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Protectionism: Greatest Fear?

June 15, 2001

Is the economy in new trouble? Or is today's sobering market behavior just a cross between a failed intraweek rally during a Triple Witching Expiration, while the Fed's Tan (or Beige) Book Report was a little pessimistic? And what's suddenly changed? And would it have been better for the Fed to ease monetary policy less aggressively?

On the last point first; no. That's what Japan did and caused a myriad of lasting woes as a result. It was sort of like the 'attrition' approach to fighting the Vietnam War. Just moving so gingerly meant there was no measurable dramatic short-term impact any time during their (ongoing) Recession, and thus no definable place where stimulus in fact had much of an impact. The Fed learned that lesson, and while they undoubtedly were too slow in implement ease sooner (they also hiked rates for too long a time), it is abundantly clear that they got the message. Further, that the first couple cuts had a barely detectable impact, though the Money Supply was growing hysterically rapidly, is further evidence that had the Fed pursued any more gradual approach, we'd be in more than the tech Recession the United States continues to experience, with some ebbing and flowing of consumer spending (and confidence), but no pell-mell retreat.

In that sense, we are experiencing the milder of alternatives, which is why for months we have described this as a bifurcated environment (distinguishing the tech behavior, versus the mainstream market, which has a tech component, but much more). Some think that the big blue-chips are the real techs, because they can employ technology, rather than develop it. Well, that's not news either, as they've been doing that for the past two generations at least; embracing computers far sooner than did consumers.

What is progress, is the implementation of computers to eliminate bottlenecks and in some cases middlemen (or departmental involvement), which does enhance profits, and internal productivity as well. Interestingly, because of the generally somber mood surrounding technology (which remains appropriate for several more months overall), this reality (which has become more sophisticated during the bear market in tech) is typically overlooked, though will be a contributor not only to tech-demand later on, but to increased profit margins for some mainstream companies most adept at using it. It is probably part of the reason tech-heavy Nasdaq 100 (NDX)has lagged blue-chips.

One example to keep an eye on (because of potential psychology impact on markets overall) is General Electric (GE), which is flirting with a critical juncture in price now. As rumors abound as to whether a proposed merger with Honeywell (HON) fails as a result of EU opposition, GE's stock seems to flirt with rebounds when such news is circulated. Now we all know that when mergers are proposed, typically the acquirer declines and the takeover target rallies a bit; so maybe that's all that's going on (just the opposite if it appears the deal might be off, with the determination still pending). It is also a Dow Industrials component issue; another factor making its action notable. (Keep in mind the remarks were written Wednesday evening, before Thursday news; and is most worried about whether European protectionism starts-up a sort of new protectionism, due to partial State ownerships in aviation and avionics.)

The emphasis on GE here is because the shares had an apparent 'head & shoulders' top developed over a long-time between the Spring of 2000 and the Fall of the year, with a 'head' roughly in last year's late Summer. Then the shares dropped about 40% or so (overall), making a climactic low approximately with the broader market in this year's March panic, which was expected to turnaround, and have a good rally until a return of rocky times this Summer (overall, interspersed with trading moves). Well, it broke from the H&S, rebounded to just shy of the right shoulder, and now has fallen to the weekly moving average approximately (mid-to-upper 40's). Take-out the mid-to-low 40's, and you likely have more than a normal retracement pullback of a move from the March lows to the recent May highs a few weeks ago, while holding there or in the vicinity, and then taking out the mid-50's, would suggest something other than a rally failure (bearish alternative) and be the bullish alternative (suggesting the rise from the March lows to the May highs was merely the first new leg up, and a current decline just a correction, before moving higher). Should that turn-out to be the case, it would be well received psychologically by the entire market, so that's the importance.

Back to the first point; of course the economy's been in trouble, and to an extent still is (many CEO's say conditions are worsening. That's why the Fed's efforts had such limited effects (alternatively would have been worse), and why this is all so dragged-out (as opposed to a 'crashing' market). And yes, the jury's still out on whether The Fed and its Chairman moved swiftly even under these circumstances, because the commencement of stimulus was so belated. That means there is some lingering doubt (probably even at the Fed) as to whether it is capable of reflating the economy sufficiently, or whether a comeback can endure. Renewed firmness in T-Bonds (albeit off a tick today) suggest overall economic sluggishness continues.

Our view on this is unchanged; and that's why it's a bit incredible that a 'Beige Book' report showing continued weakness (or even a little deterioration in some regions of the Nation) could surprise so many today. We don't know a professional analyst who was looking for the U.S. economy to firm this Summer (certainly not us), though we do know several who inappropriately view the market as 'strong' without separating the behavior of the Energy stocks, particularly Oil shares, which led the big-cap rally.

There is history correlating soft economies and strong oil with formal recessions; the Fed Chairman himself has acknowledged this. Trouble is, there is little evidence that oil prices (as distinguished from refined products, which are easing as demand starts to contract as forecast here) are climbing; as a matter of fact MACD and other data is supporting our contention, for weeks, that money would starting exiting the oil sector. There is no precise correlation with lower raw materials (crude) and higher end-user prices (gasoline, though again that is softening a tad) foreshadowing a full recession.

Does that mean the coast is clear? Nope. Techs will (in particular) report poor results for the soon-to-end Quarter; but that's not unexpected (ditto the ensuing Quarter too). We have not expected signs of renewed vigor until late this year and early next, with a slight concern that may even be pushing the envelope. Certainly share prices don't have to (and won't) wait until the last minute to advance, but only in companies that have some visibility in regards to that timeframe. That takes us to (during extremes on the downside, certainly not their peaks we warned about as simply an early June 'fling') such stocks as Intel (INTC) and Microsoft (MSFT), which are married of sorts, as regards what's coming in that timeframe. We have learned that Windows XP won't work well with anything shy of a 1 year old high-end machine (such as an 800 MHz PIII or any P4), and that it is particularly memory-dependent. (Balance on who is hurt, or helped, by all this, is a fairly involved discussion reserved for our subscribers.) …..

If 'T' can balance their business (video email won't be sufficient; though cute playing around), and the spin-off's go well, each center could be independently better-able to compete in the forthcoming sequel to the hype of the '90's (fostered by the Fed too as often noted, by their ridiculous stimulation of money growth in the late '90's while they argued against the very speculation they were funding by their very own profligacy). If there's one sector where prices are down, but the future complicated, it's telecom. It's also an area we didn't expect, along with slow wireless (as the 3G efforts are delayed at least as much as we suggested 2 years ago) to reap many benefits 'til mid-decade.

In essence; before we even suggested the Winter bottom and Spring rally, we noted the probability of a rough Summertime, that would challenge everyone's confidence newly, and might ultimately prove a plus, with respect to a stair-step overall advance. At the same time, we called ideally for an up-down-up June, with some maneuvering around the Triple Witching, but probably working lower thereafter, in harmony with an overall call that wants bearishness to become more rampant before next sustainable rallying phases are likely. Nothing much has changed; the economy wasn't expected to bottom yet (especially for tech, with most of the upside led by Oil previously, which hardly is a plus for many industries, such as anything that is Transportation sensitive) overall; though the market lows may well be behind (breadth is not bad, and acts like a correction more than the start of a new leg-down), and the visibility everyone likes to bemoan is absent, isn't. That visibility still points towards the combination of fiscal and monetary stimulus providing pretty good business activity next year, and beyond, with some risks this Summer, but ameliorated if the Dollar has no more than a dip.

Daily action . . . meanwhile, notes the (900.933.GENE) hotline did get quite a good move off of a forecast 'turnaround Tuesday', though it worked better for players who (as most do) exited the long near Tuesday's close, rather than staying with the effort. Even staying with did in fact yield a gain of about 1100 for the session, including a modest short-sale gain on Wednesday. We are flat the S&P guidelines in-front of Thursday's early PPI report. That number will probably be soft (helping bonds a bit), and probably not troublesome for stocks, so while the afternoon is questionable, we may well get some softness followed by a renewed rebound ahead of mid-session. (The balance of this discussion and guidelines for readers, are fully reserved.)

Fundamentally . . . there was not expected to be a sign that a rebound in earnings is at hand yet, because that isn't expected until late this year or next, although here and there we do see companies that are no longer focused on the Q4 weakness or 2003 woes. Ponder if some players are reacting to the present (something markets never do for long), or companies are starting to contemplate inventory depletions, and you can see what likely is afoot. What's difficult, of course, is a necessary position on the defense for many corporate CEO's, as they have to be prepared for that comeback, while trying to meet payroll or daily development necessities in the interim; but that's their operating problem for the short-term, and generally (for bigger firms) shouldn't impact investment decisions, which should be focused (in our opinion) only on late this year and next. That still allows the ongoing forecast to proceed for this Summer.

In summary . . . every number and sentiment (reported or otherwise) tends to affirm semi-recessionary conditions. This should not be news to anyone understand how it takes time to work-through the aftermath of what has gone before; nothing changed.

As for Thursday, we suspect it tries to extend the downside, then rebounds from what is a clear declining-tops pattern increasingly visible, and then makes a stab at poking up a bit to test that breakdown, as discussed. The outcome of this rebound effort will likely hinge on that 2nd effort (Wednesday's 2nd effort failed, which is where we got on the short-side briefly). If all goes well, the day may become sort of an down-up-dip-up-dip-up-fade (or something like that to be assessed intraday) Thursday session.

McClellan Oscillator data continues consolidating, and is threatening a failure at the comeback efforts (as should be the case anyway, given our overview for weakness at midmonth interspersed by rallies, and then down somewhat before the next rally try). At the moment, Wednesday's -60 NYSE read is a nominal -3 change, after a +3 the prior day, while the posting on NASDAQ of -21 is a -3 nominal change; also implying the tentative nature of this market (yesterday was stated as a +2; errata, it was a -2).

For now the (900.933.GENE) hotline is flat the September S&P, after closing a long from 1248 at 1260, and a brief short too. It carries about a 800 premium tonight, with futures down about 3 points in early evening Globex trading. We suspect premium will be tossed back on in the a.m., after the market digests the PPI report early-on.

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