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The Market's Zoom Lens

Last week, the market showed that it is starting to extend its focus beyond the near term.

Nearly four weeks have passed since Sept 11. The heroic effort at Ground Zero has begun to reflect itself in a recovery and recuperation process in other aspects of American life. Airlines are operating again, their financial solvency backstopped by taxpayer-supported loan guarantees.

Reagan National Airport, close to the Pentagon, has been reopened. Movie and TV fare that depicts violence is recovering audience share. Psychologists as well as comedians assure us that, despite the pain, it is OK to laugh again. Tickets are still available, but lines have lengthened at Broadway ticket booths.

A key question for the months ahead is whether the U.S. and its more reliable allies can balance this return toward normalcy with an unwavering commitment to unity and purpose.

Public sentiment remains an important issue for the economic outlook as well as for the conduct of the global anti-terrorism campaign. Sentiment remains fragile, if advertisements for gas masks and hazmat suits are a valid indication.

Last week's

New York Times Magazine

contained an article by Paul Krugman, titled "The Fear Economy," in which the usually opinionated author wrung his hands and offered a very hedged view of the outlook.

The market, meanwhile, has begun to search through the rubble for a base upon which to rebuild. After two weeks of propulsive selling, there has been some stabilization and bargain-hunting. Beaten-down techs, many of which have been building bases for months, led the rebound last week, an indication perhaps that investors have begun to "look across the valley" of dire near-term results.

The market is a discounting mechanism, everyone agrees, but it is not always plain to see what the market is discounting at any particular time: Think of it as something like a zoom lens, which enables the photographer to focus near or far, as he chooses. The horrors of Sept. 11 clearly caused an extreme foreshortening of perspective as investors were forced to re-examine all sorts of implicit assumptions. For two weeks, the market has reflected a galvanic pullback from risk as this re-examination has taken place.

Last week, however, the market gave evidence that it has begun to extend its focal length, to reach out for a more distant picture while permitting the close-up to blur.

The near term is undoubtedly ugly, as the late summer weakness that preceded Sept. 11 has begun to show up in the data. September saw the loss of 199,000 jobs and an increase in the unemployment rate to 4.9%. Earnings shortfalls and lowered guidance remain the daily diet of the business news. The "Fear Economy" effect will exacerbate these conditions for months to come, as vacation trips, business travel and entertainment, and a range of other investments and commitments are postponed or canceled.

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But there comes a point at which the bad news is fully discounted and the market begins to "see around corners," to take into consideration the likely effects of some of the remedies that have been put into place to combat the near-term negatives.

Last week, the

Federal Reserve

cut its fed funds target for the ninth time this year while leaving in place the formulaic language of its press release that indicates a commitment to cut further, as conditions require. Money supply and other liquidity measures have soared, including specifically the dry powder of money market balances available to be committed to investment in stocks and bonds.

Short-term interest rates have fallen to levels last seen during the Kennedy administration, which demonstrates that safety and security have a price. The market's focal length adjustment may have begun to conjure last week with the question of how long investors will be willing to accept 'two-handle' returns as the nation struggles back toward normalcy.

Not all the news is bad. The Mortgage Bankers' refinance index has boomed as lower rates have permitted households to restructure their mortgage debt on advantageous terms. Automobile sales have held up moderately well, given attractive financing incentives. These are indications that monetary ease has begun to have a palliative effect and may yet produce the stimulative effect that it has done historically.

With sensitivity to bipartisanship and effective design, the Bush administration is working with Congress to create a program of tax cuts and credits, and federal spending for public investments with both near- and long-term payouts. Textbook theory and common sense say that these should help to catalyze a commitment of all the monetary reserves now held in store by households and businesses.

In the absence of information, the market naturally will tend to discount the worst scenario, and that was the nature of trading in the first two weeks following the exchanges reopening after Sept. 11. But now we have information about the nature of the conduct of civilization's counteroffensive, about the skill and sensitivity with which a diverse coalition has been assembled, about the patience and careful focus of the force structure and tactics that will be used. We read that the Taliban is "watching the skies" in dread of American strikes and suffering dissent and defection as a result.

No one thinks the campaign is going to be brief or easy, but the market last week seemed to be reaching out to discount a future time of much better national mood and business conditions. It seems to me that, in these circumstances, the real risk takers are not those who will commit to the market, but those who would short it.

Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to send comments on his column to

Jim Griffin.