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[TTHQ Staff]

Gene Inger's Daily Briefing. . . . for Monday, July 17, 2006:

Reverse dominos . . . could be the theoretically ideal goal for Western Civilization, if one wants to characterize the optimum outcome of what so many people think is just another dispute in the ever-volatile Middle East. Consider for example what happens, if Iran doesn't enter the fray, Syria remains contained, and Hezbollah is pushed-back.

Or, consider what happens (and what's implied) if even the United Nations, by some miracle, is actually able to compel Lebanon to enforce a UN Resolution calling for the deployment of troops along their southern border, thus redeploying terrorists north.

If this sounds too wild consider the daunting alternatives. Conflicts produce casualties no doubt, but democracies don't typically challenge their neighbors militarily. Well this crisis has occurred because (just like occurred with Nazi, fascist or rarely communist electoral successes) the naïve mass of people (typically in a fragmented multi-party sort of situation in a country) allow the demagogues, such as terrorists or extremists, to become part of an electric parliament or coalition government. They historically do tend to rue-the-day that occurred, but nevertheless it occasionally occurred.

Over the years such coalitions have events occur (whether it's the Reichstag burning, or just a for-instance, the takeover of government in Gaza by Hamas from the none-too-kind preceding Fatah elements) that become defining moments when the elected supposedly former (newly legitimized) terrorists or extremists overtake a society, and often invoke something other than the constitutional rights under which they actually were elected. Then citizens of such a country learn that just because you 'bring in' a group to an electoral process, doesn't mean that's not just a 'means to an end' later, as the communists and fascists repeatedly have shown the world. We're thinking just a bit not only about European history (which many Europeans too often easily forget, it seems), but places like Venezuela, or certainly Gaza and Lebanon, where enemies of the state, actually used the state's processes, to come-into a position of influence.

(Places like Iran or Cuba were different, as those were flat-out violent revolutions and in the examples we gave the 'free' dominos fell because people thought of evil-doer's as somehow changed, because they 'consented' to be in an election rather than just in a mood to continue killing people, including anyone in a society that opposed them as we saw for-instance via assassination of Lebanon's former decent Prime Minister.)

Here is a situation that could be capable, if successful, of reversing the dominos. So do we think the United States (and any intelligent civilized society, which by the way, in this situation, includes Jordan, Turkey, Egypt, Kuwait, or possibly even moderating Saudi Arabian thinking) is 'green-lighting' an Israeli response to unprovoked attacks so as to show the world that Hezballah and other terror groups aren't omnipresent, or that Iran isn't able to (yet, which is another discussion as to the risk of waiting for their nuclear capabilities and then risk being drawn-into a conflict) support their surrogates to the extent the masses in the pro-Islamist world expect? Yes we think that's a goal.

It may even be why Iran and Hezballah ratcheted-up the rhetoric today, by not only a chilling claim to be able to fire missiles into Central Israel (Haifa and Tel Aviv areas of course, and which by the way the Israeli Chief of Staff acknowledged they could; just another reason to amplify how the terrorists and rogue states took advantage of what were total withdrawals from Lebanon and Gaza by Israel, which terrorists are using to their advantage), but also suggesting that (as Hezbollah said late today) they could in the course of events attack Israel's nuclear facilities, raining radiation on the region to last hundreds of years.

Well, if that isn't enough reason to see the dangerous threat of such groups, what is?

Islamic extremists would 'martyr' everyone to accede to their goals; Christians, Jews, Moslems; just everyone. Hezballah today sounded as crazy as Iran's President (well, it's the same management) or al Qaeda (hmm… could this all be tied together?) or of the Moslem Brotherhood (most dangerous of all, though it's hard to imagine worse). It is the case that the Hezballah barbarian actually said 'he would leave the Middle East with radioactive fallout for hundreds of years'. We don't think he referenced Israel's A-Bomb stock (that they've never acknowledged of course but thankfully have if needed in a worst-case scenario), but believe he meant nuclear power plants. Precisely what is intended to be protected by advanced Directed Energy Weaponry like LIPC or any similar technology. But nobody has that yet (do they?).

If nothing else; these long-range missile attacks on Israel (which the pro-Islamist silly Europeans engaged in appeasement consider worthy of only 'proportional' response) are proof-positive that Israel is justified in having a security zone around it's borders. I realize that when intermediate missiles are arrayed and fired from afar (say Syria or of course Iran itself) there is no choice but to retaliate strategically. That's what this is about, plus showing the mostly-normal (wealthy or poor) people in the region that the enemies of humanity residing in Teheran and their surrogates, aren't going to control the future of their lives. That may disarm Hezballah (hopefully destroy it as a fighting force permanently) and be as important as the Israeli attack on Saddam's reaction so many years ago (cheered by normal humans; criticized by left-wingers, until Iraq did the invasion of Kuwait, at which point everyone said 'thank God Israel struck it then').

It may also deter the aggressive designs of Shiites in Iraq, and promote democracies in the region. In the meantime risk-aversion continues in a miserable seasonal time; a time when we were looking for (turns out to be an understatement) overall a 'Summer of Discontent', with a down-up-down pattern starting from late April / early May. But in the long-run if Israel is successful, or especially if Iran fires anything or tries blocking the Straits of Hormuz, you'll see the destruction or neutering of the Mullahs, and over time a probable revolution of the true Persians in Iran, eliminating the theocracy. That might be why Iran is said to be talking tough but telling Hezballah to stop already, lest 'Armageddon' occur before Teheran is really ready to take the world into the abyss.

Daily action . . . suspects that a 'reverse domino' effect would be the optimum bullish alternative for the markets, and combined with high Oil prices during the crisis, and a firm T-Bond market, will co-habitat with a gentler Federal Reserve with even a partial cessation of housing pressure (not there yet, but without any 10% mortgages coming from this), amidst a softer consumer environment, which will cause surfacing worries about things slowing down too much, rather than an inflationary-pull the Fed has any sort of influence on.

So sure, it's a cyclical bear within a secular bull (our opinion), and inline with what for any purposes our call for this Summer. We've speculated a little in special situations; have avoided big-cap techs like in the Semiconductor Index (SOX) or Nasdaq 100 (NDX), since selling-out in late 2005 and the first moments of 2006 (shares bought in 2002, not since; including our warnings that these big-cap techs would tank big-time), along with an avoidance of multinational Dow Industrial types, in favor of domestic-centric stocks, on a limited basis. Now, as prices are purged, we get more interested. But we don't want to jump the gun; after all, the crisis could evolve unfavorably, or we could find that North Korea 'loaned' Iran nukes. Hard to tell. Stay tuned, as we're very inclined to have our finger on the 'buy trigger', should an event evaporate prices very traumatically during the course of the Summer and Fall, as suspected all year long.

MarketCast (intraday audio-email) comments expected generally a sloppy session, ahead for Friday, and suspect we open on Monday in response to Sunday's coming events (just a hunch based on certain necessary measures and preparations). This is a punishing attack forthcoming against Hezballah, and if they're smart, the Syrians or the Iranians won't tangle with the Israelis. And again, we believe other neighboring or titurally hostile Arab countries, aren't; and hope Israel succeeds against the terrorists.

If so this could pave-the-way for rolling-back the dominos of theocracy and mediocrity in the region; something Israel's offered (modern irrigation, joint technology sharing a couple examples) for a generation, and only Egypt, Jordan, and Turkey engaged with (and are better of for it, as is Israel too). The United States will be behind them, so we believe will be Japan and China, and if they wise-up to the current realities, Europe.

If that happens; a huge bull market plus will be established, though seers will worry of course about the nearsighted issues (which will plague markets in an immediate term of course). And the road will partially be hoed for the big upward (or speculative) tech cycle we're projecting for 2007-2009. Not a recession the big anti-Dollar international speculators want, but something much more exciting or terrific coming for civilization.

Of course first we have to get through (and overwhelm) the forces of evil or antiquity, by which devout Islam tends to generate extremists from (more a cult than a religion). If modernity prevails, and the cultists and their missiles are disarmed, an era of peace and prosperity could come to the land, as finally people put the crutch of dependence on fanatics and hatred on the back-burner, and embrace the future, not the past. The dominos would indeed fall, as the world would be far better, for generations to come.

The devil is in the details; and that's why this could become a defining historical time amidst the hysteria of the moment. Nobody (except the fanatics) like war; however it can be said that if a war must be fought, it may as well occur before the fanatics have nukes. And we believe the radicals elsewhere, whether in the hills of Pakistan or the barren fields of North Korea, would get the message that freedom is on the march as the dominos of hatred, fear and oppression (Islamists are pure-oppression) … fade.

Incidentally; this has to succeed. Why? Saudi Arabia has issued a statement that is a very chilling one against the Hezballah. While 'cloaked' in traditional Arab rhetoric, as relates to the 'lack of coordination with major Arab states', it clearly is telling terrorists to back-off and resolve the crisis they started. If they aren't defeated in this situation it could create a price for both Riyadh and Cairo later. So it appears they are banking on Israel's success. This is a 'first', so it could be part of shaping a new Middle East, and clearly reflects something we've noted before: Arab fear of an Iranian hegemony. They finally are starting to grasp (a bit slow) that their enemy isn't Israel, but Islamism and the rising tide of Persia, masquerading as the savior of Islam, which it sure isn't.

Details:

Yesterday, we noted that Hezbollah's arsenal had obtained Iranian missiles unlike all the rockets of the past, which are guided (rather than random World War II type mere projectiles), and that's what hit Haifa. Well, the terrorist arsenal is said likely filled with even deadlier weapons. Israel believes the terrorist group "has missiles that can hit most of Israel, and which could even strike Be'er Sheva [deep in Israel's southern, Negev desert] under optimum conditions," as is noted in today's Ha'Aretz newspaper.

Note that while the Vatican condemns Israel for the assault into Lebanon (how dare a sanctimonious Rome again blame the victim), they completely omitted the years-long Iranian-supported and financed Hezbollah build-up, using more modern missiles, that for the first time bring all of Israel under threat of attack. This differs from the cold-war for instance, in that the terrorists are actually firing-off these missiles at Israeli cities. I am appalled (not that I'll tell the Pope personally on my next invitation to the Vatican), and find it 'of note' that even Saudi Arabia is now pressing Hezballah to stop what the Saudi's call an 'aggressive provocation' (not by Israel, but by Hezballah) endangering the Arab world (presumably as a result of counterattacks and reprisals). Shocking to see the Church of Rome seemingly supporting keeping people shackled to the past.

What a strange world; Saudi Arabia supports Israel (so do Jordan and Egypt, simply by virtue of not opposing by deed or even rhetoric the Israeli counter-offensive), and Greece, Italy and the Vatican oppose her self-defense efforts. Interesting indeed. Of course the Vatican did mildly criticize the terrorists too, but took the 'disproportionate' line, as did France's Chirac, which seems to be a new style of 'appeasement', urging equal devastation. To us, when a rogue group or state launches an attack, you don't just do quid-pro-quo; you respond to try to destroy an attacker, not merely exchange slaps with the terrorist. A quid-pro-quo approach would tend to amplify and lengthen, not shorten the conflict, if of course the victim (Israeli and for that matter Iraqi's and all of us who have been attacked) have ample courage or sufficient forces to prevail.

Should the situation resolve miraculously, a market trough could come earlier, but it's not a bet I'd make. Given odds, I'd suspect this 'crisis' expands rather than contracts, and I believe appeasement efforts on the part of certain European leaders to not only be pathetic, but suspect they'll come around to a clearer modern understanding of all the 'real' issues. In these situations there are never guarantees, but appeasement is most likely to get an undesired miserable outcome, than to foster movement towards an enduring peace. And we believe that's why Israel and most major Arab states are not so covertly in-favor of crossing fingers that Israel can deal terrorists a real blow.

With respect to those remarks, keep in mind we expected big techs and others likely to miss numbers this Quarter (and maybe the next), so that their shares would crater, creating opportunity in the process. Hence that is not a surprising aspect of the saga. It takes a lot of patience we realize, and it's a tough environment for speculation; we understand that, and expected that for this Summer. We also suspect that as it tends to wind-down, and the bears, or out-of-market gloomsters revel in downside action or lack of upside, that we'll find the best buy-points (especially where novel situations of course exist) will be behind. Meanwhile we continue limited engaging in speculation mostly in smaller special situations, while the forecast big-cap tech purges continue. At the same time, given clearly shaken prices, we're open-minded to earlier troughs.

Scheduled Economic News Releases (provided):

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. In light of terrorists using (Chinese design) Silkworm missiles, or probing attacks into a sovereign nation, Israel; from a sovereign nation, Lebanon; it's increasingly clear how forestalling eliminating terrorists is to free world security. It's in Moslem interests too.

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 (further discussion at ingerletter.com).

McClellan Oscillator finds NY 'Mac' currently around NY at -77; NASDAQ at -46.

Issues continue including oil, terror; Iraq; Iran; Hamasistan, Korea, and Lebanon. As to the situation in Iraq; things remain fluid. But needs for advanced weaponry to protect secured civilized areas will remain as important, or certainly in future combat engagements elsewhere. Further, advanced weaponry to eviscerate vermin without mushroom clouds, sparing harm to the majorities of people (innocents) are necessary for civilization and for the military's armamentarium. We are focused on this area now and in the future. That's partially as 'advanced defense' isn't so sensitive to consumer economics or domestic recession fears as a forecast 'Summer of Discontent' evolves.

Ideally Monday/Tuesday may see washouts and turaround tries, but these could be a bit tempered by earnings and warnings (including Intel's as forecast for many months of decline, as it works in the desired direction) though the action will likely be choppy and news-dependent, of course; sensitive to G8 world trade developments as well.

Enjoy the 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)

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