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The Inger Letter Forecast

December 2, 1999

Beginning of month buying . . . at least superficially helped the market look like everyone who sold just yesterday, simply got right back into the same stocks after that big limit-down behavior seen on NASDAQ futures at one point in Tuesday's market, attempted to turn-into nearly just the opposite on Wednesday. It of course is not that simple; particularly with today's final hour's wild flailing amidst negative breadth. Was it an up day? Sure. Most 1st sessions in a new month are.

But it was not an inclusive or broad-based session, despite much discussion pertaining to all the ideas that Y2k problems will be minimized, and that huge relief rallies will thus dominate most of this month. That's unlikely; though there's little doubt the stock market's now fixated on Friday's Employment Report, with much sentiment stacked-up behind ideas that if that data is benign, the market will somehow stage a big rally. It might; but if it does, lookout for a fairly rapid reversal. If not, then the stage will be set to take out today's lows, which preceded an expected bounce, for which the DJIA came back to make higher highs, though the S&P wasn't able to accomplish it.

Technicals; Daily Action; Bits & Bytes and Economic News: (sections reserved for readers)

Sure; action's still testy, and there are arguable responses to unprecedented conditions that may surround Y2k. Our view is simply that if the market doesn't have a hard-hit in this month of Dec., it would tend to rally next month (if there aren't worldwide glitches of significance), and then drop very hard. At the same time, if the market does have a harder hit this month (over the next 2-3 weeks in particular), then the market may very well become a speculative buy for a New Year's fling, which could be particularly explosive (on a daily basis) if there aren't major disruptions.

The rub on all that would of course be two-fold; the renewed pressure on the Federal Reserve to hike rates and reign in the growth of the money supply, and also the cost-push implications of all the world's productive nations making it through the millennium shift essentially unscathed, which would point towards higher unit labor and component costs for any number of U.S. parts imports, as well as end-user products. That, candidly, is one reason why the protests at the WTO mostly are not understood, because lasting cheap labor overseas contributed to a domestic disinflation.

It should be considered that the impact on U.S. workers in Y2k, is actually lessened if the world recovers, broadly, as a greater equalization of wages occurs. This however, would definitely be inflationary and would also compel further restrictive efforts on the part of the Federal Reserve Board. From a narrow domestic perspective, the most bullish event would ironically be a broader mess overseas, which takes months to recover from. That would tend to cause a retention of the money temporarily parked in Dollar-denominated assets, while diminishing the need for a Fed tightening, as worldwide inflation would be deferred and a strong Greenback assured, which thus wouldn't require higher rates to attract money to these shores. In a sense that's why how it goes with Y2k may turnout to be about opposite to the mass perception; good news will be bad news for the markets, while bad news would be good news for the U.S. market, albeit almost alone.

Since technology has generally not come under the extent of pressure feared, although some of course has been seen, there is the prospect of a resounding boom among IT (information tech) exec's, as soon as we get into the New Year unscathed, but only if that indeed is generally seen. And that is why we're interested in buying stocks on a pullback into mid-month, but the durations of retentions may very well relate to how deep we go first, and to how the Century's changeover is executed by many factors very distinct from raw analysis of the U.S. stock and bond markets. (Forward-looking commentaries about current action patterns are reserved for subscribers only.)

There's nothing inherent in Wednesday's DJI 120 point comeback denying (that) probability; very much a reflection of GE's (GE) announced e-commerce intentions, and the Procter & Gamble (PG) comments made about how they could handsomely profit from expansion of Asian markets. That no doubt is true, which is why we added (representatively) Kellogg (K) to the buy list, after covering a profitable short on it over a month ago. The implications are similar for a broad list of stocks; but the problem (if there is one) for the markets is that many stocks like GE are priced at the max for a perfect world, which is fine if that's what this will be. Trouble is; if the world moves into Y2k without a glitch, then that's great for the longer-term, but would compel affirmative action by the Fed to contain and control excess; if it doesn't then those markets don't emerge anew just as fast as the most optimistic comments heard between the volleys of pepper spray in Seattle.

It all comes down to our cyclical concerns against a bullish longer-term backdrop, which is why we only added a single short to the list in the Letter, and numerous under-market longs. A basic suspicion is that smaller or larger drop this month, the market will be prepared to sprint ahead (on the short-term) once worries of Y2k are sidestepped, should that be the outcome. But again; good news will be great for the long-run; bearish from such explosions for probably a few weeks to a few months; hard to tell. Bad news would be very bullish for the U.S. market over the short-run, and the long-run, but not the intermediate term. That's because what's good for disinflation and Dollar retention, might also be bad for profits and growth rates of key multinational stocks that comprise Averages such as Dow Jones Industrials. Psychologically, that can be a key.

Confusing? Not meant to be. You're looking at one analyst's thinking that does consider 15,000 on the Dow still doable by 2006, provided a decline over the months immediately ahead doesn't break the approximate limits of a bearish contraction, which means as low as (reserved), though by no means does that mean we expect the Dow to go so low. It might go lower; might never see it; but probably will see (reserved) at some point over the next six months, one way or another.

(Section reserved.)

Finally, technical rebounds in the December T-Bonds took place; but the March '00 T-Bonds (it is US00H on most quote services) is now the front-month contract. This is again complex, due to coupon maturity changes, which give the impression that the 92 and 26/32 price is a big drop, as it is not. Beginning with this March 2000 contract, notional coupons of the CBOT Treasury bond, 10-year, 5-year, and 2-year Treasury note futures contracts will change from 8% to 6%. Changes will affect many aspects of fixed-income contracts as well, including noted level of futures prices, cheapest-to-deliver status, embedded delivery option values, and calendar spreads (especially this latest one, the Dec '99-Mar '00 spread), basis point values, as well as implied volatility levels and broadly so. The CBOT says a 6% coupon would increase duration, making it a much more effective instrument for those hedging the long end of the yield curve. Agreed; though the timing is a bit disconcerting along with all the other concerns along the road to the millennium transition.

(Portion reserved.) Our hunch remains that the market is increasingly on the defensive (despite the Dow's rally) and that the market will likely fade tomorrow ahead of Friday's numbers; albeit not particularly dramatically. Today's rally basically was as outline on the hotline; a rebound to the breakdown point, and nothing more. It may become more, but isn't so far now.

Interpretation: a choppy market continues to fight to put-together another advance, but it's doing so in negative environments to achieve that, especially with Dollar/Yen continuing firm, as Japan concludes a stronger Yen can't much longer be sustained, and a potential paucity of buyers ahead of Y2k transition risks, which may temporarily shift abruptly thereafter. A vacuum on the downside's again possible if the S&P simply takes out yesterday's low on a short-term basis.

The stock market established a form of pennant formation (flag) on top of a stilt (flag pole), then eased from an overbought situation. Chances of breaking were behind the position short-sale at the 1426-27 level, and so far what has occurred validates that decision, despite the normal first of the month rally in Senior Averages, to the dismay of continued internal market deterioration. If what we are getting runs into trepedance in-front of the Employment Report and that information is not market friendly, then the market will have completed a technical rebound before sharp and immediately lower levels are seen, and that's particularly so for the recently-strong leader stocks.

Nothing is cast in stone in the world, much less in markets. But the argument was (and for that matter still is) leaning towards picking one's place to commit to the market, rather than chase the "brass ring" of an old move, which for all practical purposes was anticipated to be a test of former highs, not the commencement of a new entire leg of the market to the upside, as many thought. It is particularly dangerous if theAverage Hourly Wages are up sharply on Friday's report.

Bits & Bytes. . . includes brief remarks on stocks such as our Merck (MRK), America Online (AOL), Apple Computer (AAPL), Lucent (LU), Texas Instruments (TXN) and Liberty Digital (LDIG); plus comments on Novell (NOVL), multi-year hold GM Hughes (GMH), last year's "pick of the year" Conexant (CNXT), and on Comcast (CMCSA). Picks originate in the Letter, with an occasional comment (when there's notable action or news) in the Daily Briefing.

In Summary. . . the NAPM numbers were slightly lower than the prior reporting period, but trend evaluations of higher prices and robust economic activity continue unfettered, which is what's so important we think to watch in such reports. Therefore slightly diminished prices-paid component was not sufficient to really change anything, as far as influencing the Fed's sentiments.

Our (900.933.GENE hotline) guidelines remain short the December S&P, for the moment, from the 1426-27 level, which is inline with our looking for a correction, a tricky rebound to around the potential breakdown area (low 1400's), and speculating that last Friday's conclusion might be a bit soft, in front of this week, particularly if traders believe that the rebound was a test of earlier highs, and not the commencement of any new upside leg. For now that is our market viewpoint.

The McClellan Oscillator spent much of the last week eroding, while the Averages progressed, until the expected downside recently seen after the holiday, interrupted by expected intervening rallies in front of a crucial Employment Report on Friday, for those impacted by single reports, as opposed to trending data, which has long shown the strong economy and tight labor market. The Oscillator posting Tuesday was around -83; and on Wednesday near -76, which is narrow, but accompanied by tightly-congested dots on the Summation, which makes this an effort to abate negative price behavior. Given the overall indications, we'll stay with the position trade for now, and have left the mental disciplines for new determination as of the early Thursday commentary.

An old saw holds that the stock market almost always does best when climbing a wall of worry. Anyone seen a "wall of worry" lately? That we are not hearing that is in itself a bit worrisome. If one contrasts a couple old-line NY member firms that are talking about a market cut in half; that's too bearish, although there's no argument that the Senior Averages aren't cheap by any normal yardstick, while the run-of-the-mine stock remains suppressed, as has long been the A/D case.


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