Searle; the latest from gene inger -- one of the best market timers. Thinks blue chip blip probably a trap, but positive on the badly beaten up small caps.
(Complimentary excerpt from Thursday night's www.ingerletter.com posting. After being
short the majority of the entire move down from the Dec. S&P 1070 level, the 900.933.GENE
hotline is flat at the moment. If all were to go perfectly, stocks would do something dramatic
like move to DJ 8100 or higher, then be smashed anew into the upper 6,000's. It certainly may
not go that way; but it would frustrate both bulls & bears alike.)
(For October 19, 1998)
The Fed Responds to an Unprecedented Credit Emergency !
Coordinated panic among officials. . . .probably stimulated the Federal
Reserve Board's very surprising (as far as moment-to-moment trading)
twin-moves to cut both the Fed Funds rate and the Discount Rate by a
quarter-point each, at approximately 3:20 p.m. ET, during market hours.
There's no doubt that most analysts including us, ultimately expected further Fed
ease over time. It is reminiscent of 1987, as the Fed steps up to the plate to rescue the
markets from a disaster. And yes, if it works, it changes everything going forward for the near,
intermediate & longer term.
Also remember that only nominal rates have been cut (wisely kept in reserve); real rates stayed
high while the world unraveled. That means Greenspan is really scared now, hopes to halt
what threatens to undermine (if it hasn't already) domestic consumer optimism, probably is
being now pushed by the New York Fed (the real power) to cut again on November 17, and
now we'll see if all these cuts are really bullish, or only temporarily so, as was the case when
after the '29 Crash, officials moved from restriction to ease in a frantic effort to sidestep a
Credit Crunch. They failed.
If spreads between corporates and governments tighten over the next few days; better look out.
Be very careful trading just here; even though a reduction in U.S. rates will likely help
emerging markets, while potentially further damaging the Dollar. While the history of Fed
moves, of cuts in both of these sectors has always left the market higher 6-9 months later
than at the time of such cuts; there is still the risk that this is aimed more internationally than
domestically, and in fact will increase dollar-denominated asset repatriation. Tread lightly in
assumptions that this market will perform just as it always has in the past; though domestic
stimulus (historically) is better received in the United States, than it is overseas. If it does
succeed; should markets fear later inflation? Of course the answer is yes, but that's a
longer-term factor in topping the T-Bond market next year.
Ironically today's action fundamentally means the Fed agrees; you and I have been very
correct about risk of a profits recession in the United States next year, and of how much the
Fed risked getting even further behind the curve. While the goose surely came out of the blue;
no doubt the rationale behind the Fed's action didn't, and stems from the very factors that put
markets at risk. If they pull it off, they will engineer a softer-landing for U.S. companies next
year. That's exactly what we mean when (the DB & in the Letter), we've argued that cutting
rates doesn't simply just rescue profits (but in fact affirms our view they are and will be in
trouble) immediately, but makes the ultimate low not as low as it otherwise would be. In fact
just (I think last night) we speculated that can be the difference between an ultimate low a
couple thousand points higher than would be the case otherwise. Does that mean the major
bottom is behind us? For small-cap stocks, a few of which we've nibbled at already, generally
the worst is behind, as already noted. For blue-chips, it doesn't prevent significant testing at
minimum or in some cases later new lows. But yes, a chance that those lows will hold higher
bottoms is definitely enhanced by Fed trending action.
Will the Dollar get creamed overnight, while the Nikkei soars? If so, a domestic rally may
well be a sale; if not, a pullback will be a buy. Prior opinions related to daily trading
automatically vanish when the fundamentals change, and that's readily the case today. In fact,
historically major lows have been known to occur from nominal washouts and ensuing
short-covering (such as into any expiration), upon which a savvy Federal Reserve takes action.
Are we fundamentally now into a more bullish bigger picture posture? Too soon to tell;
somewhat uncharted territory by the way. (Open-minded; having reversed the short-term
attitude a week ago amidst analyst downgrades.)
Before this is over (the next six to nine months). . .you may get to a time when
investors will view every further rate-cut as extremely bearish, not bullish, (balance of this
section is reserved).
Remember, it is because the Fed has now capitulated to the general non-optimism we've warned
of since Spring, that further breaking of the "structural bubble" after this clearly-defined Fed
move still has worst-case risk (we won't get into that tonight). At least the Fed is more
preoccupied with markets than Monicas, and that's a plus. Just remember; the PE for the S&P
still presumes there will not be a recession; and even with the cuts that is still (at least mildly) an
odds-on probability.
Market TKO
For the Dow Industrials; let's consider short-term resistance at 8450 or so, with support at
8120. If we can get the former before the latter, we can think of a punch-up to 8700 or so
before risk in next year's dicey market hits the market front-and-center. If it works the other
way around, then you won't see 8700, but rather a profit-taking wave, a rebound that fails, and
then new lows, or at least an effort in that direction. That would (unfortunately) be a TKO for
the market, we otherwise define as a "Technical Knockout" (a term we first used I believe,
back in the Summer of 1987 before the Crash). Of course, we thought such an event would
be a beautiful buying opportunity; now we have an interesting challenge of a market where
most smaller stocks have already done that, while many big stocks still trade as if nothing is
wrong, or ever will be. This is a different era, as we all know, and that means the outcome of
Fed action may not have an unchallenged result.
In Summary. . . there probably are other shoes to drop; we might need to note. And the
market has overdone this to the upside, or will have tomorrow, with or without an additional
push in the new week. Don't be too skeptical, as we probably get a new rally effort before a
decline. Since there are all kinds of rumors out there about unexpired S&P and T-Bond
positions that unknown traders hold that could roil (and probably will) Friday's action, an early
up-down-up-down-flat call might generally be a reasonable expectation, but likely doesn't do
justice to the coming chaos.
The McClellan Oscillator moved from Wednesday's +47 reading to a near-overbought
posting of +143, which suggests extreme short-term risk conditions approaching within
(reserved) days. Also, today's Summation reading is -1658. S&P premium is 1750 at 7:00 p.m.
ET; Dec. futures at 1065, up 100 from Chicago's regular close at 1064. We are flat in our daily
trading as of now.
…Thus no change in this general view, or the specific view a week ago that even though overall
conditions remain unsettled, not to not press the downside of the market, but play for a
rebound, while the Street was increasingly pessimistic. Now, the real question is whether order
is restored to the Treasury arena, which recently has experienced uncharacteristic volatility,
even though in many ways it was inline both with our forecast for a "panic in" once stocks
broke even though the Dollar broke then (as called for), and now is slightly disorderly, though
we indicated expectations for it to snapback to "test the highs" before succumbing. (Bond/stock
relationship call; reserved.)
Remember, at no time (the last time was 1992) when the Fed cut Funds and Discount rates at the
same time, was the PE of the S&P still at illusory and risky price levels. In Japan, when they
(years ago) cut rates, you got one heck of a rebound, but ultimately prices worked lower. There
is little doubt (and we've said this before) that the relatively-high "real" rates (as opposed to the
nominal rates) gave the Fed some wiggle room, and given the world's state-of-affairs, they may
need it. Certainly, they've known that for months; and surely the premature dropping of rates
by the Japanese must have been on their mind for months already. (But our PE remains very
risky.)
What we are seeing is the Fed admitting a black-hole loomed, and that they understood the full
panic in the investment community, despite the financial media's relative civility in explaining
all of what's been going on to investors. The Budget Bill's passing, IMF funding approval, and
quick basic bailout of Brazil, were hardly noticed in the day's late going, but have something to
do with what increasingly is shaping-up as Washington's coming-to-grips with problems that
do matter.
Let us pray that this great step back retards others' recent Hooveresque monetary policies , is
a positive abroad, but without destabilizing our domestic economy further. The real risk (and
that is why a precise pronouncement that the Bear is over based on today's move is impossible
and in fact reckless) is that the Dollar weakens so much as to trigger a massive selling-wave of
dollar denominated assets; a touch of which we've already witnessed. Yes; this all falls
under the type of derivatives crisis and implosion risks warned of starting last year; though
not all of it is solely debt-based. What I'm trying not to say; is that this series of actions may
be a last best chance to save an historically unprecedented intertwined international derivatives
mess from total collapse.
Gene Inger,
Publisher,
www.ingerletter.com
The Inger Letter (on ingerletter.com and other financial sites)
The Inger Letter Daily Forecast Daily (on ingerletter.com and other financial sites)
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