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'Will Unity Prevail; or World War III?

September 21, 2001

In this war climate, our views are subject to change not only daily or intraday, but even momentarily as events may require. Sensitivity to movement, and understanding of the economic trauma unfolding, has us primarily going for base-hits, but achieving some homeruns, due to the extreme volatility and repetitive swings. Wednesday garnered about 5000 points of theoretical gain, mostly from a short-sale done at the 1040 level, and Thursday's first effort was a short-sale at 1007, with the second a profit-taking covering and long from the low 990's. We anticipate additional shifts, as heavy volatility requires.

God bless America in an epic struggle.

'Infinite Justice' . . . is the name of the counterattack operation's first phase, but it is oversimplification to celebrate a victory (though we pray for one) before the assault, much less to yet expect it to have the psychological impact of the historic Doolittle Raid of 1942, though we discussed earlier in the week how that would be a first step equivalent, before what probably becomes the modern Battle of Midway equivalent, though these are not the same standing (or floating) forces; though some event may hold similar importance as quietly signaling the nadir of the threats against the U.S.

Days ago (for new readers) we made the comparison with the events following that dastardly attack on Pearl Harbor, and how the Doolittle Raid lifted spirits after initial market declines, followed by consolidation, followed by a big rally after Japan's once-invincible Imperial Fleet was decimated primarily by our valiant Pacific Fleet air arm. From that point on, though no bell was rung and despite war continuing for years yet, the enemy was constantly backtracking (though ferocious and difficult), while the U.S. stock market, measured by the Dow Industrials, more than doubled before war's end.

Today, the Dow Industrials were down over 400 points at one point, and while not particularly happy about that, we were correct in calling for upward action at the start and finish of the day, with deep air pockets in between. As often noted, Wednesday's of Expiration weeks tend to be strong, particularly at the end, and we weren't in any way disappointed. The intraday theoretical gains were humongous grand slam home runs of sorts (only requiring 2 or 3 efforts, which were basically all very successful), for those that checked-in with our 900.933.GENE hotline, and everybody already was aware here in the DB, that there was a probability of another dramatic down-and-up reversal session. The hotline in the morning suspected all the rallies would fail until we broke the SPZ 1000 level, as that would instill a panic capable of a later reversal.

World War III?

That's probably an extreme term to be using here, unless things deteriorate into the historically-dreaded (since the days of Richard Nixon's warnings) East-West conflict warnings. Nevertheless, there are lots of delicacies (and we don't mean hors devours of course) involved with a fight that could involve a narrow area wedged between the antagonists in East Asia, and not so far from Red China. If it is a World War, it's likely of a different sort, and with (if things hold together) almost all civilized nations aligned on the same side, which is inherently different from the World War II era. Further, the levels of armaments on the Allied side exceeds anything the nearly-disarmed West had at the start of WWII. The 'nuclear Genie', along with biological warfare fears will of course be a concern, though some of us believe (as far as these terrorists so far) that if they had that, they probably would have used it. All the more reason to destroy them while the civilized world can; hopefully without the collateral damage of WWII.

As noted before, since the days of Alexander the Great, much less Britain or Russia, nobody has prevailed on the ground against an enemy lodged in the Khyber Pass or surrounding areas. While secrets are secrets, and we don't know, we would hope the leaders of the world know enough to protect what is economically sensitive before the unleashing of the unknown, and that would mean protecting the oil fields of the Gulf so they won't be at-risk, before assaulting the individuals and groups that must be the ultimate targets. Here at home, law enforcement assaults will have to be mounted for some time, and on the short-term that is one of the most crucial areas to monitor.

So what is this 'campaign', and why are so many disparate countries with us on this? Because it's a fight against anarchy, against extremist, and the perversion of religion to undermine governments of all types, as has often happened in history, by various religions. We think the coalition of democracies, republics, monarchies and even just a few socialistic or dictatorial regimes, signals that this is a fight to preserve concepts of 'governments', which almost always (even the worst) don't deny someone's right to live merely because of their faith, as was the case a thousand years ago sometimes. Therefore it's a fight against theocracies, or a fear of establishment of more of them in the future; as once empowered, they rarely voluntarily yield to any populist desires.

As we said last week, while the market was closed, we didn't expect the DJIA to drop more than 2000 points, and not all in one day either; subject to sensitive news, as of course it unfolds, of course. And no, we didn't see this as a new 'Great Depression' of a sort that would hold us down for years. If anything, the Country was better prepared than before WWII, and we fought that one anyway, and recovered economically. For sure, some of the immediate action is tentative at best, but per plan, and eventually a huge revival, that dwarfs anything that would have otherwise occurred (later in time of course, but greater in scope and magnitude) would appear to be on the agenda. That is something to address day-by-day of course, but the West and the civilized East will prevail together; there can be no alternative, nor would one be worth considering.

In the meantime, we'll do our best to touch on developments as we have throughout the disaster, even when the market was closed; particularly as they point (or don't) towards suspected economic outcomes. Most important economically, is that whether the low was today, or whether events cause more panicky peddling pummeling prices again later on (fundamentally very likely), we don't see protracted deflationary moves unfolding, though are open-minded. That transpired in some industries over the past two years, residual effects will continue into at least 2002, but in domestic-centric businesses, may be ameliorated sooner than others, as confidence returns seriously.

The crux of the matter is that the liquidity injections combining with military spending, and a host of commitments resulting therefore, will more likely give us a reflation we need to have in the year ahead, and eventually higher rates, but that will be positive, not a negative. Just as the post-Persian Gulf War crowd lamenting the 'pushing on a string' scenario was ultimately wrong (and we ourselves used that term earlier in this year, but do not see that as the forward condition), we'll see higher rates signaling a new era of growth and prosperity in the years ahead, here and probably abroad too. To get from here to there will be no easy task however, and therein lie challenges. As the media frightens Americans with layoff news, and tells them to forget about signs of recovery, they will be right; but if other events go as desired, confidence gradually will return. However, because of the stealth-like nature of the enemy assault, and the clandestine way in which they hide, it won't be exactly like the bell-ringing moments of World War II, though even then few investors realized that the Battle of Midway was a defining moment of the conflict, for the markets, not just the battlefields. Let us pray, as we await the President's Address Thursday night, for our troops success this time too, in whatever ways our leaders address the gravest assault ever on the U.S.

Technically . . . it's paramount that, to carry forward, the turnaround show an ability to be more than Expiration-related, and a short-covering flight to the sidelines. You in fact could see this coming during the day, as the 2-year T-Bills went to absurd lower rates, while T-Bonds and (very importantly) the Dollar, held relatively firm, despite a few media proclamations to the contrary, which were incorrect. The steepening Yield Curve reflected not just the expectation of greater growth (yes, that's growth, in time), but the panic into money funds and the like (short-term instruments) as capitulation in this case very clearly shifted funds from deeply depressed stocks into more or less a non-yielding parking place. That's evidence of panic, pure and simple.

Balance of this section is reserved for subscribers, though parts have been shared. Expectation that we'd get a turnaround of sorts during Expiration week was tried, but beyond that remains dicey, as far as volatility, and if things don't go well as a very justifiably angry U.S. responds (not necessarily from victim to conqueror, but at least for retribution), we'll address that too. Rome wasn't built in a day, nor was the British Empire dismantled overnight. And in this scenario history's greatest unity is unfolding.

In essence, we can't really see a sustainable turnaround, until we see what transpires after Expiration, how things go on the military and/or diplomatic front (if there is much of one), or what kinds of stimulative actions come from the day's rather hastily-called meeting today, between the President, Mr. Greenspan, and others, behind closed doors. Nevertheless, the market remains in oversold territory, which alone never has turned a market (because people buy stocks, not indicators), but makes us watchful.

Daily action . . . amidst this, on Wednesday, saw the hotline (900.933.GENE) start with a December S&P short, early on at the 1040 level (on a failing little early rally), and then staying with that over a period of hours, with the constant caveat that S&P actions are not the same as one would use in equities (where shorting would be incredibly insane or risky into heavy weakness, with some consideration to the opposite seen as more appropriate tentatively, and on a limited basis, while down). That would be the case even if the Dow (where we used the unfortunate term of the 'unkilled' stocks for some months now), fell to levels recognizing earnings prospects.

The market accelerated lower, to some extent after (or coincident with) a negative Beige Book report; though besides nobody expecting a good report, it doesn't matter since all the fundamentals are shifted as a result of the war climate following attacks. Again, the comeback may partially be Expiration-related, as forecast, or a response to an evident preparation (which should be thought-out and as gradual as necessary) by the American Armed Forces, in the wake of the unprecedented surprise attack. It's said this wasn't Pearl Harbor, and in a sense that's right; this was sneakier and aimed at civilians as well as our economic heart; something former enemies never tried. We suspect that the outcome will be a 'don't tread on me' attitude, that will be embraced by the entire civilized world, particularly as many were domestically awakened to the risks of terrorism, years before the U.S. took it (apparently) seriously enough. In last week's comments, we used the euphemism ascribed to Admiral Yamamoto; when he said to his 'joyous' pilots after their attack on Hawaii, that he feared all they had done was to awaken a sleeping giant. So it was, and so it is, and not only free, but civilized men and women (whether the enemy likes that or not), will survive and prevail in this.

At the 7 p.m. ET hour the December S&P is up about 150 from the regular closing. Last night we were essentially optimistic for a short-term washout and turn, however questionable durability for the turn, as consumer confidence deteriorates, but maybe bolstered a bit, after the President's Address to a Congressional joint session. Later, a sobering reassessment, of the impact upon an ongoing recession, will be made, on the road to an eventual multiyear boom in reconstruction and growth which follows.

We kept an eye open to see if any connection unfolds regarding Iraq; and that seems to have commenced yesterday, but is not discussed in any detail (or affirmed, at least for the moment). In the meantime, we would look for an effort to extend in the a.m.; a drop of some sort; then a huge fight to reestablish strength in the day's later going. In any event, we don't think the American economic landscape is going to be altered; it may even be an improvement over a 5-year period. Other things will change in ways we haven't begun to address, and will; as you know or may presume. Chances for all of this to be a 'climactic wave' that concludes the downside are not iffy from technical perspectives; and if the military and/or surreptitious counterattacks are successful, it's not out of the question that the low points (not fundamentally, but technically) happen this month, as suspected before all this started, rather than in October. However, in a trading sense, we'll have to take it a day-at-a-time, more so than usual, because it's a war, and that can't fully be fought (if only it were possible) by market analysis. In the meantime, God bless our Armed Forces, America, and all freedom-loving humankind.

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