In event of a bio-chem attack, no one should have emerged from the Capitol or White House without a hazmat N-B-C (nuclear, biological, chemical) mask on his person, or everyone should have been handed an NBC mask as they evacuated the Capitol (it's something we presumed already in-place for politicians, but obviously isn't). It might be recalled folks running out of the NYSE at the time of NYC attack, quickly dove into not out-of, the nearest building. Many old TV acquaintances quickly returned into the NYSE from which they just emerged (at the time the NYSE was feared a next target).

This is the problem without being able to identify the nature of a brewing threat, as if it is a missile attack then sure, run for your lives; but if it's biochem, sequester oneself as best able, with minimal airflow from the outside. And of course what's on a missile is impossible to know, so there are no perfect answers. Maybe blast-proof buildings, of a type that also can immediately shift to 100% circulated/filtered air, are the ticket, as we have (coincidentally) been discussing a bit in the last couple days with respect to the demand relating to Federal building construction technique and trend (stock).

Sure, people say protection is ridiculous and impossible. Is it? Where's Civil Defense in this age; that's a question we raised right after 9-11. It's time to bring it back; that's for sure. 1st responders would never be able to adequately reach mass casualties in an attack satisfactorily, which means the numbers of victims has to be minimized, by adequate defenses 'in-place'. During WWII all Federal and telephone (yes, AT&T) or other such buildings were mostly built to resist blasts (that's why no windows). Today we can incorporate windows into the blast-resistant designs, but the general concept remains valid. Add HEPA filtration and mandatory potable water; that could help lots.

Daily action . . . already had a full plate, given continuing (suddenly not discussed as if market decisions were reduced to sound bites, which they're not) worry that several hedge funds are going to get hurt by GM or Ford (reference to worries about holders of bonds putting money into Treasuries only; a little ridiculously overblown we think), or more importantly, by hedgers extreme high-priced chasing of Oil and Oil contracts, which could compel some liquidations of what they can sell, if Oil is indeed able to penetrate solidly into the 40's as time goes on (as we're projecting). If push-comes-to shove, we suspect some big leverage 'anti-inflationary' funds are going to implode, and that such liquidations will help Oil eventually likely venture into the 30's…really.

Then there was the 'improved' Trade Deficit; an irrelevant interpretation of short-term data, that helped goose a rally at the opening, that we suspected would immediately fade, as it did. The Apple/Yahoo! competitive music challenges are just noise, as to any effect on the overall markets. Ditto Cisco; and less so Dell, which is relevant.

MarketCasts (intraday audio-email comments) didn't do poorly in all of this, we think (we say because it was all so fast), given a theoretical short-sale as things crumbled. We also caught a wonderful upside wave by our intentional interim comment calling for a resulting guideline June S&P long from around 1160 to be carefully stewarded.

There may be something to concerns; after all derivatives these days are incredibly complex trading strategies (the instruments themselves wouldn't be so complex if the so-called hedges weren't put-on in ways that sometimes cause the trades to loose on both ends of the play). And for our part we would be shocked if there wasn't anything to it; particularly because of the bond mavens and the hedge managers who listen to them, who often were entirely juxtapositioned on the wrong side of not only T-Bonds or Treasuries, but the strategies as related to the perception of higher Oil and rates.

Are these redemptions? Not exactly; though there are liquidations of positions just to raise cash where they can raise cash; so that's where overtones of 'panic' surface in a brief way from time-to-time. That's where the general debt and equity markets for a brief time suffer, because the guys will sell what they can sell, because they can't sell what they didn't plan to sell. That's because the positions went against them. Heavily.

Some of the Euro-based funds are so soaked in oil-based positions, or anti-inflation U.S. hedge funds (heavily marketed and essentially a misnomer), that they now risk perpetuating exactly what they don't want to see, which cause more liquidations if or as their 'plays' unravel. We won't attempt to think we could dissect all of these in any way, but it should be known that a lot of those inflation funds were buying Crude Oil while shorting Bonds; basically expecting higher interest rates and higher energy costs. What they're getting borders on being something quite different, so far mostly on one side of the ledger (relatively low rates holding up as short-term fund rates rose, in harmony with our forecast, but just about nobody else's). If the trade's other side craters (we think it will) that gives them a tremendous unwinding in oil positions, and that's in fact a part of why we've postulated that oil will be heading to the lower 40's, not just the higher 40's (already entered before temporary rebounds in our view) and then as it does that, the same fund jockeys have to sell what they can (for cash).

If so, the general markets can temporarily feel the pain of the derivatives insanity (not important some might think, but it is, because there's such vast sums involved), even as the backdrop of the unwinding (lower rates and lower energy costs) actually tends to improve the prospects for the vast majority of companies that are energy-sensitive.

Well, first of all, this isn't likely an LTCM situation; which is unfortunate. That was the most bullish opportunity of the year at the time, as we so stated, and waited for dust to settle just a bit, believing that the bailing-out of the fiasco of mathematically-based system trading (we never believed in 'systems', because if something works thusly, it by nature becomes self-defeating; one should think a mathematician would recognize that, but they often don't, because they are overly impressed with the idea that stock or debt odds can be accurately constructed with formulas; sometimes, not always).

Why unfortunate? Because LTCM was such a debacle that there was 'systemic risk' in our view on the first day or two, and that meant that the Feds had to rescue things. Actually Washington didn't quickly rise to the challenge, but Bill McDonough (more). They did; hence what we called: the 'plunge protection team'. The PPT on this go-round (sorry; our idea is thus conveyed; more reserved for ingerletter.com members.)

These are some of the dangerous ramifications of the follies recently warned about; that managers might be lulled into, and obviously they didn't listen to him. They tried to play old tired momentum trends, and they swallowed a superficial interpretation of interest rates; hook, line and sinker; and they're paying dearly for that we suspect (or about to). But there is something else, and more immediate (reserved for members).

There was also an unusual public statement by the Chinese Government, warning about the potential negative economic effects of a forced revaluation of the Chinese Yuan. Does that relate to American pressures? Sure. Did they send a message by hitting in the Dollar arena? No. Are they obliquely trying to tell us to stay away from Taiwan, or (more ominously for now) the Korean Pennisula? (reserved viewpoints)

Expectations for the markets are pretty low, and that's probably a subtle plus for the future, and part of why the dominant structure of some hedge funds is defensive or in an inflation hedge mode; which isn't exactly the way it's likely to pan-out successfully for them. Rather, a temporary breakdown in energy pricing, accompanied by stability in interest rates and a stable Dollar, is really quite benign with respect to roiling world stability, and also proves that they can't 'press' superior profits out of old strategies.

Further, this remains a market of stocks, rather than a stock market. And that's why, at the same time as being generally optimistic about the way things are going under the circumstances of war, terror risk and various known or postulated threat matrixes out there, we have focused on a few areas, including (reserved) buying candidates.

Bull or bear, it all depends a lot more on oil prices, than on chip prices, a lot more on perceptions of gradual growth amidst relatively stable spending levels than Fed policy or grandiose long-term schemes to address deficit or budgetary concerns. And it will depend more on corporate capex than Government spending, except for a handful of areas perceived as in the primacy 'sights' of Federal spending's short-term focus.

Stay tuned to this market, because it may not evolve according to common behavior. That's because the market has habitually not acted in a seasonal way this year, and about that we forewarned from before the year's start. The 2nd half might be stronger.

In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples. Though few generally concur, our view of slow but persistent American growth isn't negative; it allows protracted gradual growth without ancillary significant high interest rate pressures (slightly higher over time; not high). There's not a restrictive monetary policy; nor is there likely to be one, irrespective of energy-induced inflationary pressures; though that's likely history become of forecast further (and potentially significant) oil price drops from a projected structural topping.

As to flies in the bullish alternative continuing; in our view, it's realization terror matrix issue continues, with challenges ahead, and as attacks and various difficulties show. Ongoing earthquake temblors continuing in bunches across much of the West; larger in Central California (North of Ventura County) and again clustered SE of Tahoe. It's likely worth mentioning there's a pattern of shakers going South/Southwest from the Reno area all the way to coastal areas of Southern California, through the dessert. A gradually increasing number of shakers continues around various parts of California. A small quake was indicated monitored in or around the Las Vegas area yesterday.

We indicated Tuesday that the shakeout could become a bullish alternative. Chances were there for a fast and furious series of moves that turn the market down-and-up, as it interestingly developed (but it took the 'scare' in DC to entirely develop all this). S&P this evening's flat, with up-down-up-dip scenarios feasible Thursday if oil slides.

Gene Inger,
Publisher

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