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The Inger Letter Forecast

February 25, 2000

We're not on the edge of instability . . . and "there's no reason to slam on the brakes"; so said a beleaguered Fed Chairman, to the Phase II Humphrey Hawkins testimony in the U.S. Senate. This the Fed Chairman just blink? And did this break the bond market which was hoping he'd get a grip on speculation and stick with it? Did he do so because of unreported bond short-sqeezes?

We suspect the answer to all these questions is a preliminary "yes", or at least we suspect so. At the same time, we can look at the pattern of the March S&P, or the Dow Jones Industrials, and see how the market's working towards reaching short-term oversold as speculated possible while many "new bears" are looking at diminished participation of groups (etc.), and arriving at bearish conclusions, sometimes to the extreme. To us; while we do not totally dismiss chances of an '87 style crash occurring (as there are only so many ways to resolve this), we are suspicious of all of this new-found bearishness on "value" stocks, after they've typically been declining for nearly 22 months as far as the A/D deterioration, while so many of the "run-of-the-mine" small cap stocks, at least many we watch, have stopped going down after years of duress, and are in early stage advances, based on technical analysis. It's sort of like the Street finally figures out that blue-chips ran out of steam, when in reality this is not news. Just ask the oracle of Omaha for verification.

If one embraces the new bearishness, instead of getting less bearish the harder the market's hit, one risks missing not only the new economy advances, but also potential comebacks in many of the old-line stocks that increasingly are on a modernization binge to embrace the Internet and all kinds of new technologies to enhance their efficiency and productivity. Hence, does that suggest the decline in most of those stocks is long-in-the-tooth, or just starting? First of all, many of those stocks are down 30-70% from their 1998 or 1999 highs, which means well along in the game, if we're not to have a crash. And if we do crash, is that the beginning of disaster, or a buying spot?

It's going to be a buying spot for such stocks, at least those seen as dominant businesses in the essential sectors, and that's especially so as the Dollar (interestingly) eases down a bit from a too lofty perch. This was precisely the grist of our forecast for Y2k migration that went well, being a bearish omen for the blue-chips initially, but eventually bullish down the line. And no, one need not just focus on a single stock, be it tech or industrial, but to all those viewingGeneral Electric (GE) as the market, we'd say (comments on it and Intel (INTC) are reserved for subscribers, but we'll note here that both have at least psychological importance to markets for various reasons).

Before we get too embroiled in all this (which can't be resolved anyway with any degree of clear certainty), because there never has been a market with greater divergences (and it will probably stay that way for awhile) between sectors; let's make these further observations: a) if the market really is the Nasdaq 100 (NDX), wherein are harbored most of our stocks, well, the market does not normally crash from the highs, but from oversold. Hence a market collapse would have to be coming from a sector that, while obviously overdue for a meaningful correction again, is not by any measure currently oversold; b) if theDow Transports still are valid, we should be crashing already, but we're not, which must be because the old-line stocks already have become thrashed and smashed, albeit so gradually that few wanted to acknowledge ongoing nearly two year drops in a host of such stocks (several represented by short-sales in our list for much of this time); c) if the market manages to crash from here, which market crashes, the one that's overbought or the one that's increasingly oversold, albeit on only a daily basis?

Well, of course you see the situation; a rebound to crucial resistance (the breakdown point) at an S&P uptrend line that was broken (and caught) last week, and we're honored to have captured a clear majority of Wednesday's decline as well as the ensuing rally in our hotline S&P guidelines. (Certain conclusions reserved.) That doesn't mean we can't crash the market; it means investors should be less enthusiastic about listening to those who only now have figured out what held the DJ up so long, and understand that the time to ease-out of many such stocks was as far back as two years ago. (On a short-term basis; the market failure at our "island in the sky" was truly key.)

At the same time, while we understand that a panic could ensue if certain Dow stocks break their lows, we can't imagine who would be doing the panicking, and therein lies the rub. Most investor types in such stocks do not use margin and would not be forced into liquidations; while the crowd that does use leverage (which we vehemently argue against no matter how high this real market goes, due to increased risks at minimum) isn't playing the stocks near the lows, but those near a high. That means, as is likely the case for most readers, your portfolios are doing terrifically, if in a balanced portion of semiconductor and other preferred technology stocks, while the "so-called" stock market appears rocky. If my hunch is right, the majority of investors, structured as are we, have not only meandered these zigs & zags of 2000 handsomely in the S&P efforts (mostly very well nailed), but also are watching portfolios of stocks that are handsomely up for less than two months into the new, and exceedingly complex, trading year. The 90% of the market that we've warned of consistently as bearish is becoming increasingly exhausted on the downside while the 10% that has been strong must correct, if there's any chance at all for new bears to be right. The alternative of course is that overcooked Internets and older techs cool, while new tech stays hot. At the same time don't forget our very correct forecast for the PC and RDRAM memory business in Q4 and Q1, which suggests we may be equally correct about the second half of this year. (For these purposes "new bears" relates primarily to some technicians; institutional sentiment remains superficially complacent and optimistic, though in private discussions there's real nervousness.)

Historic Greenspan; the back-step

In the same breath as saying "there's no reason to slam on the brakes", during Wednesday's Q & A Senate segment, Chairman Greenspan argued we don't have such a runaway inflationary situation, as existed last during the inflationary wake of '70's Energy Crisis (in my own words, but that's the overall gist of it). He spoke of "balance and retardation" of the "incremental" nuance of change; all of which not only dovetail in with our stock market view, but our view of this very Fed Board, which has been a gradualist (if not at times timid) governorship, unless necessary.

The last time it was necessary was of course the expansion of the money supply ahead of Y2k, which turned into an unnecessary goosing of the aggregates beyond their normal conservatism, which they are having trouble easing back from (again; my policy interpretation, nothing he said). "The problem has to be an evaluation as to whether the acceleration of productivity creates a wealth effect that opens the gap between demand and supply"; and those are essentially his words, with a remark that he doesn't know the answer. We do; which is why we indicated that the migration of the industrialized world smoothly into year 2000 was short-term bearish, while likely a phenomena that would remain long-term bullish beyond, hence our optimism for (upward move at a noted time), not to mention extreme optimism about the future beyond these rough spots. It's also why we projected correctly that imports would cost more if the world blossomed, but that in fact it would set the stage for an easing Dollar, and eventually more demand for traditional export oriented sales by many old-line cyclicals…ah. Again, we have no intention of buying a bunch of them, but we've made our point, as it relates to the world's economic transitions, and we think it's necessary to do that, since we integrate market analysis, not just solely tech stock assessments.

It's beyond my understanding as to why many analysts somehow think internals aren't crashed; although of course if the tech and new economy stocks capitulate, it can appear to for a while. In the handful of old Dow leaders that held up, yes, something severe isn't out of the question. But for a host of those who question why not be more bearish now on the Dow or cyclical types; the answer is we were, and the majority of stocks already went down. Why would one now anticipate collapse in the stocks that have already collapsed? One would at least start preparing for them to ease around (base), while recognizing that capitulation in the ones that are still up can absolutely delay a new rally. And don't forget this is an Election Year; so we wouldn't be surprised if another market rout turns into a bear trap, setting the stage for a sizeable progression within parameters already outlined as likely to contain and control declines leading to eventual above-market goals.

Panic Attacks

The SEC today released a concept paper on the "fragmentation" of markets; which is essentially what we've talked about, spreads and transparency on occasion from time-to-time, as impacting confidence. Tie-that into the Fed Chairman's "gradualist" affirmation, and you have a very clear explanation for why the T-Bonds gave back over a half point, rather than rallying on his muted "reassurances". Put differently, the idea that the Fed will only gradually move (which is what he said) regarding interest rates, was not well received by the bond market, as it implies more of a drawn-out series of stair-step moves, fairly typical of "historic Greenspan" absent panic matters.

And panic does matter; witness the LTCM (Long-term Capital Management) fiasco we nailed in our S&P and bond activity then. Later, riding in much like the Calvary, the Fed panicked, not to hike rates (such as speculated in today's discussion regarding inflation of another era), but rather to lower them. Panic, clearly, can be implemented in either direction. In that case it panicked up. In this scenario, the Chairman is right, that there's no reason to panic, but there's also no reason for the bonds to steadily advance unless they're convinced this Fed means business fighting the steep speculative surges, and the incipient inflation building around them. Today's testimony was from this perspective, a slight step backwards on the part of the Fed Chairman, hence the sharp T-Bond retreat, which should not at all be confusing to bond traders, as many seemed to reflect.

Once again the Dow Industrials rebounded at the end of Humphrey Hawkins, and once again it was trimmed before day's end; eerily similar to last week's response. However, this time it wasn't a rout, even though breadth, ticks, volume criteria and prices, all deteriorated across a fairly wide swath by day's end. So far, although we'd definitely not be overconfident about real upside here, it appears the initial drop and the later swoon were products of the continued (interrupted only for brief rebounds) evacuation of old-economy stocks, while the post-testimony rebound was normal for a "relief effect" comeback, inline with expectations. We're proud to have caught both swings.

Finally, before we review the S&P action and parameters for tomorrow, note that a very big deal occurred today for our technology evolution: the Consumer Electronics Industry (finally) made an agreement with the National Cable Television Association to establish standards for HDTV and DTV connectivity, essentially for everything to hook up to everything else (basically, with few exceptions). It's a language that everyone can agree on, and be compatible with. Now, by next year, you won't need a special cable box to connect to HDTV or DTV, and new Digital TV sets will be able to become digital-cable-ready, which they aren't so far without interconnect devices.

Now lets go back to the market, where after Tuesday's 3600 point downside S&P theoretical gain we did super Wednesday, by virtue of covering and reversing long at the 1350 March S&P level. (Again, the long was sold early Thursday and reversed back to the shot-side at the 1360 level by guidelines on our intraday 900.933.GENE S&P-oriented hotline.)

Daily action; Technicas; Bits & Bytes & Economic News: (Are reserved subscriber sections.)

Stocks discussed tonight include LightPath Technologies (LPTHA), Texas Instruments (TXN), Conexant (CNXT), Analog Devices (ADI), Rambus (RMBS), ACTV (IATV), Liberty Digital (LDIG), the Nasdaq 100 (NDX) pattern itself, Analog Devices (ADI), America Online (AOL), and little Wave Systems (WAVX). No inference of suitability to buy or sell is intended.

In summary . . . the 900.933.GENE hotline guideline (was) long overnight by intention, from the March S&P 1350, after reversing a very profitable short previously, most recently from 1361 in the prior day (one's decisions are solely their own, and may have done better or worse than the guidelines of course), and (as of early Thursday) find us back to the short-side again near 1360.

Overall we remain better than just seamlessly short (much more than that actually) from either the identified described "island in the sky" (unsustainable rally above a 40-day Moving Average) in the 1440's a couple weeks ago (by virtue of intervening trades to catch multiple swings), and from far higher than 1500 if adjusted to January's start. An orthodox resolution of an increasingly inverted yield curve is a slowing or recessionary economy. The stock market action is totally taking place under the DMZ as we called it, and key moving averages; for sure taken alone not pluses for stock Averages; as far as the S&P is concerned, while the Dow continues weaker and NDX resuming a parabolic extended pattern to new highs. Today's second phase of Humphrey Hawkins, was expected to lean on this rally, but a relief rally thereafter was the idea, and was played, before a resuming downtrend. The decline in the Dow does not reflect Wednesday's ride.

The McClellan Oscillator continues negative, again consolidating a bit, and is around -104. This abbreviated trading week was seen as likely featuring a failing rebound, then really nervous wild rides, which may continue in the stairstep variety as seen so far this year, which is volatile, but works lower over time. However, easy downside for most big (non tech) stocks is behind us, and while we suspect no ultimate low is hardly at hand, this is not the time to get bearish as the pack does (on already beaten down stocks), which is ridiculous given all the many early warnings from this market, even if the DJIA should drop another 1000 or so, which may be tough, but doable if techs can be made to contract; so far they are not, which we're thrilled about. As a matter of fact if they contract enough, it may become yet tougher, 'cause money will look to relative value (temporarily) in old-line Industrial Age stocks, which while certainly not going to do 10-fold moves like some of our techs have, could advance decently for conservative investors over a 2-5 year basis. Meanwhile, Thursday should be a potentially failing early decline preceding another and crucial rally effort. A failing effort then to rally above noted resistance, or a matter of hours before new downside resumes, is a risk, and probability. As of 7:30 p.m. ET, S&P Globex premium is at 391 with futures at 1364.50, which is actually up 30 from Chicago's regular close of 1365.20. We hold long (for now) from 1350 after a fine day even for the most gradual position players both in covering the old short at 1350 and reversing long. (Again; back to the short-side early Thursday.)

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.
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