The Inger Letter 'The Eye of the Storm?'

Gene Inger's Daily Briefing. . . . for Monday, July 10, 2006:

Rumors of emergency meetings . . . by China's monetary authority, didn't sway the already-nervous market in the U.S. on Friday, after celebrating the tentative victory of the 'conservative' candidate by narrow margin in Mexico helping preceding action. As to the well-awaited Employment Report on Friday, it did not buttress optimism as so many expected, but was not so negative as many interpreted. That's because what's overlooked is the 'quality' of the jobs responsible for the 'wage increases', not volume of those jobs. If one asks if inflation continues; of course it does, but not as response to what was reported, or as relates to 'stagflation' (though that's a risk we denoted, oh about three months ago, in describing our then-forecast 'Summer of Discontent).

All year we've been underweighted in big technology, like Nasdaq 100 (NDX) stocks reflect, and looking for this unanimity of negativity to set-up an entry for the first time in years (since the Fall of 2002); although as noted all year long, we'd of course have lots of patience in anticipation affirmation of the nadir of such selling that we called to start late last year and early this year, with a conclusion (as ingerletter.com outlines), or as may transpire later this year for varying reasons.

MarketCast (intraday audio-email) comments thought the alternating moves of risky markets would be interrupted by a late June / early (to mid) July rebound effort; then a renewal of downside efforts (how low depends on variables we've outlined) that as it evolves may be short-circuited by such events as Oil cracking, for any reason at all.

The Mexican Bolsa and Peso rallies had more to do with domestic markets than very nervous responses to the North Korean missile launch provocations, as illegal and for sure disconcerting, they were. An ultimatum midday Friday by their UN Ambassador, certainly made it tougher for comebacks in the Dow Industrials or S&P to hold water then; so with no compelling reason for traders to 'press their luck' Friday, they stood at least somewhat detached, if not merely avoiding stocks, going into the weekend.

This 'indifference' was an absence of bids that probably returns (at least temporarily) as outlined, so if there's a Chinese revaluation (doubtful at the moment; but not later) or simply an increase in the 'rating' of their 'paper', we could see first the second, and then the first, which means that between now and Elections in the U.S. (as forecast in the past here) the Chinese Yuan probably gets revalued, and the liquidity erosion we have outlined for two months, starting in the Middle East (yes, the Saudi market was the first to 'crash', though it has hardly yet been reported) and then steadily spreading to reductions in liquidity through Asia and much of the rest of the Asian subcontinent, might abate. Interesting question: will there be a flood of liquidity pre-U.S. elections?

We also expressed concern about the Chinese banking system, and believed that at least some of the pressure (and preceding Gold rally) was caused by Iran redirecting funds out of Dollar and EU-based investments, and probably into Gold or diamonds for that matter. (And that move was largely assessed as completed, not just starting, as Gold got to 700, as ingerletter.com members will recall.) For now we're looking for an increase in Chinese rates, which may negatively effect Dollar/Yen too, and after it is out of the way you might see the set-up for another rebound in Dollar-denominated assets, including U.S. Stocks. While we don't want to see Dollar-erosion, that might be exactly how we get a rebound in many multinational Dow-type component issues.

As to North Korea, sure; it was partially an issue this week, but not the overwhelming focus that for universal 'blame' by the financial press. Nor were alternating shuffles in the past week primarily just 'pauses to refresh' after an upward Monday, but related more to perceptions that the political environment South of the Border is more like a half-empty glass than the one thought half-full prematurely. In our view a 'victory' (as they say) of Calderon suggests monetary stability, less threat to NAFTA, and the end of this ridiculous idea that Latins will vote for anyone anti-U.S. It might be recalled we opined that Peru already dispatched that idea, as did Equador and Chile, and as did failure of a recent Chevez-led effort to undermine politics of Venezuela's neighbors.

In extended audio comments tonight, a 'technical corner' gander at 'weekly basis' chart patterns is provided; outlining prospects for a number of Indexes and issues. It will be interesting to see whether some of these issues galvanize in a way that denies the 'other side of the storm' from being as ferocious as is so commonly anticipated. If they don't galvanize, then there is an argument for even stronger squalls; but is that a common forecast that gets just a bit carried away with next-leg downside potential?

Daily action . . . realizes our views on the market or individual stocks aren't carved-in-stone, as the answers may not be known for several more months. We'll for sure keep abreast of this during July and August; though clearly in the case of major Index plays; the overall top was as forecast in late April / early May, with a trading bottom just a couple weeks back, with necessary upward interlude movements, as outlined regularly on a daily-basis. The Employment Report retreat (which wasn't primarily on the back of that, as ingerletter.com members know), may turnout to be a bit a short-term issue. However, don't be surprised to see further rallying efforts later next week, irrespective of all the fretting about the risk matrix, first outlined by us back in April, and which continues generally inline with the schedule.

What this leaves us is a pattern such as seen; the Spring top, a forecast plunge from the 1300's of the September S&P, a stabilization, a rebound, some horsing around with an upward bias just ahead of a Fed Meeting; another rally phase, with duration subject to evaluation as it unfolds (into Quarter-end, and early-mid July potentially as well), and then we'll see if the overall backdrop (internationally too) allows for more in terms of rebound (less likely) or resumption of the other side of a storm (more likely).

Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of major technology issues (as needed for assessment of general factors in techs overall, or as compelling developments may call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks merit further reflection. Most everything tonight via audio comments; other than as noted below.

Broadwing (BWNG); Intel (INTC); Texas Instruments (TXN) Motorola (MOT); plus
Microsoft (MSFT); Advanced Photonix (API); InkSure (INKS); Essex Corporation (KEYW); Ionatron (IOTN); PURE Bioscience (PURE); and QPC Lasers (QPCI) are commented upon. Refer to prior reports for in-depth QPC Lasers reviews. A special assessment of current prospects for Texas Instruments is forthcoming tomorrow.
Ionatron may become caught-up in rumors swirling of negotiating DoD agreements; though nothing is confirmed nor addressed that we're aware of as of now; so we can't say whether anything's forthcoming (additional comments). Technical action is well-positioned for further gain should anything favorable be forthcoming, as the pattern between roughly 6.50-7 we'd say is a consolidation prior to potential breakouts. A lift over 7 could gather steam. In the meantime, the late shakeout (retraced partially) on Friday was on light volume, which looked like more 'playing' by shorts or sellers than anything else. Let's consider that if a vast majority of shares are solidly held by long-term investors, funds or others (including insiders), that are reasonably intractable positions for now, and if we presume the remaining float is merely about 4-5 million shares, well then, the interesting consideration, should anything pertinent transpire, would be what is to happen should 10 million shorts try to buy 4-5 million total float? Naked short-sales can't be estimated, but what happens if that somehow artificially bloated apparent ('virtual') float? Don't know but suspect (reserved for members).
QPC Lasers (QPCI) may also be a player in the low, mid, and high-power laser area, that we wrote about (as relates to various Directed Energy Weapons or technologies under development). While price behavior for this quite-new public company is rather speculative, to an extent this is not an unknown, with regard to their solid-state lasers that they've developed. It was of-interest that they'd recently received a key DARPA (Defense Advanced Project Research Agency) award, related (balance for members)

PURE Bioscience (PURE) seems to be on-hold pending the initial distribution run as anticipated by their Enviroguard partner to occur soon (that's the Tommy Thompson group, and he sits on their Board as well). While we remain less focused on how it is done (whether gratis or for-charge) on the trial run, we are interested to see this be implemented, essentially inline with intentions outlined (balance for members). Much of that will depend on efforts by CIBA Speciality Chemicals, who is in-charge of most marketing to distribute the anti-pathogenic concentrate to big household name firms.

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We can't answer detailed questions for you (how could we; companies release what they will when they do; ditto for the Departments of Defense or Homeland Security); but these are topics previously explored as part of our assessment of advanced tech stocks; notably for key reasons: we view Directed Energy Weapons and all related or sector products, of any 'pure play' or high-power solid-state laser-related companies, as new potentially important 'disruptive technologies' to benefit the U.S. defense; they're important as anything else able to shift the world into 21st Century technology.

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 adjust to the hurricane recoveries and other emerging issues.

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 oil-induced inflationary pressures. This is a continuing saga. Often we get a speculative phase later in a bull market, but increasingly towards the end of an overall rising phase. In our view, there has not been that degree of speculation, but that is a potential feature developing let us suggest somewhere in the years ahead, maybe late 2007-2009, barring disaster.

McClellan Oscillator finds NY 'Mac' currently around NY at +101; NASDAQ at +6.

After some chop early in the new week, we anticipate a guarded effort to advance the market to higher levels at least temporarily, with downside goals (support if preferred) as well as upside prospects (including resistance) as accompanying audio outlines.

Have a great trading week!

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)