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By Paul E. Erdman, CBS MarketWatch Last Update: 10:28 AM ET Dec 7, 1999

SAN FRANCISCO (CBS.MW) -- My old pal Alex Trzesniewski of Credit Suisse First Boston is a perennial bull.

But now he has cast all caution to the wind.

"Just in case anyone even had the slightest hint of a doubt," he said this week, "the market once again proved that there is no sense in looking for a downside correction."

He went on to say: "The lesson of recent years is clear. Buying on weakness always works. Selling into strength only works occasionally and for short periods."

Therefore, Alex suggests, we should try to resist the temptation to fine tune the market. "There is just too much upside to be missed by such efforts."

Looking at gold, and applying the Trzesniewski theorem in reverse, one could say that there is no sense in looking for a lasting upside correction in the gold market, and that selling into strength always works.

Gold mirage

It was just a couple of months ago when the gold bugs thought that the new millenium had arrived early. After bottoming out in the $250 an ounce range, gold soared to $325. The Internet gold bugs went nuts. It was, they said, a sure thing that the old peak of $875 would be surpassed before the end of the year, and that the next stop would be $2,000.

I must say that even I got caught up in this to a limited extent, suggesting that gold was now destined to trade in the $300 to $326-per-ounce range.

Well, we were all wrong.

After the Dutch central bank announced that it was selling 300 tons of the stuff, the price in London sank to $276.

Hordes of gold

I guess this announcement brought home the fact that the huge remaining hordes of gold still owned by central banks -- and not just those in Europe, where a temporary limit on central bank gold sales has been agreed to -- are no longer in "safe hands." The market could get blindsided at any moment by Kuwait or Taiwan dumping gold.

But as most of us over the age of 39 should have learned, extrapolating market trends indefinitely into the future is a dicey practice. At some point, the music, good or bad, stops. But are there any real signs in the air that that is about to happen?

If you know the answer, please let me know.

-- Bart Beanfang (, December 08, 1999



THE FED IS PARANOID ABOUT Y2K By JOHN CRUDELE THE Federal Reserve is being driven to distraction by Y2K. Even as the Central Bank has been publicly tightening monetary conditions through three interest rate hikes this year, it has been quietly pumping money galore just in case the Millennium madness being predicted actually does happen.

Michael Belkin, a Fed expert who writes the Belkin Report, says Alan Greenspan has allowed $70 billion in cash to flood the U.S. monetary system in recent weeks and has created something called a "repo option." These options could leave the monetary system awash in another $426 billion in additional emergency cash in the next few weeks.

"This all adds up to the biggest Fed credit expansion ever. This monetary boost is wildly stimulative for the U.S. equity market in the short term," Belkin says, "but will leave equities painfully vulnerable to a crash once the Y2K-related credit expansion is withdrawn in the new year."

In recent weeks the Fed has allowed the nation's money supply to soar and has liberalized collateral requirements for government securities dealers doing business with the Fed.

Last week alone, the government's M-3 money supply figure rose at an annual growth rate of 12 percent. That's more than double the normal growth and far above what the Fed would generally allow.

But the repo options, which were first sold on Oct. 20, are the thing that could pump more money into the nation's monetary system the quickest.

Financial insitutions that buy these options can convert them quickly to cash in a pinch.

Ironically, this liquidity burst comes at a time when the Fed is pretending to be very stingy. The third rate hike of the year that came a couple of weeks ago was billed as the Central Bank's "get- tough policy."

By the Y2K actions really means that the Fed isn't the Scrooge Wall Street fears but really a very generous Santa. And a Santa who's petrified about the New Year consequences.

What the Fed has been doing could help stocks rise nicely over the short term. As I've already said, there are only a few hurdles that could get in the way of bigger bubbles by year end.

But the Fed's generosity in itself could be a big long-term problem for the financial markets.

The bond market would normally rally if it thought the Fed was being diligent in fighting inflation. And that's precisely the message that the three rate hikes should have conveyed.

But bonds have, instead, been very weak despite the Fed's supposed nastiness and rates have risen beyond where the Fed intended.

And that is leading many to believe that investors worldwide are wise to the Fed's Santa Claus ruse.

That's also why the U.S. dollar has been so weak. And why, traders say, the Fed was forced to rig the bond market last week with massive purchases of all maturities of government securities.

The prognosis? The stock market should have a very easy time between now and year's end -- even easier than I first thought.

But there could be trouble later when word gets around about the Fed's dirty little secret -- so don't go spreading this around.

-- (M@rket.trends), December 08, 1999.

Speaking of GOLD, whatever happened to "Cut and Paste" Andy? Did he run with his tail between his legs?

-- (, December 08, 1999.

Thanks Bart.

Now I know that selling my last shares of GE today was the right move.

-- nothere nothere (, December 08, 1999.


Wednesday November 17, 7:10 pm Eastern Time

Fed's Y2K liquidity measures keep markets calm

By Ross Finley

NEW YORK, Nov 17 (Reuters) - While the Federal Reserve has financial markets guessing whether Tuesday's interest-rate increase may be the last for several months, the central bank has taken great pains to quell fears about year-end liquidity.

The Fed has put in place a series of measures to make sure markets work smoothly when the clocks on the world's computers change over to 2000 and investors decide whether to hold their positions or convert to cash because of fears of technology-related disruptions on the financial markets.

New York Federal Reserve Bank President William McDonough affirmed on Wednesday that the Fed had ``gone a long way'' toward addressing year- end liquidity fears that peaked in August and September of this year.

Analysts, economists, market players and primary dealers -- the firms that conduct securities transactions with the New York Fed -- agreed.

``It's certainly been useful -- it's a valuable backstop to have there. The mere fact that the Fed has been so aggressive has been helpful,'' said Lou Crandall, chief economist at R.H. Wrightson & Associates.

Economists also say market interest in the Fed's new liquidity insurance scheme means investors are approaching the issue calmly rather than with panic.

Until the Fed came to the rescue, many investors said they were content to park money in safe, liquid short-term U.S. Treasuries and keep their money away from riskier assets such as stocks or debt from corporations and government-sponsored agencies. If that occurred, it might have led to a liquidity squeeze similar to what was seen last year at this time.

Instead, stocks have rallied and so-called spread products have also performed rather well.

But many analysts added that the bond market's resilience running into the last quarter before the date changes to 2000 is only partly a result of the Fed's preemptive measures.

Crandall cited the concern several months ago in the corporate bond and mortgage-backed markets about widening of spreads -- which indicated a preference by investors for Treasuries, securities which are much easier to turn over in the event of a crisis.

``We've seen liquidity in lots of other markets hold up,'' Crandall said. ``The corporate bond market had this expectation spreads would widen dramatically and they haven't.''

One of the Fed's main tools in fighting Y2K fears is STRIPs options -- securities that allow dealers to cash in the value of the option on one of three maturity dates offered.

This ability to exchange STRIPs for cash readily if needed is the kind of safety net prudent dealers crave as insurance against a year- end liquidity crunch. The December 30 maturity date, two days before computer clocks change over, has met the highest demand. The other two maturities are December 23 and January 6.

The Fed has auctioned five separate offerings of STRIPs since October 20, all of which have generated widespread interest, according to the New York Fed.

``There has been a tremendous amount of interest in the options auctions that have taken place,'' the New York Fed's McDonough said on Wednesday.

Analysts say that with five of seven STRIPs options auctions already behind them -- totaling just over $370 billion -- many market players who were concerned about cash on hand at year-end have already taken out their respective millennium insurance policies and are now sitting comfortably.

Citing strong demand, the Fed on November 4 added two additional STRIPs auctions to the original total of five and said it could add more if there were a further strengthening in demand.

The Fed has twice increased the amount of securities offered in individual auctions, also citing increased demand. But the amounts offered in the November 17 auctions decreased slightly, indicating the market may be more confident about year-end cash flows.

``In terms of why they were recently cut back, I would say it could reflect a number of things -- perhaps some greater confidence in the market about Y2K itself and how it will go,'' said Spence Hilton, associate vice president at the Federal Reserve Bank of New York.

In addition to the STRIPs auctions, the New York Fed also announced in September that it would begin entering into repurchase transactions with maturities up to 90 days, up from the previous maximum period of 60 days.

The Fed has already tied up approximately $30 billion in long-term repurchase agreements, a further reinforcement against liquidity concerns in the repo market.

``The only risk at this point is customers -- and by that I mean mutual funds having large withdrawals at the end of the term,'' said Marc Wanshel, economist at J.P. Morgan & Co. ``But the dealers, I think, are very comfortable.''

Vincent Verterano, head government bond trader at Nomura Securities International, said the STRIPs options provide good insurance for dealers who need extra liquidity toward year-end. But he underlined that insurance doesn't come for free.

``The Fed's going to make a ton of money on this,'' Verterano said. ``Chances are they (the options) are not going to be exercised.''

The interest rate on options is 150 basis points (1-1/2 percentage points) above the Federal funds rate, now at 5.50 percent, but traders see the insurance as cheap.

Before Wednesday's auction, the total amount the Fed had received in premiums was ``just shy of $5 million -- a little bit more with today's sale,'' Hilton said.

Many traders say that the premium is a small price to pay for what amounts to peace of mind running up to the new year.

In addition to the options auctions, The Fed now accepts a broader range of collateral for its open market repurchase operations. And it introduced in September a special facility to ease pressure on smaller regional banks toward year-end.

Despite the fact few banks have stepped forward and used the facility, Crandall and other analysts acknowledged that the very fact the Fed made the liquidity facility available to small banks if they needed it was a positive step forward.

-- (M@rket.trends), December 08, 1999.

"Driven to distraction" eh?

I'll pay the cabbie fare!


-- Y2Kook (, December 08, 1999.

Let's see, London has sold plenty of gold, the dutch SAY they are going to sell plenty of gold and the price has plunged to $282.oo. That ain't much of a plunge. Shouldn't that force the price of gold a whole bunch lower? Time to look at those charts and compare the amount of physical gold mined per year, versus the amount traded per year. Isn't it interesting that a few european central banks merely limiting future gold loaning did more than all the IMF, Swiss and London talk-talk? What does that tell you?

-- Ken Seger (, December 08, 1999.

Ken, it tells me it's time to buy gold.

-- cody (, December 08, 1999.

My feeling is that this is a bad time to be long in equities...some commodities might retain value better...

-- Mad Monk (, December 08, 1999.

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