ContraryInvestor - Market Observations

It Ain't Over Till It's Over...The Greenspan Follies are destined to continue their extended run on Wall Street. As you know, the next performance is in May. Unfortunately it's the same act over and over again. It's now to the point where the performers are simply being ignored. Individuals in the audience are just too concerned with the actions of other members of the audience to be bothered with noticing the Central Bank song and dance routine on stage. The Fed Funds futures know the song and dance routine by heart. Have a look:

Month	Fed Fund Futures Rate Anticipation	Date of FOMC Meeting

April	6.02 %	None
May	6.13	5/16
June	6.25	6/28
July	6.39	None
August	6.42	8/3
September	6.53	None
October	6.61	10/3
November	6.67	11/15
December	6.74	12/19

The Fed's timid actions haven't even put a dent in the side of the ship, let alone landed a bomb on the deck. Here's a fun fact - never since 1928 has the Fed raised interest rates during October in an election year. We fully expect the Greenspan team to uphold "old era" tradition and take a pass at the October meeting this year. Also, given the political sensitivities of the current administration, we'd bet August is also a Fed no-show. That means the G team has but two more meetings to get their point across. After all, with the price of oil receding (temporarily?) and the major indices either at or destined for new highs, do you really expect economic activity to cool down in the months ahead? Of course you don't. You know Marty Zweig's old saying, "don't fight the Fed". Taking literary license we add the following to Marty's market truism, "don't fight the Fed when you can simply laugh at them". After all, the only violent actions that count these days are those of upward stock price movements.

Bondlands...Isn't it amazing how we can have the Fed raise short rates and simultaneously see the rest of the yield curve rally? Stock market rallies on Fed moves are now passé. In fact after Wednesday and today's NASDAQ blast off, we had to check and make sure that the Fed hadn't raised rates again. After all, what other positive news could have accounted for the mid-week NASDAQ upswing? (Oh yeah, it must have been the positive news out of Micron. We simply forgot amid all those cogent MU analyst upgrades to super duper strong buy. And this time they reeeeeeeally mean it.) We're sure it has not escaped your attention that outside of Treasuries, the rest of the bond world is struggling mightily. In three short months, the spread between Treasuries and low rated corporate bonds has widened 80 basis points. In fact, spreads between Treasuries and almost everything else are gapping open. Day by day. Month by month. Basis point by basis point. This suggests one of two things. Either the economy is in real trouble directly ahead, or the Fed is restricting liquidity. You know the routine, when macro liquidity is becoming in shorter and shorter supply, it's the money and debt markets that show the first strains. (Don't worry, it eventually gets around to the equities. Especially the leveraged portion of the equity market.) You noticed the currency and bonds give way in Asia long before the equities simply imploded. Same in South America, same in Russia. Are we next? Most assuredly not to the extent of these emerging market experiences, but it does appear there is some restriction of liquidity brewing. The bond market players have acute sensitivity to liquidity trouble. Most equity participants are too far gone to notice until it's already too late.

Could this really be the beginning of a real problem, especially for Fannie and Freddie? We doubt it, although we're not saying that equities and bonds won't have a tough time ahead. The Treasury may not want to endorse the mega balance sheets of these two entities, but there is absolutely no way they could be allowed to fail or become questionable credits as the mortgage market in the US would blow up. What do you think that would do to real estate prices?

Splitsville...Fannie and Freddie's balance sheets are expanding almost as fast as shares outstanding at Cisco. Wonderful CSCO has been adorned with an additional $52 billion in market cap over the last two days because it "enhanced shareholder value" by splitting its stock. For those of you who are counting, that brings the YTD market cap increase for Cisco to $167 billion (or roughly $1.85 billion per day or $77 million per hour 24/7). That's simply not fast enough compared to their cohort in madness, Intel, who is up $201 billion since the 1/1/00 opening bell. Oracle is simply a distant third with a YTD increase of $87.4 billion. Add those together and waddya got? $455 billion. Or almost 3 years worth of total mutual fund inflows in this country. Not that was easy, wasn't it? We can hardly wait for second quarter performance.

As we have mentioned far too many times, in a bull market, price is all that counts. Conversely, in a bear market it's all about units - number of shares for sale. Price is almost an afterthought when the masses are headed for the exits. With 6.9 billion shares now outstanding at Cisco, our advice to Cisco shareholders during the next bear market is simply to "take a number and we'll call your name". It's going to be a long line. You know the old saying. "Sell? To who? You were the buyer."

Listen Up...The chances are pretty good that Tim's comments on the chart are right on the money. Any institutional manager holding cash or not in "the stocks" has been forced to play before quarter end. We'd make the strong bet that most of the windows have been dressed. With the speed this thing is moving, who wants to wait until next week? Of course a few more skyrockets would not surprise us, but as Tim speculates, it appears that the "easy money" for this rally has been made.

Earnings season approaches. Fred Hickey at The High Tech Strategist predicts a good number of number misses. Will it matter, or will the anal-ist cheerleaders be able to drown out the fundamental questions with their loud buy reiterations? At this point the spin is incredible, but then again, where is the constituency for telling the truth? Karl Marx was wrong. Dead wrong. Religion is not the "opium of the people", it's the stock market.