Concern about inflation has been replaced by fears of a recession, and, boy, is there plenty to be scared about.

Let’s put this another way: The “good news is bad news” maxim usually applicable to capital markets doesn’t work quite the way it did just a couple of months ago. That’s mainly because good news is so scarce, and the bad news is getting worse.

The Federal Open Market Committee’s decision to hold Fed Funds at 6.5 percent seems to have aided no security outside the Treasury market, while its official change of policy bias two steps, from tightening to easing, if anything shook things up.

Indeed, with the markets rediscovering the importance of earnings and the value of a good bottom line, the market movers to watch out for are increasingly less macroeconomic.

Shoe to Drop?

But, even though the FOMC has held its last regularly scheduled meeting of the Clinton Administration, many are still waiting for the other shoe to drop.

Just about everybody thinks the Fed will drop rates by at least 25 basis points when it next convenes late January. The surprising thing is that many are actually predicting action before that.

The last time Greenspan & Co. shifted monetary policy between FOMC meetings was Oct. 15, 1998. While this does demonstrate that the Fed can pull just such a surprise when necessary, today’s economic scenario is far from similar to that which prevailed at that point, when world markets risked being thrown into a perceived “crisis” over the meltdown of Russian debt.

The argument in favor of intra-meeting action then was that the crisis situation necessitated an urgent injection of liquidity so that the U.S. would not have to suffer as a result of a world economic meltdown.

These Problems Are Homegrown

Now, the problems are of our own making.

A string of earnings disappointments announced by U.S. firms has heightened the sensitivity of equity markets, causing whatever new primary issuance was on the calendar to be pulled and stock market levels to plummet.

Debt has fared only somewhat better at this point.

Of course, the big beneficiary of the “flight” away from speculative investment was the Treasury market. The yield on a 10-year Treasury note, for example, was hovering around 5.1 percent as of late last week, and had even dipped below 5 percent at some points in intraday trading.

Investment grade debt was just about able to keep up, with spreads to Treasuries unchanged during the week.

“The tone is okay, considering,” says one trader of investment grade debt, who notes that with no new issues due “at least until mid-January,” the focus is on the earnings reports and other “specific credit events” that increasingly have been sending shock waves through the market.

Lucent May Face Crunch

The latest culprit in this regard has been Lucent Technologies, which may very well see its ability to secure short-term funding dry up, and soon.

After the firm released a dismal earnings update, both Moody’s Investors Service and Standard & Poor’s downgraded the firm’s $8.1 billion of debt and warned that further ratings cuts may be ahead if the situation doesn’t improve.

S&P lowered the firm’s short-term ratings to A2 from A1, and brought its senior debt down to triple-B-plus from single-A. Moody’s lowered the company’s long-term debt to A3 from A2, and its commercial paper to Prime-2 from Prime-1.

While market sources say the firm should still be able to borrow through long-term bond issues, assuming there is a decent market for long-term bond issues, experts say the real liquidity crunch could come if the firm needs a quick infusion of cash.

“There could be a real problem if they try to place some CP (commercial paper),” a market source says.

Bond Pipeline Dry

Looking ahead, the shortened trading week and the skittish market conditions now prevailing, especially in the telecommunications sector, mean that the only major bond issues being mentioned as possible in the short term are definitely not going to happen this year and probably are at least a few weeks away.

In investment grade, Motorola, is said to be planning its first-ever euro note offering via its Motorola Credit Corp. unit. Morgan Stanley Dean Witter is being tapped to manage the offering. The company’s existing senior unsecured notes are rated A1 by Moody’s and Single-A-plus by S&P.

In junk, there is still talk that Charter Communications will eventually sell $1.2 billion. The firm, a cable television concern owned by billionaire Paul Allen, will use the proceeds to finance network upgrades, according to reports. Charter’s outstanding senior unsecured notes are rated B2 by Moody’s and single-B-plus by S&P.

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