Impact of a Slower Growth-Curve

November 30, 2001

The ripple effects of the market's technical status . . . had much more to do with a very heavy and forlorn tone to Wednesday's action, than did corporate news such as Enron's (ENE), frequently being cited by analysts as a 'reason' for decline. However, as much as we have criticized that Company over the past year (as a key contributor to high electrical and natural gas prices because of their trading practices), we simply believe that the corrective action underway is about as desired (having warned stock market advances as long-in-the-tooth over the past two weeks), though there are at least a few factors that (to an extent) can be fundamentally correlated to the pullback.

Though we tend to believe most of this action is technically-based, there is no doubt that our comments in recent days about a slowing of recovery expectations, termed a 'protracted' but slower-rate growth curve, may be on-cue but not particularly thrilling to investors. While we do understand (and concur with) fears our slowdown need not degrade to a 'Japanese' level debacle, the basis for our perspective stems more from a belief that there will not be the instant post-Afghan war recovery (such as post Gulf War snapback) many look for immediately, because the heart of the fighting overseas may lie ahead. That does not mean we won't get that recovery over a protracted time period (we will), or necessarily endorse pursuit of all enemies, or view the year's only blessing-in-disguise from the tragedy as being one that prompts action against states and terrorists that have similar ends in mind, before they are fully prepared to strike with feared WMD's (weapons of mass destruction); though that sure is a valid point.

While we think the markets for two weeks have recognized the extended nature of all the forecast under-belt price rises, and the possibility (if not probability) of a wider war in the future, that has primarily been a factor to help T-Bonds increase a bit again (a lowering of rates), after the sharp break from the indicated previous short-squeeze in a topping formation. We think what we think the market is sniffing-out, if one insists in finding a fundamental 'reason' for decline, includes some fears not just of Middle-East coalition members bolting the cause, not just the increasing tension with the Saudi's (a factor again revealed by their singular hesitation at providing aircraft passenger list manifest data to U.S. INS and Customs staffers), but also the reticence of Europeans to back our efforts (certainly not universal, but detectable) to rid the world's terrorists, aside from those involved directly or conspiratorially with the September 11th attacks.

That is a bit disconcerting when one looks beyond the very immediate term. Since the day of the 9-11 attacks, ingerletter.com felt that the greatest threats weren't those solely in the mountains of Afghanistan (important as they are), but the 5th columns and urban infiltrators here and abroad. Assuming we're right on that (and evidence suggests we are), then anything that potentially erodes the world's staunch unanimity on these efforts is potentially deleterious to the rapidity of success on the terrorist-war front; hence an impediment to subsequent economic recovery on a worldwide basis.

While we have felt that Dollar strength has been assisted by many foreign countries (particularly some oil producers) somewhat leery of their own fortunes once efforts to root-out terrorism come closer to them, and have recently felt the overall American recovery is a far longer-term affair because of the probability of an expansion of the 'theaters of war' beyond Afghanistan; we still believe that such a combination is a net plus for the durability, if not a spring-like quality, for a forthcoming economic recovery.

It is accordingly probable that interest rates will remain relatively low for quite some time, and that will help underpin the recovery too. It is also ironic that recognition this isn't going to be a slam-bang contraction/recovery, will help some form of economic stimulus package traverse the increasingly-combative halls of Congress. As lingering worries about the economy increase, the probabilities of meaningful further stimulus, and likely additional Fed action as well, will work well into the idea of the forecast dip in the market being contained and limited (likely) within the outlined parameters. This may even have some correlation with the upcoming FOMC meeting, and we may get further hints on Fed policy at the 'roundtable' discussion with Mr. Greenspan Friday.

As far as the pullback, expected long before the Enron matter, goes, whether related to a celebratory blow-off or not, it should be well-contained within reasonable limits as any time you get sharp panic lows, such as September's 'V-bottom', coming as it did on the heels of what was expected to be resumed -albeit temporary- bearish activity in the post-Labor Day timeframe in any event (prior to the 9-11 tragedies as it was); it is important to note that in such liquidation washouts you normally don't make similar low prices available anytime soon if the rebound move is for-real from a longer-term basis. So while it didn't matter if the December S&P was able to penetrate monthly resistance -or not- on any sort of upside multi-month after-the-fact closing price level (unlikely for now), we wouldn't expect it to fold in full-blown tests of September's lows.

The primary weakness in the market has remained those sectors we've warned of as vulnerable, or where often too much institutional money was being parked in what are so-called defensive areas. Cyclicals and multinationals have been singled-out as risk vehicles for weeks, with warnings about Oil spiking to near 30, and then breaking 20, that goes back to the start of the war, with the one failing fling to that price area then. Most of the weakness in Tuesday's reversal, which continued throughout much of the Wednesday action, was in these categories of stocks, as well as financials such as the Banks (BKX), where a deferred recovery would indeed impact their expectations.

Because we're nevertheless coming to the late stages of a recession (regardless of how rapid the recovery is, and that may vary according to the pace of eliminating the scourge of terrorism), and fiscal and monetary stimulus have already been in place, and will likely be augmented (whether by payroll tax breaks or other designs), there's less of a bear market rally argument to recently-projected topping phases, than there was earlier in the year, or at various times before stock prices dropped significantly.

There is possibly more such an argument for multinational or cyclical stocks, beyond this drop and their next rebound, than there is for technology, which was expected to lead the post-panic advance, from it's very start, as clearly denoted on September 20th and 21st. The very potent behavior of theNasdaq 100 (NDX) is certainly entitled to a rest, though we do not expect the type of downside some analysts do (many of whom probably were focused on the wrong groups, and basically hope to get Fall prices available once more in solid technology stocks, which is particularly unlikely).

One of the key stories we've discussed for some time, has been high-end demand for Pentium 4 chips exceeding Intel's (INTC) own business forecasts, a couple months or so ago. Contrary to those who see an apparent P4 shortage as a negative, we've tended to focus on the little-discussed shift to the .13 micron architecture of the new Pentium 4 2.2 GIG chip, which more importantly than being their first use of copper connectors, has double the 'cache' memory (512kb) of previous P4 iterations. As you know, we thought the Company was keeping mum about the improved chip so as not to hurt holiday sales, and that's probably the case. We also believed the new design is well into production already, so they could not increase capacity devoted to making more of the older designs, as far as the high-end chips are concerned. Today, some analysts assess lack of current old-P4 production as a negative; we don't. Technically the stock of course is entitled to correct somewhat after leading the upside from lows in September, as postulated. Fundamentally, if supplies of the higher-end sort of P4 run-out, all they might do is premier the upcoming one sooner than was first planned.

This may not be as difficult as it sounds; since we understand deliveries commenced to OEM's (balance of these stock discussions reserved for ingerletter.com readers).

So, for the moment, the expected soft 'Beige (Tan) Book' Fed regional report, a falter at what some thought was key resistance (we've belied the importance of that for the last few weeks, since daily and weekly resistance long ago came out, not to mention that most emphasizing that recently have failed to cull-out distinctive group qualities), and the ignored beneficial by-product of maintaining a friendly fiscal initiative string in Washington, while general war progress continues; all point to a technical pullback. It has been and remains our view, that most of what's occurring is technically-based. Of course we might also note the 'wash-sale rule' impact, which would be people selling now, hoping to buy-back at December's tail-end (conclusions reserved for readers).

It would have been a lot of fun to have the market breakout before rolling-over, but is not out-of-the-question that this kind of falter may actually rekindle negativity enough to actually be of help down the road, if not at the moment. Suffice to say, we've had a lot of achievements over these past three months, so aren't particularly disappointed in the rollover; not only because we were on guard for one anyway, but because this is probably about what a market doctor needs to write prescriptive stimuli for later on. In the meantime, the (900.933.GENE) hotline contemplates buying into an early fade on Thursday, but mostly for short-term contratrend rebounds; then maybe lower later. (As of mid-morning Thursday, the hotline holds a Dec. S&P 1126 long for now. It's in hopes of meaningful rebound, if not an early shallow low of overall corrective action.)

In summary . . . as this post-holiday week evolves, several factors have had and will have potential impacts on what was described as a short-term extended market days ago. One of course relates to safety and success of our troops in Afghanistan, now that Marines have joined the fray too (10th Mountain possibly enroute). Another is the reactive response to more soft data on the economy, as if anything was unusual with that. After all with the U.S. Nation being in Recession, and Deflation of sort underway (many months after the actual submersion), we should be closer to the cusp of newer recovery from that contraction, at least in domestic-centric industries, as 'official' data reveals what the entire Country has known for months overall, and about two years in technology. Basically they should be focused on the next phase, not the forecast that a break was coming in 1998, the Fed-led rebound therefrom and an unsustainable or parabolic thrust-up in early 2000, which was not only fraught will peril, but expected to break, partially because of actions the Fed took while talking-down speculation. At this point the Fed's actions, and it's intentions, are on the same (and proper) page.

Next Durable Goods orders may not be so soft as Confidence, as 'cocooning' reflects itself in the sale of useable home goods for the holidays; something we've speculated about since the war's start, but let's not worry about how that impacts Thursday, quite a minor factor in overall technical behavior, unfolding within reasonable parameters.

This coming Friday, Fed Chairman Greenspan will speak in Washington to the Euro 50 group, in the afternoon. These prepared comments rarely make news, but as he is expected to participate in a 'roundtable' after the formalities; that will be well-watched.

Special note: to visitors that missed our remark last night: due to personal injury from a fall, Gene felt compelled to cancel an anticipated presentation at a weekend Miami investment conference. We apologize for any inconvenience to those planning to say hi, but the accident just occurred, so discretion requires limited movement for awhile.

Wednesday's NYSE McClellan Oscillator eased to around -18 (after maxing-out an overbought condition over the preceding two weeks), while NASDAQ worked lower, to +5 now. Of course the move from September's climactic reversal lows, had been long-in-the-tooth as outlined for two weeks, and noted as on borrowed time since, but intermediate and longer-term, ideally will head to projected later levels noted, barring major interruptions to Allied efforts; but not sustainable yet. The Summation dots now have either turned-down or contracted (incidentally); and this is about the right time, as the overall Senior Averages completed their 'equidistant' moves two weeks ago.

This evening the S&P futures are up about 170, with premium about 78 (post-NYSE selling took place at a fairly robust clip in the final moments, with a little evening blip up). Thursday will likely be down-up-fade-up-down, and hopefully better for an hour or two, with more bears back on board the market's activity. However, even if we can get a revival underway, bears will resist it if they can, as more correction would be the normal occurrence over time. Our prayers remain with U.S. Marines, Army and all the other free world troops, as they join Allied Forces fighting on the ground overseas.

One cubic foot of gold weighs more than half a ton (1,306 pounds).