Action Akin to a Tomato's EKG, Ending'

August 17, 2001

An EKG of a tomato . . . would be more exciting than recent stock market action. Of course that presumes that one considers all tomato's to be heartless, or that more-or-less 'flat-lining' isn't leading to something much more exciting; not too far off either. Of course it can be argued, and we did, that the repeated deflections several weeks ago from the 1230 level of theSeptember S&P was a bullish failure, and structurally did mean that the expected decline into mid-August would engender more fear, amidst an internal market picture more agitated, than if there had first been an upside move, that took-out the resistance. Well, it didn't happen, as repeatedly observed, thus we'll recognize several factors (mostly discussed in technicals) that may help define what is likely going to occur next; though certainly this remains a very sensitive climate.

At the same time, everyone is seeing why we called for a decline into mid-August as the most-likely pattern for this part of the month weeks ago, and why we thought that the acquiescence to a 'soft-Dollar' stance might not be acknowledged officially, and it has not been in the weeks since we suspected pressures were afoot to hit the Dollar.

Virtually everyone is talking about the currency 'hit', and of course Treasury denies a change in policy. We suspected sometime back that their trading desks may actually have encouraged this move, since so much of the world is closed for vacation during August. We also cautioned that the idea of containing an 'erosion', so that it doesn't become something more dangerous (like a freefall), can be incredibly dangerous. It's part of the reason we discouraged political forces from succumbing to the corporate pressures; and also because we felt (still do) that doing so won't help those firms with better profitability anyway. That's because, at least on the short-term, weakness here would tend to expand weakness abroad, and as you saw by Japan's action, they can take measures (intended or not) that weaken their own currency, thus changing the spreads comparatively little. Hence, companies selling to Japan aren't going to gain a lot of share penetration, or profitability, simply as both countries ratchet-down a bit.

Now of course the big question is whether control is lost and things cascade in spite of the soft Dollar, or as we suspect, partially because of it. And the answer, one more time, is that nobody knows for sure, but letting the currency crowd play with basically unsupported Greenbacks in August is fraught with peril. Remember 1987 and 1990?

Now, interestingly, there are ways to sidestep some of the problems. One would be a smaller-than-capable rate cut by the Federal Reserve next week; maybe just ¼ of a percent. That might suggest to borrowers that rates aren't going much lower, and that could actually improve confidence, especially if accompanied by a statement from the Fed suggesting continued liquidity support, and monetary-base expansion, whereas dropping rates the maximum would potentially destabilize things further, supporting a thought-process that there's no end to problems in sight. Remember what we said on this score the other night about shipping/trucking and inventories (and the mix of that) and you'll contemplate a potential basis for what the Fed could say about why it's not in the Country's interest to cut rates too much now, because things are on the mend.

Of course the signs are only nuances, but coming from the Fed could enhance some semblance of confidence, as the markets work through these expected tough August days. And keep in mind our thinking about a potentially interesting late month action. In the meantime, T-Bonds have remained stable, almost sideways while overbought.

And we may have a tricky period, where housing slows a bit, while depressed sectors try to bottom and prepare for some semblance of recovery, but in the interim, there is the possibility of a difficult period where things look like they're just all going the way of the diced tomato. (Balance of this discussion reserved for our regular subscribers.)

Certainly however, these somber moods have likely impacted nearly every investor, and even those who are not active, psychologically all must worry to some extent, by all the discussions of economic woes, somewhat stratified as they are. That's why, as most Americans were not directly involved (not just investment, but their careers) in the 'dot.bomb' fiascoes, the residual impacts continue to crater demand for the 'net as well as diminished buying of related products, like computers. However, that likely is going to be somewhat mitigated by the rotation into Windows XP, and as time goes on, things become much clearer regarding a forecast we made about three years ago regarding the sectors; that in the 'net there would be a handful of survivors (edited for brevity; issues discussed with readers). It remains short-term dicey; longer-term, the emergence on the other side was to a decent extent preordained before the bubble-bursting occurred in the first place. After that a small but growing number of survivors (including facilitators) will be evidenced (discussion continues about this sector).

At the same time, we get more reports of brokerage firm cutbacks, lower transactions and cost containment, including from some who urged not worrying about the market. Like any other company, they must, because payroll and overhead have certain fixed levels that recur, irrespective of eventual business prospects (or even optimism). It's also a field that likely completes a shakeout, with ongoing consolidation for awhile. At the time we talked about compression in the online brokerage (and especially within a sub-category known as daytrading of common stocks), it was heresy for most ('98), and while it would have been terrific if those concerns weren't warranted, they were, on an historical and mania-of-crowds basis. (Balance of discussion is fairly reserved.)

Technical; Daily Action; Economic News and Bits & Bytes: reserved subscriber areas. This week Bits & Bytes touches on a number of issues, which merely noting in these remarks doesn't constitute a buy, sell, hold or short. Included tonight are Texas Instruments (TXN), Microsoft (MSFT),Micron (MU), Merck (MRK), Dell (DELL), Broadcom (BRCM), Analog Devices (ADI), AOL Time Warner (AOL), Sony (SNE) and Tellium (TELM). Not all of these are on the Letter's suggested list. The DB tends to try to reflect several with unusual price movement, or noteworthy developments.

Recently, the hotline (900.933.GENE) has talked about further nuances contributing to ideas of exhaustion of downside economic behavior, including our discussion with trucker-shipping firms. We heard that from chip makers (such as TI), with a nod to the state-of-the-art products moving a bit, not holdover inventory or prior designs, that many vendors continue to try to off-load, rather than write-off. That tends to cloud inventory pictures somewhat, which we suspect is thinner than most recognize. If so, then a reversal of the contracted demand could assert itself faster than generally is expected, because so many facilities are ramped-down; thus hindering any feasible rapid efforts to fulfill orders that may evolve in an economic turnaround. Of course, we're moving towards 'peak' traditional manufacturing and shipping times, ahead of a holiday shopping season approaching; so pick-up would be seasonally normal soon.

It does not mean we expect things to improve much this year; we don't. It does mean it is a climate where demand may contract, but that's not a sufficient argument for the inventory contractions; as today's surplus can easily become tomorrow's shortage. In Industrial Production & Capacity Utilization reports, the former showing a slight drop only, while Capacity is still large. That's not unusual at this stage (especially if it is the Quarterly nadir of the economic swoon), and again is basically retroactive or current information, which really doesn't help a whole lot with forward outlooks. That's why we focus on what information can be gleaned about the future, and so far it's the small nuances we've spoken about, plus besides 'hope', certain normal cycles.

As for levels, very little has changed with respect to the market's position at this point; other than the inability to hold several moves above theSeptember S&P 1200 level, and the challenge of the prior month's lows, which is threatening to unfold about now. The parameters are again as outlined in the last couple night's DB's.

In summary . . . the market may be poised to try a washout and turn, though we're all familiar with the difficulties involved in trying that late on a Thursday. The key data to get out of the way is not the CPI, but thePhiladelphia Fed Survey, at noon EDT.

McClellan Oscillator data saw slight improvements on Tuesday, after little occurred on Monday, and then eroded a tad on Wednesday, as the flat-line EKG behavior still continues; not surprising, and in fact generally looked-for, since the last weekly basis challenge of the S&P was repulsed. NYSE data is now +59 (a nominal -4 change and on the NASDAQ is at -10 (a slightly-over-nominal -6 change).

Ongoing; we remain skeptical that the markets can work higher in the morning, but as a matter of fact are on-guard for something to be attempted later on Thursday (ideally from down to up, not from down to worse); probably encouraged by the proximity of a breaking of recent lows, which would likely galvanize opinion negatively, setting it up. Flat the S&P for now, we see futures down a tad from their regular Chicago close.

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