How Fast Is Too Fast?

Growth figures may be out of whack because of Y2K-related stockpiling (not of the freeze-dried foods sort). Also, which losers should be dumped?
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Too Fast for Love (or Alan Greenspan)?

If you thought

today was somewhat soporific, just wait until tomorrow -- or Wednesday for that matter. Certainly, some individual stocks and groups will experience earnings-related drama, but the big picture is likely to remain about as potent as the

Atlanta Braves

offense until Thursday's

Employment Cost Index

and initial third-quarter


reports. (No word on whether a change of venue will help the Braves.)

While ECI is a known favorite of

Federal Reserve


Alan Greenspan

and thus

intently watched, the GDP is garnering an unusual amount of notice this time around.

The consensus estimate is for third quarter GDP growth of 4.6%, up from 1.6% in the second-quarter. Acceleration to that degree is sure to grab headlines and the attention of traders, economists and central bankers alike.

Stephen Slifer, chief U.S. economist at

Lehman Brothers

, recently upped his forecast for third-quarter GDP to 5%, prompting Jeffrey Applegate, chief equity strategist at the firm, to revise



Growth of 5% is "too fast" for the Fed, Applegate wrote in a research report published Friday. "We're now looking for the Federal Reserve to tighten next month, an event we think the markets have already priced in. With this new forecast, we're also expecting less of a bond rally than previously."

Still, the strategist remains true to his bullish form. After the Nov. 16 meeting "we think growth will slow enough to keep the Fed on hold," the strategist said. "If we're right ... it is entirely conceivable that the bond yield peak was 6.36% on

Oct. 21 and that the stock market low was

Oct. 15 when the

S&P 500

slumped to 1247.41" and the

Dow Jones Industrial Average

slid to 10,019.74

Phil Orlando, chief investment officer at

Value Line

, also thinks equities have bottomed. Bonds are "a little trickier," he said, foreseeing the 30-year yielding 6.40% to 6.50% in the near term vs. today's close of 6.35%.

The trick is how the market absorbs this week's economic data. "Given the fact third- and possibly fourth-quarter GDP are going to run hot, investors and the Fed need to understand that the strength may be aberrant," Orlando said. "We have seen with Y2K rapidly approaching a temporary shift from 'just in time' to the 'just in case' business model."

In other words, "stockpiling" by some companies has the potential to increase GDP, according to the market watcher.

On Oct. 15, the

Commerce Department

reported business inventories rose 0.3% to $1.1 trillion in August, slightly ahead of expectations. However, sales gained 1.3% to $845.2 billion, bringing the inventory-to-sales ratio -- or the amount of time it would take to deplete stockpiles -- down to 1.32 months. That record low suggests that if companies are trying to stockpile ahead of Y2K, they're having trouble keeping product in house because sales remain robust.

"I don't know how market psychology is going to react" to robust GDP data, Orlando said when I asked the inevitable. The Fed is "done" tightening, he believes, acknowledging it is a risky call. But a bigger risk may be "investors aren't smart enough to understand we're not looking at sustainable growth," he said (no doubt referring to investors




Greenspan and the Fed are the "ultimate arbiters," but a key to investor reaction will be how economic "gurus" react to the data, Orlando continued. "If they're smooth and relaxing and say this is temporary," the markets will react favorably.


Among the experts whose outlook Orlando cited as being key is Maury Harris, chief economist at


, who said "final demand" is more important than inventories.

Even if final demand suggests "people wanted to buy more stuff," Harris said (using the kind of lingo economists are so famous for), the issue is "what are they going buy? If the Fed were to see a situation where durable goods spending and housing weren't all that strong, they would discount other strength. That's what we really have our eye on: Something non-Y2K reliant." (FYI, durable goods orders for September are reported on Wednesday.)

Admitting "it's a close call," the economist does not believe the Fed will raise rates in November. His outlook is based on a belief the housing market is "going to come down a lot more," judging by a slowdown in new mortgage applications. Today's report that existing home sales fell 2.1% to 5.13 million units in September also supports that view.

Additionally, "you're going to find the price index

for gross domestic purchases probably won't go up very much and employment costs probably won't go up very much either if my calculations are correct," he said.

IRS Alert

So you say you want tax-loss selling candidates? Boy, have we got candidates for tax-loss selling, thanks to Paul Lieberman, an analyst in the equity derivatives research group at

Lehman Brothers


The extensive table below lists 70 names identified by Lehman in a recent report, the criteria being the stock must be down at least 40% year to date through Sept. 30 and have increased turnover, "which suggests the trend will continue," Lieberman said in an interview today.

Rather than looking for buying opportunities created by fund managers selling losers, as was the focus of a

recent column, Lieberman recommends investors sell these names "before any further declines occur." More aggressive investors may want to play the theme from the short side.

Also, the analyst breaks with the conventional wisdom that the so-called January effect has evolved into a fall classic because of the large numbers of mutual funds with fiscal years ending Sept. 30.

"Although many U.S. fund managers' fiscal year-end is before Dec. 31, others do indeed end on Dec. 31," he wrote. "Consequently, these managers could consider selling for capital-loss strategies all the way until year-end. Also, individual investors can and do tend to wait until year-end to do the same."

Furthermore, "January Effect" buyers will indeed wait until January to buy these beaten-down stocks because of concerns about Y2K and additional tightening by the Federal Reserve, Lieberman believes. Thus, "stocks that have experienced negative year-to-date returns should experience further selling pressure in the fourth quarter."

The silver lining in this rather depressing forecast for those long these names is the strategist believes there is still time to sell before any further declines occur. (A Pyrrhic victory perhaps, but you did resolve to get a jump-start on doing your taxes this year. Didn't you?)

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 welcomes your feedback at