F.GEMS: MICROS to GO!...

[Francois+Goelo]

***¶***Weekly Economic Indicators & Second Guessing Grenspan....

WEEKLY UPDATE FOR: June 23, 2001 by Bob Bose...

Prior Week in Review:

Financial Market Highlights:
============================

                        06/22/01     06/15/01     %Change 
  
 S&P 500                 1,225.35     1,214.36       +.91% 
 Dow Jones              10,604.59    10,623.64       -.18% 
 NASD Comp               2,034.82     2,028.42       +.32% 
 Russell 2000              488.65       495.13      -1.31% 
 SOX Index                 586.31       608.92      -3.71% 
 Value Line                386.35       391.26      -1.26% 
 MS Growth                 545.49       548.30       -.51% 
 MS Cyclical               541.26       538.97       +.43% 
 T - Bill                    3.36%        3.43%      -7 BP 
 Long Bond                   5.58%        5.67%      -9 BP 
 Gold - Oz-Near Month     $273.30      $272.30      +$1.00 
 Silver - Oz-Near Month     $4.30        $4.40       -$.10

Economic News:
==============

Last Week's Reports Very Consistent And Quite Positive
Nonetheless, FOMC Very Likely To Lower Rates Once More
No Surprise - We Still Believe Second Half Recovery Best Bet


*May Housing Starts eased -.4% to 1.62 miliion rate
April revised upward to +2.3% and 1.63 million rate
May Housing Permits rose +2.1% to 1.62 million rate

*Leading Indicators for May rose +.5% to 109.3 - Also
Coincident Index unchanged, Lagging Indicator eased -.2%

*Jobless Claims fell -34,000 to 400,000 - Four Week
Moving Average eased -2,750 to 422,500

*April Trade deficit down to $32.17 billion from upwardly
Revised March level of $33.08 billion

*Philadelphia FRB Index improves to -3.7 in June from -8.8


We liked last week's reports. First, the easing of May Housing
Starts was only an "easing" given the revision to the prior
report. And, while longer term readers know we are often quite
skeptical of this report in the winter months, by now the report
is much more accurate and indicates that housing activity is run-
ning at a very high level. In addition, permits are also at a
very solid annualized rate. The clear inference is not only
that the important housing sector is likely to stay healthy for
the foreseeable future, but there is the implied message that
consumer confidence has at least stabilized.

The other major forward looking report, leading indicators, was
also quite positive. The +.5% improvement was not only much
larger than consensus expectations, but it was broadly based.
In other words, there wasn't a large change in stock prices that
can sometimes have a distorting impact.

In addition, it was the second consecutive monthly gain, and the
third in the last six months to a level that is the highest in
six months. And, the coincident indicator was flat, which is
probably a fairly accurate depiction of second quarter economic
activity, and the lagging indicator continued to fall - but at a
low rate. So, the "numbers" were consistent internally, and are
very supportive of our view for a late second half economic
recovery - if not sooner.

But the real issue is not whether or not we liked the data, but
how the Federal Open Market Committee (FOMC) interprets it at
their upcoming two day meeting. Our suspicion is that they will
like the data as much as we do, but yet because they have backed
themselves into somewhat of a box, they will nonetheless cut
rates one more time - as an "insurance policy."

In our view, now that they have resurrected the "Greenspan Put",
no change in rates would be a major negative for stocks, and
therefore in their view on consumer spending through the "wealth
effect" - the connection between changes in net worth and the
impact on consumer spending. But, they would not want to raise
inflationary concerns either.

So, a pragmatic solution would be a change of only one quarter
point, leave the bias toward lower rates in place, and through
the press release "hint" that they will likely "step back" to
await the impact of prior rate cuts. If they lower rates one
quarter point, and remove the bias, a sensible move in our
opinion, they would be signaling that they are very likely
finished lowering rates for this cycle - and are at least mildly
concerned, as we are, that there is some, albeit currently modest,
inflationary risk given their prior aggressive policy actions.

One other point that should not be forgotten, is that the tax
refund checks will be mailed shortly. Clearly this fiscal
stimulus will be part of the FOMC's policy deliberations, and
would also argue for modest current moves, and a "wait and see"
attitude. And, as we are getting close to the end of the second
quarter, and by definition the end of corporate "confession
season", and the stock market has not been under the pressure it
was in the first quarter - the FOMC may have some room to be
less aggressive.

Our "economic preference" would actually be for no action at this
meeting, but maintain the bias - remember we, even if no one else
does, have some concerns that the FOMC has been too aggressive in
lowering rates. However, our "money manager" preference is for
a quarter point cut, leave the bias in place, but hint that a wait
and see approach is quite likely.

The least desirable action, in our opinion, would be a half point
cut, even assuming the bias would be removed. In our view,
furthering the aggressive policy to date is not necessary, and
unwise. The stock market might "pop" near term, but longer run,
in our view, the risks to financial asset prices would have risen
materially as inflationary pressure would be likely to build.

Root for a tortoise policy. Stay tuned !



Current Weekly Calendar of Economic Data:
=========================================

Monday: Existing Home Sales

Tuesday: New Home Sales, Durable Goods, Consumer Confidence, FOMC Meeting

Wednesday: FOMC Meeting Concludes - Announcement

Thursday: Jobless Claims

Friday: Q1 Final GDP, Chicago Purchasing Managers' Index