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Projected Turnaround & Key Rally Underway

January 25, 2002

A valuable contribution to market analysis . . . was hopefully completed over these past few days; following our warning in late December and early January suggesting it was not wise to be chasing upside behavior in the Senior Averages, but rather the view of looking for completion to that tremendous late-September, early January run, as we projected a subsequent movement down into midmonth, and beyond. Now, as that drop started after the first few days; was affirmed (and accordingly noted) by the January 9th outside-down-day (which was a classic final fling at forewarned difficult resistance more than once repelled from, repeatedly in the March S&P 1170's), we'd looked for an ideally shallow price decline, accompanied by a working-off of what was at the time a very overbought short-term and weekly-basis condition.

Because a total panic was reflected in the forecast primary lows of September 20th / 21st, we viewed the contraction this month as not needing to essentially embark upon a full 'test' of that September low, and in fact believed that if the market dropped that far, it would actually not be within a bullish overall structure. We thought a test of the December lows (+/- 1115 or so) was more realistic, though clearly a rally that starts in that vicinity, cannot automatically be assured to be of solid quality and participation in its initial phases. However, that doesn't mean that a tentative start, no matter how the initiation was almost precisely targeted here and on the hotline, doesn't assure we do or don't gather strength as the market tries rolling uphill. We suspect it will; helped by 'Greenspeak' in the a.m. (whether or not there's a profit-taking wave after his remarks or not), or because companies are so burned that they are being sufficiently cautious in their guidance, as discussed last night, that almost ensures they beat estimates in the future. And that conceivably could really help the market as we approach Spring.

Export conditions have not improved, as we frequently point out with respect to our continuing relative bearishness on multinational old-line stocks that haven't moved to 21st Century economics and technologies. That's why we count less on stoic old-line members of the Dow Jones Industrial Average to lead, than we do on those tech members of that august body, which often are also represented in the S&P, NASDAQ of course, and in some cases the Nasdaq 100 (NDX). Today the NDX and the NYSE Composite, which is much broader than the DJIA itself, were consistently firm hours before the DJIA picked-up any speed, along with breadth, which never was negative to any meaningful degree. All this combined to keep us optimistic for what occurred.

We do not disagree that tech valuations got temporarily excessive earlier this month; we said so. We also believe in discriminating between solid leaders versus also-rans among tech; not to mention a (little shared) view that internet infrastructure has gone through a sufficient purge to set-in-gear at least nominal basing patterns, followed by actual improvement in business conditions. While this may be a transition year for many of the sector's businesses, equity price levels virtually never wait for realization of good earnings, which the market we believe started to anticipate last year, and will do so in a broader selection of issues under pressure this year.

Now of course there is the argument that a 'head & shoulders' top of some potential is a risk; well, we noted that construction prospect weeks ago, and that's why the rally to (certain above-market levels, reserved for readers) is so important now, though we think eventually we surpass that barring some unforeseen particular catastrophe (that we all worry somewhat about). I might mention first of all, that such a disaster would not likely be an 'Enron' style default of other companies broadly (while sure a couple aren't impossible), as most of the financial media is missing key points, that any poor sufferer even at that company had to realize; and that is they were essentially a large commodity speculator, not so much a conventional Utility. Their nature, and greed, were characterized by comments here last Summer, as to why we basically blamed California's energy non-crisis on them; and that was without any company knowledge (never owned it), but knew we didn't like business models, lack of social conscience vis-à-vis California, and obvious implications that what they were doing was reckless speculation, not the kind of conservative business approaches typically perceived as occurring in Utilities. We reflected on Utilities being early 20th Century Internet stocks.

It's mentioned tonight, because we are fairly confident that the accounting or auditing trails will be explored, and over time the confidence of American investors restored. If so, and with the Fed Chairman likely to focus on the economy 'basing' and preparing for an upward phase, you really might be more concerned about terrorist risks far out from here, than companies not making their numbers later this year, which they are in the process of ensuring, basically by the mediocre estimates being broadly provided.

Those of course are among the very many fundamental variables outlined here in last night's DB, though we suspect some of the answers will come along favorably during the market's ragged upside, which may put some gusto into the rebound move, as it (key levels have been outlined to subscribers in specificity; as recent trade low were).

Another reason for that is that amidst this the American consumer is incredible; with a continued spending spree that boggles the mind. Andinterest rates are firming just a tad; a reason why we think (given the onus on Congress, more than the Fed, now) that it might be advisable for the Fed not to cut rates further, but to leave them alone; which would attest to the bottoming of the American economy likely being behind. Keep in mind we argued months ago that there was no inventory surplus, and that advanced items (new styles) were in short supply, while overall figures included discontinued or hard-to-market items. Clearly the dearth of inventory subsequently proved our case. This is what you'd expect if the economy bottomed, and thus rates shouldn't decline if the economy is recovering. Or sure, if the Fed doesn't cut, you'd likely get some rocky moments initially (because too many are conditioned to look for lower rates all the time, without realizing that can paint a poor, not desirable, picture at this stage), but then the market might realize it speaks to the Fed having done its job, with other measure dependent upon the Congress.

That Daschle is speaking about being cooperative on tax credits or accelerated rates of depreciation, is a big plus. We know he plays to the lowest common denominator of citizen by talking about ridiculous rebates; but that's minor. Anyone in the know will clearly understand that investment tax credits or faster (but temporary) reduced times for depreciation, will help kick-start capex that otherwise has no reason to commence regardless of interest rates. (Balance of this comment reserved for subscribers.)

For Wed., the (900.933.GENE) hotline let the market do it's initial gap-up and a fade back down (from an up opening), without us playing the downside, and we got into a single long at the March S&P 1119 level, and retained that until it (via mental trailing stop) came out for near a homerun gain in the 1129 area, or thereabouts. It's surely possible that some played for the moves up or down, or up again in the final minutes, though we never encourage such late tries, and suspect they would have been near a wash if anyone did that; with most all of it basically late intraday squaring episodes.

There is a plan to purchase a pullback after Greenspeak Thursday morning, with an expectation of a short-lived profit-taking wave after an initial thurst-up on presumption that his remarks focus on the inventory contraction and improved economic basing.

In summary . . the market turned as desired; and we caught virtually all of it; with a single guideline effort on the (900.933.GENE) hotline, and as these ingerletter.com remarks expected from early post-holiday weakness, at least temporarily for now.

The McClellan Oscillator readings were about -46 on the NYSE, and near -27 for the NASDAQ stock market, as markets remains fairly nervous, and even a few of the staunch conservatives are worried about market implosions (is that bullish we asked). Clearly there is a bit of dependence on regulatory and other actions taken to buttress corporate and investor confidence and psychology, necessary, going forward. We too will watch closely to see how the 'hearings' handle this as very much can be at stake.

What we are saying is that it doesn't take a panic to provoke intelligent responses, but if they do not provide sensible resolutions, then the risk of a panic returns to the forefront. It is also occurring in wartime; all the more reason to discard partisanship and rapidly shore-up the confidence of the American people, many of whom are not investors, or we might add not overly conscious about their retirement and pension holdings (typically oblivious to them; less so now); though recent surveys show 60% of Americans are following the story; so it is important in showing that the Enron guys were commodity speculators, with many mistakes of their doing, not just big utility executives they presented themselves as. Fed optimism is essential on Thursday.

Our prayers and thoughts remain with our troops fighting anywhere in the world, as is our responsibility (as a people) never to forget while hostilities continue, even as life goes on. The new week began moderately down, and we've got quite a meaningful rebound, expected, and generally stronger (and with better breadth) than a cursory look at the Averages suggest. As maneuvering room is limited, and rally durability is going to remain questionable; it is essential for companies and Government to assure the people of actions they find comforting, even if to buy time for Congress to more fully investigate. And then there is the Rico Act, which we suspect applies to Enron. As of mid-evening, the S&P premium is about 82, with futures up just over a point.


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