F.GEMS: MICROS to GO!...

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

WEEKLY UPDATE FOR: January 27, 2001 by Bob Bose

Prior Week in Review:

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

                        01/26/01     01/19/01     %Change

S&P 500 1,354.95 1,342.55 +.92%
Dow Jones 10,659.90 10,587.50 +.68%
NASD Comp 2,781.30 2,770.42 +.39%
Russell 2000 498.69 488.09 +2.17%
SOX Index 692.47 719.51 -3.76%
Value Line 414.12 407.13 +1.72%
MS Growth 576.58 576.36 +.04%
MS Cyclical 513.10 502.76 +2.06%
T - Bill 5.04% 5.08% -4 BP
Long Bond 5.64% 5.55% +9 BP
Gold - Oz-Near Month $265.20 $264.90 +$.30
Silver - Oz-Near Month $4.83 $4.78 +$.05


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

Last Week's Reports Weaker On Balance - Odds Shift
Very, Very Close Call - But Half Point Cut Likely
But Removal Of Easing Bias Then Also More Likely

*December Leading Indicators fell -.6% - See Below

*Existing Home Sales in December drop -7.4% - Partly
Weather Related

*Jobless Claims rose +12,000 to 316,000 - Four Week
Moving Average fell -13,750 to 336,000 - Lowest
Level since mid-November

*Chairman Greenspan's Senate Testimony - See Below

*4th Qtr Employment Cost Index rose +.8% - See Below

*December Durable Goods Orders rose +2.2%


As longer term subscribers know, our view had been that
a quarter point cut this Wednesday and the maintenance of
the Federal Open Market Committee's (FOMC) bias to ease
was the best bet, although a close call. But two important
reports last week, in our opinion, now make a half point
cut, and the removal of the easing bias, now a somewhat more
likely outcome. The economic impact between the two outcomes
is probably insignificant, past the end of the week, but a
half point cut will be more financial market friendly.

The Leading Indicators Report was particularly weak, as a
-.6% drop is a large change, and was bigger than expected.
In addition, there is noise in the report as there were
benchmark revisions, and, of course, December weather was
generally more disruptive than usual, so the decline may be
overstated. However, the headlines still read "Worst Since
1996" and the third monthly decline in a row. And, as every
first year economics student "knows" - three declines in a
row imply recession. In other words, the report, rightly
or wrongly, will be interpreted as accelerating weakness -
the implication being that strong action is needed in the
form of a half point rate reduction.

The second important report was the Fourth Quarter Employment
Cost Index (ECI), which includes benefits as well as wages
and salaries, so it is a broader measure than the Average
Hourly Earnings available in the monthly Labor Department
Report. And, the "trend" is positive.

Second Quarter +1.0%
Third Quarter + .9%
Fourth Quarter + .8%

The FOMC will like the numbers as the implication is that
cost pressures eased, almost instantly, as the economy slowed
during the second half. If there are still a few Phillips
Curve advocates at the FOMC (i.e. those that believe in a
direct trade-off between lower levels of unemployment and
rising wage pressures) they will now likely disappear into
the ornate paneling.

Granted the Jobless Claims Report was stronger than expected,
as was Durable Goods, but Home Sales were soft. And, these
reports will simply not carry the influence of either leading
indicators or the ECI. So, last week's reports tip the odds,
even as some were disappointed that Chairman Greenspan in his
Senate testimony did not telegraph the FOMC's intentions.

But, there was, nonetheless very, very important information in
his testimony that was largely overlooked, even though it too is
supportive of a half point cut. Specifically, his comments re-
garding productivity, in relation to budget surpluses, were very
important, and revealing. A few quotes should make this clear.

"Between the early 1970s and 1995, output per hour in the nonfarm
business sector rose about 1-1/2 percent per year, on average.
Since 1995, however, productivity growth has accelerated markedly,
about doubling the earlier pace, even after taking account of the
impetus from cyclical forces. ... was an important test of the
extent of the improvement in structural productivity." From
Chairman Greenspan, this is a very important point.

He goes on to note that " ... neither the OMB (Office of Man-
agement and Budget) nor the CBO (Congressional Budget Office)
projects productivity to continue to improve at the stepped-up
pace of the past few years. Both expect productivity growth rates
through next decade to average roughly 2-1/4 to 2-1/2 percent per
year -- far above the average pace from the early 1970s to the
mid-1990s, but still below that of the past five years."

The point here is that Chairman Greenspan is more optimistic
than either the OMB or CBO, so in his view budget surpluses would
build faster than currently projected. So, he favors a tax cut.
Fine. But, the implication is also that economic growth can be
higher than now currently projected without any buildup of
inflationary pressures - and the confirmation that Chairman
Greenspan believes that, and strongly, really is good news no
matter what the actual outcome on Wednesday.

Net, net our view is now that the odds favor a half point cut, as
the economic reports "allow" for it, even though it remains a
very close call. But, much more importantly, from our viewpoint,
was that Chairman Greenspan has now fully "bought into" the
secular, rather than only cyclical, improvements in productivity.
The impact on monetary policy going forward is profound, and
beneficial for long term investors.

Stay tuned, though, as the long term is clearly made up of a
series of short terms. !


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

Tuesday: Consumer Confidence

Wednesday: FOMC Meeting Ends, Chicago Purchasing Managers' Index, New Home Sales

Thursday: Jobless Claims, Construction Spending, Nat'l Assn. of Purchasing Managers' Index, Personal Income/Spending

Friday: Labor Dept. Employment Report, Factory Orders


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