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The Inger Letter Forecast

February 11, 2000

Inversion strategies. . . are becoming perversions for those bond vigilantes, who only in the past few "daze", recognized what's going on in the T-Bondmarket, and belatedly embraced our ideas of impact from a modest, but nevertheless evident for weeks, slight Inverted Yield Curve. This has consistently been in harmony with the idea that higher short-end rates would lower rates on the long-end, because the Federal Reserve would get a handle on what they couldn't fool with, at least until we got through the initial phase of the Y2k transition, due to domestic liquidity needs. It was felt consistently that the greater risk would occur if the world migrated safely into Y2k; with a degree of spillover in certain areas going into the late winter and spring, not just New Year's Day.

Since T-Bonds were indicated here two days ago as fairly overbought short-term, hence ready or at least capable of a correction (even if within a likely longer-term uptrend), it was gratifying to see those who didn't think that any meaning could be drawn from the slight inversion (initially), so recently paying up for bonds well off the lows; and now, after a hard hit today, trying to justify the expectation of a semi-permanent Inverted Yield Curve. Some sold the lows and bought the high.

We do not expect a permanent Inverted Yield Curve; not only because the Treasury Secretary says offerings in all classes of Government debt maturities will continue to be issued on a scale to be determined, but because of (reasons reserved for subscribers).

Of course Treasury Secretary Summers' late clarification of Treasury's debt-buyback plans, and of offering long-bonds, had the big impact in the afternoon. This was after pundits spent much of the day debating whether the cyber-terrorist attacks were impacting the market. Well, besides last night's warning, which followed our late January bullishness nailing the low two weeks ago in a belief that the market would press-higher into early February before risk returned, we noted the risk of the cyber story becoming a concern particularly if they started hitting financial sites. Sadly that occurred, which had to take at least short-term toll on confidence regarding Internet security.

In our view however, it's not the so-called security stocks that deserve to rally so much, since the only known way to readily control "denial of service" attacks is to have excess bandwidth; hence modernization of infrastructure becomes almost compulsory. Certain companies we've discussed may have better chances to capitalize on a major ramp-up in bandwidth, via new optical routers, switches and refined lenses, that can accommodate ultimately needed wider service capabilities and capacities anyway (and that includes digitally-televised approaches to "caching" as well; with stocks named very reserved discussions, regarding issues already on the list for at least awhile).

By no means are we suggesting some or all can't correct from time-to-time; but that they'll likely be positioned in the forefront of the build-out of the new Internet as time goes forward. A couple already are. If there is a risk in all this; it's that Internet II isn't rolling yet, outside of industry and university trials. In a sense a lot of business (anybody worry about b-2-b stocks?) are geared up for something at no point intended to carry this much traffic, and not prepared for an onslaught. "Caching" firms, as an example, are a stopgap way of trying to regionally distribute stored data, whereas the new Internet II will be capable of distributing information and facilitate commerce more efficiently, with advanced methods than what's out there presently. What's happening now (taken to extreme) is the Internet equivalent of having big businesses all shift to using telephones from the telegraph, in the 1920's before phone systems were totally built-out. (Balance reserved.)

Daily action . . . guidelines were perfect. We not only stayed with the 1446-48 short-sale, which began the day with a broad mental stop in the 1450's that was of course never approached, but emphasized on the two pushes into the 1446's (after 10 and around 11 a.m. ET), that an intraday player who wasn't aboard the Tuesday guideline effort overnight, had a good spot to embrace an essentially identical effort. So, via the (900.933.GENE) intraday hotline, we emphasized beliefs well into Wednesday's morning action, that the stock market was going to break. We had already warned about T-Bonds daily. (Keep in mind the hotline reversed Thursday morning at the 1415 area, nailing about 3000 points downside theoretical, and at least for the moment is again long.)

Daily (balance); Technicals; Economic News & Bits & Bytes: (reserved subscriber areas)

For now; we are proud that our hotline in the final couple hours forecast a DJ extension down to the -200 Dow area from -100 (nailed that), and ideally that the S&P would in fact horse around the mid-1430's and then tank to 1418-20 towards the close (happily nailed that too). That was the idea of taking the move from the morning's rebound high to the next low, allowing intervening consolidation, and then an equidistant move to the downside late Wednesday; hence1418-20. We hope new readers understand catching both the surge, struggle, and the purge, isn't easy.

In summary . . . the hotline, after as flawless an intraday call as occurs, remains short overnight from 1446-48 since Tuesday, with an emphasis near that price level even Tuesday morning that markets would likely have a hard decline coming this very afternoon. The McClellan Oscillator deteriorated moderately to -16; after the Summation Index dots were noted recently tightening, reflecting narrow breadth, and renewed market risk (market risk is viewed short-term, our longer views about breadth is considerably different, as regular readers know). The market could rally smartly if the FBI is able to make an arrest in the cyber matter, so as to dissect and deter future Internet incursions. Cyber terrorism is not the market's main concern, but it can be a tech-buster if not resolved in fairly short-order. The forewarned T-Note Auction was the main market mover.

S&P premium is 679 at 8:00 p.m. ET, with futures at 1418.50; up 20 this evening. We would be a bit suspicious of any rapid turnaround rally tomorrow, but do not intend to "press" the downside, as those that tend to respond after-the-fact often do. Quite the contrary, we'll make a decision as to whether or not to reverse direction, if even against the backdrop of unaddressed greater stock market corrective action. We are not even dropping the "ballistic" option if several things occur. It is less likely of course, since our DMZ (Demilitarized Zone) deflected the S&P market after some churning; but not totally a remote consideration, at least not yet.

Last night we contemplated what would happen if the hackers get around to electronic brokerage sites, or other time sensitive site that are crucial to many investors or even VPN's (Virtual Private Networks), and today we partially found out; though certainly Secretary Summer's remarks had more to do with the final hour's extension, as far as fundamentals. Technically, this is essentially as exact as it gets with respect to the up move last week, the forecast churning, and turn down. Nevertheless, this cyberterrorism is the kind of thing, as noted last night, that if not nipped-in-the-bud, risks setbacks for the broader embrace of the 'net. The 'net is the core of modern America, so while we won't dismiss the threat, simply because of the overwhelming importance the 'net has in this Nation, we'll assume that it's not going to be a huge commercial interruption, because nobody in this Country can afford to let it become that, for a very protracted period of time. The 'net is too big, which means the digital equivalent of a Federal Reserve liquidity intervention has to occur in the Internet realm, which will be a full-court-press to address and arrest the situation.

In the interim, we're continuing to hold the March S&P guideline short on the hotline from 1446-8. (That guideline was suggested worthy of reversal from short to long in the 1414-15 area in efforts to rebound S&P's as Thursday progressed. Further ideas aren't determined at this posting time.)

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).
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