Inger Letter 'Is Chicken Little Actually Right?'

Gene Inger's Daily Briefing. . . . for Thursday, September 22, 2005:

Good Evening;

An omen . . . to an already weary Gulf Coast striking fears of another 'storm-surge' into the market 'mix', and as we noted all week, have theoretical potential to trigger renewed 'market purges', as or if Hurricane Rita makes her way this ominously in that direction (of the Texas Gulf coast where the 'crown jewels' of U.S. oil production are located). Of course it caused selling pressure, but I have views on what happens (even in a worst-case scenario) differing a bit from conventional wisdom, so we shall comment on that (in our special audio remarks accompanying tonight's text report).

Also little noticed, were renewed 'strikes and riots' in Nigeria, conceivably threatening oil production there if not brought under control quickly. As to Texas, a storm moving right up the Houston Ship Channel would be surely devastating, making the politically expedient generosity to rebuilding New Orleans seem overly grandiose gestures; if it now becomes necessary to contribute to rebuilding the Port of the 4th largest US city.

As you are doubtless aware by now, the most prolific oil platforms and concentrations of refineries are to the East of Houston, though not exclusively so. Therefore there is going to be a modicum of damage, but the extensiveness from (now) Category 5 Rita is going to depend upon whether or not the 'cane can thread the needle between the areas. To wit; as outlined days ago here, we wish our members in Corpus Christi the best (especially selfless physicians we know in the area); but if they take the brunt of the storm, it's to the betterment of the oil industry as well as the economic prospects for the United States going forward (it looks like Rita will go further East tragically).

Galveston has a different issue; because it's largely built on a 'barrier island', which unlike the Mississippi coast (more reserved for ingerletter.com). So, Texas is better protected, is above sea level, and only Galveston Island (with seawall nevertheless) is built right on-top of a barrier island, and could be taken-out if the 100 year old 'wall' doesn't hold. (Note that updated information again confirms what we'd thought at the onset of Katrina in New Orleans; the flood walls were broken, but the much-maligned levees did not fail, and water actually didn't even overflow the levees as such; it was the seawall or floodwalls in Industrial Canals that gave way. In the future, automating 'locks' that keep the water from the Gulf out of the Lake could address the situation. Texas has no such risk. Texas is better prepared; communications or organizational structures are by far superior to those of Louisiana before Katrina (more).

So, the point is, it will be what it will be; but we would not panic. We would not have a slew of unnecessary new evacuees from New Orleans heading West (wrong way) for sure, but North and East (towards Florida, which is the safest for now), unnecessarily putting more demands on authorities and relief personnel. We also would not infer all the worst about market prospects (though we discussed some of those risks just last evening, with respect to what happens if the 'worst case' scenario were to develop (of course that's the storm going right up the Houston Ship Channel; flooding Houston in a miserable way). We note certain broad-market technical indicators look ominous for now. For sure they do; because buyers are typically scarce in-front of obvious 'event risk', so nobody feels any urgency to buy, so incremental selling takes stocks down.

That creates an impression of an 'air pocket' under here (more at ingerletter.com). In the audio comments that accompany these remarks, I'll touch on why a very common presumed outcome for oil stocks may not be exactly as cheerleading high oil pundits proclaim. Certainly some would prosper, but others wouldn't, as the audio discusses.

Daily action . . . notes it's all about Rita for now. Interpretations of the Fed's decision aren't relevant; nobody cares if the Fed gave a sign of confidence (they did) by virtue of hiking rates, or not. In a hundred years there have been 30 hurricanes hitting more or less the Galveston area. None have been this severe as far as we can determine (if it maintained a Category 5 strength to landfall, which may drop to a Cat 4 first). As to the economics; it's simple: Galveston cannot survive an 18 foot storm surge; even with its seawall. But, from a National economic (and hence recessionary) potential as this evolves, it's the Beaumont, Port Arthur, Saint Charles (LA) and of course right in the Galveston area; plus the Texas City and Baytown refiners that are large and key. Areas primarily to the East have more offshore platforms; fewer exist heading West.

MarketCast (intraday audio-email comments) and these Daily Briefings already did outline earlier this week what this could mean both short-term and longer-term to the market and, of course, Oil prices. While providing intraday December S&P guideline observations, we have in a sense suspended the importance of trying to scale these intraday movements pending the strike of the storm (as outlined at ingerletter.com).

All along we have suggested these 'instant hurricanes' borne in the Western Atlantic weren't going to be particularly devastating to Florida and more a risk to the Gulf, but with a probability of this storm moving more Southwest of Houston due to a lingering high (if that high yields even modestly it's the difference between absorption and very significant economic risks that would take quite some time to recover from). Maybe it will require more serious varied assessments, as we'll address in the days ahead.

We may also denote that certain of the major refiners in East Texas have pointed out relative resistance to flooding and surges; first of all most are not directly on the Gulf itself, but in just a ibt. Second, they have built their own flood/seawalls that many in Louisiana did not have. Third, their natural elevations are slightly higher as well. Of course that doesn't mean they could survive a 'Cat 5' hit directly (more discussion). Also, there have never even been two 'Cat 4' storms to hit the Gulf in the same year.

There are certain 'hints' generated by some technical work that have historic potential of a short-term negative nature (we say that because all 'crashes' and 'crashetts' tend to precede wonderful buying points), and we think the fundamental concerns we've of course expressed tonight and in the last couple days, explain why the technicals now are giving off unpleasant 'vibes'. At the moment it's merely an absence of buying, and maybe (by some smarter or nervous traders)..balance (reserved for ingerletter.com).

As to technical indicators, any washout on a major 'strike' would take both daily and weekly work to oversold, almost instantly. Trouble is; if it's so bad that the market will be in position to (only our members will understand what we mean by terminology in this case). On the other hand, by nature those are very rare, and just the appearance of risk here doesn't make something like that a probability.

Frankly, because the mainstream techs were no longer bargain-basement priced for a few months, and the real opportunity was way back in the fall of 2002 as outlined, we focused on 'special situation' issues that wouldn't necessarily be impervious to a general psychological exodus, but would come back probably as quickly, because of the realization that they have little if anything to do with how many cars are sold, the fortunes of discount retailers (mostly with jobs supported in Asia, not America, which recovery from storms absolutely supports), or profitability of oil companies, airlines or the like. In essence, besides unusual potential, such (mostly undiscovered uncovered as of yet by the Street) stocks probably have potentially less hurricane-related violent volatility to contend with than do the macro old-line big economy or retailing issues.

As to a kindly old technical wag (hey; I almost resemble that remark) suggesting that this market looks like a 'Hindenberg Omen'; we can only suspect the reference is to Rita, as being the 'disaster coming from the sky' (we do give that an 'A' for creativity).

Of course the market could 'crash and burn' if Rita messes up everything, but we're of a suspicion it won't go that way, and that if it did, while we'd have dislocations here at home, and rationing or limiting of gasoline availability; it could all lead to a variation of a 'new deal' following 'this bad deal', as a sober Administration realizes they can't overspend on Iraqi reconstruction, also try to rebuild New Orleans 'as it was' and take on the costs of South/East Texas as well. With damage so vast as to provoke serious reevaluations of insurability and insurance capabilities, not to mention how a slew of 'lenders eyes' are opened at the thought of 'flood insurance' not covering their loan amounts on properties, or at least the dwellings (land is never covered per se), it is already likely that Katrina has dictated how the South will be rebuilt (more inland in all areas where there are not proper barrier islands or seawalls, or as contemplated). If Rita floods Houston; well, obviously there will be a big-time insurance coverage fight (which came first; chicken or egg, ie: flood, or the winds causing the flood of course).

Rita will be the budget-buster decision-maker, and that's going to be quite sobering. It will also contribute to realizing, that global warming or not, the ice caps are melting; it is a fact that tides are rising naturally due to the foregoing, and the seas are warming (not cooling as some thought with the polar caps collapsing). The combination we are thinking takes care of itself in some basic ways; insurance costs along unprotected beaches will either be at prohibitive costs or totally unavailable over several years. Or instead of having 'hurricane riders', they will have hurricane waivers; covering normal homeowners things, but neither flood or windstorm damage. If that occurs, nobody in their right mind outside of millionaires willing to pay cash and self-insure, will build on the beaches. Or there may be policies available for those who do it right (elevated on pilings, so the sea and floods can flow-freely under the first level unimpeded). If the homeowner rebuilds to that extent, he may find coverage (impact glass becomes a must; and older homes either get refitted or have new systems which apply coatings to windows so that they not only won't shatter to the point of letting wind in, but clean themselves… more on that, as a small-cap stock speculation, down the road maybe).

In the meantime, be calm, realistic, not leveraged (unless familiar with pitfalls and all risks), and focus more on the actual outcome of the storm, rather than 'omens' and/or 'fishhook patterns', which we concur have the aura of potentially looking negative, but we also suspect that's because of a total absence of interest on the big-cap buy-side for now. (Unless you're in a story stock, with a story pending, what's the rush to buy?)

In the meantime, remember that plunges and purges in September and/or October in most cases are opportunities to buy, not times to respond emotionally and to sell. All through history, including after the 'crash of 1929', such purges were actually handled best by doing the opposite of what faced investors in their news reports; using all the associated (post-event) weakness for positioning into stocks, not getting out of them.

Are there bearish alternatives? Sure, but they don't relate to interest rates, the FOMC or OPEC which also met and did little but offer surplus production (if any), or even to hurricane Rita's ominous potential. It is more dire; as they relate to risks of 'bird flu' moving from Asia to other nations over there, and then across to ocean to over here. So far it's not a pandemic in Asia, as yet, but may become that. New Indonesian cases were reported yesterday, as we pointed-out risks of an outbreak are vast, as the interplay between humans and animals and fowl is much greater than in the Western world. Of course not to mention such things as (reserved for members).
Unfortunately we are obligated to tell you that just late today Indonesia has declared an epidemic of Bird Flu, and has 'sacked' (fired, not bagged) their health director for mishandling the crisis. They are stockpiling an emergency 'anti-viral' horde, and they are pointing out that most cases are occurring to people living in proximity to ducks and chickens; the same situation talked about that some thought politically incorrect, which is nonsensically irrelevant at times like this. Few countries would be prepared for a mass outbreak, especially not in the developing economies (more follows).
Later this year we think stock markets will actually accelerate even more dramatically as fund managers increasingly try craving-out a niche of net gains for the entire year providing we survive (economically) Rita, and Hitchcock's 'birds' don't attack us, yet. Eventually folks will start to absorb the reality of what happens to leveraged housing investments when prices come down, and if they don't plummet, which they probably won't because of the pressure to keep rates reasonable and the changed occupancy of so many cities (which may even be broadened after this week), we may simply get a 'balancing' of assets a bit better between financial holdings and property retention, and that could be good for American family diversification overall.

Bits & Bytes . . . last week provided investors in Ionatron (IOTN) a variation of some of the possibilities that could evolve from this ongoing 'chess game' involving what at that point again became an increasingly 'wild' stock. The main fundamental thrusts as loom 'just ahead' (ideally) for now, were discussed; included reflections of 'nuanced' information in our view, from the Roth Conference, that we suspected reflected signs of increased military or international, plus commercial interest in JIN or LIPC, not lessened US interest. Last Wednesday we reviewed 'Five C's' (as I dubbed it), and again call new readers attention to that, as well as the two preceding nights reviewing various thoughts about all of this. Most interesting each day are that attempts to sell-off Ionatron more or less got nowhere, which as in our intraday comments this past week noted, was in our view likely to be followed by late rallies (more for members).

In any case, it's already an excellent gain for us from the original pick at 2, and even more interesting for those caught-up in this summer's correction, by virtue of our very forthright decision to augment positions (as stated that day) at the 6.50 level. We also shared the view for short-sellers that such a washout under 7 was their last chance in our view to capitalize on their brief success; but apparently few listened, as shorts are seemingly mostly still aboard, with now significant and building losses, virtually daily. It's helpful actually, as awareness on Wall Street and short-covering, is a prescription to (potentially) get this (reserved price target objectives), and then we'll see.

Elsewhere: commens on InkSure (INKS), Essex (KEYW), Texas Instruments (TXN), Motorola (MOT), Intel (INTC) and Advanced Photonix (API).

If you do quote excerpts of our remarks anywhere on the internet, please respect our work; as we request mentioning it came from www.ingerletter.com . At the same time, please realize sending or even posting our entire Daily to another investor isn't fair at all, to us or our members, and is discouraged, unless done rarely only, so as to help enlighten an investor as to our work (and that courtesy we graciously appreciate).

Members please note: we have no association with IOTN or any other publicly traded firm (never have had), other than as shareholders of course. Yours truly remains an Ionatron shareholder throughout coverage timeframes, as regularly noted. Comments are interpretative speculative postulations, provided 'as is with all faults', and all risks, with no assurance about future performance of anything, in any way, whatsoever.

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 awakening to terror threats grows, real domestic concerns absorb us almost entirely, adjusting to the hurricane’s aftermath, the important 'chain of command' changes, and now Rita, which is historically strong and threatening.

McClellan Oscillator finds NY 'Mac' oscillating currently; NY -98 today; NASDAQ neutral; presently -20. The 'Summation Index' has a wider separation of postings to the downside, which historically are breakaway moves that signify a 'buyer's strike' to us (in this case). This is where the term 'fishhook' can come from; though since we're tending to interject what's behind the buyer's strike (the hurricane threat), we reserve simply becoming bearish because of an extrapolation by the chart (though interesting of course). Should Rita strike the key areas of concern, we suspect this will turn back to the upside, with oil cratering, irrespective of any 'fishhook' (the fish that got away, as it would become an empty indicator in that respect). If Rita devastates the Coast, and production doesn't fast recover, then the hook will have caught a very big fish.

Issues continue including oil, terror; of course Iraq; recovery from the hurricane, and future 'Rita' events. Terror threats continue, and while barbarians have a history of attacking where and when not expected, there is a new 'quiet' again reportedly in the internet Islamist chattering, so we have to remain on-guard now, and probably through Ramadan, starting Oct. 5th.

As to flies in the bullish alternative continuing; in our view, it's realization terror matrix issues continue, with challenges ahead, and as attacks and various difficulties show. Ongoing earthquake temblors continuing in lighter bunches across much of the West, including Southern California and Alaska, while more concern about instant hurricane risk from the Atlantic increasing, as Rita moves into Gulf-attack poise later this week.

At this hour, the S&P is off about 150 in nervous anticipation of a growing Rita risk of (perceived) new National disaster in the 'crown jewels' of Gulf Oil producing areas.
Enjoy the evening,

Gene

Gene Inger,
Publisher

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