Boats & Stocks

[Francois+Goelo]

>>> Prepare for Interest Rates going UP!!...

WEEKLY UPDATE FOR: March 23, 2002 by Bob Bose...

Prior Week in Review:

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

                        03/22/02     03/15/02     %Change 
  
 S&P 500                 1,148.70     1,166.16      -1.50% 
 Dow Jones              10,427.67    10,607.23      -1.69% 
 NASD Comp               1,851.39     1,868.30       -.91% 
 Russell 2000              502.39       499.12       +.66% 
 SOX Index                 590.42       594.19       -.63% 
 Value Line                376.34       376.52       -.05% 
 MS Growth                 598.91       600.44       -.26% 
 MS Cyclical               571.74       591.03      -3.26% 
 T - Bill                    1.80%        1.82%      -2 BP 
 Long Bond                   5.81%        5.78%      +3 BP 
 Gold - Oz-Near Month     $297.60      $290.10      +$7.50 
 Silver - Oz-Near Month     $4.54        $4.49       +$.05

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

Another Week Of Data Supporting Our Forecast
Recovery Underway - But Likely Softens After Spurt
Outlook For Financial Assets Remains Positive


*Trade Deficit rose to $28.5 billion in January

*FOMC leaves rates unchanged - Removes bias

*February Housing Starts rose +2.8% to 1.769 million
Highest annualized rate since December 1998

*February Housing Permits rose +1.8% after Jan +4.1%

*Jobless Claims fell -12,000 to 371,000 - Four Week
Moving Average rose +2,500 to 379,000

*February Consumer Prices rose +.2% - Ex volatile
Food and Energy +.3%

*Leading Index in February unchanged - Coincident +.2%
Lagging -.3% - Coincident/Lagging Ratio Up - See below

*Philadelphia FRB Index somewhat soft


Most of last week's reports were fairly good, and
supportive of our outlook that it won't be a straight
line recovery. What appears to be increasingly
likely is a stronger initial surge than we had origianlly
expected, and then a slowing - which we had forecast.
As we have repeatedly stated, this is not a bad
outlook for financial assets.

To no one's surprise, the Federal Open Market Committee
(FOMC) left interest rates unchanged last week, and as
most of us expected, they removed their official
bias toward lower rates. In their official view, the
risks are now equal between recovery and a slip back
toward recession. Practically, though, the risk is to
the upside, but an institution like the FRB simply doesn't
do an abrupt "180".

In our view, the most likely scenario is a rate increase
at the May meeting, perhaps a half point. Or, alternatively,
a quarter point with an official risk assessment (bias) to
the upside. The "driver" for such a decision should be
fairly strong first quarter GDP. But, if we are right,
then the policy issues get more interesting.

If the leading indicators are right, then our "slowdown
after spurt" scenario should play out. If true, then
the FOMC will certainly not want to "reinforce" a slowdown
outlook by raising rates too aggressively. While they deny
it, they do take the financial markets into account, and
an agressive rate policy as the second quarter slows would
raise fears of a "double dip" back into recession. Clearly
there is a lot of time until the early May meeting, but
some increase at that meeting is virtually guaranteed -
in my opinion.

After that it depends upon the data. If the FOMC raises
rates a quarter point in May, they can just continue to do
so for a while, without, in my opinion, raising the risk of
a slip back into recession. The real problem will arise if
productivity data worsens, or price increases accelerate.
But for now the outlook remains positive.

Against this backdrop, it appears that the corporate
profit outlook is beginning to improve. While it is still
very, very early in the quarterly "pre-announcement"
period, for the most part no news is good news. Clearly
there will be exceptions, but if estimates in the
aggregate hold, or get marked up during the second quarter,
based upon good first quarter numbers, then the stock
market can do well even as interest rates move up.

Overall then, we continue to like both the economic outlook,
and the risk/reward ratio for the stock market. As we noted
last week, it won't be straight up. But it should be positive.


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



Tuesday: Durable Goods Orders

Wednesday: New Home Sales

Thursday: Jobless Claims, 4th Qtr Final GDP,

Friday: GOOD FRIDAY - STOCK MARKET CLOSED