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[TTHQ Staff]

Gene Inger's Daily Briefing. . . . for Thursday, February 15, 2007: Good weekend! The market's 'Valentine' . . . based on the Fed Chairman's testimony was no huge surprise, and simply allowed robust relief rallying based on the continued 'perception' of moderating growth amidst mild inflationary pressures, as now being Fed-verified. It was probably assisted by the inability of the 'Valentine's Day' massacre at Chrysler to ruffle feathers much; though there are concerns clearly other than sweetheart issues. In this regard that combination of factors contributing to rally extensions (Oil inventory reports didn't hurt..more). Nobody reported Switzerland's proposals to Iran essentially resulting in 'nuclear control' that could foster optimism or a sense of relief. However, it was reported that the Shiite leader (Sadr) had departed for Teheran, presumably fear of a JDAM (big precision bomb) falling on his head being a part of that determination. We suspect there's more to it. While we can't verify that the extreme Shiite zealots of his ilk are fleeing in fear of U.S. retribution (as warranted as that surely is), neither do we dismiss another possibility; that the Western media hasn't considered. What's that one asks? Well, how about extremists being in Iran to assist coordination with Tehran as to how they might expand their mischief in Iraq or alternatively (even concurrently) address any American efforts to interdict their attempts to broaden regional influence. And does the recent enemy effectiveness against our helicopters mitigate air-cover to our Forces, in a similarity to what happened to Russia against the Taliban after they'd acquired the capability to either knock-down choppers or compel evasive maneuvers. Yes, we say we aren't planning to attack Iran. But what if Iran continues attacking us? Let's at least explore what might occur should push-come-to-shove, instead of simply accepting the idea of a U.S. disengagement or conversely engagement to protect the region (which the Battle Groups and Patriot Missile battery dispositions suggest likely as this goes forward). Let's presuppose that the road to conflict is underway, though I am not suggesting it's unavoidable. If it goes thusly (and keep in mind though maybe the media highlights General Pace saying that the evidence of Iranian weapons may be mostly circumstantial, that's not to say they're not involved or this won't escalate), it might be of interest to speculate how such a conflict could actually ramp-into-action, and what the implications are for commodities; not least in Oil, and thus to financials. Yesterday a story surfaced about 'Austrian' sniper rifles in the hands of 'insurgents' at the margin, or in the hands of Iranian agents at the maximum, taking-out Americans, and at considerable distance. If you saw 'Future Weapons' on the Discovery Channel a few days ago, you likely saw this weapon, which is more accurate than the Barrett semi-automatic weapon our forces use, and which was also displayed on that show's comparison. Because the accuracy is unbelievable up to a half-mile distant (think as to how far that is for a sniper's round), the U.S. and UK had protested Vienna's sale a couple years back to Iran for 'policing'. Clearly I see the evidence of where they are. I also find it unconscionable to imagine that the Pentagon will sit-back and sustain this. Assume America is heading toward war with Iran, inadvertent or otherwise. A picture of how the conflict might emerge, is becoming clearer. In all-out war, basic American military tactics will be air attacks, naval blockades, offshore bombardments, and the destruction of oil and power infrastructure, plus Iran's Persian Gulf naval presence. Iran presumably will respond with deployment of ground forces on its borders, attacks more likely by their proxy-armies in Iraq against American troops inside Iraq, and also the likely activation of hundreds of trained, well-armed, dormant terror cells peppered from one end of the Persian Gulf to the other; plus possibly proxies in Lebanon etc. America's visible response would derive from the two Naval carrier groups deployed in the Persian Gulf, supplemented by USAF fighters and bombers from neighboring quasi allies (but infiltrated heavily by Shiites and Islamist sympathizers), like Kuwait, Oman, Qatar -where U.S. Central Command bases operations for that region- plus of course the United Arab Emirates, and possibly Saudi Arabia and Egypt, should all the stops be pulled-out, and the tentative efforts of Sunni terrorists to bring a harmonious theme to both Sunni and Shiite 'jihad' efforts against the West, actually not succeed. Bases in Europe possibly wouldn't be utilized, excepting Great Britain probably, if it's determined that B2 bombers need to be utilized operating out of bases there (we're in a sense nearly at a point where concerns about 'domestic' Islamic terror must take at best a secondary concern in England, even if there's a likelihood of renewed enemy terror actions in England, which they might anyway; and which this would tend to sort of smoke 'em out, though it will be controversial or surely dangerous). There's no way (in our thinking) to at this point mollify or pacify Islamic threats in England (or France) particularly, short of just doing what's in the 'real' national interests of these societies, come what may; as well as dealing with whatever comes (I suspect if unassimilated groups such as the Moslems in Europe fail to put their adopted homes ahead of old-country views of the world that theoretically they wanted to get away from when they moved to new residence, Europeans will stop putting up with 'victimization' nonsense, and get on with their lives, even if it means upsetting 'political correctness' or certainly perpetrator's lives; something European tradition experienced before if challenged). It thus strikes us that there won't be a risk of 'Eurabia' because Europe will reverse this. As to an American land invasion of Iran; nonsense. It's out of the question, given Iran has a 1 million-strong army, neighbors won't allow it, and the lack of American troops to carry it out is obvious to everyone. That's dangerous however, because 'perception of impotency' to engage the Iranians may compel things going beyond 'expectations'. To wit; the Iranians could get quite cocky about their ability, thus underestimating us. Also generally unreported, there have been some increases in opposition to fanatical 'mullah governance' in Tehran. Just today a number of 'Revolutionary Guard' extreme shock troops were killed or injured in an attack on a bus carrying them inside Iran. It's a 'sign of the times', in that at least some younger (that's key) Iranians aren't steeped, to the extent their elders think, in the ways of 'revolution', and/or admire al Qaeda, or even the West, to which they'd like to see a great Persian people re-embrace in time. We doubt that the CIA is behind these efforts inside Iran. But we see this as welcome and a reason to be very careful how we tread, lest we (in typical Washington fashion) disrupt that which may undermine the enemy without our having to do Herculean type tasks. We suspect that the radical Shiite Sadr is actually in Iran to help Iran figure-out how to suppress and discipline their own 'sects' and population, plus plot adventurism against the forces of stability in Iraq. They may in fact be coordinating an effort not so much to 'ensure his safety' as reported in the news here, but to deny safety to civilian groups and the U.S. military in Iraq. In essence Sadr is the Quisling of this era, so if it is presumed that he is not there simply 'fleeing' (U.S. media oversimplification) then it is conceivable that he's there to help the demagogues plot their takeover of Baghdad. Should it be shown Iran is plotting a takeover of Iraq (reserved for ingerletter.com) we could find a point where U.S. Special Operations may be pushed into Iran to carry out attacks on the country's prized nuclear research facilities or designated 'hot' or Quds (shock troop) targets. The objective: dismantling mullah command and control of Iran. We dispute the conventional notion that Teheran's most lethal weapon is manpower, alone. We dispute the simplicity of the argument that destruction of their Air Force or Navy, accomplished in a day or two, would negate the risk from their terrorist forces, very much as they do threaten, numerous parts of the world. But right there, in their neighborhood, we believe the evidentiary use of sophisticated sniper rifles and AEP's (that's my acronym; Advanced Explosive Devices, which are the infrared-triggered as well as totally devastating 'shape charges', so I'm not going to minimize these, calling them simply IED's, because they're not improvised, but advanced munitions) provide ample evidence of surreptitious involvement of the Iranians with the terrorists, and we again believe all these discussions minimizing their capabilities underestimate enemy capabilities, just as was done in the past, and just as was/is done in the Lebanon too. These jihadist and Shiite guys are professional killers, and they are being supported by a terrorist state: Iran. No ifs ands or doubts here. This is not political correctness; it is simply realistic political assessment. We aren't championing war; but war is coming to us; we have a choice: retreat or respond. Simply: face the music, as it is facing us. While there's valid argument as to whether or not the United States should be or not be involved between roving marauding or dangerous groups of Arabs and Persians, there is no underestimating the dangers as inherent in this situation. We even think that the (wishful thinking whether he's in Iran or still in Iraq) basic idea of Sadr fleeing to Iran misses the point: we believe he's working with the Iranian fanatics, not simply seeking refuge. There's a great difference; asylum versus conspiracy for making war. Or worse, for planning overthrowing the Baghdad regime. Again it's all a reflection of 'desire' (or naiveté) that reports tend to oversimplify all of this. Ingerletter.com hence believes that facing the reality of this before it faces us in devastating ways is the key. From its army alone, we should point out that Iran can marshal oh, a several hundred thousand troop force along its border with Iraq and Afghanistan to pressure American forces in those countries, and it can call on Syria to inflame its border region with Iraq as well. Or pretend that attacks on the IRG today was not from al Qaeda.. (reserved). Iraqi Shiite militias (partial remarks reserved for ingerletter.com members). Together, these radicals command some 80,000 to 100,000 men; armed, funded, trained, and possibly planning coordination by Iran right now, via the personage of Sadr's 'visit' to Iran for the purpose of fomenting war, not fleeing. Iran's air defense is modernized; thanks to Russia. Should it prove adequate, it risks downing American pilots, sapping morale and raising more political questions here. Iranian dogma dictates that war will translate into regional upheaval; but it may not if it spooks Sunni's into realizing their perceived enemy (even al Qaeda's) isn't what they thought (the U.S.), but their closer neighbor; Iran. It may actually be demonstrated if Iran targets U.S. Central Command in Qatar and the U.S. Navy's 6th Fleet in Bahrain, which has a majority who are Shiite so possibly pro-Iranian. Or in Lebanon, pro-Iranian Hezbollah might fire-up the place, as conceivably would Hamas in Gaza. Only myopic views see these not intertwined. One way or another, such a war will involve oil production and prices, and not drop oil into the 20's or 30's that so many bulls are expecting to embolden the stock market in the near-term (that's increasingly absurd, even without such a dangerous conflict; just because the 'war threat matrix' quotient keeps prices from dropping like that). A U.S. strategy will need to maximize Iranian pain without setting world oil prices ablaze with fear of supply disruptions. To do this, possibly as a 'blockade' or threat prior to attack, U.S. assaults must freeze Iran's offshore oil platforms while preventing Iran's shutting down everyone else by blocking the Straits of Hormuz to oil export shipping. Perilous. If other oil producers, especially Saudi Arabia and Kuwait, maintain production and/or exports up, any rise in prices can be contained below a tolerable $85 a barrel in such a scenario. Now we're not advocating such a scenario; but with today's stock market, and the Goldilocks scenario, being bantered about as if there is no alternative to glee (in wartime?), it seems logical to contemplate the other side of the coin just in case. Daily action . . . is viewed by certain pundits as being the best of times to now make money; actually the move is the reward for those who already owned. One most risky approach might be the funds that invest in (reserved specifics) that have run-up most lately, while we do not dispute anything Chairman Bernanke said, absent disruptions. For now, upside momentum continues, and generally sidestepped worrying about a couple other issues that surfaced during the day publicly, but weren't focused on (the Austrian arms showing up in the hands of those shooting at our boys is an example). Increduously nobody is (yet) focusing on war or Trade Gap issues. Neither are they yet noticing how it's increasingly 'testy' in a military environment (maybe they notice, but they don't think it has meaning for stocks), or are they contemplating implications of what may be a frustration by (of all people) the terrorists and insurgents perceived leading the Jihad adventures, versus Tehran-backed Shiites, who have used certain weakness among the Sunnis to sow discord, and also to usurp leadership roles. This of course relates less to wanting expanded restored Islamic caliphates, we think, but more towards a quest to assert non-Arab-led Persian hegemony in the region. We'll offer the argument that risk is not low, but extremely high, and that this is not a lower risk investment environment because the market went up so much. Au contraire; it's higher and that increases the threat scenario; whether credit default concerns, war(s) or other areas. If the world doesn't fall apart, then the correction (nearly inevitable) is going to be constructive; if the world does fall apart; well then dangers are (reserved). MarketCast (intraday audio-email) remarks were inclined to anticipate revival efforts in-front and after Chairman Bernanke's testimony, but are concerned about this fling that's inclined to reverse virtually anytime. That the market hasn't been 'parabolic' like in 1999-2000 is definitely helpful; but since we're not looking for a secular peak, that's not the structure we're anticipating anyway. Hence; a milder sloping rally can still shift into (described mode). That certain foreign markets dipped -from parabolic- might be a concern transmitted across the sea. That's entirely ignored by panting optimists at current extended levels. Guideline short efforts weren't expected to work until a post-Fedhead time. Our view holds rallies occur, but unsustainable (per ingerletter.com). Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. Apple (AAPL); Level 3 (LVLT); Intel (INTC); Texas Instruments (TXN), Microsoft (MSFT); Motorola (MOT); QPC Lasers (QPCI); Whole Foods (WFMI); LightPath (LPTH); Intel (INTC); PURE Bioscience (PURE); InkSure (INKS); Ionatron (IOTN); and Northrop (NOC); a small group commented upon via accompanying audio. ``` In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries. A world addressing terror threats continues, as domestic issues absorb us less as we focus on the Middle East crisis and World War III avoidance. Though few generally concurred for three years, our consistent view has been slow but persistent American growth isn't negative, allowing the protracted gradual growth without ancillary significantly high interest rate pressures. There's no truly-restrictive monetary policy; nor is there likely to be one, irrespective of (pressures as reviewed). That is a potential feature developing ahead, maybe late 2007-2009, barring disaster. McClellan Oscillator finds NYSE 'Mac' shuffling with intervening rebounds recently at +40 for the NYSE; and +7 on the NASDAQ, with complacency pervading ideas of sustainable extensions. It's also the case markets ignored 'negative divergences' in big-caps once again; preparatory to this key (and probably failing) upside flailing run. It isn't fair to suggest we dispute bullish fundamentals; in fact we argued this thrust of a friendly monetary policy by the Fed when few others did during the crucial 2001-'02 timeframe. It hasn't changed; but an excess of those joining the chorus of celebrants 'now realizing' this five-year-plus old fiscal philosophy has developed, is what needs correcting. So that's the point here; we're not secular bearish; just desire a correction. Issues continue including oil, terror; the whole Middle East, Korea, and economics. As assessed for a couple weeks, extended rebounds were showing just exhaustion syndromes, and now without interpretation or forecast, increasingly negative action. Overall continue to think major Senior Indexes ideally reverse anytime; considerably so maybe; especially if we rebound only to reverse in the wake of Fed 'Hill' testimony. Wednesday bounced immediately because the Chairman's testimony allowed it to by validating the 'Goldilocks' prospects (in theory); but if the argument holds or not, this activity may merely set-the-stage for renewed downside (as ingerletter.com outlines). Again it is not that we disagree about the longer-term (we concur); it's the shorter-run that is so extended that historically not having correction is inherently dangerous. It's preferable that the adjustment occur sooner rather than later, for a bullish longer-term healthy condition to prevail. All the 'terrific' discussion about Fed policy or inflationary moderations are irrelevant if the international situation collapses, or the market does; for which there is precedent, irrespective of the prevalence of an optimistic unanimity. As a matter of historical note it's only when everyone's 'already in', because optimism reigns supreme, that matters can be 'rocked' by events other than a market valentine. Enjoy the evening, Gene Gene Inger, Publisher ~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com) ~Gene Inger’s MarketCast™ (Intraday audio updates emphasizing S&P futures and market action)