New Debt Bubble, or Opportunity?

December 15, 2000

Prospective political response patterns . . . followed almost to a 'T' the outline expected if we indeed found a Bush primacy in the outcome; though either way the prospects for the macro or longer-range pattern would remain as outlined (in our opinion). The Commerce Department now is talking about a 'punk' retail environment; all the better to support of expected Fed policy shifts.

The financial press says the 'retail slowing' was unexpected; well some of us expected slowing. To us, this has long been telegraphed by the computer and automobile industries, in particular, with no doubt for months that consumer electronics retailers were hamstrung by a number of key factors that would not only herald slowing profits, but also incredibly ill-timed marketing strategies on the part of a couple of them. Many such stocks declined for months ahead of the recent data; some were on our short (or warning) lists, and several may be either past their lows or nearing them. The question is a question of extremes; both to the upside earlier last year or the inverse into purges now, where rebounds to nearly standard-deviation means, seem fairly reasonable.

Meanwhile, shorting the first upside thrust in the March S&P worked-out as planned; and then a series of irresolute moves by the market dominated much of the session, with one further upside thrust anticipated, which allowed the hotline to accrue decent theoretical gains in the first half of the day, little in the middle, then we were disappointed by missing the later decline, which was a form of 'bushwhack' following the early Bush rally. What we had hoped for was a selling wave of course, following the initial victory rally (which was scaled-back by the experience of so many ins and outs this post-Election uncertainty has gone through). Though by now the cynicism has gone from simply contrary-action on the part of traders, to skepticism that even a concession by Gore is sufficient, (though apparently) no open 'wiggle-room' for change, pending the Electoral College meet coming up. With the Vice President making a seemingly unequivocal concession (without an opening as regards the Electoral votes), then we could see later firming ahead of the Expiration.

In our view the market would have a better chance to regroup and advance in-front of Friday; the conclusion of Triple Witching Expiration. Meanwhile the T-Bonds continued firming contrary to popular wisdom of a Bush win; which either means the markets aren't convinced, or suspect that a meaningful tax-cut isn't actually going to transpire (which we suspect many believe anyway). It is important to us that the low inventory of long bonds tends to sustain upside stamina in this key area we've been bullish on overall since reversing at the 89 level (currently around 104), retains our expectation for higher numbers (lower yields) in the fullness of time other than corrections. It is helpful too that the lower rates (as 10-year Notes have long affirmed, preceding the Fed action we continue to believe is not only forthcoming but overdue) have not severely roiled the Dollar; an Index that was due for a pullback, got one, but hasn't violated the primary trend; a positive.

At the same time it's very hard to overlook the short-term continuing (falling-off the proverbial cliff kind of decline) economic slowing, which we've outlined for a long time, but which increasingly is taking-a-toll on individual sectors; often apart from the technology sector, some of which has just recently given signs of holding, parts of which have already been rebounding, and others just off the radar-screen as far as buying interest. While the market has recently become overbought for the short-term (as noted last night), there is a positive aspect to the overhanging earnings fears, and ongoing individual tax selling, which probably helps this exhaust without defining longer term trends. Amidst this, market internals have (for a couple weeks) telegraphed improving internals.

New Debt Bubble?

A couple ingerletter.com readers have shared (well-circulated) discussions among permabears, about the ongoing debt concerns; about which we don't disagree. We have occasionally noted this as part of our debt & derivativesdiscussions; which absolutely recognize an international 'debt bubble' that's been building for a couple decades, and is nothing new. It is however, even larger than in days before Asia's Contagion; when we forewarned of brewing derivatives crisis.

While we don't disagree with the premise (probably we were disdained among the first to denote it even on national television back in 1997 before the implosions overseas), where the concern at the time was dismissed as some far-out worries about dynamics that never come home to roost. Well they did; ultimately manifesting themselves in the LTCM debacle, posing systemic risk, and prompting the Fed's series of late '98 and early '99 stimulation, which candidly was behind some speculation here that the actual top was April of '98, and not a subsequent narrowly-based rally.

As a matter of fact, even when we dropped-down in some of the quality levels of speculative tech stocks in that timeframe (more speculative than usual over the years), it was explained that a top of greater importance was our April ('98) indicated peak, and that the concentrated focus into just a handful of issues to impact the Averages (not to mention changing the composition of the very Averages themselves to obfuscate the internal distribution that was ongoing through that period), was the kind of structural handle (read 'momentum' if you like) in the marketplace, that kept most investors from recognizing what was afoot. You never know for sure until later, but a wild idea in fact contrasted the '98 peak to that of New York in 1928, which preceded a hard hit, and then the rally into 1929, which was accompanied by narrowing leadership, but higher superficial prices for the Averages (impacted of course by capitalization). We actually think that pattern more closely resembles the New York pattern of the late 1990's than does the Tokyo pattern from 1989's top; although we did forecast the Nikkei to crash in '90, per a late overall Letter targeting near 40,000 as a peak then. The Governmental/industrial relationships, not to mention banking, are so varied in this Country versus Japan, that we really don't want to excessively correlate these markets.

In our view, while the late '20's in the U.S. is a better reference, and the bubble-bursting of a very domestic brood of Internet stocks not dissimilar to that of the auto's, radio's and early airplanes in the '20's, all of which were frenzy-sectors too; there is one huge difference to impact markets this go-round. The primary amongst them is the monetary structure, which includes a Fed well aware of what happens if they get seriously behind the curve; a Fed that probably didn't want moves in an earlier fashion, because of (maybe) some thoughts about what happened when the BoJ tried to hard to push rates down without any market break or big slowing in Japan; and because there is a stated intention not to be the ultimate rescuer of financial institutions (in the wake of LTCM in New York in 1998), though when push-comes-to-shove, they really have little choice about that.

Where that leaves us, is the same conclusion as before; that while those problems loom (and will continue to loom) on the 'back-burner' of fundamental worst-case scenarios, bears promulgating such fears as we presented over three years ago, are forgetting (or omitting) that one reason so many of the world's financially rich (and other) nations deposit their surplus funds here; just that: perception of the United States as the relatively safest bastion to serve as a repository for funds.

Hence, that leads us to conclude that the very argument getting some so bearish after various of the hard market drops that have sprinkled the past few years (this is nothing new, contrary to the nonsense in some corners of the financial press that act like there was a broad brushstroke rally preceding this year, which there was not, and that includes the movement to new highs in most of the key Averages earlier this year) . . . that's the very argument that assures the majority of funds remaining in the U.S., and probably reinforces the idea that the broad market that some do tend to argue is topping, actually did so several years ago, with breadth more likely bottoming. It is debatable whether there will be hard declines in 2001; though it's not debatable that a broad market top predates this market by ages; just a glance at Advance/Decline Lines affirms it.

As for Wednesday's action, we did about 1000 points via the early March S&P short from 1407 or so, on the (900.933.GENE) hotline, and though the action got quite choppy before flattening-out a bit, we did manage to offset a small whipsaw loss by a moderate gain on the bounceback. It was the afternoon that was disappointing, not because we took any particular loss at all (made a small gain actually), but since if we had just continued the earlier approach, the majority of the downside acceleration would have been captured; though moderate net gains always beat loss.

Beyond (the foregoing reserved fundamental discussion), we don't dismiss the idea of a modest-to-moderate recession; have said so for a long time; the trick however, is to gauge when markets have 'discounted' the depth of that; not so much whether investors are overly optimistic about not expecting an increasingly deeper shorter term purge. Many stocks have already shown signs of bottoming; others remain at variance with analysis though one might contemplate (the outcome).

But hope tends to spring eternal in some industries, just one reason some of the dot.com's, such as in e-tailing, or computer e-tailing (fields we've specifically thought long-ago in serious trouble) can warn, and then their competitors do, and they decline as if no warning from like stocks had in fact already been presented. That's a sign of residual optimism that traditionally warrants some defensiveness; but again this is mostly occurring in sectors we haven't cared for anyway. Optics, or infrastructure stocks, tend to have exhibited signs of bottoming; though remain tentative so far as this unfolds. Many investors are trying to discern individual fundamental 'explanations' for any stock that's down (or underperforming), and that's almost impossible where there isn't any news, for a number of reasons. One is the overall market condition, and has been for months, with the well-known extension as a result of the unprecedented Election result delay (so much so that the realization it's probably over has trouble even now sinking in); another are actual poor economic results in a number of sectors, and increasingly moving across-the-board of mainstream America in nearly every sector; while others (like infrastructure) quietly started fairly meaningful rebounds. And of course there's the impossible-to-extrapolate ability of any shareholder to sell until the last day of the year for tax-loss purposes; something that undoubtedly contributes to mixed results.

At the moment, the market, though roiled both ways repeatedly today, remains essentially locked in a sort of range, that is neither at resistance, nor below support, as measured by key Averages. That is especially notable in the March S&P, which is hovering just above (reserved technicals in the S&P discussion, as well as downside and then upside targets for the Dow and for the NDX).

Bits & Bytes . . . began to reflect a renewed focus on 'companies' rather than just on 'chaos' as the week began; as that was the message here Friday, when we warned of 'responders to panic' rarely being rewarded by reacting with the masses in either direction on post-close news fears.

Tonight's brief discussions touch on stocks such as Digital Island (ISLD),Compaq (CPQ), last year's early favorite Analog Devices (ADI), a pick from the early '90's (mostly sold and then low levels likely identified for)Texas Instruments (TXN), and Conexant (CNXT). Newer speculative issues, like Metricom (MCOM), were discussed; with remarks aboutLucent (LU), Nokia (NOK), Alcatel (ALA), and Rambus (RMBS), included. (Not all of these are on our current list; but have daily news that's considered worthy of note; or have had meaningful moves. Just mentioning this here does not constitute -nor should anyone assume- a buy, sell, hold or short on any of these.)

In summary . . in our view, for Fall lows preceding an erratic but nevertheless evident struggling advance, it was expected to be up in the morning, with a selling squall, though we understand at this point the market's hesitance to come back late in the session (absence of bids) pending the speech tonight. We do not disagree (have said so for months) with views that the first couple of Quarterly comparisons in 2001 are going to be difficult-to-miserable for a number of companies. In some cases that's in the price of the stocks (witness issues that fail to meaningfully decline in the wake of warnings; in others that's not so; primarily those inevitably expected to survive are ignoring what some of us realize has long been in the cards -especially given the Fed reticence earlier this Fall- while residual tax-selling hits randomly, as it may until the year's bitter end). The implications of this, support our thinking that rather than 'sucker rallies', the pullbacks are of a neurotic quality, with traumatic occasional drops (like after Friday's close) as 'sucker declines'.

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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