Relief and Exuberance

November 16, 2001

Relief and exuberance . . . have characterized this week's market, as Wednesday in fact again delivered the projected pattern, which included the idea of a 'second rally' a bit less euphoric than Wednesday's first one. We have emphasized that a growing short-term risk exists, versus our continued long-term favorable expectations (barring any severe news reversals, of course), against our bullishness backdrop for the post-Labor Day projected erosion, likely terminating in the post-attack panic, and effective Sept. 20th. After buying the post-attack panic, we forecast and saw our big rebound.

Since then we've had tremendous increases in the Senior Averages, and of particular note in Semiconductors (SOX) and in the Nasdaq 100 (NDX); which doesn't sound like a big deal now, but sure was when you consider we projected that back in a late September panic, that became precisely the climactic reversal and desired recovery.

All of which again proves how ridiculous it is for a great many investors to believe that somehow they can frequently make money in markets by responding after-the-fact to news-stimulated moves, be they emotional washouts after some sort of panic, with of course an understanding of the uniqueness of the 'surprise attack' on America, or just the reverse, 'relief' that things seem to be going in a more favorable way on far-away war fronts, whether fought somewhat by proxy armies or not, and may have a longer-term impact (in fact we expect that) on the domestic economy. Of course the future developments aren't cast-in-stone, but so far they are advancing according to Hoyle, and in that regard we sort of wrote the book in advance on this Fall's entire outcome.

Part of that call included faith (even before the market reopened in mid-September) in our military, faith in our system, and speculation that the enemies could be on the run by this year's holiday season; something that seemed like a very illusive dream then, at least to many. Now, of course there can be speculation that the Taliban is setting some sort of trap, like the Russians encountered by venturing onto the plains, but not the hillsides; though there is little doubt that technology to combat that situation (even if it really exists, about which we're not convinced, due to the rapid flight, arrogance on the enemy's part, as they alienated numerous members of their former presumed constituency) is more advanced now, with a psychological turning pointing identified a couple weeks back when OBL castigated even the Arab leaders and the UN, on top of everyone else. That was seen as clearly denigrating his support (at least our view), and subsequent events bore that out, or at least it seems to have, by making him an antagonist of basically all civilizations, East or West. There are concerns that Special Forces have suffered more casualties than generally known; that the enemy may have Scud missiles and radiological devices; all the more reason to pursue this.

Now, we have no illusions about a clean-sweep of Afghanistan (if it can be achieved in a rapid fashion, so as not to bog-down the Allied Forces in ways that risk situations resembling a quagmire, or some previous last-Century conflicts, setting-in) that would eliminate all risks to the world, particularly from 5th columnists and fanatic infiltrators. At the same time world history tends to show such extremists galvanizing toward one charismatic or central leader, and when he vanishes the scene or loses the effective support their perverted cause requires, it usually is the beginning of the end for that particular brand of extremism, whether championing theocracies or any philosophy that is intolerant and not inclusive of the majority of a people, in any country or area.

Now certainly such fanatics (or basic dictators or juntas) have survived, but typically only if they confine their despotism to their home countries; rarely when they attempt to export it, which really gets people upset, and unified against them. That is the case in the current situation, where monstrous acts have capped years of treachery that is the signature of these radicals, who increasingly show their true non-Islamic colors to the world. We argued two months ago that they hijacked Afghanistan, that it wasn't at the core of the problem (other than probable locale for the transgressors), but that as it was liberated, the world could focus on routing-out the 'clear and present danger' in our midst, in the form of remaining infiltrators. However, because the peak tension is seen by so many to only now being relieved, you've got investors piling into markets; in some cases the same people who were piling out in September; as outlined then, the most ludicrous way to approach a panic. It is also ludicrous to chase strength just now, even though there is no change in our longer-term expectations for the future. It is also true (and projected consistently) that the U.S. Dollar would remain stable; and that so many bearish arguments against the Greenback (and often for Gold, beyond a short-term rebound we too expected and saw) made no big-picture sense...for now.

Inflation is a prospect down the road, but not yet, and not in a way deleterious to U.S. interests, or those in-sync with ours internationally (which is most of the world; so for anyone to have felt otherwise these past couple months was to fight the central bank not only here, but basically those in the entire free world). There are a few people out there in a fog believing the markets are totally free, and that there is no 'massaging' of markets (including Treasuries); but typically they haven't studied financial history of the modern world, or been aware of the many moves that did have an impact. Not all were favorable (don't mistake me); for example while the 1998 LTCM bailout was big-time favorable (and we said so instantly) as the Fed orchestrated the stimulation that would abort the systemic risk then; you also have the pre-Y2k money supply pumping that occurred while the very same Fed that argued against speculation stoked all the mechanisms that sustained the excess (and we said so then too). So there certainly have been contradictions in actual policy versus perceived Fed policy, but not often.

Therefore to fight this market in the midst of monetary and fiscal stimulus, augmented in the wake of the atrocious attacks on New York and Washington, was not only a big high-risk move against probability, but directly fought not only the Fed, but Congress, and the central banks of Europe, and basically the strategy of every civilized nation. It became even more incredible as T-Bonds spiked in the wake of a Treasury decision that we viewed as nothing but a blow-off in bonds (short-covering squeeze), as rates were pushed-down in Notes, and thus aided the backdrop for economic recovery. No bearish case of a macro nature already existed; though it was further set-to-rest with such definitive (Rubinesque?) actions by the Treasury. And an upward equity stage, or swing-rule thrust if you like, was added to reasonable existing technical measures.

(Noted) release of the hostages will not change the Taliban's fate, but it is welcomed. What will also have an impact is the near-collapse of Oil prices, as long forewarned a very probable accompaniment of the war, not the much higher prices that some tried engineering, whether by production cuts from OPEC or other measures. Even today, as certain countries talk about curtailing production levels to stabilize prices, there is no reason to be impressed by that. Certainly Oil wasn't; it dropped almost 1.75 a bbl, clearly breaking 20 now; something we thought ideal since calling the near-30 highs. As a matter of fact, the quiet cooperation we spoke of the other day with Iran, opens a new possibility to the West, which can offset some oil price pressures from certain countries not too far away, if the issue is pressed, and maybe even if it isn't heavily.

In the meantime, the (900.933.GENE) hotline did very well, given the less robust kind of market environment, as relates to the S&P, and as T-Bondscontinued contracting following our admonition that the upside following the 30-year cessation was the trap we spoke of then, regarding sucking money into a short-squeeze near a top of sorts. As for the December S&P, we had several minor shifts midday around 1138; though the opening burst (which we shorted) at 1150, had a terrific 1300 gain, and then what was expected to be reduced upside; nevertheless a nicely successful, final hour long.

Finally, the latest thinking about the JFK American Airlines tragedy surrounds more or less what we were afraid of; not terrorism as much as the structural integrity of the A300; though built of composite materials, there's some speculation if there's more to the accident than initially speculated about. Wake turbulence likely played a role, but that particular aircraft had been through the worst of airborne turbulence some seven years ago, and theoretically inspected on a few occasions since. While nothing is certain, it will be interesting to see whether design limits (when all is said and done) are less stringent than the standards used by Boeing. If they are, Boeing (BA) will be in an interesting position when the industry recovers, though the surplus of available aircraft (for the moment) is still a glut on the market, and thus won't really help sales.

Bits & Bytes . . . in tonight's abbreviated comments notes that the technology stocks typically have broken the daily and weekly downtrend lines many worry about, weeks ago, which isn't recognized by those who look at Averages comprised of a mixture of stocks, but fail to dissect the component and industries within those Senior Averages.

In summary . . . Taliban are on the run (though some caught in isolated strongpoints are fighting); retail sales extraordinary (particularly with autos of course); New York's air tragedy continues curious, while apparent progress in the war noted for several days, has had a constructive impact on the market, as alerts continue domestically, but a sense of relief prevails. Markets were expected by to try to rally into midweek (ongoing of course), but the longevity may be questionable on the short-run beyond what can become a spike or temporary exhaustion of sorts.

This is a nominal Expiration week, but the actual 'event' may be uninspired, as there will have been opportunities for players to unwind positions (in either direction) well before Expiration completion, we suspect. For now Thursday may be up-dip-up and flat, with a possible final fling, providing the news backdrop remains equally terrific.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.