first majestic silver

Gold, Dollar, Faith, and Resolve

September 20, 2002

Persisting faith . . . in a 'soup-bowl-like' morning low leading to a filling of 'gap down' opening action (expected to go below the early September low) was the highlight of a pre-Expiration Wednesday, although it was certainly a market struggle for some time. And, as discussed in recent days, coming back (Expiration related or just running in a slew of short-sellers), was likely preparatory to further downside explorations coming, whether in most-watched Dow Jones Industrial Averages, or other market gauges. This has been our oft-stated viewpoint on a limitation of rallies for several weeks now.

The forecast (ideal) down-up-down session for Wednesday was quite understated as it turns out; particularly given the variety of news, some chaotic, after the day's close. Given the backdrop, you've got lots of strategists talking about 'high quality Treasury' T-Bond investments, or comparable (war fear related?) holdings. We understand of course, because we've been looking for lower overall price levels since mid-August, interspersed with unsustainable rebounds, such as around Labor Day, or even today.

So, by no means do we presume any particular pattern evolution to the weeks ahead as you know; not because 'pat' assessments are destined to be right or wrong, but as it's a year with all kinds of factors involved that go far beyond normal corporate woes, or fears of stagnation combining with inflation (stagflation?) rather than a continuation of the semi-deflationary spiral which has dominated many fields in recent times as all are aware of. Rather it's a 'war factor' we suspected would dominate Q3 and Q4 this year, and that's not something you can 'schedule' on seasonal calendars overall. And ironically, though we don't see tremendous significance of the CPI rise, we think one of the riskier plays is that portrayed as being the opposite (reserved ingerletter.com reader discussion about allocation strategies). Even ponder the implications of a UN effort to give Saddam 'a year' to comply; how would that impact American policies?

It's been an incredibly painful three years for most investors who ignored rather clear warnings in the late '90's and early 2000; it's not a scenario addressed by becoming defensive in this Fall's maze of developments, that probably will affect structures as intended. That doesn't mean one should be an aggressive buyer or look for disasters. It also doesn't mean that a time to unwind defensive strategies (in place) has arrived.

We actually believe the Nation's security forces have done a better job of late, but we are also realistic enough to recognize that it doesn't take many oversights for enemy forces to find an opening. Today there have been more stories about al Qaeda cells possibly operating within the United States, and as Buffalo showed, we all recognize these risks. So does the market, which may be obvious now, but we've said that quite consistently in recent weeks, because we believed it was the terrorist/war anxiety and stress impacting the markets and economy, not the other way around. Hence, that is the basis of perceptions that the corporate restructurings and downgraded estimates were somewhat 'in the market', with events and short-term war talk at the heart of this month's downside. And of course, that was the core of the argument that just as most estimators were overly optimistic near tops in 1998 or '00 they'd be overly pessimistic about corporate outlooks during downward extensions (or economically driven pause that is related to the war), as well as in the face of overt new geopolitical threats.

Clearly nobody knows precisely how it will all play-out, and it's incredible to hear the 'what if' scenarios being debated by the media now as relates to what happens to the market if we go into a bigger war and don't prevail. The answers are as resoundingly obvious as they have been through much of history; though it makes little sense to have a defeatist attitude about such things. Just the opposite; history is replete with examples of negative market alternatives that didn't pan-out; World War II, Vietnam, the Persian Gulf War (#1); even Korea and more briefly, the Cuban Missile Crisis. In each and every case, the market stabilized and advanced during or just after matters were resolved, and in the case of Vietnam, it was a totally distinct manifestation of an inflationary fear resulting from the OPEC-induced energy crisis, that derailing things.

There always can be exceptions; but in this case, with the markets down almost three consecutive years for the Senior Averages (almost five internally, but that's our view), it rarely makes sense to solely be prepared for worst-case alternatives. Sure, bears in this environment argue that a long bull market takes a long bear market to counter all the excess, and they have a point. However, price and time don't always correlate; it clearly is a situation where 'price', outside of the most extremely senior big-caps, has deteriorated proportionately to the worst post-boom declines (reserved). Historically it is true that the tendency of prices long-term is higher, not lower; which to an extent is a function of liquidity. Liquidity is quietly swelling; makes down-the-road interesting.

Resolution of War?

As for today (Wednesday), we again would not have remained short overnight, even if we had a live short going into the close. It's too dangerous to do that these days. At the same time, the post-close news is extremely fluid, and could affect markets both ways, though one would presume to the downside initially on Thursday. Among other things; a late story today suggests that the White House will send a 'resolution of war' over to the Congress on Thursday. That will not likely be as widely resisted as many might be thinking; not in-front of timeframes when politicians want to start campaigns. (Balance of discussion, about 'calamitous declines', are reserved for subscribers.)

The markets are wary of (varied) things; they may even be anxious about what could happen if we don't move; since the prestige and might of the Nation is heavily leaning towards action. And in the midst of this, few are focused on the JP Morgan/Chase or other financial issues, which to many on Wall Street, are significant concerns alone. Coming settlement ofCitiGroup matter would go aways to resolving some concerns.

Daily action . . . as Wednesday's session evolved, struggled and then eventually got the opening gap-down filled. So the resulting daily intraday hotline (900.933.GENE or direct-dial access) results were respectable, primarily because we were looking for a rebound like that, and almost solely because of a homerun long which was exited at the 876 level, in harmony with a general thought of not pressing anything the upside after that suspected run-up scrunching those who shorted into the morning's swoon.

Even the Oil market didn't know what to make of it all; with a partial recovery late on Tuesday, and an outright gain on Wednesday, in the face of an OPEC meeting. At the same time, Gold, which had a couple mild profit-taking waves earlier this month, seemed poised to challenge (and maybe breakout from) congestion or declining-tops patterns (in the December), which currently would be achieved by a move over 325.

Some are trying to correlate stronger Gold with a weaker Dollar, but it's not a purist necessity. In mid-summer, when we had looked for completion of the Dollar's swoon, it was also suggested Gold could sparkle a bit anew, and it has, while the Greenback ideally might stabilize it's preceding decline. Interestingly, both occurred. Many of the Dollar bears do not consider that there doesn't have to be a better-handled currency; so as deflationary concerns permeate thinking (even as the CPI rose), it was feasible, and the markets have concurred, that the Dollar may not have to tank in a new purge for defensive strategies to remain valid (over the short-term). This isn't just a position now, because the markets' behavior have validated the concept.

Remember, most markets, just like life itself, aren't primarily focused on looking for or being at, an 'extreme'. Things oscillate somewhere on either side of activity closer to sort of a 'mean'. If not so, then parabolic rallies and crashes would not be described thusly, because they wouldn't be the very extreme manifestations they are. Hence by definition, they're more or less aberrations, and should not be the excessive focus of investors, even if they occasionally appear. We think that's part of what's wrong with investment strategies constantly arguing for real extreme optimism or dire pessimism; both are infrequent visitors to the real world. It may make better 'press', but making a psychosis of the market for all scenarios is not only the minimal odds, but really does a disservice to all kind of market investors. In Gold, it was entitled to a rally, as noted for months; it got one. It's not so necessary to call for something akin to 30 years ago is it? In stocks, surveys tend to ask people if the Dow Industrials are going above or below modern historic levels. Do surveys mean anything; or is catching moves key?

In summary . . a ridiculous decline early Wednesday was difficult to catch a reverse; but it did do that in 'soup-bowl' fashion over a few hours. Most of the news today was after the close, and not reassuring on a daily-basis, which should help the market's clear (and anyway expected) short-term penetrations. Just remember this is again in oversold territory, which never turns a market; but regardless of how nasty it gets, is not a time to commence negativity, barring catastrophe (other than market-initiated).

This remains a squirrelly Quarterly Expiration week; always challenging. Rallies may occur but, as noted, in harmony with downward action, which is also probably limited, as emotions are drained by corporate warnings and the world geopolitical situation.

McClellan Oscillator readings erratic, with the NYSE now at a -82 or so level, and at NASDAQ, which never got much going either way, is mildly soft at -33, but likely is continuing erratic behavior over (reserved) horizons; with intervening mild rebounds.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and that includes the troops manning security posts during the 'Orange Alert' at home in the United States. The events of this week explicitly continue reminding us of various risks Allied fighting forces face, or may face, and not only given new threats received in the midst of solemn times. We have to keep in mind that the unexpected, which we unfortunately cannot dismiss as overwrought concerns, remains a risk, as civilization cheers human progress amidst ongoing worries about barbarians trying to reverse hundreds of years of modernity, in their quest against the advancement of mankind.

As of mid-evening, the S&P is a sharp 600 discount (again), with the futures breaking well below the old lows (setting up a down opening again; maybe mild running of the shorts, but nothing durable). After that a toss-up, maybe another down-up-down day.


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