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Having Whine With Their Pleas: Investors Refuse to See the Good in Fed Action

A strategist says the Fed did go pretty far, even if investors were unhappy. Plus, beware the VIX.
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SAN FRANCISCO -- If 2000 has proved nothing else, it's that

Gordon Gekko

was wrong about greed being "good." That's been the case pretty consistently since March 10, and again today when the

Federal Reserve's

decision to leave interest rates unchanged sent stock proxies careening from morning highs.

After reaching 10,784.58, the

Dow Jones Industrial Average

closed down 0.6% to 10,584.37, while the

S&P 500

closed down 1.3% to 1305.60 after trading as high as 1346.43. The

Nasdaq Composite Index

, meanwhile, shed 4.3% to a 52-week low of 2511.70 vs. its intraday best of 2696.61.

Obviously, many investors were disappointed the Fed didn't cut rates, but the central bank did alter its bias from one focused on the risks of inflation to one concerned about "conditions that may generate economic weakness in the foreseeable future," according to its

statement. Realistically, the about-face on the bias was the best thing Wall Street could have hoped for today, given that the Fed hasn't eased when heading into an


meeting with a tightening bias since at least 1987, according to

Aubrey G. Lanston & Co.


Yet, disappointment abounded because many investors are proving to be petulant children who complain the

G.I. Joe

with the kung fu grip isn't sufficient when they were expecting the super-deluxe armed-to-the-teeth model (

Alan Greenspan

now being the "uncle" whose presents can never live up to

the gifts he provided in 1998).

"It's a little puzzling to me," Peter Canelo, U.S. investment strategist at

Morgan Stanley Dean Witter

said of the market's reaction to the Fed announcement. "The Fed went further than going to neutral: They said, 'We're ready to ease and it will probably happen in January.' " (Yet market players sulked, refusing to play nice or share.)

The economy is "clearly softening but nothing looks like it's falling off a cliff," Canelo said, noting strength in the housing market. Additionally, monetary contraction is "no worse" today than in 1993-94 and durable goods orders (excluding defense) are stronger now than at a similar stage of what would prove to be a soft landing in 1995. Thus, he believes the ease- today-to-avoid-a-recession tomorrow argument is an overstatement, bordering on hysteria.

Additionally, Canelo noted the Dow remains within 10% of its all-time high, suggesting today's decline had more to do with year-end considerations than the Fed. "Investors continue to fear the Nasdaq will go down until the end of the quarter because nobody wants to show they were dumb enough to hold tech," he said. "We're now in the grip of window-dressing, and

fund managers want to pretend they never owned tech."

The good news for those long is that Canelo foresees managers switching back into tech once the New Year arrives. He also believes expectations for 14% growth in tech earnings next year are overly pessimistic -- he's looking for high teens -- and says current valuations in the sector are "absurdly low."

Specifically, the price/earnings-to-growth (or PEG) ratio of the S&P 500 tech sector is now under 1.4 vs. around 1.5 times for the overall market, whereas growth groups normally trade with a 15%-to-35% premium, the strategist noted. Health care, for example, is trading at a 33% PEG premium to the S&P overall, he said, calling 2000 a mirror image of 1999, when investors dumped drug stocks and were buying techs and "didn't care how expensive" they got. "That's not going to end until we get a inflection point in tech and the nearest one before a Fed ease

in January is the end of the quarter."

Finally, Canelo predicted the S&P 500 will reach 1575 in the first half of 2001 and end the year around 1600. He sees a similar pattern of a strong first half and a flattish second half for the Comp, predicting it will rise near 3500 and then retreat to "build a base for a larger rise above 4000 in 2002."

Admittedly, I haven't followed Canelo's work as closely as I have some other gurus, but the bad-news side of this is that he's been pretty bullish throughout the past year. Coming into 2000, he had year-end price targets of 11,500 for the Dow and 1425 for the S&P but in mid-January raised them to 13,000 and 1620, respectively, according to



The worse news, for those long, is that as much as it may have seemed like apocalypse now on Wall Street today, the

Chicago Board Options Exchange Volatility Index



2.3% to 30.73. That suggests we didn't even approach a point where enough fear accumulated to say a sustainable bottom is in place. Similarly, while the CBOE's equity put/call ratio rose to 0.68 from 0.51, it's still a long way from extreme levels, noted Peter Green, market analyst at

Gerard Klauer Mattison


Until sentiment numbers get "really extreme," it's premature to declare any type of capitulation, Green said. While not predicting such a downturn, he suggested put/call ratios, particularly, "may pick up tomorrow because of a lot of accidents after the close," including warnings from

Foundry Networks



Vishay Intertechnology


, as well as disappointing earnings from

Jabil Circuits



Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.