first majestic silver

Relief for a Besieged Market?

July 12, 2002

A besieged market . . . continued resisting technical overtures to reverse, though it became more interesting as we again penetrated those old September panic lows (of course the façade of not have breeched that area existed only in the Dow Industrials, not the broader 'real' market, including the NASDAQ or the S&P 500 Index) for awhile already. The specter of Government increasingly intervening in a scenario where the equity arena was doing the job of ridding itself of prior excesses, also contributed to a slew of fears that a post-horse-leaving-the-barn-door approach is counterproductive.

Meanwhile, September S&P action was particularly fascinating, given that the S&P Corporation determined today to delist a number of primarily foreign companies, and focus on domestic-centricity; an investment focus we have felt appropriate for months now; not because of any tendency for isolationism, but because of risks incumbent to the myriad of companies that have relied on foreign revenue growth in recent years. It would be interesting if they gave a big-cap crash and nobody else attended, which seems to be what's continuing. In recent days we captured thousands of S&P points, primarily because of nailing the pre-holiday and Friday rallies, and subsequent drops. If or as the S&P eventually breaks into the 800's, you will have taken it into levels we feared a month ago might eventually be ventured-into, but at the same time you will be again knocking on the door of technical factors, that if given any reason to soon, could knock-socks off the market in the other direction, if even just temporarily. For a number of reasons that will be the (900.933.GENE) hotline focus on a Thursday dip.

Frequently when stocks are dropped from the S&P or the Dow, like happened when they dropped Chevron from the DJIA, you get a sharp drop and then the shares may become a buy; particularly where the company is solid. And of course, those added to the most-watched Index lists tend to jump initially (because Index managers have to add them proportionately), and then wax-and-wane with the fortunes of the Index, as you would expect of course. Now, few companies are truly bereft of foreign sales operations, which is one reason that it's so hard to practice a modern foreign policy of any type that fails to take into-account the ramifications of huge overseas operations.

In fact the business growth abroad essentially hamstrings the U.S. Government, to a philosophy that may appropriately recognize the independence of other nations, but acts sometimes at variance to that, because of the necessity of representing big U.S. interests in those countries; which typically are more of a business than government nature. It's precisely why the currency morass can help some of those companies as it harms this Nation's overall best interests, and why the expansion of big corporate growth outside of politically-stable areas of the world is basically fraught with peril as it compels an American foreign policy sometimes at odds with economic philosophies abroad. That's why we have (for ages) argued for domestic-centricity as a focus, and the concentration of what foreign expansion interest there is, in countries that either are politically and economically stable, have no problem cooperating and supporting offshore corporate security operations, or are among the traditional trading partners.

To do otherwise is to invite trouble, and to give the impression of an American regime torn between supporting its citizens and companies overseas, versus foreign policies that should and do respect the interests of other nations. Hence, countries that aren't interested in stability (reserved; as this section is primarily political and economic. A discussion of petro-dollarrecirculation is included in commentaries for subscribers.)

There is therefore too much focus on domestic politics in current press commentary, and no discussion we've heard of such really important quid pro quo relationships. At a time when the news is filled with sound-bites about terror, Saddam, and superficial economic discourse, there should be discussion about the core issues that delineate international currency flows, and hence have impacts on interest rates and T-Bonds too, as confidence ebbs and flows. Few foreign leaders believe their own success is ensured without a U.S. 'engine'; all the more reason for any (wittingly or otherwise) who would undo the modern era to give pause and think about the economic future.

Daily action . . . addresses the condition of the TRIN and the Volatility Index (VIX), as well as a look at the Put-Call ratios, inline with interpretations primarily of what we observed for some time; those big-cap multinational stocks now catching down with where so much of the market has been for so long; particularly the NASDAQ that is factored-away from the big-cap components that dominated the Average's loftiness for about five years (no, not just the last two, and maybe even longer than five years).

If that is a valid interpretation, it's pretty much what we've said; impossible to 'crash' a stock market that's already crashed, unless you unlock vast institutional holdings of the big-caps, as those investors are generally not in speculative technology vehicles. (Balance of this discussion reserved for regular ingerletter.com readers.) Now, don't dismiss some of the long-term concerns, as we're not at all sure that 9-11 in fact was nothing more than the (first generally notable) cannon fire of World War III. It's a concern we've had all along, believing the enemy declared war many years ago, but the West (not just the U.S. by the way) simply wasn't interested in having any war declared on it. So, they ramped up the targeting until we couldn't fail to take notice.

..At the same time it means realize slaughter of grand dame big-caps is traditionally a capitulation signal; that's especially so when the smaller stocks just sit languishing for disinterest. That suggests mutual fund repatriation dominating this now, and thus can also characterize a washout, if there's hints of a reason to switch from despair modes to modalities interested in scrambling for cover, even if not yet particularly enthused about investing. Hence, when the broad market is deeply on its haunches, most big-caps are imploding, and nobody's optimistic; bears be wary this Wednesday night.

In the process, we absolutely will play hit-and-run downside moves; in fact clearly a majority of guideline shots on Wednesday were on the short-side. But at the same time we're not willing to risk overstaying any particularly downside effort, because it's too popular a thing to do, and that's when sweeping bearish stances aren't hardly the low-risk approach to trading the market. The intraday S&P hotline (900.933.GENE or direct-dial access) did a stellar job of capturing moves Wed., including a couple longs and several solid short-sales during the course of the session. By the conclusion of the day, an estimated astounding 4600 points or so was theoretically doable. Most of that was from an early long at 947 reversed at 954, and later (amidst the oscillations), shorts from 950, 941, 929, and even 925. September S&P closed near the 919 level.

Remember that the events of the past years have focused most managements on the embrace of what we called 'generally accepted accounting principals' that dominated for generations. The emphasis on 'corporate responsibility' basically years (not weeks or months) after the horse was long out of the barn-door; years after everyone knew business had to face both reg. FD and FASB accounting rule changes, is pretty much (albeit unavoidable) heavy political fallout from conditions which had to be addressed at least several years ago and which (by the witch-hunting approach now) does more damage to the system, as well as increase risks, as we've sadly consistently argued.

There's no argument about the evil-doers in some companies; we've implied as much in sectors ranging from finance, to technology, to the internet, for about five years off and on. We've criticized some managements of networking companies, structures for the awarding of stock options, and overall debt structures as potential 'implosions', that one couldn't easily pinpoint (as to when the house of cards had structural cracks) with finesse from years ago, and were castigated when mentioning it publicly over the air, way back in antiquity (1997). Now the same critics come forth, with some 'holier than though' prescriptions for solutions, which actually can undo securities reform act efforts of the past, and pander to the state-of-confusion that merely ups-the-risk ante.

There is no doubt that corporate corruption existed; but the pressures primarily date from the 1990's competitive landscape, in the way companies felt pressed to deliver (perceived) results. Many managers were culpable in the '90's, and analysts typically didn't differentiate behavior, because it was so widespread as to become for the most part the 'norm' of the era. That helped set-up debt unwinding, and as that unwinding works through a transition, the Government's belated interventions have some risk of worsening the illness they're presumably trying to cure. Not that we think leaders are not aware that some of political posturing is so obvious as to patronize anyone in the know, but they do that anyway, and to some extent that's from both sides of the Aisle.

What they risk is a repeat of the 1930's (that was so bad that economists prefer the focus to the 'railroad bond bust' of the 1800's, though either will essentially do); even if neither period's parallels really apply. However, as we've mentioned before, there is a tendency for anti-business forces to perceive the overall economic quiescence as some sort of indication that they can probe and poke the system with abandon, as all is o.k. on Main Street if not on Wall Street. Not so if all goes further afield. (reserved). Today we were delighted to see S&P embrace our view about domestic-centricity (at the same time critical of some stocks S&P selected or deselected), but once more that failed to glean the importance it deserved amidst the hoopla about regulations. In a sense we thought it was a broadside at those repatriating funds abroad who may in fact be seeing a glimmer of what U.S. institutions can do to counter that, if needed. It is never mentioned, but think of the implications of vanishing ADR's and restrictions (let's reserve these remarks, to avoid non-subscriber controversy on these views).

As noted the other day, nobody is talking about all the options strategies (at least not in depth, though we heard a glimmer about that too finally); nobody is talking about short-selling strategies; and nobody is talking about the damage some hedge funds have done to the financial markets by their ability to compress moves, both up, and then in terms of downside swoons. They can pass all the accounting legislation after the fact, but it doesn't address the core of some other problems. In the fullness of time, the Nation would be told things are 'fixed', but other major areas wouldn't be.

In summary . . economic news continues subordinated to the scandal or news of the moment. This the kind of move, included capital preservation fears, that can readily precede the psychology of a potent rebound; but what ignites it is sheer speculation. It is impossible to deny the chances of an acceleration into the abyss later, but with panic lows of yore broken, there's very little for the market to do for an encore shorter term. Hence instead of 'crash alert' how about late week down-up reversal prospects.

As to McClellan Oscillator readings: about -111 for the NYSE; now with continuing stable-to-softer NASDAQ behavior at -16. After days and weeks of mostly successful S&P guidelines, with numerous rally failures at inflection, consider evolving snappy rallies around mid-July, preceding risk of any than new decline. Hopefully, though we too are not happy with Government responses to everything, what we are now seeing (Wednesday) is a cobbling-out of exhaustion on NASDAQ, and big-cap capitulation.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of this week explicitly continue to remind us of various new risks the Allied fighting forces face, or may face, we try to keep in mind that the unexpected remains a risk as civilization cheers human progress, but worries about those trying to reverse hundreds of years of modernity. Stay focused to news trends aside from paramount concerns about Mid-East terror, and a renewed focus on domestic risks… for now.

Of course the key this week was the first pullback, the subsequent failure, and then a downward extension. Now, while no particular resistance looms, the hotline pointed out (as did ingerletter.com last night) that we had to fill last week's gap and maybe a good bit more, demolish hopes again and then maybe try to turn things around. Not pleased with motivation factors, we nevertheless can't cheer the downside further in such a climate, even as we played it. This evening, S&P is off 40, at a -140 discount.


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