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Gene Inger's Daily Briefing 7/1/4


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Posted 01 July 2004 - 06:19 PM

Gene Inger's Daily Briefing. . . . for Thursday, July 1, 2004: Good Evening; Lower interest rates & higher stock prices . . . were the initial projected response to the broadly-expected modest rate hike by the Federal Reserve, Wednesday. This combination plus favorable quarter's-end activity were properly assessed not only as likely, but to combine with several other factors, to reactively buoy stock prices. In the hours since there is a battle shaping-up from the stock price spike on a rate hike. In our view this pattern has evolved procedurally as outlined for many weeks, while it is certainly not without occasional disruptions, or subject to the ever-shifting backdrop of news developments. However, this week was not expected to be particularly news responsive; in fact, we had projected that the Iraqi handover was overrated short-run, and the FOMC decision a no-brainer, particularly if the Fed did as we thought best (it turns out they did, even to a point of embracing our view about inflationary transients) at this point in the economic evolution. We pondered whether this was a consensus or view, but obviously not common, as T-Bonds rallied (interest rates dropped as we called for) on the news and stocks shot-up, with less on-news roiling than is common. Last evening we also speculated about 'what ifs' regarding 'peace breaking out' in the Middle East, if not the Persian Gulf. Subsequent to that we're hearing about concerns in Iraq, not about America leaving the fray, but whether the Coalition will indeed fight in ways the new regime may require (more). At the same time ideas of 'improvement' in the situation is not a prevailing view; it's bound to be rocked by terrorist interlopers, as they have lots to lose if this is so. (More commentary at ingerletter.com) Note that the on-again/off-again romance with technology was on-again; and that the patterns indeed have occurred with the Nasdaq 100 (NDX) and Semiconductors (SOX) at least broaching the idea of a 'trending' breaking of negative price behavior. This will be particularly interesting if the SOX pauses, then makes it above (a) level before any setback worthy of the term, and the NDX holds (level) or better on a near-term pause, then works-above the (level) over time. The overall NASDAQ is solid too, in harmony with projections for mid-May market lows, and subsequent reluctant rally. Late today the Government says there's no sign of mad-cow disease, which indirectly is a plus too (and certainly is welcomed by those of us looking forward to cookouts on the holiday). The only 'mad cows' are the bulls as they squirm a bit now and then, but generally continue with suspected late June upside moves, continuing into early July. My mantra's been to focus on the terror risks this summer, and that hasn't changed. In fact its tenure might become more visible if barbarians decide to 'lash-out' to show increasingly calmed populations that they're still active or capable of wracking havoc anywhere they please almost. That's possibly true, but as Europe joins constructive efforts in Iraq, irrespective of preceding differences, and as most Iraqi people clearly are interested in jobs, not fighting, it increasingly can erode (contrary to many media assumptions) the base from which the vermin recruit their ranks, and can also tend to focus on their origins as external to the actual 'theater' of operations. In other words, they are terrorists, not insurgents; increasingly portraying their efforts as not intended to restore Baath Party leaders to prominence, but reveal apparent Shiite roots, which are anathema to most Iraqis as a consideration, so that could result in robust support for the interim government there, contrary to the many Islamic apologists suggesting otherwise. If so, a pleasant surprise to the world, and to pundits, will be if this works. Daily action . . . clearly recognizes some of this may be wishful thinking, or might be related more to potential amelioration (incredibly enough) of Israeli-Palestinian stress, than in Iraq or the Persian Gulf (because al Qaeda's primary target is Saudi Arabia of course). The 'range' of threats and achievements is widening however; just today the government forces in Saudi Arabia encountered al Qaeda in another gun battle, and killed their lead ideologue. Separately terrorists spelled-out strategies in a captured handbook, revealing little that we didn't know (such as pressures on Spain to pullout; hoping that would undermine British resolve, eventually draining an American resolve and troop morale to continue underpinning a free Iraq). While everyone's been focused on the Persian Gulf, Europe or domestic terror strike risks, we have on-occasion mentioned terrorist traffic growing in South America, and repeatedly referenced shipping 'choke points' around the world. Hard to tell whether there's any connection with 'tri-border' groups, at least as of now, but there is a new story surfacing today about an Islamist who tried (last week) to plant explosives in the Panama Canal to disrupt traffic. In a local Honduran newspaper are four pictures of a suspect posted, along with details of a reward (etc.) He'd transited Honduras, and held passports from..Canada..as well as Trinidad & Guyana. Oh, for any desiring additional comment about the Federal Reserve (little needed as they very much adhered to the desired modalities of action), we'll note that the FOMC indicated that 'elevated inflation was partially transitory', which we interpret as robust agreement with our view that energy prices, and Oil related spikes relating to Iraq for that matter, contributed to some of the short-term inflationary movements. However, it is our view that more gentle price increases have prevailed for almost two years or so, and that the energy spike merely amplified an in-place trend underlying all of that. The statement today indicated the 'Fed will respond as needed', as that's sort of just stating the obvious of course, but in a sense that's about all they should ever say we think. Some perceive this as 'hawkish', because they didn't talk about a maintenance of stimulus, but that's what got them in trouble (managing by press release); so they had to discard that. A couple economists see just the opposite, as 'dovish', because they didn't ramp-up rates more firmly. That's the more ridiculous side of the ledger, as too high rates can throttle an economy in the throes of showing slightly softer rates of growth (more economics at ingerletter.com), so could spook (reserved commentary). Watch closely now, because the next (and less-emphasized) element in this pattern is likely to be a strong jobs number on Friday. For sure we can't attest to the market's unrelenting stamina during this timeframe, but at this point it continues to look (more). MarketCast (intraday audio-emails) maintained a consistent long-side bias (took two efforts, from 1136 and then between 1133-34) on the September S&P, which was of course pleased to see only minimal shuffling in the wake of the projected Fed move. Thursday may not be so sanguine, but what a potential set-up for Friday's action.. The pre-positioning and posturing of the S&P currently, is right where it needs to be. We continue to suspect that, aside from tempered moves related to fadings ahead of a slightly apprehensive weekend, that this market is positioned to continue renewed challenges (as are ongoing). Today's 1144 high was a couple points shy of the high back over a week ago, but reflects an excellent job by the market as relates to this week's comeback. Providing the mid-1130's hold (or thereabouts, this is not rocket science, nor should it be approached that way), we can envision this as a thrust over (more… later), towards a challenge of (higher later). We've suspected all week that this pattern was logical; it is ongoing and will evolve over hours or days likely ahead. No doubt last evening's discussion about 'peace' was probably overly-optimistic, but if such prospects are simmering in the throes of the Middle East's caldron, it would be very favorable indeed. Not just for the region, and long-suffering peoples (on all sides of all the issues), but for growing enlightenment that extremists are enemies not only of the Coalition, or Israel, but mostly varying Moslem communities who have the most to lose by being shunned by normal societies because of implications their corrupted leaders held, and with opportunities to make peace dismissed or disdained. Does this mean anyone thinks the Dow Industrials might rally 1000 points upon realization of Middle East peace? Maybe not, because the terrorists will continue to flail somewhat, whether it happens there, or somewhere else as this 'summer of discontent' evolves. But many terrorist leaders are already toast, with others presumably running for cover themselves, not necessarily simply posturing for attacks, as many always presume. It's a dicey subject to broach, because there is little doubt but that al Qaeda and other barbarians are trans-national, trying to shock the world this summer (and we continue to fear they may). But we also sense that normal people are slowly in a mode to turn away from war and terror, in that region, so that may increasingly leave the terrorists without the backing they crave and require. Some in the media portend to see a shift to even more radical terrorism among the insurgents in Iraq for instance and that is doubtless so. But as they become more radicalized, one may find populations less supportive of extremists, and more disgusted by outrageous intolerant belligerence. Overall, our view has been that the market inflection point was in mid-May, not June; and we've said that repeatedly. Hence, with this week's forecast for early dips, then a recovery before the market essentially went 'on-hold' ahead of the Fed decision, we found nothing to dispute the stance consistently followed in these Daily Briefings. At the same time, tech emergence in cooperative leading-roles helped offset (desirable) contractions in energy-related areas, and that's held-back big-caps a bit, but already had contributed to favorable backdrops and potentially improving structure (not at all not to suggest we don't get an intervening profit-taking wave, which is fairly likely). So, we harbor no illusions about a sudden retreat of the barbarians or the taming of a 'summer of discontent'. As a matter of fact, the evidence of secularism or democracy showing some strength may embolden or provoke terrorists into desperate efforts to get attention (some of which we saw with brutal murders) again. What's suggested is that such barbarity should backfire on monsters of this world, on a presumption that a majority of people (even in Islamic countries) are horrified by the inhumanity of it all, and start to realize that the West is helping them, or at least giving them a chance to help themselves (nothing will if they won't responsibly engage at some point for their futures; or that's how demagogues maintain control). Of course there are those in this Country who cast aspersions only inwardly, but if they take an open-minded gander around the world, they might see some emergence of hostility to terror developing. Bits & Bytes…mentions Intel (INTC), Texas Instruments (TXN), Microsoft (MSFT) and Motorola (MOT) as well as speculative Ionatron (IOTN) and Corvis (CORV). In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including assorted terrorist groups. A world awakening to terror threats grows, as domestic observations absorb us, and at least some investors fret inflation and reflation, more than more-fearful alternatives. In terms of economic news, numbers are excellent; but of course that's not a primary concern now (continued terrorist threats, are as or if they flail in desperation soon). McClellan Oscillator finds the NY 'Mac' firm at +51; a tad up on NASDAQ at about +35 readings. In normal (non-wartime) settings, conditions would create potential for yet another new recovery high ahead, or higher important highs in the very long run. We suspected that may occur, though there are numerous variables (reserved). As to flies in the bullish alternative continuing, in our view, it's not earnings or markets as such, but realization terror wars continues expanding, not contracting, with difficult challenges ahead, speculated about on occasion, and as attacks showed once more. Ongoing California temblors; a couple minor shakes in Central California and again in Georgia, near the Tennessee line (the pattern is mild, but locales are a bit unusual). Overall the threat matrix perspectives remain quite high, pretty much worldwide. God be with our troops in continuing struggles; as well citizens who continue at risk while traveling on pleasure or business. S&P futures; up about 50 at mid-evening or so. In terms of Thursday; probably selling squalls then on-hold ahead of anticipated strong jobs numbers; then roiling, then maybe rebound higher later-on, to the bears chagrin. Have a pleasant evening, Gene Gene Inger, Publisher