Chasing Alan Down A Rabbit Hole

"The question is," said Alice, "whether you can make words mean so many different things." - Lewis Carroll

In the well-known children's story "Alan in Wonderland," you may recall the part in which Alan, the most powerful man on the planet, hoists interest rates and gets . . . a rising stock market?

This really is wonderland, isn't it?

(A brief grammatical note: See the phrase, "on the planet." One can stand on the planet. That's different from "on the season" or "on the year," where standing requires a person with special skills. Such criticism of sportscasters normally wouldn't be countenanced, but it's a holiday weekend, when most are away and we can play.)

Under common situations, higher interest rates beget lower prices for stocks and bonds. The first reason that didn't happen in this situation is because Alan - Greenspan, for the underinitiated - said the nation's interest-rate watchdogs, known as the Federal Reserve System, would change its sentiment from leaning toward a rate hike to neutral. Many had hoped, but few had predicted such a turn of events. The Fed said that, at least in the short term, a quarter-point rise in its benchmark fed funds rate was enough.

The second reason was the market's action before the hike. From last summer's low of 7,400, the Dow Jones industrial average had carved a peak of 11,107 in mid-May. (That's a cool 50 percent in eight months.) Then the interest-rate jitters struck, and the Dow made three trips down to 10,500. In effect, it had priced in the news. U.S. Treasury bonds had done the same, their yields soaring to accommodate higher rates.

After hint-hint-laden appearances by Alan and his band of merry men in the weeks preceding the increase, the shocker would have been no increase. The Fed did everything it could to soften up public opinion. Now you had market pros clamoring for the change, when the normal reaction to higher rates is abhorrence.

It's a tricky course: three rate cuts last fall that overstimulated business, one rate increase today to slow it down.

But it's a fairy tale economy and a fairy tale stock market - the best in both respects in our lifetimes. So far, Alan is holding the Wicked Queen at bay and sharing Wonderland with us all.

F5 Networks leads

Once investors decided the Fed's fate for interest rates was benign, stocks ripped higher in a hurry. Early last week, the Dow collected more than 300 points to turn a second quarter on the verge of boring to a boomer.

The Dow ended up 12 percent ahead for the quarter and was up 19.5 percent for the year. That gives the index a decent shot at a fourth straight year of better-than-20 percent gains, a truly astonishing prospect.

Northwest stocks have hardly been disgraceful, up about 8 percent for the quarter and 20 percent for the year.

The quarter's best regional stock was F5 Networks, a Seattle-based company whose shares weren't traded until June 4. The $10 stock jumped to $41, a 310 percent gain. F5 products provide traffic management for the Internet. A big reason it jumped $23 in the last four sessions of the quarter was a similar company, Juniper Networks, came public a week ago at $34 and soared to $159 before quarter's end.

In second place was Advanced Digital Information Corp. The Redmond provider of data-storage equipment got a big push in a preliminary agreement to supply IBM with equipment. But the 30 percent move in the final three days apparently stemmed from word the stock would be added to the Russell 2,000 index. Index listings are pluses. They add luster to a company, and sometimes money managers are prevented from buying an issue if the stock is not in an index.

And now, the pros

Five Wall Street professionals compelled by The Times to select five stocks apiece in December, and hold them for a year, are doing well. The composite gain for the stocks they picked is 23 percent, better even than the Nasdaq Composite's 22.5 percent year to date.

The midpoint leader is Dave Simpson, a first-year entrant who runs Washington Mutual's WM Northwest Fund. Simpson's quintet is up 54 percent. Corixa's 93 percent leap helped a lot, but so did In Focus Systems' 69 percent and SonoSite's 64. Icos, at plus 37 percent, and FEI, at a positive 8 percent, rounded out the group.

Mike Kunath of Kunath Karren Rinne & Atkin galloped into second place, up 47 percent, thanks to a complex gain from Western Wireless. Western spun off VoiceStream Wireless, so Kunath got the adjusted gain from the former and all of the gain from the latter. That amounted to 308 percent, helping offset losses from Wall Data (minus 60), Albertson's (minus 19) and First Mutual Savings Bank (down less than 1 percent). He also had Visio at plus 4 percent.

Here are the three others:

Les Childress, Childress Investment Management (8 percent): Starbucks, 34 percent; Microsoft, 30 percent; Visio, 4 percent; Alaska Air, minus 6 percent, and Gardenburger, minus 23 percent.

Terry Douglas, U.S. Bancorp Piper Jaffray (7 percent): Starbucks, 34 percent; Microsoft, 30 percent; Costco, 11 percent; Washington Mutual, minus 7 percent, and Cutter & Buck, minus 32 percent.

Bill Whitlow, Safeco Northwest Fund (minus 7 percent): Protocol Systems, 22 percent; Ambassadors International, 1 percent; Washington Mutual, minus 7 percent; Albertson's, minus 19 percent, and Aris, minus 30 percent.

Stocks and bonds

The Dow Jones industrial average of 30 blue-chip stocks last week notched a record high gain in points of 586.68 to close at its first record high in seven weeks, 11,139.24.

The WM Group Northwest 50, 50 stocks weighted by their regional economic impact, jumped 301.04 points to 7,954.25.

The U.S. Treasury's 30-year bond rallied on the Fed's decision to move to a neutral stance from a rate-increasing position. The 30-year U.S. Treasury bellwether bond rose $20 per $1,000 to $897.50. That was priced to yield 6.00 percent, said Pamela Warren, Everen Securities senior vice president.

The bond yield had skyrocketed from last fall's low of 4.72 percent to a recent high of 6.16 on expectation of higher rates. When the Fed raised rates a quarter point Wednesday and announced the switch to neutral, the bond market breathed a sigh of relief. Warren said she expects a more stable environment until the next Fed meeting Aug. 24 gets closer.

Tax-exempt performance was quieter, reported Judith Cochrane, Seafirst Bank vice president and municipal trader. But the trend was favorble, with longer-term bonds up about $5 per $1,000 of face value.

Cochrane said new money at the start of July, when many bonds pay interest or are redeemed, a light new-issue market and a dwindling secondary market (trades in previously issued bonds) helped.

The Seafirst Northwest Muni index improved by 0.05, dropping the yield from 5.50 percent to 5.45.

Wall Street Recap appears Sunday in the Business section of The Seattle Times. Greg Heberlein's phone message number is 206-464-2267. His e-mail address is: gheberlein@seatimes.com ------------------------------- Readers portfolio 10 NW stocks preferred by readers

%CHANGE STOCK SINCE 1/99 . ----------------------------------- Alaska Air -1.7 . Amazon.com +15.9 . Boeing +35.1 . Costco +13.3 . Icos +38.0 . Micron Technology -16.3 . Microsoft +32.7 . Starbucks -1.8 . Visio +2.2 . Washington Mutual -8.5 .

Average: +10.9%.

What $1,000 invested in those stocks would be today: $1,109.

Readers' non-portfolio 10 NW Stocks picked randomly

%CHANGE STOCK SINCE 1/99 . ----------------------------------- Avista -11.4 . Horizon Financial +9.4 . Micron Technology -16.3 . Penford -6.3 . Precision Castparts -4.1 . Puget Sound Energy -13.2 . Pyramid Breweries +22.9 . SeaMed +4.4 . Summit Design -69.1 . Westower -34.4 .

Average: -11.8%.

What $1,000 invested in those stocks would be today: $882.