In fact, the last time we saw a four quarter consistent up tick of increasing magnitude per quarter was the year before the last Presidential election. What a coincidence. It should be interesting to watch what happens over the next few quarters as the push-pull shoving match between higher interest rates and increasing government spending plays out. As you know, higher rates accompanied higher spending in 1994. After the "stealth bear" market of 1994, we began the mega stock mania melt up leaving us where we are today. Increasing government spending should have a much different effect on the current economy as it accompanies a fever pitch, stock market driven, wealth effect that already has the economy on fire. The recently revised 6.9% GDP number clearly is a function of these two forces. Going into the election, just how much do you really believe government spending will back off? (Final answer: Not much.) If stocks do not continue to cool off, Greenspan's rate increase "project" may be far from over.

Without a doubt, we are witnessing economic growth acceleration in 1Q. Today's minor back off in the consumer confidence number is merely a ding in the body armor of faster economic growth. Helping the cause are e-refunds.com. Thanks to Ed Hyman and the folks at ISI for the following:

TAX REFUNDS	Jan 1 - Feb 18

	AMOUNT (billions)	Y/Y %

1997	$ 26.0	7 %
1998	$ 29.4	13 %
1999	$ 35.1	19 %
2000	$ 43.2	23 %

The fact that more people are filing electronically is probably helping the acceleration in refunds this year. On top of e-filing, electronic direct deposit of refunds is undoubtedly also a factor. As you would imagine, this money is probably burning e-holes in the pockets of e-consumers. E-gads, God help the bonds when 1Q GDP is reported.

Accountability...You may remember it was no more than three months ago that "New Economy" investment strategists such as Tom Galvin and Joe Battipaglia firmly predicted that the market would be at 13,000 by March of 2000. We wonder what will happen the next time they grace the CNBC studios with their perennial bullish forecasts? Do you think Hanes and Kernan will treat them as they have treated the bears in the past? Might they possibly ask, "Isn't that what you said last time?" Don't count on it. Nonetheless, the "new age" prognosticators are already revving up for the good times ahead with predictions for Dow 13,000 by June. Yeah, that's the ticket. Even Abby reiterated her "broken clock" mantra of stocks currently being 5% undervalued. We're just wondering when she's going to go out on a limb and call equities 6% undervalued? We know it's a stretch, but we keep hoping for an aggressive call. You go, girl.

Where Do We Go From Here?...As you know, month end and quarter end are always a "special time". Investment strategists reflect on the month ahead in quiet contemplation. Government economists begin the important task of tallying up statistical data. Administrative staffs begin their peaceful ritual of final month end account report preparation. And all the while, portfolio managers far and wide frenetically jam their largest portfolio positions higher in a blizzard of trade tickets and frantic calls to market makers.

It's a tough call from here. The action in the tech issues is nothing short of manic. Semiconductor stock volatility is simply mind boggling. Individual moves in stocks like MU and RMBS are heart stopping. We see it going either way. As you know, we are embarking on the final month of the quarter. Tech is clearly all that matters. We could have yet another levitation of the tech sector by those ethical portfolio managers who "need" to show they were in the winners for the quarter end (forget where they bought them or what they paid). If so, they will need to do it in the next few weeks. They can't wait until the last few weeks of March as prices may have spurted again. Seems to be that for the quarter end window dressers, it's now or never. It seems hard to imagine that many of the groups moving within tech can go any faster. The semi equipment crowd, many of the chip makers, the optical stocks, etc. We're seeing doubles and some triples YTD.

Alternatively, Greenspan gets to prove whether he is a man or a mouse at the Fed March 21 soiree. In HH testimony, Greenspan seemed to clearly desire a slowdown in consumption and the stock market that is driving it. Was another "buying opportunity" dip all he really meant? If he is serious about slowing the speculation, he'll pop for 50 basis points. We aren't about to make that bet yet, but without some stern action and commentary from the fearless monetary leader, the NAZ is on a 5K trajectory plain and simple. The rest of the market is another matter entirely. But who really cares about anything as unexciting as non-technology stocks anyway?

We're at another crossroads (for what seems like the millionth time in the past few years). Tech seems the last bastion for the bull. We're just going to have to see how much longer and how much higher tech stocks can go. Will what's shaping up to be shoddy 1Q tech earnings end the frenzy? Don't count on it.