Unrelenting Grim Scenario

August 10, 2001

An unrelenting grim report . . . from the Beige (or 'Tan') Book, spooked markets in a dramatic way Wednesday; though little of that should have been surprising to any. The report, prepared by the San Francisco Fed, amplified what we already felt about the economy; but (little noticed) talked of slow growth, more than just deterioration. It makes sense, however, to assume that things are muddling-along at low levels, as is also almost always the custom this time of year regardless of more-macro conditions.

That the Dollar was down, while long rates were too, reflects worries about problems impacting the Greenback, along with economic thinking that lots of room for the lower rates that so many believe the Fed capable of still engineering. We agree with that to an extent; and applauded the Fed for not cutting more at the last meeting, as it would not likely have helped, going into a very weak and slow seasonal time of the year. All the earlier cuts were sufficient from a long-term standpoint, so that's why we thought the Fed was better advised to restrain itself until the late Summer or early Fall, when a further move on their part would have better chances of improving some economic prospects. However, this presupposes that the economy isn't slowing faster than the speed at which the Fed can also pump-up the Money Supply; as may be the case.

Further the 'Tan Book' report suggesting tighter credit lending standards didn't help at all; with some thought that in the very long run deterring consumer on-whims lending, could be helpful to the society; though finding credit religion in a recession is fraught with peril. You basically don't want to turn-off the screws to a Nation heavily indebted after it finally is realized by the society; or you risk hearkening back to a '30's scene.

Given our view of the last several months, there was no chance for meaningful profits recovery until next year, or even for business activity (especially in technology) to get a 'pick-up' until late this year or early next; though Microsoft's (MSFT) determination to expedite shipment of Windows XP, could help that sector a tad more late this year, as we heard and shared Tuesday, and was picked-up by most media types today. As for the financial press, the continue focusing on multiples, and other arcane analysis, at this point; as everyone should realize that PE's (especially for tech) will lean lower both at market highs, and in the process of completing bottoms, as earnings flows for the most part are miserable at such times. That's how some arrive at bearish ideas of the future, whether correct, or whether what normally is the case for developing lows. It's also why we long suggested focusing on Price/Revenue-flows, not merely PE's.

Interestingly, our early (900.933.GENE) hotline comments reiterated a conversation Tuesday evening, with a large trucking executive friend, tending to confirm our view of the economy and shipping trends; which while almost identical in thinking to these later reports today from the Fed, was a little more current, given that the 'official' Fed survey dates to near the end of July. (His is a privately-held firm, that does lots of big Consumer Electronics and general transcon and transpacific shipping, so there's no hesitation about discussing specifics about this with friends, even if an analyst). What we heard just reaffirmed what we've said; and there are few signs yet of impending or increasing forward-orders for shipments related to the upcoming holiday season (it is also a bit early, but not by much, to be looking for any such signs). Basically; factory layoffs, worried managers, and pressured incomes. The opposite of a top, isn't it?

(There's an old saying that relates to times that when you can't get accurate forecasts from CEO's or economists, but want to know how things look; just ask the truckers. In this case a trucking firm management, which has clearer ideas about forward orders.)

None of it changes our 'macro-view'; which is that the economy is careening toward a turnaround (if it isn't grudgingly transpiring in some areas already; not all is like tech), while some stronger sectors did not tank severely (in some cases direct beneficiaries of the equity arena woes; like housing investments). It wouldn't surprise us if some of these increases are tempered over the next year, not because citizens can't afford higher-priced housing (though that should be part of an equation), but eventually as fearful money reluctantly shifts into the equity arena, at the expense of 'safe havens'. Some of that mentality is reflected in today's large sprint back intoT-Bonds; fine by us, though they are increasingly becoming overbought on a daily and weekly basis. (Again; this doesn't change our trepidations about the late Summer; since last year.)

Later, we'd probably expect real estate and the markets to improve; but not instantly. For now, though the month is sure tricky; there's little variance from our August ideas (of up-down-up, with some jockeying surrounding the FOMC later in the month); and of course not to forget that on several occasions, technically, September S&P, failed to surmount resistance on a weekly basis, which was the set-up described as leading to new stock instability towards mid-August, with absolute risk of breaking back into a price level in the 1100's (how far can make a big difference psychologically; though at this point we're a week into a scenario that was almost preordained if resistance held.

Certainly, for those of us who would have been stunned at anything other than a very negative Fed Regional report, the technical aspects of today's market are very worth noting. That's a reason we just happened to get short the September S&P in the low 1200's today, and basically remained mostly short until the day's end. At this point, the (900.933.GENE) hotline took those gains, pending Thursday's opening. (Update: on Thursday's opening remarks we called for a drop, false start, new drop and effort at a rise, though we have continuing ideas regarding sustainability, at least for now.)

In summary . . . it is increasingly unpopular to be optimistic about America's future, which possibly means (outside of normal forecast August seasonal vacillations, and indeed heaviness), that the long-view might be appropriately less negative on bigger survivors (including some techs), than the recent retorts we've all heard, and less optimistic about the pricey overpriced stocks, that some of the same analysts are presumably more 'comfortable' being in, but that were initiators of today's pressures.

Sustainability of any bounce this week was questionable before any attempts, based on last week's deflection from resistance; though as noted Tuesday, on a short-term basis, trying to challenge prior resistance is increasingly even more burdened.

And yes, as noted all week, a bearish alternative was still there technically, if markets could not advance more than was currently visible, and here we are, at least for now. However, the bearish alternative is probably comparatively limited in scope; outside of greater (outlined) vulnerability in the Senior Averages, with psychological erosion a factor in the already-depressed stocks. Talk of technology recessions and depression is not news here; we're speculated for over 3 years about how the ashes would look after the bubble burst; comparing it to the bubble-bursting in cable (more recent era), and way back for airlines, autos, and of course the notorious experiences of earlier in the last Century, when the Internet stocks of their day (the Utilities) flew and folded; as did every technology from radio to railroads, at various periods of time. Later, the better-positioned (sometimes financially, not technologically) reigned supreme.

Complex of course; but sometimes (almost always after bubbles) that's the markets. It is more like a 'wake' to hear talk about it now, as this is the story of the last 2 years. (Balance of the section discusses more than a short-term future, so is thus reserved.)

Again; if we can avoid Dollar meltdowns, sidestep computer terrorism, and if the low returns of derivatives don't trigger a new debt implosion soon; then we're preparing for better times; despite long-standing worries about this month, or even this week. Nevertheless, August remains tricky to navigate, as it was unfortunately expected to be (historically August & September are roughest, not Octobers, with rare exception).

McClellan Oscillator data reversed across the zero lines (NASDAQ already had); as it deteriorates. We'd be cautious about trying to put too much faith in 'indicators' now, as this could be one of those surrender and washout times, over the short-term only. At this point we're near -16 for NYSE data, and NASDAQ at -17; both consolidating after recently engaged in mostly positive postures, but with the markets failing weekly resistance. Ongoing; we remain guardedly optimistic that the markets can work lower (for now), but barring blue-bolt news, will turn-up just a bit again after some further hit early Thursday, ,maybe in more dramatic fashion than Wednesday's failing efforts, where drama was totally on the downside, once the Beige Book report hit the wires.

Wednesday evening on Globex, S&P futures are unchanged from Chicago's close. We're flat the S&P overnight, after Wed. hotline net gains mostly on the short-side of this, session, and contemplate buying any rapid 2nd Thursday break, at least briefly. (Guidelines did so near mid-morning, at the 1180 SPU level; trailing mental stops.)

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