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The Inger Letter Forecast

February 11, 1999

Supply is overwhelming demand. . . not just in IPO's, like the permabulls are rationalizing, but with the huge long positions "hot panting" mutual fund or vociferous hedge managers apparently haven't in any meaningful way started liquidating. This not only precisely reflects our warnings of virtually non-existent cash balances among funds putting the corralled retirement funds to work as soon as they got their hands on them last month, nor just their frenetic efforts to squeeze out of keyhole-size exits during recent days of projected market breaks, but also what increasingly is an absence of analytical skills. (Either that; or they were overtaken with lusting after markets that had already advanced, which was the reward for those buying last Fall, not the signal to lunge in after a forecast double-top had already been conventionally constructed in the January patterns.)

We are indeed appreciative of the many kudo's from investors noting the broad outline of what's transpired several months back, when we called for a strong 4th Quarter, no equity shorting until we got into early '99, and a general up-down-up January (to be primarily used for lightening-up), preceding specific calls for a "false-start" February rally leading to risk of market breaks between Feb. 2-9; now accomplished. That of course was the basis of not only a March S&P 1280 short-sale, but the ensuing shorts on each rebound since that one was covered, which yielded results exceeding the total drop from the 1280 level to where we are now, incidentally.

(For a couple days, recognizing the technicians selling anytime on the way down from our call of a top at the March S&P 1280 level, in harmony with the rally on the Fed non-news failure call we shared the prior week, we've been on the prowl for a rally -albeit temporary- in front of a nominal February Expiration, believing too many players belatedly established bearish positions. That of course is the rally underway, and the Inger Letter hotline -900.933.GENE- after accruing many thousands of basis points on the downside since 1280, reversed, and is now holding long the March S&P from 1226-28 on the first pullback early Thursday morning. Please do not assume this to be more than a trade, in harmony with remarks in Friday's Daily Briefing, later tonight.)

Let's begin our technical work tonight, with a look at the TRIN (or Arms) Index, which is quite a bit like what we saw in June and early July, and nothing like what bottoms look like. While this is a bit of a "rough" kind of gauge (which it why we don't show it often), it's helpful to keep in mind that many of the proclamations from the Street are likely early as far as an Intermediate condition of the market interpretation is concerned. Also; while emphasizing that breadth was not a key to our 4th Quarter rally, we warned that breadth continuing negative into early '99 was important, to the maximum, quite really. And on top of that, the Russell 2000 (RUT) is deteriorating as well. A bearish alternative would be a series of failing efforts to hold, even over a week or two, followed by an accelerated collapse of the stock market. Probably that's a sufficiently straight-forward eye on risk; while we continue trading S&P's from a much shorter-term perspective, as we must do.

Banking reform. . . is a topic of Thursday's "Greenspeak"; not to mention an Impeachment Vote nearing; though that's probably not a major market factor actually; at least not as expected to go. We've observed a consistent deterioration of the Hong Kong market; which though not grabbing the 30 second (if that) attention span of domestic media soundbites when serious things warrant, is still not only worthy of analysis, but is a real concern. Our ongoing views in late '97 or early '98 held that overseas problems would drive money into the Port of New York's perceived safety, at least temporarily, then for various reasons concluded in advance the market would capitulate in July, with no important low until October, with an ensuing flight-safety-assisted rally into early '99, as indeed happened. It's not out of the question that late rumors yesterday, regarding Japanese sales of US Bank shares, were tied to an indirect warning to Greenspan not to be too tough at the testimony tomorrow. However; we already concluded minor repatriations are underway (how it resolves comes next; which must be reserved for subscribers).

The problem with the latest phases of the ongoing debt implosion and (next derivative crisis), is also the opportunity. First of all; Latin America is not Asia; and we export intellectually-derived products Southward, as opposed to natural-resource products Westward. Therefore, permabulls are just putting another spin on the trade situation by talking percentages of exports, rather than what those exports are, and which industries would be negatively impacted. Further; Argentina & Hong Kong are dollar-linked currencies; therefore a domino-capitulation out of Brazil, would for sure (o.k.; likely) have ramifications that impact U.S. markets harder than is broadly perceived.

Now; in correctly forecasting Q4 '99 strength; initial flight-to-safety effects from Brazil, and the up-down-up January which afforded selling (not buying) opportunities before rather a precisely (in all humility) identified February 2-9 breakdown of the New York markets, we noted that this is not 1998. "Shock value" is somewhat diminished, which set's up a varying form of complacency. And that is why we properly said the market wouldn't have a broad brushstroke move in January, but instead a series of alternating stair-step rallies and declines, which by the time we entered February, at least would be recognized enough to initiate a harder hit. (Then; expected rebound.)

We think there's no doubt the domestic economy held up longer than even Chairman Greenspan was looking for (but not other than we were), and we think there's no doubt that the LTCM "fix" in fact was so obvious that it triggered our extreme (relative) optimism for the 4th Quarter, changing virtually on a dime, and very profitably so. At the same time we concluded that once we got into 1999, whether they admitted so or not (some have; others haven't) banks wouldhalt leveraged lending to hedge funds (or at least in the proportions of insanity provided in the past), while smart investors would demand their managers embrace more conservative and realistic policies. Most investors in such "pools" (that's what they were/are, and exceed leverage prevailing during most of the speculation in the 1920's or a mini-version in 1986-'87) tend to be middle-aged (around 39 or so, which I'll admit to, though I've never leveraged myself so insanely, nor should anyone ever in our view), and we suspect did not realize how leveraged they were, and do not desire it again.

This assumption had something to do with our '99 call, as we felt "ponzi-like" unending thrusts of a type that endeared themselves to the "new-paradigm" crowd were not only unsustainable, but in fact were destined to history, at least for crowds that failed to heed our Spring/early Summer of '98 warnings, and got decimated while we profited from last Summer's and post-Labor Day forecast liquidation phase, before the then-determined 4th Quarter comeback. We are "new-era" stock analysts; thus our multiyear focus on computers and telecommunications well before there even was an "Internet". However, we are not "new-paradigm" types that believe somehow all this equates to outlawing the Business Cycle, or periodic bear markets. It's also very noteworthy that investors tend to hear such talk of "this time it's different" only near tops, but never near bottoms. If we were cynical, we'd argue that isn't curiosity, but efforts from some on the Street to market or help out their necessary exit strategies. Some vociferous "school of what works" types embrace strictly buy-side mentalities whether or not they're knowingly assisting institutional exit strategies.

Digesting that remark. . . we again cheer the American investor who has properly shunned high equity investment this year; with a tempered-enthusiasm we absolutely advocated in our call for the Street to simply be trying to get working citizens to identify equity, vs. debt and money funds, in those little boxes they check on their annual choice list. Our view was that the January rallies were the culmination of rewards for those who agreed the ''fix was in" last Fall, or who don't at all buy the argument that Gold has to move before anyone's going to worry about inflation's rise in the fullness of time (not yet, but we're getting closer). If the precious metals conspicuous lack of participation reflects, (as some have speculated) an orchestrated intra-governmental effort to control the supply that's fed out (though we lean towards Russia innocently being part of that… well that would explain why Fortress America has been able to resist international onslaughts so well. It might also be a warning about what happens when that intra-governmental strategy is ended, but let's not unduly focus on that here; after all this is just a Daily Briefing not the Letter.

In any event. . . we wouldn't be surprised to see the Chairman try to walk a narrow road between needing to see foreign markets continue stabilizing, but helping my old friend Dan Glickman's (he is our Ag Secretary, for any who don't know) efforts to help achieve some price support for U.S. grain producers, or for that matter cattlemen. (We don't provide particular commodity choices.)

We suspect the Fed is getting into a Catch 22 situation; (balance reserved for subscribers).

Technical . .Daily action. . . Bits & Bytes. . . and Economic News & Releases: (these are all sections reserved for subscribers only; as per usual).

In summary. . . the McClellan Oscillator is at -130, down from -120, which continues to show deterioration, but at a fairly oversold daily basis. Before getting too excited about upside, note that the Summation's now below the zero line, at a reading of -4 today. Recently we shared an overall chart to show this internal deterioration, noting it supported our view that we've been going through what is a distribution phase of the market, which after another series of false rally efforts, likely (portion reserved; but basically refers to the then ensuing drop). Only then would one look for accumulation phase, making most of the clarion calls for "bargain buying" premature in our view; unless one's timeframe is highly miniscule in duration (to wit; the expected Expiration rally of some debatable magnitude). While there are always "trades" (and the next certainly was going to be a long for this particular rebound on an hourly/daily oversold situation), we view new investing as something a good bit more than a couple hours or even day's duration. That's why a distinction between trading and investing is clearly made. (In this case; again; we reversed to the long side for trading of determinable duration as DB readers will be apprised in Friday's report.)

The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”
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