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[TTHQ Staff]

Gene Inger's Daily Briefing. . . . for Thursday, March 3, 2005: Good Evening; Is a moment of truth at hand? Some technicians may spot that prospect now, but in our view we know what the resolution ought to be. Based on numerous factors that are long-term in nature (and we mean months and years, not decades where clearly the outlook becomes cloudier, as it always does), we think the resolution is higher, at least for now. Yes, we hear all the time from permabears or natural naysayers, who somehow grab at any straws for periodic excuses for a horrendous decline. This time they have nothing of a fundamental nature to really argue (even the Chair of the Fed retracted his concern about foreign holders of Dollar-denominated assets; a conclusion we proffered last week, and properly so), so they grapple with deflection action (which we expected) in the March S&P, and somehow interpolate that as new signs of a major top, or top of a bear market rally. We strongly think it's not so simple. Sure, they can (and that's correct) argue that monthly work has (after-the-fact since it is more of a 'lag') turned-down slightly, and that shorter-term work is overbought. Well so what; taken alone. It was in 2003 throughout that year; during which our forecasts were for most market accidents to be on the upside, not the downside. Last year was anticipated to be more volatile, as it was, with a 2nd half rally that ran into a brick wall of resistance early in 2005, and it did. Continuation of forecasts was for market lows to come-in during late January, extend up into February, retreat and then rally anew. It has done that (occasionally drifting from ideal marks, but never by much, as action for the most part closely adhered to our ideals for the actions in both directions) quite well, and the backdrop for the market is actually improving, not deteriorating. So we'll not succumb to urgings to turn-turtle on this market. Bears will point to 'blow-up's' in a few stocks, but those are stock specific and not market general and historically occur when the rug is pulled-out from any single-product stock in any overall environment, as noted the other day. They argue that retracement from the 2002 low for the Dow Industrials or S&P is about all you can get; and we say.. sure, if you want remaining arguments at all for a bearish case, though we don't concur (reserved for members). That's because, time and fundamentals, are both far enough from the debacle that of course occurred in 2000-2002 (initiating per forecast, concluding per expectations, at the same time as the pain in the midst of that was worse that about anyone thought, with the ramifications of 9-11 having more to do with it that is recalled by 'experts' at this point in time)… that we have argued (and have consistently since the Fall of '02), that this is not the same cycle. To be a major bear, you have to believe that this is all just a rebound in that same old cycle. We say no it's not. The world has changed. It's not 'different this time'; just a new cycle. That means that the bagholders of 2002 were the sellers, and they bemoan that by being bearish now (as typically they have been all the way up), because they realize that if we 'pop the highs' here or soon, it's a 'confirmation' in a sense that the next intermediate upward move is continuing. It's not that something traumatic couldn't break the market, or something terrific spike it (more for ingerletter.com readers). Because it's a new cycle, there are inconsequential holders of securities waiting for a 'break even and get out' match of previous highs (or anything like that), given that the washout in 2001 and earlier-to-mid 2002 was pretty thorough. In fact risk capital has been so enamored of perceived equity risk, that it's gone into real estate (more). The follow-the-leader types are happy leveraging leveraged housing investments (that's not a typo; they often borrow on already mortgaged property to pyramid that game, and whether such continues to work or not, it's dangerous; especially given that real estate has never had the liquidity of equity markets). Oh sure, nobody wants to hear this, anymore than they did our warnings in 1999 and early 2000 that upside moves in equities were totally unsustainable; or later drops down in 2002 unsustainable too. Slightly comforting, real estate for the most part isn't the stock market, and a majority of the housing stock (homes not condos) are usually owner-occupied, not speculative vehicles like so much of the condo market. Who knows, maybe it will just settle-down gently, via slower absorption (already visible as we've forewarned in major 'hot' areas of the Country), and given that part of this virtuous cycle features relatively low rates of interest in our forecast, there's no reason to presume T-Bonds have to (reserved). As frequently observed here, the foregoing is key to this. It's why we have compared the era more to (another timeframe). If so we don't have to think in terms of 'average duration' bull markets of the modern past as many analysts dote upon (reserved). Daily action . . . does tie right into this, because a potential moment-of-truth is here. A lack of 'will' on the part of bulls could erode the prospects very short-term, or ideally they will take the bull by the horns and thrust it over the fence for upside confirmation. (ingerletter.com readers know our thoughts our confirmations and handling thereof). Now of course there are flies that could tickle the bull's belly (perish the thought). For sure a systemic 'mess' occasioned by a string of hedge fund failures might contribute to problems; though not likely in the equity arena. Most of the hedge types crowded-into the bearish side of the Dollar as the decline was ending (as we forewarned) and likely got crunched somewhat. Their pain was possibly exacerbated if they also went short T-Bonds or Notes, because their play (which was not a hedge at all) probably anticipated much higher intermediate-to-long rates and a softer Greenback, neither of which was likely (in our view). Now you probably will have a firmer Dollar continuing in the (reserved), and Treasuries will (reserved) as rates meander higher (more). We know bears are fond of arguing that bonds are 'risk without much return', and that is essentially a valid statement of the current dormant rate climate (best case for the Nation by the way). Hedge managers are essentially greedy (greed is good, but in a sense it's an excessive speculative environment for some, because compensations are typically a percentage of profits for hedge managers, and if there are no profits..) .. so some hedge boys take chances on going for homeruns in the bond market, or currency market, where no homeruns have been available. If leveraged it's worse. Because so many are momentum players, they were (that's what we meant when we said a 'crowding in') probably mostly overstaying on the bearish side of the Dollar, or pressing the downside of T-Bonds, which ultimately occurs, but without any rush or pressure, and that's the kind of procedural evolution that makes for a bullish cycle in the economy, while concurrently precipitating a time of shallow gains for those trying to make games where none really exist (or worse, they're just on the wrong side of a trade). So while it's impossible to tell how many hedge funds are positioned inversely to realities in the marketplace, it is an area that can spook markets generally, if this is too wide a specter, than a couple Florida hedge funds caught nearly totally depleted. And of course there are those major bond funds thought wrongheaded for years…. Today MarketCasts (intraday audio-emails) maintained a generally bullish bias to the stock market, including allowance for some hesitation ahead of another Greenspeak session (this time to the House Budget Committee), and pullbacks after the testimony related 'relief' rally during the Q&A or immediately thereafter, prior to another bounce. For now, we think March S&P's regroup (barring more news such as we noted) and tries again; with the third overall effort (reserved). If repulsed again, but without any severe repercussions that's o.k. too (next week's projection reserved). Last evening, we spoke to renewal and later extensions of markets to higher highs as outlined, but also something far more significant in terms of how the entire Century may be perceived, or at least contemplated. Analyst and money managers absolutely (in my view) have not factored this possibility into thinking about what could underpin a super-bull, so we shared the thoughts. Touched on just periodically for over a year, with guarded optimism; it is something that increasingly looks (interesting). Certainly, on a short-term basis, there has been no 'indecision pattern' in markets of late, nor was what some saw as that expected to become such. Rather, it was a rousing rally in late January and early February, leading to a normal corrective wave in later February (per the expectations, and in-harmony with a bullish construction we would think any experienced technician should have identified, though many didn't for reasons that are elusive to us, but irrelevant), and then a planned upside resumption. The little 'indecision' here shy of the old highs is normal projected deflections (more). What is that best case? How about the resurgence of a 'pax Americana'. Or at least a suspicion something like that is feasible. Nobody sees it.. we've never (and forgive us if we've missed something) read that, and is merely a thought lurking in my mind based on perceptions that the world is increasingly on the mend. That may provoke terrorists and naysayers (yes, we'll lump them just a bit together), who for one reason or another, do not honor our brave fighting folks by virtue of criticizing everything or anything, even when matters actually go quite well. Are we on the cusp of a new era? (Some comments reserved or abridged.) So the world suffered decades of upheaval and theocracy, as well as spoiled monarchies and oligarchies that were a throwback to (varied) European rule, that overall were counterproductive to popular government. Libyans threw-out the Italian-backed King Idris; but got a Gaddafi. The Egyptians got Nasser and what followed, instead of King Faruk. Persians got ayatollahs; while the Iraqis got a regime dominated by Baathists, who were basically Nazis (an historical fact); while Saudis endured an entrenched monarchy which committed the tragic sin of trying to buy-off opponents, by exporting vile versions of Islam, brainwashing many millions of Moslems (setting the stage for these tremendous challenges of our time). The outcome? The West finally (led by the United States and grudgingly a few others brave enough to see the handwriting on the wall if this isn't done) took a lead that the people of the region have been unable to accomplish; doing for them similar to what the French did for us over 200 years ago (speaking of ironies). We saw in Iraq tinges of democracy (which few believe can erupt in the region; maybe so but we suspect otherwise), and now we see it in open defiance of Syrian demagogy in 'the Lebanon'. Lebanon may become the 800-lb guerrilla of a new regional enlightenment. Combine hostility average Iraqis apparently are starting to feel as regards daily horrors brought by 'insurgents', and what you have are 'hints' that the populace is starting to actually 'get it' over there. As broad populations start to at least 'get it' (as far as concepts of individual rights or representative government to an extent), there may be a backlash not towards us, but toward the Islamist enemies of modernity, and it could snowball into a watershed trend remaking the Islamic world in a favorable world for everyone. What does this mean? It could be an historic shift; empowering people really for the first time in the Arab world, and bringing-down barriers and antagonisms of an earlier era (if all goes well). If it does, the United States, not France or the Russians, will be remembered for this great accomplishment or for the stimulation and sacrifice. While the current war may have started with lots of stumbling and inappropriate assertions, the outcome, may not be judged so harshly by history, as so many incorrectly think. If that's the case, despite the disappointing education levels among America's youth, and lots of other issues, the United States would be tremendously elevated among a host of countries; the politicians who decried this effort as it transformed into a really worthy challenge (presuming the first rationale and commitment was diffuse), would be shamed, and George Bush would (stumbling and bumbling along the way or not), would probably become known as … believe it or not … actually a great President. Equally, or more importantly from a stock market perspective, we'd have to presume the above is not factored into the market at current price levels. (Oil, Dollar and ideal goals for the Dow Industrials and S&P are reserved for ingerletter.com members.) The power of the 'bully pulpit' is amazing, and George Bush may have called this one right (even if he made missteps before). Finally the youth who are media savvy are at this point able to contemplate why so many Americans (other than to defend oil; part of it of course) are fighting with such determination. Finally the old order resembles the terrorists and insurgents, not the other way around. We think we see increasing light at the end of a tunnel, and this time it's not an incoming rocket or mortar attack. Of course we could be wrong, or we could be right, but it could take much longer than we'd like to come to fruition. How hard will old orders fight to maintain power, and how much damage will the terrorists cause with their crusade to topple that order, merely to take the reigns of power for themselves? (Balance of thoughts reserved.) Elsewhere. . . in any event, we thought Tuesday's drug-fiasco pressed wild biotechs less dramatically than protagonists involved, while the psychology never changed (it is necessary to reserve comments on specifics). An example; years ago we followed ICOS (ICOS), having picked it at a very low price, and commenting after approval, that the game at that point was played (doesn't mean can't go higher, but nobody's surprised). A different field; last year we thought Taser (TASR) was overpriced given the controversy, and at some point a potential short-side winner for speculators. That took a while, but sure was. Conversely something like Ionatron (IOTN) was less than a rank speculation, because it had a determined (although classified) technology and was not a household name among speculators (still isn't, balance reserved). So, no, we don't think February was an 'indecision pattern'; rather it was exhaustion, completion and reversal of the preceding month's correction, with an occasional bout of consolidation during the month, and a general upward bias for the majority of it. To us that is about as constructive as the pattern could or should have been that rapidly. After all, we only wanted the market to move higher in the first half, and then digest the gains with some erratic pullback in the second half, prior to setting-off for higher highs thereafter in March (late winter/early spring). (The overall pattern call follows.) Concurrently, while closely watching interesting events, risks and assorted domestic issues, we must not shirk from monitoring the rest of the world situation as well. Yes, saboteurs, infiltrators, and 5th columnists are still operating in the U.S. and we remain concerned about the implications of al Qaeda European activity, which quietly yielded higher alerts, and having seen nothing to ease security concerns in this regard here. It should be noted that domestic discussion of 'terrorist cells' operating in the U.S. is a topic of conversation recently in some quarters; so we suspected it was a tip-off that enemy activity had been newly detected, or that a sweep of domestic vermin may be likely. So far, the Virginia guy alleged to conspire against the President; plans found of a contemplated attack (by Islamist cells in Spain) against Grand Central Station in New York, and of a British Arab under arrest in London, pending extradition for trying to set-up a terrorist training camp in .. Arizona. What's ongoing in the Middle East is unchartered territory of course, but nevertheless fascinating to watch unfold. It's also a time when radicals, theocrats and terrorists can be most dangerous, as if they sense the handwriting on the wall, and that it may be for them that the 'bell tolls'…this week we expounded a bit on this fascinating subject. Bits & Bytes… notes mixed action in lots of issues; Texas Instruments (TXN) and Motorola (MOT) as well as Essex (KEYW) are mentioned. Intel (INTC) and now the news from Microsoft (MSFT) triggered a little interest there. Broadwing (BWNG) is basically mixed, while Ionatron (IOTN) rose overall amidst ongoing volatility. 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 concerns retreat from absorbing us. Though few generally concur (interestingly the Fed does), our view has been slow but persistent American growth isn't negative, as it allows protracted gradual growth without ancillary significant high interest rate pressures (slightly higher over time; but not high). There's not a truly-restrictive monetary policy; nor is there likely to be one employed over time, irrespective of energy-induced inflationary pressures that can't be addressed simply; but (as suspected) may again be tempered by price drops later. As to flies in the bullish alternative continuing; in our view, it's realization terror matrix issue continues, with challenges ahead, and as attacks and various difficulties show. Ongoing earthquake temblors increasing in bunches across much of the West; not to mention Arizona; sort of southeast of Flagstaff today. Most are dispersed along the San Andreas fault; some randomly noted in Washington or Alaska. Little noticed: a high 'alert' stage continues at the Mt. St. Helen's volcano since increases in activity a couple months back, and there are new small California swarms east of San Diego; all of this follows a recent heavy shaker in Mexico's Gulf of California. We think we're near a transit point, and the majority of investors aren't enthused. If all goes well, we'll see some jockeying, and then a revived rally, but it may falter ahead of Friday's well-watched data. If that data's not too robust, we may see (more). Enjoy the evening, Gene Gene Inger, Publisher