first majestic silver

Nuclear Winter

June 22, 2001

Huge financial losses . . . piling-upon each other, can have a bright side, just as the old saw about 'every cloud having a silver lining' might suggest (long-time readers will recall our musing about three years ago that 'every silver lining has its cloud', while it was a lonely time warning about how so many so-called 'new economy' stocks would not defy history, and were headed for a bubble-bursting). What is this 'silver lining' we suspect is being created? Sobriety pure and simple. (While this has little to do with an overnight long in September S&P at 1220; our first it weeks, it's an interesting spot. At the present time the 900.933.GENE contemplates retaining the long in early chop.)

Huge financial losses (especially to those managers who, for some elusive reasoning thought their companies would stride through wide minefields, only to find that losses were a question of degree, not exclusion), may sometimes actually be the end-stage of suffering, and presage the start of a string of more positive developments. While it is tough to foretell, for many companies, that can include new financing efforts, asset sales which, outside of key-focus competency realms, and important debt reductions, are often able to first help stabilize a business, then eventually return it to profitability. At the same time, that can put a firm in better steed with lenders and rating agencies.

Nuclear Winters

Certainly that's not always the case; one reason you don't see us suggesting any sort of stocks like Motorola (MOT), Nortel (NT) or Global Crossing (GX) here; in fact we warned about the latter two in particular (due to their debt structures) over a year ago while choosing a competitor (under pressure, but no longer aboard) to Motorola. Over time, while not warming to most of those particular companies, we are increasingly at least optimistic that the worst of the debacles are behind, and that the risk spectrums are shifting to different sectors, while the already decimated become more attractive in some cases. While we don't like stocks under $5, because sometimes institutions are compelled to liquidate, and that can cause implosions under their own weight, we find so many that fit that description these days, that among those will be survivors.

The strain of eons of huge borrowings to financial growth, especially in networking or telecom sectors, are not alone in encountering tough going as the U.S. joins a global economic slowdown, and many multinational-oriented companies stay hard-pressed. While many managers are either getting 'cold feet', or rationalizing 'nuclear winters' or something akin (as their justification for selling into extreme weakness), the reality is many of them have no choice, so will try to rationalize their justification for selling the stocks they liked at sometimes 10-20 times higher price levels, either on survivability (certainly true for some), or on the idea of an eternity until recovery is remotely even a consideration. The reality is their managements make them sell under 5, just as a typical brokerage firm won't allow any stock under 5 to count towards a margin play; another reason that temporary pressure occurs at such a point.

Nevertheless, while that often puts additional short-term pressure on a stock, it can also 'clean-out' sellers beyond the dark-humor aspect of what that accomplishes for holders. As those sellers are liquidated, there is often a long period of basing, during which (if able) managements reform their expectations, and if not expecting their long term prospects to be nil (varies), may set-the-stage for a streamlined, efficient, and in some cases restructured firm, which ultimately regains its footing. That doesn't tend to do much (say, in the case of a $40 stock that goes to 4, or a once-$100 stock that goes to 5), at least for people who bought into the height of the frenzy and then froze for a couple years, something we warned vehemently against in the 1998-early 2000 timeframe; eventually creating opportunities (expected during this Summer's 'hits') for a slew of patient investors gradually taking opposite tacts during tough market times.

Negativity is so thick . . . you can cut it with a knife; one reason stock prices had the difficulty they did during the week's early efforts to rebound. In telecom where claims are that business isn't below (already lowered?) expectations, CEO's were trotted-out to ameliorate shareholder angst, which basically has no stomach for optimistic ideas. (In most cases, business is dramatically below such firms estimates; stunningly so.)

A few managers talk about enthusiasm for the future; hardly anyone believes them. It is almost the inverse of the perpetual optimism that gripped the markets during what in our view was an unsustainable parabolic upward move of over a couple years back now. Nobody wanted to hear those warnings; some complained a year or two ago by our urging every investor to avoid margin like a plague, diversify, or cutback holdings to sleeping or safety points. Now, human nature doesn't want to consider that most damage already occurred, or that risks are increased in the Oil and basic-materials, as we've warned. Now nobody wants to hear ideas of buying extreme panic phases. While it will be a 'nuclear winter' for some debt-laden decimated issues, that's not of course the case for all; so this may be (in hindsight) a discontented Summer for buys.

Difficult Conundrum

It's a difficult conundrum, because of the question of premature leadership from tech, in an environment where the oldline blue-chips are often selling at premium multiples right now, and thus incapable of being much more fully-priced in our view, without the advent of some of the damaged stocks coming to the leadership fore later in the year. That's a reason we suspected the Summertime would be a 'rocky road' to later gains, and a reason we saw no sense (as outlined a month or two ago) to the idea of great gains then (beyond a conclusion of our targeted Spring rally, and early June fling), as others expected some sort of miraculous June (no idea why, and said so then), while we focused on pitfall targets this Summer to create buy spots for potential later gains.

Daily action . . . did not view the pre-release of the Fed Chairman's remarks as what was key to running shorts-in during the first 'pop' of the day; but rather the release of an LEI report that was comparatively encouraging. Reporters tended to minimize that (if mentioned at all), by saying it was a slow-growth situation. (Interpretation and what it means for the future is reserved for subscribers; so is discussion of daily targets.)

We did suspect that Wednesday's downward opening-gap would be retraced, and it's thus a reason we didn't call (as we sometimes due) for a more complex first-hour, but instead simply went long the September S&Pat the 1218 level early-on, sold gains as time evolved, did not short the giveback; guidelines going long by intent at 1220.

Keep in mind that after Tuesday's close the API (American Petroleum Institute) came out and affirmed the ongoing growing inventory of gasoline stocks, which continued what has been our view regarding retail gasoline prices joining Oil prices, by heading lower this Summer, not higher, the inverse of overwhelming conventional viewpoints. While it will take time for many to recognize this, the breaking of Oil prices, along with 'bandage' caps put on Electricity costs in California, will contribute to some increased economic recovery prospects; however that's down the road a tad. It all can combine.

In any event, finessing the next month is potentially as difficult as the 'dismal science of economics'; though for now we're expecting essentially a continuation of our calls for this Summer choppiness, which means an up-down-up June, with more troubles (reserved timing for readers). Technicals (support/resistance are reserved areas).

In summary . . . virtually every number and sentiment (reported or otherwise) has up to now tended to affirm semi-recessionary conditions or worse. This hasn't changed; but the slight improvement of parts of the LEI (not all) are a step in the right direction. None of the Nation's economic challenges (particularly telecom) should be news at all to investors understanding how it takes time to work-through the aftermath of what has gone before. So nothing is changed, and the June pattern continues slogging through the general outlook, which of course is expected to feature a late comeback, which tentatively commenced erratically, but was very worthwhile for a trading effort. That is why guidelines bought Wednesday's gap-down, sold it; buying the secondary plunge later. It is our continuing view that the Summer remains choppy, while beyond that it may be a cautiously better environment. At the same time, we were very ready for short-term rises, commencing a couple days ago, amidst as much negativity as any imagined.

Hence, while worries are fundamentally correct, it's not based on anything unknown or not foreseen, and that makes short-term downside follow-through a tad suspect. In mid-evening Wed. Globex trading S&P's hold nearly a 700 premium; futures up about 1.50. It remains, however, a Summer of discontent; expected to include many areas; some untouched so far, before rotational changes (more defined analysis reserved), concludes. As of now, the (900.933.GENE) hotline continues Wed.'s most recent long from 1220 in the September S&P, or as close as able (for those who concurred).

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