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[TTHQ Staff]

Gene Inger's Daily Briefing. . . . for Wednesday, December 20, 2006:

Good evening;

Markets and society . . . generally seem unprepared for disaster(s). Rather than just the simplistic view (because the event in Thailand was in-isolation vs. world currency concerns) of the market 'absorbing in stride' the Thaibhat overnight story, what might be gleaned relates to how any cracks in the Goldilocks story can have a quick impact on markets. Derivatives risks are what come to mind, as we've mentioned lately, per the remarks about certain exposures of 'normally conservative' American banks too. (I won't even venture into discussing the latest Fannie Mae concerns, at least now.)

You bet; what happened to Thailand has 'nadda' to do with the banking concerns, as discussed, and has mostly something to do with an inept military regime in Thailand, that took over (with the King's purported blessings at the time), but without what may pass for an understanding about Parliamentary processes or how ruling via decree(s) might work domestically, but not when it calls attention to foreign financial investors, or sources such as banks, which certainly don't respond to dictatorial proclamations.

The significance of what is solely a regional international story is that it highlights how extended the Asian, European and certainly American Senior Market Averages are in a day which initially radiated negatively worldwide, before being caught domestically. This to us wasn't surprising, despite overriding concerns about the extended market. As to why; that's easy: this was an expected Tuesday turnaround prospect anyway, so it was suspected and projected that intraweek traders would attempt to mount a comeback, mostly as a trading move irrespective of what might be implied (beyond).

However what it can be is a sobering reminder of the risks of 'contagion'. It's not just a great story about 'market discipline' as portrayed (though of course it is daily basis); but a reminder that the semi-fanatic, and sometimes frenetic, globalist investments or trend toward moving money overseas, is not without certain risks. In that regard, this is a sobering reminder, though by a naïve military regime that's already backpedaling from their move, (more as discussed at ingerletter.com and we won't be sending the PPT -Plunge Protection Team- everywhere of course, even if it becomes needed).

A key may come (based on noted parameters); though yearend crosscurrents are of course very tough to divine (and will continue almost irrespective of the S&P or DJIA weekly action. Again, notice the NASDAQ and NDX were non-participants, for the most part, in the comeback, often reflective of concentrated efforts to 'save' or defer any issues related to the macro concerns about the biggest-cap Senior Averages.

We might even mention that had the market viewed the Thai situation as 'real', what might have happened would have been a surge in the Dollar, as international types would quickly be reminded of certain stabilities that exist financially on this side of the pond, which don't elsewhere, or at least in many places. That's also why Iran's 'order' to stop doing contracts in Greenbacks, but only in Euro's, is not likely to garner much of a following; especially since the French (did you hear that one?) are contemplating moving away from the Euro (what a shock; Paris changing it's mind; explored a bit).

Daily action . . . takes note of something else too: a minor Mt. St. Helen's eruption. There is no such thing as earthquake or volcano weather (coming after the big storm that just ravaged the region with downed trees and vast power outages), aside what's rarely noted: the planetary alignments concurrent with lunar tides, that if you consider that 'weather', do have some historic association with a propensity for earthquakes, in that the pressures (and eruptions) on the planet's plates are (thusly) often effected.

While not at all concerned about that marketwise (reserved remark), we're concerned that the Country continues (regionally or Nationally) not to react particularly swiftly to emergencies like storms, earthquakes, volcanic and/or other natural disasters. We're not sure what could reference 'Homeland Security' as a false sense of security, if the response is almost non-existent aside TV coverage (reserved). Thus we tend to still retain back-of-the-mind concern about local first responders having enormous weight on their shoulders if something truly horrific were to occur, like another enemy attack.

Billions spent but very little to show for it in terms of a reformed modernized approach to responses, and still all they talk about is the auctioning of analog TV bandwidth as we go to HDTV digital transmissions by mandate in 2009; freeing it up for emergency services uses. That's fine, but the irony is even that is beyond the original date, which was determined prior to the 9/11 attacks. And then we hear that only 6 out of 1000 in our Baghdad Embassy speak fluent Arabic. Why are we not surprised? Curious what the cursory most fluent language was among the Embassy staffers? (Reserved.)

Seriously (although that was), we suspect the game is ongoing; to defer strategic or a really essential military modernization so as to fund more 'boots on the ground' which by most estimates of the Generals including former Sec'y. Powell, won't be a solution to the issue. They are doing one thing belatedly right: the recall of the Iraqi Army from disbanding; albeit about 3 years tardy. Since they are mostly Sunni, that might help a highly corrupt Army, Police and Government there, to clean itself up of death squads and so on. Hopefully this isn't too late, but there is no excuse for taking this long to do what was done in every war since the Spanish-American War; and that is change the mantra and philosophy of the Army and Police, but don't un-employ armed men with some moral high-ground that expects the unfed not to return to bite the feeding hand.

We think that strategy typifies what's been wrong with the war-effort: tactics based on what the leadership 'wants' to believe is going to happen, rather than what might. The better approach might be what is called 'hoping for the best, while preparing for worst' case alternatives, which you of course desire to avoid. Put differently; it's almost like a prenuptial agreement: you don't expect to get divorced before you're married, but in case it happens, you'd like to have an idea what might be involved in that process.

So it may be with the stock market; the majority are finally bullish (fine by us after four years of calling for basically unbridled optimism), but are they a bit concerned about what happens if they're wrong? Are they unprepared for anything coming 'out-of-the-blue' (since they are unprepared anything will be addressed thusly I suspect) to derail the market's advance, which they will then say was 'entirely' unexpected?

That's how it will probably go; as the presumption is they just throw more money at the market and prevent a correction. That can be done, particularly this time of year. So, if and as that continues to be the predilection (until or unless it stops working for more than a couple hours, and that time is basically meandering in this area we are thinking), because they know 'seasonal reinvestment' money is out there; well, that's an excuse for complacency, not a logic for new investment. So while fund managers will indeed embrace that philosophy, we suggest individuals understand that, but not be swept-up in that psychology. That means 'value' is not the awful alternative that is portrayed by the institutional-beholden crowd in the financial venues; it's just that they aren't interested (yet; they will be) because at the moment they need their big-caps to work into yearend, and frankly (or mostly) potentially care about nothing or little else. Also, it has absolutely nothing to do with absorbing international news or war politics; it has to do with their performance and 'mark to the market' goals; probably little else.

MarketCast (intraday audio-email) comments have observed the divergences; a slew of derivative issues; and the dangerously low Volatility along with toppy Transports (almost an evolving 'head & shoulders' potential; is that conceivable and ignored by a whole bunch of Street technicians..wow..how could they miss that 'lest they desire to) as well as candidly observing the Thai story wasn't a 'real' international currency sort of crisis (though could be a preview of coming attractions for down-the-road a bit).

It remains that the market is due for -shall we say- something other than a persistent lethargy and complacency after such a long time of low volatility; and while very hard to quantify, the international and extended price situations are rife to shake things up, though timing it can see risk manifesting itself anytime; though most likely in January. (ingerletter.com seeks not a lump of coal on the holiday mantle; just being realistic as the upside play is essentially behind, rather than ahead, for the preceding trend while not requiring changed expectations with respect to prospects over the ensuing year).

Finally; if nothing else this market is stressed; and the Tuesday comeback was timid. The liquidity saga we have related (as well as the idea that the Fed was not about to encourage a breaking stock market at the same time as a declining housing market, as it is despite stories to the contrary), is valid, but derivative leveraged techniques at some of the banking institutions is seen by us as potentially negative, because with a few normally restrained fiduciaries now on-board the Goldilocks bandwagon (more). Sure, we think the Fed fostered some of this (probably why M3 isn't reported), and is doing exactly the reflating (pumping liquidity into the system) as we anticipated and correctly gauged starting in 2002, before the lows. And this is basically a heads-up in relation to the next meaningful move see likely for the big-caps, rather than whether or not the market goes up or down from one day to the next, especially into yearend.

The pundits continue to champion 'getting in ahead of' technology developments, and we don't disagree. But for companies that are announcing things at CES coming up it is either in the stocks by the time CES starts (as outlined further to members). It is of interest to us from a bullish side of the ledger, because some are working lower; but we're not in a rush noting how CES can be anticlimactic, and some Q4 results are likely to be miserable; and not just because of more retailers or wholesales dividing the pie (which is the typical explanation given, with some validity, for the poor sales at this holiday time; though our continuing anecdotal information suggests people aren't forsaking their usual favorable vendor for another, but simply spending less money in total, which is not the story being circulated by the mainstream press except in a few honest instances featuring reporting about the echoes in the halls of the malls). We're exaggerating only slightly to make a point; retailing and tech sales are generally soft. So 'on-sale' prices of such stocks eventually may mean buy; but generally (reserved).

A year ago, and particularly four years ago, many thought our optimism was absurd and nothing could cobble markets back together. Now they (even same individuals) think nothing can hurt this market, that they view as impervious to risk or attack. We respectfully disagree. New members who think we're particularly bears or something, let me reiterate: back in 2002 we were almost alone in calling for a multiyear upward saga; every report this year has noted near the end that no truly-restrictive monetary policy was anticipated; and that's still the case. In the Mansfield Blue Ribbon Panel survey they reminded me that of the 15 or so analysts and money managers (mostly institutional), I was the only one calling for 12,500 plus finish for the Dow Industrials at new highs in 2006 (in a late '05 survey we participated in, as we have enjoyed for many years). Now of course we may or may not make that; but exact numbers aren't important or the point. The point is we were the most bullish a year ago of everyone; and we are increasingly less so now; at least pending an impending price adjustment.

We can't prove the idea that money 'sloshing' around is trying to achieve just the goal of holding this together through yearend; but it makes sense. We assess divergences or focus on certain big-caps at the same time certain quarters in the financial world are particularly mum about a few areas showing fissures in universally bullish stories about those sectors. That makes us a bit concerned, while in a sense reinforcing suspicions that what in the past couple weeks has been going on is near the end of something; not the (short-term) start. And that's whether (pattern prospect reserved).

Overdue 'correction' aside, this is a market that is still overplayed by a slew of money managers, trying (in our view) to 'make their own game' into yearend. We see prices higher in the long-term, providing the world doesn't really fall-apart; provided a likely evolving series of liquidity declines aren't precipitous draw-downs; and provided it isn't shown that the economy is doing something other than 'advertised', such as the retail numbers as are increasingly suspect (actually we're pretty sure they're a crock, as noted for the past week and the new data coming in increasingly is supporting us).

At this point there's excess liquidity that contributed to propelling the markets higher just because 'they' can (in order to make goals), rather than based on a fundamental logic related to corporate realities. And we think the vulnerability increases with each failing rally, of which another modest effort was forecast to manifest itself after early Tuesday downside follow-through efforts. We got that so tomorrow may be up-dip-up with some increasing uncertainly particularly in the final couple (reserved).

Summary: market conditions potentially present a risky big-cap 'keyhole exit' should anything occur causing fund or hedge boys to attempt (comments reserved). This is a tough situation with a perceived rosy scenario domestically, against deteriorating world backdrops. Maybe it will be absorbed anyway; though I suspect an accident isn't impossible; but it might be borderline. If markets hold together more or less in-entirety into early January; that's actually a more (reserved for members).

Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection.

Broadwing (BWNG); Intel (INTC); Texas Instruments (TXN) Motorola (MOT); plus Microsoft (MSFT); InkSure (INKS); Essex Corporation (KEYW); Ionatron (IOTN); PURE Bioscience (PURE); QPC Lasers (QPCI); and LightPath (LPTH), the latest addition to the small group we monitor, are commented upon in accompanying audio.

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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.

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Members please note: we have no association with any publicly traded firm (never have had; never will), other than as shareholders, while trading from time to time as deemed necessary for personal reasons; especially once initial targets are reached. We may be right or wrong on a stock, but are not financial PR or IR, and have never, and will never, been compensated by a company, or their representatives, directly or indirectly, for coverage. Our opinions may be valid or invalid, but reflect our own view.

Comments are interpretative speculative postulations, provided 'as is with all faults', and all risks, with no assurance about future performance of anything (markets or for stocks) in any way whatsoever. Personal necessity, irrespective of opinion on stocks, may periodically require buys or sells deemed appropriate or required, without notice.

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.

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 (this comment has been withheld other than for our members, in every Daily Briefing throughout the year).

McClellan Oscillator finds NY 'Mac' vacillating in an evolving retreat: -90; NASDAQ sluggish at -31; defensive patterns amidst a complacency; irrespective of daily highs.

Issues continue including oil, terror; the whole Middle East, Korea, and economics. Since hope springs eternal this market has rallied beyond the breakdown point once again; we got concerned of durability of such extensions; tentative easing evolving. If it holds together via an intraweek rally; we'll be suspicious of the longevity (more). So in reality: this remains an extended rebound market risking exhaustion syndromes.

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)