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The Inger Letter Forecast

January 14, 2000

A "Coming of Age" . . by the Internet, likely summarizes much of what the Street is fearing now, as suggested immediately here in the wake of the largest "new & old media" merger Monday. To be sure, there are concerns about multiples contracting in the 'nets, while media partners mostly remain firm, which underlies both the maturity implied by the proposed merger, and the volatility.


You know there is General Motors (GM) and there also is Ford (F); so as one is always the first, that doesn't automatically make them the best, or the only victor in the grander scheme of things. Plus we were honored to have considtently owned Time Warner (TWX), somewhat unappealing a few said, when we bought it under 20 (split-adjusted) a couple years back. Meanwhile nailing a correct forecast of the "new media" consolidation trend has not resulted in immediate or general thrusts by other stocks, and in fact (as discussed Monday and Tuesday) resulted in profit-taking as multiples tended to gravitate towards some "mean". Since almost all 'net and media stocks do not have relatively low multiples, a degree of consolidation was expected and necessary in most all. Auto prices (and their stocks) soared early in the last Century (an age of antiquity, we realize) until the "production line" concept of Henry Ford compelled both price and volume concerns.

The protests and howls of competitors and their investment bankers were audible, but competing big and small cars had to move into streamlined production, along with dramatic consumer price cuts, which allowed the "mainstreaming" of the industry. AOL/TWX puts modern era pressure on competitors also; and hastens the rollout of AT&T's (T) digital broadband cable, to compete with what AOL/TWX will do. Does Microsoft (MSFT) which has already funded some of this, now buy Telephone? Ah; that's exactly why some things (including multiple adjustments) are corrective in nature, and do not define the end of growth, though they do denote a shift from revolution to the evolution of the industry we've rather clearly been outlining in our reports for many months. What we do know is that the Internet stocks have pricey paper which needs to be spent while they can; and we remain honored to be cross-represented in so many of the areas that have, are, and will be benefiting from all this, regardless of any dearth of general investor testiness, which is more a function of our forecast market pattern, and shift of focus to the Fed on the short-term. (reserved)

Every now and then we add a new representative one, which is what we did in November with Analog Devices (ADI), and what we did recently with yet-another optical networking stock. At a point during the unfortunate trip of the past week, an investor walked up to me and asked if by a chance I was "that guy" who worries about the market but owns the volatile techs long-term from years ago, and isn't bad to have in "his corner". Well; I don't about that part, but do know that we love to buy new-tech when few do, haven't hit every stock right (just the vast majority over years) and by the way believe the long-term interpretation of this week's mega-merger is a plus, after all this expected profit-taking (in harmony with our general market pattern call as well for January) is eventually out of the way, although how severe (this) is, is a function of monetary policy as well.

Note the Utilities were very strong today, which implies the stock market expects the Fed to hike rates, hence getting a handle on inflation and rate pressures. Keep in mind monetary policy most of the time has been expansive, regardless of rates (the "price", not "availability" of money); thus it was "a given" that money would come out of high multiple stocks in general, and Internets most particularly, as we moved into a New Year. Hence our forecast for acomplex January pattern; a call exacerbated slightly by the merger news, but not changed in our view. That view has been a false-start rally that was sold into by investors shepherding their long-term gains into year 2000, as you know, followed by a hard-hit to the market, but ideally not much more downside than near March S&P 1390, before another rally up, which might make new highs in the Dow Industrials, but ideally not in the S&P or the NASDAQ, before coming under new pressures.

This is not an exact science (though some keep trying to make it that, or probably wish it was) of course, though we're very pleased to have called both the market break (a "macro" March S&P short from 1494 at the year's start), and the speculated rebound a week ago, which precipitated a lunge at the highs, and took us out of defensive Puts and shorts at that time. While we noted that S&P players certainly can't stay with a single trade through this kind of volatility, we made a point about "that 1494 level being the top for anything early this year", and continue to stick with that, though nobody should try to extrapolate grandiose bearish conclusions (or bullish ones) out of S&P moves, because this remains a fractionated and heavily rotational market environment. What we decided to do on the hotline is scalp thrusts with the (900.933.GENE) guideline efforts, while recognizing many can't and shouldn't try to catch every hourly-basis move in the markets.

Daily Action; Perspective; Bits & Bytes & Economic News: (are normally reserved sections)

For the session, S&P results could approach 4200 points (probably a little bit less in the real S&P world, though that's the estimation based on the raw numbers), or better than triple the day's net change in the March S&P itself, which closed down only 1230. We indicated 1450+ as "inflection for now", pending any recalculation of the action, based on our ongoing work and down-up-down call for Wed. Thursday will be sensitive to Retail Sales and the PPI data, as well as the evening's Greenspeak, hence we are not doing any overnight Wed. intraday guideline S&P hotline effort.

As we discussed Monday and Tuesday, the merger contracts multiples, even if growth rates of a business don't slow; and that's because the integrated companies don't command such numbers of course, and because these things will take time to ramp-up and expand. For instance, there is no doubt but thatbroadband will now expand more rapidly, and hence reach more Americans in 2002 that might otherwise have waited until 2004 to have some modern connectivity, as so many of us already are starting to take for granted. But the costs to do that are immense, and will thus have a greater impact on earnings of such stocks for awhile than would otherwise be the case.

In addition, it made no sense to us that the market would keep surging in this year's first half, to only run into trouble in the second. The reappointment of the Fed Chairman gave a green light to move as needed (without political considerations), and if things remain historically per the norm (historically hysterical), we could then anticipate whatever the Fed's going to do in the first half, (portions preceding and following are reserved in fairness to subscribers).

The general investing crowds cannot be expected to be rewarded by responding to TV merger or acquisition news, or "new media" concepts after announcements, and that's precisely what is in essence going on here. For several months professional managers have been astounded that so much time was afforded for their distribution; often assisted (wittingly or otherwise) by what we're sometimes referring to as sell-side analysts who tend to upgrade stocks after they're already run.

The handwriting (we thought) has been on the wall for some time as far as both a consolidation, and transition of the 'net industry to a "medium", so we're shocked that so few analysts used the term "new media", which we have for months here, and kept focusing on the overworked cellular and internet portal sites, which haven't been attractive from a risk/reward standpoint for ages.

It was simply the evolving into a term of the convergence of entertainment and information, along with a forecast amalgamation of the Internet & conventional media, that has been a "core focus" here for over a year, and why we coined the term "new media" to describe our emphasis on how this was going to evolve into a next phase. And it is, although instant comprehension by many, of how this relates and integrates, was the great excuse for sort of a blow-off in many stocks which were no longer cheap, and actually weren't for some time ahead of the specific news, which has had industry-wide ramifications. For us, a number of stocks have been identified as "new media" all along, specifically Time Warner (TWX), which was moving that way for about the last year or so, and then Liberty Digital (LDIG), which is essentially trading up and down as a tracking stock for content, though in the long-run it is potentially quite a bit more, based on interactive television commerce, on the channels reserved by LDIG in the LM deal with AT&T (T) as previously noted. (The foregoing is not intended to suggest buying any stocks, which are well off last year's lows. Stock selections originate in periodic Letters, with interim follow-up's occasionally in the DB's.)

In summary . . . incredible volatility and events continue characterizing the first weeks of 2000. It was our advance forecast, that if the world outside of the U.S.A. got through the Y2k worries etc., essentially unscathed, that was bearish, not bullish as so many analysts thought. And that if they did not experience problems (there was an assumption the U.S. would navigate it essentially fine on a relative basis), the outlook was for repatriation to accelerate, along with the Fed draining of reserves. The world navigated into Y2k fine; and hence the forecast January pattern's unfolding.

As repeated last night; mostly we're trying to follow our own gameplan; which was the idea that the first break wouldn't be sustainable, and you'd get a subsequent rally to new Dow Industrial highs, but not necessarily in the NASDAQ or even March S&P. You got a new DJIA high, but not NASDAQ or SPH; so why in the world should we doublethink our own advance volatility forecast, unless the market requires revisions. As far as that goes, we think the merger-trends are healthy for Internet stocks, just not at prices the sizeable crowds of never-satiated institutional investors would like to see. The TWX/AOL "benchmark" deal, by definition, sets some parameters which will be harder for other Internet stocks to surpass. So, if the largest of Online/Internet firms can't do a higher number, how can anyone else? Therein lies the rub, and therein lies the pressure in many Internet stocks, in harmony with favorable longer-term prospects (fundamentally) by virtue of combinations with companies than can have the capability to ensure survival of what basically are concept stocks betting on the come. But what the problem is will be that bane of the modern world: numbers than can be run and calculated by actual analysts, and with actual numbers put on them, which creates what euphoric Internet players often don't want; a valuation modality.

The McClellan Oscillator was very extended around +170 or so Monday, +105 Tuesday, and it is around +81 today, which looks like a fairly confirmed turn-down from overbought excess to us. As of 6:30 p.m. Wednesday, the S&P premium is 1125 on Globex, which futures ahead slightly from their regular Chicago close. Our intraday action is flat, pending reaction to Thursday news. (After a theoretical 4200 point S&P Wednesday gain, the 900.933.GENE hotline is conservative.)

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