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[TTHQ Staff]

Gene Inger's Daily Briefing. . . . for Thursday, May 3, 2007: Good evening; Fictitious Capital . . . is a semi-understood term to describe creative purchasing of stocks (or other assets) that gives an 'illusion' of strength, and/or widespread buying participation as may not actually persist even though seen unstoppable at new highs. This dovetails-in with an idea that glorious celebrations about the upside's impressive duration at this point, or with breadth improving after a period of negative divergence, may actually represent crescendos (sort of upside capitulations) to the overpowering movement that's primarily been limited to big-cap stocks such as in ubiquitous ETF's. Daily action . . . notes this would also (possibly) complement what surrounds today's warning by the New York Federal Reserve about the 'risk' structure of hedge funds at this stage. This meshes with our own concerns about many of the funds 'by definition' (given the concentration of upside interest through much of this market's upside ramp particularly the recent phases) probably holding essentially similar merchandize. That in-and-of-itself (further validated by nearly identical performance rankings for the larger funds, and especially those utilizing ETF's, which of course hold identical stock positions, or at least reflect that generally) is of-concern; which may be what they are alluding to. Keep in mind, when most of the same crowd were calling for 'bear market rallying', during 2002-2003-2004-2005 and much of 2006 we were saying all accident moves would likely be to the upside not the downside. Today those crowds are totally bullish or at least structured thusly, even if a bit disingenuous about their optimism. In our view, that doesn't mean the market must top-out here; but it means that once it does, they may experience the 'closeness' they do not seek, by virtue of trying to get out (or squeeze out) of a keyhole exit. If that occurs simultaneously, the compression on the downside could readily (and rather swiftly) exceed that seen in the upside run. This is not a classic (ie: secular top) bubble yet; because speculative participation at no point has rivaled 1929, or 1987; much less 1999-2000; when we last warned of a big unsustainable parabola. However, the further it goes here, the more dangerous it gets (not less dangerous); thus any 'comfort' obtained by virtue of higher prices risks being fleeting at best, and enhancing the extent and duration of decline, at worst. In a sense, this is ideally no more than an intermediate top (if any) developing; but that it's gone so far increases the prospect that for big-cap stocks in particular (less so for the non-participating or limited participation smaller-caps that respond to domestic issues more so than the global 'spin' that has been presented to account for moves in other) areas, as well as the ETF ying-and-yang; this is a form of bubble developing. Such behavior in the annals of bubbleology, have been attributed to stocks at several times during the years we've been around, and interestingly only a couple times that we weren't (to wit: the mid-1880's and 1920's of course); with most other moves fairly gradual; thus allowing gracious entry and exit opportunities; with its primary emphasis on stocks, rather than stock markets (an era of the 1950's comes to my mind, and not because of 'uranium booms' of the times either; but a time when in my youth, a whole lot of early technology stocks, and particularly airlines, sure were trading obsessions; followed shortly thereafter by motion picture, television, and oil stocks, of course). While bullish in 1969 for slight increases in price levity, at the start of my financial TV career covering stocks and other events (but mostly stocks) in Los Angeles, warnings of impending problems seemed to rule the day; though it took time for things to 'play' out. And that was the era when a threat to 'bust-up' IBM (never truly enacted upon by the Justice Department) plunged that stock and the market rather severely (as was at the time preordained by technical behavior that we saw on the charts; not in the news of the days ahead of the 'event'). Today a similar threat towards GE falls on deaf ears or so it seems, at least to this point (will that be cited as a 'reason' after the fact of the likely market implosion that's shaping up; probably not); while 'merger mania / private equities' are all the rage. In hindsight many will wonder what they were thinking 'back when' the market blew-off back in the middle of 2007. MarketCast (audio/video chart comments intraday and embedded in our Daily) .. for sure recognizes that this moment-in-time may not turn-on-a-dime. However, this year so far our S&P guidelines have stayed short only three times overnight: a first was in late February where we caught the crest of the expected A-B-C decline prior to the anticipated rebound (as exceeded expectations overall; but was looked for); second was the other day from June S&P 1501-02, which was a homerun cover the morning after around 1487; and the third is tonight from the intentional 1504 area. This may not work at all; and we don't like 'gunning' for a top. Typically we'd prefer to see (pattern reserved for ingerletter.com members). However, our concern is that this 'creature' may have incredible ferocity when it does break, so not be that simple. With several technical analysts who aren't 'permabulls' reportedly already having turned to a bearish-bent of late, we aren't particularly surprised that a combination of the Street seeking new highs in the S&P (not yet seen; if to be on this thrust), or short-covering from those pulling the 'logical' trigger on rebounds, allowed this to evolve a bit higher. It is why we called for several upside moves in recent days, and suspected we'd still ramp further (inline with up-dip-up, rather than down, overnight calls). That doesn't at all suggest we back-off from believing this 'crests', but that it wouldn't make it easy. It is a reality that we have been essentially fully invested in specs, with buying power at the ready for future purges in big-cap tech. And with hardly an exception; none today are higher than where we sold them (one computer stock; it departed way too early). Keep in mind we may exit this overnight so-called 'position' at the drop of a hat early, or we may stay with it. The 1504 guideline short, like that in February or the other day of course; is intended to denote 'risk' quotients. And unlike the others it may not work. Either way we'll address it for MarketCast members in the morning; and review it later while nothing to everyone, that lower or higher oil; lower or higher interest rates (you know our view on the subjects); this remains an extended market short-term for now. Hourly there is a little bit of a cushion; so it will be assessed as we open up or down. We're also reflecting respect for the words of the NY Fed even as others ignore that. In summary; do you think that pundits focusing on defensive portfolios, Chinese or a smattering of French and other European stocks, is a sign about confidence here? Is it a sign of the globalized market, which the U.S. Fed can influence less than ever we know of in modern times? Is it something to sleep better about as regards markets? I suggest not letting this market stress oneself; and maybe that's easier said because I did not short a single stock all year. However, my inclination to 'insure' a bit increased as of today (into strength) but per usual that may change just hour-to-hour if needed. In recent years I projected the housing 'bubble' based on 'free money' created by an essential 'fiat' from the Federal Reserve in the wake of our forecast 2000 market tank which particularly in the wake of still largely-unanswered attacks on the United States (because the funding sources or perverse mentality, sponsoring at least a majority of the Islamist hatred was spanned by the world's largest oil power, pretending to be an ongoing U.S. friend) generating literally 'no cost' loans, has combined with profligate opportunist consumer lending policies by primarily smaller, but also larger lenders; to promulgate many unqualified naïve buyers being drawn-into-a-caldron of unchecked risk. What's the correlation with this market? That 'inflection point' still lies ahead, not behind, as some of the permabulls would have you believe regarding indexed loans. That is why we termed no/low equity buyers essentially: 'renters with debt'. That still unadressed issue, at a time when the financial community generally tells investors or consumers that the 'crisis' of subprime is past, is troubling. It's the same community telling Americans U.S. growth continues; albeit at slower rates; but not to worry since foreign countries are buying our debt, and for that matter our equities too. What if we were to say it is likely Treasury Auction behavior will shift from the liquidity injections any time? (I'll address subtle shifts with China, Sec'y. Paulson alludes to, via audio). Caveat emptor to those who buying now; be they domestic or foreign players, in what we suspect increasingly is a cruel combination hoax foisted on the American people. (This summary of our thinking finds more reflections via ingerletter.com audio/video.) Of course our main point is to address investment arenas as usually focused on. The negative divergences we have discussed of-late continue to build; and are masked in a sense by upside 'capitulation' as the S&P pops over 1500. We're almost at a sort of crescendo. A few technicians who missed internal tops of big-cap tech in late 2006 / early 2007 (in very few cases did moves extend beyond those highs) find solace now by either being bullish given the swing back up by the Averages to higher highs, or in other cases suspect the market is at a decision point based on regression (upward to an extension of the preceding rising bottoms pattern, which means higher highs that do not have increased participation of significance) analysis methodologies, contrary to the perception some technicians have that nothing can reverse this market theme. Regression analysis is not really what troubles us; as left alone, that too can and may allow for slightly higher highs, thrusting 'too pat' crowds looking for tops at particularly precise points, for a bit of a loop. In our thinking; that's simply our 'swing rule', which refutes conventional analysis somewhat; in that nothing 'seems' to make sense; and then the market goes ahead and does what it intended (which in this case would be a reversal; possibly precipitously, depending on some variables in geopolitical, volcanic -actual or financial with serious repercussions- currency, oil or even other contributing exogenous factors, which will be 'explained' as triggers later by those so bullish now). Indiscriminate purchases are generally thought to occur from foreign central bankers, or others seeking parking places for surplus capital (petrodollars or similar in Asia as a result of our trading folly, which goes beyond anything sane Presidents Nixon, and even Reagan, ever envisioned or intended). However, there's another avenue we do see; and that's ETF's, often utilized by hedge funds and other entities to provide sort of visible broad-brushstroke ways that levitate at least the market's 'appearance'. Of course they do it to make money; not merely create cosmetic beauty for markets. But it has the associated characteristic, we think, of being like makeup hiding what at this point are the market's wrinkles. And we're afraid to say this time Botox injections may already have been made, trying to pump-up (or plump-up) the sagging features. (O.k.; some prefer Juvaderm, as it conceivably has less toxicity and granularity; plus is now approved and maybe a bit harder to detect in terms of any lumpiness; but the stock market's cosmetic 'folds' may not be concealed as easily as nasolabial folds.) Cosmetically, liquidity injections (printing money essentially, or foreign purchases too) prop-up the stock market's nasolabial folds, temporarily providing better appearances for those who haven't examined a patient in detail. (You have the thrust implication.) Lest I digress: the FCB (foreign central bank) purchases, and hedge fund ETF buying essentially are (we suspect) combining to contribute to perceptions of intact rallying in the U.S. stock market. These may be (with a little short-covering thrown-in to boot) at this time the apparent mechanism by which the DJIA and to a lesser degree the S&P, have managed to move-up to an extension of the classic warning of a regression line. In sum: not an easy market to grasp; but it is not as healthy as appears at first blush. That is why I chose the discussion tonight to emphasize shall we say the 'plasticity' of it all. One of two things has to occur, if my basic premise has merit. Either stocks will catch-up with the 'superficial' appearance of the Averages, or the market will reverse. And remember, this is coming from the biggest bull from the 2002 Summer/Fall lows. 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. 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, (balance reserved for ingerletter.com). McClellan Oscillator finds NYSE 'Mac' shuffling with intervening bull-bear fights that more recently are at -15 for the NYSE and -3 on NASDAQ. Issues continue including oil, terror; China, Pakistan (possibly the key to survival for a number of aspects of the 'war on Terror'); certainly all the Middle East, Korea, and economics. As assessed for a couple weeks, watch the Dollar and Oil in all of this. The permabulls say it's not risky, because of reacceleration overseas, and that's part of the 'this time is different' ideas. So far it is, with respect to big stocks, if you believe they are reflecting the American markets, versus the global scenario. Caveat emptor. 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) Updates about 10 minutes after: the opening bell, 10 a.m. ET, noon, 3 p.m., with a nightly final issued at approximately 8 p.m. In times of volatility, an additional interim report update is frequently provided.