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Complex Geopolitical Maze

October 5, 2001

The complex maize . . . of political, military and terrorist-planted landmines has not dissuaded the pattern from evolving as we suspected it would; based less on 'events' that have unfolded (or will), and more on monetary and market timing analysis, which we pledged not to toss out the window in the face of this horrible disaster, weeks ago.

The key to that was to assume, that if a market looked like a duck, quacked like one, and took the normal pattern purges we expected anyway in September, it was likely a duck; thus we weren't in a mood to panic with the herd after-the-fact, regardless of strong feelings many had, that damage was awful enough to make U.S. economic conditions irrecoverable, with which we didn't, and don't, agree. Quite the opposite in the longer-term sphere of things. No doubt there are several awful tragedies which could befall freedom-loving people that in a worst-case scenario might be the modern equivalent of Armageddon. However, absent a horrific progression, we expected the American economy to be fairly resilient lately, and so played it that way for rebounds.

The payoff was capturing the lows in the December S&P from the 940's, not staying long often overnight (in Indexes) just in case, and expecting prices to rebound from a panic low, to approximately the breakaway gap from the day markets reopened after the 'surprise attack' against our Country; and that comeback would be regardless of what might or might not come later. We took that approach to markets; it worked well. (Most intraday guideline efforts orchestrated on our 900.933.GENE S&P hotlines.)

Strategically . . . in recent days, these DB's have discussed not so much tactics, as it has who may have actually masterminded the horrific assaults, besides bin Laden's gang, and what that may mean to a longer term progress of the 'war', as contrasted to merely an expedited resolution, that many of us expect (with respect to the actual gang of extremists hiding in Afghanistan; many of who trace their origins elsewhere).

However, we have also expressed our view of what it can mean when our domestic stability seems to gradually come-about, as enemies and 5th columns are rounded-up. And despite an ongoing long-term confrontation with enemies of modernity, we've continued to believe that a stunning success on the military front, combined with the reestablishment of a pax-Americana in this Country (where more potential threats are conceivable than abroad, though hopefully that risk is being reduced each day by the valiant and persistent efforts of the FBI), could be the modern-day equivalent of the Battle of Midway, which market the inflection point in 1942, and the market bottom, despite 3 years of further conflict with the Japanese Empire, and with Germany too.

Combining geopolitical history with not forgetting our market timing knowledge; what we determined to do was to view the S&P's drop below 'declining bottoms' a week or so after the disaster (when trading resumed) as a climactic washout that analysts of long experience would have to view as a buying opportunity, whether for rebound or more. Now that we've had the rebound, the 'or more' question comes up, and that is going to depend on the next phase; a successful military expedition by the Allies.

This is a key, as may be gleaned from what's not being said about Sec. Rumsfeld's trip to the Middle East and Persian Gulf today. As you know there have been mixed discussions about equivocal support from some of our supposed dedicated coalition members. We've heard (through sources in the U.K.) that at least one form of attack was planned for Tuesday night, but was cancelled (or delayed) due to equivocations from some allies, such as Saudi Arabia (which withheld the use of the key command center) and Oman, where Naval facilities exist, as well as Egypt. We suspect the part of the trip that is really key is not merely to 'reassure' these countries, but to check-on why these countries got surprisingly rattled all of a sudden. For instance did they fear the U.S. would just attack and retrench once again, or were they threatened by their own domestic extremist fundamentalist minorities, or both?

The importance to the markets lies in several areas; one is the Dollar Index, which has tried to maintain stamina (as we predicted it would) in the wake of 'war', because even a wounded U.S. is a safer repository (more so now) than most financial centers. Another is the timing of 'when' the U.S. responds militarily, because only then can we reasonably gauge if there is 'another shoe' to drop in terms of further attacks here. In the meantime, soccer moms out there buying gas masks aren't going to achieve real protection (unless they also get an NBC…nuclear, biologic and chemical detector for everywhere they go), and dependence on Government for security is paramount. As this day winds down, the Taliban is again calling for jihad against anyone who shows a support for America or its allies; about what you'd expect from retrograde thinkers.

What we do know is that America does not shirk from the future, will not retard world thinking in an anti-technology way, and that come-what-may, this Nation will lead the way to progress, not retardation. We're sure cavemen were horrified as someone in their era invented the wheel, and were as against 'change' as these neo-middle-ages gangs of drug dealing zealots are today. Humankind cannot allow them to prevail in any lasting way, and they shall not. An ongoing flow into Western investment classes suggests this, as does the stabilization of T-Bonds in the presence of equity gains. We also believe the latest stories, that no opposition will be made to .. Russia.. being able to join NATO, are part and parcel of a new vision for a stronger world order. Of course Oil & Gas are involved too; but so what; it's the lifeblood of industrial nations. The long-term security and strategic implications are potentially bullish, not bearish.

Of course on the short-term, you have lots of technicians now talking about October lows and the like; presumably as they hope for some sort of renewed equity beating, though we're sure they don't actually want that to be at the expense of new attacks on our Country. Our view, even before the attack, was that the low point would likely be in September, and that declines (which would likely occur) later in October would be secondary tests of that low; not a new low. Of course, continuing to achieve this is a function of events to a great degree; but also monetary and fiscal policies, which in our view already have built-in a tremendous economic recovery when this is all over.

Technically . . . there are other factors involved in the advance, which at this point is partially technical, largely short-covering, and also includes institutional adjustments. As to the latter, part may be a result of certain FASB rule changes that are postponed or some portfolio adjustments related to mutual funds having to report both pre-tax as well as after-tax results, effective from this month. That was part of why we thought a lot of the fund-related adjustments (selling and portfolio shifting) would occur not as a slew of technicians expect (October), but in September with October relatively milder.

The bears, or simply those who missed the buy point of a couple weeks back, now in many cases are 'counting on' the plethora of horrible earnings reports, warnings, and downsizings, to either break the markets, or provide them an entry point. We suspect, (and this must be reserved for subscribers). Meanwhile, the Dow Industrials have made a new recovery high; the S&P is near fully-filling the old breakaway gap of that fateful September post-war reopening, and the NASDAQ and Nasdaq 100 (NDX)are finally kicking-in a bit, in the wake of an upside leadership from the very big-caps.

Now of course, this is all terribly event-sensitive and subject to revision as or if events require. A bus crashes in Tennessee, with the driver's throat cut by a man carrying a Croatian passport, but with a Middle Eastern accent, and investigators cull-over this in a mode to investigate for chemical and biological hazards, which a month ago they would not have. The Sears Tower was reinforced (the area around it) today, inline for sure with concerns expressed here and elsewhere in recent days. So nobody knows how this plays-out, but we continue to have faith that the Allied Coalition will prevail. If so, then while airlines will remain handicapped (more crowded planes, but fewer in numbers; therefore like other industries too, pressure on the bottom line), but some of the homebound industries may actually continue to firm, as we suspected they would.

Daily action . . . is warning of some tense times returning again soon, but just from a technical market-timing perspective, expects some efforts at upside follow-through for a bit yet. Continuing this into another (and maybe more tense) military weekend is of course problematic, but Thursday could see an effort to gap-up, pull-back, then more upside, at least temporarily. believes closing of a key gap from Sept. 10th will probably be achieved, as we stay on alert for a 'confirmation' of strength to actually conclude this upside from some short-term standpoint, before the market attempts to go back on the defensive; however just for the near (and tense) term.

Wednesday, much as we captured homerun longs Tuesday, in the wake of the squall of selling in the wake of the broadly-anticipated Fed Funds rate target cut, the hotline (900.933.GENE) again, after being flat overnight, targeted the upside, by entering the long-side of the December S&Pguidelines at around 1046; staying there until near the Wednesday closing in the mid-1070's, for a grandslam triple, or very nearly that.

Bits & Bytes . . . touches on individual issues nightly, as seen worthy of note. Intel (INTC); Microsoft (MSFT); Analog Devices (ADI); Texas Instruments (TXN) and Merck (MRK) had notable moves, while Home Depot (HD); General Electric (GE); Comcast (CMCSA) and AT&T (T)were mentioned. None constitute buys or sells to visitors, and investor decisions always are their own; as we merely provide ideas.

In summary . . . we continue with no choice but to apply approaches both as relate to indicators and psychology to what we know, with willingness to adjust to the many variables, but the outcomes of which are not known. What we've done in these past weeks is decline (essentially fade) the emotional (non-analytical) temptations to panic into-the-hole, and markets have notably rewarded that, by ensuring snapbacks from an overall standpoint. Ideally more to come after a pause in the morning, with caveat points including the range to resistance, news (though maybe not much for a couple days) and noting the limitations of participation, aside from short-covering or big-cap rallies. In the interim the behavior before and after the Fed's move, was as projected.

As for the McClellan Oscillators, the NYSE data is at +130 or so and NASDAQ now up to near +36. Ideas of further upside price rises presuppose daily-basis stability, as we move beyond the Fed's action, which was achieved, and approach the unknown military contingencies. Certainly, we'll be alert for any subsequent responses by the enemies abroad and particularly within 5th columns that are known as 'sleeper cells', though we know that some are off the streets, by virtue of exhaustive efforts by the FBI and other authorities; though this terrorist roundup is by no means over. Of course the biggest fear remains the unknown about bio-terrorism, and/or radiological weapons, after stories surfaced about Russian mafia connections with bin Laden. It is in the interest of the Russian Government to dispel such concerns, with every effort they can make, which the West won't forget in the years following this great conflict.

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