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The Inger Letter Forecast

May 20, 1999

Strength in T-Bonds. . . followed only a minor hiccup in the wake of our forecast move this week by the Federal Reserve Board's Open Market Committee. It came in the form of an asymmetric directive on tightening, was expected to deliver equity rebounds in Wednesday's ebb and flow, simply because (and it's truly amazing) many investors in this era don't understand some of the very basic correlation's between monetary policy moves, the bond market, and the stock market.

Nevertheless, the market's always right; and we planned to exit the S&P short once stops were hit. It was surprising that this again didn't happen, although the day's later rebound came close, indeed. It will probably be necessary to exit this tomorrow, and not nurse it further, despite reality checks noting that very little happened outside of a desperate late effort to firm some key DJIA component issues, plus we are well within the rebound parameters outlined in last night's DB. So why bother exiting the trade? Because we could still get the desperate effort to swing this higher; and with the presence of some bears ceasing the moment to talk about how risky things are; you just sort of know others will make valiant efforts to take this up, even if it fails fast in the process.

(As it turns out; that is not exactly what we did; but maintained the S&P 1380 short that came on top of a 5000 point down and up gain, as we fortunately were prepositioned before Sec'y. Rubin resigned last week -a short, which became a long- and then basically got short at 1380, which is ahead considerably since. What we did do was designate it as an intermediate play, for those so inclined, and for those who don't of course stay with any trade overnight -which is the case for many S&P players- provided guidelines separately for any trying just for intraday base hit plays.)

By the time Wed. was said & done; the Dow Industrials recovered to plus 50; Dow Transports were off 70, and the Dow Jones Utilities were breaking out to new highs for the move, amidst numerous recommendations (likely months after they bought) from various funds to buy the Ut's. Again; the Transports were confirming not a strong stock market recently, but a strong economy, as was originally intended when Charles Dow commissioned the gentleman to work out a study to determine just that. That is why Dow "Theory" confirmations typically come near a market top, because in the modern era that is normally accompanied by higher Oil prices (transport fuel cost of course), as well as the first inklings of wage and price pressures thought by most impossible. I suggest that although the API data we commented on last night showed an inventory surge, this is a transitory factor, and that demand will increase later in the year. If it does not, then the stock market's problems are infinitely more immense, as troubles won't be competitive debt yields of a traditional nature (in late-stage business cycle growth), but unsupportable multiples & ROE.

We, to no great surprise, see the potential of a confluence of both difficulties, as profit margins in fact likely are peaking, while at the same time a slowing forward economy runs into real pent-up pricing pressures, that for a time will not be able to co-exist rather easily. That is what we meant when we spoke of Asia and Europe eventually catching up with the forecast market & currency stabilization's we accurately forecast last year (and which Secretary of the Treasury Rubin today in fact basically affirmed, almost precisely in the same words), while consumption or demand for U.S. produced goods would lag that development significantly enough to foster a non-linear year.

Will the submerged, emerge?

Late last night my old friend Dan Glickman, our U.S. Secretary of Agriculture, was on ABC's Nightline with Ted Kopple. He again emphasized (as have we in the past occasionally) the plight of the American farmer, the number of acres coming out of production for a few reasons, noting a mostly inadequate subsidized non-production Farm Bill, in the wake of the submergence of so many foreign buyers. (And no; he is not a conduit for the similarity of remarks from the Treasury Secretary, to the extent they seemed to emulate my view on the condition of the Asian recovery. If anything, we're pleased to have forecast the stages by which these nuances of change would evolve from the depths of despair overseas. It's only common sense that such unused productive capacity must be utilized, and put back in production before there's large demand for new goods and services, particularly such as those foreign countries long-bought from the United States.)

Anyway there's clearly an avoidance on the Government's part (some old friends included or not) to come to grips with the extent the American farmer has been proselytized in the interests of not spiking the CPI, and keeping the illusion of low interest rates and zero cost pressures alive. Now; it's almost too late. Thousands of independent farmers are being destroyed, crop prices came up a bit, but the last three years have had excellent yields per acre for all the major grains (negating it). Combine near-destruction of Russia's market with absence of the traditional Asian purchases; and it becomes pretty obvious how low price levels have been maintained, other than with cheap oil for long. In our view this is an aberration; and an area where the politicians have perpetuated the unusually low price levels by not acting (both Parties are responsible, and Dan for years was a Congressman from Kansas; who came from an oil producing family, so knows this very well).

At the risk of suggesting what this means now; we have the following ideas: a) commodity prices must in fact bottom, even if the U.S. has to subsidize prices indirectly by fostering resurgences of foreign buying, b) not to do so will accelerate the already pathetic slaughter and destruction of American cattlemen, which in itself sets the stage for higher beef prices next year, and c) not to do any of this, would in fact set the stage for much higher foodstuff costs when demand returns in a solely natural environment down the road. So, pay now or pay later; that's the ticket. Either way, you surrender the Goldielocksenvironment, which though politicians take credit for it, was an aberration by definition. A number of factors combined to remove the customers for awhile; so they ameliorate, which increases demand, or they don't, which means that big stocks don't justify current price levels. Particularly it's an inflationary combination (if you add higher Oil prices later).

Summary and market stance:

Remember; the interest rate arena bottomed last year, so of course the Bonds would be ready to move once serious threats to embark on any restrictive monetary policy commenced. With the DJU low way back when, the T-bond peak (rate low) months ago with futures then in the 130's; it is no surprise at all that such longer-term interest rate sectors are advancing now; it was the call. Terrific: borrow short to buy long; that's great, while the game works, but not for long. That's just a variation on the Japanese Yen-carry trade; probably very much alive at least on the short term.

So much for the wide naiveté on the subject of the interrelationships between stocks & bonds, and the myths being perpetuated regarding the never-ending era of low prices and interest rates. Not only sets-up forward trading opportunities for us, (this portion is projective; thus is reserved).

Daily action; Technical; Economic calendar (sections are reserved for subscribers per usual).

Our intermediate June S&P 1380 short-sale, which I believe drives home our view in this market of increasing risk, is clear. Now; for those who don't read or hear our work daily, be aware that we're also providing some interim guideline scalping ideas on the S&P hotline (900.933.GENE) for those who are even shorter-term oriented, and never (or rarely) stay with S&P's overnight.

In next week's Inger Letter, we'll also touch on why a mixed approach to investment structure is appropriate, and why varying types of allocation and suitability can't be summed up as "bullish or bearish", which is just one key reason we dispute such permabull, and particularly permabear, messages regarding either Rosy Scenario approaches, or bubble bursting mania psychosis. In the latter case, investors certainly are over exposed to equities based on mutual fund stat's, but those guys have missed the entire decade for the most part, so fall in the "stopped clock is right twice a day" category. From our part, as was the case around this time last year, we have little argument with being concerned, and that's why we're heavily in cash or equivalents (as ever in fact). But, we're always looking for special stocks (long or short) and always on the prowl for the best way to structure accounts. Let the bulls & bears argue valuation, which we well understand and have explained often; while we trade the market successfully in most all varying climates. A few ideas, or updates on old, have been gleaned from meetings at last week's Networld/InterOp; the world's largest computer Networking gathering in Las Vegas, and will be included. Voice-over-IP, (Internet Protocol telephony) and VPN's (Virtual Private Networks) were key buzzwords.

In a sense our S&P trading takes care of the "market timing" approach, and what started out as a bit of fun money, became a core component of our activity, and our service for that matter, over a number of years. We have no argument about difficulties increasing for "the market to hold its own", and we have promulgated the idea of a "wealth effect-induced decline" emanating more from Wall Street, than from the Main Street economy, or somewhere in the backwood mountains which I'm sure have great trout fishing. However, while definitely worried about valuation (when you don't worry, is when you're in trouble; but worrying isn't the same as avoiding or even hating the stock market, for whatever reason people get that type abhorrence embodied in their system) we play it. And, while having less total investment allocation, have still outperformed Indexes this year again; by virtue of trading the S&P in both directions, regardless of our personal bias of risk.

Don't fight the Fed!

Meanwhile, we think all these rallies are part of a bigger distribution, that the media's (especially on the more bullish ..almost institutionally so…channels of the media) sirens are disguising with the ideas presented to the public suggesting that not all Fed asymmetric directives are followed by a tightening. Sure; that's absolutely true. But if we get another LTCM debacle, we have not a shed of a problem of buying when the Fed comes to the rescue (if they do). However, talk about pulling the wool over anyone's eyes; the Street is forgetting how many of them fought the Fed in last Spring's environment, and they are doing essentially the same thing right now, by the way.

Again.. they are fighting the Fed. We have heard more than one analyst (and even a permabear) say to wait for the Fed to hike rates, then sell. Ha. By the time the Fed does that, we'll likely be a good bit closer to being interested in buying more stocks, and committing more cash, not selling. Since we expected this S&P trade to be important, and also that the FOMC would move mostly to warn than act (with a new Treasury Secretary coming on board and entitled to a "honeymoon") at this meeting, we thought the market wouldn't (especially in front of a nominal Expiration Friday as you know) totally tank yet; but we thought it was dicey enough to make this a more-macro bit of a play, not to mention my family commitments this week, and InterOp computer Networking gathering last week. The trades have served us well; about 5000+ gained last week in down and up trading (on the 900.933.GENE hotline), and then this retained live short from June S&P 1380.

Bits & Bytes. . . notes Tyco's (TYC) big 4 point rally, and TCI Music (TUNE) was very firm at the end; maybe helped by the defection of some AT&T guys from a video division, resignation of their old President effective with the change of name to Liberty Digital next month (and early on Thursday, a new potentially important deal with Viacom's MTV unit). Texas Instruments (TXN) was up 3; so those were the Letter's big Wednesday movers. (Just tidbits; balanced reserved.)

In a nutshell . . the market eased, after minor follow-through rallying, after the Fed's asymmetric bias statement forecast as most likely on Tuesday, then tried to tank, but got nowhere with a late comeback subsequently mounted. The McClellan Oscillator had a Tuesday read of -87, which was a nominal -4 change and that's often negative; but it improved Wed. to -56, which may be all part of the rebound & this week's nominal double-witching Expiration. It is a bit difficult to call the pattern for tomorrow (Thursday), but normally we'd say up-down-up; though we don't know that it will play that way. As of 9 pm. ET, the S&P on Globex is a little higher from Chicago's daily close.

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