ContraryInvestor - Market Observations

EC Yi-Yi-Yi...Feeling hot, hot hot. As if you probably haven't seen enough already, let's take a two second peak inside the ECI. As you may know, the wages and salaries component accounts for about 3/4th's of the total ECI calculation. Benefits largely make up the rest. Today's overall ECI index increase was the largest in 11 years. It was largely driven higher than expected by the benefits portion of the index. You know, minor little thing like health care cost increases. This is now two quarters in a row of strong ECI readings. Quite unfortunately, the following graphs are not completely up to date, but clearly show upward directional change from the bottom.

The following table likewise shows the clear acceleration and essentially updates where the above graphs leave off:

	2Q 99	3 Q 99	4 Q 99	1 Q 00

ECI - Total Compensation	3.2 %	3.1 %	3.4 %	4.3 %
ECI - Wages & Salaries	3.6	3.3	3.5	4.1
ECI - Benefits	2.5	2.7	3.3	5.0

Let's be realistic for a moment. Yes, these are strong numbers. Yes, inflation is accelerating. Yes, the Fed is sure to push rates higher until these type of numbers cool down. Intuitively, you know and we know that these numbers understate the real employment cost increases. You have only to look at Microsoft's actions a few days back to appreciate this. MSFT essentially "repriced" a boatload of options for its employees given the significant loss in the value of the stock over the last six months. Forget the dazed shareholders who most surely felt equity dilution from this action, this is an increase in employee costs that MSFT will never show on the books and simply won't find its way into the next ECI number. (By the way, we expect MSFT's actions to become the model for tech companies far and wide as this stock market continues to sniper shoot its former best and brightest. Who says they're not pacesetters anymore?) Wage pressures, inclusive of real items such as stock options, one-time bonuses, etc. are much stronger than the little old ECI number displays. Greenspan's back is against the wall. He had to have known that we would eventually get to this point. And now, for Alan's next trick.....he does have another trick, doesn't he? Doesn't he?

What would be a real surprise to the many would be if the May 3 productivity number proves an utter disappointment to the new era adherents. Clearly employment costs are an input to this number. Jim Grant pointed this out a few weeks back and we echo the comment. The May 3 productivity number may become a perceptual crossroads. At least we won't have to wait to long to find out, now will we.

Oils Well That Ends Well...Yesterday, OPEC President Ali Rodriguez (Venezuela) said that it is unlikely that OPEC will make any production quota changes at their meeting in late June. As you may know, OPEC decided to adopt a "price band" philosophy to keep crude prices between $22 and $28 per barrel. Above $28, they crank up the output. Below $22 and it's time to cutback. Quite a nice little put option to those levered to crude. For the rest of us negatively levered to inflation, maybe not so nice.

Consumption Addiction...Will Greenspan's exercise in raising interest rates become a 12 step program? If the GDP report today is any reflection on that question, the answer just may be yes. Although today's GDP number was a touch less than expected, the growth in GDP was powered by an 8.3% increase in consumption. This is the largest consumption increase number in 17 years. That's right, 17 years. The GDP number probably would have been a blow out had it not been for the fact that US exports were off nicely. (Now you know why the trade deficit is so out of hand.) Furthermore, what does this say about foreign consumption. God forbid they are doing something as un-American as putting their money in the bank.) Lastly, the GDP deflator rose 2.7% and cinched the fact the Fed no longer need anticipate inflation - it's here. The last thing the financial doctor had in mind - excessive consumption accompanied by increasing inflation. Not even the CNBC spin doctors could come up with much to say except "it was expected". Oh really?

Impressionist Artists...With the type of news we received today, it seems kinda funny that the NASDAQ, NDX 100, and many tech specific indexes would bolt higher. Especially given the fact that the SPX and NAZ futures were lock limit down prior to the open today. The tape painters seemed out in force trying to create the "impression" that big tech is simply immune from interest rates and inflation. Clearly there are a number of vested interests in keeping "the chosen" from falling before the end of the month tomorrow. We happened to notice today that Cisco, Sun, Dell, Texas Instruments and even little niche oriented Hispanic Broadcasting were uncharacteristically strong (up plus or minus 5% or more). You have only to look at the top three institutional holders of these stocks to find the common thread. (Hint: They openly brag about adding to their mega tech positions on any downturns.) This specific fund family has big buckets of paint. After all, it's fund holder paint, not their paint. Wall Street lesson of the day: When painting the tape, it's always more fun to use someone else's paint. That way if it spills, it's less painful.

MACD Antics...The NDX 100 and the SPX MACD lines (moving average convergence divergence) appear capable of potential upside breakouts (admittedly, the MACD is swinging wildly for many stocks and many indices.):

If they were to cross to the upside, the real question would be for how long? Our bet would be not long, given the effect of the current month end "support". The following chart of the NDX 100 looks awfully similar. What is clearly also a strong possibility in the case of the NASDAQ, we may be looking at the development of a classic, textbook head and shoulders pattern. The conclusion of the story remains to be told:

If this is still a bull market, a significant upward break in the MACD could mean away we go again. Conversely, beware of false breakouts in bear markets. They are nothing short of confidence (and capital) destroyers.