The shape of the economy . . . is clearly molded by geopolitical concerns, as again dominated Wednesday's oscillations; more so than the Fed Chairman's second stage testimony at Humphrey Hawkins. The CIA warnings, new ones about North Korea, as well as increased concerns (primarily from England) about terrorism, also prevailed.

These sobering wakeup calls are achieving several things; a serious clock-cleaning of latent optimism among investment strategists; a frustration among traders unable to see the bare outlines of even common intraweek rebounds from normal set-ups for minimal recoveries; a perception that economic conditions will be weak regardless of how things go; and even some significant proportion (almost half) of investors from a survey or two, believing prices will be headed dramatically lower from current levels.

Do we concur? That's normally a perfect backdrop for historic downside completions, with the indeterminable caveat that's little different than what we've said before; there must not be a truly catastrophic event of a meaningful magnitude (to the Nation or its economic infrastructure); there must be at least a perception that the Iraqi issue is at the crossroads of being resolved; also there ought to be a perception that the world isn't going to regress from the entire globalist trading structures developed for years.

That in itself is in our view the reason for concern about the Dow Industrials through all this; it's why ingerletter.com believed for months that markets would be troubled particularly in February, with emphasis on erosion in multinational big-caps more than tech sectors. However, the psychology could not, does not, and for the moment will likely not, permit the markets to see sufficient daylight, absent some favorable event.

Though none of this will answer all these pending questions, or be very comforting, there are a couple factors that should be considered. Among those; it's easy to forget things can appear darkest before the dawn (though that's oversimplification for now); it's clear the market technicals are reaching into the depth of short-term oversolds at this point (though we've indicated that's not particularly relevant when the basis for a decline relates to events); that in fact also means the filling of gaps dating from lows of the March S&P in October is also irrelevant, since it's merely an emotional purge of primarily internationalist-oriented stocks for which there are few if any bids to be seen (and that's a pattern we've felt would be the case after an early January rally, even before that rally got underway); and there is the perception, shared by the Fed Chairman, that the economy can recover handsomely if we simply put these current geopolitical fears behind us; somewhat like occurred at the cessation of Gulf War I.

However, there is the downside we all know about: thermonuclear or radiological war that engulfs part of the world, and might have little to do with the Middle East or Gulf situation, if North Korea carries political opportunism to the extreme. That's where the argument has been made regarding the risks from there exceeding anything involving Saddam (it doesn't matter which story gets the time on the evening news; the facts in these dilemmas matter a lot). If both were to occur (war with Iraq and North Korea), it is feasible that the North would saturate Seoul with artillery fire, and we would react in the most far-reaching ways. With Iraq, it is not out of the question that we move to a modus vivendi of sorts, though that isn't being publicly discussed. Much depends on how the UN report Friday shapes up. If it doesn't, if a smoking gun (such as longer range missiles found and being revealed as weaponized), then regardless of how the UN Security Council may vote, the commitment is probably all but unavoidable. While all of this continues, the U.S. Dollar has been stable-to-firm, which suggests that the world is less concerned about things loosing control, than apparently investors are.

As noted for weeks; investors aren't liquidating; stocks are falling due to an absence of bids. This is sensible, because as forecast there's been no reason to chase or buy, when there is the perception that 'mountains of cash' could be committed into serious panic that may occur. Great risks seem to be not a breaking of a level by Averages; but rather an actual attack on Western Civilization. That is the British fear, quantified by the military moves to provide security at transportation and government facilities.

Given the heightened alerts overseas (and they are not limited to the UK by the way), one can only presume that there's something more specific than publicly disclosed in terms of risks. Certainly we don't know how the outcome will go, though we suspect a stock market assessment would include the suspicion that a huge sum of money now awaits a crucial point (presumably related to opening of hostilities with Iraq, with more frantic responses if to a terrorist event) to enter, not exit. We have speculated that the daily resistance areas wouldn't be reached in any rebound foray this year (wasn't), as we suspected a filling of the gaps and emotional overrun (to wit a test of the S&P 800 area and possible penetration into the 700's once again) would be realistic, whether a precursor to a washout and turn, or even a more dramatic kind of seminal event first.

Obviously washouts are contingent on damage to the National infrastructure not as an occurrence (which of course the terrorists want us to believe is forthcoming, as in and of itself that plays to paranoia, fear, and contracted economic activity), and that a draw-down of not so much confidence, but the ability of the Nation to function close to normal levels isn't 'at risk'. The Government is concerned; law enforcement is said to be running hard in terms of chasing 5th columnist leads and collaborator suspicions now; but apparently without tangible results as yet. And that is worrisome. In such an environment, where fears are promulgated by those who are charged with comforting the populace at most times (how about girding and confidence building), it's still hard to imagine they are being so alarmist without serious reason to perceive the threat matrix is flashing all kind of alarm bells. It can't be just political spin or expediency.

Hence why would anyone look for a turning point in the market? We haven't; though we are a bit curious as to how much more can be eked-out on the downside absent events, as this is long-in-the-tooth based on any technicals historically seen, short of the start of World War I, when the market was closed for several months. Our main concern remains the trade-based shift from manufacturing to service, though from a mundane standpoint, some of that actually cushions the downside (because it's types of businesses that continue almost regardless), while it lacks vision for the future. At the same time, technology (reserved for readers). The Nasdaq 100's (NDX) breaking to new lows, but comparatively above October's lows, as is about how it should go. (Reserved for readers) the NYSE should actually be lower due to the large number of interest-rate sensitive issues within the list; including preferred stocks and bond funds that distort the inherent picture of the market.

For now, October's lows aren't sacred, and we've noted that for weeks; believing that the key is what the backdrop is accompanying such penetrations if they occur. Since these are the war/terror related stimuli, we do not believe the penetrations have such longer-term significance as some pundits do; although our arguments for market level movements do not (as you know) require the market to hold at any particular level for the immediate future. Rather, depending upon the nature of consequences, and how emotional the reaction is (although again the specifics matter greatly), we may tend to become optimistic for a serious trading rebound, or an historical investment entry.

If the worst case occurs (which is the ongoing 'alert' threat reaction) then it depends on what that is…. Sort of (to summarize a regular serious investor remark).. "kinda like standing on one side of some gorge with about a 5,000' drop, and the only thing standing between here and the other side is one of those rickety old rope-bridges about 3' wide spanning the chasm to the safety of the other side". Sort of says it all.

Daily action . . . suspects downside exhaustion of sorts, but not much of a recovery (aside from requisite short-covering squaring jaunts) for several stated reasons, plus it's a forthcoming three-day market weekend (President's Day), so traders will likely be particularly loathe to hold positions in-front of this particular (military) weekend. In terms of Thursday, down-bounce-down-up-down would seem logical, but again, this is getting so oversold that (reserved). Economic consequences can become heavier, as interest rates remain low and undeterred, though not making T-Bonds attractive, as the persistent stability is absolutely a consequence of perpetuated tension. Most serious is probably not Iraq (in our view), but the higher risks from al Qaeda attacks.

The idea (from the FBI) that there are hundreds of enemy agents in American cities is a chilling one. The FBI admitted this yesterday, and echoes the calls (reserved in this public forum) for citizens and other residents to help in security. Let those who decry freedom of movement when push-comes-to-shove remember all the time they had to be of help to the society, when the society has no choice left but to implement what borders on (emergency measures described, and we would elaborate here for now).

In the meantime (comments about motivation, institutional accumulation and how an individual can approach this market, are reserved for ingerletter.com readers now). It has been the expectation for recent turmoil, the period now, and ahead as outlined. With Banks (BKX) & Governments closed this weekend, one can speculate whether that would create a day or two for markets to adjust to the commencement of matters depending on how UN things go Friday. Oil stocks (XOI) also continue easing… with the banks and oils heavily negative, and techs just eroding, there's no chance for a rally here.. however, if it develops that the war just started and the enemy is already on the defensive.. well, that may be an interesting scenario to immediately evaluate.

Skeptical on staying power of any rebounds yet, we again emphasized the negative side of the ledger, while guarding against short-covering spurts, but not anticipating a return of investment interest (at least yet), given the overall backdrop. This worked well for the hotline (900.933.GENE or direct-dial access), which accumulated small base hits (mostly shorts), leading to a solid homerun plus overall net theoretical gain.

With respect to the Fed Chairman, whose comments continue to be lost amidst the dissociated chaos, what is standing out in our minds is the demographic admonition (unrelated to war or terror) about this decade, with which we concur. That has to do with 'basic' economic growth not likely being counted upon to eliminate deficits; and that's where Mr. Greenspan slightly departs from the Administration. Also, he says 'greater output of goods and services' is necessary. Again, we concur. That's why we lament the changed role in the U.S. that emphasizes services and not manufacturing; though great ideas absolutely originate in this Country, but doesn't contribute enough if all the complex work is then outsourced abroad. But in war scenarios it can actually be helpful to have a preponderance on services; that area isn't as severely impacted as hard goods or manufacturing, during a crisis.

In summary . . . the market was thought to likely fail rebounds (did, of course faltering as the news deteriorated, instilling near-paranoia on many people); while rallies were still likely within a downtrending overall context in any event. The Humphrey Hawkins testimonies were newsworthy, but were eclipsed by the focus on terrorist hysteria.

Serious events (and potential ones) still continue reminding us of various risks Allied fighting forces may face, not only given new threats received (some reported, some not) in the midst of solemn and challenging times for sure, and not limited to an easily definable theater of operations. We have to keep in mind that the unexpected, which we unfortunately can't dismiss as overwrought citizen worry, remain a risk as western civilization cheers human progress, amidst ongoing concern about barbarians trying to reverse hundreds of years of modernity, in their quest against the advancement of mankind. We have said this for well over a year now, and nothing has changed this.

Late this week will be tense ahead of the additional (Hans Blix) weapons report, with little focus on corporate results, which weren't all that bad for the most part, and by the way have little to do with the market, as argued for weeks now. The threat matrix was projected to be robust in February, as it continues to be, and that's just what we have to contend with, as investors, and as citizens. S&P futures around mid-evening are up a couple ticks or so.

Gene Inger
Publisher

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