Gene Inger's Daily Briefing . . . for Monday March 24, 2008:
Good weekend!
Napoleon . . . is purported to have said: "never get in the way of any enemy, who is destroying himself". In the 'great deleveraging battle,' of this post-turn-of-the-Century 'reflation' fight; the antagonists came to greater loggerheads than monetarists thought likely. Partially, because rules changed midstream while the game was being played, it became a very challenging confrontation; with (as forecast) the housing bubble bust just a microcosm of bigger issues; as we analyzed that to be over two years ago.
Maybe, if I omit humility for a moment; one of the least noticed of our calls (which few of the bankers or lenders seemed to notice) was the most important: that in 2006-'07, early-on, money would first slosh over to Wall Street from Main Street's housing bust, before those boys -buoyed by far fatter wallets- would feel a pinch. Later they would.
It was this concept; of rotational money seeking a place to go, that restrained caution towards the market during 2005-2006; because we thought bears seeking immediate follow-through of housing by stocks, were premature; ignoring the big money rotation. At the same time; our theory held it was inevitable this would eventually come home to roost everywhere; which is why the 'end 2006' Outlook for 2007 (published in a few independent journals who review us too) called for a 'massive rotational distribution'.
Because that concept was thus freely circulated; but hardly anybody gave credence; instead obfuscating with belligerent proclamations of 'permanent prosperity plateaus', in a new world order, and 'free market capitalism' (which it actually wasn't; as having no policy and oversight is neither free, market-oriented, nor fair; just complacent and detached, or flat-out ignorant); I got fairly feisty about making our case; to be of help. (That can be attested to by all who know I was already then doing mostly audio; very little video; and planning to diminish text; but ramped it all up all because of believing we were facing 'the most challenging forthcoming distribution' in my humble career.)
And that we did address. Unlike Napoleon, we tried to offer a 'force majeure' (well it is French, why should I say 'ceasefire or truce') to our adversary; to save their blood we were convinced was going to be spilled. So spilled it was; far more than big Indexes.
Quantitative analysts . . . replaced field marshals and generals; always a mistake in warfare; which trading is. The mind must control movement of troops (money), and in that regard mathematical algorithms had already (remember Long Term Capital Mgt.) been previously-discredited; because they can't fully factor-in emotion; contagion and that other aspect carefully being reassembled; which happens to be one word: 'trust'.
On the road to 'Wall Street's Waterloo', the Gilded Age elite partied like no tomorrow. They had that part right. (I can prove that too; as Ferrari waiting lists are vanishing as fast as fast as Delta and Southwest jets from the active fleets; as well as new upscale 5th Avenue shoppers, as the Dollar firms, and brokers and traders are shell-shocked.) Once again the 'quants' were running the show; while those actually running the firms tended to silence, ignore, or fire (if they even piped-up with protest) 'risk' managers. It was a prescription for disaster (if not broad insolvencies; we saw and we analyzed it).
In 1814 and 1815 there were two sieges of Paris; in 2007 and 2008; two sieges now seen of New York (and now one in Chicago's commodity pits; which we also forecast by noting for a month that commodities were in a 5th wave -often final- upward cycle). Equities are more stable as we identified several days ago; because the pieces of the puzzle for stabilization if not recovery itself (which, by definition, must come later), are at least being implemented. It's been our consistent belief (unlike whiners or moaners you may see on TV) through all this, that the Bernanke Fed was studiously studying the battlefield, not ignorant at all of the risk; and not complacent. But the Fed knew all the limits in this gargantuan mess; so had to move decisively, but with deliberate care (I proved that too; via having identified the Reg W waiver discovery in Spring of '07. I said from that point that the Fed knew the magnitude of the temblor approaching us.)
Bernanke is our Napoleon!
And he won't be relegated to ignominious defeat (better hope not; or the Nation will). He let enemies of the proletariat (who think they are his constituents, craving beads tossed to the masses from time-to-time while the global elitists preach trickle-down, which can work only if America 1st remains the priority; not allegiance for foreign and spurious organizations that do not have the actual best interests of our people, or in a sense the free world paramount, as if it was a sort of permanent Mardi Gras parade), get to the gates of Paris (in this case Main Street driveways and then the Wall Street caverns, that seems to have made Wall Street a lagging rather than leading indicator, but really isn't so because internal market action deteriorated as projected long prior to the peaking of the Senior Averages)..let this happen; (mostly Greenspan did it, and Bernanke stayed studious), before revealing his position when time to 'strike' came.
Actually better financial military strategy doesn't exist when preceding commanders (Greenspan and Congress) allowed skirmishes to proceed 'without' being engaged. They indeed turned the other cheek; probably as it was all great prosperity for them, even though brokers, bankers, speculators, realtors, and builders, knew it could not possibly be a permanently sustainable state of affairs. Consumers: the house ATM.
Evolution
By the time that extraordinary Napoleonic phase of European history wound-down; Europe's very backbone changed; political frontiers were revised; Italy and Belgium suffered war, as baroque Vienna (where my family hails from) eyed an international Congress. Before the current phase of the housing (core issue of which even SIV's are mercenaries fighting on behalf of large power-brokers) morass is escaped from (recovery); the face of not only real estate; but the enforcement of financial oversight hegemony will be seen. This type of governance will last for years -decades actually- and that's just how it goes; it doesn't matter if you like it or not; or approve of what the astute Congressman Barney Franks proposes; even if he's stonewalled by globalists or other radicals. Most normal Republicans and conservatives concur with him (that crowd that is so vocal are not normal politicians or economists; they are either slightly fascistic or mired in an agenda that favors global corporations who in the long run will only prosper if we the people actually do too. (Actually that's why we concur with not all, but most of his points; as do many Repubicans). A vanquishing army determines its benevolence. And those who do not think government will exact a toll; don't get it.
Is this too complex an alliteration? Probably not. Let's make it simple; as there's too much news to cover on a pre-holiday report, let's say this: the fashion of the masses of the bygone era (bling and conspicuous consumption) is gone or winding-down for good reason. Thankfully skirmishes of court jesters (candidates?) pale by comparison with a realization that issues are skirted; the economy is what matters; and the world does return to our fold, as the Dollar firms, and circumstances attempt to normalize.
Daily action . . . has occasionally noted that most of life is not black, nor white; but shades of gray. The perspective of investors is often like brave captains and majors in the field of battle; not commanders. They see the trees, because they're groveling at the bark; but not checking the forest. That's understandable; everybody has a role.
Napoleon Bernanke has to look at the forest; to engage the enemy at an opportune if not certain, point, with the best chance to score a decisive victory. He has done that; and almost all he can without other agencies (and he's commandeering them for the fight too) being drafted to the cause 'for the greater good'. Conditions were favorable, in this week just past (and the prior one too), for our forecast irregular rebound shots.
Cartoonists have reacted to the battlefield conditions much as the accompanying little drawing in the Journal. Much like Danish cartoons depicting the modern barbarians, it doesn't tell you the circumstances of the juxtapositioned forces, unless you've studied it. Having done so and clearly (for a year) forewarned (Gene 'Paul Revere' Inger as not recognized by this Continental Congress, but that's o.k.; they can debate minutia) American investors what was coming (at least ingerletter.com members), we humbly are pleased to have saved lots of money for folks from those Laundromats eagerly or aggressively trying to wring every nickel out of their pockets during developing bears.
However; the struggle by America, Great Britain; and the French Republic; against an assortment of interlopers with moneybags filled by the largesse of faded empires; has not ended. Translation (if needed): we are at war; the battlelines are drawn; enemy is at or inside the gates (those that are in our houses literally; the outcome remains fluid for the short-term. However the building blocks of solution are increasingly visible and while the timeframe for resolution is absolutely not going to be instantaneous, at least transparent evidence is coming together (coalescing) to suggest conceptual 'gelling'.
Summary: that means there is more damage as outlined last night (brief summary is next; new members may visit the archives below for the full versions and videos) to be seen (including bank balance sheets; much of which is still suspiciously perilous); but the banks, the hedgers (next shoe to drop?), and business overall, knows what is necessary to do. That most businesses were concerned (they saw this before most of course; and this go-round were relatively cash-rich), is why we called for this mostly as 'Chinese Water Torture' or deli 'Salami Decline' rather than a crash, over the year. (Salami Decline: where they slice-off your portfolio one slice at a time, but eventually get the whole .. enchilada. All the while the bulls yak about buying and never selling; or worse ascribe 'value' based on rearview mirror earnings, unrelated to the future. It may be so but they don't know so; as wouldn't be quick in a long & deep recession.)
Reinforcing my previous comments; the commodity markets have broken. Inflation as leads to deflation; as leads to a bottom; as leads to reform; political pendulum swings and recovery (irrespective of which Party wins; and McCain has a double-digit lead it should be noted by one of the latest polls); all of which allowed reflation's halt just a tad inside the gates (close call if we're lucky); with the hordes turned-back. As I note it's especially important in wartime. However, as in the French Revolution; or the U.S. one for that matter (and no, I don't consider myself Paul Revere; but yes, if my views had been properly aired by those who think avoiding candor somehow helps investor classes; well, there might have been a few more people able to avoid this debacle). I realize they're all candid now (well mostly); but always so after the barn is emptied.
We need to realize that the kind of 'wild oscillations' characterize a thrashing trying to determine if a bottom is being constructed. Odds remain (outlined at ingerletter.com). However (reserved) dimmed (fortunately) by virtue of the valiant strategic thinkers at the NY Fed and Washington (yes, when they finally got into it; even as predecessors developed it in the first place; solving little to emphasize other than relating to reforms noted). Emphatically expected the past two week's roiling and rolling upside bias; and ensuing churn, with crosscurrents alive and well in the final minutes Thursday, given Expiration; long weekend and S&P rebalancing. Many variables next week (more).
If (reserved) there is a bearish counterattack soon; it will be crucial to study market behavior associated with that coming skirmish, to help ascertain what lurks ahead. I think at best, we can envision (forecast in fairness reserved for members) duration of the struggle, like any ongoing battle, is subject to revision; as quick reaction 'surges' don't always set a future pace. This flanking maneuver by the Fed (who may actually make money on some of the paper they're absorbing incidentally) is like the surge in Iraq; it buys time to assess strategy. That is what they Fed did since last Spring too.
Having argued for the better part of a year, that the false bullish bravado by analysts, or pundits, or global fanatics; was aimed at buying time for industry deleveraging; it's our view that the easy money on the downside (it's never easy; but we mean majority in the race to 'zero') is behind. By no means is the (reserved for members); for that reason combat duration assessments remain open-ended. If that means we argue that the recent two-weeks pre-Expiration and Triple Witching upward affair, projected by ingerletter.com as irregular but occur, hasn't affirmed sustainable lows; then so be it.
And then there is the 'cluster bomb' possibilities of earnings and downgrades looming here in the U.S. during upcoming earnings periods; sprinkle that in Goldie's porridge.
Bottom line: macro signs as interpreted; including (updated slightly) the following bullet points:
Fed has power in 'unusual & exigent circumstances' to expand emergency lending venues;
Primary issue remains not sharp 'lending issues' or even liquidity, but of financial solvency;
Deleveraging remains 'a b*tch', as unpleasant (secular) scenarios rotationally evolve;
Further points: nearer-term issues to contend with beyond above; some with macro aspects:
Pyramiding mountains of compounding debt have not ended; facilitation assisted a bit;
Extreme volatility oscillations are indicative of a market at great pains of instability & risk;
Possibility commodity rallies 'blowing-off' at least temporarily (5th wave patterns) was call;
· (A dozen more 'bullet points' provided on full version to ingerletter.com members).
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks continue guidelines to catch short-term swings. Forecast a multi-hundred point rally in Tuesday's market; and shorted early upside efforts on Wednesday. Thereafter long in another of sequential short-term longs or chop. Rally risks diminishing (as outlined to members); implosion may resume; stay tuned during next week's video remarks too.
Basically we thought they'd nuke the shorts; get a 500-1000 point Dow rally last week and this week; then move-on to the next outlined stage. Mortgage backed securities issues notwithstanding; bank balance sheets remain (as persistently challenged).
We retain our macro (forward-roll adjusted) June S&P 1599 short-sale; irrespective of interim short washouts & long-side plays; as projected and outlined these 2 weeks.
Very unusual: having thoroughly forewarned of the commodity break; of inflation very shortly moving towards Deflation (as always historically is how it works; simply put); a comment last week about a (hardly reported by media) Chinese market 'crash' that I forecast months ago; with the clear expectation that the new longs (yesterday after a 400-point Dow rally that triggered absurd 'the bottom is in' comments by so many) in our view should be (tending to behave as suspected in the days and weeks ahead).
Our psychological strategy in 2007 was to be off-margin; cash-rich; debt-free; and the opposite of what most on Wall Street actually did. We wanted to have our head clear I said then, for the eventual washout, rather than be swimming crazily with masses of panicked hordes (worldwide; since we also argued 'decoupling was an impossibility').
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. (Individual stock comments generally are provided in the video overviews only; once in awhile I'll have some thoughts here, where something's particularly emphasized or of technical nature necessitating some discussion. Increasingly most all is via video.)
Should mention PURE Biosciences (PURE). No news yet; however, shares as we suspected, did a 'v bottom' the other day, hovered at consolidation (resistance) and in the late going broke-out. The near 42% gain on Thursday concludes a wild reversal; and I believe made (eye-opening) PURE the largest percentage gainer of any today. It is relevant to see the pattern; higher volume washout below support, and then the disbelief (lower volume) of the recovery until it accelerated. Ideally (moves outlined).
Long-range WiFi
One aspect that is technical is the growth of WiFi while everyone generally 'assumes' only the newer WiMax can do what Intel has achieved. That's why we want to share a bit we gleaned from MIT, where they reporting new Intel WiFi radio devices stated to drastically increase the effective range of 'bridged' routers. (Comments follow.)
How do they get the range out of WiFi you ask? Most wireless routers routinely wait for acknowledgment from other nodes on the network before sending additional data, drastically reducing bandwidth and range. The new Intel routers (details explored just a bit); we'd think American school systems in many states qualify for this inexpensive high-speed wireless connectivity program. (All infrastructure should be state-of-art as opposed to piling-onto antiquated systems in-place. Otherwise we're not world-class.)
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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 more while as we also focus on Middle East and World War III avoidance.
Our 2007 view had been that we're in an ill-defined recession; finally recognized as it evolves. As to whether it descends into something akin to post-railroad debacles way back in the 1880's; all year what we thought the Fed worries about; never talks about; actions affirm they desperately engaged to stabilize fluidity of functionality. Hasten to add, whether depressing or realistic (per a 3 year forecast here of the housing break combined with 'junk debt' investment avoidance); stocks eventually do get interesting. Gilded Age globalists unflaggingly failed to see the era's transition, or detect growing public mood of increased populism; essential reform calls; and low taxes. Actually it's a conservative mantra; that the radicals are claiming is liberal. Being smart; engaging in fair free trade; or having reasonable policies; is not isolationist; it's common sense.
McClellan Oscillator finds NYSE 'Mac' fluctuating via intervening bull-bear shuffles on the NYSE & NASDAQ. Reflex rallies allowed 'risk off-loading' tactics; as 'Street' debt holdings aren't investment grade. Multi-month efforts evolving. (Reserved part.)
Issues continue including oil, terror; China (including latest Pentagon hack spying; a type of action that if we were financially sober would provoke warranted redressing), Pakistan; certainly all the Middle East, Europe; funny money NY economics. Noted for a year: includes international dependencies, as outcroppings of a radical extremist globalism which is neither pro-American nor conservative; even as true conservatives support fair trading; constrained spending, and not squandering our US crown jewels.
Thirteen months ago I called this an 'accident waiting to happen'; commenting that it is affirmed historically that long-duration periods of free money (Gilded Age mentality) do not create permanent liquidity; but give that illusion while the opposite transpires. There will be various trading swings; through 2008. We scalp these, while retaining our (adjusted) position short from June S&P 1599 (rolled), which continues clearly to represent the belief (pattern forward discussion reserved for our members).
Since early 2007 we noted economic conditions more similar to post the Gilded Age ending in 1929, the panic of 1907 (hence our call for the start to be the 'panic of 2007' last year at the end of that Gilded Age, and it's NOT coming back (party over whether they like it or not, as they didn't or only now 'start' to 'concede' there's needed rehab). It is not a structure entirely resolved by rate cuts, stimulus, 'miracles', arrogance of a few who think they have influence; although all can have short-run (more follows).
Long-run: 'new' adults in charge will enable better fiscal and public policy, than what passed for prudent economic or money management in the past era. We played the upside so long as sensible (Oct. 2002 - early '07); look forward to doing so yet-again, in a macro perspective. To the case of recent 'cobbling-out' of an evolving bottoming structure (sorry unfair to paying members to explore this further). Warned a stronger Dollar would ease the inflation insanity (the one they distort); that's a clue to keep an eye on in the days immediately ahead. Finally kicking-in a bit.
Enjoy the holiday!
Gene
Gene Inger,
Publisher
~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com)
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