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The Inger Letter Forecast

June 18, 1999

Megalomania or common sense? Those are factors to consider when evaluating Thursday's testimony by Chairman Greenspan; especially the part that focused on the ability of modern day monetary authorities to intervene in ways that presumably didn't exist in the 1929 era. Not that we're in the camp calling for a "crash" any time soon (per se), but we are a bit cynical when any "managers" (which is what Fed heads are) start believing they can engage in a series of interest rate hikes, with the express (and he did basically express that) intent of breaking the markets to a certain degree, but presumably not so much as to result in a snowballing effect that endures or initiates some fiasco that requires years or longer to emerge from. How do we feel about this?

We actually concur with the Chairman; as you already know. As has already been frequently noted here; the real concerns center around the "earnings warnings" that will increasingly take center stage. Remember our noting that the "inflation devil" so many of course think is the only factor capable of influencing equity and debt prices, isn't. And that putting it back into hibernation via superficially benign CPI andCapacity Utilization data reports, combined with "relief" the Fed only will engage in a rate hike or two, would help spur the upside per our overall forecast, but at the risk of looking too far ahead, would find a real surprise being selling into strength regardless.

The Fed intended keeping the Street "at bay", as they're trying hard not to get behind the curve. Listening to the Chairman today; you almost heard an echo of our comments that the choice was as noted the other day; "to pay the Piper a little now, or more later-on". Clearly not prescient; just aware of classic Federal Reserve monetary policy thinking; and his testimony amplified just that. The Chairman compared last year's rescue to the seizing-up of markets in 1987; suggesting that we might not need all the factors in place for such efforts. In a sense that's inline with views on IMF intentions of being deflected from numerous interventions too. Combined with absence of tight collars in stock markets, means there's freefall decline potential out there; just potential.

Megalomania comes into play, only if you believe (as he hinted) that "men" can prevent stupidity such as occurred when (belatedly) theHoover Administration tried to tame the markets in 1929, and thus let normal market breathers turn into something far nastier, which led toDepression at the outside a couple years later (contrary to film-clips, it didn't happen in immediate succession). We don't think the Chairman is out to "save the world", as he's already done that with the bailout of LTCM last year (which turned us from correctly bearish from July to extremely bullish virtually on a dime in early October into this year's Q1; which did mark the high for most stocks). We just think he views the Fed's role as trying to prevent a relapse; but the hook as we've warned will be earnings; irrespective of well-intentioned efforts from the Fed, and maybe exacerbated by a hike just at the time things would be slowing of their own accord. When the IMF noted infinite rescues as not sustainable weeks ago; the markets ignored it totally. We think they missed something.

We think the international financial architecture is quietly being revised; especially where fixed or unrealistic rate-pegs exist. We also suspect this is the silent additional risk the markets are very much looking askance at; which means they can implode prices should any of thesederivatives matters resurface during the course of the next few months. We suspect that the Fed's message is not just to calm the market's superficial concerns that everyone's dissected today, but rather to prepare the markets for a series of hikes, and for an absence of Fed & Treasury intervention like last year; in the event push comes to shove, and some of the greedier hedge fund managers are not inclined to retrench a bit during these periods of strength we have forecast from mid-June 'till early-to-mid July overall at the longest. We suspect the market recently misinterpreting relief rally action from daily oversold, by putting excess confidence in ideas big-picture corrections are over.

And it is that "mix", where import prices are not declining as they where, where labor markets are not only tightening, but experiencing higher wages slightly, and where earnings will likely soften in the United States; that creates an interesting combination which could actually make investors & analysts who argue there won't be much of a rate hike essentially correct; but wrong on stocks. That would be exactly what we've warned of as relates to "relief rallies" that then shock investors when there is only limited follow-through to the upside, and they discover the real trouble: profits.

Modest preemption action on the part of the Fed is what we've called for; precisely so the Fed is able to avoid traversing the trails pioneered by the Japanese roaders; as noted last week. (We must reserve this portion; as it includes an assessment of Greenspan's conclusions, why he did take the stance noted, plus an early speculative call for what happens later this year and next.)

Our macro pattern call . . . was adjusted months ago to the similarity that had developed, both with the late Winter and early Spring distribution, and our forecast sharp May decline, which was when we established the 1380 level (which forward-roll adjusts to the 1392 Sept. S&P level) for a reference purpose representing an important top for the stock market. At the same time we then indicated (yes; way back then) that there would likely be a rebound around Memorial Day, a drop into mid-June, a rally into but not necessarily all the way throughTriple Witching Expiration, followed by another dip, then a rally up into early July, followed by a next significant down wave.

Art, not science . . . describes trading the market; otherwise systems and rigidity would work all the time for investors and money managers. And though the market (not every trade; nor each or every day, but most) generally is adhering to our macro-pattern-call outline, we don't require that it hold together quite so long; even though so far it is doing so for the Senior Averages. And we'd love nothing better than to proclaim clear sailing ahead and all corrective action over; but life isn't so simple, and this market isn't going to be that graceful. In this case; a couple analysts (remarks tend to focus on what's wrong with the fascination on Fed vaccinations; and must be reserved).

…..That's not to say we're not long the stock market periodically; in fact we were during a good part of this week on our 900.933.GENE hotline service. No; we don't have technical evidence to say the market will in fact "crack" as soon as we get through Expiration; but with the Fed head plainly outspoken, it is the equivalent of an Expiration-boosted rate hike that the market thinks it likes (nominal), and a more likely failure that can take place and then come up into the Holiday from slightly lower level areas, as expected, and maybe not roiled but accelerated higher by the actual FOMC meeting. (S&P pattern projection is fairly complex, and reserved for subscribers as are Daily action . . . Bits & Bytes. . and Economic News & Releases. . . (separate sections)

Meanwhile we did get an Unemployment Claims number contraction Thursday, and we did get virtually precisely the attitude and tone regarding preemptive action by the Fed Chairman, and a T-Bond rally which was due almost regardless of what was said; just by nature of trapped shorts and the net commercial long positions, as previously outlined in recent days and weeks. We're in a bit of a neutral stance regarding the long-term bond conditions, because it's a contest between fading profits and rising wage & price pressures; and it's hard to know which will impact faster. If either occurs (or worse both); it's going to be anything but enthusiastically bullish for the market. It was encouraging to hear a Fed Chairman concur about how harmful a rate cut now would be.

In Summary . . . the Fed Chairman validated our argument (at least his opinion agrees with ours in this case) regarding difficulties in improving productivity from here; an essential we've noted to building profits in the kind of straight-line growth some are looking for. He has faith in the system; and so do we, unless events ever require otherwise. We also think the PC stance we've taken in the first part of this year represents the calming of a technological revolution into an evolution. It's our view that the majority agrees, which is why they all shifted intoInternet stocks, just in time for a blow-off, from which only the hardy (and/or smart) will be assured survivors. The minions of sites existing today will pail over the years; though the winners won't necessarily be all the older household names from media, though each and every one of those companies are trying to do just that.

(And of course the majority of 'net IPO's imploded; though statistics at offering prices…you know; the prices essentially no normal personal was able to buy them at… makes them look a bit better for the year. If you look at most all the new ones on the basis of the first week's close or even the first day's close -not open-; the results for those chasing pipedreams was disappointing; per our warnings much earlier this year. Sometimes what you don't buy is more important than what you do; and in this case we argued even late last year against Y2k stocks en masse. That sector isn't even mentioned by most on the Street; as especially Y2k plays, imploded, with buyers of stocks with no legacy business once fixes were done, just as we said would be the case, holding-on to essentially imploded or even nearly worthless stocks in many cases. What we did is stay with is half portions of aggregator or facilitator stocks, mostly in cable and telecom. This worked out very well; as we basically took gains off the table for stocks bought in last year's collapse or even earlier in the case of some of the late '97 and Summer of '96 buys; each time when few liked the sector or the market and even fewer had the vision to see trends of convergence & connectivity.)

On the discussions about "IT lockout" of new purchases; I just chatted with a regional manager for one of the major national Telco's (prefers not to be identified) who affirms that his field rep's. are having trouble "booking" IT manager's new projects until after the first of next year. If so, on a broader front, and per our earlier thoughts suggesting this, there would be a fading of profits in the '99 2nd half; much per forecast, and very much not what the Street is generally anticipating.

At 8:30 p.m. EDT; on Globex, the S&P Sept. premium is 1460, which is little changed from the regular Chicago's close. As suspected last night, the Fed Chairman's tesitmony supported the mere quarter-point increase argument coming from the FOMC meeting later this month, and then a strong rally into early July, which would fall-inline with our overall pattern call. However; for now we'd be wary of a strong rallyextension effort Friday morning, and look for it to wane later in the day; with possibly an interesting little sell-off into the late going. Preliminary call: sideways-up-dip-up-down. Next week could easily be down-up-down; but that's tentative for the moment; and will be updated on the 900.933.GENE hotline and our nightly Daily Briefing's going forward.

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