"Six Hours Ahead of its Time"

GENERAL COMMENTS: Although Black Box Forecasts has perhaps been too eager in the past to sound taps for this 17-year bull market, the newsletter has scored nothing but bullseyes in predicting what the Fed would do next. Are they going to raise rates? For millions of investors this has been an obsessive concern over the last six years. Their anxiety has been fueled in no small part by CNBC and its stable of misguided commentators, not one of whom has correctly anticipated the Fed's steadfast neutrality going back 5-6 years. Black Box Forecasts has never wavered, though, and its track record for second-guessing the Open Market Committee may be unsurpassed. It is even better than that of some "insiders," including ex-Fed governor Lyle Gramley. Here is what I wrote in this space on July 6, 1996:

No Rate

Hike Fed governor Lyle Gramley predicted on CNBC yesterday that the Open Market Committee would vote to raise short-term rates by 50 basis points at its August 20 meeting. He said they didn't do it at the July 3 meeting because there wasn't enough evidence to prove that the economy is starting to overheat. But by late August, he predicted, we will have seen two more months of statistics for the PPI, the CPI, and the purchasing managers' index, and they should provide ample reason for effecting the long-feared rate hike.

I am predicting otherwise. About the only thing that will look "overheated" come late August will be the equity averages. I'd still bet against a rate hike, notwithstanding either Mr. Gramley's insider status or the purportedly bullish look of U.S. unemployment numbers. (Note to Mr. Gramley and others who seemingly have trouble interpreting statistics correctly: The drop in joblessness is the result of a slowdown in the number of Americans seeking work , not any big increase in hiring.)

I cannot comprehend how the economic views of Mr. Gramley and no few of his colleagues could be so very different from yours and mine. I have emphasized many times that anecdote alone refutes any suggestion that the economy is about to take off from the turgid, sub-3.0% growth rates it has achieved during the Bush and Clinton years. In fact, Americans have been working their tails off even as household income has fallen by an average of $2,100 since 1989. GDP growth has averaged 1.8% since then, vs. 3.2% during the Reagan years. Annual productivity gains over the same period have declined to 1.1% from 1.4%, and the personal savings rate has fallen from 6.5% to 5.0%.

These are clear signs of an economy that has been overtaxed and over-regulated practically to death. (You already know about the taxes, but were you aware that the regulatory apparatus costs the average household about $6,000 in lost income each year?) The statistics above also reflect the huge burden of interest payments on a credit binge that has enabled Americans to maintain high levels of consumption even as the economy has weakened. For the Fed to tighten the screws now would be like injecting an AIDS patient with cholera. Gramley may not know any better, but his boss at the Fed, Alan Greenspan, surely does.

Meanwhile, I am looking for a strong summer rally in stocks, keyed off a bear rally in the bonds. It should be under way by week's end. If you are nibbling on the S&Ps now for purposes of hedging or position trading, I'd suggest completing the process by no later than Thursday's opening. Although the economy has heated up somewhat since I wrote the above, there is still no reason to expect the Fed to boost rates. Greenspan and his cohorts recognize that the U.S. economy will need all the "overheating" it can muster to help prop up a sickly Asia and Latin America. The Fed governors also are no doubt scared to death of bursting the U.S. financial-asset bubble that has kept consumer spending here in overdrive since 1992 -- even as household savings growth dwindled to zero. So I will go out on a limb once again and predict, as I have for the last six years, that no rate hike is in the cards. I will also assert that the recent blip in the CRB index portends no outbreak of inflation. Rather, it reflects an oversold rally in oil prices and a knee-jerk reaction to the costly war in Kosovo. Neither effect will linger much longer, and, as gold's continuing weakness strongly attests, deflationary forces remain by far the most powerful of those affecting the global economy.

The foregoing was prompted by the usual arrant stupidity of CNBC on Thursday. I do not often watch the show, but I heard bits and pieces of it while on my accustomed 20-minute hold for tech support at Signal Data. One could only infer that CNBC's talking heads had worked themselves into a lather in anticipation of today's employment figures. You'd think that after five or six years of egregiously misdirecting investors' focus toward a phantom inflation CNBC would have learned something, but I guess not. If you believe the show could benefit from the occasional alternative point of view, please do drop Ron Insana et al. a line, at CNBC Editorial Dept., 2200 Fletcher Avenue - 6th Floor, Fort Lee NJ 07024, and tell him Black Box Forecasts has had it right all along. Meanwhile, here's the URL for a Sunday Examiner column of mine that may be of interest:

http://www.sfgate.com/cgi-bin/article.cgi?file=/examiner/archive/1998/09...

* * *

* JUNE S&Ps (1305.00): This rally still stinks to hell as far as I'm concerned, but that doesn't make it any easier to short. My immediate objective is 1320.00, with peak resistance along the way at 1307.80. The latter number could be a rally-stopper, but I wouldn't bet heavily on it. Day traders should risk no more that 0.40 points (four ticks) if laying out a short at that price. Officially, I'll recommend a somewhat safer play: Buy one JULY 1260 put (SP9NP1260) at-the-market if the JUNE futures look as though they will finish the day within a point of 1320.00. My intention is to sell a June out-of-the-money put against it later. FYI, the July 1260 put (on the September futures) closed at 24.00, or $6,000.

* JUNE DJIA (10691): Buy one July 10400 put on the close at-the-market if the JUNE futures looks as though they will finish the day between 10790 and 10802. My exact target is 10797, and my goal is to sell a July put of a lower strike later.

* OEX (657.66): Again, we'll nibble on the short side by attempting to buy puts near my rally target, 667.17. Bid 5.00 or better for a single June 650 put (OEYRJ), contingent on the index trading 667.40 or lower; and also bid 4.00 for another of the puts, no contingencies.

* SEP BONDS (116-2/32): My long-term outlook is bullish, but my immediate objective is a bearish 114-23/32. I still see no way to go short at current levels without risking less than $2,000 per contract on a stop. Instead, we'll bottom-fish as follows: When the September bond futures fall below 115-23/32, place an order to buy two August 116 calls (US9QC116 on my data system, they closed yesterday at 156, or $1,875)) at-the-market if and when 114-24/32 is touched. (Note: If we buy the calls and the futures rally, we'll be looking to sell some out-of-the-moneys against them.) FYI, my target for the June contract remains 115- 6/32.

JUNE YEN (8230): Again, nothing to advise.

+ AUGUST GOLD (267.60): We hold no position officially, but I will continue to advise as though some of you went short at 267.60. For now, use a 272.50 stop and a 251.00 objective. If the rally continues for a couple more days, the model portfolio may stake out a short.