Symmetrical Seesaw: Bullish?

July 20, 2001

Rapid 'losses of faith' . . . characterized Wednesday's seesaw action, as the Fed's head realistically portrayed the still-softening business conditions, which were not in any way able to stimulate a meaningful rebound, though a couple were attempted. It was basically impossible to trade S&P's in such an environment, especially right after the lunch hour; though a final hour comeback was looked for and seen (we held the 1207 long as a result, on a hunch that IBM disappointments would be well-absorbed). Other than that, the seesaw meanderings of the market have just got to be frustrating to investors; and maybe (at least in the next several days) that's surprisingly bullish. (As a result our 900.933.GENE hotline determined to be long 1207 S&P's overnight.)

What's most interesting to us is not the many companies with poor business results, or for that matter even the few with outsized favorable reports and/or outlooks. That's as we didn't expect much, outside of some gradual inventory attrition, to characterize this series of results. That a couple reports immediately have the Street back in some sort of desperation mood, doesn't mean the market won't break further, but continues to suggest some managers optimism for the year's 2nd half was misplaced, as argued here for sometime. It's the Fed's attitude that's more disconcerting, as they -at best if at all- are taking an approach that risks continuing on the side of economic softness.

The T-Bond market loved it, by virtue of the full-point advance; though as suspected, a further advance of bonds (lower rates) infers stretching-out of economic prospects; something that fits our fundamental structure for the economy and market, but tones down the budding optimism relating to not only the market's rebound, but multiples at least as they apply to many of the multinational companies, whose earnings depend to great extents on international sales, where business conditions are generally poor.

We were particularly delighted the Chairman at least sidestepped currency issues, by deferring to the Treasury Secretary, questions related to Dollarpolicy. Our view likely is shared by the Fed (we suspect), and that makes a 'strong dollar policy' a terribly paramount necessity, regardless of certain corporate pressures on Government from a core group of CEO's who run companies with growth almost exclusively overseas, for as much as a generation. It is not opposition to their prosperity, but a belief that an attack on the Greenback would weaken their ultimate prospects, that causes us still to caution against any intentional weakening of the Dollar, regardless of pressures. In early Thursday trading, the Japanese Yen broke another support; thus even stronger Dollar behavior should be anticipated on the short-term, versus the Yen (even Euro).

At the same time, this is not to suggest that certain seasonal vulnerabilities we have oft-discussed won't appear (as even today's session slightly again hints at). However, remember our point about the variation in such patterns earlier this year, that leaves so many potential sellers (often institutional) without meaningful gains going into the late Summer, but with expectations that likely share our view of a troughing timetable. Rather than providing brackets; comments regarding forward action are just withheld.

Approaching the session from a trading standpoint required very nimble reversals, as a symmetrical intraday pattern eventually developed, that wasn't resolved until (what was expected to be) a little short-covering squeeze very late in the session. However, IBM's (IBM) post-close gloom, put the kibosh on favorable moods about extending in the a.m.; though how well that selling is absorbed (or not) may be a key on Thursday. We didn't expect IBM to show robust PC or overseas sales (how could anyone), but were a bit optimistic about their service sector. However, the Company was glum on a slew of divisions, and that took the shares down hard in after-hours. (reserved)

We have tended to believe the market would loose conviction if more rates cuts seem terribly needed, and thought that if the Chairman took that approach, stocks wouldn't like it for the immediate term. (Again, this departs from those who believe further cuts are always desirable, but that is because they probably don't differentiate between having to do so, and 'confidence creation', which isn't helped by such statements as the Fed initiated today). However, later in his testimony, the Chairman seemed to embrace our own ideas regarding signs of recovery much later this year, and/or early next, and we hope he's as late in that assessment as he was with a commencement of rate cutting policies sometime back. Actually we concur you know (about the late year prospects); so possibly the key for the moment will of course be whether there's a downside expansion of a meaningfully heavy nature in the a.m., beyond the selling in today's aftermarket behavior that took a number of stocks quite heavily down from their regular closes. Beyond that, one has to ponder a forthcoming further rate cut. It will probably we well-received at the time, even if the market is rocky ahead of that.

It is hard to believe the Fed doesn't understand professional investors wanted lower rates, but not so low, or persistent, that they encourage saving rather than spending, or despair rather than confidence. And we don't think the Chairman intended that, but it's the way his initial remarks were responded to. Later he focused on the help from a softening Oilmarket and so on, which also dovetails with our own view as to how it exceeds nominal tax rebates and even short-term impacts of slightly lower brackets, as already noted. However it was very hard for the stock market to get back on-track.

Where the hotline (900.933.GENE) has repeatedly warned that post-rebound activity this week, would not necessarily depart from our general forecast of problems after a possibly rally ahead of the nominal Expiration (most of it last week, with a surprisingly strong rebound a couple days back), but where it is almost a bit disconcerting that the Fed acknowledges more stimulus is likely. We think that's o.k., but restrains optimism from those who realize that there is such a thing as taking rates too low. Probably we are not yet at that point by the way. Thus another 50 basis points likely is not too low.

In this regard, it should be kept in mind that some institutional players may not hardly be so motivated as were the media or aftermarket players. Many were not particularly optimistic about results this Summer, much less the preceding Quarter. IBM's Chair's comments that overseas and currency factors will continue to work against the firm, are generally mirroring the conditions that impact many firms with big overseas sales. (Companies nevertheless have sort of stopped talking of order 'push-outs'; bullish?)

Bits & Bytes . . . touches on a number of stocks, mostly in the Letter's list (whether a new selection or a retained position, or partial hold; though mentioning here does not constitute a buy, sell or hold on any. Touched on Wednesday at were: AT&T (T), Comcast's (CMCSA),Apple (AAPL), Cabletron (CS), America Online (AOL), Digital Lightwave (DIGL), Merck (MRK), Sony (SNE) & Tellium (TELM).

In summary . . . the CPI was a non-issue; and housing was firmer, but permits were contracting (not bad; as that may trim excess inventory down the road). Any efforts to 'bear' the markets on Thursday are going to be a little crucial, given the proximity to the short-term so-called 'supports'; and thus intraday guidelines will be flexible. What no-one seems prepared for is an upside breakout as the day unfolds; interesting….)

McClellan Oscillator data reversed recovery again; now near -32 for the NYSE, and at -10 on the NASDAQ; a reading that shifts negative after a brief zero-line crossing, that of course is just an after-the-fact mechanical buy signal. Long the S&P for now from 1207; futures at 8 p.m. ET around 1210.30; off around 2 from the regular close. Expect irregularity to yield to new upside tries, while for the moment approaching any breakout proportions (a key weekly 1230 area) superficially seems pushed-out even further down-the-pike. This is tough going this week (for bulls or bears, as trading oscillates), so we are pleased to have had as many decent 'base hits' as we did in the earlier going, and 'home runs' these past couple weeks. For now, we're surely not seeing any particular reason to modify our ongoing structural Summer forecasts.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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