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[TTHQ Staff]

Gene Inger's Daily Briefing. . . . for Wednesday, February 28, 2007: Good evening; The 'Year of the Pig' . . . was a more appropriate designation than most -Chinese at least- likely realized; though in big-cap stocks there was some of that 'pork' in the US. In the American steak-eating tradition; 'beefing-up' portfolios was our euphemism for defensive action to protect against a possibility, and we thought perceived probability, of something against-the-grain of general perceptions about liquidity, buy-out actions, or momentum overcoming concerns about a pricey market. We saw historical lunacy as almost hilarity akin to 'rearranging the Titanic's deckchairs', as cheerleaders just failed miserably in recognizing or acknowledging excess, and instead sold one stock already overpriced, for another, which if not terribly overpriced, had no attractiveness. The accompanying Volatility Index essentially reflects everything we've talked about in recent weeks, and why ingerletter.com showed this a couple weeks ago in-respect to our view of volatility being unsustainable at persisting low levels. Audio comments for tonight are brief; because tonight's text is key. One day does not a market make; though our persistent recent warnings were more than vindicated; as all yearly gains evaporated; the prospect of which was enhanced by virtue of unadjusted durations. MarketCast (intraday audio-email) comments suggested those porkers were right on the cusp of being roasted on a market 'spit', for their failing to perceive how well-done price levels already were. As to the perceived 'plus' of money sloshing around; well of course ingerletter.com members know our view of that…it's a negative not positive at this point, and forestalls many investors coming-to-grips with the inevitable reality. It's not unlikely they make a 'hail Mary' effort to employ that liquidity; ahh.. but then what? Tonight's Daily Briefing . . . first of all will not engage in the 'blame game' many others are promulgating. We'd gone an almost-historic time without a reasonable correction. Yours truly has more aggressively engaged -candidly sharing- ideas about shorting, Put buying, and basic defensive procedures, increasingly in the most recent days that led-up to this non-surprising specifically anticipated keyhole exit market decline. We think the discussion of 'mechanical glitches' later in the day borders on a 'spin' rather than a candid assessment of overseas action; hedge issues; commodity compression prospects; or even something as basic as domestic Durable Goods orders; or even a despicable failure to reflect on the implications of the growing Afghanistan / Pakistan War (we did not inadvertently mention that latter), which we do note they managed to forget most of these underlying daily contributors during the spate of evolving purges. Of course the Fed will come forth to reassure everyone about liquidity. Don't they do that always? Of course people will be confident about a 'Plunge Protection Team' that will magically appear if needed (and we believe .. must reserve this suspicion). It may also be true at the same time, that decline this sharp don't end with a single 3% or so shot to the downside after such an unreconstructed excessive preceding advance. At the same time, internally this decline began as stated, about 10 days ago in mid-Feb. This has less to do with 'fear'; little to do with protagonists of globalism; of prosperity or faith in the U.S. (we retain that too); or any efforts at building complacency versus just watching the market, which will convey the messages (as we outlined). What we did (and we put in more hours to drive-home our perspective of building risk over the last couple weeks than we'd like based on normal life activity) was emphasize 'selling opportunity', that actually were passing in the biggest of big-cap tech stocks, about a week behind the projected peaks in the biggest of big financial stocks (in a related matter, those would not be the first issues I'd .. again reserved for ingerletter.com). Of course we'll get to emphasizing the next buying opportunity (timing remark reserved). Another issue is the idea about quality big-cap growth that most money managers for all practical purposes view as what 'patient' investors should 'retreat' to. Au contraire we say, and said rather precisely just the other day, in anticipation of further reverses (yes, for a week or more we've made the point that the internal top was behind, not at all something yet-ahead for the stock market in that particular cycle); that momentum, and easy liquidity, were problematic, and causing a false perception kind of logic for a perpetuated move up, that we believed had essentially already transpired (more). Our cynicism about this 'generation' moving into instead of out-of big-cap stock, when it was entirely evident that there was no 'great value' nor fundamental rational for new buying, played right into the hands of those 'distributing' stock to the unwashed hands (whether knowingly or unwittingly) as a top was churned out. It was a grind, but since it lasted as long as it did, the risk of a greater carnage as many tried subsequently for a 'keyhole exit', is exactly the kind of chaotic exodus we have warned about all month now. And we also noted that none of the big-cap stocks we deliberately sold early-on in a persistent year (for the most visible Senior Averages) were higher than our sales. That in itself was emphasizing the concentration of active interest and capital into the narrower-and-narrower scope of stocks, while 'so-called' experienced traders publicly told investors not only not to worry, but merely shift into other stocks temporarily. Our point wasn't to criticize anyone's opinion, but to question how experience would make a 'wise' trader or investor chase price, even if nominal gains were yet to be seen. Just made no sense to us; and obviously a 'keyhole-exit' argument was 'right on'; witness the herd trying to get through the door after the sheep-herders had likely left the field. Daily action . . . goes way beyond stock prices becoming too 'rich too quickly'. Really they didn't do so particularly quickly, but did do so persistently. There was no relative parabolic spike above-trend like we'd seen in the past (or China saw in recent weeks, as we warned at the time, preceding the recent catharsis) but there is something else that drives this, and will continue we suspect to drive this, beyond simplistic answers. That might include a hoodwinking of investors by shoving (offloading) mortgage debt into their coffers, by virtue of the sub-prime warning even Chairman Greenspan once mentioned (probably not more than once, if anyone 'in power' heard him say that and questioned why he was leveling with investors). Basically 'hedge funds' purchased a lot, if not the bulk, of secondary mortgage market paper, and placed it with investors. What this suggests is that not only did the tightened lending standards (we've spoken to that all year; incredible that Freddie Mac only moved belatedly now on some of it) I advocated for well over a year, and the sub-prime issue becoming systemic (sorry we didn't mean to address next month's story just yet); but it's inconceivable this doesn't have an impact on housing and even commercial real estate, as 'wealth perceptions' are sobered dramatically, if and in places where, they haven't happened yet (we tried to warn and did, persistently in the last couple weeks). Can this become a contagion? Many say 'nothing changed', and that 'bear markets don't start this way'. We'll accept a part of that. (Sorry to visitors; we work hard, and welcome you at IngerLetter.com). Liquidity can vanish or go to 'money heaven' faster than one can (reserved). We will have lists of names we are interested in (you know some already); but not more, yet. Too orderly decline for our tastes (yes; irrespective of a 3 pm ET perceived insanity); though in cyclical corrections within a secular bull, it's acceptable. There is something to be learned from this: they're holding back from rushing to the 'keyhole exit', and that means we probably see morning bounces continued sold for now; with another 'press' to the downside thereafter. For most money managers who haven't seen this before; well, where's a boss? No supervising adult? Prepare for a new career, when the dust settles. There always need be someone around a corner who has been here before; who knows what these things look like; and is not just apologetic or blaming it on 'artificial' factors, as excuses for not knowing what to do (more at ingerletter.com). Stop blaming, it was overdue; and mechanicals didn't trigger it! Talk about naiveté. Yes, there is some debate amongst NYSE officials about an accelerated decline; but while academic (and we don't entirely know the answer to today's mechanics around the issue aside thinking it was 'less abnormal' than generally suggested, as programs seemed to hit when certain collars ended), we think there's a point worth mentioning. That is: nobody is fretting or worrying lots. Everyone (including the sage international analysts or money managers) are mostly saying this was an 'equity event', but not a 'consumer or economic event'. They think one can't impact the other? Nonsense! Pick your poison if you like; but markets tend to anticipate and telegraph concerns of note. Yes; markets have anticipated 'recessions' and so on that never occur. Policies are not entirely the heart of what happens; psychology can be a part of it. There may be a 'feedback loop' (we'll reserve it). Then there's noted ETF hedge concentration. That our markets are institutionally driven, rather than retail-driven (proponents tend to view that as reflecting the so-called unsophisticated nature of the investor class), is seen as a palliative for investors here, at least for now. That's fine, if it's true. But we'll side with investors, to opine that it's not entirely true. Hence we think that's an 'effete' attitude tending to suggest the Chinese were stupid enough to mortgage their homes to buy stocks; an approach Americans presumably would never take. Also that tends to presuppose no ratcheting of 'hurt' via homeowner and consumer fears. I think it's a given that a treadmill of fear can tend to have a 'multiplier effect' upon such issues. These may only be known under duress than evolves from the initiation days ago (it's not something that began today; people just think it began today; as was most visible of course), and as transpires. However, the effete point can't be underestimated, just in it's own right. That's because a so-called 'wise' institutional concentration is just the ticket for the kind of keyhole exodus we predicted, as Tuesday partially (more). Finally 'signs of the times' may be the valiant effort (which we see as a disservice to investors, unless they happen to be right, which we doubt) to keep investors calm. It's the way they always handle breaks from steep uncorrected perpetuated advances. In our view the time-tested rule is (about the next morning's weakness). If more than a mild adjustment; things may rebound (and will rebound) periodically, but when/if they fail and for the second or third time (more) take-out the initial lows, risk of a plunge of serious magnitude (prospects outlined). Oh since we argue that little is changed to be 'different this time', and as profits probably peaked (despite protests in this zone); we ask if the unreconstructed remember another detail: there's an inverted yield curve. This is a financial event perceived not likely to 'contaminate' the market psychology at all; here or in China. That's the 'party line'. We demur; though would be delighted if it were correct. The prosperity boom, we concur, isn't over long-term (need not be we'd say; though that will only be known in hindsight); but that isn't a sign to jump into the stock market whole hog here (unless one wishes to join those on that barbeque spit). Do not fight the Fed. Do not fight antigrowth regulatory threats from a China Nation that has little idea, or less experience, about regulating markets or investor behavior. It is China that can, more so than ever in history, have impacts beyond their borders. On our Treasuries; on our Trade Balance; on our normally-domestic-centric interest rates that should continue (as hopefully will) come down, but may be massaged if it is in-absence of the international 'support' (further discussion reserved for members). China may take procedural effort to slow-down their economy at meetings next week and the market is in-part focusing on that too. And that effects their Treasury portfolio holdings, or intended purchases, in theory. Instead of Goldilocks versus the 'bear', we ought to be studying the porridge, in-part with it a litmus test of what is or isn't toxic. Glitches are irrelevant in the overall scope of NYSE trading. Prices were lower; ticket sales could not be kept up with; and this wasn't a meltdown of computers, but likely a fairly logical (if not seen in recent times) 'flood of orders' following renewed trading as (reserved) rules eased. We will find out what the NYSE says ('glitches'); but that's not the point. The prices were real; markets do not and should not go straight up with no adjustment. So if longer (we must reserve this for ingerletter.com members; join us). A vertical cliff decline . . . was dismissed by the accelerating surge .. not world-end, of course; but again they don't get it. When 'trading restrictions' kick-in, you get what we used to call 'pink tickets' (sell-orders) queuing-up to pepper the market with sale orders when the market (essentially reopens) such that it accepts normal 'order flow'. A move comparable to the 1987 decline would drop the Dow Industrials probably by something like 2000 points peak-to-trough; (comparison and prospects reserved). When it clears some (and that will become visible; partially from manners we'll note in ingerletter.com remarks), and partially from our proprietary work that hasn't caught all markets in the last 38 years of this; but the vast majority of meaningful shifts; of which this is one of them), we'll do our best to indicate a return to big-cap value. This may in advance we say.. be early or late; but for the moment we'd be suspect of those trying to 'blame' Tuesday's follow-on decline on 'mechanics' or the whims of broken NYSE computer systems. Maybe they should look at fundamentals, including peaking profit cycles for big-caps, rather than pretending that momentum and liquidity is the end-all. And as for perceived weakness of the Dollar helping stocks it's balderdash. Given all the risks in Asia, and spreading to a less-than-stable EU, guess what they want; $$$. That was not the causal factor of this decline; nor the stack-up of orders pending any mechanical trading restriction. We think (while 'wishing' the best to everyone always) that commentators who think they are helping investors by soothing their comments, are actually helping perpetuate the overall duration of the decline. How so? Because investors will not have sold in one fell-swoop, and there will be stages of selling vs. a single broadside. If one were shrewd, rather than engaged in gibberish intended just to keep investors 'in the big-cap game' by trying to convince them something 'broke', as if otherwise it wouldn't have happened; is it inviting a greater 'China Syndrome' ? We won't say that type of meltdown is essential; but is it enhanced by nonsense over the financial markets suggesting something broke? Even if it did (balance reserved). Finally… if we had to guess where the huge selling came from later in the session, if not (as we suspect most likely) the rather orthodox and expected 'pink-ticket pileup', it could be a 'hedge fund' in trouble; as we first alluded to (reserved ETF remark too). The point: immense liquidity, and the arrogance it promotes, can vanish rapidly if the perception arises that holders will sell whatever then can sell; not necessarily what a manager might want to sell. That might (from a different angle) be not only why Gold was down not up, but why the pundits focus on the 'greatness' and qualifications of a new breed of managers (oh; does that mean they all think the same way, thus might take everyone into the abyss with equal deliberation?).. beware when they argue that a reason for complacency, or buying financials (in particular) is because of the guys.. This time was not expected to be different. This time is not different. There will be lots of efforts to rebound. Some will be real; some will be tradable. (Balance is reserved.) Yesterday we mentioned again that investors intent on pressing the upside might find that they get a 'brass ring', at best, and not a golden one. At worst they will find their perception of stocks simply in a continuous uptrend, or encased in a 'gilded cage', is a total misread of what now is occurring. Distribution hasn't occurred much even after Tuesday's hit; which either means worrying is wrong, or conversely, something quite direr faces markets, in the directional shift, beyond a one-day-wonder sort of decline. I found it slightly ironic some of the same technically-oriented types who'd chided our 'extreme bullishness' from 2002 (during weakness as we accumulated big techs), all the way through our forecasts year-after-year for accidents to be 'on the upside', are now the same types very critical of our persistent recent projection for 'adjustments' within the 'secular bull' as not only due, but overdue at this point (was melting slowly, like Al Gore's glaciers, but nevertheless occurring as we had already noted ahead of this), to an extent hard to define precisely, but transitioning, whether confronts reality or not. In that respect like 'global warming' no choice but grapple with. More melting? 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. McClellan Oscillator finds NYSE 'Mac' shuffling with intervening bull-bear fights that more recently are at -42 for the NYSE; and -00- on the NASDAQ, with complacency pervading ideas of sustainable extensions. It's also the case markets (reserved). Issues continue including oil, terror; China, Pakistan, all the 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. We might add dubious confidence about liquidity and momentum. Beware clueless arrogance: there is nothing in the charts to suggest (reserved). Do I believe that's what they did on the first wave down prior to a secondary test in 1987 and also in .. ahem.. 1929? Too bad we can't have a survey to see if those guys will put their personal money (rather than your money or mine) where permabull mouths are. They wouldn't buy on alternating shuffles that we called a major low in 2002; and they wouldn't sell what we called a major top in early 2000. Here they're suddenly so much more educated, erudite and suave, that somehow they know thoroughly about the future? Personally we'd doubt it. And we wouldn't imply that 'this time is different'. It's likely not. An absence of buyers; besides a reflex rebound 'squaring' is a warning. (What comes next -even an inside day- before the next phase, is for our members.) 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)