Out of the Woods Yet?

September 7, 2001

Out of the woods . . . is not the question here; though we were delighted to see the first rebound fail, and then a series of flailing moves in a multi-hour sort of elongated symmetrical pattern, which surely was not easy to have certainty about, but ultimately allowed the market to traverse essentially the desired pattern calls. Generally we've allowed for the market to work-lower, interrupted by rallying behavior around holiday recesses, and rebounds after daily resistance was deflected from. There's no change in this, theoretically, though as you know we suspected on Tuesday that some sort of further turnaround (especially if we drove down or had a failing early rally) was likely, particularly on Wednesday. Now we got that, and of course sustainability is dubious.

Nevertheless, there was no way to get the downside 'cranking' without the 'unkilled' (as we termed them) coming under pressure, joining the vast hordes of those stocks previously departed, as discussed for weeks. More particularly, we suspected that at least the bulk of pressures would come from some of the very same blue-chip stocks that many investors and money managers had been seeking perceived 'safer havens' in during recent months. And that resulted in some thoughts about what's been going on, as well as some surprises we suspect will be in store next year regarding mantles of leadership, or their transition. Meanwhile, we suspected today (Wednesday) would be an up-day for the Dow Industrialsand other blue-chip Senior Averages, but keep to our views that without daily resistance being surmounted, the picture is unchanged of course. That does not mean however, that one gets short-term bearish into soft or imploding markets, but rather recognize just what we expected regarding snapbacks.

The NASDAQ market was more doubtful, as investors increasingly worry that levels of the technology playing field will be thinned in the year or two ahead (why is that so bad, and isn't that what we've talked about for about 3 years now?). Nevertheless, it's disconcerting not only to the blue-chip 'unkilled' stocks which are descending per the game-plan (with structured interruptions), but to those who believe the Nasdaq 100 (NDX) will be christened an index of fewer tech names (again not necessarily bearish for the survivors). We concur that some of the newer strange bedfellows within techs, are marriages borne of necessity and circumstance, rather than merely fond desire. It is also too soon to determine whether such complex transactions are going to be very mired in intricacies, that let certain current CEO's blame the process, not business of itself, should such gargantuan tasks not be easily accomplished. The market's say on such deals is fairly skeptical; witness the response to the HWP and CPQ proposals. It will probably surprise some though, that this is an ongoing pattern that's not nearly at an end, with this year (and maybe parts of next) consumed by mergers, bankruptcies, and consolidations; which was our expected main thrust of this year before it started.

Is that beneficial to investors, or does it matter? Absolutely; deals done well will likely be a pleasant surprise to the Street (maybe even to their creators), and provoke more such once-thought-unholy alliances. Ultimately this trims the competitive climate, will tend to reinforce views of those who (incorrectly) see the future as just commoditized (something we predicted years ago for the PC industry, but that is mitigated by these very consolidations and departures in the sector, just like autos and airplane makers in days of old), and interestingly allow forward-profitability (yes, the inevitable return of profits that so many believe is impossible for the decade, not just a couple years) to accrue straight to the bottom-line when it occurs. We've focused on these shifts as well as why the delays in at least several areas of connectivity predestined trends to be delayed. But delay of a celebration is not the same as never having a party again. Interactivity and digital broadcasting are among such areas; not all firms there either will survive; but the well-backed of them probably will, and as outlined for sometime, the arrival of VOD was a key to part of the transition; especially as it gravitates over coming years into HDTV.

(Wed.) alone there were two announcements supporting our view on this subject; one a deal between NewsCorp and Disney, and the other a first-ever HDTV Network. It is not compatible with non-HD signals or STB's (set-top-boxes). Of course everyone realizes that digital cable has nothing to do with HD, despite some cable reps trying to convince consumers to the contrary. In the former case, we're talking about Video on Demand; which contrary to news reports, can be a plus to PVR's (personal video recorders) as future generations shift to the capability of short-term full digital (HD) storage. The initial reaction is guarded. In the latter case, you have Mark Cuban's 'maverick' network in Dallas, destined now to become the first (and only exclusive) High Definition Network; in this case sports, but setting an interesting benchmark for the future, by not providing simulcast sports programming in analog (conventional NTSC) television outside of their local markets. (He is of broadcast.com fame, selling near the top to Yahoo!, and seems to be of kindred spirits about the future of HDTV.)

On top of that (at least initially) reception will only be possible (without extra charge) on DirecTV (Channel 199, starting Thursday), and not on cable or other satellites. It's of course much too early to see if any of this starts a trend as significant as did earlier focus on things line online and internet services, but clearly there's movement (finally we would add) towards both VOD and full-time HD; both occurring in a single day. No investor wants to get excited, understandably, and even GM Hughes (GMH) stock is still moribund pending resolution as to whom (if either contestant) buys their holdings, and cutting back staffing overhead (a little tardy on that one, though we fault them for delays in launching more bandwidth to accommodate spot-beam birds shifting local to the new bird, so HD capacity opens-up to offset competitive threats, but at least we see they're working on comebacks). To us what's important here is a direction these technologies are taking, in a time of constrained capital expenditures, and struggling businesses of all stripes. May even be a plus in making such endeavors affordable with equipment prices down too (for the various broadcasters; whereas large cuts by both Sony and Panasonic in broadcast HD cameras, such as 24 fps have occurred).

We highlighted this field in the current Letter, partially because of a belief that 2002 is the year HDTV finally blossoms, and because we suspect efforts of broadcasters and some cable systems (or even the MPAA) to derail these trends, are already defeated, by fiat from the FCC, by determination of the CEA, and that neither a Motion Picture Association, with its vast influences on cable vendors (and their aging pay-per-view systems), nor broadcasters who believe they'll derail DTV somehow using spectrum that is already committed for other purposes (civilian wireless or military), will prevail. We continue to believe that the years 2003-2006 will reflect upon 2001-'02 as years in which the germination long ago finally took, and from which new services blossom. And we do not concur that datacasting or multicasting (though there's some room for that, such as PBS is already doing in certain cities) will supplant HDTV, which is now the only technology with self-evident appeal to consumers even in these trying times. More another time; just keep in mind this all ties-in with our view of the latter decade. (Sound strange to talk of progress amidst all the psychological fear? Guess which is more important once the mania's bubble burst yields to a selling climax? Emotion? Of course not; analysis, and an understanding of where one wants to be after it's over.)

Technically . . . however, from a trading standpoint, this is of nominal importance. It is more important that the Fed may be prepared to preempt the consumer slowdown to some extent, as suggested by Governor Poolelate Wed. The economic severity is of course not news, and has been dropping for well over a year overall; or as much as 2-3 years, depending on the sector. And the Money Supply is now growing faster, as well, something we've called upon the Fed to focus on, more so that merely rates.

In this regard, we find it interesting that some permabears will trot-out the argument of few rate cuts remaining, as some sort of argument for perpetual decline. Nonsense in the extreme. As we've always said; it's not rates, but the availability of money that counts. If the Fed gets ahead of the curve (so far they've not, but they understand we suspect) you'll see the pump-priming take place in ways that stimulate growth, and it will not matter if T-Bonds drop a bit, as long rates actually firm some more (which is what they should do as visible signs for some moderate recovery appear in earnest).

In the interim, we suspect there will be more (action, but further comments and levels of technical importance must be reserved for our esteemed subscribers).

Belief in rebounds, regardless of what comes later, allowed hotline (900.933.GENE) efforts, after good gains Tuesday, to capture 2 out-of 3 early tries (for a homerun gain by the way, which included a 10 full point gain on a long from 1124 to 1134; a 6 point gain on a short from 1134 to 1128, and a 4 point loss from 1128, followed by being flat), and then the most important September S&P guideline; a long from the 1118 level, by intention as price levels were imploding during the 1 p.m. ET comment; enabling a rather decisive move. Individual results will of course vary, as we don't give trades but guidelines; for the most part again right-on for Wednesday runs. (As to Thursday, it's starting incredibly wildly, and the hotline has been scalping moves.)

In summary . . . it remains a climate where there are few compelling reasons to get aggressive; there's a break below supposed support (expected to happen and caught per expectations again); there has been a failure to rebound from declines, which we thought would not be the case on Wednesday at least, with temporary snapbacks surrounding the holiday a likely ongoing and increasingly crucial feature in the start of post-holiday activity, after yesterday's breakdown. And yes, we though they'd try it again, but unless coming off a truly climactic emotional turn, would be challenged at best. Nevertheless, we did expect such an attempt today, with the quality of the turn a bit mixed, but nonetheless not completely impossible to build-upon, with caveats.

McClellan Oscillator data is mixed, with NYSE data coming off oversold a bit, at -79, and on NASDAQ softer at -28. Even though forecasting the market to drop and turn-up again, we continue to see renewed volatility ahead, absent news. That does not yet change the reality that odds will favor these purges (in a series) forming a low, even if the bottom falls out of the Dow in the process…and it may not do that for the already killed; just the unkilled. That could be the point where big-cap 'liquidation wave' drives matters to a bottom. For that to have already occurred, requires noted circumstances.

(For the moment, the 900.933.GENE hotline's long at SPU1119; going into Thursday noon or so, with complex parameters for staying with -or exiting- as the market may require in the wake of a volatile response to the morning's Microsoft (MSFT) news.)

A one-ounce gold nugget is rarer than a five-carat diamond.

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