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Holiday Survival Guide

December 23, 2000

The sky is falling? Actually, most of the market is way past that bubble-bursting projected in the forecast for this year, presented over a year ago, and with roots dating to our bullish-to-bearish turn in April of 1998. Interesting, though we thought instantly that we'd get a big rally with the Fed charge to the rescue in the immediate wake of the LTCM debacle, we did not think that the move would be a new bull market; and at no time have the market internals affirmed that since. That's why we have often referred to this an 'aging' bear market; not some new negative adventure.

For sure one can argue whether monetary policy delays are behind the market's latest and very devastating woes for the large mass of investors who (for some reason) presumed the former old bull market was still ongoing (the one that ended in 1998, with the subsequent rally being mostly a modern-day version of the 1928-'29 rebound that we've occasionally speculated about, as from the real top of that 'bubble' preceding the '29 pre-crash high by about a year and a half). Where we to argue that, we'd have to point out a very key aspect to our more recent Labor Day calls; an expectation for the (more eventual than hoped-for, but interesting) break in the Crude Oil prices, which were then in the upper middle 30's, and thought it would likely coincide with some easing in the Dollar Index, as a then-throttled Euro firmed up this Fall and Winter; not bearish for trade or U.S. interests by the way, but an essential plus towards restoring and maintaining equilibrium.

At the same time, there's been a basing period in Gold, that has emerged from a basing sort of pattern (a couple times, but this move has a better momentum and structure to it), that likely is tied-to the easing of the Dollar (because it firmed in foreign currencies before Dollar equivalents), and possibly to fears of deflation, which are the opposite of traditionally inflation-related rallies. It is not that we can determine the sustainability of this move; but this is probably the first one liked in a long time, as outlined in the late November (December issue) of the Inger Letter, which very interestingly noted the commercial shorts working-off their positions, the oversold status capable of a $50 rally coming up, and even speculated about a potential rally on U.S. Election traumas.

Not big bulls on Gold, we nevertheless looked at resistance dropped to 275, and better technical conditions developing. To us the key is not inflation (that's gold-bug stuff, and not the real worry); but deflation and/or depression, which isn't something we fully expect, though recession already is here (by our interpretations of 'relativity'), as outlined in recent Daily Briefings. What does this have to do with our remarks on Oil, and hence the economic backdrop? A lot in our opinion. This is, precisely the opposite from the huge imbalances in the 1970's, a credit and debt implosion risk building, not dissimilar to that during 1997-'98, of the type we were chastised for pointing out then, and which precedes a possible derivatives crisis unless targeted interventions come forth.

To us that's the real reason the market's disappointed by the absence of a rate cut from the Fed this week; something we did not expect to occur (our forecast was a dramatic shift of bias, but as a matter of fact nothing more for now). This is fairly typical of Greenspan gradualism, as we have often pointed out, because he will move when prodded during systemic risk, but otherwise tends to be blindsided by preempting situations from unfolding in a more chaotic fashion. Now, we did not expect the Fed to move, for structural reasons that impact Fed Funds and other seasonally-tied rate matters, at this time of year. We do expect a series of moves in the new year, but after a degree of (cleansing as we termed it the other day) suffering beyond what might have been seen if the Fed had shifted their bias two meetings ago, and cut rates over a month ago, long after our work had already not only foreseen an economic slowdown, but anecdotally thought the 'official' economic data was completely missing the 'falling off a cliff' of the American economy then, as it also impacted the rest of the world, as essentially the engine 'anchoring' many other economies.

The Putrefaction Stage

We would not start focusing on precious metals; wouldn't invest purely in basic materials, would not overly focus on downside targets or price-points (even our own being approached shortly), or worry about statistical comparisons relating this NASDAQ decline to others historically. Mostly, to do so is media-driven hysteria that is somewhat the inverse of the absurd optimism ahead of this year's start, when certain pundits were estimating incredibly ridiculous goals for Dow Industrials while we were thinking of something like 7800 after the late Winter/Spring rally, which hasn't yet been seen (and we hoped would be seen sooner), but was impacted by the structural changes to the composition of the Averages too. Even now the action in the Dow isn't characteristic of a new 'bear market', but is something else; either a focus on survivable stocks while the 'new economy' ones fold (though this is pretty much across-the-board at this point), or one that just might shock investors further, if they get a shift into post-fund-liquidation and tax-selling seasonality, into the more equitably-priced tech stocks, at the expense of the currently rallying defensive plays, which include a couple of our own too, like (big) drugs which are becoming fully-valued short-term now.

The main point remains that a 'credit-crunch' is well advanced now, as is the bear market outside of the DJIA, and that an intervening rally could actually rotate the action from relative DJIA action stability, to a focus on the beaten-down NASDAQ, and not because of those compounded return commentaries, which make it sound like the OTC market is somewhere to invest, versus trading. When you combine immediate and decisive relief on the Energy-pricing scene, stabilize the Euro as we expected would occur, get past a Fed understanding the scope of President-Elect Bush's tax-cutting plans (so that there isn't too much stimulation, starting incredible speculation, instead of the multi-years overwrought investors are now being conditioned to prepare for to recover); it, well, is reasonable to presume that low energy and stimulative fiscal policies can combine to hit the permabears when it counts, which is slightly into the new year (or maybe just a bit sooner if all goes just right), after an automatic rally is already underway as the heavy foot of selling just naturally comes off the jugular of this market; the equity equivalent of a drowning person in what might be described as the putrefaction stage.

If that doesn't happen, then there will be unsustainable rallies, and the markets will continue what is a multiyear macro decline (when you factor-out capitalization and component issue adjustment considerations) to its (logical and) climactic conclusion. The timing would be variable or extended of course, but in no event we contemplate, stretched-out as long as some speculation. The credit pressures (that's the real bubble facing the Country) are too great; the difficulty of emerging from an extended economic catharsis too hefty a burden; and the proximity of the populace's general panic so real, that it would not be out of the question to see (the turn) into a rally that is met by a move on the Fed's part, that coincident with falling Energy futures, combine to result in one of the larger short-covering (and new investment) binges, seen in some time. That's part of a dilemma the Fed would rather avoid; but may be inseparable if they want to avoid something more dire.

Technically . . . this Fall's decline (in time) surely exceeded our own initial guesstimates as to its duration, though the estimated measures from the pre-Labor Day warning (such as for S&P and NASDAQ vulnerability goals), incredibly are only now being approached. A solid move into these 1200's for the March S&P was a given, if the noted key resistance around 1360-65 was not seen on a closing-price basis, and it wasn't. (Balance of section reserved for subscribers.)

Daily action . . . (after assessing what we believe is on the menu coming up soon), continued to work as well as able, with a rather wild, but successful, series of base-hit moves in March S&P's once again Wednesday. While few players likely made all the swings, which theoretically totaled a gain of around 4400 points, just with respect to today's shifts, the S&P hotline (900.933.GENE) guidelines remained flexible, and stayed on the short-side frequently, based on our thinking that (balance reserved; and by the way the way was to short a false start rally and then buy the drop subsequently anticipated for the early Thursday action).

Cliff Diving… has been a topic in recent days and weeks here. Again, we do not believe that the fundamentals for businesses are going to improve anytime very soon yet, which makes money manager views that the economy is still very strong, actually more of an ongoing bearish stance; though many of the guys and gals saying so, don't realize that. The only way to coerce the Fed to move before the January 31 meeting (and they should, though not likely until the Fed has a better feel of how significant a tax-cut is going to be pushed through Congress; so that what they view as excess stimulation isn't set-into-motion) is a perception of the economy in cliff-diving mode; not gliding along smoothly. Smooth is not urgent, capitulation fosters urgency; as has in almost every case been the hallmark of this particular Fed, as oft noted in these DB's. We now have a market in a 'capitulation' phase, that risks bordering on 'liquidation', if not arrested soon.

Despite our forewarning late in 1999 and early this year how the 'bubbles' would burst, and the market having a hard landing (with the once-strongest techs folding last into the rubble), this has extended past any level that would be viewed 'comfortably' by investors, and that includes many of the value buyers, not just traditional players in virtually any sector of the market. Reiterated last night, that gave the market an opportunity for a 'cleansing' continuing, though outside of a few absurdly high multiple stocks, we really don't see how much lower they're going to take this immediately unless it simply crashes, or better yet, does a turnaround and (balance reserved).

Further, we repeatedly reminded investors that this Fed has never gone from one extreme to the other, without some intervening gradualism, that was already telegraphed a couple weeks ago (by the unmistakably friendlier Greenspan tone). By that we mean jumping (as we thought they would; and in fact did) from a 'bias towards tightening' to 'bias towards ease', but not with instant immediate rate cuts concurrently with the total reversal in stance. That will follow, but wasn't and didn't occur, inline with our call. Also, we again reiterate that the Fed's prime responsibility's price stability, not market-underpinning moves, per se. The Federal Reserve Board is inevitably aware of the extraordinarily fast response to the Chairman's initial economic address to the bankers, so knows that if all desires were satisfied at once, that the market (balance reserved for readers).

In summary . . we are looking for the possibility of something like an up (false start)-down-up pattern on Thursday; if we can get an early rally, margin liquidation selling squall, and turn up.

For weeks (actually a couple months now) we have not disagree with views that the first couple of Quarterly comparisons in 2001 are going to be difficult-to-miserable for any large number of companies, as reiterated repeatedly, and expanded upon beyond our anecdotal concerns early this year, and early in the Fall. In some cases that's in the price of the stocks (rest reserved).

Flat the S&P for the moment on our 900.933.GENE guidelines (your own efforts may approach our theoretical efforts, may do none of them, or may do better or worse as players determine on their own, which is the only way they should utilize any resource service) after quite a good day actually, even catching the last hard drop. Daily main concerns include those still-expensive stocks yet-to-warn, and depending on timing, could impact the market's technical status at such times; though we suspect remaining progression this week will remain erratic, but generally work to higher levels if we can get a rapid turnaround after midmorning selling Thursday. That's a hard goal for this week's market, but something to be watching for, even if short between the efforts to catch turns; with the realization of how this dampens sentiment sufficiently to actually be able to potentially increase the odds of a stronger (albeit possibly not sustainable) imminent rally try.

(Postscript: as outlined Wednesday night, we were looking for a false start, drop, and turn-up on Thursday. As of midmorning Thursday, Gene's hotline closed the opening March S&P 1286 short around 1273, and has continued long since; around 1300 at the time of this posting to web sites. We take this moment to wish a very Merry Christmas and Happy Chanukah to visiting investors.)

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