The New 'Red Sea'

July 7, 2001

The Marconi Crash . . . 'telegraphed' concerns that America's telecom woes weren't limited to this side of the Atlantic (in case anybody thought that was the case, which we can't imagine). However Federated's (FD)warning really cemented the message, which aside from speculation about a little early July upside extension, led investors into much talk about a Summer rally, while we've long-forecast a Summer decline, or at least a good bit of trouble once the little late-June/early-July rebound was finished.

As to whether it's finished, much may depend on the morning'sEmployment Report, though for all practical purposes, we have been unenthusiastic about immediate tries to advance prices beyond the 'Mom's B'day rally time' (which often ends around the 6th or so), having warned about where this is likely going overall from here for at least some significant period of time, before the next meaningful advance is attempted. For sure, any way you slice it, what's increasingly evident to Summer's overly optimistic crowds, is that the tech-wreck and bubble-bursting wake are not unique at all to those areas, but are contributing to discontent across an increasingly-broad sector of U.S. commerce. We have not understood what, other than seasonal factors around certain holidays (Memorial Day and the 4th of July, and later on maybe Labor Day), has hosts of money managers & analysts talking about a solid economic recovery we don't see.

Now while we do see the combination of fiscal and monetary stimulus contributing to an offsetting of the 'other shoe' of accelerated warnings coming out, we don't see the urgency to climb-aboard aggressively, until several things happen: an oversold daily and weekly condition (not developed at this point, but heading that way rapidly at this rate); a failure of the market to react to negative news (had that for awhile; but not at this point); and probably an air-pocket of discontent resulting in a short-term washout (inference reserved for readers); and that finally hints the economy's able to absorb the punches in a very real way (not definitive yet; we don't think it should be just yet).

What may also be occurring is the belated recognition by corporate managers that an attempt to bolster sagging fortunes is a sort of 'pushing on a string' mentality; so they stop doing that, the earnings estimators go from one extreme to the other (this part is reserved); and as a result they start realizing they're better-off getting worst-case alternatives out now, making almost any comparison next year look favorable.

Besides that, you've got the 'Fed fighting' mentality alive and well among the bears; in a climate that reinforces their negativity by virtue of the very reports such as today. Ideally what this can do is bring-forth a concentrated spate of selling somewhere this month (rather than waiting for later); in theory that could evoke (subscribers only). Probably first in technology, with the Dow Jones Industrial Average the most risky of the Senior Averages and Indexes, as we have discussed. Later, many may be very surprised to see the NASDAQ, and even the Nasdaq 100 (NDX) rallying, at the same time as the multinational-laden DJIA is still struggling. Whether or not we've got a Fed inter-meeting rate cut coming in the midst of all that is another story; likely it might occur if evidence suggests (beyond these well-thought-out company releases) a real slip-sliding in the economy outside of the areas already known to be struggling.

After the close Advanced Micro Devices (AMD) reported drops in sales so dramatic as to shave previously warned-of poor sales by another 20% or so. That issue (which we have never owned) is dragging sentiment further into the abyss of psychology that suggests many big-name companies are going to take longer to turn-around than has been thought on the Street. Also EMC (EMC), the major storage company, proved it's not a safe-haven either, by virtue of a warning of lower profits on slightly higher sales, and comments about slowing sales on a global basis too. (These two companies that we do not own, are down 5 and 6 points respectively in late trading, and likely will aid the downside in the morning at least, almost irrespective of the Employment Report.)

Our own view, for some months, has been the 'profits recession' continues until late this year or early next (less for some companies, longer for others), for improvements in the core computer stocks, but certainly not even that timeframe for most telecom or wireless stocks; fields that could easily lag for a couple years, if not longer, because of an ongoing delay in high-speed 3G capabilities and disappointments in adoption of WAP services. (Both of these are characteristics we expected to throttle growth in the area, with the balance of our thoughts on this subject & stocks reserved for readers.)

In any event, it would be preferable to see the Fed not inject itself overtly again; since that would convince many economists that the economy simply had a bubble-up (our view essentially) in the Spring, and now must checkout the structural mettle that's at the core of the Nation. Such a scenario would have more chance of chilling consumer sentiment fast, and while that could all coalesce in a fashion, that's how you get later Summer implosions; which we can't entirely rule-out of the equation. Delighted if we can sidestep that degree of further big-cap capitulation (because that's were most of it would be, along with certain techs that haven't eroded very much of late, as are in the news right now), we haven't been and we're not going to be, complacent about a late Summer ability of the market to avoid stresses, and these are the times clearly to be prepared for it. It's also seasonally time currency woes can occasionally surface.

If the Dollar holds-up (so far remarkably) through the Summer's balance, great; if not it can be a retort by today's optimists as to 'why' the Summer rally couldn't blossom. If this market works-through the current added spate of earnings warnings (not unusual after the 4th by the way, where necessary) and then (sorry; reserved for subscribers).

Technicals; Daily Action & Economic News: (all are reserved subscriber areas).
In the meantime, Thursday's hotline (900.933.GENE) addressed the complexity of the past session as best able, which included a fairly early short-sale from the 1237 level of the September S&P, a couple long-efforts at snapbacks (got nowhere), and then a breakeven guideline, before a testy but nevertheless quite successful further short-sale from around 1229 that was suggested to be closed in the post-NYSE closing bell time the S&P trades for a few more minutes (that could have had a close of anywhere from 1224 down to 1220, because the market fell off increasingly in those final moments, quite rapidly). [A new short Thursday morning (on the rebound to 1214 it was) will likely be closed around the next measured goal of 1205 or so, for rebound behavior, and then we'll take it from there in intraday efforts on the hotline.]

For the moment daily 'support' is likely around 1205 (vicinity over 1200 may try holds temporarily, probably not ultimately), and resistance (we've shared some current and forward thinking, but must reserve the rest for regular readers). Now we probably get a mini-climax of sorts Friday morning (other than impact of the Employment Report), and we'll see how it can be played for washout and a rebound. Because there was a good theoretical gain on the short sale at the closing NYSE bell (with the S&P futures trading another 15 minutes), with the specter of the numbers in the morning, it was decided to cover and not hold short overnight; planning to re-short an early bounce.

In summary . . . virtually every number and sentiment (reported or otherwise) until very recently, has tended to affirm semi-recessionary conditions or worse. This hasn't changed vastly; though slight improvements in sectors of some economic reports are very welcome, as noted the other day and as continued with Monday's NAPM data. It is notable that we are again bombarded with more earnings warnings; these tend to be late-stage assessments (that we suspect managements knew were forthcoming in most cases) released early in the new Quarter, after portfolio managers often made decisions (presumably without such knowledge) at the tail end of the prior Quarter.

It's the kind of thing, nevertheless, which causes short-term evacuations from stocks in the limelight of a newly-filled 'red sea', and eventually sets-up rebound efforts. Key turnarounds are almost impossible to sustain in such an environment, so we suspect the first efforts to comeback will be transitory, enroute to lower prices; maybe despair. And then, we'll be closer to safer new buy points; especially if that's below supports or inflection areas, such as (outlined to readers).

If we had to worry about what (fundamentally) will worry investors later this Summer, it might be failure (which is normal) of a late-season economic comeback, currencies, and also the worry about write-offs, as some companies try to mark-down their losses not only in inventory, but in valuation due to debt service and declining prospects, as some accounting firms require since the FASB rules changes. How important this will turnout to be is debatable, due to the possibility that such write-downs may not occur until we're at a point of inflection, where the economic recovery is increasingly visible.

McClellan Oscillator data reversed from the get-go, aborting chances for any instant post-holiday (would have been temporary anyway) effort to extend rebounds. NYSE readings about +14, and the NASDAQ -8 or so. Short-term unresolved; but heavy. At this point, what could have been a crucial (but likely failing) effort, not has to take the form of a rebound, which is even less likely to succeed absent a broad oversold, that we don't yet have. As of 8:30 Thursday; about a 300 Discount; has futures 300 lower.

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