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The Inger Letter Forecast

November 18, 1999

T-Bond action foretold the reversal . . . or so we thought late Tuesday. After the FOMC action, there nevertheless was little doubt so many on the Street were going to minimize probabilities of any new decline; by simply concluding that no likely further Fed action this year would somehow still equate with the equity market not suffering at least a round of robust profit-taking. That was expected, but only after the knee-jerk selling and ensuing rally in the immediate wake of those rate hikes by the Federal Reserve. Wednesday's upside efforts were repetitive, even tenacious, due to persistency in the face of new negative T-Bond and Bank Stock Index (BKX) behavior.

Fundamentally, nothing yet has really occurred to improve the chances of the bulls as of yet, and we have a winding-down of the technology conclave, that should usher-in a news vacuum for at least the majority of the major players in the industry, which is why the curtain rings-down in Las Vegas almost concurrently with the prices in the leading tech Index, the Nasdaq 100 (NDX), for at least the short-term. Given the sales dearth that could handily dominate into the New Year for so many players, it's not out of the question at all that the current expected reversal efforts turn into something a little more interesting on the downside, than many are considering. Stay tuned.

Today's CPI report was very much inline with consensus expectations, in the up .2 range both for the core or overall CPI. Today's stronghousing starts number tended to buoy the Fed's case in the rate hikes, and thus contributed to more concerns about a further series of hikes, such as we discussed in last night's DB, related to potential actions once we move into Y2k, in harmony with the Fed's reticence to charge-ahead on this scale right in the face of the millennium transition. At least nominal weakness in the Dollar Index, recently suggested from the short-term overbought condition, tends to support this concern about U.S. rate fears. Longer-term the Dollar will be fine.

Technically . . . that may also be the case for the stock market; but it's very hard to say. Profits and earnings would normally be firm into the Holiday season; the time of seasonally traditional strength in the computer industry in particular, as we've discussed in the past. However, we did expect unusual combinations of the millennium shift, of new product rollouts plus total reluctance to train personnel on new software or other devices, and even slowdowns in multinational growth rates, to combine to throttle the well-meaning efforts of investors to engineer a huge new upside.

We can't say that anything has yet been broken to suggest more than an orderly profit-taking of a necessary degree, though we are suspicious that today sees the beginnings of something more. It will require taking out approximately something near 10,500 or so for a Dow Jones Industrial Average to imply that, but as that's almost 500 points from here, and would likely see short-term work shifting from overbought to nearly daily oversold in the process, we're not very enthusiastic about waiting for such a lower level to be challenged (while thinking that it should be, over time) before becoming a bit more pessimistic, while so many just in fact became more euphoric now.

The experience in markets, and this one in our view most recently went to considerable excess, is that many become almost giddy very near the top of moves, whether or not they turn-out to be meaningful peaks beyond the short-term; while conversely (and seen only a few weeks ago just before the onset of the recent and amazingly persistent upside surge) the mood becomes almost dour and almost desperate, just before some sort of upside effort is again mounted. Sure, we're not pleased that we weren't more enthusiastic about much of the upside, though we are glad we did not get excited about the downside towards the decline's end, as we were interested only in buying stocks cheaply when available. We actually suspect that from a short-term perspective, it is likely that a little downside enthusiasm was appropriate late yesterday and early today, as was noted here and on the hotline. That doesn't mean the permabulls will surrender on a dime; they won't and shouldn't. That doesn't mean markets have to collapse or do anything totally traumatic; they won't and shouldn't do that particularly. But for now, until or unless otherwise noted, risks in this market remain with the buyers here, with debates overall likely centered on a degree of drop; not whether the stock market has some risk over the coming two-three weeks just ahead overall.

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In any event we will address the intraday action tomorrow for those who took profits Wednesday, and are thinking the December S&P will eventually move down to challenge the 1410-12 area in the process of testing more important short-term supports in the high 1390's or thereabouts over the course of the next couple of weeks. Continued defensive short-term action in T-Bonds would be very important as far as contributing to this pattern, which would have many investors or even money managers increasingly nervous about the market's ability to sustain inflationary pressures and/or a concurrent slowing of the rate of profits growth. These two are not mutually exclusive.

Technically, the S&P left numerous gaps on the way up; particularly about three weeks ago, at a time the action briefly got quite out-of-hand with giant upside openings. Certainly that invited the follow-through action, investors contributed to by basically throwing money at the stock markets, and extremely high volumes that has thusly been reflected not only on the NYSE, but NASDAQ.

These volume expansions are of a type normally associated with parabolic swings that complete a pattern, more frequently than they initiate one. Most are assuming that we had a climax, and a turn-up, which will endure into the new year. It might, and we actually hope they are right about that; but doubt so, as the fundamentals argue it was more likely one of the greatest false rallies, based on the facts in the real world of profits and earnings, than is generally considered by most.

Sure; normally when you take-out a declining tops pattern as this market did several weeks ago, you run hard, and it can be significant. That's what happened last year in the wake of the Fed's orchestrated bailout (excuse us, make that rescue) of the LTCM debacle. However, that was the Fed easing rates, and withdrawing prior rate hikes. Now we are in the midst (not end, unless the economy breaks hard) of a series of hikes, and the prior rate increases have all been restored, as we've argued would likely eventually be the case once the Fed accomplished short-term goals that were essential in the wake of last year's (near systemic-risking) situation.

This year's is unique in that the Fed is concurrently stoking the money supply while hiking rates which can contribute to sustaining the availability of money for consumption, even as it costs a bit more to borrow. What could readily happen if we muddle into the New Year without so much of the chaos many worry about, is a Fed then slamming on the brakes; thus draining the system of the added liquidity it's injecting as a precaution ahead of the year's turn into '00. If that occurs, there is some limited risk of a tighter policy combining with higher rates, to really spook markets.

Of course next year is an Election year; so they may not want to do that. However, we remain at least nominally flexible in this area, because history suggests it's necessary. We've just come off a "high" where prices made new ones (at least in the narrow leadership sectors) and Washington euphoria chimed-in, by virtue of the repeal of Depression era legislation nominally separating the umbilical between brokers, bankers, and insurers. If you needed a combination of the Fed fueling monetary growth, profits growth slowing, and euphoria being concurrently stoked, you just saw it. We're not going to say that any sort of "stagflation" is going to occur; because hopefully earnings growth will be limited along with demand contractions overseas, at least for the initial scene into the New Year. If so then the Fed's "dream goal" of a soft landing, could become everyone's goal.

The riskier pattern would seem to be that so many want; where strong housing and holiday sales contribute to a robust consumerism once again, thus putting pressures on the Fed to act in '00. It might be notable that many Airlines are talking about pressed revenues (not just profits) ahead, due to the combination of lower prices (fare wars starting), lower rates of occupancy anticipated, and higher concurrent wage and fuel costs (precisely the recent petroleum product pressures). (Of course many other soft commodities are not firming, but what if they have Y2k disruptions?)

At the same time, hotels are (contrary to popular belief) available over New Year's in Las Vegas, and even at Florida's Disneyworld; because many key employees are being pressed to stay on the job over the holidays. That might seem to reiterate a prior comment on this score and does; at the same time it emphasizes that outside of the Senior Averages run-up, fundamental worries are not squashed just because the market doesn't recognize them. They may be ameliorated as -or if- consumption increases at retail, but they won't be completely denied. Strong stock markets help, but are not everything as we approach going into Y2k. And if the market breaks hard into December, as many start to ponder how various disruptions could wrack havoc with earnings on a broader international front (keeping in mind that the majority of American companies have had the majority of their growth in growth overseas over the past generation), things could get dicey.

Bits & Bytes. . . is reserved, but comments on long-held low-cost spec. Imatron's (IMAT) final approval from the Food & Drug Administration (FDA) to market its coronary virtual angiogram technology has been received. This performs Electron Beam Angiography(EBA) of coronary arteries, a very minimally invasive procedure, which requires only injection of a contrast agent; and we share the "heads-up", as we believe every older investor should be aware of the ability to avoid invasive angiograms for the majority of procedures, and hence by-pass invasive follow-up exams. Later on, the application of EBT for coronary artery scanning for calcification could become interesting. In the interim, the stock has more than tripled, and is now comfortably near 4. This was one of very small developmental stocks held with much patience, and is not anything we're suggesting anyone be buying after the news, though it's important for the Company. Again; we are sharing this tidbit with visitors, only because everyone should be aware that safer heart & circulatory examinations increasingly are available, though mostly in major medical centers now.

Elsewhere this evening, we comment on Intel (INTC), Unisys (UIS), Texas Instruments (TXN), Time Warner (TWX), Cabletron (CS),Liberty Digital (LDIG), Compaq (CPQ), America Online (AOL), Digital Lightwave (DIGL), Hauppauge Digital (HAUP) and Wave Systems (WAVX), a cross-section that provides an idea of the diversity of stocks we follow in various tech areas. All initial ideas normally take place in the Letter, with interim commentaries in the Daily Briefings.

In Summary. . . during Comdex, these DB's tend to be posted by staff in the a.m., as they are not available so late after written by yours truly after each day's events, and the requisite fighting of crowds and traffic to retreat to our privacy on the Vegas strip. Our normal posting schedules should resume as of Monday's reports. Hotlines continue on a nearly-normal schedule.

The McClellan Oscillator was at +96 Monday, at +110 Tuesday's, and now at a +69 posting.

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