No Short-Circuits on Wall Street

January 19, 2001

Rolling blackouts. . . seemed to dim the enthusiasm on Wall Street, about the same time the actual blackouts dimmed the electric lights of Northern California; but not in Southern California at all. Correlations between that and the dislocations threatened by the OPEC production cuts, combined to juice-up fears of New York short-circuits, though many on the Street are failing to distinguish why certain money-shifts roll-on.

Much bad news has been 'in the market' months ago, with the post-Labor Day drop in our view anticipating a couple miserable Quarters of earnings; thus responding to this now makes little sense, as the market (in it's infinite wisdom) is frequently affirming to all at this time (a favorable omen overall, as suspected would be the January case). It is also interesting to have power-outages really conjure-up West Coast electrifying or economically devastating theories, which are aided and abetted by the actual events.

If this too shall pass (and we suspect that will be the case from a longer-term impact, as much of the 'crisis' is political and a case of monetary gouging, not just insufficient generating capacity, though that is of course a factor too), then pretty much almost all that can be negatively looked-for has already been seen. Of course our yearend talks did mention 'earthquakes', but we had in mind either the West Coast or Japan, not for New York City, which was indeed rocked by a rare 2.4 temblor earlier today, centered on the upper Eastside, believe it or not, in the vicinity of Bloomingdale's (stampeding heavily made-up damsels were not reported fleeing the cosmetics department though some may have thought bargain-counter competition was becoming very frantic).

On Wall Street, the quiet rising (we presume not magma in underground volcanoes) quality of the market we forecast for this month continued, oblivious to any uptown shaking. While the market's recovery can still be described as 'fragile', we've referred to breadth as improving before any of this, and it sure continues to do so. Upside vs. downside volume continues dominant on both the NYSE and NASDAQ markets, as it is also noteworthy that the S&P 600 small-cap has now joined the Value Line noted last night, as making new highs, at least intraday, if not on a closing basis as of yet. It is of course noteworthy that non-capitalization-based small or mid-cap Indexes can do this, but if the entire so-called 'diamond pattern' was a consolidation rather than a pending colossal disaster (greater than we allowed for last year and starting in 1998), well, then tops of big-cap consolidations can also be breeched, in the fullness of time.

It is not that we don't expect the continuing pattern outlined last month for this year; it is ongoing; but despite the considered (midstream) air-pockets, we see no reason for now to change the outlook, that as you know was considerably varied from last year. The financial structure of a strugglingPG&E (PCG) won't change this pattern, and as Federal intervention have already compelled the out-of-State producers to sell power to California producers (reserved), it's probable in fact to see the token power-downs really sobering action among all the parties. It is also not our desire to 'bet' on future economic status of any of the Western utilities. In markets like this, where everything was beat up, why in the world would one buy Ut's?

On-and-off-again surges dominated stock market action, as the March S&P tried very hard not to fill the opening expected gap-up via constrained declines, while NASDAQ action remained favorable throughout the entire affair. It would have been orthodox to have the earlier drops fill (or try to) the gap-up, but market psychology was too strong for that in the wake of a projected 'relief rally' after Intel's (INTC) report yesterday of course, and at least until OPEC's determination to cut production by 5% was affirmed today, as well as actual powering-down of parts of Silicon Valley this afternoon. More important analytically, was the drop in Oil after the widely-expected decision, which is a further sign that even the prescient thinking of the Oil Ministers regarding a forward-demand picture, is probably already behind the curve (do they know Fed staffers?).

It remains our view that all rallies in Oil will be merely transitory, as crude works lower for now, on a continuing trending basis with its origins in the mid-30's as targeted last year, and fought for. Actually, we would be surprised if the mid-20's hold for Oil on an intermediate pricing basis, which would help the economic recovery as the year goes on, while throttling some of the Dow Industrials, were Oil remains among big-caps.

As for Intel's report, it in a sense was better than cursory interpretations of President Craig Barrett's demeanor might in fact have suggested a couple weeks back (as per our on the scene comments ten days ago at the Las Vegas's CES, which included all the remarks at the time), including disputing the antagonistic attitude of a well-known tech reporter in the post-presentation news conference (as regards the future), where Mr. Barrett appreciated my thanks for a 'vision' comment that preceded my questions about product ramping and scalability, which we've discussed in recent reports here, and which accorded the accomplished gentleman the courtesy of not questioning the petty concerns some had about chip pricing and competition, which are self-evident questions when posed to the President of such a concern.

Yes, we did think a bit of anxiety was displayed, and that the President of Intel is a far better engineering administrator, than up-front sales spokesman for their firm. Frankly Bill Gates from Microsoft (MSFT) did a far better job of integrating the mixed-use not only software and hardware, but 'devices', such as very great hype about Ultimate TV (you know our thoughts vis-à-vis DirecTV boxes from the other big manufacturers, at least from the demonstration units we could evaluate there, keeping an open-mind). If Intel benefits from becoming the center of a PC universe, it may not be relegated to a home-networking server closet (as some suspect), but rather because of efforts from other firms; though that quite frankly is and has been our interpretation of the ongoing Intel business-model approach for years, ever since the 1996 Connectivity Forum we greatly enjoyed, having had the pleasure of having 'breakfast with Andy Grove' then.

I continue to suspect that, while our primary gains were taken years ago in Intel, and as well earlier last year as new highs were achieved, completing the pattern then, our argument for the future may indeed hinge upon the nearly-coincident rolling-out later this year of a pair of worthwhile upgrades; the (more profitable for Intel) Pentium 4 on .13 micron architecture, and MSFT's (code name Whistler) consumer version of W2k. At that point, and as such computers are able to drive digital datacasting (as we'll be in a fight versus one of our other primary focus areas, that being interactive television rollouts), we'll have a much higher consciousness on the part of users about what in fact they can do (and we include those over the age of 21) usefully on a modern PC.

After the close, both IBM (IBM) and Apple Computer (AAPL) reported better results than some analysts had looked for, despite some in the financial media contradicting that conclusion. Both companies have their work cut-out for them of course, though it is a helpful factor for generalized confidence to see some report less severe messes. IBM, in particular, shared their fairly favorable (and almost bold) outlook for the future with which we basically agree, though we have some varying equipment concerns. In any event it is not our view that the newly-growling bears make any sense at all with respect to calling for PC consolidation, or share-price avoidance into the deep hole. It is true at the same time, that we abhor gap-up openings such as Wednesday's, with a suspicion that predates this market, with respect to how they perform unless filled.

It has been our view for several weeks that the newly-bearish pundits (who despised all the concerns we had a year or longer ago), are and were 'fighting the last war' and not behaving responsibly by moving from tech into defensive stocks recently, when it was our view the opposite made new sense, as outlined properly. Some of the better defensive stocks (probably including drugs like our own Merck (MRK), which we've owned since the low 20's) will more than hold their own in this shift, but at the same time those paying give-or-take 90 for the shares aren't anticipating a new trend, but reacting also to what has already taken place; the inverse of those out there selling computer stocks far after the horrendous fall (especially of the internet infrastructure management or structural type, which are just starting to firm again nicely, we'll note).

Note that the Nasdaq 100 (NDX) made another very respectable gain after being just temporarily deflected from resistance as outlined. After we get through there, we'd be looking for the higher levels outlined (specifics reserved; more later) as this pattern progresses. Once the 'light at the end of the tunnel' becomes visible to others later in the year, and presuming it's not a train of course, the capacity of certain key modern technology component or key stocks (within big capitalized averages) to contribute to the advance will increase, and that's a big consideration to broach for later this year.

At the same time, the testimony of the Treasury Secretary (nominee) O'Neill was very clearly a factor in the late firming, as he intimated a desire to move Tax Cut proposals quickly and retroactively through the Congress, with a targeted lower-end contribution (as far as taxing philosophy to the average income families) that the market did like. It should also be noted that the T-Bonds benefited from these comments, not only from a demand perspective (in such an environment where surplus remainders are vague) but as the whole combination promises more than short-term rate relief forthcoming.

At the same time, per expectations of a cyclical (not secular) Dollar Indexcorrection in its ebbing phase, now that the Greenback has indeed found support lately, as we suspected it would, we can see an environment where the rate and currency markets are complimentary to equities. Hence, simply moving over (reserved) would confirm the new reversal to the upside, which would be perfectly normal and logical, given the expectation for the U.S. to move-out of forecast slowdown (or recession) conditions, for later-on this year. It is barely relevant to hear economists talk about the minutia of whether or not we'll get a statistical 'official' recession or not; as markets are already suggesting (and will do more of by virtue of taking-out the declining tops pattern on a weekly basis, regardless of ensuing likely pauses-to-refresh as the year progresses).

In our view, not only have the markets discounted more recessions than occurred in the past, but sometimes the markets conclude negativity long before the economic nadir; which is the primary point. In our view the bottom of the Senior Averages and even the smaller Indexes, completed as suggested, with the forward scenario mostly impacted by 'emotion', and hence the technical variability will be of pullback versus a forward thrust that becomes 'spiky' for awhile (necessitating a sharper pullback) with either way the markets working higher over time. If confidence is shored-up by what is a combination approach involving taxes and rates; all the better to ease the tension and improve the underpinnings of the market, as time goes on. All the better to force compelling paying-up to get, in by the very managers suspected likely to do just that.

Daily action . . . meanwhile, continues a buy-dips more than sell-the-rallies structure, advocated here to commence with the first 'hiccup' anticipated at the New Year's very beginning. Today we allowed for the opening gap-up to be filled, with expectations of then-higher prices. Just to make it tougher, the market didn't fill the opening gap until the final hour today, proceeding to then close the Senior Averages on the firmer side (relatively speaking). Because of that expectation, and our fairly optimistic outlook for tomorrow, we determined to hold that last March S&P long from 1337 (per intraday 900.933.GENE hotline guidelines) on an overnight basis (balance reserved remarks).

Technically . . . keep in mind that by having the early January expected 'false start' and then a subsequent selling squall, the market (as projected) sort of 'hiccupped' sufficiently to let investors doubt the staying-power of any rally, actually contributing to the market's later sustained recovery, by virtue of making it difficult for those who thought things would just explode to higher levels automatically at the year's start; an overly simplistic expectation which we suspected would be too easy these days. So, as players gave up, we got our push-up into mid-month as targeted. It's not over yet. (Balance of technical discussion, including support and resistance, is reserved.)

Economic News & Releases: (reserved section) With the Philadelphia Fed survey likely to be horrendous, this may be taken favorably the market, as sort of prodding the Fed to even greater rate cuts at the upcoming meeting, in harmony with our call.

In summary . . McClellan Oscillator data is around +86 for the NYSE (that's -11), and +83 for NASDAQ markets (that's about a +2 nominally favorable improvement). Preliminary call for Thursday remains favorable, both on our 900.933.GENE hotline and here at ingerletter.com, as we are long from 1337 currently. As of 8:45 p.m. ET, the S&P premium is around 1573, with futures ahead by 330.

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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