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Market Risks in a World Without a Gandhi

April 19, 2002

Greenspeak didn't help follow-through . . . primarily because we apparently were not alone in anticipating that the Fed Chairman would speak in terms of 'uncertainty', as regards strength of the economic recovery overall. That stance (somewhat inline with the idea that comments about an insufficient recovery to justify hiking interest rates, would result initially in a rally, but then a decline), makes sense, as what this market really wants to hear, is that the American economy is becoming more robust.

What Greenspan's comments about 'ample time to raise rates when the economy is stronger' may also suggest, is that our advance expectation about no leaning-upon a lethargic (in some areas) economy is not only valid, but that relatively low rates for at least a few months will help absorb pressures that may appear from any flash points of concern, and that includes war risks. The Chairman spoke about the economy as having 'uncertain strength', and that's of course (we think) based on a corporate need as well as a recognition that there is no inflationary pressure aside from energy, thus an erring on the side of expansion has virtually no risk. In fact, it has no impact on the cost of energy with demand comparatively sluggish; thus there's no downside from a standpoint of maintaining the policy, which is exactly what we thought he'd advocate.

Further, once oil eases on it's own, pressures will diminish, and the equivalent of yet-another tax cut will result; hence boosting the economy further, in a favorable case of course. That might be one reason the Bank Stocks (BKX) were strong today despite the roly-poly behavior of the Senior Averages. Indirectly that's a meaningful plus sign. It's especially so considering the banks absorbed the Chairman's comments about debt in 'specific' (unidentified) portions of the consumer or housing-buying spectrum.

Again to emphasis; we believe the Chairman's views are appropriate efforts to keep a significant level of demand, and though it seemed obvious to us in advance, there's a certain reassurance in hearing him say so; since this Chairman has not always seen things clearly or appropriately (such as in the Y2k expansion/high rate concurrences), even though there were those of us who advocated not stimulating while hiking rates; specifically because the Fed was contributing to the very speculation they opposed.

Now, we still believe the economy is doing better, as we have forecast since clearly identifying the low point of the recession in Q3 of last year, aside from techs and the few areas that are dependent on energy variables and of course international risks. The Chairman noted that risk prospects rise with the price of oil; with which we fully agree, though it basically states the obvious, and wouldn't occur without discord of at least some significance, whether Middle East, Persian Gulf, or Venezuelan related.

But we do believe the slow recovery continues, and to some extent because of such dire forecasts from CEO's and CFO's, causing not only the wide-ranging cutbacks of last year, but forecasts which were as negative as they were overly optimistic about two years ago. We thought they created benchmarks that were almost impossible not to reach, and they are doing that (sometimes better). The sometimes better is what is encouraging, and particularly amidst a climate that follows a necessary expansionist policy environment, after the worst market event since the 1930's. If that wasn't so, it is not possible that the Dow Industrials would still be hovering around 10,000 (more or less by a few hundred doesn't matter in the macro sense), and it's not possible that we would have such negativity from analysts that totally opposed worried views such as ours in the late '90's, that a time of reckoning was coming, which followed our '98 view that Internet bubbles were going to burst. We hear more doubt about a recovery now, than we heard agreement with our arguments of busts starting with deteriorating market internals in this month of April back in 1998. Isn't human nature amazing?

The economy is climbing this incredible 'wall of worry', built upon the existing one in place before the horrific attack on America. It doesn't mean throw caution to the wind of course; and there's no telling precisely when another 'shoe' might befall our people in their quest to save civilization and enlightenment. We don't have a monopoly on it of course, but we're not exactly dealing with intelligent Gandhi-like spirits opposing us in the modern world, which is part of why the enemies are uncivilized, and cannot be seen by any modern people as having qualities resembling contemporary humanity. If there is any modernity among those enemies who historically condone violence or barbarism, even against their own peoples, we haven't spied it. They don't even have a Lawrence of Arabia (who was not non-violent; and certainly no Gandhi-like figure), who might try to settle disputes through non-violence, or even arbitration. To those with centuries of historical violence and oppression, the West can assume nothing other, unless demonstrable by actions, not mere moaning followed by more murders.

So this 'worry wall' is real; there may be more problems (almost certain at some point ahead), but from what level of the stock market? And if something happens less than catastrophic, will it again be a buy point reminiscent of how we assessed the panic of last September, while bemoaning, but not succumbing, to the tragic mood of the time.

(Withheld). Besides, we suspect there is real evidence that inventories are drying up, as incremental demand inherently improves conditions in the midst of very genuine problems. That's why Capacity Utilization was improving a tad, and why a number of firms (reserved) were showing better expectations and results, that tend to deflect taxing questions remaining about debt. In our view, the Chairman dares take no other tact, because of the financial structure of most corporations (the durations prevailing in their financing are primarily on the intermediate portion of the Yield Curve), and the necessity to keep consumption and housing industries relatively robust, particularly at a time when there's (few) real definable engines of growth alive and well in the U.S.

At the same time, we had a Presidential comment about another terrorist attack being almost certain (to paraphrase), and we don't disagree. Where we've disagreed, is in terms of areas to focus on, because we think the 'lemming-like' mentality of some of the money managers, focusing just on big-cap stocks, continuing to ignore the higher highs of the smaller-caps (on a 52-week basis, or reversals of downtrends), and the very negative mood suddenly seen by some of the last holdouts in technology. We're not in that camp; having believed rotational lows last year and earlier this year, were bottom points for the major survivors (so far that's generally the case), and view most behavior by the Nasdaq 100 (NDX) as forming (reserved for readers). It almost seems contrarian to hear of supporters of major networking stocks we hated for years (primarily because of debt exposure, not just internet/telecom dependence, though that was part of it), only now making big deals of downgrading them to sells. If we were cynical we'd almost think that would suggest they're becoming buys on dips.

The Fed Chairman pointedly denoted the risk of protracted increasing Oil prices; just as we suspected he might, for the purpose of buttressing reasons to err on the side of caution; i.e.: not contemplating any increase in interest rates or a tighter monetary policy (a neutrality bias isn't much considering the post-attack panic drop of fund rates), as discussed. And that's all part of a cautionary stance he appropriately takes.

So, there was no S&P breakout aside from a momentary flirtation with the June S&P 1135+ area when the pre-release statement came just before the appearance before the Joint Economic Committee; and then profit-taking on the news reared it's head. In the evolving session (continuing the see-saw behavior of the last ten days) the stock market, at least as measured by the S&P, could not reconstitute its strength; nor did it weaken appreciably. Hotline (direct-dial or 900.933.GENE access) was near a wash. It really wasn't a session, unlike yesterday's terrific results, where much was doable.

As to Thursday, we would suspect the market generally starts mixed, possibly with a bit of a dip, then bounces, then sells-off, then tries the upside again. (Balance of this forecast is reserved)

In summary . . economic data continues the projected consistent improvement type of indications we've suggested since targeting the economic low in the Third Quarter; although there's no doubt that profits are comparatively slow, and somewhat 'on hold' in a world that almost unanimously is sure tensions or stress (not just economic ones either) aren't over; so we concur with that, though again on alert for snapback rallies, such as the one we suspected for Tuesday; with sustainability suspect. Ditto the next.

As to McClellan Oscillator readings: up strongly yesterday, and easing a bit today to about +50 for the NYSE, and very similarly changed to +14 for NASDAQ. No activity pattern analysis change, as upside developed per expectations, in harmony with a 'complex' April, working on completing a tough-love market, in a news environment anything but certain; though continuing (balance of forward discussion reserved).

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of next week explicitly continue to remind us of various new risks the Allied fighting forces face, or may face, we try to keep in mind that the unexpected remains a risk; as all civilization cheers human progress. As of mid-evening Tuesday, the S&P futures are up about 140, with near a 320 premium in the front-month June contract. Whether evening upside can hold past the opening before fading is news dependent.

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