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War Perpetuates Buyer's Boycott

April 5, 2002

Complex crosscurrents . . . continue to roil the markets, as they have since warning a month ago that we were looking at a short-term topping process, that stocks should not be chased on 'confirmation' of strength then, and that this is essentially what (at least much of the early part of) April had in store, with rallies occurring, but generally not sustainable, absent an improved news backdrop. As ramifications of these events become clearer as to how the future may unfold, the majority of investors both abhor the idea of buying equities (finally, as suspected, after the breakdown, they turned to the dark side); visualize markets as a sort of monolith, which increasingly they're not.

For months we've questioned the wisdom of heavy crowding-into Dow Industrials, as it seemed to us that not only were the major big-caps generally expensive, but that many had international exposure that paled when compared to more domestic-centric stocks (not just limited to technology, but certainly including many who derive at least the majority of their revenue base here at home, or in politically secure areas). What is increasingly being witnessed includes the realization that security for operations in far-flung places is dubious, and that the reticence of managements to support those locales is verbally said to be dedicated, but in practice adopts caution we suspected.

That does not equate to being against international business or even to globalization; but does, in a few ways, reflect concerns we've long had about excess globalization as a method to offset diminishing growth rates of such companies at home (over a generation or so). Pressures on profit margins overseas predates the current morass by years; and was building even before the currency and debt implosions started way back in 1997-'98 (though were certainly accelerated by that series of bubble-bursts).

In a sense, many money managers belatedly recognized the panic climactic low we outlined in September, after the markets reopened, ignored the improved internals that bottomed months earlier, and even dismissed the idea of the domestic slowing being at least temporarily offset by the infusion of funds from a pumped-up Fed that was stepping on the gas even faster than they previously had applied the brakes. It might be noted, that even with all the talk of higher interest rates (gradually firming actually for several months since the noted rate low in October), expansionist policy directives have not reversed, but simply continued at unsustainable stimulative rates that are not in-and-of themselves negative, by simply stabilizing the rate of what we shall call pump-priming. T-Bonds are reflecting not only flight-to-safety flows now, but a perception that interest rates, while stable-to-firmer in the real world, won't rise significantly in the nearer-term. That's why our comments weeks ago about the year including a significant bond rally (rate dip), much to chagrin of all the new bond bears.

The point of this really is optimistic; that domestic centricity helps the mainstream of companies here; though those excessively exposed overseas have mixed outlooks; that earnings when they appear will accrue more rapidly to the bottom-line than most expect; and that managements would err on the side of underestimation, just as they erred on the side of excess optimism a couple years ago. That is precisely what we'd thought was behind the ultra-conservative fog surrounding the oft-stated 'absence of visibility' by so many firms; which we thought would set them up to exceed reduced estimates of their own; hence giving a tone to stock valuation that would look pretty good later this year; particularly for those companies without great international risk.

We're already seeing it, in a few (mostly small-medium) stocks, but even some larger firms are actually doing quite good, despite the financial media reporting those that aren't; because when the market drops, they tend to seek-out negative stories that in a sense seem to fundamentally support the movement of the market on a daily basis; in the same way that when the market's up, they look for stocks that contributed to it.

That's fine; and is human nature. Often it's the facts. But at this point it misses what is a disconnect between the obvious 'buyer's boycott' vs signs of better domestic U.S. sales in some cases. It also fails to reflect the building 'oversold' short-term status of the market, which in itself doesn't make any market bottom, but tells one to be alert to a change of status (to wit, conclusion of downside, at least temporarily) out on the horizon, if not yet upon the market (and we don't think a sustainable turnaround is yet here, but we're getting into the numbers that are at the upper-portion of the downside goal for this move), as relates to the June S&P, which tracks daily.

We have suspected for many weeks (well before they were reached) that these June S&P's would encounter resistance approximately in the 1170's, and that rallies would not be sustainable, which they weren't. We also expected that subsequent declines would be quite erratic, and simultaneously be very news sensitive. To an extent that of course made this week's rebound efforts defeated before they started (we thought we'd get a couple efforts, maybe even more, but the news hasn't allowed much at all) and we suspected as much. That's why all post-holiday rallies were termed rebounds within downtrends, as the most likely prognosis. More importantly, because this has in fact already been proven to be the outcome, we suspected that before it was over, we'd go down and take-out a few supports or ideal goals, keeping traders confused, thus enhancing chances they'll be negative when the low-points develop, instead of being excited about buying dips, as just a few weeks ago they would have loved to.

This section addresses the psychology of 'shifting gears' as we assess whether the heat of the decline is consumed, so that investors will be anticipating a turnaround at outlined points, rather than swimming with the mass of after-the-fact panic out there.

Much of our further discussion is reserved, as it relates to presumptions regional war is not an outcome from the Middle East tensions (for example), though we don't know that. In fact we suspect Saddam Hussein and others want things to deteriorate, which is why they were funding the suicide bombers for a long time (this is not recent, only recently recognized on the world stage), and why heavy weapons and even al-queda people were smuggled into hostile zones such as the 'territories' or particularly into Lebanon. Those against peace actually hope the U.S. or others shy from responsible moves to defuse things, because they want to maximize capitalizing on high emotion.

If we do have a transitory halt to the fighting (ideally several days out) the market will rally in response; though that does not mean even that rebound wouldn't be within an overall downtrend that resumes later, particularly if extremists disinterested in peace subsequently attack the West anyway. In fact, the most revealing progression of this might turn-out to be eventual cessation of hostilities in the Middle East, movements towards understanding (but not in the face of suicide bombers), while terrorists that have an agenda that actually minimizes the centrality of the Mid-East crisis reappear on the scene, very much reawakening understanding that the overall war is far wider.

In the meantime, while Wednesday for that matter was not particularly easy to trade (and was essentially a wash, with later gains on the short-side and an expected little short-covering spurt late in the session) we have outlined here and on the hotline (900.933.GENE or direct-dial access) how we expected this to evolve, and likely duration of (then) forecast downward behavior. Basically we're suggesting more or less a couple more false rallies within the downtrend (and the forecast's balance).

Part of that is the understanding that Iraq is trying to exploit people's differences, as many in Europe respond to their own fears of the crowds; not necessarily addressing right or wrong as relates to mitigating the crisis in a legitimate understanding way. In any event, while we suspected for weeks that the 'complex' (understatement, huh?) declining phase, particularly in April, would be news-sensitive and erratic, we do see this working (towards the forward objectives within harmony of outline macro plans).

That does not change the pattern, which continues to be just negative enough over this period, to bring-out a degree of mini-panic, which washes out the markets, in the process of establishing the basis for a subsequent upside move. Probably that will be aided and abetted by declining Crude Oil prices, which may tip-off the start of cooling of the tensions; though the violence is so severe, that the overtones of World War are not exactly indecipherable. The media suggests 'people-led' disturbances in Europe or other areas; but neglects to emphasize that these are the very risks that occurred from open-borders and immigration from all areas, and could even erupt in the U.S.; although if that happened, the façade that such demonstrations are just expressions of desire for hostilities to end, would evaporate. In any event, we still hold-out hopes that the thread-bare dangerous cycle actually migrates to a manageable situation in terms of eventual negotiations. We all know the alternative; and it may exist anyway. In any event, we won't solve the world's dilemmas tonight, but we can see how these can coalesce to obscure a normal correction for daily and weekly overbought, that we indeed thought would have complications along the way in April to make sustaining the new rally tries almost impossible, and then by the time we get to a mini-washout low, the very managers who have said they'd buy a pullback, will be too afraid to.

In a perfect world (and we'll see whether this is one; so far not) with great complexity making everyone a bit bipolar, the June S&P would resume upside activity later on (in a reserved time and price framework, in fairness to readers), and possibly eventually challenge the earlier high in March. Thus April (in essence) a volatile month that has rallies, declines, rallies and whipsaws churning those who get enthused on upside breakout romps, or even despair (or short-sell) a decline that looks ominous just enough to be believable, but later turns around anew. For those scalping short-term moves, it can be greatly challenging, albeit alternating action, that we address daily.

In summary . . economic data continues the projected gradual improvement type of indications we've suggested since targeting the economic low in '01's Third Quarter. Overall, we have written for over a month that parts of April-May would be complex, volatile, churn; however in longer-term (reserved) frameworks. Secondary slowdown; recession? No. Not unless world war includes China, the MidEast, and the U.S. (it's possible; not probable; but when all are talking about it, is not usually when such things happen). Many economic numbers come out Friday morning, as noted.

As to the McClellan Oscillator readings: slid a bit more, to about -88 for the NYSE, and -17 for NASDAQ. No change to pattern analysis of this activity, which expected that after minor efforts to let sellers try to do something, we would have period tries to go up, but any efforts may have some severe limitations associated with it thereafter in harmony with a complex April, (balance reserved).

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of the 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; while all free peoples certainly hope for the best. As of mid-evening the S&P on GLOBEX has a 490 Premium, and at 1131.70, is actually up about 140 or so.

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