first majestic silver

Beware the Ides of March

March 16, 2001

Beware the ides of March? Or would that be akin to merely panic after little is left unknown about the market's condition? Certainly Wednesday worked better for any approach to scalping S&P's (or NDX's) than to position-plays, and in that regard was an interesting session. In our experience it isn't the long-term investors commonly in a mood to panic at such times, but either margin players (something we're constantly against) or interestingly, mutual fund managers. Some of them, despite the drones of consistency argued to investors, are actually heavy traders, which is why turnover in the funds is so huge, and why the same evacuation we've seen recently, will reverse.

Nevertheless, not every day is going to commence with incredible huge 'angst' as did Wednesday's, in the wake of warnings about Japanese bank stability. One that won't is probably Thursday; there will probably be just a later pullback tied to margin call or some fund redemptions, but we really don't expect a great amount of that at this point of the saga. Rather, anyone who wants to sell, probably has, and now patience might just become a virtue, as far as holders, or bottom-fishers in the current environment. For sure if this turns into a full-blown debt/derivatives crisis that isn't arrested; that will be another story. But absent such neglect by the authorities, we're likely near a low.

It's correct that a couple American banks (such as B of A or CitiCorp) invested in the Tokyo financial rubble in recent years, presumably thinking they got bargains there, and indeed they may (in the fullness of time) find that they don't regret those moves. It's not our focus, but after-all they were bottom-fishing, not coming in during the long-ago aggressive campaigns by Japanese banks to infiltrate Western markets; which was roundly defeated in time, as many American property owners got back the very banks and buildings sold to Japan; often cheaper in virtual foreclosures. Turnabout is fair play, some would say; so we're not sure that the American banks are positioned inappropriately, for what in time should be (maybe must be) a turnaround in Tokyo.

In our yearend forecast, we did discuss the greatest risk to the American market as a repatriation of funds from Japan; which is the largest non-domestic T-Bond holder for years. (And, though that's not our point, the maintenance of high taxes here tends to subsidize the financial situation in Tokyo, without the express consent of taxpayers.) In our speculation about repatriation, we had more in mind something like the largest earthquake in Tokyo's history; as that would require repatriation for reconstruction, as did Kobe to a lesser extent some years back. Now if you want to get really bearish, it might be asked what happens if the banks go bust and then there's an earthquake? It is a question we won't address, and the answer would be more than catastrophic.

For our point of view is this something for Americans to focus upon? Well, it does fall into the 'bolt-from-the-blue' category for many investors, but not for professionals. On the other hand, we couldn't imagine a group of MIT scholars playing foreign currency derivatives in 1998's second half; but they did that, and gave the market LTCM (Long Term Capital Management, a term we suggested was an oxymoron). Bearish ahead, and during much of that, we got very bullish, believing the Fed would ride to a rescue, given systemic risks implied by the derivatives situation, and today's view is slightly a similar interpretation, but not precisely the same, for a number of reasons.

First of all, the condition in Japan is the culmination of bad management, bad politics, and overly aggressive domestic and worldwide expansion; poorly handled by many of their companies, which have interlocking relationships not known of here in the U.S. I don't believe that ensures a non-recoverable further debacle, and it rather may mark a belated coming-to-grips with reality over there; something we advocated ever since our Letter specifically forecast a 'crash' from near the Nikkei 40,000 level in late 1989.

Since the actual crash some weeks later, we saw Band-Aid and other approaches in place, with Tokyo benefiting slightly from the general malaise (and cheap labor and parts) in Asia during the later Contagion; which we thought would temporarily bring capital into stronger financial centers (especially New York and London) despite the coming of a later day of reckoning. For Japan, even now, it will probably follow New York's lead, though there are many pending restructurings that must be embraced. In the interim, there is no solution for these problems other than for the Fed to realize at minimum the inability to provide a strong growth rate requires heavy-handed cutting.

This must happen quickly, though trying to prevent panic by waiting until Tuesday is not unreasonable. We have argued this is already overdue; have argued that we're still working-off the last couple of unwarranted rate hikes (total lunacy), last year and that all the nuvo-financial-planners urging increased savings rates here were reacting to what has happened, and anticipating nothing. Certainly diversified asset classes of several types, and cash savings are laudable; but note Japan has the highest saving rate of all, and we know what happened there. As noted a couple weeks ago, pundits now cajoling Americans to liquidate (primarily their mutual funds) into weakness, are in fact risking the stability of the Nation, by trying to shift a creative risk-taking society into a savings-and-graying society, faster and in ways of panic, which cannot help.

At the same time, we emphasize we're in favor of this gradual conservatism (have been for years), but not as it is being publicized now; rather over a period of time, including real estate equity as we've often advocated (for at least the last 20 years). We saw the risks in hedgers as you know; thought several leaving the business was a sign of the times, and now we have permabears preaching sub-1000 levels for the Dow (yup) before it all ends. For sure, that's not what's going to occur, and the time to embrace that view is hardly just the moment that 'confirmations' of weakness are provided by simple price breakdown. Rather it's the concept of scaling-out when the markets are up, and shifting portions of assets into what were other compelling buys.

Now, real estate is temporarily extended, interest rates are coming down, but stock entries will become relatively attractive; just about the time too many citizens try to cushion the blow by shifting after-the-fall into overpriced defensive issues (as we've warned for weeks now) or into property, after desirable assets have appreciated. So savings are laudable, but the time to make such shifts is when you heard about the books calling for Dow 36,000 or the topping of the Advance/Decline Line in 1998 of course (and as noted then); not when the task at hand is simply finessing a bottom.

Currently it is a continuingly fluid environment, where these (measured) levels have not been seen, approached, or breeched yet, though it is one that still has everyone 'bewaring the Ides of March', when it might dawn on them that a multiple stab-wound would occur by only now shifting the leadership, after the big carnage that has been wrought sequentially for several years. (It is not our habit, for new readers, to mark price performance from number highs of an Average or Index, but from the market internals, which in the last case topped in '98; while narrowly-based leadership briefly took the market Caesars to yet-higher levels.)

Hence; the greatest risk to the American economy is for everyone to only now start to conserve and save (as an outgrowth of fear and panic), rather than remember all this the next time the markets advance, which won't likely take a full generation to see. Of course there are studies that suggest (as have we when contemplating past bubbles, that burst) it takes a generation to come back, with new leaders (balance reserved).

As to referring to 'the next time the market goes up'; there is no argument here that a repeat of the percentages seen in recent years should not be repeated. But ironically the percentages for the survivors, from these levels, may indeed be attractive, even if they don't make it anywhere near their former highs, which made no sense to us for a slew of issues at the time, due to what we termed 'outrageous earnings estimations'.

If we settle to a 1% growth rate in this Country (after the recession obviously), we're in for a lot of trouble; due to the structure of this Nation. That's another reason all the new-conservatives should ponder their thoughts; or they may see a whole world that reaps what they sow; as this is the world's only capable engine remotely remaining. It is only my opinion (as are all these remarks), but it seems to me that the only times a happy United States has prospered is, when money and lending policies were easier, when technology and creativity was encouraged, not criticized, and when politicians did not over-emphasize Hooveresque policies (found it interesting to see WSJ using that term we used here some time back) that took from the people while not creating the backdrop to lend to them, at favorable rates, and to help them grow small firms.

It's advisable, to be philosophically true to the American spirit, that Washington needs to worry less about surpluses and debt; more about systemic-shoring-up for just now, and then can put the other matters in perspective over time. To do otherwise is to put the whole situation in jeopardy, which won't help the poor, won't help the retirees (or soon to be retired, who would have no reasonable time for expecting fund holdings or other assets to recover sufficiently), and definitely won't help Social Security. To let it loose again in the U.S. (excess stimulation, of various types) is the right prescription. Then we can worry about trimming programs, reducing the deficit, and other laudable tasks. In the meantime, to do otherwise is to repeat the risks of the late 1920's again. It is incredible that some in Washington (who are older and presumably wiser than us in such matters) do not study history to realize what happens if they demur too long.

Daily action . . . has the hotline (900.933.GENE) determined to hold Wednesday's last long overnight from June S&P 1168-70; an afternoon effort that did have stop disciplines, but which weren't breeched. (Balance of section reserved for readers.)

Recall the presence of a forthcoming Triple Expiration Friday; a part of the mix here. We also think the NASDAQ and the Nasdaq 100 (NDX) did pretty well, considering that an inverse relationship has existed (first outlined over a year ago here) between blue-chip action and a few of the big technology sectors; other than some techs are in the Dow these days. That characteristic is important here, because if you start to see the DJIA and NDX both rally for any period of time, that would likely signify the entry of some new money to the market from sideline reserves or even Treasuries. At the same time, T-Bonds are acting satisfactorily, having a little trouble surmounting a double-top, but probably will in time. The very short-end remains inverted, but won't for long. That means there's essentially a total probability implied of rate cuts coming.

Of course this argument strikes at the heart of the 'defensive' posturing argument that has been making the rounds after the bulk of decline, because it suggests that harsh conditions may temporarily shift from tech to blue-chips, but that in hardly any event is it sensible to blow-out of major (likely to survive) techs in favor of defensive plays at this point. We thought that already had been telegraphed by the easing of Drugs, and others. Why would a money manager do such switches? That would normally be a hangover from the old momentum days, when they like what has gone up, and hate what has gone down, even if they're big survivable companies. Likely a risky posture.

It is now de rigueur to talk about infinite poor profits; no turnaround visibility and even the demise of everything from telecommunications to cell-phones to even computers. We agreed that all were coming down; hated the cell-phone handset market for years past, and thought the heyday of computer gains were past prime, but not really over by a long shot, to say the least. Our view has been that the overhang into Y2k was at least a sizeable part of the problem, both with a ramping of demand then, and just an opposite approach by monetary authorities. Now our attitude is increasingly reversed.

Simply put, you had fear and emotion overtake logic and reasonable caution; you did have 'confirmations' of weakness, and penetrated lower envelopes (or bands if one is biased towards a modified standard deviation measure), something that historically is almost never continued, no matter what comes along in the fullness of time. While we can always argue negatively just to chime-in with the crowd, when our technical work, and historical momentum indicators, are screaming extremes, we aren't likely to join the mob running for the hills, many of which compounded their losses today, by virtue of constant selling (or worse shorting for more than a brief scalp), and/or shifting into defensive stocks, which have been signaling distribution to us for weeks already.

Now, while we are not convinced confidence won't deteriorate if a speculative rally of one more thrust to recent resistance fails, we are convinced this should be the final or climactic phase for now. We would remind simply or automatically being bearish now is to fight the Fed, just as being structurally optimistic in early 2000 was also to fight the Fed, when rates were going the opposite way; up. However, there is no evidence of a successful turnaround as of yet; though we suspect such an event is pending. It will not necessarily be the bottom; but at a minimum should be a bottom, for just now.

For the moment we're holding an 1168 long overnight on the (900.933.GENE hotline) hoping that it will be greeted by further upside in the a.m. We may very well then sell it, and play another wave up later on; though we suspect the result (if all goes well) will have us positioned as we do not expect a replication of today's action tomorrow.

In summary . . . England and France worry about 'hoof and mouth disease', while we suspect that some of the advisors championing giving up beef (tech) for chicken (the defensive stocks) have points if they made it last year or the year before; hardly now. We'll try not to suffer the inverse of that condition, but really suspect risks of secular economic contraction hinge on actions taken by Government, and mightily fast too. In the interim the market should again turn; though sustainability depends on a number of factors; not just the Fed, but some perception that business slowing will be limited, at least as we go into 2002. The market dynamic will impact the economy, with many Americans in the market these days; and hence the increased sensitivity. That's why the underlying economy (chicken and egg; not beef) can only be rekindled by easier monetary policies and corporate encouragement, not by clarion calls to run for hills.

McClellan Oscillator data continued heavy, with the NYSE Oscillator at -187, due to money coming out of the NYSE yet again and into the NASDAQ, which had a reading of around -48, after a recently noted failure near the zero line, some couple weeks or so ago now. (portion reserved for ingerletter.com readers)

We'll continue to do our best to capture as many of the short-term moves as feasible, maintaining close watch on key levels for indications of longer-term possibilities. The collapse below supports tends to increase the pain, to the throw-in-the-towel stage; and in perverse ways may turnout to be a plus of sorts. As of 8:00 p.m. Globex premium is a bit soft near 909, as the June futures are a few lower than regular Chicago close at 1180.50; the hotline holds long from June S&P 1168-70 for now.


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