GreenSpan Hangs Tough        Apr.  2001 - Issue 8

Earlier this year we wrote 'The tale of two indices' in which we commented that the bursting bubble did not only relate to the Nasdaq, but also the S&P 500, the Dow and even the mighty Dollar.

Since that update, the S&P 500 blue chip index has joined the Nasdaq in being officially a bear market i.e. a 20% fall or more. However, to date, the Dow Jones Industrial Average has not. So what is so important about the Dow?

In this new economy era, one might be tempted to suggest that the Dow has become less relevant in that it only consists of 30 stocks.

Aside of being a price weighted index, rather than the Nasdaq and S&P's market capitalisation, the Dow does share a decent smattering of Tech heavy weights with the other indices, such as Intel, Hewlett Packard, IBM and Microsoft to name but a few.

The fact remains however, that to most people the Dow is the market. Therefore it is psychologically very important indeed. Furthermore, investors have a thing about round numbers, so the 10,000 level of the Dow has become very important - Does it offer a support level or a resistance level?

Thus far the judge is still out. From its all time high of 11723 reached back in January 2000, the Dow has penetrated the 10,000 levels on three occasions, each time bouncing back above it. The latter fall ended at the 9389 closing level on 22/3/2001, just about making the 20% bear market fall referred to above, before it rallied once more. In fact it avoided its worst 1st Qtr since 1960 by a mere 50 points.

Goldman Sach's guru and perma bull, Abbey J Cohen is calling for a year end Dow level of 13,000.

Uncle Al, the chairman of Federal Reserve has certainly done his bit, with a 200 basis point interest rate cut so far this year, with half of it coming between Fed meetings, usually unheard of. One's immediate reaction should be 'Why is Al panicking? Particularly as the recent economic data does little to support his actions, in that industrial production has ticked up, housing starts are still strong and inflation is picking up.

His main objective of course is to spur borrowing by both consumers and companies, thereby increasing demand for goods and services, to speed up the economy. Alas, with consumer credit at historic levels and excess capacity throughout the world, it is highly unlikely that lower interest rates will do much to stimulate the economy, nor the Dow come to that.

We repeat a statement from the earlier newsletter: "The nature of bear markets is that the direction is down, interspersed with short, sharp rallies. These rallies are made to separate the largest amount of money possible from the majority of investors. We do not expect to be amongst this majority".

Al will keep cutting, albeit that the long bond yield is sniffing higher inflation. Likewise, the dollar didn't like the recent ½ point cut. The Fed funds rate is now at 4.5% and below the ECB's 4.75%. The saying goes that 'Every dog has his (or her) day'. In this respect we feel that history will identify Abbey with the 13,000 call. We would suggest that it will be many a year before this level is reached and predict that later this year 7500 is more likely.