The Inger Letter Forecast

January 15, 1999

Financial markets around the world . . . were in modest turmoil before Wednesday's Brazilian announcement that it's Central Bank President, Gustavo Franco, had resigned, and that a Real (their currenty) mini-band in which rangebound trading had been occurring, was being removed. The Dollar immediately rose by 8.6% vs. the Real -- an effective real devaluation of about 7.5%.

Recognizing Brazil's turmoil is why (Tues.) night's DB summary ended with a remark that while our Intel's (INTC) blowout earnings were certainly a help (for it) looking forward to Wednesday, troubles in Brazil were not a help; nor was the data we reported regarding the PPI, which though denied by the Government just about the time we went to Press (Tues. evening) turned out to be exactly the correct PPI. If you look at the Bank Stock Index (BKX), you might ponder why New York banks (which are the main Latin America lenders) haven't shored things up since Summer. They may have; but that doesn't mean they're prepared for ripple-effects throughout neighboring countries, which might start with Argentina (but they'd be least likely to devalue) orVenezuela.

And, of course the media's missing the point about the domestic Internet (IIX) stocks. They are very pricey, whereas domestic-centric small caps and downtrodden stocks don't have pie-in-the-sky multiples. Of course the Nasdaq 100 (NDX), where most core longs are, isn't cheap either, but you know that. However most of those companies are real businesses, not just online stores. No offense to retailers, but we know what the long-run is for a Lucent orCompaq; but not eBay.

(Last week, complimentary readers on the 'net also saw our Annual Outlook & a few stock picks, one of which was a short-sale of eBay between 310 and330. We're actually pretty proud of that first-ever short in this stock, and first short of an Internet stock since our decision to be only long and not short anything new, way back in October. In case you didn't notice, it peaked within two days, and then dropped almost 100 points before rebound. Sort of set the stage for this week, as did the Jan. 7 report warning of a top & reversal of some sort within about 2-3 trading sessions.)

Dejavu for us? Sort of, but not exactly. Last year we had anticipated the derivatives crisis and even spreading debt implosions, that culminated in a leveraged American hedge fund disaster in the late Summer and early Fall. Since then many economists and market analysts considered Brazil's Real overvalued, fearing a devaluation might spark new confidence crisis this year. Right here (in the DB and the Letter) we've said the Contagion's impacts aren't over, but beyond being "backburnered" in investors' thinking, Governmental interventions (which lagged tremendously in last year's fiascoes) were broadly perceived to have blunted the most pervasive effects, thus the shock value of new events was therefore blunted.

Mark 'em up before putting 'em down. . .

Does that mean the markets (and investors) in fact may have become newly complacent? Sure, in a sense it does, and that's why you had to assume the market's would snapback from today's opening mini-purge. From the get-go (as noted on our 900.933.GENE trading hotline), today's minimalist impact of this was adjudged to be the initial case, and for several reasons, although it was noted that in the "fullness of time" the ensuring rally (s) would likely be "false and abortive".

A false rally occurs because specialists and market-makers have no intention of panicking and thus in fact getting excessively caught-up in the daily-basis chaos. They have learned that ability to survive requires: "absorbing stock onto their books, regardless of what comes later" (our view noted in the Wednesday opening bell 900.933.GENE hotline). So, that was the basis our concluding that a) the initial break was in fact in harmony with the forecast for an up-down-up January per our advance outlook for this month, b) that the rally back up would have reduced chances of making new highs for most of theSenior Averages (Dow & S&P) if we first got down to the number ironically mentioned just in Tuesday night's report (March S&P 1210), and c) but that would not prevent some sort of crucial rally, if for no other reason than the experience of last year has most investors and strategists now fully into the "buy all dips" approach. Finally, d) that we would short that rally, which we did at the March S&P 1255 level, ideally holding it overnight.

What's wrong with rallies? Only a few things. Like PE ratios of this market, which will now fully move into a time of fairly good reported earnings, but running into forward earnings warnings. An investing community that now considers itself "insulated" by Government or structural matters, is a market heading towards another accident but not quite in the same way, because as noted, the shock value isn't really there for more than the shortest-timeframes. Which of course means the next (or domino-led) decline will be more pervasive, have greater endurance, and not take place all at once, because investors are convinced all declines quickly come back up. That actually can set the stage for increased portfolio damage, to the unwary, in the weeks and months ahead.

Don't forget, this is not a cheap market; it's a pricey one. Don't forget, you've only got so many of these overseas fiascoes to prop-up the New York markets (that continues to be part of this, as in fact we've forecast for going on two years, since the first plunge of the Thai Bhat currency.) Of course recognize that technically that set's up an ideal stairstep series of declines, which only will accelerate to the downside well after the fact of the next decline. First we'll get our surging action into the latter part of this month and early February, whether or not it gets the new highs that our work has suggested for weeks would be seen then, rather than in January's first thrust, if at all.

The way "the system" works. . you had to get the rebounds, as noted from the beginning within our hotline, though we had no way of course of knowing how much stock would "spill" from U.S. investors, before the requisite rebound. We did know, and have previously discussed, that it was a plunging of the world into a short-lived credit crunch after Russia and much of Asia shifted to a type of chaos, after they bungled numerous devaluation's. We actually believe that there still is a type of "corporate credit crunch", not reflected in the market's obsession with consumerism.

The implication of this is lack of comprehension by most investors (and some fund managers we presume) regarding the immediate growth prospects for business beyond that occasioned by the Y2k preparations, and in certain aspects of technology and also slight cyclical recoveries, which are slightly bullish for several most downtrodden sectors as previously discussed over the recent few months of (for us) extreme optimism. When we say that, we're emphasizing Latin America overall is much more a consumer of U.S. sophisticated exports than are most Asian countries, as they tend to buy natural resource (not intellectual property-based) materials from this country, at least on a dollar-volume basis. If Argentina goes, Venezuela goes, and so doesColumbia, with funds temporarily coming frantically into dollar-denominated investments (and not just from the drug cartels either). Many Latins routinely keep a large portion of their liquid assets in Miami and/or New York anyway, for just the concerns about currency stability, whether their country's is tied to the U.S. Dollar, or not. That's because of a realization that deep recessions and retarded growth rates are not solved by simply tying your currency to the Dollar; a case that is also true for Hong Kong, which we would be a little concerned about as the year goes forward. (More on all this in the next Inger Letter, which will be posted sometime Sunday night or early Monday.)

Profits Pressure & Secular Risk comments…(abbreviated; full version for subscribers).

We believe the resulting collapsing dominoes would initially do what they did today; push money into the Port of New York (flight-safety buying); but only initially.

That means that while the market's may regroup and even post historic highs, they are doing so with the last vestiges of seasonally captured money (IRA etc.), which was expected to levitate the stock market before and into 1999. That also means that if the banks (and major investors) were hesitant to allowhedge or other funds to employ significant leverage on their behalf, they're less likely to permit that going forward. That's also part of our 1999 forecast, as you know. This is a kind of still-frothy situation that provides opportunities for fast market condition trading, an environment that should have the majority of aggressive positions kept on a very short leash. (An extensive commentary is provided on how best to integrate the use of Options in trading now. It must be reserved for subscribers. Several complain that we work hard at what we do, and should not provide strategy information to non-subscribers, whom we of course will welcome to join us.)

….Even last year, the primary purpose of the wonderfully successful Summer equity short-sales as well as our S&P trading, was to ensure long-term positions would be protected from loss, or at least mostly off-set, while we built cash so that once the market broke we could buy key bargains without hesitation or worry about temporary erosion to those retained equity longs. We said so in advance by the way (so it wasn't hindsight), and the plan was just that, not being bearish solely for the sake of being bearish. Yes, of course we made the right market call, but that's not just the point; as most money in the market is made on the long side, historically, so we were looking first and foremost to protect our assets more than proving some point about the market's vulnerability (though we certainly did accomplish that as well, with a specific forecast of an early July DJI top.)

Is there a difference here? Maybe. Just as it was appropriate for us to have no new shorts from early October forward, and we're glad of that, as the upside has been fantastic, that condition will change, if it hasn't already, and it will be generally inline with our view that trouble would return in 1999, but only after the Street had restored a modicum of complacency to investors in general.

Degrees of Control

A fundamental interpretation of that complacency would be the belief that anytime there is a real problem, the Fed (and or befuddlers at the IMF) will charge-in to the rescue, as Mr. Greenspan will not permit the American economy to be hobbled by second or third tier countries problems. Of course I'm sure he'd like to concur with that view, but is not in the mood to fan the flames of a more speculative U.S. market, and knows that if this breaks hard, there's only so much easing or other stimulus he can control. This may be the weak link this year: a belief that humans have the unending ability to impact foreign financial conditions beyond the capabilities they have, or in fact to preempt the normal course of cyclical economic events by currency or financial rescue plans.

It did not actually happen in Mexico (to the degree claimed, as they simply shifted many loans to European countries to pay the U.S.) and it clearly isn't working in Brazil. And, if the Euro erodes later this year (it probably will as various central bankers there are pressed to implement varying approaches to stemming their own recessionary tendencies), or Hong Kong folds (also a risk as we have previously forewarned for the middle of this year), investors will discover that there are real limits to Washington's ability to intervene to prevent a pulling-down economic domino saga or the perception that when all is said and done, these things don't impact the American market. They do, and they will, not in everyday life per se, but in the profits pictures for U.S. multinational companies which have experienced the majority of their growth overseas for the past 2 decades.

Daily trading. . for us on Wednesday, was pretty wild, with our first serious profit on the long not short, side of the ledger. That was based to a great degree on both fear and at the same time the expectation of specialists mark-up operations, despite our bigger picture worries going forward. (Later we did 2 more shorts, both successful, with the second held overnight well into Thursday.)

That is why, as our own projected "peaking" (quite coincidentally accurate, as we thought it may hit something like +130 ahead of time) of +132 in at least one Oscillator, the McClellan, gave the market, on top of our 2-minute and otherwise generally topping stochastics, a major warning just last Thurs. In fact, we noted that if not for the upcoming "nominal Expiration", we might issue a familiar tidbit from last year's upside spike's amidst internal deterioration: a "crash alert". Despite not getting that excited (and even today that seems to have been a reasonable compromise; just warning), we did indicate for Friday that it was a good time to start cutting back (if you had not at that point) on strong momentum favorites of your own, and to be protective, not enthused in all of the "froth". As history has it so far, that was the market's peak day, with Monday an Internet high.

(All the minutiae of our intraday summary and how we arrived at these series of mostly-profitable trades is exclusively reserved for subscribers, as per ususal. All of it was pretty wild, at towards the end took us to the 3 o'clock final hour call. With S&P futures coming down off the 1258 high, it was a very interestingexit of a long and reversal to short from the March S&P 1255 level.)

Bits & Bytes . . .begins with a good question from a regular reader, which relates to the impact of the Brazilian crisis to small-cap (tax-loss depressed) stock buys for the January Effect, and whether or not this is going to derail their ability to move forward (where they have been) into at least early February. During international chaos, the domestic companies that don't do at least very much business overseas, have more flexibilty (as is usually the case with managements anyway) to avoid deep pitfalls. Further, as money managers get concerned about multinational or other export-oriented companies, they will tend to focus on the mid and smaller cap "values" in this country, which can set-up a situation (but not always) where those stocks that "nobody cares about" (generally), actually do better than ones most of the mainstream players are heavily in.

Of course the first question would be why then would the Internet stocks have been hit, as they are a domestic-centric business. Ah…but they are not a value-priced domestic business, and in fact have the most risk of any sector on the Board. That also makes them hard to short without risk of heart attack (or at least flutters), but we gave this a one-shot (yes, we did use the term "pick of the year" as you may have noticed, along with also-rans) suggestion with the trying of an eBay (EBAY) short within the "annual outlook" special the other day (provided to media and a couple other web sites late last week), with a310-330 shorting-zone, and amazingly it worked so far. It actually got to 320 the day after the remarks were written; now 215, down 25 today and near 100 in 3 days. The buy zone for the "pick" on the buy side aspect is 90-110, or as subject to change most likely going forward. It should be noted we would absolutely not chase this on the downside; the 90 area was to make a point, plus there is an unfilled gap which this bubble-stock might come down and fill, later in '99. Is this too wild? For most hearts, we would think so. And it can rally 20 points in 10 minutes too. So we wouldn't think most should focus on this, but at least I made our point regarding the vulnerability of the sector, which we thought would move into the new year (since too many analysts were already too critical last year), but not advance all that much more once it became "looney tunes" time.

Tonight's remarks center on: Intel (INTC),Advanced Micro Devices (AMD); which we never have been fond of, Apple Computer (AAPL), Rambus (RMBS), EarthLink (ELNK), Comcast (CMCSA), Dell (DELL), Compaq (CPQ), Netscape (NSCP), and wild InfoSeek (SEEK) trading.

Also remarks on.. Lucent (LU), Texas Instruments (TXN), Tyco (TYCO), Time Warner (TWX), Unisys (UIS) and Novell (NOVL). Also on big-caps like:Caterpillar (CAT), Minnesota Mining (MMM), Kellogg (K) and Int'l. Paper (IP). Not all of these are longs; some are short-sales from earlier, that remain live, as their fundamentals are so weak the tightened stops were never hit. It should be noted that all recommendations initiate in the Inger Letter, while the Daily Briefing will comment on daily moves of note, and news impacting our list, simply because readers want this. (The primarily purpose of the DB is to integrate world's economics and intermarket relationships, and put that together with our technical and fundamental domestic market trading perspective.)

Economic News & Releases: (reserved for subscribers)

In summary. . .the McClellan Oscillator posting today was –111, down from –65. Getting into oversold daily territory, but we'll stay with the downside for now, as longer-term work only now is getting interesting. Basically, the so-called "Teflon Market" failed to hold together, as the types of players who bought the first dip probably expected. This is not a surprise, and was expected on our commentary on the hotline, and as we suspected this can evolve into a "stairstep-type" decline. For now, this type action will continue, and we'll have to be aggressive. That means we don't expect to be so fortunate as to have straight-down action like last Summer; though that in fact might happen only if we get the Latin dominos falling, or Hong Kong capitulating, none of it likely to happen instantly. If we hold 1210 in March S&P tomorrow (probably) then there is still an argument for the upside late this month, into early Feb. There is anyway, but the degree of rally, or much less new highs, is too optimistic. We can construct a technically bearish pattern slowly developing out of this, which is why we are staying with an overnight short by specific intention.

At 5:30 p.m., the Globex premium is 580, up about a point from the Chicago close. After today's close, Deutschebank cut their Internet stock ratings (we can see why), which might dampen the enthusiasm about tomorrows broadly-anticipated IPO, which will go to a premium anyway, but we wouldn't be interested in paying up for that one (reasons why withheld).

The call for the overall market Thursday preliminarily is: dip-up-fail-drop-test-rally-drop-rally-fail. Or something like that. At this point we're obviously trading the market per our warning a week ago of risk increasing, and are not making any particular allowance for this minimal and nominal upcoming Expiration. So, we go into Thursday with several thousand (2000-4000, depending on luck and executions we suspect) basis points gains on Wednesday's S&P trading, and a new live short from 1255 in the March S&P. No stop pending the opening bell hotline (available most typically 5 min. into the market day). Good luck; and don't worry about the overnight firm premiums, which are simply "normalizing" the very low premium at the end of the regular day.

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