Gene Inger's Daily Briefing. . . . for Friday, August 10, 2007:
Good evening;
The freeze is deepening . . . and ingerletter.com members aren't at all surprised by it. The only surprise is how many pundits keep blaming everyone, 'but themselves' or Wall Street for engineering (essentially) a circumvention of established regulations on borrowing; which had the effect (per our warnings that liquidity could evaporate faster than a tornado in Brooklyn) of nullifying the spirit and intent of all Federal regulations, such as were instigated after the 'panic of 1907', and of course the 'Crash of 1929'. In a sense this is (potentially) more serious than what preceded the '87 Crash, or a little labeled crash, which we also predicted as the 1999-2000 unsustainable insanity.
Today's record volume came on the back of the (noted) historic short-interest, which I believe related to the confluence and crosscurrents of events (the French bank panic) or fear (which we have been restrained about while assessing) of the threats being I'll say far broader than going beyond the 'sub-prime' issue. The intoning permubulls are telling everyone this is overdone (overdone; they don't know the half of it) or insulting intelligence by suggesting that everyone should buy financials. Why do we hear such ideas (in particular) on a daily basis, whether the markets up or down? (redacted)
Rallies here, or pronouncements from the White House, have about as much odds of being a 'salvation' for all the financial stocks, without further declines or at least a test of the lows, even if after the forecast rebound rally, within a continuing downtrend for sure, exhausted (amazing it did stop right where we'd originally forecast, at the daily moving average). Irrespective, our point has been 'all rallies will be false and abortive' and the (redacted; duration) big downtrend will continue in force. For a period of time we've noted that the longer they pressed the 'narrow universe' rally in the Spring and Summer, the harder the market would fall, and the greater the full risk.
Daily action . . . believes that liquidity injections by the Fed do not save the day here, but actually merely buttress systemic stability. The pundits keep asking when do all of the 'fundamentals' take control. Hah! What the heck do they think is going on? Sorry to clue them in, but the fundamentals are eroding, or worse. And they say all is well. I would have more sympathy if these were youngsters, but the oldsters are saying it so they ought to know how it works. Unless of course they dubiously (public redaction).
What really happened was that 'circumvention' of regulations, laws, and ethics codes; either intentionally or coincidentally, or naively. That, and in which particular case, we of course do not know. Whether it be the rating agencies, the banks, brokers, dealers and money managers, hedge funds (some), or the at-the-margin mortgage brokers or even appraisers, there has been a sort of aura of collusion to leverage everyone in all the ways (reserved opinion). This goes way past sub-prime; as I contend anyone, for sure with a sufficient pedigree (redacted), should know. If not then do we excuse their error for ignorance, are they stupid, party-liners, or just naïve to all of it. Worse yet, do they really believe these areas somehow decline 'in isolation' to all other areas?
We predict that half of today's hedge funds (more or less) will be (redacted). We will predict people are and will be burned, and will not quickly forget what Wall Street and the mortgage industry did to them. We predict that the remaining (entities) likely, in at least some cases, completely agree with us, and are presently successful, because they too expected this. We predict that the stupid survey on Wall Street, that (in case you didn't hear) took a poll, in which they asked A-B-C-D, as to 'how long' all of this mess could continue in real estate, had the fix put in. Do know that the longest of all possibilities you could select was the end of this year. Who are they kidding..ha.
Liquidity does not (redacted). Injections and an open-discount-window is for sure a far-different animal. That's for the system; not as 'savior' for 'the boys'. We'll yet be returning to an older time (some of us remember that); when if you borrowed real money; and didn't repay it, the same banker you took the loan from came beckoning.
Today, the guy (or gal) who originated such loans, dumped that loan into the 'pool' or secondary mortgage market, and has his or her hand washed of it, could care less if problems arise; she/he got paid, and the loan is gone. Bye-bye. Don't buy. Basically, the responsibility of servicing (and collecting) had been off-loaded to someone else.
And to add insult to injury, the Street got (naively or however) the rating agencies to apply some of the highest grade quality to paper that (by definition) was barely junk.
Remember weeks ago when the Irvine firm got liquidated; NASD regulations do NOT allow firms (reserved for ingerletter.commembers). Then to avoid 'forced liquidation' (of the firm, not the investments) they have to sell what they can sell (like normal so-called 'good' stocks), to get funds. (We'd share all specifics but some may get upset; our members know precisely what we're talking about, and have for many weeks.)
Whala. That's part of the decline. And the part 'they' are not talking about. For us this is the bottom line, as we forewarned for months in determining it would be a liquidity, or 'credit crunch': Wall Street and the collusion (or coincidence) with bankers and the real estate mortgage industry, created a scenario to 'press' the longevity of 'free', or I think at the most very low cost money, by circumventing (we better redact this too).
There is no FDIC protection; there's no cushion for such investors; there are no super fundamentals for those sectors, and the joke will be if successful hedge funds rescue the banks for this round of fiascos; just the opposite of what happened after LTCM a decade earlier. Do we see anything good: sure; a few hedgers have bucks; (names must be withheld to the non-member public; not going to infer which are soundest).
We do believe however, that as this fights and struggles, and succumbs in the weeks or particularly months ahead, that it will set-up (especially in technology) the superb entry spots that we've been alluding to as promising for some time. Patience is truly a virtue in this situation, and it is what we've essentially counseled most of this year, as regards investors, versus traders. Few stocks are higher; many are lower; and a slow 'Chinese Water Torture' distribution plus decline remains very much in continuation.
Today's near 400 point Dow decline is not a washout; not a capitulation; it's orderly in terms of a 'hit'. There are more corrosive influences to be seen, or experienced, as this evolves… as to terms like 'crash'.. that is (a topic for our membership only).
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks
by every means expected erratic rebounds (relief) and alternating declines, in what's not a tricky period, except for those who are just wrong-headed or mostly uninformed.
Key credit or derivative issues are not ameliorated; though of course a 'structuring' will move toward improvements, as that is increasingly the trend, as they can't in our view be past peak impact; though many analysts argue it, naively. Our 'mirror image' view about what's happening, denotes the trend must be toward a reform, not quick-fixes to sustain greed. A reform of industry; and of priorities. And political 'centricity'.
Given our comments tonight; instead of worrying about concealing the circumvention of the regulations and laws established over a hundred years (see above discussion), consider that those who fought this and tried to bury the facts, will see a circumcision.
In any event, remember that actual foreclosure impacts or other economic/consumer aspects won't sort of 'hit the wall' until later on this year or even well into next; though equity markets may discount recovery; rolling as noted. Our suspicion is (reserved). An enduring low point for Senior Averages if Recession is somehow avoided is likely not until later (as outlined). If evidence points to Recession as a prospective 'official' event (unofficially we're well on our way into one we're suspecting), then a decline in later September and/or October could be something other than mild-mannered.
And remember I've said (from before the high) we could enter one of the most severe recessions in the history of the United States, due to policies on Wall Street and also a result of the melding of the investment banking, mortgage and securities industries; which we opposed for just this sort of day-of-reckoning, many year ago. Regulators at the Federal level are culpable mostly because they looked askance as this unfurled it appears, and this has its roots in the melding of the financial sectors, globalism, trade turned into unfair trade, and basically gross negligence that allowed this to persevere since there was an argument that the circumvention of 'rules' was in itself a violation. But we also understand; it was part of a 'reflation' effort, carried to ridiculous extreme.
Mark-'em-up-and-put-'em down is a saying we applied to how trading structure this week would likely evolve. Irrespective of Fed non-action; that remained most logical probable scenario(s); as the call for all rallies failing, remains actually about just right.
We'd opined before that 'Gilded Age' disconnects of Wall Street from Main Street for awhile, had 'Street' crooners wanting the Fed to rescue 'risk', rather than do their job. Shame on pundits blaming the Fed as Wall Street gets hoisted by their own petard, in situations brought on themselves by poor ratings; poor due diligence, or perceptions that nothing mattered but liquidity or sucking-in capital. America thrives on money on the move; and it will again. But not now; so they're wailing to a disinclined audience; without realizing it. Few such guys address fabricated natures of leveraged liquidity; itself risky. Fewer yet will publicly acknowledge the 'well' has temporarily seized-up.
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.
Rarely we will comment about stocks in text. Typically remarks are via audio-video.
One late item: Tapline, the Trans-Arabian Pipeline Company started operating in 1950 as the largest oil pipeline of its time, a joint venture of Standard Oil of New Jersey (Esso; now Exxon), Standard Oil of California (now Chevron), The Texas Company (Texaco) and Socony-Vacuum Oil Company (became Magnolia; is now Exxon/Mobil). It transported Saudi oil from Persian Gulf fields to the terminal at Zahrani south of Saida, where it was shipped to Europe or the eastern United States.
This is being revived, and will transport oil again. Also land-based transport to Oman, as well as the other way to the Med, will avoid conflict with Iran. Iran and their ally we call Iraq, have agreed to pipe crude directly to Iranian refineries (you didn't think they were holding hands for nothing did; or that this was about politics; not oil money). Could it be Shiite Gov'ments in Iraq & Iran are enemies of the United States.
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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 this case World War III or IV if you count the Cold War as III, could be Islamic terrorist interference targeting 'global village' communication or necessity supply-chains.)
Though few generally concurred for five+ 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, irrespective of oil-induced inflationary pressures or whining by Wall Street bemoaning the disappearance of 'free bucks', as we absolutely correctly forecast would be the underpinnings of this continuing saga.
Often we get a speculative phase late in bull markets; increasingly towards the end of an overall rising phase. In our view there hasn't been that broad degree of overall speculation in big-caps, but that is a potential feature developing let us suggest if so it will be somewhere in the years ahead, maybe later 2009-2012, barring disaster. In the last 3-5 weeks we adjusted the 'risk-matrix' threat to markets as members know.
McClellan Oscillator finds NYSE 'Mac' stabilizing with intervening bull-bear shuffles that most recently are at -92 for the NYSE or -17 on NASDAQ. If LBO or hedge funds increasingly implode in days or weeks ahead; of course allowing rebounds (including again near Labor Day) we'll respond as needed. Rebound rallies projected seemingly minimize significance of systemic risk developing; but omit noting 'risk off-loading' implementation tactics. These are ongoing; many holdings aren't investment grade.
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. It is also pertinent not to forget that when there's one cockroach, there are likely others.
While we are eternally optimistic for the Nation (you know the old adage about 'every' ten years; well I'm fairly enthused about the period from -redacted- preliminarily; just so you know; from now until then we'll have fabulous intermediate swings and that's a great thing for market timing as will embarrass consistent/persistent investing theory).
Thanks! I appreciate the understanding of the persisting call of 'liquidity momentum' nonsense foisted by so many others all year. We call alternating rallies and declines; mostly right. Including the big rally from June into July; while warning it had a -zero- odds of success for extensions before the next phase of our forecast pattern action. I know that most ingerletter.com members realize I'm semi-retired, and wouldn't bother with all this if I didn't want to be potentially helpful in steering away risk more than just fostering greed. We are not permabears or permabulls, but permarealists. This will of course lead to an opportunity; but for now we'd keep our power dry in what evolves in theory, this late in my career as one of the most important forecasts I've ever made. If that makes one curious; consider that the 1969 bear market and low of May 1970 just at the start, were followed by a 'generational buying opportunity' post energy war(s) in the late '70's (last train in), and then the '87 crash, expected to be a blip then higher. I note this because we had the forecast 2000 top; the 2002 low and then noted as this year evolved that the 'real' market had only retraced about half the preceding bear….
Nobody's perfect; but we've got your back often. And we'll try to continue in the future to 'have your back' in a sense; rather than back you into absurdly priced stocks at the highs, and then days later suggest somehow that there was a mission to help people.
This market does not require flip-flopping (unless you're distributing stocks -deleted- on Wall Street); it requires trading in the Averages if you want to catch moves; but not investing in anything. Cash is king. So the Broad & Wall shuffle is a continuing tune; not something to be sung in different languages from day-to-day as if things changed (of course they will change; but up to now the underlying ingredients for this did not).
We warned that sub-prime could not decline 'in isolation', and that ripple effects were unavoidable. Today others say this is broadening; or there are ripple effects. Uh huh. And those belatedly figuring things out are actually contributing to a panic; not by any means helping avoid one. That's because they cheerlead folks into risk, at the highs. Is there reason few quoted my views in the last few months? Would it expose 'truths', or were 'they' not finished distributing, or helping their pals suck-in the last few bucks.
For weeks I'd said the decline cannot (in our view) be at a point of bottoming yet; nor should it be by any normal historical, not hysterical, market perspective. Rallies were projected to intersperse with declines last week and this week; especially given those historic shorting levels out there. Later it's reasonable to presume purges (beyond full test) prior to a pre-Labor Day (redacted) after which I'll see how things (fundamentally too) evolve during these timeframes. That's the bullish alternative. A 'frantic' Fed rate 'cut' would merely create a sharp rally, then precede (reserved) follow-up's. It is so, because there is no such thing as 'growth' expectations for now, and soon we'll hear about the extent of erosion forecasts. As to global growth, while I really do respect our Treasury Secretary, I am not encouraged that he returns from China to tell us that the economy is fine. Excuse me; we were interested in the American economy, sir.
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)
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