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A Taste of Bear

January 18, 2002

A taste of 'bear' . . . has many speculating that something is amiss here. Well, there is something 'amiss'; but it's nothing new. Multinational stocks remain haggard; techs are in a seasonally-typical retrenchment, as is retail; you've got hoards of analysts for some reason only now speculating how many more Enron's are out there; not even to mention advance psychological characteristics we projected for midmonth declines long ago. Only the increased asbestos liability to companies not normally associated with the issue, like Minnesota Mining & Mgf. (MMM), Halliburton (HAL), which we haven't been drawn to in decades, seems a tad new. Then there are the fears of IBM (IBM) missing their numbers (that is one tech with a huge international exposure, not shared by many other computer stocks). However, nearly all impacted issues today are well-followed big blue-chips; frequently components of the Dow Industrials.

Is this all a new sort of witch-hunt, as litigious-wary investors shy from any company from asbestos relationships? After all, it's months since Mississippi ruled defendants had to pay millions to a few asbestos victims, and there's been ample time for many to realize that asbestos was among the toxic or carcinogenic substances inhaled by the heroic 9-11 rescue workers, and potentially all kinds of citizen survivors in those vicinities (of New York and the Pentagon, much of which dates to a time when their use was common; as it even was in the World Trade Center). We already knew the typical masks and respirators were not adequately protective, so why now? Well, it was MMM's decision to make a statement that while it has substantial product liability insurance, there can be 'no certainty that the company may not ultimately incur large charges for litigation in excess of presently recorded liabilities'. Everything then fell; even though news that nine U.S. companies have filed for bankruptcy protection as a result of the financial burden of asbestos claims, in the past two years, is well known.

To give an example; not only the oil field giant Halliburton, but huge Dixie cup maker Georgia-Pacific (GP) and media conglomerate Viacom (VIA)are possibly exposed. Many concerns stems from Dow Chemical Co.'s (DOW) undisclosed settlement last Wednesday, after which the shares dropped nearly 30 percent. Bears will blend all of this with their doctrinaire 'debt' and earnings level fears; we'll say there's more current specificity to this, and have included reasons for constantly express concerns about excess expectations from many blue-chips; particularly internationally exposed ones.

The systemic aspect can only go so far, in terms of attacking big-money companies, before there's a filtering-down impact upon the general market psychology. Sure, at the same time we need to look carefully at the accountants and their audit trails, such as Enron made so clear, and others may soon, due to not totally dissimilar concerns. This can create a crisis of confidence; so has nothing to do (in and of itself) with the orthodox fears of the Dollar, of earnings expectations and multiples, or the consumer debt structure. In fact, most big declines historically did not ignite for common fears of analysts, but for reasons that were not focused upon. That includes our warning of a 'contagion' back in 1997, and warning about both blue-chip earnings vulnerabilities in the Spring of 1998 (and forward from there) as well as an expected 'net bubble burst.

Strange companies to be impacted? Not if you consider that Dow'sexposure results from the purchase of Union Carbide, or Viacom's from the merger with CBS, which added the Westinghouse Company to its portfolio of companies. And there are other companies like Goodrich (GR), trying to spin-off business units with potential liability. Will they do so in time, or will litigious legions actually provoke a market meltdown?

(Portion reserved for subscribers); it's not rocket-science to calculate dollar amounts of claimants would bankrupt any company with historical history of contracting for the use of asbestos; as difficult as it is for the victims (and potential victims, that should it could be argued, could have been better-warned as NY's cleanup operations began).

So the question is will executives of companies that didn't have anything to do with all the early claims, fight this successfully (of course we expect them to try) or should the market assume that money managers will avoid impacted shares in the same way as they would a deteriorating asbestos-shedding structure, until they at least know more about the exposure. (Some conclusions or prospects, must be reserved for readers.) A good way to spot problems increasing, but ironically not necessarily to negative for lots of U.S. big-caps, would be an easing Dollar (not in the picture yet, meaningfully), along with firmer Gold (lately having tried to modestly improve its technical posture, though some of that may also relate to questionable confidence in the new Euro).

And the greater question might be that if you combine fear about K-Mart (KM) being next to falter; FleetBoston (FBF) Argentine exposure (CitiGroup's relatively minor); along with other banks, or various recent credit rating cuts by Moody's, in toto having a greater financial impact on the companies of the NYSE than did the 'attack on America' upon firms outside the area of direct impact, then you have potential fatigue among investors, and certainly a hesitation among money managers to invest in the very companies directly involved, while they tell us that this only happens at bottoms.

(Interpretive portion is reserved for subscribers.) The energy market has faded, which makes no news, but is what we thought would happen after the rebound, once OPEC tried to curtail production to buoy prices (expected to fail); so Oil is working lower, as oil stocks are still big-cap contributors in the big averages; thus enhancing heaviness.

Earlier events have been responded to, digested, and rebounded from over the past months; while these latter events threaten the next phase occurring more-or-less on schedule. Or maybe, this is just the type of backdrop that many weeks ago we looked to characterize the depths of a short-term oversold condition as we got into or past a projected mid-January purge (that began as noted with the January 9th outside-down reversal day), and that would cause those after-the-fact buyers into strength that we'd warned about, to capitulate just in time for putting in another short-term low point.

First of all, we don't think enduring rebounds are there yet. As regular ingerletter.com readers are well aware, we suspected any intraweek rallies (once we repelled from resistance in the S&P 1170's) would fail for awhile; that any this week would be within ongoing downward short-term trends. No doubt it's so; we'll see about next phases.

Consistently, we've felt that the risks were more significant, many much more so, in the internationally-oriented blue-chips, trying for (at least) many years now, we recall, to replicate their domestic growth of an earlier generation, via overseas sales, and as even traditional old-economy stocks, were both merely having rebounds; not rises that were particularly sustainable. Sound like a broken-record? Meant to; the risks in the past, present, and maybe even after another rebound, are still greater for 'blues', than for better (survivor) beaten-down techs, as you might have noticed, easing little.

Meanwhile, for Wednesday, we allowed only one short sale to try to capture any sort of breakdown. As it turned out, that was all that was needed to catch the swoon, as the (900.933.GENE) hotline had parameters to reverse again for a late rebound, but there never was one. Result: good solid late downside gains theoretically taken; more than offsetting a couple point here or there uneven gains/losses from early neutrality.

We are suggesting that sympathetic declines in domestic-centric stocks are going to be an increasing draw to money managers wounded in the big blue-chips, desiring to reduce their unknown political risk tolerance, and basically focus on sectors that are almost certain to recover in any economic comeback. And the battle-lines on that are being drawn in (sectors noted reserved) relate to our concept since the war's outset: domestic cocooning. Certainly the discovery of certain (undisclosed) containers of WDM (Weapons of Mass Destruction) materials in Afghanistan, makes us all wary.

Daily basis stochastic work is starting to get oversold, so traders should be on-guard for short-term completion of the easing that started before, but (for precise numbers) dates from a very clearly noted outside-down day we had last Wednesday (the 9th). Ideally we'd test not the lows of last Fall that some permabears speculate about, but (a non-conventional pattern that we've outlined to regular ingerletter.com readers).

Today we mention: Yahoo! (YHOO); Compaq (CPQ); Apple (AAPL) as regards the earnings news; Intel (INTC), primarily on the executive changes, and our impression of the particular individual capabilities; plusRambus (RMBS); Merck (MRK), relating to an HIV vaccine, which the whole world so urgently needs, and Microsoft (MSFT).

In summary . . the McClellan Oscillator readings were about -74 on the NYSE, and near -34 for the NASDAQ stock market, as markets digest gains and thus continue to correct internally, with only minimal interim rebounds, which failed and accelerated to the downside, for the myriad of reasons discussed earlier; and in harmony with what is an overall expected ongoing decline from the outside-down reversal day. All this is logical after the year's initial thrusts up, and with most financial news in harmony with efforts to dispel excess enthusiasm, for various reasons, including political, economic and others observed. Note that so far this is occurring with the desired comparatively shallow or minimal price changes in best sectors; primarily technology, not big-caps.

Tentative expectations were for an intraweek rebound likely within a downtrend, with or without a bit of a washout in the new week's initial start; a bit of a squirrelly session on Thursday, with some ferocity, and possibly rebounds into a (reserved) nominal Expiration of sorts, though about that time the short-term condition becomes more oversold. Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events explicitly continue reminding us of various risks Allied fighting forces face. This evening S&P's are near a -157 discount; and that's actually up 2.


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