Gene Inger's Daily Briefing. . . . for Monday, August 20, 2007:
Good evening;
The jury's still out . . . (at least it's the conventional wisdom) regarding sustainability of what we called Expiration related washouts combined with PPT (Plunge Protection Team) Bailouts, as is a bit reminiscent of the old Paul Volker mentality at the Fed's helm (he once chided the majority admiring Greenspan, by saying his successor was the best 'clerk' he'd had during his leadership at the Federal Reserve). This time the coercion was heavy. And the issue is restoring 'credibility, but actually not liquidity'.
No doubt; we're honored not only about calling virtually all of the past couple months' patterns in this stock market, but doing something else. That was nearly 2 weeks ago when, irrespective of all the rhetoric streaming forth from certain cheerleaders after it has been done; we opined about a couple things: a) the market would not likely enter a 'crash' mode at least until later (if at all); B) that stocks would washout and by doing so essentially 'panic' the majority (including professionals; c) rebound related to what everyone was failing to note was an upcoming nominal (but key because of historical heavy shorting and universal after-the-fact bearishness) Expiration; and d) ideally we suggested the Fed would accomplish very little by cutting the 'Funds rate', because of the irrelevance in the preceding (and incidentally ongoing) situation, but we advised a consideration of e) cutting the Discount Rate, and said so specifically at that time.
Though we really don't care who pats themselves on the back; we doubt you'll find all of the self-congratulatory pundits who blamed the Fed (wrong) then backtracked (that is right), but never ever said a word about the Discount Rate until the Fed did it. Nor for that matter did any of them allude to the primary brewing 'credit crunch liquidity' risk, before the market topped-out, which we forewarned back in June would be what would derail the market after our forecast rally into early-mid July, which we believed had 'zero' chance of sustainability or meaningful upside extension beyond that time (it has no direct relevance -necessarily- to what occurs down the road, of course, as the one 'constant' in life and in the markets is change and a need to be prepared for it).
In fact, with 'everyone' convinced the market was going to hell a couple days ago, we in fact believed and reemphasized that we would 'trade our way there', rather than go and accomplish it all at once (unless the Fed had the 'fix-in', as I already suspected). How did we arrive at the 'fix was in' assumption, while the popular heroes didn't? Well that part was simple: as most all central banks in the world were injecting liquidity, and big time at that (including the EU and the U.S.), there was also 'zero' chance that it was occurring in a vacuum, or not as a coordinated plan with the Federal Reserve.
Daily action . . . during the most dire part of the past week repeatedly emphasized a series of macro risks that we've pointed out most of the year, including the derivative issue we alluded to as preventing an uncorrected market extension which is why we urged extreme patience and caution from an investment perspective virtually all year.
During this extraordinary volatility that I haven't seen since 2000 or earlier when, yes, yours truly called for the 'Crash of 1987', as old-time financial television viewers well know; not to mention the fabulous generational buying opportunity both after than as well as tech lows in 1994 and '96 that hardly anyone remembers prior to our calling a top for the unsustainable post-Y2k move-up, by the S&P primarily, during early 2000; during this time we urged first (early July-mid-July and nailed the two points to short, or in my opinion anyway, fade the upside, which were appropriate) as a top, and then this past week to essentially 'fade the downside' by preparing for a snapback rebound that could horse around and even extend within the parameters that we've discussed.
The importance of the foregoing is something else [besides our fairly unique advance call for a) the top, and B) a Discount Rate cut, plus c) the nominal Expiration turn up]: you will not hear from most of the supposedly uniquely insightful crowd, that technical conditions have a particular unique situation; if you look at accompanying long-term charts of the Dow and S&P. Note one little potential double-top the other doesn't?
Now, in our audio-video we'll chat about these things a bit more, but suffice to say it is particularly interesting when you factor-in the historical evidence of narrow rallying and what that 'may' often (not always) mean for the market if breadth doesn't expand.
Then there is an aspect of 'calamity' which Fed heads just two days earlier said may deter rate changes, unless that was likely. Well, it was already occurring as we noted likely for weeks, even before the high. How did we know? Try the derivatives data for the big institutions, and certain 'failures to fund' that we already knew about earlier in particular transactions. Not to mention the one-way mentality of most 'quants' or what in our view was a 'funny money' ponzi scheme of sorts as was cheerlead, by the best of breed as far as promoters and Wall Street distributative assistants are concerned.
Yours truly, as ingerletter.com members know, was particularly concerned that snobs in the industry thought that this time was 'different' (yup, I said was more dangerous), and that the Nation could miraculously continue creating wealth by virtue of 'deals' or private equity, or CMO's, or CDO's, or the like, without actually producing anything of substance, other than money itself. That historically is a recipe for potential disaster.
But at the same time, as we alerted, the Fed would give this the 'college try', and thus we'd get a meaningful rebound effort, probably associated with Expiration (an assist, said we, because of the short interest and large number of Puts to be closed, etc.). It was also noted what the subsequent post-Expiration action could be, and then what's likely around Labor Day, and potentially thereafter. There's no change for the outlook; irrespective of this forecast move to intervene on the part of the Fed, or the rally now.
What the Fed has done is 'facilitate' the stabilization of the system; not save property or hedgies; though some would like to imagine that the latter has occurred. It doesn't work that way, and our suspicion of how many hedge funds survive over the period of time we noted (about three years) has actually not changed. Some did terrific too, as we noted earlier in the week as well. Middle America, contrary to those wishing so (it might be notable to observe we have no problem helping 'people', but this doesn't go to the point of salvaging insane circumvention of nearly a hundred years of rules that were intended to protect people, by the very same crowd that pleaded for bailout by a Fed they poked their nose at previously, by circumventing many Fed and FDIC rules.
The only reason the Fed did what we expected (liquidity injections and Discount Rate cut) was initially to let all circumventers be punished first and then underpinned much of the banking industry, that incidentally just happens to be their primary constituents. It's my belief they intended to punish circumventers with the painful circumcisions we saw, and only then intervene increasingly to deflect clearly unfolding 'system risk'.
We were surprised that even the greatest 'living legend' on the NYSE Floor noted our examination of the situation as relates to Emelda Marco's ©shoes, and while it was, in our opinion, too late for 'this' phase to get negative, it was appropriate to anticipate a rebound within the context of the volatility that we'd forecast for many weeks now.
In essence, Wall Street and the hedge funds (not all, but many; some were right on it all along, as they agreed with us) backed the entire Country into such 'funny money' situations, that the Fed sort of had no choice but to acquiesce to what essentially is, if it's not too strong a term, financial blackmail (circumventor coercion basically). We do not need to again detail the leverage employed to circumvent the post 1907-Panic or the 'Crash of '29' rules to prevent basically what was not entirely unprecedented, but ingerletter.com members know not only how extensive that was/is, but the derivatives to equity ratios of other 'entities' as well, which we need not reiterate at this time.
Pushing on a string . . . fairly describes the issues we've been worried about; in-part because the rates -and the Fed- are not the problem. Timidity is not offset by insanity as care is still pertinent. The Fed's job's not to let markets seize-up beyond punishing the perpetrators; which is their job. What the market wants to hear is 'underwriting of risk', so it seems if you listen to what some say; but not what the Fed intends here. At this point we will reiterate that the Fed isn't mandated to insure against risk; yes, did it once (LTCM) so you see the consequences. Already these 'characters' thought they had essentially Fed 'Puts' under their risky strategies. Don't be surprised if they don't.
Underlying issues aren't ameliorated, just halted in a corrosive situation, that enabled not only sub-prime debacles, or leverage in the corporate world that a most extreme and dangerous overall level, probably in history as I viewed it. The American people have seen the warnings; and they won't miss this from a 'warning shot' perspective.
As 'risk' was projected to be 'seemingly removed' from the equation for the moment, folks will presume stock prices are attractive. They may rebound more (I suspected in prior comments this past week that they will); but warn 'consumer demand' remains problematic at best, and dire at worst. A sigh of relief can become a sign of relief, but you know what we think the prospects are, and you know what those charts do say.
Even a 1000 point rally in the Dow Jones (discussed before the turn) I suspect would not remedy the forecast years of excessive leverage and debt. Regulation it appears, is not and was not an issue, though the Street did blame excessive regulation. More isn't needed, but enforcement of what exists clearly is (it isn't being done, generally). Actually the opposite: violators and their pals used their muscle and got an audience so to speak. Now are we being sore? Heck no! We forecast this past week's reversal, but within (I still suspect) a continuing evolution as we have outlined all these weeks.
Even some bears suddenly capitulated. Interesting; we do not dispute this power-play by the hedgies and leveraged boys; remember we expected the 'fix to be in'. But bull market extensions 'that stick' are dependent on 'results' and the consumer will first be relieved, then likely see that the benefits aren't passing-through to him or her, as they would normally expect. That might affirm that institutions are taking these 'injections' (and forecast ideal Discount Rate cut) and stoking their own liquidity. If this evolves in that manner beware because it won't help the 'actual' economy at all, just the system.
This takes the fullness of time to sort-out. If there is no follow-up then risk returns lots faster than even we suspect; if there is (now was) the requisite 'overt' Fed action, per king-pin orders, it buys time. That's time for the market; not necessarily homeowners; and not necessarily the underpinnings; though it's not impossible that a brewing bear was halted (for now) by dramatic interventions. (The summary was pre-late week lift.)
Credit access, will nevertheless not be as easy as previously, even if some 'calamity' compels a future 'emergency low interest rate' condition, such as existed in the post 9/11 world. The consumer 'balance sheet' is stretched; we're likely in for tough times and 'withdrawal symptoms' from consuming and credit binging, irrespective of what in this case we predicted as the rebound, whether for Americans or corporate largesse.
They cannot conceive (though they do) that the funny money era is not only ending; or that the game's over and they won for a long time; but now lost basically because they (financiers and henchmen, under the guise of greatest situations or stories ever) pushed it too far, or to fragile ground leading to destabilization of the United States. Basically 'hanging on by economic fingernails', we acted defensively per forecast.
In summary: we already said the light at the end of the tunnel could be an oncoming freight (or the caboose of the last train out of Dodge). We'll see in the next few weeks as the bloom is off the downside rose, we hoped at least for the moment days ago.
But look at the other side of the coin in fairness (me being optimistic since some don't like my July bearishness; as I think is ironic, since we had warned of these conditions developing through the year up to the break, and even called the last rallies as likely to occur but be false). So sure; never catch a falling knife; except for a turnaround in front of Expiration maybe? Even if the Fed cuts rates lots of stuff (especially retail; old buy back plans or not) could go to lower levels, said I; but only after expected respite.
Again: I contend that 'sub-prime' is a microcosm of a bigger issue; that Wall Street as well as the big boys held out longer than homeowners or even mortgage companies, or LBO and private equity guys etc., because they're better heeled that the rest of us. Same church; just better financed, so that pew can be mounted longer than others. I suggest new ingerletter.com members review preceding reports; I'll not summarize.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks in recent nights discussed various of Emelda's shoes heels breaking (you know what I mean) and was handled well again today; including a suspicion that we'd get a little more panic, then a Fed-driven (ideally) cobbled-together turnaround (into Expiration). We called Friday to be up-down-up, with some horsing around, and it definitely was.
Key credit or derivative issues are not ameliorated; though of course a 'structuring' does move toward improvement, which is a different issue then just stemming a tide. There was a real 'band-aid' applied; and we got it in the ideal manner we preferred.
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.
Comments are interpretative speculative postulations provided 'as is with all faults' and all risks with no assurance about future performance of anything (markets or stocks) in any way whatsoever. Personal necessity, irrespective of opinions, may require buys or sells deemed necessary, without prior 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. (In this case World War III is Islamic terrorist and Iranian interference, targeting 'global village' communication or necessity supply-chains.) We'd move to higher alerts now.
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 has there been nor is there likely to be one, irrespective of oil-induced inflationary pressure or whining by Wall Street bemoaning disappearance of 'free bucks', as fully correctly forecast to be the underpinnings of an ongoing saga. In that regard, many increasingly grasp it 'now'; but our 'edge' (of months) made money, because we projected the rally into early/mid July, with 'zero' chance of an extension.
In all my 38 years of market analysis, it was the first rally with 'zero' extendibility call. Sure beats all those saying 'nobody could have foreseen the problem' or the 'Fed so smart as to cut the Discount Rate'. Excuse me; in all humility, I called for both items. And the crowd that bemoans Government, but begs for bails, is hypocritical silliness.
McClellan Oscillator finds NYSE 'Mac' stabilizing with intervening bull-bear shuffles that most recently are at -66 for the NYSE; -6 on NASDAQ. As LBO / hedge funds increasingly implode (post-forecast reprieves) of course allowing rebounds (as noted) we'll respond as needed. Rebound rallies projected seemingly minimize significance of systemic risk evolving; but omit noting 'risk off-loading' implementation tactics. These are ongoing; as many holdings aren't investment grade. Such efforts continue.
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.
The 'circumvention boys' were allowed to be painfully 'circumcised', then the Fed (just as forecast) entered the fray to save their constituents the banks, not hedgies or any of the mortgage crowd; and definitely not to acquiesce to media shill calls for action. I think that the major banks, based on what we shared last night, were the key reason.
Gene
Gene Inger,
Publisher
~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com)
