first majestic silver

The Inger Letter Forecast

November 20, 1998

Joining the "shooting stars". . .light parade in the skies, a number of high-flying Internet stocks are at risk of suffering the same fate as the meteor particles, at least in the fullness of time. Well aware of history, we are in our share of these spectacular plays, but because we bought them for a good value price some time back, not because we're interested in chasing breakout or relative strength issues that protrude above-trend, and risk becoming ultimate exploding stars. Further, a glance at selections we've made commonly show infrastructure, substance, actual revenue, or at least decent promise of delivering just that. Just as was the case in numerous industries, through time, the ultimate victors in a sector are not necessarily the early pioneers. Of course, that's why those who do play such vehicles, should approach them strictly as in-and-out trades, not as long-term holds (though some will be survivors). Already there have been a few implosions, and more will come. The current scenario reflects "money chasing money", always a very dangerous sport.

Our pick of the year, Rambus (RMBS), was actually a short-sale at this time a year ago from the 80's on the way down to our buy amazingly in the 30's. In a sense the stock was free, for all who profited by 40 points or so on the short, and now even better, with a new high for the comeback. Today, Rambus took-out 80! Even a previous pick of the year, Texas Instruments (TXN), made a new high today at 72; and has now tripled from it's split-adjusted cost around20. Fortunately, when we bought Netscape (NSCP), it was down in the 'teens, and totally out-of-favor. We saw the potential, and with relatively low-risk. Wednesday's biggest gain of all, Netscape was ahead by over 30%, up 10 around 39! (see Bits & Bytes) These were reasonable investments; not lust.

Conditions were similar for the buys of Earthlink (ELNK) and more recently Infoseek (SEEK), which while not unique today, have progressively done just fine, without risk of trading Internet stocks that are being "handled". Is the point current froth? Oh no, but yes, there is some of that present. Is it that the entire market's at risk? Not particularly, though a pause-to-refresh is quite absolutely due, and in some stocks already underway. The point is; making money sanely, and also controlling risk, even in the wildest sector of the stock market. And, for many investors more important; not getting drawn into chasing a "shooting star", even though we have said weeks ago (in The Inger Letter, too) that higher-highs than most think possible, will likely happen if all goes just right moving into the 1st Quarter of '99, though not without occasional, even volatile, pauses.

We congratulate all who leveraged themselves more than we were willing to; but wonder if they avoided getting hurt last Summer, or are just riding the coattails of the comeback that very much owes its longevity to an excess of cash pumped into New York, or leveraged by some of the very same parties that almost decimated their investors a scant two-to-four months ago. A warning; a manufactured rally is a rally, no doubt. And we haven't added a single short in recent weeks, as we took the view that this could happen, though on a daily basis it should run out of steam as a nominal Expiration completes, and of course we're gunning for a daily top with shorting of spikes in the S&P (a modest hedge to our longs, a periodic reasonable effort, with very disciplined risk).

Technically . . . keep in mind the S&P's continuation chart measures a minimum 1160 and to a maximum in excess of 1180 on this run, if it's simply a channel continuation. So far it is; that's why we made a point this morning, and last night, that until you take out 1130 in the Dec. S&P, you do not have a confirmed short-term reversal. Overall, into next year? Above 1200 we think.

Daily trading. . .sees virtually no chance of an important top at this time, continuing to anticipate the Street is on a quest to capture seasonal reinvestment monies, before they depart the overall trend. However, on a daily basis, the move -outside of a handful of stocks- looks exhausted, and even Wednesday's breadth was negative, with volume quite light. No doubt, options' unwinding and scared-shorts contributed to the final half-hour's acceleration, which really helped our stocks. As our (900.933.GENE) hotline noted in the morning, Wednesday's of Expiration weeks, typically are the strongest days of the week. Later a tug-of-war normally resumes, with all final Expiration related pressures yielding to new selling a day or two hence. (Balance reserved for subscribers.)

Profound fear, not confidence. . .likely prodded the Fed's move this week. Fundamentally; this market in many ways is ignoring potential realities, in favor of traditional interpretations of what a three-step series of cuts historically implies. To us; an American economy receiving stimulus, but in no way coming off a higher interest rate environment -that could remotely be interpreted as an impediment to a corporation or consumer borrowing- should be viewed as a defensive Fed effort. That's why yesterday we found interesting irony in a fully-invested money manager running into your's truly at Comdex, commenting "The Fed may save us yet". Ironical, because competing with his peers, he's fully in the "game", though worried like heck, and had and has no confidence particularly, as to whether the Country makes it. We have more faith, but are long stocks without leverage, and with no new equity shorts since the Fed increased its moves, earlier. However in a slightly more mature manner than those vying for performance bonuses, we're maintaining our (mostly terrifically performing) core longs, but refuse to put fresh cash into an extended run. Plus we have sporadically shorted S&P's as a minimal hedge, while at the same time acknowledging for a couple months that everything changed when the Fed started cutting between meetings.

However, why is the Fed continuing to ease (though they basically are done until the Q1 of 1999 in any event)? (Discussion reserved for subscribers.)

Fighting the Fed? Nope; we've repeatedly stated we have no new added equity short-sales for many weeks; and that's in recognition of our pattern call for the 4th Quarter, along with respect for the Fed's efforts, though our interpretation of why they're moving is at variance with many others. Foreign buying capacity remains more than constrained, and that won't change from a Fed cut. I suspect, as noted yesterday, that hangovers from LTCM and the like are behind the Fed ongoing panic, and in fact that many of these characteristics are reflected in an illiquid bill market which might probably be the prime Fed target right now. (Discussion balance reserved for subscribers.)

Risk aversion . . .is the generally unspoken bottom line for debt and equity managers. You won't hear many arguing against the markets, but there's little to be found in terms of financial values, T-Bonds have rebounded somewhat after the knee-jerk up-and-then-down reaction following the twin cuts Tuesday, and equities have had some trouble following Treasuries. Interestingly, this was (a few days ago) just the outline we provided for an environment in which the Fed moved, as we speculated domestic economic factors didn't warrant further cuts, though the Fed might move anyway. That means general consumer demand is quite reasonable, while the farmer can't really take advantage of lower rates now (demand for his products isn't spiking; even though prices are firming slightly), and players in the bond pits are increasingly becoming risk averse.

(High-yield bond and capital markets liquidity concerns; comments reserved for subscribers.) Is the Fed saying it'll be there if needed? Sure; but that's not going to trigger a new buying binge; not when bargains are scarce, fair market values not compelling, and fears of a profits recession in this country next year very much increasingly on the front burner, as we do forecast. That spells risk aversion, and the tepid reception to Fed action tends to validate that. In fact, since the hot Internet game is separate and apart from pursuits of many established money managers, one can speculate that the larger-caps are being dragged-along, under protest.

In a nutshell. .the "school of what works" crowd, at least for stocks, has seasonality on their side going into the 1st Quarter, though most are fatigued now, or suspect the game has been played. (Balance of discussion on specific stocks and forward outlook; reserved for subscribers.)

In Summary. . . we continued to view this market as at increasingly short-term high risk. Twin quarter-point cuts of the Funds and Discount Rate, emphasize the Fed is more worried about liquidity, not in a mood to actually spark the kind of "irrational exuberance" nearly 2 years since they first warned of it. However, they will always err on the side of "reflation" if they must err.

The McClellan Oscillator's +6 reading on Tuesday (a near-nominal –8 change) was followed by a Wednesday posting of -2, a mechanical sell signal, which might be a day or two early.. if that.

The market continues in transition, while a narrower universe of "stars" leads the charge. Today (Wed.) the charge was led by our own tech holdings, not recent cyclical performers. (Everything from our Time Warner (TWX) to 3Com (COMS) to Netscape (NSCP) to Rambus (RMBS) is in play.) We suspect the rotation is an effort to keep the advance alive, but simultaneously borders on insanity in 'net stocks, but not ours of course:-}. An accident waiting to happen? Not yet. Don't fight the Fed? We're not. If we were, you'd see shorts, whereas we've added absolutely none. Shorting the S&P into spike periods, is hedging the market, and provides minimum insurance against positions, which increasingly (by price appreciation), become a larger portion of any portfolio. As of 10 p.m. in Las Vegas, at Comdex, the Dec. S&P premium is 402; -150 from Wednesday's regular close. (After early selling efforts, Thursday should try the upside again.)

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